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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 [FEE REQUIRED]
For the fiscal year ended March 1, 1997.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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) 878-8000
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 7, 1997, there were 45,015,771 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 $925 million.
DOCUMENTS INCORPORATED BY REFERENCE
Location in Form 10-K Incorporated Document
Part III Proxy Statement for 1997 Annual Meeting
PART I
Item 1. Business.
(a) General Development of Business.
From fiscal 1992 through fiscal 1997, the Company, (references to the
"Company" or "Pier 1" shall include Pier 1 Imports, Inc. and its
subsidiaries throughout this document), expanded its specialty retail
operations from 585 North American retail stores to 687 stores. In fiscal
year 1997, the Company continued to execute its expansion plan by opening 50
new North American Pier 1 stores while closing 25 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 55 new Pier 1 stores in fiscal year 1998 and plans to close 29
stores, contingent upon lease renewal negotiations and relocation space
availability.
Set forth below is a list by city of Pier 1 stores opened in North
America in fiscal 1997:
Alpharetta, GA Lafayette, IN
Birmingham, AL Lake Grove, NY
Charlotte, NC Littleton, CO
Clarksville, IN Maple Grove, MN
Columbia, MO Merritt Island, FL
Conroe, TX Muncy, PA
Dickson, PA Newport, RI
Duluth, MN Niles, IL
Eagan, MN Oakville, OT
East York, OT Oklahoma City, OK
Encinitas, CA Phoenix, AZ
Fairless Hills, PA Portland, OR
Falls Church, VA Santa Fe, NM
Fayetteville, AR Sarasota, FL
Fort Worth, TX Staten Island, NY
Freehold, NJ Sugarland, TX
Gainesville, FL Sunset Valley, TX
Gainesville, GA Tacoma, WA
Hamden, CT Temple, TX
High Point, NC Vero Beach, FL
Houston, TX Virginia Beach, VA
Humble, TX Washington, DC
Key West, FL Willow Grove, PA
Knoxville, TN Woodbury, MN
La Mesa, CA Yakima, WA
During fiscal 1997, the Company continued its program to redesign 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 refurnish
older stores. In the fiscal year 34 stores were remodeled and
remerchandised and 54 were remerchandised.
During fiscal 1997, the Company acquired two corporations which owned
38 Pier 1 store locations which were leased to the Company at the time of
the acquisition.
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 is a
fifteen-store retail operation that offers decorative home furnishings and
related items in a store setting similar to Pier 1 stores. At fiscal 1997
year-end, The Pier operated thirteen stores in England, one store in Wales
and one in Scotland. At the end of fiscal 1997, the Company's net
investment in The Pier was $6.5 million. The Company also guarantees a bank
line available to The Pier of 5.0 million British Pounds (or $8.1 million)
and as of March 1, 1997, $6.1 million was outstanding under this line. While
the history of The Pier reflects net losses aggregating $7.8 million since
fiscal 1993, The Pier's fiscal 1997 results were better than planned and the
current plan indicates marginal profitability and positive cash flow in
fiscal 1998.
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
certain Sears Mexico stores throughout Mexico. Presently, nine Sears Mexico
stores offer Pier 1 merchandise and the parties have entered into a letter
of intent to formally franchise these nine locations and all future
locations. Along with the change in the structure of the arrangement with
Sears Mexico and the prospects for an expanding Mexican economy, the
franchise agreement will substantially insulate the Company from currency
fluctuations which have reduced its profitability in the past.
The Company entered into another separate 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 the Sears Puerto Rico stores.
Sears Puerto Rico operates 10 stores in Puerto Rico, four of which offer
Pier 1 merchandise. During the second quarter of fiscal 1998, Sears Puerto
Rico plans to begin marketing and selling Pier 1 merchandise in two
additional existing stores. Puerto Rico operations were marginally
profitable in fiscal 1997 and are planned to improve as new locations are
added.
Additionally 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. In fiscal 1997, Akatsuki has expanded its retail operations to
five Pier 1 stores in the Tokyo metropolitan area and surrounding suburbs
and, due to the success of the stores opened to date, the Company and
Akatsuki have agreed to accelerate the expansion plan and open an additional
twelve stores by the end of fiscal 1998. The agreement provides for the
licensing of up to 100 total stores.
In October 1996, the Company completed its planned elimination of high
cost fixed debt from its balance sheet. The transactions included the
conversion of $68,250,000 of its 6 7/8 subordinated convertible debentures
into the Company's common stock which eliminated this obligation from the
balance sheet. Further the Company sold $86.25 million of 5 3/4%
convertible subordinated notes and utilized the proceeds to retire $18.6
million of 11 1/2% subordinated debentures, and $25 million in 11% senior
notes and to reduce the Company's outstanding bank revolving credit facility
by $38 million.
In February 1997, the Company closed the securitization of its
proprietary credit card receivables through a private placement of trust
certificates which bear interest at the rate of 6.74% per annum and have an
average life of approximately five years. The Company received cash
proceeds of approximately $50 million.
In May 1997, the Company purchased a national bank charter in Omaha,
Nebraska. The Company plans to use the newly named Pier 1 National Bank to
standardize the interest rates and fees charged on its proprietary credit
card and export the Nebraska interest rate to the 46 states where the
Company operates stores. The Company has 2.27 million card holders.
On July 31, 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. Pursuant to the settlement
agreement, Sunbelt agreed to a claim by the Company of $14.7 million and
agreed to continue to sublease the 13 stores at market rates for up to three
years or until the Company is able to find buyers for the properties. As of
March 1, 1997, the Company had sold seven of the 13 subleased stores.
Additionally, Sunbelt is obligated to make future deferred payments out of
its cash flow above specified levels up to a total of $8 million, with the
ability to prepay the obligation at a significant discount. Sunbelt
estimates that payments to the Company will commence in 2009 and the
obligation will be fully satisfied in the year 2016. If Sunbelt fully
performs its obligations relating to these and other terms of the settlement
agreement, the remaining $6.7 million of the Company's claim will be deemed
satisfied. On January 31, 1997 Sunbelt and the Company modified the terms
of the settlement agreement to allow Sunbelt the opportunity to eliminate
the existing $8.0 million obligation for a total consideration of $2.0
million, which is comprised of $200,000 in cash, $.8 million in a note and
the remaining $1.0 million to be settled by Mr. Duoos, Chairman of the
Board, on behalf of Sunbelt upon the registration and sale of $1.0 million
of his personal shares of common stock in Sunbelt, valued on the date
delivered and immediately following the registration of the shares with the
Securities and Exchange Commission. The Company has the unilateral right to
terminate this agreement (i) if the Sunbelt shares are not delivered by May
30, 1997 or (ii) if the closing price of Sunbelt's common stock on the day
immediately preceding the delivery date is less than one dollar per share.
(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 name "Pier 1 Imports," "The Market of Pier 1" and
"The Pier," selling a wide variety of furniture, decorative home
furnishings, dining and kitchen goods, accessories and other specialty items
for the home. At the end of fiscal 1997, the Company had completely
discontinued casual clothing and fashion accessories in all Pier 1 stores.
