Hills Stores Co/DE · 10-K405 · For 1/28/95

Filed On 4/14/95   ·   SEC File 1-09505   ·   Accession Number 950135-95-953

Annual Report -- [X] Reg. S-K Item 405   ·   Form 10-K
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10-K405     Hills Stores Company Form 10-K                        46    289K 
 2: EX-3.1      Amended & Restated Certificate of Incorporation        4     19K 
 3: EX-3.2      Amendment to Certificate of Incorporation              2±    10K 
 4: EX-10.12    Form of Employment Agreements                         13     61K 
 5: EX-10.13    Consulting Agreement                                   8     48K 
 6: EX-11.1     Computation of Earnings Per Share                      2     16K 
 7: EX-21       Subsidiaries                                           1      5K 
 8: EX-23       Consent of Coopers & Lybrand Llp                       1      7K 
 9: EX-24       Powers of Attorney                                     2±    11K 
10: EX-27       Financial Data Schedule                                1     10K 

10-K405   ·   Hills Stores Company Form 10-K
Document Table of Contents

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FORM 10-K 

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549 

X     Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
---    Act of 1934                                                              

For the fiscal year ended January 28, 1995                        

or

___    Transition Report Pursuant to Section 13 or 15(d) of the Securities      
Exchange Act of 1934                                              

For the transition period from __________ to __________           

Commission file number 1-9505 

HILLS STORES COMPANY
--------------------
(Exact name of registrant as specified in its charter)

     DELAWARE                                #31-1153510
     --------                                -----------
(State or other jurisdiction of                    (I.R.S. Employer 
  incorporation or organization)                     Identification No.)

15 DAN ROAD, CANTON, MASSACHUSETTS                          02021           
----------------------------------                          -----           
(Address of principal executive offices)                  (Zip Code)        

Registrant's telephone number, including area code:  (617) 821-1000             
                                        --------------

Securities registered pursuant to Section 12(b) of the Act: 

                                                                · Download Table
         Title of each class             Name of each exchange on which registered
         -------------------             -----------------------------------------
                                                                                  
Common Stock, Par Value $0.01 per share  New York Stock Exchange                  

10.25% Senior Notes due 2003             New York Stock Exchange                  

Series A Convertible Preferred Stock,    New York Stock Exchange                  
Par Value $0.10 per share                                                         

Securities registered pursuant to Section 12(g) of the Act: 

                                                        · Enlarge/Download Table

         Title of each class                   Name of each exchange on which registered
         -------------------                   -----------------------------------------
                                                                                        
Series 1993 Warrants to Purchase Common Stock  Boston Stock Exchange                    

Indicate by check mark whether the registrant (1) has filed all reports         
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of   
1934 during the preceding 12 months (or for such shorter period that the        
registrant was required to file such reports), and (2) has been subject to such 
filing requirements for the past 90 days.                                       

Yes        X              No          
       --------             --------

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The aggregate market value of the voting stock held by nonaffiliates of the     
Registrant as of March 31, 1995 was $130,836,992 with respect to the Common     
Stock and $30,104,560 with respect to the Series A Convertible Preferred Stock, 
which has coextensive voting rights with the Common Stock.                      

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405  
of Regulation S-K is not contained herein, and will not be contained, to the    
best of the registrant's knowledge, in definitive proxy or information          
statements incorporated by reference in Part III of this Form 10-K or any       
amendment to this Form 10-K.  [  X  ]                                           

APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY 
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Indicate by check mark whether the registrant has filed all documents and       
reports required to be filed by Section 12, 13 or 15(d) of the Securities       
Exchange Act of 1934 subsequent to the distribution of securities under a plan  
confirmed by a court.                                                           

Yes    X               No           
  --------              --------

The number of shares of Common Stock outstanding as of March 31, 1995 was       
9,286,462.                                                                      

DOCUMENTS INCORPORATED BY REFERENCE 

Part III of this report on Form 10-K is incorporated by reference from the      
proxy statement dated May 5, 1995 for the annual meeting of security holders to 
be held on June 12, 1995.                                                       

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                                                        · Enlarge/Download Table
                                           TABLE OF CONTENTS                                       

                                                PART I                                             

                                                                                                   
ITEM 1.     Business  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  4 
       (a)  General   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  4 
       (b)  Merchandising   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  4 
       (c)  Purchasing  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  5 
       (d)  Distribution  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  5 
       (e)  Store Operations and Management   . . . . . . . . . . . . . . . . . . . . . . . . .  5 
       (f)  Management Information and Control Systems  . . . . . . . . . . . . . . . . . . . .  5 
       (g)  Competition   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  6 
       (h)  Trademarks and Service Marks  . . . . . . . . . . . . . . . . . . . . . . . . . . .  6 
       (i)  Employees   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  6 
       (j)  Reorganization  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  6 

ITEM 2.     Properties  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  7 
            Store Locations and Leases  . . . . . . . . . . . . . . . . . . . . . . . . . . . .  7 
ITEM 3.     Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  7 
ITEM 4.     Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . .  7 
            Executive Officers of the Registrant  . . . . . . . . . . . . . . . . . . . . . . .  7 

                                            PART II                                                

ITEM 5.     Market for the Registrant's Common Equity and Related                                  
            Security Holder Matters   . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  9 
ITEM 6.     Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 
ITEM 7.     Management's Discussion and Analysis of Financial                                      
            Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . 11 
ITEM 8.     Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . 16 
ITEM 9.     Changes in and Disagreements with Accountants on Accounting                            
            and Financial Disclosure  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 

                                            PART III                                               

ITEM 10.    Directors and Executive Officers of the Registrant  . . . . . . . . . . . . . . . . 16 
ITEM 11.    Executive Compensation  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 
ITEM 12.    Security Ownership of Certain Beneficial Owners and                                    
            Management  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 
ITEM 13.    Certain Relationships and Related Transactions  . . . . . . . . . . . . . . . . . . 16 

                                            PART IV                                                

ITEM 14.    Exhibits, Financial Statement Schedules and Reports                                    
            on Form 8-K   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 

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PART I

ITEM 1.  BUSINESS                                                               
--------                                                      

Hills Stores Company (the "Company" or "Hills") operates, through its           
wholly-owned subsidiary Hills Department Store Company ("HDSC"), a chain of     
discount department stores under the trade name of Hills Department Stores.     
These stores are located in the mid-western and mid-Atlantic regions of the     
United States.                                                                  

a)  GENERAL                                                                     
-------                                                                 

The Company is a leading regional discount retailer offering a broad range of   
brand name and other first quality general merchandise.  The Company's pricing  
strategy is to offer every day low prices on all items.  The Company emphasizes 
product lines designed to appeal to its predominantly female customer base,     
such as apparel, footwear, domestics and home furnishings, jewelry, housewares, 
toys and other family-oriented items.  Management's business strategy will      
continue to stress every day low prices, depth and breadth of products in       
selected merchandise categories, remodeled facilities, strict operating         
controls and an accelerated growth plan.                                        

Hills stores are located in cities and towns of varying sizes, with some of the 
larger cities being Pittsburgh, Buffalo, Cleveland and Richmond.  The Company   
concentrates its stores in selected markets within a geographic region in order 
to reinforce marketing programs, enhance name recognition, achieve market       
penetration, and gain economies of scale in management, advertising and         
distribution.  Hills' expansion program is currently directed mainly to the     
Tidewater area of Virginia and the north central region of North Carolina.      

The Company has remodeled 80% of its stores in the last three years and expects 
to complete the chain-wide store remodeling program by June 1, 1995.  The       
program is designed to make its stores more visually appealing to customers and 
to take full advantage of the most profitable merchandise categories.           

b)  MERCHANDISING                                                               
-------------                                                           

The Company believes that its customer base consists primarily of female        
customers shopping for family needs.  Accordingly, Hills emphasizes merchandise 
in its softlines departments and selected hardware departments such as          
housewares, toys and seasonal merchandise which appeal to Hills' targeted       
female customer.  The Company considers the depth of its merchandise in these   
departments to be an important factor in attracting and retaining female        
customers, and accordingly emphasizes the availability of a wide selection of   
sizes, styles and colors of items in these departments.                         

Hills carries a diverse line of products, all first quality, including a full   
line of clothing and footwear for women, men and children, toys, health and     
beauty aids, small household appliances and housewares, home entertainment      
equipment, hardware, stationery and greeting cards, automotive supplies, lawn   
and garden products and jewelry.  Hills offers a broad range of brand name      
apparel and other products for the family and supplements brand name goods with 
manufacturers' private brands (brands made by major manufacturers but not       
nationally advertised) and Hills' private label program.  The Company accepts   
all major consumer credit cards and offers a year-round layaway program for     
those customers who do not rely on credit cards.                                

As part of its merchandise strategy, Hills primarily endeavors to purchase      
goods that are made in the                                                      

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U.S.A. and has developed a special merchandise program using its "American      
Spirit" trademark to help market that concept to customers. Imported goods are  
purchased by Hills from an importing subsidiary and from unaffiliated sources.  
In fiscal year 1994, the subsidiary, CRH International, Inc., imported products 
that accounted for approximately 6.0% of total purchases of the Hills           
Department Stores chain.                                                        

c)  PURCHASING                                                                  
----------                                                              

Hills uses a centralized buying organization staffed by merchandise managers,   
buyers and a support staff organized along the Company's product lines.  Most   
of Hills' buying organization is located at its Canton, Massachusetts           
headquarters.  Hills also maintains an important fashion buying office in the   
garment district of New York City to purchase and merchandise women's fashion   
and basic apparel.                                                              

Hills' merchandise managers and buyers develop detailed merchandising plans for 
each selling season.  These plans include sales, inventory and initial mark-up  
and mark-down budgets for each buyer.  Sales performance reports are received   
both daily and weekly and assist management in making related merchandising     
decisions.  The formats of these plans are programmed into computer planning    
systems for each department.                                                    

d)  DISTRIBUTION                                                                
------------                                                            

The Company's central distribution facilities are located in Columbus, Ohio.    
These facilities provide central stocking of inventory and flow-through         
allocation of inventory for delivery to the stores, resulting in efficient      
inventory management.  Significant reductions in store receiving expense are    
achieved by performing many product handling functions at the central           
facilities.  Further improvements in equipment and facilities are underway to   
support the growing number of Hills stores to be served.                        

e)  STORE OPERATIONS AND MANAGEMENT                                             
-------------------------------                                         

In recent years, the Company has instituted several significant changes in its  
store operations and management structure to enhance expense control,           
flexibility and competitive responsiveness. Computerized scheduling of work     
hours based upon forecasted sales levels, productivity standards and freight    
activity allocates more payroll dollars to sales generating positions, while    
reducing overall payroll expense.  The Company has also given renewed attention 
to evaluating the sales and profit potential of specialty businesses, such as   
optical shops and fast food purveyors.                                          

Store managers report to a district manager, who reports to a regional vice     
president.  The 16 district managers and 2 regional vice presidents visit their 
stores on a regular basis to oversee operations.  Store managers and associates 
are empowered to respond directly to the needs of the customers.  The Company   
maintains a strategic field office near Pittsburgh to facilitate store          
visitations and reduce travel expenses, particularly by those associates with   
greater responsibilities for store performance.                                 

f)  MANAGEMENT INFORMATION AND CONTROL SYSTEMS                                  
------------------------------------------                              

To support Hills' strategy of centralized management control, the Company       
relies extensively on computerized information systems.  Hills operates its     
principal data processing center at its headquarters in Canton, Massachusetts.  
All Hills stores and administrative locations are tied to the data center's     
mainframe computer by means of an on-line leased telephone network.             

Hills' merchandising systems are designed to integrate the key retailing        
functions of seasonal merchandise planning, purchase order management,          
merchandise distribution, receiving, sales capture, inventory control,          
open-to-buy and replenishment.  Unit sales data is recorded via the             
point-of-sale register systems in each store.  The point of sale registers and  
bar code readers in all stores eliminate labor intensive price marking and      
price changes.  The sales data is transmitted nightly to the Company's          
mainframe computer                                                              

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where it is processed to produce a wide range of daily and weekly management    
reports.  Each Hills buyer also has on-line access to information via a         
workstation located in the buyer's office.  The merchandising systems allow     
Hills to distribute specific categories and styles of merchandise to each store 
based upon the sales patterns of the stores.                                    

Store operations are supported by a number of additional on-line systems        
including electronic correspondence among all locations, payroll and labor      
scheduling systems, accounts payable, price change management and layaway       
control.  The purpose of these systems is to promote timely and accurate        
communication among all Hills locations and to allow personnel at the Company's 
headquarters to monitor and control key store activity.                         

g)  COMPETITION                                                                 
-----------                                                             

The discount general merchandise business is highly competitive.  The Company   
considers price, merchandise presentation, product selection and merchandise    
quality, together with store location, to be the most significant competitive   
factors.  Hills' primary competitors are regional and national discount         
department store chains, some of which, such as Wal-Mart and K Mart, are larger 
and better capitalized than Hills.  Wal-Mart's expansion has brought and is     
bringing more of its stores into the Company's market areas.  Management        
believes that the Company's store remodeling program and its strength in        
certain merchandising lines allows it to defend its competitive position, even  
with Wal-Mart's presence in most of the Company's markets.  The Company         
believes it was the 8th largest general merchandise discount retailer in the    
United States in 1994 as measured by sales revenue.                             

h)  TRADEMARKS AND SERVICE MARKS                                                
----------------------------                                            

The "Hills" name is a registered service mark.  The Company considers this mark 
and the associated name recognition to be valuable to its business.  The        
Company has additional trademarks, trade names and service marks, many of       
which, such as "American Spirit", are used in connection with the Company's     
private label program.  Although the Company considers these additional marks   
to be valuable in the aggregate, individually, they have varying degrees of     
importance to the Company's business.                                           

i)  EMPLOYEES                                                                   
---------                                                               

As of March 31, 1995, Hills employed approximately 19,500 persons, including    
approximately 12,500 full-time and 7,000 part-time employees.  The number of    
employees varies during the year, reaching a peak during the Christmas selling  
season.  The Company considers its relations with its employees to be good.     

j)  REORGANIZATION                                                              
--------------                                                          

On October 4, 1993 (the "Effective Date"), Hills emerged from reorganization    
proceedings under Chapter 11 of the United States Bankruptcy Code ("Chapter     
11").  Hills, its former parent, Hills Department Stores, Inc. (the             
"Predecessor Company"), and the five principal subsidiaries of Hills            
voluntarily filed petitions for reorganization under Chapter 11 on February 4,  
1991 (the "Filing Date").  The Predecessor Company operated its business as a   
debtor-in-possession under Chapter 11 from the Filing Date until October 4,     
1993.                                                                           

Pursuant to the plan of reorganization, the Predecessor Company was dissolved   
and Hills succeeded to and assumed the Predecessor Company's former status as a 
holding company by transferring to HDSC, a newly formed operating subsidiary of 
Hills, all of the assets, property and interest of Hills as of October 4, 1993. 
Pre-petition claims and interests were cancelled in exchange for cash, senior   
notes, common stock, preferred stock, stock rights and stock warrants.          

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HDSC obtained a three year unsecured line of credit with Chemical Bank and a    
syndicate of other banks for $225 million, of which up to $75 million is        
available as a letter of credit facility.  All of the common stock of the       
Company's subsidiaries is pledged as collateral for the credit facility, which  
is guaranteed by Hills.                                                         

For more information about the Chapter 11 filings and the credit facility, see  
Item 7 and Notes 1 and 7 of Notes to Consolidated Financial Statements.         

