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 May 2, 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
--------------------
(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
------------
(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 May 31, 1998 was
10,388,301 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 May 2, 1998,
January 31, 1998 and May 3, 1997 3
Condensed Consolidated Statements of Operations for the
Quarters Ended May 2, 1998 and May 3, 1997 4
Condensed Consolidated Statements of Cash Flows for the
Quarters Ended May 2, 1998 and May 3, 1997 5
Notes to Condensed Consolidated Financial Statements 6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 9
PART II - OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS 12
ITEM 2: CHANGES IN SECURITIES 12
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K 12
</TABLE>
2
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<TABLE>
HILLS STORES COMPANY AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
<CAPTION>
May 2, January 31, May 3,
(in thousands) 1998 1998 1997
- --------------------------------------------------------------------------------
(unaudited) (unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 15,914 $ 37,523 $ 17,537
Accounts receivable, net 26,952 21,869 27,131
Inventories 404,476 340,719 395,344
Deferred and interim tax assets 33,433 26,933 38,292
Other current assets 6,205 5,542 6,103
-------- -------- --------
Total current assets 486,980 432,586 484,407
Property and equipment, net 178,725 183,112 171,102
Property under capital leases, net 99,944 102,350 109,717
Beneficial lease rights, net 5,889 6,081 6,656
Other assets, net 47,136 40,748 22,190
Deferred tax asset 28,592 28,592 21,585
Reorganization value in excess of amounts
allocable to identifiable assets, net 87,690 89,112 96,046
-------- -------- --------
Total assets $934,956 $882,581 $911,703
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of capital leases 10,541 10,541 7,430
Current portion of long-term debt 1,000 500 -
Borrowings under secured credit
facility 35,000 - 5,000
Accounts payable, trade 134,861 110,329 127,267
Other accounts payable and accrued
expenses 81,722 77,803 88,809
-------- -------- --------
Total current liabilities 263,124 199,173 228,506
Long term debt 204,000 204,500 195,000
Capital lease and
other financing obligations 142,869 144,254 152,914
Other liabilities 99,322 98,467 100,276
Preferred stock, at mandatory redemption
value (Note 2) 18,107 18,209 19,782
Common shareholders' equity 207,534 217,978 215,225
-------- -------- --------
Total liabilities and
stockholder's equity $934,956 $882,581 $911,703
======== ======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
3
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HILLS STORES COMPANY AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
Quarter Ended
------------------------
(unaudited) May 2, May 3,
(in thousands, except per share amounts) 1998 1997
________________________________________________________________________________
<S> <C> <C>
Net sales $362,947 $353,504
Cost of sales 263,596 256,720
Selling and administrative expenses 103,322 99,142
Amortization of reorganization value in
excess of amounts allocable to
identifiable assets 1,422 1,462
-------- --------
Operating loss ( 5,393) ( 3,820)
Interest expense, net (Note 3) ( 11,740) ( 11,300)
-------- --------
Loss before income taxes ( 17,133) ( 15,120)
Income tax benefit (Note 4) 6,500 5,300
-------- --------
Net loss ($ 10,633) ($ 9,820)
======== ========
Basic and diluted loss per share (Note 5) ($ 1.02) ($ 0.95)
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
4
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<TABLE>
HILLS STORES COMPANY AND SUBSIDIARIES
- -------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Quarter Ended
-----------------------
(unaudited) May 2, May 3,
(in thousands) 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($ 10,633) ($ 9,820)
Adjustments to reconcile net loss to net cash used
for operating activities:
Depreciation and amortization 10,580 9,095
Amortization of deferred financing costs 669 627
Amortization of reorganization value in excess
of amounts allocable to identifiable assets 1,422 1,462
Deferred and interim income taxes ( 6,500) ( 5,300)
Increase in accounts receivable and other
current assets ( 5,746) ( 3,773)
Increase in inventories ( 63,757) ( 53,867)
Increase in accounts payable, accrued expenses
and other liabilities 29,571 17,325
Other, net ( 6) 110
-------- --------
Net cash used for operating activities ( 44,400) ( 44,141)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ( 3,059) ( 3,605)
Deferred software expenditures ( 7,764) ( 4,376)
-------- -------
Net cash used for investing activities ( 10,823) ( 7,981)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolving credit facility, net 35,000 5,000
Principal payments under capital lease obligations ( 1,386) ( 1,550)
Other financing activities - 46
-------- --------
Net cash provided by financing activities 33,614 3,496
-------- --------
Net increase (decrease) in cash
and cash equivalents ( 21,609) ( 48,626)
Cash and cash equivalents at beginning of period 37,523 66,163
-------- --------
Cash and cash equivalents at end of period $ 15,914 $ 17,537
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
5
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HILLS STORES COMPANY AND SUBSIDIARIES
- ------------------------------------------------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
---------------------
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 of its operating earnings, with operating
earnings particularly concentrated in the Christmas selling season.
