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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 11, 1998
REGISTRATION NO. 333-47969
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 4
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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HASTINGS ENTERTAINMENT, INC.
(Exact name of registrant as specified in its charter)
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<S> <C> <C>
TEXAS 5942 75-1386375
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
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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)
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Copies to:
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<S> <C>
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
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
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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
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TITLE OF EACH CLASS OF SECURITIES PROPOSED MAXIMUM AMOUNT OF
TO BE REGISTERED AGGREGATE OFFERING PRICE REGISTRATION FEE
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Common Stock, $.01 par value......................... $58,650,000(1) $17,302
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(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.
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<PAGE> 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 JUNE 11, 1998
PROSPECTUS
3,377,333 SHARES
HASTINGS ENTERTAINMENT, INC.
COMMON STOCK
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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.
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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.
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UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) SHAREHOLDER(2)
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<S> <C> <C> <C> <C>
Per Share $ $ $ $
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Total(3) $ $ $ $
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(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.
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SALOMON SMITH BARNEY
A.G. EDWARDS & SONS, INC.
FURMAN SELZ
, 1998
<PAGE> 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
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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
effected on June 4, 1998. 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
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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
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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
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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).............. 11,549,726 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
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(1) Does not include 2,370,278 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
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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").
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FISCAL YEAR
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1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
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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 $ 20,860 $ 26,998 $ 28,535 $ 33,576
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%
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JANUARY 31
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1998 1998
ACTUAL AS ADJUSTED(7)
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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
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(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.
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(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."
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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
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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
<PAGE> 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."
QUARTERLY OPERATING RESULTS MAY FLUCTUATE. The Company has experienced in
the past, and may experience in the future, significant fluctuations in
quarterly operating results. Such fluctuations may be caused by many factors,
including but not limited to the amount and timing of revenues recognized by the
Company and the amount of expenses of the Company relating to operations and
expansion of superstores. The Company continually seeks to decrease its expenses
and increase its revenues through incorporating new retailing techniques, such
as the modification of its returns process and the leasing of videotape
inventory. The effect of these changes in operations, among other factors, many
of which are beyond the Company's control, may cause quarterly revenues and
operating results to be difficult to forecast or to be inconsistent with
comparable fiscal periods of the Company. It is possible that the Company's
future quarterly operating results from time to time will not meet the
expectations of securities analysts or investors, which could have a material
adverse effect on the market price of the Company's Common Stock. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- General."
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
10
<PAGE> 12
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 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
11
<PAGE> 13
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 11,549,726
shares of Common Stock outstanding. Of these shares, 8,172,393 shares will be
"restricted securities" as defined by Rule 144 ("Rule 144") adopted under the
Securities Act. These shares may be sold in the future in compliance with the
volume limitations and other restrictions of Rule 144. The Company is unable to
predict the effect that future sales made under Rule 144 or otherwise will have
on the market price of the Common Stock prevailing at that time. See "Shares
Eligible for Future Sale" and "Underwriting." The Company's officers and
directors, and certain other shareholders including the Selling Shareholder,
who, after giving effect to the Offering, will collectively hold 7,833,568
shares, which constitutes approximately 96% of the unregistered, outstanding
shares of Common Stock, 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
<PAGE> 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
<PAGE> 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:
<TABLE>
<S> <C> <C>
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
======
</TABLE>
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):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------- -------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- -------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
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
========== ===== ======= ===== ======
</TABLE>
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
<PAGE> 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.
<TABLE>
<CAPTION>
JANUARY 31, 1998
----------------------
ACTUAL AS ADJUSTED
-------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
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
======== ========
</TABLE>
- ---------------
(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
<PAGE> 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.
<TABLE>
<CAPTION>
FISCAL YEAR
----------------------------------------------------------
1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<S> <C> <C> <C> <C> <C>
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 $ 20,860 $ 26,998 $ 28,535 $ 33,576
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%
</TABLE>
<TABLE>
<CAPTION>
JANUARY 31,
--------------------------------------------------------------------
1998 1998
1994 1995 1996 1997 ACTUAL AS ADJUSTED(7)
------- -------- -------- -------- -------- --------------
<S> <C> <C> <C> <C> <C> <C>
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
</TABLE>
- ---------------
(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
<PAGE> 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
<PAGE> 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 from fiscal 1993 to fiscal 1997. 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
<PAGE> 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.
<TABLE>
<CAPTION>
STORE OPENING AND CLOSING DATA
------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
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
</TABLE>
Videotape Rental Expense Allocation; Change in Method. The Company's cost
of videotape rentals is primarily video depreciation and markdowns of videotape
rental products. Through fiscal 1997 the Company used 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 were 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 conducted 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
did not reflect a profit based on rental revenues over any rolling average
four-week period, the superstore's inventory for the title was reduced by the
number of copies necessary to result in pro forma profit for the period in
question. Unless the reduced copies could be transferred to another superstore,
they were revalued from their current net book value to $8.96, the Company's
average sale price for previously viewed videotapes and were transferred to the
superstore's videotape sales department. This markdown expense was taken monthly
and reflected in videotape cost of rentals. Excess copies that could be
transferred to another superstore were transferred at their current net book
value, and depreciation continued in accordance with the Company's standard
policy.
As of February 1, 1998, the Company adopted a new method of depreciation
for its rental videos. Under the new method the Company will depreciate all
rental videos on a straight-line basis to their estimated salvage value of $5.
Videos identified as base stock (including the first four copies per store of
hit titles) will be depreciated over 36 months, and new releases (hit titles
five copies and up) will be depreciated over six months. The Company believes
this accelerated methodology is appropriate for matching revenues and expenses.
The Company also believes its results of operations would not have been
materially different had the Company been on the new method in fiscal 1995,
fiscal 1996 and fiscal 1997.
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.
19
<PAGE> 21
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.
Videotape Leasing Arrangements; Returns Expense. The Company obtains its
videotape inventory through purchases from vendors and studios and, to a lesser
extent, through leasing arrangements. The Company's leasing arrangements, which
commenced in August 1997, require an initial fee per videotape and require the
Company to share revenue from the rental of such videotapes. The margin realized
by the Company from the rental of videotape inventory obtained through these
leasing arrangements generally is lower than the margin on the rental of
purchased videotape inventory. As a result, the Company's results of operations
will reflect the lower margins realized by renting the leased videotape
inventory, and the leasing arrangements may have an adverse effect on the
Company's earnings when compared with periods before which the leasing
arrangements commenced.
In connection with the implementation of the Company's current returns
process to more effectively control return-related costs, Hastings suspended
product returns to vendors during July 1997 and renewed product returns
beginning in August 1997. As a consequence, the Company incurred minimal returns
expense for July 1997, which resulted in the Company's returns expense for the
second quarter of fiscal 1997 being lower than other comparable periods.
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.
<TABLE>
<CAPTION>
FISCAL YEAR
-----------------------
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
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%
===== ===== =====
</TABLE>
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
20
<PAGE> 22
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.
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 27.7% 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." As a result of 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
increased from 4.3% 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%
21
<PAGE> 23
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 27.7% of revenues in fiscal 1996 from 26.2% 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-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
22
<PAGE> 24
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.
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
23
<PAGE> 25
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.
<TABLE>
<CAPTION>
Q1 Q2 Q3 Q4
------- ------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
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% 0.1% 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%
</TABLE>
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, it is expected that 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
24
<PAGE> 26
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.
25
<PAGE> 27
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
26
<PAGE> 28
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 1997 Communications Industry Forecast of Veronis, Suhler &
Associates, Inc. (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 5.6% from
1996, with such growth anticipated to stem from annual price increases of 1.7%
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 5.0%. 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 5.5%, 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 7.3%, 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 $430 million in 1991 to $1.8 billion in 1996, according to
the Veronis, Suhler Forecast, for a compound annual growth rate of 33.5%. 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 4.0%. Veronis, Suhler & Associates, Inc. (350 Park Avenue,
New York, New York 10022) serve as industry analysts and investment bankers for
the communications, media, publishing, broadcasting and information industries.
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."
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<PAGE> 29
BUSINESS STRATEGY
The Company's goal is to enhance its position as a leading multimedia
entertainment retailer by expanding existing stores, opening new stores in
selected markets, and offering its products through the Internet. Each element
of the Company's business strategy is designed to build consumer awareness of
the 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.
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<PAGE> 30
Low Pricing. Hastings' pricing strategy at its superstores is to offer
value to its customers by maintaining prices that are competitive with or lower
than the lowest prices charged by other retailers in the market. The Company
determines its prices on a market-by-market basis, depending on the level of
competition and other market-specific considerations. The Company believes that
its low pricing structure results in part from (i) its ability to purchase
directly from publishers, studios and manufacturers as opposed to purchasing
from distributors, (ii) its proprietary information systems that enable
management to make more precise and targeted purchases for each superstore, and
(iii) its consistent focus on maintaining low occupancy and operating costs.
EXPANSION STRATEGY
Expanded Selling Square Footage. With the relatively recent completion of
its corporate infrastructure, the Company is positioned to accelerate its growth
strategy. The Company has identified 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.
The following table sets forth the approximate amount of total Company
revenues contributed by each of the following product categories for the periods
presented:
<TABLE>
<CAPTION>
FISCAL YEAR
-------------------------------------------------------------------------------
1994 1995 1996 1997
---------------- ---------------- ---------------- ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Merchandise Revenues:
Music....................... $ 98,766 38.7% $112,061 37.5% $118,425 36.5% $131,109 36.6%
Books....................... 65,952 25.9 77,796 26.0 85,404 26.3 93,829 26.2
Video....................... 16,605 6.5 22,167 7.4 23,420 7.2 26,550 7.4
Software.................... 9,022 3.5 10,767 3.6 13,465 4.2 19,240 5.4
Other....................... 6,966 2.7 9,672 3.2 11,220 3.5 12,298 3.4
-------- ----- -------- ----- -------- ----- -------- -----
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%
</TABLE>
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<PAGE> 31
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 the Entertainment Retail Industry and Changes
in Entertainment Technology Could Adversely Affect the Company's Results of
Operations."
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<PAGE> 32
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]
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
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<PAGE> 33
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.
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
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<PAGE> 34
network which allows interchange of current information. The primary components
of the information system are as follows:
New Release Allocation. Hastings' buyers use the new release allocation
system to purchase new release products for the superstores. Buyers have the
ability within the system to utilize up to 15 different methods of forecasting
demand. By using store-specific sales history, factoring in specific market
traits, applying sales curves for similar titles or groups of products and
minimizing subjectivity and human emotion for a transaction, the system
customizes purchases for each individual superstore to satisfy customer demand.
The process provides the flexibility to allow store management to anticipate
customer needs, including tracking missed sales and factoring in regional
influences. The Company believes that the new release allocation system enables
Hastings to increase revenues by having the optimum levels and selection of
products available in each superstore at the appropriate time to satisfy
customers' entertainment needs.
Rental Videotape Purchasing System. The Company's rental videotape
purchasing system uses store specific performance on individual rental videotape
titles to anticipate customer demand for new release rental videotapes. The
primary method of purchasing analyzes the first eight weeks' performance of a
similar title and factors in the effect of such influences as seasonal trends,
box office draw and prominence of the movie's cast to customize an optimum
inventory for each individual superstore. The system also allows for the
customized purchasing of other catalog rental videotapes on an individual store
basis. The Company believes that its rental videotape purchasing system allows
Hastings to efficiently plan and stock each superstore's rental videotape
inventory, thereby improving performance and reducing exposure from excess
inventory.
Store Replenishment. Store replenishment covers three main areas for
controlling a superstore's inventory.
Selection Management. Selection management constantly analyzes
store-specific sales, traits and seasonal trends to determine title
selection and inventory levels for each individual superstore. By
forecasting annual sales of products and consolidating recommendations from
store management, the system enables the Company to identify overstocked or
understocked items to prompt required store actions and optimize inventory
levels. The system tailors each store's individual inventory to the market
utilizing over 2,000 product categories.
Model Stock Calculation/Ordering. Model stock calculation uses
store-specific sales, seasonal trends and sophisticated curve fitting to
forecast orders. It also accounts for turnaround time from a vendor or the
Hastings distribution center and tracks historical missed sales to adjust
orders to adequately fulfill sales potential. Orders are currently
calculated on a weekly basis and transmitted by all superstores to the
corporate office to establish a source vendor for the product. Currently,
over 85% of both new and replenishment orders are transmitted
electronically to vendors, thus providing speed and immediate order
acknowledgment on each purchase order.
Inventory Management. Inventory management systems interface with
other store systems and accommodate electronic receiving and returns to
maintain accurate perpetual inventory information. Cycle counting
procedures allow the Company to perform all physical inventory functions,
with the Company counting each superstore's inventory up to four times per
year. The system provides immediate feedback on any variances, and the
system provides several research tools to assist in controlling inventory.
Store Systems. Each superstore has a dedicated server within the store for
processing information connected through a wide area network. This connectivity
provides consolidation of individual transactions and allows store management
and corporate office associates easy access to the information needed to make
informed decisions. Transactions at the store are summarized and used to assist
in staff scheduling, loss prevention and inventory control. All point of sale
transactions utilize scanning technology allowing for maximum customer
efficiency at checkout. The Company also utilizes an automated system for
scheduling store management and sales associates. This system was developed to
assist in controlling personnel costs while maintaining desired levels of
customer service by preventing overscheduling or underscheduling sales, stocking
and customer service associates.
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<PAGE> 35
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:
<TABLE>
<CAPTION>
NAME OF STATE NUMBER OF STORES
------------- ----------------
<S> <C>
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
</TABLE>
The Company leases sites for all of its superstores. These sites typically
are located in pre-existing, stand-alone buildings or strip shopping centers.
The Company's primary market areas are small and medium-sized communities with
populations typically ranging from 25,000 to 150,000. The Company has developed
a systematic approach using its site selection criteria to evaluate and identify
potential sites for new superstores. Key demographic criteria for Company
superstores include community population, community and regional retail sales,
personal and household disposable income levels, education levels, median age
and proximity of colleges or universities. Other site selection factors include
current competition in the community, visibility, available parking, ease of
access and other neighbor tenants. To maintain its low occupancy costs, Hastings
typically concentrates on leasing existing locations that have been operated
previously by other retailers.
The Company typically is able to open a superstore within 120 days after
entering into a lease by utilizing cross-functional, in-house teams to manage
the individual new superstore development process. These teams provide
assistance in space planning, construction management, fixture procurement and
installation, product merchandising, information systems installation and
initial store operations. The Company operates its own fixture manufacturing
facility that produces approximately 80% of a new superstore's display fixturing
and prototypical fixture designs.
The Company actively manages its existing stores and from time to time
considers closing stores. Over the last three years, the Company has closed one
to three stores each year.
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<PAGE> 36
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:
<TABLE>
<CAPTION>
NUMBER OF STORES OPTIONS
---------------- -------
<S> <C> <C>
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
=== ===
</TABLE>
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 50,600 square feet for
office space and 100,000 square feet for the distribution center. The leases for
this property terminate in September 2003, and the Company has the option to
renew these leases 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."
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<PAGE> 37
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
36
<PAGE> 38
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.
37
<PAGE> 39
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Set forth below is information concerning the executive officers and
directors of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
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
</TABLE>
- ---------------
(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 G. Hill, Stephen S. Marmaduke and Leonard L. Berry presently hold office
as Class II Directors until the 1999 annual shareholders meeting; John H.
Marmaduke, Gaines L. Godfrey and Jeffrey G. Shrader presently hold office as
Class I Directors until the 2000 annual shareholders meeting; and Ron G.
Stegall, Peter A. Dallas and Craig R. Lentzsch presently hold office as Class
III Directors until the 2001 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.
38
<PAGE> 40
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.
39
<PAGE> 41
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.
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION(1) --------------------
NAME AND ----------------------- NUMBER OF SECURITIES
PRINCIPAL POSITION SALARY BONUS UNDERLYING OPTIONS
------------------ ---------- ---------- --------------------
<S> <C> <C> <C>
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
</TABLE>
- ---------------
(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.
40
<PAGE> 42
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.
<TABLE>
<CAPTION>
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%
---------- --------------- --------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
John H. Marmaduke.... 25,118 3.0% $15.00(6) 08/28/02 $ 104,115 $ 230,067
40,649 4.9% 13.64 08/28/07 348,669 883,595
404,720(5) 48.7% 11.07(5) 01/31/07 4,833,598 14,234,072
Phillip Hill......... 25,295 3.0% 13.64 05/22/07 216,969 549,841
35,413 4.3% 13.64 08/28/07 303,756 769,778
50,590 6.1% 14.03(7) 01/31/10 766,039 2,255,846
Dennis McGill........ 10,118 1.2% 13.64 05/22/07 86,787 219,936
20,236 2.4% 13.64 08/28/07 173,575 439,873
20,236 2.4% 14.03(7) 01/31/10 306,416 902,338
Robert A. Berman..... 30,354 3.7% 13.64 05/22/07 260,362 659,809
25,295 3.0% 17.20(7) 01/31/12 469,334 1,382,103
Michael Woods........ 15,177 1.8% 13.64 08/28/07 130,181 329,905
</TABLE>
- ---------------
(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.
41
<PAGE> 43
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.
<TABLE>
<CAPTION>
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
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
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
</TABLE>
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.
42
<PAGE> 44
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
43
<PAGE> 45
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
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<PAGE> 46
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.
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<PAGE> 47
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.
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<PAGE> 48
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 of
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<PAGE> 49
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
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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 4,037 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.
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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.
<TABLE>
<CAPTION>
SHARES OWNED SHARES SHARES OWNED
BEFORE THE OFFERING TO BE SOLD AFTER THE OFFERING
---------------------- ---------- -----------------------
NAME AND ADDRESS(1) NUMBER PERCENT(2) NUMBER PERCENT(2)
------------------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
John H. Marmaduke(3)(4)....... 4,609,427 51.5% 293,333(5) 4,316,094(4) 35.9%
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 69.1% -- 5,953,045 49.1%
</TABLE>
- ---------------
* 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 the issuance of 3,084,000 shares by the Company in connection with the
Offering and for purposes of calculating the beneficial ownership of all
directors and executive officers as a group 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.
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<PAGE> 52
(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 233 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
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<PAGE> 53
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" and "-- 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
52
<PAGE> 54
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 11,549,726 shares of
Common Stock outstanding (12,056,326 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 8,172,393 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 1,796,238 shares of Common Stock
are currently 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 (11,549,726 shares immediately following this
Offering) or (ii) the average weekly trading volume of the Company's outstanding
Common
53
<PAGE> 55
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 8,144,821 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:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- ---------
<S> <C>
Smith Barney Inc............................................
A.G. Edwards & Sons, Inc....................................
Furman Selz LLC.............................................
-----
Total.............................................
=====
</TABLE>
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
54
<PAGE> 56
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's officers and directors, and certain other
shareholders of the Company (including the Selling Shareholder) who will
collectively own 7,833,568 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
55
<PAGE> 57
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.
56
<PAGE> 58
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.
57
<PAGE> 59
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
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
</TABLE>
F-1
<PAGE> 60
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.
/s/ KPMG Peat Marwick LLP
------------------------------------
Dallas, Texas
March 20, 1998, except as to note 12,
which is as of June 4, 1998
F-2
<PAGE> 61
HASTINGS ENTERTAINMENT, INC.
BALANCE SHEETS
JANUARY 31, 1997 AND 1998
(DOLLARS IN THOUSANDS, EXCEPT PAR VALUE)
ASSETS
<TABLE>
<CAPTION>
FISCAL
--------------------
1996 1997
-------- --------
<S> <C> <C>
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
======== ========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 62
HASTINGS ENTERTAINMENT, INC.
STATEMENTS OF INCOME
YEARS ENDED JANUARY 31, 1996, 1997 AND 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR
--------------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
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
======== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 63
HASTINGS ENTERTAINMENT, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED JANUARY 31, 1996, 1997 AND 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
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
--------- ------ ---------- -------- ------- ------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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 $80,168 187,725 $(2,191) $ (8,000) $71,718
========= === ====== ======= ======= ======= ======== =======
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 64
HASTINGS ENTERTAINMENT, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED JANUARY 31, 1996, 1997 AND 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR
---------------------------------
1995 1996 1997
-------- --------- --------
<S> <C> <C> <C>
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
Deferred compensation................................ -- -- 1,040
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) 24,055
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
======== ========= ========
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE> 65
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 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
<PAGE> 66
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.
As of February 1, 1998, the Company adopted a new method of depreciation
for its rental videos. Under the new method the Company will depreciate all
rental videos on a straight-line basis to their estimated salvage value of
$5. Videos identified as base stock (including the first four copies per
store of hit titles) will be depreciated over 36 months, and new releases
(hit titles five copies and up) will be depreciated over six months. The
Company believes this accelerated methodology is appropriate for matching
revenues and expenses. The Company also believes its results of operations
would not have been materially different had the Company been on the new
method in fiscal 1995, fiscal 1996 and fiscal 1997.
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
F-8
<PAGE> 67
HASTINGS ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
(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.
F-9
<PAGE> 68
HASTINGS ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(2) MERCHANDISE INVENTORIES
Merchandise inventories consisted of the following (dollars in thousands):
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
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
======== ========
</TABLE>
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):
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
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
======== ========
</TABLE>
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.
F-10
<PAGE> 69
HASTINGS ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(4) LONG-TERM DEBT
Long-term debt and capitalized lease obligations consisted of the following
(dollars in thousands):
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
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
======= =======
</TABLE>
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. 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.
