FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended November 25, 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 1-7832
PIER 1 IMPORTS, INC.
(Exact name of registrant as specified in its charter)
Delaware 75-1729843
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
301 Commerce Street, Suite 600, Fort Worth, Texas 76102
(Address of principal executive offices including zip code)
(817) 878-8000
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [ X ]. No [ ].
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Shares outstanding as of January 2, 1996
Common Stock, $1.00 par value 39,533,127
PART I
------
Item 1. Financial Statements.
PIER 1 IMPORTS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands except per share amounts)
(Unaudited)
[CAPTION]
Three Months Ended Nine Months Ended
Nov. 26, Nov. 26,
Nov. 25, 1994 (as Nov. 25, 1994 (as
1995 (restated) 1995 * (restated)
-------- -------- -------- --------
[S] [C] [C] [C] [C]
Net sales $190,185 $165,761 $566,456 $512,650
Operating costs and expenses:
Cost of sales (including
buying and store occupancy) 111,614 99,664 343,989 310,969
Selling, general and
administrative expenses 59,252 51,146 163,046 151,770
Depreciation and amortization 4,270 4,008 12,608 11,788
-------- -------- -------- --------
175,136 154,818 519,643 474,527
-------- -------- -------- --------
Operating income 15,049 10,943 46,813 38,123
Nonoperating expenses:
Interest income (14) (701) (610) (1,425)
Interest expense 3,637 3,453 10,131 10,792
Investment (gains) losses(Note 2) (95) 5,749 16,463 11,445
Provision for Sunbelt Nursery
Group, Inc. defaults -- -- 14,000 --
Write-down of General Host
securities -- 7,543 -- 7,543
-------- -------- -------- --------
Income (loss) before income
taxes 11,521 (5,101) 6,829 9,768
Provision for income taxes 4,572 425 10,636 6,799
-------- -------- -------- --------
Net income (loss) $ 6,949 $ (5,526) $ (3,807) $ 2,969
======== ======== ======== ========
Net income (loss) per share:
Primary $.18 $(.14) $(.10) $.07
==== ===== ===== ====
Fully diluted $.17 $(.14) $(.10) $.07
==== ===== ===== ====
Average shares outstanding during
period, including common stock
equivalents:
Primary 39,700 39,683 39,721 39,642
====== ====== ====== ======
Fully diluted 45,224 46,247 45,241 46,208
====== ====== ====== ======
*Reflects restatements of the first and second quarters of fiscal 1996. See
Note 2.
The accompanying notes are an integral part of these financial statements.
PIER 1 IMPORTS, INC.
CONSOLIDATED BALANCE SHEET
(Dollars in thousands except share data)
(Unaudited)
November 25, February 25,
1995 1995 (as
restated)
------------ ------------
ASSETS
Current assets:
Cash, including temporary investments of $475
and $42,536, respectively $ 13,488 $ 50,566
Accounts receivable, net 74,490 64,229
Inventories 234,913 200,968
Other current assets 34,269 34,325
-------- --------
Total current assets 357,160 350,088
Properties, net 104,636 105,618
Other assets 36,900 30,219
-------- --------
$498,696 $485,925
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current portion of long-term
debt $ 35,016 $ 2,638
Accounts payable and accrued liabilities 85,401 82,419
-------- --------
Total current liabilities 120,417 85,057
Long-term debt 139,982 154,432
Deferred income taxes 2,537 2,538
Other non-current liabilities 21,095 21,501
Stockholders' equity:
Common stock, $1.00 par, 200,000,000 shares
authorized, 39,877,000 and 37,826,000
issued, respectively 39,877 37,826
Paid-in capital 110,698 93,833
Retained earnings 69,359 94,516
Cumulative currency translation adjustments (1,214) (1,195)
Less - 373,000 and 162,000 common shares in
treasury, at cost, respectively (3,212) (1,477)
Less - subscriptions receivable and unearned
compensation (843) (1,106)
-------- --------
214,665 222,397
-------- --------
$498,696 $485,925
======== ========
The accompanying notes are an integral part of these financial statements.