2. HILLS STORES SERIES A CONVERTIBLE PREFERRED STOCK
-------------------------------------------------
During the quarter ended May 2, 1998, 5,100 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.
3. INTEREST EXPENSE
----------------
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Interest expense is stated net of the following (in thousands):
<CAPTION>
Thirteen Weeks Ended
--------------------
May 2, May 3,
1998 1997
<S> <C> <C>
Interest income $ 36 $ 414
Capitalized interest 610 110
----- -----
Total for each period $ 646 $ 524
===== =====
</TABLE>
Capitalized interest relates to the Company's program to replace its primary
information systems ocurring in fiscal years 1998 and 1997.
6
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HILLS STORES COMPANY AND SUBSIDIARIES
- ------------------------------------------------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4. INCOME TAX BENEFIT
------------------
The Company calculates its provision for interim income taxes 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 first quarter of 1998 and the first quarter of 1997), 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 an unreasonably large
interim tax benefit rate would occur. The measurement of interim income taxes
has no effect on the amount of income tax expense for the full year.
5. 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 periods ended May 2, 1998 and May 3, 1997, as all common stock
equivalents are antidilutive, due to the net loss incurred during these periods.
Basic earnings per share was computed based on the weighted average number of
common shares assumed to be outstanding during each period. Such shares
amounted to 10,448,417 and 10,345,781 for the periods ended May 2, 1998 and
May 3, 1997, 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.
6. 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.
7
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HILLS STORES COMPANY AND SUBSIDIARIES
- ------------------------------------------------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
-----------------------------------------
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
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 against the seven new directors of the Company
elected at the 1995 annual meeting, Dickstein Partners Inc. ("Dickstein
Partners") and the Company. In November 1995, the plaintiffs amended their
complaint to include a shareholder's derivative cause of action against the
Former Directors for breach of their fiduciary duties to the Company and its
shareholders. In the amended complaint, the plaintiffs claim (under Section
225 of the Delaware Corporation Code) that in connection with Dickstein Partners
effort to solicit proxies in support of the election of its nominees for
directors of the Company, Dickstein Partners issued a number of false and
misleading statements regarding its offer to acquire all of the Company's shares
it did not already own. On the Section 225 claim, the plaintiffs seek an order
nullifying the election of directors and declaring there has been "no change of
control" of the Company. The derivative cause of action seeks damages against
the Former Directors. In January 1996 in the same Delaware Chancery Court,
another shareholder, Peter M. Fusco, filed a substantially similar class action
and shareholder derivative suit against the parties named in the Dolowich suit.
The Former Directors filed a motion to dismiss the Dolowich and Fusco suits, and
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.
8
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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 United 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; and other factors that may be described in this
document.
RESULTS OF OPERATIONS
QUARTER ENDED MAY 2, 1998 COMPARED WITH
QUARTER ENDED MAY 3, 1997
Net sales and comparable store sales increased 2.7% compared with the same
period in 1997. The Company generated above-average sales increases in home
categories, girl's apparel, and seasonal lawn and garden merchandise. Sales
were also positively impacted by the addition of two advertising circulars
compared with the prior year.
Cost of sales as a percentage of sales was 72.6% for the quarters ended May 2,
1998 and May 3, 1997. Gross profit increased by $2.6 million primarily due to
the sales increase, but remained flat as a percentage of sales. The Company
improved the initial markon on its merchandise through continued cost reductions
in merchandise procurement, which was offset by increased promotional markdowns.
Selling and administrative expenses, including depreciation and other occupancy
expenses, was 28.5% as a percentage of sales in the current quarter compared
with 28.0% in 1997, a 0.5% increase. Selling and administrative expenses
excluding depreciation were flat with last year as a percentage of sales at
25.6%, as advertising cost increases and minimum wage adjustments were fully
offset by labor productivity and other cost control enhancements. Noncash
depreciation and amortization increased by approximately $1.6 million for the
first quarter, resulting from the Company's investment programs and also from
accelerated depreciation for the store that is being relocated during fiscal
year 1998.
