UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- ----- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 1998
- ----- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------- -------
COMMISSION FILE NUMBER 1-9505
-----------------------------
HILLS STORES COMPANY
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(Exact name of registrant as specified in its charter)
DELAWARE 31-1153510
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
15 DAN ROAD, CANTON, MASSACHUSETTS 02021
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(Address of principal executive offices) (Zip Code)
781-821-1000
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant; (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
-------- --------
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
YES X NO
-------- --------
The number of shares of common stock outstanding as of November 30, 1998
was 10,420,870 shares.
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HILLS STORES COMPANY AND SUBSIDIARIES
TABLE OF CONTENTS
-----------------
PART I - FINANCIAL INFORMATION
FINANCIAL STATEMENTS
<S> <C> <C>
Condensed Consolidated Balance Sheets as of October 31, 1998,
January 31, 1998, and November 1, 1997 3
Condensed Consolidated Statements of Operations for the
Thirteen and Thirty-nine Weeks Ended October 31, 1998
and November 1, 1997 4
Condensed Consolidated Statements of Cash Flows for the
Thirty-nine Weeks Ended October 31, 1998 and November 1, 1997 5
Notes to Condensed Consolidated Financial Statements 6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION 11
AND RESULTS OF OPERATIONS
PART II - OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS 19
ITEM 2: CHANGES IN SECURITIES 19
ITEM 5: OTHER INFORMATION 19
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K 19
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2
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HILLS STORES COMPANY AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
<CAPTION>
October 31, January 31, November 1,
(in thousands) 1998 1998 1997
- --------------------------------------------------------------------------------
(unaudited) (unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 17,070 $ 37,523 $ 20,078
Accounts receivable, net 47,513 21,869 63,737
Inventories 552,079 340,719 522,118
Deferred and interim tax assets - 26,933 57,372
Other current assets 5,847 5,542 5,184
---------- -------- ----------
Total current assets 622,509 432,586 668,489
Property and equipment, net 176,231 183,112 175,201
Property under capital leases, net 102,178 102,350 104,791
Beneficial lease rights, net 5,506 6,081 6,273
Other assets, net 64,296 40,748 35,462
Deferred tax asset - 28,592 13,289
Reorganization value in excess of amounts
allocable to identifiable assets, net 84,846 89,112 93,110
---------- -------- ----------
$1,055,566 $882,581 $1,096,615
========== ======== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of capital leases $ 11,693 $ 10,541 $ 8,580
Current portion of long-term debt - 500 -
Borrowings under secured credit
facility (Note 3) 224,000 - 136,000
Accounts payable, trade 188,128 110,329 202,556
Other accounts payable and accrued
expenses 91,732 77,803 86,398
---------- -------- ----------
Total current liabilities 515,553 199,173 433,534
Long-term debt 195,000 204,500 195,000
Capital lease and
other financing obligations 143,900 144,254 148,608
Other liabilities 90,456 98,467 104,366
Preferred stock, at mandatory redemption
value (Note 4) 18,086 18,209 18,317
Common shareholders' equity 92,571 217,978 196,790
---------- -------- ----------
$1,055,566 $882,581 $1,096,615
========== ======== ==========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
3
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HILLS STORES COMPANY AND SUBSIDIARIES
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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
Thirteen Weeks Ended Thirty-nine Weeks Ended
------------------------ ------------------------
(unaudited) October 31, November 1, October 31, November 1,
(in thousands, except per 1998 1997 1998 1997
share amounts)
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $399,720 $434,555 $1,119,879 $1,137,328
Cost of sales 293,915 319,454 828,940 839,295
Selling and administrative
expenses 115,125 106,648 323,678 304,172
Amortization of reorganization
value in excess of amounts
allocable to identifiable assets 1,422 1,463 4,266 4,388
-------- -------- ---------- ----------
Operating earnings (loss) ( 10,742) 6,990 ( 37,005) ( 10,527)
Interest expense, net (Note 5) ( 14,942) ( 13,236) ( 39,406) ( 36,558)
-------- -------- ---------- ----------
Loss before income taxes ( 25,684) ( 6,246) ( 76,411) ( 47,085)
Income tax benefit
(provision)(Note 6) ( 69,500) 2,300 ( 49,600) 17,200
-------- -------- ---------- ----------
Net loss ($ 95,184) ($ 3,946) ($ 126,011) ($ 29,885)
======== ======== ========== ==========
Basic and diluted loss per
share (Note 7): ($ 9.08) ($ 0.38) ($ 12.04) ($ 2.87)
======== ======== ========== ==========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
4
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HILLS STORES COMPANY AND SUBSIDIARIES
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Thirty-Nine Weeks Ended
-------------------------
(unaudited) October 31, November 1,
(in thousands) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($126,011) ($ 29,885)
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation and amortization 30,666 27,523
Amortization of deferred financing costs 1,129 1,883
Amortization of reorganization value in excess
of amounts allocable to identifiable assets 4,266 4,388
Deferred and interim income taxes 55,525 ( 16,085)
Loss on disposal of fixed assets - 67
Increase in accounts receivable and other
current assets ( 25,949) ( 39,460)
Increase in inventories ( 211,360) ( 180,641)
Increase in accounts payable, accrued expenses
and other liabilities 83,984 94,749
Other, net 489 82
-------- --------
Net cash used for operating activities ( 187,261) ( 137,379)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ( 14,765) ( 20,298)
Deferred software expenditures ( 26,228) ( 19,018)
-------- --------
Net cash used for investing activities ( 40,993) ( 39,316)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolving credit facility, net 224,000 136,000
Principal payments under capital lease and other
financing obligations ( 6,199) ( 4,706)
Payment of term note ( 10,000) -
Other financing activities - ( 684)
-------- --------
Net cash provided by financing activities 207,801 130,610
-------- --------
Net decrease in cash and cash equivalents ( 20,453) ( 46,085)
Cash and cash equivalents at beginning of period 37,523 66,163
-------- --------
Cash and cash equivalents at end of period $ 17,070 $ 20,078
======== ========
NONCASH INVESTING AND FINANCING ACTIVITIES:
Capital lease investments and obligations $ 6,998 $ -
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
5
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HILLS STORES COMPANY AND SUBSIDIARIES
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
---------------------
During the thirty-nine weeks ended October 31, 1998, Hills Stores Company (the
"Company") operated, through its wholly owned subsidiary Hills Department Store
Company ("HDSC"), a chain of 155 discount department stores located primarily
in the Great Lakes and Ohio Valley regions of the United States. The condensed
consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiaries. All significant intercompany transactions and
balances have been eliminated. The information furnished reflects all normal
recurring adjustments which are, in the opinion of management, necessary to
present a fair statement of the results for the interim period.
The accompanying unaudited condensed consolidated financial statements are
presented in accordance with the requirements of Form 10-Q and consequently do
not include all the disclosures normally required by generally accepted
accounting principles nor those normally made in the Company's annual Form 10-K
filing. Reference should be made to the Company's Annual Report on Form 10-K
for additional disclosures, including a summary of the Company's accounting
policies. Certain prior year amounts have been reclassified to conform to the
current year presentation. The Company's business is seasonal in nature and
the results of operations for the interim periods presented are not necessarily
indicative of the results to be expected for the full fiscal year. The fourth
quarter of each fiscal year provides the most significant portion of the
Company's annual sales and most or all of its operating earnings, with operating
earnings particularly concentrated in the Christmas selling season.
2. TENDER OFFER AND PROPOSED MERGER
--------------------------------
On November 12, 1998, the Company signed a definitive agreement with HSC
Acquisition Corp. and Ames Department Stores, Inc. (Ames) providing for the
acquisition of the Company by Ames. That transaction is contingent on Ames'
successful completion of its tender offer to the Company's shareholders and
noteholders, and on Ames successfully obtaining final financing, and on
regulatory approval and other customary closing conditions. The Board of
Directors of the Company has recommended that the Company's stockholders
tender their shares to Ames in the offer.
3. SECURED CREDIT FACILITY AND RECENT DEVELOPMENTS
-----------------------------------------------
On September 30, 1998, the Company and its lenders modified the terms of its
secured credit facility increasing the facility to $340 million from $300
million. Other enhancements include an increased advance rate, improvements in
the calculation of eligible assets on which to base maximum borrowings, the
elimination of the annual "clean-up" requirement, and a modest improvement in
interest rate brackets.
Effective October 31, 1998, the Company and its lenders further modified the
terms of its secured credit facility to amend the definition of actual "adjusted
tangible net worth" to increase the calculation of actual adjusted tangible net
worth by the amount of non-cash valuation reserves applicable to deferred and
interim tax assets.
6
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HILLS STORES COMPANY AND SUBSIDIARIES
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3. SECURED CREDIT FACILITY AND RECENT DEVELOPMENTS (CONTINUED)
-----------------------------------------------------------
The Company has since mid-1998 experienced a substantial erosion in sales and a
resulting substantial erosion in operating results and cash flow. Sales in the
third quarter of fiscal year 1998 declined by approximately 8%, sales for
November declined by approximately 10%, and sales in the first two weeks of
December declined by approximately 13%. These declines have resulted in the
need to increase substantially the Company's use of and reliance on its secured
credit facility, made possible, in part, through the recent agreed modifications
to the facility.
Based on recent operating trends, the Company expects that it will fail the
rolling twelve months cash flow maintenance covenant effective as of the end of
the current fiscal year on January 30, 1999, as required by its secured credit
facility. Such non-compliance, absent a waiver by the secured lenders, would
constitute an event of default under the agreement. The prospect of such non-
compliance could also be deemed to constitute a material adverse effect,
resulting in an event of default. An event of default would result in potential
acceleration of repayment by the lenders, among other remedies available.
The Company's Senior Notes indenture and certain other obligations of the
Company contain cross-default provisions, which might also cause repayment
acceleration of the Senior Notes or other obligations due to an event of default
under the secured credit facility.
If the Ames tender offer is not successful (see Note 2 above), and the Company's
recent operating trends continue, there is a substantial prospect that the
Company would be required to seek protection under federal bankruptcy laws in
the near term.
4. HILLS STORES SERIES A CONVERTIBLE PREFERRED STOCK
-------------------------------------------------
During the thirty-nine weeks ended October 31, 1998, 6,178 shares of the
Company's Series A Convertible Preferred Stock ($20 mandatory redemption value)
were converted to the Company's Common Stock on a share for share basis.
5. INTEREST EXPENSE
----------------
<TABLE>
Interest expense is stated net of the following (in thousands):
Thirteen Weeks Ended Thirty-Nine Weeks Ended
---------------------- ------------------------
October 31, November 1, October 31, November 1,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Interest income $ 23 $ 41 $ 77 $ 467
Capitalized interest 155 353 1,427 699
------ ------ ------ -----
Total for each period $ 178 $ 394 $1,504 $1,166
====== ====== ====== =====
</TABLE>
7
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HILLS STORES COMPANY AND SUBSIDIARIES
- ------------------------------------------------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5. INTEREST EXPENSE (CONTINUED)
----------------------------
Capitalized interest relates to the Company's program to replace its primary
information systems occurring in fiscal years 1997 through 1999.
