<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934
For the quarterly period ended October 28, 1995
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------------ ------------
Commission file number 1-9505
HILLS STORES COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 31-1153510
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
15 DAN ROAD, CANTON, MASSACHUSETTS 02021
(Address of principal executive offices) (Zip Code)
617-821-1000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
--- ---
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
YES X NO
--- ---
The number of shares of common stock outstanding as of November 25, 1995
was 9,798,564 shares.
<PAGE> 2
HILLS STORES COMPANY AND SUBSIDIARIES
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
<TABLE>
<S> <C>
FINANCIAL STATEMENTS
Consolidated Balance Sheets as of October 28, 1995, January 28, 1995 and
October 29, 1994 3
Consolidated Statements of Operations for the Thirteen and Thirty-nine
Weeks Ended October 28, 1995 and October 29, 1994 4
Consolidated Statements of Cash Flows for the Thirty-nine Weeks Ended
October 28, 1995 and October 29, 1994 5
Notes to Consolidated Financial Statements 6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS 10
OF OPERATIONS
PART II - OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS 13
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K 13
</TABLE>
2
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HILLS STORES COMPANY AND SUBSIDIARIES
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CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
October 28, January 28, October 29,
(in thousands) 1995 1995 1994
- ------------------------------------------------------------------------------------------------
(unaudited) (unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,625 $ 180,051 $ 8,988
Trade receivables, net 62,776 23,471 62,573
Inventories 518,108 313,851 474,208
Deferred tax asset 20,923 20,923 --
Other current assets 9,924 4,743 5,962
---------- ---------- ----------
Total current assets 616,356 543,039 551,731
Property and equipment, net 190,657 154,950 153,772
Property under capital leases, net 116,357 124,108 126,692
Beneficial lease rights, net 8,454 9,075 9,282
Other assets, net 13,501 6,380 9,179
Deferred tax asset 10,061 10,061 --
Reorganization value in excess of amounts
allocable to identifiable assets, net 138,948 144,765 169,989
---------- ---------- ----------
$1,094,334 $ 992,378 $1,020,645
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Borrowings under revolving credit facility (Note 5) $ 169,000 $ -- $ --
Current portion of capital leases 6,121 6,121 5,532
Accounts payable, trade 180,897 82,943 173,990
Other accounts payable and accrued expenses 152,165 212,489 186,962
---------- ---------- ----------
Total current liabilities 508,183 301,553 366,484
Senior notes (Notes 5 and 8) 160,000 160,000 160,000
Obligations under capital leases 119,971 124,508 126,525
Financing obligation - sale/leaseback 25,169 25,169 20,169
Other liabilities 9,118 10,263 10,268
Commitments and contingencies -- -- --
Preferred stock, at mandatory redemption value (Note 2) 25,206 64,144 69,661
Common shareholders' equity (Note 4):
Common stock 99 108 105
Additional paid-in capital 208,993 229,967 224,234
Retained earnings 37,595 76,666 43,199
---------- ---------- ----------
Total common shareholders' equity 246,687 306,741 267,538
---------- ---------- ----------
$1,094,334 $ 992,378 $1,020,645
========== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements
3
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HILLS STORES COMPANY AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-nine Weeks Ended
-------------------------- --------------------------
(unaudited) October 28, October 29, October 28, October 29,
(in thousands, except per share amounts) 1995 1994 1995 1994
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 448,033 $ 457,212 $ 1,200,319 $ 1,198,441
Cost of sales 323,339 321,591 873,574 856,027
Selling and administrative expenses 95,860 98,623 285,074 276,373
Depreciation and amortization 10,039 9,147 28,619 26,338
Costs related to change in control (Note 5) (7,166) -- 36,126 --
----------- ----------- ----------- -----------
Operating earnings (loss) 25,961 27,851 (23,074) 39,703
Other income (expense):
Capital lease interest (3,496) (3,657) (10,613) (11,085)
Other interest (10,489) (6,063) (26,067) (17,548)
Other income, net 206 968 2,168 2,070
----------- ----------- ----------- -----------
(13,779) (8,752) (34,512) (26,563)
----------- ----------- ----------- -----------
Earnings (loss) before income taxes 12,182 19,099 (57,586) 13,140
Income tax benefit (provision) 13,254 (6,176) 33,515 (6,176)
----------- ----------- ----------- -----------
Net earnings (loss) applicable
to common shareholders $ 25,436 $ 12,923 $ (24,071) $ 6,964
=========== =========== =========== ===========
Primary earnings (loss) per share applicable
to common shareholders (Note 3) $ 2.28 $ 0.91 $ (2.47) $ 0.49
=========== =========== =========== ===========
Fully-diluted earnings (loss) per share applicable
to common shareholders (Note 3) $ 2.24 $ 0.87 $ (2.39) $ 0.47
=========== =========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
4
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HILLS STORES COMPANY AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF CASH FLOWS
Thirty-nine Weeks Ended October 28, 1995 and October 29, 1994
<TABLE>
<CAPTION>
(unaudited)
(in thousands) 1995 1994
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ (24,071) $ 6,964
Adjustments to reconcile net earnings (loss) to net cash used for
operating activities:
Depreciation and amortization 32,137 28,239
Gain on conversion of pension plan -- (4,479)
Increase in accounts receivable and other current assets (44,486) (40,520)
Increase in inventories (204,257) (147,743)
Increase in accounts payable and other accrued expenses 37,996 107,818
Other, net 423 503
--------- ---------
Net cash used for operating activities (202,258) (49,218)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (50,551) (32,646)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolving credit facility 235,000 --
Repayments of borrowings under revolving credit facility (66,000) --
Principal payments under capital lease obligations (4,537) (4,101)
Sale/leaseback financing -- 20,169
Cash distributions pursuant to the Plan of Reorganization (2,348) (13,673)
Shares repurchased in self-tender (75,000) --
Other financing activities (9,732) (1,592)
--------- ---------
Net cash provided by financing activities 77,383 803
--------- ---------
Net decrease in cash and cash equivalents (175,426) (81,061)
Cash and cash equivalents at beginning of period 180,051 90,049
--------- ---------
Cash and cash equivalents at end of period $ 4,625 $ 8,988
========= =========
</TABLE>
See Notes to Consolidated Financial Statements
5
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HILLS STORES COMPANY AND SUBSIDIARIES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant intercompany transactions and
balances have been eliminated. The information furnished reflects all normal
recurring adjustments which are, in the opinion of management, necessary to
present a fair statement of the results for the interim period.
