<PAGE> 1
PROSPECTUS
$75,000,000
[PIER 1 IMPORTS LOGO]
5 3/4% CONVERTIBLE SUBORDINATED NOTES DUE 2003
---------------------
Pier 1 Imports, Inc. (the "Company") is offering $75,000,000 aggregate
principal amount of 5 3/4% Convertible Subordinated Notes due 2003 (the
"Notes"). Interest on the Notes will be payable semi-annually on April 1 and
October 1 of each year, commencing April 1, 1997. The Notes are convertible at
any time prior to maturity, unless previously redeemed or repurchased, into
shares of Common Stock, par value $1.00 per share (the "Common Stock"), of the
Company, at a conversion price of $18.50 per share, subject to adjustment under
certain circumstances. The Common Stock is traded on the New York Stock Exchange
under the symbol "PIR." On September 17, 1996, the last reported sale price for
the Common Stock on the New York Stock Exchange was $15 1/8 per share.
The Notes are unsecured and subordinate to all Senior Indebtedness (as
defined). At August 31, 1996, Senior Indebtedness was $109.6 million. The
Indenture does not restrict the incurrence of additional indebtedness by the
Company or any of its subsidiaries. See "Description of the
Notes -- Subordination." The Notes will mature on October 1, 2003. The Company
may redeem the Notes, in whole or in part, on or after October 1, 1999, at the
redemption prices set forth herein, plus accrued but unpaid interest at the date
fixed for redemption. See "Description of the Notes -- Optional Redemption by
the Company." Upon a Change of Control (as defined), the Company will offer to
repurchase each holder's Notes at a purchase price equal to 100% of the
principal amount thereof, plus accrued and unpaid interest to the date of
repurchase. See "Description of the Notes -- Repurchase at the Option of Holders
Upon Change of Control."
The Notes have been approved for listing on the New York Stock Exchange,
subject to official notice of issuance.
---------------------
SEE "INVESTMENT CONSIDERATIONS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN
MATTERS THAT SHOULD BE CONSIDERED BY POTENTIAL INVESTORS.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY SUCH STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<TABLE>
<CAPTION>
========================================================================================================
UNDERWRITING
DISCOUNTS AND PROCEEDS TO
PRICE TO PUBLIC(1) COMMISSIONS(2) COMPANY(1)(3)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Note.......................................... 100% 3% 97%
Total(4).......................................... $75,000,000 $2,250,000 $72,750,000
========================================================================================================
</TABLE>
(1) Plus accrued interest, if any, from the date of issuance.
(2) The Company has agreed to indemnify the several Underwriters identified
elsewhere herein against certain liabilities, including liabilities under
the Securities Act of 1933, as amended (the "Securities Act"). See
"Underwriting."
(3) Before deducting expenses payable by the Company, estimated at $600,000.
(4) The Company has granted the Underwriters a 30-day option to purchase up to
an additional $11,250,000 principal amount of Notes solely for the purpose
of covering over-allotments, if any. If the Underwriters exercise such
option in full, the Price to Public, Underwriting Discounts and Commissions
and Proceeds to Company would be $86,250,000, $2,587,500 and $83,662,500,
respectively. See "Underwriting."
---------------------
The Notes are offered by the Underwriters, subject to prior sale, when, as
and if delivered to and accepted by the Underwriters, and subject to the
Underwriters' right to reject orders in whole or in part. It is expected that
delivery of the Notes will be made against payment therefor on or about
September 23, 1996 at the offices of Forum Capital Markets L.P., Old Greenwich,
Connecticut.
JEFFERIES & COMPANY, INC. FORUM CAPITAL MARKETS L.P.
September 18, 1996
<PAGE> 2
[GRAPHIC CONTAINING PHOTOGRAPHS OF A TABLE SETTING,
A WHITE WICKER SOFA AND CHAIR WITH A WHITE
SCREEN, A BED WITH A BREAKFAST TRAY AND A
WICKER SOFA, CHAIR AND COFFEE TABLE, TOGETHER WITH THE
"AT HOME WITH PIER 1" LOGO]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE NOTES AND THE
COMMON STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
<PAGE> 3
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the detailed
information and financial statements, including notes thereto, appearing
elsewhere in this Prospectus. Unless otherwise indicated, information in this
Prospectus assumes no exercise of the Underwriters' over-allotment option.
THE COMPANY
Pier 1 Imports, Inc. ("Pier 1" or the "Company") is North America's largest
specialty retailer of imported decorative home furnishings, gifts and related
items with 706 stores in 47 states, Puerto Rico, Canada, the United Kingdom,
Japan and Mexico. Pier 1 stores offer a diverse selection of quality merchandise
presented in an upscale atmosphere which allows customers to choose unique items
expressing their individual tastes, interests and character. Key factors
supporting the Company's success have been the variety, quality and value of its
merchandise. Pier 1's assortment of merchandise consists of over 5,000 products
imported from 44 countries, features up to 50% proprietary items and is enriched
with approximately 40% new merchandise each season. The Company differentiates
itself through its global sourcing capabilities, reflecting 34 years of
experience and the considerable resources that the Company has applied to
developing vendor relationships and the buying function.
Over the last several years, the Company has experienced significant
positive momentum in its operating performance, reflecting the successful
implementation of key strategic initiatives. Sales increased from $586.7 million
in fiscal 1992 to $810.7 million in fiscal 1996, a compound annual growth rate
of 8.4%. Over the same period, operating income increased from $41.0 million to
$72.7 million, a compound annual growth rate of 15.4%. Through July 1996, the
Company posted same store sales gains in 24 of the prior 25 months.
The Company's business strategy focuses on (i) increasing profitable sales
in existing stores through an upgraded merchandise assortment, stronger customer
focus, a comprehensive remerchandising and remodeling program and other
marketing initiatives; (ii) growing the domestic store base through new store
openings; and (iii) developing partnerships and franchising arrangements in
international markets. The core initiatives supporting this strategy include the
following:
Upgraded and Broadened Merchandise Assortment. Pier 1 offers a broad range
of merchandise consisting of decorative accessories, furniture, housewares,
apparel, bed and bath items and seasonal goods. The Company carries over 5,000
products, approximately 85% of which are directly imported from 44 countries.
Through attention to style, color, texture and quality, Pier 1 has steadily
upgraded its product offering over the last decade. Within the last year, Pier 1
has established an in-house product development capability to further expand its
proprietary product lines and to ensure consistency across its merchandise
assortment. To further refine its focus on home furnishings, the Company is
emphasizing its furniture category which carries higher price points and is
planning to discontinue its apparel line in all stores in fiscal 1998.
Stronger Customer Focus. As a destination retailer with a majority of its
customers making targeted shopping visits to its stores, the Company stresses
superior customer service and has taken steps to elevate the richness of the
customer's shopping experience. Representative of this commitment to an enhanced
customer shopping experience are the new "100% Greet" and "Best Seller" programs
which focus store associates on initiating contact with customers and offering
solutions to their home furnishing and decorating needs. Store associates
regularly receive training in support of these programs and other customer
service initiatives. A national bridal and gift registry program will be fully
implemented by November 1996, which, in combination with new wrapping and
mailing stations, will provide an added convenience for shoppers.
Remerchandising/Remodeling Program. Pier 1 embarked upon a major program in
fiscal 1996 to redesign all store interiors to improve the visual merchandising
of its products. This program will incorporate 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 attractive, home-use settings
to assist customers with decorating ideas. This remerchandising effort will be
accompanied by a major remodeling program to refurbish older stores.
3
<PAGE> 4
Shift in Advertising Strategy. The Company instituted a major change in its
advertising strategy in fiscal 1996 by shifting a majority of its advertising
spending to a national television campaign. Previously, the Company relied
primarily on newspaper advertising as its major marketing tool. The Company's
television advertising features image-building ads as compared to the
promotional ads it typically employed in newspaper advertising. Management
believes its television advertising has contributed to same store sales growth
and has been effective in expanding Pier 1's customer base. The shift in
advertising has had the additional benefit of improving merchandise margins
through less reliance on promotional pricing.
Proprietary Credit Card Program. Pier 1 has offered its proprietary card
since 1988 and views its credit card as an important part of its marketing
strategy. In the last two years, the number of cardholders increased from
932,000 to nearly 1.9 million, with proprietary credit card sales representing
23.2% of total Pier 1 sales in fiscal 1996. For the six month period ending
August 31, 1996, sales on Pier 1's proprietary credit card averaged $138 per
transaction as compared to average third party credit card transactions of $57
and cash transactions of $16. Management believes the Company's strong credit
card program is a valuable tool for building a larger customer base, increasing
customer loyalty and improving average transaction size.
Global Expansion Strategy. The Company's global expansion strategy is to
continue its growth by opening stores in existing and new North American markets
while building its international presence. The number of stores worldwide has
increased from 585 at the end of fiscal 1992 to 706 stores currently. In fiscal
1997, Pier 1 anticipates opening 50 to 55 stores in North America while closing
20 to 25 stores. The Company anticipates the opening of additional stores
internationally, principally through franchise agreements. Since April 1996, two
Pier 1 franchised stores have been opened in Tokyo, Japan, which, if successful,
could lead to the development of up to 100 stores in Japan by the year 2000. The
Company currently expects that the Japanese franchise program will serve as the
model for future international expansion.
The Company's strong management information systems enable it to
effectively implement its strategic initiatives. Over the past ten years, the
Company has invested more than $35 million in state-of-the-art data processing
systems to better serve its customers and improve inventory management. Future
capital investments are anticipated to further improve logistical support and
distribution functions.
The Company's executive offices are located at 301 Commerce Street, Suite
600, Fort Worth, Texas 76102 and its telephone number is (817) 878-8000. The
Company was founded in 1962 and is incorporated in Delaware.
4
<PAGE> 5
SUMMARY FINANCIAL AND OPERATING DATA
<TABLE>
<CAPTION>
AT OR FOR
THE THREE
AT OR FOR THE FISCAL YEAR ENDED MONTHS ENDED
----------------------------------------------------------------- -----------------
FEBRUARY 29, FEBRUARY 27, FEBRUARY 26, FEBRUARY 25, MARCH 2, MAY 27, JUNE 1,
1992 1993 1994 1995 1996 1995 1996
------------ ------------ ------------ ------------ -------- ------- -------
(IN MILLIONS, EXCEPT PER SHARE, RATIO AND OTHER OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales......................... $586.7 $629.2 $685.4 $712.0 $810.7 $176.8 $205.3
Gross profit...................... 228.4 246.2 259.6 277.6 325.5 69.1 81.7
Operating income.................. 41.0 50.9 27.1 55.6 72.7 13.0 16.4
Nonrecurring charges(1)........... -- -- 23.2 10.3 30.5 30.0 --
Net income (loss)................. 26.3 23.0 5.9 22.1 10.0 (18.3) 8.3
Net income (loss) per
share(2)(3)..................... $ 0.68 $ 0.59 $ 0.15 $ 0.56 $ 0.25 ($0.46) $ 0.21
Weighted average number of shares
outstanding and common share
equivalents(2).................. 38.9 39.2 39.5 39.7 39.8 39.8 40.2
OTHER OPERATING DATA:
Change in same store sales(4)..... (3.3)% 3.7% 4.8% 4.8% 6.5% 2.7% 10.8%
Retail square footage
(in millions)(5)................ 4.4 4.5 4.5 4.8 5.1 4.9 5.2
Average sales per square
foot(6)......................... $132.7 $139.6 $144.6 $150.9 $162.0 $153.5 $163.8
Number of stores (worldwide)(5)... 585 605 588 634 688 665 697
Capital expenditures (in
millions)....................... $ 6.2 $ 12.6 $ 24.6 $ 17.5 $ 22.1 $ 4.0 $ 9.1
Ratio of earnings to fixed
charges(7)...................... 1.7x 1.7x 1.2x 1.7x 1.6x 2.0x
Ratio of earnings before
nonrecurring charges to fixed
charges(7)(8)................... 1.7x 1.7x 1.6x 1.9x 2.2x 2.0x
Supplemental pro forma ratio of
earnings to fixed
charges(7)(9)(10)............... 1.8x 2.4x
</TABLE>
<TABLE>
<CAPTION>
AT JUNE 1, 1996
-------------------------------------------
PRO FORMA AS
ACTUAL PRO FORMA(9) ADJUSTED(10)
------ ------------ ---------------
(IN MILLIONS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital................................................ $254.9 $256.0 $ 258.2
Total assets................................................... 545.7 544.3 546.6
Long-term debt and capital leases.............................. 180.2 117.5 125.1
Total stockholders' equity..................................... 236.2 298.8 295.5
</TABLE>
- ---------------
(1) Nonrecurring charges include net trading losses (gains) of ($0.1) million,
$2.8 million and $16.5 million in fiscal years 1994, 1995 and 1996,
respectively, and $16.0 million for the first quarter of fiscal 1996; the
provision for Sunbelt Nursery Group, Inc. defaults of $14.0 million in
fiscal 1996 and for the first quarter of fiscal 1996; the write-down of
General Host Corporation securities of $2.0 million and $7.5 million in
fiscal years 1994 and 1995, respectively, and a $21.3 million store closing
provision in fiscal year 1994.
(2) Reflects the effect of the 5% stock dividend distributed May 8, 1995.
(3) Fully diluted net income per share is $0.20 for the three months ended June
1, 1996.
(4) Expressed as a percentage increase (decrease) from prior year, based on
sales of stores opened prior to the beginning of the preceding fiscal year
and still open at the end of the period. Changes in same store sales
reflect a 52-week comparison for all fiscal years presented.
(5) As of period end. Retail square footage is the number of square feet of
space devoted to selling space in all open stores. Retail square footage
and number of stores at the end of fiscal 1994 have been adjusted to
exclude 50 stores as a result of a store closing program authorized in
February 1994.
(6) Reflects average sales per square foot of selling space which is calculated
by dividing total store sales by the weighted average retail square
footage.
(7) For purposes of computing the ratio of earnings to fixed charges, earnings
consist of pre-tax income plus fixed charges. Fixed charges consist of
interest expense, amortization of debt issue expense and original issue
discount, and an estimated portion of rental expense representing interest
costs.
(8) For purposes of computing ratio of earnings before nonrecurring charges to
fixed charges, earnings before nonrecurring charges include pre-tax income
before nonrecurring charges plus fixed charges. Nonrecurring charges are
described in note (1) above.
(9) Pro forma to reflect the conversion/redemption of the 6 7/8% convertible
notes due 2002. See "Recent Developments."
(10) As adjusted for the receipt of the proceeds of this offering and the
application thereof. See "Use of Proceeds."
5
<PAGE> 6
THE OFFERING
<TABLE>
<S> <C>
Notes Offered...................... $75,000,000 aggregate principal amount of 5 3/4%
Convertible Subordinated Notes due 2003.
Maturity Date...................... October 1, 2003.
Interest Payment Dates............. April 1 and October 1, commencing April 1, 1997.
Interest........................... 5 3/4% per annum.
Conversion......................... The Notes are convertible at the option of the holder
into Common Stock at any time prior to maturity, unless
previously redeemed or repurchased, at a conversion
price of $18.50 per share, subject to adjustment in
certain circumstances. See "Description of the
Notes -- Conversion of the Notes."
Redemption at the Option of
the Company...................... The Notes are not redeemable prior to October 1, 1999.
Thereafter, the Notes are redeemable at any time and
from time to time at the option of the Company, in whole
or in part, at the redemption prices set forth herein,
plus accrued and unpaid interest to the date fixed for
redemption. See "Description of the Notes -- Optional
Redemption by the Company."
Repurchase at the Option of Holders
Upon Change of Control........... Upon a Change of Control (as defined), the Company will
offer to repurchase the Notes at a repurchase price
equal to 100% of the principal amount thereof, plus
accrued and unpaid interest to the date of repurchase.
See "Description of the Notes -- Repurchase at the
Option of Holders Upon Change of Control."
Subordination...................... The Notes are unsecured and subordinate to all existing
and future Senior Indebtedness (as defined). At August
31, 1996, Senior Indebtedness was $109.6 million. The
Indenture does not restrict the incurrence of additional
indebtedness by the Company or any of its subsidiaries.
See "Description of the Notes -- Subordination."
Use of Proceeds.................... To retire outstanding long-term indebtedness of the
Company. See "Use of Proceeds."
New York Stock Exchange
Common Stock Symbol.............. PIR.
Trading............................ The Notes have been approved for listing on the New York
Stock Exchange, subject to official notice of issuance.
The Notes will trade under the symbol PIRO03.
</TABLE>
6
<PAGE> 7
INVESTMENT CONSIDERATIONS
Prospective purchasers of the Notes should carefully consider the following
matters, together with the other information contained elsewhere in this
Prospectus, before making an investment in the Notes offered hereby.
COMPETITION
The retail industry generally is highly competitive. Pier 1 primarily
competes with small specialty sections of large department stores, home
furnishing stores, small specialty import stores and discount stores. An
intensely competitive environment may cause Pier 1 to engage in a marketing
program that relies on promotional sales that would lower gross margins. The
Company believes that Pier 1 enjoys an advantage over competing stores due to
its greater name recognition, its established vendor relationships and the
extent and variety of its merchandise.
ECONOMIC CONDITIONS
As with most retail businesses, the Company's results of operations may be
adversely affected by unfavorable local, regional or national economic
conditions, including those affecting levels of disposable income and consumer
debt. In particular, as a retailer of furniture and decorative home furnishings,
the Company benefits from new home construction and sales of existing homes.
There can be no assurance that home sales will continue to increase or will not
decline in the future, which could result in a decrease in demand for some Pier
1 products.
SEASONALITY
Due to the Christmas selling season, the Company's business is seasonal,
with approximately 15% of sales during the last five years occurring in December
of each year. The occurrence of a poor retailing environment or an impairment of
the Company's ability to supply merchandise to its stores during the Christmas
selling season could adversely affect results of operations.
MERCHANDISE
As with all retailers, the Company's sales are dependent upon a positive
response to its merchandise assortment. Much of Pier 1's home furnishings
products display distinctive styles, and although home furnishings are not
subject to the high volatility of clothing fashion trends, Pier 1's sales may be
susceptible to changing trends and preferences of home furnishings purchasers.
Because of the long lead times required to order and obtain delivery of imported
merchandise, the Company would not be able to respond quickly to a rapid change
in customer preferences.
FOREIGN SOURCING OF MERCHANDISE
Pier 1 directly imports approximately 85% of its merchandise from foreign
countries. As a result, the Company must order merchandise from four to 12
months in advance of delivery to the Company's regional warehouses in the United
States and must carefully coordinate its advertising and marketing programs to
provide product availability to meet customer demand. In addition, dock strikes,
import quotas, duties, taxes and other charges on imports, fluctuations in
currency exchange rates, restrictions on foreign currency convertibility into
U.S. dollars and any other restrictions placed on foreign trade can adversely
affect the price, availability and delivery time of Pier 1's merchandise. The
inability to import products from certain countries or the imposition of
significant tariffs could have a material adverse effect on the Company's
results of operations. During the past year, China, from which the Company
acquired approximately 27.5% of its merchandise, was investigated and designated
under the Trade Act of 1974, as amended, as possibly subject to sanctions (such
as quotas or increased duties) for failure to protect certain intellectual
property rights of U.S. companies. An agreement was subsequently reached with
China to end that designation prior to the imposition of any sanctions.
Additionally, China has been, and continues to be, subject to annual review of
its most favored nation ("MFN") trade status. In June 1996, the President
renewed China's MFN status, but if in the
7
<PAGE> 8
future China's MFN status were lost, Chinese products would be subject to
possible quotas and increased tariffs. 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. If products from any country should become
subject to significant quotas or tariffs, the Company would seek to obtain
similar products from other countries. See "Business -- Importing Risks."
SUBORDINATION
The Notes will be unsecured and subordinated in right of payment in full to
all existing and future Senior Indebtedness (as defined) of the Company. As a
result of such subordination, in the event of bankruptcy, liquidation or
reorganization of the Company, or upon the acceleration of any Senior
Indebtedness, the Senior Indebtedness must be paid in full before the Company
may make any payments with respect to the principal of or interest on the Notes
and any other obligations ranking pari passu with the Notes. As of August 31,
1996, outstanding Senior Indebtedness aggregated $109.6 million. The Indenture
does not prohibit or limit incurring additional Senior Indebtedness, and the
Company may incur additional Senior Indebtedness in the future. As of June 1,
1996, the Company had $80.0 million of committed bank lines of credit, of which
$40.0 million was outstanding, and $126.2 million of uncommitted bank lines of
credit, of which $69.6 million was outstanding. See "Description of the
Notes -- Subordination."
The Company is a holding company which operates its business through
subsidiaries. The Notes are obligations only of the Company and not of the
subsidiaries. As an equity holder of its subsidiaries, the right of the Company
to receive assets from a subsidiary upon the bankruptcy, liquidation or
reorganization of such subsidiary (and therefore the right of the holders to
participate in these assets) will be effectively subordinated to the claims of
all creditors of that subsidiary, except to the extent that the Company is
recognized as a creditor of the subsidiary. As of June 1, 1996, the Company's
subsidiaries had $25.0 million in senior debt.
ABSENCE OF FINANCIAL COVENANTS
The Indenture contains no financial performance covenants. The Company is
not required under the Indenture to meet any financial tests that measure the
Company's working capital, interest coverage, fixed charge coverage or net worth
in order to comply with the terms of the Indenture. Although the Company
currently must comply with various financial covenants in its loan agreements,
to the extent these agreements are terminated and not replaced with other
agreements containing such requirements, the Company would no longer have to
meet financial performance covenants.
REPURCHASE OF NOTES
Upon a Change of Control (as defined), the Company will be obligated to
offer to repurchase the Notes from each holder at 100% of the principal amount
plus accrued and unpaid interest to the date of repurchase. See "Description of
the Notes -- Repurchase at the Option of Holders Upon Change of Control." In the
event of a Change of Control, there can be no assurance that the Company would
have sufficient funds to pay the repurchase price for all Notes tendered. In
addition, current or future credit agreements and guarantees to which the
Company is a party may contain limitations on such repurchases. If the Company
were restricted from making such repurchase and could not obtain the consent of
the lenders or could not refinance the loans, the Company would remain
restricted from repurchasing the Notes. In such event, the Company's failure to
repurchase the Notes would constitute an event of default under the Indenture,
which may in turn constitute defaults under other Company indebtedness, in which
case the subordination provisions of the Indenture would likely restrict
payments to holders.
8
<PAGE> 9
RECENT DEVELOPMENTS
CONVERSION OF 6 7/8% CONVERTIBLE NOTES
In July 1996, the Company called its $62.8 million of outstanding 6 7/8%
convertible notes due 2002 for redemption. As a result, $62.7 million of those
notes were converted into 5,483,823 shares of Common Stock and $69,000 of the
notes were redeemed by the Company for cash. The conversion of the notes
increased the Company's equity capitalization by $62.6 million.
PROPOSED SECURITIZATION OF CREDIT CARD RECEIVABLES
The Company proposes to securitize substantially all its proprietary credit
card receivables in October 1996 through a private placement of trust
certificates. If the transaction is completed, the Company would receive
approximately $70 million in cash and would use the proceeds to retire any debt
outstanding under the Company's revolving credit facility and provide funds for
working capital and other general corporate purposes.
