<PAGE> 1
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
FILED BY THE REGISTRANT /X/ FILED BY A PARTY OTHER THAN THE REGISTRANT / /
- --------------------------------------------------------------------------------
Check the appropriate box:
/ / Preliminary Proxy Statement
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to sec.240.14a-11(c) or sec.240.14a-12
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
Hills Stores Company
(Name of Registrant as Specified In Its Charter)
Hills Stores Company
(Name of Person(s) Filing Proxy Statement)
PAYMENT OF FILING FEE (CHECK THE APPROPRIATE BOX):
/X/ $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(i)(2) or
Item 22(a)(2) of Schedule 14A.
/ / $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
2) Aggregate number of securities to which transaction applies:
3) Per unit price or other underlying value of transaction computed pursuant
to Exchange Act
Rule 0-11 (Set forth the amount on which the filing fee is calculated and
state how it was determined):
4) Proposed maximum aggregate value of transaction:
5) Total fee paid:
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
2) Form, Schedule or Registration Statement No.:
3) Filing Party:
4) Date Filed:
- --------------------------------------------------------------------------------
<PAGE> 2
[HILLS LOGO]
================================================================================
HILLS STORES COMPANY
NOTICE OF ANNUAL MEETING OF
SHAREHOLDERS
TO BE HELD ON JUNE 18, 1996
AND
PROXY STATEMENT
================================================================================
IMPORTANT
PLEASE MARK, SIGN AND DATE YOUR PROXY
AND PROMPTLY RETURN IT IN THE ENCLOSED ENVELOPE.
<PAGE> 3
[HILLS LOGO]
May 10, 1996
Dear Fellow Shareholder:
You are cordially invited to attend the Annual Meeting of Shareholders of
Hills Stores Company to be held on Tuesday, June 18, 1996 at 10:00 AM at the
Sheraton Tara Hotel, 37 Forbes Road, Braintree, Massachusetts 02184. Your Board
of Directors and management look forward to greeting personally those
shareholders able to attend.
At the Meeting, shareholders will elect seven Directors and consider
proposals to approve the Company's 1996 Directors Stock Option Plan, amend the
Company's 1993 Incentive and Nonqualified Stock Option Plan and approve the
Company's 162(m) Bonus Plan. Information regarding the proposals is set forth in
the accompanying Notice of Annual Meeting and Proxy Statement to which you are
urged to give your prompt attention.
It is important that your shares be represented and voted at the meeting.
Whether or not you plan to attend, please take a moment to sign, date and mail
the enclosed proxy promptly. Your cooperation is appreciated.
On behalf of your Board of Directors, thank you for your continued interest
and support.
Sincerely,
/s/ GREGORY K. RAVEN
--------------------------------
GREGORY K. RAVEN
President and
Chief Executive Officer
<PAGE> 4
[LOGO]
HILLS STORES COMPANY
NOTICE OF ANNUAL MEETING OF
SHAREHOLDERS
TO BE HELD JUNE 18, 1996
Notice is hereby given that the Annual Meeting of Shareholders of Hills
Stores Company ("the Company") will be held Tuesday, June 18, 1996 in the
ballroom of the Sheraton Tara Hotel, 37 Forbes Road, Braintree, MA 02184 at
10:00 AM local time to take action with respect to the following matters:
1. The election of seven Directors to serve for the ensuing year and until
their successors are elected and qualified;
2. The approval of the Company's 1996 Directors Stock Option Plan covering
100,000 shares of Common Stock;
3. The approval of the amendment of the Hills Stores Company 1993
Incentive and Nonqualified Stock Option Plan to increase the number of
shares which may be issued thereunder by 250,000, from 1,053,763 to
1,303,763;
4. The approval of the Company's 162(m) Bonus Plan; and
5. Transaction of such other business as may properly be brought before
the Annual Meeting or any adjournments thereof.
Holders of record of Common Stock and Series A Preferred Stock at the close
of business on April 26, 1996 are entitled to receive notice of and to vote at
the meeting or any adjournments thereof.
Your attention is directed to the accompanying Proxy Statement and form of
proxy. Whether or not you plan to attend the meeting, you are urged to sign,
date and mail the enclosed form of proxy promptly in the enclosed envelope (no
postage required if mailed in the United States) so that your shares may be
counted. Your cooperation will save your Company additional solicitation costs.
By order of the Board of Directors
/s/ William K. Friend
---------------------------
William K. Friend
Vice President-Secretary
Canton, Massachusetts
May 10, 1996
IT IS IMPORTANT THAT YOUR SHARES BE REPRESENTED AND VOTED AT THE ANNUAL
MEETING. REGARDLESS OF THE NUMBER OF SHARES YOU OWN, PLEASE SIGN, DATE AND
PROMPTLY MAIL YOUR PROXY IN THE ENCLOSED POSTAGE-PAID ENVELOPE. YOUR COOPERATION
IS APPRECIATED.
<PAGE> 5
PROXY STATEMENT
HILLS STORES COMPANY
15 DAN ROAD, CANTON, MASSACHUSETTS 02021
(617) 821-1000
PROXY SOLICITATION
This Proxy Statement and the enclosed form of proxy have been mailed to
shareholders on or about May 10, 1996 in connection with the solicitation by the
Board of Directors of Hills Stores Company (the "Company") of proxies to be used
at the June 18, 1996 Annual Meeting of Shareholders.
It is important that your shares be represented and voted at the Annual
Meeting regardless of the number of shares that you own. Accordingly, you are
asked to sign, date and promptly mail the accompanying proxy card in order to
ensure that your shares are voted. Shares cannot be voted at the meeting unless
the owner is represented by proxy or is present at the meeting. A majority of
the shares entitled to vote at the Annual Meeting must be present either in
person or by proxy in order for there to be a quorum. Elections for Directors
will be decided by a plurality of the votes cast. Approval of the 1996 Directors
Stock Option Plan, approval of the amendment of the Company's 1993 Incentive and
Nonqualified Stock Option Plan and approval of the Company's 162(m) Bonus Plan
will be decided by majority vote of shares present or represented by proxy at
the Annual Meeting and entitled to vote.
Abstentions and shares as to which brokers or other nominees are not
provided with instructions (otherwise known as broker non-votes) are counted as
present or represented for purposes of determining the presence or absence of a
quorum at the Annual Meeting. With respect to the election of Directors,
abstentions and broker non-votes will not count as votes for or against any such
election. With respect to approval of the 1996 Directors Stock Option Plan,
approval of the amendment of the Company's 1993 Incentive and Nonqualified Stock
Option Plan and approval of the Company's 162(m) Bonus Plan, abstentions will
have the same effect as votes against the proposal, but broker non-votes as to
such proposals will not be deemed to be part of the voting power present with
respect to such proposals and therefore will not be counted as votes for or
against such proposals and will not be included in calculating the number of
votes necessary to approve such proposals.
The shares represented by the proxy will be voted for the election of the
nominees herein listed, for approval of the 1996 Directors Stock Option Plan,
for approval of the amendment of the Company's 1993 Incentive and Nonqualified
Stock Option Plan and for approval of the Company's 162(m) Bonus Plan unless
authority to so vote is withheld or a contrary instruction is made.
Each shareholder appointing a proxy has the power to revoke such
appointment by a later-dated proxy delivered to the Company or by giving notice
of revocation to the Company in writing or at the meeting. Any vote taken prior
to a revocation is not affected. The presence at the Annual Meeting of the
shareholder appointing a proxy does not in and of itself revoke the appointment.
Prior to its October 4, 1993 emergence from Chapter 11 proceedings, Hills
Stores Company was a wholly-owned subsidiary of Hills Department Stores, Inc.
(the "Predecessor Company"). Pursuant to the Company's Plan of Reorganization,
effective October 4, 1993, the Predecessor Company was dissolved. References
herein to periods prior to October 4, 1993 may, as appropriate, refer either to
the Company or the Predecessor Company. References to periods from and after
October 4, 1993 refer to the Company.
VOTING SECURITIES
On April 26, 1996, the record date for the meeting, there were 10,189,114
shares of Common Stock and 1,016,096 shares of Series A Preferred Stock
outstanding, each entitled to one vote.
1
<PAGE> 6
MATTERS TO BE VOTED ON
ITEM 1 -- ELECTION OF DIRECTORS
It is proposed that seven Directors, constituting the current Board of
Directors, be elected for the ensuing year and until their successors are
elected and qualified. It is intended that the shares represented by the proxy,
unless otherwise instructed, will be voted for the election of the seven
nominees listed in the following section. Insofar as is known, all of the
nominees will be able to serve. Should any nominee become unavailable, the
persons named in the proxy may vote for a substitute for such nominee. If no
substitute nominee is designated, then, following the Annual Meeting, the Board
of Directors as permitted by the By-Laws of the Company may reduce the number of
Directors to less than seven or may fill the vacancy.
<TABLE>
INFORMATION ABOUT NOMINEES
<CAPTION>
SERVED AS A
NAME AGE POSITION DIRECTOR 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 B. Dickstein...... 37 Director 1995
Samuel L. Katz......... 30 Director 1995
Gregory K. Raven....... 46 Director, President and Chief 1996
Executive Officer
</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 and a consultant to
the Company since July 1995. 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. Since prior
to 1991 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 has been a Director since December 28, 1995. He has been
Vice President-General Counsel of Dickstein Partners Inc. since March 1992.
Prior to that, he was an attorney with the firm of Rosenman & Colin since 1983.
MARK B. DICKSTEIN has been a Director since July 5, 1995 and was Chairman
of the Board from July 5, 1995 to February 7, 1996. He has been the President of
Dickstein Partners Inc. since prior to 1990 and is
2
<PAGE> 7
primarily responsible for the operations of Dickstein & Co., L.P., Dickstein
Focus Fund L.P. and Dickstein International Limited (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-Acquisitions of HFS Incorporated, a public corporation, and a
consultant to Dickstein Partners Inc. and to the Company. From July 1993 to
December 1995 he was a Vice President of Dickstein Partners Inc. 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. From 1988 until 1995, Mr. Raven was 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.
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.
Directors of the Company and Hills Department Store Company, the Company's
principal operating subsidiary, are elected for a term of one year or until
their successors are elected and qualified.
During the fiscal year ended February 3, 1996, the Board of Directors of
the Company met eighteen times. No incumbent director attended fewer than 75% of
the total number of meetings of the Board and Committees of the Board on which
he served.
The Board of Directors has a standing Audit Committee and a standing
HR/Compensation Committee (Option Committee). The Board of Directors does not
have a Nominating Committee. During the fiscal year ended February 3, 1996, the
Audit Committee met three times and the HR/Compensation Committee (Option
Committee) met six times.
The Audit Committee, consisting entirely of non-employee Directors, is
composed of Mr. Katz, as Chairman, and Mr. Cooper. The Audit Committee's
functions include the following:
Recommendation to the full Board concerning the engagement or discharge of
independent auditors; direction and supervision of investigations into
matters within the scope of the Committee's duties; review with auditors of
plans and results of auditing procedures; review, for Board approval, of
each significant professional service provided by auditors and review of
the independence of the auditors; consideration of the range of audit and
nonaudit fees and the adequacy of the Company's system of internal
accounting controls.
The HR/Compensation Committee (Option Committee), consisting entirely of
non-employee Directors, is composed of Mr. Dickstein, as Chairman, Mr. Bluestone
and Mr. Burden. The HR/Compensation Committee (Option Committee)'s functions
include the following:
Reviewing the corporate compensation programs and policies, including the
compensation of the Chief Executive Officer, to assure that said programs
and policies are competitive and provide for internal equity; reviewing and
advising the Chief Executive Officer on specific compensation matters for
officers and executives; overseeing the Company's performance bonus
program; administering the 1993 Stock Option Plan; administering the
Company's 162(m) Bonus Plan; and performance of such other duties as the
Chairman of the Board may require.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" ALL NOMINEES.
3
<PAGE> 8
ITEM 2 -- ADOPTION OF THE HILLS STORES COMPANY 1996 DIRECTORS STOCK OPTION PLAN
The Company is seeking shareholder approval of the adoption of the 1996
Directors Stock Option Plan, which was adopted, subject to shareholder approval,
by the Board of Directors on January 18, 1996. The following description of the
1996 Directors Stock Option Plan is qualified in its entirety by reference to
the copy of the 1996 Directors Stock Option Plan attached hereto as Exhibit 1.
The Board of Directors believes that approval of the 1996 Directors Stock
Option Plan will assist the Company in attracting and retaining qualified
individuals to serve as members of the Board of Directors, as well as provide
Directors with additional incentive to improve the Company's performance and
enhance long term shareholder value.
On January 18, 1996, each member of the Board of Directors who is not an
employee of the Company and has not received a restricted stock award (a
"Participating Director") was granted, subject to obtaining shareholder
approval, an option to purchase 4,000 shares of Common Stock at a purchase price
of $12.00 per share. On January 18, 1996, the closing price of the Company's
Common Stock was $10.50 per share. All current members of the Board of
Directors, other than Mr. Edelstein and Mr. Raven, are Participating Directors.
Beginning with the 1997 - 1998 fiscal year of the Company, each Participating
Director continuing to serve on the Board of Directors will be automatically
granted an additional option to purchase 2,000 shares of Common Stock on the
first business day of each fiscal year of the Company. Each Participating
Director who joins the Board of Directors of the Company after January 18, 1996
shall be automatically granted without any further action by the Board of
Directors, an option to purchase 4,000 shares of Common Stock upon his or her
initial election or appointment as a Director. Thereafter, beginning with the
1997 - 1998 fiscal year of the Company, each such Participating Director
continuing to serve on the Board of Directors shall be automatically granted an
additional option to purchase 2,000 shares of Common Stock on the first business
day of each fiscal year of the Company. Except for the January 18, 1996 grants
(which were for a price in excess of the closing price on the date of the
grant), the purchase price per share under each option will be the fair market
value of the Common Stock on the date of the grant. Fair market value means the
closing price on the date of the grant on the New York Stock Exchange or another
nationally recognized stock exchange or on NASDAQ. Each such option will expire
on the tenth anniversary date of the grant and will vest at the rate of
one-third of the option shares on each of the first three anniversary dates of
the grant, provided the grantee is still a Director on the vesting date. Vesting
will accelerate upon a Change of Control as defined in the 1996 Directors Stock
Option Plan.
The total number of shares of the Company's Common Stock initially
authorized for issuance pursuant to options granted under the 1996 Directors
Stock Option Plan during the ten (10) year duration of the Plan is 100,000,
subject to adjustment for recapitalizations, stock splits, stock dividends and
similar events. Any option issued pursuant to the 1996 Directors Stock Option
Plan will terminate on the earliest of (a) the date of expiration thereof, (b)
the date of termination of the optionee's membership on the Board of Directors
for cause (as defined) or (c) the first anniversary of the termination of the
optionee's membership on the Board for any other reason. Options that terminate
unexercised will be available for future grant.
