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 November 2, 1996
- ----- 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
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HILLS STORES COMPANY
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(Exact name of registrant as specified in its charter)
DELAWARE 31-1153510
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
15 DAN ROAD, CANTON, MASSACHUSETTS 02021
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(Address of principal executive offices) (Zip Code)
617-821-1000
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(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
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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 November 30, 1996 was
10,231,184 shares.
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HILLS STORES COMPANY AND SUBSIDIARIES
TABLE OF CONTENTS
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PART I - FINANCIAL INFORMATION
FINANCIAL STATEMENTS
<S> <C> <C>
Condensed Consolidated Balance Sheets as of November 2, 1996,
February 3, 1996, and October 28, 1995 3
Condensed Consolidated Statements of Operations for the
Thirteen and Thirty-nine Weeks Ended November 2, 1996 and
October 28, 1995 4
Condensed Consolidated Statements of Cash Flows for the
Thirty-nine Weeks Ended November 2, 1996 and October 28, 1995 5
Notes to Condensed Consolidated Financial Statements 6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 10
PART II - OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS 14
ITEM 2: CHANGES IN SECURITIES 14
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K 14
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2
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HILLS STORES COMPANY AND SUBSIDIARIES
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CONDENSED CONSOLIDATED BALANCE SHEETS
<CAPTION>
November 2, February 3, October 28,
(in thousands) 1996 1996 1995
- --------------------------------------------------------------------------------------
(unaudited) (unaudited)
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ASSETS
Current assets:
Cash and cash equivalents $ 25,013 $ 22,898 $ 23,159
Accounts receivable, net 72,688 25,187 62,776
Inventories 539,907 331,697 518,108
Deferred tax asset 34,011 34,011 20,923
Income taxes (Note 10) 33,582 - 37,686
Other current assets 6,556 5,352 4,013
---------- -------- ----------
Total current assets 711,757 419,145 666,665
Property and equipment, net 186,598 190,893 190,657
Property under capital leases, net 110,979 113,785 116,357
Beneficial lease rights, net 7,380 8,247 8,454
Other assets, net 17,573 15,746 13,501
Deferred tax asset 8,233 8,233 10,061
Reorganization value in excess of amounts
allocable to identifiable assets, net 102,138 107,514 138,948
---------- -------- ----------
$1,144,658 $863,563 $1,144,643
========== ======== ==========
LIABILITIES AND COMMON SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of capital leases $ 6,428 5,732 6,121
Borrowings under the revolving
credit facility (Note 2) 137,000 - 169,000
Accounts payable, trade 211,024 87,471 199,431
Other accounts payable and accrued
expenses 186,631 178,852 186,935
---------- -------- ----------
Total current liabilities 541,083 272,055 561,487
Senior notes (Note 3) 195,000 160,000 160,000
Long-term obligations under capital leases 119,553 118,776 119,971
Financing obligations (Note 4) 35,119 25,169 25,169
Other liabilities 6,434 8,264 9,118
Commitments and contingencies - - -
Preferred stock, at mandatory redemption
value (Note 5) 20,807 24,636 25,206
Common shareholder's equity 226,662 254,663 243,692
---------- -------- ----------
$1,144,658 $863,563 $1,144,643
========== ======== ==========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
3
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HILLS STORES COMPANY AND SUBSIDIARIES
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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
Thirteen Weeks Ended Thirty-Nine Weeks Ended
(unaudited) ------------------------ -------------------------
(in thousands, except per November 2, October 28, November 2, October 28,
share amounts) 1996 1995 1996 1995
___________________________________________________________________________________________________
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Net sales $460,983 $448,033 $1,219,831 $1,200,319
Cost of sales 340,152 323,339 902,046 873,574
Selling and administrative expenses 112,110 103,781 318,587 307,249
Amortization of reorganization value in
excess of amounts allocable to
identifiable assets 1,509 1,938 4,540 5,816
Costs related to change in control (Note 6) - - - 43,292
Impairment of long-lived assets (Note 7) - - 11,706 -
-------- -------- ---------- ----------
Operating earnings (loss) 7,212 18,975 ( 17,048) ( 29,612)
Interest expense, net ( 13,691) ( 13,959) ( 42,423) ( 35,140)
-------- -------- ---------- ----------
Earnings (loss) before income taxes,
and extraordinary loss ( 6,479) 5,016 ( 59,471) ( 64,752)
Income tax benefit 3,675 17,425 31,608 37,686
-------- -------- ---------- ----------
Earnings (loss) before extraordinary loss ( 2,804) 22,441 ( 27,863) ( 27,066)
Extraordinary loss (Notes 2 and 3) ( 2,232) - ( 4,278) -
-------- -------- ---------- ----------
Net earnings (loss) applicable
to common shareholders ($ 5,036) $ 22,441 ($ 32,141) ($ 27,066)
======== ======== ========== ==========
Primary earnings (loss) per
common share (Note 8):
Before extraordinary items ($ 0.27) $ 2.01 ($ 2.72) ($ 2.77)
Extraordinary items ( 0.22) - ( 0.42) ( -)
-------- -------- ---------- ----------
Net earnings (loss) per share ($ 0.49) $ 2.01 ($ 3.14) ($ 2.77)
======== ======== ========== ==========
Fully-diluted earnings (loss) per
common share (Note 8):
Before extraordinary items ($ 0.27) $ 1.98 ($ 2.72) ($ 2.69)
