-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HSI/Hth/uK/Oz+qB8bpVs7iu1YvC0q8WMLqYtaZmlUNnuOKaXVHKEy5+HDYXOZ17 eprCyYLnwq8taXqcf95Cbg== 0000786877-96-000005.txt : 19960411 0000786877-96-000005.hdr.sgml : 19960411 ACCESSION NUMBER: 0000786877-96-000005 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19960203 FILED AS OF DATE: 19960410 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: HILLS STORES CO /DE/ CENTRAL INDEX KEY: 0000786877 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-DEPARTMENT STORES [5311] IRS NUMBER: 311153510 STATE OF INCORPORATION: DE FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-09505 FILM NUMBER: 96545582 BUSINESS ADDRESS: STREET 1: 15 DAN RD CITY: CANTON STATE: MA ZIP: 02021 BUSINESS PHONE: 6178211000 MAIL ADDRESS: STREET 1: 15 DAN ROAD CITY: CANTON STATE: MA ZIP: 02021 FORMER COMPANY: FORMER CONFORMED NAME: HILLS STORES CO /NEW/ DATE OF NAME CHANGE: 19931103 FORMER COMPANY: FORMER CONFORMED NAME: HILLS STORES CO /NEW/ DATE OF NAME CHANGE: 19931015 FORMER COMPANY: FORMER CONFORMED NAME: THL HOLDINGS INC DATE OF NAME CHANGE: 19870506 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 X Annual Report Pursuant to Section 13 or 15(d) of the Securities - ------ Exchange Act of 1934 For the fiscal year ended February 3, 1996 or Transition Report Pursuant to Section 13 or 15(d) of the Securities - ------ Exchange Act of 1934 For the transition period from ___________ to ____________ Commission file number 1-9505 HILLS STORES COMPANY -------------------- (Exact name of registrant as specified in its charter) DELAWARE #31-1153510 -------- ----------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 15 DAN ROAD, CANTON, MASSACHUSETTS 02021 ---------------------------------- ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (617) 821-1000 ------------- Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered ------------------- ----------------------------------------- Common Stock, Par Value $0.01 per share New York Stock Exchange Boston Stock Exchange Senior Notes due 2003 New York Stock Exchange Series A Convertible Preferred Stock, New York Stock Exchange Par Value $0.10 per share
Securities registered pursuant to Section 12(g) of the Act:
Title of each class Name of each exchange on which registered ------------------- ----------------------------------------- Series 1993 Warrants to Boston Stock Exchange Purchase Common Stock
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing require- ments for the past 90 days. Yes X No ----------- ----------- The aggregate market value of the voting stock held by nonaffiliates of the Registrant as of March 20, 1996 was $101,271,000 with respect to the Common Stock and $14,050,716 with respect to the Series A Convertible Preferred Stock, which has coextensive voting rights with the Common Stock. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 or Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information state- ments incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes X No ----------- ----------- The number of shares of Common Stock outstanding as of March 20, 1996 was 9,976,635. DOCUMENTS INCORPORATED BY REFERENCE Certain portions of Part III of this report on Form 10-K are incorporated by reference from the proxy statement dated May 10, 1996 for the annual meeting of security holders to be held on June 18, 1996. 2 TABLE OF CONTENTS PART I ITEM 1. Business .................................................... 4 ITEM 2. Properties .................................................. 6 ITEM 3. Legal Proceedings ........................................... 7 ITEM 4. Submission of Matters to a Vote of Security Holders ......... 8 PART II ITEM 5. Market for the Registrant's Common Equity and Related Security Holder Matters ..................................... 9 ITEM 6. Selected Financial Data ..................................... 9 ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ......................... 11 ITEM 8. Financial Statements and Supplementary Data ................. 17 ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ......................... 17 PART III ITEM 10. Directors and Executive Officers of the Registrant .......... 18 ITEM 11. Executive Compensation ...................................... 19 ITEM 12. Security Ownership of Certain Beneficial Owners and Management .................................................. 20 ITEM 13. Certain Relationships and Related Transactions .............. 23 PART IV ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K ................................................. 24
3 PART I ITEM 1. BUSINESS -------- Hills Stores Company (the "Company" or "Hills") operates, through its wholly- owned subsidiary Hills Department Store Company ("HDSC"), a chain of discount department stores under the trade name of Hills Department Stores. These stores are located in the mid-Western and mid-Atlantic regions of the United States. Ten new stores were opened in 1995. At fiscal year end, the Company operated 164 stores in twelve states. The Company is a leading regional discount retailer offering a broad range of brand name and other first quality general merchandise. Management's business strategy stresses every day low prices, depth and breadth of products in selected merchandise categories, remodeled facilities and strict operating controls. Hills stores are located in cities and towns of varying sizes, with some of the larger cities being Pittsburgh, Buffalo, Cleveland and Richmond. The Company concentrates its stores in selected markets within a geographic region in order to reinforce marketing programs, enhance name recognition, achieve market pene- tration, and gain economies of scale in management, advertising and distribution. The Company has remodeled substantially all of its stores within the last five years and is continuing the program on an ongoing basis. The remodeling program is designed to make and keep the Company's stores more visually appealing to customers and to take full advantage of the most profitable merchandise cate- gories. The Company believes that its customer base consists primarily of female customers shopping for family needs. Accordingly, Hills emphasizes merchandise in its softlines departments and selected hardlines departments such as toys and seasonal merchandise which appeal to Hills' targeted female customer. The Company considers the depth of its merchandise in these departments to be an important factor in attracting and retaining female customers, and accordingly emphasizes the availability of a wide selection of sizes, styles and colors of items in these departments. Hills carries a diverse line of products, all first quality, including a full line of clothing and footwear for women, men and children, toys, health and beauty aids, small household appliances and housewares, home entertainment equipment, hardware, stationery and greeting cards, automotive supplies, lawn and garden products and jewelry. Hills offers a broad range of brand name apparel and other products for the family and supplements brand name goods with manufacturers' private brands (brands made by major manufacturers but not nationally advertised) and Hills' private label program. The Company accepts all major consumer credit cards and offers a year-round layaway program. As part of its merchandise strategy, Hills endeavors to purchase goods that are made in the U.S.A. and has developed a special merchandise program using its "American Spirit" trademark to help market that concept to customers. Imported goods are purchased by Hills from an importing subsidiary and from other sources. In fiscal year 1995, the subsidiary, CRH International, Inc., imported products that accounted for approximately 7.6% of total purchases of the Hills Department Stores chain. 4 Hills uses a centralized buying organization staffed by merchandise managers, buyers and a support staff organized along the Company's product lines. Most of Hills' buying organization is located at its Canton, Massachusetts head- quarters. Hills also maintains an important fashion buying office in the garment district of New York City to purchase and merchandise women's fashion and basic apparel. Hills' merchandise managers and buyers develop detailed merchandising plans for each selling season. These plans include sales, inventory and initial markup and markdown budgets for each buyer. Sales performance reports are received both daily and weekly and assist management in making related merchandising decisions. The formats of these plans are programmed into computer planning systems for each department. The Company's central distribution facilities are located in Columbus, Ohio. These facilities provide central stocking of inventory and flow-through alloca- tion of inventory for delivery to the stores, resulting in efficient inventory management. Significant reductions in store receiving expense are achieved by performing many product handling functions at the central distribution facilities. In recent years, the Company has instituted several significant changes in its store operations and management structure to enhance expense control, flexibility and competitive responsiveness. Computerized scheduling of work hours based upon forecasted sales levels, productivity standards and freight activity allows the Company to allocate more payroll dollars to sales generating positions, while reducing overall payroll expense. The Company periodically reviews and evaluates licensing space within the Company's stores to specialty businesses based on the appeal of the products or services offered by such specialty businesses to Hills' targeted customer as well as the sales and profit potential of such specialty businesses. Store managers report to district managers, who report to regional vice presidents. The district managers and regional vice presidents visit their stores on a regular basis to oversee operations. Store managers and associates are empowered to respond directly to the needs of the customers. The Company maintains a field office strategically located near Pittsburgh to facilitate store visitations and reduce travel expenses, particularly by those associates with greater responsibilities for store performance. To support Hills' strategy of centralized management control, the Company relies extensively on computerized information systems. Hills operates its principal information technology center at its headquarters in Canton, Massa- chusetts. All Hills stores, distribution centers and administrative locations are tied to the information center's computer by means of an on-line data com- munications network. Hills' merchandising systems are designed to integrate the key retailing functions of seasonal merchandise planning, purchase order management, merchan- dise distribution, receiving, sales capture, inventory control, open-to-buy and replenishment. Hills maintains electronic data interchange (EDI) connections through third party services to a large number of its vendors. Unit sales data are recorded via the point-of-sale register systems in each store. The point- of-sale registers and bar code scanners in all stores significantly reduce labor intensive price marking and price changes. The sales data are transmitted nightly to the Company's computer where they are processed to produce a wide range of daily and weekly management reports. Each Hills buyer also has on-line access to information on the mainframe computer or local area network server via a personal computer located in the buyer's office. The merchandising systems 5 allow Hills to distribute specific categories and styles of merchandise to each store based upon the sales patterns of the stores. Store operations are supported by a number of additional on-line systems including electronic correspondence among all locations, payroll and labor scheduling systems, accounts payable, price change management and layaway control. The purpose of these systems is to promote timely and accurate communication among all Hills locations and to allow personnel at the Company's office locations to monitor and control key store activity. The discount general merchandise retail business is highly competitive. The Company considers price, merchandise presentation, product selection and merchandise quality, and store location to be the most significant competitive factors. Hills' principle competitors are regional and national discount department store chains, some of which, such as Wal-Mart, Kmart, and Target, as well as specialty retailers, such as Toys "R" Us, are larger and have more capital than Hills. Management believes that the Company's store remodeling program and its strength in certain merchandising lines allows it to defend its competitive position, even with Wal-Mart's presence in most of the Company's markets. Hills' expansion in Virginia and Target's opening of stores in Cleveland, Ohio has increased Target's position as a competitor of the Company. The "Hills" name is a registered service mark. The Company considers this mark and the associated name recognition to be valuable to its business. The Company has additional trademarks, trade names and service marks, many of which, such as "American Spirit," are used in connection with the Company's private label program. Although the Company considers these additional marks to be valuable in the aggregate, individually, they have varying degrees of importance to the Company's business. As of March 1, 1996, Hills employed approximately 17,900 persons, including approximately 10,300 full-time and 7,600 part-time employees. None of the Company's employees are represented by a labor union. The number of employees varies during the year, reaching a peak during the Christmas selling season. The Company considers its relations with its employees to be good. On July 5, 1995, following a proxy contest in connection with the annual meeting of stockholders held on June 23, 1995, seven nominees of Dickstein Partners Inc. ("Dickstein Partners") were certified as being elected directors of the Registrant, replacing the former Board of Directors, thereby effecting a change in control of the Registrant (the "1995 Change in Control"). Following the 1995 Change in Control, the executive officers of the Company resigned, resulting in a change in the Company's senior management personnel. In addition, negotiations were successfully conducted with the holders of the Company's Senior Notes to defer a redemption option in the Senior Notes indenture which would have resulted from the 1995 Change in Control. The Company also refinanced its existing bank debt, which would have become due as a result of the 1995 Change in Control, and increased its working capital credit line to $300 million of secured debt. ITEM 2. PROPERTIES ---------- Hills operates 164 stores (163 stores are leased and one is owned) in the states of Illinois, Indiana, Kentucky, Maryland, Massachusetts, New York, North Carolina, Ohio, Pennsylvania, Tennessee, Virginia, and West Virginia, located in regional and other enclosed shopping malls, strip shopping centers and as free standing units. The Company leases nearly all of its stores under 6 long-term leases. In addition, Hills leases buying and administrative offices, including the Company's headquarters in Canton, Massachusetts, the field office in Aliquippa, Pennsylvania and the buying office in New York, New York, and its central distribution facilities in Columbus, Ohio. The typical store lease has an initial term of between 20 and 30 years, with four to seven renewal periods of five years each, exercisable at the Company's option. Substantially all of the Company's leases provide for a minimum annual rent that is constant or adjusts to fixed levels through the lease term, including renewal periods. Most leases provide for additional rent based on a percentage of sales to be paid when designated sales levels are achieved. See Note 9 of Notes to Consolidated Financial Statements for additional information about the Company's long-term leases. ITEM 3. LEGAL PROCEEDINGS ----------------- On September 11, 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 1995 Change in Control. On October 10, 1995 the defendants filed a motion to dismiss this suit. That motion is presently pending. The Company and HDSC also filed suit against Smith Barney, Inc. on September 11, 1995 in the New York State Supreme Court for the County of New York, seeking damages for losses, as stated in the complaint, caused by the gross negligence of this firm in rendering financial advice to the Company's Former Directors in breach of their fiduciary duties. On October 30, 1995, Smith Barney, Inc. served a motion to dismiss this suit. That motion is presently pending. On August 7, 1995, in the Court of Chancery of the State of Delaware, Gayle Dolowich, Ivan J. Dolowich and Joseph Weiss filed a class action lawsuit against the seven new directors of the Company elected at the annual meeting, Dickstein Partners and the Company. On November 3, 1995, the plaintiffs amended their complaint to include a shareholders 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 that in connection with the effort by Dickstein Partners to solicit proxies in support of the elec- tion of its nominees to be 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. 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. On January 19, 1996 in the same Delaware Chancery Court, Peter M. Fusco filed a substantially similar class action and shareholder derivative suit against the parties named in the above identified Dolowich suit. The plaintiff made the same claims and seeks the same remedies as are made and sought in the Dolowich suit. The Former Directors have filed motions to dismiss the derivative actions in both the Dolowich and Fusco suits. These motions are presently pending. 7 ITEM 3. LEGAL PROCEEDINGS (CONTINUED) ---------------------------- Management does not believe that the disposition of the foregoing suits will have a material adverse effect upon the continuing operations and financial position of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS --------------------------------------------------- NONE 8 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SECURITY HOLDER MATTERS --------------------------------------------------------------------- (a) The principal market on which the Company's Common Stock is traded is the New York Stock Exchange. The following table sets forth the range of high and low prices of the Company's Common Stock as reported on the New York Stock Exchange during each quarter of fiscal years 1994 and 1995. COMMON STOCK PRICES - -------------------
Quarter Ended High Price Low Price February 3, 1996 $12.000 $ 7.125 October 28, 1995 $18.125 $ 8.125 July 29, 1995 $24.875 $18.125 April 29, 1995 $22.750 $18.250 January 28, 1995 $21.625 $19.375 October 29, 1994 $23.000 $20.125 July 30, 1994 $21.000 $18.000 April 30, 1994 $21.750 $19.000 (b) As of March 20, 1996, there were outstanding 9,976,635 shares of Common Stock held by 2,407 holders of record, and 1,108,346 shares of Series A Convertible Preferred Stock held by 2,238 holders of record. (c) The Company has not paid a cash dividend on its Common Stock in the last two fiscal years. The Credit Agreement dated as of August 21, 1995 between HDSC and Chemical Bank, and the Company as the Guarantor, prohibits the payment of dividends on the Company's Common Stock and limits the amount of dividends which HDSC may pay to the Company in any fiscal year. The Company's Senior Notes Indenture also has restrictions on the payment of cash dividends. See Notes 7 and 8 of Notes to Consolidated Financial Statements.
ITEM 6. SELECTED FINANCIAL DATA ----------------------- The Company emerged from Chapter 11 proceedings on October 4, 1993. For financial reporting purposes, the Company adopted fresh-start reporting as of October 2, 1993. Under fresh-start reporting, a new reporting entity is created and recorded amounts of assets and liabilities are adjusted to reflect their estimated fair values. Financial data prior to October 2, 1993 has been designated as those of the Predecessor Company. Black lines have been drawn to separate the Successor Company financial data from the Predecessor Company financial data to signify that they are those of a new reporting entity and have been prepared on a basis not comparable to prior periods (see Notes 1 and 2 of Notes to Consolidated Financial Statements). 9 ITEM 6. SELECTED FINANCIAL DATA (CONTINUED)
Successor Company ---------------------------------------------------- Fiscal Fiscal Seventeen (in thousands, except per share amounts Year Year Weeks Ended and number of stores) 1995 1994 January 29, 1994 - ------------------------------------------------------------------------------------------------------ || Net sales $1,900,104 $1,872,021 $ 772,685 || Gross profit $ 515,683 $ 531,800 $ 223,034 || || Net earnings (loss) applicable to || common shareholders before || extraordinary items $ (16,666) (1) $ 40,431 $ 36,235 || || Net earnings (loss) applicable to || common shareholders $ (16,666) (1) $ 40,431 $ 36,235 || || Fully-diluted earnings (loss) per common share $ (1.66) $ 2.73 $ 2.45 || || Fully-diluted average shares outstanding 10,029 14,832 14,794 || || FINANCIAL POSITION: || Total assets $ 858,723 $ 992,378 $ 907,621 || Working capital $ 147,090 $ 241,486 $ 171,440 || Liabilities subject to compromise (4) $ - $ - $ - || Long-term obligations $ 185,169 $ 185,169 $ 160,000 || Long-term obligations under capital leases $ 118,776 $ 124,508 $ 130,626 || Preferred stock $ 24,636 $ 64,144 $ 100,000 || Common shareholders' equity (deficit) $ 254,663 $ 306,741 $ 230,235 || Number of stores operated at period end 164 154 151 || Predecessor Company ------------------------------------------------ Thirty-Five Fiscal Fiscal (in thousands, except per share amounts Weeks Ended Year Year and number of stores) October 2, 1993 1992 1991 - --------------------------------------------------------------------------------------------------- Net $ 992,848 $1,750,266 $1,679,866 Gross profit $ 282,549 $ 500,454 $ 465,776 Net earnings (loss) applicable to common shareholders before extraordinary items $ (9,747) $ 24,385 $ 7,637 Net earnings (loss) applicable to common shareholders $ 248,492 (2) $ 47,264 $ 20,117 Fully-diluted earnings (loss) per common share $ 11.30 (3) $ 2.15 (3) $ 0.92 (3) Fully-diluted average shares outstanding 21,982 21,982 21,982 FINANCIAL POSITION: Total assets $ 972,838 $ 922,745 $ 846,906 Working capital $ 301,980 $ 299,927 $ 261,007 Liabilities subject to compromise (4) $ 775,169 $ 761,443 $ 771,606 Long-term obligations $ - $ - $ - Long-term obligations under capital leases $ 122,230 $ 133,457 $ 137,793 Preferred stock $ 33,143 $ 31,481 $ 29,049 Common shareholders' equity (deficit) $ (186,934) $ (183,172) $ (230,446) Number of stores operated at period end 151 154 154 (1) Includes a $45.5 million pre-tax charge incurred in connection with the 1995 Change in Control (see Note 21 of Notes to Consolidated Financial Statements). (2) Includes a $258.2 million after-tax extraordinary gain on the discharge of prepetition debt. (3) Fully-diluted earnings per share for fiscal years 1992 and 1991 include extraordinary credits per common share of $1.04 and $0.57, respectively, attributable to the realization of the benefit of tax loss carryforwards. Fully-diluted earnings per share for the thirty-five weeks ended October 2, 1993 includes an extraordinary gain per common share of $11.75 on the discharge of prepetition debt. (4) On February 4, 1991, the Company, its former parent, Hills Department Stores, Inc., and the five principal subsidiaries of the Company, filed petitions for relief under Chapter 11 of the United States Bankruptcy Code. As a result, the Company reclassified certain current liabilities to Liabilities subject to compromise at February 3, 1991 (see Note 1 of Notes to Consolidated Financial Statements). THE SELECTED FINANCIAL DATA SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS.