Payment for shares of Common Stock purchased by the exercise of an option
must be made either by cash, check, bank draft or money order.
Grants will consist of Nonqualified Stock Options. As of March 29, 1996 the
Company had five Participating Directors eligible to receive grants under the
1996 Directors Stock Option Plan. None of the individuals listed in the Summary
Compensation Table received grants under the 1996 Directors Stock Option Plan.
Generally, there is no taxable income realized by the recipient of the
grant of Nonqualified Stock Options, nor is the Company entitled to a deduction
at such time. Upon exercise of a Nonqualified Stock Option, the recipient will
have compensation income equal to the difference between the fair market value
at the date of exercise and the exercise price, and the Company will receive a
corresponding tax deduction. The amount taxed to the recipient will be added to
the recipient's basis for determining future gain or loss.
4
<PAGE> 9
The terms of the options granted under the 1996 Directors Stock Option
Plan, as described above, are set forth in the Plan and may be changed only by
an amendment of the Plan by the Board of Directors. Shareholder approval will be
required for any amendment that changes the eligible class of persons,
materially increases the benefits to optionees or increases the aggregate number
of shares authorized for issuance.
<TABLE>
The following table shows the number of shares of Common Stock subject to
options awarded under the 1996 Directors Stock Option Plan during the fiscal
year ended February 3, 1996. All grants made prior to the June 18, 1996 Annual
Meeting of Shareholders are subject to shareholder approval of the 1996
Directors Stock Option Plan.
NEW PLAN BENEFITS
HILLS STORES COMPANY 1996 DIRECTORS STOCK OPTION PLAN
<CAPTION>
NAME AND POSITION DOLLAR VALUE NUMBER OF UNITS
----------------- ------------ ---------------
<S> <C> <C>
All Executive Officers as a Group............................ 0 0
Non-Executive Officer Director Group......................... * 20,000
Non-Executive Officer Employee Group......................... 0 0
<FN>
- ------------------------------
(*) Not determinable.
</TABLE>
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" ITEM NUMBER 2.
ITEM 3 -- APPROVAL OF THE AMENDMENT OF THE HILLS STORES COMPANY 1993 INCENTIVE
AND NONQUALIFIED STOCK OPTION PLAN
The Company is seeking shareholder approval of the amendment of the
Company's 1993 Incentive and Nonqualified Stock Option Plan (the "1993 Stock
Option Plan"). The following description of the 1993 Stock Option Plan is
qualified in its entirety by reference to the copy of the 1993 Stock Option Plan
as proposed to be amended, attached hereto as Exhibit 2.
The amendment will increase the total number of shares of the Company's
Common Stock that may be issued pursuant to options granted under the 1993 Stock
Option Plan by 250,000, from 1,053,763 to 1,303,763. The amendment will also
clarify that members of the committee which administers the 1993 Stock Option
plan may receive automatic nondiscretionary grants under the 1996 Directors
Stock Option Plan. All other terms and provisions of the 1993 Stock Option Plan
will remain unchanged.
As of March 29, 1996, options for 802,527 shares of common stock have been
granted pursuant to the 1993 Stock Option Plan and 251,236 remain available. If
the amendment of the 1993 Stock Option Plan is approved by shareholders, the
number of shares available will increase to 501,236. The Company believes that
increasing the number of shares available under the 1993 Stock Option Plan will
further align the interests of shareholders and management and will assist the
Company in attracting and retaining outstanding executives.
Pursuant to the Company's Plan of Reorganization, the Company implemented
the 1993 Stock Option Plan effective upon the Company's emergence from
bankruptcy on October 4, 1993. The 1993 Stock Option Plan is designed to provide
additional incentive to the officers, employees and certain other individuals
providing services to the Company by enabling the persons to whom options are
granted to acquire or increase their proprietary interest in the Company through
the acquisition of shares of the Company's Common Stock.
The 1993 Stock Option Plan is administered by the HR/Compensation Committee
(Option Committee) of the Company's Board of Directors (the "Committee"),
consisting of Mark B. Dickstein, as Chairman, Stanton J. Bluestone and John W.
Burden III, all of whom are non-employee Directors and none of whom has received
grants under the 1993 Stock Option Plan. The duties and powers of the Committee
are: (a) to determine the persons to whom options are to be granted and to
prescribe the terms, conditions, restrictions, if any, and provisions (which
need not be identical) of each option granted; (b) to interpret the 1993 Stock
Option Plan and to establish, amend and revoke rules and regulations for the
administration of the 1993 Stock Option Plan; and (c) to amend outstanding
options, including amendment (i) to reduce the exercise price,
5
<PAGE> 10
(ii) to accelerate the vesting schedule and (iii) to extend the expiration date.
No grant under the 1993 Stock Option Plan may be made to a person who is a
member of the Committee at the time of the grant.
The total number of shares of the Company's Common Stock authorized to be
issued pursuant to options granted under the 1993 Stock Option Plan is 1,053,763
and will be increased to 1,303,763 if the amendment of the 1993 Stock Option
Plan is approved by shareholders, subject to adjustment for recapitalizations,
stock splits, stock dividends and similar events. Options are exercisable at a
price and subject to vesting and other conditions as prescribed by the
Committee, provided that the exercise price of an incentive stock option shall
not be less than the fair market value of the Common Stock on the date of the
grant (110% of the fair market value in the case of a greater than ten percent
shareholder). Fair market value means the closing price on the New York Stock
Exchange or on another nationally recognized stock exchange or on NASDAQ on the
date of the grant. Incentive stock options may have a term of no more than ten
years from the date of the grant (five years in the case of a greater than ten
percent shareholder). Generally, options expire upon termination of employment
for cause or voluntary resignation, ninety days after termination by the Company
without cause, and one year after termination for death or disability.
Payment for shares of Common Stock purchased pursuant to the exercise of an
option shall be made either by (i) cash, certified check, bank draft or money
order, or (ii) with the consent of the Committee, shares of the Company's Common
Stock having a fair market value equal to the option price, or (iii) such other
consideration as is acceptable to the Committee and has a fair market value
equal to the option price.
Grants may consist of Incentive Stock Options, Nonqualified Stock Options
or a combination thereof. Incentive Stock Options may be granted only to
officers and other employees of the Company, its parent or subsidiaries.
Nonqualified Stock Options may be granted to officers or other employees of the
Company, its parent or subsidiaries and to members of the Board of Directors and
to consultants and other persons who render services to the Company. The
aggregate fair market value (determined at the time of the grant) of the Common
Stock with respect to which Incentive Stock Options are exercisable by any
individual for the first time in any calendar year may not exceed $100,000. As
of March 1, 1996, the Company had approximately 17,900 employees and six
non-employee Directors. The number of eligible consultants and other persons who
provide services to the Company cannot be determined.
Generally, there is no taxable income realized by the recipient on the
grant or exercise of an Incentive Stock Option, nor is the Company entitled to a
deduction at such time. If the recipient of an Incentive Stock Option holds the
shares acquired upon exercise for the required holding period (the later of two
years from the date of the grant or one year from exercise), then upon
disposition of the shares, the recipient will have a long term capital gain
equal to the difference between the amount received from the disposition and the
exercise price. If the recipient disposes of the shares prior to the end of the
holding period, the recipient will have compensation income in the year of the
disposition equal to the excess of the fair market value of the shares on the
date of exercise or the date of disposition, whichever is less, over the
exercise price; and the Company will have a corresponding tax deduction. Any
gain on a subsequent sale will be treated as a capital gain.
Generally, there is no taxable income realized by the recipient on the
grant of Nonqualified Stock Options, nor is the Company entitled to a deduction
at such time. Upon exercise of a Nonqualified Stock Option, the recipient will
have compensation income equal to the difference between the fair market value
at the date of exercise and the exercise price, and the Company will receive a
corresponding tax deduction. The amount taxed to the recipient will be added to
the recipient's basis for determining future gain or loss.
The Board of Directors may modify, revise or terminate the 1993 Stock
Option Plan, except that shareholder approval is required to change the class of
persons eligible to receive grants or to increase the aggregate number of shares
authorized for issuance thereunder.
No specific grants to any individuals, including the persons named in the
Summary Compensation Table, are presently contemplated with respect to the
250,000 shares proposed to be added to the 1993 Stock Option Plan. However, it
is possible that the Company may make grants, including grants during fiscal
1996, covering some or all of said 250,000 shares to individuals, including
persons named in the Summary Compensation Table.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" ITEM NUMBER 3.
6
<PAGE> 11
ITEM 4 -- ADOPTION OF THE HILLS STORES COMPANY 162(M) BONUS PLAN
The Company is seeking shareholder approval of the adoption of the Hills
Stores Company 162(m) Bonus Plan (the "Bonus Plan"), which was adopted by the
Board of Directors, subject to shareholder approval, on April 23, 1996. The text
of the Bonus Plan is attached hereto as Exhibit 3. The following description of
the Bonus Plan is qualified in its entirety by reference to the full text.
Under section 162(m) of the Internal Revenue Code ("section 162(m)"),
annual compensation in excess of $1 million (per person) paid to a
publicly-traded company's chief executive officer and any of the next four
highest paid executive officers will generally be non-deductible, subject to
certain exceptions, including shareholder - approved programs. The Board of
Directors has adopted the Bonus Plan in order to provide performance incentives
to selected executive officers while securing, to the extent practicable, a tax
deduction by the Company for payments of incentive compensation to such
executives. The regulations under section 162(m) require that shareholders
approve the material terms of the Bonus Plan.
During the first quarter of each fiscal year of the Company, the
HR/Compensation Committee (Option Committee) of the Board of Directors (the
"Committee") will designate which of the Company's executive officers are to
participate in the Bonus Plan for that year. Those designated will not be
eligible for the Company's regular bonus program for that year. Also during the
first quarter, the Committee will establish one or more objective performance
goals for each participant, together with a maximum dollar bonus opportunity for
the participant and a formula to determine bonus payments based on the
achievement of the goal(s). In no event may the bonus for any participant exceed
$1 million under the Bonus Plan. The Committee, however, reserves the right to
establish alternative incentive compensation arrangements for otherwise eligible
executives if it determines, in its discretion, that it would be in the best
interests of the Company and its shareholders to do so, even if the result is a
loss of deductibility for certain compensation payments.
The performance goals will be expressed in terms of (a) one or more
corporate or divisional earnings-based measures (which may be based on net
income, operating income, cash flows, or any combination thereof) and/or (b) one
or more corporate or divisional sales-based measures. Each such goal may be
expressed on an absolute and/or relative basis, may employ comparisons with past
performance of the Company (including one or more divisions) and/or the current
or past performance of other companies, and in the case of earnings-based
measures, may employ comparisons to capital, shareholders' equity and shares
outstanding. Performance goals need not be uniform among participants.
After the Company's financial results for a fiscal year have been
determined, the Committee will certify the level of performance goal attainment
and the potential bonus payment for each participant. The Committee will have
full authority to reduce, but not to increase, the amount that would otherwise
be payable to any participant for a fiscal year.
An individual who is promoted or hired into an executive officer position
during a fiscal year may be designated a participant with performance goals
established for the remainder of the year. If employment of a participant is
terminated during a fiscal year other than by the Company for cause, the
Committee may in its discretion award him a prorated share of such bonus as
would otherwise have been payable.
If approved by the shareholders, the Bonus Plan will be initially effective
for the current fiscal year ending February 1, 1997. The Committee has
designated Gregory K. Raven as a participant. The Board of Directors may amend
or terminate the Bonus Plan at any time, provided that shareholder approval is
obtained for any amendment for which such approval is required under section
162(m). Unless sooner terminated, the Bonus Plan will be resubmitted for
shareholder approval no later than the first shareholder meeting occurring in
2001.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" ITEM NUMBER 4.
7
<PAGE> 12
BENEFICIAL OWNERSHIP
<TABLE>
The following table sets forth as of March 20, 1996 information with
respect to beneficial ownership of shares of the Company's Common Stock. The
information was obtained from Company records and information supplied by the
shareholders, including information on Schedules 13D and 13G and Forms 3 and 4
prescribed by the Securities and Exchange Commission ("SEC"). No person has
reported ownership of more than five (5%) of the Series A Preferred Stock.
<CAPTION>
PERCENT OF
NAME AND ADDRESS AMOUNT AND NATURE PERCENT OF VOTING
OF BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP COMMON STOCK STOCK(1)
- ---------------------------------------- ----------------------- ------------ ----------
<S> <C> <C> <C>
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 Limited(2)
129 Front Street
Hamilton HM12 Bermuda
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
BEA Associates 830,147 8.3 7.5
153 East 53rd Street
One Citicorp Center
New York, NY 10022
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)
World Financial Center
South Tower, 23rd Fl.
New York, NY 10080-6123
Wellington Management Company 655,925 6.6 5.9
75 State Street
Boston, MA 02109
<FN>
- ------------------------------
(1) Represents the percentage of shares of Common 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. 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.
(2) Dickstein Partners Inc., Dickstein Partners, L.P., Dickstein & Co., L.P.,
Dickstein Focus Fund L.P., Dickstein International Limited and Mark B.
Dickstein have filed a Schedule 13D and amendments thereto showing, in the
aggregate, beneficial ownership of 1,209,170 shares. Of the 1,209,170 total
shares reported, Dickstein & Co., L.P. owns beneficially 758,456 of such
shares, Dickstein Focus Fund L.P. owns beneficially 86,095 of such shares
and Dickstein International Limited owns 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 B. Dickstein is the President and sole director
of Dickstein Partners Inc.
</TABLE>
8
<PAGE> 13
(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 L.P. 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.
<TABLE>
The following table sets forth as of March 20, 1996 the beneficial
ownership of the Company's Common Stock held by each Director, the current
executive officers named in the Summary Compensation Table and Directors and
executive officers as a group. None of these persons owns any shares of Series A
Preferred Stock.
<CAPTION>
AMOUNT AND NATURE PERCENT OF
NAME AND ADDRESS OF BENEFICIAL PERCENT OF VOTING
OF BENEFICIAL OWNER OWNERSHIP COMMON STOCK STOCK(1)
--------------------------------------- ------------------------ -------------- -------------
<S> <C> <C> <C>
Chaim Y. Edelstein 25,000(2) * *
Stanton J. Bluestone 0 * *
John W. Burden III 0 * *
Alan S. Cooper 0 * *
Mark B. Dickstein 1,209,170(3) 12.1 10.9
Samuel L. Katz 0 * *
Gregory K. Raven 100,000(4) 1.0 *
Kim D. Ahlholm 3,000(5) * *
James E. Feldt 7,599(6) * *
William K. Friend 29,245(7)(9) * *
Director and Executive Officers as a
Group(10 Persons) 1,374,014(8)(9) 13.8 12.4
<FN>
- ------------------------------
* Represents less than 1% of outstanding shares.
