<PAGE> 1
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
FILED BY THE REGISTRANT /X/ FILED BY A PARTY OTHER THAN THE REGISTRANT / /
- --------------------------------------------------------------------------------
Check the appropriate box:
/ / Preliminary Proxy Statement
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to sec.240.14a-11(c) or sec.240.14a-12
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
HILLS STORES COMPANY
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement)
PAYMENT OF FILING FEE (CHECK THE APPROPRIATE BOX):
/X/ No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
2) Aggregate number of securities to which transaction applies:
3) Per unit price or other underlying value of transaction computed pursuant
to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee
is calculated and state how it was determined):
4) Proposed maximum aggregate value of transaction:
5) Total fee paid:
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
2) Form, Schedule or Registration Statement No.:
3) Filing Party:
4) Date Filed:
- --------------------------------------------------------------------------------
<PAGE> 2
[HILLS STORES LOGO]
================================================================================
HILLS STORES COMPANY
NOTICE OF ANNUAL MEETING OF
SHAREHOLDERS
TO BE HELD ON JUNE 17, 1998
AND
PROXY STATEMENT
================================================================================
IMPORTANT
PLEASE MARK, SIGN AND DATE YOUR PROXY
AND PROMPTLY RETURN IT IN THE ENCLOSED ENVELOPE.
<PAGE> 3
[HILLS STORES LOGO]
April 30, 1998
Dear Fellow Shareholder:
You are cordially invited to attend the Annual Meeting of Shareholders of
Hills Stores Company to be held on Wednesday, June 17, 1998 at 10:00 AM at the
Hills Corporate Headquarters, 15 Dan Road, Canton, Massachusetts 02021. Your
Board of Directors and management look forward to greeting personally those
shareholders able to attend.
At the meeting, shareholders will elect eight Directors. Information
regarding the nominees is set forth in the accompanying Notice of Annual Meeting
and Proxy Statement to which you are urged to give your prompt attention.
It is important that your shares be represented and voted at the meeting.
Whether or not you plan to attend, please take a moment to sign, date and mail
the enclosed proxy promptly. Your cooperation is appreciated.
On behalf of your Board of Directors, thank you for your continued interest
and support.
Sincerely,
/s/ GREGORY K. RAVEN
---------------------
GREGORY K. RAVEN
President and
Chief Executive Officer
<PAGE> 4
[HILLS STORES LOGO]
HILLS STORES COMPANY
NOTICE OF ANNUAL MEETING OF
SHAREHOLDERS
TO BE HELD JUNE 17, 1998
Notice is hereby given that the Annual Meeting of Shareholders of Hills
Stores Company (the "Company") will be held Wednesday, June 17, 1998 in the main
conference room of the Hills Corporate Headquarters, 15 Dan Road, Canton, MA
02021 at 10:00 AM local time to take action with respect to the following
matters:
1. The election of eight Directors to serve for the ensuing year and until
their successors are elected and qualified; and
2. Transaction of such other business as may properly be brought before
the Annual Meeting or any adjournments thereof.
Holders of record of Common Stock and Series A Preferred Stock at the close
of business on April 22, 1998 are entitled to receive notice of and to vote at
the meeting or any adjournments thereof.
Your attention is directed to the accompanying Proxy Statement and form of
proxy. Whether or not you plan to attend the meeting, you are urged to sign,
date and mail the enclosed form of proxy promptly in the enclosed envelope (no
postage required if mailed in the United States) so that your shares may be
counted. Your cooperation will save your Company additional solicitation costs.
By order of the Board of Directors
/s/ William K. Friend
-------------------------------
William K. Friend
Senior Vice President-Secretary
Canton, Massachusetts
April 30, 1998
IT IS IMPORTANT THAT YOUR SHARES BE REPRESENTED AND VOTED AT THE ANNUAL
MEETING. REGARDLESS OF THE NUMBER OF SHARES YOU OWN, PLEASE SIGN, DATE AND
PROMPTLY MAIL YOUR PROXY IN THE ENCLOSED POSTAGE-PAID ENVELOPE. YOUR COOPERATION
IS APPRECIATED.
<PAGE> 5
PROXY STATEMENT
HILLS STORES COMPANY
15 DAN ROAD, CANTON, MASSACHUSETTS 02021
(781) 821-1000
PROXY SOLICITATION
This Proxy Statement and the enclosed form of proxy have been mailed to
shareholders on or about April 30, 1998 in connection with the solicitation by
the Board of Directors of Hills Stores Company (the "Company") of proxies to be
used at the June 17, 1998 Annual Meeting of Shareholders.
It is important that your shares be represented and voted at the Annual
Meeting regardless of the number of shares that you own. Accordingly, you are
asked to sign, date and promptly mail the accompanying proxy card in order to
ensure that your shares are voted. Shares cannot be voted at the Annual Meeting
unless the owner is represented by proxy or is present at the Annual Meeting. A
majority of the shares entitled to vote at the Annual Meeting must be present
either in person or by proxy in order for there to be a quorum. Elections for
Directors will be decided by a plurality of the votes cast.
Abstentions and shares as to which brokers or other nominees are not
provided with instructions (otherwise known as broker non-votes) are counted as
present or represented for purposes of determining the presence or absence of a
quorum at the Annual Meeting. Abstentions and broker non-votes will not count as
votes for or against the election of Directors.
The shares represented by the proxy will be voted FOR the election of the
nominees herein listed unless authority to so vote is withheld or a contrary
instruction is made.
Each shareholder appointing a proxy has the power to revoke such
appointment by a later-dated proxy delivered to the Company or by giving notice
of revocation to the Company in writing or at the meeting. Any vote taken prior
to a revocation is not affected. The presence at the Annual Meeting of the
shareholder appointing a proxy does not in and of itself revoke the appointment.
Prior to its October 4, 1993 emergence from Chapter 11 proceedings, Hills
Stores Company was a wholly-owned subsidiary of Hills Department Stores, Inc.
(the "Predecessor Company"). Pursuant to the Company's Plan of Reorganization,
effective October 4, 1993, the Predecessor Company was dissolved. References
herein to periods prior to October 4, 1993 may, as appropriate, refer either to
the Company or the Predecessor Company. References to periods from and after
October 4, 1993 refer to the Company.
VOTING SECURITIES
On April 22, 1998, the record date for the meeting, there were 10,388,224
shares of Common Stock and 850,009 shares of Series A Preferred Stock
outstanding, each entitled to one vote.
1
<PAGE> 6
MATTERS TO BE VOTED ON
ELECTION OF DIRECTORS
It is proposed that eight Directors, constituting the current members of
the Board of Directors, be elected for the ensuing year and until their
successors are elected and qualified. It is intended that the shares represented
by the proxy, unless otherwise instructed, will be voted for the election of the
eight nominees listed in the following section. Insofar as is known, all of the
nominees will be able to serve. Should any nominee become unavailable, the
persons named in the proxy may vote for a substitute for such nominee. If no
substitute nominee is designated, then, following the Annual Meeting, the Board
of Directors, as permitted by the By-Laws of the Company, may reduce the number
of Directors to less than eight or may fill the vacancy.
