UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ------ EXCHANGE ACT OF 1934
For the fiscal year ended February 1, 1997
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ------ EXCHANGE ACT OF 1934
For the transition period from ___________ to ____________
Commission file number 1-9505
HILLS STORES COMPANY
--------------------
(Exact name of registrant as specified in its charter)
DELAWARE 31-1153510
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
15 DAN ROAD, CANTON, MASSACHUSETTS 02021
---------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (617) 821-1000
-------------
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
<S> <C>
Common Stock, Par Value $0.01 per share New York Stock Exchange
Boston Stock Exchange
12 1/2% Senior Notes due 2003, Series B New York Stock Exchange
Series A Convertible Preferred Stock, New York Stock Exchange
Par Value $0.10 per share
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
<TABLE>
<CAPTION>
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
<S> <C>
Series 1993 Warrants to Boston Stock Exchange
Purchase Common Stock
</TABLE>
<PAGE>
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing require-
ments for the past 90 days.
Yes X No
----------- -----------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
or Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information state-
ments incorporated by reference in Part III of this Form 10-K or any amendment
to this Form 10-K. [ X ]
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant as of March 31, 1997 was $42,140,548 with respect to the Common
Stock and $4,669,200 with respect to the Series A Convertible Preferred Stock,
which has coextensive voting rights with the Common Stock.
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes X No
----------- -----------
The number of shares of Common Stock outstanding as of March 31, 1997 was
10,280,547.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of Part III of this report on Form 10-K are incorporated by
reference from the proxy statement dated May 5, 1997 for the annual meeting of
stockholders to be held on June 17, 1997.
2
<PAGE>
<TABLE>
TABLE OF CONTENTS
PART I
<S> <C> <C>
ITEM 1. Business .................................................... 4
ITEM 2. Properties .................................................. 7
ITEM 3. Legal Proceedings ........................................... 7
ITEM 4. Submission of Matters to a Vote of Security Holders ......... 8
Executive Officers of the Registrant ........................ 8
PART II
ITEM 5. Market for the Registrant's Common Equity and Related
Stockholder Matters ......................................... 10
ITEM 6. Selected Financial Data ..................................... 11
ITEM 7. Management's Discussion and Analysis of Financial
Condition and Results of Operation .......................... 12
ITEM 8. Financial Statements and Supplementary Data ................. 17
ITEM 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure ......................... 17
PART III
ITEM 10. Directors and Executive Officers of the Registrant .......... 18
ITEM 11. Executive Compensation ...................................... 18
ITEM 12. Security Ownership of Certain Beneficial Owners and
Management .................................................. 18
ITEM 13. Certain Relationships and Related Transactions .............. 18
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K ................................................. 19
</TABLE>
3
<PAGE>
PART I
ITEM 1. BUSINESS
--------
Hills Stores Company (the "Company" or "Hills") operates, through its wholly-
owned subsidiary Hills Department Store Company ("HDSC"), a chain of discount
department stores under the trade name of Hills Department Stores. These
stores are located primarily in the Great Lakes and Ohio Valley regions of the
United States. One new store was opened in 1996. At fiscal year-end, the
Company operated 165 stores in twelve states. Shortly before year-end, Hills
announced plans to close 10 stores during the first quarter of fiscal 1997,
reducing the chain to 155 stores.
The Company is a leading regional discount retailer offering a broad range of
brand name and other first quality general merchandise. Management's business
strategy stresses every day low prices, depth and breadth of products in
selected merchandise categories, remodeled facilities and strict operating
controls.
Hills stores are located in cities and towns of varying sizes, with some of the
larger cities being Pittsburgh, Buffalo and Cleveland. The Company concentrates
its stores in selected markets within a geographic region in order to reinforce
marketing programs, enhance name recognition, achieve market penetration, and
gain economies of scale in management, advertising and distribution.
Since 1991, the Company has remodeled all of its stores and is continuing the
program on an ongoing basis. The remodeling program is designed to make and
keep the Company's stores more visually appealing to customers and to take full
advantage of the most profitable merchandise categories.
Store managers report to district managers, who report to regional vice
presidents. The district managers and regional vice presidents visit their
stores on a regular basis to oversee operations. Store managers and associates
are empowered to respond directly to the needs of the customers. The Company
maintains a stores headquarters office strategically located near Pittsburgh.
The Company believes that its customer base consists primarily of female
customers shopping for family needs. Accordingly, Hills emphasizes merchandise
in its softlines departments and selected hardlines departments, such as toys
and seasonal merchandise, which appeal to Hills' targeted female customer. The
Company considers the breadth and depth of its merchandise in these departments
to be an important factor in attracting and retaining customers, and accordingly
emphasizes the availability of a wide selection of sizes, styles and colors of
items in these departments.
Hills carries a diverse line of products, all first quality, including a full
line of clothing for women, men and children, toys, health and beauty aids,
small household appliances and housewares, home entertainment equipment,
hardware, stationery and greeting cards, automotive supplies, lawn and garden
products and jewelry. Hills licenses its footwear departments to a nationally
known footwear retailer. Hills offers a broad range of brand name apparel and
other products for the family and supplements brand name goods with
manufacturers' private brands (brands made by major manufacturers but not
nationally advertised) and Hills' private label program (approximately 5% of
total purchases). The Company accepts all major consumer credit cards and
offers a year-round layaway program.
4
<PAGE>
Imported goods are purchased by Hills through its importing subsidiary and from
other sources. In fiscal year 1996, the subsidiary, C.R.H. International, Inc.
("CRH"), imported products that accounted for approximately 12% of total
purchases of the Hills Department Stores chain.
Hills uses a centralized buying organization staffed by merchandise managers,
buyers and a support staff organized along the Company's product lines. Most
of Hills' buying organization is located at its Canton, Massachusetts offices.
Hills also maintains a fashion buying office in the garment district of New
York City to purchase and merchandise women's fashion and basic apparel.
The Company's central distribution facilities are located in Columbus, Ohio.
These facilities provide central stocking of merchandise and flow-through
allocation of merchandise for delivery to the stores. During fiscal year 1996,
the Company shipped approximately 60% of the dollar value of its merchandise
receipts through these distribution facilities, which consisted primarily of
items handled in casepack quantities and imports. The balance of the Company's
merchandise receipts, consisting primarily of apparel and less-than casepack
quantity items, were delivered to stores direct from vendors or through a
variety of distributor, jobber or in-store service vendors. In 1997, the
Company plans to open an interim processing center, primarily focused on
apparel, to pre-process merchandise, thereby reducing in-store handling costs
and consolidating and reducing freight costs. Hills is presently conducting a
study directed towards opening a second full service distribution facility, not
later than 1999, which will include breakpack capabilities to enable less-than
casepack quantity deliveries to stores. The second distribution center
initiative may involve an interim facility in 1998.
The Company relies extensively on computerized information systems. Hills
operates its principal information technology center at its corporate offices
in Canton, Massachusetts. All Hills stores, distribution centers and
administrative locations are tied to the information center's computer by means
of an on-line data communications network.
Hills' merchandising systems are designed to integrate the key retailing
functions of seasonal merchandise planning and allocation, purchase order
management, merchandise distribution, receiving, sales capture, inventory
control, open-to-buy and replenishment. Hills maintains electronic data inter-
change (EDI) connections through third party services to a large number of its
vendors. Unit sales data are recorded via the point-of-sale register systems in
each store. The point-of-sale registers and bar code scanners in all stores
significantly reduce labor intensive price marking and price changes. Each
Hills buyer has on-line access to information via a workstation located in the
buyer's office. Sales performance reports are received both daily and weekly
and assist management in making related merchandising decisions. The
merchandising systems allow Hills to distribute specific categories and styles
of merchandise to each store based upon the sales patterns of the stores. Store
operations are supported by a number of additional on-line systems including
electronic correspondence among all locations, payroll and labor scheduling
systems, price change management and layaway control.
5
<PAGE>
Hills has embarked on a project designed to replace most of its existing
systems and enhance processes to meet the demands of retailing in the year 2000
and beyond. The Company will update its hardware and applications and
reengineer its business processes in order to take advantage of new technology.
Hills anticipates substantially completing this project prior to the 1998
Christmas selling season.
The discount general merchandise retail business is highly competitive. The
Company considers merchandise price, presentation, selection and quality, store
location, and the expertise of its buying, selling and support management and
associates to be the most significant competitive factors. Hills' principal
competitors are regional and national discount department store chains, some of
which, such as Wal-Mart, Kmart, and Target, as well as specialty retailers, such
as Toys "R" Us, are larger and have more capital than Hills. Management
believes that the Company's store remodeling program and its strength in certain
merchandising lines allow it to defend its competitive position, even with
Wal-Mart's presence in most of the Company's markets.
The "Hills" name is a registered service mark. The Company considers this mark
and the associated name recognition to be valuable to its business. The
Company has additional trademarks, trade names and service marks, many of which,
such as "American Spirit," are used in connection with the Company's private
label program. Although the Company considers these additional marks to be
valuable in the aggregate, individually, they have varying degrees of importance
to the Company's business.
As of March 31, 1997, Hills employed approximately 16,200 persons, including
approximately 9,200 full-time and 7,000 part-time employees. None of the
Company's employees are represented by a labor union. The number of employees
varies during the year, reaching a peak during the Christmas selling season.
The Company considers its relations with its employees to be good.
During the 1996 fiscal year, the Company rebuilt its senior management team with
the addition of a new president and chief executive officer, executive vice
president-chief financial officer, executive vice president-store and distri-
bution operations, corporate vice president-human resources, vice president-
information technology and services, vice president-controller, vice president-
treasurer, and a regional vice president. In addition, several other vice
president positions were filled by internal promotions and reorganizations,
including a regional vice president, a vice president-merchandise presentation,
and two merchandise vice presidents. The Company has also recently hired a new
vice president-logistics. As of the date of this Report, the Company has
vacancies in the positions of executive vice president-chief merchandising
officer and vice president-marketing. The Company also strengthened its balance
sheet by refinancing its long-term senior debt, deferring maturities to 2003,
and obtaining a replacement $300 million revolving credit facility with greater
financing flexibility.
Certain statements contained in this document are foward-looking statements that
involve a number of risks and uncertainties. Among the factors that could cause
actual results to differ materially are the following: general economic condi-
tions, consumer demand, consumer preferences and weather patterns in the Great
Lakes and Ohio Valley regions of the United States; competitive factors,
including continuing pressure from pricing and promotional activities of major
competitors; impact of excess retail capacity and the availability of desirable
store locations on suitable terms, the availability, selection and purchasing of
attractive merchandise on favorable terms; import risks, including potential
disruptions and duties, tariffs and quotas on imported merchandise; acquisition
and divestment activities; and other factors that may be described in this
document.
6
<PAGE>
ITEM 2. PROPERTIES
----------
At the end of fiscal 1996, Hills operated 165 stores (164 stores leased and one
owned) in the states of Pennsylvania, Ohio, New York, West Virginia, Indiana,
Virginia, Tennessee, Illinois, Kentucky, Maryland, Massachusetts and North
Carolina. The stores are located in regional and other enclosed shopping malls,
strip shopping centers and as free standing units. In early 1997, the Company
closed 10 stores, located in Kentucky (2), North Carolina (4), Virginia (3) and
Ohio (1). The Company leases nearly all of its stores under long-term leases.
In addition, Hills leases buying and administrative offices, including the
Company's executive, buying and administrative office in Canton, Massachusetts,
the stores headquarters in Aliquippa, Pennsylvania, and a buying office in New
York, New York, and its central distribution facilities in Columbus, Ohio.
The typical store lease has an initial term of between 20 and 30 years, with
four to seven renewal periods of five years each, exercisable at the Company's
option. Substantially all of the Company's leases provide for a minimum annual
rent that is constant or adjusts to fixed levels through the lease term,
including renewal periods. Most leases provide for additional rent based on a
percentage of sales to be paid when designated sales levels are achieved. See
Note 7 of the Notes to Consolidated Financial Statements for additional
information about the Company's long-term leases.
ITEM 3. LEGAL PROCEEDINGS
-----------------
In September 1995, the Company and HDSC filed a suit in the Court of Chancery
of the State of Delaware against the former members of the Board of Directors
(the "Former Directors") of the Company. That action seeks, among other things,
recovery of damages caused by the breach by the Former Directors of their
fiduciary duties to shareholders arising from the refusal of the Former
Directors to approve the change in control which took place on July 5, 1995 (the
"1995 Change of Control") following the election of seven replacement directors
by the shareholders of the Company. In October 1995, the defendents filed a
motion to dismiss the suit. In February 1996, the court granted a motion of the
Former Directors to stay discovery pending the outcome of their motion to
dismiss. In March 1997, the court denied the Former Directors' motion to
dismiss.
The Company and HDSC also filed suit against Smith Barney, Inc. in September
1995 in the New York State Supreme Court for the County of New York, seeking
damages for losses, as stated in the complaint, caused by the gross negligence
of this firm in rendering financial advice to the Former Directors of the
Company in breach of their fiduciary duties. In April 1996, the court granted
Smith Barney's motion to dismiss this suit. In May 1996, the Company filed in
the Appellate Division a Notice of Appeal of the trial court's dismissal of the
suit. The appeal is presently pending.
In August 1995, in the Court of Chancery of the State of Delaware, three share-
holders of the Company, Gayle Dolowich, Ivan J. Dolowich and Joseph Weiss, filed
a class action lawsuit against the seven new directors of the Company elected at
the 1995 annual meeting, Dickstein Partners Inc. ("Dickstein Partners") and the
Company. In November 1995, the plaintiffs amended their complaint to include a
shareholder's derivative cause of action against the Former Directors for breach
7
<PAGE>
ITEM 3. LEGAL PROCEEDINGS (CONTINUED)
-----------------------------
of their fiduciary duties to the Company and its shareholders. In the amended
complaint, the plaintiffs claim (under Section 225 of the Delaware Corporation
Code) that in connection with Dickstein Partners' effort to solicit proxies in
support of the election of its nominees for directors of the Company, Dickstein
Partners issued a number of false and misleading statements regarding its offer
to acquire all of the Company's shares it did not already own. On the Section
225 claim, the plaintiffs seek an order nullifying the election of directors and
declaring there has been no "change of control" of the Company. The derivative
cause of action seeks damages against the Former Directors. In January 1996,
in the same Delaware Chancery Court, another shareholder, Peter M. Fusco, filed
a substantially similar class action and shareholder derivative suit against the
parties named in the Dolowich suit. The Former Directors filed a motion to
dismiss the Dolowich and Fusco suits, and that motion was argued in October 1996
and is presently pending.
The Company is involved in various other suits and claims in the ordinary course
of business.
Management does not believe that the disposition of such suits and claims will
have a material adverse effect upon the continuing operations and financial
position of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
NONE
EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------
(Furnished pursuant to General Instruction G of Form 10-K)
The executive officers of the Company currently are:
Gregory K. Raven, 47, was elected President and Chief Executive Officer and a
Director of Hills on February 7, 1996. He was executive vice president,
finance and chief financial officer of Revco D.S., Inc., from September 1988
until August 1995. From 1977 until he joined Revco in 1987, Mr. Raven served in
various financial management capacities with The Great Atlantic & Pacific Tea
Company, Inc.
Michael R. Hamilton, 51, joined the Company as Executive Vice President-
Operations on October 21, 1996. Prior to joining Hills, Mr. Hamilton had been
executive vice president of store operations for Venture Stores, Inc. He joined
Venture in 1973 and at the date of his departure from Venture he served as
executive vice president of stores, asset protection and leased businesses.
C. Scott Litten, 47, was elected Executive Vice President and Chief Financial
Officer on April 23, 1996. Previously, he served as senior vice president-
finance of Hechinger Stores Company from May 1994 to September 1995. He also
held positions as chief financial officer at The Butler Group, Inc. (January
1993 to May 1994) and senior vice president-finance of Family Dollar Stores,
Inc. (August 1989 to December 1991). He is a certified public accountant.
8
<PAGE>
Kim D. Ahlholm, 40, became Vice President-Financial Services in September 1996.
She had been Vice President-Controller since March 1994, Treasurer from June
1993 to March 1994, Assistant Controller from July 1990 to June 1993 and
Director-Audit from April 1989 to June 1990. She is a certified public
accountant.
John M. Doyle, 37, joined the Company as Vice President-Treasurer on
September 23, 1996. He had been vice president and treasurer of Carson Pirie
Scott & Co. from 1995 to September 1996, and held various financial management
positions since joining that company in 1991 and at Marshall Field's from 1985
to 1990. Mr. Doyle is a certified public accountant.
William K. Friend, 50, is and since December 1985 has been Vice President-
Secretary and Corporate Counsel for Hills. Prior to joining Hills, Mr. Friend
held senior management positions with SCOA Industries Inc. and Shoe Corporation
of America, Hills' predecessor companies.
Reginald B. Garrett, 49, became Corporate Vice President-Human Resources on
December 1, 1996. Prior to that date, he had been vice president-human
resources for Montgomery Ward & Company, Inc., since 1993. In addition,
Mr. Garrett held various human resource management positions with Wal-Mart
Stores, Inc. (1991 to 1993), Zale Corporation, Cook United, Inc., Cole National
Corporation, and Sherwin-Williams Company.
Wollaston B. Morin, 54, became Vice President-Information, Technology & Services
in February 1997. He joined Hills on October 23, 1996 as Vice President-
Information Systems. He served as vice president of information services for
Stride Rite Corporation from July 1993 to October 1996 and for Marshalls from
1989 to June 1993. Previously, he held other senior management MIS positions
with Zayre, Allied Stores, and Talbot's.
Brian J. Sheehan, 41, joined the Company as Vice President-Controller on
September 5, 1996. Prior to joining Hills, Mr. Sheehan was vice president and
chief financial officer of Healthcare Direct Inc., since November 1995. He
served as assistant corporate controller of Caldor Corporation from 1990 to
1995.
Officers are elected to serve until their successors are elected and qualified.
9
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
-----------------------------------------------------------------
(a) The principal market on which the Company's Common Stock is traded is the
New York Stock Exchange. The following table sets forth the range of high and
low prices of the Company's Common Stock as reported on the New York Stock
Exchange during each quarter of fiscal years 1995 and 1996.
<TABLE>
COMMON STOCK PRICES
- -------------------
<CAPTION>
Quarter Ended High Price Low Price
<S> <C> <C>
February 1, 1997 $ 7.750 $ 2.750
November 2, 1996 $ 8.875 $ 6.750
August 3, 1996 $12.875 $ 6.875
May 4, 1996 $13.750 $ 7.875
February 3, 1996 $12.000 $ 7.125
October 28, 1995 $18.125 $ 8.125
July 29, 1995 $24.875 $18.125
April 29, 1995 $22.750 $18.250
<FN>
(b) As of March 31, 1997, there were outstanding 10,280,547 shares of Common
Stock held by 2,234 holders of record, and 933,840 shares of Series A Conver-
tible Preferred Stock held by 2,047 holders of record.
