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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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SCHEDULE 13E-4
ISSUER TENDER OFFER STATEMENT
(PURSUANT TO SECTION 13(E)(1) OF THE SECURITIES EXCHANGE ACT OF 1934)
HILLS STORES COMPANY
(NAME OF ISSUER)
HILLS STORES COMPANY
(NAME OF PERSON(S) FILING STATEMENT)
COMMON STOCK, PAR VALUE $.01 PER SHARE
(INCLUDING THE ASSOCIATED PREFERRED STOCK PURCHASE RIGHTS)
(TITLE OF CLASS OF SECURITIES)
43169210-2
(CUSIP NUMBER OF CLASS OF SECURITIES)
WILLIAM K. FRIEND, ESQ.
VICE PRESIDENT--CORPORATE COUNSEL
HILLS STORES COMPANY
15 DAN ROAD
CANTON, MASSACHUSETTS 02021
(617) 821-1000
(NAME, ADDRESS AND TELEPHONE NUMBER OF PERSON AUTHORIZED TO RECEIVE NOTICES AND
COMMUNICATIONS ON BEHALF OF THE PERSON(S) FILING STATEMENT)
COPY TO:
BARRY B. WHITE, ESQ.
FOLEY, HOAG & ELIOT
ONE POST OFFICE SQUARE
BOSTON, MASSACHUSETTS 02109
(617) 832-1000
JANUARY 24, 1995
(DATE TENDER OFFER FIRST PUBLISHED,
SENT OR GIVEN TO SECURITY HOLDERS)
CALCULATION OF FILING FEE
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<TABLE>
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TRANSACTION VALUATION* AMOUNT OF FILING FEE
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<S> <C>
$75,000,000 $15,000
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</TABLE>
*Based upon $25 cash per share for 3,000,000 shares.
Check here if any part of the fee is offset as provided by Rule 0-11(a)(2)
and identify the filing with which the offsetting fee is previously paid.
Identify the previous filing by registration statement number, or the Form or
Schedule and the date of its filing. [_]
Amount Previously Paid: N/A Filing Party: N/A
Form or Registration No.: N/A Date Filed: N/A
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ITEM 1. SECURITY AND ISSUER.
(a) The Issuer of the securities to which this statement relates is Hills
Stores Company, a Delaware corporation (the "Company"), and the address of its
principal executive office is 15 Dan Road, Canton, Massachusetts 02021.
(b) This Schedule 13E-4 relates to a tender offer by the Company to purchase
up to 3,000,000 shares of its Common Stock, par value $.01 per share ("Common
Stock"), at $25 per share, net to the seller in cash, upon the terms and
subject to the conditions set forth in the Offer to Purchase, dated January 24,
1995 (the "Offer to Purchase"), and in the related Letter of Transmittal (which
together constitute the "Offer"), copies of which are filed as Exhibits (a)(1)
and (a)(2), respectively. The information set forth in the "Introduction",
Section "1. Background and Purpose of the Offer", Section "3. Terms of the
Offer" and Section "8. Interests of Certain Persons in the Offer" of the Offer
to Purchase is incorporated herein by reference.
(c) The information set forth in Section "7. Price Range of Common Stocks;
Dividends" of the Offer to Purchase is incorporated herein by reference.
(d) Not applicable.
ITEM 2. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION.
(a)-(b) The information set forth in Section "11. Source and Amount of Funds"
of the Offer to Purchase is incorporated herein by reference.
ITEM 3. PURPOSE OF THE TENDER OFFER AND PLANS OR PROPOSALS OF THE ISSUER OR
AFFILIATE.
The information set forth in the "Introduction" and Section "1. Background
and Purpose of the Offer" of the Offer to Purchase is incorporated herein by
reference.
(a)-(j) The information set forth in the "Introduction", Section "1.
Background and Purpose of the Offer", Section "2. Certain Information
Concerning the Company", Section "8. Interests of Certain Persons in the
Offer", and Section "9. Effects of the Offer on the Market for Common Stock;
Registration Under the Exchange Act" of the Offer to Purchase is incorporated
herein by reference.
ITEM 4. INTEREST IN SECURITIES OF THE ISSUER.
The information set forth in Section "8. Interests of Certain Persons in the
Offer" of the Offer to Purchase is incorporated herein by reference.
ITEM 5. CONTRACTS, ARRANGEMENTS, UNDERSTANDINGS OR RELATIONSHIPS WITH RESPECT
TO THE ISSUER'S SECURITIES.
The information set forth in the "Introduction", Section "1. Background and
Purpose of the Offer", Section "2. Certain Information Concerning the Company",
and Section "8. Interests of Certain Persons in the Offer" of the Offer to
Purchase is incorporated herein by reference.
ITEM 6. PERSONS RETAINED, EMPLOYED OR TO BE COMPENSATED.
None; however, the information set forth in the "Introduction" and Section
"15. Fees and Expenses" of the Offer to Purchase is incorporated herein by
reference.
ITEM 7. FINANCIAL INFORMATION.
(a) The information set forth in Section "2. Certain Information Concerning
the Company--Summary Consolidated Financial Information" of the Offer to
Purchase is incorporated herein by reference. The audited financial statements
of the Company at January 29, 1994, and January 30, 1993, and for the fiscal
years ended January 29, 1994, and January 30, 1993, included in the Company's
Annual Report on
1
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Form 10-K for the fiscal year ended January 29, 1994, a copy of which is filed
as Exhibit (g)(1), is incorporated herein by reference. The unaudited financial
statements of the Company at October 29, 1994, and October 30, 1993, and for
the thirty-nine week periods ended October 29, 1994, and October 30, 1993,
included in the Company's Quarterly Report on Form 10-Q for the period ended
October 29, 1994, a copy of which is filed as Exhibit (g)(2), is incorporated
herein by reference.
(b) The information set forth in Section "2. Certain Information Concerning
the Company--Summary Consolidated Financial Information" of the Offer to
Purchase is incorporated herein by reference. The Consolidated Pro Forma
Financial Information of the Company and its subsidiaries filed as Exhibit
(g)(3) is incorporated herein by reference.
ITEM 8. ADDITIONAL INFORMATION.
(a) Not applicable.
(b) The information set forth in Section "13. Certain Legal Matters;
Regulatory Approvals" of the Offer to Purchase is incorporated herein by
reference.
(c) The information set forth in Section "9. Effects of the Offer on the
Market for Common Stock; Registration under the Exchange Act" of the Offer to
Purchase is incorporated herein by reference.
(d) The information set forth in Section "1. Background and Purpose of the
Offer--Certain Litigation Relating to the Dickstein Consent Solicitation" of
the Offer to Purchase is incorporated herein by reference.
(e) Reference is hereby made to the Offer to Purchase and the related Letter
of Transmittal which are attached hereto as Exhibits (a)(1) and (a)(2),
respectively, and incorporated in their entirety herein by reference.
ITEM 9. MATERIAL TO BE FILED AS EXHIBITS.
<TABLE>
<C> <S>
(a)(1) -- Offer to Purchase, dated January 24, 1995.
(a)(2) -- Letter of Transmittal.
(a)(3) -- Letter to the Company's stockholders from Thomas H. Lee, Chairman
of the Board, and Michael Bozic, President and Chief Executive
Officer of the Company, dated January 24, 1995.
(a)(4) -- Notice of Guaranteed Delivery.
(a)(5) -- Letter to Brokers, Dealers, Commercial Banks, Trust Companies and
Other Nominees.
(a)(6) -- Letter to Clients for use by Brokers, Dealers, Commercial Banks,
Trust Companies and Other Nominees.
(a)(7) -- Guidelines for Certification of Taxpayer Identification Number on
Substitute Form W-9.
(a)(8) -- Form of Summary Advertisement dated January 24, 1995.
(a)(9) -- Form of Press Release issued by the Company on January 24, 1995.
(c)(1) -- Settlement Agreement dated as of September 23, 1994 among the
Company, Dickstein Partners Inc. and affiliates of Dickstein
Partners Inc./1/
(c)(2) -- Stipulation and Agreement of Compromise, Settlement and Release
dated as of December 16, 1994./2/
(d) -- Not Applicable.
(e) -- Not Applicable.
(f) -- Not Applicable.
(g)(1) -- Annual Report of the Company on Form 10-K for the fiscal year
ended January 29, 1994.
(g)(2) -- Quarterly Report of the Company on Form 10-Q for the quarterly
period ended October 29, 1994.
(g)(3) -- Hills Stores Company and Subsidiaries Consolidated Pro Forma
Financial Information.
</TABLE>
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/1/ Incorporated by reference to the Report on Form 8-K of the Company dated
September 27, 1994.
/2/ Incorporated by reference to the Report on Form 8-K of the Company dated
January 13, 1995.
2
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SIGNATURE
After due inquiry and to the best of my knowledge and belief, I certify that
the information set forth in this statement is true, complete and correct.
Dated: January 24, 1995
Hills Stores Company
/s/ William K. Friend
By: _________________________________
William K. Friend, Esq.
Vice President--Corporate Counsel
3
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EXHIBIT INDEX
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<CAPTION>
Sequentially
Numbered
Exhibit No. Description Page
----------- ----------- ------------
<C> <S> <C>
(a)(1) -- Offer to Purchase, dated January 24, 1995..........
(a)(2) -- Letter of Transmittal..............................
(a)(3) -- Letter to the Company's stockholders from Thomas
H. Lee, Chairman of the Board, and Michael Bozic,
President and Chief Executive Officer of the
Company, dated January 24, 1995....................
(a)(4) -- Notice of Guaranteed Delivery......................
(a)(5) -- Letter to Brokers, Dealers, Commercial Banks,
Trust Companies and Other Nominees.................
(a)(6) -- Letter to Clients for use by Brokers, Dealers,
Commercial Banks, Trust Companies and Other
Nominees...........................................
(a)(7) -- Guidelines for Certification of Taxpayer
Identification Number on Substitute Form W-9.......
(a)(8) -- Form of Summary Advertisement dated January 24,
1995...............................................
(a)(9) -- Form of Press Release issued by the Company on
January 24, 1995...................................
(c)(1) -- Settlement Agreement dated as of September 23,
1994 among the Company, Dickstein Partners Inc. and
affiliates of Dickstein Partners Inc./1/...........
(c)(2) -- Stipulation and Agreement of Compromise,
Settlement and Release dated as of December 16,
1994./2/...........................................
(d) -- Not Applicable.....................................
(e) -- Not Applicable.....................................
(f) -- Not Applicable.....................................
(g)(1) -- Annual Report of the Company on Form 10-K for the
fiscal year ended January 29, 1994.................
(g)(2) -- Quarterly Report of the Company on Form 10-Q for
the quarterly period ended October 29, 1994........
(g)(3) -- Hills Stores Company and Subsidiaries Consolidated
Pro Forma Financial Information....................
</TABLE>
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/1/ Incorporated by reference to the Report on Form 8-K of the Company dated
September 27, 1994.
/2/ Incorporated by reference to the Report on Form 8-K of the Company dated
January 13, 1995.
<PAGE>
OFFER TO PURCHASE FOR CASH
BY
HILLS STORES COMPANY
UP TO 3,000,000 SHARES OF ITS COMMON STOCK
AT
$25.00 NET PER SHARE
THE OFFER, PRORATION PERIOD AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00
MIDNIGHT,
NEW YORK CITY TIME, ON TUESDAY, FEBRUARY 21, 1995, UNLESS THE OFFER IS
EXTENDED.
Hills Stores Company, a Delaware corporation (the "Company"), is offering to
purchase up to 3,000,000 shares of its Common Stock, par value $.01 per share
("Common Stock"), at $25.00 per share, net to the seller in cash, upon the
terms and subject to the conditions set forth in this Offer to Purchase and in
the related Letter of Transmittal (which together constitute the "Offer").
Although only shares of Common Stock will be purchased pursuant to the Offer,
holders of shares of Series A Convertible Preferred Stock, par value $.10 per
share, of the Company ("Series A Preferred Stock") may tender shares of Common
Stock into which their shares of Series A Preferred Stock are convertible by
following the instructions contained in Section 4 and the Letter of
Transmittal.
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THE OFFER IS NOT CONDITIONED UPON ANY MINIMUM NUMBER OF SHARES BEING
TENDERED. THE OFFER IS, HOWEVER, SUBJECT TO CERTAIN OTHER CONDITIONS. SEE
SECTION 12.
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The Common Stock is listed and principally traded on The New York Stock
Exchange (the "NYSE"). On January 23, 1995, the last trading day prior to
commencement of the Offer, the closing sale price per share of Common Stock as
reported on the NYSE Composite Tape was $21.125. STOCKHOLDERS ARE URGED TO
OBTAIN A CURRENT MARKET QUOTATION FOR THE COMMON STOCK.
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If more than 3,000,000 shares of Common Stock are validly tendered and not
withdrawn prior to the Expiration Date (as defined in Section 3), the Company
will accept for payment shares of Common Stock first from all stockholders who
beneficially owned on January 23, 1995, and continue to own until the
Expiration Date, an aggregate of fewer than 100 shares of Common Stock
(including shares of Common Stock underlying the conversion rights of shares
of Series A Preferred Stock) and who validly tender all such shares of Common
Stock, and then on a pro rata basis from all other stockholders who validly
tender shares of Common Stock. The Company will return all shares of Common
Stock not purchased pursuant to the Offer, including shares not purchased
because of proration. Unless otherwise instructed in the Letter of
Transmittal, shares of Series A Preferred Stock delivered pursuant to the
instructions set forth in Section 4 and the Letter of Transmittal will be
converted into Common Stock only to the extent such tender of Common Stock is
accepted by the Company. Unless otherwise instructed, all remaining shares of
Series A Preferred Stock so delivered will not be converted and will be
returned to the stockholder. See Section 4.
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NEITHER THE COMPANY NOR ITS BOARD OF DIRECTORS MAKES ANY RECOMMENDATION AS
TO WHETHER ANY STOCKHOLDER SHOULD TENDER ANY OR ALL OF SUCH STOCKHOLDER'S
SHARES PURSUANT TO THE OFFER. EACH STOCKHOLDER MUST MAKE ITS OWN DECISION
WHETHER TO TENDER SHARES AND, IF SO, HOW MANY SHARES TO TENDER.
THE COMPANY HAS BEEN ADVISED THAT NONE OF ITS DIRECTORS OR EXECUTIVE
OFFICERS INTENDS TO TENDER ANY SHARES OF COMMON STOCK PURSUANT TO THE OFFER.
THE COMPANY HAS ALSO BEEN ADVISED, HOWEVER, THAT APOLLO CAPITAL MANAGEMENT,
INC. ("APOLLO"), MAY TENDER SOME OR ALL OF THE APPROXIMATELY 700,000 SHARES OF
COMMON STOCK BENEFICIALLY OWNED BY APOLLO PURSUANT TO THE OFFER. MICHAEL S.
GROSS, A DIRECTOR OF THE COMPANY, IS AN OFFICER OF APOLLO. SEE INTRODUCTION
AND SECTION 8.
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The Dealer Manager for the Offer is:
SMITH BARNEY INC.
January 24, 1995
<PAGE>
IMPORTANT
Any stockholder desiring to tender all or any portion of such stockholder's
shares of Common Stock should either (1) complete and sign the Letter of
Transmittal or a facsimile thereof in accordance with the instructions in the
Letter of Transmittal, mail or deliver it and any other required documents to
Chemical Bank (the "Depositary"), and mail or deliver the certificates for such
shares to the Depositary along with the Letter of Transmittal or follow the
procedure for book-entry transfer set forth in Section 4 or (2) request such
stockholder's broker, dealer, commercial bank, trust company or other nominee
to effect the transaction for such stockholder. Although only shares of Common
Stock will be purchased pursuant to the Offer, holders of shares of Series A
Preferred Stock may tender shares of Common Stock into which their shares of
Series A Preferred Stock are convertible by either (1) completing and signing
the Letter of Transmittal or a facsimile thereof in accordance with the
instructions in the Letter of Transmittal, mailing or delivering it and any
other required documents to the Depositary, and mailing or delivering the
certificates for such shares of Series A Preferred Stock to the Depositary
along with the Letter of Transmittal or following the procedure for book-entry
transfer set forth in Section 4 or (2) requesting that such stockholder's
broker, dealer, commercial bank, trust company or other nominee effect the
transaction for such stockholder. In such case, unless otherwise instructed in
the Letter of Transmittal, shares of Series A Preferred Stock so delivered will
be converted into Common Stock only to the extent such tender of Common Stock
is accepted by the Company. Unless otherwise instructed in the Letter of
Transmittal, all remaining shares of Series A Preferred Stock so delivered will
not be converted and will be returned to the stockholder.
A stockholder having shares of Common Stock or Series A Preferred Stock
registered in the name of a broker, dealer, commercial bank, trust company or
other nominee must contact such broker, dealer, commercial bank, trust company
or other nominee if such stockholder desires to tender shares. Stockholders who
desire to tender shares of Common Stock and whose certificates for such shares
or for shares of Series A Preferred Stock convertible into such shares are not
immediately available, or who cannot deliver the certificates for such shares
and any other required document by the Expiration Date, may tender shares by
following the procedures for guaranteed delivery set forth in Section 4.
Questions and requests for assistance may be directed to the Information
Agent or the Dealer Manager at their respective addresses and telephone numbers
set forth on the back cover of this Offer to Purchase. Requests for additional
copies of this Offer to Purchase, the Letter of Transmittal or the Notice of
Guaranteed Delivery may be directed to the Information Agent.
NO PERSON HAS BEEN AUTHORIZED TO MAKE ANY RECOMMENDATION ON BEHALF OF THE
COMPANY AS TO WHETHER STOCKHOLDERS SHOULD TENDER OR REFRAIN FROM TENDERING
SHARES PURSUANT TO THE OFFER. NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE OFFER OTHER
THAN THOSE CONTAINED IN THIS OFFER TO PURCHASE OR IN THE LETTER OF TRANSMITTAL.
IF GIVEN OR MADE, SUCH RECOMMENDATION, INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY.
2
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TABLE OF CONTENTS
<TABLE>
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SECTION PAGE
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<C> <S> <C>
INTRODUCTION............................................................ 4
1. Background and Purpose of the Offer............................. 5
Dickstein Solicitation......................................... 5
Hills Growth Plan.............................................. 6
Tender Offer................................................... 6
Certain Litigation Relating to the Dickstein Solicitation...... 7
2. Certain Information Concerning the Company...................... 8
The Company.................................................... 8
Recent Developments............................................ 8
Emergence from Bankruptcy...................................... 8
Summary Consolidated Financial Information..................... 8
Stockholder Rights Plan........................................ 11
Available Information.......................................... 12
3. Terms of the Offer.............................................. 13
Proration...................................................... 13
Tenders by Holders of Fewer than 100 Shares.................... 14
General........................................................ 14
4. Procedure for Tendering Shares.................................. 14
Valid Tender of Shares......................................... 14
Signature Guarantees and Method of Delivery.................... 15
Book-Entry Delivery............................................ 16
Guaranteed Delivery............................................ 16
Federal Income Tax Withholding................................. 17
Determination of Validity; Waiver of Defects; No Obligation to
Give Notice of Defects......................................... 17
5. Withdrawal Rights............................................... 17
6. Acceptance for Payment and Payment.............................. 18
7. Price Range of Common Stock; Dividends.......................... 19
8. Interest of Certain Persons in the Offer........................ 20
9. Effects of the Offer on the Market for Common Stock;
Registration Under
the Exchange Act............................................... 20
10. Certain Federal Income Tax Consequences......................... 21
11. Source and Amount of Funds...................................... 23
12. Certain Conditions of the Offer................................. 23
13. Certain Legal Matters; Regulatory Approvals..................... 25
14. Extension of Tender Period; Termination and Amendments.......... 25
15. Fees and Expenses............................................... 26
16. Miscellaneous................................................... 26
</TABLE>
3
<PAGE>
To the Holders of the Common Stock and
Series A Preferred Stock of Hills Stores Company:
INTRODUCTION
Hills Stores Company, a Delaware corporation (the "Company"), is offering to
purchase up to 3,000,000 shares of its Common Stock, par value $.01 per share
("Common Stock"), at $25.00 per share, net to the seller in cash, upon the
terms and subject to the conditions set forth in this Offer to Purchase and the
related Letter of Transmittal (which together constitute the "Offer"). Although
only shares of Common Stock will be purchased pursuant to the Offer, holders of
shares of Series A Convertible Preferred Stock, par value $.10 per share, of
the Company ("Series A Preferred Stock") may tender shares of Common Stock into
which their shares of Series A Preferred Stock are convertible by following the
instructions contained in Section 4 and the Letter of Transmittal. Each
reference in this Offer to Purchase and the related Letter of Transmittal to
the Common Stock or the Series A Preferred Stock includes the associated rights
(the "Rights") to purchase Series B Participating Cumulative Preferred Stock,
par value $.10 per shares, of the Company. See Section 2.
THE OFFER IS NOT CONDITIONED UPON ANY MINIMUM NUMBER OF SHARES BEING
TENDERED. THE OFFER IS, HOWEVER, SUBJECT TO CERTAIN OTHER CONDITIONS. SEE
SECTION 12.
If more than 3,000,000 shares of Common Stock are validly tendered by the
Expiration Date (as defined in Section 3) and not withdrawn, the Company will
accept for payment shares of Common Stock first from all stockholders who
beneficially owned on January 23, 1995, and continue to own until the
Expiration Date, an aggregate of fewer than 100 shares of Common Stock
(including shares of Common Stock underlying the conversion rights of shares of
Series A Preferred Stock) and who validly tender all such shares of Common
Stock (each, an "Odd Lot Owner"), and then on a pro rata basis from all other
stockholders who validly tender shares of Common Stock. The Company will return
all shares of Common Stock not purchased pursuant to the Offer, including
shares not purchased because of proration. Unless otherwise instructed in the
Letter of Transmittal, shares of Series A Preferred Stock delivered pursuant to
the instructions set forth in Section 4 and the Letter of Transmittal will be
converted into Common Stock only to the extent such tender of Common Stock is
accepted by the Company. Unless otherwise instructed in the Letter of
Transmittal, all remaining shares of Series A Preferred Stock so delivered will
not be converted and will be returned to the stockholder. See Section 4.
Tendering stockholders will not be obligated to pay brokerage commissions,
solicitation fees or, subject to Instruction 6 of the Letter of Transmittal,
stock transfer taxes on the purchase of shares of Common Stock by the Company
pursuant to the Offer. In addition, the Company will pay all fees and expenses
of Smith Barney Inc. ("Smith Barney"), which is acting as Dealer Manager,
Chemical Bank (the "Depositary") and D. F. King & Co., Inc. (the "Information
Agent"), incurred in connection with the Offer. See Section 15.
The Common Stock is listed and principally traded on The New York Stock
Exchange (the "NYSE") and is also listed and traded on the Boston Stock
Exchange. On January 23, 1995, the last trading day prior to commencement of
the Offer, the closing sale price per share of Common Stock as reported on the
NYSE Composite Tape was $21.125. See Section 7. THE COMPANY URGES STOCKHOLDERS
TO OBTAIN A CURRENT MARKET QUOTATION FOR THE COMMON STOCK.
NEITHER THE COMPANY NOR THE BOARD OF DIRECTORS OF THE COMPANY MAKES ANY
RECOMMENDATION AS TO WHETHER ANY STOCKHOLDER SHOULD TENDER ANY OR ALL OF SUCH
STOCKHOLDER'S SHARES PURSUANT TO THE COMPANY'S OFFER.
4
<PAGE>
EACH STOCKHOLDER MUST MAKE ITS OWN DECISION AS TO WHETHER TO TENDER SHARES AND,
IF SO, HOW MANY SHARES TO TENDER.
THE COMPANY HAS BEEN ADVISED THAT NONE OF ITS DIRECTORS OR EXECUTIVE OFFICERS
INTENDS TO TENDER ANY SHARES OF COMMON STOCK PURSUANT TO THE OFFER. THE COMPANY
HAS ALSO BEEN ADVISED, HOWEVER, THAT APOLLO MAY TENDER SOME OR ALL OF THE
APPROXIMATELY 700,000 SHARES OF COMMON STOCK BENEFICIALLY OWNED BY APOLLO
PURSUANT TO THE OFFER. MICHAEL S. GROSS, A DIRECTOR OF THE COMPANY, IS AN
OFFICER OF APOLLO. SEE SECTION 8.
As of the close of business on January 23, 1995, the Company had 10,572,527
shares of Common Stock and 3,182,107 shares of Series A Preferred Stock issued
and outstanding. Each share of Series A Preferred Stock is convertible, at the
option of the holder thereof, into one share of Common Stock. As of the close
of business on January 23, 1995, options to purchase an additional 1,015,021
shares of Common Stock were outstanding under the Company's 1993 Incentive and
Nonqualified Stock Option Plan. Options to purchase 160,821 of such shares were
exercisable as of such date. In addition, the Company has reserved 700,000
shares of Common Stock for issuance upon exercise of its Series 1993 Stock
Rights which, as of the date hereof, are unvested, and 432,990 shares of Common
Stock for issuance upon exercise of Series 1993 Warrants to purchase Common
Stock at $30.00 per share. Such stock rights and warrants were issued by the
Company pursuant to the plan of reorganization governing the Company's
emergence from bankruptcy proceedings in October 1993. The Company may also
issue from time to time additional shares of Common Stock or Series A Preferred
Stock pursuant to such plan of reorganization upon settlement of bankruptcy
claims, although the Company does not believe that the issuance of any such
shares would have a material effect on the proration of shares of Common Stock
tendered pursuant the Offer. The 3,000,000 shares of Common Stock which the
Company is offering to purchase represent approximately 28% of the Common Stock
outstanding as of the close of business on January 23, 1995, and approximately
22% of the Company's Common Stock outstanding as of such date assuming the
conversion of all shares of Series A Preferred Stock outstanding, and the
exercise of all stock options exercisable, as of the close of business on
January 23, 1995.
1. BACKGROUND AND PURPOSE OF THE OFFER.
DICKSTEIN SOLICITATION
On August 16, 1994, Dickstein Partners, Inc. ("Dickstein"), commenced a
consent solicitation to remove without cause four members of the Board of
Directors of the Company (the "Board") and replace them with four Dickstein
nominees (the "Dickstein Solicitation"). In connection with the Dickstein
Solicitation, Dickstein initially proposed that the Company repurchase up to
5.5 million shares of its Common Stock and Series A Preferred Stock in exchange
for $27 principal amount per share of high yield notes (the "Dickstein Exchange
Proposal").
In August 1994, the Board retained Smith Barney as its financial advisor to
evaluate, from a financial point of view, the Dickstein Exchange Proposal and
other alternatives available to the Company and announced that, at the same
time, the Board would consider whether any changes in the Company's operating
or strategic plans were appropriate. Based on the Board's review of the
Company's operating and strategic plans and the financial analysis of Smith
Barney, the Board determined that the Dickstein Exchange Proposal was
inconsistent with the continued successful execution of the Company's operating
strategies and the implementation of its growth plan.
On September 21, 1994, the Company announced that the Board had approved a
program to enhance stockholder value, including the implementation of the
growth plan described below and the decision to pursue the Offer. The approval
of this program followed completion of an in-depth analysis of various means
for the Company to enhance stockholder value that was conducted by the Board,
in consultation with the Company's senior management, during August and
September 1994. Included within the analysis was an evaluation of the Dickstein
Exchange Proposal (including modifications made by Dickstein to its initial
proposal).
On September 23, 1994, the Company and Dickstein entered into a Settlement
Agreement (the "Dickstein Settlement Agreement") pursuant to which Dickstein
agreed, among other things, (i) to cease the
5
<PAGE>
Dickstein Solicitation, (ii) to support the Company's effort to adopt an
amendment to the Company's Amended and Restated Certificate of Incorporation to
provide that any action required or permitted to be taken by stockholders must
be taken at an annual or special meeting of stockholders and may not be taken
by written consent of stockholders (the "Proposed Charter Amendment") and (iii)
not to challenge the validity of certain of the Company's employment and
consulting agreements, the Company's stockholder rights plan and certain
amendments to the Company's Amended and Restated By-Laws. In the Dickstein
Settlement Agreement, the Company agreed to use its best efforts to consummate
the Offer as promptly as practicable and to reimburse Dickstein for up to
$600,000 of Dickstein's expenses in connection with the Dickstein Solicitation
and to use the Company's best efforts to consummate the Offer. In addition, the
Dickstein Settlement Agreement provides that if the Company does not purchase
shares of Common Stock pursuant to the Offer (in accordance with the terms of
the Offer) prior to March 31, 1995 (unless the Offer is made, all conditions to
the purchase of shares of Common Stock in the Offer are satisfied and no shares
of Common Stock are tendered), then the Company will promptly amend its Amended
and Restated By-Laws to grant to its stockholders the right to take action
without a meeting by written consent (and such by-law amendment will not be
subject to modification or amendment without stockholder approval).
HILLS GROWTH PLAN
The Company's growth plan consists of three main components--(i) a remodeling
program under which the successful remodeling of the Company's stores, begun in
1991, will be completed by the end of the Company's 1995 fiscal year, the
Company will continually improve its overall store design and merchandising
presentation, and the Company anticipates commencing a second phase of its
remodeling program in 1996; (ii) a new store program under which the Company
plans to open up to 15 new stores in 1995 and up to 20 new stores per year over
the next several years; and (iii) continuation of an operating improvements
program under which the Company is committed to reducing operating expenses as
a percentage of sales. The capital required to implement the Company's growth
plan is approximately $65 million in 1995 and approximately $75-80 million
annually thereafter for the next several years. While such capital expenditure
levels are significantly higher than expenditures incurred in recent years
(particularly in light of the Company's restructuring and store closings during
the pendency of its Chapter 11 bankruptcy proceedings that were concluded in
1993), the Company anticipates that it will be able to make all such capital
expenditures out of cash flows from operations and believes that the
expenditures are appropriate in light of the anticipated returns on the
Company's investments in remodeling and opening new stores.
TENDER OFFER
The adoption by the Board of its plan to enhance stockholder value also
involved approval of the Offer. Commencement of the Offer was conditioned on
stockholder approval of the Proposed Charter Amendment. In addition, the
Indenture governing the Company's 10.25% Senior Notes due 2003 (the "Senior
Notes") contained a limitation on restricted payments which, unless such
limitation were amended or modified, would not have permitted the Company to
consummate the Offer. Accordingly, commencement of the Offer also was
conditioned upon either approval of a majority in interest of the holders of
the Senior Notes to an amendment to the restricted payments provision contained
in the Indenture or formation of a new holding company which would not have
been subject to the Indenture and could have purchased shares of Common Stock
pursuant to a self-tender offer without violating the Indenture's restricted
payments limitation. To facilitate commencement of the Offer, the Company
solicited the consent of holders of Senior Notes to modify the Indenture's
restricted payments limitation and agreed to pay $15.00 in cash for each $1,000
principal amount of Senior Notes consenting to such modification.
On January 11, 1995, holders of the Senior Notes consented to the adoption of
an amendment to the restricted payments provision contained in the Indenture
governing the Senior Notes so that shares of Common Stock may be purchased
pursuant to the Offer without violating such restricted payments provision.
6
<PAGE>
At a special meeting of stockholders of the Company held on January 18, 1995,
the stockholders of the Company approved the Proposed Charter Amendment.
The primary purpose of the Offer is to provide the Company's stockholders who
wish to realize a portion of their investment currently in cash with an
opportunity to sell a portion of their shares at a premium over recent market
prices of the shares without the usual transaction costs associated with a
market sale. Stockholders whose shares are not purchased pursuant to the Offer
will increase their proportionate ownership interest in the Company and thus in
its future earnings and profits. The Offer will also allow qualifying Odd Lot
Owners whose shares of Common Stock are purchased pursuant to the Offer to
avoid the payment of brokerage commissions and any applicable odd-lot discount
payable on a sale of shares of Common Stock in a transaction effected on a
securities exchange. To the extent the purchase of shares of Common Stock in
the Offer results in a reduction in the number of stockholders of record, the
costs to the Company for services to stockholders will be reduced.
Shares of Common Stock the Company acquires pursuant to the Offer will
initially be held in the Company's treasury or retired (or a combination
thereof) and will be available for the Company to issue without further
stockholder action (except as required by applicable law or the rules of the
securities exchanges on which shares of Common Stock are listed) for such
purposes as, among others, the acquisition of other businesses, the raising of
additional capital for use in the Company's business, the satisfaction of
conversion requirements under securities issued by the Company, the
distribution of stock dividends and the implementation of, or the satisfaction
of obligations under, employee benefit plans. The Company's certificate of
designation governing the terms of the Series A Preferred Stock provides that
any shares of Series A Preferred Stock which are converted into shares of
Common Stock shall, after such conversion, be retired, and the Company shall
take all appropriate action to cause such shares to obtain the status of
authorized but unissued shares of preferred stock of the Company without
designation as to series until such shares are once more designated as part of
a particular series by the Board.
CERTAIN LITIGATION RELATING TO THE DICKSTEIN SOLICITATION
On August 24, 1994, a stockholder's derivative and class action lawsuit was
filed in the Court of Chancery of the State of Delaware captioned Weiss v. Lee,
et al., which named each Board member and the Company as defendants. The
plaintiff amended his complaint on September 9, 1994, alleging, among other
things, that the Board adopted a stockholder rights plan and entered into new
employment and consulting agreements for the express purpose of entrenching the
Board members and management in their current offices for their own personal
gain and to the detriment of the Company's stockholders, and, consequently,
breached their fiduciary duty to the Company's stockholders. The Company and
its directors have denied, and continue to deny, that any of them have
committed any violation of law or breached any duty owed the Company or its
stockholders and believe the plaintiff's allegations are without merit.
However, in order to eliminate the burden and expense of further litigation,
and because the Board believes a settlement is in the best interests of the
Company and all of its stockholders, on December 16, 1994, the parties entered
into a Stipulation and Agreement of Compromise, Settlement and Release (the
"Weiss Settlement"). The Weiss Settlement, which contemplates treatment of the
action as a stockholder class action and would not permit members of the
stockholder class to opt out of the Weiss Settlement, has been presented to the
Court of Chancery for its approval.
In the Weiss Settlement, the Company has agreed, among other things, (i) to
amend the challenged employment agreements to change the definition of change
in control, shorten the initial term of the agreements and adjust certain
termination payments, (ii) to undertake the Offer and (iii) not to oppose an
application of plaintiff's counsel for an award of attorneys' fees in an amount
not to exceed $350,000, plus expenses not to exceed $35,000. A hearing
regarding the Weiss Settlement has been scheduled for March 20, 1995. On
January 17, 1995, the Company distributed a notice of the Weiss Settlement and
the scheduling of
7
<PAGE>
such hearing to its stockholders. Additional copies of such notice may be
obtained by contacting the Vice President--Corporate Counsel of the Company at
(617) 821-1000, extension 1720. The tendering of shares of Common Stock
pursuant to the Offer will not affect any substantive rights of the Company's
stockholders under the Weiss Settlement.
2. CERTAIN INFORMATION CONCERNING THE COMPANY.
THE COMPANY
The Company is a leading regional discount retailer offering a broad range of
brand name and other first quality general merchandise, and operates, through
HDSC, its wholly-owned subsidiary, a chain of discount department stores under
the trade name of Hills Department Stores. The Company currently operates 154
stores in the states of Illinois, Indiana, Kentucky, Maryland, Massachusetts,
New York, Ohio, Pennsylvania, Tennessee, Virginia and West Virginia.
The Company is a Delaware corporation. Its principal executive offices are
located at 15 Dan Road, Canton, Massachusetts 02021 (telephone 617-821-1000).
RECENT DEVELOPMENTS
On January 5, 1995, the Company publicly announced that comparable sales for
the five-week period ended December 31, 1994, increased 4.1 percent to $364.0
million from $349.7 million for the corresponding period in fiscal 1993. Total
sales for December 1994 increased 6.5 percent to $372.6 million. Comparable
sales for the forty-eight week period ended December 31, 1994, increased 4.7
percent to $1,775.1 million from $1,695.6 million for the corresponding period
in the previous year. Total sales increased 5.6 percent during the forty-eight
week period ended December 31, 1994, to $1,796.8 million. The Company also
publicly announced that the 1994 Christmas period sales were ahead of the
Company's plan and that hard-line and seasonal businesses, particularly those
associated with the home, continued to be very strong, while apparels, though
ahead for the period, experienced more modest gains.
EMERGENCE FROM BANKRUPTCY
On October 4, 1993, the Company and certain of its principal subsidiaries
emerged from reorganization proceedings under Chapter 11 of the United States
Bankruptcy Code ("Chapter 11") pursuant to a Confirmation Order entered on
September 10, 1993, by the United States Bankruptcy Court for the Southern
District of New York, which confirmed the Company's First Amended Consolidated
Plan of Reorganization. The Company, its former parent, Hills Department
Stores, Inc. (the "Predecessor Company"), and the five principal subsidiaries
of the Company, voluntarily filed petitions for reorganization under Chapter 11
on February 4, 1991. The Predecessor Company operated its business as a debtor-
in-possession under Chapter 11 from February 4, 1991, until October 4, 1993.
Under the reorganization plan, the Predecessor Company was dissolved, all of
the Company's assets, property and interest were transferred to Hills
Department Store Company, the Company's principal operating subsidiary
("HDSC"), and the Company succeeded to the Predecessor Company's status as a
holding company and the parent of HDSC.
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
The tables set forth below present certain summary consolidated historical,
historical adjusted, and pro forma financial information of the Company. The
summary historical information at January 29, 1994, and January 30, 1993, and
for the year ended January 30, 1993, has been summarized from the audited
consolidated financial statements included in the Company's Annual Report on
Form 10-K for the fiscal year ended January 29, 1994 (the "Form 10-K"). The
summary historical information at October 29, 1994, and October 30, 1993, and
for the thirty-nine weeks ended October 29, 1994, has been summarized from the
8
<PAGE>
unaudited consolidated financial statements included in the Company's Quarterly
Report on Form 10-Q for the thirty-nine weeks ended October 29, 1994 (the "Form
10-Q"). Such summary historical financial information is qualified in its
entirety by reference to the Form 10-K or the Form 10-Q, as applicable, and all
of the financial statements and related notes contained therein. See "Available
Information" below. The historical information for the thirty-nine weeks ended
October 29, 1994 is unaudited; however, the information furnished reflects all
normal recurring adjustments which are, in the opinion of management, necessary
to present a fair statement of the results for the interim periods.
The summary unaudited historical adjusted financial information for the
fiscal year ended January 29, 1994, has been summarized from the Combined
Statement of Operations included in footnote 3 to the audited consolidated
financial statements included in the Form 10-K. The summary historical adjusted
financial information for the thirty-nine weeks ended October 30, 1993, has
been summarized from the Combined Statement of Operations included in footnote
2 to the unaudited consolidated financial statements included in the Form 10-Q.
Such summary historical adjusted financial information is qualified in its
entirety by reference to the Form 10-K or the Form 10-Q, as applicable, and all
of the financial statements and related notes contained therein. See "Available
Information" below. The historical adjusted information for the fiscal year
ended January 29, 1994, and the thirty-nine weeks ended October 30, 1993, has
been adjusted to reflect: the combination of pre-emergence and post-emergence
accounting periods, the implementation of fresh-start reporting as of January
31, 1993, elimination of the effects of non-recurring transactions resulting
from the reorganization pursuant to the Company's emergence from bankruptcy and
payments to creditors in connection with such emergence from bankruptcy as of
January 31, 1993. Financial information for periods after the Company's
emergence from bankruptcy proceedings has been separated from pre-emergence
financial data by black lines to signify that they have been prepared on a
basis not comparable to prior periods. See footnote 2 to the consolidated
financial statements included in the Form 10-K, which may be obtained as
provided under "Available Information" below.
The summary pro forma financial information at October 29, 1994, and January
29, 1994, for the year ended January 29, 1994, and for the thirty-nine weeks
ended October 29, 1994, has been summarized from the unaudited Consolidated Pro
Forma Financial Information of the Company and its subsidiaries (the "Pro Forma
Financial Information") filed as an exhibit to the Issuer Tender Offer
Statement on Schedule 13E-4 (the "Schedule 13E-4") filed by the Company with
the Securities and Exchange Commission (the "Commission") in connection with
the Offer. Such summary pro forma financial information is qualified in its
entirety by reference to the Pro Forma Financial Information, which may be
obtained as provided under "Available Information" below. The Pro Forma
Financial Information assumes payment of a full $2.4 million to holders of the
Senior Notes (which full payment assumes that $160 million principal amount of
Senior Notes are outstanding and holders of all such Senior Notes consented to
the modification of the restricted payments limitation contained in the
Indenture governing the Senior Notes), a pro rata tender of shares of Common
Stock and shares of Series A Preferred Stock, the repurchase of three million
shares of Common Stock for $25 per share in cash and, for purposes of the pro
forma financial information at October 29, 1994, borrowings under the working
capital credit facility of HDSC (the "Credit Facility") in order to fund the
repurchase of shares of Common Stock. The Company anticipates funding the
actual purchase of shares of Common Stock pursuant to the Offer with cash on
hand at the time of purchase. In addition to the assumptions described in the
immediately preceding sentence, the Pro Forma Financial Information for the
year ended January 29, 1994, also includes the adjustments relating to the
Company's emergence from bankruptcy referred to in the preceding paragraph.
The historical results of operations for the thirty-nine weeks ended October
29, 1994, and October 30, 1993, are not necessarily indicative of the results
of operations to be expected for a full year because the Company's business is
seasonal in nature. The fourth quarter of each fiscal year provides the major
portion of the Company's annual sales and operating earnings, with operating
earnings particularly concentrated in the Christmas selling season. See "Recent
Developments" above.
9
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Thirty-nine weeks ended Years ended
----------------------- -----------------------
Historical Historical
Historical Adjusted Adjusted Historical
October 29, October 30, January 29, January 30,
1994 1993 1994 1993
----------- ----------- ----------- -----------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
HISTORICAL/HISTORICAL ADJUSTED
STATEMENT OF
OPERATIONS DATA:
Net sales...................... $1,198,441 $1,138,539 $1,765,533* $1,750,266
Earnings before extraordinary *
item.......................... 6,964 1,060 30,041* 26,817
Net earnings applicable to com- *
mon shareholders.............. 6,964 1,060 30,041* 47,264
PRIMARY EARNINGS PER COMMON *
SHARE: *
Earnings before extraordinary *
item.......................... 0.49 0.08 2.14* 1.23
Extraordinary item............. -- -- -- * 1.16
Net earnings applicable to com- *
mon shareholders.............. 0.49 0.08 2.14* 2.39
FULLY-DILUTED EARNINGS PER COM- *
MON SHARE: *
Earnings before extraordinary *
item.......................... 0.47 0.07 2.03* 1.11
Extraordinary item............. -- -- -- * 1.04
Net earnings applicable to com- *
mon shareholders.............. 0.47 0.07 2.03* 2.15
AVERAGE NUMBER OF SHARES: *
Primary earnings............... 14,097 14,000 14,056* 19,757
Fully-diluted earnings......... 14,797 14,700 14,794* 21,982
RATIO OF EARNINGS TO FIXED *
CHARGES(1).................... 1.31 1.05 2.06* 2.16
- --------------------------------------------------------------------------------
PRO FORMA STATEMENT OF OPERA-
TIONS DATA:
Net sales...................... $1,198,441 $1,765,533
Earnings before extraordinary
item.......................... 4,878 27,533
Net earnings applicable to com-
mon shareholders.............. 4,878 27,533
PRIMARY EARNINGS PER COMMON
SHARE:
Earnings before extraordinary
item.......................... 0.44 2.49
Net earnings applicable to com-
mon shareholders.............. 0.44 2.49
FULLY-DILUTED EARNINGS PER COM-
MON SHARE:
Earnings before extraordinary
item.......................... 0.41 2.33
Net earnings applicable to com-
mon shareholders.............. 0.41 2.33
AVERAGE NUMBER OF SHARES:
Primary earnings............... 11,097 11,056
Fully-diluted earnings......... 11,797 11,794
RATIO OF EARNINGS TO FIXED
CHARGES(1).................... 1.20 1.91
</TABLE>
- --------
(1) Computed by dividing earnings from continuing operations, before income
taxes and fixed charges, by fixed charges. Fixed charges consist of
interest expense, approximately 39% of rent expense (estimated by
management to be the interest component of such rent expense) and preferred
dividend requirements of the Predecessor Company accrued but not paid
during the Company's bankruptcy proceedings. Preferred stock dividend
requirements have been increased to reflect the estimated amount of pre-tax
earnings that would be necessary to cover such dividends.
10
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
October 29, October 30, January 29, January 30,
1994 1993 1994 1993
----------- ----------- ----------- -----------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
HISTORICAL BALANCE SHEET DATA:
Working capital............... $ 185,247 $ 107,194 $171,440* $ 299,927
Reorganization value in excess *
of amounts allocable to *
identifiable assets, net..... 169,989 203,586 176,728* --
Goodwill...................... -- -- -- * 135,627
Total assets.................. 1,020,645 1,021,453 907,621* 922,745
Total indebtedness............ 753,107 823,444 677,386* 1,105,917
Shareholders' equity (defi- *
cit)......................... 267,538 198,009 230,235* (183,172)
Book value per share.......... 25.44 22.00 25.58* (9.27)
*
- -------------------------------------------------------------------------------
PRO FORMA BALANCE SHEET DATA:
Working capital............... $ 107,847 $ 94,040
Reorganization value in excess
of amounts allocable to
identifiable assets, net..... 169,989 176,728
Total assets.................. 1,020,645 832,621
Total indebtedness............ 813,180 655,957
Shareholders' equity.......... 207,465 176,664
Book value per share.......... 27.60 24.98
</TABLE>
STOCKHOLDER RIGHTS PLAN
On August 16, 1994, the Board distributed to each outstanding share of Common
Stock and Series A Preferred Stock one right (a "Right") to purchase from the
Company one one-thousandth (1/1,000th) of a share of Series B Participating
Cumulative Preferred Stock, par value $.10 per share ("Series B Preferred
Stock"), at a price of $75 per share (the "Purchase Price"). The Rights are not
exercisable until the Distribution Date (as defined below) and will expire on
August 16, 2004 (the "Rights Expiration Date"), unless earlier redeemed by the
Company as described below. The description and terms of the Rights are set
forth in the Rights Agreement dated as of August 16, 1994, between the Company
and Chemical Bank, as rights agent (the "Rights Agreement").
Until the earlier of (i) such time as the Company learns that a person or
group (including any affiliate or associate of such person or group) has
acquired, or has obtained the right to acquire, beneficial ownership of an
amount equal to or greater than 15% of the outstanding shares of Common Stock
and Series A Preferred Stock (or in the event a person or group beneficially
owned on August 16, 1994, in excess of 15%, such percentage so owned plus 1%
(the "Higher Percentage")), other than pursuant to a Qualifying Offer (as
defined below) (such person or group, being an "Acquiring Person"), and (ii)
such date, if any, as may be designated by the Board following the commencement
of, or first public disclosure of an intent to commence, a tender or exchange
offer for outstanding shares of Common Stock or Series A Preferred Stock which
could result in such person or group becoming the beneficial owner of an amount
equal to or greater than 15% of the outstanding shares of Common Stock and
Series A Preferred Stock (or, if applicable, the Higher Percentage), other than
pursuant to a Qualifying Offer (the earlier of such dates being called the
"Distribution Date"), the Rights will be evidenced by the certificates for
shares of Common Stock and Series A Preferred Stock registered in the names of
the holders thereof and not by separate right certificates. A "Qualifying
Offer" is defined as an all-cash tender offer for all outstanding shares of
Common Stock and Series A Preferred Stock for which firm commitments for
financing have been obtained and that must meet certain other conditions,
including without limitation, remaining open for a period of at least 45
business days and
11
<PAGE>
providing for a prompt second-step acquisition of shares not purchased in the
tender offer at the same price as the tender offer.
At such time as there is an Acquiring Person, the Rights will entitle each
holder (other than such Acquiring Person) of a Right to purchase, for the
Purchase Price, that number of one one-thousandths (1/1,000ths) of a share of
Series B Preferred Stock equivalent to the number of shares of Common Stock
which at the time of such event would have a market value of twice the Purchase
Price.
In the event the Company is acquired in a merger or other business
combination by an Acquiring Person or 50% or more of the Company's assets or
assets representing 50% or more of the Company's revenues or cash flow are
sold, leased, exchanged or otherwise transferred (in one or more transactions)
to an Acquiring Person, each Right will entitle its holder (other than such
Acquiring Person) to purchase, for the Purchase Price, that number of common
shares of such Acquiring Person (or, in certain instances, an affiliate
thereof) which at the time of the transaction would have a market value (or, in
the case of a non-publicly traded entity, book value) of twice the Purchase
Price.
At any time prior to the earlier of (i) such time as a person becomes an
Acquiring Person and (ii) the Rights Expiration Date, the Board may redeem the
Rights in whole, but not in part, at a price (in cash or Common Stock or other
securities of the Company deemed by the Board to be at least equivalent in
value) of $.01 per Right, subject to adjustment as provided in the Rights
Agreement. At any time prior to the Distribution Date, the Company may, without
the approval of any holder of the Rights, supplement or amend any provision of
the Rights Agreement (including the date on which the Distribution Date shall
occur, the time during which the Rights may be redeemed or the terms of the
Series B Preferred Stock), except that no supplement or amendment shall be made
which reduces the Redemption Price (other than pursuant to certain adjustments
therein) or provides for an earlier Rights Expiration Date.
The Rights have certain anti-takeover effects. The Rights will cause
substantial dilution to a person or group that attempts to acquire the Company
without conditioning the offer on substantially all the Rights being acquired.
The Rights will not interfere with any acquisition of the Company pursuant to a
Qualifying Offer or with a third party approved by the Board since the Board
may, at its option, at any time prior to any person becoming an Acquiring
Person, redeem all but not less than all of the then outstanding Rights at the
Redemption Price.
Each reference in this Offer to Purchase and the related Letter of
Transmittal to the Common Stock or the Series A Preferred Stock includes the
associated Rights. The tender of shares pursuant to the Offer will therefore
include a tender of the associated Rights.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files annual and periodic reports, proxy statements and other
information with the Commission relating to its business, financial condition
and other matters. Information, as of particular dates, concerning the
Company's directors and officers, their remuneration, options granted to them,
the principal holders of the Company's securities and any material interest of
such persons in transactions with the Company is required to be disclosed in
proxy statements distributed to the Company's stockholders and filed with the
Commission. Pursuant to Rule 13e-4 of the General Rules and Regulations under
the Exchange Act, the Company has filed with the Commission a Tender Offer
Statement on Schedule 13E-4 (the "Schedule 13E-4"), together with exhibits,
furnishing certain additional information with respect to the Offer. The
Schedule 13E-4, and exhibits thereto and the reports and other information
filed by the Company with the Commission, can be inspected and copied at the
public reference facilities maintained by the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. The reports
and other information filed by the Company with the Commission under the
Exchange Act should also be available for inspection and copying at the
Commission's regional
12
<PAGE>
offices located at Suite 1400, 500 West Madison Street, Chicago, Illinois 60661
and Seven World Trade Center, Thirteenth Floor, New York, New York 10048.
Copies of all the materials referred to above can be obtained from the public
reference section of the Commission, Washington, D.C. 20549, at prescribed
rates. Reports and other information concerning the Company should also be
available for inspection at the offices of the NYSE, 20 Broad Street, New York,
New York 10005, and the Boston Stock Exchange, One Boston Place, 30th Floor,
Boston, Massachusetts 02108.
3. TERMS OF THE OFFER.
Upon the terms and subject to the conditions set forth in the Offer, the
Company will accept for payment and pay for up to 3,000,000 shares of Common
Stock validly tendered prior to the Expiration Date and not theretofore
withdrawn in accordance with the procedures set forth in Section 5. The term
"Expiration Date" shall mean 12:00 Midnight, New York City time, on Tuesday,
February 21, 1995, unless and until the Company, in its sole discretion, shall
have extended the period of time for which the Offer is open, in which event
the term "Expiration Date" shall mean the latest time and date at which the
Offer, as so extended by the Company, shall expire. Subject to the purchase of
all shares of Common Stock validly tendered and not withdrawn by Odd Lot Owners
as set forth in Section 4, if the Offer is oversubscribed, shares of Common
Stock tendered before the Expiration Date will be subject to proration. The
proration period expires on the Expiration Date.
THE OFFER IS NOT CONDITIONED UPON ANY MINIMUM NUMBER OF SHARES OF COMMON
STOCK BEING TENDERED. THE COMPANY'S OBLIGATION TO ACCEPT FOR PAYMENT, AND TO
PAY FOR, SHARES OF COMMON STOCK PURSUANT TO THE OFFER IS SUBJECT TO CERTAIN
CONDITIONS SET FORTH IN SECTION 12.
