<PAGE>
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE
SECURITIES EXCHANGE ACT OF 1934
FILED BY THE REGISTRANT /X/
FILED BY A PARTY OTHER THAN THE REGISTRANT / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to sec. 240.14a-11(c) or sec. 240.14a-12
HILLS STORES COMPANY
- --------------------------------------------------------------------------------
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NOT APPLICABLE
- --------------------------------------------------------------------------------
(NAME OF PERSON(S) FILING PROXY STATEMENT)
PAYMENT OF FILING FEE (CHECK THE APPROPRIATE BOX):
/ / $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(i)(2) or
Item 22(a)(2) of Schedule 14A.
/ / $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4)
and 0-11.
1) Title of each class of securities to which transaction applies:
------------------------------------------------------------------------
2) Aggregate number of securities to which transaction applies:
------------------------------------------------------------------------
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:(1)
------------------------------------------------------------------------
4) Proposed maximum aggregate value of transaction:
------------------------------------------------------------------------
5) Total fee paid:
------------------------------------------------------------------------
(1)Set forth the amount on which the filing fee is calculated and state how
it was determined.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
------------------------------------------------------------------------
2) Form, Schedule or Registration Statement No.:
------------------------------------------------------------------------
3) Filing Party:
------------------------------------------------------------------------
4) Date Filed:
------------------------------------------------------------------------
<PAGE>
[HSC LOGO/LETTERHEAD]
HILLS STORES COMPANY
15 Dan Road, Canton, Massachusetts 02021-9128
(617) 821-1000 Telex 172127
IMPORTANT ANNUAL MEETING
JUNE 23, 1995
June 1, 1995
DEAR FELLOW SHAREHOLDER:
You are cordially invited to attend the Annual Meeting of Shareholders of
Hills Stores Company to be held on Friday, June 23, 1995 at 10:00 AM at the
Sheraton Tara Hotel, 37 Forbes Road, Braintree, Massachusetts. Your Board of
Directors and management look forward to greeting personally those shareholders
able to attend.
At this year's important Annual Meeting, Hills' shareholders will elect
seven
directors. In selecting these directors, all shareholders will be making a
critical choice in establishing a course for the future of the Company and their
investment. As demonstrated by our financial results, Hills' operating plan is
working and producing value for all our shareholders. We strongly believe we can
deliver greater value to our shareholders by continuing to follow our plan,
rather than selling your Company in an auction as described below.
On May 3, 1995, Dickstein Partners Inc. and certain of its affiliates
(collectively, "Dickstein") made an unsolicited, conditional, and non-binding
proposal to acquire, pursuant to a merger, all of Hills' outstanding shares of
capital stock for $25.00 per share in cash, subject to Dickstein being able to
obtain debt and equity financing. On May 22, 1995, Dickstein stated that the
form of payment could include "securities or other consideration." Just two days
later, on May 24, Dickstein changed its proposal to include subordinated,
pay-in-kind "junk bonds" as a part of the consideration to be offered to Hills'
shareholders. As now structured, Dickstein's conditional, non-binding merger
proposal (the "Dickstein Proposal") is comprised of $22 per share in cash,
rather than the $25 per share originally proposed, and $5 principal amount per
share of a subordinated, pay-in-kind debenture maturing in 12 years. Holders of
these 14% debentures may receive additional debentures -- rather than cash -- as
payment of interest for the first five years. The revised proposal is still
subject to Dickstein being able to obtain debt and equity financing.
To further its own objectives, Dickstein has commenced a proxy contest and
is
now seeking your support to elect its own hand-picked nominees, including Mark
Dickstein, in place of the experienced, qualified directors nominated by your
Board.
<PAGE>
Dickstein has indicated that, if elected, its nominees would attempt to auction
Hills and that Dickstein would be a bidder in such an auction. However, there is
no guarantee that any such auction would take place, that it would be conducted
in a disinterested manner or that it would result in a successful sale of the
Company.
AFTER CAREFUL CONSIDERATION, HILLS' BOARD OF DIRECTORS
UNANIMOUSLY REJECTED THE DICKSTEIN PROPOSAL. THE BOARD BELIEVES THAT THE
COMPANY'S STRATEGIC GROWTH PLAN IS IN THE BEST INTERESTS OF HILLS' SHAREHOLDERS
AND IS THE BEST OPPORTUNITY TO MAXIMIZE SHAREHOLDER VALUE.
In arriving at this decision, your Board of Directors relied upon its own
knowledge and understanding of Hills and its prospects. Your Board also
considered the advice of Hills' financial advisor, Smith Barney Inc., that the
Dickstein Proposal is inadequate, from a financial point of view, to the holders
of Hills Common Stock (other than Dickstein).
YOUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE BOARD'S
NOMINEES. DO NOT RETURN ANY PROXY CARDS SENT TO YOU BY DICKSTEIN.
Enclosed with this letter are the Company's Annual Report, Notice of Annual
Meeting and Proxy Statement and a WHITE proxy. You should read the proxy
materials for a more complete description of the matters to be considered at the
Annual Meeting. Then, take a moment to mark, sign, date and mail your WHITE
proxy in the postage-paid envelope provided.
HILLS' CURRENT GROWTH STRATEGY IS THE BEST WAY
TO MAXIMIZE SHAREHOLDER VALUE
Your Board of Directors is convinced that Hills' current growth strategy
offers shareholders the best opportunity to maximize value. Over the past few
years, Hills has undergone a remarkable rebirth as a well-managed and extremely
competitive regional discount retailer. Your Company has in place a respected
and exceptionally strong management team that has worked closely with the
current directors to develop an operating strategy that is producing positive
results. Our focus on growth and operating efficiency has increased sales and
expanded operating profit margins in each of the last four years. Today, Hills
ranks as one of the most profitable discount retailers.
Under the direction of your Board and management, the entire chain of Hills
stores was recently remodeled with an updated merchandise presentation. Our
automated distribution center continues to shorten the distribution cycle,
eliminate tasks, and produce savings in inventory and operating costs. We have
developed an exciting new prototype store which will serve as the Company's new
look for store openings in 1995 and beyond.
2
<PAGE>
The Company's new store program is a thoughtful and measured growth plan.
From the inception of this plan, we have followed an internal guideline that a
new store will be opened only when management believes that during its first
full year of operations the store can achieve a level of profitability
approximately equal to the entire chain's average profitability. For example,
this past year a typical new store would involve capital expenditures of
approximately $1.8 million and would be opened only if its ratio of earnings
before interest, taxes, depreciation and amortization (EBITDA) to sales could be
expected to equal or exceed 7% in its first full year of operations. In 1995, we
have opened two new stores that we expect will meet this standard and anticipate
opening an additional eight later this year, which will increase the Hills chain
to 164 stores.
Hills' strategic plan is working. In fiscal 1994, Hills' first full fiscal
year since emerging from bankruptcy, your Board and management team recorded
many operating and financial achievements: sales increased 6%; operating
earnings rose by more than 14%; and net income soared 34.6%. We also
successfully reduced our selling, general and administrative (SG&A) expenses as
a percentage of sales in each of the last three years -- from 22.4% in 1991 to
20.9% in 1994. We are well on our way to reaching our goal of reducing SG&A to
less than 20% of sales by fiscal 1996.
THE FOLLOWING GRAPHS ILLUSTRATE THAT HILLS' STRATEGIC PLAN IS
WORKING AND PRODUCING VALUE FOR SHAREHOLDERS:
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
SALES 91 92 93 94
<S> <C> <C> <C> <C>
1.680 1.750 1.766 1.872
</TABLE>
SALES
Fiscal Year (in
<TABLE>
<CAPTION>
OPERATING EARNINGS
<S> <C>
billions)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
91 $ 52.5
92 $ 77.9
93 $ 92.5
94 $ 105.8
</TABLE>
OPERATING EARNINGS
Fiscal Year (in millions)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
SG&A REDUCTION
<S> <C>
91 22.4%
92 21.9%
93 21.4%
94 20.9%
</TABLE>
SG&A REDUCTION
SG&A as a Percentage of
Sales
- ------------------
3
<PAGE>
*Reflects the implementation of "fresh start" accounting and other
transactions resulting from the reorganization as of January 31, 1993, on a
pro forma basis.
4
<PAGE>
Hills' financial performance, as illustrated by the chart below, ranks at or
near the top of the regional and national discount retail sector in all key
financial performance ratios. Take a closer look at Hills' record of success:
<TABLE>
<CAPTION>
1994 MARGIN ANALYSIS
(% OF SALES)
1994 -----------------------
COMPARABLE NET
SALES EBITDA EBIT INCOME
------ ------ ------- ------
<S> <C> <C> <C> <C>
REGIONAL
Hills Stores Company................... 5.1 % 7.6 % 5.6 % 2.2 %
Bradlees Inc........................... -2.7 4.7 2.1 0.3
Caldor Corp............................ 2.2 5.8 4.0 1.8
ShopKo Stores, Inc..................... 1.2 7.0 4.1 1.6
Venture Stores, Inc.................... 0.0 4.2 2.8 1.4
NATIONAL
Kmart Corporation...................... 1.4 4.2 2.1 0.3
Wal-Mart Stores, Inc................... 7.0 7.3 6.0 3.2
Hills' ranking in this list............ 2 1 2 2
<FN>
Source: Based upon public filings and press releases.
</TABLE>
The success of the Company's strategic plan and the strength of its
management are highlighted by the fact that Hills has achieved superior
financial results in an increasingly competitive environment. For example, in
1990, at least 20 Hills stores competed with
Wal-Mart stores; today 106 Hills stores compete with Wal-Mart stores. In
addition, almost every Hills store competes with a Kmart and at least 12 Hills
stores compete with Target stores. The strength of Hills' management and balance
sheet, and the soundness of its competitive strategy, position Hills to be an
eventual consolidator in an industry in need of consolidation.
NOW IS THE WRONG TIME TO SELL HILLS
Your Board of Directors believes that now is NOT the time to sell Hills or
change its management. Rather than maximizing value, we are convinced that an
auction of the type Dickstein proposes would prevent shareholders from realizing
the value inherent in Hills' business. Why? Because discount retail stocks are
now trading at historically low values. While it does not make us feel any
better, we are not alone in having our stock trading below our expectations. In
fact, Bradlees, Caldor, Kmart and Venture have all recently traded at or near
their 12-month lows.
The General Merchandise Index chart on the next page illustrates the
fluctuation of price/earnings multiples for an index of stocks in the discount
retail sector over time. It shows that such multiples are now at or near 10-year
lows. Despite Hills' strong operating results, the contraction of the
price/earnings multiples in the discount retail sector has contributed to Hills'
share price remaining flat.
5
<PAGE>
GENERAL MERCHANDISE INDEX
1 YEAR FORWARD PRICE/EARNINGS MULTIPLES
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
INDEX OF GENERAL MERCHANDISE STORES
<S> <C> <C>
1 Year Forward Price/Earnings Multiples
1983 1/83 13.84
2/83 14.64
3/83 18.02
4/83 13.89
5/83 14.38
6/83 15.48
7/83 16.14
8/83 15.47
9/83 15.81
10/83 14.56
11/83 15.30
12/83 14.09
1984 1/84 12.96
2/84 11.87
3/84 10.08
4/84 9.91
5/84 10.22
6/84 11.41
7/84 11.44
8/84 12.33
9/84 12.03
10/84 11.86
11/84 11.34
12/84 10.92
1985 1/85 12.95
2/85 12.97
3/85 11.23
4/85 10.84
5/85 12.35
6/85 12.55
7/85 11.79
8/85 12.31
9/85 11.61
10/85 12.70
11/85 14.25
12/85 15.20
1986 1/86 15.30
2/86 16.10
3/86 15.45
4/86 15.76
5/86 18.99
6/86 19.68
7/86 17.54
8/86 17.66
9/86 15.83
10/86 16.52
11/86 17.34
12/86 16.84
1987 1/87 17.56
2/87 19.72
3/87 16.12
4/87 16.12
5/87 16.56
6/87 18.59
7/87 20.40
8/87 21.58
9/87 20.45
10/87 14.74
11/87 12.95
12/87 14.02
1988 1/88 15.08
2/88 16.21
3/88 12.61
4/88 12.76
5/88 12.82
6/88 13.57
7/88 14.44
8/88 13.33
9/88 14.43
10/88 14.13
11/88 13.59
12/88 13.70
1989 1/89 14.75
2/89 14.03
3/89 11.71
4/89 12.65
5/89 13.37
6/89 13.28
7/89 15.17
8/89 15.05
9/89 14.74
10/89 14.78
11/89 15.45
12/89 15.89
1990 1/90 15.04
2/90 15.52
3/90 14.04
4/90 14.19
5/90 16.08
6/90 17.69
7/90 17.58
8/90 15.98
9/90 15.51
10/90 15.29
11/90 17.44
12/90 17.51
1991 1/91 19.20
2/91 20.85
3/91 18.84
4/91 19.61
5/91 20.74
6/91 20.68
7/91 23.07
8/91 24.58
9/91 23.24
10/91 22.52
11/91 24.01
12/91 28.95
1992 1/92 26.40
2/92 26.47
3/92 21.53
4/92 21.12
5/92 21.46
6/92 21.60
7/92 22.44
8/92 22.97
9/92 23.77
10/92 24.47
11/92 26.11
12/92 25.99
1993 1/93 26.29
2/93 26.49
3/93 21.51
4/93 18.19
5/93 18.94
6/93 18.05
7/93 17.57
8/93 18.04
9/93 17.38
10/93 18.48
11/93 20.06
12/93 17.70
1994 1/94 18.77
2/94 20.23
3/94 15.78
4/94 15.46
5/94 14.44
6/94 15.02
7/94 15.50
8/94 15.30
9/94 14.70
10/94 14.70
11/94 14.50
12/94 13.40
1995 1/95 14.60
2/95 15.10
3/95 14.30
4/95 13.50
</TABLE>
This chart underscores why your Board believes that, at this time, an
auction of the type that Dickstein claims its hand-picked nominees would pursue
is not in the best interests of shareholders. Simply put, the right time to sell
any asset is at or near its high, not low, price. The Dickstein nominees should
not be allowed to auction the Company or to sell it to Dickstein at a time when
Hills is, in our view, substantially undervalued.
ELECTION OF THE DICKSTEIN NOMINEES
POSES SERIOUS RISKS TO HILLS' SHAREHOLDERS
Election of Dickstein's nominees poses serious risks to your investment in
Hills. It would disrupt the Company's management, employees, relationships with
vendors and operations and would do so solely to advance Dickstein's own
speculative, contingent acquisition proposal.
ELECTION OF THE DICKSTEIN NOMINEES WOULD TRIGGER COSTLY CHANGE IN CONTROL
PROVISIONS
HILLS' SHAREHOLDERS SHOULD BE AWARE THAT ELECTION OF THE DICKSTEIN NOMINEES
WOULD TRIGGER A "CHANGE IN CONTROL" UNDER THE INDENTURE COVERING HILLS' 10.25%
SENIOR NOTES, THE CREDIT AGREEMENT GOVERNING THE COMPANY'S $225 MILLION WORKING
CAPITAL FACILITY, THE EMPLOYMENT AGREEMENTS OF HILLS' KEY SENIOR EXECUTIVES AND
OTHER SIGNIFICANT
ARRANGEMENTS TO WHICH HILLS IS A PARTY. First, Hills could be required
immediately to repay -- at a premium -- approximately $160 million in principal
of existing senior debt as well as any accrued but unpaid interest. Next, the
loss of the credit facility could adversely
6
<PAGE>
affect the terms under which Hills purchases inventory from vendors. The
Dickstein Proposal also calls for replacing Hills' unsecured working capital
facility with a secured facility -- a change that we believe will harm
relationships with vendors, reduce the amount of trade credit available to the
Company and adversely affect your Company's cash flow.
Election of the Dickstein nominees also would be extremely expensive for the
Company. As described above, such a change in control could require Hills to
refinance its 10.25% Senior Notes and working capital credit facility. In
addition, substantial payments could be required under certain sale-leaseback
arrangements to which the Company is a party, under employment agreements with
certain of the Company's senior executives, and under the Company's supplemental
executive retirement plan. If the parties to the various
arrangements described above exercise their rights upon a change in control,
management estimates that such a change in control could cost Hills
approximately $60 to $70 million. This estimate does not even consider many of
the transaction costs involved in these refinancings and similar activities.
Hills could incur these change in control costs even if the Dickstein nominees
do not succeed in selling the Company. Merely electing Dickstein's nominees
triggers a change in control.
KEY SENIOR MANAGEMENT COULD LEAVE THE COMPANY
Perhaps even more important than the financial burdens, if the Dickstein
nominees are elected, the key senior executives who have been responsible for
Hills' success will be able to terminate their employment and obtain substantial
severance benefits. There is no assurance that Hills' senior management would
remain with the Company upon such a change in control. The departure of those
executives would be detrimental to the value of the Hills franchise. Remember,
Dickstein has failed to disclose any business plan for Hills' day-to-day
operations. ASK YOURSELF WHAT WILL HAPPEN TO YOUR INVESTMENT IF DICKSTEIN TAKES
CONTROL OF YOUR BOARD, IS UNABLE TO SELL THE COMPANY AND YOUR PRESENT MANAGEMENT
TEAM LEAVES HILLS.
DICKSTEIN'S PROPOSAL IS HIGHLY CONTINGENT AND INADEQUATE
Your Board does not believe that shareholders should assume the risk of
jeopardizing the Company's relationship with vendors and losing current
management so that Dickstein can advance its own acquisition proposal which we
believe is inadequate. Do not forget that the Dickstein Proposal is contingent
on financing, and Dickstein has neither the equity nor debt commitments in place
to finance an acquisition of Hills. Even if Dickstein succeeds in obtaining
financing, Dickstein has assumed that $58 million of such financing will come
from Hills' own available cash -- cash that will not be on hand until the 1995
Christmas season. Due to the seasonal nature of its business, the Company does
not generate significant positive cash flow during the first three quarters of
its fiscal year. FOR THESE REASONS, WE BELIEVE THAT DICKSTEIN'S OWN FINANCING
PLAN -- IF FINANCING IS
AVAILABLE -- CONTEMPLATES THAT ITS ACQUISITION OF HILLS WILL NOT BE COMPLETED
UNTIL THE END OF 1995 OR EARLY 1996, IF EVER. UNTIL SUCH TIME -- AND THROUGH THE
CRITICAL CHRISTMAS SELLING SEASON -- MARK DICKSTEIN AND HIS HAND-PICKED NOMINEES
WILL CONTROL YOUR COMPANY. IS THIS A RISK YOU WANT TO ASSUME?
