1. This is a securities class action on behalf of persons who purchased the publicly traded securities of Hastings Entertainment, Inc. ("Hastings" or the "Company") between June 12, 1998 and March 7, 2000, inclusive (the "Class Period"), against Hastings and certain of its senior officers. Hastings is a leading multimedia entertainment retailer that combines the sale of books, music, software, periodicals, videocassettes and DVDs with the rental of videocassettes, video games and DVDs in a superstore format. As of April 30, 1999, the Company operated 131 superstores located in 19 states primarily in the western and midwestern United States. The Company also operates a multimedia entertainment e-commerce Web site offering a broad selection of books, music, software, videocassettes, video games and DVDs. The Company's superstores offer customers an extensive product assortment consisting of approximately 20,000 to 40,000 book, 15,000 to 30,000 music, 1,000 to 2,000 software, 1,000 to 2,000 periodical, 5,000 to 10,000 videocassette and 1,000 to 2,000 complementary and accessory titles for sale. In addition, customers can select from 400 to 800 DVD titles for sale and rent and 12,000 to 20,000 videocassette and video game selections for rent.

2. During the Class Period, Hastings reported record results, and up until the end of the Class Period, the defendants maintained that the Company's growth would continue through the third quarter 1999 and beyond. While defendants were publicly reporting profits of more than $12 million during the Class Period, defendants used Hastings common stock to keep the fiction of its growth and profitability alive by rasing almost $40 million in an initial public offering ("IPO").

3. During the Class Period, the Individual Defendants (John Marmaduke and Dennis McGill), who controlled and were senior officers of Hastings, engaged in the scheme to conceal Hastings's badly flagging growth to prevent the decline in the price of Hastings stock in order to: (i) raise almost $40 million in an IPO to fund its operations; (ii) reap $4.6 million in insider trading proceeds; and (iii) expand its working credit facility by $30 million in order to fund its expansion.

4. As Hastings continued to report "record" profits throughout the Class Period and defendants created the fiction that they were achieving record growth in net income, the price of Hastings stock reacted, rising to a Class Period high of $19-1/8 on November 30, 1998. Defendants sought to profit from Hastings's fictional record profits and purported growth and sold approximately 368,000 shares for total ill-gotten proceeds of $4.6 million. In order to inflate the price of Hastings's stock, defendants caused the Company to falsely report its results for its entire existence as a public company and continued to attempt to improperly recognize revenue in the fourth quarter until Hastings's auditors refused to signoff on the defendants' fourth quarter and year-end financial results.

5. By the end of March 2000, the defendants were facing pressure knowing they would have to announce that Hastings had improperly understated cost of its revenue throughout 1996, 1997, 1998 and 1999, and sought to continue to do so in its to-be-released fourth quarter results, as Hastings was in its pre-audit stages and would be forced to come clean once accounting improprieties were revealed. On March 7, 2000, Hastings revealed that it would restate all prior periods of the Company's public existence and that it would fall desperately short of meeting its forecasted earnings for the fourth quarter 1999.

6. The claims asserted herein arise under and pursuant to§§10(b) and 20(a) of the Securities Exchange Act of 1934 (the "Exchange Act") [15 U.S.C. §§78j(b) and 78t(a)], and Rule 10b-5 promulgated thereunder by the Securities and Exchange Commission ("SEC") [17 C.F.R. §240.10b-5].

7. Venue is proper in this District pursuant to §27 of the Exchange Act. Many of the acts and transactions giving rise to the violations of law complained of herein, including the preparation and dissemination to the investing public of false and misleading information, occurred in this District. Hastings has its principal place of business at 3601 Plains Boulevard, Suite #1, Amarillo, Texas.

8. In connection with the acts, conduct and other wrongs complained of, the defendants, directly or indirectly, used the means and instrumentalities of interstate commerce, the United States mails, and the facilities of the national securities markets.

9. Plaintiff Richard Caudle purchased Hastings common stock during the Class Period as detailed in the attached certification and was damaged thereby.

10. Defendant Hastings is headquartered in Amarillo, Texas, and represents itself as a company which is a leading multimedia entertainment retailer that combines the sale of books, music, software, periodicals, videocassettes and DVDs with the rental of videocassettes, video games and DVDs in a superstore format. As of April 30, 1999, the Company operated 131 superstores located in 19 states primarily in the western and midwestern United States. The Company also operates a multimedia entertainment e-commerce Web site offering a broad selection of books, music, software, videocassettes, video games and DVDs. The Company's superstores offer customers an extensive product assortment consisting of approximately 20,000 to 40,000 book, 15,000 to 30,000 music, 1,000 to 2,000 software, 1,000 to 2,000 periodical, 5,000 to 10,000 videocassette and 1,000 to 2,000 complementary and accessory titles for sale. In addition, customers can select from 400 to 800 DVD titles for sale and rent and 12,000 to 20,000 videocassette and video game selections for rent.

11. (a) Defendant John H. Marmaduke ("Marmaduke") is Chairman, President and CEO of Hastings. Because of Marmaduke's positions, he knew the adverse non-public information about the business of Hastings, as well as its finances, markets and present and future business prospects via access to internal corporate documents (including Hastings's operating plans, budgets and forecasts and reports of actual operations compared thereto), conversations and connections with other corporate officers and employees, attendance at management and Board of Directors' meetings and committees thereof and via reports and other information provided to him in connection therewith. During the Class Period, Marmaduke participated in the issuance and/or review of false and/or misleading statements, including the preparation of false and/or misleading press releases and SEC filings. During the Class Period, Marmaduke sold 360,000 shares of Hastings stock for proceeds of over $4.5 million.⁽¹⁾

(b) Defendant Dennis McGill ("McGill") was the Chief Financial Officer of Hastings. Because of McGill's position, he knew the adverse non-public information about the business of Hastings, as well as its finances, markets and present and future business prospects via access to internal corporate documents (including Hastings's operating plans, budgets and forecasts and reports of actual operations compared thereto), conversations and connections with other corporate officers and employees, attendance at management meetings and via reports and other information provided to him in connection therewith. During the Class Period, McGill participated in the issuance of false and/or misleading statements, including the preparation and/or review of the false and/or misleading press releases and SEC filings. During the Class Period, McGill sold 100% of his shares of Hastings stock.

