FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
X Annual Report Pursuant to Section 13 or 15(d) of the Securities
- ------ Exchange Act of 1934
For the fiscal year ended February 3, 1996
or
Transition Report Pursuant to Section 13 or 15(d) of the Securities
- ------ Exchange Act of 1934
For the transition period from ___________ to ____________
Commission file number 1-9505
HILLS STORES COMPANY
--------------------
(Exact name of registrant as specified in its charter)
DELAWARE #31-1153510
-------- -----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
15 DAN ROAD, CANTON, MASSACHUSETTS 02021
---------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (617) 821-1000
-------------
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
<S> <C>
Common Stock, Par Value $0.01 per share New York Stock Exchange
Boston Stock Exchange
Senior Notes due 2003 New York Stock Exchange
Series A Convertible Preferred Stock, New York Stock Exchange
Par Value $0.10 per share
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
<TABLE>
<CAPTION>
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
<S> <C>
Series 1993 Warrants to Boston Stock Exchange
Purchase Common Stock
</TABLE>
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing require-
ments for the past 90 days.
Yes X No
----------- -----------
<PAGE>
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant as of March 20, 1996 was $101,271,000 with respect to the Common
Stock and $14,050,716 with respect to the Series A Convertible Preferred Stock,
which has coextensive voting rights with the Common Stock.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
or Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information state-
ments incorporated by reference in Part III of this Form 10-K or any amendment
to this Form 10-K. [ X ]
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes X No
----------- -----------
The number of shares of Common Stock outstanding as of March 20, 1996 was
9,976,635.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of Part III of this report on Form 10-K are incorporated by
reference from the proxy statement dated May 10, 1996 for the annual meeting
of security holders to be held on June 18, 1996.
2
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<TABLE>
TABLE OF CONTENTS
PART I
<S> <C> <C>
ITEM 1. Business .................................................... 4
ITEM 2. Properties .................................................. 6
ITEM 3. Legal Proceedings ........................................... 7
ITEM 4. Submission of Matters to a Vote of Security Holders ......... 8
PART II
ITEM 5. Market for the Registrant's Common Equity and Related
Security Holder Matters ..................................... 9
ITEM 6. Selected Financial Data ..................................... 9
ITEM 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations ......................... 11
ITEM 8. Financial Statements and Supplementary Data ................. 17
ITEM 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure ......................... 17
PART III
ITEM 10. Directors and Executive Officers of the Registrant .......... 18
ITEM 11. Executive Compensation ...................................... 19
ITEM 12. Security Ownership of Certain Beneficial Owners and
Management .................................................. 20
ITEM 13. Certain Relationships and Related Transactions .............. 23
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K ................................................. 24
</TABLE>
3
<PAGE>
PART I
ITEM 1. BUSINESS
--------
Hills Stores Company (the "Company" or "Hills") operates, through its wholly-
owned subsidiary Hills Department Store Company ("HDSC"), a chain of discount
department stores under the trade name of Hills Department Stores. These
stores are located in the mid-Western and mid-Atlantic regions of the United
States. Ten new stores were opened in 1995. At fiscal year end, the Company
operated 164 stores in twelve states.
The Company is a leading regional discount retailer offering a broad range of
brand name and other first quality general merchandise. Management's business
strategy stresses every day low prices, depth and breadth of products in
selected merchandise categories, remodeled facilities and strict operating
controls.
Hills stores are located in cities and towns of varying sizes, with some of the
larger cities being Pittsburgh, Buffalo, Cleveland and Richmond. The Company
concentrates its stores in selected markets within a geographic region in order
to reinforce marketing programs, enhance name recognition, achieve market pene-
tration, and gain economies of scale in management, advertising and
distribution.
The Company has remodeled substantially all of its stores within the last five
years and is continuing the program on an ongoing basis. The remodeling program
is designed to make and keep the Company's stores more visually appealing to
customers and to take full advantage of the most profitable merchandise cate-
gories.
The Company believes that its customer base consists primarily of female
customers shopping for family needs. Accordingly, Hills emphasizes merchandise
in its softlines departments and selected hardlines departments such as toys
and seasonal merchandise which appeal to Hills' targeted female customer. The
Company considers the depth of its merchandise in these departments to be an
important factor in attracting and retaining female customers, and accordingly
emphasizes the availability of a wide selection of sizes, styles and colors of
items in these departments.
Hills carries a diverse line of products, all first quality, including a full
line of clothing and footwear for women, men and children, toys, health and
beauty aids, small household appliances and housewares, home entertainment
equipment, hardware, stationery and greeting cards, automotive supplies, lawn
and garden products and jewelry. Hills offers a broad range of brand name
apparel and other products for the family and supplements brand name goods with
manufacturers' private brands (brands made by major manufacturers but not
nationally advertised) and Hills' private label program. The Company accepts
all major consumer credit cards and offers a year-round layaway program.
As part of its merchandise strategy, Hills endeavors to purchase goods that are
made in the U.S.A. and has developed a special merchandise program using its
"American Spirit" trademark to help market that concept to customers. Imported
goods are purchased by Hills from an importing subsidiary and from other
sources. In fiscal year 1995, the subsidiary, CRH International, Inc., imported
products that accounted for approximately 7.6% of total purchases of the Hills
Department Stores chain.
4
<PAGE>
Hills uses a centralized buying organization staffed by merchandise managers,
buyers and a support staff organized along the Company's product lines. Most
of Hills' buying organization is located at its Canton, Massachusetts head-
quarters. Hills also maintains an important fashion buying office in the
garment district of New York City to purchase and merchandise women's fashion
and basic apparel.
Hills' merchandise managers and buyers develop detailed merchandising plans for
each selling season. These plans include sales, inventory and initial markup
and markdown budgets for each buyer. Sales performance reports are received
both daily and weekly and assist management in making related merchandising
decisions. The formats of these plans are programmed into computer planning
systems for each department.
The Company's central distribution facilities are located in Columbus, Ohio.
These facilities provide central stocking of inventory and flow-through alloca-
tion of inventory for delivery to the stores, resulting in efficient inventory
management. Significant reductions in store receiving expense are achieved by
performing many product handling functions at the central distribution
facilities.
In recent years, the Company has instituted several significant changes in its
store operations and management structure to enhance expense control,
flexibility and competitive responsiveness. Computerized scheduling of work
hours based upon forecasted sales levels, productivity standards and freight
activity allows the Company to allocate more payroll dollars to sales
generating positions, while reducing overall payroll expense. The Company
periodically reviews and evaluates licensing space within the Company's stores
to specialty businesses based on the appeal of the products or services offered
by such specialty businesses to Hills' targeted customer as well as the sales
and profit potential of such specialty businesses.
Store managers report to district managers, who report to regional vice
presidents. The district managers and regional vice presidents visit their
stores on a regular basis to oversee operations. Store managers and associates
are empowered to respond directly to the needs of the customers. The Company
maintains a field office strategically located near Pittsburgh to facilitate
store visitations and reduce travel expenses, particularly by those associates
with greater responsibilities for store performance.
To support Hills' strategy of centralized management control, the Company
relies extensively on computerized information systems. Hills operates its
principal information technology center at its headquarters in Canton, Massa-
chusetts. All Hills stores, distribution centers and administrative locations
are tied to the information center's computer by means of an on-line data com-
munications network.
Hills' merchandising systems are designed to integrate the key retailing
functions of seasonal merchandise planning, purchase order management, merchan-
dise distribution, receiving, sales capture, inventory control, open-to-buy and
replenishment. Hills maintains electronic data interchange (EDI) connections
through third party services to a large number of its vendors. Unit sales data
are recorded via the point-of-sale register systems in each store. The point-
of-sale registers and bar code scanners in all stores significantly reduce labor
intensive price marking and price changes. The sales data are transmitted
nightly to the Company's computer where they are processed to produce a wide
range of daily and weekly management reports. Each Hills buyer also has on-line
access to information on the mainframe computer or local area network server via
a personal computer located in the buyer's office. The merchandising systems
5
<PAGE>
allow Hills to distribute specific categories and styles of merchandise to each
store based upon the sales patterns of the stores.
Store operations are supported by a number of additional on-line systems
including electronic correspondence among all locations, payroll and labor
scheduling systems, accounts payable, price change management and layaway
control. The purpose of these systems is to promote timely and accurate
communication among all Hills locations and to allow personnel at the Company's
office locations to monitor and control key store activity.
The discount general merchandise retail business is highly competitive. The
Company considers price, merchandise presentation, product selection and
merchandise quality, and store location to be the most significant competitive
factors. Hills' principle competitors are regional and national discount
department store chains, some of which, such as Wal-Mart, Kmart, and Target,
as well as specialty retailers, such as Toys "R" Us, are larger and have more
capital than Hills. Management believes that the Company's store remodeling
program and its strength in certain merchandising lines allows it to defend its
competitive position, even with Wal-Mart's presence in most of the Company's
markets. Hills' expansion in Virginia and Target's opening of stores in
Cleveland, Ohio has increased Target's position as a competitor of the Company.
The "Hills" name is a registered service mark. The Company considers this mark
and the associated name recognition to be valuable to its business. The
Company has additional trademarks, trade names and service marks, many of which,
such as "American Spirit," are used in connection with the Company's private
label program. Although the Company considers these additional marks to be
valuable in the aggregate, individually, they have varying degrees of importance
to the Company's business.
As of March 1, 1996, Hills employed approximately 17,900 persons, including
approximately 10,300 full-time and 7,600 part-time employees. None of the
Company's employees are represented by a labor union. The number of employees
varies during the year, reaching a peak during the Christmas selling season.
The Company considers its relations with its employees to be good.
On July 5, 1995, following a proxy contest in connection with the annual
meeting of stockholders held on June 23, 1995, seven nominees of Dickstein
Partners Inc. ("Dickstein Partners") were certified as being elected directors
of the Registrant, replacing the former Board of Directors, thereby effecting a
change in control of the Registrant (the "1995 Change in Control").
Following the 1995 Change in Control, the executive officers of the Company
resigned, resulting in a change in the Company's senior management personnel.
In addition, negotiations were successfully conducted with the holders of the
Company's Senior Notes to defer a redemption option in the Senior Notes
indenture which would have resulted from the 1995 Change in Control. The
Company also refinanced its existing bank debt, which would have become due as
a result of the 1995 Change in Control, and increased its working capital
credit line to $300 million of secured debt.
ITEM 2. PROPERTIES
----------
Hills operates 164 stores (163 stores are leased and one is owned) in the
states of Illinois, Indiana, Kentucky, Maryland, Massachusetts, New York,
North Carolina, Ohio, Pennsylvania, Tennessee, Virginia, and West Virginia,
located in regional and other enclosed shopping malls, strip shopping centers
and as free standing units. The Company leases nearly all of its stores under
6
<PAGE>
long-term leases. In addition, Hills leases buying and administrative offices,
including the Company's headquarters in Canton, Massachusetts, the field office
in Aliquippa, Pennsylvania and the buying office in New York, New York, and its
central distribution facilities in Columbus, Ohio.
The typical store lease has an initial term of between 20 and 30 years, with
four to seven renewal periods of five years each, exercisable at the Company's
option. Substantially all of the Company's leases provide for a minimum annual
rent that is constant or adjusts to fixed levels through the lease term,
including renewal periods. Most leases provide for additional rent based on a
percentage of sales to be paid when designated sales levels are achieved. See
Note 9 of Notes to Consolidated Financial Statements for additional information
about the Company's long-term leases.
ITEM 3. LEGAL PROCEEDINGS
-----------------
On September 11, 1995, the Company and HDSC filed a suit in the Court of
Chancery of the State of Delaware against the former members of the Board of
Directors (the "Former Directors") of the Company. That action seeks, among
other things, recovery of damages caused by the breach by the Former Directors
of their fiduciary duties to shareholders arising from the refusal of the Former
Directors to approve the 1995 Change in Control. On October 10, 1995 the
defendants filed a motion to dismiss this suit. That motion is presently
pending.
The Company and HDSC 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 in breach of their fiduciary duties. On October 30, 1995,
Smith Barney, Inc. served a motion to dismiss this suit. That motion is
presently pending.
On August 7, 1995, in the Court of Chancery of the State of Delaware, Gayle
Dolowich, Ivan J. Dolowich and Joseph Weiss filed a class action lawsuit against
the seven new directors of the Company elected at the annual meeting, Dickstein
Partners and the Company. On November 3, 1995, the plaintiffs amended their
complaint to include a shareholders derivative cause of action against the
Former Directors for breach of their fiduciary duties to the Company and its
shareholders. In the amended complaint, the plaintiffs claim that in connection
with the effort by Dickstein Partners to solicit proxies in support of the elec-
tion of its nominees to be directors of the Company, Dickstein Partners 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. The derivative cause of action seeks damages against
the Former Directors.
On January 19, 1996 in the same Delaware Chancery Court, Peter M. Fusco filed a
substantially similar class action and shareholder derivative suit against the
parties named in the above identified Dolowich suit. The plaintiff made the
same claims and seeks the same remedies as are made and sought in the Dolowich
suit.
The Former Directors have filed motions to dismiss the derivative actions in
both the Dolowich and Fusco suits. These motions are presently pending.
7
<PAGE>
ITEM 3. LEGAL PROCEEDINGS (CONTINUED)
----------------------------
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
NONE
8
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SECURITY HOLDER
MATTERS
---------------------------------------------------------------------
(a) The principal market on which the Company's Common Stock is traded is the
New York Stock Exchange. The following table sets forth the range of high and
low prices of the Company's Common Stock as reported on the New York Stock
Exchange during each quarter of fiscal years 1994 and 1995.
<TABLE>
COMMON STOCK PRICES
- -------------------
<CAPTION>
Quarter Ended High Price Low Price
<S> <C> <C>
February 3, 1996 $12.000 $ 7.125
October 28, 1995 $18.125 $ 8.125
July 29, 1995 $24.875 $18.125
April 29, 1995 $22.750 $18.250
January 28, 1995 $21.625 $19.375
October 29, 1994 $23.000 $20.125
July 30, 1994 $21.000 $18.000
April 30, 1994 $21.750 $19.000
<FN>
(b) As of March 20, 1996, there were outstanding 9,976,635 shares of Common
Stock held by 2,407 holders of record, and 1,108,346 shares of Series A
Convertible Preferred Stock held by 2,238 holders of record.
(c) The Company has not paid a cash dividend on its Common Stock in the last
two fiscal years. The Credit Agreement dated as of August 21, 1995 between
HDSC and Chemical Bank, and the Company as the Guarantor, prohibits the payment
of dividends on the Company's Common Stock and limits the amount of dividends
which HDSC may pay to the Company in any fiscal year. The Company's Senior
Notes Indenture also has restrictions on the payment of cash dividends. See
Notes 7 and 8 of Notes to Consolidated Financial Statements.
</TABLE>
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
The Company emerged from Chapter 11 proceedings on October 4, 1993. For
financial reporting purposes, the Company adopted fresh-start reporting as of
October 2, 1993. Under fresh-start reporting, a new reporting entity is
created and recorded amounts of assets and liabilities are adjusted to reflect
their estimated fair values. Financial data prior to October 2, 1993 has been
designated as those of the Predecessor Company. Black lines have been drawn to
separate the Successor Company financial data from the Predecessor Company
financial data to signify that they are those of a new reporting entity and
have been prepared on a basis not comparable to prior periods (see Notes 1 and
2 of Notes to Consolidated Financial Statements).
9
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<TABLE>
ITEM 6. SELECTED FINANCIAL DATA (CONTINUED)
<CAPTION>
Successor Company
----------------------------------------------------
Fiscal Fiscal Seventeen
(in thousands, except per share amounts Year Year Weeks Ended
and number of stores) 1995 1994 January 29, 1994
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> ||
Net sales $1,900,104 $1,872,021 $ 772,685 ||
Gross profit $ 515,683 $ 531,800 $ 223,034 ||
||
Net earnings (loss) applicable to ||
common shareholders before ||
extraordinary items $ (16,666) (1) $ 40,431 $ 36,235 ||
||
Net earnings (loss) applicable to ||
common shareholders $ (16,666) (1) $ 40,431 $ 36,235 ||
||
Fully-diluted earnings (loss) per common share $ (1.66) $ 2.73 $ 2.45 ||
||
Fully-diluted average shares outstanding 10,029 14,832 14,794 ||
||
FINANCIAL POSITION: ||
Total assets $ 858,723 $ 992,378 $ 907,621 ||
Working capital $ 147,090 $ 241,486 $ 171,440 ||
Liabilities subject to compromise (4) $ - $ - $ - ||
Long-term obligations $ 185,169 $ 185,169 $ 160,000 ||
Long-term obligations under capital leases $ 118,776 $ 124,508 $ 130,626 ||
Preferred stock $ 24,636 $ 64,144 $ 100,000 ||
Common shareholders' equity (deficit) $ 254,663 $ 306,741 $ 230,235 ||
Number of stores operated at period end 164 154 151 ||
<CAPTION>
Predecessor Company
------------------------------------------------
Thirty-Five Fiscal Fiscal
(in thousands, except per share amounts Weeks Ended Year Year
and number of stores) October 2, 1993 1992 1991
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net $ 992,848 $1,750,266 $1,679,866
Gross profit $ 282,549 $ 500,454 $ 465,776
Net earnings (loss) applicable to
common shareholders before
extraordinary items $ (9,747) $ 24,385 $ 7,637
Net earnings (loss) applicable to
common shareholders $ 248,492 (2) $ 47,264 $ 20,117
Fully-diluted earnings (loss) per common share $ 11.30 (3) $ 2.15 (3) $ 0.92 (3)
Fully-diluted average shares outstanding 21,982 21,982 21,982
FINANCIAL POSITION:
Total assets $ 972,838 $ 922,745 $ 846,906
Working capital $ 301,980 $ 299,927 $ 261,007
Liabilities subject to compromise (4) $ 775,169 $ 761,443 $ 771,606
Long-term obligations $ - $ - $ -
Long-term obligations under capital leases $ 122,230 $ 133,457 $ 137,793
Preferred stock $ 33,143 $ 31,481 $ 29,049
Common shareholders' equity (deficit) $ (186,934) $ (183,172) $ (230,446)
Number of stores operated at period end 151 154 154
<FN>
(1) Includes a $45.5 million pre-tax charge incurred in connection with the 1995 Change in Control
(see Note 21 of Notes to Consolidated Financial Statements).
(2) Includes a $258.2 million after-tax extraordinary gain on the discharge of prepetition debt.
(3) Fully-diluted earnings per share for fiscal years 1992 and 1991 include extraordinary credits
per common share of $1.04 and $0.57, respectively, attributable to the realization of the
benefit of tax loss carryforwards. Fully-diluted earnings per share for the thirty-five weeks
ended October 2, 1993 includes an extraordinary gain per common share of $11.75 on the discharge
of prepetition debt.
(4) On February 4, 1991, the Company, its former parent, Hills Department Stores, Inc., and the five
principal subsidiaries of the Company, filed petitions for relief under Chapter 11 of the United
States Bankruptcy Code. As a result, the Company reclassified certain current liabilities to
Liabilities subject to compromise at February 3, 1991 (see Note 1 of Notes to Consolidated Financial
Statements).
THE SELECTED FINANCIAL DATA SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
10
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
GENERAL
On October 4, 1993 (the "Effective Date"), Hills Stores Company (the "Company"
or the "Successor Company") emerged from reorganization proceedings under
Chapter 11 of the United States Bankruptcy Code ("Chapter 11"). The Company,
its former parent, Hills Department Stores, Inc. (the "Predecessor Company"),
and the five principal subsidiaries of the Company, voluntarily filed petitions
for reorganization under Chapter 11 on February 4, 1991 (the "Filing Date").
The Predecessor Company operated its business as a debtor-in-possession under
Chapter 11 from the Filing Date until October 4, 1993.
The Plan of Reorganization (the "POR") provided for the Predecessor Company to
be dissolved and the Company to succeed to and assume the Predecessor Company's
former status as a holding company (see Note 1 of Notes to Consolidated
Financial Statements).
In conjunction with its emergence from Chapter 11, the Company adopted
fresh-start reporting as of October 2, 1993 in accordance with the American
Institute of Certified Public Accountants Statement of Position 90-7:
"Financial Reporting by Entities in Reorganization under the Bankruptcy Code."
In connection with the adoption of fresh-start reporting and the consummation
of the POR, a new entity was deemed created for financial reporting purposes.
Accordingly, the consolidated financial statements for the periods subsequent
to October 2, 1993 have been designated "Successor Company" to signify that
they are those of the new entity for financial reporting purposes and have
been prepared on a basis not comparable to prior periods.
To facilitate comparison of the Successor and Predecessor Companies' operating
performances, the discussions below are presented using the pro forma results
of combined operations of the Successor and Predecessor Companies for fiscal
1993 as presented in Note 2 of Notes to Consolidated Financial Statements.
Consequently, the information presented below does not reflect the periods in
the fifty-two weeks ended January 29, 1994 as they are presented in the
Consolidated Statements of Operations. The most significant pro forma
adjustment to earnings before reorganization items, income taxes and
extraordinary items is the increase in interest expense due to the pro forma
issuance of the Senior Notes at January 31, 1993 (see Note 2 of Notes to
Consolidated Financial Statements).
RESULTS OF OPERATIONS
FISCAL YEAR ENDED FEBRUARY 3, 1996 (FISCAL 1995) VERSUS
YEAR ENDED JANUARY 28, 1995 (FISCAL 1994)
The following discussion, as well as other portions of this document, includes
certain statements which are or may be construed as forward looking about the
Company's business, sales and expenses, and operating and capital requirements.
Any such statements are subject to risks that could cause the actual results or
requirements to vary materially.
Sales increased 1.5% compared to fiscal 1994. The improvement is attributable
to opening ten new stores and fiscal 1995 having 53 weeks compared to 52 weeks
in fiscal 1994. The extra week represents an increase in sales of $17.6
11
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RESULTS OF OPERATIONS (CONTINUED)
FISCAL YEAR ENDED FEBRUARY 3, 1996 (FISCAL 1995) VERSUS
FISCAL YEAR ENDED JANUARY 28, 1995 (FISCAL 1994) (CONTINUED)
million. Sales increases in hardlines categories, particularly in areas
associated with the home, all occasion and electronics, were partially offset
by a decrease in apparel sales. Comparable store sales, excluding the
fifty-third week, were $1.777 billion in fiscal 1995 versus $1.849 billion in
fiscal 1994, a 3.9% decrease.
Cost of sales as a percentage of sales was 72.9% in fiscal 1995 compared to
71.6% in fiscal 1994. This increase of 1.3% is due to a higher rate of
markdowns, particularly in the apparel categories, a shift in the mix of
business to lower margin hardlines categories, and a decrease in the purchase
markup percentage in the hardlines areas. Because of the increasingly
competitive discount store industry, the Company anticipates that it will
continue to experience pressure on gross margin.
Selling and administrative expenses as a percentage of sales was 21.0% in
fiscal 1995 and 20.9% in fiscal 1994. Savings in payroll and payroll related
expenses as a percentage of sales were offset by increased advertising costs
in the Company's new markets and higher operating costs associated with opening
10 new stores. Prior year expenses include a $4.5 million gain from the
elimination of pension obligations. Selling and administrative expenses
excluding the pension gain as a percentage of sales was 21.1% in fiscal 1994.
Depreciation and amortization as a percentage of sales was 1.6% in fiscal 1995
compared to 1.4% in fiscal 1994. The increase is due to a higher fixed asset
base resulting from the Company's remodeling and new store program.
Costs related to the 1995 Change in Control (see Note 21 of Notes to
Consolidated Financial Statements) were $45.5 million. The costs consist of
$31.0 million for severance and retirement payments, including certain taxes
attributable thereto, to six senior executives, a consultant to the Company
and 20 associates of the Company, $6.0 million paid to holders of the Senior
Notes, and legal and other miscellaneous change in control costs.
Other interest expense was $35.4 million in 1995 compared to $24.0 million in
1994. The $11.4 million increase is primarily due to interest on borrowings
under the revolving credit facility, non-cash interest on the sale/leaseback
financing, and additional amortization of deferred financing costs related to
securing the new revolving credit facility (see Note 7 of Notes to Consolidated
Financial Statements). Average direct borrowings under the revolving credit
facility were $62.6 million for fiscal 1995 at an average interest rate of
9.4%, with peak borrowings of $188.0 million. In fiscal 1994, average
borrowings approximated $88,000 at an average interest rate of 9.25%, with peak
borrowings at $8.0 million.
Other income was $4.9 million in fiscal 1995 and $9.2 million in fiscal 1994,
a $4.3 million decrease. The fourth quarter of fiscal 1994 included a reversal
of liabilities established in "fresh-start" reporting totalling $9.6 million
which was partially offset by $2.2 million paid to the holders of the Company's
Senior Notes in connection with the Company's self-tender for shares of its
common stock (see Note 20 of Notes to Consolidated Financial Statements) and
$2.2 million of additional amortization of deferred financing costs.
In fiscal 1995, the Company recorded a tax expense of $3.2 million on a loss
before income taxes of $13.5 million as a result of $7.8 million of
12
<PAGE>
RESULTS OF OPERATIONS (CONTINUED)
FISCAL YEAR ENDED FEBRUARY 3, 1996 (FISCAL 1995) VERSUS
FISCAL YEAR ENDED JANUARY 28, 1995 (FISCAL 1994) (CONTINUED)
amortization of reorganization value and $14.1 million of change in control
costs which are non-deductible. The Company's effective tax rate was 47.0% in
fiscal 1994.
FISCAL YEAR ENDED JANUARY 28, 1995 (FISCAL 1994) VERSUS PRO FORMA COMBINED
FISCAL YEAR ENDED JANUARY 29, 1994 (FISCAL 1993)
Sales increased 6.0% compared to fiscal 1993. This improvement was primarily
attributable to increased hardlines sales, particularly in toys, all occasion,
and areas associated with the home. In addition, modest gains in apparel sales,
the opening of three new stores, and comparatively strong January 1995 sales
due to the unusually bad weather conditions in January of the prior year also
contributed to the sales increase. The strong fiscal 1994 Christmas season was
highlighted by a fourth quarter comparable stores sales increase of 4.7%.
Comparable store sales were $1.849 billion in fiscal 1994 versus $1.759 billion
in fiscal 1993, a 5.1% increase.