INFORMATION ABOUT NOMINEES
<TABLE>
<CAPTION>
SERVED AS A
NAME AGE POSITION DIRECTOR SINCE
---- --- -------- --------------
<S> <C> <C> <C>
Chaim Y. Edelstein..... 55 Chairman of the Board 1995
Gregory K. Raven....... 48 Director, President and Chief 1996
Executive Officer
Stanton J. Bluestone... 63 Director 1995
John W. Burden III..... 61 Director 1995
Alan S. Cooper......... 39 Director 1995
Mark B. Dickstein...... 39 Director 1995
Samuel L. Katz......... 32 Director 1995
Richard E. Montag...... 66 Director 1997
</TABLE>
CHAIM Y. EDELSTEIN was elected Chairman of the Board in February 1996. He
has been a Director and a consultant to the Company since July 1995. He has been
a retail consultant since February 1994. From 1985 to February 1994 he was
Chairman and Chief Executive Officer of Abraham & Straus, a division of
Federated Department Stores, Inc. Mr. Edelstein is a director of Independence
Community Bank.
GREGORY K. RAVEN was elected President and Chief Executive Officer and a
Director in February 1996. From September 1988 until August 1995, Mr. Raven was
Executive Vice President-Finance and Chief Financial Officer of Revco D.S., Inc.
STANTON J. BLUESTONE has been a Director since July 1995. Since February
1998 he has been Chairman of Carson Pirie Scott, a Division of Proffitt's, Inc.
(a department store retailer). From March 1996 to February 1998 he was Chairman
of the Board and Chief Executive Officer of Carson Pirie Scott & Co. From August
1993 to March 1996 he served as President and Chief Executive Officer of Carson
Pirie Scott & Co. From 1991 to August 1993 he was President and Acting Chief
Executive Officer of Carson Pirie Scott & Co. He is a director of Proffitt's
Inc.
JOHN W. BURDEN III has been a Director since July 1995. Since January 1998
he has been a retail consultant. From 1993 to December 1997, he was a consultant
and partner in Retail Options, Inc. Mr. Burden is a director of Proffitt's, Inc.
and Chico's Inc., a women's specialty retailer.
ALAN S. COOPER has been a Director since December 1995. He has been Vice
President-General Counsel of Dickstein Partners Inc. since March 1992. Prior to
that, he was an attorney with the firm of Rosenman & Colin since 1983. He is a
director of Specialty Catalogue Corp., a direct catalogue marketer.
MARK B. DICKSTEIN has been a Director since July 1995 and was Chairman of
the Board from July 1995 to February 1996. He has been the President of
Dickstein Partners Inc. since prior to 1990 and is primarily responsible for the
operations of Dickstein & Co., L.P., Dickstein Focus Fund L.P. and Dickstein
International Limited (collectively the "Dickstein Funds"). He is a director of
News Communications Inc., a publisher and distributor of community newspapers,
and The Leslie Fay Company, Inc., a manufacturer of women's sportswear.
2
<PAGE> 7
SAMUEL L. KATZ has been a Director since July 1995. He is Executive Vice
President, Strategic Development of Cendant Corporation (f/k/a HFS
Incorporated), a franchiser of hotels and real estate brokerage services. From
January 1996 to April 1998 he was Senior Vice President-Acquisitions of Cendant
Corporation. From January 1996 to June 1996 Mr. Katz was a consultant to the
Company. From July 1993 to December 1995 he was a Vice President of Dickstein
Partners Inc. From February 1992 to July 1993, Mr. Katz was the Co-Chairman of
Saber Capital, Inc., a firm making private equity investments.
RICHARD E. MONTAG, has been a Director since June 1997. For the past five
years he has been Vice President-Development of The Richard E. Jacobs Group, a
developer of regional shopping malls. He is a director of Getty Petroleum
Marketing, Inc.
Directors of the Company are elected for a term of one year or until their
successors are elected and qualified.
During the fiscal year ended January 31, 1998, the Board of Directors of
the Company met seven (7) times. No incumbent director attended fewer than 75%
of the total number of meetings of the Board and Committees of the Board on
which they served.
The Board of Directors has a standing Audit Committee, HR/Compensation
Committee (Option Committee) and Nominating Committee. During the fiscal year
ended January 31, 1998, the Audit Committee met three (3) times, and the
HR/Compensation Committee (Option Committee) met six (6) times.
The Audit Committee, consisting entirely of non-employee Directors, is
composed of Mr. Katz, as Chairman, Mr. Cooper, and Mr. Montag. The Audit
Committee's functions include the following:
Recommendations to the full Board concerning the engagement or discharge of
independent auditors; direction and supervision of investigations into
matters within the scope of the Committee's duties; review with auditors of
plans and results of auditing procedures; review, for Board approval, of
each significant professional service provided by auditors and review of
the independence of the auditors; consideration of the range of audit and
nonaudit fees and the adequacy of the Company's system of internal
accounting controls.
The HR/Compensation Committee (Option Committee), consisting entirely of
non-employee Directors, is composed of Mr. Dickstein, as Chairman, Mr. Bluestone
and Mr. Burden. The functions of the HR/Compensation Committee (Option
Committee) include the following:
Reviewing the corporate compensation programs and policies, including the
compensation of the Chief Executive Officer, to assure that said programs
and policies are competitive and provide for internal equity; reviewing and
advising the Chief Executive Officer on specific compensation matters for
officers and executives; overseeing the Company's performance bonus
programs; administering the 1993 Stock Option Plan; administering the
Company's 162(m) Bonus Plan; and performance of such other duties as the
Chairman of the Board may require.
The Nominating Committee, consisting entirely of non-employee directors, is
composed of Mr. Katz, as Chairman, Mr. Cooper and Mr. Montag. The Nominating
Committee's functions include evaluation of potential candidates for membership
on the Board of Directors and recommendations to the full Board regarding such
candidates.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" ALL NOMINEES.
3
<PAGE> 8
BENEFICIAL OWNERSHIP
The following table sets forth as of March 31, 1998 information with
respect to beneficial ownership of shares of the Company's Common Stock. The
information was obtained from Company records and information supplied by the
shareholders, including information on Schedules 13D and 13G and Forms 3 and 4
prescribed by the Securities and Exchange Commission ("SEC"). No person has
reported ownership of more than five (5%) percent of the Series A Preferred
Stock.
<TABLE>
<CAPTION>
PERCENT OF PERCENT OF
NAME AND ADDRESS AMOUNT AND NATURE COMMON VOTING
OF BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP STOCK STOCK(1)
- --------------------------------------------------- ----------------------- ---------- ----------
<S> <C> <C> <C>
DDJ Capital Management, LLC(2) 904,234 8.7 8.1
141 Linden Street, Suite S-4
Wellesley, MA 02181
ML-Lee Acquisition Fund II, 799,293 7.7 7.1
L.P., ML-Lee Acquisition Fund
(Retirement Accounts) II, L.P.,
Thomas H. Lee Advisors II, L.P. (3)
World Financial Center
South Tower, 23rd Fl.
