Item 1. Business.
(a) General Development of Business.
From fiscal 1988 through fiscal 1994, Registrant, through its subsidiary, Pier 1 Imports (U.S.), Inc. ("Pier 1"), expanded its specialty retail operations from 350 retail stores to 636 stores. In fiscal year 1994, Registrant continued to execute its expansion plan by opening 48 new Pier 1 Imports stores, including one in Puerto Rico, and closed 17 stores. The rate of expansion for the fiscal year doubled the previous fiscal year rate when Registrant opened 26 new Pier 1 Imports stores. Throughout the fiscal year Registrant continued its focus on cost efficiencies and expense controls. Subject to changes in the retail environment, availability of suitable store sites and adequate financing, Registrant plans to open 45 - 50 new Pier 1 Imports stores in fiscal year 1995.
Set forth below is a list by city of Pier 1-operated stores opened in fiscal 1994:
Billings, MT 1 Lancaster, OH 1 Boulder, CO 1 Las Vegas, NV 1 Camp Hill, PA 1 Lawrenceville, NJ 1 Cary, NC 1 Lima, OH 1 Cedar Rapids, IA 1 Lynchburg, VA 1 Cheyenne, WY 1 Mankato, MN 1 Chula Vista, CA 1 McAllen, TX 1 Clarksville, TN 1 Montgomery, AL 1 Colonial Heights, VA 1 New York, NY 1 Columbus, OH 1 Niles, OH 1 Daytona Beach, FL 1 Pacific Grove, CA 1 Elyria, OH 1 Palm Desert, CA 1 Fairlawn, OH 1 Palmdale, CA 1 Fort Gratiot, MI 1 Pineville, NC 1 Fort Myers, FL 1 Poughkeepsie, NY 1 Fredericksburg, VA 1 Rapid City, SD 1 Grand Forks, ND 1 Raynham, MA 1 Greenville, NC 1 Roanoke, VA 1 Hatillo, PR 1 Salisbury, MD 1 Hickory, NC 1 Vancouver, WA 1 Houston, TX 1 Victor, NY 1 Huntsville, AL 1 Watertown, NY 1 Johnstown, PA 1 Wichita Falls, TX 1 Joplin, MO 1 Wilmington, NC 1
Pier 1 maintains regional distribution center facilities in or near Baltimore, Maryland; Columbus, Ohio; Chicago, Illinois; Fort Worth, Texas; Los Angeles, California; Savannah, Georgia; and Montreal, Canada.
Registrant has provided a special after-tax reserve of $16,507,000 to provide for the closing of approximately 50 unprofitable stores and to adjust the carrying value of the Registrant's holdings in General Host Corporation ("General Host") common stock. The store closing provision reflects anticipated costs associated with closing certain under performing stores including estimated costs relating to leases, fixed assets, relocation, inventory liquidation and losses from operations during interim period before closings. The adjustment to the carrying value of General Host common stock is Registrant's estimate of the portion of the decline in the market value that is other than temporary.
In fiscal 1993, the Registrant invested in preference stock of The Pier Retail Group Limited ("The Pier") located in the United Kingdom. As of April 26, 1994, investment in and loans to The Pier aggregated $3.4 million, with additional debt guarantees of approximately $4 million. The Pier is a ten- store retail operation that offers decorative home furnishings and related items in a store setting similar to that operated by Pier 1.
During fiscal 1994, Pier 1 became active in an arrangement to supply Sears de Mexico with Pier 1 merchandise to be sold in certain Sears stores throughout Mexico. Presently two Sears stores in Mexico City offer Pier 1 merchandise.
In April 1993, Registrant sold its 49.5% interest in Sunbelt Nursery Group, Inc. ("Sunbelt") to General Host in exchange for 1,940,000 shares of General Host common stock. In connection with Registrant's sale, Registrant agreed to make available up to $25 million of properties for lease (the "Lease Commitment") to Sunbelt and to provide Sunbelt a $12 million credit facility (the "Credit Facility") either in guarantees of Sunbelt indebtedness or direct loans until April 28, 1994. Sunbelt's repayment obligations under this agreement are secured by General Host's pledge of 4.2 million shares of Sunbelt common stock. Additionally, Registrant guarantees approximately $4.5 million of Sunbelt's lease obligations. Currently, $12 million in loans are outstanding under the Credit Facility and $23 million of properties have been leased to Sunbelt under the Lease Commitment. These leases are required to be refinanced by Sunbelt from September 1994 to October 1995. If Sunbelt defaults on refinancing these leases as the terms expire, Registrant will be required to obtain other financing for such leases.
During April 1994, Sunbelt sought an extension for repayment of loans under the Credit Facility, and on April 25, 1994, Registrant and Sunbelt entered into an Extension Agreement to extend the maturity of the Credit Facility from April 28, 1994, to June 30, 1994. Registrant granted the extension to allow Sunbelt additional time to obtain new financing to replace the Credit Facility. If Sunbelt is unable to refinance the debt prior to June 30, 1994, Sunbelt has reported that it would be unable to repay the debt at maturity. In such event, Sunbelt would be in default under the Credit Facility as well as the Lease Commitment. Sunbelt has also reported that such a default could force it to consider legal proceedings to restructure its obligations.
In May 1994, Registrant waived Sunbelt's breach of certain covenants relating to Sunbelt's failure to (i) timely deliver its annual report to Registrant, (ii) satisfy the required current ratio, and (iii) timely provide notice of such breaches. The waiver expires on June 30, 1994. In connection with such waiver, Sunbelt agreed to not borrow additional funds under the Credit Facility or Lease Commitment in excess of the amount outstanding at the time the waiver was consummated.
(b) Financial Information About Industry Segments.
Registrant operates in one business segment consisting of the retail sale of decorative home furnishings and related items.
Financial information with respect to Registrant's business is found in Registrant's Consolidated Financial Statements which are set forth in Item 8 herein.
(c) Narrative Description of Business.
The specialty retail operations of Pier 1 consist of a chain of retail stores operating in the United States, Canada, and Puerto Rico under the name "Pier 1 Imports" and selling a wide variety of furniture, decorative home furnishings, dining and kitchen goods, accessories and other specialty items for the home, and distinctive casual clothing and fashion accessories.
On February 26, 1994, Pier 1 operated 606 stores in 46 states of the United States, the District of Columbia and Puerto Rico, and 30 stores in four Canadian provinces as well as additional international operations in England and Mexico. It also had franchised 36 stores in 24 states. The company-operated Pier 1 stores average approximately 7,000 square feet in size of retail selling space, and are generally located in strip shopping centers or are freestanding units and are predominately located near or in suburbs of metropolitan areas. During fiscal 1994, net sales of Pier 1 totalled $685.4 million. Pier 1 stores have their highest sales volumes during November and December, reflecting the Christmas selling season.
Pier 1 offers a diverse selection of products consisting of over 5,000 items. While the broad categories of Pier 1's merchandise remain constant, individual items within these product groupings change frequently in order to meet the demands of customers. The principal categories of merchandise include the following:
FURNITURE - This product group consists of furniture sold to be used on patios and in sun rooms, living, dining and kitchen areas, and constituted approximately 26.8%, 26.3% and 24.6% of the total retail sales of Pier 1 in fiscal years 1994, 1993 and 1992, respectively. These goods are mainly imported from Taiwan, Hong Kong, China, the Philippines and Indonesia, and are handcrafted from natural materials, including rattan, buri, willow, pine, beech, rubber, and selected hardwoods and have either natural or painted finishes. This product group also includes metal furniture.
DECORATIVE HOME FURNISHINGS - This product group constituted the broadest category of merchandise in Pier 1's sales mix and contributed approximately 24.4%, 23.7% and 23.9% to Pier 1's total retail sales in fiscal years 1994, 1993 and 1992, respectively. These items are imported from approximately 40 countries and include brass, marble, and wood items, as well as lamps, vases, dried and silk flowers, baskets, wall decorations and numerous other decorative items, practically all of which are handcrafted from natural materials.
DINING AND KITCHEN GOODS - This product group is imported from India, the Far East and Europe and include ceramics, dinnerware and other functional and decorative items. These goods accounted for approximately 14.1%, 14.1% and 13.8% of the total retail sales of Pier 1 in fiscal years 1994, 1993 and 1992, respectively.