6. INCOME TAXES
------------
<TABLE>
Income tax benefit (provision) consisted of the following (in thousands):
Thirteen Weeks Ended Thirty-Nine Weeks Ended
------------------------ -------------------------
October 31, November 1, October 31, November 1,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Interim tax benefit
related to losses
before income taxes $10,000 $2,300 $29,900 $17,200
Reversal of accrued tax
liabilities 5,925 - 5,925 -
Valuation allowances on
deferred and interim tax
assets ( 85,425) - ( 85,425) -
------- ------ ------- -------
Total ($69,500) $2,300 ($49,600) $17,200
======= ====== ======= =======
</TABLE>
As the result of substantial resolution of a federal tax audit covering fiscal
years 1991-1993, the Company has determined that certain previously recorded tax
liabilities are no longer required. Accordingly, effective October 31, 1998,
the Company reversed approximately $5.9 million of accrued tax liabilities
(previously included in Other liabilities - noncurrent) that had been
established after October 4, 1993, the effective date of confirmation of the
Company's Plan of Reorganization in its Chapter 11 bankruptcy proceedings
("Emergence Date").
Effective October 31, 1998, the Company recorded valuation allowances of
approximately $85.4 million on all post-emergence deferred and interim tax
assets. These allowances were established to reflect the Company's opinion
that the realization of the deferred tax assets is uncertain as a result of
continuing sales declines and related pre-tax losses.
The Company calculates its provision for interim income taxes (before valuation
allowance) in accordance with Accounting Principles Board Opinion No. 28. This
usually calls for the application of the estimated full year tax rate to interim
pretax accounting income. In circumstances when the usual approach would cause
an unrealistically high interim tax benefit rate or other unreasonable tax
results (which is the case for the interim periods of fiscal years 1997 and
1998), the interim tax provision is calculated by applying the appropriate
Federal and State statutory tax rates to taxable book income. The Company
expects to employ this approach until it is no longer reasonably possible that
8
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HILLS STORES COMPANY AND SUBSIDIARIES
- ------------------------------------------------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6. INCOME TAXES (CONTINUED)
-----------------------
an unreasonably large interim tax benefit (before valuation allowance) rate
would occur. The measurement of interim income taxes has no effect on the
amount of income tax expense for the full year.
7. EARNINGS PER SHARE
------------------
Statement of Financial Accounting Standards Number 128, "Earnings per Share"
("FAS 128") requires the presentation of "basic" earnings per share (income
applicable to common shareholders divided by the weighted-average number of
common shares outstanding during the period) and "diluted" earnings per share
(which gives effect to all dilutive potential common shares that were
outstanding during the period). All prior-period earnings per share data have
been restated to conform to FAS 128. Basic and diluted earnings per share are
the same for the thirteen and thirty-nine week periods ended October 31, 1998
and November 1, 1997, as all common stock equivalents are antidilutive, due to
the net loss incurred during these periods.
Basic loss per share for the thirteen week periods ended October 31, 1998 and
November 1, 1997 was computed based on the weighted average number of common
shares assumed to be outstanding during the period of 10,484,033 and 10,413,708
shares, respectively. Basic loss per share for the thirty-nine week periods
ended October 31, 1998 and November 1, 1997 was computed based on the weighted
average number of common shares assumed to be outstanding during the period of
10,464,345 and 10,373,499 shares, respectively.
If the impact would be dilutive, the following securities would be included in
the calculation of diluted earnings per share: preferred stock, stock options,
series 1993 Warrants and stock rights.
8. 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
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.
In April 1997, three of the Former Directors, Michael Bozic, Norman S. Matthews
and John G. Reen, filed a counterclaim against the Company and the seven
replacement directors seeking damages of not less than $2.5 million for breach
of contract, unjust enrichment and intentional interference with contractual
relations arising out of allegations that the Company improperly failed to honor
their request to exercise stock options. The Company believes the counterclaim
9
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HILLS STORES COMPANY AND SUBSIDIARIES
- ------------------------------------------------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
-----------------------------------------
is without merit and has denied the allegations and asserted various defenses.
Discovery is ongoing in the case.
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 (the "Dolowich suit") 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 (the "Fusco suit") against the parties named in
the Dolowich suit. The Former Directors filed a motion to dismiss the Dolowich
and Fusco suits, and in March 1997 the court denied that motion.
The Company is also involved in various 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.
10
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HILLS STORES COMPANY AND SUBSIDIARIES
- -------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
Certain disclosures contained in this document include forward-looking
statements within the meaning of the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. Although the Company believes its
plans are based upon reasonable assumptions as of the current date, it can give
no assurances that any expectations will be attained. 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 River Valley regions of the Unites States where the
Company has the majority of its stores; 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; potential year 2000 disruption, whether directly
resulting from the state and costs of internal preparation or indirectly
resulting from the impact of year 2000 on customers and/or suppliers; and other
factors that may be described in this document.
RESULTS OF OPERATIONS
QUARTER ENDED OCTOBER 31, 1998 COMPARED WITH
QUARTER ENDED NOVEMBER 1, 1997
Net sales and comparable store sales decreased by 8.0% compared with the same
period in 1997. The Company generated weaker than average sales in nearly
every major merchandising category, led by larger declines in sales of apparel,
toys and electronics. During the quarter, the Company added one additional
advertising circular compared with the prior year.
Cost of sales as a percentage of sales was 73.5% in the third quarter of fiscal
year 1998 and fiscal year 1997. Gross profit decreased by $9.3 million,
primarily because of the decline in sales volume. An improvement in margin rate
from lower merchandise procurement costs was offset by increased promotional
markdowns.
Selling and administrative expenses, including depreciation and amortization,
increased as a percentage of sales to 28.8% in the current quarter compared
with 24.5% in the third quarter of 1997. Selling and administrative expenses
excluding depreciation increased to 26.2% of sales in the third quarter of
fiscal year 1998 from 22.5% in the same period in 1997 primarily as a result of
the decline in sales, and also increased by $6.8 million as the result of
approximately $2.5 million of severance and other payments incurred as the
result of management changes at the end of the quarter, duplicative system
migration costs, and increased advertising and payroll costs. Noncash
depreciation and amortization for the third quarter increased by approximately
$1.7 million resulting from the Company's investment programs.
Net interest expense increased by $1.7 million primarily due to increased
borrowings under the Company's secured credit facility.
The Company reflected a tax charge of $69.5 million in the third quarter of
11
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HILLS STORES COMPANY AND SUBSIDIARIES
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
QUARTER ENDED OCTOBER 31, 1998 COMPARED WITH
QUARTER ENDED NOVEMBER 1, 1997 (CONTINUED)
fiscal 1998 as a result of recording valuation allowances against deferred and
interim tax assets. The effective tax benefit rate was 36.8% in the third
quarter of fiscal year 1997. See Note 6 of Notes to Condensed Consolidated
Financial Statements.
THIRTY-NINE WEEKS ENDED OCTOBER 31, 1998 COMPARED WITH
THIRTY-NINE WEEKS ENDED NOVEMBER 1, 1997
Net sales and comparable store sales decreased by 1.5% compared with the same
period in 1997. Sales increases in seasonal goods, housewares and home
categories were offset by sales decreases in apparel, toys and electronics.
During the first nine months the Company added three advertising circulars
compared with the prior year and reinstated a "free" back to school layaway
promotion not run in 1997.
Cost of sales as a percentage of sales increased to 74.0% compared with 73.8%
for the same period in 1997. Gross profit decreased by $7.1 million or 2.5%.
The decrease in rate was primarily due to higher interim inventory shortages
this year and increased promotional markdowns, during the third quarter of 1998
offset by an improvement in margin rate from lower merchandise procurement
costs.
Selling and administrative expenses, including depreciation and amortization,
increased as a percentage of sales to 28.9% in the first nine months of 1998
from 26.7% in the same period of 1997. Selling and administrative expenses
excluding depreciation increased to 26.1% from 24.4% in the same period in
1997 due to duplicative system migration costs, increased advertising, higher
payroll costs and as a result of the decline in sales. Noncash depreciation
and amortization increased during the period by approximately $4.5 million as a
result of the Company's investment programs.
Net interest expense increased by $2.8 million, primarily due to increased
borrowings under the Company's secured credit facility, partially offset by a
decrease in interest on capital leases and other financing agreements and by
increased capitalized interest.
The Company reflected a tax charge of $49.6 million for the thirty-nine weeks
ended October 31, 1998 as a result of recording valuation allowances against
deferred and interim tax assets. The Company's effective tax benefit rate was
36.5% for the thirty-nine weeks ended November 1, 1997. See Note 6 of the Notes
to Condensed Consolidated Financial Statements.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
RECENT DEVELOPMENTS
The Company has since mid-1998 experienced a substantial erosion in sales and a
resulting substantial erosion in operating results and cash flow. Sales in the
third quarter of fiscal year 1998 declined by approximately 8%, sales for
12
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HILLS STORES COMPANY AND SUBSIDIARIES
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
RECENT DEVELOPMENTS (CONTINUED)
November declined by approximately 10%, and sales in the first two weeks of
December declined by approximately 13%. These declines have resulted in the
need to increase substantially the Company's use of and reliance on its secured
credit facility, made possible, in part, through recent agreed modifications to
the facility by increasing the total credit line, by increasing advance rates,
by modifying certain financial covenants, and by eliminating the year-end
clean-up requirement. (See Note 3 to the Consolidated Financial Statements).
Based on recent operating trends, the Company expects that it will fail the
rolling twelve months cash flow maintenance covenant effective as of the end of
the current fiscal year on January 30, 1999, as required by its secured credit
facility. Such non-compliance, absent a waiver by the secured lenders, would
constitute an event of default under the agreement. The prospect of such non-
compliance could also be deemed to constitute a material adverse effect,
resulting in an event of default. An event of default would result in potential
acceleration of repayment by the lenders, among other remedies available.
The Company's Senior Notes indenture and certain other obligations of the
Company contain cross-default provisions, which might also cause repayment
acceleration of the Senior Notes or other obligations due to an event of default
under the secured credit facility.
Through November 1998, the Company had minimal disruption of merchandise
shipments, although selected vendors restricted credit availability to varying
degrees, usually by reducing dating terms or by reducing the maximum amounts of
credit lines. In early December, the Company began to experience a more
pronounced merchandise shipping disruption on the part of a more significant
number of vendors, although overall in-stock position remained reasonably good
at that time. The Company has had indications from a substantial number of
vendors and factors that future merchandise shipments will likely be negatively
impacted to a more substantial degree. The Company expects the cumulative
effect of continued shipping disruptions on in-stock merchandise availability
will be to negatively impact sales, operating results and financial liquidity
to an even larger, but undetermined, degree than the Company has experienced in
recent months.
Effective November 12, 1998, the Company and Ames Department Stores, Inc.,
("Ames") signed a definitive agreement providing for the acquisition of the
Company by Ames. That transaction is contingent on Ames' successful completion
of its tender offer to the Company's shareholders and noteholders, on Ames
successfully obtaining final financing, and on regulatory approval and other
customary closing conditions. The Board of Directors of the Company has
recommended that the Company's stockholders tender their shares to Ames in the
offer.
If the Ames tender offer is not successful, and the Company's recent operating
trends continue, there is a substantial prospect that the Company would be
required to seek protection under federal bankruptcy laws in the near term.
13
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HILLS STORES COMPANY AND SUBSIDIARIES
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
ANALYSIS OF CASH FLOW
Net cash used for operating activities was $187.3 million for the thirty-nine
weeks ended October 31, 1998 compared with a use of $137.4 million for the same
period last year, an increase of $49.9 million. This was primarily due to a
decrease of approximately $22.0 million in operating cash flow, or EBITDA
(earnings/loss before interest, taxes, depreciation and amortization), and a
larger increase in inventory together with a smaller increase in trade
payables in the first nine months of 1998 compared to the same period of 1997.
