UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended February 27, 1999.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from [ ] to [ ]
Commission File No. 1-7832
PIER 1 IMPORTS, INC.
(Exact name of Company as specified in its charter)
DELAWARE 75-1729843
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
301 Commerce Street, Suite 600
Fort Worth, Texas 76102
(Address of principal executive offices) (Zip Code)
Company's telephone number, including area code: (817) 252-8000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- ---------------------
Common Stock, $1 par value New York Stock Exchange
5 3/4% Convertible Sub. Notes Due 2003 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Company (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Company was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of the Company's knowledge, in
definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. [ X ]
As of May 5, 1999, the approximate aggregate market value of voting
stock held by non-affiliates of the Registrant was $901,670,000 using the
closing sales price on this day of $9.50. It is assumed for purposes of this
computation an affiliate includes all persons registered as Registrant
insiders with the Securities and Exchange Commission.
As of May 5, 1999, 96,417,736 shares of the Registrant's Common Stock,
$1.00 par value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents have been incorporated herein by
reference:
1) Registrant's Annual Report to Shareholders for the fiscal year
ended February 27, 1999 in Parts I and II hereof and;
2) Registrant's Proxy Statement for the 1999 Annual Meeting in Part
III hereof.
<PAGE>
PART I
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Item 1. Business.
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(a) General Development of Business.
-------------------------------
From fiscal 1994 through fiscal 1999, the Company (references to the
"Company" or "Pier 1" shall include Pier 1 Imports, Inc. and its consolidated
subsidiaries throughout this document) expanded its specialty retail
operations from 636 to 751 North American retail stores. In fiscal 1999, the
Company continued to execute its expansion plan in North America by opening
63 new Pier 1 stores while closing 30 stores. Subject to changes in the
retail environment, availability of suitable store sites and adequate
financing, the Company plans to open approximately 60 new stores and close
approximately 25 stores in North America in fiscal 2000, depending upon lease
renewal negotiations, relocation space availability and general economic
conditions.
Set forth below is a list by city of Pier 1 stores opened in North
America in fiscal 1999:
Ajax, OT Midland, MI
Albuquerque, NM Mississauga, OT
Aliso Viejo, CA Mohegan Lake, NY
Ardmore, PA Murfreesboro, TN
Auburn, AL Newark, DE
Barrie, OT Oak Park, IL
Batavia, IL Ontario, OH
Bellingham, MA Orlando, FL
Bowie, MD Ottawa, OT
Bradenton, FL Phoenix, AZ
Brunswick, GA Racine, WI
Carson City, NV Redding, CA
Cincinnati, OH Redmond, WA
Dallas, TX Salem, OR
Del Mar, CA San Luis Obispo, CA
Eugene, OR San Mateo, CA
Fayetteville, GA Santa Maria, CA
Framingham, MA Snellville, GA
Gastonia, NC Solon, OH
Greensburg, PA Spokane, WA
Harrisonburg, VA Springfield, VA
Hilton Head, SC Topeka, KS
Honolulu, HI Towson, MD
Houma, LA Tustin, CA
Kahului, HI Vienna, WV
Knoxville, TN Wanamaker, KS
Largo, FL Westminster, MD
Lawrence, KS White Marsh, MD
Lexington, KY Winston-Salem, NC
Mason, OH Woodbridge, OT
Meridian, MS Yuma, AZ
Merriam, KS
Throughout fiscal 1999, the Company continued its program to remodel and
remerchandise all store interiors to improve the visual merchandising of its
products. This program incorporates store improvements such as better
lighting, wider aisles, a more open view for ease of shopping and greater use
of "lifestyle merchandising" by grouping products in home-use settings. This
remerchandising effort is accompanied by a remodeling program to refurbish
older stores. In fiscal 1999, 41 stores were remodeled and remerchandised
while 96 were remerchandised. This program, which will upgrade more than 700
stores by the end of fiscal 2001, was approximately 80% complete at 1999
fiscal year-end.
Presently, Pier 1 maintains regional distribution center facilities in
or near Baltimore, Maryland; Columbus, Ohio; Chicago, Illinois; Fort Worth,
Texas; Ontario, California and Savannah, Georgia.
The Company owns 90% of the capital stock of The Pier Retail Group
Limited ("The Pier") which operates 18 retail stores that offer decorative
home furnishings and related items in a store setting similar to Pier 1
stores. At fiscal 1999 year-end, The Pier operated 15 stores in England, one
store in Wales and two stores in Scotland. At the end of fiscal 1999, the
Company's net investment in The Pier was $11.8 million.
During fiscal 1994, the Company initiated an arrangement to supply Sears
de Mexico S.A. ("Sears Mexico") with Pier 1 merchandise to be sold in a
"store within a store" format in certain Sears Mexico stores throughout
Mexico. In fiscal 1998, the Company amended its agreement with Sears Mexico
to an arrangement that will substantially insulate the Company from currency
fluctuations which have reduced its profitability in the past. As of
February 27, 1999, Pier 1 merchandise was offered in 11 Sears Mexico stores.
The Company entered into a product distribution agreement with Sears
Roebuck de Puerto Rico, Inc. ("Sears Puerto Rico") in fiscal 1996 for Sears
Puerto Rico to market and sell Pier 1 merchandise in a "store within a store"
format in certain Sears Puerto Rico stores. Sears Puerto Rico operates a
total of 10 stores in Puerto Rico and as of February 27, 1999, seven of these
stores offered Pier 1 merchandise. The Company has no immediate plans for
further expansion in Puerto Rico but would consider future sites.
In fiscal 1996, a wholly-owned subsidiary of the Company entered into a
franchise agreement with Akatsuki Printing Co., Ltd. (collectively
"Akatsuki") and Skylark Group to develop Pier 1 retail stores in Japan. The
agreement provides for the licensing of up to 100 total stores. In fiscal
1999, Akatsuki expanded its retail operations by opening 4 new locations and
closing 2 underperforming stores. At the end of fiscal 1999, Akatsuki
operated 18 Pier 1 stores in the Tokyo metropolitan area and surrounding
cities. Subsequent to fiscal 1999 year-end, Akatsuki has indicated that they
may close 9 additional underperforming stores. The Company and Akatsuki will
consider further expansion in Japan based upon economic conditions within the
country.
In fiscal 1998, the Company purchased a national bank and its assets in
Omaha, Nebraska, now operating under the name of Pier 1 National Bank. The
bank holds the credit card accounts for the Company's proprietary credit
card. As of February 27, 1999, the Company, through the bank, had
approximately 3,500,000 proprietary cardholders with 1,085,000 active
accounts (accounts with a purchase within the previous 12 months). The
Company's proprietary credit card sales accounted for 26% of total U.S. store
sales in fiscal 1999.
(b) Financial Information About Industry Segments.
---------------------------------------------
The Company operates in one business segment consisting of the retail
sale of decorative home furnishings and related items.
Financial information with respect to the Company's business is found in
the Company's Consolidated Financial Statements which are incorporated by
reference into Item 8 herein.
(c) Narrative Description of Business.
---------------------------------
The specialty retail operations of Pier 1 consist of a chain of retail
stores operating under the names "Pier 1 Imports" and "The Pier," selling a
wide variety of furniture, decorative home furnishings, dining and kitchen
goods, bath and bedding accessories and other specialty items for the home.
On February 27, 1999, Pier 1 operated 723 stores in 47 states of the
United States and 28 stores in two Canadian provinces and supported nine
franchised stores in nine states. Additionally, the Company operated 18
stores in the United Kingdom under the name "The Pier." The Company supplies
merchandise and licenses the Pier 1 name to Sears Mexico and Sears Puerto
Rico, which sell Pier 1 merchandise in a "store within a store" format in 11
Sears Mexico stores and in seven Sears Puerto Rico stores. Eighteen
franchised stores operated in Tokyo and surrounding cities as of February 27,
1999. The Company-operated Pier 1 stores in the United States and Canada
average approximately 7,500 square feet in size of retail selling space. The
stores are generally freestanding units located near major shopping centers
or malls in all major United States metropolitan areas and many of the
primary smaller markets. In fiscal 1999, net sales of the Company totalled
$1,138.6 million. Pier 1 stores generally have their highest sales volumes
during November and December, reflecting the Christmas selling season.
The Company offers a diverse selection of products consisting of over
5,000 items imported from over 60 countries around the world. While the
broad categories of Pier 1's merchandise remain constant, individual items
within these product groupings change frequently in order to meet the demands
of customers. The principal categories of merchandise include the following:
FURNITURE - This product group consists of furniture and the related
furniture pads and pillows to be used on patios and in sun rooms, living,
dining, kitchen and bedroom areas. The group constituted approximately 35%
of total North American retail sales of Pier 1 in fiscal year 1999, 34% in
fiscal 1998 and 31% in fiscal 1997. These goods are imported from a variety
of countries such as Italy, Malaysia, Chile, Mexico, China, the Philippines
and Indonesia, and are also obtained from domestic sources. The furniture
is made of metal or handcrafted natural materials, including rattan, pine,
beech, rubberwood and selected hardwoods with either natural, stained or
painted finishes. Pier 1 also sells upholstered furniture.
DECORATIVE ACCESSORIES - This product group constituted the broadest
category of merchandise in Pier 1's sales mix and contributed approximately
23% to Pier 1's total North American retail sales in fiscal year 1999, 26% in
fiscal 1998 and 25% in fiscal 1997. These items are imported from
approximately 40 countries and include brass, marble and wood items, as well
as lamps, vases, dried and silk flowers, baskets, wall decorations and
numerous other decorative items. A majority of these products are
handcrafted from natural materials.
HOUSEWARES - This product group is imported mainly from the Far East and
Europe and includes ceramics, dinnerware and other functional and decorative
items. These goods accounted for approximately 13% of total North American
retail sales of Pier 1 in fiscal year 1999, 14% in fiscal 1998 and 14% in
fiscal 1997.
BED & BATH - This product group is imported mainly from India, England,
Italy and China, and is also obtained from domestic sources. The group
includes bath and fragrance products, candles and bedding. These goods
accounted for approximately 19% of total North American retail sales of Pier
1 in fiscal year 1999, 18% in fiscal 1998 and 15% in fiscal 1997.
SEASONAL - This product group consists of merchandise to celebrate
holiday and spring/summer entertaining and is imported mainly from Europe,
Canada, China and India. These items accounted for approximately 10% of
total North American retail sales of Pier 1 in fiscal year 1999, 8% in fiscal
1998 and 10% in fiscal 1997.
APPAREL - At the end of fiscal 1997, this product group was completely
discontinued. In previous years, this merchandise was imported from India,
Greece, Thailand and Indonesia and accounted for approximately 5% of the
total North American retail sales of Pier 1 in fiscal year 1997.
Pier 1 merchandise largely consists of items that require a significant
degree of handcraftsmanship. Pier 1 imports most items directly from foreign
suppliers. Pier 1 is not dependent on any particular supplier and has
enjoyed long-standing relationships with many vendors. During fiscal 1999,
Pier 1 sold merchandise imported from over 60 different countries with
approximately 27% of its sales from merchandise produced in China, 13% from
merchandise produced in India and 18% from merchandise produced in Indonesia,
Japan, Thailand, the Philippines and Italy. The remaining 42% of sales was
from merchandise produced in various Asian, European, Central American, South
American and African countries or obtained from United States manufacturers.
In selecting the source of a product, Pier 1 considers quality, dependability
of delivery and cost. For the most part, the imported merchandise is
handcrafted in cottage industries and small factories.
The Company has six regional distribution centers located in or near
Baltimore, Maryland; Columbus, Ohio; Chicago, Illinois; Fort Worth, Texas;
Ontario, California and Savannah, Georgia and leases additional space from
time to time. Imported merchandise and a portion of domestic purchases are
delivered to the distribution centers, unpacked and made available for
shipment to the various stores in the centers' region. Due to the time
delays involved in procuring merchandise from foreign suppliers, Pier 1
maintains a substantial inventory in order to be assured of a sufficient
supply of products to its customers.
The Company is in the highly competitive specialty retail business and
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,
merchandise assortment, merchandise visual presentation and customer service.
The Company believes its stores enjoy a competitive edge over competing
retailers due to greater name recognition, established vendor relationships
and the extent and variety of the merchandise offered. While other retail
stores change their items less frequently, Pier 1 differentiates itself by
offering an array of unique and frequently changing products.
As a retailer of imported merchandise, the Company is subject to certain
risks that typically do not affect retailers of domestically produced
merchandise. The Company must order merchandise from four to twelve months
in advance of delivery and pay for the merchandise at the time it is loaded
for transport to designated U.S. and international destinations.
Additionally, dock strikes, fluctuations in foreign currency exchange rates,
restrictions on the convertibility of the dollar and other currencies,
duties, taxes and other charges on imports, import quota systems and other
restrictions generally placed on foreign trade can affect the price, delivery
and availability of ordered merchandise. The inability to import products
from certain countries or the imposition of significant tariffs could have a
material adverse effect on the results of operations of the Company.
The 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 established the World Trade Organization to replace
the General Agreement on Tariffs and Trade. The Company considers any
agreement that reduces tariff and non-tariff barriers in international trade
beneficial to its business in the United States and around the world.
The World Trade Organization provides a framework for international
trade matters and includes a process for the resolution of trade disputes
among the member countries. Most recently the dispute resolution process of
the World Trade Organization has been utilized to resolve differences between
the European Union and the United States concerning the Union's restrictions
on imports of bananas and U.S. beef. These United States and European Union
trade disputes have led to the threat of sanctions against each other which
have included import prohibitions and increases in duty rates on imported
items.
Currently China is not a member of the World Trade Organization but has
been negotiating with the United States on an accession agreement acceptable
to the World Trade Organization members. The U.S. Trade Representative is
optimistic that an agreement with China can be reached notwithstanding the
significance of the matters which are yet to be resolved.
The 1988 Omnibus Trade and Competitiveness Act was signed into law
amending the Trade Act of 1974. This legislation was enacted partly in
response to a perceived decline in U.S. global competitiveness and the
continuing presence of unfair trade practices that limit U.S. exporters'
access to foreign markets. Under the law, the office of the U.S. Trade
Representative may investigate unfair trade practices of countries around the
world. These investigations may lead to sanctions which could take the form
of quotas or increased duties on imports into the U.S.