TEXTILES - This product group consists of linen items, padding, custom order fabrics as well as window coverings, bedspreads, and pillows of which the majority of these items are produced from original designs created both domestically and in India. These goods accounted for approximately 13.5%, 13.9% and 14.9% of the total retail sales of Pier 1 in fiscal years 1994, 1993 and 1992, respectively.
CLOTHING, JEWELRY AND FASHION ACCESSORIES - This product group is imported from India, Greece and Indonesia and accounted for approximately 12.1%, 14.4% and 15.4% of the total retail sales of Pier 1 in fiscal years 1994, 1993 and 1992 respectively.
Merchandise offered for sale in Pier 1's stores largely consists of items which require a significant degree of handcraftsmanship. A majority of the items is imported directly by Pier 1 from foreign suppliers. Although Pier 1 is not dependent on any particular supplier, it has enjoyed long-standing relationships with many vendors. During fiscal 1994, Pier 1 imported approximately 29% of its purchases from China, 19% from India, and another 31% was imported from Indonesia, Japan, Thailand, the Philippines, and Italy. The remaining 21% was imported from various Asian, European, Central American, South American and African countries or obtained from United States manufacturers, wholesalers or importers. In selecting the source of a product, Pier 1 considers quality, dependability of delivery and cost. For the most part, the imported merchandise is handcrafted in cottage industries and small factories.
Pier 1 currently operates 7 regional distribution centers located in or near Baltimore, Maryland; Los Angeles, California; Fort Worth, Texas; Chicago, Illinois; Savannah, Georgia; Columbus, Ohio, and Montreal, Canada. Imported merchandise and a portion of domestic purchases are delivered to the distribution centers, unpacked, and made available for shipment to the various stores in the center's region. The merchandise is then distributed to the retail stores by company-operated trucks and contract carriers. Due to the time delays involved in procuring merchandise from foreign suppliers, Pier 1 is required to maintain a significant amount of inventory in order to be assured of a sufficient supply of products to its customers. A stock of regularly reordered items and temporary inventory surpluses have, from time to time, been carried at the distribution centers.
Pier 1 stores have no direct national competitors. The major competition arises at a local level from other retailers offering similar lines of merchandise, such as small specialty sections of large department stores, home furnishing stores, small specialty import stores and discount stores. Registrant believes Pier 1 enjoys a competitive edge over these stores, due to its greater name awareness and the extent and variety of the merchandise offered at Pier 1 stores. While other competing stores may offer a few items that change somewhat infrequently, Pier 1 offers over 5,000 items of which approximately forty percent (40%), change each year.
As a retailer of imported merchandise, Pier 1 is subject to certain risks which typically do not affect retailers of domestically produced merchandise, including the need to order merchandise from four to twelve months in advance of delivery and to pay for such merchandise at such time as it is loaded for transport to designated U.S. or Canadian destinations. Additionally, dock strikes, fluctuations in currency values and monetary 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 Pier 1.
In 1988, the Omnibus Trade and Competitiveness Act was signed into law. This legislation was enacted in response to a perceived decline in U.S. global competitiveness and the continuing presence of unfair trade practices that limit U.S. exporters' access to foreign markets. Under the law, unfair trade practices of countries around the world may be investigated by the United States Trade Representative and such investigations may lead to sanctions which could take the form of quotas or increased duties on imports into the U.S.
On March 3, 1994, President Clinton signed an executive order re- instituting a trade provision known as Super 301 which is designed to allow negotiations before countries are designated as priority foreign countries. Priority foreign countries are the nations whose trade practices, if corrected, would provide the greatest potential for expansion of U.S. exports. The announcement did not designate any country or any practice. The current renewal of Super 301 will expire after two years. The United States may employ other measures to implement its international trade policies and objectives, such as the withdrawal, selectively or entirely, of most favored nation status ("MFN") to countries around the world which would cause import duties to increase. Presently, the President is considering the MFN status of the Peoples Republic of China, which, if lost entirely, would cause Registrant to source affected goods from other countries. Any type of sanction is likely to increase Registrant's import costs or limit the availability of products purchased from sanctioned countries. In such event, Registrant will seek similar products from other countries.
On April 14, 1994, the United States and more than 100 other countries reached an agreement to reduce, over time, tariff and non-tariff barriers to world trade in goods and services and to establish a new world trade organization to replace the General Agreement on Tariffs and Trade next year. The United States must have congressional approval to be bound by the terms of the agreement which was the culmination of seven years of negotiations. Any agreement which may reduce tariff and non-tariff barriers in international trade is considered beneficial to Registrant's business in the United States and around the world.
Pier 1 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.
On May 3, 1994, Pier 1 employed approximately 7,850 persons: 500 were full time employees at Pier 1's home office, 3,900 were part time employees in its retail stores and distribution centers and 3,450 were full time employees in the stores and distribution centers.
Registrant maintains one wholly owned foreign subsidiary, which is incorporated under the laws of Hong Kong. The foreign subsidiary manages certain merchandise procurement, export and financial service functions for Pier 1.
Item 2.
Item 2. Properties.
(a) Properties of Registrant.
As a holding company, Registrant does not own any physical property materially important to the conduct of its business operations. Registrant's home office in Fort Worth, Texas is leased by Pier 1.
(b) Properties of Pier 1.
Pier 1 leases certain properties consisting principally of retail stores, warehouses and office space. In July 1985, Pier 1 entered into a lease agreement which currently provides 128,770 square feet of office space in downtown Fort Worth for Registrant's home office. Most of Pier 1's retail store operations are conducted pursuant to leases which are classified as operating leases, and at February 26, 1994, Pier 1's minimum operating lease commitments for various stores and warehouses aggregated approximately $574 million.
Pier 1 currently owns and leases distribution space of approximately 3 million square feet. Additional space requirements could be accommodated, if necessary, by leasing additional space.
The following table shows the distribution by state of Pier 1 stores operated by Pier 1 as of February 26, 1994, prior to the fiscal 1994 provision to close 50 unprofitable stores:
United States and Puerto Rico
Alabama 4 Nebraska 3 Arizona 8 Nevada 3 Arkansas 2 New Hampshire 3 California 88 New Jersey 17 Colorado 14 New Mexico 2 Connecticut 11 New York 36 Delaware 2 North Carolina 11 District of Columbia 1 North Dakota 3 Florida 37 Ohio 34 Georgia 17 Oklahoma 6 Idaho 1 Oregon 5 Illinois 38 Pennsylvania 21 Indiana 9 Puerto Rico 1 Iowa 3 Rhode Island 2 Kansas 4 South Carolina 5 Kentucky 6 South Dakota 1 Louisiana 9 Tennessee 11 Maryland 16 Texas 49 Massachusetts 19 Utah 4 Michigan 22 Virginia 21 Minnesota 14 Washington 14 Mississippi 2 West Virginia 1 Missouri 12 Wisconsin 12 Montana 1 Wyoming 1
Canada
New Brunswick 1 Nova Scotia 2 Ontario 18 Quebec 9
Warehouse properties that are owned or leased by Pier 1 are as follows:
Owned/Leased Location Approx. Sq. Ft. Facility
Baltimore, Maryland 634,186 sq. ft. Leased Columbus, Ohio 527,127 sq. ft. Leased Chicago, Illinois 297,552 sq. ft. Owned Fort Worth, Texas 454,868 sq. ft. Owned Rancho Cucamonga, California 515,990 sq. ft. Leased Savannah, Georgia 393,216 sq. ft. Owned Montreal, Quebec, Canada 105,489 sq. ft. Leased
Pier 1 participates in a limited partnership to provide for financing and construction of Pier 1 retail stores. As of May 1, 1994, the partnership owned 33 retail store sites that are currently open and operating. The investment by the partnership in land and building approximated $44.3 million as of the end of April 1994.
Registrant has agreements with unaffiliated groups to lease certain stores and distribution center space. These unaffiliated groups are committed to make available up to $101.8 million for development or acquisition of stores leased by Pier 1. Presently, Registrant has used $99.5 million of that availability. Agreements with these groups mature over the next five years, and Registrant is continuously monitoring financial markets to optimize renewal terms. In connection with the financing of 38 stores by these unaffiliated groups, Registrant has guaranteed the residual value of these buildings at approximately $25 million at the end of the lease terms.