F-11
<PAGE> 70
HASTINGS ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The aggregate maturities of long-term debt and capitalized lease
obligations for years subsequent to fiscal 1997 are as follows (dollars in
thousands):
<TABLE>
<S> <C>
1998........................................................ $ 301
1999........................................................ 29,341
2000........................................................ 5,354
2001........................................................ 5,370
2002........................................................ 5,238
Thereafter.................................................. 6,008
-------
$51,612
=======
</TABLE>
(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):
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
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
======= ======= =======
</TABLE>
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):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
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
=======
</TABLE>
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
F-12
<PAGE> 71
HASTINGS ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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):
<TABLE>
<CAPTION>
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
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
====== ====== ======
</TABLE>
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):
<TABLE>
<CAPTION>
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
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
====== ====== ======
</TABLE>
F-13
<PAGE> 72
HASTINGS ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are
presented below (dollars in thousands):
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
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)
======= =======
</TABLE>
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 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.
F-14
<PAGE> 73
HASTINGS ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
A summary of information with respect to all stock option plans is as
follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
--------- ----------------
<S> <C> <C>
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
</TABLE>
F-15
<PAGE> 74
HASTINGS ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
<TABLE>
<CAPTION>
WEIGHTED-
WEIGHTED- AVERAGE
AVERAGE REMAINING
OPTIONS EXERCISE PRICE CONTRACTUAL LIFE
RANGE: $5.34 -- $6.92 --------- -------------- ----------------
<S> <C> <C> <C>
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
</TABLE>
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 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:
<TABLE>
<CAPTION>
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
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
</TABLE>
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.
F-16
<PAGE> 75
HASTINGS ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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:
<TABLE>
<CAPTION>
EXERCISE PRICE MINIMUM VALUE
------------------------ ------------------------
1995 1996 1997 1995 1996 1997
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
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
</TABLE>
The following assumptions were used in the calculation:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Expected dividend yield..................................... -- -- --
Risk-free interest rate..................................... 6.43% 6.68% 6.47%
Expected life in years...................................... 10 10 10
</TABLE>
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. 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.
Noncash operating activities in fiscal 1997 include deferred compensation
expense of $1.0 million recognized on the reduction in exercise price of
certain of the Chief Executive Officer's stock options. There were no
noncash operating activities during fiscal 1995 and 1996.
F-17
<PAGE> 76
HASTINGS ENTERTAINMENT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(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. The
leases on all stores were assigned to Camelot in connection with the
transaction. In the initial assignments, the Company was relieved from any
further liability under eight leases.
In August 1996, Camelot filed for protection from creditors under the
federal bankruptcy code. At the time Camelot filed bankruptcy, seven
additional leases had expired, and the Company believed that an additional
seven leases had been terminated or amended by agreement of Camelot and the
lessors such that the Company would have no liability, leaving a total of
20 leases on which the Company believed it might have potential liability.
In 1996, the Company recorded a loss reserve of $2.5 million for the future
lease obligations of these stores. Camelot ultimately rejected six leases
in its bankruptcy proceeding, and the bankruptcy court approved the plan in
December 1997. 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. The remaining terms of these leases
range from one to 3.5 years. 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 June 4, 1998, the effects
of which have been retroactively applied to the financial statements.
F-18
<PAGE> 77
======================================================
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
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
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.............................. 26
Management............................ 38
Certain Transactions.................. 49
Principal Shareholders and Selling
Shareholder......................... 50
Description of Capital Stock.......... 51
Shares Eligible for Future Sale....... 53
Underwriting.......................... 54
Legal Matters......................... 56
Experts............................... 56
Available Information................. 57
Index to Financial Statements......... F-1
</TABLE>
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
[HASTINGS LOGO]
------------
PROSPECTUS
, 1998
------------
SALOMON SMITH BARNEY
A.G. EDWARDS & SONS, INC.
FURMAN SELZ
======================================================
<PAGE> 78
SCHEDULE II
HASTINGS ENTERTAINMENT, INC. AND SUBSIDIARY
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
JANUARY 31, JANUARY 31, JANUARY 31,
DESCRIPTION 1998 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C>
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
======= ======= =======
</TABLE>
S-1
<PAGE> 79
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:
<TABLE>
<S> <C>
SEC Registration Fee........................................ $ 17,302
NASD Filing Fee............................................. 6,365
Nasdaq National Market Listing Fee.......................... 81,625
Transfer Agent and Registrar Fees........................... 2,500*
Blue Sky Fees (including counsel fees)...................... 2,500*
Accountants' Services and Expenses.......................... 175,000*
Legal Services.............................................. 345,000*
Printing and Engraving Fees................................. 175,000*
Miscellaneous............................................... 194,708*
----------
TOTAL............................................. $1,000,000
==========
</TABLE>
- ---------------
* Estimated
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
<PAGE> 80
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
<PAGE> 81
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 June
4, 1998.
<TABLE>
<CAPTION>
NUMBER OF PRICE PER AGGREGATE
PURCHASER/TRANSFEREE DATE OF TRANSACTION SHARES SHARE PRICE
-------------------- ------------------- --------- --------- -----------
<S> <C> <C> <C> <C>
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
</TABLE>
- ---------------
(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
<PAGE> 82
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
<C> <S>
1.1* -- Underwriting Agreement between the Company, the Selling
Shareholder and the several Underwriters.
3.1+ -- Third Restated Articles of Incorporation of the Company.
3.2+ -- Amended and Restated Bylaws of the Company.
4.1+ -- Specimen of Certificate of Common Stock of the Company.
4.2+ -- Third Restated Articles of Incorporation of the Company
(see 3.1 above).
4.3+ -- Amended and Restated Bylaws of the Company (see 3.2
above).
5.1+ -- Opinion of Locke Purnell Rain Harrell (A Professional
Corporation).
10.1+ -- Form of Indemnification Agreement by and between the
Company and its directors and executive officers.
10.2+ -- Note Purchase Agreement regarding $25,000,000 7.75%
Senior Notes Due June 13, 2003.
10.3+ -- Credit Agreement among Hastings Books, Music & Video,
Inc. and The Boatmen's National Bank of St. Louis dated
as of December 12, 1994, as amended.
10.4+ -- Hastings Amended 1996 Incentive Stock Plan.
10.5+ -- Hastings 1994 Stock Option Plan.
10.6+ -- Hastings 1991 Stock Option Plan.
10.7+ -- Hastings Entertainment, Inc. Associates' 401(k) Plan and
Trust Agreement.
10.8+ -- Hastings Employee Stock Ownership Plant Trust Agreement.
10.9+ -- Chief Executive Officer Stock Option, as amended.
10.10+ -- Corporate Officer Incentive Plan.
10.11+ -- Management Stock Purchase Plan.
10.12+ -- Management Incentive Plan.
10.13+ -- Salary Incentive Plan.
10.14+ -- Hastings Entertainment, Inc. Stock Option Plan for
Outside Directors.
10.15+ -- Lease Agreement, dated August 3, 1994, 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, as amended,
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) (included in Exhibit 5.1).
23.3* -- Consent of Veronis, Suhler & Associates Inc.
23.4* -- Consent of KPMG Peat Marwick LLP for Amendment No. 4 to
Registration Statement.
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.
</TABLE>
- ---------------
* Filed herewith.
+ Previously filed.
II-4
<PAGE> 83
(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
<PAGE> 84
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 4 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 11th day of June, 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. 4 to Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<C> <S> <C>
/s/ JOHN H. MARMADUKE* Chairman of the Board, President and June 11, 1998
- ----------------------------------------------------- Chief Executive Officer (principal
John H. Marmaduke executive officer)
/s/ DENNIS MCGILL Vice President of Finance, Chief June 11, 1998
- ----------------------------------------------------- Financial Officer, Treasurer and
Dennis McGill Secretary (principal financial
officer and principal accounting
officer)
/s/ PHILLIP HILL* Senior Vice President, Chief June 11, 1998
- ----------------------------------------------------- Operating Officer and Director
Phillip Hill
/s/ LEONARD L. BERRY* Director June 11, 1998
- -----------------------------------------------------
Leonard L. Berry
/s/ PETER A. DALLAS* Director June 11, 1998
- -----------------------------------------------------
Peter A. Dallas
/s/ GAINES L. GODFREY* Director June 11, 1998
- -----------------------------------------------------
Gaines L. Godfrey
/s/ CRAIG R. LENTZSCH* Director June 11, 1998
- -----------------------------------------------------
Craig R. Lentzsch
/s/ STEPHEN S. MARMADUKE* Director June 11, 1998
- -----------------------------------------------------
Stephen S. Marmaduke
/s/ JEFFREY G. SHRADER Director June 11, 1998
- -----------------------------------------------------
Jeffrey G. Shrader
/s/ RON G. STEGALL* Director June 11, 1998
- -----------------------------------------------------
Ron G. Stegall
</TABLE>
*By: /s/ DENNIS MCGILL
-------------------------------
Dennis McGill
Attorney-in-Fact
II-6
<PAGE> 85
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
<C> <S>
1.1* -- Underwriting Agreement between the Company, the Selling
Shareholder and the several Underwriters.
3.1+ -- Third Restated Articles of Incorporation of the Company.
3.2+ -- Amended and Restated Bylaws of the Company.
4.1+ -- Specimen of Certificate of Common Stock of the Company.
4.2+ -- Third Restated Articles of Incorporation of the Company
(see 3.1 above).
4.3+ -- Amended and Restated Bylaws of the Company (see 3.2
above).
5.1+ -- Opinion of Locke Purnell Rain Harrell (A Professional
Corporation).
10.1+ -- Form of Indemnification Agreement by and between the
Company and its directors and executive officers.
10.2+ -- Note Purchase Agreement regarding $25,000,000 7.75%
Senior Notes Due June 13, 2003.
10.3+ -- Credit Agreement among Hastings Books, Music & Video,
Inc. and The Boatmen's National Bank of St. Louis dated
as of December 12, 1994, as amended.
10.4+ -- Hastings Amended 1996 Incentive Stock Plan.
10.5+ -- Hastings 1994 Stock Option Plan.
10.6+ -- Hastings 1991 Stock Option Plan.
10.7+ -- Hastings Entertainment, Inc. Associates' 401(k) Plan and
Trust Agreement.
10.8+ -- Hastings Employee Stock Ownership Plant Trust Agreement.
10.9+ -- Chief Executive Officer Stock Option, as amended.
10.10+ -- Corporate Officer Incentive Plan.
10.11+ -- Management Stock Purchase Plan.
10.12+ -- Management Incentive Plan.
10.13+ -- Salary Incentive Plan.
10.14+ -- Hastings Entertainment, Inc. Stock Option Plan for
Outside Directors.
10.15+ -- Lease Agreement, dated August 3, 1994, 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, as amended,
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) (included in Exhibit 5.1).
23.3* -- Consent of Veronis, Suhler & Associates Inc.
23.4* -- Consent of KPMG Peat Marwick LLP for Amendment No. 4 to
Registration Statement.
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.
</TABLE>
- ---------------
* Filed herewith.
+ Previously filed.
<PAGE> 1
EXHIBIT 1.1
3,377,333 Shares
HASTINGS ENTERTAINMENT, INC.
Common Stock
UNDERWRITING AGREEMENT
June ______, 1998
SMITH BARNEY INC.
A.G. EDWARDS & SONS, INC.
FURMAN SELZ LLC
As Representatives of the Several Underwriters
c/o SMITH BARNEY INC.
388 Greenwich Street
New York, New York 10013
Dear Sirs:
Hastings Entertainment, Inc., a Texas corporation (the "Company"),
proposes to issue and sell an aggregate of 3,084,000 shares of its common stock,
$0.01 par value per share, to the several Underwriters named in Schedule II
hereto (the "Underwriters"), and the Estate of Sam Marmaduke (the "Selling
Shareholder") proposes to sell to the several Underwriters an aggregate of
293,333 shares of common stock of the Company. The Company and the Selling
Shareholder are hereinafter sometimes referred to as the "Sellers". The
Company's common stock, $0.01 par value, is hereinafter referred to as the
"Common Stock" and the 3,084,000 shares of Common Stock to be issued and sold to
the Underwriters by the Company and the 293,333 shares of Common Stock to be
sold to the Underwriters by the Selling Shareholder are hereinafter referred to
as the "Firm Shares". The Company also proposes to sell to the Underwriters,
upon the terms and conditions set forth in Section 2 hereof, up to an additional
506,600 shares (the "Additional Shares") of Common Stock. The Firm Shares and
the Additional Shares are hereinafter collectively referred to as the "Shares".
The Company and the Selling Shareholder wish to confirm as follows
their respective agreements with you (the "Representatives") and the other
several Underwriters on whose behalf you are acting, in connection with the
several purchases of the Shares by the Underwriters.
1. Registration Statement and Prospectus. The Company has prepared and
filed with the Securities and Exchange Commission (the "Commission") in
accordance with the provisions of the Securities Act of 1933, as amended, and
the rules and regulations of the Commission thereunder
<PAGE> 2
(collectively, the "Act"), a registration statement on Form S-1 under the Act
(the "registration statement"), including a prospectus subject to completion
relating to the Shares. The term "Registration Statement" as used in this
Agreement means the registration statement (including all financial schedules
and exhibits), as amended at the time it becomes effective, or, if the
registration statement became effective prior to the execution of this
Agreement, as supplemented or amended prior to the execution of this Agreement.
If it is contemplated, at the time this Agreement is executed, that a
post-effective amendment to the registration statement will be filed and must be
declared effective before the offering of the Shares may commence, the term
"Registration Statement" as used in this Agreement means the registration
statement as amended by said post-effective amendment. If an abbreviated
registration statement is prepared and filed with the Commission in accordance
with Rule 462(b) under the Act (an "Abbreviated Registration Statement"), the
term "Registration Statement" as used in this Agreement includes the Abbreviated
Registration Statement. The term "Prospectus" as used in this Agreement means
the prospectus in the form included in the Registration Statement, or, if the
prospectus included in the Registration Statement omits information in reliance
on Rule 430A under the Act and such information is included in a prospectus
filed with the Commission pursuant to Rule 424(b) under the Act, the term
"Prospectus" as used in this Agreement means the prospectus in the form included
in the Registration Statement as supplemented by the addition of the Rule 430A
information contained in the prospectus filed with the Commission pursuant to
Rule 424(b). The term "Prepricing Prospectus" as used in this Agreement means
the prospectus subject to completion in the form included in the registration
statement at the time of the initial filing of the registration statement with
the Commission, and as such prospectus shall have been amended from time to time
prior to the date of the Prospectus.
2. Agreements to Sell and Purchase. Subject to such adjustments as you
may determine in order to avoid fractional shares, the Company hereby agrees,
subject to all the terms and conditions set forth herein, to issue and sell to
each Underwriter and, upon the basis of the representations, warranties and
agreements of the Company and the Selling Shareholder herein contained and
subject to all the terms and conditions set forth herein, each Underwriter
agrees, severally and not jointly, to purchase from the Company, at a purchase
price of $[________] per Share (the "purchase price per share"), the number of
Firm Shares which bears the same proportion to the aggregate number of Firm
Shares to be issued and sold by the Company as the number of Firm Shares set
forth opposite the name of such Underwriter in Schedule I hereto (or such number
of Firm Shares increased as set forth in Section 12 hereof) bears to the
aggregate number of Firm Shares to be sold by the Company and the Selling
Shareholder.
Subject to such adjustments as you may determine in order to avoid
fractional shares, the Selling Shareholder hereby agrees, subject to all the
terms and conditions set forth herein, to sell to each Underwriter and, upon the
basis of the representations, warranties and agreements of the Company and the
Selling Shareholder herein contained and subject to all the terms and conditions
set forth herein, each Underwriter agrees, severally and not jointly, to
purchase from the Selling Shareholder at the purchase price per share that
number of Firm Shares which bears the same proportion to the aggregate number of
Firm Shares to be sold by the Selling Shareholder in Schedule I hereto as the
number of Firm Shares set forth opposite the name of such Underwriter in
Schedule II hereto (or such number of Firm Shares increased as set forth in
Section 12 hereof) bears to the aggregate number of Firm Shares to be sold by
the Company and the Selling Shareholder.
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<PAGE> 3
The Company also agrees, subject to all the terms and conditions set
forth herein, to sell to the Underwriters, and, upon the basis of the
representations, warranties and agreements of the Company herein contained and
subject to all the terms and conditions set forth herein, the Underwriters shall
have the right to purchase from the Company, at the purchase price per share,
pursuant to an option (the "over-allotment option") which may be exercised at
any time (but not more than once) prior to 9:00 P.M., New York City time, on the
30th day after the date of the Prospectus (or, if such 30th day shall be a
Saturday or Sunday or a holiday, on the next business day thereafter when the
New York Stock Exchange is open for trading), up to an aggregate of 506,600
Additional Shares from the Company. Additional Shares may be purchased only for
the purpose of covering over-allotments made in connection with the offering of
the Firm Shares. Upon any exercise of the over-allotment option, each
Underwriter, severally and not jointly, agrees to purchase from the Company the
number of Additional Shares (subject to such adjustments as you may determine in
order to avoid fractional shares) which bears the same proportion that the
number of Firm Shares set forth opposite the name of such Underwriter in
Schedule II hereto ( or such number of Firm Shares increased as set forth in
Section 12 hereof) bears to the aggregate number of Firm Shares to be sold by
the Company and the Selling Shareholder.
3. Terms of Public Offering. The Sellers have been advised by you that
the Underwriters propose to make a public offering of their respective portions
of the Shares as soon after the Registration Statement and this Agreement have
become effective as in your judgment is advisable and initially to offer the
Shares upon the terms set forth in the Prospectus.
4. Delivery of the Shares and Payment Therefor. Delivery to the
Underwriters of and payment for the Firm Shares shall be made at the office of
Locke Purnell Rain Harrell (A Professional Corporation), 2200 Ross Avenue, Suite
2200, Dallas, Texas 75201, at 10:00 A.M., New York City time, on
[______________], 1998 (the "Closing Date"). The place of closing for the Firm
Shares and the Closing Date may be varied by agreement among you, the Company
and the Selling Shareholder.
Delivery to the Underwriters of and payment for any Additional Shares
to be purchased by the Underwriters shall be made at the aforementioned office
of Locke Purnell Rain Harrell at such time on such date (the "Option Closing
Date"), which may be the same as the Closing Date but shall in no event be
earlier than the Closing Date nor earlier than two nor later than five business
days after the giving of the notice hereinafter referred to, as shall be
specified in a written notice from you on behalf of the Underwriters to the
Company and the Selling Shareholder of the Underwriters' determination to
purchase a number, specified in such notice, of Additional Shares; provided that
any Option Closing Date not occurring on the Closing Date shall occur no earlier
than the third business day following the Closing Date, unless otherwise agreed
by the parties hereto. The place of closing for any Additional Shares and the
Option Closing Date for such Shares may be varied by agreement among you, the
Company and the Selling Shareholder.
Certificates for the Firm Shares and for any Additional Shares to be
purchased hereunder shall be registered in such names and in such denominations
as you shall request prior to 9:30 A.M., New York City time, on the second
business day preceding the Closing Date or any Option Closing Date, as the case
may be. Such certificates shall be made available to you in New York City for
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<PAGE> 4
inspection and packaging not later than 9:30 A.M., New York City time, on the
business day next preceding the Closing Date or the Option Closing Date, as the
case may be. The certificates evidencing the Firm Shares and any Additional
Shares to be purchased hereunder shall be delivered to you on the Closing Date
or the Option Closing Date, as the case may be, against payment of the purchase
price therefor by wire transfer to the appropriate Seller(s) in immediately
available funds.
5. Agreements of the Company. The Company agrees with the several
Underwriters as follows:
(a) If, at the time this Agreement is executed and delivered,
it is necessary for the Registration Statement or a post-effective amendment
thereto to be declared effective before the offering of the Shares may commence,
the Company will endeavor to cause the Registration Statement or such
post-effective amendment to become effective as soon as possible and will advise
you promptly and, if requested by you, will confirm such advice in writing, when
the Registration Statement or such post-effective amendment has become
effective.
(b) The Company will advise you promptly and, if requested by
you, will confirm such advice in writing: (i) of any request by the Commission
for amendment of or a supplement to the Registration Statement, any Prepricing
Prospectus or the Prospectus or for additional information; (ii) of the issuance
by the Commission of any stop order suspending the effectiveness of the
Registration Statement or of the suspension of qualification of the Shares for
offering or sale in any jurisdiction or the initiation of any proceeding for
such purpose; (iii) within the period of time referred to in paragraph (f)
below, of any change in the Company's condition (financial or other), business,
prospects, properties, net worth or results of operations, or of the happening
of any event, which makes any statement of a material fact made in the
Registration Statement or the Prospectus (as then amended or supplemented)
untrue or which requires the making of any additions to or changes in the
Registration Statement or the Prospectus (as then amended or supplemented) in
order to state a material fact required by the Act or the regulations thereunder
to be stated therein or necessary in order to make the statements therein (in
the case of the Prospectus, in light of the circumstances under which they were
made) not misleading, or of the necessity to amend or supplement the Prospectus
(as then amended or supplemented) to comply with the Act or any other law; (iv)
when the Registration Statement and any amendments thereto become effective; (v)
of the mailing or the delivery to the Commission for filing of any amendment of
or supplement to the Registration Statement or the Prospectus; and (vi) of the
receipt of any comments from the Commission. If at any time the Commission shall
issue any stop order suspending the effectiveness of the Registration Statement,
the Company will make every reasonable effort to obtain the withdrawal of such
order at the earliest possible time.
