<PAGE> 1
FORM 10-Q/A
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934
For the quarterly period ended October 28, 1995
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-9505
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HILLS STORES COMPANY
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(Exact name of registrant as specified in its charter)
DELAWARE 31-1153510
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
15 DAN ROAD, CANTON, MASSACHUSETTS 02021
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(Address of principal executive offices) (Zip Code)
617-821-1000
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
--- ---
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
YES X NO
--- ---
The number of shares of common stock outstanding as of November 25, 1995
was 9,798,564 shares.
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EXPLANATORY NOTE
The Registrant is amending Part I in its entirety and the related
Fiancial Data Schedule of its Quarterly Report on Form 10-Q for the quarterly
period ended October 28, 1995 ("Third Quarter 10-Q") solely to correct an error
regarding the recognition of certain expenses relating to the change in control
of the Registrant that occurred on July 5, 1995. The Third Quarter 10-Q
reflected a $7.2 million credit for change of control expenses that is now
being reversed. The Company had initially reversed this credit by means of a
fourth quarter adjustment. The effect of this Amendment is to reduce previously
reported third quarter net earnings and increase previously announced fourth
quarter net earnings, but this change has no effect on the Registrant's results
of operations for the full fiscal year ended February 3, 1996.
Accordingly, Part I of the Third Quarter 10-Q is hereby amended by
deleting the text thereof in its entirety and substituting the following:
Part I
<PAGE> 3
HILLS STORES COMPANY AND SUBSIDIARIES
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CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
October 28, January 28, October 29,
(in thousands) 1995 1995 1994
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(unaudited) (unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,625 $ 180,051 $ 8,988
Trade receivables, net 62,776 23,471 62,573
Inventories 518,108 313,851 474,208
Deferred tax asset 20,923 20,923 --
Other current assets 4,013 4,743 5,962
---------- ---------- ----------
Total current assets 610,445 543,039 551,731
Property and equipment, net 190,657 154,950 153,772
Property under capital leases, net 116,357 124,108 126,692
Beneficial lease rights, net 8,454 9,075 9,282
Other assets, net 13,501 6,380 9,179
Deferred tax asset 10,061 10,061 --
Reorganization value in excess of amounts
allocable to identifiable assets, net 138,948 144,765 169,989
---------- ---------- ----------
$1,088,423 $ 992,378 $1,020,645
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Borrowings under revolving credit facility (Note 5) $ 169,000 $ -- $ --
Current portion of capital leases 6,121 6,121 5,532
Accounts payable, trade 180,897 82,943 173,990
Other accounts payable and accrued expenses 149,249 212,489 186,962
---------- ---------- ----------
Total current liabilities 505,267 301,553 366,484
Senior notes (Notes 5 and 8) 160,000 160,000 160,000
Obligations under capital leases 119,971 124,508 126,525
Financing obligation - sale/leaseback 25,169 25,169 20,169
Other liabilities 9,118 10,263 10,268
Commitments and contingencies -- -- --
Preferred stock, at mandatory redemption value (Note 2) 25,206 64,144 69,661
Common shareholders' equity (Note 4):
Common stock 99 108 105
Additional paid-in capital 208,993 229,967 224,234
Retained earnings 34,600 76,666 43,199
---------- ---------- ----------
Total common shareholders' equity 243,692 306,741 267,538
---------- ---------- ----------
$1,088,423 $ 992,378 $1,020,645
========== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements
3
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HILLS STORES COMPANY AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-nine Weeks Ended
-------------------------- --------------------------
(unaudited) October 28, October 29, October 28, October 29,
(in thousands, except per share amounts) 1995 1994 1995 1994
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<S> <C> <C> <C> <C>
Net sales $ 448,033 $ 457,212 $ 1,200,319 $ 1,198,441
Cost of sales 323,339 321,591 873,574 856,027
Selling and administrative expenses 95,860 98,623 285,074 276,373
Depreciation and amortization 10,039 9,147 28,619 26,338
Costs related to change in control (Note 5) -- -- 43,292 --
----------- ----------- ----------- -----------
Operating earnings (loss) 18,795 27,851 (30,240) 39,703
Other income (expense):
Capital lease interest (3.496) (3,657) (10,613) (11,085)
