UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended February 28, 1998.
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 No. 1-7832
PIER 1 IMPORTS, INC.
(Exact name of Company 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) (Zip Code)
Company's telephone number, including area code: (817) 252-8000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
- -------------------------------------- ---------------------
Common Stock, $1 par value New York Stock Exchange
5 3/4% Convertible Sub. Notes Due 2003 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Company (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
Company was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Sec. 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of the Company'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. [ ]
As of May 6, 1998, there were 67,437,880 shares of Common Stock, $1.00
par value, outstanding, and the aggregate market value of the Common Stock of
the Company held by non-affiliates was approximately $1,717 million.
DOCUMENTS INCORPORATED BY REFERENCE
Location in Form 10-K Incorporated Document
Part III Proxy Statement for 1998 Annual Meeting
PART I
Item 1. Business.
(a) General Development of Business.
From fiscal 1993 through fiscal 1998, the Company (references to the
"Company" or "Pier 1" shall include Pier 1 Imports, Inc. and its consolidated
subsidiaries throughout this document) expanded its specialty retail
operations from 605 North American retail stores to 718 stores. In fiscal
1998, the Company continued to execute its expansion plan by opening 54 new
North American Pier 1 stores while closing 23 stores. Throughout the fiscal
year, the Company continued its focus on cost efficiencies and expense
controls. Subject to changes in the retail environment, availability of
suitable store sites and adequate financing, the Company plans to open
approximately 60 new North American Pier 1 stores in fiscal 1999 and plans to
close approximately 25 stores, depending upon lease renewal negotiations,
relocation space availability and general economic conditions.
Set forth below is a list by city of Pier 1 stores opened in North
America in fiscal 1998:
Allentown, PA Lufkin, TX
Amarillo, TX Manchester, NH
Anaheim, CA Medford, OR
Atlanta, GA Memphis, TN
Aurora, IL Mesa, AZ
Bend, OR Missoula, MT
Cape Girardeau, MO Montclair, CA
Corning-Elmira, NY Myrtle Beach, SC
Covington, LA New Market, OT
Cranberry Township, PA Orem, UT
Denver, CO Orlando, FL
Des Moines, IA Pembroke Pines, FL
Detroit, MI Pueblo, CO
Florence, AL Reading, PA
Ft. Collins, CO San Antonio, TX
Ft. Lauderdale, FL San Antonio/Hill Country, TX
Great Falls, MT San Francisco, CA
Green Bay, WI Sarasota, FL
Hot Springs, AR Seattle, WA
Lake Charles, LA Southern Pines, NC
Lakeland, FL Spokane, WA
Larchmont, NY State College, PA
Layton, UT Summit County, CO
Lincoln, NE Tampa Bay, FL
London, OT Texarkana, TX
Long Beach, CA Waco, TX
Longmont, CO Washington, DC
During fiscal 1998, the Company continued its program to remodel and
remerchandise all store interiors to improve the visual merchandising of its
products. This program incorporates store improvements such as better
lighting, wider aisles, a more open view for ease of shopping and greater use
of "lifestyle merchandising" by grouping products in home-use settings. This
remerchandising effort is accompanied by a remodeling program to refurbish
older stores. In fiscal 1998, 51 stores were remodeled and remerchandised
while 144 were remerchandised. This program, which will upgrade 566 stores
by fiscal 2000, is approximately 50% complete.
Presently, Pier 1 maintains regional distribution center facilities in
or near Baltimore, Maryland; Columbus, Ohio; Chicago, Illinois; Fort Worth,
Texas; Los Angeles, California; and Savannah, Georgia.
In May 1997, pursuant to the Company's option, the preference stock of
The Pier Retail Group Limited ("The Pier") acquired by the Company in 1993
was converted into a 90% controlling interest of The Pier. The Pier operates
14 retail stores that offer decorative home furnishings and related items in
a store setting similar to Pier 1 stores. At fiscal 1998 year-end, The Pier
operated 12 stores in England, one store in Wales and one in Scotland. At
the end of fiscal 1998, the Company's net investment in The Pier was $8.7
million. Fiscal 1998 was the first year of profitable results for The Pier.
During fiscal 1994, the Company initiated an arrangement to supply Sears
de Mexico S.A. ("Sears Mexico") with Pier 1 merchandise to be sold in a
"store within a store" format in certain Sears Mexico stores throughout
Mexico. In fiscal 1998, the Company amended its agreement with Sears Mexico
to an arrangement that will substantially insulate the Company from currency
fluctuations which have reduced its profitability in the past. As of
February 28, 1998, eight Sears Mexico stores offer Pier 1 merchandise.
The Company entered into a product distribution agreement with Sears
Roebuck de Puerto Rico, Inc. ("Sears Puerto Rico") in fiscal 1996 for Sears
Puerto Rico to market and sell Pier 1 merchandise in a "store within a store"
format in certain Sears Puerto Rico stores. Sears Puerto Rico operates 10
stores in Puerto Rico. During fiscal 1998, the number of Puerto Rico stores
which offered Pier 1 merchandise increased from four to seven. The Company
has no immediate plans for further expansion in Puerto Rico but would
consider future sites.
In fiscal 1996, a wholly owned subsidiary of the Company entered into a
franchise agreement with Akatsuki Printing Co., Ltd. (collectively
"Akatsuki") and Skylark Group to develop Pier 1 retail stores in Japan. The
agreement provides for the licensing of up to 100 total stores. In fiscal
1998, Akatsuki expanded its retail operations from five to 16 Pier 1 stores
in the Tokyo metropolitan area and surrounding cities. The Company and
Akatsuki have agreed to slow the expansion plan and Akatsuki may open up to
10 additional stores during fiscal 1999 depending upon its ability to obtain
financing.
In May 1997, the Company purchased a national bank and its assets in
Omaha, Nebraska. The newly named Pier 1 National Bank standardizes the
interest rates and fees charged on the Company's proprietary credit card and
exports the Nebraska interest rate to the 46 states where the Company
operates stores. As of February 28, 1998, the Company had 2.9 million
proprietary cardholders of which 562,000 were considered active (cardholders
with account activity in the last month of fiscal 1998). The Company's
proprietary credit card sales accounted for 25.9% of total U.S. sales for
fiscal 1998.
In July 1995, the Company entered into a settlement agreement with
Sunbelt Nursery Group, Inc. concerning Sunbelt's default on 13 Sunbelt
nursery stores subleased from the Company. The settlement agreement required
the Company to record a pre-tax charge of $14.0 million in fiscal 1996 for
estimated losses resulting from terminating the subleases and disposing of
the properties. As of February 28, 1998, all 13 nursery store properties had
been sold at costs consistent with the Company's estimates used to record the
charge. The Company guarantees other Sunbelt store lease commitments,
through the year 2001, aggregating $2.1 million with a present value of
approximately $1.8 million at fiscal 1998 year-end. In March 1998, Sunbelt
initiated bankruptcy proceedings. The Company believes it has accrued
sufficient amounts to cover any deficiencies in Sunbelt's payments on these
store lease commitments.
At the end of fiscal 1998, the Company decided to abandon the test
concept for mall-based stores operating under the name "The Market of Pier
1." All of the test stores were closed as of April 1, 1998.
(b) Financial Information About Industry Segments.
The Company operates in one business segment consisting of the retail
sale of decorative home furnishings and related items.
Financial information with respect to the Company's business is found in
the Company's Consolidated Financial Statements which are set forth in Item 8
herein.
(c) Narrative Description of Business.
The specialty retail operations of Pier 1 consist of a chain of retail
stores operating under the names "Pier 1 Imports" and "The Pier," selling a
wide variety of furniture, decorative home furnishings, dining and kitchen
goods, accessories and other specialty items for the home.
On February 28, 1998, Pier 1 operated 692 stores in 47 states of the
United States and 26 stores in two Canadian provinces and supported 17
franchised stores in 13 states. Additionally, the Company, through certain
subsidiaries, operated 14 stores in the United Kingdom under the name "The
Pier." The Company supplies merchandise and licenses the Pier 1 name to
Sears Mexico and Sears Puerto Rico, which sell Pier 1 merchandise in a "store
within a store" format in eight Sears Mexico stores and in seven Sears Puerto
Rico stores. Sixteen franchised stores operate in Tokyo and surrounding
cities. The company-operated Pier 1 stores in the United States and Canada
average approximately 7,500 square feet in size of retail selling space, and
are generally freestanding units located near major shopping centers or
malls, predominately located in all major United States metropolitan areas
and many of the primary smaller markets. In fiscal 1998, net sales of the
Company totalled $1,075.4 million. Pier 1 stores have their highest sales
volumes during November and December, reflecting the Christmas selling
season.
The Company offers a diverse selection of products consisting of over
5,000 items imported from over 50 countries around the world. While the
broad categories of Pier 1's merchandise remain constant, individual items
within these product groupings change frequently in order to meet the demands
of customers. The principal categories of merchandise include the following:
FURNITURE - This product group consists of furniture and the related
furniture pads and pillows to be used on patios and in sun rooms, living,
dining, kitchen and bedroom areas, and constituted approximately 34.3%, 31.4%
and 32.7% of the total North American retail sales of Pier 1 in fiscal years
1998, 1997 and 1996, respectively. These goods are imported from a variety
of countries such as Italy, Malaysia, Chile, Mexico, China, the Philippines
and Indonesia, as well as obtained from domestic sources. The furniture is
made of metal or handcrafted natural materials, including rattan, pine,
beech, rubberwood and selected hardwoods with either natural, stained or
painted finishes. Upholstered furniture is also included in this group.
DECORATIVE ACCESSORIES - This product group constituted the broadest
category of merchandise in Pier 1's sales mix and contributed approximately
23.4%, 23.7% and 23.6% to Pier 1's total North American retail sales in
fiscal years 1998, 1997 and 1996, respectively. These items are imported
from approximately 40 countries and include brass, marble and wood items, as
well as lamps, vases, dried and silk flowers, baskets, wall decorations and
numerous other decorative items, practically all of which are handcrafted
from natural materials.
HOUSEWARES - This product group is imported mainly from the Far East and
Europe and includes ceramics, dinnerware and other functional and decorative
items. These goods accounted for approximately 13.5%, 13.6% and 13.8% of the
total North American retail sales of Pier 1 in fiscal years 1998, 1997 and
1996, respectively.
BED & BATH - This product group is imported mainly from India, England,
Italy and China, as well as obtained from domestic sources and includes bath
and fragrance products, candles and bedding. These goods accounted for
approximately 18.3%, 15.7% and 12.4% of the total North American retail sales
of Pier 1 in fiscal years 1998, 1997 and 1996, respectively.
SEASONAL - This product group consists of merchandise to celebrate
holiday and spring/summer entertaining and is imported mainly from Europe,
Canada, China and India. These items accounted for approximately 10.5%,
10.2% and 9.9% of the total North American retail sales of Pier 1 in fiscal
years 1998, 1997 and 1996, respectively.
APPAREL - At the end of fiscal 1997, this product group was completely
discontinued. In previous years, this merchandise was imported from India,
Greece, Thailand and Indonesia and accounted for approximately 5.4% and 7.6%
of the total North American retail sales of Pier 1 in fiscal years 1997 and
1996, respectively.
Merchandise offered for sale in Pier 1 stores largely consists of items
that require a significant degree of handcraftsmanship. Most items are
imported directly by Pier 1 from foreign suppliers. Pier 1 is not dependent
on any particular supplier and has enjoyed long-standing relationships with
many vendors. During fiscal 1998, Pier 1 sold merchandise imported from over
50 different countries with approximately 24.8% of its sales from merchandise
produced in China, 11.9% from merchandise produced in India and 18.3% from
merchandise produced in Indonesia, Japan, Thailand, the Philippines and
Italy. The remaining 45.0% of sales was from merchandise produced in various
Asian, European, Central American, South American and African countries or
obtained from United States manufacturers. In selecting the source of a
product, Pier 1 considers quality, dependability of delivery and cost. For
the most part, the imported merchandise is handcrafted in cottage industries
and small factories.
The Company currently maintains six regional distribution centers
located in or near Baltimore, Maryland; Los Angeles, California; Fort Worth,
Texas; Chicago, Illinois; Savannah, Georgia; and Columbus, Ohio, and leases
additional space from time to time. Imported merchandise and a portion of
domestic purchases are delivered to the distribution centers, unpacked and
made available for shipment to the various stores in the centers' region.
Due to the time delays involved in procuring merchandise from foreign
suppliers, Pier 1 maintains a substantial inventory in order to be assured of
a sufficient supply of products to its customers.
Pier 1 primarily competes with small specialty sections of large
department stores, home furnishing stores, small specialty import stores and
discount stores. Management believes that its stores compete on the basis of
price, depth and breadth of merchandise assortment, merchandise visual
presentation and customer service. The Company believes its stores enjoy a
competitive edge over competing retailers due to greater name recognition,
established vendor relationships and the extent and variety of the
merchandise offered. While other stores change their items less frequently,
Pier 1 differentiates itself by offering an array of unique and frequently
changing products.
As a retailer of imported merchandise, the Company is subject to certain
risks that typically do not affect retailers of domestically produced
merchandise, including the need to order merchandise from four to twelve
months in advance of delivery and to pay for such merchandise at the time it
is loaded for transport to designated U.S. and international destinations.
Additionally, dock strikes, fluctuations in foreign currency exchange rates,
restrictions on the convertibility of the dollar and other currencies,
duties, taxes and other charges on imports, import quota systems and other
restrictions generally placed on foreign trade can affect the price, delivery
and availability of ordered merchandise. The inability to import products
from certain countries or the imposition of significant tariffs could have a
material adverse effect on the results of operations of the Company.
The 1988 Omnibus Trade and Competitiveness Act ("1988 Act") was signed
into law amending the Trade Act of 1974 (the "Act"). This legislation was
enacted partly in response to a perceived decline in U.S. global
competitiveness and the continuing presence of unfair trade practices that
limit U.S. exporters' access to foreign markets. Under the law, unfair trade
practices of countries around the world may be investigated by the office of
the U.S. Trade Representative, and such investigations may lead to sanctions
which could take the form of quotas or increased duties on imports into the
U.S.