(c) The Company will furnish to you, without charge, three
signed copies of the registration statement as originally filed with the
Commission and of each amendment thereto, including financial statements and all
exhibits thereto, and will also furnish to you, without charge, such number of
conformed copies of the registration statement as originally filed and of each
amendment thereto, but without exhibits, as you may reasonably request.
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<PAGE> 5
(d) The Company will not (i) file any amendment to the
Registration Statement or make any amendment or supplement to the Prospectus of
which you shall not previously have been advised or to which you shall
reasonably object after being so advised or (ii) so long as, in the opinion of
counsel for the Underwriters, a Prospectus is required to be delivered in
connection with sales by any Underwriter or dealer, file any information,
documents or reports pursuant to the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), without delivering a copy of such information, documents
or reports to you, as Representatives of the Underwriters, prior to or
concurrently with such filing.
(e) Prior to the execution and delivery of this Agreement, the
Company has delivered to you, without charge, in such quantities as you have
reasonably requested, copies of each form of the Prepricing Prospectus. The
Company consents to the use, in accordance with the provisions of the Act and
with the securities or Blue Sky laws of the jurisdictions in which the Shares
are offered by the several Underwriters and by dealers, prior to the date of the
Prospectus, of each Prepricing Prospectus so furnished by the Company.
(f) As soon after the execution and delivery of this Agreement
as practicable and thereafter from time to time for such period as in the
opinion of counsel for the Underwriters a prospectus is required by the Act to
be delivered in connection with sales by any Underwriter or dealer, the Company
will expeditiously deliver to each Underwriter and each dealer, without charge,
as many copies of the Prospectus (and of any amendment or supplement thereto) as
you may reasonably request. The Company consents to the use of the Prospectus
(and of any amendment or supplement thereto) in accordance with the provisions
of the Act and with the securities or Blue Sky laws of the jurisdictions in
which the Shares are offered by the several Underwriters and by all dealers to
whom Shares may be sold, both in connection with the offering and sale of the
Shares and for such period of time thereafter as the Prospectus is required by
the Act to be delivered in connection with sales by any Underwriter or dealer.
If during such period of time any event shall occur that in the judgment of the
Company or in the reasonable opinion of counsel for the Underwriters is required
to be set forth in the Prospectus (as then amended or supplemented) or should be
set forth therein in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading, or if it is necessary
to supplement or amend the Prospectus to comply with the Act or any other law,
the Company will forthwith prepare and, subject to the provisions of paragraph
(d) above, file with the Commission an appropriate supplement or amendment
thereto, and will expeditiously furnish to the Underwriters and dealers a
reasonable number of copies thereof. In the event that the Company and you, as
Representatives of the several Underwriters, agree that the Prospectus should be
amended or supplemented, the Company, if requested by you, will promptly issue a
press release announcing or disclosing the matters to be covered by the proposed
amendment or supplement.
(g) The Company will cooperate with you and with counsel for
the Underwriters in connection with the registration or qualification of the
Shares for offering and sale by the several Underwriters and by dealers under
the securities or Blue Sky laws of such jurisdictions as you may designate and
will file such consents to service of process or other documents necessary or
appropriate in order to effect such registration or qualification; provided that
in no event shall the Company be obligated to qualify to do business in any
jurisdiction where it is not now so qualified
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<PAGE> 6
or to take any action which would subject it to service of process in suits,
other than those arising out of the offering or sale of the Shares, in any
jurisdiction where it is not now so subject.
(h) The Company will make generally available to its security
holders a consolidated earnings statement, which need not be audited, covering a
twelve-month period commencing after the effective date of the Registration
Statement and ending not later than 15 months thereafter, as soon as practicable
after the end of such period, which consolidated earnings statement shall
satisfy the provisions of Section 11(a) of the Act.
(i) During the period of three years hereafter, the Company
will furnish to you (i) as soon as available, a copy of each report of the
Company mailed to stockholders or filed with the Commission, and (ii) from time
to time such other information concerning the Company as you may reasonably
request.
(j) If this Agreement shall terminate or shall be terminated
after execution pursuant to any provisions hereof (otherwise than pursuant to
the second paragraph of Section 12 hereof or by notice given by you terminating
this Agreement pursuant to Section 12 or Section 13 hereof) or if this Agreement
shall be terminated by the Underwriters because of any failure or refusal on the
part of the Company or the Selling Shareholder to comply with the terms or
fulfill any of the conditions of this Agreement, the Company agrees to reimburse
the Representatives for all reasonable out-of-pocket expenses (including fees
and expenses of counsel for the Underwriters) incurred by you in connection
herewith.
(k) The Company will apply the net proceeds from the sale of
the Shares to be sold by it hereunder substantially in accordance with the
description set forth in the Prospectus.
(l) If Rule 430A of the Act is employed, the Company will
timely file the Prospectus pursuant to Rule 424(b) under the Act and will advise
you of the time and manner of such filing.
(m) During the period of 180 days from the date of the
Prospectus, the Company will not, without your prior written consent, issue,
sell, offer or agree to sell, pledge, grant any option, right or warrant for the
sale of, or otherwise dispose of or transfer, directly or indirectly, any shares
of Common Stock or other capital stock of the Company (or any securities
convertible into or exercisable or exchangeable for shares of Common Stock or
such other capital stock) or publicly disclose the intention to make any such
disposition or transfer, except for the Company's sale of Shares hereunder, the
Company's issuance of Common Stock upon the exercise of presently outstanding
stock options, or the Company's grant of stock options or other rights under the
Amended 1996 Incentive Stock Plan, the 1991 Stock Option Plan, the 1994 Stock
Option Plan, the Hastings Entertainment, Inc. Associates' 401(k) Plan and Trust,
the Associate Stock Ownership Plan, the Corporate Officer Incentive Plan, the
Management Incentive Plan, the Salary Incentive Plan or the Management Stock
Purchase Plan to its officers, directors and employees.
(n) The Company has obtained and delivered to you agreements
executed and delivered by each of its officers and directors and such of its
shareholders as have been heretofore
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<PAGE> 7
designated by you and listed on Schedule II attached hereto all in form and
substance satisfactory to you to the effect that during the period of 180 days
from the date of the Prospectus, such persons will not, without your prior
written consent (i) issue, sell, offer or agree to sell, pledge, grant any
option, right or warrant for the sale of, or otherwise dispose of or transfer,
directly or indirectly, any shares of Common Stock or other capital stock of the
Company (or any securities convertible into or exercisable or exchangeable for
shares of Common Stock or such other capital stock) or publicly disclose the
intention to make any such disposition or transfer or (ii) enter into any
hedging, swap or other arrangement that transfers all or a portion of the
economic consequences associated with the beneficial ownership of any Common
Stock or other capital stock of the Company.
(o) Except as stated in this Agreement and in the Prepricing
Prospectus and Prospectus, the Company has not taken, nor will it take, directly
or indirectly, any action designed to or that might reasonably be expected to
cause or result in stabilization or manipulation of the price of the Common
Stock to facilitate the sale or resale of the Shares.
(p) The Company will use its best efforts to have the Common
Stock listed, subject to notice of issuance, on the Nasdaq National Market
concurrently with the effectiveness of the registration statement.
(q) During the 180-day period after the Closing Date, the
Company shall use reasonable efforts to cause any person who exercises an
option, warrant or right of any character that obligates the Company to issue
shares of Common Stock to such person to enter into an agreement substantially
similar to that required by paragraph (n) above for the remainder of such
180-day period if the exercise of such option, warrant or right results in such
person beneficially owning more than 1% of the Common Stock outstanding
immediately after the Closing Date and such person has not previously entered
into such an agreement pursuant to paragraph (n) above.
6. Agreements of the Selling Shareholder. The Selling Shareholder
agrees with the several Underwriters as follows:
(a) Such Selling Shareholder will cooperate to the extent
necessary to cause the registration statement or any post-effective amendment
thereto to become effective at the earliest possible time.
(b) Such Selling Shareholder will pay all Federal and other
taxes, if any on the transfer or sale of the Shares being sold by the Selling
Shareholder to the Underwriters.
(c) Such Selling Shareholder will do or perform all things
required to be done or performed by the Selling Shareholder prior to the Closing
Date or any Option Closing Date, as the case may be, to satisfy all conditions
precedent and applicable thereto to the delivery of the Shares pursuant to this
Agreement.
(d) Such Selling Shareholder has executed or will execute a
"lock-up" letter as provided in Section 5(n) above and, except for the sale of
Shares to the Underwriters pursuant to this Agreement, without your prior
written consent, for the period set forth in the lock-up letter will not
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<PAGE> 8
issue, sell, offer or agree to sell, pledge, grant any option, right or warrant
for the sale of, or otherwise dispose of or transfer, directly or indirectly,
any shares of Common Stock or other capital stock of the Company (or any
securities convertible into or exercisable or exchangeable for shares of Common
Stock or such other capital stock) or publicly disclose the intention to make
any such disposition or transfer.
(e) Except as stated in this Agreement and in the Prepricing
Prospectus and the Prospectus, such Selling Shareholder will not take, directly
or indirectly, any action designed to or that might reasonably be expected to
cause or result in stabilization or manipulation of the price of the Common
Stock to facilitate the sale or resale of the Shares.
(f) Such Selling Shareholder will advise you promptly, and if
requested by you, will confirm such advice in writing, within the period of time
referred to in Section 5(f) hereof, of any change in the Company's condition
(financial or other), business, prospects, properties, net worth or results of
operations or of any change in information relating to such Selling Shareholder
or the Company or any new information relating to the Company or relating to any
matter stated in the Prospectus or any amendment or supplement thereto which
comes to the attention of such Selling Shareholder that suggests that any
statement made in the Registration Statement or the Prospectus (as then amended
or supplemented, if amended or supplemented) is or may be untrue in any material
respect or that the Registration Statement or Prospectus (as then amended or
supplemented, if amended or supplemented) omits or may omit to state a material
fact or a fact necessary to be stated therein in order to make the statements
therein not misleading in any material respect, or of the necessity to amend or
supplement the Prospectus (as then amended or supplemented, if amended or
supplemented) in order to comply with the Act or any other law.
7. Representations and Warranties of the Company. The Company
represents and warrants to each Underwriter that:
(a) Each Prepricing Prospectus included as part of the
registration statement as originally filed or as part of any amendment or
supplement thereto, or filed pursuant to Rule 424 under the Act, complied when
so filed in all material respects with the provisions of the Act. The Commission
has not issued any order preventing or suspending the use of any Prepricing
Prospectus.
(b) The Registration Statement in the form in which it became
or becomes effective and also in such form as it may be when any post-effective
amendment thereto shall become effective and the prospectus and any supplement
or amendment thereto when filed with the Commission under Rule 424(b) under the
Act, complied or will comply in all material respects with the provisions of the
Act and did not or will not at any such times contain an untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein (in the case of the Prospectus, in
light of the circumstances under which they were made) not misleading, except
that this representation and warranty does not apply to statements in or
omissions from the Registration Statement or the Prospectus made in reliance
upon and in conformity with information relating to any Underwriter furnished to
the Company in writing by or on behalf of any Underwriter through you expressly
for use therein.
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<PAGE> 9
(c) All the outstanding shares of Common Stock of the Company,
including the shares of Common Stock to be sold by the Selling Shareholder, have
been duly authorized and validly issued, are fully paid and nonassessable and
are free of any preemptive or similar rights; the Shares to be issued and sold
by the Company have been duly authorized and, when issued and delivered to the
Underwriters against payment therefor in accordance with the terms hereof, will
be validly issued, fully paid and nonassessable and free of any preemptive or
similar rights; and as of the Closing Date the capital stock of the Company will
conform to the description thereof in the Registration Statement and the
Prospectus.
(d) The Company is a corporation duly organized and validly
existing in good standing under the laws of the State of Texas with full
corporate power and authority to own, lease and operate its properties and to
conduct its business as described in the Registration Statement and the
Prospectus, and is duly registered and qualified to conduct its business and is
in good standing in each jurisdiction or place where the nature of its
properties or the conduct of its business requires such registration or
qualification, except where the failure so to register or qualify does not have
a material adverse effect on the condition (financial or other), business,
properties, net worth or results of operations of the Company and the
Subsidiaries (as hereinafter defined) taken as a whole (a "Material Adverse
Effect").
(e) The Company's only subsidiaries (the "Subsidiaries") are
listed in Exhibit 21.1 to the Registration Statement. Each of the Subsidiaries
is a corporation duly organized, validly existing and in good standing in the
jurisdiction of its incorporation, with full corporate power and authority to
own, lease and operate its properties and to conduct its business as described
in the Registration Statement and the Prospectus, and is duly registered and
qualified to conduct its business and is in good standing in each jurisdiction
or place where the nature of its properties or the conduct of its business
requires such registration or qualification, except where the failure so to
register or qualify does not have a Material Adverse Effect; all the outstanding
shares of capital stock of each Subsidiary have been duly authorized and validly
issued, are fully paid and nonassessable, and are owned by the Company directly,
free and clear of any lien, adverse claim, security interest, or other
encumbrance. The Company does not own any capital stock or other ownership
interests in any corporation, partnership, limited liability company, joint
venture or other legal entity other than in the Subsidiaries.
(f) There are no legal or governmental proceedings pending or,
to the knowledge of the Company, threatened, against the Company or the
Subsidiaries, or to which the Company, the Subsidiaries or any of their
respective properties is subject, that are required to be described in the
Registration Statement or the Prospectus but are not described as required, and
there are no agreements, contracts, indentures, leases or other instruments that
are required to be described in the Registration Statement or the Prospectus or
to be filed as an exhibit to the Registration Statement that are not described
or filed as required by the Act.
(g) Neither the Company nor any of the Subsidiaries is in
violation of its certificate or articles of incorporation or by-laws, or other
organizational documents, or of any law, ordinance, administrative or
governmental rule or regulation applicable to the Company or any Subsidiary or
of any decree of any court or governmental agency or body having jurisdiction
over
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<PAGE> 10
the Company or any Subsidiary (except where any such violation or violations in
the aggregate would not have a Material Adverse Effect), or in default in the
performance of any obligation, agreement or condition contained in any bond,
debenture, note or any other evidence of indebtedness or in any material
agreement, indenture, lease or other instrument to which the Company or any
Subsidiary is a party or by which any of them or their respective properties may
be bound (except where any such default or defaults, singly or in the aggregate,
would not have a Material Adverse Effect).
(h) Neither the issuance and sale of the Shares, the
execution, delivery or performance of this Agreement by the Company nor the
consummation by the Company of the transactions contemplated hereby (i) requires
any consent, approval, authorization or other order of or registration or filing
with, any court, regulatory body, administrative agency or other governmental
body, agency or official (except such as may be required for the registration of
the Shares under the Act and the Exchange Act, compliance with the securities or
Blue Sky laws of various jurisdictions and compliance with the requirements of
the National Association of Securities Dealers, Inc. (the "NASD"), all of which
have been or will be effected in accordance with this Agreement) or conflicts or
will conflict with or constitutes or will constitute a breach of, or a default
under, the certificate or articles of incorporation or bylaws, or other
organizational documents, of the Company or any Subsidiary or (ii) conflicts or
will conflict with or constitutes or will constitute a breach of or a default
under any agreement, indenture, lease or other instrument to which the Company
or any Subsidiary is a party or by which any of them or any of their respective
properties may be bound (except for such conflicts, breaches or defaults for
which waivers or consents have been obtained), or violates or will violate any
statute, law, regulation or filing or judgment, injunction, order or decree
applicable to the Company or any Subsidiary or any of their respective
properties, or will result in the creation or imposition of any lien, charge or
encumbrance upon any property or assets of the Company or any Subsidiary
pursuant to the terms of any agreement or instrument to which any of them is a
party or by which any of them may be bound or to which any of their respective
property or assets is subject, in each case except for such conflicts, breaches,
defaults, violations or encumbrances the existence of which, or such consents,
approvals, authorizations or orders, the absence of which, would not, singly or
in the aggregate, have a Material Adverse Effect or adversely affect the power,
authority or ability of the Company to consummate the transactions contemplated
hereby in any material respect.
(i) The accountants, KPMG Peat Marwick LLP, who have certified
or shall certify the financial statements included in the Registration Statement
and the Prospectus (or any amendment or supplement thereto) are independent
public accountants as required by the Act.
(j) The financial statements, together with related schedules
and notes, included in the Registration Statement and the Prospectus (and any
amendment or supplement thereto), present fairly the consolidated financial
position, results of operations and changes in financial position of the Company
on the basis stated in the Registration Statement at the respective dates or for
the respective periods to which they apply; such statements and related
schedules and notes have been prepared in accordance with generally accepted
accounting principles consistently applied throughout the periods involved,
except as disclosed therein; and the other financial and statistical information
and data included in the Registration Statement and the Prospectus (and any
amendment
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<PAGE> 11
or supplement thereto) are accurately presented and prepared on a basis
consistent with such financial statements and the books and records of the
Company.
(k) The execution and delivery of, and the performance by the
Company of its obligations under, this Agreement have been duly and validly
authorized by the Company, and this Agreement has been duly executed and
delivered by the Company and constitutes the valid and legally binding agreement
of the Company, enforceable against the Company in accordance with its terms,
except that (i) the enforceability hereof may be limited by bankruptcy,
insolvency, reorganization, moratorium or other similar laws now or hereafter in
effect relating to creditors' rights generally, (ii) the remedy of specific
performance and other forms of equitable relief may be subject to certain
equitable defenses and to judicial discretion , and (iii) rights to indemnity
and contribution hereunder may be limited by federal or state securities laws
and the public policy underlying such laws.
(l) Except as disclosed in the Registration Statement and the
Prospectus (or any amendment or supplement thereto), subsequent to the
respective dates as of which such information is given in the Registration
Statement and the Prospectus (or any amendment or supplement thereto), neither
the Company nor any of the Subsidiaries has incurred any liability or
obligation, direct or contingent, or entered into any transaction, not in the
ordinary course of business, that is material to the Company and the
Subsidiaries taken as a whole, and there has not been any change in the capital
stock, or material increase in the short-term debt or long-term debt, of the
Company or any Subsidiary, or any material adverse change, or any development
involving or which may reasonably be expected to involve, a prospective material
adverse change, in the condition (financial or other), business, net worth or
results of operations of the Company and the Subsidiaries taken as a whole.
Except as disclosed in or contemplated by the Prospectus, since the date of the
last audited financial statements included in the Prospectus, there has been no
dividend or distribution of any kind declared, paid or made by the Company on
any class of its capital stock.
(m) Each of the Company and the Subsidiaries has good and
marketable title to all property (real and personal) described in the Prospectus
as being owned by it (with respect to which personal property is material to the
business of the Company and the Subsidiaries taken as a whole), free and clear
of all liens, claims, security interests or other encumbrances except such as
are described in the Registration Statement and the Prospectus or in a document
filed as an exhibit to the Registration Statement, and all the property
described in the Prospectus as being held under lease by the Company or any
Subsidiary is held by it under valid, subsisting and enforceable leases
(although no representation is made as to the lessors' title to such property).
(n) The Company has not distributed and, prior to the later to
occur of (i) the Closing Date and (ii) completion of the distribution of the
Shares, will not distribute any offering material in connection with the
offering and sale of the Shares other than the Registration Statement, the
Prepricing Prospectus, the Prospectus or other materials, if any, permitted by
the Act.
(o) Each of the Company and the Subsidiaries has such permits,
licenses, franchises and authorizations of governmental or regulatory
authorities ("permits") as are necessary to own its respective properties and to
conduct its business in the manner described in the
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<PAGE> 12
Prospectus, subject to such qualifications as may be set forth in the Prospectus
and except where the failure to have any permit would not have a Material
Adverse Effect; each of the Company and the Subsidiaries has fulfilled and
performed all its obligations with respect to such permits and no event has
occurred which allows, or after notice or lapse of time would allow, revocation
or termination thereof or results in any other material impairment of the rights
of the holder of any such permit, subject in each case to such qualification as
may be set forth in the Prospectus and except where the failure to so fulfill or
perform its obligations or such revocation or termination would not have a
Material Adverse Effect; and, except as described in the Prospectus, none of
such permits contains any restriction that is materially burdensome to the
Company or any Subsidiary.
(p) The Company maintains a system of internal accounting
controls sufficient to provide reasonable assurances that (i) transactions are
executed in accordance with management's general or specific authorization; (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets; (iii) access to assets is permitted only in
accordance with management's general or specific authorization; and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(q) To the Company's knowledge, neither the Company nor any of
the Subsidiaries nor any employee or agent of the Company or any of the
Subsidiaries has made any payment of funds of the Company or any Subsidiary or
received or retained any funds in violation of any law, rule or regulation,
which payment, receipt or retention of funds is of a character required to be
disclosed in the Prospectus.
(r) Each of the Company and the Subsidiaries has filed all tax
returns required to be filed, which returns are complete and correct, and
neither the Company nor any of the Subsidiaries is in default in the payment of
any taxes which were payable pursuant to said returns or any assessments with
respect thereto.
(s) No holder of any security of the Company has any right to
require registration of shares of Common Stock or any other security of the
Company because of the filing of the registration statement or consummation of
the transactions contemplated by this Agreement.