On March 1, 1997, Pier 1 operated 661 stores in 47 states of the United
States, 25 stores in two Canadian provinces and 1 store in Puerto Rico. It
also had 20 franchised stores in 15 states. Additionally, the Company,
through certain subsidiaries, operated 15 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
dedicated retail space in nine Sears Mexico stores and in four Sears Puerto
Rico stores. The Company has five franchise stores in Tokyo and surrounding
suburbs. 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 1997, net sales of the
Company totalled $947.1 million of which The Pier totalled $20.3 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. 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 and kitchen areas, and constituted approximately 31.5%, 32.8% and
32.8% of the total retail sales of Pier 1 in fiscal years 1997, 1996, and
1995, respectively. These goods are purchased mainly from Italy, Malaysia,
Chile, China, the Philippines and Indonesia, as well as domestic sources
and are made of metal and handcrafted natural materials, including rattan,
pine, beech, rubberwood and selected hardwoods with either natural, stained
or painted finishes.
DECORATIVE HOME FURNISHINGS - This product group constituted the
broadest category of merchandise in Pier 1's sales mix and contributed
approximately 27.5%, 27.0% and 27.5% to Pier 1's total retail sales in
fiscal years 1997, 1996 and 1995, 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 purchased mainly from India, the Far
East and Europe and includes ceramics, dinnerware and other functional and
decorative items. These goods accounted for approximately 13.8%, 14.1% and
14.3% of the total retail sales of Pier 1 in fiscal years 1997, 1996 and
1995, respectively.
BED & BATH - This product group is imported mainly from India, England,
Italy and China, as well as domestic sources and includes bath and fragrance
products, candles, and bedding. These goods accounted for approximately
12.2%, 9.2% and 7.8% of the total retail sales of Pier 1 in fiscal years
1997, 1996 and 1995, 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 9.6%,
9.3% and 8.7% of the total retail sales of Pier 1 in fiscal years 1997, 1996
and 1995, respectively.
APPAREL - This product group is imported from India, Greece, Thailand
and Indonesia and accounted for approximately 5.4%, 7.6% and 8.9% of the
total retail sales of Pier 1 in fiscal years 1997, 1996 and 1995,
respectively. Apparel has now been completely discontinued.
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 1997, Pier 1 imported approximately 30.3% of
its purchases from China, 18.1% from India, and 28.7% from Indonesia, Japan,
Thailand, the Philippines, and Italy. The remaining 22.9% was imported from
various Asian, European, Central American, South American and African
countries or obtained from United States manufacturers, wholesalers or
importers. 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 6 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 and on a temporary basis. 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 center's region. The merchandise is then distributed
to the retail stores by leased fleet and contract carriers. 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 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
may offer fewer items and change them 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., international or
Canadian 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.
In 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 United States 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 three previous occasions, the U.S. Trade Representative
identified China as a priority foreign country under the Act, which
designations were rescinded after agreements were reached with China
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. In May 1997, the
President indicated he would recommend to Congress renewal of China's MFN
trading status. Congress has 90 days from June 3, 1997 to revoke China's
MFN status. If no action is taken, China's MFN status would be renewed for
one year from July 3, 1997. 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 five 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 and 1,907,947 for the mark PIER 1 IMPORTS FOR
A CHANGE and 1,903,864 for the mark FOR A CHANGE. 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 March 1, 1997, the Company employed a total of 11,255 persons:
5,721 were full-time employees and 5,534 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, Puerto Rico
and Mexico.
Item 2. Properties.
As a holding company, the Company does not own any physical property
materially important to the conduct of its business operations. The
Company's home office in Fort Worth, Texas is leased by Pier 1.
A subsidiary of the Company leases certain properties consisting
principally of retail stores, warehouses and office space. The subsidiary
leases currently provide 136,777 square feet of office space in downtown
Fort Worth for the Company's home office. Most of the Company's North
American retail store operations are conducted pursuant to leases which are
classified as operating leases, and at March 1, 1997, the present value of
the Company's minimum future operating lease commitments aggregated
approximately $375 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 North
American stores as of March 1, 1997:
United States and Puerto Rico
- -----------------------------
Alabama 8 Nebraska 4
Arizona 10 Nevada 3
Arkansas 4 New Hampshire 4
California 78 New Jersey 20
Colorado 15 New Mexico 3
Connecticut 13 New York 34
Delaware 2 North Carolina 14
Florida 48 North Dakota 3
Georgia 20 Ohio 31
Idaho 3 Oklahoma 6
Illinois 33 Oregon 6
Indiana 15 Pennsylvania 27
Iowa 5 Puerto Rico 1
Kansas 6 Rhode Island 3
Kentucky 6 South Carolina 7
Louisiana 9 South Dakota 2
Maryland 16 Tennessee 13
Massachusetts 20 Texas 56
Michigan 21 Utah 4
Minnesota 17 Virginia 23
Mississippi 4 Washington 17
Missouri 11 West Virginia 1
Montana 2 Wisconsin 13
Wyoming 1
Canada
- ------
Ontario 16
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
Rancho Cucamonga, California 417,000 sq. ft. Leased
Savannah, Georgia 393,216 sq. ft. Owned
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 $25.0 million for development or
acquisition of properties leased by Pier 1. As of March 1, 1997, the
Company utilized $23.9 million of that availability. This facility expires
December 30, 1997, at which time the Company must extend the term of the
facility or purchase the properties covered under the facility. 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.
During fiscal 1997, the Company acquired two corporations which owned
38 Pier 1 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.
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 March 1, 1997. 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 December 27, 1995, a derivative suit, entitled Harry Lewis v. Clark
A. Johnson, et al., was filed by a stockholder on behalf of the Company in
the Delaware Chancery Court against each member of the Company's Board of
Directors. The complaint alleged that the Directors violated their
fiduciary duties to the Company and its stockholders by not adequately
supervising the officers, employees and agents of the Company who were
responsible for the trading activities that resulted in the $19.3 million in
losses described in Note 12 to the financial statements. The suit was
consolidated with four other stockholder derivative suits and was dismissed
without prejudice on April 14, 1997.
On January 3, 1996, another 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 alleges 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 seeks
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 brokerage firm, Refco, Inc., asserting
conspiracy and fraud and seeking damages sustained by the Company from the
trading activities managed by Goldinger. The plaintiffs agreed to dismiss
without prejudice claims against the Company's officers and directors other
than the former chief financial officer, but Refco subsequently filed a
third-party suit against the Company's officers and directors seeking
indemnification and contribution. 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. The ultimate outcome of such matters cannot presently be
determined.
On January 24, 1996, a suit, entitled Hernan Velasquez v. Clark A.
Johnson, et al., was filed in the District Court of Tarrant County, Texas
against the Company and each member of the Company's Board of Directors.