Under the Act, the U.S. Trade Representative is required to take some
action within 30 days (subject to being postponed for 180 days) after the
conclusion of its investigation of countries alleged to have committed unfair
trade practices. Upon a determination that a country has committed an unfair
trade practice, the U.S. Trade Representative may designate the subject
country a priority foreign country whose trade practices, if corrected, would
provide the greater potential for expansion of U.S. exports. On previous
occasions, the U.S. Trade Representative has identified certain countries
which supply merchandise to the Company as a priority foreign country under
the Act, which designations were rescinded after agreements were reached
regarding the basis for the designations.
The United States may employ other measures besides the Act to implement
its international trade policies and objectives, such as the withdrawal of
most favored nation ("MFN") status to countries around the world, which would
cause import duties to increase. President Clinton is expected to recommend
to Congress renewal of China's MFN status by June 3, 1998, and Congress can
block the renewal if both houses pass a resolution of disapproval by
September 3, 1998. China's MFN status has been renewed every year since it
was granted in 1980. If no action is taken, China's MFN status would be
renewed for one year. However, if China's MFN status is lost, the Company
would choose to source affected goods from other countries. Any type of
sanction on imports is likely to increase the Company's import costs or limit
the availability of products purchased from sanctioned countries. In such
event, the Company will seek similar products from other countries.
The United States and more than 100 other countries culminated seven
years of negotiations with an agreement which became effective January 1,
1995 to reduce, over time, tariff and non-tariff barriers to world trade in
goods and services and to establish a World Trade Organization to replace the
General Agreement on Tariffs and Trade. Any agreement which may reduce
tariff and non-tariff barriers in international trade is considered
beneficial to the Company's business in the United States and around the
world.
The Company owns three federally registered service marks under which
its company-operated and franchised stores do business. These registrations
are numbered 948,076 and 1,620,518 for the mark PIER 1 IMPORTS and 1,104,059
for the mark PIER 1. Also the Company has registered and has applications
pending for the registration of Pier 1 trademarks and service marks in the
United States and in numerous foreign countries.
On February 28, 1998, the Company employed a total of 12,571 associates
in North America: 5,285 were full-time employees and 7,286 were part-time
employees.
The Company maintains a wholly owned foreign subsidiary incorporated
under the laws of Hong Kong to manage certain merchandise procurement, export
and financial service functions for Pier 1. Also the Company maintains a
wholly owned foreign subsidiary incorporated under the laws of Bermuda which
owns the right to license and to franchise the Company's trademarks and
service marks outside the United States, Canada and Puerto Rico.
Item 2. Properties.
The Company's home office of 193,216 square feet of office space in Fort
Worth, Texas is leased by one of its subsidiaries.
The principal operating subsidiary of the Company leases certain
properties consisting principally of retail stores, warehouses and office
space. A majority of the Company's North American retail store operations
are conducted pursuant to leases which are classified as operating leases,
and at February 28, 1998, the present value of the Company's minimum future
operating lease commitments aggregated approximately $413 million.
The Company currently owns and leases distribution space of
approximately 2.75 million square feet. Additional temporary space
requirements can be met by leasing space on a short-term basis.
The following table shows the distribution by state of Pier 1's North
American stores as of February 28, 1998:
United States
- --------------
Alabama 9 Nebraska 4
Arizona 11 Nevada 3
Arkansas 5 New Hampshire 4
California 79 New Jersey 20
Colorado 19 New Mexico 3
Connecticut 13 New York 35
Delaware 2 North Carolina 15
Florida 52 North Dakota 3
Georgia 20 Ohio 31
Idaho 3 Oklahoma 6
Illinois 33 Oregon 8
Indiana 15 Pennsylvania 29
Iowa 6 Rhode Island 3
Kansas 6 South Carolina 8
Kentucky 6 South Dakota 2
Louisiana 11 Tennessee 14
Maryland 15 Texas 58
Massachusetts 18 Utah 6
Michigan 22 Virginia 24
Minnesota 17 Washington 19
Mississippi 4 West Virginia 1
Missouri 12 Wisconsin 13
Montana 4 Wyoming 1
Canada
- ------
Ontario 17
Quebec 9
Warehouse properties that are owned or leased by Pier 1 are as follows:
Owned/Leased
Location Approx. Sq. Ft. Facility
- ------------------- --------------- --------
Baltimore, Maryland 634,186 sq. ft. Leased
Columbus, Ohio 527,127 sq. ft. Leased
Chicago, Illinois 297,552 sq. ft. Owned
Fort Worth, Texas 454,868 sq. ft. Owned
Los Angeles, California 417,000 sq. ft. Leased
Savannah, Georgia 393,216 sq. ft. Owned
In support of its long range growth plan, the Company is expanding its
distribution facilities. The Company will be increasing the size of its
Chicago area distribution center by 68% to approximately 500,000 square feet.
This expansion is scheduled for completion in December 1998. In addition,
the Company is replacing the West Coast distribution center with a new,
leased, built-to-suit facility in Ontario, California. The new facility will
be 750,000 square feet, expandable to 1,000,000 square feet, with projected
occupancy in the second quarter of fiscal 1999.
The Company has agreements with unaffiliated parties to lease certain
stores and distribution center space. Certain of these unaffiliated parties
are committed to make available up to $23.6 million for development or
acquisition of properties leased by Pier 1. As of February 28, 1998, the
Company had utilized all of that availability. This facility terminates June
15, 1998, at which time the Company expects to complete alternative
financing.
Item 3. Legal Proceedings.
There are various claims, lawsuits, investigations and pending actions
against the Company and its subsidiaries incident to the operation of their
businesses. Liability, if any, associated with these matters is not
determinable at February 28, 1998. While a certain number of the lawsuits
involve substantial amounts, it is the opinion of management, after
consultation with counsel, that the ultimate resolutions of such litigation
will not have a material adverse effect on the Company's financial position,
results of operations or liquidity. The Company intends to vigorously defend
itself against the claims asserted against the Company in these lawsuits.
On January 3, 1996, a derivative suit, entitled John P. McCarthy Profit
Sharing Plan, et al. v. Clark A. Johnson, et al., was filed by a stockholder
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 the outside financial consultant of the Company. The complaint
alleged that the Directors and executives of the Company violated their
duties to the Company and its stockholders 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 stockholders. The suit sought an award in the amount of all
damages sustained by the Company. On February 12, 1996, the Company filed a
related cross-claim suit against S. Jay Goldinger, the financial consultant,
and his firm, Capital Insight, and a third-party claim against a commodity
brokerage firm, Refco, Inc., asserting conspiracy and fraud and seeking
damages sustained by the Company from the trading activities managed by
Goldinger. The Company's former chief financial officer filed cross-claims
against the Company seeking unpaid and post-employment benefits and damages
for alleged libel and slander by the Company. The Company filed cross-claims
against its former chief financial officer based on his actions related to
the investments which led to the trading losses.
In July 1997, the court approved a settlement among the Company, its
Directors and officers and the commodities brokerage firm that executed the
trades for S. Jay Goldinger, pursuant to which the commodities brokerage firm
paid the Company $7.5 million. The commodities brokerage firm and the
Company and its Directors and current officers who were parties to the suit
provided mutual releases, and such parties' claims against each other were
dismissed. Additional settlements from other parties were approved in the
fourth quarter of fiscal 1998 which provided aggregate payments to the
Company of $3.5 million and provided mutual releases to all parties. Total
recoveries of the previously reported trading losses aggregated $11.0
million, of which the Company has considered $1.9 million as a reimbursement
of legal fees associated with the recovery of these losses. All litigation
related to this matter has been settled.
Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted to a vote of the Company's security
holders during the fourth quarter of the Company's 1998 fiscal year.
Executive Officers of the Company
CLARK A. JOHNSON, age 67, has served as Chairman and Chief Executive
Officer of the Company, and a member of the Executive Committee since March
1988. He has been a Director of the Company since March 1983. From May 1985
to March 1988, Mr. Johnson was President and Chief Executive Officer of the
Company.
MARVIN J. GIROUARD, age 58, has served as President and Chief Operating
Officer of the Company and as a Director since August 1988. From May 1985
until August 1988, he served as Senior Vice President - Merchandising of Pier
1 Imports (U.S.), Inc.
STEPHEN F. MANGUM, age 44, has served as Senior Vice President, Chief
Financial Officer and Treasurer of the Company since August 1996. From
January 1994 to July 1996, he served as Senior Vice President and Chief
Financial Officer of Bloomingdale's, Inc., a subsidiary of Federated
Department Stores, Inc., and served as Vice President of Profit Development
from March 1993 to December 1993. From August 1987 to March 1993, he served
as Vice President of Finance/Control of the Hecht's division of The May
Department Stores Company, Inc.
JAY R. JACOBS, age 43, has served as Senior Vice President of
Merchandising of the Company since May 1995, served as Vice President of
Divisional Merchandising of Pier 1 Imports (U.S.), Inc. from May 1993 to May
1995 and served as Director of Divisional Merchandising of the Company from
July 1991 to May 1995.
J. RODNEY LAWRENCE, age 52, has served as Senior Vice President of Legal
Affairs and Secretary of the Company and Pier 1 Imports (U.S.), Inc. since
June 1992, and served as Vice President of Legal Affairs and Secretary of the
Company from November 1985 to June 1992.
PERRY R. MCNEELY, age 50, has served as Senior Vice President of
Logistics of the Company and Pier 1 Imports (U.S.), Inc. since June 1993.
From January 1989 to June 1993, he was Vice President of Operations for
Lechters, Inc.
PHIL E. SCHNEIDER, age 46, has served as Senior Vice President of
Marketing of the Company and Pier 1 Imports (U.S.), Inc. since May 1993 and
served as Vice President of Advertising of Pier 1 Imports (U.S.), Inc. from
January 1988 to May 1993.
CHARLES H. TURNER, age 41, has served as Senior Vice President of Stores
of the Company and Pier 1 Imports (U.S.), Inc. since August 1994 and served
as Controller and Principal Accounting Officer of the Company from January
1992 to August 1994.
E. MITCHELL WEATHERLY, age 50, has served as Senior Vice President of
Human Resources of the Company since June 1992 and served as Vice President
of Human Resources of the Company from June 1989 to June 1992 and of Pier 1
Imports (U.S.), Inc. from August 1985 to June 1992.
The officers of the Company are appointed by the Board of Directors,
hold office until their successors are elected and qualified and/or until
their earlier death, resignation or removal.
None of the above executive officers has any family relationship with
any other of such officers. None of such officers was selected pursuant to
any arrangement or understanding between him and any other person.
PART II
Item 5. Market for the Company's Common Equity and Related Stockholder
Matters.
The Company's common stock is traded on the New York Stock Exchange. As
of May 1998, there were approximately 33,000 stockholders of the Company's
common stock.
Market Price
--------------------- Cash Dividends
Fiscal 1998 High Low Per Share
- ----------- -------- -------- -------------
First Quarter(1) 14 59/64 11 5/64 $.025
Second Quarter(1) 19 3/4 14 37/64 .035
Third Quarter 22 3/8 16 1/2 .035
Fourth Quarter 27 15/16 19 1/4 .035
Fiscal 1997(1)
- -----------
First Quarter 10 1/2 8 $.025
Second Quarter 11 21/64 9 37/64 .025
Third Quarter 11 8 21/64 .025
Fourth Quarter 12 27/64 9 43/64 .025
- ----------------
(1) Market prices and cash dividends have been adjusted to reflect the effect
of the three for two stock split, effected in the form of a stock dividend,
distributed July 30, 1997.
In April 1998, the Board of Directors approved the purchase of up to
three million shares of the Company's outstanding common stock. These
purchases of common stock will be made from open market or private
transactions from time to time depending on prevailing market conditions.
Certain of the Company's existing loan and lease guarantee agreements
require the Company to maintain certain financial ratios and limit certain
investments and distributions to stockholders, including cash dividends,
loans to stockholders and purchases of treasury stock. Generally the Company
may make "restricted payments," as defined in the loan agreements, which
include the payment of cash dividends, up to an aggregate maximum of
approximately $30.0 million as of February 28, 1998. The Company's Board of
Directors currently expects to continue to pay cash dividends in fiscal 1999
but intends to retain most of its future earnings for the expansion of the
Company's business. The Company's dividend policy will depend upon the
earnings, financial condition and capital needs of the Company and other
factors deemed relevant by the Company's Board of Directors.
Item 6. Selected Financial Data.
Pier 1 Imports, Inc.
FINANCIAL SUMMARY
($ in millions except per share amounts)
4-Year
Compound
Annual Year Ended
Growth ------------------------------------
Rate 1998 1997 1996 1995 1994
-------- -------- ----- ----- ----- -----
Summary of operations:
Net sales 11.9% $1,075.4 947.1 810.7 712.0 685.4
Gross profit 15.5% $ 461.5 384.5 325.5 277.6 259.6
Selling, general and
administrative expenses 12.8% $ 315.8 274.5 235.6 206.0 195.4
Depreciation and
amortization 10.9% $ 23.9 19.8 17.2 16.0 15.8
Store-closing provision $ - - - - 21.3
Operating income 45.6% $ 121.7 90.2 72.7 55.6 27.1
Nonoperating (income) and
expense, net(1) ($ 2.3) 9.9 44.3 22.3 18.8
Income before income taxes
and extraordinary charges 96.0% $ 124.0 80.3 28.4 33.2 8.4
Income before extraordinary
charges 90.7% $ 78.0 48.2 10.0 22.1 5.9
Extraordinary charges, net
of income tax benefit(2) $ - 4.1 - - -
Net income for common
stockholders 90.7% $ 78.0 44.1 10.0 22.1 5.9
Per common share data:(3)(4)
Basic earnings for common
stockholders 84.6% $ 1.16 .68 .17 .37 .10
Diluted earnings before
extraordinary charges for
common stockholders 81.3% $ 1.08 .71 .17 .37 .10
Diluted earnings for
common stockholders 81.3% $ 1.08 .65 .17 .37 .10
Cash dividends declared 21.3% $ .13 .10 .09 .07 .06
Stockholders' equity 14.2% $ 5.83 5.01 3.86 3.77 3.43
Other financial data:
Working capital 5.1% $ 279.5 215.3 246.8 265.0 229.0
Current ratio 3.3 3.0 3.5 4.1 3.5
Total assets 9.0% $ 654.7 570.3 531.1 485.9 463.3
Long-term debt (5.7%) $ 114.9 114.5 180.1 154.4 145.2
Stockholders' equity 18.2% $ 392.7 323.0 227.9 222.4 201.1
Weighted average shares
outstanding(millions)(3)(4) 67.4 64.5 59.0 59.1 58.6
Effective tax rate(5) 37.1% 40.0 64.7 33.6 29.0
Return on average stock-
holders' equity 21.8% 16.0 4.5 10.4 3.0
Return on average total assets 12.7% 8.0 2.0 4.6 1.3
Pre-tax return on sales(6) 11.5% 8.5 3.5 4.7 1.2
- ---------------------
(1) Nonoperating (income) and expense, net, is comprised of interest expense
and interest and investment income in each fiscal year presented, and in
addition, includes net trading losses, gains or recoveries in fiscal years
1998, 1996, 1995 and 1994, the provision for Sunbelt Nursery Group, Inc.
defaults in fiscal year 1996 and the write-down of General Host Corporation
securities in fiscal years 1995 and 1994.