Net interest expense was $11.7 million in the first quarter of 1998 compared
with $11.3 million in the same period of 1997. This $0.4 million increase was
primarily attributable to reduced cash position at the beginning of fiscal year
1998, and resulting increased borrowings associated with Company's secured
credit facility.
9
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HILLS STORES COMPANY AND SUBSIDIARIES
- ------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS (CONTINUED)
QUARTER ENDED MAY 2, 1998 COMPARED WITH
QUARTER ENDED MAY 3, 1997 (CONTINUED)
The effective tax rate was 37.9% in the first quarter of 1998 compared with a
rate of 35.1% in the first quarter of 1997. See Note 4 of Notes to Condensed
Consolidated Financial Statements.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Net cash used for operating activities was $44.4 million for the quarter ended
May 2, 1998 compared with $44.1 million for the same period last year, an
increase of $0.3 million. The use of cash for the interim periods primarily
reflects the build-up of merchandise inventories, net of vendor trade credit,
due to the seasonal nature of the Company's business.
Net cash used for investing activities was $10.8 million compared with $8.0
million in the first quarter of 1997, a $2.8 million increase. This increase
was primarily the result of the Company's informaton technology replacement
program which was partially offset by a reduction in other capital expenditures
versus last year. During fiscal year 1998, combined capital expenditures and
deferred software expenditures are expected to approximate $65 million including
approximately $10 million of non-cash acquisitions which the Company expects to
finance by capital leases, and including approximately $3 million to $4 million
of capitalized interest. The Company will relocate one store during fiscal
year 1998 and expects to open no new stores during the year.
In connection with the Company's information system replacement program, the
Company is implementing a program designed to assure that all new and continuing
systems are capable of year 2000 ("Y2K") compliance, including upgrades to
those systems not being replaced. The cost of most of such upgrades are
generally covered by on-going third-party software maintenance agreements, with
additional Y2K upgrade costs not anticipated to exceed $2 million. The Company
has experienced difficulty in acquiring the contractors and staff needed to
install the new systems, and there have been some delays in the installation of
certain elements of the new systems. The Company has taken and is taking
corrective action, and anticipates conversion of the final system components
not later than mid-1999. 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 systems could severely disrupt the Company's ability to
process merchandise orders, receive goods, pay its vendors and/or employees,
and/or service its customers. In addition, if a significant number of the
Company's vendors or lenders are directly or indirectly negatively impacted by
Y2K noncompliance, the Company could suffer similar adverse effects. The
Company is undertaking steps to limit its exposure to merchandise and service
vendors who may be Y2K noncompliant.
Net cash provided by financing activities was $33.6 million in the first quarter
of 1998 compared with $3.5 million in the same period a year ago, a $30.1
10
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HILLS STORES COMPANY AND SUBSIDIARIES
- ------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
million increase. The increase was primarily due to reduced beginning of year
cash balances in fiscal year 1998 compared with fiscal year 1997, requiring
increased borrowings under the secured credit facility in fiscal year 1998.
During the first quarter of 1998, average borrowings under the secured credit
facility were approximately $36.3 million at an average interest rate of 8.2%.
During the first quarter of 1997, average borrowings were $396 thousand at an
average interest rate of 9.0%. Excess credit availability under the secured
credit facility at May 2, 1998 was approximately $136.0 million compared with
approximately $169.4 million at May 3, 1997.
The Company believes that its credit arrangements, together with cash from
operations, will enable the Company to maintain the liquidity necessary to
finance its continuing operations and capital expenditure requirements.
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 Facility and the Senior Notes Indenture,
as well as the Company's leverage, could adversely affect the Company's ability
to obtain additional financing in the future, to make capital expenditures, to
effect store expansions, to make acquisitions, to take advantage of business
opportunities that may arise, and to withstand adverse general economic and
retail industry conditions and increased competitive pressures. Retail
suppliers and their factors monitor carefully the financial performance of
retail companies such as the Company, and may reduce credit availability quickly
upon learning of actual or perceived deterioration in the financial condition or
results of operations of a retail company.
11
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
- ------- -----------------
See Note 6 to the Notes to Condensed Consolidated Financial Statements.
ITEM 2. CHANGES IN SECURITIES
- ------- ---------------------
During the quarter ended May 2, 1998, the Company issued 5,100 shares of Common
Stock, par value $.01 per share (the "Common Shares"), upon the conversion of
5,100 shares of Series A Preferred Stock, par value $.10 per share ("the Series
A Preferred Shares"). The Series A Preferred Shares were issued pursuant to an
exemption from registration set forth is Section 1145(a) of the Federal
Bankruptcy Code, and the Common Shares were issued pursuant the exemption
contained in Sections 3(a)(9) of the Securities Act of 1933, as amended.