The accompanying unaudited consolidated financial statements are presented in
accordance with the requirements of Form 10-Q and consequently do not include
all the disclosures normally required by generally accepted accounting
principles nor those normally made in the Company's annual Form 10-K filing.
Reference should be made to the Company's Annual Report on Form 10-K for
additional disclosures, including a summary of the Company's accounting
policies. The Company's business is seasonal in nature and the results of
operations for the interim periods presented are not necessarily indicative of
the results to be expected for the full fiscal year. The fourth quarter of each
fiscal year provides a major portion of the Company's annual sales and operating
earnings, with operating earnings particularly concentrated in the Christmas
selling season.
2. HILLS STORES SERIES A CONVERTIBLE PREFERRED STOCK
During the nine months ended October 28, 1995, 1,946,852 shares of the Company's
Series A Convertible Preferred Stock (the "Preferred Stock") were converted to
Hills Stores Common Stock (the "Common Stock") on a share for share basis. These
noncash conversions amounted to $38.9 million.
3. EARNINGS PER SHARE
Primary earnings per share for the thirteen week periods ended October 28, 1995
and October 29, 1994 was computed based on the weighted average number of common
and common equivalent shares assumed to be outstanding during the period of
11,164,254 shares and 14,141,390 shares, respectively. Fully-diluted earnings
per share for the thirteen week periods ended October 28, 1995 and October 29,
1994 was computed based on the weighted average number of common and common
equivalent shares assumed to be outstanding during the period of 11,346,339
shares and 14,841,390 shares, respectively.
Primary earnings (loss) per share for the thirty-nine week periods ended October
28, 1995 and October 29, 1994 was computed based on the weighted average number
of common and common equivalent shares assumed to be outstanding during the
period of 9,754,522 shares and 14,096,892 shares, respectively. Fully-diluted
earnings (loss) per share for the thirty-nine week periods ended October 28,
1995 and October 29, 1994 was computed based on the weighted average number of
common and common equivalent shares assumed to be outstanding during the period
of 10,057,566 shares and 14,796,892 shares, respectively.
The calculation of the fully-diluted earnings (loss) per share assumes that
actual conversions of Preferred Stock during the thirteen and thirty-nine week
periods occurred as of the beginning of the period being reported on. The
weighted average number of shares used reflects all shares of common and
preferred stock intended to be issued in accordance with the Plan of
Reorganization.
4. SELF-TENDER FOR COMMON STOCK
In August 1994, Dickstein Partners, L.P., et al. ("Dickstein") commenced a
consent solicitation to replace four members of the then current Board of
Directors with Dickstein nominees. In response to the Dickstein consent
6
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HILLS STORES COMPANY AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. SELF-TENDER FOR COMMON STOCK (CONTINUED)
solicitation, the Company's Board of Directors announced a program to enhance
shareholder value, including the approval of a self-tender to purchase up to
3,000,000 common shares at $25 per share in cash. Effective February 21, 1995,
the Company accepted for payment 3,000,000 shares of Common Stock which were
validly tendered pursuant to the Company's offer, and for which payment of
$75,000,000 was made in March 1995. The excess of the purchase price over the
original issue price of the Common Stock, or $15,000,000, was charged to
retained earnings. In connection with the offer, 561,863 shares of Preferred
Stock were converted to Common Stock.
5. CHANGE IN CONTROL
At the June 1995 Annual Meeting, Dickstein nominees were elected to the Board of
Directors. On July 5, 1995, the election of the Dickstein nominees was certified
and a change in control occurred.
Under the terms of the Senior Note Indenture (the "Indenture"), because of the
election of the new Board of Directors, the Company was required to offer to
redeem all of the Senior Notes at 101% of par. Effective August 1, 1995, the
Indenture was amended to permit the Company to defer the redemption of the
Senior Notes until May 3, 1996, and, at the option of the Company, upon the
payment of an additional fee of $7.5 million, to May 5, 1997. In addition, the
change of control put price under the Indenture would be increased to 102% if no
notice of redemption is mailed to Senior Note holders before January 1, 1997.
The amendment also allowed the Company to increase the amount of its working
capital facility from $225 million to $300 million. In connection with obtaining
this amendment, the consenting holders of the Senior Notes were paid $6 million
in August 1995, which has been included in costs related to change in control in
the Consolidated Statements of Operations. The Company does not currently intend
to redeem the Senior Notes during fiscal 1996 and therefore has classified the
debt as long-term. The Company may seek to refinance the Senior Notes before the
redemption dates referenced above, provided that acceptable long-term financing
is available to do so.
On August 21, 1995, in connection with the change in control, Hills Department
Store Company ("HDSC"), a wholly-owned subsidiary of the Company, entered into a
new $300 million secured revolving credit facility (the "Facility"), of which up
to $100 million is available as a letter of credit facility. The Facility
expires May 1, 1997 (or May 1, 1996 if the Company has not exercised its option
by April 30, 1996 to extend the Senior Note redemption). If the Senior Notes are
refinanced on terms acceptable to the lenders or their redemption date is
extended to a date later than April 30, 1998, the Facility will be automatically
extended to April 30, 1998. Borrowings under the Facility are limited by a
borrowing base, as defined, and bear interest, at the option of the borrower, at
either of (1) the Adjusted London Interbank Offered Rate plus 2.75%, or (2) the
highest of (a) Chemical Bank's Prime Rate plus 1.75%, (b) the Federal Funds
Effective rate plus 2.25%, and (c) the Base CD Rate plus 2.75%. HDSC must pay
commitment fees at an annual rate of 1/2% on the average daily unused portion of
the commitment. HDSC must also pay letter of credit fees on the aggregate face
amount of outstanding standby letters of credit at an annual rate equal to
2.75%, and on the face amount of outstanding trade letters of credit at an
annual rate of 2.25%. The Facility is secured by a pledge of all of the capital
stock of HDSC and an interest in all tangible and intangible assets of HDSC. The
Facility is guaranteed by the Company. The Facility also contains, among other
restrictions, requirements regarding the maintenance of certain financial
ratios, minimum net worth requirements, and provisions limiting: business
combinations, the issuance of additional debt including capital lease
obligations, the redemption and repurchase of common and preferred stock, the
repurchase and prepayment of debt, the amount of rent expense, and the payment
of dividends. In addition, the Facility also requires, on a date (the "Clean-Up
Date") determined at the discretion of the Company between December 1 and April
1 of each year, HDSC to pay or prepay all of the outstanding loans and for a
period of at least thirty consecutive days following the Clean-Up Date, HDSC
shall have no direct borrowings outstanding under the Facility.