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 potential
for expansion of U.S. exports. On previous occasions, the U.S. Trade
Representative has identified certain countries which supply merchandise to
the Company as a priority foreign country. These designations, however, were
rescinded after the U.S. Trade Representative and the countries reached
agreements regarding the basis for the designations.
The United States employs other measures besides this trade legislation
to implement its international trade policies and objectives. For example,
the United States may withdraw most favored nation status to a country which
would cause import duties to increase on products from that country.
President Clinton is expected to recommend to Congress renewal of China's
most favored nation status by June 3, 1999, but Congress can block the
renewal if both houses pass a resolution of disapproval by September 3, 1999.
China's most favored nation status has been renewed every year since it was
granted in 1980. If no action is taken, China's most favored nation status
would be renewed for one year. However, if China's most favored nation
status is lost, the Company would 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 that case, the Company will seek similar products from other
countries.
The Company owns three federally registered service marks under which
its Company-operated and franchised stores do business. These registrations
are numbered 948,076 and 1,620,518 for the mark PIER 1 IMPORTS and 1,104,059
for the mark PIER 1. Also the Company has registered and has applications
pending for the registration of Pier 1 trademarks and service marks in the
United States and in numerous foreign countries.
On February 27, 1999, the Company employed approximately 12,600
associates in North America: approximately 5,400 were full-time employees
while 7,200 were part-time employees.
The Company maintains a wholly-owned foreign subsidiary incorporated
under the laws of Hong Kong to manage certain merchandise procurement, export
and financial service functions. Also, a wholly-owned foreign subsidiary
incorporated under the laws of Bermuda owns the right to license and to
franchise the Company's trademarks and service marks outside the United
States, Canada and Puerto Rico.
Certain statements contained in Item 1, Item 7 and elsewhere in this
report may constitute "forward-looking statements" within the meaning of
Section 21E of the Securities Exchange Act of 1934. The Company may also
make forward-looking statements in other reports filed with the Securities
and Exchange Commission and in material delivered to the Company's
shareholders. Forward-looking statements provide current expectations of
future events based on certain assumptions. These statements encompass
information that does not directly relate to any historical or current fact
and often may be identified with words such as "anticipates," "believes,"
"expects," "estimates," "intends," "plans," "projects" and other similar
expressions. Management's expectations and assumptions regarding planned
store openings, financing of Company obligations from operations and other
future results are subject to risks, uncertainties and other factors that
could cause actual results to differ materially from the anticipated results
or other expectations expressed in the forward-looking statements. Risks and
uncertainties that may affect Company operations and performance include,
among others, the general strength of the economy and levels of consumer
disposable income, the strength of new home construction and sales of
existing homes, the ability of the Company to import merchandise from foreign
countries without significantly restrictive tariffs, duties or quotas and the
ability of the Company to ship items from foreign countries at reasonable
rates in timely fashion. The foregoing risks and uncertainties are in
addition to others discussed elsewhere in this report.
Item 2. Properties.
----------
The Company leases its corporate office containing 194,434 square feet
of office space in Fort Worth.
The Company leases almost all of its retail stores, its warehouses and
other office space. At February 27, 1999, the present value of the Company's
minimum future operating lease commitments aggregated approximately $465
million.
The Company currently owns and leases distribution space of
approximately 3 million square feet. The Company also acquires temporary
space at times through short-term leases.
The following table shows the distribution by state of Pier 1's North
American stores as of February 27, 1999:
United States
- -------------
Alabama 10 Nebraska 4
Arizona 13 Nevada 4
Arkansas 5 New Hampshire 4
California 83 New Jersey 19
Colorado 18 New Mexico 4
Connecticut 13 New York 36
Delaware 3 North Carolina 17
Florida 55 North Dakota 3
Georgia 22 Ohio 33
Hawaii 2 Oklahoma 6
Idaho 3 Oregon 10
Illinois 35 Pennsylvania 28
Indiana 14 Rhode Island 3
Iowa 6 South Carolina 9
Kansas 8 South Dakota 2
Kentucky 7 Tennessee 16
Louisiana 12 Texas 54
Maryland 17 Utah 6
Massachusetts 18 Virginia 25
Michigan 23 Washington 21
Minnesota 16 West Virginia 2
Mississippi 5 Wisconsin 12
Missouri 12 Wyoming 1
Montana 4
Canada
- ------
Ontario 19
Quebec 9
Warehouse properties that are owned or leased by Pier 1 are as follows:
Owned/Leased
Location Approx. Sq. Ft. Facility
- -------- --------------- --------
Baltimore, Maryland 634,186 sq. ft. Leased
Columbus, Ohio 527,127 sq. ft. Leased
Chicago, Illinois 517,481 sq. ft. Owned
Fort Worth, Texas 454,868 sq. ft. Owned
Ontario, California 750,000 sq. ft. Leased
Savannah, Georgia 393,216 sq. ft. Owned
In support of its long range growth plan, the Company continues to
expand its distribution facilities. The Company completed expansion to the
Chicago facility in February 1999, enlarging the building by 74% to 517,481
square feet. In addition, the Company has replaced its West Coast
distribution center with a new, leased, built-to-suit facility in Ontario,
California. The new facility is 750,000 square feet, expandable to 1,000,000
square feet, with projected occupancy by the end of the first quarter of
fiscal 2000.
Item 3. Legal Proceedings.
-----------------
The Company is subject to various claims, lawsuits, investigations and
pending actions against the Company and its subsidiaries incident to the
operation of their businesses. Liability, if any, associated with these
matters is not determinable at February 27, 1999. While a certain number of
the lawsuits involve substantial amounts, it is the opinion of management,
after consultation with counsel, that the ultimate resolutions of such
litigation will not have a material adverse effect on the Company's financial
position, results of operations or liquidity. The Company intends to
vigorously defend itself against the claims asserted against the Company in
these lawsuits.
Item 4. Submission of Matters to a Vote of Security Holders.
---------------------------------------------------
There were no matters submitted to a vote of the Company's security
holders during the fourth quarter of the Company's 1999 fiscal year.
Executive Officers of the Company
---------------------------------
MARVIN J. GIROUARD, age 59, has served as Chairman and Chief Executive
Officer of the Company since March 1999 and has been a member of the
Executive Committee since December 1998. He has been a Director of the
Company since August 1988. From June 1998 to February 1999, Mr. Girouard
served as President and Chief Executive Officer of the Company and from
August 1988 to June 1998, he served as President and Chief Operating Officer
of the Company. From May 1985 until August 1988, he served as Senior Vice
President-Merchandising.
STEPHEN F. MANGUM, age 45, has served as Senior Vice President, Chief
Financial Officer and Treasurer of the Company since August 1996. From
January 1994 to July 1996, he served as Senior Vice President and Chief
Financial Officer of Bloomingdale's, Inc., a subsidiary of Federated
Department Stores, Inc., and served as Vice President of Profit Development
from March 1993 to December 1993. From August 1987 to March 1993, he served
as Vice President of Finance/Control of the Hecht's division of The May
Department Stores Company, Inc.
JAY R. JACOBS, age 44, has served as Senior Vice President of
Merchandising of the Company since May 1995. He served as Vice President of
Divisional Merchandising of Pier 1 Imports (U.S.), Inc. from May 1993 to May
1995 and served as Director of Divisional Merchandising of Pier 1 Imports
(U.S.), Inc. from July 1991 to May 1995.
J. RODNEY LAWRENCE, age 53, 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.
PERRY R. MCNEELY, age 51, has served as Senior Vice President of
Logistics of the Company since June 1993. From January 1989 to June 1993, he
was Vice President of Operations for Lechters, Inc.
PHIL E. SCHNEIDER, age 47, has served as Senior Vice President of
Marketing of the Company since May 1993 and served as Vice President of
Advertising of Pier 1 Imports (U.S.), Inc. from January 1988 to May 1993.
CHARLES H. TURNER, age 42, has served as Senior Vice President of Stores
of the Company since August 1994 and served as Controller and Principal
Accounting Officer of the Company from January 1992 to August 1994.
E. MITCHELL WEATHERLY, age 51, has served as Senior Vice President of
Human Resources of the Company since June 1992 and served as Vice President
of Human Resources of the Company from June 1989 to June 1992 and of Pier 1
Imports (U.S.), Inc. from August 1985 to June 1992.
The officers of the Company are appointed by the Board of Directors,
hold office until their successors are elected and qualified and/or until
their earlier death, resignation or removal.
None of the above executive officers has any family relationship with
any other of such officers. None of such officers was selected pursuant to
any arrangement or understanding between him and any other person.
PART II
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Item 5. Market for the Company's Common Equity and Related Stockholder
Matters.
--------------------------------------------------------------
Information required by this Item is incorporated by reference to the
section entitled "Market Price and Dividend Information" set forth in the
Company's Annual Report to Shareholders for the fiscal year ended February
27, 1999.
The Company's common stock is traded on the New York Stock Exchange. As
of May 1999, there were approximately 55,000 shareholders of the Company's
common stock.
In April 1998, the Board of Directors approved the Company's purchase of
up to 4.5 million (split-adjusted equivalent) shares of its outstanding
common stock. Upon completion of these purchases in September 1998, the
Board of Directors approved the Company's purchase of up to an additional
five million shares. Future purchases of common stock will be made from open
market or private transactions from time to time depending on prevailing
market conditions, the Company's available cash and the Company's
consideration of any loan covenant restrictions and its corporate rating.
Certain of the Company's existing loan and lease guarantee agreements
require the Company to maintain certain financial ratios and limit certain
investments and distributions to shareholders, including cash dividends,
loans to shareholders and purchases of treasury stock. Generally the Company
may make "restricted payments," as defined in the loan agreements, which
include the payment of cash dividends, up to an aggregate maximum of
approximately $30 million as of February 27, 1999. During fiscal 1999, the
Company paid cash dividends totalling $.12 per share and distributed a three
for two stock split, effected in the form of a stock dividend. The Company's
Board of Directors currently expects to continue to pay cash dividends in
fiscal 2000 but intends to retain most of its future earnings for the
expansion of the Company's business. The Company paid a cash dividend of
$.03 per share on May 19, 1999. The Company's dividend policy will depend
upon the earnings, financial condition and capital needs of the Company and
other factors deemed relevant by the Company's Board of Directors.
Item 6. Selected Financial Data.
-----------------------
Information required by this Item is incorporated by reference to the
section entitled "Financial Summary" set forth in the Company's Annual Report
to Shareholders for the fiscal year ended February 27, 1999.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
-----------------------------------------------------------
Information required by this Item is incorporated by reference to the
section entitled "Management's Discussion and Analysis of Financial Condition
and Results of Operations" set forth in the Company's Annual Report to
Shareholders for the fiscal year ended February 27, 1999.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
----------------------------------------------------------
Information required by this Item is incorporated by reference to the
section entitled "Market Risk Disclosures" set forth in the Company's Annual
Report to Shareholders for the fiscal year ended February 27, 1999.
Item 8. Financial Statements and Supplementary Data.
-------------------------------------------
Information required by this Item is incorporated by reference to the
material in the Company's consolidated financial statements and notes thereto
set forth in the Company's Annual Report to Shareholders for the fiscal year
ended February 27, 1999:
Consolidated Statements of Operations for the Years Ended
February 27, 1999, February 28, 1998 and March 1, 1997
Consolidated Balance Sheets at February 27, 1999 and February
28, 1998
Consolidated Statements of Cash Flows for the Years Ended
February 27, 1999, February 28, 1998 and March 1, 1997
Consolidated Statements of Shareholders' Equity for the Years
Ended February 27, 1999, February 28, 1998 and March 1,
1997
Notes to Consolidated Financial Statements
Report of Independent Auditors
The unaudited quarterly information required by this Item is
incorporated by reference to the section entitled "Market Price and Dividend
Information" set forth in the Company's Annual Report to Shareholders for the
fiscal year ended February 27, 1999.
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.
-----------------------------------------------------------
None
PART III
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Item 10. Directors and Executive Officers of the Company.
-----------------------------------------------
Information regarding directors of the Company required by this Item is
incorporated by reference to the section entitled "Election of Directors" set
forth in the Company's Proxy Statement for its 1999 Annual Meeting of
Shareholders.
The information regarding compliance with Section 16(a) of the
Securities Exchange Act of 1934 required by this Item is incorporated by
reference to the section entitled "Section 16(a) Beneficial Ownership
Reporting Compliance" set forth in the Company's Proxy Statement for its 1999
Annual Meeting of Shareholders.
Item 11. Executive Compensation.
----------------------
The information required by this Item is incorporated herein by
reference to the section entitled "Executive Compensation" set forth in the
Company's Proxy Statement for its 1999 Annual Meeting of Shareholders.
Item 12. Security Ownership of Certain Beneficial Owners and
Management.
---------------------------------------------------
The information required by this Item is incorporated herein by
reference to the section entitled "Election of Directors - Security Ownership
of Management" set forth in the Company's Proxy Statement for its 1999 Annual
Meeting of Shareholders.
Item 13. Certain Relationships and Related Transactions.
----------------------------------------------
None
PART IV
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Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K.
------------------------------------------------------
(a) List of consolidated financial statements, schedules and
exhibits filed as part of this report.
--------------------------------------------------------
1. Financial Statements
--------------------
Consolidated Statements of Operations for the Years Ended
February 27, 1999, February 28, 1998 and March 1,
1997
Consolidated Balance Sheets at February 27, 1999 and
February 28, 1998
Consolidated Statements of Cash Flows for the Years Ended
February 27, 1999, February 28, 1998 and March 1,
1997
Consolidated Statements of Shareholders' Equity for the
Years Ended February 27, 1999, February 28, 1998
and March 1, 1997
Notes to Consolidated Financial Statements
Report of Independent Auditors
2. Financial Statement Schedules
-----------------------------
* Schedule II - Valuation and Qualifying Accounts and
Reserves
* Report of Independent Auditors
Schedules other than those referred to above have been
omitted because they are not required or are not
applicable or because the information required to be set
forth therein either is not material or is included in
the financial statements or notes thereto.