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
3.3 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.
12
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (continued)
- ------- --------------------------------------------
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.
10
10.2 * Employment Agreement made as of February 7, 1996 with Gregory K.
Raven.
11
10.3 * Consulting Agreement made as of February 7, 1998 with Chaim Y.
Edelstein.
12
10.4 * Employment Agreement made as of November 19, 1996 with Michael
R. Hamilton.
13
10.5 * Employment Agreement made as of July 22, 1997 with Frederic L.
Angst.
14
10.6 * Employment Agreement made as of November 11, 1997 with C. Scott
Litten.
15
10.7 * 1993 Incentive and Nonqualified Stock Option Plan, as amended.
10
10.8 * 1996 Directors Stock Option Plan.
10.9 * Hills Stores Company/Hills Department Store Company Associate
Stock Purchase Plan, as amended.
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.
13
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (continued)
- ------- --------------------------------------------
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 Annual Report on Form 10-K
of the Company for the fiscal year ended February 3, 1996.
11. Incorporated by reference from the Report on Form 10-K of the
Company for the fiscal year ended January 31, 1998.
12. Incorporated by reference from the Quarterly Report on Form 10-Q
for the quarter ended November 2, 1996.
13. Incorporated by reference from the Quarterly Report on Form 10-Q
for the quarter ended August 2, 1997.
14. Incorporated by reference from the Report on Form 10-Q of the
Company for the quarter ended November 1, 1997.
15. Incorporated by reference from the Company's definitive proxy
materials dated May 5, 1997.
b. Reports on Form 8-K
1. A report on Form 8-K dated February 28, 1997 was filed by the
Company concerning the First Amendment to the Loan and Security
Agreement.
2. A report on Form 8-K dated March 12, 1997 was filed by the Company
concerning the fourth quarter and year-end press release issued on
that date.
14
<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: June 12, 1998 /s/C. Scott Litten
---------------------------
C. Scott Litten
Executive Vice President-
Chief Financial Officer
Date: June 12, 1998 /s/Brian J. Sheehan
---------------------------
Brian J. Sheehan
Vice President - Controller
and Principal Accounting Officer
15
<PAGE>
EXHIBIT INDEX
Pursuant to Item 601 of Regulation S-K
Exhibit Title
- ------- -----
10.9 Hills Stores Company/Hills Department Store Company
Associate Stock Purchase Plan, as amended.
11 Statements regarding computation of earnings per share.
27 Financial Data Schedule.
16
EXHIBIT 10.9
HILLS STORES COMPANY/HILLS DEPARTMENT STORE COMPANY
ASSOCIATE STOCK PURCHASE PLAN
1. PURPOSE.
-------
The Hills Stores Company/Hills Department Store Company Associate Stock
Purchase Plan (the "Plan") is intended to provide a method whereby associates of
Hills Stores Company and Hills Department Store Company (hereinafter jointly
referred to as the "Company") will have an opportunity to acquire an ownership
interest (or increase an existing ownership interest) in the Company through the
purchase of shares of the Common Stock of Hills Stores Company. It is the
intention of the Company that the Plan qualify as an "employee stock purchase
plan" under Section 423 of the Internal Revenue Code of 1986, as amended (the
"Code"). The provisions of the Plan shall, accordingly, be construed so as to
extend and limit participation in a manner consistent with the requirements of
that section of the Code.
2. DEFINITIONS.
-----------
(a) "Associate" means any person who is customarily employed at
least 20 hours per week and more than five months in a calendar year by the
Company.
(b) "Board" means the Board of Directors of Hills Stores Company.
(c) "Committee" means the Compensation Committee of Hills Stores
Company.
(d) "Common Stock" means the common stock, $.01 par value per share,
of Hills Stores Company.
(e) "Company" shall also include any Parent or Subsidiary of Hills
Stores Company or Hills Department Store Company designated by the Board, unless
the context otherwise requires.
(f) "Compensation" means, for the purposes of any Offering pursuant
to this Plan, the pre-tax base pay in effect as of the Offering Commencement
Date (as hereinafter defined). Compensation shall not include any deferred
compensation other than contributions by an individual through a salary
reduction agreement to a cash or deferred plan pursuant to Section 401(k) of the
Code or to a cafeteria plan pursuant to Section 125 of the Code.
(g) "Management Committee" means a committee consisting of the
Senior Vice President-Human Resources, Executive Vice President-Chief Financial
Officer and Senior Vice President-Secretary (or replacement executives holding
similar positions as determined by the Board of Directors).