7
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HILLS STORES COMPANY AND SUBSIDIARIES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. CHANGE IN CONTROL (CONTINUED)
In connection with the change in control, the Company recognized $26.6 million
in expense related to severance and retirement payments, including certain taxes
attributable thereto, to six senior executives, a consultant to the Company and
approximately 20 associates of the Company.
6. STOCK RIGHTS
On August 22, 1995, the Company repurchased 693,092 of its 700,000 outstanding
stock rights in exchange for 198,026 shares of newly issued common stock. The
par value of the newly issued common shares was reclassified from additional
paid-in capital to common stock.
7. COMMITMENTS AND CONTINGENCIES
Litigation
Following the change in control of the Company, the parties to two
previously-reported lawsuits (which have been dismissed by stipulation) filed a
joint class-action lawsuit on August 7, 1995 in the Court of Chancery of the
State of Delaware, under the names of Gayle Dolowich, Ivan J. Dolowich and
Joseph Weiss, as plaintiffs, against the seven new directors of the Company,
Dickstein Partners Inc. and the Company. On November 3, 1995, the plaintiffs
amended their complaint to include a derivative cause of action against the
former members of the Company's Board of Directors for breach of their fiduciary
duties to the Company and its shareholders. In the amended complaint, the
plaintiffs claim that in connection with Dickstein Partners Inc.'s effort to
solicit proxies in support of the election of its nominees to be directors of
the Company, Dickstein Partners Inc. issued a number of false and misleading
statements regarding its offer to acquire all of the Company's shares it did not
already own. The plaintiffs seek an order nullifying the election of directors
and declaring there has been no "change of control" of the Company.
On August 2, 1995, Mitchell Dobies and Leslie Susser filed a class action
lawsuit in the U.S. District Court for Massachusetts, against Dickstein Partners
Inc. and Mark Dickstein, and Leslie Susser individually filed a derivative
action against the seven former directors of the Company, with the Company named
a "nominal defendant." The plaintiffs allege that Dickstein Partners Inc. and
Mark Dickstein issued false and misleading statements and omitted to state
material facts regarding an intended acquisition of or sale of the Company.
Plaintiff Susser, derivatively, claims the former directors breached their
fiduciary duties by not approving the change in control resulting from the
election of the Dickstein Partners Inc. nominees to the Board of Directors, thus
allowing "golden parachute" severance payments to be made to a director and six
senior officers (two of whom were also directors) of the Company. The plaintiffs
seek compensatory money damages for themselves and the class, an order that each
former director account for damages to the Company caused by an alleged breach
of fiduciary duties, and an award of pre and post-judgment interest along with
attorneys' fees and expenses, including experts' fees. On October 17, 1995,
plaintiffs filed a stipulation to transfer the class action claim against
Dickstein Partners Inc. and Mark Dickstein to the U.S. District Court for the
Southern District of New York, which is the venue for the class action suit
filed by Jeffrey B. Cross and Nancy Cross (as described below). Plaintiff Susser
has dismissed without prejudice the derivative action claim against the former
directors and the Company.
Jeffrey B. Cross and Nancy Cross also filed a class action lawsuit against
Dickstein Partners Inc. and Mark Dickstein as defendants and a derivative action
suit against the former directors, with the Company named as a nominal defendant
in the derivative action, in the U.S. District Court for the Southern District
of New York. The suit seeks the same or similar relief sought in the
Massachusetts lawsuit described in the preceding paragraph. The plaintiffs have
dismissed without prejudice their derivative claim against the former directors
and the Company.
8
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HILLS STORES COMPANY AND SUBSIDIARIES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
On September 11, 1995, the Company and Hills Department Store Company filed a
suit in the Court of Chancery of the State of Delaware against the former
members of the Board of Directors of the Company. That action seeks, among other
things, recovery of damages caused by the breach by the former members of their
fiduciary duties to shareholders arising from the refusal of the former Board
members to approve the change in control which took place on July 5, 1995
following the election of seven replacement directors by the shareholders of the
Company. On October 10, 1995 the defendants filed a motion to dismiss the
complaint.
The Company and Hills Department Store Company also filed suit against Smith
Barney, Inc. on September 11, 1995 in the New York State Supreme Court for the
County of New York, seeking damages for losses, as stated in the complaint,
caused by the gross negligence of this firm in rendering financial advice to the
Company's former directors, for its breach of fiduciary duty to the Company, and
for aiding and abetting the former directors in the breach of their fiduciary
duties. On October 30, 1995, Smith Barney, Inc. served a motion to dismiss the
complaint.
Management does not believe that the disposition of the foregoing suits will
have a material adverse effect upon the continuing operations and financial
position of the Company.