12. By reason of their positions, the officer and/or director defendants identified above, (collectively the "Individual Defendants") had access to material inside information about Hastings and were able to control directly or indirectly the acts of Hastings and the contents of the representations disseminated during the Class Period by or in the name of Hastings.

13. The defendants are liable, jointly and severally, as direct participants in the wrongs complained of herein. Defendants had a duty to promptly disseminate accurate and truthful information with respect to Hastings's products, operations, financial condition and future business prospects or to cause and direct that such information be disseminated so that the market prices of Hastings's publicly traded securities would be based on truthful and accurate information.

14. The Individual Defendants, because of their positions of control and authority as officers and/or directors of the Company were able to and did control the contents of the various quarterly and annual financial reports, SEC filings, press releases, and presentations to securities analysts pertaining to Hastings. Each Individual Defendant was provided with copies of Hastings's press releases and SEC filings alleged herein to be misleading prior to or shortly after their issuance and had the ability and opportunity to prevent their issuance or to cause them to be corrected. Because of their board membership and/or executive and managerial positions with Hastings, each Individual Defendant had access to the adverse non-public information about Hastings's business, finances, products, markets and present and future business prospects particularized herein, via access to internal corporate documents, conversations or connections with corporate officers and employees, attendance at Hastings's management and/or Board of Directors' meetings and committees thereof and via reports and other information provided to them in connection therewith. The Individual Defendants are liable for the false statements pleaded herein at ¶¶18-19, 21-22, 24-25, 27-28, 30, 32-33, 35-36, 38-40, 42 and 44-47, as those statements were each "group published" information, the result of the collective action of the Individual Defendants.

15. During the Class Period, the Individual Defendants engaged in the scheme to conceal Hastings's wrongful revenue recognition practices in order to: (i) raise almost $40 million in its IPO; and (ii) reap $4.6 million in insider trading proceeds.

16. The defendants wanted to profit from their scheme and use the Company's stock as currency to funds its operations. Prior to raising $40 million in the IPO, Hastings's cash position had fallen to dire levels of below $4 million. Without the infusion of cash via the IPO, Hastings would have been unable to fund its expansion and obtain increased credit lines. The Individual Defendants knew that without the infusion of the $40 million, Hastings's future would be bleak and their ability to sell Hastings shares at artificially inflated prices or in a liquid market would be virtually impossible.

17. Each of the defendants either knew or was consciously reckless in disregarding the fact that the illegal acts and practices and misleading statements and omissions described herein would adversely affect the integrity of the market for Hastings's securities and would artificially inflate or maintain the prices of those securities. Each of the defendants, by acting as herein described, did so knowingly or in such a reckless manner as to constitute a fraud and deceit upon plaintiff and members of the Class plaintiff seeks to represent.

18. On or about June 12, 1998, Hastings filed its Registration Statement/Prospectus ("Prospectus") with the Securities Exchange Commission ("SEC"). The Prospectus contained the Company's income statements for years 1993-1997. The Prospectus also stated that the financials contained therein were compiled and reported in accordance with Generally Accepted Accounting Principals ("GAAP").

19. On June 18, 1998, Hastings announced the closing of its IPO. The release stated in part:

Hastings ... announces the closing of its initial public offering of 3,377,333 shares of its Common Stock at a price to the public of $13.00 per share. The stock began trading on The Nasdaq National Market on Friday, June 12, under the symbol "HAST".

Net proceeds from the offering after underwriting commissions and estimated expenses were approximately $39.8 million, of which approximately $36.4 million was received by the Company for the 3,084,000 shares it offered. It is anticipated that these proceeds will be used to fund the opening of new superstores and the expansion of existing superstores and for general corporate purposes. The remaining proceeds of approximately $3.4 million, representing sales of 293,333 shares, have been received by the estate of the Company's founder.

The Company has granted to the underwriters group, managed by Salomon Smith Barney, A.G. Edwards & Sons, Inc. and Furman Selz LLC, an option to purchase up to 506,000 additional shares to cover over-allotments, if any.

21. On July 7, 1998, Hastings reported fiscal 1998 first quarter financial results, with earnings up 31% on 14% revenue gain. Additionally, comparable-store revenues rose 9%. The release stated in part:

Hastings Entertainment, Inc., a leading multimedia entertainment superstore retailer, today reported that for the fiscal 1998 first quarter ended April 30, 1998, net earnings were up 30.7 percent to $1,202,000 or $0.14 per diluted share from $920,000 or $0.10 per diluted share for the fiscal 1997 first quarter ended April 30, 1997. Total revenues for the fiscal 1998 first quarter were up 14.0 percent to $89,387,000, compared with $78,436,000 for the first quarter of fiscal 1997. Comparable-store revenues were up 9 percent for the first quarter of fiscal 1998.

"Our focus on small to medium-sized markets has been a key contributor to the growth we achieved during the first quarter in each of our five major merchandise sales categories, as well as in video and game rentals," said John H. Marmaduke, chairman and chief executive officer. "The strength of the entertainment marketplace has created many excellent growth opportunities for Hastings over the past 30 years that have been reflected in our solid record of revenues and earnings growth over that time.