Cost of sales as a percentage of sales was 71.6% in fiscal 1994 compared to
71.4% in fiscal 1993. The increase of 0.2% is due to a higher rate of
markdowns, particularly in the apparel market, and an increase in the provision
for inventory shortage. These were partially offset by an improved purchase
markup and an improvement in logistics cost due to operational efficiencies
achieved at the Company's distribution center, which became fully operational
in July 1993.
Selling and administrative expenses as a percentage of sales was 20.9% in
fiscal 1994 compared to 21.4% in fiscal 1993, a 0.5% decrease. This improvement
was primarily a result of the Company's focus on cost reduction, principally in
payroll and payroll related expenses. A $4.5 million gain from the elimination
of pension obligations, which were replaced by a Company matching 401(K) plan,
was also included in selling and administrative expenses. Selling and
administrative expenses excluding the pension gain as a percentage of sales was
21.1% in fiscal 1994.
Other income was $9.2 million in fiscal 1994 compared to $3.7 million in fiscal
1993, a $5.5 million increase. This increase was primarily due to a fourth
quarter reversal of liabilities established in "fresh-start" reporting totalling
$9.6 million which was partially offset by $2.2 million paid to the holders of
the Company's Senior Notes in connection with the Company's self-tender for
shares of its common stock and $2.2 million of additional amortization of
deferred financing costs.
The Company's effective tax rate was 47.0% in fiscal 1994 compared to 48.1% in
fiscal 1993, a 1.1% decrease resulting principally from the decrease in non-
deductible goodwill amortization as a percentage of the related pre-tax
earnings.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
GENERAL
On August 21, 1995, in connection with the 1995 Change in Control, Hills
Department Store Company ("HDSC"), a wholly-owned subsidiary of the Company,
13
<PAGE>
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
GENERAL (CONTINUED)
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 April 30, 1998 (or May 1, 1996 if the Company
has not exercised its option by April 30, 1996 to extend by one year the Senior
Note redemption offer or May 1, 1997 if the Company has not exercised its
second option to extend the Senior Note redemption offer an additional year).
If the Senior Notes are refinanced on terms acceptable to the lenders the
Facility will be automatically extended to April 30, 1998. 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 Company and HDSC are in compliance with all of the Facility's
restrictive covenants as of February 3, 1996. As of February 3, 1996, there
were no direct borrowings outstanding under the Facility.
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 offer of
the Senior Notes until April 3, 1996, and, at the option of the Company by
giving notice on or before April 19, 1996 and upon the payment of an additional
fee of $7.5 million, to further defer the offer to redeem obligation to April 5,
1997. In addition, the change in control put price under the Indenture would be
increased to 102% if no notice of the offer to redeem 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.
Effective January 15, 1996, the Indenture was again amended to permit the
Company (upon payment to persons who then hold Senior Notes of a fee equal to
5.5% of the principal amount of such Senior Notes) to defer the redemption of
the Senior Notes until July 8, 1998. The amendment also eliminates the
obligation of the Company to offer to redeem the Senior Notes upon any future
Change in Control Event, as defined, if such Change in Control Event results
in an increase of at least $40 million in the capital of the Company and at
least 50% of the Company's net proceeds therefrom are used to repurchase or
redeem Senior Notes. In addition, the amendment modifies the definition of
"Consolidated Fixed Charge Coverage Ratio" in order to exclude, for the purposes
of determining the amount of indebtedness that the Company is permitted to
incur, the effect of up to $43.3 million in non-recurring costs relating to the
Company's change in control in July 1995. The amendment also imposes
limitations upon the Company's ability to make payments with respect to its
capital stock and increases the interest rate on the Senior Notes to 10.75%
from January 13, 1996 through March 31, 1997, to 11.25% from April 1, 1997 to
March 31, 1998 and thereafter by 1.00% on April 1 of each succeeding year.
The Company is proposing to offer in April 1996 $175.0 million principal amount
of a new series of senior notes due 2003 (the "New Notes"). If the Company
proceeds with the offering of the New Notes, it will offer to redeem the
outstanding Senior Notes, using substantially all of the proceeds from the
issuance of the New Notes. If the Company does not proceed with the offering
14
<PAGE>
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
GENERAL (CONTINUED)
of New Notes, it will pay the $7.5 million fee, as described above, to defer
the redemption offer of the Senior Notes until April 5, 1997. As a result of
the Company's intention to refinance the Senior Notes or to defer redemption of
the Senior Notes until after fiscal 1996, the Company has classified the Senior
Notes as long-term.
The Company also has significant lease commitments which require cash outflows.
Operating and capital lease payments in fiscal 1996, including rentals based on
sales, are expected to approximate $58.9 million.
<TABLE>
A summary of cash flow information and financial position is presented
below (in thousands):
<CAPTION>
Fiscal Year Fiscal Year
Ended Ended
February 3, January 28,
1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Cash and cash equivalents
at begining of period $ 180,051 $ 90,049
Net cash provided by (used for)
operating activities (8,004) 124,612
Capital expenditures (56,714) (38,458)
Principal payments under capital lease
obligations (6,121) (5,529)
Proceeds from sale/leaseback financing - 25,169
Cash distributions pursuant to the POR (5,297) (14,419)
Shares repurchased per self-tender offer (75,000) -
Deferred finance costs and other
financing activities (10,857) (1,373)
-------- ---------
Cash and cash equivalents
at end of period $ 18,058 $ 180,051
======== =========
Working capital at end of period $ 147,090 $ 241,486
======== =========
</TABLE>
The Company's working capital as of February 3, 1996 decreased $94.4 million
from January 28, 1995. The working capital decrease is primarily due to the
payment of $75 million related to the Company's self-tender offer completed in
March 1995, and $56.7 million primarily spent on the store remodeling and
expansion program, partially offset by the reversal of $20.0 million of
liabilities established in "fresh-start" reporting that are no longer required
and a decrease in other accounts payable and accrued expenses of $11.9 million.
Net cash provided by operating activities for the fiscal year ended February 3,
1996 decreased $132.6 million compared to fiscal year ended January 28, 1995.
This use of cash for operating activities is primarily due to net earnings
before taxes of $32.1 million (before the $45.5 million change in control
expense) versus $76.3 million in fiscal 1994, the recognition of $45.5 million
in expenses related to the change in control, an increase due to inventories of
$30.5 million resulting from the opening of ten stores, a $54.9 million decrease
in accounts payable and accrued expenses, and a $32.7 million decrease in income
taxes.
15
<PAGE>
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
GENERAL (CONTINUED)
Capital expenditures, primarily for the remodeling and upgrading of existing
stores and the opening of ten new stores, were $56.7 million during fiscal
1995. The Company has substantially completed its chainwide remodeling program
in fiscal 1995. During fiscal 1996, capital expenditures are expected to
approximate $35.8 million.
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
self-tender offer, and for which payment of $75,000,000 was made in March 1995.
Management believes that amounts available under the Company's current
borrowing agreement, together with cash from operations, will enable the
Company to fund its current liquidity and capital expenditures requirements.
Any or all of the restrictions, limitations or contingencies under the Facility
and the Senior Note Indenture, as well as the Company's leverage, could
adversely affect the Company's ability to obtain additional financing in the
future, to make capital expenditures, to effect store expansions, to make
acquisitions, to take advantage of business opportunities that may arise, and
to withstand adverse general economic and retail industry conditions and
increased competitive pressures. Retail suppliers and their factors monitor
carefully the financial performance of retail companies such as the Company,
and may reduce credit availability quickly upon learning of actual or
perceived deterioration in the financial condition or results of operations of
a retail company.
OTHER MATTERS
SEASONALITY
The Company's business is highly seasonal due to increased consumer buying for
back-to-school needs and Christmas. The second half of each year provides the
major portion of the Company's annual sales and operating earnings with
operating earnings particularly concentrated in the Christmas selling season.
16
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
See accompanying page F-1 through F-28.
<TABLE>
Information called for by this item can be found at the pages listed in the
following index.
INDEX TO FINANCIAL STATEMENTS
<CAPTION>
Hills Stores Company and Subsidiaries Page
<S> <C>
Reports of Independent Auditors ...................................... F-1
Consolidated Balance Sheets .......................................... F-3
Consolidated Statements of Operations ................................ F-4
Consolidated Statements of Cash Flows ................................ F-5
Consolidated Statements of Common Shareholders' Equity ............... F-6
Notes to Consolidated Financial Statements ........................... F-7
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
-----------------------------------------------------------
AND FINANCIAL DISCLOSURE
------------------------
On November 14, 1995, the Company engaged Deloitte & Touche LLP ("Deloitte &
Touche") as its independent auditors, following the resignation of Coopers &
Lybrand L.L.P. ("Coopers & Lybrand") as independent auditors for Hills Stores
Company on November 8, 1995.
None of the reports of Coopers & Lybrand on the financial statements of the
Company for either of the two fiscal years preceding such resignation contained
an adverse opinion or a disclaimer of opinion, or was qualified or modified as
to uncertainty, audit scope or accounting principles. During the Company's two
most recent fiscal years and the subsequent interim period preceding the resig-
nation of Coopers & Lybrand, there were no disagreement(s) with Coopers &
Lybrand on any matter of accounting principles or practices, financial statement
disclosure or auditing scope or procedures, which disagreement(s), if not re-
solved to the satisfaction of Coopers & Lybrand would have caused it to make
reference to the subject matter of the disagreement(s) in connection with its
report. None of the reportable events listed in Item 304(a)(1)(v) of
Regulation S-K occurred with respect to the Company during the Registrant's
two most recent fiscal years and the subsequent interim period preceding the
resignation of Coopers & Lybrand.
During the Company's two most recent fiscal years and the subsequent interim
period preceding the engagement of Deloitte & Touche, neither the Company nor
anyone on its behalf consulted Deloitte & Touche regarding the application of
accounting principles to a specific completed or contemplated transaction, or
the type of audit opinion that might be rendered on the Company's financial
statements, and no written or oral advice concerning same was provided to the
Company that was an important factor considered by the Company in reaching a
decision as to any accounting, auditing or financial reporting issue.
17
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
<TABLE>
<CAPTION>
Name Age Position Since
- ---- --- -------- -----
<S> <C> <C> <C>
Chaim Y. Edelstein 53 Chairman of the Board 1995
Stanton J. Bluestone 61 Director 1995
John W. Burden III 59 Director 1995
Alan S. Cooper 37 Director 1995
Mark Dickstein 37 Director 1995
Samuel L. Katz 30 Director 1995
Gregory K. Raven 46 Director, President 1996
and Chief Executive Officer
Kim D. Ahlholm 39 Vice President-Controller 1994
James E. Feldt 41 Executive Vice President-
General Merchandise Manager 1995
William K. Friend 49 Vice President-Secretary and
Corporate Counsel 1985
</TABLE>
CHAIM Y. EDELSTEIN was elected Chairman of the Board on February 7, 1996. He
has been a Director since July 5, 1995. He was a consultant to Federated
Department Stores, Inc. from February 1994 to March 1995 and has been a
consultant to Carson, Pirie, Scott & Co. since November 1994. From 1985 to
February 1994 he was Chairman and Chief Executive Officer of Abraham & Straus,
a division of Federated Department Stores, Inc. Federated Department Stores,
Inc. filed a petition for reorganization under the Bankruptcy Code in 1990 and
has since emerged from bankruptcy. Mr. Edelstein is a director of Carson,
Pirie, Scott & Co., a department store retailer and of Jan-Bell Marketing,
Inc., a jewelry retailer.
STANTON J. BLUESTONE has been a Director since July 5, 1995. Since March 1996
he has been Chairman of the Board of Carson, Pirie, Scott & Co. For the past
five years, he has been President and Chief Executive Officer and a Director of
Carson, Pirie, Scott & Co. Carson, Pirie, Scott & Co. was formerly known as
P.A. Bergner & Co. which filed a petition for reorganization under the
Bankruptcy Code in 1991 and emerged from bankruptcy in 1993.
JOHN W. BURDEN III has been a Director since July 5, 1995. He has been a
consultant and partner in Retail Options, Inc. since November 1993. From
December 1990 to March 1993, Mr. Burden's principal occupation was as an
officer in Pelican Palms Realty Corporation, a real estate sales company he
owned. From August 1988 to February 1990 Mr. Burden served as Chairman and
Chief Executive Officer of Federated Department Stores, Inc. and Allied Stores
Corporation, each a department store chain, and was Vice Chairman of Federated
Department Stores, Inc., from December 1985 to July 1988. Federated Department
Stores, Inc. filed a petition for reorganization under the Bankruptcy Code in
1990 and has since emerged from bankruptcy. Mr. Burden is a director of
Carson, Pirie, Scott & Co., Bernard Chaus, Inc., a manufacturer of women's
clothing and Jan-Bell Marketing, Inc.
ALAN S. COOPER became a member of the Board of Directors on December 28, 1995.
He has been Vice President-General Counsel of Dickstein Partners since March
1992. Prior to that, he was an attorney with the firm of Rosenman and Colin
since 1983.
18
<PAGE>
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (CONTINUED)
-------------------------------------------------------------
MARK B. DICKSTEIN has been a Director since July 5, 1995 and was Chairman of
the Board from July 5, 1995 through February 7, 1996. He has been the
President of Dickstein Partners since prior to 1990 and is primarily
responsible for the operations of Dickstein Partners, L.P., Dickstein & Co.,
L.P., Dickstein Focus Fund L.P. and Dickstein International Ltd (collectively
the "Dickstein Funds"). He is a director of Carson, Pirie, Scott & Co.
SAMUEL L. KATZ has been a Director since July 5, 1995. He is Senior Vice
President of HFS Incorporated, a public corporation. From July 1993 to
December 1995 he was a Vice President of Dickstein Partners. From February
1992 to July 1993, Mr. Katz was the Co-Chairman of Saber Capital, Inc., a firm
making private equity investments. From 1988 to 1992, Mr. Katz was an Associate
and then a Vice President of the Blackstone Group, an investment and merchant
bank, where he focused on leveraged buyout transactions.
GREGORY K. RAVEN was elected President and Chief Executive Officer and a
Director on February 7, 1996. For the past five years, Mr. Raven has been
Executive Vice President-Finance and Chief Financial Officer of Revco D.S.,
Inc. Revco D.S., Inc. filed a petition for reorganization under the Bankruptcy
Code in 1988 and emerged from bankruptcy in 1992.
KIM D. AHLHOLM was elected Vice President-Controller of Hills in March 1994.
She had been Treasurer since June 1993, Assistant Controller from July 1990 to
June 1993 and Director-Audit from April 1989 to June 1990.
JAMES E. FELDT was elected Executive Vice President-General Merchandise Manager
in July 1995. He had been the Vice President-Fashion Hardlines since November
1993 and Vice President-Boston Softlines from October 1990 to November 1993.
WILLIAM K. FRIEND is and since December 1985 has been Vice President-Secretary
and Corporate Counsel of Hills.
Officers are elected to serve until their successors are elected and qualified.
In September 1990, the Commodity Futures Trading Commission (the "CFTC")
initiated an administrative proceeding against Mr. Dickstein alleging that in
1987 certain of his personal commodities trading activities were in violation
of applicable laws. Specifically, the CFTC claimed that Mr. Dickstein, in his
capacity as a local floor trader, aided and abetted another floor trader in,
among other things, non-competitive trading and defrauding such floor trader's
customers. Without admitting or denying the CFTC's allegations, Mr. Dickstein
settled this matter in September 1991. As part of the settlement, Mr.
Dickstein agreed not to engage in commodities transactions for a period of one
year, and for two additional years not to trade on the floor of any commodities
exchange. Mr. Dickstein also had his commodities floor brokerage license
revoked and paid a $150,000 civil penalty.
ITEM 11. EXECUTIVE COMPENSATION
----------------------
Incorporated by reference from the item entitled "Executive Compensation" in
the proxy statement dated May 10, 1996 for the annual meeting of stockholders
to be held June 18, 1996.
19
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
The following table sets forth as of March 20, 1996 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>
- --------------------------------------------------------------------------------
Title of Name and Address Amount and Nature Percent Percent
Class of Beneficial Owner of Beneficial of of
Ownership Class Voting
Stock (1)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Dickstein Partners, Inc. 1,209,170 12.1 10.9
Dickstein Partners, L.P.
Dickstein & Co., L.P.
Dickstein Focus Fund L.P.
9 West 57th Street
Suite 4630
New York, NY 10019
Dickstein International Ltd.(2)
129 Front Street
Hamilton HM12 Bermuda
- --------------------------------------------------------------------------------
Common FMR Corp. 988,874 9.9 8.9
Fidelity Management and
Research Company
Fidelity Management and
Trust Company(3)
82 Devonshire Street
Boston, MA 02109-3614
- --------------------------------------------------------------------------------
Common BEA Associates 830,147 8.3 7.5
153 East 53rd Street
One Citicorp Center
New York, NY 10022
- --------------------------------------------------------------------------------
Common ML-Lee Acquisition Fund II, 799,293 8.0 7.2
L.P., ML-Lee Acquisition Fund
(Retirement Accounts) II, L.P.,
Thomas H. Lee Advisors II,
L.P.(4)
Word Financial Center
South Tower, 23rd Fl.
New York, NY 10080-6123
- --------------------------------------------------------------------------------
Common Wellington Management 655,925 6.6 5.9
Company
75 State Street
Boston, MA 02109
- --------------------------------------------------------------------------------
</TABLE>
20
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
(CONTINUED)
----------
(1) Represents the shares of Common Stock and Series A Preferred Stock owned
beneficially as a percentage of the aggregate of 9,976,635 shares of
Common Stock and 1,108,346 shares of Series A Preferred Stock outstanding.
(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 1,209,170 shares. Of the
1,209,170 total shares owned beneficially, Dickstein & Co., L.P. owned
beneficially 758,456 of such shares. Dickstein Focus Fund L.P. owned
beneficially 86,095 of such shares and Dickstein International Limited
owned beneficially 364,619 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, Mark Dickstein is
the President and sole director of Dickstein Partners Inc.
(3) FMR Corp. has filed a Schedule 13G showing beneficial ownership of
988,874 shares. FMR is a holding company one of whose principal assets
is the capital stock of a wholly-owned subsidiary, Fidelity Management
and Research Company ("Fidelity"). Fidelity provides investment advice
to certain investment companies and funds. Fidelity Management and Trust
Company("FMTC"), also a wholly-owned subsidiary of FMR and a bank,
serves as a trustee or managing agent for various investment accounts and
serves as investment advisor to certain funds. The Company believes that
FMR, Fidelity and FMTC may be deemed a "group" as that term is used in
Rule 13d-5(b) of the Exchange Act. FMR beneficially owns, through FMTC,
983,314 shares of Common Stock of the Company and beneficially owns,
through Fidelity, 5,560 shares of Common Stock of the Company including
2,581 shares issuable upon conversion of 2,581 shares of the Company's
Series A Preferred Stock.
(4) ML-Lee Acquisition Fund II, L.P. owns beneficially 521,048 shares of
Common Stock, and ML-Lee Acquisition Fund (Retirement Accounts) II owns
beneficially 278,245 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 799,293 shares of Common
Stock owned beneficially in the aggregate by the Funds. Thomas H. Lee,
who was the Chairman of the Board of the Company until July 5, 1995, is
a general partner of both funds.
The following table sets forth as of March 20, 1996 the beneficial ownership of
the Company's Common Stock and Series A Preferred Stock held by each director,
the nominees for director, the current 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.
21
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
(CONTINUED)
----------
<TABLE>
- --------------------------------------------------------------------------------
Title of Name and Address Amount and Nature Percent Percent
Class of Beneficial Owner of Beneficial of of
Ownership Class Voting
Stock (1)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Chaim Y. Edelstein 25,000(2) * *
Common Stanton J. Bluestone 0 * *
Common John W. Burden III 0 * *
Common Alan S. Cooper 0 * *
Common Mark B. Dickstein 1,209,170(3) 12.1 10.9
Common Samuel L. Katz 0 * *
Common Gregory K. Raven 100,000(4) 1.0 *
Common Kim D. Ahlholm 3,000(5) * *
Common James E. Feldt 7,599(6) * *
Common William K. Friend 29,245(7)(9) * *
Common Directors and 1,374,014(8)(9) 13.8 12.4
Executive Officers as
a Group (10 Persons)
- --------------------------------------------------------------------------------
</TABLE>
(1) Represents the shares of Common Stock and Series A Preferred Stock owned
beneficially as a percentage of the aggregate of 9,976,635 shares of
Common Stock and 1,108,346 shares of Series A Preferred Stock outstanding.
(2) Includes 20,000 shares of restricted stock. See section captioned
"Restricted Stock Agreements" below.
(3) The shares listed are beneficially owned by the Dickstein Funds. Mark
Dickstein is the President and sole director of Dickstein Partners Inc.,
and he may be deemed to beneficially own all the shares shown.
(4) Consists of restricted stock. See section captioned "Restricted Stock
Agreements" below.
(5) Consists of stock options which are presently exercisable or will be
exercisable within sixty (60) days.
(6) Consists of 99 shares of Common Stock and 7,500 presently exercisable
stock options.
22
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
(CONTINUED)
- ----------
(7) Consists of 2,558 shares of Common Stock, 26,000 exercisable stock options
and 687 shares issuable upon exercise of Series 1993 Warrants.
(8) Consists of 1,216,827 shares of Common Stock, 120,000 shares of restricted
stock, 36,500 stock options which are presently exercisable or will be
exercisable within sixty (60) days and 687 shares issuable upon exercise
of Series 1993 Warrants.
(9) 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
$11.73 per share closing price on the New York Stock Exchange on March 29,
1996.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
At the June 1995 Annual Meeting, following a proxy contest, nominees of
Dickstein Partners were elected to the Board of Directors. The Company
reimbursed Dickstein Partners for, or directly paid, approximately $1.9 million
in third-party fees and expenses incurred or committed to by Dickstein Partners
in connection with the proxy contest and the related acquisition proposal of
Dickstein Partners. This amount includes $1.0 million paid by the Company to
the financial advisor of Dickstein Partners, in respect of the advisor's
proposal to refinance the indebtedness of the Company accelerated as a result
of the election of the Dickstein Partners nominees. In its proxy solicitation
materials, Dickstein Partners declared its intention to seek reimbursement or
payment of such fees and expenses, upon the election of its nominees. These
costs are included in the Consolidated Statements of Operations in costs
related to change in control. Due to 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 (see Note 8 of Notes to Consolidated Financial Statements) and
on August 21, 1995, HDSC entered into a new $300 million secured revolving
credit facility (see Note 7 of Notes to Consolidated Financial Statements).
In addition, a description of certain consulting agreements and employment
contracts is incorporated by reference from the items entitled "Executive
Compensation", "Employment Contracts" and "Compensation of Directors" in the
proxy statement dated May 10, 1996 for the annual meeting of stockholders to
be held June 18, 1996.
23
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
---------------------------------------------------------------
<TABLE>
(a) Documents filed as part of this report:
<S> <C> <C>
1. Financial statements
Reports of Independent Auditors F-1
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Cash Flows F-5
Consolidated Statements of Common Shareholders' Equity F-6
Notes to Consolidated Financial Statements F-7
2. Financial statement schedule
I Reports of Independent Auditors S-1
II Valuation and Qualifying Accounts S-3
</TABLE>
Schedules other than these listed above are omitted because they are not
required, not applicable, or the information is otherwise included in the
financial statements.
3. Certain of the exhibits listed hereunder have previously been filed with
the Commission as exhibits to certain registration statements and periodic
reports set forth in the footnotes following this exhibit list and are hereby
incorporated by reference pursuant to Rule 411 promulgated under the Securities
Act and Rule 24 of the Commission's Rules of Practice. The location of each
document, so incorporated by reference, is indicated by footnote (the number in
parentheses).
3.1(1) Amended and Restated Certificate of Incorporation of the Company.
3.2(2) Amended and Restated By-Laws of the Company.
4.1(3) Certificate of the Voting Powers, Preferences and other designated
attributes of the Series A Convertible Preferred Stock of the
Company.
4.2(4) Form of Series 1993 Stock Right.
4.3(3) Indenture relating to the Senior Notes Due 2003 of the Company.
4.4(5) First Supplemental Indenture dated as of January 1, 1995 to the
Senior Note Indenture.
4.5(5) Second Supplemental Indenture dated as of August 1, 1995 to the
Senior Note Indenture.
4.6(6) Third Supplemental Indenture dated as of January 15, 1996 to the
Senior Note Indenture.
4.7(7) Series 1993 Warrant Agreement dated October 4, 1993 between the
Company and Chemical Bank, as warrant agent.
24
<PAGE>
4.8(8) Rights Agreement dated as of August 16, 1994 between the Company and
Chemical Bank, as Rights Agent.
4.9(8) Form of Certificate of the Voting Powers, Preferences and other
designated attributes of Series B Participating Cumulative Preferred
Stock of the Company (which is attached as Exhibit A to the Rights
Agreement incorporated by reference as Exhibit 4.8 hereto).
4.10(8) Form of Right Certificate (which is attached as Exhibit B to the
Rights Agreement incorporated by reference as Exhibit 4.8 hereto).
10.1(5) Credit Agreement dated as of August 21, 1995 among Hills Stores
Company, Hills Department Store Company, the Lenders named therein,
Chemical Bank as Administrative Agent and Fronting Bank, and NatWest
Bank, N.A., as Managing Agent.
10.2 First Amendment dated as of December 7, 1995 to the Credit Agreement.
10.3 Second Amendment and Consent dated as of January 12, 1996 to the
Credit Agreement.
10.4(1)* Form of individual Employment Agreements dated September 30, 1994
with, respectively, Messrs. Bozic, Reen, Samuto, Smailes and
Stevenish, accompanied by Schedule A from each individual agreement
setting forth the office, term, compensation, etc., applicable to
each such person.
10.5(5)* Employment Agreement made as of July 6, 1995 with E. Jackson Smailes.
10.6(5)* Employment Agreement made as of July 6, 1995 with William K. Friend.
10.7(9)* Employment Agreement made as of August 16, 1995 with James E. Feldt.
10.8(9)* Resolution adopted by the Board of Directors of the Company relating
to the consultant compensation of Chaim Y. Edelstein, a director.
10.9 * Employment Agreement made as of February 7, 1996 with Gregory K.