The complaint asserted a class action by Company stockholders purchasing
and/or holding Company common stock between July 8, 1994, and December 22,
1995, and alleged fraud and violations of the Texas Securities Act in the
dissemination of materially false and misleading information concerning the
Company's financial condition and sought compensatory and exemplary damages
in excess of $50 million in connection with purchases by the stockholder
class of Company common stock during the class period. The suit was
dismissed without prejudice on April 14, 1997.
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 fiscal year.
Executive Officers of the Company
CLARK A. JOHNSON, age 66, 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. He is a Director of Albertson's, Inc., InterTAN, Inc., Metro Media
International Group and Heritage Media Corporation.
MARVIN J. GIROUARD, age 57, 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. Additionally, he serves as a Director of ENSERCH Corporation.
STEPHEN F. MANGUM, age 43, 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.
J. RODNEY LAWRENCE, age 51, 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.
E. MITCHELL WEATHERLY, age 49, 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.
PHIL E. SCHNEIDER, age 45, 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 40, 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.
PERRY R. MCNEELY, age 49, 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.
JAY R. JACOBS, age 42, 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.
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 1997, there were approximately 18,000 stockholders of the
Company's common stock.
Market Price
--------------- Cash Dividends
Fiscal 1997 High Low Per Share(1)
- ----------- ------ ------ --------------
First Quarter 15 3/4 12 $0.04
Second Quarter 17 14 3/8 0.04
Third Quarter 16 1/2 13 0.04
Fourth Quarter 18 5/8 14 5/8 0.04
Fiscal 1996
- -----------
First Quarter(2) 9 1/2 8 $0.03
Second Quarter 10 7 3/4 0.03
Third Quarter 10 7/8 8 7/8 0.03
Fourth Quarter 13 1/4 9 5/8 0.04
____________________
(1) For restrictions on the payments of dividends, see Management's
Discussion and Analysis of Financial Condition and Results of Operations
- Liquidity and Capital Resources.
(2) Market prices and cash dividends have been adjusted to reflect the
effect of the 5% stock dividend distributed May 8, 1995.
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 $22.6 million as of March 1, 1997. The Company's Board of
Directors currently expects to continue to pay cash dividends in fiscal 1998
but intends to retain most of its future earnings for the expansion of the
Company's business. The Company's dividend policy will depend upon the
earnings, financial condition and capital needs of the Company and other
factors deemed relevant by the Company's Board of Directors.
Item 6. Selected Financial Data.
Pier 1 Imports, Inc.
FINANCIAL SUMMARY
($ in millions except per share amounts)
4-Year
Compound
Annual Year Ended
Growth ----------------------------------
Rate 1997 1996 1995 1994 1993
-------- ------ ------ ------ ------ ------
Summary of operations:
Net sales 10.8% $947.1 810.7 712.0 685.4 629.2
Gross profit 11.8% $384.5 325.5 277.6 259.6 246.2
Selling, general and
administrative expenses 11.1% $274.5 235.6 206.0 195.4 180.2
Depreciation and
amortization 7.0% $ 19.8 17.2 16.0 15.8 15.1
Store-closing provision $ - - - 21.3 -
Operating income 15.4% $ 90.2 72.7 55.6 27.1 50.9
Nonoperating expense,
net of income (1) (9.9%) $ 9.9 44.3 22.3 18.8 15.0
Income before income taxes,
extraordinary charges and
equity in net
loss of subsidiary 22.3% $ 80.3 28.4 33.2 8.4 35.9
Equity in net loss of
Sunbelt Nursery Group, Inc. $ - - - - (3.6)
Income before extraordinary
charges 20.3% $ 48.2 10.0 22.1 5.9 23.0
Extraordinary charges, net
of income tax benefit (2) $ 4.1 - - - -
Net income for common
stockholders 17.7% $ 44.1 10.0 22.1 5.9 23.0
Per common share data:(3)
Primary net income for common
stockholders 14.4% $ 1.01 .25 .56 .15 .59
Fully diluted net income
before extraordinary
charges for common stock-
holders 16.8% $ 1.06 .25 .55 .15 .57
Fully diluted net income for
common stockholders 14.2% $ .97 .25 .55 .15 .57
Cash dividends declared 27.8% $ .16 .13 .10 .09 .06
Stockholders' equity 9.7% $ 7.40 5.73 5.60 5.09 5.11
Other financial data:
Working capital(4) (6.1%) $175.1 246.8 265.0 229.0 225.2
Current ratio(4) 2.6 3.5 4.1 3.5 3.4
Total assets 5.5% $570.3 531.1 485.9 463.3 460.5
Long-term debt (6.8%) $111.3 180.1 154.4 145.2 147.2
Stockholders' equity 12.7% $323.0 227.9 222.4 201.1 200.5
Weighted average shares
outstanding and common
stock equivalents
(millions) (3) 43.7 39.8 39.7 39.5 39.2
Effective tax rate(5) 40.0% 64.7 33.6 29.0 25.9
Return on average stock-
holders' equity 16.0% 4.5 10.4 3.0 12.2
Return on average total assets 8.0% 2.0 4.6 1.3 5.4
Pre-tax return on sales(6) 8.5% 3.5 4.7 1.2 5.7
- ---------------------
(1) Nonoperating expense, net of income, is comprised of interest expense
and interest and investment income in each fiscal year presented, and in
addition, includes net trading losses or gains in fiscal years 1996,
1995 and 1994, the provision for Sunbelt
Nursery Group, Inc. defaults in fiscal year 1996 and the write-down of
General Host securities in fiscal years 1995 and 1994.
(2) The Company recorded after-tax extraordinary charges aggregating $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 5% stock dividend distributed May 8, 1995.
(4) The reduction in the fiscal year 1997 working capital and current ratio
is due to the recording as a non-current asset the beneficial interest
from the securitization of proprietary credit card receivables. See:
Note 2 of the Notes to Consolidated Financial Statements.
(5) The Company has not recorded any 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 extraordinary charges, net of income tax benefit, in
fiscal year 1997.
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 720 stores in 47 states, Puerto Rico and Canada, and
international operations in the United Kingdom, Japan and Mexico as of
fiscal 1997 year-end. The Company directly imports merchandise from 44
countries around the world and designs proprietary assortments that become
exclusive Pier 1 Imports offerings. In fiscal 1997, the Company reported
sales of $947.1 million and net income of $44.1 million or $.97 per share on
a fully diluted basis, after recording after-tax extraordinary charges of
$4.1 million for the early retirement of debt. Income before extraordinary
charges aggregated $48.2 million, or $1.06 per share on a fully 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
increased $136.4 million, or 16.8%, to $947.1 million 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 is 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 have improved the
layout and design of approximately 144 new and existing stores during fiscal
1997. The Company's remerchandising strategy focuses 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. North American sales
per average square foot of retail selling space increased to $177.67 in
fiscal 1997 from $164.39 in the prior year, and the North American average
dollar transaction increased 6.6% in fiscal 1997 over fiscal 1996.