"Our company achieved a solid 30% increase in operating profitability in the first quarter of fiscal 1998. Our commitment to controlling costs in every aspect of our operations was a primary factor in reducing our selling, general and administrative expenses," added Marmaduke. "Those savings more than offset a reduction in gross margin resulting primarily from the impact of lower-margin rental video leasing arrangements that commenced in August 1997."

"We are very confident of Hastings' ability to maintain its growth going forward because of the position we've established within our various markets as a community-oriented, customer-driven multimedia entertainment retailer," Marmaduke noted. "We have the management systems and inventory controls to tailor our product assortment to each market and to quickly respond to changing customer demands. As a result, we have been growing in all product categories."

23. The financial results reported by Hastings for the first quarter 1998 were false and misleading and prepared in violation of GAAP as detailed in ¶¶51-59.

24. On August 25, 1998, Hastings announced net income up 41% on 12% sales gain and fiscal 1998 second quarter comparable-store sales up 6%. The release also stated:

Hastings Entertainment, Inc., a leading multimedia entertainment superstore retailer, today reported that for the fiscal 1998 second quarter ended July 31, 1998, net income was up 40.6% to $1,798,000 from $1,279,000 for the fiscal 1997 second quarter ended July 31, 1997. Basic earnings per share were up 20.0% to $0.18 on 18.8% more shares outstanding, compared with $0.15 per share a year ago. Diluted earnings per share were up 13.3% to $0.17 on 17.8% more diluted shares, compared with $0.15 per share last year. Total revenues for the second quarter of this year were $91,187,000, up 11.7% from $81,653,000 for the second quarter of last year. Comparable-store revenues were up 6% for the second quarter of fiscal 1998.

For the first six months of fiscal 1998, net income was up 36.4% to $3,000,000 from $2,199,000 for the first half of fiscal 1997. Basic earnings per share were up 23.1% to $0.32 on 9.3% more shares outstanding, compared with $0.26 per share a year ago. Diluted earnings per share were up 24.0% to $0.31 on 8.8% more shares, compared with $0.25 per share a year ago. Total revenues for the first half of fiscal 1998 were $180,574,000, up 12.8% from $160,090,000 for the first half of last year.

"Despite the unusually hot and dry weather that negatively affected virtually all of our markets during the second quarter, we exceeded expectations for the quarter, with solid demand in all five of our key merchandise sales categories and in video rentals," said John H. Marmaduke, President and Chief Executive Officer. "Our concentration on small to medium-sized markets, combined with our wide-ranging entertainment product offerings, continued to be key contributors to our sales and profit gains for the quarter.

26. The financial results reported by Hastings for the second quarter 1998 were false and misleading and prepared in violation of GAAP as detailed in ¶¶51-59.

27. On November 18, 1998, Hastings announced an eleven-fold increase in third quarter 1998 EPS, revenue growth of 13.8% and a comparable-store sales increase of 6%. The release stated, in part:

Hastings Entertainment, Inc., a leading multimedia entertainment superstore retailer, today reported net income for the fiscal 1998 third quarter ending October 31, 1998 jumped to $1,318,000 from $90,000 for the comparable fiscal 1997 third quarter. Basic earnings per share for the quarter were $0.11 on 35.9% more shares outstanding, compared with $0.01 per share for the like period a year ago. Diluted earnings per share for the current quarter were $0.11 on 33.2% more shares outstanding versus $0.01 for the similar period in fiscal 1997. Total revenues for the third quarter of this year were $91,622,000, up 13.8% from $80,520,000 for the third quarter of last year. Comparable-store revenues were up 6% for the third quarter of fiscal 1998.

* * *

"As had been the case in the second quarter, gains in merchandise sales were well balanced between our book, music, video and software departments, with the movie 'Titanic' being a great sales success in our superstores," said John H. Marmaduke, chairman and chief executive officer." We are feeling confident about the upcoming Christmas season, with our seasonal inventories in excellent condition and our anticipation of significant product releases in the fourth quarter."

29. The financial results reported by Hastings for the third quarter 1998 were false and misleading and prepared in violation of GAAP as detailed in ¶¶51-59.

30. On January 14, 1999, Hastings announced that holiday revenues increased 10.6% and comparable-store revenues exceeded expectations. The release stated, in part:

Hastings Entertainment, Inc., a leading multimedia entertainment superstore retailer, today announced that total revenues for the five-week Christmas holiday period ended Jan. 2, 1999, increased 10.6% to a record $63,382,000 from $57,315,000 for the five-week period ended Jan. 3, 1998. Comparable-store revenues for the current five weeks were up 3.2% from a strong 12.9% increase in comparable-store revenues for the like period one year ago.

"Hastings' record revenues for the 1998 Christmas season were ahead of expectations, including favorable comparable-store revenue versus our exceptionally strong 1997 Christmas season," said John H. Marmaduke, chairman and chief executive officer. "Our customers responded very positively during the season to Hastings' significant entertainment and seasonal product offerings."

* * *

"The very positive response of our customers to Hastings' gift card offering for the 1998 holiday season is another verification of our customers' enthusiastic acceptance of Hastings multimedia retailing concept, with its wide assortment of entertainment products offered in small- to medium-sized communities," added Marmaduke. "We were especially pleased with the growth in this gift card category, because the redemption process will generate additional, often new, customer traffic in our superstores beginning in January. Additionally, card redemptions often create incremental sales because many recipients spend more than the face value of their cards."