The larger inventory increase in 1998 resulted from the run-off of excess
inventories in fiscal year 1997 that were on hand at the end of fiscal year
1996, together with targeted increases in certain basic and seasonal merchandise
categories coupled with the lower than expected sales volume in the third
quarter of 1998. The smaller trade payables increase resulted from, in part,
a shift in the flow of merchandise in 1998 to imported merchandise requiring
letters of credit together with a modest tightening of trade credit terms in
October 1998.
Net cash used for investing activities was $41.0 million compared with $39.3
million in the first nine months of 1997, a $1.7 million increase. A larger
increase in expenditures related to the Company's information systems
replacement program was partially offset by a reduction in other capital
expenditure programs. Fixed asset capital spending decreased to $14.8 million
in the first nine months of fiscal year 1998 (exclusive of approximately $7
million of non-cash capital expenditures financing by capital leases) compared
with $20.3 million in the same period of 1997, while deferred software
expenditures increased to $26.2 million in the first nine months of 1998
compared with $19.0 million last year.
During fiscal year 1998, capital expenditures are expected to approximate $25
million, including approximately $7 million of non-cash acquisitions which the
Company has financed by capital leases, and deferred software expenditures are
expected to approximate $34 million, including approximately $2 million of
capitalized interest. The Company relocated one store during the second quarter
of fiscal year 1998 and will not open any new stores during the year.
Net cash provided by financing activities was $207.8 million in the first nine
months of fiscal 1998 compared with $130.6 million in the same period a year
ago, a $77.2 million increase. The increase was due to reduced beginning of the
year cash balances in fiscal year 1998 compared with fiscal year 1997 and the
increased use of funds for operating activities which required increased
borrowings under the secured credit facility in fiscal year 1998. During the
first nine months of fiscal year 1998, average revolving borrowings under the
secured credit facility were $99.0 million at an average interest rate of 8.0%
compared to $39.1 million at an interest rate of 8.1% for the same period in
1997. Excess credit availability under the secured credit facility at October
31, 1998 was approximately $79 million compared with approximately $124 million
at November 1, 1997.
14
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
SYSTEMS-RELATED INVESTMENT AND YEAR 2000 READINESS
The Company's systems replacement program is designed to replace the Company's
present mainframe systems, including certain host-connected store systems and
certain other office systems. The program is intended to provide benefits
in improved operating efficiencies, improved data integrity and improved
information access, through new and improved process functionality included in
new application programs, and through upgraded data management and systems
infrastructure. While the systems replacement program was not initiated
specifically for correcting year 2000 (Y2K) "bugs," the systems replacement
program eliminates the need for specific Y2K corrections for the impacted
systems being replaced, which represent the majority of the Company's
information and data processing systems.
The Company's systems replacement program was initiated at the end of fiscal
year 1996, following a planning engagement by a major systems consulting
organization. The consultants initially informed the Company that there was a
high probability that substantial completion could be achieved in 1998 as a
result of the plan to install a specific collection of unmodified, slightly or
moderately modified third-party package systems. However, during late 1997 and
early 1998, the Company experienced difficulty in acquiring the contractors and
staff needed to install portions of the new systems, and there were delays in
the integration, testing and installation of certain elements of the new
systems. The Company has taken corrective action, including obtaining an
independent assessment of steps that can be implemented to further increase the
likelihood of the program's timely success. As of early December 1998, the
Company has:
* installed and is increasing its use of most of its new systems
infrastructure, including most office processors, office and store
servers, networks, client workstations, data storage and backup
devices, and operating systems and systems management software,
* implemented most of its new support systems, primarily its finance-
related and payroll/human resource systems,
* implemented the first merchandise system component, and
* finalized or is nearing completion of modifications and interfaces
for the remaining systems components (primarily merchandise-related),
and has begun testing of such components.
For these remaining systems, data conversion has begun, the balance of initial
testing and integration testing remains to be completed in the fourth quarter of
fiscal 1998 and the first few months of fiscal year 1999, which is to be
followed by completion of data conversion and pilot testing. The Company
currently anticipates implementation of these remaining new system components
and the completion of the /training of impacted Company personnel in their use
by approximately August 1999.
15
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
SYSTEMS-RELATED INVESTMENT AND YEAR 2000 READINESS (CONTINUED)
<TABLE>
The systems replacement program investment to date through October 31, 1998, and
estimated remaining spending for the systems replacement program, is as follows
(in millions):
Through October Additional
31, 1998 Projected Total
--------------- ---------- -------
<S> <C> <C> <C>
Hardware capital expenditures $ 13.0 $ 1.3 $ 14.3
Deferred software expenditures 49.7 22.5 72.2
------- ------- -------
Subtotal 62.7 23.8 86.5
Less - expenditures financed by 3.1 - 3.1
capital leases ------- ------- -------
Net cash program expenditures $ 59.6 $ 23.8 $ 83.4
======= ======= =======
</TABLE>
Expenditures to complete the information systems replacement program are
estimated at approximately $8 million for the balance of fiscal year 1998, and
approximately $16 million in fiscal year 1999.
In addition, the Company has acquired certain additional computer equipment for
this program (with an initial value if purchased of approximately $8 million)
through operating lease transactions for periods less than the economic lives of
of the equipment. Following the period of systems duplication that continues
into mid-1999, rents for this equipment will supplant rents for the replaced
equipment.
In connection with the Company's information systems replacement program, the
Company is implementing a supplemental program designed to increase the
likelihood that all new and continuing systems are capable of year 2000 ("Y2K")
compliance, including upgrades to the continuing systems, as needed. The cost
of most of such upgrades are generally covered by on-going third party software
maintenance agreements. Additional Y2K systems remediation and testing costs,
(the primary remediation costs coming for the Company's store point-of-sale
("POS") system) are currently not anticipated to exceed approximately $3
million. To address the Y2K needs of the store POS control equipment as well as
to improve its functionality, the Company has decided to accelerate the
replacement of the existing control equipment (which is currently leased or
owned for negligible cost) with new leased equipment. The vendors for the POS
remediation and control equipment upgrade have been selected, detailed design
work is under way, and completion is targeted for late summer 1999. The POS
remediation and control equipment upgrade is not a component of the general
mainframe systems replacement program.
The Company is also taking steps to test, and assess its exposure and related
alternatives and costs, if any, to resolve potential non-systems Y2K problems.
16
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
SYSTEMS-RELATED INVESTMENT AND YEAR 2000 READINESS (CONTINUED)
The Company has commenced a program to communicate with its merchandise and
service vendors, for the purpose of limiting its exposure to vendors who may not
be Y2K compliant. In connection with this program, the Company expects to
undertake contingency plans, if necessary, to direct, to the extent possible,
merchandise orders to vendors who can demonstrate Y2K readiness most clearly, as
well as to find alternative methods of interacting with any key vendors who may
need assistance should they have Y2K difficulties. Testing is under way to
validate incoming and outgoing electronic data interchange (EDI) commerce with
EDI partners. The Company does not currently have other contingency plans to
address direct (internal) or indirect (external) Y2K disruption, but intends to
consider such contingency plans as part of its evaluation process regarding its
internal Y2K plans and as it obtains additional information regarding the
readiness of its merchandise and service vendors and lenders.
Because the old systems being replaced are not Y2K compliant, a substantial
delay in conversion to the new systems or improper functioning of the new,
remediated or upgraded systems could severely disrupt the Company's ability to
process merchandise orders, receive goods, pay its vendors, and/or service and
sell to its customers. In addition, if a significant number of the Company's
merchandise and service vendors or lenders are directly or indirectly negatively
impacted by Y2K noncompliance, the Company could suffer similar adverse effects.
While the Company can not quantify the probability or possible degree of impact
on the Company's business operations should significant direct or indirect Y2K
disruptions occur, a significant disruption could result in the Company's
available liquidity falling short of its cash requirements to support its
operations and service its debt.
The Company is employing an independent consultant to provide assistance in
assessing the feasibility and advisability of employing alternative strategies
for meeting the Y2K deadline. The Company's current financial and operating
circumstances substantially lessen the practicality of pursuing such alternative
strategies, and following the development of alternative plans and assessing
the risks of both the existing and the alternative plans, the independent
consultant has recommended, and Company management agrees, that the best course
of action is to complete the current replacement program and other Y2K actions
as outlined above, and not pursue alternative strategies. The decision to
continue the current replacement program and not pursue alternative strategies
will be reviewed with the Board of Directors at their next scheduled meeting in
December. It is highly unlikely, in the event the Company determines to
continue with the replacement program, that time constraints will allow future
consideration of the alternative strategies.
The Company has taken steps to mitigate the risk of negative impact that its
current operating and financial difficulties (see "Recent Developments" above)
might have on completing its systems replacement program and other Y2K actions.
However, the Company can not assure that such difficulties will not have a
negative impact to some degree.
17
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
OTHER CONSIDERATIONS
The terms of the Company's secured credit facility and senior notes limit the
ability of the subsidiaries to pay dividends. Any or all of the restrictions,
limitations or contingencies under the secured credit 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.
18
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
- ------- -----------------
See Note 6 of the Notes to Condensed Consolidated Financial Statements.
ITEM 2. CHANGES IN SECURITIES
- ------- ---------------------
On November 11, 1998, the Company amended its Rights Agreement dated as of
August 16, 1994 (the "Rights Agreement") between the Company and The Chase
Manhattan Bank (formerly known as Chemical Bank), as Rights Agent.
The Amendment to the Rights Agreement provides that no person shall become an
Acquiring Person under the Rights Agreement by reason or as a result of the
consummation of the merger between the Company and Ames Department Stores, Inc.
and that no Distribution Date shall occur by reason or as a result of
consummation of the merger. The Amendment also provides that the indemnity
provided for therein shall survive the termination of the Rights Agreement
and the termination and the expiration of the Rights.
The foregoing description of the Amendment to Rights Agreement does not purport
to be complete and is qualified in its entirety by reference to the Amendment
to Rights Agreement, which if filed as an exhibit hereto and incorporated herein
by reference.
During the quarter ended October 31, 1998, the Company issued 1 share of Common
Stock, par value $.01 per share (the "Common Shares"), upon the conversion of 1
share of Series A Convertible Preferred Stock, par value $.10 per share (the
"Series A Preferred Shares"). The Series A Preferred Shares were issued
pursuant to the exemption from registration set forth in Section 1145(a) of the
Federal Bankruptcy Code, and the Common Shares were issued pursuant to the
exemption contained in Section 3(a)(9) of the Securities Act of 1933, as
amended.
ITEM 5. OTHER INFORMATION
-----------------
In accordance with recently amended regulations of the Securities and Exchange
Commission ("SEC"), these are the dates by which a stockholder who wishes to
make a proposal to the Company at the Company's annual meeting of stockholders
must submit that proposal to the Company for consideration.
In order to be eligible for inclusion in the Company's proxy statement and form
of proxy for the next annual meeting, stockholder proposals must comply with SEC
Rule 14a-8 and any other applicable rules and must be delivered to the Company's
principal executive offices at least 120 days prior to the date of mailing of
the Company proxy statement for last year's annual meeting. Last year's proxy
statement was sent April 30, 1998, so the date by which proposals are required
to be received under Rule 14a-8 is December 31, 1998.
In addition, Section 4 of Article II of the Company's By-laws requires that any
stockholder who wishes to nominate a candidate for election to the Board of
Directors must provide notice of such candidate to the Company at its principal
19
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (continued)
- ------ --------------------------------------------
executive offices not less than 60 days in advance of the anniversary of the
date of mailing of notice of the annual meeting in the previous year. Section 5
of Article II of the By-laws imposes the same deadline for stockholders
proposals. Any nomination or proposal submitted after March 1, 1999 will be
untimely. The By-laws contain a number of other substantive and procedural
requirements, which should be reviewed by any interested stockholder.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- ------ --------------------------------
a. The following documents are filed as part of this report:
1
3.1 Amended and Restated Certificate of Incorporation of the Company,
as amended.
