UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
- ----- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 2, 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
---------------------
(Exact name of registrant as specified in its charter)
DELAWARE 31-1153510
-------- ----------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
15 DAN ROAD, CANTON, MASSACHUSETTS 02021
---------------------------------- -----
(Address of principal executive offices) (Zip Code)
617-821-1000
-------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
-------- --------
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
YES X NO
-------- --------
The number of shares of common stock outstanding as of August 31, 1997
was 10,350,237 shares.
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
TABLE OF CONTENTS
-----------------
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS
<S> <C>
Condensed Consolidated Balance Sheets as of August 2, 1997,
February 1, 1997, and August 3, 1996 3
Condensed Consolidated Statements of Operations for the
Thirteen and Twenty-six Weeks Ended August 2, 1997
and August 3, 1996 4
Condensed Consolidated Statements of Cash Flows for the
Twenty-six Weeks Ended August 2, 1997 and August 3, 1996 5
Notes to Condensed Consolidated Financial Statements 6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 9
<CAPTION>
<S> <C>
PART II - OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS 12
ITEM 2: CHANGES IN SECURITIES 12
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 12
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K 13
</TABLE>
2
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
- -------------------------------------------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
August 2, February 1, August 3,
(in thousands) 1997 1997 1996
- -------------------------------------------------------------------------------
(unaudited) (unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 17,183 $ 66,163 $ 23,374
Accounts receivable, net 31,986 24,346 50,077
Inventories 426,658 341,477 458,094
Deferred and interim tax assets 55,072 46,491 63,918
Other current assets 5,140 5,115 6,318
-------- -------- ----------
Total current assets 536,039 483,592 601,781
Property and equipment, net 174,639 173,701 184,439
Property under capital leases, net 107,231 112,201 109,619
Beneficial lease rights, net 6,465 6,848 7,581
Deferred tax asset 13,289 8,085 8,233
Reorganization value in excess of amounts
allocable to identifiable assets, net 94,573 97,508 103,648
Other assets, net 27,173 18,418 19,691
-------- -------- ----------
$959,409 $900,353 $1,034,992
======== ======== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 7,430 $ 7,255 $ 6,428
Borrowings under revolving
credit facility 55,000 - 95,000
Accounts payable, trade 152,253 111,064 150,459
Other accounts payable and accrued
expenses 174,066 182,018 175,969
-------- -------- ----------
Total current liabilities 388,749 300,337 427,856
Senior Notes 195,000 195,000 195,000
Capital lease and other
financing obligations 151,340 154,639 152,428
Other liabilities 5,356 5,651 7,304
Preferred stock, at mandatory redemption
value (Note 2) 18,429 19,942 21,421
Common shareholders' equity 200,535 224,784 230,983
-------- -------- ----------
$959,409 $900,353 $1,034,992
======== ======== ==========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
3
<PAGE>
<TABLE>
<CAPTION>
HILLS STORES COMPANY AND SUBSIDIARIES
- -----------------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Thirteen Weeks Ended Twenty-six Weeks Ended
-------------------- ----------------------
(unaudited) August 2, August 3, August 2, August 3,
(in thousands, except per 1997 1996 1997 1996
share amounts)
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $349,269 $388,600 $702,773 $758,848
Cost of sales 263,121 290,909 519,841 561,894
Selling and administrative
expenses 98,344 103,767 197,524 206,477
Amortization of reorganization
value in excess of amounts
allocable to identifiable assets 1,463 1,510 2,925 3,031
Impairment of long-lived assets - - - 11,706
(Note 6)
-------- -------- -------- --------
Operating loss ( 13,659) ( 7,586) ( 17,517) ( 24,260)
Interest expense, net ( 12,060) ( 15,466) ( 23,322) ( 28,732)
-------- -------- -------- --------
Loss before income taxes ( 25,719) ( 23,052) ( 40,839) ( 52,992)
Income tax benefit (Note 4) 9,600 12,731 14,900 27,933
-------- -------- -------- --------
Loss before extraordinary loss ( 16,119) ( 10,321) ( 25,939) ( 25,059)
Extraordinary loss on extinguishment - ( 2,046) - ( 2,046)