3. Exhibits
--------
See Exhibit Index
(b) Reports on Form 8-K.
-------------------
None
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: May 21, 1999 PIER 1 IMPORTS, INC.
By: /s/ Marvin J. Girouard
Marvin J. Girouard, Chairman
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Company and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Marvin J. Girouard Chairman and May 21, 1999
Marvin J. Girouard Chief Executive Officer
/s/ Stephen F. Mangum Senior Vice President, May 21, 1999
Stephen F. Mangum Chief Financial Officer and Treasurer
(Principal Financial Officer and
Principal Accounting Officer)
/s/ John H. Burgoyne Director May 21, 1999
John H. Burgoyne
/s/ Dr. Michael R. Ferrari Director May 21, 1999
Dr. Michael R. Ferrari
/s/ Craig C. Gordon Director May 21, 1999
Craig C. Gordon
/s/ James M. Hoak, Jr. Director May 21, 1999
James M. Hoak, Jr.
/s/ Sally F. McKenzie Director May 21, 1999
Sally F. McKenzie
/s/ Tom M. Thomas Director May 21, 1999
Tom M. Thomas
<PAGE>
REPORT OF INDEPENDENT AUDITORS
We have audited the consolidated balance sheets of Pier 1 Imports, Inc. as of
February 27, 1999 and February 28, 1998, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of
the three years in the period ended February 27, 1999 and have issued our
report thereon dated April 12, 1999, incorporated by reference in this Annual
Report (Form 10-K). Our audits also included the financial statement
schedule listed in Item 14(a) of the Annual Report (Form 10-K). This
schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Fort Worth, Texas
April 12, 1999
S-1
<PAGE>
SCHEDULE II
PIER 1 IMPORTS, INC. AND CONSOLIDATED SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(in thousands)
ALLOWANCE FOR DOUBTFUL ACCOUNTS
-------------------------------
Year Ended
----------------------------------------
February 27, February 28, March 1,
1999 1998 1997
------------ ------------ ----------
Balance at beginning of year $ 142 $ 267 $ 3,949
Additions charged to income 88 1 6,728
Balances written off, net of
recoveries -- (126) (5,572)
Reserve reversal in conjunction
with securitization -- -- (4,838)
------------ ------------ ----------
Balance at end of year $ 230 $ 142 $ 267
============ ============ ==========
S-2
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
3(i) Certificate of Incorporation and Amendments thereto
incorporated herein by reference to Exhibit 3(i) to
Registrant's Form 10-Q for the quarter ended May 30, 1998.
3(ii) Bylaws of the Company, Restated as of December 7, 1994,
incorporated herein by reference to Exhibit 3(ii) to the
Company's Form 10-Q for the quarter ended November 26, 1994.
4.1 Rights Agreement dated December 9, 1994, between the Company
and First Interstate Bank, N.A., as rights agent, incorporated
herein by reference to Exhibit 4 to the Company's Registration
Statement on Form 8-A, Reg. No. 1-7832, filed December 20,
1994.
4.2 Indenture, dated September 18, 1996, between the Company and
Wells Fargo Bank (Texas), N.A., as Trustee, relating to 5 3/4%
Convertible Subordinated Notes Due 2003, incorporated herein
by reference to Exhibit 4.1 to Amendment No. 2 to the
Company's Registration Statement on Form S-3, Reg. No.
333-10677, filed September 11, 1996.
As permitted by Item 601(b)(4)(iii) of Regulation S-K, Exhibit
Number 4 omits instruments relating to issues of long-term
debt of the Company and its subsidiaries, the total authorized
principal amount of which for each issue does not exceed 10%
of the consolidated total assets of the Company and its
subsidiaries. The Company agrees to furnish a copy of any
such instrument to the Securities and Exchange Commission upon
request.
10.1* Form of Indemnity Agreement between the Company and the
directors and executive officers of the Company, incorporated
herein by reference to Exhibit 10(l) to the Company's Form
10-K for the fiscal year ended February 29, 1992.
10.2* The Company's Supplemental Executive Retirement Plan effective
May 1, 1986, as amended and restated as of January 1, 1996,
incorporated herein by reference to Exhibit 10.2 to the
Company's Form 10-K for the fiscal year ended March 1, 1997.
10.3* The Company's Supplemental Retirement Plan effective
September 28, 1995, incorporated herein by reference to
Exhibit 10.1 to the Company's Form 10-Q for the quarter ended
June 1, 1996.
10.4* The Company's Benefit Restoration Plan as Amended and Restated
effective July 1, 1995, incorporated herein by reference to
Exhibit 10.5.1 to the Company's Form 10-Q for the quarter
ended May 27, 1995.
10.5* The Company's Restricted Stock Plan effective March 5, 1990,
incorporated herein by reference to Exhibit 10(p) to the
Company's Form 10-K for the fiscal year ended March 3, 1990.
10.6* The Company's Management Restricted Stock Plan, effective
June 24, 1993, incorporated herein by reference to Exhibit
10.7 to the Company's Form 10-K for the fiscal year ended
February 25, 1995.
10.7* The Company's 1989 Employee Stock Option Plan, effective
June 29, 1989, incorporated herein by reference to Exhibit
10(q) to the Company's Form 10-K for the fiscal year ended
March 3, 1990; as amended by Amendment No. 1 to the 1989
Employee Stock Option Plan, incorporated herein by reference
to the Company's Form 10-Q for the quarter ended June 1, 1996.
10.8* The Company's 1989 Non-Employee Director Stock Option Plan,
effective June 29, 1989, incorporated herein by reference to
Exhibit 10(r) to the Company's Form 10-K for the fiscal year
ended March 3, 1990.
10.9* Form of Post-Employment Consulting Agreement between the
Company and its executive officers, incorporated herein by
reference to Exhibit 10(r) to the Company's Form 10-K for the
fiscal year ended February 29, 1992.
10.10* The Company's Management Medical and Tax Benefit Plans,
incorporated herein by reference to Exhibit 10.18 to the
Company's Form 10-K for the fiscal year ended February 26,
1994.
10.11.1 Pooling and Servicing Agreement, dated February 12, 1997,
among Pier 1 Imports (U.S.), Inc., Pier 1 Funding, Inc. and
Texas Commerce Bank National Association, as Trustee,
incorporated herein by reference to Exhibit 10.13 to the
Company's Form 10-K for the fiscal year ended March 1, 1997.
10.11.2 Amendments Nos. 1, 2 and 3 to the Pooling and Servicing
Agreement, incorporated herein by reference to Exhibit 10.13.2
to the Company's Form 10-K for the fiscal year ended
February 28, 1998.
10.12* Form of Deferred Compensation Agreement, between the Company
and senior executive officers, incorporated herein by
reference to Exhibit 10.1 to the Company's Form 10-Q for the
quarter ended November 29, 1997.
10.13* Senior Management Annual Bonus Plan, incorporated herein by
reference to Exhibit 10.1 to the Company's Form 10-Q for the
quarter ended May 31, 1997.
10.14 Revolving Credit Agreement, dated November 12, 1998, among the
Company, certain of its subsidiaries, NationsBank, N.A., Bank
One, Texas, N.A., and Wells Fargo Bank (Texas), National
Association, incorporated herein by reference to Exhibit 10.1
to the Company's Form 10-Q for the quarter ended November 28,
1998.
10.15* Special Officer Compensation Agreement, incorporated herein by
reference to Exhibit 10.2 to the Company's Form 10-Q for the
quarter ended November 28, 1998.
13 Selected portions of theAnnual Report to Shareholders for the
fiscal year ended February 27, 1999.
21 Roster of Subsidiaries of the Company.
23 Consent of Independent Auditors.
27 Financial Data Schedule for Twelve-Month Period Ended
February 27, 1999.
*Management Contracts and Compensatory Plans
Pier 1 Imports, Inc.
FINANCIAL SUMMARY
($ in millions except per share amounts)
Year Ended
--------------------------------------
1999 1998 1997 1996 1995
-------- ------- ----- ----- -----
Summary of operations:
Net sales $1,138.6 1,075.4 947.1 810.7 712.0
Gross profit $500.4 461.5 384.5 325.5 277.6
Selling, general and
administrative expenses $334.6 315.8 274.5 235.6 206.0
Depreciation and
amortization $31.1 23.9 19.8 17.2 16.0
Operating income $134.7 121.7 90.2 72.7 55.6
Nonoperating (income) and
expense, net(1) $5.0 (2.3) 9.9 44.3 22.3
Income before income taxes
and extraordinary charges $129.6 124.0 80.3 28.4 33.2
Income before extraordinary
charges $ 80.4 78.0 48.2 10.0 22.1
Extraordinary charges from
early retirement of debt,
net of income tax benefit $ -- -- 4.1 -- --
Net income $ 80.4 78.0 44.1 10.0 22.1
Per share data (adjusted for
stock splits and dividends):
Basic earnings before
extraordinary charges $ .82 .77 .50 .11 .25
Basic earnings $ .82 .77 .46 .11 .25
Diluted earnings before
extraordinary charges $ .77 .72 .47 .11 .25
Diluted earnings $ .77 .72 .44 .11 .25
Cash dividends declared $ .12 .09 .07 .06 .05
Shareholders' equity $ 4.12 3.89 3.34 2.57 2.51
Other financial data:
Working capital $252.1 280.8 215.3 246.8 265.0
Current ratio 2.9 3.3 3.0 3.5 4.1
Total assets $654.0 653.4 570.3 531.1 485.9
Long-term debt $ 96.0 114.9 114.5 180.1 154.4
Shareholders' equity $403.9 392.7 323.0 227.9 222.4
Weighted average shares out-
standing(millions) 98.1 101.1 96.8 88.5 88.6
Effective tax rate(2) 38.0% 37.1 40.0 64.7 33.6
Return on average share-
holders' equity 20.2% 21.8 16.0 4.5 10.4
Return on average total assets 12.3% 12.8 8.0 2.0 4.6
Pre-tax return on sales(3) 11.4% 11.5 8.5 3.5 4.7
- ---------------------
(1) Nonoperating (income) and expense, net, is comprised of interest expense
and interest and investment income in each fiscal year presented, and in
addition, includes net losses or recoveries associated with trading
activities in fiscal years 1998, 1996 and 1995, the provision for Sunbelt
Nursery Group, Inc. defaults in fiscal year 1996 and the write-down of
General Host Corporation securities in fiscal year 1995.
(2) No income tax expense was provided on the net recoveries associated with
trading activities, which resulted in a lower effective tax rate in fiscal
year 1998. Additionally, the Company had not recorded any income tax benefit
on the fiscal years 1996 and 1995 net losses associated with trading
activities, which resulted in higher effective tax rates in those years.
(3) Calculated before fiscal year 1997 extraordinary charges from the early
retirement of debt, net of income tax benefit.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Pier 1 Imports, Inc. (the "Company") is North America's largest
specialty retailer of imported decorative home furnishings, gifts and related
items, with over 800 stores in 47 states, Puerto Rico, Canada, the United
Kingdom, Mexico and Japan as of fiscal 1999 year-end. The Company directly
imports merchandise from over 60 countries around the world and designs
proprietary offerings. The Company reported record sales of $1,138.6 million
for fiscal 1999 and net income of $80.4 million, or $.77 per diluted share.
On July 29, 1998, the Company distributed a three for two stock split,
effected in the form of a stock dividend, to shareholders of record on July
15, 1998. All prior year earnings per share amounts have been adjusted to
reflect the impact of the stock split.
FISCAL YEARS ENDED FEBRUARY 27, 1999 AND FEBRUARY 28, 1998
Net sales in fiscal 1999 increased $63.2 million to $1,138.6 million,
representing a 6% increase over net sales of $1,075.4 million in fiscal 1998.
This increase is due to a slight improvement in same-store sales and an
increase in the number of North American stores. Compared to the previous
fiscal year, same-store sales grew 3% in fiscal 1999. This growth is in
addition to same-store sales increases of 16% in fiscal 1998 and 13% in
fiscal 1997. The overall slow down in sales growth is primarily due to
increased competition with other retailers in certain merchandise categories.
However, the Company experienced sales increases in fiscal 1999 over fiscal
1998 of 11% in furniture, 8% in decorative accessories and 9% in bed and
bath.
Throughout the fiscal year, the Company continued its store remodeling
and remerchandising programs. In fiscal 1999, these programs provided
approximately 200 new and existing stores with an updated store layout and
design. The new floor plans and fixture designs assist in the presentation
of a wider merchandise selection. Additionally, the Company opened 63 new
stores and closed 30 stores in North America during fiscal 1999. The North
American store count was 751 at the end of the 1999 fiscal year compared to
718 at the end of the 1998 fiscal year. Stores worldwide, including North
America, Puerto Rico, the United Kingdom, Mexico and Japan, totaled 805 at
the end of the 1999 fiscal year.
Sales on the Company's proprietary credit card totaled $276.2 million in
fiscal 1999. This represents an increase of $18.7 million, or 7%, over
proprietary credit card sales of $257.5 million for the prior fiscal year.
Proprietary credit card sales accounted for 26% of total U.S. store sales in
fiscal 1999, unchanged from a year earlier. Proprietary credit card
customers spent an average of $134 per transaction in fiscal 1999 compared to
$129 per transaction in fiscal 1998. The number of active cardholder
accounts was approximately 1,085,000 at the end of fiscal 1999. The Company
continues to encourage sales on the proprietary credit card through targeted
marketing promotions.
Gross profit, after related buying and store occupancy costs, expressed
as a percentage of sales, increased 1.1% to 44.0% in fiscal 1999 from 42.9%
in fiscal 1998. Merchandise margins, as a percentage of sales, improved 1.3%
to 56.2% in fiscal 1999 from 54.9% in fiscal 1998. The improvement in
merchandise margins is principally due to increases in the initial markup of
merchandise sold. In addition, margins increased because of a decline in
lower margin international sales coupled with larger duty refunds and
improved freight rates. Partially offsetting this improvement was an
increase in clearance and promotional markdowns that were used to facilitate
sales of certain seasonal merchandise in the first half of fiscal 1999.