(t) The Company and the Subsidiaries own or possess all
patents, trademarks, trademark registrations, service marks, service mark
registrations, trade names, copyrights, licenses, inventions, trade secrets and
rights described in the Prospectus as being owned by them or necessary for the
conduct of their businesses, and the Company is not aware of any claim to the
contrary or any challenge by any other person to the rights of the Company or
the Subsidiaries with respect to the foregoing.
(u) The Company is not now, and after sale of the Shares to be
sold by it hereunder and application of the net proceeds from such sale as
described in the Prospectus under the caption "Use of Proceeds" will not be, an
"investment company" within the meaning of the Investment Company Act of 1940,
as amended.
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<PAGE> 13
(v) Except as disclosed in the Prospectus, neither the Company
nor any of the Subsidiaries (i) is in violation of any statute or any rule,
regulation, decision or order of any governmental agency or body or any court,
domestic or foreign, relating to the use, disposal or release of hazardous or
toxic substances or relating to the protection or restoration of the environment
or human exposure to hazardous or toxic substances (collectively, "environmental
laws"), (ii) to the knowledge of the Company, owns or operates any real property
contaminated with any substance that is subject to any environmental laws, (iii)
to the knowledge of the Company, is liable for any off-site disposal or
contamination pursuant to any environmental laws, or (iv) to the knowledge of
the Company, is subject to any claim relating to any environmental laws, which
violation, contamination, liability or claim would individually or in the
aggregate have a Material Adverse Effect; and the Company is not aware of any
pending investigation which might lead to such a claim.
8. Representations and Warranties of the Selling Shareholder. The
Selling Shareholder represents and warrants to each Underwriter that:
(a) The Selling Shareholder now has, and on the Closing Date
will have, valid and marketable title to the Shares to be sold by the Selling
Shareholder, free and clear of any lien, claim, security interest or other
encumbrance, including, without limitation, any restriction on transfer.
(b) The Selling Shareholder now has, and on the Closing Date
will have, full legal right, power and authorization, and any approval required
by law, to sell, assign transfer and deliver such Shares in the manner provided
in this Agreement, and upon delivery of and payment for such Shares hereunder,
the several Underwriters will acquire valid and marketable title to such Shares
free and clear of any lien, claim, security interest, or other encumbrance.
(c) This Agreement has been duly authorized, executed and
delivered by or on behalf of the Selling Shareholder and is a valid and binding
agreement of the Selling Shareholder enforceable against the Selling Shareholder
in accordance with its terms, except that (i) the enforceability hereof may be
limited by bankruptcy, insolvency, reorganization, moratorium or other similar
laws now or hereafter in effect relating to creditors' rights generally, (ii)
the remedy of specific performance and other forms of equitable relief may be
subject to certain equitable defenses and to judicial discretion , and (iii)
rights to indemnity and contribution hereunder may be limited by federal or
state securities laws and the public policy underlying such laws.
(d) Neither the execution and delivery of this Agreement by or
on behalf of the Selling Shareholder nor the consummation of the transactions
herein contemplated by or on behalf of the Selling Shareholder requires any
consent, approval, authorization or order of, or filing or registration with,
any court, regulatory body, administrative agency or other governmental body,
agency or official (except such as may be required under the Act, such as may be
required under state securities or Blue Sky laws governing the purchase and
distribution of the Shares or such as may be required by the NASD, all of which
have been or will be effected in accordance with this Agreement) or conflicts or
will conflict with or constitutes or will constitute a breach of, or default
under, or violates or will violate, any agreement, indenture or other instrument
to which the Selling Shareholder is a party or by which the Selling Shareholder
is or may be bound or to which any of the Selling
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<PAGE> 14
Shareholder's property or assets is subject, or any statute, law, rule,
regulation, ruling, judgment, injunction, order or decree applicable to the
Selling Shareholder or to any property or assets of the Selling Shareholder, in
each case except for such conflicts, breaches, defaults, violations or
encumbrances the existence of which, or such consents, the absence of which,
would not, singly or in the aggregate, have a Material Adverse Effect or affect
the power, authority or ability of the Selling Shareholder to consummate the
transactions contemplated by this Agreement.
(e) The Registration Statement and the Prospectus, insofar as
they relate to the Selling Shareholder, do not and will not contain an untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein (in the case of the
Prospectus, in light of the circumstances under which they were made) not
misleading.
(f) The Selling Shareholder does not have any knowledge or any
reason to believe that the Registration Statement or the Prospectus (or any
amendment or supplement thereto) contains any untrue statement of a material
fact or omits to state any material fact required to be stated therein or
necessary to make the statements therein (in the case of the Prospectus, in
light of the circumstances under which they were made) not misleading, except
that this representation and warranty does not apply to statements in or
omissions from the Registration Statement or the Prospectus made in reliance
upon and in conformity with information relating to any Underwriter furnished to
the Company in writing by or on behalf of any Underwriter through you expressly
for use therein.
(g) The Selling Shareholder has not taken, directly or
indirectly, any action designed to or that might reasonably be expected to cause
or result in stabilization or manipulation of the price of the Common Stock to
facilitate the sale or resale of the Shares, except for the lock-up arrangements
described in the Prospectus.
9. Indemnification and Contribution. (a) The Company agrees to
indemnify and hold harmless each of you and each other Underwriter and each
person, if any, who controls any Underwriter within the meaning of Section 15 of
the Act or Section 20(a) the Exchange Act from and against any and all losses,
claims, damages, liabilities and expenses (including reasonable costs of
investigation) arising out of or based upon any untrue statement or alleged
untrue statement of a material fact contained in any Prepricing Prospectus or in
the Registration Statement or the Prospectus or in any amendment or supplement
thereto, or arising out of or based upon any omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein (in the case of the Prospectus, in light of the
circumstances under which they were made) not misleading, except insofar as such
losses, claims, damages, liabilities or expenses arise out of or are based upon
any untrue statement or omission or alleged untrue statement or omission which
has been made therein or omitted therefrom in reliance upon and in conformity
with the information relating to such Underwriter furnished in writing to the
Company by or on behalf of any Underwriter through you expressly for use in
connection therewith; provided, however, that the indemnification contained in
this paragraph (a) with respect to any Prepricing Prospectus shall not inure to
the benefit of any Underwriter (or to the benefit of any person controlling such
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<PAGE> 15
Underwriter) on account of any such loss, claim, damage, liability or expense
arising from the sale of the Shares by such Underwriter to any person if a copy
of the Prospectus shall not have been delivered or sent to such person within
the time required by the Act and the regulations thereunder, and the untrue
statement or alleged untrue statement or omission or alleged omission of a
material fact contained in such Prepricing Prospectus was corrected in the
Prospectus, provided that the Company has delivered the Prospectus to the
several Underwriters in requisite quantity on a timely basis to permit such
delivery or sending. The foregoing indemnity agreement shall be in addition to
any liability which the Company may otherwise have.
(b) The Selling Shareholder agrees to indemnify and hold
harmless each of you and each other Underwriter and each person, if any, who
controls any Underwriter within the meaning of Section 15 of the Act or Section
20(a) the Exchange Act from and against any and all losses, claims, damages,
liabilities and expenses (including reasonable costs of investigation) arising
out of or based upon any untrue statement or alleged untrue statement of a
material fact contained in any Prepricing Prospectus or in the Registration
Statement or the Prospectus or in any amendment or supplement thereto, or
arising out of or based upon any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein (in the case of the Prepricing Prospectus or the Prospectus, in light of
the circumstances under which they were made) not misleading, in each case to
the extent that such untrue statement or alleged untrue statement or omission or
alleged omission was made in any Prepricing Prospectus or in the Registration
Statement or the Prospectus or in any amendment or supplement thereto, in
reliance upon and in conformity with information furnished to the Company or any
Underwriter by the Selling Shareholder specifically for use in the preparation
thereof; provided, however, that the indemnification contained in this paragraph
(b) with respect to any Prepricing Prospectus shall not inure to the benefit of
any Underwriter (or to the benefit of any person controlling such Underwriter)
on account of any such loss, claim, damage, liability or expense arising from
the sale of the Shares by such Underwriter to any person if a copy of the
Prospectus shall not have been delivered or sent to such person within the time
required by the Act and the regulations thereunder, and the untrue statement or
alleged untrue statement or omission or alleged omission of a material fact
contained in such Prepricing Prospectus was corrected in the Prospectus,
provided that the Company has delivered the Prospectus to the several
Underwriters in requisite quantity on a timely basis to permit such delivery or
sending. The foregoing indemnity agreement shall be in addition to any liability
which the Selling Shareholder may otherwise have. Notwithstanding any other
provision of this Agreement, the aggregate liability of the Selling Shareholder
pursuant to all provisions of this Agreement shall be limited to an amount equal
to the aggregate public offering price of the shares sold by such Selling
Shareholder, less commissions received by the Underwriters.
(c) If any action, suit or proceeding shall be brought against
any Underwriter or any person controlling any Underwriter in respect of which
indemnity may be sought against the Company or the Selling Shareholder, such
Underwriter or such controlling person shall promptly notify the parties against
whom indemnification is being sought (the "indemnifying parties"), and such
indemnifying parties shall assume the defense thereof, including the employment
of counsel and payment of all fees and expenses. Such Underwriter or any such
controlling person shall have the right to employ separate counsel in any such
action, suit or proceeding and to participate in the defense thereof, but the
fees and expenses of such counsel shall be at the expense of such
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<PAGE> 16
Underwriter or such controlling person unless (i) the indemnifying parties have
agreed in writing to pay such fees and expenses, (ii) the indemnifying parties
have failed to assume the defense and employ counsel, or (iii) the named parties
to any such action, suit or proceeding (including any impleaded parties) include
both such Underwriter or such controlling person and the indemnifying parties
and such Underwriter or such controlling person shall have been advised by its
counsel in writing delivered to the indemnifying parties that representation of
such indemnified party and any indemnifying party by the same counsel would be
inappropriate under applicable standards of professional conduct (whether or not
such representation by the same counsel has been proposed) due to actual or
potential differing interests between them (in which case the indemnifying party
shall not have the right to assume the defense of such action, suit or
proceeding on behalf of such Underwriter or such controlling person). It is
understood, however, that the indemnifying parties shall, in connection with any
one such action, suit or proceeding or separate but substantially similar or
related actions, suits or proceedings in the same jurisdiction arising out of
the same general allegations or circumstances, be liable for the reasonable fees
and expenses of only one separate firm of attorneys (in addition to any local
counsel) at any time for all such Underwriters and controlling persons not
having actual or potential differing interests with you or among themselves,
which firm shall be designated in writing by Smith Barney Inc., and that all
such fees and expenses shall be reimbursed as they are incurred. The
indemnifying parties shall not be liable for any settlement of any such action,
suit or proceeding effected without their written consent, but if settled with
such written consent, or if there be a final judgment for the plaintiff in any
such action, suit or proceeding, the indemnifying parties agree to indemnify and
hold harmless any Underwriter, to the extent provided in the preceding
paragraph, and any such controlling person from and against any loss, claim,
damage, liability or expense by reason of such settlement or judgment.
(d) Each Underwriter agrees, severally and not jointly, to
indemnify and hold harmless the Company, its directors, its officers who sign
the Registration Statement, the Selling Shareholder and its executor, and any
person who controls the Company or the Selling Shareholder within the meaning of
Section 15 of the Act or Section 20(a) of the Exchange Act, to the same extent
as the foregoing indemnity from the Company and the Selling Shareholder to each
Underwriter, but only with respect to (i) information relating to such
Underwriter furnished in writing by or on behalf of such Underwriter through you
expressly for use in the Registration Statement, the Prospectus or any
Prepricing Prospectus, or any amendment or supplement thereto or (ii) from the
failure of any Underwriter within the time required by the Act and the
regulations thereunder to send or deliver a copy of the Prospectus to the person
asserting any such losses, claims, damages, liabilities or expenses and the
Prospectus corrects any untrue statement or alleged untrue statement or omission
or alleged omission of a material fact contained in a Prepricing Prospectus,
unless such failure is the result of the Company not delivering copies of the
Prospectus to the several Underwriters in requisite quantity on a timely basis
to permit such sending or delivery. If any action, suit or proceeding shall be
brought against the Company, any of its directors, any such officer, the Selling
Shareholder, or any such controlling person based on the Registration Statement,
the Prospectus or any Prepricing Prospectus, or any amendment or supplement
thereto, and in respect of which indemnity may be sought against any Underwriter
pursuant to this paragraph (d), such Underwriter shall have the rights and
duties given to the Company by paragraph (c) above (except that if the Company
shall have assumed the defense thereof such Underwriter shall not be required to
do so, but may employ separate counsel therein and participate in the defense
thereof, but the fees and expenses of such
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<PAGE> 17
counsel shall be at such Underwriter's expense), and the Company, its directors,
any such officer, the Selling Shareholder, and any such controlling person shall
have the rights and duties given to the Underwriters by paragraph (c) above. The
foregoing indemnity agreement shall be in addition to any liability which any
Underwriter may otherwise have.
(e) If the indemnification provided for in this Section 9 is
unavailable to an indemnified party under paragraphs (a), (b) or (d) hereof in
respect of any losses, claims, damages, liabilities or expenses referred to
therein, then an indemnifying party, in lieu of indemnifying such indemnified
party, shall contribute to the amount paid or payable by such indemnified party
as a result of such losses, claims, damages, liabilities or expenses (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company and the Selling Shareholder on the one hand and the Underwriters on the
other hand from the offering of the Shares, or (ii) if the allocation provided
by clause (i) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of the Company and the Selling Shareholder on
the one hand and the Underwriters on the other in connection with the statements
or omissions that resulted in such losses, claims, damages, liabilities or
expenses, as well as any other relevant equitable considerations. The relative
benefits received by the Company and the Selling Shareholder on the one hand and
the Underwriters on the other hand shall be deemed to be in the same proportion
as the total net proceeds from the offering (before deducting expenses) received
by the Company and the Selling Shareholder bear to the total underwriting
discounts and commissions received by the Underwriters, in each case as set
forth in the table on the cover page of the Prospectus; provided that, in the
event that the Underwriters shall have purchased any Additional Shares
hereunder, any determination of the relative benefits received by the Company,
the Selling Shareholder or the Underwriters from the offering of the Shares
shall include the net proceeds (before deducting expenses) received by the
Company and the Selling Shareholder, and the underwriting discounts and
commissions received by the Underwriters, from the sale of such Additional
Shares, in each case computed on the basis of the respective amounts set forth
in the notes to the table on the cover page of the Prospectus. The relative
fault of the Company and the Selling Shareholder on the one hand and the
Underwriters on the other hand shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company or the Selling Shareholder on the one hand or by the
Underwriters on the other hand and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission.
(f) The Company, the Selling Shareholder and the Underwriters
agree that it would not be just and equitable if contribution pursuant to this
Section 9 were determined by a pro rata allocation (even if the Underwriters
were treated as one entity for such purpose) or by any other method of
allocation that does not take account of the equitable considerations referred
to in paragraph (e) above. The amount paid or payable by an indemnified party as
a result of the losses, claims, damages, liabilities and expenses referred to in
paragraph (e) above shall be deemed to include, subject to the limitations set
forth above, any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating any claim or defending any such action,
suit or proceeding. The obligations of the Selling Shareholder to contribute
pursuant to this Section 9 shall be subject to the limitation contained in
paragraph 9(b) above with respect to the
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maximum aggregate liability of the Selling Shareholder under or in connection
with this Agreement. Notwithstanding the provisions of this Section 9, no
Underwriter shall be required to contribute any amount in excess of the amount
by which the total price of the Shares underwritten by it and distributed to the
public exceeds the amount of any damages which such Underwriter has otherwise
been required to pay by reason of such untrue or alleged untrue statement or
omission or alleged omission. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations to contribute pursuant to this
Section 9 are several in proportion to the respective numbers of Firm Shares set
forth opposite their names in Schedule II hereto (or such numbers of Firm Shares
increased as set forth in Section 12 hereof) and not joint.
(g) No indemnifying party shall, without the prior written
consent of the indemnified party, effect any settlement of any pending or
threatened action, suit or proceeding in respect of which any indemnified party
is or could have been a party and indemnity could have been sought hereunder by
such indemnified party, unless such settlement includes an unconditional release
of such indemnified party from all liability on claims that are the subject
matter of such action, suit or proceeding.
(h) Any losses, claims, damages, liabilities or expenses for
which an indemnified party is entitled to indemnification or contribution under
this Section 9 shall be paid monthly by the indemnifying party to the
indemnified party as such losses, claims, damages, liabilities or expenses are
incurred. The indemnity and contribution agreements contained in this Section 9
and the representations and warranties of the Company and the Selling
Shareholder set forth in this Agreement shall remain operative and in full force
and effect, regardless of (i) any investigation made by or on behalf of any
Underwriter or any person controlling any Underwriter, the Company, its
directors or officers or the Selling Shareholder or any person controlling the
Company, (ii) acceptance of any Shares and payment therefor hereunder, and (iii)
any termination of this Agreement. A successor to any Underwriter or any person
controlling any Underwriter, to the Company, its directors or officers, or any
person controlling the Company or to the Selling Shareholder, its executor or
any other person controlling the Selling Shareholder, shall be entitled to the
benefits of the indemnity, contribution and reimbursement agreements contained
in this Section 9.
10. Conditions of Underwriters' Obligations. The several obligations of
the Underwriters to purchase the Firm Shares hereunder are subject to the
following conditions:
(a) If, at the time this Agreement is executed and delivered,
it is necessary for the Registration Statement or a post-effective amendment
thereto to be declared effective before the offering of the Shares may commence,
the Registration Statement or such post-effective amendment shall have become
effective not later than 5:30 P.M., New York City time, on the date hereof, or
at such later date and time as shall be consented to in writing by you, and all
filings, if any, required by Rules 424 and 430A under the Act shall have been
timely made; no stop order suspending the effectiveness of the Registration
Statement shall have been issued and no proceeding for that purpose shall have
been instituted or, to the knowledge of the Company or any Underwriter,
threatened by the Commission, and any request of the Commission for additional
information (to be included in
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the Registration Statement or the Prospectus or otherwise) shall have been
complied with to your satisfaction.
(b) Subsequent to the effective date of this Agreement, there
shall not have occurred (i) any change, or any development involving a
prospective change, in or affecting the condition (financial or other),
business, properties, net worth, or results of operations of the Company and the
Subsidiaries, taken as a whole, not contemplated by the Prospectus, which in
your opinion, as Representatives of the several Underwriters, would materially,
adversely affect the market for the Shares, or (ii) any event or development
relating to or involving the Company or any officer or director of the Company
or the Selling Shareholder which makes any statement made in the Prospectus
untrue in any material respect or which, in the reasonable opinion of the
Company and its counsel or the Underwriters and their counsel, requires the
making of any addition to or change in the Prospectus in order to state a
material fact required by the Act or any other law to be stated therein or
necessary in order to make the statements therein(in light of the circumstances
under which they were made) not misleading, if amending or supplementing the
Prospectus to reflect such event or development would, in your reasonable
opinion, as Representatives of the several Underwriters, materially adversely
affect the market for the Shares.