PRORATION
If the number of shares of Common Stock validly tendered and not withdrawn
prior to the Expiration Date is less than or equal to 3,000,000 shares of
Common Stock, the Company, upon the terms and subject to the conditions of the
Offer, will purchase for $25.00 per share, net to the seller in cash, all
shares of Common Stock so tendered and not withdrawn.
If the number of shares of Common Stock validly tendered and not withdrawn
prior to the Expiration Date is greater than 3,000,000 shares of Common Stock,
the Company, upon the terms and subject to the conditions of the Offer, will
accept shares of Common Stock for payment in the following order of priority:
(a) first, all shares of Common Stock validly tendered and not withdrawn
prior to the Expiration Date by any Odd Lot Owner (that being a stockholder
who beneficially owned as of January 23, 1995, and continues to
beneficially own until the Expiration Date, an aggregate of less than 100
shares of Common Stock (including shares of Common Stock underlying the
conversion rights of shares of Series A Preferred Stock)) who:
(1) tenders all shares of Common Stock (including shares of Common
Stock underlying the conversion rights of shares of Series A Preferred
Stock) beneficially owned by such Odd Lot Owner (partial tenders will
not qualify for this preference); and
(2) completes the box captioned "Odd Lots" on the Letter of
Transmittal and, if applicable, on the Notice of Guaranteed Delivery;
and
(b) then, after purchase of all the foregoing shares of Common Stock,
all shares of Common Stock validly tendered and not withdrawn prior to the
Expiration Date on a pro rata basis, if necessary (with adjustments to
avoid purchase of fractional shares of Common Stock).
All shares of Common Stock not purchased pursuant to the Offer, including
shares of Common Stock not purchased because of proration and shares of Common
Stock tendered and withdrawn, will be returned to the tendering stockholder at
the Company's expense as promptly as practicable (which, in the event of
proration, is expected to be up to approximately 12 NYSE trading days)
following the Expiration Date or as
13
<PAGE>
promptly as practicable following withdrawal, as the case may be. Unless
otherwise instructed in the Letter of Transmittal, shares of Series A Preferred
Stock delivered pursuant to the instructions set forth in Section 4 and the
Letter of Transmittal will be converted into Common Stock only to the extent
such tender of Common Stock is accepted by the Company. Unless otherwise
instructed, all other shares of Series A Preferred Stock so delivered will not
be converted and will be returned to the tendering stockholder at the Company's
expense as promptly as practicable (which, in the case of proration, is
expected to be up to approximately 12 NYSE trading days) following the
Expiration Date.
In the event of proration, because of the difficulty of determining the
precise number of shares of Common Stock validly tendered and not withdrawn,
the Company does not expect to be able to announce the final results of such
proration until at least seven NYSE trading days after the Expiration Date.
Preliminary results of such proration will be announced by press release as
promptly as practicable after the Expiration Date. Stockholders may obtain such
preliminary information, when available, from the Dealer Manager or the
Information Agent.
TENDERS BY HOLDERS OF FEWER THAN 100 SHARES
The Company, upon the terms and subject to the conditions of the Offer, will
accept for payment, without proration, all shares of Common Stock (including
shares of Common Stock underlying the conversion rights of shares of Series A
Preferred Stock) validly tendered and not withdrawn on or before the Expiration
Date by or on behalf of Odd Lot Owners. To avoid possible proration, however,
an Odd Lot Owner must validly tender all shares of Common Stock that such Odd
Lot Owner beneficially owns (including shares of Common Stock underlying the
conversion rights of shares of Series A Preferred Stock); partial tenders will
not qualify for this preference. This preference is not available to owners of
100 or more shares of Common Stock (including shares of Common Stock underlying
the conversion rights of shares of Series A Preferred Stock), even if such
owners have separate stock certificates for less than 100 shares. Any Odd Lot
Owner wishing to tender all shares of Common Stock beneficially owned by such
Odd Lot Owner pursuant to this Offer must complete the box captioned "Odd Lots"
on the Letter of Transmittal and, if applicable, on the Notice of Guaranteed
Delivery. See Section 4.
GENERAL
This Offer to Purchase and the related Letter of Transmittal are being mailed
to record holders of shares of Common Stock and record holders of shares of
Series A Preferred Stock and will be furnished to brokers, dealers, commercial
banks, trust companies and similar persons whose names, or the names of whose
nominees, appear on the stockholder lists or, if applicable, who are listed as
participants in a clearing agency's security position listing, for subsequent
transmittal to beneficial owners of shares of Common Stock or Series A
Preferred Stock.
By tendering shares of Common Stock pursuant to the Offer, a stockholder will
also be tendering the associated Rights issued pursuant to the Rights
Agreement, unless the Rights have previously been redeemed or become separately
transferable in accordance with their terms. The Rights are not currently
exercisable, and they trade together with the shares associated therewith.
Acceptance for payment of, and payment for, shares of Common Stock by the
Company will also constitute the concurrent purchase of such Rights;
accordingly, no extra or separate consideration will be paid for Rights so
purchased. See Section 2.
4. PROCEDURE FOR TENDERING SHARES.
VALID TENDER OF SHARES
For shares of Common Stock to be validly tendered pursuant to the Offer:
(a) the certificates for such shares of Common Stock or shares of Series
A Preferred Stock convertible into such shares of Common Stock (or
confirmation of receipt of such shares of Common
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<PAGE>
Stock or Series A Preferred Stock pursuant to the procedures for book-entry
transfer set forth below), together with a properly completed and duly
executed Letter of Transmittal (or a facsimile thereof) with any required
signature guarantees, or an Agent's Message (as defined under Book-Entry
Delivery below) in connection with a book-entry delivery, and any other
documents required by the Letter of Transmittal, must be received before
the Expiration Date by the Depositary at one of its addresses set forth on
the back cover of this Offer to Purchase; or
(b) the tendering stockholder must comply with the guaranteed delivery
procedure set forth below.
Although only shares of Common Stock will be purchased pursuant to the Offer,
holders of Series A Preferred Stock may tender shares of Common Stock into
which their shares of Series A Preferred Stock are convertible by complying
with the instructions for the valid tender of shares of Common Stock set forth
above. In such case, unless otherwise instructed in the Letter of Transmittal,
shares of Series A Preferred Stock delivered to the Depositary will be
converted into Common Stock only to the extent such tender of Common Stock is
accepted by the Company. Unless otherwise instructed, all remaining shares of
Series A Preferred Stock so delivered will not be converted and will be
returned to the stockholder.
A tender of shares of Common Stock made pursuant to any method of delivery
set forth herein will constitute a binding agreement between the tendering
stockholder and the Company upon the terms and subject to the conditions of the
Offer, including the tendering stockholder's representation that (a) such
stockholder has a net long position in the shares of Common Stock being
tendered within the meaning of Rule 14e-4 promulgated under the Exchange Act,
and (b) the tender of such shares of Common Stock complies with Rule 14e-4. It
is a violation of Section 14(e) of the Exchange Act and Rule 14e-4 promulgated
thereunder, for a person to tender shares of Common Stock for such person's own
account unless the person so tendering at the time of tender and as of the
Expiration Date has a net long position at least equal to the number of shares
of Common Stock tendered and: (i) owns the number of shares of Common Stock
tendered; or (ii) owns other securities (including Series A Preferred Stock)
convertible into or exchangeable for such shares of Common Stock or owns an
option, warrant or right to purchase such shares of Common Stock and will
acquire shares of Common Stock for tender by conversion, exchange or exercise
of such option, warrant or right. Section 14(e) and Rule 14e-4 provide a
similar restriction applicable to the tender or guarantee of a tender on behalf
of another person.
SIGNATURE GUARANTEES AND METHOD OF DELIVERY
No signature guarantee is required on the Letter of Transmittal (i) if the
Letter of Transmittal is signed by the registered holder of shares of Common
Stock tendered therewith or shares of Series A Preferred Stock convertible into
tendered shares and such registered holder has not completed either the box
entitled "Special Payment Instructions" or the box entitled "Special Delivery
Instructions" on the Letter of Transmittal or (ii) if such shares of Common
Stock or shares of Series A Preferred Stock convertible into tendered shares
are tendered for the account of a bank, broker, dealer, credit union, savings
association or other entity that is a member in good standing of a recognized
Medallion Program approved by The Securities Transfer Association Inc. (each
such entity being hereinafter referred to as an "Eligible Institution"). In all
other cases all signatures on Letters of Transmittal must be guaranteed by an
Eligible Institution. See Instructions 1 and 5 of the Letter of Transmittal. If
the certificates are registered in the name of a person other than the signer
of the Letter of Transmittal, or if payment is to be made or certificates for
shares of Common Stock not tendered or accepted for payment or certificates for
shares of Series A Preferred Stock convertible into shares of Common Stock not
tendered or accepted for payment are to be issued to a person other than the
registered owner, then the tendered certificates must be endorsed or
accompanied by appropriate stock powers, in either case signed exactly as the
name or names of the registered owner or owners appear on the certificates,
with the signatures on the certificates or stock powers guaranteed as
aforesaid. See Instruction 5 of the Letter of Transmittal.
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<PAGE>
THE METHOD OF DELIVERY OF CERTIFICATES FOR SHARES OF COMMON STOCK OR SERIES A
PREFERRED STOCK AND ALL OTHER REQUIRED DOCUMENTS IS AT THE OPTION AND RISK OF
THE TENDERING STOCKHOLDER. IF DELIVERY IS BY MAIL, REGISTERED MAIL WITH RETURN
RECEIPT REQUESTED, PROPERLY INSURED, IS RECOMMENDED.
BOOK-ENTRY DELIVERY
The Depositary will establish an account with respect to the shares of Common
Stock or shares of Series A Preferred Stock convertible into such shares of
Common Stock at each of The Depository Trust Company, the Midwest Securities
Trust Company and the Philadelphia Depository Trust Company (collectively, the
"Book-Entry Transfer Facilities") for purposes of the Offer within two business
days after the date of this Offer to Purchase. Any financial institution that
is a participant in a Book-Entry Transfer Facility's system may make book-entry
delivery of tendered shares of Common Stock or shares of Series A Preferred
Stock convertible into such tendered shares of Common Stock by causing such
facility to transfer such shares of Common Stock or Series A Preferred Stock
into the Depositary's account in accordance with such facility's procedure for
such transfer. Even though delivery of shares of Common Stock or Series A
Preferred Stock may be effected through book-entry transfer into the
Depositary's account at one of the Book-Entry Transfer Facilities, a properly
completed and duly executed Letter of Transmittal (or a facsimile thereof),
with any required signature guarantees, or an Agent's Message in connection
with a book-entry delivery, and other required documents, must, in any case, be
transmitted to and received by the Depositary at one of its addresses set forth
on the back cover of this Offer to Purchase prior to the Expiration Date, or
the guaranteed delivery procedure set forth below must be followed. DELIVERY OF
THE LETTER OF TRANSMITTAL AND ANY OTHER REQUIRED DOCUMENTS TO ONE OF THE BOOK-
ENTRY TRANSFER FACILITIES DOES NOT CONSTITUTE DELIVERY TO THE DEPOSITARY.
The term "Agent's Message" means a message transmitted by a Book-Entry
Transfer Facility to, and received by, the Depositary and forming a part of the
timely confirmation of a book-entry delivery of tendered shares of Common Stock
or Series A Preferred Stock convertible into tendered shares of Common Stock
which states that such Book-Entry Transfer Facility has received an express
acknowledgment from the participant in such Book-Entry Transfer Facility
tendering the shares of Common Stock which are the subject of such confirmation
of book-entry delivery, that such participant has received and agrees to be
bound by the terms of the Letter of Transmittal and that the Company may
enforce such agreement against such participant.
GUARANTEED DELIVERY
If a stockholder desires to tender shares of Common Stock pursuant to the
Offer and such stockholder's certificates for such shares of Common Stock or
shares of Series A Preferred Stock convertible into such shares of Common Stock
are not immediately available or time will not permit all required documents to
reach the Depositary prior to the Expiration Date, such stockholder's tender
may nevertheless be effected if all the following conditions are met: (i) such
tender is made by or through an Eligible Institution; (ii) a properly completed
and duly executed Notice of Guaranteed Delivery substantially in the form
provided by the Company is received by the Depositary, as provided below, prior
to the Expiration Date; and (iii) the certificates for all tendered shares of
Common Stock or shares of Series A Preferred Stock convertible into such shares
of Common Stock, in proper form for transfer (or confirmation of book-entry
transfer of such shares of Common Stock or Series A Preferred Stock into the
Depositary's account at one of the Book-Entry Transfer Facilities), together
with a properly completed and duly executed Letter of Transmittal (or facsimile
thereof), with any required signature guarantees (or, in the case of book-entry
delivery, an Agent's Message) and any other documents required by the Letter of
Transmittal, are received by the Depositary within five NYSE trading days after
the date of execution of such Notice of Guaranteed Delivery. The Company
reserves the right to shorten or eliminate this period so long as the
announcement of such shortened period or elimination is made at least six NYSE
trading days before the Expiration Date.
The Notice of Guaranteed Delivery may be delivered by hand to the Depositary
or transmitted by telegram, facsimile transmission or letter to the Depositary
and must include a guarantee by an Eligible Institution in the form set forth
in such Notice.
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<PAGE>
FEDERAL INCOME TAX WITHHOLDING
Unless an exemption applies under the applicable law and regulations
concerning "backup withholding" of Federal income tax, the Depositary will be
required to withhold, and will withhold, 31% of the gross proceeds otherwise
payable to a stockholder or other payee pursuant to the Offer unless the
stockholder or other payee provides his tax identification number (social
security number or employer identification number) and certifies that such
number is correct. Each tendering stockholder, other than a noncorporate
foreign stockholder, should complete and sign the main signature form and the
Substitute Form W-9 included as part of the Letter of Transmittal, so as to
provide the information and certification necessary to avoid backup
withholding, unless an applicable exemption exists and is proved in a manner
satisfactory to the Company and the Depositary. Noncorporate foreign
stockholders should generally complete and sign a Form W-8, Certificate of
Foreign Status, a copy of which may be obtained from the Depositary, in order
to avoid backup withholding. In the case of any foreign stockholder, the
Depositary will withhold 30% of the purchase price of shares of Common Stock
purchased from such stockholder in order to satisfy certain withholding
requirements, unless such foreign stockholder proves in a manner satisfactory
to the Company and the Depositary that either (i) the sale of its shares of
Common Stock pursuant to the Offer will qualify as a sale or exchange, rather
than a dividend, for federal income tax purposes (see Section 10), in which
case no withholding will be required, or (ii) the foreign stockholder is
eligible for a reduced tax treaty rate with respect to dividend income, in
which case the Depositary will withhold at the reduced treaty rate.
DETERMINATION OF VALIDITY; WAIVER OF DEFECTS; NO OBLIGATION TO GIVE NOTICE OF
DEFECTS
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance for payment of any tender of shares of Common Stock
will be determined by the Company in its sole discretion, which determination
will be final and binding. The Company reserves the absolute right to reject
any or all tenders of shares of Common Stock determined by it not to be in
proper form or the acceptance for payment of which may, in the opinion of the
Company's counsel, be unlawful. The Company also reserves the absolute right to
waive any of the conditions of the Offer or any defect or irregularity in
tender of any shares of Common Stock of any particular stockholder. NONE OF THE
COMPANY, THE DEALER MANAGER, THE DEPOSITARY, THE INFORMATION AGENT OR ANY OTHER
PERSON WILL BE UNDER ANY DUTY TO GIVE ANY NOTICE OF ANY DEFECTS OR
IRREGULARITIES IN TENDERS OR INCUR ANY LIABILITY FOR FAILURE TO GIVE ANY SUCH
NOTICE. The Company's interpretation of the terms and conditions of the Offer
(including the Letter of Transmittal and the instructions thereto) will be
final and binding.
5. WITHDRAWAL RIGHTS.
Except as otherwise provided in this Section 5, a tender of shares of Common
Stock pursuant to the Offer is irrevocable. Shares of Common Stock tendered
pursuant to the Offer may be withdrawn at any time before the Expiration Date
and, unless theretofore accepted for payment by the Company, may also be
withdrawn after 12:00 Midnight, New York City time, on March 21, 1995.
In order for the withdrawal of the tender of shares of Common Stock to be
effective, a written, telegraphic, or facsimile transmission notice of
withdrawal must be timely received by the Depositary at one of its addresses
set forth on the back cover of this Offer to Purchase. Any such notice of
withdrawal must specify the name of the person having tendered the shares of
Common Stock as to which the tender is to be withdrawn, the number of shares of
Common Stock as to which the tender is to be withdrawn and the name of the
registered holder of the shares of Common Stock (or shares of Series A
Preferred Stock convertible into such shares of Common Stock) as to which the
tender is to be withdrawn (if different from that of the person who tendered
such shares of Common Stock). If the certificate(s) for the tendered shares of
Common Stock or for shares of Series A Preferred Stock convertible into such
shares have been delivered or otherwise identified to the Depositary, then,
prior to the physical release of such certificate(s), the serial numbers shown
on the particular certificate must be submitted and the signature on the notice
of withdrawal must be guaranteed by an Eligible Institution (except in the case
of shares of Common Stock tendered by an Eligible
17
<PAGE>
Institution). If shares of Common Stock or Series A Preferred Stock have been
delivered pursuant to the procedure for book-entry transfer set forth in
Section 4, the notice of withdrawal must specify the name and the number of the
account at the applicable Book-Entry Transfer Facility to be credited with the
withdrawn shares of Common Stock or Series A Preferred Stock and otherwise
comply with the procedures of such facility. Withdrawals of tenders of shares
of Common Stock may not be rescinded, and any shares of Common Stock as to
which a tender is withdrawn will thereafter be deemed not validly tendered for
purposes of the Offer. Withdrawn shares of Common Stock may, however, be
tendered before the Expiration Date by again following any of the procedures
described in Section 4.
All questions as to the form and validity (including time of receipt) of
notices of withdrawal will be determined by the Company, in its sole
discretion, which determination shall be final and binding. None of the
Company, the Dealer Manager, the Depositary, the Information Agent or any other
person will be under any duty to give any notice of any defects or
irregularities in any notice of withdrawal, and none of them will incur any
liability for failure to give any such notice.
6. ACCEPTANCE FOR PAYMENT AND PAYMENT.
Upon the terms and subject to the conditions of the Offer, the acceptance for
payment of up to 3,000,000 shares of Common Stock validly tendered and not
properly withdrawn in accordance with the provisions of Section 5 prior to the
Expiration Date, will be made as promptly as practicable after the Expiration
Date. Notwithstanding any other provision hereof, payment for shares of Common
Stock accepted for payment pursuant to the Offer will be made only after timely
receipt by the Depositary of certificates for such shares of Common Stock or
Series A Preferred Stock convertible into such shares of Common Stock (or a
timely confirmation of receipt of such shares of Common Stock or Series A
Preferred Stock pursuant to the procedures for book-entry transfer set forth
above), a properly completed and duly executed Letter of Transmittal (or
facsimile thereof), with any required signature guarantees, or an Agent's
Message in connection with a book-entry delivery, and any other documents
required by the Letter of Transmittal. The Company expressly reserves the
right, in its sole discretion, to delay the acceptance for payment of or
payment for shares of Common Stock in order to comply, in whole or in part,
with any applicable legal requirement or court order. See Section 14. The
Company's reservation of the right to delay payment for shares of Common Stock
which it has accepted for payment is limited by Rule 13e-4(f)(5) promulgated
under the Exchange Act, which requires that the Company must pay the
consideration offered or return the tendered shares promptly after termination
or withdrawal of a tender offer.
In the event of proration, because of the difficulty of determining the
precise number of shares of Common Stock validly tendered and not withdrawn,
the Company does not expect to be able to announce the final results of such
proration until at least seven NYSE trading days after the Expiration Date.
Preliminary results of such proration will be announced by press release as
promptly as practicable after the Expiration Date. Stockholders may obtain such
preliminary information, when available, from the Dealer Manager or the
Information Agent.
For purposes of the Offer, the Company will be deemed to have accepted for
payment tendered shares of Common Stock as, if and when the Company gives oral
or written notice to the Depositary of its acceptance of the tender of such
shares of Common Stock. Payment for shares of Common Stock accepted for payment
pursuant to the Offer will be made by deposit of the purchase price therefor
with the Depositary, which will act as agent for tendering stockholders for the
purpose of receiving payment from the Company and transmitting payment to
tendering stockholders. UNDER NO CIRCUMSTANCES WILL INTEREST BE PAID ON THE
PURCHASE PRICE OF THE SHARES OF COMMON STOCK TO BE PAID BY THE COMPANY,
REGARDLESS OF ANY DELAY IN MAKING SUCH PAYMENT.
If the Company is delayed in its acceptance for payment of or payment for
shares of Common Stock, or is unable to accept for payment or pay for shares of
Common Stock pursuant to the Offer for any reason, then, without prejudice to
the Company's rights under this Offer to Purchase (including, without
limitation,
18
<PAGE>
those set forth in Sections 12 and 14), the Depositary may nevertheless, on
behalf of the Company, retain tendered shares of Common Stock, and the tender
of such shares of Common Stock may not be withdrawn except to the extent
tendering stockholders are entitled to, and duly exercise, withdrawal rights as
described in Section 5.
If any tendered shares of Common Stock are not accepted for payment or paid
for because of an invalid tender, the tender of more shares of Common Stock
than the Company is obligated to purchase, the occurrence of an event set forth
in Section 12, or otherwise, certificates for any such shares of Common Stock
or shares of Series A Preferred Stock convertible into such shares, as
applicable, will be returned (or, in the case of shares of Common Stock or
Series A Preferred Stock delivered by book-entry transfer, such shares of
Common Stock or Series A Preferred Stock will be credited to the account
maintained with one of the Book-Entry Transfer Facilities by the participant
therein who so delivered such shares) as soon as practicable after the
Expiration Date without expense to the tendering stockholder.
The Company will pay any stock transfer taxes with respect to the transfer
and sale of shares of Common Stock to it or its order pursuant to the Offer.
If, however, payment of the purchase price for tendered shares of Common Stock
is to be made to, or if certificates for shares of Common Stock not tendered or
accepted for payment or if certificates for Series A Preferred Stock not
converted into Common Stock are to be registered in the name of, any person
other than the registered holder, or if tendered certificates are registered in
the name of any person other than the person(s) signing the Letter of
Transmittal, the amount of any stock transfer taxes (whether imposed on the
registered holder or such person) payable on account of the transfer to such
person will be deducted from the purchase price for shares of Common Stock
unless satisfactory evidence of the payment of such taxes or exemption
therefrom is submitted. See Instruction 6 of the Letter of Transmittal.
ANY TENDERING STOCKHOLDER OR OTHER PAYEE WHO FAILS TO COMPLETE FULLY AND SIGN
THE SUBSTITUTE FORM W-9 INCLUDED IN THE LETTER OF TRANSMITTAL (OR, IN THE CASE
OF A FOREIGN INDIVIDUAL, FORM W-8 OBTAINABLE FROM THE DEPOSITARY) MAY BE
SUBJECT TO REQUIRED FEDERAL INCOME TAX WITHHOLDING OF 31% OF THE GROSS PROCEEDS
PAID TO SUCH STOCKHOLDER OR OTHER PAYEE PURSUANT TO THE OFFER. SEE SECTION 4.
7. PRICE RANGE OF COMMON STOCK; DIVIDENDS.
The shares of Common Stock are listed and principally traded on the NYSE and
are also listed and traded on the Boston Stock Exchange. The following table
sets forth for the periods indicated the reported quarterly high and low sale
prices of the shares of Common Stock on the NYSE Composite Tape from October 5,
1993 (the day after the Company's emergence from reorganization proceedings)
through January 23, 1995 (the day immediately preceding the date of this Offer
to Purchase). The trading prices of the Common Stock of the Predecessor Company
prior to October 5, 1993, are not presented because such prices are not
meaningful.
<TABLE>
<CAPTION>
High Low
------- -------
<S> <C> <C>
1993
----
Third Quarter ended October 30, 1993 (from and after Octo-
ber 5, 1993)............................................. $21.625 $20.250
Fourth Quarter ended January 29, 1994..................... $22.250 $17.875
1994
----
First Quarter ended April 30, 1994........................ $21.750 $19.000
Second Quarter ended July 30, 1994........................ $21.000 $17.000
Third Quarter ended October 29, 1994...................... $23.000 $20.125
Fourth Quarter (through January 23, 1995)................. $21.500 $19.375
</TABLE>
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<PAGE>
On January 23, 1995, the last full day of trading in the Common Stock prior
to the commencement of the Offer, the reported closing price of the Common
Stock on the NYSE Composite Tape was $21.175 per share. STOCKHOLDERS ARE URGED
TO OBTAIN A CURRENT MARKET QUOTATION FOR THE COMMON STOCK.
The Company has not paid a cash dividend on its Common Stock in the last two
fiscal years. The Credit Facility prohibits the payment of dividends on the
Common Stock and limits the amount of dividends which HDSC may pay to the
Company in any fiscal year. In addition, the Indenture governing the Senior
Notes contains limitations on restricted payments that may prevent the Company
from paying dividends on the Common Stock.
8. INTEREST OF CERTAIN PERSONS IN THE OFFER.
On September 23, 1994, the Company and Dickstein entered into the Dickstein
Settlement Agreement described in Section 1. On December 16, 1994, the Company
and the plaintiff in Weiss v. Lee, et al., entered into the Weiss Settlement
described in Section 1.
As of the close of business on January 23, 1995, the executive officers and
directors of the Company as a group beneficially owned 11.58% of the
outstanding shares of Common Stock (including shares of Common Stock issuable
upon conversion of all outstanding shares of Series A Preferred Stock). The
Company has been advised that none of its directors or executive officers
intends to tender any shares of Common Stock pursuant to the Offer. If no such
executive officer or director tenders shares of Common Stock and the Company
purchases 3,000,000 shares of Common Stock pursuant to the Offer, the executive
officers and directors of the Company as a group will beneficially own 14.81%
of the outstanding shares of Common Stock (including shares of Common Stock
issuable upon conversion of all outstanding shares of Series A Preferred Stock)
after giving effect to the purchase of shares pursuant to the Offer. The
Company has also been advised, however, that Apollo may tender some or all of
the approximately 700,000 shares of Common Stock beneficially owned by Apollo
pursuant to the Offer. Michael S. Gross, a director of the Company, is an
officer of Apollo.
Michael Bozic, President and Chief Executive Officer of the Company,
purchased 5,479 shares of Common Stock on November 29, 1994, and 5,000 shares
of Common Stock on January 10, 1995, pursuant to the exercise of stock options
previously granted to Mr. Bozic under the Company's employee stock option plan.
Except as described above, based upon the Company's records and upon
information provided to the Company by its directors, executive officers and
affiliates, neither the Company nor any of its subsidiaries nor, to the best of
the Company's knowledge, any of the directors or executive officers of the
Company or any of its subsidiaries, nor any associates of any of the foregoing,
has effected any transactions in shares of Common Stock or Series A Preferred
Stock during the 40 business days prior to the date hereof.
Except as set forth in this Offer to Purchase, neither the Company nor, to
the best of the Company's knowledge, any of its affiliates, directors or
executive officers, or any of the executive officers or directors of its
subsidiaries, is a party to any contract, arrangement, understanding or
relationship with any other person relating, directly or indirectly, to the
Offer with respect to any securities of the Company (including, but not limited
to, any contract, arrangement, understanding or relationship concerning the
transfer or the voting of any such securities, joint ventures, loan or option
arrangements, puts or calls, guaranties of loans, guaranties against loss or
the giving or withholding of proxies, consents or authorizations).
9. EFFECTS OF THE OFFER ON THE MARKET FOR COMMON STOCK; REGISTRATION UNDER
THE EXCHANGE ACT.
The Company's purchase of shares of Common Stock pursuant to the Offer will
reduce the number of shares of Common Stock that might otherwise trade
publicly. Nonetheless, the Company anticipates that there will still be a
sufficient number of shares of Common Stock outstanding and publicly traded
following the Offer to ensure a liquid trading market in the shares of Common
Stock. Based on the published guidelines of the NYSE and the Boston Stock
Exchange, the Company does not believe that its purchase of shares of Common
Stock pursuant to the Offer will result in the remaining shares of Common Stock
being delisted from either of such exchanges.
Shares of Common Stock are currently "margin securities" under the
regulations of the Board of Governors of the Federal Reserve System. This has
the effect, among other things, of allowing brokers to
20
<PAGE>
extend credit on the collateral of shares of Common Stock. It is expected that,
following the purchase of shares of Common Stock pursuant to the Offer, shares
of Common Stock will continue to be "margin securities" for purposes of the
margin regulations of the Board of Governors of the Federal Reserve System.
The Common Stock is registered under the Exchange Act, which requires, among
other things, the Company to file certain information with the Commission and
to furnish proxy statements and other information to its stockholders. It is
not expected that the purchase of shares of Common Stock pursuant to the Offer
will result in shares of Common Stock becoming eligible for deregistration
under the Exchange Act.
10. CERTAIN FEDERAL INCOME TAX CONSEQUENCES.
Sales of shares of Common Stock by stockholders pursuant to the Offer will be
taxable transactions for United States federal income tax purposes and may also
be taxable transactions under applicable state, local, foreign and other tax
laws. Although the Company's payments for shares of Common Stock will also
constitute the concurrent purchase of Rights, the Company believes that no part
of such payment should be allocable to the Rights. Moreover, the Company
believes that the distribution of the Rights did not constitute a distribution
of stock or property for federal income tax purposes. Accordingly, no gain or
loss should be recognized with respect to the purchase of Rights attaching to
tendered shares of Common Stock.
The federal income tax consequences of a stockholder's sale of shares of
Common Stock pursuant to the Offer may vary depending upon the stockholder's
particular facts and circumstances. Under Section 302 of the Internal Revenue
Code of 1986, as amended (the "Code"), a sale of shares of Common Stock
pursuant to the Offer will, as a general rule, be treated as a sale or exchange
if the receipt of cash upon such sale (a) is "substantially disproportionate"
with respect to the stockholder, (b) results in a "complete redemption" of the
stockholder interest in the Company or (c) is "not essentially equivalent to a
dividend" with respect to the stockholder.
If any of these three tests is satisfied, a stockholder who sells shares of
Common Stock pursuant to the Offer will recognize gain or loss equal to the
difference between (a) the amount of cash that such stockholder receives and
(b) the stockholder's tax basis in the shares of Common Stock sold. Such gain
or loss will be capital gain or loss, assuming the shares of Common Stock are
held as a capital asset and will be long-term capital gain or loss if the
shares of Common Stock are held for more than one year.
If none of the three tests under Section 302 is satisfied, and if, as is
anticipated, the Company has sufficient earnings and profits, stockholders who
sell shares of Common Stock will be treated as having received a dividend
includible in gross income in an amount equal to the entire amount of cash
received by the stockholder pursuant to the Offer (without regard to gain or
loss, if any). The stockholder's adjusted tax basis in the sold shares of
Common Stock will be transferred to any of the stockholder's remaining
stockholdings in the Company. If, however, the stockholder has no such
remaining stockholdings, then such basis may be transferred to the
stockholdings of a related person, or it may be lost.
In the case of a corporate stockholder, if the cash paid is treated as a
dividend, the dividend income may be eligible for the 70% dividends-received
deduction. The dividends-received deduction is subject to certain limitations,
and may not be available if the corporate stockholder does not satisfy certain
holding period requirements with respect to the shares of Common Stock or if
the shares of Common Stock are treated as "debt financed portfolio stock". If a
dividends-received deduction is available, the dividend will be treated as an
"extraordinary dividend" under Section 1059(a) of the Code, in which case such
corporate shareholder's tax basis in shares of Common Stock retained by such
stockholder would be reduced, but not below zero, by the amount of the nontaxed
portion of the dividend. Any amount of the nontaxed portion of the dividend in
excess of the stockholder's basis will generally be subject to tax upon sale or
disposition of those shares of Common Stock. Corporate stockholders are urged
to consult their tax advisors concerning treatment of the
21
<PAGE>
cash paid as a dividend, availability of the dividends-received deduction and
the effect of Section 1059 of the Code on their tax basis in shares of Common
Stock.
In determining whether any of the tests under Section 302 of the Code is
satisfied, stockholders must take into account not only the shares of Common
Stock that they actually own, but also shares of Common Stock that they are
deemed to own pursuant to the constructive ownership rules of Section 318 of
the Code. Pursuant to these constructive ownership rules, a stockholder is
deemed to own the shares of Common Stock actually owned, and in some cases
constructively owned, by certain related individuals or entities, and the
shares of Common Stock which the stockholder has the right to acquire by
exercise of an option or by conversion or exchange of a security.
The receipt of cash will be "substantially disproportionate" with respect to
a stockholder if the percentage of the outstanding voting stock of the Company
(both shares of Common Stock and shares of Series A Preferred Stock) actually
and constructively owned by the stockholder immediately following the sale of
shares of Common Stock pursuant to the Offer (treating as no longer outstanding
all shares of Common Stock purchased pursuant to the Offer) is less than 80% of
the percentage of the outstanding voting stock of the Company actually and
constructively owned by such stockholder immediately before the sale of shares
of Common Stock pursuant to the Offer (treating as outstanding all shares of
Common Stock purchased pursuant to the Offer). In addition, for the
"substantially disproportionate" exception to apply, this 80% requirement must
also be satisfied with respect solely to the shares of Common Stock (that is,
disregarding ownership of Series A Preferred Stock) owned actually and
constructively by the stockholder before and after the Offer. Stockholders
should consult their tax advisors with respect to the application of the
"substantially disproportionate" test to their particular facts and
circumstances.
The receipt of cash by a stockholder will be deemed to result in a "complete
redemption" of the stockholder's interest in the Company if either (a) all of
the shares of Common Stock actually and constructively owned by the stockholder
are sold pursuant to the Offer or (b) all of the shares of Common Stock
actually owned by the stockholder are sold pursuant to the Offer and the
stockholder is eligible to waive and does effectively waive attribution of all
shares of Common Stock constructively owned by the stockholder in accordance
with Section 302(c) of the Code.
Even if the receipt of cash by a stockholder fails to satisfy the
"substantially disproportionate" test or the "complete redemption" test, such
stockholder may nevertheless satisfy the "not essentially equivalent to a
dividend" test, if the stockholder's sale of shares of Common Stock pursuant to
the Offer results in a "meaningful reduction" in the stockholder's
proportionate interest in the Company. Whether the receipt of cash by a
stockholder will be "not essentially equivalent to a dividend" will depend upon
the individual stockholder's facts and circumstances. In certain circumstances,
even a small reduction in a stockholder's proportionate interest may satisfy
this test. For example, the Internal Revenue Service has indicated in a
published ruling that a 3.3% reduction in the proportionate interest of a small
minority (substantially less that 1%) stockholder in a publicly held
corporation who exercises no control over corporate affairs constitutes such a
"meaningful reduction". Stockholders expecting to rely upon the "not
essentially equivalent to a dividend" test should, therefore, consult with
their tax advisors as to its application in their particular situations.
It may otherwise be possible for a tendering stockholder to satisfy one of
the above three tests by contemporaneously selling or otherwise disposing of
all or some of the shares of Common Stock that are actually or constructively
owned by such stockholder but are not purchased pursuant to the Offer.
Correspondingly, a tendering stockholder may not be able to satisfy one of the
above three tests because of contemporaneous acquisitions of shares of Common
Stock by such stockholder or a related party whose shares of Common Stock would
be attributed to such stockholder. Stockholders should consult their tax
advisors regarding the tax consequences of such sales or acquisitions in their
particular circumstances.
22
<PAGE>
A foreign stockholder may be subject to dividend tax withholding at the 30%
rate or a lower applicable treaty rate on the gross proceeds of the sale of
shares of Common Stock pursuant to the Offer. Foreign stockholders should
consult their tax advisors regarding application of these withholding rules.
The foregoing discussion may not apply to shares of Common Stock acquired
pursuant to certain compensation arrangements with the Company.
THE TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL INFORMATION ONLY.
THE TAX CONSEQUENCES OF A SALE PURSUANT TO THE OFFER MAY VARY DEPENDING UPON,
AMONG OTHER THINGS, THE PARTICULAR CIRCUMSTANCES OF THE TENDERING STOCKHOLDER.
NO INFORMATION IS PROVIDED HEREIN AS TO THE STATE, LOCAL OR FOREIGN TAX
CONSEQUENCES OF THE TRANSACTION CONTEMPLATED BY THE OFFER. STOCKHOLDERS ARE
URGED TO CONSULT THEIR OWN TAX ADVISORS TO DETERMINE THE PARTICULAR FEDERAL,
STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF SALES MADE BY THEM PURSUANT TO THE
OFFER AND THE EFFECT OF THE CONSTRUCTIVE STOCK OWNERSHIP RULES MENTIONED ABOVE.
11. SOURCE AND AMOUNTS OF FUNDS.
Assuming the Company purchases 3,000,000 shares of Common Stock pursuant to
the Offer at a purchase price of $25 per share of Common Stock, the Company
expects the aggregate cost of such purchases, including all fees and expenses
applicable to the Offer, to be approximately $75,500,000. The Company
anticipates that it will fund the purchase of shares of Common Stock pursuant
to the Offer and the payment of related fees and expenses with available cash.
12. CERTAIN CONDITIONS OF THE OFFER.
Notwithstanding any other provision of the Offer, the Company shall not be
required to accept for payment, or pay for, any shares of Common Stock not
theretofore accepted for payment or paid for, and may terminate or amend the
Offer or may postpone the acceptance for payment of, or the payment for, shares
of Common Stock tendered, as provided in Section 14 if, at any time after
January 23, 1995, and prior to the time of acceptance for payment of, or
payment for, any of such shares of Common Stock, any of the following
conditions exist:
(a) a preliminary or permanent injunction or other order by any federal
or state court which prevents the acceptance for payment of, or payment
for, some of or all the shares of Common Stock pursuant to the Offer shall
have been issued and shall remain in effect; or
(b) there shall be threatened, instituted or pending any action or
proceeding by any government or governmental authority or agency, domestic
or foreign, or by any other person, domestic or foreign, before any court
or governmental authority or agency, domestic or foreign, (i) challenging
or seeking to, or which could, make illegal, delay or otherwise directly or
indirectly restrain or prohibit or make more costly the making of the
Offer, the acceptance for payment of or payment for some of all shares of
Common Stock pursuant to the Offer, seeking to obtain damages in connection
with the Offer, or seeking to restrain or prohibit the consummation of the
Offer or (ii) which otherwise, in the sole judgment of the Company, could
materially adversely affect the business, properties, assets, liabilities,
capitalization, stockholders' equity, condition (financial or otherwise),
operations, licenses or franchises, results of operations or prospects of
the Company or any of its subsidiaries, or otherwise materially impair the
contemplated benefits to the Company of the Offer; or, with respect to any
of the foregoing actions or proceedings pending on the date hereof and
known to the Company, there shall occur a development in such action or
proceeding which, in the sole judgment of the Company, is materially
adverse; or
(c) there shall have been any action threatened or taken, or approval
withheld, or any statute, rule or regulation proposed, sought, promulgated,
enacted, entered, amended, enforced or deemed to be
23
<PAGE>
applicable to the Offer or the Company or any of its subsidiaries, by any
government or governmental, regulatory or administrative authority or
agency or tribunal, domestic or foreign, which, in the Company's sole
judgment, would directly or indirectly:
(1) make the acceptance for payment of, or payment for, some or all
of the shares of Common Stock illegal or otherwise restrict or prohibit
consummation of the Offer;
(2) delay or restrict the ability of the Company, or render the
Company unable, to accept for payment or pay for some or all of the
shares of Common Stock pursuant to the Offer; or
(3) materially adversely affect the business, properties, assets,
liabilities, capitalization, stockholders' equity, condition (financial
or other), income, operations or prospects of the Company and its
subsidiaries, taken as a whole, or otherwise materially impair in any
way the contemplated future conduct of the business of the Company or
any of its subsidiaries.
(d) there shall have occurred (i) any general suspension of trading in,
or limitation on prices for, securities on any United States national
securities exchange or in the over-the-counter market (excluding any
coordinated trading halt triggered solely as a result of a specified
decrease in a market index), (ii) the declaration of a banking moratorium
or any suspension of payments in respect of banks in the United States,
(iii) the commencement of a war, armed hostilities or other international
or national crisis directly or indirectly involving the United States, (iv)
any limitation (whether or not mandatory) by any governmental, regulatory
or administrative agency or authority on, or any event which, in the sole
judgment of the Company, might affect, the extension of credit by banks or
other lending institutions in the United States, (v) any significant
decrease in the market price of the shares of Common Stock, (vi) any change
in the general political, market, economic or financial conditions in the
United States or abroad that could, in the sole judgment of the Company,
have a material adverse effect on the Company's business, operations,
prospects or the trading in the shares of Common Stock, (vii) in the case
of any of the foregoing existing at the time of the commencement of the
Offer, a material acceleration or worsening thereof or (vii) any decline in
either the Dow Jones Industrial Average (3867.41 at the close of business
on January 23, 1995) or the Standard and Poor's Index of 500 Industrial
Companies (465.82 at the close of business on January 23, 1995) by an
amount in excess of 15% measured from January 23, 1995;
(e) any tender or exchange offer with respect to the shares of Common
Stock (other than the Offer), or any merger, acquisition, business
combination or other similar transaction with or involving the Company or
any subsidiary, shall have been proposed, announced or made by any person
or entity;
(f) any change shall occur or be threatened in the business, condition
(financial or other), income, operations or prospects of the Company and
its subsidiaries, taken as a whole, which, in the sole judgment of the
Company, is or may be materially adverse to the Company; or
(g) (i) any person, entity or "group" (as that term is used in Section
13(d)(3) of the Exchange Act) shall have acquired, or proposed to acquire,
beneficial ownership of more than 5% of the outstanding shares of Common
Stock (other than a person, entity or group which had publicly disclosed
such ownership in a Schedule 13D or 13G (or an amendment thereto) on file
with the Commission on or prior to January 23, 1995), (ii) any new group
shall have been formed which beneficially owns more than 5% of the
outstanding shares of Common Stock or (iii) any person, entity or group
shall have filed a Notification and Report Form under the Hart-Scott-Rodino
Antitrust Improvement Act of 1976, or made a public announcement reflecting
an intent to acquire the Company or any of its subsidiaries or any of their
respective assets or securities;
and, in the sole judgment of the Company, in any such case and regardless of
the circumstances (including any action or inaction by the Company) giving rise
to such condition, such event makes it inadvisable to proceed with the Offer or
with such acceptance for payment or payments.
The foregoing conditions are for the Company's sole benefit and may be
asserted by the Company regardless of the circumstances giving rise to any such
condition (including any action or inaction by the Company) or may be waived by
the Company in whole or in part. The Company's failure at any time to
24
<PAGE>
exercise any of the foregoing rights shall not be deemed a waiver of any such
right and each such right shall be deemed an ongoing right which may be
asserted at any time or from time to time. Any determination by the Company
concerning the events described in this Section 12 shall be final and shall be
binding on all parties.
13. CERTAIN LEGAL MATTERS; REGULATORY APPROVALS.
The Company is not aware of any license or regulatory permit that appears to
be material to its business that might be adversely affected by its acquisition
of shares of Common Stock as contemplated in the Offer or of any approval or
other action by any government or governmental, administrative or regulatory
authority or agency, domestic or foreign, that would be required for the
Company's acquisition or ownership of shares of Common Stock as contemplated by
the Offer. Should any such approval or other action be required, the Company
currently contemplates that it will seek such approval or other action. The
Company cannot predict whether it may determine that it is required to delay
the acceptance for payment of, or payment for, shares of Common Stock tendered
pursuant to the Offer pending the outcome of any such matter. There can be no
assurance that any such approval or other action, if needed, would be obtained
or would be obtained without substantial conditions or that the failure to
obtain any such approval or other action might not result in adverse
consequences to the Company's business. See Section 12 for certain conditions
of the Offer, including conditions relating to litigation and governmental
actions.
14. EXTENSION OF TENDER PERIOD; TERMINATION AND AMENDMENTS.
The Company reserves the right (but will not be obligated), at any time or
from time to time in its sole discretion, to extend the period during which the
Offer is open by giving oral or written notice of such extension to the
Depositary and by making a public announcement of such extension. The Company
does not anticipate exercising its right to extend the Offer.
The Company also reserves the right (i) subject to complying with applicable
rules and regulations of the Commission, to delay acceptance for payment or
payment for any shares of Common Stock not theretofore accepted for payment or
paid for, or to terminate the Offer and not accept for payment or pay for any
shares of Common Stock not theretofore accepted for payment or paid for, upon
the occurrence of any of the conditions specified in Section 12, by giving oral
or written notice of such delay or termination to the Depositary and (ii)
subject to complying with applicable rules and regulations of the Commission,
to amend the Offer at any time and from time to time in any respect by public
announcement. Without limiting the manner in which the Company may choose to
make any public announcement, the Company will have no obligation to publish,
advertise or otherwise communicate any such public announcement other than by
making a release to the Dow Jones News Service, subject to the Company's
obligations under Rule 14e-4(e)(2) under the Exchange Act (relating to the
Company's obligation to disseminate public announcements concerning material
changes to this Offer to Purchase), if such rule is applicable. In a published
release, the Commission has stated that in its view an offer must remain open
for a minimum period of time following a material change in the terms of the
offer. The release states that an offer should remain open for a minimum of
five business days from the date the material change is first published, sent
or given to security holders, and that, if material changes are made with
respect to information that approaches the significance of price and share
levels, a minimum of ten business days may be required to allow for adequate
dissemination and investor response.
If the Company increases or decreases by more than two per cent of the
outstanding shares of Common Stock (assuming, for this purpose, conversion of
all outstanding shares of Series A Preferred Stock) the percentage of shares of
Common Stock being sought or increases or decreases the consideration to be
paid for shares of Common Stock pursuant to the Offer and the Offer is
scheduled to expire at any time before the expiration of a period ending on the
tenth business day from and including, the date that notice of such increase or
decrease is first published, sent or given, the Offer will be extended until
the expiration of such period of 10 business days.
25
<PAGE>
The Company may not increase the number of shares of Common Stock that it may
elect to purchase pursuant to the Offer without the prior consent of the bank
lenders under the Credit Facility.
15. FEES AND EXPENSES.
Smith Barney is acting as Dealer Manager in connection with the Offer and has
acted as the Company's financial advisor and consent solicitation agent in
connection with the Company's solicitation of consents from holders of its
Senior Notes to the amendment of the restricted payments limitation contained
in the Indenture governing the Senior Notes. In connection with such
engagement, the Company has paid Smith Barney a fee of $400,000, agreed to
reimburse Smith Barney for its reasonable out-of-pocket expenses relating to
the Offer, including the reasonable fees and expenses of its counsel, and
agreed to indemnify Smith Barney against certain liabilities in connection with
the Offer, including certain liabilities under the federal securities laws. The
Company also engaged Smith Barney to act as its financial adviser to evaluate,
from a financial point of view, the Dickstein Exchange Proposal and other
alternatives to the Company. In connection with such engagement, the Company
paid Smith Barney a fee of $750,000, agreed to reimburse Smith Barney for its
reasonable out-of-pocket expenses and agreed to indemnify Smith Barney against
certain liabilities and expenses.
The Company has retained D. F. King & Co., Inc. ("D.F.King"), as Information
Agent, and Chemical Bank, as Depositary, in connection with the Offer. The
Information Agent may contact stockholders by mail, telephone, telex, telegraph
and in person, and may request brokers, dealers and other nominee stockholders
to forward materials relating to the Offer to beneficial owners. The Depositary
and the Information Agent will receive reasonable and customary compensation
for their services. The Company will also reimburse the Depositary and the
Information Agent for out-of-pocket expenses, including reasonable attorneys'
fees, and has agreed to indemnify the Depositary and the Information Agent
against certain liabilities in connection with the Offer, including certain
liabilities under the federal securities laws. The Dealer Manager, the
Information Agent and the Depositary have not been retained to make
solicitations or recommendations in connection with the Offer.
The Company will not pay fees or commissions to any broker, dealer,
commercial bank, trust company or other person for soliciting tenders of shares
of Common Stock pursuant to the Offer. The Company will, however, on request
reimburse such persons for customary handling and mailing expenses incurred in
forwarding materials in respect of the Offer to the beneficial owners for which
they act as nominees. No such broker, dealer, commercial bank or trust company
has been authorized to act as the Company's agent for purposes of the Offer.
The Company will pay (or cause to be paid) any stock transfer taxes on its
purchase of shares of Common Stock, except as otherwise provided in Instruction
6 of Letter of Transmittal.
16. MISCELLANEOUS.
The Offer is not being made to, nor will tenders be accepted from or on
behalf of, holders of shares of Common Stock residing in any jurisdiction in
which the making of the Offer or acceptance thereof would not comply with the
securities, blue sky or other laws of such jurisdiction. The Company is not
aware of any jurisdiction in which the making of the Offer or the tender of
shares of Common Stock in connection therewith would not be in compliance with
the laws of such jurisdiction. To the extent the Company becomes aware of any
state law that would limit the class of offerees in the Offer, the Company will
amend the Offer and, depending on the timing of such amendment, if any, will
extend the Offer to provide adequate dissemination of such information to
holders of shares of Common Stock prior to the expiration of the Offer. In any
jurisdiction in which the securities, blue sky or other laws require the Offer
to be made by a licensed broker or dealer, the Offer will be deemed to be made
on the Company's behalf by the Dealer Manager or by one or more registered
brokers or dealers licensed under the laws of such jurisdiction.
26
<PAGE>
No person has been authorized to give any information or make any
representation on behalf of the Company not contained herein or in the Letter
of Transmittal and, if given or made, such information or representation must
not be relied upon as having been authorized.
Hills Stores Company
January 24, 1995
27
<PAGE>
Facsimile copies of the Letter of Transmittal will be accepted. The Letter of
Transmittal and certificates for the shares of Common Stock or Series A
Preferred Stock and any other required documents should be sent or delivered by
each stockholder or his broker, dealer, commercial bank, trust company or other
nominee to the Depositary at one of its addresses set forth below:
The Depositary:
CHEMICAL BANK
By Hand By Facsimile Transmission
or Overnight Mail: (for Eligible Institutions only): By Mail:
(212) 629-8015 or (212) 629-8016
(To confirm receipt of facsimile
transmissions call: (212) 946-7137.)
Reorganization Department Reorganization Department
55 Water Street 2nd GPO Station P.O. Box 3085
Floor, Room 234 New York, New York, New York 10116-3085
New York 10041
Any questions or requests for assistance or for additional copies of this
Offer to Purchase, the Letter of Transmittal or the Notice of Guaranteed
Delivery may be directed to the Information Agent at the telephone numbers and
addresses below. You may also contact the Dealer Manager or your broker,
dealer, commercial bank or trust company for assistance concerning the Offer.
The Information Agent:
D. F. KING & CO., INC.
77 Water Street
New York, New York 10005
Call Collect: (212) 269-5550
or
TOLL FREE (800) 326-3066
The Dealer Manager:
SMITH BARNEY INC.
1345 Avenue of the Americas
New York, New York 10105
(212) 830-8781 (call collect)
<PAGE>
LETTER OF TRANSMITTAL
TO TENDER SHARES OF COMMON STOCK
OF
HILLS STORES COMPANY
PURSUANT TO ITS OFFER TO PURCHASE DATED JANUARY 24, 1995
THE OFFER, PRORATION PERIOD AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00
MIDNIGHT,
NEW YORK CITY TIME, ON TUESDAY, FEBRUARY 21, 1995, UNLESS THE OFFER IS
EXTENDED.
The Depositary:
CHEMICAL BANK
By Hand or Overnight By Facsimile Transmission
Mail: (for Eligible Institutions only): By Mail:
(212) 629-8015 or (212) 629-8016
(To confirm receipt of facsimile
transmissions call: (212) 946-7137.)
Reorganization Reorganization Department
Department GPO Station
55 Water Street P.O. Box 3085
2nd Floor, Room 234 New York, New York 10116-
New York, New York 10041 3085
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS, OR TRANSMISSION OF INSTRUCTIONS TO
A FACSIMILE NUMBER OTHER THAN AS SET FORTH ABOVE, WILL NOT CONSTITUTE A VALID
DELIVERY.
THE INSTRUCTIONS ACCOMPANYING THIS LETTER OF TRANSMITTAL SHOULD BE READ
CAREFULLY BEFORE THIS LETTER OF TRANSMITTAL IS COMPLETED.
This Letter of Transmittal is to be used only if (a) certificates for shares
of Common Stock, par value $.01 per share ("Common Stock"), or Series A
Convertible Preferred Stock, par value $.10 per share ("Series A Preferred
Stock"), of Hills Stores Company, a Delaware corporation (the "Company"), are
to be delivered with it or (b) unless an Agent's Message (as defined in the
Offer to Purchase) is utilized, shares of Common Stock or Series A Preferred
Stock are being delivered concurrently by book-entry transfer to the account
maintained by the Depositary at the Depository Trust Company, the Midwest
Securities Trust Company or the Philadelphia Depository Trust Company
(collectively the "Book-Entry Transfer Facilities") as set forth in Section 4
of the Offer to Purchase (as defined below).