8. SUBSEQUENT EVENTS
The Company is currently soliciting the holders of the Senior Notes to further
amend the Senior Note Indenture to defer the redemption of the Senior Notes, at
the option of the Company, from May 5, 1997 until a date not later than July 8,
1998; eliminate the obligation of the Company to offer to redeem the Senior
Notes upon any future change of control; and modify the Indenture covenants to
exclude, for purposes of determining the amount of permitted indebtedness, the
effect of the change of control costs related to the July 5, 1995 change in
control. Upon execution of the amendment, the Company will pay to each person
who is a holder of the Senior Notes a fee of 0.75% of the principal amount of
the holder's Senior Notes. If the Company elects to defer the redemption until
July 8, 1998, the Company will pay a fee of 5.0% of the principal amount of each
holder's Senior Notes. To be approved, the amendment will require the consent of
60% of the outstanding principal amount of the Senior Notes. The consent
solicitation will expire January 5, 1996, subject to extension at the Company's
option. At any time prior to the execution of the amendment to the Indenture,
the Company may, in its sole discretion, modify or terminate the consent
solicitation. Prior to execution, the Company must obtain a consent to the
amendment by the lenders under the Facility.
9
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HILLS STORES COMPANY AND SUBSIDIARIES
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THIRTEEN WEEKS ENDED OCTOBER 28, 1995 VERSUS
THIRTEEN WEEKS ENDED OCTOBER 29, 1994
Sales decreased 2.0% compared to the same period in 1994. This decrease is
primarily attributable to weak apparel sales and a toy clearance sale held in
October of the prior year. Sales were positively impacted by new store sales and
strong results in electronics, seasonal and the housewares categories.
Comparable store sales were $423.6 million compared to $452.3 million in 1994, a
6.3% decrease.
Cost of sales as a percentage of sales was 72.2% in 1995 compared to 70.3% in
1994. The increase of 1.9% is principally due to a higher rate of markdowns and
a shift in the mix of sales from softlines to hardlines resulting from sluggish
apparel sales.
Selling and administrative expenses as a percentage of sales was 21.4% compared
to 21.6% in 1994, a 0.2% decrease. The decrease is attributable to savings in
payroll related expenses which were partially offset by additional operating
costs associated with new stores and increased advertising in the Company's new
markets. In addition, the prior year expenses included $2.2 million of expenses
related to the consent solicitation by Dickstein Partners Inc.
Depreciation and amortization as a percentage of sales was 2.2% in 1995 compared
to 2.0% for the same period in 1994. The increase is due to a higher fixed asset
base, resulting from the Company's remodeling and new store opening program, and
a lower sales base.
The $7.2 million credit recorded in the third quarter to change in control costs
(see Note 5 of Notes to Consolidated Financial Statements) resulted principally
from a correction in the calculation of employment taxes related to severance
expenses paid in connection with the July 5, 1995 change in control.
Other interest expense was $10.5 million for the third quarter of 1995 compared
to $6.1 million for the same period in 1994. The $4.4 million increase is due
primarily to interest on borrowings under the revolving credit facility and the
sale/leaseback agreement. Average direct borrowings under the revolving credit
facility were $141.0 million during the third quarter of 1995 while there were
no borrowings during the same period of 1994.
The Company's effective tax rate for the year was revised to 58.2%. As a result,
a benefit of $13.3 million was recorded in the third quarter.
THIRTY-NINE WEEKS ENDED OCTOBER 28, 1995 VERSUS
THIRTY-NINE WEEKS ENDED OCTOBER 29, 1994
Sales increased 0.2% compared to the same period in 1994. The 0.2% increase is a
result of sales from new stores and strong comparable sales increases in
electronics, seasonal and home decor. Comparable store sales were $1,151 million
compared to $1,192 million in 1994, a 3.5% decrease.
Cost of sales as a percentage of sales was 72.8% in 1995 compared to 71.4% in
1994. The increase of 1.4% is due to a decrease in purchase markup and a higher
rate of markdowns, particularly in ladies sportswear, lawn and garden, and
health and beauty care.
10
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HILLS STORES COMPANY AND SUBSIDIARIES
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
RESULTS OF OPERATIONS (CONTINUED)
THIRTY-NINE WEEKS ENDED OCTOBER 28, 1995 VERSUS
THIRTY-NINE WEEKS ENDED OCTOBER 29, 1994 (CONTINUED)
Selling and administrative expenses as a percentage of sales was 23.7% compared
to 23.1% in 1994, an increase of 0.6%. The increase is attributable to
additional operating costs associated with new stores and increased advertising
in the Company's new markets. The prior year expenses include a $4.5 million
gain from the elimination of pension obligations and $2.2 million of expenses
related to the consent solicitation by Dickstein Partners Inc.
Depreciation and amortization as a percentage of sales was 2.4% in 1995 compared
to 2.2% for the same period in 1994. The increase is due to a higher fixed asset
base, resulting from the Company's remodeling and new store opening program.
Costs related to the July 5, 1995 change in control were $36.1 million. The
costs consist of $26.6 million for severance and retirement payments, including
certain taxes attributable thereto, to six senior executives, a consultant to
the Company and approximately 20 associates, $6.0 million paid to holders of the
Senior Notes and legal and other miscellaneous change in control costs.
Other interest expense was $26.1 million in 1995 compared to $17.5 million in
1994. This $8.6 million increase is primarily due to interest on borrowing under
the revolving credit facility, interest on the sale/leaseback financing, and
additional amortization of deferred financing costs. Average direct borrowings
under the revolving credit facility were $61.1 million during the first nine
months of 1995 while there were no borrowings during the same period of 1994.
The Company's effective tax rate for the year was estimated at 58.2% compared to
a rate of 47.0% for the year ended January 28, 1995. The increase in the rate
results principally from an increase in non-deductible reorganization value
amortization as a percentage of the related expected pre-tax earnings.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital as of October 28, 1995 decreased by $133.3 million
from January 28, 1995. The working capital decrease is primarily due to the
recognition of $36.1 million in expenses related to the change in control, the
payment of $75 million related to the Company's self-tender offer completed in
March 1995, and $50.6 million of capital expenditures spent primarily on the
store remodeling and expansion program.
Net cash used for operating activities for the thirty-nine weeks ended October
28, 1995 increased $153.0 million compared to the same period in 1994. This use
of cash for operating activities is primarily due to a net loss before taxes of
$21.5 million (before the $36.1 million change in control costs) versus $13.1
million in net earnings last year, the seasonal nature of the Company's business
and the recognition of $36.1 million in expenses related to the change in
control.