7
<PAGE>
DICKSTEIN'S LATEST PROPOSAL REDUCES THE CASH PORTION AND
SUBSTITUTES DEBT SECURITIES OF QUESTIONABLE VALUE
Dickstein wants you to assume other risks as well. Originally, Dickstein
specified payment of $25 per share in cash. Now Dickstein wants to increase
dramatically the Company's debt load and has included subordinated, pay-in-kind
"junk bonds" as part of the consideration you may be offered. This proposal is
reminiscent of actions taken by many retailers in the 1980s, that led to
bankruptcy filings in the early 1990s. On May 24, Dickstein changed its proposal
to include $22 in cash and $5 principal amount per share of a 14% (payable in
kind for up to 5 years) structurally subordinated debenture maturing in twelve
years. (Pay-in-kind securities are issued when a borrower cannot or will not pay
interest in cash but "pays" the coupon by issuing additional debentures.)
Receipt of
pay-in-kind securities will result in taxable income, though no cash changes
hands, to non-exempt taxpayers.
ASK YOURSELF IF YOU WILL WANT TO RECEIVE THESE PAY-IN-KIND SECURITIES AS
PARTIAL
PAYMENT FOR YOUR HILLS STOCK. REMEMBER, IF DICKSTEIN'S NOMINEES ARE ELECTED IT
MAY FURTHER MODIFY THE CONSIDERATION YOU MAY RECEIVE. DO YOU WANT TO ASSUME THE
RISK THAT YOU MAY BE ISSUED ILLIQUID DEBT THAT IS DEEPLY SUBORDINATED OR EQUITY
SECURITIES IN A HIGHLY LEVERAGED COMPANY WITH NEW MANAGEMENT CONTROLLED BY
DICKSTEIN?
Finally, even if Dickstein's nominees are elected and proceed to conduct an
auction, we believe that none of those nominees are independent from Dickstein.
According to Dickstein's own SEC filings, the two nominees slated by Dickstein
to run a so-called "independent" auction of the Company are being paid by
Dickstein for serving as its nominees. Dickstein has also stated that it intends
to install one of these two nominees as Hills' interim chief executive officer
if current senior management resigns. With the nominees having such a conflict
of interest, how can the Dickstein nominees evaluate fairly the Dickstein
Proposal against other proposals, if any, that may be made? In our view,
Dickstein's control of the Board would have a chilling effect on the entire
process. An auction conducted by Dickstein's hand-picked nominees, in which
Dickstein is a bidder, does not augur well for a fair and open auction process.
NOW IS THE TIME TO ACT
Now is the time to establish a course for the future success of your
Company. We believe you should vote to continue Hills' current growth and
operating strategy -- a strategy which your Board believes represents the best
opportunity to maximize shareholder value.
We believe that the course of action proposed by Dickstein is reckless. It
is excessively short-term oriented, very costly and distracting to the Company,
and would not deliver to shareholders the potential gain to be realized by
continuing to pursue the Company's current strategy.
8
<PAGE>
We strongly urge you to vote in favor of the nominees proposed by your Board
of Directors. Please mark, sign, date and mail the enclosed WHITE proxy card in
the enclosed envelope to support your Board's nominees. Please act today to
ensure that your proxy is received in time to be counted. Remember, mailing your
proxy will not prevent you from voting at the Annual Meeting if you attend.
On behalf of your Board of Directors, thank you for your continued support.
Sincerely,
<TABLE>
<S> <C>
THOMAS H. LEE MICHAEL BOZIC
CHAIRMAN OF THE BOARD PRESIDENT AND CHIEF
EXECUTIVE OFFICER
</TABLE>
IMPORTANT
It is important that your shares are voted at the Annual Meeting.
Shareholders are urged promptly to mark, sign, date and mail the WHITE proxy
in the enclosed postage-paid envelope. Please act today!
If you have any questions, or need assistance, please call D. F. King &
Co., Inc., which is assisting us, at the numbers listed below:
D. F. KING & CO., INC.
77 Water Street
New York, New York 10005
(212) 269-5550 (Collect)
or
CALL TOLL FREE -- 1-800-290-6425
<PAGE>
[LOGO]
HILLS STORES COMPANY
NOTICE OF ANNUAL MEETING OF
SHAREHOLDERS
TO BE HELD JUNE 23, 1995
Notice is hereby given that the Annual Meeting of Shareholders of Hills
Stores Company (the "Company" or "Hills") will be held on Friday, June 23, 1995
in the ballroom of the Sheraton Tara Hotel, 37 Forbes Road, Braintree,
Massachusetts 02184 at 10:00 AM local time to take action with respect to the
following matters:
1. The election of seven directors to serve for the ensuing year and until
their successors are elected and qualified;
2. The approval of the Company's 1995 Incentive and Nonqualified Stock
Option Plan covering 500,000 shares of Common Stock;
3. The approval of the Hills Stores Company Associate Stock Purchase Plan
covering 500,000 shares of Common Stock; and
4. Transaction of such other business as may properly be brought before the
Annual Meeting or any adjournments thereof.
Holders of record of Common Stock and Series A Preferred Stock at the close
of business on April 24, 1995 are entitled to receive notice of and to vote at
the meeting or any adjournments thereof.
As noted in the enclosed proxy statement, Dickstein Partners Inc. and
certain of its affiliates have initiated a proxy contest with the objective of
electing their own representatives to Hills' Board of Directors instead of the
candidates nominated by your Board. Your Board of Directors urges you NOT to
return any blue proxies sent to you by Dickstein.
To support your Board, please MARK, SIGN, DATE AND MAIL THE ENCLOSED WHITE
PROXY. PLEASE ACT TODAY.
By order of the Board of Directors
William K. Friend
VICE PRESIDENT-SECRETARY
Canton, Massachusetts
June 1, 1995
WE URGE YOU TO REJECT THE DICKSTEIN SOLICITATION -- DO NOT SIGN OR RETURN ANY
BLUE PROXY CARD SENT YOU BY DICKSTEIN. TO SUPPORT YOUR BOARD OF DIRECTORS,
PLEASE MARK, SIGN, DATE AND PROMPTLY MAIL YOUR WHITE PROXY CARD IN THE RETURN
ENVELOPE. IF YOU HAVE ANY QUESTIONS OR NEED ASSISTANCE, PLEASE CALL D. F. KING
& CO., INC., WHICH IS ASSISTING US, TOLL-FREE, AT 800-290-6425.
<PAGE>
PROXY STATEMENT
HILLS STORES COMPANY
15 DAN ROAD, CANTON, MASSACHUSETTS 02021
(617) 821-1000
INTRODUCTION
This Proxy Statement and the enclosed form of proxy have been mailed to
shareholders on or about June 1, 1995 in connection with the solicitation by the
Board of Directors of Hills Stores Company (the "Company" or "Hills") of proxies
to be used at the June 23, 1995 Annual Meeting of Shareholders.
At the meeting, shareholders will elect seven directors who will determine
the future direction of the Company. In addition, shareholders will be asked to
approve the Company's 1995 Incentive and Nonqualified Stock Option Plan (the
"1995 Stock Option Plan") and the Hills Stores Company Associate Stock Purchase
Plan (the "Stock Purchase Plan").
On May 3, 1995, Dickstein Partners Inc. and certain of its affiliates
(collectively, "Dickstein") made an unsolicited, conditional, and non-binding
proposal to acquire, pursuant to a merger, all of Hills' outstanding shares of
capital stock for $25.00 per share in cash, subject to Dickstein being able to
obtain debt and equity financing. On May 22, 1995, Dickstein stated that the
form of payment could include "securities or other consideration." Just two days
later, on May 24, Dickstein changed its proposal to include subordinated,
pay-in-kind "junk bonds" as a part of the consideration to be offered to Hills'
shareholders. As now structured, Dickstein's conditional, non-binding merger
proposal (the "Dickstein Proposal") is comprised of $22 per share in cash,
rather than the $25 per share originally proposed, and $5 principal amount per
share of a subordinated, pay-in-kind debenture maturing in 12 years. Holders of
these 14% debentures may receive additional debentures in lieu of cash as
payment of interest for the first five years. The revised proposal is still
subject to Dickstein being able to obtain debt and equity financing.
To further its own objectives, Dickstein has indicated that it will solicit
proxies (the "Dickstein Solicitation") to elect its own hand-picked nominees,
including Mark Dickstein, in place of the experienced, qualified directors
nominated by your Board. Dickstein has indicated that, if elected, its nominees
would attempt to auction Hills and that Dickstein would be a bidder in such an
auction. However, there is no guarantee that any such auction would take place,
that it would be conducted in a disinterested manner or that it would result in
a successful sale of the Company.
Your Board strongly recommends a vote "FOR" the Board's nominees because the
Board believes that Hills' current growth strategy represents the best
opportunity to maximize shareholder value and that election of the Dickstein
nominees poses serious risks to Hills' shareholders.
IMPORTANT
YOUR BOARD OF DIRECTORS BELIEVES THAT IT IS IN THE BEST INTERESTS OF HILLS
SHAREHOLDERS TO ELECT THE BOARD'S NOMINEES AS DIRECTORS OF THE COMPANY. YOUR
BOARD URGES YOU TO REJECT THE DICKSTEIN SOLICITATION AND NOT SIGN OR RETURN ANY
BLUE PROXY CARD SENT TO YOU BY DICKSTEIN.
Your vote is important, regardless of how many shares you own. Please mark,
sign and date the accompanying WHITE proxy card and mail it in the envelope
provided as promptly as possible, whether or not you expect to attend the Annual
Meeting.
Whether or not you have previously signed a proxy card sent by Dickstein,
the Board urges you to show your support for the Board by marking, signing,
dating and promptly mailing the enclosed WHITE proxy card. By signing and dating
the WHITE proxy card, you will revoke any earlier dated proxy card solicited by
Dickstein which you may have signed.
Remember, it will not help your Board to return a Dickstein blue proxy card
voting to "withhold authority". Do not return any BLUE card sent to you by
Dickstein. The only way to support your Board's nominees is to vote "FOR" those
nominees on the WHITE proxy card.
IF YOUR SHARES ARE HELD IN THE NAME OF A BANK, BROKER, OR OTHER NOMINEE, WE URGE
YOU TO CONTACT THE PARTY RESPONSIBLE FOR YOUR ACCOUNT AND DIRECT HIM OR HER TO
VOTE "FOR" YOUR BOARD'S NOMINEES ON THE HILLS WHITE PROXY CARD. THEN, MARK,
SIGN, DATE AND MAIL YOUR WHITE PROXY ONCE YOU RECEIVE IT FROM THE BANK, BROKER
OR OTHER NOMINEE TO ENSURE THAT YOUR VOTE IS COUNTED.
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WHY IT IS IMPORTANT THAT YOU VOTE "FOR" YOUR BOARD'S NOMINEES
After careful consideration, Hills' Board of Directors unanimously rejected
the Dickstein Proposal. The Board believes that the Company's strategic growth
plan is in the best interests of Hills' shareholders and represents the best
opportunity to maximize shareholder value. In arriving at its decision, the
Board of Directors relied upon its own knowledge and understanding of Hills and
its prospects. The Board also considered the advice of Hills' financial advisor,
Smith Barney Inc. ("Smith Barney"), that the Dickstein Proposal is inadequate,
from a financial point of view, to the holders of Hills Common Stock (other than
Dickstein). A copy of Smith Barney's opinion is attached as Exhibit 1 to this
Proxy Statement.
The Board of Directors is convinced that Hills' current growth strategy
offers shareholders the best opportunity to maximize value. Over the past few
years, Hills has undergone a remarkable rebirth as a well-managed, highly
respected and extremely competitive regional discount retailer. The Company has
in place a respected and exceptionally strong management team that has worked
closely with the current directors to develop an operating strategy that is
producing positive results. The Board of Directors and management have focused
on growth and operating efficiency, thereby expanding operating profit margins
in each of the last four years. Today, Hills ranks as one of the most profitable
discount retailers.
Under the direction of the Board and management, the entire chain of Hills
stores was recently remodeled with an updated merchandise presentation. The
Company's automated distribution center continues to shorten the distribution
cycle, eliminate tasks, and produce savings in inventory and operating costs.
The Board and management have developed an exciting new prototype store which
will serve as the Company's new look for store openings in 1995 and beyond.
The Company's new store program is a thoughtful and measured growth plan.
From the inception of this plan, management has followed an internal guideline
that a new store will be opened only when management believes that during its
first full year of operations the store can achieve a level of profitability
approximately equal to the entire chain's average profitability. For example,
this past year a typical new store would involve capital expenditures of
approximately $1.8 million and would be opened only if its ratio of earnings
before interest, taxes, depreciation and amortization (EBITDA) to sales could be
expected to equal or exceed 7% in its first full year of operations. In 1995,
the Company has opened two new stores that we expect will meet this standard,
and anticipate opening an additional eight later this year, which will increase
the Hills chain to 164 stores.
Hills' strategic plan is working. In fiscal 1994, Hills' first full fiscal
year since emerging from bankruptcy, the Board and Hills' management team
recorded many operating and financial achievements: sales increased 6%;
operating earnings rose by more than 14%; and net income soared 34.6%. The Board
and management also successfully reduced Hills' selling, general and
administrative (SG&A) expenses as a percentage of sales in each of the last
three years -- from 22.4% in 1991 to 20.9% in 1994. The Company is well on its
way to reaching its goal of reducing SG&A to less than 20% of sales by fiscal
1996. Hills' financial performance ranks at or near the top of the regional and
national discount retail sector in all key financial performance ratios.
The success of the Company's strategic plan and the strength of its
management are highlighted by the fact that Hills has achieved superior
financial results in an increasingly competitive environment. For example, in
1990, at least 20 Hills stores competed with Wal-Mart stores; today 106 Hills
stores compete with Wal-Mart stores. In addition, almost every Hills store
competes with a Kmart and at least 12 Hills stores compete with Target stores.
The strength of Hills' management and balance sheet, and the soundness of its
competitive strategy, position Hills to be an eventual consolidator in an
industry in need of consolidation.
The Board of Directors believes that now is NOT the time to sell Hills or
change its management. The Board of Directors and management of Hills are
convinced that an auction of the type Dickstein proposes, rather than maximizing
value, would prevent shareholders from realizing the value inherent in Hills'
business. Why? Because discount retail stocks are now trading at historically
low values. The Board of Directors and management have noted that Hills is not
alone in having its stock trade below expectations. In
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fact, Bradlees, Caldor, Kmart and Venture have all recently traded at or near
their 12-month lows. Therefore, at this time, an auction of the type that
Dickstein claims its hand-picked nominees would pursue is not in the best
interests of shareholders. The Dickstein nominees should not be allowed to
auction the Company or to sell it to Dickstein at a time when Hills is, in the
view of the Company's Board and management, substantially undervalued.
Election of Dickstein's nominees poses serious risks to your investment in
Hills. It would disrupt the Company's management, employees, relationships with
vendors and operations and would do so solely to advance Dickstein's own
speculative, contingent acquisition proposal.
ELECTION OF THE DICKSTEIN NOMINEES WOULD TRIGGER A "CHANGE IN CONTROL" UNDER
THE INDENTURE COVERING HILLS' 10.25% SENIOR NOTES, THE CREDIT AGREEMENT
GOVERNING THE COMPANY'S $225 MILLION WORKING CAPITAL FACILITY, THE EMPLOYMENT
AGREEMENTS OF HILLS' KEY SENIOR EXECUTIVES AND OTHER SIGNIFICANT ARRANGEMENTS TO
WHICH HILLS IS A PARTY. Hills could be required immediately to repay -- at a
premium -- approximately $160 million in principal of existing senior debt as
well as any accrued but unpaid interest. The loss of the credit facility could
adversely affect the terms under which Hills purchases inventory from vendors.
The Dickstein Proposal also calls for replacing Hills' unsecured working capital
facility with a secured facility -- a change that management believes will harm
relationships with vendors and reduce the amount of trade credit available to
the Company, adversely affecting the Company's cash flow.
Election of the Dickstein nominees also would be extremely expensive for the
Company. Such a change in control could require Hills to refinance its 10.25%
Senior Notes and working capital credit facility. In addition, substantial
payments could be required under certain sale-leaseback arrangements to which
the Company is a party, under employment agreements with certain of the
Company's senior executives, and under the Company's supplemental executive
retirement plan. If the parties to the various arrangements described above
exercise their rights upon a change in control, management estimates that a
change in control could cost Hills approximately $60 to $70 million. This
estimate does not even consider many of the transaction costs involved in these
refinancings and similar activities. Hills would incur these change in control
costs even if the Dickstein nominees do not succeed in selling the Company.
Merely electing Dickstein's nominees triggers a change in control.
Perhaps even more important than the financial burdens, if the Dickstein
nominees are elected, the key senior executives who have been responsible for
Hills' success will be able to terminate their employment and obtain substantial
severance benefits. See "Employment Contracts" below. There is no assurance that
Hills' senior management would remain with the Company upon such a change in
control. The departure of those executives would be detrimental to the value of
the Hills franchise. Moreover, Dickstein has failed to disclose a business plan
for Hills' day-to-day operations if members of top management leave the Company.
The Board of Directors does not believe that shareholders should assume the
risk of jeopardizing the Company's relationship with vendors and losing current
management so that Dickstein can advance its own acquisition proposal, which the
Board of Directors of Hills believes is inadequate. The Dickstein Proposal is
contingent on financing, and Dickstein has neither the equity nor debt
commitments in place to finance an acquisition of Hills. Even if Dickstein
succeeds in obtaining financing, Dickstein has assumed that $58 million of such
financing will come from Hills' own available cash -- cash that will not be on
hand until the 1995 Christmas season. Due to the seasonal nature of its
business, the Company does not generate significant positive cash flow during
the first three quarters of its fiscal year. For these reasons, the Board of
Directors believes that Dickstein's own financing plan -- if financing is
available -- contemplates that its acquisition of Hills will not be completed
until the end of 1995 or early 1996, if ever. UNTIL SUCH TIME -- AND THROUGH THE
CRITICAL CHRISTMAS SELLING SEASON -- MARK DICKSTEIN AND HIS HAND-PICKED NOMINEES
WILL CONTROL THE COMPANY. IS THIS A RISK HILLS SHAREHOLDERS WANT TO ASSUME?
