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 1, 1997
- ----- 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
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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)
781-821-1000
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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, 1997 was
10,419,403 shares.
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HILLS STORES COMPANY AND SUBSIDIARIES
TABLE OF CONTENTS
------------------
PART I - FINANCIAL INFORMATION
FINANCIAL STATEMENTS
<S> <C> <C>
Condensed Consolidated Balance Sheets as of November 1, 1997,
February 1, 1997, and November 2, 1996 3
Condensed Consolidated Statements of Operations for the
Thirteen and Thirty-nine Weeks Ended November 1, 1997 and
November 2, 1996 4
Condensed Consolidated Statements of Cash Flows for the
Thirty-nine Weeks Ended November 1, 1997 and November 2, 1996 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 1, February 1, November 2,
(in thousands) 1997 1997 1996
- --------------------------------------------------------------------------------------
(unaudited) (unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 20,078 $ 66,163 $ 25,013
Accounts receivable, net 63,737 24,346 72,688
Inventories 522,118 341,477 539,907
Deferred tax asset 57,372 46,491 67,593
Other current assets 5,184 5,115 6,556
---------- -------- ----------
Total current assets 668,489 483,592 711,757
Property and equipment, net 175,201 173,701 186,598
Property under capital leases, net 104,791 112,201 110,979
Beneficial lease rights, net 6,273 6,848 7,380
Other assets, net 35,462 18,418 17,573
Deferred tax asset 13,289 8,085 8,233
Reorganization value in excess of amounts
allocable to identifiable assets, net 93,110 97,508 102,138
---------- -------- ----------
$1,096,615 $900,353 $1,144,658
========== ======== ==========
LIABILITIES AND COMMON SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of capital leases $ 8,580 $ 7,255 $ 6,428
Borrowings under the revolving
credit facility 136,000 - 137,000
Accounts payable, trade 202,556 111,064 211,024
Other accounts payable and accrued
expenses 185,379 182,018 186,631
---------- -------- ----------
Total current liabilities 532,515 300,337 541,083
Senior notes 195,000 195,000 195,000
Capital lease and other financing obligations 148,608 154,639 154,672
Other liabilities 5,385 5,651 6,434
Preferred stock, at mandatory redemption
value (Note 2) 18,317 19,942 20,807
Common shareholder's equity 196,790 224,784 226,662
---------- -------- ----------
$1,096,615 $900,353 $1,144,658
========== ======== ==========
See Notes to Condensed Consolidated Financial Statements
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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 1, November 2, November 1, November 2,
share amounts) 1997 1996 1997 1996
___________________________________________________________________________________________________
<S> <C> <C> <C>
Net sales $434,555 $460,983 $1,137,328 $1,219,831
Cost of sales 319,454 340,152 839,295 902,046
Selling and administrative expenses 106,648 112,110 304,172 318,587
Amortization of reorganization value in
excess of amounts allocable to
identifiable assets 1,463 1,509 4,388 4,540
Impairment of long-lived assets (Note 3) - - - 11,706
-------- -------- ---------- ----------
Operating earnings (loss) 6,990 7,212 ( 10,527) ( 17,048)
Interest expense, net (Note 4) ( 13,236) ( 13,691) ( 36,558) ( 42,423)
-------- -------- ---------- ----------
Loss before income taxes,
and extraordinary loss ( 6,246) ( 6,479) ( 47,085) ( 59,471)
Income tax benefit (Note 5) 2,300 3,675 17,200 31,608
-------- -------- ---------- ----------
Loss before extraordinary loss ( 3,946) ( 2,804) ( 29,885) ( 27,863)
Extraordinary loss (Note 6) - ( 2,232) - ( 4,278)
-------- -------- ---------- ----------
Net loss applicable to common shareholders ($ 3,946) ($ 5,036) ($ 29,885) ($ 32,141)
======== ======== ========== ==========
Primary loss per
common share (Note 7):
Before extraordinary items ($ 0.38) ($ 0.27) ($ 2.87) ($ 2.72)
Extraordinary items - ( 0.22) - ( 0.42)
-------- -------- ---------- ----------
Net loss per share ($ 0.38) ($ 0.49) ($ 2.87) ($ 3.14)
======== ======== ========== ==========
Fully-diluted loss per
common share (Note 7):
Before extraordinary items ($ 0.38) ($ 0.27) ($ 2.88) ($ 2.72)
Extraordinary items - ( 0.22) - ( 0.42)
-------- -------- ---------- ----------
Net loss per share ($ 0.38) ($ 0.49) ($ 2.88) ($ 3.14)
======== ======== ========== ==========
See Notes to Condensed Consolidated Financial Statements
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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 1, November 2,
(in thousands) 1997 1996
- -------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss ($ 29,885) ($ 32,141)
