Annual Report — [x] Reg. S-K Item 405 — Form 10-K
Filing Table of Contents
Document/Exhibit Description Pages Size
1: 10-K405 Hills Stores Company Form 10-K 46 274K
2: EX-3.1 Amended & Restated Certificate of Incorporation 4 17K
3: EX-3.2 Amendment to Certificate of Incorporation 2± 9K
4: EX-10.12 Form of Employment Agreements 13 55K
5: EX-10.13 Consulting Agreement 8 43K
6: EX-11.1 Computation of Earnings Per Share 2 16K
7: EX-21 Subsidiaries 1 6K
8: EX-23 Consent of Coopers & Lybrand LLP 1 7K
9: EX-24 Powers of Attorney 2± 11K
10: EX-27 Financial Data Schedule 1 10K
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 28, 1995
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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
15 DAN ROAD, CANTON, MASSACHUSETTS 02021
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(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:
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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:
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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, 1995 was $130,836,992 with respect to the Common
Stock and $30,104,560 with respect to the Series A Convertible Preferred Stock,
which has coextensive voting rights with the Common Stock.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
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
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The number of shares of Common Stock outstanding as of March 31, 1995 was
9,286,462.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this report on Form 10-K is incorporated by reference from the
proxy statement dated May 5, 1995 for the annual meeting of security holders to
be held on June 12, 1995.
2
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TABLE OF CONTENTS
PART I
ITEM 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
(a) General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
(b) Merchandising . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
(c) Purchasing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
(d) Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
(e) Store Operations and Management . . . . . . . . . . . . . . . . . . . . . . . . . 5
(f) Management Information and Control Systems . . . . . . . . . . . . . . . . . . . . 5
(g) Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
(h) Trademarks and Service Marks . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
(i) Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
(j) Reorganization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
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 . . . . . . . . . . . . . . . . 7
Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . . . . . 7
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
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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) 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 every day low prices on all items. 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, strict operating
controls and an accelerated growth plan.
Hills stores are located in cities and towns of varying sizes, with some of the
larger cities being Pittsburgh, Buffalo, Cleveland and Richmond. The Company
concentrates its stores in selected markets within a geographic region in order
to reinforce marketing programs, enhance name recognition, achieve market
penetration, and gain economies of scale in management, advertising and
distribution. Hills' expansion program is currently directed mainly to the
Tidewater area of Virginia and the north central region of North Carolina.
The Company has remodeled 80% of its stores in the last three years and expects
to complete the chain-wide store remodeling program by June 1, 1995. The
program is designed to make its stores more visually appealing to customers and
to take full advantage of the most profitable merchandise categories.
b) 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 and selected hardware departments such as
housewares, toys and seasonal merchandise which appeal to Hills' targeted
female customer. The Company considers the depth of its merchandise in these
departments to be an important factor in attracting and retaining female
customers, and accordingly emphasizes the availability of a wide selection of
sizes, styles and colors of items in these departments.
Hills carries a diverse line of products, all first quality, including a full
line of clothing and footwear for women, men and children, toys, health and
beauty aids, small household appliances and housewares, home entertainment
equipment, hardware, stationery and greeting cards, automotive supplies, lawn
and garden products and jewelry. Hills offers a broad range of brand name
apparel and other products for the family and supplements brand name goods with
manufacturers' private brands (brands made by major manufacturers but not
nationally advertised) and Hills' private label program. The Company accepts
all major consumer credit cards and offers a year-round layaway program for
those customers who do not rely on credit cards.
As part of its merchandise strategy, Hills primarily endeavors to purchase
goods that are made in the
4
U.S.A. and has developed a special merchandise program using its "American
Spirit" trademark to help market that concept to customers. Imported goods are
purchased by Hills from an importing subsidiary and from unaffiliated sources.
In fiscal year 1994, the subsidiary, CRH International, Inc., imported products
that accounted for approximately 6.0% of total purchases of the Hills
Department Stores chain.
c) PURCHASING
----------
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 merchandising
decisions. The formats of these plans are programmed into computer planning
systems for each department.
d) DISTRIBUTION
------------
The Company's central distribution facilities are located in Columbus, Ohio.
These facilities provide central stocking of inventory and flow-through
allocation of inventory for delivery to the stores, resulting in efficient
inventory management. Significant reductions in store receiving expense are
achieved by performing many product handling functions at the central
facilities. Further improvements in equipment and facilities are underway to
support the growing number of Hills stores to be served.
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 standards and freight
activity allocates more payroll dollars to sales generating positions, while
reducing overall payroll expense. The Company has also given renewed attention
to evaluating the sales and profit potential of specialty businesses, such as
optical shops and fast food purveyors.
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. Store managers and associates
are empowered to respond directly to the needs of the customers. The Company
maintains a strategic field office near Pittsburgh to facilitate store
visitations and reduce travel expenses, particularly by those associates with
greater responsibilities for store performance.
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 point of sale registers and
bar code readers in all stores eliminate labor intensive price marking and
price changes. The sales data is transmitted nightly to the Company's
mainframe computer
5
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
scheduling systems, accounts payable, price change management and layaway
control. The purpose of these systems is to promote timely and accurate
communication among all Hills locations and to allow personnel at the Company's
headquarters to monitor and control key store activity.
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, such as Wal-Mart and K Mart, are larger
and better capitalized than Hills. 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 allows it to defend its competitive position, even
with Wal-Mart's presence in most of the Company's markets. The Company
believes it was the 8th largest general merchandise discount retailer in the
United States in 1994 as measured by sales revenue.
h) TRADEMARKS AND SERVICE MARKS
----------------------------
The "Hills" name is a registered service mark. The Company considers this mark
and the associated name recognition to be valuable to its business. The
Company has additional trademarks, trade names and service marks, many of
which, such as "American Spirit", are used in connection with the Company's
private label program. Although the Company considers these additional marks
to be valuable in the aggregate, individually, they have varying degrees of
importance to the Company's business.
i) EMPLOYEES
---------
As of March 31, 1995, Hills employed approximately 19,500 persons, including
approximately 12,500 full-time and 7,000 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.
j) REORGANIZATION
--------------
On October 4, 1993 (the "Effective Date"), Hills emerged from reorganization
proceedings under Chapter 11 of the United States Bankruptcy Code ("Chapter
11"). 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.
Pursuant to the plan of reorganization, the Predecessor Company was dissolved
and Hills succeeded to and assumed 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 October 4, 1993.
Pre-petition claims and interests were cancelled in exchange for cash, senior
notes, common stock, preferred stock, stock rights and stock warrants.
6
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.
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.
ITEM 2. PROPERTIES
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STORE LOCATIONS AND LEASES
--------------------------
Hills operates 156 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 the buying
office in New York, New York, and its central distribution facilities in
Columbus, Ohio.
The typical store lease has an initial term of between 20 and 30 years, with
four to seven renewal periods of five years each, exercisable at the Company's
option. Substantially all of the Company's leases provide for a minimum annual
rent that is constant or adjusts to fixed levels through the lease term,
including renewal periods. Most leases provide for additional rent based on a
percentage of sales to be paid when designated sales levels are achieved. See
Note 9 of Notes to Consolidated Financial Statements for additional information
about the Company's long-term leases.
ITEM 3. LEGAL PROCEEDINGS
-----------------
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.
On March 20, 1995, the Court of Chancery of the State of Delaware approved the
settlement agreement entered into by the plaintiff and the defendants in the
previously reported stockholders' derivative and class action lawsuit captioned
Weiss v. Lee, et al. The plaintiff had named each member of the Board and the
Company as defendants. The plaintiff's counsel are awarded fees of $379,000,
to be paid by the Company. In addition, minor modifications made to the
employment contracts of executives and the consulting contract with Mr.
Matthews became effective upon the Court's approval of the settlement
agreement.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
At a special meeting on January 18, 1995 the Company's stockholders voted to
amend its corporate charter to require that all stockholder actions be taken at
annual or special meetings of stockholders. Of the total votes cast, 9,236,219
were for the amendment, 999,197 were against the amendment and 30,307
abstained. There were 1,882,482 broker non-votes.
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, 54, 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
7
Executive Officer from 1987 to 1990 of the Sears Merchandising Group.
Kim D. Ahlholm, 38, 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, 37, 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, 48, is and since December 1985 has been Vice
President-Secretary and Corporate Counsel of Hills.
John G. Reen, 45, 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, 52, 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, 52, 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.
Robert J. Stevenish, 51, was elected Executive Vice President-Store and
Distribution Operations in April, 1994. He had been Executive Vice
President-Store Operations since November 1992. 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
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(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 28, 1995, 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.