Sales on the Company's proprietary credit card aggregated $226.2
million, or 23.9% of total sales, for the 52-week period in fiscal 1997, an
increase of 20.2% over proprietary credit card sales of $188.3 million, or
23.2% of total sales, for the 53-week period in fiscal 1996. Proprietary
credit card customers spent an average of $136 per transaction in fiscal
1997 compared to $130 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 are 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 continues 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 continues 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. See: Notes 6 and 12 of the Notes
to Consolidated Financial Statements.
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
reflects the Company's estimated losses resulting from the lease termination
costs associated with the 13 nursery store subleases and other related
costs. As of March 1997, seven nursery store properties had been sold at
costs consistent with the Company's estimates to record the charge. For
additional information, see the results of operations discussion of the
fiscal years ended March 2, 1996 and February 25, 1995 below.
The Company's effective income tax rate for fiscal 1997 is 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%. The effective
income tax rate for fiscal 1998 is expected to approximate 40%.
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 aggregated $44.1 million, or $.97 per share on a
fully diluted basis, compared to fiscal 1996 net income of $10.0 million, or
$.25 per share. Fiscal 1997 net income before extraordinary charges and
related income tax benefit aggregated $48.2 million, or $1.06 per share on a
fully diluted basis, compared to net income before special charges in fiscal
1996 of $35.6 million, or $.85 per share on a fully 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.
FISCAL YEARS ENDED MARCH 2, 1996 AND FEBRUARY 25, 1995
Net sales grew $98.7 million, or 13.9%, to $810.7 million for the 53-
week period of fiscal 1996 compared to $712.0 million for the 52-week period
of fiscal 1995. For the comparable 52-week period of fiscal 1996 versus the
same period of fiscal 1995, total sales increased 12.0% and same-store sales
increased 6.5%. The growth in sales was partially attributable to the
national television advertising campaign which began in July 1995 and
increased customer traffic and transactions in the stores. In addition, the
Company instituted new in-store selling programs, redesigned stores to
enhance visual merchandising, and remodeled 35 stores in fiscal 1996 as part
of a long-term strategy to refurbish existing stores. During fiscal 1996,
the Company opened 48 conventional Pier 1 stores and 8 mall-based stores,
and closed 22 stores in North America, resulting in an 8.0% increase in the
weighted average store count (which is calculated based on the number of
days a store is open during a given period) over the prior year. Hard goods
sales, such as furniture and decorative accessories, contributed 93% of
total sales, while soft goods sales of apparel, jewelry and accessories
comprised 7% of total sales. Hard goods sales increased 11.8% during fiscal
1996, while soft goods sales declined 6.2% in fiscal 1996 compared to the
year earlier. The Company continued to improve store sales by de-
emphasizing apparel and focusing merchandise selection on products for the
home and family. Sales per average square foot of retail selling space
increased to $164.39 in fiscal 1996 from $154.03 a year ago. Net sales for
fiscal years 1996 and 1995 excluded $3.6 million and $26.7 million,
respectively, for stores included in the fiscal 1994 store-closing program.
Sales on the Company's proprietary credit card comprised 23.2% of the
Company's net sales for fiscal 1996 and aggregated $188.3 million for the
53-week year, up 48.5% from a year earlier. Proprietary credit card
receivables totalled $76.9 million at fiscal 1996 year-end, an increase of
22.7% compared to the prior fiscal year. Proprietary credit card customers
spent an average of $130 per transaction in fiscal 1996, and the number of
active cardholder accounts grew 31% over fiscal 1995. Sales on the
Company's proprietary credit card are encouraged through targeted marketing
promotions.
Gross profit, after related buying and store occupancy costs, expressed
as a percentage of sales, increased 1.2% to 40.2% in fiscal 1996 from 39.0%
in fiscal 1995. Merchandise margins improved to 54.1% in fiscal 1996 from
53.4% in fiscal 1995. The margin growth was due to a shift from newspaper
advertising that emphasized promotional discounts to national television
advertising that focused on bringing new customers into the stores. In
addition, margins improved for the Company with increased emphasis on hard
goods and decreased emphasis on soft goods, as well as the use of 11
Clearance Centers allowing fresh merchandise to be delivered to the stores
throughout the year. Store occupancy costs, as a percentage of sales,
decreased to 14.0% during fiscal 1996 from 14.5% in fiscal 1995. This
improvement was primarily due to leveraging relatively fixed occupancy
expenses on a greater sales base, partially offset by slightly higher market
rates, in the aggregate, on new store leases entered into during fiscal 1996
and incremental increases in floating rate leases linked to LIBOR for
approximately 55 store operating leases. In addition, the Company purchased
the remaining 90% interest in a limited partnership which owns 33 Pier 1
stores previously leased to the Company, thus eliminating base rent expenses
for those stores beginning after December 1995.
Selling, general and administrative expenses, including marketing,
aggregated 29.1% of sales in fiscal 1996 compared to 28.9% of sales in
fiscal 1995. In dollars, the fiscal 1996 increase of $29.6 million over the
prior year was affected by the 53-week year compared to the fiscal 1995 52-
week year, as well as increases in expenses that normally grow
proportionately with sales and net new stores, such as store salaries and
supplies. Although marketing expenses declined slightly as a percentage of
sales, expenses increased $2.5 million to support the shift from primarily
print advertising to primarily television advertising beginning in mid-
summer of fiscal 1996. Additionally, supply expenses increased 0.4% as a
percentage of sales or $4.6 million due, in part, to increased costs
associated with bags, boxes, tissues, and funding of the new exclusive Pier
1 tags. Other costs included in fiscal 1996 selling, general and
administrative expenses were $1.2 million related to the investigation of
the trading losses.
During fiscal 1996, the Company utilized $6.0 million of the remaining
fiscal 1994 store-closing reserve which consisted of $5.0 million for lease
termination costs and $1.0 million for interim operating losses and other
costs. In addition, the Company credited $1.4 million to income during
fiscal 1996 for its changes in estimates relating to the fiscal 1994 store-
closing program. The remaining liability of $4.4 million is for final
payments on lease termination costs on three stores for which settlement
agreements are pending. During the fourth quarter of fiscal 1996, the
Company identified five underperforming stores to close and recorded a
charge of $1.4 million consisting of costs for lease terminations of $0.9
million and fixed asset write-downs of $0.5 million.
In fiscal 1996, operating income improved to 9.0% of sales, a $17.1
million increase over fiscal 1995 in which operating income was 7.8% of
sales.
Net interest expense increased in fiscal 1996 compared to fiscal 1995
primarily due to decreased interest income on lower cash balances and short-
term investments coupled with higher debt levels beginning in the second
half of fiscal 1996.
The Company's special charges in fiscal years 1996 and 1995 included
trading losses and losses related to Sunbelt and General Host Corporation
("General Host") as discussed below.