(c) During the quarter ended February 1, 1997, the Company issued 43,279 shares
of Common Stock (the "Common Shares"), upon the conversion of 43,279 shares of
Series A Convertible Preferred Stock (the "Series A Preferred Shares"). The
Series A Preferred Shares were issued pursuant to the exemption from registra-
tion set forth in Section 1145(a) of the Federal Bankruptcy Code, and the Common
Shares were issued pursuant to the exempton from registration set forth in
Section 3(a)(9) of the Securities Act of 1933, as amended.
(d) The Company has not paid a cash dividend on its Common Stock in the last
two fiscal years. The Loan and Security Agreement dated as of September 30,
1996, as amended, between HDSC and CRH as the Borrowers, BankAmerica Business
Credit, Inc. as the Agent, and the Company and its other subsidiaries as the
Guarantors, prohibits the payment of dividends on the Company's Common Stock.
HDSC is permitted to make all transfers of funds (in the form of loans, advances
or cash dividends) to the Company necessary for the Company to pay interest on
the Senior Notes and otherwise conduct its activities as a holding company;
however, such transfers can not be made for purposes other than in the normal
course of business. The Company's Senior Note Indenture also has restrictions
on the payment of cash dividends. See Notes 5 and 6 of the Notes to
Consolidated Financial Statements.
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
The Company emerged from Chapter 11 proceedings on October 4, 1993. For financial reporting purposes, the Company adopted fresh-
start reporting as of October 2, 1993. Under fresh-start reporting, a new reporting entity is created and recorded amounts of
assets and liabilities are adjusted to reflect their estimated fair values. Financial data prior to October 2, 1993 has been
designated as those of the Predecessor Company. Black lines have been drawn to separate the Successor Company financial data from
the Predecessor Company financial data to signify that they are those of a new reporting entity and have been prepared on a basis
not comparable to prior periods.
Successor Company || Predecessor Company
------------------------------------------------------------------------------------------------
(in thousands, Fiscal Fiscal Fiscal Seventeen || Thirty-Five Fiscal
except per share amounts Year Year Year Weeks Ended || Weeks Ended Year
and number of stores) 1996 1995 1994 January 29, 1994 || October 2, 1993 1992
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> || <C> <C>
Net sales $1,878,477 $1,900,104 $1,872,021 $772,685 || $ 992,848 $1,750,266
Gross profit $ 486,124 $ 515,683 $ 531,800 $223,034 || $ 282,549 $ 500,454
||
Net earnings (loss) ||
applicable to common ||
shareholders before ||
extraordinary items $ (30,780)(1) $ (16,666)(2) $ 40,431(3) $ 36,235 || $ (9,747) $ 24,385
||
Net earnings (loss) ||
applicable to ||
common shareholders $ (35,058)(1) $ (16,666)(2) $ 40,431(3) $ 36,235 || $ 248,492 (4) $ 47,264
||
Fully-diluted earnings (loss) ||
per common share $ (3.39) $ (1.66) $ 2.73 $ 2.45 || $ 11.30 (5) $ 2.15(5)
Fully-diluted average shares ||
outstanding 10,336 10,029 14,832 14,794 || 21,982 21,982
||
FINANCIAL POSITION: ||
Total assets $ 900,353 $ 863,563 $1,009,801 $928,129 || $ 987,268 $ 945,673
Working capital $ 183,255 $ 147,090 $ 241,486 $171,440 || $ 301,980 $ 299,927
Liabilities subject to ||
compromise (6) $ - $ - $ - $ - || $ 775,169 $ 761,443
Long-term obligations $ 229,100 $ 185,169 $ 185,169 $160,000 || $ - $ -
Long-term obligations ||
under capital leases $ 120,539 $ 118,776 $ 124,508 $130,626 || $ 122,230 $ 133,457
Preferred stock $ 19,942 $ 24,636 $ 64,144 $100,000 || $ 33,143 $ 31,481
Common shareholders' ||
equity (deficit) $ 224,784 $ 254,663 $ 306,741 $230,235 || $(186,934) $ (183,172)
Number of stores operated ||
at period end 165 164 154 151 || 151 154
<FN>
(1) Includes a $33.7 million pretax charge ($20.7 million after tax, or $2.00 per fully-diluted share) related to the estimated cost
of impairment of long-lived assets and the closing of ten stores in January 1997. In addition, the net loss applicable to
common shareholders includes an extraordinary after tax loss of $4.3 million, or $0.41 per fully-diluted share, from early
extinguishments of debt.
(2) Includes a $45.5 million pretax charge ($32.5 million after tax, or $3.24 per fully-diluted share) incurred in connection with
the 1995 Change in Control (see Note 19 of Notes to Consolidated Financial Statements).
(3) Includes the following pretax items: $9.6 million of income related to a reversal of liabilities established in fresh-start
accounting, $2.2 million paid to holders of the Company's Senior Notes in connection with the Company's self-tender in March
1995, and a $4.5 million pension gain.
(4) Includes a $258.2 million after tax extraordinary gain on the discharge of prepetition debt.
(5) Fully-diluted earnings per share for the thirty-five weeks ended October 2, 1993 includes an extraordinary gain per common
share of $11.75 on the discharge of prepetition debt. Fully-diluted earnings per share for fiscal 1992 includes an
extraordinary credit per common share of $1.04 attributable to the realization of the benefit of tax loss carryforwards.
(6) On February 4, 1991, the Company, its former parent, Hills Department Stores, Inc., and the five principal subsidiaries of
the Company, filed petitions for relief under Chapter 11 of the United States Bankruptcy Code. As a result, the Company
reclassified certain current liabilities to Liabilities subject to compromise at February 3, 1991.
THE SELECTED FINANCIAL DATA SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
11
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
RESULTS OF OPERATIONS
FISCAL YEAR ENDED FEBRUARY 1, 1997 (FISCAL 1996) VERSUS
YEAR ENDED FEBRUARY 3, 1996 (FISCAL 1995)
Net sales decreased 1.1% compared with fiscal 1995 principally due to fiscal
1996 having 52 weeks compared with 53 weeks in fiscal 1995. Comparable store
sales, on an equivalent 52 week calendar basis, decreased 1.7%. In particular,
sales were weak in men's and children's apparel, and the home decor categories
of the business.
Cost of sales as a percentage of sales was 74.1% in fiscal 1996 compared with
72.9% in fiscal 1995. This margin decrease of 1.2% was due to a higher rate of
markdowns, particularly in the men's and girl's apparel, toys, and seasonal
categories. The decrease was partially offset by an improvement in inventory
shrinkage results.
Selling and administrative expenses, including depreciation and other occupancy
costs, as a percentage of sales was 23.3% in fiscal 1996 compared with 22.5% in
fiscal 1995. The 0.8% increase was largely due to the full year impact of
expenses associated with the mid-year opening of ten new stores in fiscal 1995
compared with one store that opened in fiscal 1996, combined with the decrease
in sales. Expenses per average store decreased by 3.1%.
Earnings before interest, taxes, depreciation, amortization, store closing
expenses, change in control costs, and other non-cash items (EBITDA) was $84.7
million in fiscal 1996 compared with $119.3 million in fiscal 1995.
During fiscal 1996, the Company recorded a $33.7 million charge for the
impairment of long-lived assets and store closings. See Note 15 of the Notes
to Consolidated Financial Statements.
Costs related to the 1995 Change in Control were $45.5 million. See Note 19 of
the Notes to Consolidated Financial Statements.
Interest expense was $53.6 million in fiscal 1996 compared with $47.7 million
in fiscal 1995. The $5.9 million increase was primarily due to the refinancing
of $160 million, 10.25% Senior Notes with $195 million, 12 1/2% Senior Notes.
This increase was partially offset by decreased interest related to bank
borrowings under the Company's working capital facilities due to lower average
borrowings and lower interest rates. See Financial Condition, Liquidity and
Capital Resources. Average direct borrowings under the revolving credit
facilities were $58.0 million for fiscal 1996 at an average interest rate of
8.4%, with peak borrowings of $142.8 million. In fiscal 1995, average
borrowings approximated $62.6 million at an average interest rate of 9.4%, with
peak borrowings at $188.0 million.
In fiscal 1996, the Company recorded a tax benefit of $14.0 million on a loss
before income taxes and extraordinary items of $44.8 million, an effective tax
rate of 31.3%. Of the total tax benefit, $13.0 million related to impairment
and store closing charges. The remaining $1.0 million tax benefit related to
the $11.1 million pretax loss before those charges, a 9.0% effective tax rate,
resulted from non-deductible goodwill amortization and certain expenses only
partially deductible for state income tax purposes.
12
<PAGE>
RESULTS OF OPERATIONS (CONTINUED)
FISCAL YEAR ENDED FEBRUARY 1, 1997 (FISCAL 1996) VERSUS
YEAR ENDED FEBRUARY 3, 1996 (FISCAL 1995) (CONTINUED)
In connection with the Senior Notes refinancing mentioned above and the
refinancing of the Company's working capital facility, the Company recognized
an extraordinary after-tax loss of $4.3 million. See Notes 5 and 6 of the Notes
to Consolidated Financial Statements.
FISCAL YEAR ENDED FEBRUARY 3, 1996 (FISCAL 1995) VERSUS
FISCAL YEAR ENDED JANUARY 28, 1995 (FISCAL 1994)
Net sales increased 1.5% compared with fiscal 1994. The improvement was
attributable to opening ten new stores and fiscal 1995 having 53 weeks compared
to 52 weeks in fiscal 1994. The extra week represented an increase in sales of
$17.6 million. Sales increases in hardlines categories, particularly in areas
associated with the home, all occasion and electronics, were partially offset
by a decrease in apparel sales. Comparable store sales, excluding the
fifty-third week, decreased 3.9%.
Cost of sales as a percentage of sales was 72.9% in fiscal 1995 compared with
71.6% in fiscal 1994. This margin decrease of 1.3% was due to a higher rate of
markdowns, particularly in the apparel categories, a shift in the mix of
business to lower margin hardlines categories, and a decrease in the purchase
markup percentage in the hardlines areas.
Selling and administrative expenses, including depreciation and other occupancy
costs, as a percentage of sales was 22.5% in fiscal 1995 and 21.9% in fiscal
1994. Savings in payroll and payroll related expenses as a percentage of sales
were offset by increased advertising costs in the Company's new markets and
higher operating costs associated with opening ten new stores. Fiscal 1994
expenses included the following unusual items: a $4.5 million gain from the
elimination of pension obligations and a credit due to a reversal of liabilities
established in "fresh-start" reporting totalling $9.6 million. These credits
were partially offset by $2.2 million paid to the holders of the Company's
Senior Notes in connection with the Company's repurchase of $75 million of
common stock. Selling and administrative expenses excluding these unusual
items, as a percentage of sales, was 22.6% in fiscal 1994.
EBITDA was $119.3 million in fiscal 1995 compared with $138.1 million in fiscal
1994. The $138.1 million represents first-in, first-out (FIFO) earnings before
interest, taxes, depreciation, amortization and the unusual items noted above.
Costs related to the 1995 Change in Control were $45.5 million. See Note
19 of the Notes to Consolidated Financial Statements.
Interest expense was $47.7 million in fiscal 1995 compared with $35.9 million
in fiscal 1994. The $11.8 million increase was primarily due to interest on
borrowings under the revolving credit facility (mainly caused by cash outflows
during fiscal 1995 for the repurchase of common stock for $75 million and for
$45.5 million of costs related to the change in control, and by the store
expansion program) and additional amortization of deferred financing costs
related to securing a new revolving credit facility. Average direct borrowings
under the revolving credit facility were $62.6 million for fiscal 1995 at an
average interest rate of 9.4%, with peak borrowings of $188.0 million. In
fiscal 1994, average borrowings approximated $88,000 at an average interest
rate of 9.25%, with peak borrowings at $8.0 million.
13
<PAGE>
RESULTS OF OPERATIONS (CONTINUED)
FISCAL YEAR ENDED FEBRUARY 3, 1996 (FISCAL 1995) VERSUS
FISCAL YEAR ENDED JANUARY 28, 1995 (FISCAL 1994) (CONTINUED)
In fiscal 1995, the Company recorded a tax expense of $3.2 million on a loss
before income taxes of $13.5 million. A tax benefit of $13.8 million, an
effective tax rate of 30.4%, was attributable to the $45.5 million of costs
related to change in control due to certain nondeductible costs. A tax expense
of $17.0 million, an effective tax rate of 53.2%, was attributable to all other
pretax income of $32.0 million as a result of nondeductible goodwill
amortization.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Certain statements contained in this document (in particular, the discussion of
liquidity) are forward-looking statements that involve a number of risks and
uncertainties. Among the factors that could cause actual results to differ
materially are the following: general economic conditions, consumer demand,
consumer preferences and weather patterns in the Great Lakes and Ohio Valley
regions of the United States; competitive factors, including continuing
pressure from pricing and promotional activities of major competitors; impact
of excess retail capacity and the availability of desirable store locations on
suitable terms; the availability, selection and purchasing of attractive
merchandise on favorable terms; import risks, including potential disruptions
and duties, tariffs and quotas on imported merchandise; acquisition and
divestment activities; and other factors that may be described in this document.
Effective September 30, 1996, the Company, through its wholly-owned subsidiary
Hills Department Store Company ("HDSC"), and C.R.H. International, Inc., a
wholly-owned subsidiary of HDSC, obtained a new $300 million secured revolving
credit facility (the "Facility"), replacing an existing facility. The Facility
was amended in March 1997. See Note 5 of the Notes to Consolidated Financial
Statements.
In April 1996, the Company issued $195 million of unsecured 12 1/2% Senior Notes
(the "New Senior Notes") due 2003. The Company subsequently redeemed or called
for redemption all of its $160 million of outstanding 10.25% Senior Notes due
2003. See Note 6 of the Notes to Consolidated Financial Statements.
The Company has significant commitments which require cash outflows for
operating and capital lease payments and financing obligations. These
commitments are expected to approximate $63.3 million for fiscal 1997.
14
<PAGE>
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
<TABLE>
A summary of cash flow information and financial position is presented
below (in thousands):
<CAPTION>
Fiscal Fiscal
1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C>
Cash and cash equivalents
at begining of period $ 22,898 $197,474
Net cash provided by (used for)
operating activities 47,519 ( 20,587)
Capital expenditures ( 32,858) ( 56,714)
Refinancing of Senior Notes 25,151 -
Capital lease and sale/leaseback financing 10,092 ( 6,121)
Cash distributions pursuant to the
Plan of Reorganization ( 2,682) ( 5,297)
Shares repurchased per self-tender offer - ( 75,000)
Deferred finance costs and other
financing activities ( 3,957) ( 10,857)
-------- --------
Cash and cash equivalents
at end of period $ 66,163 $ 22,898
======== ========
Working capital at end of period $183,255 $147,090
======== ========
</TABLE>
Net cash provided by operating activities for fiscal 1996 increased by $68.1
million compared with fiscal 1995. This increase in cash provided by operating
activities was primarily due to $45.5 million of costs in fiscal 1995 related
to the 1995 Change in Control.
Capital expenditures were $32.9 million for fiscal 1996 compared with $56.7
million for fiscal 1995, a $23.8 million decrease. This decrease was due to
the completion of the Company's chainwide store remodeling in fiscal 1995. In
addition, the prior year's use of cash reflected the impact of opening ten new
stores. During fiscal 1997, capital expenditures are expected to approximate
$30 million. The Company expects to open no new stores during fiscal 1997.
Fiscal 1997 investing activities are expected to include approximately
$20 million of deferred, intangible costs for software procurement, development
and installation costs.
Net cash provided by financing activities was $28.6 million for fiscal 1996
compared with a $97.3 million use of cash in the same period a year ago, a
$125.9 million increase. The increase was primarily due to $25.2 million in
net proceeds received from the issuance of long-term debt in excess of the debt
refinanced, $16.6 million received from fixture and equipment financings, and
the prior year payment of $75.0 million related to the Company's self-tender
offer.
15
<PAGE>
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
As a result of the Company's long-term financing activities during fiscal 1996
and the improvements in the Facility (see Note 5 of the Notes to Consolidated
Financial Statements), the Company has improved its liquidity compared with the
prior year. Excess credit availability under the Facility at February 1, 1997
was approximately $149.2 million compared with approximately $145.7 million at
February 3, 1996.
The Company believes that its credit arrangements, together with cash from
operations, will enable the Company to maintain the liquidity necessary to
finance its continuing operations, including its planned capital expenditures
and software procurement, and installation costs for fiscal 1997.
The terms of the Company's revolving credit facility and the New Senior Notes
limit the ability of the subsidiaries to pay dividends. Any or all of the
restrictions, limitations or contingencies under the Facility and the Senior
Note Indenture, as well as the Company's leverage, could adversely affect the
Company's ability to obtain additional financing in the future, to make
capital expenditures, to effect store expansions, to make acquisitions, to
take advantage of business opportunities that may arise, and to withstand
adverse general economic and retail industry conditions and increased
competitive pressures. Retail suppliers and their factors monitor carefully
the financial performance of retail companies such as the Company, and may
reduce credit availability quickly upon learning of actual or perceived
deterioration in the financial condition or results of operations of a retail
company.
OTHER MATTERS
SEASONALITY
The Company's business is highly seasonal due to increased consumer buying for
back-to-school needs and Christmas. The second half of each year provides the
major portion of the Company's annual sales and operating earnings with
operating earnings particularly concentrated in the Christmas selling season.
16
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
See accompanying page F-1 through F-27.
<TABLE>
Information called for by this item can be found at the pages listed in the
following index.
INDEX TO FINANCIAL STATEMENTS
<CAPTION>
Hills Stores Company and Subsidiaries Page
<S> <C>
Reports of Independent Auditors ...................................... F-1
Consolidated Balance Sheets .......................................... F-3
Consolidated Statements of Operations ................................ F-4
Consolidated Statements of Cash Flows ................................ F-5
Consolidated Statements of Common Shareholders' Equity ............... F-6
Notes to Consolidated Financial Statements ........................... F-7
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
-----------------------------------------------------------
AND FINANCIAL DISCLOSURE
------------------------
On November 14, 1995, the Company engaged Deloitte & Touche LLP ("Deloitte &
Touche") as its independent auditors, following the resignation of Coopers &
Lybrand L.L.P. ("Coopers & Lybrand") as independent auditors for the Company
on November 8, 1995.