ITEM 2.  PROPERTIES                                                             
----------                                                    

STORE LOCATIONS AND LEASES                                                      
--------------------------                                                      

Hills operates 156 stores in the states of Illinois, Indiana, Kentucky,         
Maryland, Massachusetts, New York, Ohio, Pennsylvania, Tennessee, Virginia, and 
West Virginia, located in regional and other enclosed shopping malls, strip     
shopping centers and as free standing units.  The Company leases nearly all of  
its stores under long-term leases.  In addition, Hills leases buying and        
administrative offices, including the Company's headquarters in Canton,         
Massachusetts, the field office in Aliquippa, Pennsylvania and the buying       
office in New York, New York, and its central distribution facilities in        
Columbus, Ohio.                                                                 

The typical store lease has an initial term of between 20 and 30 years, with    
four to seven renewal periods of five years each, exercisable at the Company's  
option.  Substantially all of the Company's leases provide for a minimum annual 
rent that is constant or adjusts to fixed levels through the lease term,        
including renewal periods.  Most leases provide for additional rent based on a  
percentage of sales to be paid when designated sales levels are achieved.  See  
Note 9 of Notes to Consolidated Financial Statements for additional information 
about the Company's long-term leases.                                           

ITEM 3.  LEGAL PROCEEDINGS                                                      
-----------------                                             

Other than ordinary routine litigation incidental to the business, neither      
Hills nor any of its subsidiaries is a party to any material pending legal      
proceedings.                                                                    

On March 20, 1995, the Court of Chancery of the State of Delaware approved the  
settlement agreement entered into by the plaintiff and the defendants in the    
previously reported stockholders' derivative and class action lawsuit captioned 
Weiss v. Lee, et al.  The plaintiff had named each member of the Board and the  
Company as defendants.  The plaintiff's counsel are awarded fees of $379,000,   
to be paid by the Company.  In addition, minor modifications made to the        
employment contracts of executives and the consulting contract with Mr.         
Matthews became effective upon the Court's approval of the settlement           
agreement.                                                                      

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                    
---------------------------------------------------           

At a special meeting on January 18, 1995 the Company's stockholders voted to    
amend its corporate charter to require that all stockholder actions be taken at 
annual or special meetings of stockholders.  Of the total votes cast, 9,236,219 
were for the amendment, 999,197 were against the amendment and 30,307           
abstained.  There were 1,882,482 broker non-votes.                              

EXECUTIVE OFFICERS OF THE REGISTRANT (Furnished pursuant to General             
------------------------------------                                            
Instruction G of Form 10-K.)                                                    

The executive officers of the Company currently are:                            

Michael Bozic, 54, became the President and Chief Executive Officer of Hills in 
May 1991.  He was President and Chief Operating Officer from August 1990 to     
January 1991 and Chairman and Chief                                             

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Executive Officer from 1987 to 1990 of the Sears Merchandising Group.           

Kim D. Ahlholm, 38, was elected Vice President-Controller of Hills in March     
1994.  She had been Treasurer since June 1993, Assistant Controller from July   
1990 to June 1993 and Director-Audit from April 1989 to June 1990.              

Bruce A. Caldwell, 37, was elected Vice President-Treasurer in March 1994.  He  
was Assistant Vice President-Financial Planning and Analysis since April 1993,  
Director-Accounting from December 1990 to March 1993 and Manager-External       
Reporting from February 1989 to November 1990.                                  

William K. Friend, 48, is and since December 1985 has been Vice                 
President-Secretary and Corporate Counsel of Hills.                             

John G. Reen, 45, was elected Executive Vice President-Chief Financial Officer  
of Hills in March 1992.  He had been Senior Vice President-CFO since February   
1991 and Vice President-Controller from December 1985 to January 1991.          

Andrew J. Samuto, 52, was elected Executive Vice President-Real Estate and      
Support Services of Hills in June 1990.  He became Senior Vice President-Real   
Estate Development and Human Resources of Hills Department Stores division in   
1985.                                                                           

E. Jackson Smailes, 52, was elected Executive Vice President-General            
Merchandise Manager in September 1992.  From January 1990 to September 1992, he 
was President and Chief Operating Officer of C.R. Anthony, Inc.                 

Robert J. Stevenish, 51, was elected Executive Vice President-Store and         
Distribution Operations in April, 1994.  He had been Executive Vice             
President-Store Operations since November 1992.  Prior to joining Hills in      
November 1992, he had been Director of Specialty Retailing of the J.C. Penney   
Company since 1986.                                                             

Officers are elected to serve until their successors are elected and qualified. 

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PART II 

ITEM 5.  MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SECURITY HOLDER  
MATTERS                                                       
       ---------------------------------------------------------------------

(a)  The principal market on which the Company's Common Stock is traded is the  
New York Stock Exchange.  The following table sets forth the range of high and  
low prices of the Company's Common Stock as reported on the New York Stock      
Exchange from October 5, 1993 (the day after the Company's emergence from       
reorganization proceedings) through January 28, 1995, the end of the Company's  
fiscal year.  The trading prices of the Common Stock of the Predecessor Company 
prior to October 5, 1993 are not presented herein because such prices are not   
meaningful.                                                                     

                                                                · Download Table
COMMON STOCK PRICES                                                            
-------------------                                                            

         Quarter Ended                    High Price               Low Price   
                                                                               
         January 28, 1995                 $21.625                  $19.375     
         October 29, 1994                 $23.000                  $20.125     
         July 30, 1994                    $21.000                  $18.000     
         April 30, 1994                   $21.750                  $19.000     

         January 29, 1994                 $22.250                  $17.875     
         October 30, 1993                 $21.625                  $20.250     

<FN>                                                                           
(b)  As of March 31, 1995, there were outstanding 9,286,462 shares of Common   
Stock held by approximately 1,710 holders of record, and 1,505,683 shares of   
Series A Convertible Preferred Stock held by approximately 1,529 holders of    
record.                                                                        

(c)  The Company has not paid a cash dividend on its Common Stock in the last  
two fiscal years.  The Credit Agreement dated as of October 4, 1993 between    
HDSC and Chemical Bank, and the Company as the Guarantor, prohibits the payment
of dividends on the Company's Common Stock and limits the amount of dividends  
which HDSC may pay to the Company in any fiscal year.  The Company's Senior    
Notes Indenture also has restrictions on the payment of cash dividends.  See   
Notes 7 and 8 of Notes to Consolidated Financial Statements.                   


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                                                        · Enlarge/Download Table
ITEM 6.  SELECTED FINANCIAL DATA                                                                                         
         -----------------------                                                                                         

The Company emerged from Chapter 11 proceedings on October 4, 1993.  For                                                 
financial reporting purposes, the Company adopted fresh- start reporting as of                                           
October 2, 1993.  Under fresh-start reporting, a new reporting entity is                                                 
created and recorded amounts of assets and liabilities are adjusted to reflect                                           
their estimated fair values.  Financial data prior to October 2, 1993 has been                                           
designated as those of the Predecessor Company.  Black lines have been drawn to                                          
separate the Successor Company financial data from the Predecessor Company                                               
financial data to signify that they are those of a new reporting entity and                                              
have been prepared on a basis not comparable to prior periods (see Notes 1, 2                                            
and 3 of Notes to Consolidated Financial Statements).                                                                    


-------------------------------------------------------------------------------------------------------------------------
                                                                           Successor Company        Predecessor Company  
                                                                   -----------------------------    ---------------------
                                                                      Fiscal        Seventeen          Thirty-five       
                                                                       Year        Weeks Ended         Weeks Ended       
(in thousands, except per share amounts and number of stores)          1994      January 29, 1994     October 2, 1993    
-------------------------------------------------------------------------------------------------------------------------
                                                                                                                         
Net sales                                                            $1,872,021       $772,685    ||   $ 992,848         
                                                                                                  ||                     
Gross profit                                                         $  531,800       $223,034    ||   $ 282,549         
                                                                                                  ||                     
Net earnings (loss) applicable to                                                                 ||                     
  common shareholders before extraordinary items                     $   40,431       $ 36,235    ||   $  (9,747)        
                                                                                                  ||                     
Net earnings (loss) applicable to common shareholders                $   40,431       $ 36,235    ||   $ 248,492 (2)     
                                                                                                  ||                     
Fully-diluted earnings (loss)  per common share                      $     2.73       $   2.45    ||   $   11.30 (3)     
                                                                                                  ||                     
Fully-diluted average shares outstanding                                 14,832         14,794    ||      21,982         
                                                                                                  ||                     
FINANCIAL POSITION:                                                                               ||                     
                                                                                                  ||                     
Total assets                                                         $  992,378       $907,621    ||   $ 972,838 (6)     
                                                                                                  ||                     
Working capital                                                      $  241,486       $171,440    ||   $ 301,980 (6)     
                                                                                                  ||                     
Liabilities subject to compromise (4)                                $        -       $      -    ||   $ 775,169 (6)     
                                                                                                  ||                     
Long-term obligations                                                $  185,169       $160,000    ||   $       - (6)     
                                                                                                  ||                     
Long-term obligations under capital leases                           $  124,508       $130,626    ||   $ 122,230 (6)     
                                                                                                  ||                     
Redeemable preferred stock                                           $   64,144       $100,000    ||   $  33,143 (6)     
                                                                                                  ||                     
Common shareholders' equity (deficit)                                $  306,741       $230,235    ||   $(186,934)(6)     
                                                                                                  ||                     
Number of stores operated at period end                                     154            151    ||         151         

                                                        · Enlarge/Download Table

-----------------------------------------------------------------------------------------------------------------------         
                                                                              Predecessor Company                               
                                                                 -------------------------------------------------              
                                                                      Fiscal         Fiscal             Fiscal                  
                                                                       Year           Year               Year                   
(in thousands, except per share amounts and number of stores)          1992           1991               1990                   
------------------------------------------------------------------------------------------------------------------              
                                                                                                                                
Net sales                                                         $ 1,750,266       $ 1,679,866       $ 2,140,868               

Gross profit                                                      $   500,454       $   465,776       $   580,706               

Net earnings (loss) applicable to                                                                                               
  common shareholders before extraordinary items                  $    24,385       $     7,637       $  (276,415)(1)           

Net earnings (loss) applicable to common shareholders             $    47,264       $    20,117       $  (276,415)(1)           

Fully-diluted earnings (loss)  per common share                   $      2.15(3)    $      0.92 (3)   $    (14.45)              

Fully-diluted average shares outstanding                               21,982            21,982            19,131               

FINANCIAL POSITION:                                                                                                             

Total assets                                                      $   922,745       $   846,906       $   775,227               

Working capital                                                   $   299,927       $   261,007       $   270,403               

Liabilities subject to compromise (4)                             $   761,443       $   771,606       $   819,094               

Long-term obligations                                             $         -       $         -       $     7,155               

Long-term obligations under capital leases                        $   133,457       $   137,793       $   137,831               

Redeemable preferred stock                                        $    31,481       $    29,049       $    26,654               

Common shareholders' equity (deficit)                             $ ( 183,172)      $(  230,446)      $  (259,413)              

Number of stores operated at period end                                   154               154               186 (5)           

<FN>                                                                                                                            
(1) Includes a $242.0 million pre-tax provision for store closing and restructuring costs.                                      

(2) Includes a $258.2 million after-tax extraordinary gain on the discharge of prepetition debt.                                

(3) Fully-diluted earnings per share for fiscal years 1992 and 1991 include extraordinary credits per common share of $1.04 and 
    $0.57, respectively, attributable to the realization of the benefit of tax loss carryforwards. Fully-diluted earnings per   
    share for the thirty-five weeks ended October 2, 1993 includes an extraordinary gain per common share of $11.75 on discharge
    of prepetition debt.                                                                                                        

(4) On February 4, 1991, the Company, its former parent, Hills Department Stores, Inc., and the five principal subsidiaries of  
    the Company, filed petitions for relief under Chapter 11 of the United States Bankruptcy Code. As a result, the Company     
    reclassified certain current liabilities to Liabilities subject to compromise at February 3, 1991 (see Note 1 of Notes to   
    Consolidated Financial Statements).                                                                                         

(5)  The Predecessor Company operated 214 stores at January 2, 1991 and closed 28 stores by year end.                           

(6) Reflects financial position of the Predecessor Company at October 2, 1993 prior to the confirmation of the Plan of          
    Reorganization.                                                                                                             


THE SELECTED FINANCIAL DATA SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED 
FINANCIAL STATEMENTS.                                                           
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ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND      
     ---------------------------------------------------------------
RESULTS OF OPERATIONS                                     
---------------------                                     

GENERAL                                                                         

On October 4, 1993 (the "Effective Date"), Hills Stores Company (the "Company"  
or the "Successor Company") emerged from reorganization proceedings under       
Chapter 11 of the United States Bankruptcy Code ("Chapter 11").  The Company,   
its former parent, Hills Department Stores, Inc. (the "Predecessor Company"),   
and the five principal subsidiaries of the Company, voluntarily filed petitions 
for reorganization under Chapter 11 on February 4, 1991 (the "Filing Date").    
The Predecessor Company operated its business as a debtor-in-possession under   
Chapter 11 from the Filing Date until October 4, 1993.                          

The Plan of Reorganization (the "POR") provided for the Predecessor Company to  
be dissolved and the Company to succeed to and assume the Predecessor Company's 
former status as a holding company (see Note 1 of Notes to Consolidated         
Financial Statements).                                                          

In conjunction with its emergence from Chapter 11, the Company adopted          
fresh-start reporting as of October 2, 1993 in accordance with the American     
Institute of Certified Public Accountants Statement of Position 90-7:           
"Financial Reporting by Entities in Reorganization under the Bankruptcy Code"   
(see Note 2 of Notes to Consolidated Financial Statements).                     

In connection with the adoption of fresh-start reporting and the consummation   
of the POR, a new entity was deemed created for financial reporting purposes.   
Accordingly, the consolidated financial statements for the periods subsequent   
to October 2, 1993 have been designated "Successor Company" to signify that     
they are those of the new entity for financial reporting purposes and have been 
prepared on a basis not comparable to prior periods.                            

To facilitate comparison of the Successor and Predecessor Companies' operating  
performances between fiscal years 1994, 1993 and 1992, the discussions below    
are presented using the pro forma results of combined operations of the         
Successor and Predecessor Companies for fiscal 1993 as presented in Note 3 of   
Notes to Consolidated Financial Statements.  Consequently, the information      
presented below does not reflect the periods in the fifty-two weeks ended       
January 29, 1994 as they are presented in the Consolidated Financial Statements 
of Operations.  The most significant pro forma adjustment to earnings before    
reorganization items, income taxes and extraordinary items is the increase in   
interest expense due to the pro forma issuance of the Senior Notes at January   
31, 1993 (see Note 3 of Notes to Consolidated Financial Statements).            

RESULTS OF OPERATIONS                                                           

FISCAL YEAR ENDED JANUARY 28, 1995 (FISCAL 1994) VERSUS                         
PRO FORMA COMBINED FISCAL YEAR ENDED JANUARY 29, 1994 (FISCAL 1993)     

Sales increased 6.0% compared to fiscal 1993.  This improvement was primarily   
attributable to increased hardlines sales, particularly in toys, all occasion,  
and areas associated with the home.  In addition,  modest gains in apparel      
sales, the opening of three new stores, and comparatively strong January 1995   
sales due to the unusually bad weather conditions in January of the prior year  
also contributed to the sales increase.  The strong fiscal 1994 Christmas       
season was highlighted by a fourth quarter comparable stores sales increase of  
4.7%.  Comparable store sales were $1.849 billion in fiscal 1994 versus $1.759  
billion in fiscal 1993, a 5.1% increase.                                        

Cost of sales as a percentage of sales was 71.6% in fiscal 1994 compared to     
71.4% in fiscal 1993.  The increase of 0.2% is due to a higher rate of          
markdowns, particularly in the apparel market, and an increase                  

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RESULTS OF OPERATIONS (CONTINUED)                                               

FISCAL YEAR ENDED JANUARY 28, 1995 (FISCAL 1994) VERSUS                         
 PRO FORMA COMBINED FISCAL YEAR ENDED JANUARY 29, 1994 (FISCAL 1993) (CONTINUED)

in the provision for inventory shortage.  These were partially offset by an     
improved purchase markup and an improvement in logistics costs due to           
operational efficiencies achieved at the Company's distribution center, which   
became fully operational in July 1993.                                          

Selling and administrative expenses as a percentage of sales was 20.9% in       
fiscal 1994 compared to 21.4% in fiscal 1993, a 0.5% decrease.  This            
improvement was primarily a result of the Company's focus on cost reduction,    
principally in payroll and payroll related expenses.  This is the third         
consecutive year in which the Company has reduced selling and administrative    
expenses as a percentage of sales.  A $4.5 million gain from the elimination of 
pension obligations, which were replaced by a company matching 401(k) plan, was 
also included in selling and administrative expenses.                           