In late December 1995, the Company was made aware of trading losses of
$19.3 million resulting from substantial trading activities in a
discretionary account. The Company had regularly designated a portion of
its excess cash and short-term investments for management by a financial
consultant in the discretionary account. The amount of funds deposited by
the Company varied during each year, and the funds were generally withdrawn
near the end of each fiscal year. According to statements of the account
provided by brokerage firms that executed trading activity at the financial
consultant's instructions, the funds were invested in treasury bonds,
treasury bond futures contracts and options on treasury bond futures
contracts. The futures and options contracts were often used in a manner
that provided a high degree of speculation and leverage to the invested
funds. As a result of the investigations of the trading losses, the Company
recorded $16.5 million of the net trading losses in fiscal 1996 and restated
its fiscal 1995 financial statements to record $2.8 million of the net
trading losses during that year. Fiscal 1996 and 1995 quarterly financial
statements have been restated to reflect the trading losses and gains during
those periods based on the information available to the Company. The
Company deposited a total of $19.5 million in the discretionary account in
fiscal 1996, and during the first and second quarters incurred net trading
losses in the account of $16.0 million and $0.6 million, respectively, and
during the third quarter attained a net trading gain of $0.1 million.
During the first, second and third fiscal quarters of fiscal 1995, the
Company incurred net trading losses in the account of $1.5 million, $4.2
million and $5.7 million, respectively, and during the fourth quarter
attained a net trading gain of $8.6 million. To the extent trading losses
are not offset by trading gains, 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 $19.3
million in the aggregate.
In April 1993, the Company completed the sale of its 49.5% ownership
interest in Sunbelt to General Host and, in connection with the sale,
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. The Company also had outstanding guarantees on other
Sunbelt store lease commitments which aggregated $4.5 million with a present
value of approximately $3.4 million at fiscal 1996 year-end. 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. Sunbelt also defaulted on three
nursery store lease agreements guaranteed by the Company. In July 1995, the
Company entered into a settlement agreement with Sunbelt concerning
Sunbelt's default on the 13 store sublease agreements and store lease
agreements guaranteed by the Company. Pursuant to the settlement agreement,
Sunbelt agreed to a claim by the Company of $14.7 million (secured by a
second lien on up to $6 million of Sunbelt's assets) and agreed to continue
to sublease the 13 stores for up to three years or until the Company is able
to find a buyer for the properties. Sunbelt also cured the defaults on the
three nursery store leases guaranteed by the Company. Additionally, Sunbelt
is obligated to make future deferred payments out of its cash flow above
specified levels up to a total of $8 million (which may be prepaid with $4
million in payments made by May 1997 or with $6 million in payments made by
May 1998). The remaining $6.7 million of the Company's claim will be deemed
satisfied if Sunbelt fully performs its obligations relating to these and
other terms of the settlement agreement. During the first quarter of fiscal
1996, the Company recorded a pre-tax charge of $14 million which represents
the estimated cost to disengage from its financial support of Sunbelt. 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. As of March 1996, two nursery store properties had been sold
at costs consistent with the Company's estimates used to record the charge.
In the third quarter of fiscal 1995, the Company recorded a non-cash,
pre-tax special charge of $7.5 million to reflect an 'other than temporary'
decline in the market value of the General Host common stock held by the
Company. As a result of the issuance of the Company's exchangeable
debentures in December 1994, the General Host common stock was no longer
available for sale, and the Company no longer had market risk in relation to
the General Host common stock.
The Company's effective income tax rate for fiscal 1996 increased to
64.7% from 33.6% in fiscal 1995. The effective rates for fiscal 1996 and
1995, exclusive of the effects of the aforementioned net trading losses,
would have been 41% and 31%, respectively. The increase in these rates is
primarily due to the benefit of favorable tax treatment from the sale of
Sunbelt common stock recognized in fiscal 1995 and no longer available in
fiscal 1996.
Net income for fiscal 1996 aggregated $10.0 million, or $.25 per
primary share, compared to net income of $22.1 million, or $.56 per primary
share in fiscal 1995. Before special charges in fiscal years 1996 and 1995,
net income improved 18.5% to $35.6 million in fiscal 1996 compared to $30.1
million in fiscal 1995. Special charges in fiscal 1995 included the $7.5
million write-down of the General Host common stock and net trading losses
of $2.8 million.
LIQUIDITY AND CAPITAL RESOURCES
Cash, including temporary investments, increased $18.8 million to $32.3
million in fiscal 1997 from $13.5 million a year earlier. Cash flow from
operations increased $123.7 million to $135.1 million in fiscal 1997 from
$11.4 million in fiscal 1996 primarily due to net income (adjusted for non-
cash and non-operating items) totalling $75.5 million, the sale of the
proprietary credit card receivables in February 1997, which provided net
cash proceeds of $49.6 million, and a reduction in inventory levels of $7.8
million. Other sources of cash during fiscal 1997 included $83.6 million in
net proceeds from the issuance of 5 3/4% convertible subordinated notes in
September 1996 and $4.7 million in net proceeds from the liquidation of the
Whiffletree investment. These cash increases were partially offset by
repayments of long-term debt of $90.6 million, acquisitions aggregating
$59.9 million by the Company of two corporations owning 38 Pier 1 Imports
store locations, which were leased to the Company, capital expenditures of
$36.8 million, purchases of the Company's stock in open market transactions
of $7.7 million, cash dividend payments of $7.0 million, payments on the
reserve for Sunbelt defaults of $3.4 million and net payments under line of
credit agreements of $2.0 million. Other net cash provided by operating,
investing and financing activities aggregated $5.0 million.
During fiscal 1997, capital expenditures of $13.0 million were required
to support the opening of 50 new Pier 1 Imports stores in North America. A
total of 34 stores were remodeled in fiscal 1997 at a cost of approximately
$6.1 million. In fiscal 1998, an additional 55 existing stores will be
remodeled for approximately $13.7 million. The Company's new store
development plan for fiscal 1998 provides for the opening of approximately
56 U.S. stores, primarily in single-store markets. Financing for new store
land and building costs will be provided by operating leases. Inventory and
fixtures for the fiscal 1998 development plan are estimated to cost
approximately $15.1 million, which will be funded by operations, working
capital and bank lines of credit. Twenty-nine stores are expected to close
in fiscal 1998 as their leases expire.
Working capital requirements will continue to be provided by cash on
hand, operations, sales of proprietary credit card receivables and a
committed three-year, $65 million competitive advance and revolving credit
facility, all of which was available at the end of fiscal 1997, and other
short-term (12-month) bank facilities aggregating $159.7 million, of which
$75.3 million in uncommitted lines of credit was available at fiscal 1997
year-end. At the end of fiscal 1997, the short-term bank facilities
consisted of $29.7 million in committed lines of credit and $130.0 million
in uncommitted lines. 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 1997 year-end, the
most restrictive of these agreements limited the aggregate of such payments
to $22.6 million. The Company's current ratio was 2.6 to 1 at fiscal 1997
year-end compared to 3.5 to 1 at fiscal 1996 year-end. The reduction in the
fiscal 1997 current ratio is due to the recording as a non-current asset the
$34.1 million of beneficial interest received in connection with the sale of
proprietary credit card receivables. See: Note 2 of the Notes to
Consolidated Financial Statements.