(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 Preferred Stock. 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.
(2) Consists of 5,000 shares of Common Stock and 20,000 shares of restricted
stock. See section below captioned "Restricted Stock Agreements."
(3) Of the 1,209,170 total shares reported, Dickstein & Co., L.P. owns
beneficially 758,456 of such shares, Dickstein Focus Fund L.P. owns
beneficially 86,095 of such shares and Dickstein International Limited owns
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.
(4) Consists of restricted stock. See section below captioned "Restricted Stock
Agreements."
(5) Consists of stock options which are presently exercisable or will be
exercisable within sixty (60) days.
</TABLE>
9
<PAGE> 14
(6) Consists of 99 shares of Common Stock and 7,500 presently exercisable stock
options.
(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) Each Series 1993 Warrant is immediately exercisable for one share of Common
Stock at an exercise price of $30 per share.
SECURITIES AND EXCHANGE COMMISSION FILINGS
Section 16(a) of the Exchange Act requires the Company's officers and
Directors and persons who own more than ten percent of a registered class of the
Company's equity securities to file reports of ownership and changes in
ownership with the SEC and the New York Stock Exchange. Officers, Directors and
greater than ten percent shareholders are required by SEC regulations to furnish
the Company with copies of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by it, or
written representations from certain reporting persons that no Forms 5 were
required for those persons, the Company believes that for the fiscal year ended
February 3, 1996, its officers, Directors and greater than ten percent
beneficial owners complied with all filing requirements applicable to them.
10
<PAGE> 15
EXECUTIVE COMPENSATION
<TABLE>
The following table sets forth the annual and long-term compensation for
service in all capacities to the Company for the fiscal year ended February 3,
1996 and the two prior fiscal years (identified as fiscal years 1995, 1994 and
1993 respectively) of (i) those persons who served as the Chief Executive
Officer of the Company during the fiscal year ended February 3, 1996, (ii) the
other four most highly compensated executive officers of the Company serving on
February 3, 1996 whose salary and bonus exceeded $100,000 and (iii) two
additional former executive officers who were among the four most highly
compensated executive officers but were not employed by the Company on February
3, 1996:
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
<CAPTION>
LONG TERM
COMPENSATION
AWARDS:
NAME AND FISCAL OTHER ANNUAL STOCK ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS(#) COMPENSATION
- ------------------ ------ -------- ---------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
E. Jackson Smailes(1)............. 1995 $507,083 $ 0 $ 1,039,470(2) 122,000(3) $3,328,404(4)(5)(6)(7)
Former President and 1994 375,000 257,500 -- 18,000 3,000(8)
Chief Executive Officer 1993 375,000 272,450(9) 210,988(10) 55,000 --
(No longer with the
Company)
Michael Bozic(11)................. 1995 389,930 0 3,039,718(2) -- 6,324,753(4)(5)(6)
Former President & 1994 875,000 537,500 -- 35,000 3,000(8)
Chief Executive Officer 1993 875,000 1,437,500(9) -- 170,000 --
(No longer with the
Company)
James E. Feldt.................... 1995 287,083 0 -- 40,000(12) 367,819(5)(6)(13)
Executive Vice 1994 225,000 130,000 -- -- 5,990(8)
President-General 1993 202,395 213,490(9) -- 25,000 --
Merchandise Manager
Robert J. Stevenish(14)........... 1995 216,079 0 829,081(2) 122,000(15) 1,730,207(4)(5)(6)
Former Sr. Executive 1994 258,333 202,500 -- 18,000 3,000(8)
Vice President 1993 225,000 194,068(9) 41,934(16) 55,000 --
Chief Operating Officer
(No longer with the
Company)
William K. Friend(17)............. 1995 168,166 0 710,497(2) 26,000(18) 1,415,240(4)(5)(6)(13)
Vice President-Secretary 1994 163,166 81,600 -- 5,000 4,084(8)
and Corporate Counsel 1993 158,333 197,792(9) -- 21,500 --
John G. Reen(19).................. 1995 131,458 0 1,649,594(2) -- 3,081,338(4)(5)(6)(13)
Former Executive Vice 1994 284,583 215,000 -- 23,000 6,000(8)
President and 1993 256,250 447,947(9) -- 50,000 --
Chief Financial Officer
(No longer with the
Company)
Kim D. Ahlholm.................... 1995 116,050 0 -- 6,666(20) 20,885(5)(6)
Vice President-Controller 1994 108,958 54,000 -- 2,000 2,906(8)
1993 83,666 79,606(9) -- 8,000
Bruce A. Caldwell(21)............. 1995 115,278 0 -- 6,000(20)(21) 17,579(5)(6)
Former Vice President- 1994 93,958 48,000 -- 2,000 2,469(8)
Treasurer 1993 67,833 61,898(9) -- 7,000 --
(No Longer with the
Company)
</TABLE>
11
<PAGE> 16
- ------------------------------
(1) Mr. Smailes resigned as Executive Vice President-General Merchandise
Manager on July 5, 1995. On July 6, 1995 he was hired as President and
Chief Executive Officer by the new Board of Directors. See sections below
captioned "Change of Control Payments" and "Employment Contracts." Mr.
Smailes resigned as President and Chief Executive Officer on February 7,
1996.
(2) Consists of "gross up" to cover excise taxes pursuant to Section 4999 of
the Internal Revenue Code with respect to the termination payments
described in footnote (4) below. The Company has brought litigation with
respect to certain of these payments. See section below captioned "Change
of Control Payments."
(3) Effective August 15, 1995, Mr. Smailes was granted 122,000 cash-only
rights, 72,000 of which had an exercise price of $18.56 per right and a
term of one year and 50,000 of which had an exercise price of $20.125 per
right and a term of ten (10) years. Effective October 18, 1995, Mr. Smailes
exchanged said cash-only rights for options to purchase 122,000 shares of
the Company's Common Stock at an exercise price of $12.00 per share
pursuant to the 1993 Stock Option Plan. See sections below captioned "Stock
Option Table" and "Ten Year Option Repricings." Mr. Smailes' options were
cancelled upon his resignation on February 7, 1996.
(4) Includes termination payments made to Messrs. Smailes, Bozic, Stevenish,
Reen and Friend upon their resignations following the election of the
nominees of Dickstein Partners Inc. ("the Dickstein Nominees") at the
Company's 1995 Annual Meeting of Shareholders in the following amounts: Mr.
Smailes, $1,768,750; Mr. Bozic, $4,430,208; Mr. Stevenish, $1,442,916; Mr.
Reen, $1,564,374 and Mr. Friend, $714,468. The Company has brought
litigation with respect to certain of these payments. See section below
captioned "Change of Control Payments."
(5) Includes payments under the Company's Supplemental Executive Retirement
Plan ("SERP") to Messrs. Smailes, Bozic, Feldt, Stevenish, Friend, Reen and
Caldwell and Ms. Ahlholm in connection with the election of the Dickstein
Nominees at the Company's 1995 Annual Meeting of Shareholders in the
following amounts: Mr. Smailes, $406,654; Mr. Bozic, $1,891,545; Mr. Feldt,
$128,604; Mr. Stevenish, $284,291; Mr. Friend $479,678; Mr. Reen,
$1,210,894; Ms. Ahlholm, $15,444 and Mr. Caldwell, $11,945. The Company has
brought litigation with respect to certain of these payments. See section
below captioned "Change of Control Payments."
(6) The Company made the following contributions in fiscal 1995 to the 401(k)
accounts of the executives listed in the Summary Compensation Table: Mr.
Smailes, $3,000; Mr. Bozic, $3,000; Mr. Feldt, $5,253; Mr. Stevenish,
$3,000; Mr. Friend, $6,000; Mr. Reen, $4,183; Ms. Ahlholm, $5,441; and Mr.
Caldwell, $5,634.
(7) Includes a termination payment with respect to Mr. Smailes' February 7,
1996 resignation of $1,150,000 which was accrued in fiscal 1995 but paid in
fiscal 1996.
(8) Consists of Company contributions to the Company's 401(k) plan in fiscal
1994.
(9) Includes both annual and emergence bonuses. Emergence bonuses were paid
upon confirmation of the Company's Plan of Reorganization by the United
States Bankruptcy Court for the Southern District of New York, effective
October 4, 1993, pursuant to an emergence bonus plan approved by the
Bankruptcy Court.
(10) Consists of relocation expenses including a "gross up" of $91,134 for
federal and state taxes.
(11) Mr. Bozic resigned as President and Chief Executive Officer on July 5,
1995. See section below captioned "Change of Control Payments."
(12) Includes 23,333 options granted to Mr. Feldt effective November 4, 1995 in
a repricing exchange for 35,000 options granted to Mr. Feldt on August 15,
1995 and 16,667 options granted to Mr. Feldt in a repricing exchange for
25,000 options granted to Mr. Feldt in 1993. See sections below captioned
"Stock Option Table" and "Ten Year Option Repricings."
(13) The Company's former pension plan was terminated effective April 30, 1994.
Former participants in the pension plan received, at their option, either
an annuity or a rollover to their 401(k) account. As a consequence of the
plan termination, certain executives of the Company, including Messrs.
Reen,
12
<PAGE> 17
Friend and Feldt, based on certain actuarial computations, received less
than they would have had the pension plan not been terminated. To make up
for that shortfall, the Company paid Mr. Reen $301,887, Mr. Feldt $233,962
and Mr. Friend $215,094.
(14) Mr. Stevenish resigned as Executive Vice President-Store and Distribution
Operations on July 5, 1995. On July 6, 1995, he was hired as Executive Vice
President-Store and Distribution Operations and Chief Operating Officer by
the new Board of Directors. See section below captioned "Change of Control
Payments." Mr. Stevenish resigned as Executive Vice President-Store and
Distribution Operations and Chief Operating Officer on September 1, 1995.
(15) Effective August 15, 1995, Mr. Stevenish was granted 122,000 cash-only
rights, 72,000 of which had an exercise price of $18.56 per right and a
term of one year and 50,000 of which had an exercise price of $20.125 per
right and a term of ten (10) years. Mr. Stevenish's cash-only rights were
cancelled upon his resignation on September 1, 1995.
(16) Consists of relocation expenses including a "gross up" of $10,043 for
federal and state taxes.
(17) Mr. Friend resigned as Vice President-Secretary and Corporate Counsel on
July 5, 1995. On July 6, 1995, he was rehired in the same position by the
new Board of Directors. See sections below captioned "Change of Control
Payments" and "Employment Contracts."
(18) Effective August 15, 1995, Mr. Friend was granted 39,000 cash-only rights,
26,500 of which had an exercise price of $18.49 per right and a term of one
year and 12,500 of which had an exercise price of $20.125 per right and a
term of ten (10) years. Effective October 18, 1995, Mr. Friend exchanged
said cash-only rights for options to purchase 26,000 shares of the
Company's Common Stock at an exercise price of $12.00 per share pursuant to
the 1993 Stock Option Plan. See sections below captioned "Stock Option
Table" and "Ten Year Option Repricings."
(19) Mr. Reen resigned as Executive Vice President-Chief Financial Officer
effective July 5, 1995. See section below captioned "Change of Control
Payments."
(20) Consists of repricing of options previously granted. See table below
captioned "Ten Year Option Repricings."
(21) Mr. Caldwell resigned as Vice President-Treasurer on February 12, 1996,
whereupon his stock options terminated.
RELATED TRANSACTIONS
At the June 1995 Annual Meeting, following a proxy contest, the nominees of
Dickstein Partners Inc. (the "Dickstein Nominees") 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 NatWest Bank, N.A., the financial advisor of
Dickstein Partners ("NatWest"), in respect of NatWest's proposal to refinance
the indebtedness of the Company accelerated as a result of the election of the
Dickstein 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 the Dickstein Nominees.
CHANGE OF CONTROL PAYMENTS
On July 5, 1995, following certification of the election of the Dickstein
Nominees as the Directors of the Company at the 1995 Annual Meeting of
Shareholders, several executive officers of the Company, including Michael
Bozic, John G. Reen, Robert J. Stevenish, E. Jackson Smailes, Andrew J. Samuto
and William K. Friend, along with Norman S. Matthews, a consultant to the
Company, resigned and were paid by the Company a total of $13,935,299
purportedly pursuant to employment or consulting agreements (the "Employment
Agreements"). The Employment Agreements, as amended, provided for a payment
equal to three times their respective 1994 salary and targeted bonus upon the
resignation of the employee or consultant following a Change of Control of the
Company (as defined in the Employment Agreements) not approved by the Board of
Directors. The Employment Agreements also provided for "gross-up" payments to
the employees
13
<PAGE> 18
or consultant in the amount of all excise taxes payable with respect to the
Change of Control payments, including all taxes payable in respect of such
"gross-up" payments. The Company paid $10,195,648 with respect to the "gross up"
relating to the executive officers and consultant named above.
In addition, following the certification of the Dickstein Nominees, the
Company made total payment of $7,074,696 pursuant to the Company's Supplemental
Executive Retirement Plan (the "SERP"), including $5,566,513 to the Company's
executive officers named above. The SERP provided for payment of these amounts
following a Change of Control of the Company (as defined in the SERP), but
permitted the Board to amend the SERP to eliminate the acceleration of benefits
or vesting under the SERP in the event the amendment was enacted prior to the
date of a Change of Control.
The Company has taken action to recover certain of the payments under the
Employment Agreements and the SERP made in connection with the Change of
Control, including commencement of a lawsuit filed against each of the former
directors of the Company.
The lawsuit alleges that the former directors breached their fiduciary
duties to the Company and Hills Department Store Company by, among other things,
(i) failing to approve the Change of Control, (ii) failing to amend the SERP to
eliminate the vesting of benefits upon a Change of Control, and (iii) failing to
follow the terms of the Employment Agreements in calculating the amounts to be
paid to the Hills executives. These latter allegations also form the basis for
breach of contract claims against certain of the former directors.