(2) The Company recorded after-tax extraordinary charges of $4.1 million
during the third quarter of fiscal year 1997 from the early retirement of
debt. See: Note 5 of the Notes to Consolidated Financial Statements.
(3) Reflects the effect of the adoption of Statement of Financial Accounting
Standards No. 128, "Earnings per Share."
(4) Reflects the effect of the three for two stock split, effected in the
form of a stock dividend, distributed July 30, 1997 and the 5% stock dividend
distributed May 8, 1995.
(5) No income tax expense has been provided on the net trading loss
recoveries, resulting in a lower effective tax rate in fiscal 1998, as the
Company had not recorded any income tax benefit on the fiscal year 1996 and
1995 net trading losses, which resulted in higher effective tax rates in
those years.
(6) Calculated before fiscal year 1997 extraordinary charges, net of income
tax benefit.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Pier 1 Imports, Inc. (the "Company") is North America's largest
specialty retailer of imported decorative home furnishings, gifts and related
items, with over 760 stores in 47 states, Puerto Rico, Canada, the United
Kingdom, Japan and Mexico as of fiscal 1998 year-end. The Company directly
imports merchandise from over 50 countries around the world and designs
proprietary assortments that become exclusive Pier 1 Imports offerings. The
Company reported record sales of $1.075 billion for fiscal 1998 and net
income of $78.0 million, or $1.08 per diluted share, after recording a
special recovery of trading losses of $9.1 million, or $.12 per diluted
share. Net income before the special recovery was $68.9 million, or $.96 per
diluted share. On July 30, 1997, the Company distributed a three for two
stock split, effected in the form of a stock dividend, to stockholders of
record on July 16, 1997. All prior year earnings per share amounts have been
adjusted to reflect the impact of the stock split.
FISCAL YEARS ENDED FEBRUARY 28, 1998 AND MARCH 1, 1997
During fiscal 1998, the Company recorded net sales of $1,075.4 million,
an increase of $128.3 million, or 13.5%, over net sales of $947.1 million for
the prior fiscal year. This growth was primarily fueled by the improvement
in same-store sales, which increased 15.6% compared to fiscal 1997, after
excluding apparel sales for both fiscal years. Increases in same-store sales
are primarily a result of the continued success of the national television
advertising campaign coupled with the store remodel and remerchandising
programs, which have improved the layout and design of approximately 249 new
and existing stores during fiscal 1998. Additionally, a new company-wide
customer service program was initiated during the latter half of fiscal 1998
to enhance previously established customer service programs. The Company's
remodel and remerchandising strategy has focused not only on improving floor
plan and fixture design, but also on improving the merchandise mix,
especially in the areas of furniture, decorative accessories and bed and
bath. As a result of the improved merchandise mix, hard goods sales
increased 18.4% in fiscal 1998 compared to fiscal 1997. At the end of fiscal
1997, the Company discontinued its apparel lines in all stores; apparel
represented 5.0% of total merchandise sales in fiscal 1997. The Company
opened 54 new North American stores and closed 23 stores during fiscal 1998,
bringing the North American store count to 718 at the end of the 1998 fiscal
year compared to 687 at the end of the 1997 fiscal year. Stores worldwide,
including North America, Puerto Rico, the United Kingdom, Mexico and Japan
aggregated 763 at the end of the 1998 fiscal year.
Sales on the Company's proprietary credit card were $257.5 million, or
25.9% of total U.S. store sales, during the 1998 fiscal year, an increase of
$31.3 million, or 13.8% over proprietary credit card sales of $226.2 million
in the prior fiscal year. Proprietary credit card customers spent an average
of $129 per transaction in fiscal 1998 compared to $125 per transaction in
fiscal 1997, while the number of active cardholder accounts grew from
approximately 396,000 at the end of fiscal 1997 to 562,000 at the end of
fiscal 1998, an increase of 41.9%. The Company continues to encourage sales
on the proprietary credit card through targeted marketing promotions.
Gross profit, after related buying and store occupancy costs, expressed
as a percentage of sales, increased 2.3% to 42.9% in fiscal 1998 from 40.6%
in fiscal 1997. Merchandise margins improved to 54.9% in fiscal 1998 from
53.8% in fiscal 1997. The margin growth was principally the result of a
decrease in clearance and promotional markdowns on soft goods merchandise
during fiscal 1998 compared to fiscal 1997 due to the Company's discontinuing
sales of soft goods. In addition, merchandise margins on hard goods improved
over the prior fiscal year, primarily as a result of favorable freight rates
and merchandise product mix. Partially offsetting this increase in
merchandise margins is the approximate $2.2 million in duty refunds paid to
the Company during fiscal 1997 as a result of retroactive legislation passed
in August 1996, compared to the approximate $0.5 million in duty refunds
recorded during fiscal 1998. Store occupancy costs, as a percentage of
sales, decreased to 12.0% during fiscal 1998 from 13.2% in fiscal 1997. This
improvement was primarily due to leveraging relatively fixed rental rates on
store leases on a greater sales base, coupled with the Company's purchase in
the fourth quarter of fiscal 1997 of 37 stores previously leased to the
Company, thus eliminating base rent for those stores.
Selling, general and administrative expenses, including marketing,
aggregated 29.4% of sales in fiscal 1998 compared to 29.0% of sales in fiscal
1997. In total dollars, selling, general and administrative expenses
increased $41.3 million in fiscal 1998 over fiscal 1997, with $26.7 million
of the increase attributable to expenses that normally grow proportionately
with sales and net new stores, such as store salaries and bonuses, store
equipment rental, supplies and marketing expenses. These variable expenses
increased 0.2% as a percentage of sales for fiscal 1998 compared to fiscal
1997, primarily due to additional store salaries incurred to assist in store
remodels and increased expenditures to enhance store systems and data
communications. Administrative salaries and bonuses, which remained
relatively flat as a percentage of sales, increased $6.2 million for fiscal
1998. Travel and relocation expenses increased $1.9 million and net
proprietary credit card costs increased $1.2 million. All other selling,
general and administrative expenses increased a total of $5.3 million.
In fiscal 1998, operating income improved to $121.7 million, or 11.3% of
sales, from $90.2 million, or 9.5% of sales, in the prior year.
Interest and investment income decreased $0.8 million in fiscal 1998
compared to fiscal 1997, primarily due to $1.6 million in investment income
recognized on an investment in a limited partnership during the first quarter
of fiscal 1997, which was liquidated in fiscal 1997. Excluding the income
from the limited partnership investment, the Company received higher interest
income in fiscal 1998 over fiscal 1997 due to higher cash balances and short-
term investments.
Interest expense decreased $3.9 million during fiscal 1998 compared to
fiscal 1997. The decrease was primarily a result of the conversion of the
6 7/8% convertible subordinated notes in the second quarter of fiscal 1997,
the exchange of the 8 1/2% exchangeable debentures and the retirement of the
11 1/2% subordinated debentures due 2003 and the 11% senior notes due 2001 in
the third quarter of fiscal 1997 and the repayment of the $40 million
outstanding under the Company's bank revolving credit facility in the third
and fourth quarters of fiscal 1997. These decreases were partially offset by
interest expense on the 5 3/4% convertible subordinated notes due 2003 issued
in the third quarter of fiscal 1997.
In late December 1995, the Company was made aware of losses aggregating
$19.3 million resulting from trading activities in a discretionary account.
During fiscal 1998, the Company recovered $11.0 million of the previously
reported trading loss. Of this partial recovery, the Company considered
$1.9 million as a reimbursement of legal fees, resulting in a net recovery of
trading losses for fiscal 1998 of $9.1 million. The Company did not record
any income tax benefit on the previously reported net trading losses and,
accordingly, no tax expense has been provided on the net trading recoveries.
See: Note 12 of the Notes to Consolidated Financial Statements.
The Company's effective income tax rate for fiscal 1998, exclusive of
the aforementioned net trading loss recovery, is 40%, unchanged from the 40%
recorded for fiscal 1997. The effective rate for fiscal 1999 is expected to
decline slightly.
During fiscal 1997, the Company utilized the net proceeds from a public
offering of the 5 3/4% convertible subordinated notes due 2003 to retire
$17.5 million of 11 1/2% subordinated debentures due 2003 and $25 million of
11% senior notes due 2001. In addition, the Company induced the exchange of
its $12.5 million of 8 1/2% exchangeable debentures. The Company recorded
after-tax extraordinary charges of $4.1 million during fiscal 1997 for costs
related to the early retirement of debt. The pre-tax extraordinary charges
were $6.9 million.
Fiscal 1998 net income aggregated $78.0 million, or $1.08 per share on a
diluted basis, compared to fiscal 1997 net income of $44.1 million, or $.65
per share on a diluted basis. Fiscal 1998 net income before the net trading
loss recovery aggregated $68.9 million, or $.96 per share on a diluted basis,
compared to net income before extraordinary charges and related income tax
benefit in fiscal 1997 of $48.2 million, or $.71 per share on a diluted
basis.
FISCAL YEARS ENDED MARCH 1, 1997 AND MARCH 2, 1996
During the 52-week period of fiscal 1997, the Company's net sales were
$947.1 million, an increase of $136.4 million, or 16.8%, over net sales of
$810.7 million reported in the 53-week period of fiscal 1996. Same-store
sales in fiscal 1997 increased 12.9% over the comparable 52-week period of
fiscal 1996. The continued growth in sales was primarily due to increased
customer traffic in the stores resulting from the national television
advertising campaign which commenced in the second quarter of fiscal 1996,
the continued focus on company-wide customer service programs and the
Company's store remodel and remerchandising programs which improved the
layout and design of approximately 144 new and existing stores during fiscal
1997. The Company's remerchandising strategy focused on upgrading the store
chain through a new floor plan and fixture design. The Company opened 50 and
closed 25 North American stores during fiscal 1997. Beginning in fiscal
1997, the Company consolidated the operations of The Pier Retail Group
Limited ("The Pier"), a 15-store retail chain in the United Kingdom in which
the Company has an investment in preference stock. As a result of the
consolidation, the Company recorded $20.3 million in The Pier's net sales
during fiscal 1997. Hard goods sales, such as furniture and decorative
accessories, increased 16.2% in fiscal 1997 compared to fiscal 1996, while
soft goods sales declined 19.9% in fiscal 1997 compared to fiscal 1996.
During fiscal 1997, the Company de-emphasized apparel in stores and at the
end of fiscal 1997, the Company had completely discontinued soft goods in all
Pier 1 Imports stores. Hard goods and soft goods sales contributed 95% and
5%, respectively, of total sales in fiscal 1997.
Sales on the Company's proprietary credit card aggregated $226.2
million, or 25.5% of total U.S. store sales, for the 52-week period in fiscal
1997, an increase of 20.2% over proprietary credit card sales of $188.3
million, or 24.1% of total U.S. store sales, for the 53-week period in fiscal
1996. Proprietary credit card customers spent an average of $125 per
transaction in fiscal 1997 compared to $123 per transaction in fiscal 1996,
while the number of active cardholder accounts grew 10.9% over fiscal 1996.
Sales on the Company's proprietary credit card were encouraged through
targeted marketing promotions.
Gross profit, after related buying and store occupancy costs, expressed
as a percentage of sales, increased 0.4% to 40.6% in fiscal 1997 from 40.2%
in fiscal 1996. Merchandise margins decreased slightly in fiscal 1997 to
53.8% compared to 54.1% in fiscal 1996, primarily due to clearance and
promotional markdowns on soft goods merchandise during fiscal 1997 as the
Company de-emphasized soft goods merchandise in the stores throughout the
fiscal 1997 year. The decrease in soft goods merchandise margins was
partially offset by an increase in hard goods merchandise margins for
decorative accessories, housewares and bed and bath, coupled with
approximately $2.2 million in duty refunds, including interest, paid to the
Company as a result of retroactive legislation passed in August 1996. The
Company continued to operate 13 Clearance Centers within North America to
move older merchandise and allow more room for fresh merchandise in the
stores throughout the year. Store occupancy costs, as a percentage of sales,
improved 0.8% to 13.2% in fiscal 1997 from 14.0% in fiscal 1996, primarily
due to the effect of higher sales leveraging relatively fixed store lease
costs. In addition, store lease costs were reduced as a result of the
Company's purchase of stores previously leased to the Company, thereby
eliminating base and percentage rents for those stores.
Selling, general and administrative expenses, including marketing, as a
percentage of sales, decreased 0.1% to 29.0% in fiscal 1997 from 29.1% in
fiscal 1996. In total dollars, selling, general and administrative expenses
increased $38.9 million in fiscal 1997 compared to fiscal 1996, with $24.3
million of the increase attributable to expenses that normally grow
proportionately with sales and net new stores, such as store salaries and
supplies, and profit sharing bonuses. Marketing expenses, which decreased
0.2% as a percentage of sales, increased $4.6 million in fiscal 1997 as the
Company continued to utilize primarily television advertising. Selling,
general and administrative expenses related to international operations and
ventures increased by $2.3 million. Travel and meeting expenses increased by
$2.2 million. All other selling, general and administrative expenses
increased by a total of $5.5 million.
Operating income increased $17.5 million to $90.2 million, or 9.5% of
sales, in fiscal 1997 from $72.7 million, or 9.0% of sales, in fiscal 1996.