The Company has commitments from unaffiliated parties to make available
up to $25.0 million for the development or acquisition of stores for lease
to the Company. As of fiscal 1997 year-end, the Company utilized $23.9
million of that availability. This facility expires December 30, 1997, at
which time the Company must extend the term of the facility or purchase the
properties covered under the facility. 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 1998
aggregate $95.6 million, and the present value of total existing operating
lease commitments is $375.3 million. These commitments will be funded from
operating cash flow.
In February 1997, the Company securitized its entire portfolio of
proprietary credit card receivables (the "Receivables"). The Company sold
all existing Receivables to a wholly owned subsidiary, Pier 1 Funding, Inc.
("Funding"), which transferred the Receivables to the Pier 1 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 will sell to Funding for transfer to the Master
Trust all future-generated Receivables, except those failing certain
eligibility criteria, and receive 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.
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 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. At March 1, 1997, the Master Trust held $87.1 million in
Receivables.
The Master Trust is in the process of issuing a Series 1997-2 of
variable funding certificates, of which the Series 1997-2 Class A
Certificates are anticipated to 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 fixed spreads over the
Certificateholder's A-1/P-1 commercial paper rate and mature approximately
five years after issuance. Funding expects to retain the Series 1997-2
Class B subordinated Certificates, which will be issued in amounts equal to
11.7% of the corresponding Class A Certificates.
In September 1996, the Company completed a public offering of 5 3/4%
convertible subordinated notes due 2003 which yielded $86.3 million in gross
proceeds. These notes are convertible at any time prior to maturity, unless
previously redeemed or repurchased, into shares of common stock at a
conversion price of $18.50 per share, subject to adjustment under certain
circumstances. Net proceeds from the public offering were used to retire
high cost, long-term debt and repay $20 million outstanding under the
Company's bank revolving credit facility. Cash costs for the early
retirement of debt totaled approximately $5.6 million. See: Note 5 of the
Notes to Consolidated Financial Statements.
During fiscal 1997, approximately $3.4 million was expended and charged
against the Company's previously established reserve to disengage from its
financial support of Sunbelt. At fiscal 1997 year-end, approximately $10.4
million remained in the reserve. Cash requirements to fund this reserve
will be funded through working capital and operations. As of March 1997,
seven of the 13 store properties have been sold at costs consistent with the
Company's previously recorded reserve. The Company guarantees other Sunbelt
store lease commitments aggregating $3.0 million with a present value of
approximately $2.6 million at the end of fiscal 1997. The Company is not
aware of any defaults on these leases.
In March 1993, the Company invested $3 million in Whiffletree. In
April 1996, the Company divested its interest in Whiffletree for
approximately $4.7 million, yielding a three-year compound annual return of
approximately 14.7% after termination costs.
During fiscal 1997, the Company purchased for approximately $7.7
million 500,000 shares of its common stock in open market transactions under
a Board of Directors approved program. In addition, approximately 116,000
shares of common stock were acquired as payment for the exercise of employee
stock options.
During fiscal 1997, the Company paid cash dividends aggregating $.16
per share and subsequently declared a cash dividend of $.04 per share
payable on May 15, 1997 to shareholders of record on May 1, 1997. The
Company currently expects to continue to pay cash dividends in fiscal 1998
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 accounts
receivable through securitization agreements, are sufficient to meet its
foreseeable cash requirements.
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 February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard ("SFAS") No. 128, "Earnings per
Share." The Company is required to adopt SFAS No. 128 in the fourth quarter
of fiscal year 1998. The adoption of this standard will impact earnings per
share calculations; however, the adoption will have no impact on the
Company's results of operations.
Item 8. Financial Statements and Supplementary Data.
Index to Financial Statements
Financial Statements:
Reports of Independent Auditors
Consolidated Statements of Operations for the Years Ended
March 1, 1997, March 2, 1996 and February 25, 1995
Consolidated Balance Sheets at March 1, 1997 and March 2,
1996
Consolidated Statements of Cash Flows for the Years Ended
March 1, 1997, March 2, 1996 and February 25, 1995
Consolidated Statements of Stockholders' Equity for the Years
Ended March 1, 1997, March 2, 1996 and February 25, 1995
Notes to Consolidated Financial Statements
Financial Statement Schedules:
For the Years Ended March 1, 1997, March 2, 1996 and
February 25, 1995
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 March 1, 1997 and March 2, 1996, and the related
consolidated statements of operations, stockholders' equity, and cash flows
for the years then ended. 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. The consolidated financial statements and
schedule of Pier 1 Imports, Inc. for the year ended February 25, 1995 were
audited by other auditors whose reports dated April 7, 1995, except for
Notes 6, 9, 12, and 13, as to which the date is February 29, 1996, expressed
an unqualified opinion on those statements and schedule.
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 March 1, 1997 and March 2, 1996, and the
consolidated results of its operations and its cash flows for the years then
ended 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
ERNST & YOUNG LLP
Fort Worth, Texas
April 11, 1997
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of Pier 1 Imports, Inc.
In our opinion, the consolidated statements of operations, of cash
flows and changes in stockholders' equity for the year ended February 25,
1995, after the restatement described in Note 12, present fairly, in all
material respects, the results of operations and cash flows of Pier 1
Imports, Inc. and its subsidiaries for the year ended February 25, 1995 in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based
on our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above. We have not audited the
consolidated financial statements of Pier 1 Imports, Inc. for any period
subsequent to February 25, 1995.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
Fort Worth, Texas
April 7, 1995, except for Notes 6, 9,
12, and 13, as to which the
date is February 29, 1996
Pier 1 Imports, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share amounts)
Year Ended
----------------------------
1997 1996 1995
-------- -------- --------
Net sales $947,091 $810,707 $711,985
Operating costs and expenses:
Cost of sales (including buying and
store occupancy) 562,629 485,186 434,412
Selling, general and administrative
expenses 274,477 235,617 206,022
Depreciation and amortization 19,765 17,204 15,989
-------- -------- --------
856,871 738,007 656,423
-------- -------- --------
Operating income 90,220 72,700 55,562
Nonoperating (income) and expense:
Interest and investment income (2,713) (935) (2,231)
Interest expense 12,595 14,723 14,223
Trading losses -- 16,463 2,799
Provision for Sunbelt Nursery Group,
Inc. defaults -- 14,000 --
Write-down of General Host securities -- -- 7,543
-------- -------- --------
9,882 44,251 22,334
-------- -------- --------
Income before income taxes and
extraordinary charges 80,338 28,449 33,228
Provision for income taxes 32,129 18,400 11,168
-------- -------- --------
Income before extraordinary charges 48,209 10,049 22,060
Extraordinary charges from early
retirement of debt, net of income tax
benefit of $2,747 4,122 -- --
-------- -------- --------
Net income $ 44,087 $ 10,049 $ 22,060
======== ======== ========
Primary net income per share:
Before extraordinary charges $1.10 $.25 $.56
Extraordinary charges, net of income
tax benefit (.09) -- --
----- ---- ----
Net income $1.01 $.25 $.56
===== ==== ====
Fully diluted net income per share:
Before extraordinary charges $1.06 $.25 $.55
Extraordinary charges, net of income
tax benefit (.09) -- --
----- ---- ----
Net income $ .97 $.25 $.55
===== ==== ====
The accompanying notes are an integral part of these financial statements.