(c) You shall have received on the Closing Date an opinion of
Locke Purnell Rain Harrell (A Professional Corporation), counsel for the Company
and the Selling Shareholder, dated the Closing Date and addressed to you, as
Representatives of the several Underwriters, to the effect that:
(i) The Company is a corporation duly incorporated
and validly existing in good standing under the laws of the State of
Texas with full corporate power and authority to own, lease and operate
its properties and to conduct its business as described in the
Registration Statement and the Prospectus (and any amendment or
supplement thereto), and is duly qualified to conduct its business and
is in good standing in each jurisdiction or place where the nature of
its properties or the conduct of its business requires such
qualification, except where the failure so to qualify does not have a
Material Adverse Effect;
(ii) Each of the Subsidiaries is a corporation duly
organized and validly existing in good standing under the laws of the
jurisdiction of its organization, with full corporate power and
authority to own, lease, and operate its properties and to conduct its
business as described in the Registration Statement and the Prospectus
(and any amendment or supplement thereto); all the outstanding shares
of capital stock of each Subsidiary have been duly authorized and
validly issued, are fully paid and nonassessable, and are owned by the
Company directly, free and clear of any perfected security interest,
or, to the best knowledge of such counsel after reasonable inquiry, any
other security interest, lien, adverse claim, equity or other
encumbrance and, to the best knowledge of such counsel after reasonable
inquiry, the Company does not own any capital stock or other ownership
interests in any corporation, partnership, limited liability company,
joint venture or other legal entity other than in the Subsidiaries;
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(iii) The authorized capital stock of the Company is
as set forth under the caption "Capitalization" in the Prospectus; and
the authorized capital stock of the Company conforms in all material
respects as to legal matters to the description thereof contained in
the Prospectus under the caption "Description of Capital Stock";
(iv) All the shares of capital stock of the Company
outstanding prior to the issuance of the Shares to be issued and sold
by the Company hereunder have been duly authorized and validly issued
and are fully paid and nonassessable;
(v) The Shares to be issued and sold to the
Underwriters by the Company hereunder have been duly authorized and,
when issued and delivered to the Underwriters against payment therefor
in accordance with the terms hereof, will be validly issued, fully paid
and nonassessable and free of any preemptive rights or, to the best
knowledge of such counsel after reasonable inquiry, similar rights that
entitle or will entitle any person to acquire any Shares upon the
issuance thereof by the Company;
(vi) The form of certificates for the Shares conforms
to the requirements of the Texas Business Corporation Act;
(vii) The Registration Statement and all
post-effective amendments, if any, have become effective under the Act
and, to the best knowledge of such counsel after reasonable inquiry, no
stop order suspending the effectiveness of the Registration Statement
has been issued and no proceedings for that purpose are pending before
or contemplated by the Commission; and any required filing of the
Prospectus pursuant to Rule 424(b) has been made in accordance with
Rule 424(b);
(viii) The Company has the corporate power and
authority to enter into this Agreement and to issue, sell and deliver
the Shares to be sold by it to the Underwriters as provided herein, and
this Agreement has been duly authorized, executed and delivered by the
Company and is a valid, legal and binding agreement of the Company,
enforceable against the Company in accordance with its terms, except as
enforcement of rights to indemnity and contribution hereunder may be
limited by Federal or state securities laws or principles of public
policy and subject to the qualification that the enforceability of the
Company's obligations hereunder may be limited by bankruptcy,
fraudulent conveyance, insolvency, reorganization, moratorium, and
other laws now or hereafter in effect relating to or affecting
creditors' rights generally and by general equitable principles and
judicial discretion;
(ix) To the best knowledge of such counsel after
reasonable inquiry, neither the Company nor any of the Subsidiaries is
in violation of its certificate or articles of incorporation or bylaws,
or other organizational documents, or to the best knowledge of such
counsel after reasonable inquiry, is in default in the performance of
any material obligation, agreement or condition contained in any bond,
debenture, note or other evidence of indebtedness, except as may be
disclosed in the Prospectus, in each case except for such violation or
default that would not, singly or in the aggregate, have a Material
Adverse Effect
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or adversely affect the power, authority or ability of the Company to
fulfill its obligations hereunder;
(x) Neither the offer, sale or delivery of the
Shares, the execution, delivery or performance of this Agreement,
compliance by the Company with the provisions hereof, nor consummation
by the Company of the transactions contemplated hereby conflicts or
will conflict with or constitutes or will constitute a breach of, or a
default under, the certificate or articles of incorporation or bylaws,
or other organizational documents, of the Company or any Subsidiary or
any agreement, indenture, lease or other instrument to which the
Company or any Subsidiary is a party or by which any of them or their
respective properties is bound that is an exhibit to the Registration
Statement, or is known to such counsel after reasonable inquiry, or
will result in the creation or imposition of any lien, charge or
encumbrance upon any property or assets of the Company or any
Subsidiary, nor will any such action result in any violation of any
existing law or regulation, or any violation of any ruling (assuming
compliance with all applicable state securities and Blue Sky laws and
the requirements of the NASD), judgment, injunction, order or decree
known to such counsel after reasonable inquiry, applicable to the
Company, any Subsidiary or any of their respective properties, in each
case except for such conflict, breach, default, violation, lien charge
or encumbrance that would not, singly or in the aggregate, have a
Material Adverse Effect or affect the power, authority or ability of
the Company to fulfill its obligations hereunder;
(xi) To the best knowledge of such counsel after
reasonable inquiry, no consent, approval, authorization or other order
of, or registration or filing with, any court, regulatory body,
administrative agency or other governmental body, agency, or official
is required on the part of the Company (except as have been obtained
under the Act and the Exchange Act, or such as may be required under
state securities or Blue Sky laws governing the purchase and
distribution of the Shares or such as may be required by the NASD) for
the valid issuance and sale of the Shares to the Underwriters as
contemplated by this Agreement;
(xii) The Registration Statement and the Prospectus
and any supplements or amendments thereto (except for the financial
statements and the notes thereto and the schedules and other financial
and statistical data included therein, as to which such counsel need
not express any opinion) comply as to form in all material respects
with the requirements of the Act;
(xiii) To the best knowledge of such counsel after
reasonable inquiry, (A) other than as described or contemplated in the
Prospectus (or any supplement thereto), there are no legal or
governmental proceedings pending or threatened against the Company or
any Subsidiary, or to which the Company, any Subsidiary or any of their
property is subject, which are of a character required to be described
in the Registration Statement or Prospectus (or any amendment or
supplement thereto) and (B) there are no agreements, contracts,
indentures, leases or other instruments relating to the Company or the
Subsidiaries of a character that are required to be described in the
Registration Statement or the Prospectus (or any amendment or
supplement thereto) or to be filed as an exhibit to the Registration
Statement that are not described or filed as required, as the case may
be;
21
<PAGE> 22
(xiv) The statements in the Registration Statement
and Prospectus, insofar as they are descriptions of contracts,
agreements or other legal documents, or refer to statements of law or
legal conclusions, are accurate and present fairly the information
required to be shown;
(xv) To the best knowledge of such counsel after
reasonable inquiry, neither the Company nor any of the Subsidiaries is
in violation of any law, ordinance, or administrative or governmental
rule or regulation applicable to the Company or the Subsidiaries or of
any decree of any court or governmental agency or body having
jurisdiction over the Company or the Subsidiaries, which violation or
decree is of a character required to be described in the Registration
Statement and is not so described;
(xvi) This Agreement has been duly executed and
delivered by or on behalf of the Selling Shareholder and is a valid and
binding agreement of the Selling Shareholder enforceable against the
Selling Shareholder in accordance with its terms;
(xvii) To the knowledge of such counsel, the Selling
Shareholder has full legal right, power and authorization, and any
approval required by law, to sell, assign, transfer and deliver good
and marketable title to the Shares which such Selling Shareholder has
agreed to sell pursuant to this Agreement;
(xviii) The execution and delivery of this Agreement
by the Selling Shareholder and the consummation of the transactions
contemplated hereby will not conflict with, violate, result in a breach
of or constitute a default under the terms or provisions of any
agreement, indenture, mortgage or other instrument known to such
counsel to which the Selling Shareholder is a party or by which it or
any of its assets or property is bound, or any court order or decree or
any law, rule, or regulation applicable to the Selling Shareholder or
to any of the property or assets of the Selling Shareholder, in each
case except for such conflict, default, breach or violation that would
not adversely affect the power, authority or ability of the Selling
Shareholder to fulfill its obligations hereunder.
(xix) Upon the delivery of and payment for the Firm
Shares as contemplated hereby, each of the Underwriters who has
acquired Firm Shares from the Selling Shareholder without notice of any
adverse claim within the meaning of Chapter 8 of the Texas Uniform
Commercial Code will acquire the Firm Shares being sold by the Selling
Shareholder on the Closing Date, free of any adverse claim.
(xx) To the best knowledge of such counsel after
reasonable inquiry, each of the Company and the Subsidiaries has all
necessary governmental authorizations, approvals, orders, licenses,
certificates, franchises and permits of and from all governmental
regulatory officials and bodies (except where the failure so to have
any such authorizations, approvals, orders, licenses, certificates,
franchises or permits, individually or in the aggregate, would not have
a Material Adverse Effect) to own its properties and to conduct its
business as now being conducted, as described in the Prospectus;
22
<PAGE> 23
(xxi) To the best knowledge of such counsel after
reasonable inquiry, except as described in the Prospectus, there are no
outstanding options, warrants or other rights calling for the issuance
of, and such counsel does not know of any commitment, plan or
arrangement to issue, any shares of capital stock of the Company or any
security convertible into or exchangeable or exercisable for capital
stock of the Company; and
(xxii) To the best knowledge of such counsel after
reasonable inquiry, except as described in the Prospectus, there is no
holder of any security of the Company or any other person who has the
right, contractual or otherwise, to cause the Company to sell or
otherwise issue to them, or to permit them to underwrite the sale of,
the Shares or the right to have any Common Stock or other securities of
the Company included in the registration statement or the right, as a
result of the filing of the registration statement, to require
registration under the Act of any shares of Common Stock or other
securities of the Company.
In addition, such counsel shall state that, although counsel has not
undertaken, except as otherwise indicated in their opinion, to determine
independently, and does not assume any responsibility for, the accuracy,
completeness or fairness of the statements in the Registration Statement, such
counsel has participated in the preparation of the Registration Statement and
the Prospectus, including review and discussion of the contents thereof but has
made no independent check or verification thereof (relying as to materiality to
a large extent upon the statements of officers and other representatives of the
Company), and nothing has come to the attention of such counsel that has caused
it to believe that the Registration Statement at the time the Registration
Statement became effective, or the Prospectus, as of its date and as of the
Closing Date or the Option Closing Date, as the case may be, contained an untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein not misleading or
that any amendment or supplement to the Prospectus, as of its respective date,
and as of the Closing Date or the Option Closing Date, as the case may be,
contained any untrue statement of a material fact or omitted to state a material
fact necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading (it being understood
that such counsel need express no opinion with respect to the financial
statements and the notes thereto and the schedules and other financial and
statistical data included in the Registration Statement or the Prospectus).
In rendering their opinion as aforesaid, counsel may, as to factual
matters, rely upon written certificates or statements of officers of the
Company, each dated the Closing Date, and may rely upon an opinion or opinions,
each dated the Closing Date, of other counsel retained by them or the Company,
provided that (A) each such local counsel is acceptable to the Representatives
(it being agreed that the firm of Sprouse Smith & Rowley, PC is acceptable to
the Representatives, (B) such reliance is expressly authorized by each opinion
so relied upon and a copy of each such opinion is delivered to the
Representatives and is in form and substance satisfactory to them and their
counsel, and (C) counsel shall state in their opinion that they believe that
they and the Underwriters are justified in relying thereon.
(d) You shall have received on the Closing Date an opinion of
Vinson & Elkins L.L.P., counsel for the Underwriters, dated the Closing Date and
addressed to you, as
23
<PAGE> 24
Representatives of the several Underwriters, with respect to the matters
referred to in clauses (iv), (vi), (vii), (xi) and (xxiv) of the foregoing
paragraph (c) and such other related matters as you may request.
(e) You shall have received letters addressed to you, as
Representatives of the several Underwriters, and dated the date hereof and the
Closing Date from KPMG Peat Marwick LLP, independent certified public
accountants, substantially in the forms heretofore approved by you.
(f) (i) No stop order suspending the effectiveness of the
Registration Statement shall have been issued and no proceedings for that
purpose shall have been taken or, to the knowledge of the Company, shall be
contemplated by the Commission at or prior to the Closing Date; (ii) there shall
not have been any change in the capital stock of the Company nor any material
increase in the short-term or long-term debt of the Company (other than in the
ordinary course of business) from that set forth or contemplated in the
Registration Statement or the Prospectus (or any amendment or supplement
thereto); (iii) there shall not have been, since the respective dates as of
which information is given in the Registration Statement and the Prospectus (or
any amendment or supplement thereto), except as may otherwise be stated in the
Registration Statement and Prospectus (or any amendment or supplement thereto),
any material adverse change in the condition (financial or other), business,
prospects, properties, net worth or results of operations of the Company and the
Subsidiaries, taken as a whole; (iv) the Company and the Subsidiaries shall not
have any liabilities or obligations, direct or contingent (whether or not in the
ordinary course of business), that are material to the Company and the
Subsidiaries, taken as a whole, other than those reflected in the Registration
Statement or the Prospectus (or any amendment or supplement thereto); and (v)
all the representations and warranties of the Company contained in this
Agreement shall be true and correct in all material respects on and as of the
date hereof and on and as of the Closing Date as if made on and as of the
Closing Date, and you shall have received a certificate, dated the Closing Date
and signed by the chief executive officer and the chief financial officer of the
Company (or such other officers as are acceptable to you), to the effect set
forth in this Section 10(f) and in Section 10(g) hereof.
(g) The Company shall not have failed at or prior to the
Closing Date to have performed or complied in all material respects with any of
its agreements herein contained and required to be performed or complied with by
it hereunder at or prior to the Closing Date.
(h) All the representations and warranties of the Selling
Shareholder contained in this Agreement shall be true and correct in all
material respects on and as of the date hereof and on and as of the Closing Date
as if made on and as of the Closing Date, and you shall have received a
certificate, dated the Closing Date and signed by the Selling Shareholder to the
effect set forth in this Section 10(h) and in Section 10(i) hereof.
(i) The Selling Shareholder shall not have failed at or prior
to the Closing Date to have performed or complied in all material respects with
any of its agreements herein contained and required to be performed or complied
with by it hereunder at or prior to the Closing Date.
24
<PAGE> 25
(j) The Shares shall have been listed or approved for listing
upon notice of issuance on the Nasdaq National Market.
(k) The Sellers shall have furnished or caused to be furnished
to you such further certificates and documents as you shall have reasonably
requested.
All such opinions, certificates, letters and other documents will be in
compliance with the provisions hereof only if they are reasonably satisfactory
in form and substance to you and your counsel.
Any certificate or document signed by any officer of the Company or the
Selling Shareholder and delivered to you, as Representatives of the
Underwriters, or to counsel for the Underwriters, shall be deemed a
representation and warranty by the Company or the Selling Shareholder, as the
case may be, to each Underwriter as to the statements made therein.
The several obligations of the Underwriters to purchase Additional
Shares hereunder are subject to the satisfaction on and as of any Option Closing
Date of the conditions set forth in this Section 10, except that, if any Option
Closing Date is other than the Closing Date, the certificates, opinions and
letters referred to in paragraphs (c) through (h) shall be dated the Option
Closing Date in question and the opinions called for by paragraphs (c) and (d)
shall be revised to reflect the sale of Additional Shares.
11. Expenses. The Sellers (in proportion to the number of Shares being
offered by each of them, including any Additional Shares which the Underwriters
shall have elected to purchase) agree to pay the following costs and expenses
and all other costs and expenses incident to the performance by them of their
obligations hereunder: (a) the preparation, printing or reproduction, and filing
with the Commission of the Registration Statement (including financial
statements and exhibits thereto), each Prepricing Prospectus, the Prospectus,
and each amendment or supplement to any of them; (b) the printing (or
reproduction) and delivery (including postage, air freight charges and charges
for counting and packaging) of such copies of the Registration Statement, each
Prepricing Prospectus, the Prospectus, and all amendments or supplements to any
of them as may be reasonably requested for use in connection with the offering
and sale of the Shares; (c) the preparation, printing, authentication, issuance
and delivery of certificates for the Shares, including any stamp taxes in
connection with the original issuance and sale of the Shares; (d) the printing
(or reproduction) and delivery of this Agreement, the Blue Sky Memorandum and
all other agreements or documents printed (or reproduced) and delivered in
connection with the offering of the Shares; (e) the registration of the Shares
under the Exchange Act and the listing of the Shares on the Nasdaq National
Market; (f) the registration or qualification of the Shares for offer and sale
under the securities or Blue Sky laws of the several states as provided in
Section 5(g) hereof (including the reasonable fees, expenses and disbursements
of counsel for the Underwriters relating to the preparation, printing or
reproduction, and delivery of the Blue Sky Memorandum and such registration and
qualification); (g) the filing fees and the fees and expenses of counsel for the
Underwriters in connection with any filings required to be made with the
National Association of Securities Dealers, Inc.; (h) the transportation and
other expenses incurred by or on behalf of Company representatives in connection
with presentations to prospective purchasers of the Shares;
25
<PAGE> 26
and (i) the fees and expenses of the Company's accountants and the fees and
expenses of counsel (including local and special counsel) for the Company and
the Selling Shareholder.
12. Effective Date of Agreement. This Agreement shall become effective:
(a) upon the execution and delivery hereof by the parties hereto; or (b) if, at
the time this Agreement is executed and delivered, it is necessary for the
Registration Statement or a post-effective amendment thereto to be declared
effective before the offering of the Shares may commence, when notification of
the effectiveness of the Registration Statement or such post-effective amendment
has been released by the Commission. Until such time as this Agreement shall
have become effective, it may be terminated by the Company, by notifying you, or
by you, as Representatives of the several Underwriters, by notifying the Company
and the Selling Shareholder.
If any one or more of the Underwriters shall fail or refuse to purchase
Shares which it or they are obligated to purchase hereunder on the Closing Date,
and the aggregate number of Shares which such defaulting Underwriter or
Underwriters are obligated but fail or refuse to purchase is not more than
one-tenth of the aggregate number of Shares which the Underwriters are obligated
to purchase on the Closing Date, each non-defaulting Underwriter shall be
obligated, severally, in the proportion which the number of Firm Shares set
forth opposite its name in Schedule II hereto bears to the aggregate number of
Firm Shares set forth opposite the names of all non-defaulting Underwriters or
in such other proportion as you may specify in accordance with Section 20 of the
Master Agreement Among Underwriters of Smith Barney Inc., to purchase the Shares
which such defaulting Underwriter or Underwriters are obligated, but fail or
refuse, to purchase. If any one or more of the Underwriters shall fail or refuse
to purchase Shares which it or they are obligated to purchase on the Closing
Date and the aggregate number of Shares with respect to which such default
occurs is more than one-tenth of the aggregate number of Shares which the
Underwriters are obligated to purchase on the Closing Date and arrangements
satisfactory to you and the Company for the purchase of such Shares by one or
more non-defaulting Underwriters or other party or parties approved by you and
the Company are not made within 36 hours after such default, this Agreement will
terminate without liability on the part of any non-defaulting Underwriter or the
Company. In any such case which does not result in termination of this
Agreement, either you or the Company shall have the right to postpone the
Closing Date, but in no event for longer than seven days, in order that the
required changes, if any, in the Registration Statement and the Prospectus or
any other documents or arrangements may be effected. Any action taken under this
paragraph shall not relieve any defaulting Underwriter from liability in respect
of any such default of any such Underwriter under this Agreement. The term
"Underwriter" as used in this Agreement includes, for all purposes of this
Agreement, any party not listed in Schedule II hereto who, with your approval
and the approval of the Company, purchases Shares which a defaulting Underwriter
is obligated, but fails or refuses, to purchase.
Any notice under this Section 12 may be given by telegram, telecopy or
telephone but shall be subsequently confirmed by letter.
13. Termination of Agreement. This Agreement shall be subject to
termination in your absolute discretion, without liability on the part of any
Underwriter to the Company or the Selling Shareholder, by notice to the Company,
if prior to the Closing Date or any Option Closing Date (if
26
<PAGE> 27
different from the Closing Date and then only as to the Additional Shares), as
the case may be, (a) trading in securities generally on the New York Stock
Exchange, American Stock Exchange or the Nasdaq National Market shall have been
suspended or materially limited, (b) a general moratorium on commercial banking
activities in New York or Texas shall have been declared by either federal or
state authorities, or (c) there shall have occurred any outbreak or escalation
of hostilities or other international or domestic calamity, crisis or change in
political, financial or economic conditions, the effect of which on the
financial markets of the United States is such as to make it, in your judgment,
impracticable or inadvisable to commence or continue the offering of the Shares
at the offering price to the public set forth on the cover page of the
Prospectus or to enforce contracts for the resale of the Shares by the
Underwriters. Notice of such termination may be given to the Company by
telegram, telecopy or telephone and shall be subsequently confirmed by letter.
14. Information Furnished by the Underwriters. The statements set forth
in the last paragraph on the cover page, the stabilization legend on the inside
cover page, and the statements in the first, third and tenth paragraphs under
the caption "Underwriting" in any Prepricing Prospectus and in the Prospectus,
constitute the only information furnished by or on behalf of the Underwriters
through you as such information is referred to in Sections 7(b) and 9 hereof.
15. Miscellaneous. Except as otherwise provided in Sections 5, 12 and
13 hereof, notice given pursuant to any provision of this Agreement shall be in
writing and shall be delivered (a) if to the Company, at the office of the
Company at 3601 Plains Boulevard, Suite #1, Amarillo, Texas 79102, Attention:
John H. Marmaduke, President and Chief Executive Officer; or (b) if to the
Selling Shareholder, at the office of the Company at 3601 Plains Boulevard,
Suite #1, Amarillo, Texas 79102, Attention: John H. Marmaduke, Independent
Executor, or (c) if to you, as Representatives of the several Underwriters, care
of Smith Barney Inc., 388 Greenwich Street, New York, New York 10013, Attention:
Manager, Investment Banking Division.
This Agreement has been and is made solely for the benefit of the
several Underwriters, the Selling Shareholder, the Company, its directors and
officers, and the other controlling persons referred to in Section 9 hereof and
their respective successors and assigns, to the extent provided herein, and no
other person shall acquire or have any right under or by virtue of this
Agreement. Neither the term "successor" nor the term "successors and assigns" as
used in this Agreement shall include a purchaser from any Underwriter of any of
the Shares in his status as such purchaser.
16. Applicable Law; Counterparts. This Agreement shall be governed by
and construed in accordance with the laws of the State of New York applicable to
contracts made and to be performed within the State of New York.
This Agreement may be signed in various counterparts which together
constitute one and the same instrument. If signed in counterparts, this
Agreement shall not become effective unless at least one counterpart hereof
shall have been executed and delivered on behalf of each party hereto.
27
<PAGE> 28
Please confirm that the foregoing correctly sets forth the agreement
among the Company, the Selling Shareholder and the several Underwriters.
Very truly yours,
HASTINGS ENTERTAINMENT, INC.
By:
-------------------------------------
Chairman of the Board
ESTATE OF SAM MARMADUKE
By:
-------------------------------------
John H. Marmaduke
Executor
Confirmed as of the date first above
mentioned on behalf of themselves and the
other several Underwriters named
in Schedule II hereto.