Adjustments to reconcile net loss to net
cash used for operating activities:
Depreciation and amortization 27,523 26,304
Amortization of deferred financing costs 1,883 5,308
Amortization of reorganization value in excess
of amounts allocable to indentifiable assets 4,388 4,540
Loss on disposal of fixed assets 67 998
Impairment of long-lived assets - 11,706
Extraordinary loss on extinguishment of debt - 4,278
Increase in accounts receivable and other
current assets ( 39,460) ( 48,705)
Increase in inventories ( 180,641) ( 208,210)
Increase in accounts payable and
accrued expenses 94,749 133,739
Increase in income taxes ( 17,200) ( 33,582)
Decrease in deferred tax asset 1,115 -
Other, net 82 ( 70)
--------- --------
Net cash used for operating activities ( 137,379) ( 135,835)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ( 20,298) ( 26,158)
Deferred software expenditures ( 19,018) -
--------- --------
Net cash used for investing activities ( 39,316) ( 26,158)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolving credit facility, net 136,000 137,000
Principal payments under capital lease obligations ( 4,706) ( 4,951)
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)
Fixture and equipment financings - 12,639
Cash distributions pursuant to the Plan
of Reorganization ( 84) ( 2,068)
Other ( 600) ( 3,663)
--------- --------
Net cash provided by financing activities 130,610 164,108
--------- --------
Net (decrease) increase in cash
and cash equivalents ( 46,085) 2,115
Cash and cash equivalents at beginning of period 66,163 22,898
--------- --------
Cash and cash equivalents at end of period $ 20,078 $ 25,013
========= ========
See Notes to Condensed Consolidated Financial Statements
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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. HILLS STORES SERIES A CONVERTIBLE PREFERRED STOCK
-------------------------------------------------
During the thirty-nine weeks ended November 1, 1997, 81,245 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.
3. 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.
6
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HILLS STORES COMPANY AND SUBSIDIARIES
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4. INTEREST EXPENSE
----------------
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Interest expense is stated net of the following (in thousands):
<CAPTION>
Thirteen Weeks Ended Thirty-Nine Weeks Ended
------------------------ ------------------------
November 1, November 2, November 1, November 2,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Interest income $ 41 $ 59 $ 467 $ 868
Capitalized interest 353 0 699 0
----- ----- ------ -----
Total for each period $ 394 $ 59 $1,166 $ 868
===== ===== ====== =====
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Capitalized interest relates to the Company's program to replace its primary
information systems ocurring in fiscal years 1997 and 1998.
5. INCOME TAX BENEFIT
------------------
The Company calculates its provision for interim income taxes in accordance
with Accounting Principles Board Opinion No. 28. This usually calls for the
application of the estimated full year tax rate to interim pretax accounting
income, which practice the Company followed through 1996. In circumstances
when the usual approach would cause an unrealistically high interim tax benefit
rate or other unreasonable tax results (which the Company is experiencing in
1997), the interim tax provision is calculated by applying the appropriate
Federal and State statutory tax rates to taxable book income. Had the 1997
approach been used in 1996, the income tax benefit for the third quarter and
nine-month period ended November 2, 1996 would have been reduced, and the net
loss increased, by approximately $1.9 million and $9.9 million, respectively.
The Company expects to continue to employ the 1997 approach until it is no
longer reasonably possible that an unreasonably large interim tax benefit rate
would occur. The 1997 approach to interim income taxes will have no effect on
the amount of income tax expense or benefit for the full year, but will cause
income tax expense in the fourth quarter of fiscal year 1997 to be lower than
it would have been had the 1996 approach been used.
6. DEBT REFINANCINGS AND EXTRAORDINARY LOSSES
------------------------------------------
In the first half of fiscal year 1996, the Company refinanced $160 million of
10.25% Senior Notes with proceeds from the sale of $195 million of 12 1/2%
Senior Notes. As a result of these transactions, the Company recognized an
extraordinary after-tax loss for early extinguishment of debt of $2.0 million,
or $0.20 per share, in the second quarter of fiscal year 1996. The
extraordinary loss included the redemption premiums and the write-off of the
related deferred financing costs.