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COMMON STOCK PRICES
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Quarter Ended High Price Low Price
January 28, 1995 $21.625 $19.375
October 29, 1994 $23.000 $20.125
July 30, 1994 $21.000 $18.000
April 30, 1994 $21.750 $19.000
January 29, 1994 $22.250 $17.875
October 30, 1993 $21.625 $20.250
<FN>
(b) As of March 31, 1995, there were outstanding 9,286,462 shares of Common
Stock held by approximately 1,710 holders of record, and 1,505,683 shares of
Series A Convertible Preferred Stock held by approximately 1,529 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. The Company's Senior
Notes Indenture also has restrictions on the payment of cash dividends. See
Notes 7 and 8 of Notes to Consolidated Financial Statements.
9
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ITEM 6. SELECTED FINANCIAL DATA
-----------------------
The Company emerged from Chapter 11 proceedings on October 4, 1993. For
financial reporting purposes, the Company adopted fresh- start reporting as of
October 2, 1993. Under fresh-start reporting, a new reporting entity is
created and recorded amounts of assets and liabilities are adjusted to reflect
their estimated fair values. Financial data prior to October 2, 1993 has been
designated as those of the Predecessor Company. Black lines have been drawn to
separate the Successor Company financial data from the Predecessor Company
financial data to signify that they are those of a new reporting entity and
have been prepared on a basis not comparable to prior periods (see Notes 1, 2
and 3 of Notes to Consolidated Financial Statements).
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Successor Company Predecessor Company
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Fiscal Seventeen Thirty-five
Year Weeks Ended Weeks Ended
(in thousands, except per share amounts and number of stores) 1994 January 29, 1994 October 2, 1993
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Net sales $1,872,021 $772,685 || $ 992,848
||
Gross profit $ 531,800 $223,034 || $ 282,549
||
Net earnings (loss) applicable to ||
common shareholders before extraordinary items $ 40,431 $ 36,235 || $ (9,747)
||
Net earnings (loss) applicable to common shareholders $ 40,431 $ 36,235 || $ 248,492 (2)
||
Fully-diluted earnings (loss) per common share $ 2.73 $ 2.45 || $ 11.30 (3)
||
Fully-diluted average shares outstanding 14,832 14,794 || 21,982
||
FINANCIAL POSITION: ||
||
Total assets $ 992,378 $907,621 || $ 972,838 (6)
||
Working capital $ 241,486 $171,440 || $ 301,980 (6)
||
Liabilities subject to compromise (4) $ - $ - || $ 775,169 (6)
||
Long-term obligations $ 185,169 $160,000 || $ - (6)
||
Long-term obligations under capital leases $ 124,508 $130,626 || $ 122,230 (6)
||
Redeemable preferred stock $ 64,144 $100,000 || $ 33,143 (6)
||
Common shareholders' equity (deficit) $ 306,741 $230,235 || $(186,934)(6)
||
Number of stores operated at period end 154 151 || 151
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Predecessor Company
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Fiscal Fiscal Fiscal
Year Year Year
(in thousands, except per share amounts and number of stores) 1992 1991 1990
------------------------------------------------------------------------------------------------------------------
Net sales $ 1,750,266 $ 1,679,866 $ 2,140,868
Gross profit $ 500,454 $ 465,776 $ 580,706
Net earnings (loss) applicable to
common shareholders before extraordinary items $ 24,385 $ 7,637 $ (276,415)(1)
Net earnings (loss) applicable to common shareholders $ 47,264 $ 20,117 $ (276,415)(1)
Fully-diluted earnings (loss) per common share $ 2.15(3) $ 0.92 (3) $ (14.45)
Fully-diluted average shares outstanding 21,982 21,982 19,131
FINANCIAL POSITION:
Total assets $ 922,745 $ 846,906 $ 775,227
Working capital $ 299,927 $ 261,007 $ 270,403
Liabilities subject to compromise (4) $ 761,443 $ 771,606 $ 819,094
Long-term obligations $ - $ - $ 7,155
Long-term obligations under capital leases $ 133,457 $ 137,793 $ 137,831
Redeemable preferred stock $ 31,481 $ 29,049 $ 26,654
Common shareholders' equity (deficit) $ ( 183,172) $( 230,446) $ (259,413)
Number of stores operated at period end 154 154 186 (5)
<FN>
(1) Includes a $242.0 million pre-tax provision for store closing and restructuring costs.
(2) Includes a $258.2 million after-tax extraordinary gain on the discharge of prepetition debt.
(3) Fully-diluted earnings per share for fiscal years 1992 and 1991 include extraordinary credits per common share of $1.04 and
$0.57, respectively, attributable to the realization of the benefit of tax loss carryforwards. Fully-diluted earnings per
share for the thirty-five weeks ended October 2, 1993 includes an extraordinary gain per common share of $11.75 on discharge
of prepetition debt.
(4) On February 4, 1991, the Company, its former parent, Hills Department Stores, Inc., and the five principal subsidiaries of
the Company, filed petitions for relief under Chapter 11 of the United States Bankruptcy Code. As a result, the Company
reclassified certain current liabilities to Liabilities subject to compromise at February 3, 1991 (see Note 1 of Notes to
Consolidated Financial Statements).
(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") emerged from reorganization proceedings under
Chapter 11 of the United States Bankruptcy Code ("Chapter 11"). The Company,
its former parent, Hills Department Stores, Inc. (the "Predecessor Company"),
and the five principal subsidiaries of the Company, voluntarily filed petitions
for reorganization under Chapter 11 on February 4, 1991 (the "Filing Date").
The Predecessor Company operated its business as a debtor-in-possession under
Chapter 11 from the Filing Date until October 4, 1993.
The Plan of Reorganization (the "POR") provided for the Predecessor Company to
be dissolved and the Company to succeed to and assume the Predecessor Company's
former status as a holding company (see Note 1 of Notes to Consolidated
Financial Statements).
In conjunction with its emergence from Chapter 11, the Company adopted
fresh-start reporting as of October 2, 1993 in accordance with the American
Institute of Certified Public Accountants Statement of Position 90-7:
"Financial Reporting by Entities in Reorganization under the Bankruptcy Code"
(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 was deemed created for financial reporting purposes.
Accordingly, the consolidated financial statements for the periods subsequent
to October 2, 1993 have been designated "Successor Company" to signify that
they are those of the new entity for financial reporting purposes and have been
prepared on a basis not comparable to prior periods.
To facilitate comparison of the Successor and Predecessor Companies' operating
performances between fiscal years 1994, 1993 and 1992, 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
FISCAL YEAR ENDED JANUARY 28, 1995 (FISCAL 1994) VERSUS
PRO FORMA COMBINED FISCAL YEAR ENDED JANUARY 29, 1994 (FISCAL 1993)
Sales increased 6.0% compared to fiscal 1993. This improvement was primarily
attributable to increased hardlines sales, particularly in toys, all occasion,
and areas associated with the home. In addition, modest gains in apparel
sales, the opening of three new stores, and comparatively strong January 1995
sales due to the unusually bad weather conditions in January of the prior year
also contributed to the sales increase. The strong fiscal 1994 Christmas
season was highlighted by a fourth quarter comparable stores sales increase of
4.7%. Comparable store sales were $1.849 billion in fiscal 1994 versus $1.759
billion in fiscal 1993, a 5.1% increase.
Cost of sales as a percentage of sales was 71.6% in fiscal 1994 compared to
71.4% in fiscal 1993. The increase of 0.2% is due to a higher rate of
markdowns, particularly in the apparel market, and an increase
11
RESULTS OF OPERATIONS (CONTINUED)
FISCAL YEAR ENDED JANUARY 28, 1995 (FISCAL 1994) VERSUS
PRO FORMA COMBINED FISCAL YEAR ENDED JANUARY 29, 1994 (FISCAL 1993) (CONTINUED)
in the provision for inventory shortage. These were partially offset by an
improved purchase markup and an improvement in logistics costs due to
operational efficiencies achieved at the Company's distribution center, which
became fully operational in July 1993.
Selling and administrative expenses as a percentage of sales was 20.9% in
fiscal 1994 compared to 21.4% in fiscal 1993, a 0.5% decrease. This
improvement was primarily a result of the Company's focus on cost reduction,
principally in payroll and payroll related expenses. This is the third
consecutive year in which the Company has reduced selling and administrative
expenses as a percentage of sales. A $4.5 million gain from the elimination of
pension obligations, which were replaced by a company matching 401(k) plan, was
also included in selling and administrative expenses.