2
3.2 Amended and Restated By-Laws of the Company.
3
4.1 Certificate of the Voting Powers, Preferences and other
designated attributes of the Series A Convertible Preferred
Stock of the Company.
4
4.2 Form of Series 1993 Stock Right.
5
4.3 Series 1993 Warrant Agreement dated October 4, 1993 between the
Company and Chemical Bank, as Warrant Agent.
6
4.4 Rights Agreement dated as of August 16, 1994 (the "Rights
Agreement") between the Company and Chemical Bank, as Rights
Agent.
6
4.5 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 4.4
hereto).
6
4.6 Form of Right Certificate (which is attached as Exhibit B to the
Rights Agreement incorporated by reference as Exhibit 4.4 hereto).
7
4.7 Amendment dated as of October 18, 1995 to the Rights Agreement.
8
4.8 Indenture dated as of April 19, 1996 relating to the 12 1/2%
Senior Notes due 2003, Series B, of the Company.
4.9 Second Amendment dated as of November 11, 1998 to the Rights
Agreement.
9
10.1 Loan and Security Agreement (the "Loan and Security Agreement")
dated as of September 30, 1996 and amended and restated as of
January 30, 1998 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.
20
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (continued)
- ------ --------------------------------------------
10
10.2 First Amendment to Amended and Restated Loan and Security
Agreement dated as of September 30, 1998 among the Financial
Institutions named therein as the Lenders, BankAmerica Business
Credit, Inc. as the Agent, Hills Department Store Company as the
Borrower, and the Other Loan Parties named therein.
11
10.3 Second Amendment to Amended and Restated Loan and Security
Agreement dated as of October 31, 1998 among Hills Department
Store Company, Hills Stores Company, the Other Loan Parties
named therein, the financial institutions listed on the signature
pages thereof, and BankAmerica Business Credit, Inc., as Agent.
12
10.4 Agreement and Plan of Merger by and among Ames Department Stores,
Inc., HSC Acquisition Corp. and Hills Stores Company dated as of
November 12, 1998.
13
10.5 * Employment Agreement made as of February 7, 1996 with Gregory K.
Raven. (No longer effective).
10.6 * Letter dated October 27, 1998 relating to the resignation of
Gregory K. Raven as President and Chief Executive Officer of the
Company.
14
10.7 * Consulting Agreement made as of February 7, 1998 with Chaim Y.
Edelstein. (No longer effective).
15
10.8 * Amendment dated as of August 1, 1998 to the Consulting Agreement
with Chaim Y. Edelstein. (No longer effective).
10.9 * Executive Employment Agreement dated as of October 27, 1998
between the Company and Chaim Edelstein as amended by letter
agreement dated November 6, 1998.
16
10.10 * Employment Agreement made as of November 19, 1996 with Michael
R. Hamilton.
10.11 * Amendment dated November 2, 1998 to Employment Agreement between
the Company and Michael R. Hamilton.
17
10.12 * Employment Agreement made as of July 22, 1997 with Frederick L.
Angst. (No longer effective).
10.13 * Letter dated October 28, 1998 relating to the resignation of
Frederick L. Angst as Executive Vice President-Chief Merchandising
Officer of the Company.
18
10.14 * Employment Agreement made as of November 11, 1997 with C. Scott
Litten.
19
10.15 * 1993 Incentive and Nonqualified Stock Option Plan, as amended.
13
10.16 * 1996 Directors Stock Option Plan.
21
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (continued)
- ------ --------------------------------------------
20
10.17 * Hills Stores Company/Hills Department Store Company Associate
Stock Purchase Plan, as amended. (Terminated effective December
1, 1998).
11 Statements regarding computation of per share earnings.
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 September 16, 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 8-K of the
Company dated October 4, 1993.
6. Incorporated by reference from the Report on Form 8-K of the
Company dated August 16, 1994.
7. Incorporated by reference from the Report on Form 8-K of the
Company dated October 18, 1995.
8. Incorporated by reference from the Report on Form 10-Q of the
Company for the quarter ended May 4, 1996.
9. Incorporated by reference from the Report on Form 8-K of the
Company dated January 30, 1998.
10. Incorporated by reference from the current Report on Form 8-K
of the Company dated September 30, 1998.
11. Incorporated by reference from the current Report on Form 8-K
of the Company dated October 31, 1998.
12. Incorporated by reference from the Schedule 14D-9 of the Company
dated November 18, 1998.
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 Annual Report on Form 10-K
of the Company for the fiscal year ended January 31, 1998.
15. Incorporated by reference from the Quarterly Report Form 10-Q
of the Company for the quarter ended August 1, 1998.
22
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (continued)
- ------ --------------------------------------------
16. Incorporated by reference from the Quarterly Report on Form 10-Q
for the quarter ended November 2, 1996.
17. Incorporated by reference from the Quarterly Report on Form 10-Q
of the Company for the quarter ended August 2, 1997.
18. Incorporated by reference from the Quarterly Report on Form 10-Q
of the Company for the quarter ended November 1, 1997.
19. Incorporated by reference from the Company's definitive proxy
materials dated May 5, 1997.
20. Incorporated by reference from the Quarterly Report on Form 10-Q
of the Company for the quarter ended May 2, 1998.
b. Reports on Form 8-K.
The Company filed a Current Report on Form 8-K dated September 30,
1998 relating to the First Amendment to the Loan and Security
Agreement with BankAmerica Business Credit, Inc. and the financial
institutions named therein.
The Company filed a Current Report on Form 8-K dated October 31,
1998 relating to the Second Amendment to the Loan and Security
Agreement with BankAmerica Business Credit, Inc. and the financial
institutions named therein.
23
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
HILLS STORES COMPANY
Date: December 15, 1998 /s/C. Scott Litten
---------------------------
C. Scott Litten
Executive Vice President-
Chief Financial Officer
and Principal Accounting Officer
24
<PAGE>
<TABLE>
EXHIBIT INDEX
Pursuant to Item 601 of Regulation S-K
Exhibit Title
- ------- -----
<S> <C>
4.9 Second Amendment dated as of November 11, 1998 to the Rights
Agreement.
10.6 Letter dated October 27, 1998 relating to the resignation of
Gregory K. Raven as President and Chief Executive Officer of
the Company.
10.9 Executive Employment Agreement dated as of October 27, 1998
between the Company and Chaim Edelstein as amended by letter
agreement dated November 6, 1998.
10.11 Amendment dated November 2, 1998 to Employment Agreement between
the Company and Michael R. Hamilton.
10.13 Letter dated October 28, 1998 relating to the resignation of
Frederick L. Angst as Executive Vice President-Chief Merchandising
Officer of the Company.
11 Statements regarding computations of earnings per share.
27 Financial Data Schedule.
</TABLE>
25
<page 1>
<TABLE>
EXHIBIT 11
HILLS STORES COMPANY AND SUBSIDIARIES
STATEMENTS RE COMPUTATION OF PER SHARE EARNINGS
<CAPTION>
Thirteen Thirteen
Weeks Ended Weeks Ended
October 31, November 1,
1998 1997
----------- -----------
<S> <C> <C>
Weighted average basic shares outstanding
- -----------------------------------------
Weighted average number of common shares
assumed to be outstanding during the period 10,484,033 10,413,708
Assumed conversion of preferred stock - -
Assumed exercise of stock options - -
Assumed exercise of stock rights - -
Assumed exercise of stock warrants - -
---------- ----------
10,484,033 10,413,708
========== ==========
</TABLE>
<TABLE>
<CAPTION>
Thirty-nine Thirty-nine
Weeks Ended Weeks Ended
October 31, November 1,
1998 1997
----------- -----------
<S> <C> <C>
Weighted average basic shares outstanding
- -----------------------------------------
Weighted average number of common shares
assumed to be outstanding during the period 10,464,345 10,373,499
Assumed conversion of preferred stock - -
Assumed exercise of stock options - -
Assumed exercise of stock rights - -
Assumed exercise of stock warrants - -
---------- ----------
10,464,345 10,373,499
========== ==========
</TABLE>
<PAGE>
<page 2>
<TABLE>
EXHIBIT 11
HILLS STORES COMPANY AND SUBSIDIARIES
STATEMENTS RE COMPUTATION OF PER SHARE EARNINGS
<CAPTION>
Thirteen Thirteen
Weeks Ended Weeks Ended
October 31, November 1,
1998 1997
----------- -----------
<S> <C> <C>
Weighted average diluted shares outstanding
- -------------------------------------------
Weighted average number of common shares assumed
to be outstanding during the period 10,484,033 10,413,708
Assumed conversion of preferred stock - -
Assumed exercise of stock options - -
Assumed exercise of stock rights - -
Assumed exercise of stock warrants - -
---------- ----------
10,484,033 10,413,708
========== ==========
</TABLE>
<TABLE>
<CAPTION>
Thirty-nine Thirty-nine
Weeks Ended Weeks Ended
October 31, November 1,
1998 1997
----------- -----------
<S> <C> <C>
Weighted average diluted shares outstanding
- -------------------------------------------
Weighted average number of common shares assumed
to be outstanding during the period 10,464,345 10,373,499
Assumed conversion of preferred stock - -
Assumed exercise of stock options - -
Assumed exercise of stock rights - -
Assumed exercise of stock warrants - -
---------- ----------
10,464,345 10,373,499
========== ==========
</TABLE>
The conversion of Preferred Stock, and the exercise of stock options, stock
rights, and stock warrants was not assumed as the result would be anti-dilutive.
<PAGE>
EXHIBIT 4.9
SECOND AMENDMENT
to
RIGHTS AGREEMENT
SECOND AMENDMENT dated as of November 11, 1998 (this "Amendment")
between Hills Stores Company, a Delaware corporation (the "Company"), and The
Chase Manhattan Bank (formerly known as Chemical Bank), a New York banking
corporation, as Rights Agent (the "Rights Agent"), to Rights Agreement dated as
of August 16, 1994, between the Company and the Rights Agent.
WHEREAS, the Company and the Rights Agent have entered into a Rights
Agreement dated as of August 16, 1994 (as amended by the Amendment to Rights
Agreement, dated as of October 18, 1995, and as otherwise amended, supplemented
or modified from time to time, the "Rights Agreement");
WHEREAS, Section 26 of the Rights Agreement provides that at any time
prior to the Distribution Date (as defined in the Rights Agreement), the Company
may, and the Rights Agent shall if the Company so directs, supplement or amend
any provision of the Rights Agreement (other than an amendment or supplement
that reduces the Redemption Price or provides for an earlier Expiration Date
(each, as defined in the Rights Agreement)) without the approval of any holder
of Rights issued pursuant to the Rights Agreement;
WHEREAS, the Distribution Date has not occurred and this Amendment does
not reduce the Redemption Price or provide for an earlier Expiration Date; and
WHEREAS, the Company and the Rights Agent desire to amend the Rights
Agreement on the terms set forth herein;
NOW, THEREFORE, in consideration of the premises and the mutual agree-
ments herein set forth, the parties hereby agree as follows:
1. All capitalized terms used herein, unless otherwise defined,
shall have the meanings ascribed to them in the Rights Agreement, and each
reference in the Rights Agreement to "this Rights Agreement," "hereof,"
"herein," "hereunder" or "hereby" and each other similar reference shall be
deemed to refer to the Rights Agreement as amended hereby. All references to
the Rights Agreement in any other agreement between or among any of the parties
hereto relating to the transactions contemplated by the Rights Agreement shall
be deemed to refer to the Rights Agreement as amended hereby.