Item 3.
Item 3. Legal Proceedings.
There are various claims, lawsuits, investigations and pending actions against Registrant and its subsidiaries incident to the operation of their businesses. Liability, if any, associated with these matters is not determinable at February 26, 1994. 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 Registrant's financial position.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted to a vote of Registrant's security holders during the fourth quarter of Registrant's fiscal year.
Executive Officers of Registrant
CLARK A. JOHNSON, age 63, is Chairman and Chief Executive Officer of Registrant, is a member of the Executive Committee and since March 1983 has been a Director of Registrant. From May 1985 to August 1988, Mr. Johnson was President and Chief Executive Officer of Registrant. He currently serves as a Director of Albertson's, Inc., InterTAN, Inc., The Actava Group Inc., Anacomp, Inc. and Heritage Media Corporation.
MARVIN J. GIROUARD, age 54, is President and Chief Operating Officer of Registrant and has been a Director since August 1988. From May 1985 until August 1988, he served as Senior Vice President - Merchandising of Pier 1 Imports (U.S.), Inc., a wholly owned subsidiary of Registrant. Additionally, he serves as a Director of ENSERCH Corporation.
ROBERT G. HERNDON, age 60, has been Executive Vice President of Registrant since August 1988 and Chief Financial Officer of Registrant since November 1985. He served as Senior Vice President from November 1985 to August 1988. He currently serves as a director of The Leather Factory.
J. RODNEY LAWRENCE, age 48, has been Senior Vice President of Legal Affairs and Secretary of Registrant and Pier 1 since June 1992, and served as Vice President of Legal Affairs and Secretary of Registrant from November 1985 to June 1992.
E. MITCHELL WEATHERLY, age 46, has been Senior Vice President of Human Resources of Registrant since June 1992 and served as Vice President of Human Resources of Registrant from June 1989 and of Pier 1 from August 1985 to June 1992.
JAMES R. TENER, age 45, has been Senior Vice President of Operations of Registrant and Pier 1 since June 1992 and served as Vice President of Operations of Pier 1 from December 1989 to June 1992.
ADRIAN G. LONG, age 54, has been Senior Vice President of Merchandising of Registrant and Pier 1 since June 1992 and served as Vice President of Merchandising of Pier 1 from August 1988 to June 1992.
PHIL E. SCHNEIDER, age 43, has been Senior Vice President of Marketing of Registrant and Pier 1 since May 1993 and served as Vice President of Advertising of Pier 1 from January 1988 to May 1993.
The officers of Registrant, who are appointed by the Board of Directors, hold office until their successors are elected and qualified, or until their earlier death, resignation or removal.
None of the above executive officers has any family relationship with any other of such officers. None of such officers was selected pursuant to any arrangement or understanding between him and any other person.
PART II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
MARKET PRICE AND DIVIDEND INFORMATION
Market Price Cash Dividends Fiscal 1994 High Low Per Share - - ----------- ------ ------ -------------- First Quarter 12 1/2 8 3/8 $0.020 Second Quarter 10 1/8 8 1/4 0.025 Third Quarter 11 1/4 8 1/8 0.025 Fourth Quarter 10 7/8 8 3/8 0.025
Fiscal 1993 - - ----------- First Quarter 11 5/8 8 5/8 $0.015 Second Quarter 9 5/8 6 5/8 0.015 Third Quarter 11 1/2 7 1/8 0.015 Fourth Quarter 13 1/8 10 0.020
Registrant's common stock is traded on the New York Stock Exchange. As of May 4, 1994, there were approximately 16,000 shareholders of Registrant's common stock.
Certain of Registrant's existing loan agreements limit specific payments and distributions, including cash dividends, loans to shareholders and purchases of treasury stock. Generally Registrant may make "restricted payments", as defined in the loan agreements, which include the payment of cash dividends, up to an aggregate maximum of $10 million as of February 26, 1994. Additionally, Registrant is required to maintain various other financial ratios. Registrant's Board of Directors currently expects to pay modest cash dividends in fiscal 1995, but intends to retain most of the future earnings for the expansion of Registrant's business. A cash dividend of $.025 per share was paid May 18, 1994. Registrant's dividend policy will depend upon the earnings, financial condition and capital needs of Registrant and other factors deemed relevant by Registrant's Board of Directors.
Item 6.
Item 6. Selected Financial Data.
Pier 1 Imports, Inc. FINANCIAL SUMMARY (See Notes) ($ in millions except per share amounts)
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation.
Pier 1 Imports, Inc. Management's Discussion and Analysis of Financial Condition and Results of Operations
Pier 1 Imports, Inc. is North America's largest specialty retailer of decorative home furnishings, gifts and related items, with stores in 47 states, Puerto Rico and Canada, and additional international operations in England and Mexico. Registrant reported record sales of $685,393,000 for fiscal 1994 and net income of $5,933,000, or $.16 per share, after providing an after-tax special charge of $16,507,000 in the fourth quarter for closing approximately 50 unprofitable stores and adjusting the carrying value of General Host common stock. If the special charge had not been provided, net income for the year would have totalled $22,440,000, or $.60 per share, compared to $23,017,000, or $.62 per share, last year. Stores in operation at fiscal year-end aggregated 586 after removing stores to be closed. In early fiscal 1994, Registrant sold its interest in Sunbelt to General Host.
Fiscal Years Ended February 26, 1994 and February 27, 1993
Net sales in fiscal 1994 grew $56.2 million or 8.9% over the prior year with same-store sales growth of 4.8%. Last year net total sales grew 7.3% and same-store sales grew 3.7%. Forty-eight (48) new stores opened during the year and 17 stores closed, before giving effect to the provision for the closing of 50 stores.
Gross profit, after related buying and store occupancy costs, expressed as a percentage of net sales, declined 1.2% from 39.1% in fiscal 1993 to 37.9% in fiscal 1994. Store occupancy costs, expressed as a percentage of net sales, improved slightly due to higher sales volumes. The sales mix of furniture and decorative goods remained unchanged as a percentage of sales; however, promotional markdowns and other discounts caused reduced margins on these goods. Sales from clothing, jewelry and accessories compared to total sales declined, as did the gross profit rate due to additional promotional markdowns taken in fiscal 1994 compared with fiscal 1993.
Selling, general and administrative expenses, including advertising, improved 0.1% to 28.5% as a percentage of sales in fiscal 1994 compared to 28.6% in fiscal 1993. In total dollars, expenses for fiscal 1994 increased $15.2 million over the prior year primarily due to 31 net new stores opened during the year (before giving effect to the provision for the closing of 50 stores), new point-of-sale register equipment installed in all stores, new selling programs introduced in stores, losses related to the earthquake in California and severe weather during fiscal 1994.
The store-closing provision of $21.3 million and the $2.0 million adjustment to the carrying value of General Host common stock were special charges in fiscal 1994. The store-closing provision reflected the anticipated costs associated with closing certain underperforming stores. This provision includes estimated costs related to leases, fixed assets, relocation, inventory liquidation and losses from operations during the interim period before closings. The adjustment to the carrying value of General Host common stock is management's estimate of the portion of the decline in the market value that is other than temporary.
Operating income declined $25.8 million to $25.1 million in fiscal 1994 from $50.9 million in the prior year, due to the special charges in fiscal 1994 and the gross profit rate decline from fiscal 1993.
During fiscal 1994, cash was utilized to reduce short-term debt, fund inventory and fixtures for new store development, expand the Pier 1 credit card program, and pay dividends to shareholders. Due to lower interest income on declining cash balances, net interest expense increased $1.8 million in fiscal 1994 over the prior year.
Registrant's effective income tax rate for fiscal 1994 increased to 29% compared to 25.9% in fiscal 1993, primarily due to an increase in the state tax effective rate.
Registrant's equity in losses from Sunbelt was $3.6 million in fiscal 1993. In April 1993, Registrant completed the sale of its 49.5% interest in Sunbelt. Sunbelt's results were not included in Registrant's earnings during fiscal 1994.
Net income for fiscal 1994 aggregated $5.9 million, or $.16 per share, compared to income of $23.0 million, or $.62 per share last year.