New York, NY 10080-6123
Europe American Capital Foundation 755,000 7.3 6.7
Lugano Switzerland
</TABLE>
- ------------------------------
(1) Represents the shares of Common Stock and Series A Preferred Stock owned
beneficially as a percentage of the aggregate of 10,388,224 shares of Common
Stock outstanding and 850,009 shares of Series A Preferred Stock
outstanding. Each share of Series A Preferred Stock is immediately
convertible into one share of Common Stock, and the Series A Preferred Stock
has coextensive voting rights with the Common Stock.
(2) DDJ Capital Management, LLC and its affiliates, DDJ Overseas Corp., DDJ
Galileo, LLC, DDJ Galileo Management, LLC, The Galileo Fund L.P., Kepler
Overseas Corp., The Copernicus Fund, L.P., DDJ Copernicus, LLC and DDJ
Copernicus Management, LLC, jointly filed a Schedule 13D showing beneficial
ownership of 904,234 shares of Common Stock. DDJ Copernicus, LLC is the
general partner of, and DDJ Copernicus Management, LLC is the investment
manager for, The Copernicus Fund, L.P. DDJ Galileo, LLC owns all of the
voting securities of, and DDJ Galileo Management, LLC is the investment
manager for, DDJ Overseas Corp. DDJ Galileo, LLC is the general partner of
and, DDJ Galileo Management, LLC is the investment manager for, The Galileo
Fund, L.P. DDJ provides administrative services to the DDJ Affiliates and is
the investment manager for Kepler Overseas Corp. The Company believes that
DDJ and its affiliates listed above may be deemed a group as that term is
used in Rule 13d-5(b) of the Securities and Exchange Act of 1934 (the
"Exchange Act").
(3) ML-Lee Acquisition Fund II, L.P. owns beneficially 521,048 shares of Common
Stock, and ML-Lee Acquisition Fund (Retirement Accounts) II L.P. owns
beneficially 278,245 shares of Common Stock. Thomas H. Lee Advisors II,
L.P., as the investment advisor to both Funds, shares the power to vote and
to direct the disposition of securities held by the Funds and therefore may
be deemed to own beneficially the 799,293 shares of Common Stock owned
beneficially in the aggregate by the Funds. Thomas H. Lee, who was the
Chairman of the Board of the Company until July 5, 1995, is a general
partner of both funds.
4
<PAGE> 9
The following table sets forth as of March 31, 1998 the beneficial
ownership of the Company's Common Stock held by each Nominee for Director, the
executive officers named in the Summary Compensation Table and Directors and
executive officers as a group. None of these persons owns any shares of Series A
Preferred Stock.
<TABLE>
<CAPTION>
AMOUNT AND NATURE PERCENT OF PERCENT OF
BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP COMMON STOCK VOTING STOCK(1)
- ----------------------------------------- ----------------------- ------------ ---------------
<S> <C> <C> <C>
Chaim Y. Edelstein 35,935(2) * *
Stanton J. Bluestone 2,245(3) * *
John W. Burden III 4,245(4) * *
Alan S. Cooper 2,245(3) * *
Mark B. Dickstein 73,215(5) * *
Samuel L. Katz 3,245(6) * *
Richard E. Montag 5,000 * *
Gregory K. Raven 232,612(7) 2.2 2.1
Michael R. Hamilton 22,912(8) * *
C. Scott Litten 47,522(9) * *
Frederick L. Angst 42,752(10) * *
Mark P. Ramsdell 900(3) * *
Directors and Executive Officers as a
Group (24 Persons) 507,772(11) 4.8 4.4
</TABLE>
- ------------------------------
* Represents less than 1% of outstanding shares.
(1) Represents the shares of Common Stock owned beneficially as a percentage of
the aggregate of 10,388,224 shares of Common Stock outstanding and 850,009
shares of Preferred Stock outstanding. Each share of Series A Preferred
Stock is immediately convertible into one share of Common Stock, and the
Series A Preferred Stock has coextensive voting rights with the Common
Stock.
(2) Consists of 10,935 exercisable stock options and 25,000 shares of Common
Stock (including 10,000 shares of restricted stock). See section below
captioned "Restricted Stock Agreements".
(3) Consists of exercisable stock options.
(4) Consists of 2,000 shares of Common Stock and 2,245 exercisable stock
options.
(5) Includes 2,245 exercisable stock options owned by Mr. Dickstein
individually and 30,970 shares of Common Stock owned by Dickstein & Co.
L.P. and 40,000 shares of Common Stock owned by Dickstein International
Limited. Mark Dickstein, a Director, is the President and sole director of
Dickstein Partners Inc., which is the general partner of Dickstein
Partners, L.P. and the advisor to Dickstein International Limited.
Dickstein Partners L.P. is the general partner of Dickstein & Co. L.P.
(6) Consists of 1,000 shares of Common Stock and 2,245 exercisable stock
options.
(7) Consists of 129,511 shares of Common Stock (including 100,000 shares of
restricted stock) and 103,101 exercisable stock options. See section below
captioned "Restricted Stock Agreements".
(8) Consists of 15,000 shares of Common Stock and 7,912 exercisable stock
options.
(9) Consists of 32,596 shares of Common Stock and 14,926 exercisable stock
options.
(10) Consists of 35,000 shares of Common Stock and 7,752 exercisable stock
options.
(11) Consists of 324,203 shares of Common Stock (including 110,000 shares of
restricted stock), 182,882 exercisable stock options and 687 shares
issuable upon exercise of Series 1993 Warrants.
SECURITIES AND EXCHANGE COMMISSION FILINGS
Section 16(a) of the Exchange Act requires the Company's officers and
Directors and persons who own more than ten percent of a registered class of the
Company's equity securities to file reports of ownership and
5
<PAGE> 10
changes in ownership with the SEC and the New York Stock Exchange. Officers,
Directors and greater than ten percent shareholders are required by SEC
regulations to furnish the Company with copies of all Section 16(a) forms they
file.
Based solely on its review of the copies of such forms received by it, or
written representations from certain reporting persons that no Forms 5 were
required for those persons, the Company believes that for the fiscal year ended
January 31, 1998, its officers, Directors and greater than ten percent
beneficial owners complied with all filing requirements applicable to them.