EMPLOYMENT CONTRACTS
Effective February 7, 1996, the Company entered into an employment contract
with Gregory K. Raven, the current President and Chief Executive Officer of the
Company. The contract provides for a term commencing February 8, 1996 and
terminating January 30, 1999, subject to automatic one-year renewals thereafter
unless either the Company or Mr. Raven gives notice of non-renewal at least
ninety (90) days prior to the expiration of the term. The contract provides for
a base salary of $700,000 per year, subject to annual review, and a bonus of up
to 50% of base salary if performance goals established by the HR/Compensation
Committee (Option Committee) of the Board of Directors are met. Mr. Raven's
contract provides that he will receive a bonus of not less than 25% of base
salary for the year ending January 1997. Mr. Raven has the right to terminate
his employment contract for "Good Reason," defined as assignment to duties
inconsistent with his position, removal from his position, a material reduction
in benefits, a relocation of the Company's principal office outside the Boston
metropolitan area or material breach by the Company. If the Company terminates
Mr. Raven without cause or if he terminates his employment for "Good Reason,"
then Mr. Raven shall be entitled to severance pay equal to two times his base
pay then in effect. If within two years following a Change in Control (as
defined in the employment contract) the Company terminates Mr. Raven's
employment without cause or he terminates his employment contract for Good
Reason (other than a relocation of the Company's office), Mr. Raven's severance
pay shall be three times his then current base pay and three times his bonus for
the current fiscal year (assuming all performance goals had been achieved).
For purposes of Mr. Raven's employment contract, a Change in Control shall
have occurred if: (i) a person or entity (other than Dickstein Partners Inc. and
its affiliates) acquires 30% or more of the Company's voting stock, (ii) the
majority of the Board of Directors consists of persons who were not Incumbent
Directors (members of the Board on February 7, 1996 or a person who becomes a
member of the Board of Directors subsequent to February 7, 1996 whose election
was supported by a majority of Incumbent Directors), (iii) the Company
liquidates or sells substantially all of its assets, or (iv) the Company merges
or consolidates with another company and the shareholders of the Company
immediately before the combination hold 50% or less of the combined entity.
If the Company gives Mr. Raven notice of non-renewal of Mr. Raven's
employment contract, the Company will pay Mr. Raven a lump sum equal to two
times Mr. Raven's then base pay and continue his benefits for one year following
expiration of the employment contract.
Mr. Raven's employment contract provides for the issuance of 100,000 shares
of restricted stock to Mr. Raven on the terms described in the section below
captioned "Restricted Stock Agreements". Mr. Raven's
14
<PAGE> 19
employment contract also provides for the issuance to Mr. Raven of nonqualified
options to purchase 300,000 shares of the Company's Common Stock under the
Company's 1993 Stock Option Plan. See sections below captioned "Stock Option
Table" and "Ten Year Option Repricings."
On July 6, 1995 the Company entered into an employment contract with E.
Jackson Smailes, former President and Chief Executive Officer, replacing the
previous employment contract dated September 30, 1994 between the Company and
Mr. Smailes. The previous employment contract had been terminated by Mr. Smailes
on July 5, 1995, following the election of the Dickstein Nominees at the 1995
Annual Meeting of Shareholders. Mr. Smailes' July 6, 1995 employment contract
was for a term expiring January 31, 1997 at a base salary of $600,000 per year
subject to annual review and a bonus of up to 50% of base salary if annual goals
were met. Mr. Smailes resigned effective February 7, 1996.
Effective August 16, 1995, the Company entered into an employment contract
with James E. Feldt, Executive Vice President-General Merchandise Manager for a
term of two years to August 16, 1997 at a base salary of $325,000 per year,
subject to annual review. Mr. Feldt is entitled to participate in any bonus,
stock option or other incentive compensation plans and all benefit plans of the
Company at a level commensurate with his position. On March 29, 1996, Mr.
Feldt's employment contract was amended to extend the term to March 29, 1999.
On July 6, 1995 the Company entered into an employment contract with
William K. Friend, Vice President-Secretary and Corporate Counsel, replacing the
previous employment contract between the Company and Mr. Friend dated September
30, 1994. The previous employment contract had been terminated by Mr. Friend on
July 5, 1995 following the election of the Dickstein Nominees at the 1995 Annual
Meeting of Shareholders. Mr. Friend's July 6, 1995 employment contract is for a
term of two years to July 6, 1997 at a base salary of $169,500 per year, subject
to annual review and a bonus of up to 40% of base salary if annual goals are
met. The employment contract provides for a change of control bonus equal to one
year's base salary.
RESTRICTED STOCK AGREEMENTS
The Company entered into a Restricted Stock Agreement dated as of February
8, 1996 with Gregory K. Raven, President and Chief Executive Officer. Pursuant
to said agreement, the Company issued Mr. Raven 100,000 shares of Common Stock,
subject to the restrictions described below. Said shares may not be sold or
otherwise disposed of until the restrictions expire. The restrictions shall
expire as to 60,000 shares on January 30, 1999 and as to 40,000 shares on
January 29, 2000. Furthermore, said restrictions will terminate immediately upon
(i) a Change in Control, as defined in Mr. Raven's employment contract, (ii)
termination by the Company of Mr. Raven's employment contract other than for
Cause as defined in Mr. Raven's employment contract or (iii) termination of Mr.
Raven's employment by Mr. Raven for Good Reason. The shares are subject to
forfeiture prior to vesting upon the termination of Mr. Raven's employment other
than as described in (ii) and (iii) above.
The Company entered into a Restricted Stock Agreement with Chaim Y.
Edelstein, Chairman of the Board, dated as of February 8, 1996. Pursuant to said
agreement, the Company issued Mr. Edelstein 20,000 shares of Common Stock,
subject to the restrictions described below. The restricted shares may not be
sold or otherwise disposed of until the restrictions expire. The restrictions
will expire as to 5,000 shares on each of the first four anniversaries of
February 8, 1996, so long as Mr. Edelstein is at that time available, willing
and able to provide consulting services to the Company and Mr. Edelstein's
consulting agreement has not been terminated by the Company for cause (as
defined in the consulting agreement). The restrictions shall immediately
terminate in the event of death or disability or if Mr. Edelstein terminates the
consulting agreement for Good Reason, as defined therein. The shares are subject
to forfeiture prior to vesting should Mr. Edelstein not be available, willing
and able to perform consulting services for the Company.
COMPENSATION OF DIRECTORS
The Company pays to non-employee Directors a fee of $2,000 per month, plus
$1,000 for each meeting of the Board and $500 for each committee meeting
attended, plus expenses. Committee chairmen receive $750 for each committee
meeting attended. Messrs. Edelstein, Raven and Katz do not receive directors
fees.
15
<PAGE> 20
Subject to shareholder approval of the 1996 Directors Stock Option Plan,
each Participating Director has been granted an option to purchase 4,000 shares
of the Company's Common Stock and will be granted an option to purchase 2,000
shares of the Company's Common Stock on the first business day of each fiscal
year, commencing with the fiscal year ending January 31, 1998. Mr. Edelstein and
Mr. Raven did not receive grants under the 1996 Directors Stock Option Plan.
During the fiscal year ended February 3, 1996, the Company paid Mr.
Edelstein consulting fees of $75,000 for services through September 4, 1995 plus
$50,000 per month from September 1995 through January 31, 1996. The Company
entered into a consulting agreement dated as of February 7, 1996 with Mr.
Edelstein. The consulting agreement is for a term of one year, during which Mr.
Edelstein agrees to commit a substantial portion of his professional time to
providing consulting services to the Company. The consulting agreement provides
that the Company will pay Mr. Edelstein a consulting fee of $400,000 per year,
plus a bonus of up to $200,000 if the Company meets certain performance goals
for fiscal 1996.
Mr. Edelstein's consulting agreement also provides for the issuance to Mr.
Edelstein of options to purchase 30,000 shares of the Company's Common Stock
under the 1993 Stock Option Plan. Mr. Edelstein's consulting agreement also
provides for the issuance of 20,000 shares of restricted stock. See the section
above captioned "Restricted Stock Agreements".
The Company entered into a consulting agreement with Samuel L. Katz, a
Director, dated December 26, 1995. The consulting agreement is for a term from
January 1, 1996 to June 30, 1996. Pursuant to the agreement, Mr. Katz provides
advice to the Company in the areas of his professional experience, and the
Company pays Mr. Katz $20,000 per month. In addition, Mr. Katz will be eligible
to receive a bonus of up to $100,000 at the end of the consultancy based on the
good faith determination by the Board of Directors with respect to Mr. Katz's
contributions to the Company's accomplishment of certain financial goals as more
particularly described in the consulting agreement.
Pursuant to an agreement dated September 30, 1994 between the Company and
Norman S. Matthews, a former director, the Company paid Mr. Matthews consulting
fees at the rate of $500,000 per year through Mr. Matthews' resignation July 5,
1995. In addition, the Company paid Mr. Matthews termination payments of
$4,038,735, including $1,474,566 in excise tax "gross up", purportedly pursuant
to said agreement. The Company has brought litigation with respect to such
termination payments. See section above captioned "Change of Control Payments."
Until July 5, 1995, the Company paid Thomas H. Lee, former Chairman of the
Board, consulting fees at the rate of $250,000 per year.
16
<PAGE> 21
STOCK OPTION TABLE
<TABLE>
The following table sets forth grants during the fiscal year ended February
3, 1996 of options to purchase shares of the Company's Common Stock under the
Company's 1993 Stock Option Plan to the individuals named in the Summary
Compensation Table. In addition to the grants shown in the table below, on
February 7, 1996, Mr. Raven was granted options to purchase 300,000 shares of
Common Stock and Mr. Edelstein was granted options to purchase 30,000 shares of
Common Stock under the 1993 Stock Option Plan. The grants to both Mr. Edelstein
and Mr. Raven were at an exercise price of $12.00 per share and have a ten year
term expiring on February 7, 2006. On March 8, 1996, the Board of Directors
repriced the grants to both Mr. Raven and Mr. Edelstein to an exercise price of
$10.125 per share, the closing price of the Company's Common Stock on the New
York Stock Exchange on February 7, 1996, the date of the grants.
<CAPTION>
POTENTIAL REALIZABLE
% OF TOTAL VALUE AT ASSUMED
NUMBER OF OPTIONS ANNUAL RATES OF STOCK
SECURITIES GRANTED TO PRICE APPRECIATION
UNDERLYING EMPLOYEES EXERCISE OR FOR OPTION TERM(1)
OPTIONS IN FISCAL BASE EXPIRATION ----------------------
NAME GRANTED YEAR PRICE(2) DATE 5% 10%
- ---- ---------- ----------- ----------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
E. Jackson
Smailes(2).......... 122,000(2) 32.7% $ 12.00 10/18/05 $423,889 $1,542,148
Michael Bozic......... 0 N/A N/A N/A N/A
James E. Feldt(3)..... 16,667(4) 10.7 12.00 11/04/03 28,220 131,735
23,333(5) 12.00 08/15/05 68,716 270,972
Robert J. Stevenish... 0 N/A N/A N/A N/A
William K. Friend..... 26,000(6) 7.0 12.00 10/18/05 90,337 328,654
John G. Reen.......... 0 N/A N/A N/A N/A
Kim D. Ahlholm(7)..... 5,333(4) 1.8 12.00 11/04/03 9,030 42,152
1,333(4) 12.00 04/21/04 2,671 11,725
Bruce A.
Caldwell(8)......... 4,667(4)(8) 1.6 12.00 11/04/03 7,902 36,888
1,333(4)(8) 12.00 04/21/04 2,671 11,725
<FN>
- ------------------------------
(1) The amounts shown as potential realizable value illustrate what might be
realized upon exercise immediately prior to expiration using the 5% and 10%
appreciation rates established in regulations of the SEC, compounded
annually. The potential realizable value is not intended to predict future
appreciation of the price of the Company's Common Stock. The values shown do
not consider nontransferability, vesting over five years or termination of
the options upon termination of employment.
(2) Effective August 15, 1995, Mr. Smailes was granted 122,000 cash-only rights,
72,000 of which had an exercise price of $18.56 per right and a term of one
year and 50,000 of which had an exercise price of $20.125 per right and a
term of ten (10) years. Effective October 18, 1995, Mr. Smailes exchanged
said cash-only rights for options to purchase 122,000 shares of the
Company's Common Stock at an exercise price of $12.00 per share pursuant to
the 1993 Stock Option Plan. See table below captioned "Ten Year Option
Repricings". Mr. Smailes' options were cancelled upon his resignation on
February 7, 1996.
(3) In addition to the grants shown in the table above, on March 25, 1996, Mr.
Feldt was granted options to purchase 35,000 shares of Common Stock at an
exercise price of $11.25 per share for a ten year term to March 25, 2006.
(4) Consists of repricing of options previously granted. See table below
captioned "Ten Year Option Repricings".
(5) Effective August 15, 1995, Mr. Feldt was granted options to purchase 35,000
shares of Common Stock at an exercise price of $16.375 per share and a term
to August 15, 2005. Effective November 4, 1995, Mr. Feldt exchanged said
35,000 options for the 23,333 options shown in the table with an exercise
price of $12.00 per share and the same term. See table below captioned "Ten
Year Option Repricings".
(6) Effective August 15, 1995, Mr. Friend was granted 39,000 cash-only rights,
26,500 of which had an exercise price of $18.49 per right and a one year
term and 12,500 of which had an exercise price of $20.125 per right and a
term of ten (10) years. Effective October 18, 1995, Mr. Friend exchanged
said cash-only rights for options to purchase 26,000 shares of the Company's
Common Stock at an exercise
</TABLE>
17
<PAGE> 22
price of $12.00 per share pursuant to the 1993 Stock Option Plan. See table
below captioned "Ten Year Option Repricings."
(7) In addition to the grants shown in the table above, on March 25, 1996, Ms.
Ahlholm was granted options to purchase 3,334 shares of Common Stock at an
exercise price of $11.25 per share for a ten year term to March 25, 2006.
(8) The options shown for Mr. Caldwell were cancelled upon his resignation on
February 12, 1996.
<TABLE>
The following table sets forth all stock option/SAR repricings during the
fiscal year ended February 3, 1996 and during the Company's last ten (10) fiscal
years relating to the persons listed in the Summary Compensation Table.