Fiscal Years Ended February 27, 1993 and February 29, 1992
During fiscal 1993, net sales grew $42.6 million or 7.3% with same-store sales contributing 3.7% over fiscal 1992. Sales from stores opened in fiscal years 1993 and 1992 increased fiscal 1993 sales levels by 3.6% when compared to fiscal 1992. Twenty-six new stores (net 20) were opened during fiscal 1993.
Gross profit, after related buying and store occupancy costs, expressed as a percentage of net sales, increased to 39.1% during fiscal 1993 from 38.9% in fiscal 1992. The improvement was the result of store occupancy costs which, as a percentage of sales, improved due to higher sales volumes. Merchandise gross margin in fiscal 1993 remained unchanged as a percentage of sales from fiscal 1992 due to a similar merchandise mix in both years, and, although promotional sales discounts increased in fiscal 1993 from a year ago, there was a reduction in the amount of clearance markdowns and shrinkage in fiscal 1993 versus fiscal 1992.
Selling, general and administrative expenses, including advertising, improved 0.8% to 28.6% as a percentage of sales in fiscal 1993 compared to 29.4% in fiscal 1992. In total dollars, expenses for fiscal 1993 increased $7.7 million over the prior year, principally due to 20 net new stores in operation by the end of fiscal 1993. This increase resulted in higher payroll and store-related costs as well as increased catalog and other promotional advertising. These increased costs from fiscal 1992 were partially offset by expense control, favorable medical insurance claim experience, lower Pier 1 credit card expenses, the reduction in scope of the mid-year physical inventory counts, and decreased litigation costs.
Operating income increased $9.9 million to $50.9 million in fiscal 1993 from $41 million a year earlier, mainly due to revenue growth from both new store openings and existing store sales and the reductions in controllable expenses.
Net interest expense decreased $1.4 million during fiscal 1993 from fiscal 1992 due to a decline in Registrant's debt (net of cash) position and a slight decrease in Registrant's effective interest rate.
During fiscal 1992, Registrant recorded a one-time gain of $5.9 million related to the sale of 50.5% of Sunbelt's common stock.
Registrant's effective income tax rate for fiscal 1993 decreased to 25.9% from 28.3% due to the benefit of lower tax rates on income from foreign subsidiaries and tax-favored investment income.
Registrant recorded equity in losses of Sunbelt during fiscal 1993 of $3.6 million compared to income of $4.5 million in fiscal 1992. During fiscal 1993, Registrant included only 49.5% of Sunbelt's earnings during an unprofitable year, compared to 100% in fiscal 1992 when Sunbelt experienced greater profits.
Net income for fiscal 1993 of $23.0 million, or $.62 per share, was below last year's $26.3 million, or $.71 per share, as a result of Sunbelt's losses in fiscal 1993 and the gain on sale of Sunbelt stock in fiscal 1992.
Liquidity and Capital Resources
The sources of liquidity during the past three years have been earnings from operations, working capital changes, long-term borrowings, and the sale of 50.5% of Sunbelt stock in fiscal 1992. Primarily, these funds were utilized to reduce short-term debt, acquire property and equipment, finance the expansion of inventories and the Pier 1 credit card program, and pay dividends.
During fiscal 1994, increases in inventory and capital expenditures were required to support the opening 48 new stores. Financing for new store land and building costs is provided by operating leases. Registrant's new store development plan for fiscal 1995 is approximately 50 stores. Inventory and fixtures for the development plan are estimated to cost approximately $15 million, which will be funded by operations, working capital and bank lines of credit. Cash requirements to close 50 stores in fiscal 1995 through the store-closing program are estimated to aggregate $16 million and will be funded through working capital and operations.
New store construction funding is expected to be provided by operating leases. Registrant is expanding existing lease facilities and exploring additional financing opportunities currently available in the capital markets. In connection with leases for 38 stores executed in prior years, Registrant has guaranteed the residual building values at approximately $25 million. Minimum future operating lease commitments expected for fiscal 1995 aggregate to $86 million, and the present value of total existing operating lease commitments is $372 million. These commitments will be funded from operating cash flow.
Working capital requirements are currently provided by cash, short-term revolving lines of credit, including bankers' acceptances and working capital loans, in an aggregate amount of approximately $165 million. Registrant's current ratio was 3.5 to 1 at the end of fiscal 1994 compared to 3.4 to 1 a year earlier.
In connection with Registrant's sale of its Sunbelt investment to General Host, Registrant provided Sunbelt a line of credit aggregating $12 million, all of which was outstanding at February 26, 1994. In order for Sunbelt to meet repayment obligations under this line, Sunbelt must obtain replacement financing. To enable Sunbelt to raise these funds, Registrant has granted Sunbelt a temporary extension of the credit facility until June 30, 1994. Also, Registrant is committed to provide Sunbelt $25 million of non-revolving store development financing through April 1996. Registrant has arranged for a bank group to provide financing by which Registrant leases from an unaffiliated third party and subleases store sites to Sunbelt. Under this leasing facility, the leases are required to be refinanced by Sunbelt from September 1994 to October 1995. If Sunbelt defaults on refinancing these store leases as the terms expire, Registrant will be required to obtain other financing. Registrant expects financing of Sunbelt's store sites to remain at same or similar terms and conditions as are currently in place. In addition to the above, Registrant also guarantees approximately $4.5 million of Sunbelt store lease commitments. Registrant's line of credit and leasing commitments are collateralized by 4.2 million shares of Sunbelt's common stock.
The Board of Directors anticipates a continuation of its current cash dividends to shareholders.
In fiscal 1993, Registrant invested in preference stock of The Pier Retail Group Limited ("The Pier") located in the United Kingdom. Currently, investment in and loans to The Pier aggregate $3.4 million, with additional debt guarantees of approximately $4 million. The Pier is a ten-store retail operation that offers decorative home furnishings and related items in a store setting similar to that operated by Registrant.
Registrant's inventory purchases are made almost entirely in U.S. dollars. To the extent purchases are made in foreign currencies, Registrant usually enters into forward exchange contracts when they are available in order to manage its exposure to foreign currency exchange fluctuations.
Registrant believes the funds provided from operations, coupled with Registrant's cash position and available lines of credit, are more than sufficient to meet its foreseeable cash requirements.
Impact of Inflation and Changing Prices
Inflation has not had a significant impact on the operations of Registrant.
Impact of New Accounting Standards
The adoption of Financial Accounting Standards Board's Statements No. 114 and 115 is expected to have no impact on Registrant's results of operations.
Item 8.
Item 8. Financial Statements and Supplementary Data.
Financial Statements: - - -------------------- Report of Independent Accountants Consolidated Statement of Operations for the Years ended February 26, 1994, February 27, 1993 and February 29, 1992 Consolidated Balance Sheet at February 26, 1994 and February 27, 1993 Consolidated Statement of Cash Flows for the years ended February 26, 1994, February 27, 1993 and February 29, 1992 Consolidated Statement of Stockholders' Equity for the years ended February 26, 1994, February 27, 1993 and February 29, 1992 Notes To Consolidated Financial Statements
Financial Statement Schedules For the years Ended February 26, 1994, February 27, 1993 and February 29, 1992 II Amounts Receivable From Related Parties and Underwriters, Promoters and Employees Other Than Related Parties V Property, Plant and Equipment VI Accumulated Depreciation and Amortization of Property Plant and Equipment VIII Valuation and Qualifying Accounts and Reserves IX Short-Term Borrowings X Supplementary Income Statement Information
All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
Pier 1 Imports, Inc. REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of Pier 1 Imports, Inc.
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Pier 1 Imports, Inc. and its subsidiaries at February 26, 1994 and February 27, 1993, and the results of their operations and their cash flows for each of the three years in the period ended February 26, 1994, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Registrant's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
/s/ Price Waterhouse - - --------------------
Fort Worth, Texas April 14, 1994
Pier 1 Imports, Inc. CONSOLIDATED STATEMENT OF OPERATIONS (in thousands except per share amounts)
Pier 1 Imports, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Statement of significant accounting policies
Basis of consolidation - The consolidated financial statements of Pier 1 Imports, Inc. and its consolidated subsidiaries include the accounts of all subsidiary companies. Material intercompany transactions and balances have been eliminated.