Extraordinary items ( 0.22) - ( 0.42) -
-------- -------- ---------- ----------
Net earnings (loss) per share ($ 0.49) $ 1.98 ($ 3.14) ($ 2.69)
======== ======== ========== ==========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
4
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HILLS STORES COMPANY AND SUBSIDIARIES
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Thirty-Nine Weeks Ended
-------------------------
(unaudited) November 2, October 28,
(in thousands) 1996 1995
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($ 32,141) ($ 27,066)
Adjustments to reconcile net loss to net
cash used for operating activities
before reorganization items:
Depreciation and amortization 26,304 23,265
Amortization of deferred financing costs 5,308 3,055
Extraordinary loss on extinguishment of debt 4,278 -
Amortization of reorganization value in excess
of amounts allocable to indentifiable assets 4,540 5,816
Loss on disposal of fixed assets 998 54
Impairment of long-lived assets 11,706 -
Increase in accounts receivable and other
current assets ( 48,705) ( 44,486)
Increase in inventories ( 208,210) ( 204,257)
Decrease in accounts payable and
accrued expenses 133,739 97,212
Increase in income taxes ( 33,582) ( 37,686)
Other, net ( 70) 369
-------- --------
Net cash used for operating activities ( 135,835) ( 183,724)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ( 26,158) ( 50,551)
-------- --------
Net cash used for investing activities ( 26,158) ( 50,551)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of 12 1/2% Senior Notes 195,000 -
Fees incurred with the issuance of
12 1/2% Senior Notes ( 8,100) -
Redemption of 10.25% Senior Notes ( 160,000) -
Payment of debt premium ( 1,749) -
Borrowings under revolving credit facility, net 137,000 169,000
Shares repurchased per self-tender offer - ( 75,000)
Fixture and equipment financings 12,639 -
Principal payments under capital lease obligations ( 4,951) ( 4,537)
Cash distributions pursuant to the Plan
of Reorganization ( 2,068) ( 2,348)
Other ( 3,663) ( 9,732)
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Net cash provided by financing activities 164,108 77,383
-------- --------
Net increase (decrease) in cash
and cash equivalents 2,115 ( 156,892)
Cash and cash equivalents at beginning of period 22,898 180,051
-------- --------
Cash and cash equivalents at end of period $ 25,013 $ 23,159
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
5
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HILLS STORES COMPANY AND SUBSIDIARIES
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NOTES TO CONDENSED 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. Certain prior year amounts have been reclassified to conform to the
current year presentation. The Company's business is seasonal in nature and
the results of operations for the interim periods presented are not necessarily
indicative of the results to be expected for the full fiscal year. The fourth
quarter of each fiscal year provides the most significant portion of the
Company's annual sales and most of its operating earnings, with operating
earnings particularly concentrated in the Christmas selling season.
2. REVOLVING CREDIT AGREEMENT
--------------------------
On October 1, 1996, the Company, through its wholly-owned subsidiary Hills
Department Store Company ("HDSC"), and C.R.H. International, Inc. ("CRH"), a
wholly-owned subsidiary of HDSC (collectively referred to as the "Borrowers"),
closed on a new $300 million secured revolving credit facility (the "Facility"),
of which $200 million is available as a letter of credit facility. Borrowings
under the Facility are limited by a borrowing base, as defined, and bear
interest, at the option of the Borrowers, at either of (1) the Bank of America's
"reference rate" plus a margin ranging from 0% to .75% or (2) LIBOR plus a
margin ranging from 1.5% to 2.5% (2.25% at October 31, 1996), determined by the
Company's excess cash flow. The Borrowers must pay commitment fees at an annual
rate of 3/8% on the average daily unused portion of the commitment. The
Borrowers must also pay letter of credit fees on the average undrawn amount at
an annual rate ranging from 1.5% to 2.25% (2.0% at October 31, 1996), determined
by the Company's excess cash flow. The Facility is secured by a pledge of all
of the capital stock of the Borrowers and their subsidiaries (the
"Subsidiaries") and a security interest in all tangible and intangible assets
of the Company, the Borrowers and the Subsidiaries, other than store fixtures
and equipment and real estate. The Facility is guaranteed by the Company and
the Subsidiaries.
The financial covenants under the Loan and Security Agreement (the "Agreement")
require (1) that the Company maintain tangible net worth (after adjusting for
goodwill and certain non-cash reserves) of $130 million at year-end, with
seasonally lower amounts at other times during the year, and (2) that earnings
before interest, taxes, depreciation and amortization, and certain other items
("EBITDA") defined in the Agreement exceed cash requirements for capital
expenditures, taxes, and net interest/debt service. The Agreement also
contains, among other restrictions, provisions limiting to varying degrees:
business combinations, the issuance of certain kinds of additional debt, the
6
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HILLS STORES COMPANY AND SUBSIDIARIES
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2. REVOLVING CREDIT AGREEMENT (CONTINUED)
--------------------------------------
repurchase and prepayment of debt, and the payment of dividends. In addition,
the Facility requires the outstanding principal balance of loans to be zero
for at least thirty consecutive days during the period from December 1 of each
year to March 31 of the next year.