TEN YEAR OPTION REPRICINGS
<CAPTION>
NUMBER OF NUMBER OF LENGTH OF
SECURITIES SECURITIES ORIGINAL
UNDERLYING UNDERLYING EXERCISE MARKET OPTION TERM
OPTIONS OPTIONS PRICE AT PRICE REMAINING
PRIOR TO AFTER TIME OF AT TIME NEW EXERCISE AT DATE OF
NAME DATE REPRICING REPRICING REPRICING OF REPRICING PRICE REPRICING
- ---- -------- ---------- ---------- -------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
E. Jackson Smailes(1).......... 10/18/95 72,000 72,000 $ 18.56 $9.50 $ 12.00 10/18/05(1)
10/18/95 50,000 50,000 20.125 9.50 12.00 10/18/05(1)
James E. Feldt................. 11/04/95 25,000 16,667 18.25 9.25 12.00 11/04/03
11/04/95 35,000 23,333 16.375 9.25 12.00 08/15/05
William K. Friend(2)........... 10/18/95 26,500 N/A 18.49 10/18/05
10/18/95 12,500 N/A 20.125 10/18/05
10/18/95 N/A 26,000 N/A 9.50 12.00 10/18/05
Kim D. Ahlholm................. 11/04/95 8,000 5,333 18.25 9.25 12.00 11/04/03
11/04/95 2,000 1,333 19.50 9.25 12.00 04/21/04
Bruce A. Caldwell(3)........... 11/04/95 7,000 4,667 18.25 9.25 12.00 11/04/03
11/04/95 2,000 1,333 19.50 9.25 12.00 04/21/04
<FN>
- ------------------------------
(1) Effective August 15, 1995, Mr. Smailes was granted 122,000 cash-only rights,
72,000 of which had an exercise price of $18.56 per right and a term of one
year and 50,000 of which had an exercising price of $20.125 per right and a
term of ten (10) years. Effective October 18, 1995, Mr. Smailes exchanged
said cash-only rights for options to purchase 122,000 shares of the
Company's Common Stock at an exercise price of $12.00 per share pursuant to
the 1993 Stock Option Plan. See section above captioned "Stock Option
Table". Mr. Smailes' options were cancelled upon his resignation on February
7, 1996.
(2) Effective August 15, 1995, Mr. Friend was granted 39,000 cash-only rights,
26,500 of which had an exercise price of $18.49 per right and a term of one
year and 12,500 of which had an exercise price of $20.125 per right and a
term of ten (10) years. Effective October 18, 1995, Mr. Friend exchanged
said cash-only rights for options to purchase 26,000 shares of the Company's
Common Stock at an exercise price of $12.00 per share pursuant to the 1993
Stock Option Plan. See section above captioned "Stock Option Table".
(3) The options shown for Mr. Caldwell were cancelled upon his resignation on
February 12, 1996.
</TABLE>
18
<PAGE> 23
OPTION EXERCISES IN FISCAL 1995
<TABLE>
The following table sets forth information regarding the number and value
of stock option exercises during the last fiscal year and unexercised stock
options as of February 3, 1996.
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED IN THE
OPTIONS AT FISCAL MONEY OPTIONS AT
SHARES YEAR END YEAR END(1)
ACQUIRED VALUE ----------------------------- -------------------------------
ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- --------- ------------ -------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
E. Jackson Smailes(2)............ 0 0 122,000(2) 0 0 0
Michael Bozic.................... 0 0 0 0 0 0
James E. Feldt................... 0 0 7,500 32,500 0 0
Robert J. Stevenish(3)........... 1,000 $ 750(4) 0 0 0 0
William K. Friend................ 0 0 26,000 0 0 0
John G. Reen..................... 0 0 0 0 0 0
Kim D. Ahlholm................... 0 0 2,666 4,000 0 0
Bruce A. Caldwell(5)............. 0 0 2,367(5) 3,633(5) 0 0
<FN>
- ------------------------------
(1) Based on the closing price of the Company's Common Stock on the New York
Stock Exchange February 2, 1996 of $10.125 per share and an exercise price
of $12.00 per share for all options shown, none of the options shown in this
table were in the money.
(2) Mr. Smailes' stock options were cancelled upon his resignation on February
7, 1996.
(3) Mr. Stevenish exercised 1,000 stock options on April 17, 1995.
(4) Based on the difference between the exercise price of $18.25 per share and
the closing price of the Company's Common Stock on April 17, 1995 of $19.00
per share.
(5) Mr. Caldwell's stock options were cancelled upon his resignation on February
12, 1996.
</TABLE>
LONG TERM INCENTIVE PLAN AWARDS
The Company does not have a long term incentive plan, and the Company made
no long term incentive plan awards in fiscal 1995.
COMPENSATION COMMITTEE REPORT
In accordance with the rules and regulations of the SEC, the following
report of the HR/Compensation Committee (Option Committee) and the performance
graph thereafter shall not be deemed to be "soliciting material" or to be
"filed" with the SEC or subject to Regulations 14A or 14C of the Exchange Act or
to the liabilities of Section 18 of the Exchange Act and shall not be deemed to
be incorporated by reference into any filing under the Securities Act of 1933,
as amended, or the Exchange Act, notwithstanding any general incorporation by
reference of this Proxy Statement into any other filed document.
The Company's Board of Directors has established the HR/Compensation
Committee (Option Committee) (the "Committee"), consisting entirely of
non-employee directors. The Committee's functions include:
(i) Reviewing the corporate compensation programs, including the
compensation of the Chief Executive Officer, and policies to
insure that the programs and policies are competitive and
provide for internal fairness;
(ii) Reviewing and advising the Chief Executive Officer about
specific compensation matters for officers and executives;
(iii) Overseeing the Company's performance bonus program;
(iv) Administering the Hills Stores Company 1993 Incentive and
Nonqualified Stock Option Plan;
(v) Administering the Hills Stores Company 162(m) Bonus Plan; and
(vi) Such other duties as the Chairman of the Board may assign.
19
<PAGE> 24
Change of Control Payments
The previous Board of Directors of the Company and the previous
HR/Compensation Committee authorized certain employment agreements dated
September 30, 1994 between the Company and each of Michael Bozic, John G. Reen,
Robert J. Stevenish, E. Jackson Smailes, Andrew J. Samuto and William K. Friend,
and a consulting agreement also dated September 30, 1994 between the Company and
Norman S. Matthews (collectively the "Employment Agreements"). The Employment
Agreements, as amended, provided for a payment of three times their respective
1994 salary and targeted bonuses upon the resignation of said executives or
consultant following a Change of Control (as defined in the Employment
Agreements) not approved by the Board of Directors. The Employment Agreements
also provided for "gross up" payments to said executives and consultant in the
amount of all excise taxes payable with respect to the Change of Control
payments, including all taxes payable in respect of such "gross up" payments.
On July 5, 1995, following the certification of the election of the
Dickstein Nominees as the Board of Directors, Messrs. Bozic, Reen, Stevenish,
Smailes, Samuto, Friend and Matthews resigned and were paid a total of
$13,935,299, purportedly pursuant to the Employment Agreements. In addition, the
Company paid $10,195,648 with respect to the "gross up" relating to said
payments.
Furthermore, following such certification of the Dickstein Nominees, the
Company made a total payment of $7,074,696 to approximately twenty executives
pursuant to the Company's Supplemental Executive Retirement Plan ("SERP"),
including $5,566,513 to Messrs. Bozic, Reen, Smailes, Stevenish, Samuto and
Friend. The SERP provided for these payments following a Change of Control (as
defined in the SERP).
The Company has taken action to recover certain of the Change of Control
payments made under the Employment Agreements and the SERP, including the
commencement of a lawsuit against each of the members of the previous Board of
Directors. The lawsuit alleges that the former directors breached their
fiduciary duty to the Company and Hills Department Store Company, the Company's
principal operating subsidiary, by, among other things, (i) failing to approve
the Change of Control, (ii) failing to amend the SERP to eliminate the vesting
of benefits upon a Change of Control and (iii) failing to follow the terms of
the Employment Agreements in calculating the amounts to be paid to said
executives and consultant. These latter allegations also form the basis for
breach of contract claims against certain of the former directors.
Rehiring of Certain Former Executives
Throughout the proxy contest leading to the election of the Dickstein
Nominees at the Company's 1995 Annual Meeting of Shareholders, the Dickstein
Nominees expressed their intention, if elected, to retain existing management.
Consistent with this expressed intention, on July 6, 1995, the Company hired Mr.
Smailes, formerly Executive Vice President-General Merchandise Manager, as
President and Acting Chief Executive Officer and hired Mr. Stevenish, formerly
Executive Vice President-Store and Distribution Operations, as Executive Vice
President-Store and Distribution Operations and Chief Operating Officer. The
Company also rehired Mr. Friend to his previous position of Vice
President-Secretary and Corporate Counsel.
Objectives
The objective of the Company's executive compensation program is to attract
and retain executives with high levels of talent and expertise in areas related
to retailing and to encourage these executives to achieve superior performance
on behalf of the Company and its shareholders. The Company has developed a
compensation strategy that ties a substantial portion of executive compensation
to the Company's success in meeting specified performance goals. The Company
believes that its executive compensation program allows it to compete with other
high volume discount retailers and to remain competitive in a demanding retail
market. Executive compensation generally consists of the following basic
components: base salary, performance bonus, stock option grants and awards of
restricted stock.
Base Salary
Base salaries for executive officers are determined by the Company by
evaluating the duties and responsibilities of each position and the experience
of the executive and by conducting executive salary surveys
20
<PAGE> 25
and comparing salaries for similar positions with other companies. Annual salary
increases and adjustments are determined by the Company and based on individual
performance, changes in responsibilities, and market-based salary comparisons
with other retail companies. Salaries of all executives are reviewed annually.
Performance Bonus
A significant portion of executive compensation is directly related to
Company performance by means of the Company's performance bonus program.
Depending on position, maximum bonus eligibility ranges from a low of 6% of an
executive's base salary to a high of 50% of an executive's base salary. Actual
pay-out is determined by Company performance, including the achievement of
financial and profit goals, and individual performance. Early in each year, the
Board of Directors approves performance goals for the Company and for individual
executives. The size of the bonus pool is determined by the Company's level of
attainment of those performance goals. In the fiscal year ended February 3,
1996, the Company goal was a target of earnings before interest, taxes,
depreciation and amortization (EBITDA). EBITDA thresholds in descending amounts
were established for a maximum bonus pool, lesser bonus pools and no bonus pool.
In addition to the Company goal, each executive has individual performance
goals. These individual goals vary by position. Even if the Company meets its
maximum bonus goal, an executive may not receive a maximum bonus if individual
performance goals are not met. Furthermore, executives who exceed their
individual performance goals may be awarded special discretionary bonuses. In
the fiscal year ended February 3, 1996, no bonuses were paid.
Stock Option Plans
The Company's 1993 Stock Option Plan is intended to provide a long-term
incentive and to motivate executives to increase the long-term market value of
the Company's Common Stock. During the fiscal year ended February 3, 1996,
options (including repricings) to purchase a total of 371,464 shares of the
Common Stock of the Company were granted to 66 individuals, including Messrs.
Smailes, Feldt, Friend and Caldwell and Ms. Ahlholm. In addition, on February 7,
1996, options to purchase 300,000 shares of Common Stock were granted to Mr.
Raven and options to purchase 30,000 shares of Common Stock were granted to Mr.
Edelstein. The grants to Mr. Raven and Mr. Edelstein were repriced on March 8,
1996. The option repricings are described in more detail in the section below
captioned "Repricing of Stock Options" and in the sections captioned "Stock
Option Table" and "Ten Year Option Repricings" on pages 17 and 18 of this Proxy
Statement.
The Committee determines the amount and timing of grants under the
Company's 1993 Stock Option Plan. No member of the Committee has received a
grant under the 1993 Stock Option Plan.
The Committee believes that the amendment of the 1993 Stock Option Plan
described in pages 5 and 6 of this Proxy Statement is in the best interest of
the Company. The 1993 Stock Option Plan was instituted in connection with the
Company's emergence from Chapter 11 proceedings, and the number of shares
available for grants thereunder was the product of the negotiation of the
Company's Reorganization Plan. As of March 29, 1996, only 251,236 shares remain
available for grant under the 1993 Stock Option Plan. The Committee believes
that increasing the number of shares available for grant will assist the Company
in further aligning the interests of management and shareholders and providing
additional incentives for management to produce excellent operating results.
Repricing of Stock Options
On October 18, 1995, recognizing that exercise prices with respect to
options held by employees under the 1993 Stock Option Plan were substantially
above the fair market value of the Common Stock, the Committee determined to
offer to exchange the old options then held by employees for new options at an
exchange rate of two new options for every three old options exchanged. The
exercise price on the new options is $12.00 per share (which was still well
above the closing price of the Company's Common Stock on the New York Stock
Exchange of $9.50 per share on October 18, 1995), and the term and vesting
remain unchanged.
21
<PAGE> 26
Substantially all employees participating in the 1993 Stock Option Plan,
including Messrs. Feldt and Caldwell and Ms. Ahlholm, accepted the offer and
exchanged their old options for new, repriced options.
On October 18, 1995 Mr. Smailes and Mr. Friend did not hold options under
the 1993 Stock Option Plan but held "cash only" rights with a base value
substantially in excess of the fair market value of the Company's Common Stock.
The Committee determined to offer to issue to Mr. Smailes and Mr. Friend options
to purchase 122,000 and 26,000 shares of Common Stock respectively under the
1993 Stock Option Plan at an exercise price of $12.00 per share in exchange for
their cash only rights. Both Mr. Smailes and Mr. Friend accepted the offer and
exchanged their cash only rights for said options.
The options granted to Mr. Smailes and Mr. Caldwell were cancelled upon
their resignations on February 7, 1996 and February 12, 1996 respectively.
On March 8, 1996, the Committee determined to reprice the stock options
granted to Mr. Raven and Mr. Edelstein to $10.125 per share, the closing price
of the Company's Common Stock on February 7, 1996, the date of the grants.
The Committee believes that the foregoing grants and option repricings will
motivate and provide additional incentive to the grantees to improve the
Company's performance and enhance shareholder value.
Restricted Stock Awards
From time to time the Committee may make awards of restricted stock to
individuals including executive officers. No awards of restricted stock were
made during the fiscal year ended February 3, 1996. However, on February 7,
1996, the Company awarded Mr. Raven 100,000 shares of restricted stock and Mr.
Edelstein 20,000 shares of restricted stock. The Committee believes that
restricted stock awards assist the Company in attracting and retaining qualified
individuals and serve to motivate the recipients to improve the Company's
operating results and enhance shareholder value.
Compensation of Chief Executive Officers
Mr. Bozic received salary pursuant to his September 30, 1994 employment
agreement until his resignation on July 5, 1995. Upon his resignation, he
received the payments described above in "Change of Control Payments" and set
forth in the Summary Compensation Table on pages 11 through 14 of this Proxy
Statement.
Mr. Smailes received salary for his tenure as President and Chief Executive
Officer pursuant to his July 6, 1995 employment agreement and cash only rights,
which he later exchanged for a stock option grant pursuant to the 1993 Stock
Option Plan. Effective February 7, 1996 Mr. Smailes resigned and received a
termination payment of $1,150,000. Mr. Smailes' stock options were cancelled
upon his February 7, 1996 resignation.
Neither Mr. Bozic nor Mr. Smailes received a performance bonus for fiscal
1995.