Stockholders who cannot deliver their certificates for shares of Common Stock
or Series A Preferred Stock to the Depositary prior to the Expiration Date (as
defined in Section 3 of the Offer to Purchase), who cannot complete the
procedure for book-entry transfer on a timely basis or who cannot deliver a
Letter of Transmittal and all other required documents to the Depositary prior
to the Expiration Date must tender their shares of Common Stock (including
shares of Common Stock underlying the conversion rights of shares of Series A
Preferred Stock) pursuant to the guaranteed delivery procedure set forth in
Section 4 of the Offer to Purchase. See Instruction 2.
<PAGE>
A STOCKHOLDER OWNING BENEFICIALLY AS OF THE CLOSE OF BUSINESS ON JANUARY 23,
1995, WHO CONTINUES TO OWN BENEFICIALLY UNTIL THE EXPIRATION OF THE OFFER, AN
AGGREGATE OF FEWER THAN 100 SHARES OF COMMON STOCK (INCLUDING SHARES OF COMMON
STOCK UNDERLYING THE CONVERSION RIGHTS OF SHARES OF SERIES A PREFERRED STOCK),
AND WHO SATISFIES THE OTHER REQUIREMENTS SET FORTH IN INSTRUCTION 8, MAY HAVE
ALL SUCH SHARES PURCHASED BEFORE PRORATION, IF ANY, OF THE PURCHASE OF OTHER
SHARES PURSUANT TO THE OFFER.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
DESCRIPTION OF SHARES TENDERED
(SEE INSTRUCTIONS)
- -------------------------------------------------------------------------------
NAME(S) AND ADDRESS(ES) OF
REGISTERED OWNER(S) (PLEASE FILL
IN AS NAME(S) APPEAR(S) ON CERTIFICATE(S) TENDERED
CERTIFICATE(S)) (ATTACH ADDITIONAL LIST IF NECESSARY)
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NUMBER
CLASS OF SHARES NUMBER
OF CERTIFICATE REPRESENTED BY OF SHARES
SHARES* NUMBER(S) CERTIFICATE(S)** TENDERED***
------------------------------------------------
------------------------------------------------
------------------------------------------------
------------------------------------------------
------------------------------------------------
TOTAL SHARES...
- -------------------------------------------------------------------------------
</TABLE>
* Insert "Common" or "Preferred".
** Need not be completed by stockholders delivering shares of Common
Stock or Series A Preferred Stock by book-entry transfer.
*** Unless otherwise indicated, it will be assumed that all shares of
Common Stock represented by any Common Stock certificates, and all
shares of Common Stock underlying the conversion rights of any shares
of Series A Preferred Stock represented by Series A Preferred Stock
certificates, delivered to the Depositary are being tendered. See
Instruction 4.
- -------------------------------------------------------------------------------
<PAGE>
[_] CHECK HERE IF SHARES OF COMMON STOCK OR SHARES OF SERIES A PREFERRED STOCK
ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER TO THE DEPOSITARY'S ACCOUNT AT
ONE OF THE BOOK-ENTRY TRANSFER FACILITIES AND COMPLETE THE FOLLOWING:
Name of Tendering Institution _____________________________________________
Check Box of Book-Entry Transfer Facility:
[_] The Depository Trust Company
[_] Midwest Securities Trust Company
[_] Philadelphia Depository Trust Company
Account No. _________________ Transaction Code No. ________________________
[_] CHECK HERE IF SHARES OF COMMON STOCK OR SHARES OF SERIES A PREFERRED STOCK
ARE BEING DELIVERED PURSUANT TO A NOTICE OF GUARANTEED DELIVERY PREVIOUSLY
SENT TO THE DEPOSITARY AND COMPLETE THE FOLLOWING:
Name(s) of Tendering Stockholder(s) _______________________________________
Date of Execution of Notice of Guaranteed Delivery ________________________
Name of Institution which Guaranteed Delivery _____________________________
If delivery is by book-entry transfer:
Name of Tendering Institution ___________________________________________
Check Box of Book-Entry Transfer Facility:
[_] The Depository Trust Company
[_] Midwest Securities Trust Company
[_] Philadelphia Depository Trust Company
Account No. _________________ Transaction Code No. ________________________
<PAGE>
NOTE: SIGNATURES MUST BE PROVIDED BELOW
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
Ladies and Gentlemen:
The undersigned hereby tenders to Hills Stores Company, a Delaware
corporation (the "Company"), the shares of its Common Stock, par value $.01 per
share ("Common Stock"), if any, described above pursuant to the Company's offer
to purchase 3,000,000 shares of its Common Stock at a price of $25.00 per share
(the "Purchase Price"), net to the seller in cash, upon the terms and subject
to the conditions set forth in the Offer to Purchase dated January 24, 1995
(the "Offer to Purchase"), receipt of which is hereby acknowledged, and in this
Letter of Transmittal (which together constitute the "Offer"). In the event
that the undersigned is a holder of shares of Series A Convertible Preferred
Stock, par value $.10 per share ("Series A Preferred Stock"), of the Company,
the undersigned hereby converts the above-described shares of Series A
Preferred Stock into Common Stock to the extent described below and hereby
tenders to the Company the shares of its Common Stock issuable upon such
conversion pursuant to the Offer. Unless the undersigned has otherwise
specified in the box captioned "Series A Preferred Stock Conversion" below, the
undersigned's conversion of shares of Series A Preferred Stock into Common
Stock, if any, shall be limited to the extent that the shares of Common Stock
issuable upon such conversion and tendered herewith are accepted for payment
and paid for by the Company pursuant to the Offer.
Subject to and effective upon the acceptance for payment of the shares of
Common Stock tendered herewith, in accordance with the terms of the Offer
(including, if the Offer is extended or amended, the terms and conditions of
any such extension or amendment), the undersigned hereby sells, assigns and
transfers to or upon the order of the Company all right, title and interest in
and to all the shares of Common Stock that are being tendered hereby, or orders
the registration of such shares of Common Stock delivered by book-entry
transfer, that are purchased pursuant to the Offer and hereby irrevocably
constitutes and appoints Chemical Bank (the "Depositary") the true and lawful
agent and attorney-in-fact of the undersigned with respect to such shares of
Common Stock, with full power of substitution (such power of attorney being
deemed to be an irrevocable power coupled with an interest), to:
(a) deliver certificates for such shares of Common Stock, or transfer
ownership of such shares on the account books maintained by any of the
Book-Entry Transfer Facilities, together, in any such case, with all
accompanying evidences of transfer and authenticity, to or upon the order
of the Company, upon receipt by the Depositary, as the undersigned's agent,
of the Purchase Price with respect to such shares of Common Stock;
(b) present such shares of Common Stock for cancellation and transfer on
the Company's books; and
(c) receive all benefits and otherwise exercise all rights of beneficial
ownership of such shares of Common Stock, all in accordance with the terms
of the Offer.
The undersigned hereby represents and warrants that:
(a) the undersigned "owns" the shares of Common Stock tendered hereby
within the meaning of Rule 14e-4 promulgated under the Securities Exchange
Act of 1934, as amended, and has full power and authority to validly
tender, sell, assign and transfer the shares of Common Stock tendered
hereby;
(b) the tender of shares of Common Stock by the undersigned complies with
Rule 14e-4;
(c) when and to the extent the Company accepts the shares of Common Stock
for payment, the Company will acquire good, marketable and unencumbered
title to those shares of Common Stock, free and clear of all security
interests, liens, charges, encumbrances, conditional sales agreements or
other obligations relating to their sale or transfer, and not subject to
any adverse claim;
<PAGE>
(d) on request, the undersigned will execute and deliver any additional
documents the Depositary or the Company deems necessary or desirable to
complete the assignment, transfer and purchase of the shares of Common
Stock tendered hereby and, if applicable, to complete the conversion of
shares of Series A Preferred Stock into Common Stock as provided herein;
and
(e) the undersigned has read and agrees to all the terms of the Offer.
The undersigned recognizes that, under certain circumstances set forth in the
Offer to Purchase, the Company may terminate or amend the Offer or may not be
required to accept for payment any of the shares of Common Stock tendered
herewith or may accept for payment, pro rata with shares of such Common Stock
tendered by other stockholders, fewer than all of the shares of Common Stock
tendered herewith.
The undersigned understands that tenders of shares of Common Stock pursuant
to any one of the procedures described in Section 4 of the Offer to Purchase
and in the Instructions hereto will constitute a binding agreement between the
undersigned and the Company upon the terms and subject to the conditions of the
Offer.
All authority conferred or agreed to be conferred in this Letter of
Transmittal shall be binding upon the successors, assigns, heirs, executors,
administrators and legal representatives of the undersigned and shall not be
affected by, and shall survive, the death or incapacity of the undersigned.
Except as stated in the Offer to Purchase, this tender is irrevocable.
Unless otherwise indicated herein under "Special Payment Instructions",
please issue the check for the Purchase Price and/or return or issue the
certificate(s) evidencing any shares of Common Stock not tendered or not
accepted for payment and any certificate(s) evidencing any shares of Series A
Preferred Stock not converted into Common Stock pursuant hereto in the name(s)
of the registered holder(s) appearing under "Description of Shares Tendered".
Similarly, unless otherwise indicated under "Special Delivery Instructions",
please mail the check for the Purchase Price and/or the certificate(s)
evidencing any shares of Common Stock not tendered or not accepted for payment
and any certificate(s) evidencing any shares of Series A Preferred Stock not
converted into Common Stock pursuant hereto (and accompanying documents, as
appropriate) to the address of the registered holder(s) appearing under
"Description of Shares Tendered". In the event that both the "Special Delivery
Instructions" and the "Special Payment Instructions" are completed, please
issue the check for the Purchase Price and/or issue or return the
certificate(s) evidencing shares of Common Stock not tendered or accepted for
payment and any certificate(s) evidencing any shares of Series A Preferred
Stock not converted into Common Stock pursuant hereto in the name(s) of, and
deliver said check and/or certificate(s) to the person or persons so indicated.
In the case of book-entry delivery of shares of Common Stock or Series A
Preferred Stock, please credit the account maintained at the Book-Entry
Transfer Facility indicated above with any shares of Common Stock not accepted
for payment or any shares of Series A Preferred Stock not converted into Common
Stock. The undersigned recognizes that the Company has no obligation pursuant
to the "Special Payment Instructions" to transfer any shares of Common Stock or
Series A Preferred Stock from the name of the registered holder thereof if the
Company does not accept for payment any of the shares of Common Stock so
tendered (including shares of Common Stock tendered upon conversion of shares
of Series A Preferred Stock).
<PAGE>
SPECIAL PAYMENT INSTRUCTIONS SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 1, 4, 5, 6, 7, (SEE INSTRUCTIONS 5, 6 AND 7)
10 AND 11)
To be completed ONLY if the To be completed ONLY if the
check for the aggregate Purchase check for the aggregate Purchase
Price of shares of Common Stock Price of shares of Common Stock
purchased and/or certificates for purchased and/or certificates for
shares of Common Stock not ten- shares of Common Stock not ten-
dered or not accepted for payment dered or not accepted for payment
or certificates for shares of Se- or certificates for shares of Se-
ries A Preferred Stock not con- ries A Preferred Stock not con-
verted into Common Stock are to verted into Common Stock are to
be issued in the name of someone be mailed to someone other than
other than the undersigned. the undersigned or to the under-
signed at an address other than
that shown below the
undersigned's signature(s).
Issue [_] check Mail [_] check
[_] certificate(s) to: [_] certificate(s) to:
Name _____________________________ Name _____________________________
(PLEASE PRINT) (PLEASE PRINT)
Address __________________________ Address __________________________
__________________________________ __________________________________
(ZIP CODE) (ZIP CODE)
<PAGE>
SIGN HERE
(SEE INSTRUCTIONS 1 AND 5)
(ALSO COMPLETE SUBSTITUTE FORM W-9)
----------------------------------------------------------------
----------------------------------------------------------------
SIGNATURE(S) OF OWNER(S)
Name(s):
---------------------------------------------------------
---------------------------------------------------------
(PLEASE PRINT)
Capacity (full title)
-------------------------------------------
Address
---------------------------------------------------------
----------------------------------------------------------------
(INCLUDE ZIP CODE)
Area Code and Telephone Number
----------------------------------
Taxpayer Identification Number
----------------------------------
Dated
-----------------------------------------------------------
(Must be signed by registered holder(s) exactly as name(s)
appear(s) on stock certificate(s) or security position listing
or by person(s) authorized to become registered holder(s) by
certificates and documents transmitted herewith. If signature
is by trustees, executors, administrators, guardians,
attorneys-in-fact, officers of corporations or others acting in
a fiduciary or representative capacity, please set forth full
title and see Instruction 5.)
GUARANTEE OF SIGNATURE(S)
(SEE INSTRUCTIONS 1 AND 5)
Authorized Signature
--------------------------------------------
Name
------------------------------------------------------------
(PLEASE PRINT)
Title
-----------------------------------------------------------
Name of Firm
----------------------------------------------------
Address
---------------------------------------------------------
- -----------------------------------------------------------------
(INCLUDE ZIP CODE)
Area Code and Telephone Number
----------------------------------
Dated
-----------------------------------------------------------
<PAGE>
SERIES A PREFERRED STOCK CONVERSION
(SEE INSTRUCTION 2)
[_] CHECK HERE IF YOU WISH TO CONVERT ALL OF YOUR SHARES OF SERIES A
PREFERRED STOCK INTO COMMON STOCK AND HAVE RETURNED, AFTER PRORATION,
SHARES OF COMMON STOCK, IF ANY, THAT WERE NOT ACCEPTED FOR PAYMENT BY
THE COMPANY.
ODD LOTS
(SEE INSTRUCTION 8)
This section is to be completed ONLY if shares of Common Stock (including
shares of Common Stock underlying the conversion rights of shares of Series
A Preferred Stock) being tendered by or on behalf of a person owning
beneficially as of the close of business on January 23, 1995, and continuing
to own beneficially until the Expiration Date, aggregate fewer than 100 such
shares.
The undersigned either (check one box):
[_] was the beneficial owner as of the close of business on January 23,
1995, and will continue to be the beneficial owner until the Expiration
Date, of an aggregate of fewer than 100 shares of Common Stock
(including shares of Common Stock underlying the conversion rights of
shares of Series A Preferred Stock), all of which are being tendered,
or
[_] is an "Eligible Institution" (as defined in the Offer to Purchase) that
(i) is tendering, for the beneficial owners thereof, shares of Common
Stock (including shares of Common Stock underlying the conversion
rights of shares of Series A Preferred Stock) with respect to which it
is the record owner, and (ii) believes, based upon representations made
to it by each such beneficial owner, that such beneficial owner owned
beneficially as of the close of business on January 23, 1995, and will
continue to own beneficially until the Expiration Date, an aggregate of
fewer than 100 shares of Common Stock (including shares of Common Stock
underlying the conversion rights of shares of Series A Preferred
Stock), and is tendering all of such shares,
and, in either case, hereby represents that the above indicated information
is true and correct as to the undersigned.
<PAGE>
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE OFFER
1. GUARANTEE OF SIGNATURES
Except as otherwise provided below, all signatures on this Letter of
Transmittal must be guaranteed by a firm which is an "Eligible Institution" (as
defined in the Offer to Purchase). Signatures on this Letter of Transmittal
need not be guaranteed if (a) this Letter of Transmittal is signed by the
registered owner (which term, for purposes of this document, shall include any
participant in one of the Book-Entry Transfer Facilities whose name appears on
a security position listing as the owner of shares of Common Stock or Series A
Preferred Stock) of the shares of Common Stock tendered herewith or shares of
Series A Preferred Stock convertible into tendered shares and such owner(s) has
not completed either the box entitled "Special Delivery Instructions" or the
box entitled "Special Payment Instructions" on this Letter of Transmittal, or
(b) if such shares of Common Stock are tendered for the account of an Eligible
Institution. In all other cases all signatures on this Letter of Transmittal
must be guaranteed by an Eligible Institution. See Instruction 5.
2. DELIVERY OF LETTER OF TRANSMITTAL AND CERTIFICATES
This Letter of Transmittal is to be used only if (a) certificates for shares
of Common Stock or Series A Preferred Stock are to be delivered herewith or (b)
unless an Agent's Message is utilized, delivery of such shares of Common Stock
or Series A Preferred Stock is to be made by book-entry transfer pursuant to
the procedures set forth in Section 4 of the Offer to Purchase. Certificates
for all physically delivered shares of Common Stock or Series A Preferred
Stock, or a confirmation of a book-entry transfer of all such shares of Common
Stock or Series A Preferred Stock transferred electronically into the
Depositary's account at one of the Book-Entry Transfer Facilities, together in
each case with a properly completed and duly executed Letter of Transmittal (or
facsimile thereof) with any required signature guarantees, and any other
documents required by this Letter of Transmittal, must be received by the
Depositary at its address set forth on the front page of this Letter of
Transmittal prior to the Expiration Date (as defined in the Offer to Purchase),
or the tendering stockholder must comply with the procedures set forth in the
next paragraph. DELIVERY OF DOCUMENTS TO ONE OF THE BOOK-ENTRY TRANSFER
FACILITIES DOES NOT CONSTITUTE DELIVERY TO THE DEPOSITARY.
Stockholders who cannot deliver the certificates for their shares of Common
Stock or Series A Preferred Stock to the Depositary prior to the Expiration
Date or who cannot complete the procedure for book-entry transfer on a timely
basis or who cannot deliver a Letter of Transmittal and all other required
documents to the Depositary prior to the Expiration Date must tender their
shares of Common Stock by properly completing and duly executing the Notice of
Guaranteed Delivery pursuant to the guaranteed delivery procedure set forth in
Section 4 of the Offer to Purchase. Pursuant to such procedure: (a) such tender
must be made by or through an Eligible Institution, (b) a properly completed
and duly executed Notice of Guaranteed Delivery substantially in the form
provided by the Company must be received by the Depositary, as provided below,
prior to the Expiration Date, and (c) the certificates for all tendered shares
of Common Stock or shares of Series A Preferred Stock convertible into such
shares of Common Stock, in proper form for transfer (or a confirmation of book-
entry transfer of such shares into the Depositary's account at one of the Book-
Entry Transfer Facilities), together with a properly completed and duly
executed Letter of Transmittal (or facsimile thereof) with any required
signature guarantees (or, in the case of a book-entry delivery, an Agent's
Message) and any other documents required by this Letter of Transmittal, are
received by the Depositary within five New York Stock Exchange, Inc. ("NYSE")
trading days after the date of execution of such Notice of Guaranteed Delivery.
The Company reserves the right to shorten or eliminate this period so long as
the announcement of such shortened period or elimination is made at least six
NYSE trading days before the Expiration Date. The Notice of Guaranteed Delivery
may be delivered by hand to the Depositary or transmitted by telegram,
facsimile transmission or letter to the Depositary and must include a guarantee
by an Eligible Institution in the form set forth in such Notice, all as
provided in Section 4 of the Offer to Purchase.
<PAGE>
Although only shares of Common Stock will be purchased pursuant to the Offer,
holders of Series A Preferred Stock may tender shares of Common Stock into
which their shares of Series A Preferred Stock are convertible by complying
with the instructions for the valid tender of shares of Common Stock set forth
in Section 4 of the Offer to Purchase and in this Letter of Transmittal. Unless
the box captioned "Series A Preferred Stock Conversion" in this Letter of
Transmittal and, if applicable, the Notice of Guaranteed Delivery, is
completed, shares of Series A Preferred Stock so delivered will be converted
into Common Stock only to the extent such tender of Common Stock is accepted
for payment by the Company and all remaining shares of Series A Preferred Stock
so delivered will not be converted and will be returned to the stockholder. ANY
STOCKHOLDER WHO WISHES TO CONVERT ALL OF SUCH STOCKHOLDER'S SHARES OF SERIES A
PREFERRED STOCK INTO COMMON STOCK AND HAVE RETURNED, AFTER PRORATION, SHARES OF
COMMON STOCK, IF ANY, THAT WERE NOT ACCEPTED FOR PAYMENT BY THE COMPANY MUST SO
INDICATE BY COMPLETING THE BOX CAPTIONED "SERIES A PREFERRED STOCK CONVERSION"
ON THE BOTTOM OF THE FACING PAGE HERETO.
THE METHOD OF DELIVERY OF CERTIFICATES FOR SHARES OF COMMON STOCK OR SERIES A
PREFERRED STOCK AND ANY OTHER REQUIRED DOCUMENTS IS AT THE OPTION AND RISK OF
THE TENDERING STOCKHOLDER. IF DELIVERY IS BY MAIL, REGISTERED MAIL WITH RETURN
RECEIPT REQUESTED, PROPERLY INSURED, IS RECOMMENDED.
No alternative, conditional or contingent tenders will be accepted and no
fractional shares of Common Stock will be purchased. All tendering
stockholders, by execution of this Letter of Transmittal (or facsimile
thereof), waive any right to receive any notice of the acceptance of their
shares of Common Stock for payment.
3. INADEQUATE SPACE
If the space provided herein is inadequate, the class of shares, certificate
numbers and/or the number of shares of Common Stock or Series A Preferred Stock
should be listed on a separate schedule and attached to this Letter of
Transmittal.
4. PARTIAL TENDERS AND UNPURCHASED SHARES
(Not applicable to stockholders who deliver their shares by book-entry
transfer.) If fewer than all the shares of Common Stock evidenced by any
certificate delivered to the Depositary (or issuable upon conversion of shares
of Series A Preferred Stock evidenced by any such certificate) are to be
tendered, fill in the number of shares which are to be tendered in the box
entitled "Number of Shares Tendered". If such shares of Common Stock are
purchased, a new certificate for the remainder of the shares of Common Stock
(or, in the event the tendering stockholder holds shares of Series A Preferred
Stock, the remainder of the shares of Series A Preferred Stock) that were
evidenced by the older certificate(s) will be sent to and in the name of the
registered holder(s) (unless otherwise provided by such holder(s) having
completed either of the boxes entitled "Special Payment Instructions" or
"Special Delivery Instructions" on this Letter of Transmittal) as promptly as
practicable after the expiration or termination of the Offer. All shares of
Common Stock represented by certificates delivered to the Depositary or
underlying the conversion rights of shares of Series A Preferred Stock
represented by certificates delivered to the Depositary will be deemed to have
been tendered unless otherwise indicated.
5. SIGNATURES ON LETTER OF TRANSMITTAL, STOCK POWERS AND ENDORSEMENTS
(a) If this Letter of Transmittal is signed by the registered holder(s) of
the shares of Common Stock tendered hereby or the registered holder(s) of the
shares of Series A Preferred Stock convertible into such shares, the
signature(s) must correspond with the name(s) as written on the face of the
certificates without any change whatsoever.
(b) If any of the shares of Common Stock tendered herewith or shares of
Series A Preferred Stock convertible into such shares are registered in the
names of two or more joint owners, each such owner must sign this Letter of
Transmittal.
<PAGE>
(c) If any of the shares of Common Stock tendered herewith or shares of
Series A Preferred Stock convertible into such shares are registered in
different names on different certificates, it will be necessary to complete,
sign and submit as many separate Letters of Transmittal as there are different
registrations of certificates.
(d) If this Letter of Transmittal or any certificates or stock powers are
signed by a trustee, executor, administrator, guardian, attorney-in-fact,
officer of corporations or other person acting in a fiduciary or representative
capacity, such persons should so indicate when signing and proper evidence
satisfactory to the Company of the authority of such person so to act must be
submitted.
(e) If this Letter of Transmittal is signed by the registered holder(s) of
the shares of Common Stock tendered herewith or the registered holder(s) of the
shares of Series A Preferred Stock convertible into such shares, no
endorsements or certificates or separate stock powers are required unless
payment is to be made, and/or certificates for shares of Common Stock not
tendered or purchased or certificates for shares of Series A Preferred Stock
not converted into Common Stock are to be issued, to a person other than the
registered holder(s). If this Letter of Transmittal is signed by a person other
than the registered holder(s) of the shares of Common Stock tendered herewith
or the registered holder(s) of the shares of Series A Preferred Stock
convertible into such shares, however, the certificates must be endorsed or
accompanied by appropriate stock powers, in either case, signed exactly as the
name(s) of the registered holder(s) appear(s) on the certificates for such
shares of Common Stock or such shares of Series A Preferred Stock convertible
into such shares. Signature(s) on any such certificates or stock powers must be
guaranteed by an Eligible Institution. See Instruction 1.
6. STOCK TRANSFER TAXES
The Company will pay any stock transfer taxes with respect to the transfer
and sale of shares of Common Stock to it or its order pursuant to the Offer.
If, however, payment of the Purchase Price is to be made to, or if certificates
for shares of Common Stock not tendered or accepted for payment or certificates
for any shares of Series A Preferred Stock not converted into Common Stock are
to be registered in the name of, any person other than the registered holder,
or if tendered certificates are registered in the name of any person other than
the person(s) signing this Letter of Transmittal, the amount of any stock
transfer taxes (whether imposed on the registered holder or such person)
payable on account of the transfer to such person will be deducted from the
Purchase Price unless satisfactory evidence of the payment of such taxes or
exemption therefrom is submitted.
EXCEPT AS PROVIDED IN THIS INSTRUCTION 6, IT WILL NOT BE NECESSARY FOR
TRANSFER TAX STAMPS TO BE AFFIXED TO THE CERTIFICATES LISTED IN THIS LETTER OF
TRANSMITTAL.
7. SPECIAL PAYMENT AND DELIVERY INSTRUCTIONS
If the check for the Purchase Price of any shares of Common Stock is to be
issued to, or certificates representing any shares of Common Stock not tendered
or not purchased or certificates representing any shares of Series A Preferred
Stock not converted into Common Stock are to be returned in the name of, a
person other than the person(s) signing this Letter of Transmittal or if a
check is to be sent or certificates for shares of Common Stock not tendered or
not purchased or certificates representing any shares of Series A Preferred
Stock not converted into Common Stock are to be mailed to someone other than
the person(s) signing this Letter of Transmittal or to the person(s) signing
this Letter of Transmittal at an address other than that shown in the box
entitled "Description of Shares Tendered", the boxes entitled "Special Payment
Instructions" and/or "Special Delivery Instructions" in this Letter of
Transmittal should be completed.
8. ODD LOTS
As described in Section 3 of the Offer to Purchase, if fewer than all shares
of Common Stock validly tendered and not withdrawn prior to the Expiration Date
are to be purchased, the shares of Common Stock
<PAGE>
purchased first will consist of all shares of Common Stock tendered by any
stockholder who beneficially owned an aggregate of fewer than 100 shares of
Common Stock (including shares of Common Stock underlying the conversion rights
of shares of Series A Preferred Stock) as of the close of business on January
23, 1995, and continued to own beneficially such shares of Common Stock until
the Expiration Date, who properly tendered all such shares of Common Stock
(partial tenders of Shares will not qualify for this preference) and who
completes the box captioned "Odd Lots" in this Letter of Transmittal and, if
applicable, the Notice of Guaranteed Delivery.
9. WAIVER OF CONDITIONS
The Company reserves the absolute right in its sole discretion to waive any
of the specified conditions of the Offer in the case of any shares of Common
Stock tendered.
10. SUBSTITUTE FORM W-9
Except as provided below under "Important Tax Information", each tendering
stockholder is required to provide the Depositary with a correct taxpayer
identification number ("TIN") on Substitute Form W-9 which is provided under
"Important Tax Information" below. Failure to provide the information on the
form may subject the tendering stockholder to a $50 penalty and 31% federal
income tax withholding may be imposed on the payments made to the stockholder
or other payee with respect to shares of Common Stock purchased pursuant to the
Offer.
11. WITHHOLDING ON FOREIGN STOCKHOLDERS
The Depositary will withhold federal income taxes equal to 30% of the gross
payments payable to a foreign stockholder unless such foreign stockholder
proves in a manner satisfactory to the Company and the Depositary that either
(i) the sale of its shares of Common Stock pursuant to the Offer will qualify
as a sale or exchange, rather than as a dividend, for federal income tax
purposes (as described in Section 10 of the Offer to Purchase), in which case
no withholding will be required, or (ii) the foreign stockholder is eligible
for a reduced tax treaty rate with respect to dividend income, in which case
the Depositary will withhold at the reduced treaty rate. For this purpose, a
foreign stockholder is any stockholder that is not (i) a citizen or resident of
the United States, (ii) a corporation, partnership or other entity created or
organized in or under the laws of the United States or any political
subdivision thereof or (iii) any estate or trust the income of which is subject
to United States federal income taxation regardless of the source of such
income. The Depositary will determine a stockholder's status as a foreign
stockholder and eligibility for a tax treaty reduced rate of withholding by
reference to the stockholder's address and to any outstanding certificates or
statements concerning eligibility for a reduced rate of withholding unless
facts and circumstances indicate that reliance is not warranted. A foreign
stockholder who had not previously submitted the appropriate certificates or
statements with respect to a reduced rate of withholding for which such
stockholder may be eligible should consider doing so in order to avoid
overwithholding. A foreign stockholder may be eligible to obtain a refund of
tax withheld if such stockholder meets one of the three tests for sale
treatment described in Section 10 of the Offer to Purchase or is otherwise able
to establish that no tax or reduced amount of tax was due.
12. IRREGULARITIES
All questions as to the number of shares of Common Stock to be accepted and
the validity, form, eligibility (including time of receipt) and acceptance for
payment of any tender of shares of Common Stock will be determined by the
Company, in its sole discretion, and its determination shall be final and
binding on all parties. The Company reserves the absolute right to reject any
or all tenders it determines not to be in proper form or the acceptance of or
payment for which may, in the opinion of the Company's counsel, be unlawful.
The Company also reserves the absolute right to waive any of the conditions of
the Offer or any defect or irregularity in the tender of any particular shares
of Common Stock. No tender of shares of Common
<PAGE>
Stock will be deemed to be properly made until all defects and irregularities
have been cured or waived. Unless waived, any defects or irregularities in
connection with tenders must be cured within such time as the Company shall
determine. None of the Company, the Depositary, the Information Agent nor any
other person is or will be obligated to give notice of any defects or
irregularities in tenders, and none of them will incur any liability for
failure to give such notice.
13. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES
Questions and requests for assistance or additional copies of the Offer to
Purchase, the Letter of Transmittal, the Notice of Guaranteed Delivery and the
Guidelines for Certification of Taxpayer Identification Number on Substitute
Form W-9 may be directed to the Information Agent or the Dealer Manager at
their respective addresses set forth below.
IMPORTANT: THIS LETTER OF TRANSMITTAL OR A FACSIMILE COPY THEREOF (TOGETHER
WITH CERTIFICATES FOR SHARES OF COMMON STOCK OR SERIES A PREFERRED STOCK OR
CONFIRMATION OF BOOK-ENTRY TRANSFER OF SHARES OF COMMON STOCK OR SERIES A
PREFERRED STOCK AND ALL OTHER REQUIRED DOCUMENTS) MUST BE RECEIVED BY THE
DEPOSITARY, OR THE NOTICE OF GUARANTEED DELIVERY MUST BE RECEIVED BY THE
DEPOSITARY, PRIOR TO THE EXPIRATION DATE (AS DEFINED IN THE OFFER TO PURCHASE).
<PAGE>
IMPORTANT TAX INFORMATION
Under U.S. federal income tax law, a stockholder whose tendered shares of
Common Stock are accepted for payment is required to provide the Depositary
with such stockholder's correct taxpayer identification number ("TIN") on
Substitute Form W-9 below. If the Depositary is not provided with the correct
TIN, the Internal Revenue Service may subject the stockholder or other payee to
a $50 penalty. In addition, payments that are made to such stockholder or other
payee with respect to shares of Common Stock purchased pursuant to the Offer
may be subject to 31% backup withholding.
Certain stockholders (including, among others, all corporations and certain
foreign individuals) are not subject to these backup withholding and reporting
requirements and should indicate their status by writing "exempt" across the
face of the Substitute Form W-9. In order for a foreign individual to qualify
as an exempt recipient, the stockholder must submit a Form W-8, signed under
penalties of perjury, attesting to that individual's exempt status. A Form W-8
can be obtained from the Depositary. See the enclosed "Guidelines for
Certification of Taxpayer Identification Number on Substitute Form W-9" for
more instructions.
If backup withholding applies, the Depositary is required to withhold 31% of
any such payments made to the stockholder or other payee. Backup withholding is
not an additional tax. Rather, the tax liability of persons subject to backup
withholding will be reduced by the amount of tax withheld. If withholding
results in an overpayment of taxes, a refund may be obtained from the Internal
Revenue Service.
The box in Part 2 of the form may be checked if the tendering stockholder has
not been issued a TIN and has applied for a TIN or intends to apply for a TIN
in the near future. If the box in Part 2 is checked, the stockholder or other
payee must also complete the Certificate of Awaiting Taxpayer Identification
Number below in order to avoid backup withholding. Notwithstanding that the box
in Part 2 is checked (and the Certificate of Awaiting Taxpayer Identification
Number is completed), the Depositary will withhold 31% on all payments made
prior to the time a properly certified TIN is provided to the Depositary.
PURPOSE OF SUBSTITUTE FORM W-9
To prevent backup withholding on payment made to a stockholder or other payee
with respect to shares of Common Stock purchased pursuant to the Offer, the
stockholder is required to notify the Depositary of the stockholder's correct
TIN by completing the form below, certifying that the TIN provided on
Substitute Form W-9 is correct (or that such stockholder is awaiting a TIN).
WHAT NUMBER TO GIVE THE DEPOSITARY
The stockholder is required to give the Depositary the TIN (e.g., social
security number or employer identification number) of the record owner of the
shares of Common Stock or of the record owner of the shares of Series A
Preferred Stock convertible into such shares of Common Stock or of the last
transferee appearing on the transfers attached to, or endorsed on, the
certificates evidencing the shares of Common Stock or Series A Preferred Stock,
as applicable. If the shares of Common Stock or Series A Preferred Stock, as
applicable, are in more than one name or are not in the name of the actual
owner, consult the enclosed "Guidelines for Certification of Taxpayer
Identification Number on Substitute Form W-9" for additional guidance on which
number to report.
<PAGE>
PAYER'S NAME: CHEMICAL BANK
SUBSTITUTE PART 1--PLEASE PROVIDE YOUR
FORM W-9 TIN IN THE BOX AT THE RIGHT ------------------------
AND CERTIFY BY SIGNING AND Social Security Number
DATING BELOW OR
--------------------
PAYER'S REQUEST Employee
FOR TAXPAYER Identification Number
IDENTIFICATION --------------------------------------------------------
NUMBER (TIN) PART 2--Awaiting TIN [_]
--------------------------------------------------------
CERTIFICATION--UNDER THE PENALTIES OF PERJURY, I
CERTIFY THAT THE INFORMATION PROVIDED ON THIS FORM IS
TRUE, CORRECT AND COMPLETE.
NAME
-------------------------------------------------
(PLEASE PRINT)
ADDRESS
----------------------------------------------
------------------------------------------------------
(INCLUDE ZIP CODE)
SIGNATURE DATE
--------------------------- ----------
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE BOX
IN PART 2 OF SUBSTITUTE FORM W-9
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification number
has not been issued to me, and either (a) I have mailed or delivered an
application to receive a taxpayer identification number to the appropriate
Internal Revenue Service Center or Social Security Administration Office or
(b) I intend to mail or deliver an application in the near future. I
understand that, notwithstanding that I have checked the box in Part 2 (and
have completed this Certificate of Awaiting Taxpayer Identification Number),
all reported payments made to me prior to the time I provide the Company with
a properly certified taxpayer identification number will be subject to a 31%
backup withholding tax.
SIGNATURE DATE
---------------------------------- ------------------
NOTE: FAILURE TO COMPLETE THIS FORM W-9 MAY RESULT IN A BACKUP WITHHOLDING OF
31% OF ANY PAYMENTS MADE TO YOU PURSUANT TO THE OFFER. PLEASE REVIEW THE
ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER
ON SUBSTITUTE FORM W-9 FOR ADDITIONAL DETAILS.
<PAGE>
The Information Agent:
D. F. KING & CO., INC.
77 Water Street
New York, New York 10005
(Call Collect) (212) 269-5550
or
TOLL FREE (800) 326-3066
The Dealer Manager:
SMITH BARNEY INC.
1345 Avenue of the Americas
New York, New York 10105
(212) 723-5816 (call collect)
<PAGE>
[LETTERHEAD OF HILLS STORES COMPANY APPEARS HERE]
January 24, 1995
Dear Fellow Stockholder:
Hills Stores Company (the "Company") is offering to purchase up to 3,000,000
shares of its Common Stock from its stockholders for cash at $25.00 per share
net to the selling stockholder. Although only shares of Common Stock will be
purchased pursuant to the offer, holders of Series A Convertible Preferred
Stock of the Company may tender shares of Common Stock into which their shares
of Series A Convertible Preferred Stock are convertible by following the
procedures set forth in the enclosed Offer to Purchase.
The offer is one component of the Company's plan to enhance stockholder
value announced by the Company on September 21, 1994. The primary purpose of
the offer is to provide those of you who wish to convert a portion of your
equity investment into cash with an opportunity to do so at a premium over
recent market prices of the shares without the usual transaction costs
associated with a market sale. Those of you whose shares are not purchased
pursuant to the offer will increase your proportionate ownership interest in
the Company and thus in its future earnings and profits.
The offer, proration period and withdrawal rights will expire at 12:00
Midnight, New York City time, on Tuesday, February 21, 1995, unless the offer
is extended. You are encouraged to act promptly in making your decision
regarding your shares of Common Stock. Neither the Company nor its Board of
Directors is making any recommendation as to whether you should tender shares
of Common Stock in the offer.
The offer is explained in detail in the enclosed Offer to Purchase and
Letter of Transmittal. If you want to tender your shares, the instructions on
how to tender shares are also explained in detail in the enclosed materials.
We encourage you to read these materials carefully before making any decision
with respect to the offer.
If you have any questions regarding the offer, please call D. F. King & Co.,
Inc., the Information Agent for the offer, or Smith Barney Inc., the Dealer
Manager for the Offer, at the appropriate number set forth on the back page of
the Offer to Purchase.
Sincerely,
/s/ Thomas H. Lee /s/ Michael Bozic
Thomas H. Lee Michael Bozic
Chairman of the Board President and Chief Executive
Officer
<PAGE>
NOTICE OF GUARANTEED DELIVERY
FOR
TENDER OF SHARES OF COMMON STOCK
OF
HILLS STORES COMPANY
This Notice of Guaranteed Delivery or one substantially equivalent hereto
must be used to accept the Offer (as defined below) if:
(a) certificates for shares of Common Stock, par value $.01 per share
(the "Common Stock"), or Series A Convertible Preferred Stock, par value
$.10 per share (the "Series A Preferred Stock"), of Hills Stores Company, a
Delaware corporation (the "Company"), cannot be delivered to the Depositary
prior to the Expiration Date (as defined in Section 3 of the Company's
Offer to Purchase dated January 24, 1995 (the "Offer to Purchase")); or
(b) the procedure for book-entry transfer (set forth in Section 4 of the
Offer to Purchase) cannot be completed on a timely basis; or
(c) the Letter of Transmittal (or a facsimile thereof) and all other
required documents cannot be delivered to the Depositary prior to the
Expiration Date.
This Notice of Guaranteed Delivery, properly completed and duly executed, may
be delivered by hand, mail or facsimile transmission to the Depositary. See
Section 4 of the Offer to Purchase.
To the Depositary:
CHEMICAL BANK
By Hand By Facsimile Transmission By Mail:
or Overnight Mail: (for Eligible Institutions only):
(212) 629-8015 or (212) 629-8016
(To confirm receipt of facsimile
transmissions call: (212) 946-7137.)
Reorganization Department Reorganization Department
55 Water Street GPO Station
2nd Floor, Room 234 P.O. Box 3085
New York, New York 10041 New York, New York 10116-3085
DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY TO AN ADDRESS, OR TRANSMISSION
OF INSTRUCTIONS TO A FACSIMILE NUMBER, OTHER THAN AS SET FORTH ABOVE DOES NOT
CONSTITUTE A VALID DELIVERY.
This Notice of Guaranteed Delivery is not to be used to guarantee signatures.
If a signature on a Letter of Transmittal is required to be guaranteed by an
"Eligible Institution" (as defined in the Offer to Purchase) under the
instructions thereto, such signature guarantee must appear in the applicable
space provided in the signature box on the Letter of Transmittal.
<PAGE>
Ladies and Gentlemen:
The undersigned hereby tenders to the Company, upon the terms and subject to
the conditions set forth in the Offer to Purchase and in the related Letter of
Transmittal (which together constitute the "Offer"), receipt of which is hereby
acknowledged, shares of Common Stock (including shares of Common Stock
issuable upon conversion of shares of Series A Preferred Stock) pursuant to the
guaranteed delivery procedure set forth in Section 4 of the Offer to Purchase.
ODD LOTS
(SEE INSTRUCTION 8 OF THE LETTER OF TRANSMITTAL)
The undersigned either (check one box):
[_] was the beneficial owner as of the close of business on January 23, 1995,
and will continue to be the beneficial owner until the Expiration Date, of
an aggregate of fewer than 100 shares of Common Stock (including shares of
Common Stock underlying the conversion rights of shares of Series A
Preferred Stock), all of which are being tendered, or
[_] is an Eligible Institution that (i) is tendering, for the beneficial owners
thereof, shares of Common Stock (including shares of Common Stock
underlying the conversion rights of shares of Series A Preferred Stock)
with respect to which it is the record owner, and (ii) believes, based upon
representations made to it by each such beneficial owner, that such
beneficial owner owned beneficially as of the close of business on January
23, 1995, and will continue to own beneficially until the Expiration Date,
an aggregate of fewer than 100 shares of Common Stock (including shares of
Common Stock underlying the conversion rights of shares of Series A
Preferred Stock), and is tendering all of such shares of Common Stock.
Signature(s): Address:
----------------------- ----------------------------
----------------------- ----------------------------
Zip Code
Name(s) of Record Holder(s): Area Code and Tel. No.:
-------------
- -------------------------------------
Please Print
Certificate Nos.: Dated:
(if available) ------------------- ------------------------------
If shares will be delivered by book-entry transfer:
Name of Tendering Institution:
--------------------------------------------
Account No.:
--------------------------------------------------------------
at:
[_] The Depository Trust Company
[_] Midwest Securities Trust Company
[_] Philadelphia Depository Trust Company
<PAGE>
GUARANTEE
(NOT TO BE USED FOR SIGNATURE GUARANTEE)
The undersigned, an Eligible Institution, guarantees (i) that the above named
person(s) "own(s)" the shares of Common Stock tendered hereby within the
meaning of Rule 14e-4 under the Securities Exchange Act of 1934, as amended,
(ii) that such tender of such shares of Common Stock complies with Rule 14e-4
and (iii) to deliver to the Depositary either the stock certificates
representing the shares of Common Stock tendered hereby or stock certificates
representing shares of Series A Preferred Stock convertible into such shares of
Common Stock, in proper form for transfer, or confirmation of the book-entry
transfer of such shares into the Depositary's account at The Depository Trust
Company, the Midwest Securities Trust Company or Philadelphia Depository Trust
Company, in any such case, together with one or more properly completed and
duly executed Letter(s) of Transmittal (or facsimile(s) thereof), or an Agent's
Message (as defined in the Offer to Purchase) in the case of a book-entry
delivery, and any other required documents, all within five New York Stock
Exchange, Inc. trading days after the date of execution of this notice (or such
shorter period as is provided pursuant to Section 4 of the Offer to Purchase).
-------------------------------------
(NAME OF FIRM)
-------------------------------------
(AUTHORIZED SIGNATURE)
-------------------------------------
(NAME)
-------------------------------------
(ADDRESS)
-------------------------------------
(ZIP CODE)
NOTE: DO NOT SEND CERTIFICATES WITH THIS NOTICE OF GUARANTEED DELIVERY; SHARE
CERTIFICATES SHOULD BE SENT WITH YOUR LETTER OF TRANSMITTAL.
<PAGE>
[LOGO OF SMITH BARNEY
APPEARS HERE]
OFFER TO PURCHASE FOR CASH
BY
HILLS STORES COMPANY
UP TO 3,000,000 SHARES OF ITS COMMON STOCK
AT
$25.00 NET PER SHARE
January 24, 1995
To Brokers, Dealers, Commercial Banks,
Trust Companies and Other Nominees:
We have been appointed by Hills Stores Company, a Delaware corporation (the
"Company"), to act as Dealer Manager in connection with its offer to purchase
up to 3,000,000 shares of its Common Stock, par value $.01 per share ("Common
Stock"), at a price of $25.00 per share, net to the seller in cash, upon the
terms and subject to the conditions set forth in the Company's Offer to Purchase
dated January 24, 1995 (the "Offer to Purchase"), and in the related Letter of
Transmittal (which together constitute the "Offer"). Although only shares of
Common Stock will be purchased pursuant to the Offer, holders of shares of
Series A Convertible Preferred Stock, par value $.10 per share, of the Company
("Series A Preferred Stock") may tender shares of Common Stock into which their
shares of Series A Preferred Stock are convertible by following the instructions
contained in Section 4 of the Offer to Purchase and in the Letter of
Transmittal.
For your information and for forwarding to those of your clients for whom you
hold shares of Common Stock or Series A Convertible Preferred Stock, par value
$.10 per share (the "Series A Preferred Stock"), of the Company registered in
your name or in the name of your nominee, we are enclosing herewith copies of
the following documents:
1. A Letter to the Company's stockholders from Thomas H. Lee, Chairman of
the Board of Directors of the Company, and Michael Bozic, President and
Chief Executive Officer of the Company;
2. The Offer to Purchase dated January 24, 1995;
3. The Letter of Transmittal to be used by holders of shares of Common
Stock or shares of Series A Preferred Stock convertible into shares of
Common Stock in accepting the Offer;
4. A printed form of letter which may be sent to your clients for whose
account you hold shares of Common Stock or Series A Preferred Stock in your
name or in the name of a nominee in order to obtain such clients'
instructions with regard to the Offer;
5. The Notice of Guaranteed Delivery;
6. Guidelines of the Internal Revenue Service for Certification of
Taxpayer Identification Number on Substitute Form W-9; and
7. Return envelope addressed to Chemical Bank, the Depositary.
If more than 3,000,000 shares of Common Stock are validly tendered and not
withdrawn prior to the expiration of the Offer, the Company will accept for
payment shares of Common Stock first from all stockholders who beneficially
owned on January 23, 1995, and continue to own until the expiration of the
Offer, an aggregate of fewer than 100 shares of Common Stock (including shares
of Common Stock underlying the conversion rights of shares of Series A
Preferred Stock) and who validly tender all such shares of Common Stock and
then on a pro rata basis from all other stockholders who validly tender shares
of Common Stock.
The Offer is not conditioned upon any minimum number of shares of Common
Stock being tendered. The Offer is, however, subject to certain other
conditions set forth in the Offer to Purchase.
WE URGE YOU TO CONTACT YOUR CLIENTS PROMPTLY.
<PAGE>
THE OFFER, PRORATION PERIOD AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00
MIDNIGHT, NEW YORK CITY TIME, ON TUESDAY, FEBRUARY 21, 1995, UNLESS THE OFFER
IS EXTENDED.
NEITHER THE COMPANY NOR ITS BOARD OF DIRECTORS MAKES ANY RECOMMENDATION AS TO
WHETHER ANY STOCKHOLDER SHOULD TENDER ANY OR ALL OF SUCH STOCKHOLDER'S SHARES
PURSUANT TO THE OFFER. EACH STOCKHOLDER MUST MAKE ITS OWN DECISION WHETHER TO
TENDER SHARES AND, IF SO, HOW MANY SHARES TO TENDER. THE COMPANY HAS BEEN
ADVISED THAT NONE OF ITS DIRECTORS OR EXECUTIVE OFFICERS INTENDS TO TENDER ANY
SHARES OF COMMON STOCK PURSUANT TO THE OFFER. THE COMPANY HAS ALSO BEEN
ADVISED, HOWEVER, THAT APOLLO CAPITAL MANAGEMENT, INC. ("APOLLO"), MAY TENDER
SOME OR ALL OF THE APPROXIMATELY 700,000 SHARES OF COMMON STOCK BENEFICIALLY
OWNED BY APOLLO PURSUANT TO THE OFFER. MICHAEL S. GROSS, A DIRECTOR OF THE
COMPANY, IS AN OFFICER OF APOLLO.
The Company will not pay fees or commissions to any broker, dealer,
commercial bank, trust company or other person for soliciting tenders of shares
of Common Stock pursuant to the Offer. You will be reimbursed for customary
mailing and handling expenses incurred by you in forwarding the enclosed
material to your clients.
Any inquiries you may have with respect to the Offer shall be addressed to,
and additional copies of the enclosed material may be obtained by calling the
undersigned or D. F. King & Co., Inc., the Information Agent, 77 Water Street,
New York, New York 10005, telephone (212) 269-5550 (collect) or (800) 326-3066
(toll free).
Very truly yours,
Smith Barney Inc.
----------------
NOTHING CONTAINED HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE YOU OR
ANY OTHER PERSON THE AGENT OF THE COMPANY, THE DEPOSITARY, THE INFORMATION
AGENT OR THE DEALER MANAGER OR AUTHORIZE YOU OR ANY OTHER PERSON TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATION ON BEHALF OF ANY OF THEM WITH RESPECT TO
THE OFFER NOT CONTAINED IN THE OFFER TO PURCHASE OR THE LETTER OF TRANSMITTAL.
<PAGE>
OFFER TO PURCHASE FOR CASH
BY
HILLS STORES COMPANY
UP TO 3,000,000 SHARES OF ITS COMMON STOCK
AT
$25.00 NET PER SHARE
THE OFFER, PRORATION PERIOD AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00
MIDNIGHT,
NEW YORK CITY TIME, ON TUESDAY, FEBRUARY 21, 1995, UNLESS THE OFFER IS
EXTENDED.
To Our Clients:
Enclosed for your consideration are the Offer to Purchase, dated January 24,
1995 (the "Offer to Purchase"), and the related Letter of Transmittal (which
together constitute the "Offer"), relating to an offer by Hills Stores Company,
a Delaware corporation (the "Company"), to purchase up to 3,000,000 shares of
its Common Stock, par value $.01 per share ("Common Stock"), at $25.00 per
share, net to the seller in cash.
WE ARE THE HOLDER OF RECORD OF SHARES OF COMMON STOCK OR SHARES OF SERIES A
CONVERTIBLE PREFERRED STOCK, PAR VALUE $.10 PER SHARE ("SERIES A PREFERRED
STOCK") OF THE COMPANY HELD BY US FOR YOUR ACCOUNT. A TENDER OF SHARES OF
COMMON STOCK (INCLUDING SHARES OF COMMON STOCK UNDERLYING THE CONVERSION RIGHTS
OF SHARES OF SERIES A PREFERRED STOCK) CAN BE MADE ONLY BY US AS THE HOLDER OF
RECORD AND PURSUANT TO YOUR INSTRUCTIONS. THE LETTER OF TRANSMITTAL IS
FURNISHED TO YOU FOR YOUR INFORMATION ONLY AND CANNOT BE USED BY YOU TO TENDER
SHARES OF COMMON STOCK HELD BY US FOR YOUR ACCOUNT.
We request instructions as to whether you wish to tender any or all of the
shares of Common Stock held by us for your account or any or all of the shares
of Common Stock underlying the conversion rights of shares of Series A
Preferred Stock held by us for your account, pursuant to the terms and
conditions set forth in the Offer.
Your attention is invited to the following:
1. The Offer price is $25.00 per share of Common Stock, net to the seller
in cash.
2. The Offer is being made for up to 3,000,000 shares of Common Stock.
3. Although only shares of Common Stock will be purchased pursuant to the
Offer, holders of Series A Preferred Stock may tender shares of Common
Stock into which their shares of Series A Preferred Stock are convertible
by following the instructions contained in Section 4 of the Offer to
Purchase and the Letter of Transmittal.
4. The Offer and withdrawal rights will expire at 12:00 midnight, New
York City time, on Tuesday, February 21, 1995, unless the Offer is
extended.
5. The Offer is not conditioned upon any minimum number of shares of
Common Stock being tendered. The Offer is, however, subject to certain
other conditions set forth in the Offer to Purchase.
6. If you owned beneficially as of the close of business on January 23,
1995, and continue to beneficially own until the expiration of the Offer,
an aggregate of fewer than 100 shares of Common Stock (including shares of
Common Stock underlying the conversion rights of shares of Series A
Preferred Stock) and you instruct us to tender on your behalf all such
shares prior to the expiration of the Offer and check the box captioned
"Odd Lots" in the instruction form, all such shares will be accepted for
payment before proration, if any, of the purchase of other shares validly
tendered.