None of the reports of Coopers & Lybrand on the financial statements of the
Company for either of the two fiscal years preceding such resignation contained
an adverse opinion or a disclaimer of opinion, or was qualified or modified as
to uncertainty, audit scope or accounting principles. During the Company's two
most recent fiscal years and the subsequent interim period preceding the resig-
nation of Coopers & Lybrand, there were no disagreement(s) with Coopers &
Lybrand on any matter of accounting principles or practices, financial statement
disclosure or auditing scope or procedures, which disagreement(s), if not re-
solved to the satisfaction of Coopers & Lybrand would have caused it to make
reference to the subject matter of the disagreement(s) in connection with its
report. None of the reportable events listed in Item 304(a)(1)(v) of
Regulation S-K occurred with respect to the Company during the Registrant's
two most recent fiscal years and the subsequent interim period preceding the
resignation of Coopers & Lybrand.
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 New Senior Notes, 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 Dickstien Partners Inc. who own shares of the Company's Common
17
<PAGE>
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.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
Incorporated by reference from the item entitled "Information About Nominees"
in the proxy statement dated May 5, 1997 for the annual meeting of stockholders
to be held June 17, 1997, except for information regarding executive officers
of the Company, which information is furnished in a separate item captioned
"Executive Officers of the Registrant" in Part I of this report.
ITEM 11. EXECUTIVE COMPENSATION
----------------------
Incorporated by reference from the item entitled "Executive Compensation" in
the proxy statement dated May 5, 1997 for the annual meeting of stockholders
to be held June 17, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
Incorporated by reference from the item entitled "Beneficial Ownership" in the
proxy statement dated May 5, 1997 for the annual meeting of stockholders to be
held June 17, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
Incorporated by reference from the items entitled "Information About Nominees,"
"Executive Compensation," "Employment Contracts," and "Compensation of
Directors" in the proxy statement dated May 5, 1997 for the annual meeting of
stockholders to be held June 17, 1997.
18
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
----------------------------------------------------------------
<TABLE>
(a) Documents filed as part of this report:
<S> <C> <C>
1. Financial statements
Reports of Independent Auditors F-1
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Cash Flows F-5
Consolidated Statements of Common Shareholders' Equity F-6
Notes to Consolidated Financial Statements F-7
2. Financial statement schedules
I Reports of Independent Auditors S-1
II Valuation and Qualifying Accounts S-3
</TABLE>
Schedules other than these listed above are omitted because they are not
required, not applicable, or the information is otherwise included in the
financial statements.
3. Certain of the exhibits listed hereunder have previously been filed with
the Commission as exhibits to certain registration statements and periodic
reports set forth in the footnotes following this exhibit list and are hereby
incorporated by reference pursuant to Rule 411 promulgated under the Securities
Act and Rule 24 of the Commission's Rules of Practice. The location of each
document, so incorporated by reference, is indicated by footnote (the number in
parentheses).
3.1(1) Amended and Restated Certificate of Incorporation of the Company, as
amended.
3.2(2) Amended and Restated By-Laws of the Company.
4.1(3) Certificate of the Voting Powers, Preferences and other designated
attributes of the Series A Convertible Preferred Stock of the
Company.
4.2(4) Form of Series 1993 Stock Right.
4.3(3) Indenture dated as of October 1, 1993 relating to the 10.25% Senior
Notes due 2003 of the Company (the "Old Senior Note Indenture").
4.4(5) First Supplemental Indenture dated as of January 1, 1995 to the Old
Senior Note Indenture.
4.5(5) Second Supplemental Indenture dated as of August 1, 1995 to the Old
Senior Note Indenture.
4.6(6) Third Supplemental Indenture dated as of January 15, 1996 to the Old
Senior Note Indenture.
4.7(7) Series 1993 Warrant Agreement dated October 4, 1993 between the
Company and Chemical Bank, as Warrant Agent.
19
<PAGE>
4.8(8) Rights Agreement dated as of August 16, 1994 (the "Rights Agreement)
between the Company and Chemical Bank, as Rights Agent.
4.9(8) Form of Certificate of the Voting Powers, Preferences and other
designated attributes of Series B Participating Cumulative Preferred
Stock of the Company (which is attached as Exhibit A to the Rights
Agreement incorporated by reference as Exhibit 4.8 hereto).
4.10(8) Form of Right Certificate (which is attached as Exhibit B to the
Rights Agreement incorporated by reference as Exhibit 4.8 hereto).
4.11(9) Amendment dated as of October 18, 1995 to the Rights Agreement.
4.12(10) Indenture dated as of April 19, 1996 relating to the 12 1/2% Senior
Notes due 2003, Series B, of the Company.
10.1(11) Loan and Security Agreement dated as of September 30, 1996 among the
Financial Institutions named therein as the Lenders, BankAmerica
Business Credit, Inc. as the Agent, Hills Department Store Company
and C.R.H. International, Inc. as the Borrowers, and the other Loan
Parties named therein.
10.2(12) First Amendment to the Loan and Security Agreement dated as of
February 28, 1997.
10.3(13) * Employment Agreement made as of February 7, 1996 with Gregory K.
Raven.
10.4 * Consulting Agreement made as of February 8, 1997 with Chaim Y.
Edelstein.
10.5(5) * Employment Agreement made as of July 6, 1995 with William K. Friend.
10.6(14) * Employment Agreement made as of November 19, 1996 with Michael R.
Hamilton.
10.7 * Separation Agreement dated February 7, 1996 between the Company and
E. Jackson Smailes.
10.8 * Confidential Separation Agreement, Voluntary Release and Notice
dated March 6, 1997 between the Company and James E. Feldt.
10.9(4) * 1993 Incentive and Nonqualified Stock Option Plan, as amended.
10.10(13)* 1996 Directors Stock Option Plan.
11.1 Computation of earnings per share.
16(15) Letter re: change in certifying accountant.
21 Subsidiaries.
23.1 Consent of Deloitte & Touche LLP.
23.2 Consent of Coopers & Lybrand L.L.P.
24 Powers of Attorney of directors and officers of the Company.
20
<PAGE>
27 Financial Data Schedule.
__________________________
* Executive Compensation Plans and Arrangements.
1. Incorporated by reference from the Annual Report on Form 10-K of the
Company for the fiscal year ended January 28, 1995.
2. Incorporated by reference from the Report on Form 8-K of the Company
dated January 18, 1996.
3. Incorporated by reference from the Form 8-A of the Company filed on
October 5, 1993.
4. Incorporated by reference from the Annual Report on Form 10-K of the
Company for the fiscal year ended January 29, 1994.
5. Incorporated by reference from the Report on Form 10-Q of the Company
for the quarter ended July 29, 1995.
6. Incorporated by reference from the Report on Form 8-K of the Company
dated January 15, 1996.
7. Incorporated by reference from the Report on Form 8-K of the Company
dated October 4, 1993.
8. Incorporated by reference from the Report on Form 8-K of the Company
dated August 16, 1994.
9. Incorporated by reference from the Report on Form 10-Q of the Company
for the quarter ended October 28, 1995.
10. Incorporated by reference from the Report on Form 10-Q of the Company
for the quarter ended May 4, 1996.
11. Incorporated by reference from the Report on Form 8-K of the Company
dated October 1, 1996.
12. Incorporated by reference from the Report on Form 8-K of the Company
dated February 28, 1997.
13. Incorporated by reference from the Annual Report on Form 10-K of the
Company for the fiscal year ended February 3, 1996.
14. Incorporated by reference from the Report on Form 10-Q of the Company
for the quarter ended November 2, 1996.
15. Incorporated by reference from the Report on Form 8-K of the Company
dated November 8, 1995.
21
<PAGE>
(b) Reports on Form 8-K:
1. A report on Form 8-K dated November 21, 1996 was filed by the Company
concerning the third quarter financial press release issued on that date.
2. A report on Form 8-K dated January 13, 1997 was filed by the Company
concerning planned store closings.
3. A report on Form 8-K dated February 28, 1997 was filed by the Company
concerning the First Amendment to the Loan and Security Agreement.
4. A report on Form 8-K dated March 12, 1997 was filed by the Company con-
cerning the fourth quarter and year-end press release issued on that date.
22
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the Town of Canton,
Commonwealth of Massachusetts, on April 21, 1997.
HILLS STORES COMPANY
By: /s/William K. Friend
-----------------------
William K. Friend
Vice President - Secretary
<TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<S> <C> <C>
* Chairman of the Board of the
- ------------------ Company and Hills Department
Chaim Y. Edelstein Store Company April 21, 1997
* Director, President and Chief
- ------------------ Executive Officer of the Company
Gregory K. Raven and Hills Department Store Company
(Principal Executive Officer) April 21, 1997
* Director of the Company and
- ------------------ Hills Department Store Company April 21, 1997
Mark B. Dickstein
* Director of the Company and
- ------------------ Hills Department Store Company April 21, 1997
Stanton J. Bluestone
* Director of the Company and
- ------------------ Hills Department Store Company April 21, 1997
Samuel L. Katz
* Director of the Company and
- ------------------ Hills Department Store Company April 21, 1997
John W. Burden
* Director of the Company and
- ------------------ Hills Department Store Company April 21, 1997
Alan S. Cooper
Executive Vice President-Chief
* Financial Officer of the Company
- ------------------ and Hills Department Store Company
C. Scott Litten (Principal Financial Officer) April 21, 1997
* Vice President-Controller of the
- ------------------ Company and Hills Department Store
Brian J. Sheehan Company (Principal Accounting Officer) April 21, 1997
*By: /s/ William K. Friend
---------------------
William K. Friend
Attorney-In-Fact
</TABLE>
23
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Hills Stores Company and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Hills Stores
Company and Subsidiaries as of February 1, 1997 and February 3, 1996 and the
related consolidated statements of operations, common shareholders' equity,
and cash flows for the years then ended (the "1996 and 1995 consolidated
financial statements"). These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provides a reasonable basis
for our opinion.
In our opinion, the 1996 and 1995 consolidated financial statements present
fairly, in all material respects, the financial position of the Company as of
February 1, 1997 and February 3, 1996 and the results of its operations and its
cash flows for the years then ended in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
March 11, 1997
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Directors
of Hills Stores Company and Subsidiaries:
We have audited the accompanying consolidated statement of operations, cash
flows and common shareholders' equity of Hills Stores Company and Subsidiaries
for the year ended January 28, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated results of operations and cash flows
of Hills Stores Company and Subsidiaries for the year ended January 28, 1995 in
conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
March 10, 1995
F-2
<PAGE>
<TABLE>
HILLS STORES COMPANY AND SUBSIDIARIES
____________________________________________________________________________________________
CONSOLIDATED BALANCE SHEETS
<CAPTION>
February 1, February 3,
(dollars in thousands) 1997 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 66,163 $ 22,898
Accounts receivable, less allowance
for doubtful accounts of approximately
$4,500 and $3,500 24,346 25,187
Inventories 341,477 331,697
Deferred tax asset, net (Note 16) 46,491 34,011
Other current assets 5,115 5,352
-------- --------
Total current assets 483,592 419,145
Property and equipment, net (Note 2) 173,701 190,893
Property under capital leases, net (Note 7) 112,201 113,785
Beneficial lease rights, net (Note 1) 6,848 8,247
Deferred tax asset, net (Note 16) 8,085 8,233
Reorganization value in excess of amounts allocable
to identifiable assets, net (Notes 1 and 3) 97,508 107,514
Other assets, net (Note 1) 18,418 15,746
-------- --------
$900,353 $863,563
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt (Note 7) $ 7,255 $ 5,732
Accounts payable, trade 111,064 87,471
Other accounts payable and accrued expenses (Note 4) 182,018 178,852
-------- --------
Total current liabilities 300,337 272,055
Senior notes (Note 6) 195,000 160,000
Obligations under capital leases (Note 7) 120,539 118,776
Financing obligations - sale/leaseback (Note 7) 34,100 25,169
Other liabilities 5,651 8,264
Commitments and contingencies (Note 18) - -
Preferred stock, at mandatory redemption value (Note 9) 19,942 24,636
Common shareholders' equity (Notes 10 and 11):
Common stock, 50,000,000 shares of $0.01 par value
authorized, 10,337,761 and 9,982,842 shares issued and
outstanding 103 100
Additional paid-in capital 215,537 209,563
Retained earnings 9,942 45,000
Unearned compensation (Note 11) ( 798) -
-------- --------
Total common shareholders' equity 224,784 254,663
-------- --------
$900,353 $863,563
======== ========
</TABLE>
See Notes to Consolidated Financial Statements
F-3
<PAGE>
<TABLE>
HILLS STORES COMPANY AND SUBSIDIARIES
________________________________________________________________________________________
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
February 1, February 3, January 28,
(in thousands, except per 1997 1996 1995
share amounts) (52 Weeks) (53 Weeks) (52 Weeks)
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $1,878,477 $1,900,104 $1,872,021
Cost of sales 1,392,353 1,384,421 1,340,221
Selling and administrative expenses
(Notes 6 and 8) 437,593 428,212 410,661
Amortization of reorganization
value in excess of amounts
allocable to identifiable assets 6,050 7,755 8,986
Impairment of long-lived assets and
store closings (Note 15) 33,706 - -
Costs related to change
in control (Note 19) - 45,529 -
---------- ---------- ----------
Operating earnings 8,775 34,187 112,153
Interest expense, net (Note 1) 53,555 47,666 35,869
---------- ---------- ----------
( 44,780) ( 13,479) 76,284
Income tax benefit
(provision) (Note 16) 14,000 ( 3,187) ( 35,853)
---------- ---------- ----------
( 30,780) ( 16,666) 40,431
Extraordinary loss on early
extinguishment of debt, net 4,278 - -
---------- ---------- ----------
Net earnings (loss) ($ 35,058) ($ 16,666) $ 40,431
========== ========== ==========
Primary earnings (loss) per
common share (Note 17):
Earnings (loss) before
extraordinary loss ($ 3.00) ($ 1.70) $ 2.87
Extraordinary loss ( 0.42) - -
---------- ---------- ----------
Net earnings (loss) ($ 3.42) ($ 1.70) $ 2.87
========== ========== ==========
Fully-diluted earnings (loss)
per common share (Note 17):
Earnings (loss) before
extraordinary loss ($ 2.98) ($ 1.66) $ 2.73
Extraordinary loss ( 0.41) - -
---------- ---------- ----------
Net earnings (loss) ($ 3.39) ($ 1.66) $ 2.73
========== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements
F-4
<PAGE>
<TABLE>
HILLS STORES COMPANY AND SUBSIDIARIES
________________________________________________________________________________________
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
February 1, February 3, January 28,
1997 1996 1995
(in thousands) (52 Weeks) (53 Weeks) (52 Weeks)
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) ($ 35,058) ($ 16,666) $ 40,431
Adjustments to reconcile net earnings
(loss) to net cash provided by (used for)
operating activities:
Depreciation and amortization 35,130 31,784 26,801
Amortization of deferred financing costs 5,942 4,847 4,649
Extraordinary loss on extinguishment of debt 4,278 - -
Amortization of reorganization value in
excess of amounts allocable to
identifiable assets 6,050 7,755 8,986
Gain on termination of pension plan - - ( 4,479)
Loss on disposal of fixed assets 998 54 -
Impairment of long-lived assets
and store closings 28,958 - -
Decrease in deferred tax assets
recognized through a reduction in
reorganization value in excess of
amounts allocable to identifiable assets 2,592 9,496 22,977
Deferred income taxes ( 12,332) ( 11,260) ( 30,984)
Decrease (increase) in accounts receivable
and other current assets 1,078 ( 2,325) ( 199)
Decrease (increase) in inventories ( 15,080) ( 17,846) 12,614
Increase (decrease) in accounts payable
and other accrued expenses 25,293 ( 24,464) 39,959
Other, net ( 330) ( 1,962) 772
-------- -------- --------
Net cash provided by (used for)
operating activities 47,519 ( 20,587) 121,527
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ( 32,858) ( 56,714) ( 38,458)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of
12 1/2% Senior Notes 195,000 - -
Fees incurred with the issuance of
12 1/2% Senior Notes ( 8,100) - -
Redemption of 10.25% Senior Notes ( 160,000) - -
Payment of premium on debt redemption ( 1,749) - -
Principal payments under capital
lease obligations ( 6,467) ( 6,121) ( 5,529)
Proceeds from sale/leaseback financing 16,559 - 25,169
Cash distributions pursuant to the Plan
of Reorganization ( 2,682) ( 5,297) ( 14,419)
Shares repurchased per self-tender offer - ( 75,000) -
Deferred finance costs and
other financing activities ( 3,957) ( 10,857) ( 1,373)
-------- -------- --------
Net cash provided by (used for)
financing activities 28,604 ( 97,275) 3,848
-------- -------- --------
Net increase (decrease) in cash and
cash equivalents 43,265 ( 174,576) 86,917
Cash and cash equivalents:
Beginning of period 22,898 197,474 110,557
-------- -------- --------
End of period $ 66,163 $ 22,898 $197,474
======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements
F-5
<PAGE>
<TABLE>
HILLS STORES COMPANY AND SUBSIDIARIES
__________________________________________________________________________________________________________________
CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY
<CAPTION>
Common Stock Additional Common
------------------ Paid-in Retained Unearned Shareholders'
(dollars in thousands) Shares Amount Capital Earnings Compensation Equity
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 29, 1994 9,000,000 $ 90 $193,910 $36,235 $ - $230,235
Conversion of Preferred Stock 1,792,805 18 35,838 - - 35,856
Exercise of stock options 11,979 - 219 - - 219
Net earnings - - - 40,431 - 40,431
--------------------------------------------------------------------------
Balance at January 28, 1995 10,804,784 108 229,967 76,666 - 306,741
Retirement of Common Stock (Note 20) ( 3,000,000) ( 30) ( 59,970) ( 15,000) - ( 75,000)
Conversion of Preferred Stock 1,975,400 20 39,488 - - 39,508
Exercise of stock options
and warrants 4,387 - 80 - - 80
Exchange for Stock Rights (Note 12) 198,271 2 ( 2) - - -
Net loss - - - ( 16,666) - ( 16,666)
--------------------------------------------------------------------------
Balance at February 3, 1996 9,982,842 100 209,563 45,000 - 254,663
Conversion of Preferred Stock 234,674 2 4,692 - - 4,694
Restricted stock grants 120,000 1 1,202 - (1,203) -
Amortization of restricted
stock grants - - - - 405 405
Other 245 - 7 - - 7
Issued stock options (Note 11) - - 73 - - 73
Net loss - - - ( 35,058) - ( 35,058)
--------------------------------------------------------------------------
Balance at February 1, 1997 10,337,761 $103 $215,537 $ 9,942 ($ 798) $224,784
==========================================================================
</TABLE>
See Notes to Consolidated Financial Statements
F-6
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
_______________________________________________________________________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
BASIS OF REPORTING
During fiscal 1996, the Company operated, through its wholly-owned subsidiary
Hills Department Store Company ("HDSC"), a chain of 165 discount department
stores located primarily in the Great Lakes and Ohio Valley regions of the
United States. The consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All significant intercompany
transactions and balances have been eliminated. Certain prior year amounts
were reclassified to conform to the current year presentation. The Company's
fiscal year ends on the Saturday closest to January 31. Fiscal 1995 was a
fifty-three week year, fiscal years 1996 and 1994 were fifty-two week years.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash and highly liquid investments with
maturities of three months or less from the date of purchase and whose cost
approximates market value due to the short maturity of the investments.
