<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)
PAYMENT OF FILING FEE (CHECK THE APPROPRIATE BOX):
/X/ No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1) 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 STORES COMPANY LOGO]
================================================================================
HILLS STORES COMPANY
NOTICE OF ANNUAL MEETING OF
SHAREHOLDERS
TO BE HELD ON JUNE 17, 1997
AND
PROXY STATEMENT
================================================================================
IMPORTANT
PLEASE MARK, SIGN AND DATE YOUR PROXY
AND PROMPTLY RETURN IT IN THE ENCLOSED ENVELOPE.
<PAGE> 3
[HILLS STORES COMPANY LOGO]
May 5, 1997
Dear Fellow Shareholder:
You are cordially invited to attend the Annual Meeting of Shareholders of
Hills Stores Company to be held on Tuesday, June 17, 1997 at 10:00 AM at the
Hills Corporate Headquarters, 15 Dan Road, Canton, Massachusetts 02021. Your
Board of Directors and management look forward to greeting personally those
shareholders able to attend.
At the meeting, shareholders will elect eight Directors and consider a
proposal to amend the Company's 1993 Incentive and Nonqualified Stock Option
Plan. Information regarding the nominees and the proposal 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
[HILLS STORES COMPANY LOGO]
HILLS STORES COMPANY
NOTICE OF ANNUAL MEETING OF
SHAREHOLDERS
TO BE HELD JUNE 17, 1997
Notice is hereby given that the Annual Meeting of Shareholders of Hills
Stores Company (the "Company") will be held Tuesday, June 17, 1997 in the main
conference room of the Hills Corporate Headquarters, 15 Dan Road, Canton, MA
02021 at 10:00 AM local time to take action with respect to the following
matters:
1. The election of eight Directors to serve for the ensuing year and until
their successors are elected and qualified;
2. The approval of the amendment to the Hills Stores Company 1993
Incentive and Nonqualified Stock Option Plan to qualify the plan under
Section 162(m) of the Internal Revenue Code; and
3. 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 23, 1997 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
[FRIEND SIGNATURE]
William K. Friend
Vice President-Secretary
Canton, Massachusetts
May 5, 1997
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 5, 1997 in connection with the solicitation by the
Board of Directors of Hills Stores Company (the "Company") of proxies to be used
at the June 17, 1997 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 Annual Meeting
unless the owner is represented by proxy or is present at the Annual 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
amendment of the Company's 1993 Incentive and Nonqualified Stock Option Plan
(the "1993 Stock Option 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 amendment of the 1993 Stock Option
Plan, abstentions will have the same effect as votes against the proposal, but
broker non-votes will not be deemed to be part of the voting power present with
respect to the proposal and therefore will not be counted as votes for or
against and will not be included in calculating the number of votes necessary to
approve the proposal.
The shares represented by the proxy will be voted FOR the election of the
nominees herein listed and FOR approval of the amendment of the 1993 Stock
Option 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 23, 1997, the record date for the meeting, there were 10,286,354
shares of Common Stock and 938,125 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 eight Directors, constituting the seven current members
of the Board of Directors plus an additional nominee, Richard E. Montag, 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 eight 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 eight or may fill the vacancy.
INFORMATION ABOUT NOMINEES
<TABLE>
<CAPTION>
SERVED AS A
NAME AGE POSITION DIRECTOR SINCE
----------------------- ---- ------------------------------ --------------
<S> <C> <C> <C>
Chaim Y. Edelstein .... 54 Chairman of the Board 1995
Gregory K. Raven....... 47 Director, President and Chief 1996
Executive Officer
Stanton J. Bluestone... 62 Director 1995
John W. Burden III .... 60 Director 1995
Alan S. Cooper......... 38 Director 1995
Mark B. Dickstein...... 38 Director 1995
Samuel L. Katz......... 31 Director 1995
Richard E. Montag...... 65 Nominee for Director N/A
</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 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. Mr. Edelstein is a director of Carson Pirie
Scott & Co., a department store retailer, Jan Bell Marketing, a jewelry
retailer, and a trustee of Independence Savings Bank.
GREGORY K. RAVEN was elected President and Chief Executive Officer and a
Director on February 7, 1996. From September 1988 until August 1995, Mr. Raven
was Executive Vice President-Finance and Chief Financial Officer of Revco D.S.,
Inc.
STANTON J. BLUESTONE has been a Director since July 5, 1995. Since March
1996 he has been Chairman of the Board and Chief Executive Officer of Carson
Pirie Scott & Co. From August 1993 to March 1996 he served as President and
Chief Executive Officer of Carson Pirie Scott & Co. From May 1991 through August
1993 he was President and Acting Chief Executive Officer of Carson Pirie Scott &
Co.
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. Mr. Burden is a director of Carson Pirie
Scott & Co. and Danskin Inc., a manufacturer of women's active clothing.
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.
He is a director of Specialty Catalogue Corp.
2
<PAGE> 7
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 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. and News Communications Inc.
SAMUEL L. KATZ has been a Director since July 5, 1995. He is Senior Vice
President-Acquisitions of HFS Incorporated. From January 1996 to June 1996 Mr.
Katz was a consultant 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.
RICHARD E. MONTAG, if elected by shareholders, will become a Director
following the Annual Meeting on June 17, 1997. For the past five years he has
been Vice President-Development of The Richard E. Jacobs Group, a developer of
regional shopping malls. He is a director of Getty Petroleum Marketing, Inc.
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 1, 1997, the Board of Directors of
the Company met nine (9) times. No incumbent director attended fewer than 75% of
the total number of meetings of the Board and Committees of the Board on which
they 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 1, 1997, the
Audit Committee met four (4) times, and the HR/Compensation Committee (Option
Committee) met six (6) 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
programs; 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 -- 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 1.
On March 11, 1997, subject to obtaining shareholder approval, the Board of
Directors amended the 1993 Stock Option Plan. It is the intention of the Board
of Directors to maximize the tax deductibility to the Company of 1997 grants,
including the March 1997 repricings, under Section 162(m) of the Internal
Revenue Code. Accordingly, the amendment has an effective date of January 1,
1997. See section below captioned "Ten Year Option Repricings". The amendment
adds Section 4.4 to the 1993 Stock Option Plan which limits the number of
options to purchase shares of Common Stock that may be granted to any individual
in any fiscal year to 300,000 and modifies Section 2.1 to provide that the 1993
Stock Option Plan will be administered by a committee of "Outside Directors", as
that term is defined in regulations under Section 162(m). No other substantive
amendments are being made to the 1993 Stock Option Plan.