2. The definition of "ACQUIRING PERSON" in Section 1 of the Rights
Agreement is hereby amended by adding the following proviso to the end of such
definition:
"Notwithstanding the foregoing, no person shall become an Acquiring
Person by reason or as a result of the consummation of the Merger or any other
transactions contemplated by the Merger Agreement."
<page 2>
3. The definition of "DISTRIBUTION DATE" in Section 1 of the Rights
Agreement is hereby amended by adding the following proviso to the end of such
definition:
"; provided that no Distribution Date shall occur by reason or as a
result of the consummation of the Merger or any other transactions contemplated
by the Merger Agreement."
4. The following definitions are hereby added to Section 1:
""Merger" means the merger of Merger Subsidiary with and into the
Company upon the terms and subject to the conditions set forth in the Merger
Agreement."
""Merger Agreement" means the Agreement and Plan of Merger, dated as of
November 12, 1998, among Ames, Merger Subsidiary and the Company."
""Merger Subsidiary" means HSC Acquisition Corp., a Delaware corporation
and a direct, wholly-owned subsidiary of Ames"
""Ames" means Ames Department Stores, Inc., a Delaware corporation."
5. Section 21 of the Rights Agreement is hereby amended by
inserting the following at the end of Section 21(j) thereof:
"The indemnity provided herein shall survive the termination of this
Agreement and the termination and the expiration of the Rights. The
costs and expenses incurred in enforcing this right of indemnification
shall be paid by the Company. Anything to the contrary notwithstanding,
in no event shall the Rights Agent be liable for special, punitive,
indirect, consequential or incidental loss or damage of any kind what-
soever (including but not limited to lost profits), even if the Rights
Agent has been advised of the likelihood of such loss or damage. Any
liability of the Rights Agent under this Rights Agreement will be
limited to the amount of fees paid by the Company to the Rights Agent."
6. This Amendment shall be governed by and construed in accordance
with the laws of the State of Delaware.
7. This Amendment may be signed in any number of counterparts, each
of which shall be deemed an original, with the same effect as if the signatures
thereto and hereto were upon the same instrument.
8. Except as expressly modified by this Amendment, the Rights
Agreement shall remain in full force and effect.
<page 3>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed as of the day and year first above written.
HILLS STORES COMPANY
By: /s/ William K. Friend
-------------------------
Name: William K. Friend
Title: Sr. Vice President-Secretary
THE CHASE MANHATTAN BANK
(formerly known as Chemical Bank),
as Rights Agent
By: /s/ Eric Leason
-------------------------
Name: Eric Leason
Title: Vice President
EXHIBIT 10.6
HILLS STORES COMPANY
HILLS DEPARTMENT STORE COMPANY
15 Dan Road
Canton, Massachusetts 02021
October 27, 1998
Mr. Gregory K. Raven
15 Dan Road
Canton, Massachusetts 02021-9128
Dear Gregory:
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 February 7, 1996, 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.
2. SEVERANCE.
(a) The Companies hereby agree to pay you as severance a
payment in cash of $1,400,000, of which $1,120,000 will be paid on or before
October 30, 1998 and $280,000 will be paid on February 1, 1999. The Companies
agree to make such payments by wire-transfer to your bank account pursuant to
such instructions as you shall provide. These payments and all other payments
and benefits to you under this letter agreement are in exchange for your release
<page 2>
Mr. Gregory K. Raven
October 27, 1998
Page -2-
of your rights under the Employment Agreement, your surrender of options
pursuant to paragraph 3(a) hereof, your agreement to continue in effect section
8 and 9 of your Employment Agreement, your execution of the release contained in
paragraph 5 hereof, and your resignation three months prior to the expiration of
the term of your employment provided in the Employment Agreement.
(b) The Companies will reimburse you for your heretofore
unreimbursed 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) In the event that either of the Companies consummates on
or before January 31, 1999 a transaction that would constitute a "Change of
Control" under the Employment Agreement, the Companies will pay you the
additional sum of $250,000 in cash promptly following the consummation of the
constituting the "Change of Control."
(d) The Companies will continue for a period of one year
from the date hereof the benefits under Sections 4(c) and 4(h) of the Employment
Agreement, provided that such benefits will include only medical benefits,
dental benefits, life insurance, short term and long term disability benefits
and car allowance all as in effect on the date of this letter agreement.
(e) The Companies will pay the fee, not to exceed $25,000
per year, to provide you with outplacement services by the firm of your choosing
until the earlier of (i) the first anniversary of the date of this letter
agreement and (ii) the date on which you accept employment with another
employer.
(f) 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
<page 3>
Mr. Gregory K. Raven
October 27, 1998
Page -3-
you otherwise might be entitled under any understanding or agreement with the
Companies or any of their subsidiaries; provided, however, that you will be
entitled to receive your accrued base salary through and including October 28,
1998 and payment on account of accrued vacation through the date of this letter
agreement.
(g) 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. The
Companies agree that any amounts payable hereunder shall be subject to
withholding at a rate of 28% for federal income tax purposes.
3. OPTIONS AND RESTRICTED SHARES. (a) You hereby surrender for
cancellation, without consideration, all options to purchase shares of common
stock of the Company that were previously granted to you by the Company. Such
options (and any option grant agreements related thereto) are hereby terminated.
(b) You will be issued 100,000 restricted shares of Common
Stock granted to you under the Employment Agreement, and all restrictions on
such shares will lapse as of the date hereof.
4. CONTINUING OBLIGATIONS.
(a) The provisions of Sections 8 and 9 of the Employment
Agreement will 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. RELEASE BY RAVEN.
(a) You hereby represent that you do not have any claim,
action or proceeding pending against Hills. For purposes of this paragraph 5
and paragraph 6(a), the term "Hills" refers to the Companies, each of their
<page 4>
Mr. Gregory K. Raven
October 27, 1998
Page -4-
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
agreement, 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 federal, state or local law or regulation
(except to the extent such claim cannot be released by law), and any claim for
attorney's fees or costs.
(c) You promise never to file or participate in a lawsuit,
arbitration or other legal proceeding asserting any claims that are released
pursuant to this paragraph 5, unless you are compelled to testify or otherwise
participate in any lawsuit, arbitration or other legal proceeding by subpoena
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, Hills shall be entitled to any other relief available
to it at law or in equity.
<page 5>
Mr. Gregory K. Raven
October 27, 1998
Page -5-
(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
violation, or violation of any federal, state or local law or regulation.
6. RELEASE BY THE COMPANIES.
(a) Hills hereby represents that it does not have any claim,
action or proceeding pending against you. Except as necessary to enforce the
terms of this letter agreement, 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 agreement 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 6, unless the Companies are
compelled to testify or otherwise participate in any lawsuit, arbitration or
other legal proceeding by subpoena 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.
<page 6>
Mr. Gregory K. Raven
October 27, 1998
Page -6-
(c) In executing this letter agreement, you are not
admitting any liability or wrongdoing, and the considerations exchanged herein
do not constitute an admission by you of any liability, error, contract
violation, or violation of any federal, state or local law or regulation.
7. MISCELLANEOUS.
(a) This letter agreement will 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 6, 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.
(c) This letter agreement constitutes the entire agreement
between the parties hereto with respect to the subject matter hereof and fully
supersedes any and all prior agreements or understandings between us with
respect to such subject matter. 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.
<page 7>
Mr. Gregory K. Raven
October 27, 1998
Page -7-
(f) The Companies shall pay to you all costs incurred by you
in any proceeding for the successful enforcement of the terms of this Agreement,
including reasonable costs of investigation and reasonable attorneys' fees and
expenses.
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/ Chaim Y. Edelstein
-------------------------
Chairman
ACCEPTED AND AGREED
AS OF OCTOBER 27th, 1998 By: /s/ William K. Friend
-------------------------
/s/ Gregory K. Raven Sr. Vice President-Secretary
- -------------------------
Gregory K. Raven
EXHIBIT 10.9
EXECUTIVE EMPLOYMENT AGREEMENT
------------------------------
EXECUTIVE EMPLOYMENT AGREEMENT made as of October 27, 1998 among Hills
Stores Company, a Delaware corporation (the "Company"), Hills Department Store
Company, a Delaware corporation and wholly-owned subsidiary of the Company
(the "Subsidiary"), each having its principal office at 15 Dan Road, Canton,
Massachusetts 02021-9128, and Chaim Y. Edelstein (the "Executive"), an
individual residing at the address specified on the signature page hereof.
The Company and the Subsidiary each desire to employ the Executive in
the capacities of President and Chief Executive Officer, and the Executive
desires to be so employed by the Company and the Subsidiary, in each case
subject to the terms and conditions set forth in this agreement (the
"Agreement").
Now, therefore, in consideration of the mutual covenants hereinafter set
forth and other good and valuable consideration the receipt and sufficiency of
which is hereby acknowledged, the Company and the Executive intending to be
legally bound hereby agree as follows:
1. EMPLOYMENT: TERM. The Company and the Subsidiary each hereby
employ the Executive, and the Executive hereby accepts such employment and
agrees to serve the Company and the Subsidiary, upon the terms and conditions
hereinafter set forth, for a term commencing on October 27, 1998 (the
"Commencement Date") and terminating on May 1, 2000 (the "Ending Date") unless
terminated earlier in accordance with Section 5 (the "Term").
2. POSITION: CONDUCT.
(a) During the Term, the Executive will hold the titles and
offices of, and serve in the positions of, President and Chief Executive Officer
of the Company and the Subsidiary. The Executive shall report to the Board of
Directors of the Company and the Subsidiary and shall perform such specific
duties and services of a chief executive nature (including service as an
officer, director or equivalent position of any subsidiary, affiliated company
or venture of the Company, without additional compensation) as they shall
reasonably request consistent with the Executive's position; provided, however,
if there is ever any conflict between the instructions of the Board of the
Company and the instructions of the Board of the Subsidiary, the instructions of
the Board of the Company shall govern.
(b) During the Term, the Executive agrees to (i) devote his
full time and attention and best efforts to the business and affairs of the
Company and the Subsidiary and to faithfully and diligently perform, to the best
of his ability, all of his duties and responsibilities; (ii) abide by all
applicable policies of the Company and the Subsidiary from time to time in
effect provided that such policies are reasonable and comply with applicable
law; and (iii) not take any action or conduct himself in any manner which would
<page 2>
be reasonably likely to harm the reputation or goodwill of the Company or the
Subsidiary. Nothing in this Section shall preclude the Executive from devoting
reasonable time and attention to (A) serving, with the prior approval of the
Board of Directors of the Company and the Subsidiary, as director, trustee or
member of a committee of any organization; (B) engaging in charitable and
community activities; and (C) managing his personal investments and affairs;
provided that such activities do not involve any material conflict of interest
with the interests of the Company or individually or collectively interfere
materially with the performance of his duties and responsibilities as
contemplated under this Agreement.
(c) During the Term, the Executive will reside in New York,
New York but will, however, spend substantially all of his working time at the
Company's headquarters in Canton, MA and Pittsburgh, PA and at the Company's
store locations and other facilities.