of debt, net (Note 7) -------- -------- -------- --------
Net loss ($ 16,119) ($ 12,367) ($ 25,939) ($ 27,105)
======== ======== ======== ========
Primary loss per share (Note 3):
Before extraordinary loss ($ 1.56) ($ 1.01) ($ 2.51) ($ 2.45)
Extraordinary loss - ( .20) - ( .20)
-------- -------- -------- --------
Net loss per share ($ 1.56) ($ 1.21) ($ 2.51) ($ 2.65)
======== ======== ======== ========
Fully-diluted loss per share
(Note 3):
Before extraordinary loss ($ 1.55) ($ 1.01) ($ 2.49) ($ 2.45)
Extraordinary loss ( -) ( .20) ( -) ( .20)
-------- -------- -------- --------
Net loss per share ($ 1.55) ($ 1.21) ($ 2.49) ($ 2.65)
======== ======== ======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
4
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
- -------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Twenty-Six Weeks Ended
--------------------------
(unaudited) August 2, August 3,
(in thousands) 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($ 25,939) ($ 27,105)
Adjustments to reconcile net loss to net cash
used for operating activities before
reorganization items:
Depreciation and amortization 18,204 17,616
Amortization of deferred financing costs 1,252 3,812
Amortization of reorganization value in
excess of amounts allocable to
identifiable assets 2,925 3,031
Loss on disposal of fixed assets 28 797
Extraordinary loss on extinguishment of Debt - 2,046
Impairment of long-lived assets - 11,706
Increase in accounts receivable and other
current assets ( 7,665) ( 25,856)
Increase in inventories ( 85,181) ( 126,397)
Increase in accounts payable and
accrued expenses 33,133 60,652
Increase in income taxes ( 14,900) ( 28,456)
Decrease in deferred tax asset 1,115 -
Other, net 187 ( 321)
-------- ---------
Net cash used for operating activities ( 76,841) ( 108,475)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ( 13,337) ( 17,667)
Deferred software expenditures ( 10,183) -
-------- ---------
Net cash used for investing activities ( 23,520) ( 17,667)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolving credit facility 55,000 95,000
Principal payments under capital lease obligations ( 3,124) ( 3,460)
Proceeds from issuance of 12 1/2% Senior Notes - 195,000
Payment of debt premium - ( 1,749)
Fees incurred with the issuance of
12 1/2% Senior Notes - ( 8,100)
Redemption of 10.25% Senior Notes - ( 160,000)
Fixture and equipment financing - 12,639
Cash distributions pursuant to the Plan
of Reorganization ( 84) ( 1,620)
Other ( 411) ( 1,092)
-------- ---------
Net cash provided by financing activities 51,381 126,618
-------- ---------
Net increase (decrease) in cash
and cash equivalents ( 48,980) 476
Cash and cash equivalents at beginning of period 66,163 22,898
-------- ---------
Cash and cash equivalents at end of period $ 17,183 $ 23,374
======== =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
5
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
- -------------------------------------------------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
---------------------
The condensed 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 condensed consolidated financial statements are
presented in accordance with the requirements of Form 10-Q and consequently do
not include all the disclosures normally required by generally accepted
accounting principles nor those normally made in the Company's annual Form 10-K
filing. Reference should be made to the Company's Annual Report on Form 10-K
for additional disclosures, including a summary of the Company's accounting
policies. The Company's business is seasonal in nature and the results of
operations for the interim periods presented are not necessarily indicative of
the results to be expected for the full fiscal year. The fourth quarter of
each fiscal year provides 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 twenty-six weeks ended August 2, 1997, 75,640 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. EARNINGS PER SHARE
------------------
Primary loss per share for the thirteen week periods ended August 2, 1997 and
August 3, 1996 was computed based on the weighted average number of common
shares assumed to be outstanding during the period of 10,358,807 and 10,263,118
shares, respectively. Fully diluted loss per share for the thirteen week
periods ended August 2, 1997 and August 3, 1996 was computed based on the
weighted average number of common shares assumed to be outstanding during the
period of 10,413,400 and 10,263,118 shares, respectively.