The amendment is necessary in order to maximize the tax deductibility to
the Company of compensation in excess of $1 million paid to the executive
officers named in the Summary Compensation Table in any year under Section
162(m). In order to qualify for tax deductibility to the Company of performance
based compensation under Section 162(m), grants to key executives must be made
under a stock option plan which meets certain requirements. Although the 1993
Stock Option Plan has been previously approved by shareholders, the amendment
being submitted to shareholders is intended to bring the 1993 Stock Option Plan
into compliance with those requirements. Accordingly, if the amendment to the
1993 Stock Option Plan is not approved, the Company would be placed in the
position of suspending or significantly curtailing the issuance of grants under
the 1993 Stock Option Plan in order to minimize the possibility of stock option
grants which might result in non-deductible compensation for tax purposes. The
Company would then need to consider alternative measures and plans, if any, that
could be developed to similarly reward, attract and retain outstanding key
management employees and concurrently meet the objective of preserving
deductibility under Section 162(m). The Company believes that the proposed
amendment is the best option available to achieve these dual goals. In the
interim, a suspension or curtailment in the granting of options under the 1993
Stock Option Plan could negatively impact the Company's ability to reward,
attract and retain key management employees, including those whom the Company
has recently recruited and candidates for positions which are currently vacant.
As of April 23, 1997 (after the March 1997 repricings), options to purchase
807,947 shares of Common Stock have been granted pursuant to the 1993 Stock
Option Plan and 495,816 remain available for future grants.
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 Outside Directors as defined under Section 162(m).
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,
(ii) to accelerate the vesting schedule or (iii) to extend the expiration date.
4
<PAGE> 9
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
1,303,763, 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 31, 1997, the Company had approximately 16,200 employees and five
Outside 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 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 or under certain circumstances under Section
162(m).
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" APPROVAL OF ITEM
NUMBER 2.
5
<PAGE> 10
BENEFICIAL OWNERSHIP
The following table sets forth as of March 31, 1997 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%) percent of the Series A Preferred
Stock.
<TABLE>
<CAPTION>
PERCENT OF PERCENT OF
NAME AND ADDRESS AMOUNT AND NATURE COMMON VOTING
OF BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP STOCK STOCK(1)
- --------------------------------------------------- ----------------------- ---------- -----------
<S> <C> <C> <C>
DDJ Capital Management, LLC(2) 1,021,834 9.9 9.1
141 Linden Street, Suite S-4
Wellesley, MA 02181
ML-Lee Acquisition Fund II, 799,293 7.8 7.1
L.P., ML-Lee Acquisition Fund
(Retirement Accounts) II, L.P.,
Thomas H. Lee Advisors II, L.P.(3)
World Financial Center
South Tower, 23rd Fl.
New York, NY 10080-6123
Europe American Capital Foundation 755,000 7.3 6.7
Lugano Switzerland
BEA Associates 616,047 6.0 5.5
153 East 53rd Street
One Citicorp Center
New York, NY 10022
</TABLE>
- ------------------------------
(1) Represents the shares of Common Stock and Series A Preferred Stock owned
beneficially as a percentage of the aggregate of 10,280,547 shares of Common
Stock and 933,840 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
Common Stock.
(2) DDJ Capital Management, LLC and its affiliates, DDJ Overseas Corp., DDJ
Galileo, LLC, DDJ Galileo Management, LLC, The Galileo Fund L.P., Kepler
Overseas Corp., The Copernicus Fund, L.P., DDJ Copernicus, LLC and DDJ
Copernicus Management, LLC, jointly filed a Schedule 13D showing beneficial
ownership of 1,021,834 shares of Common Stock including 550 shares issuable
upon conversion of Series A Preferred Stock. DDJ Copernicus, LLC is the
general partner of, and DDJ Copernicus Management, LLC is the investment
manager for, The Copernicus Fund, L.P. DDJ Galileo, LLC owns all of the
voting securities of, and DDJ Galileo Management, LLC is the investment
manager for, DDJ Overseas Corp. DDJ Galileo, LLC is the general partner of
and, DDJ Galileo Management, LLC is the investment manager for, The Galileo
Fund, L.P. DDJ provides administrative services to the DDJ Affiliates and is
the investment manager for Kepler Overseas Corp. The Company believes that
DDJ and its affiliates listed above may be deemed a group as that term is
used in Rule 13d-5(b) of the Securities and Exchange Act of 1934 (the
"Exchange Act").
(3) 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.
6
<PAGE> 11
The following table sets forth as of March 31, 1997 the beneficial
ownership of the Company's Common Stock held by each Nominee for Director, the
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.
<TABLE>
<CAPTION>
AMOUNT AND NATURE PERCENT OF PERCENT OF
BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP COMMON STOCK VOTING 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 275,970(3) 2.7 2.5
Samuel L. Katz 0 * *
Richard E. Montag 0 * *
Gregory K. Raven 125,000(4) 1.2 1.1
Kim D. Ahlholm 5(5)(9) * *
James E. Feldt 24,265(6) * *
William K. Friend 5,242(7)(9) * *
C. Scott Litten 0 * *
Michael R. Hamilton 0 * *
Directors and Executive Officers as a
Group (16 Persons) 455,482(8)(9) 4.4 4.1
</TABLE>
- ------------------------------
* Represents less than 1% of outstanding shares.
(1) Represents the shares of Common Stock owned beneficially as a percentage of
the aggregate of 10,280,547 shares of Common Stock and 933,840 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 Common Stock (including 15,000 shares of restricted stock). See
section below captioned "Restricted Stock Agreements".
(3) Includes 235,970 shares of Common Stock owned by Dickstein & Co. L.P. and
40,000 shares of Common Stock owned by Dickstein International Limited. Mark
Dickstein, a Director, is the President and sole director of Dickstein
Partners Inc., which is the general partner of Dickstein Partners, L.P. and
the advisor to Dickstein International Limited. Dickstein Partners L.P. is
the general partner of Dickstein & Co. L.P.
(4) Consists of Common Stock (including 100,000 shares of restricted stock). See
section below captioned "Restricted Stock Agreements".