Other income was $9.2 million in fiscal 1994 compared to $3.7 million in fiscal
1993, a $5.5 million increase. This increase was primarily due to a fourth
quarter reversal of liabilities established in "fresh-start" accounting
totalling $9.6 million which was partially offset by $2.2 million paid to the
holders of the Company's Senior Notes in connection with the Company's
self-tender for shares of its common stock (see Note 20 of Notes to
Consolidated Financial Statements) and $2.2 million of additional amortization
of deferred financing costs.
The Company's effective tax rate was 47.0% in fiscal 1994 compared to 48.1% in
fiscal 1993, a 1.1% decrease resulting principally from the decrease in
non-deductible goodwill amortization as a percentage of the related pre-tax
earnings.
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.
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.
12
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)
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.
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
28, 1995. 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
fresh-start reporting as of October 2, 1993.
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 other banks for
$225 million, of which up to $75 million is available as a letter of credit
facility (see Note 7 of Notes to Consolidated Financial Statements). All of
the common stock of the Company's subsidiaries are pledged as collateral for
the Facility, which is guaranteed by the Company. The Company had borrowings
under the Facility for four days during fiscal 1994 and there was no
outstanding balance at January 28, 1995. During the fiscal year ended January
28, 1995, average borrowings approximated $88,000 at an average interest rate
of 9.25%, with peak borrowings at $8.0 million. Additionally, the Company met
the economic performance requirements as defined in the Facility and qualified
for a 1/4% interest rate reduction effective August 1, 1994. In fiscal 1995,
there have not been any borrowings under the Facility through the date of this
filing. The Company is in compliance with all of the Facility's restrictive
covenants as of January 28, 1995.
The Company also has significant lease commitments which require cash outflows.
Operating and capital lease payments in fiscal 1995, including rentals based on
sales, are expected to approximate $57.9 million.
In fiscal 1994, the Company obtained $25.2 million of financing for certain of
its real properties through sale/leaseback arrangements (see Note 10 of Notes
to Consolidated Financial Statements).
To facilitate comparisons of cash flow information of the Successor and
Predecessor companies, the following discussion is presented using the combined
cash flow information of the Successor and Predecessor companies for the
fifty-two weeks ended January 29, 1994. Fresh-start reporting has no
13
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
GENERAL (CONTINUED)
[Enlarge/Download Table]
impact on cash flow information. A summary of cash flow information and
financial position is presented below (in thousands):
Combined
Successor and
Successor Predecessor Predecessor
Company Companies Company
Fiscal Year Fifty-two Fiscal Year
Ended Weeks Ended Ended
January 28, January 29, January 30,
1995 1994 1993
-------------------------------------------------------------------------------------------------------------
Cash and cash equivalents
at beginning of period $ 90,049 $ 173,343 $ 113,907
Net cash provided by operating activities 124,612 50,022 105,587
Capital expenditures ( 38,458) ( 30,232) ( 40,066)
Principal payments under capital lease
obligations ( 5,529) ( 5,126) ( 4,806)
Sale/leaseback financing 25,169 - -
Cash distributions pursuant to the POR ( 14,419) ( 90,318) -
Other investing activities - - 780
Other financing activities ( 1,373) ( 7,640) ( 2,059)
---------- ---------- ----------
Cash and cash equivalents
at end of period $ 180,051 $ 90,049 $ 173,343
========== =========== ==========
Working capital at end of period $ 241,486 $ 171,440 $ 299,927
========== =========== ==========
The Company's working capital as of January 28, 1995 increased by $70.0 million
from January 29, 1994. This increase is principally due to net cash provided
by operations and cash from the sale/leaseback transactions, partially offset
by capital expenditures.
Net cash provided by operating activities for the fiscal year ended January 28,
1995 increased $74.6 million compared to fiscal year ended January 29, 1994.
This increase is primarily due to a decrease in inventories from fiscal 1993
due to the Company's emphasis during the year on improving inventory turnover
and an increase from fiscal 1993 in days accounts payable outstanding due to
normal seasonal factors, reduced by an increase in deferred tax assets of $31.0
million. Over the past four years, the Company has generated positive cash
flows from operations in excess of its capital expenditure requirements.
Capital expenditures, primarily for the remodeling and upgrading of existing
stores and the opening of five new stores, were $38.5 million during fiscal
1994. The Company expects to complete the remainder of its store remodeling
program in fiscal 1995. During fiscal 1995, capital expenditures are expected
to approximate $65 million, with 10 to 15 new store openings.
In August 1994, Dickstein Partners, L.P., et al. ("Dickstein") commenced a
consent solicitation to replace four members of the Board of Directors with
Dickstein nominees (see Note 19 of Notes to Consolidated Financial Statements).
In response to the consent solicitation, the Company's Board of Directors
announced a program to enhance shareholder value, including the approval of a
self-tender for three million shares of the Company's common stock for $25 per
share (see Note 20 of Notes to Consolidated
14
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
GENERAL (CONTINUED)
Financial Statements) and the implementation of a growth program which includes
remodeling, opening new stores, and the continuation of operating improvement
programs. The Company completed the self-tender offer in March 1995 and
purchased, with cash on hand, three million shares of common stock for $75.0
million.
Management believes that amounts available under the Company's current
borrowing agreement, together with cash from operations, will enable the
Company to fund its current liquidity and capital expenditure requirements.
OTHER MATTERS
SEASONALITY
The Company's business is highly seasonal due to increased consumer buying for
back-to-school needs and Christmas. The second half of each year provides the
major portion of the Company's annual sales and operating earnings with
operating earnings particularly concentrated in the Christmas selling season.
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-23.
[Enlarge/Download Table]
Information called for by this item can be found at the pages listed in the following index.
INDEX TO FINANCIAL STATEMENTS
Hills Stores Company and Subsidiaries Page
----
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 May 5, 1995 for the annual meeting of stockholders
to be held June 12, 1995, 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 May 5, 1995 for the annual meeting of stockholders to
be held June 12, 1995.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
Incorporated by reference from the item entitled "Beneficial Ownership" in the
proxy statement dated May 5, 1995 for the annual meeting of stockholders to be
held June 12, 1995.
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 May 5, 1995 for the annual meeting of stockholders to be held June 12,
1995.
16
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
---------------------------------------------------------------
[Download Table]
(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 schedule
I Report of Independent Accountants S-1
II Valuation and Qualifying Accounts S-2
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 Amended and Restated Certificate of Incorporation of the Company,
dated September 27, 1993.
3.2 Amendment dated January 18, 1995 to the Certificate of Incorporation
of the Company.
3.3 (6) Amended and Restated By-Laws of the Company.
4.1 (1) Certificate of the Voting Powers, Preferences and other designated
attributes of the Series A Convertible Preferred Stock of the Company.
4.2 (5) Form of Series 1993 Stock Right.
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.
17
4.5 (6) Rights Agreement dated as of August 16, 1994 between the Company and
Chemical Bank, as Rights Agent.
4.6 (6) Form of Certificate of the Voting Powers, Preferences and other
designated attributes of Series B Participating Cumulative Preferred
Stock of the Company (which is attached as Exhibit A to the Rights
Agreement incorporated by reference as Exhibit 4.5 hereto).
4.7 (6) Form of Right Certificate (which is attached as Exhibit B to the
Rights Agreement incorporated by reference as Exhibit 4.5 hereto).
10.1 (4)* Employment Agreement with Michael Bozic, dated March 10, 1993.
10.2 (4)* Consulting Agreement with Norman S. Matthews, dated March 10, 1993.
10.3 (4)* Form of individual Employment Agreements entered into in March 1993
with, respectively, Messrs. Reen, Samuto, Smailes and Stevenish.
10.4 (6)* Form of Employment Agreement made as of August 19, 1994 with Michael
Bozic.
10.5 (6)* Form of Employment Agreement made as of August 19, 1994 with
Andrew J. Samuto.
10.6 (6)* Form of Employment Agreement made as of August 19, 1994 with
John G. Reen.
10.7 (6)* Form of Employment Agreement made as of August 19, 1994 with E.
Jackson Smailes.
10.8 (6)* Form of Employment Agreement made as of August 19, 1994 with
Robert J. Stevenish.
10.9 (6)* Form of Consulting Agreement made as of August 19, 1994 with
Norman S. Matthews.
10.10(5)* 1993 Incentive and Nonqualified Stock Option Plan.
10.11(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 ("Chemical Bank Agreement").
10.12* Form of individual Employment Agreements dated September 30, 1994
with, respectively, Messrs. Bozic, Reen, Samuto, Smailes and
Stevenish, accompanied by Schedule A from each individual agreement
setting forth the office, term, compensation, etc., applicable to
each such person.
10.13* Consulting Agreement with Norman S. Matthews dated September 30,
1994.