PIER 1 IMPORTS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended
November 25, November 26,
1995 1994 (as
restated)
Cash flow from operating activities: ------------ ------------
Net income (loss) $(3,807) $ 2,969
Adjustments to reconcile to net cash (used in)
provided by operating activities:
Depreciation and amortization 12,608 11,788
Deferred taxes and other 5,912 5,187
Provision for Sunbelt Nursery Group, Inc.
defaults 14,000 --
Write-down of General Host securities -- 7,543
Investment losses 16,463 11,445
Changes in cash from:
Inventories (33,945) 7,453
Accounts receivable and other current assets (10,836) (13,458)
Accounts payable and accrued expenses (4,527) (5,652)
Store-closing reserve (5,914) (2,144)
Other assets, liabilities and other, net (37) (923)
Net cash (used in) provided by ------- -------
operating activities (10,083) 24,208
------- -------
Cash flow from investing activities:
Capital expenditures (16,417) (14,004)
Proceeds from disposition of properties 255 238
Loan to Sunbelt Nursery Group, Inc. -- (9,600)
Proceeds from Sunbelt Nursery Group, Inc. -- 11,600
Investments in The Pier Retail Group, Ltd. (7,785) (1,593)
Investments (19,500) (12,500)
Proceeds from sale of investments 3,637 --
------- -------
Net cash used in investing activities (39,810) (25,859)
Cash flow from financing activities: ------- -------
Cash dividends (3,576) (3,009)
Retirement of long-term debt (14,750) (2,500)
Net borrowings under line of credit agreements 31,100 13,000
Proceeds from sales of capital stock, treasury
stock, and other, net 41 615
Net cash provided by financing ------- -------
activities 12,815 8,106
------- -------
Change in cash (37,078) 6,455
Cash at beginning of period 50,566 17,123
------- -------
Cash at end of period $13,488 $23,578
======= =======
The accompanying notes are an integral part of these financial statements.
PIER 1 IMPORTS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED NOVEMBER 25, 1995
(In thousands)
(Unaudited)
Cumulative Subscriptions
Currency Receivable and Total
Common Paid-in Retained Translation Treasury Unearned Stockholders'
Stock Capital Earnings Adjustments Stock Compensation Equity
------ ------- -------- ----------- -------- -------------- -------------
Balance February 25, 1995 (as restated) $37,826 $ 93,833 $94,516 $(1,195) $(1,477) $(1,106) $222,397
Purchase of treasury stock (3,606) (3,606)
Restricted stock grant and amortization 7 44 (129) 263 185
Stock Purchase Plan, exercise of stock
options and other 166 560 365 2,000 3,091
Currency translation adjustments (19) (19)
Cash dividends, declared or paid (3,576) (3,576)
Five percent stock dividend 1,878 16,261 (18,139) 0
Net income (loss) (3,807) (3,807)
------- -------- ------- ------- ------- ------- --------
Balance November 25, 1995 $39,877 $110,698 $69,359 $(1,214) $(3,212) $ (843) $214,665
======= ======== ======= ======= ======= ======= ========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
/TABLE
PIER 1 IMPORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The accompanying unaudited financial statements should be read in
conjunction with the Form 10-K for the year ended February 25, 1995. An
amended Form 10-K will be filed for that year to incorporate restatements
required to properly reflect the investment losses described in Note 2.
All adjustments that are, in the opinion of management, necessary for a
fair statement of the financial position as of November 25, 1995, and the
results of operations and cash flows for the interim periods ended November
25, 1995 and November 26, 1994, as restated, have been made and consist
only of normal recurring adjustments except for the investment losses
described in Note 2. The results of operations for the three and nine
months ended November 25, 1995 and November 26, 1994 are not indicative of
results to be expected for the fiscal year because of, among other things,
seasonality factors in the retail business.
Note 1 - Net income (loss) per share
Primary net income (loss) per share was determined by dividing net
income (loss) by the applicable average shares outstanding. Fully diluted
net income (loss) per share amounts are similarly computed, but include the
effect, when dilutive, of the Company's potentially dilutive securities.
To determine fully diluted net income (loss), interest and debt issue
costs, net of any applicable taxes, have been added back to net income to
reflect assumed conversions. The computation of fully diluted net income
(loss) per share for the three and nine months ended November 26, 1994 were
antidilutive; therefore, the amounts reported for primary and fully diluted
net income (loss) per share are the same.
Primary average shares include common shares outstanding and common
stock equivalents attributable to outstanding stock options. In addition
to common and common equivalent shares, fully diluted average shares
include common shares that would be issuable upon conversion of the
Company's convertible securities.