<PAGE>
7. If you beneficially own shares of Series A Preferred Stock and would
like to convert all such shares of Series A Preferred Stock into Common
Stock so that you will be issued, after any proration, shares of Common
Stock, if any, not accepted for payment by the Company, check the box
captioned "Series A Preferred Stock Conversion" in the instruction form.
8. Any stock transfer taxes applicable to a sale of shares of Common
Stock to the Company will be borne by the Company except as otherwise
provided in Instruction 6 of the Letter of Transmittal.
9. Payment for shares of Common Stock accepted for payment pursuant to
the Offer will be made only after timely receipt by Chemical Bank (the
"Depositary") of certificates for such shares of Common Stock or Series A
Preferred Stock convertible into such shares of Common Stock (or a timely
confirmation of receipt of such shares of Common Stock or Series A
Preferred Stock pursuant to the procedures for book-entry delivery set
forth in Section 4 of the Offer to Purchase), a properly completed and duly
executed Letter of Transmittal (or facsimile thereof), with any required
signature guarantees, or an Agent's Message (as defined in the Offer to
Purchase) in connection with a book-entry delivery, and any other documents
required by the Letter of Transmittal. In the event of proration, because
of the difficulty of determining the precise number of shares of Common
Stock validly tendered and not withdrawn, the Company does not expect to be
able to announce the final results of such proration until at least seven
New York Stock Exchange trading days after the expiration of the Offer.
Preliminary results of such proration will be announced by press release as
promptly as practicable after the expiration of the Offer. Stockholders may
obtain such preliminary information, when available, from Smith Barney
Inc., the Dealer Manager for the Offer, or D. F. King & Co., Inc., the
Information Agent for the Offer.
If you wish to have us tender any or all of your shares of Common Stock or
any or all of the shares of Common Stock underlying the conversion rights of
your shares of Series A Preferred Stock, please so instruct us by completing,
executing and returning to us the attached Instruction Form. An envelope to
return your Instructions to us is enclosed. If you authorize tender of your
shares of Common Stock or of shares of Common Stock underlying the conversion
rights of your shares of Series A Preferred Stock, all such shares will be
tendered unless otherwise specified on the attached Instruction Form. Your
Instructions should be forwarded to us in ample time to permit us to submit a
tender on your behalf prior to the expiration of the Offer.
THE OFFER IS NOT BEING MADE, NOR WILL TENDERS BE ACCEPTED FROM OR ON BEHALF
OF, HOLDERS OF SHARES OF COMMON STOCK RESIDING IN ANY JURISDICTION IN WHICH THE
MAKING OF THE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE WITH
THE SECURITIES, BLUE SKY OR OTHER LAWS OF SUCH JURISDICTION. IN ANY
JURISDICTION IN WHICH THE SECURITIES, BLUE SKY OR OTHER LAWS REQUIRE THE OFFER
TO BE MADE BY A LICENSED BROKER OR DEALER, THE OFFER WILL BE DEEMED TO BE MADE
ON THE COMPANY'S BEHALF BY SMITH BARNEY INC. OR ONE OR MORE BROKERS OR DEALERS
LICENSED UNDER THE LAWS OF SUCH JURISDICTION.
<PAGE>
INSTRUCTIONS
The undersigned acknowledge(s) receipt of your letter, the Offer to Purchase
of Hills Stores Company dated January 24, 1995, and the related Letter of
Transmittal, in connection with the Offer by Hills Stores Company to purchase
up to 3,000,000 shares of its Common Stock, par value $.01 per share, at a
price of $25.00 per share, net to the undersigned in cash.
This will instruct you to tender the number of shares of Common Stock
(including shares of Common Stock underlying the conversion rights of shares of
Series A Preferred Stock) indicated below held by you for the account of the
undersigned, on the terms and subject to the conditions set forth in such Offer
to Purchase and Letter of Transmittal.
SERIES A PREFERRED STOCK CONVERSION
[_] By checking this box, the undersigned requests that all of its shares of
Series A Preferred Stock be converted into Common Stock and, after
proration, any shares of Common Stock that were not accepted for payment by
the Company be returned to the undersigned. (Applicable only to beneficial
owners of Series A Preferred Stock.)
ODD LOTS
[_] By checking this box, the undersigned represent(s) that the undersigned
owned beneficially as of the close of business on January 23, 1995, and will
continue to beneficially own until the expiration of the Offer, an aggregate
of fewer than 100 shares of Common Stock (including shares of Common Stock
underlying the conversion rights of shares of Series A Preferred Stock) and
is tendering all such shares of Common Stock.
Number of shares of Common SIGN HERE:
Stock (including shares of -------------------------------------
Common Stock underlying the -------------------------------------
conversion rights of shares Signature(s)
of Series A Preferred
Stock) to be tendered:
-------------------------------------
shares* -------------------------------------
- ----------- -------------------------------------
-------------------------------------
Please print name(s) and
address(es) here
Dated:
--------------- -------------------------------------
Social Security or Tax
Identification Number(s):
* Unless otherwise indicated, it will be assumed that all of your shares of
Common Stock held by us for your account and all shares of Common Stock
underlying the conversion rights of shares of Series A Preferred Stock held by
us for your account are to be tendered.
<PAGE>
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
GUIDELINES FOR DETERMINING THE PROPER IDENTIFICATION NUMBER TO GIVE THE
PAYER.-- Social Security numbers have nine digits separated by two hyphens:
i.e. 000-00-0000. Employer identification numbers have nine digits separated by
only one hyphen: i.e. 00-0000000. The table below will help determine the
number to give the payer.
<TABLE>
<CAPTION>
- --------------------------------------------
GIVE THE
FOR THIS TYPE OF ACCOUNT: SOCIAL SECURITY
NUMBER OF--
- --------------------------------------------
<S> <C>
1. An individual's account The individual
2. Two or more individuals The actual owner
(joint account) of the account
or, if combined
funds, any one
of the
individuals (1)
3. Husband and wife (joint The actual owner
account) of the account
or, if joint
funds, either
person(1)
4. Custodian account of a The minor(2)
minor (Uniform Gift to
Minors Act)
5. Adult and minor (joint The adult or, if
account) the minor is the
only
contributor, the
minor(1)
6. Account in the name of The ward, minor,
guardian or committee or incompetent
for a designated ward, person(3)
minor, or incompetent
person
7.a. The usual revocable The grantor-
savings trust account trustee(1)
(grantor is also
trustee)
b. So-called trust account The actual
that is not a legal or owner(4)
valid trust under State
law
8. Sole proprietorship The owner(4)
account
- --------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------
GIVE THE EMPLOYER
FOR THIS TYPE OF ACCOUNT: IDENTIFICATION
NUMBER OF--
- --------------------------------------------
<S> <C>
9. A valid trust, estate, The legal entity
or pension trust (do not furnish
the identifying
number of the
personal
representative
or trustee
unless the legal
entity itself is
not designated
in the account
title.)(5)
10. Corporate account The corporation
11. Religious, charitable, The organization
or educational
organization account
12. Partnership account The partnership
held in the name of the
business
13. Association, club, or The organization
other tax-exempt
organization
14. A broker or registered The broker or
nominee nominee
15. Account with the The public
Department of entity
Agriculture in the name
of a public entity
(such as a State or
local government,
school district, or
prison) that receives
agricultural program
payments
- --------------------------------------------
</TABLE>
(1) List first and circle the name of the person whose number you furnish.
(2) Circle the minor's name and furnish the minor's social security number.
(3) Circle the ward's, minor's or incompetent person's name and furnish such
person's social security number.
(4) Show the name of the owner.
(5) List first and circle the name of the legal trust, estate, or pension
trust.
NOTE: IF NO NAME IS CIRCLED WHEN THERE IS MORE THAN ONE NAME, THE NUMBER WILL
BE CONSIDERED TO BE THAT OF THE FIRST NAME LISTED.
<PAGE>
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
PAGE 2
OBTAINING A NUMBER
If you don't have a taxpayer identification number or you don't know your num-
ber, obtain Form SS-5, Application for a Social Security Number Card, or Form
SS-4, Application for Employer Identification Number, at the local office of
the Social Security Administration or the Internal Revenue Service and apply
for a number.
PAYEES EXEMPT FROM BACKUP WITHHOLDING
Payees specifically exempted from backup withholding on ALL payments include
the following:
. A corporation.
. A financial institution.
. An organization exempt from tax under section 501(a), or an individual re-
tirement plan.
. The United States or any agency or instrumentality thereof.
. A State, the District of Columbia, a possession of the United States, or
any subdivision or instrumentality thereof.
. A foreign government, a political subdivision of a foreign government, or
any agency or instrumentality thereof.
. An international organization or any agency, or instrumentality thereof.
. A registered dealer in securities or commodities registered in the U.S. or
a possession of the U.S.
. A real estate investment trust.
. A common trust fund operated by a bank under section 584(a).
. An exempt charitable remainder trust, or a non-exempt trust described in
section 4947(a)(1).
. An entity registered at all times under the Investment Company Act of
1940.
. A foreign central bank of issue.
Payments of dividends and patronage dividends not generally subject to backup
withholding include the following:
. Payments to nonresident aliens subject to withholding under section 1441.
. Payments to partnerships not engaged in a trade or business in the U.S.
and which have at least one nonresident partner.
. Payments of patronage dividends where the amount received is not paid in
money.
. Payments made by certain foreign organizations.
. Payments made to a nominee.
Payments of interest not generally subject to backup withholding include the
following:
. Payments of interest on obligations issued by individuals. Note: You may
be subject to backup withholding if this interest is $600 or more and is
paid in the course of the payer's trade or business and you have not pro-
vided your correct taxpayer identification number to the payer.
. Payments of tax-exempt interest (including exempt-interest dividends under
section 852).
. Payments described in section 6049(b)(5) to nonresident aliens.
. Payments on tax-free covenant bonds under section 1451.
. Payments made by certain foreign organizations.
. Payments made to a nominee.
Exempt payees described above should file Form W-9 to avoid possible erroneous
backup withholding. FILE THIS FORM WITH THE PAYER, FURNISH YOUR TAXPAYER IDEN-
TIFICATION NUMBER, WRITE "EXEMPT" ON THE FACE OF THE FORM, AND RETURN IT TO
THE PAYER. IF THE PAYMENTS ARE INTEREST, DIVIDENDS, OR PATRONAGE DIVIDENDS,
ALSO SIGN AND DATE THE FORM.
Certain payments other than interest, dividends, and patronage dividends, that
are not subject to information reporting are also not subject to backup with-
holding. For details, see the regulations under sections 6041, 6041A(a), 6045,
and 6050A.
PRIVACY ACT NOTICE. Section 6109 requires most recipients of dividend, inter-
est, or other payments to give taxpayer identification numbers to payers who
must report the payments to IRS. IRS uses the numbers for identification pur-
poses. Payers must be given the numbers whether or not recipients are required
to file tax returns. Beginning January 1, 1993, payers must generally withhold
31% of taxable interest, dividend, and certain other payments to a payee who
does not furnish a taxpayer identification number to a payer. Certain penal-
ties may also apply.
PENALTIES
(1) PENALTY FOR FAILURE TO FURNISH TAXPAYER IDENTIFICATION NUMBER. If you fail
to furnish your taxpayer identification number to a payer, you are subject to
a penalty of $50 for each such failure unless your failure is due to reason-
able cause and not to willful neglect.
(2) FAILURE TO REPORT CERTAIN DIVIDEND AND INTEREST PAYMENTS. If you fail to
include any portion of an includible payment for interest, dividends, or pat-
ronage dividends in gross income, such failure will be treated as being due to
negligence and will be subject to a penalty of 5% on any portion of an under-
payment attributable to that failure unless there is clear and convincing evi-
dence to the contrary.
(3) CIVIL PENALTY FOR FALSE INFORMATION WITH RESPECT TO WITHHOLDING. If you
make a false statement with no reasonable basis which results in no imposition
of backup withholding, you are subject to a penalty of $500.
(4) CRIMINAL PENALTY FOR FALSIFYING INFORMATION. Falsifying certifications or
affirmations may subject you to criminal penalties including fines and/or im-
prisonment.
FOR ADDITIONAL INFORMATION CONTACT YOUR TAX CONSULTANT OR THE INTERNAL REVENUE
SERVICE.
<PAGE>
This announcement is neither an offer to purchase nor a solicitation of an
offer to sell shares of Common Stock. The Offer is made solely by the Offer to
Purchase dated January 24, 1995, and the related Letter of Transmittal and is
not being made to (nor will tenders be accepted from or on behalf of) holders
of shares of Common Stock residing in any jurisdiction in which the making of
the Offer or the acceptance thereof would not be in compliance with the
securities, blue sky or other laws of such jurisdiction. In any jurisdiction in
which the securities, blue sky or other laws require the Offer to be made by a
licensed broker or dealer, the Offer will be deemed to be made on the Company's
behalf by Smith Barney Inc. or by one or more brokers or dealers licensed under
the laws of such jurisdiction.
Notice of Offer to Purchase for Cash
by
HILLS STORES COMPANY
Up to 3,000,000 Shares of Its Common Stock
at
$25.00 Net Per Share
Hills Stores Company, a Delaware corporation (the "Company"), is offering to
purchase up to 3,000,000 shares of its Common Stock, par value $.01 per share
("Common Stock"), at $25.00 per share, net to the seller in cash, upon the
terms and subject to the conditions set forth in the Offer to Purchase dated
January 24, 1995 (the "Offer to Purchase"), and in the related Letter of
Transmittal (which together constitute the "Offer"). Although only shares of
Common Stock will be purchased pursuant to the Offer, holders of shares of
Series A Convertible Preferred Stock, par value $.10 per share, of the Company
("Series A Preferred Stock") may tender shares of Common Stock into which their
shares of Series A Preferred Stock are convertible by following the
instructions contained in Section 4 of the Offer to Purchase and the Letter of
Transmittal.
THE OFFER, PRORATION PERIOD AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00
MIDNIGHT, NEW YORK CITY TIME, ON TUESDAY, FEBRUARY 21, 1995, UNLESS THE OFFER
IS EXTENDED.
NEITHER THE COMPANY NOR ITS BOARD OF DIRECTORS MAKES ANY RECOMMENDATION AS
TO WHETHER ANY STOCKHOLDER SHOULD TENDER ANY OR ALL OF SUCH STOCKHOLDER'S
SHARES PURSUANT TO THE OFFER. EACH STOCKHOLDER MUST MAKE ITS OWN DECISION
WHETHER TO TENDER SHARES AND, IF SO, HOW MANY SHARES TO TENDER.
The Company has been advised that none of its directors or executive
officers intends to tender any shares of Common Stock pursuant to the Offer.
The Company has also been advised, however, that Apollo Capital Management,
Inc. ("Apollo"), may tender some or all of the approximately 700,000 shares of
Common Stock beneficially owned by Apollo pursuant to the Offer. Michael S.
Gross, a director of the Company, is an officer of Apollo. See Introduction and
Section 8 of the Offer to Purchase.
The primary purpose of the Offer is to provide the Company's stockholders
who wish to realize a portion of their investment currently in cash with an
opportunity to sell a portion of their shares at a premium over recent market
prices of the shares without the usual transaction costs associated with a
market sale. Stockholders whose shares are not tendered or purchased pursuant
to the Offer will increase their proportionate ownership interest in the
Company and thus in its future earnings and profits. The Offer will also allow
qualifying stockholders owning beneficially fewer than 100 shares of Common
Stock (including shares of Common Stock underlying the conversion rights of
Series A Preferred Stock) whose shares of Common Stock are purchased pursuant
to the Offer to avoid the payment of brokerage commissions and any applicable
odd-lot discount payable on a sale of shares of Common Stock in a transaction
effected on a securities exchange. See Sections 1 and 3 of the Offer to
Purchase.
The Offer is not conditioned upon any minimum number of shares being
tendered. The Offer is, however, subject to certain other conditions set forth
in the Offer to Purchase. See Section 12 of the Offer to Purchase.
Upon the terms and subject to the conditions of the Offer, the Company will
accept for payment and pay for up to 3,000,000 shares of Common Stock validly
tendered and not withdrawn on or before 12:00 Midnight, New York City time, on
Tuesday, February 21, 1995, or the latest time and date at which the Offer, if
extended by the Company, shall expire (the "Expiration Date"). The Company
expressly reserves the right, in its sole discretion, at any time or from time
to time, to extend the period of time during which the Offer is open by giving
oral or written notice of such extension to Chemical Bank (the "Depositary")
and making a public announcement thereof. See Sections 4 and 14 of the Offer to
Purchase.
If the number of shares of Common Stock validly tendered and not withdrawn
prior to the Expiration Date is greater than 3,000,000 shares of Common Stock,
the Company, upon the terms and subject to the conditions of the Offer, will
accept shares of Common Stock for payment in the following order of priority:
(a) first, all shares of Common Stock validly tendered and not withdrawn prior
to the Expiration Date by any stockholder who beneficially owned as of January
23, 1995, and continues to beneficially own until the Expiration Date, an
aggregate of fewer than 100 shares of Common Stock (including shares of Common
Stock underlying the conversion rights of shares of Series A Preferred Stock)
and who: (1) tenders all such shares of Common Stock (partial tenders will not
qualify for the preference); and (2) completes the box captioned "Odd Lots" on
the Letter of Transmittal and, if applicable, on the Notice of Guaranteed
Delivery; and (b) then, after purchase of all the foregoing shares of Common
Stock, all other shares of Common Stock validly tendered and not withdrawn
prior to the Expiration Date on a pro rata basis, if necessary (with
adjustments to avoid purchases of fractional shares).
Except as otherwise provided in Section 5 of the Offer to Purchase, a tender
of shares of Common Stock pursuant to the Offer is irrevocable. Shares of
Common Stock tendered pursuant to the Offer may be withdrawn at any time before
the Expiration Date and, unless theretofore accepted for payment by the
Company, may also be withdrawn after 12:00 Midnight, New York City time, on
March 21, 1995. See Section 5 of the Offer to Purchase.
In order for a withdrawal of the tender of shares of Common Stock to be
effective, a written, telegraphic or facsimile transmission notice of
withdrawal must be timely received by the Depositary at one of its addresses
set forth on the back cover of the Offer to Purchase. Any such notice of
withdrawal must specify the name of the person having tendered the shares of
Common Stock to be withdrawn, the number of shares of Common Stock as to which
the tender is to be withdrawn and the name of the registered holder of the
shares of Common Stock (or shares of Series A Preferred Stock convertible into
such shares of Common Stock) as to which the tender is to be withdrawn (if
different from that of the person who tendered such shares of Common Stock). If
the certificate(s) have been delivered or otherwise identified to the
Depositary, then, prior to the release of such certificate(s), the serial
numbers shown on the particular certificate(s) must be submitted and the
signature on the notice of withdrawal must be guaranteed by an Eligible
Institution (as defined in Section 4 of the Offer to Purchase) (except in the
case of shares of Common Stock tendered by an Eligible Institution). If shares
of Common Stock or Series A Preferred Stock have been delivered pursuant to the
procedure for book-entry transfer set forth in Section 4 of the Offer to
Purchase, the notice of withdrawal must specify the name and number of the
account at the applicable Book-Entry Transfer Facility (as defined in Section 4
of the Offer to Purchase) to be credited with the withdrawn shares of Common
Stock or Series A Preferred Stock and otherwise comply with the procedures of
such facility. Withdrawals of tenders of shares of Common Stock may not be
rescinded, and any shares of Common Stock as to which a tender is withdrawn
will thereafter be deemed not validly tendered for purposes of the Offer.
Withdrawn shares of Common Stock may, however, be retendered before the
Expiration Date by again following any of the procedures described in Section 4
of the Offer to Purchase.
The Offer to Purchase and the Letter of Transmittal contain important
information that should be read before any decision is made with respect to the
Offer. These documents are being mailed to record holders of shares of Common
Stock and Series A Preferred Stock and will be furnished to brokers, dealers,
banks and similar persons whose names, or the names of whose nominees, appear
on the Company's stockholder list or, if applicable, who are listed as
participants in a clearing agency's security position listing for subsequent
transmittal to beneficial owners of shares of Common Stock or Series A
Preferred Stock.
The information required to be disclosed by Rule 13e-4(d)(1) of the General
Rules and Regulations under the Securities Exchange Act of
<PAGE>
1934 is contained in the Offer to Purchase and is incorporated herein by
reference.
Any questions or requests for assistance may be directed to the Information
Agent or the Dealer Manager at the addresses and telephone numbers set forth
below. Requests for additional copies of the Offer to Purchase, Letter of
Transmittal or other tender offer materials may be directed to the Information
Agent and such copies will be furnished at the Company's expense. Stockholders
may also contact their broker, dealer, commercial bank or trust company for
assistance concerning the Offer.
The Information Agent:
D. F. King & Co., Inc.
77 Water Street
New York, New York 10005
Call Collect: (212) 269-5550
or
TOLL FREE (800) 326-3066
The Dealer Manager:
Smith Barney Inc.
1345 Avenue of the Americas
New York, New York 10105
(212) 723-5816 (call collect)
January 24, 1995
<PAGE>
[LETTERHEAD OF HILLS STORES COMPANY APPEARS HERE]
FOR IMMEDIATE RELEASE:
JANUARY 24, 1995 Contact: William K. Friend
VP-Corporate Counsel
(617) 821-1000, Ext. 1189
HILLS STORES COMPANY COMMENCES $25 PER SHARE
CASH TENDER OFFER FOR UP TO 3,000,000
SHARES OF ITS COMMON STOCK
CANTON, Massachusetts, January 24, 1995--Hills Stores Company (NYSE-HDS)
announced today that it has commenced a cash tender offer for up to 3 million
shares of its outstanding Common Stock at $25 per share. The offer is not
conditioned on any minimum number of shares of Common Stock being tendered. The
tender offer, proration period and withdrawal rights will expire at 12:00
midnight, New York City time, on Tuesday, February 21, 1995, unless extended.
The offer is being made pursuant to an offer to purchase and related documents
to be mailed to Hills' stockholders.
Although only shares of Common Stock will be purchased pursuant to the offer,
holders of shares of Hills' Series A Convertible Preferred Stock may tender
shares of Common Stock into which their shares of Series A Convertible
Preferred Stock are convertible by following the procedures set forth in the
offer.
If more than 3 million shares of Common Stock are validly tendered pursuant
to the offer and not withdrawn, Hills will first purchase all shares validly
tendered by stockholders who beneficially owned on January 23, 1995, and
continue to own until the expiration of the offer, fewer than 100 shares and
who validly tender all such shares, and will then purchase validly tendered
shares on a pro rata basis from all other stockholders.
The offer is one component of Hills' plan to enhance stockholder value
announced on September 21, 1994. "The offer is intended to provide Hills
stockholders who wish to convert a portion of their equity investment into cash
with an opportunity to do so at a premium over recent market prices without the
usual transaction costs associated with a market sale," said Michael Bozic,
President and Chief Executive Officer of Hills. "Stockholders whose shares are
not purchased pursuant to the offer will increase their proportionate ownership
interest in Hills."
Hills has been advised that none of its directors or executive officers
intends to tender any shares of Common Stock pursuant to the offer. Hills has
also been advised, however, that Apollo Capital Management, Inc. may tender
some or all of the approximately 700,000 shares of Common Stock beneficially
owned by Apollo pursuant to the offer. Michael S. Gross, a director of the
Company, is an officer of Apollo.
Smith Barney Inc. is acting as Dealer Manager for the offer. D. F. King &
Co., Inc. is the Information Agent.
Hills Stores Company is a leading regional discount retailer operating 154
stores in 11 Mid-Western and Mid-Atlantic states.
#####
<PAGE>
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
X Annual Report Pursuant to Section 13 or 15(d) of the Securities
----- Exchange Act of 1934
For the fiscal year ended January 29, 1994
or
Transition Report Pursuant to Section 13 or 15(d) of the
----- Securities Exchange Act of 1934
For the transition period from __________ to __________
Commission file number 1-9505
HILLS STORES COMPANY
--------------------
(Exact name of registrant as specified in its charter)
DELAWARE #31-1153510
-------- -----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
15 DAN ROAD, CANTON, MASSACHUSETTS 02021
---------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (617) 821-1000
--------------
<TABLE>
Securities registered pursuant to Section 12(b) of the Act:
<CAPTION>
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
<S> <C>
Common Stock, Par Value $0.01 per share New York Stock Exchange
10.25% Senior Notes due 2003 New York Stock Exchange
Series A Convertible Preferred Stock, New York Stock Exchange
Par Value $0.10 per share
</TABLE>
<TABLE>
Securities registered pursuant to Section 12(g) of the Act:
<CAPTION>
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
<S> <C>
Series 1993 Warrants to Purchase Common Stock Boston Stock Exchange
</TABLE>
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
-------- ---------
<PAGE>
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant as of March 31, 1994 was $129,207,812 in respect to the Common Stock
and $61,035,320 in respect to the Series A Convertible Preferred Stock,
which has coextensive voting rights with the Common Stock.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a
plan confirmed by a court.
Yes X No
-------- ---------
The number of shares of Common Stock outstanding as of March 31, 1994 was
8,900,660.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this report on Form 10-K is incorporated by reference from the
proxy statement dated April 29, 1994 for the annual meeting of security holders
to be held on June 8, 1994.
2
<PAGE>
<TABLE>
TABLE OF CONTENTS
PART I
<S> <C> <C>
ITEM 1. Business . . . . . . . . . . . . . . . . . . . . . . 4
(a) Reorganization . . . . . . . . . . . . . . . . . . . 4
(b) General. . . . . . . . . . . . . . . . . . . . . . . 5
(c) Merchandising. . . . . . . . . . . . . . . . . . . . 5
(d) Purchasing and Distribution. . . . . . . . . . . . . 5
(e) Store Operations and Management. . . . . . . . . . . 6
(f) Management Information and Control Systems . . . . . 6
(g) Competition. . . . . . . . . . . . . . . . . . . . . 7
(h) Trademarks and Service Marks . . . . . . . . . . . . 7
(i) Employees. . . . . . . . . . . . . . . . . . . . . . 7
ITEM 2. Properties . . . . . . . . . . . . . . . . . . . . . 7
Store Locations and Leases . . . . . . . . . . . . . 7
ITEM 3. Legal Proceedings. . . . . . . . . . . . . . . . . . 7
ITEM 4. Submission of Matters to a Vote of Security Holders 8
Executive Officers of the Registrant . . . . . . . . 8
PART II
ITEM 5. Market for the Registrant's Common Equity and
Related Security Holder Matters. . . . . . . . . . . 9
ITEM 6. Selected Financial Data. . . . . . . . . . . . . . . 10
ITEM 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . 11
ITEM 8. Financial Statements and Supplementary Data. . . . . 16
ITEM 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure. . . . . . . . . 16
PART III
ITEM 10. Directors and Executive Officers of the Registrant . 16
ITEM 11. Executive Compensation . . . . . . . . . . . . . . . 16
ITEM 12. Security Ownership of Certain Beneficial Owners and
Management . . . . . . . . . . . . . . . . . . . . . 16
ITEM 13. Certain Relationships and Related Transactions . . . 16
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K. . . . . . . . . . . . . . . . . 17
</TABLE>
3
<PAGE>
PART I
ITEM 1. BUSINESS
Hills Stores Company (the "Company" or "Hills") operates, through its
wholly-owned subsidiary Hills Department Store Company ("HDSC"), a chain of
discount department stores under the trade name of Hills Department Stores.
These stores are located in the mid-western and mid-Atlantic regions of the
United States.
a) REORGANIZATION
On October 4, 1993 (the "Effective Date"), Hills and certain of its principal
subsidiaries emerged from reorganization proceedings under Chapter 11 of the
United States Bankruptcy Code ("Chapter 11") pursuant to the Confirmation Order
entered on September 10, 1993 by the United States Bankruptcy Court for the
Southern District of New York (the "Bankruptcy Court") confirming the First
Amended Consolidated Plan of Reorganization (as modified as of September 10,
1993, the "POR"). Hills, its former parent, Hills Department Stores, Inc. (the
"Predecessor Company"), and the five principal subsidiaries of Hills voluntarily
filed petitions for reorganization under Chapter 11 on February 4, 1991 (the
"Filing Date"). The Predecessor Company operated its business as a
debtor-in-possession under Chapter 11 from the Filing Date until October 4,
1993.
The POR provided for the Predecessor Company to be dissolved and Hills to
succeed to and assume the Predecessor Company's former status as a holding
company by transferring to HDSC, a newly formed operating subsidiary of Hills,
all of the assets, property and interest of Hills as of the Effective Date. The
POR provided for the cancellation of approximately $721.9 million of unsecured
claims in exchange for (i) $52.4 million in cash; (ii) $160 million of 10.25%
Senior Notes of Hills; (iii) 5 million shares of Hills Series A Convertible
Preferred Stock; (iv) 8.95 million shares of Hills Common Stock; and (v) Series
1993 Stock Rights to purchase 700,000 shares of Hills Common Stock. The POR
also provided for the cancellation of the old preferred stock of Hills in
exchange for 50,000 shares of Hills Common Stock and the cancellation of the
common stock of the Predecessor Company in exchange for Series 1993 Warrants to
purchase 432,990 shares of Hills Common Stock. The POR further provided for,
among other things, the cash settlement in full of certain administrative,
executory contract, priority, secured party and convenience claims aggregating
approximately $70.2 million and the release of the Company from certain lease
guarantees.
HDSC obtained a three year unsecured line of credit with Chemical Bank and a
syndicate of other banks for $225 million, of which up to $75 million is
available as a letter of credit facility. All of the Common Stock of the
Company's subsidiaries is pledged as collateral for the credit facility, which
is guaranteed by Hills.
New leadership of the Company is being provided by Michael Bozic, formerly
President and Chief Operating Officer of the Sears Merchandising Group, and
Norman Matthews, former President of Federated Department Stores. Mr. Bozic
is a Director, President and Chief Executive Officer of the Company and Mr.
Matthews is a Director and a Consultant to the Company. The Company also has
new Executive Vice Presidents of Store and Distribution Operations and
Merchandising.
For more information about the Chapter 11 filings and the credit facility,
see Item 7 and Notes 1 and 7 of Notes to Consolidated Financial Statements.
4
<PAGE>
b) GENERAL
The Company is a leading regional discount retailer offering a broad range of
brand name and other first quality general merchandise. The Company's pricing
strategy is to offer consistently low prices on all items on an every day
basis. The Company emphasizes product lines designed to appeal to its
predominantly female customer base, such as apparel, footwear, domestics and
home furnishings, jewelry, housewares, toys and other family-oriented
items. Management's business strategy will continue to stress every day low
prices, depth and breadth of products in selected merchandise categories,
remodeled facilities and strict operating controls.
Hills stores are located in cities and towns of varying sizes, with some of the
larger cities being Pittsburgh, Buffalo and Cleveland. The Company concentrates
its stores in selected markets within a geographic region in order to reinforce
marketing programs, enhance name recognition, achieve market penetration, and
gain economies of scale in management, advertising and distribution.
The Company has remodelled 50% of its stores in the last two years and expects
to complete a chain-wide store remodeling program within the next two years.
The program is designed to make its stores more visually appealing to its
customers. Based upon results to date, the improved presentation of both
softlines and hardlines merchandise has generated increased revenue and profit.
c) MERCHANDISING
The Company believes that its customer base consists primarily of female
customers shopping for family needs. Accordingly, Hills emphasizes merchandise
in its softlines departments that appeals to Hills' targeted female customer.
The Company considers the depth of its merchandise in these departments to be an
important factor in attracting and retaining female customers, and accordingly
emphasizes the availability of a wide selection of sizes, styles and colors of
items in these departments. Hills also emphasizes certain of its hardlines
departments, such as housewares and toys.
Hills carries a diverse line of products, all first quality, including a full
line of clothing and footwear for women, men and children, plus toys, health and
beauty aids, small household appliances and housewares, home entertainment
equipment, hardware, stationery and greeting cards, automotive supplies, lawn
and garden products and jewelry. Hills offers a broad range of brand name
apparel and other products for the family and supplements brand name goods with
manufacturers' private brands (brands made by major manufacturers but not
nationally advertised) and Hills' private label program. The Company also
offers a year-round layaway program for those customers who do not rely on
credit cards.
As part of its merchandising strategy, Hills endeavors to primarily purchase
goods that are made in the U.S.A. and has developed a special merchandising
program using its "American Spirit" trademark to help market that concept to
customers. Imported goods are purchased by Hills from an importing subsidiary
and from unaffiliated sources. In fiscal year 1993, the subsidiary, CRH
International, Inc., imported products that accounted for approximately 5% of
total purchases of the Hills Department Stores chain.
d) PURCHASING AND DISTRIBUTION
Hills uses a centralized buying organization staffed by merchandise managers,
buyers and a support staff organized along the Company's product lines. Most of
Hills' buying organization is located at its Canton, Massachusetts
headquarters. Hills also maintains an important fashion buying office in the
garment district of New York City to purchase and merchandise women's fashion
and basic apparel.
Hills' merchandise managers and buyers develop detailed merchandising plans for
each selling season. These plans include sales, inventory and initial mark-up
and mark-down budgets for each buyer. Sales performance reports are received
both daily and weekly and assist management in making related
5
<PAGE>
merchandising decisions. The formats of these plans are programmed into
computer planning systems for each department.
The Company's new central distribution facilities located in Columbus, Ohio
became fully operational in 1993. The new facilities replace a prior system,
which relied mainly on vendors shipping direct to individual stores or to
regional consolidators for delivery to stores. The Company believes the central
distribution facilities will improve stocking and flow-through allocation and
deliveries to the stores, resulting in more efficient inventory management,
while significantly reducing store receiving expense. Many product handling
functions are more efficiently handled at the central facilities.
e) STORE OPERATIONS AND MANAGEMENT
In recent years, the Company has instituted several significant changes in its
store operations and management structure to enhance expense control,
flexibility and competitive responsiveness. Computerized scheduling of work
hours based upon forecasted sales levels, productivity work standards and
freight activity permits a reduction in full-time associates and the use of more
part-time associates. This strategy has resulted in the redirection of more
payroll dollars into sales-generating positions within the store while reducing
overall payroll expense.
Store managers report to a district manager, who reports to a regional vice
president. The 16 district managers and 2 regional vice presidents visit their
stores on a regular basis to oversee operations. The regional and district
organizations have been realigned in order to provide improved operational
assistance to the stores. Store managers and associates are empowered to
respond directly to the needs of the customer. The substantially new management
team at the corporate level has instituted new programs to analyze all store
functions and to continue improvement in the efficiency and effectiveness of
work processes. The Company maintains a field office near Pittsburgh to
facilitate store supervision and reduce travel expenses, particularly by those
associates with greater responsibilities for store operations.
Hills operates a loss prevention program, a store audit program and a system of
internal controls which Management believes has contributed to maintaining
Hills' inventory shrinkage at levels either consistent with or below industry
levels.
f) MANAGEMENT INFORMATION AND CONTROL SYSTEMS
To support Hills' strategy of centralized management control, the Company relies
extensively on computerized information systems. Hills operates its principal
data processing center at its headquarters in Canton, Massachusetts. All Hills
stores and administrative locations are tied to the data center's mainframe
computer by means of an on-line leased telephone network.
Hills' merchandising systems are designed to integrate the key retailing
functions of seasonal merchandise planning, purchase order management,
merchandise distribution, receiving, sales capture, inventory control,
open-to-buy and replenishment. Unit sales data is recorded via the
point-of-sale register systems in each store. The sales data is transmitted
nightly to the Company's mainframe computer where it is processed to produce
a wide range of daily and weekly management reports. Each Hills buyer also has
on-line access to information via a workstation located in the buyer's office.
The merchandising systems allow Hills to distribute specific categories and
styles of merchandise to each store based upon the sales patterns of the stores.
Store operations are supported by a number of additional on-line systems
including electronic correspondence among all locations, payroll and labor
control systems, accounts payable, price change management and layaway control.
The purpose of these systems is to promote timely and accurate communication
among all Hills locations and to allow personnel at the Company's headquarters
to monitor and control key store activity.
6
<PAGE>
g) COMPETITION
The discount general merchandise business is highly competitive. The Company
considers price, merchandise presentation, product selection and merchandise
quality, together with store location, to be the most significant competitive
factors. Hills' primary competitors are regional and national discount
department store chains, some of which, like Wal-Mart and K Mart, are larger and
better capitalized than Hills. The recent pattern of Wal-Mart's expansion has
brought and is bringing more of its stores into the Company's market areas.
Management believes that the Company's store remodeling program and its strength
in certain merchandising lines will allow it to defend its competitive position,
even with Wal-Mart's entry into the Company's markets. The Company believes
it was the 7th largest general merchandise discount retailer in the United
States in 1993 as measured by sales revenue.
h) TRADEMARKS AND SERVICE MARKS
The "Hills" name written in its distinctive script is a registered service
mark. The Company considers this mark and the associated name recognition to be
valuable to its business. The Company has additional trademarks, trade names
and service marks, many of which, such as "American Spirit", are used in
connection with the Company's private label program. Although the Company
considers these additional marks to be valuable in the aggregate, individually,
they have varying degrees of importance to the Company's business.
i) EMPLOYEES
As of March 26, 1994, Hills employed approximately 17,775 persons, including
approximately 11,690 full-time and 6,085 part-time employees. The number of
employees varies during the year, reaching a peak during the Christmas selling
season. The Company considers its relations with its employees to be good.
ITEM 2. PROPERTIES
STORE LOCATIONS AND LEASES
Hills operates 151 stores in the states of Illinois, Indiana, Kentucky,
Maryland, Massachusetts, New York, Ohio, Pennsylvania, Tennessee, Virginia, and
West Virginia, located in regional and other enclosed shopping malls, strip
shopping centers and as free standing units. The Company leases nearly all of
its stores under long-term leases. In addition, Hills leases buying and
administrative offices including the Company's headquarters in Canton,
Massachusetts, the field office in Aliquippa, Pennsylvania and a buying office
in New York, New York.
The typical store lease has an initial term of between 20 and 30 years, with
four to seven renewal periods of five years each, exercisable at the Company's
option. Substantially all of the Company's leases provide for a minimum annual
rent that is constant or adjusts to fixed levels through the lease term,
including renewal periods. Most leases provide for additional rent based on a
percentage of sales to be paid when designated sales levels are achieved. See
Note 9 of Notes to Consolidated Financial Statements for additional information
about the Company's long-term leases.
ITEM 3. LEGAL PROCEEDINGS
Other than ordinary routine litigation incidental to the business, neither Hills
nor any of its subsidiaries is a party to any material pending legal
proceedings.
7
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE OFFICERS OF THE REGISTRANT (Furnished pursuant to General Instruction
G of Form 10-K.)
The executive officers of the Company currently are:
Michael Bozic, 53, became the President and Chief Executive Officer of Hills in
May 1991. He was President and Chief Operating Officer from August 1990 to
January 1991 and Chairman and Chief Executive Officer from 1987 to 1990 of
the Sears Merchandising Group.
Kim D. Ahlholm, 37, was elected Vice President-Controller of Hills in March
1994. She had been Treasurer since June 1993, Assistant Controller from July
1990 to June 1993 and Director-Audit from April 1989 to June 1990.
Bruce A. Caldwell, 36, was elected Vice President-Treasurer in March 1994. He
was Assistant Vice President-Financial Planning and Analysis since April
1993, Director-Accounting from December 1990 to March 1993 and Manager-External
Reporting from February 1989 to November 1990.
William K. Friend, 47, is and since December 1985 has been Vice President-
Secretary and Corporate Counsel of Hills.
John G. Reen, 44, was elected Executive Vice President-Chief Financial Officer
of Hills in March 1992. He had been Senior Vice President-CFO since February
1991 and Vice President-Controller from December 1985 to January 1991.
Andrew J. Samuto, 51, was elected Executive Vice President-Real Estate and
Support Services of Hills in June 1990. He became Senior Vice President-Real
Estate Development and Human Resources of Hills Department Stores division in
1985.
E. Jackson Smailes, 51, was elected Executive Vice President-General Merchandise
Manager in September 1992. From January 1990 to September 1992, he was
President and Chief Operating Officer of C.R. Anthony, Inc. and prior to January
1990 was with Federated Department Stores with his last position being Vice
Chairman of its Gold Circle Stores division.
Robert J. Stevenish, 50, is Executive Vice President-Store and Distribution
Operations. Prior to joining Hills in November 1992, he had been Director of
Specialty Retailing of the J.C. Penney Company since 1986.
Officers are elected to serve until their successors are elected and qualified.
8
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SECURITY
HOLDER MATTERS
(a) The principal market on which the Company's Common Stock is traded is the
New York Stock Exchange. The following table sets forth the range of high and
low prices of the Company's Common Stock as reported on the New York Stock
Exchange from October 5, 1993 (the day after the Company's emergence from
reorganization proceedings) through January 29, 1994, the end of the Company's
fiscal year. The trading prices of the Common Stock of the Predecessor Company
prior to October 5, 1993 are not presented herein because such prices are
not meaningful.
<TABLE>
COMMON STOCK PRICES
<CAPTION>
Quarter Ended High Price Low Price
<S> <C> <C>
January 29, 1994 $22.250 $17.875
October 30, 1993 $21.625 $20.250
</TABLE>
(b) As of March 31, 1994, there were outstanding 8,900,660 shares of Common
Stock held by approximately 1,615 holders of record, and 3,971,231 shares of
Series A Convertible Preferred Stock held by approximately 1,545 holders of
record.
(c) The Company has not paid a cash dividend on its Common Stock in the last
two fiscal years. The Credit Agreement dated as of October 4, 1993 between
HDSC and Chemical Bank, and the Company as the Guarantor, prohibits the
payment of dividends on the Company's Common Stock, and limits the amount of
dividends which HDSC may pay to the Company in any fiscal year. See Note 7
of Notes to Consolidated Financial Statements.
9
<PAGE>
<TABLE>
ITEM 6. SELECTED FINANCIAL DATA
The Company emerged from Chapter 11 proceedings on October 4, 1993. For
financial reporting purposes, the Company adopted fresh-start reporting as of
October 2, 1993. Under fresh-start reporting, a new reporting entity is created
and recorded amounts of assets and liabilities are adjusted to reflect their
estimated fair values. Financial data prior to October 2, 1993 have been
designated as those of the Predecessor Company. Black lines have been drawn to
separate the Successor Company financial data from the Predecessor Company
financial data to signify that they are those of a new reporting entity and have
been prepared on a basis not comparable to prior periods (see Notes 1, 2 and 3
of Notes to Consolidated Financial Statements).
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Successor Predecessor Company
Company ------------------------------------------------------------------------------
Seventeen Thirty-five Fiscal Fiscal Fiscal Fiscal
(in thousands, except per share Weeks Ended Weeks Ended Year Year Year Year
amounts and number of stores) January 29, 1994 October 2, 1993 1992 1991 1990 1989
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net sales $772,685 * $992,848 $1,750,266 $1,679,866 $2,140,868 $2,075,603
Gross profit $223,034 * $282,549 $ 500,454 $ 465,776 $ 580,706 $ 593,557
*
Net earnings (loss) applicable to *
common shareholders before *
extraordinary items $ 36,235 * ($ 9,747) $ 24,385 $ 7,637 ($ 276,415) (1) $ 2,908
*
Net earnings (loss) applicable to *
common shareholders $ 36,235 * $248,492 (2) $ 47,264 $ 20,117 ($ 276,415) (1) $ 2,908
*
Fully-diluted earnings (loss) per *
common share (3) $ 2.45 * $ 11.30 $ 2.15 $ 0.92 ($ 14.45) $ 0.15
*
Fully-diluted average shares *
outstanding 14,794 * 21,982 21,982 21,982 19,131 19,155
*
FINANCIAL POSITION: *
Total assets $907,621 * $972,838 (6) $ 922,745 $ 846,906 $ 775,227 $1,058,647
Working capital $171,440 * $301,980 (6) $ 299,927 $ 261,007 $ 270,403 $ 22,823
Liabilities subject to compromise (4) $ - * $775,169 (6) $ 761,443 $ 771,606 $ 819,094 $ -
Long-term obligations $160,000 * $ - (6) $ - $ - $ 7,155 $ 371,653
Long-term obligations under capital *
leases $130,626 * $122,230 (6) $ 133,457 $ 137,793 $ 137,831 $ 221,410
Redeemable preferred stock $100,000 * $ 33,143 (6) $ 31,481 $ 29,049 $ 26,654 $ 25,760
Common shareholders' equity (deficit) $230,235 * ($186,934) (6) ($ 183,172) ($ 230,446) ($ 259,413) $ 13,688
Number of stores operated at period *
end 151 * 151 154 154 186 (5) 208
<FN>
(1) Includes a $242.0 million provision for store closing and restructuring costs.
(2) Includes a $258.2 extraordinary gain on discharge of prepetition debt.
(3) Fully-diluted earnings per share for fiscal years 1992 and 1991 include extraordinary credits per common share of $1.04 and
$0.57, respectively, attributable to the realization of the benefit of tax loss carryforwards. Fully-diluted earnings per share for
the thirty-five weeks ended October 2, 1993 includes an extraordinary gain per common share of $11.75 on discharge of
prepetition debt. No cash dividends have been paid to date on the Successor and Predecessor Companies' common stocks.
(4) On February 4, 1991, the Company, its former parent, Hills Department Stores, Inc., and the five principal subsidiaries of the
Company, filed petitions for relief under Chapter 11 of the United States Bankruptcy Code. As a result the Company reclassified
certain current liabilities to Liabilities subject to compromise at February 3, 1991 (see Note 1 of Notes to Consolidated Financial
Statements).
(5) The Predecessor Company operated 214 stores at January 2, 1991 and closed 28 stores by year end.
(6) Reflects financial position of the Predecessor Company at October 2, 1993 prior to the confirmation of the Plan of
Reorganization.
</TABLE>
The selected financial data should be read in conjunction with the Consolidated
Financial Statements.
10
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
On October 4, 1993 (the "Effective Date"), Hills Stores Company (the "Company"
or the "Successor Company") and certain of its principal subsidiaries emerged
from reorganization proceedings under Chapter 11 of the United States Bankruptcy
Code ("Chapter 11") pursuant to the Confirmation Order entered on September 10,
1993 by the United States Bankruptcy Court for the Southern District of New York
(the "Bankruptcy Court") confirming the First Amended Consolidated Plan of
Reorganization (as modified as of September 10, 1993, the "POR"). The Company,
its former parent, Hills Department Stores, Inc. (the "Predecessor Company"),
and the five principal subsidiaries of the Company, voluntarily filed petitions
for reorganization under Chapter 11 on February 4, 1991 (the "Filing Date").
The Predecessor Company operated its business as a debtor-in-possession under
Chapter 11 from the Filing Date until October 4, 1993.
The POR provided for the Predecessor Company to be dissolved and the Company to
succeed to and assume the Predecessor Company's former status as a holding
company (see Note 1 of Notes to Consolidated Financial Statements).
In conjunction with its emergence from Chapter 11, the Company adopted
fresh-start reporting as of October 2, 1993 in accordance with the American
Institute of Certified Public Accountants Statement of Position 90-7:
"Financial Reporting by Entities in Reorganization under the Bankruptcy Code"
(see Note 2 of Notes to Consolidated Financial Statements).
In connection with the adoption of fresh-start reporting and the consummation of
the POR, a new entity has been deemed created for financial reporting purposes.
Accordingly, the consolidated financial statements for the periods
subsequent to October 2, 1993 have been designated "Successor Company" to
signify that they are those of the new entity for financial reporting purposes
and have been prepared on a basis not comparable to prior periods.
To facilitate comparison of the Successor and Predecessor Companies' operating
performances between fiscal years 1993, 1992 and 1991, the discussions below are
presented using the pro forma results of combined operations of the Successor
and Predecessor Companies for fiscal 1993 as presented in Note 3 of Notes to
Consolidated Financial Statements. Consequently, the information presented
below does not reflect the periods in the fifty-two weeks ended January 29, 1994
as they are presented in the Consolidated Financial Statements of Operations.
The most significant pro forma adjustment to earnings before reorganization
items, income taxes and extraordinary items is the increase in interest expense
due to the pro forma issuance of the Senior Notes at January 31, 1993 (see Note
3 of Notes to Consolidated Financial Statements).
RESULTS OF OPERATIONS
Pro Forma Combined Fiscal Year Ended January 29, 1994 (Fiscal 1993) versus
fiscal Year Ended January 30, 1993 (Fiscal 1992)
Sales increased 0.9% compared to fiscal 1992. This improvement was primarily
attributable to the Company's strong sales performance during the fiscal 1993
Christmas season partially offset by weak sales results due to unusually bad
weather conditions in the first quarter of fiscal 1993 and January 1994 and the
closing of three stores in June 1993. The strong fiscal 1993 Christmas season
was highlighted by a fourth quarter comparable store sales increase of 8.6%
compared to fiscal 1992. Comparable store sales were $1.759 billion in fiscal
1993 versus $1.728 billion in fiscal 1992, a 1.8% increase.
11
<PAGE>
RESULTS OF OPERATIONS (continued)
Pro FOrma Combined Fiscal Year Ended January 29, 1994 (Fiscal 1993) versus
fiscal Year Ended January 30, 1993 (Fiscal 1992) (continued)
Cost of sales as a percentage of sales was 71.4% in fiscal years 1993 and 1992.
An improvement in purchase margin was offset by increases in markdowns and
logistics costs. Logistics costs are expected to decline as a percentage of
sales as the Company's new distribution facility begins to achieve economies of
scale.
Selling and administrative expenses as a percentage of sales was 21.4% in fiscal
1993 compared to 21.9% in fiscal 1992, a 0.5% decrease. This improvement is
primarily a result of the Company's continued focus on cost reduction,
principally in payroll and payroll related expenses, and follows a 0.6% decrease
in costs in 1992 versus 1991.
Depreciation and amortization as a percentage of sales was 2.0% in fiscal 1993
compared to 2.2% in fiscal 1992, a 0.2% decrease. This decrease is primarily a
result of a pro forma January 31, 1993 revaluation and/or the change in the
related estimated remaining useful lives of the Company's depreciable and
amortizable assets in the pro forma implementation of fresh-start reporting.
Other interest expense was $23.1 million in fiscal 1993 compared to $5.9 million
in fiscal 1992, a $17.2 million increase. This increase is primarily due to 12
months of pro forma interest expense on the Senior Notes of $16.4 million
and pro forma amortization ($2.4 million) of deferred financing costs assumed to
have been paid on January 31, 1993, related to securing the revolving credit
facility.
Other income was $3.7 million in fiscal 1993 compared to $0.6 million in fiscal
1992, a $3.1 million increase. This increase is primarily due to the
classification of $1.4 million of interest income as a reorganization item in
fiscal 1992 versus other income in fiscal 1993 and a $0.9 million recovery in
fiscal 1993 of a fully reserved note receivable.
The Company's effective tax rate was 48.1% in fiscal 1993 compared to 49.8% in
fiscal 1992, a 1.7% decrease. This decrease resulted principally from the
decrease of certain non-deductible reorganization costs and state and local
income taxes, partially offset by an increase in non-deductible goodwill
amortization as a percentage of the related pre-tax earnings.
Fiscal Year Ended January 30, 1993 (Fiscal 1992) versus
fiscal Year Ended February 1, 1992 (Fiscal 1991)
Sales and comparable store sales increased 4.2% as compared to fiscal 1991. This
improvement was attributable to the Predecessor Company's strong sales
performance during the fiscal 1992 Christmas season as well as improved sales
performance in the first quarter of fiscal 1992 compared to fiscal 1991 (in
which sales were unusually depressed following the Chapter 11 filing).
Cost of sales as a percentage of sales was 71.4% in fiscal 1992 compared to
72.3% in fiscal 1991, a 0.9% decrease. This increase in gross margin reflects
the improvement in purchase margin in both hardlines, principally in the home
decor merchandising categories, and softlines. The Predecessor Company did not
record any LIFO provision in fiscal 1992, as a result of very low inflation
during the year. In fiscal 1991, the Predecessor Company recorded a LIFO
provision of approximately 0.3% as a percentage of sales.
12
<PAGE>
RESULTS OF OPERATIONS (continued)
Fiscal Year Ended January 30, 1993 (Fiscal 1992) versus
fiscal Year Ended February 1, 1992 (Fiscal 1991) (continued)
Selling and administrative expenses as a percentage of sales was 21.9% in fiscal
1992 compared to 22.5% in fiscal 1991, a 0.6% decrease. This improvement was
primarily due to the Company's continued focus on cost reduction, principally in
payroll and payroll related expenses. During fiscal years 1992 and 1991, the
Company managed staffing levels in response to reduced sales expectations, which
allowed salaries and wages to decline from prior year's levels.