In the third quarter of fiscal year 1996, the Company, through its wholly-owned
subsidiary Hills Department Store Company ("HDSC"), and C.R.H. International,
7
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HILLS STORES COMPANY AND SUBSIDIARIES
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6. DEBT REFINANCINGS AND EXTRAORDINARY LOSSES (CONTINUED)
------------------------------------------------------
Inc., a wholly-owned subsidiary of HDSC, obtained a new $300 million secured
revolving credit facility (the "Facility"), of which $200 million is available
as a letter of credit facility. 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 $2.3 million and will be
amortized over the life of the Facility.
7. EARNINGS PER SHARE
------------------
Primary loss per share for the thirteen week periods ended November 1, 1997
and November 2, 1996 was computed based on the weighted average number of
common shares assumed to be outstanding during the period of 10,413,708 and
10,273,400 shares, respectively. Fully-diluted loss per share for the thirteen
week periods ended November 1, 1997 and November 2, 1996 was computed based on
the weighted average number of common shares assumed to be outstanding during
the period of 10,424,500 and 10,273,400 shares, respectively.
Primary loss per share for the thirty-nine week periods ended November 1, 1997
and November 2, 1996 was computed based on the weighted average number of common
shares assumed to be outstanding during the period of 10,373,499 and 10,234,024
shares, respectively. Fully-diluted loss per share for the thirty-nine week
periods ended November 1, 1997 and November 2, 1996 was computed based on the
weighted average number of common shares assumed to be outstanding during the
period of 10,420,533 and 10,234,024 shares, respectively.
8. COMMITMENTS AND CONTINGENCIES
-----------------------------
In September 1995, the Company filed a suit in the Court of Chancery of the
State of Delaware against the former members of the Board of Directors (the
"Former Directors") of the Company. That action seeks, among other things,
recovery of damages caused by the breach by the Former Directors of their
fiduciary duties to shareholders arising from the refusal of the Former
Directors to approve the change in control which took place on July 5, 1995 (the
"1995 Change of Control") following the election of seven replacement directors
by the shareholders of the Company. In October 1995, the defendants filed a
motion to dismiss the suit. In March 1997, the court denied that motion. On or
about April 25, 1997, the defendants filed an answer and three of the defendants
asserted a counterclaim against the Company and certain members of the Company's
Board of Directors. In the counterclaim, these defendants allege that,
following the 1995 Change of Control, the Company improperly refused to allow
them to exercise options to purchase shares of Hills Stores Company common
stock. They seek damages of $2.5 million for lost profits plus consequential
damages. The Company has replied to the counterclaim, denying its material
allegations. Discovery is ongoing in the case.
In August 1995, in the Court of Chancery of the State of Delaware, three
shareholders of the Company, Gayle Dolowich, Ivan J. Dolowich and Joseph Weiss,
8
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HILLS STORES COMPANY AND SUBSIDIARIES
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
-----------------------------------------
filed a class action lawsuit against the seven new directors of the Company
elected at the 1995 annual meeting, Dickstein Partners Inc. ("Dickstein
Partners") and the Company. In November 1995, the plaintiffs amended their
complaint to include a shareholder's derivative cause of action against the
Former Directors for breach of their fiduciary duties to the Company and its
shareholders. In the amended complaint, the plaintiffs claim (under Section
225 of the Delaware Corporation Code) that in connection with Dickstein
Partners' effort to solicit proxies in support of the election of its nominees
for directors of the Company, Dickstein Partners issued a number of false and
misleading statements regarding its offer to acquire all of the Company's shares
it did not already own. On the Section 225 claim, the plaintiffs seek an order
nullifying the election of directors and declaring there has been "no change of
control" of the Company. The derivative cause of action seeks damages against
the Former Directors. In January 1996, in the same Delaware Chancery Court,
another shareholder, Peter M. Fusco, filed a substantially similar class action
and shareholder derivative suit against the parties named in the Dolowich suit.
The Former Directors filed a motion to dismiss the Dolowich and Fusco suits and
in March 1997, the court denied that motion.
Management does not believe that the disposition of such suits and claims will
have a material adverse effect upon the continuing operations and financial
position of the Company.
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
QUARTER ENDED NOVEMBER 1, 1997 COMPARED WITH
QUARTER ENDED NOVEMBER 2, 1996
Sales decreased by 5.7 percent from the previous year to $434.6 million, and
comparable store sales decreased by 1.8 percent. The comparable store sales
decrease reflected weak apparel sales in September and part of October,
partially as the result of unseasonably warm autumn weather, and also reflected
weak back-to-school sales in August. Total sales were also impacted by the
closing of 10 stores at the beginning of the fiscal year.