Fiscal periods - Registrant utilizes 5-4-4 quarterly accounting periods with the fiscal year of 52 weeks ending on the Saturday nearest the last day of February. Fiscal 1994 ended February 26, 1994, fiscal 1993 ended February 27, 1993, and fiscal 1992 ended February 29, 1992.
Cash and cash equivalents - Registrant 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 changes on cash is not material.
Marketable equity securities - Registrant records marketable equity securities at the lower of cost or market. Unrealized gains and losses on non-current marketable equity securities and related income tax effects are accumulated and included as a separate component of stockholders' equity. Adjustments for any impairments in the value (based on market conditions) that are deemed to be other than temporary are included as a loss in the current year's operations. In fiscal 1994, General Host Corporation ("General Host") common stock was Registrant's only non-current marketable equity security.
Translation of foreign currencies - Assets and liabilities are translated to U.S. dollars at fiscal year-end exchange rates. Income and expense items are translated at average rates of exchange prevailing during the year. Translation adjustments are accumulated in a separate component of stockholders' equity.
Inventories - Inventories are comprised primarily of finished merchandise and are stated at the lower of average cost or market; cost is determined principally on the first-in, first-out method.
Properties, maintenance and repairs - Buildings, equipment, furniture and fixtures, and leasehold interests and improvements are carried at cost less accumulated depreciation. Depreciation is based on the straight-line method over estimated useful lives or lease terms, if shorter.
Expenditures for maintenance, repairs and renewals which do not materially prolong the useful lives of the assets are charged to expense as incurred. In the case of disposals, assets and the related depreciation are removed from the accounts and the net amount, less proceeds from disposal, is credited or charged to income.
Deferred costs - Certain costs associated with the acquisition of new proprietary credit card accounts are capitalized and amortized over the average life of an account. Preopening costs associated with new stores are capitalized and expensed over one year.
Advertising costs - All advertising costs are expensed the first time the advertising takes place.
Income taxes - Income tax expense for fiscal 1994 and 1993 is based on the liability method under Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109). See Note 9 for further description. SFAS 109 was issued in February 1992 and was adopted by Registrant in the fourth quarter retroactively to the beginning of the 1993 fiscal year. The adoption had no effect on Registrant's financial position or results of operations. Deferred federal income taxes, net of applicable foreign tax credits, are not provided on the undistributed earnings of foreign subsidiaries to the extent Registrant intends to permanently reinvest such earnings abroad. At February 26, 1994, such undistributed earnings aggregated $9.9 million.
Earnings per share - Earnings per share during a period are computed on the weighted average number of common shares plus common stock equivalents outstanding and were 37,648,000, 37,359,000 and 37,023,000 for fiscal 1994, 1993 and 1992, respectively. Computation of weighted average shares outstanding for fiscal 1994, 1993 and 1992 includes common stock equivalents of 443,000, 595,000 and 590,000, respectively. The computation of weighted average number of shares for each year gives retroactive effect to the 2% stock dividend distributed May 15, 1991 and the 3% stock dividend distributed November 19, 1991. Fully diluted earnings per share is based on the assumed conversion of all of the 6-7/8% Convertible Subordinated Notes into common stock, whereby interest expense and debt issue costs, net of tax, on the 6- 7/8% Convertible Subordinated Notes is added back to net earnings. Fully diluted earnings per share resulted in less than 3% dilution of primary earnings per share for each of the three fiscal years ended February 26, 1994 and all periods presented with the exception of the first and second quarters of fiscal years 1994 and 1993.
Note 2 - Proprietary credit card information
Registrant's Preferred Customer Card is managed and administered by an unrelated third party. Credit card account origination costs of $976,000, $480,000 and $528,000 were deferred during fiscal years 1994, 1993 and 1992, respectively. Registrant is amortizing these costs over 36 months, which Registrant believes is the approximate average active life of an account. The credit cards have no expiration date and no annual fee for the use of the card. At February 26, 1994 and February 27, 1993, deferred costs, net of amortization, totalled $1,135,000 and $759,000, respectively.
Concentrations of credit risk with respect to customer receivables are limited due to the large number of customers comprising Registrant's base and their dispersion across may different geographic areas of the country.
Net credit card charges on Registrant's proprietary credit card accounts are netted against selling, general and administrative expenses. A summary of Registrant's credit card results for each of the three fiscal years ended February 26, 1994 follows (in thousands):
1994 1993 1992 ------- ------- ------- [S] [C] [C] [C] Costs: Processing fees $ 6,114 $ 5,049 $ 4,875 Bad debt expense 2,195 1,855 2,702 ------- ------- ------- 8,309 6,904 7,577 ------- ------- ------- Income: Finance charges 6,087 4,998 4,751 Insurance and other income 238 165 185 ------- ------- ------- 6,325 5,163 4,936 ------- ------- ------- Net credit card costs $ 1,984 $ 1,741 $ 2,641 ======= ======= ======= Pier 1 Preferred Card sales $98,625 $60,661 $48,998 ======= ======= ======= Net cost as a percent of credit sales 2.0% 2.9% 5.4% ==== ==== ====
Note 3 - Properties
Properties are summarized as follows at February 26, 1994 and February 27, 1993 (in thousands):
1994 1993 ------ ------ Land $ 7,205 $ 7,204 Buildings 33,063 32,688 Equipment, furniture and fixtures 90,505 85,413 Leasehold interests and improvements 79,022 71,545 Construction in progress 190 214 -------- -------- 209,985 197,064 Less accumulated depreciation and amortization 98,475 89,053 -------- -------- Properties, net $111,510 $108,011 ======== ========
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 26, 1994 and February 27, 1993 (in thousands): 1994 1993 ------ ------ Trade accounts payable $27,937 $23,603 Accrued payroll and fringes 16,933 17,637 Accrued taxes, other than income 2,913 2,412 Accrued interest 3,397 3,560 Accrued real property tax 4,697 3,830 Store-closing provision 21,250 -- Other accrued liabilities and expenses 12,645 8,749 ------- ------- Accounts payable & accrued liabilities $89,772 $59,791 ======= ======= Accrued average rent $15,034 $13,531 Other non-current liabilities 6,126 5,782 ------- ------- Other non-current liabilities $21,160 $19,313 ======= =======
Note 5 - Store-closing provision and other
The store-closing provision of $21.3 million and the $2.0 million adjustment to the carrying value of General Host common stock were special charges in fiscal 1994. The store-closing provision reflects the anticipated costs associated with closing certain underperforming stores. This provision includes estimated costs related to leases, fixed assets, relocation, inventory liquidation and losses from operations during the interim period before closings. The adjustment to the carrying value of General Host common stock is management's estimate of the portion of the decline in the market value that is other than temporary.
Note 6 - Current and long-term debt
Registrant has various lines of credit available which aggregate approximately $165 million. At year-end, approximately $41 million had been committed under various outstanding letters of credit issued primarily in conjunction with overseas merchandise procurements, leaving $124 million of available lines of credit. The lines may be used for borrowings through working capital loans, bankers' acceptances or letters of credit. The weighted average interest rate on short-term borrowings outstanding during the year was 4.0%.
Long-term debt is summarized as follows (in thousands):
1994 1993 -------- -------- 11-1/2% subordinated debentures, net of original issue discount of $2,812 and $3,179, respectively $ 22,188 $ 21,821 Industrial revenue bonds 25,000 25,000 11% senior notes 25,000 25,000 6-7/8% convertible subordinated notes 75,000 75,000 Capital lease obligations 475 564 Other 207 -- -------- -------- 147,870 147,385 Less - portion due within one year 2,639 139 -------- -------- $145,231 $147,246 ======== ========
In July 1983, Registrant issued $25 million of 11-1/2% subordinated debentures. Interest is payable on January 15 and July 15. Mandatory annual $2.5 million sinking fund payments will commence in July 1994 and will continue until they mature in July 2003. The debentures are callable at any time at par plus accrued interest.
In fiscal 1987, Registrant 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 7-day lower floater put bonds and interest rates float with the market rate for tax-exempt paper. Interest is payable monthly.
In May 1991, Registrant issued $25 million of 11% senior notes due June 1, 2001. Annual principal reductions in the amount of $5 million are due beginning June 1, 1997. Interest is payable each June 1 and December 1.