SUMMARY OPERATING DATA FOR SECOND FISCAL QUARTER
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------ ------------------------
AUGUST 26, AUGUST 31, AUGUST 26, AUGUST 31,
1995 1996 1995 1996
---------- ---------- ---------- ----------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Net Sales.................................. $199.5 $231.1 $376.3 $436.3
Net Income (Loss).......................... 8.9 11.4 (9.4) 19.7
Net Income (Loss) Per Share:
Primary.................................. 0.22 0.26 (0.24) 0.47
Fully Diluted............................ 0.21 0.26 (0.24) 0.45
</TABLE>
Sales during the 1997 fiscal second quarter totaled $231.1 million, an
increase of 15.8% over sales for the second quarter of the prior year, while
sales during the first six months of fiscal 1997 increased 16.0% to $436.3
million compared to the first six months of fiscal for 1996. Same store sales
during the second quarter of fiscal 1997 increased 10.0% compared to the same
period for the prior year. Net income of $11.4 million and fully diluted
earnings per share of $0.26 represent an increase of 28.3% and 23.8%,
respectively, during the fiscal 1997 second quarter over the same quarter for
the prior year. Net income during the six months of fiscal 1996 was adversely
affected by pre-tax special charges aggregating $30.6 million during the fiscal
1996 first quarter.
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the Notes
offered hereby (after deducting underwriting discounts and commissions and
estimated offering expenses payable by the Company) are estimated to be
approximately $72.2 million ($83.1 million if the Underwriters' over-allotment
option is exercised in full).
The Company intends to utilize such net proceeds 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 such net proceeds will be used to repay $26.8 million
($37.7 million if the Underwriters' overallotment option is exercised in full)
outstanding under the Company's bank revolving credit facility, which bears
interest at a floating rate, currently 6.44% per annum, and was incurred to
finance the purchase of the remaining 90% ownership interest not previously
owned by the Company in a limited partnership formed to construct and lease 33
Pier 1 stores. The Company will be required to pay an estimated $2.9 million in
redemption and other fees to retire the 11 1/2% subordinated debentures and the
11% senior notes and will record an estimated extraordinary loss of $3.2
million, after tax.
9
<PAGE> 10
CAPITALIZATION
The following table sets forth as of June 1, 1996 (i) the actual
capitalization of the Company, (ii) the pro forma capitalization to reflect the
conversion/redemption of the Company's 6 7/8% convertible notes due 2002, as
described in "Recent Developments," and (iii) the pro forma capitalization, as
adjusted to reflect the sale of the $75.0 million aggregate principal amount of
Notes offered hereby and the anticipated use of the estimated net proceeds
therefrom. This table should be read in conjunction with the Consolidated
Financial Statements of the Company and notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere herein.
<TABLE>
<CAPTION>
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Short-term debt and current portion of long-term
debt and capital leases(1)...................... $ 7,523 $ 5,023 $ 5,023
======== ======== =========
Long-term debt:
11% Senior Notes due 2001....................... $ 25,000 $ 25,000 $ --
Revolving Credit Facility....................... 40,000 40,000 13,208
Other senior debt and capital lease
obligations.................................. 25,029 25,029 25,029
11 1/2% Subordinated Debentures due 2003(2)..... 15,548 15,548 --
8 1/2% Exchangeable Debentures due 2000(3)...... 11,899 11,899 11,899
6 7/8% Convertible Notes due 2002(4)............ 62,750 -- --
5 3/4% Convertible Notes due 2003............... -- -- 75,000
-------- --------- -----------
Total long-term debt.................... 180,226 117,476 125,136
-------- --------- -----------
Stockholders' equity:
Common Stock, $1.00 par, 200,000,000 shares
authorized, 39,877,000 outstanding(4)(5)..... 39,877 45,361 45,361
Paid-in capital(4).............................. 111,238 168,354 168,354
Retained earnings(6)............................ 88,319 88,319 85,099
Cumulative translation adjustments.............. (1,015) (1,015) (1,015)
Less -- 173,000 common shares in treasury at
cost......................................... (1,474) (1,474) (1,474)
Less -- subscriptions receivable and unearned
compensation................................. (793) (793) (793)
-------- --------- -----------
Total stockholders' equity.............. 236,152 298,752 295,532
-------- --------- -----------
Total capitalization.................... $416,378 $ 416,228 $ 420,668
======== ======== =========
</TABLE>
- ---------------
(1) Includes $2.5 million recorded as the current portion of the 11 1/2%
subordinated debentures due 2003. The $2.5 million was retired as scheduled
in July 1996.
(2) Net of unamortized original issue discount of $1.9 million.
(3) Net of unamortized original issue discount of $0.6 million.
(4) Reflects conversion and redemption of the 6 7/8% convertible notes due 2002
after June 1, 1996. See "Recent Developments -- Conversion of 6 7/8%
Convertible Notes." Paid-in capital has been adjusted for accrued interest
and unamortized debt issue costs related to the notes.
(5) Does not include 1.4 million shares of Common Stock issuable upon the
exercise of outstanding options granted under the Company's 1980 Stock
Option Plan, the 1989 Employee Stock Option Plan and the 1989 Non-Employee
Director Stock Option Plan.
(6) Assumes an estimated $3.2 million of extraordinary charges that would result
from the proposed early retirement of the 11 1/2% subordinated debentures
due 2003 and the 11% senior notes due 2001. The extraordinary charges
include redemption fees, unamortized original issue discount and unamortized
debt issue costs.
10
<PAGE> 11
PRICE RANGE OF COMMON STOCK AND DIVIDENDS
The Company's Common Stock is listed on the New York Stock Exchange and
traded under the symbol "PIR." The following table sets forth for the periods
indicated the high and low sales prices per share of the Company's Common Stock,
as reported for New York Stock Exchange consolidated transactions, and cash
dividends paid per share.
<TABLE>
<CAPTION>
CASH DIVIDENDS
HIGH LOW PER SHARE
---- ---- --------------
<S> <C> <C> <C>
Fiscal year ending March 1, 1997
Third Quarter (through September 17, 1996).......... $16 7/8 $15 --
Second Quarter...................................... 17 3/8 14 3/8 $ .04
First Quarter....................................... 15 3/4 12 .04
Fiscal year ended March 2, 1996
Fourth Quarter...................................... 13 1/4 9 5/8 .04
Third Quarter....................................... 10 7/8 8 7/8 .03
Second Quarter...................................... 10 7 3/4 .03
First Quarter....................................... 9 1/2 8 .03
Fiscal year ended February 25, 1995
Fourth Quarter...................................... 9 5/8 7 1/8 .03
Third Quarter....................................... 8 3/8 7 .03
Second Quarter...................................... 8 1/4 6 3/4 .02
First Quarter....................................... 8 3/4 7 .02
</TABLE>
On September 17, 1996, the last reported sales price of the Common Stock
was $15 1/8.
Certain of the Company's existing loan and lease agreements limit specific
payments and distributions, 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 $15 million as of June 1,
1996. Additionally, the Company is required to maintain various other financial
ratios. The Company's Board of Directors currently expects to pay cash dividends
in fiscal 1997, but intends to retain most of 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.
11
<PAGE> 12
SELECTED FINANCIAL DATA
The following financial data, with the exception of "Other Operating Data,"
for the 1992 through 1996 fiscal years were derived from the audited
consolidated financial statements of the Company. The consolidated financial
statements of the Company at or for each of the three-month periods ended May
27, 1995 and June 1, 1996 are unaudited, but in the Company's opinion reflect
all adjustments, consisting only of normal recurring adjustments (except for the
trading losses and the provision for Sunbelt Nursery Group, Inc. defaults
included in "Nonoperating expenses, net of income" for the three months ended
May 27, 1995), necessary for a fair presentation of such information. Because of
the seasonal nature of the Company's business, the results of the three-month
periods are not necessarily indicative of the results to be expected for a full
fiscal year. The selected financial data presented below should be read in
conjunction with the Consolidated Financial Statements and related notes thereto
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere herein.
<TABLE>
<CAPTION>
AT OR FOR THE
THREE MONTHS
AT OR FOR THE FISCAL YEAR ENDED ENDED
--------------------------------------------------------------- ---------------
FEBRUARY FEBRUARY FEBRUARY FEBRUARY MARCH 2, MAY 27, JUNE 1,
29, 1992 27, 1993 26, 1994 25, 1995 1996 1995 1996
----------- ----------- ----------- ----------- -------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
(IN MILLIONS, EXCEPT PER SHARE, RATIO AND OTHER OPERATING DATA)
STATEMENT OF OPERATIONS DATA:
Net sales............................... $ 586.7 $ 629.2 $ 685.4 $ 712.0 $810.7 $176.8 $205.3
Gross profit............................ 228.4 246.2 259.6 277.6 325.5 69.1 81.7
Selling, general & administrative
expenses.............................. 172.4 180.2 195.4 206.0 235.6 52.1 60.5
Depreciation and amortization........... 15.0 15.1 15.8 16.0 17.2 4.1 4.8
Store-closing provision................. -- -- 21.3 -- -- -- --
Operating income........................ 41.0 50.9 27.1 55.6 72.7 13.0 16.4
Nonoperating expense, net of
income(1)(2).......................... 10.4 15.0 18.8 22.3 44.3 32.9 2.6
Income (loss) before income taxes and
equity in net income (loss) of Sunbelt
Nursery Group, Inc. .................. 30.5 35.9 8.4 33.2 28.4 (19.9) 13.8
Equity in net income (loss) of Sunbelt
Nursery Group, Inc.................... 4.5 (3.6) -- -- -- -- --
Net income (loss)....................... 26.3 23.0 5.9 22.1 10.0 (18.3) 8.3
Net income (loss) per share(3)(4)....... 0.68 0.59 0.15 0.56 0.25 (0.46) 0.21
Cash dividends per share(3)............. $ -- $ 0.06 $ 0.09 $ 0.10 $ 0.13 $ 0.03 $ 0.04
Weighted average number of shares
outstanding and common share
equivalents(3)........................ 38.9 39.2 39.5 39.7 39.8 39.8 40.2
OTHER OPERATING DATA:
Change in same store sales(5)........... (3.3)% 3.7% 4.8% 4.8% 6.5 % 2.7% 10.8%
Retail square footage (in
millions)(6).......................... 4.4 4.5 4.5 4.8 5.1 4.9 5.2
Average sales per square foot(7)........ $ 132.7 $ 139.6 $ 144.6 $ 150.9 $162.0 $153.5 $163.8
Number of stores(6)..................... 585 605 588 634 688 665 697
Capital expenditures (in millions)...... $ 6.2 $ 12.6 $ 24.6 $ 17.5 $ 22.1 $ 4.0 $ 9.1
Ratio of earnings to fixed charges(8)... 1.7x 1.7x 1.2x 1.7x 1.6 x 2.0x
Ratio of earnings before nonrecurring
charges to fixed charges(8)(9)........ 1.7x 1.7x 1.6x 1.9x 2.2 x 2.0x
Supplemental pro forma ratio of earnings
to fixed charges(8)(10)............... 1.8 x 2.4x
BALANCE SHEET DATA:
Working capital......................... $ 160.0 $ 225.2 $ 229.0 $ 265.0 $246.8 $231.2 $254.9
Total assets............................ 386.4 460.5 463.3 485.9 531.1 464.2 545.7
Long-term debt and capital leases....... 106.8 147.2 145.2 154.4 180.1 143.0 180.2
Total stockholders' equity.............. 177.1 200.5 201.1 222.4 227.9 204.4 236.2
</TABLE>
- ---------------
(footnotes on following page)
12
<PAGE> 13
(1) Nonoperating expense, net of income is comprised of interest expense and
interest income in each fiscal year presented, and in addition includes the
following nonrecurring charges: net trading losses (gains) of ($0.1)
million, $2.8 million and $16.5 million in fiscal years 1994, 1995 and
1996, respectively, and $16.0 million for the first quarter of fiscal 1996;
the provision for Sunbelt Nursery Group, Inc. defaults of $14.0 million in
fiscal 1996 and for the first quarter of fiscal 1996; and the write-down of
General Host Corporation securities of $2.0 million and $7.5 million in
fiscal years 1994 and 1995, respectively.
(2) Fiscal 1992 includes a gain on the sale of subsidiary stock of $5.9
million.
(3) Reflects the effect of the 5% stock dividend distributed May 8, 1995.
(4) Fully diluted net income per share is $0.20 for the three months ended June
1, 1996.
(5) Expressed as a percentage increase (decrease) from prior year, based on
sales of stores opened prior to the beginning of the preceding fiscal year
and still open at the end of the period. Changes in same store sales
reflect a 52-week comparison for all fiscal years presented.
(6) As of period end. Retail square footage is the number of square feet of
space devoted to selling space in all open stores. Retail square footage
and number of stores at the end of fiscal 1994 have been adjusted to
exclude 50 stores as a result of a store closing program authorized in
February 1994.
(7) Reflects average sales per square foot of selling space which is calculated
by dividing total store sales by the weighted average retail square
footage.
(8) For purposes of computing the ratio of earnings to fixed charges, earnings
consist of pre-tax income plus fixed charges. Fixed charges consist of
interest expense, amortization of debt issue expense and original issue
discount, and an estimated portion of rental expense representing interest
costs.
(9) For purposes of computing the ratio of earnings before nonrecurring charges
to fixed charges, earnings before nonrecurring charges include pre-tax
income before nonrecurring charges plus fixed charges. Nonrecurring charges
include the items described in note (1) above, as well as the store closing
provision recorded in fiscal 1994.
(10) Pro forma to reflect the conversion/redemption of the 6 7/8% convertible
notes due 2002 (see "Recent Developments"); and adjusted for the receipt of
the proceeds of this offering. See "Use of Proceeds."
13
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the information
in "Selected Financial Data" and the Consolidated Financial Statements of the
Company and notes thereto included elsewhere herein.
GENERAL
The Company is North America's largest specialty retailer of imported
decorative home furnishings, gifts and related items, with 706 stores as of
September 17, 1996, in 47 states, Puerto Rico, Canada, the United Kingdom,
Mexico and Japan. For the 53-week period of fiscal 1996, the Company reported
sales of $810.7 million and net income of $10.0 million, or $0.25 per share,
after recording pre-tax special charges of $14.0 million to disengage from
financial support of Sunbelt Nursery Group, Inc. ("Sunbelt") and approximately
$18 million of net trading losses and related expenses. Net income before
special charges was $35.6 million, or $0.85 per share on a fully diluted basis.
In July 1996, the Company called its $62.8 million of outstanding 6 7/8%
convertible notes due 2002 for redemption, resulting in all but $69,000 of the
notes being converted into Common Stock. On May 8, 1995, the Company distributed
a 5% stock dividend, or approximately 1.9 million shares, to stockholders of
record on May 1, 1995. All prior fiscal year per share amounts have been
adjusted to reflect the impact of the stock dividend. The Company proposes to
securitize its proprietary credit card receivables in October 1996 which, if
completed, would result in a cash payment of approximately $70 million that
would be used to retire debt and provide funds for working capital and other
general corporate purposes. If completed, the Company's proposed securitization
of its proprietary credit card receivables and the use of the proceeds thereof
would affect significantly the financial condition of the Company discussed
below. See "Recent Developments -- Proposed Securitization of Receivables."
RESULTS OF OPERATIONS
Three Months Ended June 1, 1996 and May 27, 1995
The Company recorded net sales of $205.3 million for the first quarter of
fiscal 1997, a 16.1% increase over the $176.8 million recorded for the same
period of fiscal 1996. Same store sales for the first quarter of fiscal 1997
grew 10.8% compared to the first quarter of fiscal 1996. The improvement in same
store sales resulted from an 11% increase in store traffic which management
believes is due to the national television advertising campaign implemented
during the second quarter of last year, the continued focus on customer service
programs and the Company's store remodeling and remerchandising programs which
have improved the layout and design of approximately 40 stores since the first
quarter of last year. Hard goods sales, such as furniture and decorative
accessories, increased 16.5% during the first quarter of fiscal 1997, while soft
goods sales of apparel, jewelry and accessories decreased 21.7% during the first
quarter of fiscal 1997 compared to the first quarter of fiscal 1996,
respectively. Hard goods and soft goods sales contributed 93.3% and 6.7%,
respectively, of merchandise sales for the first quarter of fiscal 1997. The
Company plans to de-emphasize apparel in stores as a part of the remodel program
during fiscal 1997, and management expects to completely discontinue soft goods
in all Pier 1 stores in fiscal 1998. Sales on the Company's proprietary credit
card were $55.7 million, or 27.1% of total sales, for the first quarter of
fiscal 1997, an increase of $12.2 million, or 28.1% over the same period last
year. The Company opened 12 new North American stores and closed six stores
during the first quarter of fiscal 1997, bringing the North American store count
to 668 at the end of the fiscal 1997 first quarter compared to 643 stores at the
end of the first quarter of fiscal 1996. The number of stores worldwide
aggregated 697 at the end of the first quarter of fiscal 1997.
Gross profit, after related buying and store occupancy costs, expressed as
a percentage of sales, increased 0.7% to 39.8% for the first quarter of fiscal
1997 compared to 39.1% for the first quarter of fiscal 1996. Merchandise margins
decreased to 53.9% for the first three months of fiscal 1997 from 54.6% for the
same period a year ago, primarily due to soft goods promotions. In addition, the
Company's expanding international operations produce lower margin rates compared
to its North American operations. Hard goods merchandise margins improved for
the first quarter of fiscal 1997. Store occupancy costs, as a percentage of
sales, improved 1.3% to 14.2% during the first three months of fiscal 1997 over
the comparable period of fiscal 1996 primarily
14
<PAGE> 15
due to higher sales leveraging relatively fixed rates on store leases coupled
with the Company's purchase (in the fourth quarter of fiscal 1996) of 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.
Selling, general and administrative expenses, including marketing, as a
percentage of sales, increased 0.1% to 29.5% in the first quarter of fiscal 1997
compared to the same period last year. In total dollars, expenses for the first
quarter of fiscal 1997 increased $8.5 million versus the first quarter of fiscal
1996 primarily due to a $4.6 million increase in payroll expenses, which
decreased 0.4% as a percentage of sales, a $2.5 million increase in marketing
expenditures due to the national television advertising campaign that started in
July 1995 and a $1.1 million increase in store operating expenses, which
increased 0.2% as a percentage of sales, due to increased costs associated with
selling supplies. Other selling, general and administrative expenses increased
$0.3 million.
Operating income increased $3.4 million, or 26.4%, to $16.4 million during
the first quarter of fiscal 1997 compared to $13.0 million in the first quarter
of fiscal 1996.
Net interest expense decreased $0.3 million during the first quarter of
fiscal 1997 compared to the same period of fiscal 1996 primarily due to higher
investment income earned on the investment in Whiffletree Partners, L.P., an
investment fund, in the first quarter of fiscal 1997, offset partially by an
increase in interest expense resulting from higher floating rate debt coupled
with interest expense on the $40.0 million debt used to acquire the remaining
90% interest in a limited partnership which owns 33 Pier 1 stores.
In late December 1995, the Company was made aware of trading losses of
$19.3 million resulting from trading activities in a discretionary investment
account managed by a financial consultant. The Company has regularly designated
a portion of its excess cash and short-term investments for management by a
financial consultant in the discretionary investment account. The amount of
funds deposited by the Company has 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 and
$2.8 million of the net trading losses in fiscal 1996 and fiscal 1995,
respectively, with $16.0 million of the net trading losses recorded in the first
quarter of fiscal 1996. Fiscal 1996, 1995 and 1994 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
restatements of the various quarters have no effect on net income for the full
1994 fiscal year. The Company has not recorded any tax benefit on these losses
since the realization of such benefit is not considered likely based on the
information available at this time. The Company and a Special Committee of the
Board of Directors investigated the matter and found no evidence to suggest that
the Company's net losses from these trading activities will exceed the $19.3
million recorded in fiscal years 1996 and 1995.
In April 1993, the Company completed the sale of its 49.5% ownership
interest in Sunbelt to General Host Corporation ("General Host") in exchange for
1.9 million shares of General Host common stock. In connection with the sale,
the Company committed to provide Sunbelt a $12.0 million credit facility through
April 1994 and up to $25.0 million of non-revolving store development financing
through April 1996. In October 1994, in connection with the sale by General Host
of its 49.5% interest in Sunbelt to a third party unrelated to the Company or
General Host, the Company received payment of the amounts owed under the credit
facility and agreed to extend $22.8 million of the non-revolving store
development financing to Sunbelt until June 30, 1998, at market rental rates. In
April 1995, Sunbelt defaulted on 13 nursery store sublease agreements with the
Company comprising the $22.8 million 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
15
<PAGE> 16
related costs. The Company currently has outstanding guarantees on other Sunbelt
store lease commitments which aggregated $4.1 million with a present value of
approximately $3.4 million at the end of the first quarter of fiscal 1997. The
Company is not aware of any defaults on these leases. As of June 1996, two
nursery store properties had been sold at costs consistent with the Company's
estimates to record the charge. The Company believes that it is reasonably
possible that a change in this estimate could occur in the near term; however,
no further charge is warranted at this time.
The Company's effective income tax rate for fiscal 1997 is estimated at 40%
compared to 40% recorded in the first quarter of fiscal 1996, exclusive of the
aforementioned trading losses.
Net income for the first quarter of fiscal 1997 aggregated $8.3 million or
$0.20 per share on a fully diluted basis compared to net income before special
charges of $6.2 million or $0.15 per share on a fully diluted basis for the
first quarter of fiscal 1996. Special charges in the first quarter of fiscal
1996 included the $16.0 million in trading losses and the $14.0 million
provision for Sunbelt defaults.
Fiscal Years Ended March 2, 1996 and February 25, 1995
Net sales increased $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 is 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 has 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 aging stores. During fiscal 1996, the Company opened 48
conventional Pier 1 stores and eight 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 continues 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 in the prior year. 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 new 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
16
<PAGE> 17
eliminating base rent expenses for those stores beginning after December 1995.
See "-- Liquidity and Capital Resources."
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 print advertising to 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 in
the discretionary account as discussed above.
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 as discussed below
and in "Three Months Ended June 1, 1996 and May 27, 1995" above.
In relation to losses resulting from trading activities in a discretionary
investment account managed by a financial consultant, 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. The Company deposited a total of $19.5 million in the discretionary
investment 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. See " Three Months Ended June 1, 1996 and May 27,
1995" above.
In connection with Sunbelt's default in April 1995 of the 13 store
subleases with the Company, the Company entered into a settlement agreement with
Sunbelt in July 1995 concerning such default 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
$6.0 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 buyers for the
properties, if earlier. Sunbelt also agreed to cure the previous defaults on
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 $8.0 million (which may be prepaid with $4.0 million in
payments made by May 1997 or with $6.0 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. For additional information, see "Three Months Ended June
1, 1996 and May 27, 1995" above.
17
<PAGE> 18
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. For additional information, see "Fiscal Years Ended February 25, 1995
and February 26, 1994" below.
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. The effective
income tax rate for fiscal 1997 is expected to approximate 40%.
Net income for fiscal 1996 aggregated $10.0 million, or $0.25 per primary
share, compared to net income of $22.1 million, or $0.56 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.