10 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL ------------------------------------------------- CONDITION AND RESULTS OF OPERATIONS ----------------------------------- GENERAL On October 4, 1993 (the "Effective Date"), Hills Stores Company (the "Company" or the "Successor Company") emerged from reorganization proceedings under Chapter 11 of the United States Bankruptcy Code ("Chapter 11"). The Company, its former parent, Hills Department Stores, Inc. (the "Predecessor Company"), and the five principal subsidiaries of the Company, voluntarily filed petitions for reorganization under Chapter 11 on February 4, 1991 (the "Filing Date"). The Predecessor Company operated its business as a debtor-in-possession under Chapter 11 from the Filing Date until October 4, 1993. The Plan of Reorganization (the "POR") provided for the Predecessor Company to be dissolved and the Company to succeed to and assume the Predecessor Company's former status as a holding company (see Note 1 of Notes to Consolidated Financial Statements). In conjunction with its emergence from Chapter 11, the Company adopted fresh-start reporting as of October 2, 1993 in accordance with the American Institute of Certified Public Accountants Statement of Position 90-7: "Financial Reporting by Entities in Reorganization under the Bankruptcy Code." In connection with the adoption of fresh-start reporting and the consummation of the POR, a new entity was deemed created for financial reporting purposes. Accordingly, the consolidated financial statements for the periods subsequent to October 2, 1993 have been designated "Successor Company" to signify that they are those of the new entity for financial reporting purposes and have been prepared on a basis not comparable to prior periods. To facilitate comparison of the Successor and Predecessor Companies' operating performances, the discussions below are presented using the pro forma results of combined operations of the Successor and Predecessor Companies for fiscal 1993 as presented in Note 2 of Notes to Consolidated Financial Statements. Consequently, the information presented below does not reflect the periods in the fifty-two weeks ended January 29, 1994 as they are presented in the Consolidated Statements of Operations. The most significant pro forma adjustment to earnings before reorganization items, income taxes and extraordinary items is the increase in interest expense due to the pro forma issuance of the Senior Notes at January 31, 1993 (see Note 2 of Notes to Consolidated Financial Statements). RESULTS OF OPERATIONS FISCAL YEAR ENDED FEBRUARY 3, 1996 (FISCAL 1995) VERSUS YEAR ENDED JANUARY 28, 1995 (FISCAL 1994) The following discussion, as well as other portions of this document, includes certain statements which are or may be construed as forward looking about the Company's business, sales and expenses, and operating and capital requirements. Any such statements are subject to risks that could cause the actual results or requirements to vary materially. Sales increased 1.5% compared to fiscal 1994. The improvement is attributable to opening ten new stores and fiscal 1995 having 53 weeks compared to 52 weeks in fiscal 1994. The extra week represents an increase in sales of $17.6 11 RESULTS OF OPERATIONS (CONTINUED) FISCAL YEAR ENDED FEBRUARY 3, 1996 (FISCAL 1995) VERSUS FISCAL YEAR ENDED JANUARY 28, 1995 (FISCAL 1994) (CONTINUED) million. Sales increases in hardlines categories, particularly in areas associated with the home, all occasion and electronics, were partially offset by a decrease in apparel sales. Comparable store sales, excluding the fifty-third week, were $1.777 billion in fiscal 1995 versus $1.849 billion in fiscal 1994, a 3.9% decrease. Cost of sales as a percentage of sales was 72.9% in fiscal 1995 compared to 71.6% in fiscal 1994. This increase of 1.3% is due to a higher rate of markdowns, particularly in the apparel categories, a shift in the mix of business to lower margin hardlines categories, and a decrease in the purchase markup percentage in the hardlines areas. Because of the increasingly competitive discount store industry, the Company anticipates that it will continue to experience pressure on gross margin. Selling and administrative expenses as a percentage of sales was 21.0% in fiscal 1995 and 20.9% in fiscal 1994. Savings in payroll and payroll related expenses as a percentage of sales were offset by increased advertising costs in the Company's new markets and higher operating costs associated with opening 10 new stores. Prior year expenses include a $4.5 million gain from the elimination of pension obligations. Selling and administrative expenses excluding the pension gain as a percentage of sales was 21.1% in fiscal 1994. Depreciation and amortization as a percentage of sales was 1.6% in fiscal 1995 compared to 1.4% in fiscal 1994. The increase is due to a higher fixed asset base resulting from the Company's remodeling and new store program. Costs related to the 1995 Change in Control (see Note 21 of Notes to Consolidated Financial Statements) were $45.5 million. The costs consist of $31.0 million for severance and retirement payments, including certain taxes attributable thereto, to six senior executives, a consultant to the Company and 20 associates of the Company, $6.0 million paid to holders of the Senior Notes, and legal and other miscellaneous change in control costs. Other interest expense was $35.4 million in 1995 compared to $24.0 million in 1994. The $11.4 million increase is primarily due to interest on borrowings under the revolving credit facility, non-cash interest on the sale/leaseback financing, and additional amortization of deferred financing costs related to securing the new revolving credit facility (see Note 7 of Notes to Consolidated Financial Statements). Average direct borrowings under the revolving credit facility were $62.6 million for fiscal 1995 at an average interest rate of 9.4%, with peak borrowings of $188.0 million. In fiscal 1994, average borrowings approximated $88,000 at an average interest rate of 9.25%, with peak borrowings at $8.0 million. Other income was $4.9 million in fiscal 1995 and $9.2 million in fiscal 1994, a $4.3 million decrease. The fourth quarter of fiscal 1994 included a reversal of liabilities established in "fresh-start" reporting totalling $9.6 million which was partially offset by $2.2 million paid to the holders of the Company's Senior Notes in connection with the Company's self-tender for shares of its common stock (see Note 20 of Notes to Consolidated Financial Statements) and $2.2 million of additional amortization of deferred financing costs. In fiscal 1995, the Company recorded a tax expense of $3.2 million on a loss before income taxes of $13.5 million as a result of $7.8 million of 12 RESULTS OF OPERATIONS (CONTINUED) FISCAL YEAR ENDED FEBRUARY 3, 1996 (FISCAL 1995) VERSUS FISCAL YEAR ENDED JANUARY 28, 1995 (FISCAL 1994) (CONTINUED) amortization of reorganization value and $14.1 million of change in control costs which are non-deductible. The Company's effective tax rate was 47.0% in fiscal 1994. FISCAL YEAR ENDED JANUARY 28, 1995 (FISCAL 1994) VERSUS PRO FORMA COMBINED FISCAL YEAR ENDED JANUARY 29, 1994 (FISCAL 1993) Sales increased 6.0% compared to fiscal 1993. This improvement was primarily attributable to increased hardlines sales, particularly in toys, all occasion, and areas associated with the home. In addition, modest gains in apparel sales, the opening of three new stores, and comparatively strong January 1995 sales due to the unusually bad weather conditions in January of the prior year also contributed to the sales increase. The strong fiscal 1994 Christmas season was highlighted by a fourth quarter comparable stores sales increase of 4.7%. Comparable store sales were $1.849 billion in fiscal 1994 versus $1.759 billion in fiscal 1993, a 5.1% increase. Cost of sales as a percentage of sales was 71.6% in fiscal 1994 compared to 71.4% in fiscal 1993. The increase of 0.2% is due to a higher rate of markdowns, particularly in the apparel market, and an increase in the provision for inventory shortage. These were partially offset by an improved purchase markup and an improvement in logistics cost due to operational efficiencies achieved at the Company's distribution center, which became fully operational in July 1993. Selling and administrative expenses as a percentage of sales was 20.9% in fiscal 1994 compared to 21.4% in fiscal 1993, a 0.5% decrease. This improvement was primarily a result of the Company's focus on cost reduction, principally in payroll and payroll related expenses. A $4.5 million gain from the elimination of pension obligations, which were replaced by a Company matching 401(K) plan, was also included in selling and administrative expenses. Selling and administrative expenses excluding the pension gain as a percentage of sales was 21.1% in fiscal 1994. Other income was $9.2 million in fiscal 1994 compared to $3.7 million in fiscal 1993, a $5.5 million increase. This increase was primarily due to a fourth quarter reversal of liabilities established in "fresh-start" reporting totalling $9.6 million which was partially offset by $2.2 million paid to the holders of the Company's Senior Notes in connection with the Company's self-tender for shares of its common stock and $2.2 million of additional amortization of deferred financing costs. The Company's effective tax rate was 47.0% in fiscal 1994 compared to 48.1% in fiscal 1993, a 1.1% decrease resulting principally from the decrease in non- deductible goodwill amortization as a percentage of the related pre-tax earnings. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES GENERAL On August 21, 1995, in connection with the 1995 Change in Control, Hills Department Store Company ("HDSC"), a wholly-owned subsidiary of the Company, 13 FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES (CONTINUED) GENERAL (CONTINUED) entered into a new $300 million secured revolving credit facility (the "Facility"), of which up to $100 million is available as a letter of credit facility. The Facility expires April 30, 1998 (or May 1, 1996 if the Company has not exercised its option by April 30, 1996 to extend by one year the Senior Note redemption offer or May 1, 1997 if the Company has not exercised its second option to extend the Senior Note redemption offer an additional year). If the Senior Notes are refinanced on terms acceptable to the lenders the Facility will be automatically extended to April 30, 1998. The Facility is secured by a pledge of all of the capital stock of HDSC and an interest in all tangible and intangible assets of HDSC. The Facility is guaranteed by the Company. The Company and HDSC are in compliance with all of the Facility's restrictive covenants as of February 3, 1996. As of February 3, 1996, there were no direct borrowings outstanding under the Facility. Under the terms of the Senior Note Indenture (the "Indenture"), because of the election of the new Board of Directors, the Company was required to offer to redeem all of the Senior Notes at 101% of par. Effective August 1, 1995, the Indenture was amended to permit the Company to defer the redemption offer of the Senior Notes until April 3, 1996, and, at the option of the Company by giving notice on or before April 19, 1996 and upon the payment of an additional fee of $7.5 million, to further defer the offer to redeem obligation to April 5, 1997. In addition, the change in control put price under the Indenture would be increased to 102% if no notice of the offer to redeem is mailed to Senior Note holders before January 1, 1997. The amendment also allowed the Company to increase the amount of its working capital facility from $225 million to $300 million. In connection with obtaining this amendment, the consenting holders of the Senior Notes were paid $6 million in August 1995, which has been included in costs related to change in control in the Consolidated Statements of Operations. Effective January 15, 1996, the Indenture was again amended to permit the Company (upon payment to persons who then hold Senior Notes of a fee equal to 5.5% of the principal amount of such Senior Notes) to defer the redemption of the Senior Notes until July 8, 1998. The amendment also eliminates the obligation of the Company to offer to redeem the Senior Notes upon any future Change in Control Event, as defined, if such Change in Control Event results in an increase of at least $40 million in the capital of the Company and at least 50% of the Company's net proceeds therefrom are used to repurchase or redeem Senior Notes. In addition, the amendment modifies the definition of "Consolidated Fixed Charge Coverage Ratio" in order to exclude, for the purposes of determining the amount of indebtedness that the Company is permitted to incur, the effect of up to $43.3 million in non-recurring costs relating to the Company's change in control in July 1995. The amendment also imposes limitations upon the Company's ability to make payments with respect to its capital stock and increases the interest rate on the Senior Notes to 10.75% from January 13, 1996 through March 31, 1997, to 11.25% from April 1, 1997 to March 31, 1998 and thereafter by 1.00% on April 1 of each succeeding year. The Company is proposing to offer in April 1996 $175.0 million principal amount of a new series of senior notes due 2003 (the "New Notes"). If the Company proceeds with the offering of the New Notes, it will offer to redeem the outstanding Senior Notes, using substantially all of the proceeds from the issuance of the New Notes. If the Company does not proceed with the offering 14 FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES (CONTINUED) GENERAL (CONTINUED) of New Notes, it will pay the $7.5 million fee, as described above, to defer the redemption offer of the Senior Notes until April 5, 1997. As a result of the Company's intention to refinance the Senior Notes or to defer redemption of the Senior Notes until after fiscal 1996, the Company has classified the Senior Notes as long-term. The Company also has significant lease commitments which require cash outflows. Operating and capital lease payments in fiscal 1996, including rentals based on sales, are expected to approximate $58.9 million. A summary of cash flow information and financial position is presented below (in thousands):
Fiscal Year Fiscal Year Ended Ended February 3, January 28, 1996 1995 - -------------------------------------------------------------------------------- Cash and cash equivalents at begining of period $ 180,051 $ 90,049 Net cash provided by (used for) operating activities (8,004) 124,612 Capital expenditures (56,714) (38,458) Principal payments under capital lease obligations (6,121) (5,529) Proceeds from sale/leaseback financing - 25,169 Cash distributions pursuant to the POR (5,297) (14,419) Shares repurchased per self-tender offer (75,000) - Deferred finance costs and other financing activities (10,857) (1,373) -------- --------- Cash and cash equivalents at end of period $ 18,058 $ 180,051 ======== ========= Working capital at end of period $ 147,090 $ 241,486 ======== =========
The Company's working capital as of February 3, 1996 decreased $94.4 million from January 28, 1995. The working capital decrease is primarily due to the payment of $75 million related to the Company's self-tender offer completed in March 1995, and $56.7 million primarily spent on the store remodeling and expansion program, partially offset by the reversal of $20.0 million of liabilities established in "fresh-start" reporting that are no longer required and a decrease in other accounts payable and accrued expenses of $11.9 million. Net cash provided by operating activities for the fiscal year ended February 3, 1996 decreased $132.6 million compared to fiscal year ended January 28, 1995. This use of cash for operating activities is primarily due to net earnings before taxes of $32.1 million (before the $45.5 million change in control expense) versus $76.3 million in fiscal 1994, the recognition of $45.5 million in expenses related to the change in control, an increase due to inventories of $30.5 million resulting from the opening of ten stores, a $54.9 million decrease in accounts payable and accrued expenses, and a $32.7 million decrease in income taxes. 15 FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES (CONTINUED) GENERAL (CONTINUED) Capital expenditures, primarily for the remodeling and upgrading of existing stores and the opening of ten new stores, were $56.7 million during fiscal 1995. The Company has substantially completed its chainwide remodeling program in fiscal 1995. During fiscal 1996, capital expenditures are expected to approximate $35.8 million. Effective February 21, 1995, the Company accepted for payment 3,000,000 shares of Common Stock which were validly tendered pursuant to the Company's self-tender offer, and for which payment of $75,000,000 was made in March 1995. Management believes that amounts available under the Company's current borrowing agreement, together with cash from operations, will enable the Company to fund its current liquidity and capital expenditures requirements. Any or all of the restrictions, limitations or contingencies under the Facility and the Senior Note Indenture, as well as the Company's leverage, could adversely affect the Company's ability to obtain additional financing in the future, to make capital expenditures, to effect store expansions, to make acquisitions, to take advantage of business opportunities that may arise, and to withstand adverse general economic and retail industry conditions and increased competitive pressures. Retail suppliers and their factors monitor carefully the financial performance of retail companies such as the Company, and may reduce credit availability quickly upon learning of actual or perceived deterioration in the financial condition or results of operations of a retail company. OTHER MATTERS SEASONALITY The Company's business is highly seasonal due to increased consumer buying for back-to-school needs and Christmas. The second half of each year provides the major portion of the Company's annual sales and operating earnings with operating earnings particularly concentrated in the Christmas selling season. 16 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ------------------------------------------- See accompanying page F-1 through F-28. Information called for by this item can be found at the pages listed in the following index. INDEX TO FINANCIAL STATEMENTS
Hills Stores Company and Subsidiaries Page Reports of Independent Auditors ...................................... F-1 Consolidated Balance Sheets .......................................... F-3 Consolidated Statements of Operations ................................ F-4 Consolidated Statements of Cash Flows ................................ F-5 Consolidated Statements of Common Shareholders' Equity ............... F-6 Notes to Consolidated Financial Statements ........................... F-7
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING ----------------------------------------------------------- AND FINANCIAL DISCLOSURE ------------------------ On November 14, 1995, the Company engaged Deloitte & Touche LLP ("Deloitte & Touche") as its independent auditors, following the resignation of Coopers & Lybrand L.L.P. ("Coopers & Lybrand") as independent auditors for Hills Stores Company on November 8, 1995. None of the reports of Coopers & Lybrand on the financial statements of the Company for either of the two fiscal years preceding such resignation contained an adverse opinion or a disclaimer of opinion, or was qualified or modified as to uncertainty, audit scope or accounting principles. During the Company's two most recent fiscal years and the subsequent interim period preceding the resig- nation of Coopers & Lybrand, there were no disagreement(s) with Coopers & Lybrand on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedures, which disagreement(s), if not re- solved to the satisfaction of Coopers & Lybrand would have caused it to make reference to the subject matter of the disagreement(s) in connection with its report. None of the reportable events listed in Item 304(a)(1)(v) of Regulation S-K occurred with respect to the Company during the Registrant's two most recent fiscal years and the subsequent interim period preceding the resignation of Coopers & Lybrand. During the Company's two most recent fiscal years and the subsequent interim period preceding the engagement of Deloitte & Touche, neither the Company nor anyone on its behalf consulted Deloitte & Touche regarding the application of accounting principles to a specific completed or contemplated transaction, or the type of audit opinion that might be rendered on the Company's financial statements, and no written or oral advice concerning same was provided to the Company that was an important factor considered by the Company in reaching a decision as to any accounting, auditing or financial reporting issue. 17 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT --------------------------------------------------
Name Age Position Since - ---- --- -------- ----- Chaim Y. Edelstein 53 Chairman of the Board 1995 Stanton J. Bluestone 61 Director 1995 John W. Burden III 59 Director 1995 Alan S. Cooper 37 Director 1995 Mark Dickstein 37 Director 1995 Samuel L. Katz 30 Director 1995 Gregory K. Raven 46 Director, President 1996 and Chief Executive Officer Kim D. Ahlholm 39 Vice President-Controller 1994 James E. Feldt 41 Executive Vice President- General Merchandise Manager 1995 William K. Friend 49 Vice President-Secretary and Corporate Counsel 1985
CHAIM Y. EDELSTEIN was elected Chairman of the Board on February 7, 1996. He has been a Director since July 5, 1995. He was a consultant to Federated Department Stores, Inc. from February 1994 to March 1995 and has been a consultant to Carson, Pirie, Scott & Co. since November 1994. From 1985 to February 1994 he was Chairman and Chief Executive Officer of Abraham & Straus, a division of Federated Department Stores, Inc. Federated Department Stores, Inc. filed a petition for reorganization under the Bankruptcy Code in 1990 and has since emerged from bankruptcy. Mr. Edelstein is a director of Carson, Pirie, Scott & Co., a department store retailer and of Jan-Bell Marketing, Inc., a jewelry retailer. STANTON J. BLUESTONE has been a Director since July 5, 1995. Since March 1996 he has been Chairman of the Board of Carson, Pirie, Scott & Co. For the past five years, he has been President and Chief Executive Officer and a Director of Carson, Pirie, Scott & Co. Carson, Pirie, Scott & Co. was formerly known as P.A. Bergner & Co. which filed a petition for reorganization under the Bankruptcy Code in 1991 and emerged from bankruptcy in 1993. JOHN W. BURDEN III has been a Director since July 5, 1995. He has been a consultant and partner in Retail Options, Inc. since November 1993. From December 1990 to March 1993, Mr. Burden's principal occupation was as an officer in Pelican Palms Realty Corporation, a real estate sales company he owned. From August 1988 to February 1990 Mr. Burden served as Chairman and Chief Executive Officer of Federated Department Stores, Inc. and Allied Stores Corporation, each a department store chain, and was Vice Chairman of Federated Department Stores, Inc., from December 1985 to July 1988. Federated Department Stores, Inc. filed a petition for reorganization under the Bankruptcy Code in 1990 and has since emerged from bankruptcy. Mr. Burden is a director of Carson, Pirie, Scott & Co., Bernard Chaus, Inc., a manufacturer of women's clothing and Jan-Bell Marketing, Inc. ALAN S. COOPER became a member of the Board of Directors on December 28, 1995. He has been Vice President-General Counsel of Dickstein Partners since March 1992. Prior to that, he was an attorney with the firm of Rosenman and Colin since 1983. 18 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (CONTINUED) ------------------------------------------------------------- MARK B. DICKSTEIN has been a Director since July 5, 1995 and was Chairman of the Board from July 5, 1995 through February 7, 1996. He has been the President of Dickstein Partners since prior to 1990 and is primarily responsible for the operations of Dickstein Partners, L.P., Dickstein & Co., L.P., Dickstein Focus Fund L.P. and Dickstein International Ltd (collectively the "Dickstein Funds"). He is a director of Carson, Pirie, Scott & Co. SAMUEL L. KATZ has been a Director since July 5, 1995. He is Senior Vice President of HFS Incorporated, a public corporation. From July 1993 to December 1995 he was a Vice President of Dickstein Partners. From February 1992 to July 1993, Mr. Katz was the Co-Chairman of Saber Capital, Inc., a firm making private equity investments. From 1988 to 1992, Mr. Katz was an Associate and then a Vice President of the Blackstone Group, an investment and merchant bank, where he focused on leveraged buyout transactions. GREGORY K. RAVEN was elected President and Chief Executive Officer and a Director on February 7, 1996. For the past five years, Mr. Raven has been Executive Vice President-Finance and Chief Financial Officer of Revco D.S., Inc. Revco D.S., Inc. filed a petition for reorganization under the Bankruptcy Code in 1988 and emerged from bankruptcy in 1992. KIM D. AHLHOLM was elected Vice President-Controller of Hills in March 1994. She had been Treasurer since June 1993, Assistant Controller from July 1990 to June 1993 and Director-Audit from April 1989 to June 1990. JAMES E. FELDT was elected Executive Vice President-General Merchandise Manager in July 1995. He had been the Vice President-Fashion Hardlines since November 1993 and Vice President-Boston Softlines from October 1990 to November 1993. WILLIAM K. FRIEND is and since December 1985 has been Vice President-Secretary and Corporate Counsel of Hills. Officers are elected to serve until their successors are elected and qualified. In September 1990, the Commodity Futures Trading Commission (the "CFTC") initiated an administrative proceeding against Mr. Dickstein alleging that in 1987 certain of his personal commodities trading activities were in violation of applicable laws. Specifically, the CFTC claimed that Mr. Dickstein, in his capacity as a local floor trader, aided and abetted another floor trader in, among other things, non-competitive trading and defrauding such floor trader's customers. Without admitting or denying the CFTC's allegations, Mr. Dickstein settled this matter in September 1991. As part of the settlement, Mr. Dickstein agreed not to engage in commodities transactions for a period of one year, and for two additional years not to trade on the floor of any commodities exchange. Mr. Dickstein also had his commodities floor brokerage license revoked and paid a $150,000 civil penalty. ITEM 11. EXECUTIVE COMPENSATION ---------------------- Incorporated by reference from the item entitled "Executive Compensation" in the proxy statement dated May 10, 1996 for the annual meeting of stockholders to be held June 18, 1996. 19 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT -------------------------------------------------------------- The following table sets forth as of March 20, 1996 information with respect to beneficial ownership of shares of the Company's Common Stock and Series A Preferred Stock. The information was obtained from Company records and information supplied by the shareholders, including information on Schedules 13D and 13G and Forms 4 prescribed by the Securities and Exchange Commission ("SEC"). 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 Company's Common Stock. - -------------------------------------------------------------------------------- Title of Name and Address Amount and Nature Percent Percent Class of Beneficial Owner of Beneficial of of Ownership Class Voting Stock (1) - -------------------------------------------------------------------------------- Common Dickstein Partners, Inc. 1,209,170 12.1 10.9 Dickstein Partners, L.P. Dickstein & Co., L.P. Dickstein Focus Fund L.P. 9 West 57th Street Suite 4630 New York, NY 10019 Dickstein International Ltd.(2) 129 Front Street Hamilton HM12 Bermuda - -------------------------------------------------------------------------------- Common FMR Corp. 988,874 9.9 8.9 Fidelity Management and Research Company Fidelity Management and Trust Company(3) 82 Devonshire Street Boston, MA 02109-3614 - -------------------------------------------------------------------------------- Common BEA Associates 830,147 8.3 7.5 153 East 53rd Street One Citicorp Center New York, NY 10022 - -------------------------------------------------------------------------------- Common ML-Lee Acquisition Fund II, 799,293 8.0 7.2 L.P., ML-Lee Acquisition Fund (Retirement Accounts) II, L.P., Thomas H. Lee Advisors II, L.P.(4) Word Financial Center South Tower, 23rd Fl. New York, NY 10080-6123 - -------------------------------------------------------------------------------- Common Wellington Management 655,925 6.6 5.9 Company 75 State Street Boston, MA 02109 - --------------------------------------------------------------------------------
20 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT -------------------------------------------------------------- (CONTINUED) ---------- (1) Represents the shares of Common Stock and Series A Preferred Stock owned beneficially as a percentage of the aggregate of 9,976,635 shares of Common Stock and 1,108,346 shares of Series A Preferred Stock outstanding. (2) Dickstein Partners Inc., Dickstein Partners, L.P., Dickstein & Co., L.P., Dickstein Focus Fund L.P., Dickstein International, Limited and Mark Dickstein have filed a Schedule 13D and amendments thereto showing beneficial ownership of an aggregate of 1,209,170 shares. Of the 1,209,170 total shares owned beneficially, Dickstein & Co., L.P. owned beneficially 758,456 of such shares. Dickstein Focus Fund L.P. owned beneficially 86,095 of such shares and Dickstein International Limited owned beneficially 364,619 of such shares. Dickstein Partners, L.P. is the general partner of Dickstein & Co., L.P. and Dickstein Focus Fund L.P. Dickstein Partners Inc. is the general partner of Dickstein Partners, L.P. and is the advisor to Dickstein International Limited, Mark Dickstein is the President and sole director of Dickstein Partners Inc. (3) FMR Corp. has filed a Schedule 13G showing beneficial ownership of 988,874 shares. FMR is a holding company one of whose principal assets is the capital stock of a wholly-owned subsidiary, Fidelity Management and Research Company ("Fidelity"). Fidelity provides investment advice to certain investment companies and funds. Fidelity Management and Trust Company("FMTC"), also a wholly-owned subsidiary of FMR and a bank, serves as a trustee or managing agent for various investment accounts and serves as investment advisor to certain funds. The Company believes that FMR, Fidelity and FMTC may be deemed a "group" as that term is used in Rule 13d-5(b) of the Exchange Act. FMR beneficially owns, through FMTC, 983,314 shares of Common Stock of the Company and beneficially owns, through Fidelity, 5,560 shares of Common Stock of the Company including 2,581 shares issuable upon conversion of 2,581 shares of the Company's Series A Preferred Stock. (4) ML-Lee Acquisition Fund II, L.P. owns beneficially 521,048 shares of Common Stock, and ML-Lee Acquisition Fund (Retirement Accounts) II 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. The following table sets forth as of March 20, 1996 the beneficial ownership of the Company's Common Stock and Series A Preferred Stock held by each director, the nominees for director, the current executive officers named in the Summary Compensation Table and directors and executive officers as a group. 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. 21 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT -------------------------------------------------------------- (CONTINUED) ---------- - -------------------------------------------------------------------------------- Title of Name and Address Amount and Nature Percent Percent Class of Beneficial Owner of Beneficial of of Ownership Class Voting Stock (1) - -------------------------------------------------------------------------------- Common Chaim Y. Edelstein 25,000(2) * * Common Stanton J. Bluestone 0 * * Common John W. Burden III 0 * * Common Alan S. Cooper 0 * * Common Mark B. Dickstein 1,209,170(3) 12.1 10.9 Common Samuel L. Katz 0 * * Common Gregory K. Raven 100,000(4) 1.0 * Common Kim D. Ahlholm 3,000(5) * * Common James E. Feldt 7,599(6) * * Common William K. Friend 29,245(7)(9) * * Common Directors and 1,374,014(8)(9) 13.8 12.4 Executive Officers as a Group (10 Persons) - --------------------------------------------------------------------------------