In April 1992, Registrant issued $75 million of 6-7/8% Convertible Subordinated Notes. These notes are convertible into shares of common stock of Registrant at $12.00 per share at any time at or prior to maturity which is April 1, 2002. The notes may be redeemed by Registrant at any time on or after April 1, 1995 in whole or in part, but redemption prior to the year 2000 would be at a premium. Interest on the notes is payable each April 1 and October 1.
As of February 26, 1994, the fair value of long-term debt was $155.0 million compared to its recorded value of $147.9 million. The fair value of long-term debt was estimated based on the quoted market values for the same or similar debt issues, or rates currently available for debt with similar terms. There are no other significant assets or liabilities with a fair value different from the recorded value.
Registrant has an interest rate hedging agreement on $100 million of notional principal with a commercial bank intended to limit Registrant's exposure to interest rate fluctuations on floating rate obligations. This agreement was designated as a hedge contract; therefore, the differential to be paid or received is recognized over the life of the agreement. The fair value of this hedging agreement was $2.2 million at year end and represented the estimated amount, which was obtained from counterparties, that Registrant would pay to terminate the agreement at February 26, 1994.
Long-term debt matures as follows (in thousands):
1995 $ 2,639 1996 2,940 1997 2,566 1998 7,537 1999 7,500 Thereafter 124,688 -------- $147,870 ========
Registrant's loan agreements require that Registrant maintain certain financial ratios and limit specific payments and equity distributions including cash dividends, loans to shareholders and purchases of treasury stock. At year-end, the most restrictive of the agreements limits the aggregate of such payments to $10 million.
Note 7 - Employee benefit plans
In 1986, Registrant adopted a qualified, defined contribution employee retirement plan. Except for the initial enrollment period, all full- and part-time personnel who are at least 21 years old and who have been employed for six months are eligible to participate in the plan. Employees contributing from 1% to 5% of their compensation receive Registrant contributions of up to 3%. Registrant contributions to the plan were $1,114,000, $915,000 and $714,000 in fiscal 1994, 1993 and 1992, 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.
Registrant maintains a Supplemental Executive Retirement Plan for certain of its executive officers. The plan provides that upon retirement, disability, death or other termination of employment a participant will receive annual benefits. Retirement benefits under the plan vest for each participant at the rate of 10% per year over 10 years of service. Registrant's accrued contributions to the plan were $765,000, $554,000 and $443,000 in fiscal 1994, 1993 and 1992, respectively.
Note 8 - Matters concerning stockholders' equity
Stock purchase plan - Substantially all employees and directors are eligible to participate in the Pier 1 Imports, Inc. Stock Purchase Plan under which Registrant's common stock is purchased on behalf of employees at market prices through regular payroll deductions. Each employee participant may contribute up to 10% of the eligible portions of annual compensation and directors may contribute a maximum equal to their monthly directors' fees. Registrant contributes from 10% to 100% of the participants' contributions, depending upon length of participation and date of entry into the plan. Approximately 268,000 shares were allocated to Stock Purchase Plan participants during fiscal 1994, all of which were purchased on the open market. Registrant's contributions to the Plan were $867,000, $841,000 and $830,000 in fiscal years 1994, 1993 and 1992, respectively.
Restricted stock grant plans - In 1993 and 1992, Registrant issued 17,414 shares and 19,157 shares, respectively, of its common stock to key officers pursuant to a Management Restricted Stock Plan which provides for the issuance of up to 250,000 shares. The shares of restricted stock were awarded in conjunction with granting of stock options to those officers, with the number of shares awarded representing 25% of the number of stock options granted. The restricted stock will vest at the times and to the extent that 25% of such stock options have been exercised and the option shares have been held for two years.
In 1991 Registrant issued 292,825 shares of its common stock to key officers pursuant to a Restricted Stock Grant Plan which provides for issuance of up to 500,000 shares. These shares vest and the cost of these shares will be expensed over a ten-year period of continued employment. Unvested shares are returned to the plan if employment is terminated for any reason.
Stock option plans - In June 1989, Registrant adopted two stock option plans, the 1989 Employee Stock Option Plan and the 1989 Non-Employee Director Stock Option Plan. Options have been granted at the fair market value of shares on date of grant and may be granted to qualify as Incentive Stock Options under Section 422 of the Internal Revenue Code or as non-qualified options. Registrant may grant options covering up to 1,500,000 and 150,000 shares of Registrant's common stock under the 1989 Employee Stock Option Plan and the 1989 Non-Employee Director Stock Option Plan, respectively.
In 1990, the 1980 Stock Option Plan expired subject to outstanding granted options covering 589,871 shares at fiscal year-end 1994.
A summary of stock option transactions related to the plans, adjusted for stock dividends, during the years ended February 26, 1994 and February 27, 1993, is as follows: Shares Option Prices --------- ------------- Outstanding at February 29, 1992 1,405,980 $3.16 - 12.30 Options granted 96,649 6.75 - 11.13 Options exercised (428,755) 3.20 - 12.30 Options cancelled or expired (157,376) 4.28 - 10.59 --------- ------------- Outstanding at February 27, 1993 916,498 3.16 - 12.30 Options granted 220,277 8.75 - 9.00 Options exercised (72,864) 3.16 - 8.00 Options cancelled or expired (12,189) 4.28 - 10.59 --------- ------------- Outstanding at February 26, 1994 1,051,722 $3.20 - 12.30 ========= =============
At February 26, 1994 and February 27, 1993 outstanding options covering 634,111 and 518,530 shares were exercisable and 832,385 and 1,040,473 shares were available for grant, respectively.
Transactions with Intermark - Prior to June 1991, Intermark, Inc. ("Intermark") was the largest shareholder and exercised voting control of Registrant. On June 6, 1991, Intermark sold its shares of Registrant's common stock through a secondary public offering. On June 17, 1991, Registrant repurchased all shares of Registrant's preferred stock held by Intermark. In consideration of such repurchase, Registrant delivered to Intermark all shares of the preferred stock of a wholly owned subsidiary of Intermark that were owned by Registrant which had a stated value of $5.8 million on Registrant's balance sheet. The difference in the cost of the shares held by Registrant and the preferred shares held by Intermark reduced Registrant's capital by $4.4 million.
Common stock dividend - On March 15, 1991 and November 19, 1991, Registrant announced stock dividends of 2% and 3%. Based on the closing price of Registrant's common stock at the date of each dividend, the market values of the shares distributed were approximately $4,005,000 and $10,169,000, respectively.
Loans to officers - 1991 - In fiscal 1991, the Board of Directors approved the sale of 210,000 treasury shares of common stock to certain corporate officers in exchange for promissory notes of $892,500 which approximated fair market value. These notes were reflected as a reduction to stockholders' equity in 1991. In fiscal 1992, the Board of Directors authorized Registrant to accept approximately 77,600 common shares from these officers, at the current fair market value, in payment for the outstanding loan balances.
Loans to officers - 1988 - The Board of Directors approved loans to certain corporate officers in 1988 to enable those officers to acquire Pier 1 common stock through open market purchases. These demand notes were unsecured, accrued interest at floating rates, and, if not demanded, would mature in 1997. In fiscal 1992, the Board of Directors authorized Registrant to accept approximately 112,600 common shares from certain of these officers at current market value, which together with cash payments, reduced the principal amount outstanding at February 26, 1994 to $776,000.
Note 9 - Income taxes
In fiscal 1993, Registrant adopted SFAS 109. Under SFAS 109, the deferred tax provision is determined under 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. Adoption of the statement had no effect on results of operations.