Effective February 8, 1996, the Company hired Gregory K. Raven as President
and Chief Executive Officer. The Company entered into an employment agreement
with Mr. Raven for a term from February 8, 1996 to January 30, 1999 at a salary
of $700,000 per year, subject to annual review. Mr. Raven will also be eligible
to receive a bonus of up to 50% of his base salary, subject to meeting
performance goals with a minimum bonus of 25% of base salary for the current
fiscal year. Mr. Raven's contract also provides for a grant of 300,000 options
pursuant to the 1993 Stock Option Plan and an award of 100,000 shares of
restricted stock.
Compensation of Named Executive Officers
Messrs. Smailes, Reen, Stevenish and Friend received salary pursuant to
their September 30, 1994 employment agreements until their resignations July 5,
1995. Upon their resignations, they received the payments described above in
"Change of Control Payments" and in the Summary Compensation Table on pages 11
through 14 of this Proxy Statement.
Mr. Stevenish received salary pursuant to his July 6, 1995 employment
agreement until his September 1, 1995 resignation. He also received cash only
rights which were cancelled upon his resignation. Mr. Friend
22
<PAGE> 27
received salary pursuant to his July 6, 1995 employment agreement and cash only
rights which he later exchanged for a stock option grant pursuant to the 1993
Stock Option Plan. Mr. Feldt received salary pursuant to his employment
agreement, a stock option grant and stock option repricings pursuant to the 1993
Stock Option Plan.
Mr. Caldwell and Ms. Ahlholm received salary and received stock option
repricings pursuant to the 1993 Stock Option Plan. Mr. Caldwell's stock options
were cancelled upon his February 12, 1996 resignation.
No executive officer received a performance bonus for fiscal 1995.
Section 162(m) Policy
Section 162(m) of the Internal Revenue Code provides that annual
compensation in excess of $1,000,000 to the Company's Chief Executive Officer or
any other executive officer named in the Summary Compensation Table will not be
deductible, subject to certain exceptions, which include shareholder-approved
programs. In order to preserve the deductibility of such compensation, the Board
of Directors has adopted, and is seeking shareholder approval of, the Hills
Stores Company 162(m) Bonus Plan described on pages 7 and 8 of this Proxy
Statement. While it is the policy of the Committee to preserve the deductibility
of compensation to executive officers where practicable, the Committee reserves
the right to establish alternative incentive arrangements for otherwise eligible
executives if it determines in its discretion that it would be in the best
interest of the Company and its shareholders to do so, even if the result is
loss of tax deductibility for certain compensation arrangements.
The Committee anticipates that, subject to shareholder approval, only Mr.
Raven will participate in the Hills Stores Company 162(m) Bonus Plan in the
current fiscal year and be eligible to receive compensation thereunder if
performance goals are met.
No member of the Committee is a current or former officer or employee of
the Company or any of its subsidiaries.
HR/COMPENSATION COMMITTEE
(OPTION COMMITTEE)
Mark B. Dickstein
Stanton J. Bluestone
John W. Burden III
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the fiscal year ended February 3, 1996, no executive officer of the
Company (i) served on the board of directors of any company of which Mr.
Dickstein, Mr. Bluestone or Mr. Burden (the members of the Company's
HR/Compensation Committee (Option Committee) was an executive officer or (ii)
served as a member of the compensation committee (or other board committee
performing equivalent functions or, in the absence of such a committee, on the
board) of another entity, one of whose executive officers is a member of the
Board of Directors of the Company.
23
<PAGE> 28
PERFORMANCE GRAPHS
<TABLE>
The following graphs compare the percentage change in cumulative total
shareholders return on the Common Stock of the Company and the Predecessor
Company to the cumulative total shareholders return of the S&P 500 and to the
cumulative total shareholders return of the S&P Retail Composite. The
Predecessor Company Graph covers the period January 31, 1991 to October 4, 1993
and assumes an investment of $100 in the Common Stock of the Predecessor Company
and each index on January 31, 1991. The Company Graph covers the period from
October 5, 1993 to February 2, 1996 and assumes an investment of $100 in the
Company's Common Stock and in each index on October 5, 1993.
TOTAL RETURN TO SHAREHOLDERS
Predecessor Company
<CAPTION>
RETAIL HILLS DE-
Measurement Period STORES- S&P 500 PARTMENT
(Fiscal Year Covered) COMPOSITE INDEX STORES INC.
<S> <C> <C> <C>
Jan 91 100 100 100
Jan 92 139.73 122.69 116.67
Jan 93 166.78 135.67 124.94
OCT 4, 93 156.91 145.66 33.33
</TABLE>
<TABLE>
Company
<CAPTION>
RETAIL
Measurement Period S&P 500 STORES- HILLS
(Fiscal Year Covered) INDEX COMPOSITE STORES CO.
<S> <C> <C> <C>
OCT 5, 1993 100 100 100
Jan 94 105.12 102.36 100.58
Jan 95 105.68 94.78 99.42
Feb 2, 96 146.54 102.20 47.67
------ HILLS DEPARTMENT STORES, INC. ------ HILLS STORES COMPANY
---- S&P 500 INDEX ---- S&P 500 INDEX
---- RETAIL STORES-COMPOSITE ---- RETAIL STORES-COMPOSITE
</TABLE>
OTHER MATTERS
At the time this Proxy Statement was published, the Board of Directors knew
of no other matters constituting a proper subject of action by the shareholders
which would be presented at the meeting. Should any other matters be properly
brought before the Annual Meeting, the persons appointed in the proxy or their
substitutes will vote in accordance with their best judgment on such issues.
NOTE: THE COMPANY'S ANNUAL REPORT ON FORM 10-K AS FILED WITH THE SECURITIES
AND EXCHANGE COMMISSION IS INCLUDED IN THE COMPANY'S 1995 ANNUAL REPORT
WHICH IS BEING PROVIDED TO YOU TOGETHER WITH THIS PROXY STATEMENT. UPON THE
WRITTEN REQUEST OF ANY SHAREHOLDER ENTITLED TO RECEIVE THIS PROXY
STATEMENT, THE COMPANY WILL PROVIDE, WITHOUT CHARGE, AN ADDITIONAL COPY OF
ITS FORM 10-K. ANY SUCH REQUEST SHOULD BE ADDRESSED TO THE COMPANY AT 15
DAN ROAD, CANTON, MA 02021, ATTENTION: WILLIAM K. FRIEND, VICE
PRESIDENT-SECRETARY.
<PAGE> 29
RELATIONSHIP OF INDEPENDENT ACCOUNTANTS
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 past two fiscal years 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 resignation 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 resolved 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.
In connection with its audit functions, Deloitte & Touche examined the
Company's financial statements for the fiscal year ended February 3, 1996.
Representatives of Deloitte & Touche are expected to attend the Annual
Meeting of Shareholders, may make a statement if they so desire and will be
available to respond to questions submitted to the Company at 15 Dan Road,
Canton, MA 02021, Attention: William K. Friend, Vice President-Secretary, in
writing at least ten days prior to the meeting.
SHAREHOLDER PROPOSALS
In order to be considered for inclusion in the proxy materials related to
the 1997 Annual Meeting of Shareholders, shareholder proposals must satisfy
applicable SEC requirements and must be received by the Company (addressed to
the attention of the Secretary) not later than January 10, 1997.
COST OF SOLICITATION
The cost of soliciting proxies in the accompanying form will be borne by
the Company. In addition to solicitations by mail, officers, Directors and
regular associates of the Company may solicit proxies in person or by telephone.
No compensation, other than their regular compensation, will be paid to them for
any such solicitations. The Company may reimburse banks, brokers, nominees and
other fiduciaries for postage and reasonable clerical expenses incurred by them
in forwarding the proxy material to principals.
The Company has retained MacKenzie Partners, Inc. to assist in the
solicitation of proxies at a cost not to exceed $6,000, plus out-of-pocket
expenses.
25
<PAGE> 30
EXHIBIT 1
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 and who have not received restricted stock
("Participating 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 Participating 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
determination 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 100,000
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
automatically to Participating Directors of the Company as hereinafter provided:
(a) Each Participating 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 Participating Director
shall be automatically granted an additional option to purchase 2,000
shares of Common Stock on the first business day of each fiscal year of the
Company, provided that the optionee is then a Participating Director of the
Company.
(b) Each Participating 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
business day of each subsequent fiscal year of the Company, provided that
the optionee is then a Participating 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
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<PAGE> 31
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 anniversary 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 outstanding, 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 cumulative.
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 purchase 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 exercise of an option shall be made by cash in an
amount, or a check, bank draft or post or express money
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<PAGE> 32
order payable in an amount, equal to the aggregate exercise price for the number
of shares specified in the Notice.
As promptly as practicable after receipt of the Notice and accompanying
payment, the Company shall deliver to the optionee certificates for the number
of shares with respect to which such option has been so exercised, issued in the
optionee's name; provided, however, that such delivery shall be deemed effected
for all purposes when the Company or a stock transfer agent of the Company shall
have deposited such certificates in the United States mail, addressed to the
optionee, at the address specified in the Notice.
SECTION 8. CHANGES IN 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 affecting the Common Stock or the rights thereof, or
the dissolution or liquidation of the Company, or any sale or transfer of all or
any part of its assets or business, or any other corporate act or proceeding,
whether of a similar character or otherwise.
8.2 Recapitalization, Stock Splits and Dividends. If the Company shall
effect a subdivision or consolidation of shares or other capital readjustment,
the payment of a stock dividend, or other increase or reduction of the number of
shares of the Common Stock outstanding, in any such case without receiving
compensation therefor in money, services or property, then (i) the number,
class, and price per share of shares of stock subject to outstanding options
hereunder shall be appropriately adjusted in such a manner as to entitle an
optionee to receive upon exercise of an option, for the same aggregate cash
consideration, the same total number and class of shares as he or she would have
received as a result of the event requiring the adjustment had he or she
exercised his or her option in full immediately prior to such event; and (ii)
the number and class of shares with respect to which options may be granted
under the Plan shall be adjusted by substituting for the total number of shares
of Common Stock then reserved for issuance under the Plan that number and class
of shares of stock that the owner of an equal number of outstanding shares of
Common Stock would own as the result of the event requiring the adjustment.
8.3 Merger without Change of Control. After a merger of one or more
corporations into the Company, or after a consolidation of the Company and one
or more corporations in which (i) the Company shall be the surviving
corporation, and (ii) the stockholders of the Company immediately prior to such
merger or consolidation own after such merger or consolidation shares
representing at least fifty percent of the voting power of the Company, each
holder of an outstanding option shall, at no additional cost, be entitled upon
exercise of such option, to receive in lieu of the number of shares as to which
such option shall then be so exercisable, the number and class of shares of
stock or other securities to which such holder would have been entitled pursuant
to the terms of the agreement of merger or consolidation if, immediately prior
to such merger or consolidation, such holder had been the holder of record of a
number of shares of Common Stock equal to the number of shares for which such
option was exercisable.
8.4 Sale or Merger with Change of Control. If the Company is merged into
or consolidated with another corporation under circumstances where the Company
is not the surviving corporation, or if there is a merger or consolidation where
the Company is the surviving corporation but the stockholders of the Company
immediately prior to such merger or consolidation do not own after such merger
or consolidation shares representing at least fifty percent of the voting power
of the Company or if the Company is liquidated, or sells or otherwise disposes
of substantially all of its assets to another corporation while unexercised
options remain outstanding under the Plan, (i) the time for exercise of all
unexercised and unexpired options shall accelerate 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,
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<PAGE> 33
cash or property as the holders of shares of Common Stock receive 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 subject 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 exercise 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 registration statement in effect under
such Act or unless an opinion of counsel satisfactory to the Company has been
received by the Company to the effect that such registration is not required.
Any determination in this connection by the 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.
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
governmental 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.
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<PAGE> 34
SECTION 11. NONEXCLUSIVITY OF THE PLAN
Neither the adoption of the Plan by the Board of Directors nor the
submission of the Plan to the stockholders of the Company for approval shall be
construed as creating any limitations on the power of the Board of Directors to
adopt such other incentive arrangements as it may deem desirable, including,
without limitation, the granting of stock options otherwise than under the Plan,
and such arrangements may be either applicable generally or only in specific
cases.
SECTION 12. EFFECTIVE DATE AND DURATION OF PLAN
The Plan shall become effective 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
interpreted in accordance with the laws of the Commonwealth of Massachusetts,
without giving effect to principles of conflict of laws.
* * * * * * * * * * * * * * * * * *
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<PAGE> 35
EXHIBIT 2
HILLS STORES COMPANY
1993 INCENTIVE AND NONQUALIFIED STOCK OPTION PLAN
SECTION 1. PURPOSE
This 1993 Incentive and Nonqualified Stop Option Plan (the "Plan") of Hills
Stores Company, a Delaware corporation (the "Company"), is designed to provide
additional incentive to executives and other key employees of the Company, its
parent and subsidiaries and for certain other individuals providing services to
or acting as directors of the Company, its parent and subsidiaries. The Company
intends that this purpose will be effected by the granting of incentive stock
options ("Incentive Stock Options") as defined in Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"), and nonqualified stock options
("Nonqualified Options") under the Plan which afford such executives and key
employees an opportunity to acquire or increase their proprietary interest in
the Company through the acquisition of shares of its Common Stock. The Company
intends that Incentive Stock Options issued under the Plan will qualify as
"incentive stock options" as defined in Section 422 of the Code and the terms of
the Plan shall be interpreted in accordance with this intention. The terms
"parent" and "subsidiary" shall have the respective meanings set forth in
Section 424 of the Code.
SECTION 2. ADMINISTRATION
2.1 The Committee. The Plan shall be administered by a Committee (the
"Committee") consisting of at least two members of the Company's Board of
Directors (the "Board"). None of the members of the Committee shall be an
officer or other employee of the Company, and none shall have been granted any
incentive stock option or nonqualified option under this Plan or any other stock
option plan of the Company (other than the automatic nondiscretionary grants
under the 1996 Directors Stock Option Plan) within one year prior to service on
the Committee. It is the intention of the Company that the Plan shall be
administered by "disinterested persons" within the meaning of Rule 16b-3 under
the Securities Exchange Act of 1934, but the authority and validity of any act
taken or not taken by the Committee shall not be affected if any person
administering the Plan is not a disinterested person. Except as specifically
reserved to the Board under the terms of the Plan, the Committee shall have full
and final authority to operate, manage and administer the Plan on behalf of the
Company. Action by the Committee shall require the affirmative vote of a
majority of all members thereof.