Raven.
10.10 * Consulting Agreement made as of February 8, 1996 with Chaim Y.
Edelstein.
10.11(4)* 1993 Incentive and Nonqualified Stock Option Plan.
10.12 * 1996 Directors Stock Option Plan.
10.13 * Consulting Agreement dated December 26, 1995 with Samuel L. Katz.
11.1 Computation of earnings per share.
16(10) Letter re: change in certifying accountant.
21 Subsidiaries.
23.1 Consent of Coopers & Lybrand L.L.P.
23.2 Consent of Deloitte & Touche LLP.
24 Powers of Attorney of directors and officers of the Company.
25
<PAGE>
27 Financial Data Schedule.
__________________________
* Executive Compensation Plans and Arrangements.
1. Incorporated by reference from the Annual Report on Form 10-K of the
Company for the fiscal year ended January 28, 1995.
2. Incorporated by reference from the Report on Form 8-K of the Company
dated January 18, 1996.
3. Incorporated by reference from the Form 8-A of the Company filed on
October 5, 1993.
4. Incorporated by reference from the Annual Report on Form 10-K of the
Company for the fiscal year ended January 29, 1994.
5. Incorporated by reference from the Report on Form 10-Q of the Company
for the quarter ended July 29, 1995.
6. Incorporated by reference from the Report on Form 8-K of the Company
dated January 15, 1996.
7. Incorporated by reference from the Report on Form 8-K of the Company
dated October 4, 1993.
8. Incorporated by reference from the Report on Form 8-K of the Company
dated August 23, 1994.
9. Incorporated by reference from the Report on Form 10-Q of the Company
for the quarter ended October 28, 1995.
10. Incorporated by reference from the Report on Form 8-K of the Company
dated November 8, 1995.
(b) Reports on Form 8-K:
1. A report on Form 8-K dated November 8, 1995 was filed by the Company,
stating that a change in the Company's independent certifying accountants had
occurred due to the resignation of Coopers & Lybrand L.L.P. The report noted
Coopers & Lybrand L.L.P. did not issue any adverse or qualified opinions on the
Company's financial statements for the preceding two fiscal years, nor did any
disagreement arise prior to the resignation of Coopers & Lybrand L.L.P. which,
if not resolved, would have required a comment in connection with its report.
The Company also reported it has retained Deloitte & Touche LLP as its new
independent certifying accountants.
2. A report on Form 8-K dated January 15, 1996 was filed by the Company,
stating that the Company and the Trustee under the Senior Note Indenture
executed the Third Supplemental Indenture which provides for (A) periodic
increases in the interest rate on the Senior Notes, (B) the option of the
Company to further defer to July 8, 1998, upon payment of a fee, its obligation
to offer to redeem the Senior Notes, (C) a modification of the redemption offer
obligation provision in respect to any future change in control event, (D) a
modification of the Indenture's definition of "Consolidated Fixed Charge
Coverage Ratio," and (E) further limitations upon the Company's ability to make
payments with respect to its capital stock.
26
<PAGE>
3. A report on Form 8-K dated January 18, 1996 was filed by the Company,
stating that two amendments were made to the By-Laws of the Company concerning
the nomination of persons for election to the Board of Directors of the Company
and the presentation of business to be brought before the annual meeting of
stockholders.
27
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 13 and 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the Town of Canton,
Commonwealth of Massachusetts, on April 9, 1996.
HILLS STORES COMPANY
By: /s/William K. Friend
-----------------------
William K. Friend
Vice President - Secretary
<TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons in the capacities indicated in
which they act for the Registrant and on the date indicated.
<S> <C> <C>
* Chairman of the Board of the
- ------------------ Company and Hills Department
Chaim Y. Edelstein Store Company April 9, 1996
* Director, President and Chief
- ------------------ Executive Officer of the Company
Gregory K. Raven and Hills Department Store Company
(Principal Executive Officer and
Principal Financial Officer) April 9, 1996
* Director of the Company and
- ------------------ Hills Department Store Company April 9, 1996
Mark B. Dickstein
* Director of the Company and
- ------------------ Hills Department Store Company April 9, 1996
Stanton J. Bluestone
* Director of the Company and
- ------------------ Hills Department Store Company April 9, 1996
Samuel L. Katz
* Director of the Company and
- ------------------ Hills Department Store Company April 9, 1996
John W. Burden
* Director of the Company and
- ------------------ Hills Department Store Company April 9, 1996
Alan S. Cooper
* Vice President-Controller of the
- ------------------ Company and Hills Department Store
Kim D. Ahlholm Company (Principal Accounting
Officer) April 9, 1996
*By: /s/ William K. Friend
---------------------
William K. Friend
Attorney-In-Fact
</TABLE>
28
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
Hills Stores Company and Subsidiaries
We have audited the accompanying consolidated balance sheet of Hills Stores
Company and Subsidiaries as of February 3, 1996 and the related consolidated
statements of operations, common shareholders' equity, and cash flows for the
year then ended (the "1995 consolidated financial statements"). These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the 1995 consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of February 3,
1996 and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
March 14, 1996
(April 5, 1996 with respect to the
fifth paragraph of Note 8)
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Directors
of Hills Stores Company and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Hills Stores
Company and Subsidiaries as of January 28, 1995, and January 29, 1994, and the
related consolidated statements of operations, cash flows and common
shareholders' equity for the year ended January 28, 1995, the seventeen-week
period ended January 29, 1994, and the thirty-five week period ended October 2,
1993. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Hills Stores
Company and Subsidiaries as of January 28, 1995, and January 29, 1994, and the
consolidated results of its operations and its cash flows for the year ended
January 28, 1995, the seventeen-week period ended January 29, 1994 and the
thirty-five week period ended October 2, 1993 in conformity with generally
accepted accounting principles.
On October 4, 1993, the Company emerged from reorganization proceedings under
Chapter 11 of the U.S. Bankruptcy Code. As described in Note 1 to the
consolidated financial statements, the Company accounted for this reorganization
and adopted "fresh-start reporting" as of October 2, 1993. As a result, the
statement of operations for the year ended January 28, 1995, and for the
seventeen-week period ended January 29, 1994, are not comparable to the
Company's consolidated statements of operations for prior periods.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
March 10, 1995
F-2
<PAGE>
<TABLE>
HILLS STORES COMPANY AND SUBSIDIARIES
____________________________________________________________________________________________
CONSOLIDATED BALANCE SHEETS
<CAPTION>
February 3, January 28,
(dollars in thousands) 1996 1995
- --------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 18,058 $180,051
Trade receivables, less allowance
for doubtful accounts of $3,459 and $4,228 25,187 23,471
Inventories 331,697 313,851
Deferred tax asset (Note 17) 34,011 20,923
Other current assets 5,352 4,743
------- -------
Total current assets 414,305 543,039
Property and equipment, net (Note 4) 190,893 154,950
Property under capital leases, net (Note 9) 113,785 124,108
Beneficial lease rights, net (Note 3) 8,247 9,075
Other assets, net 15,746 6,380
Deferred tax asset (Note 17) 8,233 10,061
Reorganization value in excess of amounts allocable
to identifiable assets, net (Notes 3 and 5) 107,514 144,765
------- -------
$858,723 $992,378
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of capital leases (Note 9) $ 5,732 $ 6,121
Accounts payable, trade 82,631 82,943
Other accounts payable and accrued expenses (Note 6) 178,852 212,489
------- -------
Total current liabilities 267,215 301,553
Senior notes (Note 8) 160,000 160,000
Obligations under capital leases (Note 9) 118,776 124,508
Financing obligation - sale/leaseback (Note 10) 25,169 25,169
Other liabilities 8,264 10,263
Commitments and contingencies (Note 19) - -
Preferred stock, at mandatory redemption value (Note 12) 24,636 64,144
Common shareholders' equity (Notes 13 and 14):
Common stock, 50,000,000 shares of $0.01 par value
authorized, 9,982,842 and 10,804,784 shares issued and
outstanding 100 108
Additional paid-in capital 209,563 229,967
Retained earnings 45,000 76,666
------- -------
Total common shareholders' equity 254,663 306,741
------- -------
$858,723 $992,378
======= =======
</TABLE>
See Notes to Consolidated Financial Statements
F-3
<PAGE>
<TABLE>
HILLS STORES COMPANY AND SUBSIDIARIES
- --------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION> Successor Company
---------------------------------------------- Predecessor
Fiscal Year Fiscal Year Company
Ended Ended Seventeen Thirty-Five
February 3, January 28, Weeks Ended Weeks Ended
(in thousands, except per 1996 1995 January 29, October 2,
share amounts) (53 Weeks) (52 Weeks) 1994 1993
- --------------------------------------------------------------------------------------------------------
||
<S> <C> <C> <C> || <C>
Net sales $1,900,104 $1,872,021 $772,685 || $992,848
Cost of sales 1,384,421 1,340,221 549,651 || 710,299
Selling and administrative expenses 399,934 390,397 138,360 || 239,997
Depreciation and amortization 31,297 26,662 7,920 || 27,978
Amortization of reorganization ||
value in excess of amounts ||
allocable to identifiable assets 7,755 8,986 3,408 || -
Costs related to change in control 45,529 - - || -
--------- --------- ------- || -------
Operating earnings 31,168 105,755 73,346 || 14,574
||
Other income (expense): ||
Capital lease interest ( 14,066) ( 14,707) ( 5,029) || ( 10,284)
Other interest (Note 1) ( 35,431) ( 24,005) ( 8,112) || ( 3,364)
Other income, net 4,850 9,241 2,639 || 231
--------- ---------- ------- || -------
Total other expense ( 44,647) ( 29,471) ( 10,502) || ( 13,417)
--------- ---------- ------- || -------
( 13,479) 76,284 62,844 || 1,157
Reorganization items, net - - - || ( 9,242)
--------- ---------- ------- || -------
( 13,479) 76,284 62,844 || ( 8,085)
Income taxes (Note 17) ( 3,187) ( 35,853) ( 26,609) || -
--------- ---------- ------- || -------
( 16,666) 40,431 36,235 || ( 8,085)
Extraordinary gain on discharge ||
of prepetition debt (Notes 1 and 17) - - - || 258,239
--------- ---------- ------- || -------
Net earnings (loss) ( 16,666) 40,431 36,235 || 250,154
||
Preferred dividend requirements - - - || ( 1,662)
--------- ---------- ------- || -------
Net earnings (loss) applicable to ||
common shareholders ($ 16,666) $ 40,431 $ 36,235 || $248,492
========= ========== ======= || =======
Primary earnings (loss) per ||
common share (Note 18): ||
Earnings (loss) before ||
extraordinary items ($ 1.70) $ 2.87 $ 2.58 || ($ 0.49)
Extraordinary gain on discharge ||
of prepetition debt - - - || 13.07
--------- ---------- -------- || -------
Net earnings (loss) applicable to ||
common shareholders ($ 1.70) $ 2.87 $ 2.58 || $ 12.58
========= ========== ======== || =======
||
Fully-diluted earnings (loss) ||
per common share (Note 18): ||
Earnings (loss) before ||
extraordinary items ($ 1.66) $ 2.73 $ 2.45 || ($ 0.45)
Extraordinary gain on discharge ||
of prepetition debt - - - || 11.75
--------- ---------- -------- || -------
Net earnings (loss) applicable ||
to common shareholders ($ 1.66) $ 2.73 $ 2.45 || $ 11.30
========= ========== ======== || =======
</TABLE>
See Notes to Consolidated Financial Statements
F-4
<PAGE>
<TABLE>
HILLS STORES COMPANY AND SUBSIDIARIES
- -------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION> Successor Company
-------------------------------------------- Predecessor
Fiscal Year Fiscal Year Company
Ended Ended Seventeen Thirty-Five
February 3, January 28, Weeks Ended Weeks Ended
1996 1995 January 29, October 2,
(in thousands) (53 Weeks) (52 Weeks) 1994 1993
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES: ||
||
Net earnings (loss) ($ 16,666) $ 40,431 $ 36,235 || $250,154
Adjustments to reconcile net earnings (loss) ||
to net cash provided by (used for) operating ||
activities before reorganization items: ||
Depreciation and amortization 44,386 40,436 12,113 || 28,780
Gain on termination of pension plan - ( 4,479) - || -
Decrease in deferred tax assets ||
recognized through a reduction in ||
reorganization value in excess of ||
amounts allocable to identifiable assets 9,496 22,977 24,281 || -
Increase in deferred tax assets ( 11,260) ( 30,984) - || -
Decrease (increase) in accounts receivable ||
and other current assets ( 2,325) ( 199) 12,513 || ( 19,485)
Decrease (increase) in inventories ( 17,846) 12,614 81,736 || ( 141,704)
Increase (decrease) in accounts payable ||
and other accrued expenses ( 11,881) 43,044 ( 40,229) || 61,087
Other, net ( 1,908) 772 308 || 2,761
-------- -------- -------- || --------
Net cash provided by (used for) operating ||
activities before reorganization items ( 8,004) 124,612 126,957 || 181,593
Reorganization items: ||
Decrease in liabilities subject ||
to compromise - - - || ( 6,274)
Fresh-start revaluation - - - || 5,985
Extraordinary gain on discharge of ||
prepetition debt - - - || ( 258,239)
-------- -------- -------- || --------
Net cash provided by (used for) ||
operating activities ( 8,004) 124,612 126,957 || ( 76,935)
||
CASH FLOWS FROM INVESTING ACTIVITIES: ||
||
Capital expenditures ( 56,714) ( 38,458) ( 3,070) || ( 27,162)
||
CASH FLOWS FROM FINANCING ACTIVITIES: ||
||
Principal payments under capital ||
lease obligations ( 6,121) ( 5,529) ( 1,726) || ( 3,400)
Proceeds from sale/leaseback financing - 25,169 - || -
Cash distributions pursuant to the Plan ||
of Reorganization ( 5,297) ( 14,419) ( 85,153) || ( 5,165)
Shares repurchased per self-tender offer ( 75,000) - - || -
Deferred finance costs and ||
other financing activities ( 10,857) ( 1,373) ( 196) || ( 7,444)
-------- -------- -------- || --------
Net cash provided by (used for) ||
financing activities ( 97,275) 3,848 ( 87,075) || ( 16,009)
-------- -------- -------- || --------
Net increase (decrease) in cash and ||
cash equivalents ( 161,993) 90,002 36,812 || ( 120,106)
||
Cash and cash equivalents at ||
beginning of period 180,051 90,049 53,237 || 173,343
-------- -------- -------- || --------
Cash and cash equivalents at ||
end of period $ 18,058 $180,051 $ 90,049 || $ 53,237
======== ======== ======== || ========
</TABLE>
See Notes to Consolidated Financial Statements
F-5
<PAGE>
<TABLE>
HILLS STORES COMPANY AND SUBSIDIARIES
- -------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY
<CAPTION>
Common
Common Stock Additional Retained Treasury Stock Shareholders'
------------------ Paid-in Earnings -------------- Equity
(dollars in thousands) Shares Amount Capital (Deficit) Shares Amount (Deficit)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Predecessor Company balance
- January 30, 1993 19,784,078 $198 $ 65,215 ($248,492) 26,688 ($93) ($183,172)
Preferred stock dividend requirements - - - ( 1,662) - - ( 1,662)
Net earnings - - - 250,154 - - 250,154
Cancellation of Predecessor
Company common stock (19,784,078) ( 198) ( 65,215) - (26,688) 93 ( 65,320)
---------------------------------------------------------------------------
Predecessor Company balance
- October 2, 1993 - $ - $ - $ - - $ - $ -
===========================================================================
===================================================================================================================
Issuance of Successor Company
common stock - October 2, 1993 9,000,000 $ 90 $193,910 $ - - $ - $194,000
Net earnings - - - 36,235 - - 36,235
---------------------------------------------------------------------------
Successor Company balance
- January 29, 1994 9,000,000 90 193,910 36,235 - - 230,235
Conversion of Preferred Stock 1,792,805 18 35,838 - - - 35,856
Exercise of Stock Options 11,979 - 219 - - - 219
Net earnings - - - 40,431 - - 40,431
---------------------------------------------------------------------------
Successor Company balance
- January 28, 1995 10,804,784 108 229,967 76,666 - - 306,741
Retirement of
Common Stock (Note 20) ( 3,000,000) ( 30) ( 59,970) ( 15,000) - - ( 75,000)
Conversion of Preferred Stock 1,975,400 20 39,488 - - - 39,508
Exercise of Stock Options
and Warrants 4,387 - 80 - - - 80
Exchange for Stock Rights (Note 14) 198,271 2 ( 2) - - - -
Net loss - - - ( 16,666) - - ( 16,666)
--------------------------------------------------------------------------
Successor Company balance
- February 3, 1996 9,982,842 $100 $209,563 $45,000 - - $254,663
==========================================================================
</TABLE>
See Notes to Consolidated Financial Statements
F-6
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
_______________________________________________________________________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. REORGANIZATION
--------------
On October 4, 1993 (the "Effective Date"), Hills Stores Company (the "Company"
or the "Successor Company") and certain of its principal subsidiaries emerged
from reorganization proceedings under Chapter 11 of the United States
Bankruptcy Code ("Chapter 11"). The Company, its former parent, Hills
Department Stores, Inc. (the "Predecessor Company"), and the five principal
subsidiaries of the Company voluntarily filed petitions for reorganization
under Chapter 11 on February 4, 1991 (the "Filing Date"). The Predecessor
Company operated its business as a debtor-in-possession under Chapter 11 from
the Filing Date until October 4, 1993.
In accordance with the American Institute of Certified Public Accountants
("AICPA") Statement of Position 90-7: "Financial Reporting by Entities in
Reorganization under the Bankruptcy Code" ("SOP 90-7"), the Predecessor
Company's other interest expense excluded contractual interest of $40.4
million for the thirty-five weeks ended October 2, 1993.
Pursuant to SOP 90-7, the Successor Company adopted fresh-start reporting as
of October 2, 1993. Under fresh-start reporting, a new reporting entity is
created and recorded amounts of assets and liabilities are adjusted to reflect
their estimated fair values. Financial statements for the period prior to
October 2, 1993, have been designated as those of the Predecessor Company.
Black lines have been drawn to separate the Successor Company financial
statements from the Predecessor Company financial statements to signify that
they are those of a new reporting entity and have been prepared on a basis not
comparable to prior periods.
The Plan of Reorganization (the "POR") provided for the Predecessor Company to
be dissolved and the Company to succeed to and assume the Predecessor Company's
former status as a holding company by transferring to Hills Department Store
Company, a newly formed operating subsidiary of the Company, all of the assets,
property and interest of the Company as of the Effective Date. Prepetition
claims and interests were cancelled in exchange for cash, senior notes,
securities, warrants and rights which were less in value than the value of the
allowed claims on and interests in the Predecessor Company and its
subsidiaries; accordingly, the Predecessor Company recorded an extraordinary
gain of $258.2 million related to the discharge of prepetition liabilities in
the thirty-five week period ended October 2, 1993. The Consolidated Financial
Statements presume full issuance of all common stock, preferred stock, stock
rights and senior notes in accordance with the POR.
2. PRO FORMA COMBINING STATEMENTS OF OPERATIONS
--------------------------------------------
The following unaudited Pro Forma Combining Statements of Operations present
the pro forma combined results of the operations of the Successor and
Predecessor companies for the fifty-two weeks ended January 29, 1994 and have
been adjusted to reflect: the implementation of fresh-start reporting as of
January 31, 1993, elimination of the effects of non-recurring transactions
resulting from the reorganization included in the results of the Predecessor
Company, and payment to creditors pursuant to the POR as of January 31, 1993.
The following information should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations.
F-7
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
_______________________________________________________________________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
2. PRO FORMA COMBINING STATEMENTS OF OPERATIONS (CONTINUED)
--------------------------------------------------------
PRO FORMA COMBINED FIFTY-TWO WEEKS ENDED JANUARY 29, 1994 (UNAUDITED)
(in thousands, except per share amounts)
<CAPTION>
Successor Predecessor Pro Forma
Company Company Combined
Seventeen Thirty-five Fiscal Year
Weeks Ended Weeks Ended Ended
January 29, October 2, Pro Forma January 29,
1994 1993 Adjustments 1994
------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $772,685 $992,848 $ - $1,765,533
Cost of sales 549,651 710,299 - 1,259,950
Selling and administrative expenses 138,360 239,997 - 378,357
Depreciation and amortization 11,328 27,978 ( 4,545) (a) 34,761
------------------------------------------------------------
Operating earnings 73,346 14,574 4,545 92,465
Capital lease interest ( 5,029) ( 10,284) 172 (b) ( 15,141)
Other interest ( 8,112) ( 3,364) ( 11,662) (c) ( 23,138)
Other income, net 2,639 231 822 (d) 3,692
------------------------------------------------------------
62,844 1,157 ( 6,123) 57,878
Reorganization items:
Professional fees - ( 6,045) 6,045 (e) -
Fresh-start revaluation - ( 5,985) 5,985 (e) -
Interest income - 2,788 ( 2,788) (e) -
------------------------------------------------------------
Earnings (loss) before income taxes
and extraordinary gain 62,844 ( 8,085) 3,119 57,878
Income taxes 26,609 - 1,228 (f) 27,837
------------------------------------------------------------
36,235 ( 8,085) 1,891 30,041
Extraordinary gain on discharge of
prepetition debt - 258,239 ( 258,239) (e) -
------------------------------------------------------------
Net earnings 36,235 250,154 ( 256,348) 30,041
Preferred dividend requirements - ( 1,662) 1,662 (e) -
------------------------------------------------------------
Net earnings applicable to
common shareholders $ 36,235 $248,492 ($254,686) $ 30,041
============================================================
Primary earnings per share
applicable to common
shareholders $ 2.58 (g) $ 2.14 (g)
========= =========
Fully-diluted earnings per share
applicable to common
shareholders $ 2.45 (g) $ 2.03 (g)
========= =========
</TABLE>
F-8
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
_______________________________________________________________________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. PRO FORMA COMBINING STATEMENTS OF OPERATIONS (CONTINUED)
--------------------------------------------------------
(a) Reflects the impact of the revaluation and/or the change in the related
estimated remaining useful lives of property and equipment, property under
capital leases and beneficial lease rights in connection with fresh-start
reporting, the pro forma twelve month amortization of the Successor
Company's reorganization value in excess of amounts allocable to
identifiable assets and the elimination of the Predecessor Company's
goodwill amortization.
(b) Reflects the impact on interest expense due to the revaluation of capital
lease obligations.
(c) Reflects interest expense on the senior notes, the revolving credit facility
based on estimated cash requirements and the amortization of deferred
financing costs related to securing the revolving credit facility.
(d) Reflects pro forma interest income after taking into consideration
distributions in accordance with the POR.
(e) Reflects elimination of reorganization items, gain on debt discharge and
preferred dividend requirements.
(f) Reflects the income tax effect of the pro forma adjustments.
(g) Pro forma primary and fully-diluted earnings per share were calculated
based on an estimated fifty-two week weighted average shares outstanding
for the period ended January 29, 1994 of 14,056,470 and 14,794,492,
respectively.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
BASIS OF REPORTING
The Company operates, through its wholly-owned subsidiary Hills Department
Store Company ("HDSC"), a chain of 164 discount department stores located in
the Mid-Western and Mid-Atlantic regions of the United States. The consolidated
financial statements since October 3, 1993, include the accounts of the
Successor Company and its wholly-owned subsidiaries, and, through the period
ended October 2, 1993 the accounts of the Predecessor Company and its
wholly-owned subsidiaries. All significant intercompany transactions and
balances have been eliminated. Certain Predecessor Company amounts were
reclassified to conform to the Successor Company presentation. The Company's
fiscal year ends on the Saturday closest to January 31. For financial
reporting purposes, fiscal 1993 has been segregated into two periods: the
Successor Company seventeen weeks ended January 29, 1994 and the Predecessor
Company thirty-five weeks ended October 2, 1993. Fiscal 1995 was a fifty-three
week year, fiscal years 1994 and 1993 were fifty-two week years.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash and highly liquid investments with
maturities of three months or less from the date of purchase and whose cost
approximates market value due to the short maturity of the investments.
F-9
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
_______________________________________________________________________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
------------------------------------------------------
INVENTORIES
Inventories are valued using the retail method on the lower of last-in,
first-out (LIFO) cost or market basis. In connection with fresh-start
reporting, a new LIFO base layer was established based on inventory levels as
of October 2, 1993. Since October 1993, LIFO cost has exceeded the cost of
inventory on a first-in, first-out basis, accordingly, there has been no LIFO
charge since emergence from Chapter 11.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization are provided on a straight-line basis over the
estimated useful lives of the related assets, which is twenty-seven and half
years for buildings and range from five to eight years for machinery, furniture
and fixtures. Amortization of leasehold improvements is provided on a
straight-line basis over the shorter of the lease term, considering renewal
options that are likely to be exercised, or the estimated useful life of the
related asset. Leasehold improvements are amortized principally over a
fifteen year period.
DEFERRED FINANCING COSTS
Net deferred financing costs of $11.1 million at February 3, 1996 and $3.4
million at January 28, 1995 are included in other assets and are being
amortized on a straight-line basis over the estimated term of the related debt.
Accumulated amortization of deferred financing costs was $2.8 million at
February 3, 1996 and $5.5 million at January 28, 1995.
INTANGIBLE ASSETS
Beneficial lease rights are amortized using the straight-line method over the
terms of the related leases. Accumulated amortization of beneficial lease
rights was $1.9 million at February 3, 1996 and $1.1 million at January 28,
1995.
Reorganization value in excess of amounts allocable to identifiable assets is
being amortized over twenty years on a straight-line basis. Accumulated
amortization was $20.1 million at February 3, 1996 and $12.4 million at
January 28, 1995 (See Notes 5 and 17).
Management plans to formally adopt Statement of Financial Accounting Standards
No. 121: "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of "("FAS 121") in fiscal 1996. The Company has not yet
determined the effect of adopting FAS 121.
PREOPENING COSTS
Preopening costs consist of direct costs of opening a store and are charged to
operations within the fiscal year that a new store opens.
F-10
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
_______________________________________________________________________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
------------------------------------------------------
INTEREST CAPITALIZATION
The Company's policy is to capitalize interest incurred in connection with the
construction of new stores. In fiscal 1995, the Company capitalized $452,000
of such interest.
USE OF MANAGEMENT'S ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Significant estimates used in preparation of the consolidated financial
statements include income tax liabilities (primarily those associated with the
Company's emergence from bankruptcy), self-insurance reserves for worker's
compensation and general liabilities, and the estimated useful life of
intangible assets.
4. PROPERTY AND EQUIPMENT
----------------------
<TABLE>
The components of property and equipment are listed below (in thousands):
<CAPTION>
February 3, January 28,
1996 1995
------------ -----------
<S> <C> <C>
Land $ 3,430 $ 3,430
Buildings 17,292 16,193
Leasehold improvements 50,899 40,401
Machinery, furniture and fixtures 156,658 111,280
Improvements in progress 2,919 3,430
-------- --------
231,198 174,734
Accumulated depreciation and amortization ( 40,305) ( 19,784)
-------- --------
$190,893 $154,950
======== ========
</TABLE>
F-11
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
_______________________________________________________________________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. REORGANIZATION VALUE IN EXCESS OF AMOUNTS ALLOCABLE TO IDENTIFIABLE ASSETS
--------------------------------------------------------------------------
<TABLE>
The activity for reorganization value in excess of amounts allocable to
identifiable assets is presented below (in thousands):
<CAPTION>
February 3, January 28,
1996 1995
------------ -----------
<S> <C> <C>
Beginning balance $144,765 $176,728
Amortization ( 7,755) ( 8,986)
Tax benefit applied to reduce
reorganization value in excess of
amounts allocable to identifiable assets ( 9,496) ( 22,977)
Reversal of liabilities established
in fresh-start (see Note 6) ( 20,000) -
-------- --------
Ending balance $107,514 $144,765
======== ========
</TABLE>
6. OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES
-------------------------------------------
<TABLE>
Significant components of other accounts payable and accrued expenses are
presented below (in thousands):
<CAPTION>
February 3, January 28,
1996 1995
----------- -----------
<S> <C> <C>
Accrued payroll and related costs $ 15,289 $ 27,193
Self-insurance reserves 28,083 26,961
Accrued Chapter 11 and related
reorganization costs 11,316 31,417
Accrued distribution payable
pursuant to the POR 7,672 11,482
Income taxes payable - 20,895
Other 116,492 94,541
-------- --------
$178,852 $212,489
======== ========
</TABLE>
In the fourth quarter of fiscal 1995, the Company determined that $20.0 million
of liabilities established in fresh-start accounting for the purpose of
relocating certain operations and facilities were no longer required, and,
accordingly, these liabilities were reduced with a corresponding reduction in
"Reorganization value in excess of amounts allocable to identifiable assets."
F-12
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
_______________________________________________________________________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. REVOLVING CREDIT AGREEMENT
--------------------------
On August 21, 1995, in connection with the 1995 Change in Control (see Note 21),
HDSC 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 April 30, 1998 (or May 1, 1996 if the Company
has not exercised its option by April 30, 1996 to extend by one year the Senior
Note redemption offer or May 1, 1997 if the Company has not exercised its
second option to extend the Senior Note redemption offer an additional year).
If the Company's Senior Notes (see Note 8) are refinanced on terms acceptable
to the lenders 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) the Chemical
Bank's Prime Rate plus 1.75% (10.0% at February 3, 1996), (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
(the "Clean-Up Period"), HDSC shall have no direct borrowings outstanding under
the Facility.
At February 3, 1996, the Company has maintained a Clean-Up Period of at least
thirty consecutive days, had no direct borrowings under the Facility, and
outstanding letters of credit totalled $31.1 million.
8. SENIOR NOTES
------------
Pursuant to the POR, the Company is authorized to issue $160 million of
unsecured redeemable 10.25% Senior Notes ("Senior Notes") due September 30,
2003. As of February 3, 1996, a total of approximately $2.5 million of Senior
Notes remain to be issued pending resolution of prepetition claims and
interests. Interest is payable semi-annually. The unsecured Senior Notes may
be redeemed, at the option of the Company, at prices ranging from 104% at
October 1, 1995, and declining by 1% on October 1 of each year to 100% at
October 1, 1999 and thereafter. Principal amounts of $25 million are subject
to mandatory redemption on March 31, 2002 and on March 31, 2003. The Senior
Notes contain covenants which management believes are no more restrictive than
the terms of the Facility.
F-13
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
_______________________________________________________________________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. SENIOR NOTES (CONTINUED)
-----------------------
The Senior Note Indenture (the "Indenture") was amended to permit the Company
to enter into the self-tender as described in Note 20. In connection with
obtaining this amendment, the holders of the Senior Notes were paid $2.2
million in the fourth quarter of fiscal 1994, which was included in other
expense.
Under the terms of 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 Company's obligation to offer to redeem the Senior
Notes until April 3, 1996, and, at the option of the Company, by giving notice
on or before April 19, 1996 and upon the payment of an additional fee of $7.5
million, to further defer the offer to redeem obligation to April 5, 1997. In
addition, the put price under the Indenture would be increased to 102% from 101%
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
revolving credit facility from $225 million to $300 million. In connection with
obtaining this amendment, the consenting holders of the Senior Notes were paid
$6.0 million in August 1995, which has been included in costs related to change
in control in the Consolidated Statements of Operations.
Effective January 15, 1996, the Indenture was again amended to permit the
Company (upon payment to persons who then hold Senior Notes of a fee equal to
5.5% of the principal amount of such Senior Notes) to defer the redemption of
the Senior Notes until July 8, 1998. The amendment also eliminates the
obligation of the Company to offer to redeem the Senior Notes upon any future
Change in Control Event, as defined, if such Change in Control Event results
in an increase of at least $40 million in the capital of the Company and at
least 50% of the Company's net proceeds therefrom are used to repurchase or
redeem Senior Notes. In addition, the amendment modifies the definition of
"Consolidated Fixed Charge Coverage Ratio" in order to exclude, for the
purposes of determining the amount of indebtedness that the Company is
permitted to incur, the effect of up to $43.3 million in non-recurring costs
relating to the Company's change in control in July 1995. The amendment also
imposes limitations upon the Company's ability to make payments with respect
to its capital stock and increases the interest rate on the Senior Notes to
10.75% from January 13, 1996 through March 31, 1997, to 11.25% from April 1,
1997 to March 31, 1998 and thereafter by 1.00% on April 1 of each succeeding
year.
The Company is proposing to offer in April 1996 $175.0 million principal amount
of a new series of senior notes due 2003 (the "New Notes"). If the Company
proceeds with the offering of the New Notes, it will offer to redeem the
outstanding Senior Notes, using substantially all of the proceeds from the
issuance of the New Notes. If the Company does not proceed with the offering
of New Notes, it will pay the $7.5 million fee, as described above, to defer
the redemption offer of the Senior Notes until April 5, 1997. As a result of
the Company's intention to refinance the Senior Notes or to defer redemption of
the Senior Notes until after fiscal 1996, the Company has classified the Senior
Notes as long-term.
The estimated fair value of the Senior Notes of $152.8 million at February 3,
F-14
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
_______________________________________________________________________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. SENIOR NOTES (CONTINUED)
-----------------------
1996 and $147.3 million at January 28, 1995 was based on quoted market prices
in effect at that time.
In the fourth quarter of fiscal 1994, the Company determined that due to
changing market conditions $9.6 million of liabilities included in "Other
accounts payable and accrued expenses" related to a potential refinancing of
the Senior Notes were no longer required, and in accordance with AICPA Practice
Bulletin 11: "Accounting for Preconfirmation Contingencies in Fresh-Start
Reporting," these liabilities were reversed and included in other income.
9. LEASE COMMITMENTS
-----------------
The Company's operations are conducted primarily in leased properties which
consist principally of retail outlets. Leases are generally for periods between
twenty to thirty years plus renewal options and generally include fixed rentals
and rentals based on sales in excess of predetermined levels.
<TABLE>
The composition of property under capital leases, net of accumulated
amortization, is shown below (in thousands):
<CAPTION>
February 3, January 28,
1996 1995
----------- -----------
<S> <C> <C>
Retail outlets $131,408 $131,408
Other 6,476 6,476
-------- --------
137,884 137,884
Accumulated amortization ( 24,099) ( 13,776)
-------- --------
Property under capital leases, net $113,785 $124,108
======== ========
</TABLE>
<TABLE>
Consolidated rental expense under operating leases and rental expense based on
sales in excess of predetermined levels under capital leases are presented
below (in thousands):
<CAPTION>
Successor Company Predecessor
------------------------------------------- Company
Fiscal Year Fiscal Year Seventeen Thirty-five
Ended Ended Weeks Ended Weeks Ended
February 3, January 28, January 29, October 2,
1996 1995 1994 1993
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Capital leases: ||
Rental based on sales $ 1,251 $ 1,577 $ 574 || $ 843
Operating leases: ||
Minimum facility rentals 26,133 23,519 8,223 || 16,501
Equipment and other rentals 17,706 17,757 6,795 || 10,820
Rental based on sales 1,244 1,404 481 || 702
------- ------- ------- || -------
Consolidated rental ||
expense $46,334 $44,257 $16,073 || $28,866
======= ======= ======= || =======
</TABLE>
F-15
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
_______________________________________________________________________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. LEASE COMMITMENTS (CONTINUED)
----------------------------
<TABLE>
Minimum future lease commitments under noncancelable leases in effect at
February 3, 1996 are listed below (in thousands):
<CAPTION>
Capital Operating
Fiscal years: Leases Leases Total
-----------------------------------------
<S> <C> <C> <C>
1996 $ 19,111 $ 37,301 $ 56,412
1997 17,398 32,437 49,835
1998 16,971 29,987 46,958
1999 16,797 28,804 45,601
2000 16,797 27,690 44,487
Thereafter 179,810 169,634 349,444
-----------------------------------------
Minimum rental commitments 266,884 $325,853 $592,737
========================
Less amount representing
interest ( 142,376)
--------
Present value of net minimum
lease payments 124,508
Current portion ( 5,732)
--------
$118,776
========
</TABLE>
10. SALE/LEASEBACK FINANCING
------------------------
During 1994, the Company obtained $25.2 million of financing, which includes
transaction costs, for certain of its real properties through sale/leaseback
arrangements. These transactions were accounted for as financings under which
the property remains on the Company's books and continues to be depreciated.
The related property is included in Property and equipment and has a net book
value of $14.8 million at February 3, 1996. The leases, which have terms of
ten years, require minimum annual rental payments of $4.3 million in 1996,
$4.6 million in 1997, $5.2 million in 1998, $4.5 million in 1999, $4.6 million
in 2000, $4.7 million on 2001 and a total of $13.6 million thereafter. The
lease terms also include options to purchase some or all of the properties
either at the end of the initial lease term or renewal periods at an amount not
greater than the then current fair market value of the properties.
11. EMPLOYEE BENEFITS
-----------------
PENSION PLANS
The Company's Board of Directors authorized the termination, effective April 30,
1994, of the Company's pension plan. In connection with the termination of the
pension plan, a participant's vested benefits were calculated based on all
F-16
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
_______________________________________________________________________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. EMPLOYEE BENEFITS (CONTINUED)
----------------------------
credited service, pension earnings, and contributions up to April 30, 1994.
There was no asset reversion to the Company as plan assets in excess of benefit
obligations, as adjusted for the termination of the plan, were allocated to
participants. The settlement of the vested benefit obligation by the purchase
of nonparticipating annuity contracts for, or the optional lump sum rollover to
the 401(k) plan account for, each covered employee was completed in fiscal 1995.
In the first quarter of fiscal 1994, the Company recorded a $4.5 million gain,
which was included in selling and administrative expenses, related to the
curtailment and settlement of the pension plan and the elimination of the
related pension obligation.
Net pension expense included in the results of operations was $830,000 for the
year ended January 28, 1995, $964,000 for the seventeen weeks ended January 29,
1994, and $1,645,000 for the thirty-five weeks ended October 2, 1993. The
discount rate used in determining the actuarial present value of projected
benefit obligations was 7.0% and the expected long-term rate of return on plan
assets used in determining net pension expense was 8.0%.
In fiscal 1994, the Company adopted an expanded defined contribution 401(k)
savings plan (the "401(k)") for employees meeting certain employment conditions.
In addition to permitting employee contributions, the 401(k) plan provides for
company matching contributions. Company matching contributions were $3.9
million in fiscal 1995 and $3.0 million in fiscal 1994.
OTHER
The Company accounts for postretirement benefits (such as health care) in
accordance with Statement of Financial Accounting Standards No. 106: "Employers'
Accounting for Postretirement Benefits Other Than Pensions" ("FAS 106"). This
statement requires accrual of postretirement benefits during the years an
employee provides services. Under FAS 106, the Company recognized expenses of
$0.2 million in fiscal 1995, $0.4 million in fiscal 1994, and $0.3 million in
fiscal 1993. The Company, consistent with the practice of the Predecessor
Company, continues to fund benefit costs principally on a pay-as-you-go basis,
with the retiree paying a portion of the costs. The status of the plan is as
follows (in thousands):
<TABLE>
<CAPTION> February 3, January 28,
1996 1995
----------- -----------
<S> <C> <C>
Accumulated postretirement
benefit obligation for:
Retirees $ 573 $ 789
Active employees 1,904 2,126
------- -------
2,477 2,915
Plan assets at fair value - -
------- -------
Funded status 2,477 2,915
Unrecognized gain 1,294 959
------ ------
Accrued postretirement benefit cost $ 3,771 $ 3,874
======= =======
</TABLE>
F-17
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
_______________________________________________________________________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. EMPLOYEE BENEFITS (CONTINUED)
-----------------------------
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation was 13.0% in fiscal 1995 (10.0% for Medicare
eligible retirees); grading down to 5.0% (5.0% for Medicare eligible retirees)
by fiscal 2002 and remaining at that level thereafter. A one percentage point
increase in the assumed health care cost trend rate would increase the
accumulated postretirement benefit obligation at the end of fiscal 1995 by
$421,000 (or by 17%) and the service and interest cost by $36,400 (or by 12%).
The assumed discount rate used in determining the accumulated postretirement
benefit obligation was 8.5% in fiscal 1995 and 7% in fiscal 1994.
12. HILLS STORES SERIES A CONVERTIBLE PREFERRED STOCK
-------------------------------------------------
The Company is authorized to issue 15,000,000 shares of preferred stock, par
value of $0.10 per share. Pursuant to the POR, a total of 5,000,000 of such
shares are authorized to be issued as payment and cancellation of prepetition
liabilities and interests and designated as Hills Stores Series A Convertible
Preferred Stock (the "Preferred Stock"). As of February 3, 1996, a total of
55,331 shares of the 5,000,000 shares of the Preferred Stock remain to be
issued pending resolution of prepetition claims and interests. The Company may
redeem, at its option prior to October 4, 2008, all or part of the outstanding
shares of the Preferred Stock at $20 per share; and in any case shall redeem
all outstanding shares of the Preferred Stock on October 4, 2008 at $20 per
share. The Preferred Stock is convertible by the holders, at any time, into
Hills Stores Common Stock ("Common Stock") at a rate of one share of Common
Stock for each share of the Preferred Stock, subject to antidilution
adjustments. Each holder of the Preferred Stock has one vote per share in the
same class as the holders of Common Stock. The holders of the Preferred Stock
are entitled to dividends when and if declared by the Board of Directors;
however, dividend payments are restricted under the terms of the Facility and
Senior Notes. The Company does not expect to pay dividends in the foreseeable
future.
Upon dissolution or liquidation of the Company, the holders of the Preferred
Stock will be entitled to receive $20 per share out of the assets of the
Company available for distribution to shareholders, in preference to the
holders of Common Stock and any other class or series of capital stock of the
Company that is junior to the Preferred Stock.
13. HILLS STORES COMMON STOCK
-------------------------
Pursuant to the POR, a total of 9,000,000 shares of Common Stock are authorized
to be issued as payment for prepetition liabilities and cancellation of old
preferred stock interests. As of February 3, 1996, a total of 64,233 shares of
the 9,000,000 shares of Common Stock remain to be issued pending resolution of
prepetition claims and interests. Each holder of Common Stock has one vote per
share and is entitled to dividends when and if declared by the Board of
Directors; however, dividend payments are restricted under the terms of the
Facility and Senior Notes. The Company does not expect to pay dividends in the
foreseeable future.
F-18
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
_______________________________________________________________________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. HILLS STORES COMMON STOCK (CONTINUED)
------------------------------------
STOCK OPTION PLAN
As of the Effective Date, the Company established an incentive and nonqualified
stock option plan (the "Option Plan") providing for the grant of nonqualified
stock options or incentive stock options. The options are granted at prices
greater than or equivalent to the market price of the Common Stock on the date
of each grant. The options are subject to a five year vesting schedule with
initial vesting beginning one year from the date of grant. A total of 1,053,763
shares of Common Stock were reserved for grants of options under the Option
Plan as of the Effective Date. The Option Plan was amended in fiscal 1995 to
allow participants, for a limited time, to exchange three existing options for
two new options with an exercise price of $12.00.
<TABLE>
Option activity for the period from October 3, 1993 to February 3, 1996 was
as follows:
<CAPTION>
Shares Price Range
---------- ---------------
<S> <C> <C>
Outstanding at October 3, 1993 - $ -
Granted 886,500 18.00-18.25
Cancelled ( 10,000) 18.25
----------
Outstanding at January 29, 1994 876,500 18.00-18.25
Granted 191,000 19.50
Exercised ( 11,979) 18.25
Cancelled ( 41,500) 18.25
----------
Outstanding at January 28, 1995 1,014,021 18.00-19.50
Granted 183,000 12.00-16.38
Exchanged November 4, 1995 ( 335,200) 18.00-19.50
Issued in Exchange
on November 4, 1995 223,464 12.00
Exercised ( 4,300) 18.25
Cancelled ( 683,521) 18.00-19.50
----------
Outstanding at February 3, 1996 397,464 $12.00-18.25
==========
Exercisable options at February 3, 1996 231,894
==========
</TABLE>
In January 1996, the Company adopted, subject to shareholder approval at the
Company's June 1996 annual meeting, a stock option plan for non-employee
members of the Board of Directors. The plan provides for an initial grant (in
January 1996) of 4,000 options to each non-employee member of the Board of
Directors with subsequent annual automatic grants of 2,000 options. All
options are granted at prices greater than or equivalent to the market price
F-19
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
_______________________________________________________________________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. HILLS STORES COMMON STOCK (CONTINUED)
-------------------------------------
STOCK OPTION PLAN (CONTINUED)
of the Common Stock on the date of each grant. The options are subject to a
three year vesting schedule with vesting beginning from the date of the grant.
A total of 250,000 shares of Common Stock are reserved for grants under the
plan.
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("FAS 123"). FAS 123 encourages, but does not require, the
recognition of compensation expense for the fair value of stock options and
other equity instruments issued to employees. If the fair value provisions of
FAS 123 are not adopted, the Company will be required to disclose the pro forma
amounts of net earnings and earnings per share that would have been reported
had these provisions been adopted. FAS 123 is required for the Company's
fiscal year beginning February 4, 1996. The Company is evaluating whether or
not it will adopt the recognition provisions of FAS 123 and has not yet
determined the effect of adopting these provisions.
14. SERIES 1993 STOCK RIGHTS
------------------------
Pursuant to the POR, Series 1993 Stock Rights (the "Stock Rights") were issued
as of the Effective Date under Stock Right Agreements. Each Stock Right
entitles the holder to acquire, at $0.01 per share, shares of Common Stock,
subject to antidilution adjustments, as determined pursuant to a formula which
is based on the Company's pro forma utilization of certain tax benefits as
defined in the Stock Right Agreements. As of the Effective Date, 700,000
shares of Common Stock were reserved for issuance upon exercise of the Stock
Rights. Shares under the Stock Right Agreements are not available for issuance
until vested. During 1995, the Company repurchased 693,949 of its 700,000
outstanding stock rights in exchange for 198,271 shares of newly issued common
stock. The aggregate par value of the newly issued common stock was
reclassified from additional paid-in capital to common stock.
15. SERIES 1993 WARRANTS
--------------------
Pursuant to the POR, Series 1993 Warrants (the "Warrants") were issued as of
the Effective Date. Each Warrant entitles the holder to purchase, subject to
antidilution adjustments, one share of Common Stock at $30 per share.
Initially, 432,990 shares of Common Stock were reserved for issuance upon
exercise of the Warrants. The Warrants are callable by the Company at $.01 per
Warrant at any time after October 4, 1998 if the average closing price of
Common Stock, subject to antidilution adjustments, for a period of thirty
consecutive trading days is equal to or greater than $35 per share. The
Warrants expire on October 4, 2000. During fiscal 1995, 87 warrants were
exercised.
F-20
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
_______________________________________________________________________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. RIGHTS AGREEMENT
----------------
Pursuant to a Rights Agreement adopted on August 16, 1994, the Company declared
a distribution of one purchase right (the "Right") for each share of Common
Stock and Preferred Stock then outstanding. Each Right would initially entitle
the holder to purchase, subject to adjustment, one one-thousandth share of the
Company's Series B Participating Cumulative Preferred Stock, consisting of
55,000 shares authorized, $.10 par value per share, at an exercise price of $75
per one one-thousandth share. Each share of Common Stock and Preferred Stock
issued after August 16, 1994 will also have one Right attached. The Rights
expire August 16, 2004 and, under certain conditions, may be redeemed by the
Company at a price of $.01 per Right. The Rights have no voting or dividend
privileges and are not currently separable from the capital stock. The Rights
would become exercisable if certain events occurred relating to a person or
group (the "Acquiring Person") acquiring or attempting to acquire 15% or more
of the outstanding shares of capital stock other than through a qualifying
tender offer. Upon the occurrence of such an event, each Right (except the
Rights beneficially owned by the Acquiring Person, which become null and void)
entitles its holder to purchase for $75 the economic equivalent of Common
Stock, or in certain circumstances, securities of the Acquiring Person, or its
affiliate, worth twice as much. After there is an Acquiring Person, the Rights
may be exchanged, at the election of the Company, for consideration per Right
consisting of one-half of the securities that would otherwise be issuable at
that time. The Rights Agreement was amended on October 20, 1995 to raise the
ownership threshhold to 20%.
17. INCOME TAXES
------------
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109: "Accounting for Income Taxes" ("FAS 109"). Under
FAS 109, deferred taxes are computed on the difference between the bases of
assets and liabilities for tax reporting purposes and their corresponding bases
for financial reporting purposes. Deferred tax assets, net of appropriate
valuation reserves, may be recorded.
F-21
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
_______________________________________________________________________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. INCOME TAXES (CONTINUED)
------------------------
<TABLE>
Temporary differences and carryforwards which give rise to significant deferred
tax assets and liabilities are as follows (in thousands):
<CAPTION>
February 3, 1996 January 28, 1995
Deferred Deferred Deferred Deferred
Tax Tax Tax Tax
Asset Liability Asset Liability
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
Net operating loss and
tax credit carryforwards $ 65,461 $ - $ 63,391 $ -
Capital lease obligations 51,584 - 54,393 -
Assets under capital leases - 47,141 - 51,679
Accrued expenses 33,281 - 30,683 -
Beneficial lease rights 18,423 - 19,693 -
Property and equipment - 19,942 - 17,257
Financing obligation-sale/
leaseback 10,428 - 10,480 -
Other 18,908 - 19,534 -
------- ------- ------- ------
Total deferred taxes 198,085 67,083 198,174 68,936
Valuation allowance ( 88,758) - ( 98,254) -
------- ------- ------- ------
Net deferred taxes $109,327 $ 67,083 $ 99,920 $68,936
======= ======= ======= ======
</TABLE>
The consummation of the POR resulted in a change in ownership for federal
income tax purposes. As a result, the Company's ability to utilize its net
operating loss and tax credit carryforwards is subject to an annual limitation
of $16.8 million. For the year ended February 3, 1996, the Company generated
a net operating loss for tax purposes of $5.1 million, which may be used without
limitation to offset taxable income in future years. Total deferred tax assets
as of February 3, 1996, include $88.8 million of deferred tax assets which arose
before the Company's emergence from bankruptcy and which have been fully
reserved. For financial reporting purposes, any reduction of the valuation
allowance related to Predecessor Company deferred tax assets will not be
credited to the tax provision, but instead will reduce reorganization value in
excess of amounts allocable to identifiable assets.
F-22
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
_______________________________________________________________________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. INCOME TAXES (CONTINUED)
------------------------
<TABLE>
The Company's net operating loss and tax credit carryforwards at February 3,
1996 expire as follows (in thousands):
<CAPTION>
Net Operating Tax
Losses Credits
----------------------------------
<S> <C> <C>
Fiscal years:
2000 $ - $ 413
2001 - 797
2002 - 664
2003 - 1,369
2004 329 2,196
2005 - 1,547
2006 60,901 949
2007 56,848 797
2008 10,954 944
2009 - -
2010 5,094 -
----------------------------------
$134,126 $ 9,676
==================================
</TABLE>
The income tax provision in each of the periods presented reflects an effective
tax rate that differs from the statutory federal income tax rate for those
periods.
For net earnings (loss) from operations before extraordinary items, the table
below reconciles the statutory federal income tax rate to the effective tax
rate.
<TABLE>
<CAPTION>
Predecessor
Successor Company Company
----------------- ---------
Fiscal Fiscal Seventeen Thirty-Five
Year Ended Year Ended Weeks Ended Weeks Ended
February 3, January 28, January 29, October 2,
1996 1995 1994 1993
------------------------------------------------------
<S> <C> <C> <C> ||
Statutory tax rate (35.0%) 35.0% 35.0% || (35.0%)
State and local income taxes, ||
net of federal tax benefit 3.7 6.4 6.7 || (6.5)
Goodwill 20.1 4.1 0.9 || 11.9
Targeted jobs credit ||
and other, net 0.7 1.5 (0.3) || 2.2
Reorganization fees - - - || 26.2
Loss producing no current ||
tax benefit - - - || 1.2
Change in control costs 34.2 - - || -
------- ------ ------ || -----
Effective tax rate 23.7% 47.0% 42.3% || -
======= ====== ====== || =====
</TABLE>
F-23
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
_______________________________________________________________________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. INCOME TAXES (CONTINUED)
------------------------
<TABLE>
The provision for income taxes consists of the following components
(in thousands):
<CAPTION>
Successor Company
-----------------
Fiscal Fiscal Seventeen
Year Ended Year Ended Weeks Ended
February 3, January 28, January 29,
1996 1995 1994
-------------------------------------------------
<S> <C> <C> <C>
Current provision:
Federal $ 227 $ 19,524 $ -
State and local 23 9,973 2,328
------ ------- -------
250 29,497 2,328
Deferred provision:
Federal ( 9,986) ( 23,393) -
State and local ( 1,274) ( 7,591) -
------ ------- -------
( 11,260) ( 30,984) -
Tax benefit applied to
reduce reorganization value
in excess of amounts allocable
to identifiable assets 14,197 37,340 24,281
------ ------- -------
Total taxes $ 3,187 $ 35,853 $ 26,609
====== ======= =======
</TABLE>
As stated in Note 1, the Company recorded an extraordinary gain of $258.2
million on the extinguishment of debt for financial reporting purposes in the
third quarter of fiscal 1993. Because the debt was discharged pursuant to the
Chapter 11 filing, the Company did not record any income tax expense on the
gain from the extinguishment of the debt in the period ended October 2, 1993.
The Internal Revenue Service is currently auditing the years of fiscal 1991,
1992, and 1993. The audit has not progressed to a stage where an
accurate estimate of its impact can be determined.
18. EARNINGS PER SHARE
------------------
Primary earnings per share of the Successor Company was computed based on the
weighted average number of common and common equivalent shares assumed to be
outstanding during each period. Such shares amounted to 9,809,675, 14,105,498
and 14,056,470 for fiscal 1995, fiscal 1994, and the seventeen weeks ended
January 29, 1994, respectively. If primary earnings per share were calculated
as if all conversions of preferred stock which occurred during the period took
place at the beginning of such period, the net loss per share would have been
F-24
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
_______________________________________________________________________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. EARNINGS PER SHARE (CONTINUED)
-----------------------------
$1.66 for fiscal 1995. Fully-diluted earnings per share for each period also
assumes, any shares of Preferred Stock actually converted in the period were
done so at the beginning of such period and, if the effect is dilutive, the
exercise of the Stock Rights. Such shares amounted to 10,029,442, 14,831,568
and 14,794,492 for fiscal 1995, fiscal 1994, and the seventeen weeks ended
January 29, 1994, respectively. Exercise of the Warrants is not assumed as
their exercise would be antidilutive. The weighted average number of shares
reflects all shares of common and preferred stock intended to be issued in
accordance with the POR.
Primary earnings per share of the Predecessor Company for the thirty-five weeks
ended October 2, 1993 was computed using the weighted average common and common
equivalent shares outstanding of 19,757,390. Fully-diluted earnings per share
for the period assumes the conversion of the 11% Convertible Junior Subordinated
Debentures. Fully-diluted weighted average common and common equivalent shares
amounted to 21,981,683.
19. COMMITMENTS AND CONTINGENCIES
-----------------------------
On September 11, 1995, the Company and HDSC filed a suit in the Court of
Chancery of the State of Delaware against the former members of the Board of
Directors (the "Former Directors") of the Company. That action seeks, among
other things, recovery of damages caused by the breach by the Former Directors
of their fiduciary duties to shareholders arising from the refusal of the Former
Directors to approve the July 5, 1995 change in control (see Note 21). On
October 10, 1995 the defendants filed a motion to dismiss this suit. That
motion is presently pending.
The Company and HDSC 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 in the breach of their fiduciary duties. On October 30, 1995,
Smith Barney, Inc. served a motion to dismiss this suit. That motion is
presently pending.
On August 7, 1995, in the Court of Chancery of the State of Delaware, Gayle
Dolowich, Ivan J. Dolowich and Joseph Weiss filed a class action lawsuit
against the seven new directors of the Company elected at the annual meeting,
Dickstein Partners Inc. and the Company. On November 3, 1995, the plaintiffs
amended their complaint to include a shareholders derivative cause of action
against the Former Directors for breach of their fiduciary duties to the
Company and its shareholders. In the amended complaint, the plaintiffs claim
that in connection with the effort by Dickstein Partners Inc. 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.
The derivative cause of action seeks damages against the Former Directors.
F-25
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
_______________________________________________________________________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. COMMITMENTS AND CONTINGENCIES (CONTINUED)
----------------------------------------
On January 19, 1996 in the same Delaware Chancery Court, Peter M. Fusco filed a
substantially similar class action and shareholder derivative suit against the
parties named in the above identified Dolowich suit. The plaintiff made the
same claims and seeks the same remedies as are made and sought in the Dolowich
suit. The Former Directors have filed motions to dismiss the derivative actions
in both the Dolowich and Fusco suits. These motions are presently pending.
The Company is also involved in various suits and claims in the ordinary course
of business. The Company is also actively resolving certain disputed
prepetition claims related to the POR. Management does not believe that the
disposition of such suits and claims will have a material adverse effect upon
the continuing operations and financial position of the Company.
20. 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
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.
21. CHANGE IN CONTROL
-----------------
On July 5, 1995, following a proxy contest in connection with the annual
meeting of shareholders held on June 23, 1995, nominees of Dickstein Partners
were certified as being elected to the Board of Directors. The Company
reimbursed Dickstein Partners for, or directly paid, approximately $1.9 million
in third-party fees and expenses incurred or committed to by Dickstein Partners
in connection with the proxy contest and the related acquisition proposal of
Dickstein Partners. This amount includes $1.0 million paid by the Company to
the financial advisor of Dickstein Partners, in respect of the advisor's
proposal to refinance the indebtedness of the Company accelerated as a result of
the election of the Dickstein Partners nominees. In its proxy solicitation
materials, Dickstein Partners declared its intention to seek reimbursement or
payment of such fees and expenses, upon the election of its nominees. These
costs are included in the Consolidated Statements of Operations in costs related
to change in control. Due to 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 (see Note 8) and on August 21, 1995, HDSC entered into a new $300 million
secured revolving credit facility (see Note 7).
In connection with the change in control, the Company recognized $45.5 million
in expense, including $31.0 million related to severance and retirement
F-26
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
_______________________________________________________________________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
21. CHANGE IN CONTROL (CONTINUED)
----------------------------
payments, including certain taxes attributable thereto, to six senior
executives, a consultant to the Company and approximately 20 associates of the
Company, $6.0 million paid to holders of the Senior Notes, and legal and other
miscellaneous change in control costs.
22. STATEMENTS OF CASH FLOWS
------------------------
<TABLE>
Supplemental disclosures of cash flow information are presented in the table
below:
<CAPTION>
Successor Company Predecessor
-------------------------------------------- Company
Fiscal Year Fiscal Year Seventeen Thirty-five
Ended Ended Weeks Ended Weeks Ended
February 3, January 28, January 29, October 2,
(in thousands) 1996 1995 1994 1993
------------------------------------------------------------
<S> <C> <C> <C> <C>
NONCASH INVESTING AND ||
FINANCING ACTIVITIES: ||
||
Issuance of senior notes $ - $ - $160,000 || $ -
Issuance of preferred stock - - 100,000 || -
Cancellation of preferred stock - - - || 33,143
Preferred stock conversions ||
to common stock 39,508 35,856 - || -
Issuance of common stock ||
and stock rights - - 194,000 || -
Cancellation of common stock - - - || 65,413
Capital lease obligations, net - - 1,450 || -
Preferred stock accretion - - - || 1,662
||
CASH PAID (RECEIVED): ||
||
Reorganization related ||
professional fees - - 6,618 || 2,407
Interest 38,655 34,731 5,662 || 12,074
Income taxes 17,877 8,562 2,848 || 1,317
Interest received on available ||
cash due to the Chapter 11 ||
proceedings - - - || ( 2,643)
</TABLE>
F-27
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
_______________________________________________________________________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
23. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
-------------------------------------------
<TABLE>
<CAPTION>
(in thousands, First Second Third Fourth
except per share amounts) Quarter Quarter Quarter(1) Quarter(1)(2)
----------------------------------------------------
FISCAL 1995
<S> <C> <C> <C> <C>
Net sales $362,862 $389,424 $448,033 $699,785
======== ======== ======== ========
Gross profit $101,310 $100,741 $124,694 $188,938
======== ======== ======== ========
Net earnings (loss) applicable to
common shareholders ($ 4,337) ($ 45,170) $ 22,441 $ 10,400
======== ======== ======== ========
Primary earnings (loss) per
share applicable to common
shareholders ($ 0.45) ($ 4.66) $ 2.01 $ 0.93
======== ======== ======== ========
Fully-diluted earnings (loss) per
share applicable to common
shareholders ($ 0.42) ($ 4.64) $ 1.98 $ 0.93
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
---------------------------------------------------
FISCAL 1994
<S> <C> <C> <C> <C>
Net sales $365,597 $375,632 $457,212 $673,580
======== ======== ======== ========
Gross profit $100,334 $106,459 $135,621 $189,386
======== ======== ======== ========
Net earnings (loss) applicable to
common shareholders ($ 2,362) ($ 3,597) $ 12,923 $ 33,467
======== ======== ======== ========
Primary earnings (loss) per
share applicable to common
shareholders ($ 0.25) ($ 0.36) $ 0.91 $ 2.37
======== ======== ======== ========
Fully-diluted earnings (loss) per
share applicable to common
shareholders ($ 0.25) ($ 0.36) $ 0.87 $ 2.26
======== ======== ======== ========
</TABLE>
(1) The Company reclassified $7.2 million before taxes, of change in control
costs from its previously announced fiscal 1995 fourth quarter results to the
third quarter. The effect of the change is to decrease third quarter net
earnings by $3.0 million, or $0.27 per share on a primary basis, and to increase
fourth quarter net earnings by $3.0 million, or $0.27 per share on a primary
basis, from the amounts previously reported.
(2) Net earnings in the fourth quarter of fiscal 1995 include $11.0 million of
additional income tax expense resulting from a change in the estimated annual
effective tax rate.
F-28
<PAGE>
INDEPENDENT AUDITORS' REPORT
We have audited the consolidated financial statements of Hills Stores Company
and Subsidiaries as of February 3, 1996 and for the year then ended, and have
issued our report thereon dated March 14, 1996; (April 5, 1996 with respect to
the fifth paragraph of Note 8) such consolidated financial statements and
report are included elsewhere in this Form 10-K.
Our audit also included the consolidated financial statement schedule of Hills
Stores Company and Subsidiaries for the year ended February 3, 1996, listed in
Item 14(a)(2). This financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audit. In our opinion, such consolidated financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
March 14, 1996
(April 5, 1996 with respect to the
fifth paragraph of Note 8)
S-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Directors
of Hills Stores Company and Subsidiaries:
Our report on the consolidated financial statements of Hills Stores Company and
Subsidiaries is included on page F-2 of this Form 10-K. In connection with our
audits of such financial statements, we have also audited the related financial
statement schedule listed in the index on page 24 of this Form 10-K for the year
ended January 28, 1995, the seventeen-week period ended January 29, 1994 and the
thirty-five week period ended October 2, 1993.
In our opinion, this financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information required to be
included therein.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
March 10, 1995
S-2
<PAGE>
<TABLE>
HILLS STORES COMPANY AND SUBSIDIARIES
- -------------------------------------------------------------------------------
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the Fiscal Year Ended February 3, 1996, the Fiscal Year Ended January 28,
1995, the Seventeen Weeks Ended January 29, 1994 and the Thirty-five Weeks
Ended October 2, 1993
<CAPTION>
Additions
Balance at Charged to Deductions Balance at
Beginning Cost and from End of
(in thousands) of Period Expense Reserves Other Period
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SUCCESSOR COMPANY
- -----------------
FISCAL YEAR ENDED FEBRUARY 3, 1996:
Allowance for doubtful accounts $4,228 $1,010 ($1,779) $ - $3,459
====== ====== ====== ====== =====
FISCAL YEAR ENDED JANUARY 28, 1995:
Allowance for doubtful accounts $5,497 $ 866 ($2,135) $ - $4,228
===== ===== ===== ===== =====
SEVENTEEN WEEKS ENDED JANUARY 29, 1994:
Allowance for doubtful accounts $9,420 $ 73 ($3,996) $ - $5,497
===== ===== ===== ===== =====
=======================================================================================================
PREDECESSOR COMPANY
- -------------------
THIRTY-FIVE WEEKS ENDED OCTOBER 2, 1993:
Allowance for doubtful accounts $4,591 $1,433 ($2,216) $5,612 (1) $9,420
===== ===== ===== ===== =====
<FN>
(1) Represents fresh-start adjustments.
</TABLE>
S-3
EXHIBIT INDEX
Pursuant to Item 601 of Regulation S-K
Exhibit Title
- ------- -----
10.2 First Amendment dated as of December 7, 1995 to the Credit
Agreement
10.3 Second Amendment and consent dated as of January 12, 1996
to the Credit Agreement
10.9 Employment Agreement made as of February 7, 1996 with
Gregory K. Raven
10.10 Consulting Agreement made as of February 8, 1996 with
Chaim Y. Edelstein
10.12 1996 Directors Stock Option Plan
10.13 Consulting Agreement dated December 26, 1995 with
Samuel L. Katz
11.1 Computation of earnings per share
21 Subsidiaries
23.1 Consent of Coopers & Lybrand L.L.P.
23.2 Consent of Deloitte & Touche LLP
24 Powers of Attorney of directors and officers of
the Company
27 Financial Data Schedule
EXHIBIT 10.2
FIRST AMENDMENT dated as of December 7,
1995 (this "Amendment"), to the Credit Agreement
dated as of August 21, 1995, (the "Credit
Agreement"), among Hills Stores Company, a
Delaware corporation (the "Parent"), Hills
Department Store Company, a Delaware corporation
(the "Borrower") and a wholly owned subsidiary
of the Parent, the financial institutions party
thereto (the "Lenders"), the Co-Agents and
Managing Agent named in the Credit Agreement and
Chemical Bank, as agent for the Lenders (in such
capacity, the "Administrative Agent") and as
Fronting Bank.
WHEREAS, the Borrower and the Parent have requested that the Lenders
amend certain terms and provisions of the Credit Agreement;
WHEREAS, all capitalized terms used but not defined herein shall have
the meanings assigned to such terms in the Credit Agreement; and
WHEREAS, the Lenders are willing, on the terms, subject to the condi-
tions and to the extent set forth below, to effect such amendments.
NOW, THEREFORE, in consideration of the premises and the agreements,
provisions and covenants herein contained, the Borrower, the Parent and the
Lenders hereby agree, on the terms and subject to the conditions set forth
herein, as follows:
SECTION 1. Amendment.
----------
Section 7.03 of the Credit Agreement is hereby amended by
deleting the amount "$15,000,000" contained in such Section and replacing such
amount with the amount "$45,000,000".
SECTION 2. Representations and Warranties.
-------------------------------
Each of the Borrower and the Parent represents and warrants to
each of the Lenders that:
(a) The execution, delivery and performance by the Borrower
and the Parent of this Amendment (a) have been duly authorized by all
requisite corporate and, if required, stockholder action and (b) will
not (i) violate (A) any provision of law, statute, rule or regulation,
or of the certificate or articles of incorporation or other constitutive
documents or by-laws of the Parent or any of its Subsidiaries, (B) any
order of any Governmental Authority or (C) any provision of any inden-
ture, agreement or other instrument to which Parent or any of its
1
- ------------------------------------------------------------------------------
<PAGE>
Subsidiaries is a party or by which any of them or any of their property
is or may be bound, (ii) be in conflict with, result in a breach of or
constitute (alone or with notice or lapse of time or both) a default
under any such indenture or any other material agreement or other
instrument or (iii) result in the creation or imposition of any Lien
upon any property or assets of the Parent or any of its Subsidiaries.
(b) This Amendment has been duly executed and delivered by the
Borrower and the Parent and constitutes a legal, valid and binding obli-
gation of the Borrower and the Parent, as the case may be, enforceable
against the Borrower and the Parent, as the case may be, in accordance
with its terms, subject to, or except as enforceability may be limited
by, applicable bankruptcy, insolvency, reorganization, moratorium or
similar laws affecting the enforcement of creditors' rights generally
and by general equitable principles (whether enforcement is sought in a
proceeding in equity or at law).
SECTION 3. Loan Documents.
---------------
This Amendment shall be a Loan Document for all purposes.
SECTION 4. Effectiveness.
--------------
This Amendment shall become effective as of the date hereof when
the Administrative Agent shall have received copies hereof that, when taken to-
gether, bear the signatures of each of the Borrower, the Parent and the Required
Lenders.
SECTION 5. Notices.
--------
All notices hereunder shall be given in accordance with the pro-
visions of Sections 11.01 of the Credit Agreement.
SECTION 6. Applicable Law.
---------------
THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE
WITH, THE LAWS OF THE STATE OF NEW YORK.
SECTION 7. No Novation.
------------
Except as expressly set forth herein, this Amendment shall not
by implication or otherwise limit, impair, constitute a waiver of or otherwise
affect the rights and remedies of any party under the Credit Agreement, nor
alter, modify, amend or in any way affect any of the terms, conditions, obliga-
tions, covenants or agreements contained in the Credit Agreement, nor alter,
modify, amend or in any way affect any of the terms, conditions, obligations,
covenants or agreements contained in the Credit Agreement, all of which are
ratified and affirmed in all respects and shall continue in full force and
effect. This Amendment shall apply and be effective only with respect to the
provisions of the Credit Agreement specifically referred to herein.
2
- ------------------------------------------------------------------------------
<PAGE>
SECTION 8. Counterparts.
-------------
This Amendment may be executed in two or more counterparts, each
of which shall constitute an original but all of which when taken together shall
constitute but one contract. Delivery of an executed counterpart of a signature
page of this Amendment by facsimile transmission shall be as effective as
delivery of a manually executed counterpart of this Amendment.
SECTION 9. Headings.
---------
Section headings used herein are for convenience of reference
only, are not part of this Amendment and are not to affect the construction of,
or to be taken into consideration in interpreting, this Amendment.
IN WITNESS WHEREOF, the Borrower, the Parent and the Required Lenders
have caused this Amendment to be duly executed by their duly authorized
officers, all as of the date and year first above written.
HILLS STORE COMPANY,
by
_________________________
Name:
Title:
HILLS DEPARTMENT STORE
COMPANY,
by
_________________________
Name:
Title:
CHEMICAL BANK, individually, as
Administrative Agent and as
Fronting Bank,
by
_________________________
Name:
Title:
3
- ------------------------------------------------------------------------------
<PAGE>
NATWEST BANK N.A., individually
and as Managing Agent,
by
________________________
Name:
Title:
CREDIT LYONNAIS NEW YORK BRANCH,
individually and as Co-Agent,
by
________________________
Name:
Title:
CREDIT LYONNAIS CAYMAN ISLAND
BRANCH, individually and as
Co-Agent,
by
________________________
Name:
Title:
INTERNATIONAL NEDERLADEN (U.S.)
CAPITAL CORPORATION, individu-
ally and as Co-Agent,
by
________________________
Name:
Title:
THE CIT GROUP/BUSINESS CREDIT
INC., individually and as
Co-Agent,
by
________________________
Name:
Title:
4
- -------------------------------------------------------------------------------
<PAGE>
DRESDNER BANK AG, NEW YORK AND
GRAND CAYMAN BRANCHES,
by
________________________
Name:
Title:
by
________________________
Name:
Title:
FIRST SOURCE FINANCIAL LLP,
by FIRST SOURCE FINANCIAL,
INC., its agent and manager,
by
________________________
Name:
Title:
GENERAL ELECTRIC CAPITAL
CORPORATION,
by
________________________
Name:
Title:
NATIONAL CITY BANK,
by
________________________
Name:
Title:
SANWA BUSINESS CREDIT
CORPORATION,
by
________________________
Name:
Title:
5
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<PAGE>
TRANSAMERICA BUSINESS CREDIT
CORPORATION,
by
________________________
Name:
Title:
BANKAMERICA BUSINESS CREDIT
CORPORATION,
by
________________________
Name:
Title:
CONGRESS FINANCIAL SERVICES
HOLDING, INC.,
by
________________________
Name:
Title:
DEUTSCHE FINANCIAL SERVICES
HOLDING, INC.,
by
________________________
Name:
Title:
LASALLE BUSINESS CREDIT, INC.,
by
________________________
Name:
Title:
MIDLANTIC BANK,
by
________________________
Name:
Title:
6
- -------------------------------------------------------------------------------
<PAGE>
EXHIBIT 10.3
SECOND AMENDMENT AND CONSENT dated as
of January 12, 1996 (this "Amendment") to the
Credit Agreement dated as of August 21, 1995,
(the "Credit Agreement"), among Hills Stores
Company, a Delaware corporation (the "Parent"),
Hills Department Store Company, a Delaware
corporation (the "Borrower") and a wholly owned
subsidiary of the Parent, the financial insti-
tutions party thereto (the "Lenders"), the Co-
Agents and Managing Agent named in the Credit
Agreement and Chemical Bank, as agent for the
Lenders (in such capacity, the "Administrative
Agent") and as Fronting Bank.
WHEREAS, the Borrower and the Parent have requested that the Lenders
(a) amend certain terms and provisions of the Credit Agreement and (b) consent
to the taking of certain actions by the Borrower and the Parent;
WHEREAS, all capitalized terms used but not defined herein shall have
the meanings assigned to such terms in the Credit Agreement; and
WHEREAS, the Lenders are willing, on the terms, subject to the condi-
tions and to the extent set forth below, to effect such amendments and grant
such consent.
NOW, THEREFORE, in consideration of the premises and the agreements,
provisions and covenants herein contained, the Borrower, the Parent and the
Lenders hereby agree, on the terms and subject to the conditions set forth
herein, as follows:
SECTION 1. Amendments.
-----------
(a) The definition of the term "Continuation Fee" set forth in
Article I of the Credit Agreement is hereby deleted and replaced in its
entirety with the following text:
"Continuation Fee" shall mean each of (a) a fee not in
excess of $7,500,000 to be paid to the holders of Senior Notes
in connection with the exercise by the Parent of the option de-
scribed in clause (a) of the definition of the term "Extension
Election" and (b) a fee not in excess of $8,800,000 to be paid
to the holders of the Senior Notes in connection with the exer-
cise by the Parent of the option described in clause (b) of the
definition of the term "Extension Election".
1
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<PAGE>
(b) The definition of the term "Extension Election" set forth
in Article I of the Credit Agreement is hereby deleted and replaced in
its entirety with the following text:
"Extension Election" shall mean each of (a) the Parent's
option pursuant to Section 1103(d) of the Senior Note Indenture
to extend the redemption date contemplated by Section 1103 of
the Senior Note Indenture with respect to the 1995 Change in
Control to May 5, 1997, and (b) the Parent's option pursuant to
Section 1103(e) of the Senior Note Indenture to extend the re-
demption date contemplated by Section 1103 of the Senior Note
Indenture with respect to the 1995 Change in Control to July 8,
1998.
(c) The definition of the term "Maturity Date" set forth in
Article I of the Credit Agreement is hereby deleted and replaced in its
entirety with the following text:
"Maturity Date" shall mean May 1, 1997; provided,
however, that the Maturity Date shall automatically become
May 1, 1996, if the Extension Election described in clause (a)
of the definition of such term is not exercised on or prior to
April 30, 1996; provided further, however, that if either (a)
the Extension Election described in clause (b) of the definition
of such term is exercised or (b) the Senior Notes are refinanced
in full with the proceeds of the Refinancing Notes, the Maturity
Date shall automatically be extended to April 30, 1998.
SECTION 2. Consents.
---------
(a) The Lenders hereby consent to the amendment of the Senior
Note Indenture pursuant to terms and provisions substantially identical to the
terms and provisions of the Third Supplemental Indenture attached hereto as
Exhibit A (the "Third Supplemental Indenture").
(b) The Lenders hereby consent to (i) the payment by the
Borrower of a dividend of up to $2,050,000 to the Parent for payment by the
Parent to the holders of the Senior Notes of a consent fee in connection with
obtaining the consent of such holders to the amendment to the Senior Note
Indenture contained in the Third Supplemental Indenture and payment by the
Parent of related incidental costs and expenses and (ii) the payment by the
Parent of such payments.
SECTION 3. Exercise Fee.
-------------
The Borrower hereby agrees that if the Parent exercises the
Extension Election described in clause (b) of the definition of such term, the
Borrower shall pay to the Administrative Agent, for the account of the Lenders,
on the date of the payment to the holders of the Senior Notes of the Continua-
tion Fee described in clause (b) of the definition of such term (and, in any
event, on or before May 7, 1997), an amount equal to 0.75% of the aggregate
principal amount of the Commitment of each Lender.
2
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<PAGE>
SECTION 4. Representations and Warranties.
-------------------------------
Each of the Borrower and the Parent represents and warrants to
each of the Lenders that:
(a) The execution, delivery and performance by the Borrower and
the Parent of this Amendment (i) have been duly authorized by all
requisite corporate and, if required, stockholder action and (ii) will
not (A) violate (1) any provision of law, statute, rule or regulation,
or of the certificate or articles of incorporation or other constitutive
documents or by-laws of the Parent or any of its Subsidiaries, (2) any
order of any Governmental Authority or (3) any provision of any
indenture, agreement or other instrument to which Parent or any of its
Subsidiaries is a party or by which any of them or any of their property
is or may be bound, (B) be in conflict with, result in a breach of or
constitute (alone or with notice or lapse of time or both) a default
under any such indenture or any other material agreement or other
instrument or (C) result in the creation or imposition of any Lien upon
any property or assets of the Parent or any of its Subsidiaries.
(b) This Amendment has been duly executed and delivered by the
Borrower and the Parent and constitutes a legal, valid and binding obli-
gation of the Borrower and the Parent, as the case may be, enforceable
against the Borrower and the Parent, as the case may be, in accordance
with its terms, subject to, or except as enforceability may be limited
by, applicable bankruptcy, insolvency, reorganization, moratorium or
similar laws affecting the enforcement of creditors' rights generally
and by general equitable principles (whether enforcement is sought in a
proceeding in equity or at law).
(c) The representations and warranties set forth in Article IV
of the Credit Agreement are true and correct in all material respects
on and as of the date hereof with the same effect as though made on and
as of the date hereof, except to the extent that such representations
and warranties expressly relate to an earlier date.
SECTION 5. Loan Documents.
---------------
This Amendment shall be a Loan Document for all purposes.
SECTION 6. Effectiveness.
--------------
This Amendment shall become effective as of the date hereof when
(a) the Administrative Agent shall have received copies hereof that, when taken
together, bear the signatures of each of the Borrower, the Parent and the Re-
quired Lenders and (b) the Administrative Agent shall have received executed
form UCC-3s in the form of Exhibit B hereto; provided, however, that the amend-
ments set forth in Section 1(a), Section 1(b) and Section 1(c) of this Amendment
shall not become effective until the Third Supplemental Indenture shall have
become effective.
3
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<PAGE>
SECTION 7. Notices.
--------
All notices hereunder shall be given in accordance with the pro-
visions of Section 11.01 of the Credit Agreement.
SECTION 8. Applicable Law.
---------------
THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE
WITH, THE LAWS OF THE STATE OF NEW YORK.
SECTION 9. No Novation.
------------
Except as expressly set forth herein, this Amendment shall not
by implication or otherwise limit, impair, constitute a waiver of or otherwise
affect the rights and remedies of any party under the Credit Agreement, nor
alter, modify, amend or in any way affect any of the terms, conditions, obliga-
tions, covenants or agreements contained in the Credit Agreement, all of which
are ratified and affirmed in all respects and shall continue in full force and
effect. This Amendment shall apply and be effective only with respect to the
provisions of the Credit Agreement specifically referred to herein.
SECTION 10. Counterparts.
-------------
This Amendment may be executed in two or more counterparts, each
of which shall constitute an original but all of which when taken together shall
constitute but one contract. Delivery of an executed counterpart of a signature
page of this Amendment by facsimile transmission shall be as effective as de-
livery of a manually executed counterpart of this Amendment.
SECTION 11. Headings.
---------
Section headings used herein are for convenience of reference
only, are not part of this Amendment and are not to affect the construction of,
or to be taken into consideration in interpreting, this Amendment.
IN WITNESS WHEREOF, the Borrower, the Parent and the Required Lenders
have caused this Amendment to be duly executed by their duly authorized
officers, all as of the date and year first above written.
HILLS STORES COMPANY,
by
_________________________
Name:
Title:
4
- ------------------------------------------------------------------------------
<PAGE>
HILLS DEPARTMENT STORE
COMPANY,
by
_________________________
Name:
Title:
CHEMICAL BANK, individually, as
Administrative Agent and as
Fronting Bank,
by
_________________________
Name:
Title:
NATWEST BANK N.A., individually
and as Managing Agent,
by
________________________
Name:
Title:
CREDIT LYONNAIS NEW YORK BRANCH,
individually and as Co-Agent,
by
________________________
Name:
Title:
CREDIT LYONNAIS CAYMAN ISLAND
BRANCH, individually and as
Co-Agent,
by ________________________
Name:
Title:
INTERNATIONAL NEDERLADEN (U.S.)
CAPITAL CORPORATION, individ-
ually and as Co-Agent,
by
________________________
Name:
Title:
5
- -------------------------------------------------------------------------------
<PAGE>
THE CIT GROUP/BUSINESS CREDIT,
INC., individually and as
Co-Agent,
by
________________________
Name:
Title:
DRESDNER BANK AG, NEW YORK AND
GRAND CAYMAN BRANCHES,
by
________________________
Name:
Title:
by
________________________
Name:
Title:
FIRST SOURCE FINANCIAL LLP,
by FIRST SOURCE FINANCIAL, INC.,
its agent and manager,
by
________________________
Name:
Title:
GENERAL ELECTRIC CAPITAL
CORPORATION,
by
________________________
Name:
Title:
NATIONAL CITY BANK,
by
________________________
Name:
Title:
6
- -------------------------------------------------------------------------------
<PAGE>
SANWA BUSINESS CREDIT
CORPORATION,
by
________________________
Name:
Title:
TRANSAMERICA BUSINESS CREDIT
CORPORATION,
by
________________________
Name:
Title:
BANKAMERICA BUSINESS CREDIT
CORPORATION,
by
________________________
Name:
Title:
CONGRESS FINANCIAL SERVICES
HOLDING, INC.,
by
_________________________
Name:
Title:
DEUTSCHE FINANCIAL SERVICES
HOLDING CORPORATION,
by
_________________________
Name:
Title:
LASALLE BUSINESS CREDIT, INC.,
by
________________________
Name:
Title:
7
- -------------------------------------------------------------------------------
<PAGE>
MIDLANTIC BANK,
by
________________________
Name:
Title:
8
- ------------------------------------------------------------------------------
<PAGE>
EXHIBIT 10.9
EXECUTIVE EMPLOYMENT AGREEMENT
------------------------------
EXECUTIVE EMPLOYMENT AGREEMENT made as of February 7, 1996 among Hills
Stores Company, a Delaware corporation (the "Company), Hills Department Store
Company, a Delaware corporation and wholly-owned subsidiary of the Company (the
"Subsidiary"), each having its principal office at 15 Dan Road, Canton, Massa-
chusetts 02021-9128, and Gregory K. Raven (the "Executive"), an individual
residing at the address specified on the signature page hereof.
The Company and the Subsidiary each desire to employ the Executive in
the capacities of President and Chief Executive Officer, and the Executive
desires to be so employed by the Company and the Subsidiary, in each case
subject to the terms and conditions set forth in this agreement (the "Agree-
ment").
Now, therefore, in consideration of the mutual covenants hereinafter
set forth and other good and valuable consideration the receipt and sufficiency
of which is hereby acknowledged, the Company and the Executive intending to be
legally bound hereby agree as follows:
1. Employment; Term.
----------------
The Company and the Subsidiary each hereby employ the Executive,
and the Executive hereby accepts such employment and agrees to serve the Company
and the Subsidiary, upon the terms and conditions hereinafter set forth, for a
term commencing on February 8, 1996 (the "Commencement Date") and terminating on
January 30, 1999 unless terminated earlier in accordance with Section 6;
provided that such term shall thereafter be extended from time to time for addi-
tional periods of one fiscal year on the date it would otherwise expire unless
the Executive or the Company or the Subsidiary gives notice not less than 90
days prior to such date that it elects to let this Agreement expire without ex-
tension on such date (as so extended, the "Term").
2. Position; Conduct.
-----------------
(a) During the Term, the Executive will hold the titles and
offices of, and serve in the positions of, President and Chief Executive Officer
of the Company and the Subsidiary. The Executive shall report to the Board of
Directors of the Company and the Subsidiary and shall perform such specific
duties and service of a chief executive nature (including service as an officer,
director or equivalent position of any subsidiary, affiliated company or venture
of the Company, without additional compensation) as they shall reasonably
request consistent with the Executive's position.
(b) During the Term, the Executive agrees to (i) devote his
full time and attention and best efforts to the business and affairs of the
Company and the Subsidiary and to faithfully and diligently perform, to the
best of his ability, all of his duties and responsibilities; (ii) abide by all
applicable policies of the Company and the Subsidiary from time to time in
1
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<PAGE>
effect provided that such policies are reasonable and comply with applicable
law; and (iii) not take any action or conduct himself in any manner which would
be reasonably likely to harm the reputation or goodwill of the Company or the
Subsidiary. Nothing in this Section shall preclude the Executive from devoting
reasonable time and attention to (A) serving, with the prior approval of the
Board of Directors of the Company and the Subsidiary, as director, trustee or
member of a committee of any organization; (B) engaging in charitable and commu-
nity activities; and (C) managing his personal investments and affairs; provided
that such activities do not involve any material conflict of interest with the
interests of the Company or individually or collectively interfere materially
with the performance of his duties and responsibilities as contemplated under
this Agreement.
3. Boards of Directors.
-------------------
While it is understood that the right to elect directors of the
Company is by law vested in the stockholders and directors of the Company, it is
nevertheless mutually contemplated that, subject to such rights, the Executive
will be elected to serve as a member of the Company's Board of Directors
promptly following the Commencement Date. The Company will use its reasonable
efforts to cause such election, including by (i) obtaining the election of the
Executive to fill a vacancy on the Board of Directors of the Company until the
next annual meeting of stockholders of the Company; (ii) by expanding the size
of the Board of Directors of Company to create such vacancy, if necessary, and
(iii) by nominating the Executive for reelection to successive terms as a member
of the Board of Directors of the Company during the Term. The Company will
cause the Executive to be elected as a member of the Board of Directors of the
Subsidiary and use its reasonable efforts to retain him as such during the Term.
The Executive agrees to serve on the Boards of Directors of the Company and the
Subsidiary without additional compensation.
4. Salary; Additional Compensation; Perquisites and Benefits.
---------------------------------------------------------
(a) During the Term, the Company and the Subsidiary will
pay the Executive a base salary at an annual rate of not less than $700,000 per
annum, subject to annual review by the Compensation Committee of the Board of
Directors of the Company (the "Compensation Committee") and, in the discretion
of such Committee, increased from time to time. Once increased, such salary
shall not be decreased. Such salary shall be paid in installments in accor-
dance with the Company's standard practice, but not less frequently than
monthly.
(b) For each fiscal year during the Term, the Executive will
be eligible to earn a bonus. The award and amount of such bonus shall be based
upon the Compensation Committee's determination of actual performance as
measured against goals set by such Committee within 90 days of the commencement
of the applicable performance period, which goals shall provide the Executive
with the opportunity to earn a bonus upon achievement in full of such goals of
50% of the base salary paid to the Executive during such fiscal year (the
"Target Bonus"), subject to approval by the stockholders of the Company to the
extent required pursuant to Section 162(m) of the Internal Revenue Code of 1986,
as amended (the "Code"). Such bonus shall be paid within 60 days of the comple-
tion of such fiscal year. Notwithstanding the foregoing, for the year ending
January 1997, the Executive will receive a bonus of no less than 25% of the
base salary paid to the Executive.
2
- ------------------------------------------------------------------------------
<PAGE>
(c) During the Term, the Executive will participate in all
plans now existing or hereafter adopted for the general benefit of the Company's
or the Subsidiary's employees, such as bonuses, stock option or other incentive
compensation plans, profit sharing plans, retirement plans, life and health
insurance plans, or other insurance plans and benefits (not including, however,
bonus, severance or cash incentive arrangements other than those specified in
this Agreement), if and to the extent that Executive is and remains eligible to
participate thereunder, and subject to the provisions of such plans as the same
may be in effect from time to time; provided, however, the Executive shall not
be adversely affected by any change to such plans unless such change is applic-
able to all senior executives of the Company. The Executive will be included
in any Company or Subsidiary benefit plans in which senior executives of the
Company and the Subsidiary participate. To the extent permitted by law, the
terms of the respective plans (as such terms are currently in effect or may be
amended to accommodate the provisions of this sentence) and applicable federal
tax restrictions, (x) all waiting periods and vesting periods for such plans of
the Company and the Subsidiary will be waived for the Executive and (y) the
Executive shall be given such credit for his prior years of service as senior
executive officer of a public company as shall be determined in accordance with
the implementation of the Benefits Review (as hereinafter defined).
(d) The Executive shall be eligible for stock option grants
from time to time pursuant to the Company's 1993 Incentive and Non-Qualified
Stock Option Plan (the "Option Plan") in accordance with the terms and condi-
tions thereof. The Committee designated pursuant to the Option Plan has granted
to the Executive, effective upon the Commencement Date, nonqualified options to
purchse 300,000 shares of common stock of the Company at an exercise price of
$12.00 per share. Such options shall vest as follows:
First anniversary of the Commencement Date.......... 25% vested
Second anniversary of the Commencement Date......... 50% vested
January 30, 1999.................................... 75% vested
January 29, 2000.................................... 100% vested
Such options shall be exercisable (subject to vesting) for ten years from the
date of grant and shall in all respects be subject to the terms and conditions
of the Option Plan. Notwithstanding the foregoing, all such options shall be-
come immediately exercisable in the event of a Change in Control or if the
Executive's employment is terminated by the Company or the Subsidiary other
than for Cause (as hereinafter defined), or if such employment is terminated by
the Executive for Good Reason (as hereinafter defined). The Company and the
Executive shall enter into an Option Agreement in respect of such options in a
form reasonably acceptable to the Company and the Executive.
(e) The Company shall grant to the Executive, effective upon
the Commencement Date, 100,000 restricted shares of Common Stock, which shares
shall be subject to divestiture if the Executive's employment shall terminate
during the period of restriction. The restrictions shall lapse with respect to
60% of the shares on January 30, 1999 and with respect to the remainder of the
shares on January 29, 2000. Notwithstanding the foregoing, all restrictions
shall lapse upon either a Change in Control or if the Executive's employment is
terminated by the Company or the Subsidiary other than for Cause or if such
employment is terminated by the Executive for Good Reason.
(f) The Company and the Subsidiary will reimburse Executive,
in accordance with their standard policies from time to time in effect, for such
reasonable and necessary documented out-of-pocket business expenses as may be
incurred by the Executive during the Term in the performance of his duties.
3
- -----------------------------------------------------------------------------
<PAGE>
(g) The Executive shall be entitled to a vacation period to
be credited and taken in accordance with Company policy from time to time in
effect for similarly situated executives, which in any event shall not be less
than a total of four weeks per calendar year, beginning with the first calendar
year of this Agreement (pro rata as to portions of years).
(h) The Executive shall be granted a car allowance of up to
$900 per month for lease of a luxury automobile (e.g., Cadillac STS, Jaguar,
BMW or Lexus) arranged through the Company in accordance with the Company's
automobile leasing program for senior executives.
(i) The Executive's rights under this Agreement with
respect to the plans, programs, perquisites and policies of the Company and the
Subsidiary shall not preclude the Company or the Subsidiary from modifying or
terminating any such plan, program, perquisite or policy, subject to the Execu-
tive's right, in accordance with the terms of this Agreement, to participate in
or be eligible for such program, perquisite or policy as so modified or any re-
placement thereof and subject to the provisions of Section 7(c) and Section 7(d)
with respect to the Executive's termination of his employment for Good Reason.
(j) In the event that any accelerated vesting of the
Executive's rights under this Agreement following a Change in Control (as here-
inafter defined) results in the imposition of an excise tax payable by the
Executive under Section 4999 of the Internal Revenue Code, or any successor pro-
vision with respect to "excess parachute payments" within the meaning of Section
280G(b) of the Internal Revenue Code, the Company shall make a cash payment to
the Executive in the amount of such taxes and shall also make a cash payment to
the Executive in an amount equal to the total of federal, state and local income
and excise taxes for which the Executive may be liable on account of the cash
payments to be made under this subsection (j).
(k) As soon as practicable following the Commencement Date,
the Company, in consultation with the Executive and such compensation profes-
sionals as the Company deems reasonably appropriate, shall undertake a review
(the "Benefits Review") of the compensation of chief executive officers of
companies similar to the Company in its size and the character of its operations
for the purpose of evaluating (i) the retirement and welfare benefits of the
Executive; (ii) the benefits payable to the Executive or his beneficiaries in
the event of the Executive's death or Disability (as hereinafter defined) during
the Term; (iii) the accrual credit that should be granted to the Executive under
the Company's employee benefit plans for his prior years of service as senior
executive officer of a public company; and (iv) the benefits under Section 4(c)
that should continue to be available to the Executive following the termination
of the Executive's employment by the Company without Cause or by the Executive
for Good Reason, pursuant to Section 7(c) or Section 7(d), or following the ex-
piration of the Term, pursuant to Section 7(e). Based upon the Benefits Review,
and as soon as practicable following the conclusion thereof, the Company,
consistent with the fiduciary obligations of its Board of Directors and the
Compensation Committee, shall implement with respect to the Executive such of
the foregoing benefit provisions as are consistent with benefits available to
chief executive officers of companies similar to the Company in its size and the
character of its operations (such action being referred to herein as the imple-
mentation of the Benefits Review).
5. Relocation.
----------
(a) The Executive agrees to relocate his principal residence
to an area proximate to the Company's headquarters in Canton, Massachusetts as
4
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<PAGE>
soon as practicable after the date of this Agreement. The Company and the Sub-
sidiary shall reimburse the Executive for the Executive's reasonable, documented
expenses incurred to move the Executive's family and the Executive's family
household property from the Executive's current residence to such new resi-
dences, including: (i) the cost of moving the Executive's family and its house-
hold property, including packing and unpacking expenses; (ii) expenditures for
travel and accommodations for visits and commutation to the Canton area by the
Executive and his family in connection with such relocation; (iii) the use with-
out charge of a two-bedroom corporate apartment proximate to the Company's head-
quarters for a period of up to six months pending relocation of the Executive's
residence; (iv) one half of the mortgage and real estate taxes on the Execu-
tive's current residence after the sixth month following the time that such
residence is first put up for sale by the Executive, up to a maximum of $25,000;
(v) reasonable and customary brokerage commissions on the sale of the Execu-
tive's current residence; (vi) a percentage of the principal amount of any
mortgage on the Executive's new residence payable to the lender at the closing
of such mortgage, up to a maximum two (2) percentage points; and (vii) to the
extent any of the items listed in clause (i) through (vi) is not tax deductible
to the Executive, a cash payment to the Executive in the amount of any taxes
payable with respect thereto (including any taxes imposed by reason of the pay-
ment by the Company to the Executive of the amount of any taxes pursuant to this
clause).
6. Termination.
-----------
(a) The Term will terminate at the election of the Company
or the Subsidiary immediately upon notice from the Company or the Subsidiary to
the Executive.
(b) The Term will terminate forthwith upon the Executive's
death or, upon notice by the Company or the Executive, upon the Executive's Dis-
ability. As used herein the term "Disability" means the Executive's inability
to perform the Executive's duties and responsibilities as contemplated under
this Agreement for a period of more than 180 days, whether or not continuous,
during any 365-day period, due to physical or mental incapacity or impairment.
A determination of Disability will be made by a physician satisfactory to both
the Executive and the Company; provided that if the Executive and the Company
cannot agree as to a physician, then each will select a physician and these two
together will select a third physician, whose determination as to Disability
will be binding on the Executive and the Company. The Executive, the Execu-
tive's legal representative or any adult member of the Executive's immediate
family shall have the right to present to the Company and such physician such
information and arguments on the Executive's behalf as the Executive or they
deem appropriate, including the opinion of the Executive's personal physician.
Should the Executive become incapacitated, the Executive's employment shall con-
tinue and all base salary and other compensation otherwise due to the Executive
hereunder shall be continued through the date on which the Executive's employ-
ment is terminated for Disability.
7. Severance.
---------
(a) In the event that the Term is terminated by the Company
or the Subsidiary for Cause, or if the Executive terminates his employment
hereunder without Good Reason, the Company and the Subsidiary will pay to the
Executive an amount equal to the Executive's accrued but unpaid base salary
pursuant to Section 4(a) through the date of such termination, accrued but un-
5
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<PAGE>
paid bonus for any completed fiscal year, additional salary payments in lieu of
the Executive's accrued and unused vacation for the current calendar year (on a
pro rata basis), unreimbursed business expenses in accordance with Section 4(f),
unreimbursed medical, dental and other employee benefit expenses incurred in
accordance with the applicable plans and any amount owed pursuant to Section 5
of this Agreement and any and all other benefits provided under the terms of the
applicable employee plans to terminated employees (hereinafter referred to as
the "Standard Termination Payments").
(b) Upon the Executive's death, the Company and the Sub-
sidiary shall pay the Standard Termination Payments to the Executive's estate,
and any and all death benefits under the Company's benefit plans or as shall be
implemented pursuant to the Benefits Review shall be paid to the Executive's
beneficiary or beneficiaries as duly designated in writing by the Executive.
Upon termination of the Term for Disability, the Company and the Subsidiary
shall pay to the Executive the Standard Termination Payments and any and all
other employee benefits as may be provided under the terms of the applicable
employee benefit plans or as shall be implemented pursuant to the Benefits
Review.
(c) Subject to Section 7(d), in the event that the Company
or the Subsidiary terminate the Executive's employment under this Agreement
without Cause and other than by reason of his death or Disability or the
Executive terminates his employment hereunder for Good Reason, so long as the
Executive shall not have breached the Executive's obligations to the Company
under Section 8 and Section 9 hereof (without limitation to any other remedy
available to the Company), the Company shall (i) pay the Executive a lump sum
payment equal to two times his base pay as then in effect pursuant to Section
4(a) for the current fiscal year and (ii) continue in effect the Executive's
benefits under Section 4(c) and Section 4(h) or their equivalent for a period
equal to the greater of two years and the remainder of the Term of this Agree-
ment, provided that the benefits included in this clause (ii) (the "Severance
Benefits") shall include only medical benefits, dental benefits, life insurance,
disability benefits and car allowance and such other benefits as are designated
pursuant to the implementation of the Benefits Review.
(d) If, following a Change in Control, the Company or the
Subsidiary terminates the Executive's employment under this Agreement without
Cause or the Executive terminates his employment hereunder for Good Reason with-
in two years of the Change in Control, the Company shall (i) pay the Executive a
lump sum payment equal to the sum of three times the amount of the Executive's
base pay as then in effect pursuant to Section 4(a) for the current fiscal year
and three times the Executive's bonus pursuant to Section 4(b) for the current
fiscal year (assuming all performance goals had been achieved) and (ii) continue
in effect the Severance Benefits for a period equal to the greater of two years
and the remainder of the Term of this Agreement; provided, however, that, in
the case of the Executive's termination of his employment for Good Reason
notice of such termination shall have been delivered to the Company within 60
days following the occurrence of the circumstances giving rise to such Good
Reason; provided further that if the Executive terminates his employment here-
under following a Change in Control for Good Reason as defined in clause (iv)
of Section 7(g), the provisions of Section 7(c) and not this Section 7(d) shall
apply to such termination.
(e) If the employment of the Executive continues hereunder
without termination to the end of the Term (as the Term may be extended pursuant
to the proviso contained in Section 1), and the Term is not thereafter extended
pursuant to the proviso to Section 1, the Company shall (i) pay the Executive a
lump sum payment equal to two times his base pay as in effect pursuant to
Section 4(a) for the then ended fiscal year and (ii) continue in effect the
6
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<PAGE>
Severance Benefits for a period of one year; provided, however, that the Execu-
tive shall not be entitled to any payment or benefits pursuant to this Section
7(e) if the Executive has given notice of his election to let this Agreement
expire pursuant to the aforementioned proviso.
(f) As used herein, the term "Cause" means:
(i) The Executive's willful or intentional failure or refusal to
perform or observe any of the Executive's material duties,
responsibilities or obligations set forth in, or as contem-
plated under, this Agreement, if such breach is not cured
within 30 days after notice thereof to the Executive by the
Company or the Subsidiary;
(ii) Any willful or intentional act or failure to act involving
fraud, theft, embezzlement, dishonesty or moral turpitude
(collectively, "Fraud") affecting the Comapny or the Sub-
sidiary or any supplier or employee of the Company or the
Subsidiary; or
(iii) Conviction of (or a plea of nolo contendere to) an offense
which is a felony in the jurisdiction involved or which is
a misdemeandor in the jurisdiction involved but which in-
volves Fraud;
(g) As used herein, termination of employment hereunder
by the Executive for "Good Reason" shall mean the Executive's termination of his
employment upon notice to the Company following
(i) assignment to the Executive of duties materially inconsistent
with the Executive's position as described in Section 2(a);
(ii) the Executive's being removed from such position;
(iii) any change in any employee benefit plan in effect and applic-
able to the Executive immediately following the implementation
of the Benefits Review and such change, taking into account any
offsetting increase in compensation or benefits, constitutes a
material reduction in the Executive's compensation considered
as a whole;
(iv) the change in the location of the Company's principal executive
offices to a location outside of the Boston metropolitan area;
or
(v) a material breach by the Company of the terms of this Agreement,
in each case without the Executive's consent, which termination shall be
effective 30 days after prompt notice of such circumstances by the Executive to
the Company, if such circumstances have not been cured prior to such date.
(h) As used herein, a "Change in Control" shall mean the
occurrence of any one of the following events:
(i) any "person," as such term is used in Sections 3(a)(9) and 13(d)
of the Securities Exchange Act of 1934, other than Dickstein
Partners Inc. and its Affiliates becomes a "beneficial owner,"
as such term is used in Rule 13d-3 promulgated under such Act,
of 30% or more of the Voting Stock of the Company or the
majority of the Board of Directors of the Company consists of
7
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<PAGE>
individuals other than Incumbent Directors, which term means
the members of the Board on the date of this Agreement; provided
that any person becoming a director subsequent to such date
whose election or nomination for election was supported by a
majority of the directors who then comprised the Incumbent
Directors shall be considered to be an Incumbent Director;
(ii) the Company or the Subsidiary adopts any plan of liquidation
providing for the distribution of all or substantially all of
the assets of the Company on a consolidated basis;
(iii) the Company merges or combines with another company and,
immediately after the merger or combination, the stockholders
of the Company immediately prior to the combination hold,
directly or indirectly, (1) in the event the Company is the
surviving corporation 50% or less of the Voting Stock of the
combined company or (2) in the event the Company is not the
surviving corporation 50% or less of the Voting Stock or other
ownership interests of the entity or entities, if any, that
succeed to the business of the Company; or
(iv) the Company sells all or substantially all of its assets deter-
mined on a consolidated basis.
As used herein, an "Affiliate" of a person or other entity shall mean a person
or other entity that directly or indirectly controls, is controlled by or is
under common control with the person or other entity specified (including with-
out limitation any investment entity managed by the person or other entity
specified or a person or entity that directly or indirectly controls, is
controlled by or is under common control with the person or other entity speci-
fied). As used herein, "Voting Stock" shall mean capital stock of any class or
classes having general voting power under ordinary circumstances, in the absence
of contingencies, to elect the directors of a corporation.
(i) In the event that the Term is terminated for any reason,
payments provided in this Section 7 shall constitute complete satisfaction of
all obligations of the Company and the Subsidiary to the Executive pursuant to
this Agreement. Upon any such termination, the Executive shall cease to be an
employee of the Company and Subsidiary for all purposes, and (except as other-
wise expressly set forth in this Section 7) the Company and the Subsidiary shall
have no obligation to provide the Executive with any employee benefits or
perquisites hereunder. The Executive's rights set out in this Section 7 shall
constitute the Executive's sole and exclusive rights and remedies as a result of
the Executive's actual or constructive termination of employment without Cause.
8. Confidential Information.
------------------------
(a) The Executive acknowledges that the Company, its sub-
sidiaries, affiliated companies and ventures from time to time (collectively,
including the Company, the "Company Affiliates") own and have developed and com-
piled, and will own, develop and compile, certain proprietary techniques and
confidential information which have great value to their business ("Confidential
Information"). Confidential Information includes not only information disclosed
by the Company Affiliates to the Executive, but also information developed or
learned by the Executive during the course or as a result of employment here-
under, which information the Executive acknowledges is and shall be the sole and
exclusive property of the Company Affiliates. Confidential Information includes
all proprietary information that has or could have commericial value or other
8
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<PAGE>
utility in the business in which the Company Affiliates are engaged or contem-
plate engaging, and all proprietary information of which the unauthorized dis-
closure could be detrimental to the interests of any of the Company Affiliates,
whether or not such information is specifically labelled as Confidential
Information by a Company Affiliate. By way of example and without limitation,
Confidential Information includes any and all information developed, obtained or
owned by any Company Affiliate concerning trade secrets, techniques, know-how
(including designs, plans, procedures, merchandising know-how, processes and
research records), software, computer programs, innovations, discoveries, im-
provements, research, development, test results, reports, specifications, data,
formats, marketing data and plans, business plans, strategies, forecasts, unpub-
lished financial information, orders, agreements and other forms of documents,
price and cost information, merchandising opportunities, expansion plans,
designs, plans, budgets, projections, customer, supplier and subcontractor
identities, characteristics and agreements, and salary, staffing and employment
information. Notwithstanding the foregoing, Confidential Information shall not
in any event include information which (i) was generally known or generally
available to the public prior to its disclosure to the Executive; (ii) becomes
generally known or generally available to the public subsequent to disclosure to
the Executive through no wrongful act of any person or (iii) which the Executive
is required to disclose by applicable law or regulation (provided that the
Executive provides the Company with prior notice of the contemplated disclosure
and reasonably cooperates with the Company and the Subsidiary at their expense
in seeking a protective order or other appropriate protection of such informa-
tion).
(b) The Executive acknowledges and agrees that in the per-
formance of his duties hereunder the Company Affiliates will from time to time
disclose to him and entrust him with Confidential Information. The Executive
also acknowledges and agrees that the unauthorized disclosure of Confidential
Information, among other things, may be prejudicial to the interests of the
Company Affiliates, an invasion of privacy and an improper disclosure of trade
secrets. The Executive agrees that he shall not, directly or indirectly, use,
make available, sell, disclose or otherwise communicate to any corporation,
partnership, individual or other third party, other than in the course of his
assigned duties and for the benefit of the Company Affiliates, any Confidential
Information, either during the Term or thereafter.
(c) In the event the Executive's employment with the Company
and the Subsidiary ceases for any reason, the Executive will not remove from the
premises of the Company or the Subsidiary without their prior written consent
any records, files, drawings, documents, equipment, materials or writings re-
ceived from, created for or belonging to the Company Affiliates, including those
which relate to or contain Confidential Information, or any copies thereof.
Upon request or when the Executive's employment with the Company and the
Subsidiary terminates, the Executive will immediately deliver the same to the
Company.
(d) During the Term, the Executive will disclose to the
Company and the Subsidiary all designs, inventions and business strategies or
plans developed by the Executive during such period which relate directly or
indirectly to the business of the Company Affiliates, including without limita-
tion any process, operation, product or improvement. The Executive agrees that
all of the foregoing are and will be the sole and exclusive property of the
Company and the Subsidiary and that the Executive will at the request and cost
of the Company or the Subsidiary do whatever is necessary to secure the rights
thereto, by patent, copyright or otherwise, to the Company or the Subsidiary.
9
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<PAGE>
(e) The Executive, the Company and the Subsidiary agree that
the Executive shall not disclose to any Company Affiliate or use for the benefit
of any Company Affiliate, any information which may constitute trade secrets or
confidential information of third parties, to the extent the Executive has any
such secrets or information.
(f) The provisions of this Section 8 shall survive the
termination of this Agreement and the Term.
9. Restrictive Covenants.
---------------------
(a) The Executive acknowledges and agrees (i) that the
services to be rendered by the Executive for the Company and the Subsidiary are
of a special, unique, extraordinary and personal character, (ii) that the Execu-
tive has and will continue to develop a personal acquaintance and relationship
with one or more of the employees, suppliers and independent contractors of the
Company Affiliates, which may constitute the primary or only contact of the
Company or the Subsidiary with such employees, suppliers and independent con-
tractors, and (iii) that the Executive will be uniquely identified by employees,
suppliers, independent contractors and retail customers with the Company and
the Subsidiary. Consequently, the Executive agrees that it is fair, reasonable
and necessary for the protection of the business, operations, assets and repu-
tation of the Company and the Subsidiary that the Executive make the covenants
contained in this Section 9.
(b) The Executive agrees that, during the Term and for 12
months thereafter, the Executive shall not, directly or indirectly, own, manage,
operate, join, control, participate in, invest in or otherwise be connected or
associated with, in any manner, including as an officer, director, employee,
partner, consultant, advisor, proprietor, trustee or investor, any Competing
Business in the Territory; provided however that nothing contained in this
Section 9(b) shall prevent the Executive from owning less than 2% of the voting
stock of a publicly held corporation for investment purposes. For purposes of
this Section 9(b), the term "Competing Business" shall mean a business engaged
in the operation of discount retailing department stores. For purposes of this
Section 9(b), the term "Territory" means any location within a radius of 10
miles from any location at which any Company Affiliate then operates a discount
retailing department store and or any location at which, at the date of termina-
tion of the Executive's employment hereunder, any Company Affiliate has taken
substantial steps toward establishing such operations.
(c) The Executive agrees that, during the Term and for 24
months thereafter, the Executive shall not, directly or indirectly,
(i) seek to employ or engage, or assist anyone else to seek to
employ or engage, any person who at any time during the year
preceding the termination of the Executive's employment here-
under was in the employ of any of the Company Affiliates or was
an independent contractor providing material merchandising,
marketing, sales, financial or management consulting services in
connection with the business of any of the Company Affiliates
and with whom the Executive had regular contact; or
(ii) interfere in any manner in the relationship of any Company
Affiliate with any of its suppliers or independent contractors,
whether or not the relationship between such Company Affiliate
and such supplier or independent contractor was originally
established in whole or in part by the Executive's efforts.
10
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<PAGE>
As used in this Section 9, the "supplier" shall mean and include any individual,
proprietorship, partnership, corporation, joint venture, trust or any other form
of business entity which is then a supplier of any Company Affiliate or which
was a supplier at any time during the one-year period immediately preceding the
date of termination of employment.
(d) The provisions of this Section 9 shall survive the
termination of this Agreement and the Term.
10. Specific Performance.
--------------------
The Executive acknowledges that the Company Affiliates would
sustain irreparable injury in the event of a violation by the Executive of any
of the provisions of Section 8 or Section 9 hereof, and by reason thereof the
Executive consents and agrees that if the Executive violates any of the provi-
sions of Section 8 or Section 9, in addition to any other remedies available,
the Company or the Subsidiary shall be entitled to a decree specifically
enforcing such provisions, and shall be entitled to a temporary and permanent
injunction restraining the Executive from committing or continuing any such
violation, from any arbitrator duly appointed in accordance with the terms of
this Agreement or any court of competent jurisdiction, without the necessity of
proving actual damages, posting any bond, or seeking arbitration in any form.
11. Withholding.
-----------
The parties understand and agree that all payments to be made by
the Company and the Subsidiary pursuant to this Agreement shall be subject to
all applicable tax withholding obligations of the Company and the Subsidiary.
12. No Conflict.
-----------
The Executive represents and warrants that the Executive is not
party to or subject to any agreement, contract, understanding, covenant, judg-
ment or decree or under any obligation, contractual or otherwise, in any way
restricting or adversely affecting the Executive's ability to act for the
Company and the Subsidiary in all of the respects contemplated hereby.
13. Notices.
-------
All notices required or permitted hereunder will be given in
writing by personal delivery; by confirmed facsimile transmission (with a copy
dispatched by express delivery or registered or certified mail hereunder); or
by express delivery via express mail or any reputable express courier service,
in each case addressed:
to the Company and the Subsidiary: Hills Stores Company
15 Dan Road
Canton, MA 02021-9128
Attention: Corporate Counsel
Fax: 617-821-6966
Confirm: 617-821-1000
11
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<PAGE>
and to the Executive at the address set forth on the signature page or, as to
each party, at such other address as may be designated by notice in the manner
set forth herein. Notices which are delivered personally, by confirmed fac-
simile transmission, or by courier as aforesaid, will be effective on the date
of delivery.
14. Miscellaneous:
-------------
(a) The failure of any party at any time to require perfor-
mance of any provision hereunder will in no way affect the right of that or any
other party thereafter to enforce the same or to enforce any of the other provi-
sions in this Agreement; nor will the waiver by any party of the breach of any
provision hereof be taken or held to be a waiver of any prior or subsequent
breach of such provision or as a waiver of the provision itself.
(b) This Agreement is a personal contract calling for the
provision of unique services by the Executive, and the Executive's rights and
obligations hereunder may not be sold, transferred, assigned, pledged or
hypothecated by the Executive. In the event of any attempted assignment or
transfer of rights hereunder by the Executive contrary to the provisions hereof
(other than as may be required by law), the Company and the Subsidiary will
have no further liability for payments hereunder. The rights and obligations of
the Company and the Subsidiary hereunder will be binding upon and run in favor
of the successors and assigns of the Company and the Subsidiary.
(c) Each of the covenants and agreements set forth in this
Agreement is a separate and independent covenant which has been separately
bargained for and the parties hereto intend that the provisions of each such
covenant shall be enforced to the fullest extent permissible. Should the whole
or any part or provision of any such separate covenant be held or declared in-
valid, such invalidity shall not in any way affect the validity of any other
such covenant or of any part or provision of the same covenant not also held or
declared invalid. If any covenant shall be found to be invalid but would be
valid if some part thereof were deleted or the period or area of application
reduced, then such covenant shall apply with such minimum modification as may
be necessary to make it valid and effective.
(d) This Agreement has been made and will be governed in all
respects by the laws of the State of Massachusetts applicable to contracts made
and to be wholly performed within such state, and the parties hereby irrevocably
consent to the jurisdiction of the courts of the State of Massachusetts and
federal courts located therein for the purpose of enforcing this Agreement.
(e) Any controversy arising out of or relating to this
Agreement or the breach hereof shall be settled by arbitration in Boston, Massa-
chusetts by a single neutral arbitrator who shall be a retired federal or state
court judge in accordance with the Commercial Arbitration Rules then obtaining
of the American Arbitration Association and judgment upon the award rendered
may be entered in any court having jurisdiction thereof, except that in the
event of any controversy relating to any violation or alleged violation of any
provision of Section 8 or Section 9 hereof, the Company and the Subsidiary shall
in their sole discretion be entitled to seek injunctive relief from a court of
competent jurisdiction without any requirement to seek arbitration. The parties
hereto agree that any arbitral award may be enforced against the parties to an
arbitration proceeding or their assets wherever they may be found.
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<PAGE>
(f) This Agreement sets forth the entire understanding
between the parties as to the subject matter of this Agreement and merges and
supersedes all prior agreements, commitments, representations, writings and
discussions among the parties with respect to that subject matter. This Agree-
ment may be terminated, altered, modified or changed only by a written instru-
ment signed by all of the parties hereto.
(g) The Section heading contained herein are for purposes of
convenience only and are not intended to define or list the contents of the
Sections.
(h) The provisions of this Agreement which by their terms
call for performance subsequent to termination of the Term hereunder, or of this
Agreement, shall so survive such termination.
(i) The Company shall pay to the Executive all costs
incurred by the Executive in any proceeding for the successful enforcement of
the terms of this Agreement, including reasonable costs of investigation and
attorneys' fees and expenses.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
HILLS STORES COMPANY
By: /s/ Mark B. Dickstein
_________________________
Name:
Title:
HILLS DEPARTMENT STORE COMPANY
By: /s/ Mark B. Dickstein
_________________________
Name:
Title
Accepted and Agreed:
/s/ Gregory K. Raven
_________________________
Gregory K. Raven
Address for notices:
7385 McShu Lane
- -------------------------
Hudson, Ohio 44236
- -------------------------
Fax:
Confirm:
13
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<PAGE>
EXHIBIT 10.10
CONSULTING AGREEMENT made as of February 8, 1996, by and between Hills
Department Store Company, a Delaware corporation having its principal office at
15 Dan Road, Canton, Massachusetts ("Principal Office"), and Hills Stores
Company (the "Company"), a Delaware corporation having its principal office at
the Principal Office, and Chaim Y. Edelstein the ("Consultant"), who resides at
the address specified in Schedule A.
WHEREAS, Consultant is presently working for the Company, in a "Senior
Advisory Position" as a consultant; and
WHEREAS, the Company desires to secure the continued services of Consultant
in such Senior Advisory Position, and Consultant is willing to continue to
provide such services.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
hereinafter contained, the Company and Consultant agree as follows:
SECTION 1. Engagement.
----------
The Company hereby agrees to continue to engage Consultant in the Senior
Advisory Position, and Consultant hereby accepts such engagement. The Consul-
tant agrees to commit a substantial portion of his professional time to pro-
viding consulting services to the Company hereunder.
SECTION 2. Term.
----
The engagement of Consultant by the Company as provided in Section 1 shall
continue to February 7, 1997.
SECTION 3. Compensation and Expenses.
-------------------------
(a) Salary.
------
Consultant shall receive the consulting fee, specified in Schedule
A. Consultant will be paid in equal monthly installments on the
1st day following each calendar month in which consultant's
services are provided to the Company.
(b) Bonuses.
-------
Consultant shall receive the bonus specified in Schedule A, upon
the terms and conditions specified in Schedule A. Such bonus
shall be paid to Consultant within sixty (60) days after the end
of the Company's 1996 fiscal year.
(c) Options.
-------
Consultant shall receive the stock options specified in
Schedule A, subject to the terms of the Company's 1993 Incentive
and Nonqualified Stock Option Plan and the actual Option Grant
dated February 7, 1996.
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(d) Restricted Stock.
----------------
Consultant shall receive the restricted stock specified in
Schedule A, subject to the terms of the Restricted Stock Agreement
dated as of February 8, 1996.
(e) Expenses.
--------
The Company shall reimburse Consultant for all reasonable and
documented out-of-pocket expenses incurred by Consultant in con-
nection with the business of the Company and in performance of
Consultant's duties under this Agreement.
SECTION 4. Termination by the Company.
--------------------------
The Company shall have the right to terminate Consultant's engagement at
any time for "Cause." For purposes of this Agreement, "Cause" shall mean (a)
termination by action of a majority of the members of the Hills Stores Company's
Board of Directors, because of:
(i) The Consultant's willful or intentional failure or refusal to
perform or observe any of the Consultant's material duties,
responsibilities or obligations set forth in, or as contemplated
under, this Agreement, if such breach is not cured within 30 days
after notice thereof to the Consultant by the Company;
(ii) Any willful or intentional act or failure to act involving fraud,
theft, embezzlement, dishonesty or moral turpitude (collectively,
"Fraud") affecting the Company or any supplier or employee of the
Company; or
(iii) Conviction of (or a plea of nolo contendere to) an offense which
is a felony in the jurisdiction involved or which is a misdemeanor
in the jurisdiction involved but which involves Fraud.
SECTION 5. Termination by Death.
--------------------
In the event Consultant dies during the Term, Consultant's engagement shall
terminate.
SECTION 6. Termination by Disability.
-------------------------
In the event that Consultant suffers a disability which prevents Consultant
from substantially performing Consultant's duties under this Agreement for a
period of a least ninety (90) consecutive or nonconsecutive calendar days within
any three hundred sixty-five (365) calendar day period, the Company shall have
the right, after such ninety (90) calendar day period has elapsed, to terminate
Consultant's engagement hereunder.
SECTION 7. Termination by Consultant.
-------------------------
Notwithstanding any other provision of this Agreement, Consultant may
terminate Consultant's engagement following a Change in Control, by written
notice served upon the Company within thirty (30) calendar days after Consultant
has knowledge of an event constituting "Good Reason."
2
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<PAGE>
(a) For purposes of this Agreement, the term "Change in Control" shall
mean any one of the following events:
(i) any "person" as such term is used in Sections 3(a)(9) and
13(d) of the Securities Exchange Act of 1934, other than
Dickstein Partners Inc. and its Affiliates becomes a
"beneficial owner," as such term is used in Rule 13-d-3
promogulated under such Act, of 30% or more of the voting
stock of Hills Stores Company or the majority of the Board
of Directors of Hills Stores Company consist of individuals
other than Incumbent Directors, which term means the members
of the Board on the date of this Agreement; provided that
any person becoming a director subsequent to such date whose
election or nomination for election was supported by a
majority of the directors who then comprised the Incumbent
Directors shall be considered to be an Incumbent Director;
(ii) the Company adopts any plan of liquidation providing for the
distribution of all or substantially all of the assets of
the Company on a consolidated basis;
(iii) Hills Stores Company merges or combines with another company
and, immediately after the merger or combination, the stock-
holders of the Company immediately prior to the combination
hold, directly or indirectly, (1) in the event Hills Stores
Company is the surviving corporation 50% or less of the
voting stock of the combined company or (2) in the event
Hills Stores Company is not the surviving corporation 50% or
less of the voting stock or other ownership interests of the
entity or entities, if any, that succeed to the business of
Hills Stores Company; or
(iv) the Company sells all or substantially all of its assets
determined on a consolidated basis.
For purposes of this Agreement, the term "Good Reason" shall mean:
(i) any action by the Company which results in a diminution of
Consultant's Senior Advisory Position or
(ii) any failure by the Company to timely pay the amounts or pro-
vide the benefits prescribed by this Agreement, other than
an isolated failure not occurring in bad faith and which is
remedied promptly after receipt of written notice thereof
given by Consultant.
(b) In the event of (i) termination of this Agreement by the Company
other than for Cause or (ii) termination of this Agreement by Con-
sultant for Good Reason after a Change in Control, the Company
shall continue to pay Consultant, the amounts described in Section
3 and in the manner set forth in Section 3 of this Agreement
throughout the term of the Agreement.
SECTION 8. Acceleration and Expiration of Options.
--------------------------------------
(a) Any options to purchase the Common Stock of the Company
("Options") granted by the Company to Consultant that have not yet
become exercisable shall become exercisable upon the earliest to
occur of (i) the termination of Consultant's engagement as a re-
3
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<PAGE>
sult of Consultant's death or disability; (ii) the termination by
Consultant with Good Reason; after a Change in Control. Notwith-
standing the foregoing, all Options, whether currently exercisable
or not, shall expire and cease to be exercisable as follows:
(i) if the Company terminates Consultant's engagement for Cause,
immediately upon the effective date of such termination;
(ii) if Consultant dies while engaged by the Company, six (6)
calendar months after Consultant's death; and
(iii) if Consultant's engagement is terminated as a result of dis-
ability, six (6) calendar months after the effective date of
such termination.
(b) Notwithstanding the termination of this Consulting Agreement (pro-
vided Consultant's stock options, as shown on Schedule A hereto,
have not been otherwise terminated pursuant to the terms of this
Consulting Agreement or the terms of the 1993 Incentive and Non-
qualified Stock Option Plan) as long as Consultant is available,
willing and able to provide the Consulting services contemplated
by this Agreement, the stock options shown on Schedule A shall re-
main in effect and all vesting and exercise rights of Consultant
with respect to these options shall continue.
SECTION 9. Accelerated Vesting of Restricted Stock.
---------------------------------------
Consultant shall receive restricted stock grants from the Company which are
subject to periodic vesting. In the event Consultant's engagement with the
Company is terminated (a) as a result of Consultant's death or disability or (b)
by Consultant with good reason after a Change in Control, then all restricted
stock held by Consultant, not otherwise vested, shall become fully vested,
subject to the terms of the restricted stock agreement between the Company and
Consultant.
SECTION 10. No Mitigation; No Offset.
------------------------
Consultant shall be under no obligation to mitigate damages or the amount
of any payment provided for under this Agreement by seeking another engagement
or otherwise and there shall be no offset against amounts due Consultant under
this Agreement on account of any remuneration attributable to any subsequent
engagement that Consultant may obtain.
SECTION 11. Covenants of Consultant.
-----------------------
(a) Consultant recognizes that the knowledge of, information con-
cerning and relationship with customers, suppliers and agents, and
the knowledge of the Company's business methods, systems, plans
and policies which Consultant will establish, receive or obtain as
a consultant to the Company, are valuable and unique assets of the
business of the Company. Consultant will not, during or within
two (2) years after the Term, disclose any such knowledge or in-
formation pertaining to the Company, its customers, suppliers,
agents, policies or other aspects of the business, for any reason
or purpose, whatsoever except pursuant to Consultant's duties
hereunder or as otherwise authorized by the Company in writing.
The foregoing restriction shall not apply, following termination
4
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<PAGE>
of Consultant's engagement hereunder, to knowledge or information
which (i) is in or enters the public domain without violation of
this Agreement or other obligations of confidentiality by Consul-
tant or his agents or representatives, (ii) Consultant can demon-
strate was in his possession on a nonconfidential basis prior to
the commencement of his engagement with the Company, or (iii)
Consultant can demonstrate was received or obtained by him on a
non-confidential basis from a third party who did not acquire it
wrongfully or under an obligation of confidentiality, subsequent
to the termination of his engagement hereunder.
(b) All memoranda, notes, records or other documents made or compiled
by Consultant or made available to Consultant while engaged con-
cerning customers, suppliers, agents or personnel of the Company,
or the Company's business methods, systems, plans and policies,
shall be the Company's property and shall be delivered to the
Company on termination of Consultant's engagement or at any other
time on request.
(c) During the term of the Consultant's engagement and for two (2)
years thereafter, Consultant shall not, except pursuant to and in
furtherance of his duties hereunder, directly or indirectly
solicit or initiate contact with any employee of the Company with
a view to inducing or encouraging such employee to leave the em-
ploy of the Company for the purpose of being hired by Consultant,
an employer affiliated with him or any competitor of the Company.
(d) Consultant acknowledges that the provisions of this section are
reasonable and necessary for the protection of the Company and
that the Company will be irrevocably damaged if such covenants are
not specifically enforced. Accordingly, Consultant agrees that,
in addition to any other relief to which the Company may be en-
titled in the form of actual or punitive damages, the Company
shall be entitled to seek and obtain injunctive relief from a
court of competent jurisdiction for the purposes of restraining
Consultant from any actual or threatened breach of such covenants.
(e) In the event that, following the termination of this Agreement,
Consultant is entitled to receive any further payments other than
for compensation or other amounts accrued prior to termination or
expiration of this Agreement, such payments shall nonetheless
cease and the Company shall no longer be obligated to make such
payments if there is a material breach of any of the covenants in
this section and Consultant shall forthwith upon demand of the
Company repay any such amounts paid to Consultant subsequent to
the date such breach occurred.
SECTION 12. Entire Agreement.
----------------
This Agreement contains the entire understanding of the parties with
respect to the subject matter thereof, and, supersedes and replaces in its en-
tirety any and all prior agreements and arrangements of the parties with respect
to the subject matter hereof.
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<PAGE>
SECTION 13. Governing Law.
-------------
This Agreement and all matters and issues collateral thereto shall be
governed by the laws of The Commonwealth of Massachusetts applicable to con-
tracts performed entirely therein.
SECTION 14. Severability.
------------
If any of this Agreement, as applied to either party or to any circum-
stance, shall be adjudged by a court to be void and unenforceable, the same
shall in no way affect any other provision of this Agreement or the validity or
enforceability thereof.
SECTION 15. Notices.
-------
All notices or other communications hereunder shall be given in writing and
shall be deemed given if served personally or mailed by registered or certified
mail, return receipt requested, to the parties at their respective addresses
indicated below, or at such other address or addresses as they may hereafter
designate in writing
To the Company c/o: Hills Stores Company
15 Dan Road
Canton, MA 02021-9128
ATTN: Vice President-Secretary
& Corporate Counsel
To the Consultant: At the address noted on Exhibit A.
IN WITNESS WHEREOF, the parties have executed this Agreement on
February 7, 1996.
/s/ Chaim Edelstein
------------------------------
Chaim Edelstein
HILLS DEPARTMENT STORE COMPANY
HILLS STORES COMPANY
BY:/s/ Gregory K. Raven
------------------------------
President
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______________________________________________________________________________
<PAGE>
SCHEDULE A
TO
CONSULTING AGREEMENT
BETWEEN
HILLS DEPARTMENT STORE COMPANY
AND
CONSULTANT
Name Chaim Y. Edelstein
Address 1040 Park Avenue - 12E
New York, NY 10028
Title of Position Senior Advisory Position and Consultant
for Hills Department Store Company and
Hills Stores Company
Term of Engagement February 8, 1996 through February 7, 1997
Annual Consulting Fee $400,000 - payable in equal monthly installments
of $33,333.00.
Bonuses
If the Consultant provides or is available to
provide consulting service to the Company
throughout the term of this Agreement, then
Consultant shall be entitled to a performance
bonus in accordance with the schedule set forth
herein below, provided the Company's EBITDA
goals for the year are achieved:
Bonus to be Paid
$100,000 - If 1996 Bank Plan EBITDA goal is
achieved by Company.
$200,000 - If 1996 Operating Plan EBITDA
goal is achieved by the Company.
In the event the actual EBITDA achieved by the
Company is in excess of the Bank Plan, but less
than the Operating Plan goal, then Consultant
shall receive a bonus in excess of $100,000 which
has been prorated on a straight-line basis to
reflect the actual EBITDA performance achieved
relative to the two EBITDA goals. (As an example,
if EBITDA is halfway between the two goals, the
bonus would be $150,000).
Options An option to purchase 30,000 shares of Hills
Stores Company Common Stock which was granted on
February 7, 1996. The purchase price is $10.125.
Restricted Stock 20,000 shares of restricted stock will be granted
to Consultant pursuant to a restricted stock
agreement between Hills Stores Company and
Consultant.
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<PAGE>
EXHIBIT 10.12
HILLS STORES COMPANY
1996 DIRECTORS STOCK OPTION PLAN
SECTION 1. PURPOSE
This 1996 Directors Stock Option Plan (the "Plan") of Hills Stores Company,
a Delaware corporation (the "Company"), is designed to provide additional
incentive to individuals acting as directors of the Company who are not also
employees of the Company ("Non-Employee Directors"). The Company intends that
this purpose will be effected by the granting of nonqualified stock options
("Stock Options") under the Plan which afford such Non-Employee Directors an
opportunity to acquire or increase their proprietary interest in the Company
through the acquisition of shares of its Common Stock.
SECTION 2. ADMINISTRATION
The terms of the Stock Options are set forth herein and may not be varied
other than by amendment of the Plan in accordance with Section 10. To the
extent that any administrative action is required in connection with the Plan,
such action shall be taken by the Board of Directors (the "Board"), whose deter-
mination in such case shall be conclusive.
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 per
share (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 250,000 shares of Common
Stock; provided, however, that the class and aggregate number of shares which
may be subject to options granted under the Plan shall be subject to adjustment
as provided in Section 8 hereof.
3.2 Expiration, Cancellation or Termination of Option.
Whenever any outstanding option under the Plan expires, is cancelled
or is otherwise terminated (other than by exercise), the shares of Common Stock
allocable to the unexercised portion of such option may again be the subject of
options under the Plan.
SECTION 4. OPTION GRANTS
All Stock Options issued pursuant to this Plan shall be granted automati-
cally to Non-Employee Directors of the Company as hereinafter provided:
(a) Each Non-Employee Director of the Company on January 18, 1996
shall be entitled to receive an option to purchase 4,000 shares of Common Stock
at a purchase price of $12.00 per share. Thereafter, beginning with the 1997 -
1998 fiscal year of the Company, each such Director shall be automatically
granted an additional option to purchase 2,000 shares of Common Stock on the
first day of each fiscal year of the Company, provided that the optionee is then
a Non-Employee Director of the Company.
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<PAGE>
(b) Each Non-Employee Director of the Company who joins the Board
after January 18, 1996 shall be automatically granted an option to purchase
4,000 shares of Common Stock upon his or her initial election or initial
appointment as a director. Thereafter, beginning with the 1997-1998 fiscal year
of the Company, each such Director shall be automatically granted an additional
option to purchase 2,000 shares of Common Stock on the first day of each subse-
quent fiscal year of the Company, provided that the optionee is then a Non-
Employee Director.
SECTION 5. TERMINATION OF SERVICES OF OPTIONEE
If an optionee's membership on the Board terminates for cause pursuant to
Section 141(k) of the Delaware Corporation law or any successor statute, all
Stock Options held by such optionee shall thereupon terminate. If an optionee's
membership on the Board terminates for any other reason, he/she may exercise any
outstanding Stock Option to the extent that he/she was entitled to exercise it
on the date of termination. Exercise must occur no later than the first anni-
versary of such termination. Following such first anniversary, all such Stock
Options shall be null and void.
SECTION 6. TERMS OF THE OPTION AGREEMENTS
Each option agreement shall be in writing and shall contain the substance
of all of the following provisions:
6.1 Expiration of Option.
Unless earlier terminated pursuant to Section 5 of this Plan, each
option shall expire on the tenth anniversary of the date on which the option was
granted.
6.2 Vesting and Exercise.
Each option shall be exercisable, so long as it is valid and out-
standing, in part or as a whole, as follows:
(a) one-third of the shares during the period beginning on the first
anniversary of the date of grant, provided that the optionee is then a director
of the Company, and ending on the tenth anniversary of the date of grant;
(b) one-third of the shares during the period beginning on the second
anniversary of the date of grant, provided that the optionee is then a director
of the Company, and ending on the tenth anniversary of the date of grant; and
(c) one-third of the shares during the period beginning on the third
anniversary of the date of grant, provided that the optionee is then a director
of the Company, and ending on the tenth anniversary of the date of grant.
The right to purchase shares pursuant to the options shall be cumu-
lative.
6.3 Purchase Price.
Except as provided in Section 4(a) with respect to options granted on
January 18, 1996, the purchase price per share under each option shall be the
fair market value of the Common Stock on the date the option is granted. 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 the
New York Stock Exchange, or by another nationally recognized stock exchange, or
on NASDAQ. If no such closing price is reported for the date of grant, the pur-
2
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<PAGE>
chase price per share will be the closing price per share for the most recent
date for which a closing price is thus reported.
6.4 Transferability of Options.
Options shall not be transferable 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 Transferability of Shares.
As long as the Company has a class of securities registered pursuant
to Section 12 of the Securities Exchange Act of 1934, as amended, the shares of
stock issuable upon exercise of an option by any director may not be sold or
transferred (except that such shares may be issued upon exercise of such option)
by such director for a period of six months following the date of grant of said
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 exer-
cise of an option shall be made by cash in an amount, or a check, bank draft or
post or express money order payable in an amount, equal to the aggregate exer-
cise price for the number of shares specified in the Notice.
As promptly as practicable after receipt of the Notice and accom-
panying 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, ad-
dressed to the optionee, at the address specified in the Notice.
SECTION 8. CHANGES IN 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, or prior preference stock or other capital stock ahead of or
3
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<PAGE>
affecting the Common Stock or the rights thereof, or the dissolution or liquida-
tion 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 in-
crease 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 adjust-
ment 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 ad-
justment.
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 corpora-
tion 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) the time for exercise of all unexercised and unexpired options shall ac-
celerate 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 Board; and (ii) on or 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 property as the holders of shares of Common Stock receive
4
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<PAGE>
pursuant to the terms of the 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 sub-
ject to outstanding options.
8.6 Miscellaneous.
Adjustments under this Section 8 shall be determined by the Board 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 "Securities Act"), upon exer-
cise of any option, the Company shall not be required to issue such shares
unless the Board has received evidence satisfactory to it to the effect that the
holder of such option will not transfer such shares except pursuant to a regis-
tration 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
Board shall be final, binding and conclusive. In the event the shares issuable
on exercise of an option are not registered under the Securities Act, the
Company may imprint upon any certificate representing shares so issued the
following legend which counsel for the Company considers necessary or advisable
to comply with the Securities 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.
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<PAGE>
The Company may, but shall in no event be obligated to, register any
securities covered hereby pursuant to the Securities 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 govern-
mental authority.
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 shareholder approval shall be required
for any amendment that changes the class of persons eligible to receive options,
increases the aggregate number of shares issuable pursuant to this Plan (other
than by operation of Section 8 hereof) or materially increases the benefits to
optionees under the Plan. Notwithstanding anything herein to the contrary, the
provisions of this Plan which affect the price, date of exercisability, option
period or amount of shares under an option shall not be amended more than once
in any six-month period, other than to comport with changes in the Internal
Revenue Code of 1986, as amended.
SECTION 11. NONEXCLUSIVITY OF THE PLAN
Neither the adoption of the Plan by the Board of Directors nor the sub-
mission 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 on January 18, 1996; provided, that no
Stock Option may be exercised prior to the date on which the shareholders of the
Company approve the Plan. 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.
SECTION 13. GOVERNING LAW
All rights and obligations under the Plan shall be construed and inter-
preted in accordance with the laws of the Commonwealth of Massachusetts, without
giving effect to principles of conflict of laws.
******************
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<PAGE>
EXHIBIT 10.13
HILLS STORES COMPANY
CONSULTING AGREEMENT DATED DECEMBER 26, 1995 WITH SAMUEL L. KATZ
Mr. Samuel L. Katz
145 West 67th Street, Apt 15G
New York, New York 10023
Dear Sam:
This will confirm the terms on which you are being engaged as a financial
consultant to Hills Stores Company and Hills Department Stores Company
("Hills").
SECTION 1. CONSULTING AGREEMENT
Commencing January 1, 1996, you will serve as a financial consultant to
Hills, on the following basis.
(a) The consultancy will end on June 30, 1996 or earlier (i) at your
election upon one week notice to Hills or (ii) upon your commencement of another
full time permanent emplyment position which results in your inability to
fulfill your consulting duties. It is understood that during the period of
your consultancy with Hills you may obtain one or more consulting positions or
a full-time employment position (so long as the same does not interfere with
your consulting duties to Hills). You agree that you will resign this
consultancy before you commence providing services to any other discount
retailer.
(b) As a consultant, you will, if and as reasonably requested by
Hills, provide advice to Hills in the areas of your professional experience.
You will also continue to serve as a director of Hills for no additional
compensation (except as expressly provided for herein).
(c) Your compensation shall be as follows:
(i) You shall be paid a base fee of $20,000 per month. This
base fee shall be paid monthly in advance on the first business day
of each calendar month (except that the payment for February 1996
shall be made on February 5, 1996). If you terminate your consultancy
prior to the end of a calendar month, you shall be entitled to retain
that percentage of the current month's base fee equal to the percentage
of the current month elapsed, and you shall promptly return the
remainder of that month's fee payment (less any amounts otherwise owing
to you under this agreement).
(ii) You shall be eligible to receive at the end of the term
of this consultancy a bonus of up to $100,000, based upon the good
faith determination by the Board of Directors of Hills of your
contribution to Hills accomplishing the following goals: achieving
generally acceptable levels of liquidity and financial solvency,
obtaining financing secured by Hills' lay-away receivables and
obtaining financing secured by Hills' fixtures.
1
(iv) Hills will promptly reimburse you (against customary
documentation) for any reasonable out-of-pocket expenses incurred by
you in the performance of your services hereunder.
(d) Hills hereby exculpates you and agrees to indemnify you and hold
you harmless as provided in Exhibit A hereto.
(e) You may perform your consultancy services from any locations as
long as you are reasonably accessible to Hills in person or by phone.
(f) You may at any time, by notice to Hills, elect to transfer your
rights and obligations under this Section 1 to a corporation, partnership,
limited liability company or other entity that is solely owned by you (or by
you and your wife), provided that all of the consulting services to be provided
by that entity hereunder shall be provided by you as its representative. Such
transfer shall constitute a novtion that relieves you of personal liability for
obligations hereunder relating to activities subsequent to the transfer.
(g) Hills represents to you that this letter agreement has been duly
authorized by, and is valid, binding and enforceable against, Hills.
SECTION 2. MISCELLANEOUS
(a) Hills's obligations to you hereunder shall be absolute and shall
not be subject to any right of setoff, recoupment or counterclaim.
(b) This letter agreement shall be governed by the laws of the State
of New York applicable to contracts made and to be performed herein.
(c) Any dispute hereunder or in connection with the services to be
provided hereby shall, if not consensually resolved between the parties, be
resolved exclusively by arbitration under the auspices of the New York City
chapter of the American Arbitration Association. The arbitration award may be
entered as a judgment in any court of competent jurisdiction. The parties
irrevocably consent to jurisdiction for this purpose in, without limitation,
the courts of the State of New York in the County of New York and the Federal
District Court for the Southern District of New York. Service of process may
be provided by means of notice given in accordance with this agreement. You
shall be entitled to collect from Hills (x) all reasonable costs of
successfully enforcing your rights hereunder and (y) interest at the rate of
15% per annum on all amounts which you are entitled to be paid or recover
hereunder (such interest to begin to accrue on the fifth day after your demand
for such amounts).
(d) Notices hereunder shall be effective when received in writing by
the pertinent party at the adress specified below or at such other address as
such party shall have previously designated by notice:
If to Hills, in care of Hills Stores Company at 15 Dan Road,
Canton, Massachusetts 02021-9128, to the attention of
Corporate Counsel.
If to you, at the address to which this letter is addressed.
(e) This agreement shall not be assignable by Hills. There are no
third party beneficiaries of this agreement.
2
(f) All obligations of "Hills" hereunder shall be joint and several
obligations of Hills Stores Company and Hills Department Store Company.
Kindly confirm your agreement with the foregoing by countersigning
and returning a copy of this letter.
Very truly yours,
HILLS STORES COMPANY and HILLS
DEPARTMENT STORE COMPANY
By _____________________________________
E. Jackson Smailes, President and CEO
Agreed:
__________________________________
Samuel L. Katz
3
EXHIBIT A -- INDEMNIFICATION PROVISIONS
Reference is made to the "Indemnification Provisions" annexed to the
engagement letter of August 11, 1995 between Bear Stearns & Co., Inc. and Hills
Department Store Company and Hills Stores Company.
Those Indemnification Provisions shall, as if set forth herein, apply
to yourself (as if all references therein to Bear Stearns were to you), except
that the following shall for this purpose be inserted in lieu of clauses
(a) - (d):
"the letter agreement dated December 26, 1995 between you and Hills
Department Store Company and Hills Stores Company (the "agreement") to
which this Exhibit A is annexed, or the consultancy contemplated
thereby, or any act or omission taken (or alleged to have been taken)
by you in that capacity;"
If you transfer your rights in accordance with Section 1(f) of the
Agreement, the foregoing provisions shall apply to both yourself and the entity
to which that transfer is made.
INDEMNIFICATION PROVISIONS
REFERRED TO IN EXHIBIT A OF CONSULTING AGREEMENT
DATED DECEMBER 26, 1995 WITH SAMUEL L. KATZ
The Company (as such term is defined in the Agreement (as such term is
defined below) agrees to indemnify and hold harmless Bear Stearns, to the
fullest extent permitted by law, from and against any and all losses, claims,
damages, liabilities, obligations, penalties, judgments, awards, costs,
expenses and disbursements (and any and all actions, suits, proceedings and
investigations in respect thereof and any and all reasonable legal and other
costs, expenses and disbursements in giving testimony or furnishing documents
in response to a subpoena or otherwise), including, without limitation, the
reasonable costs, expenses and disbursements, as and when incurred, of
investigating, preparing or defending any such action, suit, proceeding or
investigation (whether or not in connection with litigation in which Bear
Stearns is a party), directly or indirectly, caused by, relating to, based
upon, arising out of or in connection with (a) Bear Stearns' acting for the
Company in connection with the Venture Transaction, any Alternative Transaction
and/or any Acquisition Transaction, including, without limitation, any act or
omission by Bear Stearns in connection with its acceptance of or the
performance or non-performance of its obligations under the letter agreement
dated August 11, 1995, between Bear Stearns and Hills Department Store Company
and Hills Stores Company, as it may be amended from time to time (the
"Agreement"), (b) any untrue statement or alleged untrue statement of a
material fact contained in, or omissions or alleged omissions from, the
Offering Memorandum (as such term is defined in the Agreement) or similar
statements or omissions in or from any other information concerning the
Company, the Venture Transaction, any Alternative Transaction and/or any
Acquisition Transaction furnished by the Company to Bear Stearns, Venture
Stores, any Alternative Bidder or any Prospective Purchaser (as such terms are
defined in the Agreement) or any party to the Venture Transaction, an
Alternative Transaction or an Acquisition Transaction (as such terms are
defined in the Agreement) or to any Agency (as such term is defined in the
Agreement), (c) the Venture Transaction, any Alternative Transaction or any
Acquisition Transaction or (d) any Opinion; provided, however, such indemnity
agreement shall not apply to any portion of such loss, claim, damage,
obligation, penalty, judgment, award, liability, cost, expense or disbursement
to the extent it is found in a final judgment by a court of competent
4
jurisdiction (not subject to further appeal) to have resulted primarily and
directly from the gross negligence or willful misconduct of Bear Stearns.
These Indemnification Provisions shall be in addition to any liability
which the Company may otherwise have to Bear Stearns or the persons indemnified
below in this sentence and shall extend to the following: The Bear Stearns
Companies Inc., Bear, Stearns & Co. Inc., and their respective affiliated
entities, directors, officers, employees, legal counsel, agents and controlling
persons (within the meaning of the federal securities laws). All references
to Bear Stearns in these Indemnification Provisions shall be understood to
include any and all of the foregoing.
If any action, suit, proceeding or investigation is commenced, as to
which Bear Stearns proposes to demand indemnification, it shall notify the
Company with reasonable promptness; provided, however, that any failure by Bear
Stearns to notify the Company shall not relieve the Company from its
obligations hereunder, except to the extent that the Company was materially
prejudiced by such failure to notify. Bear Stearns shall have the right to
retain one counsel of its own choice to represent it, and the Company shall pay
the reasonable fees, expenses and disbursements of such counsel; and such
counsel shall, to the extent consistent with its professional responsibilities,
cooperate with the Company and any counsel designated by the Company. The
Company shall be liable for any settlement of any claim against Bear Stearns
made with the Company's written consent, which consent shall not be
unreasonably withheld. The Company shall not, without the prior written
consent of Bear Stearns, settle or compromise any claim, or permit a default
or consent to the entry of any judgment in respect thereof, unless such
settlement, compromise or consent includes, as an unconditional term hereof,
the giving by the claimant to Bear Stearns of an unconditional and irrevocable
release from all liability in respect of such claim.
In order to provide for just and equitable contribution, if a claim
for indemnification pursuant to these Indemnifiacation Provisions is made but
it is found in a final judgment by a court of competent jurisdiction (not
subject to further appeal) that such indemnification may not be enforced in
such case, even though the express provisions hereof provide for
indemnification in such case, then the Company, on the one hand, and Bear
Stearns, on the other hand, shall contribute to the losses, claims, damages,
obligations, penalties, judgments, awards, liabilities, costs, expenses, and
disbursements to which the indemnified persons may be subject in accordance
with the relative benefits received by the Company, on the one hand, and Bear
Stearns, on the other hand, and also the relative fault of the Company, on the
one hand, and Bear Stearns, on the other hand, in connection with the
statements, acts or omissions which resulted in such losses, claims, damages,
obligations, penalties, judgments, awards, liabilities, costs, expenses or
disbursements and the relevant equitable considerations shall also be
considered. No person found liable for a fraudulent misrepresentation shall
be entitled to contribution from any person who is not also found liable for
such fraudulent misrepresentation. Notwithstanding the foregoing, Bear Stearns
shall not be obligated to contribute any amount hereunder that exceeds the
amount of fees previously received by Bear Stearns pursuant to the Agreement.
Neither termination nor completion of the engagement of Bear Stearns
referred to above shall affect these Indemnification Provisions which shall
then remain operative and in full force and effect.
5
<TABLE>
EXHIBIT 11.1
HILLS STORES COMPANY AND SUBSIDIARIES
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
<CAPTION>
Successor Company
------------------------------------------------------------
Fourteen Fiscal Year Thirteen Fiscal Year
Weeks Ended Ended Weeks Ended Ended
February 3, February 3, January 28, January 28,
1996 1996 1995 1995
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PRIMARY
Weighted average number of
common shares assumed to be
outstanding during the period 9,962,450 9,809,675 10,797,637 10,794,013
Assumed conversion of preferred
stock 1,252,389 - 3,207,195 3,207,195
Assumed exercise of stock options - - 105,733 104,290
Assumed exercise of stock rights 6,514 - - -
Assumed exercise of stock warrants - - - -
---------- --------- ---------- ----------
11,221,353 9,809,675 14,110,565 14,105,498
========== ========= ========== ==========
<CAPTION>
Predecessor
Sucessor Company Company
------------------------------- -------------
Thirteen Seventeen Thirty-Five
Weeks Ended Weeks Ended Weeks Ended
January 29, January 29, October 2,
1994 1994 1993
------------------------------------------------
<S> <C> <C> <C>
||
PRIMARY ||
||
Weighted average number of ||
common shares assumed to be ||
outstanding during the period 9,000,000 9,000,000 || 19,757,390
||
Assumed conversion of preferred ||
stock 5,000,000 5,000,000 || N/A
||
Assumed exercise of stock options 73,845 56,470 || -
||
Assumed exercise of stock rights - - || N/A
||
Assumed exercise of stock warrants - - || N/A
||
---------- ---------- || ----------
14,073,845 14,056,470 || 19,757,390
========== ========== || ==========
</TABLE>
1
- -------------------------------------------------------------------------------
<PAGE>
<TABLE>
EXHIBIT 11.1
HILLS STORES COMPANY AND SUBSIDIARIES
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
<CAPTION>
Successor Company
------------------------------------------------------------
Fourteen Fiscal Year Thirteen Fiscal Year
Weeks Ended Ended Weeks Ended Ended
February 3, February 3, January 28, January 28,
1996 1996 1995 1995
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FULLY-DILUTED
Weighted average number of
common shares assumed to be
outstanding during the period 9,983,044 10,029,442 10,797,637 10,794,013
Assumed conversion of preferred
stock 1,231,795 - 3,207,195 3,207,195
Assumed exercise of stock options - - 132,446 130,360
Assumed exercise of stock rights 6,514 - 700,000 700,000
Assumed exercise of stock warrants - - - -
Assumed conversion of Convertible
Junior Subordinated Debentures - - N/A N/A
---------- ---------- ---------- ----------
11,221,353 10,029,442 14,837,278 14,831,568
========== ========== ========== ==========
<CAPTION>
Predecessor
Successor Company Company
----------------------------------- ------------
Thirteen Seventeen Thirty-Five
Weeks Ended Weeks Ended Weeks Ended
January 29, January 29, October 2,
1994 1995 1993
--------------------------------------------------------
<S> <C> <C> <C>
FULLY-DILUTED ||
||
Weighted average number of ||
common shares assumed to be ||
outstanding during the period 9,000,000 9,000,000 || 19,757,390
||
Assumed conversion of preferred ||
stock 5,000,000 5,000,000 || N/A
||
Assumed exercise of stock options 123,566 94,492 || -
||
Assumed exercise of stock rights 700,000 700,000 || N/A
||
Assumed exercise of stock warrants - - || N/A
|
Assumed conversion of Convertible ||
Junior Subordinated Debentures N/A N/A || 2,224,293
---------- ---------- || ----------
14,823,566 14,794,492 || 21,981,683
========== ========== || ==========
</TABLE>
2
- ------------------------------------------------------------------------------
<PAGE>
<TABLE>
EXHIBIT 21
SUBSIDIARIES OF HILLS STORES COMPANY
<CAPTION>
NAME OF SUBSIDIARY STATE OF INCORPORATION
- ------------------ ----------------------
<S> <C>
Hills Department Store Company Delaware
HDS Transport, Inc. (1) Ohio
CRH International, Inc. (1) Ohio
Canton Advertising, Inc. (2) Massachusetts
Corporate Vision Inc. (1) Massachusetts
Hills Distributing Company (1) Delaware
<FN>
(1) Wholly-owned subsidiary of Hills Department Store Company
(2) Wholly-owned subsidiary of CRH International, Inc.
</TABLE>
1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
Hills Stores Company on Form S-8 (File No. 33-56321) of our report dated
March 10, 1995 on our audits of the Consolidated Financial Statements and
Financial Statement Schedules of Hills Stores Company as of January 28, 1995
and January 29, 1994 and for the year ended January 28, 1995, the seventeen
week period ended January 29, 1994, and the thirty-five week period ended
October 2, 1993, which report is included in this annual report on Form 10-K.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
April 9, 1996
1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Registration Statement No.
33-56321 of Hills Stores Company and Subsidiaries on Form S-8 of our reports
dated March 14, 1996 (April 5, 1996 with respect to the fifth paragraph of
Note 8), appearing in this annual report on Form 10-K of Hills Stores Company
and Subsidiaries for the year ended February 3, 1996.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
April 5, 1996
2
EXHIBIT 24
HILLS STORES COMPANY
FORM 10-K
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each of the directors and officers of Hills
Stores Company whose signature appears below constitutes and appoints Gregory
K. Raven, Kim D. Ahlholm and William K. Friend, and each of them, his/her true
and lawful attorneys-in-fact and agents with full power of substitution, for
him/her and in his/her name, place and stead, in any and all capacities,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in connection with the preparation, delivery and filing
of an Annual Report on Form 10-K of Hills Stores Company for the fiscal year
ended February 3, 1996 with the Securities and Exchange Commission and any
appropriate state or governmental agencies, as fully to all intents and purposes
as such person might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents or any of them, or their or his substi-
tutes, may lawfully do or cause to be done by virtue hereof.
SIGNATURE TITLE DATE
/s/ Chaim Y. Edelstein Chairman of the Board of
- ----------------------- the Company and Hills
Chaim Y. Edelstein Department Store Company March 6, 1996
/s/ Gregory K. Raven Director, President and Chief
- ----------------------- Executive Officer of the Company
Gregory K. Raven and Hills Department Store Company
(Principal Executive Officer and
Principal Financial Officer) March 6, 1996
/s/ Mark B. Dickstein Director of the Company and Hills
- ----------------------- Department Store Company March 6, 1996
Mark B. Dickstein
/s/Stanton J. Bluestone Director of the Company and Hills
- ----------------------- Department Store Company March 6, 1996
Stanton J. Bluestone
/s/ Samuel L. Katz Director of the Company and Hills
- ----------------------- Department Store Company March 6, 1996
Samuel L. Katz
/s/ John W. Burden Director of the Company and Hills
- ----------------------- Department Store Company March 6, 1996
John W. Burden
/s/ Alan S. Cooper Director of the Company and Hills
- ----------------------- Department Store Company March 6, 1996
Alan S. Cooper
/s/ Kim D. Ahlholm Vice President-Controller (Principal
- ----------------------- Accounting Officer) of the Company
Kim D. Ahlholm and Hills Department Store Company March 6, 1996
1
- -------------------------------------------------------------------------------
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> FEB-03-1996
<PERIOD-END> FEB-03-1996
<CASH> 18,058
<SECURITIES> 0
<RECEIVABLES> 28,646
<ALLOWANCES> (3,459)
<INVENTORY> 331,697
<CURRENT-ASSETS> 414,305
<PP&E> 231,198
<DEPRECIATION> (40,305)
<TOTAL-ASSETS> 858,723
<CURRENT-LIABILITIES> 267,215
<BONDS> 303,945
24,636
0
<COMMON> 100
<OTHER-SE> 254,563
<TOTAL-LIABILITY-AND-EQUITY> 858,723
<SALES> 1,900,104
<TOTAL-REVENUES> 1,900,104
<CGS> 1,384,421
<TOTAL-COSTS> 1,384,421
<OTHER-EXPENSES> 479,665
<LOSS-PROVISION> 683
<INTEREST-EXPENSE> 49,497
<INCOME-PRETAX> (13,479)
<INCOME-TAX> 3,187
<INCOME-CONTINUING> (16,666)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (16,666)
<EPS-PRIMARY> (1.70)
<EPS-DILUTED> (1.66)
</TABLE>