Other interest expense was $5.9 million in fiscal 1992 compared to $9.2 million
in fiscal 1991, a $3.3 million decrease. Lower average borrowing rates, lower
average borrowing levels and lower amortization of deferred financing costs of
the old revolving credit facility were the major reasons for this decrease.
The Predecessor Company's effective tax rate was 49.8% in fiscal 1992 and 55.5%
in fiscal 1991, a 5.7% decrease. This decrease resulted principally from the
decrease of certain non-deductible reorganization costs and non-deductible
goodwill amortization as a percentage of the related pre-tax earnings. Fiscal
1992 and fiscal 1991 results reflect extraordinary credits of $22.9 and $12.5
million, respectively, representing the utilization of available book federal
and state operating loss carryforwards.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
General
The discussion of the Company's financial condition, liquidity and capital
resources that follows is based on the Company's financial position at January
29, 1994, which reflects the confirmation of the POR and implementation of
fresh-start reporting as of October 2, 1993. The financial information of the
Company generally is not comparable with the prior periods due to the POR and
the effect of the implementation of the transactions contemplated thereby.
Hills Department Store Company, a wholly-owned subsidiary of the Company,
entered into a three year unsecured revolving credit facility on October 4,
1993 (the "Facility") with Chemical Bank and a syndicate of 11 other banks for
$225 million, of which up to $75 million is available as a letter of credit
facility. All of the common stock of the Company's subsidiaries are pledged as
collateral for the Facility and the Facility is guaranteed by the Company (see
Note 7 of Notes to Consolidated Financial Statements). At January 29, 1994,
there was no outstanding balance under the Facility. During the Successor
Company's seventeen weeks ended January 29, 1994, average borrowings
approximated $12.9 million at an average interest rate of approximately 6.9%,
with peak borrowings at $56.0 million. In fiscal 1994, there have not been any
borrowings under the Facility through the date of this filing. In addition to
its funded debt, the Company has significant lease commitments which require
cash outflows. Operating lease payments in fiscal 1994 are expected to
approximate fiscal 1993 payments of $44.9 million.
Based on current projections of cash flows, management believes that amounts
available under its current borrowing agreement, together with cash from
operations, will enable the Company to meet its current liquidity and capital
expenditure requirements.
To facilitate comparison of cash flow information of the Successor and
Predecessor Companies, the following discussion is presented using the
fifty-two weeks combined cash flow information of the Successor and Predecessor
Companies. Fresh-start reporting has no impact on cash flow information. A
summary of cash flow information and financial position is presented on the
following page.
13
<PAGE>
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES (continued)
General (continued)
<TABLE>
<CAPTION>
Combined Predecessor Company
Successor and -----------------------------
Predecessor
Companies
Fifty-two Fiscal Year Fiscal Year
Weeks Ended Ended Ended
January 29, January 30, February 1,
(in thousands) 1994 1993 1992
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash and cash equivalents
at beginning of period $173,343 $113,907 $ 39,911
Cash provided by operating activities 50,022 105,587 99,094
Capital expenditures ( 30,232) ( 40,066) ( 11,487)
Principal payments under capital obligations ( 5,126) ( 4,806) ( 3,538)
Cash distributions pursuant to the POR ( 90,318) - -
Other investing activities - 780 ( 4,585)
Other financing activities ( 7,640) ( 2,059) ( 5,488)
--------- -------- --------
Cash and cash equivalents
at end of period $ 90,049 $173,343 $113,907
======== ======== ========
Working capital at end of period $171,440 $299,927 $261,007
======== ======== ========
</TABLE>
The Company's working capital as of January 29, 1994 decreased by $128.5 million
from January 30, 1993. This decrease is primarily due to cash distributions
pursuant to the POR, capital expenditures and an increase in accrued
liabilities related to the emergence from Chapter 11, partially offset by an
increase in inventories.
Net cash provided by operating activities during the fiscal twelve month period
ended January 29, 1994 decreased $55.6 million compared to the comparable fiscal
twelve month period ended January 30, 1993. This decrease is primarily due to
an increase in inventories from fiscal 1992 of $60.9 million due to an emphasis
on maintaining in-stock positions in basic merchandise in fiscal 1993 and a 6.8%
decrease from fiscal 1992 in accounts payable as a percentage of ending
inventory. Over the past three years, the Company has generated positive cash
flows from operations in excess of its capital expenditure requirements.
Capital expenditures totalled $30.2 million during fiscal 1993. Since 1991,
over 50% of the Company's 151 stores have been remodeled with another 20%
scheduled for completion in the spring of fiscal 1994. A new store is planned
to open in July 1994. Fiscal 1994 capital expenditures are expected to
approximate $37 million.
Due to the seasonality of the Company's business, the Company utilized its
revolving credit facility during the seventeen weeks ended January 29, 1994
primarily to fund merchandise purchases and distributions pursuant to the POR,
with peak borrowings at $56.0 million. All such borrowings were repaid in
December 1993. Other financing activities reflect fees paid to secure the $225
million revolving credit facility.
14
<PAGE>
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES (continued)
OTHER MATTERS
SEASONALITY
The Company's business is highly seasonal due to increased consumer buying for
back-to-school needs and at Christmas. The second half of each year provides
the major portion of the Company's annual sales and operating profit with
operating profit particularly concentrated in the Christmas selling season.
INFLATION
The Company, although subject to the effects of changing prices, generally has
experienced a lesser rate of inflation than the economy as a whole. The Company
uses the LIFO inventory accounting method for financial reporting purposes
because it is believed to provide a better matching of current costs with
revenues than does the FIFO method. Consequently, the cost of goods sold
included in the results of operations is already adjusted for inflation.
15
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See accompanying pages F-1 through F-24.
Information called for by this item can be found at the pages listed in the
following index.
<TABLE>
INDEX TO FINANCIAL STATEMENTS
<CAPTION>
Page
<S> <C>
Hills Stores Company and Subsidiaries
Report of Independent Accountants. . . . . . . . . . . . F-1
Consolidated Balance Sheets. . . . . . . . . . . . . . . F-2
Consolidated Statements of Operations. . . . . . . . . . F-3
Consolidated Statements of Cash Flows. . . . . . . . . . F-4
Consolidated Statements of Common Shareholders' Equity . F-5
Notes to Consolidated Financial Statements . . . . . . . F-6
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by reference from the item entitled "Information about Nominees"
in the proxy statement dated April 29, 1994 for the annual meeting of
stockholders to be held June 8, 1994, except for information regarding executive
officers of the Company, which information is furnished in a separate item
captioned "Executive Officers of the Registrant" in Part I of this report.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference from the item entitled "Executive Compensation" in the
proxy statement dated April 29, 1994 for the annual meeting of stockholders
to be held June 8, 1994.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Incorporated by reference from the item entitled "Beneficial Ownership" in the
proxy statement dated April 29, 1994 for the annual meeting of stockholders to
be held June 8, 1994.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference from the items entitled "Information about Nominees",
"Employment Contracts" and "Compensation of Directors" in the proxy statement
dated April 29, 1994 for the annual meeting of stockholders to be held June 8,
1994.
16
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
<TABLE>
<S> <C> <C>
1. Financial statements
Report of Independent Accountants F-1
Consolidated Balance Sheets F-2
Consolidated Statements of Operations F-3
Consolidated Statements of Cash Flows F-4
Consolidated Statements of Common Shareholders' Equity F-5
Notes to Consolidated Financial Statements F-6
2. Financial statement schedules
Report of Independent Accountants on Schedules S-1
V Property, Plant and Equipment S-2
VI Accumulated Depreciation and Amortization of
Property, Plant and Equipment S-3
VIII Valuation and Qualifying Accounts S-4
IX Short-Term Borrowings S-5
X Supplementary Income Statement Information S-6
</TABLE>
Schedules other than these listed above are omitted because they are not
required, not applicable, or the information is otherwise included in the
financial statements.
3. Certain of the exhibits listed hereunder have previously been filed with the
Commission as exhibits to certain registration statements and periodic reports
set forth in the footnotes following this exhibit list and are hereby
incorporated by reference pursuant to Rule 411 promulgated under the Securities
Act and Rule 24 of the Commission's Rules of Practice. The location of each
document so incorporated by reference is indicated by footnote.
2.1(3) First Amended Consolidated Plan of Reorganization, dated as of July 16,
1993.
2.2(3) September 10, 1993 Amendment to such Plan of Reorganization.
3.1(1) Restated Certificate of Incorporation of the Company, as amended.
3.2(1) Amended and Restated By-Laws of the Company.
4.1(1) Provisions of the Restated Certificate of Incorporation of the Company
relating to its Series A Convertible Preferred Stock.
4.2 Form of Series 1993 Stock Right. (Filed herewith)
4.3(1) Indenture relating to the 10.25% Senior Notes due 2003 of the Company.
4.4(2) Series 1993 Warrant Agreement dated October 4, 1993 between the Company
and Chemical Bank, as warrant agent.
10.1(4)* Retention Agreement with Norman S. Matthews, dated April 30, 1991.
17
<PAGE>
10.2(4)* Undated Employment Agreement between Hills Stores and Michael Bozic
(executed in April 1991).
10.3(4)* Employment Agreement with E. Jackson Smailes, effective September 15,
1992.
10.4(4)* Employment Agreement with Robert J. Stevenish, effective December 14,
1992.
10.5(4)* Employment Agreement with Michael Bozic, dated March 10, 1993.
10.6(4)* Consulting Agreement with Norman S. Matthews, dated March 10, 1993.
10.7(4)* Form of individual Employment Agreements entered into in March 1993
with, respectively, Messrs. Reen, Samuto, Smailes and Stevenish.
10.8 * 1993 Incentive and Nonqualified Stock Option Plan. (Filed herewith)
10.9(2) Credit Agreement dated as of October 4, 1993 among HDSC, Hills Stores
Company, the Lenders named therein and Chemical Bank, as
Administrative Agent and Fronting Bank.
11.1 Computation of earnings per share. (Filed herewith)
21 Subsidiaries. (Filed herewith)
24 Powers of Attorney of directors and officers of the Company. (Filed
herewith)
[FN]
- -------------------
* Executive Compensation Plans and Arrangements.
1. Incorporated by reference from the Form 8-A of the Company filed on
October 5, 1993.
2. Incorporated by reference from the Report on Form 8-K of the Company
dated October 4, 1993.
3. Incorporated by reference from the Report on Form 8-K of Hills
Department Stores, Inc. dated September 10, 1993 (same Commission File
No. 1-9505)
4. Incorporated by reference from the Annual Report on Form 10-K of Hills
Department Stores, Inc. for the fiscal year ended January 30, 1993.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the Town of Canton,
Commonwealth of Massachusetts, on April 21, 1994.
HILLS STORES COMPANY
By: /s/ William K. Friend
-----------------------------
William K. Friend
Vice President-Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities
indicated in which they act for the Registrant and on the date indicated.
<TABLE>
<S> <C> <C>
* Chairman of the Board of
__________________ the Company and Hills Department
Thomas H. Lee Store Company April 21, 1994
* Director, President and
__________________ Chief Executive Officer of the Company
Michael Bozic and Hills Department Store Company
(Principal Executive Officer) April 21, 1994
* Director and Executive Vice President-
__________________ Chief Financial Officer (Principal Financial
John G. Reen Officer) of the Company and Hills Department
Store Company April 21, 1994
*
__________________ Director of the Company
Susan E. Engel and Hills Department Store Company April 21, 1994
*
__________________ Director of the Company
Michael S. Gross and Hills Department Store Company April 21, 1994
*
__________________ Director of the Company
Richard B. Loynd and Hills Department Store Company April 21, 1994
*
__________________ Director of the Company
Norman S. Matthews and Hills Department Store Company April 21, 1994
*
__________________ Director of the Company
James L. Moody, Jr. and Hills Department Store Company April 21, 1994
*
__________________ Vice President-Controller (Principal Accounting
Kim D. Ahlholm Officer) of the Company and Hills Department
Store Company April 21, 1994
</TABLE>
* By: /s/ William K. Friend
__________________
William K. Friend
Attorney-in-Fact
19
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
of Hills Stores Company and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Hills Stores
Company and Subsidiaries as of January 29, 1994, and January 30, 1993, and the
related consolidated statements of operations, cash flows and common
shareholders' equity for the seventeen week period ended January 29, 1994, the
thirty- five week period ended October 2, 1993 and each of the two years in the
period ended January 30, 1993. 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 consolidated financial position of Hills Stores
Company and Subsidiaries as of January 29, 1994, and January 30, 1993 and the
consolidated results of its operations and its cash flows for the seventeen week
period ended January 29, 1994, the thirty-five week period ended October
2, 1993 and each of the two years in the period ended January 30, 1993 in
conformity with generally accepted accounting principles.
On October 4, 1993, the Company emerged from reorganization proceedings under
Chapter 11 of the U.S. Bankruptcy Code. As described in Note 2 to the
consolidated financial statements, the Company accounted for this reorganization
and adopted "fresh-start reporting" as of October 2, 1993. As a result, the
January 29, 1994 consolidated balance sheet and the statement of operations for
the seventeen weeks ended January 29, 1994 are not comparable to the
Company's consolidated balance sheets or consolidated statements of operations
for prior periods.
Boston, Massachusetts
March 22, 1994
Coopers & Lybrand
F-1
<PAGE>
<TABLE>
HILLS STORES COMPANY AND SUBSIDIARIES
____________________________________________________________________________________________
CONSOLIDATED BALANCE SHEETS
<CAPTION>
Successor Predecessor
Company Company
January 29, January 30,
(dollars in thousands) 1994 1993
____________________________________________________________________________________________
*
<S> <C> * <C>
ASSETS *
Current assets: *
Cash and cash equivalents $ 90,049 * $173,343
Trade receivables, less allowance for doubtful accounts of *
$5,497 and $4,591 23,368 * 22,055
Inventories (Note 4) 326,465 * 265,533
Other current assets 4,647 * 4,679
-------- * --------
Total current assets 444,529 * 465,610
*
Property and equipment, net (Note 5) 132,431 * 122,737
Property under capital leases, net (Note 9) 134,476 * 132,971
Beneficial lease rights, net (Note 4) 9,902 * 50,811
Other assets, net 9,555 * 14,989
Goodwill, net (Note 4) - * 135,627
Reorganization value in excess of amounts allocable to *
identifiable assets, net (Note 4) 176,728 * -
-------- * --------
$907,621 * $922,745
======== * ========
LIABILITIES AND SHAREHOLDERS' EQUITY *
Current liabilities: *
Current portion of capital leases (Note 9) $ 5,532 * $ 5,229
Accounts payable, trade 64,192 * 70,274
Other accounts payable and accrued expenses (Note 6) 203,365 * 90,180
-------- * --------
Total current liabilities 273,089 * 165,683
*
Senior notes (Note 8) 160,000 * -
Obligations under capital leases (Note 9) 130,626 * 133,457
Other liabilities 13,671 * 13,853
Liabilities subject to compromise (Note 1) - * 761,443
*
Commitments and contingencies (Note 18) - * -
*
Preferred stock, at mandatory redemption value (Note 12) 100,000 * 31,481
*
Common shareholders' equity (deficit) (Note 13): *
Common stock, 50,000,000 shares of $0.01 par value authorized *
and 9,000,000 and 19,757,390 shares issued and outstanding 90 * 198
Additional paid-in capital 193,910 * 65,215
Retained earnings (deficit) 36,235 * (248,492)
-------- * --------
230,235 * (183,079)
Less-treasury stock - * (93)
-------- * --------
Total common shareholders' equity (deficit) 230,235 * (183,172)
-------- * --------
$907,621 * $922,745
======== * ========
</TABLE>
See notes to consolidated financial statements
F-2
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
<TABLE>
______________________________________________________________________________________________________________________________
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
PRO FORMA Successor Predecessor Company
COMBINED Company __________________________________________
FIFTY-TWO Seventeen Thirty-five Fiscal Year Fiscal Year
WEEKS ENDED Weeks Ended Weeks Ended Ended Ended
JANUARY 29, January 29, October 2, January 30, February 1,
(in thousands, except per share amounts) 1994 1994 1993 1993 1992
______________________________________________________________________________________________________________________________
(Unaudited) *
(Note 3) *
<S> <C> <C> * <C> <C> <C>
Net sales $1,765,533 $772,685 * $992,848 $1,750,266 $1,679,866
Cost of sales 1,259,950 549,651 * 710,299 1,249,812 1,214,090
Selling and administrative expenses 378,357 138,360 * 239,997 383,581 377,039
Depreciation and amortization 34,761 11,328 * 27,978 38,959 36,223
---------- -------- * -----------------------------------------
Operating earnings 92,465 73,346 * 14,574 77,914 52,514
*
Other income (expense): *
Capital lease interest (15,141) (5,029) * (10,284) (16,151) (16,395)
Other interest (Note 1) (23,138) (8,112) * (3,364) (5,865) (9,156)
Other income, net 3,692 2,639 * 231 635 678
---------- -------- * -----------------------------------------
(34,587) (10,502) * (13,417) (21,381) (24,873)
---------- -------- * -----------------------------------------
57,878 62,844 * 1,157 56,533 27,641
Reorganization items: *
Professional fees - - * (6,045) (5,730) (6,850)
Fresh-start revaluation (Note 2) - - * (5,985) - -
Interest income - - * 2,788 2,602 1,778
---------- -------- * -----------------------------------------
57,878 62,844 * (8,085) 53,405 22,569
Income taxes (Note 16) 27,837 26,609 * - 26,588 12,537
---------- -------- * -----------------------------------------
30,041 36,235 * (8,085) 26,817 10,032
Extraordinary credit - benefit of net *
operating loss carryforward (Note 16) - - * - 22,879 12,480
Extraordinary gain on discharge of *
prepetition debt (Note 1) - - * 258,239 - -
---------- -------- * ------------------------------------------
Net earnings 30,041 36,235 * 250,154 49,696 22,512
*
Preferred dividend requirements - - * (1,662) (2,432) ( 2,395)
---------- -------- * ------------------------------------------
Net earnings applicable to *
common shareholders $ 30,041 $ 36,235 * $248,492 $ 47,264 $ 20,117
========== ======== * =========================================
Primary earnings (loss) per common share (Note 17): *
Earnings (loss) before extraordinary items $ 2.14 $ 2.58 * ($ 0.49) $ 1.23 $ 0.39
Extraordinary credit - benefit of net operating loss *
carryforward - - * - 1.16 0.63
Extraordinary gain on discharge of prepetition debt - - * 13.07 - -
---------- -------- * ------------------------------------------
Net earnings applicable to common shareholders $ 2.14 $ 2.58 * $ 12.58 $ 2.39 $ 1.02
========== ======== * =========================================
Fully-diluted earnings (loss) per common *
share (Note 17): *
Earnings (loss) before extraordinary items $ 2.03 $ 2.45 * ($ 0.45) $ 1.11 $ 0.35
Extraordinary credit - benefit of net operating loss *
carryforward - - * - 1.04 0.57
Extraordinary gain on discharge of prepetition debt - - * 11.75 - -
---------- -------- * ------------------------------------------
Net earnings applicable to common shareholders $ 2.03 $ 2.45 * $ 11.30 $ 2.15 $ 0.92
========== ======== * =========================================
</TABLE>
See notes to consolidated financial statements
F-3
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
<TABLE>
__________________________________________________________________________________________________________________________
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Successor Predecessor Company
Company ____________________________________________
Seventeen Thirty-five Fiscal Year Fiscal Year
Weeks Ended Weeks Ended Ended Ended
January 29, October 2, January 30, February 1,
(in thousands) 1994 1993 1993 1992
__________________________________________________________________________________________________________________________
<S> <C> * <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES: *
Net earnings $ 36,235 * $250,154 $ 49,696 $ 22,512
Adjustments to reconcile net earnings *
to net cash provided by operating activities *
before reorganization items: *
Depreciation and amortization 12,113 * 28,780 41,622 38,363
Decrease in deferred tax assets recognized through *
reduction of reorganization value in excess of amounts *
allocable to identifiable assets 24,281 * - - -
Decrease (increase) in accounts receivable and other *
current assets 12,513 * (19,485) (173) (18,609)
Decrease (increase) in inventories 81,736 * (141,704) (15,850) (30,414)
Increase (decrease) in accounts payable and other *
accrued expenses (40,229) * 61,087 38,621 93,406
Other, net 308 * 2,761 1,824 1,296
-------- * ---------------------------------------
Net cash provided by operating activities *
before reorganization items 126,957 * 181,593 115,740 106,554
Reorganization items: *
Decrease in liabilities subject to compromise - * (6,274) (10,153) (45,913)
Fresh-start revaluation - * 5,985 - -
Extraordinary gain on discharge of prepetition debt - * (258,239) - -
Cash received from inventory liquidations - * - - 36,889
Cash received from liquidator for reimbursable *
expenses, net - * - - 1,564
-------- * ---------------------------------------
Net cash provided by (used for) operating activities 126,957 * (76,935) 105,587 99,094
*
CASH FLOWS FROM INVESTING ACTIVITIES: *
*
Capital expenditures (3,070) * (27,162) (40,066) (11,487)
Other investing activities - * - 780 (4,585)
-------- * ---------------------------------------
Net cash used for investing activities (3,070) * (27,162) (39,286) (16,072)
*
CASH FLOWS FROM FINANCING ACTIVITIES: *
*
Principal payments under capital lease obligations (1,726) * (3,400) (4,806) (3,538)
Cash distributions pursuant to the Plan *
of Reorganization (85,153) * (5,165) - -
Other financing activities (196) * (7,444) (2,059) (5,488)
-------- * ---------------------------------------
Net cash used for financing activities (87,075) * (16,009) (6,865) (9,026)
-------- * ---------------------------------------
Net increase (decrease) in cash and cash equivalents 36,812 * (120,106) 59,436 73,996
*
Cash and cash equivalents at beginning of period 53,237 * 173,343 113,907 39,911
-------- * ---------------------------------------
Cash and cash equivalents at end of period $ 90,049 * $ 53,237 $173,343 $113,907
======== * =======================================
</TABLE>
See notes to consolidated financial statements
F-4
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
<TABLE>
______________________________________________________________________________________________________________________________
CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY
<CAPTION>
Total
Common
Common Stock Additional Retained Treasury Stock Shareholders'
___________________ Paid-in Earnings _______________ Equity
(dollars in thousands) Shares Amount Capital (Deficit) Shares Amount (Deficit)
______________________________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C> <C>
Predecessor Company balance
- February 3, 1991 19,151,228 $192 $56,361 ($315,873) 26,688 ($93) ($259,413)
Conversion of 11% Convertible
Junior Subordinated Debentures 632,136 6 8,844 - - - 8,850
Preferred stock dividend requirements - - - (2,395) - - (2,395)
Net earnings - - - 22,512 - - 22,512
-----------------------------------------------------------------------------
Predecessor Company balance
- February 1, 1992 19,783,364 198 65,205 (295,756) 26,688 (93) (230,446)
Conversion of 11% Convertible
Junior Subordinated Debentures 714 - 10 - - - 10
Preferred stock dividend requirements - - - (2,432) - - (2,432)
Net earnings - - - 49,696 - - 49,696
-----------------------------------------------------------------------------
Predecessor Company balance
- January 30, 1993 19,784,078 198 65,215 (248,492) 26,688 (93) (183,172)
Preferred stock dividend requirements - - - (1,662) - - (1,662)
Net earnings - - - 250,154 - - 250,154
Cancellation of Predecessor
Company common stock (19,784,078) (198) (65,215) - (26,688) 93 (65,320)
-----------------------------------------------------------------------------
Predecessor Company balance
- October 2, 1993 - $ - $ - $ - - $ - $ -
=============================================================================
=============================================================================================================================
Issuance of Successor Company
common stock - October 2, 1993 9,000,000 $ 90 $193,910 $ - - $ - $194,000
Net earnings - - - 36,235 - - 36,235
-----------------------------------------------------------------------------
Successor Company balance
- January 29, 1994 9,000,000 $ 90 $193,910 $ 36,235 - $ - $230,235
=============================================================================
</TABLE>
See notes to consolidated financial statements
F-5
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
________________________________________________________________________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Reorganization
On October 4, 1993 (the "Effective Date"), Hills Stores Company (the "Company"
or the "Successor Company") and certain of its principal subsidiaries emerged
from reorganization proceedings under Chapter 11 of the United States
Bankruptcy Code ("Chapter 11") pursuant to the Confirmation Order entered on
September 10, 1993 by the United States Bankruptcy Court for the Southern
District of New York (the "Bankruptcy Court") confirming the First Amended
Consolidated Plan of Reorganization (as modified as of September 10, 1993, the
"POR"). The Company, its former parent, Hills Department Stores, Inc. (the
"Predecessor Company"), and the five principal subsidiaries of the Company
voluntarily filed petitions for reorganization under Chapter 11 on February 4,
1991 (the "Filing Date"). The Predecessor Company operated its business as a
debtor-in-possession under Chapter 11 from the Filing Date until October 4,
1993. Under Chapter 11, all claims against the Predecessor Company and its co-
filing affiliates in existence prior to the Filing Date were stayed. These
prepetition claims and obligations were segregated and reclassified as
"Liabilities subject to compromise" in the consolidated balance sheet as of the
Filing Date. The principal categories of claims reclassified in the January
30, 1993 Consolidated Balance Sheet and included in "Liabilities subject to
compromise" are identified below.
<TABLE>
<CAPTION>
January 30,
(in thousands) 1993
-----------
<S> <C>
11% Convertible Junior Subordinated Debentures $ 33,523
13-1/2% Senior Notes 87,738
14-1/8% Senior Subordinated Debentures 92,023
14-5/8% Subordinated Debentures 50,906
15% Junior Subordinated Notes 96,896
Prepetition bank credit facility 119,145
Trade and other miscellaneous claims 281,212
--------
$761,443
========
</TABLE>
In accordance with the American Institute of Certified Public Accountants
Statement of Position 90-7, the Predecessor Company's other interest expense
excluded contractual interest of $40.4 million, $60.3 million and $62.0
million for the thirty-five weeks ended October 2, 1993 and fiscal years ended
January 30, 1993 and February 1, 1992, respectively.
The POR provided for the Predecessor Company to be dissolved and the Company to
succeed to and assume the Predecessor Company's former status as a holding
company by transferring to Hills Department Store Company, a newly formed
operating subsidiary of the Company, all of the assets, property and interest
of the Company as of the Effective Date. The POR provided for the cancellation
of approximately $721.9 million of unsecured claims in exchange for (i) $52.4
million in cash; (ii) $160.0 million of 10.25% Senior Notes of the Company;
(iii) 5 million shares of the Company's Series A Convertible Preferred Stock
(the "Preferred Stock"); (iv) 8.95 million shares of the Company's common stock
("Hills Stores Common Stock"); and (v) Series 1993 Stock Rights to purchase
700,000 shares of Hills Stores Common Stock. The POR also provided for the
cancellation of the old preferred stock of the Company in exchange for 50,000
shares of Hills Stores Common Stock and the cancellation of the common stock of
the Predecessor Company in exchange for Series 1993 Warrants to purchase
432,990 shares of Hills Stores Common Stock. The POR further provided for,
among other things, the cash settlement in full of certain administrative,
executory contract, priority, secured party and convenience claims aggregating
approximately $70.2 million and the release of the Company from certain lease
F-6
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
________________________________________________________________________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. Reorganization (continued)
guarantees. The value of the cash, notes, securities, warrants and rights
required to be distributed under the POR is less than the value of the allowed
claims on and interests in the Predecessor Company and its subsidiaries;
accordingly, the Predecessor Company recorded an extraordinary gain of $258.2
million related to the discharge of prepetition liabilities in the period ended
October 2, 1993. All payments and distributions associated with the
prepetition claims and obligations have been provided for in the Successor
Company Consolidated Balance Sheet as of October 2, 1993. The Consolidated
Financial Statements at October 2, 1993 presumed full issuance of all common
stock, preferred stock, stock rights and senior notes in accordance with the
POR.
2. Fresh-Start Reporting
During the bankruptcy proceedings, the consolidated financial statements of the
Predecessor Company were presented in accordance with the American Institute of
Certified Public Accountants Statement of Position 90-7: "Financial Reporting
by Entities in Reorganization under the Bankruptcy Code" ("SOP 90-7"). Pursuant
to SOP 90-7, the Successor Company adopted fresh-start reporting as of October
2, 1993. Under fresh-start reporting, a new reporting entity is created and
recorded amounts of assets and liabilities are adjusted to reflect their
estimated fair values. Financial statements for the period prior to October
2, 1993, have been designated as those of the Predecessor Company. Black lines
have been drawn to separate the Successor Company financial statements from the
Predecessor Company financial statements to signify that they are those of a
new reporting entity and have been prepared on a basis not comparable to prior
periods.
The Company's fresh-start reorganization equity value of $294 million was
determined with the assistance of financial advisors employed by the Company.
The valuation was predicated in part on the Company's forecasts of unleveraged,
after-tax cash flows calculated for each year over the five year period from
1993 to 1997, the capitalization of projected 1997 earnings at a multiple
selected to value earnings and cash flows beyond 1997, and the discounting of
the resulting amounts to present value at a rate selected to approximate the
Company's projected weighted average cost of capital. The projections assume
that the Company's remodeling program would be completed as planned and
provided for the opening of new stores during the projection period.
The five year cash flow projections were based on estimates and assumptions
about circumstances and events that have not yet taken place. Such estimates
and assumptions are inherently subject to significant economic and competitive
uncertainties beyond the control of the Company, including, but not limited to,
those with respect to the future course of the Company's business activity.
Accordingly, there will be differences between projections and actual results
as events and circumstances frequently do not occur as expected, and those
differences may be material. Any difference between the Company's projected
and actual results following the Company's emergence from Chapter 11 will not
alter the determination of the fresh-start reorganization equity value as such
value is not contingent upon the Company achieving the projected results.
In connection with fresh-start reporting, the Company adopted Statement of
Financial Accounting Standards No. 112: "Employers' Accounting for Post
Employment Benefits." The statement requires accrual of the estimated cost of
benefits provided to former or inactive employees at the time that benefit
payments are determined to be probable and estimable. The effect of this
adoption was not material to the Company's Consolidated Financial Statements at
October 2, 1993.
F-7
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
______________________________________________________________________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
<TABLE>
2. Fresh-Start Reporting (continued)
Adjustments to the Predecessor Company's balance sheet as of October 2, 1993 to
reflect the discharge of pre-petition debt and fresh-start reporting
adjustments are presented in the table below:
<CAPTION>
Predecessor
Company Successor
Pre- Company
(in thousands) Confirmation Debt Discharge Fresh-start Reorganized
_______________________________________________________________
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 59,789 ($ 6,552) (a) $ - $ 53,237
Trade receivables, net 41,838 - (5,612) (e) 36,226
Inventories 407,237 - 964 (c) 408,201
Other current assets 14,852 - (10,550) (d) 4,302
----------------------------------------------------------
Total current assets 523,716 (6,552) (15,198) 501,966
Property and equipment, net 133,364 - 269 (e) 133,633
Property under capital leases, net 119,014 - 18,870 (e) 137,884
Beneficial lease rights, net 48,703 - (38,530) (e) 10,173
Other assets, net 15,164 6,552 (a) (11,952) (e) 9,764
Goodwill, net 132,877 - (132,877) (i) -
Reorganization value in excess of
amounts allocable to identifiable assets - - 204,417 (j) 204,417
----------------------------------------------------------
$972,838 $ - $ 24,999 $997,837
==========================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of capital leases $ 5,360 $ - $ 1,640 (e) $ 7,000
Accounts payable, trade 119,154 - - 119,154
Other accounts payable and
accrued expenses 97,222 135,293 (b) 41,270 (f) 273,785
----------------------------------------------------------
221,736 135,293 42,910 399,939
Senior notes - 160,000 (b) - 160,000
Obligations under capital leases 122,230 - 8,654 (e) 130,884
Other liabilities 27,494 6,100 (b) (20,580) (g) 13,014
Liabilities subject to compromise 755,169 (755,169) (b) - -
Preferred stock 33,143 66,857 (b) - 100,000
Common shareholders' equity (deficit):
Common stock 198 (108) (b) - 90
Additional paid-in capital 65,215 128,695 (b) - 193,910
Retained earnings (deficit) (252,254) 258,239 (b) (5,985) (h) -
----------------------------------------------------------
(186,841) 386,826 (5,985) 194,000
Less-treasury stock (93) 93 (b) - -
----------------------------------------------------------
Total common shareholders'
equity (deficit) (186,934) 386,919 (5,985) 194,000
----------------------------------------------------------
$972,838 $ - $24,999 $997,837
==========================================================
</TABLE>
F-8
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
_____________________________________________________________________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. Fresh-Start Reporting (continued)
(a) Represents financing costs paid to secure the new revolving credit
facility upon emergence from Chapter 11.
(b) Reflects the settlement of liabilities subject to compromise and
cancellation of old preferred stocks and old common stock in exchange for cash,
senior notes, new preferred stock, new common stock, stock rights and stock
warrants, resulting in an extraordinary gain on debt discharge of $258.2
million.
(c) Represents revaluation of last-in, first-out (LIFO) inventories to
estimated fair value as of October 2, 1993.
(d) Reflects reversal of deferred tax assets by approximately $10.5 million in
accordance with fresh-start reporting.
(e) Reflects fair value adjustment as of October 2, 1993 in accordance with
fresh-start reporting.
(f) Reflects accrued liabilities of the Successor Company arising out of the
reorganization including legal and professional fees, a provision for
consolidating and relocating certain facilities, the refinancing of long-term
liabilities and other reorganization related expenses.
(g) Reflects reversal of deferred tax liabilities by approximately $10.5
million in accordance with fresh-start reporting and fair value adjustments
decreasing pension obligations by approximately $8.7 million and other
liabilities by approximately $1.4 million as of October 2, 1993.
(h) Reflects adjustment to eliminate the Predecessor Company's retained
earnings in accordance with fresh-start reporting.
(i) Reflects adjustment to eliminate the Predecessor Company goodwill as of
October 2, 1993 in accordance with fresh-start reporting.
(j) Reflects adjustment to record reorganization value in excess of amounts
allocable to identifiable assets as of October 2, 1993 in accordance with
fresh-start reporting.
3. Pro Forma Combining Statements of Operations
The following unaudited Pro Forma Combining Statements of Operations present
the pro forma combined results of the operations of the Successor and
Predecessor companies for the fifty-two weeks ended January 29, 1994 and have
been adjusted to reflect: the implementation of fresh-start reporting as of
January 31, 1993; elimination of the effects of non-recurring transactions
resulting from the reorganization included in the results of the Predecessor
Company; and payment to creditors pursuant to the POR as of January 31, 1993.
The following information should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations.
F-9
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
______________________________________________________________________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
<TABLE>
3. Pro Forma Combining Statements of Operations (continued)
Pro Forma Combined Fifty-two Weeks Ended January 29, 1994 (unaudited)
(in thousands, except per share amounts)
<CAPTION>
Successor Predecessor Pro Forma
Company Company Combined
Seventeen Thirty-five Fiscal Year
Weeks Ended Weeks Ended Ended
January 29, October 2, Pro Forma January 29,
1994 1993 Adjustments 1994
_______________________________________________________
<S> <C> <C> <C> <C>
Net sales $772,685 $992,848 $ - $1,765,533
Cost of sales 549,651 710,299 - 1,259,950
Selling and administrative expenses 138,360 239,997 - 378,357
Depreciation and amortization 11,328 27,978 (4,545) (a) 34,761
------------------------------------------------------
Operating earnings 73,346 14,574 4,545 92,465
Capital lease interest (5,029) (10,284) 172 (b) (15,141)
Other interest (8,112) (3,364) (11,662) (c) (23,138)
Other income, net 2,639 231 822 (d) 3,692
------------------------------------------------------
62,844 1,157 (6,123) 57,878
Reorganization items:
Professional fees - (6,045) 6,045 (e) -
Fresh-start revaluation - (5,985) 5,985 (e) -
Interest income - 2,788 (2,788) (e) -
------------------------------------------------------
Earnings (loss) before income taxes
and extraordinary gain 62,844 (8,085) 3,119 57,878
Income taxes 26,609 - 1,228 (f) 27,837
------------------------------------------------------
36,235 (8,085) 1,891 30,041
Extraordinary gain on discharge of
prepetition debt - 258,239 (258,239) (e) -
------------------------------------------------------
Net earnings 36,235 250,154 (256,348) 30,041
Preferred dividend requirements - (1,662) 1,662 (e) -
------------------------------------------------------
Net earnings applicable to
common shareholders $36,235 $248,492 ($254,686) $ 30,041
======================================================
Primary earnings per share
applicable to common
shareholders $ 2.58 (g) $ 2.14 (g)
======= ========
Fully-diluted earnings per share
applicable to common
shareholders $ 2.45 (g) $ 2.03 (g)
======= ========
</TABLE>
F-10
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
_____________________________________________________________________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. Pro Forma Combining Statements of Operations (continued)
(a) Reflects the impact of the revaluation and/or the change in the related
estimated remaining useful lives of property and equipment, property under
capital leases and beneficial lease rights in connection with fresh-start
reporting, the pro forma twelve month amortization of the Successor Company's
reorganization value in excess of amounts allocable to identifiable assets and
the elimination of the Predecessor Company's goodwill amortization.
(b) Reflects the impact on interest expense due to the revaluation of capital
lease obligations.
(c) Reflects interest expense on the senior notes, the revolving credit
facility based on estimated cash requirements and the amortization of deferred
financing costs related to securing the revolving credit facility.
(d) Reflects pro forma interest income after taking into consideration
distributions in accordance with the POR.
(e) Reflects elimination of reorganization items, gain on debt discharge and
preferred dividend requirements.
(f) Reflects the income tax effect of the pro forma adjustments.
(g) Pro forma primary and fully-diluted earnings per share were calculated based
on an estimated fifty-two week weighted average shares outstanding for the
period ended January 29, 1994 of 14,056,470 and 14,794,492, respectively.
4. Summary of Significant Accounting Policies
Basis of Reporting
The Company operates, through its wholly-owned subsidiary Hills Department
Store Company, a chain of discount department stores. The consolidated
financial statements include the accounts of the Successor Company and the
Predecessor Company and their wholly-owned subsidiaries. All significant
intercompany transactions and balances have been eliminated. Certain
Predecessor Company amounts were reclassified to conform to the Successor
Company presentation. The Company's fiscal year ends on the Saturday closest to
January 31. For financial reporting purposes, fiscal 1993 has been segregated
into two periods: the Successor Company seventeen weeks ended January 29, 1994
and the Predecessor Company thirty-five weeks ended October 2, 1993.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and highly liquid investments with
maturities of three months or less from the date of purchase and whose cost
approximates market value due to the short maturity of the investments.
Inventories
Inventories are valued using the retail method on the lower of last-in,
first-out (LIFO) cost or market basis. If the first-in, first-out cost method
of inventory had been used, inventories would have been
F-11
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
______________________________________________________________________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. Summary of Significant Accounting Policies (continued)
Inventories (continued)
$14,357,000 higher than reported at January 30, 1993. In connection with
fresh-start reporting, a new LIFO base layer has been established based on
inventory levels as of October 2, 1993 (see Note 2 of Notes to Consolidated
Financial Statements).
Depreciation and Amortization
Depreciation and amortization are provided on a straight-line basis over the
estimated useful lives of the related assets. Amortization of leasehold
improvements is provided on a straight-line basis over the shorter of the lease
term or the estimated useful life of the related asset.
Deferred Financing Costs
Deferred financing costs included in other assets are being amortized on a
straight-line basis over the life of the related debt. Accumulated
amortization of deferred financing costs was $807,000 for the Successor Company
at January 29, 1994 and $6,443,000 for the Predecessor Company at January 30,
1993.
Intangible Assets
Reorganization value in excess of amounts allocable to identifiable assets is
being amortized over twenty years on a straight-line basis. Accumulated
amortization was $3,407,000 at January 29, 1994. Predecessor Company goodwill
was being amortized over forty years on a straight-line basis. Accumulated
amortization was $29,395,000 at January 30, 1993.
Beneficial lease rights are amortized using the straight-line method over the
terms of the leases. Accumulated amortization of beneficial lease rights was
$271,000 for the Successor Company at January 29, 1994 and $21,115,000 for the
Predecessor Company at January 30, 1993.
Statement of Cash Flows
Supplemental disclosures of cash flow information are presented in the table on
the following page.
F-12
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
_______________________________________________________________________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. Summary of Significant Accounting Policies (continued)
<TABLE>
Statement of Cash Flows (continued)
<CAPTION>
Successor Predecessor Company
Company ___________________________________________
Seventeen Thirty-five Fiscal Year Fiscal Year
Weeks Ended Weeks Ended Ended Ended
January 29, October 2, January 30, February 1,
(in thousands) 1994 1993 1993 1992
___________________________________________________________
<S> <C> * <C> <C> <C>
Noncash investing and *
financing activities: *
*
Issuance of senior notes $160,000 * $ - $ - $ -
Issuance of preferred stock 100,000 * - - -
Cancellation of preferred stock - * 33,143 - -
Issuance of common stock and stock *
rights 194,000 * - - -
Cancellation of common stock - * 65,413 - -
Debt conversion to common stock - * - 10 8,850
Capital lease obligations, net 1,450 * - 988 4,532
Preferred stock accretion - * 1,662 2,432 2,395
*
Cash paid (received): *
*
Reorganization related *
professional fees 6,618 * 2,407 5,823 2,854
Interest 832 * 1,710 2,005 3,366
Income taxes (Note 16) 2,848 * 1,317 1,995 154
Interest received on available cash *
due to the Chapter 11 proceedings - * (2,643) (2,896) (1,072)
</TABLE>
<TABLE>
5. Property and Equipment
The components of property and equipment are listed below:
<CAPTION>
Successor Predecessor
Company Company
January 29, January 30,
(in thousands) 1994 1993
_________________________
<S> <C> * <C>
Land $ 3,430 * $ 2,148
Buildings 16,192 * 5,420
Leasehold improvements 33,400 * 65,896
Machinery, furniture and fixtures 81,781 * 138,520
Improvements in progress 1,813 * 6,846
-------- * --------
136,616 * 218,830
Less - accumulated depreciation and amortization (4,185) * (96,093)
-------- * --------
$132,431 * $122,737
======== * ========
</TABLE>
F-13
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
______________________________________________________________________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
<TABLE>
6. Other Accounts Payable and Accrued Expenses
Certain items now classified as other accounts payable and accrued expenses in
the Successor Company's balance sheet as of January 29, 1994 were included in
"Liabilities subject to compromise" in the Predecessor Company's balance sheet
as of January 30, 1993. Significant components of other accounts payable and
accrued expenses are presented below:
<CAPTION>
Successor Predecessor
Company Company
January 29, January 30,
(in thousands) 1994 1993
_______________________________
<S> <C> * <C>
Accrued payroll and related costs $ 25,261 * $22,371
Accrued insurance 22,388 * 12,836
Accrued Chapter 11 and related reorganization costs 50,430 * 15,930
Accrued distribution payable pursuant to the POR 25,838 * -
Other 79,448 * 39,043
-------- * -------
$203,365 * $90,180
======== * =======
</TABLE>
7. Revolving Credit Agreement
Hills Department Store Company ("HDSC"), a wholly-owned subsidiary of the
Company, entered into a three year unsecured Revolving Credit Agreement dated as
of October 4, 1993 (the "Facility") with Chemical Bank and a syndicate of 11
other banks for $225 million, of which up to $75 million is available as a
letter of credit facility. Borrowings under this Facility are limited by a
borrowing base, as defined, and bear interest, at the option of the borrower, at
(1) the highest of; Chemical Bank's Prime Rate plus 1-3/4%, the Federal Funds
Effective Rate, as defined, plus 2-1/4% and the Base CD Rate, as defined, plus
2-3/4% or (2) the Adjusted London Interbank Offered Rate (LIBOR), as defined,
plus 2-3/4%. If the Company meets certain economic performance tests, the
interest rate would be reduced by 1/4% as of July 30, 1994 and another 1/4% as
of July 29, 1995. In addition to various initial facility fees totalling $6.5
million paid at the commencement of the Facility, HDSC must pay commitment fees
at an annual rate of 1/2% on the average daily unused portion of the
commitment. HDSC must also pay letter of credit fees on the aggregate face
amount of outstanding trade letters of credit at an annual rate of 2% and on
the aggregate face amount of outstanding standby letters of credit at an
annual rate equal to the spread applicable to Adjusted LIBOR loans. All of the
common stock of the Company's subsidiaries are pledged as collateral for the
Facility and the Facility is guaranteed by the Company. The Facility also
contains, among other restrictions, the maintenance of certain financial
ratios, minimum net worth requirements and provisions limiting: business
combinations; the issuance of additional debt including capital lease
obligations; the redemption and repurchase of common and preferred stock; the
repurchase and prepayment of debt; the amount of rent expense; and the payment
of dividends. In addition, the Facility also requires, on a date (the
"Clean-Up Date") determined at the discretion of the Company between
December 1 and April 1 of each year, HDSC to pay or prepay all of the
outstanding loans and for a period of at least thirty consecutive days
following the Clean-Up Date (the "Clean-Up Period"), HDSC shall continue to
have no loans outstanding. At January 29, 1994, the Company has satisfied the
requirements of the Clean-Up Period, outstanding letters of credit totalled
$30.9 million and there was no outstanding working capital loan balance
under the Facility.
F-14
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
_______________________________________________________________________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
8. Senior Notes
Pursuant to the POR, the Company is issuing up to $160 million of unsecured
redeemable 10.25% Senior Notes ("Senior Notes") due September 30, 2003 with
interest accruing from August 1, 1993. Interest is payable semiannually
beginning March 31, 1994. The unsecured Senior Notes may be redeemed, at the
option of the Company, at prices ranging from 106% at October 1, 1993 and
declining by 1% on October 1 of each year to 100% at October 1, 1999 and
thereafter. Principal amounts of $25 million are subject to mandatory
redemption on March 31, 2002 and on March 31, 2003. In the event of a change in
control, as defined, the Company will be required to offer to redeem the
Senior Notes at a price of 101% of the principal amount. The Senior Notes
contain covenants which management believes are no more restrictive than the
terms of the Facility.
9. Lease Commitments
The Company's operations are conducted primarily in leased properties which
consist principally of retail outlets. Leases are generally for periods
between twenty to thirty years plus renewal options. Leases generally include
fixed rentals and rentals based on sales in excess of predetermined levels.
<TABLE>
The composition of property under capital leases, net of accumulated
amortization, is shown below:
<CAPTION>
Successor Predecessor
Company Company
January 29, January 30,
(in thousands) 1994 1993
____________________________
<S> <C> * <C>
Retail outlets $131,408 * $173,180
Other 6,476 * 18,753
-------- * --------
137,884 * 191,933
Less - accumulated amortization (3,408) * (58,962)
-------- * --------
Property under capital leases, net $134,476 * $132,971
======== * ========
</TABLE>
<TABLE>
Consolidated rental expense under operating leases and rental expense based on
sales in excess of predetermined levels under capital leases are presented
below:
<CAPTION>
Successor Predecessor Company
Company __________________________________________
Seventeen Thirty-five Fiscal Year Fiscal Year
Weeks Ended Weeks Ended Ended Ended
January 29, October 2, January 30, February 1,
(in thousands) 1994 1993 1993 1992
__________________________________________________________
<S> <C> * <C> <C> <C>
Capital leases: *
Rental based on sales $ 574 * $ 843 $ 1,029 $ 1,318
Operating leases: *
Minimum facility rentals 8,223 * 16,501 21,395 22,587
Equipment and other *
rentals 6,795 * 10,820 16,791 15,553
Rental based on sales 481 * 702 1,442 1,226
------- * ------- ------- -------
Consolidated rental *
expense $16,073 * $28,866 $40,657 $40,684
======= * ======= ======= =======
</TABLE>
F-15
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
_______________________________________________________________________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
9. Lease Commitments (continued)
-----------------------------
<TABLE>
Minimum future lease commitments under noncancelable leases in effect at
January 29, 1994 are listed below:
<CAPTION>
Capital Operating
(in thousands) Leases Leases Total
________________________________________
<S> <C> <C> <C>
Fiscal years:
1994 $ 20,235 $ 36,877 $ 57,112
1995 20,187 30,600 50,787
1996 19,111 26,926 46,037
1997 17,398 26,592 43,990
1998 16,971 25,574 42,545
Thereafter 213,403 169,176 382,579
----------------------------------------
Minimum rental commitments 307,305 $315,745 $623,050
=======================
Less amount representing interest (171,147)
--------
Present value of net minimum
lease payments 136,158
Less-current portion (5,532)
---------
$ 130,626
=========
</TABLE>
10. Pension Plan
------------
The Company sponsors a contributory retirement plan (the "Plan") which covers
substantially all employees of the Company and its subsidiaries. The benefit
formula for the Plan is based on years of credited service and salary levels,
as defined. It is the policy of the Company to fund the cost of the Plan,
including prior service costs, within Internal Revenue Service funding limits.
The assets of the Plan were invested in equity and fixed income securities as
well as short-term investment funds at January 29, 1994.
<TABLE>
Net pension expense includes the following components:
<CAPTION>
Successor Predecessor Company
Company __________________________________________
Seventeen Thirty-five Fiscal Year Fiscal Year
Weeks Ended Weeks Ended Ended Ended
January 29, October 2, January 30, February 1,
(in thousands) 1994 1993 1993 1992
_________________________________________________________
<S> <C> * <C> <C> <C>
Service cost $927 * $ 1,855 $2,543 $2,967
Interest cost on projected *
benefit obligation 844 * 1,688 2,143 2,173
Actual return on plan assets (569) * (1,581) (1,676) (2,906)
Net amortization and deferral (238) * (317) (798) 1,101
---- * -------------------------------------
Net pension expense $964 * $ 1,645 $2,212 $3,335
==== * =====================================
</TABLE>
In connection with fresh-start reporting, the Company adjusted its pension
liability to its estimated fair value by decreasing the obligation by
approximately $8.7 million.
F-16
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
_______________________________________________________________________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
10. Pension Plan (continued)
<TABLE>
The following table sets forth the Plan's funded status and amounts recorded in
other long-term liabilities in the balance sheets:
<CAPTION>
Successor Predecessor
Company Company
January 29, January 30,
(in thousands) 1994 1993
__________________________________
<S> <C> * <C>
Vested benefit obligation $20,037 * $14,402
Nonvested accumulated benefits 1,022 * 1,540
------- * -------
Accumulated benefit obligation $21,059 * $15,942
======= * =======
Projected benefit obligation $37,620 * $31,833
Plan assets at market value 32,732 * 27,705
------- * -------
Projected benefit obligation in *
excess of plan assets 4,888 * 4,128
Unrecognized prior service cost - * 3,001
Unrecognized gain (loss) (238) * 4,124
------- * -------
Pension liability $ 4,650 * $11,253
======== * =======
</TABLE>
The discount rate and rate of increase in future compensation levels used in
determining the actuarial present value of projected benefit obligations were
7.0% and 5.5%, respectively. The expected long-term rate of return on plan
assets used in determining net pension expense was 8.0%.
On February 24, 1994, the Company's Board of Directors authorized the
termination of the Plan, subject to the approval of such termination by the
Pension Benefit Guaranty Corporation and the Internal Revenue Service. The
termination is intended to be effective April 30, 1994. Participants' vested
pension benefits will be calculated based on all credited service, pension
earnings and contributions up to April 30, 1994. There will be no asset
reversion to the Company as plan assets in excess of benefit obligations, as
adjusted for the termination of the Plan, will be allocated to participants.
11. Postretirement Benefits Other than Pensions
In fiscal 1992, the Predecessor Company adopted statement of Financial
Accounting Standards No. 106: "Employers' Accounting for Postretirement
Benefits Other Than Pensions" ("SFAS 106"). This statement requires accrual
of postretirement benefits (such as health care benefits) during the years an
employee provides services. The impact of accruing such costs in fiscal 1993
and 1992 operations is not material. The Company, consistent with the practice
of the Predecessor Company, continues to fund benefit costs principally on a
pay-as-you-go basis, with the retiree paying a portion of the costs.
12. Hills Stores Series A Convertible Preferred Stock
The Company is authorized to issue 15,000,000 shares of preferred stock, par
value of $0.10 per share. Pursuant to the POR, a total of 5,000,000 of such
shares are being issued as payment and cancellation of prepetition liabilities
and interests and designated as Hills Stores Series A Convertible Preferred
Stock (the "Preferred Stock"). As of January 29, 1994, a total of 1,090,806
shares of the 5,000,000 shares of the Preferred Stock remain to be issued
pending resolution of prepetition claims and interests. The
F-17
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
_______________________________________________________________________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
12. Hills Stores Series A Convertible Preferred Stock (continued)
Company may redeem, at its option prior to October 4, 2008, all or part of the
outstanding shares of the Preferred Stock at $20 per share; and in any case
shall redeem all outstanding shares of the Preferred Stock on October 4, 2008
at $20 per share. The Preferred Stock is convertible by the holders, at any
time, into Hills Stores Common Stock at a rate of one share of Hills Stores
Common Stock for each share of the Preferred Stock, subject to antidilution
adjustments. Each holder of the Preferred Stock has one vote per share in the
same class as the holders of Hills Stores Common Stock. The holders of the
Preferred Stock are entitled to dividends when and if declared by the Board of
Directors; however, dividend payments are restricted under the terms of the
Facility and Senior Notes. The Company does not expect to pay dividends in the
foreseeable future.