Other interest (10,489) (6,063) (26,067) (17,548)
Other income, net 206 968 2,168 2,070
----------- ----------- ----------- -----------
(13,779) (8,752) (34,512) (26,563)
----------- ----------- ----------- -----------
Earnings (loss) before income taxes 5,016 19,099 (64,752) 13,140
Income tax benefit (provision) 17,425 (6,176) 37,686 (6,176)
----------- ----------- ----------- -----------
Net earnings (loss) applicable
to common shareholders $ 22,441 $ 12,923 $ (27,066) $ 6,964
=========== =========== =========== ===========
Primary earnings (loss) per share applicable
to common shareholders (Note 3) $ 2.01 $ 0.91 $ (2.77) $ 0.49
=========== =========== =========== ===========
Fully-diluted earnings (loss) per share applicable
to common shareholders (Note 3) $ 1.98 $ 0.87 $ (2.69) $ 0.47
=========== =========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
4
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HILLS STORES COMPANY AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF CASH FLOWS
Thirty-nine Weeks Ended October 28, 1995 and October 29, 1994
<TABLE>
<CAPTION>
(unaudited)
(in thousands) 1995 1994
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ (27,066) $ 6,964
Adjustments to reconcile net earnings (loss) to net cash used for
operating activities:
Depreciation and amortization 32,137 28,239
Gain on conversion of pension plan -- (4,479)
Increase in accounts receivable and other current assets (38,575) (40,520)
Increase in inventories (204,257) (147,743)
Increase in accounts payable and other accrued expenses 35,080 107,818
Other, net 423 503
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Net cash used for operating activities (202,258) (49,218)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (50,551) (32,646)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolving credit facility 235,000 --
Repayments of borrowings under revolving credit facility (66,000) --
Principal payments under capital lease obligations (4,537) (4,101)
Sale/leaseback financing -- 20,169
Cash distributions pursuant to the Plan of Reorganization (2,348) (13,673)
Shares repurchased in self-tender (75,000) --
Other financing activities (9,732) (1,592)
--------- ---------
Net cash provided by financing activities 77,383 803
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Net decrease in cash and cash equivalents (175,426) (81,061)
Cash and cash equivalents at beginning of period 180,051 90,049
--------- ---------
Cash and cash equivalents at end of period $ 4,625 $ 8,988
========= =========
</TABLE>
See Notes to Consolidated Financial Statements
5
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HILLS STORES COMPANY AND SUBSIDIARIES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant intercompany transactions and
balances have been eliminated. The information furnished reflects all normal
recurring adjustments which are, in the opinion of management, necessary to
present a fair statement of the results for the interim period.
The accompanying unaudited consolidated financial statements are presented in
accordance with the requirements of Form 10-Q and consequently do not include
all the disclosures normally required by generally accepted accounting
principles nor those normally made in the Company's annual Form 10-K filing.
Reference should be made to the Company's Annual Report on Form 10-K for
additional disclosures, including a summary of the Company's accounting
policies. The Company's business is seasonal in nature and the results of
operations for the interim periods presented are not necessarily indicative of
the results to be expected for the full fiscal year. The fourth quarter of each
fiscal year provides a major portion of the Company's annual sales and operating
earnings, with operating earnings particularly concentrated in the Christmas
selling season.
2. HILLS STORES SERIES A CONVERTIBLE PREFERRED STOCK
During the nine months ended October 28, 1995, 1,946,852 shares of the Company's
Series A Convertible Preferred Stock (the "Preferred Stock") were converted to
Hills Stores Common Stock (the "Common Stock") on a share for share basis. These
noncash conversions amounted to $38.9 million.
3. EARNINGS PER SHARE
Primary earnings per share for the thirteen week periods ended October 28, 1995
and October 29, 1994 was computed based on the weighted average number of common
and common equivalent shares assumed to be outstanding during the period of
11,164,254 shares and 14,141,390 shares, respectively. Fully-diluted earnings
per share for the thirteen week periods ended October 28, 1995 and October 29,
1994 was computed based on the weighted average number of common and common
equivalent shares assumed to be outstanding during the period of 11,346,339
shares and 14,841,390 shares, respectively.
