-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, RQyq/CJRfwkmb4jelzWsVPl1rNAS3B3PbTyFluY9Ij1XQc1HyH1EMvlagZJoS2bu r8btYv8TffeOesZ2CmQ9AQ== 0000950109-95-000133.txt : 19950607 0000950109-95-000133.hdr.sgml : 19950607 ACCESSION NUMBER: 0000950109-95-000133 CONFORMED SUBMISSION TYPE: SC 13E4 PUBLIC DOCUMENT COUNT: 13 FILED AS OF DATE: 19950124 SROS: BSE SROS: NYSE SUBJECT COMPANY: COMPANY DATA: COMPANY CONFORMED NAME: HILLS STORES CO /NEW/ 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: SC 13E4 SEC ACT: 1934 Act SEC FILE NUMBER: 005-38982 FILM NUMBER: 95502632 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: 19931015 FORMER COMPANY: FORMER CONFORMED NAME: THL HOLDINGS INC DATE OF NAME CHANGE: 19870506 FILED BY: COMPANY DATA: COMPANY CONFORMED NAME: HILLS STORES CO /NEW/ 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: SC 13E4 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: 19931015 FORMER COMPANY: FORMER CONFORMED NAME: THL HOLDINGS INC DATE OF NAME CHANGE: 19870506 SC 13E4 1 SCHEDULE 13E-4 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- SCHEDULE 13E-4 ISSUER TENDER OFFER STATEMENT (PURSUANT TO SECTION 13(E)(1) OF THE SECURITIES EXCHANGE ACT OF 1934) HILLS STORES COMPANY (NAME OF ISSUER) HILLS STORES COMPANY (NAME OF PERSON(S) FILING STATEMENT) COMMON STOCK, PAR VALUE $.01 PER SHARE (INCLUDING THE ASSOCIATED PREFERRED STOCK PURCHASE RIGHTS) (TITLE OF CLASS OF SECURITIES) 43169210-2 (CUSIP NUMBER OF CLASS OF SECURITIES) WILLIAM K. FRIEND, ESQ. VICE PRESIDENT--CORPORATE COUNSEL HILLS STORES COMPANY 15 DAN ROAD CANTON, MASSACHUSETTS 02021 (617) 821-1000 (NAME, ADDRESS AND TELEPHONE NUMBER OF PERSON AUTHORIZED TO RECEIVE NOTICES AND COMMUNICATIONS ON BEHALF OF THE PERSON(S) FILING STATEMENT) COPY TO: BARRY B. WHITE, ESQ. FOLEY, HOAG & ELIOT ONE POST OFFICE SQUARE BOSTON, MASSACHUSETTS 02109 (617) 832-1000 JANUARY 24, 1995 (DATE TENDER OFFER FIRST PUBLISHED, SENT OR GIVEN TO SECURITY HOLDERS) CALCULATION OF FILING FEE - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------
TRANSACTION VALUATION* AMOUNT OF FILING FEE - ------------------------------------------------------------------------------ $75,000,000 $15,000 - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------
*Based upon $25 cash per share for 3,000,000 shares. Check here if any part of the fee is offset as provided by Rule 0-11(a)(2) and identify the filing with which the offsetting fee is previously paid. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. [_] Amount Previously Paid: N/A Filing Party: N/A Form or Registration No.: N/A Date Filed: N/A - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ITEM 1. SECURITY AND ISSUER. (a) The Issuer of the securities to which this statement relates is Hills Stores Company, a Delaware corporation (the "Company"), and the address of its principal executive office is 15 Dan Road, Canton, Massachusetts 02021. (b) This Schedule 13E-4 relates to a tender offer by the Company to purchase up to 3,000,000 shares of its Common Stock, par value $.01 per share ("Common Stock"), at $25 per share, net to the seller in cash, upon the terms and subject to the conditions set forth in the Offer to Purchase, dated January 24, 1995 (the "Offer to Purchase"), and in the related Letter of Transmittal (which together constitute the "Offer"), copies of which are filed as Exhibits (a)(1) and (a)(2), respectively. The information set forth in the "Introduction", Section "1. Background and Purpose of the Offer", Section "3. Terms of the Offer" and Section "8. Interests of Certain Persons in the Offer" of the Offer to Purchase is incorporated herein by reference. (c) The information set forth in Section "7. Price Range of Common Stocks; Dividends" of the Offer to Purchase is incorporated herein by reference. (d) Not applicable. ITEM 2. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION. (a)-(b) The information set forth in Section "11. Source and Amount of Funds" of the Offer to Purchase is incorporated herein by reference. ITEM 3. PURPOSE OF THE TENDER OFFER AND PLANS OR PROPOSALS OF THE ISSUER OR AFFILIATE. The information set forth in the "Introduction" and Section "1. Background and Purpose of the Offer" of the Offer to Purchase is incorporated herein by reference. (a)-(j) The information set forth in the "Introduction", Section "1. Background and Purpose of the Offer", Section "2. Certain Information Concerning the Company", Section "8. Interests of Certain Persons in the Offer", and Section "9. Effects of the Offer on the Market for Common Stock; Registration Under the Exchange Act" of the Offer to Purchase is incorporated herein by reference. ITEM 4. INTEREST IN SECURITIES OF THE ISSUER. The information set forth in Section "8. Interests of Certain Persons in the Offer" of the Offer to Purchase is incorporated herein by reference. ITEM 5. CONTRACTS, ARRANGEMENTS, UNDERSTANDINGS OR RELATIONSHIPS WITH RESPECT TO THE ISSUER'S SECURITIES. The information set forth in the "Introduction", Section "1. Background and Purpose of the Offer", Section "2. Certain Information Concerning the Company", and Section "8. Interests of Certain Persons in the Offer" of the Offer to Purchase is incorporated herein by reference. ITEM 6. PERSONS RETAINED, EMPLOYED OR TO BE COMPENSATED. None; however, the information set forth in the "Introduction" and Section "15. Fees and Expenses" of the Offer to Purchase is incorporated herein by reference. ITEM 7. FINANCIAL INFORMATION. (a) The information set forth in Section "2. Certain Information Concerning the Company--Summary Consolidated Financial Information" of the Offer to Purchase is incorporated herein by reference. The audited financial statements of the Company at January 29, 1994, and January 30, 1993, and for the fiscal years ended January 29, 1994, and January 30, 1993, included in the Company's Annual Report on 1 Form 10-K for the fiscal year ended January 29, 1994, a copy of which is filed as Exhibit (g)(1), is incorporated herein by reference. The unaudited financial statements of the Company at October 29, 1994, and October 30, 1993, and for the thirty-nine week periods ended October 29, 1994, and October 30, 1993, included in the Company's Quarterly Report on Form 10-Q for the period ended October 29, 1994, a copy of which is filed as Exhibit (g)(2), is incorporated herein by reference. (b) The information set forth in Section "2. Certain Information Concerning the Company--Summary Consolidated Financial Information" of the Offer to Purchase is incorporated herein by reference. The Consolidated Pro Forma Financial Information of the Company and its subsidiaries filed as Exhibit (g)(3) is incorporated herein by reference. ITEM 8. ADDITIONAL INFORMATION. (a) Not applicable. (b) The information set forth in Section "13. Certain Legal Matters; Regulatory Approvals" of the Offer to Purchase is incorporated herein by reference. (c) The information set forth in Section "9. Effects of the Offer on the Market for Common Stock; Registration under the Exchange Act" of the Offer to Purchase is incorporated herein by reference. (d) The information set forth in Section "1. Background and Purpose of the Offer--Certain Litigation Relating to the Dickstein Consent Solicitation" of the Offer to Purchase is incorporated herein by reference. (e) Reference is hereby made to the Offer to Purchase and the related Letter of Transmittal which are attached hereto as Exhibits (a)(1) and (a)(2), respectively, and incorporated in their entirety herein by reference. ITEM 9. MATERIAL TO BE FILED AS EXHIBITS. (a)(1) -- Offer to Purchase, dated January 24, 1995. (a)(2) -- Letter of Transmittal. (a)(3) -- Letter to the Company's stockholders from Thomas H. Lee, Chairman of the Board, and Michael Bozic, President and Chief Executive Officer of the Company, dated January 24, 1995. (a)(4) -- Notice of Guaranteed Delivery. (a)(5) -- Letter to Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees. (a)(6) -- Letter to Clients for use by Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees. (a)(7) -- Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9. (a)(8) -- Form of Summary Advertisement dated January 24, 1995. (a)(9) -- Form of Press Release issued by the Company on January 24, 1995. (c)(1) -- Settlement Agreement dated as of September 23, 1994 among the Company, Dickstein Partners Inc. and affiliates of Dickstein Partners Inc./1/ (c)(2) -- Stipulation and Agreement of Compromise, Settlement and Release dated as of December 16, 1994./2/ (d) -- Not Applicable. (e) -- Not Applicable. (f) -- Not Applicable. (g)(1) -- Annual Report of the Company on Form 10-K for the fiscal year ended January 29, 1994. (g)(2) -- Quarterly Report of the Company on Form 10-Q for the quarterly period ended October 29, 1994. (g)(3) -- Hills Stores Company and Subsidiaries Consolidated Pro Forma Financial Information.
- -------- /1/ Incorporated by reference to the Report on Form 8-K of the Company dated September 27, 1994. /2/ Incorporated by reference to the Report on Form 8-K of the Company dated January 13, 1995. 2 SIGNATURE After due inquiry and to the best of my knowledge and belief, I certify that the information set forth in this statement is true, complete and correct. Dated: January 24, 1995 Hills Stores Company /s/ William K. Friend By: _________________________________ William K. Friend, Esq. Vice President--Corporate Counsel 3 EXHIBIT INDEX
Sequentially Numbered Exhibit No. Description Page ----------- ----------- ------------ (a)(1) -- Offer to Purchase, dated January 24, 1995.......... (a)(2) -- Letter of Transmittal.............................. (a)(3) -- Letter to the Company's stockholders from Thomas H. Lee, Chairman of the Board, and Michael Bozic, President and Chief Executive Officer of the Company, dated January 24, 1995.................... (a)(4) -- Notice of Guaranteed Delivery...................... (a)(5) -- Letter to Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees................. (a)(6) -- Letter to Clients for use by Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees........................................... (a)(7) -- Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9....... (a)(8) -- Form of Summary Advertisement dated January 24, 1995............................................... (a)(9) -- Form of Press Release issued by the Company on January 24, 1995................................... (c)(1) -- Settlement Agreement dated as of September 23, 1994 among the Company, Dickstein Partners Inc. and affiliates of Dickstein Partners Inc./1/........... (c)(2) -- Stipulation and Agreement of Compromise, Settlement and Release dated as of December 16, 1994./2/........................................... (d) -- Not Applicable..................................... (e) -- Not Applicable..................................... (f) -- Not Applicable..................................... (g)(1) -- Annual Report of the Company on Form 10-K for the fiscal year ended January 29, 1994................. (g)(2) -- Quarterly Report of the Company on Form 10-Q for the quarterly period ended October 29, 1994........ (g)(3) -- Hills Stores Company and Subsidiaries Consolidated Pro Forma Financial Information....................
- -------- /1/ Incorporated by reference to the Report on Form 8-K of the Company dated September 27, 1994. /2/ Incorporated by reference to the Report on Form 8-K of the Company dated January 13, 1995. EX-99.A.1 2 OFFER OF PURCHASE OFFER TO PURCHASE FOR CASH BY HILLS STORES COMPANY UP TO 3,000,000 SHARES OF ITS COMMON STOCK AT $25.00 NET PER SHARE THE OFFER, PRORATION PERIOD AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON TUESDAY, FEBRUARY 21, 1995, UNLESS THE OFFER IS EXTENDED. Hills Stores Company, a Delaware corporation (the "Company"), is offering to purchase up to 3,000,000 shares of its Common Stock, par value $.01 per share ("Common Stock"), at $25.00 per share, net to the seller in cash, upon the terms and subject to the conditions set forth in this Offer to Purchase and in the related Letter of Transmittal (which together constitute the "Offer"). Although only shares of Common Stock will be purchased pursuant to the Offer, holders of shares of Series A Convertible Preferred Stock, par value $.10 per share, of the Company ("Series A Preferred Stock") may tender shares of Common Stock into which their shares of Series A Preferred Stock are convertible by following the instructions contained in Section 4 and the Letter of Transmittal. ---------------- THE OFFER IS NOT CONDITIONED UPON ANY MINIMUM NUMBER OF SHARES BEING TENDERED. THE OFFER IS, HOWEVER, SUBJECT TO CERTAIN OTHER CONDITIONS. SEE SECTION 12. ---------------- The Common Stock is listed and principally traded on The New York Stock Exchange (the "NYSE"). On January 23, 1995, the last trading day prior to commencement of the Offer, the closing sale price per share of Common Stock as reported on the NYSE Composite Tape was $21.125. STOCKHOLDERS ARE URGED TO OBTAIN A CURRENT MARKET QUOTATION FOR THE COMMON STOCK. ---------------- If more than 3,000,000 shares of Common Stock are validly tendered and not withdrawn prior to the Expiration Date (as defined in Section 3), the Company will accept for payment shares of Common Stock first from all stockholders who beneficially owned on January 23, 1995, and continue to own until the Expiration Date, an aggregate of fewer than 100 shares of Common Stock (including shares of Common Stock underlying the conversion rights of shares of Series A Preferred Stock) and who validly tender all such shares of Common Stock, and then on a pro rata basis from all other stockholders who validly tender shares of Common Stock. The Company will return all shares of Common Stock not purchased pursuant to the Offer, including shares not purchased because of proration. Unless otherwise instructed in the Letter of Transmittal, shares of Series A Preferred Stock delivered pursuant to the instructions set forth in Section 4 and the Letter of Transmittal will be converted into Common Stock only to the extent such tender of Common Stock is accepted by the Company. Unless otherwise instructed, all remaining shares of Series A Preferred Stock so delivered will not be converted and will be returned to the stockholder. See Section 4. ---------------- NEITHER THE COMPANY NOR ITS BOARD OF DIRECTORS MAKES ANY RECOMMENDATION AS TO WHETHER ANY STOCKHOLDER SHOULD TENDER ANY OR ALL OF SUCH STOCKHOLDER'S SHARES PURSUANT TO THE OFFER. EACH STOCKHOLDER MUST MAKE ITS OWN DECISION WHETHER TO TENDER SHARES AND, IF SO, HOW MANY SHARES TO TENDER. THE COMPANY HAS BEEN ADVISED THAT NONE OF ITS DIRECTORS OR EXECUTIVE OFFICERS INTENDS TO TENDER ANY SHARES OF COMMON STOCK PURSUANT TO THE OFFER. THE COMPANY HAS ALSO BEEN ADVISED, HOWEVER, THAT APOLLO CAPITAL MANAGEMENT, INC. ("APOLLO"), MAY TENDER SOME OR ALL OF THE APPROXIMATELY 700,000 SHARES OF COMMON STOCK BENEFICIALLY OWNED BY APOLLO PURSUANT TO THE OFFER. MICHAEL S. GROSS, A DIRECTOR OF THE COMPANY, IS AN OFFICER OF APOLLO. SEE INTRODUCTION AND SECTION 8. ---------------- The Dealer Manager for the Offer is: SMITH BARNEY INC. January 24, 1995 IMPORTANT Any stockholder desiring to tender all or any portion of such stockholder's shares of Common Stock should either (1) complete and sign the Letter of Transmittal or a facsimile thereof in accordance with the instructions in the Letter of Transmittal, mail or deliver it and any other required documents to Chemical Bank (the "Depositary"), and mail or deliver the certificates for such shares to the Depositary along with the Letter of Transmittal or follow the procedure for book-entry transfer set forth in Section 4 or (2) request such stockholder's broker, dealer, commercial bank, trust company or other nominee to effect the transaction for such stockholder. Although only shares of Common Stock will be purchased pursuant to the Offer, holders of shares of Series A Preferred Stock may tender shares of Common Stock into which their shares of Series A Preferred Stock are convertible by either (1) completing and signing the Letter of Transmittal or a facsimile thereof in accordance with the instructions in the Letter of Transmittal, mailing or delivering it and any other required documents to the Depositary, and mailing or delivering the certificates for such shares of Series A Preferred Stock to the Depositary along with the Letter of Transmittal or following the procedure for book-entry transfer set forth in Section 4 or (2) requesting that such stockholder's broker, dealer, commercial bank, trust company or other nominee effect the transaction for such stockholder. In such case, unless otherwise instructed in the Letter of Transmittal, shares of Series A Preferred Stock so delivered will be converted into Common Stock only to the extent such tender of Common Stock is accepted by the Company. Unless otherwise instructed in the Letter of Transmittal, all remaining shares of Series A Preferred Stock so delivered will not be converted and will be returned to the stockholder. A stockholder having shares of Common Stock or Series A Preferred Stock registered in the name of a broker, dealer, commercial bank, trust company or other nominee must contact such broker, dealer, commercial bank, trust company or other nominee if such stockholder desires to tender shares. Stockholders who desire to tender shares of Common Stock and whose certificates for such shares or for shares of Series A Preferred Stock convertible into such shares are not immediately available, or who cannot deliver the certificates for such shares and any other required document by the Expiration Date, may tender shares by following the procedures for guaranteed delivery set forth in Section 4. Questions and requests for assistance may be directed to the Information Agent or the Dealer Manager at their respective addresses and telephone numbers set forth on the back cover of this Offer to Purchase. Requests for additional copies of this Offer to Purchase, the Letter of Transmittal or the Notice of Guaranteed Delivery may be directed to the Information Agent. NO PERSON HAS BEEN AUTHORIZED TO MAKE ANY RECOMMENDATION ON BEHALF OF THE COMPANY AS TO WHETHER STOCKHOLDERS SHOULD TENDER OR REFRAIN FROM TENDERING SHARES PURSUANT TO THE OFFER. NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE OFFER OTHER THAN THOSE CONTAINED IN THIS OFFER TO PURCHASE OR IN THE LETTER OF TRANSMITTAL. IF GIVEN OR MADE, SUCH RECOMMENDATION, INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. 2 TABLE OF CONTENTS
SECTION PAGE ------- ---- INTRODUCTION............................................................ 4 1. Background and Purpose of the Offer............................. 5 Dickstein Solicitation......................................... 5 Hills Growth Plan.............................................. 6 Tender Offer................................................... 6 Certain Litigation Relating to the Dickstein Solicitation...... 7 2. Certain Information Concerning the Company...................... 8 The Company.................................................... 8 Recent Developments............................................ 8 Emergence from Bankruptcy...................................... 8 Summary Consolidated Financial Information..................... 8 Stockholder Rights Plan........................................ 11 Available Information.......................................... 12 3. Terms of the Offer.............................................. 13 Proration...................................................... 13 Tenders by Holders of Fewer than 100 Shares.................... 14 General........................................................ 14 4. Procedure for Tendering Shares.................................. 14 Valid Tender of Shares......................................... 14 Signature Guarantees and Method of Delivery.................... 15 Book-Entry Delivery............................................ 16 Guaranteed Delivery............................................ 16 Federal Income Tax Withholding................................. 17 Determination of Validity; Waiver of Defects; No Obligation to Give Notice of Defects......................................... 17 5. Withdrawal Rights............................................... 17 6. Acceptance for Payment and Payment.............................. 18 7. Price Range of Common Stock; Dividends.......................... 19 8. Interest of Certain Persons in the Offer........................ 20 9. Effects of the Offer on the Market for Common Stock; Registration Under the Exchange Act............................................... 20 10. Certain Federal Income Tax Consequences......................... 21 11. Source and Amount of Funds...................................... 23 12. Certain Conditions of the Offer................................. 23 13. Certain Legal Matters; Regulatory Approvals..................... 25 14. Extension of Tender Period; Termination and Amendments.......... 25 15. Fees and Expenses............................................... 26 16. Miscellaneous................................................... 26
3 To the Holders of the Common Stock and Series A Preferred Stock of Hills Stores Company: INTRODUCTION Hills Stores Company, a Delaware corporation (the "Company"), is offering to purchase up to 3,000,000 shares of its Common Stock, par value $.01 per share ("Common Stock"), at $25.00 per share, net to the seller in cash, upon the terms and subject to the conditions set forth in this Offer to Purchase and the related Letter of Transmittal (which together constitute the "Offer"). Although only shares of Common Stock will be purchased pursuant to the Offer, holders of shares of Series A Convertible Preferred Stock, par value $.10 per share, of the Company ("Series A Preferred Stock") may tender shares of Common Stock into which their shares of Series A Preferred Stock are convertible by following the instructions contained in Section 4 and the Letter of Transmittal. Each reference in this Offer to Purchase and the related Letter of Transmittal to the Common Stock or the Series A Preferred Stock includes the associated rights (the "Rights") to purchase Series B Participating Cumulative Preferred Stock, par value $.10 per shares, of the Company. See Section 2. THE OFFER IS NOT CONDITIONED UPON ANY MINIMUM NUMBER OF SHARES BEING TENDERED. THE OFFER IS, HOWEVER, SUBJECT TO CERTAIN OTHER CONDITIONS. SEE SECTION 12. If more than 3,000,000 shares of Common Stock are validly tendered by the Expiration Date (as defined in Section 3) and not withdrawn, the Company will accept for payment shares of Common Stock first from all stockholders who beneficially owned on January 23, 1995, and continue to own until the Expiration Date, an aggregate of fewer than 100 shares of Common Stock (including shares of Common Stock underlying the conversion rights of shares of Series A Preferred Stock) and who validly tender all such shares of Common Stock (each, an "Odd Lot Owner"), and then on a pro rata basis from all other stockholders who validly tender shares of Common Stock. The Company will return all shares of Common Stock not purchased pursuant to the Offer, including shares not purchased because of proration. Unless otherwise instructed in the Letter of Transmittal, shares of Series A Preferred Stock delivered pursuant to the instructions set forth in Section 4 and the Letter of Transmittal will be converted into Common Stock only to the extent such tender of Common Stock is accepted by the Company. Unless otherwise instructed in the Letter of Transmittal, all remaining shares of Series A Preferred Stock so delivered will not be converted and will be returned to the stockholder. See Section 4. Tendering stockholders will not be obligated to pay brokerage commissions, solicitation fees or, subject to Instruction 6 of the Letter of Transmittal, stock transfer taxes on the purchase of shares of Common Stock by the Company pursuant to the Offer. In addition, the Company will pay all fees and expenses of Smith Barney Inc. ("Smith Barney"), which is acting as Dealer Manager, Chemical Bank (the "Depositary") and D. F. King & Co., Inc. (the "Information Agent"), incurred in connection with the Offer. See Section 15. The Common Stock is listed and principally traded on The New York Stock Exchange (the "NYSE") and is also listed and traded on the Boston Stock Exchange. On January 23, 1995, the last trading day prior to commencement of the Offer, the closing sale price per share of Common Stock as reported on the NYSE Composite Tape was $21.125. See Section 7. THE COMPANY URGES STOCKHOLDERS TO OBTAIN A CURRENT MARKET QUOTATION FOR THE COMMON STOCK. NEITHER THE COMPANY NOR THE BOARD OF DIRECTORS OF THE COMPANY MAKES ANY RECOMMENDATION AS TO WHETHER ANY STOCKHOLDER SHOULD TENDER ANY OR ALL OF SUCH STOCKHOLDER'S SHARES PURSUANT TO THE COMPANY'S OFFER. 4 EACH STOCKHOLDER MUST MAKE ITS OWN DECISION AS TO WHETHER TO TENDER SHARES AND, IF SO, HOW MANY SHARES TO TENDER. THE COMPANY HAS BEEN ADVISED THAT NONE OF ITS DIRECTORS OR EXECUTIVE OFFICERS INTENDS TO TENDER ANY SHARES OF COMMON STOCK PURSUANT TO THE OFFER. THE COMPANY HAS ALSO BEEN ADVISED, HOWEVER, THAT APOLLO MAY TENDER SOME OR ALL OF THE APPROXIMATELY 700,000 SHARES OF COMMON STOCK BENEFICIALLY OWNED BY APOLLO PURSUANT TO THE OFFER. MICHAEL S. GROSS, A DIRECTOR OF THE COMPANY, IS AN OFFICER OF APOLLO. SEE SECTION 8. As of the close of business on January 23, 1995, the Company had 10,572,527 shares of Common Stock and 3,182,107 shares of Series A Preferred Stock issued and outstanding. Each share of Series A Preferred Stock is convertible, at the option of the holder thereof, into one share of Common Stock. As of the close of business on January 23, 1995, options to purchase an additional 1,015,021 shares of Common Stock were outstanding under the Company's 1993 Incentive and Nonqualified Stock Option Plan. Options to purchase 160,821 of such shares were exercisable as of such date. In addition, the Company has reserved 700,000 shares of Common Stock for issuance upon exercise of its Series 1993 Stock Rights which, as of the date hereof, are unvested, and 432,990 shares of Common Stock for issuance upon exercise of Series 1993 Warrants to purchase Common Stock at $30.00 per share. Such stock rights and warrants were issued by the Company pursuant to the plan of reorganization governing the Company's emergence from bankruptcy proceedings in October 1993. The Company may also issue from time to time additional shares of Common Stock or Series A Preferred Stock pursuant to such plan of reorganization upon settlement of bankruptcy claims, although the Company does not believe that the issuance of any such shares would have a material effect on the proration of shares of Common Stock tendered pursuant the Offer. The 3,000,000 shares of Common Stock which the Company is offering to purchase represent approximately 28% of the Common Stock outstanding as of the close of business on January 23, 1995, and approximately 22% of the Company's Common Stock outstanding as of such date assuming the conversion of all shares of Series A Preferred Stock outstanding, and the exercise of all stock options exercisable, as of the close of business on January 23, 1995. 1. BACKGROUND AND PURPOSE OF THE OFFER. DICKSTEIN SOLICITATION On August 16, 1994, Dickstein Partners, Inc. ("Dickstein"), commenced a consent solicitation to remove without cause four members of the Board of Directors of the Company (the "Board") and replace them with four Dickstein nominees (the "Dickstein Solicitation"). In connection with the Dickstein Solicitation, Dickstein initially proposed that the Company repurchase up to 5.5 million shares of its Common Stock and Series A Preferred Stock in exchange for $27 principal amount per share of high yield notes (the "Dickstein Exchange Proposal"). In August 1994, the Board retained Smith Barney as its financial advisor to evaluate, from a financial point of view, the Dickstein Exchange Proposal and other alternatives available to the Company and announced that, at the same time, the Board would consider whether any changes in the Company's operating or strategic plans were appropriate. Based on the Board's review of the Company's operating and strategic plans and the financial analysis of Smith Barney, the Board determined that the Dickstein Exchange Proposal was inconsistent with the continued successful execution of the Company's operating strategies and the implementation of its growth plan. On September 21, 1994, the Company announced that the Board had approved a program to enhance stockholder value, including the implementation of the growth plan described below and the decision to pursue the Offer. The approval of this program followed completion of an in-depth analysis of various means for the Company to enhance stockholder value that was conducted by the Board, in consultation with the Company's senior management, during August and September 1994. Included within the analysis was an evaluation of the Dickstein Exchange Proposal (including modifications made by Dickstein to its initial proposal). On September 23, 1994, the Company and Dickstein entered into a Settlement Agreement (the "Dickstein Settlement Agreement") pursuant to which Dickstein agreed, among other things, (i) to cease the 5 Dickstein Solicitation, (ii) to support the Company's effort to adopt an amendment to the Company's Amended and Restated Certificate of Incorporation to provide that any action required or permitted to be taken by stockholders must be taken at an annual or special meeting of stockholders and may not be taken by written consent of stockholders (the "Proposed Charter Amendment") and (iii) not to challenge the validity of certain of the Company's employment and consulting agreements, the Company's stockholder rights plan and certain amendments to the Company's Amended and Restated By-Laws. In the Dickstein Settlement Agreement, the Company agreed to use its best efforts to consummate the Offer as promptly as practicable and to reimburse Dickstein for up to $600,000 of Dickstein's expenses in connection with the Dickstein Solicitation and to use the Company's best efforts to consummate the Offer. In addition, the Dickstein Settlement Agreement provides that if the Company does not purchase shares of Common Stock pursuant to the Offer (in accordance with the terms of the Offer) prior to March 31, 1995 (unless the Offer is made, all conditions to the purchase of shares of Common Stock in the Offer are satisfied and no shares of Common Stock are tendered), then the Company will promptly amend its Amended and Restated By-Laws to grant to its stockholders the right to take action without a meeting by written consent (and such by-law amendment will not be subject to modification or amendment without stockholder approval). HILLS GROWTH PLAN The Company's growth plan consists of three main components--(i) a remodeling program under which the successful remodeling of the Company's stores, begun in 1991, will be completed by the end of the Company's 1995 fiscal year, the Company will continually improve its overall store design and merchandising presentation, and the Company anticipates commencing a second phase of its remodeling program in 1996; (ii) a new store program under which the Company plans to open up to 15 new stores in 1995 and up to 20 new stores per year over the next several years; and (iii) continuation of an operating improvements program under which the Company is committed to reducing operating expenses as a percentage of sales. The capital required to implement the Company's growth plan is approximately $65 million in 1995 and approximately $75-80 million annually thereafter for the next several years. While such capital expenditure levels are significantly higher than expenditures incurred in recent years (particularly in light of the Company's restructuring and store closings during the pendency of its Chapter 11 bankruptcy proceedings that were concluded in 1993), the Company anticipates that it will be able to make all such capital expenditures out of cash flows from operations and believes that the expenditures are appropriate in light of the anticipated returns on the Company's investments in remodeling and opening new stores. TENDER OFFER The adoption by the Board of its plan to enhance stockholder value also involved approval of the Offer. Commencement of the Offer was conditioned on stockholder approval of the Proposed Charter Amendment. In addition, the Indenture governing the Company's 10.25% Senior Notes due 2003 (the "Senior Notes") contained a limitation on restricted payments which, unless such limitation were amended or modified, would not have permitted the Company to consummate the Offer. Accordingly, commencement of the Offer also was conditioned upon either approval of a majority in interest of the holders of the Senior Notes to an amendment to the restricted payments provision contained in the Indenture or formation of a new holding company which would not have been subject to the Indenture and could have purchased shares of Common Stock pursuant to a self-tender offer without violating the Indenture's restricted payments limitation. To facilitate commencement of the Offer, the Company solicited the consent of holders of Senior Notes to modify the Indenture's restricted payments limitation and agreed to pay $15.00 in cash for each $1,000 principal amount of Senior Notes consenting to such modification. On January 11, 1995, holders of the Senior Notes consented to the adoption of an amendment to the restricted payments provision contained in the Indenture governing the Senior Notes so that shares of Common Stock may be purchased pursuant to the Offer without violating such restricted payments provision. 6 At a special meeting of stockholders of the Company held on January 18, 1995, the stockholders of the Company approved the Proposed Charter Amendment. The primary purpose of the Offer is to provide the Company's stockholders who wish to realize a portion of their investment currently in cash with an opportunity to sell a portion of their shares at a premium over recent market prices of the shares without the usual transaction costs associated with a market sale. Stockholders whose shares are not purchased pursuant to the Offer will increase their proportionate ownership interest in the Company and thus in its future earnings and profits. The Offer will also allow qualifying Odd Lot Owners whose shares of Common Stock are purchased pursuant to the Offer to avoid the payment of brokerage commissions and any applicable odd-lot discount payable on a sale of shares of Common Stock in a transaction effected on a securities exchange. To the extent the purchase of shares of Common Stock in the Offer results in a reduction in the number of stockholders of record, the costs to the Company for services to stockholders will be reduced. Shares of Common Stock the Company acquires pursuant to the Offer will initially be held in the Company's treasury or retired (or a combination thereof) and will be available for the Company to issue without further stockholder action (except as required by applicable law or the rules of the securities exchanges on which shares of Common Stock are listed) for such purposes as, among others, the acquisition of other businesses, the raising of additional capital for use in the Company's business, the satisfaction of conversion requirements under securities issued by the Company, the distribution of stock dividends and the implementation of, or the satisfaction of obligations under, employee benefit plans. The Company's certificate of designation governing the terms of the Series A Preferred Stock provides that any shares of Series A Preferred Stock which are converted into shares of Common Stock shall, after such conversion, be retired, and the Company shall take all appropriate action to cause such shares to obtain the status of authorized but unissued shares of preferred stock of the Company without designation as to series until such shares are once more designated as part of a particular series by the Board. CERTAIN LITIGATION RELATING TO THE DICKSTEIN SOLICITATION On August 24, 1994, a stockholder's derivative and class action lawsuit was filed in the Court of Chancery of the State of Delaware captioned Weiss v. Lee, et al., which named each Board member and the Company as defendants. The plaintiff amended his complaint on September 9, 1994, alleging, among other things, that the Board adopted a stockholder rights plan and entered into new employment and consulting agreements for the express purpose of entrenching the Board members and management in their current offices for their own personal gain and to the detriment of the Company's stockholders, and, consequently, breached their fiduciary duty to the Company's stockholders. The Company and its directors have denied, and continue to deny, that any of them have committed any violation of law or breached any duty owed the Company or its stockholders and believe the plaintiff's allegations are without merit. However, in order to eliminate the burden and expense of further litigation, and because the Board believes a settlement is in the best interests of the Company and all of its stockholders, on December 16, 1994, the parties entered into a Stipulation and Agreement of Compromise, Settlement and Release (the "Weiss Settlement"). The Weiss Settlement, which contemplates treatment of the action as a stockholder class action and would not permit members of the stockholder class to opt out of the Weiss Settlement, has been presented to the Court of Chancery for its approval. In the Weiss Settlement, the Company has agreed, among other things, (i) to amend the challenged employment agreements to change the definition of change in control, shorten the initial term of the agreements and adjust certain termination payments, (ii) to undertake the Offer and (iii) not to oppose an application of plaintiff's counsel for an award of attorneys' fees in an amount not to exceed $350,000, plus expenses not to exceed $35,000. A hearing regarding the Weiss Settlement has been scheduled for March 20, 1995. On January 17, 1995, the Company distributed a notice of the Weiss Settlement and the scheduling of 7 such hearing to its stockholders. Additional copies of such notice may be obtained by contacting the Vice President--Corporate Counsel of the Company at (617) 821-1000, extension 1720. The tendering of shares of Common Stock pursuant to the Offer will not affect any substantive rights of the Company's stockholders under the Weiss Settlement. 2. CERTAIN INFORMATION CONCERNING THE COMPANY. THE COMPANY The Company is a leading regional discount retailer offering a broad range of brand name and other first quality general merchandise, and operates, through HDSC, its wholly-owned subsidiary, a chain of discount department stores under the trade name of Hills Department Stores. The Company currently operates 154 stores in the states of Illinois, Indiana, Kentucky, Maryland, Massachusetts, New York, Ohio, Pennsylvania, Tennessee, Virginia and West Virginia. The Company is a Delaware corporation. Its principal executive offices are located at 15 Dan Road, Canton, Massachusetts 02021 (telephone 617-821-1000). RECENT DEVELOPMENTS On January 5, 1995, the Company publicly announced that comparable sales for the five-week period ended December 31, 1994, increased 4.1 percent to $364.0 million from $349.7 million for the corresponding period in fiscal 1993. Total sales for December 1994 increased 6.5 percent to $372.6 million. Comparable sales for the forty-eight week period ended December 31, 1994, increased 4.7 percent to $1,775.1 million from $1,695.6 million for the corresponding period in the previous year. Total sales increased 5.6 percent during the forty-eight week period ended December 31, 1994, to $1,796.8 million. The Company also publicly announced that the 1994 Christmas period sales were ahead of the Company's plan and that hard-line and seasonal businesses, particularly those associated with the home, continued to be very strong, while apparels, though ahead for the period, experienced more modest gains. EMERGENCE FROM BANKRUPTCY On October 4, 1993, the Company and certain of its principal subsidiaries emerged from reorganization proceedings under Chapter 11 of the United States Bankruptcy Code ("Chapter 11") pursuant to a Confirmation Order entered on September 10, 1993, by the United States Bankruptcy Court for the Southern District of New York, which confirmed the Company's First Amended Consolidated Plan of Reorganization. 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 Predecessor Company operated its business as a debtor- in-possession under Chapter 11 from February 4, 1991, until October 4, 1993. Under the reorganization plan, the Predecessor Company was dissolved, all of the Company's assets, property and interest were transferred to Hills Department Store Company, the Company's principal operating subsidiary ("HDSC"), and the Company succeeded to the Predecessor Company's status as a holding company and the parent of HDSC. SUMMARY CONSOLIDATED FINANCIAL INFORMATION The tables set forth below present certain summary consolidated historical, historical adjusted, and pro forma financial information of the Company. The summary historical information at January 29, 1994, and January 30, 1993, and for the year ended January 30, 1993, has been summarized from the audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended January 29, 1994 (the "Form 10-K"). The summary historical information at October 29, 1994, and October 30, 1993, and for the thirty-nine weeks ended October 29, 1994, has been summarized from the 8 unaudited consolidated financial statements included in the Company's Quarterly Report on Form 10-Q for the thirty-nine weeks ended October 29, 1994 (the "Form 10-Q"). Such summary historical financial information is qualified in its entirety by reference to the Form 10-K or the Form 10-Q, as applicable, and all of the financial statements and related notes contained therein. See "Available Information" below. The historical information for the thirty-nine weeks ended October 29, 1994 is unaudited; however, the information furnished reflects all normal recurring adjustments which are, in the opinion of management, necessary to present a fair statement of the results for the interim periods. The summary unaudited historical adjusted financial information for the fiscal year ended January 29, 1994, has been summarized from the Combined Statement of Operations included in footnote 3 to the audited consolidated financial statements included in the Form 10-K. The summary historical adjusted financial information for the thirty-nine weeks ended October 30, 1993, has been summarized from the Combined Statement of Operations included in footnote 2 to the unaudited consolidated financial statements included in the Form 10-Q. Such summary historical adjusted financial information is qualified in its entirety by reference to the Form 10-K or the Form 10-Q, as applicable, and all of the financial statements and related notes contained therein. See "Available Information" below. The historical adjusted information for the fiscal year ended January 29, 1994, and the thirty-nine weeks ended October 30, 1993, has been adjusted to reflect: the combination of pre-emergence and post-emergence accounting periods, the implementation of fresh-start reporting as of January 31, 1993, elimination of the effects of non-recurring transactions resulting from the reorganization pursuant to the Company's emergence from bankruptcy and payments to creditors in connection with such emergence from bankruptcy as of January 31, 1993. Financial information for periods after the Company's emergence from bankruptcy proceedings has been separated from pre-emergence financial data by black lines to signify that they have been prepared on a basis not comparable to prior periods. See footnote 2 to the consolidated financial statements included in the Form 10-K, which may be obtained as provided under "Available Information" below. The summary pro forma financial information at October 29, 1994, and January 29, 1994, for the year ended January 29, 1994, and for the thirty-nine weeks ended October 29, 1994, has been summarized from the unaudited Consolidated Pro Forma Financial Information of the Company and its subsidiaries (the "Pro Forma Financial Information") filed as an exhibit to the Issuer Tender Offer Statement on Schedule 13E-4 (the "Schedule 13E-4") filed by the Company with the Securities and Exchange Commission (the "Commission") in connection with the Offer. Such summary pro forma financial information is qualified in its entirety by reference to the Pro Forma Financial Information, which may be obtained as provided under "Available Information" below. The Pro Forma Financial Information assumes payment of a full $2.4 million to holders of the Senior Notes (which full payment assumes that $160 million principal amount of Senior Notes are outstanding and holders of all such Senior Notes consented to the modification of the restricted payments limitation contained in the Indenture governing the Senior Notes), a pro rata tender of shares of Common Stock and shares of Series A Preferred Stock, the repurchase of three million shares of Common Stock for $25 per share in cash and, for purposes of the pro forma financial information at October 29, 1994, borrowings under the working capital credit facility of HDSC (the "Credit Facility") in order to fund the repurchase of shares of Common Stock. The Company anticipates funding the actual purchase of shares of Common Stock pursuant to the Offer with cash on hand at the time of purchase. In addition to the assumptions described in the immediately preceding sentence, the Pro Forma Financial Information for the year ended January 29, 1994, also includes the adjustments relating to the Company's emergence from bankruptcy referred to in the preceding paragraph. The historical results of operations for the thirty-nine weeks ended October 29, 1994, and October 30, 1993, are not necessarily indicative of the results of operations to be expected for a full year because the Company's business is seasonal in nature. The fourth quarter of each fiscal year provides the major portion of the Company's annual sales and operating earnings, with operating earnings particularly concentrated in the Christmas selling season. See "Recent Developments" above. 9 HILLS STORES COMPANY AND SUBSIDIARIES SUMMARY CONSOLIDATED FINANCIAL INFORMATION
Thirty-nine weeks ended Years ended ----------------------- ----------------------- Historical Historical Historical Adjusted Adjusted Historical October 29, October 30, January 29, January 30, 1994 1993 1994 1993 ----------- ----------- ----------- ----------- (in thousands, except per share data) HISTORICAL/HISTORICAL ADJUSTED STATEMENT OF OPERATIONS DATA: Net sales...................... $1,198,441 $1,138,539 $1,765,533* $1,750,266 Earnings before extraordinary * item.......................... 6,964 1,060 30,041* 26,817 Net earnings applicable to com- * mon shareholders.............. 6,964 1,060 30,041* 47,264 PRIMARY EARNINGS PER COMMON * SHARE: * Earnings before extraordinary * item.......................... 0.49 0.08 2.14* 1.23 Extraordinary item............. -- -- -- * 1.16 Net earnings applicable to com- * mon shareholders.............. 0.49 0.08 2.14* 2.39 FULLY-DILUTED EARNINGS PER COM- * MON SHARE: * Earnings before extraordinary * item.......................... 0.47 0.07 2.03* 1.11 Extraordinary item............. -- -- -- * 1.04 Net earnings applicable to com- * mon shareholders.............. 0.47 0.07 2.03* 2.15 AVERAGE NUMBER OF SHARES: * Primary earnings............... 14,097 14,000 14,056* 19,757 Fully-diluted earnings......... 14,797 14,700 14,794* 21,982 RATIO OF EARNINGS TO FIXED * CHARGES(1).................... 1.31 1.05 2.06* 2.16 - -------------------------------------------------------------------------------- PRO FORMA STATEMENT OF OPERA- TIONS DATA: Net sales...................... $1,198,441 $1,765,533 Earnings before extraordinary item.......................... 4,878 27,533 Net earnings applicable to com- mon shareholders.............. 4,878 27,533 PRIMARY EARNINGS PER COMMON SHARE: Earnings before extraordinary item.......................... 0.44 2.49 Net earnings applicable to com- mon shareholders.............. 0.44 2.49 FULLY-DILUTED EARNINGS PER COM- MON SHARE: Earnings before extraordinary item.......................... 0.41 2.33 Net earnings applicable to com- mon shareholders.............. 0.41 2.33 AVERAGE NUMBER OF SHARES: Primary earnings............... 11,097 11,056 Fully-diluted earnings......... 11,797 11,794 RATIO OF EARNINGS TO FIXED CHARGES(1).................... 1.20 1.91
- -------- (1) Computed by dividing earnings from continuing operations, before income taxes and fixed charges, by fixed charges. Fixed charges consist of interest expense, approximately 39% of rent expense (estimated by management to be the interest component of such rent expense) and preferred dividend requirements of the Predecessor Company accrued but not paid during the Company's bankruptcy proceedings. Preferred stock dividend requirements have been increased to reflect the estimated amount of pre-tax earnings that would be necessary to cover such dividends. 10 HILLS STORES COMPANY AND SUBSIDIARIES SUMMARY CONSOLIDATED FINANCIAL INFORMATION
October 29, October 30, January 29, January 30, 1994 1993 1994 1993 ----------- ----------- ----------- ----------- (in thousands, except per share data) HISTORICAL BALANCE SHEET DATA: Working capital............... $ 185,247 $ 107,194 $171,440* $ 299,927 Reorganization value in excess * of amounts allocable to * identifiable assets, net..... 169,989 203,586 176,728* -- Goodwill...................... -- -- -- * 135,627 Total assets.................. 1,020,645 1,021,453 907,621* 922,745 Total indebtedness............ 753,107 823,444 677,386* 1,105,917 Shareholders' equity (defi- * cit)......................... 267,538 198,009 230,235* (183,172) Book value per share.......... 25.44 22.00 25.58* (9.27) * - ------------------------------------------------------------------------------- PRO FORMA BALANCE SHEET DATA: Working capital............... $ 107,847 $ 94,040 Reorganization value in excess of amounts allocable to identifiable assets, net..... 169,989 176,728 Total assets.................. 1,020,645 832,621 Total indebtedness............ 813,180 655,957 Shareholders' equity.......... 207,465 176,664 Book value per share.......... 27.60 24.98
STOCKHOLDER RIGHTS PLAN On August 16, 1994, the Board distributed to each outstanding share of Common Stock and Series A Preferred Stock one right (a "Right") to purchase from the Company one one-thousandth (1/1,000th) of a share of Series B Participating Cumulative Preferred Stock, par value $.10 per share ("Series B Preferred Stock"), at a price of $75 per share (the "Purchase Price"). The Rights are not exercisable until the Distribution Date (as defined below) and will expire on August 16, 2004 (the "Rights Expiration Date"), unless earlier redeemed by the Company as described below. The description and terms of the Rights are set forth in the Rights Agreement dated as of August 16, 1994, between the Company and Chemical Bank, as rights agent (the "Rights Agreement"). Until the earlier of (i) such time as the Company learns that a person or group (including any affiliate or associate of such person or group) has acquired, or has obtained the right to acquire, beneficial ownership of an amount equal to or greater than 15% of the outstanding shares of Common Stock and Series A Preferred Stock (or in the event a person or group beneficially owned on August 16, 1994, in excess of 15%, such percentage so owned plus 1% (the "Higher Percentage")), other than pursuant to a Qualifying Offer (as defined below) (such person or group, being an "Acquiring Person"), and (ii) such date, if any, as may be designated by the Board following the commencement of, or first public disclosure of an intent to commence, a tender or exchange offer for outstanding shares of Common Stock or Series A Preferred Stock which could result in such person or group becoming the beneficial owner of an amount equal to or greater than 15% of the outstanding shares of Common Stock and Series A Preferred Stock (or, if applicable, the Higher Percentage), other than pursuant to a Qualifying Offer (the earlier of such dates being called the "Distribution Date"), the Rights will be evidenced by the certificates for shares of Common Stock and Series A Preferred Stock registered in the names of the holders thereof and not by separate right certificates. A "Qualifying Offer" is defined as an all-cash tender offer for all outstanding shares of Common Stock and Series A Preferred Stock for which firm commitments for financing have been obtained and that must meet certain other conditions, including without limitation, remaining open for a period of at least 45 business days and 11 providing for a prompt second-step acquisition of shares not purchased in the tender offer at the same price as the tender offer. At such time as there is an Acquiring Person, the Rights will entitle each holder (other than such Acquiring Person) of a Right to purchase, for the Purchase Price, that number of one one-thousandths (1/1,000ths) of a share of Series B Preferred Stock equivalent to the number of shares of Common Stock which at the time of such event would have a market value of twice the Purchase Price. In the event the Company is acquired in a merger or other business combination by an Acquiring Person or 50% or more of the Company's assets or assets representing 50% or more of the Company's revenues or cash flow are sold, leased, exchanged or otherwise transferred (in one or more transactions) to an Acquiring Person, each Right will entitle its holder (other than such Acquiring Person) to purchase, for the Purchase Price, that number of common shares of such Acquiring Person (or, in certain instances, an affiliate thereof) which at the time of the transaction would have a market value (or, in the case of a non-publicly traded entity, book value) of twice the Purchase Price. At any time prior to the earlier of (i) such time as a person becomes an Acquiring Person and (ii) the Rights Expiration Date, the Board may redeem the Rights in whole, but not in part, at a price (in cash or Common Stock or other securities of the Company deemed by the Board to be at least equivalent in value) of $.01 per Right, subject to adjustment as provided in the Rights Agreement. At any time prior to the Distribution Date, the Company may, without the approval of any holder of the Rights, supplement or amend any provision of the Rights Agreement (including the date on which the Distribution Date shall occur, the time during which the Rights may be redeemed or the terms of the Series B Preferred Stock), except that no supplement or amendment shall be made which reduces the Redemption Price (other than pursuant to certain adjustments therein) or provides for an earlier Rights Expiration Date. The Rights have certain anti-takeover effects. The Rights will cause substantial dilution to a person or group that attempts to acquire the Company without conditioning the offer on substantially all the Rights being acquired. The Rights will not interfere with any acquisition of the Company pursuant to a Qualifying Offer or with a third party approved by the Board since the Board may, at its option, at any time prior to any person becoming an Acquiring Person, redeem all but not less than all of the then outstanding Rights at the Redemption Price. Each reference in this Offer to Purchase and the related Letter of Transmittal to the Common Stock or the Series A Preferred Stock includes the associated Rights. The tender of shares pursuant to the Offer will therefore include a tender of the associated Rights. AVAILABLE INFORMATION The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance therewith, files annual and periodic reports, proxy statements and other information with the Commission relating to its business, financial condition and other matters. Information, as of particular dates, concerning the Company's directors and officers, their remuneration, options granted to them, the principal holders of the Company's securities and any material interest of such persons in transactions with the Company is required to be disclosed in proxy statements distributed to the Company's stockholders and filed with the Commission. Pursuant to Rule 13e-4 of the General Rules and Regulations under the Exchange Act, the Company has filed with the Commission a Tender Offer Statement on Schedule 13E-4 (the "Schedule 13E-4"), together with exhibits, furnishing certain additional information with respect to the Offer. The Schedule 13E-4, and exhibits thereto and the reports and other information filed by the Company with the Commission, can be inspected and copied at the public reference facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. The reports and other information filed by the Company with the Commission under the Exchange Act should also be available for inspection and copying at the Commission's regional 12 offices located at Suite 1400, 500 West Madison Street, Chicago, Illinois 60661 and Seven World Trade Center, Thirteenth Floor, New York, New York 10048. Copies of all the materials referred to above can be obtained from the public reference section of the Commission, Washington, D.C. 20549, at prescribed rates. Reports and other information concerning the Company should also be available for inspection at the offices of the NYSE, 20 Broad Street, New York, New York 10005, and the Boston Stock Exchange, One Boston Place, 30th Floor, Boston, Massachusetts 02108. 