(1) Represents the shares of Common Stock and Series A Preferred Stock owned beneficially as a percentage of the aggregate of 9,976,635 shares of Common Stock and 1,108,346 shares of Series A Preferred Stock outstanding. (2) Includes 20,000 shares of restricted stock. See section captioned "Restricted Stock Agreements" below. (3) The shares listed are beneficially owned by the Dickstein Funds. Mark Dickstein is the President and sole director of Dickstein Partners Inc., and he may be deemed to beneficially own all the shares shown. (4) Consists of restricted stock. See section captioned "Restricted Stock Agreements" below. (5) Consists of stock options which are presently exercisable or will be exercisable within sixty (60) days. (6) Consists of 99 shares of Common Stock and 7,500 presently exercisable stock options. 22 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT -------------------------------------------------------------- (CONTINUED) - ---------- (7) Consists of 2,558 shares of Common Stock, 26,000 exercisable stock options and 687 shares issuable upon exercise of Series 1993 Warrants. (8) Consists of 1,216,827 shares of Common Stock, 120,000 shares of restricted stock, 36,500 stock options which are presently exercisable or will be exercisable within sixty (60) days and 687 shares issuable upon exercise of Series 1993 Warrants. (9) Although each Series 1993 Warrant is immediately exercisable for one share of Common Stock, each such Series 1993 Warrant is, at present, significantly "out of the money" ($30 per share exercise price versus $11.73 per share closing price on the New York Stock Exchange on March 29, 1996. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ---------------------------------------------- At the June 1995 Annual Meeting, following a proxy contest, nominees of Dickstein Partners were elected to the Board of Directors. The Company reimbursed Dickstein Partners for, or directly paid, approximately $1.9 million in third-party fees and expenses incurred or committed to by Dickstein Partners in connection with the proxy contest and the related acquisition proposal of Dickstein Partners. This amount includes $1.0 million paid by the Company to the financial advisor of Dickstein Partners, in respect of the advisor's proposal to refinance the indebtedness of the Company accelerated as a result of the election of the Dickstein Partners nominees. In its proxy solicitation materials, Dickstein Partners declared its intention to seek reimbursement or payment of such fees and expenses, upon the election of its nominees. These costs are included in the Consolidated Statements of Operations in costs related to change in control. Due to the election of the new Board of Directors, the Company was required to offer to redeem all of the Senior Notes at 101% of par (see Note 8 of Notes to Consolidated Financial Statements) and on August 21, 1995, HDSC entered into a new $300 million secured revolving credit facility (see Note 7 of Notes to Consolidated Financial Statements). In addition, a description of certain consulting agreements and employment contracts is incorporated by reference from the items entitled "Executive Compensation", "Employment Contracts" and "Compensation of Directors" in the proxy statement dated May 10, 1996 for the annual meeting of stockholders to be held June 18, 1996. 23 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K --------------------------------------------------------------- (a) Documents filed as part of this report: 1. Financial statements Reports of Independent Auditors F-1 Consolidated Balance Sheets F-3 Consolidated Statements of Operations F-4 Consolidated Statements of Cash Flows F-5 Consolidated Statements of Common Shareholders' Equity F-6 Notes to Consolidated Financial Statements F-7 2. Financial statement schedule I Reports of Independent Auditors S-1 II Valuation and Qualifying Accounts S-3
Schedules other than these listed above are omitted because they are not required, not applicable, or the information is otherwise included in the financial statements. 3. Certain of the exhibits listed hereunder have previously been filed with the Commission as exhibits to certain registration statements and periodic reports set forth in the footnotes following this exhibit list and are hereby incorporated by reference pursuant to Rule 411 promulgated under the Securities Act and Rule 24 of the Commission's Rules of Practice. The location of each document, so incorporated by reference, is indicated by footnote (the number in parentheses). 3.1(1) Amended and Restated Certificate of Incorporation of the Company. 3.2(2) Amended and Restated By-Laws of the Company. 4.1(3) Certificate of the Voting Powers, Preferences and other designated attributes of the Series A Convertible Preferred Stock of the Company. 4.2(4) Form of Series 1993 Stock Right. 4.3(3) Indenture relating to the Senior Notes Due 2003 of the Company. 4.4(5) First Supplemental Indenture dated as of January 1, 1995 to the Senior Note Indenture. 4.5(5) Second Supplemental Indenture dated as of August 1, 1995 to the Senior Note Indenture. 4.6(6) Third Supplemental Indenture dated as of January 15, 1996 to the Senior Note Indenture. 4.7(7) Series 1993 Warrant Agreement dated October 4, 1993 between the Company and Chemical Bank, as warrant agent. 24 4.8(8) Rights Agreement dated as of August 16, 1994 between the Company and Chemical Bank, as Rights Agent. 4.9(8) Form of Certificate of the Voting Powers, Preferences and other designated attributes of Series B Participating Cumulative Preferred Stock of the Company (which is attached as Exhibit A to the Rights Agreement incorporated by reference as Exhibit 4.8 hereto). 4.10(8) Form of Right Certificate (which is attached as Exhibit B to the Rights Agreement incorporated by reference as Exhibit 4.8 hereto). 10.1(5) Credit Agreement dated as of August 21, 1995 among Hills Stores Company, Hills Department Store Company, the Lenders named therein, Chemical Bank as Administrative Agent and Fronting Bank, and NatWest Bank, N.A., as Managing Agent. 10.2 First Amendment dated as of December 7, 1995 to the Credit Agreement. 10.3 Second Amendment and Consent dated as of January 12, 1996 to the Credit Agreement. 10.4(1)* Form of individual Employment Agreements dated September 30, 1994 with, respectively, Messrs. Bozic, Reen, Samuto, Smailes and Stevenish, accompanied by Schedule A from each individual agreement setting forth the office, term, compensation, etc., applicable to each such person. 10.5(5)* Employment Agreement made as of July 6, 1995 with E. Jackson Smailes. 10.6(5)* Employment Agreement made as of July 6, 1995 with William K. Friend. 10.7(9)* Employment Agreement made as of August 16, 1995 with James E. Feldt. 10.8(9)* Resolution adopted by the Board of Directors of the Company relating to the consultant compensation of Chaim Y. Edelstein, a director. 10.9 * Employment Agreement made as of February 7, 1996 with Gregory K. Raven. 10.10 * Consulting Agreement made as of February 8, 1996 with Chaim Y. Edelstein. 10.11(4)* 1993 Incentive and Nonqualified Stock Option Plan. 10.12 * 1996 Directors Stock Option Plan. 10.13 * Consulting Agreement dated December 26, 1995 with Samuel L. Katz. 11.1 Computation of earnings per share. 16(10) Letter re: change in certifying accountant. 21 Subsidiaries. 23.1 Consent of Coopers & Lybrand L.L.P. 23.2 Consent of Deloitte & Touche LLP. 24 Powers of Attorney of directors and officers of the Company. 25 27 Financial Data Schedule. __________________________ * Executive Compensation Plans and Arrangements. 1. Incorporated by reference from the Annual Report on Form 10-K of the Company for the fiscal year ended January 28, 1995. 2. Incorporated by reference from the Report on Form 8-K of the Company dated January 18, 1996. 3. Incorporated by reference from the Form 8-A of the Company filed on October 5, 1993. 4. Incorporated by reference from the Annual Report on Form 10-K of the Company for the fiscal year ended January 29, 1994. 5. Incorporated by reference from the Report on Form 10-Q of the Company for the quarter ended July 29, 1995. 6. Incorporated by reference from the Report on Form 8-K of the Company dated January 15, 1996. 7. Incorporated by reference from the Report on Form 8-K of the Company dated October 4, 1993. 8. Incorporated by reference from the Report on Form 8-K of the Company dated August 23, 1994. 9. Incorporated by reference from the Report on Form 10-Q of the Company for the quarter ended October 28, 1995. 10. Incorporated by reference from the Report on Form 8-K of the Company dated November 8, 1995. (b) Reports on Form 8-K: 1. A report on Form 8-K dated November 8, 1995 was filed by the Company, stating that a change in the Company's independent certifying accountants had occurred due to the resignation of Coopers & Lybrand L.L.P. The report noted Coopers & Lybrand L.L.P. did not issue any adverse or qualified opinions on the Company's financial statements for the preceding two fiscal years, nor did any disagreement arise prior to the resignation of Coopers & Lybrand L.L.P. which, if not resolved, would have required a comment in connection with its report. The Company also reported it has retained Deloitte & Touche LLP as its new independent certifying accountants. 2. A report on Form 8-K dated January 15, 1996 was filed by the Company, stating that the Company and the Trustee under the Senior Note Indenture executed the Third Supplemental Indenture which provides for (A) periodic increases in the interest rate on the Senior Notes, (B) the option of the Company to further defer to July 8, 1998, upon payment of a fee, its obligation to offer to redeem the Senior Notes, (C) a modification of the redemption offer obligation provision in respect to any future change in control event, (D) a modification of the Indenture's definition of "Consolidated Fixed Charge Coverage Ratio," and (E) further limitations upon the Company's ability to make payments with respect to its capital stock. 26 3. A report on Form 8-K dated January 18, 1996 was filed by the Company, stating that two amendments were made to the By-Laws of the Company concerning the nomination of persons for election to the Board of Directors of the Company and the presentation of business to be brought before the annual meeting of stockholders. 27 SIGNATURE Pursuant to the requirements of Section 13 and 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the Town of Canton, Commonwealth of Massachusetts, on April 9, 1996. HILLS STORES COMPANY By: /s/William K. Friend ----------------------- William K. Friend Vice President - Secretary Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities indicated in which they act for the Registrant and on the date indicated. * Chairman of the Board of the - ------------------ Company and Hills Department Chaim Y. Edelstein Store Company April 9, 1996 * Director, President and Chief - ------------------ Executive Officer of the Company Gregory K. Raven and Hills Department Store Company (Principal Executive Officer and Principal Financial Officer) April 9, 1996 * Director of the Company and - ------------------ Hills Department Store Company April 9, 1996 Mark B. Dickstein * Director of the Company and - ------------------ Hills Department Store Company April 9, 1996 Stanton J. Bluestone * Director of the Company and - ------------------ Hills Department Store Company April 9, 1996 Samuel L. Katz * Director of the Company and - ------------------ Hills Department Store Company April 9, 1996 John W. Burden * Director of the Company and - ------------------ Hills Department Store Company April 9, 1996 Alan S. Cooper * Vice President-Controller of the - ------------------ Company and Hills Department Store Kim D. Ahlholm Company (Principal Accounting Officer) April 9, 1996 *By: /s/ William K. Friend --------------------- William K. Friend Attorney-In-Fact
28 REPORT OF INDEPENDENT AUDITORS To the Board of Directors and Stockholders of Hills Stores Company and Subsidiaries We have audited the accompanying consolidated balance sheet of Hills Stores Company and Subsidiaries as of February 3, 1996 and the related consolidated statements of operations, common shareholders' equity, and cash flows for the year then ended (the "1995 consolidated financial statements"). These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the 1995 consolidated financial statements present fairly, in all material respects, the financial position of the Company as of February 3, 1996 and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Boston, Massachusetts March 14, 1996 (April 5, 1996 with respect to the fifth paragraph of Note 8) F-1 REPORT OF INDEPENDENT AUDITORS To the Shareholders and Board of Directors of Hills Stores Company and Subsidiaries: We have audited the accompanying consolidated balance sheets of Hills Stores Company and Subsidiaries as of January 28, 1995, and January 29, 1994, and the related consolidated statements of operations, cash flows and common shareholders' equity for the year ended January 28, 1995, the seventeen-week period ended January 29, 1994, and the thirty-five week period ended October 2, 1993. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Hills Stores Company and Subsidiaries as of January 28, 1995, and January 29, 1994, and the consolidated results of its operations and its cash flows for the year ended January 28, 1995, the seventeen-week period ended January 29, 1994 and the thirty-five week period ended October 2, 1993 in conformity with generally accepted accounting principles. On October 4, 1993, the Company emerged from reorganization proceedings under Chapter 11 of the U.S. Bankruptcy Code. As described in Note 1 to the consolidated financial statements, the Company accounted for this reorganization and adopted "fresh-start reporting" as of October 2, 1993. As a result, the statement of operations for the year ended January 28, 1995, and for the seventeen-week period ended January 29, 1994, are not comparable to the Company's consolidated statements of operations for prior periods. Coopers & Lybrand L.L.P. Boston, Massachusetts March 10, 1995 F-2 HILLS STORES COMPANY AND SUBSIDIARIES ____________________________________________________________________________________________ CONSOLIDATED BALANCE SHEETS
February 3, January 28, (dollars in thousands) 1996 1995 - -------------------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 18,058 $180,051 Trade receivables, less allowance for doubtful accounts of $3,459 and $4,228 25,187 23,471 Inventories 331,697 313,851 Deferred tax asset (Note 17) 34,011 20,923 Other current assets 5,352 4,743 ------- ------- Total current assets 414,305 543,039 Property and equipment, net (Note 4) 190,893 154,950 Property under capital leases, net (Note 9) 113,785 124,108 Beneficial lease rights, net (Note 3) 8,247 9,075 Other assets, net 15,746 6,380 Deferred tax asset (Note 17) 8,233 10,061 Reorganization value in excess of amounts allocable to identifiable assets, net (Notes 3 and 5) 107,514 144,765 ------- ------- $858,723 $992,378 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of capital leases (Note 9) $ 5,732 $ 6,121 Accounts payable, trade 82,631 82,943 Other accounts payable and accrued expenses (Note 6) 178,852 212,489 ------- ------- Total current liabilities 267,215 301,553 Senior notes (Note 8) 160,000 160,000 Obligations under capital leases (Note 9) 118,776 124,508 Financing obligation - sale/leaseback (Note 10) 25,169 25,169 Other liabilities 8,264 10,263 Commitments and contingencies (Note 19) - - Preferred stock, at mandatory redemption value (Note 12) 24,636 64,144 Common shareholders' equity (Notes 13 and 14): Common stock, 50,000,000 shares of $0.01 par value authorized, 9,982,842 and 10,804,784 shares issued and outstanding 100 108 Additional paid-in capital 209,563 229,967 Retained earnings 45,000 76,666 ------- ------- Total common shareholders' equity 254,663 306,741 ------- ------- $858,723 $992,378 ======= =======
See Notes to Consolidated Financial Statements F-3 HILLS STORES COMPANY AND SUBSIDIARIES - -------------------------------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF OPERATIONS
Successor Company ---------------------------------------------- Predecessor Fiscal Year Fiscal Year Company Ended Ended Seventeen Thirty-Five February 3, January 28, Weeks Ended Weeks Ended (in thousands, except per 1996 1995 January 29, October 2, share amounts) (53 Weeks) (52 Weeks) 1994 1993 - -------------------------------------------------------------------------------------------------------- || || Net sales $1,900,104 $1,872,021 $772,685 || $992,848 Cost of sales 1,384,421 1,340,221 549,651 || 710,299 Selling and administrative expenses 399,934 390,397 138,360 || 239,997 Depreciation and amortization 31,297 26,662 7,920 || 27,978 Amortization of reorganization || value in excess of amounts || allocable to identifiable assets 7,755 8,986 3,408 || - Costs related to change in control 45,529 - - || - --------- --------- ------- || ------- Operating earnings 31,168 105,755 73,346 || 14,574 || Other income (expense): || Capital lease interest ( 14,066) ( 14,707) ( 5,029) || ( 10,284) Other interest (Note 1) ( 35,431) ( 24,005) ( 8,112) || ( 3,364) Other income, net 4,850 9,241 2,639 || 231 --------- ---------- ------- || ------- Total other expense ( 44,647) ( 29,471) ( 10,502) || ( 13,417) --------- ---------- ------- || ------- ( 13,479) 76,284 62,844 || 1,157 Reorganization items, net - - - || ( 9,242) --------- ---------- ------- || ------- ( 13,479) 76,284 62,844 || ( 8,085) Income taxes (Note 17) ( 3,187) ( 35,853) ( 26,609) || - --------- ---------- ------- || ------- ( 16,666) 40,431 36,235 || ( 8,085) Extraordinary gain on discharge || of prepetition debt (Notes 1 and 17) - - - || 258,239 --------- ---------- ------- || ------- Net earnings (loss) ( 16,666) 40,431 36,235 || 250,154 || Preferred dividend requirements - - - || ( 1,662) --------- ---------- ------- || ------- Net earnings (loss) applicable to || common shareholders ($ 16,666) $ 40,431 $ 36,235 || $248,492 ========= ========== ======= || ======= Primary earnings (loss) per || common share (Note 18): || Earnings (loss) before || extraordinary items ($ 1.70) $ 2.87 $ 2.58 || ($ 0.49) Extraordinary gain on discharge || of prepetition debt - - - || 13.07 --------- ---------- -------- || ------- Net earnings (loss) applicable to || common shareholders ($ 1.70) $ 2.87 $ 2.58 || $ 12.58 ========= ========== ======== || ======= || Fully-diluted earnings (loss) || per common share (Note 18): || Earnings (loss) before || extraordinary items ($ 1.66) $ 2.73 $ 2.45 || ($ 0.45) Extraordinary gain on discharge || of prepetition debt - - - || 11.75 --------- ---------- -------- || ------- Net earnings (loss) applicable || to common shareholders ($ 1.66) $ 2.73 $ 2.45 || $ 11.30 ========= ========== ======== || =======
See Notes to Consolidated Financial Statements F-4 HILLS STORES COMPANY AND SUBSIDIARIES - ------------------------------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS
Successor Company -------------------------------------------- Predecessor Fiscal Year Fiscal Year Company Ended Ended Seventeen Thirty-Five February 3, January 28, Weeks Ended Weeks Ended 1996 1995 January 29, October 2, (in thousands) (53 Weeks) (52 Weeks) 1994 1993 - ------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: || || Net earnings (loss) ($ 16,666) $ 40,431 $ 36,235 || $250,154 Adjustments to reconcile net earnings (loss) || to net cash provided by (used for) operating || activities before reorganization items: || Depreciation and amortization 44,386 40,436 12,113 || 28,780 Gain on termination of pension plan - ( 4,479) - || - Decrease in deferred tax assets || recognized through a reduction in || reorganization value in excess of || amounts allocable to identifiable assets 9,496 22,977 24,281 || - Increase in deferred tax assets ( 11,260) ( 30,984) - || - Decrease (increase) in accounts receivable || and other current assets ( 2,325) ( 199) 12,513 || ( 19,485) Decrease (increase) in inventories ( 17,846) 12,614 81,736 || ( 141,704) Increase (decrease) in accounts payable || and other accrued expenses ( 11,881) 43,044 ( 40,229) || 61,087 Other, net ( 1,908) 772 308 || 2,761 -------- -------- -------- || -------- Net cash provided by (used for) operating || activities before reorganization items ( 8,004) 124,612 126,957 || 181,593 Reorganization items: || Decrease in liabilities subject || to compromise - - - || ( 6,274) Fresh-start revaluation - - - || 5,985 Extraordinary gain on discharge of || prepetition debt - - - || ( 258,239) -------- -------- -------- || -------- Net cash provided by (used for) || operating activities ( 8,004) 124,612 126,957 || ( 76,935) || CASH FLOWS FROM INVESTING ACTIVITIES: || || Capital expenditures ( 56,714) ( 38,458) ( 3,070) || ( 27,162) || CASH FLOWS FROM FINANCING ACTIVITIES: || || Principal payments under capital || lease obligations ( 6,121) ( 5,529) ( 1,726) || ( 3,400) Proceeds from sale/leaseback financing - 25,169 - || - Cash distributions pursuant to the Plan || of Reorganization ( 5,297) ( 14,419) ( 85,153) || ( 5,165) Shares repurchased per self-tender offer ( 75,000) - - || - Deferred finance costs and || other financing activities ( 10,857) ( 1,373) ( 196) || ( 7,444) -------- -------- -------- || -------- Net cash provided by (used for) || financing activities ( 97,275) 3,848 ( 87,075) || ( 16,009) -------- -------- -------- || -------- Net increase (decrease) in cash and || cash equivalents ( 161,993) 90,002 36,812 || ( 120,106) || Cash and cash equivalents at || beginning of period 180,051 90,049 53,237 || 173,343 -------- -------- -------- || -------- Cash and cash equivalents at || end of period $ 18,058 $180,051 $ 90,049 || $ 53,237 ======== ======== ======== || ========
See Notes to Consolidated Financial Statements F-5 HILLS STORES COMPANY AND SUBSIDIARIES - ------------------------------------------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY
Common Common Stock Additional Retained Treasury Stock Shareholders' ------------------ Paid-in Earnings -------------- Equity (dollars in thousands) Shares Amount Capital (Deficit) Shares Amount (Deficit) - ------------------------------------------------------------------------------------------------------------------- Predecessor Company balance - January 30, 1993 19,784,078 $198 $ 65,215 ($248,492) 26,688 ($93) ($183,172) Preferred stock dividend requirements - - - ( 1,662) - - ( 1,662) Net earnings - - - 250,154 - - 250,154 Cancellation of Predecessor Company common stock (19,784,078) ( 198) ( 65,215) - (26,688) 93 ( 65,320) --------------------------------------------------------------------------- Predecessor Company balance - October 2, 1993 - $ - $ - $ - - $ - $ - =========================================================================== =================================================================================================================== Issuance of Successor Company common stock - October 2, 1993 9,000,000 $ 90 $193,910 $ - - $ - $194,000 Net earnings - - - 36,235 - - 36,235 --------------------------------------------------------------------------- Successor Company balance - January 29, 1994 9,000,000 90 193,910 36,235 - - 230,235 Conversion of Preferred Stock 1,792,805 18 35,838 - - - 35,856 Exercise of Stock Options 11,979 - 219 - - - 219 Net earnings - - - 40,431 - - 40,431 --------------------------------------------------------------------------- Successor Company balance - January 28, 1995 10,804,784 108 229,967 76,666 - - 306,741 Retirement of Common Stock (Note 20) ( 3,000,000) ( 30) ( 59,970) ( 15,000) - - ( 75,000) Conversion of Preferred Stock 1,975,400 20 39,488 - - - 39,508 Exercise of Stock Options and Warrants 4,387 - 80 - - - 80 Exchange for Stock Rights (Note 14) 198,271 2 ( 2) - - - - Net loss - - - ( 16,666) - - ( 16,666) -------------------------------------------------------------------------- Successor Company balance - February 3, 1996 9,982,842 $100 $209,563 $45,000 - - $254,663 ==========================================================================
See Notes to Consolidated Financial Statements F-6 HILLS STORES COMPANY AND SUBSIDIARIES _______________________________________________________________________________ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. REORGANIZATION -------------- On October 4, 1993 (the "Effective Date"), Hills Stores Company (the "Company" or the "Successor Company") and certain of its principal subsidiaries emerged from reorganization proceedings under Chapter 11 of the United States Bankruptcy Code ("Chapter 11"). The Company, its former parent, Hills Department Stores, Inc. (the "Predecessor Company"), and the five principal subsidiaries of the Company voluntarily filed petitions for reorganization under Chapter 11 on February 4, 1991 (the "Filing Date"). The Predecessor Company operated its business as a debtor-in-possession under Chapter 11 from the Filing Date until October 4, 1993. In accordance with the American Institute of Certified Public Accountants ("AICPA") Statement of Position 90-7: "Financial Reporting by Entities in Reorganization under the Bankruptcy Code" ("SOP 90-7"), the Predecessor Company's other interest expense excluded contractual interest of $40.4 million for the thirty-five weeks ended October 2, 1993. Pursuant to SOP 90-7, the Successor Company adopted fresh-start reporting as of October 2, 1993. Under fresh-start reporting, a new reporting entity is created and recorded amounts of assets and liabilities are adjusted to reflect their estimated fair values. Financial statements for the period prior to October 2, 1993, have been designated as those of the Predecessor Company. Black lines have been drawn to separate the Successor Company financial statements from the Predecessor Company financial statements to signify that they are those of a new reporting entity and have been prepared on a basis not comparable to prior periods. The Plan of Reorganization (the "POR") provided for the Predecessor Company to be dissolved and the Company to succeed to and assume the Predecessor Company's former status as a holding company by transferring to Hills Department Store Company, a newly formed operating subsidiary of the Company, all of the assets, property and interest of the Company as of the Effective Date. Prepetition claims and interests were cancelled in exchange for cash, senior notes, securities, warrants and rights which were less in value than the value of the allowed claims on and interests in the Predecessor Company and its subsidiaries; accordingly, the Predecessor Company recorded an extraordinary gain of $258.2 million related to the discharge of prepetition liabilities in the thirty-five week period ended October 2, 1993. The Consolidated Financial Statements presume full issuance of all common stock, preferred stock, stock rights and senior notes in accordance with the POR. 2. PRO FORMA COMBINING STATEMENTS OF OPERATIONS -------------------------------------------- The following unaudited Pro Forma Combining Statements of Operations present the pro forma combined results of the operations of the Successor and Predecessor companies for the fifty-two weeks ended January 29, 1994 and have been adjusted to reflect: the implementation of fresh-start reporting as of January 31, 1993, elimination of the effects of non-recurring transactions resulting from the reorganization included in the results of the Predecessor Company, and payment to creditors pursuant to the POR as of January 31, 1993. The following information should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations. F-7 HILLS STORES COMPANY AND SUBSIDIARIES _______________________________________________________________________________ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. PRO FORMA COMBINING STATEMENTS OF OPERATIONS (CONTINUED) -------------------------------------------------------- PRO FORMA COMBINED FIFTY-TWO WEEKS ENDED JANUARY 29, 1994 (UNAUDITED) (in thousands, except per share amounts)
Successor Predecessor Pro Forma Company Company Combined Seventeen Thirty-five Fiscal Year Weeks Ended Weeks Ended Ended January 29, October 2, Pro Forma January 29, 1994 1993 Adjustments 1994 ------------------------------------------------------------ Net sales $772,685 $992,848 $ - $1,765,533 Cost of sales 549,651 710,299 - 1,259,950 Selling and administrative expenses 138,360 239,997 - 378,357 Depreciation and amortization 11,328 27,978 ( 4,545) (a) 34,761 ------------------------------------------------------------ Operating earnings 73,346 14,574 4,545 92,465 Capital lease interest ( 5,029) ( 10,284) 172 (b) ( 15,141) Other interest ( 8,112) ( 3,364) ( 11,662) (c) ( 23,138) Other income, net 2,639 231 822 (d) 3,692 ------------------------------------------------------------ 62,844 1,157 ( 6,123) 57,878 Reorganization items: Professional fees - ( 6,045) 6,045 (e) - Fresh-start revaluation - ( 5,985) 5,985 (e) - Interest income - 2,788 ( 2,788) (e) - ------------------------------------------------------------ Earnings (loss) before income taxes and extraordinary gain 62,844 ( 8,085) 3,119 57,878 Income taxes 26,609 - 1,228 (f) 27,837 ------------------------------------------------------------ 36,235 ( 8,085) 1,891 30,041 Extraordinary gain on discharge of prepetition debt - 258,239 ( 258,239) (e) - ------------------------------------------------------------ Net earnings 36,235 250,154 ( 256,348) 30,041 Preferred dividend requirements - ( 1,662) 1,662 (e) - ------------------------------------------------------------ Net earnings applicable to common shareholders $ 36,235 $248,492 ($254,686) $ 30,041 ============================================================ Primary earnings per share applicable to common shareholders $ 2.58 (g) $ 2.14 (g) ========= ========= Fully-diluted earnings per share applicable to common shareholders $ 2.45 (g) $ 2.03 (g) ========= =========
F-8 HILLS STORES COMPANY AND SUBSIDIARIES _______________________________________________________________________________ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 2. PRO FORMA COMBINING STATEMENTS OF OPERATIONS (CONTINUED) -------------------------------------------------------- (a) Reflects the impact of the revaluation and/or the change in the related estimated remaining useful lives of property and equipment, property under capital leases and beneficial lease rights in connection with fresh-start reporting, the pro forma twelve month amortization of the Successor Company's reorganization value in excess of amounts allocable to identifiable assets and the elimination of the Predecessor Company's goodwill amortization. (b) Reflects the impact on interest expense due to the revaluation of capital lease obligations. (c) Reflects interest expense on the senior notes, the revolving credit facility based on estimated cash requirements and the amortization of deferred financing costs related to securing the revolving credit facility. (d) Reflects pro forma interest income after taking into consideration distributions in accordance with the POR. (e) Reflects elimination of reorganization items, gain on debt discharge and preferred dividend requirements. (f) Reflects the income tax effect of the pro forma adjustments. (g) Pro forma primary and fully-diluted earnings per share were calculated based on an estimated fifty-two week weighted average shares outstanding for the period ended January 29, 1994 of 14,056,470 and 14,794,492, respectively. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ------------------------------------------ BASIS OF REPORTING The Company operates, through its wholly-owned subsidiary Hills Department Store Company ("HDSC"), a chain of 164 discount department stores located in the Mid-Western and Mid-Atlantic regions of the United States. The consolidated financial statements since October 3, 1993, include the accounts of the Successor Company and its wholly-owned subsidiaries, and, through the period ended October 2, 1993 the accounts of the Predecessor Company and its wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated. Certain Predecessor Company amounts were reclassified to conform to the Successor Company presentation. The Company's fiscal year ends on the Saturday closest to January 31. For financial reporting purposes, fiscal 1993 has been segregated into two periods: the Successor Company seventeen weeks ended January 29, 1994 and the Predecessor Company thirty-five weeks ended October 2, 1993. Fiscal 1995 was a fifty-three week year, fiscal years 1994 and 1993 were fifty-two week years. CASH AND CASH EQUIVALENTS Cash and cash equivalents consist of cash and highly liquid investments with maturities of three months or less from the date of purchase and whose cost approximates market value due to the short maturity of the investments. F-9 HILLS STORES COMPANY AND SUBSIDIARIES _______________________________________________________________________________ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) ------------------------------------------------------ INVENTORIES Inventories are valued using the retail method on the lower of last-in, first-out (LIFO) cost or market basis. In connection with fresh-start reporting, a new LIFO base layer was established based on inventory levels as of October 2, 1993. Since October 1993, LIFO cost has exceeded the cost of inventory on a first-in, first-out basis, accordingly, there has been no LIFO charge since emergence from Chapter 11. DEPRECIATION AND AMORTIZATION Depreciation and amortization are provided on a straight-line basis over the estimated useful lives of the related assets, which is twenty-seven and half years for buildings and range from five to eight years for machinery, furniture and fixtures. Amortization of leasehold improvements is provided on a straight-line basis over the shorter of the lease term, considering renewal options that are likely to be exercised, or the estimated useful life of the related asset. Leasehold improvements are amortized principally over a fifteen year period. DEFERRED FINANCING COSTS Net deferred financing costs of $11.1 million at February 3, 1996 and $3.4 million at January 28, 1995 are included in other assets and are being amortized on a straight-line basis over the estimated term of the related debt. Accumulated amortization of deferred financing costs was $2.8 million at February 3, 1996 and $5.5 million at January 28, 1995. INTANGIBLE ASSETS Beneficial lease rights are amortized using the straight-line method over the terms of the related leases. Accumulated amortization of beneficial lease rights was $1.9 million at February 3, 1996 and $1.1 million at January 28, 1995. Reorganization value in excess of amounts allocable to identifiable assets is being amortized over twenty years on a straight-line basis. Accumulated amortization was $20.1 million at February 3, 1996 and $12.4 million at January 28, 1995 (See Notes 5 and 17). Management plans to formally adopt Statement of Financial Accounting Standards No. 121: "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of "("FAS 121") in fiscal 1996. The Company has not yet determined the effect of adopting FAS 121. PREOPENING COSTS Preopening costs consist of direct costs of opening a store and are charged to operations within the fiscal year that a new store opens. F-10 HILLS STORES COMPANY AND SUBSIDIARIES _______________________________________________________________________________ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) ------------------------------------------------------ INTEREST CAPITALIZATION The Company's policy is to capitalize interest incurred in connection with the construction of new stores. In fiscal 1995, the Company capitalized $452,000 of such interest. USE OF MANAGEMENT'S ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates used in preparation of the consolidated financial statements include income tax liabilities (primarily those associated with the Company's emergence from bankruptcy), self-insurance reserves for worker's compensation and general liabilities, and the estimated useful life of intangible assets. 4. PROPERTY AND EQUIPMENT ---------------------- The components of property and equipment are listed below (in thousands):