Interest and investment income increased in fiscal 1997 compared to
fiscal 1996 primarily due to $1.6 million in investment income recognized on
the investment in Whiffletree Partners, L.P. ("Whiffletree") during fiscal
1997. Interest expense decreased $2.1 million during fiscal 1997 compared to
fiscal 1996. The decrease was due to the conversion of the 6 7/8%
convertible subordinated notes in the second quarter of fiscal 1997, the
exchange of the 8 1/2% exchangeable debentures and the retirement of the
11 1/2% subordinated debentures due 2003 and the 11% senior notes due 2001 in
the third quarter of fiscal 1997. These decreases were offset partially by
interest expense related to the issuance in the third quarter of fiscal 1997
of the 5 3/4% convertible subordinated notes due 2003 and higher average
short-term debt levels.
In late December 1995, the Company was made aware of losses of $19.3
million resulting from trading activities in a discretionary account. As a
result of the investigations of the trading losses, the Company recorded
$16.5 million and $2.8 million of the net trading losses in fiscal 1996 and
fiscal 1995, respectively. The Company has not recorded any tax benefit on
these losses. The Company and a Special Committee of the Board of Directors
investigated the matter and found no evidence to suggest that the Company's
net losses from these trading activities will exceed the $19.3 million
recorded in fiscal years 1996 and 1995.
In April 1995, Sunbelt Nursery Group, Inc. ("Sunbelt") defaulted on 13
nursery store sublease agreements with the Company comprising $22.8 million
of non-revolving store development financing, and the Company terminated the
subleases. At the same time, Sunbelt defaulted on three nursery store lease
agreements guaranteed by the Company; however, such defaults were
subsequently cured. During the first quarter of fiscal 1996, the Company
recorded a pre-tax charge of $14.0 million which represented the estimated
cost to disengage from its financial support of Sunbelt. The charge
reflected the Company's estimated losses resulting from the lease termination
costs associated with the 13 nursery store subleases and other related costs.
All 13 properties now have been sold at costs consistent with the Company's
estimates to record the charge.
The Company's effective income tax rate for fiscal 1997 was 40% compared
to 64.7% in fiscal 1996. The effective rate for fiscal 1996, exclusive of
the aforementioned net trading losses, would have been 41%.
During the third quarter of fiscal 1997, the Company utilized the net
proceeds from the public offering of the 5 3/4% convertible subordinated
notes due 2003 to retire $17.5 million of 11 1/2% subordinated debentures due
2003 and $25 million of 11% senior notes due 2001. In addition, the Company
induced the exchange of its $12.5 million of 8 1/2% exchangeable debentures.
The Company recorded after-tax extraordinary charges of $4.1 million during
the third quarter of fiscal 1997 for the early retirement of debt. The pre-
tax extraordinary charges aggregated $6.9 million.
Fiscal 1997 net income was $44.1 million, or $.65 per share on a diluted
basis, compared to fiscal 1996 net income of $10.0 million, or $.17 per share
on a diluted basis. Fiscal 1997 net income before extraordinary charges and
related income tax benefit was $48.2 million, or $.71 per share on a diluted
basis, compared to net income before special charges in fiscal 1996 of $35.6
million, or $.56 per share on a diluted basis. Special charges in fiscal
1996 included the $16.5 million in net trading losses and the $14.0 million
provision for Sunbelt defaults.
LIQUIDITY AND CAPITAL RESOURCES
Cash, including temporary investments, totalled $80.7 million at fiscal
1998 year-end compared to $32.3 million at fiscal 1997 year-end. Operating
activities generated $106.9 million during fiscal 1998 compared to $135.1
million in fiscal 1997, a decrease of $28.2 million. This decrease in cash
provided from operations is primarily due to the sale of the proprietary
credit card receivables in fiscal 1997, which provided net cash proceeds of
$49.6 million, offset by an increase of $27.7 million in net income (adjusted
for non-cash and non-operating related items). Other sources of cash during
fiscal 1998 included $12.8 million in proceeds from disposition of
properties, $3.9 million of which was received in connection with the
disposition of certain properties leased to Sunbelt. These cash increases
were partially offset by capital expenditures of $49.9 million, purchases of
the Company's stock in open market transactions of $10.2 million, cash
dividend payments of $8.9 million, increased beneficial interest in
securitized receivables of $6.1 million and the acquisition of a bank charter
and other assets of $1.0 million. Other net cash provided by investing and
financing activities aggregated $4.8 million.
During fiscal 1998, capital expenditures of $14.0 million were required
to support the opening of 54 new Pier 1 Imports stores in North America. A
total of 51 stores were remodeled in fiscal 1998 at a cost of approximately
$14.5 million. In fiscal 1999, the Company plans to remodel approximately 50
existing stores for $16.1 million. The Company's new store development plan
for fiscal 1999 also provides for the opening of approximately 60 U.S.
stores, primarily in single-store markets. Operating leases are expected to
provide financing for new store land and building costs. Inventory and
fixtures for the fiscal 1999 development plan are estimated to cost
approximately $20.7 million, which will be funded by operations, working
capital and bank lines of credit. The Company expects to close approximately
25 stores in fiscal 1999.
The Company expects working capital requirements will continue to be
provided through cash flow from operations, sales of proprietary credit card
receivables and bank lines of credit. The bank credit facilities consist of
a committed $65 million competitive advance and revolving credit facility,
which expires in December 1998, all of which was available at the end of
fiscal 1998, other short-term (12-month) bank facilities used principally for
the issuance of letters of credit aggregating $145.2 million, $75.7 million
of which was available at fiscal 1998 year-end, and other long-term bank
facilities of $32.2 million. At the end of fiscal 1998, the short-term bank
facilities consisted of $3.9 million in committed lines of credit and $141.3
million in uncommitted lines, while the long-term facilities consisted of
$25.6 million in committed lines of credit and $6.6 million in uncommitted
lines. The Company expects to replace the competitive advance and revolving
credit facility with a new $100 million facility under substantially similar
or better terms prior to the existing facility's expiration date. Most of
the Company's loan and lease guarantee agreements require the Company to
maintain certain financial ratios and limit certain investments and
distributions to stockholders, including cash dividends and purchases of
treasury stock. At fiscal 1998 year-end, the most restrictive of these
agreements limited the total of such payments to $30.0 million. The
Company's current ratio was 3.3 to 1 at fiscal 1998 year-end compared to 3.0
to 1 at fiscal 1997 year-end.
In October 1997, the Pier 1 Imports Credit Card Master Trust issued
Series 1997-2 variable funding certificates which mature in October 2002.
The 1997-2 Class A Certificates provide for a maximum outstanding principal
balance of $50 million that may be issued and repaid from time to time in
minimum increments of $1.0 million, bear interest at either a fixed spread
over LIBOR or the A-1/P-1 commercial paper rate plus program and
administrative fees. As of February 28, 1998, $11.7 million was available to
be drawn on the Class A Certificates. Pier 1 Funding, Inc. ("Funding"), a
subsidiary of the Company, retained the 1997-2 Class B Certificates which are
issued in amounts equal to 11.7% of the corresponding Class A Certificates,
are non-interest bearing and are subordinated to the Class A Certificates.
Funding has the right to sell in the future all or part of the Class B
Certificates, which would then bear interest at a rate determined at that
time. Funding may increase or decrease the amount outstanding of the Class A
Certificates on any day if certain conditions are met. As of February 28,
1998, no amounts have been drawn on the Class A Certificates.
In May 1997, the Company acquired a national bank and its assets in
Omaha, Nebraska for $1.0 million. The newly named Pier 1 National Bank has
been utilized by the Company to standardize the interest rates and fees
charged on its proprietary credit card and to export the Nebraska interest
rate to all other states where the Company makes credit card sales. As of
February 28, 1998, the Company had 2.9 million cardholders, approximately
562,000 of which are considered active accounts.
The Company has commitments from unaffiliated parties to make available
up to $23.6 million for the development or acquisition of stores for lease to
the Company. This facility, which is fully utilized, matures on June 15,
1998, at which time the Company expects to find alternative financing. In
order to continue to finance new store land and building costs, the Company
is exploring other financing opportunities currently available in the capital
markets. The Company's minimum future operating lease commitments expected
for fiscal 1999 aggregate $99.3 million, and the present value of total
existing operating lease commitments is $413.4 million. The Company expects
to fund these commitments from operating cash flow.
During fiscal 1998, approximately $8.3 million was charged against the
Company's previously established reserve to disengage from its financial
support of Sunbelt. This charge reflected the Company's loss on the sale of
the remaining six of 13 store properties leased to Sunbelt. As of February
28, 1998, all 13 store properties have been sold at costs consistent with the
Company's previously recorded reserve. The Company continues to guarantee
other Sunbelt store lease commitments through the year 2001, which aggregate
$2.1 million with a present value of approximately $1.8 million at the end of
fiscal 1998. Sunbelt initiated bankruptcy proceedings in March 1998. The
Company believes it has accrued sufficient amounts to cover any deficiencies
in Sunbelt's payments on these store lease commitments. Any cash payments to
satisfy these guarantees are expected to be funded through working capital
and operations.
During fiscal 1998, the Company repurchased under a Board of Directors
approved program 577,200 shares of its common stock in open market
transactions for approximately $10.2 million. In addition, approximately
87,000 shares of common stock were acquired as payment for the exercise of
employee stock options.
In April 1998, the Board of Directors approved the purchase of up to
three million shares of the Company's outstanding common stock. These
purchases of common stock will be made from open market or private
transactions from time to time depending on prevailing market conditions. As
of February 28, 1998, the Company had 67.7 million shares outstanding. The
Company expects to fund these purchases from operating cash flow.
During fiscal 1998, the Company paid cash dividends aggregating $.13 per
share and distributed a three for two stock split, effected in the form of a
stock dividend. Subsequently, the Company declared a cash dividend of $.04
per share payable on May 20, 1998 to shareholders of record on May 6, 1998.
The Company currently expects to continue to pay cash dividends in fiscal
1999 but to retain most of its future earnings for expansion of the Company's
business.
The Company's inventory purchases are made almost entirely in U.S.
dollars. When purchase commitments are denominated in foreign currencies,
the Company may enter into forward exchange contracts when they are available
in order to manage its exposure to foreign currency exchange fluctuations.
Management believes the funds provided from operations, coupled with the
Company's cash position, available lines of credit and sales of its credit
card accounts receivable to the Pier 1 Imports Credit Card Master Trust, are
sufficient to meet its foreseeable cash requirements.
IMPACT OF YEAR 2000 ISSUE
The year 2000 issue results from the fact that many computer programs
were previously written using two digits rather than four to define the
applicable year. Programs written in this way may recognize a date ending in
"00" as the year 1900 rather than the year 2000. This could result in a
system failure or miscalculations causing business delays and disruptions of
operations. At this time, the Company is implementing plans to ensure that
its systems are compliant with the requirements to process transactions in
the year 2000 and thereafter. The Company's plans will utilize both internal
and external resources to identify, correct or reprogram and test systems for
year 2000 compliance, but it has yet to complete the process. Key financial,
informational and operational systems, including those that interact with
customers and suppliers of merchandise, are being assessed to determine the
extent to which the Company's interface systems are vulnerable to those third
parties' failure to remediate their own year 2000 issues. If necessary
modifications and conversions by other companies on whose systems the
Company's business processes rely are not completed on time, the year 2000
issue may have an adverse effect on the Company's operations. The total cost
and time which will be incurred by the Company associated with the impact of
its year 2000 compliance currently has not been determined with certainty,
but the Company believes that its year 2000 compliance efforts will not have
a material adverse effect on its financial condition, results of operations
or liquidity.
IMPACT OF INFLATION AND CHANGING PRICES
Inflation has not had a significant impact on the operations of the
Company.
IMPACT OF NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard ("SFAS") No. 130, "Reporting
Comprehensive Income," and SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 130 requires that an
enterprise report, by major component and as a single total, the change in
its equity during the period from nonowner sources, and SFAS No. 131
establishes annual and interim reporting requirements for an enterprise's
operating segments and related disclosures about its products and services,
geographical areas in which it operates and major customers. Both statements
are effective for fiscal years beginning after December 15, 1997, with
earlier application permitted. Adoption of these statements is not expected
to materially impact the Company's consolidated financial position or
statements of operations, stockholders' equity and cash flows. Effects of
the adoption of these statements will primarily be limited to the form and
content of the Company's disclosures.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of
Computer Software Developed for or Obtained for Internal Use." The SOP is
effective for the Company beginning in fiscal 2000. The SOP will require the
capitalization of certain costs incurred after the date of adoption in
connection with developing or obtaining software for internal use that the
Company currently expenses as incurred and will require expensing as incurred
certain costs that the Company now capitalizes.
Item 8. Financial Statements and Supplementary Data.
Index to Financial Statements
Financial Statements:
Report of Independent Auditors
Consolidated Statements of Operations for the Years Ended
February 28, 1998, March 1, 1997 and March 2, 1996
Consolidated Balance Sheets at February 28, 1998 and
March 1, 1997
Consolidated Statements of Cash Flows for the Years Ended
February 28, 1998, March 1, 1997 and March 2, 1996
Consolidated Statements of Stockholders' Equity for the Years
Ended February 28, 1998, March 1, 1997 and March 2, 1996
Notes to Consolidated Financial Statements
Financial Statement Schedules:
For the Years Ended February 28, 1998, March 1, 1997 and
March 2, 1996
II - Valuation and Qualifying Accounts and Reserves
All other schedules are omitted because they are not required or are not
applicable or the required information is shown in the financial statements
or notes thereto.
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors of Pier 1 Imports, Inc.