32. On March 16, 1999, Hastings announced fiscal 1998 full year and fourth quarter results. The release stated, in part:

For the fourth quarter of fiscal 1998, revenue increased 8.0% to a record $126.5 million from $117.2 million for the fourth quarter of the prior year. Before the non-recurring entries, net income was up 15.0% to $6.7 million from $5.9 million for the fiscal 1997 fourth quarter. With 3,141,000 or 36.1% more share outstanding, excluding the non-recurring entries, diluted earnings per share for the quarter were $0.57 per share, compared to $0.67 per diluted share for the fourth quarter of fiscal 1997. After the non-recurring entries, the company reported a net loss of $3.9 million, or $0.33 per diluted share, for the fourth quarter of fiscal 1998.

34. The financial results reported by Hastings for the fourth quarter 1998 were false and misleading and prepared in violation of GAAP as detailed in ¶¶51-59.

35. On May 19, 1999, Hastings announced that first quarter net income jumped 41.8% on a 12.5% revenue gain and comparable-store sales were up 5.5%. The release also stated:

Hastings Entertainment, Inc., a leading multimedia entertainment superstore retailer, today announced that for the fiscal 1999 first quarter ended April 30, 1999, net income jumped 41.8% to $1,705,000 from $1,202,000 for the fiscal 1998 first quarter ended April 30, 1998. With 35.1% more shares outstanding, diluted earnings per share were $0.15 per share versus $0.14 per share for the first quarter of fiscal 1998. Revenues rose 12.5% to $100,579,000 for the fiscal 1999 first quarter from $89,387,000 for the first quarter of fiscal 1998, as comparable-store sales increased 5.5% from a year ago.

"Our first quarter results exhibited revenue growth in each of our major sale and rental categories with solid improvement in our gross margin performance," said John H. Marmaduke, chairman and chief executive officer. "Our retailing concept of providing a wide range of multimedia home entertainment products to small- to medium-sized communities is unique, and it continues to allow Hastings to meet its growth goals while increasing profitability."

"As planned, we opened two superstores during the first quarter, and we have signed leases for an additional five superstores to be opened by the end of the second quarter. Hastings is well positioned to meet its goal to open 20 new superstores in 1999," added Marmaduke. "In addition, we are very enthusiastic about the potential revenue upside related to our new Web site, gohastings.com, which we anticipate will be launched by the end of May."

37. The financial results reported by Hastings for the first quarter 1999 were false and misleading and prepared in violation of GAAP as detailed in ¶¶51-59.

38. On August 19, 1999, Hastings announced that its retail space exceeded 3 million square feet with the openings of new superstores in Champaign, Illinois, and McAllen, Texas. The openings also place the Company well ahead of its fiscal 1999 store expansion plan at the mid-point of the year. Commenting on the release, defendant Marmaduke stated:

"We have steadily and profitability built Hastings' superstore base by concentrating primarily on small to medium-sized markets across America that typically are under-served by other entertainment retailers," added Marmaduke. "Hastings stores average 21,500 square feet, providing enough space to offer our customers a wide range of entertainment products in a single location. Our stores reflect our total commitment to satisfying our guests' desires for personal entertainment and information, and I believe it is reflected in the success our stores have achieved in their individual neighborhoods."

Hastings Entertainment, Inc., a leading multimedia entertainment superstore retailer, today announced that for the fiscal 1999 second quarter ended July 31, 1999, net income increased 16.1% to $2,088,000 from $1,798,000 for the fiscal 1998 second quarter ended July 31, 1998. With 14.5% more diluted shares outstanding, earnings per share were $0.18, up 5.9% from $0.17 per diluted share for the second quarter of fiscal 1998. Total revenues rose 12.3% to $102,438,000 for the fiscal 1999 second quarter from $91,187,000 for the second quarter of fiscal 1998, as comparable-store sales increased 4.9% from a year ago.

For the first six months of fiscal 1999, net income increased 26.5% to $3,794,000 from $3,000,000 for the first half of fiscal 1998. With 23.3% more diluted shares outstanding, earnings per share were up 3.2% to $0.32 for the first half of fiscal 1999, compared with $0.31 per diluted share for the first half of fiscal 1998. Total revenues for the first six months of fiscal 1999 totaled $203,017,000, up 12.4% from $180,574,000 for the first half of last year. Comparable-store revenues were up 5.2% for the first six months of fiscal 1999.

"Even with the additional costs associated with our expanded superstore opening program and the operation of our new e-commerce Web site, http://securities.stanford.edu/complaints/hast/unknown/www.gohastings.com, our second quarter profitability was excellent," said John H. Marmaduke, chairman and chief executive officer. "We continue to deliver positive operating results as we grow our revenue base."

"Over the years, Hastings had consistently recorded operating income in all four quarters of the year, which is not the case for many other companies in the entertainment retailing segment, many of whom usually live and die by their Christmas quarters," Marmaduke pointed out. "Hastings' unique multimedia retailing concept and our emphasis on operating in small to medium-sized markets provide a very solid base for growing future revenues and earnings."

41. The financial results reported by Hastings for the second quarter 1999 were false and misleading and prepared in violation of GAAP as detailed in ¶¶51-59.

42. On September 23, 1999, Hastings announced the resignation of Chief Financial Officer McGill. Commenting on the announcement, defendant Marmaduke stated:

"We appreciate the contribution Dennis has made to the company during his tenure, and we wish him well in his new endeavor.... Dennis was instrumental in completing our initial public offering of common stock in June 1998, and his knowledge of the financial markets has been a tremendous asset to Hastings in our public marketing efforts."