Fiscal Years Ended February 25, 1995 and February 26, 1994
During fiscal 1995, net sales increased $26.6 million, or 3.9%, to $712.0
million compared with fiscal 1994 net sales of $685.4 million. This growth was
primarily attributable to growth in same store sales which increased 4.8%
compared to fiscal 1994. During fiscal 1995, the Company opened 42 new North
American stores. Sales of hard goods such as furniture and decorative
accessories increased 12% in fiscal 1995 over fiscal 1994, and sales of soft
goods such as apparel and jewelry decreased 21% in fiscal 1995 compared to the
prior year. Hard goods and soft goods sales contributed approximately 91% and
9%, respectively, of total sales during fiscal 1995. The Company's sales mix
shifted during fiscal 1995 to reflect the Company's focus on increasing consumer
demand for furniture and decorative accessories coupled with lower demand and
less Company emphasis on apparel and related accessories. This sales shift
resulted in higher average ticket sales and a 5.1% increase in sales per average
square foot of retail selling space to $154.03 from $146.57 in the prior year.
Sales of $26.7 million from stores closed during the year pursuant to the fiscal
1994 store-closing program were excluded from the Company's reported sales for
fiscal 1995. Sales in these stores were included in fiscal 1994 reported sales
and aggregated $37.7 million.
Sales on the Company's proprietary credit card were $126.8 million, or
17.8% of total sales, during the 1995 fiscal year, an increase of $25.6 million,
or 25.3%, over the prior fiscal year. Proprietary credit card receivables
totalled $62.6 million at the end of fiscal 1995, a 29.9% increase over the
prior fiscal year. The Company actively pursues increasing the cardholder base
in order to use the cardholder list as a basis for direct mail advertising and
because it believes that such a base increases customer loyalty and repeat
business. Sales on the Company's proprietary credit card are encouraged through
specific marketing promotions.
Gross profit, after related buying and store occupancy costs, expressed as
a percentage of sales, increased 1.1% to 39.0% in fiscal 1995 from 37.9% in
fiscal 1994. The increase resulted primarily from leveraging relatively fixed
store occupancy costs through greater sales, combined with the closing of 49
stores (which as a group had higher occupancy costs as a percentage of sales
than did the remaining population of stores). Gross profit on merchandise, as a
percentage of sales, remained unchanged at 53.4% in fiscal 1995 compared to
fiscal 1994. During fiscal 1995, the contribution of the components of gross
profit changed as margins improved in furniture due to a reduction in
merchandise discounts and clearance markdowns, and margins decreased in
decorative accessories and dining and kitchen items as a result of clearance
markdowns aimed at decreasing inventory levels. Soft goods gross profit
components were down from 52% in fiscal 1994 to 50% in fiscal 1995 as a result
of intentional lowering of retail prices to stimulate sales.
Selling, general and administrative expenses, including marketing, as a
percentage of sales, increased 0.4% to 28.9% in fiscal 1995 compared to 28.5% in
fiscal 1994. In total dollars, these expenses for fiscal 1995 increased $10.6
million over fiscal 1994, with $7.0 million of the increase attributable to
expenses that normally increase proportionately with sales, such as store
salaries and marketing. These variable expenses, as
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a percentage of sales, remained essentially unchanged from the prior year.
Management bonuses increased by $3.6 million as a result of increased earnings.
Net proprietary credit card expenses declined by $1.2 million, primarily as a
result of increased finance charge income, and all other selling, general and
administrative expenses increased by $1.2 million.
In fiscal 1994, the Company recorded a special charge of $21.3 million
before taxes for a store-closing provision that was established to reflect the
anticipated costs to close 49 stores with histories of under-performance and
high occupancy costs and to close the Canadian distribution center and
administrative offices. At the end of fiscal 1995, the Company had closed 46
stores; the Canadian distribution center and administrative offices were closed
in March 1995. Agreements have been reached with a majority of landlords
regarding lease terminations for stores in the store-closing program. The
balance of the store-closing reserve at fiscal 1995 year-end was $11.8 million,
which consisted primarily of anticipated final cash requirements associated with
lease termination costs. The $9.5 million utilized out of the store-closing
reserve during fiscal 1995 consisted of lease termination costs of $3.0 million,
fixed asset write-downs and inventory liquidation costs of $4.8 million, interim
operating losses and other costs of $1.4 million and severance costs of $0.3
million.
Operating income improved $28.5 million to $55.6 million in fiscal 1995
from $27.1 million in fiscal 1994.
During fiscal 1995, net interest expense declined primarily due to lower
effective interest rates coupled with lower debt, net of cash balances.
In relation to losses resulting from trading activities in a discretionary
investment account managed by a financial consultant, the Company deposited a
total of $12.5 million in the discretionary investment account in fiscal 1995,
and during the first, second and third fiscal quarters 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. During the first, second and third fiscal quarters of fiscal 1994 the
Company incurred net trading losses in the account of $4.0 million, $6.2 million
and $4.6 million, respectively, and during the fourth quarter attained a net
trading gain of $14.8 million. See "Three Months Ended June 1, 1996 and May 27,
1995" above.
Subsequent to the April 1993 sale of the Company's interest in Sunbelt to
General Host for 1.9 million shares of General Host's common stock, General Host
distributed two 5% stock dividends, resulting in an increase in the Company's
holdings to 2.1 million shares of General Host common stock at February 25,
1995. In fiscal 1994, the Company recorded a provision for the write-down of the
carrying value of the Company's holdings of General Host common stock. Based on
prices at fiscal year-end 1994, the market value of General Host common stock
was $5.6 million less than the Company's original carrying amount. After an
assessment of factors which may have contributed to the decline, the Company
estimated $2 million of this decline to be "other than temporary" and recorded a
corresponding charge to income in fiscal 1994. The remaining $3.6 million
decline in market value was considered to be temporary. Despite favorable
developments relating to General Host, the General Host stock price did not
improve during fiscal 1995. Consequently, in the third quarter of fiscal 1995,
the Company concluded that these developments were not having the expected
positive effect on General Host's market price per share, and a non-cash,
pre-tax special charge of $7.5 million was recorded to reflect an "other than
temporary" decline in the market value of the General Host common stock. As a
result of the issuance of the Company's exchangeable debentures in December
1994, the General Host common stock is no longer available for sale, and the
Company no longer has market risk in relation to the General Host common stock.
The Company's effective income tax rate for fiscal 1995 increased to 33.6%
from 29% in fiscal 1994. The effective rate for fiscal 1995 exclusive of the
effects of the aforementioned net trading losses would be 31%. The increase is
primarily due to the benefit of tax-favored investment income in fiscal 1994
compared to fiscal 1995 and an increase in the effective state income tax rate
for fiscal 1995 as compared to fiscal 1994.
Net income for fiscal 1995 aggregated $22.1 million, or $0.56 per share,
compared to income of $5.9 million, or $0.15 per share, last year.
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LIQUIDITY AND CAPITAL RESOURCES
Cash, including temporary investments, aggregated $13.5 million at fiscal
1996 year-end compared to $50.6 million at fiscal 1995 year-end and increased to
$17.5 million at the end of the first quarter of fiscal 1997. Cash from
operating activities produced $11.4 million during fiscal 1996 compared to $46.5
million in fiscal 1995. The decrease in cash from operations during fiscal 1996
was primarily due to the recording of net trading losses of $16.5 million and a
build-up of inventory during fiscal 1996 compared to a reduction of inventory
levels during fiscal 1995. This inventory increase at the end of fiscal 1996 was
the result of timing of normal shipments for spring and summer merchandise
affected by the 53rd week in the fiscal year, as well as the Chinese New Year
celebration (which is a long holiday for many of the Company's vendors) that
occurred later in fiscal 1996 than in fiscal 1995, causing spring inventory
shipments to be earlier than in fiscal 1995. The increase in cash during the
first quarter of fiscal 1997 was primarily due to cash flow from operations of
$11.7 million and the net proceeds of $4.7 million from the liquidation of the
investment in Whiffletree Partners, L.P., offset partially by capital
expenditures of $9.1 million, net payments under line of credit agreements of
$1.8 million, cash dividend payments of $1.6 million and payments on the reserve
for Sunbelt defaults of $1.0 million.
In December 1995, the Company purchased the remaining 90% ownership
interest, previously held by unrelated third parties, in a limited partnership
in which the Company held a 10% ownership interest. The partnership was formed
to construct and lease 33 Pier 1 stores to the Company. The Company paid
approximately $40 million for this remaining ownership interest which was funded
through a $65 million revolving credit facility obtained in December 1995.
Capital expenditures of $10.7 million were used during fiscal 1996 to
support the opening of 48 Pier 1 stores and eight mall-based stores in North
America and expenditures of $5.3 million were used to remodel 35 stores.
Beginning in fiscal 1996, the Company began a store remodeling program to
refurbish aging stores in the chain. Thirty-five additional stores are planned
for refurbishment in fiscal 1997 at an estimated cost of $7 million. The Company
plans to remodel 150 additional stores during the following three years that
will require estimated expenditures of $33.9 million. The Company's store
development plan for fiscal 1997 provides for the opening of approximately 50
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 1997 development plan are estimated to cost approximately $18
million, which will be funded by operations, working capital and bank lines of
credit. Thirty-one stores in North America are expected to be closed in fiscal
1997; 26 of these have expiring leases, and the remaining five stores are
included in a $1.4 million store-closing reserve recorded in the fourth quarter
of fiscal 1996.
Working capital requirements are provided by cash flow from operations and
a three-year, $65 million revolving credit facility obtained in December 1995,
$25.0 million of which was available at the end of the first quarter of fiscal
1997, and other short-term (12-month) bank facilities aggregating $141.2
million, $71.6 million of which was available at the end of the first quarter of
fiscal 1997. The short-term bank facilities consist of $15.0 million of
committed lines of credit and $126.2 million of uncommitted lines. Provisions of
certain of the Company's loan agreements currently limit the total amount of
borrowings under all debt facilities to an aggregate of $129.0 million in excess
of current borrowings at the end of the first quarter of fiscal 1997. 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 the end of the first quarter of fiscal 1997, the most
restrictive of these agreements limited the aggregate of such payments to $15.3
million. The Company requested and received agreement from its lenders to either
exempt or waive the net trading losses and Sunbelt default special charges from
the calculation of certain restrictive covenants. The Company is in compliance
with the provisions of all loan agreements and lease guarantees. The Company's
current ratio was 3.4 to 1 at the end of the first quarter of fiscal 1997
compared to 3.5 to 1 at fiscal 1996 year-end and 4.1 to 1 at fiscal 1995
year-end.
The Company currently has a $45 million short-term store development and
lease financing facility, of which approximately $9 million is unused. In
addition, the Company maintains approximately $52 million in intermediate-term
lease financing facilities for 41 stores. The property leases for these 41
stores require that
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upon expiration of the leases over the next two years, unless the leases are
extended by the parties, the Company must either obtain alternative financing
for the properties or arrange for the sale of the properties to a third party or
purchase the properties. In order to continue to finance new store land and
building costs through operating leases, the Company is exploring other
financing opportunities currently available in the capital markets. The
Company's minimum operating lease commitments for the last three quarters of
fiscal 1997 aggregate $72.0 million, and the present value of total existing
operating lease commitments is $366.0 million. These commitments will be funded
from operating cash flow.
In July 1996, the Company called its $62.8 million of outstanding 6 7/8%
convertible notes due 2002 for redemption. As a result, $62.7 million of the
6 7/8% notes were converted into 5,483,823 shares of Common Stock and $69,000 of
such notes were redeemed by the Company. The conversion of the notes increased
the Company's equity capitalization by $62.6 million. In October 1995, the
Company announced that its Board of Directors authorized the purchase of up to
three million shares of the Common Stock in open market or private transactions
from time to time depending on prevailing market conditions. To date, no
significant number of shares has been repurchased.
The Company proposes to securitize substantially all its proprietary credit
card receivables in October 1996 through a private placement of trust
certificates. If the transaction is completed, the Company would receive
approximately $70 million in cash and intends to use the proceeds to retire the
outstanding balance of the Company's bank revolving credit facility and to
provide funds for working capital and other general corporate purposes.
In fiscal 1993, the Company invested in preference stock of The Pier Retail
Group, Limited ("The Pier"), a 15-store retail chain in the United Kingdom that
offers decorative home furnishings and related items in a store setting similar
to that operated by the Company. At the Company's option, the preference stock
may be converted into a 90% controlling interest of The Pier. At the end of the
first quarter of fiscal 1997, the Company's net investment in The Pier was $6.0
million. At the end of the first quarter of fiscal 1997, the Company also
guaranteed a bank line available to The Pier of L4.1 million or $6.3 million of
which $4.8 million was outstanding. The Company expects to invest approximately
$4 million of additional funds in The Pier's operations during fiscal 1997,
approximately $2 million of which is expected to be used to reduce The Pier's
bank debt guaranteed by the Company.
The Pier plans to close one store near the end of fiscal 1997 and focus on
profitability rather than expansion. From fiscal 1993 to the first quarter of
fiscal 1997, The Pier's operating losses aggregated $7.9 million. With this
change in focus, several steps are underway to improve operating results,
including utilization of the Company's overseas purchasing function to
supplement that function at The Pier; implementation of store associate training
programs focused on customer service and selling to stimulate same-store sales
growth; use of the Company's visual merchandising standards to differentiate The
Pier from its local competition; and improvement of the warehouse and
distribution functions, based on the Company's systems, to allow The Pier to
reduce its warehouse requirements. Prior to fiscal 1997, the Company had
provided limited management and operational support to The Pier. These
improvements can be provided at minimal cost to the Company. Projections of The
Pier's results indicate marginal profitability and positive cash flow in fiscal
1998. The Company anticipates that the years following fiscal 1998 will reflect
continued improvements in this trend such that the expected future undiscounted
cash flows of The Pier will exceed the carrying amount of the Company's
investment in The Pier. This estimate of recoverability of the Company's
investment is dependent upon the actual results of operations of The Pier
realizing the projected amounts. As a result, the Company believes that it is
reasonably possible that a change in this estimate could occur in the near term,
requiring a charge to earnings but no such charge is warranted at this time.
Cash requirements to fund the Company's previously established reserve to
disengage financial support of Sunbelt are expected to be $12.7 million and will
be funded through working capital and operations. As of June 1996, two of the
thirteen nursery store properties have been sold at costs consistent with the
Company's previously recorded reserve. The Company's guarantees of other Sunbelt
store lease commitments aggregates $4.1 million with a present value of $3.4
million at the end of the first quarter of fiscal 1997. The Company is
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not aware of any defaults on these leases. The Company believes that it is
reasonably possible that a change in this estimate could occur in the near term;
however, no further charge is warranted at this time.
In March 1993, the Company invested $3.0 million in Whiffletree Partners,
L.P., an investment fund. In April 1996, the Company divested its interest in
Whiffletree Partners, L.P. for $4.7 million, yielding a three-year compound
annual return of approximately 14.7% after termination costs.
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 that funds provided from operations, coupled with the
Company's cash position and available lines of credit, 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.
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BUSINESS
Pier 1 is North America's largest specialty retailer of imported decorative
home furnishings, gifts and related items with 706 stores in 47 states, Puerto
Rico, Canada, the United Kingdom, Japan and Mexico. Pier 1 stores offer a
diverse selection of quality merchandise presented in an upscale atmosphere
which allows customers to choose unique items expressing their individual
tastes, interests and character. Key factors supporting the Company's success
have been the variety, quality and value of its merchandise. Pier 1's assortment
of merchandise consists of over 5,000 products imported from 44 countries,
features up to 50% proprietary items and is enriched with approximately 40% new
merchandise each season. The Company differentiates itself through its global
sourcing capabilities, reflecting 34 years of experience and the considerable
resources that the Company has applied to developing vendor relationships and
the buying function.
Over the last several years, the Company has experienced significant
positive momentum in its operating performance, reflecting the successful
implementation of key strategic initiatives. Sales increased from $586.7 million
in fiscal 1992 to $810.7 million in fiscal 1996, a compound annual growth rate
of 8.4%. Over the same period, operating income increased from $41.0 million to
$72.7 million, a compound annual growth rate of 15.4%. Through July 1996, the
Company posted same store sales gains in 24 of the prior 25 months.
BUSINESS STRATEGY
The Company's business strategy focuses on (i) increasing profitable sales
in existing stores through an upgraded merchandise assortment, stronger customer
focus, a comprehensive remerchandising and remodeling program and other
marketing initiatives; (ii) growing the domestic store base through new store
openings; and (iii) developing partnerships and franchising arrangements in
international markets. The core initiatives supporting this strategy include the
following:
Upgraded and Broadened Merchandise Assortment. Pier 1 offers a broad range
of merchandise consisting of decorative accessories, furniture, housewares,
apparel, bed and bath items and seasonal goods. The Company carries over 5,000
products, approximately 85% of which are directly imported from 44 countries.
Through attention to style, color, texture and quality, Pier 1 has steadily
upgraded its product offering over the last decade. Within the last year, Pier 1
has established an in-house product development capability to further expand its
proprietary product lines and to ensure consistency across its merchandise
assortment. To further refine its focus on home furnishings, the Company is
emphasizing its furniture category which carries higher price points and is
planning to discontinue its apparel line in all stores in fiscal 1998.
Stronger Customer Focus. As a destination retailer with a majority of its
customers making targeted shopping visits to its stores, the Company stresses
superior customer service and has taken steps to elevate the richness of the
customer's shopping experience. Representative of this commitment to an enhanced
customer shopping experience are the new "100% Greet" and "Best Seller" programs
which focus store associates on initiating contact with customers and offering
solutions to their home furnishing and decorating needs. Store associates
regularly receive training in support of these programs and other initiatives. A
national bridal and gift registry program will be fully implemented by November
1996, which, in combination with new wrapping and mailing stations, will provide
an added convenience for shoppers.
Remerchandising/Remodeling Program. Pier 1 embarked upon a major program
beginning in fiscal 1996 to redesign all store interiors to improve the visual
merchandising of its products. This program will incorporate 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 attractive,
home-use settings to assist customers with decorating ideas. This
remerchandising effort will be accompanied by a major remodeling program to
refurbish older stores.
Shift in Advertising Strategy. The Company instituted a major change in its
advertising strategy in fiscal 1996 by shifting a majority of its advertising
spending to a national television campaign. Previously, the Company relied
primarily upon newspaper advertising as its major marketing tool. The Company's
television advertising features image-building ads as compared to the
promotional ads it typically employed in its
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newspaper advertising. Management believes its television advertising has
contributed to same store sales growth and has been effective in expanding Pier
1's customer base. The shift in advertising has had the additional benefit of
improving merchandise margins through less reliance on promotional pricing.
Proprietary Credit Card Program. Pier 1 has offered its proprietary card
since 1988 and views its credit card as an important part of its marketing
strategy. In the last two years, the number of cardholders increased from
932,000 to nearly 1.9 million, with proprietary credit card sales representing
23.2% of total Pier 1 sales in fiscal 1996. For the six month period ending
August 31, 1996, sales on Pier 1's proprietary credit card averaged $138 per
transaction as compared to average third party credit card transactions of $57
and cash transactions of $16. Management believes the Company's strong credit
card program is a valuable tool for building a larger customer base, increasing
customer loyalty and improving average transaction size.
Global Expansion Strategy. The Company's global expansion strategy is to
continue its growth by opening stores in existing and new North American markets
while building its international presence. The number of stores worldwide has
increased from 585 at the end of fiscal 1992 to 706 stores currently. In fiscal
1997, Pier 1 anticipates opening 50 to 55 stores in North America while closing
20 to 25 stores. The Company anticipates the opening of additional stores
internationally, principally through franchise agreements. Since April 1996, two
Pier 1 franchised stores have been opened in Tokyo, Japan, which, if successful,
could lead to the development of up to 100 stores in Japan by the year 2000. The
Company currently expects that the Japanese franchise program will serve as the
model for future international expansion.
The Company's strong management information systems enable it to
effectively implement its strategic initiatives. Over the past ten years, the
Company has invested more than $35 million in state-of-the-art data processing
systems to better serve its customers and improve inventory management. Future
capital investments are anticipated to further improve logistical support and
distribution functions.
RETAIL OPERATIONS
Pier 1 operates stores in 47 states, Puerto Rico, Canada, the United
Kingdom, Japan and Mexico. The 15 stores in the United Kingdom operate under the
name The Pier. The Company has a relationship with Sears de Mexico and Sears de
Puerto Rico pursuant to which Pier 1 merchandise is sold in dedicated retail
space in 10 Sears stores in Mexico and four in Puerto Rico. The Company has two
franchise stores in Tokyo. See "-- Foreign Operations." No one state or foreign
country accounts for more than 14% of total sales and no one store accounts for
more than 0.5% of total sales. This diversification helps mitigate the effects
of local or regional economic downturns. Company-operated stores are generally
free-standing or located in point positions in upscale strip centers in or near
suburbs of metropolitan areas. Stores average approximately 7,500 square feet of
retail selling space. The Company is testing a smaller prototype store in
selected resort areas and continues to test market a mall-based concept under
the name "The Market of Pier 1." Pier 1 also operates 11 clearance centers in
the U.S. allowing the Company to move excess store inventory on an orderly basis
and improve margins on clearance items while permitting the conventional stores
to display new merchandise. The average Pier 1 store achieves annual sales of
slightly more than $1.2 million, with the highest sales volume occurring during
November and December, reflecting the Christmas selling season.
Pier 1's specialty retail operations have grown over the past decade from
306 stores to 706 stores worldwide. In addition, the Company currently
franchises 20 stores in the United States. The Company opened 12 North American
stores and closed six stores during the first quarter of fiscal 1997, bringing
the North American store count to 668 at the end of the fiscal 1997 first
quarter compared to 643 stores the prior year. Subject to changes in the retail
environment, availability of suitable store sites and adequate financing, the
Company plans to open 50 to 55 stores in North America and to close
approximately 20 to 25 stores in fiscal year 1997. In the last three years, 66%
of the 150 new stores that the Company opened were in single-store markets,
where one key location serves a wide market area.
MERCHANDISING
Pier 1's product assortment is selected and designed to provide items that
are distinctive and specifically suited to the tastes of its customers. Although
the general categories of the merchandise sold in Pier 1 stores
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remain the same, individual items within each general product group are
frequently changed to respond to the interests and demands of customers. By
continually upgrading and changing the product assortment, Pier 1 generates
additional store traffic by encouraging customers to revisit stores to see new
items. Products fall generally in the following categories:
Furniture designed for use in living, dining and kitchen areas as well as
sun rooms and covered patios constituted 32.8%, 33.1% and 31.6% of the total
retail sales of Pier 1 in fiscal years 1996, 1995 and 1994, respectively. These
goods are mainly imported from Italy, Malaysia, Chile, China, the Philippines
and Indonesia, and are handcrafted from natural materials, including rattan,
pine, beech and rubberwood with either natural, stained or painted finishes.
This product category also includes metal and upholstered furniture, glass table
tops and seating pads.
Decorative Accessories constituted the broadest group of merchandise in
Pier 1's sales mix and contributed 27.0%, 27.5% and 28.3% to Pier 1's total
retail sales in fiscal years 1996, 1995 and 1994, respectively. These items are
imported from approximately 40 countries and include brass, stone and wood
items, as well as pillows, dried florals, wall decor, baskets and window
treatments.
Housewares are imported from Italy, India and elsewhere in the Far East and
Europe and include dinnerware, table top textiles, stemware and barware, as well
as additional decorative and functional kitchen or foodservice related items.
These goods accounted for 14.1%, 14.3% and 14.0% of the total retail sales of
Pier 1 in fiscal years 1996, 1995 and 1994, respectively.