Store occupancy costs, as a percentage of sales, increased to 12.2% during
fiscal 1999 from 12.0% in fiscal 1998. This increase is largely the result
of additional store rental expense due to the sale-leaseback of 25 store
properties previously owned by the Company. These sale-leaseback
transactions also resulted in a reduction of depreciation expense.
Expressed as a percentage of sales, selling, general and administrative
expenses, including marketing, remained constant at 29.4% for fiscal 1999,
when compared to a year earlier. In total dollars, selling, general and
administrative expenses for fiscal 1999 increased $18.8 million over the
prior fiscal period. Expenses that normally increase proportionately with
sales and number of newly opened stores, such as store compensation, store
equipment rental, supplies and marketing expenses, increased $19.7 million.
These variable expenses increased 0.6% as a percentage of sales for fiscal
1999 compared to fiscal 1998. The increase resulted primarily from higher
marketing expenditures related to the Company's expanded network television
advertising campaign and the introduction of seasonal direct mail advertising
pieces. Variable expenses also rose as a result of continued enhancements to
store systems and communications. Partially offsetting the increase in
variable expenses was a $0.9 million decrease in other selling, general and
administrative expenses. This decrease largely resulted from a $1.8 million
settlement of a receivable previously deemed uncollectible.
Depreciation and amortization expense increased $7.2 million to $31.1
million for fiscal 1999 compared to $23.9 million for fiscal 1998. This
increase was primarily attributable to the replacement of leased store point
of sale equipment with purchased equipment. Partially offsetting this
increase was a reduction of depreciation expense on the 25 store properties
which the Company sold and leased back in the second quarter of fiscal 1999.
Operating income improved $13.0 million to $134.7 million in fiscal 1999
from $121.7 million in the prior year, primarily due to revenue growth,
improved gross profit rates and effective expense control.
Interest and investment income increased $1.0 million in fiscal 1999
compared to fiscal 1998 as a result of increased interest income earned on
higher average cash balances and short-term investments. Interest expense
decreased $0.8 million during fiscal 1999 compared to fiscal 1998. The
decrease was primarily attributable to the repurchase of $18.3 million of the
Company's outstanding 5 3/4% convertible subordinated notes in the third
quarter of fiscal 1999.
In late December 1995, the Company was made aware of losses totaling
$19.3 million resulting from trading activities in a discretionary account.
During fiscal 1998, the Company recovered $11.0 million of the previously
reported losses associated with these trading activities. Of this amount,
the Company considered $1.9 million as a reimbursement of fiscal 1998 legal
fees, resulting in a net recovery of losses associated with trading
activities of $9.1 million for fiscal 1998. The Company did not record any
income tax benefit on the previously reported losses associated with trading
activities and, accordingly, no income tax expense was provided on the net
recovery of losses associated with trading activities. See Note 12 of the
Notes to Consolidated Financial Statements.
The Company's effective income tax rate for fiscal 1999 was 38% compared
to 40% recorded for fiscal 1998, exclusive of the net recovery of losses
associated with trading activities. The decline in the estimated effective
income tax rate was due primarily to reduced state income taxes. The
effective rate for fiscal 2000 is expected to decline slightly.
Net income for fiscal 1999 was $80.4 million, or $.77 per share on a
diluted basis, compared to net income for fiscal 1998 of $78.0 million, or
$.72 per share on a diluted basis. Fiscal 1998 net income before special
credits was $68.9 million, or $.64 per share on a diluted basis. The special
credits in fiscal 1998 represent the previously described net recovery of
losses associated with trading activities.
FISCAL YEARS ENDED FEBRUARY 28, 1998 AND MARCH 1, 1997
During fiscal 1998, the Company recorded net sales of $1,075.4 million,
an increase of $128.3 million, or 14%, over net sales of $947.1 million for
the prior fiscal year. This growth was primarily fueled by the improvement
in same-store sales, which increased 16% compared to fiscal 1997, after
excluding apparel sales for both fiscal years. Increases in same-store sales
were primarily a result of the continued success of the national television
advertising campaign and the store remodel and remerchandising programs.
These programs improved the layout and design of approximately 250 new and
existing stores during fiscal 1998. Additionally, the Company initiated a
new customer service program during the latter half of fiscal 1998 to enhance
previously established customer service programs. The Company's remodel and
remerchandising of stores focused not only on improving floor plan and
fixture design, but also on improving the merchandise mix, especially in the
areas of furniture, decorative accessories and bed and bath. As a result of
the improved merchandise mix, hard goods sales increased 18% in fiscal 1998
compared to fiscal 1997. At the end of fiscal 1997, the Company discontinued
its apparel lines in all stores; apparel represented 5.0% of total
merchandise sales in fiscal 1997. The Company opened 54 new North American
stores and closed 23 stores during fiscal 1998. The North American store
count was 718 at the end of the 1998 fiscal year compared to 687 at the end
of the 1997 fiscal year. Stores worldwide, including North America, Puerto
Rico, the United Kingdom, Mexico and Japan, totaled 763 at the end of the
1998 fiscal year.
Sales on the Company's proprietary credit card were $257.5 million, or
26% of total U.S. store sales, during the 1998 fiscal year. This was an
increase of $31.3 million, or 14% over proprietary credit card sales of
$226.2 million in the prior fiscal year. Proprietary credit card customers
spent an average of $129 per transaction in fiscal 1998 compared to $125 per
transaction in fiscal 1997. The Company continued to encourage sales on the
proprietary credit card through targeted marketing promotions.
Gross profit, after related buying and store occupancy costs, expressed
as a percentage of sales, increased 2.3% to 42.9% in fiscal 1998 from 40.6%
in fiscal 1997. Merchandise margins improved to 54.9% in fiscal 1998 from
53.8% in fiscal 1997. The margin growth was principally the result of a
decrease in clearance and promotional markdowns on soft goods merchandise
during fiscal 1998 compared to fiscal 1997 due to the Company's discontinued
sales of soft goods. In addition, merchandise margins on hard goods improved
over the prior fiscal year, primarily as a result of favorable freight rates
and product mix. Partially offsetting this increase in merchandise margins
was the approximate $2.2 million in duty refunds paid to the Company during
fiscal 1997 as a result of retroactive legislation passed in August 1996,
compared to the approximate $0.5 million in duty refunds recorded during
fiscal 1998. Store occupancy costs, as a percentage of sales, decreased to
12.0% during fiscal 1998 from 13.2% in fiscal 1997. This improvement was
primarily due to leveraging relatively fixed rental rates on store leases
over a greater sales base, and the Company's purchase, in the fourth quarter
of fiscal 1997, of 37 stores previously leased to the Company, which
eliminated base rent for those stores.
Selling, general and administrative expenses, including marketing, were
29.4% of sales in fiscal 1998 compared to 29.0% of sales in fiscal 1997. In
total dollars, selling, general and administrative expenses increased $41.3
million in fiscal 1998 over fiscal 1997. This increase included $26.7
million of expenses that normally grow proportionately with sales and number
of newly opened stores, such as store salaries and bonuses, store equipment
rental, supplies and marketing expenses. These variable expenses increased
0.2% as a percentage of sales for fiscal 1998 compared to fiscal 1997,
primarily due to additional store salaries incurred to assist in store
remodels and increased expenditures to enhance store systems and data
communications. Administrative salaries and bonuses, which remained
relatively flat as a percentage of sales, increased $6.2 million for fiscal
1998. Travel and relocation expenses increased $1.9 million and net
proprietary credit card costs increased $1.2 million. All other selling,
general and administrative expenses increased a total of $5.3 million.
In fiscal 1998, operating income improved to $121.7 million, or 11.3% of
sales, from $90.2 million, or 9.5% of sales, in the prior year.
Interest and investment income decreased $0.8 million in fiscal 1998
compared to fiscal 1997. This decrease was primarily due to $1.6 million in
investment income recognized on an investment in a limited partnership during
the first quarter of fiscal 1997, which was liquidated in fiscal 1997.
Excluding the income from the limited partnership investment, the Company
received higher interest income in fiscal 1998 over fiscal 1997 due to higher
average cash balances and short-term investments.
Interest expense decreased $3.9 million during fiscal 1998 compared to
fiscal 1997. The decrease was primarily a result of the net reduction of
debt during the latter half of fiscal 1997, as discussed below.
The Company's effective income tax rate for fiscal 1998, exclusive of
the previously described net recovery of losses associated with trading
activities, was 40%, unchanged from the 40% recorded for fiscal 1997.
During fiscal 1997, the Company utilized the net proceeds from a public
offering of the 5 3/4% convertible subordinated notes due 2003 to retire
$17.5 million of 11 1/2% subordinated debentures due 2003 and $25 million of
11% senior notes due 2001. In addition, the Company induced the exchange of
its $12.5 million of 8 1/2% exchangeable debentures. The Company recorded
after-tax extraordinary charges of $4.1 million during fiscal 1997 for costs
related to the early retirement of debt. The pre-tax extraordinary charges
were $6.9 million.
Fiscal 1998 net income totaled $78.0 million, or $.72 per share on a
diluted basis, compared to fiscal 1997 net income of $44.1 million, or $.44
per share on a diluted basis. Fiscal 1998 net income before the net recovery
of losses associated with trading activities totaled $68.9 million, or $.64
per share on a diluted basis, compared to net income before extraordinary
charges and related income tax benefit in fiscal 1997 of $48.2 million, or
$.47 per share on a diluted basis.
LIQUIDITY AND CAPITAL RESOURCES
Cash, including temporary investments, decreased $38.8 million to $41.9
million at fiscal 1999 year-end from $80.7 million a year earlier. Cash flow
from operating activities produced $95.7 million during fiscal 1999 compared
to $106.9 million in fiscal 1998, a decrease of $11.2 million. Uses of cash
during fiscal 1999 included $78.1 million of capital expenditures, $65.8
million of open market purchases of the Company's outstanding stock, $18.3
million of repurchases of the Company's outstanding 5 3/4% convertible
subordinated notes, $11.5 million of cash dividend payments, $4.2 million of
franchise stores acquisitions and $2.0 million of repayments of other long-
term debt. These cash expenditures were partially offset by proceeds from
the disposition of properties of $36.4 million, decreased beneficial interest
in securitized receivables of $3.1 million and other investing and financing
activities totaling $5.9 million.
During fiscal 1999, the Company made capital expenditures of $11.8
million to open 63 new Pier 1 Imports stores in North America. The Company
remodeled 41 stores in fiscal 1999 at a cost of $11.1 million. In fiscal
2000, the Company plans to remodel approximately 20 existing stores for an
estimated $6.9 million. The Company's new store development plan for fiscal
2000 provides for the opening of approximately 60 U.S. stores, primarily in
single-store markets, which requires capital expenditures of approximately
$18.2 million. Operating leases are expected to provide financing for new
store land and building costs. The Company estimates inventory and fixtures
for the fiscal 2000 development plan will cost approximately $25.7 million
and are expected to be funded by operations, working capital and bank lines
of credit. The Company expects to close approximately 25 stores in fiscal
2000.
Other capital expenditures for fiscal 1999 primarily consisted of $19.0
million of enhanced point of sale and communication systems for North
American stores, a $6.6 million expansion of the Chicago distribution center
and $4.2 million of franchise store acquisitions.
Prior to June 1998, the Company leased 21 store properties from an
unaffiliated third party under operating leases expiring June 1998. Prior to
the lease expiration date, the lessor sold 14 of the store properties to
another unaffiliated third party and seven of the store properties to the
Company. The Company paid $6.7 million for the seven stores acquired.
Additionally, the Company sold 25 company-owned stores for $31.0 million and
entered into leases on these properties with unaffiliated third parties. The
Company deferred gains of $1.3 million on the sale-leaseback transactions,
and these deferred gains are being amortized over the lives of the leases.
The Company's minimum future operating lease commitments expected for fiscal
2000 total $117.9 million, and the present value of total existing operating
lease commitments is $465.3 million. The Company expects to fund these
commitments from operating cash flow.
The Company's current sources of working capital are cash flow from
operations, sales of proprietary credit card receivables and bank lines of
credit. The bank facilities consist of a five-year $125 million credit
facility, all of which was available at the end of fiscal 1999, other short-
term (12-month) bank facilities used principally for the issuance of letters
of credit totaling $146.2 million, of which $101.0 was available at fiscal
1999 year-end, and other long-term bank facilities of $32.8 million, of which
$4.0 million was available at fiscal 1999 year-end. The new credit facility
replaces the previous three-year $65 million competitive advance and
revolving credit facility and contains improved terms and similar restrictive
covenants. 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 shareholders, including cash dividends and
purchases of treasury stock. The Company's current ratio was 2.9 to 1 at
fiscal 1999 year-end compared to 3.3 to 1 at fiscal 1998 year-end.
During fiscal 1999, the Company settled some of its lease guarantee
obligations on prior nursery stores of Wolfe Nursery, Inc., a subsidiary of
Sunbelt Nursery Group, Inc. In April 1998, Sunbelt Nursery Group and its
subsidiaries initiated bankruptcy proceedings, and Wolfe Nursery rejected all
of the leases guaranteed by the Company. As a result, the Company settled
several of the nursery store lease guarantees within the previously
established accrued amounts. The Company believes it has accrued sufficient
amounts to cover its financial obligations under the remaining store lease
guarantees. The Company expects any cash payments to satisfy the remaining
guarantees will be funded through working capital.
In April 1998, the Board of Directors approved the Company's purchase of
up to 4.5 million (split-adjusted equivalent) shares of its outstanding
common stock. Upon the completion of these purchases in September 1998, the
Board of Directors approved the Company's purchase of up to an additional
five million shares. During fiscal 1999, the Company repurchased 4,739,200
(split-adjusted equivalent) shares of its common stock in open market
transactions for $65.8 million at an average split-adjusted price of $13.88
per share. In addition, the Company acquired approximately 194,000 (split-
adjusted equivalent) shares of common stock as payment for the exercise of
employee stock options. All future purchases of common stock will be made
through open market or private transactions from time to time depending on
prevailing market conditions, the Company's available cash and the Company's
consideration of any loan covenant restrictions and its corporate credit
ratings.