(5) Consists of shares issuable upon exercise of Series 1993 Warrants.
(6) Consists of 99 shares of Common Stock and 24,166 presently exercisable stock
options.
(7) Consists of 4,555 shares of Common Stock and 687 shares issuable upon
exercise of Series 1993 Warrants.
(8) Consists of 430,624 shares of Common Stock (including 115,000 shares of
restricted stock), 24,166 exercisable stock options and 692 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
7
<PAGE> 12
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 1, 1997, its officers, Directors and greater than ten percent
beneficial owners complied with all filing requirements applicable to them.
EXECUTIVE COMPENSATION
The following table sets forth the annual and long-term compensation for
service in all capacities to the Company for the fiscal year ended February 1,
1997 and the two prior fiscal years (identified as fiscal years 1996, 1995 and
1994 respectively) of (i) the Chief Executive Officer of the Company during the
fiscal year ended February 1, 1997, (ii) the other four most highly compensated
executive officers of the Company serving on February 1, 1997 whose salary and
bonus exceeded $100,000 and (iii) one additional former executive officer who
was among the four most highly compensated executive officers but was not an
executive officer on February 1, 1997:
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
NAME AND FISCAL OTHER ANNUAL AWARDS: STOCK ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS(#) COMPENSATION(1)
- ---------------------------- ------ -------- -------- ------------ ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Gregory K. Raven............ 1996 $665,274 $172,000(2) $141,221(3) 300,000(4) $ 0
President and Chief 1995 -- -- -- -- --
Executive Officer 1994 -- -- -- -- --
C. Scott Litten............. 1996 177,230 85,000(2) 121,931(5) 50,000(4) 0
Executive Vice President - 1995 -- -- -- -- --
Chief Financial Officer 1994 -- -- -- -- --
Michael R. Hamilton......... 1996 87,533 175,000(2) 16,644 50,000(4) 0
Executive Vice President - 1995 -- -- -- -- --
Operations 1994 -- -- -- -- --
William K. Friend........... 1996 169,000 0 0 0 6,000(6)
Vice President-Secretary 1995 168,166 0 710,497(7) 26,000(8) 1,415,240(9)(10)(11)(12)
and Corporate Counsel 1994 163,166 81,600 0 5,000 4,084(6)
Kim D. Ahlholm.............. 1996 127,917 23,500(13) 0 3,334(4) 6,000(6)
Vice President-Financial 1995 116,050 0 0 6,666(14) 20,885(10)(11)
Services 1994 108,958 54,000 0 2,000 2,906(6)
James E. Feldt.............. 1996 350,000 65,000(13) 0 35,000 6,000(6)
Executive Vice President - 1995 287,083 0 0 40,000(15) 367,819(10)(11)(12)
General Merchandise 1994 225,000 130,000 0 0 5,990(6)
Manager
(No longer with the
Company)
</TABLE>
- ------------------------------
(1) In connection with his resignation as President and Chief Executive Officer
on February 7, 1996, E. Jackson Smailes received a termination payment of
$1,150,000.
(2) The Company did not pay a performance bonus for fiscal 1996 to any
executive officers, including the executive officers named in the Summary
Compensation Table. The amounts shown represent, in the case of Mr. Raven,
a bonus guaranteed by his employment contract; in the case of Mr. Litten, a
hiring bonus of $25,000 and a guaranteed bonus of $60,000; and in the case
of Mr. Hamilton, a hiring bonus of $75,000 and a guaranteed bonus of
$100,000. See section below captioned "Employment Contracts".
8
<PAGE> 13
(3) Consists of relocation expenses, including a "gross up" of $54,984 for
federal and state taxes.
(4) The stock option numbers shown for fiscal 1996 do not take into account the
March 1997 repricings. See section below captioned "Ten Year Option
Repricings".
(5) Consists of relocation expenses, including a "gross up" of $48,375 for
federal and state taxes.
(6) Consists of Company contributions to the Company's 401(k) plan.
(7) Consists of "gross up" to cover excise taxes pursuant to Section 4999 of
the Internal Revenue Code with respect to the termination payment described
in footnote (9) below.
(8) 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".
(9) Includes a termination payment made to Mr. Friend following the election of
the nominees of Dickstein Partners Inc. (the "Dickstein Nominees") at the
Company's 1995 Annual Meeting of Shareholders in the amount of $714,468.
(10) Includes payments under the Company's Supplemental Executive Retirement
Plan ("SERP") to Messrs. Feldt and Friend 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. Friend, $479,678; Ms.
Ahlholm, $15,444; and Mr. Feldt, $128,604.
(11) The Company made the following contributions in fiscal 1995 to the 401(k)
accounts of the executives listed in the Summary Compensation Table: Mr.
Friend, $6,000; Ms. Ahlholm, $5,441; and Mr. Feldt, $5,253.
(12) 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.
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. Friend $215,094 and Mr. Feldt
$233,962.
(13) The Company did not pay a performance bonus for fiscal 1996 to any of the
executive officers named in the Summary Compensation Table. The amount
shown represents a payment made in July 1996 pursuant to a retention
program adopted shortly after the July 1995 change in control.
(14) Consists of repricing of options previously granted. See table below
captioned "Ten Year Option Repricings".
(15) 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 option granted to Mr. Feldt in 1993. See sections below captioned
"Stock Option Table" and "Ten Year Option Repricings".
EMPLOYMENT CONTRACTS
Effective February 7, 1996, the Company entered into an employment contract
with Gregory K. Raven, 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 target of 50% of base
salary if performance goals established by the HR/Compensation Committee (Option
9
<PAGE> 14
Committee) of the Board of Directors are met. Mr. Raven's contract provides for
a bonus of not less than 25% of base salary for the year ended February 1, 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 employment contract also
provides for the issuance to Mr. Raven of 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 November 11, 1996, the Company entered into an employment contract with
Michael R. Hamilton, Executive Vice President-Operations, for a term of three
years to October 21, 1999 at a base salary of $312,000 per year, subject to
annual review and a bonus target of 50% of base salary. For fiscal 1996, the
contract provides for a minimum guaranteed bonus of $100,000. Mr. Hamilton is
entitled to participate in any bonus, stock option or other incentive
compensation plans and other benefit plans of the Company at a level
commensurate with his position.