Bed, Bath and Candles is comprised of bedding, bath and home fragrance
products, as well as candles. These rapidly growing categories are imported from
the United Kingdom, Germany, Italy, India and the Far East. These goods
accounted for 9.2%, 7.8% and 7.4% of the total retail sales of Pier 1 in fiscal
years 1996, 1995 and 1994, respectively.
Seasonal categories of merchandise are comprised of toys, games, festive
decorations, picnic, poolside and garden accessories. Pier 1 purchases
merchandise to complement both holiday decorating and gift giving, as well as
seasonal entertaining. These product categories are purchased from over 20
countries including Sri Lanka, Greece and The Czech Republic. These goods
accounted for 9.3%, 8.5% and 6.5% of the total retail sales of Pier 1 in fiscal
years 1996, 1995 and 1994, respectively.
Apparel, which includes jewelry and fashion accessories, is imported from
India, Greece, Thailand and Indonesia and accounted for 7.6%, 8.8% and 12.2% of
the total retail sales of Pier 1 in fiscal years 1996, 1995 and 1994,
respectively. The decreases in sales of soft goods are a result of the Company's
focus on increasing consumer demand for home related products coupled with lower
demand for apparel and related accessories. The Company plans to de-emphasize
apparel in stores during fiscal 1997 and to discontinue sales of soft goods in
all its stores during fiscal 1998.
Most of Pier 1's merchandise is directly imported from foreign suppliers
and is handcrafted in cottage industries and small factories. Pier 1 is not
dependent on any particular supplier and has enjoyed long-standing relationships
with many vendors. During fiscal 1996, Pier 1 imported approximately 27.5% of
its purchases from China, 17.5% from India, and another 31.4% was imported from
Indonesia, Japan, Thailand, the Philippines and Italy. The remaining 23.6% 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.
CUSTOMER SERVICE
Pier 1's goal is to provide the highest level of customer service. This
process begins with the selection of store managers, attracting those
entrepreneurial women and men who understand their primary job is serving
customers and training store associates. The average store manager is 34 years
old and has served the Company for eight years; 55% of the managers are women.
Managers are compensated on store sales and profit performance and are motivated
to produce positive results. The Company focuses its hiring practices on
candidates who enjoy serving people and present a helpful, caring demeanor.
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As part of its emphasis on customer service, the Company instituted the
"100% Greet" program which requires 100% of the sales associates to greet
customers 100% of the time. The Company's "Best Seller" program supplements 100%
Greet and encourages sales associates to offer solutions to customers' home
furnishing and decorating challenges. Additional sales initiatives, originating
from the field or home office, are communicated to store personnel on a regular
basis. The Company monitors levels of customer assistance and sales techniques
with approximately 6,000 "mystery customers" who report to the Company on
service and 100% Greet standards via a toll-free number after shopping Pier 1
stores. Each mystery customer call is logged and a written report is sent to
each individual store on its performance.
MARKETING
Pier 1 uses various media to convey its message of variety, quality and
value to its target customers, consisting principally of television and magazine
advertising, promotional sales inserts in newspapers and by direct mail, and
mailings to Pier 1's proprietary credit card customers. The Company's current
domestic advertising budget is 4.4% of its domestic annual sales. Market
research has revealed that Pier 1's customer base consists primarily of women
(70%) with half of the customers between the ages of 25 and 44. Over 75% of Pier
1's customers have some college education and work full or part time. The median
household income of its customers is $50,000. The Company uses its market
research to focus its advertising campaigns.
The Company instituted a major change in its advertising program in fiscal
1996 by implementing a national network television campaign focusing on image
building rather than promotions. Prior to this campaign the Company relied on
newspaper advertising as its major marketing tool. Careful media analysis,
however, revealed a decline in newspaper readership by the Company's target
customers and low penetration among younger consumers. Television commercials
air monthly on network programs including several popular NBC and Fox prime time
shows, NBC's Today Show, ten cable networks and top-rated syndicated programs.
The Company has designated 67% of its fiscal 1997 advertising budget for
television advertising, funded in part by the discontinuation of most newspaper
advertising. The TV commercials present a typical shopping experience at Pier 1
stores and feature actual customers sharing their personal reasons for shopping
at Pier 1 stores. Since the national television advertising was instituted, Pier
1 has experienced strong same store sales increases and significant increases in
store traffic and gross margins.
In addition to television advertising, the Company continues to rely on
promotional and seasonal sales inserts that support monthly store promotions;
nearly 20% of its domestic advertising budget is dedicated to this effort. Nine
monthly inserts are distributed through newspapers and direct mail to over 14
million customers in the top sales-producing zip codes surrounding each store.
The Company allocates 10% of its domestic advertising budget to magazine
advertising, selecting popular home and shelter magazines to showcase Pier 1's
newest, most fashion-forward merchandise, with an emphasis on style and quality.
The Company initiated its proprietary credit card program in 1988 and views
its credit card as an important part of its marketing strategy. In the last two
years, the number of cardholders increased from 932,000 to nearly 1.9 million
with proprietary credit card sales increasing from $126.8 million to $188.3
million during the same period. For the six month period ending August 31, 1996,
sales on Pier 1's proprietary credit card averaged $138 per transaction compared
to average third-party credit card purchases of $57 and average cash
transactions of $16. During the past fiscal year, credit card purchases
represented 23.2% of total sales. The Company increases its cardholder base
using in-store credit card promotions aided by sales-oriented quick-credit
approvals, combined with targeted, direct-mail offerings to potential new
customers. With its recently upgraded cardholder database, the Company is
initiating programs to stimulate sales from credit customers, such as
promotional mailings for birthdays, relocations and card anniversaries;
quarterly newsletters to Pier 1's top 5% of its credit cardholders; awards for
reaching specified purchase levels; and efforts to reactivate inactive accounts
by sending different promotional material depending on the length of time of
inactivity. Future programs anticipate using the purchase history of customers
to target promotions for specific lines of merchandise.
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<PAGE> 27
Management recently instituted a national bridal and gift registry as a new
marketing tool that will be fully implemented by November 1996. The bridal
registry will be supported by the addition of wrapping and mailing stations in
each store, enabling purchases to be shipped conveniently nationwide.
FOREIGN OPERATIONS
In fiscal 1996, a wholly owned subsidiary of the Company entered into a
franchise agreement with Akatsuki Printing Co., Ltd. and Skylark Group
("Akatsuki") to develop Pier 1 retail stores in Japan. Akatsuki recently opened
its first two licensed stores in Tokyo, and initial sales have exceeded
Akatsuki's expectations. Akatsuki plans to open an additional three stores in
the Tokyo area in this fiscal year. The franchise agreement provides for the
licensing of up to an additional 95 stores if the initial five stores prove to
be successful during a 12-month test period. The Company currently expects that
the Japanese franchise program will serve as the model for future international
expansion elsewhere.
In fiscal 1993, the Company invested in preference stock of The Pier, a
15-store retail chain located in the United Kingdom that offers decorative home
furnishings and related items in a store setting similar to that operated by the
Company. At the Company's sole option, the preference stock may be converted
into a 90% controlling interest of The Pier. At the end of the first quarter of
fiscal 1997, the Company's net investment in The Pier was $6.0 million. The
Company also guarantees a bank line available to The Pier of L4.1 million or
$6.3 million and as of June 1, 1996, $4.8 million was outstanding under this
line. The Pier plans to close one store near the end of fiscal 1997 and focus on
profitability rather than expansion.
During fiscal 1994, Pier 1 entered into an arrangement to supply Sears de
Mexico with Pier 1 merchandise to be sold in certain Sears stores throughout
Mexico. Presently 10 Sears stores in Mexico offer Pier 1 merchandise. This
program was slowed by the Mexican recession, but improved results are expected
in fiscal 1997. In fiscal 1996, the Company entered into a separate agreement
with Sears Roebuck de Puerto Rico to market and sell Pier 1 merchandise in
Puerto Rico. The Sears de Puerto Rico and Pier 1 alliance is growing: currently
four Sears de Puerto Rico Pier 1 stores are in operation and the Company
anticipates that two more stores will be opened in Puerto Rico in fiscal 1997.
The Company maintains two wholly owned foreign subsidiaries; one which is
incorporated under the laws of Hong Kong and manages certain merchandise
procurement, export and financial service functions for Pier 1, and a second
which is incorporated under the laws of Bermuda and owns the right to license
the Pier 1 trademarks outside the U.S. and Canada.
DISTRIBUTION
Pier 1 currently operates six regional distribution centers located in or
near Baltimore, Maryland; Los Angeles, California; Fort Worth, Texas; Chicago,
Illinois; Savannah, Georgia; and Columbus, Ohio, and leases additional space
from time to time on a temporary basis. Imported merchandise and a portion of
domestic purchases are delivered to the distribution centers and staged for
shipment to the various stores in the center's region. The merchandise is then
distributed to retail stores by contract carriers. Due to the time delays
involved in procuring merchandise from foreign suppliers, Pier 1 is required to
maintain a significant amount of inventory in order to be assured of a
sufficient supply of products to its customers. A stock of regularly reordered
items and temporary inventory surpluses have, from time to time, been carried at
the distribution centers.
COMPETITION
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
Pier 1 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.
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<PAGE> 28
IMPORTING RISKS
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 12 months in
advance of delivery and the obligation 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 1988, the Omnibus Trade and Competitiveness Act was signed into law
amending the Trade Act of 1974 (the "Act"). This legislation was enacted 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 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 greatest
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 bases 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 MFN
status to countries around the world which would cause import duties to
increase. In June 1996, the President renewed the MFN status of the People's
Republic of China; however, annually, the MFN status with China is subject to
review and renewal which, if lost, would cause the Company 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.
TRADE MARKS
Pier 1 owns five federally registered service marks under which its
Company-operated and franchised stores do business. These registrations are for
the marks PIER 1 IMPORTS, PIER 1, PIER 1 IMPORTS FOR A CHANGE and FOR A CHANGE.
Also the Company has registered, and has applications pending for the
registration of, Pier 1 trademarks and servicemarks in the U.S. and in numerous
foreign countries.
EMPLOYEES
On March 2, 1996, Pier 1 employed approximately 9,399 persons: 519 were
full time employees at the Company's home office, 4,224 were part time employees
in its retail stores and distribution centers and 4,656 were full time employees
in the stores and distribution centers. The employees of the Company are not
covered by any collective bargaining agreement. The Company considers its
relationship with its employees to be good.
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<PAGE> 29
PROPERTIES
Pier 1 leases certain properties consisting principally of retail stores,
distribution centers and office space. Pier 1 has leased through February 28,
2004, a total of 136,777 square feet of office space in downtown Fort Worth for
the Company's home office. Most of the retail store properties are operated
under leases that are classified as operating leases. Pier 1 currently owns or
leases six distribution centers providing approximately 2.75 million square feet
of space in Baltimore, Maryland; Los Angeles, California; Fort Worth, Texas;
Chicago, Illinois; Savannah, Georgia; and Columbus, Ohio. Additional space
requirements could be accommodated, if necessary, by leasing additional space.
At March 2, 1996, the present value of Pier 1's future operating lease
commitments aggregated approximately $374 million.
The Company has agreements with unaffiliated groups to lease certain stores
and distribution center space. These unaffiliated groups are committed to make
available up to $96.8 million for development or acquisition of stores leased by
Pier 1. As of June 1, 1996, the Company had used $86.3 million of that
availability. Agreements with these groups mature over the next two years, and
the Company is continuously monitoring financial markets to optimize renewal
terms.
LEGAL PROCEEDINGS
As a result of the trading losses incurred in a discretionary investment
account managed by a financial consultant, several lawsuits were filed with
respect to the Company as described below.
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.
Four other derivative suits filed in Delaware have been consolidated into this
proceeding. The complaint alleges 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. The suit seeks
an accounting to the Company for the damages it sustained. A motion by the
defendants to dismiss the suit is pending.
On January 3, 1996, a derivative suit, entitled John P. McCarthy Profit
Sharing Plan, et al. v. Clark A. Johnson et al., was filed by a stockholder on
behalf of the Company in the District Court of Tarrant County, Texas against
each member of the Board of Directors, two executive officers of the Company and
an outside financial consultant of the Company. The complaint alleges that the
Directors and executives of the Company violated their duties to the Company and
its stockholders by gross mismanagement and waste of the Company's assets
exceeding $34.0 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. The
Company has filed cross claims against the financial consultant and third party
claims against a commodities brokerage firm which executed transactions for the
financial consultant, asserting conspiracy and fraud and seeking damages
sustained by the Company from the trading activities. Pursuant to an agreement
with the plaintiffs, the current directors and officers of the Company were
dismissed from the suit without prejudice.
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
asserts a class action by Company stockholders purchasing and/or holding Company
common stock between July 8, 1994, and December 22, 1995, and alleges fraud and
violations of the Texas Securities Act in the dissemination of materially false
and misleading information concerning the Company's financial condition. This
suit seeks 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.
In addition, 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 this time. While a certain number of the lawsuits (including
those discussed above) involve substantial amounts, it is the opinion of
management, after consultation with counsel, that the ultimate
29
<PAGE> 30
resolutions of such litigation will not have a material adverse effect on the
Company's financial position, results of operation or liquidity.
DISPOSITION OF SUNBELT
In April 1993, the Company sold its 49.5% interest in Sunbelt to General
Host in exchange for 1.9 million shares of General Host's Common Stock.
Subsequently, General Host paid a 5% stock dividend, resulting in the Company's
holding 2.1 million shares of General Host's Common Stock. In connection with
the sale, the Company agreed to make available to Sunbelt up to $25.0 million of
non-revolving store development financing (the "Lease Commitment") and to
provide Sunbelt a $12.0 million credit facility (the "Credit Facility") 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, the Company agreed to extend $22.8
million of the Lease Commitment to Sunbelt until June 30, 1998, at market rental
rates and the Company received payment of amounts owed under the Credit
Facility. Additionally, the Company guarantees approximately $4.1 million of
other Sunbelt lease obligations with a present value of approximately $3.4
million as of June 1, 1996. In April 1995, Sunbelt defaulted on 13 store
sublease agreements with the Company comprising the $22.8 million of the Lease
Commitment, 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
$8.0 million (which may be prepaid with $4.0 million in payments made by May
1997 or with $6.0 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 $14.0 million which represents the estimated cost to disengage
from its financial support of Sunbelt.
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<PAGE> 31
MANAGEMENT
Listed below are the executive officers of Pier 1 Imports, Inc.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Clark A. Johnson 65 Chairman of the Board and Chief Executive Officer
Marvin J. Girouard 57 President and Chief Operating Officer
Stephen F. Mangum 42 Senior Vice President, Chief Financial Officer and
Treasurer
J. Rodney Lawrence 51 Senior Vice President of Legal Affairs and
Secretary
E. Mitchell Weatherly 48 Senior Vice President of Human Resources
Phil E. Schneider 44 Senior Vice President of Marketing
Charles H. Turner 39 Senior Vice President of Stores
Perry R. McNeely 48 Senior Vice President of Logistics
Jay R. Jacobs 41 Senior Vice President of Merchandising
</TABLE>
Clark A. Johnson 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,
Anacomp, Inc. and Heritage Media Corporation.
Marvin J. Girouard has served as President and Chief Operating Officer of
the Company and as a Director since August 1988. From May 1985 until August
1988, he served as Senior Vice President -- Merchandising of Pier 1 Imports
(U.S.), Inc. ("Pier 1 (U.S.)"). Additionally, he serves as a Director of ENSERCH
Corporation.
Stephen F. Mangum has served as Senior Vice President, Chief Financial
Officer and Treasurer of the Company since August 1996. From March 1993 until
July 1996, he served as chief financial officer of Bloomingdales, Inc. From
September 1987 to March 1993, Mr. Mangum served as vice president of finance and
control of Hecht Company, a division of May Department Stores.
J. Rodney Lawrence has served as Senior Vice President of Legal Affairs and
Secretary of the Company 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 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.
Phil E. Schneider has served as Senior Vice President of Marketing of the
Company since May 1993 and served as Vice President of Advertising of Pier 1
(U.S.) from January 1988 to May 1993.
Charles H. Turner has served as Senior Vice President of Stores of the
Company since August 1994 and served as principal accounting officer of the
Company from January 1992 to August 1994.
Perry R. McNeely has served as Senior Vice President of Logistics of the
Company since June 1994.
Jay R. Jacobs has served as Senior Vice President of Merchandising of the
Company since May 1995 and served as Vice President of Pier 1 (U.S.) Divisional
Merchandising from May 1993 to May 1995.
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<PAGE> 32
DESCRIPTION OF THE NOTES
The Notes will be issued under an indenture (the "Indenture") between the
Company and Wells Fargo Bank (Texas), N.A., as trustee (the "Trustee"), a copy
of the form of which has been filed as an exhibit to Amendment No. 1 to the
Company's Registration Statement on Form 8-A, filed with the Commission (as
defined below) on September 18, 1996. The following are summaries of certain
terms applicable to the Notes and do not purport to be complete. The summaries
are subject to, and qualified in their entirety by reference to, the provisions
of the Indenture, including the definitions therein of certain terms. Whenever
reference is made to defined terms of the Indenture, such defined terms are
incorporated herein by reference.
GENERAL
The Notes will be unsecured general obligations of the Company, subordinate
in right of payment to certain other obligations of the Company as described
under "-- Subordination," and convertible into Common Stock as described under
"-- Conversion of the Notes." The Notes will be limited to $75.0 million
aggregate principal amount ($86.25 million if the Underwriters' over-allotment
option is exercised in full) and will mature on October 1, 2003 (the "Maturity
Date"). The Notes will bear interest at the rate per annum shown on the cover
page hereof from the date of original issue or from the most recent Interest
Payment Date (as defined below) to which interest has been paid or duly provided
for, and accrued but unpaid interest will be payable semi-annually in arrears on
April 1 and October 1 of each year, commencing April 1, 1997 (each, an "Interest
Payment Date"), or, if any such day is not a business day, on the next
succeeding business day. Interest will be paid to Noteholders of record
("Holders") at the close of business on March 15 and September 15, respectively,
immediately preceding the relevant Interest Payment Date (each, a "Regular
Record Date"). Interest will be computed on the basis of a 360-day year of
twelve 30-day months.
Principal and premium, if any, and interest will be payable, and the Notes
may be presented for conversion, registration of transfer and exchange, at the
office or agency of the Company maintained for those purposes in New York, New
York (which will be a corporate trust office designated by the Trustee), except
that, at the option of the Company, payment of interest may be made by check
mailed to the address of the Holder entitled thereto as it appears on the
Register for the Notes (the "Note Register") on the related record date.
The Notes will be issued in fully registered form, without coupons, in
denominations of $1,000 and any integral multiple thereof. No service charge
will be made for any transfer or exchange of Notes, but, subject to certain
exceptions set forth in the Indenture, the Company may require payment of a sum
sufficient to cover any tax or other governmental charge payable in connection
therewith.
The Indenture does not contain any restrictions on the payment of dividends
or on the repurchase of securities by the Company or any financial covenants,
nor does the Indenture require the Company to maintain any sinking fund or other
reserve for the payment of the Notes.
CONVERSION OF THE NOTES
The Notes are convertible at any time prior to the Maturity Date (subject
to earlier redemption or repurchase, as described below) into shares of Common
Stock at the Conversion Price, subject to adjustment under certain circumstances
as described below. The right to convert Notes called for redemption will
terminate at the close of business on the first business day prior to the date
fixed for redemption, unless the Company shall default on payment of the
redemption price.
The Conversion Price is subject to adjustment as set forth in the Indenture
upon the occurrence of certain events, including: (i) the issuance of Common
Stock as a dividend or other distribution on any class of capital stock of the
Company; (ii) a subdivision or combination of outstanding shares of Common
Stock; (iii) the issuance or distribution of capital stock of the Company or the
issuance or distribution of options, rights, warrants or convertible or
exchangeable securities entitling the holder thereof to subscribe for, purchase,
convert into or exchange for capital stock of the Company at less than the
current market price of such capital stock on the date of issuance or
distribution, but in each case only if such issuance or distribution is made
generally to holders of Common Stock or of a class or series of outstanding
capital stock convertible into or exchangeable or exercisable for Common Stock
(provided that the issuance of capital stock upon the exercise
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<PAGE> 33
of such options, rights, or warrants or the conversion or exchange of
convertible or exchangeable securities will not cause an adjustment in the
Conversion Price if no such adjustment would have been required at the time such
options, rights or warrants or convertible or exchangeable securities were
issued); (iv) the dividend or other distribution to holders of Common Stock, or
of a class or series of capital stock convertible into or exchangeable or
exercisable for Common Stock, generally of evidences of indebtedness of the
Company or assets (including securities, but excluding issuances, dividends and
distributions referred to above, dividends and distributions in connection with
the liquidation, dissolution or winding up of the Company and distributions of
cash referred to below); and (v) distributions of cash (other than in connection
with the liquidation or dissolution of the Company) to holders of Common Stock,
or of a class or series of capital stock convertible into or exchangeable or
exercisable for Common Stock, generally to the extent the amount of such cash,
combined with all such cash distributions made within the preceding 12 months
with respect to which no adjustment has been made exceeds 10% of the Company's
market capitalization (being the product of the current market price of the
Common Stock multiplied by the number of shares of Common Stock then
outstanding) on the record date for such distribution.
Notwithstanding the foregoing, (a) if the options, rights or warrants or
convertible or exchangeable securities described in clause (iii) of the
preceding paragraph are exercisable only upon the occurrence of certain
triggering events, then the Conversion Price will not be adjusted until such
triggering events occur and (b) if such options, rights or warrants or
convertible or exchangeable securities expire unexercised, the Conversion Price
will be readjusted to take into account only the actual number of such options,
rights or warrants or convertible or exchangeable securities which were
exercised. In addition, the provisions of the preceding paragraph will not apply
to the issuance of Common Stock or the issuance or exercise of options to
purchase Common Stock under any stock-based employee compensation plan now
existing or hereafter adopted.
No adjustment will be made to the Conversion Price until cumulative
adjustments to the Conversion Price amount to at least 1% of the Conversion
Price, as last adjusted. Except as stated above, the Conversion Price will not
be adjusted for the issuance of Common Stock or any securities convertible into
or exchangeable for Common Stock or carrying the right to purchase any of the
foregoing, or the payment of dividends on the Common Stock. The Company from
time to time may reduce the Conversion Price if the Board of Directors of the
Company has made a determination that such reduction would be in the best
interests of the Company, which determination shall be conclusive.
In the event that rights certificates are issued pursuant to the Rights
Agreement dated as of December 9, 1994, between the Company and Wells Fargo Bank
(Texas), N.A. (formerly named First Interstate Bank of Texas, N.A.), as Rights
Agent to holders of Common Stock upon the occurrence of certain events specified
in such Rights Agreement (the "Distribution Date"), holders of Notes that have
not been converted into Common Stock prior to the Distribution Date will not be
entitled to receive the rights that would otherwise have been issued with
respect to the shares of Common Stock received upon such conversion, but the
Conversion Price of such Notes will be reduced as provided above. Shares of
Common Stock received upon conversion of any Note prior to the Distribution Date
will be accompanied by the appropriate number of rights provided under such
Rights Agreement, and no adjustment will be made with respect to the Conversion
Price for any such Note.
In the event of (i) any reclassification or change of the Common Stock or
(ii) a consolidation, merger or combination to which the Company is a party or a
sale or conveyance to another entity of the property and assets of the Company
as an entirety or substantially as an entirety, in each case as a result of
which holders of Common Stock will be entitled to receive stock, other
securities, other property or assets (including cash) with respect to or in
exchange for such Common Stock, each Holder will have the right thereafter to
convert such Holder's Notes into the kind and amount of shares of stock, other
securities or other property or assets which the Holder would have owned or have
been entitled to receive immediately upon such consolidation, merger,
combination, sale or conveyance had such Note been converted into Common Stock
immediately prior to the effective date of such reclassification, change,
consolidation, merger, combination, sale or conveyance. Certain of the foregoing
events may also constitute or result in a Change of Control requiring the
Company to offer to repurchase the Notes. See "-- Repurchase at the Option of
Holders Upon Change of Control."
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<PAGE> 34
Fractional shares of Common Stock will not be issued upon conversion. A
person otherwise entitled to a fractional share of Common Stock upon conversion
will receive cash equal to the equivalent fraction of the current market price
of a share of Common Stock on the business day prior to conversion.
Except as provided below, a Holder who surrenders a Note (or portion
thereof) between the close of business on a Regular Record Date and the next
Interest Payment Date will receive interest on such Interest Payment Date with
respect to the Note (or portion thereof) so converted through such Interest
Payment Date. If, however, such Regular Record Date is on or after March 15,
2000, any Note surrendered for conversion between the Regular Record Date and
the related Interest Payment Date must be accompanied by a payment equal to the
interest on such Note (or portion thereof converted) payable by the Company on
such Interest Payment Date, which payment will be returned to such Holder if the
Company defaults in the payment of such interest. Except as otherwise provided,
no payment of interest on converted Notes will be payable by the Company on any
Interest Payment Date subsequent to the date of conversion, and no adjustment
will be made upon conversion of any Note for interest accrued thereon or
dividends paid on Common Stock issued.
OPTIONAL REDEMPTION BY THE COMPANY
The Notes are not redeemable at the option of the Company prior to October
1, 1999. Thereafter, the Notes will be redeemable, in whole or from time to time
in part, upon not less than 30 days' nor more than 60 days' prior notice of
redemption to each Holder at such Holder's last address as it appears in the
Note Register, at the redemption prices established for the Notes, together with
accrued but unpaid interest, if any, to the date fixed for redemption. The
redemption prices for the Notes (expressed as percentages of principal amount)
are as follows:
<TABLE>
<CAPTION>
FOR THE 12
MONTHS
AFTER OCTOBER 1, PERCENTAGE
- ---------------- ----------
<S> <C> <C>
1999......................................... 103%
2000......................................... 102%
2001......................................... 101%
2002......................................... 100%
</TABLE>
If less than all the Notes are to be redeemed, the Trustee will select the
Notes to be redeemed in compliance with the requirements of the principal
national securities exchange, if any, on which the Notes are listed, or, if the
Notes are not so listed, by lot or by such method that complies with applicable
legal requirements and that the Trustee considers fair and appropriate. The
Trustee may select for redemption portions of the principal amount of Notes that
have a denomination larger than $1,000. Notes and portions thereof will be
redeemed in the amount of $1,000 or integral multiples of $1,000. The Trustee
will make the selection from Notes outstanding and not previously called for
redemption.
REPURCHASE AT THE OPTION OF HOLDERS UPON CHANGE OF CONTROL
If a Change of Control occurs, the Company will offer to repurchase each
Holder's Notes pursuant to an offer (the "Change of Control Offer") at a
purchase price equal to 100% of the principal amount of such Holder's Notes,
plus accrued but unpaid interest, if any, to the date of purchase.
A "Change of Control" means the occurrence of any of the following events
after the date of the Indenture: (i) any person or group (within the meaning of
Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act")) becomes the direct or indirect beneficial owner of shares of
capital stock of the Company representing greater than 50% of the combined
voting power of all outstanding shares of capital stock of the Company entitled
to vote in the election of directors under ordinary circumstances; (ii) subject
to certain exceptions, the Company consolidates with or merges into any other
entity and the outstanding Common Stock is changed or exchanged as a result;
(iii) the Company conveys, transfers or leases all or substantially all of its
assets to any other entity; (iv) at any time Continuing Directors do not
constitute a majority of the Board of Directors of the Company; or (v) on any
day (a "Calculation
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Date") the Company makes any distribution or distributions of cash, property or
securities (other than regular quarterly dividends, Common Stock, preferred
stock which is substantially equivalent to Common Stock or rights to acquire
Common Stock or preferred stock which is substantially equivalent to Common
Stock) to holders of Common Stock, or the Company or any of its subsidiaries
purchases or otherwise acquires Common Stock, and the sum of the fair market
value of such distribution or purchase on the Calculation Date, plus the fair
market value, when made, of all other such distributions and purchases which
have occurred during the 12 month period ending on the Calculation Date, in each
case expressed as a percentage of the aggregate market price of all of the
shares of Common Stock outstanding at the close of business on the last day
prior to the date of each such distribution or purchase, exceeds 50%.
"Continuing Director" means at any date a member of the Company's Board of
Directors (i) who is a member of such Board on the date of the Indenture or (ii)
who was nominated or elected by at least two-thirds of the directors who were
Continuing Directors at the time of such nomination or election or whose
election to the Company's Board of Directors was recommended or endorsed by at
least two-thirds of the directors who were Continuing Directors at the time of
such election. Under this definition, if the present Board of Directors of the
Company were to approve a new director or directors and then resign, no Change
of Control would occur even though the present Board of Directors would
thereafter cease to be in office.
Within 30 days after any Change of Control, unless the Company has
previously given a notice of optional redemption by the Company of all of the
Notes, the Company will give a notice of the Change of Control Offer to each
Holder at such Holder's last address as it appears on the Note Register which
will include: (i) a statement that a Change of Control has occurred and that the
Company is offering to repurchase all of such Holder's Notes; (ii) a brief
description of such Change of Control; (iii) the repurchase price (the "Change
of Control Payment"); (iv) the expiration date of the Change of Control Offer,
which must be no earlier than 30 days nor later than 60 days from the date such
notice is given; (v) the date such purchase will be effected, which must be no
later than 30 days after the expiration date of the Change of Control Offer;
(vi) a statement that unless the Company defaults in the payment of the Change
of Control Payment, all Notes accepted for payment pursuant to the Change of
Control Offer will cease to accrue interest after the Change of Control Payment
Date; (vii) the Conversion Price; (viii) the name and address of the paying
agent and conversion agent; (ix) a statement that Notes must be surrendered to
the paying agent to collect the Change of Control Payment; and (x) any other
information required by applicable law and any other procedures that a Holder
must follow in order to have such Notes repurchased.
In the event the Company is required to make a Change of Control Offer, the
Company will comply with any applicable securities laws and regulations,
including, to the extent applicable, Section 14(e) of, and Rule 14e-1 and any
other tender offer rules under, the Exchange Act which may then be applicable in
connection with any offer by the Company to purchase Notes at the option of
Holders.
The Company, could, in the future, enter into certain transactions,
including certain recapitalizations of the Company, that would not constitute a
Change of Control, but that would increase the amount of Senior Indebtedness (or
any other indebtedness) outstanding at such time. The incurrence of significant
amounts of additional indebtedness could have an adverse effect on the Company's
ability to service its indebtedness, including the Notes. If a Change of Control
were to occur, there can be no assurance that the Company would have sufficient
funds at the time of such event to pay the Change of Control Payment for all
Notes tendered by Holders.
Certain of the Company's existing and future agreements relating to its
indebtedness could prohibit the purchase by the Company of the Notes pursuant to
the tender by Holders pursuant to a Change of Control Offer. Depending on the
financial circumstances of the Company, such purchase by the Company could cause
a breach of certain covenants contained in such agreements. A default by the
Company on its obligation to pay the Change of Control Payment could, pursuant
to cross-default provisions, result in acceleration of the payment of other
indebtedness of the Company outstanding at that time. See "-- Subordination."
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SUBORDINATION
The payment of principal of and premium, if any, and interest on the Notes
will be, to the extent set forth in the Indenture, subordinated in right of
payment to the prior payment in full of all Senior Indebtedness (as defined).
Upon any payment or distribution of assets to creditors upon any liquidation,
dissolution, winding up, reorganization, assignment for the benefit of creditors
or marshalling of assets, whether voluntary, involuntary or in receivership,
bankruptcy, insolvency or similar proceedings, the holders of all Senior
Indebtedness will first be entitled to receive payment in full of all amounts
due or to become due thereon before Holders will be entitled to receive any
payment on account of principal of and premium, if any, and interest on the
Notes or on account of any other monetary claims under or with respect to the
Notes, and before the Company may acquire any Notes for cash, property, assets
or securities. No payments on account of principal of and premium, if any, and
interest on the Notes may be made if at the time thereof: (i) there exists a
default in the payment of all or any portion of the obligations under any Senior
Indebtedness or (ii) there exists a default in any covenant with respect to the
Senior Indebtedness that would permit acceleration of the maturity thereof
(other than as specified in clause (i) of this sentence) which has not been
cured or waived and is continuing, and the Trustee and the Company receive
written notice from any holder of such Senior Indebtedness stating that no
payment may be made with respect to the Notes, provided that no such default
will prevent any payment on, or with respect to, the Notes for more than 120
days unless the maturity of such Senior Indebtedness is accelerated.
The Holders will be subrogated to the rights of the holders of the Senior
Indebtedness to the extent of payments made on Senior Indebtedness upon any
distribution of assets in any such proceedings out of the distributive share of
the Notes.
"Senior Indebtedness" means the principal of (and premium, if any) and
accrued interest on (a) existing indebtedness of the Company (including
indebtedness of others guaranteed by the Company) other than the Notes and the
8 1/2% exchangeable debentures due 2000, which is (i) for money borrowed or (ii)
evidenced by a note or similar instrument given in connection with the
acquisition of any businesses, properties or assets of any kind, (b) obligations
of the Company as lessee under leases required to be capitalized on the balance
sheet of the lessee under generally accepted accounting principles and leases of
property or assets made as part of any sale and leaseback transaction to which
the Company is a party, (c) amendments, renewals, extensions, modifications and
refundings of any such indebtedness or obligation and (d) future indebtedness of
the Company described in (a) above, and amendments, renewals, extensions,
modifications and refundings thereof, if the instrument creating or evidencing
such future indebtedness provides that such indebtedness or obligation is senior
in right of payment to the Notes. Senior Indebtedness does not include
indebtedness or amounts owed (except to banks or other financial institutions)
for compensation to employees, or for goods or materials purchased, or services
utilized, in the ordinary course of business of the Company or of any other
person from whom such indebtedness or amount was assumed.
The Notes are unsecured obligations of the Company, and, accordingly, will
rank pari passu with all obligations of the Company that arise by operation of
law or are imposed by any judicial or governmental authority. The Notes are
obligations exclusively of the Company, and accordingly, will be effectively
subordinated to all indebtedness and other liabilities and commitments
(including trade payables and lease obligations) of its Subsidiaries. The right
of the Company, and, therefore, the right of creditors of the Company (including
Holders) to receive assets of any such Subsidiary upon the liquidation or
reorganization of such Subsidiary or otherwise, as a practical matter, will be
effectively subordinated to the claims of such Subsidiary's creditors, except to
the extent the Company is itself recognized as a creditor of such Subsidiary or
such other creditors have agreed to subordinate their claims to the payment of
the Notes, in which case the claims of the Company would still be subordinate to
any secured claim on the assets of such Subsidiary and any indebtedness of such
Subsidiary senior to that held by the Company.
At August 31, 1996, $109.6 million of Senior Indebtedness was outstanding.
The Company will from time to time incur additional indebtedness constituting
Senior Indebtedness.
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CONSOLIDATION, MERGER AND SALE OF ASSETS
The Company may not, without the consent of the Holders of a majority in
aggregate principal amount of Notes then outstanding, consolidate with or merge
into any other entity or convey, transfer, sell or lease its assets
substantially as an entirety to any entity unless: (i) either (a) the Company is
the continuing corporation or (b) the entity formed by such consolidation or
into which the Company is merged or the entity to which such assets are sold,
leased, transferred, conveyed or disposed is organized under the laws of the
United States or any state thereof or the District of Columbia and expressly
assumes by supplemental indenture all obligations of the Company under the Notes
and the Indenture, (ii) immediately before and immediately after giving effect
to such merger, consolidation, conveyance, transfer, sale, lease or disposition
no Event of Default, and no event which, after notice or lapse of time or both,
would become an Event of Default, under the Indenture has occurred and is
continuing, (iii) immediately after giving effect to such merger, consolidation,
conveyance, transfer, sale, lease or disposition, the Notes and the Indenture,
as supplemented, will be valid and enforceable obligations of the Company or
such successor and (iv) the Company has delivered to the Trustee an Officer's
Certificate and an opinion of counsel, each stating that such merger,
consolidation, conveyance, transfer, sale, lease or disposition and such
supplemental indenture comply with the applicable provisions of the Indenture.
EVENTS OF DEFAULT
The following will be Events of Default under the Indenture: (a) failure to
pay principal or premium or repurchase price, if any, of any Note when due and
payable, whether at maturity, upon redemption, upon a Change of Control Offer or
otherwise, whether or not such payment is prohibited by the subordination
provisions of the Indenture; (b) failure to pay any interest on any Note when
due, which failure continues for 30 days, whether or not such payment is
prohibited by the subordination provisions of the Indenture; (c) failure to
perform the other covenants of the Company in the Indenture, which failure
continues for 90 days after written notice as provided in the Indenture; (d)
failure to pay when due principal of, or acceleration of, any indebtedness for
money borrowed by the Company or any of its Subsidiaries in excess of $10
million, individually or in the aggregate, if such indebtedness is not
discharged, or such acceleration is not annulled, within 10 days after written
notice as provided in the Indenture; and (e) certain events of bankruptcy,
insolvency or reorganization of the Company or any Significant Subsidiary.
Subject to the provisions of the Indenture relating to the duties of the Trustee
in case of the occurrence of an Event of Default, the Trustee will be under no
obligation to exercise any of its rights or powers under the Indenture at the
request or direction of any Holders, unless such Holders have offered to the
Trustee reasonable indemnity. Subject to such provisions for the indemnification
of the Trustee, Holders of a majority in aggregate principal amount of the
outstanding Notes will have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee or exercising
any trust or power conferred on the Trustee.
If an Event of Default occurs and is continuing, either the Trustee or the
Holders of at least 25% in aggregate principal amount of the then outstanding
Notes by notice to the Company and Trustee may declare the unpaid principal of
and premium, if any, of and interest on all outstanding Notes due and payable;
provided, however, that if an Event of Default under clause (e) above occurs,
all unpaid principal of and premium, if any, of and interest on all outstanding
Notes will automatically become due and payable without any declaration or other
act on the part of the Trustee or any Holders. After such acceleration, but
before a judgment or decree based on acceleration, Holders of a majority in
aggregate principal amount of the then outstanding Notes may, under certain
circumstances, rescind and annul such acceleration if all Events of Default,
other than the nonpayment of accelerated principal, have been cured or waived as
provided in the Indenture. For information as to waiver of defaults, see
"-- Modifications, Amendments and Waivers."
No Holder of any Note will have any right to institute any proceeding with
respect to the Indenture or for the appointment of a receiver or trustee or for
any other remedy thereunder unless (i) such Holder has previously given to the
Trustee written notice of a continuing Event of Default, (ii) Holders of at
least 25% in aggregate principal amount of the then outstanding Notes have made
written request and offered satisfactory indemnity to the Trustee to institute
such proceeding as Trustee, (iii) the Trustee failed to institute such
proceeding within 60 days after the receipt of such request and offer of
indemnity and (iv) during such 60-day
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<PAGE> 38
period, no direction inconsistent with such request is given to the Trustee by
the Holders of a majority in aggregate principal amount of the then outstanding
Notes.
MODIFICATIONS, AMENDMENTS AND WAIVERS
Modifications and amendments of the Indenture may be made by the Company
and the Trustee with the consent of the Holders of a majority in aggregate
principal amount of the then outstanding Notes held by persons other than
affiliates of the Company; provided, however, that no such modification or
amendment may, without the consent of the Holder of each outstanding Note
affected thereby, (i) change the stated maturity of, or any installment of
interest on, or waive a default in the payment of principal, premium, if any, or
interest on, any Note, (ii) reduce the principal amount of any Note or reduce
the rate or extend the time of payment of interest on any Note, (iii) increase
the Conversion Price (other than in connection with a reverse stock split as
provided in the Indenture), (iv) change the currency of payment of principal or
premium or repurchase price, if any, of or interest on, any Note, (v) impair the
right to institute suit for the enforcement of any payment on or with respect to
any Note, (vi) adversely affect the right to exchange or convert Notes, (vii)
reduce the vote of Holders necessary to waive certain defaults or compliance
with certain provisions of the Indenture, consent to any merger, consolidation
or conveyance, sale, transfer or lease of assets, or modify or amend the
Indenture, (viii) modify the provisions of the Indenture with respect to the
subordination of the Notes in a manner adverse to the Holders, (ix) except as
permitted by the Indenture, consent to the assignment or transfer by the Company
of any of its rights and obligations thereunder or (x) modify the provisions of
the Indenture with respect to the obligations of the Company to repurchase Notes
in a manner adverse to the Holders.
Holders of a majority in aggregate principal amount of the then outstanding
Notes held by persons other than affiliates of the Company may, on behalf of all
Holders, waive any past default under the Indenture or Event of Default, except
a default in the payment of principal or premium or repurchase price, if any, of
or interest on any of the Notes or a provision which under the Indenture cannot
be amended without the consent of the Holder of each outstanding Note.
Amendments and supplements of the Indenture may be made by the Company and
the Trustee without the consent of any Holder, in part, to: (i) cure any
ambiguity, defect or inconsistency (which does not adversely affect the rights
of any Holder); (ii) comply with the restriction on mergers, consolidations, and
asset sales or with the provisions relating to conversion upon such events;
(iii) add to the covenants of the Company further covenants, restrictions,
conditions or provisions for the protection of the Holders; (iv) make any change
that does not adversely affect the rights of any Holder under the Indenture; (v)
comply with requirements of the Securities and Exchange Commission in order to
effect or maintain qualification of the Indenture under the Trust Indenture Act;
or (vi) to change the place of payment of principal or premium or repurchase
price, if any, of or interest on the Notes other than within the 48 contiguous
states of the United States.
GOVERNING LAW
The Indenture and the Notes will be governed by, and construed in
accordance with, the laws of the State of New York, without giving effect to
such State's conflict of law principles.
CONCERNING THE TRUSTEE
The Trustee makes loans to and is a depository for funds of the Company.
The Trustee is a participating lender in the amounts of: $20 million of the
Company's $65 million revolving credit facility; $10 million of the Company's
$105 million trade finance facility; $5 million in standby letters of credit
supporting $25 million of industrial revenue bonds guaranteed by the Company;
and $12 million of a $45 million store development and lease facility of a
company that leases stores to the Company, which leases are guaranteed by the
Company. The Trustee is resigning as the Company's transfer agent for the Common
Stock. The Trustee may in the future perform other services for the Company and
its subsidiaries in the normal course of its business. The Indenture does not
preclude the Trustee from enforcing its rights as a creditor, including rights
as a holder of Senior Indebtedness.
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DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 200,000,000 shares
of Common Stock, par value $1.00 per share, and 5,000,000 shares of Preferred
Stock, par value $1.00 per share. At August 31, 1996, there were 45,360,945
shares of Common Stock outstanding and no shares of Preferred Stock outstanding.
The transfer agent and registrar for the Common Stock is Wells Fargo Bank
(Texas), N.A., which will be replaced by Chase Mellon Shareholder Services, LLC.
The following statements with respect to the Company's capital stock include
summaries of certain provisions of the Company's Certificate of Incorporation
and By-Laws. These statements do not purport to be complete and are qualified in
their entirety by reference to such documents.
COMMON STOCK
Each outstanding share of Common Stock entitles the holder thereof to one
vote on all matters voted upon by stockholders of the Company. Holders of Common
Stock are not entitled to any cumulative voting rights or to any preemptive
rights other than pursuant to the Share Purchase Rights Plan discussed below.
The outstanding shares of Common Stock are fully paid and nonassessable.
In the event of any liquidation, dissolution or winding up of the affairs
of the Company, subject to the rights of holders of any Preferred Stock, each
outstanding share of Common Stock entitles its holder to receive pro rata any
assets remaining after satisfaction of corporate liabilities.
All outstanding shares of Common Stock are entitled to share equally in
such dividends as the Board of Directors of the Company, in its discretion, may
validly declare from funds legally available therefor. For information on
restrictions on the payment of dividends, see "Price Range of Common Stock and
Dividends."
On December 9, 1994, the Board of Directors adopted a Share Purchase Rights
Plan and declared a dividend of one common stock purchase right (a "Right")
payable on each outstanding share of the Company's Common Stock on December 21,
1994 and authorized the issuance of Rights for subsequently issued Common Stock.
The Rights, which will expire on December 21, 2004, are initially not
exercisable, and until becoming exercisable will trade only with the associated
Common Stock. After the Rights become exercisable, each Right entitles the
holder to purchase at a specified exercise price one share of Common Stock. The
Rights will become exercisable after the earlier to occur of (i) 10 days
following a public announcement that a person or group of affiliated or
associated persons have acquired beneficial ownership of 15% or more of the
outstanding Common Stock or (ii) ten business days (or such later date as
determined by the Board of Directors) following the commencement of, or
announcement of an intention to make, a tender or exchange offer the
consummation of which would result in beneficial ownership by a person or group
of 15% or more of the outstanding Common Stock. If the Company were acquired in
a merger or other business combination transaction or 50% or more of its
consolidated assets or earning power were sold, proper provisions would be made
so that each Right would entitle its holder to purchase, upon the exercise of
the Right at the then current exercise price, that number of shares of common
stock of the acquiring company having a market value of twice the exercise price
of the Right. If any person or group were to acquire beneficial ownership of 15%
or more of the outstanding Common Stock, each Right would entitle its holder
(other than such acquiring person whose Rights would become void) to purchase,
upon the exercise of the Right at the then current exercise price, that number
of shares of Common Stock having a market value on the date of such 15%
acquisition of twice the exercise price of the Right. The Board of Directors may
at its option, at any time after such 15% acquisition but prior to the
acquisition of more than 50% of the outstanding Common Stock, exchange all or
part of the then outstanding and exercisable Rights (other than those held by
such acquiring person whose Rights would become void) for Common Stock at an
exchange rate per Right of one-half the number of shares of Common Stock
receivable upon exercise of a Right. The Board of Directors may, at any time
prior to such 15% acquisition, redeem all the Rights at a redemption price of
$0.01 per Right. The foregoing summary of the Rights does not purport to be
complete and is subject to the more complete description thereof set forth in
the Company's Registration Statement on Form 8-A dated December 20, 1994, and to
the Rights Agreement dated as of December 9, 1994, between the Company and Wells
Fargo Bank (Texas), N.A. (formerly named First Interstate Bank of Texas, N.A.),
as Rights Agent.
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PREFERRED STOCK
The Board of Directors of the Company is authorized, without further action
by the Company's stockholders, from time to time to issue shares of Preferred
Stock in one or more series and may, at the time of issuance, fix the voting
rights, liquidation preferences, dividend rates, redemption rights and terms and
certain other rights and limitations of each series. In February 1987, the
Company designated a series of 5,000,000 shares of Preferred Stock, which in
October 1987 became the Formula Rate Preferred Stock, and 1,500,000 shares were
issued. In June 1991, the Company repurchased and redeemed all outstanding
shares of the Formula Rate Preferred Stock, which is currently held in the
Company's treasury.
The Company's Board of Directors may, without further action by the
Company's stockholders, from time to time direct the reissuance of shares of
Formula Rate Preferred Stock or cancel and retire any or all of the Formula Rate
Preferred Stock and direct the issuance of one or more new series of Preferred
Stock and at the time of issuance determine the rights, preferences and
limitations of each series. The Board of Directors without stockholder approval
can issue Preferred Stock with voting and conversion rights that could adversely
affect holders of Common Stock. Satisfaction of any dividend preferences of
outstanding Preferred Stock would reduce the amount of funds available for the
payment of dividends on Common Stock. Holders of Preferred Stock normally would
be entitled to receive a preference payment in the event of any liquidation,
dissolution or winding up of the Company before any payment is made to holders
of Common Stock.
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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following summary is a general discussion of certain federal income tax
consequences of purchasing, holding, converting and disposing of the Notes. This
summary is based on laws, regulations, rulings and judicial decisions now in
effect, all of which are subject to change, possibly with retroactive effect.
This summary is presented for informational purposes only and relates only to
persons who purchase the Notes pursuant to this Prospectus, who hold the Notes
or shares of Common Stock issued on conversion of the Notes as "capital assets"
within the meaning of section 1221 of the Internal Revenue Code of 1986, as
amended (the "Code") and who are United States Holders of the Notes. For
purposes of this discussion a "United States Holder" means a beneficial owner of
Notes that is an individual citizen or resident of the United States, a
corporation or partnership organized under the laws of the United States or of
any state or political subdivision thereof, an estate, trust or other person or
entity the income of which is includible in gross income for tax purposes
regardless of its source, or any other holder who is subject to tax on a net
income basis with respect to the Notes.
This summary does not purport to deal with all potential federal income tax
considerations, does not discuss state, local or foreign tax consequences and
does not cover special rules applicable to taxpayers who may fall into special
classes, such as non-resident alien individuals, foreign corporations or other
non-United States persons, financial institutions, insurance companies, mutual
funds, subchapter S corporations, trusts, exempt institutions, broker/dealers
and taxpayers who may be subject to the alternative minimum tax.
INTEREST
Interest on a Note will generally be taxable to a holder of Notes as
ordinary income at the time it is paid or accrued in accordance with the
holder's method of accounting for tax purposes. The rules relating to original
issue discount will not be applicable to the Notes as the issue price of the
Notes will not be less than the stated redemption price at maturity.
CONVERSION OF NOTES INTO COMMON STOCK
In general, no gain or loss will be recognized for income tax purposes on a
conversion of the Notes into shares of Common Stock. Cash paid in lieu of a
fractional share of Common Stock, however, will result in taxable gain (or
loss), which will be capital gain (or loss) to the extent that the amount of
such cash exceeds (or is exceeded by) the portion of the adjusted basis of the
Note allocable to such fractional share. The adjusted basis of shares of Common
Stock received on conversion will equal the adjusted basis of the Note
converted, reduced by the portion of adjusted basis allocated to any fractional
share of Common Stock exchanged for cash. The holding period of an investor in
Common Stock received on conversion will include the period during which the
converted Note was held. Any interest deemed paid to a holder of Notes in
connection with a conversion will be taxable as ordinary income.
Adjustment of Conversion Price
The conversion price of the Notes is subject to adjustment under certain
circumstances. See "Description of Notes -- Conversion of the Notes." Pursuant
to Treasury Regulations promulgated under Section 305 of the Code, a holder of
Notes may be treated as having received a constructive distribution from the
Company, resulting in ordinary income to the extent of the Company's earnings
and profits as of the end of the taxable year (subject to a possible dividends
received deduction in the case of corporate holders), upon an adjustment of the
conversion price of the Notes if (i) the adjustment results in an increase in
the holder's proportionate interest in the assets or earnings and profits of the
Company and (ii) the adjustment is not made pursuant to a bona fide, reasonable
anti-dilution formula. An adjustment made to compensate for certain taxable
distributions to holders of Common Stock would not be considered an adjustment
made pursuant to such a formula. In addition, the failure to fully adjust the
conversion price of the Notes to reflect distributions of stock dividends to
holders of Common Stock may result in a taxable dividend to such holders of
Common Stock.
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Distribution on Common Stock
Distributions on the Common Stock into which Notes have been converted will
be taxable as dividends to the extent of the Company's current and/or
accumulated earnings and profits, as determined under United States federal
income tax principles. Such dividends may be eligible for the dividends received
deduction in the case of holders which are domestic corporations, subject to
applicable limitations. To the extent that the amount of any distribution
exceeds the Company's current and accumulated earnings and profits for a taxable
year, the distribution will first be treated as a tax-free return of capital,
causing a reduction in the adjusted basis of the Common Stock (thereby
increasing the amount of gain, or decreasing the amount of loss, to be
recognized by the investor on a subsequent disposition of the Common Stock), and
the balance in excess of adjusted basis will be taxed as capital gain.
DISPOSITION OF NOTES OR COMMON STOCK
Each holder of Notes generally will recognize gain or loss upon the sale,
redemption, repurchase, retirement or other disposition of such holder's Notes
measured by the difference, if any, between (i) the amount of cash and the fair
market value of any property received (except to the extent that such cash or
other property is attributable to the payment of accrued interest not previously
included in income, which amount will be taxable as ordinary income) and (ii)
the holder's adjusted tax basis in such Notes, which generally will be the
holder's cost. Each holder of Common Stock into which the Notes are converted
generally will recognize gain or loss upon the sale or other disposition of the
Common Stock measured under rules similar to those described in the preceding
sentence for the Notes. Special rules may apply to redemptions of Common Stock
which may result in different treatment. Any such gain or loss recognized on the
sale, redemption, repurchase, retirement or other disposition of a Note or share
of Common Stock should be capital gain or loss and would be long-term capital
gain or loss if the Notes or the Common Stock had been held for more than one
year at the time of the sale or exchange. A holder's initial basis in a Note
will be the cash price paid for the Notes. Any interest payment received by a
holder in connection with a redemption, repurchase, retirement or other
disposition of Notes will be taxed as ordinary income.
BACKUP WITHHOLDING
A holder of Notes or Common Stock may be subject to "back-up withholding"
at a rate of 31% with respect to certain "reportable payments," including
interest payments, dividend payments and, under certain circumstances, principal
payments on the Notes. These back-up withholding rules apply if the holder,
among other things, (i) fails to furnish a social security number or other
taxpayer identification number ("TIN") certified under penalties of perjury
within a reasonable time after request, (ii) furnishes an incorrect TIN, (iii)
fails to report properly interest or dividends, (iv) under certain
circumstances, fails to provide a certified statement, signed under penalties of
perjury, that the TIN furnished is the correct number and that such holder is
not subject to back-up withholding or (v) does not certify its foreign or other
exempt status. A holder who does not provide the Company with such holder's
correct TIN also may be subject to penalties imposed by the Internal Revenue
Service. Any amount withheld from a payment to a holder under the back-up
withholding rules is creditable against the holder's federal income tax
liability, provided the required information is furnished to the Internal
Revenue Service. Back-up withholding will not apply, however, with respect to
payments made to certain holders, including corporations, tax-exempt
organizations and certain foreign persons, provided their exemption from back-up
withholding is properly established. The Company will report to holders of Notes
and Common Stock and to the Internal Revenue Service the amount of any
"reportable payments" required to be reported by the Company under U.S. Treasury
Regulations for each calendar year and the amount of tax withheld, if any, with
respect to such payments.
THE U.S. FEDERAL INCOME TAX DISCUSSION ABOVE IS INTENDED FOR GENERAL
INFORMATION ONLY AND MAY NOT BE APPLICABLE TO A PARTICULAR HOLDER OF NOTES.
PROSPECTIVE PURCHASERS OF NOTES SHOULD CONSULT THEIR OWN TAX ADVISORS WITH
RESPECT TO THE APPLICATION TO THEM OF FEDERAL, STATE, LOCAL AND FOREIGN TAX LAWS
RELEVANT TO THEIR PARTICULAR CIRCUMSTANCES.
42
<PAGE> 43
UNDERWRITING
Subject to the terms and conditions of an underwriting agreement (the
"Underwriting Agreement") among the Company and the Underwriters named below
(the "Underwriters"), the Company has agreed to sell an aggregate of $75 million
principal amount of Notes to the Underwriters, and the Underwriters have
severally agreed to purchase the principal amount of Notes set forth opposite
their respective names in the table below.
<TABLE>
<CAPTION>
AMOUNT OF
UNDERWRITER NOTES
------------------------------------------------------------------------ -----------
<S> <C>
Jefferies & Company, Inc................................................ $37,500,000
Forum Capital Markets L.P............................................... $37,500,000
-----------
Total......................................................... $75,000,000
===========
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters to purchase the Notes are subject to certain conditions. The
Underwriters are committed to purchase all of such Notes if any of such Notes
are purchased.
The Company has been advised by the Underwriters that the Underwriters
propose to offer the Notes to the public initially at the public offering price
set forth on the cover page of this Prospectus, and to certain dealers at such
price less a concession not in excess of 1.725% of the principal amount of
Notes. The Underwriters may allow, and such dealers may reallow, a concession
not in excess of .25% of the principal amount of Notes to other dealers. After
this offering, the public offering price, the concession to selected dealers and
the reallowance to other dealers may be changed by the Underwriters.
The Company has granted to the Underwriters an option, expiring 30 days
from the date of this Prospectus, to purchase from the Company up to $11,250,000
additional aggregate principal amount of Notes at the public offering price less
the underwriting discounts and commissions set forth on the cover page of this
Prospectus. To the extent that the Underwriters exercise such option, each of
the Underwriters will have a firm commitment, subject to certain conditions, to
purchase approximately the same percentage thereof that the Notes to be
purchased by it shown in the above table bears to $75 million, and the Company
will be obligated, pursuant to the option, to sell such additional Notes to the
Underwriters. The Underwriters may exercise such option only to cover
over-allotments, if any, made in connection with this offering.
The Company has agreed to indemnify the Underwriters against certain
liabilities that may be incurred in connection with the offering of the Notes,
including liabilities under the Securities Act, or to contribute to certain
payments that the Underwriters may be required to make in respect thereof.
The Notes have been approved for listing on the New York Stock Exchange,
subject to official notice of issuance.
Forum Capital Markets L.P. has in the past performed, and may in the future
perform, investment banking or financial advisory services for the Company.
Affiliates of Forum Capital Markets L.P. have an interest in the Company's
8 1/2% exchangeable debentures due 2000.
LEGAL MATTERS
The validity of the Notes offered hereby will be passed upon for the
Company by Kelly, Hart & Hallman (a professional corporation), Fort Worth,
Texas, and for the Underwriters by Kelley Drye & Warren LLP, New York, New York
and Stamford, Connecticut.
43
<PAGE> 44
EXPERTS
The consolidated financial statements and financial statement schedule of
the Company at March 2, 1996, and for the year then ended, incorporated by
reference in this Prospectus and the Registration Statement and the consolidated
financial statements of the Company at March 2, 1996, and for the year then
ended appearing herein have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon appearing elsewhere herein and
incorporated herein by reference, and are included and incorporated herein by
reference in reliance upon such report given upon the authority of such firm as
experts in accounting and auditing.
The consolidated financial statements of the Company at February 25, 1995,
and for each of the two years in the period ended February 25, 1995, included in
this Prospectus and the Registration Statement, and the consolidated financial
statements, including financial statement schedules, at February 25, 1995, and
for each of the two years ended February 25, 1995, incorporated in this
Prospectus and the Registration Statement by reference to the Annual Report on
Form 10-K of the Company for the year ended March 2, 1996, have been so included
and incorporated in reliance upon the reports of Price Waterhouse LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act, and, in accordance therewith files reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission"). Such
reports, proxy statements and other information can be inspected and copied at
the office of the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, as well as at the regional offices of the Commission at
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511, and 7 World Trade Center, Suite 1300, New York, New York 10048.
Copies of such information can be obtained by mail from the Public Reference
Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. The Commission also maintains a Web
site (http://www.sec.gov) that contains reports, proxy statements and other
information regarding the Company. Copies of such information can also be
inspected at the offices of the New York Stock Exchange, 20 Broad Street, New
York, New York 10005.
The Company has filed with the Commission in Washington, D.C. a
Registration Statement on Form S-3 (including all amendments thereto, the
"Registration Statement") under the Securities Act with respect to the
securities offered hereby. As permitted by the rules and regulations of the
Commission, this Prospectus does not contain all of the information set forth in
the Registration Statement and the exhibits and schedules thereto. For further
information pertaining to the Company and the securities offered hereby,
reference is made to the Registration Statement and the exhibits thereto, which
may be examined without charge at the public reference facilities maintained by
the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and copies of which may be obtained from the Commission
upon payment of the prescribed fees.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents and information heretofore filed with the
Commission by the Company are hereby incorporated by reference into this
Prospectus.
1. The Company's Annual Report on Form 10-K for the fiscal year ended
March 2, 1996.
2. The Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended June 1, 1996.
3. The Company's Current Reports on Form 8-K and 8-K/A, dated March 8,
1996, and March 21, 1996, respectively, and on Form 8-K, dated September
16, 1996.
4. The description of the Company's common stock, par value $1.00 per
share, contained in the Company's Registration Statement on Form 8-B,
filed on September 17, 1986.
5. The description of the Rights to Purchase Common Stock contained in
the Company's Registration Statement on Form 8-A, dated December 20,
1994.
44
<PAGE> 45
All documents subsequently filed by the Company pursuant to Sections 13(a),
13(c), 14 or 15(d) of the Exchange Act prior to the termination of the offering
of the Notes offered hereby shall be deemed to be incorporated by reference into
this Prospectus and to be a part hereof from the date of filing of such
documents. Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.
The Company will provide without charge to each person, including any
beneficial owner, to whom this Prospectus is delivered, upon written or oral
request a copy of the documents incorporated by reference herein, other than
exhibits thereto not specifically incorporated by reference. Such requests
should be directed to Pier 1 Imports, Inc., 301 Commerce Street, Suite 600, Fort
Worth, Texas 76102, Attention: Corporate Secretary, telephone (817) 878-8000.
45
<PAGE> 46
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 47
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Reports of Independent Auditors and Accountants...................................... F-2
Consolidated Statements of Operations................................................ F-4
Consolidated Balance Sheets.......................................................... F-5
Consolidated Statements of Cash Flows................................................ F-6
Consolidated Statements of Stockholders' Equity...................................... F-7
Notes to Consolidated Financial Statements........................................... F-8
</TABLE>
F-1
<PAGE> 48
REPORT OF INDEPENDENT AUDITORS
To the Stockholders and Board of Directors of Pier 1 Imports, Inc.
We have audited the accompanying consolidated balance sheet of Pier 1
Imports, Inc. as of March 2, 1996, and the related consolidated statements of
operations, stockholders' equity, and cash flows for the year then ended. 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. The consolidated financial statements of Pier 1 Imports, Inc. for the
years ended February 25, 1995 and February 26, 1994, were audited by other
auditors whose report dated April 7, 1995, except for Notes 2, 8, 11, and 17, as
to which the date is February 29, 1996, expressed an unqualified opinion on
those statements.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated 1996 financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of Pier 1 Imports, Inc. at March 2, 1996, and the consolidated results
of its operations and its cash flows for the year ended March 2, 1996, in
conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
Fort Worth, Texas
April 11, 1996
F-2
<PAGE> 49
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of Pier 1 Imports, Inc.
In our opinion, the consolidated balance sheet and the related consolidated
statements of operations, of cash flows and changes in stockholders' equity as
of and for each of the two years in the period ended February 25, 1995, after
the restatement described in Note 2, present fairly, in all material respects,
the financial position, results of operations and cash flow of Pier 1 Imports,
Inc. and its subsidiaries as of and for each of the two years 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 audits. We conducted our audits 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 audits provide 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
April 7, 1995, except for Notes 2, 3,
9, and 12, as to which the
date is February 29, 1996
F-3
<PAGE> 50
PIER 1 IMPORTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------- YEAR ENDED
JUNE 1, MAY 27, --------------------------------
1996 1995 1996 1995 1994
----------- ----------- -------- -------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales................................. $ 205,292 $ 176,815 $810,707 $711,985 $685,393
Operating costs and expenses:
Cost of sales (including buying and
store occupancy)..................... 123,595 107,677 485,186 434,412 425,801
Selling, general and administrative
expenses............................. 60,546 52,058 235,617 206,022 195,444
Depreciation and amortization........... 4,775 4,123 17,204 15,989 15,771
Store-closing provision................. -- -- -- -- 21,250
--------- --------- -------- -------- --------
188,916 163,858 738,007 656,423 658,266
Operating income................ 16,376 12,957 72,700 55,562 27,127
Nonoperating (income) and expense:
Interest income......................... (1,661) (345) (935) (2,231) (4,334)
Interest expense........................ 4,253 3,272 14,723 14,223 21,177
Trading losses (gains).................. -- 15,956 16,463 2,799 (72)
Provision for Sunbelt Nursery Group,
Inc. defaults........................ -- 14,000 14,000 -- --
Write-down of General Host securities... -- -- -- 7,543 2,000
--------- --------- -------- -------- --------
2,592 32,883 44,251 22,334 18,771
--------- --------- -------- -------- --------
Income (loss) before income
taxes......................... 13,784 (19,926) 28,449 33,228 8,356
Provision (benefit) for income taxes...... 5,511 (1,591) 18,400 11,168 2,423
--------- --------- -------- -------- --------
Net income (loss)......................... $ 8,273 $ (18,335) $ 10,049 $ 22,060 $ 5,933
========= ========= ======== ======== ========
Primary net income (loss) per share....... $ .21 $ (.46) $ .25 $ .56 $ .15
========= ========= ======== ======== ========
Fully diluted net income (loss) per
share................................... $ .20 $ (.46) $ .25 $ .56 $ .15
========= ========= ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 51
PIER 1 IMPORTS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
JUNE 1, MARCH 2, FEBRUARY 25,
1996 1996 1995
----------- -------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash, including temporary investments of $6,533
(unaudited), $1,588 and $42,536, respectively......... $ 17,521 $ 13,534 $ 50,566
Accounts receivable, net of allowance for doubtful
accounts of $3,767 (unaudited), $3,949 and $2,335,
respectively.......................................... 86,425 77,735 64,229
Inventories.............................................. 222,460 223,166 200,968
Other current assets..................................... 33,753 33,078 34,325
--------- -------- --------
Total current assets............................. 360,159 347,513 350,088
Properties, net............................................ 152,666 144,627 105,618
Other assets............................................... 32,891 38,956 30,219
--------- -------- --------
$ 545,716 $531,096 $485,925
========= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current portion of long-term debt...... $ 7,523 $ 4,454 $ 2,638
Accounts payable and accrued liabilities................. 97,723 96,246 82,419
--------- -------- --------
Total current liabilities........................ 105,246 100,700 85,057
Long-term debt............................................. 180,226 180,100 154,432
Deferred income taxes...................................... -- -- 2,538
Other non-current liabilities.............................. 24,092 22,373 21,501
Stockholders' equity:
Common stock, $1.00 par, 200,000,000 shares authorized,
39,877,000 (unaudited), 39,877,000 and 37,826,000
issued, respectively.................................. 39,877 39,877 37,826
Paid-in capital.......................................... 111,238 110,899 93,833
Retained earnings........................................ 88,319 81,633 94,516
Cumulative currency translation adjustments.............. (1,015) (1,072) (1,195)
Less -- 173,000 (unaudited), 303,000 and 162,000 common
shares in treasury, at cost, respectively............. (1,474) (2,545) (1,477)
Less -- subscriptions receivable and unearned
compensation.......................................... (793) (869) (1,106)
--------- -------- --------
236,152 227,923 222,397
Commitments and contingencies
--------- -------- --------
$ 545,716 $531,096 $485,925
========= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 52
PIER 1 IMPORTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------- YEAR ENDED
JUNE 1, MAY 27, --------------------------------
1996 1995 1996 1995 1994
----------- ----------- -------- -------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flow from operating activities:
Net income (loss)............................. $ 8,273 $ (18,335) $ 10,049 $ 22,060 $ 5,933
Adjustments to reconcile to net cash provided
by operating activities:
Depreciation and amortization.............. 4,775 4,123 17,204 15,989 15,771
Deferred taxes and other................... 757 1,046 4,509 3,515 (3,006)
Store-closing provision.................... -- -- -- -- 21,250
Write-down of General Host securities...... -- -- -- 7,543 2,000
Provision for Sunbelt Nursery Group, Inc.
defaults................................. -- 14,000 14,000 -- --
Investment gain............................ (1,607) -- -- -- --
Change in cash from:
Inventories.............................. 5,328 (3,295) (22,198) 18,352 (30,053)
Accounts receivable and other current
assets................................ (8,499) (6,407) (13,346) (16,071) (17,550)
Accounts payable and accrued expenses.... 387 (2,991) 7,159 417 10,103
Store-closing reserve.................... (4) (4,043) (6,020) (4,650) --
Other assets, liabilities, and other,
net................................... 2,270 (193) 27 (618) (28)
------- --------- -------- -------- --------
Net cash provided by (used in)
operating activities................ 11,680 (16,095) 11,384 46,537 4,420
------- --------- -------- -------- --------
Cash flow from investing activities:
Capital expenditures.......................... (9,147) (3,969) (22,127) (17,471) (24,617)
Acquisition of limited partnership interest... -- -- (40,000) -- --
Proceeds from disposition of properties and
other, net................................. 106 213 84 62 791
Loans to Sunbelt Nursery Group, Inc. ......... -- -- -- (9,600) (1,000)
Proceeds from Sunbelt Nursery Group, Inc. .... -- -- -- 11,600 2,105
Reserve for Sunbelt Nursery Group, Inc.
defaults................................... (1,010) -- -- -- --
Proceeds (payments) from investments.......... 4,665 (5,000) (7,600) (2,093) (2,353)
------- --------- -------- -------- --------
Net cash used in investing
activities.......................... (5,386) (8,756) (69,643) (17,502) (25,074)
------- --------- -------- -------- --------
Cash flow from financing activities:
Cash dividends................................ (1,587) (1,208) (5,158) (4,138) (3,560)
Proceeds from issuance of long-term debt...... -- -- 40,000 11,060 --
Repayments of long-term debt.................. -- (11,500) (14,750) (2,500) --
Net borrowings (payments) under line of credit
agreements................................. (1,802) 1,600 1,700 -- (33,000)
Proceeds (payments) from (purchases) sales of
capital stock, treasury stock, and other,
net........................................ 1,082 874 (565) (14) 752
------- --------- -------- -------- --------
Net cash provided by (used in)
financing activities................ (2,307) (10,234) 21,227 4,408 (35,808)
------- --------- -------- -------- --------
Change in cash and cash equivalents............. 3,987 (35,085) (37,032) 33,443 (56,462)
Cash and cash equivalents at beginning of year
or period..................................... 13,534 50,566 50,566 17,123 73,585
------- --------- -------- -------- --------
Cash and cash equivalents at end of year or
period........................................ $17,521 $ 15,481 $ 13,534 $ 50,566 $ 17,123
======= ========= ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 53
PIER 1 IMPORTS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
CUMULATIVE SUBSCRIPTIONS UNREALIZED LOSS
CURRENCY RECEIVABLE ON MARKETABLE TOTAL
COMMON PAID-IN RETAINED TRANSLATION TREASURY AND UNEARNED EQUITY STOCKHOLDERS'
STOCK CAPITAL EARNINGS ADJUSTMENTS STOCK COMPENSATION SECURITIES EQUITY
------- -------- -------- ----------- -------- ------------ --------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance February 27,
1993................... $37,607 $ 93,184 $74,413 $ (433) $(2,599) $ (1,678) $ -- $ 200,494
Purchase of treasury
stock.................. -- -- -- -- (1,545) -- -- (1,545)
Restricted stock grant
and amortization....... -- (62) -- -- 9 309 -- 256
Exercise of stock options
and other.............. 10 (452) (189) -- 3,251 -- -- 2,620
Currency translation
adjustments............ -- -- -- (531) -- -- -- (531)
Unrealized loss on
marketable equity
securities............. -- -- -- -- -- -- (2,574) (2,574)
Cash dividends ($.09 per
share)................. -- -- (3,560) -- -- -- -- (3,560)
Net income............... -- -- 5,933 -- -- -- -- 5,933
------- -------- -------- ------- ------- -------- ------- ---------
Balance February 26,
1994................... 37,617 92,670 76,597 (964) (884) (1,369) (2,574) 201,093
Purchase of treasury
stock.................. -- -- -- -- (2,575) -- -- (2,575)
Restricted stock grant
and amortization....... -- (2) -- -- (61) 263 -- 200
Exercise of stock options
and other.............. 209 1,165 (3) -- 2,043 -- -- 3,414
Currency translation
adjustments............ -- -- -- (231) -- -- -- (231)
Realized loss on
marketable equity
securities............. -- -- -- -- -- -- 2,574 2,574
Cash dividends ($.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
Purchase 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
Purchase of treasury
stock (unaudited)...... -- -- -- -- (78) -- -- (78)
Restricted stock grant
and amortization
(unaudited)............ -- -- -- -- -- 76 -- 76
Stock purchase plan,
exercise of stock
options and other
(unaudited)............ -- 339 -- -- 1,149 -- -- 1,488
Currency translation
adjustments
(unaudited)............ -- -- -- 57 -- -- -- 57
Cash dividends ($.04 per
share) (unaudited)..... -- -- (1,587) -- -- -- -- (1,587)
Net income (unaudited)... -- -- 8,273 -- -- -- -- 8,273
------- -------- -------- ------- ------- -------- ------- ---------
Balance June 1, 1996
(unaudited)............ $39,877 $111,238 $88,319 $(1,015) $(1,474) $ (793) $ -- $ 236,152
======= ======== ======== ======= ======= ======== ======= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE> 54
PIER 1 IMPORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL INFORMATION RELATING TO THE THREE MONTHS ENDED JUNE 1, 1996 AND MAY 27,
1995 IS UNAUDITED)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION -- Pier 1 Imports, Inc. is North America's largest specialty
retailer of imported decorative home furnishings, gifts and related items, with
retail stores located in the United States, Canada, Puerto Rico and expanding
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 this merchandise could be replaced by
manufacturers from other countries at comparable terms.