During fiscal 1999, the Company paid cash dividends totaling $.12 per
share and distributed a three for two stock split, effected in the form of a
stock dividend. Subsequently, the Company has declared a cash dividend of
$.03 per share payable on May 19, 1999 to shareholders of record on May 5,
1999. The Company currently expects to continue to pay cash dividends in
fiscal 2000 but to retain most of its future earnings for expansion of the
Company's business.
The Company's inventory purchases are made almost entirely in U.S.
dollars. When purchase commitments are denominated in foreign currencies,
the Company may enter into forward exchange contracts when they are available
in order to manage its exposure to foreign currency exchange fluctuations.
Management believes the funds provided from operations, coupled with the
Company's cash position, available lines of credit and sales of its credit
card accounts to the Pier 1 Imports Credit Card Master Trust, are sufficient
to meet its foreseeable cash requirements.
MARKET RISK DISCLOSURES
Market risks relating to the Company's operations result primarily from
changes in foreign exchange rates and interest rates. The Company has only
limited involvement with derivative financial instruments, and does not use
them for trading purposes and is not a party to any leveraged derivatives.
The Company periodically enters into foreign exchange forward contracts
to hedge some of its foreign currency exposure. The Company uses such
contracts to hedge exposures to changes in foreign currency exchange rates,
primarily Italian Lira, associated with purchases denominated in foreign
currency. Gains and losses on these contracts are deferred and recognized as
an adjustment of the transaction price when it occurs. Forward contracts
generally have maturities not exceeding six months. At February 27, 1999,
the notional amount of the Company's foreign currency derivative instruments
totaled $5.2 million with a negligible fair market value.
The Company manages its exposures to changes in interest rates by
optimizing the use of variable and fixed rate debt. The Company had
approximately $28.2 million of variable rate borrowings at February 27, 1999.
A hypothetical 10% adverse change would have a negligible impact on the
Company's earnings and cash flows.
Collectively, the Company's exposure to these market risk factors was
not significant and had not materially changed from February 28, 1998.
IMPACT OF YEAR 2000 ISSUE
The Company has a comprehensive plan to address the risks associated
with the Year 2000 issue, which arises when computers or embedded computer
chips are unable to distinguish the proper century associated with a two-
digit year in a date. The Company's Year 2000 project has been divided into
five phases: 1) awareness, 2) assessment, 3) renovation, 4) validation and
5) implementation. The awareness phase is complete and all remaining phases
are underway, as discussed below.
Assessment
- ----------
The Company has completed its assessment of all internal technology,
which includes hardware and software components. The Company has thus far
identified no significant risks associated with embedded chips in non-
computer equipment for which it is responsible. Equipment in the Company's
six distribution centers is still being assessed, particularly safety
equipment such as locks and alarms. Assessment of the compliance status of
the Company's high and medium risk vendors and service providers is in
progress and will continue throughout the project. Satisfactory responses
have been received from over 70% of such vendors and providers.
Renovation
- ----------
Remediation or replacement of the Company's mission critical software
applications is over 90% complete, and all but one of these applications is
running in production. Remediation of hardware, operating systems, utility
programs, database programs, etc., is essentially complete except for
upgrades of personal computers, which are expected to be completed by May
1999, for headquarters computers and by August 1999, for all others.
Validation and Implementation
- -----------------------------
The Company's usual practice has been to put remediated or certified-
compliant versions of its software applications into production, then conduct
future-date testing in a special technology environment that has been set up
for that purpose. For mission critical applications, the Company is
conducting testing for all future dates deemed to be at risk even if the
application is certified by the vendor to be Year 2000 compliant. Testing of
some applications is complete; all such testing is expected to be complete by
September 1999, and the remainder of the year may be used to conduct
integrated "end to end" testing of applications working together or to re-
test certain interfaces among applications.
Testing of certain processes involving technology owned by third parties
will be conducted during the second and third quarters of fiscal 2000.
Contingency Plans
- -----------------
The Company is developing contingency plans to address possible failures
that would impede the normal flow of its business processes. These plans
address the Company's internal technology, vendors and service providers.
Although the Company's risk is mitigated somewhat by the broad geographic
dispersion of its physical facilities and vendors and by the large number of
alternative sources of supply for its merchandise categories, the Company has
had difficulty obtaining information concerning compliance in some foreign
countries. Material adverse consequences could occur as a result of Year
2000 failures beyond the Company's control, such as:
* widespread or long-term failures of telecommunications, electric or
water services,
* failure of the Company's credit card processors to provide services,
* inability of ports and customs authorities to process imports and
exports, or
* failure of domestic and ocean transportation services.
The Company does not believe any of these events to be reasonably likely to
occur, but occurrences in varying degrees could result in interruption of
store and distribution operations, delays in delivery of goods and reductions
in cash inflows and revenues. The Company continues to develop contingency
plans to address sporadic or short-term interruptions in services,
particularly in locations of greatest exposure, such as headquarters,
centralized data processing facilities and distribution centers.
As part of its contingency plans, the Company is addressing mission
critical systems of the business. The contingency plans are being designed
to mitigate serious disruptions to the business beyond December 31, 1999 and
will focus on the operation of the Company's business independent of third-
party service providers' Year 2000 compliance. The contingency plan
currently provides for maintaining increased inventory to meet customer
needs, identifying and securing alternate sources of critical services,
materials and utilities when possible and establishing crisis teams to
address unexpected problems. The Company expects to finalize the contingency
plans by the end of the third quarter of fiscal 2000.
Costs
- -----
The Company intends to continue to rely primarily on internal resources
for renovation and validation of its computer systems, with support from
consultants and contractors. Costs incurred since 1995 for Year 2000
assessment and remediation have totaled approximately $3.0 million. The
Company also accelerated approximately $10.0 million in planned capital
purchases as a result of Year 2000 issues. Remaining remediation costs are
not expected to exceed $4.0 million over the next fiscal year, approximately
30% to 40% of which represents ongoing budgeted salaries to be paid to
existing employees. Significant utilization of outside resources beyond what
is included in the Company's project plan, although not expected, could cause
remediation costs to increase above these estimates. The Company's plan
provides for internal compliance and completed testing of all significant
systems by the third quarter of fiscal 2000.
The Company expects to fund all expenditures related to its Year 2000
readiness initiatives through cash flow from operations. These expenditures
are not expected to have an adverse effect on other operating or investment
plans.
IMPACT OF INFLATION AND CHANGING PRICES
Inflation has not had a significant impact on the operations of the
Company during the preceding three years.
IMPACT OF NEW ACCOUNTING STANDARDS
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed for or Obtained for Internal Use." The Statement of
Position is effective for the Company beginning in fiscal 2000. After the
date of adoption, the Statement of Position will require the capitalization
of certain costs to develop or obtain software for internal use that the
Company currently expenses as incurred and will require expensing certain
costs that the Company now capitalizes. The Company does not anticipate the
adoption of this Statement of Position will have a material impact to the
Company's consolidated financial statements.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting
and reporting guidelines for derivatives and requires an establishment to
record all derivatives as assets or liabilities on the balance sheet at fair
value. Additionally, this statement establishes accounting treatment for
three types of hedges: hedges of changes in the fair value of assets,
liabilities or firm commitments; hedges of the variable cash flows of
forecasted transactions; and hedges of foreign currency exposures of net
investments in foreign operations. Any derivative that qualifies as a hedge,
depending upon the nature of that hedge, will either be offset against the
change in fair value of the hedged assets, liabilities or firm commitments
through earnings, or recognized in other comprehensive income until the
hedged item is recognized in earnings. This statement is effective for the
Company beginning in fiscal 2001. The Company is analyzing the
implementation requirements and does not anticipate that the adoption of this
statement will have a material impact on the Company's consolidated financial
statements.
<PAGE>
Pier 1 Imports, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share amounts)
Year Ended
---------------------------------
1999 1998 1997
---------- ---------- --------
Net sales $1,138,590 $1,075,405 $947,091
Operating costs and expenses:
Cost of sales (including buying and
store occupancy) 638,173 613,937 562,629
Selling, general and administrative
expenses 334,629 315,788 274,477
Depreciation and amortization 31,130 23,946 19,765
---------- ---------- --------
1,003,932 953,671 856,871
---------- ---------- --------
Operating income 134,658 121,734 90,220
Nonoperating (income) and expenses:
Interest and investment income (2,868) (1,880) (2,713)
Interest expense 7,916 8,704 12,595
Recovery of losses associated with
trading activities -- (9,101) --
---------- ---------- --------
5,048 (2,277) 9,882
---------- ---------- --------
Income before income taxes and
extraordinary charges 129,610 124,011 80,338
Provision for income taxes 49,253 45,964 32,129
---------- ---------- --------
Income before extraordinary
charges 80,357 78,047 48,209
Extraordinary charges from early
retirement of debt, net of income
tax benefit of $2,747 -- -- 4,122
---------- ---------- --------
Net income $ 80,357 $ 78,047 $ 44,087
========== ========== ========
Basic earnings per share:
Before extraordinary charges $.82 $.77 $.50
Extraordinary charges, net of income
tax benefit -- -- (.04)
---- ---- ----
Net income $.82 $.77 $.46
==== ===== ====
Diluted earnings per share:
Before extraordinary charges $.77 $.72 $.47
Extraordinary charges, net of income
tax benefit -- -- (.03)
---- ---- ----
Net income $.77 $.72 $.44
===== ===== ====
The accompanying notes are an integral part of these financial statements.
<PAGE>
Pier 1 Imports, Inc.
CONSOLIDATED BALANCE SHEETS
(in thousands except share data)
1999 1998
-------- --------
ASSETS
Current assets:
Cash, including temporary investments of $32,434
and $67,972, respectively $ 41,945 $ 80,729
Accounts receivable, net of allowance for doubtful
accounts of $230 and $142, respectively 9,060 12,638
Inventories 258,773 234,180
Prepaid expenses and other current assets 72,165 74,834
-------- --------
Total current assets 381,943 402,381
Properties, net 226,262 216,330
Other assets 45,786 34,699
-------- --------
$653,991 $653,410
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable and current portion of long-term debt $ 350 $ 1,994
Accounts payable and accrued liabilities 129,482 119,596
-------- --------
Total current liabilities 129,832 121,590
Long-term debt 96,008 114,881
Other non-current liabilities 24,257 24,208
Shareholders' equity:
Common stock, $1.00 par, 500,000,000 shares
authorized, 100,779,000 and 67,903,000 issued,
respectively 100,779 67,903
Paid-in capital 159,631 166,824
Retained earnings 201,457 165,345
Cumulative other comprehensive income (1,850) (1,108)
Less--3,107,000 and 176,000 common shares in
treasury, at cost, respectively (54,654) (3,149)
Less--unearned compensation (1,469) (3,084)
-------- --------
403,894 392,731
Commitments and contingencies
-------- --------
$653,991 $653,410
======== ========
The accompanying notes are an integral part of these financial statements.
<PAGE>
Pier 1 Imports, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended
----------------------------
1999 1998 1997
-------- -------- --------
Cash flow from operating activities:
Net income $ 80,357 $ 78,047 $ 44,087
Adjustments to reconcile to net cash
provided by operating activities:
Depreciation and amortization 31,130 23,946 19,765
Deferred taxes and other (2,575) 1,281 6,422
Investment gain -- -- (1,607)
Extraordinary charges from early
retirement of debt -- -- 6,869
Change in cash from:
Inventories (24,103) (13,617) 7,775
Accounts receivable and other
current assets 2,500 (10,302) 74,672
Accounts payable and accrued expenses 12,826 25,031 12,889
Other assets, liabilities and
other, net (4,409) 2,468 (35,773)
Net cash provided by operating -------- -------- --------
activities 95,726 106,854 135,099
-------- -------- --------
Cash flow from investing activities:
Capital expenditures (78,055) (49,854) (36,775)
Proceeds from disposition of properties 36,408 8,856 841
Net (cost) proceeds from disposition of
Sunbelt Nursery Group, Inc. properties (597) 3,905 (3,412)
Acquisitions (4,235) (1,003) (59,936)
Beneficial interest in securitized
receivables 3,145 (6,106) --
Other investments -- -- 4,665
Net cash used in investing -------- -------- --------
activities (43,334) (44,202) (94,617)
-------- -------- --------
Cash flow from financing activities:
Cash dividends (11,522) (8,934) (6,999)
Purchases of treasury stock (65,777) (10,228) (7,728)
Proceeds from issuance of long-term debt -- -- 83,602
Repayments of long-term debt (20,325) -- (90,639)
Net payments under line of credit
agreements -- -- (1,961)
Proceeds from stock options exercised,
stock purchase plan and other, net 6,448 4,959 1,989
Net cash used in financing -------- -------- --------
activities (91,176) (14,203) (21,736)
-------- -------- --------
Change in cash and cash equivalents (38,784) 48,449 18,746
Cash and cash equivalents at beginning
of year 80,729 32,280 13,534
-------- -------- --------
Cash and cash equivalents at end of year $ 41,945 $ 80,729 $ 32,280
======== ======== ========
The accompanying notes are an integral part of these financial statements.