2.2 Powers of the Committee. Subject to the terms and conditions of the
Plan, the Committee shall have the power:
(a) To determine from time to time the persons eligible to receive
options and the options to be granted to such persons under the Plan and to
prescribe the terms, conditions, restrictions, if any, and provisions
(which need not be identical) of each option granted under the Plan to such
persons;
(b) To construe and interpret the Plan and options granted thereunder
and to establish, amend, and revoke rules and regulations for
administration of the Plan. In this connection, the Committee may correct
any defect or supply any omission, or reconcile any inconsistency in the
Plan, or in any option agreement, in the manner and to the extent it shall
deem necessary or expedient to make the Plan fully effective. All decisions
and determinations by the Committee in the exercise of this power shall be
final and binding upon the Company and optionees;
(c) To make, in its sole discretion, changes to any outstanding option
granted under the Plan, including; (i) to reduce the exercise price, (ii)
to accelerate the vesting schedule or (iii) to extend the expiration date;
and
(d) Generally, to exercise such powers and to perform such acts as are
deemed necessary or expedient to promote the best interests of the Company
with respect to the Plan.
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<PAGE> 36
SECTION 3. STOCK
3.1 Stock to be Issued. The stock subject to the options granted under
the Plan shall be shares of the Company's authorized but unissued common stock,
$.01 par value (the "Common Stock"), or shares of the Company's Common Stock
held in treasury. The total number of shares that may be issued pursuant to
options granted under the Plan shall not exceed an aggregate of 1,303,763 shares
of Common Stock; provided, however, that the class and aggregate number of
shares which may be subject to options granted under the plan shall be subject
to adjustment as provided in Section 8 hereof.
3.2 Expiration, Cancellation or Termination of Option. Whenever any
outstanding option under the Plan expires, is cancelled or is otherwise
terminated (other than by exercise), the shares of Common Stock allocable to the
unexercised portion of such option may again be the subject of options under the
plan.
SECTION 4. ELIGIBILITY
4.1 Persons Eligible. Incentive Stock Options under the Plan may be
granted only to officers and other employees of the Company or its parent or
subsidiaries. Nonqualified Options may be granted to officers or other employees
of the Company or its parent or subsidiaries, and to members of the Board and
consultants or other persons who render services to the Company (regardless of
whether they are also employees), provided, however, that no such option may be
granted to a person who is a member of the Committee at the time of the grant.
4.2 Greater-Than-Ten-Percent Stockholders. Except as may otherwise be
permitted by the Code or other applicable law or regulation, no Incentive Stock
Option shall be granted to an individual who, at the time the option is granted,
owns (including ownership attributed pursuant to Section 424 of the Code) more
than ten percent of the total combined voting power of all classes of stock of
the Company or any parent or subsidiary (a "greater-than-ten-percent
stockholder"), unless such Incentive Stock Option provides that (i) the purchase
price per share shall not be less than one hundred ten percent of the fair
market value of the Common Stock at the time such option is granted, and (ii)
that such option shall be not exercisable to any extent after the expiration of
five years from the date it is granted.
4.3 Maximum Aggregate Fair Market Value. The aggregate fair market value
(determined at the time the option is granted) of the Common Stock with respect
to which Incentive Stock Options are exercisable for the first time by any
optionee during any calendar year (under the Plan and any other plans of the
Company or any parent or subsidiary for the issuance of incentive stock options)
shall not exceed $100,000 (or such greater amount as may from time to time be
permitted with respect to incentive stock options by the Code or any other
applicable law or regulation).
SECTION 5. TERMINATION OF EMPLOYMENT OR DEATH OF OPTIONEE
5.1 Termination of Employment. Except as may be otherwise expressly
provided herein, options shall terminate on the earlier of:
(a) the date of the expiration thereof,
(b) the date of termination of the optionee's employment with or
services to the Company by it for cause (as determined by the Company), or
voluntarily (other than early or normal retirement in accordance with the
Company's retirement policies) by the optionee; or
(c) ninety days after the date of termination of the optionee's
employment with or services to the Company by it without cause;
provided, that Options need not, unless the Committee determines otherwise,
be subject to the provisions set forth in clauses (b) and (c) above, and
provided further, that if the optionee, whose employment or services are
terminated by the Company without cause, has an employment, consulting or
retention contract with the Company in force immediately prior to such
termination, then in such event such option shall remain in force to the stated
expiration date of such employment, consulting or retention contract with
vesting accruing to such expiration date.
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<PAGE> 37
An employment relationship between the Company and the optionee shall be
deemed to exist during any period in which the optionee is employed by the
Company or its parent or any subsidiary. Whether authorized leave of absence, or
absence on military or government service, shall constitute termination of the
employment relationship between the Company and the optionee shall be determined
by the Committee at the time thereof.
As used herein, "cause" shall mean (i) any material breach by the optionee
of any agreement to which the optionee and the Company are both parties, (ii)
the willful engagement by the optionee in conduct which is materially injurious
to the Company or any of its subsidiaries or affiliates, monetarily or
otherwise, (iii) the misappropriation (including the unauthorized use or
disclosure of confidential or proprietary information of the Company or any of
its subsidiaries or affiliates) or embezzlement with respect to the Company or
any of its subsidiaries or affiliates, (iv) a conviction of or guilty plea or
confession by the optionee to any fraud, conversion, misappropriation,
embezzlement or felony, or (v) any material misconduct or material neglect of
duties by the Holder in connection with the business or affairs of the Company
or any affiliate of the Company.
5.2 Death or Permanent Disability of Optionee. In the event of the death
or permanent and total disability of the holder of an option that is subject to
clause (b) or (c) of Section 5.1 above prior to termination of the optionee's
employment with or services to the Company and before the date of expiration of
such option, such option shall terminate on the earlier of such date of
expiration or one year following the date of such death or disability. After the
death of the optionee, his/her executors, administrators or any person or
persons to whom his/her option may be transferred by will or by the laws of
descent and distribution, shall have the right, at any time prior to such
termination, to exercise the option to the extent the optionee was entitled to
exercise such option immediately prior to his/her death. An optionee is
permanently and totally disabled if he/she is unable to engage in any
substantial gainful activity by reason of any medically determinable physical or
mental impairment which can be expected to last for a continuous period of not
less than 12 months; permanent and total disability shall be determined in
accordance with Section 22(e)(3) of the Code and the regulations issued
thereunder.
SECTION 6. TERMS OF THE OPTION AGREEMENTS
Each option agreement shall be in writing and shall contain such terms,
conditions, restrictions, if any, and provisions as the Committee shall from
time to time deem appropriate. Such provisions or conditions may include without
limitation restrictions on transfer, repurchase rights, or such other provisions
as shall be determined by the Committee; provided that such additional
provisions shall not be inconsistent with any other term or condition of the
Plan and such additional provisions shall not cause any Incentive Stock Option
granted under the Plan to fail to qualify as an incentive option within the
meaning of Section 422 of the Code. The shares of stock issuable upon exercise
of an option by an executive officer, director or beneficial owner of more than
ten percent of the Common Stock of the Company may not be sold or transferred
(except that such shares may be issued upon exercise of such option) by such
officer, director or beneficial owner for a period of six months following the
grant of such option.
Option agreements need not be identical, but each option agreement by
appropriate language shall include the substance of all of the following
provisions:
6.1 Expiration of Option. Notwithstanding any other provision of the Plan
or of any option agreement, each option shall expire on the date specified in
the option agreement, which date shall not, in the case of an Incentive Stock
Option, be later than the tenth anniversary (fifth anniversary in the case of a
greater-than-ten-percent stockholder) of the date on which the option was
granted, or as specified in Section 5 of this Plan.
6.2 Exercise. Each option may be exercised, so long as it is valid and
outstanding, from time to time in part or as a whole, subject to any limitations
with respect to the number of shares for which the option may be exercised at a
particular time and to such other conditions as the Committee in its discretion
may specify upon granting the option.
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6.3 Purchase Price. The purchase price per share under each option shall
be determined by the Committee at the time the option is granted; provided,
however, that the option price of any Incentive Stock Option shall not, unless
otherwise permitted by the Code or other applicable law or regulations, be less
than the fair market value of the Common Stock on the date the option is granted
(110% of the fair market value in the case of a greater-than-ten-percent
stockholder). For the purpose of the Plan, the fair market value of the Common
Stock shall be the closing price per share on the date of grant of the option as
reported by a nationally recognized stock exchange, or, if the Common Stock is
not listed on such an exchange, as reported by the National Association of
Securities Dealers Automated Quotation System, Inc. ("NASDAQ"), or, if the
Common Stock is not quoted on NASDAQ, the fair market value as determined by the
Committee.
6.4 Transferability of Options. Options shall not be transferrable by the
optionee otherwise than by will or under the laws of descent and distribution,
and shall be exercisable, during his or her lifetime, only by him or her.
6.5 Rights of Optionees. No optionee shall be deemed for any purpose to
be the owner of any shares of Common Stock subject to any option unless and
until the option shall have been exercised pursuant to the terms thereof, and
the Company shall have issued and delivered the shares to the optionee.
6.6 Repurchase Right. The Committee may in its discretion provide upon
the grant of any option hereunder that the Company shall have an option to
repurchase upon such terms and conditions as determined by the Committee all or
any number of shares purchased upon exercise of such option. The repurchase
price per share payable by the Company shall be such amount or be determined by
such formula as is fixed by the Committee at the time the option for the shares
subject to repurchase is granted. In the event the Committee shall grant options
subject to the Company's repurchase option, the certificates representing the
shares purchased pursuant to such option shall carry a legend satisfactory to
counsel for the Company referring to the Company's repurchase option.
SECTION 7. METHOD OF EXERCISE, PAYMENT OF PURCHASE PRICE
7.1 Method of Exercise. Any option granted under the Plan may be
exercised by the optionee by delivering to the Company on any business day a
written notice specifying the number of shares of Common Stock the optionee then
desires to purchase and specifying the address to which the certificates for
such shares are to be mailed (the "Notice"), accompanied by payment for such
shares.
7.2 Payment of Purchase Price. Payment for the shares of Common Stock
purchased pursuant to the exercise of an option shall be made either by (i)
cash, certified check, bank draft or postal or express money order equal to the
option price for the number of shares specified in the Notice, or (ii) with the
consent of the Committee, shares of Common Stock of the Company having a fair
market value equal to the option price of such shares, or (iii) with the consent
of the Committee, such other consideration which is acceptable to the Committee
and which has a fair market value equal to the option price of such shares, or
(iv) with the consent of the Committee, a combination of (i), (ii) and/or (iii).
For the purpose of the preceding sentence, the fair market value per share of
Common Stock so delivered to the Company shall be determined in the manner
specified in Section 6.3. As promptly as practicable after receipt of the Notice
and accompanying payment, the Company shall deliver to the optionee certificates
for the number of shares with respect to which such option has been so
exercised, issued in the optionee's name; provided, however, that such delivery
shall be deemed effected for all purposes when the Company or a stock transfer
agent of the Company shall have deposited such certificates in the United States
mail, addressed to the optionee, at the address specified in the Notice.
SECTION 8. CHANGES IN THE COMPANY'S CAPITAL STRUCTURE
8.1 Rights of Company. The existence of outstanding options shall not
affect in any way the right or power of the Company or its stockholders to make
or authorize, without limitation, any or all adjustments, recapitalizations,
reorganizations or other changes in the Company's capital structure or its
business, or any merger or consolidation of the Company, or any issue of Common
Stock, or any issue of bonds, debentures, preferred or prior preference stock or
other capital stock ahead of or affecting the Common Stock or the rights
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thereof, or the dissolution or liquidation of the Company, or any sale or
transfer of all or any part of its assets or business, or any other corporate
act or proceeding, whether of a similar character or otherwise.
8.2 Recapitalization, Stock Splits and Dividends. If the Company shall
effect a subdivision or consolidation of shares or other capital readjustment,
the payment of a stock dividend, or other increase or reduction of the number of
shares of the Common Stock outstanding, in any such case without receiving
compensation therefor in money, services or property, then (i) the number,
class, and price per share of shares of stock subject to outstanding options
hereunder shall be appropriately adjusted in such a manner as to entitle an
optionee to receive upon exercise of an option, for the same aggregate cash
consideration, the same total number and class of shares as he or she would have
received as a result of the event requiring the adjustment had he or she
exercised his or her option in full immediately prior to such event; and (ii)
the number and class of shares with respect to which options may be granted
under the Plan shall be adjusted by substituting for the total number of shares
of Common Stock then reserved for issuance under the Plan that number and class
of shares of stock that the owner of an equal number of outstanding shares of
Common Stock would own as the result of the event requiring the adjustment.
8.3 Merger without Change of Control. After a merger of one or more
corporations into the Company, or after a consolidation of the Company and one
or more corporations in which (i) the Company shall be the surviving
corporation, and (ii) the stockholders of the Company immediately prior to such
merger or consolidation own after such merger or consolidation shares
representing at least fifty percent of the voting power of the Company, each
holder of an outstanding option shall, at no additional cost, be entitled upon
exercise of such option to receive in lieu of the number of shares as to which
such option shall then be so exercisable, the number and class of shares of
stock or other securities to which such holder would have been entitled pursuant
to the terms of the agreement of merger or consolidation, if, immediately prior
to such merger or consolidation, such holder had been the holder of record of a
number of shares of Common Stock equal to the number of shares for which such
option was exercisable.
8.4 Sale or Merger with Change of Control. If the Company is merged into
or consolidated with another corporation under circumstances where the Company
is not the surviving corporation, or if there is a merger or consolidation where
the Company is the surviving corporation but the stockholders of the Company
immediately prior to such merger or consolidation do not own after such merger
or consolidation shares representing at least fifty percent of the voting power
of the Company, or if the Company is liquidated, or sells or otherwise disposes
of substantially all of its assets to another corporation while unexercised
options remain outstanding under the Plan, (i) subject to the provisions of
clause (iii) below, after the effective date of such merger, consolidation,
liquidation, sale or disposition, as the case may be, each holder of an
outstanding option shall be entitled, upon exercise of such option, to receive,
in lieu of shares of Common Stock, shares of such stock or other securities,
cash or properties as the holders of shares of Common Stock received pursuant to
the terms of the merger, consolidation, liquidation, sale or disposition; (ii),
the Committee may accelerate the time for exercise of all unexercised and
unexpired options to and after a date prior to the effective date of such
merger, consolidation, liquidation, sale or disposition, as the case may be,
specified by the Committee; or (iii) all outstanding options may be cancelled by
the Committee as of the effective date of any such merger, consolidation,
liquidation, sale or disposition provided that (x) notice of such cancellation
shall be given to each holder of an option and (y) each holder of an option
shall have the right to exercise such option to the extent that the same is then
exercisable or, if the Committee shall have accelerated the time for exercise of
all unexercised or unexpired options, in full during the 30-day period preceding
the effective date of such merger, consolidation, liquidation, sale or
disposition.