Pier 1 Imports, Inc.
CONSOLIDATED BALANCE SHEETS
(in thousands except share data)
1997 1996
-------- --------
ASSETS
Current assets:
Cash, including temporary investments of $22,188
and $1,588, respectively $ 32,280 $ 13,534
Accounts receivable, net of allowance for doubtful
accounts of $267 and $3,949, respectively 4,128 77,735
Inventories 220,013 223,166
Prepaid expenses and other current assets 29,057 33,078
-------- --------
Total current assets 285,478 347,513
Properties, net 216,836 144,627
Other assets 67,954 38,956
-------- --------
$570,268 $531,096
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current portion of long-term debt $ 4,845 $ 4,454
Accounts payable and accrued liabilities 105,541 96,246
-------- --------
Total current liabilities 110,386 100,700
Long-term debt 111,250 180,100
Other non-current liabilities 25,584 22,373
Stockholders' equity:
Common stock, $1.00 par, 200,000,000 shares
authorized, 45,361,000 and 39,877,000 issued,
respectively 45,361 39,877
Paid-in capital 166,475 110,899
Retained earnings 118,721 81,633
Cumulative currency translation adjustments (1,385) (1,072)
Less--373,000 and 303,000 common shares in
treasury, at cost, respectively (5,437) (2,545)
Less--unearned compensation (687) (869)
-------- --------
323,048 227,923
Commitments and contingencies
-------- --------
$570,268 $531,096
======== ========
The accompanying notes are an integral part of these financial statements.
Pier 1 Imports, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended
---------------------------
1997 1996 1995
------- ------- -------
Cash flow from operating activities:
Net income $ 44,087 $10,049 $22,060
Adjustments to reconcile to net cash
provided by operating activities:
Depreciation and amortization 19,765 17,204 15,989
Deferred taxes and other 6,422 4,509 3,515
Investment gain (1,607) -- --
Extraordinary charges on early retirement
of debt 6,869 -- --
Provision for Sunbelt Nursery Group, Inc.
defaults -- 14,000 --
Write-down of General Host securities -- -- 7,543
Change in cash from:
Inventories 7,775 (22,198) 18,352
Accounts receivable and other
current assets 37,596 (13,346) (16,071)
Accounts payable and accrued expenses 12,889 7,159 417
Store-closing reserve -- (6,020) (4,650)
Other assets, liabilities, and
other, net 1,303 27 (618)
Net cash provided by operating -------- ------- -------
activities 135,099 11,384 46,537
-------- ------- -------
Cash flow from investing activities:
Capital expenditures (36,775) (22,127) (17,471)
Proceeds from disposition of properties 841 84 62
Cost of disposition of Sunbelt Nursery
Group, Inc. properties (3,412) -- --
Acquisitions (59,936) -- --
Acquisition of limited partnership
interest -- (40,000) --
Loans to Sunbelt Nursery Group, Inc. -- -- (9,600)
Proceeds from Sunbelt Nursery Group, Inc. -- -- 11,600
Other investments 4,665 (7,600) (2,093)
Net cash used in investing ------- ------- -------
activities (94,617) (69,643) (17,502)
------- -------- -------
Cash flow from financing activities:
Cash dividends (6,999) (5,158) (4,138)
Proceeds from issuance of long-term debt 83,602 40,000 11,060
Repayments of long-term debt (90,639) (14,750) (2,500)
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 (5,739) (565) (14)
Net cash (used in) provided by -------- ------- -------
financing activities (21,736) 21,227 4,408
-------- ------- -------
Change in cash and cash equivalents 18,746 (37,032) 33,443
Cash and cash equivalents at beginning
of year 13,534 50,566 17,123
-------- ------- -------
Cash and cash equivalents at end of year $ 32,280 $13,534 $50,566
======== ======= =======
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 Subscriptions
Currency Receivable Unrealized Loss Total
Common Paid-in Retained Translation Treasury and Unearned on Marketable Stockholders'
Stock Capital Earnings Adjustments Stock Compensation Equity Securities Equity
------- ------- -------- ----------- -------- ------------ ----------------- -------------
Balance February 26, 1994 $37,617 $ 92,670 $76,597 ($ 964) ($ 884) ($1,369) ($2,574) $201,093
Purchases of treasury stock -- -- -- -- (2,575) -- -- (2,575)
Restricted stock grant and
amortization -- (2) -- -- (61) 263 -- 200
Exercise of stock options
and other 209 1,165 (3) -- 2,043 -- -- 3,414
Currency translation
adjustments -- -- -- (231) -- -- -- (231)
Realized loss on marketable
equity securities -- -- -- -- -- -- 2,574 2,574
Cash dividends ($.10
per share) -- -- (4,138) -- -- -- -- (4,138)
Net income -- -- 22,060 -- -- -- -- 22,060
------- -------- -------- ------- ------- ------- ------- --------
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 ($.13
per share) -- -- (5,158) -- -- -- -- (5,158)
Stock dividend (5%) 1,878 16,261 (18,139) -- -- -- -- --
Net income -- -- 10,049 -- -- -- -- 10,049
------- -------- -------- ------- ------- ------- ------- --------
Balance March 2, 1996 39,877 110,899 81,633 (1,072) (2,545) (869) -- 227,923
Purchases of treasury stock -- -- -- -- (9,520) -- -- (9,520)
Restricted stock grant and
amortization -- -- -- -- -- 182 -- 182
Exercise of stock options
and other -- (1,539) -- -- 6,628 -- -- 5,089
Currency translation
adjustments -- -- -- (313) -- -- -- (313)
Cash dividends ($.16
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
======= ======== ======== ======= ======= ======= ======= ========
The accompanying notes are an integral part of these financial statements.
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 and
Puerto Rico and international operations in 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 inventory from China; however, 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. 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.
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 1997 consisted of a 52-week year; fiscal 1996 was a 53-
week year (which occurs every seven years); and fiscal 1995 was a 52-week
year. Fiscal 1997 ended March 1, 1997, fiscal 1996 ended March 2, 1996 and
fiscal 1995 ended February 25, 1995.