Other income was $9.2 million in fiscal 1994 compared to $3.7 million in fiscal 
1993, a $5.5 million increase.  This increase was primarily due to a fourth     
quarter reversal of liabilities established in "fresh-start" accounting         
totalling $9.6 million which was partially offset by $2.2 million paid to the   
holders of the Company's Senior Notes in connection with the Company's          
self-tender for shares of its common stock (see Note 20 of Notes to             
Consolidated Financial Statements) and $2.2 million of additional amortization  
of deferred financing costs.                                                    

The Company's effective tax rate was 47.0% in fiscal 1994 compared to 48.1% in  
fiscal 1993, a 1.1% decrease resulting principally from the decrease in         
non-deductible goodwill amortization as a percentage of the related pre-tax     
earnings.                                                                       

PRO FORMA COMBINED FISCAL YEAR ENDED JANUARY 29, 1994 (FISCAL 1993) VERSUS      
FISCAL YEAR ENDED JANUARY 30, 1993 (FISCAL 1992)                            

Sales increased 0.9% compared to fiscal 1992.  This improvement was primarily   
attributable to the Company's strong sales performance during the fiscal 1993   
Christmas season partially offset by weak sales results due to unusually bad    
weather conditions in the first quarter of fiscal 1993 and January 1994 and the 
closing of three stores in June 1993.  The strong fiscal 1993 Christmas season  
was highlighted by a fourth quarter comparable store sales increase of 8.6%     
compared to fiscal 1992.  Comparable store sales were $1.759 billion in fiscal  
1993 versus $1.728 billion in fiscal 1992, a 1.8% increase.                     

Cost of sales as a percentage of sales was 71.4% in fiscal years 1993 and 1992. 
An improvement in purchase margin was offset by increases in markdowns and      
logistics costs.  Logistics costs are expected to decline as a percentage of    
sales as the Company's new distribution facility begins to achieve economies of 
scale.                                                                          

Selling and administrative expenses as a percentage of sales was 21.4% in       
fiscal 1993 compared to 21.9% in fiscal 1992, a 0.5% decrease.  This            
improvement is primarily a result of the Company's continued focus on cost      
reduction, principally in payroll and payroll related expenses, and follows a   
0.6% decrease in costs in 1992 versus 1991.                                     

Depreciation and amortization as a percentage of sales was 2.0% in fiscal 1993  
compared to 2.2% in fiscal 1992, a 0.2% decrease.  This decrease is primarily a 
result of a pro forma January 31, 1993 revaluation and/or the change in the     
related estimated remaining useful lives of the Company's depreciable and       
amortizable assets in the pro forma implementation of fresh-start reporting.    

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RESULTS OF OPERATIONS (CONTINUED)                                               

PRO FORMA COMBINED FISCAL YEAR ENDED JANUARY 29, 1994 (FISCAL 1993) VERSUS      
FISCAL YEAR ENDED JANUARY 30, 1993 (FISCAL 1992) (CONTINUED)                

Other interest expense was $23.1 million in fiscal 1993 compared to $5.9        
million in fiscal 1992, a $17.2 million increase.  This increase is primarily   
due to 12 months of pro forma interest expense on the Senior Notes of $16.4     
million and pro forma amortization ($2.4 million) of deferred financing costs   
assumed to have been paid on January 31, 1993, related to securing the          
revolving credit facility.                                                      

Other income was $3.7 million in fiscal 1993 compared to $0.6 million in fiscal 
1992, a $3.1 million increase.  This increase is primarily due to the           
classification of $1.4 million of interest income as a reorganization item in   
fiscal 1992 versus other income in fiscal 1993 and a $0.9 million recovery in   
fiscal 1993 of a fully reserved note receivable.                                

The Company's effective tax rate was 48.1% in fiscal 1993 compared to 49.8% in  
fiscal 1992, a 1.7% decrease.  This decrease resulted principally from the      
decrease of certain non-deductible reorganization costs and state and local     
income taxes, partially offset by an increase in non-deductible goodwill        
amortization as a percentage of the related pre-tax earnings.                   

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES                            

GENERAL                                                                         

The discussion of the Company's financial condition, liquidity and capital      
resources that follows is based on the Company's financial position at January  
28, 1995.  The financial information of the Company generally is not comparable 
with the prior periods due to the POR and the effect of the implementation of   
fresh-start reporting as of October 2, 1993.                                    

Hills Department Store Company, a wholly-owned subsidiary of the Company,       
entered into a three year unsecured revolving credit facility on October 4,     
1993 (the "Facility") with Chemical Bank and a syndicate of other banks for     
$225 million, of which up to $75 million is available as a letter of credit     
facility (see Note 7 of Notes to Consolidated Financial Statements).  All of    
the common stock of the Company's subsidiaries are pledged as collateral for    
the Facility, which is guaranteed by the Company. The Company had borrowings    
under the Facility for four days during fiscal 1994 and there was no            
outstanding balance at January 28, 1995. During the fiscal year ended January   
28, 1995, average borrowings approximated $88,000 at an average interest rate   
of 9.25%, with peak borrowings at $8.0 million.  Additionally, the Company met  
the economic performance requirements as defined in the Facility and qualified  
for a 1/4% interest rate reduction effective August 1, 1994.  In fiscal 1995,   
there have not been any borrowings under the Facility through the date of this  
filing.  The Company is in compliance with all of the Facility's restrictive    
covenants as of January 28, 1995.                                               

The Company also has significant lease commitments which require cash outflows. 
Operating and capital lease payments in fiscal 1995, including rentals based on 
sales, are expected to approximate $57.9 million.                               

In fiscal 1994, the Company obtained $25.2 million of financing for certain of  
its real properties through sale/leaseback arrangements (see Note 10 of Notes   
to Consolidated Financial Statements).                                          

To facilitate comparisons of cash flow information of the Successor and         
Predecessor companies, the following discussion is presented using the combined 
cash flow information of the Successor and Predecessor companies for the        
fifty-two weeks ended January 29, 1994.  Fresh-start reporting has no           

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FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)                

GENERAL (CONTINUED)                                                             

                                                        · Enlarge/Download Table
impact on cash flow information.  A summary of cash flow information and                                     
financial position is presented below (in thousands):                                                        


                                                                             Combined                        
                                                                          Successor and                      
                                                    Successor              Predecessor            Predecessor
                                                     Company                Companies               Company  
                                                    Fiscal Year             Fifty-two             Fiscal Year
                                                      Ended                Weeks Ended               Ended   
                                                   January 28,             January 29,            January 30,
                                                       1995                    1994                  1993    
-------------------------------------------------------------------------------------------------------------
                                                                                                             
Cash and cash equivalents                                                                                    
  at beginning of period                           $    90,049             $   173,343           $   113,907 
Net cash provided by operating activities              124,612                  50,022               105,587 
Capital expenditures                               (    38,458)            (    30,232)          (    40,066)
Principal payments under capital lease                                                                       
  obligations                                      (     5,529)            (     5,126)          (     4,806)
Sale/leaseback financing                                25,169                       -                     - 
Cash distributions pursuant to the POR             (    14,419)            (    90,318)                    - 
Other investing activities                                   -                       -                   780 
Other financing activities                         (     1,373)            (     7,640)          (     2,059)
                                                    ----------              ----------            ---------- 
Cash and cash equivalents                                                                                    
  at end of period                                  $  180,051             $    90,049            $  173,343 
                                                    ==========             ===========            ========== 
Working capital at end of period                    $  241,486             $   171,440            $  299,927 
                                                    ==========             ===========            ========== 

The Company's working capital as of January 28, 1995 increased by $70.0 million 
from January 29, 1994.  This increase is principally due to net cash provided   
by operations and cash from the sale/leaseback transactions, partially offset   
by capital expenditures.                                                        

Net cash provided by operating activities for the fiscal year ended January 28, 
1995 increased $74.6 million compared to fiscal year ended January 29, 1994.    
This increase is primarily due to a decrease in inventories from fiscal 1993    
due to the Company's emphasis during the year on improving inventory turnover   
and an increase from fiscal 1993 in days accounts payable outstanding due to    
normal seasonal factors, reduced by an increase in deferred tax assets of $31.0 
million.  Over the past four years, the Company has generated positive cash     
flows from operations in excess of its capital expenditure requirements.        

Capital expenditures, primarily for the remodeling and upgrading of existing    
stores and the opening of five new stores, were $38.5 million during fiscal     
1994.  The Company expects to complete the remainder of its store remodeling    
program in fiscal 1995.  During fiscal 1995, capital expenditures are expected  
to approximate $65 million, with 10 to 15 new store openings.                   

In August 1994, Dickstein Partners, L.P., et al. ("Dickstein") commenced a      
consent solicitation to replace four members of the Board of Directors with     
Dickstein nominees (see Note 19 of Notes to Consolidated Financial Statements). 
In response to the consent solicitation, the Company's Board of  Directors      
announced a program to enhance shareholder value, including the approval of a   
self-tender for three million shares of the Company's common stock for $25 per  
share (see Note 20 of Notes to Consolidated                                     

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FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)                

GENERAL (CONTINUED)                                                             

Financial Statements) and the implementation of a growth program which includes 
remodeling, opening new stores, and the continuation of operating improvement   
programs.  The Company completed the self-tender offer in March 1995 and        
purchased, with cash on hand, three million shares of common stock for $75.0    
million.                                                                        

Management believes that amounts available under the Company's current          
borrowing agreement, together with cash from operations, will enable the        
Company to fund its current liquidity and capital expenditure requirements.     

OTHER MATTERS                                                                   

SEASONALITY                                                                     

The Company's business is highly seasonal due to increased consumer buying for  
back-to-school needs and Christmas.  The second half of each year provides the  
major portion of the Company's annual sales and operating earnings with         
operating earnings particularly concentrated in the Christmas selling season.   

INFLATION                                                                       

The Company, although subject to the effects of changing prices, generally has  
experienced a lesser rate of inflation than the economy as a whole.  The        
Company uses the LIFO inventory accounting method for financial reporting       
purposes because it is believed to provide a better matching of current costs   
with revenues than does the FIFO method.  Consequently, the cost of goods sold  
included in the results of operations is already adjusted for inflation.        

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ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                          
-------------------------------------------               

See accompanying pages F-1 through F-23.                                        

                                                        · Enlarge/Download Table
Information called for by this item can be found at the pages listed in the following index. 

                                INDEX TO FINANCIAL STATEMENTS                                



Hills Stores Company and Subsidiaries                                                    Page
                                                                                         ----
                                                                                             
Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . .   F-1
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   F-2
Consolidated Statements of Operations . . . . . . . . . . . . . . . . . . . . . . . . .   F-3
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . .   F-4
Consolidated Statements of Common Shareholders' Equity .  . . . . . . . . . . . . . . .   F-5
Notes to Consolidated Financial Statements  . . . . . . . . . . . . . . . . . . . . . .   F-6

ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND      
     ---------------------------------------------------------------
FINANCIAL DISCLOSURE                                      
--------------------                                      

Not applicable.                                                                 

PART III    

ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                   
--------------------------------------------------        

Incorporated by reference from the item entitled "Information about Nominees"   
in the proxy statement dated May 5, 1995 for the annual meeting of stockholders 
to be held June 12, 1995, except for information regarding executive officers   
of the Company, which information is furnished in a separate item captioned     
"Executive Officers of the Registrant" in Part I of this report.                

ITEM 11.   EXECUTIVE COMPENSATION                                               
----------------------                                    

Incorporated by reference from the item entitled "Executive Compensation" in    
the proxy statement dated May 5, 1995 for the annual meeting of stockholders to 
be held June 12, 1995.                                                          

ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT       
    --------------------------------------------------------------

Incorporated by reference from the item entitled "Beneficial Ownership" in the  
proxy statement dated May 5, 1995 for the annual meeting of stockholders to be  
held June 12, 1995.                                                             

ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                       
----------------------------------------------            

Incorporated by reference from the items entitled "Information about Nominees", 
"Employment Contracts"  and "Compensation of Directors" in the proxy statement  
dated May 5, 1995 for the annual meeting of stockholders to be held June 12,    
1995.                                                                           

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PART IV 

ITEM 14.   EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K      
     ---------------------------------------------------------------

                                                                · Download Table
(a)  Documents filed as part of this report:                                   

                                                                               
1.  Financial statements                                                       

         Report of Independent Accountants                                  F-1
         Consolidated Balance Sheets                                        F-2
         Consolidated Statements of Operations                              F-3
         Consolidated Statements of Cash Flows                              F-4
         Consolidated Statements of Common Shareholders' Equity             F-5
         Notes to Consolidated Financial Statements                         F-6

2.  Financial statement schedule                                               

           I    Report of Independent Accountants                           S-1
           II   Valuation and Qualifying Accounts                           S-2

Schedules other than these listed above are omitted because they are not        
required, not applicable, or the information is otherwise included in the       
financial statements.                                                           

3.  Certain of the exhibits listed hereunder have previously been filed with    
the Commission as exhibits to certain registration statements and periodic      
reports set forth in the footnotes following this exhibit list and are hereby   
incorporated by reference pursuant to Rule 411 promulgated under the Securities 
Act and Rule 24 of the Commission's Rules of Practice.  The location of each    
document so incorporated by reference is indicated by footnote.                 

2.1 (3)   First Amended Consolidated Plan of Reorganization, dated as of        
July 16, 1993.                                              

2.2 (3)   September 10, 1993 Amendment to such Plan of Reorganization.          

3.1       Amended and Restated Certificate of Incorporation of the Company,     
dated September 27, 1993.                                   

3.2       Amendment dated January 18, 1995 to the Certificate of Incorporation  
of the Company.                                             

3.3 (6)   Amended and Restated By-Laws of the Company.                          

4.1 (1)   Certificate of the Voting Powers, Preferences and other designated    
          attributes of the Series A Convertible Preferred Stock of the Company.

4.2 (5)   Form of Series 1993 Stock Right.                                      

4.3 (1)   Indenture relating to the 10.25% Senior Notes Due 2003 of the Company.

4.4 (2)   Series 1993 Warrant Agreement dated October 4, 1993 between the       
Company and Chemical Bank, as warrant agent.                

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4.5 (6)    Rights Agreement dated as of August 16, 1994 between the Company and 
Chemical Bank, as Rights Agent.                           

4.6 (6)    Form of Certificate of the Voting Powers, Preferences and other      
          designated attributes of Series B Participating Cumulative Preferred
        Stock of the Company (which is attached as Exhibit A to the Rights
 Agreement incorporated by reference as Exhibit 4.5 hereto).

4.7 (6)    Form of Right Certificate (which is attached as Exhibit B to the     
        Rights Agreement incorporated by reference as Exhibit 4.5 hereto).

10.1 (4)*  Employment Agreement with Michael Bozic, dated March 10, 1993.       

10.2 (4)*  Consulting Agreement with Norman S. Matthews, dated March 10, 1993.  

10.3 (4)*  Form of individual Employment Agreements entered into in March 1993  
      with, respectively, Messrs. Reen, Samuto, Smailes and Stevenish.

10.4 (6)*  Form of Employment Agreement made as of August 19, 1994 with Michael 
Bozic.                                                    

10.5 (6)*  Form of Employment Agreement made as of August 19, 1994 with         
Andrew J. Samuto.                                         

10.6 (6)*  Form of Employment Agreement made as of August 19, 1994 with         
John G. Reen.                                             

10.7 (6)*  Form of Employment Agreement made as of August 19, 1994 with E.      
Jackson Smailes.                                          

10.8 (6)*  Form of Employment Agreement made as of August 19, 1994 with         
Robert J. Stevenish.                                      

10.9 (6)*  Form of Consulting Agreement made as of August 19, 1994 with         
Norman S. Matthews.                                       

10.10(5)*  1993 Incentive and Nonqualified Stock Option Plan.                   

10.11(2)   Credit Agreement dated as of October 4, 1993 among HDSC, Hills Stores
Company, the Lenders named therein and Chemical Bank, as  
         Administrative Agent and Fronting Bank ("Chemical Bank Agreement").