In connection with this transaction, the Company recognized an extraordinary
after-tax loss for early extinguishment of debt of $2.2 million, or $.22 per
share, in the third quarter, from the write-off of deferred financing costs
related to the prior credit facility. Front-end fees in connection with the
Facility were $2.25 million and will be amortized over the life of the
Facility.
3. SENIOR NOTES
------------
On April 19, 1996 the Company issued $195 million of unsecured 12 1/2% Senior
Notes (the "New Senior Notes") due 2003. The New Senior Notes are noncallable,
unconditionally guaranteed by all the subsidiaries of the Company, with interest
payable semiannually. The New Senior Notes contain covenants regarding
limitations on debt incurrence and the issuance of preferred stock. Separate
financial statements of the Company's subsidiary guarantors have not been
provided because (1) the subsidiary guarantors constitute all of the Company's
direct and indirect subsidiaries, (2) they have fully and unconditionally
guaranteed the New Senior Notes on a joint and several basis, (3) their
aggregate assets, liabilities, earnings and equity are substantially equivalent
to those of the Company on a consolidated basis, and (4) separate financial
statements are not deemed to be material to investors. Additionally, both the
terms of the Company's revolving credit facility and the New Senior Notes limit
the ability of the subsidiaries to pay dividends.
In connection with the sale of the New Senior Notes, the Company offered to
redeem all of its outstanding 10.25% Senior Notes due 2003 (the "Old Senior
Notes") at a redemption price equal to 101% of principal, plus accrued interest,
with $159.1 million of the proceeds from the New Senior Notes placed in escrow
for this purpose. On May 20, 1996, the Company redeemed approximately $155
million of its approximately $157.5 million of outstanding Old Senior Notes.
On July 1, 1996, the Company redeemed the approximately $2.5 million Old Senior
Notes which remained outstanding following the May 20, 1996 redemption at the
indenture specified price of 104% of principal plus accrued interest. In
addition, on June 28, 1996 the Company deposited, in trust, funds sufficient to
redeem, upon issuance, approximately $2.5 million of Old Senior Notes yet to be
issued under the terms of the Company's 1993 plan of reorganization. As a
result of these transactions, the Company recognized an extraordinary after-tax
loss for early extinguishment of debt of $2.0 million, or $.20 per share, in the
second quarter. The extraordinary loss includes the redemption premiums and the
write-off of the related deferred financing costs.
4. FINANCING OBLIGATIONS
---------------------
During June 1996, the Company obtained $2.7 million of financing for certain of
its fixed assets through a sale/leaseback arrangement. The lease, which has
7
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HILLS STORES COMPANY AND SUBSIDIARIES
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4. FINANCING OBLIGATIONS (CONTINUED)
---------------------------------
been accounted for as a capital lease, has a term of 42 months and requires
minimum annual rental payments of $0.5 million in 1996, $0.9 million in 1997,
$0.9 million in 1998, and $0.8 million in 1999.
During July 1996, the Company obtained $10.0 million of financing, which
includes transaction costs, for certain of its fixed assets through a sale/
leaseback arrangement. This transaction was accounted for as a financing
under which the property remains on the Company's books and continues to be
depreciated. The lease, which has a term of five years, requires minimum
annual rental payments of $0.6 million in 1996, $2.1 million in 1997, $3.2
million in 1998, $3.2 million in 1999, $3.2 million in 2000 and $1.6 million
in 2001. The lease term also includes a bargain purchase option to purchase
all of the assets at the end of the initial lease term.
5. HILLS STORES SERIES A CONVERTIBLE PREFERRED STOCK
-------------------------------------------------
During the thirty-nine weeks ended November 2, 1996, 191,418 shares of the
Company's Series A Convertible Preferred Stock ($20 par value) were converted
to the Company's Common Stock on a share for share basis.
6. CHANGE IN CONTROL
-----------------
On July 5, 1995, following a proxy contest in connection with the annual meeting
of shareholders held on June 23, 1995, nominees of Dickstein Partners, Inc. were
certified as being elected to the Board of Directors (see Note 21 of Notes to
Consolidated Financial Statements in the Company's Annual Report for the year
ended February 3, 1996 on Form 10-K). Costs related to the July 5, 1995 change
in control were $43.3 million. These costs consisted of $33.8 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 Old Senior Notes, and legal and
other miscellaneous change in control costs.
7. IMPAIRMENT OF LONG-LIVED ASSETS
-------------------------------
Effective February 4, 1996, the Company adopted Statement of Financial
Accounting Standards No. 121: "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of" ("FAS 121"). FAS 121
requires that the carrying value of long-lived tangible and certain intangible
assets be evaluated periodically in relation to the operating performance and
estimated future cash flows of the underlying assets. In accordance with
FAS 121, in the first quarter of fiscal 1996, the Company recognized a pre-tax
charge of $11.7 million ($7.2 million after tax, or $0.70 per share on a fully-
diluted basis) to reduce the carrying value of certain of its long-lived
tangible and intangible assets to their estimated fair market value.