February 3, January 28, 1996 1995 ------------ ----------- Land $ 3,430 $ 3,430 Buildings 17,292 16,193 Leasehold improvements 50,899 40,401 Machinery, furniture and fixtures 156,658 111,280 Improvements in progress 2,919 3,430 -------- -------- 231,198 174,734 Accumulated depreciation and amortization ( 40,305) ( 19,784) -------- -------- $190,893 $154,950 ======== ========
F-11 HILLS STORES COMPANY AND SUBSIDIARIES _______________________________________________________________________________ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. REORGANIZATION VALUE IN EXCESS OF AMOUNTS ALLOCABLE TO IDENTIFIABLE ASSETS -------------------------------------------------------------------------- The activity for reorganization value in excess of amounts allocable to identifiable assets is presented below (in thousands):
February 3, January 28, 1996 1995 ------------ ----------- Beginning balance $144,765 $176,728 Amortization ( 7,755) ( 8,986) Tax benefit applied to reduce reorganization value in excess of amounts allocable to identifiable assets ( 9,496) ( 22,977) Reversal of liabilities established in fresh-start (see Note 6) ( 20,000) - -------- -------- Ending balance $107,514 $144,765 ======== ========
6. OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES ------------------------------------------- Significant components of other accounts payable and accrued expenses are presented below (in thousands):
February 3, January 28, 1996 1995 ----------- ----------- Accrued payroll and related costs $ 15,289 $ 27,193 Self-insurance reserves 28,083 26,961 Accrued Chapter 11 and related reorganization costs 11,316 31,417 Accrued distribution payable pursuant to the POR 7,672 11,482 Income taxes payable - 20,895 Other 116,492 94,541 -------- -------- $178,852 $212,489 ======== ========
In the fourth quarter of fiscal 1995, the Company determined that $20.0 million of liabilities established in fresh-start accounting for the purpose of relocating certain operations and facilities were no longer required, and, accordingly, these liabilities were reduced with a corresponding reduction in "Reorganization value in excess of amounts allocable to identifiable assets." F-12 HILLS STORES COMPANY AND SUBSIDIARIES _______________________________________________________________________________ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. REVOLVING CREDIT AGREEMENT -------------------------- On August 21, 1995, in connection with the 1995 Change in Control (see Note 21), HDSC entered into a new $300 million secured revolving credit facility (the "Facility"), of which up to $100 million is available as a letter of credit facility. The Facility expires April 30, 1998 (or May 1, 1996 if the Company has not exercised its option by April 30, 1996 to extend by one year the Senior Note redemption offer or May 1, 1997 if the Company has not exercised its second option to extend the Senior Note redemption offer an additional year). If the Company's Senior Notes (see Note 8) are refinanced on terms acceptable to the lenders the Facility will be automatically extended to April 30, 1998. Borrowings under the Facility are limited by a borrowing base, as defined, and bear interest, at the option of the borrower, at either of (1) the Adjusted London Interbank Offered Rate plus 2.75%, or (2) the highest of (a) the Chemical Bank's Prime Rate plus 1.75% (10.0% at February 3, 1996), (b) the Federal Funds Effective rate plus 2.25%, and (c) the Base CD Rate plus 2.75%. HDSC must pay commitment fees at an annual rate of 1/2% on the average daily unused portion of the commitment. HDSC must also pay letter of credit fees on the aggregate face amount of outstanding standby letters of credit at an annual rate equal to 2.75%, and on the face amount of outstanding trade letters of credit at an annual rate of 2.25%. The Facility is secured by a pledge of all of the capital stock of HDSC and an interest in all tangible and intangible assets of HDSC. The Facility is guaranteed by the Company. The Facility also contains, among other restrictions, requirements regarding the maintenance of certain financial ratios, minimum net worth requirements, and provisions limiting: business combinations, the issuance of additional debt including capital lease obligations, the redemption and repurchase of common and preferred stock, the repurchase and prepayment of debt, the amount of rent expense, and the payment of dividends. In addition, the Facility also requires, on a date (the "Clean- Up Date") determined at the discretion of the Company between December 1 and April 1 of each year, HDSC to pay or prepay all of the outstanding loans and for a period of at least thirty consecutive days following the Clean-Up Date (the "Clean-Up Period"), HDSC shall have no direct borrowings outstanding under the Facility. At February 3, 1996, the Company has maintained a Clean-Up Period of at least thirty consecutive days, had no direct borrowings under the Facility, and outstanding letters of credit totalled $31.1 million. 8. SENIOR NOTES ------------ Pursuant to the POR, the Company is authorized to issue $160 million of unsecured redeemable 10.25% Senior Notes ("Senior Notes") due September 30, 2003. As of February 3, 1996, a total of approximately $2.5 million of Senior Notes remain to be issued pending resolution of prepetition claims and interests. Interest is payable semi-annually. The unsecured Senior Notes may be redeemed, at the option of the Company, at prices ranging from 104% at October 1, 1995, and declining by 1% on October 1 of each year to 100% at October 1, 1999 and thereafter. Principal amounts of $25 million are subject to mandatory redemption on March 31, 2002 and on March 31, 2003. The Senior Notes contain covenants which management believes are no more restrictive than the terms of the Facility. F-13 HILLS STORES COMPANY AND SUBSIDIARIES _______________________________________________________________________________ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. SENIOR NOTES (CONTINUED) ----------------------- The Senior Note Indenture (the "Indenture") was amended to permit the Company to enter into the self-tender as described in Note 20. In connection with obtaining this amendment, the holders of the Senior Notes were paid $2.2 million in the fourth quarter of fiscal 1994, which was included in other expense. Under the terms of the Indenture, because of the election of the new Board of Directors, the Company was required to offer to redeem all of the Senior Notes at 101% of par. Effective August 1, 1995, the Indenture was amended to permit the Company to defer the Company's obligation to offer to redeem the Senior Notes until April 3, 1996, and, at the option of the Company, by giving notice on or before April 19, 1996 and upon the payment of an additional fee of $7.5 million, to further defer the offer to redeem obligation to April 5, 1997. In addition, the put price under the Indenture would be increased to 102% from 101% if no notice of redemption is mailed to Senior Note holders before January 1, 1997. The amendment also allowed the Company to increase the amount of its revolving credit facility from $225 million to $300 million. In connection with obtaining this amendment, the consenting holders of the Senior Notes were paid $6.0 million in August 1995, which has been included in costs related to change in control in the Consolidated Statements of Operations. Effective January 15, 1996, the Indenture was again amended to permit the Company (upon payment to persons who then hold Senior Notes of a fee equal to 5.5% of the principal amount of such Senior Notes) to defer the redemption of the Senior Notes until July 8, 1998. The amendment also eliminates the obligation of the Company to offer to redeem the Senior Notes upon any future Change in Control Event, as defined, if such Change in Control Event results in an increase of at least $40 million in the capital of the Company and at least 50% of the Company's net proceeds therefrom are used to repurchase or redeem Senior Notes. In addition, the amendment modifies the definition of "Consolidated Fixed Charge Coverage Ratio" in order to exclude, for the purposes of determining the amount of indebtedness that the Company is permitted to incur, the effect of up to $43.3 million in non-recurring costs relating to the Company's change in control in July 1995. The amendment also imposes limitations upon the Company's ability to make payments with respect to its capital stock and increases the interest rate on the Senior Notes to 10.75% from January 13, 1996 through March 31, 1997, to 11.25% from April 1, 1997 to March 31, 1998 and thereafter by 1.00% on April 1 of each succeeding year. The Company is proposing to offer in April 1996 $175.0 million principal amount of a new series of senior notes due 2003 (the "New Notes"). If the Company proceeds with the offering of the New Notes, it will offer to redeem the outstanding Senior Notes, using substantially all of the proceeds from the issuance of the New Notes. If the Company does not proceed with the offering of New Notes, it will pay the $7.5 million fee, as described above, to defer the redemption offer of the Senior Notes until April 5, 1997. As a result of the Company's intention to refinance the Senior Notes or to defer redemption of the Senior Notes until after fiscal 1996, the Company has classified the Senior Notes as long-term. The estimated fair value of the Senior Notes of $152.8 million at February 3, F-14 HILLS STORES COMPANY AND SUBSIDIARIES _______________________________________________________________________________ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. SENIOR NOTES (CONTINUED) ----------------------- 1996 and $147.3 million at January 28, 1995 was based on quoted market prices in effect at that time. In the fourth quarter of fiscal 1994, the Company determined that due to changing market conditions $9.6 million of liabilities included in "Other accounts payable and accrued expenses" related to a potential refinancing of the Senior Notes were no longer required, and in accordance with AICPA Practice Bulletin 11: "Accounting for Preconfirmation Contingencies in Fresh-Start Reporting," these liabilities were reversed and included in other income. 9. LEASE COMMITMENTS ----------------- The Company's operations are conducted primarily in leased properties which consist principally of retail outlets. Leases are generally for periods between twenty to thirty years plus renewal options and generally include fixed rentals and rentals based on sales in excess of predetermined levels. The composition of property under capital leases, net of accumulated amortization, is shown below (in thousands):
February 3, January 28, 1996 1995 ----------- ----------- Retail outlets $131,408 $131,408 Other 6,476 6,476 -------- -------- 137,884 137,884 Accumulated amortization ( 24,099) ( 13,776) -------- -------- Property under capital leases, net $113,785 $124,108 ======== ========
Consolidated rental expense under operating leases and rental expense based on sales in excess of predetermined levels under capital leases are presented below (in thousands):
Successor Company Predecessor ------------------------------------------- Company Fiscal Year Fiscal Year Seventeen Thirty-five Ended Ended Weeks Ended Weeks Ended February 3, January 28, January 29, October 2, 1996 1995 1994 1993 ----------------------------------------------------------- Capital leases: || Rental based on sales $ 1,251 $ 1,577 $ 574 || $ 843 Operating leases: || Minimum facility rentals 26,133 23,519 8,223 || 16,501 Equipment and other rentals 17,706 17,757 6,795 || 10,820 Rental based on sales 1,244 1,404 481 || 702 ------- ------- ------- || ------- Consolidated rental || expense $46,334 $44,257 $16,073 || $28,866 ======= ======= ======= || =======
F-15 HILLS STORES COMPANY AND SUBSIDIARIES _______________________________________________________________________________ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. LEASE COMMITMENTS (CONTINUED) ---------------------------- Minimum future lease commitments under noncancelable leases in effect at February 3, 1996 are listed below (in thousands):
Capital Operating Fiscal years: Leases Leases Total ----------------------------------------- 1996 $ 19,111 $ 37,301 $ 56,412 1997 17,398 32,437 49,835 1998 16,971 29,987 46,958 1999 16,797 28,804 45,601 2000 16,797 27,690 44,487 Thereafter 179,810 169,634 349,444 ----------------------------------------- Minimum rental commitments 266,884 $325,853 $592,737 ======================== Less amount representing interest ( 142,376) -------- Present value of net minimum lease payments 124,508 Current portion ( 5,732) -------- $118,776 ========
10. SALE/LEASEBACK FINANCING ------------------------ During 1994, the Company obtained $25.2 million of financing, which includes transaction costs, for certain of its real properties through sale/leaseback arrangements. These transactions were accounted for as financings under which the property remains on the Company's books and continues to be depreciated. The related property is included in Property and equipment and has a net book value of $14.8 million at February 3, 1996. The leases, which have terms of ten years, require minimum annual rental payments of $4.3 million in 1996, $4.6 million in 1997, $5.2 million in 1998, $4.5 million in 1999, $4.6 million in 2000, $4.7 million on 2001 and a total of $13.6 million thereafter. The lease terms also include options to purchase some or all of the properties either at the end of the initial lease term or renewal periods at an amount not greater than the then current fair market value of the properties. 11. EMPLOYEE BENEFITS ----------------- PENSION PLANS The Company's Board of Directors authorized the termination, effective April 30, 1994, of the Company's pension plan. In connection with the termination of the pension plan, a participant's vested benefits were calculated based on all F-16 HILLS STORES COMPANY AND SUBSIDIARIES _______________________________________________________________________________ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 11. EMPLOYEE BENEFITS (CONTINUED) ---------------------------- credited service, pension earnings, and contributions up to April 30, 1994. There was no asset reversion to the Company as plan assets in excess of benefit obligations, as adjusted for the termination of the plan, were allocated to participants. The settlement of the vested benefit obligation by the purchase of nonparticipating annuity contracts for, or the optional lump sum rollover to the 401(k) plan account for, each covered employee was completed in fiscal 1995. In the first quarter of fiscal 1994, the Company recorded a $4.5 million gain, which was included in selling and administrative expenses, related to the curtailment and settlement of the pension plan and the elimination of the related pension obligation. Net pension expense included in the results of operations was $830,000 for the year ended January 28, 1995, $964,000 for the seventeen weeks ended January 29, 1994, and $1,645,000 for the thirty-five weeks ended October 2, 1993. The discount rate used in determining the actuarial present value of projected benefit obligations was 7.0% and the expected long-term rate of return on plan assets used in determining net pension expense was 8.0%. In fiscal 1994, the Company adopted an expanded defined contribution 401(k) savings plan (the "401(k)") for employees meeting certain employment conditions. In addition to permitting employee contributions, the 401(k) plan provides for company matching contributions. Company matching contributions were $3.9 million in fiscal 1995 and $3.0 million in fiscal 1994. OTHER The Company accounts for postretirement benefits (such as health care) in accordance with Statement of Financial Accounting Standards No. 106: "Employers' Accounting for Postretirement Benefits Other Than Pensions" ("FAS 106"). This statement requires accrual of postretirement benefits during the years an employee provides services. Under FAS 106, the Company recognized expenses of $0.2 million in fiscal 1995, $0.4 million in fiscal 1994, and $0.3 million in fiscal 1993. The Company, consistent with the practice of the Predecessor Company, continues to fund benefit costs principally on a pay-as-you-go basis, with the retiree paying a portion of the costs. The status of the plan is as follows (in thousands):
February 3, January 28, 1996 1995 ----------- ----------- Accumulated postretirement benefit obligation for: Retirees $ 573 $ 789 Active employees 1,904 2,126 ------- ------- 2,477 2,915 Plan assets at fair value - - ------- ------- Funded status 2,477 2,915 Unrecognized gain 1,294 959 ------ ------ Accrued postretirement benefit cost $ 3,771 $ 3,874 ======= =======
F-17 HILLS STORES COMPANY AND SUBSIDIARIES _______________________________________________________________________________ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 11. EMPLOYEE BENEFITS (CONTINUED) ----------------------------- The assumed health care cost trend rate used in measuring the accumulated postretirement benefit obligation was 13.0% in fiscal 1995 (10.0% for Medicare eligible retirees); grading down to 5.0% (5.0% for Medicare eligible retirees) by fiscal 2002 and remaining at that level thereafter. A one percentage point increase in the assumed health care cost trend rate would increase the accumulated postretirement benefit obligation at the end of fiscal 1995 by $421,000 (or by 17%) and the service and interest cost by $36,400 (or by 12%). The assumed discount rate used in determining the accumulated postretirement benefit obligation was 8.5% in fiscal 1995 and 7% in fiscal 1994. 12. HILLS STORES SERIES A CONVERTIBLE PREFERRED STOCK ------------------------------------------------- The Company is authorized to issue 15,000,000 shares of preferred stock, par value of $0.10 per share. Pursuant to the POR, a total of 5,000,000 of such shares are authorized to be issued as payment and cancellation of prepetition liabilities and interests and designated as Hills Stores Series A Convertible Preferred Stock (the "Preferred Stock"). As of February 3, 1996, a total of 55,331 shares of the 5,000,000 shares of the Preferred Stock remain to be issued pending resolution of prepetition claims and interests. The Company may redeem, at its option prior to October 4, 2008, all or part of the outstanding shares of the Preferred Stock at $20 per share; and in any case shall redeem all outstanding shares of the Preferred Stock on October 4, 2008 at $20 per share. The Preferred Stock is convertible by the holders, at any time, into Hills Stores Common Stock ("Common Stock") at a rate of one share of Common Stock for each share of the Preferred Stock, subject to antidilution adjustments. Each holder of the Preferred Stock has one vote per share in the same class as the holders of Common Stock. The holders of the Preferred Stock are entitled to dividends when and if declared by the Board of Directors; however, dividend payments are restricted under the terms of the Facility and Senior Notes. The Company does not expect to pay dividends in the foreseeable future. Upon dissolution or liquidation of the Company, the holders of the Preferred Stock will be entitled to receive $20 per share out of the assets of the Company available for distribution to shareholders, in preference to the holders of Common Stock and any other class or series of capital stock of the Company that is junior to the Preferred Stock. 13. HILLS STORES COMMON STOCK ------------------------- Pursuant to the POR, a total of 9,000,000 shares of Common Stock are authorized to be issued as payment for prepetition liabilities and cancellation of old preferred stock interests. As of February 3, 1996, a total of 64,233 shares of the 9,000,000 shares of Common Stock remain to be issued pending resolution of prepetition claims and interests. Each holder of Common Stock has one vote per share and is entitled to dividends when and if declared by the Board of Directors; however, dividend payments are restricted under the terms of the Facility and Senior Notes. The Company does not expect to pay dividends in the foreseeable future. F-18 HILLS STORES COMPANY AND SUBSIDIARIES _______________________________________________________________________________ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 13. HILLS STORES COMMON STOCK (CONTINUED) ------------------------------------ STOCK OPTION PLAN As of the Effective Date, the Company established an incentive and nonqualified stock option plan (the "Option Plan") providing for the grant of nonqualified stock options or incentive stock options. The options are granted at prices greater than or equivalent to the market price of the Common Stock on the date of each grant. The options are subject to a five year vesting schedule with initial vesting beginning one year from the date of grant. A total of 1,053,763 shares of Common Stock were reserved for grants of options under the Option Plan as of the Effective Date. The Option Plan was amended in fiscal 1995 to allow participants, for a limited time, to exchange three existing options for two new options with an exercise price of $12.00. Option activity for the period from October 3, 1993 to February 3, 1996 was as follows:
Shares Price Range ---------- --------------- Outstanding at October 3, 1993 - $ - Granted 886,500 18.00-18.25 Cancelled ( 10,000) 18.25 ---------- Outstanding at January 29, 1994 876,500 18.00-18.25 Granted 191,000 19.50 Exercised ( 11,979) 18.25 Cancelled ( 41,500) 18.25 ---------- Outstanding at January 28, 1995 1,014,021 18.00-19.50 Granted 183,000 12.00-16.38 Exchanged November 4, 1995 ( 335,200) 18.00-19.50 Issued in Exchange on November 4, 1995 223,464 12.00 Exercised ( 4,300) 18.25 Cancelled ( 683,521) 18.00-19.50 ---------- Outstanding at February 3, 1996 397,464 $12.00-18.25 ========== Exercisable options at February 3, 1996 231,894 ==========
In January 1996, the Company adopted, subject to shareholder approval at the Company's June 1996 annual meeting, a stock option plan for non-employee members of the Board of Directors. The plan provides for an initial grant (in January 1996) of 4,000 options to each non-employee member of the Board of Directors with subsequent annual automatic grants of 2,000 options. All options are granted at prices greater than or equivalent to the market price F-19 HILLS STORES COMPANY AND SUBSIDIARIES _______________________________________________________________________________ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 13. HILLS STORES COMMON STOCK (CONTINUED) ------------------------------------- STOCK OPTION PLAN (CONTINUED) of the Common Stock on the date of each grant. The options are subject to a three year vesting schedule with vesting beginning from the date of the grant. A total of 250,000 shares of Common Stock are reserved for grants under the plan. In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("FAS 123"). FAS 123 encourages, but does not require, the recognition of compensation expense for the fair value of stock options and other equity instruments issued to employees. If the fair value provisions of FAS 123 are not adopted, the Company will be required to disclose the pro forma amounts of net earnings and earnings per share that would have been reported had these provisions been adopted. FAS 123 is required for the Company's fiscal year beginning February 4, 1996. The Company is evaluating whether or not it will adopt the recognition provisions of FAS 123 and has not yet determined the effect of adopting these provisions. 14. SERIES 1993 STOCK RIGHTS ------------------------ Pursuant to the POR, Series 1993 Stock Rights (the "Stock Rights") were issued as of the Effective Date under Stock Right Agreements. Each Stock Right entitles the holder to acquire, at $0.01 per share, shares of Common Stock, subject to antidilution adjustments, as determined pursuant to a formula which is based on the Company's pro forma utilization of certain tax benefits as defined in the Stock Right Agreements. As of the Effective Date, 700,000 shares of Common Stock were reserved for issuance upon exercise of the Stock Rights. Shares under the Stock Right Agreements are not available for issuance until vested. During 1995, the Company repurchased 693,949 of its 700,000 outstanding stock rights in exchange for 198,271 shares of newly issued common stock. The aggregate par value of the newly issued common stock was reclassified from additional paid-in capital to common stock. 15. SERIES 1993 WARRANTS -------------------- Pursuant to the POR, Series 1993 Warrants (the "Warrants") were issued as of the Effective Date. Each Warrant entitles the holder to purchase, subject to antidilution adjustments, one share of Common Stock at $30 per share. Initially, 432,990 shares of Common Stock were reserved for issuance upon exercise of the Warrants. The Warrants are callable by the Company at $.01 per Warrant at any time after October 4, 1998 if the average closing price of Common Stock, subject to antidilution adjustments, for a period of thirty consecutive trading days is equal to or greater than $35 per share. The Warrants expire on October 4, 2000. During fiscal 1995, 87 warrants were exercised. F-20 HILLS STORES COMPANY AND SUBSIDIARIES _______________________________________________________________________________ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 16. RIGHTS AGREEMENT ---------------- Pursuant to a Rights Agreement adopted on August 16, 1994, the Company declared a distribution of one purchase right (the "Right") for each share of Common Stock and Preferred Stock then outstanding. Each Right would initially entitle the holder to purchase, subject to adjustment, one one-thousandth share of the Company's Series B Participating Cumulative Preferred Stock, consisting of 55,000 shares authorized, $.10 par value per share, at an exercise price of $75 per one one-thousandth share. Each share of Common Stock and Preferred Stock issued after August 16, 1994 will also have one Right attached. The Rights expire August 16, 2004 and, under certain conditions, may be redeemed by the Company at a price of $.01 per Right. The Rights have no voting or dividend privileges and are not currently separable from the capital stock. The Rights would become exercisable if certain events occurred relating to a person or group (the "Acquiring Person") acquiring or attempting to acquire 15% or more of the outstanding shares of capital stock other than through a qualifying tender offer. Upon the occurrence of such an event, each Right (except the Rights beneficially owned by the Acquiring Person, which become null and void) entitles its holder to purchase for $75 the economic equivalent of Common Stock, or in certain circumstances, securities of the Acquiring Person, or its affiliate, worth twice as much. After there is an Acquiring Person, the Rights may be exchanged, at the election of the Company, for consideration per Right consisting of one-half of the securities that would otherwise be issuable at that time. The Rights Agreement was amended on October 20, 1995 to raise the ownership threshhold to 20%. 17. INCOME TAXES ------------ The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109: "Accounting for Income Taxes" ("FAS 109"). Under FAS 109, deferred taxes are computed on the difference between the bases of assets and liabilities for tax reporting purposes and their corresponding bases for financial reporting purposes. Deferred tax assets, net of appropriate valuation reserves, may be recorded. F-21 HILLS STORES COMPANY AND SUBSIDIARIES _______________________________________________________________________________ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 17. INCOME TAXES (CONTINUED) ------------------------ Temporary differences and carryforwards which give rise to significant deferred tax assets and liabilities are as follows (in thousands):
February 3, 1996 January 28, 1995 Deferred Deferred Deferred Deferred Tax Tax Tax Tax Asset Liability Asset Liability -------- --------- -------- --------- Net operating loss and tax credit carryforwards $ 65,461 $ - $ 63,391 $ - Capital lease obligations 51,584 - 54,393 - Assets under capital leases - 47,141 - 51,679 Accrued expenses 33,281 - 30,683 - Beneficial lease rights 18,423 - 19,693 - Property and equipment - 19,942 - 17,257 Financing obligation-sale/ leaseback 10,428 - 10,480 - Other 18,908 - 19,534 - ------- ------- ------- ------ Total deferred taxes 198,085 67,083 198,174 68,936 Valuation allowance ( 88,758) - ( 98,254) - ------- ------- ------- ------ Net deferred taxes $109,327 $ 67,083 $ 99,920 $68,936 ======= ======= ======= ======
The consummation of the POR resulted in a change in ownership for federal income tax purposes. As a result, the Company's ability to utilize its net operating loss and tax credit carryforwards is subject to an annual limitation of $16.8 million. For the year ended February 3, 1996, the Company generated a net operating loss for tax purposes of $5.1 million, which may be used without limitation to offset taxable income in future years. Total deferred tax assets as of February 3, 1996, include $88.8 million of deferred tax assets which arose before the Company's emergence from bankruptcy and which have been fully reserved. For financial reporting purposes, any reduction of the valuation allowance related to Predecessor Company deferred tax assets will not be credited to the tax provision, but instead will reduce reorganization value in excess of amounts allocable to identifiable assets. F-22 HILLS STORES COMPANY AND SUBSIDIARIES _______________________________________________________________________________ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 17. INCOME TAXES (CONTINUED) ------------------------ The Company's net operating loss and tax credit carryforwards at February 3, 1996 expire as follows (in thousands):
Net Operating Tax Losses Credits ---------------------------------- Fiscal years: 2000 $ - $ 413 2001 - 797 2002 - 664 2003 - 1,369 2004 329 2,196 2005 - 1,547 2006 60,901 949 2007 56,848 797 2008 10,954 944 2009 - - 2010 5,094 - ---------------------------------- $134,126 $ 9,676 ==================================
The income tax provision in each of the periods presented reflects an effective tax rate that differs from the statutory federal income tax rate for those periods. For net earnings (loss) from operations before extraordinary items, the table below reconciles the statutory federal income tax rate to the effective tax rate.