10.12*     Form of individual Employment Agreements dated September 30, 1994    
  with, respectively, Messrs. Bozic, Reen, Samuto, Smailes and
         Stevenish, accompanied by Schedule A from each individual agreement
       setting forth the office, term, compensation, etc., applicable to
each such person.                                         

10.13*     Consulting Agreement with Norman S. Matthews dated September 30,     
1994.                                                     

11.1       Computation of earnings per share.                                   

21         Subsidiaries.                                                        

23         Consent of Coopers & Lybrand.                                        

24         Powers of Attorney of directors and officers of the Company.         

27         Financial Data Schedule.                                             

____________________                                                            

*  Executive Compensation Plans and Arrangements.                               

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1.       Incorporated by reference from the Form 8-A of the Company filed on    
October 5, 1993.                                              

2.       Incorporated by reference from the Report on Form 8-K of the Company   
dated October 4, 1993.                                        

3.       Incorporated by reference from the Report on Form 8-K of Hills         
        Department Stores, Inc. dated September 10, 1993 (same Commission File
No. 1-9505)                                                   

4.       Incorporated by reference from the Annual Report on Form 10-K of Hills 
     Department Stores, Inc. for the fiscal year ended January 30, 1993.

5.       Incorporated by reference from the Annual Report on Form 10-K of the   
Company for the fiscal year ended January 29, 1994.           

6.       Incorporated by reference from the Form 8-K of the Company dated       
August 23, 1994.                                              

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange  
Act of 1934, the Registrant has duly caused this report to be signed on its     
behalf by the undersigned, thereunto duly authorized, in the Town of Canton,    
Commonwealth of Massachusetts, on April 14, 1995.                               

                          HILLS STORES COMPANY

                               By: /s/ William K. Friend
                                      ------------------------
                               William K. Friend
                                      Vice President-Secretary

                                                        · Enlarge/Download Table
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons in the capacities indicated in which they act for the Registrant and on the date indicated.

                                                                                                             
           *                      Chairman of the Board of                                                   
----------------------------      the Company and Hills Department                                           
Thomas H. Lee                     Store Company                                      April 14, 1995          

           *                      Director, President and                                                    
----------------------------      Chief Executive Officer of the Company                                     
Michael Bozic                     and Hills Department Store Company                                         
                                  (Principal Executive Officer)                      April 14, 1995          

           *                      Director and Executive Vice President-                                     
----------------------------      Chief Financial Officer (Principal Financial                               
John G. Reen                      Officer) of the Company and Hills Department                               
                                  Store Company                                                              
                                                                                     April 14, 1995          

           *                      Director of the Company                                                    
----------------------------      and Hills Department Store Company                 April 14, 1995          
Susan E. Engel                                                                                               

           *                      Director of the Company                                                    
----------------------------      and Hills Department Store Company                 April 14, 1995          
Richard B. Loynd                                                                                             

           *                      Director of the Company                                                    
----------------------------      and Hills Department Store Company                 April 14, 1995          
Norman S. Matthews                                                                                           

           *                      Director of the Company                                                    
----------------------------      and Hills Department Store Company                 April 14, 1995          
James L. Moody, Jr.                                                                                          

           *                      Vice President-Controller (Principal Accounting                            
----------------------------      Officer) of the Company and Hills Department                               
Kim D. Ahlholm                    Store Company                                      April 14, 1995          

*By: /s/ William K. Friend                                                                                   
     ----------------------------                                                                            
 William K. Friend                                                                                           
 Attorney-In-Fact                                                                                            

                    20

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REPORT OF INDEPENDENT ACCOUNTANTS 

To the Shareholders and Board of Directors                                      
of Hills Stores Company and Subsidiaries:                               

We have audited the accompanying consolidated balance sheets of Hills Stores    
Company and Subsidiaries as of January 28, 1995, and January 29, 1994, and the  
related consolidated statements of operations, cash flows and common            
shareholders' equity for the year ended January 28, 1995, the seventeen week    
period ended January 29, 1994, the thirty-five week period ended October 2,     
1993 and  the year ended January 30, 1993.  These financial statements are the  
responsibility of the Company's management.  Our responsibility is to express   
an opinion on these financial statements based on our audits.                   

We conducted our audits in accordance with generally accepted auditing          
standards.  Those standards require that we plan and perform the audit to       
obtain reasonable assurance about whether the financial statements are free of  
material misstatement.  An audit includes examining, on a test basis, evidence  
supporting the amounts and disclosures in the financial statements.  An audit   
also includes assessing the accounting principles used and significant          
estimates made by management, as well as evaluating the overall financial       
statement presentation.  We believe that our audits provide a reasonable basis  
for our opinion.                                                                

In our opinion, the financial statements referred to above present fairly, in   
all material respects, the consolidated financial position of Hills Stores      
Company and Subsidiaries as of January 28, 1995, and January 29, 1994 and the   
consolidated results of its operations and its cash flows for the year ended    
January 28, 1995, the seventeen week period ended January 29, 1994, the         
thirty-five week period ended October 2, 1993 and the year ended January 30,    
1993 in conformity with generally accepted accounting principles.               

On October 4, 1993, the Company emerged from reorganization proceedings under   
Chapter 11 of the U.S. Bankruptcy Code.  As described in Note 2 to the          
consolidated financial statements, the Company accounted for this               
reorganization and adopted "fresh-start reporting" as of October 2, 1993.  As a 
result, the statement of operations for the year ended January 28, 1995 and for 
the seventeen week period ended January 29, 1994 are not comparable to the      
Company's consolidated statements of operations for prior periods.              

                                                Coopers & Lybrand L.L.P.

Boston, Massachusetts                                                           
March 10, 1995                                                                  

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HILLS STORES COMPANY AND SUBSIDIARIES                                                                                  
-----------------------------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS                                                                                            


                                                                               January 28,                  January 29,
(dollars in thousands)                                                             1995                        1994    
-----------------------------------------------------------------------------------------------------------------------
                                                                                                                       
ASSETS                                                                                                                 
Current assets:                                                                                                        
  Cash and cash equivalents                                                   $   180,051                   $   90,049 
  Trade receivables, less allowance for doubtful accounts                                                              
    of $4,228 and $5,497                                                           23,471                       23,368 
  Inventories                                                                     313,851                      326,465 
  Deferred tax asset (Note 17)                                                     20,923                            - 
  Other current assets                                                              4,743                        4,647 
                                                                              -----------                   ---------- 
    Total current assets                                                          543,039                      444,529 

Property and equipment, net (Note 5)                                              154,950                      132,431 
Property under capital leases, net (Note 9)                                       124,108                      134,476 
Beneficial lease rights, net (Note 4)                                               9,075                        9,902 
Other assets, net                                                                   6,380                        9,555 
Deferred tax asset (Note 17)                                                       10,061                            - 
Reorganization value in excess of amounts allocable to                                                                 
  identifiable assets, net (Note 4)                                               144,765                      176,728 
                                                                              -----------                   ---------- 
                                                                              $   992,378                   $  907,621 
                                                                              ===========                   ========== 

LIABILITIES AND SHAREHOLDERS' EQUITY                                                                                   
Current liabilities:                                                                                                   
  Current portion of capital leases (Note 9)                                  $     6,121                   $    5,532 
  Accounts payable, trade                                                          82,943                       64,192 
  Other accounts payable and accrued expenses (Note 6)                            212,489                      203,365 
                                                                              -----------                   ---------- 
    Total current liabilities                                                     301,553                      273,089 

Senior notes (Note 8)                                                             160,000                      160,000 
Obligations under capital leases (Note 9)                                         124,508                      130,626 
Financing obligation - sale/leaseback (Note 10)                                    25,169                            - 
Other liabilities                                                                  10,263                       13,671 

Commitments and contingencies (Note 19)                                                 -                            - 

Preferred stock, at mandatory redemption value (Note 12)                           64,144                      100,000 

Common shareholders' equity (Notes 13 and 14):                                                                         
  Common stock, 50,000,000 shares of $0.01 par value authorized                                                        
       10,804,784 and 9,000,000 shares issued and outstanding,                                                         
       respectively                                                                   108                           90 
  Additional paid-in capital                                                      229,967                      193,910 
  Retained earnings                                                                76,666                       36,235 
                                                                              -----------                   ---------- 
    Total common shareholders' equity                                             306,741                      230,235 
                                                                              -----------                   ---------- 
                                                                              $   992,378                   $  907,621 
                                                                              ===========                   ========== 

See Notes to Consolidated Financial Statements                                  

                                             F-2

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HILLS STORES COMPANY AND SUBSIDIARIES                                                                                               
------------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS                                                                                               

                                                                  Successor        PRO FORMA      Successor                         
                                                                   Company          COMBINED      Company                           
                                                                 Fiscal Year       FIFTY-TWO     Seventeen                          
                                                                    Ended         WEEKS ENDED     Weeks Ended                       
                                                                 January 28,      JANUARY 29,   January 29,                         
(in thousands, except per share amounts)                             1995            1994           1994                            
----------------------------------------------------------------------------------------------------------------                    
                                                                                  (UNAUDITED)                                       
                                                                                   (NOTE 3)                                         
                                                                                                                                    
Net sales                                                       $  1,872,021   $  1,765,533    $  772,685   ||                      
                                                                                                            ||                      
Cost of sales                                                      1,340,221      1,259,950       549,651   ||                      
                                                                                                            ||                      
Selling and administrative expenses                                  390,397        378,357       138,360   ||                      
                                                                                                            ||                      
Depreciation and amortization                                         35,648         34,761        11,328   ||                      
                                                                ------------   ------------    ----------   ||                      
Operating earnings                                                   105,755         92,465        73,346   ||                      
                                                                                                            ||                      
Other income (expense):                                                                                     ||                      
  Capital lease interest                                       (      14,707) (      15,141)  (     5,029)  ||                      
                                                                                                            ||                      
  Other interest (Note 1)                                      (      24,005) (      23,138)  (     8,112)  ||                      
                                                                                                            ||                      
  Other income, net                                                    9,241          3,692         2,639   ||                      
                                                                ------------   ------------    ----------   ||                      
                                                               (      29,471) (      34,587)  (    10,502)  ||                      
                                                                ------------   ------------    ----------   ||                      
                                                                      76,284         57,878        62,844   ||                      
                                                                                                            ||                      
Reorganization items, net                                                  -              -             -   ||                      
                                                                ------------   ------------    ----------   ||                      
                                                                      76,284         57,878        62,844   ||                      
                                                                                                            ||                      
Income taxes (Note 17)                                                35,853         27,837        26,609   ||                      
                                                                ------------   ------------    ----------   ||                      
                                                                      40,431         30,041        36,235   ||                      
                                                                                                            ||                      
Extraordinary credit - benefit of net operating loss                                                        ||                      
  carryforward (Note 17)                                                   -              -             -   ||                      
                                                                                                            ||                      
Extraordinary gain on discharge of prepetition                                                              ||                      
  debt (Note 1)                                                            -              -             -   ||                      
                                                                ------------   ------------    ----------   ||                      
                                                                                                            ||                      
Net earnings                                                          40,431         30,041        36,235   ||                      
                                                                                                            ||                      
Preferred dividend requirements                                            -              -             -   ||                      
                                                                ------------   ------------    ----------   ||                      
Net earnings applicable to common shareholders                  $     40,431   $     30,041    $   36,235   ||                      
                                                                ============   ============    ==========   ||                      
Primary earnings (loss) per common share (Note 18):                                                         ||                      
  Earnings (loss) before extraordinary items                    $       2.87   $       2.14       $  2.58   ||                      
                                                                                                            ||                      
  Extraordinary credit - benefit of net operating loss                                                      ||                      
    carryforward                                                           -              -             -   ||                      
                                                                                                            ||                      
  Extraordinary gain on discharge of prepetition debt                      -              -             -   ||                      
                                                                ------------   ------------     ---------   ||                      
  Net earnings applicable to common shareholders                $       2.87   $       2.14     $    2.58   ||                      
                                                                ============   ============     =========   ||                      
Fully-diluted earnings (loss) per common                                                                    ||                      
  share (Note 18):                                                                                          ||                      
  Earnings (loss) before extraordinary items                    $       2.73   $       2.03       $  2.45   ||                      
                                                                                                            ||                      
  Extraordinary credit - benefit of net operating loss                                                      ||                      
    carryforward                                                           -              -             -   ||                      
                                                                                                            ||                      
  Extraordinary gain on discharge of prepetition debt                      -              -             -   ||                      
                                                                ------------   ------------     ---------   ||                      
  Net earnings applicable to common shareholders                $       2.73   $       2.03     $    2.45   ||                      

                                                        · Enlarge/Download Table

                                                               Predecessor Company     
                                                          ---------------------------- 
                                                          Thirty-five     Fiscal Year  
                                                          Weeks Ended         Ended    
                                                           October 2,      January 30, 
(in thousands, except per share amounts)                      1993             1993    
-------------------------------------------------------------------------------------- 
                                                                                       
Net sales                                                $    992,848     $  1,750,266 

Cost of sales                                                 710,299        1,249,812 

Selling and administrative expenses                           239,997          383,581 

Depreciation and amortization                                  27,978           38,959 
                                                         ------------     ------------ 
Operating earnings                                             14,574           77,914 

Other income (expense):                                                                
  Capital lease interest                                 (     10,284)    (     16,151)

  Other interest (Note 1)                                (      3,364)    (      5,865)

  Other income, net                                               231              635 
                                                         ------------     -------------
                                                         (     13,417)    (     21,381)
                                                         ------------     -------------
                                                                1,157           56,533 

Reorganization items, net                                (      9,242)    (      3,128)
                                                         ------------     ------------ 
                                                         (      8,085)          53,405 

Income taxes (Note 17)                                              -           26,588 
                                                         ------------     ------------ 
                                                         (      8,085)          26,817 

Extraordinary credit - benefit of net operating loss                                   
  carryforward (Note 17)                                                        22,879 
                                                                    -                  
Extraordinary gain on discharge of prepetition                                         
  debt (Note 1)                                               258,239                - 
                                                         ------------     ------------ 

Net earnings                                                  250,154           49,696 

Preferred dividend requirements                          (      1,662)    (      2,432)
                                                         ------------     ------------ 
Net earnings applicable to common shareholders           $    248,492     $     47,264 
                                                         ============     ============ 
Primary earnings (loss) per common share (Note 18):                                    
  Earnings (loss) before extraordinary items             $(      0.49)    $       1.23 
  Extraordinary credit - benefit of net operating loss                                 
    carryforward                                                    -             1.16 
  Extraordinary gain on discharge of prepetition debt           13.07                - 
                                                         ------------     ------------ 
  Net earnings applicable to common shareholders         $      12.58     $       2.39 
                                                         ============     ============ 
Fully-diluted earnings (loss) per common                                               
  share (Note 18):                                                                     
  Earnings (loss) before extraordinary items             $(      0.45)    $       1.11 
  Extraordinary credit - benefit of net operating loss                                 
    carryforward                                                    -             1.04 

  Extraordinary gain on discharge of prepetition debt           11.75                - 
                                                         ------------     ------------ 
  Net earnings applicable to common shareholders         $      11.30     $       2.15 
                                                         ============     ============ 

See Notes to Consolidated Financial Statements                                  

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HILLS STORES COMPANY AND SUBSIDIARIES                                                                                            
------------------------------------------------------------------------------------------------------------------------         
CONSOLIDATED STATEMENTS OF CASH FLOWS                                                                                            


