Hills Stores Company (“Hills” or “The Company”) operated through its wholly-owned subsidiary Hills Department Store Company (“HDSC”). It was a chain of discount department stores under the trade name of Hills Department Stores.  These stores were located primarily in the Great Lakes and Ohio Valley regions of the United States.  One new store was opened in 1996.  the Company operated 165 stores in twelve states.  Shortly after Hills announced plans to close 10 stores during the first quarter of fiscal 1997, reducing the chain to 155 stores.

The Company was a leading regional discount retailer offering a broad range of brand names and other first quality general merchandise.  Management’s business strategy stressed everyday low prices, depth and breadth of products in selected merchandise categories, remodeled facilities, and strict operating controls.

Hills stores were located in cities and towns of varying sizes, with some of the larger cities being Pittsburgh, Buffalo, and Cleveland.  The Company concentrated 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.

In 1991, the Company remodeled all of its stores and continued the program on an ongoing basis.  The remodeling program was designed to make and keep the Company’s stores more visually appealing to customers and to take full advantage of the most profitable merchandise categories.

Store managers reported to district managers, who reported to regional vice presidents.  The district managers and regional vice presidents visited their stores on a regular basis to oversee operations.  Store managers and associates were empowered to respond directly to the needs of the customers. The Company maintained a stores headquarters office strategically located near Pittsburgh. 

The Company believed that its customer base consists primarily of female customers shopping for family needs.  Accordingly, Hills emphasized merchandise in its softlines departments and selected hardlines departments, such as toys and seasonal merchandise, which appealed to Hills’ targeted female customer.

The Company considered the breadth and depth of its merchandise in these departments to be an important factor in attracting and retaining customers, and accordingly emphasized the availability of a wide selection of sizes, styles and colors of items in these departments.

Hills carried a diverse line of products, all first quality, including a full line of clothing 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 licensed its footwear departments to a nationally known footwear retailer.  Hills offered 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 (approximately 5% of total purchases).  The Company accepted all major consumer credit cards and offers a year-round layaway program.

Imported goods were purchased by Hills through its importing subsidiary and from other sources.  The subsidiary, C.R.H. International, Inc. (“CRH”), imported products that accounted for approximately 12% of total purchases of the Hills Department Stores chain.

Hills used 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 were located at its Canton, Massachusetts offices. Hills also maintained a fashion buying office in the garment district of New York City to purchase and merchandise women’s fashion and basic apparel.

The Company’s central distribution facilities were located in Columbus, Ohio. These facilities provided central stocking of merchandise and flow-through allocation of merchandise for delivery to the stores.  During the fiscal year 1996, the Company shipped approximately 60% of the dollar value of its merchandise receipts through these distribution facilities, which consisted primarily of items handled in casepack quantities and imports.  The balance of the Company’s merchandise receipts, consisting primarily of apparel and less-than casepack quantity items, were delivered to stores direct from vendors or through a variety of distributor, jobber or in-store service vendors.  In 1997, the

Company planned to open an interim processing center, primarily focused on apparel, to pre-process merchandise, thereby reducing in-store handling costs and consolidating and reducing freight costs.  Hills is presently conducting a study directed towards opening a second full-service distribution facility, not later than 1999, which would have included breakpack capabilities to enable less-than casepack quantity deliveries to stores.  The second distribution center initiative may have involve an interim facility in 1998.

The Company relied extensively on computerized information systems.  Hills operated its principal information technology center at its corporate offices in Canton, Massachusetts.  All Hills stores, distribution centers, and administrative locations were tied to the information center’s computer by means of an online data communications network.

Hills’ merchandising systems were designed to integrate the key retailing functions of seasonal merchandise planning and allocation, purchase order management, merchandise distribution, receiving, sales capture, inventory control, open-to-buy, and replenishment.  Hills maintained electronic data interchange (EDI) connections through third party services to a large number of its vendors.  Unit sales data were recorded via the point-of-sale register systems in each store.  The point-of-sale registers and bar code scanners in all stores significantly reduced labor-intensive price marking and price changes.  Each Hills buyer had on-line access to information via a workstation located in the buyer’s office.  Sales performance reports were received both daily and weekly and assisted management in making related merchandising decisions.  The merchandising systems allowed Hills to distribute specific categories and styles of merchandise to each store based on the sales patterns of the stores.  Store operations were supported by a number of additional on-line systems including electronic correspondence among all locations, payroll and labor scheduling systems, price change management and layaway control. 

Hills had embarked on a project designed to replace most of its existing systems and enhance processes to meet the demands of retailing in the year 2000 and beyond.  The Company would update its hardware and applications and reengineer its business processes in order to take advantage of new technology. Hills anticipated substantially completing this project prior to the 1998 Christmas selling season.

The discount general merchandise retail business was and still is highly competitive.  The Company considered merchandise price, presentation, selection and quality, store location, and the expertise of its buying, selling, and support management and associates to be the most significant competitive factors.  Hills’ principal competitors were regional and national discount department store chains, some of which, such as Wal-Mart, Kmart, and Target, as well as specialty retailers, such as Toys “R” Us, are larger and have more capital than Hills.  Management believed that the Company’s store remodeling program and its strength in certain merchandising lines allow it to defend its competitive position, even with Wal-Mart’s presence in most of the Company’s markets. 

The “Hills” name was a registered service mark.  The Company considered this mark and the associated name recognition to have been valuable to its business.  The Company had 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 considered these additional marks to be valuable in the aggregate, individually, they have varying degrees of importance to the Company’s business.

As of March 31, 1997, Hills employed approximately 16,200 persons, including approximately 9,200 full-time and 7,000 part-time employees.  None of the Company’s employees are represented by a labor union.  The number of employees varies during the year, reaching a peak during the Christmas selling season. The Company considered its relations with its employees to be good.

During the 1996 fiscal year, the Company rebuilt its senior management team with the addition of a new president and chief executive officer, executive vice president-chief financial officer, executive vice president-store and distribution operations, corporate vice president of human resources, vice president of information technology and services, vice president controller, vice president-treasurer, and a regional vice president.  In addition, several other vice president positions were filled by internal promotions and reorganizations, including a regional vice president, a vice president-merchandise presentation, and two merchandise vice presidents.  The Company has also recently hired a new vice president-logistics.  The Company had vacancies in the positions of executive vice president-chief merchandising officer and vice president-marketing.  The Company had also strengthened its balance sheet by refinancing its long-term senior debt, deferring maturities to 2003, and obtained a replacement $300 million revolving credit facility with greater financing flexibility.

At the end of fiscal 1996, Hills operated 165 stores (164 stores leased and one owned) in the states of Pennsylvania, Ohio, New York, West Virginia, Indiana, Virginia, Tennessee, Illinois, Kentucky, Maryland, Massachusetts and North Carolina.  The stores were located in regional and other enclosed shopping malls, strip shopping centers, and free-standing units.  In early 1997, the Company closed ten stores located in Kentucky (2), North Carolina (4), Virginia (3), and Ohio (1).  The Company leases nearly all of its stores under long-term leases. In addition, Hills leased buying and administrative offices, including the Company’s executive, buying and administrative office in Canton, Massachusetts, the stores headquarters in Aliquippa, Pennsylvania, and a buying office in New York, New York, and its central distribution facilities in Columbus, Ohio.

The typical store lease hac 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 provided for a minimum annual rent that is constant or adjusts to fixed levels through the lease term, including renewal periods.  Most leases provided for additional rent based on a percentage of sales to be paid when designated sales levels are achieved.