<PAGE><TABLE>
Pier 1 Imports, Inc.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands except share data)
Cumulative
Other Total
Common Paid-in Retained Comprehensive Treasury Unearned Shareholders'
Stock Capital Earnings Income Stock Compensation Equity
-------- -------- -------- ------------- --------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance March 2, 1996 $ 39,877 $110,899 $ 81,633 ($1,072) ($ 2,545) ($ 869) $227,923
--------
Comprehensive income:
Net income -- -- 44,087 -- -- -- 44,087
Other comprehensive income, net of tax:
Currency translation adjustments -- -- -- (313) -- -- (313)
--------
Comprehensive income 43,774
--------
Purchases of treasury stock -- -- -- -- (7,728) -- (7,728)
Restricted stock grant and amortization -- -- -- -- -- 182 182
Stock purchase plan, exercise of stock
options and other -- (1,539) -- -- 4,836 -- 3,297
Cash dividends ($.07 per share) -- -- (6,999) -- -- -- (6,999)
Conversion of 6 7/8% convertible debt 5,484 57,115 -- -- -- -- 62,599
-------- -------- -------- ------- -------- ------- --------
Balance March 1, 1997 45,361 166,475 118,721 (1,385) (5,437) (687) 323,048
--------
Comprehensive income:
Net income -- -- 78,047 -- -- -- 78,047
Other comprehensive income, net of tax:
Currency translation adjustments -- -- -- 277 -- -- 277
--------
Comprehensive income 78,324
--------
Purchases of treasury stock -- -- -- -- (10,228) -- (10,228)
Restricted stock grant and amortization -- 291 -- -- 2,664 (2,345) 610
Stock purchase plan, exercise of stock
options and other -- 51 -- -- 9,852 -- 9,903
Cash dividends ($.09 per share) -- -- (8,934) -- -- -- (8,934)
Three for two stock split 22,541 -- (22,489) -- -- (52) --
Conversion of 5 3/4% convertible debt 1 7 -- -- -- -- 8
-------- -------- -------- ------- -------- ------- --------
Balance February 28, 1998 67,903 166,824 165,345 (1,108) (3,149) (3,084) 392,731
--------
Comprehensive income:
Net income -- -- 80,357 -- -- -- 80,357
Other comprehensive income, net of tax:
Currency translation adjustments -- -- -- (742) -- -- (742)
--------
Comprehensive income 79,615
--------
Purchases of treasury stock -- -- -- -- (65,777) -- (65,777)
Restricted stock grant and amortization -- -- -- -- -- 1,758 1,758
Stock purchase plan, exercise of stock
options and other -- (7,308) -- -- 14,272 -- 6,964
Cash dividends ($.12 per share) -- -- (11,522) -- -- -- (11,522)
Three for two stock split 32,866 -- (32,723) -- -- (143) --
Conversion of 5 3/4% convertible debt 10 115 -- -- -- -- 125
-------- -------- -------- ------- -------- ------- --------
Balance February 27, 1999 $100,779 $159,631 $201,457 ($1,850) ($54,654) ($1,469) $403,894
======== ======== ======== ======= ======== ======= ========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization - Pier 1 Imports, Inc. is North America's largest specialty
retailer of imported decorative home furnishings, gifts and related items,
with retail stores located in the United States, Puerto Rico, Canada, 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 its largest amount of imported inventory from
China. Management believes that alternative merchandise could be obtained
from manufacturers in other countries over time.
Basis of consolidation - The consolidated financial statements of Pier 1
Imports, Inc. and its consolidated subsidiaries (the "Company") include the
accounts of all subsidiary companies except for Pier 1 Funding, Inc., which
is a non-consolidated bankruptcy remote securitization subsidiary. See Note
2 of the Notes to Consolidated Financial Statements. Material intercompany
transactions and balances have been eliminated.
Use of estimates - Preparation of the financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could differ
from those estimates.
Reclassifications - Certain reclassifications have been made in the
prior years' consolidated financial statements to conform to the fiscal 1999
presentation.
Fiscal periods - The Company utilizes 5-4-4 (week) quarterly accounting
periods with the fiscal year of 52 weeks ending on the Saturday nearest the
last day of February. Fiscal 1999 ended February 27, 1999, fiscal 1998 ended
February 28, 1998, and fiscal 1997 ended March 1, 1997.
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.
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 shareholders' equity and are included in comprehensive income.
Financial instruments - The fair value of financial instruments is
determined by reference to various market data and other valuation techniques
as appropriate. Unless otherwise disclosed, the fair values of financial
instruments approximate their recorded values.
Risk management instruments: The Company may utilize various financial
instruments to manage interest rate and market risk associated with its on
and off balance sheet commitments.
The Company hedges certain commitments denominated in foreign currency
through the purchase of forward contracts. The forward contracts are
purchased only to cover specific commitments to buy merchandise for resale;
any gains or losses on such contracts are included in the cost of the
merchandise purchased.
The Company enters into foreign exchange forward contracts only with
major financial institutions and continually monitors its positions with, and
the credit quality of, these counterparties to its off balance sheet
financial instruments. The Company does not expect non-performance by any of
the counterparties, and any losses incurred in the event of non-performance
would not be material.
Inventories - Inventories are comprised primarily of finished
merchandise and are stated at the lower of average cost or market; cost is
determined principally on a weighted-average method.
Properties, maintenance and repairs - Buildings, equipment, furniture
and fixtures, and leasehold interests and improvements are carried at cost
less accumulated depreciation. Depreciation is computed using the
straight-line method over estimated remaining useful lives of the assets
ranging from three to thirty years. Amortization of improvements to leased
properties is based upon the shorter of the remaining lease term or the
estimated useful lives of such assets.
Expenditures for maintenance, repairs and renewals which do not
materially prolong the useful lives of the assets are charged to expense as
incurred. In the case of disposals, assets and the related depreciation are
removed from the accounts and the net amount, less proceeds from disposal, is
credited or charged to income.
Advertising costs - All advertising costs are expensed the first time
the advertising takes place. Advertising costs were $47,491,000, $40,630,000
and $36,968,000 in fiscal 1999, 1998 and 1997, respectively. The amounts of
prepaid advertising at the ends of fiscal years 1999 and 1998 were $1,557,000
and $1,274,000, respectively.
Income taxes - Income tax expense is based on the liability method.
Under this method, deferred tax assets and liabilities are recognized based
on differences between financial statement and tax bases of assets and
liabilities using presently enacted tax rates. Deferred federal income
taxes, net of applicable foreign tax credits, are not provided on the
undistributed earnings of foreign subsidiaries to the extent the Company
intends to permanently reinvest such earnings abroad. At February 27, 1999,
such undistributed earnings aggregated $21.2 million.
Stock-based compensation - The Company grants stock options and
restricted stock for a fixed number of shares to employees with stock option
exercise prices equal to the fair market value of the shares at the date of
grant. The Company continues to account for stock option grants and
restricted stock grants in accordance with Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and,
accordingly, recognizes no compensation expense for the stock option grants.
Earnings per share - Basic earnings per share was determined by dividing
net income by the weighted average number of common shares outstanding for
the period. Diluted earnings per share amounts were similarly computed, but
included the effect, when dilutive, of the Company's weighted average number
of stock options outstanding and the average number of common shares that
would be issuable upon conversion of the Company's convertible securities.
Interest and debt issue costs, net of any applicable taxes, have been added
back to net income to reflect assumed conversions.
Earnings per share amounts have been adjusted to reflect the effect of
the three for two stock splits, effected in the form of stock dividends,
distributed July 29, 1998 and July 30, 1997 and are calculated as follows (in
thousands except per share amounts):
1999 1998 1997
-------- -------- --------
Net income $ 80,357 $ 78,047 $ 44,087
Plus interest and debt issue costs, net of
tax, on the assumed conversion of:
6 7/8% subordinated notes -- -- 929
5 3/4% subordinated notes 3,083 3,245 1,414
-------- -------- --------
Diluted net income $ 83,440 $ 81,292 $ 46,430
======== ======== ========
Average shares outstanding:
Basic 98,120 101,088 96,756
Plus assumed exercise of stock options 1,101 1,303 982
Plus assumed conversion of:
6 7/8% subordinated notes -- -- 4,373
5 3/4% subordinated notes 9,643 10,489 4,582
------- ------- -------
Diluted 108,864 112,880 106,693
======= ======= =======
Earnings per share:
Basic $.82 $.77 $.46
==== ==== ====
Diluted $.77 $.72 $.44
==== ==== ====
Options for which the exercise price was greater than the average market
price of common shares were not included in the computation of diluted
earnings per share. As of fiscal 1999 year-end, 1,543,500 options were
outstanding with an exercise price greater than the average market price for
the period. Exercise prices on these options ranged from $11.55 to $18.50
with expiration dates of July 2007 to March 2008, respectively. At the end
of fiscal years 1998 and 1997, no options were outstanding with exercise
prices greater than the average market price for the respective periods.
Impact of recently issued accounting standards - In March 1998, the
American Institute of Certified Public Accountants issued Statement of
Position ("SOP") 98-1, "Accounting for the Costs of Computer Software
Developed for or Obtained for Internal Use." The SOP is effective for the
Company beginning in fiscal 2000. After the date of adoption, the SOP will
require the capitalization of certain costs to develop or obtain software for
internal use that the Company currently expenses as incurred and will require
expensing certain costs that the Company now capitalizes. The Company does
not anticipate that the adoption of this SOP will have a material impact on
the Company's consolidated financial statements.
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income." This statement was adopted by the Company in the
first quarter of fiscal 1999. SFAS No. 130 establishes new rules for the
reporting and display of comprehensive income and its components, which for
the Company includes foreign currency translation adjustments. The impact of
the adoption of this statement was primarily limited to the form and content
of the disclosures on the Company's consolidated balance sheets and statement
of shareholders' equity with no impact to the Company's financial position or
net income. Prior year financial statements have been conformed to the
requirements of SFAS No. 130.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting
and reporting guidelines for derivatives and requires an establishment to
record all derivatives as assets or liabilities on the balance sheet at fair
value. Additionally, this statement establishes accounting treatment for
three types of hedges: hedges of changes in the fair value of assets,
liabilities or firm commitments; hedges of the variable cash flows of
forecasted transactions; and hedges of foreign currency exposures of net
investments in foreign operations. Any derivative that qualifies as a hedge,
depending upon the nature of that hedge, will either be offset through
earnings against the change in fair value of the hedged assets, liabilities
or firm commitments or recognized in other comprehensive income until the
hedged item is recognized in earnings. This SFAS is effective for the
Company beginning in fiscal 2001. The Company is analyzing the
implementation requirements and does not anticipate that the adoption of this
statement will have a material impact on the Company's consolidated financial
statements.
NOTE 2 - PROPRIETARY CREDIT CARD INFORMATION
The proprietary credit card receivables, securitized as discussed below,
arise primarily under open-end revolving credit accounts issued by the
Company's subsidiary, Pier 1 National Bank, to finance purchases of
merchandise and services offered by the Company. These accounts have various
billing and payment structures, including varying minimum payment levels.
The Company has an agreement with a third party to provide certain credit
card processing and related credit services, while the Company maintains
control over credit policy decisions and customer service standards.
As of fiscal 1999 year-end, the Company had approximately 3,500,000
proprietary cardholders and approximately 1,085,000 customer credit accounts
considered active (accounts with a purchase within the previous 12 months).
The Company's proprietary credit card sales accounted for 26% of total U.S.
store sales in fiscal 1999. A summary of the Company's proprietary credit
card results for each of the last three fiscal years follows (in thousands):
1999 1998 1997
-------- -------- --------
Costs:
Processing fees $ 9,456 $ 8,739 $ 7,811
Write-off of capitalized costs -- -- 3,151
Bad debts 6,356 6,845 6,728
Reversal of bad debt provision -- -- (3,824)
-------- -------- --------
15,812 15,584 13,866
-------- -------- --------
Income:
Finance charge income, net of fees 15,117 12,338 11,476
Insurance and other income 314 303 614
-------- -------- --------
15,431 12,641 12,090
-------- -------- --------
Net proprietary credit card costs $ 381 $ 2,943 $ 1,776
======== ======== ========
Proprietary credit card sales $276,184 $257,518 $226,248
======== ======== ========
Costs as a percent of proprietary credit
card sales 5.73% 6.05% 6.13%
===== ===== =====
Gross proprietary credit card receivables
at year-end $ 87,601 $ 90,930 $ 87,089
======== ======== ========
Proprietary credit card sales as a percent
of total U.S. store sales 26.0% 25.9% 25.5%
===== ===== =====
In February 1997, the Company securitized its entire portfolio of
proprietary credit card receivables (the "Receivables"). The Company sold
all existing Receivables to a special purpose wholly-owned subsidiary, Pier 1
Funding, Inc. ("Funding"), which transferred the Receivables to the Pier 1
Imports Credit Card Master Trust (the "Master Trust"). The Master Trust may
issue one or more series of beneficial interests in the Master Trust that
represent undivided interests in the assets of the Master Trust consisting of
the Receivables and all proceeds of the Receivables. In the initial sale of
the Receivables, the Company sold $84.1 million of the Receivables and
received $49.6 million in cash and $34.1 million in beneficial interests in
the Master Trust. As of February 27, 1999 and February 28, 1998, the Company
had $41.0 million and $43.1 million, respectively, in beneficial interests in
the Master Trust. On a daily basis, the Company sells to Funding for
transfer to the Master Trust all newly generated Receivables, except those
failing certain eligibility criteria, and receives as the purchase price
payments of cash (funded from the amount of undistributed principal
collections from the Receivables in the Master Trust) and residual interests
in the Master Trust. The Company is obligated to repurchase from Funding
certain Receivables related to customer credits such as merchandise returns
and other receivable defects, but has no obligation to reimburse Funding, the
Master Trust or purchasers of any certificates issued by the Master Trust for
credit losses from the Receivables. The holder of any subordinated
certificate of interest in the Master Trust, which currently is only Funding,
is subject to credit losses from the Receivables before holders of senior
certificates. Funding, as holder of the residual interest in the Master
Trust, is subject to credit losses allocable to the residual interest in
proportion to that interest relative to all interests in the Master Trust.
Funding was capitalized by the Company as a wholly-owned special purpose
subsidiary that is subject to certain covenants and restrictions, including a
restriction from engaging in any business or activity unrelated to acquiring
and selling interests in the Receivables. Neither Funding nor the Master
Trust is consolidated with the Company.
As part of the initial transaction securitizing the Receivables, the
Master Trust sold to third parties $50.0 million of Series 1997-1 Class A
Certificates, which bear interest at 6.74% and mature in May 2002. Funding
retained the $14.1 million of Series 1997-1 Class B Certificates, which are
currently non-interest bearing and subordinated to the Class A Certificates.
Funding also retained the residual interest in the Master Trust. Funding has
the right to sell in the future all or part of the Class B Certificates,
which would then bear interest at a rate determined at that time, and to
exchange a portion of its residual interest for the proceeds of a new
issuance of certificates by the Master Trust. Beginning in October 2001,
unless pre-funded through a new series of certificates, principal collections
of the Receivables allocable to Series 1997-1 Certificates will be used to
amortize the outstanding balances of the Series 1997-1 Certificates and will
not be available to fund the purchase of new receivables being transferred
from the Company.