                                                                    Successor Company                 Predecessor Company        
                                                                ----------------------------          ---------------------------
                                                               Fiscal Year      Seventeen           Thirty-five      Fiscal Year 
                                                                  Ended        Weeks Ended          Weeks Ended         Ended    
                                                               January 28,      January 29,         October 2,       January 30, 
(in thousands)                                                     1995            1994                1993             1993     
---------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                 
CASH FLOWS FROM OPERATING ACTIVITIES:                                                          ||                                
                                                                                               ||                                
Net earnings                                                   $   40,431      $     36,235    ||  $    250,154      $  49,696   
Adjustments to reconcile net earnings to net cash                                              ||                                
  provided by operating activities before                                                      ||                                
  reorganization items:                                                                        ||                                
  Depreciation and amortization                                    40,436            12,113    ||        28,780         41,622   
  Gain on termination of pension plan                         (     4,479)                -    ||             -              -   
  Decrease in deferred tax assets recognized through a                                         ||                                
    reduction in reorganization value in excess of amounts                                     ||                                
    allocable to identifiable assets                               22,977            24,281    ||             -              -   
  Increase in deferred tax assets                             (    30,984)                -    ||             -              -   
  Decrease (increase) in accounts receivable and other                                         ||                                
    current assets                                            (       199)           12,513    ||  (     19,485)    (      173)  
  Decrease (increase) in inventories                               12,614            81,736    ||  (    141,704)    (   15,850)  
  Increase (decrease) in accounts payable and other                                            ||                                
    accrued expenses                                               43,044      (     40,229)   ||        61,087         38,621   
  Other, net                                                          772               308    ||         2,761          1,824   
                                                               ----------       -----------        ------------     ----------   
    Net cash provided by operating activities                                                  ||                                
       before reorganization items                                124,612           126,957    ||       181,593        115,740   
Reorganization items:                                                                          ||                                
  Decrease in liabilities subject to compromise                         -                 -    ||  (      6,274)    (   10,153)  
  Fresh-start revaluation                                               -                 -    ||         5,985              -   
  Extraordinary gain on discharge of prepetition debt                   -                 -    ||  (    258,239)             -   
                                                               ----------       -----------         -----------      ---------   
    Net cash provided by (used for) operating activities          124,612           126,957    ||  (     76,935)       105,587   
                                                                                               ||                                
CASH FLOWS FROM INVESTING ACTIVITIES:                                                          ||                                
                                                                                               ||                                
  Capital expenditures                                        (    38,458)     (      3,070)   ||  (     27,162)    (   40,066)  
  Other investing activities                                            -                 -    ||             -            780   
                                                               ----------       -----------        ------------      ---------   
    Net cash used for investing activities                    (    38,458)     (      3,070)   ||  (     27,162)    (   39,286)  
                                                                                               ||                                
CASH FLOWS FROM FINANCING ACTIVITIES:                                                          ||                                
                                                                                               ||                                
  Principal payments under capital lease obligations          (     5,529)     (      1,726)   ||  (      3,400)    (    4,806)  
  Proceeds from sale/leaseback financing                           25,169                 -    ||             -              -   
  Cash distributions pursuant to the Plan                                                      ||                                
    of Reorganization                                         (    14,419)     (     85,153)   ||  (      5,165)             -   
  Other financing activities                                  (     1,373)     (        196)   ||  (      7,444)    (    2,059)  
                                                               ----------       -----------         -----------      ---------   
    Net cash provided by (used for) financing activities            3,848      (     87,075)   ||  (     16,009)    (    6,865)  
                                                               ----------       -----------         -----------      ---------   
                                                                                               ||                                
Net increase (decrease) in cash and cash equivalents               90,002            36,812    ||  (    120,106)        59,436   
                                                                                               ||                                
Cash and cash equivalents at beginning of period                   90,049            53,237    ||       173,343        113,907   
                                                               ----------       -----------        ------------      ---------   
                                                                                               ||                                
Cash and cash equivalents at end of period                     $  180,051       $    90,049    ||  $     53,237      $ 173,343   
                                                               ==========       ===========        ============      =========   

See Notes to Consolidated Financial Statements                                  
                                             F-4

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HILLS STORES COMPANY AND SUBSIDIARIES                                                                                        
------------------------------------------------------------------------------------------------------------------------     
CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY                                                                       


                                                                                                                  Common     
                                             Common Stock       Additional   Retained      Treasury Stock       Shareholders'
                                           -----------------     Paid-in     Earnings     ----------------        Equity     
(dollars in thousands)                    Shares      Amount     Capital    (Deficit)       Shares  Amount       (Deficit)   
-----------------------------------------------------------------------------------------------------------------------------
                                                                                                                             
Predecessor Company balance                                                                                                  
  - February 1, 1992                   19,783,364    $ 198       $ 65,205    $ (295,756)     26,688   $(93)      $(230,446)  

Conversion of 11% Convertible                                                                                                
  Junior Subordinated Debentures              714        -             10             -           -      -              10   
Preferred stock dividend requirements           -        -              -        (2,432)          -      -          (2,432)  
Net earnings                                    -        -              -        49,696           -      -          49,696   
                                      -------------------------------------------------------------------------------------  
Predecessor Company balance                                                                                                  
  - January 30, 1993                   19,784,078      198         65,215      (248,492)     26,688    (93)       (183,172)  
Preferred stock dividend requirements           -        -              -        (1,662)          -      -          (1,662)  
Net earnings                                    -        -              -       250,154           -      -         250,154   
Cancellation of Predecessor                                                                                                  
  Company common stock                (19,784,078)    (198)       (65,215)            -     (26,688)    93         (65,320)  
                                      -------------------------------------------------------------------------------------  
Predecessor Company balance                                                                                                  
  - October 2, 1993                             -    $   -       $      -    $        -           -   $  -       $       -   
                                      =====================================================================================  
= = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = =  

Issuance of Successor Company                                                                                                
  common stock - October 2, 1993        9,000,000    $  90       $193,910    $        -           -   $  -       $ 194,000   
Net earnings                                    -        -              -        36,235           -      -          36,235   
                                      -------------------------------------------------------------------------------------  
Successor Company balance                                                                                                    
  - January 29, 1994                    9,000,000       90        193,910        36,235           -      -         230,235   
Conversion of Preferred Stock           1,792,805       18         35,838             -           -      -          35,856   
Exercise of Stock Options                  11,979        -            219             -           -      -             219   
Net earnings                                    -        -              -        40,431           -      -          40,431   
                                      -------------------------------------------------------------------------------------  
Successor Company balance                                                                                                    
  - January 28, 1995                   10,804,784    $ 108       $229,967    $   76,666          -    $  -       $ 306,741   
                                      =====================================================================================  

See Notes to Consolidated Financial Statements                                  

                                       F-5

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HILLS STORES COMPANY AND SUBSIDIARIES                                           
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                      

1. REORGANIZATION                                                               
--------------                                                            

On October 4, 1993 (the "Effective Date"), Hills Stores Company (the "Company"  
or the "Successor Company") and certain of its principal subsidiaries emerged   
from reorganization proceedings under Chapter 11 of the United States           
Bankruptcy Code ("Chapter 11").  The Company, its former parent, Hills          
Department Stores, Inc. (the "Predecessor Company"), and the five principal     
subsidiaries of the Company voluntarily filed petitions for reorganization      
under Chapter 11 on February 4, 1991 (the "Filing Date").  The Predecessor      
Company operated its business as a debtor-in-possession under Chapter 11 from   
the Filing Date until October 4, 1993.                                          

In accordance with the American Institute of Certified Public Accountants       
("AICPA") Statement of Position 90-7: "Financial Reporting by Entities in       
Reorganization under the Bankruptcy Code" ("SOP 90-7"), the Predecessor         
Company's other interest expense excluded contractual interest of  $40.4        
million and $60.3 million for the thirty-five weeks ended October 2, 1993 and   
fiscal year ended January 30, 1993, respectively.                               

The Plan of Reorganization (the "POR") provided for the Predecessor Company to  
be dissolved and the Company to succeed to and assume the Predecessor Company's 
former status as a holding company by transferring to Hills Department Store    
Company, a newly formed operating subsidiary of the Company, all of the assets, 
property and interest of the Company as of the Effective Date.  Prepetition     
claims and interests were cancelled in exchange for cash, senior notes,         
securities, warrants and rights which were less in value than the value of the  
allowed claims on and interests in the Predecessor Company and its              
subsidiaries; accordingly, the Predecessor Company recorded an extraordinary    
gain of $258.2 million related to the discharge of prepetition liabilities in   
the period ended October 2, 1993.  The Consolidated  Financial Statements       
presume full issuance of all common stock, preferred stock, stock rights and    
senior notes in accordance with the POR.                                        

2. FRESH-START REPORTING                                                        
---------------------                                                     

During the bankruptcy proceedings, the consolidated financial statements of the 
Predecessor Company were presented in accordance with SOP 90-7.  Pursuant to    
SOP 90-7, the Successor Company adopted fresh-start reporting as of October 2,  
1993.  Under fresh-start reporting, a new reporting entity is created and       
recorded amounts of assets and liabilities are adjusted to reflect their        
estimated fair values.  Financial statements for the period prior to October 2, 
1993, have been designated as those of the Predecessor Company.  Black lines    
have been drawn to separate the Successor Company financial statements from the 
Predecessor Company financial statements to signify that they are those of a    
new reporting entity and have been prepared on a basis not comparable to prior  
periods.  Adjustments to the Predecessor Company's balance sheet as of October  
2, 1993 to reflect the discharge of pre-petition debt and fresh-start reporting 
adjustments are presented in the table on the following page (in thousands):    

F-6 

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HILLS STORES COMPANY AND SUBSIDIARIES                                           
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)                          

                                                        · Enlarge/Download Table
2.  FRESH-START REPORTING (CONTINUED)                                                                                  
    ---------------------------------                                                                                  

                                            Predecessor                                                       Successor
                                              Company           Debt Discharge            Fresh-start          Company 
                                            ---------------------------------------------------------------------------
                                                                                                                       
ASSETS                                                                                                                 
Current assets:                                                                                                        

  Cash and cash equivalents                  $   59,789           $   (6,552) (a)      $        -            $   53,237

  Trade receivables, net                         41,838                    -               (5,612) (e)           36,226

  Inventories                                   407,237                    -                  964  (c)          408,201

  Other current assets                           14,852                    -              (10,550) (d)            4,302
                                             --------------------------------------------------------------------------
   Total current assets                         523,716               (6,552)             (15,198)              501,966

Property and equipment, net                     133,364                    -                  269  (e)          133,633

Property under capital leases, net              119,014                    -               18,870  (e)          137,884

Beneficial lease rights, net                     48,703                    -              (38,530) (e)           10,173

Other assets, net                                15,164                6,552  (a)         (11,952) (e)            9,764

Goodwill, net                                   132,877                    -             (132,877) (i)                -

Reorganization value in excess of                                                                                      
  amounts allocable to identifiable assets            -                    -              204,417  (j)          204,417
                                             --------------------------------------------------------------------------
                                             $  972,838           $        -           $   24,999            $  997,837
                                             ==========================================================================

LIABILITIES AND SHAREHOLDERS' EQUITY                                                                                   

Current liabilities:                                                                                                   

  Current portion of capital leases          $    5,360           $        -           $    1,640  (e)       $    7,000

  Accounts payable, trade                       119,154                    -                    -               119,154

  Other accounts payable and                                                                                           
   accrued expenses                              97,222              135,293  (b)          41,270  (f)          273,785
                                             --------------------------------------------------------------------------
   Total current liabilities                    221,736              135,293               42,910               399,939

Senior notes                                          -              160,000  (b)               -               160,000

Obligations under capital leases                122,230                    -                8,654  (e)          130,884

Other liabilities                                27,494                6,100  (b)         (20,580) (g)           13,014

Liabilities subject to compromise               755,169             (755,169) (b)               -                     -

Preferred stock                                  33,143               66,857  (b)               -               100,000

Common shareholders' equity (deficit):                                                                                 
  Common stock                                      198                 (108) (b)               -                    90

  Additional paid-in capital                     65,215              128,695  (b)               -               193,910

  Retained earnings (deficit)                  (252,254)             258,239  (b)          (5,985) (h)                -
                                             --------------------------------------------------------------------------
                                               (186,841)             386,826               (5,985)              194,000
  Less-treasury stock                               (93)                  93  (b)               -                     -
                                            ---------------------------------------------------------------------------
   Total common shareholders'                                                                                          
     equity (deficit)                          (186,934)             386,919               (5,985)              194,000
                                             --------------------------------------------------------------------------
                                             $  972,838           $        -           $   24,999            $  997,837
                                             ==========================================================================

                                         F-7

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HILLS STORES COMPANY AND SUBSIDIARIES                                           
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)                          

2.  FRESH-START REPORTING (CONTINUED)                                           
---------------------------------                                       

(a)  Represents financing costs paid to secure the new revolving credit         
facility upon emergence from Chapter 11.                                        

(b)  Reflects the settlement of liabilities subject to compromise and           
cancellation of old preferred stocks and old common stock in exchange for cash, 
senior notes, new preferred stock, new common stock, stock rights and stock     
warrants, resulting in an extraordinary gain on debt discharge of $258.2        
million.                                                                        

(c)  Represents revaluation of last-in, first-out (LIFO) inventories to         
estimated fair value as of October 2, 1993.                                     

(d)  Reflects reversal of deferred tax assets by approximately $10.5 million in 
accordance with fresh-start reporting.                                          

(e)  Reflects fair value adjustment as of October 2, 1993 in accordance with    
fresh-start reporting.                                                          

(f) Reflects accrued liabilities of the Successor Company arising out of the    
reorganization including legal and professional fees, a provision for           
consolidating and relocating certain facilities, the refinancing of long-term   
liabilities and other reorganization related expenses.                          

(g)  Reflects reversal of deferred tax liabilities by approximately $10.5       
million in accordance with fresh-start reporting and fair value adjustments     
decreasing pension obligations by approximately $8.7 million and other          
liabilities by approximately $1.4 million as of October 2, 1993.                

(h)  Reflects adjustment to eliminate the Predecessor Company's retained        
earnings in accordance with fresh-start reporting.                              

(i)  Reflects adjustment to eliminate the Predecessor Company goodwill as of    
October 2, 1993 in accordance with fresh-start reporting.                       

(j)  Reflects adjustment to record reorganization value in excess of amounts    
allocable to identifiable assets as of October 2, 1993 in accordance with       
fresh-start reporting.                                                          

3. PRO FORMA COMBINING STATEMENTS OF OPERATIONS                                 
--------------------------------------------                              

The following unaudited Pro Forma Combining Statements of Operations present    
the pro forma combined results of the operations of the Successor and           
Predecessor companies for the fifty-two weeks ended January 29, 1994 and have   
been adjusted to reflect:  the implementation of fresh-start reporting as of    
January 31, 1993, elimination of the effects of non-recurring transactions      
resulting from the reorganization included in the results of the Predecessor    
Company, and payment to creditors pursuant to the POR as of January 31, 1993.   
The following information should be read in conjunction with Management's       
Discussion and Analysis of Financial Condition and Results of Operations.       

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HILLS STORES COMPANY AND SUBSIDIARIES                                           
-------------------------------------                                           
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)                          

3.  PRO FORMA COMBINING STATEMENTS OF OPERATIONS (CONTINUED)                    
--------------------------------------------------------                

                                                        · Enlarge/Download Table
PRO FORMA COMBINED FIFTY-TWO WEEKS ENDED JANUARY 29, 1994 (UNAUDITED)                                                    
(in thousands, except per share amounts)                                                                                 

                                              Successor          Predecessor                              Pro Forma      
                                               Company             Company                                Combined       
                                              Seventeen          Thirty-five                             Fiscal Year     
                                             Weeks Ended         Weeks Ended                                Ended        
                                             January 29,         October 2,            Pro Forma         January 29,     
                                                1994                 1993             Adjustments           1994         
                                            ------------------------------------------------------------------------     
                                                                                                                         
  Net sales                                  $   772,685         $   992,848        $        -          $  1,765,533     
  Cost of sales                                  549,651             710,299                 -             1,259,950     
  Selling and administrative expenses            138,360             239,997                 -               378,357     
  Depreciation and amortization                   11,328              27,978            (4,545)   (a)         34,761     
                                            ------------------------------------------------------------------------     

  Operating earnings                              73,346              14,574             4,545                92,465     

  Capital lease interest                          (5,029)            (10,284)              172    (b)        (15,141)    
  Other interest                                  (8,112)             (3,364)          (11,662)   (c)        (23,138)    
  Other income, net                                2,639                 231               822    (d)          3,692     
                                            ------------------------------------------------------------------------     
                                                  62,844               1,157            (6,123)               57,878     
  Reorganization items:                                                                                                  
   Professional fees                                   -              (6,045)            6,045    (e)              -     
   Fresh-start revaluation                             -              (5,985)            5,985    (e)              -     
   Interest income                                     -               2,788            (2,788)   (e)              -     
                                            ------------------------------------------------------------------------     
  Earnings (loss) before income taxes                                                                                    
   and extraordinary gain                         62,844              (8,085)            3,119                57,878     

  Income taxes                                    26,609                   -             1,228    (f)         27,837     
                                            ------------------------------------------------------------------------     
                                                  36,235              (8,085)            1,891                30,041     

  Extraordinary gain on discharge of                                                                                     
   prepetition debt                                    -             258,239          (258,239)   (e)              -     
                                            ------------------------------------------------------------------------     

  Net earnings                                    36,235             250,154          (256,348)               30,041     

  Preferred dividend requirements                      -              (1,662)            1,662    (e)              -     
                                            ------------------------------------------------------------------------     
  Net earnings applicable to                                                                                             
   common shareholders                       $    36,235         $   248,492        $ (254,686)         $     30,041     
                                            ========================================================================     
  Primary earnings per share                                                                                             
   applicable to common                                                                                                  
   shareholders                              $      2.58   (g)                                          $       2.14  (g)
                                            ============                                                ============     
  Fully-diluted earnings per share                                                                                       
   applicable to common                                                                                                  
   shareholders                              $      2.45   (g)                                          $       2.03  (g)
                                            ============                                                ============     

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HILLS STORES COMPANY AND SUBSIDIARIES                                           
--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)                          

3.  PRO FORMA COMBINING STATEMENTS OF OPERATIONS (CONTINUED)                    
--------------------------------------------------------                

(a) Reflects the impact of the revaluation and/or the change in the related     
estimated remaining useful lives of property and equipment, property under      
capital leases and beneficial lease rights in connection with fresh-start       
reporting, the pro forma twelve month amortization of the Successor Company's   
reorganization value in excess of amounts allocable to identifiable assets and  
the elimination of the Predecessor Company's goodwill amortization.             

