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Proc-Type: 2001,MIC-CLEAR
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<SEC-DOCUMENT>0000950134-02-006464.txt : 20020530
<SEC-HEADER>0000950134-02-006464.hdr.sgml : 20020530
<ACCEPTANCE-DATETIME>20020530151724
ACCESSION NUMBER: 0000950134-02-006464
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 4
CONFORMED PERIOD OF REPORT: 20020302
FILED AS OF DATE: 20020530
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: PIER 1 IMPORTS INC/DE
CENTRAL INDEX KEY: 0000278130
STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-HOME FURNITURE, FURNISHINGS & EQUIPMENT STORES [5700]
IRS NUMBER: 751729843
STATE OF INCORPORATION: DE
FISCAL YEAR END: 0228
FILING VALUES:
FORM TYPE: 10-K
SEC ACT: 1934 Act
SEC FILE NUMBER: 001-07832
FILM NUMBER: 02666236
BUSINESS ADDRESS:
STREET 1: 301 COMMERCE ST STE 600
CITY: FORT WORTH
STATE: TX
ZIP: 76102
BUSINESS PHONE: 8178788000
MAIL ADDRESS:
STREET 1: 301 COMMERCE STREET
STREET 2: SUITE 600
CITY: FORT WORTH
STATE: TX
ZIP: 76102
FORMER COMPANY:
FORMER CONFORMED NAME: PIER 1 INC
DATE OF NAME CHANGE: 19860921
FORMER COMPANY:
FORMER CONFORMED NAME: NEWCORP INC
DATE OF NAME CHANGE: 19800423
FORMER COMPANY:
FORMER CONFORMED NAME: PIER 1 IMPORTS INC/GA
DATE OF NAME CHANGE: 19840729
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<FILENAME>d97269e10vk.txt
<DESCRIPTION>FORM 10-K FOR FISCAL YEAR END MARCH 2, 2002
<TEXT>
<PAGE>
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 MARCH 2, 2002.
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:
<Table>
<Caption>
Name of each exchange
Title of each class on which registered
------------------- ---------------------
<S> <C>
COMMON STOCK, $1 PAR VALUE NEW YORK STOCK EXCHANGE
</Table>
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 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 28, 2002, the approximate aggregate market value of voting
stock held by non-affiliates of the Registrant was $1,875,400,000 using the
closing sales price on this day of $20.70. 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 28, 2002, 93,651,706 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 March 2, 2002 in Parts I and II hereof and;
(2) Registrant's Proxy Statement for the 2002 Annual Meeting in
Part III hereof.
<PAGE>
PART I
Item 1. Business.
(a) General Development of Business.
Throughout this document, references to the "Company" include Pier 1
Imports, Inc. and its consolidated subsidiaries. References to "Pier 1" relate
to the Company's retail locations operating under the name Pier 1 Imports.
References to "The Pier" relate to the Company's retail locations in the United
Kingdom operating under the name The Pier. References to "Cargo" relate to the
Company's retail locations operating under the names Cargo, "Cargo Furniture &
Home" and "Cargokids!".
From fiscal 1997 through fiscal 2002, the Company expanded its
specialty retail operations from 720 to 974 worldwide retail stores. In fiscal
2002, the Company continued to execute its expansion plan in North America by
opening a net 84 new Pier 1 stores. Subject to changes in the retail
environment, availability of suitable store sites, lease renewal negotiations
and availability of adequate financing, Pier 1 plans to open approximately 115
to 120 new stores and close approximately 30 stores in North America in fiscal
2003. Almost all of the stores expected to close in fiscal 2003 are anticipated
to be replaced with a more favorable location within the same market.
Set forth below is a list by city of Pier 1 stores opened in North
America in fiscal 2002:
<Table>
<S> <C> <C>
Abbotsford, BC Harvey, LA Petoskey, MI
Aiken, SC Heath, OH Pittsburgh, PA (2 locations)
Bloomingdale, IL Hendersonville, NC Rehoboth Beach, DE
Bolingbrook, IL Holmdel, NJ Richmond, BC
Braintree, MA Homestead, PA Rocky Point, NY
Broomfield, CO Indiana, PA Rogers, AR
Burlington, ON Indianapolis, IN (2 locations) Rosemere, QC
Burlington, WA Jefferson City, MO Roseville, CA
California, MD Kamloops, BC Rossford, OH
Cedar Hill, TX Kerrville, TX Rotterdam, NY
Christiansburg, VA Kingston, ON Salisbury, NC
Clarksburg, WV La Jolla, CA San Antonio, TX
Cookeville, TN Lake Ozark, MO Selma, TX
Covington, WA Las Vegas, NV Shrewsbury, MA
Dallas, TX Leominster, MA South Elgin, IL
Daphne, AL Lisbon, CT St. Cloud, MN
Dekalb, IL Lithonia, GA St. Clairsville, OH
Decatur, AL Littleton, CO St. George, UT
Deer Park, IL Louisville, KY St. Louis, MO
Dubois, PA Lynchburg, VA Surprise, AZ
Durham, NC Marshfield, WI Surrey, BC
Edmonton, AB McMinnville, OR Tampa, FL
El Cerrito, CA Miami, FL Tracy, CA
Elk Grove, CA Midlothian, VA Watchung, NJ
Encino, CA Milford, CT Wausau, WI
Everett, MA Monaca, PA Webster, NY
Flemington, NJ Montreal, QC (3 locations) Wellington, FL
Folsom, CA Morehead City, NC West Hartford, CT
Fullerton, CA Naples, FL Westport, CT
Glastonbury, CT Oro Valley, AZ Wichita, KS
Glen Allen, VA Oshkosh, WI Williamsville, NY
Glen Mills, PA Paoli, PA Winnipeg, MB
Goldsboro, NC Pasadena, TX Woodcliff Lake, NJ
Greenville, SC
</Table>
Presently, Pier 1 maintains regional distribution center facilities in
or near Baltimore, Maryland; Chicago, Illinois; Columbus, Ohio; Fort Worth,
Texas; Ontario, California and Savannah, