FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
- ----- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 3, 1996
- ----- 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
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(Exact name of registrant as specified in its charter)
DELAWARE 31-1153510
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
15 DAN ROAD, CANTON, MASSACHUSETTS 02021
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(Address of principal executive offices) (Zip Code)
617-821-1000
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant; (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
-------- --------
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
YES X NO
-------- --------
The number of shares of common stock outstanding as of September 5, 1996
was 10,207,388 shares.
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HILLS STORES COMPANY AND SUBSIDIARIES
TABLE OF CONTENTS
-----------------
PART I - FINANCIAL INFORMATION
FINANCIAL STATEMENTS
<S> <C> <C>
Condensed Consolidated Balance Sheets as of August 3, 1996,
February 3, 1996, and July 29, 1995 3
Condensed Consolidated Statements of Operations for the
Thirteen and Twenty-six Weeks Ended August 3, 1996
and July 29, 1995 4
Condensed Consolidated Statements of Cash Flows for the
Twenty-six Weeks Ended August 3, 1996 and July 29, 1995 5
Notes to Condensed Consolidated Financial Statements 6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 9
PART II - OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS 13
ITEM 2: CHANGES IN SECURITIES 13
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 13
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K 14
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2
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HILLS STORES COMPANY AND SUBSIDIARIES
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CONDENSED CONSOLIDATED BALANCE SHEETS
<CAPTION>
August 3, February 3, July 29,
(in thousands) 1996 1996 1995
- -------------------------------------------------------------------------------
(unaudited) (unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 23,374 $ 22,898 $ 18,963
Accounts receivable, net 50,077 25,187 48,915
Inventories 458,094 331,697 442,565
Deferred tax asset 34,011 34,011 20,923
Current income taxes 29,907 - 20,261
Other current assets 6,318 5,352 6,231
---------- --------- ----------
Total current assets 601,781 419,145 557,858
Property and equipment, net 184,439 190,893 181,654
Property under capital leases, net 109,619 113,785 118,941
Beneficial lease rights, net 7,581 8,247 8,661
Other assets, net 19,691 15,746 8,187
Deferred tax asset 8,233 8,233 10,061
Reorganization value in excess of amounts
allocable to identifiable assets, net 103,648 107,514 140,887
---------- --------- ----------
$1,034,992 $ 863,563 $1,026,249
========== ========= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 6,428 $ 5,732 $ 6,121
Borrowings under revolving
credit facility 95,000 - 115,000
Accounts payable, trade 150,459 87,471 141,380
Other accounts payable and accrued
expenses 175,969 178,852 201,661
--------- --------- ----------
Total current liabilities 427,856 272,055 464,162
Long-term senior notes (Note 4) 195,000 160,000 160,000
Long-term obligations under capital leases 117,309 118,776 121,525
Financing obligations -
sale/leaseback (Note 5) 35,119 25,169 25,169
Other liabilities 7,304 8,264 8,935
Commitments and contingencies - - -
Preferred stock, at mandatory redemption
value (Note 2) 21,421 24,636 25,716
Common shareholders' equity 230,983 254,663 220,742
---------- --------- ----------
$1,034,992 $ 863,563 $1,026,249
========== ========= ==========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
3
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HILLS STORES COMPANY AND SUBSIDIARIES
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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
Thirteen Weeks Ended Twenty-six Weeks Ended
-------------------- ----------------------
(unaudited) August 3, July 29, August 3, July 29,
(in thousands, except per 1996 1995 1996 1995
share amounts)
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $388,600 $389,424 $758,848 $752,286
Cost of sales 290,909 288,683 561,894 550,235
Selling and administrative
expenses 103,767 105,574 206,477 203,468
Amortization of reorganization
value in excess of amounts
allocable to identifiable assets 1,510 1,939 3,031 3,878
Costs related to change in control - 43,292 - 43,292
Impairment of long-lived assets
(Note 6) - - 11,706 -
-------- -------- -------- --------
Operating loss ( 7,586) ( 50,064) ( 24,260) ( 48,587)
Interest expense, net ( 15,466) ( 11,688) ( 28,732) ( 21,181)
-------- -------- -------- --------
Loss before income taxes ( 23,052) ( 61,752) ( 52,992) ( 69,768)
Income tax benefit 12,731 16,582 27,933 20,261
-------- -------- -------- --------
Loss before extraordinary loss ( 10,321) ( 45,170) ( 25,059) ( 49,507)
Extraordinary loss on extinguishment
of debt, net (Note 4) ( 2,046) - ( 2,046) -
-------- -------- -------- --------
Net loss ($ 12,367) ($ 45,170) ($ 27,105) ($ 49,507)
======== ======== ======== ========
Primary loss per share (Note 3):
Before extraordinary loss ($ 1.01) ($ 4.66) ($ 2.45) ($ 5.11)
Extraordinary loss ( .20) - ( .20) -
-------- -------- -------- --------
Net loss ($ 1.21) ($ 4.66) ($ 2.65) ($ 5.11)
======== ======== ======== ========
Fully-diluted loss per share
(Note 3):
Before extraordinary loss ($ 1.01) ($ 4.64) ($ 2.45) ($ 4.90)
Extraordinary loss ( .20) - ( .20) -
-------- -------- -------- --------
Net loss ($ 1.21) ($ 4.64) ($ 2.65) ($ 4.90)
======== ======== ======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
4
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HILLS STORES COMPANY AND SUBSIDIARIES
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION> Twenty-Six Weeks Ended
--------------------------
(unaudited) August 3, July 29,
(in thousands) 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($ 27,105) ($ 49,507)
Adjustments to reconcile net loss to net
cash used for operating activities:
Depreciation and amortization 17,616 14,890
Amortization of deferred financing costs 3,812 2,099
Extraordinary loss on extinguishment of debt 2,046 -
Amortization of reorganization value in
excess of amounts allocable to
identifiable assets 3,031 3,878
Loss on disposal of fixed assets 797 45
Impairment of long-lived assets 11,706 -
Increase in accounts receivable and other
current assets ( 25,856) ( 26,932)
Increase in inventories ( 126,397) ( 128,714)
Increase in accounts payable and other
accrued expenses 60,652 46,663
Increase in income taxes ( 28,456) ( 20,261)
Other, net ( 321) 182
-------- ---------
Net cash used for operating activities ( 108,475) ( 157,657)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ( 17,667) ( 36,080)
-------- ---------
Net cash used for investing activities ( 17,667) ( 36,080)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of 12 1/2% Senior Notes 195,000 -
Fees incurred with the issuance of
12 1/2% Senior Notes ( 8,100) -
Redemption of 10.25% Senior Notes ( 160,000) -
Payment of debt premium ( 1,749) -
Borrowings under revolving credit facility, net 95,000 115,000
Shares repurchased per self-tender offer - ( 75,000)
Fixture and equipment financings 12,639 -
Principal payments under capital lease obligations ( 3,460) ( 2,983)
Cash distributions pursuant to the Plan
of Reorganization ( 1,620) ( 1,615)
Other ( 1,092) ( 2,753)
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Net cash provided by financing activities 126,618 32,649
-------- ---------
Net increase (decrease) in cash and
cash equivalents 476 ( 161,088)
Cash and cash equivalents at beginning of period 22,898 180,051
-------- ---------
Cash and cash equivalents at end of period $ 23,374 $ 18,963
======== =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
5
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HILLS STORES COMPANY AND SUBSIDIARIES
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
---------------------
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant intercompany transactions and
balances have been eliminated. The information furnished reflects all normal
recurring adjustments which are, in the opinion of management, necessary to
present a fair statement of the results for the interim period.
The accompanying unaudited consolidated financial statements are presented in
accordance with the requirements of Form 10-Q and consequently do not include
all the disclosures normally required by generally accepted accounting
principles nor those normally made in the Company's annual Form 10-K filing.
Reference should be made to the Company's Annual Report on Form 10-K for
additional disclosures, including a summary of the Company's accounting
policies. Certain prior year amounts have been reclassified to conform to the
current year presentation. The Company's business is seasonal in nature and
the results of operations for the interim periods presented are not necessarily
indicative of the results to be expected for the full fiscal year. The fourth
quarter of each fiscal year provides the most significant portion of the
Company's annual sales and most of its operating earnings, with operating
earnings particularly concentrated in the Christmas selling season.
2. HILLS STORES SERIES A CONVERTIBLE PREFERRED STOCK
-------------------------------------------------
During the twenty-six weeks ended August 3, 1996, 160,738 shares of the
Company's Series A Convertible Preferred Stock ($20 par value) were converted
to the Company's Common Stock on a share for share basis.
3. EARNINGS PER SHARE
------------------
Primary loss per share for the thirteen week periods ended August 3, 1996 and
July 29, 1995 was computed based on the weighted average number of common shares
assumed to be outstanding during the period of 10,263,118 and 9,699,128 shares,
respectively. Fully-diluted loss per share for the thirteen week periods ended
August 3, 1996 and July 29, 1995 was computed based on the weighted average
number of common shares assumed to be outstanding during the period of
10,263,118 and 9,730,370 shares, respectively.
Primary loss per share for the twenty-six week periods ended August 3, 1996 and
July 29, 1995 was computed based on the weighted average number of common shares
assumed to be outstanding during the period of 10,214,414 and 9,682,708 shares,
respectively. Fully-diluted loss per share for the twenty-six week periods
ended August 3, 1996 and July 29, 1995 was computed based on the weighted
average number of common shares assumed to be outstanding during the period of
10,214,414 and 10,108,912 shares, respectively.
4. SENIOR NOTES
------------
On April 19, 1996 the Company issued $195 million of unsecured 12 1/2% Senior
Notes (the "New Senior Notes") due 2003. The New Senior Notes are noncallable,
6
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HILLS STORES COMPANY AND SUBSIDIARIES
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4. SENIOR NOTES (CONTINUED)
------------------------
unconditionally guaranteed by all the subsidiaries of the Company, with interest
payable semiannually. The New Senior Notes contain covenants regarding
limitations on debt incurrence and the issuance of preferred stock. Separate
financial statements of the Company's subsidiary guarantors have not been
provided because (1) the subsidiary guarantors constitute all of the Company's
direct and indirect subsidiaries, (2) they have fully and unconditionally
guaranteed the New Senior Notes on a joint and several basis, (3) their
aggregate assets, liabilities, earnings and equity are substantially equivalent
to those of the Company on a consolidated basis, and (4) separate financial
statements are not deemed to be material to investors. Additionally, both the
terms of the Company's revolving credit facility and the New Senior Notes limit
the ability of the subsidiaries to pay dividends.
In connection with the sale of the New Senior Notes, the Company offered to
redeem all of its outstanding 10.25% Senior Notes due 2003 (the "Old Senior
Notes") at a redemption price equal to 101% of principal, plus accrued interest,
with $159.1 million of the proceeds from the New Senior Notes placed in escrow
for this purpose. On May 20, 1996, the Company redeemed approximately $155
million of its approximately $157.5 million Old Senior Notes. On July 1, 1996,
the Company redeemed the approximately $2.5 million Old Senior Notes which
remained outstanding following the May 20, 1996 redemption at the indenture
specified price of 104% of principal plus accrued interest. In addition, on
June 28, 1996 the Company deposited, in trust, funds sufficient to redeem, upon
issuance, approximately $2.5 million Old Senior Notes yet to be issued under the
terms of the Company's 1993 plan of reorganization. As a result of these
transactions, the Company recognized an extraordinary after-tax loss for early
extinguishment of debt of $2.0 million, or $0.20 per share, in the second fiscal
quarter. The extraordinary loss includes the redemption premiums and the
write-off of the related deferred financing costs.
5. FINANCING OBLIGATIONS - SALE/LEASEBACK
--------------------------------------
During June 1996, the Company obtained $2.7 million of financing for certain of
its fixed assets through a sale/leaseback arrangement. The lease, which has
been accounted for as a capital lease, has a term of 42 months and requires
minimum annual rental payments of $0.5 million in 1996, $0.9 million in 1997,
$0.9 million in 1998, and $0.8 million in 1999.
During July 1996, the Company obtained $10.0 million of financing, which
includes transaction costs, for certain of its fixed assets through a sale/
leaseback arrangement. This transaction was accounted for as a financing
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 $57.7 million at August 3, 1996. The lease, which has
a term of five years, requires minimum annual rental payments of $0.6 million
in 1996, $2.1 million in 1997, $3.2 million in 1998, $3.2 million in 1999,
$3.2 million in 2000 and $1.6 million in 2001. The lease term also includes a
bargain purchase option to purchase all of the assets at the end of the initial
lease term.
7
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HILLS STORES COMPANY AND SUBSIDIARIES
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6. IMPAIRMENT OF LONG-LIVED ASSETS
-------------------------------
Effective February 4, 1996, the Company adopted 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"). FAS 121
requires that the carrying value of long-lived tangible and certain intangible
assets be evaluated periodically in relation to the operating performance and
estimated future cash flows of the underlying assets. In accordance with
FAS 121, in the first quarter of fiscal 1996, the Company recognized a pre-tax
charge of $11.7 million ($7.2 million after tax, or $0.70 per share on a fully-
diluted basis) for the twenty-six weeks ended August 3, 1996, to reduce the
carrying value of certain of its long-lived tangible and intangible assets to
their estimated fair market value.
7. ACCOUNTING FOR STOCK-BASED COMPENSATION
---------------------------------------
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123: "Accounting for Stock-Based
Compensation," ("FAS 123") which is effective for the Company's fiscal year
beginning February 4, 1996. FAS 123 requires expanded disclosures of stock-
based compensation arrangements with employees and encourages, but does not
require, the recognition of compensation expense based on the fair value of the
equity instrument awarded. Companies are permitted, however, to continue to
apply APB Opinion No. 25, which recognizes compensation expense based on the
intrinsic value of the equity instrument awarded. The Company will continue to
apply APB Opinion No. 25 to its stock-based compenstion awards to employees and
will disclose the required pro forma effect on net income and earnings per
share.
8. 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, Inc. were
certified as being elected to the Board of Directors (see Note 21 of Notes to
Consolidated Financial Statements in the Company's Annual Report for the year
ended February 3, 1996 on Form 10-K). Costs related to the July 5, 1995 change
in control were $43.3 million. These costs consist of $33.8 million for
severance and retirement payments, including certain taxes attributable thereto,
to six senior executives, a consultant to the Company and approximately 20
associates, $6.0 million paid to holders of the Senior Notes, and legal and
other miscellaneous change in control costs.
8
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HILLS STORES COMPANY AND SUBSIDIARIES
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
QUARTER ENDED AUGUST 3, 1996 COMPARED WITH
QUARTER ENDED JULY 29, 1995
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 decreased 0.2% compared with the same period in fiscal 1995. The decrease
was primarily due to increased competition in the Company's primary market areas
and weak sales across all apparel categories, offset by incremental sales
increases in 1996 from the Company's ten new stores and by sales increases in
most hardlines categories, particularly in the back-to-school areas and candy.
Comparable store sales of stores open for a full fiscal year decreased by 3.6%.
Cost of sales as a percentage of sales was 74.9% in fiscal 1996 compared with
74.1% in the second quarter of 1995. The decrease in gross margin percentage
of 0.8% was primarily due to a decrease in selling prices of selected
merchandise caused by continued competitive pressures across all lines of
business and, to a lesser extent, a shift in sales towards lower margin
categories.
Selling and administrative expenses, including depreciation and other occupancy
expenses, as a percentage of sales were 26.7% compared with 27.1% in 1995, a
0.4% decrease. This decrease was due to the Company's continued emphasis on
cost control, particularly in payroll and payroll related areas, partially
offset by additional depreciation expense on a higher fixed asset base as a
result of the Company's remodeling and expansion program in 1995.
See Note 8 of the Notes to Condensed Consolidated Financial Statements regarding
the charge for the July 5, 1995 change in control.
Interest expense, net, was $15.5 million in the second quarter of 1996 compared
with $11.7 million in the same period of 1995. This $3.8 million increase was
due primarily to the increased interest expense related to the refinancing of
the 10.25% Senior Notes with a new issue of 12 1/2% Senior Notes (see Note 4 of
the Notes to Condensed Consolidated Financial Statements).
The effective tax rate was 55.2% in the second quarter of fiscal 1996 compared
with a rate of 26.9% in the second quarter of fiscal 1995. The increase in the
rate results principally from approximately $27.0 million in non-deductible
expenses associated with the prior year change in control.
The after-tax extraordinary loss of $2.0 million in 1996 represented the early
extinguishment of debt related to the refinancing and redemption of the 10.25%
Senior Notes (see Note 4 of the Notes to Condensed Consolidated Financial
Statements). This amount included redemption premiums and the write-off of the
related deferred financing costs.
9
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HILLS STORES COMPANY AND SUBSIDIARIES
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (CONTINUED)
TWENTY-SIX WEEKS ENDED AUGUST 3, 1996 COMPARED WITH
TWENTY-SIX WEEKS ENDED JULY 29, 1995
Sales increased 0.9% compared with the same period in 1995. This increase was
primarily due to opening ten new stores during fiscal 1995. Sales increases
across most hardlines categories, particularly in candy and stationery, were
partially offset by weak sales across all softlines categories. Comparable
store sales of stores open for a full fiscal year decreased by 2.7%.
Cost of sales as a percentage of sales was 74.0% in fiscal 1996 compared with
73.1% in fiscal 1995. The decrease in gross margin percentage of 0.9% was
primarily due to a decrease in selling prices of selected merchandise caused by
continued competitive pressures across all lines of business and, to a lesser
extent, a shift in sales towards lower margin categories.
Selling and administrative expenses, including depreciation and other occupancy
expenses, as a percentage of sales were 27.2% in fiscal 1996 compared with 27.0%
in fiscal 1995. The increase of 0.2% was primarily due to additional
depreciation expense on a higher fixed asset base as a result of the Company's
remodeling and expansion program and the decline in sales at the existing
stores, offset by savings in payroll and payroll related areas as a result of
the Company's continued emphasis on cost control.
See Note 8 of the Notes to Condensed Consolidated Financial Statements regarding
the charge for the July 5, 1995 change in control.
See Note 6 of the Notes to Condensed Consolidated Financial Statements regarding
the charge for the impairment of long-lived assets.
Interest expense, net, was $28.7 million in fiscal 1996 compared to $21.2
million in fiscal 1995. The $7.5 million increase was primarily due to
incremental interest expense on the 12 1/2% Senior Notes, and increased net
interest expense on working capital borrowings due to an increase in average
borrowings in fiscal 1996 compared to fiscal 1995.
The Company's effective tax rate was 52.7% in fiscal 1996 compared with a rate
of 29.0% in fiscal 1995. The increase in the rate results principally from
approximately $27.0 million in non-deductible expenses associated with the prior
year change in control.
The after-tax extraordinary loss of $2.0 million in 1996 represented the early
extinguishment of debt related to the refinancing and redemption of the 10.25%
Senior Notes (see Note 4 of the Notes to Condensed Consolidated Financial
Statements). This amount included redemption premiums and the write-off of the
related deferred financing costs.
10
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HILLS STORES COMPANY AND SUBSIDIARIES
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital as of August 3, 1996 increased by $26.8 million
from February 3, 1996 primarily due to $12.6 million received from fixture and
equipment financings (see Note 5 of Notes to Condensed Consolidated Financial
Statements) and $26.9 million of net additional proceeds received from the
issuance of long-term Senior Notes (see Note 4 of the Notes to Condensed
Consolidated Financial Statements), partially offset by funding $17.7 million
of capital expenditures.
Net cash used for operating activities was $108.5 million for the twenty-six
weeks ended August 3, 1996 compared with a use of $157.7 million for the same
period last year, a decrease in the use of cash of $49.2 million. The prior
year use of cash included the charge of $43.3 million related to the change in
control. The remaining decrease in the use of cash was primarily due to an
increase in trade payables.
Net cash used for investing activities was $17.7 million compared with $36.1
million in the first half of 1995, an $18.4 million decrease. This decrease
was due to the Company substantially completing its chainwide remodeling in
fiscal 1995. In addition, the prior year's use of cash reflected the impact
of opening ten new stores. During fiscal year 1996, capital expenditures,
primarily for store remodeling and the replacement and upgrade of fixture and
equipment, are expected to approximate $32 million, with one new store opening.
Net cash provided by financing activities was $126.6 million in the first half
of fiscal 1996 compared with $32.6 million in the same period a year ago, a
$94.0 million increase. The increase was due to $26.9 million in net proceeds
received from the issuance of long-term debt in excess of the debt refinanced,
$12.6 million received from fixture and equipment financings, and the prior year
payment of $75.0 million related to the Company's self-tender offer (see Note 20
of Notes to Consolidated Financial Statements in the Company's Annual Report for
the year ended February 3, 1996 on Form 10-K). This increase was partially
offset by a $20.0 million decrease in the seasonal usage of the revolving credit
facility in 1996 compared with 1995. During the first half of fiscal 1996,
average borrowings under the revolving credit facility were $41.0 million at an
average interest rate of 8.6%. During the first half of fiscal 1995, average
borrowings were $21.1 million at an average interest rate of 10.4%.
At the end of the first six months of 1996, the Company had improved liquidity
through its credit facility compared with the same point in mid-1995. Excess
credit availability at August 3, 1996 was approximately $78 million compared
with approximately $64 million at July 29, 1995. At August 31, 1996, credit
line borrowings stood at $79 million compared with $126 million at the end of
the fiscal month of August 1995, and excess credit availability at August 31,
1996 was approximately $108 million compared with approximately $66 million at
the end of the fiscal month of August 1995.
11
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HILLS STORES COMPANY AND SUBSIDIARIES
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
During 1996, the Company has had discussions with both its existing bank group
and with other potential lenders about improvements to its current credit
facility (which expires in May 1998) or about potential replacement facilities
which would be available to the Company. The terms of such improvements or
replacement facilities would, among other things, reduce the Company's borrowing
rates, increase the borrowing availability, result in less restrictive
covenants, and extend the term. The Company will continue to review the
available options to determine how, when or if to act with regard to such
potential modifications.
The Company believes that its credit arrangements, together with cash from
operations, will enable the Company to maintain the liquidity necessary to
finance its continuing operations.
The terms of the Company's revolving credit facility and the New Senior Notes
limit the ability of the Company's subsidiaries to pay dividends. Any or all
of the restrictions, limitations or contingencies under the revolving credit
facility and the Senior Notes 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.
12
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
- ------- -----------------
Reference is made to the Report on Form 10-Q of the Company for the quarter
ended May 4, 1996.
ITEM 2. CHANGES IN SECURITIES
- ------- ---------------------
a) In connection with the sale of the Series A Notes, the Company offered to
redeem all of its outstanding 10.25% Senior Notes due 2003 (the "Old Senior
Notes") at a redemption price equal to 101% of principal, plus accrued interest,
with $159.1 million of the proceeds from the Series A Notes placed in escrow for
this purpose. On May 20, 1996, the Company redeemed approximately $155.0
million of its approximately $157.5 million Old Senior Notes. On July 1, 1996,
the Company redeemed the approximately $2.5 million Old Senior Notes which
remained outstanding following the May 20, 1996 redemption at the indenture
specified price of 104% of principal plus accrued interest. In addition, on
June 28, 1996 the Company deposited with Fleet National Bank, the Old Senior
Notes Trustee, funds sufficient to redeem, upon issuance, approximately $2.5
million Old Senior Notes yet to be issued under the terms of the Company's 1993
plan of reorganization. As a consequence of the foregoing, the indenture
governing the Old Senior Notes had been satisfied and discharged.
b) On August 20, 1996, the Company completed its offer to exchange $1,000
principal amount of its 12 1/2% Senior Notes due 2003, Series B (the "Series B
Notes") for each $1,000 principal amount of its 12 1/2% Senior Notes due 2003
(the "Series A Notes") outstanding. All $195.0 million of Series A Notes were
exchanged for a like amount of Series B Notes, and no Series A Notes remain
outstanding. The Series B Notes are listed on the New York Stock Exchange.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------- ---------------------------------------------------
<TABLE>
a) The Company held its Annual Meeting of Shareholders on June 18, 1996. At
the Annual Meeting, the following directors, comprising the entire Board, were
elected for one year terms:
<CAPTION>
NOMINEE VOTES FOR VOTES WITHHELD
------- --------- --------------
<S> <C> <C>
Chaim Y. Edelstein 8,571,885 101,831
Gregory K. Raven 8,571,061 102,655
Stanton J. Bluestone 8,570,585 103,131
John W. Burden III 8,571,085 102,631
Alan S. Cooper 8,568,621 105,095
Mark B. Dickstein 8,525,862 147,854
Samuel L. Katz 8,562,276 111,440
</TABLE>
b) The shareholders voted for the adoption of the Hills Stores Company 1996
Directors Stock Option Plan covering 100,000 shares of Common Stock of the
Company and providing for automatic, nondiscretionary grants to members of the
Board who are not employees and have not received a restricted stock award.
13
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (CONTINUED)
- ------- ---------------------------------------------------------------
<TABLE>
The votes were:
<CAPTION>
BROKER
FOR AGAINST ABSTENTIONS NONVOTES
--- ------- ----------- --------
<C> <C> <C> <C>
8,412,560 245,433 14,750 0
</TABLE>
c) The shareholders voted for the amendment of the Hills Stores Company 1993
Incentive and Nonqualified Stock Option Plan to increase the number of shares
of common stock which may be issued thereunder by 250,000 from 1,053,763 to
1,303,763. The votes were:
<TABLE>
<CAPTION>
BROKER
FOR AGAINST ABSTENTIONS NONVOTES
--- ------- ----------- --------
<C> <C> <C> <C>
7,479,823 1,178,546 15,420 0
</TABLE>
d) The shareholders voted for the adoption of the Hills Stores Company 162(m)
Bonus Plan to preserve tax deductibility of certain compensation in excess of
$1 million. The votes were:
<TABLE>
<CAPTION>
BROKER
FOR AGAINST ABSTENTIONS NONVOTES
--- ------- ----------- --------
<C> <C> <C> <C>
8,485,030 173,716 13,965 0
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- ------ --------------------------------
a. The following documents are filed as part of this report:
3.1(1) Amended and Restated Certificate of Incorporation of the Company.
3.3(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 10.25% 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.
14
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (CONTINUED)
- ------ --------------------------------------------
4.7(7) Series 1993 Warrant Agreement dated October 4, 1993 between the
Company and Chemical Bank, as warrant agent.
4.8(7) 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 4.7
hereto).
4.10(8) Form of Right Certificate (which is attached as Exhibit B to the
Rights Agreement incorporated by reference as Exhibit 4.7 hereto).
4.11(9) Indenture relating to the 12 1/2% Senior Notes due 2003 of the
Company.
4.12(9) Registration Rights Agreement, dated as of April 19, 1996, relating
to the 12 1/2% Senior Notes due 2003 of the Company.
4.13(9) Purchase Agreement, dated April 17, 1996, relating to the 12 1/2%
Senior Notes due 2003 of the Company.
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(10) First Amendment dated as of December 7, 1995 to the Credit
Agreement.
10.3(10) Second Amendment and Consent dated as of January 12, 1996 to the
Credit Agreement.
10.4(10)* Employment Agreement made as of February 7, 1996 with Gregory K.
Raven.
10.5(10)* Consulting Agreement made as of February 8, 1996 with Chaim Y.
Edelstein.
10.6(5)* Employment Agreement made as of July 6, 1995 with William K.
Friend.
10.7(9)* Employment Agreement made as of March 25, 1996 with James E. Feldt.
10.8(9) Third Amendment and Consent dated as of April 16, 1996 to the Credit
Agreement.
11 Statement regarding computation of per share earnings.
15
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (CONTINUED)
- ------ --------------------------------------------
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 May 4, 1996.
10. Incorporated by reference from the Annual Report on Form 10-K of
the Company for the fiscal year ended February 3, 1996.
11. Incorporated by reference from the Report on Form 8-K of the
Company dated November 8, 1995.