Primary earnings (loss) per share for the thirty-nine week periods ended October
28, 1995 and October 29, 1994 was computed based on the weighted average number
of common and common equivalent shares assumed to be outstanding during the
period of 9,754,522 shares and 14,096,892 shares, respectively. Fully-diluted
earnings (loss) per share for the thirty-nine week periods ended October 28,
1995 and October 29, 1994 was computed based on the weighted average number of
common and common equivalent shares assumed to be outstanding during the period
of 10,057,566 shares and 14,796,892 shares, respectively.
The calculation of the fully-diluted earnings (loss) per share assumes that
actual conversions of Preferred Stock during the thirteen and thirty-nine week
periods occurred as of the beginning of the period being reported on. The
weighted average number of shares used reflects all shares of common and
preferred stock intended to be issued in accordance with the Plan of
Reorganization.
4. SELF-TENDER FOR COMMON STOCK
In August 1994, Dickstein Partners, L.P., et al. ("Dickstein") commenced a
consent solicitation to replace four members of the then current Board of
Directors with Dickstein nominees. In response to the Dickstein consent
6
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HILLS STORES COMPANY AND SUBSIDIARIES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. SELF-TENDER FOR COMMON STOCK (CONTINUED)
solicitation, the Company's Board of Directors announced a program to enhance
shareholder value, including the approval of a self-tender to purchase up to
3,000,000 common shares at $25 per share in cash. Effective February 21, 1995,
the Company accepted for payment 3,000,000 shares of Common Stock which were
validly tendered pursuant to the Company's offer, and for which payment of
$75,000,000 was made in March 1995. The excess of the purchase price over the
original issue price of the Common Stock, or $15,000,000, was charged to
retained earnings. In connection with the offer, 561,863 shares of Preferred
Stock were converted to Common Stock.
5. CHANGE IN CONTROL
At the June 1995 Annual Meeting, Dickstein nominees were elected to the Board of
Directors. On July 5, 1995, the election of the Dickstein nominees was certified
and a change in control occurred.
Under the terms of the Senior Note Indenture (the "Indenture"), because of the
election of the new Board of Directors, the Company was required to offer to
redeem all of the Senior Notes at 101% of par. Effective August 1, 1995, the
Indenture was amended to permit the Company to defer the redemption of the
Senior Notes until May 3, 1996, and, at the option of the Company, upon the
payment of an additional fee of $7.5 million, to May 5, 1997. In addition, the
change of control put price under the Indenture would be increased to 102% if no
notice of redemption is mailed to Senior Note holders before January 1, 1997.
The amendment also allowed the Company to increase the amount of its working
capital facility from $225 million to $300 million. In connection with obtaining
this amendment, the consenting holders of the Senior Notes were paid $6 million
in August 1995, which has been included in costs related to change in control in
the Consolidated Statements of Operations. The Company does not currently intend
to redeem the Senior Notes during fiscal 1996 and therefore has classified the
debt as long-term. The Company may seek to refinance the Senior Notes before the
redemption dates referenced above, provided that acceptable long-term financing
is available to do so.
On August 21, 1995, in connection with the change in control, Hills Department
Store Company ("HDSC"), a wholly-owned subsidiary of the Company, entered into a
new $300 million secured revolving credit facility (the "Facility"), of which up
to $100 million is available as a letter of credit facility. The Facility
expires May 1, 1997 (or May 1, 1996 if the Company has not exercised its option
by April 30, 1996 to extend the Senior Note redemption). If the Senior Notes are
refinanced on terms acceptable to the lenders or their redemption date is
extended to a date later than April 30, 1998, the Facility will be automatically
extended to April 30, 1998. Borrowings under the Facility are limited by a
borrowing base, as defined, and bear interest, at the option of the borrower, at
either of (1) the Adjusted London Interbank Offered Rate plus 2.75%, or (2) the
highest of (a) Chemical Bank's Prime Rate plus 1.75%, (b) the Federal Funds
Effective rate plus 2.25%, and (c) the Base CD Rate plus 2.75%. HDSC must pay
commitment fees at an annual rate of 1/2% on the average daily unused portion of
the commitment. HDSC must also pay letter of credit fees on the aggregate face
amount of outstanding standby letters of credit at an annual rate equal to
2.75%, and on the face amount of outstanding trade letters of credit at an
annual rate of 2.25%. The Facility is secured by a pledge of all of the capital
stock of HDSC and an interest in all tangible and intangible assets of HDSC. The
Facility is guaranteed by the Company. The Facility also contains, among other
restrictions, requirements regarding the maintenance of certain financial
ratios, minimum net worth requirements, and provisions limiting: business
combinations, the issuance of additional debt including capital lease
obligations, the redemption and repurchase of common and preferred stock, the
repurchase and prepayment of debt, the amount of rent expense, and the payment
of dividends. In addition, the Facility also requires, on a date (the "Clean-Up
Date") determined at the discretion of the Company between December 1 and April
1 of each year, HDSC to pay or prepay all of the outstanding loans and for a
period of at least thirty consecutive days following the Clean-Up Date, HDSC
shall have no direct borrowings outstanding under the Facility.