3. TERMS OF THE OFFER. Upon the terms and subject to the conditions set forth in the Offer, the Company will accept for payment and pay for up to 3,000,000 shares of Common Stock validly tendered prior to the Expiration Date and not theretofore withdrawn in accordance with the procedures set forth in Section 5. The term "Expiration Date" shall mean 12:00 Midnight, New York City time, on Tuesday, February 21, 1995, unless and until the Company, in its sole discretion, shall have extended the period of time for which the Offer is open, in which event the term "Expiration Date" shall mean the latest time and date at which the Offer, as so extended by the Company, shall expire. Subject to the purchase of all shares of Common Stock validly tendered and not withdrawn by Odd Lot Owners as set forth in Section 4, if the Offer is oversubscribed, shares of Common Stock tendered before the Expiration Date will be subject to proration. The proration period expires on the Expiration Date. THE OFFER IS NOT CONDITIONED UPON ANY MINIMUM NUMBER OF SHARES OF COMMON STOCK BEING TENDERED. THE COMPANY'S OBLIGATION TO ACCEPT FOR PAYMENT, AND TO PAY FOR, SHARES OF COMMON STOCK PURSUANT TO THE OFFER IS SUBJECT TO CERTAIN CONDITIONS SET FORTH IN SECTION 12. PRORATION If the number of shares of Common Stock validly tendered and not withdrawn prior to the Expiration Date is less than or equal to 3,000,000 shares of Common Stock, the Company, upon the terms and subject to the conditions of the Offer, will purchase for $25.00 per share, net to the seller in cash, all shares of Common Stock so tendered and not withdrawn. If the number of shares of Common Stock validly tendered and not withdrawn prior to the Expiration Date is greater than 3,000,000 shares of Common Stock, the Company, upon the terms and subject to the conditions of the Offer, will accept shares of Common Stock for payment in the following order of priority: (a) first, all shares of Common Stock validly tendered and not withdrawn prior to the Expiration Date by any Odd Lot Owner (that being a stockholder who beneficially owned as of January 23, 1995, and continues to beneficially own until the Expiration Date, an aggregate of less than 100 shares of Common Stock (including shares of Common Stock underlying the conversion rights of shares of Series A Preferred Stock)) who: (1) tenders all shares of Common Stock (including shares of Common Stock underlying the conversion rights of shares of Series A Preferred Stock) beneficially owned by such Odd Lot Owner (partial tenders will not qualify for this preference); and (2) completes the box captioned "Odd Lots" on the Letter of Transmittal and, if applicable, on the Notice of Guaranteed Delivery; and (b) then, after purchase of all the foregoing shares of Common Stock, all shares of Common Stock validly tendered and not withdrawn prior to the Expiration Date on a pro rata basis, if necessary (with adjustments to avoid purchase of fractional shares of Common Stock). All shares of Common Stock not purchased pursuant to the Offer, including shares of Common Stock not purchased because of proration and shares of Common Stock tendered and withdrawn, will be returned to the tendering stockholder at the Company's expense as promptly as practicable (which, in the event of proration, is expected to be up to approximately 12 NYSE trading days) following the Expiration Date or as 13 promptly as practicable following withdrawal, as the case may be. Unless otherwise instructed in the Letter of Transmittal, shares of Series A Preferred Stock delivered pursuant to the instructions set forth in Section 4 and the Letter of Transmittal will be converted into Common Stock only to the extent such tender of Common Stock is accepted by the Company. Unless otherwise instructed, all other shares of Series A Preferred Stock so delivered will not be converted and will be returned to the tendering stockholder at the Company's expense as promptly as practicable (which, in the case of proration, is expected to be up to approximately 12 NYSE trading days) following the Expiration Date. In the event of proration, because of the difficulty of determining the precise number of shares of Common Stock validly tendered and not withdrawn, the Company does not expect to be able to announce the final results of such proration until at least seven NYSE trading days after the Expiration Date. Preliminary results of such proration will be announced by press release as promptly as practicable after the Expiration Date. Stockholders may obtain such preliminary information, when available, from the Dealer Manager or the Information Agent. TENDERS BY HOLDERS OF FEWER THAN 100 SHARES The Company, upon the terms and subject to the conditions of the Offer, will accept for payment, without proration, all shares of Common Stock (including shares of Common Stock underlying the conversion rights of shares of Series A Preferred Stock) validly tendered and not withdrawn on or before the Expiration Date by or on behalf of Odd Lot Owners. To avoid possible proration, however, an Odd Lot Owner must validly tender all shares of Common Stock that such Odd Lot Owner beneficially owns (including shares of Common Stock underlying the conversion rights of shares of Series A Preferred Stock); partial tenders will not qualify for this preference. This preference is not available to owners of 100 or more shares of Common Stock (including shares of Common Stock underlying the conversion rights of shares of Series A Preferred Stock), even if such owners have separate stock certificates for less than 100 shares. Any Odd Lot Owner wishing to tender all shares of Common Stock beneficially owned by such Odd Lot Owner pursuant to this Offer must complete the box captioned "Odd Lots" on the Letter of Transmittal and, if applicable, on the Notice of Guaranteed Delivery. See Section 4. GENERAL This Offer to Purchase and the related Letter of Transmittal are being mailed to record holders of shares of Common Stock and record holders of shares of Series A Preferred Stock and will be furnished to brokers, dealers, commercial banks, trust companies and similar persons whose names, or the names of whose nominees, appear on the stockholder lists or, if applicable, who are listed as participants in a clearing agency's security position listing, for subsequent transmittal to beneficial owners of shares of Common Stock or Series A Preferred Stock. By tendering shares of Common Stock pursuant to the Offer, a stockholder will also be tendering the associated Rights issued pursuant to the Rights Agreement, unless the Rights have previously been redeemed or become separately transferable in accordance with their terms. The Rights are not currently exercisable, and they trade together with the shares associated therewith. Acceptance for payment of, and payment for, shares of Common Stock by the Company will also constitute the concurrent purchase of such Rights; accordingly, no extra or separate consideration will be paid for Rights so purchased. See Section 2. 4. PROCEDURE FOR TENDERING SHARES. VALID TENDER OF SHARES For shares of Common Stock to be validly tendered pursuant to the Offer: (a) the certificates for such shares of Common Stock or shares of Series A Preferred Stock convertible into such shares of Common Stock (or confirmation of receipt of such shares of Common 14 Stock or Series A Preferred Stock pursuant to the procedures for book-entry transfer set forth below), together with a properly completed and duly executed Letter of Transmittal (or a facsimile thereof) with any required signature guarantees, or an Agent's Message (as defined under Book-Entry Delivery below) in connection with a book-entry delivery, and any other documents required by the Letter of Transmittal, must be received before the Expiration Date by the Depositary at one of its addresses set forth on the back cover of this Offer to Purchase; or (b) the tendering stockholder must comply with the guaranteed delivery procedure set forth below. Although only shares of Common Stock will be purchased pursuant to the Offer, holders of Series A Preferred Stock may tender shares of Common Stock into which their shares of Series A Preferred Stock are convertible by complying with the instructions for the valid tender of shares of Common Stock set forth above. In such case, unless otherwise instructed in the Letter of Transmittal, shares of Series A Preferred Stock delivered to the Depositary will be converted into Common Stock only to the extent such tender of Common Stock is accepted by the Company. Unless otherwise instructed, all remaining shares of Series A Preferred Stock so delivered will not be converted and will be returned to the stockholder. A tender of shares of Common Stock made pursuant to any method of delivery set forth herein will constitute a binding agreement between the tendering stockholder and the Company upon the terms and subject to the conditions of the Offer, including the tendering stockholder's representation that (a) such stockholder has a net long position in the shares of Common Stock being tendered within the meaning of Rule 14e-4 promulgated under the Exchange Act, and (b) the tender of such shares of Common Stock complies with Rule 14e-4. It is a violation of Section 14(e) of the Exchange Act and Rule 14e-4 promulgated thereunder, for a person to tender shares of Common Stock for such person's own account unless the person so tendering at the time of tender and as of the Expiration Date has a net long position at least equal to the number of shares of Common Stock tendered and: (i) owns the number of shares of Common Stock tendered; or (ii) owns other securities (including Series A Preferred Stock) convertible into or exchangeable for such shares of Common Stock or owns an option, warrant or right to purchase such shares of Common Stock and will acquire shares of Common Stock for tender by conversion, exchange or exercise of such option, warrant or right. Section 14(e) and Rule 14e-4 provide a similar restriction applicable to the tender or guarantee of a tender on behalf of another person. SIGNATURE GUARANTEES AND METHOD OF DELIVERY No signature guarantee is required on the Letter of Transmittal (i) if the Letter of Transmittal is signed by the registered holder of shares of Common Stock tendered therewith or shares of Series A Preferred Stock convertible into tendered shares and such registered holder has not completed either the box entitled "Special Payment Instructions" or the box entitled "Special Delivery Instructions" on the Letter of Transmittal or (ii) if such shares of Common Stock or shares of Series A Preferred Stock convertible into tendered shares are tendered for the account of a bank, broker, dealer, credit union, savings association or other entity that is a member in good standing of a recognized Medallion Program approved by The Securities Transfer Association Inc. (each such entity being hereinafter referred to as an "Eligible Institution"). In all other cases all signatures on Letters of Transmittal must be guaranteed by an Eligible Institution. See Instructions 1 and 5 of the Letter of Transmittal. If the certificates are registered in the name of a person other than the signer of the Letter of Transmittal, or if payment is to be made or certificates for shares of Common Stock not tendered or accepted for payment or certificates for shares of Series A Preferred Stock convertible into shares of Common Stock not tendered or accepted for payment are to be issued to a person other than the registered owner, then the tendered certificates must be endorsed or accompanied by appropriate stock powers, in either case signed exactly as the name or names of the registered owner or owners appear on the certificates, with the signatures on the certificates or stock powers guaranteed as aforesaid. See Instruction 5 of the Letter of Transmittal. 15 THE METHOD OF DELIVERY OF CERTIFICATES FOR SHARES OF COMMON STOCK OR SERIES A PREFERRED STOCK AND ALL OTHER REQUIRED DOCUMENTS IS AT THE OPTION AND RISK OF THE TENDERING STOCKHOLDER. IF DELIVERY IS BY MAIL, REGISTERED MAIL WITH RETURN RECEIPT REQUESTED, PROPERLY INSURED, IS RECOMMENDED. BOOK-ENTRY DELIVERY The Depositary will establish an account with respect to the shares of Common Stock or shares of Series A Preferred Stock convertible into such shares of Common Stock at each of The Depository Trust Company, the Midwest Securities Trust Company and the Philadelphia Depository Trust Company (collectively, the "Book-Entry Transfer Facilities") for purposes of the Offer within two business days after the date of this Offer to Purchase. Any financial institution that is a participant in a Book-Entry Transfer Facility's system may make book-entry delivery of tendered shares of Common Stock or shares of Series A Preferred Stock convertible into such tendered shares of Common Stock by causing such facility to transfer such shares of Common Stock or Series A Preferred Stock into the Depositary's account in accordance with such facility's procedure for such transfer. Even though delivery of shares of Common Stock or Series A Preferred Stock may be effected through book-entry transfer into the Depositary's account at one of the Book-Entry Transfer Facilities, a properly completed and duly executed Letter of Transmittal (or a facsimile thereof), with any required signature guarantees, or an Agent's Message in connection with a book-entry delivery, and other required documents, must, in any case, be transmitted to and received by the Depositary at one of its addresses set forth on the back cover of this Offer to Purchase prior to the Expiration Date, or the guaranteed delivery procedure set forth below must be followed. DELIVERY OF THE LETTER OF TRANSMITTAL AND ANY OTHER REQUIRED DOCUMENTS TO ONE OF THE BOOK- ENTRY TRANSFER FACILITIES DOES NOT CONSTITUTE DELIVERY TO THE DEPOSITARY. The term "Agent's Message" means a message transmitted by a Book-Entry Transfer Facility to, and received by, the Depositary and forming a part of the timely confirmation of a book-entry delivery of tendered shares of Common Stock or Series A Preferred Stock convertible into tendered shares of Common Stock which states that such Book-Entry Transfer Facility has received an express acknowledgment from the participant in such Book-Entry Transfer Facility tendering the shares of Common Stock which are the subject of such confirmation of book-entry delivery, that such participant has received and agrees to be bound by the terms of the Letter of Transmittal and that the Company may enforce such agreement against such participant. GUARANTEED DELIVERY If a stockholder desires to tender shares of Common Stock pursuant to the Offer and such stockholder's certificates for such shares of Common Stock or shares of Series A Preferred Stock convertible into such shares of Common Stock are not immediately available or time will not permit all required documents to reach the Depositary prior to the Expiration Date, such stockholder's tender may nevertheless be effected if all the following conditions are met: (i) such tender is made by or through an Eligible Institution; (ii) a properly completed and duly executed Notice of Guaranteed Delivery substantially in the form provided by the Company is received by the Depositary, as provided below, prior to the Expiration Date; and (iii) the certificates for all tendered shares of Common Stock or shares of Series A Preferred Stock convertible into such shares of Common Stock, in proper form for transfer (or confirmation of book-entry transfer of such shares of Common Stock or Series A Preferred Stock into the Depositary's account at one of the Book-Entry Transfer Facilities), together with a properly completed and duly executed Letter of Transmittal (or facsimile thereof), with any required signature guarantees (or, in the case of book-entry delivery, an Agent's Message) and any other documents required by the Letter of Transmittal, are received by the Depositary within five NYSE trading days after the date of execution of such Notice of Guaranteed Delivery. The Company reserves the right to shorten or eliminate this period so long as the announcement of such shortened period or elimination is made at least six NYSE trading days before the Expiration Date. The Notice of Guaranteed Delivery may be delivered by hand to the Depositary or transmitted by telegram, facsimile transmission or letter to the Depositary and must include a guarantee by an Eligible Institution in the form set forth in such Notice. 16 FEDERAL INCOME TAX WITHHOLDING Unless an exemption applies under the applicable law and regulations concerning "backup withholding" of Federal income tax, the Depositary will be required to withhold, and will withhold, 31% of the gross proceeds otherwise payable to a stockholder or other payee pursuant to the Offer unless the stockholder or other payee provides his tax identification number (social security number or employer identification number) and certifies that such number is correct. Each tendering stockholder, other than a noncorporate foreign stockholder, should complete and sign the main signature form and the Substitute Form W-9 included as part of the Letter of Transmittal, so as to provide the information and certification necessary to avoid backup withholding, unless an applicable exemption exists and is proved in a manner satisfactory to the Company and the Depositary. Noncorporate foreign stockholders should generally complete and sign a Form W-8, Certificate of Foreign Status, a copy of which may be obtained from the Depositary, in order to avoid backup withholding. In the case of any foreign stockholder, the Depositary will withhold 30% of the purchase price of shares of Common Stock purchased from such stockholder in order to satisfy certain withholding requirements, unless such foreign stockholder proves in a manner satisfactory to the Company and the Depositary that either (i) the sale of its shares of Common Stock pursuant to the Offer will qualify as a sale or exchange, rather than a dividend, for federal income tax purposes (see Section 10), in which case no withholding will be required, or (ii) the foreign stockholder is eligible for a reduced tax treaty rate with respect to dividend income, in which case the Depositary will withhold at the reduced treaty rate. DETERMINATION OF VALIDITY; WAIVER OF DEFECTS; NO OBLIGATION TO GIVE NOTICE OF DEFECTS All questions as to the validity, form, eligibility (including time of receipt) and acceptance for payment of any tender of shares of Common Stock will be determined by the Company in its sole discretion, which determination will be final and binding. The Company reserves the absolute right to reject any or all tenders of shares of Common Stock determined by it not to be in proper form or the acceptance for payment of which may, in the opinion of the Company's counsel, be unlawful. The Company also reserves the absolute right to waive any of the conditions of the Offer or any defect or irregularity in tender of any shares of Common Stock of any particular stockholder. NONE OF THE COMPANY, THE DEALER MANAGER, THE DEPOSITARY, THE INFORMATION AGENT OR ANY OTHER PERSON WILL BE UNDER ANY DUTY TO GIVE ANY NOTICE OF ANY DEFECTS OR IRREGULARITIES IN TENDERS OR INCUR ANY LIABILITY FOR FAILURE TO GIVE ANY SUCH NOTICE. The Company's interpretation of the terms and conditions of the Offer (including the Letter of Transmittal and the instructions thereto) will be final and binding. 5. WITHDRAWAL RIGHTS. Except as otherwise provided in this Section 5, a tender of shares of Common Stock pursuant to the Offer is irrevocable. Shares of Common Stock tendered pursuant to the Offer may be withdrawn at any time before the Expiration Date and, unless theretofore accepted for payment by the Company, may also be withdrawn after 12:00 Midnight, New York City time, on March 21, 1995. In order for the withdrawal of the tender of shares of Common Stock to be effective, a written, telegraphic, or facsimile transmission notice of withdrawal must be timely received by the Depositary at one of its addresses set forth on the back cover of this Offer to Purchase. Any such notice of withdrawal must specify the name of the person having tendered the shares of Common Stock as to which the tender is to be withdrawn, the number of shares of Common Stock as to which the tender is to be withdrawn and the name of the registered holder of the shares of Common Stock (or shares of Series A Preferred Stock convertible into such shares of Common Stock) as to which the tender is to be withdrawn (if different from that of the person who tendered such shares of Common Stock). If the certificate(s) for the tendered shares of Common Stock or for shares of Series A Preferred Stock convertible into such shares have been delivered or otherwise identified to the Depositary, then, prior to the physical release of such certificate(s), the serial numbers shown on the particular certificate must be submitted and the signature on the notice of withdrawal must be guaranteed by an Eligible Institution (except in the case of shares of Common Stock tendered by an Eligible 17 Institution). If shares of Common Stock or Series A Preferred Stock have been delivered pursuant to the procedure for book-entry transfer set forth in Section 4, the notice of withdrawal must specify the name and the number of the account at the applicable Book-Entry Transfer Facility to be credited with the withdrawn shares of Common Stock or Series A Preferred Stock and otherwise comply with the procedures of such facility. Withdrawals of tenders of shares of Common Stock may not be rescinded, and any shares of Common Stock as to which a tender is withdrawn will thereafter be deemed not validly tendered for purposes of the Offer. Withdrawn shares of Common Stock may, however, be tendered before the Expiration Date by again following any of the procedures described in Section 4. All questions as to the form and validity (including time of receipt) of notices of withdrawal will be determined by the Company, in its sole discretion, which determination shall be final and binding. None of the Company, the Dealer Manager, the Depositary, the Information Agent or any other person will be under any duty to give any notice of any defects or irregularities in any notice of withdrawal, and none of them will incur any liability for failure to give any such notice. 6. ACCEPTANCE FOR PAYMENT AND PAYMENT. Upon the terms and subject to the conditions of the Offer, the acceptance for payment of up to 3,000,000 shares of Common Stock validly tendered and not properly withdrawn in accordance with the provisions of Section 5 prior to the Expiration Date, will be made as promptly as practicable after the Expiration Date. Notwithstanding any other provision hereof, payment for shares of Common Stock accepted for payment pursuant to the Offer will be made only after timely receipt by the Depositary of certificates for such shares of Common Stock or Series A Preferred Stock convertible into such shares of Common Stock (or a timely confirmation of receipt of such shares of Common Stock or Series A Preferred Stock pursuant to the procedures for book-entry transfer set forth above), a properly completed and duly executed Letter of Transmittal (or facsimile thereof), with any required signature guarantees, or an Agent's Message in connection with a book-entry delivery, and any other documents required by the Letter of Transmittal. The Company expressly reserves the right, in its sole discretion, to delay the acceptance for payment of or payment for shares of Common Stock in order to comply, in whole or in part, with any applicable legal requirement or court order. See Section 14. The Company's reservation of the right to delay payment for shares of Common Stock which it has accepted for payment is limited by Rule 13e-4(f)(5) promulgated under the Exchange Act, which requires that the Company must pay the consideration offered or return the tendered shares promptly after termination or withdrawal of a tender offer. In the event of proration, because of the difficulty of determining the precise number of shares of Common Stock validly tendered and not withdrawn, the Company does not expect to be able to announce the final results of such proration until at least seven NYSE trading days after the Expiration Date. Preliminary results of such proration will be announced by press release as promptly as practicable after the Expiration Date. Stockholders may obtain such preliminary information, when available, from the Dealer Manager or the Information Agent. For purposes of the Offer, the Company will be deemed to have accepted for payment tendered shares of Common Stock as, if and when the Company gives oral or written notice to the Depositary of its acceptance of the tender of such shares of Common Stock. Payment for shares of Common Stock accepted for payment pursuant to the Offer will be made by deposit of the purchase price therefor with the Depositary, which will act as agent for tendering stockholders for the purpose of receiving payment from the Company and transmitting payment to tendering stockholders. UNDER NO CIRCUMSTANCES WILL INTEREST BE PAID ON THE PURCHASE PRICE OF THE SHARES OF COMMON STOCK TO BE PAID BY THE COMPANY, REGARDLESS OF ANY DELAY IN MAKING SUCH PAYMENT. If the Company is delayed in its acceptance for payment of or payment for shares of Common Stock, or is unable to accept for payment or pay for shares of Common Stock pursuant to the Offer for any reason, then, without prejudice to the Company's rights under this Offer to Purchase (including, without limitation, 18 those set forth in Sections 12 and 14), the Depositary may nevertheless, on behalf of the Company, retain tendered shares of Common Stock, and the tender of such shares of Common Stock may not be withdrawn except to the extent tendering stockholders are entitled to, and duly exercise, withdrawal rights as described in Section 5. If any tendered shares of Common Stock are not accepted for payment or paid for because of an invalid tender, the tender of more shares of Common Stock than the Company is obligated to purchase, the occurrence of an event set forth in Section 12, or otherwise, certificates for any such shares of Common Stock or shares of Series A Preferred Stock convertible into such shares, as applicable, will be returned (or, in the case of shares of Common Stock or Series A Preferred Stock delivered by book-entry transfer, such shares of Common Stock or Series A Preferred Stock will be credited to the account maintained with one of the Book-Entry Transfer Facilities by the participant therein who so delivered such shares) as soon as practicable after the Expiration Date without expense to the tendering stockholder. The Company will pay any stock transfer taxes with respect to the transfer and sale of shares of Common Stock to it or its order pursuant to the Offer. If, however, payment of the purchase price for tendered shares of Common Stock is to be made to, or if certificates for shares of Common Stock not tendered or accepted for payment or if certificates for Series A Preferred Stock not converted into Common Stock are to be registered in the name of, any person other than the registered holder, or if tendered certificates are registered in the name of any person other than the person(s) signing the Letter of Transmittal, the amount of any stock transfer taxes (whether imposed on the registered holder or such person) payable on account of the transfer to such person will be deducted from the purchase price for shares of Common Stock unless satisfactory evidence of the payment of such taxes or exemption therefrom is submitted. See Instruction 6 of the Letter of Transmittal. ANY TENDERING STOCKHOLDER OR OTHER PAYEE WHO FAILS TO COMPLETE FULLY AND SIGN THE SUBSTITUTE FORM W-9 INCLUDED IN THE LETTER OF TRANSMITTAL (OR, IN THE CASE OF A FOREIGN INDIVIDUAL, FORM W-8 OBTAINABLE FROM THE DEPOSITARY) MAY BE SUBJECT TO REQUIRED FEDERAL INCOME TAX WITHHOLDING OF 31% OF THE GROSS PROCEEDS PAID TO SUCH STOCKHOLDER OR OTHER PAYEE PURSUANT TO THE OFFER. SEE SECTION 4. 7. PRICE RANGE OF COMMON STOCK; DIVIDENDS. The shares of Common Stock are listed and principally traded on the NYSE and are also listed and traded on the Boston Stock Exchange. The following table sets forth for the periods indicated the reported quarterly high and low sale prices of the shares of Common Stock on the NYSE Composite Tape from October 5, 1993 (the day after the Company's emergence from reorganization proceedings) through January 23, 1995 (the day immediately preceding the date of this Offer to Purchase). The trading prices of the Common Stock of the Predecessor Company prior to October 5, 1993, are not presented because such prices are not meaningful.
High Low ------- ------- 1993 ---- Third Quarter ended October 30, 1993 (from and after Octo- ber 5, 1993)............................................. $21.625 $20.250 Fourth Quarter ended January 29, 1994..................... $22.250 $17.875 1994 ---- First Quarter ended April 30, 1994........................ $21.750 $19.000 Second Quarter ended July 30, 1994........................ $21.000 $17.000 Third Quarter ended October 29, 1994...................... $23.000 $20.125 Fourth Quarter (through January 23, 1995)................. $21.500 $19.375
19 On January 23, 1995, the last full day of trading in the Common Stock prior to the commencement of the Offer, the reported closing price of the Common Stock on the NYSE Composite Tape was $21.175 per share. STOCKHOLDERS ARE URGED TO OBTAIN A CURRENT MARKET QUOTATION FOR THE COMMON STOCK. The Company has not paid a cash dividend on its Common Stock in the last two fiscal years. The Credit Facility prohibits the payment of dividends on the Common Stock and limits the amount of dividends which HDSC may pay to the Company in any fiscal year. In addition, the Indenture governing the Senior Notes contains limitations on restricted payments that may prevent the Company from paying dividends on the Common Stock. 8. INTEREST OF CERTAIN PERSONS IN THE OFFER. On September 23, 1994, the Company and Dickstein entered into the Dickstein Settlement Agreement described in Section 1. On December 16, 1994, the Company and the plaintiff in Weiss v. Lee, et al., entered into the Weiss Settlement described in Section 1. As of the close of business on January 23, 1995, the executive officers and directors of the Company as a group beneficially owned 11.58% of the outstanding shares of Common Stock (including shares of Common Stock issuable upon conversion of all outstanding shares of Series A Preferred Stock). The Company has been advised that none of its directors or executive officers intends to tender any shares of Common Stock pursuant to the Offer. If no such executive officer or director tenders shares of Common Stock and the Company purchases 3,000,000 shares of Common Stock pursuant to the Offer, the executive officers and directors of the Company as a group will beneficially own 14.81% of the outstanding shares of Common Stock (including shares of Common Stock issuable upon conversion of all outstanding shares of Series A Preferred Stock) after giving effect to the purchase of shares pursuant to the Offer. The Company has also been advised, however, that Apollo may tender some or all of the approximately 700,000 shares of Common Stock beneficially owned by Apollo pursuant to the Offer. Michael S. Gross, a director of the Company, is an officer of Apollo. Michael Bozic, President and Chief Executive Officer of the Company, purchased 5,479 shares of Common Stock on November 29, 1994, and 5,000 shares of Common Stock on January 10, 1995, pursuant to the exercise of stock options previously granted to Mr. Bozic under the Company's employee stock option plan. Except as described above, based upon the Company's records and upon information provided to the Company by its directors, executive officers and affiliates, neither the Company nor any of its subsidiaries nor, to the best of the Company's knowledge, any of the directors or executive officers of the Company or any of its subsidiaries, nor any associates of any of the foregoing, has effected any transactions in shares of Common Stock or Series A Preferred Stock during the 40 business days prior to the date hereof. Except as set forth in this Offer to Purchase, neither the Company nor, to the best of the Company's knowledge, any of its affiliates, directors or executive officers, or any of the executive officers or directors of its subsidiaries, is a party to any contract, arrangement, understanding or relationship with any other person relating, directly or indirectly, to the Offer with respect to any securities of the Company (including, but not limited to, any contract, arrangement, understanding or relationship concerning the transfer or the voting of any such securities, joint ventures, loan or option arrangements, puts or calls, guaranties of loans, guaranties against loss or the giving or withholding of proxies, consents or authorizations). 9. EFFECTS OF THE OFFER ON THE MARKET FOR COMMON STOCK; REGISTRATION UNDER THE EXCHANGE ACT. The Company's purchase of shares of Common Stock pursuant to the Offer will reduce the number of shares of Common Stock that might otherwise trade publicly. Nonetheless, the Company anticipates that there will still be a sufficient number of shares of Common Stock outstanding and publicly traded following the Offer to ensure a liquid trading market in the shares of Common Stock. Based on the published guidelines of the NYSE and the Boston Stock Exchange, the Company does not believe that its purchase of shares of Common Stock pursuant to the Offer will result in the remaining shares of Common Stock being delisted from either of such exchanges. Shares of Common Stock are currently "margin securities" under the regulations of the Board of Governors of the Federal Reserve System. This has the effect, among other things, of allowing brokers to 20 extend credit on the collateral of shares of Common Stock. It is expected that, following the purchase of shares of Common Stock pursuant to the Offer, shares of Common Stock will continue to be "margin securities" for purposes of the margin regulations of the Board of Governors of the Federal Reserve System. The Common Stock is registered under the Exchange Act, which requires, among other things, the Company to file certain information with the Commission and to furnish proxy statements and other information to its stockholders. It is not expected that the purchase of shares of Common Stock pursuant to the Offer will result in shares of Common Stock becoming eligible for deregistration under the Exchange Act. 10. CERTAIN FEDERAL INCOME TAX CONSEQUENCES. Sales of shares of Common Stock by stockholders pursuant to the Offer will be taxable transactions for United States federal income tax purposes and may also be taxable transactions under applicable state, local, foreign and other tax laws. Although the Company's payments for shares of Common Stock will also constitute the concurrent purchase of Rights, the Company believes that no part of such payment should be allocable to the Rights. Moreover, the Company believes that the distribution of the Rights did not constitute a distribution of stock or property for federal income tax purposes. Accordingly, no gain or loss should be recognized with respect to the purchase of Rights attaching to tendered shares of Common Stock. The federal income tax consequences of a stockholder's sale of shares of Common Stock pursuant to the Offer may vary depending upon the stockholder's particular facts and circumstances. Under Section 302 of the Internal Revenue Code of 1986, as amended (the "Code"), a sale of shares of Common Stock pursuant to the Offer will, as a general rule, be treated as a sale or exchange if the receipt of cash upon such sale (a) is "substantially disproportionate" with respect to the stockholder, (b) results in a "complete redemption" of the stockholder interest in the Company or (c) is "not essentially equivalent to a dividend" with respect to the stockholder. If any of these three tests is satisfied, a stockholder who sells shares of Common Stock pursuant to the Offer will recognize gain or loss equal to the difference between (a) the amount of cash that such stockholder receives and (b) the stockholder's tax basis in the shares of Common Stock sold. Such gain or loss will be capital gain or loss, assuming the shares of Common Stock are held as a capital asset and will be long-term capital gain or loss if the shares of Common Stock are held for more than one year. If none of the three tests under Section 302 is satisfied, and if, as is anticipated, the Company has sufficient earnings and profits, stockholders who sell shares of Common Stock will be treated as having received a dividend includible in gross income in an amount equal to the entire amount of cash received by the stockholder pursuant to the Offer (without regard to gain or loss, if any). The stockholder's adjusted tax basis in the sold shares of Common Stock will be transferred to any of the stockholder's remaining stockholdings in the Company. If, however, the stockholder has no such remaining stockholdings, then such basis may be transferred to the stockholdings of a related person, or it may be lost. In the case of a corporate stockholder, if the cash paid is treated as a dividend, the dividend income may be eligible for the 70% dividends-received deduction. The dividends-received deduction is subject to certain limitations, and may not be available if the corporate stockholder does not satisfy certain holding period requirements with respect to the shares of Common Stock or if the shares of Common Stock are treated as "debt financed portfolio stock". If a dividends-received deduction is available, the dividend will be treated as an "extraordinary dividend" under Section 1059(a) of the Code, in which case such corporate shareholder's tax basis in shares of Common Stock retained by such stockholder would be reduced, but not below zero, by the amount of the nontaxed portion of the dividend. Any amount of the nontaxed portion of the dividend in excess of the stockholder's basis will generally be subject to tax upon sale or disposition of those shares of Common Stock. Corporate stockholders are urged to consult their tax advisors concerning treatment of the 21 cash paid as a dividend, availability of the dividends-received deduction and the effect of Section 1059 of the Code on their tax basis in shares of Common Stock. In determining whether any of the tests under Section 302 of the Code is satisfied, stockholders must take into account not only the shares of Common Stock that they actually own, but also shares of Common Stock that they are deemed to own pursuant to the constructive ownership rules of Section 318 of the Code. Pursuant to these constructive ownership rules, a stockholder is deemed to own the shares of Common Stock actually owned, and in some cases constructively owned, by certain related individuals or entities, and the shares of Common Stock which the stockholder has the right to acquire by exercise of an option or by conversion or exchange of a security. The receipt of cash will be "substantially disproportionate" with respect to a stockholder if the percentage of the outstanding voting stock of the Company (both shares of Common Stock and shares of Series A Preferred Stock) actually and constructively owned by the stockholder immediately following the sale of shares of Common Stock pursuant to the Offer (treating as no longer outstanding all shares of Common Stock purchased pursuant to the Offer) is less than 80% of the percentage of the outstanding voting stock of the Company actually and constructively owned by such stockholder immediately before the sale of shares of Common Stock pursuant to the Offer (treating as outstanding all shares of Common Stock purchased pursuant to the Offer). In addition, for the "substantially disproportionate" exception to apply, this 80% requirement must also be satisfied with respect solely to the shares of Common Stock (that is, disregarding ownership of Series A Preferred Stock) owned actually and constructively by the stockholder before and after the Offer. Stockholders should consult their tax advisors with respect to the application of the "substantially disproportionate" test to their particular facts and circumstances. The receipt of cash by a stockholder will be deemed to result in a "complete redemption" of the stockholder's interest in the Company if either (a) all of the shares of Common Stock actually and constructively owned by the stockholder are sold pursuant to the Offer or (b) all of the shares of Common Stock actually owned by the stockholder are sold pursuant to the Offer and the stockholder is eligible to waive and does effectively waive attribution of all shares of Common Stock constructively owned by the stockholder in accordance with Section 302(c) of the Code. Even if the receipt of cash by a stockholder fails to satisfy the "substantially disproportionate" test or the "complete redemption" test, such stockholder may nevertheless satisfy the "not essentially equivalent to a dividend" test, if the stockholder's sale of shares of Common Stock pursuant to the Offer results in a "meaningful reduction" in the stockholder's proportionate interest in the Company. Whether the receipt of cash by a stockholder will be "not essentially equivalent to a dividend" will depend upon the individual stockholder's facts and circumstances. In certain circumstances, even a small reduction in a stockholder's proportionate interest may satisfy this test. For example, the Internal Revenue Service has indicated in a published ruling that a 3.3% reduction in the proportionate interest of a small minority (substantially less that 1%) stockholder in a publicly held corporation who exercises no control over corporate affairs constitutes such a "meaningful reduction". Stockholders expecting to rely upon the "not essentially equivalent to a dividend" test should, therefore, consult with their tax advisors as to its application in their particular situations. It may otherwise be possible for a tendering stockholder to satisfy one of the above three tests by contemporaneously selling or otherwise disposing of all or some of the shares of Common Stock that are actually or constructively owned by such stockholder but are not purchased pursuant to the Offer. Correspondingly, a tendering stockholder may not be able to satisfy one of the above three tests because of contemporaneous acquisitions of shares of Common Stock by such stockholder or a related party whose shares of Common Stock would be attributed to such stockholder. Stockholders should consult their tax advisors regarding the tax consequences of such sales or acquisitions in their particular circumstances. 22 A foreign stockholder may be subject to dividend tax withholding at the 30% rate or a lower applicable treaty rate on the gross proceeds of the sale of shares of Common Stock pursuant to the Offer. Foreign stockholders should consult their tax advisors regarding application of these withholding rules. The foregoing discussion may not apply to shares of Common Stock acquired pursuant to certain compensation arrangements with the Company. THE TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL INFORMATION ONLY. THE TAX CONSEQUENCES OF A SALE PURSUANT TO THE OFFER MAY VARY DEPENDING UPON, AMONG OTHER THINGS, THE PARTICULAR CIRCUMSTANCES OF THE TENDERING STOCKHOLDER. NO INFORMATION IS PROVIDED HEREIN AS TO THE STATE, LOCAL OR FOREIGN TAX CONSEQUENCES OF THE TRANSACTION CONTEMPLATED BY THE OFFER. STOCKHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS TO DETERMINE THE PARTICULAR FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF SALES MADE BY THEM PURSUANT TO THE OFFER AND THE EFFECT OF THE CONSTRUCTIVE STOCK OWNERSHIP RULES MENTIONED ABOVE. 11. SOURCE AND AMOUNTS OF FUNDS. Assuming the Company purchases 3,000,000 shares of Common Stock pursuant to the Offer at a purchase price of $25 per share of Common Stock, the Company expects the aggregate cost of such purchases, including all fees and expenses applicable to the Offer, to be approximately $75,500,000. The Company anticipates that it will fund the purchase of shares of Common Stock pursuant to the Offer and the payment of related fees and expenses with available cash. 12. CERTAIN CONDITIONS OF THE OFFER. Notwithstanding any other provision of the Offer, the Company shall not be required to accept for payment, or pay for, any shares of Common Stock not theretofore accepted for payment or paid for, and may terminate or amend the Offer or may postpone the acceptance for payment of, or the payment for, shares of Common Stock tendered, as provided in Section 14 if, at any time after January 23, 1995, and prior to the time of acceptance for payment of, or payment for, any of such shares of Common Stock, any of the following conditions exist: (a) a preliminary or permanent injunction or other order by any federal or state court which prevents the acceptance for payment of, or payment for, some of or all the shares of Common Stock pursuant to the Offer shall have been issued and shall remain in effect; or (b) there shall be threatened, instituted or pending any action or proceeding by any government or governmental authority or agency, domestic or foreign, or by any other person, domestic or foreign, before any court or governmental authority or agency, domestic or foreign, (i) challenging or seeking to, or which could, make illegal, delay or otherwise directly or indirectly restrain or prohibit or make more costly the making of the Offer, the acceptance for payment of or payment for some of all shares of Common Stock pursuant to the Offer, seeking to obtain damages in connection with the Offer, or seeking to restrain or prohibit the consummation of the Offer or (ii) which otherwise, in the sole judgment of the Company, could materially adversely affect the business, properties, assets, liabilities, capitalization, stockholders' equity, condition (financial or otherwise), operations, licenses or franchises, results of operations or prospects of the Company or any of its subsidiaries, or otherwise materially impair the contemplated benefits to the Company of the Offer; or, with respect to any of the foregoing actions or proceedings pending on the date hereof and known to the Company, there shall occur a development in such action or proceeding which, in the sole judgment of the Company, is materially adverse; or (c) there shall have been any action threatened or taken, or approval withheld, or any statute, rule or regulation proposed, sought, promulgated, enacted, entered, amended, enforced or deemed to be 23 applicable to the Offer or the Company or any of its subsidiaries, by any government or governmental, regulatory or administrative authority or agency or tribunal, domestic or foreign, which, in the Company's sole judgment, would directly or indirectly: (1) make the acceptance for payment of, or payment for, some or all of the shares of Common Stock illegal or otherwise restrict or prohibit consummation of the Offer; (2) delay or restrict the ability of the Company, or render the Company unable, to accept for payment or pay for some or all of the shares of Common Stock pursuant to the Offer; or (3) materially adversely affect the business, properties, assets, liabilities, capitalization, stockholders' equity, condition (financial or other), income, operations or prospects of the Company and its subsidiaries, taken as a whole, or otherwise materially impair in any way the contemplated future conduct of the business of the Company or any of its subsidiaries. (d) there shall have occurred (i) any general suspension of trading in, or limitation on prices for, securities on any United States national securities exchange or in the over-the-counter market (excluding any coordinated trading halt triggered solely as a result of a specified decrease in a market index), (ii) the declaration of a banking moratorium or any suspension of payments in respect of banks in the United States, (iii) the commencement of a war, armed hostilities or other international or national crisis directly or indirectly involving the United States, (iv) any limitation (whether or not mandatory) by any governmental, regulatory or administrative agency or authority on, or any event which, in the sole judgment of the Company, might affect, the extension of credit by banks or other lending institutions in the United States, (v) any significant decrease in the market price of the shares of Common Stock, (vi) any change in the general political, market, economic or financial conditions in the United States or abroad that could, in the sole judgment of the Company, have a material adverse effect on the Company's business, operations, prospects or the trading in the shares of Common Stock, (vii) in the case of any of the foregoing existing at the time of the commencement of the Offer, a material acceleration or worsening thereof or (vii) any decline in either the Dow Jones Industrial Average (3867.41 at the close of business on January 23, 1995) or the Standard and Poor's Index of 500 Industrial Companies (465.82 at the close of business on January 23, 1995) by an amount in excess of 15% measured from January 23, 1995; (e) any tender or exchange offer with respect to the shares of Common Stock (other than the Offer), or any merger, acquisition, business combination or other similar transaction with or involving the Company or any subsidiary, shall have been proposed, announced or made by any person or entity; (f) any change shall occur or be threatened in the business, condition (financial or other), income, operations or prospects of the Company and its subsidiaries, taken as a whole, which, in the sole judgment of the Company, is or may be materially adverse to the Company; or (g) (i) any person, entity or "group" (as that term is used in Section 13(d)(3) of the Exchange Act) shall have acquired, or proposed to acquire, beneficial ownership of more than 5% of the outstanding shares of Common Stock (other than a person, entity or group which had publicly disclosed such ownership in a Schedule 13D or 13G (or an amendment thereto) on file with the Commission on or prior to January 23, 1995), (ii) any new group shall have been formed which beneficially owns more than 5% of the outstanding shares of Common Stock or (iii) any person, entity or group shall have filed a Notification and Report Form under the Hart-Scott-Rodino Antitrust Improvement Act of 1976, or made a public announcement reflecting an intent to acquire the Company or any of its subsidiaries or any of their respective assets or securities; and, in the sole judgment of the Company, in any such case and regardless of the circumstances (including any action or inaction by the Company) giving rise to such condition, such event makes it inadvisable to proceed with the Offer or with such acceptance for payment or payments. The foregoing conditions are for the Company's sole benefit and may be asserted by the Company regardless of the circumstances giving rise to any such condition (including any action or inaction by the Company) or may be waived by the Company in whole or in part. The Company's failure at any time to 24 exercise any of the foregoing rights shall not be deemed a waiver of any such right and each such right shall be deemed an ongoing right which may be asserted at any time or from time to time. Any determination by the Company concerning the events described in this Section 12 shall be final and shall be binding on all parties. 13. CERTAIN LEGAL MATTERS; REGULATORY APPROVALS. The Company is not aware of any license or regulatory permit that appears to be material to its business that might be adversely affected by its acquisition of shares of Common Stock as contemplated in the Offer or of any approval or other action by any government or governmental, administrative or regulatory authority or agency, domestic or foreign, that would be required for the Company's acquisition or ownership of shares of Common Stock as contemplated by the Offer. Should any such approval or other action be required, the Company currently contemplates that it will seek such approval or other action. The Company cannot predict whether it may determine that it is required to delay the acceptance for payment of, or payment for, shares of Common Stock tendered pursuant to the Offer pending the outcome of any such matter. There can be no assurance that any such approval or other action, if needed, would be obtained or would be obtained without substantial conditions or that the failure to obtain any such approval or other action might not result in adverse consequences to the Company's business. See Section 12 for certain conditions of the Offer, including conditions relating to litigation and governmental actions. 14. EXTENSION OF TENDER PERIOD; TERMINATION AND AMENDMENTS. The Company reserves the right (but will not be obligated), at any time or from time to time in its sole discretion, to extend the period during which the Offer is open by giving oral or written notice of such extension to the Depositary and by making a public announcement of such extension. The Company does not anticipate exercising its right to extend the Offer. The Company also reserves the right (i) subject to complying with applicable rules and regulations of the Commission, to delay acceptance for payment or payment for any shares of Common Stock not theretofore accepted for payment or paid for, or to terminate the Offer and not accept for payment or pay for any shares of Common Stock not theretofore accepted for payment or paid for, upon the occurrence of any of the conditions specified in Section 12, by giving oral or written notice of such delay or termination to the Depositary and (ii) subject to complying with applicable rules and regulations of the Commission, to amend the Offer at any time and from time to time in any respect by public announcement. Without limiting the manner in which the Company may choose to make any public announcement, the Company will have no obligation to publish, advertise or otherwise communicate any such public announcement other than by making a release to the Dow Jones News Service, subject to the Company's obligations under Rule 14e-4(e)(2) under the Exchange Act (relating to the Company's obligation to disseminate public announcements concerning material changes to this Offer to Purchase), if such rule is applicable. In a published release, the Commission has stated that in its view an offer must remain open for a minimum period of time following a material change in the terms of the offer. The release states that an offer should remain open for a minimum of five business days from the date the material change is first published, sent or given to security holders, and that, if material changes are made with respect to information that approaches the significance of price and share levels, a minimum of ten business days may be required to allow for adequate dissemination and investor response. If the Company increases or decreases by more than two per cent of the outstanding shares of Common Stock (assuming, for this purpose, conversion of all outstanding shares of Series A Preferred Stock) the percentage of shares of Common Stock being sought or increases or decreases the consideration to be paid for shares of Common Stock pursuant to the Offer and the Offer is scheduled to expire at any time before the expiration of a period ending on the tenth business day from and including, the date that notice of such increase or decrease is first published, sent or given, the Offer will be extended until the expiration of such period of 10 business days. 25 The Company may not increase the number of shares of Common Stock that it may elect to purchase pursuant to the Offer without the prior consent of the bank lenders under the Credit Facility. 15. FEES AND EXPENSES. Smith Barney is acting as Dealer Manager in connection with the Offer and has acted as the Company's financial advisor and consent solicitation agent in connection with the Company's solicitation of consents from holders of its Senior Notes to the amendment of the restricted payments limitation contained in the Indenture governing the Senior Notes. In connection with such engagement, the Company has paid Smith Barney a fee of $400,000, agreed to reimburse Smith Barney for its reasonable out-of-pocket expenses relating to the Offer, including the reasonable fees and expenses of its counsel, and agreed to indemnify Smith Barney against certain liabilities in connection with the Offer, including certain liabilities under the federal securities laws. The Company also engaged Smith Barney to act as its financial adviser to evaluate, from a financial point of view, the Dickstein Exchange Proposal and other alternatives to the Company. In connection with such engagement, the Company paid Smith Barney a fee of $750,000, agreed to reimburse Smith Barney for its reasonable out-of-pocket expenses and agreed to indemnify Smith Barney against certain liabilities and expenses. The Company has retained D. F. King & Co., Inc. ("D.F.King"), as Information Agent, and Chemical Bank, as Depositary, in connection with the Offer. The Information Agent may contact stockholders by mail, telephone, telex, telegraph and in person, and may request brokers, dealers and other nominee stockholders to forward materials relating to the Offer to beneficial owners. The Depositary and the Information Agent will receive reasonable and customary compensation for their services. The Company will also reimburse the Depositary and the Information Agent for out-of-pocket expenses, including reasonable attorneys' fees, and has agreed to indemnify the Depositary and the Information Agent against certain liabilities in connection with the Offer, including certain liabilities under the federal securities laws. The Dealer Manager, the Information Agent and the Depositary have not been retained to make solicitations or recommendations in connection with the Offer. The Company will not pay fees or commissions to any broker, dealer, commercial bank, trust company or other person for soliciting tenders of shares of Common Stock pursuant to the Offer. The Company will, however, on request reimburse such persons for customary handling and mailing expenses incurred in forwarding materials in respect of the Offer to the beneficial owners for which they act as nominees. No such broker, dealer, commercial bank or trust company has been authorized to act as the Company's agent for purposes of the Offer. The Company will pay (or cause to be paid) any stock transfer taxes on its purchase of shares of Common Stock, except as otherwise provided in Instruction 6 of Letter of Transmittal. 16. MISCELLANEOUS. The Offer is not being made to, nor will tenders be accepted from or on behalf of, holders of shares of Common Stock residing in any jurisdiction in which the making of the Offer or acceptance thereof would not comply with the securities, blue sky or other laws of such jurisdiction. The Company is not aware of any jurisdiction in which the making of the Offer or the tender of shares of Common Stock in connection therewith would not be in compliance with the laws of such jurisdiction. To the extent the Company becomes aware of any state law that would limit the class of offerees in the Offer, the Company will amend the Offer and, depending on the timing of such amendment, if any, will extend the Offer to provide adequate dissemination of such information to holders of shares of Common Stock prior to the expiration of the Offer. In any jurisdiction in which the securities, blue sky or other laws require the Offer to be made by a licensed broker or dealer, the Offer will be deemed to be made on the Company's behalf by the Dealer Manager or by one or more registered brokers or dealers licensed under the laws of such jurisdiction. 26 No person has been authorized to give any information or make any representation on behalf of the Company not contained herein or in the Letter of Transmittal and, if given or made, such information or representation must not be relied upon as having been authorized. Hills Stores Company January 24, 1995 27 Facsimile copies of the Letter of Transmittal will be accepted. The Letter of Transmittal and certificates for the shares of Common Stock or Series A Preferred Stock and any other required documents should be sent or delivered by each stockholder or his broker, dealer, commercial bank, trust company or other nominee to the Depositary at one of its addresses set forth below: The Depositary: CHEMICAL BANK By Hand By Facsimile Transmission or Overnight Mail: (for Eligible Institutions only): By Mail: (212) 629-8015 or (212) 629-8016 (To confirm receipt of facsimile transmissions call: (212) 946-7137.) Reorganization Department Reorganization Department 55 Water Street 2nd GPO Station P.O. Box 3085 Floor, Room 234 New York, New York, New York 10116-3085 New York 10041 Any questions or requests for assistance or for additional copies of this Offer to Purchase, the Letter of Transmittal or the Notice of Guaranteed Delivery may be directed to the Information Agent at the telephone numbers and addresses below. You may also contact the Dealer Manager or your broker, dealer, commercial bank or trust company for assistance concerning the Offer. The Information Agent: D. F. KING & CO., INC. 77 Water Street New York, New York 10005 Call Collect: (212) 269-5550 or TOLL FREE (800) 326-3066 The Dealer Manager: SMITH BARNEY INC. 1345 Avenue of the Americas New York, New York 10105 (212) 830-8781 (call collect) EX-99.A.2 3 LETTER OF TRANSMITTAL LETTER OF TRANSMITTAL TO TENDER SHARES OF COMMON STOCK OF HILLS STORES COMPANY PURSUANT TO ITS OFFER TO PURCHASE DATED JANUARY 24, 1995 THE OFFER, PRORATION PERIOD AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON TUESDAY, FEBRUARY 21, 1995, UNLESS THE OFFER IS EXTENDED. The Depositary: CHEMICAL BANK By Hand or Overnight By Facsimile Transmission Mail: (for Eligible Institutions only): By Mail: (212) 629-8015 or (212) 629-8016 (To confirm receipt of facsimile transmissions call: (212) 946-7137.) Reorganization Reorganization Department Department GPO Station 55 Water Street P.O. Box 3085 2nd Floor, Room 234 New York, New York 10116- New York, New York 10041 3085 DELIVERY OF THIS INSTRUMENT TO AN ADDRESS, OR TRANSMISSION OF INSTRUCTIONS TO A FACSIMILE NUMBER OTHER THAN AS SET FORTH ABOVE, WILL NOT CONSTITUTE A VALID DELIVERY. THE INSTRUCTIONS ACCOMPANYING THIS LETTER OF TRANSMITTAL SHOULD BE READ CAREFULLY BEFORE THIS LETTER OF TRANSMITTAL IS COMPLETED. This Letter of Transmittal is to be used only if (a) certificates for shares of Common Stock, par value $.01 per share ("Common Stock"), or Series A Convertible Preferred Stock, par value $.10 per share ("Series A Preferred Stock"), of Hills Stores Company, a Delaware corporation (the "Company"), are to be delivered with it or (b) unless an Agent's Message (as defined in the Offer to Purchase) is utilized, shares of Common Stock or Series A Preferred Stock are being delivered concurrently by book-entry transfer to the account maintained by the Depositary at the Depository Trust Company, the Midwest Securities Trust Company or the Philadelphia Depository Trust Company (collectively the "Book-Entry Transfer Facilities") as set forth in Section 4 of the Offer to Purchase (as defined below). Stockholders who cannot deliver their certificates for shares of Common Stock or Series A Preferred Stock to the Depositary prior to the Expiration Date (as defined in Section 3 of the Offer to Purchase), who cannot complete the procedure for book-entry transfer on a timely basis or who cannot deliver a Letter of Transmittal and all other required documents to the Depositary prior to the Expiration Date must tender their shares of Common Stock (including shares of Common Stock underlying the conversion rights of shares of Series A Preferred Stock) pursuant to the guaranteed delivery procedure set forth in Section 4 of the Offer to Purchase. See Instruction 2. A STOCKHOLDER OWNING BENEFICIALLY AS OF THE CLOSE OF BUSINESS ON JANUARY 23, 1995, WHO CONTINUES TO OWN BENEFICIALLY UNTIL THE EXPIRATION OF THE OFFER, AN AGGREGATE OF FEWER THAN 100 SHARES OF COMMON STOCK (INCLUDING SHARES OF COMMON STOCK UNDERLYING THE CONVERSION RIGHTS OF SHARES OF SERIES A PREFERRED STOCK), AND WHO SATISFIES THE OTHER REQUIREMENTS SET FORTH IN INSTRUCTION 8, MAY HAVE ALL SUCH SHARES PURCHASED BEFORE PRORATION, IF ANY, OF THE PURCHASE OF OTHER SHARES PURSUANT TO THE OFFER.