The provision for income taxes consists of (in thousands):
1994 1993 1992 ------ ------ ------ Federal: Current $5,356 $8,875 $7,232 Deferred (4,966) (1,431) (153) State: Current 2,598 1,765 1,237 Deferred (1,127) (302) -- Foreign: Current 562 402 340 ------ ------ ------ $2,423 $9,309 $8,656 ====== ====== ======
Deferred tax liabilities (assets) at February 26, 1994 and February 27, 1993 are comprised of the following (in thousands):
1994 1993 -------- ------- Deferred tax liabilities: Depreciation $ 8,117 $ 5,938 Deferred store costs 4,697 3,947 Other 856 495 -------- ------- 13,670 10,380 -------- ------- Deferred tax assets: Inventory $ (24) $(1,087) Accrued average rent (6,126) (5,118) Accrued vacation/deferred compensation (2,494) (2,319) Deferred gain on sale/leaseback (1,493) (1,672) Bad debts (708) (850) Store-closing provision (8,454) -- Other (2,998) (817) -------- ------- (22,297) (11,863) -------- ------- $( 8,627) $(1,483) ======== =======
The difference between income taxes at the statutory federal income tax rate of 35 percent in fiscal 1994, 34 percent in fiscal 1993 and fiscal 1992, and income tax reported in the consolidated statement of operations is as follows (in thousands):
1994 1993 1992 ------ ------- ------- Tax at statutory federal tax rate $2,925 $12,208 $10,381 Tax treatment on sale of subsidiary stock (282) -- (2,312) State income taxes, net of federal benefit 856 966 816 Tax-favored investment income (284) (574) -- Targeted jobs tax credit (395) (332) (229) Foreign income taxed at lower rates (528) (2,959) -- Other, net 131 -- -- ------ -------- ------- $2,423 $ 9,309 $ 8,656 ====== ======== =======
Note 10 - Commitments and lease obligations
Registrant leases certain property consisting principally of retail stores, warehouses and transportation equipment under leases expiring through the year 2012. Substantially all retail store locations are leased, for terms varying from 10 to 15 years with varying renewal options. Certain leases provide for additional rental payments based on a percentage of sales in excess of a specified base.
Capital leases are recorded in Registrant's balance sheet as assets along with the related debt obligation. All other lease obligations are operating leases, and payments are reflected in Registrant's consolidated statement of operations as rental expense. The composition of capital leases reflected as assets in the accompanying consolidated balance sheet is as follows (in thousands):
1994 1993 ------ ------ Buildings $ 477 $ 477 Equipment, furniture and fixtures 538 538 ------ ------ 1,015 1,015 Less accumulated depreciation 827 738 ------ ------ $ 188 $ 277 ====== ======
At February 26, 1994, Registrant has the following minimum lease commitments in the years indicated (in thousands):
Capital Operating Fiscal Year Leases Leases ----------- ------- --------- 1995 $285 $ 86,025 1996 205 83,125 1997 119 75,968 1998 87 69,372 1999 -- 57,618 Thereafter -- 201,629 ---- -------- Total lease commitments 696 $573,737 ======== Less imputed interest 221 ---- Present value of total capital lease obligations including current portion of $234 $475 ==== Present value of total operating lease commitments $372,000 ========
Rental expense incurred was $89,518,000, $85,511,000 and $81,042,000 including contingent rentals of $788,000, $821,000 and $559,000 based upon a percentage of sales and net of sublease incomes totalling $1,252,000, $870,000 and $836,000 in fiscal 1994, 1993 and 1992, respectively.
Registrant has agreements with unaffiliated groups to lease certain stores and distribution center space. These unaffiliated groups are presently committed to make available up to $101.8 million for development or acquisition of stores leased by Registrant. Presently, Registrant has used $99.5 million of that availability. Agreements with these groups mature over the next five years, and Registrant's management is continuously monitoring financial markets to optimize renewal terms. In connection with the financing of 38 stores by these unaffiliated groups, Registrant has guaranteed the residual value of these buildings at approximately $25 million at the end of the lease terms.
In fiscal 1993, Registrant invested in preference stock of The Pier Retail Group Limited ("The Pier"), located in the United Kingdom. Registrant guarantees approximately $4 million of debt for The Pier.
Note 11 - Litigation
There are various claims, lawsuits, investigations and pending actions against Registrant and its subsidiaries incident to the operations of its business. Liability, if any, associated with these matters is not determinable at February 26, 1994; however, Registrant considers them to be ordinary and routine in nature. While certain of the lawsuits involve substantial amounts, it is the opinion of management that the ultimate resolution of such litigation will not have a material adverse effect on Registrant's financial position.
Note 12 - Cash flow information
The following is supplemental cash flow information (in thousands):
1994 1993 1992 ------- ------- ------- Cash paid during the year for: Interest $20,445 $16,835 $14,033 Income taxes $17,732 $17,126 $ 4,439
Note 13 - Investment in Sunbelt Nursery Group, Inc. and subsequent event
At fiscal year-end 1993, Registrant had a 49.5% ownership interest in Sunbelt. Registrant reported the results of Sunbelt using the equity method of accounting. Under such method, Registrant's share of net earnings (or losses) of Sunbelt was included as a separate item in the consolidated statement of operations.
In April 1993, Registrant completed the sale of its 49.5% ownership interest in Sunbelt to General Host. Registrant received as compensation for the Sunbelt shares 1.9 million shares of General Host common stock, which represented approximately 9.7% of that company's outstanding common stock.
In connection with Registrant's sale of its Sunbelt investment to General Host, Registrant provided Sunbelt a line of credit aggregating $12 million, all of which was outstanding at February 26, 1994. In order for Sunbelt to meet repayment obligations under this line, Sunbelt must obtain replacement financing. To enable Sunbelt to raise these funds, Registrant has granted Sunbelt a temporary extension of the credit facility until June 30, 1994. Also, Registrant is committed to provide Sunbelt $25 million of non-revolving store development financing through April 1996. Registrant has arranged for a bank group to provide the current financing by which Registrant leases from an unaffiliated third party and subleases store sites to Sunbelt. Under this leasing facility, the leases are required to be refinanced by Sunbelt from September 1994 to October 1995. If Sunbelt defaults on refinancing these store leases as the terms expire, Registrant will be required to obtain other financing. Registrant expects financing of Sunbelt's store sites to remain at same or similar terms and conditions as are currently in place. In addition to the above, Registrant also guarantees approximately $4.5 million of Sunbelt store lease commitments. Registrant's line of credit and leasing commitments are collateralized by 4.2 million shares of Sunbelt's common stock.
Note 14 - Selected quarterly financial data (unaudited)
Summarized quarterly financial data (in thousands of dollars except per share amounts) for the years ended February 26, 1994 and February 27, 1993 are set forth below:
Three Months Ended ----------------------------------------------- Fiscal 1994 5/29/93 8/28/93 11/27/93 2/26/94 ----------- -------- -------- -------- --------
Net sales $158,593 $181,441 $163,457 $181,902 ======= ======= ======= ======= Gross profit $61,690 $65,834 $63,022 $69,046 ======= ======= ======= ======= Net income (loss) $4,702 $7,343 $4,042 ($10,154) ====== ====== ====== ======== Primary net income (loss) per common share(2) $.12 $.20 $.11 ($.27) ==== ==== ==== =====
Three Months Ended ----------------------------------------------- Fiscal 1993 5/30/92 8/29/92 11/28/92 2/27/93 ----------- -------- -------- -------- --------
Net sales $152,083 $166,416 $144,923 $165,813 ======== ======== ======== ======== Gross profit $59,732 $61,548 $56,655 $68,247 ======= ======= ======= ======= Net income(1) $8,055 $7,453 $2,247 $5,262 ====== ====== ====== ====== Primary net income per common share(2) $.22 $.20 $.06 $.14 ==== ==== ==== ====
(1) SFAS 109 was issued in February 1992 and was adopted by Registrant in the fourth quarter retroactively to the beginning of the 1993 fiscal year. The adoption had no effect on Registrant's financial position or results of operations.
(2) Fully diluted earnings per share resulted in less than 3% dilution of primary earnings per share for both years and for all periods presented with the exception of a $.01 dilution in the first and second quarters of fiscal years 1994 and 1993.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
PART III
Item 10.
Item 10. Directors and Executive Officers of Registrant.
Information required by this Item is incorporated herein by reference to the Sections entitled "Election of Directors" and "Certain Relationships and Related Transactions" set forth in Registrant's Proxy Statement for its 1994 Annual Meeting of Shareholders.
The information regarding compliance with Section 16(a) of the Securities Exchange Act of 1934 is incorporated herein by reference to the Section entitled "Certain Relationships and Related Transactions" set forth in Registrant's Proxy Statement for its 1994 Annual Meeting of Shareholders.
Item 11.
Item 11. Executive Compensation.