Interest income of $1.3 million, $1.8 million and $2.8 million was included
in Interest expense, net for fiscal 1996, 1995 and 1994, respectively.
INVENTORIES
Inventories are valued using the retail method on the lower of last-in,
first-out (LIFO) cost or market basis. LIFO cost at February 1, 1997 and
February 3, 1996 exceeded the cost of inventory on a first-in, first-out
basis; accordingly, there has been no LIFO charge.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization are provided on a straight-line basis over the
estimated useful lives of the related assets, which is 27 1/2 years for
buildings and range from five to eight years for fixtures and equipment.
Amortization of leasehold improvements is provided on a straight-line basis
over the shorter of the lease term, considering renewal options that are likely
to be exercised, or the estimated useful life of the related asset. Leasehold
improvements are amortized principally over a 15 year period.
DEFERRED FINANCING COSTS
Net deferred financing costs of $11.4 million at February 1, 1997 and $11.1
million at February 3, 1996 were included in other assets and are being
amortized on a straight-line basis over the estimated term of the related debt.
Accumulated amortization of deferred financing costs was $1.7 million at
February 1, 1997 and $2.8 million at February 3, 1996.
INTANGIBLE ASSETS
Beneficial lease rights are amortized using the straight-line method over the
terms of the related leases. Accumulated amortization of beneficial lease
rights was $2.5 million at February 1, 1997 and $1.9 million at February 3,
1996.
F-7
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
_______________________________________________________________________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
------------------------------------------------------
INTANGIBLE ASSETS (CONTINUED)
Reorganization value in excess of amounts allocable to identifiable assets
("Reorganization Value") is being amortized over twenty years on a straight-
line basis. Accumulated amortization was $26.2 million at February 1, 1997
and $20.1 million at February 3, 1996 (See Notes 3 and 16).
PREOPENING COSTS
Preopening costs consist of direct costs of opening a store and are charged to
operations within the fiscal year that a new store opens.
INTEREST CAPITALIZATION
The Company capitalizes interest incurred in connection with the construction of
new stores and other major assets produced for the Company's own use. In fiscal
1995, the Company capitalized $452,000 of such interest. No interest was
capitalized during fiscal 1996 and 1994.
USE OF MANAGEMENT'S ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Significant estimates used in preparation of the consolidated financial
statements include income tax liabilities (including those associated with the
Company's emergence from bankruptcy), self-insurance reserves for worker's
compensation and general liabilities, and the estimated useful life of
intangible assets.
F-8
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
_______________________________________________________________________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. PROPERTY AND EQUIPMENT
----------------------
<TABLE>
The components of property and equipment are listed below (in thousands):
<CAPTION>
February 1, February 3,
1997 1996
------------ -----------
<S> <C> <C>
Fixtures and equipment $152,731 $156,658
Leasehold improvements 56,802 50,899
Buildings 16,192 17,292
Land 3,430 3,430
Improvements in progress 3,633 2,919
-------- --------
232,788 231,198
Accumulated depreciation and amortization ( 59,087) ( 40,305)
-------- --------
$173,701 $190,893
======== ========
</TABLE>
3. REORGANIZATION VALUE IN EXCESS OF AMOUNTS ALLOCABLE TO IDENTIFIABLE ASSETS
--------------------------------------------------------------------------
<TABLE>
The activity for Reorganization Value is presented below (in thousands):
<CAPTION>
February 1, February 3,
1997 1996
------------ -----------
<S> <C> <C>
Balance at beginning of period $107,514 $144,765
Amortization ( 6,050) ( 7,755)
Tax benefit applied to reduce
Reorganization Value ( 2,592) ( 9,496)
Impairment of long-lived assets and
store closings ( 1,364) -
Reversal of liabilities established
in fresh-start - ( 20,000)
-------- --------
Balance at end of period $ 97,508 $107,514
======== ========
</TABLE>
In the fourth quarter of fiscal 1995, the Company determined that $20.0 million
of liabilities established in fresh-start accounting for the purpose of
relocating certain operations and facilities were no longer required, and,
accordingly, these liabilities were reduced with a corresponding reduction in
Reorganization Value.
F-9
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
_______________________________________________________________________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES
-------------------------------------------
<TABLE>
Significant components of other accounts payable and accrued expenses are
presented below (in thousands):
<CAPTION>
February 1, February 3,
1997 1996
----------- -----------
<S> <C> <C>
Accrued payroll and related costs $ 17,327 $ 15,289
Self-insurance accruals 30,884 28,083
Store closing accruals 11,532 -
Accrued Chapter 11 and related
reorganization costs 9,784 11,316
Accrued distribution payable pursuant
to the Plan of Reorganization 2,939 7,672
Other 109,552 116,492
-------- --------
$182,018 $178,852
======== ========
</TABLE>
5. REVOLVING CREDIT FACILITY
-------------------------
Effective September 30, 1996, the Company, through its wholly-owned subsidiary
Hills Department Store Company ("HDSC"), and C.R.H. International, Inc., a
wholly-owned subsidiary of HDSC (collectively referred to as the "Borrowers"),
obtained a new $300 million secured revolving credit facility (the "Facility").
This Facility replaced an existing facility. Within the Facility, $200 million
is available to secure letters of credit. Borrowings under the Facility are
limited by a borrowing base, as defined, and bear interest, at the option of
the Borrowers, at either of (1) the Bank of America's "reference rate" plus a
margin ranging from 0% to .75% or (2) LIBOR plus a margin ranging from 1.5% to
2.5% (2.25% at February 1, 1997), determined quarterly by the Company's excess
cash flow. The Borrowers must pay commitment fees at an annual rate of 3/8% on
the average daily unused portion of the commitment. The Borrowers must also pay
letter of credit fees on the average undrawn amount at an annual rate ranging
from 1.5% to 2.25%, determined quarterly by the Company's excess cash flow. The
Facility is secured by a pledge of all of the capital stock of the Borrowers and
their subsidiaries (the "Subsidiaries") and a security interest in tangible and
intangible assets of the Company, the Borrowers and the Subsidiaries, other than
certain fixtures and equipment and real estate. The Facility is guaranteed by
the Company and the Subsidiaries. During March 1997, the Agreement was amended
to extend the maturity date from September 30, 1999 to January 31, 2000 and to
modify certain financial covenants.
As amended in March 1997, the financial covenants under the Loan and Security
Agreement (the "Agreement") require that the Company maintain levels of net
worth and cash flow in excess of certain defined or computed amounts. The
Agreement also contains, among other restrictions, provisions limiting to
varying degrees: business combinations, the issuance of certain kinds of
additional debt and the repurchase and prepayment of debt. Under the Agreement,
HDSC is permitted to make all transfers of funds to the parent company as
necessary for the parent company to service its senior note interest obligations
and to otherwise conduct its activities as a holding company; however, such
transfer can not be made for purposes other than in the normal course of
F-10
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
_______________________________________________________________________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. REVOLVING CREDIT FACILITY (CONTINUED)
-------------------------------------
business. The Agreement prohibits the payment of dividends on the Company's
Common Stock. Net assets of HDSC and its subsidiaries at February 1, 1997
totaled $437 million. In addition, the Facility requires the outstanding
principal balance of loans to be zero for at least thirty consecutive days
during the period from December 1 of each year to March 31 of the next year.
In connection with this transaction, the Company recognized an extraordinary
after-tax loss for early extinguishment of debt of $2.3 million ($3.8 million
pretax) from the write-off of deferred financing costs related to the prior
credit facility. Front-end fees in connection with the Facility were $2.9
million and will be amortized over the life of the Facility.
At February 1, 1997, the Company was in compliance with all covenants and
restrictions, had maintained a Clean-Up Period of at least thirty consecutive
days, had no direct borrowings under the Facility, and had outstanding letters
of credit totalling $36.8 million.
6. SENIOR NOTES
------------
On April 19, 1996 the Company issued $195 million of unsecured 12 1/2% Senior
Notes (the "New Senior Notes") due 2003. The New Senior Notes are noncallable,
unconditionally guaranteed by all the subsidiaries of the Company, with interest
payable semiannually. The subsidiary guarantees are subordinated to bank debt.
The New Senior Notes contain covenants regarding limitations on debt incurrence
and the issuance of preferred stock. Separate financial statements of the
Company's subsidiary guarantors have not been provided because (1) the
subsidiary guarantors constitute all of the Company's direct and indirect
subsidiaries, (2) they have fully and unconditionally guaranteed the New Senior
Notes on a joint and several basis, (3) their aggregate assets, liabilities,
earnings and equity are substantially equivalent to those of the Company on a
consolidated basis, and (4) separate financial statements are not deemed to be
material to investors. Additionally, both the terms of the Company's revolving
credit facility and the New Senior Notes limit the ability of the subsidiaries
to pay dividends (see Note 5).
In connection with the sale of the New Senior Notes, the Company offered to
redeem all of its outstanding 10.25% Senior Notes due 2003 (the "Old Senior
Notes") at a redemption price equal to 101% of principal, plus accrued interest.
Pursuant to this offer, the Company subsequently redeemed approximately $155
million of its approximately $157.5 million of outstanding Old Senior Notes.
The Company later called for redemption the approximately $2.5 million of
remaining outstanding Old Senior Notes at the indenture specified price of 104%
of principal plus accrued interest. In addition, the Company deposited, in
trust, funds sufficient to redeem, upon issuance, approximately $2.5 million of
Old Senior Notes yet to be issued under the terms of the Company's 1993 Plan
of Reorganization (the "POR"). As a result of these transactions, the Company
recognized an extraordinary after-tax loss for early extinguishment of debt of
$2.0 million ($3.5 million pretax). The extraordinary loss included the
redemption premiums and the write-off of the related deferred financing costs.
The estimated fair value of the New Senior Notes was $143.8 million at
F-11
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
_______________________________________________________________________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. SENIOR NOTES (CONTINUED)
-----------------------
February 1, 1997. The estimated fair value of the Old Senior Notes was $152.8
million at February 3, 1996. These values were based on quoted market prices
in effect at those dates.
In the fourth quarter of fiscal 1994, the Company determined that due to
changing market conditions $9.6 million of liabilities included in "Other
accounts payable and accrued expenses" related to a potential refinancing of
the Senior Notes were no longer required, and in accordance with AICPA Practice
Bulletin 11: "Accounting for Preconfirmation Contingencies in Fresh-Start
Reporting," these liabilities were reversed and included in selling and
administrative expenses.
7. LEASE COMMITMENTS
-----------------
The Company's operations are conducted predominantly in leased properties which
consist principally of retail outlets. Leases are generally for periods between
twenty to thirty years plus renewal options and generally include fixed rentals
and rentals based on sales in excess of predetermined levels.
<TABLE>
The composition of property under capital leases, net of accumulated
amortization, is shown below (in thousands):
<CAPTION>
February 1, February 3,
1997 1996
----------- -----------
<S> <C> <C>
Retail outlets $138,094 $131,408
Other 982 6,476
-------- --------
139,076 137,884
Accumulated amortization ( 26,875) ( 24,099)
-------- --------
Property under capital leases, net $112,201 $113,785
======== ========
</TABLE>
<TABLE>
Consolidated rental expense under operating leases and rental expense based on
sales in excess of predetermined levels under capital leases are presented
below (in thousands):
<CAPTION>
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
February 1, February 3, January 28,
1997 1996 1995
---------------------------------------------
<S> <C> <C> <C>
Capital leases:
Rental based on sales $ 801 $ 1,251 $ 1,577
Operating leases:
Minimum facility rentals 29,125 26,133 23,519
Equipment and other rentals 14,647 17,706 17,757
Rental based on sales 1,511 1,244 1,404
------- ------- -------
Consolidated rental expense $46,084 $46,334 $44,257
======= ======= =======
</TABLE>
F-12
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
_______________________________________________________________________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. LEASE COMMITMENTS (CONTINUED)
----------------------------
During 1996 and 1994, the Company obtained $16.6 million and $25.2 million,
respectively, of financing for certain of its real property and equipment
through sale/leaseback arrangements. The related property for those
transactions which were accounted for as financings, under which the property
remains on the Company's books and continues to be depreciated, is included in
Property and equipment and has a net book value of $64.8 million at February 1,
1997. The leases, which have terms from 42 months to ten years, include options
to purchase some or all of the assets either at the end of the initial lease
term or renewal periods at an amount not greater than the then current fair
market value of the properties.
<TABLE>
Minimum future lease commitments under noncancelable leases in effect at
February 1, 1997 are listed below (in thousands):
<CAPTION>
Capital Financing Operating
Fiscal years: Leases Obligations Leases Total
---------------------------------------------
<S> <C> <C> <C> <C>
1997 $ 19,916 $ 6,692 $ 36,729 $ 63,337
1998 19,488 8,369 31,347 59,204
1999 19,085 7,699 29,279 56,063
2000 17,398 7,789 27,593 52,780
2001 16,942 6,257 24,743 47,942
Thereafter 168,380 22,068 133,332 323,780
---------------------------------------------
Minimum rental commitments 261,209 58,874 $283,023 $603,106
===================
Less amount representing
interest 134,434 23,755
-------- -------
Present value of net minimum
lease payments 126,775 35,119
Current portion ( 6,236) ( 1,019)
-------- -------
$120,539 $34,100
======== =======
</TABLE>
8. EMPLOYEE BENEFITS
-----------------
PENSION PLANS
The Company's Board of Directors authorized the termination, effective April 30,
1994, of the Company's pension plan. In connection with the termination of the
pension plan, a participant's vested benefits were calculated based on all
credited service, pension earnings, and contributions up to April 30, 1994.
F-13
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
_______________________________________________________________________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. EMPLOYEE BENEFITS (CONTINUED)
-----------------------------
PENSION PLANS (CONTINUED)
There was no asset reversion to the Company as plan assets in excess of benefit
obligations, as adjusted for the termination of the plan, were allocated to
participants. The settlement of the vested benefit obligation by the purchase
of nonparticipating annuity contracts for, or the optional lump sum rollover to
the 401(k) plan account for, each covered employee was completed in fiscal 1995.
In the first quarter of fiscal 1994, the Company recorded a $4.5 million gain,
which was included in selling and administrative expenses, related to the
curtailment and settlement of the pension plan and the elimination of the
related pension obligation.
Net pension expense included in the results of operations was $830,000 for
fiscal 1994. The discount rate used in determining the actuarial present value
of projected benefit obligations was 7.0% and the expected long-term rate of
return on plan assets used in determining net pension expense was 8.0%.
In fiscal 1994, the Company adopted an expanded defined contribution 401(k)
savings plan (the "401(k)") for employees meeting certain employment conditions.
In addition to permitting employee contributions, the 401(k) plan provides for
company matching contributions. Company matching contributions were $3.6
million in fiscal 1996, $3.9 million in fiscal 1995 and $3.0 million in fiscal
1994.
OTHER
The Company accounts for postretirement benefits (such as health care) in
accordance with Statement of Financial Accounting Standards No. 106: "Employers'
Accounting for Postretirement Benefits Other Than Pensions" ("FAS 106"). This
statement requires accrual of postretirement benefits during the years an
employee provides services. Under FAS 106, the Company recognized expenses of
$0.2 million in fiscal 1996, $0.2 million in fiscal 1995 and $0.4 million in
fiscal 1994. The Company funds benefit costs principally on a pay-as-you-go
basis. The status of the plan is as follows (in thousands):
<TABLE>
<CAPTION>
February 1, February 3,
1997 1996
----------- -----------
<S> <C> <C>
Accumulated postretirement
benefit obligation ("APBO") for:
Active employees $ 2,212 $ 1,904
Retirees 303 573
------- -------
2,515 2,477
Plan assets at fair value - -
------- -------
Unfunded APBO 2,515 2,477
Unrecognized gain 1,329 1,294
------- -------
Accrued postretirement benefit cost $ 3,844 $ 3,771
======= =======
</TABLE>
F-14
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
_______________________________________________________________________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. EMPLOYEE BENEFITS (CONTINUED)
-----------------------------
OTHER (CONTINUED)
The assumed health care cost trend rate used in measuring the APBO was 11% in
fiscal 1996 (9% for Medicare eligible retirees); grading down to 5% (5% for
Medicare eligible retirees) by fiscal 2002 and remaining at that level
thereafter. A one percentage point increase in the assumed health care cost
trend rate would increase the APBO at the end of fiscal 1996 by $387,000 (or
by 15%) and the service and interest cost by $38,000 (or by 11%). The assumed
discount rate used in determining the APBO was 7% for both years.
9. HILLS STORES SERIES A CONVERTIBLE PREFERRED STOCK
-------------------------------------------------
The Company is authorized to issue 15,000,000 shares of preferred stock, par
value of $0.10 per share. Pursuant to the POR a total of 5,000,000 of such
shares are authorized to be issued as payment and cancellation of prepetition
liabilities and interests and designated as Hills Stores Series A Convertible
Preferred Stock (the "Preferred Stock"). As of February 1, 1997, a total of
51,092 shares of the 5,000,000 shares of the Preferred Stock remain to be
issued pending resolution of prepetition claims and interests.
The Preferred Stock is convertible by the holders, at any time, into Hills
Stores Common Stock ("Common Stock") at a rate of one share of Common Stock
for each share of the Preferred Stock, subject to antidilution adjustments.
During fiscal 1996, 234,674 shares of the Preferred Stock were converted to
Common Stock on a share for share basis. As of February 1, 1997 and February 3,
1996, 941,344 and 1,171,779 shares, respectively, were outstanding.
Each holder of the Preferred Stock has one vote per share in the same class as
the holders of Common Stock. The holders of the Preferred Stock are entitled
to dividends when and if declared by the Board of Directors; however, dividend
payments are restricted under the terms of the Facility and the New Senior
Notes. The Company does not expect to pay dividends in the foreseeable future.