- ------------------------------------------------------------------------------- DESCRIPTION OF SHARES TENDERED (SEE INSTRUCTIONS) - ------------------------------------------------------------------------------- NAME(S) AND ADDRESS(ES) OF REGISTERED OWNER(S) (PLEASE FILL IN AS NAME(S) APPEAR(S) ON CERTIFICATE(S) TENDERED CERTIFICATE(S)) (ATTACH ADDITIONAL LIST IF NECESSARY) - ------------------------------------------------------------------------------- NUMBER CLASS OF SHARES NUMBER OF CERTIFICATE REPRESENTED BY OF SHARES SHARES* NUMBER(S) CERTIFICATE(S)** TENDERED*** ------------------------------------------------ ------------------------------------------------ ------------------------------------------------ ------------------------------------------------ ------------------------------------------------ TOTAL SHARES... - -------------------------------------------------------------------------------
* Insert "Common" or "Preferred". ** Need not be completed by stockholders delivering shares of Common Stock or Series A Preferred Stock by book-entry transfer. *** Unless otherwise indicated, it will be assumed that all shares of Common Stock represented by any Common Stock certificates, and all shares of Common Stock underlying the conversion rights of any shares of Series A Preferred Stock represented by Series A Preferred Stock certificates, delivered to the Depositary are being tendered. See Instruction 4. - ------------------------------------------------------------------------------- [_] CHECK HERE IF SHARES OF COMMON STOCK OR SHARES OF SERIES A PREFERRED STOCK ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER TO THE DEPOSITARY'S ACCOUNT AT ONE OF THE BOOK-ENTRY TRANSFER FACILITIES AND COMPLETE THE FOLLOWING: Name of Tendering Institution _____________________________________________ Check Box of Book-Entry Transfer Facility: [_] The Depository Trust Company [_] Midwest Securities Trust Company [_] Philadelphia Depository Trust Company Account No. _________________ Transaction Code No. ________________________ [_] CHECK HERE IF SHARES OF COMMON STOCK OR SHARES OF SERIES A PREFERRED STOCK ARE BEING DELIVERED PURSUANT TO A NOTICE OF GUARANTEED DELIVERY PREVIOUSLY SENT TO THE DEPOSITARY AND COMPLETE THE FOLLOWING: Name(s) of Tendering Stockholder(s) _______________________________________ Date of Execution of Notice of Guaranteed Delivery ________________________ Name of Institution which Guaranteed Delivery _____________________________ If delivery is by book-entry transfer: Name of Tendering Institution ___________________________________________ Check Box of Book-Entry Transfer Facility: [_] The Depository Trust Company [_] Midwest Securities Trust Company [_] Philadelphia Depository Trust Company Account No. _________________ Transaction Code No. ________________________ NOTE: SIGNATURES MUST BE PROVIDED BELOW PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY Ladies and Gentlemen: The undersigned hereby tenders to Hills Stores Company, a Delaware corporation (the "Company"), the shares of its Common Stock, par value $.01 per share ("Common Stock"), if any, described above pursuant to the Company's offer to purchase 3,000,000 shares of its Common Stock at a price of $25.00 per share (the "Purchase Price"), net to the seller in cash, upon the terms and subject to the conditions set forth in the Offer to Purchase dated January 24, 1995 (the "Offer to Purchase"), receipt of which is hereby acknowledged, and in this Letter of Transmittal (which together constitute the "Offer"). In the event that the undersigned is a holder of shares of Series A Convertible Preferred Stock, par value $.10 per share ("Series A Preferred Stock"), of the Company, the undersigned hereby converts the above-described shares of Series A Preferred Stock into Common Stock to the extent described below and hereby tenders to the Company the shares of its Common Stock issuable upon such conversion pursuant to the Offer. Unless the undersigned has otherwise specified in the box captioned "Series A Preferred Stock Conversion" below, the undersigned's conversion of shares of Series A Preferred Stock into Common Stock, if any, shall be limited to the extent that the shares of Common Stock issuable upon such conversion and tendered herewith are accepted for payment and paid for by the Company pursuant to the Offer. Subject to and effective upon the acceptance for payment of the shares of Common Stock tendered herewith, in accordance with the terms of the Offer (including, if the Offer is extended or amended, the terms and conditions of any such extension or amendment), the undersigned hereby sells, assigns and transfers to or upon the order of the Company all right, title and interest in and to all the shares of Common Stock that are being tendered hereby, or orders the registration of such shares of Common Stock delivered by book-entry transfer, that are purchased pursuant to the Offer and hereby irrevocably constitutes and appoints Chemical Bank (the "Depositary") the true and lawful agent and attorney-in-fact of the undersigned with respect to such shares of Common Stock, with full power of substitution (such power of attorney being deemed to be an irrevocable power coupled with an interest), to: (a) deliver certificates for such shares of Common Stock, or transfer ownership of such shares on the account books maintained by any of the Book-Entry Transfer Facilities, together, in any such case, with all accompanying evidences of transfer and authenticity, to or upon the order of the Company, upon receipt by the Depositary, as the undersigned's agent, of the Purchase Price with respect to such shares of Common Stock; (b) present such shares of Common Stock for cancellation and transfer on the Company's books; and (c) receive all benefits and otherwise exercise all rights of beneficial ownership of such shares of Common Stock, all in accordance with the terms of the Offer. The undersigned hereby represents and warrants that: (a) the undersigned "owns" the shares of Common Stock tendered hereby within the meaning of Rule 14e-4 promulgated under the Securities Exchange Act of 1934, as amended, and has full power and authority to validly tender, sell, assign and transfer the shares of Common Stock tendered hereby; (b) the tender of shares of Common Stock by the undersigned complies with Rule 14e-4; (c) when and to the extent the Company accepts the shares of Common Stock for payment, the Company will acquire good, marketable and unencumbered title to those shares of Common Stock, free and clear of all security interests, liens, charges, encumbrances, conditional sales agreements or other obligations relating to their sale or transfer, and not subject to any adverse claim; (d) on request, the undersigned will execute and deliver any additional documents the Depositary or the Company deems necessary or desirable to complete the assignment, transfer and purchase of the shares of Common Stock tendered hereby and, if applicable, to complete the conversion of shares of Series A Preferred Stock into Common Stock as provided herein; and (e) the undersigned has read and agrees to all the terms of the Offer. The undersigned recognizes that, under certain circumstances set forth in the Offer to Purchase, the Company may terminate or amend the Offer or may not be required to accept for payment any of the shares of Common Stock tendered herewith or may accept for payment, pro rata with shares of such Common Stock tendered by other stockholders, fewer than all of the shares of Common Stock tendered herewith. The undersigned understands that tenders of shares of Common Stock pursuant to any one of the procedures described in Section 4 of the Offer to Purchase and in the Instructions hereto will constitute a binding agreement between the undersigned and the Company upon the terms and subject to the conditions of the Offer. All authority conferred or agreed to be conferred in this Letter of Transmittal shall be binding upon the successors, assigns, heirs, executors, administrators and legal representatives of the undersigned and shall not be affected by, and shall survive, the death or incapacity of the undersigned. Except as stated in the Offer to Purchase, this tender is irrevocable. Unless otherwise indicated herein under "Special Payment Instructions", please issue the check for the Purchase Price and/or return or issue the certificate(s) evidencing any shares of Common Stock not tendered or not accepted for payment and any certificate(s) evidencing any shares of Series A Preferred Stock not converted into Common Stock pursuant hereto in the name(s) of the registered holder(s) appearing under "Description of Shares Tendered". Similarly, unless otherwise indicated under "Special Delivery Instructions", please mail the check for the Purchase Price and/or the certificate(s) evidencing any shares of Common Stock not tendered or not accepted for payment and any certificate(s) evidencing any shares of Series A Preferred Stock not converted into Common Stock pursuant hereto (and accompanying documents, as appropriate) to the address of the registered holder(s) appearing under "Description of Shares Tendered". In the event that both the "Special Delivery Instructions" and the "Special Payment Instructions" are completed, please issue the check for the Purchase Price and/or issue or return the certificate(s) evidencing shares of Common Stock not tendered or accepted for payment and any certificate(s) evidencing any shares of Series A Preferred Stock not converted into Common Stock pursuant hereto in the name(s) of, and deliver said check and/or certificate(s) to the person or persons so indicated. In the case of book-entry delivery of shares of Common Stock or Series A Preferred Stock, please credit the account maintained at the Book-Entry Transfer Facility indicated above with any shares of Common Stock not accepted for payment or any shares of Series A Preferred Stock not converted into Common Stock. The undersigned recognizes that the Company has no obligation pursuant to the "Special Payment Instructions" to transfer any shares of Common Stock or Series A Preferred Stock from the name of the registered holder thereof if the Company does not accept for payment any of the shares of Common Stock so tendered (including shares of Common Stock tendered upon conversion of shares of Series A Preferred Stock). SPECIAL PAYMENT INSTRUCTIONS SPECIAL DELIVERY INSTRUCTIONS (SEE INSTRUCTIONS 1, 4, 5, 6, 7, (SEE INSTRUCTIONS 5, 6 AND 7) 10 AND 11) To be completed ONLY if the To be completed ONLY if the check for the aggregate Purchase check for the aggregate Purchase Price of shares of Common Stock Price of shares of Common Stock purchased and/or certificates for purchased and/or certificates for shares of Common Stock not ten- shares of Common Stock not ten- dered or not accepted for payment dered or not accepted for payment or certificates for shares of Se- or certificates for shares of Se- ries A Preferred Stock not con- ries A Preferred Stock not con- verted into Common Stock are to verted into Common Stock are to be issued in the name of someone be mailed to someone other than other than the undersigned. the undersigned or to the under- signed at an address other than that shown below the undersigned's signature(s). Issue [_] check Mail [_] check [_] certificate(s) to: [_] certificate(s) to: Name _____________________________ Name _____________________________ (PLEASE PRINT) (PLEASE PRINT) Address __________________________ Address __________________________ __________________________________ __________________________________ (ZIP CODE) (ZIP CODE) SIGN HERE (SEE INSTRUCTIONS 1 AND 5) (ALSO COMPLETE SUBSTITUTE FORM W-9) ---------------------------------------------------------------- ---------------------------------------------------------------- SIGNATURE(S) OF OWNER(S) Name(s): --------------------------------------------------------- --------------------------------------------------------- (PLEASE PRINT) Capacity (full title) ------------------------------------------- Address --------------------------------------------------------- ---------------------------------------------------------------- (INCLUDE ZIP CODE) Area Code and Telephone Number ---------------------------------- Taxpayer Identification Number ---------------------------------- Dated ----------------------------------------------------------- (Must be signed by registered holder(s) exactly as name(s) appear(s) on stock certificate(s) or security position listing or by person(s) authorized to become registered holder(s) by certificates and documents transmitted herewith. If signature is by trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations or others acting in a fiduciary or representative capacity, please set forth full title and see Instruction 5.) GUARANTEE OF SIGNATURE(S) (SEE INSTRUCTIONS 1 AND 5) Authorized Signature -------------------------------------------- Name ------------------------------------------------------------ (PLEASE PRINT) Title ----------------------------------------------------------- Name of Firm ---------------------------------------------------- Address --------------------------------------------------------- - ----------------------------------------------------------------- (INCLUDE ZIP CODE) Area Code and Telephone Number ---------------------------------- Dated ----------------------------------------------------------- SERIES A PREFERRED STOCK CONVERSION (SEE INSTRUCTION 2) [_] CHECK HERE IF YOU WISH TO CONVERT ALL OF YOUR SHARES OF SERIES A PREFERRED STOCK INTO COMMON STOCK AND HAVE RETURNED, AFTER PRORATION, SHARES OF COMMON STOCK, IF ANY, THAT WERE NOT ACCEPTED FOR PAYMENT BY THE COMPANY. ODD LOTS (SEE INSTRUCTION 8) This section is to be completed ONLY if shares of Common Stock (including shares of Common Stock underlying the conversion rights of shares of Series A Preferred Stock) being tendered by or on behalf of a person owning beneficially as of the close of business on January 23, 1995, and continuing to own beneficially until the Expiration Date, aggregate fewer than 100 such shares. The undersigned either (check one box): [_] was the beneficial owner as of the close of business on January 23, 1995, and will continue to be the beneficial owner until the Expiration Date, of an aggregate of fewer than 100 shares of Common Stock (including shares of Common Stock underlying the conversion rights of shares of Series A Preferred Stock), all of which are being tendered, or [_] is an "Eligible Institution" (as defined in the Offer to Purchase) that (i) is tendering, for the beneficial owners thereof, shares of Common Stock (including shares of Common Stock underlying the conversion rights of shares of Series A Preferred Stock) with respect to which it is the record owner, and (ii) believes, based upon representations made to it by each such beneficial owner, that such beneficial owner owned beneficially as of the close of business on January 23, 1995, and will continue to own beneficially until the Expiration Date, an aggregate of fewer than 100 shares of Common Stock (including shares of Common Stock underlying the conversion rights of shares of Series A Preferred Stock), and is tendering all of such shares, and, in either case, hereby represents that the above indicated information is true and correct as to the undersigned. INSTRUCTIONS FORMING PART OF THE TERMS AND CONDITIONS OF THE OFFER 1. GUARANTEE OF SIGNATURES Except as otherwise provided below, all signatures on this Letter of Transmittal must be guaranteed by a firm which is an "Eligible Institution" (as defined in the Offer to Purchase). Signatures on this Letter of Transmittal need not be guaranteed if (a) this Letter of Transmittal is signed by the registered owner (which term, for purposes of this document, shall include any participant in one of the Book-Entry Transfer Facilities whose name appears on a security position listing as the owner of shares of Common Stock or Series A Preferred Stock) of the shares of Common Stock tendered herewith or shares of Series A Preferred Stock convertible into tendered shares and such owner(s) has not completed either the box entitled "Special Delivery Instructions" or the box entitled "Special Payment Instructions" on this Letter of Transmittal, or (b) if such shares of Common Stock are tendered for the account of an Eligible Institution. In all other cases all signatures on this Letter of Transmittal must be guaranteed by an Eligible Institution. See Instruction 5. 2. DELIVERY OF LETTER OF TRANSMITTAL AND CERTIFICATES This Letter of Transmittal is to be used only if (a) certificates for shares of Common Stock or Series A Preferred Stock are to be delivered herewith or (b) unless an Agent's Message is utilized, delivery of such shares of Common Stock or Series A Preferred Stock is to be made by book-entry transfer pursuant to the procedures set forth in Section 4 of the Offer to Purchase. Certificates for all physically delivered shares of Common Stock or Series A Preferred Stock, or a confirmation of a book-entry transfer of all such shares of Common Stock or Series A Preferred Stock transferred electronically into the Depositary's account at one of the Book-Entry Transfer Facilities, together in each case with a properly completed and duly executed Letter of Transmittal (or facsimile thereof) with any required signature guarantees, and any other documents required by this Letter of Transmittal, must be received by the Depositary at its address set forth on the front page of this Letter of Transmittal prior to the Expiration Date (as defined in the Offer to Purchase), or the tendering stockholder must comply with the procedures set forth in the next paragraph. DELIVERY OF DOCUMENTS TO ONE OF THE BOOK-ENTRY TRANSFER FACILITIES DOES NOT CONSTITUTE DELIVERY TO THE DEPOSITARY. Stockholders who cannot deliver the certificates for their shares of Common Stock or Series A Preferred Stock to the Depositary prior to the Expiration Date or who cannot complete the procedure for book-entry transfer on a timely basis or who cannot deliver a Letter of Transmittal and all other required documents to the Depositary prior to the Expiration Date must tender their shares of Common Stock by properly completing and duly executing the Notice of Guaranteed Delivery pursuant to the guaranteed delivery procedure set forth in Section 4 of the Offer to Purchase. Pursuant to such procedure: (a) such tender must be made by or through an Eligible Institution, (b) a properly completed and duly executed Notice of Guaranteed Delivery substantially in the form provided by the Company must be received by the Depositary, as provided below, prior to the Expiration Date, and (c) the certificates for all tendered shares of Common Stock or shares of Series A Preferred Stock convertible into such shares of Common Stock, in proper form for transfer (or a confirmation of book- entry transfer of such shares into the Depositary's account at one of the Book- Entry Transfer Facilities), together with a properly completed and duly executed Letter of Transmittal (or facsimile thereof) with any required signature guarantees (or, in the case of a book-entry delivery, an Agent's Message) and any other documents required by this Letter of Transmittal, are received by the Depositary within five New York Stock Exchange, Inc. ("NYSE") trading days after the date of execution of such Notice of Guaranteed Delivery. The Company reserves the right to shorten or eliminate this period so long as the announcement of such shortened period or elimination is made at least six NYSE trading days before the Expiration Date. The Notice of Guaranteed Delivery may be delivered by hand to the Depositary or transmitted by telegram, facsimile transmission or letter to the Depositary and must include a guarantee by an Eligible Institution in the form set forth in such Notice, all as provided in Section 4 of the Offer to Purchase. Although only shares of Common Stock will be purchased pursuant to the Offer, holders of Series A Preferred Stock may tender shares of Common Stock into which their shares of Series A Preferred Stock are convertible by complying with the instructions for the valid tender of shares of Common Stock set forth in Section 4 of the Offer to Purchase and in this Letter of Transmittal. Unless the box captioned "Series A Preferred Stock Conversion" in this Letter of Transmittal and, if applicable, the Notice of Guaranteed Delivery, is completed, shares of Series A Preferred Stock so delivered will be converted into Common Stock only to the extent such tender of Common Stock is accepted for payment by the Company and all remaining shares of Series A Preferred Stock so delivered will not be converted and will be returned to the stockholder. ANY STOCKHOLDER WHO WISHES TO CONVERT ALL OF SUCH STOCKHOLDER'S SHARES OF SERIES A PREFERRED STOCK INTO COMMON STOCK AND HAVE RETURNED, AFTER PRORATION, SHARES OF COMMON STOCK, IF ANY, THAT WERE NOT ACCEPTED FOR PAYMENT BY THE COMPANY MUST SO INDICATE BY COMPLETING THE BOX CAPTIONED "SERIES A PREFERRED STOCK CONVERSION" ON THE BOTTOM OF THE FACING PAGE HERETO. THE METHOD OF DELIVERY OF CERTIFICATES FOR SHARES OF COMMON STOCK OR SERIES A PREFERRED STOCK AND ANY OTHER REQUIRED DOCUMENTS IS AT THE OPTION AND RISK OF THE TENDERING STOCKHOLDER. IF DELIVERY IS BY MAIL, REGISTERED MAIL WITH RETURN RECEIPT REQUESTED, PROPERLY INSURED, IS RECOMMENDED. No alternative, conditional or contingent tenders will be accepted and no fractional shares of Common Stock will be purchased. All tendering stockholders, by execution of this Letter of Transmittal (or facsimile thereof), waive any right to receive any notice of the acceptance of their shares of Common Stock for payment. 3. INADEQUATE SPACE If the space provided herein is inadequate, the class of shares, certificate numbers and/or the number of shares of Common Stock or Series A Preferred Stock should be listed on a separate schedule and attached to this Letter of Transmittal. 4. PARTIAL TENDERS AND UNPURCHASED SHARES (Not applicable to stockholders who deliver their shares by book-entry transfer.) If fewer than all the shares of Common Stock evidenced by any certificate delivered to the Depositary (or issuable upon conversion of shares of Series A Preferred Stock evidenced by any such certificate) are to be tendered, fill in the number of shares which are to be tendered in the box entitled "Number of Shares Tendered". If such shares of Common Stock are purchased, a new certificate for the remainder of the shares of Common Stock (or, in the event the tendering stockholder holds shares of Series A Preferred Stock, the remainder of the shares of Series A Preferred Stock) that were evidenced by the older certificate(s) will be sent to and in the name of the registered holder(s) (unless otherwise provided by such holder(s) having completed either of the boxes entitled "Special Payment Instructions" or "Special Delivery Instructions" on this Letter of Transmittal) as promptly as practicable after the expiration or termination of the Offer. All shares of Common Stock represented by certificates delivered to the Depositary or underlying the conversion rights of shares of Series A Preferred Stock represented by certificates delivered to the Depositary will be deemed to have been tendered unless otherwise indicated. 5. SIGNATURES ON LETTER OF TRANSMITTAL, STOCK POWERS AND ENDORSEMENTS (a) If this Letter of Transmittal is signed by the registered holder(s) of the shares of Common Stock tendered hereby or the registered holder(s) of the shares of Series A Preferred Stock convertible into such shares, the signature(s) must correspond with the name(s) as written on the face of the certificates without any change whatsoever. (b) If any of the shares of Common Stock tendered herewith or shares of Series A Preferred Stock convertible into such shares are registered in the names of two or more joint owners, each such owner must sign this Letter of Transmittal. (c) If any of the shares of Common Stock tendered herewith or shares of Series A Preferred Stock convertible into such shares are registered in different names on different certificates, it will be necessary to complete, sign and submit as many separate Letters of Transmittal as there are different registrations of certificates. (d) If this Letter of Transmittal or any certificates or stock powers are signed by a trustee, executor, administrator, guardian, attorney-in-fact, officer of corporations or other person acting in a fiduciary or representative capacity, such persons should so indicate when signing and proper evidence satisfactory to the Company of the authority of such person so to act must be submitted. (e) If this Letter of Transmittal is signed by the registered holder(s) of the shares of Common Stock tendered herewith or the registered holder(s) of the shares of Series A Preferred Stock convertible into such shares, no endorsements or certificates or separate stock powers are required unless payment is to be made, and/or certificates for shares of Common Stock not tendered or purchased or certificates for shares of Series A Preferred Stock not converted into Common Stock are to be issued, to a person other than the registered holder(s). If this Letter of Transmittal is signed by a person other than the registered holder(s) of the shares of Common Stock tendered herewith or the registered holder(s) of the shares of Series A Preferred Stock convertible into such shares, however, the certificates must be endorsed or accompanied by appropriate stock powers, in either case, signed exactly as the name(s) of the registered holder(s) appear(s) on the certificates for such shares of Common Stock or such shares of Series A Preferred Stock convertible into such shares. Signature(s) on any such certificates or stock powers must be guaranteed by an Eligible Institution. See Instruction 1. 6. STOCK TRANSFER TAXES The Company will pay any stock transfer taxes with respect to the transfer and sale of shares of Common Stock to it or its order pursuant to the Offer. If, however, payment of the Purchase Price is to be made to, or if certificates for shares of Common Stock not tendered or accepted for payment or certificates for any shares of Series A Preferred Stock not converted into Common Stock are to be registered in the name of, any person other than the registered holder, or if tendered certificates are registered in the name of any person other than the person(s) signing this Letter of Transmittal, the amount of any stock transfer taxes (whether imposed on the registered holder or such person) payable on account of the transfer to such person will be deducted from the Purchase Price unless satisfactory evidence of the payment of such taxes or exemption therefrom is submitted. EXCEPT AS PROVIDED IN THIS INSTRUCTION 6, IT WILL NOT BE NECESSARY FOR TRANSFER TAX STAMPS TO BE AFFIXED TO THE CERTIFICATES LISTED IN THIS LETTER OF TRANSMITTAL. 7. SPECIAL PAYMENT AND DELIVERY INSTRUCTIONS If the check for the Purchase Price of any shares of Common Stock is to be issued to, or certificates representing any shares of Common Stock not tendered or not purchased or certificates representing any shares of Series A Preferred Stock not converted into Common Stock are to be returned in the name of, a person other than the person(s) signing this Letter of Transmittal or if a check is to be sent or certificates for shares of Common Stock not tendered or not purchased or certificates representing any shares of Series A Preferred Stock not converted into Common Stock are to be mailed to someone other than the person(s) signing this Letter of Transmittal or to the person(s) signing this Letter of Transmittal at an address other than that shown in the box entitled "Description of Shares Tendered", the boxes entitled "Special Payment Instructions" and/or "Special Delivery Instructions" in this Letter of Transmittal should be completed. 8. ODD LOTS As described in Section 3 of the Offer to Purchase, if fewer than all shares of Common Stock validly tendered and not withdrawn prior to the Expiration Date are to be purchased, the shares of Common Stock purchased first will consist of all shares of Common Stock tendered by any stockholder who beneficially owned an aggregate of fewer than 100 shares of Common Stock (including shares of Common Stock underlying the conversion rights of shares of Series A Preferred Stock) as of the close of business on January 23, 1995, and continued to own beneficially such shares of Common Stock until the Expiration Date, who properly tendered all such shares of Common Stock (partial tenders of Shares will not qualify for this preference) and who completes the box captioned "Odd Lots" in this Letter of Transmittal and, if applicable, the Notice of Guaranteed Delivery. 9. WAIVER OF CONDITIONS The Company reserves the absolute right in its sole discretion to waive any of the specified conditions of the Offer in the case of any shares of Common Stock tendered. 10. SUBSTITUTE FORM W-9 Except as provided below under "Important Tax Information", each tendering stockholder is required to provide the Depositary with a correct taxpayer identification number ("TIN") on Substitute Form W-9 which is provided under "Important Tax Information" below. Failure to provide the information on the form may subject the tendering stockholder to a $50 penalty and 31% federal income tax withholding may be imposed on the payments made to the stockholder or other payee with respect to shares of Common Stock purchased pursuant to the Offer. 11. WITHHOLDING ON FOREIGN STOCKHOLDERS The Depositary will withhold federal income taxes equal to 30% of the gross payments payable to a foreign stockholder unless such foreign stockholder proves in a manner satisfactory to the Company and the Depositary that either (i) the sale of its shares of Common Stock pursuant to the Offer will qualify as a sale or exchange, rather than as a dividend, for federal income tax purposes (as described in Section 10 of the Offer to Purchase), in which case no withholding will be required, or (ii) the foreign stockholder is eligible for a reduced tax treaty rate with respect to dividend income, in which case the Depositary will withhold at the reduced treaty rate. For this purpose, a foreign stockholder is any stockholder that is not (i) a citizen or resident of the United States, (ii) a corporation, partnership or other entity created or organized in or under the laws of the United States or any political subdivision thereof or (iii) any estate or trust the income of which is subject to United States federal income taxation regardless of the source of such income. The Depositary will determine a stockholder's status as a foreign stockholder and eligibility for a tax treaty reduced rate of withholding by reference to the stockholder's address and to any outstanding certificates or statements concerning eligibility for a reduced rate of withholding unless facts and circumstances indicate that reliance is not warranted. A foreign stockholder who had not previously submitted the appropriate certificates or statements with respect to a reduced rate of withholding for which such stockholder may be eligible should consider doing so in order to avoid overwithholding. A foreign stockholder may be eligible to obtain a refund of tax withheld if such stockholder meets one of the three tests for sale treatment described in Section 10 of the Offer to Purchase or is otherwise able to establish that no tax or reduced amount of tax was due. 12. IRREGULARITIES All questions as to the number of shares of Common Stock to be accepted and the validity, form, eligibility (including time of receipt) and acceptance for payment of any tender of shares of Common Stock will be determined by the Company, in its sole discretion, and its determination shall be final and binding on all parties. The Company reserves the absolute right to reject any or all tenders it determines not to be in proper form or the acceptance of or payment for which may, in the opinion of the Company's counsel, be unlawful. The Company also reserves the absolute right to waive any of the conditions of the Offer or any defect or irregularity in the tender of any particular shares of Common Stock. No tender of shares of Common Stock will be deemed to be properly made until all defects and irregularities have been cured or waived. Unless waived, any defects or irregularities in connection with tenders must be cured within such time as the Company shall determine. None of the Company, the Depositary, the Information Agent nor any other person is or will be obligated to give notice of any defects or irregularities in tenders, and none of them will incur any liability for failure to give such notice. 13. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES Questions and requests for assistance or additional copies of the Offer to Purchase, the Letter of Transmittal, the Notice of Guaranteed Delivery and the Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9 may be directed to the Information Agent or the Dealer Manager at their respective addresses set forth below. IMPORTANT: THIS LETTER OF TRANSMITTAL OR A FACSIMILE COPY THEREOF (TOGETHER WITH CERTIFICATES FOR SHARES OF COMMON STOCK OR SERIES A PREFERRED STOCK OR CONFIRMATION OF BOOK-ENTRY TRANSFER OF SHARES OF COMMON STOCK OR SERIES A PREFERRED STOCK AND ALL OTHER REQUIRED DOCUMENTS) MUST BE RECEIVED BY THE DEPOSITARY, OR THE NOTICE OF GUARANTEED DELIVERY MUST BE RECEIVED BY THE DEPOSITARY, PRIOR TO THE EXPIRATION DATE (AS DEFINED IN THE OFFER TO PURCHASE). IMPORTANT TAX INFORMATION Under U.S. federal income tax law, a stockholder whose tendered shares of Common Stock are accepted for payment is required to provide the Depositary with such stockholder's correct taxpayer identification number ("TIN") on Substitute Form W-9 below. If the Depositary is not provided with the correct TIN, the Internal Revenue Service may subject the stockholder or other payee to a $50 penalty. In addition, payments that are made to such stockholder or other payee with respect to shares of Common Stock purchased pursuant to the Offer may be subject to 31% backup withholding. Certain stockholders (including, among others, all corporations and certain foreign individuals) are not subject to these backup withholding and reporting requirements and should indicate their status by writing "exempt" across the face of the Substitute Form W-9. In order for a foreign individual to qualify as an exempt recipient, the stockholder must submit a Form W-8, signed under penalties of perjury, attesting to that individual's exempt status. A Form W-8 can be obtained from the Depositary. See the enclosed "Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9" for more instructions. If backup withholding applies, the Depositary is required to withhold 31% of any such payments made to the stockholder or other payee. Backup withholding is not an additional tax. Rather, the tax liability of persons subject to backup withholding will be reduced by the amount of tax withheld. If withholding results in an overpayment of taxes, a refund may be obtained from the Internal Revenue Service. The box in Part 2 of the form may be checked if the tendering stockholder has not been issued a TIN and has applied for a TIN or intends to apply for a TIN in the near future. If the box in Part 2 is checked, the stockholder or other payee must also complete the Certificate of Awaiting Taxpayer Identification Number below in order to avoid backup withholding. Notwithstanding that the box in Part 2 is checked (and the Certificate of Awaiting Taxpayer Identification Number is completed), the Depositary will withhold 31% on all payments made prior to the time a properly certified TIN is provided to the Depositary. PURPOSE OF SUBSTITUTE FORM W-9 To prevent backup withholding on payment made to a stockholder or other payee with respect to shares of Common Stock purchased pursuant to the Offer, the stockholder is required to notify the Depositary of the stockholder's correct TIN by completing the form below, certifying that the TIN provided on Substitute Form W-9 is correct (or that such stockholder is awaiting a TIN). WHAT NUMBER TO GIVE THE DEPOSITARY The stockholder is required to give the Depositary the TIN (e.g., social security number or employer identification number) of the record owner of the shares of Common Stock or of the record owner of the shares of Series A Preferred Stock convertible into such shares of Common Stock or of the last transferee appearing on the transfers attached to, or endorsed on, the certificates evidencing the shares of Common Stock or Series A Preferred Stock, as applicable. If the shares of Common Stock or Series A Preferred Stock, as applicable, are in more than one name or are not in the name of the actual owner, consult the enclosed "Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9" for additional guidance on which number to report. PAYER'S NAME: CHEMICAL BANK SUBSTITUTE PART 1--PLEASE PROVIDE YOUR FORM W-9 TIN IN THE BOX AT THE RIGHT ------------------------ AND CERTIFY BY SIGNING AND Social Security Number DATING BELOW OR -------------------- PAYER'S REQUEST Employee FOR TAXPAYER Identification Number IDENTIFICATION -------------------------------------------------------- NUMBER (TIN) PART 2--Awaiting TIN [_] -------------------------------------------------------- CERTIFICATION--UNDER THE PENALTIES OF PERJURY, I CERTIFY THAT THE INFORMATION PROVIDED ON THIS FORM IS TRUE, CORRECT AND COMPLETE. NAME ------------------------------------------------- (PLEASE PRINT) ADDRESS ---------------------------------------------- ------------------------------------------------------ (INCLUDE ZIP CODE) SIGNATURE DATE --------------------------- ---------- YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE BOX IN PART 2 OF SUBSTITUTE FORM W-9 CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER I certify under penalties of perjury that a taxpayer identification number has not been issued to me, and either (a) I have mailed or delivered an application to receive a taxpayer identification number to the appropriate Internal Revenue Service Center or Social Security Administration Office or (b) I intend to mail or deliver an application in the near future. I understand that, notwithstanding that I have checked the box in Part 2 (and have completed this Certificate of Awaiting Taxpayer Identification Number), all reported payments made to me prior to the time I provide the Company with a properly certified taxpayer identification number will be subject to a 31% backup withholding tax. SIGNATURE DATE ---------------------------------- ------------------ NOTE: FAILURE TO COMPLETE THIS FORM W-9 MAY RESULT IN A BACKUP WITHHOLDING OF 31% OF ANY PAYMENTS MADE TO YOU PURSUANT TO THE OFFER. PLEASE REVIEW THE ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 FOR ADDITIONAL DETAILS. The Information Agent: D. F. KING & CO., INC. 77 Water Street New York, New York 10005 (Call Collect) (212) 269-5550 or TOLL FREE (800) 326-3066 The Dealer Manager: SMITH BARNEY INC. 1345 Avenue of the Americas New York, New York 10105 (212) 723-5816 (call collect) EX-99.A.3 4 STOCKHOLDER LETTER [LETTERHEAD OF HILLS STORES COMPANY APPEARS HERE] January 24, 1995 Dear Fellow Stockholder: Hills Stores Company (the "Company") is offering to purchase up to 3,000,000 shares of its Common Stock from its stockholders for cash at $25.00 per share net to the selling stockholder. Although only shares of Common Stock will be purchased pursuant to the offer, holders of Series A Convertible Preferred Stock of the Company may tender shares of Common Stock into which their shares of Series A Convertible Preferred Stock are convertible by following the procedures set forth in the enclosed Offer to Purchase. The offer is one component of the Company's plan to enhance stockholder value announced by the Company on September 21, 1994. The primary purpose of the offer is to provide those of you who wish to convert a portion of your equity investment into cash with an opportunity to do so at a premium over recent market prices of the shares without the usual transaction costs associated with a market sale. Those of you whose shares are not purchased pursuant to the offer will increase your proportionate ownership interest in the Company and thus in its future earnings and profits. The offer, proration period and withdrawal rights will expire at 12:00 Midnight, New York City time, on Tuesday, February 21, 1995, unless the offer is extended. You are encouraged to act promptly in making your decision regarding your shares of Common Stock. Neither the Company nor its Board of Directors is making any recommendation as to whether you should tender shares of Common Stock in the offer. The offer is explained in detail in the enclosed Offer to Purchase and Letter of Transmittal. If you want to tender your shares, the instructions on how to tender shares are also explained in detail in the enclosed materials. We encourage you to read these materials carefully before making any decision with respect to the offer. If you have any questions regarding the offer, please call D. F. King & Co., Inc., the Information Agent for the offer, or Smith Barney Inc., the Dealer Manager for the Offer, at the appropriate number set forth on the back page of the Offer to Purchase. Sincerely, /s/ Thomas H. Lee /s/ Michael Bozic Thomas H. Lee Michael Bozic Chairman of the Board President and Chief Executive Officer EX-99.A.4 5 NOTICE OF GUARANTEED DELIVERY NOTICE OF GUARANTEED DELIVERY FOR TENDER OF SHARES OF COMMON STOCK OF HILLS STORES COMPANY This Notice of Guaranteed Delivery or one substantially equivalent hereto must be used to accept the Offer (as defined below) if: (a) certificates for shares of Common Stock, par value $.01 per share (the "Common Stock"), or Series A Convertible Preferred Stock, par value $.10 per share (the "Series A Preferred Stock"), of Hills Stores Company, a Delaware corporation (the "Company"), cannot be delivered to the Depositary prior to the Expiration Date (as defined in Section 3 of the Company's Offer to Purchase dated January 24, 1995 (the "Offer to Purchase")); or (b) the procedure for book-entry transfer (set forth in Section 4 of the Offer to Purchase) cannot be completed on a timely basis; or (c) the Letter of Transmittal (or a facsimile thereof) and all other required documents cannot be delivered to the Depositary prior to the Expiration Date. This Notice of Guaranteed Delivery, properly completed and duly executed, may be delivered by hand, mail or facsimile transmission to the Depositary. See Section 4 of the Offer to Purchase. To the Depositary: CHEMICAL BANK By Hand By Facsimile Transmission By Mail: or Overnight Mail: (for Eligible Institutions only): (212) 629-8015 or (212) 629-8016 (To confirm receipt of facsimile transmissions call: (212) 946-7137.) Reorganization Department Reorganization Department 55 Water Street GPO Station 2nd Floor, Room 234 P.O. Box 3085 New York, New York 10041 New York, New York 10116-3085 DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY TO AN ADDRESS, OR TRANSMISSION OF INSTRUCTIONS TO A FACSIMILE NUMBER, OTHER THAN AS SET FORTH ABOVE DOES NOT CONSTITUTE A VALID DELIVERY. This Notice of Guaranteed Delivery is not to be used to guarantee signatures. If a signature on a Letter of Transmittal is required to be guaranteed by an "Eligible Institution" (as defined in the Offer to Purchase) under the instructions thereto, such signature guarantee must appear in the applicable space provided in the signature box on the Letter of Transmittal. Ladies and Gentlemen: The undersigned hereby tenders to the Company, upon the terms and subject to the conditions set forth in the Offer to Purchase and in the related Letter of Transmittal (which together constitute the "Offer"), receipt of which is hereby acknowledged, shares of Common Stock (including shares of Common Stock issuable upon conversion of shares of Series A Preferred Stock) pursuant to the guaranteed delivery procedure set forth in Section 4 of the Offer to Purchase. ODD LOTS (SEE INSTRUCTION 8 OF THE LETTER OF TRANSMITTAL) The undersigned either (check one box): [_] was the beneficial owner as of the close of business on January 23, 1995, and will continue to be the beneficial owner until the Expiration Date, of an aggregate of fewer than 100 shares of Common Stock (including shares of Common Stock underlying the conversion rights of shares of Series A Preferred Stock), all of which are being tendered, or [_] is an Eligible Institution that (i) is tendering, for the beneficial owners thereof, shares of Common Stock (including shares of Common Stock underlying the conversion rights of shares of Series A Preferred Stock) with respect to which it is the record owner, and (ii) believes, based upon representations made to it by each such beneficial owner, that such beneficial owner owned beneficially as of the close of business on January 23, 1995, and will continue to own beneficially until the Expiration Date, an aggregate of fewer than 100 shares of Common Stock (including shares of Common Stock underlying the conversion rights of shares of Series A Preferred Stock), and is tendering all of such shares of Common Stock. Signature(s): Address: ----------------------- ---------------------------- ----------------------- ---------------------------- Zip Code Name(s) of Record Holder(s): Area Code and Tel. No.: ------------- - ------------------------------------- Please Print Certificate Nos.: Dated: (if available) ------------------- ------------------------------ If shares will be delivered by book-entry transfer: Name of Tendering Institution: -------------------------------------------- Account No.: -------------------------------------------------------------- at: [_] The Depository Trust Company [_] Midwest Securities Trust Company [_] Philadelphia Depository Trust Company GUARANTEE (NOT TO BE USED FOR SIGNATURE GUARANTEE) The undersigned, an Eligible Institution, guarantees (i) that the above named person(s) "own(s)" the shares of Common Stock tendered hereby within the meaning of Rule 14e-4 under the Securities Exchange Act of 1934, as amended, (ii) that such tender of such shares of Common Stock complies with Rule 14e-4 and (iii) to deliver to the Depositary either the stock certificates representing the shares of Common Stock tendered hereby or stock certificates representing shares of Series A Preferred Stock convertible into such shares of Common Stock, in proper form for transfer, or confirmation of the book-entry transfer of such shares into the Depositary's account at The Depository Trust Company, the Midwest Securities Trust Company or Philadelphia Depository Trust Company, in any such case, together with one or more properly completed and duly executed Letter(s) of Transmittal (or facsimile(s) thereof), or an Agent's Message (as defined in the Offer to Purchase) in the case of a book-entry delivery, and any other required documents, all within five New York Stock Exchange, Inc. trading days after the date of execution of this notice (or such shorter period as is provided pursuant to Section 4 of the Offer to Purchase). ------------------------------------- (NAME OF FIRM) ------------------------------------- (AUTHORIZED SIGNATURE) ------------------------------------- (NAME) ------------------------------------- (ADDRESS) ------------------------------------- (ZIP CODE) NOTE: DO NOT SEND CERTIFICATES WITH THIS NOTICE OF GUARANTEED DELIVERY; SHARE CERTIFICATES SHOULD BE SENT WITH YOUR LETTER OF TRANSMITTAL. EX-99.A.5 6 LETTER OF BROKERS, DEALERS [LOGO OF SMITH BARNEY APPEARS HERE] OFFER TO PURCHASE FOR CASH BY HILLS STORES COMPANY UP TO 3,000,000 SHARES OF ITS COMMON STOCK AT $25.00 NET PER SHARE January 24, 1995 To Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees: We have been appointed by Hills Stores Company, a Delaware corporation (the "Company"), to act as Dealer Manager in connection with its offer to purchase up to 3,000,000 shares of its Common Stock, par value $.01 per share ("Common Stock"), at a price of $25.00 per share, net to the seller in cash, upon the terms and subject to the conditions set forth in the Company's Offer to Purchase dated January 24, 1995 (the "Offer to Purchase"), and in the related Letter of Transmittal (which together constitute the "Offer"). Although only shares of Common Stock will be purchased pursuant to the Offer, holders of shares of Series A Convertible Preferred Stock, par value $.10 per share, of the Company ("Series A Preferred Stock") may tender shares of Common Stock into which their shares of Series A Preferred Stock are convertible by following the instructions contained in Section 4 of the Offer to Purchase and in the Letter of Transmittal. For your information and for forwarding to those of your clients for whom you hold shares of Common Stock or Series A Convertible Preferred Stock, par value $.10 per share (the "Series A Preferred Stock"), of the Company registered in your name or in the name of your nominee, we are enclosing herewith copies of the following documents: 1. A Letter to the Company's stockholders from Thomas H. Lee, Chairman of the Board of Directors of the Company, and Michael Bozic, President and Chief Executive Officer of the Company; 2. The Offer to Purchase dated January 24, 1995; 3. The Letter of Transmittal to be used by holders of shares of Common Stock or shares of Series A Preferred Stock convertible into shares of Common Stock in accepting the Offer; 4. A printed form of letter which may be sent to your clients for whose account you hold shares of Common Stock or Series A Preferred Stock in your name or in the name of a nominee in order to obtain such clients' instructions with regard to the Offer; 5. The Notice of Guaranteed Delivery; 6. Guidelines of the Internal Revenue Service for Certification of Taxpayer Identification Number on Substitute Form W-9; and 7. Return envelope addressed to Chemical Bank, the Depositary. If more than 3,000,000 shares of Common Stock are validly tendered and not withdrawn prior to the expiration of the Offer, the Company will accept for payment shares of Common Stock first from all stockholders who beneficially owned on January 23, 1995, and continue to own until the expiration of the Offer, an aggregate of fewer than 100 shares of Common Stock (including shares of Common Stock underlying the conversion rights of shares of Series A Preferred Stock) and who validly tender all such shares of Common Stock and then on a pro rata basis from all other stockholders who validly tender shares of Common Stock. The Offer is not conditioned upon any minimum number of shares of Common Stock being tendered. The Offer is, however, subject to certain other conditions set forth in the Offer to Purchase. WE URGE YOU TO CONTACT YOUR CLIENTS PROMPTLY. THE OFFER, PRORATION PERIOD AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON TUESDAY, FEBRUARY 21, 1995, UNLESS THE OFFER IS EXTENDED. NEITHER THE COMPANY NOR ITS BOARD OF DIRECTORS MAKES ANY RECOMMENDATION AS TO WHETHER ANY STOCKHOLDER SHOULD TENDER ANY OR ALL OF SUCH STOCKHOLDER'S SHARES PURSUANT TO THE OFFER. EACH STOCKHOLDER MUST MAKE ITS OWN DECISION WHETHER TO TENDER SHARES AND, IF SO, HOW MANY SHARES TO TENDER. THE COMPANY HAS BEEN ADVISED THAT NONE OF ITS DIRECTORS OR EXECUTIVE OFFICERS INTENDS TO TENDER ANY SHARES OF COMMON STOCK PURSUANT TO THE OFFER. THE COMPANY HAS ALSO BEEN ADVISED, HOWEVER, THAT APOLLO CAPITAL MANAGEMENT, INC. ("APOLLO"), MAY TENDER SOME OR ALL OF THE APPROXIMATELY 700,000 SHARES OF COMMON STOCK BENEFICIALLY OWNED BY APOLLO PURSUANT TO THE OFFER. MICHAEL S. GROSS, A DIRECTOR OF THE COMPANY, IS AN OFFICER OF APOLLO. The Company will not pay fees or commissions to any broker, dealer, commercial bank, trust company or other person for soliciting tenders of shares of Common Stock pursuant to the Offer. You will be reimbursed for customary mailing and handling expenses incurred by you in forwarding the enclosed material to your clients. Any inquiries you may have with respect to the Offer shall be addressed to, and additional copies of the enclosed material may be obtained by calling the undersigned or D. F. King & Co., Inc., the Information Agent, 77 Water Street, New York, New York 10005, telephone (212) 269-5550 (collect) or (800) 326-3066 (toll free). Very truly yours, Smith Barney Inc. ---------------- NOTHING CONTAINED HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE YOU OR ANY OTHER PERSON THE AGENT OF THE COMPANY, THE DEPOSITARY, THE INFORMATION AGENT OR THE DEALER MANAGER OR AUTHORIZE YOU OR ANY OTHER PERSON TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATION ON BEHALF OF ANY OF THEM WITH RESPECT TO THE OFFER NOT CONTAINED IN THE OFFER TO PURCHASE OR THE LETTER OF TRANSMITTAL. EX-99.A.6 7 LETTER TO CLIENTS OFFER TO PURCHASE FOR CASH BY HILLS STORES COMPANY UP TO 3,000,000 SHARES OF ITS COMMON STOCK AT $25.00 NET PER SHARE THE OFFER, PRORATION PERIOD AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON TUESDAY, FEBRUARY 21, 1995, UNLESS THE OFFER IS EXTENDED. To Our Clients: Enclosed for your consideration are the Offer to Purchase, dated January 24, 1995 (the "Offer to Purchase"), and the related Letter of Transmittal (which together constitute the "Offer"), relating to an offer by Hills Stores Company, a Delaware corporation (the "Company"), to purchase up to 3,000,000 shares of its Common Stock, par value $.01 per share ("Common Stock"), at $25.00 per share, net to the seller in cash. WE ARE THE HOLDER OF RECORD OF SHARES OF COMMON STOCK OR SHARES OF SERIES A CONVERTIBLE PREFERRED STOCK, PAR VALUE $.10 PER SHARE ("SERIES A PREFERRED STOCK") OF THE COMPANY HELD BY US FOR YOUR ACCOUNT. A TENDER OF SHARES OF COMMON STOCK (INCLUDING SHARES OF COMMON STOCK UNDERLYING THE CONVERSION RIGHTS OF SHARES OF SERIES A PREFERRED STOCK) CAN BE MADE ONLY BY US AS THE HOLDER OF RECORD AND PURSUANT TO YOUR INSTRUCTIONS. THE LETTER OF TRANSMITTAL IS FURNISHED TO YOU FOR YOUR INFORMATION ONLY AND CANNOT BE USED BY YOU TO TENDER SHARES OF COMMON STOCK HELD BY US FOR YOUR ACCOUNT. We request instructions as to whether you wish to tender any or all of the shares of Common Stock held by us for your account or any or all of the shares of Common Stock underlying the conversion rights of shares of Series A Preferred Stock held by us for your account, pursuant to the terms and conditions set forth in the Offer. Your attention is invited to the following: 1. The Offer price is $25.00 per share of Common Stock, net to the seller in cash. 2. The Offer is being made for up to 3,000,000 shares of Common Stock. 