(b) Reflects the impact on interest expense due to the revaluation of capital   
lease obligations.                                                              

(c) Reflects interest expense on the senior notes, the revolving credit         
facility based on estimated cash requirements and the amortization of deferred  
financing costs related to securing the revolving credit facility.              

(d) Reflects pro forma interest income after taking into consideration          
distributions in accordance with the POR.                                       

(e) Reflects elimination of reorganization items, gain on debt discharge and    
preferred dividend requirements.                                                

(f)  Reflects the income tax effect of the pro forma adjustments.               

(g)  Pro forma primary and fully-diluted earnings per share were calculated     
based  on an estimated fifty-two week weighted average shares outstanding for   
the period ended January 29, 1994 of 14,056,470 and 14,794,492, respectively.   

4.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES                                  
------------------------------------------                              

BASIS OF REPORTING                                                              

The Company operates, through its wholly-owned subsidiary Hills Department      
Store Company, a chain of discount department stores.  The consolidated         
financial statements include the accounts of the Successor Company and the      
Predecessor Company and their wholly- owned subsidiaries.  All significant      
intercompany transactions and balances have been eliminated.  Certain           
Predecessor Company amounts were reclassified to conform to the Successor       
Company presentation. The Company's fiscal year ends on the Saturday closest to 
January 31.  For financial reporting purposes, fiscal 1993 has been segregated  
into two periods:  the Successor Company seventeen weeks ended January 29, 1994 
and the Predecessor Company thirty-five weeks ended October 2, 1993.            

CASH AND CASH EQUIVALENTS                                                       

Cash and cash equivalents consist of cash and highly liquid investments with    
maturities of three months  or less from the date of purchase and whose cost    
approximates market value due to the short maturity of the investments.         

INVENTORIES                                                                     

Inventories are valued using the retail method on the lower of last-in,         
first-out (LIFO) cost or market basis.  In connection with fresh-start          
reporting, a new LIFO base layer was established based on                       

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--------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)                          

4.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)                      
------------------------------------------------------                  

INVENTORIES (CONTINUED)                                                         

inventory levels as of October 2, 1993.  The Company recognizes the write-down  
of slow-moving or obsolete inventory in cost of sales when such write-downs are 
probable and estimable.                                                         

DEPRECIATION AND AMORTIZATION                                                   

Depreciation and amortization are provided on a straight-line basis over the    
estimated useful lives of  the related assets, which is twenty-seven years for  
buildings and range from five to eight years for machinery, furniture and       
fixtures.  Amortization of leasehold improvements is provided on a              
straight-line basis over the shorter of the lease term, considering renewal     
options that are likely to be exercised, or the estimated useful life of the    
related asset.  Leasehold improvements are amortized principally over a fifteen 
year period.                                                                    

DEFERRED FINANCING COSTS                                                        

Deferred financing costs included in other assets are being amortized on a      
straight-line basis over the estimated life of the related debt.  Accumulated   
amortization of deferred financing costs was $5,507,000 at January 28, 1995 and 
$807,000 at January 29, 1994.                                                   

INTANGIBLE ASSETS                                                               

Beneficial lease rights are amortized using the straight-line method over the   
terms of the related leases.  Accumulated amortization of  beneficial lease     
rights was $1,098,000 at January 28, 1995 and $271,000 at  January 29, 1994.    

Reorganization value in excess of amounts allocable to identifiable assets is   
being amortized over twenty  years on a straight-line basis.  Accumulated       
amortization was $12,393,000 at January 28, 1995 and $3,407,000 at January 29,  
1994 (See Note 17).                                                             

Periodically, management assesses, based on undiscounted cash flows, if there   
has been a permanent impairment in the carrying value of its intangible assets  
and, if so, the amount of any such impairment by comparing the anticipated      
discounted future operating income from the reorganized business with the       
carrying value of the related intangibles.  In performing this analysis,        
management considers such factors as current results, trends and future         
prospects, in addition to other economic factors.                               

PREOPENING COSTS                                                                

Preopening costs consist of direct incremental costs of opening a store and are 
charged to operations within the fiscal year that a new store opens.            

STATEMENT OF CASH FLOWS                                                         

Supplemental disclosures of cash flow information are presented in the table on 
the following page.                                                             

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)                          

4.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)                      
------------------------------------------------------                  

                                                        · Enlarge/Download Table
STATEMENT OF CASH FLOWS (CONTINUED)                                                                    


                                             Successor Company                  Predecessor Company    
                                         -----------------------------     ----------------------------
                                         Fiscal Year       Seventeen        Thirty-five     Fiscal Year
                                            Ended         Weeks Ended        Weeks Ended       Ended   
                                         January 28,       January 29,      October 2,      January 30,
(in thousands)                              1995              1994              1993           1993    
                                         --------------------------------------------------------------
                                                                                                       
                                                                         ||                            
                                                                         ||                            
NONCASH INVESTING AND                                                    ||                            
  FINANCING ACTIVITIES:                                                  ||                            
                                                                         ||                            
  Issuance of senior notes                $        -      $    160,000   ||  $        -     $        - 
  Issuance of preferred stock                      -           100,000   ||           -              - 
  Cancellation of preferred stock                  -                 -   ||      33,143              - 
  Preferred stock conversions to common                                  ||                            
    stock                                     35,856                 -   ||           -              - 
  Issuance of common stock and stock                                     ||                            
    rights                                         -           194,000   ||           -              - 
  Cancellation of common stock                     -                 -   ||      65,413              - 
  Debt conversion to common stock                  -                 -   ||           -             10 
  Capital lease obligations, net                   -             1,450   ||           -            988 
  Preferred stock accretion                        -                 -   ||       1,662          2,432 
                                                                         ||                            
CASH PAID (RECEIVED):                                                    ||                            
                                                                         ||                            
  Reorganization related                                                 ||                            
    professional fees                              -             6,618   ||       2,407          5,823 
  Interest                                    34,731             5,662   ||      12,074         18,228 
  Income taxes                                 8,562             2,848   ||       1,317          1,995 
  Interest received on available cash                                    ||                            
    due to the Chapter 11 proceedings              -                 -   ||      (2,643)        (2,896)
                                                        · Enlarge/Download Table
5.     PROPERTY AND EQUIPMENT                                                                               

The components of property and equipment are listed below (in thousands):                                   

                                                                    January 28,                 January 29, 
                                                                       1995                         1994    
                                                                    --------------------------------------  
                                                                                                            
   Land                                                             $    3,430                  $     3,430 
   Buildings                                                            16,193                       16,192 
   Leasehold improvements                                               40,401                       33,400 
   Machinery, furniture and fixtures                                   111,280                       81,781 
   Improvements in progress                                              3,430                        1,813 
                                                                    ----------                  ----------- 
                                                                       174,734                      136,616 
   Accumulated depreciation and amortization                           (19,784)                      (4,185)
                                                                    ----------                  ----------- 
                                                                    $  154,950                  $   132,431 
                                                                    ==========                  =========== 

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HILLS STORES COMPANY AND SUBSIDIARIES                                           
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)                          

6.   OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES                                
-------------------------------------------                           

                                                        · Enlarge/Download Table

Significant components of other accounts payable and accrued expenses are presented below (in thousands):


                                                                     January 28,             January 29, 
                                                                         1995                    1994    
                                                                     ------------------------------------
                                                                                                         
  Accrued payroll and related costs                                   $    27,193             $    25,261
  Accrued insurance                                                        26,961                  22,388
  Accrued Chapter 11 and related reorganization costs                      31,417                  50,430
  Accrued distribution payable pursuant to the POR                         11,482                  25,838
  Income taxes payable                                                     20,895                       -
  Other                                                                    94,541                  79,448
                                                                      -----------             -----------
                                                                      $   212,489             $   203,365
                                                                      ===========             ===========

In the fourth quarter of fiscal 1994, the Company determined that $9.6 million  
of liabilities included in "Accrued Chapter 11 and related reorganization       
costs" were no longer required, and in accordance with AICPA Practice Bulletin  
11:  "Accounting for Preconfirmation Contingencies in Fresh-Start Reporting,"   
these liabilities were reversed and included in other income.                   

7.   REVOLVING CREDIT AGREEMENT                                                 
--------------------------                                            

Hills Department Store Company ("HDSC"), a wholly-owned subsidiary of the       
Company, entered into a three year unsecured Revolving Credit Agreement dated   
as of October 4, 1993 (the "Facility") with Chemical Bank and a syndicate of    
other banks for $225 million, of which up to $75 million is available as a      
letter of credit facility.  Borrowings under this Facility are limited by a     
borrowing base, as defined, and bear interest, at the option of the borrower,   
at (1) the highest of: Chemical Bank's Prime Rate plus 1-3/4%, the Federal      
Funds Effective Rate, as defined, plus 2-1/4% and the Base CD Rate, as defined, 
plus 2-3/4% or (2) the Adjusted London Interbank Offered Rate (LIBOR), as       
defined, plus 2-3/4%.  The Company met certain economic performance             
requirements and qualified for a 1/4% interest rate reduction, from the rates   
above, beginning August 1, 1994.  If the Company meets additional economic      
performance tests, as of July 29, 1995, the interest rate would be reduced      
another 1/4%.  HDSC must pay commitment fees at an annual rate of 1/2% on the   
average daily unused portion of the commitment.  HDSC must also pay letter of   
credit fees on the aggregate face amount of outstanding trade letters of credit 
at an annual rate of 2% and on the aggregate face amount of outstanding standby 
letters of credit at an annual rate equal to the spread applicable to Adjusted  
LIBOR loans.  All of the common stock of the Company's subsidiaries is pledged  
as collateral for the Facility and the Facility is guaranteed by the Company.   
The  Facility also contains, among other restrictions, requirements regarding   
the maintenance of certain financial ratios, minimum net worth requirements,    
and provisions limiting: business combinations, the issuance of additional debt 
including capital lease obligations, the redemption and repurchase of common    
and preferred stock, the repurchase and prepayment of debt, the amount of rent  
expense, and the payment of dividends.  The Facility was amended to allow the   
Company to enter into the sale/leaseback transactions and the Company's         
self-tender for shares of its Common Stock as described in Notes 10 and 20,     
respectively.  In addition, the Facility also requires, on a date (the          
"Clean-Up Date") determined at the discretion of the Company between December 1 
and April 1 of each year, HDSC to pay or prepay all of the outstanding loans    
and for a period of at least thirty consecutive days following the Clean-Up     
Date (the "Clean-Up Period"), HDSC shall continue to have no loans outstanding. 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)                          

7.   REVOLVING CREDIT AGREEMENT (CONTINUED)                                     
--------------------------------------                                

At January 28, 1995, the Company has satisfied the requirements of the Clean-Up 
Period, outstanding letters of credit totalled $32.6 million and there was no   
outstanding working capital loan balance under the Facility.                    

8.    SENIOR NOTES                                                              
------------                                                        

Pursuant to the POR, the Company is issuing up to $160 million of unsecured     
redeemable 10.25% Senior Notes ("Senior Notes") due September 30, 2003 with     
interest accruing from August 1, 1993.  Interest is payable semiannually.  The  
unsecured Senior Notes may be redeemed, at the option of the Company, at prices 
ranging from 105% at October 1, 1994 and declining by 1% on October 1 of each   
year to 100% at October 1, 1999 and thereafter.  Principal amounts of $25       
million are subject to mandatory redemption on March 31, 2002 and on March 31,  
2003.  In the event of a change in control, as defined, the Company will be     
required to offer to redeem the Senior Notes at a price of 101% of the          
principal amount.  The Senior Notes contain covenants which management believes 
are no more restrictive than the terms of the Facility.  The Senior Note        
Indenture was amended to permit the Company to enter into the self-tender as    
described in Note 20.  In connection with obtaining this amendment, the holders 
of the Senior Notes were paid $2.2 million, in the fourth quarter of fiscal     
1994, which has been included in other expense.  The estimated fair value of    
the Senior Notes of $147.3 million and $169.6 million at January 28, 1995 and   
January 29, 1994, respectively, was based on quoted market prices in effect at  
that time.                                                                      

9.   LEASE COMMITMENTS                                                          
-----------------                                                     

The Company's operations are conducted primarily in leased properties which     
consist principally of retail outlets.  Leases are generally for periods        
between twenty to thirty years plus renewal options and generally include fixed 
rentals and rentals based on sales in excess of predetermined levels.           

                                                        · Enlarge/Download Table
The composition of property under capital leases, net of accumulated amortization, is shown below (in thousands):

                                                            January 28,               January 29,                
                                                                1995                     1994                    
                                                            -------------------------------------                
                                                                                                                 
   Retail outlets                                            $  131,408               $  131,408                 
   Other                                                          6,476                    6,476                 
                                                             ----------               ----------                 
                                                                137,884                  137,884                 
   Accumulated amortization                                     (13,776)                  (3,408)                
                                                             ----------               ----------                 
   Property under capital leases, net                        $  124,108               $  134,476                 
                                                             ==========               ==========                 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)                          

9.   LEASE COMMITMENTS (CONTINUED)                                              
-----------------------------                                         

                                                        · Enlarge/Download Table
Consolidated rental expense under operating leases and rental expense based on sales in excess of predetermined
levels under capital leases are presented below (in thousands):                                                


                                        Successor Company                        Predecessor Company           
                                ---------------------------------         --------------------------------     
                                Fiscal Year           Seventeen           Thirty-five        Fiscal Year       
                                   Ended             Weeks Ended          Weeks Ended           Ended          
                                January 28,          January 29,           October 2,        January 30,       
                                    1995                 1994                1993               1993           
                                --------------------------------------------------------------------------     
                                                                                                               
   Capital leases:                                                   ||                                        
     Rental based on sales        $    1,577           $      574    ||     $     843         $   1,029        
   Operating leases:                                                 ||                                        
     Minimum facility                                                ||                                        
      rentals                         23,519                8,223    ||        16,501            21,395        
     Equipment and other                                             ||                                        
      rentals                         17,757                6,795    ||        10,820            16,791        
     Rental based on sales             1,404                  481    ||           702             1,442        
                                  ----------           ----------           ---------         ---------        
   Consolidated rental                                               ||                                        
     expense                      $   44,257           $   16,073    ||     $  28,866         $  40,657        
                                  ==========           ==========           =========         =========        
                                                        · Enlarge/Download Table
Minimum future lease commitments under noncancelable leases in effect at January 28, 1995 are listed below (in thousands):


                                           Capital           Operating                                                    
   Fiscal years:                           Leases              Leases            Total                                    
                                        ------------------------------------------------                                  
                                                                                                                          
      1995                               $   20,187         $   34,733        $   54,920                                  
      1996                                   19,111             29,415            48,526                                  
      1997                                   17,398             27,170            44,568                                  
      1998                                   16,971             25,694            42,665                                  
      1999                                   16,797             24,950            41,747                                  
      Thereafter                            196,606            172,784           369,390                                  
                                        ------------------------------------------------                                  
   Minimum rental commitments               287,070         $  314,746        $  601,816                                  
                                                            ============================                                  
   Less amount representing interest       (156,441)                                                                      
                                         ----------                                                                       
   Present value of net minimum                                                                                           
     lease payments                         130,629                                                                       
   Current portion                           (6,121)                                                                      
                                         ----------                                                                       
                                         $  124,508                                                                       
                                         ==========                                                                       

10.   SALE/LEASEBACK FINANCING                                                  

During 1994, the Company obtained $25.2 million of financing, which includes    
transaction costs, for certain of its real properties through sale/leaseback    
arrangements.  These transactions were accounted for as financings.  The        
leases, which have terms of ten years each, require minimum annual rental       
payments of $4.3 million in 1996, $4.6 million in 1997, $5.2 million in 1998,   
$4.5 million in 1999, $4.6 million in 2000, and a total of $18.3 million        
thereafter.  The lease terms also include options to purchase some or all of    
the properties either at the end of the initial lease term or renewal periods   
at an amount not greater than the then current fair market value of the         
properties.                                                                     

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)                          

11.   EMPLOYEE BENEFITS                                                         
-----------------                                                   

PENSION PLANS                                                                   

The Company's Board of Directors authorized the termination, effective April    
30, 1994, of the Company's pension plan, subject to approval by the Pension     
Benefit Guaranty Corporation and the Internal Revenue Service.  In connection   
with the termination of the pension plan, participant's vested benefits were    
calculated based on all credited service, pension earnings, and contributions   
up to April 30, 1994.  There will be no asset reversion to the Company as plan  
assets in excess of benefit obligations, as adjusted for the termination of the 
plan, will be allocated to participants.  The settlement of the vested benefit  
obligation by the purchase of nonparticipating annuity contracts for, or the    
optional lump sum rollover to the 401(k) plan account for, each covered         
employee is expected to be completed in fiscal 1995.  In the first quarter of   
1994, the Company recorded a $4.5 million gain, included in selling and         
administrative expenses, related to the curtailment and settlement of the       
pension plan and the elimination of the related pension obligation.             