8
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HILLS STORES COMPANY AND SUBSIDIARIES
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
8. EARNINGS PER SHARE
------------------
Primary earnings (loss) per share for the thirteen week periods ended
November 2, 1996 and October 28, 1995 was computed based on the weighted
average number of common shares assumed to be outstanding during the period of
10,273,400 and 11,164,254 shares, respectively. Fully-diluted earnings (loss)
per share for the thirteen week periods ended November 2, 1996 and October 28,
1995 was computed based on the weighted average number of common shares assumed
to be outstanding during the period of 10,273,400 and 11,346,339 shares,
respectively.
Primary loss per share for the thirty-nine week periods ended November 2, 1996
and October 28, 1995 was computed based on the weighted average number of common
shares assumed to be outstanding during the period of 10,234,024 and 9,754,522
shares, respectively. Fully-diluted loss per share for the thirty-nine week
periods ended November 2, 1996 and October 28, 1995 was computed based on the
weighted average number of common shares assumed to be outstanding during the
period of 10,234,024 and 10,057,566 shares, respectively.
9. ACCOUNTING FOR STOCK-BASED COMPENSATION
---------------------------------------
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123: "Accounting for Stock-Based
Compensation" ("FAS 123") which is effective for the Company's fiscal year
beginning February 4, 1996. FAS 123 requires expanded disclosures of stock-
based compensation arrangements with employees and encourages, but does not
require, the recognition of compensation expense based on the fair value of the
equity instrument awarded. Companies are permitted, however, to continue to
apply APB Opinion No. 25, which recognizes compensation expense based on the
intrinsic value of the equity instrument awarded. The Company will continue to
apply APB Opinion No. 25 to its stock-based compensation awards to employees
and will disclose the required pro forma effect on net income and earnings
per share.
10. INCOME TAXES
------------
Income taxes reflected as current assets represent the net tax benefit
recognized for the loss incurred for the interim year to date period. This
asset is expected to be realized through an offset to tax expense applicable
to fourth quarter results (see Note 1).
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 NOVEMBER 2, 1996 COMPARED WITH
THIRTEEN WEEKS ENDED OCTOBER 28, 1995
Sales increased 2.9% compared with the same period in 1995. The sales increases
resulted from five new stores which opened in late 1995, and from a 1.5%
increase in comparable store sales. Sales in hardlines categories as a group,
especially in toys, electronics and food, increased while softlines categories
as a group experienced a slight decrease. Ladies apparel sales improved from
previously soft trends, while sales in other apparel and soft home categories
continued to be weak.
Cost of sales as a percentage of sales was 73.8% in fiscal 1996 compared with
72.2% in the third quarter of 1995. The 1.6% decrease in margins resulted
primarily from aggressive pricing in selected back-to-school products (designed
to reverse a decline in customer traffic patterns which had been experienced
in the first half of 1996) and markdowns for earlier clearance of certain fall
merchandise which, last year, were delayed in an effort to pursue full-priced
sales deeper into the season.
Selling and administrative expenses, including depreciation and other occupancy
expenses, as a percentage of sales were 24.3% compared with 23.2% in 1995, a
1.1% increase. This increase was due to the five new stores that were opened
in late 1995, a shift in the timing of advertising expenses related to a greater
emphasis on television and radio, costs for programs to improve control and
customer service standards, and a benefit to expenses in the third quarter of
1995 related to the timing of estimated expense accruals.
The effective tax rate was 56.7% in the third quarter of fiscal 1996. The
income tax rate exceeds the federal statutory rate due to the impact of state
income taxes and the relationship between non-deductible amortization of
reorganization value and the related expected pre-tax earnings. Income taxes
for the third quarter of fiscal 1995 reflected a tax benefit of approximately
$20.3 million from the effect of a change in the estimated effective tax rate
applicable to the results of the first and second quarters of 1995.
The after-tax extraordinary loss of $2.2 million in 1996 represented the early
extinguishment of debt related to the refinancing of the Company's bank credit
facility.
THIRTY-NINE WEEKS ENDED NOVEMBER 2, 1996 COMPARED WITH
THIRTY-NINE WEEKS ENDED OCTOBER 28, 1995
Sales increased 1.6% compared with the same period in 1995. This increase was
primarily due to opening ten new stores during fiscal 1995. Comparable store
sales of stores open for a full fiscal year decreased by 1.1%, primarily
reflecting weakness in softlines categories and declines in customer traffic in
the first half of the year.
Cost of sales as a percentage of sales was 73.9% in fiscal 1996 compared with
72.8% in fiscal 1995. The decrease in gross margin percentage of 1.1% was
primarily due to a year-to-year decrease in selling prices of selected
10
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (CONTINUED)
THIRTY-NINE WEEKS ENDED NOVEMBER 2, 1996 COMPARED WITH
THIRTY-NINE WEEKS ENDED OCTOBER 28, 1995 (CONTINUED)
merchandise caused by continued competitive conditions, the decision to
aggressively price certain back-to-school products to rebuild customer traffic,
and more aggressive markdowns this year to clear seasonal merchandise.