3. Although only shares of Common Stock will be purchased pursuant to the Offer, holders of Series A Preferred Stock may tender shares of Common Stock into which their shares of Series A Preferred Stock are convertible by following the instructions contained in Section 4 of the Offer to Purchase and the Letter of Transmittal. 4. The Offer and withdrawal rights will expire at 12:00 midnight, New York City time, on Tuesday, February 21, 1995, unless the Offer is extended. 5. The Offer is not conditioned upon any minimum number of shares of Common Stock being tendered. The Offer is, however, subject to certain other conditions set forth in the Offer to Purchase. 6. If you owned beneficially as of the close of business on January 23, 1995, and continue to beneficially own until the expiration of the Offer, an aggregate of fewer than 100 shares of Common Stock (including shares of Common Stock underlying the conversion rights of shares of Series A Preferred Stock) and you instruct us to tender on your behalf all such shares prior to the expiration of the Offer and check the box captioned "Odd Lots" in the instruction form, all such shares will be accepted for payment before proration, if any, of the purchase of other shares validly tendered. 7. If you beneficially own shares of Series A Preferred Stock and would like to convert all such shares of Series A Preferred Stock into Common Stock so that you will be issued, after any proration, shares of Common Stock, if any, not accepted for payment by the Company, check the box captioned "Series A Preferred Stock Conversion" in the instruction form. 8. Any stock transfer taxes applicable to a sale of shares of Common Stock to the Company will be borne by the Company except as otherwise provided in Instruction 6 of the Letter of Transmittal. 9. Payment for shares of Common Stock accepted for payment pursuant to the Offer will be made only after timely receipt by Chemical Bank (the "Depositary") of certificates for such shares of Common Stock or Series A Preferred Stock convertible into such shares of Common Stock (or a timely confirmation of receipt of such shares of Common Stock or Series A Preferred Stock pursuant to the procedures for book-entry delivery set forth in Section 4 of the Offer to Purchase), a properly completed and duly executed Letter of Transmittal (or facsimile thereof), with any required signature guarantees, or an Agent's Message (as defined in the Offer to Purchase) in connection with a book-entry delivery, and any other documents required by the Letter of Transmittal. In the event of proration, because of the difficulty of determining the precise number of shares of Common Stock validly tendered and not withdrawn, the Company does not expect to be able to announce the final results of such proration until at least seven New York Stock Exchange trading days after the expiration of the Offer. Preliminary results of such proration will be announced by press release as promptly as practicable after the expiration of the Offer. Stockholders may obtain such preliminary information, when available, from Smith Barney Inc., the Dealer Manager for the Offer, or D. F. King & Co., Inc., the Information Agent for the Offer. If you wish to have us tender any or all of your shares of Common Stock or any or all of the shares of Common Stock underlying the conversion rights of your shares of Series A Preferred Stock, please so instruct us by completing, executing and returning to us the attached Instruction Form. An envelope to return your Instructions to us is enclosed. If you authorize tender of your shares of Common Stock or of shares of Common Stock underlying the conversion rights of your shares of Series A Preferred Stock, all such shares will be tendered unless otherwise specified on the attached Instruction Form. Your Instructions should be forwarded to us in ample time to permit us to submit a tender on your behalf prior to the expiration of the Offer. THE OFFER IS NOT BEING MADE, NOR WILL TENDERS BE ACCEPTED FROM OR ON BEHALF OF, HOLDERS OF SHARES OF COMMON STOCK RESIDING IN ANY JURISDICTION IN WHICH THE MAKING OF THE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE WITH THE SECURITIES, BLUE SKY OR OTHER LAWS OF SUCH JURISDICTION. IN ANY JURISDICTION IN WHICH THE SECURITIES, BLUE SKY OR OTHER LAWS REQUIRE THE OFFER TO BE MADE BY A LICENSED BROKER OR DEALER, THE OFFER WILL BE DEEMED TO BE MADE ON THE COMPANY'S BEHALF BY SMITH BARNEY INC. OR ONE OR MORE BROKERS OR DEALERS LICENSED UNDER THE LAWS OF SUCH JURISDICTION. INSTRUCTIONS The undersigned acknowledge(s) receipt of your letter, the Offer to Purchase of Hills Stores Company dated January 24, 1995, and the related Letter of Transmittal, in connection with the Offer by Hills Stores Company to purchase up to 3,000,000 shares of its Common Stock, par value $.01 per share, at a price of $25.00 per share, net to the undersigned in cash. This will instruct you to tender the number of shares of Common Stock (including shares of Common Stock underlying the conversion rights of shares of Series A Preferred Stock) indicated below held by you for the account of the undersigned, on the terms and subject to the conditions set forth in such Offer to Purchase and Letter of Transmittal. SERIES A PREFERRED STOCK CONVERSION [_] By checking this box, the undersigned requests that all of its shares of Series A Preferred Stock be converted into Common Stock and, after proration, any shares of Common Stock that were not accepted for payment by the Company be returned to the undersigned. (Applicable only to beneficial owners of Series A Preferred Stock.) ODD LOTS [_] By checking this box, the undersigned represent(s) that the undersigned owned beneficially as of the close of business on January 23, 1995, and will continue to beneficially own until the expiration of the Offer, an aggregate of fewer than 100 shares of Common Stock (including shares of Common Stock underlying the conversion rights of shares of Series A Preferred Stock) and is tendering all such shares of Common Stock. Number of shares of Common SIGN HERE: Stock (including shares of ------------------------------------- Common Stock underlying the ------------------------------------- conversion rights of shares Signature(s) of Series A Preferred Stock) to be tendered: ------------------------------------- shares* ------------------------------------- - ----------- ------------------------------------- ------------------------------------- Please print name(s) and address(es) here Dated: --------------- ------------------------------------- Social Security or Tax Identification Number(s): * Unless otherwise indicated, it will be assumed that all of your shares of Common Stock held by us for your account and all shares of Common Stock underlying the conversion rights of shares of Series A Preferred Stock held by us for your account are to be tendered. EX-99.A.7 8 W-9 GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 GUIDELINES FOR DETERMINING THE PROPER IDENTIFICATION NUMBER TO GIVE THE PAYER.-- Social Security numbers have nine digits separated by two hyphens: i.e. 000-00-0000. Employer identification numbers have nine digits separated by only one hyphen: i.e. 00-0000000. The table below will help determine the number to give the payer.
- -------------------------------------------- GIVE THE FOR THIS TYPE OF ACCOUNT: SOCIAL SECURITY NUMBER OF-- - -------------------------------------------- 1. An individual's account The individual 2. Two or more individuals The actual owner (joint account) of the account or, if combined funds, any one of the individuals (1) 3. Husband and wife (joint The actual owner account) of the account or, if joint funds, either person(1) 4. Custodian account of a The minor(2) minor (Uniform Gift to Minors Act) 5. Adult and minor (joint The adult or, if account) the minor is the only contributor, the minor(1) 6. Account in the name of The ward, minor, guardian or committee or incompetent for a designated ward, person(3) minor, or incompetent person 7.a. The usual revocable The grantor- savings trust account trustee(1) (grantor is also trustee) b. So-called trust account The actual that is not a legal or owner(4) valid trust under State law 8. Sole proprietorship The owner(4) account - --------------------------------------------
- -------------------------------------------- GIVE THE EMPLOYER FOR THIS TYPE OF ACCOUNT: IDENTIFICATION NUMBER OF-- - -------------------------------------------- 9. A valid trust, estate, The legal entity or pension trust (do not furnish the identifying number of the personal representative or trustee unless the legal entity itself is not designated in the account title.)(5) 10. Corporate account The corporation 11. Religious, charitable, The organization or educational organization account 12. Partnership account The partnership held in the name of the business 13. Association, club, or The organization other tax-exempt organization 14. A broker or registered The broker or nominee nominee 15. Account with the The public Department of entity Agriculture in the name of a public entity (such as a State or local government, school district, or prison) that receives agricultural program payments - --------------------------------------------
(1) List first and circle the name of the person whose number you furnish. (2) Circle the minor's name and furnish the minor's social security number. (3) Circle the ward's, minor's or incompetent person's name and furnish such person's social security number. (4) Show the name of the owner. (5) List first and circle the name of the legal trust, estate, or pension trust. NOTE: IF NO NAME IS CIRCLED WHEN THERE IS MORE THAN ONE NAME, THE NUMBER WILL BE CONSIDERED TO BE THAT OF THE FIRST NAME LISTED. GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 PAGE 2 OBTAINING A NUMBER If you don't have a taxpayer identification number or you don't know your num- ber, obtain Form SS-5, Application for a Social Security Number Card, or Form SS-4, Application for Employer Identification Number, at the local office of the Social Security Administration or the Internal Revenue Service and apply for a number. PAYEES EXEMPT FROM BACKUP WITHHOLDING Payees specifically exempted from backup withholding on ALL payments include the following: . A corporation. . A financial institution. . An organization exempt from tax under section 501(a), or an individual re- tirement plan. . The United States or any agency or instrumentality thereof. . A State, the District of Columbia, a possession of the United States, or any subdivision or instrumentality thereof. . A foreign government, a political subdivision of a foreign government, or any agency or instrumentality thereof. . An international organization or any agency, or instrumentality thereof. . A registered dealer in securities or commodities registered in the U.S. or a possession of the U.S. . A real estate investment trust. . A common trust fund operated by a bank under section 584(a). . An exempt charitable remainder trust, or a non-exempt trust described in section 4947(a)(1). . An entity registered at all times under the Investment Company Act of 1940. . A foreign central bank of issue. Payments of dividends and patronage dividends not generally subject to backup withholding include the following: . Payments to nonresident aliens subject to withholding under section 1441. . Payments to partnerships not engaged in a trade or business in the U.S. and which have at least one nonresident partner. . Payments of patronage dividends where the amount received is not paid in money. . Payments made by certain foreign organizations. . Payments made to a nominee. Payments of interest not generally subject to backup withholding include the following: . Payments of interest on obligations issued by individuals. Note: You may be subject to backup withholding if this interest is $600 or more and is paid in the course of the payer's trade or business and you have not pro- vided your correct taxpayer identification number to the payer. . Payments of tax-exempt interest (including exempt-interest dividends under section 852). . Payments described in section 6049(b)(5) to nonresident aliens. . Payments on tax-free covenant bonds under section 1451. . Payments made by certain foreign organizations. . Payments made to a nominee. Exempt payees described above should file Form W-9 to avoid possible erroneous backup withholding. FILE THIS FORM WITH THE PAYER, FURNISH YOUR TAXPAYER IDEN- TIFICATION NUMBER, WRITE "EXEMPT" ON THE FACE OF THE FORM, AND RETURN IT TO THE PAYER. IF THE PAYMENTS ARE INTEREST, DIVIDENDS, OR PATRONAGE DIVIDENDS, ALSO SIGN AND DATE THE FORM. Certain payments other than interest, dividends, and patronage dividends, that are not subject to information reporting are also not subject to backup with- holding. For details, see the regulations under sections 6041, 6041A(a), 6045, and 6050A. PRIVACY ACT NOTICE. Section 6109 requires most recipients of dividend, inter- est, or other payments to give taxpayer identification numbers to payers who must report the payments to IRS. IRS uses the numbers for identification pur- poses. Payers must be given the numbers whether or not recipients are required to file tax returns. Beginning January 1, 1993, payers must generally withhold 31% of taxable interest, dividend, and certain other payments to a payee who does not furnish a taxpayer identification number to a payer. Certain penal- ties may also apply. PENALTIES (1) PENALTY FOR FAILURE TO FURNISH TAXPAYER IDENTIFICATION NUMBER. If you fail to furnish your taxpayer identification number to a payer, you are subject to a penalty of $50 for each such failure unless your failure is due to reason- able cause and not to willful neglect. (2) FAILURE TO REPORT CERTAIN DIVIDEND AND INTEREST PAYMENTS. If you fail to include any portion of an includible payment for interest, dividends, or pat- ronage dividends in gross income, such failure will be treated as being due to negligence and will be subject to a penalty of 5% on any portion of an under- payment attributable to that failure unless there is clear and convincing evi- dence to the contrary. (3) CIVIL PENALTY FOR FALSE INFORMATION WITH RESPECT TO WITHHOLDING. If you make a false statement with no reasonable basis which results in no imposition of backup withholding, you are subject to a penalty of $500. (4) CRIMINAL PENALTY FOR FALSIFYING INFORMATION. Falsifying certifications or affirmations may subject you to criminal penalties including fines and/or im- prisonment. FOR ADDITIONAL INFORMATION CONTACT YOUR TAX CONSULTANT OR THE INTERNAL REVENUE SERVICE. EX-99.A.8 9 SUMMARY OF ADVERTISEMENT This announcement is neither an offer to purchase nor a solicitation of an offer to sell shares of Common Stock. The Offer is made solely by the Offer to Purchase dated January 24, 1995, and the related Letter of Transmittal and is not being made to (nor will tenders be accepted from or on behalf of) holders of shares of Common Stock residing in any jurisdiction in which the making of the Offer or the acceptance thereof would not be in compliance with the securities, blue sky or other laws of such jurisdiction. In any jurisdiction in which the securities, blue sky or other laws require the Offer to be made by a licensed broker or dealer, the Offer will be deemed to be made on the Company's behalf by Smith Barney Inc. or by one or more brokers or dealers licensed under the laws of such jurisdiction. Notice of Offer to Purchase for Cash by HILLS STORES COMPANY Up to 3,000,000 Shares of Its Common Stock at $25.00 Net Per Share Hills Stores Company, a Delaware corporation (the "Company"), is offering to purchase up to 3,000,000 shares of its Common Stock, par value $.01 per share ("Common Stock"), at $25.00 per share, net to the seller in cash, upon the terms and subject to the conditions set forth in the Offer to Purchase dated January 24, 1995 (the "Offer to Purchase"), and in the related Letter of Transmittal (which together constitute the "Offer"). Although only shares of Common Stock will be purchased pursuant to the Offer, holders of shares of Series A Convertible Preferred Stock, par value $.10 per share, of the Company ("Series A Preferred Stock") may tender shares of Common Stock into which their shares of Series A Preferred Stock are convertible by following the instructions contained in Section 4 of the Offer to Purchase and the Letter of Transmittal. THE OFFER, PRORATION PERIOD AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON TUESDAY, FEBRUARY 21, 1995, UNLESS THE OFFER IS EXTENDED. NEITHER THE COMPANY NOR ITS BOARD OF DIRECTORS MAKES ANY RECOMMENDATION AS TO WHETHER ANY STOCKHOLDER SHOULD TENDER ANY OR ALL OF SUCH STOCKHOLDER'S SHARES PURSUANT TO THE OFFER. EACH STOCKHOLDER MUST MAKE ITS OWN DECISION WHETHER TO TENDER SHARES AND, IF SO, HOW MANY SHARES TO TENDER. The Company has been advised that none of its directors or executive officers intends to tender any shares of Common Stock pursuant to the Offer. The Company has also been advised, however, that Apollo Capital Management, Inc. ("Apollo"), may tender some or all of the approximately 700,000 shares of Common Stock beneficially owned by Apollo pursuant to the Offer. Michael S. Gross, a director of the Company, is an officer of Apollo. See Introduction and Section 8 of the Offer to Purchase. The primary purpose of the Offer is to provide the Company's stockholders who wish to realize a portion of their investment currently in cash with an opportunity to sell a portion of their shares at a premium over recent market prices of the shares without the usual transaction costs associated with a market sale. Stockholders whose shares are not tendered or purchased pursuant to the Offer will increase their proportionate ownership interest in the Company and thus in its future earnings and profits. The Offer will also allow qualifying stockholders owning beneficially fewer than 100 shares of Common Stock (including shares of Common Stock underlying the conversion rights of Series A Preferred Stock) whose shares of Common Stock are purchased pursuant to the Offer to avoid the payment of brokerage commissions and any applicable odd-lot discount payable on a sale of shares of Common Stock in a transaction effected on a securities exchange. See Sections 1 and 3 of the Offer to Purchase. The Offer is not conditioned upon any minimum number of shares being tendered. The Offer is, however, subject to certain other conditions set forth in the Offer to Purchase. See Section 12 of the Offer to Purchase. Upon the terms and subject to the conditions of the Offer, the Company will accept for payment and pay for up to 3,000,000 shares of Common Stock validly tendered and not withdrawn on or before 12:00 Midnight, New York City time, on Tuesday, February 21, 1995, or the latest time and date at which the Offer, if extended by the Company, shall expire (the "Expiration Date"). The Company expressly reserves the right, in its sole discretion, at any time or from time to time, to extend the period of time during which the Offer is open by giving oral or written notice of such extension to Chemical Bank (the "Depositary") and making a public announcement thereof. See Sections 4 and 14 of the Offer to Purchase. If the number of shares of Common Stock validly tendered and not withdrawn prior to the Expiration Date is greater than 3,000,000 shares of Common Stock, the Company, upon the terms and subject to the conditions of the Offer, will accept shares of Common Stock for payment in the following order of priority: (a) first, all shares of Common Stock validly tendered and not withdrawn prior to the Expiration Date by any stockholder who beneficially owned as of January 23, 1995, and continues to beneficially own until the Expiration Date, an aggregate of fewer than 100 shares of Common Stock (including shares of Common Stock underlying the conversion rights of shares of Series A Preferred Stock) and who: (1) tenders all such shares of Common Stock (partial tenders will not qualify for the preference); and (2) completes the box captioned "Odd Lots" on the Letter of Transmittal and, if applicable, on the Notice of Guaranteed Delivery; and (b) then, after purchase of all the foregoing shares of Common Stock, all other shares of Common Stock validly tendered and not withdrawn prior to the Expiration Date on a pro rata basis, if necessary (with adjustments to avoid purchases of fractional shares). Except as otherwise provided in Section 5 of the Offer to Purchase, a tender of shares of Common Stock pursuant to the Offer is irrevocable. Shares of Common Stock tendered pursuant to the Offer may be withdrawn at any time before the Expiration Date and, unless theretofore accepted for payment by the Company, may also be withdrawn after 12:00 Midnight, New York City time, on March 21, 1995. See Section 5 of the Offer to Purchase. In order for a withdrawal of the tender of shares of Common Stock to be effective, a written, telegraphic or facsimile transmission notice of withdrawal must be timely received by the Depositary at one of its addresses set forth on the back cover of the Offer to Purchase. Any such notice of withdrawal must specify the name of the person having tendered the shares of Common Stock to be withdrawn, the number of shares of Common Stock as to which the tender is to be withdrawn and the name of the registered holder of the shares of Common Stock (or shares of Series A Preferred Stock convertible into such shares of Common Stock) as to which the tender is to be withdrawn (if different from that of the person who tendered such shares of Common Stock). If the certificate(s) have been delivered or otherwise identified to the Depositary, then, prior to the release of such certificate(s), the serial numbers shown on the particular certificate(s) must be submitted and the signature on the notice of withdrawal must be guaranteed by an Eligible Institution (as defined in Section 4 of the Offer to Purchase) (except in the case of shares of Common Stock tendered by an Eligible Institution). If shares of Common Stock or Series A Preferred Stock have been delivered pursuant to the procedure for book-entry transfer set forth in Section 4 of the Offer to Purchase, the notice of withdrawal must specify the name and number of the account at the applicable Book-Entry Transfer Facility (as defined in Section 4 of the Offer to Purchase) to be credited with the withdrawn shares of Common Stock or Series A Preferred Stock and otherwise comply with the procedures of such facility. Withdrawals of tenders of shares of Common Stock may not be rescinded, and any shares of Common Stock as to which a tender is withdrawn will thereafter be deemed not validly tendered for purposes of the Offer. Withdrawn shares of Common Stock may, however, be retendered before the Expiration Date by again following any of the procedures described in Section 4 of the Offer to Purchase. The Offer to Purchase and the Letter of Transmittal contain important information that should be read before any decision is made with respect to the Offer. These documents are being mailed to record holders of shares of Common Stock and Series A Preferred Stock and will be furnished to brokers, dealers, banks and similar persons whose names, or the names of whose nominees, appear on the Company's stockholder list or, if applicable, who are listed as participants in a clearing agency's security position listing for subsequent transmittal to beneficial owners of shares of Common Stock or Series A Preferred Stock. The information required to be disclosed by Rule 13e-4(d)(1) of the General Rules and Regulations under the Securities Exchange Act of 1934 is contained in the Offer to Purchase and is incorporated herein by reference. Any questions or requests for assistance may be directed to the Information Agent or the Dealer Manager at the addresses and telephone numbers set forth below. Requests for additional copies of the Offer to Purchase, Letter of Transmittal or other tender offer materials may be directed to the Information Agent and such copies will be furnished at the Company's expense. Stockholders may also contact their broker, dealer, commercial bank or trust company for assistance concerning the Offer. The Information Agent: D. F. King & Co., Inc. 77 Water Street New York, New York 10005 Call Collect: (212) 269-5550 or TOLL FREE (800) 326-3066 The Dealer Manager: Smith Barney Inc. 1345 Avenue of the Americas New York, New York 10105 (212) 723-5816 (call collect) January 24, 1995 EX-99.A.9 10 PRESS RELEASE [LETTERHEAD OF HILLS STORES COMPANY APPEARS HERE] FOR IMMEDIATE RELEASE: JANUARY 24, 1995 Contact: William K. Friend VP-Corporate Counsel (617) 821-1000, Ext. 1189 HILLS STORES COMPANY COMMENCES $25 PER SHARE CASH TENDER OFFER FOR UP TO 3,000,000 SHARES OF ITS COMMON STOCK CANTON, Massachusetts, January 24, 1995--Hills Stores Company (NYSE-HDS) announced today that it has commenced a cash tender offer for up to 3 million shares of its outstanding Common Stock at $25 per share. The offer is not conditioned on any minimum number of shares of Common Stock being tendered. The tender offer, proration period and withdrawal rights will expire at 12:00 midnight, New York City time, on Tuesday, February 21, 1995, unless extended. The offer is being made pursuant to an offer to purchase and related documents to be mailed to Hills' stockholders. Although only shares of Common Stock will be purchased pursuant to the offer, holders of shares of Hills' Series A Convertible Preferred Stock may tender shares of Common Stock into which their shares of Series A Convertible Preferred Stock are convertible by following the procedures set forth in the offer. If more than 3 million shares of Common Stock are validly tendered pursuant to the offer and not withdrawn, Hills will first purchase all shares validly tendered by stockholders who beneficially owned on January 23, 1995, and continue to own until the expiration of the offer, fewer than 100 shares and who validly tender all such shares, and will then purchase validly tendered shares on a pro rata basis from all other stockholders. The offer is one component of Hills' plan to enhance stockholder value announced on September 21, 1994. "The offer is intended to provide Hills stockholders who wish to convert a portion of their equity investment into cash with an opportunity to do so at a premium over recent market prices without the usual transaction costs associated with a market sale," said Michael Bozic, President and Chief Executive Officer of Hills. "Stockholders whose shares are not purchased pursuant to the offer will increase their proportionate ownership interest in Hills." Hills has been advised that none of its directors or executive officers intends to tender any shares of Common Stock pursuant to the offer. Hills has also been advised, however, that Apollo Capital Management, Inc. may tender some or all of the approximately 700,000 shares of Common Stock beneficially owned by Apollo pursuant to the offer. Michael S. Gross, a director of the Company, is an officer of Apollo. Smith Barney Inc. is acting as Dealer Manager for the offer. D. F. King & Co., Inc. is the Information Agent. Hills Stores Company is a leading regional discount retailer operating 154 stores in 11 Mid-Western and Mid-Atlantic states. ##### EX-99.G.1 11 FORM 10-K 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 January 29, 1994 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 10.25% 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 Purchase Common Stock Boston Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No -------- --------- The aggregate market value of the voting stock held by nonaffiliates of the Registrant as of March 31, 1994 was $129,207,812 in respect to the Common Stock and $61,035,320 in 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 of 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 statements 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 31, 1994 was 8,900,660. DOCUMENTS INCORPORATED BY REFERENCE Part III of this report on Form 10-K is incorporated by reference from the proxy statement dated April 29, 1994 for the annual meeting of security holders to be held on June 8, 1994. 2 TABLE OF CONTENTS PART I ITEM 1. Business . . . . . . . . . . . . . . . . . . . . . . 4 (a) Reorganization . . . . . . . . . . . . . . . . . . . 4 (b) General. . . . . . . . . . . . . . . . . . . . . . . 5 (c) Merchandising. . . . . . . . . . . . . . . . . . . . 5 (d) Purchasing and Distribution. . . . . . . . . . . . . 5 (e) Store Operations and Management. . . . . . . . . . . 6 (f) Management Information and Control Systems . . . . . 6 (g) Competition. . . . . . . . . . . . . . . . . . . . . 7 (h) Trademarks and Service Marks . . . . . . . . . . . . 7 (i) Employees. . . . . . . . . . . . . . . . . . . . . . 7 ITEM 2. Properties . . . . . . . . . . . . . . . . . . . . . 7 Store Locations and Leases . . . . . . . . . . . . . 7 ITEM 3. Legal Proceedings. . . . . . . . . . . . . . . . . . 7 ITEM 4. Submission of Matters to a Vote of Security Holders 8 Executive Officers of the Registrant . . . . . . . . 8 PART II ITEM 5. Market for the Registrant's Common Equity and Related Security Holder Matters. . . . . . . . . . . 9 ITEM 6. Selected Financial Data. . . . . . . . . . . . . . . 10 ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. . . . . . . . . 11 ITEM 8. Financial Statements and Supplementary Data. . . . . 16 ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. . . . . . . . . 16 PART III ITEM 10. Directors and Executive Officers of the Registrant . 16 ITEM 11. Executive Compensation . . . . . . . . . . . . . . . 16 ITEM 12. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . . . . . . . . . 16 ITEM 13. Certain Relationships and Related Transactions . . . 16 PART IV ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. . . . . . . . . . . . . . . . . 17
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. a) REORGANIZATION On October 4, 1993 (the "Effective Date"), Hills and certain of its principal subsidiaries emerged from reorganization proceedings under Chapter 11 of the United States Bankruptcy Code ("Chapter 11") pursuant to the Confirmation Order entered on September 10, 1993 by the United States Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court") confirming the First Amended Consolidated Plan of Reorganization (as modified as of September 10, 1993, the "POR"). Hills, its former parent, Hills Department Stores, Inc. (the "Predecessor Company"), and the five principal subsidiaries of Hills 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 POR provided for the Predecessor Company to be dissolved and Hills to succeed to and assume the Predecessor Company's former status as a holding company by transferring to HDSC, a newly formed operating subsidiary of Hills, all of the assets, property and interest of Hills as of the Effective Date. The POR provided for the cancellation of approximately $721.9 million of unsecured claims in exchange for (i) $52.4 million in cash; (ii) $160 million of 10.25% Senior Notes of Hills; (iii) 5 million shares of Hills Series A Convertible Preferred Stock; (iv) 8.95 million shares of Hills Common Stock; and (v) Series 1993 Stock Rights to purchase 700,000 shares of Hills Common Stock. The POR also provided for the cancellation of the old preferred stock of Hills in exchange for 50,000 shares of Hills Common Stock and the cancellation of the common stock of the Predecessor Company in exchange for Series 1993 Warrants to purchase 432,990 shares of Hills Common Stock. The POR further provided for, among other things, the cash settlement in full of certain administrative, executory contract, priority, secured party and convenience claims aggregating approximately $70.2 million and the release of the Company from certain lease guarantees. HDSC obtained a three year unsecured line of credit with Chemical Bank and a syndicate of other banks for $225 million, of which up to $75 million is available as a letter of credit facility. All of the Common Stock of the Company's subsidiaries is pledged as collateral for the credit facility, which is guaranteed by Hills. New leadership of the Company is being provided by Michael Bozic, formerly President and Chief Operating Officer of the Sears Merchandising Group, and Norman Matthews, former President of Federated Department Stores. Mr. Bozic is a Director, President and Chief Executive Officer of the Company and Mr. Matthews is a Director and a Consultant to the Company. The Company also has new Executive Vice Presidents of Store and Distribution Operations and Merchandising. For more information about the Chapter 11 filings and the credit facility, see Item 7 and Notes 1 and 7 of Notes to Consolidated Financial Statements. 4 b) GENERAL The Company is a leading regional discount retailer offering a broad range of brand name and other first quality general merchandise. The Company's pricing strategy is to offer consistently low prices on all items on an every day basis. The Company emphasizes product lines designed to appeal to its predominantly female customer base, such as apparel, footwear, domestics and home furnishings, jewelry, housewares, toys and other family-oriented items. Management's business strategy will continue to stress every day low prices, depth and breadth of products in selected merchandise categories, remodeled facilities and strict operating controls. Hills stores are located in cities and towns of varying sizes, with some of the larger cities being Pittsburgh, Buffalo and Cleveland. The Company concentrates its stores in selected markets within a geographic region in order to reinforce marketing programs, enhance name recognition, achieve market penetration, and gain economies of scale in management, advertising and distribution. The Company has remodelled 50% of its stores in the last two years and expects to complete a chain-wide store remodeling program within the next two years. The program is designed to make its stores more visually appealing to its customers. Based upon results to date, the improved presentation of both softlines and hardlines merchandise has generated increased revenue and profit. c) MERCHANDISING The Company believes that its customer base consists primarily of female customers shopping for family needs. Accordingly, Hills emphasizes merchandise in its softlines departments that appeals 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 also emphasizes certain of its hardlines departments, such as housewares and toys. Hills carries a diverse line of products, all first quality, including a full line of clothing and footwear for women, men and children, plus 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 also offers a year-round layaway program for those customers who do not rely on credit cards. As part of its merchandising strategy, Hills endeavors to primarily purchase goods that are made in the U.S.A. and has developed a special merchandising 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 unaffiliated sources. In fiscal year 1993, the subsidiary, CRH International, Inc., imported products that accounted for approximately 5% of total purchases of the Hills Department Stores chain. d) PURCHASING AND DISTRIBUTION 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 headquarters. 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 mark-up and mark-down budgets for each buyer. Sales performance reports are received both daily and weekly and assist management in making related 5 merchandising decisions. The formats of these plans are programmed into computer planning systems for each department. The Company's new central distribution facilities located in Columbus, Ohio became fully operational in 1993. The new facilities replace a prior system, which relied mainly on vendors shipping direct to individual stores or to regional consolidators for delivery to stores. The Company believes the central distribution facilities will improve stocking and flow-through allocation and deliveries to the stores, resulting in more efficient inventory management, while significantly reducing store receiving expense. Many product handling functions are more efficiently handled at the central facilities. e) STORE OPERATIONS AND MANAGEMENT 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 work standards and freight activity permits a reduction in full-time associates and the use of more part-time associates. This strategy has resulted in the redirection of more payroll dollars into sales-generating positions within the store while reducing overall payroll expense. Store managers report to a district manager, who reports to a regional vice president. The 16 district managers and 2 regional vice presidents visit their stores on a regular basis to oversee operations. The regional and district organizations have been realigned in order to provide improved operational assistance to the stores. Store managers and associates are empowered to respond directly to the needs of the customer. The substantially new management team at the corporate level has instituted new programs to analyze all store functions and to continue improvement in the efficiency and effectiveness of work processes. The Company maintains a field office near Pittsburgh to facilitate store supervision and reduce travel expenses, particularly by those associates with greater responsibilities for store operations. Hills operates a loss prevention program, a store audit program and a system of internal controls which Management believes has contributed to maintaining Hills' inventory shrinkage at levels either consistent with or below industry levels. f) MANAGEMENT INFORMATION AND CONTROL SYSTEMS To support Hills' strategy of centralized management control, the Company relies extensively on computerized information systems. Hills operates its principal data processing center at its headquarters in Canton, Massachusetts. All Hills stores and administrative locations are tied to the data center's mainframe computer by means of an on-line leased telephone network. Hills' merchandising systems are designed to integrate the key retailing functions of seasonal merchandise planning, purchase order management, merchandise distribution, receiving, sales capture, inventory control, open-to-buy and replenishment. Unit sales data is recorded via the point-of-sale register systems in each store. The sales data is transmitted nightly to the Company's mainframe computer where it is processed to produce a wide range of daily and weekly management reports. Each Hills buyer also has on-line access to information via a workstation located in the buyer's office. The merchandising systems allow Hills to distribute specific categories and styles of merchandise to each store based upon the sales patterns of the stores. Store operations are supported by a number of additional on-line systems including electronic correspondence among all locations, payroll and labor control 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 headquarters to monitor and control key store activity. 6 g) COMPETITION The discount general merchandise business is highly competitive. The Company considers price, merchandise presentation, product selection and merchandise quality, together with store location, to be the most significant competitive factors. Hills' primary competitors are regional and national discount department store chains, some of which, like Wal-Mart and K Mart, are larger and better capitalized than Hills. The recent pattern of Wal-Mart's expansion has brought and is bringing more of its stores into the Company's market areas. Management believes that the Company's store remodeling program and its strength in certain merchandising lines will allow it to defend its competitive position, even with Wal-Mart's entry into the Company's markets. The Company believes it was the 7th largest general merchandise discount retailer in the United States in 1993 as measured by sales revenue. h) TRADEMARKS AND SERVICE MARKS The "Hills" name written in its distinctive script 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. i) EMPLOYEES As of March 26, 1994, Hills employed approximately 17,775 persons, including approximately 11,690 full-time and 6,085 part-time employees. 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. ITEM 2. PROPERTIES STORE LOCATIONS AND LEASES Hills operates 151 stores in the states of Illinois, Indiana, Kentucky, Maryland, Massachusetts, New York, 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 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 a buying office in New York, New York. 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 Other than ordinary routine litigation incidental to the business, neither Hills nor any of its subsidiaries is a party to any material pending legal proceedings. 7 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. EXECUTIVE OFFICERS OF THE REGISTRANT (Furnished pursuant to General Instruction G of Form 10-K.) The executive officers of the Company currently are: Michael Bozic, 53, became the President and Chief Executive Officer of Hills in May 1991. He was President and Chief Operating Officer from August 1990 to January 1991 and Chairman and Chief Executive Officer from 1987 to 1990 of the Sears Merchandising Group. Kim D. Ahlholm, 37, 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. Bruce A. Caldwell, 36, was elected Vice President-Treasurer in March 1994. He was Assistant Vice President-Financial Planning and Analysis since April 1993, Director-Accounting from December 1990 to March 1993 and Manager-External Reporting from February 1989 to November 1990. William K. Friend, 47, is and since December 1985 has been Vice President- Secretary and Corporate Counsel of Hills. John G. Reen, 44, was elected Executive Vice President-Chief Financial Officer of Hills in March 1992. He had been Senior Vice President-CFO since February 1991 and Vice President-Controller from December 1985 to January 1991. Andrew J. Samuto, 51, was elected Executive Vice President-Real Estate and Support Services of Hills in June 1990. He became Senior Vice President-Real Estate Development and Human Resources of Hills Department Stores division in 1985. E. Jackson Smailes, 51, was elected Executive Vice President-General Merchandise Manager in September 1992. From January 1990 to September 1992, he was President and Chief Operating Officer of C.R. Anthony, Inc. and prior to January 1990 was with Federated Department Stores with his last position being Vice Chairman of its Gold Circle Stores division. Robert J. Stevenish, 50, is Executive Vice President-Store and Distribution Operations. Prior to joining Hills in November 1992, he had been Director of Specialty Retailing of the J.C. Penney Company since 1986. Officers are elected to serve until their successors are elected and qualified. 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 from October 5, 1993 (the day after the Company's emergence from reorganization proceedings) through January 29, 1994, the end of the Company's fiscal year. The trading prices of the Common Stock of the Predecessor Company prior to October 5, 1993 are not presented herein because such prices are not meaningful. COMMON STOCK PRICES
Quarter Ended High Price Low Price January 29, 1994 $22.250 $17.875 October 30, 1993 $21.625 $20.250
(b) As of March 31, 1994, there were outstanding 8,900,660 shares of Common Stock held by approximately 1,615 holders of record, and 3,971,231 shares of Series A Convertible Preferred Stock held by approximately 1,545 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 October 4, 1993 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. See Note 7 of Notes to Consolidated Financial Statements. 9 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 have 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, 2 and 3 of Notes to Consolidated Financial Statements).