11.1 Computation of earnings per share.
21 Subsidiaries.
23 Consent of Coopers & Lybrand.
24 Powers of Attorney of directors and officers of the Company.
27 Financial Data Schedule.
____________________
* Executive Compensation Plans and Arrangements.
18
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.
5. Incorporated by reference from the Annual Report on Form 10-K of the
Company for the fiscal year ended January 29, 1994.
6. Incorporated by reference from the Form 8-K of the Company dated
August 23, 1994.
19
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 14, 1995.
HILLS STORES COMPANY
By: /s/ William K. Friend
------------------------
William K. Friend
Vice President-Secretary
[Enlarge/Download Table]
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 14, 1995
* Director, President and
---------------------------- Chief Executive Officer of the Company
Michael Bozic and Hills Department Store Company
(Principal Executive Officer) April 14, 1995
* Director and Executive Vice President-
---------------------------- Chief Financial Officer (Principal Financial
John G. Reen Officer) of the Company and Hills Department
Store Company
April 14, 1995
* Director of the Company
---------------------------- and Hills Department Store Company April 14, 1995
Susan E. Engel
* Director of the Company
---------------------------- and Hills Department Store Company April 14, 1995
Richard B. Loynd
* Director of the Company
---------------------------- and Hills Department Store Company April 14, 1995
Norman S. Matthews
* Director of the Company
---------------------------- and Hills Department Store Company April 14, 1995
James L. Moody, Jr.
* Vice President-Controller (Principal Accounting
---------------------------- Officer) of the Company and Hills Department
Kim D. Ahlholm Store Company April 14, 1995
*By: /s/ William K. Friend
----------------------------
William K. Friend
Attorney-In-Fact
20
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 28, 1995, and January 29, 1994, and the
related consolidated statements of operations, cash flows and common
shareholders' equity for the year ended January 28, 1995, the seventeen week
period ended January 29, 1994, the thirty-five week period ended October 2,
1993 and the year 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 28, 1995, and January 29, 1994 and the
consolidated results of its operations and its cash flows for the year ended
January 28, 1995, the seventeen week period ended January 29, 1994, the
thirty-five week period ended October 2, 1993 and the year 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 statement of operations for the year ended January 28, 1995 and for
the seventeen week period ended January 29, 1994 are not comparable to the
Company's consolidated statements of operations for prior periods.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
March 10, 1995
F-1
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HILLS STORES COMPANY AND SUBSIDIARIES
-----------------------------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
January 28, January 29,
(dollars in thousands) 1995 1994
-----------------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 180,051 $ 90,049
Trade receivables, less allowance for doubtful accounts
of $4,228 and $5,497 23,471 23,368
Inventories 313,851 326,465
Deferred tax asset (Note 17) 20,923 -
Other current assets 4,743 4,647
----------- ----------
Total current assets 543,039 444,529
Property and equipment, net (Note 5) 154,950 132,431
Property under capital leases, net (Note 9) 124,108 134,476
Beneficial lease rights, net (Note 4) 9,075 9,902
Other assets, net 6,380 9,555
Deferred tax asset (Note 17) 10,061 -
Reorganization value in excess of amounts allocable to
identifiable assets, net (Note 4) 144,765 176,728
----------- ----------
$ 992,378 $ 907,621
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of capital leases (Note 9) $ 6,121 $ 5,532
Accounts payable, trade 82,943 64,192
Other accounts payable and accrued expenses (Note 6) 212,489 203,365
----------- ----------
Total current liabilities 301,553 273,089
Senior notes (Note 8) 160,000 160,000
Obligations under capital leases (Note 9) 124,508 130,626
Financing obligation - sale/leaseback (Note 10) 25,169 -
Other liabilities 10,263 13,671
Commitments and contingencies (Note 19) - -
Preferred stock, at mandatory redemption value (Note 12) 64,144 100,000
Common shareholders' equity (Notes 13 and 14):
Common stock, 50,000,000 shares of $0.01 par value authorized
10,804,784 and 9,000,000 shares issued and outstanding,
respectively 108 90
Additional paid-in capital 229,967 193,910
Retained earnings 76,666 36,235
----------- ----------
Total common shareholders' equity 306,741 230,235
----------- ----------
$ 992,378 $ 907,621
=========== ==========
See Notes to Consolidated Financial Statements
F-2
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HILLS STORES COMPANY AND SUBSIDIARIES
------------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
Successor PRO FORMA Successor
Company COMBINED Company
Fiscal Year FIFTY-TWO Seventeen
Ended WEEKS ENDED Weeks Ended
January 28, JANUARY 29, January 29,
(in thousands, except per share amounts) 1995 1994 1994
----------------------------------------------------------------------------------------------------------------
(UNAUDITED)
(NOTE 3)
Net sales $ 1,872,021 $ 1,765,533 $ 772,685 ||
||
Cost of sales 1,340,221 1,259,950 549,651 ||
||
Selling and administrative expenses 390,397 378,357 138,360 ||
||
Depreciation and amortization 35,648 34,761 11,328 ||
------------ ------------ ---------- ||
Operating earnings 105,755 92,465 73,346 ||
||
Other income (expense): ||
Capital lease interest ( 14,707) ( 15,141) ( 5,029) ||
||
Other interest (Note 1) ( 24,005) ( 23,138) ( 8,112) ||
||
Other income, net 9,241 3,692 2,639 ||
------------ ------------ ---------- ||
( 29,471) ( 34,587) ( 10,502) ||
------------ ------------ ---------- ||
76,284 57,878 62,844 ||
||
Reorganization items, net - - - ||
------------ ------------ ---------- ||
76,284 57,878 62,844 ||
||
Income taxes (Note 17) 35,853 27,837 26,609 ||
------------ ------------ ---------- ||
40,431 30,041 36,235 ||
||
Extraordinary credit - benefit of net operating loss ||
carryforward (Note 17) - - - ||
||
Extraordinary gain on discharge of prepetition ||
debt (Note 1) - - - ||
------------ ------------ ---------- ||
||
Net earnings 40,431 30,041 36,235 ||
||
Preferred dividend requirements - - - ||
------------ ------------ ---------- ||
Net earnings applicable to common shareholders $ 40,431 $ 30,041 $ 36,235 ||
============ ============ ========== ||
Primary earnings (loss) per common share (Note 18): ||
Earnings (loss) before extraordinary items $ 2.87 $ 2.14 $ 2.58 ||
||
Extraordinary credit - benefit of net operating loss ||
carryforward - - - ||
||
Extraordinary gain on discharge of prepetition debt - - - ||
------------ ------------ --------- ||
Net earnings applicable to common shareholders $ 2.87 $ 2.14 $ 2.58 ||
============ ============ ========= ||
Fully-diluted earnings (loss) per common ||
share (Note 18): ||
Earnings (loss) before extraordinary items $ 2.73 $ 2.03 $ 2.45 ||
||
Extraordinary credit - benefit of net operating loss ||
carryforward - - - ||
||
Extraordinary gain on discharge of prepetition debt - - - ||
------------ ------------ --------- ||
Net earnings applicable to common shareholders $ 2.73 $ 2.03 $ 2.45 ||
[Enlarge/Download Table]
Predecessor Company
----------------------------
Thirty-five Fiscal Year
Weeks Ended Ended
October 2, January 30,
(in thousands, except per share amounts) 1993 1993
--------------------------------------------------------------------------------------
Net sales $ 992,848 $ 1,750,266
Cost of sales 710,299 1,249,812
Selling and administrative expenses 239,997 383,581
Depreciation and amortization 27,978 38,959
------------ ------------
Operating earnings 14,574 77,914
Other income (expense):
Capital lease interest ( 10,284) ( 16,151)
Other interest (Note 1) ( 3,364) ( 5,865)
Other income, net 231 635
------------ -------------
( 13,417) ( 21,381)
------------ -------------
1,157 56,533
Reorganization items, net ( 9,242) ( 3,128)
------------ ------------
( 8,085) 53,405
Income taxes (Note 17) - 26,588
------------ ------------
( 8,085) 26,817
Extraordinary credit - benefit of net operating loss
carryforward (Note 17) 22,879
-
Extraordinary gain on discharge of prepetition
debt (Note 1) 258,239 -
------------ ------------
Net earnings 250,154 49,696
Preferred dividend requirements ( 1,662) ( 2,432)
------------ ------------
Net earnings applicable to common shareholders $ 248,492 $ 47,264
============ ============
Primary earnings (loss) per common share (Note 18):
Earnings (loss) before extraordinary items $( 0.49) $ 1.23
Extraordinary credit - benefit of net operating loss
carryforward - 1.16
Extraordinary gain on discharge of prepetition debt 13.07 -
------------ ------------
Net earnings applicable to common shareholders $ 12.58 $ 2.39
============ ============
Fully-diluted earnings (loss) per common
share (Note 18):
Earnings (loss) before extraordinary items $( 0.45) $ 1.11
Extraordinary credit - benefit of net operating loss
carryforward - 1.04
Extraordinary gain on discharge of prepetition debt 11.75 -
------------ ------------
Net earnings applicable to common shareholders $ 11.30 $ 2.15
============ ============
See Notes to Consolidated Financial Statements
F-3
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HILLS STORES COMPANY AND SUBSIDIARIES