Cost of sales as a percentage of sales was 73.5% in the third quarter of 1997
compared with 73.8% in the third quarter of 1996. Gross profit decreased by
$5.7 million primarily due to the sales decrease, but increased as a percentage
of sales by 0.3%, primarily as the result of decreased clearance markdowns
between years and an increase in initial markon associated with changes in
merchandise procurement programs. This was partially offset by increased
promotional markdowns during the quarter.
Selling and administrative expenses, including depreciation and other occupancy
expenses, decreased by $5.5 million in the third quarter due to the Company
operating nine fewer stores in the quarter versus the same period in 1996, but
rose as a percentage of sales to 24.5% from 24.3% last year, due to the
comparable store sales decrease.
Net interest expense decreased by $0.5 million, primarily due to reduced
borrowings under the Company's working capital facility.
The effective tax rate was 36.8% in the third quarter of fiscal 1997 compared
with a rate of 56.7% in the third quarter of fiscal 1996. The decreased benefit
was due to a modification in the approach used to calculate interim income
taxes. See Note 5 of Notes to Condensed Consolidated Financial Statements.
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. See Note 6 of the Notes to Condensed Consolidated Financial
Statements.
THIRTY-NINE WEEKS ENDED NOVEMBER 1, 1997 COMPARED WITH
THIRTY-NINE WEEKS ENDED NOVEMBER 2, 1996
Sales decreased 6.8% compared with the same period in 1996. This decrease was
primarily due to the closing of ten stores at the beginning of the fiscal year.
Comparable store sales decreased by 2.9%, primarily reflecting weakness in men's
and children's apparel, and less aggressive promotional efforts early in the
year, including a sales loss related to the discontinuance of a "no down
payment" back-to-school layaway promotion.
Cost of sales as a percentage of sales was 73.8% in fiscal 1997 compared with
73.9% in fiscal 1996. Gross profit decrease by $19.8 million, primarily due
to the sales decrease, but increased as a percentage of sales by 0.1%, primarily
due to an increase in initial markon associated with changes in procurement
programs.
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
THIRTY-NINE WEEKS ENDED NOVEMBER 1, 1997 COMPARED WITH
THIRTY-NINE WEEKS ENDED NOVEMBER 2, 1996 (CONTINUED)
Selling and administrative expenses, including depreciation and other occupancy
expenses, decreased by $14.4 million from the first nine months of last year due
to the store closings, but rose as a percentage of sales to 26.7% in 1997
compared with 26.1% in the same period of 1996, due to the comparable store
sales decrease.
See Note 3 of the Notes to Condensed Consolidated Financial Statements regarding
the charge for the impairment of long-lived assets.
Net interest expense decreased by $5.9 million, primarily due to reduced
borrowings under the Company's revolving credit facility, to reduced Senior
Notes interest related to temporarily carrying two series of notes in the
second quarter of 1996 as the old series was being refinanced, and to reduced
amortization costs associated with the Senior Notes that were refinanced in
mid-1996.
The effective tax rate was 36.5% in fiscal 1997 compared with a rate of 53.1%
in fiscal 1996. The decreased benefit was due to a modification in the approach
used to calculate interim income taxes. See Note 5 of the Notes to Condensed
Consolidated Financial Statements.
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
Company's previous credit agreement which was replaced during 1996. See Note 6
of the Notes to Condensed Consolidated Financial Statements.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Certain statements contained in this document (in particular, the discussion of
liquidity) are forward-looking statements within the meaning of the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Although
the Company believes its plans are based upon reasonable assumptions as of the
current date, it can give no assurances that any expectations will be attained.
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.
Net cash used for operating activities was $137.4 million for the thirty-nine
weeks ended November 1, 1997 compared with $135.8 million for the same period
last year, an increase of $1.6 million. This net use of cash for operating
activities is primarily due to the seasonal nature of the Company's business.
The larger net use of cash for operating activities in the first nine months of
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 1997 compared with the same period in fiscal year 1996, was
primarily the result of a one-time benefit during 1996 in improved vendor terms
as expressed through higher balances of trade accounts payable, partially offset
in 1997 by a run-off of excess inventories that were on hand at the end of
fiscal year 1996, and a smaller seasonal inventory buildup in 1997 in the 155
stores operated versus the 165 stores in operation last year.