Upon dissolution or liquidation of the Company, the holders of the Preferred
Stock will be entitled to receive $20 per share out of the assets of the
Company available for distribution to shareholders, in preference to the
holders of Hills Stores Common Stock and any other class or series of capital
stock of the Company that is junior to the Preferred Stock in respect of the
right to participate in any distribution of assets upon dissolution or
liquidation.
13. Hills Stores Common Stock
The Company is authorized to issue 50,000,000 shares of Hills Stores Common
Stock, par value of $0.01 per share. Pursuant to the POR, a total of 9,000,000
shares are being issued as payment for prepetition liabilities and cancellation
of old preferred stock interests. As of January 29, 1994, a total of 257,857
shares of the 9,000,000 shares of common stock remain to be issued pending
resolution of prepetition claims and interests. Each holder of Hills Stores
Common Stock has one vote per share and is entitled to dividends when and if
declared by the Board of Directors. Dividend payments are restricted under the
terms of the Facility and Senior Notes. Hills Stores does not expect to pay
dividends in the foreseeable future.
In connection with the confirmation of the POR, the Company adopted an
incentive and nonqualified stock option plan (the "Stock Option Plan") as of
the Effective Date. The Stock Option Plan provides for the grant of
nonqualified stock options or incentive stock options. A total of 1,053,763
shares of Hills Stores Common Stock have been reserved for grants of options
under the Stock Option Plan as of the Effective Date. The option price is
established as the market price of the Hills Stores Common Stock on the date of
each grant. During the Successor Company's seventeen week period ended January
29, 1994, options to purchase 886,500 shares were granted at prices varying
from $18.00 to $18.25 per share and options to purchase 10,000 shares were
forfeited, leaving 177,263 shares available for future grants of options at
January 29, 1994. The options are subject to a five year vesting schedule with
initial vesting beginning one year from the date of grant.
14. Series 1993 Stock Rights
Pursuant to the POR, the Series 1993 Stock Rights (the "Stock Rights") were
issued as of the Effective Date under Stock Right Agreements. Each Stock Right
entitles the holder to acquire, at $0.01 per share, shares of Hills Stores
Common Stock, subject to antidilution adjustments, as determined pursuant to a
formula which is based on the Company's pro forma utilization of certain tax
benefits as defined in the Stock Right Agreements. As of the Effective Date,
700,000 shares of Hills Stores Common Stock have been reserved for issuance
upon exercise of the Stock Rights. Shares under the Stock Right Agreements are
not available for issuance until vested.
F-18
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
_______________________________________________________________________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
15. Series 1993 Warrants
Pursuant to the POR, Series 1993 Warrants (the "Warrants") were issued on the
Effective Date. Each Warrant entitles the holder to purchase, subject to
antidilution adjustments, one share of Hills Stores Common Stock at $30 per
share. Initially, 432,990 shares of Hills Stores Common Stock were reserved
for issuance upon exercise of the Warrants. The Warrants are callable by the
Company at $.01 per Warrant at any time after October 4, 1998 if the average
closing price of Hills Stores Common Stock, subject to antidilution
adjustments, for a period of thirty consecutive trading days is equal to or
greater than $35 per share. The Warrants will expire on October 4, 2000.
16. Income Taxes
The Predecessor Company adopted the Financial Accounting Standards Board's
Statement of Financial Accounting Standards No. 109: "Accounting for Income
Taxes" ("SFAS 109") during the thirty-five weeks ended October 2, 1993. Under
SFAS 109, deferred taxes are computed on the difference between the bases of
assets and liabilities for tax reporting purposes and their corresponding bases
for financial reporting purposes. Deferred tax assets, net of appropriate
valuation reserves, may be recorded. The Predecessor Company elected to adopt
SFAS 109 prospectively in fiscal 1993 and, as a result, prior periods have not
been restated.
<TABLE>
Temporary differences and carryforwards which give rise to significant deferred
tax assets and liabilities at January 29, 1994, are as follows:
<CAPTION>
Deferred Tax Deferred Tax
(in thousands) Asset Liability
____________________________________
<S> <C> * <C>
Net operating loss and tax *
credit carryforwards $84,016 * $ -
Capital lease obligations 57,186 * -
Assets under capital leases - * 56,479
Accrued expenses 25,446 * -
Beneficial lease rights 21,059 * -
Property and equipment - * 6,710
Inventory - * 2,588
Other 20,040 * -
-------- * -------
Total deferred taxes 207,747 * 65,777
Valuation allowance (141,970) * -
-------- * -------
Net deferred taxes $ 65,777 * $65,777
======== * =======
</TABLE>
The consummation of the POR resulted in a change in ownership for federal
income tax purposes. As a result, the Company's ability to utilize its net
operating loss and tax credit carryforwards will be subject to an annual
limitation of approximately $15.5 million, determined immediately after the
emergence from Chapter 11 by multiplying the federal long-term tax exempt bond
rate by the aggregate fair market value of the Hills Stores Common Stock. For
financial reporting purposes, any reduction of the valuation allowance of
$142.0 million will not be credited to the tax provision, but instead may
reduce reorganization value in excess of amounts allocable to identifiable
assets. Due to the uncertainty surrounding the realization of these favorable
tax attributes, the Company has fully reserved its net deferred tax assets.
F-19
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
_______________________________________________________________________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
16. Income Taxes (continued)
<TABLE>
The Company's net operating loss and tax credit carryforwards at January 29,
1994 expire as follows:
<CAPTION>
(in thousands)
Net Tax
Operating Losses Credits
__________________________
<S> <C> <C>
Fiscal years:
2000 $ - $ 413
2001 - 797
2002 - 664
2003 - 1,369
2004 920 2,196
2005 - 1,547
2006 103,886 949
2007 56,848 797
2008 15,820 747
-----------------------
$177,474 $9,479
=======================
</TABLE>
<TABLE>
The income tax provision in each of the periods presented reflects an effective
tax rate that differs from the statutory federal income tax rate for those
periods. For net earnings (loss) from operations before extraordinary items,
the table below reconciles the statutory federal income tax rate to the
effective tax rate.
<CAPTION>
Successor Predecessor Company
Company _________________________________________
Seventeen Thirty-five Fiscal Fiscal
Weeks Ended Weeks Ended Year Ended Year Ended
January 29, October 2, January 30, February 1,
1994 1993 1993 1992
_________________________________________________________
<S> <C> * <C> <C> <C>
Statutory tax rate 35.0% * (35.0%) 34.0% 34.0%
*
State and local income *
taxes, net of federal *
tax benefit 6.7 * (6.5) 9.3 8.0
Goodwill 0.9 * 11.9 1.9 4.7
Targeted jobs credit *
and other, net (0.3) * 2.2 1.1 (1.5)
Reorganization fees - * 26.2 3.5 10.3
Loss producing no current *
tax benefit - * 1.2 - -
---- * --------------------------------
Effective tax rate 42.3% * - 49.8% 55.5%
==== * ================================
</TABLE>
F-20
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
_______________________________________________________________________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
16. Income Taxes (continued)
<TABLE>
The provision for income taxes consists of the following components:
<CAPTION>
Successor Predecessor Company
Company ________________________________________
Seventeen Thirty-five Fiscal Fiscal
Weeks Ended Weeks Ended Year Ended Year Ended
January 29, October 2, January 30, February 1,
(in thousands) 1994 1993 1993 1992
_______________________________________________________
<S> <C> * <C> <C> <C>
Current provision: *
Federal $ - * $ - $ - $ -
State and local 2,328 * - 1,060 57
------- * -------------------------------------
2,328 * - 1,060 57
*
Deferred provision: *
Federal - * - 18,860 9,793
State and local - * - 6,668 2,687
------- * -------------------------------------
- * - 25,528 12,480
Tax benefit applied to reduce *
reorganization value in excess *
of amounts allocable to *
identifiable assets 24,281 * - - -
*
Tax benefit of net *
operating loss carryforwards: *
Federal - * - (18,860) (9,793)
State and local - * - (4,019) (2,687)
------- * -------------------------------------
- * - (22,879) (12,480)
------- * -------------------------------------
Total taxes $26,609 * $ - $ 3,709 $ 57
======= * =====================================
</TABLE>
The valuation allowance was reduced by $24.3 million in the seventeen weeks
ended January 29, 1994. As this reduction related to the realization of the
Predecessor Company's deferred tax assets, the benefit was credited to
"Reorganization value in excess of amounts allocable to identifiable assets".
As stated in Note 1, the Company recorded an extraordinary gain of $258.2
million on the extinguishment of debt for financial reporting purposes in the
third quarter of fiscal 1993. Because the debt was discharged pursuant to the
Chapter 11 filing, the Company did not record any income tax expense on the
gain from the extinguishment of the debt in the period ended October 2, 1993.
The Internal Revenue Service has examined the Company's tax returns for the
periods January 1988 through January 1990, has tentatively settled with the
Company, and no tax deficiency is expected.
F-21
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
_______________________________________________________________________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
17. Earnings Per Share
Primary earnings per share of the Successor Company for the seventeen weeks
ended January 29, 1994 was computed based on the weighted average number of
common and common equivalent shares assumed to be outstanding during the
period, assumed conversion of the Preferred Stock and the assumed exercise of
stock options. Such shares amounted to 14,056,470. Fully-diluted earnings per
share for the period also assumes the exercise of the Stock Rights. Such
shares amounted to 14,794,492. Exercise of the Warrants are not assumed as
their exercise would be antidilutive. The weighted average number of shares
used for the seventeen weeks ended January 29, 1994 reflects all shares of
common and preferred stock intended to be issued in accordance with the POR.
Primary earnings per share of the Predecessor Company for the thirty-five weeks
ended October 2, 1993 and fiscal years ended January 30, 1993 and February 1,
1992 was computed using the weighted average common and common equivalent
shares outstanding. Such shares amounted to 19,757,390, 19,757,339 and
19,715,064, respectively. Fully-diluted earnings per share for the periods
assumes the conversion of the 11% Convertible Junior Subordinated Debentures.
Such shares amounted to 21,981,683 for all three periods.
18. Commitments and Contingencies
The Company is involved in various suits and claims in the ordinary course of
business. The Company is also actively resolving certain disputed prepetition
claims related to the POR. Management does not believe that the disposition of
such suits and claims will have a material adverse effect upon the continuing
operations and financial position of the Company.
19. Quarterly Financial Information (unaudited)
As discussed in Note 2, the Company adopted fresh-start reporting as of October
2, 1993. Under fresh-start reporting, a new reporting entity is created and
recorded amounts of assets and liabilities are adjusted to reflect their
estimated fair values. Quarterly financial information for the periods prior
to October 2, 1993, have been designated as those of the Predecessor Company.
Black lines have been drawn to separate the Successor Company financial
information from the Predecessor Company financial information to signify that
they are those of a new reporting entity and have been prepared on a basis not
comparable to prior periods. The financial information for the Successor
Company four weeks ended October 30, 1993 reflects an adjustment for income
taxes in accordance with SOP 90-7. Prior to this adjustment, amounts reported
for primary and fully-diluted earnings per common share were $0.50 and $0.48,
respectively.
Quarterly financial information for the fiscal years 1993 and 1992 are
presented on the following pages.
F-22
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
_______________________________________________________________________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
19. Quarterly Financial Information (unaudited) (continued)
<TABLE>
<CAPTION>
(in thousands, except per share amounts)
Predecessor Company Successor Company
___________________________________ ________________________
Nine Weeks Four Weeks
Ended Ended
First Second October 2, October 30, Fourth
Quarter Quarter 1993 1993 Quarter
_______________________________________________________________________
<S> <C> <C> <C> <C> <C>
Fiscal 1993
Net sales $340,417 $357,285 $295,146 * $145,691 $626,994
=================================== * =======================
Gross profit $ 93,356 $100,856 $ 88,337 * $ 41,838 $181,196
=================================== * =======================
Earnings (loss) applicable to common *
shareholders before extraordinary *
gain ($11,674) ($4,899) $ 6,826 * $ 4,009 $ 32,226
Extraordinary gain on debt discharge - - 258,239 * - -
----------------------------------- * -----------------------
Net earnings (loss) applicable to *
common shareholders ($11,674) ($4,899) $ 265,065 * $ 4,009 $ 32,226
=================================== * =======================
Primary earnings (loss) per *
common share: *
Earnings (loss) applicable to common *
shareholders before extraordinary *
gain ($ 0.59) ($0.25) $ 0.35 * $ 0.29 $ 2.29
Extraordinary gain on debt discharge - - 13.07 * - -
----------------------------------- * -----------------------
Net earnings (loss) applicable to *
common shareholders ($ 0.59) ($0.25) $ 13.42 * $ 0.29 $ 2.29
=================================== * =======================
Fully-diluted earning (loss) *
per common share: *
Earnings (loss) applicable to common *
shareholders before extraordinary *
gain ($ 0.59) ($0.25) $ 0.31 * $ 0.27 $ 2.17
Extraordinary gain on debt discharge - - 11.75 * - -
----------------------------------- * -----------------------
Net earnings (loss) applicable *
to common shareholders ($ 0.59) ($0.25) $ 12.06 * $ 0.27 $ 2.17
=================================== * =======================
</TABLE>
F-23
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
_______________________________________________________________________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
19. Quarterly Financial Information (unaudited) (continued)
<TABLE>
<CAPTION>
Predecessor Company
_______________________________________________________
First Second Third Fourth
Quarter Quarter Quarter Quarter
_______________________________________________________
<S> <C> <C> <C> <C>
Fiscal 1992
Net sales $359,053 $358,943 $447,366 $584,904
========================================================
Gross profit $ 95,800 $101,266 $130,424 $172,964(1)
========================================================
Earnings (loss) applicable
to common shareholders
before extraordinary credit ($ 14,613) ($ 7,985) $ 18,524 $ 28,459
Extraordinary credit - benefit
of NOL carryforward - - - 22,879
--------------------------------------------------------
Net earnings (loss) applicable
to common shareholders ($ 14,613) ($ 7,985) $ 18,524 $ 51,338
========================================================
Primary earnings (loss)
per common share:
Earnings (loss) applicable to
common shareholders
before extraordinary credit ($ 0.74) ($ 0.40) $ 0.94 $ 1.44
Extraordinary credit - benefit
of NOL carryforward - - - 1.16
--------------------------------------------------------
Net earnings (loss) applicable
to common shareholders ($ 0.74) ($ 0.40) $ 0.94 $ 2.60
========================================================
Fully-diluted earning (loss)
per common share:
Earnings (loss) applicable
to common shareholders
before extraordinary credit ($ 0.74) ($ 0.40) $ 0.84 $ 1.30
Extraordinary credit - benefit
of NOL carryforward - - - 1.04
--------------------------------------------------------
Net earnings (loss) applicable
to common shareholders ($ 0.74) ($ 0.40) $ 0.84 $ 2.34
========================================================
<FN>
(1) During the fourth quarter of fiscal 1992, the Company recorded a net LIFO
adjustment which increased gross profit by approximately $7.0 million.
</TABLE>
F-24
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
of Hills Stores Company and Subsidiaries:
Our report on the consolidated financial statements of Hills Stores Company and
Subsidiaries is included on page F-1 of this Form 10-K. In connection with our
audits of such financial statements, we have also audited the related financial
statement schedules listed in the index on page 17 of this Form 10-K.
In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information required to be
included therein.
Boston, Massachusetts
March 22, 1994
Coopers & Lybrand
S-1
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
________________________________________________________________________________
<TABLE>
SCHEDULE V - PROPERTY, PLANT AND EQUIPMENT
For the Successor Company Seventeen Weeks Ended January 29, 1994 and the
Predecessor Company Thirty-five Weeks Ended October 2, 1993 and Fiscal
Years Ended January 30, 1993 and February 1, 1992
<CAPTION>
Balance at Balance at
Beginning Additions Retirements End of
(in thousands) of Period at Cost or Sales Other Period
_______________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
SUCCESSOR COMPANY
Seventeen Weeks Ended January 29, 1994:
Land $ 3,430 $ - $ - $ - $ 3,430
Buildings 16,192 - - - 16,192
Leasehold improvements 33,046 354 - - 33,400
Machinery, furniture and fixtures 79,079 2,789 (87) - 81,781
Improvements in progress 1,886 (73) - - 1,813
-------- ------- ------- --------- --------
Total $133,633 $ 3,070 ($ 87) $ - $136,616
======== ======= ======= ========= ========
Property under capital leases $137,884 $ - $ - $ - $137,884
======== ======= ======= ========= ========
==============================================================================================================
PREDECESSOR COMPANY
Thirty-five Weeks Ended October 2, 1993:
Land $ 2,148 $ 571 $ - $ 711 (1) $ 3,430
Buildings 5,420 2,203 - 8,569 (1) 16,192
Leasehold improvements 65,896 6,125 (189) (38,786) (1) 33,046
Machinery, furniture and fixtures 138,520 23,223 (1,962) (80,702) (1) 79,079
Improvements in progress 6,846 (4,960) - - 1,886
-------- ------- ------- --------- --------
Total $218,830 $27,162 ($2,151) ($110,208) $133,633
======== ======= ======= ========= ========
Property under capital leases $191,933 $ - ($8,361) ($ 45,688) (1) $137,884
======== ======= ======= ========= ========
Fiscal Year Ended January 30, 1993:
Land $ 2,148 $ - $ - $ - $ 2,148
Buildings 5,420 - - - 5,420
Leasehold improvements 58,453 7,443 - - 65,896
Machinery, furniture and fixtures 111,386 27,272 (138) - 138,520
Improvements in progress 1,495 5,351 - - 6,846
-------- ------- ------- --------- --------
Total $178,902 $40,066 ($ 138) $ - $218,830
======== ======= ======= ========= ========
Property under capital leases $190,927 $ 1,006 $ - $ - $191,933
======== ======= ======= ========= ========
Fiscal Year Ended February 1, 1992:
Land $ 2,148 $ - $ - $ - $ 2,148
Buildings 5,420 - - - 5,420
Leasehold improvements 54,485 4,285 (2) (315) (2) 58,453
Machinery, furniture and fixtures 103,941 10,132 (277) (2,410) (2) 111,386
Improvements in progress 3,045 (2,930) - 1,380 (2) 1,495
-------- ------- ------- --------- --------
Total $169,039 $11,487 ($ 279) ($ 1,345) $178,902
======== ======= ======= ========= ========
Property under capital leases $188,397 $ 8,552 ($5,712) ($ 310) $190,927
======== ======= ======= ========= ========
<FN>
(1) Represents fresh-start adjustments.
(2) Represents reclassifications within property and equipment, net.
</TABLE>
S-2
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
________________________________________________________________________________
<TABLE>
SCHEDULE VI - ACCUMULATED DEPRECIATION AND AMORTIZATION OF PROPERTY,
PLANT AND EQUIPMENT
For the Successor Company Seventeen Weeks Ended January 29, 1994 and the
Predecessor Company Thirty-five Weeks Ended October 2, 1993 and Fiscal
Years Ended January 30, 1993 and February 1, 1992
<CAPTION>
Balance at Balance at
Beginning Additions Retirements End of
(in thousands) of Period at Cost or Sales Other Period
__________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
SUCCESSOR COMPANY
Seventeen Weeks Ended January 29, 1994:
Buildings $ - $ 197 $ - $ - $ 197
Leasehold improvements - 723 - - 723
Machinery, furniture and fixtures - 3,297 ( 32) - 3,265
------- ------- ------- --------- -------
Total $ - $4,217 ($ 32) $ - $ 4,185
======= ======= ======= ========= =======
Property under capital leases $ - $3,408 $ - $ - $ 3,408
======= ======= ======= ========= =======
=======================================================================================================
PREDECESSOR COMPANY
Thirty-five Weeks Ended October 2, 1993:
Buildings $ 1,538 $ 180 $ - ($ 1,718) (1) $ -
Leasehold improvements 21,119 2,875 ( 65) ( 23,929) (1) -
Machinery, furniture and fixtures 73,436 12,623 ( 1,229) (84,830) (1) -
------- ------- ------- --------- -------
Total $96,093 $15,678 ($1,294) ($110,477) (1) $ -
======= ======= ======= ========= =======
Property under capital leases $58,962 $ 7,381 ($1,785) ($ 64,558) (1) $ -
======= ======= ======= ========= =======
Fiscal Year Ended January 30, 1993:
Buildings $ 1,322 $ 216 $ - $ - $ 1,538
Leasehold improvements 17,227 3,892 - - 21,119
Machinery, furniture and fixtures 57,518 16,012 ( 94) - 73,436
------- ------- ------- --------- -------
Total $76,067 $20,120 ($ 94) $ - $96,093
======= ======= ======= ========= =======
Property under capital leases $47,666 $11,296 $ - $ - $58,962
======= ======= ======= ========= =======
Fiscal Year Ended February 1, 1992:
Buildings $ 1,106 $ 216 $ - $ - $ 1,322
Leasehold improvements 14,072 3,413 - (258)(2) 17,227
Machinery , furniture and fixtures 45,458 13,392 ( 245) (1,087)(2) 57,518
------- ------- ------- --------- -------
Total $60,636 $17,021 ($ 245) ($ 1,345)(2) $76,067
======= ======= ======= ========= =======
Property under capital leases $38,896 $10,839 ($1,904) ($ 165) $47,666
======= ======= ======= ========= =======
<FN>
(1) Represents fresh-start adjustments.
(2) Represents reclassifications within property and equipment, net.
</TABLE>
S-3
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
________________________________________________________________________________
<TABLE>
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
For the Successor Company Seventeen Weeks Ended January 29, 1994 and
the Predecessor Company Thirty-five Weeks Ended October 2, 1993 and Fiscal Years Ended January 30, 1993 and February 1, 1992
<CAPTION>
Additions
Balance at Charged to Deductions Balance at
Beginning Cost and from End of
(in thousands) of Period Expense Reserves Other Period
__________________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
SUCCESSOR COMPANY
Seventeen Weeks Ended January 29, 1994:
Allowance for doubtful accounts $9,420 $ 73 ($3,996) $ - $ 5,497
====== ====== ======= ========= ==========
==================================================================================================================
PREDECESSOR COMPANY
Thirty-five Weeks Ended October 2, 1993:
Allowance for doubtful accounts $4,591 $1,433 ($2,216) $ 5,612 (1) $ 9,420
====== ====== ======= ========= ==========
Fiscal Year Ended January 30, 1993:
Allowance for doubtful accounts $3,993 $2,850 ($1,002) ($ 1,250) (2) $ 4,591
====== ====== ======= ========= ==========
Fiscal Year Ended February 1, 1992:
Allowance for doubtful accounts $3,860 $3,121 ($ 469) ($ 2,519) (2) $ 3,993
====== ====== ======= ========= ==========
<FN>
(1) Represents fresh-start adjustments.
(2) Represents reclassifications.
</TABLE>
S-4
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
________________________________________________________________________________
<TABLE>
SCHEDULE IX - SHORT TERM BORROWINGS
For the Successor Company Seventeen Weeks Ended January 29, 1994 and
the Predecessor Company Thirty-five Weeks Ended October 2, 1993 and Fiscal Years Ended January 30, 1993 and February 1, 1992
<CAPTION>
Weighted
Balance at Average Maximum Amount Average Amount Weighted Average
End Interest Outstanding Outstanding Interest Rate
(in thousands) of Period Rate During the Period During the Period During the Period
___________________________________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
SUCCESSOR COMPANY
Seventeen Weeks Ended January 29, 1994:
Revolving Credit Agreement $ - 7.75% $ 56,000 $12,857 6.87%
==== ==== ======== ======= ====
===================================================================================================================================
PREDECESSOR COMPANY
Thirty-five Weeks Ended October 2, 1993:
Debtor in Possession Financing $ - 8.00% $ - $ - -
==== ==== ======== ======= ====
Fiscal Year Ended January 30, 1993:
Debtor in Possession Financing $ - 8.00% $ 7,000 $ 236 8.11%
==== ==== ======== ======= ====
Fiscal Year Ended February 1, 1992:
Debtor in Possession Financing $ - 8.50% $ 90,000 $21,052 9.41%
==== ==== ======== ======= ====
</TABLE>
Note: The average amount outstanding during the seventeen weeks ended January
29, 1994, thirty-five weeks ended October 2, 1993 and fiscal years ended
January 30, 1993 and February 1, 1992 were calculated by dividing total
daily borrowings by the number of days in the fiscal period. The
average interest rates for the same fiscal periods were
calculated by dividing actual interest expense by the average amount
outstanding and annualizing the result.
S-5
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
________________________________________________________________________________
<TABLE>
SCHEDULE X - SUPPLEMENTARY INCOME STATEMENT INFORMATION
For the Successor Company Seventeen Weeks Ended January 29, 1994 and
the Predecessor Company Thirty-five Weeks Ended October 2, 1993, Fiscal Years Ended January 30, 1993 and February 1, 1992
<CAPTION>
Successor Predecessor
Company Company
Seventeen Thirty-five
Weeks Ended Weeks Ended Fiscal Fiscal
(in thousands) January 29, 1994 October 2, 1993 1992 1991
________________________________________________________________________________________
<S> <C> <C> <C> <C>
Media Advertising Costs $ 12,978 * $18,318 $ 31,153 $ 28,836
======== * ======= =========== ==========
</TABLE>
S-6
<PAGE>
EXHIBIT INDEX
Certain of the exhibits listed hereunder have previously been filed with the
Commission as exhibits to certain registration statements and periodic reports
set forth in the footnotes following this exhibit list and are hereby
incorporated by reference pursuant to Rule 411 promulgated under the Securities
Act and Rule 24 of the Commission's Rules of Practice. The location of each
document so incorporated by reference is indicated by footnote.
<TABLE>
<S> <C>
2.1(3) First Amended Consolidated Plan of Reorganization, dated as of July
16, 1993.
2.2(3) September 10, 1993 Amendment to such Plan of Reorganization.
3.1(1) Restated Certificate of Incorporation of the Company, as amended.
3.2(1) Amended and Restated By-Laws of the Company.
4.1(1) Provisions of the Restated Certificate of Incorporation of the Company
relating to its Series A Convertible Preferred Stock.
4.2 Form of Series 1993 Stock Right. (Filed herewith)
4.3(1) Indenture relating to the 10.25% Senior Notes due 2003 of the Company.
4.4(2) Series 1993 Warrant Agreement dated October 4, 1993 between the
Company and Chemical Bank, as warrant agent.
10.1(4) * Retention Agreement with Norman S. Matthews, dated April 30, 1991.
10.2(4) * Undated Employment Agreement between Hills Stores and Michael Bozic
(executed in April 1991).
10.3(4) * Employment Agreement with E. Jackson Smailes, effective September 15,
1992.
10.4(4) * Employment Agreement with Robert J. Stevenish, effective December 14,
1992.
10.5(4) * Employment Agreement with Michael Bozic, dated March 10, 1993.
10.6(4) * Consulting Agreement with Norman S. Matthews, dated March 10, 1993.
10.7(4) * Form of individual Employment Agreements entered into in March 1993
with, respectively, Messrs. Reen, Samuto, Smailes and Stevenish.
10.8 * 1993 Incentive and Nonqualified Stock Option Plan. (Filed herewith)
10.9(2) Credit Agreement dated as of October 4, 1993 among HDSC, Hills Stores
Company, the Lenders named therein and Chemical Bank, as
Administrative Agent and Fronting Bank.
11.1 Computation of earnings per share. (Filed herewith)
21 Subsidiaries. (Filed herewith)
</TABLE>
<PAGE>
<TABLE>
<S> <C>
24 Powers of Attorney of directors and officers of the Company. (Filed herewith) * Executive Compensation Plans and
Arrangements.
_______________
<FN>
1. Incorporated by reference from the Form 8-A of the Company filed on October 5, 1993.
2. Incorporated by reference from the Report on Form 8-K of the Company dated October 4, 1993.
3. Incorporated by reference from the Report on Form 8-K of Hills Department Stores, Inc. dated September 10, 1993
(same Commission File No. 1-9505)
4. Incorporated by reference from the Annual Report on Form 10-K of Hills Department Stores, Inc. for the fiscal
year ended January 30, 1993.
</TABLE>
<PAGE>
EXHIBIT 4.2
Dated: _________ ___, 1993
SERIES 1993 STOCK RIGHT
To Purchase _____ Shares of Common Stock of
HILLS STORES COMPANY,
Expiring July 31, 2018
THIS IS TO CERTIFY THAT, for value received, __________________________ or
registered assigns (the "Holder") is entitled to purchase from Hills Stores
Company, a Delaware corporation ("Hills"), from time to time until July 31,
2018 at the place where the stock Right Agency is located, at the Exercise
Price, the number of shares of common stock, par value $.01 per share (the
"Common Stock"), of Hills shown above (the "Face Amount"), or such lesser
number as shall then constitute Exercisable Shares (as herein defined), all
subject to adjustment and upon the terms and conditions hereinafter provided,
and is entitled also to exercise the other appurtenant rights, powers and
privileges hereinafter described.
This Stock Right is one of the Series 1993 Stock Rights (the "Stock Rights")
each in the same form and having the same terms as this Stock Right, entitling
the holders thereof to purchase up to an aggregate of 700,000 shares of Common
stock.
Certain terms used in this Stock Right are defined in Article IV.
ARTICLE I
EXERCISE OF STOCK RIGHTS
1.1 Exercisable Shares. Notwithstanding any contrary provision of this Stock
Right but subject to the provisions of Article III hereof, the number of shares
of Common Stock at any time issuable upon exercise of this Stock Right (the
"Exercisable Shares") shall be equal to (a) the lesser of (i) the aggregate
number of shares which on or before that date have become Issuable Shares (as
herein defined) and (ii) the Face Amount, less (b) the number of shares
theretofore issued upon exercise of this Stock Right.
1.2 Method of Exercise. To exercise this Stock Right in whole or in part,
the Holder shall deliver on any Business Day to Hills, at the Stock Right
Agency, (a) this Stock Right, (b) a written notice of such Holder's election to
exercise this Stock Right, which notice shall specify the number of shares of
Common Stock to be purchased (which shall not exceed the number of Exercisable
Shares as of the date of such notice and, except upon the final exercise of
this Stock Right, shall be a whole number of shares), the denominations of the
share certificate or certificates desired and the name or names in which such
certificates are to be registered, and (c) payment of the Exercise Price with
respect to such shares (which payment may be made, at the option of the Holder,
by cash or check).
Hills shall, as promptly as practicable and in any event within ten days after
receipt of such notice and payment, execute and deliver or cause to be executed
and delivered, in accordance with such notice, a certificate or certificates
representing the aggregate number of shares of Common Stock specified in said
notice together with cash in lieu of any fractional share to the extent
provided in Section 1.4. The share certificate or certificates so delivered
shall be in such denominations as may be specified in such notice, and shall be
issued in the name of the Holder or such other name or names as shall be
designated in such notice. This Stock Right shall be deemed to have been
exercised and such certificate or certificates shall be deemed to have been
issued, and such Holder or any other Person so designated to be named
<PAGE>
therein shall be deemed for all purposes to have become a holder of
record of shares, as of the date the aforementioned notice and payment is
received by Hills. If the Holder hereof exercises less than the full number of
shares evidenced by this Stock Right, Hills shall, at the time of presentation
of such certificate or certificates, note on the reverse thereof the number of
shares being exercised at that time and return such Stock Right as so annotated
to the Holder. Hills shall pay all expenses, taxes and other charges payable
in connection with the preparation, issuance and delivery of share
certificates, except that, if share certificates shall be registered in name or
names other than the name of the Holder, funds sufficient to pay all transfer
taxes payable as a result of such transfer shall be paid by the Holder at the
time of delivery of the aforementioned notice of exercise or promptly upon
receipt of a written request of Hills for payment.
1.3 Shares to Be Fully Paid and Nonassessable. All shares of Common Stock
issued upon the exercise of this Stock Right shall be validly issued, fully
paid and nonassessable and, if any Common Stock is then listed on any national
securities exchange (as defined in the Exchange Act) or quoted on NASDAQ, shall
be duly listed or quoted thereon, as the case may be.
1.4 No Fractional Shares to Be Issued. Hills shall not be required to issue
fractions of shares of Common Stock upon exercise of this Stock Right. If any
fraction of a share would, but for this Section, be issuable upon final
exercise of this Stock Right, in lieu of such fractional share, Hills shall pay
to the Holder, in cash, an amount equal to the same fraction of the Market
Price of one share of Common Stock on the Trading Day immediately prior to the
date of such exercise.
1.5 Reservation. Hills has duly reserved and will keep available for
issuance upon exercise of the Stock Rights the total number of shares of Common
Stock deliverable from time to time upon exercise of all Stock Rights from time
to time outstanding. Hills will not change the Common Stock from par value
$.01 per share to any higher par value which exceeds the Exercise Price then in
effect.
ARTICLE II
STOCK RIGHT AGENCY; TRANSFER, EXCHANGE AND
REPLACEMENT OF STOCK RIGHTS
2.1 Stock Right Agency. As long as any of the Stock Rights remain
outstanding, or until Hills has designated a new stock right agency upon notice
to each Holder of a Stock Right, Hills shall perform the obligations of and be
the stock right agency with respect to the Stock Rights (the "Stock Right
Agency") at its offices at 15 Dan Road, Canton, Massachusetts 02021-9128, or at
such other address as Hills shall specify by notice to the Holder.
2.2 Ownership of Stock Right. Hills may deem and treat the person in whose
name this Stock Right is registered as the Holder and owner hereof
(notwithstanding any notations of ownership or writing hereon made by any
person other than Hills) for all purposes and shall not be affected by any
notice to the contrary, until due presentment of this Stock Right for
registration of transfer as provided in this Article II.
2.3 Transfer of Stock Right. Hills agrees to maintain or cause to be
maintained at the Stock Right Agency books for the registration of transfers of
the Stock Rights. Transfer of this Stock Right and all rights hereunder shall
be registered, in whole or in part, on such books, upon surrender of this Stock
Right at the Stock Right Agency, together with a written assignment of this
Stock Right duly executed by the Holder or its duly authorized agent or
attorney, with (if the Holder is a natural person) signatures guaranteed by a
bank or trust company or a broker or dealer registered with the NASD, and funds
sufficient to pay any transfer taxes payable upon such transfer. Upon
surrender and, if required, such payment, the Stock Right Agency shall execute
and deliver a new Stock Right or Stock Rights in the name of the transferee or
transferees and in the denominations specified in the instrument of assignment
(which shall be whole numbers of shares only) and shall issue to the transferor
a new Stock Right evidencing the portion of this Stock Right not so assigned,
and this Stock Right shall promptly be canceled.
<PAGE>
2.4 Division or Combination of Stock Rights. This Stock Right may be divided
or combined with other Stock Rights upon presentment hereof and of any Stock
Right or Stock Rights with which this Stock Right is to be combined at the
Stock Right Agency, together with a written notice specifying the names and
denominations (which shall be whole numbers of shares only) in which the new
Stock Right or Stock Rights are to be issued, signed by the holders hereof and
thereof or their respective duly authorized agents or attorneys. Subject to
compliance with Section 2.3 as to any transfer which may be involved in the
division or combination, Hills shall execute and deliver a new Stock Right or
Stock Rights in exchange for the Stock Right or Stock Rights to be divided or
combined in accordance with such notice.
2.5 Loss, Theft, Destruction of Stock Right Certificates. Upon receipt of
evidence satisfactory to the Stock Right Agency of the ownership of and the
loss, theft, destruction or mutilation of any Stock Right and, in the case of
any such loss, theft or destruction, upon receipt of indemnity or security
satisfactory to the Stock Right Agency or, in the case of any such mutilation,
upon surrender and cancellation of such Stock Right, the Stock Right Agency
will make and deliver, in lieu of such lost, stolen, destroyed or mutilated
Stock Right, a new Stock Right of like tenor and representing the right to
purchase the same aggregate number of shares of Common Stock.
2.6 Expenses of Delivery of Stock Rights. Hills shall pay all expenses,
taxes (other than transfer taxes) and other charges payable in connection with
the preparation, issuance and delivery of Stock Rights hereunder.
ARTICLE III
ANTIDILUTION PROVISIONS
3.1 Adjustment Generally. The Exercise Price, the Division Constant (as used
in the definition of "Issuable Shares") and the number of shares of Common
Stock (or other securities or property) issuable upon exercise of this Stock
Right shall be subject to adjustment from time to time upon the occurrence of
certain events as provided in this Article III; provided that notwithstanding
anything to the contrary contained herein, the Exercise Price shall not be less
than the par value of the Common Stock; and provided further, that no such
adjustment contemplated by this Article III shall be made prior to the fifth
Business Day following the first anniversary of the date of this Stock Right,
but any adjustment which would, but for this provision, have been made prior to
such date, shall be made immediately after such date.
3.2 Common Stock Distributions; Reorganizations. In case Hills shall (i) pay
a dividend in, or make a distribution of, shares of Common Stock to holders of
Common Stock, (ii) subdivided its outstanding shares of Common Stock into a
larger number of shares of Common Stock, (iii) combine its outstanding shares
of Common Stock into a smaller number of shares of Common Stock, or (iv) issue
any of its shares of capital stock in a reclassification of the Common Stock
(including, without limitation, any such reclassification in connection with a
recapitalization or a consolidation or merger in which Hills is the continuing
corporation), the Face Amount and the number of shares of Common Stock or other
instruments purchasable upon exercise of this Stock Right immediately prior
thereto shall be adjusted so that the Holder of this Stock Right shall be
entitled to receive the kind and number of shares or other instruments of Hills
which such Holder would have owned or would have been entitled to receive after
the occurrence of any of the events described above, had the then remaining
portion of the Face Amount of this Stock Right with respect to which no
previous exercise has occurred (assuming such portion then to be exercisable in
full) been fully exercised immediately prior to the happening of such event or
any record date with respect thereto. An adjustment made pursuant to this
Section 3.2 shall become effective immediately after the effective date of such
event retroactive to the record date, if any, for such event.
3.3 Certain Limitations. No adjustment in the number of shares of Common
Stock purchasable hereunder shall be required unless such adjustment would
require an increase or decrease of at least one percent (1%) in the number of
shares purchasable upon the exercise of each Stock Right; provided, however,
that any adjustments which by reason of this Section 3.3 are not required to be
made shall be carried forward and taken into account in any subsequent
adjustment. All calculations shall be made to the nearest one-hundredth of a
share.
<PAGE>
3.4 Adjustment of Exercise Price and Division Constant. Whenever the number
of shares of Common Stock purchasable upon the exercise of each Stock Right is
adjusted as herein provided, the Exercise Price of each Stock Right and the
Division Constant (as used in the definition of "Issuable Shares") shall each
be adjusted by multiplying such Exercise Price and Division Constant
immediately prior to such adjustment by a fraction, of which the numerator
shall be the number of shares of Common Stock purchasable upon the exercise of
each Stock Right immediately prior to such adjustment, and of which the
denominator shall be the number of shares of Common Stock so purchasable
immediately thereafter, provided that, as provided in Section 3.1, the Exercise
Price shall not be less than the par value of the Common Stock.
3.5 Shares Other Than Common Stock. In the event that at any time, as a
result of an adjustment made pursuant to Section 3.2, the Holder of this Stock
Right shall become entitled to purchase any shares of Hills other than Common
Stock, thereafter the number of such other shares so purchasable upon exercise
of this Stock Right and the Exercise Price of such shares shall be subject to
adjustment from time to time in a manner and on terms as nearly equivalent as
practicable to the provisions with respect to the shares of Common Stock
contained in Sections 3.2 through 3.6, inclusive, and the provisions of this
Stock Right with respect to the shares of Common Stock shall apply on like
terms to any such other shares.
3.6 Dividends and Distributions. Except as provided in Section 3.2 and the
following sentence, no adjustment in respect of any dividends or distributions
shall be made during the term of this Stock Right or upon the exercise of this
Stock Right. If, at any time from and after the Realization Date through and
including the date 40 days after the Vesting Date for any Issuable Shares,
Hills declares any dividend or makes any distribution (whether in cash,
property or securities of Hills) on its capital stock which does not result in
an adjustment under Section 3.2, then upon the exercise of this Stock Right
with respect to any of such Issuable Shares, Hills shall deliver to the Holder,
in addition to the certificates for the shares of Common Stock to which such
Holder is entitled, the cash, property or securities which would have been
distributed to such Holder had such Holder been a shareholder of record of such
shares during the period from the Realization Date to and including (but not
after) the date 40 days after the Vesting Date, together with (i) in the case
of a cash distribution, interest on such distribution, from the date the
distribution was made on the Common Stock through the earlier of the date of
exercise of this Stock Right and the date 40 days after the Vesting Date,
computed at a rate equal to the yield on 90 day United States Treasury Bills
(which rate shall be established as of the date the distribution was made and
adjusted quarterly thereafter as of the first business day of each calendar
quarter) and compounded annually, and (ii) in the case of distributions of
property or securities, any dividends, interest or similar amounts paid with
respect to such property or securities between the date of distribution or
payment thereof and the earlier of the date of exercise of this Stock Right and
the date 40 days after the Vesting Date, together with interest on such amounts
during the same period at the rate described in clause (i) above.
3.7 Stock Rights to Remain Valid. Irrespective of any adjustments in the
Exercise Price or the number or kind of shares purchasable upon the exercise of
this Stock Right, any Stock Right theretofore or thereafter issued may continue
to express the same price and number and kind of shares as are stated in the
Stock Rights initially issuable pursuant to this agreement.
3.8 Adjustments Prospective Only. All adjustments pursuant to this Article
III shall apply only to shares purchasable upon exercise of this Stock Right on
and after the date of the adjustment, including Exercisable Shares as of such
date and shares which thereafter become Exercisable Shares; but no adjustment
shall be made with respect to any shares as to which this Stock Right may have
been exercised prior the date of the adjustment.
ARTICLE IV
DEFINITIONS
The following terms, as used in this Stock Right, have the following meanings:
<PAGE>
"Auditors" means the independent accountants from time to time appointed as
the outside auditors of Hills.
"Business Day" means (a if the Common Stock is listed or admitted to trading
on a national securities exchange, a day on which the principal securities
exchange on which the Common Stock is listed or admitted to trading is open for
business or (b) if the Common Stock is not so listed or admitted to trading, a
day on which the New York Stock Exchange is open for business.
"Common Stock" has the meaning set forth in the first paragraph of this Stock
Right, subject to change pursuant to Article III.
"Discounted Tax Benefit" means, with respect to the Tax Benefit for any
taxable year, the present value of such Tax Benefit at the date of this Stock
Right, discounted back from the Realization Date using a discount rate of 12%
per annum compounded annually. In the event that the Tax Benefit is reduced or
increased as a result of any audit adjustment or amendment to Hills' Filed
Returns, the Discounted Tax Benefit shall be recalculated, using the adjusted
Tax Benefit.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, and any
successor Federal statute, and the rules and regulations of the Securities and
Exchange Commission (or its successor) thereunder, all as the same shall be in
effect at the time.
"Exercise Price" means $.01 per share of the Common Stock, subject to
adjustment pursuant to Article III.
"Filed Returns" means, with respect to any taxable year of Hills, the federal,
state and local income tax returns (including amended returns) as actually
filed by Hills or any successor thereto or by an agent on behalf of Hills on
which Hills' tax liability for such year is set forth or calculated.
"Hills" has the meaning set forth in the first paragraph of this Stock Right.
"Holder" has the meaning set forth in the first paragraph of this Stock Right.
"Individual Stock Right Percentage" means the initial Face Amount of this
Stock Right divided by 700,000, expressed as a percentage. In the case of
Stock Rights which have been divided, the Individual Stock Right Percentage of
each new Stock Right is equal to a pro rata portion of the individual Stock
Right Percentage of the Stock Right which was divided. In the case of Stock
Rights which have been combined, the Individual Stock Right Percentage of the
combined Stock Right is equal to the sum of the Individual Stock Right
Percentages of the Stock Rights which were combined.
"Issuable Shares" means, for each taxable year commencing on or after the date
of this Stock Right (i) as to which the Vesting Date has occurred, and (ii) in
which a Tax Benefit was realized by Hills, a number of shares of Common Stock
equal to the product of (x) the Individual Stock Right Percentage, and (y) the
quotient obtained by dividing the Discounted Tax Benefit for such taxable year
by the Division Constant (as defined below). The number of Issuable Shares
shall reflect any audit adjustment or amendment to Hills' Filed Returns which
occurs between the date of initial filing of the Filed Returns and the Vesting
Date. Under no circumstances shall any Tax Benefit give rise to any Issuable
Shares prior to the Vesting Date for the taxable year of such Tax Benefit. As
used herein, the "Division Constant" shall be 20, subject to adjustment
pursuant to Section 3.4.
"Market Price" means as of any Trading Day (i) the last sales price per share
regular way as reported on the composite tape on such day or, in the case no
such reported sale takes place on such Trading Day, the average of the closing
bid and asked prices regular way as officially reported by the New York Stock
Exchange, Inc., (ii) if the Common Stock is not listed on such Exchange, the
average of the closing bid and asked prices per share regular way on such
Trading Day as reported by NASDAQ, or (iii) if the Common Stock is not so
reported, then the average of the high bid and low asked
<PAGE>
prices per share on such Trading Day as reported on the National Quotation
Bureau Incorporated, or if such organization is not in existence, by an
organization providing similar services. Market price as of any day not a
Trading Day shall be the Market Price as of the next preceding Trading Day.
"NASD" means The National Association of Securities Dealers, Inc.
"NASDAQ" means The National Association of Securities Dealers, Inc. Automated
Quotation System.
"Person" means any natural person, corporation, limited partnership, general
partnership, joint stock company, joint venture, association, company, trust,
bank, trust company, land trust, business trust or other organization, whether
or not a legal entity, and any government agency or political subdivision
thereof.
"Pro Forma Returns" means a set of pro forma federal, state and local income
tax returns, prepared by the Auditors within 60 days after Hills' filing of its
Filed Returns for each taxable year of Hills during the term hereof, which
shall be identical to the Filed Returns except that they will reflect the
realization by Hills, in the year of issuance of these Stock Rights, of
cancellation of indebtedness income in the amount of $81.9 million which income
will be treated as having reduced tax attributes of Hills in the order
prescribed in section 108(b) of the Internal Revenue Code of 1986, as amended
(the "Code"), assuming an election were made under section 108(b)(5) of the
Code by Hills first to reduce its tax basis for its depreciable assets and
assuming any election under section 1017(b)(3) of the Code would be made if it
were in the best interests of Hills (not taking into account the existence of
this Stock Right). In the event that any amended Filed Returns are filed or
any audit adjustment occurs for a taxable year, adjusted Pro Forma Returns
shall be prepared to reflect any changes made by any such amended Filed Return
or audit adjustment, but such adjusted Pro Forma Returns shall otherwise be
consistent with the original Pro Forma Returns for such taxable year.
"Realization Date" means, with respect to any Tax Benefit, the date one month
after the date on which the last estimated tax payment for the year to which
the Tax Benefit relates is due.
"Stock Right Agency" has the meaning set forth in Section 2.1.
"Stock Rights" has the meaning set forth in the second paragraph of this Stock
Right.
"Tax Benefit" means, for any taxable year of Hills, the excess of the amount
of tax shown as due on the Pro Forma Returns over the amount of tax shown as
due on the Filed Returns for that tax year or, if amended Filed Returns are
filed or any audit adjustment occurs for such year, on such amended Filed
Returns or any assessment or closing agreement to which any adjusted Pro Forma
Returns relate.
"Trading Day" means any day on which the New York Stock Exchange, Inc. is open
for trading or if the Common Stock is not listed or admitted to trading on such
Exchange, and the then current method of determining Market Price under such
definition is some method other than reference to such Exchange, a day on which
trading in accordance with such other method is being conducted.
"Vesting Date" means the date on which the Auditors shall determine that
Hills' tax liability for the tax year in which the relevant Tax Benefit accrued
is no longer subject to adjustment because (i) the statutory period during
which assessments can be made has passed; (ii) Hills and the Internal Revenue
Service (the "Service") or other relevant taxing authority have entered into a
closing agreement governing the years or issues in question; or (iii) a court
decision determining such liability has been rendered and the time period for
the filing of appeals has passed. Hills shall direct its Auditors to ascertain
whether any of the above conditions has been met with respect to any Tax
Benefit (a) at least annually, within 30 days after Hills files its original
Filed Returns for the preceding tax year, and (b) in addition, promptly after
Hills reasonably believes that any such condition has, with respect to a
particular Tax Benefit, been met. Notwithstanding the foregoing, in the event
of a sale or other disposition of all or substantially all of the assets of
Hills,
<PAGE>
or a merger or restructuring in which Hills is not the continuing
corporation, Hills shall take all reasonable steps to obtain a ruling from the
Service to the effect that it was not required to reduce its tax attributes
pursuant to section 108 of the Code as a consequence of the restructuring
transactions as a part of which these Stock Rights were issued. If such a
ruling is obtained, or if such issue shall previously have been resolved in a
manner consistent with the desired ruling through a closing agreement with, or
other administrative action by, the Service or through a final court decision,
appeal from which is no longer possible, then the later of (a) the date on
which such ruling is received and (b) in the case of a pre-existing closing
agreement, administrative action or court decision, the date on which such
sale, disposition, merger or restructuring is consummated, shall constitute a
Vesting Date with respect to any then remaining Exercisable Shares. If such a
ruling cannot be obtained, and in the absence of any pre-existing closing
agreement, administrative action or court decision, then on the earliest of (x)
the date on which a ruling contrary to the ruling sought by Hills is received
from the Service, (y) the date on which Hills receives notice from the Service
that the Service declines to rule on such issue, and (z) the date that is 180
days following the date of consummation of such sale, disposition, merger or
restructuring, this Stock Right shall terminate and lapse and the remaining
number of Exercisable Shares shall be reduced to zero.
ARTICLE V
MISCELLANEOUS
5.1 Tax Positions in Best Interests of Hills. In preparing its Filed
Returns, and in connection with any audit or contest with respect thereto,
Hills shall take positions that are designed to serve Hills' best interest,
including, without limitation, in determining whether and at what amount to
settle any dispute with the Internal Revenue Service or any other taxing
authority, provided, however, that in determining the best interests of Hills,
Hills shall not take into account any effects on it that would result from the
issuance of additional stock pursuant to the Stock Rights. Hills shall be
under no obligation either to maximize or to minimize the number of Issuable
Shares hereunder.
5.2 Notifications to Holder. (a) Hills shall provide to the Holder each
year, no later than 90 days after the filing of Hills' Filed Returns for such
year, and within 90 days after the filing of any amended return or adjustment
to Hills' tax liability, a schedule showing the utilization of net operating
loss carryforwards or other relevant tax attributes reflected in such Filed
Returns, amended Filed Returns or adjustments and the calculation of any
realization of Tax Benefits.
(b) Promptly (but in any event within 21 days) after the occurrence of the
Vesting Date for any Tax Benefits, Hills shall notify the Holder of such event
and of the number of Issuable Shares resulting from such Tax Benefits.
5.3 Notices. Notices and other communications provided for herein shall be
in writing and may be given by mail, courier, confirmed telex or facsimile
transmission and shall, unless otherwise expressly required, be deemed given
when received or, if mailed, four Business Days after being deposited in the
United States mail with postage prepaid and properly addressed. In the case of
the Holder, such notices and communications shall be addressed to its address
as shown on the books maintained by the Stock Right Agency, unless the Holder
shall notify the Stock Right Agency that notices and communications should be
sent to a different address (or telex or facsimile number), in which case such
notices and communications shall be sent to the address (or telex or facsimile
number) specified by the Holder.
5.4 Waivers; Amendments. No failure or delay of the Holder in exercising any
power or right hereunder shall operate as a waiver thereof, nor shall any
single or partial exercise of any such right or power, or any abandonment or
discontinuance of steps to enforce such a right or power, preclude any other or
further exercise thereof or the exercise of any other right or power. No
notice or demand on Hills in any case shall entitle Hills to any other or
future notice or demand in similar or other circumstances. The rights and
remedies of the Holder are cumulative and not exclusive of any rights or
remedies which it would otherwise have. The provisions of this Stock Right may
be amended, modified or waived with (and only with) the written consent of
Hills and the holders of Stock Rights entitling such holders to purchase a
majority of the Common Stock subject to purchase upon exercise of such Stock
Rights at the time outstanding
<PAGE>
(exclusive of Stock Rights then owned by Hills or any subsidiary or affiliate
thereof); provided, however, that no such amendment, modification or waiver
shall, without the written consent of the holders of all Stock Rights at the
time outstanding, (a) change the number of shares of Common Stock subject to
purchase upon exercise of this Stock Right, the Exercise Price or provisions
for payment thereof or (b) amend, modify or waive the provisions of this
Section, Section 1.5 or Article III; provided further, that no such amendment,
modification or waiver shall be made prior tot the fifth Business Day following
the first anniversary of the date of this Stock Right.