Predecessor Successor Company Company ----------------- --------- Fiscal Fiscal Seventeen Thirty-Five Year Ended Year Ended Weeks Ended Weeks Ended February 3, January 28, January 29, October 2, 1996 1995 1994 1993 ------------------------------------------------------ || Statutory tax rate (35.0%) 35.0% 35.0% || (35.0%) State and local income taxes, || net of federal tax benefit 3.7 6.4 6.7 || (6.5) Goodwill 20.1 4.1 0.9 || 11.9 Targeted jobs credit || and other, net 0.7 1.5 (0.3) || 2.2 Reorganization fees - - - || 26.2 Loss producing no current || tax benefit - - - || 1.2 Change in control costs 34.2 - - || - ------- ------ ------ || ----- Effective tax rate 23.7% 47.0% 42.3% || - ======= ====== ====== || =====
F-23 HILLS STORES COMPANY AND SUBSIDIARIES _______________________________________________________________________________ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 17. INCOME TAXES (CONTINUED) ------------------------ The provision for income taxes consists of the following components (in thousands):
Successor Company ----------------- Fiscal Fiscal Seventeen Year Ended Year Ended Weeks Ended February 3, January 28, January 29, 1996 1995 1994 ------------------------------------------------- Current provision: Federal $ 227 $ 19,524 $ - State and local 23 9,973 2,328 ------ ------- ------- 250 29,497 2,328 Deferred provision: Federal ( 9,986) ( 23,393) - State and local ( 1,274) ( 7,591) - ------ ------- ------- ( 11,260) ( 30,984) - Tax benefit applied to reduce reorganization value in excess of amounts allocable to identifiable assets 14,197 37,340 24,281 ------ ------- ------- Total taxes $ 3,187 $ 35,853 $ 26,609 ====== ======= =======
As stated in Note 1, the Company recorded an extraordinary gain of $258.2 million on the extinguishment of debt for financial reporting purposes in the third quarter of fiscal 1993. Because the debt was discharged pursuant to the Chapter 11 filing, the Company did not record any income tax expense on the gain from the extinguishment of the debt in the period ended October 2, 1993. The Internal Revenue Service is currently auditing the years of fiscal 1991, 1992, and 1993. The audit has not progressed to a stage where an accurate estimate of its impact can be determined. 18. EARNINGS PER SHARE ------------------ Primary earnings per share of the Successor Company was computed based on the weighted average number of common and common equivalent shares assumed to be outstanding during each period. Such shares amounted to 9,809,675, 14,105,498 and 14,056,470 for fiscal 1995, fiscal 1994, and the seventeen weeks ended January 29, 1994, respectively. If primary earnings per share were calculated as if all conversions of preferred stock which occurred during the period took place at the beginning of such period, the net loss per share would have been F-24 HILLS STORES COMPANY AND SUBSIDIARIES _______________________________________________________________________________ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 18. EARNINGS PER SHARE (CONTINUED) ----------------------------- $1.66 for fiscal 1995. Fully-diluted earnings per share for each period also assumes, any shares of Preferred Stock actually converted in the period were done so at the beginning of such period and, if the effect is dilutive, the exercise of the Stock Rights. Such shares amounted to 10,029,442, 14,831,568 and 14,794,492 for fiscal 1995, fiscal 1994, and the seventeen weeks ended January 29, 1994, respectively. Exercise of the Warrants is not assumed as their exercise would be antidilutive. The weighted average number of shares reflects all shares of common and preferred stock intended to be issued in accordance with the POR. Primary earnings per share of the Predecessor Company for the thirty-five weeks ended October 2, 1993 was computed using the weighted average common and common equivalent shares outstanding of 19,757,390. Fully-diluted earnings per share for the period assumes the conversion of the 11% Convertible Junior Subordinated Debentures. Fully-diluted weighted average common and common equivalent shares amounted to 21,981,683. 19. COMMITMENTS AND CONTINGENCIES ----------------------------- On September 11, 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 July 5, 1995 change in control (see Note 21). On October 10, 1995 the defendants filed a motion to dismiss this suit. That motion is presently pending. The Company and HDSC also filed suit against Smith Barney, Inc. on September 11, 1995 in the New York State Supreme Court for the County of New York, seeking damages for losses, as stated in the complaint, caused by the gross negligence of this firm in rendering financial advice to the Company's Former Directors in the breach of their fiduciary duties. On October 30, 1995, Smith Barney, Inc. served a motion to dismiss this suit. That motion is presently pending. On August 7, 1995, in the Court of Chancery of the State of Delaware, Gayle Dolowich, Ivan J. Dolowich and Joseph Weiss filed a class action lawsuit against the seven new directors of the Company elected at the annual meeting, Dickstein Partners Inc. and the Company. On November 3, 1995, the plaintiffs amended their complaint to include a shareholders 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 that in connection with the effort by Dickstein Partners Inc. to solicit proxies in support of the election of its nominees to be directors of the Company, Dickstein Partners Inc. issued a number of false and misleading statements regarding its offer to acquire all of the Company's shares it did not already own. 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. F-25 HILLS STORES COMPANY AND SUBSIDIARIES _______________________________________________________________________________ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 19. COMMITMENTS AND CONTINGENCIES (CONTINUED) ---------------------------------------- On January 19, 1996 in the same Delaware Chancery Court, Peter M. Fusco filed a substantially similar class action and shareholder derivative suit against the parties named in the above identified Dolowich suit. The plaintiff made the same claims and seeks the same remedies as are made and sought in the Dolowich suit. The Former Directors have filed motions to dismiss the derivative actions in both the Dolowich and Fusco suits. These motions are presently pending. The Company is also involved in various suits and claims in the ordinary course of business. The Company is also actively resolving certain disputed prepetition claims related to the POR. 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. 20. SELF-TENDER FOR COMMON STOCK ---------------------------- In August 1994, Dickstein Partners, L.P., et al. ("Dickstein") commenced a consent solicitation to replace four members of the then current Board of Directors with Dickstein nominees. In response to the Dickstein consent solicitation, the Company's Board of Directors announced a program to enhance shareholder value, including the approval of a self-tender to purchase up to 3,000,000 common shares at $25 per share in cash. Effective February 21, 1995, the Company accepted for payment 3,000,000 shares of Common Stock which were validly tendered pursuant to the Company's offer, and for which payment of $75,000,000 was made in March 1995. The excess of the purchase price over the original issue price of the Common Stock, or $15,000,000, was charged to retained earnings. In connection with the offer, 561,863 shares of Preferred Stock were converted to Common Stock. 21. CHANGE IN CONTROL ----------------- On July 5, 1995, following a proxy contest in connection with the annual meeting of shareholders held on June 23, 1995, nominees of Dickstein Partners were certified as being elected to the Board of Directors. The Company reimbursed Dickstein Partners for, or directly paid, approximately $1.9 million in third-party fees and expenses incurred or committed to by Dickstein Partners in connection with the proxy contest and the related acquisition proposal of Dickstein Partners. This amount includes $1.0 million paid by the Company to the financial advisor of Dickstein Partners, in respect of the advisor's proposal to refinance the indebtedness of the Company accelerated as a result of the election of the Dickstein Partners nominees. In its proxy solicitation materials, Dickstein Partners declared its intention to seek reimbursement or payment of such fees and expenses, upon the election of its nominees. These costs are included in the Consolidated Statements of Operations in costs related to change in control. Due to the election of the new Board of Directors, the Company was required to offer to redeem all of the Senior Notes at 101% of par (see Note 8) and on August 21, 1995, HDSC entered into a new $300 million secured revolving credit facility (see Note 7). In connection with the change in control, the Company recognized $45.5 million in expense, including $31.0 million related to severance and retirement F-26 HILLS STORES COMPANY AND SUBSIDIARIES _______________________________________________________________________________ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 21. CHANGE IN CONTROL (CONTINUED) ---------------------------- payments, including certain taxes attributable thereto, to six senior executives, a consultant to the Company and approximately 20 associates of the Company, $6.0 million paid to holders of the Senior Notes, and legal and other miscellaneous change in control costs. 22. STATEMENTS OF CASH FLOWS ------------------------ Supplemental disclosures of cash flow information are presented in the table below:
Successor Company Predecessor -------------------------------------------- Company Fiscal Year Fiscal Year Seventeen Thirty-five Ended Ended Weeks Ended Weeks Ended February 3, January 28, January 29, October 2, (in thousands) 1996 1995 1994 1993 ------------------------------------------------------------ NONCASH INVESTING AND || FINANCING ACTIVITIES: || || Issuance of senior notes $ - $ - $160,000 || $ - Issuance of preferred stock - - 100,000 || - Cancellation of preferred stock - - - || 33,143 Preferred stock conversions || to common stock 39,508 35,856 - || - Issuance of common stock || and stock rights - - 194,000 || - Cancellation of common stock - - - || 65,413 Capital lease obligations, net - - 1,450 || - Preferred stock accretion - - - || 1,662 || CASH PAID (RECEIVED): || || Reorganization related || professional fees - - 6,618 || 2,407 Interest 38,655 34,731 5,662 || 12,074 Income taxes 17,877 8,562 2,848 || 1,317 Interest received on available || cash due to the Chapter 11 || proceedings - - - || ( 2,643)
F-27 HILLS STORES COMPANY AND SUBSIDIARIES _______________________________________________________________________________ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 23. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) -------------------------------------------
(in thousands, First Second Third Fourth except per share amounts) Quarter Quarter Quarter(1) Quarter(1)(2) ---------------------------------------------------- FISCAL 1995 Net sales $362,862 $389,424 $448,033 $699,785 ======== ======== ======== ======== Gross profit $101,310 $100,741 $124,694 $188,938 ======== ======== ======== ======== Net earnings (loss) applicable to common shareholders ($ 4,337) ($ 45,170) $ 22,441 $ 10,400 ======== ======== ======== ======== Primary earnings (loss) per share applicable to common shareholders ($ 0.45) ($ 4.66) $ 2.01 $ 0.93 ======== ======== ======== ======== Fully-diluted earnings (loss) per share applicable to common shareholders ($ 0.42) ($ 4.64) $ 1.98 $ 0.93 ======== ======== ======== ========
First Second Third Fourth Quarter Quarter Quarter Quarter --------------------------------------------------- FISCAL 1994 Net sales $365,597 $375,632 $457,212 $673,580 ======== ======== ======== ======== Gross profit $100,334 $106,459 $135,621 $189,386 ======== ======== ======== ======== Net earnings (loss) applicable to common shareholders ($ 2,362) ($ 3,597) $ 12,923 $ 33,467 ======== ======== ======== ======== Primary earnings (loss) per share applicable to common shareholders ($ 0.25) ($ 0.36) $ 0.91 $ 2.37 ======== ======== ======== ======== Fully-diluted earnings (loss) per share applicable to common shareholders ($ 0.25) ($ 0.36) $ 0.87 $ 2.26 ======== ======== ======== ========
(1) The Company reclassified $7.2 million before taxes, of change in control costs from its previously announced fiscal 1995 fourth quarter results to the third quarter. The effect of the change is to decrease third quarter net earnings by $3.0 million, or $0.27 per share on a primary basis, and to increase fourth quarter net earnings by $3.0 million, or $0.27 per share on a primary basis, from the amounts previously reported. (2) Net earnings in the fourth quarter of fiscal 1995 include $11.0 million of additional income tax expense resulting from a change in the estimated annual effective tax rate. F-28 INDEPENDENT AUDITORS' REPORT We have audited the consolidated financial statements of Hills Stores Company and Subsidiaries as of February 3, 1996 and for the year then ended, and have issued our report thereon dated March 14, 1996; (April 5, 1996 with respect to the fifth paragraph of Note 8) such consolidated financial statements and report are included elsewhere in this Form 10-K. Our audit also included the consolidated financial statement schedule of Hills Stores Company and Subsidiaries for the year ended February 3, 1996, listed in Item 14(a)(2). This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audit. In our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. DELOITTE & TOUCHE LLP Boston, Massachusetts March 14, 1996 (April 5, 1996 with respect to the fifth paragraph of Note 8) S-1 REPORT OF INDEPENDENT AUDITORS To the Shareholders and Board of Directors of Hills Stores Company and Subsidiaries: Our report on the consolidated financial statements of Hills Stores Company and Subsidiaries is included on page F-2 of this Form 10-K. In connection with our audits of such financial statements, we have also audited the related financial statement schedule listed in the index on page 24 of this Form 10-K for the year ended January 28, 1995, the seventeen-week period ended January 29, 1994 and the thirty-five week period ended October 2, 1993. In our opinion, this financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein. Coopers & Lybrand L.L.P. Boston, Massachusetts March 10, 1995 S-2 HILLS STORES COMPANY AND SUBSIDIARIES - ------------------------------------------------------------------------------- SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS For the Fiscal Year Ended February 3, 1996, the Fiscal Year Ended January 28, 1995, the Seventeen Weeks Ended January 29, 1994 and the Thirty-five Weeks Ended October 2, 1993
Additions Balance at Charged to Deductions Balance at Beginning Cost and from End of (in thousands) of Period Expense Reserves Other Period - ------------------------------------------------------------------------------------------------------- SUCCESSOR COMPANY - ----------------- FISCAL YEAR ENDED FEBRUARY 3, 1996: Allowance for doubtful accounts $4,228 $1,010 ($1,779) $ - $3,459 ====== ====== ====== ====== ===== FISCAL YEAR ENDED JANUARY 28, 1995: Allowance for doubtful accounts $5,497 $ 866 ($2,135) $ - $4,228 ===== ===== ===== ===== ===== SEVENTEEN WEEKS ENDED JANUARY 29, 1994: Allowance for doubtful accounts $9,420 $ 73 ($3,996) $ - $5,497 ===== ===== ===== ===== ===== ======================================================================================================= PREDECESSOR COMPANY - ------------------- THIRTY-FIVE WEEKS ENDED OCTOBER 2, 1993: Allowance for doubtful accounts $4,591 $1,433 ($2,216) $5,612 (1) $9,420 ===== ===== ===== ===== ===== (1) Represents fresh-start adjustments.
S-3 EXHIBIT INDEX Pursuant to Item 601 of Regulation S-K Exhibit Title - ------- ----- 10.2 First Amendment dated as of December 7, 1995 to the Credit Agreement 10.3 Second Amendment and consent dated as of January 12, 1996 to the Credit Agreement 10.9 Employment Agreement made as of February 7, 1996 with Gregory K. Raven 10.10 Consulting Agreement made as of February 8, 1996 with Chaim Y. Edelstein 10.12 1996 Directors Stock Option Plan 10.13 Consulting Agreement dated December 26, 1995 with Samuel L. Katz 11.1 Computation of earnings per share 21 Subsidiaries 23.1 Consent of Coopers & Lybrand L.L.P. 23.2 Consent of Deloitte & Touche LLP 24 Powers of Attorney of directors and officers of the Company 27 Financial Data Schedule EX-10 2 EXHIBIT 10.2 FIRST AMENDMENT dated as of December 7, 1995 (this "Amendment"), to the Credit Agreement dated as of August 21, 1995, (the "Credit Agreement"), among Hills Stores Company, a Delaware corporation (the "Parent"), Hills Department Store Company, a Delaware corporation (the "Borrower") and a wholly owned subsidiary of the Parent, the financial institutions party thereto (the "Lenders"), the Co-Agents and Managing Agent named in the Credit Agreement and Chemical Bank, as agent for the Lenders (in such capacity, the "Administrative Agent") and as Fronting Bank. WHEREAS, the Borrower and the Parent have requested that the Lenders amend certain terms and provisions of the Credit Agreement; WHEREAS, all capitalized terms used but not defined herein shall have the meanings assigned to such terms in the Credit Agreement; and WHEREAS, the Lenders are willing, on the terms, subject to the condi- tions and to the extent set forth below, to effect such amendments. NOW, THEREFORE, in consideration of the premises and the agreements, provisions and covenants herein contained, the Borrower, the Parent and the Lenders hereby agree, on the terms and subject to the conditions set forth herein, as follows: SECTION 1. Amendment. ---------- Section 7.03 of the Credit Agreement is hereby amended by deleting the amount "$15,000,000" contained in such Section and replacing such amount with the amount "$45,000,000". SECTION 2. Representations and Warranties. ------------------------------- Each of the Borrower and the Parent represents and warrants to each of the Lenders that: (a) The execution, delivery and performance by the Borrower and the Parent of this Amendment (a) have been duly authorized by all requisite corporate and, if required, stockholder action and (b) will not (i) violate (A) any provision of law, statute, rule or regulation, or of the certificate or articles of incorporation or other constitutive documents or by-laws of the Parent or any of its Subsidiaries, (B) any order of any Governmental Authority or (C) any provision of any inden- ture, agreement or other instrument to which Parent or any of its 1 - ------------------------------------------------------------------------------ Subsidiaries is a party or by which any of them or any of their property is or may be bound, (ii) be in conflict with, result in a breach of or constitute (alone or with notice or lapse of time or both) a default under any such indenture or any other material agreement or other instrument or (iii) result in the creation or imposition of any Lien upon any property or assets of the Parent or any of its Subsidiaries. (b) This Amendment has been duly executed and delivered by the Borrower and the Parent and constitutes a legal, valid and binding obli- gation of the Borrower and the Parent, as the case may be, enforceable against the Borrower and the Parent, as the case may be, in accordance with its terms, subject to, or except as enforceability may be limited by, applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally and by general equitable principles (whether enforcement is sought in a proceeding in equity or at law). SECTION 3. Loan Documents. --------------- This Amendment shall be a Loan Document for all purposes. SECTION 4. Effectiveness. -------------- This Amendment shall become effective as of the date hereof when the Administrative Agent shall have received copies hereof that, when taken to- gether, bear the signatures of each of the Borrower, the Parent and the Required Lenders. SECTION 5. Notices. -------- All notices hereunder shall be given in accordance with the pro- visions of Sections 11.01 of the Credit Agreement. SECTION 6. Applicable Law. --------------- THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. SECTION 7. No Novation. ------------ Except as expressly set forth herein, this Amendment shall not by implication or otherwise limit, impair, constitute a waiver of or otherwise affect the rights and remedies of any party under the Credit Agreement, nor alter, modify, amend or in any way affect any of the terms, conditions, obliga- tions, covenants or agreements contained in the Credit Agreement, nor alter, modify, amend or in any way affect any of the terms, conditions, obligations, covenants or agreements contained in the Credit Agreement, all of which are ratified and affirmed in all respects and shall continue in full force and effect. This Amendment shall apply and be effective only with respect to the provisions of the Credit Agreement specifically referred to herein. 2 - ------------------------------------------------------------------------------ SECTION 8. Counterparts. ------------- This Amendment may be executed in two or more counterparts, each of which shall constitute an original but all of which when taken together shall constitute but one contract. Delivery of an executed counterpart of a signature page of this Amendment by facsimile transmission shall be as effective as delivery of a manually executed counterpart of this Amendment. SECTION 9. Headings. --------- Section headings used herein are for convenience of reference only, are not part of this Amendment and are not to affect the construction of, or to be taken into consideration in interpreting, this Amendment. IN WITNESS WHEREOF, the Borrower, the Parent and the Required Lenders have caused this Amendment to be duly executed by their duly authorized officers, all as of the date and year first above written. HILLS STORE COMPANY, by _________________________ Name: Title: HILLS DEPARTMENT STORE COMPANY, by _________________________ Name: Title: CHEMICAL BANK, individually, as Administrative Agent and as Fronting Bank, by _________________________ Name: Title: 3 - ------------------------------------------------------------------------------ NATWEST BANK N.A., individually and as Managing Agent, by ________________________ Name: Title: CREDIT LYONNAIS NEW YORK BRANCH, individually and as Co-Agent, by ________________________ Name: Title: CREDIT LYONNAIS CAYMAN ISLAND BRANCH, individually and as Co-Agent, by ________________________ Name: Title: INTERNATIONAL NEDERLADEN (U.S.) CAPITAL CORPORATION, individu- ally and as Co-Agent, by ________________________ Name: Title: THE CIT GROUP/BUSINESS CREDIT INC., individually and as Co-Agent, by ________________________ Name: Title: 4 - ------------------------------------------------------------------------------- DRESDNER BANK AG, NEW YORK AND GRAND CAYMAN BRANCHES, by ________________________ Name: Title: by ________________________ Name: Title: FIRST SOURCE FINANCIAL LLP, by FIRST SOURCE FINANCIAL, INC., its agent and manager, by ________________________ Name: Title: GENERAL ELECTRIC CAPITAL CORPORATION, by ________________________ Name: Title: NATIONAL CITY BANK, by ________________________ Name: Title: SANWA BUSINESS CREDIT CORPORATION, by ________________________ Name: Title: 5 - ------------------------------------------------------------------------------- TRANSAMERICA BUSINESS CREDIT CORPORATION, by ________________________ Name: Title: BANKAMERICA BUSINESS CREDIT CORPORATION, by ________________________ Name: Title: CONGRESS FINANCIAL SERVICES HOLDING, INC., by ________________________ Name: Title: DEUTSCHE FINANCIAL SERVICES HOLDING, INC., by ________________________ Name: Title: LASALLE BUSINESS CREDIT, INC., by ________________________ Name: Title: MIDLANTIC BANK, by ________________________ Name: Title: 6 - ------------------------------------------------------------------------------- EX-10 3 EXHIBIT 10.3 SECOND AMENDMENT AND CONSENT dated as of January 12, 1996 (this "Amendment") to the Credit Agreement dated as of August 21, 1995, (the "Credit Agreement"), among Hills Stores Company, a Delaware corporation (the "Parent"), Hills Department Store Company, a Delaware corporation (the "Borrower") and a wholly owned subsidiary of the Parent, the financial insti- tutions party thereto (the "Lenders"), the Co- Agents and Managing Agent named in the Credit Agreement and Chemical Bank, as agent for the Lenders (in such capacity, the "Administrative Agent") and as Fronting Bank. WHEREAS, the Borrower and the Parent have requested that the Lenders (a) amend certain terms and provisions of the Credit Agreement and (b) consent to the taking of certain actions by the Borrower and the Parent; WHEREAS, all capitalized terms used but not defined herein shall have the meanings assigned to such terms in the Credit Agreement; and WHEREAS, the Lenders are willing, on the terms, subject to the condi- tions and to the extent set forth below, to effect such amendments and grant such consent. NOW, THEREFORE, in consideration of the premises and the agreements, provisions and covenants herein contained, the Borrower, the Parent and the Lenders hereby agree, on the terms and subject to the conditions set forth herein, as follows: SECTION 1. Amendments. ----------- (a) The definition of the term "Continuation Fee" set forth in Article I of the Credit Agreement is hereby deleted and replaced in its entirety with the following text: "Continuation Fee" shall mean each of (a) a fee not in excess of $7,500,000 to be paid to the holders of Senior Notes in connection with the exercise by the Parent of the option de- scribed in clause (a) of the definition of the term "Extension Election" and (b) a fee not in excess of $8,800,000 to be paid to the holders of the Senior Notes in connection with the exer- cise by the Parent of the option described in clause (b) of the definition of the term "Extension Election". 1 - ------------------------------------------------------------------------------- (b) The definition of the term "Extension Election" set forth in Article I of the Credit Agreement is hereby deleted and replaced in its entirety with the following text: "Extension Election" shall mean each of (a) the Parent's option pursuant to Section 1103(d) of the Senior Note Indenture to extend the redemption date contemplated by Section 1103 of the Senior Note Indenture with respect to the 1995 Change in Control to May 5, 1997, and (b) the Parent's option pursuant to Section 1103(e) of the Senior Note Indenture to extend the re- demption date contemplated by Section 1103 of the Senior Note Indenture with respect to the 1995 Change in Control to July 8, 1998. (c) The definition of the term "Maturity Date" set forth in Article I of the Credit Agreement is hereby deleted and replaced in its entirety with the following text: "Maturity Date" shall mean May 1, 1997; provided, however, that the Maturity Date shall automatically become May 1, 1996, if the Extension Election described in clause (a) of the definition of such term is not exercised on or prior to April 30, 1996; provided further, however, that if either (a) the Extension Election described in clause (b) of the definition of such term is exercised or (b) the Senior Notes are refinanced in full with the proceeds of the Refinancing Notes, the Maturity Date shall automatically be extended to April 30, 1998. SECTION 2. Consents. --------- (a) The Lenders hereby consent to the amendment of the Senior Note Indenture pursuant to terms and provisions substantially identical to the terms and provisions of the Third Supplemental Indenture attached hereto as Exhibit A (the "Third Supplemental Indenture"). (b) The Lenders hereby consent to (i) the payment by the Borrower of a dividend of up to $2,050,000 to the Parent for payment by the Parent to the holders of the Senior Notes of a consent fee in connection with obtaining the consent of such holders to the amendment to the Senior Note Indenture contained in the Third Supplemental Indenture and payment by the Parent of related incidental costs and expenses and (ii) the payment by the Parent of such payments. SECTION 3. Exercise Fee. ------------- The Borrower hereby agrees that if the Parent exercises the Extension Election described in clause (b) of the definition of such term, the Borrower shall pay to the Administrative Agent, for the account of the Lenders, on the date of the payment to the holders of the Senior Notes of the Continua- tion Fee described in clause (b) of the definition of such term (and, in any event, on or before May 7, 1997), an amount equal to 0.75% of the aggregate principal amount of the Commitment of each Lender. 2 - ------------------------------------------------------------------------------ SECTION 4. Representations and Warranties. ------------------------------- Each of the Borrower and the Parent represents and warrants to each of the Lenders that: (a) The execution, delivery and performance by the Borrower and the Parent of this Amendment (i) have been duly authorized by all requisite corporate and, if required, stockholder action and (ii) will not (A) violate (1) any provision of law, statute, rule or regulation, or of the certificate or articles of incorporation or other constitutive documents or by-laws of the Parent or any of its Subsidiaries, (2) any order of any Governmental Authority or (3) any provision of any indenture, agreement or other instrument to which Parent or any of its Subsidiaries is a party or by which any of them or any of their property is or may be bound, (B) be in conflict with, result in a breach of or constitute (alone or with notice or lapse of time or both) a default under any such indenture or any other material agreement or other instrument or (C) result in the creation or imposition of any Lien upon any property or assets of the Parent or any of its Subsidiaries. (b) This Amendment has been duly executed and delivered by the Borrower and the Parent and constitutes a legal, valid and binding obli- gation of the Borrower and the Parent, as the case may be, enforceable against the Borrower and the Parent, as the case may be, in accordance with its terms, subject to, or except as enforceability may be limited by, applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally and by general equitable principles (whether enforcement is sought in a proceeding in equity or at law). (c) The representations and warranties set forth in Article IV of the Credit Agreement are true and correct in all material respects on and as of the date hereof with the same effect as though made on and as of the date hereof, except to the extent that such representations and warranties expressly relate to an earlier date. SECTION 5. Loan Documents. --------------- This Amendment shall be a Loan Document for all purposes. SECTION 6. Effectiveness. -------------- This Amendment shall become effective as of the date hereof when (a) the Administrative Agent shall have received copies hereof that, when taken together, bear the signatures of each of the Borrower, the Parent and the Re- quired Lenders and (b) the Administrative Agent shall have received executed form UCC-3s in the form of Exhibit B hereto; provided, however, that the amend- ments set forth in Section 1(a), Section 1(b) and Section 1(c) of this Amendment shall not become effective until the Third Supplemental Indenture shall have become effective. 