3. BOARDS OF DIRECTORS. While it is understood that the right to
elect directors of the Company is by law vested in the stockholders and
directors of the Company, it is nevertheless mutually contemplated that, subject
to such rights, the Executive will continue to serve as a member of the
Company's Board of Directors following the Commencement Date. In this regard,
the Company will nominate the Executive for reelection to successive terms as a
member of the Board of Directors of the Company during the Term. The Company
will cause the Executive to serve as a member of the Board of Directors of the
Subsidiary and use its reasonable efforts to retain him as such during the Term.
The Executive agrees to serve on the Board of Directors of the Company and the
Subsidiary without additional compensation.
4. SALARY: ADDITIONAL COMPENSATION: PERQUISITES AND BENEFITS.
(a) As an inducement to Executive to accept the position of
President and Chief Executive Officer, the Company will pay the Executive a
signing bonus (the "Signing Bonus") in the amount of $500,000 upon execution of
this Agreement. The Signing Bonus will be returned by the Executive, pro rata,
if the employment of the Executive is terminated by the Company for Cause (as
that term is defined in Section 6(d)) or if the Executive terminates his
employment without Good Reason (as that term is defined in Section 6(e); such
termination without Good Reason not to include for any purpose under this
Agreement termination on account of death or Disability (as hereinafter
defined)) prior to the Ending Date; provided, however, that the Executive will
not be required in these circumstances to return any portion of the Signing
Bonus if (x) the Executive has served at least six months and (ii) prior to the
termination of the Executive's employment as aforesaid, the Company has entered
judicially supervised reorganization proceedings ("Reorganization Proceedings").
The amount of the Signing Bonus to be returned shall be in the proportion that
the number of days remaining to the Ending Date at the time of termination bears
to the total number of days from the Commencement Date to the Ending Date. For
the avoidance of doubt, the parties acknowledge that if the Executive's
employment is terminated at any time following the Company's rejection or
disaffirmance of this Agreement, the Executive will not be required to return
any portion of the Signing Bonus.
(b) During the Term, the Company and the Subsidiary will pay
the Executive a salary at an annual rate of $1,000,000 per annum. Such salary
shall be paid in installments in accordance with the Company's standard
practice, but not less frequently than monthly.
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<page 3>
(c) The Executive will not be eligible to earn a bonus
during the Term, except as provided in clause (d) below.
(d) The Executive will receive a success bonus (a "Success
Bonus") as follows, up to the amount of $1,500,000 in total under the circum-
stances set forth clauses (i) through (iii) below (such that if the conditions
specified in more than one of such clauses is satisfied, the Executive will
receive the amount provided in all of such clauses up to a total of $1,500,000
but not in excess thereof):
(i) The Executive will receive a bonus of $1,500,000 if the
Company engages in a merger, consolidation, reorganization or
recapitalization, or a sale or other exchange of substantially all of
the assets, or any similar business combination or restructuring
transaction (a "Capital Transaction"), during the Term and as a result
of which the holders of the common stock of the Company (the "Common
Stock") shall receive consideration of at least $2.50 per share in
value, (such amounts to be appropriately adjusted for any stock splits,
reverse stock splits, stock dividends, recapitalizations or similar
capital transactions affecting the Common Stock occurring after the
date of this Agreement (each, a "Stock Change")). Such bonus will be
payable if the Capital Transaction occurs (i) during the Term or (ii)
within one year following the expiration of the Term, if the transaction
is attributable in substantial part to actions, plans or strategies
implemented by the Executive during the Term. The bonus will be payable
promptly following the consummation of the Capital Transaction, provided
that if the Company is not the surviving corporation in the Capital
Transaction, the Company shall not consummate the transaction unless the
surviving corporation agrees to be bound by the Company's obligations
under this clause (i). If the consideration received by the holders of
the Common Stock in any Capital Transaction is other than cash, the
value of such non-cash consideration shall be as determined by the Board
of Directors of the Company in good faith on the advice of an investment
banking firm of national reputation and standing selected by the Board
and reasonably acceptable to the Executive.
(ii) The Executive will receive a bonus of $500,000 if the
closing price of the Company's Common Stock as reported on the
consolidated transaction tape of the New York Stock Exchange or, if the
Company's Common Stock is then listed on the National Market System of
the Nasdaq Stock Market, on such stock market (the "Stock Price")
exceeds $2.50 per share (subject to appropriate adjustment for one or
more Stock Changes) for 20 trading days during any 30 day trading period
commencing after the date the Company releases its results of operations
for the fourth quarter of its fiscal year ended January 31, 1999. The
Executive will receive a bonus of $1,500,000 ($1,000,000 if the
Executive has earned a bonus pursuant to the preceding sentence) if the
Stock Price exceeds $2.50 per share (subject to appropriate adjustment
for one or more Stock Changes) for 20 trading days during the 40 trading
day period preceding the Ending Date. Notwithstanding the foregoing, a
bonus will not be payable under this clause (ii) if the period during
which the respective Stock Price condition, or any part thereof, is
satisfied occurs after the commencement of Reorganization Proceedings.
A bonus payable under this clause (ii) will be paid promptly following
satisfaction of the respective stock price condition; provided, however
that if, prior to the Ending Date, the employment of the Executive is
terminated by the Company for Cause or by the Executive without Good
-3-
<page 4>
Reason, the Executive will return the bonus pro rata in the proportion
that the number of days from the date of termination to the Ending Date
bears to the number of days from the date the bonus became payable to
the Ending Date.
(iii) If the Board of Directors determines in the fair and
reasonable exercise of its discretion that the Executive has made a
material contribution to the enterprise value of the Company, the
Executive will be awarded a bonus in the discretion of the Board of up
to $1,500,000.
(e) Unless and until Executive notifies the Company that he
elects to participate in a health plan maintained by the Company, the Company
will pay the Executive in amount equal to the premiums payable on the health
insurance policy maintained by the Executive as of the date of this Agreement.
(f) During the Term, the Executive will participate in all
benefit plans now existing or hereafter adopted for the general benefit of the
Company's or the Subsidiary's employees (not including equity or incentive based
compensation programs or any bonus, severance or profit sharing plans) such as
retirement plans, life and health insurance plans, or other insurance plans and
benefits (collectively, subject to the aforementioned exceptions, "Benefit
Plans"), if and to the extent that Executive is and remains eligible to
participate thereunder, and subject to the provisions of such plans as the same
may be in effect from time to time; provided, however, the Executive shall not
be adversely affected by any change to such plans unless such change is
applicable to all senior executives of the Company. The Executive will be
included in any Company or Subsidiary Benefit Plans in which senior executives
of the Company and the Subsidiary participate. To the extent permitted by law,
the terms of the respective plans (as such terms are currently in effect or may
be amended to accommodate the provisions of this sentence) and applicable
federal tax restrictions all waiting periods and vesting periods for such plans
of the Company and the Subsidiary will be waived for the Executive. Notwith-
standing the foregoing, for so long as the Executive is receiving payments
pursuant to subsection (e), the Executive shall not be entitled to participate
in any health plans of the Company or the Subsidiary.
(g) The Company and the Subsidiary will reimburse the
Executive, in accordance with their standard policies from time to time in
effect, for such reasonable and necessary documented out-of-pocket business
expenses as may be incurred by the Executive during the Term in the performance
of his duties.
(h) Without limiting the provisions of subsection (g), the
Executive shall be entitled to reimbursement for all reasonable travel, food and
lodging expenses outside of New York, New York.
(i) The Executive will be entitled to a vacation period to
be credited and taken in accordance with Company policy from time to time in
effect for similarly situated executives, which in any event shall not be less
than a total of four weeks per calendar year, beginning with the first calendar
year of this Agreement (pro rata as to portions of years).
(j) The Executive's rights under this Agreement with respect
to the plans, programs, perquisites and policies of the Company and the
Subsidiary shall not preclude the Company or the Subsidiary from modifying or
terminating any such plan, program, perquisite or policy, subject to the
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<page 5>
Executive's right, in accordance with the terms of this Agreement, to partici-
pate in or be eligible for such program, perquisite or policy as so modified or
any replacement thereof.
5. TERMINATION.
(a) The Term will terminate at the election of the Company
or the Subsidiary immediately upon notice from the Company or the Subsidiary to
the Executive.
(b) The Term will terminate forthwith upon the Executive's
death or, upon notice by the Company or the Executive, upon the Executive's
Disability. As used herein the term "Disability" means the Executive's
inability to perform the Executive's duties and responsibilities as contemplated
under this Agreement for a period of more than 180 days, whether or not
continuous, during any 365-day period, due to physical or mental incapacity or
impairment. A determination of Disability will be made by a physician
satisfactory to both the Executive and the Company; provided that if the
Executive and the Company cannot agree as to a physician, then each will select
a physician and these two together will select a third physician, whose
determination as to Disability will be binding on the Executive and the Company.
The Executive, the Executive's legal representative or any adult member of the
Executive's immediate family shall have the right to present to the Company and
such physician such information and arguments on the Executive's behalf as the
Executive or they deem appropriate, including the opinion of the Executive's
personal physician. Should the Executive become incapacitated, the Executive's
employment shall continue and all salary and other compensation otherwise due to
the Executive hereunder shall be continued through the date on which the
Executive's employment is terminated for Disability.
6. SEVERANCE.
(a) In the event that the Term is terminated by the Company
or the Subsidiary for Cause, or if the Executive terminates his employment here-
under without Good Reason, the Company and the Subsidiary will pay to the
Executive an amount equal to the Executive's accrued but unpaid salary pursuant
to Section 4(b) through the date of such termination, additional salary payments
in lieu of the Executive's accrued and unused vacation for the current calendar
year (on a pro rata basis), any Success Bonus earned but not paid prior to the
date of termination (subject to any applicable pro rata adjustment as provided
in Section 4(d)), unreimbursed business expenses in accordance with Section 4(g)
and Section 4(h), unreimbursed medical, dental and other employee benefit
expenses incurred in accordance with the applicable plans and any and all other
benefits provided under the terms of the applicable Benefit Plans to terminated
employees (all such payments being hereinafter referred to as the "Standard
Termination Payments"), less any amount of the Signing Bonus or a Success Bonus
required to be returned by the Executive as provided in Section 4(d); provided
that the Executive will continue to be obligated to repay the amount of any
bonus required to be repaid under Section 4(d) to the extent not offset against
the Standard Payments as aforesaid.
(b) Upon the Executive's death or termination for
Disability, the Company and the Subsidiary shall pay to the Executive's estate
or the Executive, as the case may be, the Standard Termination Payments. Any
and all death benefits under the Benefit Plans shall be paid to the Executive's
beneficiary or beneficiaries as duly designated in writing by the Executive.
-5-
<page 6>
(c) In the event that the Company or the Subsidiary
terminate the Executive's employment under this Agreement without Cause or the
Executive terminates his employment hereunder for Good Reason, so long as the
Executive shall not have breached the Executive's obligations to the Company
under Section 7 and Section 8 hereof (without limitation to any other remedy
available to the Company), the Company shall (i) pay the Executive a lump sum
payment equal to his salary pursuant to Section 4(b) for the remainder of the
Term, (ii) continue in effect the Executive's benefits under Section 4(e) or
their equivalent for the remainder of the Term, (iii) pay the Executive any
Success Bonus payable under Section 4(d) earned but not paid prior to the date
of termination, and (iv) if and only if the Executive terminates his employment
for Good Reason as a result of a Change of Control, pay to the Executive
$1,500,000 less the amount of any Success Bonus earned by the Executive prior
to termination, such difference to be pro rated in the proportion that the
number of days from the Commencement Date to the date of termination bears to
the total number of days from the Commencement Date to the Ending Date.