Net cash used for investing activities was $39.3 million for the first nine
months of 1997 compared with $26.2 million for the first nine months of 1996, a
$13.1 million increase. This increase was primarily the result of the
Company's information technology replacement program which was partially offset
by a reduction in capital expenditures versus last year related to store
remodels. During fiscal year 1997, capital expenditures and deferred software
expenditures are expected to approximate $29 million and $25 million,
respectively (subject to the further explanation in the following paragraph).
The Company will not open any new stores in the current fiscal year.
In 1997, the Company initiated a program, which it expects to complete in 1998,
to replace most of its primary information systems. These initiatives will
require expenditures of approximately $33 million for software procurement,
development, and installation (of which the Company estimates fiscal 1997
expenditures of approximately $25 million). In addition, the Company expects
to procure approximately $13 million of information technology equipment
pursuant to this replacement program. The Company has operating lease
commitments for approximately $10 million of this equipment. Currently, the
Company is exploring an alternative debt based financing source for the
procurement of certain of this equipment. If this alternative financing is
employed, total capital expenditures for 1997 would increase by up to $5
million.
In connection with this information systems replacement program, the Company is
executing a program designed to assure all new and continuing systems are
capable of "Year 2000" compliance, including upgrades if needed to those few
systems not being replaced.
Net cash provided by financing activities was $130.6 million for the first nine
months of fiscal 1997 compared with $164.1 million in the same period a year
ago, a $33.5 million decrease. The decrease was due to $25.0 million in net
proceeds received from the issuance of long-term debt in excess of the debt
refinanced in 1996 and $12.6 million decrease due to fixture and equipment
financing which occured in 1996. During the first nine months of fiscal 1997,
average borrowings under the revolving credit facility were $39.1 million
at an average interest rate of 8.1%. Average borrowings were $62.9 million at
an average interest rate of 8.5% for the same period in 1996. Excess credit
availability at November 1, 1997 was approximately $124 million compared with
approximately $117 million at November 2, 1996.
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.
12
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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)
The terms of the Company's revolving credit facility and 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 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.
13
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
- ------- -----------------
See Note 8 of the Notes to Condensed Consolidated Financial Statements.
Reference is also made to the Report on Form 10-Q of the Company for the
quarter ended May 3, 1997.
ITEM 2. CHANGES IN SECURITIES
- ------- ---------------------
During the quarter ended November 1, 1997, the Company issued 5,605 shares of
Common Stock, par value $.01 per share (the "Common Shares"), upon the
conversion of 5,605 shares of Series A Convertible Preferred Stock, par value
$.01 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 contained 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:
1
3.1 Amended and Restated Certificate of Incorporation of the Company,
as amended.
2
3.3 Amended and Restated By-Laws of the Company.
3
4.1 Certificate of the Voting Powers, Preferences and other designated
attributes of the Series A Convertible Preferred Stock of the
Company.
4
4.2 Form of Series 1993 Stock Right.
5
4.3 Series 1993 Warrant Agreement dated October 4, 1993 between the
Company and Chemical Bank, as Warrant Agent.
6
4.4 Rights Agreement dated as of August 16, 1994 (the "Rights
Agreement") between the Company and Chemical Bank, as Rights
Agent.
6
4.5 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 4.4
hereto).
6
4.6 Form of Right Certificate (which is attached as Exhibit B to the
Rights Agreement incorporated by reference as Exhibit 4.4 hereto).
</TABLE>
14
<PAGE>
<TABLE>
<S> <C>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (CONTINUED)
- ------- --------------------------------------------
7
4.7 Amendment dated as of October 18, 1995 to the Rights Agreement.
8
4.8 Indenture dated as of April 19, 1996 relating to the 12 1/2%
Senior Notes due 2003, Series B, of the Company.
9
10.1 Loan and Security Agreement (the "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
10.2 First Amendment dated as of February 28, 1997 to the Loan and
Security Agreement.
11
10.3 * Employment Agreement made as of February 7, 1996 with Gregory K.
Raven.
12
10.4 * Consulting Agreement made as of February 8, 1997 with Chaim Y.
Edelstein.
13
10.5 * Employment Agreement made as of November 19, 1996 with Michael
R. Hamilton.
14
10.6 * Employment Agreement made as of July 22, 1997 with Frederick L.
Angst.
10.7 * Employment Agreement made as of November 11, 1997 with C. Scott
Litten.
12
10.8 * Separation Agreement dated February 7, 1996 between the Company
and E. Jackson Smailes.