We have audited the accompanying consolidated balance sheets of Pier 1
Imports, Inc. as of February 28, 1998 and March 1, 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows
for each of the three years in the period ended February 28, 1998. Our
audits also included the financial statement schedule listed in the Index at
Item 14(a). These financial statements and schedule are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements and schedule 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Pier 1 Imports, Inc. at February 28, 1998 and March 1, 1997, and the
consolidated results of its operations and its cash flows for each of the
three years in the period ended February 28, 1998, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
/s/ Ernst & Young LLP
Fort Worth, Texas
April 10, 1998
Pier 1 Imports, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share amounts)
Year Ended
------------------------------
1998 1997 1996
---------- -------- --------
Net sales $1,075,405 $947,091 $810,707
Operating costs and expenses:
Cost of sales (including buying and
store occupancy) 613,937 562,629 485,186
Selling, general and administrative
expenses 315,788 274,477 235,617
Depreciation and amortization 23,946 19,765 17,204
---------- -------- --------
953,671 856,871 738,007
---------- -------- --------
Operating income 121,734 90,220 72,700
Nonoperating (income) and expense:
Interest and investment income (1,880) (2,713) (935)
Interest expense 8,704 12,595 14,723
Trading loss (recovery) (9,101) -- 16,463
Provision for Sunbelt Nursery Group,
Inc. defaults -- -- 14,000
---------- -------- --------
(2,277) 9,882 44,251
---------- -------- --------
Income before income taxes and
extraordinary charges 124,011 80,338 28,449
Provision for income taxes 45,964 32,129 18,400
---------- -------- --------
Income before extraordinary charges 78,047 48,209 10,049
Extraordinary charges from early
retirement of debt, net of income tax
benefit of $2,747 -- 4,122 --
---------- -------- --------
Net income $ 78,047 $ 44,087 $ 10,049
========== ======== ========
Basic earnings per share:
Before extraordinary charges $1.16 $.75 $.17
Extraordinary charges, net of income
tax benefit -- (.07) --
----- ---- ----
Net income $1.16 $.68 $.17
===== ==== ====
Diluted earnings per share:
Before extraordinary charges $1.08 $.71 $.17
Extraordinary charges, net of income
tax benefit -- (.06) --
----- ---- ----
Net income $1.08 $.65 $.17
===== ==== ====
The accompanying notes are an integral part of these financial statements.
Pier 1 Imports, Inc.
CONSOLIDATED BALANCE SHEETS
(in thousands except share data)
1998 1997
-------- --------
ASSETS
Current assets:
Cash, including temporary investments of $67,972
and $22,188, respectively $ 80,729 $ 32,280
Accounts receivable, net of allowance for doubtful
accounts of $142 and $267, respectively 12,638 4,128
Inventories 234,180 220,013
Prepaid expenses and other current assets 74,834 66,097
-------- --------
Total current assets 402,381 322,518
Properties, net 216,330 216,836
Other assets 34,699 30,914
-------- --------
$653,410 $570,268
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current portion of long-term debt $ 1,994 $ 1,641
Accounts payable and accrued liabilities 119,596 105,541
-------- --------
Total current liabilities 121,590 107,182
Long-term debt 114,881 114,454
Other non-current liabilities 24,208 25,584
Stockholders' equity:
Common stock, $1.00 par, 200,000,000 shares
authorized, 67,903,000 and 45,361,000 issued,
respectively 67,903 45,361
Paid-in capital 166,824 166,475
Retained earnings 165,345 118,721
Cumulative currency translation adjustments (1,108) (1,385)
Less--176,000 and 373,000 common shares in
treasury, at cost, respectively (3,149) (5,437)
Less--unearned compensation (3,084) (687)
-------- --------
392,731 323,048
Commitments and contingencies
-------- --------
$653,410 $570,268
======== ========
The accompanying notes are an integral part of these financial statements.
Pier 1 Imports, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended
---------------------------
1998 1997 1996
------- ------- -------
Cash flow from operating activities:
Net income $ 78,047 $ 44,087 $10,049
Adjustments to reconcile to net cash
provided by operating activities:
Depreciation and amortization 23,946 19,765 17,204
Deferred taxes and other 1,281 6,422 4,509
Investment gain -- (1,607) --
Extraordinary charges from early
retirement of debt -- 6,869 --
Provision for Sunbelt Nursery Group, Inc.
defaults -- -- 14,000
Change in cash from:
Inventories (13,617) 7,775 (22,198)
Accounts receivable and other
current assets (10,302) 37,596 (13,346)
Accounts payable and accrued expenses 25,031 12,889 7,159
Store-closing reserve -- -- (6,020)
Other assets, liabilities, and
other, net 2,468 1,303 27
Net cash provided by operating -------- -------- -------
activities 106,854 135,099 11,384
-------- -------- -------
Cash flow from investing activities:
Capital expenditures (49,854) (36,775) (22,127)
Proceeds from disposition of properties 8,856 841 84
Net proceeds (cost) from disposition of
Sunbelt Nursery Group, Inc. properties 3,905 (3,412) --
Acquisitions (1,003) (59,936) --
Beneficial interest in securitized
receivables (6,106) -- --
Acquisition of limited partnership
interest -- -- (40,000)
Other investments -- 4,665 (7,600)
Net cash used in investing ------- -------- -------
activities (44,202) (94,617) (69,643)
------- -------- -------
Cash flow from financing activities:
Cash dividends (8,934) (6,999) (5,158)
Proceeds from issuance of long-term debt -- 83,602 40,000
Repayments of long-term debt -- (90,639) (14,750)
Net (payments) borrowings under line of
credit agreements -- (1,961) 1,700
(Payments) proceeds from (purchases) sales
of capital stock, treasury stock, and
other, net (5,269) (5,739) (565)
Net cash (used in) provided by -------- -------- -------
financing activities (14,203) (21,736) 21,227
-------- -------- -------
Change in cash and cash equivalents 48,449 18,746 (37,032)
Cash and cash equivalents at beginning
of year 32,280 13,534 50,566
-------- -------- -------
Cash and cash equivalents at end of year $ 80,729 $ 32,280 $13,534
======== ======== =======
The accompanying notes are an integral part of these financial statements.
Pier 1 Imports, Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands except share data)
Cumulative
Currency Total
Common Paid-in Retained Translation Treasury Unearned Stockholders'
Stock Capital Earnings Adjustments Stock Compensation Equity
------- -------- -------- ----------- -------- ------------ --------------
Balance February 25, 1995 $37,826 $ 93,833 $ 94,516 ($1,195) ($1,477) ($1,106) $222,397
Purchases of treasury stock -- -- -- -- (4,090) -- (4,090)
Restricted stock grant and amortization 7 123 -- -- 29 237 396
Exercise of stock options and other 166 682 365 -- 2,993 -- 4,206
Currency translation adjustments -- -- -- 123 -- -- 123
Cash dividends ($.09 per share) -- -- (5,158) -- -- -- (5,158)
Stock dividend (5%) 1,878 16,261 (18,139) -- -- -- --
Net income -- -- 10,049 -- -- -- 10,049
------- -------- -------- ------- ------- ------- --------
Balance March 2, 1996 39,877 110,899 81,633 (1,072) (2,545) (869) 227,923
Purchases of treasury stock -- -- -- -- (9,520) -- (9,520)
Restricted stock grant and amortization -- -- -- -- -- 182 182
Exercise of stock options and other -- (1,539) -- -- 6,628 -- 5,089
Currency translation adjustments -- -- -- (313) -- -- (313)
Cash dividends ($.10 per share) -- -- (6,999) -- -- -- (6,999)
Conversion of 6 7/8% convertible debt 5,484 57,115 -- -- -- -- 62,599
Net income -- -- 44,087 -- -- -- 44,087
------- -------- -------- ------- ------- ------- --------
Balance March 1, 1997 45,361 166,475 118,721 (1,385) (5,437) (687) 323,048
Purchases of treasury stock -- -- -- -- (12,321) -- (12,321)
Restricted stock grant and amortization -- 291 -- -- 2,664 (2,345) 610
Exercise of stock options and other -- 51 -- -- 11,945 -- 11,996
Currency translation adjustments -- -- -- 277 -- -- 277
Cash dividends ($.13 per share) -- -- (8,934) -- -- -- (8,934)
Three for two stock split 22,541 -- (22,489) -- -- (52) --
Conversion of 5 3/4% convertible debt 1 7 -- -- -- -- 8
Net income -- -- 78,047 -- -- -- 78,047
------- -------- -------- ------- ------- ------- --------
Balance February 28, 1998 $67,903 $166,824 $165,345 ($1,108) ($3,149) ($3,084) $392,731
======= ======== ======== ======= ======= ======= ========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of Significant Accounting Policies
Organization - Pier 1 Imports, Inc. is North America's largest specialty
retailer of imported decorative home furnishings, gifts and related items,
with retail stores located in the United States, Canada, Puerto Rico, the
United Kingdom, Mexico and Japan. Concentrations of risk with respect to
sourcing the Company's inventory purchases are limited due to the large
number of vendors or suppliers and their geographic dispersion around the
world. The Company sources the largest amount of imported inventory from
China. Management believes that alternative merchandise could be obtained
from manufacturers in other countries over time.
Basis of consolidation - The consolidated financial statements of Pier 1
Imports, Inc. and its consolidated subsidiaries (the "Company") include the
accounts of all subsidiary companies except for Pier 1 Funding, Inc., which
is accounted for using the equity method. See: Note 2 of the Notes to
Consolidated Financial Statements. Beginning in fiscal 1997, the Company
consolidated the results of The Pier Retail Group Limited ("The Pier").
Material intercompany transactions and balances have been eliminated.
Use of estimates - Preparation of the financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could differ
from those estimates.
Reclassifications - Certain reclassifications have been made in the
prior years' consolidated financial statements to conform to the fiscal 1998
presentation.
Fiscal periods - The Company utilizes 5-4-4 (week) quarterly accounting
periods with the fiscal year ending on the Saturday nearest the last day of
February. Fiscal 1998 and 1997 were 52-week years; fiscal 1996 consisted of
a 53-week year. Fiscal 1998 ended February 28, 1998, fiscal 1997 ended March
1, 1997 and fiscal 1996 ended March 2, 1996.
Cash and cash equivalents - The Company considers all highly liquid
investments with an original maturity date of three months or less to be cash
equivalents. The effect of foreign currency exchange rate fluctuations on
cash is not material.
Marketable securities - Trading account assets are recorded at their
fair value, with unrealized gains and losses recorded as trading gains or
losses in the Company's statement of operations. See: Note 12 of the Notes
to Consolidated Financial Statements. Debt and equity securities available
for sale are recorded at their fair value, with unrealized gains and losses
accumulated and included as a separate component of stockholders' equity, net
of related income tax effects. Adjustments for any impairments in the market
value of equity securities available for sale (based on market conditions)
that are deemed to be 'other than temporary' are included as a loss in the
current year's operations.
Translation of foreign currencies - Assets and liabilities of foreign
operations are translated into U.S. dollars at fiscal year-end exchange
rates. Income and expense items are translated at average exchange rates
prevailing during the year. Translation adjustments arising from differences
in exchange rates from period to period are included as a separate component
of stockholders' equity.
Financial instruments - The fair value of financial instruments is
determined by reference to various market data and other valuation techniques
as appropriate. Unless otherwise disclosed, the fair values of financial
instruments approximate their recorded values.
Risk management instruments: The Company may utilize various financial
instruments to manage interest rate and market risk associated with its on
and off balance sheet commitments.
The Company hedges certain commitments denominated in foreign currency
through the purchase of forward contracts. The forward contracts are
purchased only to cover specific commitments to buy merchandise for resale;
any gains or losses on such contracts are included in the cost of the
merchandise purchased.
The Company enters into foreign exchange forward contracts only with
major financial institutions and continually monitors its positions with, and
the credit quality of, these counterparties to its off balance sheet
financial instruments. The Company does not expect non-performance by any of
the counterparties, and any losses incurred in the event of non-performance
would not be material.
Trading account instruments: Financial instruments that were used in
trading activities were recorded at their fair values, with realized and
unrealized gains and losses recorded as trading gains or losses in the
Company's statement of operations.
Inventories - Inventories are comprised primarily of finished
merchandise and are stated at the lower of average cost or market; cost is
determined principally on the first-in, first-out method.
Properties, maintenance and repairs - Buildings, equipment, furniture
and fixtures, and leasehold interests and improvements are carried at cost
less accumulated depreciation. Depreciation is based on the straight-line
method over estimated useful lives or lease terms, if shorter.
Expenditures for maintenance, repairs and renewals which do not
materially prolong the useful lives of the assets are charged to expense as
incurred. In the case of disposals, assets and the related depreciation are
removed from the accounts and the net amount, less proceeds from disposal, is
credited or charged to income.
Advertising costs - All advertising costs are expensed the first time
the advertising takes place. Advertising costs were $40,630,000, $36,968,000
and $32,093,000 in fiscal 1998, 1997 and 1996, respectively. The amounts of
prepaid advertising at fiscal year-ends 1998 and 1997 were $1,274,000 and
$762,000, respectively.
Income taxes - Income tax expense is based on the liability method.
Under this method, deferred tax assets and liabilities are recognized based
on differences between financial statement and tax bases of assets and
liabilities using presently enacted tax rates. Deferred federal income
taxes, net of applicable foreign tax credits, are not provided on the
undistributed earnings of foreign subsidiaries to the extent the Company
intends to permanently reinvest such earnings abroad. At February 28, 1998,
such undistributed earnings aggregated $18.9 million.
Stock-based compensation - The Company grants stock options and
restricted stock for a fixed number of shares to employees with stock option
exercise prices equal to the fair market value of the shares at the date of
grant. The Company continues to account for stock option grants in
accordance with Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and, accordingly, recognizes no
compensation expense for the stock option grants.
Earnings per share - Earnings per share during a period is computed by
dividing net income by the weighted average number of common shares
outstanding. The Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 128, "Earnings per
Share," in February 1997. This standard was adopted by the Company in the
fourth quarter of fiscal 1998. Weighted average number of common shares
outstanding have been restated for fiscal 1998, 1997 and 1996 in accordance
with this standard and total 67,392,000, 64,504,000 and 59,082,000,
respectively. Additionally, the computation of the weighted average shares
for fiscal 1997 and 1996 gives retroactive effect to the three for two stock
split, effected in the form of a stock dividend, distributed July 30, 1997.
Diluted earnings per share also includes the dilutive effect of the weighted
average number of outstanding stock options which total 869,000, 655,000 and
837,000 for fiscal 1998, 1997 and 1996, respectively, and the assumed
conversion into common stock of all the 5 3/4% convertible subordinated notes
which total 6,993,000 and 3,055,000 for fiscal 1998 and 1997, respectively,
and the 6 7/8% convertible subordinated notes which total 2,915,000 and
8,236,000 for fiscal 1997 and 1996, respectively. Interest expense and
amortized debt issue costs, net of tax, on the 5 3/4% convertible
subordinated notes were added back to net income and aggregated $3.2 million
and $1.4 million in fiscal 1998 and 1997, respectively. Interest expense and
amortized debt issue costs, net of tax, on the 6 7/8% convertible
subordinated notes were added back to net income and aggregated $0.9 million
and $2.7 million in fiscal 1997 and 1996, respectively. See: Note 5 of the
Notes to Consolidated Financial Statements.