Primary loss per share for the twenty-six week periods ended August 2, 1997 and
August 3, 1996 was computed based on the weighted average number of common
shares assumed to be outstanding during the period of 10,353,394 and 10,214,414
shares, respectively. Fully-diluted loss per share for the twenty-six week
periods ended August 2, 1997 and August 3, 1996 was computed based on the
weighted average number of common shares assumed to be outstanding during the
period of 10,412,985 and 10,214,414 shares, respectively.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("FAS 128").
FAS 128 is effective for financial statements, for both interim and annual
periods, ending after December 15, 1997. FAS 128 would have no impact on the
6
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
- ------------------------------------------------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3. EARNINGS PER SHARE (CONTINUED)
------------------------------
Company's earnings per share calculations for the quarters and six month periods
ended August 2, 1997 and August 3, 1996.
4. 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 second quarter and
six-month period ended August 3, 1996 would have been reduced, and the net loss
increased, by approximately $3.8 million and $8.0 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 approach to interim income taxes will have no effect on the amount
of income tax expense or benefit for the full year.
5. 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,
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
7
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
- ------------------------------------------------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
-----------------------------------------
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 that motion was argued in October 1996. In March 1997, the court denied
the Former Directors' motion to dismiss.
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.
6. 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.
7. DEBT REFINANCING AND EXTRAORDINARY LOSS
---------------------------------------
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.
8
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
- -------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
QUARTER ENDED AUGUST 2, 1997 COMPARED WITH
QUARTER ENDED AUGUST 3, 1996
Sales decreased by 10.1% from the previous year to $349.3 million, and
comparable store sales decreased by 6.4%. The comparable store sales decrease
was due to the planned elimination of a July back-to-school layaway promotion
event and the loss of sales during May and early June due to unseasonably cool
late-Spring weather. Sales decreases in mens and children's apparel, and in
seasonal and certain other hardlines categories were partially offset by
increases in sales of women's apparel, domestics and home electronics. Total
sales were also impacted by the closing of 10 stores at the beginning of the
fiscal year.
Cost of sales as percentage of sales was 75.3% in the second quarter of 1997
compared with 74.9% in the second quarter of 1996. Gross profit decreased by
$11.5 million primarily due to the sales decrease, and decreased as a percentage
of sales by 0.4%, as increased markdowns were taken to clear merchandise that
was impacted by the poor Spring weather.
Selling and administrative expenses, including depreciation and other occupancy
expenses, decreased by $5.4 million in the second 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 28.2% from 26.7% last year, due to the
comparable store sales decrease.
Net interest expense decreased by $3.4 million, primarily due to reduced
borrowings under the Company's working capital facility, reduced senior note
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 notes that were refinanced.
The effective tax rate was 37.3% in the second quarter of fiscal 1997 compared
with a rate of 55.2% in the second quarter of fiscal 1996. The decreased benefit
was due to a modification in the approach used to calculate interim income
taxes. See Note 4 of Notes to Condensed Consolidated Financial Statements.
The after-tax extraordinary loss of $2.0 million in 1996 represented the early
extinguishment of debt related to the refinancing and redemption of the 10.25%
Senior Notes. See Note 7 of the Notes to Condensed Consolidated Financial
Statements.
TWENTY-SIX WEEKS ENDED AUGUST 2, 1997 COMPARED WITH
TWENTY-SIX WEEKS ENDED AUGUST 3, 1996
Sales decreased 7.4% compared with the same period in 1996. The total sales
decrease was impacted by the Company operating nine fewer stores in the period.
Comparable store sales decreased by 3.5%, which primarily occurred in the second
quarter.