Three Months Ended Nine Months Ended
Nov. 26, Nov. 26,
Nov. 25, 1994 (as Nov. 25, 1994 (as
1995 restated) 1995 restated)
-------- -------- -------- --------
(in thousands except per share amounts)
Net income (loss) $6,949 $(5,526) $(3,807) $2,969
Assumed conversion of 6 7/8%
subordinated notes as of date of
issuance, April 1992:
Plus interest and debt issue
costs, net of tax 681 866 2,043 2,598
------ ------- ------- ------
Fully diluted net income (loss) $7,630 $(4,660) $(1,764) $5,567
====== ======= ======= ======
Average shares outstanding during
period, including common stock
equivalents:
Primary 39,700 39,683 39,721 39,642
Plus assumed exercise of stock
options 33 1 29 3
Plus assumed conversion of
6 7/8% subordinated notes
to common stock as of date
of issuance, April 1992 5,491 6,563 5,491 6,563
------ ------ ------ ------
Fully diluted 45,224 46,247 45,241 46,208
====== ====== ====== ======
Net income (loss) per share:
Primary $.18 $(.14) $(.10) $.07
==== ===== ===== ====
Fully diluted $.17 $(.14) $(.10) $.07
==== ===== ===== ====
Note 2 - Investment losses
In late December 1995, the Company was made aware of non-recurring
losses of approximately $19.3 million resulting from inappropriate and
substantial trading activities in a discretionary account by a financial
consultant retained to manage the Company's excess cash and short-term
investments. The Company maintained a relationship with the consultant
over the last nine years and provided funds under management that at one
time reached $22 million. In executing these trading transactions, the
consultant may have acted outside the scope of instructions from the
Company and improperly attributed transactions to the Company. These
transactions are recorded on statements the Company received from a
brokerage firm that executed the transactions purportedly in accordance
with the consultant's instructions. Management believes that these
statements represent the best evidence of the transactions that is
available to the Company at this time. As a result, the Company has
restated its financial statements to reflect the losses in the periods
indicated by the brokerage firm statements. The Company and the Special
Committee of the Board of Directors, which was established to investigate
the matter, are investigating the transactions and the surrounding
circumstances and attempting to obtain additional information to resolve
uncertainties which have arisen. The Company does not anticipate that its
investigation will lead to recognition of additional losses from such
trading activities. While it is possible that the findings of such efforts
may cause the Company to make adjustments in the future as the
uncertainties are resolved, any such adjustment which might result in
restatement of financial statements are not expected to result in any
additional net losses, but rather would reflect offsetting adjustments
among periods.
The table presented below summarizes the impact of these restatements
for each quarter of fiscal 1995 and the first two quarters of fiscal 1996.
These restatements indicate significant investment losses during the first
three quarters of each of the fiscal years ended February 26, 1994, and
February 25, 1995, and then a substantial recovery of such losses in the
fourth fiscal quarter of each of those years. The Company's recording of
the transactions from the brokerage firm statements produces no effect on
the financial statements as of and for the full year ended February 26,
1994. The effect on the financial statements as of and for the full year
ended February 25, 1995, is an additional loss of $2.8 million on net
income of $25 million before restatement. The effect on the financial
statements for the first and second quarters of fiscal 1996 is an
additional loss of $15.9 million and $0.6 million, respectively. The
Company has not recorded any tax benefit of these losses since the
realization of such benefit is uncertain at this time. At February 26,
1994, February 25, 1995, and November 25, 1995, the Company had no material
funds managed by the financial consultant. These amounts do not include
any possible conflicting claims which might arise involving the financial
consultant or other parties. Should such claims arise, they are expected
to be the subject of protracted legal proceedings.
After completion of its initial investigation, the Company may pursue
claims against various parties to seek recovery of all or a portion of the
losses. The Company has attempted to obtain additional information from
the financial consultant with respect to its purported trading
transactions, but the consultant has not cooperated with these efforts.
The ability of the Company to obtain such information, particularly at
dates that are relevant to the Company's financial reporting requirements,
is not ascertainable. The recorded losses have not been reduced by any
possible recoveries from such sources.