In addition, Mr. Hamilton's employment contract provides for a signing
bonus of $75,000. If Mr. Hamilton voluntarily resigns other than for cause prior
to the first anniversary of the employment contract, the signing bonus must be
refunded to the Company.
Mr. Hamilton's employment contract provides for the issuance to Mr.
Hamilton of options to purchase 50,000 shares of the Company's Common Stock
under the Company's 1993 Stock Option Plan. See section below captioned "Stock
Option Table".
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. Under the contract, Mr. Feldt was 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. Pursuant to a termination agreement dated March 6, 1997
between Mr. Feldt and the Company, Mr. Feldt's employment terminated effective
April 13, 1997. The termination agreement provides that through March 25, 1999,
Mr. Feldt will be paid at his current base salary without bonus (subject to
offset of earnings from other employment) and be permitted to participate in the
Company's medical, dental and similar benefit plans.
10
<PAGE> 15
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 $169,000 per year, subject
to annual review and a bonus target of 40% of base salary if annual goals are
met. The employment contract provides for a change of control payment equal to
one year's base salary.
Hills executives who participate in the Company's revised bonus plan,
including Messrs. Raven, Hamilton and Friend, may receive a bonus up to 50%
greater than the target amount if performance goals are exceeded. See the
Compensation Committee Report.
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 and Raven do not receive directors fees. Mr.
Katz did not receive directors fees from January 1996 to June 30, 1996 while he
served as a consultant to the Company.
Pursuant to 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. Mr.
Edelstein and Mr. Raven did not receive grants under the 1996 Directors Stock
Option Plan.
During the fiscal year ended February 1, 1997, the Company paid Mr.
Edelstein consulting fees of $401,609. The Company entered into a consulting
agreement dated as of February 7, 1997 with Mr. Edelstein which extended a
previous agreement dated February 7, 1996. The consulting agreement is for a
term to February 6, 1998 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 target of 50% of
annual consulting fees if the
11
<PAGE> 16
Company meets certain performance goals for fiscal 1997. Under the Company's
revised bonus plan, Mr. Edelstein may receive a bonus up to 50% greater than the
target amount if performance goals are exceeded.
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 was for a term
commencing January 1, 1996 and expiring June 30, 1996. Pursuant to the
agreement, Mr. Katz provided advice to the Company in the areas of his
professional experience, and the Company paid Mr. Katz $20,000 per month. In
addition, Mr. Katz received a bonus of $100,000 at the end of the consultancy.
STOCK OPTION TABLE
The following table sets forth grants during the fiscal year ended February
1, 1997 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 described in the table below, on
March 11, 1997 Mr. Raven was granted options to purchase 25,000 shares of Common
Stock under the 1993 Stock Option Plan, and Mr. Litten was granted options to
purchase 10,000 shares of Common Stock under the 1993 Stock Option Plan. Both
grants are at an exercise price of $4.625 per share, the closing price of the
Common Stock on the New York Stock Exchange on the date of the grant, and have a
ten year term expiring March 11, 2007.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES
NUMBER OF % OF TOTAL OF STOCK
SECURITIES OPTIONS PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM(1)
OPTIONS EMPLOYEES IN OR BASE EXPIRATION -------------------------
NAME GRANTED FISCAL YEAR PRICE DATE 5% 10%
- --------------------------- --------- ------------ -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Gregory K. Raven........... 300,000 46.2 $ 10.125 02/07/06 $1,768,951 $4,588,250
C. Scott Litten............ 50,000 7.7 12.75 04/23/06 400,920 1,016,011
Michael R. Hamilton........ 50,000 7.7 7.125 10/21/06 224,044 567,771
James E. Feldt............. 35,000 5.4 11.25 03/25/06 247,627 627,536
William K. Friend.......... 0 N/A N/A N/A N/A N/A
Kim D. Ahlholm............. 3,334 * 11.25 03/25/06 23,588 59,777
</TABLE>
- ------------------------------
(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.
* Less than 1%
12
<PAGE> 17
The following table sets forth all stock option/SAR repricings (i) since
February 1, 1997, (ii) during the fiscal year ended February 1, 1997 and (iii)
during the Company's last ten (10) fiscal years relating to the persons listed
in the Summary Compensation Table.
TEN YEAR OPTION REPRICINGS
<TABLE>
<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>
Gregory K. Raven....................... 03/11/97 300,000 193,704 $ 10.125 $ 4.625 $ 5.00 02/07/06
03/08/96 300,000 300,000 12.00 9.875 10.125 02/07/06
C. Scott Litten........................ 03/11/97 50,000 28,725 12.75 4.625 5.00 04/23/06
Michael R. Hamilton.................... 03/11/97 50,000 39,561 7.125 4.625 5.00 10/21/06
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...................... 03/11/97 26,000 15,383 12.00 4.625 5.00 10/18/05
10/18/95 26,500 N/A 18.49 9.50 12.00 10/18/05
10/18/95 12,500 N/A 20.125 9.50 12.00 10/18/05
10/18/95 N/A 26,000 N/A 9.50 12.00 10/18/05
Kim D. Ahlholm......................... 03/11/97 5,333 3,155 12.00 4.625 5.00 11/04/03
03/11/97 1,333 789 12.00 4.625 5.00 04/21/04
03/11/97 3,334 2,037 11.25 4.625 5.00 03/25/06
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
</TABLE>
On March 11, 1997, the Company offered to Hills employees holding stock
options the opportunity to reprice their then existing stock options. Under the
terms of the offer, subject to certain restrictions on exercise, the holder of a
stock option was given the opportunity to exchange his or her stock options,
which had exercise prices ranging from $3.00 to $12.75 per share, for a reduced
number of stock options at an exercise price of $5.00 per share. On March 11,
1997, the closing price of the Company's Common Stock on the New York Stock
Exchange was $4.625 per share.
The amount of the reduction in the number of stock options was based on a
formula pursuant to which Vice Presidents and above, including Mr. Raven, had
their stock options reduced to a proportionately greater degree than other
members of management. In addition, the repricing was contingent on recipients
agreeing not to exercise any repriced stock options for one year following
repricing and not to exercise more than one-half of otherwise exercisable
repriced stock options during the second year following the repricing. Subject
to the foregoing sentence, vesting did not change.
A majority of Hills executives holding stock options, including Messrs.