8.5 Adjustments to Common Stock Subject to Options. Except as
hereinbefore expressly provided, the issue by the Company of shares of stock of
any class, or securities convertible into shares of stock of any class, for cash
or property, or for labor or services, either upon direct sale or upon the
exercise of rights or warrants to subscribe therefor, or upon conversion of
shares or obligations of the Company convertible into such shares or other
securities, shall not affect, and no adjustment by reason thereof shall be made
with respect to, the number or price of shares of Common Stock then subject to
outstanding options.
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8.6 Miscellaneous. Adjustments under this Section 8 shall be determined
by the Committee, and such determinations shall be conclusive. No fractional
shares of Common Stock shall be issued under the Plan on account of any
adjustment specified above.
SECTION 9. GENERAL RESTRICTIONS
9.1 Investment Representations. The Company may require any person to
whom an option is granted, as a condition of exercising such option, to give
written assurances in substance and form satisfactory to the Company to the
effect that such person is acquiring the Common Stock subject to the option for
his or her own account for investment and not with any present intention of
selling or otherwise distributing the same, and to such other effects as the
Company deems necessary or appropriate in order to comply with federal and
applicable state securities laws.
9.2 Compliance with Securities Laws. The Company shall not be required to
sell or issue any shares under any option if the issuance of such shares shall
constitute a violation by the optionee or by the Company of any provisions of
any law or regulation of any governmental authority. In addition, in connection
with the Securities Act of 1933, as now in effect or hereafter amended (the
"Act"), upon exercise of any option, the Company shall not be required to issue
such shares unless the Committee has received evidence satisfactory to it to the
effect that the holder of such option will not transfer such shares except
pursuant to a registration statement in effect under such Act or unless an
opinion of counsel satisfactory to the Company has been received by the Company
to the effect that such registration is not required. Any determination in this
connection by the Committee shall be final, binding and conclusive. In the event
the shares issuable on exercise of an option are not registered under the Act,
the Company may imprint upon any certificate representing shares so issued the
following legend or any other legend which counsel for the Company considers
necessary or advisable to comply with the Act and with applicable state
securities laws:
The shares of stock represented by this certificate have not been
registered under the Securities Act of 1933 or under the securities laws of
any State and may not be sold or transferred except upon such registration
or upon receipt by the Corporation of an opinion of counsel satisfactory to
the Corporation, in form and substance satisfactory to the corporation,
that registration is not required for such sale or transfer.
The Company may, but shall in no event be obligated to, register any
securities covered hereby pursuant to the Act; and in the event any shares are
so registered the Company may remove any legend on certificates representing
such shares. The Company shall not be obligated to take any other affirmative
action in order to cause the exercise of an option or the issuance of shares
pursuant thereto to comply with any law or regulation of any governmental
authority.
9.3 Employment Obligation. The granting of any option shall not impose
upon the Company any obligation to employ or continue to employ any optionee;
and the right of the Company to terminate the employment of any officer or other
employee shall not be diminished or affected by reason of the fact that an
option has been granted to him or her.
SECTION 10. AMENDMENT OR TERMINATION OF THE PLAN
The Board of Directors may modify, revise or terminate this Plan at any
time and from time to time, except that the class of persons eligible to receive
options and the aggregate number of shares issuable pursuant to this Plan shall
not be changed or increased, other than by operation of Section 8 hereof,
without the consent of the stockholders of the Company.
SECTION 11. NONEXCLUSIVITY OF THE PLAN
Neither the adoption of the Plan by the Board of Directors nor the
submission of the Plan to the stockholders of the Company for approval shall be
construed as creating any limitations on the power of the Board of Directors to
adopt such other incentive arrangements as it may deem desirable, including,
without limitation, the granting of stock options otherwise than under the Plan,
and such arrangements may be either applicable generally or only in specific
cases.
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SECTION 12. EFFECTIVE DATE AND DURATION OF PLAN
The Plan shall become effective upon its adoption by the Board of Directors
provided that the stockholders of the Company shall have approved the Plan
within twelve months prior to or following the adoption of the Plan by the
Board. No option may be granted under the Plan after the tenth anniversary of
the effective date. The Plan shall terminate (i) when the total amount of the
Stock with respect to which options may be granted shall have been issued upon
the exercise of options or (ii) by action of the Board of Directors pursuant to
Section 10 hereof, whichever shall first occur.
* * * * * * * * * * * *
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EXHIBIT 3
HILLS STORES COMPANY 162(M) BONUS PLAN
SECTION 1. DEFINITIONS.
For purposes of this Hills Stores Company 162(m) Bonus Plan (the "Plan"),
the following terms have the meanings indicated unless a different meaning is
clearly required by the context.
1.1 "Board of Directors" means the board of directors of the Company.
1.2 "Code" means the Internal Revenue Code of 1986, as amended. Reference
to a specific provision of the Code shall include such provision, any valid
regulation or ruling promulgated thereunder and any comparable provision of
future law that amends, supplements or supersedes such provision.
1.3 "Committee" means the HR/Compensation Committee (Option Committee) of
the Board of Directors or a subcommittee thereof.
1.4 "Company" means Hills Stores Company.
1.5 "Executive Officer" has the meaning set forth in Rule 3b-7 promulgated
under the Securities Exchange Act of 1934, as amended.
1.6 "Fiscal Year" means the fiscal year of the Company.
1.7 "Participant" means an individual who participates in the Plan pursuant
to Section 3.1.
SECTION 2. PURPOSE.
The purpose of the Plan is to provide performance incentives to certain
executives who are "covered employees" within the meaning of section 162(m) of
the Code while securing, to the extent practicable, a tax deduction by the
Company for payments of incentive compensation to such executives.
SECTION 3. PARTICIPATION.
3.1 Prior to the ninety-first (91st) day of each Fiscal Year, the Committee
shall designate, from among the individuals who are Executive Officers of the
Company on the first day of such Year, the individuals who shall be Participants
in the Plan for such Fiscal Year. An individual who becomes an Executive Officer
during a Fiscal Year by virtue of being hired or promoted may be designated a
Participant.
3.2 An individual who is a Participant in the Plan for a Fiscal Year shall
not participate for such Year in the Company's regular annual bonus program.
3.3 No individual shall have any claim or right to be a Participant in this
Plan, and any individual's participation in this Plan may be terminated at any
time without notice, cause or regard for past practices. Neither this Plan nor
any action under this Plan shall confer on any individual any right to be
retained in the employ of the Company or any subsidiary.
SECTION 4. PERFORMANCE GOALS.
4.1 Prior to the ninety-first (91st) day of each Fiscal Year, the Committee
shall establish one or more objective performance goals for each Participant for
such Year. In the case of an individual designated a Participant for a Fiscal
Year, on or after the ninety-first (91st) day thereof, the applicable period
shall be the remainder of the Fiscal Year and the performance goal or goals
shall be established no later than the day on which twenty-five (25%) percent of
such performance period has elapsed.
4.2 Performance goals shall be expressed in terms of (a) one or more
corporate or divisional earnings-based measures (which may be based on net
income, operating income, cash flows, or any combination thereof) and/or (b) one
or more corporate or divisional sales-based measures. Each such goal may be
expressed on an absolute and/or relative basis, may employ comparisons with past
performance of the Company (including one or more divisions) and/or the current
or past performance of other companies, and
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<PAGE> 43
in the case of earnings-based measures, may employ comparisons to capital,
shareholders' equity and shares outstanding.
4.3 No performance goal shall be established hereunder unless, at the time
of establishment, the relevant outcome is substantially uncertain. Performance
goals need not be uniform among Participants.
4.4 The measures used in performance goals set under the Plan shall be
determined in accordance with generally accepted accounting principles ("GAAP")
and in a manner consistent with the methods used in the Company's regular
reports on Forms 10-K and 10-Q, without regard to the effect of changes in
accounting principles or of extraordinary items as determined by the Company's
independent public accountants in accordance with GAAP.
SECTION 5. BONUS AWARDS.
5.1 At the time that annual performance goals are established for
Participants, the Committee shall establish a maximum dollar bonus opportunity
for each Participant for the Fiscal Year (or remainder thereof) and a formula to
determine actual bonus payments based on the degree of achievement of the goal
or goals set for the Participant.
5.2 The annual bonus opportunity for a Participant shall in no event exceed
$1 million.
5.3 Bonuses to be paid under the Plan shall be determined following the
close of each Fiscal Year on the basis of the performance goals and bonus
opportunities established pursuant to Sections 4.1, 4.2 and 5.1; provided,
however, that the Committee shall have absolute discretion to reduce the bonus
that would otherwise be payable to any Participant on the basis of achievement
of the performance goals. Bonuses shall be paid to Participants in cash at such
time as bonuses are generally paid to Company officers; provided, however, that
no such payment shall be made until the Committee has certified in writing that
the performance goals and any other material terms have been satisfied. The
Company may establish a program enabling Participants to defer receipt of part
or all of the bonuses payable hereunder.
5.4 In the event of the termination of employment of a Participant during a
Fiscal Year other than by the Company for cause, the Committee shall have the
power in its discretion to award such Participant an equitably prorated portion
of the bonus (if any) which otherwise would have been payable to such
Participant after the close of such Fiscal Year.
5.5 The Company shall have the right to withhold from any bonus payment
such amount as the Company determines is necessary to satisfy applicable
withholding tax requirements.
SECTION 6. ADMINISTRATIVE PROVISIONS.
6.1 The Plan shall be administered by the Committee, which shall be
comprised solely of two or more members of the Board of Directors who satisfy
the requirements for an "outside director" set forth in applicable regulations
under section 162(m) of the Code. The Committee shall have sole responsibility
for administration and interpretation of the Plan and may in its discretion make
all determinations and take all actions it deems necessary or advisable for
operation of the Plan.
6.2 The Plan was adopted by the Board of Directors of April 23, 1996,
subject to shareholder approval, and shall take effect beginning with the Fiscal
Year of the Company starting February 4, 1996. No payments shall be made under
the Plan prior to the time such shareholder approval is obtained in accordance
with applicable law. The Board of Directors may at any time amend the Plan in
any fashion or terminate the Plan, provided that shareholder approval is
obtained for any amendment for which such approval is necessary for compliance
with section 162(m) of the Code. Unless sooner terminated, the Plan shall be
resubmitted to shareholders for approval no later than the first meeting of
shareholders occurring in 2001.
6.3 The Plan shall be governed by and construed in accordance with the laws
of the Commonwealth of Massachusetts without regard to principles of choice of
laws.
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<PAGE> 44
PROXY HILLS STORES COMPANY
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF
DIRECTORS OF HILLS STORES COMPANY FOR THE
JUNE 18, 1996 ANNUAL MEETING OF SHAREHOLDERS
The undersigned hereby appoints Joseph E. Andres, Richard C. Doran, and
William K. Friend, and any of them, with power of substitution in each, proxies
for the undersigned, to represent the undersigned, and to vote all Common Stock
and Series A Preferred Stock of the Company which the undersigned would be
entitled to vote, as fully as the undersigned could vote and act if personally
present, at the Annual Meeting of Shareholders to be held on June 18, 1996 at
10:00 a.m. at the Sheraton Tara Hotel, 37 Forbes Road, Braintree,
Massachusetts 02184, or at any adjournment thereof.
The Proxies are authorized to vote in their discretion for approval of
the minutes of the preceding meeting and matters incident to the conduct of
the meeting.
The undersigned hereby acknowledges receipt of the Notice of Annual
Meeting and Proxy Statement, each dated May 10, 1996 and the 1995 Annual Report
of the Company. Any proxy heretofore given to vote said stock is hereby
revoked. THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER
DIRECTED HEREIN BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS
PROXY WILL BE VOTED FOR THE ELECTION OF THE DIRECTORS, FOR ADOPTION OF THE
HILLS STORES COMPANY 1996 DIRECTORS STOCK OPTION PLAN, FOR APPROVAL OF THE
AMENDMENT OF THE HILLS STORES COMPANY 1993 INCENTIVE AND NONQUALIFIED STOCK
OPTION PLAN AND FOR ADOPTION OF THE HILLS STORES COMPANY 162(m) BONUS PLAN.
THIS PROXY IS CONTINUED ON THE REVERSE SIDE.
PLEASE COMPLETE THE REVERSE SIDE AND RETURN PROMPTLY.
- --------------------------------------------------------------------------------
[Triangle] FOLD AND DETACH HERE [Triangle]
<PAGE> 45
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ALL NOMINEES, FOR APPROVAL OF THE
HILLS STORES COMPANY 1996 DIRECTORS STOCK OPTION PLAN, FOR APPROVAL OF THE
AMENDMENT OF THE HILLS STORES COMPANY 1993 INCENTIVE AND NONQUALIFIED STOCK
OPTION PLAN AND FOR APPROVAL OF THE HILLS STORES COMPANY 162(m) BONUS PLAN.
Please mark / X /
your votes as
indicated in
this example
Item 1 - Election of Directors
Election of the following nominees as Directors: Chaim Y. Edelstein, Mark B.
Dickstein, Stanton J. Bluestone, John W. Burden III, Alan S. Cooper, Samuel
L. Katz and Gregory K. Raven.
For All Withheld for Withheld for the following only:
Nominees all Nominees (Write the name of the nominee(s) in the space below)
/ / / / ----------------------------------------------------
Item 2 - Approval of the Hills Stores Company 1996 Directors Stock Option Plan.
FOR AGAINST ABSTAIN
/ / / / / /
Item 3 - Approval of the amendment of the Hills Stores Company 1993 Incentive
and Nonqualified Stock Option Plan to increase the number of shares which
may be issued pursuant to options granted thereunder by 250,000 from 1,053,763
to 1,303,763.
FOR AGAINST ABSTAIN
/ / / / / /
Item 4 - Approval of the Hills Stores Company 162(m) Bonus Plan
FOR AGAINST ABSTAIN
/ / / / / /
I PLAN TO ATTEND THE MEETING / /
SIGNATURE SIGNATURE DATE
--------------------- --------------------- --------------
PLEASE MARK, DATE AND SIGN AS YOUR NAME(S) APPEAR(S) TO THE LEFT AND RETURN IN
THE ENCLOSED ENVELOPE. IF ACTING AS AN EXECUTOR, ADMINISTRATOR, TRUSTEE,
GUARDIAN, ETC., YOU SHOULD SO INDICATE WHEN SIGNING. IF THE SIGNER IS A
CORPORATION, PLEASE SIGN THE FULL CORPORATE NAME, BY A DULY AUTHORIZED OFFICER.
NO POSTAGE IS REQUIRED IF THIS PROXY IS RETURNED IN THE ENCLOSED ENVELOPE AND
MAILED IN THE UNITED STATES.
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[Triangle] FOLD AND DETACH HERE [Triangle]