The Company may redeem, at its option prior to October 4, 2008, all or part of
the outstanding shares of the Preferred Stock at $20 per share; and in any case
shall redeem all outstanding shares of the Preferred Stock on October 4, 2008
at $20 per share. Upon dissolution or liquidation of the Company, the holders
of the Preferred Stock will be entitled to receive $20 per share out of the
assets of the Company available for distribution to shareholders, in preference
to the holders of Common Stock and any other class or series of capital stock of
the Company that is junior to the Preferred Stock.
10. HILLS STORES COMMON STOCK
-------------------------
Pursuant to the POR, a total of 9,000,000 shares of Common Stock are authorized
to be issued as payment for prepetition liabilities and cancellation of old
preferred stock interests. As of February 1, 1997, a total of 59,341 shares of
the 9,000,000 shares of Common Stock remain to be issued pending resolution of
prepetition claims and interests. Each holder of Common Stock has one vote per
F-15
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
_______________________________________________________________________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. HILLS STORES COMMON STOCK (CONTINUED)
-------------------------------------
share and is entitled to dividends when and if declared by the Board of
Directors; however, dividend payments are restricted under the terms of the
Facility and the New Senior Notes. The Company does not expect to pay dividends
in the foreseeable future.
11. STOCK COMPENSATION PLANS
------------------------
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("FAS 123"). FAS 123 encourages, but does not require, the
recognition of compensation expense for the fair value of stock options and
other equity instruments issued to employees. This statement gives entities a
choice of recognizing related compensation expense by adopting the new fair
value method or to continue to measure compensation using the intrinsic value
approach under Accounting Principles Board Opinion No. 25 ("APB 25"), the
former standard. If the fair value provisions of FAS 123 are not adopted,
companies are required to disclose the proforma amounts of net earnings and
earnings per share that would have been reported had these provisions been
adopted. The Company has choosen to continue to recognize compensation expense
under APB 25. Accordingly, no compensation cost has been recognized for its
fixed stock option plans, other than approximately $73,000 for options granted
in connection with consulting services during fiscal 1996.
The Company has stock-based compensation plans, which are described below.
1993 STOCK OPTION PLAN
In October 1993, the Company established an incentive and nonqualified stock
option plan (the "Option Plan") providing for the grant of nonqualified stock
options or incentive stock options. The options are granted at prices greater
than or equivalent to the market price of the Common Stock on the date of each
grant. The options are generally subject to a five year vesting schedule, with
initial vesting beginning one year from the date of the grant, and expire ten
years from the date of the grant. A total of 1,303,763 shares of Common Stock
are reserved for grants of options under the Option Plan. During fiscal 1996
and 1995 eligible participants were allowed, for a limited time, to exchange
existing options for new options with an exercise price of $10.125 and $12.00,
respectively. On March 11, 1997, eligible participants were allowed to
exchange existing options for a reduced number of new options with an exercise
price of the greater of $5.00 or the closing share price on the date of
acceptance. The repriced options are subject to additional vesting restrictions
which prohibit exercise of any vested option for one year and 50% of the vested
options for two years from the date of the new grant.
1996 DIRECTORS STOCK OPTION PLAN
During fiscal 1996, the Company received shareholder approval of a stock option
plan for non-employee members of the Board of Directors. The plan provided for
an initial grant of 4,000 options to each non-employee member of the Board of
Directors with subsequent annual automatic grants of 2,000 options. All
F-16
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
_______________________________________________________________________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. STOCK COMPENSATION PLANS (CONTINUED)
------------------------------------
options are granted at prices greater than or equivalent to the market price
of the Common Stock on the date of each grant. The options are subject to a
three year vesting schedule with vesting beginning from the date of the grant.
A total of 100,000 shares of Common Stock are reserved for grants under the
plan. On March 11, 1997, participants were allowed to exchange existing options
for a reduced number of new options with an exercise price of the greater of
$5.00 or the closing share price on the date of acceptance. The repriced
options are subject to additional vesting restrictions which prohibit exercise
of any vested option for one year and 50% of the vested options for two years
from the date of the new grant.
RESTRICTED STOCK AGREEMENTS
In fiscal 1996, the Company entered into restricted stock agreements with the
Chairman of the Board and the President and Chief Executive Officer. Pursuant
to the agreements, the Company issued 120,000 shares of Common Stock subject to
certain restrictions. Unearned compensation was charged for the market value
of the restricted shares, shown as a reduction of common shareholders' equity
in the accompanying consolidated balance sheet, and is being amortized ratably
over the restricted period. The weighted-average fair value of shares granted
during fiscal 1996 was $10.02. During fiscal 1996, approximately $405,000
was charged to expense.
PROFORMA INFORMATION
Had compensation cost for the Company's two fixed stock option plans been
determined based on the fair value at the grant dates for awards under those
plans consistent with the method of FAS 123, the Company's net loss and loss
per share would have been reduced to the proforma amounts indicated below:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Net loss As reported ($35,058) ($16,666)
Proforma ($36,349) ($18,244)
Primary loss per share As reported ($ 3.42) ($ 1.70)
Proforma ($ 3.55) ($ 1.86)
Fully-diluted loss per share As reported ($ 3.39) ($ 1.66)
Proforma ($ 3.52) ($ 1.82)
</TABLE>
The effects of applying FAS 123 in this proforma disclosure are not indicative
of future amounts. The proforma disclosure does not include awards prior to
1995 and additional awards are anticipated in future years.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in fiscal 1996 and 1995: dividend yield of zero;
expected volatility of 50%, risk-free interest rate of 5.83% and 5.77%,
respectively; and expected lives of five years.
F-17
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
_______________________________________________________________________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. STOCK COMPENSATION PLANS (CONTINUED)
------------------------------------
<TABLE>
<CAPTION>
A summary of the status of the Company's fixed stock option plans as of February 1, 1997, February 3, 1996
and January 28, 1995 and changes during the years ending on those dates is presented below:
1996 1995 1994
------------------------- ------------------------- ------------------------
Weighted- Weighted- Weighted-
Average Average Average
Fixed Options Shares Exercise Price Shares Exercise Price Shares Exercise Price
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 416,797 $ 12.36 1,014,021 $ 18.48 876,500 $ 18.25
Granted 678,751 11.08 203,000 12.75 191,000 19.50
Exchanged November 4, 1995 - - ( 337,200) 18.26 - -
Issued in exchange on November 4, 1995 - - 224,797 12.00 - -
Exchanged on March 8, 1996 ( 330,000) 12.00 - - - -
Issued in exchange on March 8, 1996 330,000 10.12 - - - -
Exercised - - ( 4,300) 18.25 ( 11,979) 18.25
Forfeited ( 223,968) 12.42 ( 683,521) 18.49 ( 41,500) 18.25
-------- --------- ---------
Outstanding at end of year 871,580 * 10.64 * 416,797 12.36 1,014,021 18.48
======== ========= =========
Options exercisable at year-end 141,961 * 231,894 153,321
Weighted-average fair value of
options granted during the year $ 5.60 $ 6.40
<FN>
* As a result of the March 11, 1997 repricing, options anticipated to be outstanding and exercisable
are 637,400 (weighted-average exercise price of $6.69) and 51,659, respectively.
</TABLE>
<TABLE>
<CAPTION>
The following table summarizes information about fixed stock options outstanding at February 1, 1997:
Options Outstanding Options Exercisable
------------------------------------------------------ --------------------------------
Number Weighted-Average Number
Range of Outstanding Remaining Weighted-Average Exercisable Weighted-Average
Exercise Prices at 2/1/97 Contractual Life Exercise Price at 2/1/97 Exercise Price
<S> <C> <C> <C> <C> <C> <C>
$ 3 10,000 9.97 years $ 3.00 - -
$ 7 to $ 8 89,500 9.71 years $ 7.26 - -
$10 to $13 766,080 8.63 years $11.07 137,461 $12.00
$18 to $19 6,000 6.76 years $18.25 4,500 $18.25
------- -------
871,580 141,961
======= =======
</TABLE>
F-18
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
_______________________________________________________________________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. STOCK COMPENSATION PLANS (CONTINUED)
------------------------------------
ASSOCIATE STOCK PURCHASE PLAN
Under the Associate Stock Purchase Plan, the Company is authorized to issue up
to 500,000 shares of common stock to its full-time employees. Under the terms
of the Plan, associates can choose each year to have up to ten percent of their
annual base earnings, up to $25,000, withheld to purchase the Company's common
stock. The purchase price of the stock is 85 percent of the lower of its market
price at the commencement date or at the termination date of each offering
period. As of February 1, 1997, no offerings had as of yet been made.
12. SERIES 1993 STOCK RIGHTS
------------------------
Pursuant to the POR, Series 1993 Stock Rights (the "Stock Rights") were issued
under Stock Right Agreements. Each Stock Right entitles the holder to acquire,
at $0.01 per share, shares of Common Stock, subject to antidilution adjustments,
as determined pursuant to a formula which is based on the Company's proforma
utilization of certain tax benefits as defined in the Stock Right Agreements.
Shares under the Stock Right Agreements are not available for issuance until
vested. During 1995, the Company repurchased 693,949 of its 700,000 outstanding
stock rights in exchange for 198,271 shares of newly issued common stock. The
aggregate par value of the newly issued common stock was reclassified from
Additional paid-in capital to Common Stock. As of February 1, 1997 and
February 3, 1996, 6,051 rights were outstanding.
13. SERIES 1993 WARRANTS
--------------------
Pursuant to the POR, Series 1993 Warrants (the "Warrants") were issued. Each
Warrant entitles the holder to purchase, subject to antidilution adjustments,
one share of Common Stock at $30 per share. Initially, 432,990 shares of
Common Stock were reserved for issuance upon exercise of the Warrants. The
Warrants are callable by the Company at $.01 per Warrant at any time after
October 4, 1998 if the average closing price of Common Stock, subject to
antidilution adjustments, for a period of thirty consecutive trading days is
equal to or greater than $35 per share. The Warrants expire on October 4, 2000.
During fiscal 1995, 87 warrants were exercised. None were exercised during
fiscal 1996 and 1994. As of February 1, 1997 and February 3, 1996, 432,903
warrants were outstanding.
14. RIGHTS AGREEMENT
----------------
Pursuant to a Rights Agreement adopted on August 16, 1994, the Company declared
a distribution of one purchase right (the "Right") for each share of Common
Stock and Preferred Stock then outstanding. Each Right would initially entitle
the holder to purchase, subject to adjustment, one one-thousandth share of the
Company's Series B Participating Cumulative Preferred Stock, consisting of
55,000 shares authorized, $.10 par value per share, at an exercise price of $75
per one one-thousandth share. Each share of Common Stock and Preferred Stock
issued after August 16, 1994 will also have one Right attached. The Rights
expire August 16, 2004 and, under certain conditions, may be redeemed by the
F-19
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
_______________________________________________________________________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. RIGHTS AGREEMENT (CONTINUED)
----------------------------
Company at a price of $.01 per Right. The Rights have no voting or dividend
privileges and are not currently separable from the capital stock. The Rights
would become exercisable if certain events occurred relating to a person or
group (the "Acquiring Person") acquiring or attempting to acquire 20% or more
of the outstanding shares of capital stock other than through a qualifying
tender offer. Upon the occurrence of such an event, each Right (except the
Rights beneficially owned by the Acquiring Person, which become null and void)
entitles its holder to purchase for $75 the economic equivalent of Common
Stock, or in certain circumstances, securities of the Acquiring Person, or its
affiliate, worth twice as much. After there is an Acquiring Person, the Rights
may be exchanged, at the election of the Company, for consideration per Right
consisting of one-half of the securities that would otherwise be issuable at
that time.
15. IMPAIRMENT OF LONG-LIVED ASSETS AND STORE CLOSINGS
--------------------------------------------------
Effective February 4, 1996, the Company adopted Statement of Financial
Accounting Standards No. 121: "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of" ("FAS 121"). FAS 121
requires that the carrying value of long-lived tangible and certain intangible
assets be evaluated periodically in relation to the operating performance and
estimated future cash flows of the underlying assets. In accordance with
FAS 121, the Company recognized pre-tax charges of $23.6 million ($11.7 million
in the first quarter of fiscal 1996 and $11.9 million in the fourth quarter of
fiscal 1996, in connection with the store closings and impairments) to reduce
the carrying value of certain of its long-lived tangible and intangible assets
to their estimated fair market value. The impaired assets include property and
equipment, beneficial lease rights and Reorganization Value related to
underperforming stores. The fair value was based on estimated future cash
flows to be generated by these stores, discounted at a rate commensurate with
the risks involved.
In January 1997, the Company announced plans to close ten stores during the
first quarter of 1997 as part of its initiatives to improve profitability. In
connection with these closures, the Company recorded in fiscal 1996 a pretax
charge of $10.1 million to cover costs for disposal of inventories ($5.3
million), lease terminations, net ($3.2 million), and other related costs
($1.6 million).
During fiscal 1996, approximately $9.5 million was incurred and charged against
the accrual for store closings, consisting primarily of costs related to
disposal of inventories and store assets. The majority of the February 1, 1997
liability totalling $11.5 million is expected to be paid during fiscal 1997,
with certain amounts relating to lease terminations extending through fiscal
1998.
These ten stores generated 4.6%, 3.9% and 2.2% of the total net sales of the
Company during fiscal 1996, 1995 and 1994, respectively. In addition, these
stores had operating losses, excluding corporate overhead allocations, of $4.3
million and $1.7 million for fiscal 1996 and fiscal 1995, respectively, and an
operating profit of $1.8 million for fiscal 1994.
F-20
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
_______________________________________________________________________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. INCOME TAXES
------------
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109: "Accounting for Income Taxes" ("FAS 109"). Under
FAS 109, deferred taxes are computed on the difference between the bases of
assets and liabilities for tax reporting purposes and their corresponding bases
for financial reporting purposes. Deferred tax assets, net of appropriate
valuation reserves, may be recorded.
<TABLE>
<CAPTION>
Temporary differences and carryforwards which give rise to significant deferred
tax assets and liabilities are as follows (in thousands):
February 1, 1997 February 3, 1996
Deferred Deferred Deferred Deferred
Tax Tax Tax Tax
Asset Liability Asset Liability
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
Net operating loss and
tax credit carryforwards $ 58,307 $ - $ 65,461 $ -
Capital lease obligations 49,959 - 51,584 -
Assets under capital leases - 45,544 - 47,141
Accrued expenses 37,102 - 33,281 -
Beneficial lease rights 17,161 - 18,423 -
Property and equipment - 15,359 - 19,942
Inventories 11,922 - 5,635 -
Financing obligation-sale/
leaseback 11,717 - 10,428 -
Other 10,629 - 13,273 -
-------- -------- -------- -------
Total deferred taxes 196,797 60,903 198,085 67,083
Valuation allowance ( 81,318) - ( 88,758) -
-------- -------- -------- -------
Net deferred taxes $115,479 $ 60,903 $109,327 $67,083
======== ======== ======== =======
</TABLE>
The consummation of the POR resulted in a change in ownership for federal
income tax purposes. As a result, the Company's ability to utilize its net
operating loss and tax credit carryforwards is subject to an annual limitation
of $16.8 million. This limitation may be reduced if additional changes in
ownership are deemed to occur subsequent to October 4, 1993. For the year ended
February 1, 1997, the Company utilized net operating loss carryforwards to
offset $4.0 million in federal taxable income. Total deferred tax assets as of
February 1, 1997, include $81.3 million of deferred tax assets which arose
before the Company's emergence from bankruptcy and which have been fully
reserved. For financial reporting purposes, any benefit derived from the
reduction of the valuation allowance related to deferred tax assets in existence
at October 4, 1993 will not be credited to the tax provision, but instead will
ultimately reduce Reorganization Value.
F-21
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
_______________________________________________________________________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. INCOME TAXES (CONTINUED)
------------------------
<TABLE>
Federal income tax carryforwards at February 1, 1997 consisted of $125.1
million of net operating losses, $10.3 million of general business credits and
$0.5 million of alternative minimum tax credits. Except for the alternative
minimum tax credits which do not expire, the carryforwards expire as follows
(in thousands):
<CAPTION>
Net Operating Tax
Losses Credits
----------------------------------
<S> <C> <C>
Fiscal years:
2000 $ - $ 413
2001 - 797
2002 - 664
2003 - 1,369
2004 - 2,196
2005 - 1,547
2006 57,263 949
2007 56,848 797
2008 10,954 944
2009 - 174
2010 - 492
----------------------------------
$125,065 $10,342
==================================
</TABLE>
<TABLE>
The provision for income taxes consists of the following components
(in thousands):
<CAPTION>
Fiscal Year Ended
February 1, February 3, January 28,
1997 1996 1995
----------------------------------------------
<S> <C> <C> <C>
Current provision:
Federal ($ 689) $ 227 $19,524
State and local 1,419 23 9,973
------- ------- -------
730 250 29,497
Deferred provision:
Federal ( 9,159) ( 9,986) ( 23,393)
State and local ( 3,173) ( 1,274) ( 7,591)
------- ------- -------
( 12,332) ( 11,260) ( 30,984)
Amount to be applied to
reorganization value ( 2,398) 14,197 37,340
------- ------- -------
Income tax provision (benefit) ($14,000) $ 3,187 $35,853
======= ======= =======
</TABLE>
F-22
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
_______________________________________________________________________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. INCOME TAXES (CONTINUED)
------------------------
The income tax provision in each of the periods presented reflects an effective
tax rate that differs from the statutory federal income tax rate for those
periods. For net earnings (loss) from operations before extraordinary items,
the table below reconciles the federal statutory rate to the effective tax
rate.
<TABLE>
<CAPTION>
Fiscal Year Ended
February 1, February 3, January 28,
1997 1996 1995
-------------------------------------------
<S> <C> <C> <C>
Statutory tax rate (35.0%) (35.0%) 35.0%
State and local income taxes,
net of federal tax benefit ( 2.7 ) 3.7 6.4
Goodwill 5.8 20.1 4.1
Targeted jobs credit
and other, net 0.6 0.7 1.5
Change in control costs - 34.2 -
----- ----- -----
Effective tax rate (31.3%) 23.7% 47.0%
===== ===== =====
</TABLE>
On December 27, 1994, the Company reached a final settlement with the Internal
Revenue Service (the "IRS") for the periods ended January 1988 through January
1990. The final settlement resulted in no tax deficiencies being assessed.
The IRS is nearing completion of its audit of fiscal 1991, 1992 and 1993. The
Company has filed a Protest to certain adjustments proposed by the IRS. The
Company does not believe the final adjustments resulting from this examination
would have a material adverse effect on the Company's financial condition.
17. EARNINGS PER SHARE
------------------
Primary earnings per share was computed based on the weighted average number of
common and common equivalent shares assumed to be outstanding during each
period. Such shares amounted to 10,252,022, 9,809,675 and 14,105,498 for fiscal
1996, fiscal 1995 and fiscal 1994, respectively. If primary earnings per share
were calculated as if all conversions of preferred stock which occurred during
the period took place at the beginning of such period, the net loss per share
would have been $3.39 and $1.66 for fiscal 1996 and 1995, respectively.