9
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
- -------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (CONTINUED)
TWENTY-SIX WEEKS ENDED AUGUST 2, 1997 COMPARED WITH
TWENTY-SIX WEEKS ENDED AUGUST 3, 1996 (CONTINUED)
Cost of sales as a percentage of sales was 74.0% in fiscal 1997 as well as in
fiscal 1996. Gross profit decreased by $14.0 million, but remained flat as a
percentage of sales at 26%. An increase in initial markon was offset by
increased markdowns to clear seasonal merchandise that was impacted by
unfavorable weather.
Selling and administrative expenses, including depreciation and other occupancy
expenses, decreased by $9.0 million in the first half of 1997 due to the Company
operating nine fewer stores in the period, but rose as a percentage of sales
to 28.1% in the first half of 1997 compared with 27.2% in the same period of
1996, due to the comparable store sales decrease.
See Note 6 of the Notes to Condensed Consolidated Financial Statements regarding
the charge for the impairment of long-lived assets.
Net interest expense decreased by $5.4 million, primarily due to reduced
borrowings under the Company's working facility, 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 Company's effective tax rate was 36.5% in fiscal 1997 compared with a rate
of 52.7% in fiscal 1996. The decreased benefit was due to a modification in the
approach used to calculate interim income taxes. See Note 4 of the Notes to
Condensed Consolidated Financial Statements.
The after-tax extraordinary loss of $2.0 million in 1996 represented the early
extinguishment of debt related to the refinancing and redemption of the 10.25%
Senior Notes. See Note 7 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 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 Great Lakes and Ohio Valley
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 purchase 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 $76.8 million for the twenty-six
weeks ended August 2, 1997 compared with a use of $108.5 million for the same
10
<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)
period last year, a decrease of $31.7 million. The decrease was the result of
the run-off of excess inventories in fiscal year 1997 that was on hand at the
end of fiscal year 1996, a smaller seasonal inventory buildup in the 155 stores
operated this year versus the 164 stores operated last year, and a smaller
investment in layaway receivables in 1997 due to the deemphasis of layaway
promotions in July.
Net cash used for investing activities was $23.5 million compared with $17.7
million in the first half of 1996, a $5.8 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
related to store remodels last year. During fiscal year 1997, capital
expenditures and deferred software expenditures are expected to approximate
$30 million and $20 million respectively. The Company does not expect to open
any new stores in 1997.
Net cash provided by financing activities was $51.3 million in the first half
of fiscal 1997 compared with $126.6 million in the same period a year ago, a
$75.3 million decrease. The difference was due to $25 million in net proceeds
received from the issuance of long-term debt in excess of the debt it
refinanced in 1996, a $40.0 million decrease in borrowings under the revolving
credit facility, and $12.6 million decrease due to fixture and equipment
financing which occured in 1996. During the first half of fiscal 1997, average
borrowings under the revolving credit facility were $12.1 million at an average
interest rate of 8.3% compared to $41 million at an interest rate of 8.6% for
the same period in 1996. Excess credit availability under the revolving credit
facility at August 2, 1997 was approximately $111 million compared with
approximately $78 million at August 3, 1996.
Management believes that amounts available under the Company's borrowing
agreements, together with cash from operations, will enable the Company to fund
its current liquidity and capital expenditure requirements.
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.
11
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
- ------- -----------------
See Note 5 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 August 2, 1997, the Company issued 68,259 shares of
Common Stock, par value $.01 per share (the "Common Shares"), upon the
conversion of 68,259 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 contained in Section 3(a)(9) of the Securities Act of
1933, as amended.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------- ---------------------------------------------------
a) The Company held its Annual Meeting of Shareholders on June 17, 1997. At the
Annual Meeting, the following directors, comprising the entire Board, were
elected for one year terms:
<TABLE>
<CAPTION>
NOMINEE VOTES FOR VOTES WITHHELD
------- --------- --------------
<S> <C> <C>
Chaim Y. Edelstein 7,799,522 437,075
Gregory K. Raven 7,816,238 420,359
Stanton J. Bluestone 7,795,177 441,420
John W. Burden III 7,795,677 440,920
Alan S. Cooper 7,706,697 529,900
Mark B. Dickstein 7,697,789 538,808
Samuel L. Katz 7,745,771 490,826
Richard E. Montag 7,808,156 428,441
</TABLE>
b) The shareholders voted for the amendment of the Hills Stores Company 1993
Incentive and Nonqualified Stock Option Plan to qualify the Plan under Section
162(m) of the Internal Revenue Code. The votes were:
<TABLE>
<CAPTION>
BROKER
FOR AGAINST ABSTENTIONS NON-VOTES
--------- ------- ----------- ---------
<C> <C> <C> <C>
7,688,336 534,039 14,222 -0-
</TABLE>
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.