CONSOLIDATED STATEMENT OF OPERATIONS DATA
(In thousands except per share amounts)
Fiscal 1995
- -----------
Net Income (Loss)
----------------------------------------------------
Nine Fiscal
Months Year
Three Months Ended ended ended
---------------------------------- Nov. 26, Feb. 25,
5/28/94 8/27/94 11/26/94 2/25/95 1994 1995
------- ------- -------- -------- -------- --------
Previously reported $ 5,535 $ 8,656 $ 223 $10,445 $ 14,414 $24,859
As restated 3,991 4,504 (5,526) 19,091 2,969 22,060
Restatement amount (1,544) (4,152) (5,749) 8,646 (11,445) (2,799)
Primary Net Income (Loss) Per Common Share
----------------------------------------------------
Nine Fiscal
Months Year
Three Months Ended ended ended
----------------------------------- Nov. 26, Feb. 25,
5/28/94 8/27/94 11/26/94 2/25/95 1994 1995
------- ------- -------- -------- -------- --------
Previously reported $ 0.14 $ 0.22 $ 0.01 $0.26 $ 0.36 $ 0.63
As restated $ 0.10 $ 0.11 $(0.14) $0.48 $ 0.07 $ 0.56
Restatement amount $(0.04) $(0.11) $(0.15) $0.22 $(0.29) $(0.07)
Investment Gains (Losses)
----------------------------------------------------
Nine Fiscal
Months Year
Three Months Ended ended ended
---------------------------------- Nov. 26, Feb. 25,
5/28/94 8/27/94 11/26/94 2/25/95 1994 1995
------- ------- -------- -------- -------- --------
Previously reported $ -- $ -- $ -- $ 138 $ -- $ 138
As restated (1,544) (4,152) (5,749) 8,646 (11,445) (2,799)
Restatement amount (1,544) (4,152) (5,749) 8,508 (11,445) (2,937)
Fiscal 1996
- -----------
Net Income (Loss)
------------------------------------------
Six Nine
Months Months
Three Months Ended ended ended
------------------------- Aug. 26, Nov. 25,
5/27/95 8/26/95 11/25/95 1995 1995
-------- ------- -------- -------- --------
Previously reported $ 6,235 $ (76) $ -- $ 6,159 $ --
As restated (10,078) (678) 6,949 (10,756) (3,807)
Restatement amount (16,313) (602) -- (16,915) --
Primary Net Income (Loss) Per Common Share
------------------------------------------
Six Nine
Months Months
Three Months Ended ended ended
------------------------- Aug. 26, Nov. 25,
5/27/95 8/26/95 11/25/95 1995 1995
-------- ------- -------- -------- --------
Previously reported $ 0.16 $ 0.00 $ -- $ 0.16 $ --
As restated $(0.25) $(0.02) $0.18 $(0.27) $(0.10)
Restatement amount $(0.41) $(0.02) $ -- $(0.43) $ --
Investment Gains (Losses)
------------------------------------------
Six Nine
Months Months
Three Months Ended ended ended
------------------------- Aug. 26, Nov. 25,
5/27/95 8/26/95 11/25/95 1995 1995
-------- ------- -------- -------- --------
Previously reported $ 357 $ -- $ -- $ 357 $ 357
As restated (15,956) (602) 95 (16,558) (16,463)
Restatement amount (16,313) (602) 95 (16,915) (16,820)
CONSOLIDATED BALANCE SHEET DATA
(In thousands)
Cash Advanced to Investment Manager at End of Period
----------------------------------------------------
Three Months Ended
----------------------------------------------------
5/28/94 8/27/94 11/26/94 2/25/95 5/27/95 8/26/95
-------- ------- -------- -------- -------- --------
Investment as previously
reported $7,500 $7,500 $12,500 $ -- $19,500 $19,500
Investment as restated 5,956 1,804 1,055 838 745 143
Note 3 - New credit facility
In December 1995 the Company obtained a three-year $65 million
competitive advance and revolving credit facility. This agreement contains
certain restrictive covenants requiring, among other things, the
maintenance of certain financial ratios (including debt to net worth, debt
to net cash flow, and current ratio), minimum tangible net worth, the
limitation of maximum levels of capital expenditures, and a limitation on
certain investments. The terms of the competitive advance and revolving
credit facility limit the amount of additional borrowings under the
facility and additional borrowings under other short-term facilities to an
aggregate amount approximating $78 million over the amount outstanding at
December 30, 1995.
Note 4 - Provision for Sunbelt Nursery Group, Inc. defaults
During the second quarter of fiscal 1996, the Company recorded a pre-
tax charge of $14 million, which represents the estimated cost to disengage
from its financial support of Sunbelt Nursery Group, Inc. ("Sunbelt").
This charge resulted from Sunbelt's default on 13 nursery store subleases
from the Company in April 1995. Sunbelt has also defaulted on three
nursery store leases guaranteed by the Company. The charge reflects the
Company's estimated losses resulting from the lease termination costs
associated with the 13 nursery stores and from the Company's guarantees of
other Sunbelt store leases.