DICKSTEIN WANTS HILLS SHAREHOLDERS TO ASSUME OTHER RISKS AS WELL.
ORIGINALLY, DICKSTEIN SPECIFIED PAYMENT OF $25 PER SHARE IN CASH. NOW DICKSTEIN
WANTS TO INCREASE DRAMATICALLY THE COMPANY'S DEBT LOAD AND HAS INCLUDED
SUBORDINATED, PAY-IN-KIND "JUNK BONDS" AS PART OF THE CONSIDERATION THAT MAY BE
OFFERED TO HILLS SHAREHOLDERS. THIS PROPOSAL IS REMINISCENT OF ACTIONS TAKEN BY
MANY RETAILERS IN THE 1980S, THAT LED TO BANKRUPTCY FILINGS IN THE EARLY 1990S.
ON MAY 24, DICKSTEIN CHANGED ITS PROPOSAL TO INCLUDE $22 IN CASH
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AND $5 PRINCIPAL AMOUNT PER SHARE OF A 14% (PAYABLE IN KIND FOR UP TO 5 YEARS)
STRUCTURALLY SUBORDINATED DEBENTURE MATURING IN TWELVE YEARS. (PAY-IN-KIND
SECURITIES ARE ISSUED WHEN A BORROWER CANNOT OR WILL NOT PAY INTEREST IN CASH
BUT "PAYS" THE COUPON BY ISSUING ADDITIONAL DEBENTURES.) RECEIPT OF PAY-IN-KIND
SECURITIES WILL RESULT IN TAXABLE INCOME, THOUGH NO CASH CHANGES HANDS, TO
NON-EXEMPT TAXPAYERS.
Finally, even if Dickstein's nominees are elected and proceed to conduct an
auction, Hills' Board and management believe that none of those nominees are
independent from Dickstein. According to Dickstein's own SEC filings, the two
nominees slated by Dickstein to run a so-called "independent" auction of the
Company are being paid by Dickstein for serving as its nominees. Dickstein has
also stated that it intends to install one of these two nominees as Hills'
interim chief executive officer if current senior management resigns. With the
nominees having such a conflict of interest, how can the Dickstein nominees
evaluate fairly the Dickstein Proposal against other proposals, if any, that may
be made? An auction conducted by Dickstein's hand-picked nominees, in which
Dickstein is a bidder, does not augur well for a fair and open auction process.
For the foregoing reasons, the Board of Directors and management believes
shareholders should vote to continue Hills' growth and operating strategy -- a
strategy which the Board believes represents the best opportunity to maximize
shareholder value. The Board of Directors strongly urges shareholders to vote
FOR the Board's nominees.
BACKGROUND OF RECENT EVENTS
On August 16, 1994, Dickstein commenced a consent solicitation to remove
without cause four members of the Board and replace them with four Dickstein
nominees (the "Dickstein Consent Solicitation"). 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 above and the
decision to pursue the repurchase of up to 3 million shares of the Common Stock
for $25 in cash (the "Tender Offer"). The approval of this program resulted from
an in-depth analysis of various ways for the Company to enhance shareholder
value that was conducted by the Board, in consultation with the Company's senior
management, during August and September 1994. Two days following the
announcement of the Company's plan to enhance shareholder value and implement
the Company's growth plan, the Company and Dickstein entered into a Settlement
Agreement (the "Dickstein Settlement Agreement") whereby Dickstein agreed, among
other things, to cease the Dickstein Consent Solicitation. In the Dickstein
Settlement Agreement, the Company agreed to pay Dickstein $600,000 as a
reimbursement of Dickstein's expenses in connection with the Dickstein Consent
Solicitation and to use the Company's best efforts to consummate the Tender
Offer.
On January 24, 1995, the Company commenced the Tender Offer. On February 21,
1995, the Tender Offer expired and the Company accepted approximately 3 million
shares of the Common Stock for payment at $25 per share in cash. Among the
shares accepted for payment and purchased pursuant to the Tender Offer were
shares tendered by Dickstein.
On May 3, 1995, approximately two months following Dickstein's sale of
313,728 shares in the Tender Offer, Dickstein proposed to acquire, pursuant to a
merger, all of Hills' outstanding shares for $25 per share in cash, subject to
arranging equity and debt financing. In addition, Dickstein announced the
nomination of a slate for election as directors of Hills, each of whom is either
affiliated with Dickstein or has been compensated by Dickstein in consideration
for such nomination.
In May 1995, the Board retained Smith Barney as its financial advisor to
evaluate, from a financial point of view, Dickstein's original proposal to
acquire the Company, pursuant to a merger, for $25 per share in cash and other
alternatives available to the Company. On May 15, 1995, the Board unanimously
rejected Dickstein's original proposal as not in the best interest of Hills'
shareholders and stated its belief that Hills' current plan will result in
shareholders achieving the greatest value. In arriving at its decision, the
Board relied upon its own knowledge and understanding of Hills and its
prospects. The Board also considered the advice of Smith Barney that Dickstein's
original proposal was inadequate, from a financial point of view, to the holders
of Hills Common Stock (other than Dickstein). The Board noted that neither the
equity nor the debt financing for the original proposal was in place. On May 16,
1995, Dickstein reiterated its intention to solicit proxies for the purpose of
electing its slate of nominees to the Hills Board.
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On May 24, 1995, Dickstein changed its proposal to include subordinated,
pay-in-kind "junk bonds" as a part of the consideration to be offered to Hills
shareholders. As now structured, the Dickstein Proposal is comprised of $22 per
share in cash, rather than the $25 per share originally proposed, and $5
principal amount per share of a subordinated, pay-in-kind debenture maturing in
12 years.
On May 30, 1995, the Board unanimously rejected the revised Dickstein
Proposal as not in the best interests of Hills' shareholders and reaffirmed its
belief that Hills' current plan will result in shareholders achieving the
greatest value. In arriving at its decision, the Board relied upon its own
knowledge and understanding of Hills and its prospects. The Board also
considered the advice of Smith Barney that the revised Dickstein Proposal is
inadequate, from a financial point of view, to the holders of Hills Common Stock
(other than Dickstein). See "Financial Advisor."
VOTING
On April 24, 1995, the record date for the Annual Meeting, there were
9,273,306 shares of Common Stock and 1,451,590 shares of Series A Preferred
Stock outstanding, each entitled to one vote.
It is important that your shares be represented and voted at the Annual
Meeting regardless of the number of shares that you own. Accordingly, you are
asked to mark, sign, date and promptly mail the accompanying WHITE proxy card in
order to ensure that your shares are voted. Shares cannot be voted at the Annual
Meeting unless the owner is represented, by proxy or in person. A majority of
the shares entitled to vote at the Annual Meeting must be present either in
person or by proxy in order for there to be a quorum. Elections for director
will be decided by a plurality of the votes cast. Approval of the 1995 Stock
Option Plan and approval of the Stock Purchase Plan will be decided by majority
vote of shares present or represented by proxy at the Annual Meeting and
entitled to vote.
Abstentions and shares as to which brokers or other nominees are not
provided with instructions (otherwise known as broker non-votes) are counted as
present or represented for purposes of determining the presence or absence of a
quorum at the Annual Meeting. With respect to the election of directors,
abstentions and broker non-votes will not count as votes for or against any such
election. With respect to approval of the 1995 Stock Option Plan and the Stock
Purchase Plan, abstentions as to each proposal will have the same effect as
votes against that proposal, but broker non-votes as to each such proposal will
not be deemed to be part of the voting power present with respect to that
proposal and therefore will not be counted as votes for or against that proposal
and will not be included in calculating the number of votes necessary to approve
that proposal.
Proxies received by the Company prior to the Annual Meeting will be voted in
accordance with shareholders' specifications marked thereon. In the absence of
specification, the WHITE proxies distributed by the Hills Board of Directors
will be voted FOR the election of the Board's nominees herein listed, FOR
approval of the 1995 Stock Option Plan and FOR approval of the Stock Purchase
Plan.
The proxies named in the enclosed WHITE proxy card will be authorized to
vote in their discretion for approval of the minutes of the preceding meeting
and matters incident to the conduct of the Annual Meeting and in their
discretion upon all other matters which may properly come before the Annual
Meeting.
Each shareholder appointing a proxy has the power to revoke such appointment
by a later-dated proxy delivered to the Company, by giving notice of revocation
to the Company in writing or by voting at the Annual Meeting. Shareholders may
vote at the Annual Meeting either by proxy or by attending the Annual Meeting
and completing a ballot distributed at the Annual Meeting. Any vote taken prior
to a revocation is not affected. The presence at the Annual Meeting of the
shareholder appointing a proxy does not in and of itself revoke the appointment.
Prior to its October 4, 1993 emergence from Chapter 11 proceedings, Hills
Stores Company was a wholly-owned subsidiary of Hills Department Stores, Inc.
(the "Predecessor Company"). Pursuant to the Company's Plan of Reorganization,
effective October 4, 1993, the Predecessor Company was dissolved. References
herein to periods prior to October 4, 1993 may, as appropriate, refer either to
the Company or the Predecessor Company. References to periods from and after
October 4, 1993 refer to the Company.
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MATTERS TO BE VOTED ON
ITEM 1 -- ELECTION OF DIRECTORS
It is proposed that seven directors, constituting the current Board of
Directors, be elected for the ensuing year and until their successors are
elected and qualified. It is intended that the shares represented by the WHITE
proxy, unless otherwise instructed, will be voted FOR the election of the Board
of Director's seven nominees listed in the following section. Insofar as is
known, all of the nominees will be able to serve. Should any nominee become
unavailable, the persons named in the proxy may vote for a substitute for such
nominee.
IN CONNECTION WITH ITEM 1, ALL SHAREHOLDERS SHOULD READ THE SECTION "WHY IT
IS IMPORTANT THAT YOU VOTE "FOR" YOUR BOARD'S NOMINEES", BEGINNING ON PAGE 2 OF
THIS PROXY STATEMENT.
THE BOARD OF DIRECTORS STRONGLY RECOMMENDS A VOTE "FOR" THE BOARD'S
NOMINEES. WE URGE YOU TO SIGN THE ENCLOSED WHITE PROXY CARD AND NOT TO SIGN ANY
PROXY CARDS SENT TO YOU BY DICKSTEIN.
INFORMATION ABOUT NOMINEES
All of the nominees are currently directors of the Company and of its
subsidiary, Hills Department Store Company. The nominees are:
<TABLE>
<CAPTION>
DIRECTOR
NAME AGE POSITION SINCE
- --------------------------------- --- ---------------------------- -----------
<S> <C> <C> <C>
Thomas H. Lee.................... 51 Chairman of the Board 1985
Michael Bozic.................... 54 Director, President and 1991
Chief Executive Officer
Susan E. Engel................... 48 Director 1993
Richard B. Loynd................. 67 Director 1993
Norman S. Matthews............... 62 Director 1990
James L. Moody, Jr............... 63 Director 1987
John G. Reen..................... 45 Director, Executive Vice 1993
President -- Chief Financial
Officer
</TABLE>
THOMAS H. LEE was elected Chairman of the Board of the Predecessor Company
in November 1990. He was also Chief Executive Officer of the Predecessor Company
from November 1990 to April 1991. He has been President since 1974 of Thomas H.
Lee Company, a firm engaged in investment activities. In addition, he has been
Chairman since 1987 of Thomas H. Lee Advisors I and the individual general
partner since 1989 of Thomas H. Lee Advisors II, L.P. and THL Equity Advisors
Limited Partnership, all of which are investment advisors. He is a director of
J. Baker, Inc., General Nutrition, Inc., Playtex Family Products Corporation,
Health o meter, Inc., Autotote Corporation, Finlay Fine Jewelry Corporation,
Live Entertainment of Canada, Inc. and Gillett Holdings, Inc. He also is an
individual general partner of ML-Lee Acquisition Fund, L.P., ML-Lee Acquisition
Fund II, L.P., and ML-Lee Acquisition Fund (Retirement Accounts) II, L.P.
MICHAEL BOZIC became the President and Chief Executive Officer of the
Predecessor Company 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 Merchandise Group. He is a director of Domain, Inc.,
Eaglemark Financial Services, Inc., Weirton Steel Corporation and Dean Witter
InterCapital, Inc.
SUSAN E. ENGEL has been President and Chief Operating Officer of Department
56, Inc. since September 1994. She was a consultant from September 1993 to
September 1994 and was President and Chief Executive Officer of Champion
Products, a manufacturer of athletic apparel, from October 1991 to September
1993. She was Vice President of Booz, Allen and Hamilton prior to October 1991.
She is a director of Penn Traffic and Ryka, Inc.
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RICHARD B. LOYND has been President and Chief Executive Officer of Interco
Incorporated since 1989 and Chairman of Interco Incorporated since 1990. Interco
Incorporated filed for Chapter 11 bankruptcy protection in January 1991 and
emerged from bankruptcy protection in August 1992. He is a director of Interco
Incorporated, Emerson Electric Co., The Florsheim Shoe Company and Converse,
Inc.
NORMAN S. MATTHEWS, former President of Federated Department Stores, Inc.,
has been a retail consultant since 1988. Mr. Matthews is a director of
Lechter's, Inc., Loehman's Inc., Finlay Fine Jewelry Corporation, Progressive
Corp. and Eye Care Centers of America. Mr. Matthews was Chairman of the Board
and Chief Executive Officer of Home Ltd. from 1988 until October 1993. Home Ltd.
filed for Chapter 11 bankruptcy protection in May 1993 and was liquidated in
October 1993.
JAMES L. MOODY, JR. has been Chairman of the Board of Hannaford Bros. Co., a
chain of food stores, since 1984 and was its Chief Executive Officer from 1973
to May 1992. Mr. Moody was a director of the Predecessor Company until October
4, 1993. He became a director of the Company November 19, 1993. He is also a
director of Penobscot Shoe Company, UNUM Corporation, IDEXX Laboratories, Inc.
and a Trustee of a number of mutual funds managed by The Colonial Group, Inc.
JOHN G. REEN has been Executive Vice President-Chief Financial Officer of
the Company since March 1992. He had been Senior Vice President-Chief Financial
Officer since February 1991 and Vice President-Controller from December 1985 to
January 1991.
Directors of the Company and Hills Department Store Company are elected for
a term of one year or until their successors are elected and qualified.
During the fiscal year ended January 28, 1995, the Board of Directors of the
Company met eleven times. No incumbent director attended fewer than 75% of the
total number of meetings of the Board and Committees of the Board on which he or
she served.
The Board of Directors has a standing Audit Committee and a standing
HR/Compensation Committee. The Board of Directors does not have a Nominating
Committee. During the fiscal year ended January 28, 1995, the Audit Committee
met three times and the HR/Compensation Committee met four times.
The Audit Committee, consisting entirely of non-employee directors, is
composed of Mr. Loynd, as Chairman, Ms. Engel and Mr. Moody. The Audit
Committee's functions include the following:
Recommendation to the full Board concerning the engagement or discharge of
independent auditors; direction and supervision of investigations into
matters within the scope of the Committee's duties; review with auditors of
plans and results of auditing procedures; review, for Board approval, of
each significant professional service provided by auditors and review of the
independence of the auditors; consideration of the range of audit and
nonaudit fees and the adequacy of the Company's system of internal
accounting controls.
The HR/Compensation Committee, consisting entirely of non-employee
directors, is composed of Mr. Moody, as Chairman, Ms. Engel and Mr. Loynd. The
HR/Compensation Committee's functions include the following:
Reviewing the corporate compensation programs and policies, including the
compensation of the Chief Executive Officer, to assure that said programs
and policies are competitive and provide for internal equity; reviewing and
advising the Chief Executive Officer on specific compensation matters for
officers and executives; oversight of the Company's performance bonus
program; and performance of such other duties as the Chairman of the Board
may require.
ITEM 2 -- ADOPTION OF THE HILLS STORES COMPANY 1995 STOCK OPTION PLAN
The Company is seeking shareholder approval of the adoption of the 1995
Stock Option Plan. The total number of shares of Common Stock which may be
granted under the 1995 Stock Option Plan is 500,000 subject to adjustment for
recapitalizations, stock splits, stock dividends and similar events. The 1995
Stock Option Plan was adopted, subject to shareholder approval, by the Board of
Directors on March 30, 1995. Shareholder approval is also being sought (a) so
that Incentive Stock Options granted pursuant to the
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1995 Stock Option Plan will comply with Section 422 of the Internal Revenue Code
of 1986, as amended (the "Code"), (b) in order that the purchase of shares
pursuant to the 1995 Stock Option Plan may be eligible for exemption from the
short-swing profits requirements of Section 16(b) of the Securities and Exchange
Act of 1934 (the "Exchange Act") and (c) in order to meet the requirements of
Section 162(m) of the Code with respect to deductibility of executive
compensation in excess of $1 million. A copy of the 1995 Stock Option Plan is
attached hereto as Exhibit 2.
The Board of Directors believes that approval of the 1995 Stock Option Plan
will further align the interests of management and shareholders and is in the
best interest of the Company. The Hills Stores Company 1993 Stock Option Plan
(the "1993 Stock Option Plan") was adopted as part of the Company's Plan of
Reorganization. As of May 18, 1995, 15,979 shares of Common Stock have been
issued pursuant to options which have been exercised, 998,021 shares of Common
Stock are reserved for issuance pursuant to outstanding stock options, and only
39,763 options remain available for grant under the 1993 Stock Option Plan.
The Board of Directors believes that the 1995 Stock Option Plan will be an
important retention mechanism for the Chief Executive Officer and other key
executives. The Board of Directors also believes that the 1995 Stock Option Plan
will permit the Company to provide additional incentives to the officers,
associates, and certain other individuals providing services to the Company by
enabling persons to whom options are granted to acquire or increase their
proprietary interest in the Company through acquisition of shares of the
Company's Common Stock.
On the last business day of January of each year, each director who is not
an employee of or a paid consultant to the Company, its parent or subsidiaries
("Outside Director") will, without any action of the Stock Option Committee, be
granted a Nonqualified Option to purchase 2,000 shares of Common Stock. Each
such non-discretionary option will expire on the fifth anniversary of the date
of the grant and will vest at the rate of 500 option shares on each of the first
four anniversary dates of the grant. The Board of Directors believes that these
options, exercisable at not less than the fair market value of the Company's
Common Stock on the date of the grant, will further align the interests of Board
members with the Company's shareholders. Not more than 50,000 shares may be
issued pursuant to such non-discretionary grants, subject to adjustment for
recapitalizations, stock splits, stock dividends or similar events.