Raven, Litten, Hamilton and Friend and Ms. Ahlholm, accepted the offer, and
their stock options were repriced accordingly.
As a result of the March 1997 repricings, holders of the Company's stock
options relinquished, on a net basis, options to purchase 226,015 shares of
Common Stock, including 152,646 options relinquished, on a net basis, in the
aggregate by Mr. Raven and the other named executive officers.
13
<PAGE> 18
OPTION EXERCISES IN FISCAL 1996
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 1, 1997.
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED IN THE
OPTIONS AT FISCAL MONEY OPTIONS AT
SHARES YEAR END YEAR END(1)
ACQUIRED VALUE ----------------------------- -------------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------------------- ----------- --------- ------------ -------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Gregory K. Raven................. 0 0 0(2) 300,000 0 0
C. Scott Litten.................. 0 0 0(2) 50,000 0 0
Michael R. Hamilton.............. 0 0 0(2) 50,000 0 0
James E. Feldt................... 0 0 17,166 57,834 0 0
William K. Friend................ 0 0 26,000(2) 0 0 0
Kim D. Ahlholm................... 0 0 4,598(2) 5,402 0 0
</TABLE>
- ---------------
(1) Based on the closing price of the Company's Common Stock on the New York
Stock Exchange on January 31, 1997 of $2.75 per share and exercise prices as
of January 31, 1997 ranging from $7.125 to $12.75 per share, none of the
options shown in this table were in the money at year end.
(2) In connection with their March 11, 1997 stock option repricings, all holders
of repriced stock options, including each of the named executive officers
who received repriced options, have agreed not to exercise any stock options
for one year following the repricings and not to exercise more than one-half
of the stock options which would otherwise be exercisable during the second
year following the repricing. See section above captioned "Ten Year Option
Repricings".
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 1996.
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 Outside
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.
14
<PAGE> 19
Overview
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. During fiscal 1996, the Company
conducted a comprehensive review of its executive compensation program. As a
result, the Company determined that it was necessary to make changes to its
executive compensation program in order to attract and retain talented people
and to become more competitive in the marketplace. The Company determined that
compared to the companies with which Hills competes for executive talent, the
Company paid salaries that were slightly below market, but offered the potential
for bonuses which were, in some cases, substantially above market. This was
particularly the case below the Vice President level. In addition, the Company
had previously made its bonus program available to nearly all salaried
executives, including levels of management which typically are not eligible for
a bonus at other companies in the discount retail industry.
In response to these determinations the Company adjusted its executive
compensation program to be more consistent with the discount retail industry.
Certain lower level executive positions were removed from the bonus program. For
many executives remaining in the bonus program, bonus potential as a percentage
of base pay was reduced. Where appropriate, based on performance and market
conditions, the salaries of certain executives were increased.
The Company believes that the result of the foregoing changes is to bring
its executive compensation program in line with market conditions and better
enable the Company 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 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 portion of executive compensation is directly related to Company
performance by means of the Company's performance bonus program, which was
revised in fiscal 1996 to place greater emphasis on individual performance and
to provide additional incentives for outstanding performance. Depending on
position, bonus targets range from 15% to 50% of an executive's base salary.
Actual payout is determined by Company performance, including achievement of
financial and profit goals, and by individual performance.
Early in each year, the Board of Directors approves performance goals for
the Company and for individual executives. Individual performance goals vary by
position. Even if Company performance goals are met, individual bonuses may be
less than targeted amounts if individual goals are not met. In order to reward
superior performance, bonuses for certain individuals can exceed the target
amount by up to 50% if performance goals are exceeded.
For the fiscal year ended February 1, 1997, the Company goal was a target
of earnings before interest, taxes, depreciation and amortization (EBITDA). The
size of the bonus pool is determined by the level of attainment of the Company's
goals. EBITDA thresholds in descending amounts were established for a full
target bonus pool, lesser bonus pools, and no bonus pool. In the fiscal year
ended February 1, 1997, the Company did not meet its goals, and no performance
bonuses were paid to the Chief Executive Officer or any other executive officer
named in the Summary Compensation Table.
Stock Option Plan
The Company's 1993 Stock Option Plan is intended to provide a long-term
incentive and to motivate executives to increase the long-term market value of
the Company's Common Stock. During the fiscal year
15
<PAGE> 20
ended February 1, 1997, options to purchase a total of 678,751 shares of the
Common Stock of the Company were granted to 143 individuals, including Messrs.
Raven, Litten, Hamilton and Feldt, and Ms. Ahlholm. See the section captioned
"Stock Option Table".
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 Item 2 above which will qualify the 1993 Stock Option Plan for
deductibility under Section 162(m) of the Internal Revenue Code is in the best
interest of the Company.
Repricing of Stock Options
On March 11, 1997, 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 offered Hills employees
holding stock options, including Mr. Raven and the other then current executive
officers named in the Summary Compensation Table, the opportunity to reprice
their then existing stock options. Under the terms of the offer, subject to
agreeing to certain restrictions on exercise, the holder of an option was given
the opportunity to exchange his or her stock options, which had exercise prices
ranging from $3.00 to $12.75 per share, for a reduced number of stock options at
an exercise price of $5.00 per share. On March 11, 1997, the closing price of
the Company's Common Stock on the New York Stock Exchange was $4.625 per share.
The amounts of the reduction in the number of options was based on a
formula, with Vice Presidents and above, including Mr. Raven, having their
options reduced to a proportionately greater degree than other members of
management. In addition, the offer was conditioned on the holder of an option
agreeing not to exercise any repriced stock options for one year after the
repricing and not to exercise more than one-half of repriced stock options which
would otherwise be exercisable during the second year following the repricing.
Subject to the foregoing sentence, vesting did not change.
A majority of executives holding stock options, including Messrs. Raven,
Litten, Hamilton and Friend and Ms. Ahlholm, accepted the offer, and their stock
options were repriced accordingly. The results of the repricing are as follows:
Mr. Raven exchanged 300,000 stock options with an exercise price of $10.125 per
share for 193,704 stock options with an exercise price of $5.00 per share. Mr.
Litten exchanged 50,000 stock options with an exercise price of $ 12.75 per
share for 28,725 stock options with an exercise price of $5.00 per share. Mr.
Hamilton exchanged 50,000 stock options with an exercise price of $7.125 per
share for 39,561 stock options with an exercise price of $5.00 per share. Mr.