Plan assets at January 28, 1995, were $26.5 million, net of $7.8 million of     
annuities purchased in partial settlement of the Plan obligations.  The assets  
of the Plan are invested in short-term investment funds.  Net pension expense   
included in the results of operations was $830,000 for the thirteen weeks ended 
April 30, 1994, $964,000 for the seventeen weeks ended January 29, 1994,        
$1,645,000 for the thirty-five weeks ended October 2, 1993, and $2,212,000 for  
the fiscal year ended January 30, 1993.  The discount rate used in determining  
the actuarial present value of projected benefit obligations was 7.0% and the   
expected long-term rate of return on plan assets used in determining net        
pension expense was 8.0%.                                                       

The Company provides a defined contribution 401(k) Employee Savings Plan (the   
"401(k)") for employees meeting certain employment conditions.  In addition to  
permitting employee contributions, the 401(k) provides for company matching     
contributions.  In fiscal 1994, the Company matching contributions were $3.0    
million.                                                                        

POSTRETIREMENT BENEFITS OTHER THAN PENSIONS                                     

In fiscal 1992, the Predecessor Company adopted Statement of Financial          
Accounting Standards No. 106: "Employers' Accounting for Postretirement         
Benefits Other Than Pensions."  This statement requires accrual of              
postretirement benefits (such as health care benefits) during the years an      
employee provides services.  The impact of accruing such costs is not material. 
The Company, consistent with the practice of the Predecessor Company, continues 
to fund benefit costs principally on a pay-as-you-go basis, with the retiree    
paying a portion of the costs.                                                  

12.  HILLS STORES SERIES A CONVERTIBLE PREFERRED STOCK                          
-------------------------------------------------                     

The Company is authorized to issue 15,000,000 shares of preferred stock, par    
value of $0.10 per share.  Pursuant to the POR, a total of 5,000,000 of such    
shares are being issued as payment and cancellation of prepetition liabilities  
and interests and designated as Hills Stores Series A Convertible Preferred     
Stock (the "Preferred Stock").  As of January 28, 1995, a total of 113,400      
shares of the 5,000,000 shares of the Preferred Stock remain to be issued       
pending resolution of prepetition claims and interests.  The Company may        
redeem, at its option prior to October 4, 2008, all or part of the outstanding  
shares of the Preferred Stock at $20 per share; and in any case shall redeem    
all outstanding shares of the Preferred Stock on October 4, 2008 at $20 per     
share.  The Preferred Stock is convertible by the holders, at any               

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HILLS STORES COMPANY AND SUBSIDIARIES                                           
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)                          

12.  HILLS STORES SERIES A CONVERTIBLE PREFERRED STOCK (CONTINUED)              
-------------------------------------------------------------         

time, into Hills Stores Common Stock ("Common Stock") at a rate of one share of 
Common Stock for each share of the Preferred Stock, subject to antidilution     
adjustments.  Each holder of the Preferred Stock has one vote per share in the  
same class as the holders of Common Stock.  The holders of the Preferred Stock  
are entitled to dividends when and if declared by the Board of Directors;       
however, dividend payments are restricted under the terms of the Facility and   
Senior Notes.  The Company does not expect to pay dividends in the foreseeable  
future.                                                                         

Upon dissolution or liquidation of the Company, the holders of the Preferred    
Stock will be entitled to receive $20 per share out of the assets of the        
Company available for distribution to shareholders, in preference to the        
holders of Common Stock and any other class or series of capital stock of the   
Company that is junior to the Preferred Stock.                                  

13.  HILLS STORES COMMON STOCK                                                  
-------------------------                                             

Pursuant to the POR, a total of 9,000,000 shares of Common Stock are being      
issued as payment for prepetition liabilities and cancellation of old preferred 
stock interests.  As of January 28, 1995, a total of 143,715 shares of the      
9,000,000 shares of Common Stock remain to be issued pending resolution of      
prepetition claims and interests.  Each holder of Common Stock has one vote per 
share  and is entitled to dividends when and if declared by the Board of        
Directors, however, dividend payments are restricted under the terms of the     
Facility and Senior Notes.  The Company does not expect to pay dividends in the 
foreseeable future.                                                             

STOCK OPTION PLAN                                                               

As of the Effective Date, the Company established an incentive and nonqualified 
stock option plan (the "Option Plan") providing for the grant of nonqualified   
stock options or incentive stock options.  The options are granted at prices    
equivalent to the market price of the Common Stock on the date of each grant.   
The options are subject to a five year vesting schedule with initial vesting    
beginning one year from the date of grant.  A total of 1,053,763 shares of      
Common Stock  were reserved for grants of options under the Option Plan as of   
the Effective Date.                                                             

                                                        · Enlarge/Download Table
Option activity for the period from October 3, 1993 to January 28, 1995 was as follows:        

                                                      Shares                      Price Range  
                                                    ---------                   ---------------
                                                                                               
Outstanding at October 3, 1993                              -                   $          -   
  Granted:  November 4, 1993                          879,000                          18.25   

            November 19, 1993                           7,500                          18.00   

  Cancelled                                           (10,000)                         18.25   
                                                    ---------                                  
Outstanding at January 29, 1994                       876,500                    18.00-18.25   

  Granted:  April 21, 1994                            191,000                          19.50   

  Exercised                                           (11,979)                         18.25   

  Cancelled                                           (41,500)                         18.25   
                                                    ---------                                  

Outstanding at January 28, 1995                     1,014,021                   $18.00-19.50   
                                                    =========                                  

Exercisable options at January 28, 1995               153,321                                  
                                                    =========                                  

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HILLS STORES COMPANY AND SUBSIDIARIES                                           
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)                          

14.  SERIES 1993 STOCK RIGHTS                                                   
------------------------                                              

Pursuant to the POR, Series 1993 Stock Rights (the "Stock Rights") were issued  
as of the Effective Date under Stock Right Agreements.  Each Stock Right        
entitles the holder to acquire, at $0.01 per share, shares of Common Stock,     
subject to antidilution adjustments, as determined pursuant to a formula which  
is based on the Company's pro forma utilization of certain tax benefits as      
defined in the Stock Right Agreements.  As of the Effective Date, 700,000       
shares of Common Stock  were reserved for issuance upon exercise of the Stock   
Rights.  Shares under the Stock Right Agreements are not available for issuance 
until vested.  No stock rights have vested to date.                             

15.  SERIES 1993 WARRANTS                                                       
--------------------                                                  

Pursuant to the POR, Series 1993 Warrants (the "Warrants") were issued as of    
the Effective Date.  Each Warrant entitles the holder to purchase, subject to   
antidilution adjustments, one share of Common Stock at $30 per share.           
Initially, 432,990 shares of Common Stock were reserved for issuance upon       
exercise of the Warrants.  The Warrants are callable by the Company at $.01 per 
Warrant at any time after October 4, 1998 if the average closing price of       
Common Stock, subject to antidilution adjustments, for a period of thirty       
consecutive trading days is equal to or greater than $35 per share.  The        
Warrants expire on October 4, 2000.                                             

16.   RIGHTS AGREEMENT                                                          
----------------                                                    

Pursuant to a Rights Agreement adopted on August 16, 1994, the Company declared 
a distribution of one purchase right (the "Right") for each share of Common     
Stock and Preferred Stock then outstanding.  Each Right would initially entitle 
the holder to purchase, subject to adjustment, one one-thousandth share of the  
Company's Series B Participating Cumulative Preferred Stock, consisting of      
55,000 shares authorized, $.10 par value per share, at an exercise price of $75 
per one one-thousandth share.  Each share of Common Stock and Preferred Stock   
issued after August 16, 1994 will also have one Right attached.  The Rights     
expire August 16, 2004 and, under certain conditions, may be redeemed by the    
Company at a price of $.01 per Right.  The Rights have no voting or dividend    
privileges and are not currently separable from the capital stock.              

The Rights are not currently exercisable, but would become exercisable if       
certain events occurred relating to a person or group (the "Acquiring Person")  
acquiring or attempting to acquire 15% or more of the outstanding shares of     
capital stock other than through a qualifying tender offer.  Upon the           
occurrence of such an event, each Right (except the Rights beneficially owned   
by the Acquiring Person, which become null and void) entitles its holder to     
purchase for $75 the economic equivalent of Common Stock, or in certain         
circumstances, securities of the Acquiring Person, or its affiliate, worth      
twice as much.  After there is an Acquiring Person, the Rights may be           
exchanged, at the election of the Company, for consideration per Right          
consisting of one-half of the securities that would otherwise be issuable at    
that time.                                                                      

17.  INCOME TAXES                                                               
------------                                                          

The Predecessor Company adopted the Financial Accounting Standards Board's      
Statement of Financial Accounting Standards No. 109: "Accounting for Income     
Taxes" ("SFAS 109") during the thirty-five weeks ended October 2, 1993.  Under  
SFAS 109, deferred taxes are computed on the difference between the bases of    
assets and liabilities for tax reporting purposes and their corresponding bases 
for financial reporting purposes.  Deferred tax assets, net of appropriate      
valuation reserves, may be recorded.  The Predecessor Company elected to adopt  
SFAS 109 prospectively in fiscal 1993 and, as a result, prior periods have not  
been restated.                                                                  

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HILLS STORES COMPANY AND SUBSIDIARIES                                           
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)                          

17.  INCOME TAXES (CONTINUED)                                                   
------------------------                                              

                                                        · Enlarge/Download Table
Temporary differences and carryforwards which give rise to significant deferred                               
tax assets and liabilities are as follows (in thousands):                                                     


                                                   January 28, 1995                  January 29, 1994         
                                            Deferred Tax     Deferred Tax     Deferred Tax       Deferred Tax 
                                                Asset         Liability           Asset            Liability  
                                          ---------------  ---------------    --------------   ---------------
                                                                                                              
Net operating loss and tax credit                                                                             
  carryforwards                              $  63,391       $         -       $  84,016        $         -   

   Capital lease obligations                    54,393                 -          57,186                  -   

   Assets under capital leases                       -            51,679               -             56,479   

   Accrued expenses                             30,683                 -          25,446                  -   

   Beneficial lease rights                      19,693                 -          21,059                  -   

   Property and equipment                            -            17,257               -              6,710   

   Financing obligation-sale/leaseback          10,480                 -               -                  -   

   Other                                        19,534                 -          20,040              2,588   
                                             ---------       -----------       ---------        -----------   
     Total deferred taxes                      198,174            68,936         207,747             65,777   

   Valuation allowance                         (98,254)                -        (141,970)                 -   
                                             ---------       -----------       ---------        -----------   
     Net deferred taxes                      $  99,920       $    68,936       $  65,777        $    65,777   
                                             =========       ===========       =========        ===========   

The consummation of the POR resulted in a change in ownership for federal       
income tax purposes.  As a result, the Company's ability to utilize its net     
operating loss and tax credit carryforwards is subject to an annual limitation. 
For the year ended January 28, 1995, the Company utilized net operating loss    
carryforwards totaling $40.1 million, consisting of the fiscal year 1994 annual 
limitation of $15.5 million, the carryforward of unused fiscal year 1993 annual 
limitation, and other post-emergence net operating losses not subject to        
limitation.  Total deferred tax assets as of January 28, 1995, include $98.3    
million of deferred tax assets which arose before the Company's emergence from  
bankruptcy and which have been fully reserved.  For financial reporting         
purposes, any reduction of the valuation allowance related to Predecessor       
Company deferred tax assets will not be credited to the tax provision, but      
instead will reduce reorganization value in excess of amounts allocable to      
identifiable assets.                                                            

                                                        · Enlarge/Download Table
The Company's net operating loss and tax credit carryforwards at January 28, 1995 expire as follows (in thousands):


                                                                  Net Operating                Tax                 
   Fiscal years:                                                      Losses                 Credits               
                                                                -------------------------------------              
                                                                                                                   
   2000                                                         $         -               $      413               
   2001                                                                   -                      797               
   2002                                                                   -                      664               
   2003                                                                   -                    1,369               
   2004                                                                 329                    2,196               
   2005                                                                   -                    1,547               
   2006                                                              60,901                      949               
   2007                                                              56,848                      797               
   2008                                                              10,954                      944               
                                                                ------------------------------------               
                                                                $   129,032               $    9,676               
                                                                ====================================               

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HILLS STORES COMPANY AND SUBSIDIARIES                                           
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)                          

17.  INCOME TAXES (CONTINUED)                                                   
------------------------                                              

The income tax provision in each of the periods presented reflects an effective 
tax rate that differs from the statutory federal income tax rate for those      
periods.  For net earnings (loss) from operations before extraordinary items,   
the table below reconciles the statutory federal income tax rate to the         
effective tax rate.                                                             

                                                        · Enlarge/Download Table

                                    Successor Company               Predecessor Company      
                               ----------------------------    ----------------------------  
                                 Fiscal         Seventeen        Thirty-five       Fiscal    
                               Year Ended      Weeks Ended       Weeks Ended     Year Ended  
                               January 28,      January 29,       October 2,     January 30, 
                                  1995             1994             1993             1993    
                               --------------------------------------------------------------
                                                                                             
Statutory tax rate               35.0%            35.0%      ||    (35.0%)           34.0%   
State and local income taxes,                                ||                              
  net of federal tax benefit      6.4              6.7       ||     (6.5)             9.3    
Goodwill                          4.1              0.9       ||     11.9              1.9    
Targeted jobs credit                                         ||                              
  and other, net                  1.5             (0.3)      ||      2.2              1.1    
Reorganization fees                 -                -       ||     26.2              3.5    
Loss producing no current                                    ||                              
  tax benefit                       -                -       ||      1.2                -    
                               ------           ------            ------           ------    
Effective tax rate               47.0%            42.3%      ||        -             49.8%   
                               ======           ======            ======           ======    
                                                        · Enlarge/Download Table
The provision for income taxes consists of the following components (in thousands):                           


                                               Successor Company                      Predecessor Company     
                                        ---------------------------------        -----------------------------
                                            Fiscal           Seventeen             Thirty-five        Fiscal  
                                          Year Ended        Weeks Ended            Weeks Ended      Year Ended
                                          January 28,       January 29,            October 2,      January 30,
                                             1995               1994                   1993             1993  
                                        ----------------------------------------------------------------------
                                                                                                              
  Current provision:                                                                                          
   Federal                               $   19,524         $       -     ||       $        -     $         - 
                                                                          ||                                  
   State and local                            9,973             2,328     ||                -           1,060 
                                         ----------         ---------              ----------     ----------- 
                                             29,497             2,328     ||                -           1,060 
                                                                          ||                                  
  Deferred provision:                                                     ||                                  
   Federal                                  (23,393)                -     ||                -          18,860 
                                                                          ||                                  
   State and local                           (7,591)                -     ||                -           6,668 
                                         ----------         ---------              ----------     ----------- 
                                            (30,984)                -     ||                -          25,528 
                                                                          ||                                  
  Tax benefit applied to reduce                                           ||                                  
   reorganization value in excess                                         ||                                  
   of amounts allocable to                                                ||                                  
   identifiable assets                       37,340            24,281     ||                -               - 
                                                                          ||                                  
  Tax benefit of net operating                                            ||                                  
   loss carryforwards:                                                    ||                                  
   Federal                                        -                 -     ||                -         (18,860)
                                                                          ||                                  
   State and local                                -                 -     ||                -          (4,019)
                                         ----------         ---------              ----------     ----------- 
                                                  -                 -     ||                -         (22,879)
                                         ----------         ---------              ----------     ----------- 
                                                                          ||                                  
   Total taxes                           $   35,853         $  26,609     ||       $        -     $     3,709 
                                         ==========         =========              ==========     =========== 

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HILLS STORES COMPANY AND SUBSIDIARIES                                           
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)                          

17.  INCOME TAXES (CONTINUED)                                                   
------------------------                                              

As stated in Note 1, the Company recorded an extraordinary gain of $258.2       
million on the extinguishment of debt for financial reporting purposes in the   
third quarter of fiscal 1993.  Because the debt was discharged pursuant to the  
Chapter 11 filing, the Company did not record any income tax expense on the     
gain from the extinguishment of the debt in the period ended October 2, 1993.   