- ------------------------------------------------------------------------------------------------------------------------------------ Successor Predecessor Company Company ------------------------------------------------------------------------------ Seventeen Thirty-five Fiscal Fiscal Fiscal Fiscal (in thousands, except per share Weeks Ended Weeks Ended Year Year Year Year amounts and number of stores) January 29, 1994 October 2, 1993 1992 1991 1990 1989 - ------------------------------------------------------------------------------------------------------------------------------------ Net sales $772,685 * $992,848 $1,750,266 $1,679,866 $2,140,868 $2,075,603 Gross profit $223,034 * $282,549 $ 500,454 $ 465,776 $ 580,706 $ 593,557 * Net earnings (loss) applicable to * common shareholders before * extraordinary items $ 36,235 * ($ 9,747) $ 24,385 $ 7,637 ($ 276,415) (1) $ 2,908 * Net earnings (loss) applicable to * common shareholders $ 36,235 * $248,492 (2) $ 47,264 $ 20,117 ($ 276,415) (1) $ 2,908 * Fully-diluted earnings (loss) per * common share (3) $ 2.45 * $ 11.30 $ 2.15 $ 0.92 ($ 14.45) $ 0.15 * Fully-diluted average shares * outstanding 14,794 * 21,982 21,982 21,982 19,131 19,155 * FINANCIAL POSITION: * Total assets $907,621 * $972,838 (6) $ 922,745 $ 846,906 $ 775,227 $1,058,647 Working capital $171,440 * $301,980 (6) $ 299,927 $ 261,007 $ 270,403 $ 22,823 Liabilities subject to compromise (4) $ - * $775,169 (6) $ 761,443 $ 771,606 $ 819,094 $ - Long-term obligations $160,000 * $ - (6) $ - $ - $ 7,155 $ 371,653 Long-term obligations under capital * leases $130,626 * $122,230 (6) $ 133,457 $ 137,793 $ 137,831 $ 221,410 Redeemable preferred stock $100,000 * $ 33,143 (6) $ 31,481 $ 29,049 $ 26,654 $ 25,760 Common shareholders' equity (deficit) $230,235 * ($186,934) (6) ($ 183,172) ($ 230,446) ($ 259,413) $ 13,688 Number of stores operated at period * end 151 * 151 154 154 186 (5) 208 (1) Includes a $242.0 million provision for store closing and restructuring costs. (2) Includes a $258.2 extraordinary gain on 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 discharge of prepetition debt. No cash dividends have been paid to date on the Successor and Predecessor Companies' common stocks. (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). (5) The Predecessor Company operated 214 stores at January 2, 1991 and closed 28 stores by year end. (6) Reflects financial position of the Predecessor Company at October 2, 1993 prior to the confirmation of the Plan of Reorganization.
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") and certain of its principal subsidiaries emerged from reorganization proceedings under Chapter 11 of the United States Bankruptcy Code ("Chapter 11") pursuant to the Confirmation Order entered on September 10, 1993 by the United States Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court") confirming the First Amended Consolidated Plan of Reorganization (as modified as of September 10, 1993, the "POR"). 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 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" (see Note 2 of Notes to Consolidated Financial Statements). In connection with the adoption of fresh-start reporting and the consummation of the POR, a new entity has been 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 between fiscal years 1993, 1992 and 1991, 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 3 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 Financial 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 3 of Notes to Consolidated Financial Statements). RESULTS OF OPERATIONS Pro Forma Combined Fiscal Year Ended January 29, 1994 (Fiscal 1993) versus fiscal Year Ended January 30, 1993 (Fiscal 1992) Sales increased 0.9% compared to fiscal 1992. This improvement was primarily attributable to the Company's strong sales performance during the fiscal 1993 Christmas season partially offset by weak sales results due to unusually bad weather conditions in the first quarter of fiscal 1993 and January 1994 and the closing of three stores in June 1993. The strong fiscal 1993 Christmas season was highlighted by a fourth quarter comparable store sales increase of 8.6% compared to fiscal 1992. Comparable store sales were $1.759 billion in fiscal 1993 versus $1.728 billion in fiscal 1992, a 1.8% increase. 11 RESULTS OF OPERATIONS (continued) Pro FOrma Combined Fiscal Year Ended January 29, 1994 (Fiscal 1993) versus fiscal Year Ended January 30, 1993 (Fiscal 1992) (continued) Cost of sales as a percentage of sales was 71.4% in fiscal years 1993 and 1992. An improvement in purchase margin was offset by increases in markdowns and logistics costs. Logistics costs are expected to decline as a percentage of sales as the Company's new distribution facility begins to achieve economies of scale. Selling and administrative expenses as a percentage of sales was 21.4% in fiscal 1993 compared to 21.9% in fiscal 1992, a 0.5% decrease. This improvement is primarily a result of the Company's continued focus on cost reduction, principally in payroll and payroll related expenses, and follows a 0.6% decrease in costs in 1992 versus 1991. Depreciation and amortization as a percentage of sales was 2.0% in fiscal 1993 compared to 2.2% in fiscal 1992, a 0.2% decrease. This decrease is primarily a result of a pro forma January 31, 1993 revaluation and/or the change in the related estimated remaining useful lives of the Company's depreciable and amortizable assets in the pro forma implementation of fresh-start reporting. Other interest expense was $23.1 million in fiscal 1993 compared to $5.9 million in fiscal 1992, a $17.2 million increase. This increase is primarily due to 12 months of pro forma interest expense on the Senior Notes of $16.4 million and pro forma amortization ($2.4 million) of deferred financing costs assumed to have been paid on January 31, 1993, related to securing the revolving credit facility. Other income was $3.7 million in fiscal 1993 compared to $0.6 million in fiscal 1992, a $3.1 million increase. This increase is primarily due to the classification of $1.4 million of interest income as a reorganization item in fiscal 1992 versus other income in fiscal 1993 and a $0.9 million recovery in fiscal 1993 of a fully reserved note receivable. The Company's effective tax rate was 48.1% in fiscal 1993 compared to 49.8% in fiscal 1992, a 1.7% decrease. This decrease resulted principally from the decrease of certain non-deductible reorganization costs and state and local income taxes, partially offset by an increase in non-deductible goodwill amortization as a percentage of the related pre-tax earnings. Fiscal Year Ended January 30, 1993 (Fiscal 1992) versus fiscal Year Ended February 1, 1992 (Fiscal 1991) Sales and comparable store sales increased 4.2% as compared to fiscal 1991. This improvement was attributable to the Predecessor Company's strong sales performance during the fiscal 1992 Christmas season as well as improved sales performance in the first quarter of fiscal 1992 compared to fiscal 1991 (in which sales were unusually depressed following the Chapter 11 filing). Cost of sales as a percentage of sales was 71.4% in fiscal 1992 compared to 72.3% in fiscal 1991, a 0.9% decrease. This increase in gross margin reflects the improvement in purchase margin in both hardlines, principally in the home decor merchandising categories, and softlines. The Predecessor Company did not record any LIFO provision in fiscal 1992, as a result of very low inflation during the year. In fiscal 1991, the Predecessor Company recorded a LIFO provision of approximately 0.3% as a percentage of sales. 12 RESULTS OF OPERATIONS (continued) Fiscal Year Ended January 30, 1993 (Fiscal 1992) versus fiscal Year Ended February 1, 1992 (Fiscal 1991) (continued) Selling and administrative expenses as a percentage of sales was 21.9% in fiscal 1992 compared to 22.5% in fiscal 1991, a 0.6% decrease. This improvement was primarily due to the Company's continued focus on cost reduction, principally in payroll and payroll related expenses. During fiscal years 1992 and 1991, the Company managed staffing levels in response to reduced sales expectations, which allowed salaries and wages to decline from prior year's levels. Other interest expense was $5.9 million in fiscal 1992 compared to $9.2 million in fiscal 1991, a $3.3 million decrease. Lower average borrowing rates, lower average borrowing levels and lower amortization of deferred financing costs of the old revolving credit facility were the major reasons for this decrease. The Predecessor Company's effective tax rate was 49.8% in fiscal 1992 and 55.5% in fiscal 1991, a 5.7% decrease. This decrease resulted principally from the decrease of certain non-deductible reorganization costs and non-deductible goodwill amortization as a percentage of the related pre-tax earnings. Fiscal 1992 and fiscal 1991 results reflect extraordinary credits of $22.9 and $12.5 million, respectively, representing the utilization of available book federal and state operating loss carryforwards. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES General The discussion of the Company's financial condition, liquidity and capital resources that follows is based on the Company's financial position at January 29, 1994, which reflects the confirmation of the POR and implementation of fresh-start reporting as of October 2, 1993. The financial information of the Company generally is not comparable with the prior periods due to the POR and the effect of the implementation of the transactions contemplated thereby. Hills Department Store Company, a wholly-owned subsidiary of the Company, entered into a three year unsecured revolving credit facility on October 4, 1993 (the "Facility") with Chemical Bank and a syndicate of 11 other banks for $225 million, of which up to $75 million is available as a letter of credit facility. All of the common stock of the Company's subsidiaries are pledged as collateral for the Facility and the Facility is guaranteed by the Company (see Note 7 of Notes to Consolidated Financial Statements). At January 29, 1994, there was no outstanding balance under the Facility. During the Successor Company's seventeen weeks ended January 29, 1994, average borrowings approximated $12.9 million at an average interest rate of approximately 6.9%, with peak borrowings at $56.0 million. In fiscal 1994, there have not been any borrowings under the Facility through the date of this filing. In addition to its funded debt, the Company has significant lease commitments which require cash outflows. Operating lease payments in fiscal 1994 are expected to approximate fiscal 1993 payments of $44.9 million. Based on current projections of cash flows, management believes that amounts available under its current borrowing agreement, together with cash from operations, will enable the Company to meet its current liquidity and capital expenditure requirements. To facilitate comparison of cash flow information of the Successor and Predecessor Companies, the following discussion is presented using the fifty-two weeks combined cash flow information of the Successor and Predecessor Companies. Fresh-start reporting has no impact on cash flow information. A summary of cash flow information and financial position is presented on the following page. 13 FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES (continued) General (continued)
Combined Predecessor Company Successor and ----------------------------- Predecessor Companies Fifty-two Fiscal Year Fiscal Year Weeks Ended Ended Ended January 29, January 30, February 1, (in thousands) 1994 1993 1992 - ------------------------------------------------------------------------------------------- Cash and cash equivalents at beginning of period $173,343 $113,907 $ 39,911 Cash provided by operating activities 50,022 105,587 99,094 Capital expenditures ( 30,232) ( 40,066) ( 11,487) Principal payments under capital obligations ( 5,126) ( 4,806) ( 3,538) Cash distributions pursuant to the POR ( 90,318) - - Other investing activities - 780 ( 4,585) Other financing activities ( 7,640) ( 2,059) ( 5,488) --------- -------- -------- Cash and cash equivalents at end of period $ 90,049 $173,343 $113,907 ======== ======== ======== Working capital at end of period $171,440 $299,927 $261,007 ======== ======== ========
The Company's working capital as of January 29, 1994 decreased by $128.5 million from January 30, 1993. This decrease is primarily due to cash distributions pursuant to the POR, capital expenditures and an increase in accrued liabilities related to the emergence from Chapter 11, partially offset by an increase in inventories. Net cash provided by operating activities during the fiscal twelve month period ended January 29, 1994 decreased $55.6 million compared to the comparable fiscal twelve month period ended January 30, 1993. This decrease is primarily due to an increase in inventories from fiscal 1992 of $60.9 million due to an emphasis on maintaining in-stock positions in basic merchandise in fiscal 1993 and a 6.8% decrease from fiscal 1992 in accounts payable as a percentage of ending inventory. Over the past three years, the Company has generated positive cash flows from operations in excess of its capital expenditure requirements. Capital expenditures totalled $30.2 million during fiscal 1993. Since 1991, over 50% of the Company's 151 stores have been remodeled with another 20% scheduled for completion in the spring of fiscal 1994. A new store is planned to open in July 1994. Fiscal 1994 capital expenditures are expected to approximate $37 million. Due to the seasonality of the Company's business, the Company utilized its revolving credit facility during the seventeen weeks ended January 29, 1994 primarily to fund merchandise purchases and distributions pursuant to the POR, with peak borrowings at $56.0 million. All such borrowings were repaid in December 1993. Other financing activities reflect fees paid to secure the $225 million revolving credit facility. 14 FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES (continued) OTHER MATTERS SEASONALITY The Company's business is highly seasonal due to increased consumer buying for back-to-school needs and at Christmas. The second half of each year provides the major portion of the Company's annual sales and operating profit with operating profit particularly concentrated in the Christmas selling season. INFLATION The Company, although subject to the effects of changing prices, generally has experienced a lesser rate of inflation than the economy as a whole. The Company uses the LIFO inventory accounting method for financial reporting purposes because it is believed to provide a better matching of current costs with revenues than does the FIFO method. Consequently, the cost of goods sold included in the results of operations is already adjusted for inflation. 15 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See accompanying pages F-1 through F-24. Information called for by this item can be found at the pages listed in the following index. INDEX TO FINANCIAL STATEMENTS
Page Hills Stores Company and Subsidiaries Report of Independent Accountants. . . . . . . . . . . . F-1 Consolidated Balance Sheets. . . . . . . . . . . . . . . F-2 Consolidated Statements of Operations. . . . . . . . . . F-3 Consolidated Statements of Cash Flows. . . . . . . . . . F-4 Consolidated Statements of Common Shareholders' Equity . F-5 Notes to Consolidated Financial Statements . . . . . . . F-6
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Incorporated by reference from the item entitled "Information about Nominees" in the proxy statement dated April 29, 1994 for the annual meeting of stockholders to be held June 8, 1994, except for information regarding executive officers of the Company, which information is furnished in a separate item captioned "Executive Officers of the Registrant" in Part I of this report. ITEM 11. EXECUTIVE COMPENSATION Incorporated by reference from the item entitled "Executive Compensation" in the proxy statement dated April 29, 1994 for the annual meeting of stockholders to be held June 8, 1994. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Incorporated by reference from the item entitled "Beneficial Ownership" in the proxy statement dated April 29, 1994 for the annual meeting of stockholders to be held June 8, 1994. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Incorporated by reference from the items entitled "Information about Nominees", "Employment Contracts" and "Compensation of Directors" in the proxy statement dated April 29, 1994 for the annual meeting of stockholders to be held June 8, 1994. 16 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 Report of Independent Accountants F-1 Consolidated Balance Sheets F-2 Consolidated Statements of Operations F-3 Consolidated Statements of Cash Flows F-4 Consolidated Statements of Common Shareholders' Equity F-5 Notes to Consolidated Financial Statements F-6 2. Financial statement schedules Report of Independent Accountants on Schedules S-1 V Property, Plant and Equipment S-2 VI Accumulated Depreciation and Amortization of Property, Plant and Equipment S-3 VIII Valuation and Qualifying Accounts S-4 IX Short-Term Borrowings S-5 X Supplementary Income Statement Information S-6
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. 2.1(3) First Amended Consolidated Plan of Reorganization, dated as of July 16, 1993. 2.2(3) September 10, 1993 Amendment to such Plan of Reorganization. 3.1(1) Restated Certificate of Incorporation of the Company, as amended. 3.2(1) Amended and Restated By-Laws of the Company. 4.1(1) Provisions of the Restated Certificate of Incorporation of the Company relating to its Series A Convertible Preferred Stock. 4.2 Form of Series 1993 Stock Right. (Filed herewith) 4.3(1) Indenture relating to the 10.25% Senior Notes due 2003 of the Company. 4.4(2) Series 1993 Warrant Agreement dated October 4, 1993 between the Company and Chemical Bank, as warrant agent. 10.1(4)* Retention Agreement with Norman S. Matthews, dated April 30, 1991. 17 10.2(4)* Undated Employment Agreement between Hills Stores and Michael Bozic (executed in April 1991). 10.3(4)* Employment Agreement with E. Jackson Smailes, effective September 15, 1992. 10.4(4)* Employment Agreement with Robert J. Stevenish, effective December 14, 1992. 10.5(4)* Employment Agreement with Michael Bozic, dated March 10, 1993. 10.6(4)* Consulting Agreement with Norman S. Matthews, dated March 10, 1993. 10.7(4)* Form of individual Employment Agreements entered into in March 1993 with, respectively, Messrs. Reen, Samuto, Smailes and Stevenish. 10.8 * 1993 Incentive and Nonqualified Stock Option Plan. (Filed herewith) 10.9(2) Credit Agreement dated as of October 4, 1993 among HDSC, Hills Stores Company, the Lenders named therein and Chemical Bank, as Administrative Agent and Fronting Bank. 11.1 Computation of earnings per share. (Filed herewith) 21 Subsidiaries. (Filed herewith) 24 Powers of Attorney of directors and officers of the Company. (Filed herewith) [FN] - ------------------- * Executive Compensation Plans and Arrangements. 1. Incorporated by reference from the Form 8-A of the Company filed on October 5, 1993. 2. Incorporated by reference from the Report on Form 8-K of the Company dated October 4, 1993. 3. Incorporated by reference from the Report on Form 8-K of Hills Department Stores, Inc. dated September 10, 1993 (same Commission File No. 1-9505) 4. Incorporated by reference from the Annual Report on Form 10-K of Hills Department Stores, Inc. for the fiscal year ended January 30, 1993. 18 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the Town of Canton, Commonwealth of Massachusetts, on April 21, 1994. 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 Thomas H. Lee Store Company April 21, 1994 * Director, President and __________________ Chief Executive Officer of the Company Michael Bozic and Hills Department Store Company (Principal Executive Officer) April 21, 1994 * Director and Executive Vice President- __________________ Chief Financial Officer (Principal Financial John G. Reen Officer) of the Company and Hills Department Store Company April 21, 1994 * __________________ Director of the Company Susan E. Engel and Hills Department Store Company April 21, 1994 * __________________ Director of the Company Michael S. Gross and Hills Department Store Company April 21, 1994 * __________________ Director of the Company Richard B. Loynd and Hills Department Store Company April 21, 1994 * __________________ Director of the Company Norman S. Matthews and Hills Department Store Company April 21, 1994 * __________________ Director of the Company James L. Moody, Jr. and Hills Department Store Company April 21, 1994 * __________________ Vice President-Controller (Principal Accounting Kim D. Ahlholm Officer) of the Company and Hills Department Store Company April 21, 1994
* By: /s/ William K. Friend __________________ William K. Friend Attorney-in-Fact 19 REPORT OF INDEPENDENT ACCOUNTANTS 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 29, 1994, and January 30, 1993, and the related consolidated statements of operations, cash flows and common shareholders' equity for the seventeen week period ended January 29, 1994, the thirty- five week period ended October 2, 1993 and each of the two years in the period ended January 30, 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 29, 1994, and January 30, 1993 and the consolidated results of its operations and its cash flows for the seventeen week period ended January 29, 1994, the thirty-five week period ended October 2, 1993 and each of the two years in the period ended January 30, 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 2 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 January 29, 1994 consolidated balance sheet and the statement of operations for the seventeen weeks ended January 29, 1994 are not comparable to the Company's consolidated balance sheets or consolidated statements of operations for prior periods. Boston, Massachusetts March 22, 1994 Coopers & Lybrand F-1 HILLS STORES COMPANY AND SUBSIDIARIES ____________________________________________________________________________________________ CONSOLIDATED BALANCE SHEETS
Successor Predecessor Company Company January 29, January 30, (dollars in thousands) 1994 1993 ____________________________________________________________________________________________ * * ASSETS * Current assets: * Cash and cash equivalents $ 90,049 * $173,343 Trade receivables, less allowance for doubtful accounts of * $5,497 and $4,591 23,368 * 22,055 Inventories (Note 4) 326,465 * 265,533 Other current assets 4,647 * 4,679 -------- * -------- Total current assets 444,529 * 465,610 * Property and equipment, net (Note 5) 132,431 * 122,737 Property under capital leases, net (Note 9) 134,476 * 132,971 Beneficial lease rights, net (Note 4) 9,902 * 50,811 Other assets, net 9,555 * 14,989 Goodwill, net (Note 4) - * 135,627 Reorganization value in excess of amounts allocable to * identifiable assets, net (Note 4) 176,728 * - -------- * -------- $907,621 * $922,745 ======== * ======== LIABILITIES AND SHAREHOLDERS' EQUITY * Current liabilities: * Current portion of capital leases (Note 9) $ 5,532 * $ 5,229 Accounts payable, trade 64,192 * 70,274 Other accounts payable and accrued expenses (Note 6) 203,365 * 90,180 -------- * -------- Total current liabilities 273,089 * 165,683 * Senior notes (Note 8) 160,000 * - Obligations under capital leases (Note 9) 130,626 * 133,457 Other liabilities 13,671 * 13,853 Liabilities subject to compromise (Note 1) - * 761,443 * Commitments and contingencies (Note 18) - * - * Preferred stock, at mandatory redemption value (Note 12) 100,000 * 31,481 * Common shareholders' equity (deficit) (Note 13): * Common stock, 50,000,000 shares of $0.01 par value authorized * and 9,000,000 and 19,757,390 shares issued and outstanding 90 * 198 Additional paid-in capital 193,910 * 65,215 Retained earnings (deficit) 36,235 * (248,492) -------- * -------- 230,235 * (183,079) Less-treasury stock - * (93) -------- * -------- Total common shareholders' equity (deficit) 230,235 * (183,172) -------- * -------- $907,621 * $922,745 ======== * ========
See notes to consolidated financial statements F-2 HILLS STORES COMPANY AND SUBSIDIARIES ______________________________________________________________________________________________________________________________ CONSOLIDATED STATEMENTS OF OPERATIONS
PRO FORMA Successor Predecessor Company COMBINED Company __________________________________________ FIFTY-TWO Seventeen Thirty-five Fiscal Year Fiscal Year WEEKS ENDED Weeks Ended Weeks Ended Ended Ended JANUARY 29, January 29, October 2, January 30, February 1, (in thousands, except per share amounts) 1994 1994 1993 1993 1992 ______________________________________________________________________________________________________________________________ (Unaudited) * (Note 3) * * Net sales $1,765,533 $772,685 * $992,848 $1,750,266 $1,679,866 Cost of sales 1,259,950 549,651 * 710,299 1,249,812 1,214,090 Selling and administrative expenses 378,357 138,360 * 239,997 383,581 377,039 Depreciation and amortization 34,761 11,328 * 27,978 38,959 36,223 ---------- -------- * ----------------------------------------- Operating earnings 92,465 73,346 * 14,574 77,914 52,514 * Other income (expense): * Capital lease interest (15,141) (5,029) * (10,284) (16,151) (16,395) Other interest (Note 1) (23,138) (8,112) * (3,364) (5,865) (9,156) Other income, net 3,692 2,639 * 231 635 678 ---------- -------- * ----------------------------------------- (34,587) (10,502) * (13,417) (21,381) (24,873) ---------- -------- * ----------------------------------------- 57,878 62,844 * 1,157 56,533 27,641 Reorganization items: * Professional fees - - * (6,045) (5,730) (6,850) Fresh-start revaluation (Note 2) - - * (5,985) - - Interest income - - * 2,788 2,602 1,778 ---------- -------- * ----------------------------------------- 57,878 62,844 * (8,085) 53,405 22,569 Income taxes (Note 16) 27,837 26,609 * - 26,588 12,537 ---------- -------- * ----------------------------------------- 30,041 36,235 * (8,085) 26,817 10,032 Extraordinary credit - benefit of net * operating loss carryforward (Note 16) - - * - 22,879 12,480 Extraordinary gain on discharge of * prepetition debt (Note 1) - - * 258,239 - - ---------- -------- * ------------------------------------------ Net earnings 30,041 36,235 * 250,154 49,696 22,512 * Preferred dividend requirements - - * (1,662) (2,432) ( 2,395) ---------- -------- * ------------------------------------------ Net earnings applicable to * common shareholders $ 30,041 $ 36,235 * $248,492 $ 47,264 $ 20,117 ========== ======== * ========================================= Primary earnings (loss) per common share (Note 17): * Earnings (loss) before extraordinary items $ 2.14 $ 2.58 * ($ 0.49) $ 1.23 $ 0.39 Extraordinary credit - benefit of net operating loss * carryforward - - * - 1.16 0.63 Extraordinary gain on discharge of prepetition debt - - * 13.07 - - ---------- -------- * ------------------------------------------ Net earnings applicable to common shareholders $ 2.14 $ 2.58 * $ 12.58 $ 2.39 $ 1.02 ========== ======== * ========================================= Fully-diluted earnings (loss) per common * share (Note 17): * Earnings (loss) before extraordinary items $ 2.03 $ 2.45 * ($ 0.45) $ 1.11 $ 0.35 Extraordinary credit - benefit of net operating loss * carryforward - - * - 1.04 0.57 Extraordinary gain on discharge of prepetition debt - - * 11.75 - - ---------- -------- * ------------------------------------------ Net earnings applicable to common shareholders $ 2.03 $ 2.45 * $ 11.30 $ 2.15 $ 0.92 ========== ======== * =========================================
See notes to consolidated financial statements F-3 HILLS STORES COMPANY AND SUBSIDIARIES __________________________________________________________________________________________________________________________ CONSOLIDATED STATEMENTS OF CASH FLOWS
Successor Predecessor Company Company ____________________________________________ Seventeen Thirty-five Fiscal Year Fiscal Year Weeks Ended Weeks Ended Ended Ended January 29, October 2, January 30, February 1, (in thousands) 1994 1993 1993 1992 __________________________________________________________________________________________________________________________ * CASH FLOWS FROM OPERATING ACTIVITIES: * Net earnings $ 36,235 * $250,154 $ 49,696 $ 22,512 Adjustments to reconcile net earnings * to net cash provided by operating activities * before reorganization items: * Depreciation and amortization 12,113 * 28,780 41,622 38,363 Decrease in deferred tax assets recognized through * reduction of reorganization value in excess of amounts * allocable to identifiable assets 24,281 * - - - Decrease (increase) in accounts receivable and other * current assets 12,513 * (19,485) (173) (18,609) Decrease (increase) in inventories 81,736 * (141,704) (15,850) (30,414) Increase (decrease) in accounts payable and other * accrued expenses (40,229) * 61,087 38,621 93,406 Other, net 308 * 2,761 1,824 1,296 -------- * --------------------------------------- Net cash provided by operating activities * before reorganization items 126,957 * 181,593 115,740 106,554 Reorganization items: * Decrease in liabilities subject to compromise - * (6,274) (10,153) (45,913) Fresh-start revaluation - * 5,985 - - Extraordinary gain on discharge of prepetition debt - * (258,239) - - Cash received from inventory liquidations - * - - 36,889 Cash received from liquidator for reimbursable * expenses, net - * - - 1,564 -------- * --------------------------------------- Net cash provided by (used for) operating activities 126,957 * (76,935) 105,587 99,094 * CASH FLOWS FROM INVESTING ACTIVITIES: * * Capital expenditures (3,070) * (27,162) (40,066) (11,487) Other investing activities - * - 780 (4,585) -------- * --------------------------------------- Net cash used for investing activities (3,070) * (27,162) (39,286) (16,072) * CASH FLOWS FROM FINANCING ACTIVITIES: * * Principal payments under capital lease obligations (1,726) * (3,400) (4,806) (3,538) Cash distributions pursuant to the Plan * of Reorganization (85,153) * (5,165) - - Other financing activities (196) * (7,444) (2,059) (5,488) -------- * --------------------------------------- Net cash used for financing activities (87,075) * (16,009) (6,865) (9,026) -------- * --------------------------------------- Net increase (decrease) in cash and cash equivalents 36,812 * (120,106) 59,436 73,996 * Cash and cash equivalents at beginning of period 53,237 * 173,343 113,907 39,911 -------- * --------------------------------------- Cash and cash equivalents at end of period $ 90,049 * $ 53,237 $173,343 $113,907 ======== * =======================================
See notes to consolidated financial statements F-4 HILLS STORES COMPANY AND SUBSIDIARIES ______________________________________________________________________________________________________________________________ CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY
Total 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 - February 3, 1991 19,151,228 $192 $56,361 ($315,873) 26,688 ($93) ($259,413) Conversion of 11% Convertible Junior Subordinated Debentures 632,136 6 8,844 - - - 8,850 Preferred stock dividend requirements - - - (2,395) - - (2,395) Net earnings - - - 22,512 - - 22,512 ----------------------------------------------------------------------------- Predecessor Company balance - February 1, 1992 19,783,364 198 65,205 (295,756) 26,688 (93) (230,446) Conversion of 11% Convertible Junior Subordinated Debentures 714 - 10 - - - 10 Preferred stock dividend requirements - - - (2,432) - - (2,432) Net earnings - - - 49,696 - - 49,696 ----------------------------------------------------------------------------- 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 =============================================================================
See notes to consolidated financial statements F-5 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") pursuant to the Confirmation Order entered on September 10, 1993 by the United States Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court") confirming the First Amended Consolidated Plan of Reorganization (as modified as of September 10, 1993, the "POR"). 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. Under Chapter 11, all claims against the Predecessor Company and its co- filing affiliates in existence prior to the Filing Date were stayed. These prepetition claims and obligations were segregated and reclassified as "Liabilities subject to compromise" in the consolidated balance sheet as of the Filing Date. The principal categories of claims reclassified in the January 30, 1993 Consolidated Balance Sheet and included in "Liabilities subject to compromise" are identified below.
January 30, (in thousands) 1993 ----------- 11% Convertible Junior Subordinated Debentures $ 33,523 13-1/2% Senior Notes 87,738 14-1/8% Senior Subordinated Debentures 92,023 14-5/8% Subordinated Debentures 50,906 15% Junior Subordinated Notes 96,896 Prepetition bank credit facility 119,145 Trade and other miscellaneous claims 281,212 -------- $761,443 ========
In accordance with the American Institute of Certified Public Accountants Statement of Position 90-7, the Predecessor Company's other interest expense excluded contractual interest of $40.4 million, $60.3 million and $62.0 million for the thirty-five weeks ended October 2, 1993 and fiscal years ended January 30, 1993 and February 1, 1992, respectively. 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. The POR provided for the cancellation of approximately $721.9 million of unsecured claims in exchange for (i) $52.4 million in cash; (ii) $160.0 million of 10.25% Senior Notes of the Company; (iii) 5 million shares of the Company's Series A Convertible Preferred Stock (the "Preferred Stock"); (iv) 8.95 million shares of the Company's common stock ("Hills Stores Common Stock"); and (v) Series 1993 Stock Rights to purchase 700,000 shares of Hills Stores Common Stock. The POR also provided for the cancellation of the old preferred stock of the Company in exchange for 50,000 shares of Hills Stores Common Stock and the cancellation of the common stock of the Predecessor Company in exchange for Series 1993 Warrants to purchase 432,990 shares of Hills Stores Common Stock. The POR further provided for, among other things, the cash settlement in full of certain administrative, executory contract, priority, secured party and convenience claims aggregating approximately $70.2 million and the release of the Company from certain lease F-6 HILLS STORES COMPANY AND SUBSIDIARIES ________________________________________________________________________________ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 1. Reorganization (continued) guarantees. The value of the cash, notes, securities, warrants and rights required to be distributed under the POR is less 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 period ended October 2, 1993. All payments and distributions associated with the prepetition claims and obligations have been provided for in the Successor Company Consolidated Balance Sheet as of October 2, 1993. The Consolidated Financial Statements at October 2, 1993 presumed full issuance of all common stock, preferred stock, stock rights and senior notes in accordance with the POR. 2. Fresh-Start Reporting During the bankruptcy proceedings, the consolidated financial statements of the Predecessor Company were presented 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" ("SOP 90-7"). 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 Company's fresh-start reorganization equity value of $294 million was determined with the assistance of financial advisors employed by the Company. The valuation was predicated in part on the Company's forecasts of unleveraged, after-tax cash flows calculated for each year over the five year period from 1993 to 1997, the capitalization of projected 1997 earnings at a multiple selected to value earnings and cash flows beyond 1997, and the discounting of the resulting amounts to present value at a rate selected to approximate the Company's projected weighted average cost of capital. The projections assume that the Company's remodeling program would be completed as planned and provided for the opening of new stores during the projection period. The five year cash flow projections were based on estimates and assumptions about circumstances and events that have not yet taken place. Such estimates and assumptions are inherently subject to significant economic and competitive uncertainties beyond the control of the Company, including, but not limited to, those with respect to the future course of the Company's business activity. Accordingly, there will be differences between projections and actual results as events and circumstances frequently do not occur as expected, and those differences may be material. Any difference between the Company's projected and actual results following the Company's emergence from Chapter 11 will not alter the determination of the fresh-start reorganization equity value as such value is not contingent upon the Company achieving the projected results. In connection with fresh-start reporting, the Company adopted Statement of Financial Accounting Standards No. 112: "Employers' Accounting for Post Employment Benefits." The statement requires accrual of the estimated cost of benefits provided to former or inactive employees at the time that benefit payments are determined to be probable and estimable. The effect of this adoption was not material to the Company's Consolidated Financial Statements at October 2, 1993. F-7 HILLS STORES COMPANY AND SUBSIDIARIES ______________________________________________________________________________ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 2. Fresh-Start Reporting (continued) Adjustments to the Predecessor Company's balance sheet as of October 2, 1993 to reflect the discharge of pre-petition debt and fresh-start reporting adjustments are presented in the table below:
Predecessor Company Successor Pre- Company (in thousands) Confirmation Debt Discharge Fresh-start Reorganized _______________________________________________________________ ASSETS Current assets: Cash and cash equivalents $ 59,789 ($ 6,552) (a) $ - $ 53,237 Trade receivables, net 41,838 - (5,612) (e) 36,226 Inventories 407,237 - 964 (c) 408,201 Other current assets 14,852 - (10,550) (d) 4,302 ---------------------------------------------------------- Total current assets 523,716 (6,552) (15,198) 501,966 Property and equipment, net 133,364 - 269 (e) 133,633 Property under capital leases, net 119,014 - 18,870 (e) 137,884 Beneficial lease rights, net 48,703 - (38,530) (e) 10,173 Other assets, net 15,164 6,552 (a) (11,952) (e) 9,764 Goodwill, net 132,877 - (132,877) (i) - Reorganization value in excess of amounts allocable to identifiable assets - - 204,417 (j) 204,417 ---------------------------------------------------------- $972,838 $ - $ 24,999 $997,837 ========================================================== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of capital leases $ 5,360 $ - $ 1,640 (e) $ 7,000 Accounts payable, trade 119,154 - - 119,154 Other accounts payable and accrued expenses 97,222 135,293 (b) 41,270 (f) 273,785 ---------------------------------------------------------- 221,736 135,293 42,910 399,939 Senior notes - 160,000 (b) - 160,000 Obligations under capital leases 122,230 - 8,654 (e) 130,884 Other liabilities 27,494 6,100 (b) (20,580) (g) 13,014 Liabilities subject to compromise 755,169 (755,169) (b) - - Preferred stock 33,143 66,857 (b) - 100,000 Common shareholders' equity (deficit): Common stock 198 (108) (b) - 90 Additional paid-in capital 65,215 128,695 (b) - 193,910 Retained earnings (deficit) (252,254) 258,239 (b) (5,985) (h) - ---------------------------------------------------------- (186,841) 386,826 (5,985) 194,000 Less-treasury stock (93) 93 (b) - - ---------------------------------------------------------- Total common shareholders' equity (deficit) (186,934) 386,919 (5,985) 194,000 ---------------------------------------------------------- $972,838 $ - $24,999 $997,837 ==========================================================
F-8 HILLS STORES COMPANY AND SUBSIDIARIES _____________________________________________________________________________ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 2. Fresh-Start Reporting (continued) (a) Represents financing costs paid to secure the new revolving credit facility upon emergence from Chapter 11. (b) Reflects the settlement of liabilities subject to compromise and cancellation of old preferred stocks and old common stock in exchange for cash, senior notes, new preferred stock, new common stock, stock rights and stock warrants, resulting in an extraordinary gain on debt discharge of $258.2 million. (c) Represents revaluation of last-in, first-out (LIFO) inventories to estimated fair value as of October 2, 1993. (d) Reflects reversal of deferred tax assets by approximately $10.5 million in accordance with fresh-start reporting. (e) Reflects fair value adjustment as of October 2, 1993 in accordance with fresh-start reporting. (f) Reflects accrued liabilities of the Successor Company arising out of the reorganization including legal and professional fees, a provision for consolidating and relocating certain facilities, the refinancing of long-term liabilities and other reorganization related expenses. (g) Reflects reversal of deferred tax liabilities by approximately $10.5 million in accordance with fresh-start reporting and fair value adjustments decreasing pension obligations by approximately $8.7 million and other liabilities by approximately $1.4 million as of October 2, 1993. (h) Reflects adjustment to eliminate the Predecessor Company's retained earnings in accordance with fresh-start reporting. (i) Reflects adjustment to eliminate the Predecessor Company goodwill as of October 2, 1993 in accordance with fresh-start reporting. (j) Reflects adjustment to record reorganization value in excess of amounts allocable to identifiable assets as of October 2, 1993 in accordance with fresh-start reporting. 3. 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-9 HILLS STORES COMPANY AND SUBSIDIARIES ______________________________________________________________________________ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 3. 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-10 HILLS STORES COMPANY AND SUBSIDIARIES _____________________________________________________________________________ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 3. 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. 4. Summary of Significant Accounting Policies Basis of Reporting The Company operates, through its wholly-owned subsidiary Hills Department Store Company, a chain of discount department stores. The consolidated financial statements include the accounts of the Successor Company and the Predecessor Company and their 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. 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. Inventories Inventories are valued using the retail method on the lower of last-in, first-out (LIFO) cost or market basis. If the first-in, first-out cost method of inventory had been used, inventories would have been F-11 HILLS STORES COMPANY AND SUBSIDIARIES ______________________________________________________________________________ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 4. Summary of Significant Accounting Policies (continued) Inventories (continued) $14,357,000 higher than reported at January 30, 1993. In connection with fresh-start reporting, a new LIFO base layer has been established based on inventory levels as of October 2, 1993 (see Note 2 of Notes to Consolidated Financial Statements). Depreciation and Amortization Depreciation and amortization are provided on a straight-line basis over the estimated useful lives of the related assets. Amortization of leasehold improvements is provided on a straight-line basis over the shorter of the lease term or the estimated useful life of the related asset. Deferred Financing Costs Deferred financing costs included in other assets are being amortized on a straight-line basis over the life of the related debt. Accumulated amortization of deferred financing costs was $807,000 for the Successor Company at January 29, 1994 and $6,443,000 for the Predecessor Company at January 30, 1993. Intangible Assets Reorganization value in excess of amounts allocable to identifiable assets is being amortized over twenty years on a straight-line basis. Accumulated amortization was $3,407,000 at January 29, 1994. Predecessor Company goodwill was being amortized over forty years on a straight-line basis. Accumulated amortization was $29,395,000 at January 30, 1993. Beneficial lease rights are amortized using the straight-line method over the terms of the leases. Accumulated amortization of beneficial lease rights was $271,000 for the Successor Company at January 29, 1994 and $21,115,000 for the Predecessor Company at January 30, 1993. Statement of Cash Flows Supplemental disclosures of cash flow information are presented in the table on the following page. F-12 HILLS STORES COMPANY AND SUBSIDIARIES _______________________________________________________________________________ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 4. Summary of Significant Accounting Policies (continued) Statement of Cash Flows (continued)
Successor Predecessor Company Company ___________________________________________ Seventeen Thirty-five Fiscal Year Fiscal Year Weeks Ended Weeks Ended Ended Ended January 29, October 2, January 30, February 1, (in thousands) 1994 1993 1993 1992 ___________________________________________________________ * Noncash investing and * financing activities: * * Issuance of senior notes $160,000 * $ - $ - $ - Issuance of preferred stock 100,000 * - - - Cancellation of preferred stock - * 33,143 - - Issuance of common stock and stock * rights 194,000 * - - - Cancellation of common stock - * 65,413 - - Debt conversion to common stock - * - 10 8,850 Capital lease obligations, net 1,450 * - 988 4,532 Preferred stock accretion - * 1,662 2,432 2,395 * Cash paid (received): * * Reorganization related * professional fees 6,618 * 2,407 5,823 2,854 Interest 832 * 1,710 2,005 3,366 Income taxes (Note 16) 2,848 * 1,317 1,995 154 Interest received on available cash * due to the Chapter 11 proceedings - * (2,643) (2,896) (1,072)
5. Property and Equipment The components of property and equipment are listed below:
Successor Predecessor Company Company January 29, January 30, (in thousands) 1994 1993 _________________________ * Land $ 3,430 * $ 2,148 Buildings 16,192 * 5,420 Leasehold improvements 33,400 * 65,896 Machinery, furniture and fixtures 81,781 * 138,520 Improvements in progress 1,813 * 6,846 -------- * -------- 136,616 * 218,830 Less - accumulated depreciation and amortization (4,185) * (96,093) -------- * -------- $132,431 * $122,737 ======== * ========
F-13 HILLS STORES COMPANY AND SUBSIDIARIES ______________________________________________________________________________ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 6. Other Accounts Payable and Accrued Expenses Certain items now classified as other accounts payable and accrued expenses in the Successor Company's balance sheet as of January 29, 1994 were included in "Liabilities subject to compromise" in the Predecessor Company's balance sheet as of January 30, 1993. Significant components of other accounts payable and accrued expenses are presented below:
Successor Predecessor Company Company January 29, January 30, (in thousands) 1994 1993 _______________________________ * Accrued payroll and related costs $ 25,261 * $22,371 Accrued insurance 22,388 * 12,836 Accrued Chapter 11 and related reorganization costs 50,430 * 15,930 Accrued distribution payable pursuant to the POR 25,838 * - Other 79,448 * 39,043 -------- * ------- $203,365 * $90,180 ======== * =======
7. Revolving Credit Agreement Hills Department Store Company ("HDSC"), a wholly-owned subsidiary of the Company, entered into a three year unsecured Revolving Credit Agreement dated as of October 4, 1993 (the "Facility") with Chemical Bank and a syndicate of 11 other banks for $225 million, of which up to $75 million is available as a letter of credit facility. Borrowings under this Facility are limited by a borrowing base, as defined, and bear interest, at the option of the borrower, at (1) the highest of; Chemical Bank's Prime Rate plus 1-3/4%, the Federal Funds Effective Rate, as defined, plus 2-1/4% and the Base CD Rate, as defined, plus 2-3/4% or (2) the Adjusted London Interbank Offered Rate (LIBOR), as defined, plus 2-3/4%. If the Company meets certain economic performance tests, the interest rate would be reduced by 1/4% as of July 30, 1994 and another 1/4% as of July 29, 1995. In addition to various initial facility fees totalling $6.5 million paid at the commencement of the Facility, 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 trade letters of credit at an annual rate of 2% and on the aggregate face amount of outstanding standby letters of credit at an annual rate equal to the spread applicable to Adjusted LIBOR loans. All of the common stock of the Company's subsidiaries are pledged as collateral for the Facility and the Facility is guaranteed by the Company. The Facility also contains, among other restrictions, 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 continue to have no loans outstanding. At January 29, 1994, the Company has satisfied the requirements of the Clean-Up Period, outstanding letters of credit totalled $30.9 million and there was no outstanding working capital loan balance under the Facility. F-14 HILLS STORES COMPANY AND SUBSIDIARIES _______________________________________________________________________________ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 8. Senior Notes Pursuant to the POR, the Company is issuing up to $160 million of unsecured redeemable 10.25% Senior Notes ("Senior Notes") due September 30, 2003 with interest accruing from August 1, 1993. Interest is payable semiannually beginning March 31, 1994. The unsecured Senior Notes may be redeemed, at the option of the Company, at prices ranging from 106% at October 1, 1993 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. In the event of a change in control, as defined, the Company will be required to offer to redeem the Senior Notes at a price of 101% of the principal amount. The Senior Notes contain covenants which management believes are no more restrictive than the terms of the Facility. 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. Leases 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:
Successor Predecessor Company Company January 29, January 30, (in thousands) 1994 1993 ____________________________ * Retail outlets $131,408 * $173,180 Other 6,476 * 18,753 -------- * -------- 137,884 * 191,933 Less - accumulated amortization (3,408) * (58,962) -------- * -------- Property under capital leases, net $134,476 * $132,971 ======== * ========
Consolidated rental expense under operating leases and rental expense based on sales in excess of predetermined levels under capital leases are presented below:
Successor Predecessor Company Company __________________________________________ Seventeen Thirty-five Fiscal Year Fiscal Year Weeks Ended Weeks Ended Ended Ended January 29, October 2, January 30, February 1, (in thousands) 1994 1993 1993 1992 __________________________________________________________ * Capital leases: * Rental based on sales $ 574 * $ 843 $ 1,029 $ 1,318 Operating leases: * Minimum facility rentals 8,223 * 16,501 21,395 22,587 Equipment and other * rentals 6,795 * 10,820 16,791 15,553 Rental based on sales 481 * 702 1,442 1,226 ------- * ------- ------- ------- Consolidated rental * expense $16,073 * $28,866 $40,657 $40,684 ======= * ======= ======= =======
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 January 29, 1994 are listed below:
Capital Operating (in thousands) Leases Leases Total ________________________________________ Fiscal years: 1994 $ 20,235 $ 36,877 $ 57,112 1995 20,187 30,600 50,787 1996 19,111 26,926 46,037 1997 17,398 26,592 43,990 1998 16,971 25,574 42,545 Thereafter 213,403 169,176 382,579 ---------------------------------------- Minimum rental commitments 307,305 $315,745 $623,050 ======================= Less amount representing interest (171,147) -------- Present value of net minimum lease payments 136,158 Less-current portion (5,532) --------- $ 130,626 =========
10. Pension Plan ------------ The Company sponsors a contributory retirement plan (the "Plan") which covers substantially all employees of the Company and its subsidiaries. The benefit formula for the Plan is based on years of credited service and salary levels, as defined. It is the policy of the Company to fund the cost of the Plan, including prior service costs, within Internal Revenue Service funding limits. The assets of the Plan were invested in equity and fixed income securities as well as short-term investment funds at January 29, 1994. Net pension expense includes the following components:
Successor Predecessor Company Company __________________________________________ Seventeen Thirty-five Fiscal Year Fiscal Year Weeks Ended Weeks Ended Ended Ended January 29, October 2, January 30, February 1, (in thousands) 1994 1993 1993 1992 _________________________________________________________ * Service cost $927 * $ 1,855 $2,543 $2,967 Interest cost on projected * benefit obligation 844 * 1,688 2,143 2,173 Actual return on plan assets (569) * (1,581) (1,676) (2,906) Net amortization and deferral (238) * (317) (798) 1,101 ---- * ------------------------------------- Net pension expense $964 * $ 1,645 $2,212 $3,335 ==== * =====================================
In connection with fresh-start reporting, the Company adjusted its pension liability to its estimated fair value by decreasing the obligation by approximately $8.7 million. F-16 HILLS STORES COMPANY AND SUBSIDIARIES _______________________________________________________________________________ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 10. Pension Plan (continued) The following table sets forth the Plan's funded status and amounts recorded in other long-term liabilities in the balance sheets:
Successor Predecessor Company Company January 29, January 30, (in thousands) 1994 1993 __________________________________ * Vested benefit obligation $20,037 * $14,402 Nonvested accumulated benefits 1,022 * 1,540 ------- * ------- Accumulated benefit obligation $21,059 * $15,942 ======= * ======= Projected benefit obligation $37,620 * $31,833 Plan assets at market value 32,732 * 27,705 ------- * ------- Projected benefit obligation in * excess of plan assets 4,888 * 4,128 Unrecognized prior service cost - * 3,001 Unrecognized gain (loss) (238) * 4,124 ------- * ------- Pension liability $ 4,650 * $11,253 ======== * =======
The discount rate and rate of increase in future compensation levels used in determining the actuarial present value of projected benefit obligations were 7.0% and 5.5%, respectively. The expected long-term rate of return on plan assets used in determining net pension expense was 8.0%. On February 24, 1994, the Company's Board of Directors authorized the termination of the Plan, subject to the approval of such termination by the Pension Benefit Guaranty Corporation and the Internal Revenue Service. The termination is intended to be effective April 30, 1994. Participants' vested pension benefits will be calculated based on all credited service, pension earnings and contributions up to April 30, 1994. There will be no asset reversion to the Company as plan assets in excess of benefit obligations, as adjusted for the termination of the Plan, will be allocated to participants. 11. Postretirement Benefits Other than Pensions In fiscal 1992, the Predecessor Company adopted statement of Financial Accounting Standards No. 106: "Employers' Accounting for Postretirement Benefits Other Than Pensions" ("SFAS 106"). This statement requires accrual of postretirement benefits (such as health care benefits) during the years an employee provides services. The impact of accruing such costs in fiscal 1993 and 1992 operations is not material. 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. 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 being 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 January 29, 1994, a total of 1,090,806 shares of the 5,000,000 shares of the Preferred Stock remain to be issued pending resolution of prepetition claims and interests. The F-17 HILLS STORES COMPANY AND SUBSIDIARIES _______________________________________________________________________________ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 12. Hills Stores Series A Convertible Preferred Stock (continued) 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 at a rate of one share of Hills Stores 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 Hills Stores 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 Hills Stores Common Stock and any other class or series of capital stock of the Company that is junior to the Preferred Stock in respect of the right to participate in any distribution of assets upon dissolution or liquidation. 13. Hills Stores Common Stock The Company is authorized to issue 50,000,000 shares of Hills Stores Common Stock, par value of $0.01 per share. Pursuant to the POR, a total of 9,000,000 shares are being issued as payment for prepetition liabilities and cancellation of old preferred stock interests. As of January 29, 1994, a total of 257,857 shares of the 9,000,000 shares of common stock remain to be issued pending resolution of prepetition claims and interests. Each holder of Hills Stores Common Stock has one vote per share and is entitled to dividends when and if declared by the Board of Directors. Dividend payments are restricted under the terms of the Facility and Senior Notes. Hills Stores does not expect to pay dividends in the foreseeable future. In connection with the confirmation of the POR, the Company adopted an incentive and nonqualified stock option plan (the "Stock Option Plan") as of the Effective Date. The Stock Option Plan provides for the grant of nonqualified stock options or incentive stock options. A total of 1,053,763 shares of Hills Stores Common Stock have been reserved for grants of options under the Stock Option Plan as of the Effective Date. The option price is established as the market price of the Hills Stores Common Stock on the date of each grant. During the Successor Company's seventeen week period ended January 29, 1994, options to purchase 886,500 shares were granted at prices varying from $18.00 to $18.25 per share and options to purchase 10,000 shares were forfeited, leaving 177,263 shares available for future grants of options at January 29, 1994. The options are subject to a five year vesting schedule with initial vesting beginning one year from the date of grant. 14. Series 1993 Stock Rights Pursuant to the POR, the 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 Hills Stores 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 Hills Stores Common Stock have been reserved for issuance upon exercise of the Stock Rights. Shares under the Stock Right Agreements are not available for issuance until vested. F-18 HILLS STORES COMPANY AND SUBSIDIARIES _______________________________________________________________________________ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 15. Series 1993 Warrants Pursuant to the POR, Series 1993 Warrants (the "Warrants") were issued on the Effective Date. Each Warrant entitles the holder to purchase, subject to antidilution adjustments, one share of Hills Stores Common Stock at $30 per share. Initially, 432,990 shares of Hills Stores 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 Hills Stores 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 will expire on October 4, 2000. 16. Income Taxes The Predecessor Company adopted the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 109: "Accounting for Income Taxes" ("SFAS 109") during the thirty-five weeks ended October 2, 1993. Under SFAS 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. The Predecessor Company elected to adopt SFAS 109 prospectively in fiscal 1993 and, as a result, prior periods have not been restated. Temporary differences and carryforwards which give rise to significant deferred tax assets and liabilities at January 29, 1994, are as follows:
Deferred Tax Deferred Tax (in thousands) Asset Liability ____________________________________ * Net operating loss and tax * credit carryforwards $84,016 * $ - Capital lease obligations 57,186 * - Assets under capital leases - * 56,479 Accrued expenses 25,446 * - Beneficial lease rights 21,059 * - Property and equipment - * 6,710 Inventory - * 2,588 Other 20,040 * - -------- * ------- Total deferred taxes 207,747 * 65,777 Valuation allowance (141,970) * - -------- * ------- Net deferred taxes $ 65,777 * $65,777 ======== * =======
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 will be subject to an annual limitation of approximately $15.5 million, determined immediately after the emergence from Chapter 11 by multiplying the federal long-term tax exempt bond rate by the aggregate fair market value of the Hills Stores Common Stock. For financial reporting purposes, any reduction of the valuation allowance of $142.0 million will not be credited to the tax provision, but instead may reduce reorganization value in excess of amounts allocable to identifiable assets. Due to the uncertainty surrounding the realization of these favorable tax attributes, the Company has fully reserved its net deferred tax assets. F-19 HILLS STORES COMPANY AND SUBSIDIARIES _______________________________________________________________________________ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 16. Income Taxes (continued) The Company's net operating loss and tax credit carryforwards at January 29, 1994 expire as follows:
(in thousands) Net Tax Operating Losses Credits __________________________ Fiscal years: 2000 $ - $ 413 2001 - 797 2002 - 664 2003 - 1,369 2004 920 2,196 2005 - 1,547 2006 103,886 949 2007 56,848 797 2008 15,820 747 ----------------------- $177,474 $9,479 =======================
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.