Impact of recently issued accounting standards - In June 1997, the FASB
issued SFAS No. 130, "Reporting Comprehensive Income," and SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." SFAS
No. 130 requires that an enterprise report, by major component and as a
single total, the change in its equity during the period from nonowner
sources, and SFAS No. 131 establishes annual and interim reporting
requirements for an enterprise's operating segments and related disclosures
about its products and services, geographical areas in which it operates and
major customers. Both statements are effective for fiscal years beginning
after December 15, 1997, with earlier application permitted. Adoption of
these statements is not expected to materially impact the Company's
consolidated financial position or statements of operations, stockholders'
equity and cash flows. Effects of the adoption of these statements will
primarily be limited to the form and content of the Company's disclosures.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of
Computer Software Developed for or Obtained for Internal Use." The SOP is
effective for the Company beginning in fiscal 2000. The SOP will require the
capitalization of certain costs incurred after the date of adoption in
connection with developing or obtaining software for internal use that the
Company currently expenses as incurred and will require expensing as incurred
certain costs that the Company now capitalizes.
Note 2 - Proprietary Credit Card Information
The proprietary credit card receivables arise primarily under open-end
revolving credit accounts issued by the Company's subsidiary, Pier 1 National
Bank, to finance purchases of merchandise and services offered by the
Company. These accounts have various billing and payment structures,
including varying minimum payment levels. The Company has an agreement with
a third party to provide certain credit card processing and related credit
services, while the Company maintains control over credit policy decisions
and customer service standards.
As of fiscal 1998 year-end, the Company had approximately 2.9 million
proprietary cardholders and 562,000 customer credit accounts considered
active (accounts with activity in the last month of fiscal 1998). At
February 28, 1998, 375,000 of these active accounts had outstanding balances
that averaged $243. The Company's proprietary credit card sales accounted
for 25.9% of total U.S. store sales in fiscal 1998. A summary of the
Company's proprietary credit card results for each of the last three fiscal
years follows (in thousands):
1998 1997 1996
-------- -------- --------
Costs:
Processing fees $ 8,739 $ 7,811 $ 6,932
Write-off of capitalized costs -- 3,151 --
Bad debts 6,845 6,728 5,763
Reversal of bad debt provision -- (3,824) --
-------- -------- --------
15,584 13,866 12,695
-------- -------- --------
Income:
Finance charge income, net of fees 12,338 11,476 11,245
Insurance and other income 303 614 312
-------- -------- --------
12,641 12,090 11,557
-------- -------- --------
Net proprietary credit card costs $ 2,943 $ 1,776 $ 1,138
======== ======== ========
Preferred Card sales $257,518 $226,248 $188,303
======== ======== ========
Costs as a percent of Preferred Card sales 6.05% 6.13% 6.74%
===== ===== =====
Gross Preferred Card receivables at year-end $ 90,930 $ 87,089 $ 76,878
======== ======== ========
Owned Preferred Card receivables at year-end $ -- $ -- $ 76,878
======== ======== ========
Preferred Card sales as a percent of total
U.S. store sales 25.9% 25.5% 24.1%
===== ===== =====
In February 1997, the Company securitized its entire portfolio of
proprietary credit card receivables (the "Receivables"). The Company sold
all existing Receivables to a special purpose wholly owned subsidiary, Pier 1
Funding, Inc. ("Funding"), which transferred the Receivables to the Pier 1
Imports Credit Card Master Trust (the "Master Trust"). The Master Trust may
issue one or more series of beneficial interests in the Master Trust that
represent undivided interests in the assets of the Master Trust consisting of
the Receivables and all proceeds of the Receivables. In the initial sale of
Receivables, the Company sold $84.1 million of Receivables and received $49.6
million in cash and $34.1 million in beneficial interests in the Master
Trust. On a daily basis, the Company sells to Funding for transfer to the
Master Trust all newly generated Receivables, except those failing certain
eligibility criteria, and receives as the purchase price payments of cash
(funded from the amount of undistributed principal collections from
Receivables in the Master Trust) and residual interests in the Master Trust.
The Company is obligated to repurchase from Funding certain Receivables
related to customer credits such as merchandise returns and other receivable
defects, but has no obligation to reimburse Funding, the Master Trust or
purchasers of any certificates issued by the Master Trust for credit losses
from the Receivables. The holder of any subordinated certificate of interest
in the Master Trust, which currently is only Funding, is subject to credit
losses from the Receivables before holders of senior certificates, and
Funding, as holder of the residual interest in the Master Trust, is subject
to credit losses allocable to the residual interest in proportion to that
interest relative to all interests in the Master Trust. Funding was
capitalized by the Company as a wholly owned special purpose subsidiary that
is subject to certain covenants and restrictions, including a restriction
from engaging in any business or activity unrelated to acquiring and selling
interests in the Receivables. Neither Funding nor the Master Trust is
consolidated with the Company.
As part of the initial transaction securitizing the Receivables, the
Master Trust sold to third parties $50.0 million of Series 1997-1 Class A
Certificates, which bear interest at 6.74% and mature in May 2002. Funding
retained the $14.1 million of Series 1997-1 Class B Certificates, which are
currently non-interest bearing and subordinated to the Class A Certificates,
and retained the residual interest in the Master Trust. Funding has the
right to sell in the future all or part of the Class B Certificates, which
would then bear interest at a rate determined at that time, and to exchange a
portion of its residual interest for the proceeds of a new issuance of
certificates by the Master Trust. Beginning in October 2001, principal
collections of Receivables allocable to Series 1997-1 Certificates will be
used to amortize the outstanding balances of the Series 1997-1 Certificates
and will not be available to fund the purchase of new receivables being
transferred from the Company.
In October 1997, the Master Trust issued Series 1997-2 variable funding
certificates which mature in October 2002. The 1997-2 Class A Certificates
provide for a maximum outstanding principal balance of $50.0 million that may
be issued and repaid from time to time in minimum increments of $1.0 million,
bear interest at either a fixed spread over LIBOR or the A-1/P-1 commercial
paper rate plus program and administrative fees. As of February 28, 1998,
$11.7 million was available to be drawn on the Class A Certificates. Funding
retained the 1997-2 Class B Certificates which are issued in amounts equal to
11.7% of the corresponding Class A Certificates, are non-interest bearing and
are subordinated to the Class A Certificates. Funding has the right to sell
in the future all or part of the Class B Certificates, which would then bear
interest at a rate determined at that time. Funding may increase or decrease
the amount outstanding of the Class A Certificates on any day if certain
conditions are met. As of February 28, 1998, no amounts have been drawn on
the Class A Certificates.
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities." This
statement provides guidance for distinguishing transfers of financial assets
(securitizations) that are sales from transfers that are secured borrowings
occurring after December 31, 1996. The Company's recently completed
securitization, as discussed above, was accounted for as a sale in accordance
with SFAS No. 125. As a result of the sale, the Company reversed its
allowance for doubtful accounts and wrote off all unamortized account
origination costs. Costs of completing the transaction were charged against
income. The sale had no material impact on net income in fiscal 1997 and the
Company expects no material impact in future years, although the precise
amounts will be dependent on a number of factors such as interest rates and
levels of securitization.
Note 3 - Properties
Properties are summarized as follows at February 28, 1998 and March 1,
1997 (in thousands):
1998 1997
-------- --------
Land $ 42,445 $ 58,637
Buildings 76,586 82,198
Equipment, furniture and fixtures 129,800 108,391
Leasehold interests and improvements 122,741 105,739
Construction in progress 806 50
-------- --------
372,378 355,015
Less accumulated depreciation and
amortization 156,048 138,179
-------- --------
Properties, net $216,330 $216,836
======== ========
During fiscal 1997, the Company acquired two corporations which owned 38
Pier 1 Imports store locations, which were leased to the Company, for an
aggregate purchase price of $59.9 million. The purchase price of these
corporations approximated the fair market value of the land and buildings
owned by these corporations at the time of purchase. The effect of owning
these properties, as opposed to leasing these properties, is not expected to
have a significant impact on future operations.
Note 4 - Accounts Payable and Accrued Liabilities/Other Non-current
Liabilities
The following is a summary of accounts payable and accrued liabilities
and other non-current liabilities at February 28, 1998 and March 1, 1997 (in
thousands):
1998 1997
-------- --------
Trade accounts payable $ 49,990 $ 41,026
Accrued payroll and other employee-related
liabilities 27,194 25,068
Accrual for Sunbelt defaults 2,021 10,372
Accrued taxes, other than income 9,430 8,742
Gift certificates and merchandise credits
outstanding 11,276 8,242
Other 19,685 12,091
-------- --------
Accounts payable and accrued liabilities $119,596 $105,541
======== ========
Accrued average rent $ 14,511 $ 14,328
Other 9,697 11,256
-------- --------
Other non-current liabilities $ 24,208 $ 25,584
======== ========
Note 5 - Long-term Debt and Available Credit
Long-term debt is summarized as follows (in thousands):
1998 1997
-------- --------
Industrial revenue bonds $ 25,000 $ 25,000
5 3/4% convertible subordinated notes 86,242 86,250
Other 5,633 4,845
-------- --------
116,875 116,095
Less - portion due within one year 1,994 1,641
-------- --------
$114,881 $114,454
======== ========
In fiscal 1987, the Company entered into industrial revenue development
bond loan agreements aggregating $25 million which mature in the year 2026.
Proceeds were used to construct three warehouse distribution facilities.
These bonds are seven-day lower floater put bonds and interest rates float
with market rates for similar tax-exempt debt issues. The Company's weighted
average interest rate was 5.2% for both fiscal 1998 and 1997. Interest is
payable monthly.
In September 1996, the Company issued $86.3 million of 5 3/4%
convertible subordinated notes due October 2003. The notes are convertible
at any time prior to maturity, unless previously redeemed or repurchased,
into shares of common stock of the Company at a conversion price of $12.33
per share (adjusted for the three for two stock split, effected in the form
of a stock dividend, distributed July 30, 1997). The Company may redeem the
notes, in whole or in part, on or after October 2, 1999. Interest on the
notes is payable semiannually on April 1 and October 1 of each year.
The Company utilized the net proceeds from the issuance of the 5 3/4%
convertible subordinated notes due 2003 to retire $17.5 million of 11 1/2%
subordinated debentures due 2003 and $25 million of 11% senior notes due
2001. The balance of the net proceeds was used to repay $20 million
outstanding under the Company's bank revolving credit facility. In addition,
the Company induced the exchange of its $12.5 million of 8 1/2% exchangeable
debentures during the third quarter of fiscal 1997. The Company recorded
pre-tax extraordinary charges aggregating $6.9 million during the third
quarter of fiscal 1997 for the early retirement of the aforementioned debt.
The after-tax extraordinary charges aggregated $4.1 million or $.06 per
diluted share.
Long-term debt matures as follows (in thousands):
Fiscal 1999 $ 1,994
2000 1,994
2001 1,645
2002 --
2003 --
Thereafter 111,242
--------
$116,875
========
Some of the Company's loan and lease agreements require that the Company
maintain certain financial ratios and limit specific payments and equity
distributions including cash dividends, loans to stockholders and purchases
of treasury stock. At fiscal 1998 year-end, the most restrictive of the
agreements limits the aggregate of such payments to $30.0 million.
The Company has lines of credit which aggregate approximately $242.3
million. The lines may be used for short-term working capital requirements
and/or merchandise letters of credit. At fiscal 1998 year-end, approximately
$100.0 million had been utilized for letters of credit, leaving $142.3
million of available lines of credit. The weighted average interest rate on
short-term working capital loans outstanding was 6.5% for fiscal 1997. The
Company had no short-term working capital loans during fiscal 1998.
Note 6 - Fair Value of Financial Instruments
As of February 28, 1998 and March 1, 1997, the fair values of the
5 3/4% convertible debentures were $193.9 million and $100.1 million,
respectively, compared to the recorded values of $86.2 million and $86.3
million, respectively. The fair value of these debentures was estimated
based on the quoted market values as of February 28, 1998 and March 1, 1997
for the debentures. There are no other significant assets or liabilities
with a fair value different from the recorded value.
At February 28, 1998, the Company had approximately $7.3 million of
forward exchange contracts outstanding with negligible fair values and with
maturities ranging from one to six months.
Note 7 - Employee Benefit Plans
In 1986, the Company adopted a qualified, defined contribution employee
retirement plan. All full- and part-time personnel who are at least 21 years
old, have been employed for a minimum of 12 months and have worked 1,000
hours in the preceding twelve months are eligible to participate in the plan.
Employees contributing from 1% to 5% of their compensation receive matching
Company contributions of up to 3%. Company contributions to the plan were
$1,573,000, $1,459,000 and $1,400,000 in fiscal 1998, 1997 and 1996,
respectively.
In addition, a non-qualified retirement savings plan is available for
the purpose of providing deferred compensation for certain employees whose
benefits under the qualified plan are limited under Section 401(k) of the
Internal Revenue Code. The Company's expense for this non-qualified plan is
immaterial for fiscal 1998, 1997 and 1996.
The Company maintains supplemental retirement plans ("the Plans") for
certain of its executive officers. The Plans provide that upon death,
disability or reaching retirement age, a participant will receive benefits
based on highest compensation and years of service. The Company recorded
expenses related to the Plans of $1,185,000, $1,006,000 and $1,152,000 in
fiscal 1998, 1997 and 1996, respectively.
Note 8 - Matters Concerning Stockholders' Equity
Stock split - On July 30, 1997, the Company distributed 22,541,000
common shares pursuant to a three for two stock split, effected in the form
of a 50% common stock dividend, to stockholders of record on July 16, 1997.
Stock purchase plan - Substantially all employees and Directors are
eligible to participate in the Pier 1 Imports, Inc. Stock Purchase Plan under
which the Company's common stock is purchased on behalf of employees at
market prices through regular payroll deductions. Each employee participant
may contribute up to 10% of the eligible portions of compensation and
Directors may contribute part or all of their directors' fees. The Company
contributes from 10% to 100% of the participants' contributions, depending
upon length of participation and date of entry into the Plan. Company
contributions to the Plan were $1,037,000, $888,000 and $896,000 in fiscal
years 1998, 1997 and 1996, respectively.