On December 27, 1994, the Company reached a final settlement with the Internal  
Revenue Service for the periods January 1988 through January 1990.  The final   
settlement resulted in no tax deficiencies being assessed.                      

18.  EARNINGS PER SHARE                                                         
------------------                                                    

Primary earnings per share of the Successor Company for fiscal 1994 and the     
seventeen weeks ended January 29, 1994 was computed based on the weighted       
average number of common shares assumed to be outstanding during the period,    
assumed conversion of the Preferred Stock, and the assumed exercise of stock    
options.  Such shares amounted to 14,105,498 and 14,056,470 for fiscal 1994 and 
the seventeen weeks ended January 29, 1994, respectively.  Fully-diluted        
earnings per share for the period also assumes the exercise of the Stock        
Rights.  Such shares amounted to 14,831,568 and 14,794,492, for fiscal 1994 and 
the seventeen weeks ended January 29, 1994, respectively.  Exercise of the      
Warrants is not assumed as their exercise would be antidilutive.  The weighted  
average number of shares reflects all shares of common and preferred stock      
intended to be issued in accordance with the POR.                               

Primary earnings per share of the Predecessor Company for the thirty-five weeks 
ended October 2, 1993 and fiscal year ended January 30, 1993  was computed      
using the weighted average common and common equivalent shares outstanding of   
19,757,390 and 19,757,339, respectively.  Fully-diluted earnings per share for  
the periods assumes the conversion of the 11% Convertible Junior Subordinated   
Debentures.  Fully-diluted weighted average common and common equivalent shares 
amounted to 21,981,683 for both periods.                                        

19.   COMMITMENTS AND CONTINGENCIES                                             
-----------------------------                                       

In August 1994, Dickstein Partners, L.P., et al. ("Dickstein") commenced a      
consent solicitation to replace four members of the Board of Directors with     
Dickstein nominees.  The lawsuit was voluntarily withdrawn and a negotiated     
settlement was reached with Dickstein that resulted in the end of Dickstein's   
consent solicitation.  Dickstein agreed to vote for the Company's proposed      
shareholder solicitation, which was a condition to the Company's $75 million    
cash self-tender (see Note 20), to amend the Company's corporate charter so     
that certain actions taken by stockholders may not be taken by written consent. 
In connection with the consent solicitation by Dickstein and the subsequent     
settlement, the Company incurred costs through January 28, 1995 of $3.3         
million, which are included in selling and administrative expenses.             

In a stockholder derivative and class action lawsuit captioned Weiss v. Lee, et 
al., the defendants, including the Company, have entered into an agreement with 
the plaintiff to settle the litigation.  The settlement agreement provides for, 
among other things, the Company to pay for certain of the plaintiff's expenses  
in an amount not to exceed $385,000.                                            

The Company is also involved in various suits and claims in the ordinary course 
of business.  The Company is also actively resolving certain disputed           
prepetition claims related to the POR.  Management                              

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HILLS STORES COMPANY AND SUBSIDIARIES                                           
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)                          

19.   COMMITMENTS AND CONTINGENCIES (CONTINUED)                                 
-----------------------------------------                           

does not believe that the disposition of such suits and claims will have a      
material adverse effect upon the continuing operations and financial position   
of the Company.                                                                 

20.   SELF-TENDER FOR COMMON STOCK                                              
----------------------------                                        

In September 1994, in response to the Dickstein consent solicitation, the       
Company's Board of Directors announced a program to enhance shareholder value,  
including the approval of a self-tender to purchase up to three million common  
shares at $25 per share in cash and the implementation of a growth program      
which includes remodeling, opening new stores, and the continuation of          
operating improvement programs.  Effective February 21, 1995, the Company       
accepted for payment three million shares of Common Stock which were validly    
tendered pursuant to the Company's offer.  In connection with the offer,        
561,863 shares of Preferred Stock were converted to Common Stock.  If the       
self-tender had been completed as of January 29, 1994, earnings per share for   
fiscal 1994, after giving effect to the conversion of Preferred Stock and the   
subsequent purchase and retirement of the three million common shares, would    
have been $3.42 on a primary and $3.21 on a fully-diluted basis.                

21.   QUARTERLY FINANCIAL INFORMATION (UNAUDITED)                               
-------------------------------------------                         

As discussed in Note 2, the Company adopted fresh-start reporting as of October 
2, 1993.  Under fresh-start reporting, a new reporting entity is created and    
recorded amounts of assets and liabilities are adjusted to reflect their        
estimated fair values.  Quarterly financial information for the periods prior   
to October 2, 1993, have been designated as those of the Predecessor Company.   
Black lines have been drawn to separate the Successor Company financial         
information from the Predecessor Company financial information to signify that  
they are those of a new reporting entity and have been prepared on a basis not  
comparable to prior periods.                                                    

                                                        · Enlarge/Download Table
(in thousands, except per share amounts)                                                         


                                              First        Second         Third       Fourth     
                                             Quarter       Quarter       Quarter      Quarter    
                                          -------------------------------------------------------
FISCAL 1994                                                                                      
                                                                                                 
Net sales                                  $  365,597    $  375,632    $   457,212   $   673,580 
                                           ==========    ==========    ===========   =========== 
Gross profit                               $  100,334    $  106,459    $   135,621   $   189,386 
                                           ==========    ==========    ===========   =========== 
Net earnings (loss) applicable to                                                                
  common shareholders                      $(   2,362)   $(   3,597)   $    12,923   $    33,467 
                                           ==========    ==========    ===========   =========== 
Primary earnings (loss) per                                                                      
  share applicable to common                                                                     
  shareholders                             $(    0.25)   $(    0.36)   $      0.91   $      2.37 
                                           ==========    ==========    ===========   =========== 
Fully-diluted earnings (loss) per                                                                
  share applicable to common                                                                     
  shareholders                             $(    0.25)   $(    0.36)   $      0.87   $      2.26 
                                           ==========    ==========    ===========   =========== 

              F-22

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HILLS STORES COMPANY AND SUBSIDIARIES                                           
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)                          

                                                        · Enlarge/Download Table

21.   QUARTERLY FINANCIAL INFORMATION (UNAUDITED) (CONTINUED)                                                
      -------------------------------------------------------                                                

(in thousands, except per share amounts)                                                                     
                                                     Predecessor Company                Successor Company    
                                          -------------------------------------    -----------------------   
                                                                    Nine Weeks       Four Weeks              
                                                                      Ended            Ended                 
                                           First       Second       October 2,       October 30,      Fourth 
                                          Quarter      Quarter        1993              1993          Quarter
                                          -------------------------------------------------------------------
FISCAL 1993                                                                                                  
                                                                                                             
Net sales                               $  340,417   $  357,285    $   295,146   ||  $   145,691   $  626,994
                                        ==========   ==========    ===========       ===========   ==========
                                                                                 ||                          
Gross profit                            $   93,356   $  100,856    $    88,337   ||  $    41,825   $  181,209
                                        ==========   ==========    ===========       ===========   ==========
                                                                                 ||                          
Earnings (loss) applicable to common                                             ||                          
  shareholders before extraordinary                                              ||                          
  gain                                  $  (11,674)  $   (4,899)   $     6,826   ||  $     4,009   $   32,226
Extraordinary gain on debt                                                       ||                          
  discharge                                      -            -        258,239   ||            -            -
                                        ----------   ----------    -----------   ||  -----------   ----------
Net earnings (loss) applicable to                                                ||                          
  common shareholders                   $  (11,674)  $   (4,899)   $   265,065   ||  $     4,009   $   32,226
                                        ==========   ==========    ===========   ||  ===========   ==========
                                                                                 ||                          
Primary earnings (loss) per                                                      ||                          
  common share:                                                                  ||                          
  Earnings (loss) applicable to common                                           ||                          
   shareholders before extraordinary                                             ||                          
   gain                                 $    (0.59)  $    (0.25)   $      0.35   ||  $      0.29   $     2.29
  Extraordinary gain on debt                                                     ||                          
   discharge                                     -            -          13.07   ||            -            -
                                        ----------   ----------    -----------   ||  -----------   ----------
  Net earnings (loss) applicable to                                              ||                          
   common shareholders                  $    (0.59)  $    (0.25)   $     13.42   ||  $      0.29   $     2.29
                                        ==========   ==========    ===========   ||  ===========   ==========
                                                                                 ||                          
Fully-diluted earning (loss)                                                     ||                          
  per common share:                                                              ||                          
  Earnings (loss) applicable to common                                           ||                          
   shareholders before extraordinary                                             ||                          
   gain                                 $    (0.59)  $    (0.25)   $      0.31   ||  $      0.27   $     2.17
  Extraordinary gain on debt                                                     ||                          
   discharge                                     -            -          11.75   ||            -            -
                                        ----------   ----------    -----------   ||  -----------   ----------
  Net earnings (loss) applicable                                                 ||                          
   to common shareholders               $    (0.59)  $    (0.25)   $     12.06   ||  $      0.27   $     2.17
                                        ==========   ==========    ===========   ||  ===========   ==========

                                  F-23

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REPORT OF INDEPENDENT ACCOUNTANTS 

To the Shareholders and Board of Directors                                      
of Hills Stores Company and Subsidiaries:                                 

Our report on the consolidated financial statements of Hills Stores Company and 
Subsidiaries is included on page F-1 of this Form 10-K.  In connection with our 
audits of such financial statements, we have also audited the related financial 
statement schedule listed in the index on page 17 of this Form 10-K.            

In our opinion, the financial statement schedule referred to above, when        
considered in relation to the basic financial statements taken as a whole,      
present fairly, in all material respects, the information required to be        
included therein.                                                               

                              Coopers & Lybrand L.L.P.

Boston, Massachusetts                                                           
March 10, 1995                                                                  

S-1 

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HILLS STORES COMPANY AND SUBSIDIARIES                                                                                          
------------------------------------------------------------------------------------------------------------------------       

SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS                                                                                
For the Fiscal Year Ended January 28, 1995, the Seventeen Weeks Ended January 29, 1994, the Thirty-five Weeks Ended            
October 2, 1993 and Fiscal Year Ended January 30, 1993                                                                         


                                                               Additions                                                       
                                           Balance at         Charged to         Deductions                        Balance at  
                                           Beginning           Cost and             from                             End of    
(in thousands)                             of Period            Expense           Reserves         Other             Period    
-----------------------------------------------------------------------------------------------------------------------------  
                                                                                                                               
SUCCESSOR COMPANY                                                                                                              
-----------------                                                                                                              

FISCAL YEAR ENDED JANUARY 28, 1995:                                                                                            

Allowance for doubtful accounts             $  5,497          $    866           $( 2,135)      $      -           $   4,228   
                                            ========          ========            =======       ========           =========   

SEVENTEEN WEEKS ENDED JANUARY 29, 1994:                                                                                        

Allowance for doubtful accounts             $  9,420          $     73           $( 3,996)      $      -           $   5,497   
                                            ========          ========            =======       ========           =========   

= = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = =

PREDECESSOR COMPANY                                                                                                            
-------------------                                                                                                            

THIRTY-FIVE WEEKS ENDED OCTOBER 2, 1993:                                                                                       

Allowance for doubtful accounts             $  4,591          $  1,433           $( 2,216)      $  5,612   (1)     $   9,420   
                                            ========          ========            =======       ========           =========   

FISCAL YEAR ENDED JANUARY 30, 1993:                                                                                            

Allowance for doubtful accounts             $  3,993          $  2,850           $( 1,002)     $(  1,250)  (2)     $   4,591   
                                            ========          ========            =======       ========           =========   
<FN>                                                                                                                           

(1)  Represents fresh-start adjustments.                                                                                       
(2)  Represents reclassifications.                                                                                             


                                                 S-2

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                                 EXHIBIT INDEX                               

                    Pursuant to Item 601 of Regulation S-K                   



Exhibit                                           Title                      
-------                                           -----                      
                                                                             

3.1                     Amended and Restated Certificate of Incorporation    
                        of the Company dated September 27, 1993.             

3.2                     Amendment dated January 18, 1995 to the Certificate  
                        of Incorporation of the Company.                     

10.12                   Form of individual Employment Agreements dated       
                        September 30, 1994 with, respectively, Messrs. Bozic,
                        Reen, Samuto, Smailes and Stevenish, accompanied by  
                        Schedule A from each agreement setting forth the     
                        office, term, compensation, etc., applicable to each 
                        such person.                                         

10.13                   Consulting Agreement with Norman S. Matthews dated   
                        September 30, 1994.                                  

11.1                    Computation of earnings per share.                   

21                      Subsidiaries.                                        

23                      Consent of Coopers and Lybrand.                      

24                      Powers of Attorney of directors and officers of      
                        the Company.                                         

27                      Financial Data Schedule                              

Dates Referenced Herein   and   Documents Incorporated By Reference

				Referenced-On Page
This 10-K405 Filing		Date		First		Last			Other Filings
		1/30/93		12		45
		1/31/93		11		28
		3/10/93		18
		7/16/93		17
		8/1/93		34
		9/10/93		17		19
		9/27/93		17		46
		10/2/93		10		45
		10/3/93		37
		10/4/93		6		33
		10/5/93		9		19
		10/30/93		9
		1/29/94		9		45
		4/30/94		9		36
		7/30/94		9
		8/1/94		13		33
		8/16/94		18		38
		8/19/94		18
		8/23/94		19					DEFC14A
		9/30/94		18		46
		10/1/94		34
		10/29/94		9
		12/27/94		41
		1/18/95		7		46
For The Period Ended		1/28/95		1		45			10-K/A
		2/21/95		42
		3/10/95		21		44			SC 13D/A
		3/20/95		7
		3/31/95		2		9
Filed On / Filed As Of		4/14/95		20
		5/5/95		2		16			PREC14A, SC 13D/A
		6/1/95		4					DEFC14A
		6/12/95		2		16			10-Q, DEFA14A
		7/29/95		33					10-Q
		10/4/98		38
		10/1/99		34
		10/4/0		38
		3/31/2		34
		3/31/3		34
		9/30/3		34
		8/16/4		38
		10/4/8		36
Top									List All Filings