Successor Predecessor Company Company _________________________________________ Seventeen Thirty-five Fiscal Fiscal Weeks Ended Weeks Ended Year Ended Year Ended January 29, October 2, January 30, February 1, 1994 1993 1993 1992 _________________________________________________________ * Statutory tax rate 35.0% * (35.0%) 34.0% 34.0% * State and local income * taxes, net of federal * tax benefit 6.7 * (6.5) 9.3 8.0 Goodwill 0.9 * 11.9 1.9 4.7 Targeted jobs credit * and other, net (0.3) * 2.2 1.1 (1.5) Reorganization fees - * 26.2 3.5 10.3 Loss producing no current * tax benefit - * 1.2 - - ---- * -------------------------------- Effective tax rate 42.3% * - 49.8% 55.5% ==== * ================================
F-20 HILLS STORES COMPANY AND SUBSIDIARIES _______________________________________________________________________________ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 16. Income Taxes (continued) The provision for income taxes consists of the following components:
Successor Predecessor Company Company ________________________________________ Seventeen Thirty-five Fiscal Fiscal Weeks Ended Weeks Ended Year Ended Year Ended January 29, October 2, January 30, February 1, (in thousands) 1994 1993 1993 1992 _______________________________________________________ * Current provision: * Federal $ - * $ - $ - $ - State and local 2,328 * - 1,060 57 ------- * ------------------------------------- 2,328 * - 1,060 57 * Deferred provision: * Federal - * - 18,860 9,793 State and local - * - 6,668 2,687 ------- * ------------------------------------- - * - 25,528 12,480 Tax benefit applied to reduce * reorganization value in excess * of amounts allocable to * identifiable assets 24,281 * - - - * Tax benefit of net * operating loss carryforwards: * Federal - * - (18,860) (9,793) State and local - * - (4,019) (2,687) ------- * ------------------------------------- - * - (22,879) (12,480) ------- * ------------------------------------- Total taxes $26,609 * $ - $ 3,709 $ 57 ======= * =====================================
The valuation allowance was reduced by $24.3 million in the seventeen weeks ended January 29, 1994. As this reduction related to the realization of the Predecessor Company's deferred tax assets, the benefit was credited to "Reorganization value in excess of amounts allocable to identifiable assets". 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 has examined the Company's tax returns for the periods January 1988 through January 1990, has tentatively settled with the Company, and no tax deficiency is expected. F-21 HILLS STORES COMPANY AND SUBSIDIARIES _______________________________________________________________________________ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 17. Earnings Per Share Primary earnings per share of the Successor Company for the seventeen weeks ended January 29, 1994 was computed based on the weighted average number of common and common equivalent shares assumed to be outstanding during the period, assumed conversion of the Preferred Stock and the assumed exercise of stock options. Such shares amounted to 14,056,470. Fully-diluted earnings per share for the period also assumes the exercise of the Stock Rights. Such shares amounted to 14,794,492. Exercise of the Warrants are not assumed as their exercise would be antidilutive. The weighted average number of shares used for the seventeen weeks ended January 29, 1994 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 and fiscal years ended January 30, 1993 and February 1, 1992 was computed using the weighted average common and common equivalent shares outstanding. Such shares amounted to 19,757,390, 19,757,339 and 19,715,064, respectively. Fully-diluted earnings per share for the periods assumes the conversion of the 11% Convertible Junior Subordinated Debentures. Such shares amounted to 21,981,683 for all three periods. 18. Commitments and Contingencies The Company is 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. 19. Quarterly Financial Information (unaudited) As discussed in Note 2, 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. Quarterly financial information for the periods 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 information from the Predecessor Company financial information to signify that they are those of a new reporting entity and have been prepared on a basis not comparable to prior periods. The financial information for the Successor Company four weeks ended October 30, 1993 reflects an adjustment for income taxes in accordance with SOP 90-7. Prior to this adjustment, amounts reported for primary and fully-diluted earnings per common share were $0.50 and $0.48, respectively. Quarterly financial information for the fiscal years 1993 and 1992 are presented on the following pages. F-22 HILLS STORES COMPANY AND SUBSIDIARIES _______________________________________________________________________________ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 19. Quarterly Financial Information (unaudited) (continued)
(in thousands, except per share amounts) Predecessor Company Successor Company ___________________________________ ________________________ Nine Weeks Four Weeks Ended Ended First Second October 2, October 30, Fourth Quarter Quarter 1993 1993 Quarter _______________________________________________________________________ Fiscal 1993 Net sales $340,417 $357,285 $295,146 * $145,691 $626,994 =================================== * ======================= Gross profit $ 93,356 $100,856 $ 88,337 * $ 41,838 $181,196 =================================== * ======================= Earnings (loss) applicable to common * shareholders before extraordinary * gain ($11,674) ($4,899) $ 6,826 * $ 4,009 $ 32,226 Extraordinary gain on debt discharge - - 258,239 * - - ----------------------------------- * ----------------------- Net earnings (loss) applicable to * common shareholders ($11,674) ($4,899) $ 265,065 * $ 4,009 $ 32,226 =================================== * ======================= Primary earnings (loss) per * common share: * Earnings (loss) applicable to common * shareholders before extraordinary * gain ($ 0.59) ($0.25) $ 0.35 * $ 0.29 $ 2.29 Extraordinary gain on debt discharge - - 13.07 * - - ----------------------------------- * ----------------------- Net earnings (loss) applicable to * common shareholders ($ 0.59) ($0.25) $ 13.42 * $ 0.29 $ 2.29 =================================== * ======================= Fully-diluted earning (loss) * per common share: * Earnings (loss) applicable to common * shareholders before extraordinary * gain ($ 0.59) ($0.25) $ 0.31 * $ 0.27 $ 2.17 Extraordinary gain on debt discharge - - 11.75 * - - ----------------------------------- * ----------------------- Net earnings (loss) applicable * to common shareholders ($ 0.59) ($0.25) $ 12.06 * $ 0.27 $ 2.17 =================================== * =======================
F-23 HILLS STORES COMPANY AND SUBSIDIARIES _______________________________________________________________________________ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 19. Quarterly Financial Information (unaudited) (continued)
Predecessor Company _______________________________________________________ First Second Third Fourth Quarter Quarter Quarter Quarter _______________________________________________________ Fiscal 1992 Net sales $359,053 $358,943 $447,366 $584,904 ======================================================== Gross profit $ 95,800 $101,266 $130,424 $172,964(1) ======================================================== Earnings (loss) applicable to common shareholders before extraordinary credit ($ 14,613) ($ 7,985) $ 18,524 $ 28,459 Extraordinary credit - benefit of NOL carryforward - - - 22,879 -------------------------------------------------------- Net earnings (loss) applicable to common shareholders ($ 14,613) ($ 7,985) $ 18,524 $ 51,338 ======================================================== Primary earnings (loss) per common share: Earnings (loss) applicable to common shareholders before extraordinary credit ($ 0.74) ($ 0.40) $ 0.94 $ 1.44 Extraordinary credit - benefit of NOL carryforward - - - 1.16 -------------------------------------------------------- Net earnings (loss) applicable to common shareholders ($ 0.74) ($ 0.40) $ 0.94 $ 2.60 ======================================================== Fully-diluted earning (loss) per common share: Earnings (loss) applicable to common shareholders before extraordinary credit ($ 0.74) ($ 0.40) $ 0.84 $ 1.30 Extraordinary credit - benefit of NOL carryforward - - - 1.04 -------------------------------------------------------- Net earnings (loss) applicable to common shareholders ($ 0.74) ($ 0.40) $ 0.84 $ 2.34 ======================================================== (1) During the fourth quarter of fiscal 1992, the Company recorded a net LIFO adjustment which increased gross profit by approximately $7.0 million.
F-24 REPORT OF INDEPENDENT ACCOUNTANTS 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-1 of this Form 10-K. In connection with our audits of such financial statements, we have also audited the related financial statement schedules listed in the index on page 17 of this Form 10-K. In our opinion, the financial statement schedules 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. Boston, Massachusetts March 22, 1994 Coopers & Lybrand S-1 HILLS STORES COMPANY AND SUBSIDIARIES ________________________________________________________________________________ SCHEDULE V - PROPERTY, PLANT AND EQUIPMENT For the Successor Company Seventeen Weeks Ended January 29, 1994 and the Predecessor Company Thirty-five Weeks Ended October 2, 1993 and Fiscal Years Ended January 30, 1993 and February 1, 1992
Balance at Balance at Beginning Additions Retirements End of (in thousands) of Period at Cost or Sales Other Period _______________________________________________________________________________________________________________ SUCCESSOR COMPANY Seventeen Weeks Ended January 29, 1994: Land $ 3,430 $ - $ - $ - $ 3,430 Buildings 16,192 - - - 16,192 Leasehold improvements 33,046 354 - - 33,400 Machinery, furniture and fixtures 79,079 2,789 (87) - 81,781 Improvements in progress 1,886 (73) - - 1,813 -------- ------- ------- --------- -------- Total $133,633 $ 3,070 ($ 87) $ - $136,616 ======== ======= ======= ========= ======== Property under capital leases $137,884 $ - $ - $ - $137,884 ======== ======= ======= ========= ======== ============================================================================================================== PREDECESSOR COMPANY Thirty-five Weeks Ended October 2, 1993: Land $ 2,148 $ 571 $ - $ 711 (1) $ 3,430 Buildings 5,420 2,203 - 8,569 (1) 16,192 Leasehold improvements 65,896 6,125 (189) (38,786) (1) 33,046 Machinery, furniture and fixtures 138,520 23,223 (1,962) (80,702) (1) 79,079 Improvements in progress 6,846 (4,960) - - 1,886 -------- ------- ------- --------- -------- Total $218,830 $27,162 ($2,151) ($110,208) $133,633 ======== ======= ======= ========= ======== Property under capital leases $191,933 $ - ($8,361) ($ 45,688) (1) $137,884 ======== ======= ======= ========= ======== Fiscal Year Ended January 30, 1993: Land $ 2,148 $ - $ - $ - $ 2,148 Buildings 5,420 - - - 5,420 Leasehold improvements 58,453 7,443 - - 65,896 Machinery, furniture and fixtures 111,386 27,272 (138) - 138,520 Improvements in progress 1,495 5,351 - - 6,846 -------- ------- ------- --------- -------- Total $178,902 $40,066 ($ 138) $ - $218,830 ======== ======= ======= ========= ======== Property under capital leases $190,927 $ 1,006 $ - $ - $191,933 ======== ======= ======= ========= ======== Fiscal Year Ended February 1, 1992: Land $ 2,148 $ - $ - $ - $ 2,148 Buildings 5,420 - - - 5,420 Leasehold improvements 54,485 4,285 (2) (315) (2) 58,453 Machinery, furniture and fixtures 103,941 10,132 (277) (2,410) (2) 111,386 Improvements in progress 3,045 (2,930) - 1,380 (2) 1,495 -------- ------- ------- --------- -------- Total $169,039 $11,487 ($ 279) ($ 1,345) $178,902 ======== ======= ======= ========= ======== Property under capital leases $188,397 $ 8,552 ($5,712) ($ 310) $190,927 ======== ======= ======= ========= ======== (1) Represents fresh-start adjustments. (2) Represents reclassifications within property and equipment, net.
S-2 HILLS STORES COMPANY AND SUBSIDIARIES ________________________________________________________________________________ SCHEDULE VI - ACCUMULATED DEPRECIATION AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT For the Successor Company Seventeen Weeks Ended January 29, 1994 and the Predecessor Company Thirty-five Weeks Ended October 2, 1993 and Fiscal Years Ended January 30, 1993 and February 1, 1992
Balance at Balance at Beginning Additions Retirements End of (in thousands) of Period at Cost or Sales Other Period __________________________________________________________________________________________________________ SUCCESSOR COMPANY Seventeen Weeks Ended January 29, 1994: Buildings $ - $ 197 $ - $ - $ 197 Leasehold improvements - 723 - - 723 Machinery, furniture and fixtures - 3,297 ( 32) - 3,265 ------- ------- ------- --------- ------- Total $ - $4,217 ($ 32) $ - $ 4,185 ======= ======= ======= ========= ======= Property under capital leases $ - $3,408 $ - $ - $ 3,408 ======= ======= ======= ========= ======= ======================================================================================================= PREDECESSOR COMPANY Thirty-five Weeks Ended October 2, 1993: Buildings $ 1,538 $ 180 $ - ($ 1,718) (1) $ - Leasehold improvements 21,119 2,875 ( 65) ( 23,929) (1) - Machinery, furniture and fixtures 73,436 12,623 ( 1,229) (84,830) (1) - ------- ------- ------- --------- ------- Total $96,093 $15,678 ($1,294) ($110,477) (1) $ - ======= ======= ======= ========= ======= Property under capital leases $58,962 $ 7,381 ($1,785) ($ 64,558) (1) $ - ======= ======= ======= ========= ======= Fiscal Year Ended January 30, 1993: Buildings $ 1,322 $ 216 $ - $ - $ 1,538 Leasehold improvements 17,227 3,892 - - 21,119 Machinery, furniture and fixtures 57,518 16,012 ( 94) - 73,436 ------- ------- ------- --------- ------- Total $76,067 $20,120 ($ 94) $ - $96,093 ======= ======= ======= ========= ======= Property under capital leases $47,666 $11,296 $ - $ - $58,962 ======= ======= ======= ========= ======= Fiscal Year Ended February 1, 1992: Buildings $ 1,106 $ 216 $ - $ - $ 1,322 Leasehold improvements 14,072 3,413 - (258)(2) 17,227 Machinery , furniture and fixtures 45,458 13,392 ( 245) (1,087)(2) 57,518 ------- ------- ------- --------- ------- Total $60,636 $17,021 ($ 245) ($ 1,345)(2) $76,067 ======= ======= ======= ========= ======= Property under capital leases $38,896 $10,839 ($1,904) ($ 165) $47,666 ======= ======= ======= ========= ======= (1) Represents fresh-start adjustments. (2) Represents reclassifications within property and equipment, net.
S-3 HILLS STORES COMPANY AND SUBSIDIARIES ________________________________________________________________________________ SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS For the Successor Company Seventeen Weeks Ended January 29, 1994 and the Predecessor Company Thirty-five Weeks Ended October 2, 1993 and Fiscal Years Ended January 30, 1993 and February 1, 1992
Additions Balance at Charged to Deductions Balance at Beginning Cost and from End of (in thousands) of Period Expense Reserves Other Period __________________________________________________________________________________________________________________ SUCCESSOR COMPANY 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 ====== ====== ======= ========= ========== Fiscal Year Ended January 30, 1993: Allowance for doubtful accounts $3,993 $2,850 ($1,002) ($ 1,250) (2) $ 4,591 ====== ====== ======= ========= ========== Fiscal Year Ended February 1, 1992: Allowance for doubtful accounts $3,860 $3,121 ($ 469) ($ 2,519) (2) $ 3,993 ====== ====== ======= ========= ========== (1) Represents fresh-start adjustments. (2) Represents reclassifications.
S-4 HILLS STORES COMPANY AND SUBSIDIARIES ________________________________________________________________________________ SCHEDULE IX - SHORT TERM BORROWINGS For the Successor Company Seventeen Weeks Ended January 29, 1994 and the Predecessor Company Thirty-five Weeks Ended October 2, 1993 and Fiscal Years Ended January 30, 1993 and February 1, 1992
Weighted Balance at Average Maximum Amount Average Amount Weighted Average End Interest Outstanding Outstanding Interest Rate (in thousands) of Period Rate During the Period During the Period During the Period ___________________________________________________________________________________________________________________________________ SUCCESSOR COMPANY Seventeen Weeks Ended January 29, 1994: Revolving Credit Agreement $ - 7.75% $ 56,000 $12,857 6.87% ==== ==== ======== ======= ==== =================================================================================================================================== PREDECESSOR COMPANY Thirty-five Weeks Ended October 2, 1993: Debtor in Possession Financing $ - 8.00% $ - $ - - ==== ==== ======== ======= ==== Fiscal Year Ended January 30, 1993: Debtor in Possession Financing $ - 8.00% $ 7,000 $ 236 8.11% ==== ==== ======== ======= ==== Fiscal Year Ended February 1, 1992: Debtor in Possession Financing $ - 8.50% $ 90,000 $21,052 9.41% ==== ==== ======== ======= ====
Note: The average amount outstanding during the seventeen weeks ended January 29, 1994, thirty-five weeks ended October 2, 1993 and fiscal years ended January 30, 1993 and February 1, 1992 were calculated by dividing total daily borrowings by the number of days in the fiscal period. The average interest rates for the same fiscal periods were calculated by dividing actual interest expense by the average amount outstanding and annualizing the result. S-5 HILLS STORES COMPANY AND SUBSIDIARIES ________________________________________________________________________________ SCHEDULE X - SUPPLEMENTARY INCOME STATEMENT INFORMATION For the Successor Company Seventeen Weeks Ended January 29, 1994 and the Predecessor Company Thirty-five Weeks Ended October 2, 1993, Fiscal Years Ended January 30, 1993 and February 1, 1992
Successor Predecessor Company Company Seventeen Thirty-five Weeks Ended Weeks Ended Fiscal Fiscal (in thousands) January 29, 1994 October 2, 1993 1992 1991 ________________________________________________________________________________________ Media Advertising Costs $ 12,978 * $18,318 $ 31,153 $ 28,836 ======== * ======= =========== ==========
S-6 EXHIBIT INDEX 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. 2.1(3) First Amended Consolidated Plan of Reorganization, dated as of July 16, 1993. 2.2(3) September 10, 1993 Amendment to such Plan of Reorganization. 3.1(1) Restated Certificate of Incorporation of the Company, as amended. 3.2(1) Amended and Restated By-Laws of the Company. 4.1(1) Provisions of the Restated Certificate of Incorporation of the Company relating to its Series A Convertible Preferred Stock. 4.2 Form of Series 1993 Stock Right. (Filed herewith) 4.3(1) Indenture relating to the 10.25% Senior Notes due 2003 of the Company. 4.4(2) Series 1993 Warrant Agreement dated October 4, 1993 between the Company and Chemical Bank, as warrant agent. 10.1(4) * Retention Agreement with Norman S. Matthews, dated April 30, 1991. 10.2(4) * Undated Employment Agreement between Hills Stores and Michael Bozic (executed in April 1991). 10.3(4) * Employment Agreement with E. Jackson Smailes, effective September 15, 1992. 10.4(4) * Employment Agreement with Robert J. Stevenish, effective December 14, 1992. 10.5(4) * Employment Agreement with Michael Bozic, dated March 10, 1993. 10.6(4) * Consulting Agreement with Norman S. Matthews, dated March 10, 1993. 10.7(4) * Form of individual Employment Agreements entered into in March 1993 with, respectively, Messrs. Reen, Samuto, Smailes and Stevenish. 10.8 * 1993 Incentive and Nonqualified Stock Option Plan. (Filed herewith) 10.9(2) Credit Agreement dated as of October 4, 1993 among HDSC, Hills Stores Company, the Lenders named therein and Chemical Bank, as Administrative Agent and Fronting Bank. 11.1 Computation of earnings per share. (Filed herewith) 21 Subsidiaries. (Filed herewith)
24 Powers of Attorney of directors and officers of the Company. (Filed herewith) * Executive Compensation Plans and Arrangements. _______________ 1. Incorporated by reference from the Form 8-A of the Company filed on October 5, 1993. 2. Incorporated by reference from the Report on Form 8-K of the Company dated October 4, 1993. 3. Incorporated by reference from the Report on Form 8-K of Hills Department Stores, Inc. dated September 10, 1993 (same Commission File No. 1-9505) 4. Incorporated by reference from the Annual Report on Form 10-K of Hills Department Stores, Inc. for the fiscal year ended January 30, 1993.
EXHIBIT 4.2 Dated: _________ ___, 1993 SERIES 1993 STOCK RIGHT To Purchase _____ Shares of Common Stock of HILLS STORES COMPANY, Expiring July 31, 2018 THIS IS TO CERTIFY THAT, for value received, __________________________ or registered assigns (the "Holder") is entitled to purchase from Hills Stores Company, a Delaware corporation ("Hills"), from time to time until July 31, 2018 at the place where the stock Right Agency is located, at the Exercise Price, the number of shares of common stock, par value $.01 per share (the "Common Stock"), of Hills shown above (the "Face Amount"), or such lesser number as shall then constitute Exercisable Shares (as herein defined), all subject to adjustment and upon the terms and conditions hereinafter provided, and is entitled also to exercise the other appurtenant rights, powers and privileges hereinafter described. This Stock Right is one of the Series 1993 Stock Rights (the "Stock Rights") each in the same form and having the same terms as this Stock Right, entitling the holders thereof to purchase up to an aggregate of 700,000 shares of Common stock. Certain terms used in this Stock Right are defined in Article IV. ARTICLE I EXERCISE OF STOCK RIGHTS 1.1 Exercisable Shares. Notwithstanding any contrary provision of this Stock Right but subject to the provisions of Article III hereof, the number of shares of Common Stock at any time issuable upon exercise of this Stock Right (the "Exercisable Shares") shall be equal to (a) the lesser of (i) the aggregate number of shares which on or before that date have become Issuable Shares (as herein defined) and (ii) the Face Amount, less (b) the number of shares theretofore issued upon exercise of this Stock Right. 1.2 Method of Exercise. To exercise this Stock Right in whole or in part, the Holder shall deliver on any Business Day to Hills, at the Stock Right Agency, (a) this Stock Right, (b) a written notice of such Holder's election to exercise this Stock Right, which notice shall specify the number of shares of Common Stock to be purchased (which shall not exceed the number of Exercisable Shares as of the date of such notice and, except upon the final exercise of this Stock Right, shall be a whole number of shares), the denominations of the share certificate or certificates desired and the name or names in which such certificates are to be registered, and (c) payment of the Exercise Price with respect to such shares (which payment may be made, at the option of the Holder, by cash or check). Hills shall, as promptly as practicable and in any event within ten days after receipt of such notice and payment, execute and deliver or cause to be executed and delivered, in accordance with such notice, a certificate or certificates representing the aggregate number of shares of Common Stock specified in said notice together with cash in lieu of any fractional share to the extent provided in Section 1.4. The share certificate or certificates so delivered shall be in such denominations as may be specified in such notice, and shall be issued in the name of the Holder or such other name or names as shall be designated in such notice. This Stock Right shall be deemed to have been exercised and such certificate or certificates shall be deemed to have been issued, and such Holder or any other Person so designated to be named therein shall be deemed for all purposes to have become a holder of record of shares, as of the date the aforementioned notice and payment is received by Hills. If the Holder hereof exercises less than the full number of shares evidenced by this Stock Right, Hills shall, at the time of presentation of such certificate or certificates, note on the reverse thereof the number of shares being exercised at that time and return such Stock Right as so annotated to the Holder. Hills shall pay all expenses, taxes and other charges payable in connection with the preparation, issuance and delivery of share certificates, except that, if share certificates shall be registered in name or names other than the name of the Holder, funds sufficient to pay all transfer taxes payable as a result of such transfer shall be paid by the Holder at the time of delivery of the aforementioned notice of exercise or promptly upon receipt of a written request of Hills for payment. 1.3 Shares to Be Fully Paid and Nonassessable. All shares of Common Stock issued upon the exercise of this Stock Right shall be validly issued, fully paid and nonassessable and, if any Common Stock is then listed on any national securities exchange (as defined in the Exchange Act) or quoted on NASDAQ, shall be duly listed or quoted thereon, as the case may be. 1.4 No Fractional Shares to Be Issued. Hills shall not be required to issue fractions of shares of Common Stock upon exercise of this Stock Right. If any fraction of a share would, but for this Section, be issuable upon final exercise of this Stock Right, in lieu of such fractional share, Hills shall pay to the Holder, in cash, an amount equal to the same fraction of the Market Price of one share of Common Stock on the Trading Day immediately prior to the date of such exercise. 1.5 Reservation. Hills has duly reserved and will keep available for issuance upon exercise of the Stock Rights the total number of shares of Common Stock deliverable from time to time upon exercise of all Stock Rights from time to time outstanding. Hills will not change the Common Stock from par value $.01 per share to any higher par value which exceeds the Exercise Price then in effect. ARTICLE II STOCK RIGHT AGENCY; TRANSFER, EXCHANGE AND REPLACEMENT OF STOCK RIGHTS 2.1 Stock Right Agency. As long as any of the Stock Rights remain outstanding, or until Hills has designated a new stock right agency upon notice to each Holder of a Stock Right, Hills shall perform the obligations of and be the stock right agency with respect to the Stock Rights (the "Stock Right Agency") at its offices at 15 Dan Road, Canton, Massachusetts 02021-9128, or at such other address as Hills shall specify by notice to the Holder. 2.2 Ownership of Stock Right. Hills may deem and treat the person in whose name this Stock Right is registered as the Holder and owner hereof (notwithstanding any notations of ownership or writing hereon made by any person other than Hills) for all purposes and shall not be affected by any notice to the contrary, until due presentment of this Stock Right for registration of transfer as provided in this Article II. 2.3 Transfer of Stock Right. Hills agrees to maintain or cause to be maintained at the Stock Right Agency books for the registration of transfers of the Stock Rights. Transfer of this Stock Right and all rights hereunder shall be registered, in whole or in part, on such books, upon surrender of this Stock Right at the Stock Right Agency, together with a written assignment of this Stock Right duly executed by the Holder or its duly authorized agent or attorney, with (if the Holder is a natural person) signatures guaranteed by a bank or trust company or a broker or dealer registered with the NASD, and funds sufficient to pay any transfer taxes payable upon such transfer. Upon surrender and, if required, such payment, the Stock Right Agency shall execute and deliver a new Stock Right or Stock Rights in the name of the transferee or transferees and in the denominations specified in the instrument of assignment (which shall be whole numbers of shares only) and shall issue to the transferor a new Stock Right evidencing the portion of this Stock Right not so assigned, and this Stock Right shall promptly be canceled. 2.4 Division or Combination of Stock Rights. This Stock Right may be divided or combined with other Stock Rights upon presentment hereof and of any Stock Right or Stock Rights with which this Stock Right is to be combined at the Stock Right Agency, together with a written notice specifying the names and denominations (which shall be whole numbers of shares only) in which the new Stock Right or Stock Rights are to be issued, signed by the holders hereof and thereof or their respective duly authorized agents or attorneys. Subject to compliance with Section 2.3 as to any transfer which may be involved in the division or combination, Hills shall execute and deliver a new Stock Right or Stock Rights in exchange for the Stock Right or Stock Rights to be divided or combined in accordance with such notice. 2.5 Loss, Theft, Destruction of Stock Right Certificates. Upon receipt of evidence satisfactory to the Stock Right Agency of the ownership of and the loss, theft, destruction or mutilation of any Stock Right and, in the case of any such loss, theft or destruction, upon receipt of indemnity or security satisfactory to the Stock Right Agency or, in the case of any such mutilation, upon surrender and cancellation of such Stock Right, the Stock Right Agency will make and deliver, in lieu of such lost, stolen, destroyed or mutilated Stock Right, a new Stock Right of like tenor and representing the right to purchase the same aggregate number of shares of Common Stock. 2.6 Expenses of Delivery of Stock Rights. Hills shall pay all expenses, taxes (other than transfer taxes) and other charges payable in connection with the preparation, issuance and delivery of Stock Rights hereunder. ARTICLE III ANTIDILUTION PROVISIONS 3.1 Adjustment Generally. The Exercise Price, the Division Constant (as used in the definition of "Issuable Shares") and the number of shares of Common Stock (or other securities or property) issuable upon exercise of this Stock Right shall be subject to adjustment from time to time upon the occurrence of certain events as provided in this Article III; provided that notwithstanding anything to the contrary contained herein, the Exercise Price shall not be less than the par value of the Common Stock; and provided further, that no such adjustment contemplated by this Article III shall be made prior to the fifth Business Day following the first anniversary of the date of this Stock Right, but any adjustment which would, but for this provision, have been made prior to such date, shall be made immediately after such date. 3.2 Common Stock Distributions; Reorganizations. In case Hills shall (i) pay a dividend in, or make a distribution of, shares of Common Stock to holders of Common Stock, (ii) subdivided its outstanding shares of Common Stock into a larger number of shares of Common Stock, (iii) combine its outstanding shares of Common Stock into a smaller number of shares of Common Stock, or (iv) issue any of its shares of capital stock in a reclassification of the Common Stock (including, without limitation, any such reclassification in connection with a recapitalization or a consolidation or merger in which Hills is the continuing corporation), the Face Amount and the number of shares of Common Stock or other instruments purchasable upon exercise of this Stock Right immediately prior thereto shall be adjusted so that the Holder of this Stock Right shall be entitled to receive the kind and number of shares or other instruments of Hills which such Holder would have owned or would have been entitled to receive after the occurrence of any of the events described above, had the then remaining portion of the Face Amount of this Stock Right with respect to which no previous exercise has occurred (assuming such portion then to be exercisable in full) been fully exercised immediately prior to the happening of such event or any record date with respect thereto. An adjustment made pursuant to this Section 3.2 shall become effective immediately after the effective date of such event retroactive to the record date, if any, for such event. 3.3 Certain Limitations. No adjustment in the number of shares of Common Stock purchasable hereunder shall be required unless such adjustment would require an increase or decrease of at least one percent (1%) in the number of shares purchasable upon the exercise of each Stock Right; provided, however, that any adjustments which by reason of this Section 3.3 are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations shall be made to the nearest one-hundredth of a share. 3.4 Adjustment of Exercise Price and Division Constant. Whenever the number of shares of Common Stock purchasable upon the exercise of each Stock Right is adjusted as herein provided, the Exercise Price of each Stock Right and the Division Constant (as used in the definition of "Issuable Shares") shall each be adjusted by multiplying such Exercise Price and Division Constant immediately prior to such adjustment by a fraction, of which the numerator shall be the number of shares of Common Stock purchasable upon the exercise of each Stock Right immediately prior to such adjustment, and of which the denominator shall be the number of shares of Common Stock so purchasable immediately thereafter, provided that, as provided in Section 3.1, the Exercise Price shall not be less than the par value of the Common Stock. 3.5 Shares Other Than Common Stock. In the event that at any time, as a result of an adjustment made pursuant to Section 3.2, the Holder of this Stock Right shall become entitled to purchase any shares of Hills other than Common Stock, thereafter the number of such other shares so purchasable upon exercise of this Stock Right and the Exercise Price of such shares shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the shares of Common Stock contained in Sections 3.2 through 3.6, inclusive, and the provisions of this Stock Right with respect to the shares of Common Stock shall apply on like terms to any such other shares. 3.6 Dividends and Distributions. Except as provided in Section 3.2 and the following sentence, no adjustment in respect of any dividends or distributions shall be made during the term of this Stock Right or upon the exercise of this Stock Right. If, at any time from and after the Realization Date through and including the date 40 days after the Vesting Date for any Issuable Shares, Hills declares any dividend or makes any distribution (whether in cash, property or securities of Hills) on its capital stock which does not result in an adjustment under Section 3.2, then upon the exercise of this Stock Right with respect to any of such Issuable Shares, Hills shall deliver to the Holder, in addition to the certificates for the shares of Common Stock to which such Holder is entitled, the cash, property or securities which would have been distributed to such Holder had such Holder been a shareholder of record of such shares during the period from the Realization Date to and including (but not after) the date 40 days after the Vesting Date, together with (i) in the case of a cash distribution, interest on such distribution, from the date the distribution was made on the Common Stock through the earlier of the date of exercise of this Stock Right and the date 40 days after the Vesting Date, computed at a rate equal to the yield on 90 day United States Treasury Bills (which rate shall be established as of the date the distribution was made and adjusted quarterly thereafter as of the first business day of each calendar quarter) and compounded annually, and (ii) in the case of distributions of property or securities, any dividends, interest or similar amounts paid with respect to such property or securities between the date of distribution or payment thereof and the earlier of the date of exercise of this Stock Right and the date 40 days after the Vesting Date, together with interest on such amounts during the same period at the rate described in clause (i) above. 3.7 Stock Rights to Remain Valid. Irrespective of any adjustments in the Exercise Price or the number or kind of shares purchasable upon the exercise of this Stock Right, any Stock Right theretofore or thereafter issued may continue to express the same price and number and kind of shares as are stated in the Stock Rights initially issuable pursuant to this agreement. 3.8 Adjustments Prospective Only. All adjustments pursuant to this Article III shall apply only to shares purchasable upon exercise of this Stock Right on and after the date of the adjustment, including Exercisable Shares as of such date and shares which thereafter become Exercisable Shares; but no adjustment shall be made with respect to any shares as to which this Stock Right may have been exercised prior the date of the adjustment. ARTICLE IV DEFINITIONS The following terms, as used in this Stock Right, have the following meanings: "Auditors" means the independent accountants from time to time appointed as the outside auditors of Hills. "Business Day" means (a if the Common Stock is listed or admitted to trading on a national securities exchange, a day on which the principal securities exchange on which the Common Stock is listed or admitted to trading is open for business or (b) if the Common Stock is not so listed or admitted to trading, a day on which the New York Stock Exchange is open for business. "Common Stock" has the meaning set forth in the first paragraph of this Stock Right, subject to change pursuant to Article III. "Discounted Tax Benefit" means, with respect to the Tax Benefit for any taxable year, the present value of such Tax Benefit at the date of this Stock Right, discounted back from the Realization Date using a discount rate of 12% per annum compounded annually. In the event that the Tax Benefit is reduced or increased as a result of any audit adjustment or amendment to Hills' Filed Returns, the Discounted Tax Benefit shall be recalculated, using the adjusted Tax Benefit. "Exchange Act" means the Securities Exchange Act of 1934, as amended, and any successor Federal statute, and the rules and regulations of the Securities and Exchange Commission (or its successor) thereunder, all as the same shall be in effect at the time. "Exercise Price" means $.01 per share of the Common Stock, subject to adjustment pursuant to Article III. "Filed Returns" means, with respect to any taxable year of Hills, the federal, state and local income tax returns (including amended returns) as actually filed by Hills or any successor thereto or by an agent on behalf of Hills on which Hills' tax liability for such year is set forth or calculated. "Hills" has the meaning set forth in the first paragraph of this Stock Right. "Holder" has the meaning set forth in the first paragraph of this Stock Right. "Individual Stock Right Percentage" means the initial Face Amount of this Stock Right divided by 700,000, expressed as a percentage. In the case of Stock Rights which have been divided, the Individual Stock Right Percentage of each new Stock Right is equal to a pro rata portion of the individual Stock Right Percentage of the Stock Right which was divided. In the case of Stock Rights which have been combined, the Individual Stock Right Percentage of the combined Stock Right is equal to the sum of the Individual Stock Right Percentages of the Stock Rights which were combined. "Issuable Shares" means, for each taxable year commencing on or after the date of this Stock Right (i) as to which the Vesting Date has occurred, and (ii) in which a Tax Benefit was realized by Hills, a number of shares of Common Stock equal to the product of (x) the Individual Stock Right Percentage, and (y) the quotient obtained by dividing the Discounted Tax Benefit for such taxable year by the Division Constant (as defined below). The number of Issuable Shares shall reflect any audit adjustment or amendment to Hills' Filed Returns which occurs between the date of initial filing of the Filed Returns and the Vesting Date. Under no circumstances shall any Tax Benefit give rise to any Issuable Shares prior to the Vesting Date for the taxable year of such Tax Benefit. As used herein, the "Division Constant" shall be 20, subject to adjustment pursuant to Section 3.4. "Market Price" means as of any Trading Day (i) the last sales price per share regular way as reported on the composite tape on such day or, in the case no such reported sale takes place on such Trading Day, the average of the closing bid and asked prices regular way as officially reported by the New York Stock Exchange, Inc., (ii) if the Common Stock is not listed on such Exchange, the average of the closing bid and asked prices per share regular way on such Trading Day as reported by NASDAQ, or (iii) if the Common Stock is not so reported, then the average of the high bid and low asked prices per share on such Trading Day as reported on the National Quotation Bureau Incorporated, or if such organization is not in existence, by an organization providing similar services. Market price as of any day not a Trading Day shall be the Market Price as of the next preceding Trading Day. "NASD" means The National Association of Securities Dealers, Inc. "NASDAQ" means The National Association of Securities Dealers, Inc. Automated Quotation System. "Person" means any natural person, corporation, limited partnership, general partnership, joint stock company, joint venture, association, company, trust, bank, trust company, land trust, business trust or other organization, whether or not a legal entity, and any government agency or political subdivision thereof. "Pro Forma Returns" means a set of pro forma federal, state and local income tax returns, prepared by the Auditors within 60 days after Hills' filing of its Filed Returns for each taxable year of Hills during the term hereof, which shall be identical to the Filed Returns except that they will reflect the realization by Hills, in the year of issuance of these Stock Rights, of cancellation of indebtedness income in the amount of $81.9 million which income will be treated as having reduced tax attributes of Hills in the order prescribed in section 108(b) of the Internal Revenue Code of 1986, as amended (the "Code"), assuming an election were made under section 108(b)(5) of the Code by Hills first to reduce its tax basis for its depreciable assets and assuming any election under section 1017(b)(3) of the Code would be made if it were in the best interests of Hills (not taking into account the existence of this Stock Right). In the event that any amended Filed Returns are filed or any audit adjustment occurs for a taxable year, adjusted Pro Forma Returns shall be prepared to reflect any changes made by any such amended Filed Return or audit adjustment, but such adjusted Pro Forma Returns shall otherwise be consistent with the original Pro Forma Returns for such taxable year. "Realization Date" means, with respect to any Tax Benefit, the date one month after the date on which the last estimated tax payment for the year to which the Tax Benefit relates is due. "Stock Right Agency" has the meaning set forth in Section 2.1. "Stock Rights" has the meaning set forth in the second paragraph of this Stock Right. "Tax Benefit" means, for any taxable year of Hills, the excess of the amount of tax shown as due on the Pro Forma Returns over the amount of tax shown as due on the Filed Returns for that tax year or, if amended Filed Returns are filed or any audit adjustment occurs for such year, on such amended Filed Returns or any assessment or closing agreement to which any adjusted Pro Forma Returns relate. "Trading Day" means any day on which the New York Stock Exchange, Inc. is open for trading or if the Common Stock is not listed or admitted to trading on such Exchange, and the then current method of determining Market Price under such definition is some method other than reference to such Exchange, a day on which trading in accordance with such other method is being conducted. "Vesting Date" means the date on which the Auditors shall determine that Hills' tax liability for the tax year in which the relevant Tax Benefit accrued is no longer subject to adjustment because (i) the statutory period during which assessments can be made has passed; (ii) Hills and the Internal Revenue Service (the "Service") or other relevant taxing authority have entered into a closing agreement governing the years or issues in question; or (iii) a court decision determining such liability has been rendered and the time period for the filing of appeals has passed. Hills shall direct its Auditors to ascertain whether any of the above conditions has been met with respect to any Tax Benefit (a) at least annually, within 30 days after Hills files its original Filed Returns for the preceding tax year, and (b) in addition, promptly after Hills reasonably believes that any such condition has, with respect to a particular Tax Benefit, been met. Notwithstanding the foregoing, in the event of a sale or other disposition of all or substantially all of the assets of Hills, or a merger or restructuring in which Hills is not the continuing corporation, Hills shall take all reasonable steps to obtain a ruling from the Service to the effect that it was not required to reduce its tax attributes pursuant to section 108 of the Code as a consequence of the restructuring transactions as a part of which these Stock Rights were issued. If such a ruling is obtained, or if such issue shall previously have been resolved in a manner consistent with the desired ruling through a closing agreement with, or other administrative action by, the Service or through a final court decision, appeal from which is no longer possible, then the later of (a) the date on which such ruling is received and (b) in the case of a pre-existing closing agreement, administrative action or court decision, the date on which such sale, disposition, merger or restructuring is consummated, shall constitute a Vesting Date with respect to any then remaining Exercisable Shares. If such a ruling cannot be obtained, and in the absence of any pre-existing closing agreement, administrative action or court decision, then on the earliest of (x) the date on which a ruling contrary to the ruling sought by Hills is received from the Service, (y) the date on which Hills receives notice from the Service that the Service declines to rule on such issue, and (z) the date that is 180 days following the date of consummation of such sale, disposition, merger or restructuring, this Stock Right shall terminate and lapse and the remaining number of Exercisable Shares shall be reduced to zero. ARTICLE V MISCELLANEOUS 5.1 Tax Positions in Best Interests of Hills. In preparing its Filed Returns, and in connection with any audit or contest with respect thereto, Hills shall take positions that are designed to serve Hills' best interest, including, without limitation, in determining whether and at what amount to settle any dispute with the Internal Revenue Service or any other taxing authority, provided, however, that in determining the best interests of Hills, Hills shall not take into account any effects on it that would result from the issuance of additional stock pursuant to the Stock Rights. Hills shall be under no obligation either to maximize or to minimize the number of Issuable Shares hereunder. 5.2 Notifications to Holder. (a) Hills shall provide to the Holder each year, no later than 90 days after the filing of Hills' Filed Returns for such year, and within 90 days after the filing of any amended return or adjustment to Hills' tax liability, a schedule showing the utilization of net operating loss carryforwards or other relevant tax attributes reflected in such Filed Returns, amended Filed Returns or adjustments and the calculation of any realization of Tax Benefits. (b) Promptly (but in any event within 21 days) after the occurrence of the Vesting Date for any Tax Benefits, Hills shall notify the Holder of such event and of the number of Issuable Shares resulting from such Tax Benefits. 5.3 Notices. Notices and other communications provided for herein shall be in writing and may be given by mail, courier, confirmed telex or facsimile transmission and shall, unless otherwise expressly required, be deemed given when received or, if mailed, four Business Days after being deposited in the United States mail with postage prepaid and properly addressed. In the case of the Holder, such notices and communications shall be addressed to its address as shown on the books maintained by the Stock Right Agency, unless the Holder shall notify the Stock Right Agency that notices and communications should be sent to a different address (or telex or facsimile number), in which case such notices and communications shall be sent to the address (or telex or facsimile number) specified by the Holder. 