SMITH BARNEY INC.
A.G. EDWARDS & SONS, INC.
As Representatives of the Several
Underwriters
By: SMITH BARNEY INC.
By:
-------------------------------------
Managing Director
28
<PAGE> 29
SCHEDULE I
HASTINGS ENTERTAINMENT, INC.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER FIRM SHARES
----------- -----------
<S> <C>
Smith Barney Inc......................................................
A.G. Edwards & Sons, Inc..............................................
Furman Selz LLC.......................................................
Total..............................................
</TABLE>
<PAGE> 30
<TABLE>
<CAPTION>
REGISTERED ACCT NAME AUTHORIZED VOTER
<S> <C>
James B Crawley & Mary Crawley TR UA Dec 26 89 James
B Crawley Rev. Trust Crawley, J. B.
Peter A Dallas Dallas, P
Dwain DePrang & Kathy DePrang Jt Ten Deprang, Dwain & Kathy
Dwain DePrang Cust Cody Paris UNIF Transfers Min Gift Tx Deprang, Dwain
Wendy Edmondson Edmondson, W.
Edwards Family Limited Partnership Edwards, G.
Enerpipe Corporation Brister, Mike
J. P. English English, J.P.
Fagan Cattle Co Fagan, P.
Richard Faust Faust, R.
Annette Ferguson Ferguson, A.
First Presbyterian Church Don Singleton, Bus. Mr.
Kira Florita Florita, K.
Tyler Dean Frazer Frazer, T. D.
Mike Garner Garner, M
Gilliland Group Family Partnership Gilliland, B.
GMHA Ltd MCA Realty Co., Gen Ptnr, Robert Cunningham, VP
Cheryl A Godfrey Godfrey, C.
Gaines Godfrey Godfrey, G.
John B. Godfrey Godfrey, J.
Robert B. Godfrey Godfrey, R.
Boatmen's Trust Co of Texas TR UA Dec 29 82 Nita J Griffin
FBO Bradley F Bacewell III Wilhite, Jim
Boatmen's Trust Co of Texas TR UA Oct 01 84 Nita J Griffin
FBO Juanita Elaine Bracewell Wilhite, Jim
Boatmen's Trust Co of Texas TR UA Aug 26 86 Nita J Griffin
FBO Mary Elizabeth Bracewell Wilhite, Jim
Nita J Griffin Griffin, N. J.
Paige S Griffin Grifffin, P.
William T. Griffin, Jr Griffin, W. T. Jr.
</TABLE>
Page 2
<PAGE> 31
<TABLE>
<CAPTION>
REGISTERED ACCT NAME AUTHORIZED VOTER
<S> <C>
Carl D. Hare Hare, Carl D.
Michael Harris & Jo Ellen Harris Jt Ten Harris, M. & JE.
James Frederick Harter Harter, J. F.
John Michael Harter Harter, J. M.
Matthew Curry Harter Harter, M.C.
Hastings Books Music & Video Inc Assoc Stock Ownership Plan & Trust Trustee
Kim Hatfield TR UA Mar 3 93 S K Hatfield Revocable Trust Hatfield, K.
Hollis Hill Hill, Hollis
Phillip Hill Hill, P.
Robert C Hill Hill, Robt. C.
Alan Hirschfield TR UA Oct 29 89 Alan J Hirschfield Living Trust Hirschfield, A.
Jerry Hopkins Hopkins, J.
Margaret Indeck Indeck, M.
JJOB Corporation Shareholder
Chris Keenan & Holly Keenan JtTen Keenan, C & H
We Three Kings King, Charles
Melba S Knowles Knowles, Melba s
KNSB Ltd NEVEX, Inc., Gen Ptner, Brent Allen, Pres.
Frank A Ladd Ladd Frank
John FrancIs Ladd Ladd, Frank
William G Landess Landess,William
Craig Lentzsch Lentzsch, C.
Craig Lentzsch Tr UA Lentzsch Special Trust 1 Lentzsch, C.
Jules & Rhoda Leshansky Leshansky,Jule & Carol
William B Longest Longest, William B
James D. Mann Mann, J.
Joseph F Mansfield Mansfield, J.
Carol A Manz Manz, C.
Boatmens First National Bank of Amarillo cust Samuel
B. Marmaduke UNIF Gift Min Act Tx Wilhite, Jim
</TABLE>
Page 3
<PAGE> 32
<TABLE>
<CAPTION>
REGISTERED ACCT NAME AUTHORIZED VOTER
<S> <C>
Boatmens First National Bank of Amarillo Tr Meredith
Marmaduke Frazer Trust 1991 Wilhite, Jim
Boatmen's Trust Co of Texas Tr UA Margaret Hart Marmaduke
Trust 1992-1 Wilhite, Jim
Boatmen's Trust Co of Texas Tr UA Owen Miles Marmaduke
Trust 1992-1 Wilhite, Jim
Boatmen's Trust Co of Texas TR UA Samuel Bennett Marmaduke
Trust 1992-1 Wilhite, Jim
Boatmen's Trust Co of Texas Tr FBO Andrea Michelle Marmaduke
Finney Trust 1991 Wilhite, Jim
Andrea Marmaduke Finney Finney, A. M.
First National Bank TR UA Quinton Marmaduke 1989 Trust Wilhite, Jim
First National Bank TR UA McCall Taylor Frazer 1991 Trust Wilhite, Jim
First National Bank TR UA Meredith Marmaduke Frazer 1991 Trust Wilhite, Jim
First National Bank Tr UA Andrea Marmaduke Finney 1991 Trust Wilhite, Jim
First National Bank Tr UA Owen Marmaduke 1989 Trust Wilhite, Jim
First National Bank Tr UA Margaret Marmaduke 1989 Trust Wilhite, Jim
First National Bank Tr UA Samuel Marmaduke 1989 Trust Wilhite, Jim
First National Bank Tr UA Aaron Finney 1992 Trust Wilhite, Jim
Meredith Marmaduke Frazer Frazer, M. M.
</TABLE>
Page 4
<PAGE> 33
<TABLE>
<CAPTION>
REGISTERED ACCT NAME AUTHORIZED VOTER
<S> <C>
John H Marmaduke Family Limited Partnership Marmaduke, J. H.
Stephen S. Marmaduke Family Limited Partnership Marmaduke, S. S.
John Marmaduke Ex Est Sam Marmaduke Marmaduke, J. H. EX
John H Marmaduke Marmaduke, J. H.
Martha A Marmaduke Marmaduke, M. (Marty)
Margaret Hart Marmaduke Marmaduke, M. Hart (Meg)
Owens Miles Marmaduke Marmaduke, O. M
Shelley R. Marmaduke Marmaduke, S.
Stephen S. Marmaduke Marmaduke, S. S.
Stanley Marsh 3 Special Trust Marsh, S.
Stanley Marsh & Wendy Marsh Jt Ten Marsh, S. & W.
Stanley Marsh 3 - Dorchester Marsh 3, S.
Rachel Marie Massey Massey, Rachel
Jerry McClenagan & Martha McClenagan Jt Ten McClenagan, J & M
Dennis McGill & Julie McGill Jt Ten McGill, D & J
Dorothy McGowen McGowen, D
Jerry McKee McKee, J
Ann McNeer McNeer, A
Nancy McNeer McNeer, N.
Walter NcNeer Cust Amy McNeer UNIF Transfers Min Act TX McNeer, W. Cust
Walter McNeer Cust Kate McNeer UNIF Transfers Min Act TX McNeer, W. Cust
Walter McNeer Cust Sara McNeer UNIF Transfers Min Act TX McNeer, W. Cust
Walter NcNeer McNeer, W.
Ron McVean McVean
Howard Miller Miller, Howard
C. W. Millikin & Margaret Millikin Jt Ten Millikin, Bill & Margaret
</TABLE>
Page 5
<PAGE> 34
<TABLE>
<CAPTION>
REGISTERED ACCT NAME AUTHORIZED VOTER
<S> <C>
Merrill Lynch Pierce Fenner & Smith Cust Helen Morris Moore IRA Moore, Helen
Boatmen's Trust Co of Texas FBO Roy Wayne Moore Rollover IRA Moore, Roy Wayne
Merrill Lynch Pierce Fenner & Smith Cust Roy Wayne Moore IRA MLPFS
Wayne Moore Tr UA Dec 2 94 Wayne Moore Trust Moore, W. TTEE
Morris G Moreland Moreland, Morris G.
William J Morey Morey, William J
John Mozola Mozola, J.
A Curtis Neal Neal, A. Curtis
Frank Nelson Nelson, F.
William Nelson Nelson, William Rod
NMMI Foundation Executive Dir.
Dan M Novak Novak, D. M.
Craig Odanovich & Cathie Odanovich Jt Ten Odanovich, C. & C.
Harold Okinow Okinow, H.
Jane Ostrowski Ostrowski, J.
Virgil A Pate Pate, V. A.
Betty Patterson Patterson, Betty
Eddie L Perry Perry, E. L.
Ronald L Perry Perry, R.
Harry Phillips Phillips, H.
Pierce Energy Corporation Pierce, B. W.
Brenda Pierson-Kuykendall Pierson-Kuykendall, B
Plains & Co BFNB
Playa Petroleum Barton, B.
Don Powell Powell, D.
Rogers Commercial Properties Profit Sharing Plan & Trust Rogers, TTEE, Carroll W.
Theresa Rooney Rooney, Theresa
John B Welch TR UA Dec 22 95 Laurie A Schneider Trust 1995 Welch, John
John B Welch TR UA Dec 22 95 Molly C Schneider Trust 1995 Welch, John
</TABLE>
Page 6
<PAGE> 35
<TABLE>
<CAPTION>
REGISTERED ACCT NAME AUTHORIZED VOTER
<S> <C>
Robert Schneider Schneider, R
Robert C. Schneider Tr UA Oct 23 94 Laurie A Schneider Trust Schneider, R. C.
Robert C. Schneider Tr UA Jun 1 96 Molly C Schneider Trust Schneider, R. C.
Boatmens Trust Co of Texas FBO Maurice Schooler Defined
Benefit Plan Trustee
Sherry Scoggins Scoggins, S
Goldman Sachs & Co FBO Edward Scott IRA Goldman Sachs
Edward Scott Scott, E.
Edgar Sellers Sellers, E.
Carol A Sharber Sharber, Carol
J Malcolm Shelton Special Trust Shelton, J. Malcolm
Greg L Shrader & Laura T Shrader Jt Ten Shrader, Greg & Laura
Merrill Lynch Pierce Fenner & Smith, Jeff Shrader, IRA
Merrill Lynch Pierce Fenner & Smith Cust Devonian Shale Joint
Venture Defined Benefit Plan FBO Jeffrey Shrader Shrader, Jeffrey
Jeff Shrader Shrader, J.
Mark J Shrader & Arleen C. Shrader Jt Ten Shrader, Mark & Arleen
Scott Eugene Shrader & Carrie Sibley Shrader Jt Ten Shrader, Scott & Carrie
Jack Sisemore Tr UA Jul 15 93 Sisemore Family Trust B Sisemore, Jack
Jerry Smith Smith, J.
A C Smith Tr UA Smith, A.C.
John Sobieski Sobieski, J.
Roxanne Conant-Spradlin Conant-Spradlin, R
Spradlin Investments Spradlin, S.
(p/o Spradlin Inv) Dave
St. Mary's Church Smyer, Monsignor
Stegall Limited Partnership Stegall, R.
</TABLE>
Page 7
<PAGE> 36
<TABLE>
<CAPTION>
REGISTERED ACCT NAME AUTHORIZED VOTER
<S> <C>
Merrill Lynch Pierce Fenner & Smith Cust Julie Storm IRA Storm, Julie
Merrill Lynch Pierce Fenner & Smith Cust Chris Storm IRA Storm, Chris
Chris Storm Tr UA Nov 18 85 Andrew M Storm Trust Storm, Chris
Julie P Storm Storm, J. P.
Chris Storm TR UA Nov 18 85 Christopher Storm Jr Trust Storm, Chris
Chris Storm Tr UA Nov 18 85 George M Storm Trust Storm, Chris
Danny Striley Striley, D.
Merrill Lynch Pierce Fenner & Smith Cust FBO Wayne P
Sturdivant IRA MLPFS
Jeff E Tankersley Tankersley, J
Tankersley Family Limited Partnership Tankersley, J.
Michael Terk Terk, Michael
Renee G. Ticknor Ticknor, R.
Toothacres Partnership Houston, J. DDS
Sandra Vandivere Vandivere, S.
Alan VanOngevalle VanOngevalle, Alan
Robert Volpe Volpe, R.
Richard Ware Ware, Richard
Diane Weidling Weidling, Diane
John Richard Weidling Weidling, John R
David L Weir Weir, D. L.
John B Welch & Debra Welch Jt Ten Welch, John B & Debra
John G Whinery Whinery, Jr., J.
John Whinery Sr. Whinery, Sr., J.
Thomas Van Whinery TR UA Jun 14 95 Andrew David Whinery Trust 1995 Whinery, Thomas
Thomas Van Whinery TR UA Jun 14 95 Chester John Ostrowski Trust Whinery, Thomas
</TABLE>
Page 8
<PAGE> 37
<TABLE>
<CAPTION>
REGISTERED ACCT NAME AUTHORIZED VOTER
<S> <C>
Thomas Van Whinery TR UA Jun 14 95 Claire Ann Whinery Trust 1995 Whinery, Thomas
Thomas Van Whinery TR UA Jun 14 95 Graham David Ostrowski Trust 1995 Whinery, Thomas
Thomas Van Whinery TR UA Jun 14 95 Lisa Kate Whinery Trust 1995 Whinery, Thomas
Thomas Van Whinery TR UA Jun 14 95 Matthew John Whinery Trust 1995 Whinery, Thomas
Thomas Van Whinery TR UA Jun 14 95 Sara Jane Ostrowski Trust 1995 Whinery, Thomas
Tom V Whinery Whinery, T. V.
Mark White White, M.
Barbara Harter Whitton Whitton, B. H.
James G F Whitton Jr Whitton, J. F.
Richard Williamson Williamson, C.
Marilyn McCrary Wilson Wilson, M. McC
Kelly Wood Wood, Kelly
Michael J Woods Woods, M. J.
Hastings Entertainment, Inc. - Tsy McGill, D
Merrill Lynch Pierce Fenner & Smith Cust C. Taylor Yoakam IRA Yoakam, C. Taylor
</TABLE>
Page 9
<PAGE> 1
EXHIBIT 10.16
WAREHOUSE LEASE AGREEMENT
By and Between
Omni Capital Corporation, Landlord,
and Hastings Books, Music & Video, Inc., Tenant
<PAGE> 2
WAREHOUSE
LEASE AGREEMENT
<TABLE>
<S> <C>
TERMS AND DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
LEASE CLAUSES AND COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
A. Tenant's Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1. Lease of Premises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2. Compliance with Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
3. Minimum Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
4. Utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
5. Additional Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
6. Taxes on Tenant's Personal Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
7. Tenant's Property Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
8. Tenant's Liability Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
9. Repair and Maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
10. Tenant Finish . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
11. Indemnification by Tenant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
12. Environmental . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
13. Title III of the Americans with Disabilities Act . . . . . . . . . . . . . . . . . . . . . . . . . . 4
14. Estoppel Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
15. Cleaning and Snow Removal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
B. Landlord's Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1. Lease of Premises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2. Use of the Common Area . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
3. Compliance with Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
4. Quiet Enjoyment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
5. Utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
6. Maintenance of the Common Area . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
7. Common Area Maintenance Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
8. Real Estate Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
9. Landlord's Property Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
10. Landlord's Liability Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
11. Indemnification by Landlord . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
12. Delivery of the Premises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
13. Environmental . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
14. Title III of the Americans with Disabilities Act . . . . . . . . . . . . . . . . . . . . . . . . . . 6
15. Maintenance and Repairs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
16. Estoppel Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
17. Right to Protest Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
C. Landlord and Tenant agree to the following: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
1. Use . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2. Trade Name . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
3. Parking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
4. Ingress and Egress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
5. Signs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
6. Alterations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
7. Removal of Tenant's Personal Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
8. Waiver of Subrogation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
9. Inspection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
10. Condemnation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
11. Casualty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
12. Default by Landlord/Events . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
</TABLE>
-i-
<PAGE> 3
<TABLE>
<S> <C> <C>
13. Default by Landlord/Tenant's Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
14. Default by Tenant/Events . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
15. Default by Tenant/Landlord's Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
16. Assignment and Subletting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
17. Subordination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
18. Alternative Dispute Resolution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
19. Annual Statements/Prorations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
20. Emergency Repairs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
21. Commencement Date Letter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
22. Options to Extend . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
23. Blanket Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
24. Zoning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
25. Curb Cuts/Dock Doors/Connecting Door . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
26. Shed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
27. Roof Maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
28. Preferential Right to Purchase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
29. Additional HVAC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
D. Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
(1) Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
(2) Non-Waiver/Cumulative Remedies/Mitigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
(3) Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
(4) Choice of Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
(5) Lease Memorandum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
(6) Binding Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
(7) Holdover . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
(8) Attorney's Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
(9) Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
(10) Partial Invalidity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
(11) Relationship of the Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
(12) Waiver of Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
(13) Brokers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
(14) Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
(15) Prior Termination of this Lease . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
(16) Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
(17) Number/Gender . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
(18) Waiver of DTPA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
</TABLE>
-ii-
<PAGE> 4
WAREHOUSE
LEASE AGREEMENT
TERMS AND DEFINITIONS
Date: August 3, 1994
Landlord: Omni Capital Corporation
Landlord's Address: 1715 West 58th
Amarillo, Texas 79110
Tenant: Hastings Books, Music & Video, Inc., a Texas corporation
Tenant's Address: P.O. Box 35350
Amarillo, Texas 79120-5350
Tenant's Trade Name: Hastings
Premises: Approximately 100,000 square feet in the Shopping Center. The
Premises are outlined in red on Exhibit "A". The address of
the Premises is ______________________________.
Shopping Center: That portion of Sunset Center in Amarillo, Potter
County, Texas, described on Exhibit "B".
Minimum Rent: (a) For the eighteen (18) month period beginning on
the Commencement Date and ending on the last day of
the eighteenth (18th) month following the
Commencement Date - $90,000.00 per annum, payable in
monthly installments of $7,500.00 each.
(b) For the eighteen (18) month period beginning on
the first day of the nineteenth (19th) month
following the Commencement Date and ending on the
last day of the thirty-sixth (36th) month following
the Commencement Date - $180,000.00 per annum,
payable in monthly installments of $15,000.00 each.
Additional Rent: Tenant's Proportionate Share of the real estate taxes
on the Shopping Center, Landlord's premiums for
property insurance on Landlord's improvements in the
Shopping Center, and Landlord's premiums for
liability insurance on the Common Area, for each
calendar year or partial calendar year during the
Term of this Lease.
Initial Term: Thirty-six (36) months beginning on the Commencement
Date.
"AFFILIATE" means any person or entity that, directly or indirectly, controls,
is controlled is under common control with, Tenant.
"BUILDING" means the building in the Shopping Center that contains the
Premises.
"COMMENCEMENT DATE" means the earlier of (a) October 1, 1994, or (b) the date
Tenant begins operating in the Premises; provided, however, if prior to October
1, 1994, Tenant begins operating in the Premises on a day other than the first
day of a month, the Commencement Date shall be the first day of the month
following the date Tenant begins operating in the Premises.
"COMMON AREA" means the areas in the Shopping Center that are available for the
common use of Tenant and the other tenants of the Shopping Center, including
(without limitation) the parking areas, sidewalks, driveways, loading areas,
and service areas.
<PAGE> 5
"COMMON AREA MAINTENANCE EXPENSES" means the costs and expenses of operating,
and maintaining the Common Area.
"COMMON AREA MAINTENANCE RECORDS" means the records of the Common Area
Maintenance Expenses maintained by Landlord.
"DELIVERY DATE" means August 4, 1994.
"ENVIRONMENTAL LAWS" means all federal, state, and local environmental
statutes, ordinances, rules, regulations, and orders.
"LEASE YEAR" means a period of twelve (12) full consecutive months. The first
Lease Year shall begin on the Commencement Date. Each successive Lease Year
shall begin on the anniversary of the Commencement Date.
"LIABILITY INSURANCE PAYMENTS" means Tenant's monthly payments to Landlord in
an amount equal to one-twelfth (1/12th) of Tenant's Proportionate Share of
Landlord's premiums for liability insurance on the Common Area for each
calendar year as reasonably estimated by Landlord based upon the actual
liability insurance premiums for the prior calendar year. The Liability
Insurance Payments during the first partial calendar year shall be $_________
per month. The Liability Insurance Payments shall be adjusted within thirty
(30) days after the end of each calendar year or partial calendar year.
"PROPERTY INSURANCE PAYMENTS" means Tenant's monthly payments to Landlord in an
amount equal to one-twelfth (1/12th) of Tenant's Proportionate Share of
Landlord's premiums for property insurance on Landlord's improvements in the
Shopping Center for each calendar year as reasonably estimated by Landlord
based upon the actual property insurance premiums for the prior calendar year.
The Property Insurance Payments during the first partial calendar year shall be
$_ per month. The Property Insurance Payments shall be adjusted within thirty
(30) days after the end of each calendar year or partial calendar year.
"PROPORTIONATE SHARE" means a fraction, the numerator of which shall be the
number of square feet in the Premises, and the denominator of which shall be
the number of leasable square feet in the Shopping Center.