Restricted stock grant plans - In fiscal 1998, 1997 and 1996, the
Company issued 159,000 shares, 14,330 shares and 24,371 shares, respectively,
of its common stock to key officers pursuant to a Management Restricted Stock
Plan which provides for the issuance of up to 353,879 shares. The restricted
stock grants will vest over a four-to-ten year period of continued
employment. The cost of these restricted stock shares is being expensed over
the aforementioned specified vesting period. The fair values of the
restricted shares granted in fiscal 1998, 1997 and 1996 were $3,000,000,
$144,000 and $165,000, respectively. Shares not vested are returned to the
Plan if employment is terminated for any reason. To date, 15,956 shares have
been returned to the Plan.
In 1991, the Company issued 484,536 shares of its common stock to key
officers pursuant to a Restricted Stock Grant Plan which provides for
issuance of up to 729,894 shares. These shares vest and the cost is expensed
over a 10-year period of continued employment. Unvested shares are returned
to the Plan if employment is terminated for any reason. To date, 271,827
shares have been returned to the Plan.
Total compensation expense for the restricted stock grant plans was
$943,000, $321,000 and $260,000 for fiscal 1998, 1997 and 1996, respectively.
Stock option plans - In June 1989, the Company adopted two stock option
plans, the 1989 Employee Stock Option Plan and the 1989 Non-Employee Director
Stock Option Plan. Under the employee plan, options have been granted at the
fair market value of shares on the date of grant and may be granted to
qualify as Incentive Stock Options under Section 422 of the Internal Revenue
Code or as non-qualified options. Under the director plan, non-qualified
options covering 4,500 shares are granted once each year to each non-employee
director. The Company may grant options covering up to 3,558,305 shares of
the Company's common stock under the employee plan and up to 198,634 shares
under the director plan. Both plans are subject to adjustments for stock
dividends and certain other changes to the Company's capitalization.
In 1990, the 1980 Stock Option Plan expired subject to outstanding
options covering 33,095 shares at fiscal year-end 1998.
A summary of stock option transactions related to the stock option plans
during the three fiscal years ended February 28, 1998 is as follows (the
summary reflects the effect of the three for two stock split, effected in the
form of a stock dividend distributed July 30, 1997):
Weighted Exercisable Shares
Average Weighted Average ------------------------------
Exercise Fair Value at Number of Weighted Average
Shares Price Date of Grant Shares Exercise Price
------ -------- ---------------- ---------- ----------------
Outstanding at February 25, 1995 1,871,765 $ 4.47 1,031,783 $ 5.01
Options granted (includes effect of 5%
stock dividend) 690,231 6.87 $2.62
Options exercised (340,194) 3.01
Options cancelled or expired (109,590) 5.30
---------
Outstanding at March 2, 1996 2,112,212 5.13 1,058,162 4.21
Options granted 1,248,317 11.03 4.28
Options exercised (473,052) 3.44
Options cancelled or expired (13,080) 5.31
---------
Outstanding at March 1, 1997 2,874,397 7.97 904,905 5.33
Options granted 591,000 18.83 7.77
Options exercised (626,277) 5.89
Options cancelled or expired (179,832) 8.64
---------
Outstanding at February 28, 1998 2,659,288 10.82 900,221 7.74
=========
For shares outstanding at February 28, 1998:
Weighted
Average Weighted Average Shares Weighted Average
Total Exercise Remaining Currently Exercise Price -
Ranges of Exercise Prices Shares Price Contractual Life Exercisable Exercisable Shares
------------------------- ------ -------- ---------------- ----------- ------------------
$ 2.71 - $ 5.70 528,445 $ 4.83 5.73 369,165 $ 4.76
$ 6.02 - $11.33 1,570,593 9.86 8.29 513,056 9.55
$17.31 - $17.81 41,750 17.47 9.38 18,000 17.54
$19.25 - $23.00 518,500 19.29 9.82
At February 28, 1998 and March 1, 1997, outstanding options covering
900,221 and 904,905 shares were exercisable and 1,124,806 and 1,411,182
shares were available for grant, respectively.
The Company accounts for its stock options using the intrinsic value-
based method of accounting prescribed by APB Opinion No. 25 but is required
to disclose the pro forma effect on net income and earnings per share as if
the options were accounted for using a fair value-based method of accounting.
The fair values for options issued in fiscal 1998 and fiscal 1997 have been
estimated as of the date of grant using a binomial option pricing model with
the following weighted-average assumptions for 1998, 1997 and 1996,
respectively: risk-free interest rates of 5.76%, 6.14% and 6.10%, expected
volatility factors of .3465, .3012 and .3054, expected dividend yields of
0.8% for all three years, and weighted average expected lives of six years
from date of grant to date of exercise for all options. For purposes of
computing pro forma net income and earnings per share, the fair value of the
stock options is amortized on a straight-line basis as compensation expense
over the vesting periods of the options. The pro forma effects on net income
and earnings per share are as follows (in thousands of dollars except for per
share information):
1998 1997 1996
------- ------- ------
Pro forma net income $76,995 $43,710 $9,940
======= ======= =======
Pro forma basic earnings per share $1.14 $.68 $.17
===== ==== ====
Pro forma diluted earnings per share $1.07 $.65 $.17
===== ==== ====
Binomial option valuation models are used in estimating the fair value
of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of
highly subjective assumptions, including the expected stock price volatility
and the average life of options. Because the Company's stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its stock
options. In addition, the pro forma net income and earnings per share
amounts shown above for fiscal 1998, 1997 and 1996 do not include the effect
of any grants made prior to fiscal 1996.
Share purchase rights plan - On December 9, 1994, the Board of Directors
adopted a Share Purchase Rights Plan and declared a dividend of one common
stock purchase right (a "Right") payable on each outstanding share of the
Company's common stock on December 21, 1994, and authorized the issuance of
Rights for subsequently issued shares of common stock. The Rights, which
will expire on December 21, 2004, are initially not exercisable, and until
becoming exercisable will trade only with the associated common stock. After
the Rights become exercisable, each Right entitles the holder to purchase at
a specified exercise price one share of common stock. The Rights will become
exercisable after the earlier to occur of (i) 10 days following a public
announcement that a person or group of affiliated or associated persons have
acquired beneficial ownership of 15% or more of the outstanding common stock
or (ii) 10 business days (or such later date as determined by the Board of
Directors) following the commencement of, or announcement of an intention to
make, a tender or exchange offer the consummation of which would result in
beneficial ownership by a person or group of 15% or more of the outstanding
common stock. If the Company were acquired in a merger or other business
combination transaction or 50% or more of its consolidated assets or earning
power were sold, proper provision would be made so that each Right would
entitle its holder to purchase, upon the exercise of the Right at the then
current exercise price, that number of shares of common stock of the
acquiring company having a market value of twice the exercise price of the
Right. If any person or group were to acquire beneficial ownership of 15% or
more of the Company's outstanding common stock, each Right would entitle its
holder (other than such acquiring person whose Rights would become void) to
purchase, upon the exercise of the Right at the then current exercise price,
that number of shares of the Company's common stock having a market value on
the date of such 15% acquisition of twice the exercise price of the Right.
The Board of Directors may at its option, at any time after such 15%
acquisition but prior to the acquisition of more than 50% of the Company's
outstanding common stock, exchange all or part of the then outstanding and
exercisable Rights (other than those held by such acquiring person whose
Rights would become void) for common stock at an exchange rate per Right of
one-half the number of shares of common stock receivable upon exercise of a
Right. The Board of Directors may, at any time prior to such 15%
acquisition, redeem all the Rights at a redemption price of $.01 per Right.
Shares reserved for future issuances - As of February 28, 1998, the
Company has approximately 90,760,000 shares reserved for future issuances
under the stock plans, conversion of the 5 3/4% convertible subordinated
notes due 2003 and the share purchase rights plan.
Note 9 - Income Taxes
The provision for income taxes, net of income tax benefit for
extraordinary charges in fiscal 1997, consists of (in thousands):
1998 1997 1996
------- ------ ------
Federal:
Current $45,603 $24,487 $18,801
Deferred (5,442) (320) (3,864)
State:
Current 5,705 4,879 3,583
Deferred (699) (40) (446)
Foreign:
Current 797 376 326
------- ------- -------
$45,964 $29,382 $18,400
======= ======= =======
Deferred tax assets (liabilities) at February 28, 1998 and March 1, 1997
are comprised of the following (in thousands):
1998 1997
------- -------
Deferred tax assets:
Capital loss carryforwards $ 1,248 $ 1,890
Inventory 4,601 1,362
Deferred compensation 7,135 5,460
Accrued average rent 6,694 6,498
Trading losses 4,014 7,609
Losses on The Pier Retail Group Ltd. 2,759 3,103
Self insurance reserves 3,178 990
Other 1,990 308
-------- --------
31,619 27,220
Valuation allowance (6,199) (9,794)
-------- --------
Total deferred tax assets 25,420 17,426
-------- --------
Deferred tax liabilities:
Fixed assets, net (5,453) (3,600)
------- -------
Total deferred tax liabilities (5,453) (3,600)
------- -------
Net deferred tax assets $19,967 $13,826
======= =======
At February 28, 1998, the Company had net capital loss carryforwards of
approximately $3.2 million for income tax purposes that expire in the year
2000. For financial reporting purposes, a valuation allowance has been
established to offset the deferred tax assets relating to trading losses and
to partially offset losses of The Pier.
The Company has settled and closed all Internal Revenue Service ("IRS")
examinations of the Company's tax returns for all years through fiscal 1995.
Federal income tax returns for fiscal years 1997 and 1996 are currently under
examination. The Company does not anticipate adjustments, if any, arising
from this examination to have a material impact on the Company's results of
operations.
The difference between income taxes at the statutory federal income tax
rate of 35% in fiscal 1998, 1997 and 1996, and income tax reported in the
consolidated statement of operations is as follows (in thousands):
1998 1997 1996
------- ------- -------
Tax at statutory federal tax rate $43,404 $25,714 $ 9,957
Valuation allowance (3,595) 1,162 7,977
State income taxes, net of federal
benefit 5,580 3,300 1,280
Work opportunity tax credit, foreign
tax credit and R&E credit (541) -- (215)
Net foreign income taxed at lower
rates (590) (69) (365)
Other, net 1,706 (725) (234)
------- ------- -------
$45,964 $29,382 $18,400
======= ======= =======
Note 10 - Commitments and Contingencies
Leases - The Company leases certain property consisting principally of
retail stores, warehouses and material handling and computer equipment under
leases expiring through the year 2015. Most retail store locations are
leased for initial terms of 10 to 15 years with varying renewal options and
rent escalation clauses. Certain leases provide for additional rental
payments based on a percentage of sales in excess of a specified base.
Capital leases, which are insignificant in fiscal 1998 and 1997, are
recorded in the Company's balance sheet as assets along with the related debt
obligation. All other lease obligations are operating leases, and payments
are reflected in the Company's consolidated statement of operations.
At February 28, 1998, the Company had the following minimum lease
commitments in the years indicated (in thousands):
Operating
Fiscal Year Leases
----------- ---------
1999 $ 99,302
2000 89,459
2001 80,434
2002 69,735
2003 61,856
Thereafter 241,331
--------
Total lease commitments $642,117
========
Present value of total operating
lease commitments at 10.5% $413,395
========
Rental expense incurred was $104,797,000, $102,409,000 and $96,693,000,
including contingent rentals of $677,000, $463,000 and $784,000, based upon a
percentage of sales, and net of sublease incomes totalling $1,821,000,
$1,500,000 and $1,647,000, in fiscal 1998, 1997 and 1996, respectively.
The Company has commitments from unaffiliated parties to make available
up to $23.6 million for the development or acquisition of stores leased by
the Company. As of February 28, 1998, the Company had utilized all of that
availability. This facility was extended to June 15, 1998 at which time the
Company expects to find alternative financing.
Legal matters - In addition to the legal matters discussed in Note 12,
there are various other claims, lawsuits, investigations and pending actions
against the Company and its subsidiaries incident to the operations of its
business. Liability, if any, associated with these other matters is not
determinable at February 28, 1998; however, the Company considers them to be
ordinary and routine in nature. The Company maintains liability insurance
against most of these claims. While certain of the lawsuits involve
substantial amounts, it is the opinion of management, after consultation with
counsel, that the ultimate resolution of such litigation will not have a
material adverse effect on the Company's financial position, results of
operations or liquidity.
Note 11 - Supplemental Cash Flow Information
The following is supplemental cash flow information (in thousands):
1998 1997 1996
------- ------- -------
Cash paid during the year for:
Interest $ 8,344 $10,891 $12,937
Income taxes 40,783 34,810 22,405
Note 12 - Trading Losses and Recoveries
In late December 1995, the Company was made aware of losses of $19.3
million resulting from 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 from 1986 through 1995 and provided funds under his management
which 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
brokerage firms that executed the transactions purportedly in accordance with
the consultant's instructions. Management believes that these statements
represent the best evidence of the transactions available to the Company. As
a result, the Company restated its financial statements for affected periods
to reflect the gains and losses in the periods indicated by the brokerage
firm statements. The effect on the financial statements for fiscal years
ended March 2, 1996 and February 25, 1995 was to reduce net income by net
trading losses of $16.5 million and $2.8 million, respectively. The Company
had not recorded any tax benefit on these losses.
On January 3, 1996, a derivative suit, entitled John P. McCarthy Profit
Sharing Plan, et al. v. Clark A. Johnson et al., was filed by a stockholder
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 the outside financial consultant of the Company. The complaint
alleged that the Directors and executives of the Company violated their
duties to the Company and its stockholders 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 stockholders. The suit sought an award in the amount of all
damages sustained by the Company. On February 12, 1996, the Company filed a
related cross-claim suit against S. Jay Goldinger, the financial consultant,
and his firm, Capital Insight, and a third-party claim against a commodity
brokerage firm, Refco, Inc., asserting conspiracy and fraud and seeking
damages sustained by the Company from the trading activities managed by
Goldinger. The Company's former chief financial officer filed cross-
claims against the Company seeking unpaid and post-employment benefits and
damages for alleged libel and slander by the Company. The Company filed
cross-claims against its former chief financial officer based on his actions
related to the investments which led to the trading losses.