------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
Successor Company Predecessor Company
---------------------------- ---------------------------
Fiscal Year Seventeen Thirty-five Fiscal Year
Ended Weeks Ended Weeks Ended Ended
January 28, January 29, October 2, January 30,
(in thousands) 1995 1994 1993 1993
---------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES: ||
||
Net earnings $ 40,431 $ 36,235 || $ 250,154 $ 49,696
Adjustments to reconcile net earnings to net cash ||
provided by operating activities before ||
reorganization items: ||
Depreciation and amortization 40,436 12,113 || 28,780 41,622
Gain on termination of pension plan ( 4,479) - || - -
Decrease in deferred tax assets recognized through a ||
reduction in reorganization value in excess of amounts ||
allocable to identifiable assets 22,977 24,281 || - -
Increase in deferred tax assets ( 30,984) - || - -
Decrease (increase) in accounts receivable and other ||
current assets ( 199) 12,513 || ( 19,485) ( 173)
Decrease (increase) in inventories 12,614 81,736 || ( 141,704) ( 15,850)
Increase (decrease) in accounts payable and other ||
accrued expenses 43,044 ( 40,229) || 61,087 38,621
Other, net 772 308 || 2,761 1,824
---------- ----------- ------------ ----------
Net cash provided by operating activities ||
before reorganization items 124,612 126,957 || 181,593 115,740
Reorganization items: ||
Decrease in liabilities subject to compromise - - || ( 6,274) ( 10,153)
Fresh-start revaluation - - || 5,985 -
Extraordinary gain on discharge of prepetition debt - - || ( 258,239) -
---------- ----------- ----------- ---------
Net cash provided by (used for) operating activities 124,612 126,957 || ( 76,935) 105,587
||
CASH FLOWS FROM INVESTING ACTIVITIES: ||
||
Capital expenditures ( 38,458) ( 3,070) || ( 27,162) ( 40,066)
Other investing activities - - || - 780
---------- ----------- ------------ ---------
Net cash used for investing activities ( 38,458) ( 3,070) || ( 27,162) ( 39,286)
||
CASH FLOWS FROM FINANCING ACTIVITIES: ||
||
Principal payments under capital lease obligations ( 5,529) ( 1,726) || ( 3,400) ( 4,806)
Proceeds from sale/leaseback financing 25,169 - || - -
Cash distributions pursuant to the Plan ||
of Reorganization ( 14,419) ( 85,153) || ( 5,165) -
Other financing activities ( 1,373) ( 196) || ( 7,444) ( 2,059)
---------- ----------- ----------- ---------
Net cash provided by (used for) financing activities 3,848 ( 87,075) || ( 16,009) ( 6,865)
---------- ----------- ----------- ---------
||
Net increase (decrease) in cash and cash equivalents 90,002 36,812 || ( 120,106) 59,436
||
Cash and cash equivalents at beginning of period 90,049 53,237 || 173,343 113,907
---------- ----------- ------------ ---------
||
Cash and cash equivalents at end of period $ 180,051 $ 90,049 || $ 53,237 $ 173,343
========== =========== ============ =========
See Notes to Consolidated Financial Statements
F-4
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HILLS STORES COMPANY AND SUBSIDIARIES
------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY
Common
Common Stock Additional Retained Treasury Stock Shareholders'
----------------- Paid-in Earnings ---------------- Equity
(dollars in thousands) Shares Amount Capital (Deficit) Shares Amount (Deficit)
-----------------------------------------------------------------------------------------------------------------------------
Predecessor Company balance
- 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
Conversion of Preferred Stock 1,792,805 18 35,838 - - - 35,856
Exercise of Stock Options 11,979 - 219 - - - 219
Net earnings - - - 40,431 - - 40,431
-------------------------------------------------------------------------------------
Successor Company balance
- January 28, 1995 10,804,784 $ 108 $229,967 $ 76,666 - $ - $ 306,741
=====================================================================================
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"). The Company, its former parent, Hills
Department Stores, Inc. (the "Predecessor Company"), and the five principal
subsidiaries of the Company voluntarily filed petitions for reorganization
under Chapter 11 on February 4, 1991 (the "Filing Date"). The Predecessor
Company operated its business as a debtor-in-possession under Chapter 11 from
the Filing Date until October 4, 1993.
In accordance with the American Institute of Certified Public Accountants
("AICPA") Statement of Position 90-7: "Financial Reporting by Entities in
Reorganization under the Bankruptcy Code" ("SOP 90-7"), the Predecessor
Company's other interest expense excluded contractual interest of $40.4
million and $60.3 million for the thirty-five weeks ended October 2, 1993 and
fiscal year ended January 30, 1993, respectively.
The Plan of Reorganization (the "POR") provided for the Predecessor Company to
be dissolved and the Company to succeed to and assume the Predecessor Company's
former status as a holding company by transferring to Hills Department Store
Company, a newly formed operating subsidiary of the Company, all of the assets,
property and interest of the Company as of the Effective Date. Prepetition
claims and interests were cancelled in exchange for cash, senior notes,
securities, warrants and rights which were less in value than the value of the
allowed claims on and interests in the Predecessor Company and its
subsidiaries; accordingly, the Predecessor Company recorded an extraordinary
gain of $258.2 million related to the discharge of prepetition liabilities in
the period ended October 2, 1993. The Consolidated Financial Statements
presume full issuance of all common stock, preferred stock, stock rights and
senior notes in accordance with the POR.
2. FRESH-START REPORTING
---------------------
During the bankruptcy proceedings, the consolidated financial statements of the
Predecessor Company were presented in accordance with 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. 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 on the following page (in thousands):
F-6
HILLS STORES COMPANY AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
[Enlarge/Download Table]
2. FRESH-START REPORTING (CONTINUED)
---------------------------------
Predecessor Successor
Company Debt Discharge Fresh-start Company
---------------------------------------------------------------------------
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
--------------------------------------------------------------------------
Total current liabilities 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-7
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-8
HILLS STORES COMPANY AND SUBSIDIARIES
-------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. PRO FORMA COMBINING STATEMENTS OF OPERATIONS (CONTINUED)
--------------------------------------------------------
[Enlarge/Download Table]
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-9
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. In connection with fresh-start
reporting, a new LIFO base layer was established based on
F-10
HILLS STORES COMPANY AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
------------------------------------------------------
INVENTORIES (CONTINUED)
inventory levels as of October 2, 1993. The Company recognizes the write-down
of slow-moving or obsolete inventory in cost of sales when such write-downs are
probable and estimable.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization are provided on a straight-line basis over the
estimated useful lives of the related assets, which is twenty-seven years for
buildings and range from five to eight years for machinery, furniture and
fixtures. Amortization of leasehold improvements is provided on a
straight-line basis over the shorter of the lease term, considering renewal
options that are likely to be exercised, or the estimated useful life of the
related asset. Leasehold improvements are amortized principally over a fifteen
year period.
DEFERRED FINANCING COSTS
Deferred financing costs included in other assets are being amortized on a
straight-line basis over the estimated life of the related debt. Accumulated
amortization of deferred financing costs was $5,507,000 at January 28, 1995 and
$807,000 at January 29, 1994.
INTANGIBLE ASSETS
Beneficial lease rights are amortized using the straight-line method over the
terms of the related leases. Accumulated amortization of beneficial lease
rights was $1,098,000 at January 28, 1995 and $271,000 at January 29, 1994.
Reorganization value in excess of amounts allocable to identifiable assets is
being amortized over twenty years on a straight-line basis. Accumulated
amortization was $12,393,000 at January 28, 1995 and $3,407,000 at January 29,
1994 (See Note 17).
Periodically, management assesses, based on undiscounted cash flows, if there
has been a permanent impairment in the carrying value of its intangible assets
and, if so, the amount of any such impairment by comparing the anticipated
discounted future operating income from the reorganized business with the
carrying value of the related intangibles. In performing this analysis,
management considers such factors as current results, trends and future
prospects, in addition to other economic factors.
PREOPENING COSTS
Preopening costs consist of direct incremental costs of opening a store and are
charged to operations within the fiscal year that a new store opens.
STATEMENT OF CASH FLOWS
Supplemental disclosures of cash flow information are presented in the table on
the following page.