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. Material intercompany transactions and
balances have been eliminated.
USE OF ESTIMATES -- The preparation of the financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
RECLASSIFICATIONS -- Certain reclassifications have been made in the prior
years' consolidated financial statements to conform to the fiscal 1996
presentation.
FISCAL PERIODS -- The Company utilizes 5-4-4 (week) quarterly accounting periods
with the fiscal year ending on the Saturday nearest the last day of February.
Fiscal 1996 consisted of a 53-week year (which occurs every seven years) and
fiscal 1995 and 1994 were 52-week years. Fiscal 1996 ended March 2, 1996, fiscal
1995 ended February 25, 1995, and fiscal 1994 ended February 26, 1994.
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 -- The Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," for fiscal 1995. Under SFAS No. 115, 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 2
and 9 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 utilizes various financial
instruments to manage interest rate and market risk associated with its on- and
off-balance sheet commitments. Interest rate swap agreements have been used to
modify the interest characteristics of a portion of the Company's debt. The
differential to be paid or received is accrued as interest rates change and
recognized as an adjustment to interest expense on the
F-8
<PAGE> 55
PIER 1 IMPORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
consolidated statement of operations. The fair values of the swap agreements are
not recognized in the consolidated financial statements. Additionally, interest
rate floors have occasionally been used to lock-in rates to minimize the
Company's risks to market rate fluctuations. The costs of these interest rate
floors are amortized to interest expense over the term of the contract.
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 interest rate swap, interest rate floor, and
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. As of March 2, 1996, the
Company had no interest rate swap or interest rate floor agreements in place.
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.
DEFERRED COSTS -- Certain initial direct costs associated with new proprietary
credit card accounts are capitalized and amortized over the average life of an
account. Preopening costs associated with the new stores are capitalized and
expensed over one year.
ADVERTISING COSTS -- All advertising costs are expensed the first time the
advertising takes place. Advertising costs were $32,093,000, $29,566,000 and
$26,620,000 in fiscal 1996, 1995 and 1994, respectively. The amounts of prepaid
advertising at fiscal year-ends 1996, 1995 and 1994 were $456,000, $71,000 and
$260,000, 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 2, 1996, such undistributed earnings aggregated $16.5
million.
STOCK BASED COMPENSATION -- The Company grants stock options and restricted
stock for a fixed number of shares to employees with grant prices equal to the
fair market value of the shares at the date of grant. The Financial Accounting
Standards Board ("FASB") issued SFAS No. 123, "Accounting and Disclosure of
Stock-Based Compensation," in October 1995. This standard is effective for the
Company's 1997 fiscal year and adoption of SFAS No. 123 will have no effect on
the results of operations. The Company will continue to account for stock option
grants in accordance with Accounting Principles Board Opinion No. 25,
"Accounting
F-9
<PAGE> 56
PIER 1 IMPORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
for Stock Issued to Employees," and, accordingly, will recognize 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,
including common stock equivalents, which were 39,778,000, 39,698,000 and
39,530,000 for fiscal 1996, 1995 and 1994, respectively, and 40,153,000
(unaudited) and 39,827,000 (unaudited) for the three months ending June 1, 1996,
and May 27, 1995, respectively. Computation of the weighted average shares for
fiscal 1995 and 1994 gives retroactive effect to the 5% stock dividend
distributed May 8, 1995. Fully diluted net income per share is based on the
assumed conversion of all of the 6 7/8% convertible subordinated notes into
common stock, whereby interest expense and debt issue costs, net of tax, on the
6 7/8% convertible subordinated notes is added back to net income. Fully diluted
net income per share resulted in less than 3% dilution of primary net income per
share for each of the three fiscal years ended March 2, 1996 and for the three
months ended May 27, 1995. Fully diluted net income per share is $0.20 for the
three months ended June 1, 1996.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS -- In March 1995, the FASB issued
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," which requires impairment losses to be
recorded on long-lived assets used in operations when indicators of impairment
are present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amount. SFAS No. 121 also addresses
the accounting for long-lived assets that are expected to be disposed of by a
company. The Company will adopt SFAS No. 121 in the first quarter of fiscal 1997
and, based on current circumstances, does not believe the effect of adoption
will be material.
UNAUDITED INTERIM FINANCIAL STATEMENTS -- All adjustments that are, in the
opinion of management, necessary for a fair statement of the financial position
as of June 1, 1996, and the results of operations and cash flows for the three
months ended June 1, 1996 and May 27, 1995 have been made and consist only of
normal recurring adjustments, except for the trading losses and the provision
for Sunbelt Nursery Group, Inc. defaults recorded for the three months ended May
27, 1995. The results of operations for the three months ended June 1, 1996 and
May 27, 1995 are not indicative of results to be expected for the fiscal year
because of, among other things, seasonality factors in the retail business.
NOTE 2 -- TRADING LOSSES
In late December 1995, the Company was made aware of losses of $19.3
million resulting from substantial trading activities in a discretionary account
by a financial consultant retained to manage the Company's excess cash and
short-term investments. The Company maintained a relationship with the
consultant over the last nine years and provided funds under his management
which at one time reached $22 million. In executing these trading transactions,
the consultant may have acted outside the scope of instructions from the Company
and improperly attributed transactions to the Company. These transactions are
recorded on statements the Company received from brokerage firms that executed
the transactions purportedly in accordance with the consultant's instructions.
Management believes that these statements represent the best evidence of the
transactions that is available to the Company. As a result, the Company has
restated its financial statements for affected periods to reflect the gains and
losses in the periods indicated by brokerage firm statements.
Restatements of the financial statements indicate significant trading
losses during the first three quarters of each of the fiscal years ended
February 25, 1995 and February 26, 1994, and then a substantial recovery of such
losses in the fourth fiscal quarter of the fiscal years ended February 25, 1995
and February 26, 1994. Restatements of fiscal 1996 indicate significant trading
losses in the first and second quarters of the fiscal year. The Company's
restatements had no effect on net income for the full fiscal year ended February
26, 1994. The effect on the financial statements for the full fiscal years ended
March 2, 1996 and February 25, 1995 was to reduce net income by net trading
losses of $16.5 million and $2.8 million, respectively. These amounts do not
F-10
<PAGE> 57
PIER 1 IMPORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
include any conflicting claims involving the financial consultant or other
parties, which are expected to be the subject of protracted legal proceedings.
The Company has not recorded any tax benefit on these losses since the
realization of such benefit is not considered likely based on the information
available at this time. The amounts of the net trading losses or gains for the
quarterly periods in fiscal 1996 and 1995 are included in Note 17.
The Company has attempted to obtain additional information from the
financial consultant with respect to its purported trading transactions, but the
consultant has not cooperated with these efforts. The ability of the Company to
obtain such information, particularly at dates which are relevant to the
Company's financial reporting requirements through March 2, 1996, is not
ascertainable. The Company has been authorized by the Board of Directors to
pursue all legal remedies to recoup the lost funds against any and all parties
responsible for the trading losses. The recorded losses have not been reduced by
any possible recoveries from such sources.
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 alleges 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. The suit seeks an
accounting to the Company for the damages it sustained.
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.
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
asserts a class action by Company stockholders purchasing and/or holding Company
common stock between July 8, 1994 and December 22, 1995, and alleges fraud and
violations of the Texas Securities Act in the dissemination of materially false
and misleading information concerning the Company's financial condition. The
suit seeks 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 Company maintains Directors and Officers liability insurance and, as
such, the Company's directors and officers will seek indemnification against all
of these matters. The ultimate outcome of these complaints cannot presently be
determined.
NOTE 3 -- PROVISION FOR SUNBELT NURSERY GROUP, INC. DEFAULTS
In April 1993, the Company completed the sale of its 49.5% ownership
interest in Sunbelt Nursery Group, Inc. ("Sunbelt") to General Host Corporation
("General Host"), a third party unrelated to the Company or Sunbelt, in exchange
for 1.9 million shares of General Host common stock. Subsequently, General Host
paid two 5% stock dividends, resulting in an increase in the Company's holdings
to 2.1 million shares of General Host common stock.
F-11
<PAGE> 58
PIER 1 IMPORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In connection with the Company's sale of its Sunbelt investment to General
Host, the Company committed to provide Sunbelt a $12 million credit facility
through April 1994 and up to $25 million of non-revolving store development
financing through April 1996. In October 1994, in connection with the sale by
General Host of its 49.5% interest in Sunbelt to a third party unrelated to the
Company or General Host, the Company received payment of the amounts owed under
the credit facility and agreed to extend $22.8 million of the non-revolving
store development financing to Sunbelt until June 30, 1998, at market rental
rates.
In April 1995, Sunbelt defaulted on 13 store sublease agreements with the
Company comprising the $22.8 million of non-revolving store development
financing, and the Company terminated the subleases. In July 1995, the Company
entered into a settlement agreement with Sunbelt which required the Company to
record a pre-tax charge of $14 million in its fiscal 1996 first quarter as its
best estimate of the costs to disengage from its financial support of Sunbelt.
The charge includes estimated losses resulting from terminating the subleases
and disposing of the properties. As of March 1996, two nursery store properties
had been sold at costs consistent with the Company's estimates used to record
the charge. The Company also guarantees other Sunbelt store lease commitments
aggregating $4.5 million with a present value of approximately $3.4 million at
fiscal 1996 year-end. The Company believes that it is reasonably possible that a
change in this estimate could occur in the near term; however, no further charge
is warranted at this time.
NOTE 4 -- PROPRIETARY CREDIT CARD INFORMATION
The Company's proprietary credit card is managed and administered by an
unrelated third party. Origination costs of $2,269,000, $1,168,000 and $976,000
were deferred during fiscal years 1996, 1995 and 1994, respectively. The Company
is amortizing these initial direct origination costs over 36 months, which the
Company believes is the approximate average active life of an account. These
proprietary cards have no expiration date and no annual fee. At March 2, 1996
and February 25, 1995, deferred costs, net of amortization, totalled $2,948,000
and $1,544,000, respectively.
Concentrations of credit risk with respect to customer receivables are
limited due to the large number of customers comprising the Company's customer
base and their location in many different geographic areas of the country.
Customer receivables are classified as current assets, including amounts which
are due after one year, in accordance with retail industry practices. The
Company's policy is to write-off accounts when they become 210 days past due or
whenever deemed uncollectible by management, whichever is sooner. Collection
efforts continue subsequent to write-off.
F-12
<PAGE> 59
PIER 1 IMPORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net proprietary credit card costs, including finance charge income, are
included in selling, general and administrative expenses. A summary of the
Company's proprietary credit card results for each of the last three fiscal
years follows (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Costs:
Processing fees.................................. $ 6,932 $ 6,536 $ 6,114
Provision for bad debts.......................... 5,763 3,285 2,195
-------- -------- --------
12,695 9,821 8,309
-------- -------- --------
Income:
Finance charge income............................ 11,245 8,800 6,087
Insurance and other income....................... 312 237 238
-------- -------- --------
11,557 9,037 6,325
-------- -------- --------
Net proprietary credit card costs............. $ 1,138 $ 784 $ 1,984
======== ======== ========
Pier 1 Preferred Customer Card sales............... $188,303 $126,836 $101,227
======== ======== ========
Costs as a percent of Pier 1 card sales............ 6.74% 7.74% 8.21%
======== ======== ========
</TABLE>
NOTE 5 -- PROPERTIES
Properties are summarized as follows at March 2, 1996 and February 25, 1995
(in thousands):
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Land........................................................... $ 28,485 $ 7,203
Buildings...................................................... 52,710 34,037
Equipment, furniture and fixtures.............................. 103,108 95,208
Leasehold interests and improvements........................... 84,877 78,688
Construction in progress....................................... 402 209
-------- --------
269,582 215,345
Less accumulated depreciation and amortization................. 124,955 109,727
-------- --------
Properties, net...................................... $144,627 $105,618
======== ========
</TABLE>
F-13
<PAGE> 60
PIER 1 IMPORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6 -- 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 2, 1996 and February 25, 1995 (in
thousands):
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Trade accounts payable........................................... $32,070 $29,008
Accrued payroll and other employee-related liabilities........... 19,146 21,039
Sunbelt default reserve.......................................... 13,784 --
Accrued taxes, other than income................................. 8,200 7,652
Store-closing reserves........................................... 5,255 11,759
Accrued insurance, other than worker's compensation.............. 4,230 2,068
Accrued interest................................................. 4,070 3,387
Other............................................................ 9,491 7,506
------- -------
Accounts payable and accrued liabilities....................... $96,246 $82,419
======= =======
Accrued average rent............................................. $13,819 $14,678
Other............................................................ 8,554 6,823
------- -------
Other non-current liabilities.................................. $22,373 $21,501
======= =======
</TABLE>
NOTE 7 -- STORE-CLOSING PROVISIONS
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. At the end of fiscal 1996, the Company had closed 48
stores and the Canadian distribution center and administrative offices. The
balance of the fiscal 1994 store-closing reserve at fiscal 1996 year-end was
$4.4 million. The remaining components of the fiscal 1994 store-closing reserve
and an analysis of the amounts charged against the reserve in each fiscal year
are outlined in the following table (in thousands):
<TABLE>
<CAPTION>
FISCAL 1996
---------------------
FISCAL CHANGES
1995 IN
1994 ACTIVITY 1995 ACTIVITY ESTIMATES 1996
------- -------- ------- -------- --------- ------
<S> <C> <C> <C> <C> <C> <C>
Lease termination costs............. $15,825 $ (3,028) $12,797 $ (4,968) $(3,450) $4,379
Fixed asset write-downs and
inventory liquidation costs....... 3,318 (4,841) (1,523) -- 1,523 --
Interim operating losses and
other............................. 1,702 (1,352) 350 (974) 624 --
Severance costs..................... 405 (270) 135 (78) (57) --
------- -------- ------- -------- ------- ------
$21,250 $ (9,491) $11,759 $ (6,020) $(1,360) $4,379
======= ======== ======= ======== ======= ======
</TABLE>
After considering the remaining terminations, approximately $1.4 million of
the fiscal 1994 store-closing provision was credited to income in the fourth
quarter of fiscal 1996 to reflect changes in original estimates. Negotiations to
sublease the one store remaining to be closed and payments of lease terminations
costs on two other stores remaining in the fiscal 1994 store-closing program are
nearing completion with final payments estimated to aggregate $4.4 million.
During the fourth quarter of fiscal 1996, the Company identified five
stores which have not satisfied the Company's performance expectations. A charge
of $1.4 million was recorded to close these stores. The charge consists of $0.5
million to reduce the recorded amount of the stores' fixed assets to their net
realizable values and $0.9 million of estimated lease termination costs.
F-14
<PAGE> 61
PIER 1 IMPORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8 -- LONG-TERM DEBT AND AVAILABLE CREDIT
Long-term debt is summarized as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
11 1/2% subordinated debentures, net of unamortized discount
of $2,062 and $2,444, respectively......................... $ 17,938 $ 20,056
Industrial revenue bonds..................................... 25,000 25,000
11% senior notes............................................. 25,000 25,000
6 7/8% convertible subordinated notes........................ 62,750 75,000
8 1/2% exchangeable debentures, net of unamortized discount
of $626 and $728, respectively............................. 11,874 11,772
Competitive advance and revolving credit facility............ 40,000 --
Capital lease obligations.................................... 104 242
-------- --------
182,666 157,070
Less -- portion due within one year.......................... 2,566 2,638
-------- --------
$180,100 $154,432
======== ========
</TABLE>
In July 1983, the Company issued $25 million of 11 1/2% subordinated
debentures. Interest is payable on January 15 and July 15. Mandatory annual $2.5
million sinking fund payments commenced in July 1994 and will continue until
maturity in July 2003. The debentures are callable at any time at par plus
accrued interest.
In fiscal 1987, the Company entered into industrial revenue development
bond loan agreements aggregating $25 million which mature in the year 2026.
Proceeds were used to construct three warehouse distribution facilities. These
bonds are seven-day lower floater put bonds and interest rates float with market
rates for similar tax-exempt debt issues. Interest is payable monthly.
In May 1991, the Company issued $25 million of 11% senior notes due June 1,
2001. Annual principal reductions in the amount of $5 million are due beginning
June 1, 1997. Interest is payable each June 1 and December 1.
In April 1992, the Company issued $75 million of 6 7/8% convertible
subordinated notes. These notes are convertible into shares of common stock of
the Company at $11.43 per share (adjusted for the 5% stock dividend distributed
May 8, 1995) at any time at or prior to maturity which is April 1, 2002. The
notes may be redeemed by the Company at any time on or after April 1, 1995 in
whole or in part. Redemption prior to the year 2000 would be at a premium. Since
April 1, 1995, the Company has purchased $12.3 million of these notes. Interest
on the notes is payable each April 1 and October 1. (See Note 18 of the Notes to
Consolidated Financial Statements.)
In December 1994, the Company issued $12.5 million of 8 1/2% exchangeable
debentures. The debentures are due December 1, 2000, and are mandatorily
exchangeable at that date into 2.1 million shares of General Host common stock
held by the Company. If at any time after December 1, 1997, the closing market
price of General Host common stock shall have been equal to or greater than
$7.375 for the prior 20 consecutive trading days, the debentures will be
mandatorily exchanged 30 days thereafter for the General Host shares plus
accrued interest. Interest is payable each June 1 and December 1.
In December 1995, the Company obtained a three-year, $65 million
competitive advance and revolving credit facility (included in the $209 million
lines of credit discussed below). The maturity and interest rate, which floats
with the market rate, of each borrowing within the competitive advance and
revolving credit facility is determined separately. At fiscal 1996 year-end, the
Company had utilized $40 million of this facility to purchase the remaining 90%
ownership interest, previously held by unrelated third parties, in a limited
F-15
<PAGE> 62
PIER 1 IMPORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
partnership in which the Company had a 10% ownership interest. At fiscal 1996
year-end, the rate on outstanding borrowings under this facility was 6.75%.
Long-term debt matures as follows (in thousands):
<TABLE>
<S> <C>
Fiscal 1997....................................................... $ 2,566
1998....................................................... 7,538
1999....................................................... 47,500
2000....................................................... 7,500
2001....................................................... 20,000
Thereafter................................................. 97,562
--------
$182,666
========
</TABLE>
Some of the Company's loan and lease agreements require that the Company
maintain certain financial ratios and limit specific payments and equity
distributions including cash dividends, loans to stockholders and purchases of
treasury stock. At fiscal 1996 year-end, the most restrictive of the agreements
limits the aggregate of such payments to $11.2 million.
The Company has lines of credit available which aggregate approximately
$209 million. The lines may be used for short-term working capital requirements
or overseas merchandise letters of credit. At fiscal 1996 year-end,
approximately $90 million (of which $40 million is classified as long-term) had
been utilized, leaving $119 million of available lines of credit; however, under
the terms of certain loan and lease agreements, additional borrowings were
limited to $116.9 million at fiscal 1996 year-end. The weighted average interest
rate on short-term working capital loans outstanding during the year was 6.7%.
NOTE 9 -- FAIR VALUE OF FINANCIAL INSTRUMENTS
A financial consultant retained by the Company to manage the Company's
excess cash and short-term investments used some of the Company's funds to trade
in treasury bonds, treasury bond futures contracts, options on treasury bond
futures contracts and other financial instruments. During fiscal 1996, 1995 and
1994, the Company deposited $19.5 million, $12.5 million and $22.1 million,
respectively, with the financial consultant and withdrew $3.7 million, $9.0
million and $22.1 million of the invested funds, respectively, by the end of
each such fiscal year. There were no open positions at either March 2, 1996 or
February 26, 1994. At February 25, 1995, the Company had outstanding treasury
bond futures contracts with a notional amount of $122 million which had a
carrying and a fair market value of $0.3 million. These contracts derive value
from changes in market interest rates without the purchase and sale of the
underlying securities. The trading account was closed prior to the end of fiscal
1996. The average fair value of the trading account was $0.6 million, $1.9
million and $3.6 million during fiscal years 1996, 1995 and 1994, respectively.
Net realized and unrealized gains and (losses) associated with these trading
activities totalled approximately ($16.5) million, ($2.8) million and $0.1
million in fiscal years 1996, 1995 and 1994, respectively.
As of March 2, 1996, the fair value of long-term debt was $198.6 million
compared to its recorded value of $182.7 million. The fair value of long-term
debt was estimated based on the quoted market values for the same or similar
issues, or rates currently available for debt with similar terms. There are no
other significant assets or liabilities with a fair value different from the
recorded value.