"RENT" means the Minimum Rent and Additional Rent.
"TAX PAYMENTS" means Tenant's monthly payments to Landlord in an amount equal
to one-twelfth (1/12th) of Tenant's Proportionate Share of the real estate
taxes on the Shopping Center for each calendar year as reasonably estimated by
Landlord based upon the actual real estate taxes for the prior calendar year.
The Tax Payments during the first partial calendar year shall be $_________ per
month. The Tax Payments shall be adjusted within thirty (30) days after the
end of each calendar year or partial calendar year.
"TERM OF THIS LEASE" means the Initial Term and any extended terms exercised in
accordance with this Lease.
LEASE CLAUSES AND COVENANTS
A. TENANT'S AGREEMENTS:
1. LEASE OF PREMISES. Upon and subject to the provisions of this
Lease, Tenant leases the Premises for the Initial Term and any extended terms
exercised in accordance with this Lease.
-2-
<PAGE> 6
2. COMPLIANCE WITH LAWS. Except as otherwise provided in this
Lease, Tenant agrees to comply with all laws, ordinances, rules, regulations,
and orders of any governmental authority that are applicable to Tenant's
specific use of the Premises; provided, however, Tenant shall not be obligated
to make any structural alterations, improvements, or additions to the Premises.
3. MINIMUM RENT. Except as otherwise provided in this Lease,
Tenant agrees to make monthly Minimum Rent payments to Landlord in advance on
the first day of each month beginning on the Commencement Date. If prior to
October 1, 1994, Tenant begins operating in the Premises on a day other than
the first day of a month, Tenant agrees to pay Minimum Rent for any partial
month preceding the Commencement Date on the basis of 1/30th of the first
month's Minimum Rent for each day in the partial month.
4. UTILITIES. Tenant agrees to pay all charges for water,
telephone, electricity, gas, and other utilities used by Tenant in the
Premises.
5. ADDITIONAL RENT. Except as otherwise provided in this Lease,
Tenant agrees to pay the Additional Rent that is due for each calendar year or
partial calendar year by making a Tax Payment, Property Insurance Payment, and
Liability Insurance Payment, with each payment of Minimum Rent.
6. TAXES ON TENANT'S PERSONAL PROPERTY. Tenant agrees to pay all
taxes on Tenant's personal property in the Premises.
7. TENANT'S PROPERTY INSURANCE. Tenant agrees to keep its
personal property in the Premises insured against loss or damage by fire and
such other risks as are from time to time included in broad form extended
coverage insurance.
8. TENANT'S LIABILITY INSURANCE. Tenant agrees to maintain a
commercial general liability insurance policy covering the Premises, under
which the Landlord is named as an additional insured. A duplicate original or
a certificate of the policy shall be delivered to Landlord within ten (10) days
after Landlord's written request therefor. Each policy shall (a) contain a
provision that the underwriter will give Landlord at least thirty (30) days
prior written notice of any cancellation or lapse of the insurance, and (b)
provide (i) bodily injury and property damage coverage of at least
$1,000,000.00 for any one occurrence, and (ii) general aggregate coverage of at
least $2,000,000.00.
9. REPAIR AND MAINTENANCE. Except as otherwise provided in this
Lease and for normal wear and tear, Tenant agrees to maintain (a) the interior
of the Premises, (b) the electrical, plumbing, and sewage systems in the
Premises, (c) the doors and plate glass in the Premises, (d) the heating,
ventilating, and air conditioning systems exclusively servicing the Premises,
and (e) Tenant's signs in the Shopping Center, in good order, condition, and
repair at Tenant's cost and expense.
10. TENANT FINISH. Promptly after the Premises are delivered to
Tenant, Tenant shall (a) finish the Premises, and (b) equip the Premises for
the operation of Tenant's business, subject to delays resulting from strikes or
other labor disputes, weather, or other causes beyond the reasonable control of
Tenant. All alterations, improvements, and additions made by Tenant in
finishing the Premises shall (a) be made in accordance with all applicable laws
and in a good and workmanlike manner, and (b) remain the property of Tenant
until the expiration or termination of this Lease. At the expiration or
termination of this Lease, Tenant shall not be required to remove any
alterations, or improvements, or additions made by Tenant in finishing the
Premises or to restore the Premises to the condition in which the Premises
existed on the Delivery Date.
-3-
<PAGE> 7
11. INDEMNIFICATION BY TENANT. Tenant agrees to indemnify and
hold Landlord harmless from and against the costs, claims, expenses (including,
without limitation, reasonable attorneys' fees), or liabilities resulting from
any injury to or death of any person or persons or any damage to property that
(a) occurs in the Premises, and (b) arises from the negligence or willful
misconduct of Tenant or Tenant's employees or agents.
12. ENVIRONMENTAL. Tenant agrees to comply in all material
respects with all applicable Environmental Laws relating to the Premises.
Tenant agrees to indemnify and hold Landlord harmless from and against any
costs, claims, expenses (including, without limitation, reasonable attorneys'
fees), or liabilities arising from or related to any breach or alleged breach
of Tenant's agreement set forth in this paragraph.
13. TITLE III OF THE AMERICANS WITH DISABILITIES ACT. Tenant
agrees to comply with Title III of the Americans with Disabilities Act and the
rules and regulations issued thereunder, insofar as they apply to the Premises;
provided, however, Tenant shall not be obligated to make any structural
alterations, improvements, or additions to the Premises. Tenant agrees to
indemnify and hold Landlord harmless from and against any costs, claims,
expenses (including, without limitation, reasonable attorneys' fees), or
liabilities arising from or related to any breach or alleged breach of Tenant's
agreement set forth in this paragraph.
14. ESTOPPEL CERTIFICATES. On not less than twenty (20) days
prior written notice from Landlord, Tenant agrees to execute and deliver to
Landlord a statement in writing (a) certifying that this Lease is unmodified
and is in full force and effect (or if modified, stating the nature of the
modification and certifying that this Lease, as modified, is in full force and
effect), (b) noting the dates to which the Rent is paid in advance, if any, and
(c) acknowledging there are not, to the best of Tenant's knowledge, any uncured
defaults on the part of Landlord, or specifying the defaults if any are
claimed.
15. CLEANING AND SNOW REMOVAL. Tenant agrees to (a) keep the area
outlined in blue on Exhibit "A" clean, and (b) remove any snow in the area
outlined in blue on Exhibit "A" that it deems necessary in order to conduct
business in the Premises. Tenant shall remove the snow in a manner that will
not unreasonably interfere with the use of the Common Area by the other tenants
of the Shopping Center.
B. LANDLORD'S AGREEMENTS:
1. LEASE OF PREMISES. Upon and subject to the provisions of this
Lease, Landlord leases the Premises to Tenant for the Initial Term and any
extended terms exercised in accordance with this Lease.
2. USE OF THE COMMON AREA. Landlord grants to Tenant the
non-exclusive right to use the Common Area; provided, however, Tenant shall
have the exclusive use of those portions of the Common Area to the rear of the
Premises that are reasonably necessary for loading areas, trash enclosures, and
other service facilities.
3. COMPLIANCE WITH LAWS. Except as otherwise provided in this
Lease, Landlord agrees to comply with all laws, ordinances, rules, regulations,
and orders of any governmental authority that are applicable to the use,
condition, and occupancy of the Shopping Center, including (without limitation)
making any required structural alterations, improvements, or additions to the
Premises.
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4. QUIET ENJOYMENT. Landlord agrees to provide quiet and
exclusive enjoyment of the Premises to Tenant without any claim or interference
by Landlord or anyone claiming through Landlord.
5. UTILITIES. Landlord agrees to (a) make all utilities
available to the Premises, and (b) have the electricity used by Tenant in the
Premises separately metered.
6. MAINTENANCE OF THE COMMON AREA.
(a) Landlord agrees (i) to operate the Common Area in an
efficient manner, (ii) to maintain the Common Area in good order, condition,
and repair, (iii) to provide, adequate lighting in the Common Area, and (iv)
not to discriminate against Tenant in Tenant's use of the Common Area.
Notwithstanding anything contained in this paragraph to the contrary, Landlord
shall not be obligated to clean or remove snow in the area outlined in blue on
Exhibit "A".
(b) All parking areas, driveways, loading areas, and
service areas in the Common Area shall be (i) clearly marked with painted
lines, and (ii) repainted as and when required.
7. COMMON AREA MAINTENANCE EXPENSES. Except as otherwise
provided in this Lease, Landlord agrees to pay all Common Area Maintenance
Expenses.
8. REAL ESTATE TAXES. Landlord agrees to pay all real estate
taxes and assessments on the Shopping Center. Notwithstanding anything
contained in this paragraph to the contrary, Tenant shall pay its Proportionate
Share of the real estate taxes on the Shopping Center as a part of the
Additional Rent.
9. LANDLORD'S PROPERTY INSURANCE. Landlord agrees to keep
Landlord's improvements in the Shopping Center (including, without limitation,
the Building) insured against loss or damage by fire and such other risks as
are from time to time included in broad form extended coverage insurance, in an
amount equal to the replacement cost thereof. A duplicate original or a
certificate of the policy shall be delivered to Tenant within ten (10) days
after Tenant's written request therefor. Each policy shall contain a provision
that the underwriter will give Tenant at least thirty (30) days prior written
notice of any cancellation or lapse of the insurance.
10. LANDLORD'S LIABILITY INSURANCE. Landlord agrees to maintain a
commercial general liability insurance policy covering the Common Area, under
which the Tenant is named as an additional insured. A duplicate original or a
certificate of the policy shall be delivered to Tenant within ten (10) days
after Tenant's written request therefor. Each policy shall (a) contain a
provision that the underwriter will give Tenant at least thirty (30) days prior
written notice of any cancellation or lapse of the insurance, and (b) provide
(i) bodily injury and property damage coverage of at least $1,000,000.00 for
any one occurrence, and (ii) general aggregate coverage of at least
$2,000,000.00.
11. INDEMNIFICATION BY LANDLORD. Landlord agrees to indemnify and
hold Tenant and Tenant's shareholders, officers, directors, employees, and
agents harmless from and against the costs, claims, expenses (including,
without limitation, reasonable attorneys' fees), or liabilities resulting from
any injury to or death of any person or persons or any damage to property that
(a) occurs in the Common Area and arises from the negligence or willful
misconduct of Landlord or Landlord's employees or agents, or (b) arises from
structural defects or failures in the Shopping Center, unless the structural
defect or failure in the Shopping Center was caused by any alteration,
improvement, or addition made by Tenant.
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12. DELIVERY OF THE PREMISES.
(a) Landlord agrees to deliver the Premises to Tenant on
or before the Delivery Date in broom-clean condition. Tenant shall have
fifteen (15) days after the Premises are delivered in which to notify Landlord
of any defects Tenant finds in the Premises. Landlord shall notify Tenant
whether Landlord will correct the defects within five (5) days after Landlord
receives Tenant's notice of any defects. If Landlord elects not to correct the
defects, Tenant may terminate this Lease by giving Landlord written notice of
termination or waive the defects. If Tenant waives the defects or if Landlord
elects to correct the defects, this Lease shall continue and Landlord shall
correct the defects within a reasonable time period. If Landlord does not
correct the defects within a reasonable time period, Tenant may terminate this
Lease by giving Landlord written notice of termination.
(b) Landlord represents to Tenant that on the Delivery
Date the heating, ventilating, and air conditioning system exclusively
servicing the Premises shall be in good operating condition.
(c) Landlord agrees to indemnify and hold Tenant and
Tenant's shareholders, officers, directors, employees, and agents harmless from
and against the costs, claims, expenses (including, without limitation,
reasonable attorneys' fees), or liabilities for any injury to or death of any
person or persons or any damage to property arising from or related to any work
performed by Landlord in or about the Premises.
13. ENVIRONMENTAL. Landlord agrees (a) to comply in all material
respects with all applicable Environmental Laws relating to the Shopping
Center, and (b) not to engage in or otherwise permit the occurrence of any
activity on or relating to the Shopping Center in violation of any
Environmental Law. Landlord agrees to indemnify and hold Tenant and Tenant's
shareholders, officers, directors, employees, and agents harmless from and
against any costs, claims, expenses (including, without limitation, reasonable
attorneys' fees), or liabilities arising from or related to any breach or
alleged breach of Landlord's representation or agreements set forth in this
paragraph. During any period of environmental remediation work on the
Premises, the Rent shall be reduced by an amount equal to the product of the
Rent times a fraction, the numerator of which shall be the area of the Premises
that is untenable due to the remediation work, and the denominator of which
shall be the area of the Premises.
14. TITLE III OF THE AMERICANS WITH DISABILITIES ACT. Landlord
agrees to comply with Title III of the Americans with Disabilities Act and the
rules and regulations issued thereunder insofar as they apply to the Common
Area, or (b) any required structural alterations, improvements, or additions to
the Premises. Landlord agrees to indemnify and hold Tenant and Tenant's
shareholders, officers, directors, employees, and agents harmless from and
against any costs, claims, expenses (including, without limitation, reasonable
attorneys' fees), or liabilities arising from or related to any breach or
alleged breach of Landlord's representation or agreement set forth in this
paragraph. During any period of work on the Premises required under Title III
of the Americans with Disabilities Act and the rules and regulations issued
thereunder, the Rent shall be reduced by an amount equal to the product of the
Rent times a fraction, the numerator of which shall be the area of the Premises
that is untenable due to the work, and the denominator of which shall be the
area of the Premises.
15. MAINTENANCE AND REPAIRS. In addition to maintaining the
Common Area in accordance with the provisions of this Lease, Landlord agrees to
maintain (a) the exterior, the roof, the foundation, and the structural
components of the Premises, and (b) the electrical, plumbing, and sewage
systems lying outside of
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the Premises. Landlord agrees to make annual inspections of the fire sprinkler
system servicing the Premises and to repair any defects shown by the
inspection.
16. ESTOPPEL CERTIFICATES. Landlord agrees to reimburse Tenant
for Tenant's reasonable legal expenses for the second and each subsequent
estoppel certificate requested by Landlord during the Term of this Lease.
17. RIGHT TO PROTEST TAXES. Landlord grants to Tenant the right
to protest any taxes that Tenant believes are unreasonable.
C. LANDLORD AND TENANT AGREE TO THE FOLLOWING:
1. USE. The Premises may be used for any lawful purpose.
2. TRADE NAME. Tenant may conduct business in the Premises under
the trade name "Hastings" or any other lawful trade name adopted by Tenant.
3. PARKING. During the Term of this Lease, Landlord agrees to
provide the parking spaces shown in the area outlined in blue on Exhibit "A".
Tenant shall have the exclusive use of the parking spaces shown in the area
outlined in blue on Exhibit "A". Each parking space shall be single striped on
at least a nine (9) foot center. Landlord agrees not to (a) charge for parking
in the Common Area, or (b) alter the location of the parking spaces in the area
outlined in blue on Exhibit "A", without Tenant's prior written consent.
4. INGRESS AND EGRESS. During the Term of this Lease, there
shall be ingress to and egress from the Shopping Center at the locations shown
on Exhibit "A", subject to unavoidable temporary closings or relocations
necessitated by governmental action or other circumstances beyond Landlord's
reasonable control. Notwithstanding anything contained in this Lease to the
contrary, if ingress to and egress from the Shopping Center is materially
changed as a result of any action by Landlord for a period of thirty (30) days
or more without Tenant's written consent, Tenant may terminate this Lease by
giving Landlord written notice of termination. If Tenant does not terminate
this Lease under this paragraph, the Rent shall be reduced by fifty percent
(50%) until the ingress to and egress from the Shopping Center required by this
paragraph is restored.
5. SIGNS. Tenant may place signs on (a) the exterior of the
Premises at Tenant's cost and expense, provided (i) the signs conform with
applicable laws, and (ii) the design and proposed placement of any exterior
sign have been approved by Landlord (which approval shall not be unreasonably
withheld), and (b) on the billboard shown on Exhibit "A".
6. ALTERATIONS. Tenant may make non-structural alterations,
improvements, and additions to the Premises. All alterations, improvements,
and additions made by Tenant shall (a) be made in accordance with all
applicable laws and in a good and workmanlike manner, and (b) remain the
property of Tenant until the expiration or termination of this Lease. At the
expiration or termination of this Lease, Tenant shall not be required to remove
any alterations, improvements, or additions made by Tenant or to restore the
Premises to the condition in which the Premises existed on the Commencement
Date.
7. REMOVAL OF TENANT'S PERSONAL PROPERTY. Tenant's personal
property may be removed from the Shopping Center by Tenant at any time during
the Term of this Lease, and Tenant agrees to repair any material damage to the
Shopping Center caused by the removal.
8. WAIVER OF SUBROGATION. Notwithstanding anything contained in
this Lease to the contrary, Landlord and Tenant waive any claims, actions, or
causes
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of action against the other party or their respective shareholders, officers,
directors, employees, or agents for any loss or damage that may occur to the
Premises or any other portion of the Shopping Center by reason of fire or any
other cause that is insured against under the terms of any fire and broad form
extended coverage insurance carried in accordance with this Lease or for which
Landlord or Tenant may be reimbursed as a result of insurance coverage for any
loss suffered by either party to this Lease, regardless of the cause or origin,
including the negligence (whether sole, joint, or concurrent) of Landlord or
Tenant or their respective shareholders, officers, directors, employees, or
agents. In addition, all insurance policies carried by either party covering
the Premises or any other portion of the Shopping Center shall be endorsed to
expressly waive the insurer's right of recovery under subrogation.
9. INSPECTION. After reasonable notice to Tenant, Landlord may
enter the Premises to inspect the Premises or to make repairs. If repairs are
required to be made by Tenant under this Lease, and Tenant fails or refuses
after written demand from Landlord to make the repairs, then Landlord shall
have the right (but not the obligation) to make the repairs or cause the
repairs to be made. If Landlord makes the repairs or causes the repairs to be
made, Tenant agrees to pay Landlord the reasonable costs and expenses incurred
by Landlord.
10. CONDEMNATION.
(a) If the Premises are appropriated or taken under the
power of eminent domain by any public or quasi-public authority or are sold to
the authority under the threat of condemnation, this Lease shall terminate
effective as of the date the authority takes lawful possession of the Premises.
(b) If five percent (5%) or more of the Premises is
appropriated or taken under the power of eminent domain by any public or
quasi-public authority or is sold to the authority under the threat of
condemnation, Tenant may terminate this Lease effective as of the date the
authority takes lawful possession of the portion of the Premises by giving
Landlord written notice of termination. If Tenant does not terminate this
Lease under this subparagraph, this Lease shall continue and Landlord agrees to
restore the Premises at Landlord's cost and expense to an architectural unit as
nearly like their condition prior to the appropriation, taking, or sale as
shall be practicable within ninety (90) days from the date the authority takes
lawful possession. If Landlord fails to restore the Premises to the condition
and within the time period provided in this subparagraph, Tenant may terminate
this Lease by giving Landlord written notice of termination.
(c) If less than five percent (5%) of the Premises is
appropriated or taken under the power of eminent domain by any public or
quasi-public authority or is sold to the authority under the threat of
condemnation, this Lease shall continue and Landlord agrees to restore the
Premises at Landlord's cost and expense to an architecture unit as nearly like
their condition prior to the appropriation, taking, or sale as shall be
practicable within ninety (90) days from the date the authority takes lawful
possession. If Landlord fails to restore the Premises to the condition and
within the time period provided in this subparagraph, Tenant may terminate this
Lease by giving Landlord written notice of termination.
(d) If (i) any portion of the Premises is appropriated or
taken under the power of eminent domain by any public or quasi-public authority
or is sold to the authority under the threat of condemnation, and (ii) this
Lease continues, then (effective as of the date the authority takes lawful
possession of the portion of the Premises) the Rent shall be reduced by an
amount equal to the product of the Rent times a fraction, the numerator of
which shall be the
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area of the Premises appropriated, taken, or sold, and the denominator of which
shall be the area of the Premises prior to the appropriation, taking, or sale.
(e) Tenant shall be entitled to any separate award,
portion of the Jump sum award, or portion of the proceeds attributable to (i)
the value of Tenant's leasehold interest in the Premises prior to the
appropriation, taking, or sale, (ii) the damage to Tenant's business, (iii)
Tenant's moving and relocation expenses, (iv) the taking of any of Tenant's
personal property in the Shopping Center, and (v) the unamortized value of
Tenant's leasehold improvements,
11. CASUALTY.
(a) If (i) any portion of the Premises is damaged by fire
or other casualty, and (ii) rebuilding or repairs can be completed within
ninety (90) days from the date of the damage, this Lease shall continue and
Landlord agrees to rebuild or repair the Premises at Landlord's cost and
expense to substantially the condition in which they existed prior to the
damage within ninety (90) days from the date of the damage. If Landlord fails
to rebuild or repair the Premises to the condition and within the time period
provided in this subparagraph, Tenant may terminate this Lease by giving
Landlord written notice of termination.
(b) If (i) any portion of the Premises is damaged by fire
or other casualty, and (ii) rebuilding or repairs cannot be completed within
ninety (90) days from the date of the damage, Landlord agrees to promptly
notify Tenant in writing of the estimated time required to rebuild or repair
the Premises. Tenant may terminate this Lease by giving Landlord written
notice of termination within thirty (30) days after receipt of Landlord's
notice. If Tenant does not terminate this Lease under this subparagraph, this
Lease shall continue and Landlord agrees to rebuild or repair the Premises at
Landlord's cost and expense to substantially the condition in which they
existed prior to the damage within the estimated time. If Landlord fails to
rebuild or repair the Premises to the condition provided in this subparagraph
and within the estimated time period, Tenant may terminate this Lease by giving
Landlord written notice of termination.