(h) "Parent" shall mean any present or future corporation which is
or would constitute a "parent corporation" as that term is defined in Section
424 of the Code.
(i) "Subsidiary" shall mean any present or future corporation which
is or would constitute a "subsidiary corporation" as that term is defined in
Section 424 of the Code.
3. ELIGIBILITY
-----------
(a) Participation in the Plan is completely voluntary. Partici-
pation in any one or more of the offerings under the Plan shall neither limit,
nor require, participation in any other offering except as otherwise provided
herein.
(b) Each Associate shall be eligible to participate in the Plan on
the first Offering Commencement Date, as hereafter defined, following the
completion of five (5) full calendar months of continuous service with the
Company. No Associate shall be granted an option under the Plan:
(i) if, immediately after the grant, such Associate would
own stock, and/or hold outstanding options to purchase stock, possessing 5% or
more of the total combined voting power or value of all classes of stock of
Hills Stores Company or any Parent or Subsidiary; for purposes of this Paragraph
the rules of Section 424(d) of the Code shall apply in determining stock owner-
ship of any Associate; or
(ii) if such Associate's rights to purchase stock under all
Code Section 423 employee stock purchase plans of the Company and any Parent or
Subsidiary exceed $25,000 of the fair market value of the stock (determined at
the time such option is granted) for the calendar year in which such option is
outstanding; for purposes of this Paragraph, the rules of Section 423(b)(8) of
the Code shall apply. Further, no Associate may invest more than ten (10%)
percent of his or her Compensation in any Offering.
4. OFFERING DATES.
--------------
The right to purchase stock hereunder shall be made available in a
series of offerings (the "Offering" or "Offerings") to Associates eligible in
accordance with Paragraph 3 hereof. The Committee will, in its discretion,
determine the length of each offering period (which shall be either three, six
or nine months), the applicable date of commencement ("Offering Commencement
Date") and termination date ("Offering Termination Date") for each offering.
5. PARTICIPATION.
-------------
Any eligible Associate may become a participant by completing and
delivering the payroll deduction authorization form provided by the Company at
least ten (10) days prior to an applicable Offering Commencement Date, as
determined by the Committee pursuant to Paragrph 4. Participation in any one
or more of the Offerings under the Plan shall neither limit, nor require,
participation in any other Offering. However, a participant during one Offering
will be deemed to have elected to participate in each subsequent Offering,
provided he or she is eligible to participate during each such subsequent
Offering. Such participant will also be deemed to have authorized the same
payroll deductions under Paragraph 6 hereof for each subsequent Offering;
provided however, that, during the enrollment period prior to each new Offering,
the participant may elect to change his or her payroll deductions by submitting
2
<PAGE>
a new payroll deduction authorization form. Except as provided in Paragraphs
6(d) or 10, a participant will be permitted to change his or her payroll
deduction only during an enrollment period.
6. PAYROLL DEDUCTIONS.
------------------
(a) At the time a participant files his or her authorization for a
payroll deduction, he or she shall elect to have after-tax deductions made from
his or her pay on each payday during any Offering in which he or she is a
participant at a specified dollar amount: said dollar amount shall be in whole
dollars and may be any amount between a minimum of $5.00 and a maximum
percentage of ten (10%) percent of a participant's Compensation as determined on
the applicable Offering Commencement Date.
(b) Payroll deductions for a participant shall commence on the
applicable Offering Commencement Date when the authorization for a payroll
deduction becomes effective and shall end on the Offering Termination Date of
the Offering to which such authorization is applicable unless sooner terminated
by the participant as provided in Paragraphs 6(d) or 10.
(c) All payroll deductions made for a participant shall be credited
to the participant's account under the Plan. A participant may not make any
separate cash payment into such account.
(d) A participant may discontinue payroll deductions at any time
during the applicable Offering period; provided, however, that in the event of a
withdrawal of payroll deductions pursuant to Paragraph 10(a), no less than
twenty-one (21) days notice of withdrawal must be provided to the Company before
the Offering Termination Date.
7. GRANTING OF OPTION.
------------------
(a) On the Offering Commencement Date of each Offering, a partici-
pating associate shall be deemed to have been granted an option to purchase a
maximum number of shares of the Common Stock equal to an amount determined as
follows: $1.00 shall be divided into an amount equal to the percentage of the
Associate's Compensation which he or she has elected to have withheld (but no
more than 10%) multiplied by the Associate's Compensation over the Offering
period.