Until August 5, 1995, the Company had an interest rate hedging agreement on
$100 million of notional principal with a commercial bank for the purpose of
limiting the Company's exposure to interest rate fluctuations on its $25 million
of floating rate industrial revenue bonds, as well as approximately $75 million
of store operating lease agreements with rental payments linked to LIBOR. This
swap agreement was designated as a hedge contract and, therefore, the
differential between the floating and fixed interest rates to be paid was
F-16
<PAGE> 63
PIER 1 IMPORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
recognized over the life of the agreement. Under this swap agreement, the
Company paid a fixed rate of 6.25% and, since inception, had received an average
floating rate of 4.93%. In addition, the Company augmented the swap through the
purchase of an interest rate floor with the effect that the Company received
payments under the swap based on a floating rate not less than 6.25% from
February 6, 1995 until August 5, 1995. The Company's weighted average interest
rate, including the effects of hedging activities, was 8.3%, 7.8% and 10.0% for
the 1996, 1995 and 1994 fiscal years, respectively. The weighted average
interest rate, excluding the effects of hedging activities, would have been
8.6%, 7.9% and 8.3% for the 1996, 1995 and 1994 fiscal years, respectively. This
swap agreement expired on August 5, 1995 and was not renewed.
At March 2, 1996, the Company had approximately $4 million of forward
exchange contracts outstanding with negligible fair and recorded values and with
maturities ranging from one to six months.
NOTE 10 -- EMPLOYEE BENEFIT PLANS
In 1986, the Company adopted a qualified, defined contribution employee
retirement plan. Except for the initial enrollment period, all full- and
part-time personnel who are at least 21 years old, have been employed for a
minimum of twelve months and have worked 1,000 hours in the preceding twelve
months are eligible to participate in the plan. Employees contributing from 1%
to 5% of their compensation receive matching Company contributions of up to 3%.
Company contributions to the plan were $1,400,000, $1,282,000 and $1,114,000 in
fiscal 1996, 1995 and 1994, respectively.
In addition, a non-qualified retirement savings plan is available for the
purpose of providing deferred compensation for certain employees whose benefits
under the qualified plan are limited under Section 401(k) of the Internal
Revenue Code.
The Company maintains supplemental retirement plans ("the Plans") for
certain of its executive officers. The Plans provide that upon death,
disability, retirement age or termination, a participant will receive benefits
based on highest compensation and years of service. The Company recorded
expenses related to the Plans of $1,152,000, $850,000 and $765,000 in fiscal
1996, 1995 and 1994, respectively.
NOTE 11 -- MATTERS CONCERNING STOCKHOLDERS' EQUITY
STOCK PURCHASE PLAN -- Substantially all employees and directors are eligible to
participate in the Pier 1 Imports, Inc. Stock Purchase Plan under which the
Company's common stock is purchased on behalf of employees at market prices
through regular payroll deductions. Each employee participant may contribute up
to 10% of the eligible portions of annual compensation and directors may
contribute part or all of their monthly directors' fees. The Company contributes
from 10% to 100% of the participants' contributions, depending upon length of
participation and date of entry into the Plan. Approximately 288,000 shares were
allocated to Stock Purchase Plan participants during fiscal 1996, all of which
were issued from treasury. Company contributions to the Plan were $896,000,
$844,000 and $867,000 in fiscal years 1996, 1995 and 1994, respectively.
RESTRICTED STOCK GRANT PLANS -- In fiscal 1996, 1995 and 1994, the Company
issued 16,247 shares, 19,584 shares and 17,414 shares, respectively, of its
common stock to key officers pursuant to a Management Restricted Stock Plan
which provides for the issuance of up to 250,000 shares. The shares of
restricted stock were awarded in conjunction with granting of stock options to
those officers, with the number of shares awarded representing 25% of the number
of stock options granted. The restricted stock will vest at the times and to the
extent that 25% of such stock options have been exercised and the option shares
have been held for two years. The cost of these restricted stock shares is being
expensed over the specified vesting period. Shares not vested are returned to
the Plan if employment is terminated for any reason.
In 1991, the Company issued 292,825 shares of its common stock to key
officers pursuant to a Restricted Stock Grant Plan which provides for issuance
of up to 500,000 shares. These shares vest and the cost of
F-17
<PAGE> 64
PIER 1 IMPORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
these shares is being expensed over a ten-year period of continued employment.
Unvested shares are returned to the Plan if employment is terminated for any
reason.
STOCK OPTION PLANS -- In June 1989, the Company adopted two stock option plans,
the 1989 Employee Stock Option Plan and the 1989 Non-Employee Director Stock
Option Plan. Under the employee plan, options have been granted at the fair
market value of shares on date of grant and may be granted to qualify as
Incentive Stock Options under Section 422 of the Internal Revenue Code or as
non-qualified options. Under the director plan, non-qualified options covering
3,000 shares are granted once each year to each non-employee director. The
Company may grant options covering up to 1,500,000 shares of the Company's
common stock under the employee plan and up to 150,000 shares under the director
plan. Both plans are subject to adjustments for stock dividends.
In 1990, the 1980 Stock Option Plan expired subject to outstanding granted
options covering 457,691 shares at fiscal year-end 1996.
A summary of stock option transactions related to the stock option plans
during the years ended March 2, 1996 and February 25, 1995 is as follows:
<TABLE>
<CAPTION>
SHARES OPTION PRICES
--------- --------------
<S> <C> <C>
Outstanding at February 26, 1994.......................... 1,051,722 $3.20 - $12.30
Options granted......................................... 400,330 7.63 - 9.50
Options exercised....................................... (126,505) 3.20 - 9.00
Options cancelled or expired............................ (77,709) 4.28 - 9.00
--------- --------------
Outstanding at February 25, 1995.......................... 1,247,838 3.84 - 12.30
Options granted (includes effect of 5% stock
dividend)............................................ 460,154 9.26 - 10.38
Options exercised....................................... (226,796) 3.65 - 9.52
Options cancelled or expired............................ (73,060) 4.88 - 10.38
--------- --------------
Outstanding at March 2, 1996.............................. 1,408,136 $3.85 - $11.69
========= ==============
</TABLE>
At March 2, 1996 and February 25, 1995, outstanding options covering
705,441 and 687,855 shares were exercisable and 264,279 and 509,764 shares were
available for grant, respectively.
COMMON STOCK DIVIDEND -- On March 15, 1995, the Company announced a 5% common
stock dividend which was distributed May 8, 1995 to stockholders of record on
May 1, 1995. Based on an average of the closing price of the Company's common
stock the day before, and for a two-week period following, the date of the
dividend declaration, the market value of the 1.9 million shares distributed was
$18.1 million.
SHARE PURCHASE RIGHTS PLAN -- On December 9, 1994, the Board of Directors
adopted a Share Purchase Rights Plan and declared a dividend of one common stock
purchase right (a "Right") payable on each outstanding share of the Company's
common stock on December 21, 1994. The Rights, which will expire on December 21,
2004, are initially not exercisable, and until becoming exercisable will trade
only with the associated common stock. After the Rights become exercisable, each
Right entitles the holder to purchase at a specified exercise price one share of
common stock. The Rights will become exercisable after the earlier to occur of
(i) ten days following a public announcement that a person or group of
affiliated or associated persons have acquired beneficial ownership of 15% or
more of the outstanding common stock or (ii) ten business days (or such later
date as determined by the Board of Directors) following the commencement of, or
announcement of an intention to make, a tender or exchange offer the
consummation of which would result in beneficial ownership by a person or group
of 15% or more of the outstanding common stock. If the Company were acquired in
a merger or other business combination transaction or 50% or more of its
consolidated assets or earning power were sold, proper provision would be made
so that each Right would entitle its holder to purchase, upon the exercise of
the Right at the then current exercise price, that number of shares of common
stock of the
F-18
<PAGE> 65
PIER 1 IMPORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
acquiring company having a market value of twice the exercise price of the
Right. If any person or group were to acquire beneficial ownership of 15% or
more of the Company's outstanding common stock, each Right would entitle its
holder (other than such acquiring person whose Rights would become void) to
purchase, upon the exercise of the Right at the then current exercise price,
that number of shares of the Company's common stock having a market value on the
date of such 15% acquisition of twice the exercise price of the Right. The Board
of Directors may at its option, at any time after such 15% acquisition but prior
to the acquisition of more than 50% of the Company's outstanding common stock,
exchange all or part of the then outstanding and exercisable Rights (other than
those held by such acquiring person whose Rights would become void) for common
stock at an exchange rate per Right of one-half the number of shares of common
stock receivable upon exercise of a Right. The Board of Directors may, at any
time prior to such 15% acquisition, redeem all the Rights at a redemption price
of $.01 per Right.
NOTE 12 -- INCOME TAXES
The provision for income taxes consists of (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Federal:
Current............................................... $18,801 $ 8,733 $ 5,356
Deferred.............................................. (3,864) (436) (4,966)
State:
Current............................................... 3,583 2,040 2,598
Deferred.............................................. (446) (93) (1,127)
Foreign:
Current............................................... 326 924 562
------- ------- -------
$18,400 $11,168 $ 2,423
======= ======= =======
</TABLE>
Deferred tax assets (liabilities) at March 2, 1996 and February 25, 1995
are comprised of the following (in thousands):
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Deferred tax assets:
Capital loss carryforwards..................................... $ 2,784 $ 2,209
Inventory...................................................... 924 4,128
Deferred compensation.......................................... 4,123 3,359
Bad debts...................................................... 1,511 691
Accrued average rent........................................... 6,208 6,024
Trading losses................................................. 3,950 1,120
Losses on The Pier Retail Group Ltd. .......................... 2,712 711
Other.......................................................... 879 663
------- -------
23,091 18,905
Valuation allowance.............................................. (6,039) (1,120)
------- -------
Total deferred tax assets.............................. 17,052 17,785
------- -------
Deferred tax liabilities:
Fixed assets, net.............................................. $(3,586) $(8,629)
------- -------
Total deferred tax liabilities......................... $(3,586) $(8,629)
------- -------
Net deferred tax assets........................................ $13,466 $ 9,156
======= =======
</TABLE>
F-19
<PAGE> 66
PIER 1 IMPORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At March 2, 1996, the Company had net capital loss carryforwards of
$7,048,000 for income tax purposes that expire in the year 2000. For financial
reporting purposes, the valuation allowance has been recognized to offset the
deferred tax assets relating to trading losses and losses on The Pier Retail
Group Limited.
The Company's federal income tax returns for fiscal years 1991 through 1993
have been examined by the Internal Revenue Service ("IRS"). The field portion of
the examination has been completed and the IRS has issued a Revenue Agent Report
claiming the Company has a liability for tax and interest of approximately $8.5
million for these years. The Company intends to challenge the IRS examination
team's position through the Appellate Division of the IRS. The Company has
recorded a liability for its estimate of the outcome of this matter. This
estimate is sensitive to change based on the Company's experience through the
appeals process. As such, the Company believes that it is reasonably possible
that a change in this estimate could occur in the near term.
The difference between income taxes at the statutory federal income tax
rate of 35 percent in fiscal 1996, 1995 and 1994, and income tax reported in the
consolidated statement of operations is as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- ------
<S> <C> <C> <C>
Tax at statutory federal tax rate...................... $ 9,957 $11,630 $2,925
Tax treatment on sale of subsidiary stock.............. -- (1,959) (282)
Valuation allowance.................................... 7,977 1,120 --
State income taxes, net of federal benefit............. 1,280 1,080 856
Tax-favored investment income.......................... (88) (61) (284)
Targeted jobs tax credit............................... (215) (524) (395)
Net foreign income taxed at lower rates................ (365) (425) (528)
Other, net............................................. (146) 307 131
------- ------- ------
$18,400 $11,168 $2,423
======= ======= ======
</TABLE>
NOTE 13 -- COMMITMENTS AND CONTINGENCIES
LEASES -- The Company leases certain property consisting principally of retail
stores, warehouses and transportation equipment under leases expiring through
the year 2015. Most retail store locations are leased for initial terms from 10
to 15 years with varying renewal options and escalation clauses. Certain leases
provide for additional rental payments based on a percentage of sales in excess
of a specified base.
Capital leases are recorded in the Company's balance sheet as assets along
with the related debt obligation. All other lease obligations are operating
leases, and payments are reflected in the Company's consolidated statement of
operations as store occupancy. The composition of capital leases reflected as
assets in the accompanying consolidated balance sheet is as follows (in
thousands):
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Buildings.......................................................... $ 477 $ 477
Equipment, furniture and fixtures.................................. 538 538
------ ------
1,015 1,015
Less accumulated depreciation...................................... 974 912
------ ------
$ 41 $ 103
====== ======
</TABLE>
F-20
<PAGE> 67
PIER 1 IMPORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At March 2, 1996, the Company had the following minimum lease commitments
in the years indicated (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
FISCAL YEAR LEASES LEASES
----------- ------- ---------
<S> <C> <C>
1997................................................................ $119 $ 94,531
1998................................................................ 87 84,576
1999................................................................ -- 71,479
2000................................................................ -- 62,898
2001................................................................ -- 54,153
Thereafter.......................................................... -- 219,289
---- --------
Total lease commitments............................................. 206 $586,926
========
Less imputed interest............................................... 102
----
Present value of total capital lease obligations including current
portion............................................................. $104
====
Present value of total operating lease commitments.................. $374,318
========
</TABLE>
Rental expense incurred was $96,693,000, $92,072,000 and $89,518,000,
including contingent rentals of $784,000, $766,000 and $788,000 based upon a
percentage of sales and net of sublease incomes totalling $1,647,000, $1,552,000
and $1,252,000 in fiscal 1996, 1995 and 1994, respectively.
The Company has commitments from unaffiliated parties to make available up
to $96.8 million for development or acquisition of stores leased by the Company.
As of March 2, 1996, the Company utilized $88.2 million of that availability.
Agreements with these parties mature over the next two years, and Company
management is continuously monitoring financial markets to optimize renewal
terms. In connection with the financing of 41 stores by two of the unaffiliated
parties, the property leases require that upon expiration of the leases over the
next two years, unless extended by agreement of the parties, the Company must
either obtain alternative financing for the properties or arrange for the sale
of the properties to a third party or purchase the properties for approximately
$50 million.
RETAIL OPERATIONS IN THE UNITED KINGDOM -- In fiscal 1993, the Company invested
in preference stock of The Pier Retail Group Limited ("The Pier"), a 14-store
retail chain in the United Kingdom that offers decorative home furnishings and
related items in a store setting similar to that operated by the Company. The
Pier also operates a distribution center and an administrative office. At the
end of fiscal 1996, the Company's net investment in The Pier was $5.8 million.
The Company also guarantees a L4.1 million or $6.3 million bank line available
to The Pier and as of March 2, 1996, $5.4 million was outstanding under this
line. The Pier plans to operate 14 stores during fiscal 1997, and the Company
plans to invest $4 million of additional funds in these operations during fiscal
1997, $2 million of which is expected to be used to reduce The Pier's bank debt
guaranteed by the Company.
Because of The Pier's history of operating losses, aggregating $6.8 million
since fiscal 1993, the Company intends to curtail further investments to fund
store development and other expansion of The Pier until it becomes profitable.
Projections of The Pier's results indicate marginal profitability and positive
cash flow in fiscal 1998. Years following fiscal 1998 reflect continued
improvements in this trend such that the expected future undiscounted cash flows
of The Pier exceeds the carrying amount of the Company's investment in The Pier.
This estimate of recoverability of the Company's investment is sensitive to
change based on the actual results of operations of The Pier compared to
projected amounts. As such, the Company believes that it is reasonably possible
that a change in this estimate could occur in the near term.
LEGAL MATTERS -- In addition to the legal matters discussed in Note 2, there are
various other claims, lawsuits, investigations and pending actions against the
Company and its subsidiaries incident to the operations of its
F-21
<PAGE> 68
PIER 1 IMPORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
business. Liability, if any, associated with these other matters is not
determinable at March 2, 1996; however, the Company considers them to be
ordinary and routine in nature. While certain of the lawsuits involve
substantial amounts, it is the opinion of management, after consultation with
counsel, that the ultimate resolution of such litigation will not have a
material adverse effect on the Company's financial position, results of
operations or liquidity.
NOTE 14 -- CASH FLOW INFORMATION
The following is supplemental cash flow information (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Cash paid during the year for:
Interest............................................ $12,937 $13,477 $20,445
Income taxes........................................ 22,405 15,457 17,732
</TABLE>
NOTE 15 -- INVESTMENT IN GENERAL HOST CORPORATION
In fiscal 1994, the Company recorded a provision for the write-down of the
carrying value of the Company's holdings of General Host common stock. Based on
prices at fiscal year-end 1994, the market value of the General Host common
stock was $5.6 million less than the Company's original carrying amount. After
an assessment of factors which may have contributed to the decline, the Company
estimated $2 million of this decline to be "other than temporary" and recorded a
corresponding adjustment in the book value of the General Host common stock. The
remaining $3.6 million was considered to be temporary. In the third quarter of
fiscal 1995, the Company concluded that the decline in the market value of the
General Host common stock was "other than temporary" and a non-cash, pre-tax
special charge of $7.5 million was recorded to reflect an "other than temporary"
write-down of the carrying value of the General Host common stock. As a result
of the issuance of the Company's exchangeable debentures in December 1994, the
General Host common stock is no longer available for sale, and the Company no
longer has market risk in relation to the General Host common stock.
NOTE 16 -- RELATED PARTIES
Since 1989, the Company has maintained a one-eighth joint ownership
interest in a Cessna jet aircraft with Berman Industries, Inc., a company wholly
owned by Martin L. Berman, who has been a member of the Company's Board of
Directors since June 1994. In November 1995, the Company terminated this joint
interest agreement in the Cessna jet aircraft with Berman Industries, Inc. In
March 1993, the Company invested $3 million in a limited partnership fund with
Whiffletree Partners, L.P., which is managed by Whiffletree Corporation, one of
whose principals is Steven E. Berman, a brother of Martin L. Berman. Whiffletree
Corporation is an affiliate of Palisade Capital Management, L.L.C., of which
Martin L. Berman is Chairman and Chief Executive Officer. In April 1996, the
Company divested its interest in Whiffletree Partners, L.P. for net proceeds of
approximately $4.7 million after deducting fees of $0.3 million. In April 1994,
the Company entered into an agreement with Smith Barney, Inc. to act as trustee
of the Company's 401(k) defined contribution plan and to serve as investment
advisor to participants of the plan. Until April 1995, Martin L. Berman was a
managing director of Smith Barney, Inc.
Since fiscal 1988, interest bearing loans have been outstanding to certain
Company officers. At March 2, 1996, one officer had a loan balance of $829,000,
and maturity of this loan is in fiscal 1998.
The Company's lease commitments include amounts due to Comdisco, Inc. for a
computer leased in June 1991 for a period of five years at an annual rent of
approximately $1.1 million. In May 1994, the Company extended this lease
commitment for an additional two years through July 1998. Kenneth N.
F-22
<PAGE> 69
PIER 1 IMPORTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Pontikes, former Chairman and President of Comdisco Inc., was elected to the
Company's Board of Directors and served in that capacity from April 1993 until
June 1994.
NOTE 17 -- SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data (in thousands of dollars except per
share amounts) for the years ended March 2, 1996 and February 25, 1995 are set
forth below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------
FISCAL 1996 5/27/95 8/26/95 11/25/95 3/02/96
----------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales(1)(2).................................. $176,815 $199,456 $190,185 $244,251
Gross profit(1)(2)............................... 69,138 74,758 78,571 103,054
Net income (loss)(2)(3)(4)....................... (18,335) 8,900 6,949 12,535
Primary net income (loss) per
share(2)(3)(4)(5).............................. $ (.46) $ .22 $ .18 $ .31
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------
FISCAL 1995 5/28/94 8/27/94 11/26/94 2/25/95
----------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales(1)..................................... $161,486 $185,403 $165,761 $199,335
Gross profit(1).................................. 65,351 70,233 66,097 75,892
Net income (loss)(3)(6).......................... 3,991 4,504 (5,526) 19,091
Primary net income (loss) per
share(3)(5)(6)(7).............................. $ .10 $ .11 $ (.14) $ .48
</TABLE>
- ---------------
(1) The restatements of earnings as discussed in Note 2 for the quarters of
fiscal years 1996 and 1995 had no effect on the Company's previously
reported sales and gross profit.
(2) The fiscal 1996 fourth quarter consisted of a 14-week quarter (which occurs
every seven years) compared to a typical 13-week quarter.
(3) Fiscal 1996 first, second and third quarters net income (loss) includes
trading (losses) gains of $(15,956), $(602) and $95, respectively. Fiscal
1995 first, second, third and fourth quarters net income (loss) includes
trading (losses) gains of $(1,544), $(4,152), $(5,749) and $8,646,
respectively.
(4) Fiscal 1996 first quarter net loss includes a pre-tax charge of $14,000 for
Sunbelt defaults.
(5) Fully diluted net income per share resulted in less than 3% dilution of
primary net income per share for fiscal years 1996 and 1995 and all periods
presented with the exception of a $.01 dilution in the second and third
quarters of fiscal year 1996, a $.02 dilution in the fourth quarter of
fiscal 1996, and a $.05 dilution in the fourth quarter of fiscal year 1995.
(6) Fiscal 1995 third quarter net income (loss) includes a charge of $7,543 for
the write-down of investment in the common stock of General Host.
(7) Reflects the effect of the 5% stock dividend distributed May 8, 1995.
NOTE 18 -- EVENT (UNAUDITED) SUBSEQUENT TO DATE OF INDEPENDENT AUDITORS' REPORT
In July 1996, the Company called its $62.8 million of outstanding 6 7/8%
Convertible Subordinated Notes due 2002 for redemption. As a result, $62.7
million of the 6 7/8% notes were converted into 5,483,823 shares of Common Stock
and $69,000 of such notes were redeemed by the Company. The conversion of the
notes increased the Company's equity capitalization by $62.6 million.
F-23
<PAGE> 70
[GRAPHIC CONTAINING A PHOTOGRAPH OF THE INTERIOR OF A PIER 1 STORE.]
<PAGE> 71
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS OR
THE DOCUMENTS INCORPORATED BY REFERENCE HEREIN, IN CONNECTION WITH THE OFFERING
CONTAINED HEREIN, AND, IF GIVEN OR MADE, SUCH INFORMATION AND REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES OTHER THAN THOSE TO WHICH IT
RELATES OR AN OFFER TO ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR
SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE
DATE HEREOF.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................ 3
Investment Considerations................. 7
Recent Developments....................... 9
Use of Proceeds........................... 9
Capitalization............................ 10
Price Range of Common Stock and
Dividends............................... 11
Selected Financial Data................... 12
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.............................. 14
Business.................................. 23
Management................................ 31
Description of the Notes.................. 32
Description of Capital Stock.............. 39
Certain United States Federal Income Tax
Consequences............................ 41
Underwriting.............................. 43
Legal Matters............................. 43
Experts................................... 44
Available Information..................... 44
Incorporation of Certain Documents by
Reference............................... 44
Financial Statements...................... F-1
</TABLE>
$75,000,000
[PIER 1 IMPORTS LOGO]
5 3/4% CONVERTIBLE SUBORDINATED NOTES
DUE 2003
--------------------
PROSPECTUS
--------------------
JEFFERIES & COMPANY, INC.
FORUM CAPITAL MARKETS L.P.
September 18, 1996