Capital expenditures, primarily for the remodeling and upgrading of existing
stores and the opening of ten new stores, were $50.6 million for the thirty-nine
weeks ended October 28, 1995. During fiscal 1995, capital expenditures are
expected to approximate $57 million.
11
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HILLS STORES COMPANY AND SUBSIDIARIES
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
Under the terms of the Senior Note Indenture (the "Indenture"), because of the
election of the new Board of Directors, the Company was required to offer to
redeem all of the Senior Notes at 101% of par. Effective August 1, 1995, the
Indenture was amended to permit the Company to defer the redemption of the
Senior Notes until May 3, 1996, and, at the option of the Company, upon the
payment of an additional fee of $7.5 million, to May 5, 1997. In addition, the
change in control put price under the Indenture would be increased to 102% if no
notice of redemption is mailed to Senior Note holders before January 1, 1997.
The amendment also allowed the Company to increase the amount of its working
capital facility from $225 million to $300 million. In connection with obtaining
this amendment, the consenting holders of the Senior Notes were paid $6 million
in August 1995, which has been included in costs related to change in control in
the Consolidated Statements of Operations. The Company does not currently intend
to redeem the Senior Notes during fiscal 1996 and therefore has classified the
debt as long-term. The Company may seek to refinance the Senior Notes before the
redemption dates referenced above, provided that acceptable long-term financing
is available to do so.
On August 21, 1995, in connection with the change in control, Hills Department
Store Company ("HDSC"), a wholly-owned subsidiary of the Company, entered into a
new $300 million secured revolving credit facility (the "Facility"), of which up
to $100 million is available as a letter of credit facility. The Facility
expires May 1, 1997 (or May 1, 1996 if the Company has not exercised its option
by April 30, 1996 to extend the Senior Note redemption). If the Senior Notes are
refinanced on terms acceptable to the lenders or their redemption date is
extended to a date later than April 30, 1998, the Facility will be automatically
extended to April 30, 1998. Borrowings under the Facility are limited by a
borrowing base, as defined, and bear interest, at the option of the borrower, at
either of (1) the Adjusted London Interbank Offered Rate plus 2.75%, or (2) the
highest of (a) Chemical Bank's Prime Rate plus 1.75%, (b) the Federal Funds
Effective rate plus 2.25%, and (c) the Base CD Rate plus 2.75%. HDSC must pay
commitment fees at an annual rate of 1/2% on the average daily unused portion of
the commitment. HDSC must also pay letter of credit fees on the aggregate face
amount of outstanding standby letters of credit at an annual rate equal to
2.75%, and on the face amount of outstanding trade letters of credit at an
annual rate of 2.25%. The Facility is secured by a pledge of all of the capital
stock of HDSC and an interest in all tangible and intangible assets of HDSC. The
Facility is guaranteed by the Company. The Facility also contains, among other
restrictions, requirements regarding the maintenance of certain financial
ratios, minimum net worth requirements, and provisions limiting: business
combinations, the issuance of additional debt including capital lease
obligations, the redemption and repurchase of common and preferred stock, the
repurchase and prepayment of debt, the amount of rent expense, and the payment
of dividends. In addition, the Facility also requires, on a date (the "Clean-Up
Date") determined at the discretion of the Company between December 1 and April
1 of each year, HDSC to pay or prepay all of the outstanding loans and for a
period of at least thirty consecutive days following the Clean-up Date, HDSC
shall have no direct borrowings outstanding under the Facility. The Company
expects to satisfy the Clean-up Date provisions in January 1996. As of October
28, 1995, the outstanding loan balance under the Company's $300 million Facility
was $169 million.
Management believes that amounts available under the Company's new borrowing
agreement, together with cash from operations, will enable the Company to fund
its current liquidity and capital expenditure requirements.
12
<PAGE> 13
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Additional information about the three shareholders lawsuits previously reported
on Form 10-Q for the quarter ended July 29, 1995 and information about the
Company's suits filed against its former directors and against Smith Barney,
Inc. are hereby incorporated by reference from Item 7 of the Notes to
Consolidated Financial Statements included in this report.
Management does not believe that the disposition of the foregoing suits will
have a material adverse effect upon the continuing operations and financial
position of the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. The following documents are filed as part of this report:
3.1(4) Amended and Restated Certificate of Incorporation of the Company,
dated September 27, 1993.
3.2(4) 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(3) First Supplemental Indenture dated as of January 1, 1995 to the
Senior Note Indenture.
4.5(3) Second Supplemental Indenture dated as of August 1, 1995 to the
Senior Note Indenture.
4.6(2) Series 1993 Warrant Agreement dated October 4, 1993 between the
Company and Chemical Bank, as warrant agent.
4.7(6) Rights Agreement dated as of August 16, 1994 between the Company and
Chemical Bank, as Rights Agent.
4.8(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 4.7 hereto).
4.9(6) Form of Right Certificate (which is attached as Exhibit B to the
Rights Agreement incorporated by reference as Exhibit 4.7 hereto).
10.1(3)* Employment Agreement made as of July 6, 1995 with E. Jackson
Smailes.
10.2(3)* Employment Agreement made as of July 6, 1995 with William K. Friend.
10.3* Employment agreement made as of August 16, 1995 with James E. Feldt.
10.4* Resolution adopted by the Board of Directors of the Company
relating to the consultant compensation of Chaim Y. Edelstein, a
director.
13
<PAGE> 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (CONTINUED)
10.5(5) 1993 Incentive and Nonqualified Stock Option Plan.
10.6(3) Credit Agreement dated as of August 21, 1995 among Hills Stores
Company, Hills Department Store Company, the Lenders named therein,
Chemical Bank as Administrative Agent and Fronting Bank, and NatWest
Bank, N.A., as Managing Agent.
11 Statements regarding computation of per share earnings.
16(7) Letters re: change in certifying accountant.
27 Financial Data Schedule.
- ---------------
* Executive Compensation Plans and Arrangements.