F-11
HILLS STORES COMPANY AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
------------------------------------------------------
[Enlarge/Download Table]
STATEMENT OF CASH FLOWS (CONTINUED)
Successor Company Predecessor Company
----------------------------- ----------------------------
Fiscal Year Seventeen Thirty-five Fiscal Year
Ended Weeks Ended Weeks Ended Ended
January 28, January 29, October 2, January 30,
(in thousands) 1995 1994 1993 1993
--------------------------------------------------------------
||
||
NONCASH INVESTING AND ||
FINANCING ACTIVITIES: ||
||
Issuance of senior notes $ - $ 160,000 || $ - $ -
Issuance of preferred stock - 100,000 || - -
Cancellation of preferred stock - - || 33,143 -
Preferred stock conversions to common ||
stock 35,856 - || - -
Issuance of common stock and stock ||
rights - 194,000 || - -
Cancellation of common stock - - || 65,413 -
Debt conversion to common stock - - || - 10
Capital lease obligations, net - 1,450 || - 988
Preferred stock accretion - - || 1,662 2,432
||
CASH PAID (RECEIVED): ||
||
Reorganization related ||
professional fees - 6,618 || 2,407 5,823
Interest 34,731 5,662 || 12,074 18,228
Income taxes 8,562 2,848 || 1,317 1,995
Interest received on available cash ||
due to the Chapter 11 proceedings - - || (2,643) (2,896)
[Enlarge/Download Table]
5. PROPERTY AND EQUIPMENT
The components of property and equipment are listed below (in thousands):
January 28, January 29,
1995 1994
--------------------------------------
Land $ 3,430 $ 3,430
Buildings 16,193 16,192
Leasehold improvements 40,401 33,400
Machinery, furniture and fixtures 111,280 81,781
Improvements in progress 3,430 1,813
---------- -----------
174,734 136,616
Accumulated depreciation and amortization (19,784) (4,185)
---------- -----------
$ 154,950 $ 132,431
========== ===========
F-12
HILLS STORES COMPANY AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES
-------------------------------------------
[Enlarge/Download Table]
Significant components of other accounts payable and accrued expenses are presented below (in thousands):
January 28, January 29,
1995 1994
------------------------------------
Accrued payroll and related costs $ 27,193 $ 25,261
Accrued insurance 26,961 22,388
Accrued Chapter 11 and related reorganization costs 31,417 50,430
Accrued distribution payable pursuant to the POR 11,482 25,838
Income taxes payable 20,895 -
Other 94,541 79,448
----------- -----------
$ 212,489 $ 203,365
=========== ===========
In the fourth quarter of fiscal 1994, the Company determined that $9.6 million
of liabilities included in "Accrued Chapter 11 and related reorganization
costs" were no longer required, and in accordance with AICPA Practice Bulletin
11: "Accounting for Preconfirmation Contingencies in Fresh-Start Reporting,"
these liabilities were reversed and included in other income.
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
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%. The Company met certain economic performance
requirements and qualified for a 1/4% interest rate reduction, from the rates
above, beginning August 1, 1994. If the Company meets additional economic
performance tests, as of July 29, 1995, the interest rate would be reduced
another 1/4%. 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 is pledged
as collateral for the Facility and the Facility is guaranteed by the Company.
The Facility also contains, among other restrictions, requirements regarding
the maintenance of certain financial ratios, minimum net worth requirements,
and provisions limiting: business combinations, the issuance of additional debt
including capital lease obligations, the redemption and repurchase of common
and preferred stock, the repurchase and prepayment of debt, the amount of rent
expense, and the payment of dividends. The Facility was amended to allow the
Company to enter into the sale/leaseback transactions and the Company's
self-tender for shares of its Common Stock as described in Notes 10 and 20,
respectively. 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.
F-13
HILLS STORES COMPANY AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. REVOLVING CREDIT AGREEMENT (CONTINUED)
--------------------------------------
At January 28, 1995, the Company has satisfied the requirements of the Clean-Up
Period, outstanding letters of credit totalled $32.6 million and there was no
outstanding working capital loan balance under the Facility.
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. The
unsecured Senior Notes may be redeemed, at the option of the Company, at prices
ranging from 105% at October 1, 1994 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. The Senior Note
Indenture was amended to permit the Company to enter into the self-tender as
described in Note 20. In connection with obtaining this amendment, the holders
of the Senior Notes were paid $2.2 million, in the fourth quarter of fiscal
1994, which has been included in other expense. The estimated fair value of
the Senior Notes of $147.3 million and $169.6 million at January 28, 1995 and
January 29, 1994, respectively, was based on quoted market prices in effect at
that time.
9. LEASE COMMITMENTS
-----------------
The Company's operations are conducted primarily in leased properties which
consist principally of retail outlets. Leases are generally for periods
between twenty to thirty years plus renewal options and generally include fixed
rentals and rentals based on sales in excess of predetermined levels.
[Enlarge/Download Table]
The composition of property under capital leases, net of accumulated amortization, is shown below (in thousands):
January 28, January 29,
1995 1994
-------------------------------------
Retail outlets $ 131,408 $ 131,408
Other 6,476 6,476
---------- ----------
137,884 137,884
Accumulated amortization (13,776) (3,408)
---------- ----------
Property under capital leases, net $ 124,108 $ 134,476
========== ==========
F-14
HILLS STORES COMPANY AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. LEASE COMMITMENTS (CONTINUED)
-----------------------------
[Enlarge/Download Table]
Consolidated rental expense under operating leases and rental expense based on sales in excess of predetermined
levels under capital leases are presented below (in thousands):
Successor Company Predecessor Company
--------------------------------- --------------------------------
Fiscal Year Seventeen Thirty-five Fiscal Year
Ended Weeks Ended Weeks Ended Ended
January 28, January 29, October 2, January 30,
1995 1994 1993 1993
--------------------------------------------------------------------------
Capital leases: ||
Rental based on sales $ 1,577 $ 574 || $ 843 $ 1,029
Operating leases: ||
Minimum facility ||
rentals 23,519 8,223 || 16,501 21,395
Equipment and other ||
rentals 17,757 6,795 || 10,820 16,791
Rental based on sales 1,404 481 || 702 1,442
---------- ---------- --------- ---------
Consolidated rental ||
expense $ 44,257 $ 16,073 || $ 28,866 $ 40,657
========== ========== ========= =========
[Enlarge/Download Table]
Minimum future lease commitments under noncancelable leases in effect at January 28, 1995 are listed below (in thousands):
Capital Operating
Fiscal years: Leases Leases Total
------------------------------------------------
1995 $ 20,187 $ 34,733 $ 54,920
1996 19,111 29,415 48,526
1997 17,398 27,170 44,568
1998 16,971 25,694 42,665
1999 16,797 24,950 41,747
Thereafter 196,606 172,784 369,390
------------------------------------------------
Minimum rental commitments 287,070 $ 314,746 $ 601,816
============================
Less amount representing interest (156,441)
----------
Present value of net minimum
lease payments 130,629
Current portion (6,121)
----------
$ 124,508
==========
10. SALE/LEASEBACK FINANCING
During 1994, the Company obtained $25.2 million of financing, which includes
transaction costs, for certain of its real properties through sale/leaseback
arrangements. These transactions were accounted for as financings. The
leases, which have terms of ten years each, require minimum annual rental
payments of $4.3 million in 1996, $4.6 million in 1997, $5.2 million in 1998,
$4.5 million in 1999, $4.6 million in 2000, and a total of $18.3 million
thereafter. The lease terms also include options to purchase some or all of
the properties either at the end of the initial lease term or renewal periods
at an amount not greater than the then current fair market value of the
properties.
F-15
HILLS STORES COMPANY AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. EMPLOYEE BENEFITS
-----------------
PENSION PLANS
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 connection
with the termination of the pension plan, participant's 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. The settlement of the vested benefit
obligation by the purchase of nonparticipating annuity contracts for, or the
optional lump sum rollover to the 401(k) plan account for, each covered
employee is expected to be completed in fiscal 1995. 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 settlement of the
pension plan and the elimination of the related pension obligation.
Plan assets at January 28, 1995, were $26.5 million, net of $7.8 million of
annuities purchased in partial settlement of the Plan obligations. The assets
of the Plan are invested in short-term investment funds. Net pension expense
included in the results of operations was $830,000 for the thirteen weeks ended
April 30, 1994, $964,000 for the seventeen weeks ended January 29, 1994,
$1,645,000 for the thirty-five weeks ended October 2, 1993, and $2,212,000 for
the fiscal year ended January 30, 1993. The discount rate used in determining
the actuarial present value of projected benefit obligations was 7.0% and the
expected long-term rate of return on plan assets used in determining net
pension expense was 8.0%.