The 1995 Stock Option Plan is administered by the Stock Option Committee of
the Company's Board of Directors, consisting of Thomas H. Lee and James L.
Moody, Jr., both of whom are non-employee directors and neither of whom has been
granted any stock options under either the 1993 Stock Option Plan or the 1995
Stock Option Plan within the past year. The functions of the Stock Option
Committee are: (a) to determine the persons to whom options are to be granted
and to prescribe the terms, conditions, restrictions, if any, and provisions
(which need not be identical) of each option granted; (b) to interpret the 1995
Stock Option Plan and to establish, amend and revoke rules and regulations for
the administration of the 1995 Stock Option Plan and (c) to make, in its sole
discretion, changes to outstanding options, including (i) to reduce the exercise
price, (ii) to accelerate the vesting schedule and (iii) to extend the
expiration date.
No individual may receive grants to purchase more than 150,000 shares of
Common Stock under the 1995 Stock Option Plan during any three year period.
Options are exercisable at a price and subject to vesting and other conditions
as prescribed by the Stock Option Committee, provided that the exercise price
shall not be less than the fair market value of the Common Stock on the date of
the grant (110% of the fair market value in the case of an Incentive Stock
Option granted to a greater than ten percent shareholder). Fair market value
means the closing price on the New York Stock Exchange on the date of the grant.
Except for non-discretionary grants to Outside Directors, which are for a term
of five years, options are for a term of ten years from the date of the grant
(five years in the case of a greater than ten percent shareholder). If a grantee
ceases to be employed by the Company for any reason other than death,
disability, retirement or termination without cause, all of such grantee's
unvested options shall expire. If a grantee whose employment or services are
terminated by the Company without cause has an employment, consulting or
retention
8
<PAGE>
agreement 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 agreement with vesting accruing to such
termination date.
Payment for shares of Common Stock purchased pursuant to the exercise of an
option may be made either by (i) cash, certified check, bank draft or money
order, or (ii) with the consent of the Stock Option Committee, shares of the
Company's Common Stock having a fair market value equal to the option price, or
(iii) with the consent of the Stock Option Committee such other consideration as
is acceptable to the Stock Option Committee and has a fair market value equal to
the option price.
Grants may consist of Incentive Stock Options, Nonqualified Stock Options or
a combination thereof. Incentive Stock Options may be granted only to officers
and other associates of the Company, its parent or its subsidiaries. In addition
to non-discretionary grants to Outside Directors described above, nonqualified
Stock Options may be granted to officers (including officers who are also
directors) or other associates of the Company, its parent or subsidiaries and to
consultants (including consultants who are also directors) and other persons who
render services to the Company. The aggregate fair market value (determined at
the time of the grant) of the Common Stock with respect to which Incentive Stock
Options under all stock option plans of the Company are exercisable for the
first time in any calendar year may not exceed $100,000. As of May 18, 1995, the
Company had approximately 18,000 associates eligible to participate and five
non-employee directors. The number of eligible consultants and other persons who
provide services to the Company cannot be determined.
The Board of Directors may modify, revise or terminate the 1995 Stock Option
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 may not
be changed or increased without shareholder consent, except in the case of
recapitalizations, stock splits, stock dividends and similar events. The
provisions relating to non-discretionary grants to Outside Directors may not be
amended more often than every six months, other than to comport with the Code,
the Employee Retirement Income Security Act or the rules thereunder. In
addition, the Board of Directors may amend the 1995 Stock Option Plan at any
time or from time to time to conform to Rule 16b-3 under the Exchange Act, as
that Rule may be amended from time to time.
Generally, there is no taxable income realized by the recipient on the grant
or exercise of an Incentive Stock Option, nor is the Company entitled to a
deduction at such time. If the recipient of an Incentive Stock Option holds the
shares acquired upon exercise for the required holding period (the later of two
years from the date of the grant or one year from exercise), then upon
disposition of the shares, the recipient will have a long term capital gain
equal to the difference between the amount received from the disposition and the
exercise price. If the recipient disposes of the shares prior to the end of the
holding period, the recipient will have compensation income in the year of the
disposition equal to the lesser of (i) the fair market value of the shares on
the date of exercise or (ii) the fair market value on the date of disposition
over the exercise price. Any excess gain will be treated as a capital gain.
Generally, there is no taxable income realized by the recipient on the grant
of Nonqualified Stock Options, nor is the Company entitled to a deduction at
such time. Upon exercise of a Nonqualified Stock Option, if the shares received
are not subject to restrictions on transfer and substantial risk of forfeiture,
the recipient will have compensation income equal to the difference between the
fair market value at the date of exercise and the exercise price, and the
Company may have withholding obligations. The amount taxed to the recipient will
be added to the recipient's basis for determining future gain or loss.
The following table sets forth grants made pursuant to the 1995 Stock Option
Plan.
9
<PAGE>
NEW PLAN BENEFITS
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
COMMON STOCK UNDERLYING
NAME & POSITION DOLLAR VALUE(1) OPTIONS GRANTED (2)(3)
- ----------------------------------------------------------- --------------- ------------------------
<S> <C> <C>
Michael Bozic ............................................. $ 431,250 150,000
President & Chief Executive Officer
John G. Reen .............................................. 143,750 50,000
Executive Vice President -- Chief Financial Officer
Andrew J. Samuto .......................................... 71,875 25,000
Executive Vice President -- Real Estate & Support Services
E. Jackson Smailes ........................................ 143,750 50,000
Executive Vice President -- General Merchandise Manager
Robert J. Stevenish ....................................... 143,750 50,000
Executive Vice President -- Store & Distribution
Operations
Executive Officers, ....................................... 970,312 337,500
Including the Above Named Officers, as a Group
Non-Executive Director .................................... -- 0
Group
Non-Executive Officer ..................................... -- 0
Employee Group
<FN>
- ------------------------
(1) Based upon the closing price of $23.00 per share of the Common Stock on the
New York Stock Exchange on May 22, 1995, and the exercise price of $20.125
per share (the closing price of the Common Stock on the New York Stock
Exchange on April 28, 1995, the date of the grant).
(2) The grants were made April 28, 1995, and the exercise price is $20.125 per
share (the closing price of the Common Stock on the New York Stock Exchange
on the date of the grant). The options granted will expire April 28, 2005
and will vest over the first five years following the grant as follows:
After 12 Months -- 20.0% Vested
After 24 Months -- 45.0% Vested
After 36 Months -- 75.0% Vested
After 48 Months -- 87.5% Vested
After 60 Months -- 100.0% Vested
(3) If shareholder approval of the 1995 Stock Option Plan is not obtained, the
foregoing grants will be rescinded.
</TABLE>
Information as to grants made to the individuals named in the Summary
Compensation Table pursuant to the 1993 Stock Option Plan may be obtained from
the tables on pages 18 and 19.
THE BOARD OF DIRECTORS RECOMMENDS UNANIMOUSLY A VOTE "FOR" ITEM NUMBER 2.
ITEM 3 -- HILLS STORES COMPANY ASSOCIATE STOCK PURCHASE PLAN
The Stock Purchase Plan was adopted by the Board of Directors on January 18,
1995. The Stock Purchase Plan is being submitted to the Company's shareholders
as required by applicable provisions of Section 423 of the Code, relating to
"employee stock purchase plans" as defined therein. If the Stock Purchase Plan
is approved by shareholders, an associate participating in the Stock Purchase
Plan will incur no federal income tax liability upon the purchase of shares
under the Stock Purchase Plan. Approval by the
10
<PAGE>
Company's shareholders is also being sought in order that the purchase of shares
under the Stock Purchase Plan may be eligible for exemption from the short-swing
profits and reporting requirements of the Exchange Act.
There shall be reserved for issuance and purchase by associates under the
Stock Purchase Plan, an aggregate of 500,000 shares of the Company's Common
Stock, subject to adjustment for stock splits or stock dividends. Shares subject
to the Stock Purchase Plan may be shares of the Company's Common Stock now or
hereafter authorized but unissued or shares that were once issued but
subsequently reacquired by the Company.
A copy of the Stock Purchase Plan is attached to this Proxy Statement as
Exhibit 3.
PURPOSE AND ELIGIBILITY
The purpose of the Stock Purchase Plan is to secure for the Company and its
shareholders the benefits of the incentives inherent in the ownership of the
Company's capital stock by present and future associates of the Company and its
subsidiaries. The Stock Purchase Plan is intended to strengthen the mutuality of
interests between the Company's shareholders and associates, including
non-management associates, by encouraging greater numbers of such associates to
acquire and hold shares of the Company's Common Stock. Stock purchase plans
similar to the Stock Purchase Plan are common in the retail industry and have
proven to be an effective method of motivating and retaining associates at all
levels. The Company anticipates that participation in the Stock Purchase Plan
will benefit the Company and its shareholders through enhanced associate
motivation and awareness of the Company's stock performance.
Any of the approximately 18,000 associates (i.e. all persons employed by the
Company and its subsidiaries) of the Company and its subsidiaries at May 18,
1995, and any future associates of the Company and its present and future
subsidiaries, if they are eligible associates, may participate under the Stock
Purchase Plan except as noted below.
All regular associates who have attained the age of majority as determined
by the laws of their state of residence and who have completed at least six
months employment and have customary employment of a minimum of twenty hours per
week are eligible to participate. Associates who own 5% or more of the Company's
voting stock are not eligible to participate in the Stock Purchase Plan.
Additionally, there is a dollar limit for certain highly compensated employees,
and highly compensated employees who are also directors of the Company,
including Messrs. Bozic and Reen, are ineligible. Associates on leave of absence
or on temporary layoff as of either of the twice-yearly offering commencement
dates who are otherwise eligible to participate in the Stock Purchase Plan are
permitted to enroll in the offering beginning on that offering commencement
date; payroll deductions with respect to any such associate will begin as of the
first pay period after he or she resumes employment.
COMMENCEMENT, TERMINATION AND MODIFICATION
The Stock Purchase Plan will become effective as of August 1, 1995 and is
subject to shareholder approval to obtain the benefits mentioned above for
participating associates.
The Stock Purchase Plan and all rights of associates under the Stock
Purchase Plan will terminate (a) on the investment date that participating
associates would, but for the limitation set forth below, become entitled to
purchase a number of shares greater than the number of reserved shares remaining
available for purchase or (b) at the discretion of the Board of Directors, at
any time before that. If the Stock Purchase Plan terminates because
participating associates have become entitled to purchase more shares than are
available for purchase, reserved shares remaining available for purchase as of
the termination date will be issued to participating associates on a pro rata
basis, and any excess funds thereafter remaining in associates' accounts will be
refunded.
The Board of Directors may amend the Stock Purchase Plan in any respect,
except that the Stock Purchase Plan may not be amended in any way that will
cause rights issued under it to fail to meet the
11
<PAGE>
requirements for an employee stock purchase plan as defined in Section 423 of
the Internal Revenue Code which, among other things, requires shareholder
approval for an increase in the number of shares issuable under the Stock
Purchase Plan except pursuant to the anti-dilution provisions of the Stock
Purchase Plan.
If the shareholders do not approve the Stock Purchase Plan, it is possible
that the Board of Directors may terminate the Stock Purchase Plan. Without
shareholder approval, current federal tax law provides that the 15% discount
from the fair market value of the stock will be treated as taxable compensation
in the year of purchase by the participating associate, thus negating the
advantageous federal tax treatment the Stock Purchase Plan is expected to
provide to associates.
ADMINISTRATION
The Stock Purchase Plan is administered, at the Company's expense, by the
HR/Compensation Committee of the Board of Directors. The Committee may request
advice or assistance and employ or direct any other persons necessary for the
proper administration of the Stock Purchase Plan. Subject to the express
provisions of the Stock Purchase Plan, the Committee has the authority to
interpret the Stock Purchase Plan, to prescribe, amend and rescind rules and
regulations relating to the Stock Purchase Plan, and to make all other
determinations necessary or advisable in administering the Stock Purchase Plan,
all of which determinations will be final and binding upon all persons, unless
otherwise determined by the Board of Directors.
The Board of Directors has selected Smith Barney to maintain the investment
accounts of participating associates, and will pay Smith Barney a fee based on
the number of associate accounts enrolled at the time of each quarterly stock
allocation.
PURCHASE PRICE AND METHOD OF PURCHASE
Participating associates will authorize the Company or subsidiary employer
to make payroll deductions, not exceeding 10% of their salary or wages during
the prior 12-month period, divided by the number of pay periods in the following
twelve months. The minimum deductions shall be $5.00 per pay period. The payroll
deductions will be used to purchase shares of stock at the end of each quarter
at a price equal to 85% of the average of the high and low prices of the
Company's Common Stock traded on the New York Stock Exchange on the last day in
the calendar quarter on which the stock was traded. Smith Barney, which will
maintain an investment account for each participating associate, intends to
issue periodic reports to the associate of his or her shareholdings, although
the Stock Purchase Plan does not expressly require such reports to be issued.
Participating associates will not pay any brokerage or similar commission in
connection with the purchase of stock under the Stock Purchase Plan.
Because the Stock Purchase Plan limits each associate's participation to 10%
of his or her compensation, with a calendar year purchase limit of $25,000 of
the fair market value of the purchased stock, each associate with annual
compensation exceeding $250,000, which includes each of the executive officers
named in the Summary Compensation Table and some of the other eligible executive
officers, could obtain a maximum annual benefit of $3,750.00 (I.E. 15% of
$25,000) under the Stock Purchase Plan. Lesser-paid associates would have
available a proportionately reduced maximum annual benefit.
On May 22, 1995, the closing price of the Company's Common Stock on the New
York Stock Exchange was $23.00.
THE BOARD OF DIRECTORS RECOMMENDS UNANIMOUSLY A VOTE "FOR" ITEM NUMBER 3.
12
<PAGE>
BENEFICIAL OWNERSHIP
The following table sets forth as of May 18, 1995 information with respect
to beneficial ownership of shares of the Company's Common Stock and Series A
Preferred Stock. The information was obtained from Company records and
information supplied by the shareholders, including information on Schedules 13D
and 13G and Forms 4 prescribed by the Securities and Exchange Commission
("SEC"). Each share of Series A Preferred Stock is immediately convertible into
one share of Common Stock, and the Series A Preferred Stock has coextensive
voting rights with the Company's Common Stock.
<TABLE>
<CAPTION>
AMOUNT AND NATURE
TITLE OF NAME AND ADDRESS OF BENEFICIAL PERCENT OF PERCENT OF VOTING
CLASS OF BENEFICIAL OWNER OWNERSHIP CLASS STOCK (1)
- ------------ ----------------------------------------------- --------------------- ----------- -----------------
<S> <C> <C> <C> <C>
Common Dickstein Partners Inc. (2) 1,113,459(2) 11.68 10.38
Dickstein Partners, L.P.
Dickstein & Co., L.P.
Dickstein Focus Fund L.P.
Mark Dickstein
9 West 57th Street
Suite 4630
New York, NY 10019
Dickstein International Limited
129 Front Street
Hamilton HM12 Bermuda
Common Heine Securities Corporation (3) 952,885(3) 9.92 8.88
51 John F. Kennedy Parkway
Short Hills, NJ 07078
Common FMR Corp. (4) 808,814(4) 8.48 7.54
Fidelity Management and Trust Company
82 Devonshire Street
Boston, MA 02109-3614
Common ML-Lee Acquisition Fund II, L.P. (5), ML-Lee 786,683(5) 8.18 7.28
Acquisition Fund (Retirement Accounts) II,
L.P., Thomas H. Lee Advisors II, L.P.
Thomas H. Lee
World Financial Center
South Tower, 23rd Fl.
New York, NY 10080-6123
Common Everest Capital Limited 726,771(6) 7.62 6.78
Corner House
20 Parliament Street
Hamilton HN12, Bermuda
Common Wellington Management Company 677,245 7.10 6.31
75 State Street
Boston, MA 02109
Common Richard S. Karpin, Assistant Special Deputy 591,047(7) 6.05 5.51
Superintendent of Insurance of the State of New
York, as Agent of the Rehabilitator of
Executive Life Insurance Company of New York
123 William Street
New York, NY 10038-3889
<FN>
- --------------------------
(1) Represents the percentage of shares of Common Stock and Series A Preferred
Stock owned beneficially to the aggregate of 9,534,709 shares of Common
Stock and 1,190,432 shares of Series A Preferred Stock.
</TABLE>
13
<PAGE>
<TABLE>
<S> <C>
(2) Dickstein Partners Inc., Dickstein Partners, L.P., Dickstein & Co., L.P.,
Dickstein Focus Fund L.P., Dickstein International, Limited and Mark
Dickstein have filed a Schedule 13D and amendments thereto showing
beneficial ownership of an aggregate of 1,113,459 shares. Of the 1,113,459
total shares owned beneficially, Dickstein & Co., L.P. owned beneficially
727,315 of such shares. Dickstein Focus Fund L.P. owned beneficially 90,995
of such shares and Dickstein International Limited owned beneficially
295,149 of such shares. Dickstein Partners, L.P. is the general partner of
Dickstein & Co., L.P. and Dickstein Focus Fund L.P. Dickstein Partners Inc.
is the general partner of Dickstein Partners, L.P. and is the advisor to
Dickstein International Limited. Since Mark Dickstein is the President and
sole director of Dickstein Partners Inc., he may be deemed to own
beneficially all shares shown.
(3) Michael F. Price is the President of Heine Securities Corporation and he
may be deemed to own beneficially all the shares owned by Heine Securities
Corporation.
(4) FMR Corp. has filed a Schedule 13D and amendments thereto showing
beneficial ownership of 808,814 shares. The Company believes that FMR Corp.
and Fidelity Management and Trust Company may be deemed a "group" as that
term is used in Rule 13d5(b) of the Exchange Act. The shares listed are
owned beneficially by Fidelity Management and Trust Company, a trustee or
managing agent for various private investment accounts, primarily employee
benefit plans, and an investment advisor to certain other funds which are
generally offered to limited groups of investors.