1. Incorporated by reference from the Form 8-A of the Company filed on
October 5, 1993.
2. Incorporated by reference from the Report on Form 8-K of the Company
dated October 4, 1993.
3. Incorporated by reference from the Report on Form 10-Q of the
Company for the quarter ended July 29, 1995.
4. Incorporated by reference from the Annual Report on Form 10-K of the
Company for the fiscal year ended January 28, 1995.
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.
7. Incorporated by reference from the Form 8-K of the Company dated
November 8, 1995.
b. Reports on Form 8-K
A report on Form 8-K dated November 8, 1995 was filed by the
Company, stating that a change in the Company's independent
certifying accountants had occurred due to the resignation of
Coopers & Lybrand L.L.P. The report noted Coopers & Lybrand L.L.P.
stated it had no knowledge of any improprieties on the part of the
Company and had no disagreements with management. The Company also
reported it has retained Deloitte & Touche L.L.P. as its new
independent certifying accountants.
14
<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HILLS STORES COMPANY
Date: December 11, 1995 /s/E. Jackson Smailes
-------------------------------------
E. Jackson Smailes
President and Chief Executive Officer
Date: December 11, 1995 /s/Kim D. Ahlholm
-------------------------------------
Kim D. Ahlholm
Vice President - Controller
15
<PAGE> 16
EXHIBIT INDEX
Pursuant to Item 601 of Regulation S-K
<TABLE>
<CAPTION>
Exhibit Title
- ------- -----
<S> <C>
10.3 Employment Agreement made as of August 16, 1995 with James E. Feldt
10.4 Resolution adopted by the Board of Directors of the Company relating
to the consultant compensation of Chaim Y. Edelstein, a director
11 Statements regarding computation of per share earnings
27 Financial Data Schedule
</TABLE>
16
<PAGE> 1
EXHIBIT 10.3
JAMES E. FELDT
EMPLOYMENT AGREEMENT
This will confirm our agreement under which you are to serve as
EXECUTIVE VICE PRESIDENT-GENERAL MERCHANDISE MANAGER of Hills Department
Store Company (the "Company"), a Delaware corporation and a subsidiary of Hills
Stores Company (the "Parent").
1. Term. The Company will employ you, and you accept employment, as provided
herein, for a term beginning on the Effective Date (as defined in paragraph 6)
and ending on the second anniversary of the Effective Date, unless sooner
terminated as provided in paragraph 4.
2. Duties and Responsibilities. During the term of employment, you shall be
EXECUTIVE VICE PRESIDENT-GENERAL MERCHANDISE MANAGER of the Company and your
primary duties will be the SENIOR SUPERVISION OF ALL MERCHANDISING activities on
behalf of the Company.
3. Compensation and Benefits.
(a) Your compensation ("Base Compensation") during the term of this
agreement shall be at the rate of $325,000.00 per year. Thereafter, Base
Compensation shall be reviewed on an annual basis and increased if the
Compensation Committee of the Board of Directors deems it appropriate. No
decrease in Base Compensation will be permitted during the term of the
Agreement. In accordance with the Company's practice for its senior executives,
you will be paid twice each month.
(b) You shall be entitled to participate in any bonus, stock option or other
incentive compensation plans, profit-sharing plans, retirement plans, life and
health insurance plans, vacation and other benefit plans which are made
generally available to executives of the Company at a level commensurate with
your position and/or years worked for the Company. You shall also be entitled to
such other perquisites as the Company or the Compensation Committee of the Board
of Directors deem appropriate.
(c) You shall be entitled to reimbursement for your ordinary and necessary
business expenses, travel and entertainment incurred in the performance of your
services hereunder. You shall provide the Company with documentation of such
expenses in accordance with the Company's normal practices.
17
<PAGE> 2
4. Termination.
(a) By the Company. Your employment hereunder shall terminate upon your
death and may be terminated at the option of the Company (x) forthwith upon
delivery of Notice of Termination for Cause, (y) upon 90 days' Notice of
Termination in the case of Disability or (z) upon 90 days' Notice of Termination
without Cause.
(i) Upon termination by the Company for Cause, the Company shall have
no further obligations whatsoever to you hereunder, other than for payment of
any unpaid Base Compensation (as hereinafter defined) and vested benefits under
any retirement plans to which you are a participant in accordance with the terms
of the specific plans, accrued to the date of termination, and reimbursement of
any unused vacation pay accrued to the date of termination and any reimbursable
expenses incurred prior to the date of termination.
(ii) Upon termination by virtue of death or Disability, your Base
Compensation shall cease to accrue as of the effective date of termination, but
you or your estate shall be entitled to payment of: any unpaid Base Compensation
accrued to the date six (6) months following the date of termination; a pro rata
portion of any bonuses or other incentive compensation payable pursuant to
paragraph 3(b) with respect to the fiscal year of termination, determined on the
basis of the portion of such fiscal year during which you were employed
hereunder; and vested benefits under any retirement plans to which you are a
participant (in accordance with the terms of the specific plans) accrued prior
to date of termination; and reimbursement of any unused vacation pay accrued to
the date of termination and any reimbursable expenses incurred prior to the date
of termination.
(iii) Upon termination, by the Company without Cause (other than for
reasons of death or Disability) or by you, purusant to paragraph 4(b), you
shall, subject to the following sentence, continue to receive your Base
Compensation twice a month in accordance with paragraph 3(a) and the Company
shall maintain in full force and effect Insurance Benefits (as defined and
limited below), in each case for the full term of this Agreement or the date
twelve (12) months after the date (the "Notice Date") on which a Notice of
Termination is given, whichever is later; and you shall be further entitled to
receive: (A) vested benefits under any retirement plans to which you are a
participant in accordance with the terms of the specific plans accrued prior to
date of termination; and (B) reimbursement of any unused vacation pay accrued to
the date of termination and any reimbursable expenses incurred prior to the date
of termination. Should your employment be terminated without Cause, you shall
have an obligation to use reasonable efforts to seek other employment
appropriate to your skill and experience, and to promptly notify the Company
upon obtaining any such employment; and your Base Compensation shall be reduced
by the amount of any direct compensation earned by you and paid to you. For
purposes of this paragraph 4(a)(iii) and paragraph 6, "Insurance Benefits" shall
mean all life and health insurance or other similar plans in which you were
entitled to participate immediately prior to the date of termination. If, your
continued participation in any or all such plans is not possible under the
general terms and provisions thereof because you are no longer deemed to be an
employee of the Company, the Company itself shall pay or provide for payment of
such Insurance Benefits.