Selling and administrative expenses, including depreciation and other occupancy
expenses, as a percentage of sales were 26.1% in fiscal 1996 compared with 25.6%
in fiscal 1995. The increase of 0.5% was primarily due to the ten new stores
opened during 1995, offset by savings as a result of the Company's continued
emphasis on cost control.
See Note 6 of the Notes to Condensed Consolidated Financial Statements regarding
the charge for the July 5, 1995 change in control.
See Note 7 of the Notes to Condensed Consolidated Financial Statements regarding
the charge for the impairment of long-lived assests.
Interest expense, net, was $42.4 million in fiscal 1996 compared to $35.1
million in fiscal 1995. The $7.3 million increase was primarily due to the
increased interest expense for the new 12 1/2% Senior Notes.
The Company's effective tax rate was 53.1% in fiscal 1996 compared with a rate
of 58.2% in fiscal 1995. The decrease in the rate results principally from a
change in the relationship between non-deductible amortization of reorganization
value and the related expected pre-tax earnings, and recording the tax benefit
from the impairment of long-lived assets charge at the marginal rate.
The after-tax extraordinary loss of $4.3 million in 1996 represented the early
extinguishment of debt related to the refinancing and redemption of the 10.25%
Senior Notes and the write-off of the deferred financing costs related to the
previous credit agreement (see Notes 2 and 3 of the Notes to Condensed
Consolidated Financial Statements).
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Net cash used for operating activities was $135.8 million for the thirty-nine
weeks ended November 2, 1996 compared with $183.7 million for the same period
last year. The use of cash for the interim periods to date primarily reflects
the seasonal build-up of merchandise inventories in anticipation of holiday
season sales. The decrease in the use of cash of $47.9 million included $43.3
million related to the change in control (see Note 6 of the Notes to Condensed
Consolidated Financial Statements).
Net cash used for investing activities was $26.2 million for the first nine
months of 1996 compared with $50.6 million for the first nine months of 1995, a
$24.4 million decrease. This decrease was due to the Company substantially
completing its chainwide remodeling in fiscal 1995. In addition, the prior
year's use of cash reflected the impact of opening ten new stores. During
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
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
fiscal year 1996, capital expenditures, primarily for store remodeling and the
replacement and upgrade of fixture and equipment, are estimated at $32 million,
with one new store opening. In addition, the Company is nearing completion of
planning for the improvement of its information systems, and may begin to make
additional capital expenditures (not included in the $32 million estimate) for
the implementation of these improvements prior to the end of fiscal year 1996.
Net cash provided by financing activities was $164.1 million for the first nine
months of fiscal 1996 compared with $77.4 million in the same period a year ago,
a $86.7 million increase. The increase was due to $26.9 million in net proceeds
received from the issuance of long-term debt in excess of the debt refinanced,
$12.6 million received from fixture and equipment financings, and the prior year
payment of $75.0 million related to the Company's self-tender offer (see Note 20
of Notes to Consolidated Financial Statements in the Company's Annual Report
for the year ended February 3, 1996 on Form 10-K). This increase was partially
offset by a $32.0 million decrease in the seasonal usage of the revolving credit
facility in 1996 compared with 1995. During the first nine months of fiscal
1996, average borrowings under the revolving credit facility were $62.9 million
at an average interest rate of 8.5%. Average borrowings were $61.1 million at
an average interest rate of 9.5% for the same period last year.
As a result of the Company's long-term financing activities during fiscal 1996
and the improvements in the new bank credit facility (see Note 2 of the Notes
to Condensed Consolidated Financial Statements), the Company has improved its
liquidity compared with the prior year. Excess credit availability at
November 2, 1996 was approximately $138 million (prior to temporary availability
reductions for duplicate letters of credit related to the change-over of the
credit facilities) compared with approximately $75 million at October 28, 1995.
The Company believes that its credit arrangements, together with cash from
operations, will enable the Company to maintain the liquidity necessary to
finance its continuing operations.
The terms of the Company's revolving credit facility and the new 12 1/2 Senior
Notes limit the ability of the Company's subsidiaries to pay dividends. Any or
all of the restrictions, limitations or contingencies under the revolving credit
facility and the new Senior Notes Indenture, as well as the Company's leverage,
could adversely affect the Company's ability to obtain additional financing in
the future, to make capital expenditures, to effect store expansions, to make
acquisitions, to take advantage of business opportunities that may arise, and
to withstand adverse general economic and retail industry conditions and
increased competitive pressures. Retail suppliers and their factors monitor
carefully the financial performance of retail companies such as the Company,
and may reduce credit availability quickly upon learning of actual or
perceived deterioration in the financial condition or results of operations of
a retail company.
12
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
- ------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
Certain statements contained in this document (in particular, the discussion of
liquidity) are forward-looking statements that involve a number of risks and
uncertainties. Among the factors that could cause actual results to differ
materially are the following: general economic conditions, consumer demand,
consumer preferences and weather patterns in the Midwest and Mid-Atlantic
regions of the United States; competitive factors, including continuing
pressure from pricing and promotional activities of major competitors; impact
of excess retail capacity and the availability of desirable store locations on
suitable terms; the availability, selection and purchasing of attractive
merchandise on favorable terms; import risks, including potential disruptions
and duties, tariffs and quotas on imported merchandise; acquisition and
divestment activities; and other factors that may be described in this document.