Friend exchanged 26,000 stock options with an exercise price of $12.00 per share
for 15,383 stock options with an exercise price of $5.00 per share. Ms. Ahlholm
exchanged 6,666 stock options with an exercise price of $12.00 per share for
3,944 stock options with an exercise price of $5.00 per share and 3,334 stock
options with an exercise price of $11.25 per share for 2,037 stock options with
an exercise price of $5.00 per share.
As a result of the March 1997 repricings, holders of the Company's stock
options relinquished, on a net basis, options to purchase 226,015 shares of
Common Stock, including 152,646 options relinquished, on a net basis, in the
aggregate by Mr. Raven and the other named executive officers.
The Committee believes that the foregoing 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. 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.
16
<PAGE> 21
Compensation of Chief Executive Officer
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's contract provides
for a targeted bonus amount of 50% of his base salary, subject to meeting
performance goals. Mr. Raven's contract provided for a minimum bonus of 25% of
base salary for the fiscal year ended February 1, 1997. Mr. Raven's contract
also provided for a grant of 300,000 options pursuant to the 1993 Stock Option
Plan and an award of 100,000 shares of restricted stock. See section captioned
"Employment Contracts".
Mr. Raven received $172,000 as the minimum bonus guaranteed by his
employment contract for fiscal 1996. Since the Company did not meet its goals
for fiscal 1996, neither Mr. Raven nor any other executive officer named in the
Summary Compensation Table received a performance bonus for fiscal 1996.
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
tax deductible by the Company, subject to certain exceptions, which include
shareholder approved programs. At last year's Annual Meeting, shareholders
approved the Hills Store Company 162(m) Bonus Plan, which permits the Company to
maximize tax deductibility of cash compensation in excess of $1,000,000 by
setting performance standards and designating participants early in each year.
Executives who participate in the Company's 162(m) Bonus Plan do not participate
in the Company's regular performance bonus plan. The Committee anticipates that
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. In addition, in order to maximize the deductibility
of compensation related to stock options, the Board of Directors has adopted,
and is seeking shareholder approval of, the amendment of the Company's 1993
Stock Option Plan.
While it is the policy of the Committee to maximize the tax deductibility
to the Company 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 to the Company for certain compensation
arrangements.
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 1, 1997, 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.
17
<PAGE> 22
PERFORMANCE GRAPHS
The following graphs compare the percentage change in cumulative total
shareholders return on the Common Stock of the Company and the Predecessor
Company to the cumulative total shareholders return of the S&P 500 and to the
cumulative total shareholders return of the S&P Retail Composite. The
Predecessor Company Graph covers the period February 2, 1992 to October 4, 1993
and assumes an investment of $100 in the Common Stock of the Predecessor Company
and each index on February 2, 1992. The Company Graph covers the period from
October 5, 1993 to February 1, 1997 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 Company
[CHART] [CHART]
<TABLE>
<CAPTION>
Measurement Period
(Fiscal Year Covered)
S&P
500 RETAIL STORES HILLS DEPARTMENT
INDEX - COMPOSITE STORES INC.
<S> <C> <C> <C>
Jan 92 100 100 100
Jan 93 119.36 110.58 107.09
OCT 4, 93 112.29 118.72 28.57
</TABLE>
------ HILLS DEPARTMENT STORES, INC.
--M-- S&P 500 INDEX
--O-- RETAIL STORES-COMPOSITE
<TABLE>
<CAPTION>
Measurement Period RETAIL STORES-
(Fiscal Year Covered) S&P 500 INDEX COMPOSITE HILLS 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
Jan 96 146.54 102.20 47.67
Jan 97 185.14 122.00 12.79
</TABLE>
- ------ HILLS STORES COMPANY
- --M-- S&P 500 INDEX
- --O-- RETAIL STORES-COMPOSITE
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 PART OF THE COMPANY'S 1996 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.
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 two years preceding such resignation contained an
adverse opinion or a disclaimer of opinion, or was qualified
18
<PAGE> 23
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.
The Company has agreed to hold Coopers & Lybrand harmless against legal
costs and expenses incurred in a successful defense of a legal action or
proceeding related to the inclusion of its report in the Company's Registration
Statement on Form S-4 relating to the exchange of the Company's 12 1/2% Senior
Notes Due 2003, whereby Coopers & Lybrand is not found culpable nor pays any
part of the plaintiff's damages, legal costs and expenses as a result of a
judgment or a settlement of a claim against it. The Company has deposited a
total of $500,000 in escrow to fund payments under this indemnification
arrangement. In addition, the Company and the affiliates of Dickstein Partners
Inc. who own shares of the Company's Common Stock have released Coopers &
Lybrand from any and all claims, demands and liabilities whatsoever on account
of professional services that Coopers & Lybrand performed, as independent
auditors, for either or both of the Company and HDSC through November 8, 1995.
The Company has further agreed to reimburse Coopers & Lybrand for its
professional time and expenses, including reasonable attorney's fees, incurred
in responding to subpoena or other legal process to produce its documents
relating to the Company in a legal action or proceeding in which Coopers &
Lybrand is not a party.
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 1, 1997.
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 1998 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 5, 1998. In addition to
the foregoing, Sections 4 and 5 of the Company's By-Laws set forth additional
requirements, including notice provisions, with respect to shareholder
nominations and proposals.
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 $5,000 plus out-of-pocket
expenses.
19
<PAGE> 24
EXHIBIT 1
As Amended March 11, 1997
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 solely of two or more members of the Company's Board of
Directors (the "Board") who satisfy the requirements for an "Outside Director"
set forth in applicable regulations under Section 162(m) of the Code and who
satisfy the requirements for a "Non-Employee Director" set forth in applicable
regulations under Section 16(b) of the Securities Exchange Act of 1934, as
amended. As used herein, the term "Outside Director" means any director who (i)
is not an employee of the Company or of any "affiliated group," as such term is
defined in Section 1504(a) of the Code, which includes the Company (an
"Affiliate"), (ii) is not a former employee of the Company or any Affiliate who
is receiving compensation for prior services (other than benefits under a
tax-qualified retirement plan) during the Company's or any Affiliate's taxable
year, (iii) has not been an officer of the Company or any Affiliate, and (iv)
does not receive remuneration from the Company or any Affiliate, either directly
or indirectly, in any capacity other than as a director. It is the intention of
the Company that the Plan shall be administered by "Outside Directors" within
the meaning of applicable regulations under Section 162(m) of the Code and by
"Non-Employee Directors" 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 an Outside Director or a Non-Employee Director. 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
E-1
<PAGE> 25
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.