3 - ------------------------------------------------------------------------------ SECTION 7. Notices. -------- All notices hereunder shall be given in accordance with the pro- visions of Section 11.01 of the Credit Agreement. SECTION 8. Applicable Law. --------------- THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. SECTION 9. No Novation. ------------ Except as expressly set forth herein, this Amendment shall not by implication or otherwise limit, impair, constitute a waiver of or otherwise affect the rights and remedies of any party under the Credit Agreement, nor alter, modify, amend or in any way affect any of the terms, conditions, obliga- tions, covenants or agreements contained in the Credit Agreement, all of which are ratified and affirmed in all respects and shall continue in full force and effect. This Amendment shall apply and be effective only with respect to the provisions of the Credit Agreement specifically referred to herein. SECTION 10. Counterparts. ------------- This Amendment may be executed in two or more counterparts, each of which shall constitute an original but all of which when taken together shall constitute but one contract. Delivery of an executed counterpart of a signature page of this Amendment by facsimile transmission shall be as effective as de- livery of a manually executed counterpart of this Amendment. SECTION 11. Headings. --------- Section headings used herein are for convenience of reference only, are not part of this Amendment and are not to affect the construction of, or to be taken into consideration in interpreting, this Amendment. IN WITNESS WHEREOF, the Borrower, the Parent and the Required Lenders have caused this Amendment to be duly executed by their duly authorized officers, all as of the date and year first above written. HILLS STORES COMPANY, by _________________________ Name: Title: 4 - ------------------------------------------------------------------------------ HILLS DEPARTMENT STORE COMPANY, by _________________________ Name: Title: CHEMICAL BANK, individually, as Administrative Agent and as Fronting Bank, by _________________________ Name: Title: NATWEST BANK N.A., individually and as Managing Agent, by ________________________ Name: Title: CREDIT LYONNAIS NEW YORK BRANCH, individually and as Co-Agent, by ________________________ Name: Title: CREDIT LYONNAIS CAYMAN ISLAND BRANCH, individually and as Co-Agent, by ________________________ Name: Title: INTERNATIONAL NEDERLADEN (U.S.) CAPITAL CORPORATION, individ- ually and as Co-Agent, by ________________________ Name: Title: 5 - ------------------------------------------------------------------------------- THE CIT GROUP/BUSINESS CREDIT, INC., individually and as Co-Agent, by ________________________ Name: Title: DRESDNER BANK AG, NEW YORK AND GRAND CAYMAN BRANCHES, by ________________________ Name: Title: by ________________________ Name: Title: FIRST SOURCE FINANCIAL LLP, by FIRST SOURCE FINANCIAL, INC., its agent and manager, by ________________________ Name: Title: GENERAL ELECTRIC CAPITAL CORPORATION, by ________________________ Name: Title: NATIONAL CITY BANK, by ________________________ Name: Title: 6 - ------------------------------------------------------------------------------- SANWA BUSINESS CREDIT CORPORATION, by ________________________ Name: Title: TRANSAMERICA BUSINESS CREDIT CORPORATION, by ________________________ Name: Title: BANKAMERICA BUSINESS CREDIT CORPORATION, by ________________________ Name: Title: CONGRESS FINANCIAL SERVICES HOLDING, INC., by _________________________ Name: Title: DEUTSCHE FINANCIAL SERVICES HOLDING CORPORATION, by _________________________ Name: Title: LASALLE BUSINESS CREDIT, INC., by ________________________ Name: Title: 7 - ------------------------------------------------------------------------------- MIDLANTIC BANK, by ________________________ Name: Title: 8 - ------------------------------------------------------------------------------ EX-10 4 EXHIBIT 10.9 EXECUTIVE EMPLOYMENT AGREEMENT ------------------------------ EXECUTIVE EMPLOYMENT AGREEMENT made as of February 7, 1996 among Hills Stores Company, a Delaware corporation (the "Company), Hills Department Store Company, a Delaware corporation and wholly-owned subsidiary of the Company (the "Subsidiary"), each having its principal office at 15 Dan Road, Canton, Massa- chusetts 02021-9128, and Gregory K. Raven (the "Executive"), an individual residing at the address specified on the signature page hereof. The Company and the Subsidiary each desire to employ the Executive in the capacities of President and Chief Executive Officer, and the Executive desires to be so employed by the Company and the Subsidiary, in each case subject to the terms and conditions set forth in this agreement (the "Agree- ment"). Now, therefore, in consideration of the mutual covenants hereinafter set forth and other good and valuable consideration the receipt and sufficiency of which is hereby acknowledged, the Company and the Executive intending to be legally bound hereby agree as follows: 1. Employment; Term. ---------------- The Company and the Subsidiary each hereby employ the Executive, and the Executive hereby accepts such employment and agrees to serve the Company and the Subsidiary, upon the terms and conditions hereinafter set forth, for a term commencing on February 8, 1996 (the "Commencement Date") and terminating on January 30, 1999 unless terminated earlier in accordance with Section 6; provided that such term shall thereafter be extended from time to time for addi- tional periods of one fiscal year on the date it would otherwise expire unless the Executive or the Company or the Subsidiary gives notice not less than 90 days prior to such date that it elects to let this Agreement expire without ex- tension on such date (as so extended, the "Term"). 2. Position; Conduct. ----------------- (a) During the Term, the Executive will hold the titles and offices of, and serve in the positions of, President and Chief Executive Officer of the Company and the Subsidiary. The Executive shall report to the Board of Directors of the Company and the Subsidiary and shall perform such specific duties and service of a chief executive nature (including service as an officer, director or equivalent position of any subsidiary, affiliated company or venture of the Company, without additional compensation) as they shall reasonably request consistent with the Executive's position. (b) During the Term, the Executive agrees to (i) devote his full time and attention and best efforts to the business and affairs of the Company and the Subsidiary and to faithfully and diligently perform, to the best of his ability, all of his duties and responsibilities; (ii) abide by all applicable policies of the Company and the Subsidiary from time to time in 1 - ------------------------------------------------------------------------------ effect provided that such policies are reasonable and comply with applicable law; and (iii) not take any action or conduct himself in any manner which would be reasonably likely to harm the reputation or goodwill of the Company or the Subsidiary. Nothing in this Section shall preclude the Executive from devoting reasonable time and attention to (A) serving, with the prior approval of the Board of Directors of the Company and the Subsidiary, as director, trustee or member of a committee of any organization; (B) engaging in charitable and commu- nity activities; and (C) managing his personal investments and affairs; provided that such activities do not involve any material conflict of interest with the interests of the Company or individually or collectively interfere materially with the performance of his duties and responsibilities as contemplated under this Agreement. 3. Boards of Directors. ------------------- While it is understood that the right to elect directors of the Company is by law vested in the stockholders and directors of the Company, it is nevertheless mutually contemplated that, subject to such rights, the Executive will be elected to serve as a member of the Company's Board of Directors promptly following the Commencement Date. The Company will use its reasonable efforts to cause such election, including by (i) obtaining the election of the Executive to fill a vacancy on the Board of Directors of the Company until the next annual meeting of stockholders of the Company; (ii) by expanding the size of the Board of Directors of Company to create such vacancy, if necessary, and (iii) by nominating the Executive for reelection to successive terms as a member of the Board of Directors of the Company during the Term. The Company will cause the Executive to be elected as a member of the Board of Directors of the Subsidiary and use its reasonable efforts to retain him as such during the Term. The Executive agrees to serve on the Boards of Directors of the Company and the Subsidiary without additional compensation. 4. Salary; Additional Compensation; Perquisites and Benefits. --------------------------------------------------------- (a) During the Term, the Company and the Subsidiary will pay the Executive a base salary at an annual rate of not less than $700,000 per annum, subject to annual review by the Compensation Committee of the Board of Directors of the Company (the "Compensation Committee") and, in the discretion of such Committee, increased from time to time. Once increased, such salary shall not be decreased. Such salary shall be paid in installments in accor- dance with the Company's standard practice, but not less frequently than monthly. (b) For each fiscal year during the Term, the Executive will be eligible to earn a bonus. The award and amount of such bonus shall be based upon the Compensation Committee's determination of actual performance as measured against goals set by such Committee within 90 days of the commencement of the applicable performance period, which goals shall provide the Executive with the opportunity to earn a bonus upon achievement in full of such goals of 50% of the base salary paid to the Executive during such fiscal year (the "Target Bonus"), subject to approval by the stockholders of the Company to the extent required pursuant to Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"). Such bonus shall be paid within 60 days of the comple- tion of such fiscal year. Notwithstanding the foregoing, for the year ending January 1997, the Executive will receive a bonus of no less than 25% of the base salary paid to the Executive. 2 - ------------------------------------------------------------------------------ (c) During the Term, the Executive will participate in all plans now existing or hereafter adopted for the general benefit of the Company's or the Subsidiary's employees, such as bonuses, stock option or other incentive compensation plans, profit sharing plans, retirement plans, life and health insurance plans, or other insurance plans and benefits (not including, however, bonus, severance or cash incentive arrangements other than those specified in this Agreement), if and to the extent that Executive is and remains eligible to participate thereunder, and subject to the provisions of such plans as the same may be in effect from time to time; provided, however, the Executive shall not be adversely affected by any change to such plans unless such change is applic- able to all senior executives of the Company. The Executive will be included in any Company or Subsidiary benefit plans in which senior executives of the Company and the Subsidiary participate. To the extent permitted by law, the terms of the respective plans (as such terms are currently in effect or may be amended to accommodate the provisions of this sentence) and applicable federal tax restrictions, (x) all waiting periods and vesting periods for such plans of the Company and the Subsidiary will be waived for the Executive and (y) the Executive shall be given such credit for his prior years of service as senior executive officer of a public company as shall be determined in accordance with the implementation of the Benefits Review (as hereinafter defined). (d) The Executive shall be eligible for stock option grants from time to time pursuant to the Company's 1993 Incentive and Non-Qualified Stock Option Plan (the "Option Plan") in accordance with the terms and condi- tions thereof. The Committee designated pursuant to the Option Plan has granted to the Executive, effective upon the Commencement Date, nonqualified options to purchse 300,000 shares of common stock of the Company at an exercise price of $12.00 per share. Such options shall vest as follows: First anniversary of the Commencement Date.......... 25% vested Second anniversary of the Commencement Date......... 50% vested January 30, 1999.................................... 75% vested January 29, 2000.................................... 100% vested Such options shall be exercisable (subject to vesting) for ten years from the date of grant and shall in all respects be subject to the terms and conditions of the Option Plan. Notwithstanding the foregoing, all such options shall be- come immediately exercisable in the event of a Change in Control or if the Executive's employment is terminated by the Company or the Subsidiary other than for Cause (as hereinafter defined), or if such employment is terminated by the Executive for Good Reason (as hereinafter defined). The Company and the Executive shall enter into an Option Agreement in respect of such options in a form reasonably acceptable to the Company and the Executive. (e) The Company shall grant to the Executive, effective upon the Commencement Date, 100,000 restricted shares of Common Stock, which shares shall be subject to divestiture if the Executive's employment shall terminate during the period of restriction. The restrictions shall lapse with respect to 60% of the shares on January 30, 1999 and with respect to the remainder of the shares on January 29, 2000. Notwithstanding the foregoing, all restrictions shall lapse upon either a Change in Control or if the Executive's employment is terminated by the Company or the Subsidiary other than for Cause or if such employment is terminated by the Executive for Good Reason. (f) The Company and the Subsidiary will reimburse Executive, in accordance with their standard policies from time to time in effect, for such reasonable and necessary documented out-of-pocket business expenses as may be incurred by the Executive during the Term in the performance of his duties. 3 - ----------------------------------------------------------------------------- (g) The Executive shall be entitled to a vacation period to be credited and taken in accordance with Company policy from time to time in effect for similarly situated executives, which in any event shall not be less than a total of four weeks per calendar year, beginning with the first calendar year of this Agreement (pro rata as to portions of years). (h) The Executive shall be granted a car allowance of up to $900 per month for lease of a luxury automobile (e.g., Cadillac STS, Jaguar, BMW or Lexus) arranged through the Company in accordance with the Company's automobile leasing program for senior executives. (i) The Executive's rights under this Agreement with respect to the plans, programs, perquisites and policies of the Company and the Subsidiary shall not preclude the Company or the Subsidiary from modifying or terminating any such plan, program, perquisite or policy, subject to the Execu- tive's right, in accordance with the terms of this Agreement, to participate in or be eligible for such program, perquisite or policy as so modified or any re- placement thereof and subject to the provisions of Section 7(c) and Section 7(d) with respect to the Executive's termination of his employment for Good Reason. (j) In the event that any accelerated vesting of the Executive's rights under this Agreement following a Change in Control (as here- inafter defined) results in the imposition of an excise tax payable by the Executive under Section 4999 of the Internal Revenue Code, or any successor pro- vision with respect to "excess parachute payments" within the meaning of Section 280G(b) of the Internal Revenue Code, the Company shall make a cash payment to the Executive in the amount of such taxes and shall also make a cash payment to the Executive in an amount equal to the total of federal, state and local income and excise taxes for which the Executive may be liable on account of the cash payments to be made under this subsection (j). (k) As soon as practicable following the Commencement Date, the Company, in consultation with the Executive and such compensation profes- sionals as the Company deems reasonably appropriate, shall undertake a review (the "Benefits Review") of the compensation of chief executive officers of companies similar to the Company in its size and the character of its operations for the purpose of evaluating (i) the retirement and welfare benefits of the Executive; (ii) the benefits payable to the Executive or his beneficiaries in the event of the Executive's death or Disability (as hereinafter defined) during the Term; (iii) the accrual credit that should be granted to the Executive under the Company's employee benefit plans for his prior years of service as senior executive officer of a public company; and (iv) the benefits under Section 4(c) that should continue to be available to the Executive following the termination of the Executive's employment by the Company without Cause or by the Executive for Good Reason, pursuant to Section 7(c) or Section 7(d), or following the ex- piration of the Term, pursuant to Section 7(e). Based upon the Benefits Review, and as soon as practicable following the conclusion thereof, the Company, consistent with the fiduciary obligations of its Board of Directors and the Compensation Committee, shall implement with respect to the Executive such of the foregoing benefit provisions as are consistent with benefits available to chief executive officers of companies similar to the Company in its size and the character of its operations (such action being referred to herein as the imple- mentation of the Benefits Review). 5. Relocation. ---------- (a) The Executive agrees to relocate his principal residence to an area proximate to the Company's headquarters in Canton, Massachusetts as 4 - ------------------------------------------------------------------------------ soon as practicable after the date of this Agreement. The Company and the Sub- sidiary shall reimburse the Executive for the Executive's reasonable, documented expenses incurred to move the Executive's family and the Executive's family household property from the Executive's current residence to such new resi- dences, including: (i) the cost of moving the Executive's family and its house- hold property, including packing and unpacking expenses; (ii) expenditures for travel and accommodations for visits and commutation to the Canton area by the Executive and his family in connection with such relocation; (iii) the use with- out charge of a two-bedroom corporate apartment proximate to the Company's head- quarters for a period of up to six months pending relocation of the Executive's residence; (iv) one half of the mortgage and real estate taxes on the Execu- tive's current residence after the sixth month following the time that such residence is first put up for sale by the Executive, up to a maximum of $25,000; (v) reasonable and customary brokerage commissions on the sale of the Execu- tive's current residence; (vi) a percentage of the principal amount of any mortgage on the Executive's new residence payable to the lender at the closing of such mortgage, up to a maximum two (2) percentage points; and (vii) to the extent any of the items listed in clause (i) through (vi) is not tax deductible to the Executive, a cash payment to the Executive in the amount of any taxes payable with respect thereto (including any taxes imposed by reason of the pay- ment by the Company to the Executive of the amount of any taxes pursuant to this clause). 6. Termination. ----------- (a) The Term will terminate at the election of the Company or the Subsidiary immediately upon notice from the Company or the Subsidiary to the Executive. (b) The Term will terminate forthwith upon the Executive's death or, upon notice by the Company or the Executive, upon the Executive's Dis- ability. As used herein the term "Disability" means the Executive's inability to perform the Executive's duties and responsibilities as contemplated under this Agreement for a period of more than 180 days, whether or not continuous, during any 365-day period, due to physical or mental incapacity or impairment. A determination of Disability will be made by a physician satisfactory to both the Executive and the Company; provided that if the Executive and the Company cannot agree as to a physician, then each will select a physician and these two together will select a third physician, whose determination as to Disability will be binding on the Executive and the Company. The Executive, the Execu- tive's legal representative or any adult member of the Executive's immediate family shall have the right to present to the Company and such physician such information and arguments on the Executive's behalf as the Executive or they deem appropriate, including the opinion of the Executive's personal physician. Should the Executive become incapacitated, the Executive's employment shall con- tinue and all base salary and other compensation otherwise due to the Executive hereunder shall be continued through the date on which the Executive's employ- ment is terminated for Disability. 7. Severance. --------- (a) In the event that the Term is terminated by the Company or the Subsidiary for Cause, or if the Executive terminates his employment hereunder without Good Reason, the Company and the Subsidiary will pay to the Executive an amount equal to the Executive's accrued but unpaid base salary pursuant to Section 4(a) through the date of such termination, accrued but un- 5 - ------------------------------------------------------------------------------ paid bonus for any completed fiscal year, additional salary payments in lieu of the Executive's accrued and unused vacation for the current calendar year (on a pro rata basis), unreimbursed business expenses in accordance with Section 4(f), unreimbursed medical, dental and other employee benefit expenses incurred in accordance with the applicable plans and any amount owed pursuant to Section 5 of this Agreement and any and all other benefits provided under the terms of the applicable employee plans to terminated employees (hereinafter referred to as the "Standard Termination Payments"). (b) Upon the Executive's death, the Company and the Sub- sidiary shall pay the Standard Termination Payments to the Executive's estate, and any and all death benefits under the Company's benefit plans or as shall be implemented pursuant to the Benefits Review shall be paid to the Executive's beneficiary or beneficiaries as duly designated in writing by the Executive. Upon termination of the Term for Disability, the Company and the Subsidiary shall pay to the Executive the Standard Termination Payments and any and all other employee benefits as may be provided under the terms of the applicable employee benefit plans or as shall be implemented pursuant to the Benefits Review. (c) Subject to Section 7(d), in the event that the Company or the Subsidiary terminate the Executive's employment under this Agreement without Cause and other than by reason of his death or Disability or the Executive terminates his employment hereunder for Good Reason, so long as the Executive shall not have breached the Executive's obligations to the Company under Section 8 and Section 9 hereof (without limitation to any other remedy available to the Company), the Company shall (i) pay the Executive a lump sum payment equal to two times his base pay as then in effect pursuant to Section 4(a) for the current fiscal year and (ii) continue in effect the Executive's benefits under Section 4(c) and Section 4(h) or their equivalent for a period equal to the greater of two years and the remainder of the Term of this Agree- ment, provided that the benefits included in this clause (ii) (the "Severance Benefits") shall include only medical benefits, dental benefits, life insurance, disability benefits and car allowance and such other benefits as are designated pursuant to the implementation of the Benefits Review. (d) If, following a Change in Control, the Company or the Subsidiary terminates the Executive's employment under this Agreement without Cause or the Executive terminates his employment hereunder for Good Reason with- in two years of the Change in Control, the Company shall (i) pay the Executive a lump sum payment equal to the sum of three times the amount of the Executive's base pay as then in effect pursuant to Section 4(a) for the current fiscal year and three times the Executive's bonus pursuant to Section 4(b) for the current fiscal year (assuming all performance goals had been achieved) and (ii) continue in effect the Severance Benefits for a period equal to the greater of two years and the remainder of the Term of this Agreement; provided, however, that, in the case of the Executive's termination of his employment for Good Reason notice of such termination shall have been delivered to the Company within 60 days following the occurrence of the circumstances giving rise to such Good Reason; provided further that if the Executive terminates his employment here- under following a Change in Control for Good Reason as defined in clause (iv) of Section 7(g), the provisions of Section 7(c) and not this Section 7(d) shall apply to such termination. (e) If the employment of the Executive continues hereunder without termination to the end of the Term (as the Term may be extended pursuant to the proviso contained in Section 1), and the Term is not thereafter extended pursuant to the proviso to Section 1, the Company shall (i) pay the Executive a lump sum payment equal to two times his base pay as in effect pursuant to Section 4(a) for the then ended fiscal year and (ii) continue in effect the 6 - ----------------------------------------------------------------------------- Severance Benefits for a period of one year; provided, however, that the Execu- tive shall not be entitled to any payment or benefits pursuant to this Section 7(e) if the Executive has given notice of his election to let this Agreement expire pursuant to the aforementioned proviso. (f) As used herein, the term "Cause" means: (i) The Executive's willful or intentional failure or refusal to perform or observe any of the Executive's material duties, responsibilities or obligations set forth in, or as contem- plated under, this Agreement, if such breach is not cured within 30 days after notice thereof to the Executive by the Company or the Subsidiary; (ii) Any willful or intentional act or failure to act involving fraud, theft, embezzlement, dishonesty or moral turpitude (collectively, "Fraud") affecting the Comapny or the Sub- sidiary or any supplier or employee of the Company or the Subsidiary; or (iii) Conviction of (or a plea of nolo contendere to) an offense which is a felony in the jurisdiction involved or which is a misdemeandor in the jurisdiction involved but which in- volves Fraud; (g) As used herein, termination of employment hereunder by the Executive for "Good Reason" shall mean the Executive's termination of his employment upon notice to the Company following (i) assignment to the Executive of duties materially inconsistent with the Executive's position as described in Section 2(a); (ii) the Executive's being removed from such position; (iii) any change in any employee benefit plan in effect and applic- able to the Executive immediately following the implementation of the Benefits Review and such change, taking into account any offsetting increase in compensation or benefits, constitutes a material reduction in the Executive's compensation considered as a whole; (iv) the change in the location of the Company's principal executive offices to a location outside of the Boston metropolitan area; or (v) a material breach by the Company of the terms of this Agreement, in each case without the Executive's consent, which termination shall be effective 30 days after prompt notice of such circumstances by the Executive to the Company, if such circumstances have not been cured prior to such date. (h) As used herein, a "Change in Control" shall mean the occurrence of any one of the following events: (i) any "person," as such term is used in Sections 3(a)(9) and 13(d) of the Securities Exchange Act of 1934, other than Dickstein Partners Inc. and its Affiliates becomes a "beneficial owner," as such term is used in Rule 13d-3 promulgated under such Act, of 30% or more of the Voting Stock of the Company or the majority of the Board of Directors of the Company consists of 7 - ------------------------------------------------------------------------------ individuals other than Incumbent Directors, which term means the members of the Board on the date of this Agreement; provided that any person becoming a director subsequent to such date whose election or nomination for election was supported by a majority of the directors who then comprised the Incumbent Directors shall be considered to be an Incumbent Director; (ii) the Company or the Subsidiary adopts any plan of liquidation providing for the distribution of all or substantially all of the assets of the Company on a consolidated basis; (iii) the Company merges or combines with another company and, immediately after the merger or combination, the stockholders of the Company immediately prior to the combination hold, directly or indirectly, (1) in the event the Company is the surviving corporation 50% or less of the Voting Stock of the combined company or (2) in the event the Company is not the surviving corporation 50% or less of the Voting Stock or other ownership interests of the entity or entities, if any, that succeed to the business of the Company; or (iv) the Company sells all or substantially all of its assets deter- mined on a consolidated basis. As used herein, an "Affiliate" of a person or other entity shall mean a person or other entity that directly or indirectly controls, is controlled by or is under common control with the person or other entity specified (including with- out limitation any investment entity managed by the person or other entity specified or a person or entity that directly or indirectly controls, is controlled by or is under common control with the person or other entity speci- fied). As used herein, "Voting Stock" shall mean capital stock of any class or classes having general voting power under ordinary circumstances, in the absence of contingencies, to elect the directors of a corporation. (i) In the event that the Term is terminated for any reason, payments provided in this Section 7 shall constitute complete satisfaction of all obligations of the Company and the Subsidiary to the Executive pursuant to this Agreement. Upon any such termination, the Executive shall cease to be an employee of the Company and Subsidiary for all purposes, and (except as other- wise expressly set forth in this Section 7) the Company and the Subsidiary shall have no obligation to provide the Executive with any employee benefits or perquisites hereunder. The Executive's rights set out in this Section 7 shall constitute the Executive's sole and exclusive rights and remedies as a result of the Executive's actual or constructive termination of employment without Cause. 8. Confidential Information. ------------------------ (a) The Executive acknowledges that the Company, its sub- sidiaries, affiliated companies and ventures from time to time (collectively, including the Company, the "Company Affiliates") own and have developed and com- piled, and will own, develop and compile, certain proprietary techniques and confidential information which have great value to their business ("Confidential Information"). Confidential Information includes not only information disclosed by the Company Affiliates to the Executive, but also information developed or learned by the Executive during the course or as a result of employment here- under, which information the Executive acknowledges is and shall be the sole and exclusive property of the Company Affiliates. Confidential Information includes all proprietary information that has or could have commericial value or other 8 - ------------------------------------------------------------------------------ utility in the business in which the Company Affiliates are engaged or contem- plate engaging, and all proprietary information of which the unauthorized dis- closure could be detrimental to the interests of any of the Company Affiliates, whether or not such information is specifically labelled as Confidential Information by a Company Affiliate. By way of example and without limitation, Confidential Information includes any and all information developed, obtained or owned by any Company Affiliate concerning trade secrets, techniques, know-how (including designs, plans, procedures, merchandising know-how, processes and research records), software, computer programs, innovations, discoveries, im- provements, research, development, test results, reports, specifications, data, formats, marketing data and plans, business plans, strategies, forecasts, unpub- lished financial information, orders, agreements and other forms of documents, price and cost information, merchandising opportunities, expansion plans, designs, plans, budgets, projections, customer, supplier and subcontractor identities, characteristics and agreements, and salary, staffing and employment information. Notwithstanding the foregoing, Confidential Information shall not in any event include information which (i) was generally known or generally available to the public prior to its disclosure to the Executive; (ii) becomes generally known or generally available to the public subsequent to disclosure to the Executive through no wrongful act of any person or (iii) which the Executive is required to disclose by applicable law or regulation (provided that the Executive provides the Company with prior notice of the contemplated disclosure and reasonably cooperates with the Company and the Subsidiary at their expense in seeking a protective order or other appropriate protection of such informa- tion). (b) The Executive acknowledges and agrees that in the per- formance of his duties hereunder the Company Affiliates will from time to time disclose to him and entrust him with Confidential Information. The Executive also acknowledges and agrees that the unauthorized disclosure of Confidential Information, among other things, may be prejudicial to the interests of the Company Affiliates, an invasion of privacy and an improper disclosure of trade secrets. The Executive agrees that he shall not, directly or indirectly, use, make available, sell, disclose or otherwise communicate to any corporation, partnership, individual or other third party, other than in the course of his assigned duties and for the benefit of the Company Affiliates, any Confidential Information, either during the Term or thereafter. (c) In the event the Executive's employment with the Company and the Subsidiary ceases for any reason, the Executive will not remove from the premises of the Company or the Subsidiary without their prior written consent any records, files, drawings, documents, equipment, materials or writings re- ceived from, created for or belonging to the Company Affiliates, including those which relate to or contain Confidential Information, or any copies thereof. Upon request or when the Executive's employment with the Company and the Subsidiary terminates, the Executive will immediately deliver the same to the Company. (d) During the Term, the Executive will disclose to the Company and the Subsidiary all designs, inventions and business strategies or plans developed by the Executive during such period which relate directly or indirectly to the business of the Company Affiliates, including without limita- tion any process, operation, product or improvement. The Executive agrees that all of the foregoing are and will be the sole and exclusive property of the Company and the Subsidiary and that the Executive will at the request and cost of the Company or the Subsidiary do whatever is necessary to secure the rights thereto, by patent, copyright or otherwise, to the Company or the Subsidiary. 