"Hastings Entertainment is a strong company with a unique and outstanding business model," said Dennis McGill. "I continue to believe in Hastings' multi-media entertainment retailing concept, and anticipate excellent prospects for the company's long-term performance."

44. The Company also said that 1999 fourth quarter earnings were expected to be about $0.35 to $0.40 per diluted share due to the anticipated shortfall in revenues from planned levels and higher expenses. Fiscal 1998 fourth quarter net earnings were $0.57 per diluted share, excluding two non-recurring entries that reduced earnings by a total of $0.90 per diluted share. Total revenues for the 1999 fourth quarter were projected to be about $140 million, up approximately 10.7% from $126.5 million for the 1998 fourth quarter. Commenting on the announcement, defendant Marmaduke stated:

"We are initiating improvements in our inventory selection and are undertaking aggressive marketing programs involving key-event promotions and an expected strong line-up of releases for the fourth quarter. These initiatives are designed to bolster product sales and our rental offering as we enter the Christmas season," added Marmaduke. "While we are still on schedule to open 20 new Hastings Entertainment superstores in fiscal 1999, we have reduced our store openings to 5 to 10 new stores in fiscal 2000 so we can devote extensive resources and attention to improving profitability and inventory performance in our superstores."

"With the hiring of Tom Nugent as chief financial officer, our commitment to improving inventory performance, and tighter controls on overall operations, we are focused on increasing profitability and enhancing shareholder value."

47. As of December 1999, the Company had been able to maintain the fiction of Hastings's purported ability to achieve "record" results and continued growth for multiple quarters, but with the resignation of its CFO, defendant McGill, who previously had assisted in issuing the false quarterly statements, the Company was facing pressure to reveal that it had achieved purported "record" growth through improper revenue recognition and that its fourth quarter 1999 results would be only a fraction of what defendants had represented, as Hastings was in its pre-audit stages and would be forced to come clean concerning its accounting improprieties.

48. With the threat of Hastings's auditors withdrawing/resigning prior to the filing of Hastings's Form 10-K if defendants would not come clean on their accounting improprieties, restate all of its prior results, and "to-be-released" fourth quarter and disclose the same to the public, defendants were forced to admit their fraud. Specifically, on March 7, 2000, Hastings announced

that its fourth quarter and fiscal 1999 results (and previous four years' results) will be negatively impacted by an accounting adjustment that will result in a non-cash charge to earnings. The company has determined that merchandise receipts were not properly entered into the inventory control system for a small portion of vendor deliveries. As a result, merchandise cost of revenue was understated. The adjustment will require Hastings to restate its earnings in the first three quarters of fiscal 1999 and probably for the prior four fiscal years. The company presently believes the aggregate amount of the pre-tax effect of the restatement, after certain off-setting adjustments, could total $23-$27 million for all of the periods. The pre-tax effect by year is currently being determined....

"We are working diligently with our outside auditors to more precisely determine the magnitude of this accounting adjustment and the proper allocation to the 1999 and prior fiscal year periods. Until that process is completed, the company cannot provide information on our fiscal 1999 performance. We have made appropriate changes to our internal accounting system to ensure that this problem does not recur. Those changes are expected to have some impact on future operating margins."

John H. Marmaduke, chairman and chief executive officer, said "We have directed our finance team, headed by our new CFO, Tom Nugent, to devote whatever resources are required to resolve this issue as promptly as possible. This accounting adjustment in no way reduces our confidence in the Hastings concept and its future prospects."

Unrelated to the accounting adjustment referred to above, the company also will record an approximately $6 million pre-tax charge in the fourth quarter relating to the closing of five of its stores and will record fourth quarter inventory write-downs of approximately $3.5 million. These two fourth quarter charges, of which approximately $5.8 million is a non-cash charge, will negatively affect earnings for fiscal 1999 by approximately $0.51 loss per share.

The company presently believes the adjustment and charges referred to above will not cause the company to be out of compliance with financial covenants in its $60 million unsecured revolving credit facility, under which the company presently has outstanding borrowings of approximately $23 million. The company believes that, once fourth quarter results are final, it would not, however, be in compliance with the fixed charge coverage ratio financial covenant under its unsecured 7.75% Series A Notes due June 13, 2003, of which there is outstanding an aggregate principal amount of $20 million. The holders of the Senior Notes have granted a waiver of the company's compliance with that covenant for the quarter ending January 31, 2000. The company is also engaged in discussions with the holders of the Senior Notes to amend certain provisions of the Senior Notes, including the covenant relating to the fixed charge coverage ratio.

50. Hastings's actual financial results and the true status of its operations were concealed by defendants, which operated to artificially inflate or maintain the market price of Hastings securities during the Class Period. Each of the releases, SEC filings (including the Registration Statement/Prospectus) and statements particularized herein were false and misleading and misrepresented and/or failed to disclose the following material adverse information:

(a) Hastings's financial results were the result of accounting trickery as detailed in ¶¶51-59;

(b) Defendants knowingly tolerated Hastings's inadequate internal accounting controls and consequently lacked any reasonable basis for the financial results reported by them;

(c) Hastings's reported year-end 1996, year-end 1997 and first, second, third and fourth quarter 1998 and first, second and third quarter 1999⁽²⁾ income was materially overstated;

(d) Only through Hastings's accounting fraud had Hastings achieved the earnings for 1996-1999 reported by defendants;

(e) Hastings was not successful in achieving its purported "record" growth and its fundamentals and prospects were deteriorating; and

(f) As a result of the foregoing, there was no reasonable basis in fact for defendants' statements that Hastings actually earned $12 million during the Class Period, as the adverse facts set forth above were inconsistent with and seriously undermined those statements such that defendants had no reasonable basis to believe them and did not, in fact, believe them. In fact, defendants' purported profits were not profits at all. The "profits" were in reality losses which defendants had disguised as profits by the manipulation of their accounting entries.