(b) By the Employee. Subject to the conditions set forth below, you may
terminate your employment hereunder in the event of occurrence of any of the
following:
(i) A material breach by the Company of any of the provisions of this
Agreement, which failure or breach shall have continued for thirty days after
written notice from you to the Company specifying the nature of such failure or
breach; or
(ii) The Company's failure to retain you as its EXECUTIVE VICE
PRESIDENT-GENERAL MERCHANDISE MANAGER (other than as a result of an effective
promotion); or
(iii) A significant change in the nature or scope of your
responsibilities, authorities, powers, functions or duties (other than a change
resulting from an effective promotion).
Your right to terminate your employment under paragraphs 4(b)(i), (ii),
(iii) is conditioned upon your giving
18
<PAGE> 3
written notice to the President, with a copy to the Vice President-Secretary, of
your decision to terminate employment not later than three months after the
occurrence of the event giving rise to the right to terminate. Such termination
of employment shall be effective one month after your written notice has been
delivered to the Company, provided the occurence specified in your notice shall
then be continuing.
(c) In addition to the reasons set forth in paragraph 4(b), you may
terminate your employment hereunder at any time, with or without good cause,
upon 90 days' Notice of Termination to the Company. In the event of a
termination by you pursuant to this paragraph 4(c), the Company shall have no
further obligations whatsoever to you hereunder, other than for payment of any
unpaid Base Compensation accrued to the date of termination and vested benefits
under any retirement plans to which you are a participant in accordance with the
terms of the specific plans accrued prior to date of termination; and
reimbursement of any properly reimbursable expenses incurred prior to the date
of termination.
(d) As used herein:
- "Cause" shall mean (i) the willful failure by you to
perform your functions and assume your responsibilities in accordance with the
terms of this Agreement, which failure amounts to material neglect of your
duties, after a written demand for substantial performance is delivered to you
by the Company, (ii) the willful engagement by you in conduct which is
materially injurious to the Company or any of its subsidiaries or affiliates,
monetarily or otherwise, (iii) the misappropriation (including the unauthorized
use or disclosure of confidential or proprietary information of the Company or
any of its subsidiaries or affiliates) or embezzlement with respect to the
Company or any of its subsidiaries or affiliates, (iv) a conviction of or guilty
plea or confession by you to any fraud, conversion, misappropriation,
embezzlement or felony, or (v) your failure to substantially perform any
material covenant to be performed by you hereunder after a written demand for
substantial performance is delivered to you by the Company, or the taking of any
action in the course of your employment under this Agreement that is known by
you to have been prohibited by Company policy or by this Agreement.
- "Disability" shall mean that, as a result of any
physical or mental disability, you are unable to perform your major duties
hereunder for a continuous period of 120 days or a total of at least 180 days in
any period of 365 consecutive days.
(e) Any purported termination of your employment shall be communicated by
written Notice of Termination from one party to the other party hereto. For
purposes of this Agreement, a "Notice of Termination" shall mean a notice which
shall indicate the specific termination provision in this Agreement relied upon
and shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of your employment under the provision so
indicated.
5. Covenants.
(a) You recognize that the knowledge of, information concerning and
relationship with customers, suppliers and agents, and the knowledge of the
Company's business methods, systems, plans and policies which you will
establish, receive or obtain as an employee of the Company, are valuable and
unique assets of the business of the Company. You will not, during or within two
(2) years after the term of your employment, disclose any such knowledge or
information pertaining to the Company, its customers, suppliers, agents,
policies or other aspects of its business, for any reason or purpose whatsoever,
except pursuant to your duties hereunder or as otherwise authorized by the
Company in writing. The foregoing restriction shall not apply, following
termination of your employment hereunder, to knowledge or information which (i)
is in or enters the public domain without violation of this Agreement or other
obligations of confidentiality by you or your agents or representatives, (ii)
you can demonstrate was in your possession on a non-confidential basis prior to
the commencement of your employment with the Company, or (iii) you can
demonstrate was received or obtained by you, on a non-confidential basis from a
third party who did not acquire it wrongfully or under an obligation of
confidentiality, subsequent to the termination of your employment hereunder.
(b) All memoranda, notes, records or other documents made or compiled by you
or made available to you
19
<PAGE> 4
while employed concerning customers, suppliers, agents or personnel of the
Company, or the Company's business methods, systems, plans and policies, shall
be the Company's property and shall be delivered to the Company on termination
of your employment or at any other time on request.
(c) During the term of your employment and for two (2) years thereafter, you
shall not, except pursuant to and in furtherance of your duties hereunder,
directly or indirectly solicit or contact any employee of the Company with a
view to inducing or encouraging such employee to leave the employ of the Company
for the purpose of being hired by you, an employer affiliated with you or any
competitor of the Company.
(d) You acknowledge that the provisions of this paragraph 5 are reasonable
and necessary for the protection of the Company and that the Company will be
irrevocably damaged if such covenants are not specifically enforced.
Accordingly, you agree that, in addition to any other relief to which the
Company may be entitled in the form of actual or punitive damages, the Company
shall be entitled to seek and obtain injunctive relief from a court of competent
jurisdiction for the purposes of restraining you from any actual or threatened
breach of such covenants.
(e) In the event that, following the termination of this Agreement, you are
entitled to receive any further payments other than for compensation or other
amounts accrued prior to termination or expiration of this Agreement, such
payments shall nonetheless cease and the Company shall no longer be obligated to
make such payments if there is a material breach of any of the covenants in this
paragraph 5 and you shall forthwith upon demand of the Company repay any such
amounts paid to you subsequent to the date such breach occurred.