EXECUTIVE COMPENSATION
The following table sets forth the annual and long-term compensation for
service in all capacities to the Company for the fiscal year ended January 31,
1998 and the two prior fiscal years (identified as fiscal years 1997, 1996 and
1995 respectively) of the Chief Executive Officer of the Company during the
fiscal year ended January 31, 1998 and the other four most highly compensated
executive officers of the Company serving on January 31, 1998 whose salary and
bonus exceeded $100,000:
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
NAME AND FISCAL OTHER ANNUAL AWARDS: STOCK ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS(#) COMPENSATION
- ------------------ ------ -------- -------- ------------ ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Gregory K. Raven................ 1997 $700,000 $ 0 $117,137(1) 218,704(2) $ 0
President and Chief 1996 665,274 172,000(3) 141,221(4) 300,000 0
Executive Officer 1995 -- -- -- -- --
Michael R. Hamilton............. 1997 318,667 0 111,411(5) 39,561(6) 3,200(7)
Executive Vice President -- 1996 87,533 175,000(3) 16,644(8) 50,000 0
Operations 1995 -- -- -- -- --
C. Scott Litten................. 1997 310,417 0 10,347(9) 38,725(2) 3,200(7)
Executive Vice President -- 1996 177,230 85,000(3) 121,931(10) 50,000 0
Chief Financial Officer 1995 -- -- -- -- --
Frederick L. Angst.............. 1997 309,535 0 0 39,973(2) 3,200(7)
Executive Vice President -- 1996 263,334 51,000 7,891(11) 5,000 3,200(7)
Chief Merchandising Officer 1995 283,276 100,000 0 10,000(6) 3,000(7)
Mark P. Ramsdell................ 1997 171,959 54,000 0 12,000 1,591(7)
Vice President -- 1996 90,902 7,500 0 0 --
Home Division 1995 -- -- -- -- --
</TABLE>
- ------------------------------
(1) Consists of relocation expenses, including a "gross up" of $43,629 for
federal and state taxes.
(2) Includes repricing of options previously granted. See sections below
captioned "Stock Option Table" and "Ten Year Option Repricings".
(3) The amounts shown represent, in the case of Mr. Raven, a bonus guaranteed
by his employment contract; in the case of Mr. Hamilton, a hiring bonus of
$75,000 and a guaranteed bonus of $100,000; and in the case of Mr. Litten,
a hiring bonus of $25,000 and a guaranteed bonus of $60,000. See section
below captioned "Employment Contracts".
(4) Consists of relocation expenses, including a "gross up" of $54,984 for
federal and state taxes.
(5) Consists of relocation expenses, including a "gross up" of $46,885 for
federal and state taxes.
(6) Consists of repricings of options previously granted. See section below
captioned "Ten Year Option Repricings".
(7) Consists of Company contributions to the Company's 401(k) plan.
6
<PAGE> 11
(8) Consists of relocation expenses.
(9) Consists of relocation expenses, including a "gross up" of $4,710 for
federal and state taxes.
(10) Consists of relocation expenses, including a "gross up" of $48,375 for
federal and state taxes.
(11) Consists of relocation expenses, including a "gross up" of $3,691 for
federal and state taxes.
EMPLOYMENT CONTRACTS
Effective February 7, 1996, the Company entered into an employment contract
with Gregory K. Raven, President and Chief Executive Officer of the Company. The
contract provides for a term commencing February 8, 1996 and terminating January
30, 1999, subject to automatic one-year renewals thereafter unless either the
Company or Mr. Raven gives notice of non-renewal at least ninety (90) days prior
to the expiration of the term. The contract provides for an initial base salary
of $700,000 per year, subject to annual review, and a bonus target of 50% of
base salary if performance goals established by the HR/Compensation Committee
(Option Committee) of the Board of Directors are met. Mr. Raven has the right to
terminate his employment contract for "Good Reason", defined as assignment of
duties inconsistent with his position, removal from his position, a material
reduction in benefits, a relocation of the Company's principal office outside
the Boston metropolitan area or material breach by the Company. If the Company
terminates Mr. Raven without cause or if he terminates his employment for "Good
Reason", then Mr. Raven shall be entitled to severance pay equal to two times
his base pay then in effect. If within two years following a Change in Control
(as defined in the employment contract) the Company terminates Mr. Raven's
employment without cause or he terminates his employment contract for Good
Reason (other than a relocation of the Company's office), Mr. Raven's severance
pay shall be three times his then current base pay and three times his bonus for
the current fiscal year (assuming all performance goals had been achieved).
For purposes of Mr. Raven's employment contract, a Change in Control shall
have occurred if: (i) a person or entity (other than Dickstein Partners Inc. and
its affiliates) acquires 30% or more of the Company's voting stock, (ii) the
majority of the Board of Directors consists of persons who were not Incumbent
Directors (members of the Board on February 7, 1996 or a person who becomes a
member of the Board of Directors subsequent to February 7, 1996 whose election
was supported by a majority of Incumbent Directors), (iii) the Company
liquidates or sells substantially all of its assets, or (iv) the Company merges
or consolidates with another company and the shareholders of the Company
immediately before the combination hold 50% or less of the combined entity.
If the Company gives Mr. Raven notice of non-renewal of Mr. Raven's
employment contract, the Company will pay Mr. Raven a lump sum equal to two
times Mr. Raven's then base pay and continue his benefits for one year following
expiration of the employment contract.
Mr. Raven's employment contract provides for the issuance of 100,000 shares
of restricted stock to Mr. Raven on the terms described in the section below
captioned "Restricted Stock Agreements". Mr. Raven's employment contract also
provides for the issuance to Mr. Raven of options to purchase 300,000 shares of
the Company's Common Stock under the Company's 1993 Stock Option Plan. See
sections below captioned "Stock Option Table" and "Ten Year Option Repricings".
On November 11, 1996, the Company entered into an employment contract with
Michael R. Hamilton, Executive Vice President-Operations, for a term of three
years to October 21, 1999 at an initial base salary of $312,000 per year,
subject to annual review and a bonus target of 50% of base salary. Mr. Hamilton
is entitled to participate in any bonus, stock option or other incentive
compensation plans and other benefit plans of the Company at a level
commensurate with his position.
Mr. Hamilton's employment contract provides for the issuance to Mr.
Hamilton of options to purchase 50,000 shares of the Company's Common Stock
under the Company's 1993 Stock Option Plan. See section below captioned "Stock
Option Table".
Effective November 11, 1997, the Company entered into an employment
contract with C. Scott Litten, Executive Vice President-Chief Financial Officer,
for a term of three (3) years to November 11, 2000 at an
7
<PAGE> 12
initial base salary of $350,000 per year, subject to annual review and a bonus
target of 50% of base salary if performance goals are met. Mr. Litten is
entitled to participate in any bonus, stock option or other incentive
compensation plans and other benefit plans of the Company at a level
commensurate with his position.
Effective July 22, 1997, the Company entered into an employment contract
with Frederick L. Angst, Executive Vice President-Chief Merchandising Officer,
for a term of three (3) years to July 22, 2000 at a base salary of $350,000 per
year, subject to annual review and a bonus target of 50% of base salary if
performance goals are met. Mr. Angst is entitled to participate in any bonus,
stock option or other incentive compensation plans and other benefit plans of
the Company at a level commensurate with his position.