5.4 Waivers; Amendments. No failure or delay of the Holder in exercising any power or right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such a right or power, preclude any other or further exercise thereof or the exercise of any other right or power. No notice or demand on Hills in any case shall entitle Hills to any other or future notice or demand in similar or other circumstances. The rights and remedies of the Holder are cumulative and not exclusive of any rights or remedies which it would otherwise have. The provisions of this Stock Right may be amended, modified or waived with (and only with) the written consent of Hills and the holders of Stock Rights entitling such holders to purchase a majority of the Common Stock subject to purchase upon exercise of such Stock Rights at the time outstanding (exclusive of Stock Rights then owned by Hills or any subsidiary or affiliate thereof); provided, however, that no such amendment, modification or waiver shall, without the written consent of the holders of all Stock Rights at the time outstanding, (a) change the number of shares of Common Stock subject to purchase upon exercise of this Stock Right, the Exercise Price or provisions for payment thereof or (b) amend, modify or waive the provisions of this Section, Section 1.5 or Article III; provided further, that no such amendment, modification or waiver shall be made prior tot the fifth Business Day following the first anniversary of the date of this Stock Right. Any such amendment, modification or waiver effected pursuant to and in accordance with the provisions of this Section shall be binding upon the holders of all Stock Rights, upon each future holder thereof and upon Hills. In the event of any such amendment, modification or waiver Hills shall give prompt notice thereof to all holders of Stock Rights and, if appropriate, notation thereof shall be made on all Stock Rights thereafter surrendered for registration of transfer or exchange. 5.5 Governing Law. This Stock Right shall be construed in accordance with and governed by the internal laws of the Commonwealth of Massachusetts without regard to principles of conflict of laws. 5.6 Transfer; Covenants to Bank Successor and Assigns. All covenants, stipulations, promises and agreements made by or on behalf of Hills in this Stock Right shall bind its successors and assigns, whether so expressed or not. The provisions of this Stock Right shall be binding upon and inure to the benefit of the Holder hereof and its successors and assigns. 5.7 Severability. In case any one or more of the provisions contained in this Stock Right shall be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby. The parties shall endeavor in good faith negotiations to replace the invalid, illegal or unenforceable provisions with valid provisions the economic effect of which comes as close as possible to that of the invalid, illegal or unenforceable provisions. 5.8 Section Headings. The section headings used herein are for convenience of reference only, are not part of this Stock Right and are not to affect the construction of or be taken into consideration in interpreting this Stock Right. IN WITNESS WHEREOF, Hills has caused this Stock Right to be executed in its corporate name by one of its officers thereunto duly authorized, and its corporate seal to be hereunto affixed, attested by its Secretary or an Assistant Secretary, all as of the day and year first above written. HILLS STORES COMPANY By____________________________ Name: Title: [Corporate Seal] Attest: ______________________________ Name: Title: EXHIBIT 10.8 HILLS STORES COMPANY 1993 INCENTIVE AND NONQUALIFIED STOCK OPTION PLAN SECTION 1. PURPOSE This 1993 Incentive and Nonqualified Stop Option Plan (the "Plan") of Hills Stores Company, a Delaware corporation (the "Company"), is designed to provide additional incentive to executives and other key employees of the Company, its parent and subsidiaries and for certain other individuals providing services to or acting as directors of the Company, its parent and subsidiaries. The Company intends that this purpose will be effected by the granting of incentive stock options ("Incentive Stock Options") as defined in Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), and nonqualified stock options ("Nonqualified Options") under the Plan which afford such executives and key employees an opportunity to acquire or increase their proprietary interest in the Company through the acquisition of shares of its Common Stock. The Company intends that Incentive Stock Options issued under the Plan will qualify as "incentive stock options" as defined in Section 422 of the Code and the terms of the Plan shall be interpreted in accordance with this intention. The terms "parent" and "subsidiary" shall have the respective meanings set forth in Section 424 of the Code. SECTION 2. ADMINISTRATION 2.1 The Committee. The Plan shall be administered by a Committee (the "Committee") consisting of at least two members of the Company's Board of Directors (the "Board"). None of the members of the Committee shall be an officer or other employee of the Company, and none shall have been granted any incentive stock option or nonqualified option under this Plan or any other stock option plan of the Company within one year prior to service on the Committee. It is the intention of the Company that the Plan shall be administered by "disinterested persons" within the meaning of Rule 16b-3 under the Securities Exchange Act of 1934, but the authority and validity of any act taken or not taken by the Committee shall not be affected if any person administering the Plan is not a disinterested person. Except as specifically reserved to the Board under the terms of the Plan, the Committee shall have full and final authority to operate, manage and administer the Plan on behalf of the Company. Action by the Committee shall require the affirmative vote of a majority of all members thereof. 2.2 Powers of the Committee. Subject to the terms and conditions of the Plan, the Committee shall have the power: (a) To determine from time to time the persons eligible to receive options and the options to be granted to such persons under the Plan and to prescribe the terms, conditions, restrictions, if any, and provisions (which need not be identical) of each option granted under the Plan to such persons; (b) To construe and interpret the Plan and options granted thereunder and to establish, amend, and revoke rules and regulations for administration of the Plan. In this connection, the Committee may correct any defect or supply any omission, or reconcile any inconsistency in the Plan, or in any option agreement, in the manner and to the extent it shall deem necessary or expedient to make the Plan fully effective. All decisions and determinations by the Committee in the exercise of this power shall be final and binding upon the Company and optionees; (c) To make, in its sole discretion, changes to any outstanding option granted under the Plan, including; (i) to reduce the exercise price, (ii) to accelerate the vesting schedule or (iii) to extend the expiration date; and (d) Generally, to exercise such powers and to perform such acts as are deemed necessary or expedient to promote the best interests of the Company with respect to the Plan. 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 (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 1,053,763 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. ELIGIBILITY 4.1 Persons Eligible. Incentive Stock Options under the Plan may be granted only to officers and other employees of the Company or its parent or subsidiaries. Nonqualified Options may be granted to officers or other employees of the Company or its parent or subsidiaries, and to members of the Board and consultants or other persons who render services to the Company (regardless of whether they are also employees), provided, however, that no such option may be granted to a person who is a member of the Committee at the time of the grant. 4.2 Greater-Than-Ten-Percent Stockholders. Except as may otherwise be permitted by the Code or other applicable law or regulation, no Incentive Stock Option shall be granted to an individual who, at the time the option is granted, owns (including ownership attributed pursuant to Section 424 of the Code) more than ten percent of the total combined voting power of all classes of stock of the Company or any parent or subsidiary (a "greater-than-ten- percent stockholder"), unless such Incentive Stock Option provides that (i) the purchase price per share shall not be less than one hundred ten percent of the fair market value of the Common Stock at the time such option is granted, and (ii) that such option shall be not exercisable to any extent after the expiration of five years from the date it is granted. 4.3 Maximum Aggregate Fair Market Value. The aggregate fair market value (determined at the time the option is granted) of the Common Stock with respect to which Incentive Stock Options are exercisable for the first time by any optionee during any calendar year (under the Plan and any other plans of the Company or any parent or subsidiary for the issuance of incentive stock options) shall not exceed $100,000 (or such greater amount as may from time to time be permitted with respect to incentive stock options by the Code or any other applicable law or regulation). SECTION 5. TERMINATION OF EMPLOYMENT OR DEATH OF OPTIONEE 5.1 Termination of Employment. Except as may be otherwise expressly provided herein, options shall terminate on the earlier of: (a) the date of the expiration thereof, (b) the date of termination of the optionee's employment with or services to the Company by it for cause (as determined by the Company), or voluntarily (other than early or normal retirement in accordance with the Company's retirement policies) by the optionee; or (c) ninety days after the date of termination of the optionee's employment with or services to the Company by it without cause; provided, that Options need not, unless the Committee determines otherwise, be subject to the provisions set forth in clauses (b) and (c) above, and provided further, that if the optionee, whose employment or services are terminated by the Company without cause, has an employment, consulting or retention contract with the Company in force immediately prior to such termination, then in such event such option shall remain in force to the stated expiration date of such employment, consulting or retention contract with vesting accruing to such expiration date. An employment relationship between the Company and the optionee shall be deemed to exist during any period in which the optionee is employed by the Company or its parent or any subsidiary. Whether authorized leave of absence, or absence on military or government service, shall constitute termination of the employment relationship between the Company and the optionee shall be determined by the Committee at the time thereof. As used herein, "cause" shall mean (i) any material breach by the optionee of any agreement to which the optionee and the Company are both parties, (ii) the willful engagement by the optionee in conduct which is materially injurious to the Company or any of its subsidiaries or affiliates, monetarily or otherwise, (iii) the misappropriation (including the unauthorized use or disclosure of confidential or proprietary information of the Company or any of its subsidiaries or affiliates) or embezzlement with respect to the Company or any of its subsidiaries or affiliates, (iv) a conviction of or guilty plea or confession by the optionee to any fraud, conversion, misappropriation, embezzlement or felony, or (v) any material misconduct or material neglect of duties by the Holder in connection with the business or affairs of the Company or any affiliate of the Company. 5.2 Death or Permanent Disability of Optionee. In the event of the death or permanent and total disability of the holder of an option that is subject to clause (b) or (c) of Section 5.1 above prior to termination of the optionee's employment with or services to the Company and before the date of expiration of such option, such option shall terminate on the earlier of such date of expiration or one year following the date of such death or disability. After the death of the optionee, his/her executors, administrators or any person or persons to whom his/her option may be transferred by will or by the laws of descent and distribution, shall have the right, at any time prior to such termination, to exercise the option to the extent the optionee was entitled to exercise such option immediately prior to his/her death. An optionee is permanently and totally disabled if he/she is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to last for a continuous period of not less than 12 months; permanent and total disability shall be determined in accordance with Section 22(e)(3) of the Code and the regulations issued thereunder. SECTION 6. TERMS OF THE OPTION AGREEMENTS Each option agreement shall be in writing and shall contain such terms, conditions, restrictions, if any, and provisions as the Committee shall from time to time deem appropriate. Such provisions or conditions may include without limitation restrictions on transfer, repurchase rights, or such other provisions as shall be determined by the Committee; provided that such additional provisions shall not be inconsistent with any other term or condition of the Plan and such additional provisions shall not cause any Incentive Stock Option granted under the Plan to fail to qualify as an incentive option within the meaning of Section 422 of the Code. The shares of stock issuable upon exercise of an option by an executive officer, director or beneficial owner of more than ten percent of the Common Stock of the Company may not be sold or transferred (except that such shares may be issued upon exercise of such option) by such officer, director or beneficial owner for a period of six months following the grant of such option. Option agreements need not be identical, but each option agreement by appropriate language shall include the substance of all of the following provisions: 6.1 Expiration of Option. Notwithstanding any other provision of the Plan or of any option agreement, each option shall expire on the date specified in the option agreement, which date shall not, in the case of an Incentive Stock Option, be later than the tenth anniversary (fifth anniversary in the case of a greater-than-ten-percent stockholder) of the date on which the option was granted, or as specified in Section 5 of this Plan. 6.2 Exercise. Each option may be exercised, so long as it is valid and outstanding, from time to time in part or as a whole, subject to any limitations with respect to the number of shares for which the option may be exercised at a particular time and to such other conditions as the Committee in its discretion may specify upon granting the option. 6.3 Purchase Price. The purchase price per share under each option shall be determined by the Committee at the time the option is granted; provided, however, that the option price of any Incentive Stock Option shall not, unless otherwise permitted by the Code or other applicable law or regulations, be less than the fair market value of the Common Stock on the date the option is granted (110% of the fair market value in the case of a greater-than-ten- percent stockholder). 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 a nationally recognized stock exchange, or, if the Common Stock is not listed on such an exchange, as reported by the National Association of Securities Dealers Automated Quotation System, Inc. ("NASDAQ"), or, if the Common Stock is not quoted on NASDAQ, the fair market value as determined by the Committee. 6.4 Transferability of Options. Options shall not be transferrable 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 Repurchase Right. The Committee may in its discretion provide upon the grant of any option hereunder that the Company shall have an option to repurchase upon such terms and conditions as determined by the Committee all or any number of shares purchased upon exercise of such option. The repurchase price per share payable by the Company shall be such amount or be determined by such formula as is fixed by the Committee at the time the option for the shares subject to repurchase is granted. In the event the Committee shall grant options subject to the Company's repurchase option, the certificates representing the shares purchased pursuant to such option shall carry a legend satisfactory to counsel for the Company referring to the Company's repurchase 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 exercise of an option shall be made either by (i) cash, certified check, bank draft or postal or express money order equal to the option price for the number of shares specified in the Notice, or (ii) with the consent of the Committee, shares of Common Stock of the Company having a fair market value equal to the option price of such shares, or (iii) with the consent of the Committee, such other consideration which is acceptable to the Committee and which has a fair market value equal to the option price of such shares, or (iv) with the consent of the Committee, a combination of (i), (ii) and/or (iii). For the purpose of the preceding sentence, the fair market value per share of Common Stock so delivered to the Company shall be determined in the manner specified in Section 6.3. As promptly as practicable after receipt of the Notice and accompanying 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, addressed to the optionee, at the address specified in the Notice. SECTION 8. CHANGES IN THE 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, preferred or prior preference stock or other capital stock ahead of or affecting the Common Stock or the rights thereof, or the dissolution or liquidation 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 increase 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 adjustment 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 adjustment. 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 corporation 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) subject to the provisions of clause (iii) below, 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 properties as the holders of shares of Common Stock received pursuant to the terms of the merger, consolidation, liquidation, sale or disposition; (ii), the Committee may accelerate the time for exercise of all unexercised and unexpired options 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 Committee; or (iii) all outstanding options may be cancelled by the Committee as of the effective date of any such merger, consolidation, liquidation, sale or disposition provided that (x) notice of such cancellation shall be given to each holder of an option and (y) each holder of an option shall have the right to exercise such option to the extent that the same is then exercisable or, if the Committee shall have accelerated the time for exercise of all unexercised or unexpired options, in full during the 30-day period preceding the effective date of such 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 subject to outstanding options. 8.6 Miscellaneous. Adjustments under this Section 8 shall be determined by the Committee, 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 "Act"), upon exercise of any option, the Company shall not be required to issue such shares unless the Committee has received evidence satisfactory to it to the effect that the holder of such option will not transfer such shares except pursuant to a registration 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 Committee shall be final, binding and conclusive. In the event the shares issuable on exercise of an option are not registered under the Act, the Company may imprint upon any certificate representing shares so issued the following legend or any other legend which counsel for the Company considers necessary or advisable to comply with the 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. The Company may, but shall in no event be obligated to, register any securities covered hereby pursuant to the 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 governmental authority. 9.3 Employment Obligation. The granting of any option shall not impose upon the Company any obligation to employ or continue to employ any optionee; and the right of the Company to terminate the employment of any officer or other employee shall not be diminished or affected by reason of the fact that an option has been granted to him or her. 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 the class of persons eligible to receive options and the aggregate number of shares issuable pursuant to this Plan shall not be changed or increased, other than by operation of Section 8 hereof, without the consent of the stockholders of the Company. SECTION 11. NONEXCLUSIVITY OF THE PLAN Neither the adoption of the Plan by the Board of Directors nor the submission 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 upon its adoption by the Board of Directors provided that the stockholders of the Company shall have approved the Plan within twelve months prior to or following the adoption of the Plan by the Board. 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. * * * * * * * * * * * * Exhibit 11.1 HILLS STORES COMPANY AND SUBSIDIARIES STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
Successor Company Predecessor Company ______________________________ ____________________________ Thirteen Seventeen Thirty-five Thirteen Weeks Ended Weeks Ended Weeks Ended Weeks Ended January 29, January 29, October 2, January 30, 1994 1994 1993 1993 _____________________________________________________________________ * Primary * * Weighted average number of * common shares assumed to be * outstanding during the period 9,000,000 9,000,000 * 19,757,390 19,757,390 * Assumed conversion of preferred * stock 5,000,000 5,000,000 * N/A N/A * Assumed exercise of stock options 73,845 56,470 * - - * Assumed exercise of stock rights - - * N/A N/A * Assumed exercise of stock warrants - - * N/A N/A ---------------------------- * -------------------------- 14,073,845 14,056,470 * 19,757,390 19,757,390 ============================ * ==========================
Predecessor Company _______________________________________________________________ Fiscal Year Thirteen Fiscal Year Ended Weeks Ended Ended January 30, February 1, February 1, 1993 1992 1992 ______________________________________________________________ Primary Weighted average number of common shares assumed to be outstanding during the period 19,757,339 19,756,676 19,715,064 Assumed conversion of preferred stock N/A N/A N/A Assumed exercise of stock options - - - Assumed exercise of stock rights N/A N/A N/A Assumed exercise of stock warrants N/A N/A N/A ---------------------------------------------------------- 19,757,339 19,756,676 19,715,064 ==========================================================
Exhibit 11.1 HILLS STORES COMPANY AND SUBSIDIARIES STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
Successor Company Predecessor Company ___________________________________ __________________________________ Thirteen Seventeen Thirty-five Thirteen Weeks Ended Weeks Ended Weeks Ended Weeks Ended January 29, January 29, October 2, January 30, 1994 1994 1993 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 19,757,390 * Assumed conversion of preferred * stock 5,000,000 5,000,000 * N/A N/A * Assumed exercise of stock options 123,566 94,492 * - - * Assumed exercise of stock rights 700,000 700,000 * N/A N/A * Assumed exercise of stock warrants - - * N/A N/A * Assumed conversion of Convertible * Junior Subordinated Debentures N/A N/A * 2,224,293 2,224,293 -------------------------------- * -------------------------------- 14,823,566 14,794,492 * 21,981,683 21,981,683 ================================ * ================================
Predecessor Company ___________________________________________________________________ Fiscal Year Thirteen Fiscal Year Ended Weeks Ended Ended January 30, February 1, February 1, 1993 1992 1992 ___________________________________________________________________ Fully-diluted Weighted average number of common shares assumed to be outstanding during the period 19,757,339 19,756,676 19,715,064 Assumed conversion of preferred stock N/A N/A N/A Assumed exercise of stock options - - - Assumed exercise of stock rights N/A N/A N/A Assumed exercise of stock warrants N/A N/A N/A Assumed conversion of Convertible Junior Subordinated Debentures 2,224,344 2,225,007 2,266,619 ------------------------------------------------------------------- 21,981,683 21,981,683 21,981,683 ===================================================================
EXHIBIT 21 SUBSIDIARIES OF HILLS STORES COMPANY
Name of Subsidiary State of Incorporation __________________ ______________________ Hills Department Store Company Delaware Frando Corp. (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.
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 Michael Bozic, John G. Reen 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 January 29, 1994 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 substitutes, may lawfully do or cause to be done by virtue hereof.
SIGNATURE TITLE DATE --------- ----- ---- /s/Thomas H. Lee Chairman of the Board March 29, 1994 _______________________________ Thomas H. Lee /s/Michael Bozic Director, President and Chief March 29, 1994 _______________________________ Executive Officer (Principal Michael Bozic Executive Officer) /s/John G. Reen Director and Executive Vice March 29, 1994 _______________________________ President-Chief Financial Officer John G. Reen (Principal Financial Officer) /s/Susan E. Engel Director March 29, 1994 _______________________________ Susan E. Engel /s/Michael S. Gross Director March 29, 1994 _______________________________ Michael S. Gross /s/Richard B. Loynd Director March 29, 1994 _______________________________ Richard B. Loynd /s/Norman S. Matthews Director March 29, 1994 _______________________________ Norman S. Matthews /s/James L. Moody, Jr. Director March 29, 1994 _______________________________ James L. Moody, Jr. /s/Kim D. Ahlholm Vice President-Controller March 29, 1994 _______________________________ (Principal Accounting Officer) Kim D. Ahlholm
[HILLS STORES COMPANY - LOGO] HILLS STORES COMPANY 15 Dan Road, Canton, Massachusetts 02021-9128 (617) 821-1000 Telex 17227 April 25, 1994 Securities & Exchange Commission 450 Fifth Street N.W. Washington, D.C. 20549 RE: Hills Stores Company Form 10-K Annual Report Gentlemen: We hereby transmit the Annual Report of Hills Stores Company on Form 10-K for the fiscal year ended January 29, 1994. On October 4, 1993, the Company emerged from reorganization proceedings under Chapter 11 of the U.S. Bankruptcy Code. As described in Note 2 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 January 29, 1994 consolidated balance sheet and the statement of operations for the seventeen weeks ended January 29, 1994 are not comparable to the Company's consolidated balance sheets or consolidated statements of operations for prior periods. Very truly yours, HILLS STORES COMPANY William K. Friend Vice President-Secretary EX-99.G.2 12 FORM 10-Q FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE ------- SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended October 29, 1994 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 (I.R.S. Employer of incorporation or organization) Identification No.) 15 DAN ROAD, CANTON, MASSACHUSETTS 02021 ---------------------------------- ----- (Address of principal executive offices) (Zip Code) 617-821-1000 ------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --------- --------- Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. YES X NO --------- --------- The number of shares of common stock outstanding as of November 21, 1994 was 10,367,881 shares. HILLS STORES COMPANY AND SUBSIDIARIES TABLE OF CONTENTS ----------------- PART I - FINANCIAL INFORMATION FINANCIAL STATEMENTS Consolidated Balance Sheets as of October 29, 1994, January 29, 1994, and October 30, 1993 3 Consolidated Statements of Operations of the Successor Company for the Thirteen Weeks Ended October 29, 1994 and Four Weeks Ended October 30, 1993 and the Predecessor Company for the Nine Weeks Ended October 2, 1993 4 Consolidated Statements of Operations of the Successor Company for the Thirty-nine Weeks Ended October 29, 1994 and Four Weeks Ended October 30, 1993 and the Predecessor Company for the Thirty- five Weeks Ended October 2, 1993 5 Consolidated Statements of Cash Flows of the Successor Company for the Thirty-nine Weeks Ended October 29, 1994 and Four Weeks Ended October 30, 1993 and the Predecessor Company for the Thirty- five Weeks Ended October 2, 1993 6 Notes to Consolidated Financial Statements 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 17 PART II - OTHER INFORMATION ITEM 1: LEGAL PROCEEDINGS 21 ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K 22
2 HILLS STORES COMPANY AND SUBSIDIARIES - ------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEETS
October 29, January 29, October 30, (in thousands) 1994 1994 1993 - ------------------------------------------------------------------------------- (unaudited) (unaudited) ASSETS Current assets: Cash and cash equivalents $ 8,988 $ 90,049 $ 10,396 Trade receivables, net 62,573 23,368 51,132 Inventories 474,208 326,465 460,093 Other current assets 5,962 4,647 5,399 ---------- -------- ---------- Total current assets 551,731 444,529 527,020 Property and equipment, net 153,772 132,431 133,382 Property under capital leases, net 126,692 134,476 137,095 Beneficial lease rights, net 9,282 9,902 10,104 Other assets, net 9,179 9,555 10,266 Reorganization value in excess of amounts allocable to identifiable assets, net 169,989 176,728 203,586 ---------- -------- ---------- $1,020,645 $907,621 $1,021,453 ========== ======== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Borrowings under revolving credit facility $ - $ - $ 42,000 Current portion of capital leases 5,532 5,532 7,000 Accounts payable, trade 173,990 64,192 167,698 Other accounts payable and accrued expenses 186,962 203,365 203,128 ---------- -------- ---------- Total current liabilities 366,484 273,089 419,826 Senior notes 160,000 160,000 160,000 Obligations under capital leases 126,525 130,626 130,440 Other liabilities (Note 5) 30,437 13,671 13,178 Commitments and contingencies - - - Preferred stock, at mandatory redemption value (Note 7) 69,661 100,000 100,000 Common shareholders' equity: Common stock (Note 7) 105 90 90 Additional paid-in capital (Note 7) 224,234 193,910 193,910 Retained earnings 43,199 36,235 4,009 ---------- -------- ---------- Total common shareholders' equity 267,538 230,235 198,009 ---------- -------- ---------- $1,020,645 $907,621 $1,021,453 ========== ======== ========== See notes to consolidated financial statements
3 HILLS STORES COMPANY AND SUBSIDIARIES - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF OPERATIONS Successor Successor Predecessor Company Company Company Thirteen Four Weeks Nine Weeks
Weeks Ended Ended Ended (unaudited) October 29,October 30, October 2, (in thousands, except per share amounts) 1994 1993 1993 - ------------------------------------------------------------------------------- Net sales $457,212 $145,691 * $295,146 Cost of sales 321,591 103,866 * 206,837 Selling and administrative expenses (Note 11) 98,623 28,899 * 64,047 Depreciation and amortization 9,147 2,821 * 7,261 --------- --------- * -------- Operating earnings 27,851 10,105 * 17,001 * Other income (expense): * Capital lease interest ( 3,657)( 1,264) *( 2,461) Other interest ( 6,063)( 1,954) *( 715) Other income, net 968 122 * 67 -------- -------- * -------- ( 8,752) ( 3,096) *( 3,109) Earnings before reorganization items, income -------- ------- * -------- taxes, extraordinary gain, and preferred * dividend requirements 19,099 7,009 * 13,892 * Reorganization items, net - - *( 6,640) -------- ------- * -------- Earnings before income taxes, extraordinary * gain, and preferred dividend requirements 19,099 7,009 * 7,252 Income taxes (Note 8) 6,176 3,000 * - -------- ------- * -------- Earnings before extraordinary gain and * preferred dividend requirements 12,923 4,009 * 7,252 Extraordinary gain on discharge of * prepetition debt - - * 258,239 -------- ------- * -------- Net earnings 12,923 4,009 * 265,491 Predecessor Company preferred dividend * requirements - - *( 426) -------- ------- * -------- Net earnings applicable to common share- * holders $ 12,923 $ 4,009 * $265,065 ======== ======= * ======= Primary earnings per common share (Note 9): * Earnings before extraordinary gain $ 0.91 $ 0.29 * $ 0.35 Extraordinary gain on discharge of pre- * petition debt - - * 13.07 -------- ------- * ------- * Net earnings applicable to common * shareholders $ 0.91 $ 0.29 * $ 13.42 ======== ======== * ======= * Fully-diluted earnings per common share (Note 9): * Earnings before extraordinary gain $ 0.87 $ 0.27 * $ 0.31 Extraordinary gain on discharge of prepetition * debt - - * 11.75 -------- ------- * ------- Net earnings applicable to common * shareholders $ 0.87 $ 0.27 * $ 12.06 ======== ====== * ======== See notes to consolidated financial statements
4 HILLS STORES COMPANY AND SUBSIDIARIES - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF OPERATIONS Successor Successor Predecessor Company Company Company Thirty-nine Four Weeks Thirty-five
Weeks Ended Ended Weeks Ended (unaudited) October 29, October 30, October 2, (in thousands, except per share amounts) 1994 1993 1993 - -------------------------------------------------------------------------------- Net sales $1,198,441 $145,691 * $992,848 Cost of sales 856,027 103,866 * 710,375 Selling and administrative expenses * (Notes 6 and 11) 276,373 28,899 * 239,997 Depreciation and amortization 26,338 2,821 * 27,902 ---------- -------- * -------- Operating earnings 39,703 10,105 * 14,574 * Other income (expense): * Capital lease interest ( 11,085) ( 1,264) * ( 10,284) Other interest ( 17,548) ( 1,954) * ( 3,364) Other income, net 2,070 122 * 231 ---------- -------- * -------- ( 26,563) ( 3,096) * ( 13,417) ---------- -------- * -------- Earnings before reorganization items, income * taxes, extraordinary gain, and preferred * dividend requirements 13,140 7,009 * 1,157 * Reorganization items, net - - * ( 9,242) ----------- ------- * -------- Earnings (loss) before income taxes, * extraordinary gain, and preferred dividend * requirements 13,140 7,009 * ( 8,085) Income taxes (Note 8) 6,176 3,000 * - ---------- ------- * -------- Earnings (loss) before extraordinary gain and * preferred dividend requirements 6,964 4,009 * ( 8,085) Extraordinary gain on discharge of prepetition * debt - - * 258,239 ---------- ------- * -------- Net earnings 6,964 4,009 * 250,154 Predecessor Company preferred dividend * requirements - - * ( 1,662) ---------- ------- * -------- Net earnings applicable to common * shareholders $ 6,964 $ 4,009 * $248,492 ========== ======= * ======== Primary earnings per common share (Note 9): * Earnings (loss) before extraordinary gain $ 0.49 $ 0.29 * ($ 0.49) Extraordinary gain on discharge of * prepetition debt - - * 13.07 -------- ------- * -------- Net earnings applicable to common * shareholders $ 0.49 $ 0.29 * $ 12.58 ======== ======== * ======== Fully-diluted earnings per common share (Note 9): * Earnings (loss) before extraordinary gain $ 0.47 $ 0.27 * ($ 0.45) Extraordinary gain on discharge of * prepetition debt - - * 11.75 -------- ------- * -------- Net earnings applicable to common * shareholders $ 0.47 $ 0.27 * $ 11.30 ======== ======= * ======== See notes to consolidated financial statements
5 HILLS STORES COMPANY AND SUBSIDIARIES - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS
Successor Successor Predecessor Company Company Company Thirty-nine Four Weeks Thirty-five Weeks Ended Ended Weeks Ended (unaudited) October 29, October 30, October 2, (in thousands) 1994 1993 1993 - -------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 6,964 $ 4,009 * $ 250,154 Adjustments to reconcile net earnings to net * cash used for operating activities before * reorganization items: * Depreciation and amortization 28,239 3,031 * 28,780 Gain on conversion of pension plan ( 4,479) - * - Increase in accounts receivable and other * current assets ( 40,520) ( 16,003) *( 19,485) Increase in inventories ( 147,743) ( 51,892) *( 141,704) Increase in accounts payable and other * accrued expenses 107,818 47,953 * 61,087 Other, net 503 ( 304) * 2,761 -------- ------- * -------- Net cash provided by (used for) * operating activities before * reorganization items ( 49,218) ( 13,206) * 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 used for operating activities( 49,218) ( 13,206) *( 76,935) * CASH FLOWS FROM INVESTING ACTIVITIES: * * Capital expenditures ( 32,646) ( 929) *( 27,162) * CASH FLOWS FROM FINANCING ACTIVITIES: * * Borrowings under revolving credit facility - 42,000 * - Principal payments under capital lease * obligations ( 4,101) ( 444) *( 3,400) Sale/leaseback financing (Note 5) 20,169 - * - Cash distributions pursuant to the Plan of * Reorganization ( 13,673) ( 70,066) *( 5,165) Other financing activities ( 1,592) ( 196) *( 7,444) ------- ------- * ------- Net cash provided by (used for) financing * activities 803 ( 28,706) *( 16,009) ------- ------- * ------- Net decrease in cash and cash equivalents ( 81,061) ( 42,841) * (120,106) * Cash and cash equivalents at beginning of * period 90,049 53,237 * 173,343 ------- ------- * ------- Cash and cash equivalents at end of period $ 8,988 $10,396 * $ 53,237 ======= ======= * ======= See notes to consolidated financial statements
6 HILLS STORES COMPANY AND SUBSIDIARIES - ----------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. REORGANIZATION -------------- On October 4, 1993, 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. During the bankruptcy proceedings, the consolidated financial statements of the Predecessor Company were presented 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" ("SOP 90- 7"). 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. 2. PRO FORMA COMBINED STATEMENTS OF OPERATIONS ------------------------------------------- The following unaudited Pro Forma Combined Statements of Operations present the pro forma combined results of the operations of the Successor and Predecessor Companies for the thirteen and thirty-nine weeks ended October 30, 1993 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 Plan of Reorganization (the "POR") as of January 31, 1993. The information presented on the following pages should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations. 7 HILLS STORES COMPANY AND SUBSIDIARIES - ----------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 2. PRO FORMA COMBINED STATEMENTS OF OPERATIONS (continued) ------------------------------------------------------- PRO FORMA COMBINED THIRTEEN WEEKS ENDED OCTOBER 30, 1993
Successor Predecessor Pro Forma Company Company Combined Four Weeks Nine Thirteen (unaudited) Ended Weeks Ended Weeks Ended (in thousands, except per October 30, October 2, Pro Forma October 30, share amounts) 1993 1993 Adjustments 1993 - ----------------------------------------------------------------------------- Net sales $145,691 $295,146 $ - $440,837 Cost of sales 103,866 206,837 - 310,703 Selling and administrative expenses 28,899 64,047 - 92,946 Depreciation and amortization 2,821 7,261 ( 1,421)(a) 8,661 -------- -------- -------- -------- Operating earnings 10,105 17,001 1,421 28,527 Capital lease interest ( 1,264) ( 2,461) ( 67)(b)( 3,792) Other interest ( 1,954) ( 715) ( 3,467)(c)( 6,136) Other income, net 122 67 ( 33)(d) 156 Earnings before reorganization -------- ------- -------- ------- items, income taxes, extraordinary gain, and preferred dividend requirements 7,009 13,892 ( 2,146) 18,755 Reorganization items, net - ( 6,640) 6,640 (e) - Earnings before income taxes, -------- ------- -------- ------- extraordinary gain, and preferred dividend requirements 7,009 7,252 4,494 18,755 Income taxes 3,000 - ( 2,017)(g) 983 -------- ------- -------- ------- Earnings before extraordinary gain and preferred dividend requirements 4,009 7,252 6,511 17,772 Extraordinary gain on discharge of prepetition debt - 258,239 ( 258,239)(e) - -------- -------- -------- ------- Net earnings 4,009 265,491 ( 251,728) 17,772 Preferred dividend requirements - ( 426) 426 (e) - -------- ------- -------- ------- Net earnings applicable to common shareholders $ 4,009 $265,065 ($251,302) $ 17,772 ======== ======== ======== ======== Primary earnings per share applicable to common shareholders $ 0.29(f) $ 1.27 (f) ======== ======= Fully-diluted earnings per share applicable to common shareholders $ 0.27(f) $ 1.21 (f) ======== =======
8 HILLS STORES COMPANY AND SUBSIDIARIES - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 2. PRO FORMA COMBINED STATEMENTS OF OPERATIONS (continued) -------------------------------------------------------- PRO FORMA COMBINED THIRTY-NINE WEEKS ENDED OCTOBER 30, 1993
Successor Predecessor Pro Forma Company Company Combined Four Weeks Thirty-five Thirty-nine (unaudited) Ended Weeks Ended Weeks Ended (in thousands, except per October 30, October 2, Pro Forma October 30, share amounts) 1993 1993 Adjustments 1993 - -------------------------------------------------------------------------------- Net sales $145,691 $ 992,848 $ - $1,138,539 Cost of sales 103,866 710,375 - 814,241 Selling and administrative expenses 28,899 239,997 - 268,896 Depreciation and amortization 2,821 27,902 ( 4,545)(a) 26,178 -------- -------- ---------- ---------- Operating earnings 10,105 14,574 4,545 29,224 Capital lease interest ( 1,264) ( 10,284) 172 (b)( 11,376) Other interest ( 1,954) ( 3,364) ( 11,662)(c)( 16,980) Other income, net 122 231 822 (d) 1,175 -------- -------- -------- ---------- Earnings before reorgani- zation items, income taxes, extraordinary gain, and preferred dividend requirements 7,009 1,157 ( 6,123) 2,043 Reorganization items, net - ( 9,242) 9,242 (e) - -------- -------- -------- --------- Earnings (loss) before income taxes, extraordinary gain, and preferred dividend requirements 7,009 ( 8,085) 3,119 2,043 Income taxes 3,000 - ( 2,017)(g) 983 -------- -------- -------- --------- Earnings (loss) before extra- ordinary gain and preferred dividend requirements 4,009 ( 8,085) 5,136 1,060 Extraordinary gain on discharge of prepetition debt - 258,239 ( 258,239)(e) - -------- -------- -------- --------- Net earnings 4,009 250,154 ( 253,103) 1,060 Preferred dividend requirements - ( 1,662) 1,662 (e) - -------- -------- -------- --------- Net earnings applicable to common shareholders $ 4,009 $248,492 ($251,441) $1,060 ======== ======== ======== ========= Primary earnings per share applicable to common shareholders $ 0.29 (f) $ 0.08(f) ======== ========= Fully-diluted earnings per share applicable to common shareholders $ 0.27 (f) $ 0.07(f) ======== =========