As of December 30, 1995, the Company has disengaged from the
commitment associated with 1 of these stores at a cost approximating the
estimated amount. The Company continues to believe the leases can be
terminated at the estimated cost and thus, no further charge is warranted
at this time.
Note 5 - Litigation
On December 27, 1995, a derivative suit, entitled Harry Lewis v. Clark
A. Johnson et al., was filed by a shareholder on behalf of the Company in
the Delaware Chancery Court against each member of the Company's Board of
Directors. The complaint alleges that the Directors violated their
fiduciary duties to the Company and its shareholders by not adequately
supervising the officers, employees and agents of the Company who were
responsible for the trading activities that resulted in the $19.3 million
in losses. The suit seeks an accounting to the Company for the damages it
sustained.
On January 3, 1996, a second derivative suit, entitled John P.
McCarthy Profit Sharing Plan, et al. v. Clark A. Johnson et al., was filed
by a shareholder on behalf of the Company in the District Court of Tarrant
County, Texas against each member of the Board of Directors, two executive
officers of the Company and an outside financial consultant of the Company.
The complaint alleges that the Directors and executives of the Company
violated their duties to the Company and its shareholders by gross
mismanagement and waste of the Company's assets exceeding $34 million and
that the defendants engaged in conspiracy and fraud by concealing and
misrepresenting facts to the Company and its shareholders. The suit seeks
an award in the amount of all damages sustained by the Company.
PART I
------
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Results of Operations
Pier 1 Imports, Inc. (the "Company") recorded net sales of $190.2
million and $566.5 million for the third quarter and nine-month periods of
fiscal 1996, increases of 14.7% and 10.5%, respectively, compared to the
same periods of fiscal 1995. The increase in sales for the third quarter
and nine-month periods of fiscal 1996 is primarily attributable to a same-
store sales increase of 8.5% and 4.3%, respectively, over the same period
of fiscal 1995 and an 8.1% increase in weighted average store count (which
is calculated based on the number of days a store is open during any given
period) at the end of the third quarter of fiscal 1996 compared to the same
period of fiscal 1995. The average number of customers per store week
increased approximately 7% in the third quarter of fiscal 1996 over the
same period of fiscal 1995 primarily due to the Company's national
television advertising campaign launched during the second quarter of
fiscal 1996. The increases in same-store sales for fiscal 1996 resulted
from a continued improvement in hard goods merchandise sales which include
furniture and decorative accessories, offset partially by slight decreases
in soft goods merchandise sales such as apparel and jewelry. Hard goods
and soft goods sales contributed approximately 92% and 8%, respectively, of
total sales for the nine-month period of fiscal 1996. Sales on the
Company's proprietary credit card were $136.8 million, or 24.1% of total
sales, during the first nine months of fiscal 1996, an increase of $41.3
million, or 43.3%, over the same period of fiscal 1995. The Company's U.S.
and Canadian store count aggregated 665 at the end of the fiscal 1996 third
quarter compared to 624 at the end of the fiscal 1995 third quarter.
Gross profit, after related buying and store occupancy costs,
expressed as a percentage of sales, increased 1.4% to 41.3% for the third
quarter of fiscal 1996 and was even at 39.3% for the nine-month period of
fiscal 1996 versus the same periods in fiscal 1995. The increase in the
fiscal 1996 third quarter is primarily due to a 0.9% improvement in
merchandise margins as a result of a change in the merchandise sales mix
and a decrease in clearance and promotional markdowns partially due to the
new television advertising campaign's increasing customer traffic in the
stores. Store occupancy costs, as a percentage of sales, decreased 0.5%
to 15.0% for the third quarter of fiscal 1996 and increased 0.2% to 15.0%
for the nine-month period of fiscal 1996 compared to the same periods of
fiscal 1995. The third quarter improvement is primarily due to higher
sales leveraging fixed rental rates partially offset by slightly higher
occupancy rates on 50 new stores opened in the first nine months of fiscal
1996 and incremental increases in floating rate lease payments linked to
LIBOR for approximately 55 store operating leases.