The information required by this Item is incorporated herein by reference to the Section entitled "Executive Compensation" set forth in Registrant's Proxy Statement for its 1994 Annual Meeting of Shareholders.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this Item is incorporated herein by reference to the Sections entitled "Security Ownership of Management" set forth in Registrant's Proxy Statement for its 1994 Annual Meeting of Shareholders.
Item 13.
Item 13. Certain Relationships and Related Transactions.
The information required by this Item is incorporated herein by reference to the Section entitled "Certain Relationships and Related Transactions" set forth in Registrant's Proxy Statement for its 1994 Annual Meeting of Shareholders.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) The following consolidated financial statements, schedules and exhibits are filed as part of this report.
1. Financial Statements
* Report of Independent Accountants * Consolidated Statement of Operations for the years ended February 26, 1994, February 27, 1993 and February 29, 1992 * Consolidated Balance Sheet at February 26, 1994 and February 27, 1993 * Consolidated Statement of Cash Flows for the years ended February 26, 1994, February 27, 1993 and February 29, 1992 * Consolidated Statement of Stockholders' Equity for the years ended February 26, 1994, February 27, 1993 and February 29,
2. Financial Statement Schedules
Report of Independent Accountants II - Amounts Receivable From Related Parties and Underwriters, Promoters and Employees Other Than Related Parties V - Property, Plant and Equipment VI - Accumulated Depreciation and Amortization of Property, Plant and Equipment VIII - Valuation and Qualifying Accounts and Reserves IX - Short-Term Borrowings X - Supplementary Income Statement Information
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.
(b) Reports on Form 8-K
Not applicable
(c) Exhibits
See Exhibit Index.
(d) Not applicable.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: PIER 1 IMPORTS, INC.
May 23, 1994 By: /s/ Clark A. Johnson Clark A. Johnson, Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Registrant and in the capacities on May 23, 1994.
Signature Title
/s/ Robert G. Herndon Chief Financial Officer Robert G. Herndon
/s/ Charles H. Turner Controller and Charles H. Turner Principal Accounting Officer
/s/ Clark A. Johnson Chairman of the Board Clark A. Johnson of Directors
/s/ Marvin J. Girouard Director Marvin J. Girouard
/s/ Charles R. Scott Director Charles R. Scott
/s/ Sally F. McKenzie Director Sally F. McKenzie
/s/ James M. Hoak, Jr. Director James M. Hoak, Jr.
/s/ Kenneth N. Pontikes Director Kenneth N. Pontikes
EXHIBIT INDEX
Exhibit No. Description Page No.
2.1 Stock Purchase Agreement (filed as Exhibit 1 to dated as of April 2, 1993 by Registrant's Statement on and between General Host Schedule 13-D dated April 2, Corporation and Registrant 1993 and incorporated herein by reference)
3.(i) Certificate of Incorporation (filed as Exhibit 3(a) to and Amendments thereto Registrant's Form 10-K for the fiscal year ended March 3, 1990 and incorporated herein by reference)
3.(ii) Bylaws of Registrant, (filed as Exhibit 3(b) to Restated as of September 16, Registrant's Form 10-K for 1991 the fiscal year ended February 28, 1993 and incorporated herein by reference)
4.1 Indenture, dated April 9, (filed as Exhibit 4(a) to 1992, between the Registrant Registrant's Form 10-K for and Ameritrust Texas the fiscal year ended National Association, as February 29, 1992 and Trustee, relating to 6- incorporated herein by 7/8% Convertible reference) Subordinated Notes Due 2002.
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 Registrant and its subsidiaries, the total authorized principal amount of which for each issue does not exceed 10% of the consolidated total assets of the Registrant and its subsidiaries. The Registrant agrees to furnish a copy of any such instrument to the Securities and Exchange Commission upon request.
10.1* Registrant's Amended and (filed as Exhibit 10(a) to Restated Stock Purchase Plan Registrant's Form 10-K for as of March 25, 1987 the fiscal year ended February 28, 1993 and incorporated herein by reference)
10.2.1 Lease Contract dated July 19, (filed as Exhibit 10(b) to 1985, between Pier 1 and Registrant's Form 10-K for City Center Development the fiscal year ended Co., together with the February 28, 1993 and First through Seventh incorporated herein by Amendments reference)
10.2.2 Eighth Amendment to Lease Contract dated as of September 1, 1993, between Pier 1 and City Center Development Co.
10.3* Form of Indemnity Agreement (filed as Exhibit 10(l) to between the Registrant and Registrant's Form 10-K for the directors and executive the fiscal year ended officers of the Registrant. February 29, 1992 and incorporated herein by reference)
10.4* Registrant's Supplemental (filed as Exhibit 10(d) to Executive Retirement Plan Registrant's Form 10-K for effective May 1, 1986, as the fiscal year ended amended February 28, 1993 and incorporated herein by reference)
10.5* Registrant's Benefit (filed as Exhibit 10(y) to Restoration Plan, effective Registrant's Form 10-K for April 1, 1990 the fiscal year ended March 2, 1991 and incorporated herein by reference)
10.6* Registrant's Restricted Stock (filed as Exhibit 10(p) to Plan effective March 5, 1990 the fiscal year ended March 3, 1990 and incorporated herein by reference)
10.7* Registrant's Management Restricted Stock Plan effective June 24, 1993
10.8* Registrant's 1989 Employee (filed as Exhibit 10(q) to Stock Option Plan, effective Registrant's Form 10-K for June 29, 1989 the fiscal year ended March 3, 1990 and incorporated herein by reference)
10.9* Registrant's 1989 (filed as Exhibit 10(r) to Non-Employee Director Stock Registrant's Form 10-K for Option Plan effective June the fiscal year ended March 29, 1989 3, 1990 and incorporated herein by reference)
10.10* Form of Post-Employment (filed as Exhibit 10(r) to Consulting Agreement between Registrant's Form 10-K for the Registrant and its the fiscal year ended executive officers February 29, 1992 and incorporated herein by reference)
10.11.1 Revolving Credit Loan (filed as Exhibit 10(j) to Agreement dated as of August Registrant's Form 10-K for 14, 1992, among Registrant, the fiscal year ended Pier 1 Imports (U.S.), Inc. February 28, 1993 and and Bank One, Texas, N.A. incorporated herein by reference)
10.11.2 First, Second and Third Amendments to Revolving Credit Loan Agreement dated as of August 14, 1992, among Registrant, Pier 1 Imports (U.S.), Inc. and Bank One, Texas, N.A.
10.12 Lease Guarantee dated as of December 30, 1992 among Registrant, Pier 1 Licensing, Inc. (successor in interest to CMEI, Inc.), and Pier Set, Inc., together with Supplements and First, Second and Third Amendments
10.13 Lease Guarantee dated as of December 30, 1992 between Registrant and Pier Group, Inc., together with First and Second Amendments
10.14 Lease Guarantee dated as of December 30, 1992 among Registrant, Pier 1 Imports (U.S.), Inc. and Pier Group, Inc., together with First and Second Amendments
10.15.1 Sunbelt Credit Facilities (filed as Exhibit 10.12 to Agreement dated as of April Sunbelt Nursery Group, Inc.'s 28, 1993 between Registrant Form 10-K for the fiscal year and Sunbelt ended January 31, 1993 and incorporated herein by reference)
10.15.2 Extension Agreement dated April 25, 1994, and Waiver Agreement dated May 12, 1994, among Registrant, Sunbelt and Pier-SNG, Inc.
10.16* Registrant's Senior Management Annual Bonus Plan
10.17* Registrant's Executive Bonus Plan
10.18* Registrant's Management Medical and Tax Benefit Plans
21 Roster of Subsidiaries of Registrant
23 Consent of independent accountants to the incorporation by reference of their reports regarding the financial statements filed herewith into (i) Registration Statement on Form S-8 (Reg. No. 33-9970) relating to Registrant's 1980 Stock Option Plan, (ii) Registration Statement on Form S-8 (Reg. No. 33-32166) relating to Registrant's 1989 Employee Stock Option Plan and 1989 Non-Employee Director Stock Option Plan and (iii) Registration Statement on Form S-8 (Reg. No. 33-50278) relating to Registrant's Employee Stock Purchase Plan.
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* Management Contracts and Compensatory Plans