12
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (continued)
- ------ --------------------------------------------
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).
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.
10.6 * Employment Agreement made as of July 22, 1997 with Frederick L.
Angst.
13
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (continued)
- ------ --------------------------------------------
12
10.7 * Separation Agreement dated February 7, 1996 between the Company
and E. Jackson Smailes.
12
10.8 * Confidential Separation Agreement, Voluntary Release and Notice
dated March 6, 1997 between the Company and James E. Feldt.
14
10.9 * 1993 Incentive and Nonqualified Stock Option Plan, as amended.
11
10.10 * 1996 Directors Stock Option Plan.
15
10.11 * Hills Stores Company/Hills Department Store Company Associate
Stock Purchase Plan, as amended.
11 Statements regarding computation of per share earnings.
16
16 Letters re: change in certifying accountant.
27 Financial Data Schedule.
- ---------------------
* Executive Compensation Plans and Arrangements.
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.
14
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (continued)
- ------ --------------------------------------------
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 Company's definitive proxy
materials dated May 5, 1997.
15. Incorporated by reference from the Form S-8 of the Company filed
on May 28, 1997.
16. Incorporated by reference from the Report on Form 8-K of the
Company dated November 8, 1995.
b. Reports on Form 8-K.
None.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HILLS STORES COMPANY
Date: September 10, 1997 /s/C. Scott Litten
-------------------------
C. Scott Litten
Executive Vice President-
Chief Financial Officer
Date: September 10, 1997 /s/Brian J. Sheehan
-------------------------
Brian J. Sheehan
Vice President - Controller
and Principal Accounting Officer
16
<PAGE>
EXHIBIT INDEX
Pursuant to Item 601 of Regulation S-K
Exhibit Title
- ------- -----
10.6 Employment Agreement made as of July 22, 1997 with
Frederick L. Angst.
11 Statements regarding computations of earnings per share.
27 Financial Data Schedule.
17
<PAGE>
EXHIBIT 10.6
FREDERICK L. ANGST
EMPLOYMENT AGREEMENT
This will confirm our agreement under which you are to serve as
Executive Vice President-Chief Merchandising Officer 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-Chief Merchandising Officer of the Company.
Your primary responsibilities will be the senior supervision of the merchandise
procurement, product development, marketing/sales promotion and merchandise
presentation 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 $350,000 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 1998) 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 made generally 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) You will be eligible to receive a performance bonus of up to
fifty percent (50%) of your Base Compensation for each full fiscal year in
accordance with the terms of the Company's performance bonus plan (Level 1).
Assuming you are an employee of the Company on the next bonus payment date
(March/April 1998), you will receive a bonus equal to the higher of the bonus
payout attributable to your new position or the bonus that would have been
payable to you had you remained in the Vice President-Ladies Apparel position
for the entire year.
1
<PAGE>
(iii) You will receive on or about the Effective Date, an option
grant to purchase 25,000 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 use an apartment rented by the Company
in the Canton, MA area.
4. TERMINATION.
(a) BY THE COMPANY. 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 90 days' Notice of Termination in
the case of Disability.
(i) Upon termination by the Company for Cause, the Company shall
have no further obligations whatsoever to you hereunder, other than for payment
of any unpaid Base Compensation (as hereinafter defined) and vested benefits
under any retirement plans to which you are a participant in accordance with the
terms of the specific plans, accrued to the date of termination, and
reimbursement of any unused vacation pay accrued to the date of termination and
any reimbursable expenses incurred prior to the date of termination.