(5) ML-Lee Acquisition Fund II, L.P. owns beneficially 458,432 shares of Common
Stock, and ML-Lee Acquisition Fund (Retirement Accounts) II, L.P. owns
beneficially 244,818 shares of Common Stock. Thomas H. Lee Advisors II,
L.P., as the investment advisor to both Funds, shares the power to vote and
to direct the disposition of securities held by the Funds and therefore may
be deemed to own beneficially the 703,250 shares of Common Stock owned
beneficially in the aggregate by the Funds. Thomas H. Lee, Chairman of the
Board, is a General Partner of both Funds. The shares listed include 83,433
shares of Common Stock owned beneficially by Mr. Lee individually,
including 441 shares of Common Stock issuable upon conversion of Series A
Preferred Stock and 77,759 shares of Common Stock issuable upon exercise of
Series 1993 Warrants. Mr. Lee disclaims beneficial ownership of 87 shares
of Common Stock issuable upon exercise of Series 1993 Warrants he holds as
custodian for his son.
(6) The shares listed include 1,541 shares of Common Stock issuable upon
conversion of 1,541 shares of Series A Preferred Stock.
(7) The shares listed include 229,559 shares of Common Stock issuable upon
conversion of 229,559 shares of Series A Preferred Stock (18.59% of the
Series A Preferred) and 5,929 shares of Common Stock issuable upon exercise
of Series 1993 Warrants.
</TABLE>
14
<PAGE>
BENEFICIAL OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth as of May 18, 1995 the beneficial ownership
of the Company's Common Stock and Series A Preferred Stock held by each
director, the nominees for director, the executive officers named in the Summary
Compensation Table and directors and executive officers as a group. Each share
of Series A Preferred Stock is immediately convertible into one share of Common
Stock, and the Series A Preferred Stock has coextensive voting rights with the
Common Stock.
<TABLE>
<CAPTION>
AMOUNT AND NATURE
TITLE OF NAME AND ADDRESS OF BENEFICIAL PERCENT OF PERCENT OF
CLASS OF BENEFICIAL OWNER OWNERSHIP CLASS VOTING STOCK (1)
- ------------ ------------------------------------ --------------------- ------------- -----------------
<S> <C> <C> <C> <C>
Common Thomas H. Lee 786,683(2)(13) 8.18 7.28
Common Michael Bozic 41,000(3) * *
Common Susan E. Engel 500(4) * *
Common Richard B. Loynd 1,500(5) * *
Common Norman S. Matthews 26,307(6)(13) * *
Common James L. Moody, Jr. 1,763(7)(13) * *
Common John G. Reen 15,799(8)(13) * *
Common Andrew J. Samuto 11,968(9)(13) * *
Common E. Jackson Smailes 14,600(10) * *
Common Robert J. Stevenish 14,600(11) * *
Common Directors and Executive Officers 925,069(12)(13)
as a Group (13 Persons) 9.50 8.47
<FN>
- ------------------------
* Represents less than 1% of outstanding shares.
(1) Represents the percentage of shares of Common Stock and Series A Preferred
Stock owned beneficially to the aggregate of 9,534,709 shares of Common
Stock and 1,190,432 shares of Series A Preferred Stock, which have
coextensive voting rights.
(2) Includes 703,250 shares of Common Stock owned beneficially by ML-Lee
Acquisition Fund II, L.P. and ML-Lee Acquisition Fund (Retirement Accounts)
II, L.P. of which Mr. Lee is a general partner, 5,674 shares of Common
Stock, including 441 shares of Common Stock issuable upon conversion of
Series A Preferred Stock, and 77,759 shares issuable upon exercise of
Series 1993 Warrants held by the 1989 Thomas H. Lee Nominee Trust, of which
Mr. Lee is the beneficiary and settlor. Mr. Lee disclaims beneficial
ownership of 87 shares issuable upon exercise of Series 1993 Warrants he
holds as custodian for his son.
(3) Consists of 5,479 shares issued upon exercise of stock options exercised
November 19, 1994, 5,000 shares issued upon exercise of stock options
exercised January 10, 1995 and 30,521 exercisable stock options.
(4) Consists of exercisable stock options.
(5) Includes 1,000 shares of Common Stock and 500 exercisable stock options.
(6) Includes 26,000 exercisable stock options and 307 shares issuable upon
exercise of Series 1993 Warrants to purchase Common Stock.
(7) Includes 1,000 shares of Common Stock, 500 exercisable stock options and
263 shares issuable upon exercise of Series 1993 Warrants to purchase
Common Stock.
(8) Includes 270 shares of Common Stock, 14,600 exercisable options and 929
shares issuable upon exercise of Series 1993 Warrants to purchase Common
Stock.
(9) Includes 858 shares of Common Stock, 11,000 exercisable options and 110
shares issuable upon exercise of Series 1993 Warrants to purchase Common
Stock.
(10) Consists of 1,000 shares issued upon exercise of stock options exercised
January 27, 1995 and 13,600 exercisable stock options.
(11) Consists of 1,000 shares issued upon exercise of stock options exercised
April 17, 1995 and 13,600 exercisable stock options.
(12) Consists of 724,089 shares of Common Stock including 441 shares of Common
Stock issuable upon conversion of Series A Preferred Stock, 120,921
exercisable stock options and 80,059 shares issuable upon exercise of
Series 1993 Warrants to purchase Common Stock.
(13) Although each Series 1993 Warrant is immediately exercisable for one share
of Common Stock, each such Series 1993 Warrant is, at present,
significantly "out of the money" ($30 per share exercise price versus
$23.25 per share closing price on the New York Stock Exchange on May 18,
1995.)
</TABLE>
15
<PAGE>
SECURITIES AND EXCHANGE COMMISSION FILINGS
Section 16(a) of the Exchange Act requires the Company's officers and
directors, and persons who own more than ten percent of a registered class of
the Company's equity securities, to file reports of ownership and changes in
ownership with the SEC and the New York Stock Exchange. Officers, directors and
greater than 10% shareholders are required by SEC regulations to furnish the
Company with copies of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by it, or
written representations from certain reporting persons that no Forms 5 were
required for those persons, the Company believes that for the fiscal year ended
January 28, 1995, its officers, directors, and greater than 10% beneficial
owners complied with all filing requirements applicable to them.
EXECUTIVE COMPENSATION
The following table sets forth the annual and long-term compensation for
service in all capacities to the Company for the fiscal year ended January 28,
1995 and the two prior fiscal years of those persons who were at January 28,
1995, (i) the Chief Executive Officer and (ii) the other four most highly
compensated executive officers of the Company whose salary and bonus exceed
$100,000:
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS:
NAME AND OTHER ANNUAL STOCK ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS COMPENSATION (1)
- ------------------------------------------------- ---- ---------- ------------ ------------ ------------ ----------------
<S> <C> <C> <C> <C> <C> <C>
Michael Bozic ................................... 1994 $875,000 $ 537,500 -- 35,000 $3,000
President & Chief Executive Officer 1993 875,000 1,437,500(2) -- 170,000 --
1992 834,289 437,500 -- -- --
John G. Reen .................................... 1994 284,583 215,000 -- 23,000 6,000
Executive Vice President 1993 256,250 447,947(2) -- 50,000 --
Chief Financial Officer 1992 250,000 362,339 -- -- --
Andrew J. Samuto ................................ 1994 288,333 175,000 -- 15,000 5,845
Executive Vice President 1993 280,000 326,656(2) -- 40,000 --
Real Estate and Support Services 1992 280,000 160,000 -- -- --
E. Jackson Smailes .............................. 1994 375,000 257,500 -- 18,000 3,000
Executive Vice President 1993 375,000 272,450(2) $210,988(4) 55,000 --
General Merchandise Manager 1992 217,361(3) 35,000(3) -- -- --
Robert J. Stevenish ............................. 1994 258,333 202,500 -- 18,000 3,000
Executive Vice President 1993 225,000 194,068(2) 41,934(5) 55,000 --
Store and Distribution Operations 1992 156,250(3) 30,000(3) -- -- --
<FN>
- ------------------------------
(1) Represents Company Contributions to the Company's 401(k) Plan.
(2) Includes both annual and emergence bonuses. Emergence bonuses were paid
upon confirmation of the Company's Plan of Reorganization by the United
States Bankruptcy Court for the Southern District of New York, effective
October 4, 1993, pursuant to an emergence bonus plan approved by the
Bankruptcy Court.
(3) Amounts shown represent a partial year. Messrs. Smailes and Stevenish
commenced their employment with the Company during fiscal 1992.
(4) Consists of relocation expenses, including a "gross up" of $91,134 for
federal and state taxes.
(5) Consists of relocation expenses, including a "gross up" of $10,143 for
federal and state taxes.
</TABLE>
EMPLOYMENT CONTRACTS
On September 30, 1994, the Company entered into employment agreements with
the executive officers listed in the Summary Compensation Table and with William
K. Friend, Vice President-Secretary and
16
<PAGE>
Corporate Counsel, which employment agreements replaced existing employment
agreements with such persons. The new employment agreements provided for a term
of employment of each employee to December 31, 1996. The new agreements contain
a rolling one-year extension provision if no notice to terminate is given by
either party at least 90 days prior to the end of the term of the agreements.
There was no change in compensation amounts from that provided in the prior
employment agreements. The new employment agreements establish minimum base
salary (subject to annual increases approved by the Board) and bonus level (as a
percentage of base salary if annual goals established by the Board are attained)
for each employee as follows:
<TABLE>
<CAPTION>
1995 BASE
EMPLOYEE SALARY BONUS LEVEL
- ------------------------------------------------------------------- ----------- ----------------
<S> <C> <C>
Michael Bozic...................................................... $ 925,000 50%
John G. Reen....................................................... 315,000 50%
Andrew J. Samuto................................................... 290,000 50%
E. Jackson Smailes................................................. 390,000 50%
Robert J. Stevenish................................................ 290,000 50%
William K. Friend.................................................. 169,000 40%
</TABLE>
The employment agreements provide that if the Company fails to pay amounts
due under or otherwise is in material breach of the employment agreements or in
the event of a significant diminution of an executive's responsibility and
authority, it will be considered a "Good Reason" for such executive to terminate
his agreement. The agreements further provide that an executive may terminate
his agreement following a "Change in Control." A Change in Control is considered
to have occurred if any person or group (i) becomes the beneficial owner of more
than 50% of the Company's voting stock or (ii) elects more than 30% of the
members of the Board of Directors (40% if there are nine or more directors),
rounded down to the nearest whole number, as the result of an election contest.
In the event an executive terminates his employment agreement for Good
Reason (other than following a Change in Control) or the Company terminates his
agreement without cause (including the failure of the Company to extend), such
executive will receive a lump sum payment equal to (i) all earned but unpaid
salary and a pro rated bonus to the time of termination and (ii) two times such
executive's annual base salary in effect at the time of such termination; and
such executive will continue to be entitled to benefits and perquisites during
the stated term of the agreement.
In the event an executive terminates his employment with Good Reason within
one year after a Change in Control approved by a majority of the Company's
continuing directors (an "Approved Change in Control"), such executive will
receive a lump sum payment equal to (i) all earned but unpaid salary and a pro
rated bonus to the time of termination and (ii) three times the sum of (a) such
executive's annual base salary at the time of termination and (b) any bonus
compensation to which such executive would have been entitled if such executive
had remained as an employee to the end of the fiscal year in which such
executive's employment terminated; and such executive will continue to be
entitled to benefits and perquisites during the stated term of the agreement.
In the event an executive terminates his employment agreement within one
year after a Change in Control (other than an Approved Change in Control) such
executive will receive a lump sum payment equal to (i) all earned but unpaid
salary and a pro rated bonus to the time of termination and (ii) three times
such executive's 1994 base salary and bonus, subject to adjustment under certain
circumstances; and such executive will continue to be entitled to benefits and
perquisites during the stated term of the agreement.
The employment agreements provide that all options granted to an executive
will immediately vest in the event of such executive's (i) death or disability,
(ii) termination of his employment agreement for Good Reason or (iii)
termination of his employment agreement following a Change in Control, other
than an Approved Change in Control. The employment agreements also provide that
an executive will be fully
17
<PAGE>
indemnified by the Company for any and all expenses, fees (including legal
fees), liabilities and obligations resulting from the executive's employment
with the Company or enforcement of the terms of his employment agreement.
COMPENSATION OF DIRECTORS
The Company pays to independent, non-employee directors a fee of $2,000 per
month plus $1,000 for each meeting of the Board and $500 for each committee
meeting attended, plus expenses. Committee Chairmen receive $750 for each
committee meeting attended.
Pursuant to a consulting agreement entered into on September 30, 1994 with
Norman S. Matthews, which replaced his previous consulting agreement, Mr.
Matthews agreed to devote two-thirds of his professional time (determined on an
annual basis) to the Company's business until December 31, 1996. Under the
agreement, Mr. Matthews receives an annual fee of $500,000 (subject to annual
increases approved by the Board), annual bonuses at the 50% level, based upon
the attainment of annual goals established by the Board, and reimbursement of
expenses. In addition, for the fiscal year ended January 28, 1995, Mr. Matthews
received a special discretionary bonus of $70,000. Mr. Matthews' consulting
agreement contains substantially similar provisions with respect to termination
for Good Reason or following a Change in Control as the employment agreements
described above under "Executive Compensation -- Employment Agreements".
Mr. Lee, who is Chairman of the Board, is a financial consultant to the
Company with a fee of $250,000 per year.
Outside Directors will each receive a non-discretionary grant of a stock
option to purchase 2,000 shares of Common Stock pursuant to the 1995 Stock
Option Plan on the last day of January of each year if the 1995 Stock Option
Plan is approved by shareholders.
RELATED TRANSACTIONS
Mr. Lee, who is Chairman of the Board, is a director of J. Baker, Inc. and
owns less than 1% of the outstanding capital stock of J. Baker, Inc. The Company
and J. Baker, Inc. are parties to a license agreement pursuant to which J.
Baker, Inc. operates footwear departments in Hills Department Stores and pays
the Company a license fee.
STOCK OPTION TABLE
The following table sets forth grants of options to purchase shares of the
Company's Common Stock under the Company's 1993 Stock Option Plan to the
individuals named in the Summary Compensation Table during the fiscal year ended
January 28, 1995:
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE OF ASSUMED ANNUAL
NUMBER OF RATES OF STOCK PRICE
SECURITIES % OF TOTAL APPRECIATION FOR OPTION
UNDERLYING OPTIONS GRANTED EXERCISE OR TERM (2)
OPTIONS TO EMPLOYEES IN BASE EXPIRATION ------------------------
NAME GRANTED (1) FISCAL YEAR PRICE (2) DATE 5% 10%
- ---------------------------------- ----------- --------------- ----------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Michael Bozic..................... 35,000 18.3% $ 19.50 04/21/2004 $ 429,221 $ 1,087,729
John G. Reen...................... 23,000 12.0% 19.50 04/21/2004 282,059 714,793
Andrew J. Samuto.................. 15,000 7.9% 19.50 04/21/2004 183,952 466,170
E. Jackson Smailes................ 18,000 9.4% 19.50 04/21/2004 220,742 559,404
Robert J. Stevenish............... 18,000 9.4% 19.50 04/21/2004 220,742 559,404
<FN>
- ------------------------
(1) The options vest over the first five years following the grant as follows:
After 12 Months -- 20.0% Vested
After 24 Months -- 45.0% Vested
After 36 Months -- 75.0% Vested
After 48 Months -- 87.5% Vested
After 60 Months -- 100.0% Vested
</TABLE>
18
<PAGE>
<TABLE>
<S> <C>
(2) The exercise price is equal to the market value on the date of the grant.
The amounts shown as potential realizable value illustrate what might be
realized upon exercise immediately prior to expiration using the 5% and 10%
appreciation rates established in regulations of the SEC, compounded
annually. The potential realizable value is not intended to predict future
appreciation of the price of the Company's Common Stock. The values shown
do not consider nontransferability, vesting over five years or termination
of the options upon termination of employment.
</TABLE>
OPTION EXERCISES IN FISCAL 1994
Mr. Bozic exercised 5,479 stock options on November 29, 1994 and 5,000 stock
options on January 10, 1995. Mr. Smailes exercised 1,000 stock options on
January 27, 1995. No other directors or executive officers exercised stock
options during the fiscal year ended January 28, 1995. In addition, Mr.
Stevenish exercised 1,000 stock options on April 17, 1995. As of January 28,
1995, the following table sets forth information regarding the number and value
of unexercised stock options.
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED IN
NUMBER OF UNEXERCISED THE MONEY OPTIONS AT YEAR
SHARES OPTIONS AT FISCAL YEAR END END (2)
ACQUIRED ON VALUE ---------------------------- --------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------------------- ------------- ----------- ------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Michael Bozic.................... 10,479 $ 22,653(1) 23,521 171,000 $ 70,563 $ 469,250
John G. Reen..................... 0 0 10,000 63,000 30,000 160,250
Andrew J. Samuto................. 0 0 8,000 47,000 24,000 122,250
E. Jackson Smailes............... 1,000 3,000(2) 10,000 62,000 30,000 163,500
Robert J. Stevenish.............. 0 0 11,000 62,000 33,000 163,500
<FN>
- ------------------------------
(1) Based on the difference between the exercise price of $18.25 and (a) the
closing price of the Company's Common Stock on November 29, 1994 of $19.875
as to 5,479 shares and (b) the closing price of the Company's Common Stock
on January 10, 1995 of $21.00 as to 5,000 shares.
(2) Based on the difference between the closing price of the Company's Common
Stock on January 27, 1995 of $21.25 per share and the exercise price of
$18.25 per share, as to options granted November 4, 1993 and $19.50 per
share as to options granted April 21, 1994.
</TABLE>
LONG TERM INCENTIVE PLAN AWARDS
Except for the Company's Stock Option Plans described above, the Company
does not have a long term incentive plan, and the Company made no long term
incentive plan awards in fiscal 1994.
PENSION PLAN
The following table shows the estimated annual retirement benefit payable on
a straight life annuity basis to participating associates, including officers,
in the earnings and years of service classifications indicated, under the
Company's retirement plan which covered most officers and other salaried
associates on a contributory basis. Such benefits reflect an integration of
Social Security benefits. The Company's plan also provides for the payment of
benefits to an associate's surviving spouse or other beneficiary, under
alternative options.