Selling, general and administrative expenses, including marketing,
expressed as a percentage of sales, increased 0.3% to 31.2% in the third
quarter of fiscal 1996 and decreased 0.8% to 28.8% for the first nine
months of fiscal 1996 versus the same periods of fiscal 1995. In total
dollars, expenses increased by $8.1 million during the third quarter of
fiscal 1996 and by $11.3 million during the first nine months of fiscal
1996 versus the comparable periods of fiscal 1995. The increase in
expenses for the third quarter of fiscal 1996 is primarily attributable to
a $2.9 million increase in payroll, which decreased 1.1% as a percentage of
sales, and a $1.9 million increase in marketing expenditures as a result of
the timing of the national television advertising campaign expenses, which
shifted expenditures from earlier in the 1996 fiscal year to the second and
third quarters of fiscal 1996. Expenses related to international ventures
in the third quarter of fiscal 1996 increased approximately $2.3 million
compared to the same quarter of fiscal 1995. Other increases in selling,
general and administrative expenses of $1.0 million during the third
quarter of fiscal 1996 were a result of changes in the timing of store
physical inventories and increases in other expenses that normally increase
with sales. The increase in selling, general and administrative expenses
for the nine-month period of fiscal 1996 is primarily due to a $5.4 million
increase in payroll, which decreased 0.9% as a percentage of sales, and a
$2.8 million increase in operating expenses (including supplies and store
services) which normally increase proportionately with sales. In addition,
net proprietary credit card costs increased $0.7 million due to higher
processing costs related to the increase in proprietary credit card sales;
however, these processing costs, as a percentage of proprietary credit card
sales, decreased to 3.8% for the first nine months of fiscal 1996 compared
to 5.0% for the same period of fiscal 1995. All other selling, general and
administrative expenses increased $2.4 million, primarily as a result of
increased expenses related to international ventures.
Net interest expense increased $0.9 million during the third quarter
and declined $0.2 million during the first nine months of fiscal 1996
versus the same periods in fiscal 1995. The increase in the third quarter
of fiscal 1996 is primarily due to higher net debt levels.
In late December 1995, the Company was made aware of non-recurring
losses of approximately $19.3 million resulting from inappropriate and
substantial trading activities in a discretionary account by a financial
consultant retained to manage the Company's excess cash and short-term
investments. Prior period financial statements will be restated to reflect
the losses based upon the information available to the Company at this
time. Approximately $16.5 million of the loss falls in the current year,
principally in the first quarter, and $2.8 million will be reflected in
fiscal 1995. See Note 2 to the financial statements for additional
information regarding the losses.
In July 1995, the Company entered into a settlement agreement with
Sunbelt Nursery Group, Inc. ("Sunbelt") concerning Sunbelt's default in
April 1995 on 13 nursery store subleases and three nursery store leases
guaranteed by the Company. During the second quarter of fiscal 1996, the
Company recorded a special charge of $14 million which represents the
estimated cost to disengage from its financial support of Sunbelt. The
charge reflects the Company's estimated losses resulting from the lease
termination costs associated with the 13 nursery stores and from the
Company's guarantees of other Sunbelt store leases.
The Company's income tax provisions for the first three quarters of
fiscal 1995 and fiscal 1996 do not reflect any tax benefit associated with
the investment losses described above. The Company's effective income tax
rate for U.S. operations in fiscal 1996, excluding the effect of the tax
treatment of the aforementioned investment losses, is estimated to be 40%
compared to 31% for fiscal 1995. The increase is primarily due to the
benefit of tax-favored foreign income last fiscal year and the tax benefit
from the sale of Sunbelt common stock recognized in fiscal 1995.
Operating income increased $4.1 million to $15.0 million during the
third quarter of fiscal 1996 and increased $8.7 million to $46.8 million
for the first nine months of fiscal 1996 versus the comparable periods of
fiscal 1995 due to higher sales, improved margins and other cost
efficiencies. Net income aggregated $6.9 million or $0.18 per share
(primary) for the third quarter of fiscal 1996 compared to a net loss of
$5.5 million or $0.14 per share (primary) for the same period of fiscal
1995. Net losses aggregated $3.8 million or $0.10 per share (primary) for
the first nine months of fiscal 1996 compared to net income of $3.0 million
or $0.07 per share (primary) for the same period of fiscal 1995.
Liquidity and Capital Resources
Cash, including temporary investments, aggregated $13.5 million at the
end of the fiscal 1996 third quarter compared to $50.6 million at fiscal
1995 year-end. The Company's current ratio at the end of the fiscal 1996
third quarter was 3.0 to 1 compared to 4.1 to 1 at fiscal 1995 year-end and
3.6 to 1 at the end of the fiscal 1995 third quarter. Total debt as a
percentage of total capitalization was 44.9% at the end of the fiscal 1996
third quarter, compared to 41.4% at fiscal 1995 year-end and 43.6% at the
end of the fiscal 1995 third quarter. The decrease in cash, including
temporary investments, and the change in ratios resulted primarily from
inventory additions in preparation for the upcoming Christmas selling
season coupled with the non-recurring cash investment losses recognized
during the preceding quarters of fiscal 1996 as discussed in Note 2. At
December 30, 1995, cash, including temporary investments, aggregated
approximately $42 million and is invested in A1P1 or AAA-rated instruments.