13
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
- ------- -----------------
Reference is made to the Report on Form 10-Q of the Company for the quarter
ended May 4, 1996.
ITEM 2. CHANGES IN SECURITIES
- ------- ---------------------
a) Reference is made to Part II, Item 2(a) of the Report on Form 10-Q of the
Company for the quarter ended August 3, 1996 for a discussion of the redemption
of the Company's 10.25% Senior Notes due 2003.
b) Reference is made to Part II, Item 2(b) of the Report on Form 10-Q of the
Company for the quarter ended August 3, 1996 for a discussion of the exchange of
the Company's 12 1/2% Senior Notes due 2003 for 12 1/2% Senior Notes due 2003,
Series B.
c) During the quarter ended November 2, 1996 the Company issued 30,680 shares
of Common Stock, par value $.01 per share (the "Common Shares"), upon the
conversion of 30,680 shares of Series A Convertible Preferred Stock, par value
$.10 per share (the "Series A Preferred Shares"). The Series A Preferred
Shares were issued pursuant to the exemption from registration set forth in
Section 1145(a) of the Federal Bankruptcy Code, and the Common Shares were
issued pursuant to the exemption from registration set forth in Section
3(a)(9) of the Securities Act of 1933, as amended.
<TABLE>
<S> <C>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- ------ --------------------------------
a. The following documents are filed as part of this Report:
3.1(1) Amended and Restated Certificate of Incorporation of the Company,
as amended.
3.3(2) Amended and Restated By-Laws of the Company.
4.1(3) Certificate of the Voting Powers, Preferences and other designated
attributes of the Series A Convertible Preferred Stock of the
Company.
4.2(4) Form of Series 1993 Stock Right.
4.3(3) Indenture relating to the 10.25% Senior Notes due 2003 of the
Company (the "Old Senior Note Indenture").
4.4(5) First Supplemental Indenture dated as of January 1, 1995 to the
Old Senior Note Indenture.
4.5(5) Second Supplemental Indenture dated as of August 1, 1995 to the
Old Senior Note Indenture.
4.6(6) Third Supplemental Indenture dated as of January 15, 1996 to the
Old Senior Note Indenture.
</TABLE>
14
<PAGE>
<TABLE>
<S> <C>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (CONTINUED)
- ------- --------------------------------------------
4.7(7) Series 1993 Warrant Agreement dated October 4, 1993 between the
Company and Chemical Bank, as Warrant Agent.
4.8(8) Rights Agreement dated as of August 16, 1994 (the "Rights
Agreement") between the Company and Chemical Bank,
as Rights Agent.
4.9(8) Form of Certificate of the Voting Powers, Preferences and other
designated attributes of Series B Participating Cumulative
Preferred Stock of the Company (which is attached as Exhibit A to
the Rights Agreement incorporated by reference as Exhibit 4.8
hereto).
4.10(8) Form of Right Certificate (which is attached as Exhibit B to the
Rights Agreement incorporated by reference as Exhibit 4.8 hereto).
4.11(9) Amendment dated as of October 18, 1995 to the Rights Agreement.
4.12(10) Indenture relating to the 12 1/2% Senior Notes due 2003 of the
Company.
4.13(10) Registration Rights Agreement, dated as of April 19, 1996, relating
to the 12 1/2% Senior Notes due 2003 of the Company.
4.14(10) Purchase Agreement, dated April 17, 1996, relating to the 12 1/2%
Senior Notes due 2003 of the Company.
10.1(11) Loan and Security Agreement dated as of September 30, 1996 among
the Financial Institutions named therein as the Lenders,
BankAmerica Business Credit, Inc. as the Agent, Hills Department
Store Company and C.R.H. International, Inc. as the Borrowers, and
the Other Loan Parties named therein.
10.2(12)* Employment Agreement made as of February 7, 1996 with Gregory K.
Raven.
10.3(12)* Consulting Agreement made as of February 8, 1996 with Chaim Y.
Edelstein.
10.4(5)* Employment Agreement made as of July 6, 1995 with William K.
Friend.
10.5(10)* Employment Agreement made as of March 25, 1996 with James E. Feldt.
10.6* Employment Agreement with Michael R. Hamilton executed on
November 19, 1996.
10.7(4)* 1993 Incentive and Nonqualified Stock Option Plan.
11 Statement regarding computation of per share earnings.
27 Financial Data Schedule.
<FN>
- ---------------------
* Executive Compensation Plans and Arrangements.
</TABLE>
15
<PAGE>
<TABLE>
<S> <C>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (CONTINUED)
- ------- --------------------------------------------
1. Incorporated by reference from the Annual Report on Form 10-K
of the Company for the fiscal year ended January 28, 1995.
2. Incorporated by reference from the Report on Form 8-K of
the Company dated January 18, 1996.
3. Incorporated by reference from the Form 8-A of the Company
filed on October 5, 1993.
4. Incorporated by reference from the Annual Report on Form 10-K
of the Company for the fiscal year ended January 29, 1994.
5. Incorporated by reference from the Report on Form 10-Q of the
Company for the quarter ended July 29, 1995.
6. Incorporated by reference from the Report on Form 8-K of the
Company dated January 15, 1996.