9 - ------------------------------------------------------------------------------ (e) The Executive, the Company and the Subsidiary agree that the Executive shall not disclose to any Company Affiliate or use for the benefit of any Company Affiliate, any information which may constitute trade secrets or confidential information of third parties, to the extent the Executive has any such secrets or information. (f) The provisions of this Section 8 shall survive the termination of this Agreement and the Term. 9. Restrictive Covenants. --------------------- (a) The Executive acknowledges and agrees (i) that the services to be rendered by the Executive for the Company and the Subsidiary are of a special, unique, extraordinary and personal character, (ii) that the Execu- tive has and will continue to develop a personal acquaintance and relationship with one or more of the employees, suppliers and independent contractors of the Company Affiliates, which may constitute the primary or only contact of the Company or the Subsidiary with such employees, suppliers and independent con- tractors, and (iii) that the Executive will be uniquely identified by employees, suppliers, independent contractors and retail customers with the Company and the Subsidiary. Consequently, the Executive agrees that it is fair, reasonable and necessary for the protection of the business, operations, assets and repu- tation of the Company and the Subsidiary that the Executive make the covenants contained in this Section 9. (b) The Executive agrees that, during the Term and for 12 months thereafter, the Executive shall not, directly or indirectly, own, manage, operate, join, control, participate in, invest in or otherwise be connected or associated with, in any manner, including as an officer, director, employee, partner, consultant, advisor, proprietor, trustee or investor, any Competing Business in the Territory; provided however that nothing contained in this Section 9(b) shall prevent the Executive from owning less than 2% of the voting stock of a publicly held corporation for investment purposes. For purposes of this Section 9(b), the term "Competing Business" shall mean a business engaged in the operation of discount retailing department stores. For purposes of this Section 9(b), the term "Territory" means any location within a radius of 10 miles from any location at which any Company Affiliate then operates a discount retailing department store and or any location at which, at the date of termina- tion of the Executive's employment hereunder, any Company Affiliate has taken substantial steps toward establishing such operations. (c) The Executive agrees that, during the Term and for 24 months thereafter, the Executive shall not, directly or indirectly, (i) seek to employ or engage, or assist anyone else to seek to employ or engage, any person who at any time during the year preceding the termination of the Executive's employment here- under was in the employ of any of the Company Affiliates or was an independent contractor providing material merchandising, marketing, sales, financial or management consulting services in connection with the business of any of the Company Affiliates and with whom the Executive had regular contact; or (ii) interfere in any manner in the relationship of any Company Affiliate with any of its suppliers or independent contractors, whether or not the relationship between such Company Affiliate and such supplier or independent contractor was originally established in whole or in part by the Executive's efforts. 10 - ------------------------------------------------------------------------------- As used in this Section 9, the "supplier" shall mean and include any individual, proprietorship, partnership, corporation, joint venture, trust or any other form of business entity which is then a supplier of any Company Affiliate or which was a supplier at any time during the one-year period immediately preceding the date of termination of employment. (d) The provisions of this Section 9 shall survive the termination of this Agreement and the Term. 10. Specific Performance. -------------------- The Executive acknowledges that the Company Affiliates would sustain irreparable injury in the event of a violation by the Executive of any of the provisions of Section 8 or Section 9 hereof, and by reason thereof the Executive consents and agrees that if the Executive violates any of the provi- sions of Section 8 or Section 9, in addition to any other remedies available, the Company or the Subsidiary shall be entitled to a decree specifically enforcing such provisions, and shall be entitled to a temporary and permanent injunction restraining the Executive from committing or continuing any such violation, from any arbitrator duly appointed in accordance with the terms of this Agreement or any court of competent jurisdiction, without the necessity of proving actual damages, posting any bond, or seeking arbitration in any form. 11. Withholding. ----------- The parties understand and agree that all payments to be made by the Company and the Subsidiary pursuant to this Agreement shall be subject to all applicable tax withholding obligations of the Company and the Subsidiary. 12. No Conflict. ----------- The Executive represents and warrants that the Executive is not party to or subject to any agreement, contract, understanding, covenant, judg- ment or decree or under any obligation, contractual or otherwise, in any way restricting or adversely affecting the Executive's ability to act for the Company and the Subsidiary in all of the respects contemplated hereby. 13. Notices. ------- All notices required or permitted hereunder will be given in writing by personal delivery; by confirmed facsimile transmission (with a copy dispatched by express delivery or registered or certified mail hereunder); or by express delivery via express mail or any reputable express courier service, in each case addressed: to the Company and the Subsidiary: Hills Stores Company 15 Dan Road Canton, MA 02021-9128 Attention: Corporate Counsel Fax: 617-821-6966 Confirm: 617-821-1000 11 - ------------------------------------------------------------------------------ and to the Executive at the address set forth on the signature page or, as to each party, at such other address as may be designated by notice in the manner set forth herein. Notices which are delivered personally, by confirmed fac- simile transmission, or by courier as aforesaid, will be effective on the date of delivery. 14. Miscellaneous: ------------- (a) The failure of any party at any time to require perfor- mance of any provision hereunder will in no way affect the right of that or any other party thereafter to enforce the same or to enforce any of the other provi- sions in this Agreement; nor will the waiver by any party of the breach of any provision hereof be taken or held to be a waiver of any prior or subsequent breach of such provision or as a waiver of the provision itself. (b) This Agreement is a personal contract calling for the provision of unique services by the Executive, and the Executive's rights and obligations hereunder may not be sold, transferred, assigned, pledged or hypothecated by the Executive. In the event of any attempted assignment or transfer of rights hereunder by the Executive contrary to the provisions hereof (other than as may be required by law), the Company and the Subsidiary will have no further liability for payments hereunder. The rights and obligations of the Company and the Subsidiary hereunder will be binding upon and run in favor of the successors and assigns of the Company and the Subsidiary. (c) Each of the covenants and agreements set forth in this Agreement is a separate and independent covenant which has been separately bargained for and the parties hereto intend that the provisions of each such covenant shall be enforced to the fullest extent permissible. Should the whole or any part or provision of any such separate covenant be held or declared in- valid, such invalidity shall not in any way affect the validity of any other such covenant or of any part or provision of the same covenant not also held or declared invalid. If any covenant shall be found to be invalid but would be valid if some part thereof were deleted or the period or area of application reduced, then such covenant shall apply with such minimum modification as may be necessary to make it valid and effective. (d) This Agreement has been made and will be governed in all respects by the laws of the State of Massachusetts applicable to contracts made and to be wholly performed within such state, and the parties hereby irrevocably consent to the jurisdiction of the courts of the State of Massachusetts and federal courts located therein for the purpose of enforcing this Agreement. (e) Any controversy arising out of or relating to this Agreement or the breach hereof shall be settled by arbitration in Boston, Massa- chusetts by a single neutral arbitrator who shall be a retired federal or state court judge in accordance with the Commercial Arbitration Rules then obtaining of the American Arbitration Association and judgment upon the award rendered may be entered in any court having jurisdiction thereof, except that in the event of any controversy relating to any violation or alleged violation of any provision of Section 8 or Section 9 hereof, the Company and the Subsidiary shall in their sole discretion be entitled to seek injunctive relief from a court of competent jurisdiction without any requirement to seek arbitration. The parties hereto agree that any arbitral award may be enforced against the parties to an arbitration proceeding or their assets wherever they may be found. 12 - ------------------------------------------------------------------------------ (f) This Agreement sets forth the entire understanding between the parties as to the subject matter of this Agreement and merges and supersedes all prior agreements, commitments, representations, writings and discussions among the parties with respect to that subject matter. This Agree- ment may be terminated, altered, modified or changed only by a written instru- ment signed by all of the parties hereto. (g) The Section heading contained herein are for purposes of convenience only and are not intended to define or list the contents of the Sections. (h) The provisions of this Agreement which by their terms call for performance subsequent to termination of the Term hereunder, or of this Agreement, shall so survive such termination. (i) The Company shall pay to the Executive all costs incurred by the Executive in any proceeding for the successful enforcement of the terms of this Agreement, including reasonable costs of investigation and attorneys' fees and expenses. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. HILLS STORES COMPANY By: /s/ Mark B. Dickstein _________________________ Name: Title: HILLS DEPARTMENT STORE COMPANY By: /s/ Mark B. Dickstein _________________________ Name: Title Accepted and Agreed: /s/ Gregory K. Raven _________________________ Gregory K. Raven Address for notices: 7385 McShu Lane - ------------------------- Hudson, Ohio 44236 - ------------------------- Fax: Confirm: 13 - ------------------------------------------------------------------------------ EX-10 5 EXHIBIT 10.10 CONSULTING AGREEMENT made as of February 8, 1996, by and between Hills Department Store Company, a Delaware corporation having its principal office at 15 Dan Road, Canton, Massachusetts ("Principal Office"), and Hills Stores Company (the "Company"), a Delaware corporation having its principal office at the Principal Office, and Chaim Y. Edelstein the ("Consultant"), who resides at the address specified in Schedule A. WHEREAS, Consultant is presently working for the Company, in a "Senior Advisory Position" as a consultant; and WHEREAS, the Company desires to secure the continued services of Consultant in such Senior Advisory Position, and Consultant is willing to continue to provide such services. NOW, THEREFORE, in consideration of the premises and the mutual covenants hereinafter contained, the Company and Consultant agree as follows: SECTION 1. Engagement. ---------- The Company hereby agrees to continue to engage Consultant in the Senior Advisory Position, and Consultant hereby accepts such engagement. The Consul- tant agrees to commit a substantial portion of his professional time to pro- viding consulting services to the Company hereunder. SECTION 2. Term. ---- The engagement of Consultant by the Company as provided in Section 1 shall continue to February 7, 1997. SECTION 3. Compensation and Expenses. ------------------------- (a) Salary. ------ Consultant shall receive the consulting fee, specified in Schedule A. Consultant will be paid in equal monthly installments on the 1st day following each calendar month in which consultant's services are provided to the Company. (b) Bonuses. ------- Consultant shall receive the bonus specified in Schedule A, upon the terms and conditions specified in Schedule A. Such bonus shall be paid to Consultant within sixty (60) days after the end of the Company's 1996 fiscal year. (c) Options. ------- Consultant shall receive the stock options specified in Schedule A, subject to the terms of the Company's 1993 Incentive and Nonqualified Stock Option Plan and the actual Option Grant dated February 7, 1996. 1 - ------------------------------------------------------------------------------ (d) Restricted Stock. ---------------- Consultant shall receive the restricted stock specified in Schedule A, subject to the terms of the Restricted Stock Agreement dated as of February 8, 1996. (e) Expenses. -------- The Company shall reimburse Consultant for all reasonable and documented out-of-pocket expenses incurred by Consultant in con- nection with the business of the Company and in performance of Consultant's duties under this Agreement. SECTION 4. Termination by the Company. -------------------------- The Company shall have the right to terminate Consultant's engagement at any time for "Cause." For purposes of this Agreement, "Cause" shall mean (a) termination by action of a majority of the members of the Hills Stores Company's Board of Directors, because of: (i) The Consultant's willful or intentional failure or refusal to perform or observe any of the Consultant's material duties, responsibilities or obligations set forth in, or as contemplated under, this Agreement, if such breach is not cured within 30 days after notice thereof to the Consultant by the Company; (ii) Any willful or intentional act or failure to act involving fraud, theft, embezzlement, dishonesty or moral turpitude (collectively, "Fraud") affecting the Company or any supplier or employee of the Company; or (iii) Conviction of (or a plea of nolo contendere to) an offense which is a felony in the jurisdiction involved or which is a misdemeanor in the jurisdiction involved but which involves Fraud. SECTION 5. Termination by Death. -------------------- In the event Consultant dies during the Term, Consultant's engagement shall terminate. SECTION 6. Termination by Disability. ------------------------- In the event that Consultant suffers a disability which prevents Consultant from substantially performing Consultant's duties under this Agreement for a period of a least ninety (90) consecutive or nonconsecutive calendar days within any three hundred sixty-five (365) calendar day period, the Company shall have the right, after such ninety (90) calendar day period has elapsed, to terminate Consultant's engagement hereunder. SECTION 7. Termination by Consultant. ------------------------- Notwithstanding any other provision of this Agreement, Consultant may terminate Consultant's engagement following a Change in Control, by written notice served upon the Company within thirty (30) calendar days after Consultant has knowledge of an event constituting "Good Reason." 2 - ------------------------------------------------------------------------------ (a) For purposes of this Agreement, the term "Change in Control" shall mean any one of the following events: (i) any "person" as such term is used in Sections 3(a)(9) and 13(d) of the Securities Exchange Act of 1934, other than Dickstein Partners Inc. and its Affiliates becomes a "beneficial owner," as such term is used in Rule 13-d-3 promogulated under such Act, of 30% or more of the voting stock of Hills Stores Company or the majority of the Board of Directors of Hills Stores Company consist of individuals other than Incumbent Directors, which term means the members of the Board on the date of this Agreement; provided that any person becoming a director subsequent to such date whose election or nomination for election was supported by a majority of the directors who then comprised the Incumbent Directors shall be considered to be an Incumbent Director; (ii) the Company adopts any plan of liquidation providing for the distribution of all or substantially all of the assets of the Company on a consolidated basis; (iii) Hills Stores Company merges or combines with another company and, immediately after the merger or combination, the stock- holders of the Company immediately prior to the combination hold, directly or indirectly, (1) in the event Hills Stores Company is the surviving corporation 50% or less of the voting stock of the combined company or (2) in the event Hills Stores Company is not the surviving corporation 50% or less of the voting stock or other ownership interests of the entity or entities, if any, that succeed to the business of Hills Stores Company; or (iv) the Company sells all or substantially all of its assets determined on a consolidated basis. For purposes of this Agreement, the term "Good Reason" shall mean: (i) any action by the Company which results in a diminution of Consultant's Senior Advisory Position or (ii) any failure by the Company to timely pay the amounts or pro- vide the benefits prescribed by this Agreement, other than an isolated failure not occurring in bad faith and which is remedied promptly after receipt of written notice thereof given by Consultant. (b) In the event of (i) termination of this Agreement by the Company other than for Cause or (ii) termination of this Agreement by Con- sultant for Good Reason after a Change in Control, the Company shall continue to pay Consultant, the amounts described in Section 3 and in the manner set forth in Section 3 of this Agreement throughout the term of the Agreement. SECTION 8. Acceleration and Expiration of Options. -------------------------------------- (a) Any options to purchase the Common Stock of the Company ("Options") granted by the Company to Consultant that have not yet become exercisable shall become exercisable upon the earliest to occur of (i) the termination of Consultant's engagement as a re- 3 - ------------------------------------------------------------------------------ sult of Consultant's death or disability; (ii) the termination by Consultant with Good Reason; after a Change in Control. Notwith- standing the foregoing, all Options, whether currently exercisable or not, shall expire and cease to be exercisable as follows: (i) if the Company terminates Consultant's engagement for Cause, immediately upon the effective date of such termination; (ii) if Consultant dies while engaged by the Company, six (6) calendar months after Consultant's death; and (iii) if Consultant's engagement is terminated as a result of dis- ability, six (6) calendar months after the effective date of such termination. (b) Notwithstanding the termination of this Consulting Agreement (pro- vided Consultant's stock options, as shown on Schedule A hereto, have not been otherwise terminated pursuant to the terms of this Consulting Agreement or the terms of the 1993 Incentive and Non- qualified Stock Option Plan) as long as Consultant is available, willing and able to provide the Consulting services contemplated by this Agreement, the stock options shown on Schedule A shall re- main in effect and all vesting and exercise rights of Consultant with respect to these options shall continue. SECTION 9. Accelerated Vesting of Restricted Stock. --------------------------------------- Consultant shall receive restricted stock grants from the Company which are subject to periodic vesting. In the event Consultant's engagement with the Company is terminated (a) as a result of Consultant's death or disability or (b) by Consultant with good reason after a Change in Control, then all restricted stock held by Consultant, not otherwise vested, shall become fully vested, subject to the terms of the restricted stock agreement between the Company and Consultant. SECTION 10. No Mitigation; No Offset. ------------------------ Consultant shall be under no obligation to mitigate damages or the amount of any payment provided for under this Agreement by seeking another engagement or otherwise and there shall be no offset against amounts due Consultant under this Agreement on account of any remuneration attributable to any subsequent engagement that Consultant may obtain. SECTION 11. Covenants of Consultant. ----------------------- (a) Consultant recognizes that the knowledge of, information con- cerning and relationship with customers, suppliers and agents, and the knowledge of the Company's business methods, systems, plans and policies which Consultant will establish, receive or obtain as a consultant to the Company, are valuable and unique assets of the business of the Company. Consultant will not, during or within two (2) years after the Term, disclose any such knowledge or in- formation pertaining to the Company, its customers, suppliers, agents, policies or other aspects of the business, for any reason or purpose, whatsoever except pursuant to Consultant's duties hereunder or as otherwise authorized by the Company in writing. The foregoing restriction shall not apply, following termination 4 - ------------------------------------------------------------------------------ of Consultant's engagement hereunder, to knowledge or information which (i) is in or enters the public domain without violation of this Agreement or other obligations of confidentiality by Consul- tant or his agents or representatives, (ii) Consultant can demon- strate was in his possession on a nonconfidential basis prior to the commencement of his engagement with the Company, or (iii) Consultant can demonstrate was received or obtained by him on a non-confidential basis from a third party who did not acquire it wrongfully or under an obligation of confidentiality, subsequent to the termination of his engagement hereunder. (b) All memoranda, notes, records or other documents made or compiled by Consultant or made available to Consultant while engaged con- cerning customers, suppliers, agents or personnel of the Company, or the Company's business methods, systems, plans and policies, shall be the Company's property and shall be delivered to the Company on termination of Consultant's engagement or at any other time on request. (c) During the term of the Consultant's engagement and for two (2) years thereafter, Consultant shall not, except pursuant to and in furtherance of his duties hereunder, directly or indirectly solicit or initiate contact with any employee of the Company with a view to inducing or encouraging such employee to leave the em- ploy of the Company for the purpose of being hired by Consultant, an employer affiliated with him or any competitor of the Company. (d) Consultant acknowledges that the provisions of this section are reasonable and necessary for the protection of the Company and that the Company will be irrevocably damaged if such covenants are not specifically enforced. Accordingly, Consultant agrees that, in addition to any other relief to which the Company may be en- titled in the form of actual or punitive damages, the Company shall be entitled to seek and obtain injunctive relief from a court of competent jurisdiction for the purposes of restraining Consultant from any actual or threatened breach of such covenants. (e) In the event that, following the termination of this Agreement, Consultant is entitled to receive any further payments other than for compensation or other amounts accrued prior to termination or expiration of this Agreement, such payments shall nonetheless cease and the Company shall no longer be obligated to make such payments if there is a material breach of any of the covenants in this section and Consultant shall forthwith upon demand of the Company repay any such amounts paid to Consultant subsequent to the date such breach occurred. SECTION 12. Entire Agreement. ---------------- This Agreement contains the entire understanding of the parties with respect to the subject matter thereof, and, supersedes and replaces in its en- tirety any and all prior agreements and arrangements of the parties with respect to the subject matter hereof. 5 - ------------------------------------------------------------------------------ SECTION 13. Governing Law. ------------- This Agreement and all matters and issues collateral thereto shall be governed by the laws of The Commonwealth of Massachusetts applicable to con- tracts performed entirely therein. SECTION 14. Severability. ------------ If any of this Agreement, as applied to either party or to any circum- stance, shall be adjudged by a court to be void and unenforceable, the same shall in no way affect any other provision of this Agreement or the validity or enforceability thereof. SECTION 15. Notices. ------- All notices or other communications hereunder shall be given in writing and shall be deemed given if served personally or mailed by registered or certified mail, return receipt requested, to the parties at their respective addresses indicated below, or at such other address or addresses as they may hereafter designate in writing To the Company c/o: Hills Stores Company 15 Dan Road Canton, MA 02021-9128 ATTN: Vice President-Secretary & Corporate Counsel To the Consultant: At the address noted on Exhibit A. IN WITNESS WHEREOF, the parties have executed this Agreement on February 7, 1996. /s/ Chaim Edelstein ------------------------------ Chaim Edelstein HILLS DEPARTMENT STORE COMPANY HILLS STORES COMPANY BY:/s/ Gregory K. Raven ------------------------------ President 6 ______________________________________________________________________________ SCHEDULE A TO CONSULTING AGREEMENT BETWEEN HILLS DEPARTMENT STORE COMPANY AND CONSULTANT Name Chaim Y. Edelstein Address 1040 Park Avenue - 12E New York, NY 10028 Title of Position Senior Advisory Position and Consultant for Hills Department Store Company and Hills Stores Company Term of Engagement February 8, 1996 through February 7, 1997 Annual Consulting Fee $400,000 - payable in equal monthly installments of $33,333.00. Bonuses If the Consultant provides or is available to provide consulting service to the Company throughout the term of this Agreement, then Consultant shall be entitled to a performance bonus in accordance with the schedule set forth herein below, provided the Company's EBITDA goals for the year are achieved: Bonus to be Paid $100,000 - If 1996 Bank Plan EBITDA goal is achieved by Company. $200,000 - If 1996 Operating Plan EBITDA goal is achieved by the Company. In the event the actual EBITDA achieved by the Company is in excess of the Bank Plan, but less than the Operating Plan goal, then Consultant shall receive a bonus in excess of $100,000 which has been prorated on a straight-line basis to reflect the actual EBITDA performance achieved relative to the two EBITDA goals. (As an example, if EBITDA is halfway between the two goals, the bonus would be $150,000). Options An option to purchase 30,000 shares of Hills Stores Company Common Stock which was granted on February 7, 1996. The purchase price is $10.125. Restricted Stock 20,000 shares of restricted stock will be granted to Consultant pursuant to a restricted stock agreement between Hills Stores Company and Consultant. 7 - ------------------------------------------------------------------------------ EX-10 6 EXHIBIT 10.12 HILLS STORES COMPANY 1996 DIRECTORS STOCK OPTION PLAN SECTION 1. PURPOSE This 1996 Directors Stock Option Plan (the "Plan") of Hills Stores Company, a Delaware corporation (the "Company"), is designed to provide additional incentive to individuals acting as directors of the Company who are not also employees of the Company ("Non-Employee Directors"). The Company intends that this purpose will be effected by the granting of nonqualified stock options ("Stock Options") under the Plan which afford such Non-Employee Directors an opportunity to acquire or increase their proprietary interest in the Company through the acquisition of shares of its Common Stock. SECTION 2. ADMINISTRATION The terms of the Stock Options are set forth herein and may not be varied other than by amendment of the Plan in accordance with Section 10. To the extent that any administrative action is required in connection with the Plan, such action shall be taken by the Board of Directors (the "Board"), whose deter- mination in such case shall be conclusive. SECTION 3. STOCK 3.1 Stock to be issued. The stock subject to the options granted under the Plan shall be shares of the Company's authorized but unissued common stock, $.01 par value per share (the "Common Stock"), or shares of the Company's Common Stock held in treasury. The total number of shares that may be issued pursuant to options granted under the Plan shall not exceed an aggregate of 250,000 shares of Common Stock; provided, however, that the class and aggregate number of shares which may be subject to options granted under the Plan shall be subject to adjustment as provided in Section 8 hereof. 3.2 Expiration, Cancellation or Termination of Option. Whenever any outstanding option under the Plan expires, is cancelled or is otherwise terminated (other than by exercise), the shares of Common Stock allocable to the unexercised portion of such option may again be the subject of options under the Plan. SECTION 4. OPTION GRANTS All Stock Options issued pursuant to this Plan shall be granted automati- cally to Non-Employee Directors of the Company as hereinafter provided: (a) Each Non-Employee Director of the Company on January 18, 1996 shall be entitled to receive an option to purchase 4,000 shares of Common Stock at a purchase price of $12.00 per share. Thereafter, beginning with the 1997 - 1998 fiscal year of the Company, each such Director shall be automatically granted an additional option to purchase 2,000 shares of Common Stock on the first day of each fiscal year of the Company, provided that the optionee is then a Non-Employee Director of the Company. 1 - ------------------------------------------------------------------------------- (b) Each Non-Employee Director of the Company who joins the Board after January 18, 1996 shall be automatically granted an option to purchase 4,000 shares of Common Stock upon his or her initial election or initial appointment as a director. Thereafter, beginning with the 1997-1998 fiscal year of the Company, each such Director shall be automatically granted an additional option to purchase 2,000 shares of Common Stock on the first day of each subse- quent fiscal year of the Company, provided that the optionee is then a Non- Employee Director. SECTION 5. TERMINATION OF SERVICES OF OPTIONEE If an optionee's membership on the Board terminates for cause pursuant to Section 141(k) of the Delaware Corporation law or any successor statute, all Stock Options held by such optionee shall thereupon terminate. If an optionee's membership on the Board terminates for any other reason, he/she may exercise any outstanding Stock Option to the extent that he/she was entitled to exercise it on the date of termination. Exercise must occur no later than the first anni- versary of such termination. Following such first anniversary, all such Stock Options shall be null and void. SECTION 6. TERMS OF THE OPTION AGREEMENTS Each option agreement shall be in writing and shall contain the substance of all of the following provisions: 6.1 Expiration of Option. Unless earlier terminated pursuant to Section 5 of this Plan, each option shall expire on the tenth anniversary of the date on which the option was granted. 6.2 Vesting and Exercise. Each option shall be exercisable, so long as it is valid and out- standing, in part or as a whole, as follows: (a) one-third of the shares during the period beginning on the first anniversary of the date of grant, provided that the optionee is then a director of the Company, and ending on the tenth anniversary of the date of grant; (b) one-third of the shares during the period beginning on the second anniversary of the date of grant, provided that the optionee is then a director of the Company, and ending on the tenth anniversary of the date of grant; and (c) one-third of the shares during the period beginning on the third anniversary of the date of grant, provided that the optionee is then a director of the Company, and ending on the tenth anniversary of the date of grant. The right to purchase shares pursuant to the options shall be cumu- lative. 