Fully-diluted earnings per share for each period also assumes, any Preferred
Stock conversions in the period were converted at the beginning of such period
and, if the effect is dilutive, the exercise of the Stock Rights. Such shares
amounted to 10,336,497, 10,029,442 and 14,831,568 for fiscal 1996, fiscal 1995
and fiscal 1994, respectively. Exercise of the Warrants is not assumed as
their exercise would be antidilutive. The weighted average number of shares
reflects all shares of common and preferred stock intended to be issued in
accordance with the POR.
F-23
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
_______________________________________________________________________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. EARNINGS PER SHARE (CONTINUED)
------------------------------
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("FAS 128").
FAS 128 is effective for financial statements, for both interim and annual
periods, ending after December 15, 1997. The Company has not determined the
impact FAS 128 may have on its earnings per share calculations.
18. COMMITMENTS AND CONTINGENCIES
-----------------------------
In September 1995, the Company and HDSC filed a suit in the Court of Chancery
of the State of Delaware against the former members of the Board of Directors
(the "Former Directors") of the Company. That action seeks, among other things,
recovery of damages caused by the breach by the Former Directors of their
fiduciary duties to shareholders arising from the refusal of the Former
Directors to approve the change in control which took place on July 5, 1995 (the
"1995 Change of Control") following the election of seven replacement directors
by the shareholders of the Company. In October 1995, the defendants filed a
motion to dismiss the suit. In February 1996, the court granted a motion of the
Former Directors to stay discovery pending the outcome of their motion to
dismiss. In March 1997, the court denied the Former Directors' motion to
dismiss.
The Company and HDSC also filed suit against Smith Barney, Inc. in September
1995 in the New York State Supreme Court for the County of New York, seeking
damages for losses, as stated in the complaint, caused by the gross negligence
of this firm in rendering financial advice to the Former Directors of the
Company in breach of their fiduciary duties. In April 1996, the court granted
Smith Barney's motion to dismiss this suit. In May 1996, the Company filed in
the Appellate Division a Notice of Appeal of the trial court's dismissal of the
suit. The appeal is presently pending.
In August 1995, in the Court of Chancery of the State of Delaware, three
shareholders of the Company, Gayle Dolowich, Ivan J. Dolowich and Joseph Weiss,
filed a class action lawsuit against the seven new directors of the Company
elected at the 1995 annual meeting, Dickstein Partners Inc. ("Dickstein
Partners") and the Company. In November 1995, the plaintiffs amended their
complaint to include a shareholder's derivative cause of action against the
Former Directors for breach of their fiduciary duties to the Company and its
shareholders. In the amended complaint, the plaintiffs claim (under Section
225 of the Delaware Corporation Code) that in connection with Dickstein Partners
effort to solicit proxies in support of the election of its nominees for
directors of the Company, Dickstein Partners issued a number of false and
misleading statements regarding its offer to acquire all of the Company's shares
it did not already own. On the Section 225 claim, the plaintiffs seek an order
nullifying the election of directors and declaring there has been "no change of
control" of the Company. The derivative cause of action seeks damages against
the Former Directors. In January 1996, in the same Delaware Chancery Court,
another shareholder, Peter M. Fusco, filed a substantially similar class action
and shareholder derivative suit against the parties named in the Dolowich suit.
The Former Directors filed a motion to dismiss the Dolowich and Fusco suits, and
that motion was argued in October 1996 and is presently pending.
F-24
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
_______________________________________________________________________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. COMMITMENTS AND CONTINGENCIES (CONTINUED)
-----------------------------------------
The Company is involved in various other suits and claims in the ordinary course
of business.
Management does not believe that the disposition of such suits and claims will
have a material adverse effect upon the continuing operations and financial
position of the Company.
19. CHANGE IN CONTROL
-----------------
On July 5, 1995, following a proxy contest in connection with the annual
meeting of shareholders held on June 23, 1995, nominees of Dickstein Partners
were certified as being elected to the Board of Directors. The Company
reimbursed Dickstein Partners for, or directly paid, approximately $1.9 million
in third-party fees and expenses incurred or committed to by Dickstein Partners
in connection with the proxy contest and the related acquisition proposal of
Dickstein Partners. This amount included $1.0 million paid by the Company to
the financial advisor of Dickstein Partners, in respect of the advisor's
proposal to refinance the indebtedness of the Company accelerated as a result of
the election of the Dickstein Partners nominees. These costs are included in
the Consolidated Statements of Operations in Costs related to change in control.
In connection with the change in control, the Company recognized $45.5 million
in expense, including $31.0 million related to severance and retirement
payments, including certain taxes attributable thereto, to six senior
executives, a consultant to the Company and approximately twenty associates of
the Company, $6.0 million paid to holders of the Senior Notes, and legal and
other miscellaneous change in control costs.
20. SELF-TENDER FOR COMMON STOCK
----------------------------
In August 1994, Dickstein Partners, L.P., et al. ("Dickstein") commenced a
consent solicitation to replace four members of the then current Board of
Directors with Dickstein nominees. In response to the Dickstein consent
solicitation, the Company's Board of Directors announced a program to enhance
shareholder value, including the approval of a self-tender to purchase up to
3,000,000 common shares at $25 per share in cash. Effective February 21, 1995,
the Company accepted for payment 3,000,000 shares of Common Stock which were
validly tendered pursuant to the Company's offer, and for which payment of
$75,000,000 was made in March 1995. The excess of the purchase price over the
original issue price of the Common Stock, or $15,000,000, was charged to
retained earnings. In connection with the offer, 561,863 shares of Preferred
Stock were converted to Common Stock.
F-25
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
_______________________________________________________________________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
21. STATEMENTS OF CASH FLOWS
------------------------
<TABLE>
Supplemental disclosures of cash flow information are presented in the table
below:
<capiton>
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
February 1, February 3, January 28,
(in thousands) 1997 1996 1995
------------------------------------------
<S> <C> <C> <C>
NONCASH INVESTING AND
FINANCING ACTIVITIES:
Preferred stock conversions
to common stock $ 4,694 $39,508 $35,856
Capital lease obligations, net 3,735 - -
CASH PAID (RECEIVED):
Interest 50,122 38,655 34,731
Income taxes ( 8,956) 17,877 8,562
</TABLE>
F-26
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
_______________________________________________________________________________
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
22. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
-------------------------------------------
<TABLE>
<CAPTION>
(in thousands, First Second Third Fourth
except per share amounts) Quarter Quarter Quarter Quarter
-----------------------------------------------------
FISCAL 1996
- -----------
<S> <C> <C> <C> <C>
Net sales $370,248 $388,600 $460,983 $658,646
======== ======== ======== ========
Gross profit $ 99,263 $ 97,691 $120,831 $168,339
======== ======== ======== ========
Loss before extraordinary loss ($ 14,738) ($ 10,321) ($ 2,804) ($ 2,917)(1)
======== ======== ======== ========
Net loss ($ 14,738) ($ 12,367) ($ 5,036) ($ 2,917)(1)
======== ======== ======== ========
Primary loss per common share:
Loss before extraordinary loss ($ 1.45) ($ 1.01) ($ 0.27) ($ 0.28)
Extraordinary loss - ( 0.20) ( 0.22) -
-------- -------- -------- --------
Net loss ($ 1.45) ($ 1.21) ($ 0.49) ($ 0.28)
======== ======== ======== ========
Fully-diluted loss per common share:
Loss before extraordinary loss ($ 1.45) ($ 1.01) ($ 0.27) ($ 0.28)
Extraordinary loss - ( 0.20) ( 0.22) -
-------- -------- -------- --------
Net loss ($ 1.45) ($ 1.21) ($ 0.49) ($ 0.28)
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
FISCAL 1995
- -----------
<S> <C> <C> <C> <C>
Net sales $362,862 $389,424 $448,033 $699,785
======== ======== ======== ========
Gross profit $101,310 $100,741 $124,694 $188,938
======== ======== ======== ========
Net earnings (loss) ($ 4,337) ($ 45,170) $ 22,441(2) $ 10,400 (2)(3)
======== ======== ======== ========
Primary earnings (loss) per
share ($ 0.45) ($ 4.66) $ 2.01(2) $ 0.93 (2)
======== ======== ======== ========
Fully-diluted earnings (loss) per
share ($ 0.42) ($ 4.64) $ 1.98 $ 0.93
======== ======== ======== ========
<FN>
(1) Loss before extraordinary loss and net loss in the fourth quarter of fiscal 1996
included $22.8 million of additional income tax expense resulting from a change in
the estimated annual effective tax rate.
(2) The Company reclassified $7.2 million before taxes, of change in control costs from
its previously announced fiscal 1995 fourth quarter results to the third quarter. The
effect of the change is to decrease third quarter net earnings by $3.0 million, or $0.27
per share on a primary basis, and to increase fourth quarter net earnings by $3.0 million,
or $0.27 per share on a primary basis, from the amounts previously reported.
(3) Net earnings in the fourth quarter of fiscal 1995 included $11.0 million of additional
income tax expense resulting from a change in the estimated annual effective tax rate.
</TABLE>
F-27
<PAGE>
INDEPENDENT AUDITORS' REPORT ON SCHEDULES
To the Board of Directors and Stockholders of
Hills Stores Company and Subsidiaries:
We have audited the accompanying consolidated financial statements of Hills
Stores Company and Subsidiaries as of February 1, 1997 and February 3, 1996 and
for the years then ended, and have issued our report thereon dated March 11,
1997; such consolidated financial statements and report are included elsewhere
in this Form 10-K.
Our audits also included the consolidated financial statement schedule of Hills
Stores Company and Subsidiaries for the years ended February 1, 1997 and
February 3, 1996, listed in Item 14(a)(2). This financial statement schedule
is the responsibility of the Company's management. Our responsibility is to
express an opinion based on our audits. In our opinion, such consolidated
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
March 11, 1997
S-1
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
To the Shareholders and Board of Directors
of Hills Stores Company and Subsidiaries:
Our report on the consolidated financial statements of Hills Stores Company and
Subsidiaries is included on page F-2 of this Form 10-K. In connection with our
audit of such financial statements, we have also audited the related financial
statement schedule listed in the index on page 19 of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
March 10, 1995
S-2
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
_______________________________________________________________________________
<TABLE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the Fiscal Years Ended February 1, 1997, February 3, 1996 and January 28,
1995.
<CAPTION>
Additions
Balance at Charged to Deductions Balance at
Beginning Cost and from End of
(in thousands) of Period Expense Reserves Other Period
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FISCAL YEAR ENDED FEBRUARY 1, 1997:
Allowance for doubtful accounts $3,459 $1,697 ($ 655) $ - $4,501
====== ====== ====== ====== ======
FISCAL YEAR ENDED FEBRUARY 3, 1996:
Allowance for doubtful accounts $4,228 $1,010 ($1,779) $ - $3,459
====== ====== ====== ====== ======
FISCAL YEAR ENDED JANUARY 28, 1995:
Allowance for doubtful accounts $5,497 $ 866 ($2,135) $ - $4,228
====== ====== ====== ====== ======
</TABLE>
S-3
<PAGE>
EXHIBIT INDEX
<TABLE>
Pursuant to Item 601 of Regulation S-K
<CAPTION>
Exhibit Title
- ------- -----
<S> <C>
10.4 Consulting Agreement made as of February 8, 1997 with Chaim Y.
Edelstein
10.7 Separation Agreement dated February 7, 1996 between the Company
and E. Jackson Smailes
10.8 Confidential Separation Agreement, Voluntary Release and Notice
dated March 6, 1997 between the Company and James E. Feldt
11.1 Computation of earnings per share
21 Subsidiaries
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of Coopers & Lybrand L.L.P.
24 Powers of Attorney of directors and officers of
the Company
27 Financial Data Schedule
</TABLE>
<PAGE>
EXHIBIT 10.4
CONSULTING AGREEMENT made as of February 8, 1997, by and between Hills
Department Store Company, a Delaware corporation having its principal office at
15 Dan Road, Canton, Massachusetts ("Principal Office"), and Hills Stores
Company (the "Company"), a Delaware corporation having its principal office at
the Principal Office, and Chaim Y. Edelstein the ("Consultant"), with an office
address of 1040 Park Avenue-12E, New York, New York 10028.
WHEREAS, Consultant is presently working for the Company as a consultant;
and
WHEREAS, the Company desires to secure the continued services of Consultant
and Consultant is willing to continue to provide such services.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
hereinafter contained, the Company and Consultant agree as follows:
SECTION 1. ENGAGEMENT. The Company hereby agrees to continue to engage
Consultant and Consultant hereby accepts such engagement. The Consultant agrees
to commit a substantial portion of his professional time to providing consulting
services to the Company hereunder.
SECTION 2. TERM. The engagement of Consultant by the Company as provided
in Section 1 shall continue to February 7, 1998.
SECTION 3. FEES AND EXPENSES.
(a) FEES. Consultant shall receive the consulting fee, specified in
Schedule A. Consultant will be paid in equal monthly installments on the 1st
day following each calendar month in which consultant's services are provided to
the Company.
(b) BONUS. Consultant shall receive, as a supplemental fee, the bonus
specified in Schedule A, upon the terms and conditions specified in Schedule A.
Such bonus shall be paid to Consultant within sixty (60) days after the end of
the Company's 1997 fiscal year.
(c) EXPENSES. The Company shall reimburse Consultant for all
reasonable and documented out-of-pocket expenses incurred by Consultant in
connection with the business of the Company and in performance of Consultant's
duties under this Agreement.
SECTION 4. TERMINATION BY THE COMPANY. The Company shall have the right
to terminate Consultant's engagement at any time for "Cause." For purposes of
this Agreement, "Cause" shall mean (a) termination by action of a majority of
the members of the Hills Stores Company's Board of Directors, because of:
1
<PAGE>
(i) The Consultant's willful or intentional failure or refusal to
perform or observe any of the Consultant's material duties,
responsibilities or obligations set forth in, or as contemplated
under, this Agreement, if such breach is not cured within 30 days
after notice thereof to the Consultant by the Company;
(ii) Any willful or intentional act or failure to act involving fraud,
theft, embezzlement, dishonesty or moral turpitude (collectively,
"Fraud") affecting the Company or any supplier or employee of the
Company; or
(iii) Conviction of (or a plea of nolo contendere to) an offense which
is a felony in the jurisdiction involved or which is a misdemeanor
in the jurisdiction involved but which involves Fraud.
The Company shall have the right to terminate Consultant's engagement
hereunder at anytime without "cause." If a termination without "cause" occurs:
(i) The Consultant shall be entitled to continuation of his consulting
fee payments through the end of the term, as set forth in Section 7(b).
(ii) Notwithstanding the termination of the Consulting Agreement, all
stock options and restricted stock grants issued to Consultant pursuant to the
February 8, 1996 Consulting Agreement, which have not been otherwise terminated,
shall remain in effect and all vesting and exercise rights of Consultant shall
continue as scheduled, without accelerated vesting.
SECTION 5. TERMINATION BY DEATH. In the event Consultant dies during the
Term, Consultant's engagement shall terminate.
SECTION 6. TERMINATION BY DISABILITY. In the event that Consultant
suffers a disability which prevents Consultant from substantially performing
Consultant's duties under this Agreement for a period of a least ninety (90)
consecutive or nonconsecutive calendar days within any three hundred sixty-five
(365) calendar day period, the Company shall have the right, after such ninety
(90) calendar day period has elapsed, to terminate Consultant's engagement
hereunder.
SECTION 7. TERMINATION BY CONSULTANT. Notwithstanding any other provision
of this Agreement, Consultant may terminate Consultant's engagement following a
Change in Control, by written notice served upon the Company within thirty (30)
calendar days after Consultant has knowledge of an event constituting "Good
Reason."
(a) For purposes of this Agreement, the term "Change in Control" shall
mean any one of the following events:
(i) any "person" as such term is used in Sections 3(a)(9) and
13(d) of the Securities Exchange Act of 1934, other than
Dickstein Partners Inc. and its Affiliates becomes a
"beneficial owner," as such term is used in Rule 13-d-3
promogulated under such Act, of 30% or more of the voting
stock of Hills Stores Company or the majority of the Board of
2
<PAGE>
Directors of Hills Stores Company consist of individuals
other than Incumbent Directors, which term means the members
of the Board on the date of this Agreement; provided that any
person becoming a director subsequent to such date whose
election or nomination for election was supported by a
majority of the directors who then comprised the Incumbent
Directors shall be considered to be an Incumbent Director;
(ii) the Company adopts any plan of liquidation providing for the
distribution of all or substantially all of the assets of the
Company on a consolidated basis;
(iii) Hills Stores Company merges or combines with another company
and, immediately after the merger or combination, the stock-
holders of the Company immediately prior to the combination
hold, directly or indirectly, (1) in the event Hills Stores
Company is the surviving corporation 50% or less of the
voting stock of the combined company or (2) in the event
Hills Stores Company is not the surviving corporation 50% or
less of the voting stock or other ownership interests of the
entity or entities, if any, that succeed to the business of
Hills Stores Company; or
(iv) the Company sells all or substantially all of its assets
determined on a consolidated basis.
For purposes of this Agreement, the term "Good Reason" shall mean:
any failure by the Company to timely pay the amounts or provide
the benefits prescribed by this Agreement, other than an isolated
failure not occurring in bad faith and which is remedied promptly
after receipt of written notice thereof given by Consultant.
(b) In the event of (i) termination of this Agreement by the Company
other than for Cause or (ii) termination of this Agreement by
Consultant for Good Reason after a Change in Control, the Company
shall continue to pay Consultant, the amounts described in Section
3 and in the manner set forth in Section 3 of this Agreement
throughout the term of the Agreement. In the event the Company's
performance bonus goals are met or exceeded for the year in which
such a termination occurs, Consultant shall be entitled to receive
a performance bonus which is prorated to reflect that portion of
the year prior to the termination date, consulting services were
provided to the Company.
SECTION 8. ACCELERATION AND EXPIRATION OF OPTIONS.
(a) Any options to purchase the Common Stock of the Company
("Options") granted by the Company to Consultant that have not yet
become exercisable shall become exercisable upon the earliest to
occur of(i) the termination of Consultant's engagement as a result
of Consultant's death or disability; (ii) the termination by
Consultant with Good Reason; after a Change in Control. Notwith-
standing the foregoing, all Options, whether currently exercisable
or not, shall expire and cease to be exercisable as follows:
3
<PAGE>
(i) if the Company terminates Consultant's engagement for Cause,
immediately upon the effective date of such termination;
(ii) if Consultant dies while engaged by the Company, six (6)
calendar months after Consultant's death; and
(iii) if Consultant's engagement is terminated as a result of
disability, six (6) calendar months after the effective date
of such termination.