(ii) Upon termination by virtue of death or Disability, your Base
Compensation shall cease to accrue as of the effective date of termination, but
you or your estate shall be entitled to payment of: any unpaid Base Compensation
accrued to the date six (6) months following the date of termination; a pro rata
portion of any bonuses or other incentive compensation payable pursuant to
paragraph 3(b) with respect to the fiscal year of termination, determined on the
basis of the portion of such fiscal year up 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 the date of
termination; and reimbursement of any unused vacation pay accrued to the date of
termination and any reimbursable expenses incurred prior to the date of
termination.
(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
Compensation twice a month in accordance with paragraph 3(a) (not a lump payout)
and the Company shall maintain in full force and effect Insurance Benefits (as
defined and limited below), in each case for the full term of this Agreement or
the date twelve (12) months after the date (the "Notice Date") on which a Notice
of Termination is given, whichever is later; and you shall be further entitled
to receive: (A) vested benefits under any retirement plans to which you are a
participant in accordance with the terms of the specific plans accrued prior to
2
<PAGE>
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), "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, (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, or (F) the failure to comply
with your obligations as set forth in paragraph 5(f) herein.
As used herein - "Disability" shall mean that, as a result of any
physical or mental disability, you are unable to perform your major duties
hereunder for a continuous period of 120 days or a total of at least 180 days
in any period of 365 consecutive days.
(b) BY THE EMPLOYEE FOR GOOD REASON. Subject to the conditions set
forth below, 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 Merchandising Officer; 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).
3
<PAGE>
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 your right to terminate. Such termination of employment shall be
effective one month after your written notice has been delivered to the Company
provided the occurrence specified in the notice shall be continuing.
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.
(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 Reason,
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 in effect up to the date of termination; and
reimbursement of any properly reimbursable expenses incurred prior to the date
of termination.
5. COVENANTS.
(a) You recognize that the knowledge, information and relationships
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 confiden-
tiality 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.
4
<PAGE>
(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 by you 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.
(f) (i) The Company acknowledges that you are the Chief Executive
Officer of "Take Care Wear", a single store retailer of uniforms located in the
Philadelphia, PA area, which may expand to additional stores during the term of
this Agreement, and agrees that your current level of involvement with "Take
Care Wear" does not constitute a conflict of interest with your responsibilities
to the Company and does not interfere with your duties and time commitments to
the Company. You acknowledge that any expansion of your involvement or time
commitment to "Take Care Wear" may be a conflict of interest and interfere with
the performance of your responsibilities and duties to the Company.
(ii) It is agreed that, should your involvement with "Take Care
Wear" increase to the point where the Company determines there is a conflict
with your duties or time commitments to the Company or interference with your
responsibilities to the Company and such conflict or interference continues for
thirty (30) days after written notice of same is provided to you by the Company,
then the Company may terminate your employment for Cause as per paragraph 4(a)
of this Agreement.
(g) The Company acknowledges that you will not be relocating your
residence or your family to the Canton, MA area and the Company has agreed to
take certain steps, such as providing you with an apartment in the Canton, MA
area, to accommodate you in this regard. These accommodations by the Company
are based on your commitment and agreement that eighty percent (80%) of your
office time (not including store visits and field travel time) will be spent in
the Canton, MA office and no more than twenty percent (20%) of your office time
will be spent in the New York Buying Office.
(h) In the event the Company relocates its corporate offices away
from the Canton/Boston, MA area, you will be expected to relocate and you will
be provided the senior executive relocation package to assist in this relo-
cation. This package does not include reimbursement for club memberships.
5
<PAGE>
6. EFFECTIVE DATE OF AGREEMENT. The "Effective Date" of this
Agreement is July 22, 1997.
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:
Frederick L. Angst
4 Georgetown Circle
Newtown, PA 18940
(or at such other 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
(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
invalidity of any provision shall not affect the validity of any other
provision.