<TABLE>
<CAPTION>
HIGHEST AVERAGE ANNUAL
COMPENSATION DURING ANY
FIVE CONSECUTIVE YEARS YEARS OF CREDITED SERVICE
BETWEEN 1965 AND NORMAL ---------------------------------------------------------------
RETIREMENT AGE OF 65 15 20 25 30 35
- ------------------------ ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$ 250,000 $ 58,331 $ 77,775 $ 97,219 $ 116,663 $ 136,107*
300,000 71,456 95,275 119,094* 142,913* 166,732*
400,000 97,706 130,280* 162,850* 195,420* 227,990*
500,000 123,956* 165,275* 206,594* 247,913* 289,232*
1,000,000 255,210* 340,280* 425,350* 510,420* 595,490*
1,500,000 386,460* 515,280* 644,100* 772,920* 901,740*
<FN>
- ------------------------
*Subject to limitations imposed by the Employees Retirement Income Security Act
of 1974 ("ERISA"), as amended. The current maximum annual benefit allowed by
ERISA is $118,800.
</TABLE>
19
<PAGE>
Benefits under the plan are calculated based upon 100% of cash compensation
(salary and bonus) actually received during any calendar year, subject to any
limitations imposed by law. The compensation upon which benefit calculations are
based differs from compensation reported in the Cash Compensation Table set
forth above because the Internal Revenue Service limits to $150,000 the amount
of 1994 compensation to be used in calculating benefits under the pension plan.
At April 30, 1994, the plan termination date, Messrs. Bozic, Reen, Samuto,
Smailes and Stevenish had 3.0, 17.7, 29.2, 2.7 and 2.4 years of credited
service, respectively, and the individual compensation for calendar year 1993
for purposes of the plan was $150,000 for each of Messrs. Bozic, Samuto and
Reen. Messrs. Smailes and Stevenish do not participate in the pension plan.
Subject to receiving necessary approvals from the Internal Revenue Service,
the pension plan was terminated effective April 30, 1994. On May 12, 1995, the
Company received a favorable determination from the Internal Revenue Service.
The Company expects that during the current fiscal year accrued benefits will be
transferred to associates participating in the pension plan in the form of
either an annuity or a rollover into the associate's 401(k) savings account at
the option of the associate.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
During the fiscal year ended January 28, 1995, the Company instituted a
Supplemental Executive Retirement Plan ("SERP") which will provide certain
benefits to 20 key executives of the Company, including each of the executives
named in the Summary Compensation Table. The Company did not make any payments
pursuant to the SERP in the fiscal year ended January 28, 1995. However, during
the current fiscal year, the Company anticipates making contributions pursuant
to the SERP for each of the 20 covered executives, including each of the
executives named in the Summary Compensation Table. Said contributions are
expected to be included in the "All Other Compensation" column of the Summary
Compensation Table in the proxy statement for the 1996 Annual Meeting of
Shareholders.
The SERP provides that in the event of a Change in Control, all participants
in the SERP will immediately be fully vested, and, depending on a participant's
age, there may be adjustments in the actuarial calculations used to compute a
participant's benefits. The foregoing could require substantial additional
funding of the SERP by the Company. If there is a Change in Control in 1995, for
example, in connection with the Dickstein Proposal or the related proxy
solicitation, the Company estimates that such additional funding will be
approximately $5.5 million. "Change in Control" is defined in the SERP in the
same manner as it is defined in the employment agreements for the Company's
senior executive officers. See "Employment Contracts".
COMPENSATION COMMITTEE REPORT
In accordance with the rules and regulations of the SEC, the following
report of the Compensation Committee and the performance graph thereafter shall
not be deemed to be "soliciting material" or to be "filed" with the SEC or
subject to Regulations 14A or 14C of the Exchange Act or to the liabilities of
Section 18 of the Exchange Act and shall not be deemed to be incorporated by
reference into any filing under the Securities Act of 1933, as amended, or the
Exchange Act, notwithstanding any general incorporation by reference of this
Proxy Statement into any other filed document.
The Company's Board of Directors has established the HR/Compensation
Committee (the "Committee"), consisting entirely of non-employee directors. The
Committee's functions include:
(i) Reviewing the corporate compensation programs, including the
compensation of the Chief Executive Officer, and policies to insure that the
programs and policies are competitive and provide for internal fairness;
(ii) Reviewing and advising the Chief Executive Officer about specific
compensation matters for officers and executives;
(iii) Overseeing the Company's performance bonus program;
(iv) Administering the Hills Stores Company Associate Stock Purchase
Plan; and
20
<PAGE>
(v) Such other duties as the Chairman of the Board may assign.
OBJECTIVES
The objective of the Company's executive compensation program is to attract
and retain executives with high levels of talent and expertise in areas related
to retailing and to encourage these executives to achieve superior performance
on behalf of the Company and its shareholders. The Company has developed a
compensation strategy that ties a substantial portion of executive compensation
to the Company's success in meeting specified performance goals. The Company
believes that its executive compensation program allows it to compete with other
high volume discount retailers and to remain competitive in a demanding retail
market. Executive compensation generally consists of three basic components:
salary, performance bonus, and stock option grants.
BASE SALARY
Base salaries for executive officers are determined by the Company by
evaluating the duties and responsibilities of each position and the experience
of the executive and by conducting executive salary surveys and comparing
salaries for similar positions with other companies. Annual salary increases and
adjustments are determined by the Company and based on individual performance,
changes in responsibilities, and market-based salary comparisons with other
retail companies. Salaries of all executives are reviewed annually.
PERFORMANCE BONUS
A significant portion of executive compensation is directly related to
Company performance by means of the Company's performance bonus program.
Depending on position, maximum bonus eligibility ranges from a low of 6% of an
executive's base salary to a high of 50% of an executive's base salary. Actual
pay-out is determined by Company performance, the achievement of financial and
profit goals and individual performance. Early in each year, the Board of
Directors approves performance goals for the Company and for individual
executives. If the Company meets its performance goals, a maximum bonus pool is
established. The bonus pool is reduced or eliminated depending on the level of
performance achieved. In the fiscal year ended January 28, 1995, the Company
goal was a target of earnings before interest, taxes, depreciation and
amortization (EBITDA). EBITDA thresholds in descending amounts were established
for a maximum bonus pool, a 67% bonus pool and a 33% bonus pool. If the lowest
threshold is not met, there is no bonus pool. In the fiscal year ended January
28, 1995, the Company met the EBITDA threshold for a maximum bonus pool.
In addition to the Company goal, each executive has individual performance
goals. These individual goals vary by position. Even if the Company meets its
maximum bonus goal, an executive may not receive a maximum bonus if individual
performance goals are not met. Furthermore, executives who exceed their
individual performance goals may be awarded special discretionary bonuses. For
the fiscal year ended January 28, 1995, each executive officer named in the
Summary Compensation Table, including the Chief Executive Officer, received
special discretionary bonuses.
STOCK OPTION PLAN
The Company's 1993 Stock Option Plan is intended to provide a long-term
incentive and to motivate executives to increase the long-term market value of
the Company's common stock. During the fiscal year ended January 28, 1995,
options to purchase a total of 191,000 shares of the Common Stock of the Company
were granted to 24 individuals, including the Chief Executive Officer, all other
executives named in the Summary Compensation Table and one non-employee
director. The exercise price is equal to the market value on the date of the
grant. Options may be exercised (subject to vesting) for ten years following the
grant, with vesting occurring in annual increments during the first five years
following the grant. Option grants are fully vested after five years from the
date of the grant.
The Stock Option Committee of the Board of Directors of the Company
determines the amount and timing of grants under the Company's Stock Option
Plan. The Stock Option Committee is comprised of Thomas H. Lee and James L.
Moody, Jr., both of whom are non-employee directors and neither of whom has
received grants under the 1993 Stock Option Plan within the last year.
21
<PAGE>
The Committee believes that the adoption of the 1995 Stock Option Plan
described on pages 7 through 10 above, will further align the interests of
management and the shareholders and is in the best interest of the Company. The
1993 Stock Option Plan was instituted in connection with the Company's emergence
from Chapter 11 proceedings, and the number of shares available for grants
thereunder was the product of the negotiation of the Company's Reorganization
Plan. Only 39,763 shares remain available for grant under the 1993 Stock Option
Plan. The Committee believes the number of shares available for grant should be
increased by means of adoption of the 1995 Stock Option Plan in order to be
available to further align the interests of management and shareholders and to
provide additional incentives for management to continue to produce excellent
operating results.
COMPENSATION OF THE CHIEF EXECUTIVE OFFICER
A substantial portion of Mr. Bozic's compensation was directly related to
the Company's performance during the fiscal year ended January 28, 1995. Because
the Company met its specified EBITDA goal, in addition to his base salary paid
pursuant to his employment contract, Mr. Bozic received a maximum performance
bonus of 50% of his base salary. Mr. Bozic also received a special discretionary
bonus of $100,000 as a reward for the Company's outstanding operating results.
In setting Mr. Bozic's bonus amounts, the Committee was mindful of federal tax
limits on the deductibility of compensation amounts in excess of one million
dollars.
COMPENSATION OF NAMED EXECUTIVE OFFICERS
The other executives named in the Summary Compensation Table received a
salary for the fiscal year ended January 28, 1995 pursuant to their respective
employment contracts and received stock options pursuant to the Company's 1993
Stock Option Plan. Since the company met its EBITDA goal, each of the executives
named in the Summary Compensation Table received maximum bonuses of 50% of their
respective base salaries, and special discretionary bonuses in the following
amounts: Mr. Reen, $70,000; Mr. Samuto, $30,000; Mr. Smailes, $70,000; Mr.
Stevenish, $70,000.
AMENDMENTS TO EMPLOYMENT AGREEMENTS
The Committee decided that it was important and in the best interest of the
Company and the shareholders to amend the employment agreements of key
executives, including the Chief Executive Officer and the other executive
officers named in the Summary Compensation Table, in order that key executives
not be unnecessarily distracted by concerns about job security in the event of a
change in control. In determining what constitutes appropriate protection, the
Committee attempted to strike a balance between the need of the key executives
for security and the need of the Company for the flexibility to make necessary
management changes. The Committee considered primarily (i) the value of the
executive to the Company (ii) the length of the term of the employment
agreements (iii) the payment or other remedy to which an executive would be
entitled in the event of a change in control and (iv) what events would
constitute a change in control for the purpose of the employment agreements.
During the fiscal year ended January 28, 1995, the Company entered into
revised employment agreements with key executives, including the Chief Executive
Officer and the executive officers named in the Summary Compensation Table. The
revised employment agreements contain change in control provisions and are more
particularly described on pages 16 through 18. The revised employment agreements
do not change annual compensation or bonus levels for any executives.
No member of the Committee is a current or former officer or employee of the
Company or any of its subsidiaries.
HR/COMPENSATION COMMITTEE
James L. Moody, Jr.
Susan E. Engel
Richard B. Loynd
22
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the fiscal year ended January 28, 1995, no executive officer of the
Company (i) served on the board of directors of any company of which Mr. Moody,
Ms. Engel or Mr. Loynd (the members of the Company's HR/Compensation Committee)
was an executive officer or (ii) served as a member of the compensation
committee (or other board committee performing equivalent functions or, in the
absence of such a committee, on the board) of another entity, one of whose
executive officers is a member of the Board of Directors of the Company.
PERFORMANCE GRAPHS
The following graphs compare the percentage change in cumulative total
shareholders return on the Common Stock of the Company and the Predecessor
Company to the cumulative total shareholders return of the S&P 500 and to the
cumulative total shareholders return of the S&P Retail Composite. The
Predecessor Company Graph covers the period February 3, 1990 to October 4, 1993
and assumes an investment of $100 in the Common Stock of the Predecessor Company
and each index on February 3, 1990. The Company Graph covers the period from
October 5, 1993 to January 28, 1995 and assumes an investment of $100 in the
Company's Common Stock and in each index on October 5, 1993.
TOTAL RETURN TO SHAREHOLDERS
<TABLE>
<S> <C>
PREDECESSOR COMPANY COMPANY
</TABLE>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
10/5/93 JAN 94 JAN 95
<S> <C> <C> <C>
HILLS STORES CO. 100 100.58 99.42
S&P 500 INDEX 100 105.12 105.67
RETAIL STORES - COMPOSITE 100 102.36 94.78
</TABLE>
23
<PAGE>
FINANCIAL ADVISOR
On May 3, 1995, the Company retained Smith Barney as its financial advisor
with respect to the original Dickstein proposal, any other unsolicited offer to
acquire the Company or any possible transaction relating thereto. On May 15,
1995, Smith Barney advised the Board of Directors of the Company that the
original Dickstein proposal was inadequate, from a financial point of view, to
the holders of Hills Common Stock (other than Dickstein). On May 30, 1995, Smith
Barney advised the Board of Directors that the revised Dickstein Proposal is
inadequate, from a financial point of view, to the holders of Hills Common Stock
(other than Dickstein). A copy of the Smith Barney opinion concerning the
revised Dickstein Proposal is attached to this Proxy Statement as Exhibit 1.
Pursuant to a letter agreement dated May 3, 1995, the Company agreed to pay
Smith Barney: (a) an advisory fee of $1,750,000 payable in cash, $750,000 of
which has been paid to Smith Barney, $250,000 of which will be due and payable
on August 3, 1995 and the balance of which will be due and payable at the
earlier of November 3, 1995 or the termination of the Dickstein Proposal and all
other unsolicited offers to acquire the Company, if any, first publicly
announced prior to the conclusion of the Annual Meeting; (b) in the event that
the Company undertakes a recapitalization, a recapitalization fee of up to
$1,000,000, based upon the size and complexity of the recapitalization and Smith
Barney's contribution thereto, payable at the sole discretion of the Company's
Board of Directors; and (c) a transaction fee payable in cash promptly upon the
consummation during the term of the letter agreement or within 12 months
thereafter of (i) any transaction or series of or combination of transactions,
whether solicited or unsolicited, whereby, directly or indirectly, Control (as
defined below) of the Company or any of its properties or assets are transferred
for consideration, including, without limitation, a sale, merger or
consolidation, tender or exchange offer, negotiated purchase, leverage buyout or
partnership, collaborative venture or any similar extraordinary transaction
involving corporate control of or major divestiture by the Company or (ii) any
acquisition by the Company, other than in the ordinary course of business, which
has not been publicly announced prior to the date of the letter agreement
(collectively, a "Transaction"). The term "Control" as used in the letter
agreement is defined as any event or transaction or series or combination of
transactions whereby more than 50% of the outstanding capital stock of the
Company on a fully diluted basis, or more than 50% of the assets or financial
rights and obligations under any formal contract of the Company, is transferred
for consideration. The amount of the transaction fee payable pursuant to the
letter agreement is determined by applying a fee percentage, ranging from 0.40%
to 2.00% depending on the size of the Transaction, to the value of the total
proceeds and other consideration paid or received or to be paid or received in
connection with the Transaction. In the event that nominees or representatives
of Dickstein or any other person (or "group" of persons as defined in Rule 13d-5
under the Securities Exchange Act of 1934) (other than directors of the Company
in office as of May 3, 1995) are elected to the Company's Board of Directors and
such nominees or representatives constitute a majority of the Company's Board of
Directors, Smith Barney will be entitled to receive immediately the advisory fee
otherwise due under the letter agreement but not any recapitalization fee or
transaction fee due thereunder. The advisory fee, whether or not previously
paid, will be credited against any transaction fee that may become payable under
the letter agreement.
The Company has also agreed to indemnify Smith Barney against certain
liabilities and expenses in connection with its engagement, including certain
liabilities under the federal securities laws.
SOLICITATION OF PROXIES
The cost of the solicitation of proxies on behalf of the Board of Directors
of the Company will be borne by the Company. The Company estimates that the
total expenditures relating to such solicitation (other than salaries and wages
of officers and employees) will be approximately $725,000 (not including fees
and expenses of Smith Barney as described above), none of which has been spent
to date. In addition to solicitation by mail, directors, officers and other
employees of the Company may, without additional compensation, solicit proxies
by mail, in person, by telecommunication or by other electronic means.
The Company has retained D. F. King & Co., Inc. ("D. F. King"), at an
estimated fee of up to $125,000, to assist in the solicitation of proxies. In
addition, the Company will reimburse D. F. King for reasonable out-
24
<PAGE>
of-pocket expenses and will indemnify D. F. King against certain liabilities and
expenses. Approximately 50 persons will be utilized by such firm in its efforts.
The Company will reimburse brokerage houses, banks, custodians and other
nominees and fiduciaries for out-of-pocket expenses incurred in forwarding the
Company's proxy solicitation materials to, and obtaining instructions relating
to such materials from, beneficial owners of capital stock.
The Company anticipates that employees of Smith Barney may communicate in
person, by telephone or otherwise with the Company's shareholders for the
purpose of assisting in the solicitation of proxies in connection with the
Dickstein Solicitation. Smith Barney will not receive separate compensation for
such services. For additional expenses of the Company's solicitation, including
a description of the fees and expenses of Smith Barney, see "Financial Advisor."
Schedule A hereto contains certain information concerning persons who may be
deemed to be "participants" in the Company's solicitation of proxies. Schedule B
hereto sets forth transactions in the Company's securities by the "participants"
during the last two years. Information about the present capital stock ownership
of these participants is provided in "Beneficial Ownership of Directors and
Executive Officers".
OTHER MATTERS
At the time this Proxy Statement was published, the Board of Directors knew
of no other matters constituting a proper subject of action by the shareholders
which would be presented at the meeting. Should any other matters be properly
brought before the Annual Meeting, the persons appointed in the proxy or their
substitutes will vote in accordance with their best judgment on such issues.
NOTE: UPON WRITTEN REQUEST OF ANY SHAREHOLDER ENTITLED TO RECEIVE THIS PROXY
STATEMENT, THE COMPANY WILL PROVIDE, WITHOUT CHARGE, A COPY OF ITS ANNUAL REPORT
ON FORM 10-K AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. ANY SUCH
REQUEST SHOULD BE ADDRESSED TO THE COMPANY AT 15 DAN ROAD, CANTON, MA 02021,
ATTENTION: WILLIAM K. FRIEND, VICE PRESIDENT-SECRETARY AND CORPORATE COUNSEL.
RELATIONSHIP OF INDEPENDENT ACCOUNTANTS
The Board of Directors selects the independent accountants for the Company
each year. Coopers & Lybrand, or its predecessor companies, has acted in this
capacity since 1936 for the Company, the Predecessor Company and their
respective affiliates and predecessors, and is expected to continue to do so.