51. In order to inflate the price of Hastings's securities, defendants caused the Company to falsely report its results for four years through the use of improper revenue and cost recognition, thereby materially overstating its net income and EPS for four years. Ultimately, Hastings revealed that its results for the fourth quarter 1999 would be adversely affected due to Hastings's attempt to recognize revenue improperly.

52. Hastings reported the following amounts during the Class Period:
 

53. These results were included in Forms 10-Q and Forms 10-K filed with the SEC.

54. These results and the representations concerning them were false and misleading when made, as Hastings's financial statements for the quarters in 1998 and the first three quarters in 1999 were not fair presentations of Hastings's results and were presented in violation of GAAP and SEC rules.

55. GAAP are those principles recognized by the accounting profession as the conventions, rules and procedures necessary to define accepted accounting practice at a particular time. SEC Regulation S-X (17 C.F.R. §210.4-01(a)(1)) states that financial statements filed with the SEC which are not prepared in compliance with GAAP are presumed to be misleading and inaccurate, despite footnote or other disclosure. Regulation S-X requires that interim financial statements must also comply with GAAP, with the exception that interim financial statements need not include disclosure which would be duplicative of disclosures accompanying annual financial statements. 17 C.F.R. §210.10-01(a).

56. The Individual Defendants caused Hastings to falsify its reported financial results through its improper accounting for the cost of its merchandise resulting in materially and artificially inflated earnings.

57. Unfortunately for investors, these results, and the representations concerning them, were false. Absent the Company's improper accounting for the costs of its merchandise, Hastings would have reported materially lower EPS.

58. Due to these accounting improprieties, the Company presented its financial results and statements in a manner which violated GAAP, including the following fundamental accounting principles:

(a) The principle that interim financial reporting should be based upon the same accounting principles and practices used to prepare annual financial statements was violated (APB No. 28, ¶10);

(b) The principle that financial reporting should provide information that is useful to present and potential investors and creditors and other users in making rational investment, credit and similar decisions was violated (FASB Statement of Concepts No. 1, ¶34);

(c) The principle that financial reporting should provide information about the economic resources of an enterprise, the claims to those resources, and effects of transactions, events and circumstances that change resources and claims to those resources was violated (FASB Statement of Concepts No. 1, ¶40);

(d) The principle that financial reporting should provide information about how management of an enterprise has discharged its stewardship responsibility to owners (stockholders) for the use of enterprise resources entrusted to it was violated. To the extent that management offers securities of the enterprise to the public, it voluntarily accepts wider responsibilities for accountability to prospective investors and to the public in general (FASB Statement of Concepts No. 1, ¶50);

(e) The principle that financial reporting should provide information about an enterprise's financial performance during a period was violated. Investors and creditors often use information about the past to help in assessing the prospects of an enterprise. Thus, although investment and credit decisions reflect investors' expectations about future enterprise performance, those expectations are commonly based at least partly on evaluations of past enterprise performance (FASB Statement of Concepts No. 1, ¶42);

(f) The principle that financial reporting should be reliable in that it represents what it purports to represent was violated. That information should be reliable as well as relevant is a notion that is central to accounting (FASB Statement of Concepts No. 2, ¶¶58-59);

(g) The principle of completeness, which means that nothing is left out of the information that may be necessary to insure that it validly represents underlying events and conditions was violated (FASB Statement of Concepts No. 2, ¶79); and

(h) The principle that conservatism be used as a prudent reaction to uncertainty to try to ensure that uncertainties and risks inherent in business situations are adequately considered was violated. The best way to avoid injury to investors is to try to ensure that what is reported represents what it purports to represent (FASB Statement of Concepts No. 2, ¶¶95, 97).

59. Further, the undisclosed adverse information concealed by defendants during the Class Period is the type of information which, because of SEC regulations, regulations of the national stock exchanges and customary business practice, is expected by investors and securities analysts to be disclosed and is known by corporate officials and their legal and financial advisors to be the type of information which is expected to be and must be disclosed.

60. Hastings had a responsibility to maintain sufficient accounting controls to accurately report its financial results. It is well settled that the representations made by a company in its financial statements and in other financial disclosures to the public are the representations of that company's management. Indeed, even when a company issues audited financial statements together with the report of that company's independent auditors, that report always expressly provides that "the financial statements are the responsibility of [the company's] management."

61. According to SEC rules, to accomplish the objectives of accurately recording, processing, summarizing and reporting financial data, a company must establish an internal control structure. Pursuant to §13(b)(2) of the Exchange Act, Hastings was required to:

(A) make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer; and

(B) devise and maintain 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 ....

63. As described in SAS 55, the applicability and importance of specific control environment factors, accounting system methods and records, and control procedures that an entity should establish should be considered within the context of such criteria as an entity's size, its organization and ownership characteristics, the nature of its business, the diversity and complexity of its operations, the entity's method of processing data, and its applicable legal and regulatory requirements. In short, the larger the entity, the more the nature of the entity's business is complex, diverse and sophisticated, and the public ownership of the entity customarily requires a sophisticated internal control structure to ensure that transactions are accurately recorded and that, prior to the public disclosure of any financial information, such transactions are compared to the existing assets (e.g., comparing inventory as recorded on a company's books to those amounts actually "on hand") to eliminate any discrepancies between the recorded and actual amounts.

64. According to SAS 55.13:

Establishing and maintaining an internal control structure is an important management responsibility. To provide reasonable assurance that an entity's objectives will be achieved, the internal control structure should be under ongoing supervision by management to determine that it is operating as intended and that it is modified as appropriate for changes in conditions.