Any such amendment, modification or waiver effected pursuant to and in
accordance with the provisions of this Section shall be binding upon the
holders of all Stock Rights, upon each future holder thereof and upon Hills.
In the event of any such amendment, modification or waiver Hills shall give
prompt notice thereof to all holders of Stock Rights and, if appropriate,
notation thereof shall be made on all Stock Rights thereafter surrendered for
registration of transfer or exchange.
5.5 Governing Law. This Stock Right shall be construed in accordance with
and governed by the internal laws of the Commonwealth of Massachusetts without
regard to principles of conflict of laws.
5.6 Transfer; Covenants to Bank Successor and Assigns. All covenants,
stipulations, promises and agreements made by or on behalf of Hills in this
Stock Right shall bind its successors and assigns, whether so expressed or not.
The provisions of this Stock Right shall be binding upon and inure to the
benefit of the Holder hereof and its successors and assigns.
5.7 Severability. In case any one or more of the provisions contained in
this Stock Right shall be invalid, illegal or unenforceable in any respect, the
validity, legality and enforceability of the remaining provisions contained
herein shall not in any way be affected or impaired thereby. The parties shall
endeavor in good faith negotiations to replace the invalid, illegal or
unenforceable provisions with valid provisions the economic effect of which
comes as close as possible to that of the invalid, illegal or unenforceable
provisions.
5.8 Section Headings. The section headings used herein are for convenience
of reference only, are not part of this Stock Right and are not to affect the
construction of or be taken into consideration in interpreting this Stock
Right.
IN WITNESS WHEREOF, Hills has caused this Stock Right to be executed in its
corporate name by one of its officers thereunto duly authorized, and its
corporate seal to be hereunto affixed, attested by its Secretary or an
Assistant Secretary, all as of the day and year first above written.
HILLS STORES COMPANY
By____________________________
Name:
Title:
[Corporate Seal]
Attest:
______________________________
Name:
Title:
<PAGE>
EXHIBIT 10.8
HILLS STORES COMPANY
1993 INCENTIVE AND NONQUALIFIED STOCK OPTION PLAN
SECTION 1. PURPOSE
This 1993 Incentive and Nonqualified Stop Option Plan (the "Plan") of Hills
Stores Company, a Delaware corporation (the "Company"), is designed to provide
additional incentive to executives and other key employees of the Company, its
parent and subsidiaries and for certain other individuals providing services to
or acting as directors of the Company, its parent and subsidiaries. The
Company intends that this purpose will be effected by the granting of incentive
stock options ("Incentive Stock Options") as defined in Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), and nonqualified stock
options ("Nonqualified Options") under the Plan which afford such executives
and key employees an opportunity to acquire or increase their proprietary
interest in the Company through the acquisition of shares of its Common Stock.
The Company intends that Incentive Stock Options issued under the Plan will
qualify as "incentive stock options" as defined in Section 422 of the Code and
the terms of the Plan shall be interpreted in accordance with this intention.
The terms "parent" and "subsidiary" shall have the respective meanings set
forth in Section 424 of the Code.
SECTION 2. ADMINISTRATION
2.1 The Committee. The Plan shall be administered by a Committee (the
"Committee") consisting of at least two members of the Company's Board of
Directors (the "Board"). None of the members of the Committee shall be an
officer or other employee of the Company, and none shall have been granted any
incentive stock option or nonqualified option under this Plan or any other
stock option plan of the Company within one year prior to service on the
Committee. It is the intention of the Company that the Plan shall be
administered by "disinterested persons" within the meaning of Rule 16b-3 under
the Securities Exchange Act of 1934, but the authority and validity of any act
taken or not taken by the Committee shall not be affected if any person
administering the Plan is not a disinterested person. Except as specifically
reserved to the Board under the terms of the Plan, the Committee shall have
full and final authority to operate, manage and administer the Plan on behalf
of the Company. Action by the Committee shall require the affirmative vote of
a majority of all members thereof.
2.2 Powers of the Committee. Subject to the terms and conditions of the Plan,
the Committee shall have the power:
(a) To determine from time to time the persons eligible to receive options
and the options to be granted to such persons under the Plan and to prescribe
the terms, conditions, restrictions, if any, and provisions (which need not be
identical) of each option granted under the Plan to such persons;
(b) To construe and interpret the Plan and options granted thereunder and to
establish, amend, and revoke rules and regulations for administration of the
Plan. In this connection, the Committee may correct any defect or supply any
omission, or reconcile any inconsistency in the Plan, or in any option
agreement, in the manner and to the extent it shall deem necessary or
expedient to make the Plan fully effective. All decisions and determinations
by the Committee in the exercise of this power shall be final and binding upon
the Company and optionees;
(c) To make, in its sole discretion, changes to any outstanding option
granted under the Plan, including; (i) to reduce the exercise price, (ii) to
accelerate the vesting schedule or (iii) to extend the expiration date; and
(d) Generally, to exercise such powers and to perform such acts as are deemed
necessary or expedient to promote the best interests of the Company with
respect to the Plan.
SECTION 3. STOCK
<PAGE>
3.1 Stock to be Issued. The stock subject to the options granted under the
Plan shall be shares of the Company's authorized but unissued common stock,
$.01 par value (the "Common Stock"), or shares of the Company's Common Stock
held in treasury. The total number of shares that may be issued pursuant to
options granted under the Plan shall not exceed an aggregate of 1,053,763
shares of Common Stock; provided, however, that the class and aggregate number
of shares which may be subject to options granted under the plan shall be
subject to adjustment as provided in Section 8 hereof.
3.2 Expiration, Cancellation or Termination of Option.
Whenever any outstanding option under the Plan expires, is cancelled or is
otherwise terminated (other than by exercise), the shares of Common Stock
allocable to the unexercised portion of such option may again be the subject of
options under the plan.
SECTION 4. ELIGIBILITY
4.1 Persons Eligible. Incentive Stock Options under the Plan may be granted
only to officers and other employees of the Company or its parent or
subsidiaries. Nonqualified Options may be granted to officers or other
employees of the Company or its parent or subsidiaries, and to members of the
Board and consultants or other persons who render services to the Company
(regardless of whether they are also employees), provided, however, that no
such option may be granted to a person who is a member of the Committee at the
time of the grant.
4.2 Greater-Than-Ten-Percent Stockholders. Except as may otherwise be
permitted by the Code or other applicable law or regulation, no Incentive Stock
Option shall be granted to an individual who, at the time the option is
granted, owns (including ownership attributed pursuant to Section 424 of the
Code) more than ten percent of the total combined voting power of all classes
of stock of the Company or any parent or subsidiary (a "greater-than-ten-
percent stockholder"), unless such Incentive Stock Option provides that
(i) the purchase price per share shall not be less than one hundred ten percent
of the fair market value of the Common Stock at the time such option is
granted, and (ii) that such option shall be not exercisable to any extent
after the expiration of five years from the date it is granted.
4.3 Maximum Aggregate Fair Market Value. The aggregate fair market value
(determined at the time the option is granted) of the Common Stock with respect
to which Incentive Stock Options are exercisable for the first time by any
optionee during any calendar year (under the Plan and any other plans of the
Company or any parent or subsidiary for the issuance of incentive stock
options) shall not exceed $100,000 (or such greater amount as may from time to
time be permitted with respect to incentive stock options by the Code or any
other applicable law or regulation).
SECTION 5. TERMINATION OF EMPLOYMENT OR DEATH OF OPTIONEE
5.1 Termination of Employment. Except as may be otherwise expressly provided
herein, options shall terminate on the earlier of:
(a) the date of the expiration thereof,
(b) the date of termination of the optionee's employment with or services to
the Company by it for cause (as determined by the Company), or voluntarily
(other than early or normal retirement in accordance with the Company's
retirement policies) by the optionee; or
(c) ninety days after the date of termination of the optionee's employment
with or services to the Company by it without cause; provided, that Options
need not, unless the Committee determines otherwise, be subject to the
provisions set forth in clauses (b) and (c) above, and provided further, that
if the optionee, whose employment or services are terminated by
<PAGE>
the Company without cause, has an employment, consulting or retention contract
with the Company in force immediately prior to such termination, then in such
event such option shall remain in force to the stated expiration date of such
employment, consulting or retention contract with vesting accruing to such
expiration date.
An employment relationship between the Company and the optionee shall be
deemed to exist during any period in which the optionee is employed by the
Company or its parent or any subsidiary. Whether authorized leave of absence,
or absence on military or government service, shall constitute termination of
the employment relationship between the Company and the optionee shall be
determined by the Committee at the time thereof.
As used herein, "cause" shall mean (i) any material breach by the optionee of
any agreement to which the optionee and the Company are both parties, (ii) the
willful engagement by the optionee in conduct which is materially injurious to
the Company or any of its subsidiaries or affiliates, monetarily or otherwise,
(iii) the misappropriation (including the unauthorized use or disclosure of
confidential or proprietary information of the Company or any of its
subsidiaries or affiliates) or embezzlement with respect to the Company or any
of its subsidiaries or affiliates, (iv) a conviction of or guilty plea or
confession by the optionee to any fraud, conversion, misappropriation,
embezzlement or felony, or (v) any material misconduct or material neglect of
duties by the Holder in connection with the business or affairs of the Company
or any affiliate of the Company.
5.2 Death or Permanent Disability of Optionee. In the event of the death or
permanent and total disability of the holder of an option that is subject to
clause (b) or (c) of Section 5.1 above prior to termination of the optionee's
employment with or services to the Company and before the date of expiration of
such option, such option shall terminate on the earlier of such date of
expiration or one year following the date of such death or disability. After
the death of the optionee, his/her executors, administrators or any person or
persons to whom his/her option may be transferred by will or by the laws of
descent and distribution, shall have the right, at any time prior to such
termination, to exercise the option to the extent the optionee was entitled to
exercise such option immediately prior to his/her death. An optionee is
permanently and totally disabled if he/she is unable to engage in any
substantial gainful activity by reason of any medically determinable physical
or mental impairment which can be expected to last for a continuous period of
not less than 12 months; permanent and total disability shall be determined in
accordance with Section 22(e)(3) of the Code and the regulations issued
thereunder.
SECTION 6. TERMS OF THE OPTION AGREEMENTS
Each option agreement shall be in writing and shall contain such terms,
conditions, restrictions, if any, and provisions as the Committee shall from
time to time deem appropriate. Such provisions or conditions may include
without limitation restrictions on transfer, repurchase rights, or such other
provisions as shall be determined by the Committee; provided that such
additional provisions shall not be inconsistent with any other term or
condition of the Plan and such additional provisions shall not cause any
Incentive Stock Option granted under the Plan to fail to qualify as an
incentive option within the meaning of Section 422 of the Code. The shares of
stock issuable upon exercise of an option by an executive officer, director or
beneficial owner of more than ten percent of the Common Stock of the Company
may not be sold or transferred (except that such shares may be issued upon
exercise of such option) by such officer, director or beneficial owner for a
period of six months following the grant of such option.
Option agreements need not be identical, but each option agreement by
appropriate language shall include the substance of all of the following
provisions:
6.1 Expiration of Option. Notwithstanding any other provision of the Plan or
of any option agreement, each option shall expire on the date specified in the
option agreement, which date shall not, in the case of an Incentive Stock
Option, be later than the tenth anniversary (fifth anniversary in the case of a
greater-than-ten-percent stockholder) of the date on which the option was
granted, or as specified in Section 5 of this Plan.
<PAGE>
6.2 Exercise. Each option may be exercised, so long as it is valid and
outstanding, from time to time in part or as a whole, subject to any
limitations with respect to the number of shares for which the option may be
exercised at a particular time and to such other conditions as the Committee in
its discretion may specify upon granting the option.
6.3 Purchase Price. The purchase price per share under each option shall be
determined by the Committee at the time the option is granted; provided,
however, that the option price of any Incentive Stock Option shall not, unless
otherwise permitted by the Code or other applicable law or regulations, be less
than the fair market value of the Common Stock on the date the option is
granted (110% of the fair market value in the case of a greater-than-ten-
percent stockholder). For the purpose of the Plan, the fair market value of
the Common Stock shall be the closing price per share on the date of grant of
the option as reported by a nationally recognized stock exchange, or, if the
Common Stock is not listed on such an exchange, as reported by the National
Association of Securities Dealers Automated Quotation System, Inc. ("NASDAQ"),
or, if the Common Stock is not quoted on NASDAQ, the fair market value as
determined by the Committee.
6.4 Transferability of Options. Options shall not be transferrable by the
optionee otherwise than by will or under the laws of descent and distribution,
and shall be exercisable, during his or her lifetime, only by him or her.
6.5 Rights of Optionees. No optionee shall be deemed for any purpose to be
the owner of any shares of Common Stock subject to any option unless and until
the option shall have been exercised pursuant to the terms thereof, and the
Company shall have issued and delivered the shares to the optionee.
6.6 Repurchase Right. The Committee may in its discretion provide upon the
grant of any option hereunder that the Company shall have an option to
repurchase upon such terms and conditions as determined by the Committee all or
any number of shares purchased upon exercise of such option. The repurchase
price per share payable by the Company shall be such amount or be determined by
such formula as is fixed by the Committee at the time the option for the shares
subject to repurchase is granted. In the event the Committee shall grant
options subject to the Company's repurchase option, the certificates
representing the shares purchased pursuant to such option shall carry a legend
satisfactory to counsel for the Company referring to the Company's repurchase
option.
SECTION 7. METHOD OF EXERCISE, PAYMENT OF PURCHASE PRICE
7.1 Method of Exercise. Any option granted under the Plan may be exercised
by the optionee by delivering to the Company on any business day a written
notice specifying the number of shares of Common Stock the optionee then
desires to purchase and specifying the address to which the certificates for
such shares are to be mailed (the "Notice"), accompanied by payment for such
shares.
7.2 Payment of Purchase Price. Payment for the shares of Common Stock
purchased pursuant to the exercise of an option shall be made either by (i)
cash, certified check, bank draft or postal or express money order equal to the
option price for the number of shares specified in the Notice, or (ii) with the
consent of the Committee, shares of Common Stock of the Company having a fair
market value equal to the option price of such shares, or (iii) with the
consent of the Committee, such other consideration which is acceptable to the
Committee and which has a fair market value equal to the option price of such
shares, or (iv) with the consent of the Committee, a combination of (i), (ii)
and/or (iii). For the purpose of the preceding sentence, the fair market value
per share of Common Stock so delivered to the Company shall be determined in
the manner specified in Section 6.3. As promptly as practicable after receipt
of the Notice and accompanying payment, the Company shall deliver to the
optionee certificates for the number of shares with respect to which such
option has been so exercised, issued in the optionee's name; provided, however,
that such delivery shall be deemed effected for all purposes when the Company
or a stock transfer agent of the Company shall have deposited such certificates
in the United States mail, addressed to the optionee, at the address specified
in the Notice.
SECTION 8. CHANGES IN THE COMPANY'S CAPITAL STRUCTURE
<PAGE>
8.1 Rights of Company. The existence of outstanding options shall not affect
in any way the right or power of the Company or its stockholders to make or
authorize, without limitation, any or all adjustments, recapitalizations,
reorganizations or other changes in the Company's capital structure or its
business, or any merger or consolidation of the Company, or any issue of Common
Stock, or any issue of bonds, debentures, preferred or prior preference stock
or other capital stock ahead of or affecting the Common Stock or the rights
thereof, or the dissolution or liquidation of the Company, or any sale or
transfer of all or any part of its assets or business, or any other corporate
act or proceeding, whether of a similar character or otherwise.
8.2 Recapitalization, Stock Splits and Dividends. If the Company shall
effect a subdivision or consolidation of shares or other capital readjustment,
the payment of a stock dividend, or other increase or reduction of the number
of shares of the Common Stock outstanding, in any such case without receiving
compensation therefor in money, services or property, then (i) the number,
class, and price per share of shares of stock subject to outstanding options
hereunder shall be appropriately adjusted in such a manner as to entitle an
optionee to receive upon exercise of an option, for the same aggregate cash
consideration, the same total number and class of shares as he or she would
have received as a result of the event requiring the adjustment had he or she
exercised his or her option in full immediately prior to such event; and (ii)
the number and class of shares with respect to which options may be granted
under the Plan shall be adjusted by substituting for the total number of shares
of Common Stock then reserved for issuance under the Plan that number and class
of shares of stock that the owner of an equal number of outstanding shares of
Common Stock would own as the result of the event requiring the adjustment.
8.3 Merger without Change of Control. After a merger of one or more
corporations into the Company, or after a consolidation of the Company and one
or more corporations in which (i) the Company shall be the surviving
corporation, and (ii) the stockholders of the Company immediately prior to such
merger or consolidation own after such merger or consolidation shares
representing at least fifty percent of the voting power of the Company, each
holder of an outstanding option shall, at no additional cost, be entitled upon
exercise of such option to receive in lieu of the number of shares as to which
such option shall then be so exercisable, the number and class of shares of
stock or other securities to which such holder would have been entitled
pursuant to the terms of the agreement of merger or consolidation, if,
immediately prior to such merger or consolidation, such holder had been the
holder of record of a number of shares of Common Stock equal to the number of
shares for which such option was exercisable.
8.4 Sale or Merger with Change of Control. If the Company is merged into or
consolidated with another corporation under circumstances where the Company is
not the surviving corporation, or if there is a merger or consolidation where
the Company is the surviving corporation but the stockholders of the Company
immediately prior to such merger or consolidation do not own after such merger
or consolidation shares representing at least fifty percent of the voting power
of the Company, or if the Company is liquidated, or sells or otherwise disposes
of substantially all of its assets to another corporation while unexercised
options remain outstanding under the Plan, (i) subject to the provisions of
clause (iii) below, after the effective date of such merger, consolidation,
liquidation, sale or disposition, as the case may be, each holder of an
outstanding option shall be entitled, upon exercise of such option, to receive,
in lieu of shares of Common Stock, shares of such stock or other securities,
cash or properties as the holders of shares of Common Stock received pursuant
to the terms of the merger, consolidation, liquidation, sale or disposition;
(ii), the Committee may accelerate the time for exercise of all unexercised and
unexpired options to and after a date prior to the effective date of such
merger, consolidation, liquidation, sale or disposition, as the case may be,
specified by the Committee; or (iii) all outstanding options may be cancelled
by the Committee as of the effective date of any such merger, consolidation,
liquidation, sale or disposition provided that (x) notice of such cancellation
shall be given to each holder of an option and (y) each holder of an option
shall have the right to exercise such option to the extent that the same is
then exercisable or, if the Committee shall have accelerated the time for
exercise of all unexercised or unexpired options, in full during the 30-day
period preceding the effective date of such merger, consolidation, liquidation,
sale or disposition.
8.5 Adjustments to Common Stock Subject to Options. Except as hereinbefore
expressly provided, the issue by the Company of shares of stock of any class,
or securities convertible into shares of stock of any class, for cash or
property,
<PAGE>
or for labor or services, either upon direct sale or upon the exercise of
rights or warrants to subscribe therefor, or upon conversion of shares or
obligations of the Company convertible into such shares or other securities,
shall not affect, and no adjustment by reason thereof shall be made with
respect to, the number or price of shares of Common Stock then subject to
outstanding options.
8.6 Miscellaneous. Adjustments under this Section 8 shall be determined by
the Committee, and such determinations shall be conclusive. No fractional
shares of Common Stock shall be issued under the Plan on account of any
adjustment specified above.
SECTION 9. GENERAL RESTRICTIONS
9.1 Investment Representations. The Company may require any person to whom
an option is granted, as a condition of exercising such option, to give written
assurances in substance and form satisfactory to the Company to the effect that
such person is acquiring the Common Stock subject to the option for his or her
own account for investment and not with any present intention of selling or
otherwise distributing the same, and to such other effects as the Company deems
necessary or appropriate in order to comply with federal and applicable state
securities laws.
9.2 Compliance with Securities Laws. The Company shall not be required to
sell or issue any shares under any option if the issuance of such shares shall
constitute a violation by the optionee or by the Company of any provisions of
any law or regulation of any governmental authority. In addition, in
connection with the Securities Act of 1933, as now in effect or hereafter
amended (the "Act"), upon exercise of any option, the Company shall not be
required to issue such shares unless the Committee has received evidence
satisfactory to it to the effect that the holder of such option will not
transfer such shares except pursuant to a registration statement in effect
under such Act or unless an opinion of counsel satisfactory to the Company has
been received by the Company to the effect that such registration is not
required. Any determination in this connection by the Committee shall be
final, binding and conclusive. In the event the shares issuable on exercise of
an option are not registered under the Act, the Company may imprint upon any
certificate representing shares so issued the following legend or any other
legend which counsel for the Company considers necessary or advisable to comply
with the Act and with applicable state securities laws:
The shares of stock represented by this certificate have not been registered
under the Securities Act of 1933 or under the securities laws of any State and
may not be sold or transferred except upon such registration or upon receipt by
the Corporation of an opinion of counsel satisfactory to the Corporation, in
form and substance satisfactory to the corporation, that registration is not
required for such sale or transfer.
The Company may, but shall in no event be obligated to, register any
securities covered hereby pursuant to the Act; and in the event any shares are
so registered the Company may remove any legend on certificates representing
such shares. The Company shall not be obligated to take any other affirmative
action in order to cause the exercise of an option or the issuance of shares
pursuant thereto to comply with any law or regulation of any governmental
authority.
9.3 Employment Obligation. The granting of any option shall not impose upon
the Company any obligation to employ or continue to employ any optionee; and
the right of the Company to terminate the employment of any officer or other
employee shall not be diminished or affected by reason of the fact that an
option has been granted to him or her.
SECTION 10. AMENDMENT OR TERMINATION OF THE PLAN
The Board of Directors may modify, revise or terminate this Plan at any time
and from time to time, except that the class of persons eligible to receive
options and the aggregate number of shares issuable pursuant to this Plan shall
not be changed or increased, other than by operation of Section 8 hereof,
without the consent of the stockholders of the Company.
<PAGE>
SECTION 11. NONEXCLUSIVITY OF THE PLAN
Neither the adoption of the Plan by the Board of Directors nor the submission
of the Plan to the stockholders of the Company for approval shall be construed
as creating any limitations on the power of the Board of Directors to adopt
such other incentive arrangements as it may deem desirable, including, without
limitation, the granting of stock options otherwise than under the Plan, and
such arrangements may be either applicable generally or only in specific cases.
SECTION 12. EFFECTIVE DATE AND DURATION OF PLAN
The Plan shall become effective upon its adoption by the Board of Directors
provided that the stockholders of the Company shall have approved the Plan
within twelve months prior to or following the adoption of the Plan by the
Board. No option may be granted under the Plan after the tenth anniversary of
the effective date. The Plan shall terminate (i) when the total amount of the
Stock with respect to which options may be granted shall have been issued upon
the exercise of options or (ii) by action of the Board of Directors pursuant to
Section 10 hereof, whichever shall first occur.
* * * * * * * * * * * *
<PAGE>
<TABLE>
Exhibit 11.1
HILLS STORES COMPANY AND SUBSIDIARIES
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
<CAPTION>
Successor Company Predecessor Company
______________________________ ____________________________
Thirteen Seventeen Thirty-five Thirteen
Weeks Ended Weeks Ended Weeks Ended Weeks Ended
January 29, January 29, October 2, January 30,
1994 1994 1993 1993
_____________________________________________________________________
<S> <C> <C> * <C> <C>
Primary *
*
Weighted average number of *
common shares assumed to be *
outstanding during the period 9,000,000 9,000,000 * 19,757,390 19,757,390
*
Assumed conversion of preferred *
stock 5,000,000 5,000,000 * N/A N/A
*
Assumed exercise of stock options 73,845 56,470 * - -
*
Assumed exercise of stock rights - - * N/A N/A
*
Assumed exercise of stock warrants - - * N/A N/A
---------------------------- * --------------------------
14,073,845 14,056,470 * 19,757,390 19,757,390
============================ * ==========================
</TABLE>
<TABLE>
<CAPTION>
Predecessor Company
_______________________________________________________________
Fiscal Year Thirteen Fiscal Year
Ended Weeks Ended Ended
January 30, February 1, February 1,
1993 1992 1992
______________________________________________________________
<S> <C> <C> <C>
Primary
Weighted average number of
common shares assumed to be
outstanding during the period 19,757,339 19,756,676 19,715,064
Assumed conversion of preferred
stock N/A N/A N/A
Assumed exercise of stock options - - -
Assumed exercise of stock rights N/A N/A N/A
Assumed exercise of stock warrants N/A N/A N/A
----------------------------------------------------------
19,757,339 19,756,676 19,715,064
==========================================================
</TABLE>
<PAGE>
<TABLE>
Exhibit 11.1
HILLS STORES COMPANY AND SUBSIDIARIES
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
<CAPTION>
Successor Company Predecessor Company
___________________________________ __________________________________
Thirteen Seventeen Thirty-five Thirteen
Weeks Ended Weeks Ended Weeks Ended Weeks Ended
January 29, January 29, October 2, January 30,
1994 1994 1993 1993
__________________________________________________________________________________
<S> <C> <C> <C> <C>
Fully-diluted
Weighted average number of
common shares assumed to be
outstanding during the period 9,000,000 9,000,000 * 19,757,390 19,757,390
*
Assumed conversion of preferred *
stock 5,000,000 5,000,000 * N/A N/A
*
Assumed exercise of stock options 123,566 94,492 * - -
*
Assumed exercise of stock rights 700,000 700,000 * N/A N/A
*
Assumed exercise of stock warrants - - * N/A N/A
*
Assumed conversion of Convertible *
Junior Subordinated Debentures N/A N/A * 2,224,293 2,224,293
-------------------------------- * --------------------------------
14,823,566 14,794,492 * 21,981,683 21,981,683
================================ * ================================
</TABLE>
<TABLE>
<CAPTION>
Predecessor Company
___________________________________________________________________
Fiscal Year Thirteen Fiscal Year
Ended Weeks Ended Ended
January 30, February 1, February 1,
1993 1992 1992
___________________________________________________________________
<S> <C> <C> <C>
Fully-diluted
Weighted average number of
common shares assumed to be
outstanding during the period 19,757,339 19,756,676 19,715,064
Assumed conversion of preferred
stock N/A N/A N/A
Assumed exercise of stock options - - -
Assumed exercise of stock rights N/A N/A N/A
Assumed exercise of stock warrants N/A N/A N/A
Assumed conversion of Convertible
Junior Subordinated Debentures 2,224,344 2,225,007 2,266,619
-------------------------------------------------------------------
21,981,683 21,981,683 21,981,683
===================================================================
</TABLE>
<PAGE>
<TABLE>
EXHIBIT 21
SUBSIDIARIES OF HILLS STORES COMPANY
<CAPTION>
Name of Subsidiary State of Incorporation
__________________ ______________________
<S> <C>
Hills Department Store Company Delaware
Frando Corp. (1) Ohio
CRH International, Inc. (1) Ohio
Canton Advertising, Inc. (2) Massachusetts
Corporate Vision Inc. (1) Massachusetts
Hills Distributing Company(1) Delaware
<FN>
______________
(1) Wholly-owned subsidiary of Hills Department Store Company
(2) Wholly-owned subsidiary of CRH International, Inc.
</TABLE>
<PAGE>
<TABLE>
EXHIBIT 24
HILLS STORES COMPANY
FORM 10-K
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each of the directors and officers of Hills
Stores Company whose signature appears below constitutes and appoints Michael
Bozic, John G. Reen and William K. Friend, and each of them, his/her true and
lawful attorneys-in-fact and agents with full power of substitution, for
him/her and in his/her name, place and stead, in any and all capacities,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in connection with the preparation, delivery and filing of
an Annual Report on Form 10-K of Hills Stores Company for the fiscal year ended
January 29, 1994 with the Securities and Exchange Commission and any
appropriate state or governmental agencies, as fully to all intents and
purposes as such person might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them, or their
or his substitutes, may lawfully do or cause to be done by virtue hereof.
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/Thomas H. Lee Chairman of the Board March 29, 1994
_______________________________
Thomas H. Lee
/s/Michael Bozic Director, President and Chief March 29, 1994
_______________________________ Executive Officer (Principal
Michael Bozic Executive Officer)
/s/John G. Reen Director and Executive Vice March 29, 1994
_______________________________ President-Chief Financial Officer
John G. Reen (Principal Financial Officer)
/s/Susan E. Engel Director March 29, 1994
_______________________________
Susan E. Engel
/s/Michael S. Gross Director March 29, 1994
_______________________________
Michael S. Gross
/s/Richard B. Loynd Director March 29, 1994
_______________________________
Richard B. Loynd
/s/Norman S. Matthews Director March 29, 1994
_______________________________
Norman S. Matthews
/s/James L. Moody, Jr. Director March 29, 1994
_______________________________
James L. Moody, Jr.
/s/Kim D. Ahlholm Vice President-Controller March 29, 1994
_______________________________ (Principal Accounting Officer)
Kim D. Ahlholm
</TABLE>
<PAGE>
[HILLS STORES COMPANY - LOGO]
HILLS STORES COMPANY
15 Dan Road, Canton, Massachusetts 02021-9128
(617) 821-1000 Telex 17227
April 25, 1994
Securities & Exchange Commission
450 Fifth Street N.W.
Washington, D.C. 20549
RE: Hills Stores Company
Form 10-K Annual Report
Gentlemen:
We hereby transmit the Annual Report of Hills Stores Company on Form
10-K for the fiscal year ended January 29, 1994.
On October 4, 1993, the Company emerged from reorganization proceedings
under Chapter 11 of the U.S. Bankruptcy Code. As described in Note 2 to the
consolidated financial statements, the Company accounted for this
reorganization and adopted "fresh start reporting" as of October 2, 1993. As a
result, the January 29, 1994 consolidated balance sheet and the statement of
operations for the seventeen weeks ended January 29, 1994 are not comparable to
the Company's consolidated balance sheets or consolidated statements of
operations for prior periods.
Very truly yours,
HILLS STORES COMPANY
William K. Friend
Vice President-Secretary
<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
------- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 29, 1994
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
------- SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
-------- --------
Commission file number 1-9505
-----------------------------
HILLS STORES COMPANY
---------------------
(Exact name of registrant as specified in its charter)
DELAWARE 31-1153510
-------- ----------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
15 DAN ROAD, CANTON, MASSACHUSETTS 02021
---------------------------------- -----
(Address of principal executive offices) (Zip Code)
617-821-1000
-------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
YES X NO
--------- ---------
Indicate by check mark whether the registrant has filed all
documents and reports required to be filed by Section 12, 13 or
15(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a court.
YES X NO
--------- ---------
The number of shares of common stock outstanding as of
November 21, 1994 was 10,367,881 shares.<PAGE>
<PAGE>
<TABLE>
HILLS STORES COMPANY AND SUBSIDIARIES
TABLE OF CONTENTS
-----------------
PART I - FINANCIAL INFORMATION
FINANCIAL STATEMENTS
<S> <C> <C>
Consolidated Balance Sheets as of October 29,
1994, January 29, 1994, and October 30, 1993 3
Consolidated Statements of Operations of the
Successor Company for the Thirteen Weeks Ended
October 29, 1994 and Four Weeks Ended October 30,
1993 and the Predecessor Company for the Nine
Weeks Ended October 2, 1993 4
Consolidated Statements of Operations of the
Successor Company for the Thirty-nine Weeks Ended
October 29, 1994 and Four Weeks Ended October 30,
1993 and the Predecessor Company for the Thirty-
five Weeks Ended October 2, 1993 5
Consolidated Statements of Cash Flows of the
Successor Company for the Thirty-nine Weeks Ended
October 29, 1994 and Four Weeks Ended October 30,
1993 and the Predecessor Company for the Thirty-
five Weeks Ended October 2, 1993 6
Notes to Consolidated Financial Statements 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 17
PART II - OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS 21
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K 22
</TABLE>
2
<PAGE>
<TABLE>
HILLS STORES COMPANY AND SUBSIDIARIES
- -------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
<CAPTION> October 29, January 29, October 30,
(in thousands) 1994 1994 1993
- -------------------------------------------------------------------------------
<S> (unaudited) (unaudited)
ASSETS <C> <C> <C>
Current assets:
Cash and cash equivalents $ 8,988 $ 90,049 $ 10,396
Trade receivables, net 62,573 23,368 51,132
Inventories 474,208 326,465 460,093
Other current assets 5,962 4,647 5,399
---------- -------- ----------
Total current assets 551,731 444,529 527,020
Property and equipment, net 153,772 132,431 133,382
Property under capital leases, net 126,692 134,476 137,095
Beneficial lease rights, net 9,282 9,902 10,104
Other assets, net 9,179 9,555 10,266
Reorganization value in excess of
amounts allocable to
identifiable assets, net 169,989 176,728 203,586
---------- -------- ----------
$1,020,645 $907,621 $1,021,453
========== ======== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Borrowings under revolving
credit facility $ - $ - $ 42,000
Current portion of capital
leases 5,532 5,532 7,000
Accounts payable, trade 173,990 64,192 167,698
Other accounts payable and
accrued expenses 186,962 203,365 203,128
---------- -------- ----------
Total current liabilities 366,484 273,089 419,826
Senior notes 160,000 160,000 160,000
Obligations under capital leases 126,525 130,626 130,440
Other liabilities (Note 5) 30,437 13,671 13,178
Commitments and contingencies - - -
Preferred stock, at mandatory
redemption value (Note 7) 69,661 100,000 100,000
Common shareholders' equity:
Common stock (Note 7) 105 90 90
Additional paid-in capital
(Note 7) 224,234 193,910 193,910
Retained earnings 43,199 36,235 4,009
---------- -------- ----------
Total common shareholders'
equity 267,538 230,235 198,009
---------- -------- ----------
$1,020,645 $907,621 $1,021,453
========== ======== ==========
See notes to consolidated financial statements
</TABLE>
3
<PAGE>
<TABLE>
HILLS STORES COMPANY AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
Successor Successor Predecessor
Company Company Company
Thirteen Four Weeks Nine Weeks
<CAPTION> Weeks Ended Ended Ended
(unaudited) October 29,October 30, October 2,
(in thousands, except per share amounts) 1994 1993 1993
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $457,212 $145,691 * $295,146
Cost of sales 321,591 103,866 * 206,837
Selling and administrative expenses (Note 11) 98,623 28,899 * 64,047
Depreciation and amortization 9,147 2,821 * 7,261
--------- --------- * --------
Operating earnings 27,851 10,105 * 17,001
*
Other income (expense): *
Capital lease interest ( 3,657)( 1,264) *( 2,461)
Other interest ( 6,063)( 1,954) *( 715)
Other income, net 968 122 * 67
-------- -------- * --------
( 8,752) ( 3,096) *( 3,109)
Earnings before reorganization items, income -------- ------- * --------
taxes, extraordinary gain, and preferred *
dividend requirements 19,099 7,009 * 13,892
*
Reorganization items, net - - *( 6,640)
-------- ------- * --------
Earnings before income taxes, extraordinary *
gain, and preferred dividend requirements 19,099 7,009 * 7,252
Income taxes (Note 8) 6,176 3,000 * -
-------- ------- * --------
Earnings before extraordinary gain and *
preferred dividend requirements 12,923 4,009 * 7,252
Extraordinary gain on discharge of *
prepetition debt - - * 258,239
-------- ------- * --------
Net earnings 12,923 4,009 * 265,491
Predecessor Company preferred dividend *
requirements - - *( 426)
-------- ------- * --------
Net earnings applicable to common share- *
holders $ 12,923 $ 4,009 * $265,065
======== ======= * =======
Primary earnings per common share (Note 9): *
Earnings before extraordinary gain $ 0.91 $ 0.29 * $ 0.35
Extraordinary gain on discharge of pre- *
petition debt - - * 13.07
-------- ------- * -------
*
Net earnings applicable to common *
shareholders $ 0.91 $ 0.29 * $ 13.42
======== ======== * =======
*
Fully-diluted earnings per common share (Note 9): *
Earnings before extraordinary gain $ 0.87 $ 0.27 * $ 0.31
Extraordinary gain on discharge of prepetition *
debt - - * 11.75
-------- ------- * -------
Net earnings applicable to common *
shareholders $ 0.87 $ 0.27 * $ 12.06
======== ====== * ========
See notes to consolidated financial statements
</TABLE>
4
<PAGE>
<TABLE>
HILLS STORES COMPANY AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
Successor Successor Predecessor
Company Company Company
Thirty-nine Four Weeks Thirty-five
<CAPTION> Weeks Ended Ended Weeks Ended
(unaudited) October 29, October 30, October 2,
(in thousands, except per share amounts) 1994 1993 1993
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $1,198,441 $145,691 * $992,848
Cost of sales 856,027 103,866 * 710,375
Selling and administrative expenses *
(Notes 6 and 11) 276,373 28,899 * 239,997
Depreciation and amortization 26,338 2,821 * 27,902
---------- -------- * --------
Operating earnings 39,703 10,105 * 14,574
*
Other income (expense): *
Capital lease interest ( 11,085) ( 1,264) * ( 10,284)
Other interest ( 17,548) ( 1,954) * ( 3,364)
Other income, net 2,070 122 * 231
---------- -------- * --------
( 26,563) ( 3,096) * ( 13,417)
---------- -------- * --------
Earnings before reorganization items, income *
taxes, extraordinary gain, and preferred *
dividend requirements 13,140 7,009 * 1,157
*
Reorganization items, net - - * ( 9,242)
----------- ------- * --------
Earnings (loss) before income taxes, *
extraordinary gain, and preferred dividend *
requirements 13,140 7,009 * ( 8,085)
Income taxes (Note 8) 6,176 3,000 * -
---------- ------- * --------
Earnings (loss) before extraordinary gain and *
preferred dividend requirements 6,964 4,009 * ( 8,085)
Extraordinary gain on discharge of prepetition *
debt - - * 258,239
---------- ------- * --------
Net earnings 6,964 4,009 * 250,154
Predecessor Company preferred dividend *
requirements - - * ( 1,662)
---------- ------- * --------
Net earnings applicable to common *
shareholders $ 6,964 $ 4,009 * $248,492
========== ======= * ========
Primary earnings per common share (Note 9): *
Earnings (loss) before extraordinary gain $ 0.49 $ 0.29 * ($ 0.49)
Extraordinary gain on discharge of *
prepetition debt - - * 13.07
-------- ------- * --------
Net earnings applicable to common *
shareholders $ 0.49 $ 0.29 * $ 12.58
======== ======== * ========
Fully-diluted earnings per common share (Note 9): *
Earnings (loss) before extraordinary gain $ 0.47 $ 0.27 * ($ 0.45)
Extraordinary gain on discharge of *
prepetition debt - - * 11.75
-------- ------- * --------
Net earnings applicable to common *
shareholders $ 0.47 $ 0.27 * $ 11.30
======== ======= * ========
See notes to consolidated financial statements
</TABLE>
5
<PAGE>
<TABLE>
HILLS STORES COMPANY AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Successor Successor Predecessor
Company Company Company
Thirty-nine Four Weeks Thirty-five
Weeks Ended Ended Weeks Ended
(unaudited) October 29, October 30, October 2,
(in thousands) 1994 1993 1993
- --------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net earnings $ 6,964 $ 4,009 * $ 250,154
Adjustments to reconcile net earnings to net *
cash used for operating activities before *
reorganization items: *
Depreciation and amortization 28,239 3,031 * 28,780
Gain on conversion of pension plan ( 4,479) - * -
Increase in accounts receivable and other *
current assets ( 40,520) ( 16,003) *( 19,485)
Increase in inventories ( 147,743) ( 51,892) *( 141,704)
Increase in accounts payable and other *
accrued expenses 107,818 47,953 * 61,087
Other, net 503 ( 304) * 2,761
-------- ------- * --------
Net cash provided by (used for) *
operating activities before *
reorganization items ( 49,218) ( 13,206) * 181,593
Reorganization items: *
Decrease in liabilities subject to *
compromise - - *( 6,274)
Fresh-start revaluation - - * 5,985
Extraordinary gain on discharge of *
prepetition debt - - *( 258,239)
------- ------- * --------
Net cash used for operating activities( 49,218) ( 13,206) *( 76,935)
*
CASH FLOWS FROM INVESTING ACTIVITIES: *
*
Capital expenditures ( 32,646) ( 929) *( 27,162)
*
CASH FLOWS FROM FINANCING ACTIVITIES: *
*
Borrowings under revolving credit facility - 42,000 * -
Principal payments under capital lease *
obligations ( 4,101) ( 444) *( 3,400)
Sale/leaseback financing (Note 5) 20,169 - * -
Cash distributions pursuant to the Plan of *
Reorganization ( 13,673) ( 70,066) *( 5,165)
Other financing activities ( 1,592) ( 196) *( 7,444)
------- ------- * -------
Net cash provided by (used for) financing *
activities 803 ( 28,706) *( 16,009)
------- ------- * -------
Net decrease in cash and cash equivalents ( 81,061) ( 42,841) * (120,106)
*
Cash and cash equivalents at beginning of *
period 90,049 53,237 * 173,343
------- ------- * -------
Cash and cash equivalents at end of period $ 8,988 $10,396 * $ 53,237
======= ======= * =======
See notes to consolidated financial statements
</TABLE>
6
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
- -----------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. REORGANIZATION
--------------
On October 4, 1993, Hills Stores Company (the "Company" or the
"Successor Company") and certain of its principal subsidiaries
emerged from reorganization proceedings under Chapter 11 of the
United States Bankruptcy Code ("Chapter 11"). The Company, its
former parent, Hills Department Stores, Inc. (the "Predecessor
Company"), and the five principal subsidiaries of the Company
voluntarily filed petitions for reorganization under Chapter 11
on February 4, 1991.
During the bankruptcy proceedings, the consolidated financial
statements of the Predecessor Company were presented in
accordance with the American Institute of Certified Public
Accountants Statement of Position 90-7: "Financial Reporting by
Entities in Reorganization under the Bankruptcy Code" ("SOP 90-
7"). Pursuant to SOP 90-7, the Successor Company adopted fresh-
start reporting as of October 2, 1993. Under fresh-start
reporting, a new reporting entity is created and recorded amounts
of assets and liabilities are adjusted to reflect their estimated
fair values. Financial statements for the period prior to
October 2, 1993 have been designated as those of the Predecessor
Company. Black lines have been drawn to separate the Successor
Company financial statements from the Predecessor Company
financial statements to signify that they are those of a new
reporting entity and have been prepared on a basis not comparable
to prior periods.
2. PRO FORMA COMBINED STATEMENTS OF OPERATIONS
-------------------------------------------
The following unaudited Pro Forma Combined Statements of
Operations present the pro forma combined results of the
operations of the Successor and Predecessor Companies for the
thirteen and thirty-nine weeks ended October 30, 1993 and have
been adjusted to reflect: the implementation of fresh-start
reporting as of January 31, 1993; elimination of the effects of
non-recurring transactions resulting from the reorganization
included in the results of the Predecessor Company; and payment
to creditors pursuant to the Plan of Reorganization (the "POR")
as of January 31, 1993. The information presented on the
following pages should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of
Operations.
7
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
- -----------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. PRO FORMA COMBINED STATEMENTS OF OPERATIONS (continued)
-------------------------------------------------------
<TABLE>
PRO FORMA COMBINED THIRTEEN WEEKS ENDED OCTOBER 30, 1993
<CAPTION>
Successor Predecessor Pro Forma
Company Company Combined
Four Weeks Nine Thirteen
(unaudited) Ended Weeks Ended Weeks Ended
(in thousands, except per October 30, October 2, Pro Forma October 30,
share amounts) 1993 1993 Adjustments 1993
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $145,691 $295,146 $ - $440,837
Cost of sales 103,866 206,837 - 310,703
Selling and administrative
expenses 28,899 64,047 - 92,946
Depreciation and amortization 2,821 7,261 ( 1,421)(a) 8,661
-------- -------- -------- --------
Operating earnings 10,105 17,001 1,421 28,527
Capital lease interest ( 1,264) ( 2,461) ( 67)(b)( 3,792)
Other interest ( 1,954) ( 715) ( 3,467)(c)( 6,136)
Other income, net 122 67 ( 33)(d) 156
Earnings before reorganization -------- ------- -------- -------
items, income taxes,
extraordinary gain, and
preferred dividend
requirements 7,009 13,892 ( 2,146) 18,755
Reorganization items, net - ( 6,640) 6,640 (e) -
Earnings before income taxes, -------- ------- -------- -------
extraordinary gain, and
preferred dividend
requirements 7,009 7,252 4,494 18,755
Income taxes 3,000 - ( 2,017)(g) 983
-------- ------- -------- -------
Earnings before extraordinary
gain and preferred dividend
requirements 4,009 7,252 6,511 17,772
Extraordinary gain on discharge of
prepetition debt - 258,239 ( 258,239)(e) -
-------- -------- -------- -------
Net earnings 4,009 265,491 ( 251,728) 17,772
Preferred dividend requirements - ( 426) 426 (e) -
-------- ------- -------- -------
Net earnings applicable to
common shareholders $ 4,009 $265,065 ($251,302) $ 17,772
======== ======== ======== ========
Primary earnings per share
applicable to common
shareholders $ 0.29(f) $ 1.27 (f)
======== =======
Fully-diluted earnings per share
applicable to common
shareholders $ 0.27(f) $ 1.21 (f)
======== =======
</TABLE>
8
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. PRO FORMA COMBINED STATEMENTS OF OPERATIONS (continued)
--------------------------------------------------------
<TABLE>
PRO FORMA COMBINED THIRTY-NINE WEEKS ENDED OCTOBER 30, 1993
<CAPTION>
Successor Predecessor Pro Forma
Company Company Combined
Four Weeks Thirty-five Thirty-nine
(unaudited) Ended Weeks Ended Weeks Ended
(in thousands, except per October 30, October 2, Pro Forma October 30,
share amounts) 1993 1993 Adjustments 1993
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $145,691 $ 992,848 $ - $1,138,539
Cost of sales 103,866 710,375 - 814,241
Selling and administrative
expenses 28,899 239,997 - 268,896
Depreciation and amortization 2,821 27,902 ( 4,545)(a) 26,178
-------- -------- ---------- ----------
Operating earnings 10,105 14,574 4,545 29,224
Capital lease interest ( 1,264) ( 10,284) 172 (b)( 11,376)
Other interest ( 1,954) ( 3,364) ( 11,662)(c)( 16,980)
Other income, net 122 231 822 (d) 1,175
-------- -------- -------- ----------
Earnings before reorgani-
zation items, income taxes,
extraordinary gain, and
preferred dividend
requirements 7,009 1,157 ( 6,123) 2,043
Reorganization items, net - ( 9,242) 9,242 (e) -
-------- -------- -------- ---------
Earnings (loss) before
income taxes, extraordinary
gain, and preferred
dividend requirements 7,009 ( 8,085) 3,119 2,043
Income taxes 3,000 - ( 2,017)(g) 983
-------- -------- -------- ---------
Earnings (loss) before extra-
ordinary gain and preferred
dividend requirements 4,009 ( 8,085) 5,136 1,060
Extraordinary gain on discharge
of prepetition debt - 258,239 ( 258,239)(e) -
-------- -------- -------- ---------
Net earnings 4,009 250,154 ( 253,103) 1,060
Preferred dividend
requirements - ( 1,662) 1,662 (e) -
-------- -------- -------- ---------
Net earnings applicable to
common shareholders $ 4,009 $248,492 ($251,441) $1,060
======== ======== ======== =========
Primary earnings per share
applicable to common
shareholders $ 0.29 (f) $ 0.08(f)
======== =========
Fully-diluted earnings per
share applicable to common
shareholders $ 0.27 (f) $ 0.07(f)
======== =========
</TABLE>
9
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
- -----------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. PRO FORMA COMBINED STATEMENTS OF OPERATIONS (continued)
-------------------------------------------------------
(a) Reflects the impact of: the revaluation of and the change in
the related estimated remaining useful lives of property
and equipment, property under capital leases, and beneficial
lease rights in connection with fresh-start reporting; the
pro forma amortization of the Successor Company's reorgani-
zation value in excess of amounts allocable to identifiable
assets; and the elimination of the Predecessor Company's
goodwill amortization.
(b) Reflects the impact on interest expense due to the revalua-
tion of capital lease obligations.
(c) Reflects interest expense on the senior notes, the amortiza-
tion of deferred financing costs related to securing the
revolving credit facility, and interest expense on the
revolving credit facility.
(d) Reflects pro forma interest income after taking into
consideration distributions in accordance with the POR.
(e) Reflects elimination of reorganization items, gain on
discharge of prepetition debt, and preferred dividend
requirements.
(f) Pro forma primary earnings per share were calculated
based on a weighted average of 14,000,000 shares
outstanding. Pro forma fully-diluted earnings per
share were calculated based on a weighted average of
14,700,000 shares outstanding.
(g) Reflects the income tax effect of the pro forma adjustments.
3. BASIS OF PRESENTATION
----------------------
The consolidated financial statements include the accounts of the
Successor Company and the Predecessor Company and their wholly-
owned subsidiaries. All significant intercompany transactions
and balances have been eliminated. Certain prior year amounts
were reclassified to conform with the current year presentation.
The information furnished reflects all normal recurring adjust-
ments which are, in the opinion of management, necessary to
present a fair statement of the results for the interim periods.
10
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
- -----------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. BASIS OF PRESENTATION (continued)
---------------------------------
The accompanying unaudited consolidated financial statements are
presented in accordance with the requirements of Form 10-Q and
consequently do not include all the disclosures normally required
by generally accepted accounting principles nor those normally
made in the Company's annual Form 10-K filing; however, the
Company considers the disclosures adequate to make the informa-
tion presented not misleading. Reference should be made to the
Company's Annual Report on Form 10-K for additional disclosures,
including a summary of the Company's accounting policies, which
have not changed. The Company's business is seasonal in nature
and the results of operations for the interim periods presented
are not necessarily indicative of the results to be expected for
the full fiscal year. The fourth quarter of each fiscal year
provides the major portion of the Company's annual sales and
operating earnings, with operating earnings particularly
concentrated in the Christmas selling season.
4. REVOLVING CREDIT FACILITY
-------------------------
The Revolving Credit Agreement (the "Facility") was amended to
allow the Company to enter into the sale/leaseback transactions
described in Note 5. In addition, the Company met the economic
performance requirements as defined in the Facility and qualified
for a 1/4% interest rate reduction on borrowings under the
Facility beginning August 1, 1994.
Effective May 12, 1994, the Company obtained a consent and waiver
on the Facility permitting it to purchase, on or prior to January
28, 1995, up to $50.0 million aggregate principal amount of its
Senior Notes at a purchase price not in excess of 100% of the
principal amount of each Senior Note. As of the date of this
filing, no purchases of Senior Notes have occurred and the
Company does not expect that any such purchases will occur.
5. OTHER LIABILITIES
-----------------
In September 1994, the Company obtained $20.2 million, which
includes transaction costs, of financing for certain of its real
properties through sale/leaseback arrangements. These transac-
tions were accounted for as financings. The leases, which have
terms of ten years each, require minimum annual rental payments
of $3.5 million in 1996, $3.8 million in 1997, $4.4 million in
1998, $3.7 million in 1999, and a total of $15.7 million thereafter.
11
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
- -----------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. OTHER LIABILITIES (continued)
-----------------------------
The lease terms also include options to purchase some or all of the
properties either at the end of the initial lease term or renewal
periods at an amount not greater than the then current fair market
value of the properties.
6. PENSION PLAN
------------
The Company's Board of Directors authorized the termination,
effective April 30, 1994, of the Company's pension plan, subject
to approval by the Pension Benefit Guaranty Corporation and the
Internal Revenue Service. In place of the pension plan, the
Company amended its 401(k) Employee Savings Plan, effective May
1, 1994, to include company matching contributions.
In connection with the termination of the pension plan, partici-
pants' vested benefits were calculated based on all credited
service, pension earnings, and contributions up to April 30,
1994. There will be no asset reversion to the Company as plan
assets in excess of benefit obligations, as adjusted for the
termination of the plan, will be allocated to participants. In
the first quarter of 1994, the Company recorded a $4.5 million
gain, included in selling and administrative expenses, related to
the curtailment and termination of its pension plan and the
elimination of the related pension obligation.
7. PREFERRED STOCK CONVERSION
--------------------------
As of October 29, 1994, 1,516,933 shares of the Company's Series
A Convertible Preferred Stock (the "Preferred Stock") were
converted to the Company's Common Stock (the "Common Stock") on a
share for share basis. These noncash conversions amounted to
$30.3 million.