(d) As used herein the term "Cause" means:
(i) The Executive's willful or intentional failure or refusal to
perform or observe any of the Executive's material duties,
responsibilities or obligations set forth in, or as contemplated
under, this Agreement, if such breach is not cured within 30
days after notice thereof to the Executive by the Company or the
Subsidiary.
(ii) Any willful or intentional act or failure to act involving
fraud, theft, embezzlement, dishonesty or moral turpitude
(collectively, "Fraud") affecting the Company or the Subsidiary
or any supplier or employee of the Company or the Subsidiary; or
(iii) Conviction of (or 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;
(e) As used herein, termination of employment hereunder by
the Executive for "Good Reason" shall mean the Executive's termination of his
employment upon notice to the Company following
(i) assignment to the Executive of duties and responsibilities
materially inconsistent with the Executive's position as
described in Section 2(a);
(ii) the removal of the Executive from his position;
(iii) the failure of the Executive to be elected to the Board of
Directors of the Company and the Subsidiary or the removal of
the Executive from either Board other than for Cause;
(iv) any change in any employee benefit plan in effect and
applicable to the Executive and such change, taking into
account any offsetting increase in compensation or benefits,
constitutes a material reduction in the Executive's over-all
compensation considered as a whole; or
(v) a change in the location of the Company's principal business
offices from Canton, MA, Pittsburgh, PA or New York, NY;
-6-
<page 7>
(vi) an actual or deemed rejection or disaffirmance by the Company
of its obligations under the Agreement;
(vii) a Change in Control (as defined below); or
(viii) a material breach by the Company of the terms of this Agreement,
in each case without the Executive's consent, which termination shall be
effective 30 days after prompt notice of such circumstances by the Executive to
the Company, if such circumstances have not been cured prior to such date.
"Change of Control" means the Continuing Directors ceasing to consti-
tute a majority of the Board of Directors of the Company. "Continuing Director"
means any director of the Company on the date of this Agreement and any person
nominated for election as a director by a majority of the Continuing Directors
in office at the time of such nomination.
(f) In the event that the Term is terminated for any reason,
the payments provided in this Section 6 shall constitute complete satisfaction
of all obligations of the Company and the Subsidiary to the Executive pursuant
to this Agreement. Upon any such termination, the Executive shall cease to be
an employee of the Company and Subsidiary for all purposes, and (except as
otherwise expressly set forth in this Section 6) the Company and the Subsidiary
shall have no obligation to provide the Executive with any employee benefits or
perquisites hereunder. The Executive's rights set out in this Section 6 shall
constitute the Executive's sole and exclusive rights and remedies as a result of
the Executive's actual or constructive termination of employment without Cause.
7. CONFIDENTIAL INFORMATION.
(a) The Executive acknowledges that the Company, its
subsidiaries, affiliated companies and ventures from time to time (collectively,
including the Company, the "Company Affiliates") own and have developed and/
compiled, and will own, develop and compile, certain proprietary techniques and
confidential information which have great value to their business ("Confidential
Information"). Confidential Information includes not only information disclosed
by the Company Affiliates to the Executive, but also information developed or
learned by the Executive during the course or as a result of employment here-
under, which information the Executive acknowledges is and shall be the sole and
exclusive property of the Company Affiliates. Confidential Information includes
all proprietary information that has or could have commercial value or other
utility in the business in which the Company Affiliates are engaged or contem-
plate engaging, and all proprietary information of which the unauthorized
disclosure could be detrimental to the interests of any of the Company
Affiliates, whether or not such information is specifically labelled as
Confidential Information by a Company Affiliate. By way of example and without
limitation, Confidential Information includes any and all information developed,
obtained or owned by any Company Affiliate concerning trade secrets, techniques,
know-how (including designs, plans, procedures, merchandising know-how,
processes and research records), software, computer programs, innovations,
discoveries, improvements, research, development, test results, reports,
specifications, data, formats, marketing data and plans, business plans,
strategies, forecasts, unpublished financial information, orders, agreements
and other forms of documents, price and cost information, merchandising oppor-
tunities, expansion plans, designs, plans, budgets, projections, customer,
supplier and subcontractor identities, characteristics and agreements, and
-7-
<page 8>
salary, staffing and employment information. Notwithstanding the foregoing,
Confidential Information shall not in any event include information which (i)
was generally known or generally available to the public prior to its disclosure
to the Executive; (ii) becomes generally known or generally available to the
public subsequent to disclosure to the Executive through no wrongful act of any
person or (iii) which the Executive is required to disclose by applicable law or
regulation (provided that the Executive provides the Company with prior notice
of the contemplated disclosure and reasonably cooperates with the Company and
the Subsidiary at their expense in seeking a protective order or other appro-
priate protection of such information).
(b) The Executive acknowledges and agrees that in the
performance of his duties hereunder the Company Affiliates will from time to
time disclose to him and entrust him with Confidential Information. The
Executive also acknowledges and agrees that the unauthorized disclosure of
Confidential Information, among other things, may be prejudicial to the
interests of the Company Affiliates, an invasion of privacy and an improper
disclosure of trade secrets. The Executive agrees that he shall not, directly
or indirectly, use, make available, sell, disclose or otherwise communicate to
any corporation, partnership, individual or other third party, other than in the
course of his assigned duties and for the benefit of the Company Affiliates, any
Confidential Information, either during the Term or thereafter.
(c) In the event the Executive's employment with the Company
and the Subsidiary ceases for any reason, the Executive will not remove from the
premises of the Company or the Subsidiary without their prior written consent
any records, files, drawings, documents, equipment, materials or writings
received from, created for or belonging to the Company Affiliates, including
those which relate to or contain Confidential Information, or any copies
thereof. Upon request or when the Executive's employment with the Company and
the Subsidiary terminates, the Executive will immediately deliver the same to
the Company.
(d) During the Term, the Executive will disclose to the
Company and the Subsidiary all designs, inventions and business strategies or
plans developed by the Executive during such period which relate directly or
indirectly to the business of the Company Affiliates, including without
limitation any process, operation, product or improvement. The Executive agree
that all of the foregoing are and will be the sole and exclusive property of the
Company and the Subsidiary and that the Executive will at the request and cost
of the Company or the Subsidiary do whatever is necessary to secure the rights
thereto, by patent, copyright or otherwise, to the Company or the Subsidiary.
(e) The Executive, the Company and the Subsidiary agree that
the Executive shall not disclose to any Company Affiliate or use for the benefit
of any Company Affiliate, any information which may constitute trade secrets or
confidential information of third parties, to the extent the Executive has any
such secrets or information.
(f) The provisions of this Section 7 shall survive the
termination of this Agreement and the Term.
8. RESTRICTIVE COVENANTS.
(a) The Executive acknowledges and agrees (i) that the
services to be rendered by the Executive for the Company and the Subsidiary are
of a special, unique, extraordinary and personal character, (ii) that the
-8-
<page 9>
Executive has and will continue to develop a personal acquaintance and relation-
ship with one or more of the employees, suppliers and independent contractors of
the Company Affiliates, which may constitute the primary or only contact of the
Company or Subsidiary with such employees, suppliers and independent
contractors, and (iii) that the Executive will be uniquely identified by
employees, suppliers, independent contractors and retail customers with the
Company and the Subsidiary. Consequently, the Executive agrees that it is fair,
reasonable and necessary for the protection of the business, operations, assets
and reputation of the Company and the Subsidiary that the Executive make the
covenants contained in this Section 8.
(b) The Executive agrees that, during the Term and for three
months thereafter, the Executive shall not, directly or indirectly, own, manage,
operate, join, control, participate in, invest in or otherwise be connected or
associated with, in any manner, including as an officer, director, employee,
partner, consultant, advisor, proprietor, trustee or investor, any Competing
Business in the Territory; provided however that nothing contained in this
Section 8(b) shall prevent the Executive from owning less than 2% of the voting
stock of a publicly held corporation for investment purposes. For purposes of
this Section 8(b), the term "Competing Business" shall mean a business engaged
in the operation of discount retailing department stores. For purposes of this
Section 8(b), the term "Territory" means any location within a radius of 10
miles from any location at which any Company Affiliate then operates a discount
retailing department store and or any location at which, at the date of
termination of the Executive's employment hereunder, any Company Affiliate has
taken substantial steps toward establishing such operations.
(c) The Executive agrees that, during the Term and for one
year thereafter, the Executive shall not, directly or indirectly,
(i) seek to employ or engage, or assist anyone else to seek
to employ or engage, any person who at any time during the year
preceding the termination of the Executive's employment hereunder was
in the employ of any of the Company Affiliates or was an independent
contractor providing material merchandising, marketing, sales, financial
or management consulting services in connection with the business of any
of the Company Affiliates and with whom the Executive had regular
contact; or
(ii) interfere in any manner in the relationship of any
Company Affiliate with any of its suppliers or independent contractors,
whether or not the relationship between such Company Affiliate and such
supplier or independent contractor was originally established in whole
or in part by the Executive's efforts; provided, however, that following
three months after the end of the Term it shall not be deemed a
violation of this clause (ii) for the Executive to engage in ordinary
business contacts on behalf of competitors of the Company with suppliers
of the Company and with those independent contractors of the Company who
do not devote substantially all of their time to the Company.
As used in this Section 8, the "supplier" shall mean and include any individual,
proprietorship, partnership, corporation, joint venture, trust or any other form
of business entity which is then a supplier of any Company Affiliate or which
was a supplier at any time during the one-year period immediately preceding the
date of termination of employment.
(d) The provisions of this Section 8 shall survive the
termination of this Agreement and the Term.
-9-
<page 10>
9. SPECIFIC PERFORMANCE. The Executive acknowledges that the
Company Affiliates would sustain irreparable injury in the event of a violation
by the Executive of any of the provisions of Section 7 or Section 8 hereof, and
by reason thereof the Executive consents and agrees that if the Executive
violates any of the provisions of Section 7 or Section 8, in addition to any
other remedies available, the Company or the Subsidiary shall be entitled to a
decree specifically enforcing such provisions, and shall be entitled to a
temporary and permanent injunction restraining the Executive from committing
or continuing any such violation, from any arbitrator duly appointed in
accordance with the terms of this Agreement or any court of competent juris-
diction, without the necessity of proving actual damages, posting any bond, or
seeking arbitration in any forum.
10. WITHHOLDING. The parties understand and agree that all payments
to be made by the Company and the Subsidiary pursuant to this Agreement shall be
subject to all applicable tax withholding obligations of the Company and the
Subsidiary.
11. NO CONFLICT. The Executive represents and warrants that the
Executive is not party to or subject to any agreement, contract, understanding,
covenant, judgment or decree or under any obligation, contractual or otherwise,
in any way restricting or adversely affecting the Executive's ability to act for
the Company and the Subsidiary in all of the respects contemplated hereby.
12. NOTICES. All notices required or permitted hereunder will be
given in writing by personal delivery; by confirmed facsimile transmission
(with a copy dispatched by express delivery or registered or certified mail
hereunder); or by express delivery via express mail or any reputable express
courier service, in each case addressed:
to the Company and the Subsidiary:
Hills Stores Company
15 Dan Road
Canton, MA 02021-9128
Attention: Corporate Counsel
Fax: 617-821-6966
Confirm: 617-821-1000
and to the Executive at the address set forth on the signature page or, as to
each party, at such other address as may be designated by notice in the manner
set forth herein. Notices which are delivered personally, by confirmed
facsimile transmission, or by courier as aforesaid, will be effective on the
date of delivery.