66. On March 7, 2000, Hastings revealed that it would need to restate its 1996, 1997, 1998 and 1999 results. The release also stated that the restatement would be in the range of $23-$27 million. A restatement of this magnitude effectively evaporates all of Hastings income during its entire public existence.

67. As Hastings's stock increased in price due to these very positive statements about Hastings's business detailed in ¶¶19, 21, 24, 27, 30, 31-32, 35, 38-39, 42 and 44-45, Hastings insiders Marmaduke and McGill took advantage of this artificial inflation of Hastings's stock by selling off 360,000 and 7,921 shares, respectively, of their stock at as high as $13 per share, pocketing $4.57 million, $75,000, respectively, in illegal insider trading proceeds. In total, the Individual Defendants unloaded approximately 368,000 shares of their Hastings stock for $4.6 million in illegal insider trading proceeds.

68. Plaintiff brings this lawsuit pursuant to Rule 23(a) and (b)(3) of the Federal Rules of Civil Procedure, on behalf of himself and on behalf of a class of persons who purchased Hastings publicly traded securities from June 12, 1998 (the date of the IPO) through March 7, 2000 inclusive (the "Class"). Excluded from the Class are defendants herein, members of the immediate families of each of the defendants, any person, firm, trust, corporation, officer, director or other individual or entity in which any defendant has a controlling interest or which is related to or affiliated with any of the defendants, and the legal representatives, agents, affiliates, heirs, successors-in-interest or assigns of any such excluded party.

69. This action is properly maintainable as a class action for the following reasons:

(a) The Class is so numerous that joinder of all Class members is impracticable. As of September 30, 1999, Hastings had approximately 11.7 million shares outstanding. Members of the Class are scattered throughout the United States.

(b) There are questions of law and fact which are common to members of the Class and which predominate over any questions affecting only individual members. The common questions include, inter alia, the following:

(i) Whether the defendants' acts as alleged herein violated the federal securities laws;

(ii) Whether defendants participated in and pursued the common course of conduct complained of herein;

(iii) Whether documents, SEC filings, press releases and other statements disseminated to the investing public and Hastings's securities stockholders during the Class Period misrepresented material facts about the operations, financial condition and earnings of Hastings;

(iv) Whether the market prices of Hastings securities during the Class Period were artificially inflated due to material misrepresentations and the failure to correct the material misrepresentations complained of herein; and

(v) To what extent the members of the Class have sustained damages and the proper measure of damages.

(c) Plaintiff's claim is typical of the claims of other members of the Class and plaintiff has no interests that are adverse or antagonistic to the interests of the Class.

(d) Plaintiff is committed to the vigorous prosecution of this action and has retained competent counsel experienced in litigation of this nature. Accordingly, plaintiff is an adequate representative of the Class and will fairly and adequately protect the interests of the Class.

(e) Plaintiff anticipates that there will not be any difficulty in the management of this litigation as a class action.

70. For the reasons stated herein, a class action is superior to other available methods for the fair and efficient adjudication of this action and the claims asserted herein. Because of the size of the individual Class members' claims, few, if any, Class members could afford to seek legal redress individually for the wrongs complained of herein.

71. The statutory safe harbor provided for forward-looking statements under certain circumstances does not apply to the allegedly false statements pleaded in this Complaint, as the statutory safe harbor does not apply to the defendants' misrepresentations of currently existing or historical facts, including defendants' dissemination of false financial statements.

72. Plaintiff repeats and realleges the allegations set forth above as though fully set forth herein.

73. This Count is brought by plaintiff pursuant to §10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder by the SEC against Hastings and the Individual Defendants.

74. The defendants: (a) employed devices, schemes, and artifices to defraud; (b) made untrue statements of material fact and/or omitted to state material facts necessary in order to make the statements made not misleading; and (c) engaged in acts, practices, and a course of business which operated as a fraud and deceit upon the purchasers of Hastings securities in an effort to maintain artificially high market prices for Hastings's securities in violation of §10(b) of the Exchange Act and Rule 10b-5. Hastings and the Individual Defendants are sued either as primary participants in the wrongful and illegal conduct charged herein or as controlling persons as alleged below.

75. In addition to the duties of full disclosure imposed on the Individual Defendants by their status as controlling persons of Hastings, as a result of their affirmative statements and reports, or participation in the making of affirmative statements and reports to the investing public, defendants had a duty to promptly disseminate truthful information that would be material to investors in compliance with the integrated disclosure provisions of the SEC as embodied in SEC Regulations S-X (17 C.F.R. §§210.01, et seq.) and S-K (17 C.F.R. §§229.10, et seq.) and other SEC regulations, including accurate and truthful information with respect to Hastings's securities, operations, financial condition and earnings so that the market price of Hastings's securities would be based on truthful, complete and accurate information.

76. Hastings and the Individual Defendants, individually and in concert, directly and indirectly, by using the means and instrumentalities of interstate commerce and/or of the mails, engaged and participated in a continuous course of conduct to conceal adverse material information about the business, operations and future prospects of Hastings as specified herein. The defendants employed devices, schemes and artifices to defraud, while in possession of material adverse non-public information and engaged in acts, practices, and a course of conduct as alleged herein in an effort to assure investors of Hastings's value and performance and continued substantial growth, which included the making of, or the participation in the making of, untrue statements of material facts and omitting to state material facts necessary in order to make the statements made about Hastings and its business operations and future prospects, in the light of the circumstances under which they were made, not misleading, as set forth more particularly herein, and engaged in transactions, practices and a course of business which operated as a fraud and deceit upon the purchasers of Hastings securities during the Class Period.