In October 1997, the Master Trust issued Series 1997-2 variable funding
certificates which mature in October 2002. The 1997-2 Class A Certificates
provide for a maximum outstanding principal balance of $50.0 million that may
be issued and repaid from time to time in minimum increments of $1.0 million,
bear interest at either a fixed spread over LIBOR or the A-1/P-1 commercial
paper rate plus program and administrative fees. As of February 27, 1999,
$10.7 million was the maximum available to be drawn on the Class A
Certificates. Funding retained the 1997-2 Class B Certificates which are
issued in amounts equal to 11.7% of the corresponding Class A Certificates,
are non-interest bearing and are subordinated to the Class A Certificates.
Funding has the right to sell in the future all or part of the Class B
Certificates, which would then bear interest at a rate determined at that
time. Funding may increase or decrease the amount outstanding of the Class A
Certificates on any day if certain conditions are met. As of February 27,
1999, no amounts were outstanding related to the Class A Certificates.
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities." This
statement provides guidance for distinguishing transfers of financial assets
(securitizations) that are sales from transfers that are secured borrowings
occurring after December 31, 1996. The Company's securitization, as
discussed above, was accounted for as a sale in accordance with SFAS No. 125.
As a result of the sale, the Company reversed its allowance for doubtful
accounts and wrote off all unamortized account origination costs. Costs of
completing the transaction were charged against income. The sale had no
material impact on net income in fiscal 1997 and the Company expects no
material impact in future years, although the precise amounts will be
dependent on a number of factors such as interest rates and levels of
securitization.
NOTE 3 - PROPERTIES
Properties are summarized as follows at February 27, 1999 and February
28, 1998 (in thousands):
1999 1998
-------- --------
Land $ 31,620 $ 42,445
Buildings 67,253 76,586
Equipment, furniture and fixtures 166,460 129,800
Leasehold interests and improvements 143,817 122,741
Construction in progress 336 806
-------- --------
409,486 372,378
Less accumulated depreciation and
amortization 183,224 156,048
-------- --------
Properties, net $226,262 $216,330
======== ========
NOTE 4 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES/OTHER NON-CURRENT
LIABILITIES
The following is a summary of accounts payable and accrued liabilities
and other non-current liabilities at February 27, 1999 and February 28, 1998
(in thousands):
1999 1998
-------- --------
Trade accounts payable $ 52,231 $ 49,990
Accrued payroll and other employee-related
liabilities 26,345 27,194
Accrued taxes, other than income 10,267 9,430
Gift certificates and merchandise credits
outstanding 12,406 11,276
Accrued income taxes payable 9,793 947
Other 18,440 20,759
-------- --------
Accounts payable and accrued liabilities $129,482 $119,596
======== ========
Accrued average rent $ 15,269 $ 14,511
Other 8,988 9,697
-------- --------
Other non-current liabilities $ 24,257 $ 24,208
======== ========
NOTE 5 - LONG-TERM DEBT AND AVAILABLE CREDIT
Long-term debt is summarized as follows (in thousands):
1999 1998
-------- --------
Industrial revenue bonds $25,000 $ 25,000
5 3/4% convertible subordinated notes 67,802 86,242
Other 3,556 5,633
------- --------
96,358 116,875
Less - portion due within one year 350 1,994
------- --------
$96,008 $114,881
======== ========
In fiscal 1987, the Company entered into industrial revenue development
bond loan agreements aggregating $25 million which mature in the year 2026.
Proceeds were used to construct three warehouse distribution facilities.
These bonds are seven-day lower floater put bonds, and interest rates float
with market rates for similar tax-exempt debt issues. The Company's weighted
average interest rate was 4.9% and 5.2% for fiscal 1999 and 1998,
respectively. Interest is payable monthly.
In September 1996, the Company issued $86.3 million principal amount of
5 3/4% convertible subordinated notes due October 2003. The notes are
convertible at any time prior to maturity, unless previously redeemed or
repurchased, into shares of common stock of the Company at a conversion price
of $8.22 per share (adjusted for the three for two stock splits, effected in
the form of stock dividends, distributed July 29, 1998 and July 30, 1997).
The Company may redeem the notes, in whole or in part, on or after October 2,
1999, at redemption prices (expressed as a percentage of principal amount)
ranging from 103% to 100% in the last year. In the event of a change of
control, holders of these notes may, at their option, require the Company to
repurchase all or any portion of the principal amount. During fiscal 1999,
the Company purchased and retired $18.3 million principal amount of these
notes at an average price of 99.8% of par. Interest on the notes is payable
semiannually on April 1 and October 1 of each year.
Long-term debt matures as follows, assuming no conversion or redemption
of the convertible subordinated notes (in thousands):
Fiscal 2000 $ 350
2001 --
2002 3,206
2003 --
2004 67,802
Thereafter 25,000
-------
$96,358
=======
In November 1998, the Company replaced its three-year, $65 million
competitive advance and revolving credit facility with a five-year $125
million unsecured credit facility. The interest rate on borrowings is
determined based upon a spread to LIBOR that varies depending upon either the
Company's senior debt rating or leverage ratio. At fiscal 1999 year-end, all
of the new credit facility was available.
The Company has other lines of credit which aggregate approximately
$179.0 million. The lines may be used for short-term working capital
requirements and/or merchandise letters of credit. At fiscal 1999 year-end,
approximately $74.0 million had been utilized for letters of credit, leaving
$105.0 million of available lines of credit. The weighted average interest
rate on short-term working capital loans outstanding was 6.0% for fiscal
1999. The Company had no short-term working capital loans during fiscal
1998.
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 shareholders and purchases
of treasury stock.
NOTE 6 - FAIR VALUE OF FINANCIAL INSTRUMENTS
As of February 27, 1999 and February 28, 1998, the fair values of the
5 3/4% convertible notes were $81.7 million and $193.9 million, respectively,
compared to the recorded values of $67.8 million and $86.2 million,
respectively. The fair value of these debentures was estimated based on the
quoted market values as of February 27, 1999 and February 28, 1998 for the
debentures. There are no other significant assets or liabilities with a fair
value different from the recorded value.
At February 27, 1999, the Company had approximately $5.2 million of
forward exchange contracts outstanding with negligible fair values and with
maturities ranging from one to six months.
NOTE 7 - EMPLOYEE BENEFIT PLANS
In 1986, the Company adopted a qualified, defined contribution employee
retirement plan. All full- and part-time personnel who are at least 21 years
old, have been employed for a minimum of 12 months and have worked 1,000
hours in the preceding twelve months are eligible to participate in the plan.
Employees contributing from 1% to 5% of their compensation receive matching
Company contributions of up to 3%. Company contributions to the plan were
$1,653,000, $1,573,000 and $1,459,000 in fiscal 1999, 1998 and 1997,
respectively.
In addition, a non-qualified retirement savings plan is available for
the purpose of providing deferred compensation for certain employees whose
benefits under the qualified plan are limited under Section 401(k) of the
Internal Revenue Code. The Company's expense for this non-qualified plan was
not significant for fiscal 1999, 1998 and 1997.
The Company maintains supplemental retirement plans ("the Plans") for
certain of its executive officers. The Plans provide that upon death,
disability or reaching retirement age, a participant will receive benefits
based on highest compensation and years of service. The Company recorded
expenses related to the Plans of $1,633,000, $1,185,000 and $1,006,000 in
fiscal 1999, 1998 and 1997, respectively.
NOTE 8 - MATTERS CONCERNING SHAREHOLDERS' EQUITY
Stock splits - On July 29, 1998 and July 30, 1997, the Company
distributed 32,866,000 and 22,541,000 common shares, respectively, pursuant
to the three for two stock splits, effected in the form of 50% common stock
dividends, to shareholders of record on July 15, 1998 and July 16, 1997,
respectively.
Stock purchase plan - Substantially all employees and Directors are
eligible to participate in the Pier 1 Imports, Inc. Stock Purchase Plan under
which the Company's common stock is purchased on behalf of employees at
market prices through regular payroll deductions. Each employee participant
may contribute up to 10% of the eligible portions of compensation and
Directors may contribute part or all of their directors' fees. The Company
contributes from 10% to 100% of the participants' contributions, depending
upon length of participation and date of entry into the Plan. Company
contributions to the Plan were $1,032,000, $1,037,000 and $888,000 in fiscal
years 1999, 1998 and 1997, respectively.
Restricted stock grant plans - In fiscal 1998 and 1997, the Company
issued 238,500 shares and 21,495 shares, respectively, of its common stock to
key officers pursuant to a Management Restricted Stock Plan which provides
for the issuance of up to 415,600 shares. The restricted stock grants will
vest over a four-to-ten year period of continued employment. The fair value
at the date of grant of these restricted stock shares is being expensed over
the aforementioned specified vesting period. The fair values at the dates of
grant of the restricted shares granted in fiscal 1998 and 1997 were
$3,000,000 and $144,000, respectively. Shares not vested are returned to the
Plan if employment is terminated for any reason. To date, 23,934 shares have
been returned to the Plan.
In 1991, the Company issued 726,804 shares of its common stock to key
officers pursuant to a Restricted Stock Grant Plan which provides for
issuance of up to 1,037,214 shares. These shares vest and the fair value at
the date of grant is expensed over a ten year period of continued employment.
Unvested shares are returned to the Plan if employment is terminated for any
reason. To date, 407,742 shares have been returned to the Plan.
Total compensation expense for the restricted stock grant plans was
$1,759,000, $943,000 and $321,000 for fiscal 1999, 1998 and 1997,
respectively.
Stock option plans - In June 1989, the Company adopted two stock option
plans, the 1989 Employee Stock Option Plan ("Employee Plan") and the 1989
Non-Employee Director Stock Option Plan ("Director Plan"). Under the
Employee Plan, options have been granted at the fair market value of shares
on the date of grant and may be granted to qualify as Incentive Stock Options
under Section 422 of the Internal Revenue Code or as non-qualified options.
Under the Director Plan, non-qualified options covering 6,750 shares are
granted once each year to each non-employee director. The Company may grant
options covering up to 5,950,224 shares of the Company's common stock under
the Employee Plan and up to 294,080 shares under the Director Plan. Both
plans are subject to adjustments for stock dividends and certain other
changes to the Company's capitalization.
A summary of stock option transactions related to the stock option
plans during the three fiscal years ended February 27, 1999 is as follows
(the summary reflects the effect of the three for two stock splits, effected
in the form of stock dividends, distributed July 29, 1998 and July 30, 1997):
<PAGE>
</TABLE>
<TABLE>
Weighted Exercisable Shares
Average Weighted Average -----------------------------
Exercise Fair Value at Number of Weighted Average
Shares Price Date of Grant Shares Exercise Price
--------- -------- ---------------- --------- ----------------
<S> <C> <C> <C> <C> <C>
Outstanding at March 2, 1996 3,168,335 $ 3.42 1,587,243 $2.81
Options granted 1,872,475 7.35 $2.85
Options exercised (709,578) 2.29
Options cancelled or expired (19,620) 3.54
---------
Outstanding at March 1, 1997 4,311,612 5.31 1,357,357 3.55
Options granted 886,500 12.55 5.18
Options exercised (939,415) 3.93
Options cancelled or expired (269,748) 5.76
---------
Outstanding at February 28, 1998 3,988,949 7.21 1,350,332 5.16
Options granted 1,550,500 13.27 5.38
Options exercised (662,889) 6.11
Options cancelled or expired (278,730) 10.72
---------
Outstanding at February 27, 1999 4,597,830 9.20 1,810,819 6.66
=========
For shares outstanding at February 27, 1999:
Weighted
Average Weighted Average Shares Weighted Average
Total Exercise Remaining Currently Exercise Price -
Ranges of Exercise Prices Shares Price Contractual Life Exercisable Exercisable Shares
------------------------- --------- -------- ---------------- ----------- ------------------
<S> <C> <C> <C> <C> <C>
$ 1.81 - $ 4.61 1,156,613 $ 3.80 5.48 855,626 $ 3.67
$ 6.67 - $ 8.50 1,947,217 7.80 8.47 613,943 7.34
$11.54 - $13.13 840,750 12.78 8.81 312,750 12.71
$15.33 - $18.50 653,250 18.34 9.08 28,500 15.41
<PAGE>
At February 27, 1999 and February 28, 1998, outstanding options covering
1,810,819 and 1,350,331 shares were exercisable and 415,440 and 1,687,209
shares were available for grant, respectively.
The Company accounts for its stock options using the intrinsic value-
based method of accounting prescribed by APB Opinion No. 25 but is required
to disclose the pro forma effect on net income and earnings per share as if
the options were accounted for using a fair value-based method of accounting.
The fair values for options issued in fiscal 1999, 1998 and 1997 have been
estimated as of the date of grant using the Black-Scholes or equivalent
option pricing model with the following weighted-average assumptions for
1999, 1998 and 1997, respectively: risk-free interest rates of 5.14%, 5.76%
and 6.14%, expected volatility factors of .3655, .3465 and .3012, expected
dividend yields of 1.0%, 0.8% and 0.8% and weighted average expected lives of
six years from date of grant to date of exercise for all options. For
purposes of computing pro forma net income and earnings per share, the fair
value of the stock options is amortized on a straight-line basis as
compensation expense over the vesting periods of the options. The pro forma
effects on net income and earnings per share are as follows (in thousands of
dollars except for per share information):
1999 1998 1997
------- ------- -------
Pro forma net income $77,891 $76,995 $43,710
======= ======= =======
Pro forma basic earnings per share $.79 $.76 $.45
==== ==== ====
Pro forma diluted earnings per share $.74 $.71 $.43
==== ==== ====
Option valuation models are used in estimating the fair value of traded
options that have no vesting restrictions and are fully transferable. In
addition, option valuation models require the input of highly subjective
assumptions, including the expected stock price volatility and the average
life of options. Because the Company's stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its stock options. In
addition, the pro forma net income and earnings per share amounts shown above
for fiscal 1999, 1998 and 1997 do not include the effect of any grants made
prior to fiscal 1996.