12
10.9 * Confidential Separation Agreement, Voluntary Release and Notice
dated March 6, 1997 between the Company and James E. Feldt.
15
10.10 * 1993 Incentive and Nonqualified Stock Option Plan, as amended.
11
10.11 * 1996 Directors Stock Option Plan.
16
10.12 * Hills Stores Company/Hills Department Store Company Associate
Stock Purchase Plan, as amended.
11 Statement regarding computation of per share earnings.
17
16 Letters re: change in certifying accountant.
27 Financial Data Schedule.
- ---------------------
* 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 September 16, 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 8-K of the
Company dated October 4, 1993.
6. Incorporated by reference from the Report on Form 8-K of the
Company dated August 16, 1994.
7. Incorporated by reference from the Report on Form 8-K of the
Company dated October 18, 1995.
8. Incorporated by reference from the Report on Form 10-Q of the
Company for the quarter ended May 4, 1996.
9. Incorporated by reference from the Report on Form 8-K of the
Company dated October 1, 1996.
10. Incorporated by reference from the Report on Form 8-K of the
Company dated February 28, 1997.
11. Incorporated by reference from the Annual Report on Form 10-K
of the Company for the fiscal year ended February 3, 1996.
12. Incorporated by reference from the Annual Report on Form 10-K
of the Company for the fiscal year ended February 1, 1997.
13. Incorporated by reference from the Quarterly Report on Form 10-Q
for the quarter ended November 2, 1996.
14. Incorporated by reference from the Quarterly Report on Form 10-Q
of the Company for the quarter ended August 2, 1997.
15. Incorporated by reference from the Company's definitive proxy
materials dated May 5, 1997.
16. Incorporated by reference from the Form S-8 of the Company filed
on May 28, 1997.
17. Incorporated by reference from the Report on Form 8-K of the
Company date November 8, 1995.
b. Reports on Form 8-K.
None.
</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 16, 1997 /s/C. Scott Litten
------------------
C. Scott Litten
Executive Vice President-
Chief Financial Officer
Date: December 16, 1997 /s/Brian J. Sheehan
--------------------
Brian J. Sheehan
Vice President - Controller
17
<PAGE>
<TABLE>
EXHIBIT INDEX
Pursuant to Item 601 of Regulation S-K
<S> <C>
Exhibit Title
- ------- -----
10.7 Employment Agreement made as of November 11, 1997 with
C. Scott Litten.
11 Statements regarding computations of earnings per share.
27 Financial Data Schedule.
</TABLE>
18
<PAGE>
EXHIBIT 10.7
C. SCOTT LITTEN
EMPLOYMENT AGREEMENT
This will confirm our agreement under which you are to serve as
EXECUTIVE VICE PRESIDENT-CHIEF FINANCIAL OFFICER of Hills Department Store
Company, a Delaware corporation (the "Subsidiary") and Hills Stores Company, a
Delaware corporation (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-CHIEF FINANCIAL OFFICER of the Company and
your primary duties will be the SENIOR SUPERVISION OF ALL FINANCIAL FUNCTIONS,
INFORMATION SYSTEMS AND MERCHANDISE CONTROL activities of the Company. You
shall not be required, without your consent, to perform your duties at any
location that is more than fifty (50) miles from the Company's principal office
in Canton, Massachusetts.
3. COMPENSATION AND BENEFITS.
(a) Your initial compensation ("Base Compensation") shall be at the
rate of $350,000 per year. 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)(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 made
generally available to executives of the Company at a level commensurate with
your position and/or years worked for the Company. Notwithstanding any Company
policy to the contrary, you will be entitled to not less than four weeks
vacation per each full calendar year. You shall also be entitled to such other
perquisites as the Company or the Compensation Committee of the Board of
Directors deems appropriate.
(ii) The auto leasing, insurance and other benefit programs and plans
referenced herein, at the levels currently in place, shall not be materially
reduced as they apply to you, unless the Company has determined for good and
reasonable purposes and intentions to reduce the benefits for all salaried
executives or all senior executives and has not made compensation adjustments
for the other executives to reflect the reduced benefits. However, in no event
shall your four weeks vacation per year be reduced.
(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.
4. TERMINATION AND SEVERANCE.
(a) By the Company -
(i) Your employment hereunder shall terminate upon your death and
may be terminated at the option of the Company forthwith upon delivery of Notice
of Termination or upon 30 days Notice of Termination in the case of Disability.