(b) The option price of the Common Stock purchased with payroll
deductions made during each such Offering for a participant therein shall be the
lower of:
(i) 85% of the closing price per share on the Offering
Commencement Date as reported by a nationally recognized stock exchange (the
stock is currently listed on the NYSE), or, if the Common Stock is not listed on
such an exchange, as reported by the National Association of Securities Dealers
Automated Quotation System ("Nasdaq") National Market System; and
(ii) 85% of the closing price per share on the Offering
Termination Date as reported by a nationally recognized stock exchange, or, if
the Common Stock is not listed on such an exchange, as reported by the Nasdaq
National Market System.
3
<PAGE>
8. EXERCISE OF OPTION.
------------------
Unless a participant gives written notice to the Company as provided in
Paragraph 10, the option for the purchase of Common Stock with payroll
deductions made during any Offering will be deemed to have been exercised auto-
matically on the Offering Termination Date applicable to such Offering for the
purchase of the number of full shares of Common Stock and fractional interests
which the accumulated payroll deductions in his or her account at the time will
purchase at the applicable option price (but not in excess of the number of
shares for which options have been granted the employee pursuant to Paragraph
7(a)), and any excess in his or her account at that time, will be returned.
9. ALLOCATION OF PURCHASE.
----------------------
As promptly as possible after the appropriate Offering Termination Date,
the shares purchased upon exercise of the options will be allocated to each
participant's plan account. The allocation will be made in whole shares and in
fractional interests calculated to one hundred thousandths of a share (.00000).
10. WITHDRAWAL AND TERMINATION.
--------------------------
(a) Prior to the Offering Termination Date for an Offering, any
participant may withdraw the payroll deductions credited to his or her account
under the Plan for such Offering by giving at least twenty-one (21) days written
notice to the Payroll Department of the Company. All of the participant's
payroll deductions credited to such account will be paid out after receipt of
the notice of withdrawal, without interest, and no further payroll deductions
will be made from the participant's pay during such Offering.
(b) A participant's election not to participate in, or withdrawal
from, any Offering will not have any effect upon his or her eligibility to
participate in any succeeding Offering or in any similar plan which may herein-
after be adopted by the Company.
(c) Upon termination of the participant's employment for any reason,
prior to the Offering Termination Date, including retirement but excluding
death, the payroll deductions credited to his or her account will be returned to
the participant. Upon any such termination, the former participant shall have
the right to elect, by written notice given to the Payroll Department prior to
the expiration of a period of 90 days commencing with the date of such termina-
tion, either:
(i) to withdraw any shares of Common Stock then held by the
Plan on behalf of such former participant by (A) causing the Plan to have a
certificate representing the whole shares of Common Stock (and cash in lieu of
any fractional shares) distibuted to the former participant, provided that such
former participant shall be solely responsible for any charge incurred by the
Plan in connection with the issuance of such certificate or (B) causing, if
systems permit, the Plan to have record ownership of such shares electronically
transferred to the brokerage account of such former participant; or
(ii) to cause the Plan to sell any shares of Common Stock
held by the Plan on behalf of such former participant on the next Sale Date (as
defined in Paragraph 12) at the then fair market value and remit the proceeds,
net of any applicable transaction costs and withholding taxes (if applicable),
to such former participant.
4
<PAGE>
(d) Upon termination of the participant's employment because of
death, the beneficiary (as defined in Paragraph 14) shall have the right to
elect, by written notice given to the Company's Payroll Department prior to the
expiration of a period ending on the earlier to occur of the date 90 days
following with the date of the death of the participant and the next Offering
Termination Date, either:
(i) to withdraw all of the payroll deductions credited to
the participant's account under the Plan; or
(ii) to exercise the participant's option for the purchase of
stock on the Offering Termination Date next following the date of the partici-
pant's death for the purchase of the number of full shares which the accumulated
payroll deductions in the participant's account at the date of the participant's
death will purchase at the applicable option price (subject to the limitation
contained in Paragraph 7(a)), and any excess in such account will be returned to
said beneficiary. In the event that no such written notice of election shall be
duly received by the office of the Company's Payroll Department, the beneficiary
shall automatically be deemed to have elected to withdraw the payroll deductions
credited to the participant's account at the date of the participant's death and
the same will be paid promptly to said beneficiary.
11. INTEREST.
--------
In no event will interest be paid or allowed on any money paid into the
Plan or credited to the account of any participant.