Share purchase rights plan - On December 9, 1994, the Board of Directors
adopted a Share Purchase Rights Plan and declared a dividend of one common
stock purchase right (a "Right") payable on each outstanding share of the
Company's common stock on December 21, 1994, and authorized the issuance of
Rights for subsequently issued shares of common stock. The Rights, which
will expire on December 21, 2004, are initially not exercisable, and until
becoming exercisable will trade only with the associated common stock. After
the Rights become exercisable, each Right entitles the holder to purchase at
a specified exercise price one share of common stock. The Rights will become
exercisable after the earlier to occur of (i) 10 days following a public
announcement that a person or group of affiliated or associated persons have
acquired beneficial ownership of 15% or more of the outstanding common stock
or (ii) 10 business days (or such later date as determined by the Board of
Directors) following the commencement of, or announcement of an intention to
make, a tender or exchange offer the consummation of which would result in
beneficial ownership by a person or group of 15% or more of the outstanding
common stock. If the Company were acquired in a merger or other business
combination transaction or 50% or more of its consolidated assets or earning
power were sold, proper provision would be made so that each Right would
entitle its holder to purchase, upon the exercise of the Right at the then
current exercise price, that number of shares of common stock of the
acquiring company having a market value of twice the exercise price of the
Right. If any person or group were to acquire beneficial ownership of 15% or
more of the Company's outstanding common stock, each Right would entitle its
holder (other than such acquiring person whose Rights would become void) to
purchase, upon the exercise of the Right at the then current exercise price,
that number of shares of the Company's common stock having a market value on
the date of such 15% acquisition of twice the exercise price of the Right.
The Board of Directors may at its option, at any time after such 15%
acquisition but prior to the acquisition of more than 50% of the Company's
outstanding common stock, exchange all or part of the then outstanding and
exercisable Rights (other than those held by such acquiring person whose
Rights would become void) for common stock at an exchange rate per Right of
one-half the number of shares of common stock receivable upon exercise of a
Right. The Board of Directors may, at any time prior to such 15%
acquisition, redeem all the Rights at a redemption price of $.01 per Right.
Shares reserved for future issuances - As of February 27, 1999, the
Company has approximately 126,406,000 shares reserved for future issuances
under the stock plans, conversion of the 5 3/4% convertible subordinated
notes due 2003 and the share purchase rights plan.
NOTE 9 - INCOME TAXES
The provision for income taxes, net of income tax benefit for
extraordinary charges in fiscal 1997, consists of (in thousands):
1999 1998 1997
------- ------ ------
Federal:
Current $47,007 $45,603 $24,487
Deferred (2,948) (5,442) (320)
State:
Current 5,112 5,705 4,879
Deferred (378) (699) (40)
Foreign:
Current 460 797 376
------- ------- -------
$49,253 $45,964 $29,382
======= ======= =======
Deferred tax assets (liabilities) at February 27, 1999 and February 28,
1998 are comprised of the following (in thousands):
1999 1998
------- -------
Deferred tax assets:
Capital loss carryforwards $ 1,248 $ 1,248
Inventory 3,491 4,601
Deferred compensation 5,661 7,135
Accrued average rent 6,922 6,694
Losses associated with trading activities -- 4,014
Losses on The Pier Retail Group Ltd. 2,093 2,759
Self insurance reserves 3,841 3,178
Other 2,351 1,990
-------- --------
25,607 31,619
Valuation allowance (2,090) (6,199)
-------- --------
Total deferred tax assets 23,517 25,420
-------- --------
Deferred tax liabilities:
Fixed assets, net (223) (5,453)
------- -------
Total deferred tax liabilities (223) (5,453)
------- -------
Net deferred tax assets $23,294 $19,967
======= =======
At February 27, 1999, the Company had net capital loss carryforwards of
approximately $3.2 million for income tax purposes that expire in the year
2000. For financial reporting purposes, a valuation allowance has been
established to partially offset the deferred tax assets relating to the
losses of The Pier and the capital loss carryforward.
The Company has settled and closed all Internal Revenue Service ("IRS")
examinations of the Company's tax returns for all years through fiscal 1995.
Federal income tax returns for fiscal years 1997 and 1996 are currently under
examination. The Company does not anticipate adjustments, if any, arising
from this examination to have a material impact on the Company's results of
operations.
The difference between income taxes at the statutory federal income tax
rate of 35% in fiscal 1999, 1998 and 1997, and income tax reported in the
consolidated statement of operations is as follows (in thousands):
1999 1998 1997
------- ------- -------
Tax at statutory federal tax rate $45,364 $43,404 $25,714
Valuation allowance -- (3,595) 1,162
State income taxes, net of federal
benefit 5,832 5,580 3,300
Work opportunity tax credit, foreign
tax credit and R&E credit (327) (541) --
Net foreign income taxed at lower
rates (517) (590) (69)
Other, net (1,099) 1,706 (725)
------- ------- -------
$49,253 $45,964 $29,382
======= ======= =======
NOTE 10 - COMMITMENTS AND CONTINGENCIES
Leases - The Company leases certain property consisting principally of
retail stores, warehouses and material handling and computer equipment under
leases expiring through the year 2015. Most retail store locations are
leased for initial terms of 10 to 15 years with varying renewal options and
rent escalation clauses. Certain leases provide for additional rental
payments based on a percentage of sales in excess of a specified base. The
Company's lease obligations are considered operating leases, and all payments
are reflected in the accompanying consolidated statement of operations.
During fiscal 1999, the Company sold certain store properties for $31.0
million. These stores were leased back from unaffiliated third parties over
periods of 10 to 15 years. The resulting leases are being accounted for as
operating leases. The Company deferred gains of $1.3 million on the sale-
leaseback transaction which are being amortized over the lives of the leases.
Future minimum lease commitments of these operating leases are included in
the summary below of the Company's operating leases.
At February 27, 1999, the Company had the following minimum lease
commitments in the years indicated (in thousands):
Operating
Fiscal Year Leases
----------- ---------
2000 $117,856
2001 109,964
2002 98,049
2003 88,670
2004 82,090
Thereafter 304,778
--------
Total lease commitments $801,407
========
Present value of total operating
lease commitments at 10.5% $465,298
========
Rental expense incurred was $114,966,000, $104,797,000 and $102,409,000,
including contingent rentals of $884,000, $677,000 and $463,000, based upon a
percentage of sales, and net of sublease incomes totalling $1,511,000,
$1,821,000 and $1,500,000, in fiscal 1999, 1998 and 1997, respectively.
Legal matters - In addition to the legal matters discussed in Note 12,
there are various other claims, lawsuits, investigations and pending actions
against the Company and its subsidiaries incident to the operations of its
business. Liability, if any, associated with these other matters is not
determinable at February 27, 1999; however, the Company considers them to be
ordinary and routine in nature. The Company maintains liability insurance
against most of these claims. While certain of the lawsuits involve
substantial amounts, it is the opinion of management, after consultation with
counsel, that the ultimate resolution of such litigation will not have a
material adverse effect on the Company's financial position, results of
operations or liquidity.
NOTE 11 - SUPPLEMENTAL CASH FLOW INFORMATION
The following is supplemental cash flow information (in thousands):
1999 1998 1997
------- ------- -------
Cash paid during the year for:
Interest $ 7,929 $ 8,344 $10,891
Income taxes 43,084 40,783 34,810
NOTE 12 - TRADING ACTIVITIES
In late December 1995, the Company was made aware of losses totaling
$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. During fiscal 1998, the
Company settled all litigation related to the losses associated with the
trading activities. As a part of the settlement agreements with all parties,
the Company received settlements totaling $11.0 million, of which $1.9
million was considered a reimbursement of legal fees associated with the
recovery of these losses. As the Company had not recorded any tax benefit on
the previously reported net losses associated with trading activities, no tax
expense was provided on the recovery of these losses.
NOTE 13 - RELATED PARTIES
In March 1993, the Company invested $3.0 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, who was a director of the Company until March
1999. Whiffletree Corporation is an affiliate of Palisade Capital
Securities, L.L.C., of which Martin L. Berman is currently Chief Executive
Officer. In April 1996, the Company divested its interest in Whiffletree
Partners, L.P. for net proceeds of approximately $4.7 million after deducting
fees of $0.3 million.
NOTE 14 - SELECTED QUARTERLY FINANCIAL DATA (Unaudited)
Summarized quarterly financial data (in thousands except per share
amounts) for the years ended February 27, 1999 and February 28, 1998 are set
forth below:
Three Months Ended
--------------------------------------
Fiscal 1999 5/30/98 8/29/98 11/28/98 2/27/99
- ----------- -------- -------- -------- --------
Net sales $250,508 $281,489 $274,618 $331,975
Gross profit 109,687 118,068 124,094 148,568
Net income 15,501 17,461 19,097 28,298
Basic earnings per share(1) $.15 $.18 $.20 $.29
Diluted earnings per share(1) $.14 $.17 $.19 $.27
Three Months Ended
--------------------------------------
Fiscal 1998 5/31/97 8/30/97 11/29/97 2/28/98
- ----------- -------- -------- -------- --------
Net sales $229,243 $258,105 $262,751 $325,306
Gross profit 99,156 106,663 115,778 139,871
Net income(2) 12,639 22,042 16,795 26,571
Basic earnings per share(1)(2) $.13 $.22 $.17 $.26
Diluted earnings per share(1)(2) $.12 $.20 $.16 $.24
___________________
(1) Reflects the effect of the three for two stock splits, effected in the
form of stock dividends, distributed July 29, 1998 and July 30, 1997.
(2) Fiscal 1998 second and fourth quarters' net income includes net
recoveries of losses from trading activities of $6,355 and $2,746,
respectively.
<PAGE>
MARKET PRICE AND DIVIDEND INFORMATION
Market Price
--------------------- Cash Dividends
Fiscal 1999 High Low Per Share(2)
- ----------- -------- -------- --------------
First Quarter(1) 20 5/8 15 15/64 $.03
Second Quarter(1) 16 43/64 10 1/2 .03
Third Quarter 10 13/16 6 5/16 .03
Fourth Quarter 11 11/16 8 1/16 .03
Fiscal 1998(1)
- -----------
First Quarter 9 15/16 7 25/64 $.015
Second Quarter 13 11/64 9 23/32 .025
Third Quarter 14 59/64 11 .025
Fourth Quarter 18 5/8 12 53/64 .025
(1) Market prices and cash dividends have been adjusted to reflect the effect
of the three for two stock splits, effected in the form of stock dividends,
distributed July 29, 1998 and July 30, 1997.
(2) For restrictions on the payments of dividends, see Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources.
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors of Pier 1 Imports, Inc.
We have audited the accompanying consolidated balance sheets of Pier 1
Imports, Inc. as of February 27, 1999 and February 28, 1998, and the related
consolidated statements of operations, shareholders' equity, and cash flows
for each of the three years in the period ended February 27, 1999. 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 in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Pier
1 Imports, Inc. at February 27, 1999 and February 28, 1998, and the
consolidated results of its operations and its cash flows for each of the
three years in the period ended February 27, 1999, in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Fort Worth, Texas
April 12, 1999
</TABLE>
EXHIBIT 21
ROSTER OF SUBSIDIARIES OF THE COMPANY
-------------------------------------
Pier 1 Assets, Inc., a Delaware corporation
Pier 1 Licensing, Inc., a Delaware corporation
Pier 1 Imports (U.S.), Inc., a Delaware corporation
Pier 1 Funding, Inc., a Delaware corporation
Pier Lease, Inc., a Delaware corporation
Pier-SNG, Inc., a Delaware corporation
PIR Trading, Inc., a Delaware corporation
Pier International Limited, a Hong Kong private company
Pier Alliance Ltd., a Bermuda company
The Pier Retail Group Limited, a United Kingdom company
The Pier (Retail) Limited, a United Kingdom company
Pier Direct Limited, a United Kingdom company
Pier-FTW, Inc., a Delaware corporation
Pacific Industrial Properties, Inc., a Texas corporation
Pier Group, Inc., a Delaware corporation
Pier 1 Holdings, Inc., a Delaware corporation
Pier 1 Services Company, a Delaware business trust
Pier 1 National Bank, a national banking association
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
-------------------------------
We consent to the incorporation by reference in this Annual Report (Form 10-
K) of Pier 1 Imports, Inc. of our report dated April 12, 1999, included in
the 1999 Annual Report to Shareholders of Pier 1 Imports, Inc.
We consent to the incorporation by reference in the Registration Statements
on Form S-8 (No. 33-61475, No. 333-13491 and No. 33-32166) and in the
Registration Statements on Form S-3 (No. 33-49356 and No. 333-61155) of our
reports dated April 12, 1999, with respect to the consolidated financial
statements and schedule of Pier 1 Imports, Inc. included or incorporated by
reference in the Annual Report (Form 10-K) for the year ended February 27,
1999.
/s/ Ernst & Young LLP
Fort Worth, Texas
May 21, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED STATEMENT OF OPERATIONS AND BALANCE SHEET AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> FEB-27-1999
<PERIOD-END> FEB-27-1999
<CASH> 41,945
<SECURITIES> 0
<RECEIVABLES> 9,290
<ALLOWANCES> 230
<INVENTORY> 258,773
<CURRENT-ASSETS> 381,943
<PP&E> 409,487
<DEPRECIATION> 183,225
<TOTAL-ASSETS> 653,991
<CURRENT-LIABILITIES> 129,832
<BONDS> 96,008
<COMMON> 100,779
0
0
<OTHER-SE> 303,115
<TOTAL-LIABILITY-AND-EQUITY> 653,991
<SALES> 1,138,590
<TOTAL-REVENUES> 1,138,590
<CGS> 638,173
<TOTAL-COSTS> 638,173
<OTHER-EXPENSES> 31,130
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,916
<INCOME-PRETAX> 129,610
<INCOME-TAX> 49,253
<INCOME-CONTINUING> 80,357
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 80,357
<EPS-BASIC> .82 <F1>
<EPS-DILUTED> .77 <F1>
<FN>
<F1> Shares outstanding have been adjusted to reflect the three for two stock
split, effected in the form of a stock dividend, distributed July 29, 1998.
Prior financial data schedules have not been restated to reflect the stock
split.
</FN>
</TABLE>