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).
4.2 Greater-Than-Ten-Percent Stockholders. Except as may otherwise be
permitted by the Code or other applicable law or regulation, no Incentive Stock
Option shall be granted to an individual who, at the time the option is granted,
owns (including ownership attributed pursuant to Section 424 of the Code) more
than ten percent of the total combined voting power of all classes of stock of
the Company or any parent or subsidiary (a "greater-than-ten-percent
stockholder"), unless such Incentive Stock Option provides that (i) the purchase
price per share shall not be less than one hundred ten percent of the fair
market value of the Common Stock at the time such option is granted, and (ii)
that such option shall be not exercisable to any extent after the expiration of
five years from the date it is granted.
4.3 Maximum Aggregate Fair Market Value. The aggregate fair market value
(determined at the time the option is granted) of the Common Stock with respect
to which Incentive Stock Options are exercisable for the first time by any
optionee during any calendar year (under the Plan and any other plans of the
Company or any parent or subsidiary for the issuance of incentive stock options)
shall not exceed $100,000 (or such greater amount as may from time to time be
permitted with respect to incentive stock options by the Code or any other
applicable law or regulation).
4.4 Annual Limitation. The maximum number of options to purchase Common
Stock of the Company which may be granted to any individual under the Plan
during any given fiscal year of the Company shall be 300,000, subject to
adjustment as provided in Section 8 hereof. The number of shares of Common Stock
issuable pursuant to an option granted to a Plan participant in a fiscal year
that is subsequently forfeited, cancelled or otherwise terminated shall continue
to count toward the foregoing limitation in such fiscal year. In addition, if
the exercise price of an option is subsequently reduced, the transaction shall
be deemed a cancellation of the original option and the grant of a new one so
that both transactions shall count toward the maximum shares issuable in the
fiscal year of each respective transaction.
E-2
<PAGE> 26
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.
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.
E-3
<PAGE> 27
Option agreements need not be identical, but each option agreement by
appropriate language shall include the substance of all of the following
provisions:
6.1 Expiration of Option. Notwithstanding any other provision of the Plan
or of any option agreement, each option shall expire on the date specified in
the option agreement, which date shall not, in the case of an Incentive Stock
Option, be later than the tenth anniversary (fifth anniversary in the case of a
greater-than-ten-percent stockholder) of the date on which the option was
granted, or as specified in Section 5 of this Plan.
6.2 Exercise. Each option may be exercised, so long as it is valid and
outstanding, from time to time in part or as a whole, subject to any limitations
with respect to the number of shares for which the option may be exercised at a
particular time and to such other conditions as the Committee in its discretion
may specify upon granting the option.
6.3 Purchase Price. The purchase price per share under each option shall
be determined by the Committee at the time the option is granted; provided,
however, that the 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 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 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
E-4
<PAGE> 28
option has been so exercised, issued in the optionee's name; provided, however,
that such delivery shall be deemed effected for all purposes when the Company or
a stock transfer agent of the Company shall have deposited such certificates in
the United States mail, addressed to the optionee, at the address specified in
the Notice.
SECTION 8. CHANGES IN THE COMPANY'S CAPITAL STRUCTURE
8.1 Rights of Company. The existence of outstanding options shall not
affect in any way the right or power of the Company or its stockholders to make
or authorize, without limitation, any or all adjustments, recapitalizations,
reorganizations or other changes in the Company's capital structure or its
business, or any merger or consolidation of the Company, or any issue of Common
Stock, or any issue of bonds, debentures, preferred or prior preference stock or
other capital stock ahead of or affecting the Common Stock or the rights
thereof, or the dissolution or liquidation of the Company, or any sale or
transfer of all or any part of its assets or business, or any other corporate
act or proceeding, whether of a similar character or otherwise.
8.2 Recapitalization, Stock Splits and Dividends. If the Company shall
effect a subdivision or consolidation of shares or other capital readjustment,
the payment of a stock dividend, or other increase or reduction of the number of
shares of the Common Stock outstanding, in any such case without receiving
compensation therefor in money, services or property, then (i) the number,
class, and price per share of shares of stock subject to outstanding options
hereunder shall be appropriately adjusted in such a manner as to entitle an
optionee to receive upon exercise of an option, for the same aggregate cash
consideration, the same total number and class of shares as he or she would have
received as a result of the event requiring the adjustment had he or she
exercised his or her option in full immediately prior to such event; and (ii)
the number and class of shares with respect to which options may be granted
under the Plan shall be adjusted by substituting for the total number of shares
of Common Stock then reserved for issuance under the Plan that number and class
of shares of stock that the owner of an equal number of outstanding shares of
Common Stock would own as the result of the event requiring the adjustment.
8.3 Merger without Change of Control. After a merger of one or more
corporations into the Company, or after a consolidation of the Company and one
or more corporations in which (i) the Company shall be the surviving
corporation, and (ii) the stockholders of the Company immediately prior to such
merger or consolidation own after such merger or consolidation shares
representing at least fifty percent of the voting power of the Company, each
holder of an outstanding option shall, at no additional cost, be entitled upon
exercise of such option to receive in lieu of the number of shares as to which
such option shall then be so exercisable, the number and class of shares of
stock or other securities to which such holder would have been entitled pursuant
to the terms of the agreement of merger or consolidation, if, immediately prior
to such merger or consolidation, such holder had been the holder of record of a
number of shares of Common Stock equal to the number of shares for which such
option was exercisable.
8.4 Sale or Merger with Change of Control. If the Company is merged into
or consolidated with another corporation under circumstances where the Company
is not the surviving corporation, or if there is a merger or consolidation where
the Company is the surviving corporation but the stockholders of the Company
immediately prior to such merger or consolidation do not own after such merger
or consolidation shares representing at least fifty percent of the voting power
of the Company, or if the Company is liquidated, or sells or otherwise disposes
of substantially all of its assets to another corporation while unexercised
options remain outstanding under the Plan, (i) subject to the provisions of
clause (iii) below, after the effective date of such merger, consolidation,
liquidation, sale or disposition, as the case may be, each holder of an
outstanding option shall be entitled, upon exercise of such option, to receive,
in lieu of shares of Common Stock, shares of such stock or other securities,
cash or properties as the holders of shares 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
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extent that the same is then exercisable or, if the Committee shall have
accelerated the time for exercise of all unexercised or unexpired options, in
full during the 30-day period preceding the effective date of such merger,
consolidation, liquidation, sale or disposition.