In connection with its audit functions, Coopers & Lybrand examined the
Company's financial statements for the fiscal year ended January 28, 1995 and
reviewed the Company's Annual Report and its filings with the SEC. Additionally,
Coopers & Lybrand conducted reviews of the Company's interim financial
statements during the fiscal year.
Representatives of Coopers & Lybrand are expected to attend the Annual
Meeting of Shareholders, may make a statement if they so desire and will be
available to respond to questions submitted to the Company at 15 Dan Road,
Canton, MA 02021, Attention: William K. Friend, Vice President-Secretary, in
writing at least ten days prior to the meeting.
LITIGATION
On May 4, 1995 attorneys for Gayle L. Dolowich and Ivan S. Dolowich filed a
lawsuit in the Court of Chancery of the State of Delaware against the seven
directors of the Company, a former director of the Company and the Company on
behalf of the named plaintiffs and purportedly on behalf of all other public
shareholders of the Company. The complaint alleges that the defendants have,
among other things, "not properly responded to an offer by Dickstein to acquire
the outstanding shares of Hills." In addition, the Company has received
information, although it has not yet been served with court papers, that the
same law firm representing the Dolowich couple also filed another lawsuit on May
4, 1995 in the same Delaware court on behalf of Joseph K. Weiss, who alleges he
is a shareholder of the Company. The seven directors of the
25
<PAGE>
Company and the Company are the named defendants. The complaint seeks an
injunction ordering the directors to abide by their fiduciary duties in respect
of any proposal, including acquisition offers, to maximize shareholder value.
The Company believes that both lawsuits are without merit.
SHAREHOLDER PROPOSALS
In order to be considered for inclusion in the proxy materials related to
the 1996 Annual Meeting of Shareholders, shareholder proposals must be received
by the Company (addressed to the attention of the Secretary) not later than
February 2, 1996.
IMPORTANT
It is important that your Shares are voted at the Annual Meeting.
Shareholders are urged to promptly mark, sign, date and mail the WHITE proxy in
the enclosed postage-paid envelope. Please act today!
If you have any questions, or need assistance, please call D. F. King & Co.,
Inc., which is assisting us, at the numbers listed below:
D. F. KING & CO., INC.
77 Water Street
New York, New York 10005
(212) 269-5550 (Collect)
or
CALL TOLL-FREE -- 1-800-290-6425
26
<PAGE>
SCHEDULE A
INFORMATION CONCERNING THE DIRECTORS AND EXECUTIVE OFFICERS, AND
CERTAIN EMPLOYEES AND OTHER REPRESENTATIVES OF HILLS
The following table sets forth the name and the present principal occupation
or employment (except with respect to the directors, whose principal occupation
is set forth in the Proxy Statement), and the name, principal business and
address of any corporation or other organization in which such employment is
carried on, of the directors and certain executive officers of the Company who
may assist in soliciting proxies from the Company's shareholders. Unless
otherwise indicated below, the principal business address of each such person is
15 Dan Road, Canton, Massachusetts 02021 and such person is an employee of or
consultant to the Company. Directors are indicated with an asterisk.
<TABLE>
<CAPTION>
NAME AND PRINCIPAL PRESENT OFFICE OR OTHER PRINCIPAL
BUSINESS ADDRESS OCCUPATION OR EMPLOYMENT
- ------------------------------------ ----------------------------------------------------------------------------
<S> <C>
Thomas H. Lee*
75 State Street
Boston, Massachusetts 02109
Michael Bozic*
Susan E. Engel*
One Village Place
6436 City West Parkway
Eden Prairie, Minnesota 55344
Richard B. Loynd*
101 S. Hanley Road
St. Louis, Missouri 63105
Norman S. Matthews*
James L. Moody, Jr.*
145 Pleasant Hill Road
Scarborough, Maine 04074
John G. Reen*
Kim D. Ahlholm Vice President-Controller, Hills Stores Company
Joseph E. Andres Assistant Secretary and Assistant Corporate Counsel, Hills Stores Company
Bruce A. Caldwell Vice President-Treasurer, Hills Stores Company
Richard C. Doran Assistant Secretary and Assistant Corporate Counsel, Hills Stores Company
William K. Friend Vice President-Secretary and Corporate Counsel, Hills Stores Company
</TABLE>
27
<PAGE>
SCHEDULE B
SHARES HELD BY HILLS DIRECTORS AND CERTAIN EXECUTIVE OFFICERS
AND OTHER REPRESENTATIVES OF HILLS AND CERTAIN TRANSACTIONS
BETWEEN ANY OF THEM AND HILLS
The following directors and executive officers of Hills have had the
following transactions in the Company's securities within the past two years:
<TABLE>
<CAPTION>
NUMBER OF SHARES
OF CAPITAL STOCK
PURCHASED (OR
NAME SOLD) DATE
- ---------------------------------------------------------------------- ------------------ ---------
<S> <C> <C>
Thomas H. Lee......................................................... 785,733(1)(2) 10/04/93
950(1) 03/20/95
Michael Bozic......................................................... 23,521(3) 11/04/94
5,479(4) 11/19/94
5,000(4) 01/10/95
7,000(3) 04/21/95
Susan E. Engel........................................................ 500(3) 11/19/94
Richard B. Loynd...................................................... 1,000(5) 11/30/93
500(3) 11/19/94
Norman S. Matthews.................................................... 307(1)(6) 10/04/93
22,000(3) 11/04/94
4,000(3) 04/21/95
James L. Moody, Jr.................................................... 263(1)(7) 10/04/93
1,000(7) 12/08/93
500(3) 11/19/94
John G. Reen.......................................................... 1,199(1)(8) 10/04/93
10,000(3) 11/04/94
4,600(3) 04/21/95
Kim D. Ahlholm........................................................ 5(1)(9) 10/04/93
1,600(3) 11/04/94
400(3) 04/21/95
Joseph E. Andres...................................................... 48(1) 10/04/93
600(3) 11/04/94
Bruce A. Caldwell..................................................... 1,400(3) 11/04/94
400(3) 04/21/95
Richard C. Doran...................................................... 48(1) 10/04/93
600(3) 11/04/94
(48) 12/08/94
William K. Friend..................................................... 1,244(1)(10) 10/04/93
4,300(3) 11/04/94
1,000(3) 04/21/95
<FN>
- ------------------------
(1) Issued in connection with the confirmation of the Company's Plan of
Reorganization by the United States Bankruptcy Court for the Southern
District of New York effective October 4, 1993.
(2) See note 2 to "Beneficial Ownership of Directors and Executive Officers".
(3) Represents stock options that became exercisable on the date shown, but
which have not yet been exercised.
(4) Shares acquired upon exercise of stock options.
(5) See note 5 to "Beneficial Ownership of Directors and Executive Officers".
(6) See note 6 to "Beneficial Ownership of Directors and Executive Officers".
</TABLE>
28
<PAGE>
<TABLE>
<S> <C>
(7) See note 7 to "Beneficial Ownership of Directors and Executive Officers".
(8) See note 8 to "Beneficial Ownership of Directors and Executive Officers".
(9) Represents shares of Common Stock issuable upon exercise of Series 1993
Warrants.
(10) Includes 558 shares of Common Stock and 686 shares issuable upon exercise
of Series 1993 Warrants to purchase Common Stock.
</TABLE>
Michael Bozic, John G. Reen and William K. Friend have agreed to serve as
the proxies on the WHITE Annual Meeting proxy card.
Except as disclosed in this Schedule or in the Proxy Statement, none of
Hills, any of its directors or executive officers, or the employees or other
representatives of Hills named in Schedule A owns any securities of Hills or any
subsidiary of Hills, beneficially or of record, has purchased or sold any of
such securities within the past two years or is or was within the past year a
party to any contract, arrangement or understanding with any person with respect
to any such securities. Except as disclosed in this Schedule or in the Proxy
Statement, to the best knowledge of Hills, its directors and executive officers
or the employees and other representatives of Hills named in Schedule A, none of
their associates beneficially owns, directly or indirectly, any securities of
Hills.
Other than as disclosed in this Schedule and in the Proxy Statement, to the
knowledge of Hills, none of Hills, any of its directors or executive officers,
or the employees or other representatives of Hills named in Schedule A has any
substantial interest, direct or indirect, by security holdings or otherwise, in
any matter to be acted upon at the Annual Meeting.
Other than as disclosed in this Schedule and in the Proxy Statement, to the
knowledge of Hills, none of Hills, any of its directors or executive officers,
or the employees or other representatives of Hills named in Schedule A is, or
has been within the past year, a party to any contract, arrangement or
understanding with any person with respect to any class of securities of Hills,
including, but not limited to, joint ventures, loan or option arrangements, puts
or calls, guarantees against loss or guarantees of profit, division of losses or
profits, or the giving or withholding of proxies.
Other than as set forth in this Schedule or in the Proxy Statement, to the
knowledge of Hills, none of Hills, any of its directors or executive officers,
or the employees or other representatives of Hills named in Schedule A, or any
of their associates, has had or will have a direct or indirect material interest
in any transaction or series of similar transactions since the beginning of
Hills' last fiscal year or any currently proposed transactions, or series of
similar transactions, to which Hills or any of its subsidiaries was or is to be
a party in which the amount involved exceeds $60,000.
Other than as set forth in this Schedule and the Proxy Statement, to the
knowledge of Hills, none of Hills, any of its directors or executive officers,
or the employees or other representatives of Hills named in Schedule A, or any
of their associates (as defined in Rule 14a-1 promulgated under the Exchange
Act), has any arrangements or understandings with any person or persons with
respect to any future employment by Hills or its affiliates or with respect to
any future transactions to which Hills or any of its affiliates will or may be a
party.
29
<PAGE>
EXHIBIT 1
May 30, 1995
The Board of Directors
Hills Stores Company
15 Dan Road
Canton, Massachusetts 02021
Members of the Board:
You have requested our opinion regarding the financial terms of the written
proposal dated May 24, 1995 of Dickstein Partners Inc. ("Dickstein") pursuant to
which Dickstein has proposed to acquire all of the outstanding shares of the
common stock, par value $0.01 per share, of Hills Stores Company ("Hills" and,
such common stock, the "Hills Common Stock") for a total consideration of $22.00
per share in cash and $5.00 principal amount per share of a new 14% holding
company debenture maturing in twelve years, interest on which would be payable
in kind for up to five years (the "Revised Dickstein Proposal").
In arriving at our opinion, we reviewed the Revised Dickstein Proposal and
held discussions with certain senior officers, directors and other
representatives and advisors of Hills concerning the business, operations and
prospects of Hills. We examined certain publicly available business and
financial information relating to Hills as well as certain financial forecasts
and other data for Hills which were provided to us by the management of Hills.
We reviewed the financial terms of the Revised Dickstein Proposal in relation
to, among other things: current and historical market prices and trading volumes
of the securities of Hills and comparable companies; the historical and
projected earnings of Hills; and the capitalization and financial condition of
Hills. We also considered, to the extent publicly available, the financial terms
of certain other similar transactions recently effected which we considered
comparable to the transactions contemplated by the Revised Dickstein Proposal
and analyzed certain financial, stock market and other publicly available
information relating to the businesses of other companies whose operations we
considered comparable to those of Hills. In addition to the foregoing, we
conducted such other analyses and examinations and considered such other
financial, economic and market criteria as we deemed appropriate to arrive at
our opinion.
In rendering our opinion, we have assumed and relied, without independent
verification, upon the accuracy and completeness of all financial and other
information publicly available or furnished to or otherwise reviewed by or
discussed with us. With respect to financial forecasts and other information
provided to or otherwise reviewed by or discussed with us, we have been advised
by the management of Hills that such forecasts and other information were
reasonably prepared on bases reflecting the best currently available estimates
and judgments of the management of Hills as to the future financial performance
of Hills. We have not made or been provided with an independent evaluation or
appraisal of the assets or liabilities (contingent or otherwise) of Hills nor
have we made any physical inspection of the properties or assets of Hills. In
connection with our engagement, we have not been requested to approach, and have
not approached, third parties to solicit indications of interest in the
acquisition of all or a part of Hills. Our opinion is necessarily based upon
information available to us, and financial, stock market and other conditions
and circumstances existing and disclosed to us, as of the date hereof.
Smith Barney has been engaged to render financial advisory services to Hills
in connection with a written proposal from Dickstein dated May 3, 1995 and
certain related matters including the Revised Dickstein Proposal and is being
compensated for our services. We are also being compensated in connection with
the delivery of this opinion. In the ordinary course of our business, we may
actively trade the securities
E-1
<PAGE>
of Hills for our own account or for the account of our customers and,
accordingly, may at any time hold a long or short position in such securities.
We have in the past provided certain financial advisory services to Hills,
including acting as financial advisor to Hills in connection with a consent
solicitation by Dickstein commenced in August 1994 and the repurchase by Hills
of shares of Hills Common Stock and related consent solicitation of Hills'
bondholders in February 1995, for which services we have received compensation.
Our advisory services and the opinion expressed herein are provided solely
for the use of the Board of Directors of Hills in its evaluation of the Revised
Dickstein Proposal and may not be relied upon by any other person. Our opinion
may not be published or otherwise used or referred to, nor shall any public
reference to Smith Barney be made, without our prior written consent.
Based upon and subject to the foregoing, our experience as investment
bankers, our work as described above and other factors we deemed relevant, we
are of the opinion that, as of the date hereof, the Revised Dickstein Proposal
is inadequate, from financial point of view, to the holders of Hills Common
Stock (other than Dickstein and its affiliates).
Very truly yours,
SMITH BARNEY INC.
E-2
<PAGE>
EXHIBIT 2
HILLS STORES COMPANY
1995 INCENTIVE AND NONQUALIFIED STOCK OPTION PLAN
SECTION 1. PURPOSE
This 1995 Incentive and Nonqualified Stock 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.
E-3
<PAGE>
SECTION 3. STOCK
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 500,000 shares of Common
Stock, of which not more than 50,000 shares may be issued pursuant to Section
4.4; 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). Nonqualified Options may be granted to members
of the Board who are not employees of or paid consultants to the Company or its
parent or subsidiaries ("Outside Directors") only as provided in Section 4.4
hereof.
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).
4.4 NON-DISCRETIONARY OPTION GRANTS TO OUTSIDE DIRECTORS. Any other
provision of this plan to the contrary notwithstanding, Outside Directors shall
not be eligible to receive options under the Plan except pursuant to this
Section 4.4. On the last business day of January in each year (the "Grant
Date"), each Outside Director shall without any action of the Committee be
granted a Nonqualified Option to purchase 2,000 shares of the Common Stock of
the Company. Options shall be granted pursuant to this Section 4.4 only to
persons who are serving as Outside Directors on the Grant Date. The 2,000 share
grant referred to in this Section shall be subject to adjustment in accordance
with Section 8 hereof. The purchase price per share of the Common Stock under
each option granted pursuant to this Section shall be equal to the fair market
value of the Common Stock on the date the option is granted. Each such option
shall expire on the fifth anniversary of the date of the grant and shall vest at
the rate of 500 option shares on each of the first four anniversary dates of the
of grant.
4.5 MAXIMUM NUMBER OF OPTIONS THAT MAY BE GRANTED IN ANY THREE YEAR
PERIOD. Notwithstanding any other provision of the Plan or any option
agreement, no individual may be granted options to purchase more than 150,000
shares of Common Stock in any three (3) year period pursuant to the Plan. This
maximum number of shares which may be purchased pursuant to options granted
under the Plan is subject to adjustment in accordance with Section 8 hereof.
E-4
<PAGE>
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
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
E-5
<PAGE>
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.
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 price of any option shall not, 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 an Incentive Stock Option grant to 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
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<PAGE>
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
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
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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,
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.
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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.
In addition, the provisions of Section 4.4 shall not be amended more than
once every six months, other than to comport with changes in the Code, the
Employee Retirement Income Security Act, or the rules thereunder. Without
limiting the generality of the foregoing, the Board is expressly authorized to
amend the Plan, at any time and from time to time, to conform it to the
provisions of Rule 16b-3 under the Exchange Act, as that Rule may be amended
from time to time.
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.
* * * * * * * * * * * *
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EXHIBIT 3
HILLS STORES COMPANY
ASSOCIATE STOCK PURCHASE PLAN
1. PURPOSE OF THE PLAN:
The purpose of the Hills Stores Company Associate Stock Purchase Plan (the
"Plan") is to secure for Hills Stores Company, a Delaware corporation ("Hills"),
and its stockholders, the benefits of the incentives inherent in the ownership
of Hills capital stock by present and future associates of Hills and its
subsidiaries. The Plan is intended to comply with the provisions of Sections
421, 423, and 424 of the Internal Revenue Code of 1986, as amended (the "Code"),
and the Plan shall be administered, interpreted and construed in accordance with
such provisions.
2. SHARES RESERVED FOR THE PLAN:
There shall be reserved for issuance and purchase by associates under the
Plan, an aggregate of 500,000 shares of common stock, par value $.01 per share,
of Hills ("Common Stock"), subject to adjustment as provided in Section 12.
Shares subject to the Plan may be shares now or hereafter authorized but
unissued, or shares that were once issued and subsequently reacquired by Hills.
The right to purchase shares hereunder shall be made available in a series of
semi-annual offerings (the "Offering" or "Offerings") to eligible associates by
means of payroll deductions beginning on the pay date first occurring after the
Offering Commencement Date and ending on the Offering Termination Date (each as
hereinafter defined). If and to the extent that any right to purchase reserved
shares shall not be exercised by any associate for any reason or if such right
to purchase shall terminate as provided herein, shares that have not been so
purchased hereunder shall again become available for the purposes of the Plan
unless the Plan shall have terminated, but such unpurchased shares shall not be
deemed to increase the aggregate number of shares specified above to be reserved
for purposes of the Plan (subject to adjustment as provided in Section 12).
3. ADMINISTRATION OF THE PLAN:
The Plan shall be administered, at the expense of Hills, by the Compensation
Committee of the Board of Directors of Hills (the "Committee"). The Committee
consists of not less than three (3) members of the Board of Directors who shall
serve at the pleasure of the Board of Directors. The Committee may request
advice or assistance and employ or direct such other persons as are necessary
for the proper administration of the Plan. Subject to the express provisions of
the Plan, the Committee shall have the authority to interpret the Plan, to
prescribe, amend and rescind rules and regulations relating to it, and to make
all other determinations necessary or advisable in administering the Plan, all
of which determinations shall be final and binding upon all persons unless
otherwise determined by the Board of Directors.