(c) If (i) any portion of the Premises is damaged by fire
or other casualty, and (ii) this Lease continues, then (during the period from
the date of the damage to the date the Premises are rebuilt or repaired) the
Rent shall be reduced by an amount equal to the product of the Rent times a
fraction, the numerator of which shall be the area of the Premises damaged and
the denominator of which shall be the area of the Premises.
12. DEFAULT BY LANDLORD/EVENTS. Defaults by Landlord are (a)
failing to keep or perform any provision of this Lease required to be kept or
performed by Landlord within thirty (30) days after receipt of written notice
from Tenant, or (b) the incorrectness of any material representation made by
Landlord in this Lease.
13. DEFAULT BY LANDLORD/TENANT'S REMEDIES. Tenant's remedies for
Landlord's default are (a) to terminate this Lease by giving Landlord written
notice of termination, (b) to cure Landlord's default by any action deemed
necessary by Tenant, and in connection with the cure Tenant may pay expenses
and incur obligations, provided that no expenditure in excess of $3,000.00 may
be made by Tenant under this subparagraph without the prior written approval of
Landlord, which approval shall not be unreasonably withheld, or (c) any other
remedy available to Tenant at law or in equity. If Tenant pays expenses or
incurs obligations to cure Landlord's default, Landlord agrees to reimburse
Tenant upon receipt of Tenant's request for reimbursement. If Landlord fails to
reimburse Tenant within fifteen (15) days after Landlord receives Tenant's
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request for reimbursement, Tenant may deduct the amount of the sums expended or
obligations incurred from the Rent due or to become due under this Lease.
14. DEFAULT BY TENANT/EVENTS. Defaults by Tenant are (a) failing
to pay Rent within ten (10) days after receipt of written notice from Landlord,
(b) failing to keep or perform any provision of this Lease, other than the
payment of Rent, required to be kept or performed by Tenant within thirty (30)
days after receipt of written notice from Landlord, (c) the filing of an
involuntary petition of bankruptcy against Tenant or the appointment of a
receiver for all or substantially all the property of Tenant and such petition
or order shall not be dismissed or stayed within ninety (90) days after the
filing or entry thereof, or (d) if Tenant makes an assignment of all or
substantially all of its property for the benefit of creditors or files a
voluntary petition of bankruptcy.
15. DEFAULT BY TENANT/LANDLORD'S REMEDIES. Landlord's remedies
for Tenant's default are (a) to terminate this Lease by giving Tenant written
notice of termination, (b) to reenter, take possession, and relet the Premises
or any part thereof for the balance of the then current initial or extended
term of this Lease, or (c) any other remedy available to Landlord at law or in
equity. If Landlord elects not to terminate this Lease, Landlord shall use
reasonable efforts to relet the Premises and all rental received by Landlord
from the reletting during the Term of this Lease shall be applied to the Rent
and the other amounts Tenant is obligated to pay under this Lease. If the
rental received from the reletting is less than the Rent and the other amounts
Tenant is obligated to pay under this Lease, Tenant shall remain liable for the
deficiency.
16. ASSIGNMENT AND SUBLETTING. Tenant agrees not to sublet all or
any part of the Premises or assign this Lease without the written consent of
Landlord, which consent will not be unreasonably withheld. Notwithstanding the
foregoing, Tenant may (a) assign this Lease or sublease all or any part of the
Premises to an Affiliate, and (b) transfer this Lease by Tenant's merger or
consolidation with another corporation, without the written consent of
Landlord. If Tenant assigns this Lease with Landlord's written consent,
Tenant's liability for the payment of Rent and all other amounts Tenant is
obligated to pay under this Lease and for the performance of the provisions of
this Lease required to be performed by Tenant shall continue for a period of
one (1) year after the assignment, but shall terminate at the end of the one
(1) year period.
17. SUBORDINATION. Tenant's interest under this Lease shall be
subordinate to any first lien mortgage hereafter covering Landlord's interest
in the Premises, provided, however, the foregoing subordination shall apply
only to mortgages under which the mortgagee executes a non-disturbance
agreement that contains provisions that are reasonably satisfactory to Tenant
and the mortgagee. With respect to any existing mortgages, Landlord shall use
reasonable efforts to furnish Tenant with a non-disturbance agreement that
contains provisions that are reasonably satisfactory to Tenant and the
mortgagee.
18. ALTERNATIVE DISPUTE RESOLUTION. Landlord and Tenant agree to
submit in good faith to mediation before filing a suit for damages.
19. ANNUAL STATEMENTS/PRORATIONS.
(a) Within thirty (30) days after the end of each
calendar year or partial calendar year, Landlord shall furnish to Tenant a
written statement (in form and substance satisfactory to Tenant) that sets
forth (i) the Property Insurance Payments, Liability Insurance Payments, and
Tax Payments, made during the calendar year or partial calendar year, and (ii)
the actual premiums for the property insurance Landlord carried on Landlord's
improvements in the Shopping
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Center, premiums for the liability insurance Landlord carried on the Common
Area, and real estate taxes on the Shopping Center, paid by Landlord during the
calendar year or partial calendar year. The Property Insurance Payments,
Liability Insurance Payments, and Tax Payments made during the calendar year or
partial calendar year shall be reconciled (within thirty (30) days after the
date Tenant receives Landlord's written statement) with Tenant's Proportionate
Share of the actual premiums for the property insurance Landlord carried on
Landlord's improvements in the Shopping Center, premiums for the liability
insurance Landlord carried on the Common Area, and real estate taxes on the
Shopping Center, paid by Landlord during the calendar year or partial calendar
year. Tenant agrees to promptly pay to Landlord any deficiency and Landlord
agrees to promptly refund to Tenant any excess.
(b) Property insurance premiums for insurance carried by
Landlord on Landlord's improvements in the Shopping Center, liability insurance
premiums for insurance carried by Landlord on the Common Area, and real estate
taxes on the Shopping Center, that cover any partial calendar year shall be
prorated.
20. EMERGENCY REPAIRS. If the need for emergency repairs to the
Premises or to any system servicing the Premises arises, and the repairs are
the obligation of Landlord hereunder, Tenant may make the repairs and request
reimbursement of the cost of the repairs from Landlord. If Landlord fails to
reimburse Tenant within fifteen (15) days after Landlord receives Tenant's
request for reimbursement, Tenant may deduct the cost of the repairs from the
Rent due or to become due under this Lease.
21. COMMENCEMENT DATE LETTER. On or before thirty (30) days after
the Commencement Date, the parties shall execute a letter that sets forth the
Commencement Date and the expiration date of the Initial Term of this Lease.
22. OPTIONS TO EXTEND. Landlord grants to Tenant four (4) options
to extend the Term of this Lease for periods of eighteen (18) months each, with
each extended term to begin upon the expiration of the preceding initial or
extended term. If Tenant desires to exercise an option to extend the Term of
this Lease, it shall do so by giving Landlord written notice of Tenant's
election to extend the Term of this Lease not later than three (3) months prior
to the expiration of the then current initial or extended term. If Tenant
timely exercises an option to extend the Term of this Lease, this Lease shall
continue on the same provisions, except the Minimum Rent shall be (a)
$16,666.67 per month during the first extended term, if exercised, (b)
$16,666.67 per month during the second extended term, if exercised, (c)
$18,333.33 per month during the third extended term, if exercised, and (d)
$18,333.33 per month during the fourth extended term, if exercised. If Tenant
fails to timely exercise any option to extend the Term of this Lease, Tenant
shall not have the right to exercise any succeeding option to extend the Term
of this Lease.
23. BLANKET INSURANCE. The insurance to be provided by Landlord
or Tenant may be provided under a blanket insurance policy; provided, however,
that in no event shall the protection afforded by the blanket insurance policy
be less than that required under this Lease.
24. ZONING. On or before the Commencement Date, Landlord agrees
to change the zoning of the Premises to allow the operation of a warehouse in
the Premises. Landlord shall obtain the change in the zoning of the Premises
at its cost and expense. If Landlord fails to obtain the change in the zoning
of the Premises on or before the Commencement Date, Tenant may terminate this
Lease by giving Landlord written notice of termination.
25. CURB CUTS/DOCK DOORS/CONNECTING DOOR. At any time during the
Term of this Lease, Tenant may (at Tenant's cost and expense) (a) enlarge any
of the
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curb cuts on Plains Boulevard so long as the curb cuts conform with applicable
local ordinances regarding curb cuts, (b) install six (6) additional dock doors
on the South end of the West side of the Premises, and (c) place a connecting
door between the Premises and the space that is covered by the Office Lease
Agreement dated August 3, 1994, between Landlord and Tenant. If any curb cut
enlargement proposed by Tenant does not conform with any local ordinance
regarding curb cuts, Tenant shall have the right to obtain a waiver of the
local ordinance. Notwithstanding anything contained in this paragraph to the
contrary, Tenant shall not enlarge any curb cut, install any additional dock
door, or place a connecting door between the Premises and the office space
without Landlord's approval of the plans, which approval shall not be
unreasonably withheld. At the expiration or termination of this Lease, Tenant
shall restore the wall that contains the connecting door to the condition in
which the wall existed prior to the placement of the connecting door in the
wall.
26. SHED. Notwithstanding anything contained in this Lease to the
contrary, Tenant shall have the right to use the shed on the West side of the
Premises that is shown on Exhibit "A".
27. ROOF MAINTENANCE. Landlord agrees to repair the roof on the
Premises prior to the Commencement Date at Landlord's cost and expense so that
it does not leak. After Landlord's repairs are made, Tenant agrees to maintain
the roof of the Premises; provided, however, if Tenant makes any repairs to the
roof, Tenant shall have the right to deduct fifty percent (50%) of the costs of
such repairs from the Rent due or to become due under this Lease.
28. PREFERENTIAL RIGHT TO PURCHASE. If Landlord desires to sell
all or any part of the Premises, Landlord shall promptly give written notice
to, Tenant with full information concerning the proposed sale, which shall
include the name and address of the prospective purchaser, the purchase price,
and all other terms of the sale. Tenant shall have the right, for a period of
ten (10) days after receipt of the notice, to elect to purchase the interest on
the same terms and conditions. If Tenant elects to purchase the interest,
Tenant shall have ninety (90) days after the date of its election in which to
purchase the interest. If Tenant elects not to purchase the interest, and
Landlord does not sell the interest or Landlord does not sell the interest on
the terms and conditions contained in Landlord's notice to Tenant, the interest
shall remain subject to Tenant's preferential right to purchase.
29. ADDITIONAL HVAC. Tenant shall have the right to add
additional heating, ventilating, and air conditioning units to service the
Premises at any time during the term of this Lease at Tenant's expense.
D. MISCELLANEOUS:
(1) NOTICE. Any notice given under this Lease must be in writing,
and shall be (a) mailed, postpaid, registered or certified, return receipt
requested, and addressed to the party to be notified, or (b) delivered by
personal delivery or by overnight courier. Notice shall be deemed given when
received by the party to be notified or when the party to be notified refuses
to accept delivery of the notice. For purposes of notice the addresses of the
parties shall be as set forth in the terms and definitions, except Tenant's
address for overnight courier delivery is 421 East 34th, Amarillo, Texas 79103.
Any notice to Tenant shall be addressed to Tenant, Attn: Real Estate
Department. A copy of any notice given to Tenant shall be given to Wayne
Moore, SPROUSE, MOZOLA, SMITH & ROWLEY, P.C., 801 S. Fillmore, Suite 600,
Amarillo, Texas 79105-5008. The parties shall have the right to change their
respective addresses upon at least ten (10) days written notice to the other
party.
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<PAGE> 16
(2) NON-WAIVER/CUMULATIVE REMEDIES/MITIGATION. No failure or
delay on the part of either party in exercising any right or remedy under this
Lease shall operate as a waiver thereof; nor shall any single or partial
exercise of any right or remedy preclude any other or further exercise thereof
or the exercise of any other right or remedy under this Lease. The exercise of
any right or remedy under this Lease by either party shall not prevent the
concurrent or subsequent exercise of any other right or remedy under this Lease
or otherwise available to that party at law or in equity. Landlord and Tenant
have a duty to mitigate damages.
(3) COUNTERPARTS. This Lease may be executed in any number of
counterparts, each of which shall be deemed an original, and all of which shall
constitute one agreement.
(4) CHOICE OF LAW. This Lease shall be governed by and construed
and enforced in accordance with the laws of the State of Texas.
(5) LEASE MEMORANDUM. The parties agree that neither party will
record this Lease. However, the parties agree to execute and deliver a
memorandum of this Lease, which does not contain the amount of Rent, for
recording purposes if either party so requests.
(6) BINDING PROVISIONS. This Lease constitutes the entire
agreement of Landlord and Tenant regarding the leasing of the Premises by
Tenant, superseding any prior understandings or agreements (whether written or
oral). No modification of or amendment to this Lease shall be binding upon any
party unless set forth in writing and executed by the party. The provisions of
this Lease shall be binding upon and shall inure to the benefit of Landlord and
Tenant and their respective heirs, executors, administrators, successors, and
assigns.
(7) HOLDOVER. If Tenant remains in possession of the Premises
after the expiration or termination of this Lease, Tenant shall occupy the
Premises as a tenant from month-to-month upon all of the provisions of this
Lease, insofar as the provisions of this Lease are applicable to a
month-to-month tenancy.
(8) ATTORNEY'S FEES. If Landlord or Tenant fails to keep or
perform any of the provisions of this Lease required to be kept or performed by
that party under this Lease and the non-defaulting party employs an attorney to
protect or enforce its rights under this Lease, then the defaulting party shall
pay the non-defaulting party's reasonable attorneys' fees.
(9) HEADINGS. The paragraph headings throughout this Lease are
for convenience of reference only, and the headings shall not be used to aid in
the interpretation or construction of this Lease.
(10) PARTIAL INVALIDITY. If any provision of this Lease is held to
be invalid, illegal, or unenforceable, the invalid, illegal, or unenforceable
provision shall not affect any other provision of this Lease, and this Lease
shall be construed as if the invalid, illegal, or unenforceable provision had
never been contained in this Lease.
(11) RELATIONSHIP OF THE PARTIES. Nothing contained in this Lease
shall be construed as creating any relationship between Landlord and Tenant
other than that of landlord and tenant.
(12) WAIVER OF LIENS. Landlord waives its rights, statutory or
otherwise, to claim a lien against Tenant's personal property in the Shopping
Center.
(13) BROKERS. Landlord and Tenant each represent and warrant to
the other party that they have not dealt with any realtor, broker, or agent in
connection
-13-
<PAGE> 17
with this Lease. If either party has dealt with a realtor, broker, or agent in
connection with this Lease, that party shall indemnify and hold the other party
and the other party's shareholders, officers, directors, employees, and agents
harmless from and against any costs, claims, expenses (including, without
limitation, reasonable attorneys' fees), or liabilities arising from or related
to any claim by the realtor, broker, or agent for a fee, commission, or other
compensation for services rendered in connection with this Lease.
(14) CONSTRUCTION. Landlord and Tenant agree that (a) each party
and its counsel have reviewed and revised this Lease, and (b) the rule of
construction that any ambiguity is to be resolved against the drafting party
shall not be employed in the interpretation of this Lease or any amendment or
exhibit hereto.
(15) PRIOR TERMINATION OF THIS LEASE. If (a) this Lease terminates
prior to its expiration date, and (b) Tenant is not in default, the Rent shall
be prorated.
(16) EXHIBITS. The exhibits referred to in this Lease are (a)
attached to this Lease, and (b) made a part of this Lease for all purposes.
(17) NUMBER/GENDER. When used in this Lease, the singular number
shall include the plural, the plural number shall include the singular, and the
use of any gender shall include all other genders.
(18) WAIVER OF DTPA.
(a) Recognizing that the parties hereto cannot by matters
contained solely in this Lease stipulate conclusively that the Tenant is not in
a significantly disparate bargaining position as to the Landlord, nevertheless,
the parties do hereby state and acknowledge that the Tenant is not in a
disparate bargaining position in comparison to the Landlord for purposes of
waiving the provisions of the Texas Deceptive Trade Practices - Consumer
Protection Act, Sections 17.41 - 17.62 of the Texas Business and Commerce Code
(the "DTPA") with respect to this transaction.
(b) The Tenant represents that it is and has been
represented by legal counsel of its own choosing in seeking or acquiring the
goods and services provided and to be provided to it by the Landlord pursuant
to the terms of this Lease, and that the Tenant also represents that it is and
has been represented by legal counsel of its own choosing in executing this
waiver with respect to the transaction contained in and covered by this Lease.
(c) Pursuant to the foregoing stipulations, Tenant waives
all of the provisions of the DTPA, except the provisions of Section 17.555
thereof, with respect to this Lease and this transaction (including all
negotiations and representations related thereto whether made prior to the
execution hereof, simultaneously with the execution hereof and during the
performance of the terms of this Lease).
LANDLORD: OMNI CAPITAL CORPORATION
By: /s/ C.W. COUCH
------------------------------------
C.W. Couch, President
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<PAGE> 18
TENANT: HASTINGS BOOKS, MUSIC & VIDEO, INC.
By: /s/ JOHN H. MARMADUKE
------------------------------------
John H. Marmaduke, President
Sprouse, Mozola, Smith & Rowley, P.C. has executed this Warehouse
Lease Agreement to acknowledge that it has represented Hastings Books, Music &
Video, Inc. in connection with the waiver contained in Paragraph D(18).
SPROUSE, MOZOLA, SMITH & ROWLEY, P.C.
By: /s/ R. WAYNE MOORE
------------------------------------
R. Wayne Moore
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<PAGE> 19
AMENDMENT TO WAREHOUSE LEASE AGREEMENT
This Amendment to Warehouse 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 Warehouse Lease Agreement (the "Lease") dated August
3, 1994, Omni leased approximately 100,000 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 "3615 Plains Boulevard,
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.
<PAGE> 20
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) $16,666.67 per month during the
first extended term, if exercised, (b) $16,666.67 per month
during the second extended term, if exercised, (c) $18,333.33 per
month during the third extended term, if exercised, (d)
$18,333.33 per month during the fourth extended term, if
exercised, (e) $18,333.33 per month during the fifth extended
term, if exercised, (f) $18,333.33 per month during the sixth
extended term, if exercised, and (g) $18,333.33 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
<PAGE> 1
EXHIBIT 23.3
[VERONIS, SUHLER & ASSOCIATES INC. LETTERHEAD]
May 29, 1998
Jeffrey Reder Hastings Entertainment, Inc.
Salomon Smith Barney 3601 Plains Blvd., Suite 1
Seven World Trade Center Amarillo, TX 79102
New York, NY 10048
Dear Mr. Reder:
Veronis, Suhler & Associates Inc. hereby consents to the inclusion in the Form
S-1 Registration Statement of Hastings Entertainment, Inc. (Registration No.
333-47969) and any amendments thereto of the following information as set forth
in the "Business" section of the Registration Statement and as set forth on
Attachment A.
<TABLE>
<S> <C>
o Home Video Spending chart located on page 202-203
o Growth of Home Video Spending chart located on page 204-205
o Changes in Average Prices of Recorded Music, by Format chart located on page 228
o Changes in Net Unit Shipments of Recorded Music, by Format chart located on page 230
o Recorded-Music Expenditures, by Format chart located on page 232
o Changes in Recorded-Music Expenditures, by Format chart located on page 233
o Changes in Net Unit Shipments of Consumer Books chart located on page 277
o Growth of Average End-User Prices of Consumer Books chart located on page 280
o End-User Spending on Consumer Books chart located on page 281
o Growth of End-User Spending on Consumer Books chart located on page 282
o Packaged PC/Multimedia Software Spending chart and Growth of Packaged PC/Multimedia Software Spending chart,
both located on page 390
</TABLE>
Please cite the information used in the following fashion: Veronis, Suhler &
Associates Inc., 350 Park Avenue, New York, NY 10022, (212) 935-4990. In
addition, please provide two copies of the finished report upon publication to
my attention.
If you have any questions, please contact me at (212) 935-4990.
Sincerely,
/s/ Serina Echevarria
Serina Echevarria
Marketing & Communications Coordinator
<PAGE> 2
ATTACHMENT A
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 1997 Communications Industry Forecast of Veronis,
Suhler & Associates, Inc. (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
5.6% from 1996, with such growth anticipated to stem from annual price
increases of 1.7% 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 5.0%. 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
5.5%, 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 7.3%, 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 $430 million in
1991 to $1.8 billion in 1996, according to the Veronis, Suhler Forecast, for a
compound annual growth rate of 33.5%. 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
4.0%. Veronis, Suhler & Associates, Inc. (350 Park Avenue, New York, New York
10022) serve as industry analysts and investment bankers for the
communications, media, publishing, broadcasting and information industries.
<PAGE> 1
EXHIBIT 23.4
Independent Auditors' Consent
The Board of Directors
Hastings Entertainment, Inc.:
We consent to the use of our reports included herein and to the reference to
our firm under the heading "Experts" in the prospectus.
KPMG Peat Marwick LLP
Dallas, Texas
June 11, 1998