8.5 Adjustments to Common Stock Subject to Options. Except as
hereinbefore expressly provided, the issue by the Company of shares of stock of
any class, or securities convertible into shares of stock of any class, for cash
or property, or for labor or services, either upon direct sale or upon the
exercise of rights or warrants to subscribe therefor, or upon conversion of
shares or obligations of the Company convertible into such shares or other
securities, shall not affect, and no adjustment by reason thereof shall be made
with respect to, the number or price of shares of Common Stock then subject to
outstanding options.
8.6 Miscellaneous. Adjustments under this Section 8 shall be determined by
the Committee, and such determinations shall be conclusive. No fractional shares
of Common Stock shall be issued under the Plan on account of any adjustment
specified above.
SECTION 9. GENERAL RESTRICTIONS
9.1 Investment Representations. The Company may require any person to
whom an option is granted, as a condition of exercising such option, to give
written assurances in substance and form satisfactory to the Company to the
effect that such person is acquiring the Common Stock subject to the option for
his or her own account for investment and not with any present intention of
selling or otherwise distributing the same, and to such other effects as the
Company deems necessary or appropriate in order to comply with federal and
applicable state securities laws.
9.2 Compliance with Securities Laws. The Company shall not be required to
sell or issue any shares under any option if the issuance of such shares shall
constitute a violation by the optionee or by the Company of any provisions of
any law or regulation of any governmental authority. In addition, in connection
with the Securities Act of 1933, as now in effect or hereafter amended (the
"Act"), upon exercise of any option, the Company shall not be required to issue
such shares unless the Committee has received evidence satisfactory to it to the
effect that the holder of such option will not transfer such shares except
pursuant to a registration statement in effect under such Act or unless an
opinion of counsel satisfactory to the Company has been received by the Company
to the effect that such registration is not required. Any determination in this
connection by the Committee shall be final, binding and conclusive. In the event
the shares issuable on exercise of an option are not registered under the Act,
the Company may imprint upon any certificate representing shares so issued the
following legend or any other legend which counsel for the Company considers
necessary or advisable to comply with the Act and with applicable state
securities laws:
The shares of stock represented by this certificate have not been
registered under the Securities Act of 1933 or under the securities laws of
any State and may not be sold or transferred except upon such registration
or upon receipt by the Corporation of an opinion of counsel satisfactory to
the Corporation, in form and substance satisfactory to the corporation,
that registration is not required for such sale or transfer.
The Company may, but shall in no event be obligated to, register any
securities covered hereby pursuant to the Act; and in the event any shares are
so registered the Company may remove any legend on certificates representing
such shares. The Company shall not be obligated to take any other affirmative
action in order to cause the exercise of an option or the issuance of shares
pursuant thereto to comply with any law or regulation of any governmental
authority.
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.
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<PAGE> 30
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. Stockholder approval
must also be obtained for any amendment to the Plan for which such approval is
necessary for compliance with Section 162(m) of the Code.
SECTION 11. NONEXCLUSIVITY OF THE PLAN
Neither the adoption of the Plan by the Board of Directors nor the
submission of the Plan to the stockholders of the Company for approval shall be
construed as creating any limitations on the power of the Board of Directors to
adopt such other incentive arrangements as it may deem desirable, including,
without limitation, the granting of stock options otherwise than under the Plan,
and such arrangements may be either applicable generally or only in specific
cases.
SECTION 12. EFFECTIVE DATE AND DURATION OF PLAN
The Plan shall become effective upon its adoption by the Board of Directors
provided that the stockholders of the Company shall have approved the Plan
within twelve months prior to or following the adoption of the Plan by the
Board. No option may be granted under the Plan after the tenth anniversary of
the effective date. The Plan shall terminate (i) when the total amount of the
Stock with respect to which options may be granted shall have been issued upon
the exercise of options or (ii) by action of the Board of Directors pursuant to
Section 10 hereof, whichever shall first occur.
SECTION 13. EFFECTIVE DATE OF CERTAIN AMENDMENTS TO THE PLAN
The amendments to the Plan necessary for compliance with Section 162(m) of
the Code were adopted by the Board of Directors on March 11, 1997, subject to
stockholder approval, and shall take effect as of January 1, 1997.
* * * * * * * * * * * *
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<TABLE>
HILLS STORES COMPANY
PROXY
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF
DIRECTORS OF HILLS STORES COMPANY FOR THE
JUNE 17, 1997 ANNUAL MEETING OF SHAREHOLDERS
The undersigned hereby appoints Toby B. Richard, 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 17, 1997 at 10:00 a.m. at Hills Corporate Headquarters, 15 Dan
Road, Canton, Massachusetts 02021, 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 5, 1997 and
the 1996 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 SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE
VOTED FOR THE ELECTION OF THE DIRECTORS AND FOR ADOPTION OF THE AMENDMENT OF THE HILLS STORES COMPANY 1993 INCENTIVE AND
NONQUALIFIED STOCK OPTION PLAN.
THIS PROXY IS CONTINUED ON THE REVERSE SIDE.
PLEASE COMPLETE THE REVERSE SIDE AND RETURN PROMPTLY.
- ------------------------------------------------------------------------------------------------------------------------------------
FOLD AND DETACH HERE
<S> <C>
The Board of Directors Recommends a vote FOR all nominees for Director and FOR approval of the Please mark
amendment of the Hills Stores Company 1993 Incentive and Nonqualified Stock Option Plan. your votes as [X]
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, Richard E. Montag
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 amendment of the Hills Stores Company 1993 Incentive and Nonqualified Stock Option Plan to limit
--> the number of options that can be granted to any individual in any fiscal year to 300,000.
FOR AGAINST ABSTAIN
I PLAN TO ATTEND THE MEETING
SIGNATURE ___________________________________________ SIGNATURE ____________________________________ DATE __________________________
Please mark, date and sign as your name(s) appear(s) above 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.
FOLD AND DETACH HERE
</TABLE>