4. ELIGIBLE ASSOCIATES:
Each associate of Hills and its subsidiaries (which means any present or
future corporation which is or would constitute a "subsidiary corporation" as
that term is defined in Section 424 of the Code) who has attained the age of
majority as determined by the laws of such associate's state of residence, shall
be eligible to participate in the Plan on an Enrollment Date, as hereinafter
defined, provided that each such employee,
(a) has been employed by Hills and/or any of its subsidiaries for at
least six months prior to August 1, 1995, with respect to the initial
offering hereunder, and thereafter prior to the first day of the month
preceding the Offering Commencement Date;
(b) has customary employment of a minimum of 20 hours per week;
(c) does not own, immediately after the right is granted, stock
possessing five (5%) percent or more of the total combined voting power or
value of all classes of capital stock of Hills or of a subsidiary thereof;
and
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(d) is not a highly compensated employee within the meaning of Section
414(q) of the Code who is also a member of the Board of Directors of Hills.
In determining stock ownership under this paragraph, the rules of Section
424(d) of the Code shall apply and stock that the associate may purchase under
outstanding options shall be treated as stock owned by the associate.
"Enrollment Date" shall mean August 1, 1995, and thereafter the first day of the
week preceding the week in which June 1 or December 1 occurs. Associates
eligible to participate in the Plan pursuant to the provisions of this Section 4
are hereinafter referred to as "Eligible Associates".
5. ELECTION TO PARTICIPATE AND PAYROLL DEDUCTIONS:
Each Eligible Associate, during the enrollment period just prior to each
Enrollment Date, may, except as provided below, elect to participate in the Plan
by completing, and returning to Hills, an enrollment form authorizing specified
regular payroll deductions with respect to said Offering. The maximum payroll
deduction per pay period is ten (10%) percent of the Eligible Associate's
Eligible Compensation (as hereinafter defined) in effect on the applicable
Enrollment Date divided by the number of pay periods during the next
twelve-month period, subject to the limits set forth in Section 6.
For the purpose of this Plan, "Eligible Compensation" for any Offering shall
mean:
(a) with respect to individuals who are full-time associates, their base
salary in effect as of the Enrollment Date; and
(b) with respect to individuals who are part-time associates, the
product of their week day hourly rate and the number of their annualized
hours, in effect as of the Enrollment Date.
Eligible Compensation shall not include any deferred compensation other than
contributions by an individual through a salary reduction agreement to a cash or
deferred plan pursuant to Section 401(k) of the Code or to a cafeteria plan
pursuant to Section 125 of the Code.
The maximum number of shares of Common Stock which an Eligible Associate may
purchase during each Offering shall be equal to the quotient obtained by
dividing (a) the product of the amount of such associate's payroll deduction per
pay period in effect as of the applicable Enrollment Date multiplied by the
number of pay periods during the Offering by (b) $1.00.
The minimum payroll deduction per pay period is $5.00 (the "Minimum
Deduction"). Such payroll deductions (the "Payroll Deductions") shall be made
regularly and in equal amounts with respect to the applicable Offering and shall
be credited, as promptly as practicable, to an account in the name of the
Eligible Associate (the "Payroll Deductions Account"). Each Payroll Deductions
Account constitutes only a convenient bookkeeping entry by Hills, and no
interest will be paid or due on any money paid into the Plan or credited to the
account of an Eligible Associate. Associates who elect to participate in the
Plan are referred to herein as "Participating Associates".
Payroll Deductions with respect to Participating Associates participating in
a given Offering, will commence on the first pay date on or after September 1
initially and July 1 or January 1, as the case may be, thereafter with respect
to each Offering (the "Offering Commencement Date"). Payroll Deductions shall
continue with respect to an Offering, unless earlier terminated pursuant to the
terms of the Plan, until the first subsequent December 31st or June 30th, as the
case may be, or the last New York Stock Exchange trading day prior thereto if
December 31st or June 30th is not a New York Stock Exchange trading day (the
"Offering Termination Date").
A Participating Associate in the Plan during one Offering will be deemed to
have elected to participate in each subsequent Offering, provided he or she is
eligible to participate during each such subsequent Offering. Such Participating
Associate will also be deemed to have authorized the same Payroll Deductions for
each subsequent Offering; provided, however, that, during the enrollment period
prior to each new Offering, the Participating Associate may elect to change his
or her Payroll Deductions by submitting a new enrollment form. A Participating
Associate may at any time notify Hills in writing to terminate his or her
Payroll Deductions and thereby cease to be a Participating Associate in the
Plan; provided, however, if the
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written notice is not received by Hills three (3) business days before the
Investment Date, then the amount of his or her Payroll Deductions not
theretofore invested shall be used to purchase whole shares and/or fractional
interest in shares of Common Stock at the next Investment Date. "Investment
Date" shall mean the last day of each calendar quarter during each Offering,
which is a trading day on the New York Stock Exchange. Any associate who has so
terminated his or her Payroll Deductions may, if then eligible, elect to
participate in a subsequent Offering. A Participating Associate who is an
officer or director of Hills within the meaning of Section 16 of the Securities
Act of 1934, as amended (the "1934 Act") and who withdraws from the Plan during
any Offering will not be eligible to participate in the Plan again for a period
of six (6) months. A Participating Associate may at any time during an Offering
(but not more than two times) decrease their Payroll Deductions (but not to an
amount below the Minimum Deduction) by filing the required form with Hills,
which decrease shall become effective as soon as practicable. Associates on
approved leave of absence or on temporary layoff as of an Enrollment Date who
are eligible to participate in the Plan pursuant to the provisions of Section 4
shall be permitted to enroll in said Offering in accordance with Section 5;
payroll deductions with respect to said associates shall commence as of the
first pay period after the recommencement of employment. Before Payroll
Deductions commence and during such leave of absence or layoff, associates may
participate in the Plan by making cash payments to the Company equal to their
normal payroll deduction on the normal pay date.
6. LIMITATION OF NUMBER OF SHARES THAT AN ASSOCIATE MAY PURCHASE:
No right to purchase shares under this Plan shall permit an employee to
purchase stock under all employee stock purchase plans (as defined in Section
423 of the Code) of Hills and its subsidiaries at a rate which in aggregate
exceeds $25,000 of fair market value of such stock (determined at the time the
right is granted) for the calendar year in which the right is outstanding at any
time.
7. PURCHASE PRICE:
The purchase price for each share of Common Stock shall be eighty-five (85%)
percent of the fair market value of such share on the Investment Date. "Fair
market value" shall mean the average of the high and low sales prices of a share
of Common Stock as published by the New York Stock Exchange in its official
trading report for the close of business on the Investment Date, or if the
Common Stock shall not have been traded on such exchange on such date, the
average of the high and low sales prices on such exchange on the first day prior
thereto on which the Common Stock was so traded or such other amount as may be
determined by the Committee by any fair and reasonable means.
8. METHOD OF PURCHASE AND PARTICIPATING ASSOCIATE'S INVESTMENT ACCOUNTS:
As of the Investment Date, each Participating Associate shall have the right
to purchase the number of whole shares and fractional interest in shares of
Common Stock determined by dividing the amount of his or her Payroll Deductions
not theretofore invested or withdrawn by the purchase price as determined by
Section 7. Each Participating Associate having Payroll Deductions not
theretofore invested or withdrawn on an Investment Date shall be deemed, without
any further action, to have purchased with such Payroll Deductions the number of
whole shares and/or fractional interest in shares that he or she has the right
to purchase at the purchase price on that Investment Date. The shares of stock
purchased by a Participating Associate who is an officer or director subject to
Section 16 of the 1934 Act, at each Investment Date may not be sold or
transferred by such Participating Associate for a period of six (6) months
following such Investment Date. Certificates representing said shares of stock
issued pursuant to this Plan may bear legends to that effect. Excess amounts
remaining in the Payroll Deductions Account of a Participating Associate who has
purchased the maximum number of shares to which said associate is entitled under
Section 5 or 6 shall be refunded to said associate. All whole shares and/or
fractional interest in shares purchased shall be held in separate Participating
Associate's Investment Accounts ("Participating Associate's Investment
Accounts") maintained by such brokerage house, investment banking firm,
commercial bank or other such similar institution as may be selected by the
Board of Directors for the Participating Associate. All dividends paid with
respect to the whole shares and/or fractional interest in shares in a
Participating Associate's Investment Account shall be credited to his or her
Participating Associate's Investment Account to be disposed of at such
associate's discretion.
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9. TITLE OF ACCOUNTS:
Each Participating Associate's Investment Account shall be in the name of
the Participating Associate.
10. RIGHTS AS A SHAREHOLDER:
At the time a Participating Associate's Payroll Deductions Account shall be
charged with the amount of the purchase price of the Common Stock, he or she
shall have all of the rights and privileges of a shareholder of Hills with
respect to shares purchased under the Plan whether or not certificates
representing full shares have been issued.
11. RIGHTS NOT TRANSFERABLE:
Rights granted under the Plan are not transferable by a Participating
Associate other than by will or the laws of descent and distribution and are
exercisable during his or her lifetime only by him or her.
12. ADJUSTMENT IN CASE OF CHANGES AFFECTING HILLS COMMON STOCK:
In the event of a subdivision of outstanding shares of Common Stock, or the
payment of a stock dividend thereon, the number of shares reserved or authorized
to be reserved under this Plan shall be increased proportionately, and such
other adjustment shall be made as may be deemed necessary or equitable by the
Board of Directors. In the event of any other change affecting the Common Stock,
such adjustment shall be made as may be deemed equitable by the Board of
Directors to give proper effect to such event subject to the limitation of
Section 424 of the Code.
13. RETIREMENT, TERMINATION AND DEATH:
In the event of a Participating Associate's retirement, death or termination
of employment during an Offering, the amount of his or her Payroll Deductions
not theretofore invested shall be used to purchase whole shares and/or
fractional interest in shares of Common Stock at the next Investment Date in the
absence of a notice of termination from the Participating Associate or his or
her legal representative in accordance with Section 5.
14. DESIGNATION OF BENEFICIARY:
A Participating Associate is not entitled to designate a beneficiary under
this Plan. In the event of death, the Participating Associate's Investment
Account, opened in a Participating Associate's name, becomes the property of the
estate of the Participating Associate unless such account is a joint tenancy
with rights of survivorship.
15. AMENDMENT OF THE PLAN:
The Board of Directors may at any time, or from time to time, amend the Plan
in any respect; provided, however, that the Plan may not be amended in any way
that will cause rights issued under it to fail to meet the requirements for
employee stock purchase plans set forth in Section 423 of the Code, nor may an
amendment be made without prior approval of the shareholders of Hills if such
shareholder approval is required under Section 423 of the Code.
16. TERMINATION OF THE PLAN:
The Plan and all rights of associates hereunder shall terminate:
(a) on the Investment Date that Participating Associates become entitled
to purchase a number of shares greater than the number of reserved shares
remaining available for purchase; or
(b) at any time, at the discretion of the Board of Directors.
In the event that the Plan terminates under circumstances described in (a)
above, reserved shares remaining as of the termination date shall be issued to
Participating Associates in the proportion that the amount in each Participating
Associate's Payroll Deductions Account bears to the total amount in all Payroll
Deductions Accounts; excess amounts thereafter remaining in a Participating
Associate's Payroll Deductions Account shall be refunded to said associate.
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17. EFFECTIVE DATE OF PLAN AND APPROVAL OF SHAREHOLDERS:
The Plan shall be effective as of August 1, 1995. The Plan is subject to the
approval of the shareholders of Hills at their next annual meeting or at any
special meeting of the shareholders for which one of the purposes of such a
special meeting shall be to act upon the Plan.
18. GOVERNMENTAL AND OTHER REGULATIONS:
The Plan, and the grant and exercise of the rights to purchase shares
hereunder, and Hills' obligation to sell and deliver shares upon the exercise of
rights to purchase shares, shall be subject to all applicable Federal, State and
foreign laws, rules and regulations, and to such approvals by any regulatory or
governmental agency as may, in the opinion of counsel for Hills, be required.
The Plan shall be governed by, and construed and enforced in accordance with,
the provisions of Sections 421, 423 and 424 of the Code and the substantive laws
of the Commonwealth of Massachusetts. In the event of any inconsistency between
such provisions of the Code and any such laws, said provisions of the Code shall
govern to the extent necessary to preserve favorable federal income tax
treatment afforded associate stock purchase plans under Section 423 of the Code.
19. INDEMNIFICATION OF COMMITTEE:
Service on the Committee shall constitute service as a Director of Hills so
that members of the Committee shall be entitled to indemnification and
reimbursement as Directors of Hills pursuant to its Certificate of
Incorporation, By-Laws, or resolutions of its Board of Directors or
shareholders.
**********
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IMPORTANT
Your vote is important. Regardless of the number of shares of Hills common
or preferred stock you own, please vote as recommended by your Board of
Directors by taking these two simple steps:
1. PLEASE MARK, SIGN, DATE AND PROMPTLY MAIL THE ENCLOSED WHITE PROXY CARD IN
THE POSTAGE-PAID ENVELOPE PROVIDED.
2. DO NOT RETURN ANY BLUE PROXY CARDS SENT TO YOU BY DICKSTEIN.
IF YOU VOTED DICKSTEIN'S BLUE PROXY CARD BEFORE RECEIVING YOUR HILLS WHITE
PROXY CARD, YOU HAVE EVERY RIGHT TO CHANGE YOUR VOTE SIMPLY BY MARKING,
SIGNING, DATING AND MAILING THE ENCLOSED WHITE PROXY CARD. THIS WILL CANCEL
YOUR EARLIER VOTE SINCE ONLY YOUR LATEST DATED PROXY CARD WILL COUNT AT THE
ANNUAL MEETING.
If you own your shares in the name of a brokerage firm, only your broker can
vote your shares on your behalf and only after receiving your specific
instructions. Please call your broker and instruct him/her to execute a Hills
WHITE card on your behalf. You should also promptly mark, sign, date and mail
your WHITE card when you receive it from your broker. Please do so for each
separate account you maintain.
You should return your WHITE proxy card at once to ensure that your vote is
counted. This will not prevent you from voting in person at the meeting should
you attend.
IF YOU HAVE ANY QUESTIONS OR REQUIRE ASSISTANCE IN VOTING YOUR SHARES,
PLEASE CALL:
D. F. KING & CO., INC.
77 WATER STREET
NEW YORK, NY 10005
(212) 269-5550 (COLLECT)
CALL TOLL FREE (800) 290-6425
<PAGE>
PROXY HILLS STORES COMPANY
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF HILLS STORES
COMPANY
FOR THE JUNE 23, 1995 ANNUAL MEETING OF SHAREHOLDERS
The undersigned hereby appoints Michael Bozic, John G. Reen and William K.
Friend, or any of them, with power of substitution in each, proxies for the
undersigned, to represent the undersigned, and to vote all Common Stock and
Series A Preferred Stock of the Company which the undersigned would be entitled
to vote, as fully as the undersigned could vote and act if personally present,
at the Annual Meeting of Shareholders to be held on June 23, 1995 at 10:00 a.m.
at the Sheraton Tara Hotel, 37 Forbes Road, Braintree, Massachusetts 02184, or
at any adjournment thereof.
The Proxies are authorized to vote in their discretion for approval of the
minutes of the preceding meeting and matters incident to the conduct of the
meeting and in their discretion upon all other matters which may properly come
before the meeting.
The undersigned hereby acknowledges receipt of the Notice of Annual Meeting
and Proxy Statement, each dated June 1, 1995 and the 1994 Annual Report of the
Company. Any proxy heretofore given to vote said stock is hereby revoked. THIS
PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY THE
UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR
THE COMPANY'S NOMINEES FOR ELECTION AS DIRECTORS, FOR ADOPTION OF THE HILLS
STORES COMPANY 1995 INCENTIVE AND NONQUALIFIED STOCK OPTION PLAN AND FOR
ADOPTION OF THE HILLS STORES COMPANY ASSOCIATE STOCK PURCHASE PLAN.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" ALL NOMINEES
LISTED ON THE REVERSE SIDE OF THIS PROXY CARD, "FOR" ADOPTION OF THE HILLS
STORES COMPANY 1995 INCENTIVE AND NONQUALIFIED STOCK OPTION PLAN AND "FOR"
ADOPTION OF THE HILLS STORES COMPANY ASSOCIATE STOCK PURCHASE PLAN.
THIS PROXY IS CONTINUED ON THE REVERSE SIDE. PLEASE MARK, DATE AND SIGN ON THE
REVERSE SIDE AND MAIL PROMPTLY.
<PAGE>
<TABLE>
<S> <C> <C> <C>
1. ELECTION OF DIRECTORS / / FOR all nominees listed below / / WITHHOLD AUTHORITY
(EXCEPT AS MARKED TO THE CONTRARY BELOW) TO VOTE FOR ALL NOMINEES LISTED BELOW
Thomas H. Lee, Michael Bozic, Susan E. Engel, Richard B. Loynd, Norman S. Matthews, James L. Moody, Jr. and John
G. Reen
(INSTRUCTION: To withhold authority for any individual nominee mark FOR above and write the name(s) of the
nominee(s) with respect to whom you wish to withhold authority to vote here.)
------------------------------------------------------------------------------------------------------------------
2. ADOPTION OF THE HILLS STORES COMPANY 1995 INCENTIVE AND NONQUALIFIED STOCK OPTION PLAN.
/ / FOR / / AGAINST / / ABSTAIN
3. ADOPTION OF THE HILLS STORES COMPANY ASSOCIATE STOCK PURCHASE PLAN.
/ / FOR / / AGAINST / / ABSTAIN
/ / I plan to attend the meeting
</TABLE>
Please mark, date and sign as your
name(s) appear(s) to the left and
return in the enclosed envelope. If
acting as an executor, administrator,
trustee, guardian, etc., you should so
indicate when signing. In the case of a
corporation, please sign the full
corporate name, by a duly authorized
officer.
Dated ___________________________, 1995
_____________________
Signature(s)
_____________________
Signature if held jointly
PLEASE MARK, DATE, SIGN AND RETURN THIS PROXY PROMPTLY IN THE ENCLOSED ENVELOPE.