Hills executives who participate in the Company's bonus plan, including
Messrs. Raven, Hamilton, Litten, Angst and Ramsdell, may receive a bonus up to
50% greater than the target amount if performance goals are exceeded. See the
Compensation Committee Report.
RESTRICTED STOCK AGREEMENTS
The Company entered into a Restricted Stock Agreement dated as of February
8, 1996 with Gregory K. Raven, President and Chief Executive Officer. Pursuant
to said agreement, the Company issued Mr. Raven 100,000 shares of Common Stock,
subject to the restrictions described below. Said shares may not be sold or
otherwise disposed of until the restrictions expire. The restrictions shall
expire as to 60,000 shares on January 30, 1999 and as to 40,000 shares on
January 29, 2000. Furthermore, said restrictions will terminate immediately upon
(i) a Change in Control, as defined in Mr. Raven's employment contract, (ii)
termination by the Company of Mr. Raven's employment contract other than for
Cause as defined in Mr. Raven's employment contract or (iii) termination of Mr.
Raven's employment by Mr. Raven for Good Reason. The shares are subject to
forfeiture prior to vesting upon the termination of Mr. Raven's employment other
than as described in (ii) and (iii) above.
The Company entered into a Restricted Stock Agreement with Chaim Y.
Edelstein, Chairman of the Board, dated as of February 8, 1996. Pursuant to said
agreement, the Company issued Mr. Edelstein 20,000 shares of Common Stock,
subject to the restrictions described below. The restricted shares may not be
sold or otherwise disposed of until the restrictions expire. The restrictions
will expire as to 5,000 shares on each of the first four anniversaries of
February 8, 1996, so long as Mr. Edelstein is at that time available, willing
and able to provide consulting services to the Company and Mr. Edelstein's
consulting agreement has not been terminated by the Company for cause (as
defined in the consulting agreement). The restrictions shall immediately
terminate in the event of death or disability or if Mr. Edelstein terminates the
consulting agreement for Good Reason, as defined therein. The shares are subject
to forfeiture prior to vesting should Mr. Edelstein not be available, willing
and able to perform consulting services for the Company.
COMPENSATION OF DIRECTORS
The Company pays a fee of $2,000 per month to non-employee Directors, plus
$1,000 for each meeting of the Board and $500 for each committee meeting
attended, plus expenses. Committee chairmen receive $750 for each committee
meeting attended. Messrs. Edelstein and Raven do not receive Directors fees.
Pursuant to the 1996 Directors Stock Option Plan, each Participating
Director has been granted an option to purchase 4,000 shares of the Company's
Common Stock and will be granted an option to purchase 2,000 shares of the
Company's Common Stock on the first business day of each fiscal year. Mr.
Edelstein and Mr. Raven did not receive grants under the 1996 Directors Stock
Option Plan.
During the fiscal year ended January 31, 1998, the Company paid Mr.
Edelstein consulting fees of $400,000. The Company entered into a consulting
agreement dated as of February 8, 1998 with Mr. Edelstein which extended a
previous agreement dated February 7, 1997. The consulting agreement is for a
term to February 7, 1999 during which time Mr. Edelstein will assist the Company
with its merchandise, marketing and strategic planning efforts. The consulting
agreement provides that the Company will pay Mr. Edelstein a consulting fee of $
250,000 per year. Mr. Edelstein is eligible to participate in the Company's
bonus plan if performance goals are met. Under the Company's bonus plan, Mr.
Edelstein may receive a bonus up to 50% greater than the target amount if
performance goals are exceeded.
8
<PAGE> 13
STOCK OPTION TABLE
The following table sets forth grants during the fiscal year ended January
31, 1998 of options to purchase shares of the Company's Common Stock under the
Company's 1993 Stock Option Plan to the individuals named in the Summary
Compensation Table. In addition to the grants described in the table below, on
March 10, 1998, the named executive officers were granted options to purchase
shares of the Company's Common Stock under the 1993 Stock Option Plan as
follows: Mr. Raven, 30,000 shares; Messrs. Hamilton, Litten and Angst, 10,000
shares each; and Mr. Ramsdell, 3,000 shares. Said grants are at an exercise
price of $2.75 per share, the closing price of the Company's Common Stock on the
New York Stock Exchange on the date of the grant, and have a ten year term,
expiring March 10, 2008.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES
NUMBER OF % OF TOTAL OF STOCK
SECURITIES OPTIONS PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM(1)
OPTIONS EMPLOYEES IN OR BASE EXPIRATION ----------------------
NAME GRANTED FISCAL YEAR PRICE DATE 5% 10%
---- ---------- ------------ -------- ---------- -- ---
<S> <C> <C> <C> <C> <C> <C>
Gregory K. Raven........... 193,704(2) 26.1% $5.00 02/07/06 $456,747 $1,901,861
25,000 3.4 4.625 03/11/07 63,747 157,013
Michael R. Hamilton........ 39,561(2) 5.3 5.00 10/21/06 102,967 250,942
C. Scott Litten............ 28,725(2) 3.9 5.00 04/23/06 69,459 166,814
10,000 1.4 4.625 03/11/07 25,499 62,805
Frederick L. Angst......... 5,917(2) * 5.00 04/21/04 10,227 23,263
3,056(2) * 5.00 03/25/06 7,296 17,474
6,000 * 4.625 03/11/07 15,299 31,735
25,000 3.4 2.75 07/22/07 39,681 98,763
Mark P. Ramsdell........... 4,500 * 4.625 03/11/07 11,475 28,262
4,000 * 5.125 08/20/07 11,965 29,852
3,500 * 3.75 11/11/07 7,915 19,886
</TABLE>
- ---------------
(1) The amounts shown as potential realizable value illustrate what might be
realized upon exercise immediately prior to expiration using the 5% and 10%
appreciation rates established in regulations of the SEC, compounded
annually. The potential realizable value is not intended to predict future
appreciation of the price of the Company's Common Stock. The values shown do
not consider nontransferability, vesting over five years or termination of
the options upon termination of employment.
(2) Repricing of previously granted option. See table captioned "Ten Year Option
Repricings" below.
* Less than 1%
9
<PAGE> 14
The following table sets forth all stock option/SAR repricings during the
fiscal year ended January 31, 1998 and during the Company's last ten (10) fiscal
years relating to the persons listed in the Summary Compensation Table.