13. MISCELLANEOUS.
(a) The failure of any party at any time to require perfor-
mance of any provision hereunder will in no way affect the right of that or any
other party thereafter to enforce the same or to enforce any of the other
provisions in this Agreement; nor will the waiver by any party of the breach of
any provision hereof be taken or held to be a waiver of any prior or subsequent
breach of such provision or as a waiver of the provision itself.
-10-
<page 11>
(b) This Agreement is a personal contract calling for the
provision of unique services by the Executive, and the Executive's rights and
obligations hereunder may not be sold, transferred, assigned, pledged or
hypothecated by the Executive. In the event of any attempted assignment or
transfer of rights hereunder by the Executive contrary to the provisions hereof
(other than as may be required by law), the Company and the Subsidiary will have
no further liability for payments hereunder. The rights and obligations of the
Company and the Subsidiary hereunder will be binding upon and run in favor of
the successors and assigns of the Company and the Subsidiary.
(c) Each of the covenants and agreements set forth in this
Agreement is a separate and independent covenant which as been separately
bargained for and the parties hereto intend that the provisions of each such
covenant shall be enforced to the fullest extent permissible. Should the whole
or any part or provision of any such separate covenant be held or declared
invalid, such invalidity shall not in any way affect the validity of any other
such covenant or of any part or provision of the same covenant not also held or
declared invalid. If any covenant shall be found to be invalid but would be
valid if some part thereof were deleted or the period or area of application
reduced, then such covenant shall apply with such minimum modification as may be
necessary to make it valid and effective.
(d) This Agreement has been made and will be governed in all
respects by the laws of the State of Massachusetts applicable to contracts made
and to be wholly performed within such state, and the parties hereby irrevocably
consent to the jurisdiction of the courts of the State of Massachusetts and
federal courts located therein for the purpose of enforcing this Agreement.
(e) Any controversy arising out of or relating to this
Agreement, including, without limitation, any determination of the Company or
the Board of Directors under clause (i) of Section 4(d) but not including a
determination of the Board of Directors under clause (iii) of Section 4(d)
unless such determination constitutes a clear abuse of discretion, or the breach
hereof shall be settled by arbitration in New York, New York, Borough of
Manhattan, by a single neutral arbitrator in accordance with the Commercial
Arbitration Rules then obtaining of the American Arbitration Association and
judgment upon the award rendered may be entered in any court having jurisdiction
thereof, except that in the event of any controversy relating to any violation
or alleged violation of any provision of Section 7 or Section 8 hereof, the
Company and the Subsidiary shall in their sole discretion be entitled to seek
injunctive relief from a court of competent jurisdiction without any requirement
to seek arbitration. The parties hereto agree that any arbitral award may be
enforced against the parties to an arbitration proceeding or their assets
wherever they may be found.
(f) This Agreement sets forth the entire understanding
between the parties as to the subject matter of this Agreement and merges and
supersedes all prior agreements, commitments, representations, writings and
discussions among the parties with respect to that subject matter. This
Agreement may be terminated, altered, modified or changed only by a written
instrument signed by all of the parties hereto.
(g) The Section headings contained herein are for purposes
of convenience only and are not intended to define or list the contents of the
Sections.
-11-
<page 12>
(h) The provisions of this Agreement which by their terms
call for performance subsequent to termination of the Term hereunder, or of this
Agreement, shall so survive such termination.
(i) The Company shall pay to the Executive all reasonable
costs incurred by the Executive in any proceeding for the successful enforcement
of the terms of this Agreement, including reasonable costs of investigation and
reasonable attorney's fees and expenses.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
HILLS STORES COMPANY
By: /s/ Mark Dickstein
-------------------------
Name:
Title:
HILLS DEPARTMENT STORE
COMPANY
By: /s/ Mark Dickstein
-------------------------
Name:
Title:
Accepted and Agreed: HILLS DEPARTMENT STORE COMPANY
HILLS STORES COMPANY
/s/ Chaim Y. Edelstein By: William K. Friend
- ------------------------- -------------------------
Chaim Y. Edelstein Sr. Vice President-Secretary
Address for notices:
1040 Park Avenue, Apt. 12E
New York, New York 10028
Fax: 212 831-4089
Confirm: 212 831-3286
With a copy to:
Robert Gelfman, Esq.
Battle Bowler LLP
75 East 55th Street
New York, New York 10022
Fax: 212 856-7802
Confirm: 212 856-7000
-12-
<page 13>
HILLS STORES COMPANY
15 Dan Road
Canton, Massachusetts 02021-9128
November 6, 1998
Mr. Chaim Edelstein
1040 Park Avenue, Apt. 12E
New York, New York 10028
Dear Mr. Edelstein:
Reference is made to the Executive Employment Agreement (the "Employment
Agreement") made as of October 27, 1998 among Hills Stores Company (the
"Company"), Hills Department Store Company and you. Capitalized terms used here
without definition have the meanings assigned to them in the Employment
Agreement.
The Company is at the present time in discussions with a third party
(the "Third Party"), with whom the Company has executed a confidentiality agree-
ment dated August 21, 1998, pursuant to which such party would acquire 100% of
the outstanding equity of the Company.
Notwithstanding anything to the contrary in the Employment Agreement,
(i) at such time as the Third Party shall acquire or irrevocably accept for
payment more than 51% of the outstanding equity stock of the Company (a "Change
of Control Event"), you shall be paid an amount equal to (x) the full amount of
the Success Bonus, and (y) your aggregate salary for the remainder of the Term;
and (ii) you shall continue your employment with the Company, without any
additional compensation, for 60 days following the date of the Change of Control
Event. Thereafter, you may terminate your employment with the Company at any
time, and you shall not be required to return any portion of the Signing Bonus.
The payments made to you upon the occurrence of a Change of Control Event shall
be in full satisfaction of all amounts of salary and bonus that may otherwise be
due to you under the Employment Agreement.
Other than as set forth in this letter, the Employment Agreement remains
in full force and effect. This letter shall not apply to a transaction with any
person other than the Third Party or to a Change of Control Event with the Third
Party that occurs after June 30, 1999.
If this letter accurately reflects your agreement to the matters set
forth herein, please sign in the space indicated below.
Very truly yours,
HILLS STORES COMPANY
By: /s/ Mark Dickstein
-------------------------
Name and Title:
ACCEPTED: HILLS DEPARTMENT STORE COMPANY
/s/ Chaim Edelstein By: /s/ William K. Friend
- ------------------------- -------------------------
Chaim Edelstein Sr. Vice President-Secretary
EXHIBIT 10.11
EMPLOYMENT AGREEMENT AMENDMENT
------------------------------
THIS EMPLOYMENT AGREEMENT AMENDEMENT made effective as of November 1,
1998 by and between Hills Department Store Company and Hills Stores Company,
Delaware corporations having their principal office at 15 Dan Road, Canton,
Massachusetts (the "Company") and Michael R. Hamilton, executive vice president-
operations (the "Executive").
WHEREAS, the Company and the Executive currently have an agreement dated
October 21, 1996 (the "Employment Agreement") whereby the Company has agreed to
employ the Executive and the Executive has agreed to work for the Company.
WHEREAS, the Company and the Executive desire to amend the Employment
Agreement to provide for an extended term.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants hereinafter contained, the Company and the Executive hereby agree,
effective November 1, 1998, to amend the Employment Agreement as follows:
SECTION 1. TERM is hereby modified to read as follows:
1. TERM - The Company will employ you and you accept employment
for a term beginning on the effective date of the Employment Agreement, October
21, 1996 and ending on October 20, 2000, unless sooner terminated as provided in
paragraph 4 of the Employment Agreement.
Except as specifically amended hereby, the terms and provisions of the
Employment Agreement shall remain in full force and effect and are enforceable
by the parties hereto.
IN WITNESS WHEREOF, the parties have executed this Agreement on November
2, 1998.
EXECUTIVE: HILLS STORES COMPANY
/s/ Michael R. Hamilton /s/ Chaim Y. Edelstein
- ------------------------- -------------------------
Michael R. Hamilton Chaim Y. Edelstein
Chairman of the Board & CEO
HILLS DEPARTMENT STORE COMPANY
/s/ William K. Friend
-------------------------
William K. Friend
Sr. Vice President-Secretary
and Corporate Counsel
EXHIBIT 10.13
October 28, 1998
Mr. Frederick L. Angst
15 Dan Road
Canton, MA 02021
Dear Larry:
This letter sets forth our agreement with respect to your resignation as
executive vice president-chief merchandising officer of Hills Stores Company
and its subsidiary, Hills Department Store Company (collectively, the
"Companies").
1. Resignation.
-----------
By your execution and delivery hereof, you hereby resign, from all
positions with the Companies and any subsidiaries thereof effective
November 15, 1998.
2. Severance.
---------
(a) The Companies hereby agree to pay you as severance, a payment of
$178,500 which will be paid to you on or before November 6, 1998.
(b) You will be entitled to receive your base pay through November 15,
1998.
(c) The Companies will reimburse you for your heretofore un-reimbursed
travel and other business expenses reasonably incurred by you prior
to November 6, 1998 in the performance of your duties on behalf of
the Companies, upon submission of the required supporting
documentation.
(d) The Companies may withhold or cause to be withheld from any amount
payable under this letter agreement such amounts as shall be
required to be withheld pursuant to applicable law or regulation.
(e) You understand and agree that, except as expressly set forth in this
letter agreement, you will receive no payments, compensation,
benefits, perquisites, vacation pay, remuneration or bonuses,
including severance, to which you otherwise might be entitled under
any understanding or agreement with the Companies or any
subsidiaries; provided, however, you will be entitled to receive
your accrued base salary through November 15, 1998 and you will be
given the option of purchasing your leased automobile at the lease
buy-out price set forth in the Companies' agreement with Merchant's
Leasing.
<page 2>
3. Continuing Obligations.
----------------------
(a) Except as expressly provided in this letter agreement, the
obligations of each of the parties under the July 22, 1997
Employment Agreement are hereby terminated.
(b) The provisions of Section 5 (a), (b), (c), (d) and (e) of the
aforesaid Employment Agreement, will continue in full force and
effect.
4. Release by Angst.
----------------
(a) You hereby represent that you do not have any claim, action or
proceeding pending against Hills and are not contemplating any such
claim, action or proceeding. For purposes of this paragraph 4, 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 agreement,
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
discrimination claims under the Age Discrimination in Employment Act
of 1967 or any other federal, state or local law or regulations and
any claim for attorney's fees or costs.
(c) You agree never to file or participate in a lawsuit, arbitration or
other legal proceeding asserting any claims that are released
pursuant to this paragraph 4 unless you are compelled to testify or
otherwise participate in any lawsuit, arbitration or other legal
proceeding by subpoena 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 attorney's 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, Hills 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 violation, or violation of any federal, state or local law
or regulation.
2
<page 3>
5. Miscellaneous.
-------------
(a) This letter agreement will be binding upon and inure to the benefit
of the parties hereto and their respective legal representatives,
executors, heirs, administrators, successors and assigns.
(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.
(c) This letter agreement constitutes the entire agreement between the
parties hereto with respect to the subject matter hereof and fully
supersedes any and all prior agreements or understandings between us
with respect to such subject matter. 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) 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.
If the foregoing letter correctly sets forth our agreements 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/ Chaim Y. Edelstein
-------------------------
Chairman of the Board
By: /s/ William K. Friend
-------------------------
Sr. Vice President
Secretary & Corporate Counsel
ACCEPTED & AGREED
AS OF OCTOBER 28, 1998
/s/ Frederick L. Angst
- -------------------------
Frederick L. Angst
3
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