9 HILLS STORES COMPANY AND SUBSIDIARIES - ----------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 2. PRO FORMA COMBINED STATEMENTS OF OPERATIONS (continued) ------------------------------------------------------- (a) Reflects the impact of: the revaluation of and 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 amortization of the Successor Company's reorgani- zation 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 revalua- tion of capital lease obligations. (c) Reflects interest expense on the senior notes, the amortiza- tion of deferred financing costs related to securing the revolving credit facility, and interest expense on 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 discharge of prepetition debt, and preferred dividend requirements. (f) Pro forma primary earnings per share were calculated based on a weighted average of 14,000,000 shares outstanding. Pro forma fully-diluted earnings per share were calculated based on a weighted average of 14,700,000 shares outstanding. (g) Reflects the income tax effect of the pro forma adjustments. 3. BASIS OF PRESENTATION ---------------------- The consolidated financial statements include the accounts of the Successor Company and the Predecessor Company and their wholly- owned subsidiaries. All significant intercompany transactions and balances have been eliminated. Certain prior year amounts were reclassified to conform with the current year presentation. The information furnished reflects all normal recurring adjust- ments which are, in the opinion of management, necessary to present a fair statement of the results for the interim periods. 10 HILLS STORES COMPANY AND SUBSIDIARIES - ----------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 3. BASIS OF PRESENTATION (continued) --------------------------------- The accompanying unaudited consolidated financial statements are presented in accordance with the requirements of Form 10-Q and consequently do not include all the disclosures normally required by generally accepted accounting principles nor those normally made in the Company's annual Form 10-K filing; however, the Company considers the disclosures adequate to make the informa- tion presented not misleading. Reference should be made to the Company's Annual Report on Form 10-K for additional disclosures, including a summary of the Company's accounting policies, which have not changed. The Company's business is seasonal in nature and the results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the full fiscal year. The fourth quarter of each fiscal year provides the major portion of the Company's annual sales and operating earnings, with operating earnings particularly concentrated in the Christmas selling season. 4. REVOLVING CREDIT FACILITY ------------------------- The Revolving Credit Agreement (the "Facility") was amended to allow the Company to enter into the sale/leaseback transactions described in Note 5. In addition, the Company met the economic performance requirements as defined in the Facility and qualified for a 1/4% interest rate reduction on borrowings under the Facility beginning August 1, 1994. Effective May 12, 1994, the Company obtained a consent and waiver on the Facility permitting it to purchase, on or prior to January 28, 1995, up to $50.0 million aggregate principal amount of its Senior Notes at a purchase price not in excess of 100% of the principal amount of each Senior Note. As of the date of this filing, no purchases of Senior Notes have occurred and the Company does not expect that any such purchases will occur. 5. OTHER LIABILITIES ----------------- In September 1994, the Company obtained $20.2 million, which includes transaction costs, of financing for certain of its real properties through sale/leaseback arrangements. These transac- tions were accounted for as financings. The leases, which have terms of ten years each, require minimum annual rental payments of $3.5 million in 1996, $3.8 million in 1997, $4.4 million in 1998, $3.7 million in 1999, and a total of $15.7 million thereafter. 11 HILLS STORES COMPANY AND SUBSIDIARIES - ----------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 5. OTHER LIABILITIES (continued) ----------------------------- 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. 6. PENSION PLAN ------------ The Company's Board of Directors authorized the termination, effective April 30, 1994, of the Company's pension plan, subject to approval by the Pension Benefit Guaranty Corporation and the Internal Revenue Service. In place of the pension plan, the Company amended its 401(k) Employee Savings Plan, effective May 1, 1994, to include company matching contributions. In connection with the termination of the pension plan, partici- pants' vested benefits were calculated based on all credited service, pension earnings, and contributions up to April 30, 1994. There will be no asset reversion to the Company as plan assets in excess of benefit obligations, as adjusted for the termination of the plan, will be allocated to participants. In the first quarter of 1994, the Company recorded a $4.5 million gain, included in selling and administrative expenses, related to the curtailment and termination of its pension plan and the elimination of the related pension obligation. 7. PREFERRED STOCK CONVERSION -------------------------- As of October 29, 1994, 1,516,933 shares of the Company's Series A Convertible Preferred Stock (the "Preferred Stock") were converted to the Company's Common Stock (the "Common Stock") on a share for share basis. These noncash conversions amounted to $30.3 million. 12 HILLS STORES COMPANY AND SUBSIDIARIES - ----------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 8. INCOME TAXES ------------ The Company recorded an income tax provision of $6.2 million for the thirteen and thirty-nine week periods ended October 29, 1994 based on an estimated combined annual federal and state effective tax rate of 47.0%. A provision of $3.0 million was recorded by the Successor Company during the four weeks ended October 30, 1993 using an estimated combined federal and state effective tax rate of 42.8%. The increase in the combined effective tax rate is primarily due to the amortization of reorganization value in excess of amounts allocable to identifiable assets, which is non- deductible for income tax purposes, for twelve months in 1994 compared to four months in 1993. 9. EARNINGS PER SHARE ------------------ Primary and fully-diluted earnings per common share of the Successor Company for the thirteen and thirty-nine weeks ended October 29, 1994 and four weeks ended October 30, 1993 were computed based on the weighted average number of common and common equivalent shares assumed to be outstanding during the period. Primary weighted average shares outstanding amounted to 14,141,390 and 14,096,892 for the thirteen and thirty-nine weeks ended October 29, 1994, respectively, and 14,000,000 for the four weeks ended October 30, 1993. Fully-diluted weighted average shares outstanding also assumes the exercise of the Stock Rights. Fully-diluted weighted average shares outstanding amounted to 14,841,390 and 14,796,892 for the thirteen and thirty-nine weeks ended October 29, 1994, respectively, and 14,700,000 for the four weeks ended October 30, 1993. The weighted average number of shares used for the thirteen and thirty-nine weeks ended October 29, 1994 and four weeks ended October 30, 1993 reflect all shares of common stock intended to be issued in accordance with the POR. Primary and fully-diluted earnings per common share of the Predecessor Company for the nine and thirty-five week period ended October 2, 1993 were computed using the weighted average common and common equivalent shares outstanding during the period. Primary weighted average shares outstanding amount to 19,757,390 for both periods. Fully-diluted weighted average shares outstanding for the same periods were 21,981,683, which assumed the conversion of the 11% Convertible Junior Subordinated Debentures. 13 HILLS STORES COMPANY AND SUBSIDIARIES - ----------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 10. 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 ("Series B 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 are not currently exercisable, but 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. Each share of Series B Preferred Stock will entitle its holder to 1,000 votes. The holders of Series B Preferred Stock are entitled to receive (a) quarterly cumulative dividends payable in cash in an amount per share equal to $.01 per share less the amount of cash dividends received pursuant to the following clause (b) (but not less than zero) and (b) cash and in-kind dividends on each payment date for similar dividends on the Common Stock in an amount per whole share of Series B Preferred Stock equal to 1,000 (subject to antidilution adjustments) times the per share amount of all cash dividends then to be paid on each share of Common Stock. Whenever quarterly dividends or distributions on the Series B Preferred Stock are in arrears, the Company's right to declare or pay dividends or other distributions on or to redeem or purchase any shares of stock ranking junior to or on a parity with the 14 HILLS STORES COMPANY AND SUBSIDIARIES - ----------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 10. RIGHTS AGREEMENT (continued) ---------------------------- Series B Preferred Stock is subject to certain restrictions. Upon any liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, the holders of any shares of Series B Preferred Stock will be entitled to receive, before any distribution is made to holders of shares of stock ranking junior to the Series B Preferred Stock or any distribution (other than a ratable distribution) is made to the holders of stock ranking on a parity with the Series B Preferred Stock, an amount equal to the accrued dividends thereon plus the greater of (a) $.10 per share or (b) an amount per share equal to 1,000 (subject to antidilution adjustments) times the amount per share to be distributed to holders of the Common Stock. 11. LITIGATION ---------- In the Company's lawsuit against Dickstein Partners, L.P., et al. ("Dickstein") commenced in August 1994, the Company voluntarily withdrew the lawsuit and reached a negotiated settlement with Dickstein that resulted in the end of Dickstein's consent solicitation. Dickstein agreed to vote for the Company's proposed shareholder solicitation, which is a condition to the Company's $75 million cash self-tender for up to three million common shares at $25 per share, to amend the Company's corporate charter to require that certain actions taken by stockholders may not be taken by written consent. In connection with the consent solicitation by Dickstein and the subsequent settlement, the Company incurred costs through October 29, 1994 of $2.2 million, which are included in selling and administrative expenses. In the stockholder derivative and class action lawsuit captioned Weiss v. Lee, et al., the defendants, including the Company, have entered into a memorandum of understanding with the plaintiff to settle the litigation, subject to approval of the Chancery Court of the State of Delaware. The Company believes that the final settlement will not have a material adverse impact on the Company's consolidated financial position. 12. STOCK REPURCHASE ---------------- In September 1994, in response to the Dickstein consent solicita- tion, the Company's Board of Directors announced a program to enhance shareholder value, including the approval of the self- 15 HILLS STORES COMPANY AND SUBSIDIARIES - ----------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 12. STOCK REPURCHASE (continued) ---------------------------- tender (see Note 11) and the implementation of a growth program which includes remodeling, opening new stores, and the continua- tion of operating improvement programs. In connection with the self-tender, the Company intends to seek shareholder consent to amend its corporate charter as described in Note 11. The Company intends to solicit its senior note holders for approval of the self-tender as such stock repurchase is restricted by the Senior Note Indenture. The Company is seeking to amend its Facility to permit it to enter into the self-tender and to implement its growth program. The Company expects to complete the self-tender offer in February 1995. 16 HILLS STORES COMPANY AND SUBSIDIARIES - ---------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL On October 4, 1993, 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. In connection with the adoption of fresh-start reporting and the consummation of the Plan of Reorganization (the "POR"), a new entity has been 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 (see Note 1 of Notes to Consolidated Financial Statements). To facilitate comparison of the Successor and Predecessor Companies' operating performances for the thirteen and thirty- nine weeks ended October 29, 1994 and October 30, 1993, the discussions below are presented using the pro forma combined results of operations of the Predecessor Company for the thirteen and thirty-nine weeks ended October 30, 1993 as presented in Note 2 of Notes to Consolidated Financial Statements. Consequently, the information presented below does not reflect the operating results of the Predecessor Company for the thirteen and thirty- nine weeks ended October 30, 1993 as they are presented in the Consolidated Statements of Operations. The most significant pro forma adjustment is the increase in interest expense due to the assumed issuance of the senior notes at January 31, 1993 (see Note 2 of Notes to Consolidated Financial Statements). RESULTS OF OPERATIONS THIRTEEN WEEKS ENDED OCTOBER 29, 1994 VERSUS PRO FORMA COMBINED THIRTEEN WEEKS ENDED OCTOBER 30, 1993 Sales increased 3.7% compared to the same period in 1993. Toys, housewares, and seasonal hardlines experienced sales gains while apparel sales were negatively affected by the unseasonably warm regional weather in September and October of 1994. Comparable store sales increased 2.6% to $452.3 million. 17 HILLS STORES COMPANY AND SUBSIDIARIES - ---------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) RESULTS OF OPERATIONS (continued) THIRTEEN WEEKS ENDED OCTOBER 29, 1994 VERSUS PRO FORMA COMBINED THIRTEEN WEEKS ENDED OCTOBER 30, 1993 (continued) Selling and administrative expenses as a percentage of sales were 21.6% compared to 21.1% in 1993. This increase is primarily due to $2.2 million of expenses incurred by the Company in connection with the consent solicitation by Dickstein Partners, Inc. ("Dickstein"). Other income was $968,000 compared to $156,000 in 1993. This increase is primarily attributable to the licensing of one of the Company's product trademarks. THIRTY-NINE WEEKS ENDED OCTOBER 29, 1994 VERSUS PRO FORMA COMBINED THIRTY-NINE WEEKS ENDED OCTOBER 30, 1993 Sales increased 5.3% compared to the same period in 1993. In an improved retailing environment, sales in both hardlines and softlines showed increases over the prior year. Comparable store sales increased 5.3% to $1.2 billion. Selling and administrative expenses as a percentage of sales were 23.1% compared to 23.6% in 1993. This improvement is primarily attributable to increased sales volume, a $4.5 million gain from the elimination of the Company's pension benefit obligation due to the termination of the pension plan, and the Company's continued focus on cost containment, partially offset by $2.2 million of expenses incurred by the Company in connection with the consent solicitation by Dickstein. Other income was $2.1 million versus $1.2 million in 1993. This increase is primarily attributable to the licensing of one of the Company's product trademarks. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES The Company's working capital as of October 29, 1994 increased by $13.8 million from January 29, 1994 primarily due to the proceeds received from the sale/leaseback transactions described in Note 5 of Notes to Consolidated Financial Statements. Net cash used for operating activities was $49.2 million. The use of cash for operating activities is primarily due to the seasonal nature of the Company's business. By the end of fiscal 1994, the Company expects to generate positive cash flows from operating activities. 18 HILLS STORES COMPANY AND SUBSIDIARIES - ---------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES (continued) Capital expenditures were primarily for the remodeling and upgrading of existing stores and the opening of three new stores. Fiscal 1994 capital expenditures are expected to approximate $40 million. As of October 29, 1994, there was no outstanding loan balance under the Company's $225 million unsecured Revolving Credit Facility (the "Facility"). During the first nine months of fiscal 1994, there were no direct borrowings under the Facility. Effective May 12, 1994, the Company obtained a consent and waiver on its Facility permitting it to purchase, on or prior to January 28, 1995, up to $50.0 million aggregate principal amount of its Senior Notes at a purchase price not in excess of 100% of the principal amount of each Senior Note. As of the date of this filing, no purchases of Senior Notes have occurred and the Company does not expect that any such purchases will occur. In addition, the Company met the economic performance requirements as defined in the Revolving Credit Agreement and qualified for a 1/4% interest rate reduction on the Facility beginning August 1, 1994. In September 1994, the Company obtained $20.2 million, which includes transaction costs, of financing for certain of its real properties through sale/leaseback arrangements (see Note 5 of Notes to Consolidated Financial Statements). In response to the Dickstein consent solicitation, in September 1994, the Company's Board of Directors announced a program to enhance stockholder value, including the approval of the self- tender (see Note 11 of Notes to Consolidated Financial State- ments) and the implementation of a growth program which includes remodeling, opening new stores, and the continuation of operating improvement programs. In connection with the self-tender, the Company intends to seek shareholder consent to amend its corporate charter as described in Note 11 of Notes to Consoli- dated Financial Statements. The Company intends to solicit its senior note holders for approval of the self-tender as such stock repurchase is restricted by the Senior Note Indenture. The Company is seeking to amend its Facility to permit it to enter into the self-tender and to implement its growth program. The Company expects to complete the self-tender offer in February 1995. The Company anticipates the funds needed to complete the 19 HILLS STORES COMPANY AND SUBSIDIARIES - ---------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES (continued) self-tender offer will be met by the Company's available cash. Management believes that amounts available under the Company's current borrowing agreement, together with cash from operations and the completed sale/leaseback transactions, will enable the Company to fund its current liquidity and capital expenditure requirements, including its expansion program, and complete the self-tender transaction. 20 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS - ------ ----------------- A. In September 1994, the Company voluntarily withdrew its lawsuit against Dickstein Partners, L.P., et. al. ("Dickstein") and reached a negotiated settlement that resulted in the end of Dickstein's consent solicitation. Dickstein agreed to vote for the Company's proposed shareholder solicitation, which is a condition to the Company's $75 million cash self-tender for up to three million common shares at $25 per share, to amend the Company's corporate charter to require that certain actions taken by stockholders may not be taken by written consent. B. In the previously reported stockholder's derivative and class action lawsuit filed in the Court of Chancery of the State of Delaware captioned Weiss v. Lee, et al. which named each Board member and the Company as defendants, the parties entered into a memorandum of understanding to settle the litigation. Although the Company and its directors believe the plaintiff's allegations are without merit, the memorandum was entered into on September 30, 1994 in order to eliminate the burden and expense of further litigation. The Board believes the settlement is in the best interests of the Company and all of its stockholders. The parties intend to present the settlement, which contemplates treatment of the action as a shareholder class action not permitting members of the shareholder class to opt-out, to the Delaware Chancery Court for its approval in the near future. The Company believes that the final settlement will not have a material adverse impact on the Company's consolidated financial position. 21 PART II - OTHER INFORMATION (continued) ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K - ------- -------------------------------- a. The following documents are filed as part of this report: (10) Amendment to Credit Agreement dated as of October 4, 1993. (11) Statements regarding computation of per share earnings. (15) Letter regarding unaudited interim financial information. (15.1) Awareness letter regarding unaudited interim financial information. (27) Financial Data Schedule b. Reports on Form 8-K As previously reported, in August, 1994, Registrant filed a report on Form 8-K primarily relating to a Rights Agreement, a new class of Series B preferred stock, and certain employment contracts. - ------------ 22 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HILLS STORES COMPANY Date: December 8, 1994 /s/Michael Bozic ---------------- Michael Bozic President and Chief Executive Officer Date: December 8, 1994 /s/John G. Reen --------------- John G. Reen Executive Vice President - Chief Financial Officer 23 EXHIBIT INDEX (10) Amendment to Credit Agreement dated as of October 4, 1993. 25 (11) Statements regarding computation of per share earnings. 39 (15) Letter regarding unaudited interim financial information. 41 (15.1) Awareness letter regarding unaudited interim financial information. 42 (27) Financial Data Schedule 43 24 EXHIBIT 10 AMENDMENT, CONSENT AND WAIVER dated as of July 6, 1994 (this "Amendment"), to the Credit Agreement dated as of October 4, 1993 (the "Credit Agree- ment"), 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 listed on Schedule 2.01 to the Credit Agreement (the "Lenders"), the Co- Agents named in the Credit Agreement and Chemical Bank, as agent for the Lenders (in such capacity, the "Ad- ministrative Agent") and as Fronting Bank. WHEREAS, the Borrower and the Parent have requested that the Required Lenders (a) consent to the entry by the Borrower into the sale and lease-back transactions (the "Sale and Lease-Back Transactions") described in the summary term sheets attached to this Amendment as Exhibit A (the "Sale and Lease-Back Summary Term Sheets") and (b) in connection therewith, agree to amend the Credit Agreement as described below; and WHEREAS, the Required Lenders are willing, on the terms, subject to the conditions and to the extent set forth below, to grant such consent and waiver and effect such amendment. NOW, THEREFORE, in consideration of the premises and the agreements, provisions and covenants herein contained, the Borrower, the Parent and the Required Lenders hereby agree, on the terms and subject to the conditions set forth herein, as follows: SECTION 1. CONSENT AND WAIVER. The Required Lenders ------------------ hereby (a) consent to the entry by the Borrower into the Sale and Lease-Back Transactions described in the Sale and Lease-Back Summary Term Sheets and (b) waive the provisions of Section 7.03 of the Credit Agreement to the extent, but only to the extent, necessary to permit the Parent and the Borrower to effect the Sale and Lease-Back Transactions. The Borrower, the Parent and the Required Lenders hereby acknowledge and agree that (a) the Sale and Lease-Back Transactions shall constitute "Sale and Lease-Back Transactions" as defined in the Credit Agreement, (b) the Sale and Lease-Back Transactions shall be deemed to be permitted under Section 7.03 of the Credit Agreement, (c) the amount of any Indebtedness incurred by the Parent and its Subsidiaries in 25 EXHIBIT 10 connection with the Sale and Lease-Back Transactions (i) shall be deemed to be Indebtedness permitted to be incurred under Sections 7.01 and 7.03 of the Credit Agreement in connection with sale and lease-back transactions, (ii) shall not be included in determining whether any Indebtedness incurred in connection with sale and lease- back transactions after the date hereof would be permitted under the provisions of Section 7.03(b) of the Credit Agreement, (d) the sales of assets to be made by the Parent and its Subsidiaries in connection with the Sale and Lease-Back Transaction shall be deemed to be sales of assets permitted to be made under Section 7.06 of the Credit Agreement in connection with sale and lease-back transactions and (e) the amount expended by the Parent and its Subsidiaries in connection with the portion of the Sale and Lease-Back Transactions that relates to the sale and lease-back of truck trailers shall not be deemed to constitute Capital Expenditures for the purpose of either (i) determining the amount of Capital Expenditures that the Parent and its Subsidiaries are entitled to make or permit during the fiscal year ending January 28, 1995, or (y) determining compliance with the Consolidated Fixed Charge Coverage Ratio. SECTION 2. AMENDMENT. The Borrower, the Parent and the ---------- Required Lenders hereby amend Section 7.11 of the Credit Agreement by deleting such Section in its entirety and substituting the following therefor: SECTION 7.11. CAPITAL EXPENDITURES. Make or -------------------- permit Capital Expenditures to exceed (a) during the period from October 4, 1993, through and including January 29, 1994, $15,000,000, (b) for the fiscal year ending January 28, 1995, the sum of (i) $36,000,000 (the "Basic Fiscal 1994 Amount") and (ii) the remainder of (A) $26,000,000 minus (B) the aggregate amount expended in respect of the repurchase of the principal amount of any Senior Notes by the Parent or the Borrower prior to January 28, 1995 (such remainder, the "Additional Fiscal 1994 Amount"), (c) for the fiscal year ending February 3, 1996, $38,000,000, and (d) during the period from February 4, 1996, to the Maturity Date, $25,000,000; PROVIDED that (x) to the extent Capital Expenditures in any period (other than the fiscal year ending January 28, 1995) are less than the amount set forth above for such period, the amount of such difference, up to a maximum of $10,000,000, may be carried forward and used to make Capital Expenditures in the immediately succeeding fiscal year of the Borrower and (y) to the extent Capital Expenditures in the fiscal year ending January 28, 1995, are less than the amount set forth above for such fiscal year, the amount of such difference, up to 26 EXHIBIT 10 a maximum of (1) the lesser of $10,000,000 and the unused portion of the Basic Fiscal 1994 Amount plus (2) the unused portion of the Additional Fiscal 1994 Amount, may be carried forward and used to make Capital Expenditures in the immediately succeeding fiscal year of the Borrower (it being understood that any Capital Expenditures during the fiscal year ending January 28, 1995, will be applied first against the Basic Fiscal 1994 Amount and then against the additional Fiscal 1994 Amount). SECTION 3. 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 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, (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 obligation 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 and -------------- each certificate and instrument delivered by any party in connection herewith shall be a Loan Document for all purposes. 27 EXHIBIT 10 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 together, 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 provisions of Section 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, 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. 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, and are not part of this Amendment and are not to affect the construction of, or to be taken into consideration in interpreting, this Amendment. 28 EXHIBIT 10 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 /s/Bruce A. Caldwell -------------------- Name: Bruce A. Caldwell Title: Vice President Treasurer HILLS DEPARTMENT STORE COMPANY, by /s/Bruce A. Caldwell -------------------- Name: Bruce A. Caldwell Title: Vice President Treasurer CHEMICAL BANK, individually, as Administrative Agent and as Fronting Bank, by /s/Daniel J. Bumgardner ----------------------- Name: Daniel J. Bumgardner Title: Vice President BANK OF MONTREAL, by /s/D. Bruce Thorsen ------------------- Name: D. Bruce Thorsen Title: Director, Corporate Banking CREDIT LYONNAIS, NEW YORK BRANCH, by /s/Frederick Haddad ------------------- Name: Frederick Haddad Title: Senior Vice President 29 EXHIBIT 10 CREDIT LYONNAIS, CAYMAN ISLANDS BRANCH by /s/Frederick Haddad ------------------- Name: Frederick Haddad Title: Authorized Signer INTERNATIONALE NEDERLANDEN (U.S.) CAPITAL CORPORATION, by /s/Barry A. Iseley ------------------ Name: Barry A. Iseley Title: Vice President SOCIETE GENERALE, by /s/John J. Wagner ------------------- Name: John J. Wagner Title: Vice President CIBC, INC., by /s/Mary Kate Miller ------------------- Name: Mary Kate Miller Title: Vice President by ------------------- Name: Title: FIRST NATIONAL BANK OF BOSTON, by /s/Peter Morran ------------------- Name: Peter Morran Title: Director 30 EXHIBIT 10 FLEET BANK OF MASSACHUSETTS, N.A., by /s/Helen K. Balboni ------------------- Name: Helen K. Balboni Title: Assistant Vice President LTCB TRUST COMPANY, by /s/Noboru Kubota ------------------- Name: Noboru Kubota Title: Senior Vice President ABN AMRO BANK N.V., by /s/J.E. Davis ------------------- Name: J.E. Davis Title: Vice President by /s/Monique F. Bazoberry ----------------------- Name: Monique F. Bazoberry Title: Corporate Banking Officer IBJ SCHRODER BANK AND TRUST COMPANY, by /s/Lawrence S. Zilavy --------------------- Name: Lawrence S. Zilavy Title: Senior Vice President by --------------------- Name: Title: 31 EXHIBIT 10 PROVIDENT BANK, by /s/Mark Whitson ------------------- Name: Mark Whitson Title: Vice President RAIFFEISEN ZENTRALBANK OESTERREICH AKTIENGESELLSCHAFT, by /s/M. Gruell /s/M. Meyer ------------------------- Name: M. Gruell M. Meyer Title: Vice President LEHMAN COMMERCIAL PAPER, INC., by /s/Lisa Raggi ------------------------- Name: Lisa Raggi Title: Authorized Signer 32 EXHIBIT 10 CONFIDENTIAL HILLS DEPARTMENT STORE COMPANY - ---------------------------------------------------------------- 1. SUMMARY OF PRINCIPAL TERMS AND CONDITIONS STORES LEASE I. PARTIES ------- Lessee: Hills Department Store Company (the "Lessee") Lessee Advisor: Chemical Securities Inc. ("CSI"). Counsel to Lessee: Winston & Strawn. Owner Participant: Philip Morris Capital Corporation ("PMCC") or a wholly-owned subsidiary thereof (guaranteed by PMCC). Lessor: The Owner Participant or a bank or trust company selected by PMCC. II. THE PROPERTIES -------------- The Properties: Six retail discount stores and one distribution center (the "Properties"). Property Description: RETAIL STORE LOCATION LAND #89 W. Mifflin, Pa Ground Lease #93 Cranberry, Pa Ground Lease #94 Butler, Pa Ground Lease #101 Pittsburgh, Pa Ownership of Fee Interest #110 Cicero, N.Y. Ground Lease #127 Lockport, N.Y. Ground Lease Distribution Center, Ownership of Franklin City, Ohio Fee Interest The six retail stores are approximately 80,000 square feet each and the Distribution Center is 150,000 square feet. All of the Properties are subject to existing ground leases with the exception of store #101 and the distribution center. 33 EXHIBIT 10 CONFIDENTIAL HILLS DEPARTMENT STORE COMPANY - ----------------------------------------------------------- Properties Cost: Approximately $25 million +/- 10% but in no event greater than fair market value ("Properties Cost"). Appraisal: The Lessor will receive an appraisal from Enterprise Appraisal Co. III. TRANSACTION STRUCTURE --------------------- Funding Date: Estimated to be July 29, 1994; however, the Owner Participant's commitment to fund the purchase of the Properties shall extend through September 30, 1994. Lease Term: 10 years. Rent Payments: Semiannual (as set forth in Schedule I). Lease Renewal Options: Renewable at option of Lessee for up to 4 terms. Each renewal term will be 5 years except for the 4th renewal term, which will be 4 years. Purchase Option: At the end of the Lease Term, the Lessee will have the option to purchase one or more of the Properties for the lower of the applicable Fixed-Price Purchase Option Amount or the then fair market value. IV. TERMS AND CONDITIONS -------------------- Net Lease: The Lessee will be responsible for the operations and maintenance, insurance and expenses relating to the Properties. 34 EXHIBIT 10 CONFIDENTIAL HILLS DEPARTMENT STORE COMPANY - ----------------------------------------------------------- Other Terms and Conditions: Usual and customary for a transaction of this type (including, without limitation): maintenance; quiet enjoyment; sublease; insurance; property modification; general indemnifications; and tax indemnifications. V. GENERAL PROVISIONS ------------------ Usual and customary for facilities of this type including (without limitation) the following events of default: failure to make payment; failure to perform; misrepresentation; bankruptcy; acceleration of other indebtedness; maintenance of insurance; and a restriction on mergers. There are no financial covenants in the lease agreement. II. SUMMARY OF PRINCIPAL TERMS AND CONDITIONS TRAILERS LEASE I. PARTIES ------- Guarantor: Hills Department Store Company (the "Guarantor"). Lessee: A special purpose corporation wholly owned by Hills Department Store Company (the "Lessee"). Lessee Advisor: Chemical Securities Inc. ("CSI"). Counsel to Lessee: Winston & Strawn. Owner Participant: Philip Morris Capital Corporation ("PMCC") or a wholly-owned subsidiary thereof (guaranteed by PMCC). Lessor: The Owner Participant or a bank or trust company selected by PMCC. 35 EXHIBIT 10 CONFIDENTIAL HILLS DEPARTMENT STORE COMPANY - ----------------------------------------------------------- II. THE EQUIPMENT ------------- The Equipment: 400 new truck trailers manufac- tured by Fruehauf (the "New Equipment") and 102 used truck trailers (the "Used Equipment") (collectively the "Equipment"). Equipment Cost: Approximately $8 million +/- 10% but in no event greater than fair market value ("Equipment Cost"). Appraisal: The Lessor will receive an ap- praisal from Enterprise Appraisal Co. III. TRANSACTION STRUCTURE --------------------- Funding Date: Estimated to be December 30, 1994. Lease Term: 9.5 years for the New Equipment and 4.5 years for the Used Equipment. Lease Renewal Option: At the expiration of the Basic Lease Term, the Lessee will have the option to renew the Lease on the Equipment for a duration of three years. Other terms and conditions of the Trailer Lease are substantially the same as those of the Stores Lease. 36 EXHIBIT 10 CONFIDENTIAL HILLS DEPARTMENT STORE COMPANY - ----------------------------------------------------------- PRICING ASSUMPTIONS AND STRUCTURE --------------------------------- STORES NEW TRAILERS OLD TRAILERS ------ ------------ ------------ Lease Term: 10 years 9.5 years 4.5 years Interim Period: 362 days 179 days 179 days SPECIFICATIONS -------------- 1 Implicit Rate: * * * Present Value 2 of Rents * * * Fixed-Price Purchase Option: Subject to Appraisal but no less than: * * * Owner Participant: Phillip Morris Capital Corporation 1 Indicative pricing - subject to change. 2 Assumes an 11% discount rate. * Confidential information omitted and filed separately with the Commission. 37 EXHIBIT 10 CONFIDENTIAL HILLS DEPARTMENT STORE COMPANY - -------------------------------------------------------------- STORES (SCHEDULE I) SPLIT RENT SCHEDULE IN PERCENTAGES OF TOTAL COST % of Rent Rental Date No. Total Rent Advance Rent Arrears Rent in Arrears Jul 2, 1995 1 0.00000000 0.00000000 Jan 2, 1996 2 0.00000000 0.00000000 Jul 2, 1996 3 * * 100.00000000 Jan 2, 1997 4 0.00000000 0.00000000 Jul 2, 1997 5 * * 100.00000000 Jan 2, 1998 6 * * 0.00000000 Jul 2, 1998 7 0.00000000 0.00000000 Jan 2, 1999 8 * * 0.00000000 Jul 2, 1999 9 0.00000000 0.00000000 Jan 2, 2000 10 * * 0.00000000 Jul 2, 2000 11 0.00000000 0.00000000 Jan 2, 2001 12 * * 0.00000000 Jul 2, 2001 13 0.00000000 0.00000000 Jan 2, 2002 14 * * 0.00000000 Jul 2, 2002 15 0.00000000 0.00000000 Jan 2, 2003 16 * * 0.00000000 Jul 2, 2003 17 0.00000000 0.00000000 Jan 2, 2004 18 * * 0.00000000 Jul 2, 2004 19 0.00000000 0.00000000 ---------- ---------- ---------- ---------- * * * * Confidential information omitted and filed separately with the Commission. 38 EXHIBIT 11 HILLS STORES COMPANY AND SUBSIDIARIES STATEMENTS RE COMPUTATION OF PER SHARE EARNINGS Successor Successor Predecessor Company Company Company Thirteen Weeks Four Weeks Nine Ended Ended Weeks Ended October 29, October 30, October 2, 1994 1993 1993 ------------- ------------ ----------- Weighted average primary shares * outstanding * - ------------------------------- * * Weighted average number of common * shares assumed to be outstanding * during the period 10,516,933 9,000,000 * 19,757,390 * Assumed conversion of preferred * stock 3,483,067 5,000,000 * N/A * Assumed exercise of stock options 141,390 N/A * - * Assumed exercise of stock rights - - * N/A * Assumed exercise of stock warrants - - * N/A * ---------- ---------- * ---------- 14,141,390 14,000,000 * 19,757,390 ========== ========== * ========== Successor Successor Predecessor Company Company Company Thirty-nine Four Weeks Thirty-five Weeks Ended Ended Weeks Ended October 29, October 30, October 2, 1994 1993 1993 ----------- ----------- ---------- Weighted average primary shares * outstanding * - ---------------------------------- * * Weighted average number of common * shares assumed to be outstanding * during the period 10,516,933 9,000,000 * 19,757,390 * Assumed conversion of preferred * stock 3,483,067 5,000,000 * N/A * Assumed exercise of stock options 96,892 N/A * - * Assumed exercise of stock rights - - * N/A * Assumed exercise of stock warrants - - * N/A * ---------- ---------- * ---------- 14,096,892 14,000,000 * 19,757,390 ========== ========== * ========== 39 EXHIBIT 11 HILLS STORES COMPANY AND SUBSIDIARIES STATEMENTS RE COMPUTATION OF PER SHARE EARNINGS Successor Successor Predecessor Company Company Company Thirteen Weeks Four Weeks Nine Ended Ended Weeks Ended October 29, October 30, October 2, 1994 1993 1993 -------------- ----------- ---------- * Weighted average fully-diluted * shares outstanding * - ------------------------------ * * Weighted average number of common * shares assumed to be outstanding * during the period 10,516,933 9,000,000 * 19,757,390 * Assumed conversion of preferred * stock 3,483,067 5,000,000 * N/A * Assumed exercise of stock options 141,390 N/A * - * 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 ---------- ---------- * ---------- 14,841,390 14,700,000 * 21,981,683 ========== ========== * ========== Successor Successor Predecessor Company Company Company Thirty-nine Four Weeks Thirty-five Weeks Ended Ended Weeks Ended October 29, October 30, October 2, 1994 1993 1993 ----------- ----------- ----------- * Weighted average fully-diluted * shares outstanding * - ------------------------------ * * Weighted average number of common * shares assumed to be outstanding * during the period 10,516,933 9,000,000 * 19,757,390 * Assumed conversion of preferred * stock 3,483,067 5,000,000 * N/A * Assumed exercise of stock options 96,892 N/A * - * 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 ---------- ---------- * ---------- 14,796,892 14,700,000 * 21,981,683 ========== ========== * ========== 40 EXHIBIT 15 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors of Hills Stores Company We have reviewed the accompanying consolidated balance sheets of Hills Stores Company and Subsidiaries as of October 29, 1994 and October 30, 1993 and the related consolidated statements of operations for the thirteen and thirty-nine weeks ended October 29, 1994 and the four weeks ended October 30, 1993, the nine weeks ended October 2, 1993, and the thirty-five weeks ended October 2, 1993 and the consolidated statements of cash flows for the thirty- nine weeks ended October 29, 1994, the four weeks ended October 30, 1993 and the thirty-five weeks ended October 2, 1993. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the accompanying consolidated financial statements for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of the Company as of January 29, 1994 and the related consolidated statements of operations, common shareholders' equity and cash flows for the seventeen week period ended January 29, 1994 and the thirty-five week period ended October 2, 1993 (not presented herein); and our report dated March 22, 1994 included an explanatory paragraph relating to the Company's emergence from Chapter 11 proceedings. Boston, Massachusetts November 15, 1994 Coopers & Lybrand L.L.P. 41 EXHIBIT 15.1 Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 Re: Hills Stores Company Registration on Form 10-Q We are aware that our report dated November 15, 1994 on our review of interim financial information of Hills Stores Company for the period ended October 29, 1994 and included in the Company's quarterly report on Form 10-Q for the quarter then ended is incorporated by reference in the Company's registration statement on Form S-8. Pursuant to Rule 436 (c) under the Securities Act of 1933, this report should not be considered a part of the registration statement prepared or certified by us within the meaning of Sections 7 and 11 of that Act. Coopers and Lybrand L.L.P. Boston, Massachusetts November 15, 1994 42 [ARTICLE] 5 [MULTIPLIER] 1,000 [PERIOD-TYPE] 9-MOS [FISCAL-YEAR-END] JAN-28-1995 [PERIOD-END] OCT-29-1994 [CASH] 8,988 [SECURITIES] 0 [RECEIVABLES] 68,478 [ALLOWANCES] (5,905) [INVENTORY] 474,208 [CURRENT-ASSETS] 551,731 [PP&E] 169,346 [DEPRECIATION] (15,574) [TOTAL-ASSETS] 1,020,645 [CURRENT-LIABILITIES] 366,484 [BONDS] 160,000 [COMMON] 105 [PREFERRED-MANDATORY] 69,661 [PREFERRED] 0 [OTHER-SE] 267,433 [TOTAL-LIABILITY-AND-EQUITY] 1,020,645 [SALES] 1,198,441 [TOTAL-REVENUES] 1,198,441 [CGS] 856,027 [TOTAL-COSTS] 856,027 [OTHER-EXPENSES] 300,641 [LOSS-PROVISION] 559 [INTEREST-EXPENSE] 28,633 [INCOME-PRETAX] 13,140 [INCOME-TAX] 6,176 [INCOME-CONTINUING] 6,964 [DISCONTINUED] 0 [EXTRAORDINARY] 0 [CHANGES] 0 [NET-INCOME] 6,964 [EPS-PRIMARY] 0.49 [EPS-DILUTED] 0.47
43 EX-99.G.3 13 PRO FORMA FINANCIALS Exhibit (G)(3) HILLS STORES COMPANY AND SUBSIDIARIES CONSOLIDATED PRO FORMA FINANCIAL INFORMATION The following unaudited pro forma financial information sets forth the consolidated financial position and the results of operations for the Company and its subsidiaries assuming the Company's solicitation of consents (the "Consent Solicitation") from the holders of the 10.25% Senior Notes due 2003 of the Company (the "Senior Notes") relating to an amendment to the Indenture dated as of October 1993, among the Company, Hills Department Store Company, as guarantor, and Fleet Bank of Massachusetts, N.A., as Trustee (the "Indenture") to modify the Indenture's restricted payments limitation and the Company's repurchase of up to three million shares of its common stock, par value $.01 per share, ("Common Stock"), at $25.00 per share (the "Tender Offer") were consummated as of the respective dates of the pro forma balance sheets set forth below and as of January 31, 1993 for the pro forma statements of operations. The pro forma financial information assumes that consents to the adoption of an amendment to the Indenture's restricted payments limitation have been received and also reflects the effects of (i) a full payment of $2.4 million to the holders of Senior Notes in accordance with the terms of the Consent Solicitation (which full payment assumes that $160 million principal amount of Senior Notes are outstanding and that all holders of the Senior Notes were paid pursuant to the Consent Solicitation), (ii) a pro rata tender of Common Stock and Series A Convertible Preferred Stock, par value $.10 per share of the Company (the "Series A Preferred Stock"), (iii) the repurchase of three million shares of Common Stock for $25.00 per share in cash in accordance with the terms of the Tender Offer, and, for purposes of the pro forma financial information at October 29, 1994, (iv) borrowings under the working capital facility of Hills Department Store Company, the Company's principal operating subsidiary (the "Credit Facility") in order to fund the repurchase of Common Stock in accordance with the terms of the Tender Offer. Pro forma adjustments include only those items directly related to these transactions which are expected to have a recurring impact on the operations of the Company. The Company anticipates funding the actual purchase of shares of Common Stock pursuant to the Offer with cash on hand at the time of purchase. The pro forma financial information set forth below is not necessarily indicative of the results of operations or the financial position which would have been attained had the transactions been consummated on any of the foregoing dates or which may be attained in the future. The pro forma statements of operations for the fiscal year ended January 29, 1994, also include pro forma adjustments relating to the Company's emergence from Chapter 11 bankruptcy proceedings on October 4, 1993, in order to reflect: the combination of pre-emergence and post-emergence accounting periods, the implementation of fresh-start reporting on January 31, 1993; elimination of the effects of non-recurring transactions resulting from the reorganization included in the results of the Company's predecessor; and payments to creditors in connection with such emergence from bankruptcy proceedings as of January 31, 1993. For further information, refer to Note 3 in Notes to Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the fiscal year ended January 29, 1994. The historical results of operations for the thirty-nine weeks ended October 29, 1994, are not necessarily indicative of the results of operations to be expected for a full year because the Company's business is seasonal in nature. The fourth quarter of each fiscal year provides the major portion of the Company's annual sales and operating earnings, with operating earnings particularly concentrated in the Christmas selling season. The following pro forma information should be read in conjunction with the historical consolidated financial statements set forth in the Company's Annual Report on Form 10-K for the fiscal year ended January 29, 1994, and in the Company's Quarterly Report on Form 10-Q for the quarterly period ended October 29, 1994. HILLS STORES COMPANY AND SUBSIDIARIES PRO FORMA CONSOLIDATED BALANCE SHEET (UNAUDITED)
Pro Forma --------------------------- Historical October 29, October 29, 1994 Adjustments 1994 ----------------------------------------- (in thousands) ASSETS Current assets: Cash and cash equivalents $ 8,988 $ (2,400)(1) $ 6,588 75,000 (3) (75,000)(4) Trade receivables, net 62,573 62,573 Inventories 474,208 474,208 Other current assets 5,962 5,962 Total current assets 551,731 (2,400) 549,331 Property and equipment, net 153,772 153,772 Property under capital leases, net 126,692 126,692 Beneficial lease rights, net 9,282 9,282 Other assets, net 9,179 2,400 (1) 11,579 Reorganization value in excess of amounts allocable to identifiable assets, net 169,989 169,989 ---------------------------------------- $1,020,645 $ - $1,020,645 ======================================== LIABILITIES AND COMMON SHAREHOLDERS' EQUITY Current liabilities: Short-term borrowings $ - $ 75,000 (3) $ 75,000 Current portion of capital leases 5,532 5,532 Accounts payable, trade 173,990 173,990 Other accounts payable and accrued expenses 186,962 186,962 ---------------------------------------- Total current liabilities 366,484 75,000 441,484 Senior notes 160,000 160,000 Obligations under capital leases 126,525 126,525 Other liabilities 30,437 30,437 Commitments and contingencies - - Preferred stock, at mandatory redemption value 69,661 (14,927)(2) 54,734 Common shareholders' equity: Common stock 105 7 (2) 82 (30)(4) Additional paid-in capital 224,234 14,920 (2) 164,184 (74,970)(4) Retained earnings 43,199 43,199 ---------------------------------------- Total common shareholders' equity 267,538 (60,073) 207,465 ---------------------------------------- $1,020,645 $ - $1,020,645 ======================================== Book value per share $ 25.44 $ 27.60 ========== ==========
See Notes to Pro Forma Consolidated Balance Sheets on page 4. 2 HILLS STORES COMPANY AND SUBSIDIARIES PRO FORMA CONSOLIDATED BALANCE SHEET (UNAUDITED)
Pro Forma ---------------------------- Historical January 29, January 29, 1994 Adjustments 1994 ------------------------------------------- (in thousands) ASSETS Current assets: Cash and cash equivalents $ 90,049 $ (2,400)(1) $ 12,649 (75,000)(4) Trade receivables, net 23,368 23,368 Inventories 326,465 326,465 Other current assets 4,647 4,647 ------------------------------------------- Total current assets 444,529 (77,400) 367,129 Property and equipment, net 132,431 132,431 Property under capital leases, net 134,476 134,476 Beneficial lease rights, net 9,902 9,902 Other assets, net 9,555 2,400 (1) 11,955 Goodwill, net - - Reorganization value in excess of amounts allocable to identifiable assets, net 176,728 176,728 ------------------------------------------- $907,621 $(75,000) $832,621 =========================================== LIABILITIES AND COMMON SHAREHOLDERS' EQUITY Current liabilities: Current portion of capital leases $ 5,532 $ 5,532 Accounts payable, trade 64,192 64,192 Other accounts payable and accrued expenses 203,365 203,365 ------------------------------------------- Total current liabilities 273,089 273,089 Senior notes 160,000 160,000 Obligations under capital leases 130,626 130,626 Other liabilities 13,671 13,671 Commitments and contingencies - - Preferred stock, at mandatory redemption value 100,000 (21,429)(2) 78,571 Common shareholders' equity: Common stock 90 11 (2) 71 (30)(4) Additional paid-in capital 193,910 21,418 (2) 140,358 (74,970)(4) Retained earnings 36,235 36,235 ------------------------------------------- Total common shareholders' equity 230,235 (53,571) 176,664 ------------------------------------------- $907,621 $(75,000) $832,621 =========================================== Book value per share $ 25.58 $ 24.98 =========== ========
See Notes to Pro Forma Consolidated Balance Sheets on page 4. 3 Notes to Pro Forma Consolidated Balance Sheets (1) Reflects payment to the holders of the Senior Notes in order to obtain their consent to the proposed transaction. The amount would be amortized over the remaining term of the Senior Notes. (2) Reflects the conversion of preferred shares to common shares pursuant to the Tender Offer assuming the shares outstanding at January 29, 1994, and October 29, 1994, are tendered ratably. (3) Reflects borrowings through the Company's Credit Facility in order to fund the Tender Offer. The Company anticipates funding the actual purchase of shares of Common Stock pursuant to the Offer with cash on hand at the time of purchase. (4) Reflects the repurchase of 3,000,000 common shares at $25 per share. 4 HILLS STORES COMPANY AND SUBSIDIARIES PRO FORMA STATEMENT OF OPERATIONS (UNAUDITED) Thirty-nine Weeks Ended October 29, 1994
Historical Pro Forma Pro Forma 1994 Adjustments 1994 ---------------------------------------- (in thousands, except per share amounts) Net sales $1,198,441 $ -- $ 1,198,441 Cost of sales 856,027 -- 856,027 Selling and administrative expenses 276,373 -- 276,373 Depreciation and amortization 26,338 -- 26,338 ---------------------------------------- Operating earnings 39,703 -- 39,703 Capital lease interest (11,085) -- (11,085) Other interest (17,548) (3,042)(2) (20,590) Other income, net 2,070 (894)(3) 1,176 ---------------------------------------- Earnings before income taxes 13,140 (3,936) 9,204 Income taxes 6,176 (1,850)(4) 4,326 ---------------------------------------- Net earnings applicable to common shareholders $ 6,964 $ (2,086) $ 4,878 ======================================== Primary earnings per share applicable to common shareholders $ 0.49 $ 0.44 =========== ============ Fully-diluted earnings per share applicable to common shareholders $ 0.47 $ 0.41 =========== ============ Weighted average shares: Primary shares outstanding 14,097 11,097 =========== ============ Fully-diluted shares outstanding 14,797 11,797 =========== ============ Ratio of earnings to fixed charges 1.31 1.20 =========== ============
See Notes to Pro Forma Statements of Operations on page 7. 5 HILLS STORES COMPANY AND SUBSIDIARIES PRO FORMA STATEMENT OF OPERATIONS (UNAUDITED) Year Ended January 29, 1994
Historical Adjusted Pro Forma Pro Forma 1994 (1) Adjustments 1994 ----------------------------------------- (in thousands, except per share amounts) Net sales $1,765,533 $ -- $1,765,533 Cost of sales 1,259,950 -- 1,259,950 Selling and administrative expenses 378,357 -- 378,357 Depreciation and amortization 34,761 -- 34,761 ----------------------------------------- Operating earnings 92,465 -- 92,465 Capital lease interest (15,141) -- (15,141) Other interest (23,138) (3,789) (2) (26,927) Other income, net 3,692 (1,035) (3) 2,657 ----------------------------------------- Earnings before income taxes 57,878 (4,824) 53,054 Income taxes 27,837 (2,316) (4) 25,521 ----------------------------------------- Net earnings applicable to common shareholders $ 30,041 $(2,508) $ 27,533 ========================================= Primary earnings per share applicable to common shareholders $ 2.14 $ 2.49 =========== ========== Fully-diluted earnings per share applicable to common shareholders $ 2.03 $ 2.33 =========== ========== Weighted average shares: Primary shares outstanding 14,056 11,056 =========== ========== Fully-diluted shares outstanding 14,794 11,794 =========== ========== Ratio of earnings to fixed charges 2.06 1.91 =========== ==========
See Notes to Pro Forma Statements of Operations on page 7. 6 Notes to Pro Forma Statements of Operations (1) The Historical Adjusted information presented for the year ended January 29, 1994, includes pro forma adjustments related to the Company's emergence from Chapter 11 bankruptcy proceedings on October 4, 1993. For further information, refer to Note 3 in Notes to Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the fiscal year ended January 29, 1994. (2) Represents interest expense under the Credit Facility related to borrowings to fund the Tender Offer and the payment of consent fees and the amortization of the deferred financing costs related to consent fees. (3) Reflects the impact on interest income of the Tender Offer and the payment of consent fees. (4) Reflects the income tax effect of the pro forma adjustments. 7 -----END PRIVACY-ENHANCED MESSAGE-----