Net cash used in operating activities for the nine-month period of
fiscal 1996 was $10.1 million as compared to cash provided by operations of
$24.2 million in the same period the prior year. The $34.3 million
increase in cash used between periods was primarily a result of the timing
of inventory purchases. The Company ended fiscal 1994 with a relatively
high inventory of $219.6 million. By the end of November 1994, in spite of
seasonal purchases, the inventory had declined, generating cash of $7.5
million. From February of 1995 to November of 1995, inventories increased
from $201.0 million to $234.9 million as a result of seasonal purchases,
using cash of $33.9 million. The inventory build-up was in preparation for
expected Christmas sales; the strong Christmas selling season reduced
inventories by approximately $21 million during December 1995.
Net cash used in investing activities aggregated $39.8 million during
the nine-month period of fiscal 1996 compared to $25.9 million in the
corresponding period the prior year. Capital expenditures aggregated $16.4
million, an increase of $2.4 million over the corresponding prior year
period, partially as a result of increased store remodels. Advances to The
Pier Retail Group Limited were $7.8 million, an increase of $6.2 million
over the corresponding prior fiscal period, due to store expansion in
England and higher working capital requirements. The cash portion of the
investment losses as discussed above totalled $15.9 million.
Net cash provided by financing activities amounted to $12.8 million
during the nine-month period of fiscal 1996 compared to $8.1 million in the
corresponding period the prior year as net short-term borrowings increased
by $18.1 million and long-term debt retirements increased by $12.3 million.
At the end of the fiscal 1996 third quarter, $31.1 million was
outstanding in the form of short-term borrowings under lines of credit, and
an additional $59.5 million was committed under letters of credit. In
December 1995, the Company repaid these borrowings, allowed the related
short-term bank facilities to expire and replaced them in part with the $65
million competitive advance and revolving credit facility. As a result of
recognizing the $16.5 million non-recurring investment losses during fiscal
1996, the Company requested and received agreement of its lenders to
exclude the losses from calculation of certain restrictive covenants during
the current year to date. Management believes that the Company is in
compliance with the provisions of all loan agreements and lease guarantees.
Working capital requirements are provided by a newly obtained
(December 1995) three-year $65 million competitive advance and revolving
credit facility as well as other short-term (12-month) bank facilities
aggregating $120 million. These agreements contain various restrictive
covenants requiring, among other things, the maintenance of certain
financial ratios (including debt to net worth, debt to net cash flow, and
current ratio), minimum tangible net worth, the limitation of maximum
levels of capital expenditures, and a limitation on certain investments.
In December 1995, the Company purchased the 90% ownership interest in a
limited partnership previously held by unrelated third parties and in which
the Company held a 10% ownership interest. The partnership leases 33 Pier
1 stores to the Company. The aggregate purchase price paid by the Company
for the 90% ownership interest was approximately $40 million and was funded
through the competitive advance and revolving credit facility. The $40
million advanced under that credit facility is classified as long-term debt
due to its three-year term. The terms of the competitive advance and
revolving credit facility currently limit the amount of additional
borrowings under the facility and additional borrowings under the other
short-term facilities to an aggregate amount which at December 30, 1995,
approximates $78 million. In the opinion of management, the short-term
bank facilities will be timely renewed under substantially the same amount,
terms and conditions presently existing.
It is expected that these facilities and the Company's current cash
position will be sufficient to provide adequate liquidity to fund the
Company's expected operating needs, planned capital expenditures and
scheduled debt requirements for the remainder of fiscal 1996 and fiscal
1997.
In addition to its bank facilities, the Company had approximately $73
million at November 25, 1995 in unencumbered credit card receivables.
The Company's minimum operating lease commitments remaining for fiscal
1996 are $25 million, and the present value of total existing minimum
operating lease commitments is $364 million. The remaining portion of the
Company's new store development plan for fiscal 1996, which provided for
the opening of 50 new stores during the first nine months of fiscal 1996,
will be principally funded through operating leases. Final cash
requirements to fund the store-closing program instituted in fiscal 1994
are expected to be lease termination costs of approximately $5.9 million
for the remainder of fiscal 1996 and will be funded through working capital
and operations. During the first nine months of fiscal 1996, approximately
$5.9 million was expended and charged against the store closing reserve for
lease termination costs.