77. The primary liability and controlling person liability of the defendants named in this Count arises from the following facts: during the Class Period, the Individual Defendants (Marmaduke and McGill), who controlled and were senior officers of Hastings, engaged in the scheme to conceal Hastings's badly flagging growth to prevent the decline in the price of Hastings securities and in order to: (i) raise $40 million in its IPO; (ii) reap $4.6 million in insider trading proceeds; and (iii) expand its working credit facility by $30 million in order to continue to fund its operations.

78. The Individual Defendants had actual knowledge of the misrepresentations and omissions of material facts set forth herein. Such defendants' material misrepresentations or omissions were done knowingly and for the purpose and effect of concealing Hastings's operating condition and future business prospects from the investing public and supporting the artificially inflated price of their securities, as demonstrated by said defendants' overstatements and misstatements of Hastings's business, operations and future earnings prospects throughout the Class Period. Defendants knew that Hastings's financial statements were materially misstated throughout the Class Period.

79. As a result of the dissemination of the materially false and misleading information and failure to disclose material facts by all defendants, as set forth above, the market prices of Hastings securities were artificially inflated during the Class Period. In ignorance of the fact that the market prices of Hastings securities were artificially inflated, and relying directly or indirectly on the false and misleading statements made by defendants, or upon the integrity of the market in which the securities trade, and the truth of any representations made to appropriate agencies as to the investing public, at the times at which any statements were made, and/or in the absence of material adverse information that was known by defendants but not disclosed in public statements by defendants during the Class Period, plaintiff and the other members of the Class acquired Hastings's securities during the Class Period at artificially high prices and were damaged thereby.

80. At the time of said misrepresentations and omissions, plaintiff and other members of the Class were ignorant of their falsity and believed them to be true. Had plaintiff and the other members of the Class and the marketplace known of the true financial condition and business prospects of Hastings, which were not disclosed by defendants, plaintiff and other members of the Class would not have purchased Hastings securities during the Class Period, or, if they had purchased such securities during the Class Period, they would not have done so at the artificially inflated prices which they paid.

81. By virtue of the foregoing, Hastings and the Individual Defendants have violated §10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder.

82. As a direct and proximate result of the wrongful conduct of the defendants named in this Count, plaintiff and the other members of the Class suffered damages in connection with their purchases of Hastings securities during the Class Period.

83. Plaintiff repeats and realleges the allegations set forth above as if set forth fully herein.

84. The Individual Defendants acted as controlling persons of Hastings within the meaning of §20(a) of the Exchange Act as alleged herein. By virtue of their high-level positions, substantial stock holdings, participation in and/or awareness of Hastings's operations and/or intimate knowledge of its internal financial condition, business practices, products and the actual progress of development and marketing efforts, these defendants had the power to influence and control and did influence and control, directly or indirectly, the decision-making of Hastings, including the content and dissemination of the various statements which plaintiff contends are false and misleading. Hastings controlled the Individual Defendants and all of its employees. Each of the Individual Defendants was provided with or had unlimited access to copies of Hastings's internal reports, press releases, public filings and other statements alleged by plaintiff to be misleading prior to and/or shortly after these statements were issued and had the ability to prevent the issuance of the statements or cause the statements to be corrected.

85. In particular, each of the Individual Defendants had direct involvement in or intimate knowledge of the day-to-day operations of Hastings and therefore is presumed to have had the power to control or influence the particular transactions giving rise to the securities violations as alleged herein, and exercised the same.

86. As set forth above, the defendants violated§10(b) of the Exchange Act and Rule 10b-5 by their acts and omissions as alleged in this Complaint. By virtue of their positions as controlling persons, these defendants are liable pursuant to §20(a) of the Exchange Act.

87. As a direct and proximate result of the wrongful conduct of defendants, plaintiff and other members of the Class suffered damages in connection with their purchase of Hastings securities during the Class Period.

WHEREFORE, plaintiff, on behalf of himself and the Class, prays for judgment as follows:

A. Declaring this action to be a class action properly maintained pursuant to Rule 23 of the Federal Rules of Civil Procedure;

B. Awarding plaintiff and other members of the Class damages together with interest thereon;

C. Awarding plaintiff and other members of the Class costs and expenses of this litigation, including reasonable attorneys' fees, accountants' fees and experts' fees and other costs and disbursements; and

D. Awarding plaintiff and other members of the Class such other and further relief as may be just and proper under the circumstances.

Plaintiff demands a trial by jury.

DATED this 17th day of March, 2000.

STANLEY, MANDEL & IOLA, L.L.P.
MARC R. STANLEY
Texas State Bar No. 19046500
ROGER L. MANDEL
Texas State Bar No. 12891750
 
 
 
 

______________________________
MARC R. STANLEY

3100 Monticello Avenue, Suite 750
Dallas, TX 75205
Telephone: 214/443-4300
214/443-0358 (fax)

MILBERG WEISS BERSHAD
HYNES & LERACH LLP
WILLIAM S. LERACH
DARREN J. ROBBINS
RANDALL H. STEINMEYER
600 West Broadway, Suite 1800
San Diego, CA 92101
Telephone: 619/231-1058
619/231-7423 (fax)

CAULEY & GELLER, LLP
PAUL J. GELLER
7200 W. Camino Real, Suite 203
Boca Raton, FL 33433
Telephone: 561/750-3000
561/750-3364 (fax)

Attorneys for Plaintiff

1. Includes shares sold by Marmaduke for the benefit of an estate Marmaduke controls.

2. Hastings reported a loss in the third quarter which was materially understated.