12
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
- -----------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
8. INCOME TAXES
------------
The Company recorded an income tax provision of $6.2 million for
the thirteen and thirty-nine week periods ended October 29, 1994
based on an estimated combined annual federal and state effective
tax rate of 47.0%. A provision of $3.0 million was recorded by
the Successor Company during the four weeks ended October 30,
1993 using an estimated combined federal and state effective tax
rate of 42.8%. The increase in the combined effective tax rate
is primarily due to the amortization of reorganization value in
excess of amounts allocable to identifiable assets, which is non-
deductible for income tax purposes, for twelve months in 1994
compared to four months in 1993.
9. EARNINGS PER SHARE
------------------
Primary and fully-diluted earnings per common share of the
Successor Company for the thirteen and thirty-nine weeks ended
October 29, 1994 and four weeks ended October 30, 1993 were
computed based on the weighted average number of common and
common equivalent shares assumed to be outstanding during the
period. Primary weighted average shares outstanding amounted to
14,141,390 and 14,096,892 for the thirteen and thirty-nine weeks
ended October 29, 1994, respectively, and 14,000,000 for the four
weeks ended October 30, 1993. Fully-diluted weighted average
shares outstanding also assumes the exercise of the Stock Rights.
Fully-diluted weighted average shares outstanding amounted to
14,841,390 and 14,796,892 for the thirteen and thirty-nine weeks
ended October 29, 1994, respectively, and 14,700,000 for the four
weeks ended October 30, 1993. The weighted average number of
shares used for the thirteen and thirty-nine weeks ended October
29, 1994 and four weeks ended October 30, 1993 reflect all shares
of common stock intended to be issued in accordance with the POR.
Primary and fully-diluted earnings per common share of the
Predecessor Company for the nine and thirty-five week period
ended October 2, 1993 were computed using the weighted average
common and common equivalent shares outstanding during the
period. Primary weighted average shares outstanding amount to
19,757,390 for both periods. Fully-diluted weighted average
shares outstanding for the same periods were 21,981,683, which
assumed the conversion of the 11% Convertible Junior Subordinated
Debentures.
13
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
- -----------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
10. RIGHTS AGREEMENT
----------------
Pursuant to a Rights Agreement adopted on August 16, 1994, the
Company declared a distribution of one purchase right (the
"Right") for each share of Common Stock and Preferred Stock then
outstanding. Each Right would initially entitle the holder to
purchase, subject to adjustment, one one-thousandth share of the
Company's Series B Participating Cumulative Preferred Stock
("Series B Preferred Stock"), consisting of 55,000 shares
authorized, $.10 par value per share, at an exercise price of $75
per one one-thousandth share. Each share of Common Stock and
Preferred Stock issued after August 16, 1994 will also have one
Right attached. The Rights expire August 16, 2004 and, under
certain conditions, may be redeemed by the Company at a price of
$.01 per Right. The Rights have no voting or dividend privileges
and are not currently separable from the capital stock.
The Rights are not currently exercisable, but would become
exercisable if certain events occurred relating to a person or
group (the "Acquiring Person") acquiring or attempting to acquire
15% or more of the outstanding shares of capital stock other than
through a qualifying tender offer. Upon the occurrence of such
an event, each Right (except the Rights beneficially owned by the
Acquiring Person, which become null and void) entitles its holder
to purchase for $75 the economic equivalent of Common Stock, or
in certain circumstances, securities of the Acquiring Person, or
its affiliate, worth twice as much. After there is an Acquiring
Person, the Rights may be exchanged, at the election of the
Company, for consideration per Right consisting of one-half of
the securities that would otherwise be issuable at that time.
Each share of Series B Preferred Stock will entitle its holder to
1,000 votes. The holders of Series B Preferred Stock are
entitled to receive (a) quarterly cumulative dividends payable in
cash in an amount per share equal to $.01 per share less the
amount of cash dividends received pursuant to the following
clause (b) (but not less than zero) and (b) cash and in-kind
dividends on each payment date for similar dividends on the
Common Stock in an amount per whole share of Series B Preferred
Stock equal to 1,000 (subject to antidilution adjustments) times
the per share amount of all cash dividends then to be paid on
each share of Common Stock.
Whenever quarterly dividends or distributions on the Series B
Preferred Stock are in arrears, the Company's right to declare or
pay dividends or other distributions on or to redeem or purchase
any shares of stock ranking junior to or on a parity with the
14
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
- -----------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
10. RIGHTS AGREEMENT (continued)
----------------------------
Series B Preferred Stock is subject to certain restrictions.
Upon any liquidation, dissolution or winding up of the Company,
whether voluntary or involuntary, the holders of any shares of
Series B Preferred Stock will be entitled to receive, before any
distribution is made to holders of shares of stock ranking junior
to the Series B Preferred Stock or any distribution (other than a
ratable distribution) is made to the holders of stock ranking on
a parity with the Series B Preferred Stock, an amount equal to
the accrued dividends thereon plus the greater of (a) $.10 per
share or (b) an amount per share equal to 1,000 (subject to
antidilution adjustments) times the amount per share to be
distributed to holders of the Common Stock.
11. LITIGATION
----------
In the Company's lawsuit against Dickstein Partners, L.P., et al.
("Dickstein") commenced in August 1994, the Company voluntarily
withdrew the lawsuit and reached a negotiated settlement with
Dickstein that resulted in the end of Dickstein's consent
solicitation. Dickstein agreed to vote for the Company's
proposed shareholder solicitation, which is a condition to the
Company's $75 million cash self-tender for up to three million
common shares at $25 per share, to amend the Company's
corporate charter to require that certain actions taken by
stockholders may not be taken by written consent. In connection
with the consent solicitation by Dickstein and the subsequent
settlement, the Company incurred costs through October 29, 1994
of $2.2 million, which are included in selling and administrative
expenses.
In the stockholder derivative and class action lawsuit captioned
Weiss v. Lee, et al., the defendants, including the Company, have
entered into a memorandum of understanding with the plaintiff to
settle the litigation, subject to approval of the Chancery Court
of the State of Delaware. The Company believes that the final
settlement will not have a material adverse impact on the
Company's consolidated financial position.
12. STOCK REPURCHASE
----------------
In September 1994, in response to the Dickstein consent solicita-
tion, the Company's Board of Directors announced a program to
enhance shareholder value, including the approval of the self-
15
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
- -----------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
12. STOCK REPURCHASE (continued)
----------------------------
tender (see Note 11) and the implementation of a growth program
which includes remodeling, opening new stores, and the continua-
tion of operating improvement programs. In connection with the
self-tender, the Company intends to seek shareholder consent to
amend its corporate charter as described in Note 11. The Company
intends to solicit its senior note holders for approval of the
self-tender as such stock repurchase is restricted by the Senior
Note Indenture. The Company is seeking to amend its Facility to
permit it to enter into the self-tender and to implement its
growth program. The Company expects to complete the self-tender
offer in February 1995.
16
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
- ----------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
On October 4, 1993, Hills Stores Company (the "Company" or the
"Successor Company") and certain of its principal subsidiaries
emerged from reorganization proceedings under Chapter 11 of the
United States Bankruptcy Code ("Chapter 11"). The Company, its
former parent, Hills Department Stores, Inc. (the "Predecessor
Company"), and the five principal subsidiaries of the Company,
voluntarily filed petitions for reorganization under Chapter 11
on February 4, 1991.
In connection with the adoption of fresh-start reporting and the
consummation of the Plan of Reorganization (the "POR"), a new
entity has been deemed created for financial reporting purposes.
Accordingly, the consolidated financial statements for the
periods subsequent to October 2, 1993 have been designated
"Successor Company" to signify that they are those of the new
entity for financial reporting purposes and have been prepared on
a basis not comparable to prior periods (see Note 1 of Notes to
Consolidated Financial Statements).
To facilitate comparison of the Successor and Predecessor
Companies' operating performances for the thirteen and thirty-
nine weeks ended October 29, 1994 and October 30, 1993, the
discussions below are presented using the pro forma combined
results of operations of the Predecessor Company for the thirteen
and thirty-nine weeks ended October 30, 1993 as presented in Note
2 of Notes to Consolidated Financial Statements. Consequently,
the information presented below does not reflect the operating
results of the Predecessor Company for the thirteen and thirty-
nine weeks ended October 30, 1993 as they are presented in the
Consolidated Statements of Operations. The most significant pro
forma adjustment is the increase in interest expense due to the
assumed issuance of the senior notes at January 31, 1993 (see
Note 2 of Notes to Consolidated Financial Statements).
RESULTS OF OPERATIONS
THIRTEEN WEEKS ENDED OCTOBER 29, 1994 VERSUS
PRO FORMA COMBINED THIRTEEN WEEKS ENDED OCTOBER 30, 1993
Sales increased 3.7% compared to the same period in 1993. Toys,
housewares, and seasonal hardlines experienced sales gains while
apparel sales were negatively affected by the unseasonably warm
regional weather in September and October of 1994. Comparable
store sales increased 2.6% to $452.3 million.
17
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
- ----------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
RESULTS OF OPERATIONS (continued)
THIRTEEN WEEKS ENDED OCTOBER 29, 1994 VERSUS
PRO FORMA COMBINED THIRTEEN WEEKS ENDED OCTOBER 30, 1993
(continued)
Selling and administrative expenses as a percentage of sales were
21.6% compared to 21.1% in 1993. This increase is primarily due
to $2.2 million of expenses incurred by the Company in connection
with the consent solicitation by Dickstein Partners, Inc.
("Dickstein").
Other income was $968,000 compared to $156,000 in 1993. This
increase is primarily attributable to the licensing of one of the
Company's product trademarks.
THIRTY-NINE WEEKS ENDED OCTOBER 29, 1994 VERSUS
PRO FORMA COMBINED THIRTY-NINE WEEKS ENDED OCTOBER 30, 1993
Sales increased 5.3% compared to the same period in 1993. In an
improved retailing environment, sales in both hardlines and
softlines showed increases over the prior year. Comparable store
sales increased 5.3% to $1.2 billion.
Selling and administrative expenses as a percentage of sales were
23.1% compared to 23.6% in 1993. This improvement is primarily
attributable to increased sales volume, a $4.5 million gain from
the elimination of the Company's pension benefit obligation due
to the termination of the pension plan, and the Company's
continued focus on cost containment, partially offset by $2.2
million of expenses incurred by the Company in connection with
the consent solicitation by Dickstein.
Other income was $2.1 million versus $1.2 million in 1993. This
increase is primarily attributable to the licensing of one of the
Company's product trademarks.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital as of October 29, 1994 increased by
$13.8 million from January 29, 1994 primarily due to the proceeds
received from the sale/leaseback transactions described in Note 5
of Notes to Consolidated Financial Statements. Net cash used for
operating activities was $49.2 million. The use of cash for
operating activities is primarily due to the seasonal nature of
the Company's business. By the end of fiscal 1994, the Company
expects to generate positive cash flows from operating activities.
18
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
- ----------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES (continued)
Capital expenditures were primarily for the remodeling and
upgrading of existing stores and the opening of three new
stores. Fiscal 1994 capital expenditures are expected to
approximate $40 million.
As of October 29, 1994, there was no outstanding loan balance
under the Company's $225 million unsecured Revolving Credit
Facility (the "Facility"). During the first nine months of
fiscal 1994, there were no direct borrowings under the Facility.
Effective May 12, 1994, the Company obtained a consent and waiver
on its Facility permitting it to purchase, on or prior to January
28, 1995, up to $50.0 million aggregate principal amount of its
Senior Notes at a purchase price not in excess of 100% of the
principal amount of each Senior Note. As of the date of this
filing, no purchases of Senior Notes have occurred and the
Company does not expect that any such purchases will occur. In
addition, the Company met the economic performance requirements
as defined in the Revolving Credit Agreement and qualified for a
1/4% interest rate reduction on the Facility beginning August 1,
1994.
In September 1994, the Company obtained $20.2 million, which
includes transaction costs, of financing for certain of its real
properties through sale/leaseback arrangements (see Note 5 of
Notes to Consolidated Financial Statements).
In response to the Dickstein consent solicitation, in September
1994, the Company's Board of Directors announced a program to
enhance stockholder value, including the approval of the self-
tender (see Note 11 of Notes to Consolidated Financial State-
ments) and the implementation of a growth program which includes
remodeling, opening new stores, and the continuation of operating
improvement programs. In connection with the self-tender, the
Company intends to seek shareholder consent to amend its
corporate charter as described in Note 11 of Notes to Consoli-
dated Financial Statements. The Company intends to solicit its
senior note holders for approval of the self-tender as such stock
repurchase is restricted by the Senior Note Indenture. The
Company is seeking to amend its Facility to permit it to enter
into the self-tender and to implement its growth program. The
Company expects to complete the self-tender offer in February
1995. The Company anticipates the funds needed to complete the
19
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
- ----------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES (continued)
self-tender offer will be met by the Company's available cash.
Management believes that amounts available under the Company's
current borrowing agreement, together with cash from operations
and the completed sale/leaseback transactions, will enable the
Company to fund its current liquidity and capital expenditure
requirements, including its expansion program, and complete the
self-tender transaction.
20
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
- ------ -----------------
A. In September 1994, the Company voluntarily withdrew its
lawsuit against Dickstein Partners, L.P., et. al. ("Dickstein")
and reached a negotiated settlement that resulted in the end of
Dickstein's consent solicitation. Dickstein agreed to vote for
the Company's proposed shareholder solicitation, which is a
condition to the Company's $75 million cash self-tender for up to
three million common shares at $25 per share, to amend the
Company's corporate charter to require that certain actions taken
by stockholders may not be taken by written consent.
B. In the previously reported stockholder's derivative and
class action lawsuit filed in the Court of Chancery of the State
of Delaware captioned Weiss v. Lee, et al. which named each Board
member and the Company as defendants, the parties entered into a
memorandum of understanding to settle the litigation. Although
the Company and its directors believe the plaintiff's allegations
are without merit, the memorandum was entered into on September
30, 1994 in order to eliminate the burden and expense of further
litigation. The Board believes the settlement is in the best
interests of the Company and all of its stockholders. The
parties intend to present the settlement, which contemplates
treatment of the action as a shareholder class action not
permitting members of the shareholder class to opt-out, to the
Delaware Chancery Court for its approval in the near future. The
Company believes that the final settlement will not have a
material adverse impact on the Company's consolidated financial
position.
21
<PAGE>
PART II - OTHER INFORMATION (continued)
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- ------- --------------------------------
a. The following documents are filed as part of this report:
(10) Amendment to Credit Agreement dated as of October 4,
1993.
(11) Statements regarding computation of per share earnings.
(15) Letter regarding unaudited interim financial information.
(15.1) Awareness letter regarding unaudited interim financial
information.
(27) Financial Data Schedule
b. Reports on Form 8-K
As previously reported, in August, 1994, Registrant filed a
report on Form 8-K primarily relating to a Rights Agreement, a
new class of Series B preferred stock, and certain employment
contracts.
- ------------
22
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act
of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
HILLS STORES COMPANY
Date: December 8, 1994 /s/Michael Bozic
----------------
Michael Bozic
President and Chief Executive Officer
Date: December 8, 1994 /s/John G. Reen
---------------
John G. Reen
Executive Vice President - Chief
Financial Officer
23
<PAGE>
EXHIBIT INDEX
(10) Amendment to Credit Agreement dated as of
October 4, 1993. 25
(11) Statements regarding computation of per share
earnings. 39
(15) Letter regarding unaudited interim financial
information. 41
(15.1) Awareness letter regarding unaudited interim
financial information. 42
(27) Financial Data Schedule 43
24
<PAGE>
EXHIBIT 10
AMENDMENT, CONSENT AND WAIVER dated as of
July 6, 1994 (this "Amendment"), to
the Credit Agreement dated as of
October 4, 1993 (the "Credit Agree-
ment"), among Hills Stores Company, a
Delaware corporation (the "Parent"),
Hills Department Store Company, a
Delaware corporation (the "Borrower")
and a wholly owned subsidiary of the
Parent, the financial institutions
listed on Schedule 2.01 to the Credit
Agreement (the "Lenders"), the Co-
Agents named in the Credit Agreement
and Chemical Bank, as agent for the
Lenders (in such capacity, the "Ad-
ministrative Agent") and as Fronting
Bank.
WHEREAS, the Borrower and the Parent have requested that the
Required Lenders (a) consent to the entry by the Borrower into the
sale and lease-back transactions (the "Sale and Lease-Back
Transactions") described in the summary term sheets attached to
this Amendment as Exhibit A (the "Sale and Lease-Back Summary Term
Sheets") and (b) in connection therewith, agree to amend the Credit
Agreement as described below; and
WHEREAS, the Required Lenders are willing, on the terms,
subject to the conditions and to the extent set forth below, to
grant such consent and waiver and effect such amendment.
NOW, THEREFORE, in consideration of the premises and the
agreements, provisions and covenants herein contained, the
Borrower, the Parent and the Required Lenders hereby agree, on the
terms and subject to the conditions set forth herein, as follows:
SECTION 1. CONSENT AND WAIVER. The Required Lenders
------------------
hereby (a) consent to the entry by the Borrower into the Sale and
Lease-Back Transactions described in the Sale and Lease-Back
Summary Term Sheets and (b) waive the provisions of Section 7.03 of
the Credit Agreement to the extent, but only to the extent,
necessary to permit the Parent and the Borrower to effect the Sale
and Lease-Back Transactions. The Borrower, the Parent and the
Required Lenders hereby acknowledge and agree that (a) the Sale and
Lease-Back Transactions shall constitute "Sale and Lease-Back
Transactions" as defined in the Credit Agreement, (b) the Sale and
Lease-Back Transactions shall be deemed to be permitted under
Section 7.03 of the Credit Agreement, (c) the amount of any
Indebtedness incurred by the Parent and its Subsidiaries in
25
<PAGE>
EXHIBIT 10
connection with the Sale and Lease-Back Transactions (i) shall be
deemed to be Indebtedness permitted to be incurred under Sections
7.01 and 7.03 of the Credit Agreement in connection with sale and
lease-back transactions, (ii) shall not be included in determining
whether any Indebtedness incurred in connection with sale and lease-
back transactions after the date hereof would be permitted under the
provisions of Section 7.03(b) of the Credit Agreement, (d) the sales
of assets to be made by the Parent and its Subsidiaries in connection
with the Sale and Lease-Back Transaction shall be deemed to be sales
of assets permitted to be made under Section 7.06 of the Credit
Agreement in connection with sale and lease-back transactions and (e)
the amount expended by the Parent and its Subsidiaries in connection
with the portion of the Sale and Lease-Back Transactions that relates
to the sale and lease-back of truck trailers shall not be deemed to
constitute Capital Expenditures for the purpose of either (i)
determining the amount of Capital Expenditures that the Parent and
its Subsidiaries are entitled to make or permit during the fiscal
year ending January 28, 1995, or (y) determining compliance with
the Consolidated Fixed Charge Coverage Ratio.
SECTION 2. AMENDMENT. The Borrower, the Parent and the
----------
Required Lenders hereby amend Section 7.11 of the Credit Agreement
by deleting such Section in its entirety and substituting the
following therefor:
SECTION 7.11. CAPITAL EXPENDITURES. Make or
--------------------
permit Capital Expenditures to exceed (a) during the period
from October 4, 1993, through and including January 29,
1994, $15,000,000, (b) for the fiscal year ending January
28, 1995, the sum of (i) $36,000,000 (the "Basic Fiscal
1994 Amount") and (ii) the remainder of (A) $26,000,000
minus (B) the aggregate amount expended in respect of the
repurchase of the principal amount of any Senior Notes by
the Parent or the Borrower prior to January 28, 1995 (such
remainder, the "Additional Fiscal 1994 Amount"), (c) for
the fiscal year ending February 3, 1996, $38,000,000, and
(d) during the period from February 4, 1996, to the
Maturity Date, $25,000,000; PROVIDED that (x) to the extent
Capital Expenditures in any period (other than the fiscal
year ending January 28, 1995) are less than the amount set
forth above for such period, the amount of such difference,
up to a maximum of $10,000,000, may be carried forward and
used to make Capital Expenditures in the immediately
succeeding fiscal year of the Borrower and (y) to the
extent Capital Expenditures in the fiscal year ending
January 28, 1995, are less than the amount set forth above
for such fiscal year, the amount of such difference, up to
26
<PAGE>
EXHIBIT 10
a maximum of (1) the lesser of $10,000,000 and the unused portion
of the Basic Fiscal 1994 Amount plus (2) the unused portion of the
Additional Fiscal 1994 Amount, may be carried forward and used to
make Capital Expenditures in the immediately succeeding fiscal year
of the Borrower (it being understood that any Capital Expenditures
during the fiscal year ending January 28, 1995, will be applied first
against the Basic Fiscal 1994 Amount and then against the additional
Fiscal 1994 Amount).
SECTION 3. REPRESENTATIONS AND WARRANTIES.
------------------------------
Each of the Borrower and the Parent represents and warrants to each
of the Lenders that:
(a) The execution, delivery and performance by
the Borrower and the Parent of this Amendment (a) have
been duly authorized by all requisite corporate and, if
required, stockholder action and (b) will not (i) violate
(A) any provision of law, statute, rule or regulation, or
of the certificate or articles of incorporation or other
constitutive documents or by-laws of the Parent or any of
its Subsidiaries, (B) any order of any Governmental
Authority or (C) any provision of any indenture, agreement
or other instrument to which Parent or any of its
Subsidiaries is a party or by which any of them or any of
their property is or may be bound, (ii) be in conflict
with, result in a breach of or constitute (alone or with
notice or lapse of time or both) a default under any such
indenture or any other material agreement or other
instrument or (iii) result in the creation or imposition of
any Lien upon any property or assets of the Parent or any
of its Subsidiaries.
(b) This Amendment has been duly executed and
delivered by the Borrower and the Parent and constitutes a
legal, valid and binding obligation of the Borrower and the
Parent, as the case may be, enforceable against the
Borrower and the Parent, as the case may be, in accordance
with its terms, subject to, or except as enforceability may
be limited by, applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the
enforcement of creditors' rights generally and by general
equitable principles (whether enforcement is sought in a
proceeding in equity or at law).
SECTION 3. LOAN DOCUMENTS. This Amendment and
--------------
each certificate and instrument delivered by any party in
connection herewith shall be a Loan Document for all purposes.
27
<PAGE>
EXHIBIT 10
SECTION 4. EFFECTIVENESS. This Amendment
-------------
shall become effective as of the date hereof when the
Administrative Agent shall have received copies hereof that, when
taken together, bear the signatures of each of the Borrower, the
Parent and the Required Lenders.
SECTION 5. NOTICES. All notices hereunder
-------
shall be given in accordance with the provisions of Section 11.01
of the Credit Agreement.
SECTION 6. APPLICABLE LAW. THIS AMENDMENT
--------------
SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF
THE STATE OF NEW YORK.
SECTION 7. NO NOVATION. Except as expressly
------------
set forth herein, this Amendment shall not by implication or
otherwise limit, impair, constitute a waiver of or otherwise affect
the rights and remedies of any party under the Credit Agreement,
nor alter, modify, amend or in any way affect any of the terms,
conditions, obligations, covenants or agreements contained in the
Credit Agreement, all of which are ratified and affirmed in all
respects and shall continue in full force and effect. This
Amendment shall apply and be effective only with respect to the
provisions of the Credit Agreement specifically referred to herein.
SECTION 8. COUNTERPARTS. This Amendment may
-------------
be executed in two or more counterparts, each of which shall
constitute an original but all of which when taken together shall
constitute but one contract. Delivery of an executed counterpart
of a signature page of this Amendment by facsimile transmission
shall be as effective as delivery of a manually executed
counterpart of this Amendment.
SECTION 9. HEADINGS. Section headings used
--------
herein are for convenience of reference only, and are not part of
this Amendment and are not to affect the construction of, or to be
taken into consideration in interpreting, this Amendment.
28
<PAGE>
EXHIBIT 10
IN WITNESS WHEREOF, the Borrower, the Parent and
the Required Lenders have caused this Amendment to be duly executed
by their duly authorized officers, all as of the date and year
first above written.
HILLS STORES COMPANY,
by
/s/Bruce A. Caldwell
--------------------
Name: Bruce A. Caldwell
Title: Vice President Treasurer
HILLS DEPARTMENT STORE COMPANY,
by
/s/Bruce A. Caldwell
--------------------
Name: Bruce A. Caldwell
Title: Vice President Treasurer
CHEMICAL BANK, individually, as
Administrative Agent and as Fronting
Bank,
by
/s/Daniel J. Bumgardner
-----------------------
Name: Daniel J. Bumgardner
Title: Vice President
BANK OF MONTREAL,
by
/s/D. Bruce Thorsen
-------------------
Name: D. Bruce Thorsen
Title: Director, Corporate
Banking
CREDIT LYONNAIS, NEW YORK BRANCH,
by
/s/Frederick Haddad
-------------------
Name: Frederick Haddad
Title: Senior Vice President
29
<PAGE>
EXHIBIT 10
CREDIT LYONNAIS, CAYMAN ISLANDS
BRANCH
by
/s/Frederick Haddad
-------------------
Name: Frederick Haddad
Title: Authorized Signer
INTERNATIONALE NEDERLANDEN (U.S.)
CAPITAL CORPORATION,
by
/s/Barry A. Iseley
------------------
Name: Barry A. Iseley
Title: Vice President
SOCIETE GENERALE,
by
/s/John J. Wagner
-------------------
Name: John J. Wagner
Title: Vice President
CIBC, INC.,
by
/s/Mary Kate Miller
-------------------
Name: Mary Kate Miller
Title: Vice President
by
-------------------
Name:
Title:
FIRST NATIONAL BANK OF BOSTON,
by
/s/Peter Morran
-------------------
Name: Peter Morran
Title: Director
30
<PAGE>
EXHIBIT 10
FLEET BANK OF MASSACHUSETTS, N.A.,
by
/s/Helen K. Balboni
-------------------
Name: Helen K. Balboni
Title: Assistant Vice President
LTCB TRUST COMPANY,
by
/s/Noboru Kubota
-------------------
Name: Noboru Kubota
Title: Senior Vice President
ABN AMRO BANK N.V.,
by
/s/J.E. Davis
-------------------
Name: J.E. Davis
Title: Vice President
by
/s/Monique F. Bazoberry
-----------------------
Name: Monique F. Bazoberry
Title: Corporate Banking Officer
IBJ SCHRODER BANK AND TRUST
COMPANY,
by
/s/Lawrence S. Zilavy
---------------------
Name: Lawrence S. Zilavy
Title: Senior Vice President
by
---------------------
Name:
Title:
31
<PAGE>
EXHIBIT 10
PROVIDENT BANK,
by
/s/Mark Whitson
-------------------
Name: Mark Whitson
Title: Vice President
RAIFFEISEN ZENTRALBANK
OESTERREICH AKTIENGESELLSCHAFT,
by
/s/M. Gruell /s/M. Meyer
-------------------------
Name: M. Gruell M. Meyer
Title: Vice President
LEHMAN COMMERCIAL PAPER, INC.,
by
/s/Lisa Raggi
-------------------------
Name: Lisa Raggi
Title: Authorized Signer
32
<PAGE>
EXHIBIT 10
CONFIDENTIAL HILLS DEPARTMENT STORE COMPANY
- ----------------------------------------------------------------
1. SUMMARY OF PRINCIPAL TERMS AND CONDITIONS
STORES LEASE
I. PARTIES
-------
Lessee: Hills Department Store Company (the
"Lessee")
Lessee Advisor: Chemical Securities Inc. ("CSI").
Counsel to Lessee: Winston & Strawn.
Owner Participant: Philip Morris Capital Corporation ("PMCC")
or a wholly-owned subsidiary thereof
(guaranteed by PMCC).
Lessor: The Owner Participant or a bank or trust
company selected by PMCC.
II. THE PROPERTIES
--------------
The Properties: Six retail discount stores and one
distribution center (the "Properties").
Property Description: RETAIL STORE LOCATION LAND
#89 W. Mifflin, Pa Ground Lease
#93 Cranberry, Pa Ground Lease
#94 Butler, Pa Ground Lease
#101 Pittsburgh, Pa Ownership of
Fee Interest
#110 Cicero, N.Y. Ground Lease
#127 Lockport, N.Y. Ground Lease
Distribution Center, Ownership of
Franklin City, Ohio Fee Interest
The six retail stores are approximately 80,000
square feet each and the Distribution Center is
150,000 square feet. All of the Properties are
subject to existing ground leases with the
exception of store #101 and the distribution
center.
33
<PAGE>
EXHIBIT 10
CONFIDENTIAL HILLS DEPARTMENT STORE COMPANY
- -----------------------------------------------------------
Properties Cost: Approximately $25 million +/-
10% but in no event greater than
fair market value ("Properties
Cost").
Appraisal: The Lessor will receive an appraisal
from Enterprise Appraisal Co.
III. TRANSACTION STRUCTURE
---------------------
Funding Date: Estimated to be July 29, 1994;
however, the Owner Participant's
commitment to fund the purchase of
the Properties shall extend through
September 30, 1994.
Lease Term: 10 years.
Rent Payments: Semiannual (as set forth in Schedule
I).
Lease Renewal Options: Renewable at option of Lessee for up
to 4 terms. Each renewal term will
be 5 years except for the 4th
renewal term, which will be 4 years.
Purchase Option: At the end of the Lease Term, the
Lessee will have the option to
purchase one or more of the
Properties for the lower of the
applicable Fixed-Price Purchase
Option Amount or the then fair
market value.
IV. TERMS AND CONDITIONS
--------------------
Net Lease: The Lessee will be responsible for
the operations and maintenance,
insurance and expenses relating to
the Properties.
34
<PAGE>
EXHIBIT 10
CONFIDENTIAL HILLS DEPARTMENT STORE COMPANY
- -----------------------------------------------------------
Other Terms and Conditions: Usual and customary for a
transaction of this type (including,
without limitation): maintenance;
quiet enjoyment; sublease;
insurance; property modification;
general indemnifications; and tax
indemnifications.
V. GENERAL PROVISIONS
------------------
Usual and customary for facilities
of this type including (without
limitation) the following events of
default: failure to make payment;
failure to perform;
misrepresentation; bankruptcy;
acceleration of other indebtedness;
maintenance of insurance; and a
restriction on mergers. There are
no financial covenants in the lease
agreement.
II. SUMMARY OF PRINCIPAL TERMS AND CONDITIONS
TRAILERS LEASE
I. PARTIES
-------
Guarantor: Hills Department Store Company (the
"Guarantor").
Lessee: A special purpose corporation wholly
owned by Hills Department Store Company
(the "Lessee").
Lessee Advisor: Chemical Securities Inc. ("CSI").
Counsel to Lessee: Winston & Strawn.
Owner Participant: Philip Morris Capital Corporation
("PMCC") or a wholly-owned subsidiary
thereof (guaranteed by PMCC).
Lessor: The Owner Participant or a bank or trust
company selected by PMCC.
35
<PAGE>
EXHIBIT 10
CONFIDENTIAL HILLS DEPARTMENT STORE COMPANY
- -----------------------------------------------------------
II. THE EQUIPMENT
-------------
The Equipment: 400 new truck trailers manufac-
tured by Fruehauf (the "New
Equipment") and 102 used truck
trailers (the "Used Equipment")
(collectively the "Equipment").
Equipment Cost: Approximately $8 million +/-
10% but in no event greater than
fair market value ("Equipment
Cost").
Appraisal: The Lessor will receive an ap-
praisal from Enterprise Appraisal Co.
III. TRANSACTION STRUCTURE
---------------------
Funding Date: Estimated to be December 30, 1994.
Lease Term: 9.5 years for the New Equipment and
4.5 years for the Used Equipment.
Lease Renewal Option: At the expiration of the Basic Lease
Term, the Lessee will have the
option to renew the Lease on the
Equipment for a duration of three
years.
Other terms and conditions of the Trailer Lease are substantially
the same as those of the Stores Lease.
36
<PAGE>
EXHIBIT 10
CONFIDENTIAL HILLS DEPARTMENT STORE COMPANY
- -----------------------------------------------------------
PRICING ASSUMPTIONS AND STRUCTURE
---------------------------------
STORES NEW TRAILERS OLD TRAILERS
------ ------------ ------------
Lease Term: 10 years 9.5 years 4.5 years
Interim Period: 362 days 179 days 179 days
SPECIFICATIONS
--------------
1
Implicit Rate: * * *
Present Value
2
of Rents * * *
Fixed-Price
Purchase
Option: Subject to Appraisal but no less than:
* * *
Owner
Participant: Phillip Morris Capital Corporation
1
Indicative pricing - subject to change.
2
Assumes an 11% discount rate.
* Confidential information omitted and filed separately with the
Commission.
37
<PAGE>
EXHIBIT 10
CONFIDENTIAL HILLS DEPARTMENT STORE COMPANY
- --------------------------------------------------------------
STORES (SCHEDULE I)
SPLIT RENT SCHEDULE IN PERCENTAGES OF TOTAL COST
% of Rent
Rental Date No. Total Rent Advance Rent Arrears Rent in Arrears
Jul 2, 1995 1 0.00000000 0.00000000
Jan 2, 1996 2 0.00000000 0.00000000
Jul 2, 1996 3 * * 100.00000000
Jan 2, 1997 4 0.00000000 0.00000000
Jul 2, 1997 5 * * 100.00000000
Jan 2, 1998 6 * * 0.00000000
Jul 2, 1998 7 0.00000000 0.00000000
Jan 2, 1999 8 * * 0.00000000
Jul 2, 1999 9 0.00000000 0.00000000
Jan 2, 2000 10 * * 0.00000000
Jul 2, 2000 11 0.00000000 0.00000000
Jan 2, 2001 12 * * 0.00000000
Jul 2, 2001 13 0.00000000 0.00000000
Jan 2, 2002 14 * * 0.00000000
Jul 2, 2002 15 0.00000000 0.00000000
Jan 2, 2003 16 * * 0.00000000
Jul 2, 2003 17 0.00000000 0.00000000
Jan 2, 2004 18 * * 0.00000000
Jul 2, 2004 19 0.00000000 0.00000000
---------- ---------- ---------- ----------
* * *
* Confidential information omitted and filed separately with the Commission.
38
<PAGE>
EXHIBIT 11
HILLS STORES COMPANY AND SUBSIDIARIES
STATEMENTS RE COMPUTATION OF PER SHARE EARNINGS
Successor Successor Predecessor
Company Company Company
Thirteen Weeks Four Weeks Nine
Ended Ended Weeks Ended
October 29, October 30, October 2,
1994 1993 1993
------------- ------------ -----------
Weighted average primary shares *
outstanding *
- ------------------------------- *
*
Weighted average number of common *
shares assumed to be outstanding *
during the period 10,516,933 9,000,000 * 19,757,390
*
Assumed conversion of preferred *
stock 3,483,067 5,000,000 * N/A
*
Assumed exercise of stock options 141,390 N/A * -
*
Assumed exercise of stock rights - - * N/A
*
Assumed exercise of stock warrants - - * N/A
*
---------- ---------- * ----------
14,141,390 14,000,000 * 19,757,390
========== ========== * ==========
Successor Successor Predecessor
Company Company Company
Thirty-nine Four Weeks Thirty-five
Weeks Ended Ended Weeks Ended
October 29, October 30, October 2,
1994 1993 1993
----------- ----------- ----------
Weighted average primary shares *
outstanding *
- ---------------------------------- *
*
Weighted average number of common *
shares assumed to be outstanding *
during the period 10,516,933 9,000,000 * 19,757,390
*
Assumed conversion of preferred *
stock 3,483,067 5,000,000 * N/A
*
Assumed exercise of stock options 96,892 N/A * -
*
Assumed exercise of stock rights - - * N/A
*
Assumed exercise of stock warrants - - * N/A
*
---------- ---------- * ----------
14,096,892 14,000,000 * 19,757,390
========== ========== * ==========
39
<PAGE>
EXHIBIT 11
HILLS STORES COMPANY AND SUBSIDIARIES
STATEMENTS RE COMPUTATION OF PER SHARE EARNINGS
Successor Successor Predecessor
Company Company Company
Thirteen Weeks Four Weeks Nine
Ended Ended Weeks Ended
October 29, October 30, October 2,
1994 1993 1993
-------------- ----------- ----------
*
Weighted average fully-diluted *
shares outstanding *
- ------------------------------ *
*
Weighted average number of common *
shares assumed to be outstanding *
during the period 10,516,933 9,000,000 * 19,757,390
*
Assumed conversion of preferred *
stock 3,483,067 5,000,000 * N/A
*
Assumed exercise of stock options 141,390 N/A * -
*
Assumed exercise of stock rights 700,000 700,000 * N/A
*
Assumed exercise of stock warrants - - * N/A
*
Assumed conversion of Convertible *
Junior Subordinated Debentures N/A N/A * 2,224,293
---------- ---------- * ----------
14,841,390 14,700,000 * 21,981,683
========== ========== * ==========
Successor Successor Predecessor
Company Company Company
Thirty-nine Four Weeks Thirty-five
Weeks Ended Ended Weeks Ended
October 29, October 30, October 2,
1994 1993 1993
----------- ----------- -----------
*
Weighted average fully-diluted *
shares outstanding *
- ------------------------------ *
*
Weighted average number of common *
shares assumed to be outstanding *
during the period 10,516,933 9,000,000 * 19,757,390
*
Assumed conversion of preferred *
stock 3,483,067 5,000,000 * N/A
*
Assumed exercise of stock options 96,892 N/A * -
*
Assumed exercise of stock rights 700,000 700,000 * N/A
*
Assumed exercise of stock warrants - - * N/A
*
Assumed conversion of Convertible *
Junior Subordinated Debentures N/A N/A * 2,224,293
---------- ---------- * ----------
14,796,892 14,700,000 * 21,981,683
========== ========== * ==========
40
<PAGE>
EXHIBIT 15
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Hills Stores Company
We have reviewed the accompanying consolidated balance sheets of
Hills Stores Company and Subsidiaries as of October 29, 1994 and
October 30, 1993 and the related consolidated statements of
operations for the thirteen and thirty-nine weeks ended October 29,
1994 and the four weeks ended October 30, 1993, the nine weeks
ended October 2, 1993, and the thirty-five weeks ended October 2,
1993 and the consolidated statements of cash flows for the thirty-
nine weeks ended October 29, 1994, the four weeks ended October 30,
1993 and the thirty-five weeks ended October 2, 1993. These
financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards established
by the American Institute of Certified Public Accountants. A
review of interim financial information consists principally of
applying analytical procedures to financial data and making
inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the
financial statements taken as a whole. Accordingly, we do not
express such an opinion.
Based on our review, we are not aware of any material
modifications that should be made to the accompanying consolidated
financial statements for them to be in conformity with generally
accepted accounting principles.
We have previously audited, in accordance with generally
accepted auditing standards, the consolidated balance sheet of the
Company as of January 29, 1994 and the related consolidated
statements of operations, common shareholders' equity and cash
flows for the seventeen week period ended January 29, 1994 and the
thirty-five week period ended October 2, 1993 (not presented
herein); and our report dated March 22, 1994 included an
explanatory paragraph relating to the Company's emergence from
Chapter 11 proceedings.
Boston, Massachusetts
November 15, 1994
Coopers & Lybrand L.L.P.
41
<PAGE>
EXHIBIT 15.1
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Hills Stores Company
Registration on Form 10-Q
We are aware that our report dated November 15, 1994 on our review
of interim financial information of Hills Stores Company for the
period ended October 29, 1994 and included in the Company's
quarterly report on Form 10-Q for the quarter then ended is
incorporated by reference in the Company's registration statement
on Form S-8. Pursuant to Rule 436 (c) under the Securities Act of
1933, this report should not be considered a part of the
registration statement prepared or certified by us within the
meaning of Sections 7 and 11 of that Act.
Coopers and Lybrand L.L.P.
Boston, Massachusetts
November 15, 1994
42
<PAGE>
[ARTICLE] 5
[MULTIPLIER] 1,000
<TABLE>
<S> <C>
[PERIOD-TYPE] 9-MOS
[FISCAL-YEAR-END] JAN-28-1995
[PERIOD-END] OCT-29-1994
[CASH] 8,988
[SECURITIES] 0
[RECEIVABLES] 68,478
[ALLOWANCES] (5,905)
[INVENTORY] 474,208
[CURRENT-ASSETS] 551,731
[PP&E] 169,346
[DEPRECIATION] (15,574)
[TOTAL-ASSETS] 1,020,645
[CURRENT-LIABILITIES] 366,484
[BONDS] 160,000
[COMMON] 105
[PREFERRED-MANDATORY] 69,661
[PREFERRED] 0
[OTHER-SE] 267,433
[TOTAL-LIABILITY-AND-EQUITY] 1,020,645
[SALES] 1,198,441
[TOTAL-REVENUES] 1,198,441
[CGS] 856,027
[TOTAL-COSTS] 856,027
[OTHER-EXPENSES] 300,641
[LOSS-PROVISION] 559
[INTEREST-EXPENSE] 28,633
[INCOME-PRETAX] 13,140
[INCOME-TAX] 6,176
[INCOME-CONTINUING] 6,964
[DISCONTINUED] 0
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] 6,964
[EPS-PRIMARY] 0.49
[EPS-DILUTED] 0.47
</TABLE>
43
<PAGE>
Exhibit (G)(3)
HILLS STORES COMPANY AND SUBSIDIARIES
CONSOLIDATED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information sets forth the
consolidated financial position and the results of operations for the Company
and its subsidiaries assuming the Company's solicitation of consents (the
"Consent Solicitation") from the holders of the 10.25% Senior Notes due 2003 of
the Company (the "Senior Notes") relating to an amendment to the Indenture dated
as of October 1993, among the Company, Hills Department Store Company, as
guarantor, and Fleet Bank of Massachusetts, N.A., as Trustee (the "Indenture")
to modify the Indenture's restricted payments limitation and the Company's
repurchase of up to three million shares of its common stock, par value $.01 per
share, ("Common Stock"), at $25.00 per share (the "Tender Offer") were
consummated as of the respective dates of the pro forma balance sheets set forth
below and as of January 31, 1993 for the pro forma statements of operations.
The pro forma financial information assumes that consents to the adoption of an
amendment to the Indenture's restricted payments limitation have been received
and also reflects the effects of (i) a full payment of $2.4 million to the
holders of Senior Notes in accordance with the terms of the Consent Solicitation
(which full payment assumes that $160 million principal amount of Senior Notes
are outstanding and that all holders of the Senior Notes were paid pursuant to
the Consent Solicitation), (ii) a pro rata tender of Common Stock and Series A
Convertible Preferred Stock, par value $.10 per share of the Company (the
"Series A Preferred Stock"), (iii) the repurchase of three million shares of
Common Stock for $25.00 per share in cash in accordance with the terms of the
Tender Offer, and, for purposes of the pro forma financial information at
October 29, 1994, (iv) borrowings under the working capital facility of Hills
Department Store Company, the Company's principal operating subsidiary (the
"Credit Facility") in order to fund the repurchase of Common Stock in accordance
with the terms of the Tender Offer. Pro forma adjustments include only those
items directly related to these transactions which are expected to have a
recurring impact on the operations of the Company. The Company anticipates
funding the actual purchase of shares of Common Stock pursuant to the Offer with
cash on hand at the time of purchase. The pro forma financial information set
forth below is not necessarily indicative of the results of operations or the
financial position which would have been attained had the transactions been
consummated on any of the foregoing dates or which may be attained in the
future.
The pro forma statements of operations for the fiscal year ended January
29, 1994, also include pro forma adjustments relating to the Company's emergence
from Chapter 11 bankruptcy proceedings on October 4, 1993, in order to reflect:
the combination of pre-emergence and post-emergence accounting periods, the
implementation of fresh-start reporting on January 31, 1993; elimination of the
effects of non-recurring transactions resulting from the reorganization included
in the results of the Company's predecessor; and payments to creditors in
connection with such emergence from bankruptcy proceedings as of January 31,
1993. For further information, refer to Note 3 in Notes to Consolidated
Financial Statements included in the Company's Annual Report on Form 10-K for
the fiscal year ended January 29, 1994.
The historical results of operations for the thirty-nine weeks ended
October 29, 1994, are not necessarily indicative of the results of operations to
be expected for a full year because the Company's business is seasonal in
nature. The fourth quarter of each fiscal year provides the major portion of
the Company's annual sales and operating earnings, with operating earnings
particularly concentrated in the Christmas selling season.
The following pro forma information should be read in conjunction with the
historical consolidated financial statements set forth in the Company's Annual
Report on Form 10-K for the fiscal year ended January 29, 1994, and in the
Company's Quarterly Report on Form 10-Q for the quarterly period ended October
29, 1994.
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
PRO FORMA CONSOLIDATED BALANCE SHEET (UNAUDITED)
<TABLE>
<CAPTION>
Pro Forma
---------------------------
Historical
October 29, October 29,
1994 Adjustments 1994
-----------------------------------------
(in thousands)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 8,988 $ (2,400)(1) $ 6,588
75,000 (3)
(75,000)(4)
Trade receivables, net 62,573 62,573
Inventories 474,208 474,208
Other current assets 5,962 5,962
Total current assets 551,731 (2,400) 549,331
Property and equipment, net 153,772 153,772
Property under capital leases, net 126,692 126,692
Beneficial lease rights, net 9,282 9,282
Other assets, net 9,179 2,400 (1) 11,579
Reorganization value in excess of
amounts allocable to
identifiable assets, net 169,989 169,989
----------------------------------------
$1,020,645 $ - $1,020,645
========================================
LIABILITIES AND COMMON
SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ - $ 75,000 (3) $ 75,000
Current portion of capital leases 5,532 5,532
Accounts payable, trade 173,990 173,990
Other accounts payable and accrued
expenses 186,962 186,962
----------------------------------------
Total current liabilities 366,484 75,000 441,484
Senior notes 160,000 160,000
Obligations under capital leases 126,525 126,525
Other liabilities 30,437 30,437
Commitments and contingencies - -
Preferred stock, at mandatory
redemption value 69,661 (14,927)(2) 54,734
Common shareholders' equity:
Common stock 105 7 (2) 82
(30)(4)
Additional paid-in capital 224,234 14,920 (2) 164,184
(74,970)(4)
Retained earnings 43,199 43,199
----------------------------------------
Total common shareholders'
equity 267,538 (60,073) 207,465
----------------------------------------
$1,020,645 $ - $1,020,645
========================================
Book value per share $ 25.44 $ 27.60
========== ==========
</TABLE>
See Notes to Pro Forma Consolidated Balance Sheets on page 4.
2
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
PRO FORMA CONSOLIDATED BALANCE SHEET (UNAUDITED)
<TABLE>
<CAPTION>
Pro Forma
----------------------------
Historical
January 29, January 29,
1994 Adjustments 1994
-------------------------------------------
(in thousands)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 90,049 $ (2,400)(1) $ 12,649
(75,000)(4)
Trade receivables, net 23,368 23,368
Inventories 326,465 326,465
Other current assets 4,647 4,647
-------------------------------------------
Total current assets 444,529 (77,400) 367,129
Property and equipment, net 132,431 132,431
Property under capital leases, net 134,476 134,476
Beneficial lease rights, net 9,902 9,902
Other assets, net 9,555 2,400 (1) 11,955
Goodwill, net - -
Reorganization value in excess of
amounts allocable to
identifiable assets, net 176,728 176,728
-------------------------------------------
$907,621 $(75,000) $832,621
===========================================
LIABILITIES AND COMMON
SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of capital leases $ 5,532 $ 5,532
Accounts payable, trade 64,192 64,192
Other accounts payable and
accrued expenses 203,365 203,365
-------------------------------------------
Total current liabilities 273,089 273,089
Senior notes 160,000 160,000
Obligations under capital leases 130,626 130,626
Other liabilities 13,671 13,671
Commitments and contingencies - -
Preferred stock, at mandatory
redemption value 100,000 (21,429)(2) 78,571
Common shareholders' equity:
Common stock 90 11 (2) 71
(30)(4)
Additional paid-in capital 193,910 21,418 (2) 140,358
(74,970)(4)
Retained earnings 36,235 36,235
-------------------------------------------
Total common shareholders'
equity 230,235 (53,571) 176,664
-------------------------------------------
$907,621 $(75,000) $832,621
===========================================
Book value per share $ 25.58 $ 24.98
=========== ========
</TABLE>
See Notes to Pro Forma Consolidated Balance Sheets on page 4.
3
<PAGE>
Notes to Pro Forma Consolidated Balance Sheets
(1) Reflects payment to the holders of the Senior Notes in order to obtain
their consent to the proposed transaction. The amount would be amortized
over the remaining term of the Senior Notes.
(2) Reflects the conversion of preferred shares to common shares pursuant to
the Tender Offer assuming the shares outstanding at January 29, 1994, and
October 29, 1994, are tendered ratably.
(3) Reflects borrowings through the Company's Credit Facility in order to fund
the Tender Offer. The Company anticipates funding the actual purchase of
shares of Common Stock pursuant to the Offer with cash on hand at the time
of purchase.
(4) Reflects the repurchase of 3,000,000 common shares at $25 per share.
4
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
PRO FORMA STATEMENT OF OPERATIONS (UNAUDITED)
Thirty-nine Weeks Ended October 29, 1994
<TABLE>
<CAPTION>
Historical Pro Forma Pro Forma
1994 Adjustments 1994
----------------------------------------
(in thousands, except per share amounts)
<S> <C> <C> <C>
Net sales $1,198,441 $ -- $ 1,198,441
Cost of sales 856,027 -- 856,027
Selling and administrative expenses 276,373 -- 276,373
Depreciation and amortization 26,338 -- 26,338
----------------------------------------
Operating earnings 39,703 -- 39,703
Capital lease interest (11,085) -- (11,085)
Other interest (17,548) (3,042)(2) (20,590)
Other income, net 2,070 (894)(3) 1,176
----------------------------------------
Earnings before income taxes 13,140 (3,936) 9,204
Income taxes 6,176 (1,850)(4) 4,326
----------------------------------------
Net earnings applicable to common
shareholders $ 6,964 $ (2,086) $ 4,878
========================================
Primary earnings per share
applicable to common shareholders $ 0.49 $ 0.44
=========== ============
Fully-diluted earnings per share
applicable to common shareholders $ 0.47 $ 0.41
=========== ============
Weighted average shares:
Primary shares outstanding 14,097 11,097
=========== ============
Fully-diluted shares outstanding 14,797 11,797
=========== ============
Ratio of earnings to fixed charges 1.31 1.20
=========== ============
</TABLE>
See Notes to Pro Forma Statements of Operations on page 7.
5
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
PRO FORMA STATEMENT OF OPERATIONS (UNAUDITED)
Year Ended January 29, 1994
<TABLE>
<CAPTION>
Historical
Adjusted Pro Forma Pro Forma
1994 (1) Adjustments 1994
-----------------------------------------
(in thousands, except per share amounts)
<S> <C> <C> <C>
Net sales $1,765,533 $ -- $1,765,533
Cost of sales 1,259,950 -- 1,259,950
Selling and administrative
expenses 378,357 -- 378,357
Depreciation and amortization 34,761 -- 34,761
-----------------------------------------
Operating earnings 92,465 -- 92,465
Capital lease interest (15,141) -- (15,141)
Other interest (23,138) (3,789) (2) (26,927)
Other income, net 3,692 (1,035) (3) 2,657
-----------------------------------------
Earnings before income taxes 57,878 (4,824) 53,054
Income taxes 27,837 (2,316) (4) 25,521
-----------------------------------------
Net earnings applicable to common
shareholders $ 30,041 $(2,508) $ 27,533
=========================================
Primary earnings per share
applicable to common shareholders $ 2.14 $ 2.49
=========== ==========
Fully-diluted earnings per share
applicable to common shareholders $ 2.03 $ 2.33
=========== ==========
Weighted average shares:
Primary shares outstanding 14,056 11,056
=========== ==========
Fully-diluted shares outstanding 14,794 11,794
=========== ==========
Ratio of earnings to fixed charges 2.06 1.91
=========== ==========
</TABLE>
See Notes to Pro Forma Statements of Operations on page 7.
6
<PAGE>
Notes to Pro Forma Statements of Operations
(1) The Historical Adjusted information presented for the year ended January 29,
1994, includes pro forma adjustments related to the Company's emergence from
Chapter 11 bankruptcy proceedings on October 4, 1993. For further
information, refer to Note 3 in Notes to Consolidated Financial Statements
included in the Company's Annual Report on Form 10-K for the fiscal year
ended January 29, 1994.
(2) Represents interest expense under the Credit Facility related to borrowings
to fund the Tender Offer and the payment of consent fees and the
amortization of the deferred financing costs related to consent fees.
(3) Reflects the impact on interest income of the Tender Offer and the payment
of consent fees.
(4) Reflects the income tax effect of the pro forma adjustments.
7