(f) This Agreement shall be construed under and governed by the
internal laws of the Commonwealth of Massachusetts.
6
<PAGE>
(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/ Frederick L. Angst
- ------------------------
Frederick L. Angst
August 20, 1997
- ------------------------
Date
7
EXHIBIT 11
HILLS STORES COMPANY AND SUBSIDIARIES
STATEMENTS RE COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Thirteen Thirteen
Weeks Ended Weeks Ended
August 2, August 3,
1997 1996
---------- -----------
<S> <C> <C>
Weighted average primary shares outstanding
- -------------------------------------------
Weighted average number of common shares
assumed to be outstanding during the period 10,358,807 10,263,118
Assumed conversion of preferred stock - -
Assumed exercise of stock options - -
Assumed exercise of stock rights - -
Assumed exercise of stock warrants - -
---------- ----------
10,358,807 10,263,118
========== ==========
</TABLE>
<TABLE>
<CAPTION>
Twenty-six Twenty-six
Weeks Ended Weeks Ended
August 2, August 3,
1997 1996
---------- -----------
<S> <C> <C>
Weighted average primary shares outstanding
- -------------------------------------------
Weighted average number of common shares
assumed to be outstanding during the period 10,353,394 10,214,414
Assumed conversion of preferred stock - -
Assumed exercise of stock options - -
Assumed exercise of stock rights - -
Assumed exercise of stock warrants - -
---------- ----------
10,353,394 10,214,414
========== ==========
</TABLE>
<PAGE>
EXHIBIT 11
HILLS STORES COMPANY AND SUBSIDIARIES
STATEMENTS RE COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Thirteen Thirteen
Weeks Ended Weeks Ended
August 2, August 3,
1997 1996
---------- -----------
<S> <C> <C>
Weighted average fully-diluted shares outstanding (1)
- -----------------------------------------------------
Weighted average number of common shares assumed
to be outstanding during the period 10,413,400 10,263,118
Assumed conversion of preferred stock - -
Assumed exercise of stock options - -
Assumed exercise of stock rights - -
Assumed exercise of stock warrants - -
---------- ----------
10,413,400 10,263,118
========== ==========
</TABLE>
<TABLE>
<CAPTION>
Twenty-six Twenty-six
Weeks Ended Weeks Ended
August 2, August 3,
1997 1996
---------- -----------
<S> <C> <C>
Weighted average fully-diluted shares outstanding (1)
- -----------------------------------------------------
Weighted average number of common shares assumed
to be outstanding during the period 10,412,985 10,214,414
Assumed conversion of preferred stock - -
Assumed exercise of stock options - -
Assumed exercise of stock rights - -
Assumed exercise of stock warrants - -
---------- ----------
10,412,985 10,214,414
========== ==========
</TABLE>
The calculation of the weighted average fully-diluted shares outstanding assumes
that actual conversions of Preferred Stock during the thirteen and twenty-six
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> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> FEB-01-1997
<PERIOD-END> AUG-02-1997
<CASH> 17,183
<SECURITIES> 0
<RECEIVABLES> 35,112
<ALLOWANCES> (3,126)
<INVENTORY> 426,658
<CURRENT-ASSETS> 536,039
<PP&E> 245,857
<DEPRECIATION> (71,218)
<TOTAL-ASSETS> 959,409
<CURRENT-LIABILITIES> 388,749
<BONDS> 346,340
18,429
0
<COMMON> 104
<OTHER-SE> 200,431
<TOTAL-LIABILITY-AND-EQUITY> 959,409
<SALES> 349,269
<TOTAL-REVENUES> 349,269
<CGS> 263,121
<TOTAL-COSTS> 263,121
<OTHER-EXPENSES> 99,807
<LOSS-PROVISION> 266
<INTEREST-EXPENSE> 12,060
<INCOME-PRETAX> (25,719)
<INCOME-TAX> (9,600)
<INCOME-CONTINUING> (16,119)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (16,119)
<EPS-PRIMARY> (1.56)
<EPS-DILUTED> (1.56)
</TABLE>