(b) Notwithstanding the termination of this Consulting Agreement
(provided Consultant's stock options, as shown on Schedule A
hereto, have not been otherwise terminated pursuant to the terms
of this Consulting Agreement or the terms of the 1993 Incentive
and Nonqualified Stock Option Plan) as long as Consultant is
available, willing and able to provide the Consulting services
contemplated by this Agreement, the stock options shown on
Schedule A shall remain in effect and all vesting and exercise
rights of Consultant with respect to these options shall
continue.
SECTION 9. ACCELERATED VESTING OF RESTRICTED STOCK. Consultant has
received restricted stock grants from the Company which are subject to periodic
vesting. In the event Consultant's engagement with the Company is terminated
(a) as a result of Consultant's death or disability or (b) by Consultant with
good reason after a Change in Control, then all restricted stock held by
Consultant, not otherwise vested, shall become fully vested, subject to the
terms of the restricted stock agreement between the Company and Consultant.
SECTION 10. NO MITIGATION; NO OFFSET. Consultant shall be under no
obligation to mitigate damages or the amount of any payment provided for under
this Agreement by seeking another engagement or otherwise and there shall be no
offset against amounts due Consultant under this Agreement on account of any
remuneration attributable to any subsequent engagement that Consultant may
obtain.
SECTION 11. COVENANTS OF CONSULTANT.
(a) Consultant recognizes that the knowledge of, information
concerning and relationship with customers, suppliers and agents,
and the knowledge of the Company's business methods, systems,
plans and policies which Consultant will establish, receive or
obtain as a consultant to the Company, are valuable and unique
assets of the business of the Company. Consultant will not,
during or within two (2) years after the Term, disclose any such
knowledge or information pertaining to the Company, its customers,
suppliers, agents, policies or other aspects of the business, for
any reason or purpose, whatsoever except pursuant to Consultant's
duties hereunder or as otherwise authorized by the Company in
writing. The foregoing restriction shall not apply, following
termination of Consultant's engagement hereunder, to knowledge or
information which (i) is in or enters the public domain without
4
<PAGE>
violation of this Agreement or other obligations of
confidentiality by Consultant or his agents or representatives,
(ii) Consultant can demonstrate was in his possession on a
nonconfidential basis prior to the commencement of his engagement
with the Company, or (iii) Consultant can demonstrate was received
or obtained by him on a non-confidential basis from a third party
who did not acquire it wrongfully or under an obligation of
confidentiality, subsequent to the termination of his engagement
hereunder.
(b) All memoranda, notes, records or other documents made or compiled
by Consultant or made available to Consultant while engaged
concerning customers, suppliers, agents or personnel of the
Company, or the Company's business methods, systems, plans and
policies, shall be the Company's property and shall be delivered
to the Company on termination of Consultant's engagement or at any
other time on request.
(c) During the term of the Consultant's engagement and for two (2)
years thereafter, Consultant shall not, except pursuant to and in
furtherance of his duties hereunder, directly or indirectly
solicit or initiate contact with any employee of the Company with
a view to inducing or encouraging such employee to leave the
employ of the Company for the purpose of being hired by
Consultant, an employer affiliated with him or any competitor of
the Company.
(d) Consultant acknowledges that the provisions of this section are
reasonable and necessary for the protection of the Company and
that the Company will be irrevocably damaged is such covenants are
not specifically enforced. Accordingly, Consultant agrees that,
in addition to any other relief to which the Company may be
entitled in the form of actual or punitive damages, the Company
shall be entitled to seek and obtain injunctive relief from a
court of competent jurisdiction for the purposes of restraining
Consultant from any actual or threatened breach of such covenants.
(e) In the event that, following the termination of this Agreement,
Consultant is entitled to receive any further payments other than
for compensation or other amounts accrued prior to termination or
expiration of this Agreement, such payments shall nonetheless
cease and the Company shall no longer be obligated to make such
payments if there is a material breach of any of the covenants in
this section and Consultant shall forthwith upon demand of the
Company repay any such amounts paid to Consultant subsequent to
the date such breach occurred.
SECTION 12. ENTIRE AGREEMENT. This Agreement contains the entire under-
standing of the parties with respect to the subject matter thereof, and, super-
sedes and replaces in its entirety any and all prior agreements and arrangements
of the parties with respect to the subject matter hereof.
SECTION 13. GOVERNING LAW. This Agreement and all matters and issues
collateral thereto shall be governed by the laws of The Commonwealth of
Massachusetts applicable to contracts performed entirely therein.
5
<PAGE>
SECTION 14. SEVERABILITY. If any of this Agreement, as applied to either
party or to any circumstance, shall be adjudged by a court to be void and
unenforceable, the same shall in no way affect any other provision of this
Agreement or the validity or enforceability thereof.
SECTION 15. NOTICES. All notices or other communications hereunder shall
be given in writing and shall be deemed given if served personally or mailed by
registered or certified mail, return receipt requested, to the parties at their
respective addresses indicated below, or at such other address or addresses as
they may hereafter designate in writing
To the Company c/o: Hills Stores Company
15 Dan Road
Canton, MA 02021-9128
ATTN: Vice President-Secretary
& Corporate Counsel
To the Consultant: At the address noted on Exhibit A.
IN WITNESS WHEREOF, the parties have executed this Agreement on
February 8, 1997.
/s/ Chaim Edelstein
------------------------------
Chaim Edelstein
HILLS DEPARTMENT STORE COMPANY
HILLS STORES COMPANY
BY: /s/ Gregory K. Raven
------------------------------
President
6
<PAGE>
February 8, 1997
SCHEDULE A
TO
CONSULTING AGREEMENT
BETWEEN
HILLS DEPARTMENT STORE COMPANY
AND
CONSULTANT
NAME: Chaim Y. Edelstein
ADDRESS: 1040 Park Avenue - 12E
New York, NY 10028
TITLE OF POSITION: Consultant
TERM OF ENGAGEMENT: February 8, 1997 through
February 7, 1998
ANNUAL CONSULTING FEE: $400,000 - payable in equal monthly
installments of $33,333
BONUS
If the Consultant provides or is available to
provide consulting services to the Company
throughout the term of this Agreement, then
Consultant shall be entitled to a performance
bonus in accordance with the schedule set forth
herein below, provided the Company's
performance goals for the year are achieved.
The Company's performance goals and the
bonus to be paid to Consultant upon attaining
these goals will be determined by the
HR/Compensation Committee at the same time
as the bonus goals are determined for
Company executives.
OPTIONS: An option to purchase 30,000 shares of Hills
Stores Company Common Stock was granted
on February 7, 1996. The purchase price was
$10.125.
RESTRICTED STOCK: 20,000 shares of restricted stock were granted
to Consultant pursuant to a Restricted Stock
Agreement between Hills Stores Company and
Consultant dated February 8, 1996.
7
<PAGE>
EXHIBIT 10.7
HILLS STORES COMPANY
HILLS DEPARTMENT STORE COMPANY
15 Dan Road
Canton, Massachusetts 02021
February 7, 1996
Mr. E. Jackson Smailes
387 Far Reach Road
Westwood, Massachusetts 02090
Dear Jack:
This letter sets forth our agreement with respect to your resignation
as President and Chief Executive Officer of Hills Stores Company and, its
subsidiary, Hills Department Store Company (collectively, the "Companies").
Capitalized terms used and not defined herein shall have the meanings given such
terms in the Employment Agreement, dated as of July 6, 1995, among the Companies
and you (the "Employment Agreement").
1. RESIGNATION. By your execution and delivery hereof, you hereby
resign, effective immediately, from all positions with the Companies and any
subsidiaries thereof, including, without limitation, as (i) a director of each
of the Companies and (ii) President and Chief Executive Officer of each of the
Companies. The Companies hereby acknowledge their appreciation for the four
years of outstanding service and executive leadership you have provided on their
behalf.
<PAGE>
Mr. E. Jackson Smailes
February 7, 1996
Page -2-
2. SEVERANCE.
(a) The Companies hereby agree to pay you on February 15, 1996 as
severance a lump sum payment of $1,150,000.
(b) The Companies will reimburse you for your heretofore unreim-
bursed travel and other business expenses reasonably incurred by you prior to
the date hereof in the performance of your duties on behalf of the Companies
upon submission of the required supporting documentation.
(c) The Company's obligation to pay the Change of Control Bonus is
hereby terminated.
(d) The Companies shall, except as otherwise provided in this
letter agreement, cause to be provided to you all benefits and perquisites, or
their equivalent, to which you are entitled under Section 5(c) and 5(e) of the
Former Agreement until the earlier of December 31, 1996 and your commencement of
full-time ongoing employment as a senior executive ("Other Employment").
Effective the date hereof, you shall no longer be entitled, except as may be
required by law or the terms of any benefit plan, to any of the benefits or
perquisites set forth in Sections 5(c) and 5(e) of the Employment Agreement.
(e) The Companies will pay the fee, not to exceed $15,000 per
year,to provide you with outplacement services by the firm of your choosing
until the earlier of (i) January 31, 1998 and (ii) the date on which you accept
employment with another employer.
(f) The Companies agree promptly to (i) buy back the lease for the
automobile currently leased by the Companies for you, (ii) purchase such auto-
mobile from the leasing company, and (iii) transfer ownership of such automobile
to you. From and after the date of transfer of ownership, the Companies will no
<PAGE>
Mr. E. Jackson Smailes
February 7, 1996
Page -3-
longer be required to pay for insurance, gasoline or maintenance with respect to
such automobile or otherwise provide you with any benefits or allowances under
the car policy of the Companies for senior executives.
(g) To the extent permitted by law and applicable federal tax
restrictions, (x) until the earlier of October 1, 1997 and your commencement of
Other Employment, the Companies agree to continue, your health, disability and
life insurance programs at the levels they exist as of the date hereof and in
accordance with their current benefits practices, and you agree to continue to
make monthly contributions at the levels generally in effect for executive
participants as if you had continued to be actively employed by the Companies,
and (y) thereafter, you will be entitled to participate in the Companies'
executive retirement insurance program as it is otherwise available to executive
retirees, provided that such participation is at no cost to the Companies or
that you reimburse the Companies for any costs incurred by them in respect of
such participation.
(h) You understand and agree that, except as expressly set forth
in this letter agreement, you will receive no payments, compensation, benefits,
perquisites, remuneration or bonuses, including severance, to which you other-
wise might be entitled pursuant to the Employment Agreement or any other under-
standing or agreement with the Companies or any of their subsidiaries.
(i) The Companies may withhold or cause to be withheld from any
amounts payable under this letter agreement such amounts as shall be required to
be withheld pursuant to any applicable law or regulation.
<PAGE>
Mr. E. Jackson Smailes
February 7, 1996
Page -4-
3. OPTIONS. You hereby surrender for cancellation, without consider-
ation, options to purchase 122,000 shares of common stock of the Company that
were granted to you pursuant to the Company's 1993 Incentive and Nonqualified
Stock Option Plan. Such options (and any option grant agreements related
thereto) are hereby terminated.
4. CONTINUING OBLIGATIONS.
(a) The provisions of Sections 12, 13 and 16 of the Employment
Agreement shall continue in full force and effect.
(b) Except as expressly provided in this letter agreement, the
obligations of each of the parties under the Employment Agreement are hereby
terminated.
5. TAX COOPERATION. You agree to file your 1995 Federal, state and
local income tax returns (and any amendments thereof) consistently with the Form
W-2 issued to you by the Companies for 1995. You agree to cooperate with the
Companies in connection with any dispute between the Companies (or the Companies
on your behalf) and any taxing authority relating to the amount of 1995 compen-
sation and the tax treatment thereof (including the amount of any taxes,
interest, penalties or excise tax payble thereon). You also agree that you
will, at the reasonable request of the Companies, file any reasonable tax refund
claim for amounts that the Companies paid (or subsequently pay) to you or on
your behalf under Section 11 of the Former Agreement, and to pay to the
Companies the amount of any refund actually recovered to the extent of any prior
payments under Section 11 of the Former Agreement made by the Companies to you
or on your behalf. Any filings or cooperation by you pursuant to the second and
third sentences of this paragraph 5 will be at the sole cost and expense of the
<PAGE>
Mr. E. Jackson Smailes
February 7, 1996
Page -5-
Companies and will not result in any cost or expense to you or any reduction in
the payments made by the Companies to you, other than such payments made
pursuant to Section 11 of the Former Agreement.
6. DISPARAGING STATEMENTS. Each of the parties agrees not to take any
action or make any remarks or statements which he or it knows or reasonably
should know will have the effect of damaging the reputation of the other, or in
the case of any action, remark or statement by you, of damaging the reputation
of any of the officers or directors of the Companies.
7. RELEASE BY SMAILES.
(a) You hereby represent that you do not have any claim, action or
proceeding pending against Hills. For purposes of this paragraph 7 and para-
graph 9(a), the term "Hills" refers to the Companies, each of their respective
subsidiaries, divisions and affiliates, and each of their respective officers,
directors, agents, employees and assigns.
(b) Except as necessary to enforce the terms of this letter agree-
ment, and in exchange for and in consideration of the payments, promises,
covenants and agreements set forth in this letter agreement, you hereby release
Hills from any and all manner of claims, demands, causes of action, obligations,
damages or liabilities whatsoever of every kind and nature, at law or in equity,
known or unknown, and whether or not discoverable, which you have or may have
for any period prior to and including the date of the execution of this letter
agreement, including, but not limited to, any claim of wrongful discharge,
breach of an express or implied contract, breach of any covenant of good faith
and fair dealing, any tort and any claims of discrimination under the Age
Discrimination In Employment Act of 1967 or any other federal, state or local
law or regulation, and any claim for attorneys' fees or costs.
<PAGE>
Mr. E. Jackson Smailes
February 7, 1996
Page -6-
(c) You promise never to file or participate in a lawsuit, arbitra-
tion or other legal proceeding asserting any claims that are released pursuant
to this paragraph 7, unless you are compelled to testify or otherwise partici-
pate in any lawsuit, arbitration or other legal proceeding by subpeona or any
other legal process, but only to the extent of such compulsion. If you breach
your promise and file or participate in a legal proceeding based on claims you
have released, you agree to pay for all costs incurred by Hills, including
reasonable attorneys' fees, in defending against your claim, and you shall be
required to repay to Hills (and shall forfeit any right to receive) any monies
and benefits paid or payable to you pursuant to this letter agreement. In
addition, Hill shall be entitled to any other relief available to it at law or
in equity.
(d) In executing this letter agreement, the Companies are not
admitting any liability or wrongdoing, and the considerations exchanged herein
do not constitute an admission by Hills of any liability, error, contract viola-
tion, or violation of any federal, state or local law or regulation.
8. RELEASE BY THE COMPANIES.
(a) Except as necessary to enforce the terms of this letter agree-
ment, and in exchange for and in consideration of the promises, covenants and
agreements set forth in this letter agreement, the Companies hereby release you
from any and all manner of claims, demands, causes of action, obligations,
damages or liabilities whatsoever of every kind and nature, at law or in equity,
known or unknown, and whether or not discoverable (all of the foregoing being
hereafter referred to as "Claims"), which the Companies have or may have for any
period prior to and including the date of the execution of this letter agree-
<PAGE>
Mr. E. Jackson Smailes
February 7, 1996
Page -7-
ment arising out of or related to your having been an officer or director of the
Companies; provided that the foregoing release shall not apply to any illegal
acts undertaken by you in any capacity with the Companies.
(b) The Companies promise never to file or participate in a
lawsuit, arbitration or other legal proceeding against you, asserting any
claims that are released pursuant to this paragraph 8, unless the Companies are
compelled to testify or otherwise participate in any lawsuit, arbitration or
other legal proceeding by subpeona or any other legal process, but only to the
extent of such compulsion. If the Companies breach their promise and file or
participate in a legal proceeding against you based on claims they have
released, they agree to pay for all costs incurred by you, including reasonable
attorneys' fees, in defending against their claim. In addition, you shall be
entitled to any other relief available to you at law or in equity.
(c) In executing this letter agreement, you are not admitting any
liability or wrongdoing, and the considerations exchanged herein do not con-
stitute an admission by you of any liability, error, contract violation, or
violation of any federal, state or local law or regulation.
9. MISCELLANEOUS.
(a) This letter agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective legal representatives,
executors, heirs, administrators, successors and assigns and, for purposes of
paragraph 7, Hills.
(b) The unenforceability or invalidity of any provision or
provisions of this letter agreement shall not render any other provision or
provisions hereof unenforceable or invalid.
<PAGE>
Mr. E. Jackson Smailes
February 7, 1996
Page -8-
(c) This letter agreement constitutes the entire agreement between
the parties hereto with respect to the subject matter hereof and fully super-
sedes any and all prior agreements or understandings between us with respect to
such subject matter, except for the November 27, 1995 letter to you from the
Companies and the release of the Companies in your favor, dated July 1995. This
letter agreement may not be altered, modified or changed, and no provision
hereof may be waived, except pursuant to a written instrument signed by the
parties hereto.
(d) This letter agreement and all matters and issues collateral
thereto shall be governed by the laws of the Commonwealth of Massachusetts
applicable to contracts performed entirely therein.
(e) All notices or other communications hereunder shall be given in
writing and shall be deemed given if served personally or mailed by registered
or certified mail, return receipt requested, to the parties at their respective
addresses above indicated, or at such other address or addresses as the parties
may hereafter designate in writing.
(f) You have been afforded an opportunity to take at least twenty-
one (21) days to consider this letter agreement and have been advised to consult
with the attorneys of your choice prior to executing this letter agreement. The
parties understand and acknowledge that you will have a period of seven (7)
calendar days following your execution hereof in which to revoke your consent to
this letter agreement. If you so revoke your consent, this letter agreement
shall be null and void and of no force or effect.
<PAGE>
Mr. E. Jackson Smailes
February 7, 1996
Page -9-
If the foregoing letter correctly sets forth our agreement and under-
standing with respect to the subject matter hereof, please so indicate by
executing and returning to the Companies the enclosed duplicate copy of this
letter, whereupon it shall constitute our legally binding agreement.