7
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HILLS STORES COMPANY AND SUBSIDIARIES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. CHANGE IN CONTROL (CONTINUED)
In connection with the change in control, the Company recognized $33.8 million
in expense related to severance and retirement payments, including certain taxes
attributable thereto, to six senior executives, a consultant to the Company and
approximately 20 associates of the Company.
6. STOCK RIGHTS
On August 22, 1995, the Company repurchased 693,092 of its 700,000 outstanding
stock rights in exchange for 198,026 shares of newly issued common stock. The
par value of the newly issued common shares was reclassified from additional
paid-in capital to common stock.
7. COMMITMENTS AND CONTINGENCIES
Litigation
Following the change in control of the Company, the parties to two
previously-reported lawsuits (which have been dismissed by stipulation) filed a
joint class-action lawsuit on August 7, 1995 in the Court of Chancery of the
State of Delaware, under the names of Gayle Dolowich, Ivan J. Dolowich and
Joseph Weiss, as plaintiffs, against the seven new directors of the Company,
Dickstein Partners Inc. and the Company. On November 3, 1995, the plaintiffs
amended their complaint to include a derivative cause of action against the
former members of the Company's Board of Directors for breach of their fiduciary
duties to the Company and its shareholders. In the amended complaint, the
plaintiffs claim that in connection with Dickstein Partners Inc.'s effort to
solicit proxies in support of the election of its nominees to be directors of
the Company, Dickstein Partners Inc. issued a number of false and misleading
statements regarding its offer to acquire all of the Company's shares it did not
already own. The plaintiffs seek an order nullifying the election of directors
and declaring there has been no "change of control" of the Company.
On August 2, 1995, Mitchell Dobies and Leslie Susser filed a class action
lawsuit in the U.S. District Court for Massachusetts, against Dickstein Partners
Inc. and Mark Dickstein, and Leslie Susser individually filed a derivative
action against the seven former directors of the Company, with the Company named
a "nominal defendant." The plaintiffs allege that Dickstein Partners Inc. and
Mark Dickstein issued false and misleading statements and omitted to state
material facts regarding an intended acquisition of or sale of the Company.
Plaintiff Susser, derivatively, claims the former directors breached their
fiduciary duties by not approving the change in control resulting from the
election of the Dickstein Partners Inc. nominees to the Board of Directors, thus
allowing "golden parachute" severance payments to be made to a director and six
senior officers (two of whom were also directors) of the Company. The plaintiffs
seek compensatory money damages for themselves and the class, an order that each
former director account for damages to the Company caused by an alleged breach
of fiduciary duties, and an award of pre and post-judgment interest along with
attorneys' fees and expenses, including experts' fees. On October 17, 1995,
plaintiffs filed a stipulation to transfer the class action claim against
Dickstein Partners Inc. and Mark Dickstein to the U.S. District Court for the
Southern District of New York, which is the venue for the class action suit
filed by Jeffrey B. Cross and Nancy Cross (as described below). Plaintiff Susser
has dismissed without prejudice the derivative action claim against the former
directors and the Company.
Jeffrey B. Cross and Nancy Cross also filed a class action lawsuit against
Dickstein Partners Inc. and Mark Dickstein as defendants and a derivative action
suit against the former directors, with the Company named as a nominal defendant
in the derivative action, in the U.S. District Court for the Southern District
of New York. The suit seeks the same or similar relief sought in the
Massachusetts lawsuit described in the preceding paragraph. The plaintiffs have
dismissed without prejudice their derivative claim against the former directors
and the Company.