The Company provides a defined contribution 401(k) Employee Savings Plan (the
"401(k)") for employees meeting certain employment conditions. In addition to
permitting employee contributions, the 401(k) provides for company matching
contributions. In fiscal 1994, the Company matching contributions were $3.0
million.
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." 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 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 28, 1995, a total of 113,400
shares of the 5,000,000 shares of the Preferred Stock remain to be issued
pending resolution of prepetition claims and interests. The Company may
redeem, at its option prior to October 4, 2008, all or part of the outstanding
shares of the Preferred Stock at $20 per share; and in any case shall redeem
all outstanding shares of the Preferred Stock on October 4, 2008 at $20 per
share. The Preferred Stock is convertible by the holders, at any
F-16
HILLS STORES COMPANY AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. HILLS STORES SERIES A CONVERTIBLE PREFERRED STOCK (CONTINUED)
-------------------------------------------------------------
time, into Hills Stores Common Stock ("Common Stock") at a rate of one share of
Common Stock for each share of the Preferred Stock, subject to antidilution
adjustments. Each holder of the Preferred Stock has one vote per share in the
same class as the holders of Common Stock. The holders of the Preferred Stock
are entitled to dividends when and if declared by the Board of Directors;
however, dividend payments are restricted under the terms of the Facility and
Senior Notes. The Company does not expect to pay dividends in the foreseeable
future.
Upon dissolution or liquidation of the Company, the holders of the Preferred
Stock will be entitled to receive $20 per share out of the assets of the
Company available for distribution to shareholders, in preference to the
holders of Common Stock and any other class or series of capital stock of the
Company that is junior to the Preferred Stock.
13. HILLS STORES COMMON STOCK
-------------------------
Pursuant to the POR, a total of 9,000,000 shares of Common Stock are being
issued as payment for prepetition liabilities and cancellation of old preferred
stock interests. As of January 28, 1995, a total of 143,715 shares of the
9,000,000 shares of Common Stock remain to be issued pending resolution of
prepetition claims and interests. Each holder of Common Stock has one vote per
share and is entitled to dividends when and if declared by the Board of
Directors, however, dividend payments are restricted under the terms of the
Facility and Senior Notes. The Company does not expect to pay dividends in the
foreseeable future.
STOCK OPTION PLAN
As of the Effective Date, the Company established an incentive and nonqualified
stock option plan (the "Option Plan") providing for the grant of nonqualified
stock options or incentive stock options. The options are granted at prices
equivalent to the market price of the Common Stock on the date of each grant.
The options are subject to a five year vesting schedule with initial vesting
beginning one year from the date of grant. A total of 1,053,763 shares of
Common Stock were reserved for grants of options under the Option Plan as of
the Effective Date.
[Enlarge/Download Table]
Option activity for the period from October 3, 1993 to January 28, 1995 was as follows:
Shares Price Range
--------- ---------------
Outstanding at October 3, 1993 - $ -
Granted: November 4, 1993 879,000 18.25
November 19, 1993 7,500 18.00
Cancelled (10,000) 18.25
---------
Outstanding at January 29, 1994 876,500 18.00-18.25
Granted: April 21, 1994 191,000 19.50
Exercised (11,979) 18.25
Cancelled (41,500) 18.25
---------
Outstanding at January 28, 1995 1,014,021 $18.00-19.50
=========
Exercisable options at January 28, 1995 153,321
=========
F-17
HILLS STORES COMPANY AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. SERIES 1993 STOCK RIGHTS
------------------------
Pursuant to the POR, Series 1993 Stock Rights (the "Stock Rights") were issued
as of the Effective Date under Stock Right Agreements. Each Stock Right
entitles the holder to acquire, at $0.01 per share, shares of Common Stock,
subject to antidilution adjustments, as determined pursuant to a formula which
is based on the Company's pro forma utilization of certain tax benefits as
defined in the Stock Right Agreements. As of the Effective Date, 700,000
shares of Common Stock were reserved for issuance upon exercise of the Stock
Rights. Shares under the Stock Right Agreements are not available for issuance
until vested. No stock rights have vested to date.
15. SERIES 1993 WARRANTS
--------------------
Pursuant to the POR, Series 1993 Warrants (the "Warrants") were issued as of
the Effective Date. Each Warrant entitles the holder to purchase, subject to
antidilution adjustments, one share of Common Stock at $30 per share.
Initially, 432,990 shares of Common Stock were reserved for issuance upon
exercise of the Warrants. The Warrants are callable by the Company at $.01 per
Warrant at any time after October 4, 1998 if the average closing price of
Common Stock, subject to antidilution adjustments, for a period of thirty
consecutive trading days is equal to or greater than $35 per share. The
Warrants expire on October 4, 2000.
16. RIGHTS AGREEMENT
----------------
Pursuant to a Rights Agreement adopted on August 16, 1994, the Company declared
a distribution of one purchase right (the "Right") for each share of Common
Stock and Preferred Stock then outstanding. Each Right would initially entitle
the holder to purchase, subject to adjustment, one one-thousandth share of the
Company's Series B Participating Cumulative Preferred Stock, consisting of
55,000 shares authorized, $.10 par value per share, at an exercise price of $75
per one one-thousandth share. Each share of Common Stock and Preferred Stock
issued after August 16, 1994 will also have one Right attached. The Rights
expire August 16, 2004 and, under certain conditions, may be redeemed by the
Company at a price of $.01 per Right. The Rights have no voting or dividend
privileges and are not currently separable from the capital stock.
The Rights 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.
17. 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.
F-18
HILLS STORES COMPANY AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. INCOME TAXES (CONTINUED)
------------------------
[Enlarge/Download Table]
Temporary differences and carryforwards which give rise to significant deferred
tax assets and liabilities are as follows (in thousands):
January 28, 1995 January 29, 1994
Deferred Tax Deferred Tax Deferred Tax Deferred Tax
Asset Liability Asset Liability
--------------- --------------- -------------- ---------------
Net operating loss and tax credit
carryforwards $ 63,391 $ - $ 84,016 $ -
Capital lease obligations 54,393 - 57,186 -
Assets under capital leases - 51,679 - 56,479
Accrued expenses 30,683 - 25,446 -
Beneficial lease rights 19,693 - 21,059 -
Property and equipment - 17,257 - 6,710
Financing obligation-sale/leaseback 10,480 - - -
Other 19,534 - 20,040 2,588
--------- ----------- --------- -----------
Total deferred taxes 198,174 68,936 207,747 65,777
Valuation allowance (98,254) - (141,970) -
--------- ----------- --------- -----------
Net deferred taxes $ 99,920 $ 68,936 $ 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 is subject to an annual limitation.
For the year ended January 28, 1995, the Company utilized net operating loss
carryforwards totaling $40.1 million, consisting of the fiscal year 1994 annual
limitation of $15.5 million, the carryforward of unused fiscal year 1993 annual
limitation, and other post-emergence net operating losses not subject to
limitation. Total deferred tax assets as of January 28, 1995, include $98.3
million of deferred tax assets which arose before the Company's emergence from
bankruptcy and which have been fully reserved. For financial reporting
purposes, any reduction of the valuation allowance related to Predecessor
Company deferred tax assets will not be credited to the tax provision, but
instead will reduce reorganization value in excess of amounts allocable to
identifiable assets.
[Enlarge/Download Table]
The Company's net operating loss and tax credit carryforwards at January 28, 1995 expire as follows (in thousands):
Net Operating Tax
Fiscal years: Losses Credits
-------------------------------------
2000 $ - $ 413
2001 - 797
2002 - 664
2003 - 1,369
2004 329 2,196
2005 - 1,547
2006 60,901 949
2007 56,848 797
2008 10,954 944
------------------------------------
$ 129,032 $ 9,676
====================================
F-19
HILLS STORES COMPANY AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. INCOME TAXES (CONTINUED)
------------------------
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.