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: Notes 6 and 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 $36,968,000, $32,093,000
and $29,566,000 in fiscal 1997, 1996 and 1995, respectively. The amounts of
prepaid advertising at fiscal year-ends 1997, 1996 and 1995 were $762,000,
$456,000 and $71,000, 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 March 1, 1997,
such undistributed earnings aggregated $16.6 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 Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard ("SFAS") No. 123, "Accounting and
Disclosure of Stock-Based Compensation," in October 1995. This standard,
which was adopted by the Company in fiscal 1997, had no effect on the
Company's results of operations. 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.
Net income per share - Net income per share during a period is computed
by dividing net income by the weighted average number of common shares
outstanding and common stock equivalents, which totaled 43,682,000,
39,778,000 and 39,698,000 for fiscal 1997, 1996 and 1995, respectively.
Computation of the weighted average shares for fiscal 1995 gives retroactive
effect to the 5% stock dividend distributed May 8, 1995. Fully diluted net
income per share is based on the assumed conversion into common stock of all
the 5 3/4% convertible subordinated notes in fiscal 1997 and the 6 7/8%
convertible subordinated notes in fiscal 1997, 1996 and 1995. 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
$1.4 million in fiscal 1997. 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, $2.7 million and $3.5
million in fiscal 1997, 1996 and 1995, respectively. Fully diluted net
income per share resulted in less than 3% dilution of primary net income per
share for all fiscal years presented, with the exception of a $.04 dilution
for fiscal 1997. If the 6 7/8% convertible subordinated notes had been
converted at the beginning of the fiscal 1997 year, primary earnings per
share would have been reduced by $.02. See: Note 5 of the Notes to
Consolidated Financial Statements.
Impact of recently issued accounting standards - In February 1997, the
FASB issued SFAS No. 128, "Earnings per Share." The Company is required to
adopt SFAS No. 128 in the fourth quarter of fiscal 1998. The adoption of
this standard will impact earnings per share calculations; however, the
adoption will have no impact on the Company's results of operations.
Note 2 - Proprietary Credit Card Information
The Company's proprietary credit card receivables arise primarily under
open-end revolving credit accounts used to finance purchases of merchandise
and services offered by the Company. These accounts have various billing
and payment structures, including varying minimum payment levels and finance
charge rates. 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 1997 year-end, the Company had approximately 2.2 million
proprietary cardholders and 396,000 active customer credit accounts
(accounts with balances as of the beginning or end of fiscal 1997). These
accounts had an average balance of $220. The Company's proprietary credit
card sales accounted for 23.9% of the total sales in fiscal 1997. A summary
of the Company's proprietary credit card results for each of the last three
fiscal years follows (in thousands):
1997 1996 1995
-------- -------- --------
Costs:
Processing fees $ 7,811 $ 6,932 $ 6,536
Write-off of capitalized costs 3,151 -- --
Provision for bad debts 6,728 5,763 3,285
Reversal of bad debt provision (3,824) -- --
-------- -------- --------
13,866 12,695 9,821
-------- -------- --------
Income:
Finance charge income, net of fees 11,476 11,245 8,800
Insurance and other income 614 312 237
-------- -------- --------
12,090 11,557 9,037
-------- -------- --------
Net proprietary credit card costs $ 1,776 $ 1,138 $ 784
======== ======== ========
Preferred Card sales $226,248 $188,303 $126,836
======== ======== ========
Costs as a percent of Preferred Card sales 6.13% 6.74% 7.74%
===== ===== =====
Gross Preferred Card receivables at year-end $ 87,089 $ 76,878 $ 62,648
======== ======== ========
Owned Preferred Card receivables at year-end $ -- $ 76,878 $ 62,648
======== ======== ========
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 will sell to Funding for
transfer to the Master Trust all future-generated Receivables, except those
failing certain eligibility criteria, and receive 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 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 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 March 1, 1997 and March 2, 1996
(in thousands):
1997 1996
-------- --------
Land $ 58,637 $ 28,485
Buildings 82,198 52,710
Equipment, furniture and fixtures 108,391 103,108
Leasehold interests and improvements 105,739 84,877
Construction in progress 50 402
-------- --------
355,015 269,582
Less accumulated depreciation and
amortization 138,179 124,955
-------- --------
Properties, net $216,836 $144,627
======== ========
During fiscal 1997, the Company acquired two corporations which owned
38 Pier 1 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 March 1, 1997 and March 2, 1996 (in
thousands):
1997 1996
------- -------
Trade accounts payable $ 41,026 $32,070
Accrued payroll and other employee-
related liabilities 25,068 19,146
Sunbelt default reserve 10,372 13,784
Accrued taxes, other than income 8,742 8,200
Store-closing reserves 2,245 5,255
Accrued insurance, other than workers'
compensation 3,748 4,230
Accrued interest 2,257 4,070
Gift certificates outstanding 5,972 3,226
Other 6,111 6,265
--------- -------
Accounts payable and accrued liabilities $105,541 $96,246
======== =======
Accrued average rent $ 14,328 $13,819
Other 11,256 8,554
-------- -------
Other non-current liabilities $ 25,584 $22,373
======== =======
At the end of fiscal 1994, the Company recorded a pre-tax special
charge of $21.3 million for a store-closing provision that was established
to reflect the anticipated costs to close 49 stores with histories of
underperformance and high occupancy costs, and to close the Canadian
distribution center and administrative offices. This closing plan was
completed during fiscal 1997. In the normal course of business, the Company
may from time to time elect to close certain stores before their scheduled
lease expiration dates. The costs associated with such closures are not
expected to have a material effect on net income or cash flow and will be
charged to income when the determination is made to close such stores.
Accrued liabilities at March 1, 1997 include a provision of $2.2 million for
stores to be closed during the next year.
Note 5 - Long-term Debt and Available Credit
Long-term debt is summarized as follows (in thousands):
1997 1996
-------- --------
11 1/2% subordinated debentures, net of
unamortized discount of $2,062 in 1996 $ -- $ 17,938
Industrial revenue bonds 25,000 25,000
11% senior notes -- 25,000
6 7/8% convertible subordinated notes -- 62,750
8 1/2% exchangeable debentures, net of
unamortized discount of $626 in 1996 -- 11,874
5 3/4% convertible subordinated notes 86,250 --
Competitive advance and revolving credit
facility -- 40,000
Capital lease obligations 39 104
-------- --------
111,289 182,666
Less - portion due within one year 39 2,566
-------- --------
$111,250 $180,100
======== ========
In July 1996, $62.7 million of the Company's 6 7/8% convertible
subordinated notes due April 1, 2002 were converted into 5,483,823 shares of
the Company's common stock. The remaining $69,000 of the notes were
redeemed at a price of 103.4375% of par plus accrued interest. The
conversion and redemption of the note reduced the Company's long-term debt
by $62.8 million and increased its equity capitalization by approximately
$62.6 million.
In September 1996, the Company issued $86.3 million of 5 3/4%
convertible subordinated notes due 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 $18.50 per
share. The Company may redeem the notes, in whole or in part, on or after
October 2, 1999. Interest on the notes will be payable semiannually on
April 1 and October 1 of each year, commencing April 1, 1997.
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 $20.0 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