8
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HILLS STORES COMPANY AND SUBSIDIARIES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
On September 11, 1995, the Company and Hills Department Store Company filed a
suit in the Court of Chancery of the State of Delaware against the former
members of the Board of Directors of the Company. That action seeks, among other
things, recovery of damages caused by the breach by the former members of their
fiduciary duties to shareholders arising from the refusal of the former Board
members to approve the change in control which took place on July 5, 1995
following the election of seven replacement directors by the shareholders of the
Company. On October 10, 1995 the defendants filed a motion to dismiss the
complaint.
The Company and Hills Department Store Company also filed suit against Smith
Barney, Inc. on September 11, 1995 in the New York State Supreme Court for the
County of New York, seeking damages for losses, as stated in the complaint,
caused by the gross negligence of this firm in rendering financial advice to the
Company's former directors, for its breach of fiduciary duty to the Company, and
for aiding and abetting the former directors in the breach of their fiduciary
duties. On October 30, 1995, Smith Barney, Inc. served a motion to dismiss the
complaint.
Management does not believe that the disposition of the foregoing suits will
have a material adverse effect upon the continuing operations and financial
position of the Company.
8. SUBSEQUENT EVENTS
The Company is currently soliciting the holders of the Senior Notes to further
amend the Senior Note Indenture to defer the redemption of the Senior Notes, at
the option of the Company, from May 5, 1997 until a date not later than July 8,
1998; eliminate the obligation of the Company to offer to redeem the Senior
Notes upon any future change of control; and modify the Indenture covenants to
exclude, for purposes of determining the amount of permitted indebtedness, the
effect of the change of control costs related to the July 5, 1995 change in
control. Upon execution of the amendment, the Company will pay to each person
who is a holder of the Senior Notes a fee of 0.75% of the principal amount of
the holder's Senior Notes. If the Company elects to defer the redemption until
July 8, 1998, the Company will pay a fee of 5.0% of the principal amount of each
holder's Senior Notes. To be approved, the amendment will require the consent of
60% of the outstanding principal amount of the Senior Notes. The consent
solicitation will expire January 5, 1996, subject to extension at the Company's
option. At any time prior to the execution of the amendment to the Indenture,
the Company may, in its sole discretion, modify or terminate the consent
solicitation. Prior to execution, the Company must obtain a consent to the
amendment by the lenders under the Facility.
9
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HILLS STORES COMPANY AND SUBSIDIARIES
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THIRTEEN WEEKS ENDED OCTOBER 28, 1995 VERSUS
THIRTEEN WEEKS ENDED OCTOBER 29, 1994
Sales decreased 2.0% compared to the same period in 1994. This decrease is
primarily attributable to weak apparel sales and a toy clearance sale held in
October of the prior year. Sales were positively impacted by new store sales and
strong results in electronics, seasonal and the housewares categories.
Comparable store sales were $423.6 million compared to $452.3 million in 1994, a
6.3% decrease.
Cost of sales as a percentage of sales was 72.2% in 1995 compared to 70.3% in
1994. The increase of 1.9% is principally due to a higher rate of markdowns and
a shift in the mix of sales from softlines to hardlines resulting from sluggish
apparel sales.
Selling and administrative expenses as a percentage of sales was 21.4% compared
to 21.6% in 1994, a 0.2% decrease. The decrease is attributable to savings in
payroll related expenses which were partially offset by additional operating
costs associated with new stores and increased advertising in the Company's new
markets. In addition, the prior year expenses included $2.2 million of expenses
related to the consent solicitation by Dickstein Partners Inc.
Depreciation and amortization as a percentage of sales was 2.2% in 1995 compared
to 2.0% for the same period in 1994. The increase is due to a higher fixed asset
base, resulting from the Company's remodeling and new store opening program, and
a lower sales base.
Other interest expense was $10.5 million for the third quarter of 1995 compared
to $6.1 million for the same period in 1994. The $4.4 million increase is due
primarily to interest on borrowings under the revolving credit facility and the
sale/leaseback agreement. Average direct borrowings under the revolving credit
facility were $141.0 million during the third quarter of 1995 while there were
no borrowings during the same period of 1994.
The Company's effective tax rate for the year was revised to 58.2%. As a result,
a benefit of $17.4 million was recorded in the third quarter.