[Enlarge/Download Table]
Successor Company Predecessor Company
---------------------------- ----------------------------
Fiscal Seventeen Thirty-five Fiscal
Year Ended Weeks Ended Weeks Ended Year Ended
January 28, January 29, October 2, January 30,
1995 1994 1993 1993
--------------------------------------------------------------
Statutory tax rate 35.0% 35.0% || (35.0%) 34.0%
State and local income taxes, ||
net of federal tax benefit 6.4 6.7 || (6.5) 9.3
Goodwill 4.1 0.9 || 11.9 1.9
Targeted jobs credit ||
and other, net 1.5 (0.3) || 2.2 1.1
Reorganization fees - - || 26.2 3.5
Loss producing no current ||
tax benefit - - || 1.2 -
------ ------ ------ ------
Effective tax rate 47.0% 42.3% || - 49.8%
====== ====== ====== ======
[Enlarge/Download Table]
The provision for income taxes consists of the following components (in thousands):
Successor Company Predecessor Company
--------------------------------- -----------------------------
Fiscal Seventeen Thirty-five Fiscal
Year Ended Weeks Ended Weeks Ended Year Ended
January 28, January 29, October 2, January 30,
1995 1994 1993 1993
----------------------------------------------------------------------
Current provision:
Federal $ 19,524 $ - || $ - $ -
||
State and local 9,973 2,328 || - 1,060
---------- --------- ---------- -----------
29,497 2,328 || - 1,060
||
Deferred provision: ||
Federal (23,393) - || - 18,860
||
State and local (7,591) - || - 6,668
---------- --------- ---------- -----------
(30,984) - || - 25,528
||
Tax benefit applied to reduce ||
reorganization value in excess ||
of amounts allocable to ||
identifiable assets 37,340 24,281 || - -
||
Tax benefit of net operating ||
loss carryforwards: ||
Federal - - || - (18,860)
||
State and local - - || - (4,019)
---------- --------- ---------- -----------
- - || - (22,879)
---------- --------- ---------- -----------
||
Total taxes $ 35,853 $ 26,609 || $ - $ 3,709
========== ========= ========== ===========
F-20
HILLS STORES COMPANY AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. INCOME TAXES (CONTINUED)
------------------------
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.
On December 27, 1994, the Company reached a final settlement with the Internal
Revenue Service for the periods January 1988 through January 1990. The final
settlement resulted in no tax deficiencies being assessed.
18. EARNINGS PER SHARE
------------------
Primary earnings per share of the Successor Company for fiscal 1994 and the
seventeen weeks ended January 29, 1994 was computed based on the weighted
average number of common 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 14,105,498 and 14,056,470 for fiscal 1994 and
the seventeen weeks ended January 29, 1994, respectively. Fully-diluted
earnings per share for the period also assumes the exercise of the Stock
Rights. Such shares amounted to 14,831,568 and 14,794,492, for fiscal 1994 and
the seventeen weeks ended January 29, 1994, respectively. Exercise of the
Warrants is not assumed as their exercise would be antidilutive. The weighted
average number of shares reflects all shares of common and preferred stock
intended to be issued in accordance with the POR.
Primary earnings per share of the Predecessor Company for the thirty-five weeks
ended October 2, 1993 and fiscal year ended January 30, 1993 was computed
using the weighted average common and common equivalent shares outstanding of
19,757,390 and 19,757,339, respectively. Fully-diluted earnings per share for
the periods assumes the conversion of the 11% Convertible Junior Subordinated
Debentures. Fully-diluted weighted average common and common equivalent shares
amounted to 21,981,683 for both periods.
19. COMMITMENTS AND CONTINGENCIES
-----------------------------
In August 1994, Dickstein Partners, L.P., et al. ("Dickstein") commenced a
consent solicitation to replace four members of the Board of Directors with
Dickstein nominees. The lawsuit was voluntarily withdrawn and a negotiated
settlement was reached with Dickstein that resulted in the end of Dickstein's
consent solicitation. Dickstein agreed to vote for the Company's proposed
shareholder solicitation, which was a condition to the Company's $75 million
cash self-tender (see Note 20), to amend the Company's corporate charter so
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 January 28, 1995 of $3.3
million, which are included in selling and administrative expenses.
In a stockholder derivative and class action lawsuit captioned Weiss v. Lee, et
al., the defendants, including the Company, have entered into an agreement with
the plaintiff to settle the litigation. The settlement agreement provides for,
among other things, the Company to pay for certain of the plaintiff's expenses
in an amount not to exceed $385,000.
The Company is also involved in various suits and claims in the ordinary course
of business. The Company is also actively resolving certain disputed
prepetition claims related to the POR. Management
F-21
HILLS STORES COMPANY AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. COMMITMENTS AND CONTINGENCIES (CONTINUED)
-----------------------------------------
does not believe that the disposition of such suits and claims will have a
material adverse effect upon the continuing operations and financial position
of the Company.
20. SELF-TENDER FOR COMMON STOCK
----------------------------
In September 1994, in response to the Dickstein consent solicitation, the
Company's Board of Directors announced a program to enhance shareholder value,
including the approval of a self-tender to purchase up to three million common
shares at $25 per share in cash and the implementation of a growth program
which includes remodeling, opening new stores, and the continuation of
operating improvement programs. Effective February 21, 1995, the Company
accepted for payment three million shares of Common Stock which were validly
tendered pursuant to the Company's offer. In connection with the offer,
561,863 shares of Preferred Stock were converted to Common Stock. If the
self-tender had been completed as of January 29, 1994, earnings per share for
fiscal 1994, after giving effect to the conversion of Preferred Stock and the
subsequent purchase and retirement of the three million common shares, would
have been $3.42 on a primary and $3.21 on a fully-diluted basis.
21. 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.
[Enlarge/Download Table]
(in thousands, except per share amounts)
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------------------------------------------------------
FISCAL 1994
Net sales $ 365,597 $ 375,632 $ 457,212 $ 673,580
========== ========== =========== ===========
Gross profit $ 100,334 $ 106,459 $ 135,621 $ 189,386
========== ========== =========== ===========
Net earnings (loss) applicable to
common shareholders $( 2,362) $( 3,597) $ 12,923 $ 33,467
========== ========== =========== ===========
Primary earnings (loss) per
share applicable to common
shareholders $( 0.25) $( 0.36) $ 0.91 $ 2.37
========== ========== =========== ===========
Fully-diluted earnings (loss) per
share applicable to common
shareholders $( 0.25) $( 0.36) $ 0.87 $ 2.26
========== ========== =========== ===========
F-22
HILLS STORES COMPANY AND SUBSIDIARIES
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
[Enlarge/Download Table]
21. 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 || $ 41,825 $ 181,209
========== ========== =========== =========== ==========
||
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
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 schedule listed in the index on page 17 of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information required to be
included therein.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
March 10, 1995
S-1
[Enlarge/Download Table]
HILLS STORES COMPANY AND SUBSIDIARIES
------------------------------------------------------------------------------------------------------------------------
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the Fiscal Year Ended January 28, 1995, the Seventeen Weeks Ended January 29, 1994, the Thirty-five Weeks Ended
October 2, 1993 and Fiscal Year Ended January 30, 1993
Additions
Balance at Charged to Deductions Balance at
Beginning Cost and from End of
(in thousands) of Period Expense Reserves Other Period
-----------------------------------------------------------------------------------------------------------------------------
SUCCESSOR COMPANY
-----------------
FISCAL YEAR ENDED JANUARY 28, 1995:
Allowance for doubtful accounts $ 5,497 $ 866 $( 2,135) $ - $ 4,228
======== ======== ======= ======== =========
SEVENTEEN WEEKS ENDED JANUARY 29, 1994:
Allowance for doubtful accounts $ 9,420 $ 73 $( 3,996) $ - $ 5,497
======== ======== ======= ======== =========
= = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = =
PREDECESSOR COMPANY
-------------------
THIRTY-FIVE WEEKS ENDED OCTOBER 2, 1993:
Allowance for doubtful accounts $ 4,591 $ 1,433 $( 2,216) $ 5,612 (1) $ 9,420
======== ======== ======= ======== =========
FISCAL YEAR ENDED JANUARY 30, 1993:
Allowance for doubtful accounts $ 3,993 $ 2,850 $( 1,002) $( 1,250) (2) $ 4,591
======== ======== ======= ======== =========
<FN>
(1) Represents fresh-start adjustments.
(2) Represents reclassifications.
S-2
[Download Table]
EXHIBIT INDEX
Pursuant to Item 601 of Regulation S-K
Exhibit Title
------- -----
3.1 Amended and Restated Certificate of Incorporation
of the Company dated September 27, 1993.
3.2 Amendment dated January 18, 1995 to the Certificate
of Incorporation of the Company.
10.12 Form of individual Employment Agreements dated
September 30, 1994 with, respectively, Messrs. Bozic,
Reen, Samuto, Smailes and Stevenish, accompanied by
Schedule A from each agreement setting forth the
office, term, compensation, etc., applicable to each
such person.
10.13 Consulting Agreement with Norman S. Matthews dated
September 30, 1994.
11.1 Computation of earnings per share.
21 Subsidiaries.
23 Consent of Coopers and Lybrand.
24 Powers of Attorney of directors and officers of
the Company.
27 Financial Data Schedule
Dates Referenced Herein and Documents Incorporated by Reference
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