Cash requirements to fund the Company's previously established reserve
relating to the defaults by Sunbelt on subleases of stores leased by the
Company are being funded through working capital and operations and will
not have a significant impact on the Company's liquidity. As of the end of
the 1996 fiscal third quarter, approximately $0.2 million had been expended
and charged against the reserve.
The Company previously announced that, depending upon market
conditions, it may utilize a portion of its surplus cash to purchase up to
$25 million of the Company's 6 7/8% convertible notes in order to reduce
debt service costs and future earnings per share dilution. During the nine
months of fiscal 1996, the Company purchased $12.3 million of these notes,
leaving $62.8 million of the Company's convertible notes outstanding at the
end of the 1996 third fiscal quarter. In addition, in October 1995, the
Company announced that its Board of Directors authorized the purchase of up
to three million shares of the Company's common stock in open market or
private transactions from time to time depending on prevailing market
conditions and restrictive loan covenants permitting. An insignificant
number of shares has been repurchased.
During the nine months of fiscal 1996, the Company paid cash dividends
aggregating $.09 per share, distributed a 5% stock dividend and declared a
cash dividend of $.04 per share payable on February 26, 1996 to
shareholders of record on February 12, 1996. The Company currently expects
to continue paying modest cash dividends in the next fiscal year and
intends to retain most of its future earnings for expansion of the
Company's business.
PART II
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Item 1. Legal Proceedings.
------------------
In December 1995, the Company announced non-recurring losses of
approximately $19.3 million resulting from inappropriate trading activities
in a discretionary account by a financial consultant retained to manage the
Company's excess cash and short-term investments. Upon being informed of
the losses, the Company's Board of Directors appointed a Special Committee
of the Company's outside Directors, which retained legal counsel and
independent accountants, to investigate the matter and report its findings
to the Board. The Company and the Special Committee of the Board of
Directors are actively investigating the circumstances of the losses and
the Company intends to pursue claims against various potential sources to
seek recovery of all or a portion of the losses.
On December 27, 1995, a derivative suit, entitled Harry Lewis v. Clark
A. Johnson et al., was filed by a shareholder on behalf of the Company in
the Delaware Chancery Court against each member of the Company's Board of
Directors. The complaint alleges that the Directors violated their
fiduciary duties to the Company and its shareholders by not adequately
supervising the officers, employees and agents of the Company who were
responsible for the trading activities that resulted in the $19.3 million
in losses. The suit seeks an accounting to the Company for the damages it
sustained.
On January 3, 1996, a second derivative suit, entitled John P.
McCarthy Profit Sharing Plan, et al. v. Clark A. Johnson et al., was filed
by a shareholder on behalf of the Company in the District Court of Tarrant
County, Texas against each member of the Board of Directors, two executive
officers of the Company and an outside financial consultant of the Company.
The complaint alleges that the Directors and executives of the Company
violated their duties to the Company and its shareholders by gross
mismanagement and waste of the Company's assets exceeding $34 million and
that the defendants engaged in conspiracy and fraud by concealing and
misrepresenting facts to the Company and its shareholders. The suit seeks
an award in the amount of all damages sustained by the Company.
Item 6. Exhibits and Reports on Form 8-K.
--------------------------------
(a) Exhibits See Exhibit Index.
(b) Reports on Form 8-K None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
PIER 1 IMPORTS, INC. (Registrant)
Date: January 16, 1996 By: /s/ Clark A. Johnson
---------------- ----------------------------------------
Clark A. Johnson, Chairman of the Board
and Chief Executive Officer
(Principal Executive Officer)
Date: January 16, 1996 /s/ Susan E. Barley
---------------- ----------------------------------------
Susan E. Barley, Vice President and
Controller
(Principal Accounting Officer)
EXHIBIT INDEX
Exhibit
No. Description
- ------- -----------
10.1 Revolving Credit Agreement, dated December 15, 1995, among the
Company, certain of its subsidiaries, First Interstate Bank of
Texas, N.A., Bank One, Texas, N.A., NationsBank of Texas,
N.A., and Credit Lyonnais New York Branch.
10.12.1 Fourth Amendment to Lease Guarantee dated as of November 1,
1995 between the Company, Pier 1 Licensing, Inc., Pier 1
Assets, Inc., and Pier Set, Inc.
27 Financial Data Schedule for Nine-month Period Ended November
25, 1995