THIRTY-NINE WEEKS ENDED OCTOBER 28, 1995 VERSUS
THIRTY-NINE WEEKS ENDED OCTOBER 29, 1994
Sales increased 0.2% compared to the same period in 1994. The 0.2% increase is a
result of sales from new stores and strong comparable sales increases in
electronics, seasonal and home decor. Comparable store sales were $1,151 million
compared to $1,192 million in 1994, a 3.5% decrease.
Cost of sales as a percentage of sales was 72.8% in 1995 compared to 71.4% in
1994. The increase of 1.4% is due to a decrease in purchase markup and a higher
rate of markdowns, particularly in ladies sportswear, lawn and garden, and
health and beauty care.
10
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HILLS STORES COMPANY AND SUBSIDIARIES
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
RESULTS OF OPERATIONS (CONTINUED)
THIRTY-NINE WEEKS ENDED OCTOBER 28, 1995 VERSUS
THIRTY-NINE WEEKS ENDED OCTOBER 29, 1994 (CONTINUED)
Selling and administrative expenses as a percentage of sales was 23.7% compared
to 23.1% in 1994, an increase of 0.6%. The increase is attributable to
additional operating costs associated with new stores and increased advertising
in the Company's new markets. The prior year expenses include a $4.5 million
gain from the elimination of pension obligations and $2.2 million of expenses
related to the consent solicitation by Dickstein Partners Inc.
Depreciation and amortization as a percentage of sales was 2.4% in 1995 compared
to 2.2% for the same period in 1994. The increase is due to a higher fixed asset
base, resulting from the Company's remodeling and new store opening program.
Costs related to the July 5, 1995 change in control were $43.3 million. The
costs consist of $33.8 million for severance and retirement payments, including
certain taxes attributable thereto, to six senior executives, a consultant to
the Company and approximately 20 associates, $6.0 million paid to holders of the
Senior Notes and legal and other miscellaneous change in control costs.
Other interest expense was $26.1 million in 1995 compared to $17.5 million in
1994. This $8.6 million increase is primarily due to interest on borrowing under
the revolving credit facility, interest on the sale/leaseback financing, and
additional amortization of deferred financing costs. Average direct borrowings
under the revolving credit facility were $61.1 million during the first nine
months of 1995 while there were no borrowings during the same period of 1994.
The Company's effective tax rate for the year was estimated at 58.2% compared to
a rate of 47.0% for the year ended January 28, 1995. The increase in the rate
results principally from an increase in non-deductible reorganization value
amortization as a percentage of the related expected pre-tax earnings.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital as of October 28, 1995 decreased by $136.3 million
from January 28, 1995. The working capital decrease is primarily due to the
recognition of $43.3 million in expenses related to the change in control, the
payment of $75 million related to the Company's self-tender offer completed in
March 1995, and $50.6 million of capital expenditures spent primarily on the
store remodeling and expansion program.
Net cash used for operating activities for the thirty-nine weeks ended October
28, 1995 increased $153.0 million compared to the same period in 1994. This use
of cash for operating activities is primarily due to a net loss before taxes of
$21.5 million (before the $43.3 million change in control costs) versus $13.1
million in net earnings last year, the seasonal nature of the Company's business
and the recognition of $43.3 million in expenses related to the change in
control.
Capital expenditures, primarily for the remodeling and upgrading of existing
stores and the opening of ten new stores, were $50.6 million for the thirty-nine
weeks ended October 28, 1995. During fiscal 1995, capital expenditures are
expected to approximate $57 million.
11
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HILLS STORES COMPANY AND SUBSIDIARIES
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
Under the terms of the Senior Note Indenture (the "Indenture"), because of the
election of the new Board of Directors, the Company was required to offer to
redeem all of the Senior Notes at 101% of par. Effective August 1, 1995, the
Indenture was amended to permit the Company to defer the redemption of the
Senior Notes until May 3, 1996, and, at the option of the Company, upon the
payment of an additional fee of $7.5 million, to May 5, 1997. In addition, the
change in control put price under the Indenture would be increased to 102% if no
notice of redemption is mailed to Senior Note holders before January 1, 1997.
The amendment also allowed the Company to increase the amount of its working
capital facility from $225 million to $300 million. In connection with obtaining
this amendment, the consenting holders of the Senior Notes were paid $6 million
in August 1995, which has been included in costs related to change in control in
the Consolidated Statements of Operations. The Company does not currently intend
to redeem the Senior Notes during fiscal 1996 and therefore has classified the
debt as long-term. The Company may seek to refinance the Senior Notes before the
redemption dates referenced above, provided that acceptable long-term financing
is available to do so.