12. STOCK.
-----
(a) The maximum number of shares of Common Stock available for
purchase by all participants under the Plan, subject to adjustment upon changes
in capitalization of Hills Stores Company as provided in Paragraph 17, shall be
500,000 shares of Common Stock, par value $.01 per share. Shares of Common
Stock available for purchase under the Plan may be treasury shares, authorized
but unissued shares or shares acquired by or on behalf of the Company in open
market purchases. In the event that any option to purchase shares shall not be
exercised by any Associate for any reason or if such option shall terminate as
provided herein, shares that have not been so purchased hereunder shall again
become available for the purposes of the Plan, but such unpurchased shares shall
not be deemed to increase the aggregate number of shares specified above to be
reserved for purposes of the Plan. If the total number of shares for which
options are exercised upon any Offering Termination Date in accordance with
Paragraph 8 exceeds the maximum number of shares for the applicable Offering,
there will be a pro rata allocation of the shares available for delivery and
distribution in an equitable manner, and the balances of payroll deductions
credited to the account of each participant under the Plan will be returned to
the participant.
(b) The participant will have no interest in stock covered by his or
her option until such option has been exercised.
(c) Any dividends paid with respect to shares of Common Stock held
by the Plan on behalf of a participant shall be credited to the account of such
participant.
5
<PAGE>
(d) Participants and former participants in the Plan may cause the
Plan to sell shares of Common Stock held in their account on their behalf as of
the fifth or twentieth day of any month, or on the next succeeding business day
if any such day is not a business day (each, a "Sale Date"). The participant
will be responsible for all fees or commissions in connection with such sale.
13. ADMINISTRATION.
--------------
The Plan shall be administered by the Committee. The interpretation and
construction of any provision of the Plan and adoption of rules and regulations
for administering the Plan shall be made by the Committee. Determinations made
by the Committee with respect to any matter or provision contained in the Plan
shall be final, conclusive and binding upon the Company and upon all partici-
pants, their heirs or legal representatives. Any rule or regulation adopted by
the Committee shall remain in full force and effect unless and until altered,
amended, or repealed by the Committee. The Committee has delegated authority
for supervision of the routine administration of the Plan to the Management
Committee. All inquiries concerning the administration of the Plan or inter-
pretation of the Plan should be directed to the Senior Vice President-Secretary
of the Company.
14. DESIGNATION OF BENEFICIARY.
--------------------------
A participant shall file with the Company, a written designation of a
beneficiary who is to receive any Common Stock, fractional interests and/or cash
under the Plan in the event of the participant's death. Such designation of
beneficiary may be changed by the participant at any time by written notice.
Upon the death of a participant and upon receipt by the Company of proof of the
identity and existence at the participant's death of a beneficiary validly
designated by the participant under the Plan, the Company shall deliver such
Common Stock, fractional interests and/or cash to such beneficiary. In the
event of the death of a participant and in the absence of a beneficiary validly
designated under the Plan who is living at the time of such participant's death,
the Company shall deliver such Common Stock, fractional interests and/or cash to
the executor or administrator of the estate of the participant. No beneficiary
shall, prior to the death of the participant by whom he or she has been
designated, acquire any interest in the Common Stock, fractional interests
and/or cash credited to the participant under the Plan.
15. TRANSFERABILITY.
---------------
Neither payroll deductions credited to a participant's account nor any
rights with regard to the exercise of an option or the receipt of Common Stock
under the Plan may be assigned, transferred, pledged, or otherwise disposed of
in any way by the participant other than by will or the laws of descent and
distribution. Any such attempted assignment, transfer, pledge or other dis-
position shall be without effect, except that the Company may treat such act as
an election to withdraw funds in accordance with Paragraph 10.
16. USE OF FUNDS.
------------
All payroll deductions received under the Plan may be held by the
Company with all other corporate funds and may be used by the Company for any
proper corporate purpose, until the funds are invested, on the Offering
Termination Date.
6
<PAGE>
17. EFFECT OF CHANGES OF COMMON STOCK.
---------------------------------
If the Company shall subdivide or reclassify the Common Stock which has
been or may be subject to options under this Plan, or shall declare thereon any
dividend payable in shares of such Common Stock, or shall take any other action
of a similar nature affecting such Common Stock, then the number and class of
shares of Common Stock which may thereafter be subject to options under the Plan
(in the aggregate and to any participant) shall be adjusted accordingly and in
the case of each option outstanding at the time of any such action, the number
and class of shares which may thereafter be purchased pursuant to such option
and the option price per share shall be adjusted to such extent as may be
determined by the Committee, to be necessary to preserve the rights of the
holder of such option.