TEN YEAR OPTION REPRICINGS
<TABLE>
<CAPTION>
LENGTH OF
NUMBER OF NUMBER OF ORIGINAL
SECURITIES SECURITIES MARKET OPTION
UNDERLYING UNDERLYING EXERCISE PRICE TERM
OPTIONS OPTIONS PRICE AT AT TIME REMAINING
PRIOR TO AFTER TIME OF OF NEW EXERCISE AT DATE OF
NAME DATE REPRICING REPRICING REPRICING REPRICING PRICE REPRICING
---- ---- ---------- ---------- --------- --------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Gregory K. Raven..................... 03/11/97 300,000 193,704 $10.125 $4.625 $ 5.00 02/07/06
03/08/96 300,000 300,000 12.00 9.875 10.125 02/07/06
Michael R. Hamilton.................. 03/11/97 50,000 39,561 7.125 4.625 5.00 10/21/06
C. Scott Litten...................... 03/11/97 50,000 28,725 12.75 4.625 5.00 04/23/06
Frederick L. Angst................... 03/11/97 10,000 5,917 12.00 4.625 5.00 04/21/04
03/11/97 5,000 3,056 11.25 4.625 5.00 03/25/06
11/04/95 15,000 10,000 19.50 9.25 12.00 04/21/04
Mark P. Ramsdell..................... -- -- -- -- -- -- --
</TABLE>
On March 11, 1997, the Company offered to Hills employees holding stock
options the opportunity to reprice their then existing stock options. Under the
terms of the offer, subject to certain restrictions on exercise, the holder of a
stock option was given the opportunity to exchange his or her stock options,
which had exercise prices ranging from $3.00 to $12.75 per share, for a reduced
number of stock options at an exercise price of $5.00 per share. On March 11,
1997, the closing price of the Company's Common Stock on the New York Stock
Exchange was $4.625 per share.
The amount of the reduction in the number of stock options was based on a
formula pursuant to which Vice Presidents and above, including Mr. Raven, had
their stock options reduced to a proportionately greater degree than other
members of management. In addition, the repricing was contingent on recipients
agreeing not to exercise any repriced stock options for one year following
repricing and not to exercise more than one-half of otherwise exercisable
repriced stock options during the second year following the repricing. Subject
to the foregoing sentence, vesting did not change.
A majority of Hills executives holding stock options, including Messrs.
Raven, Litten, Hamilton and Angst, accepted the offer, and their stock options
were repriced accordingly.
As a result of the March 1997 repricings, holders of the Company's stock
options relinquished, on a net basis, options to purchase 226,015 shares of
Common Stock, including 144,037 options relinquished, on a net basis, in the
aggregate by Mr. Raven and the other named executive officers.
10
<PAGE> 15
OPTION EXERCISES IN FISCAL 1997
The following table sets forth information regarding the number and value
of stock option exercises during the last fiscal year and unexercised stock
options as of January 31, 1998.
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED IN THE
OPTIONS AT FISCAL MONEY OPTIONS AT
SHARES YEAR END YEAR END(1)
ACQUIRED VALUE ----------------------------- -----------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Gregory K. Raven................. 0 0 96,851(1) 121,853 0 0
Michael R. Hamilton.............. 0 0 7,912(1) 31,649 0 0
C. Scott Litten.................. 0 0 5,745(1) 32,980 0 0
Frederick L. Angst............... 0 0 5,048(1) 34,925 0 $9,375
Mark P. Ramsdell................. 0 0 0 12,000 0 0
</TABLE>
- ---------------
(1) In connection with their March 11, 1997 stock option repricings, all holders
of repriced stock options, including Messrs. Raven, Litten, Hamilton and
Angst, agreed not to exercise any stock options for one year following the
repricings and not to exercise more than one-half of the stock options which
would otherwise be exercisable during the second year following the
repricing. See section above captioned "Ten Year Option Repricings".
LONG TERM INCENTIVE PLAN AWARDS
The Company does not have a long term incentive plan, and the Company made
no long term incentive plan awards in fiscal 1997.
COMPENSATION COMMITTEE REPORT
In accordance with the rules and regulations of the SEC, the following
report of the HR/Compensation Committee (Option Committee) and the performance
graph thereafter shall not be deemed to be "soliciting material" or to be
"filed" with the SEC or subject to Regulations 14A or 14C of the Exchange Act or
to the liabilities of Section 18 of the Exchange Act and shall not be deemed to
be incorporated by reference into any filing under the Securities Act of 1933,
as amended, or the Exchange Act, notwithstanding any general incorporation by
reference of this Proxy Statement into any other filed document.
The Company's Board of Directors has established the HR/Compensation
Committee (Option Committee) (the "Committee"), consisting entirely of Outside
Directors. The Committee's functions include:
(i) Reviewing the corporate compensation programs, including the
compensation of the Chief Executive Officer, and policies to insure
that the programs and policies are competitive and provide for
internal fairness;
(ii) Reviewing and advising the Chief Executive Officer about specific
compensation matters for officers and executives;
(iii) Overseeing the Company's performance bonus program;
(iv) Administering the Hills Stores Company 1993 Incentive and
Nonqualified Stock Option Plan;
(v) Administering the Hills Stores Company 162(m) Bonus Plan; and
(vi) Such other duties as the Chairman of the Board may assign.
Overview
The objective of the Company's executive compensation program is to attract
and retain executives with high levels of talent and expertise in areas related
to retailing and to encourage these executives to achieve superior performance
on behalf of the Company and its shareholders. The Company believes the changes
made to its executive compensation program in 1996 (adjusting salaries,
especially below the vice president level, and tying bonus eligibility and
payout more closely to individual performance) have brought the
11
<PAGE> 16
Company more in line with the companies with which it competes for executive
talent, enabled it to attract and retain talented people and to become more
competitive in the marketplace.
Executive compensation generally consists of the following basic
components: base salary, performance bonus, stock option grants and awards of
restricted stock.
Base Salary
Base salaries for executive officers are determined by the Company by
evaluating the duties and responsibilities of each position and the experience
of the executive and by conducting executive salary surveys and comparing
salaries for similar positions with other companies. Annual salary increases and
adjustments are determined by the Company and based on individual performance,
changes in responsibilities, and market-based salary comparisons with other
retail companies. Salaries of all executives are reviewed annually.
Performance Bonus
A portion of executive compensation is directly related to Company
performance by means of the Company's performance bonus program, which was
revised in 1996 to place greater emphasis on individual performance and to
provide additional incentives for outstanding performance. Depending on
position, bonus targets range from 15% to 50% of an executive's base salary.
Actual payout is determined by Company performance, including achievement of
financial and profit goals, and by individual performance.
Early in each year, the Board of Directors approves performance goals for
the Company and for individual executives. Individual performance goals vary by
position. Even if Company performance goals are met, individual bonuses may be
less than targeted amounts if individual goals are not met. In addition, it is
possible for an executive who meets or exceeds individual goals to receive a
bonus even if Company goals are not met. In order to reward superior
performance, bonuses for certain individuals can exceed the target amount by up
to 50% if performance goals are exceeded.