7. Incorporated by reference from the Report on Form 8-K of the
Company dated October 4, 1993.
8. Incorporated by reference from the Report on Form 8-K of the
Company dated August 16, 1994.
9. Incorporated by reference from the Report on Form 8-K of the
Company dated October 18, 1995.
10. Incorporated by reference from the Report on Form 10-Q
of the Company for the quarter ended May 4, 1996.
11. Incorporated by reference from the Report on Form 8-K of the
Company dated October 1, 1996.
12. Incorporated by reference from the Annual Report on Form 10-K
of the Company for the fiscal year ended February 3, 1996.
b. Reports on Form 8-K
The Company filed a Report on Form 8-K dated October 1, 1996 which
described the new $300 million secured revolving credit facility of
Hills Department Store Company and C.R.H. International, Inc.
The Company filed a Report on Form 8-K dated November 21, 1996
concerning the third quarter financial press release issued on that
date.
</TABLE>
16
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
HILLS STORES COMPANY
Date: December 13, 1996 /s/C. Scott Litten
------------------
C. Scott Litten
Executive Vice President-
Chief Financial Officer
Date: December 13, 1996 /s/Brian M. Sheehan
--------------------
Brian M. Sheehan
Vice President - Controller
17
<PAGE>
<TABLE>
EXHIBIT INDEX
Pursuant to Item 601 of Regulation S-K
Exhibit Title
- ------- -----
<S> <C>
10.6 Employment Agreement with Michael R. Hamilton executed
on November 19, 1996.
11 Statements regarding computations of earnings per share
27 Financial Data Schedule
</TABLE>
<PAGE>
EXHIBIT 10.6
MICHAEL R. HAMILTON
-------------------
EMPLOYMENT AGREEMENT
This will confirm our agreement under which you are to serve as
Executive Vice President-Operations of Hills Department Store Company, a
Delaware corporation (the "Subsidiary") and Hills Stores Company, (the
"Parent"), together collectively referred to as (the "Company").
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 third 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-Operations of the Company. Your primary
responsibilities will be the senior supervision of the store and distribution
activities of the Company and you will report to the President and Chief
Executive Officer.
3. COMPENSATION AND BENEFITS.
(a) Your compensation ("Base Compensation") during the term of
employment shall be at the rate of $312,000 per year. In accordance with the
Company's practice for its senior executives, you will be paid twice each month.
Base Compensation shall be reviewed on an annual basis (the first performance
review will be April 1997) 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 this Agreement.
(b) (i) 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 generally made available to executives of the Company at a level commen-
surate 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.
(ii) Notwithstanding any Company policy to the contrary, you
will be entitled to not less than four (4) weeks vacation per each full year
commencing January 1, 1997.
(iii) You will be eligible to receive a performance bonus for
fiscal year 1996 of up to fifty percent (50%) of your Base Compensation in
accordance with the terms of the Company's performance bonus plan (Level 1).
Any bonus earned for the first fiscal year will be prorated because of less than
a full year's employment. Notwithstanding this proration, assuming you are an
employee of the Company on the bonus payment date (March/April 1997), you will
receive a minimum guaranteed bonus of $100,000 for fiscal 1996.
1
<PAGE>
(iv) In addition, within one week following the Effective Date,
you will be paid a "signing bonus" of $75,000. Should you voluntarily resign
from the Company, other than "for cause" prior to the first anniversary of the
Effective Date, the aforementioned "signing bonus" shall be immediately due and
payable to the Company.
(v) You will receive on or about the Effective Date, an option
grant to purchase 50,000 shares of the Common Stock of the Company pursuant to
the Company's 1993 Incentive and Nonqualified Stock Option Plan.
(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.
(d) You shall be entitled to reimbursement of your relocation costs
and expenses in accordance with the provisions of the executed Offer Sheet.
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 reimburse-
ment 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 Compen-
sation 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, pursuant to paragraph 4(b), you
shall, subject to the following sentence, continue to receive your Base Compen-
sation 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
2
<PAGE>
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.
As used herein - "Cause" shall mean (A) 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, (B) the willful engagement by you in conduct which is materially
injurious to the Company or any of its subsidiaries or affiliates, monetarily or
otherwise, (C) the misappropriation (including the unauthorized use or dis-
closure 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, (D) a conviction of or guilty plea or
confession by you to any fraud, conversion, misappropriation, embezzlement or
felony, or (E) 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 pro-
hibited by Company policy or by this Agreement.
(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-Operations; 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 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.
3
<PAGE>
(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 reimburse-
ment of any properly reimbursable expenses incurred prior to the date of
termination.
As used herein - "Disability" shall mean that, as a result of any
physical or mental disability, you are unable to perform your major duties here-
under for a continuous period of 120 days or a total of at least 180 days in any
period of 365 consecutive days.
(d) 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 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 there-
after, 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.
4
<PAGE>
(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 the date executive commences his employment with
the Company (expected to be October 21, 1996).