18. AMENDMENT OR TERMINATION.
------------------------
The Board may at any time terminate or amend the Plan. No such
termination shall affect options previously granted, nor may an amendment make
any change in any option theretofore granted which would adversely affect the
rights of any participant holding options under the Plan without the consent of
such participant.
19. NOTICES.
-------
All notices or other communications by a participant to the Company
under or in connection with the Plan shall be deemed to have been duly given
when received by the Senior Vice President-Secretary or any other proper party
or department so designated by the Senior Vice President-Secretary.
20. MERGER OR CONSOLIDATION.
-----------------------
If the Company shall at any time merge into or consolidate with another
corporation, the holder of each option then outstanding will thereafter be
entitled to receive at the next Offering Termination Date upon the exercise of
such option, in lieu of the number of shares of Common Stock as to which such
option shall be exercisable, the number and class of shares of stock or other
securities or property to which such holder would have been entitled pursuant to
the terms of the agreement of merger or consolidation, as if such holder had
been the holder of record (as of the last business day prior to the effective
date of such merger or consolidation) of a number of shares of Common Stock
equal to the number of shares for which such option was exercisable. In accor-
dance with this Paragraph and Paragraph 17, the Committee shall determine the
kind and amount of such securities or property which such holder of an option
shall be entitled to receive. A sale of all or substantially all of the assets
of the Company shall be deemed a merger or consolidation for the foregoing
purposes.
21. APPROVAL OF STOCKHOLDERS.
------------------------
The Plan was approved by the stockholders of the Company at the annual
meeting of stockholders held on June 23, 1995.
7
<PAGE>
22. GOVERNMENTAL AND OTHER REGULATIONS.
----------------------------------
The Plan, and the grant and exercise of the rights to purchase shares
hereunder, and the Company's obligation to sell and deliver shares upon the
exercise of rights to purchase shares, shall be subject to all applicable
federal, state and foreign laws, rules and regulations, and to such approvals
by any regulatory or governmental agency as may, in the opinion of counsel for
the Company, be required. The Plan shall be governed by, and construed and
enforced in accordance with, the provisions of Sections 421, 423 and 424 of the
Code and any such laws, such provisions of the Code shall govern to the extent
necessary to preserve favorable federal income tax treatment afforded employee
stock purchase plans under Section 423 of the Code.
* * * * *
8
<TABLE>
EXHIBIT 11
HILLS STORES COMPANY AND SUBSIDIARIES
STATEMENTS RE COMPUTATION OF PER SHARE EARNINGS
<CAPTION>
Quarter Ended
-------------------------
May 2, May 3,
1998 1997
---------- -----------
<S> <C> <C>
Weighted average basic shares outstanding
- -----------------------------------------
Weighted average number of common shares
assumed to be outstanding during the period 10,448,417 10,345,781
Assumed conversion of preferred stock - -
Assumed exercise of stock options - -
Assumed exercise of stock rights - -
Assumed exercise of stock warrants - -
---------- ----------
10,448,417 10,345,781
========== ==========
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
Weighted average diluted shares outstanding
- -------------------------------------------
Weighted average number of common shares
assumed to be outstanding during the period 10,448,417 10,345,781
Assumed conversion of preferred stock - -
Assumed exercise of stock options - -
Assumed exercise of stock rights - -
Assumed exercise of stock warrants - -
---------- ----------
10,448,417 10,345,781
========== ==========
</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>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-END> MAY-02-1998
<CASH> 15,914
<SECURITIES> 0
<RECEIVABLES> 28,610
<ALLOWANCES> (1,658)
<INVENTORY> 404,476
<CURRENT-ASSETS> 486,984
<PP&E> 270,347
<DEPRECIATION> (91,622)
<TOTAL-ASSETS> 934,956
<CURRENT-LIABILITIES> 263,124
<BONDS> 346,869
18,107
0
<COMMON> 105
<OTHER-SE> 205,429
<TOTAL-LIABILITY-AND-EQUITY> 934,956
<SALES> 362,947
<TOTAL-REVENUES> 362,947
<CGS> 263,596
<TOTAL-COSTS> 263,596
<OTHER-EXPENSES> 104,744
<LOSS-PROVISION> 564
<INTEREST-EXPENSE> 11,740
<INCOME-PRETAX> (17,133)
<INCOME-TAX> (6,500)
<INCOME-CONTINUING> (10,633)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,633)
<EPS-PRIMARY> (1.02)
<EPS-DILUTED> (1.02)
</TABLE>