Very truly yours,
HILLS STORES COMPANY
HILLS DEPARTMENT STORE COMPANY
By: /s/ Mark Dickstein
--------------------------
Chairman
ACCEPTED AND AGREED
AS OF FEBRUARY 7, 1996
/s/ E. Jackson Smailes
- -------------------------
E. Jackson Smailes
<PAGE>
EXHIBIT 10.8
CONFIDENTIAL SEPARATION AGREEMENT, VOLUNTARY RELEASE & NOTICE
- -------------------------------------------------------------
For and in consideration of the separation payments and other good and
sufficient consideration described herein below, subject to legally required
withholdings, to be paid to James E. Feldt ("Executive"), which payments
Executive agrees are good and sufficient consideration for this Agreement and
Release, and subject to Hills' (as defined below) obligations under this
Agreement, Executive and Executive's executors, administrators, heirs, repre-
sentatives and assigns, hereby voluntarily release and discharge Hills Stores
Company and its related companies including its parents and subsidiaries, and
their officers, agents, employees, trustees, successors and assigns (collec-
tively the "Company", or "Hills") from and against any and all losses, damages,
claims and liability, including specifically, any damages, claims or liability
due to or arising out of any breach of contract, wrongful termination, employ-
ment discrimination, violation of Title VII of the Civil Rights Act of 1964, as
amended, The Employee Retirement Income Security Act, the Massachusetts Equal
Rights Act, the Age Discrimination in Employment Act (ADEA), and/or any other
similar state or federal laws or regulations, relating to Executive's employ-
ment, the termination of Executive's employment and/or Executive's rights and
benefits pursuant to his March 25, 1996 Employment Agreement ("Employment
Agreement") (Exhibit 1). Executive will not file such claims, and Executive
agrees to save and hold Hills harmless from and against any liability, loss,
cost, damage and expense arising out of Executive's failure to comply with the
terms of this Agreement. Notwithstanding, the foregoing shall not release or
discharge Hills from, and expressly excluded from this release are, the
following: (i) any obligations to Executive under this Agreement; (ii) any of
Executive's rights of indemnification or contribution arising from any third
party claim, charge, lawsuit or complaint against Executive on account of his
employment by the Company or performance of his duties for the Company as set
forth in Article VII, Section 5 of the Company's Amended And Restated By-Laws
or as otherwise provided by law (Exhibit 2); (iii) any claim relative to any
Company stock, stock option or 401K/pension plans pursuant to the terms of
those plans.
For and in consideration of the covenants herein and other good and
sufficient consideration described herein below, which Hills agrees are good
and sufficient consideration for this Agreement and Release, and subject to
Executive's obligations under this Agreement, Hills hereby voluntarily releases
and discharges Executive and his executors, administrators, heirs, represen-
tatives, successors and assigns from and against any and all losses, damages,
claims and liability, including arising out of or relating to Executive's
employment, the termination of Executive's employment and/or Executive's obliga-
tions and promises pursuant to his March 25, 1996 Employment Agreement
(Exhibit 1). Hills will not file such claims, and Hills agrees to save and hold
Executive harmless from and against any liability, loss, cost, damage and
expense arising out of Hills' failure to comply with the terms of this Agree-
ment. Notwithstanding, the foregoing shall not release or discharge Executive
from, and expressly excluded from this release are, the following: (i) any
obligations to Hills under this Agreement; (ii) any of Hills' rights of indem-
nification or contribution arising from any third party claim, charge, lawsuit
or complaint against Hills on account of Executive's employment by the Company;
(iii) any claim relative to any Company stock, stock option or 401K/pension
plans pursuant to the terms of those plans.
<PAGE>
SEPARATION PAYMENTS AND BENEFITS:
---------------------------------
1. Executive is terminated from the Company "without cause" as pro-
vided in the Employment Agreement, effective April 13, 1997 (the "Effective
Date"), notice having been given by the Company on January 13, 1997. Hills
shall pay Executive the payments and benefits as described herein below:
A. During the ninety (90) day notice period (January 13 - April 13,
1997) Executive will be paid by Hills as an employee pursuant to
his Employment Agreement, including all rights and benefits.
B. Separation pay in semi-monthly installments for 102 weeks, from
April 14, 1997 to March 25, 1999 ("Separation Pay Time Period"),
at the current Base Compensation rate ($355,000 annually) without
bonus, based on the following conditions:
(i) Separation pay shall be paid in full only if Executive has no
direct compensation earned by and paid to Executive during
the Separation Pay Time Period. The term "direct compensa-
tion earned" or "direct compensation earnings" means any
income earned from any employment source regardless of
whether employment is full-time or part-time, temporary or
permanent, work with an organization or self-employment.
"Earnings" includes: the value of any services in lieu of
income; any income that is earned but not paid in the normal
course during the Separation Pay Time Period and any income
that may be deferred under a deferred income plan or agree-
ment; and any unemployment compensation received. "Direct
Compensation earned" does NOT include any amounts received as
a result of investment, passive income, dividends, capital
appreciation, interest or other similar unearned income.
(ii) If Executive is entitled to or receives direct compensation
earnings during or for the Separation Pay Time Period, then
such earnings will be deducted from the separation pay. In
effect, Hills will thus "make up the difference" between
Executive's earnings and what Executive would have been
receiving in full separation pay through the Separation Pay
Time Period.
(iii) Each payment made to or on behalf of the Executive hereunder
shall be deemed earned by the Executive contemporaneously
with such payment on account of the termination of the
employment of the Executive, and shall not be deemed to be
earned by the Executive on account of the Executive's length
of service.
C. Executive's 1997 vacation time shall accrue through the Effective
Date and any accrued, but unused vacation pay through the Effective
Date shall be paid no later than April 14, 1997.
D. The Company shall pay Executive all benefits under retirement/
401(k) plans accrued through the Effective Date in accordance with
the applicable Company plan or policies (Exhibit 2).
2
<PAGE>
E. During the Separation Pay Time Period, the Company shall continue
Executive's participation at the Company's expense in the insurance
benefit plans (health, life, disability and other similar plans -
copies attached as Exhibit 3) in which Executive is entitled to
participate as of January 13, 1997, subject to Executive's contri-
bution of his share of such expenses as of January 13, 1997 or as
may be calculated under the Company's plans or policies for
comparably situated executives or officers.
F. Up to the Effective Date, the Company shall pay all reasonable
expenses for Executive's automobile (1995 Cadillac STS) including
insurance, gas, maintenance and repairs. On or before the
Effective Date, Executive shall pay the Company $4,750 as the full
and final amount for Executive's automobile. The Company waives
all claims for any further reimbursement for any amounts advanced
or paid to or on behalf of Executive for the purchase of Execu-
tive's automobile. The Company agrees and acknowledges that
Executive will retain the auotmobile without any further obliga-
tion, offset or payment to the Company.
G. Upon execution of this Agreement, the Company shall advance
$20,000 to Executive as reimbursement for Executive's outplacement
service expenses.
2. The Company agrees that Executive's stock options shall continue to
accrue and vest through March 25, 1999 under the 1993 Incentive And Non-Quali-
fied Stock Option Plan and that the time for Executive to exercise such options
expires on March 25, 1999.
REPRESENTATIONS:
----------------
3. Executive represents that he understands the various claims he
might have asserted under the common law of Massachusetts, the Age Discrimin-
ation in Employment Act, Title VII of the Civil Rights Act of 1964, Chapter 151B
of the Massachusetts General Laws, the Americans with Disabilities Act and other
such similar laws; that he has read the Agreement carefully and understands all
of its provisions; that he understands that he has the right to and is advised
to consult an attorney concerning this Agreement and in particular the waiver of
any rights he might have under these laws; that to the extent, if any, that he
desired, he availed himself of this right; that he has had sufficient time to
consider whether to sign the Agreement and he enters this Agreement and waives
any claims knowingly and willingly. Executive further agrees to never bring a
proceeding to challenge the validity of the Agreement. Notwithstanding, the
foregoing shall not release or discharge the Company from its obligations under
this Agreement.
4. Hills and Executive agree that the terms of this Agreement are
strictly confidential and shall be not disclosed to any other person, except
that they may disclose this Agreement to their respective immediate families,
directors, members, attorneys and tax and other professional advisors, or as
otherwise compelled by federal, state or local law including SEC and IRS
regulations.
3
<PAGE>
5. Executive agrees that he will not disparage or defame the Company,
its officers, directors and/or employees in any way. The Company agrees that it
and its representatives, agents, employees, officers and directors will not
disparage or defame Executive in any way.
6. Executive hereby waives any and all rights to future employment
with Hills. Executive agrees not to divulge, appropriate or use any proprietary
information of the Company (including, without limitation, financial and/or
merchandising information) regardless of the form in which said information
might exist. Executive agrees not to remove from the Company's premises (and
to return to the Company if already removed), any proprietary materials of the
Company of whatever form or description whatsoever.
7. Executive agrees to notify the Company's Human Resource Department
promptly, in writing, if and when he receives direct compensation earnings.
Executive's failure to provide such notification within 30 days of receipt shall
constitute a breach of this Agreement, and Hills' payment obligations for
severance pay under this Agreement shall therefore be null and void, and any
overpayment by Hills to Executive shall be immediately due and owing to Hills.
8. Notwithstanding anything to the contrary contained herein, Execu-
tive acknowledges and agrees to comply with the covenants contained in Paragraph
5 of Executive's March 25, 1996 Employment Agreement with Hills.
ADMINISTRATIVE PROVISIONS:
--------------------------
9. All disputes between Executive and Hills concerning this Agreement
(except its validity, which shall be presumed), shall be submitted to binding
arbitration as the sole remedy for such disputes. The arbitration will be con-
ducted in Boston, Massachusetts before a single arbitrator jointly chosen by the
parties, under the rules of the American Arbitration Association (with the cost
of the arbitration to be shared equally).
10. This Agreement shall become effective seven (7) days after it is
signed. Executive may revoke this Agreement within seven (7) days after it is
signed, and it shall not become effective or enforceable until this seven (7)
day revocation period has expired.
11. This Agreement will be governed by and interpreted in accordance
with the substantive laws of the Commonwealth of Massachusetts and may be signed
on one or more copies, each of which when so signed will be deemed to be an
original, and all of which together will be one and the same document.
12. If any portion of this Agreement is found to be invalid, then it
shall not affect the remaining provisions. This Agreement includes the entire
understanding of the parties and can only be modified by a writing signed by
both parties. This Agreement is not an admission of any liability or wrongdoing
by any party.
13. All notices, requests, consents and other communications hereunder
shall be in writing, shall be addressed to the receiving party's address set
forth below or to such other address as a party may designate by notice here-
under, and shall be either (i) delivered by hand, (ii) made by telex, telecopy
or facsimile transmission, (iii) sent by overnight courier, or (iv) sent by
registered or certified mail, return receipt requested, postage prepaid as
follows:
4
<PAGE>
if sent to Executive, to,
James E. Feldt
85 Skyline Drive
Westwood, MA 02093
with a copy to:
Henry A. Sullivan, Esq.
Mintz, Levin, Cohn, Ferris,
Glovsky and Popeo, P.C.
One Financial Center
Boston, MA 02111
and if sent to Hills, to,
Vice President and Corporate Counsel
Hills Stores Company
15 Dan Road
Canton, MA 02021
All notices, requests, consents and other communications shall be effective
upon receipt.
EXECUTIVE HAS BEEN GIVEN AMPLE OPPORTUNITY TO REVIEW THIS AGREEMENT,
HAS READ AND UNDERSTOOD IT, HAS BEEN REPRESENTED BY COUNSEL AND ENTERS INTO IT
KNOWINGLY AND VOLUNTARILY.
EXECUTIVE:
/s/ James E. Feldt Date: 2/24/97
- ------------------------------ ------------------------------
HILLS:
/s/ Reginald B. Garrett Date: 3/6/97
- ------------------------------ ------------------------------
Reginald B. Garrett
Vice President-Human Resources
5
<PAGE>
<TABLE>
EXHIBIT 11.1
HILLS STORES COMPANY AND SUBSIDIARIES
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
<CAPTION>
Thirteen Fiscal Year Fourteen Fiscal Year Thirteen Fiscal Year
Weeks Ended Ended Weeks Ended Ended Weeks Ended Ended
February 1, February 1, February 3, February 3, January 28, January 28,
1997 1997 1996 1996 1995 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<s
PRIMARY <C> <C> <C> <C> <C> <C>
Weighted average number of
common shares assumed to be
outstanding during the period 10,306,070 10,252,022 9,962,450 9,809,675 10,797,637 10,794,013
Assumed conversion of preferred
stock - - 1,252,389 - 3,207,195 3,207,195
Assumed exercise of stock options - - - - 105,733 104,290
Assumed exercise of stock rights - - 6,514 - - -
---------- ---------- ---------- --------- ---------- ----------
10,306,070 10,252,022 11,221,353 9,809,675 14,110,565 14,105,498
========== ========== ========== ========= ========== ==========
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
FULLY-DILUTED
Weighted average number of
common shares assumed to be
outstanding during the period 10,337,761 10,336,497 9,983,044 10,029,442 10,797,637 10,794,013
Assumed conversion of preferred
stock - - 1,231,795 - 3,207,195 3,207,195
Assumed exercise of stock options - - - - 132,446 130,360
Assumed exercise of stock rights - - 6,514 - 700,000 700,000
---------- ---------- ---------- ---------- ---------- ----------
10,337,761 10,336,497 11,221,353 10,029,442 14,837,278 14,831,568
========== ========== ========== ========== ========== ==========
</TABLE>
1
<PAGE>
EXHIBIT 21
<TABLE>
SUBSIDIARIES OF HILLS STORES COMPANY
<CAPTION>
NAME OF SUBSIDIARY STATE OF INCORPORATION
- ------------------ ----------------------
<S> <C>
Hills Department Store Company Delaware
HDS Transport, Inc. (1) Ohio
C.R.H. International, Inc. (1) Ohio
Canton Advertising, Inc. (2) Massachusetts
Corporate Vision Inc. (1) Massachusetts
Hills Distributing Company (1) Delaware
<FN>
(1) Wholly-owned subsidiary of Hills Department Store Company
(2) Wholly-owned subsidiary of C.R.H. International, Inc.
</TABLE>
1
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITOR'S CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
33-56321 and 333-4627 on Forms S-8 and S-3, respectively, of Hills Stores
Company and to Registration Statement No. 333-5003 of Hills Stores Company,
Hills Department Store Company, Canton Advertising, Inc., Corporate Vision,
Inc., C.R.H. International, Inc., HDS Transport, Inc. and Hills Distributing
Company on Form S-4 of our report dated March 11, 1997 appearing in this
Annual Report on Form 10-K of Hills Stores Company.
DELLOITTE & TOUCHE LLP
Boston, Massachusetts
April 22, 1997
1
<PAGE>
EXHIBIT 23.2
INDEPENDENT ACCOUNTANTS' CONSENT
We consent to the incorporation by reference in Registration Statement
Nos. 33-56321 and 333-4627 on Forms S-8 and S-3, respectively, of the Hills
Stores Company and Subsidiaries to Registration Statement No. 333-5003 of Hills
Stores Company, Hills Department Store Company, Canton Advertising, Inc.,
Corporate Vision, Inc., C.R.H. International, Inc., HDS Transport, Inc. and
Hills Distributing Company on Form S-4 (File No. 333-05003) of our report dated
March 10, 1995 on our audit of the Consolidated Financial Statements and
Financial Statement Schedule of Hills Stores Company and Subsidiaries as of
January 28, 1995 and for the year then ended, which report is included in this
Annual Report on Form 10-K. We also consent to the reference to our Firm under
the caption "Experts."
Coopers & Lybrand L.L.P.
Boston, Massachusetts
April 23, 1997
2
<PAGE>
EXHIBIT 24
HILLS STORES COMPANY
FORM 10-K
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each of the directors and officers of Hills
Stores Company whose signature appears below constitutes and appoints Gregory
K. Raven, C. Scott Litten and William K. Friend, and each of them, his/her true
and lawful attorneys-in-fact and agents with full power of substitution, for
him/her and in his/her name, place and stead, in any and all capacities,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in connection with the preparation, delivery and filing
of an Annual Report on Form 10-K of Hills Stores Company for the fiscal year
ended February 1, 1997 with the Securities and Exchange Commission and any
appropriate state or governmental agencies, as fully to all intents and purposes
as such person might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents or any of them, or their or his substi-
tutes, may lawfully do or cause to be done by virtue hereof.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ Chaim Y. Edelstein Chairman of the Board of
- ----------------------- the Company and Hills
Chaim Y. Edelstein Department Store Company March 11, 1997
/s/ Gregory K. Raven Director, President and Chief
- ----------------------- Executive Officer of the Company
Gregory K. Raven and Hills Department Store Company
(Principal Executive Officer) March 11, 1997
/s/ Mark B. Dickstein Director of the Company and Hills
- ----------------------- Department Store Company March 11, 1997
Mark B. Dickstein
/s/ Stanton J. Bluestone Director of the Company and Hills
- ----------------------- Department Store Company March 11, 1997
Stanton J. Bluestone
/s/ Samuel L. Katz Director of the Company and Hills
- ----------------------- Department Store Company March 11, 1997
Samuel L. Katz
/s/ John W. Burden Director of the Company and Hills
- ----------------------- Department Store Company March 11, 1997
John W. Burden
/s/ Alan S. Cooper Director of the Company and Hills
- ----------------------- Department Store Company March 11, 1997
Alan S. Cooper
/s/ C. Scott Litten Executive Vice President-Chief
- ----------------------- Financial Officer of the Company
C. Scott Litten and Hills Department Store Company
(Principal Financial Officer) March 11, 1997
/s/ Brian J. Sheehan Vice President-Controller
- ----------------------- of the Company and Hills
Brian J. Sheehan Department Store Company
(Principal Accounting Officer) March 11, 1997
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> FEB-01-1997
<PERIOD-END> FEB-01-1997
<CASH> 66,163
<SECURITIES> 0
<RECEIVABLES> 28,847
<ALLOWANCES> (4,501)
<INVENTORY> 341,477
<CURRENT-ASSETS> 483,592
<PP&E> 232,788
<DEPRECIATION> (59,087)
<TOTAL-ASSETS> 900,353
<CURRENT-LIABILITIES> 300,337
<BONDS> 349,639
19,942
0
<COMMON> 103
<OTHER-SE> 224,681
<TOTAL-LIABILITY-AND-EQUITY> 900,353
<SALES> 1,878,477
<TOTAL-REVENUES> 1,878,477
<CGS> 1,392,353
<TOTAL-COSTS> 1,392,353
<OTHER-EXPENSES> 477,349
<LOSS-PROVISION> 1,396
<INTEREST-EXPENSE> 53,555
<INCOME-PRETAX> (44,780)
<INCOME-TAX> (14,000)
<INCOME-CONTINUING> (30,780)
<DISCONTINUED> 0
<EXTRAORDINARY> (4,278)
<CHANGES> 0
<NET-INCOME> (35,058)
<EPS-PRIMARY> (3.42)
<EPS-DILUTED> (3.39)
</TABLE>