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 or 2 days after being mailed by United States registered mail, return
receipt requested and postage prepaid, addressed as follows (or to such other
address as you or the Company may specify by notice hereunder to the other):
If to you:
Michael R. Hamilton
(at such address as
you provide to the
Vice President-Secretary
in writing)
If to the Company or the Parent:
Hills Stores Company
15 Dan Road
Canton, Massachusetts 02021
Attention: Vice President-Secretary
5
<PAGE>
(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.
(e) The provisions of this Agreement are severable, and the in-
validity 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:/s/ Gregory K. Raven
--------------------
Gregory K. Raven
President
Hills Stores Company
By:/s/ William K. Friend
---------------------
William K. Friend
Vice President-Secretary
Agreed:
Employee
/s/ Michael R. Hamilton
- -----------------------
Michael R. Hamilton
11/19/96
- -----------------------
Date
6
<PAGE>
<TABLE>
EXHIBIT 11
HILLS STORES COMPANY AND SUBSIDIARIES
STATEMENTS RE COMPUTATION OF PER SHARE EARNINGS
<CAPTION>
Thirteen Thirteen
Weeks Ended Weeks Ended
November 2, October 28,
1996 1995
----------- -----------
<S> <C> <C>
Weighted average primary shares outstanding
- -------------------------------------------
Weighted average number of common shares
assumed to be outstanding during the period 10,273,400 9,898,150
Assumed conversion of preferred stock - 1,266,104
Assumed exercise of stock options - -
Assumed exercise of stock rights - -
Assumed exercise of stock warrants - -
---------- ----------
10,273,400 11,164,254
========== ==========
</TABLE>
<TABLE>
<CAPTION>
Thirty-Nine Thirty-Nine
Weeks Ended Weeks Ended
November 2, October 28,
1996 1995
----------- -----------
<S> <C> <C>
Weighted average primary shares outstanding
- -------------------------------------------
Weighted average number of common shares
assumed to be outstanding during the period 10,234,024 9,754,522
Assumed conversion of preferred stock - -
Assumed exercise of stock options - -
Assumed exercise of stock rights - -
Assumed exercise of stock warrants - -
---------- ---------
10,234,024 9,754,522
========== =========
</TABLE>
<PAGE>
<TABLE>
EXHIBIT 11
HILLS STORES COMPANY AND SUBSIDIARIES
STATEMENTS RE COMPUTATION OF PER SHARE EARNINGS
<CAPTION>
Thirteen Thirteen
Weeks Ended Weeks Ended
November 2, October 28,
1996 1995
----------- -----------
<S> <C> <C>
Weighted average fully-diluted shares outstanding (1)
- -----------------------------------------------------
Weighted average number of common shares
assumed to be outstanding during the period 10,294,505 9,903,911
Assumed conversion of preferred stock - 1,260,343
Assumed exercise of stock options - -
Assumed exercise of stock rights - 182,085
Assumed exercise of stock warrants - -
---------- ----------
10,294,505 11,346,339
========== ==========
</TABLE>
<TABLE>
<CAPTION>
Thirty-Nine Thirty-Nine
Weeks Ended Weeks Ended
November 2, October 28,
1996 1995
----------- -----------
<S> <C> <C>
Weighted average fully-diluted shares outstanding (1)
- -----------------------------------------------------
Weighted average number of common shares assumed
to be outstanding during the period 10,292,820 10,057,566
Assumed conversion of preferred stock - -
Assumed exercise of stock options - -
Assumed exercise of stock rights - -
Assumed exercise of stock warrants - -
---------- ----------
10,292,820 10,057,566
========== ==========
</TABLE>
The calculation of the weighted average fully-diluted shares outstanding assumes
that actual conversions of Preferred Stock during the thirteen and thirty-nine
weeks ended occurred as of the beginning of the period being reported on. The
conversion of Preferred Stock, and the exercise of stock options, stock rights,
and stock warrants was not assumed, except for the thirteen weeks ended
October 28, 1995, as the result would be anti-dilutive.
(1) This calculation is presented in accordance with Item 601 of Regulation
S-K although it is not required by APB Opinion No. 15.
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> FEB-01-1997
<PERIOD-END> NOV-02-1996
<CASH> 25,013
<SECURITIES> 0
<RECEIVABLES> 75,960
<ALLOWANCES> (3,272)
<INVENTORY> 539,907
<CURRENT-ASSETS> 711,757
<PP&E> 242,784
<DEPRECIATION> (56,186)
<TOTAL-ASSETS> 1,144,658
<CURRENT-LIABILITIES> 541,083
<BONDS> 349,672
20,807
0
<COMMON> 103
<OTHER-SE> 226,559
<TOTAL-LIABILITY-AND-EQUITY> 1,144,658
<SALES> 1,219,831
<TOTAL-REVENUES> 1,219,831
<CGS> 902,046
<TOTAL-COSTS> 942,046
<OTHER-EXPENSES> 334,833
<LOSS-PROVISION> 1,262
<INTEREST-EXPENSE> 42,423
<INCOME-PRETAX> (59,471)
<INCOME-TAX> (31,608)
<INCOME-CONTINUING> (27,863)
<DISCONTINUED> 0
<EXTRAORDINARY> (4,278)
<CHANGES> 0
<NET-INCOME> (32,141)
<EPS-PRIMARY> (3.14)
<EPS-DILUTED> (3.14)
</TABLE>