On August 21, 1995, in connection with the change in control, Hills Department
Store Company ("HDSC"), a wholly-owned subsidiary of the Company, entered into a
new $300 million secured revolving credit facility (the "Facility"), of which up
to $100 million is available as a letter of credit facility. The Facility
expires May 1, 1997 (or May 1, 1996 if the Company has not exercised its option
by April 30, 1996 to extend the Senior Note redemption). If the Senior Notes are
refinanced on terms acceptable to the lenders or their redemption date is
extended to a date later than April 30, 1998, the Facility will be automatically
extended to April 30, 1998. Borrowings under the Facility are limited by a
borrowing base, as defined, and bear interest, at the option of the borrower, at
either of (1) the Adjusted London Interbank Offered Rate plus 2.75%, or (2) the
highest of (a) Chemical Bank's Prime Rate plus 1.75%, (b) the Federal Funds
Effective rate plus 2.25%, and (c) the Base CD Rate plus 2.75%. HDSC must pay
commitment fees at an annual rate of 1/2% on the average daily unused portion of
the commitment. HDSC must also pay letter of credit fees on the aggregate face
amount of outstanding standby letters of credit at an annual rate equal to
2.75%, and on the face amount of outstanding trade letters of credit at an
annual rate of 2.25%. The Facility is secured by a pledge of all of the capital
stock of HDSC and an interest in all tangible and intangible assets of HDSC. The
Facility is guaranteed by the Company. The Facility also contains, among other
restrictions, requirements regarding the maintenance of certain financial
ratios, minimum net worth requirements, and provisions limiting: business
combinations, the issuance of additional debt including capital lease
obligations, the redemption and repurchase of common and preferred stock, the
repurchase and prepayment of debt, the amount of rent expense, and the payment
of dividends. In addition, the Facility also requires, on a date (the "Clean-Up
Date") determined at the discretion of the Company between December 1 and April
1 of each year, HDSC to pay or prepay all of the outstanding loans and for a
period of at least thirty consecutive days following the Clean-up Date, HDSC
shall have no direct borrowings outstanding under the Facility. The Company
expects to satisfy the Clean-up Date provisions in January 1996. As of October
28, 1995, the outstanding loan balance under the Company's $300 million Facility
was $169 million.
Management believes that amounts available under the Company's new borrowing
agreement, together with cash from operations, will enable the Company to fund
its current liquidity and capital expenditure requirements.
12
<PAGE> 13
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Amendment to Form
10-Q to be signed on its behalf by the undersigned, thereunto duly authorized,
in the Town of Canton, Commonwealth of Massachusetts, on April 9, 1996.
HILLS STORES COMPANY
By: /S/ William K. Friend
-------------------------
William K. Friend
Vice President-Secretary
<PAGE> 14
EXHIBIT INDEX
Pursuant to Item 601 of Regulation S-K
<TABLE>
<CAPTION>
Exhibit Title
- ------- -----
<S> <C>
27 Financial Data Schedule
</TABLE>
16
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> FEB-03-1996
<PERIOD-END> OCT-28-1995
<CASH> 4,625
<SECURITIES> 0
<RECEIVABLES> 66,776
<ALLOWANCES> (4,000)
<INVENTORY> 518,108
<CURRENT-ASSETS> 610,445
<PP&E> 225,075
<DEPRECIATION> (34,418)
<TOTAL-ASSETS> 1,088,423
<CURRENT-LIABILITIES> 505,267
<BONDS> 305,140
<COMMON> 99
0
25,206
<OTHER-SE> 243,593
<TOTAL-LIABILITY-AND-EQUITY> 1,088,423
<SALES> 1,200,319
<TOTAL-REVENUES> 1,200,319
<CGS> 873,574
<TOTAL-COSTS> 873,574
<OTHER-EXPENSES> 354,817
<LOSS-PROVISION> 807
<INTEREST-EXPENSE> 36,680
<INCOME-PRETAX> (64,752)
<INCOME-TAX> (37,686)
<INCOME-CONTINUING> (27,066)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (27,066)
<EPS-PRIMARY> (2.77)
<EPS-DILUTED> (2.69)
</TABLE>