In July 1997, the court approved a settlement among the Company, its
Directors and officers and the commodities brokerage firm that executed the
trades for S. Jay Goldinger, pursuant to which the commodities brokerage firm
paid the Company $7.5 million. The commodities brokerage firm and the
Company and its Directors and current officers who were parties to the suit
provided mutual releases and such parties' claims against each other were
dismissed. Additional settlements from other parties were approved in the
fourth quarter of fiscal 1998 which provided aggregate payments to the
Company of $3.5 million and provided mutual releases to all parties. Total
recoveries of the previously reported trading losses aggregated $11.0
million, of which the Company has considered $1.9 million as a reimbursement
of legal fees associated with the recovery of these losses. As the Company
had not recorded any tax benefit on the previously reported net trading
losses, no tax expense has been provided on the net trading recoveries. All
litigation related to this matter has been settled.
Note 13 - Provision for Sunbelt Nursery Group, Inc. Defaults
In connection with the Company's sale of its Sunbelt Nursery Group, Inc.
("Sunbelt") investment to General Host Corporation ("General Host") in April
1993, the Company committed to provide Sunbelt a $12 million credit facility
through April 1994 and up to $25 million of non-revolving store development
financing through April 1996. In October 1994, in connection with the sale
by General Host of its 49.5% interest in Sunbelt to a third party unrelated
to the Company or General Host, the Company received payment of the amounts
owed under the credit facility and agreed to extend $22.8 million of the non-
revolving store development financing to Sunbelt until June 30, 1998, at
market rental rates.
In April 1995, Sunbelt defaulted on 13 store sublease agreements with
the Company comprising the $22.8 million of non-revolving store development
financing, and the Company terminated the subleases. In July 1995, the
Company entered into a settlement agreement with Sunbelt which required the
Company to record a pre-tax charge of $14.0 million in its fiscal 1996 first
quarter as its best estimate of the costs to disengage from its financial
support of Sunbelt. The charge included estimated losses resulting from
terminating the subleases and disposing of the properties. As of February
28, 1998, all 13 nursery store properties had been sold at costs consistent
with the Company's estimates used to record the charge. However, the Company
also guarantees other Sunbelt store lease commitments, through the year 2001,
aggregating $2.1 million with a present value of approximately $1.8 million
at fiscal 1998 year-end. In March 1998, Sunbelt initiated bankruptcy
proceedings. The Company believes it has accrued sufficient amounts to cover
any deficiencies in Sunbelt's payments on these store lease commitments.
Note 14 - Related Parties
In March 1993, the Company invested $3 million in a limited partnership
fund with Whiffletree Partners, L.P., which is managed by Whiffletree
Corporation, one of whose principals is Steven E. Berman, a brother of Martin
L. Berman. Whiffletree Corporation is an affiliate of Palisade Capital
Securities, L.L.C., of which Martin L. Berman is currently Chief Executive
Officer. In April 1996, the Company divested its interest in Whiffletree
Partners, L.P. for net proceeds of approximately $4.7 million after deducting
fees of $0.3 million.
Since fiscal 1988, interest-bearing loans have been outstanding to
certain Company officers. During fiscal 1998, certain officers repaid
approximately $971,000 to the Company on these interest-bearing loans.
Note 15 - Selected Quarterly Financial Data (Unaudited)
Summarized quarterly financial data (in thousands except per share
amounts) for the years ended February 28, 1998 and March 1, 1997 are set
forth below:
Three Months Ended
--------------------------------------
Fiscal 1998 5/31/97 8/30/97 11/29/97 2/28/98
----------- -------- -------- -------- --------
Net sales $229,243 $258,105 $262,751 $325,306
Gross profit 99,156 106,663 115,778 139,871
Net income(1) 12,639 22,042 16,795 26,571
Basic earnings per share(1)(2)(3) $.19 $.33 $.25 $.39
Diluted earnings per share(1)(2)(3) $.18 $.30 $.23 $.36
Three Months Ended
--------------------------------------
Fiscal 1997 6/01/96 8/31/96 11/30/96 3/01/97
----------- -------- -------- -------- --------
Net sales $205,292 $231,050 $225,598 $285,151
Gross profit 81,697 89,993 95,544 117,228
Income before extraordinary
charges 8,273 11,420 10,628 17,888
Extraordinary charges, net of
income tax benefit(4) -- -- 4,122 --
Net income 8,273 11,420 6,506 17,888
Basic earnings per share(2)(3)(4) $.14 $.18 $.10 $.27
Diluted earnings per share before
extraordinary charges(2)(3)(4) $.13 $.17 $.15 $.25
- -------------------
(1) Fiscal 1998 second and fourth quarters' net income includes net trading
loss recoveries of $6,355 and $2,746, respectively.
(2) Reflects the effect of the adoption of SFAS No. 128, "Earnings per
Share."
(3) Reflects the effect of the three for two stock split, effected in the
form of a stock dividend, distributed July 30, 1997.
(4) During the third quarter of fiscal 1997, the Company recorded pre-tax
extraordinary charges aggregating $6,869 due to the early retirement of
debt. The effect of the extraordinary charges in the third quarter of
fiscal 1997 resulted in a reduction of diluted earnings of $.05 per
share.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None
PART III
Item 10. Directors and Executive Officers of the Company.
Information required by this Item is incorporated herein by reference to
the Sections entitled "Election of Directors" set forth in the Company's
Proxy Statement for its 1998 Annual Meeting of Shareholders.
The information regarding compliance with Section 16(a) of the
Securities Exchange Act of 1934 is incorporated herein by reference to the
Section entitled "Section 16(a) Beneficial Ownership Reporting Compliance"
set forth in the Company's Proxy Statement for its 1998 Annual Meeting of
Shareholders.
Item 11. Executive Compensation.
The information required by this Item is incorporated herein by
reference to the Section entitled "Executive Compensation" set forth in the
Company's Proxy Statement for its 1998 Annual Meeting of Shareholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this Item is incorporated herein by
reference to the Sections entitled "Election of Directors - Security
Ownership of Management" and "Election of Directors - Security Ownership of
Certain Beneficial Holders" set forth in the Company's Proxy Statement for
its 1998 Annual Meeting of Shareholders.
Item 13. Certain Relationships and Related Transactions.
The information required by this Item is incorporated herein by
reference to the Section entitled "Certain Relationships and Related
Transactions" set forth in the Company's Proxy Statement for its 1998 Annual
Meeting of Shareholders.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) List of consolidated financial statements, schedule and exhibits
filed as part of this report.
1. Financial Statements
* Report of Independent Auditors
* Consolidated Statements of Operations for the years ended
February 28, 1998, March 1, 1997 and March 2, 1996
* Consolidated Balance Sheets at February 28, 1998 and March
1, 1997
* Consolidated Statements of Cash Flows for the years ended
February 28, 1998, March 1, 1997 and March 2, 1996
* Consolidated Statements of Stockholders' Equity for the
years ended February 28, 1998, March 1, 1997 and March 2,
1996
2. Financial Statement Schedules
For the Years Ended February 28, 1998, March 1, 1997 and
March 2, 1996
* II - Valuation and Qualifying Accounts and Reserves
Schedules other than those referred to above have been omitted
because they are not required or are not applicable or because
the information required to be set forth therein either is not
material or is included in the financial statements or notes
thereto.
3. Exhibits
See Exhibit Index
(b) Reports on Form 8-K.
None
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: May 29, 1998 PIER 1 IMPORTS, INC.
By: /s/ Clark A. Johnson
Clark A. Johnson, Chairman
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Company and in the capacities and on the dates indicated.
Signature Title Date
/s/Stephen F. Mangum Chief Financial Officer May 29, 1998
Stephen F. Mangum and Principal Accounting
Officer
/s/ Clark A. Johnson Chairman and Chief May 29, 1998
Clark A. Johnson Executive Officer
/s/ Marvin J. Girouard Director, President and May 29, 1998
Marvin J. Girouard Chief Operating Officer
/s/ Sally F. McKenzie Director May 29, 1998
Sally F. McKenzie
/s/ James M. Hoak, Jr. Director May 29, 1998
James M. Hoak, Jr.
/s/ Martin L. Berman Director May 29, 1998
Martin L. Berman
/s/ Craig C. Gordon Director May 29, 1998
Craig C. Gordon
SCHEDULE II
PIER 1 IMPORTS, INC. AND CONSOLIDATED SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(in thousands)
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Year Ended
--------------------------------
February 28, March 1, March 2,
1998 1997 1996
------------ -------- --------
Balance at beginning of year $ 267 $ 3,949 $ 2,335
Additions charged to income 1 6,728 5,763
Balances written off, net of recoveries (126) (5,572) (4,149)
Reserve reversal in conjunction with
securitization -- (4,838) --
------- ------- -------
Balance at end of year $ 142 $ 267 $ 3,949
======= ======= =======
EXHIBIT INDEX
Exhibit No. Description
3(i) Certificate of Incorporation and Amendments thereto incorporated
herein by reference to Exhibit 3(i) to Registrant's Form 10-K for
the fiscal year ended March 2, 1996.
3(ii) Bylaws of the Company, Restated as of December 7, 1994, incorporated
herein by reference to Exhibit 3(ii) to the Company's Form 10-Q for
the quarter ended November 26, 1994.
4.1 Rights Agreement dated December 9, 1994, between the Company and
First Interstate Bank, N.A., as rights agent, incorporated herein by
reference to Exhibit 4 to the Company's Registration Statement on
Form 8-A, Reg. No. 1-7832, filed December 20, 1994.
4.2 Indenture, dated September 18, 1996, between the Company and Wells
Fargo Bank (Texas), N.A., as Trustee, relating to 5 3/4% Convertible
Subordinated Notes Due 2003, incorporated herein by reference to
Exhibit 4.1 to Amendment No. 2 to the Company's Registration
Statement on Form S-3, Reg. No. 333-10677, filed September 11, 1996.
As permitted by Item 601(b)(4)(iii) of Regulation S-K, Exhibit
Number 4 omits instruments relating to issues of long-term debt of
the Company and its subsidiaries, the total authorized principal
amount of which for each issue does not exceed 10% of the
consolidated total assets of the Company and its subsidiaries. The
Company agrees to furnish a copy of any such instrument to the
Securities and Exchange Commission upon request.
10.1* Form of Indemnity Agreement between the Company and the directors
and executive officers of the Company, incorporated herein by
reference to Exhibit 10(l) to the Company's Form 10-K for the fiscal
year ended February 29, 1992.
10.2* The Company's Supplemental Executive Retirement Plan effective May
1, 1986, as amended and restated as of January 1, 1996, incorporated
herein by reference to Exhibit 10.2 to the Company's form 10-K for
the fiscal year ended March 1, 1997.
10.3* The Company's Supplemental Retirement Plan effective September 28,
1995, incorporated herein by reference to Exhibit 10.1 to the
Company's Form 10-Q for the quarter ended June 1, 1996.
10.4* The Company's Benefit Restoration Plan as Amended and Restated
effective July 1, 1995, incorporated herein by reference to Exhibit
10.5.1 to the Company's Form 10-Q for the quarter ended May 27,
1995.
10.5* The Company's Restricted Stock Plan effective March 5, 1990,
incorporated herein by reference to Exhibit 10(p) to the Company's
Form 10-K for the fiscal year ended March 3, 1990.
10.6* The Company's Management Restricted Stock Plan, effective June 24,
1993, incorporated herein by reference to Exhibit 10.7 to the
Company's Form 10-K for the fiscal year ended February 25, 1995.
10.7* The Company's 1989 Employee Stock Option Plan, effective June 29,
1989, incorporated herein by reference to Exhibit 10(q) to the
Company's Form 10-K for the fiscal year ended March 3, 1990; as
amended by Amendment No. 1 to the 1989 Employee Stock Option Plan,
incorporated herein by reference to the Company's Form 10-Q for the
quarter ended June 1, 1996.
10.8* The Company's 1989 Non-Employee Director Stock Option Plan,
effective June 29, 1989, incorporated herein by reference to Exhibit
10(r) to the Company's Form 10-K for the fiscal year ended March 3,
1990.
10.9* Form of Post-Employment Consulting Agreement between the Company and
its executive officers, incorporated herein by reference to Exhibit
10(r) to the Company's Form 10-K for the fiscal year ended February
29, 1992.
10.10* The Company's Management Medical and Tax Benefit Plans, incorporated
herein by reference to Exhibit 10.18 to the Company's Form 10-K for
the fiscal year ended February 26, 1994.
10.11 Agreement of Settlement dated July 31, 1995 between Pier Lease,
Inc., the Company, Sunbelt Nursery Group, Inc., Wolfe Nursery, Inc.
and Timothy R. Duoos, incorporated herein by reference to Exhibit
10.15 to Sunbelt Nursery Group, Inc.'s Form 10-K/A-2 for the fiscal
year ended January 31, 1995.
10.12 Revolving Credit Agreement, dated December 15, 1995, among the
Company, certain of its subsidiaries, Wells Fargo Bank (Texas),
N.A., Bank One, Texas, N.A., NationsBank of Texas, N.A. and Credit
Lyonnais New York Branch, incorporated herein by reference to
Exhibit 10.1 to the Company's Form 10-Q for quarter ended November
25, 1995.
10.13.1 Pooling and Servicing Agreement, dated February 12, 1997, among Pier
1 Imports (U.S.), Inc., Pier 1 Funding, Inc. and Texas Commerce Bank
National Association, as Trustee, incorporated herein by reference
to Exhibit 10.13 to the Company's Form 10-K for the year ended March
1, 1997.
10.13.2 Amendments Nos. 1, 2 and 3 to the Pooling and Servicing Agreement.
10.14 Form of Deferred Compensation Agreement, between the Company and
senior executive officers, incorporated herein by reference to
Exhibit 10.1 to the Company's Form 10-Q for the quarter ended
November 29, 1997.
10.15* Senior Management Annual Bonus Plan, incorporated herein by
reference to Exhibit 10.1 to the Company's Form 10-Q for the quarter
ended May 31, 1997.
21 Roster of Subsidiaries of the Company
23 Consent of Independent Auditors
27.1 Financial Data Schedule for Twelve-Month Period Ended February 28,
1998.
27.2 Restated Financial Data Schedules for Twelve-Month Periods Ended
March 1, 1997 and March 2, 1996.
27.3 Restated Financial Data Schedules for Nine-Month Period Ended
November 29, 1997, Six-Month Period Ended August 30, 1997 and Three-
Month Period Ended May 31, 1997.
27.4 Restated Financial Data Schedules for Nine-Month Period Ended
November 30, 1996, Six-Month Period Ended August 31, 1996 and Three-
Month Period Ended June 1, 1996.
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*Management Contracts and Compensatory Plans