(ii) Upon termination by the Company for Cause, the Company shall
have no further obligations whatsoever to you hereunder, except as required by
law and 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, both of which
are to be accrued to the date of termination, plus reimbursement of any unused
vacation pay accrued to the date of termination and any reimbursable expenses
incurred prior to the date of termination.
As used herein - "Cause" shall mean (a) a determination by a majority of
the members of the Company's Board of Directors, acting on opinion of counsel,
of your willful failure, without proper purpose, to perform your functions and
assume your responsibilities in accordance with the terms of this Agreement,
after a written demand for substantial performance is delivered to you by the
Company, which failure amounts to material neglect of your duties (no act or
failure to act on your part shall be deemed "willful" unless it is done, or
omitted to be done, by you in bad faith or without reasonable belief that the
action or omission was in the best interests of Hills), (b) your misappropri-
ation (including the unauthorized use or disclosure of confidential or
proprietary information of the Company or any of its subsidiaries or affiliates)
or your embezzlement with respect to the Company or any of its subsidiaries or
affiliates (c) a conviction of or guilty plea or confession by you to any fraud,
conversion, misappropriation, embezzlement or felony, or (d) 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.
(iii) 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 twelve (12) months following the date of termination; a pro
rata portion of any bonuses or other incentive compensation otherwise 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.
2
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 due to the same or a related medical condition.
(b) By the Employee For Good Reason -
If any one of the following events occurs during the term of this
Agreement, it will be considered "Good Reason" for you to exercise your right to
terminate your employment hereunder:
(i) A material breach by the Company of any of the provisions of
this Agreement; or
(ii) The Company's failure to retain you as its EXECUTIVE VICE
PRESIDENT-CHIEF FINANCIAL OFFICER (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, duties or activities which
has the effect of diminishing your position with the Company or limiting your
ability to act as Chief Financial Officer (other than a change resulting from
an effective promotion), or
(iv) The Relocation of your office more than fifty (50) miles from
the site of the Company's current principal office in Canton, Massachusetts;
Your right to terminate your employment under paragraphs 4(b)(i), (ii),
(iii) and (iv), 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 events or the
date you first became aware of the events, if later, which gave rise to the
right to terminate. Such termination of employment shall be effective thirty
(30) days after your written notice has been delivered to the Company, (the
"Cure Period") provided the occurrence specified in your notice shall then be
continuing.
(c) Upon termination by the Company without Cause (other than by
reasons of death or Disability) or by you, pursuant to paragraph 4(b), you
shall, subject to the limitations stated herein, continue to receive your then
current Base Compensation twice a month 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 by the
Company, whichever is later. In the event of a termination by employee for Good
Reason, the twelve-(12) month's period referenced above does not commence until
the end of the thirty-(30) day Cure Period. 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 the date of termination; and (B) reimbursement of any unused vacation pay or
any reimbursable expenses incurred prior to the Notice Date. Base Compensation
otherwise payable to you for the remaining term of this Agreement, after the
first twelve (12) months immediately following the Notice Date, or the Notice
3
Date and Cure Period, in the event of a termination by employee for Good Reason,
(the "Remainder Period") shall be reduced by the amount of any other base
employment compensation earned by you and paid to you during this Remainder
Period, through the full term of this Agreement. For purposes of this paragraph
4(c) 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,
subject to your continuing contributions pursuant to such plans. Notwith-
standing any statement to the contrary in this Agreement, it is understood and
agreed that you will be entitled to receive not less than twelve (12) months of
Base Compensation following the Notice Date and Cure Period without reduction
or offset, in the event you terminate your Employment Agreement pursuant to
paragraph 4(b).
(d) By Employee Without Good Reason -
In addition to the reasons set forth in paragraph 4(b), you may
terminate your employment hereunder at any time, with or without Good Reason,
upon 90 days' Notice of Termination to the Company. In the event of a termina-
tion by you pursuant to this paragraph 4(d), the Company shall, other than as
required by applicable law, have no further obligations whatsoever to you here-
under, 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 in effect
up to the date of termination; and reimbursement of any properly reimbursable
expenses incurred prior to the date of termination.
(e) Any purported termination of your employment shall be communi-
cated 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, if a termination for "Cause" or "Good Reason", 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.
(f) Severance -
It is understood and agreed that, at the time of your employment, the
Company committed to provide you with a minimum of twelve (12) months severance
pay without offset. Accordingly, if this Employment Agreement is not renewed or
extended or if Company policy with regard to severance eliminates severance
payments or reduces such payments to a level below the Company's commitment to
you, your severance payment will not be adjusted or eliminated. Nevertheless,
if at any time you are terminated "for cause" as defined herein, no severance
payments are due.