6. Effective Date of Agreement. This Agreement shall be effective (the
"Effective Date") as of AUGUST 16, 1995.
7. Miscellaneous.
(a) This Agreement constitutes the entire agreement between the parties
hereto with regard to the subject matter hereof, superseding all prior
understandings and agreements whether written or oral. This Agreement may not be
amended or revised except by a writing signed by the parties.
(b) This Agreement shall be binding upon and inure to the benefit of the
parties and their respective successors and assigns, but may not be assigned by
either party without the prior written consent of the other.
(c) Any notices and all other communications provided for in this Agreement
shall be in writing and shall be deemed to have been duly made when delivered by
fax and courier delivery, addressed as follows (or to such other address as you
or the Company may specify by notice hereunder to the other):
If to you:
JAMES E. FELDT
85 SKYLINE DRIVE
WESTWOOD, MA 02093
If to the Company and the Parent:
Hills Stores Company
15 Dan Road
Canton, Massachusetts 02021
Attention: Vice President-Secretary
(d) Captions have been inserted solely for convenience of reference and in
no way define, limit or describe the scope or substance of any provisions of
this Agreement.
20
<PAGE> 5
(e) The provisions of this Agreement are severable, and the invalidity of
any provision shall not affect the validity of any other provision.
(f) This Agreement shall be construed under and governed by the internal
laws of the Commonwealth of Massachusetts.
(g) This Agreement may be executed in two or more counterparts, each of
which shall be deemed to be an original, but all of which together shall
constitute one and the same instrument. If the foregoing correctly sets forth
our understanding on the subject matter hereof, kindly sign and return to the
Company the enclosed copy hereof, which will thereupon become our binding
agreement.
Sincerely,
Hills Department Store Company
By:_________________________
E. Jackson Smailes
President
Hills Stores Company
By:_________________________
William K. Friend
Vice President-Secretary
Agreed:
Employee
____________________________
James E. Feldt
21
<PAGE> 1
RESOLVED, that Chaim Y. Edelstein be, and hereby is, retained as a
consultant to the Company to provide corporate administration, marketing, store
development and merchandising advice to the Company through January 31, 1996 and
that as consideration for these services, he be paid a consulting fee of
$50,000.00 per month on the first day of the month following each month of
consulting services provided to the Company by Mr. Edelstein.
22
<PAGE> 1
EXHIBIT 11
HILLS STORES COMPANY AND SUBSIDIARIES
STATEMENTS RE COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Thirteen Thirteen
Weeks Ended Weeks Ended
October 28, October 29,
1995 1994
----------- -----------
<S> <C> <C>
Weighted average primary shares outstanding
Weighted average number of common shares
assumed to be outstanding during the period 9,898,150 10,516,933
Assumed conversion of preferred stock 1,266,104 3,483,067
Assumed exercise of stock options -- 141,390
Assumed exercise of stock rights -- --
Assumed exercise of stock warrants -- --
---------- ----------
11,164,254 14,141,390
========== ==========
</TABLE>
<TABLE>
<CAPTION>
Thirty-nine Thirty-nine
Weeks Ended Weeks Ended
October 28, October 29,
1995 1994
----------- -----------
<S> <C> <C>
Weighted average primary shares outstanding
Weighted average number of common shares
assumed to be outstanding during the period 9,754,522 10,516,933
Assumed conversion of preferred stock -- 3,483,067
Assumed exercise of stock options -- 96,892
Assumed exercise of stock rights -- --
Assumed exercise of stock warrants -- --
--------- ----------
9,754,522 14,096,892
========= ==========
</TABLE>
23
<PAGE> 2
EXHIBIT 11
HILLS STORES COMPANY AND SUBSIDIARIES
STATEMENTS RE COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Thirteen Thirteen
Weeks Ended Weeks Ended
October 28, October 29,
1995 1994
----------- -----------
<S> <C> <C>
Weighted average fully-diluted shares outstanding
Weighted average number of common shares
assumed to be outstanding during the period 9,903,911 10,516,933
Assumed conversion of preferred stock 1,260,343 3,483,067
Assumed exercise of stock options -- 141,390
Assumed exercise of stock rights 182,085 700,000
Assumed exercise of stock warrants -- --
---------- ----------
11,346,339 14,841,390
========== ==========
</TABLE>
<TABLE>
<CAPTION>
Thirty-nine Thirty-nine
Weeks Ended Weeks Ended
October 28, October 29,
1995 1994
----------- -----------
<S> <C> <C>
Weighted average fully-diluted shares outstanding
Weighted average number of common shares
assumed to be outstanding during the period 10,057,566 10,516,933
Assumed conversion of preferred stock -- 3,483,067
Assumed exercise of stock options -- 96,892
Assumed exercise of stock rights -- 700,000
Assumed exercise of stock warrants -- --
---------- ----------
10,057,566 14,796,892
========== ==========
</TABLE>
24
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> OCT-28-1995
<CASH> 4,625
<SECURITIES> 0
<RECEIVABLES> 66,776
<ALLOWANCES> (4,000)
<INVENTORY> 518,108
<CURRENT-ASSETS> 616,356
<PP&E> 225,075
<DEPRECIATION> (34,418)
<TOTAL-ASSETS> 1,094,334
<CURRENT-LIABILITIES> 508,183
<BONDS> 305,140
<COMMON> 25,206
0
99
<OTHER-SE> 246,588
<TOTAL-LIABILITY-AND-EQUITY> 1,094,334
<SALES> 1,200,319
<TOTAL-REVENUES> 1,200,319
<CGS> 873,574
<TOTAL-COSTS> 873,574
<OTHER-EXPENSES> 347,651
<LOSS-PROVISION> 807
<INTEREST-EXPENSE> 36,680
<INCOME-PRETAX> (57,586)
<INCOME-TAX> (33,515)
<INCOME-CONTINUING> (24,071)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (24,071)
<EPS-PRIMARY> (2.47)
<EPS-DILUTED> (2.39)
</TABLE>