6.3 Purchase Price. Except as provided in Section 4(a) with respect to options granted on January 18, 1996, the purchase price per share under each option shall be the fair market value of the Common Stock on the date the option is granted. For the purpose of the Plan the fair market value of the Common Stock shall be the closing price per share on the date of grant of the option as reported by the New York Stock Exchange, or by another nationally recognized stock exchange, or on NASDAQ. If no such closing price is reported for the date of grant, the pur- 2 - ------------------------------------------------------------------------------- chase price per share will be the closing price per share for the most recent date for which a closing price is thus reported. 6.4 Transferability of Options. Options shall not be transferable by the optionee otherwise than by will or under the laws of descent and distribution, and shall be exercisable, during his or her lifetime, only by him or her. 6.5 Rights of Optionees. No optionee shall be deemed for any purpose to be the owner of any shares of Common Stock subject to any option unless and until the option shall have been exercised pursuant to the terms thereof, and the Company shall have issued and delivered the shares to the optionee. 6.6 Transferability of Shares. As long as the Company has a class of securities registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended, the shares of stock issuable upon exercise of an option by any director may not be sold or transferred (except that such shares may be issued upon exercise of such option) by such director for a period of six months following the date of grant of said option. SECTION 7. METHOD OF EXERCISE; PAYMENT OF PURCHASE PRICE 7.1 Method of Exercise. Any option granted under the Plan may be exercised by the optionee by delivering to the Company on any business day a written notice specifying the number of shares of Common Stock the optionee then desires to purchase and specifying the address to which the certificates for such shares are to be mailed (the "Notice"), accompanied by payment for such shares. 7.2 Payment of Purchase Price. Payment for the shares of Common Stock purchased pursuant to the exer- cise of an option shall be made by cash in an amount, or a check, bank draft or post or express money order payable in an amount, equal to the aggregate exer- cise price for the number of shares specified in the Notice. As promptly as practicable after receipt of the Notice and accom- panying payment, the Company shall deliver to the optionee certificates for the number of shares with respect to which such option has been so exercised, issued in the optionee's name; provided, however, that such delivery shall be deemed effected for all purposes when the Company or a stock transfer agent of the Company shall have deposited such certificates in the United States mail, ad- dressed to the optionee, at the address specified in the Notice. SECTION 8. CHANGES IN COMPANY'S CAPITAL STRUCTURE 8.1 Rights of Company. The existence of outstanding options shall not affect in any way the right or power of the Company or its stockholders to make or authorize, without limitation, any or all adjustments, recapitalizations, reorganizations or other changes in the Company's capital structure or its business, or any merger or consolidation of the Company, or any issue of Common Stock, or any issue of bonds, debentures, or prior preference stock or other capital stock ahead of or 3 - ------------------------------------------------------------------------------- affecting the Common Stock or the rights thereof, or the dissolution or liquida- tion of the Company, or any sale or transfer of all or any part of its assets or business, or any other corporate act or proceeding, whether of a similar character or otherwise. 8.2 Recapitalization, Stock Splits and Dividends. If the Company shall effect a subdivision or consolidation of shares or other capital readjustment, the payment of a stock dividend, or other in- crease or reduction of the number of shares of the Common Stock outstanding, in any such case without receiving compensation therefor in money, services or property, then (i) the number, class, and price per share of shares of stock subject to outstanding options hereunder shall be appropriately adjusted in such a manner as to entitle an optionee to receive upon exercise of an option, for the same aggregate cash consideration, the same total number and class of shares as he or she would have received as a result of the event requiring the adjust- ment had he or she exercised his or her option in full immediately prior to such event; and (ii) the number and class of shares with respect to which options may be granted under the Plan shall be adjusted by substituting for the total number of shares of Common Stock then reserved for issuance under the Plan that number and class of shares of stock that the owner of an equal number of outstanding shares of Common Stock would own as the result of the event requiring the ad- justment. 8.3 Merger without Change of Control. After a merger of one or more corporations into the Company, or after a consolidation of the Company and one or more corporations in which (i) the Company shall be the surviving corporation, and (ii) the stockholders of the Company immediately prior to such merger or consolidation own after such merger or consolidation shares representing at least fifty percent of the voting power of the Company, each holder of an outstanding option shall, at no additional cost, be entitled upon exercise of such option, to receive in lieu of the number of shares as to which such option shall then be so exercisable, the number and class of shares of stock or other securities to which such holder would have been entitled pursuant to the terms of the agreement of merger or consolidation if, immediately prior to such merger or consolidation, such holder had been the holder of record of a number of shares of Common Stock equal to the number of shares for which such option was exercisable. 8.4 Sale or Merger with Change of Control. If the Company is merged into or consolidated with another corporation under circumstances where the Company is not the surviving corporation, or if there is a merger or consolidation where the Company is the surviving corpora- tion but the stockholders of the Company immediately prior to such merger or consolidation do not own after such merger or consolidation shares representing at least fifty percent of the voting power of the Company or if the Company is liquidated, or sells or otherwise disposes of substantially all of its assets to another corporation while unexercised options remain outstanding under the Plan, (i) the time for exercise of all unexercised and unexpired options shall ac- celerate to and after a date prior to the effective date of such merger, consolidation, liquidation, sale or disposition, as the case may be, specified by the Board; and (ii) on or after the effective date of such merger, consolidation, liquidation, sale or disposition, as the case may be, each holder of an outstanding option shall be entitled, upon exercise of such option, to receive, in lieu of shares of Common Stock, shares of such stock or other securities, cash or property as the holders of shares of Common Stock receive 4 - ------------------------------------------------------------------------------- pursuant to the terms of the merger, consolidation, liquidation, sale or disposition. 8.5 Adjustments to Common Stock Subject to Options. Except as hereinbefore expressly provided, the issue by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, for cash or property, or for labor or services, either upon direct sale or upon the exercise of rights or warrants to subscribe therefor, or upon conversion of shares or obligations of the Company convertible into such shares or other securities, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock then sub- ject to outstanding options. 8.6 Miscellaneous. Adjustments under this Section 8 shall be determined by the Board and such determinations shall be conclusive. No fractional shares of Common Stock shall be issued under the Plan on account of any adjustment specified above. SECTION 9. GENERAL RESTRICTIONS 9.1 Investment Representations. The Company may require any person to whom an option is granted, as a condition of exercising such option, to give written assurances in substance and form satisfactory to the Company to the effect that such person is acquiring the Common Stock subject to the option for his or her own account for investment and not with any present intention of selling or otherwise distributing the same, and to such other effects as the Company deems necessary or appropriate in order to comply with federal and applicable state securities laws. 9.2 Compliance with Securities Laws. The Company shall not be required to sell or issue any shares under any option if the issuance of such shares shall constitute a violation by the optionee or by the Company of any provisions of any law or regulation of any governmental authority. In addition, in connection with the Securities Act of 1933, as now in effect or hereafter amended (the "Securities Act"), upon exer- cise of any option, the Company shall not be required to issue such shares unless the Board has received evidence satisfactory to it to the effect that the holder of such option will not transfer such shares except pursuant to a regis- tration statement in effect under such Act or unless an opinion of counsel satisfactory to the Company has been received by the Company to the effect that such registration is not required. Any determination in this connection by the Board shall be final, binding and conclusive. In the event the shares issuable on exercise of an option are not registered under the Securities Act, the Company may imprint upon any certificate representing shares so issued the following legend which counsel for the Company considers necessary or advisable to comply with the Securities Act and with applicable state securities laws: The shares of stock represented by this certificate have not been registered under the Securities Act of 1933 or under the Securities laws of any State and may not be sold or transferred except upon such registration or upon receipt by the Corporation of an opinion of counsel satisfactory to the Corporation, in form and substance satisfactory to the Corporation, that registration is not required for such sale or transfer. 5 - ---------------------------------------------------------------------------- The Company may, but shall in no event be obligated to, register any securities covered hereby pursuant to the Securities Act; and in the event any shares are so registered the Company may remove any legend on certificates representing such shares. The Company shall not be obligated to take any other affirmative action in order to cause the exercise of an option or the issuance of shares pursuant thereto to comply with any law or regulation of any govern- mental authority. SECTION 10. AMENDMENT OR TERMINATION OF THE PLAN The Board of Directors may modify, revise or terminate this Plan at any time and from time to time, except that shareholder approval shall be required for any amendment that changes the class of persons eligible to receive options, increases the aggregate number of shares issuable pursuant to this Plan (other than by operation of Section 8 hereof) or materially increases the benefits to optionees under the Plan. Notwithstanding anything herein to the contrary, the provisions of this Plan which affect the price, date of exercisability, option period or amount of shares under an option shall not be amended more than once in any six-month period, other than to comport with changes in the Internal Revenue Code of 1986, as amended. SECTION 11. NONEXCLUSIVITY OF THE PLAN Neither the adoption of the Plan by the Board of Directors nor the sub- mission of the Plan to the stockholders of the Company for approval shall be construed as creating any limitations on the power of the Board of Directors to adopt such other incentive arrangements as it may deem desirable, including, without limitation, the granting of stock options otherwise than under the Plan, and such arrangements may be either applicable generally or only in specific cases. SECTION 12. EFFECTIVE DATE AND DURATION OF PLAN The Plan shall become effective on January 18, 1996; provided, that no Stock Option may be exercised prior to the date on which the shareholders of the Company approve the Plan. No option may be granted under the Plan after the tenth anniversary of the effective date. The Plan shall terminate (i) when the total amount of the Stock with respect to which options may be granted shall have been issued upon the exercise of options or (ii) by action of the Board of Directors pursuant to Section 10 hereof, whichever shall first occur. SECTION 13. GOVERNING LAW All rights and obligations under the Plan shall be construed and inter- preted in accordance with the laws of the Commonwealth of Massachusetts, without giving effect to principles of conflict of laws. ****************** 6 - ------------------------------------------------------------------------------ EX-10 7 EXHIBIT 10.13 HILLS STORES COMPANY CONSULTING AGREEMENT DATED DECEMBER 26, 1995 WITH SAMUEL L. KATZ Mr. Samuel L. Katz 145 West 67th Street, Apt 15G New York, New York 10023 Dear Sam: This will confirm the terms on which you are being engaged as a financial consultant to Hills Stores Company and Hills Department Stores Company ("Hills"). SECTION 1. CONSULTING AGREEMENT Commencing January 1, 1996, you will serve as a financial consultant to Hills, on the following basis. (a) The consultancy will end on June 30, 1996 or earlier (i) at your election upon one week notice to Hills or (ii) upon your commencement of another full time permanent emplyment position which results in your inability to fulfill your consulting duties. It is understood that during the period of your consultancy with Hills you may obtain one or more consulting positions or a full-time employment position (so long as the same does not interfere with your consulting duties to Hills). You agree that you will resign this consultancy before you commence providing services to any other discount retailer. (b) As a consultant, you will, if and as reasonably requested by Hills, provide advice to Hills in the areas of your professional experience. You will also continue to serve as a director of Hills for no additional compensation (except as expressly provided for herein). (c) Your compensation shall be as follows: (i) You shall be paid a base fee of $20,000 per month. This base fee shall be paid monthly in advance on the first business day of each calendar month (except that the payment for February 1996 shall be made on February 5, 1996). If you terminate your consultancy prior to the end of a calendar month, you shall be entitled to retain that percentage of the current month's base fee equal to the percentage of the current month elapsed, and you shall promptly return the remainder of that month's fee payment (less any amounts otherwise owing to you under this agreement). (ii) You shall be eligible to receive at the end of the term of this consultancy a bonus of up to $100,000, based upon the good faith determination by the Board of Directors of Hills of your contribution to Hills accomplishing the following goals: achieving generally acceptable levels of liquidity and financial solvency, obtaining financing secured by Hills' lay-away receivables and obtaining financing secured by Hills' fixtures. 1 (iv) Hills will promptly reimburse you (against customary documentation) for any reasonable out-of-pocket expenses incurred by you in the performance of your services hereunder. (d) Hills hereby exculpates you and agrees to indemnify you and hold you harmless as provided in Exhibit A hereto. (e) You may perform your consultancy services from any locations as long as you are reasonably accessible to Hills in person or by phone. (f) You may at any time, by notice to Hills, elect to transfer your rights and obligations under this Section 1 to a corporation, partnership, limited liability company or other entity that is solely owned by you (or by you and your wife), provided that all of the consulting services to be provided by that entity hereunder shall be provided by you as its representative. Such transfer shall constitute a novtion that relieves you of personal liability for obligations hereunder relating to activities subsequent to the transfer. (g) Hills represents to you that this letter agreement has been duly authorized by, and is valid, binding and enforceable against, Hills. SECTION 2. MISCELLANEOUS (a) Hills's obligations to you hereunder shall be absolute and shall not be subject to any right of setoff, recoupment or counterclaim. (b) This letter agreement shall be governed by the laws of the State of New York applicable to contracts made and to be performed herein. (c) Any dispute hereunder or in connection with the services to be provided hereby shall, if not consensually resolved between the parties, be resolved exclusively by arbitration under the auspices of the New York City chapter of the American Arbitration Association. The arbitration award may be entered as a judgment in any court of competent jurisdiction. The parties irrevocably consent to jurisdiction for this purpose in, without limitation, the courts of the State of New York in the County of New York and the Federal District Court for the Southern District of New York. Service of process may be provided by means of notice given in accordance with this agreement. You shall be entitled to collect from Hills (x) all reasonable costs of successfully enforcing your rights hereunder and (y) interest at the rate of 15% per annum on all amounts which you are entitled to be paid or recover hereunder (such interest to begin to accrue on the fifth day after your demand for such amounts). (d) Notices hereunder shall be effective when received in writing by the pertinent party at the adress specified below or at such other address as such party shall have previously designated by notice: If to Hills, in care of Hills Stores Company at 15 Dan Road, Canton, Massachusetts 02021-9128, to the attention of Corporate Counsel. If to you, at the address to which this letter is addressed. (e) This agreement shall not be assignable by Hills. There are no third party beneficiaries of this agreement. 2 (f) All obligations of "Hills" hereunder shall be joint and several obligations of Hills Stores Company and Hills Department Store Company. Kindly confirm your agreement with the foregoing by countersigning and returning a copy of this letter. Very truly yours, HILLS STORES COMPANY and HILLS DEPARTMENT STORE COMPANY By _____________________________________ E. Jackson Smailes, President and CEO Agreed: __________________________________ Samuel L. Katz 3 EXHIBIT A -- INDEMNIFICATION PROVISIONS Reference is made to the "Indemnification Provisions" annexed to the engagement letter of August 11, 1995 between Bear Stearns & Co., Inc. and Hills Department Store Company and Hills Stores Company. Those Indemnification Provisions shall, as if set forth herein, apply to yourself (as if all references therein to Bear Stearns were to you), except that the following shall for this purpose be inserted in lieu of clauses (a) - (d): "the letter agreement dated December 26, 1995 between you and Hills Department Store Company and Hills Stores Company (the "agreement") to which this Exhibit A is annexed, or the consultancy contemplated thereby, or any act or omission taken (or alleged to have been taken) by you in that capacity;" If you transfer your rights in accordance with Section 1(f) of the Agreement, the foregoing provisions shall apply to both yourself and the entity to which that transfer is made. INDEMNIFICATION PROVISIONS REFERRED TO IN EXHIBIT A OF CONSULTING AGREEMENT DATED DECEMBER 26, 1995 WITH SAMUEL L. KATZ The Company (as such term is defined in the Agreement (as such term is defined below) agrees to indemnify and hold harmless Bear Stearns, to the fullest extent permitted by law, from and against any and all losses, claims, damages, liabilities, obligations, penalties, judgments, awards, costs, expenses and disbursements (and any and all actions, suits, proceedings and investigations in respect thereof and any and all reasonable legal and other costs, expenses and disbursements in giving testimony or furnishing documents in response to a subpoena or otherwise), including, without limitation, the reasonable costs, expenses and disbursements, as and when incurred, of investigating, preparing or defending any such action, suit, proceeding or investigation (whether or not in connection with litigation in which Bear Stearns is a party), directly or indirectly, caused by, relating to, based upon, arising out of or in connection with (a) Bear Stearns' acting for the Company in connection with the Venture Transaction, any Alternative Transaction and/or any Acquisition Transaction, including, without limitation, any act or omission by Bear Stearns in connection with its acceptance of or the performance or non-performance of its obligations under the letter agreement dated August 11, 1995, between Bear Stearns and Hills Department Store Company and Hills Stores Company, as it may be amended from time to time (the "Agreement"), (b) any untrue statement or alleged untrue statement of a material fact contained in, or omissions or alleged omissions from, the Offering Memorandum (as such term is defined in the Agreement) or similar statements or omissions in or from any other information concerning the Company, the Venture Transaction, any Alternative Transaction and/or any Acquisition Transaction furnished by the Company to Bear Stearns, Venture Stores, any Alternative Bidder or any Prospective Purchaser (as such terms are defined in the Agreement) or any party to the Venture Transaction, an Alternative Transaction or an Acquisition Transaction (as such terms are defined in the Agreement) or to any Agency (as such term is defined in the Agreement), (c) the Venture Transaction, any Alternative Transaction or any Acquisition Transaction or (d) any Opinion; provided, however, such indemnity agreement shall not apply to any portion of such loss, claim, damage, obligation, penalty, judgment, award, liability, cost, expense or disbursement to the extent it is found in a final judgment by a court of competent 4 jurisdiction (not subject to further appeal) to have resulted primarily and directly from the gross negligence or willful misconduct of Bear Stearns. These Indemnification Provisions shall be in addition to any liability which the Company may otherwise have to Bear Stearns or the persons indemnified below in this sentence and shall extend to the following: The Bear Stearns Companies Inc., Bear, Stearns & Co. Inc., and their respective affiliated entities, directors, officers, employees, legal counsel, agents and controlling persons (within the meaning of the federal securities laws). All references to Bear Stearns in these Indemnification Provisions shall be understood to include any and all of the foregoing. If any action, suit, proceeding or investigation is commenced, as to which Bear Stearns proposes to demand indemnification, it shall notify the Company with reasonable promptness; provided, however, that any failure by Bear Stearns to notify the Company shall not relieve the Company from its obligations hereunder, except to the extent that the Company was materially prejudiced by such failure to notify. Bear Stearns shall have the right to retain one counsel of its own choice to represent it, and the Company shall pay the reasonable fees, expenses and disbursements of such counsel; and such counsel shall, to the extent consistent with its professional responsibilities, cooperate with the Company and any counsel designated by the Company. The Company shall be liable for any settlement of any claim against Bear Stearns made with the Company's written consent, which consent shall not be unreasonably withheld. The Company shall not, without the prior written consent of Bear Stearns, settle or compromise any claim, or permit a default or consent to the entry of any judgment in respect thereof, unless such settlement, compromise or consent includes, as an unconditional term hereof, the giving by the claimant to Bear Stearns of an unconditional and irrevocable release from all liability in respect of such claim. In order to provide for just and equitable contribution, if a claim for indemnification pursuant to these Indemnifiacation Provisions is made but it is found in a final judgment by a court of competent jurisdiction (not subject to further appeal) that such indemnification may not be enforced in such case, even though the express provisions hereof provide for indemnification in such case, then the Company, on the one hand, and Bear Stearns, on the other hand, shall contribute to the losses, claims, damages, obligations, penalties, judgments, awards, liabilities, costs, expenses, and disbursements to which the indemnified persons may be subject in accordance with the relative benefits received by the Company, on the one hand, and Bear Stearns, on the other hand, and also the relative fault of the Company, on the one hand, and Bear Stearns, on the other hand, in connection with the statements, acts or omissions which resulted in such losses, claims, damages, obligations, penalties, judgments, awards, liabilities, costs, expenses or disbursements and the relevant equitable considerations shall also be considered. No person found liable for a fraudulent misrepresentation shall be entitled to contribution from any person who is not also found liable for such fraudulent misrepresentation. Notwithstanding the foregoing, Bear Stearns shall not be obligated to contribute any amount hereunder that exceeds the amount of fees previously received by Bear Stearns pursuant to the Agreement. Neither termination nor completion of the engagement of Bear Stearns referred to above shall affect these Indemnification Provisions which shall then remain operative and in full force and effect. 5 EX-11 8 EXHIBIT 11.1 HILLS STORES COMPANY AND SUBSIDIARIES STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
Successor Company ------------------------------------------------------------ Fourteen Fiscal Year Thirteen Fiscal Year Weeks Ended Ended Weeks Ended Ended February 3, February 3, January 28, January 28, 1996 1996 1995 1995 - -------------------------------------------------------------------------------------------------- PRIMARY Weighted average number of common shares assumed to be outstanding during the period 9,962,450 9,809,675 10,797,637 10,794,013 Assumed conversion of preferred stock 1,252,389 - 3,207,195 3,207,195 Assumed exercise of stock options - - 105,733 104,290 Assumed exercise of stock rights 6,514 - - - Assumed exercise of stock warrants - - - - ---------- --------- ---------- ---------- 11,221,353 9,809,675 14,110,565 14,105,498 ========== ========= ========== ========== Predecessor Sucessor Company Company ------------------------------- ------------- Thirteen Seventeen Thirty-Five Weeks Ended Weeks Ended Weeks Ended January 29, January 29, October 2, 1994 1994 1993 ------------------------------------------------ || PRIMARY || || Weighted average number of || common shares assumed to be || outstanding during the period 9,000,000 9,000,000 || 19,757,390 || Assumed conversion of preferred || stock 5,000,000 5,000,000 || N/A || Assumed exercise of stock options 73,845 56,470 || - || Assumed exercise of stock rights - - || N/A || Assumed exercise of stock warrants - - || N/A || ---------- ---------- || ---------- 14,073,845 14,056,470 || 19,757,390 ========== ========== || ==========
1 - ------------------------------------------------------------------------------- EXHIBIT 11.1 HILLS STORES COMPANY AND SUBSIDIARIES STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
Successor Company ------------------------------------------------------------ Fourteen Fiscal Year Thirteen Fiscal Year Weeks Ended Ended Weeks Ended Ended February 3, February 3, January 28, January 28, 1996 1996 1995 1995 - -------------------------------------------------------------------------------------------------- FULLY-DILUTED Weighted average number of common shares assumed to be outstanding during the period 9,983,044 10,029,442 10,797,637 10,794,013 Assumed conversion of preferred stock 1,231,795 - 3,207,195 3,207,195 Assumed exercise of stock options - - 132,446 130,360 Assumed exercise of stock rights 6,514 - 700,000 700,000 Assumed exercise of stock warrants - - - - Assumed conversion of Convertible Junior Subordinated Debentures - - N/A N/A ---------- ---------- ---------- ---------- 11,221,353 10,029,442 14,837,278 14,831,568 ========== ========== ========== ========== Predecessor Successor Company Company ----------------------------------- ------------ Thirteen Seventeen Thirty-Five Weeks Ended Weeks Ended Weeks Ended January 29, January 29, October 2, 1994 1995 1993 -------------------------------------------------------- FULLY-DILUTED || || Weighted average number of || common shares assumed to be || outstanding during the period 9,000,000 9,000,000 || 19,757,390 || Assumed conversion of preferred || stock 5,000,000 5,000,000 || N/A || Assumed exercise of stock options 123,566 94,492 || - || Assumed exercise of stock rights 700,000 700,000 || N/A || Assumed exercise of stock warrants - - || N/A | Assumed conversion of Convertible || Junior Subordinated Debentures N/A N/A || 2,224,293 ---------- ---------- || ---------- 14,823,566 14,794,492 || 21,981,683 ========== ========== || ==========
2 - ------------------------------------------------------------------------------ EX-21 9 EXHIBIT 21 SUBSIDIARIES OF HILLS STORES COMPANY
NAME OF SUBSIDIARY STATE OF INCORPORATION - ------------------ ---------------------- Hills Department Store Company Delaware HDS Transport, Inc. (1) Ohio CRH International, Inc. (1) Ohio Canton Advertising, Inc. (2) Massachusetts Corporate Vision Inc. (1) Massachusetts Hills Distributing Company (1) Delaware (1) Wholly-owned subsidiary of Hills Department Store Company (2) Wholly-owned subsidiary of CRH International, Inc.
1 EX-23 10 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statement of Hills Stores Company on Form S-8 (File No. 33-56321) of our report dated March 10, 1995 on our audits of the Consolidated Financial Statements and Financial Statement Schedules of Hills Stores Company as of January 28, 1995 and January 29, 1994 and for the year ended January 28, 1995, the seventeen week period ended January 29, 1994, and the thirty-five week period ended October 2, 1993, which report is included in this annual report on Form 10-K. Coopers & Lybrand L.L.P. Boston, Massachusetts April 9, 1996 1 EX-23 11 EXHIBIT 23.2 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in Registration Statement No. 33-56321 of Hills Stores Company and Subsidiaries on Form S-8 of our reports dated March 14, 1996 (April 5, 1996 with respect to the fifth paragraph of Note 8), appearing in this annual report on Form 10-K of Hills Stores Company and Subsidiaries for the year ended February 3, 1996. DELOITTE & TOUCHE LLP Boston, Massachusetts April 5, 1996 2 EX-24 12 EXHIBIT 24 HILLS STORES COMPANY FORM 10-K POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS that each of the directors and officers of Hills Stores Company whose signature appears below constitutes and appoints Gregory K. Raven, Kim D. Ahlholm and William K. Friend, and each of them, his/her true and lawful attorneys-in-fact and agents with full power of substitution, for him/her and in his/her name, place and stead, in any and all capacities, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection with the preparation, delivery and filing of an Annual Report on Form 10-K of Hills Stores Company for the fiscal year ended February 3, 1996 with the Securities and Exchange Commission and any appropriate state or governmental agencies, as fully to all intents and purposes as such person might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or their or his substi- tutes, may lawfully do or cause to be done by virtue hereof. SIGNATURE TITLE DATE /s/ Chaim Y. Edelstein Chairman of the Board of - ----------------------- the Company and Hills Chaim Y. Edelstein Department Store Company March 6, 1996 /s/ Gregory K. Raven Director, President and Chief - ----------------------- Executive Officer of the Company Gregory K. Raven and Hills Department Store Company (Principal Executive Officer and Principal Financial Officer) March 6, 1996 /s/ Mark B. Dickstein Director of the Company and Hills - ----------------------- Department Store Company March 6, 1996 Mark B. Dickstein /s/Stanton J. Bluestone Director of the Company and Hills - ----------------------- Department Store Company March 6, 1996 Stanton J. Bluestone /s/ Samuel L. Katz Director of the Company and Hills - ----------------------- Department Store Company March 6, 1996 Samuel L. Katz /s/ John W. Burden Director of the Company and Hills - ----------------------- Department Store Company March 6, 1996 John W. Burden /s/ Alan S. Cooper Director of the Company and Hills - ----------------------- Department Store Company March 6, 1996 Alan S. Cooper /s/ Kim D. Ahlholm Vice President-Controller (Principal - ----------------------- Accounting Officer) of the Company Kim D. Ahlholm and Hills Department Store Company March 6, 1996 1 - ------------------------------------------------------------------------------- EX-27 13
5 12-MOS FEB-03-1996 FEB-03-1996 18,058 0 28,646 (3,459) 331,697 414,305 231,198 (40,305) 858,723 267,215 303,945 24,636 0 100 254,563 858,723 1,900,104 1,900,104 1,384,421 1,384,421 479,665 683 49,497 (13,479) 3,187 (16,666) 0 0 0 (16,666) (1.70) (1.66)
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