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
4
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 demon-
strate 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 confiden-
tiality, 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.
(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 NOVEMBER 11, 1997.
5
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 prior to termination:
C. Scott Litten
Hills Stores Company
15 Dan Road
Canton, MA 02021
If to you subsequent to termination:
C. Scott Litten
6900-29 Daniels Parkway
Ft. Myers, FL 33912
If to the Company:
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.
(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 agree-
ment.
6
Entered into, accepted and agreed this eleventh day of November 1997.
Hills Department Store Company
By: /s/ Gregory K. Raven
-----------------------------
Gregory K. Raven
President and Chief Executive Officer
Hills Stores Company
By: /s/ William K. Friend
------------------------------
William K. Friend
Vice President-Secretary
Accepted and Agreed:
Employee
/s/ C. Scott Litten
- -------------------------
C. Scott Litten
7
EXHIBIT 11
HILLS STORES COMPANY AND SUBSIDIARIES
STATEMENTS RE COMPUTATION OF PER SHARE EARNINGS
Thirteen Thirteen
Weeks Ended Weeks Ended
November 1, November 2,
1997 1996
---------- -----------
Weighted average primary shares outstanding
- -------------------------------------------
Weighted average number of common shares
assumed to be outstanding during the period 10,413,708 10,273,400
Assumed conversion of preferred stock - -
Assumed exercise of stock options - -
Assumed exercise of stock rights - -
Assumed exercise of stock warrants - -
---------- ----------
10,413,708 10,273,400
========== ==========
Thirty-nine Thirty-nine
Weeks Ended Weeks Ended
November 1, November 2,
1997 1996
---------- -----------
Weighted average primary shares outstanding
- -------------------------------------------
Weighted average number of common shares
assumed to be outstanding during the period 10,373,499 10,234,024
Assumed conversion of preferred stock - -
Assumed exercise of stock options - -
Assumed exercise of stock rights - -
Assumed exercise of stock warrants - -
---------- ----------
10,373,499 10,234,024
========== ==========
<PAGE>
EXHIBIT 11
HILLS STORES COMPANY AND SUBSIDIARIES
STATEMENTS RE COMPUTATION OF PER SHARE EARNINGS
Thirteen Thirteen
Weeks Ended Weeks Ended
November 1, November 2,
1997 1996
---------- -----------
Weighted average fully-diluted shares outstanding (1)
- -----------------------------------------------------
Weighted average number of common shares
assumed to be outstanding during the period 10,424,500 10,273,400
Assumed conversion of preferred stock - -
Assumed exercise of stock options - -
Assumed exercise of stock rights - -
Assumed exercise of stock warrants - -
---------- ----------
10,424,500 10,273,400
========== ==========
Thirty-nine Thirty-nine
Weeks Ended Weeks Ended
November 1, November 2,
1997 1996
---------- -----------
Weighted average fully-diluted shares outstanding (1)
- -----------------------------------------------------
Weighted average number of common shares assumed
to be outstanding during the period 10,420,533 10,234,024
Assumed conversion of preferred stock - -
Assumed exercise of stock options - -
Assumed exercise of stock rights - -
Assumed exercise of stock warrants - -
---------- ----------
10,420,533 10,234,024
========== ==========
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 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
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-END> NOV-01-1997
<CASH> 20,078
<SECURITIES> 0
<RECEIVABLES> 65,171
<ALLOWANCES> (1,434)
<INVENTORY> 522,118
<CURRENT-ASSETS> 668,489
<PP&E> 252,869
<DEPRECIATION> 77,668
<TOTAL-ASSETS> 1,096,615
<CURRENT-LIABILITIES> 532,515
<BONDS> 343,608
18,317
0
<COMMON> 104
<OTHER-SE> 196,686
<TOTAL-LIABILITY-AND-EQUITY> 1,096,615
<SALES> 1,137,328
<TOTAL-REVENUES> 1,137,328
<CGS> 839,295
<TOTAL-COSTS> 839,295
<OTHER-EXPENSES> 308,560
<LOSS-PROVISION> 1,408
<INTEREST-EXPENSE> 36,558
<INCOME-PRETAX> (47,085)
<INCOME-TAX> (17,200)
<INCOME-CONTINUING> (29,885)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (29,885)
<EPS-PRIMARY> (2.87)
<EPS-DILUTED> (2.87)
</TABLE>