For the fiscal year ended January 31, 1998, the Company goal was a target
of earnings before interest, taxes, depreciation and amortization (EBITDA). The
size of the bonus pool is determined by the level of attainment of the Company's
goals. EBITDA thresholds in descending amounts were established for a full
target bonus pool and lesser bonus pools. In fiscal 1997, the Company failed to
meet its bonus goals. Therefore, executives whose bonus eligibility was tied
entirely to Company performance, including Messrs. Raven, Litten, Hamilton and
Angst, did not receive bonuses. Because a portion of Mr. Ramsdell's bonus
eligibility was based on his attainment of individual goals, and because he far
exceeded those goals, Mr. Ramsdell earned a cash bonus of $54,000.
Stock Option Plan
The Company's 1993 Stock Option Plan is intended to provide a long-term
incentive and to motivate executives to increase the long-term market value of
the Company's Common Stock. During the fiscal year ended January 31, 1998,
options to purchase a total of 742,240 shares of the Common Stock of the Company
were granted to 126 individuals, including Messrs. Raven, Litten, Hamilton,
Angst and Ramsdell. See the section captioned "Stock Option Table".
The Committee determines the amount and timing of grants under the
Company's 1993 Stock Option Plan. No member of the Committee has received a
grant under the 1993 Stock Option Plan.
Repricing of Stock Options
On March 11, 1997, recognizing that exercise prices with respect to options
held by employees under the 1993 Stock Option Plan were substantially above the
fair market value of the Common Stock, the Committee offered Hills employees
holding stock options, including Mr. Raven and the other then current executive
officers named in the Summary Compensation Table, the opportunity to reprice
their then existing stock options. Under the terms of the offer, subject to
agreeing to certain restrictions on exercise, the holder of an option was given
the opportunity to exchange his or her stock options, which had exercise prices
ranging from $3.00 to $12.75 per share, for a reduced number of stock options at
an exercise price of $5.00 per share. On
12
<PAGE> 17
March 11, 1997, the closing price of the Company's Common Stock on the New York
Stock Exchange was $4.625 per share.
The amounts of the reduction in the number of options was based on a
formula, with Vice Presidents and above, including Mr. Raven, having their
options reduced to a proportionately greater degree than other members of
management. In addition, the offer was conditioned on the holder of an option
agreeing not to exercise any repriced stock options for one year after the
repricing and not to exercise more than one-half of repriced stock options which
would otherwise be exercisable during the second year following the repricing.
Subject to the foregoing sentence, vesting did not change.
A majority of executives holding stock options, including Messrs. Raven,
Litten, Hamilton and Angst, accepted the offer, and their stock options were
repriced accordingly. The results of the repricing are as follows: Mr. Raven
exchanged 300,000 stock options with an exercise price of $10.125 per share for
193,704 stock options with an exercise price of $5.00 per share. Mr. Litten
exchanged 50,000 stock options with an exercise price of $ 12.75 per share for
28,725 stock options with an exercise price of $5.00 per share. Mr. Hamilton
exchanged 50,000 stock options with an exercise price of $7.125 per share for
39,561 stock options with an exercise price of $5.00 per share. Mr. Angst
exchanged 10,000 stock options with an exercise price of $12.00 per share for
5,917 stock options with an exercise price of $5.00 per share and 5,000 stock
options with an exercise price of $11.25 per share for 3,056 stock options with
an exercise price of $5.00 per share.
As a result of the March 1997 repricings, holders of the Company's stock
options relinquished, on a net basis, options to purchase 226,015 shares of
Common Stock, including 144,037 options relinquished, on a net basis, in the
aggregate by Mr. Raven and the other named executive officers.
The Committee believes that the foregoing option repricings will motivate
and provide additional incentive to the grantees to improve the Company's
performance and enhance shareholder value.
Restricted Stock Awards
From time to time the Committee may make awards of restricted stock to
individuals including executive officers. On February 7, 1996, the Company
awarded Mr. Raven 100,000 shares of restricted stock and Mr. Edelstein 20,000
shares of restricted stock. The Committee believes that restricted stock awards
assist the Company in attracting and retaining qualified individuals and serve
to motivate the recipients to improve the Company's operating results and
enhance shareholder value.
Compensation of Chief Executive Officer
The Company entered into an employment agreement dated February 8, 1996
with Gregory K. Raven as President and Chief Executive Officer for a term from
February 8, 1996 to January 30, 1999 at a salary of $700,000 per year, subject
to annual review. Mr. Raven's contract provides for a targeted bonus amount of
50% of his base salary, subject to meeting performance goals. Because the
Company failed to meet its bonus goals for fiscal 1997, Mr. Raven did not
receive a bonus. Mr. Raven's contract provided for a grant of 300,000 options
pursuant to the 1993 Stock Option Plan and an award of 100,000 shares of
restricted stock. See section captioned "Employment Contracts".
Section 162(m) Policy
Section 162(m) of the Internal Revenue Code provides that annual
compensation in excess of $1,000,000 to the Company's Chief Executive Officer or
any other executive officer named in the Summary Compensation Table will not be
tax deductible by the Company, subject to certain exceptions, which include
shareholder approved programs. The Hills Store Company 162(m) Bonus Plan permits
the Company to maximize tax deductibility of cash compensation in excess of
$1,000,000 by setting performance standards and designating participants early
in each year. Executives who participate in the Company's 162(m) Bonus Plan do
not participate in the Company's regular performance bonus plan. The Committee
anticipates that only Mr. Raven will participate in the Hills Stores Company
162(m) Bonus Plan in the current fiscal year and be eligible to receive
compensation thereunder if performance goals are met.
13
<PAGE> 18
While it is the policy of the Committee to maximize the tax deductibility
to the Company of compensation to executive officers where practicable, the
Committee reserves the right to establish alternative incentive arrangements for
otherwise eligible executives if it determines in its discretion that it would
be in the best interest of the Company and its shareholders to do so, even if
the result is loss of tax deductibility to the Company for certain compensation
arrangements.
No member of the Committee is a current or former officer or employee of
the Company or any of its subsidiaries.
HR/COMPENSATION COMMITTEE
(OPTION COMMITTEE)
Mark B. Dickstein
Stanton J. Bluestone
John W. Burden III
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the fiscal year ended January 31, 1998, no executive officer of the
Company (i) served on the board of directors of any company of which Mr.
Dickstein, Mr. Bluestone or Mr. Burden (the members of the Company's
HR/Compensation Committee (Option Committee) was an executive officer or (ii)
served as a member of the compensation committee (or other board committee
performing equivalent functions or, in the absence of such a committee, on the
board) of another entity, one of whose executive officers is a member of the
Board of Directors of the Company.
14
<PAGE> 19
PERFORMANCE GRAPHS
The following graphs compare the percentage change in cumulative total
shareholders return on the Common Stock of the Company and the Predecessor
Company to the cumulative total shareholders return of the S&P 500 and to
the cumulative total shareholders return of the S&P Retail Composite. The
Predecessor Company Graph covers the period January 31, 1993 to October 4,
1993 and assumes an investment of $100 in the Common Stock of the Predecessor
Company and each index on January 31, 1993. The Company Graph covers the period
from October 5, 1993 to January 31, 1998 and assumes an investment of $100 in
the Company's Common Stock and in each index on October 5, 1993.