b. Reports on Form 8-K
No reports on Form 8-K were filed by the Registrant during the
quarter ended August 3, 1996.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HILLS STORES COMPANY
Date: September 17, 1996 /s/C. Scott Litten
---------------------
C. Scott Litten
Executive Vice President-
Chief Financial Officer
and Principal Accounting Officer
17
<PAGE>
<TABLE>
EXHIBIT INDEX
Pursuant to Item 601 of Regulation S-K
<S> <C>
Exhibit Title
- ------- -----
11 Statements regarding computations of earnings per share
27 Financial Data Schedule
<FN>
</TABLE>
EXHIBIT 11
<TABLE>
HILLS STORES COMPANY AND SUBSIDIARIES
STATEMENTS RE COMPUTATION OF PER SHARE EARNINGS
<CAPTION>
Thirteen Thirteen
Weeks Ended Weeks Ended
August 3, July 29,
1996 1995
---------- -----------
<S> <C> <C>
Weighted average primary shares outstanding
- -------------------------------------------
Weighted average number of common shares
assumed to be outstanding during the period 10,263,118 9,699,128
Assumed conversion of preferred stock - -
Assumed exercise of stock options - -
Assumed exercise of stock rights - -
Assumed exercise of stock warrants - -
---------- ---------
10,263,118 9,699,128
========== =========
</TABLE>
<TABLE>
<CAPTION>
Twenty-six Twenty-six
Weeks Ended Weeks Ended
August 3, July 29,
1996 1995
---------- -----------
<S> <C> <C>
Weighted average primary shares outstanding
- -------------------------------------------
Weighted average number of common shares
assumed to be outstanding during the period 10,214,414 9,682,708
Assumed conversion of preferred stock - -
Assumed exercise of stock options - -
Assumed exercise of stock rights - -
Assumed exercise of stock warrants - -
---------- ---------
10,214,414 9,682,708
========== =========
</TABLE>
<PAGE>
EXHIBIT 11
<TABLE>
HILLS STORES COMPANY AND SUBSIDIARIES
STATEMENTS RE COMPUTATION OF PER SHARE EARNINGS
Thirteen Thirteen
Weeks Ended Weeks Ended
August 3, July 29,
1996 1995
---------- -----------
<S>
Weighted average fully-diluted shares outstanding (1)
- -----------------------------------------------------
<C> <C>
Weighted average number of common shares assumed
to be outstanding during the period 10,263,974 9,730,370
Assumed conversion of preferred stock - -
Assumed exercise of stock options - -
Assumed exercise of stock rights - -
Assumed exercise of stock warrants - -
---------- ---------
10,263,974 9,730,370
========== =========
</TABLE>
<TABLE>
<CAPTION>
Twenty-six Twenty-six
Weeks Ended Weeks Ended
August 3, July 29,
1996 1995
---------- -----------
<S>
Weighted average fully-diluted shares outstanding (1)
- -----------------------------------------------------
<C> <C>
Weighted average number of common shares assumed
to be outstanding during the period 10,261,784 10,108,912
Assumed conversion of preferred stock - -
Assumed exercise of stock options - -
Assumed exercise of stock rights - -
Assumed exercise of stock warrants - -
---------- ----------
10,261,784 10,108,912
========== ==========
</TABLE>
The calculation of the weighted average fully-diluted shares outstanding assumes
that actual conversions of Preferred Stock during the thirteen and twenty-six
weeks ended occurred as of the beginning of the period being reported on. The
conversion of Preferred Stock, and the exercise of stock options, stock rights,
and stock warrants was not assumed as the result would be anti-dilutive.
(1) This calculation is presented in accordance with Item 601 of Regulation
S-K although it is not required by APB Opinion No. 15.
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> FEB-01-1997
<PERIOD-END> AUG-03-1996
<CASH> 23,374
<SECURITIES> 0
<RECEIVABLES> 53,401
<ALLOWANCES> (3,324)
<INVENTORY> 458,094
<CURRENT-ASSETS> 601,781
<PP&E> 234,649
<DEPRECIATION> (50,210)
<TOTAL-ASSETS> 1,034,992
<CURRENT-LIABILITIES> 427,856
<BONDS> 347,428
21,421
0
<COMMON> 103
<OTHER-SE> 230,880
<TOTAL-LIABILITY-AND-EQUITY> 1,034,992
<SALES> 758,848
<TOTAL-REVENUES> 758,848
<CGS> 561,894
<TOTAL-COSTS> 561,894
<OTHER-EXPENSES> 221,214
<LOSS-PROVISION> 3,500
<INTEREST-EXPENSE> 28,732
<INCOME-PRETAX> (52,992)
<INCOME-TAX> (27,933)
<INCOME-CONTINUING> (25,059)
<DISCONTINUED> 0
<EXTRAORDINARY> (2,046)
<CHANGES> 0
<NET-INCOME> (27,105)
<EPS-PRIMARY> (2.65)
<EPS-DILUTED> (2.65)
</TABLE>