TOTAL RETURN TO SHAREHOLDERS
Predecessor Company
<TABLE>
<CAPTION>
<S> <C> <C> <C>
BASE PERIOD JAN-93
4-OCT-93 100 100 100
26.68 94.08 107.36
</TABLE>
<TABLE>
<CAPTION>
Company HILLS
Measurement Period DEPARTMENT
(Fiscal Year Covered) STORES,INC. RETAIL S&P 500
<S> <C> <C> <C>
Oct-93 100 100 100
Jan-94 100.58 102.36 105.12
Jan-95 99.42 94.78 105.68
Jan-96 47.67 102.20 146.54
Jan-97 12.79 122.00 185.14
Jan-98 14.53 180.91 234.96
</TABLE>
----- HILLS DEPARTMENT STORES, INC. ----- HILLS DEPARTMENT STORES, INC.
--M-- S&P 500 INDEX --M-- S&P 500 INDEX
--O-- RETAIL STORES-COMPOSITE --O-- RETAIL STORES-COMPOSITE
OTHER MATTERS
At the time this Proxy Statement was published, the Board of Directors knew
of no other matters constituting a proper subject of action by the shareholders
which would be presented at the meeting. Should any other matters be properly
brought before the Annual Meeting, the persons appointed in the proxy or their
substitutes will vote in accordance with their best judgment on such issues.
NOTE: THE COMPANY'S ANNUAL REPORT ON FORM 10-K AS FILED WITH THE SECURITIES
AND EXCHANGE COMMISSION IS PART OF THE COMPANY'S 1997 ANNUAL REPORT WHICH
IS BEING PROVIDED TO YOU TOGETHER WITH THIS PROXY STATEMENT. UPON THE
WRITTEN REQUEST OF ANY SHAREHOLDER ENTITLED TO RECEIVE THIS PROXY
STATEMENT, THE COMPANY WILL PROVIDE, WITHOUT CHARGE, AN ADDITIONAL COPY OF
ITS FORM 10-K. ANY SUCH REQUEST SHOULD BE ADDRESSED TO THE COMPANY AT 15
DAN ROAD, CANTON, MA 02021, ATTENTION: WILLIAM K. FRIEND, SENIOR VICE
PRESIDENT-SECRETARY.
RELATIONSHIP OF INDEPENDENT ACCOUNTANTS
The Board of Directors selects the independent auditors for the Company
each year. Deloitte & Touche LLP ("Deloitte & Touche") has acted in this
capacity for the Company since November 1995 and is expected to continue to
do so.
In connection with its audit functions, Deloitte & Touche examined the
Company's financial statements for the fiscal year ended January 31, 1998.
15
<PAGE> 20
Representatives of Deloitte & Touche are expected to attend the Annual
Meeting of Shareholders, may make a statement if they so desire and will be
available to respond to questions submitted to the Company at 15 Dan Road,
Canton, MA 02021, Attention: William K. Friend, Senior Vice President-Secretary,
in writing at least ten days prior to the meeting.
SHAREHOLDER PROPOSALS
In order to be considered for inclusion in the proxy materials related to
the 1999 Annual Meeting of Shareholders, shareholder proposals must satisfy
applicable SEC requirements and must be received by the Company (addressed to
the attention of the Secretary) not later than December 30, 1998. In addition to
the foregoing, Sections 4 and 5 of the Company's By-Laws set forth additional
requirements, including notice provisions, with respect to shareholder
nominations and proposals.
COST OF SOLICITATION
The cost of soliciting proxies in the accompanying form will be borne by
the Company. In addition to solicitations by mail, officers, Directors and
regular associates of the Company may solicit proxies in person or by telephone.
No compensation, other than their regular compensation, will be paid to them for
any such solicitations. The Company may reimburse banks, brokers, nominees and
other fiduciaries for postage and reasonable clerical expenses incurred by them
in forwarding the proxy material to principals.
The Company has retained MacKenzie Partners, Inc. to assist in the
solicitation of proxies at a cost not to exceed $5,000 plus out-of-pocket
expenses.
16
<PAGE> 21
PROXY
HILLS STORES COMPANY
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF
DIRECTORS OF HILLS STORES COMPANY FOR THE
JUNE 17, 1998 ANNUAL MEETING OF SHAREHOLDERS
The undersigned hereby appoints Richard C. Doran, John M. Doyle and
William K. Friend, or any of them, with power of substitution in each, proxies
for the undersigned, to represent the undersigned, and to vote all Common Stock
and Series A Preferred Stock of the Company which the undersigned would be
entitled to vote, as fully as the undersigned could vote and act if personally
present, at the Annual Meeting of Shareholders to be held on June 17, 1998 at
10:00 a.m. at Hills Corporate Headquarters, 15 Dan Road, Canton, Massachusetts
02021, or at any adjournment thereof.
The Proxies are authorized to vote in their discretion for approval of
the minutes of the preceding meeting and matters incident to the conduct of the
meeting.
The Hills Associate Stock Purchase Plan requires that the Trustee
receive voting instructions for shares held under the Plan by June 12, 1998. To
meet this requirement, please complete and mail this card in time to be received
no later than June 12. After June 12, your vote cannot be revoked. Also, you may
not vote your plan shares in person at the meeting. The Trustee is authorized to
vote the Plan shares for which instructions have been given on any business that
may come before the meeting. ChaseMellon Shareholder Services, L.L.C. will tally
the vote on behalf of the Trustee.
This proxy is continued on the reverse side.
Please complete the reverse side and return promptly.
<PAGE> 22
- ----- Please mark your __________________
X votes as in this Common Stock
- ----- example
__________________
Series A Preferred
Stock
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ALL NOMINEES FOR DIRECTOR.
Election of Directors
Election of the following nominees as Directors: Chaim Y. Edelstein, Mark B.
Dickstein, Stanton J. Bluestone, John W. Burden III, Alan S. Cooper, Samuel L.
Katz, Richard E. Montag and Gregory K. Raven.
For all Withheld for
nominees all nominees
----- -----
----- -----
WITHHELD FOR THE FOLLOWING ONLY:
(Write the name of the nominee(s)
in the space below)
_________________________________
The undersigned hereby acknowledges receipt of the Notice of Annual
Meeting and Proxy Statement, each dated April 30, 1998 and the 1997 Annual
Report of the Company. Any proxy heretofore given to vote said stock is hereby
revoked. THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL
BE VOTED FOR THE ELECTION OF THE DIRECTORS.
- -----
I plan to attend the meeting
- -----
Please mark, date and sign as your name(s) appear(s) above and return in the
enclosed envelope. If acting as an executor, administrator, trustee, guardian,
etc., you should so indicate when signing. If the signer is a corporation,
please sign the full corporate name, by a duly authorized officer.
Date ,1998
--------------------------------
Signature
--------------------------------
Signature
--------------------------------
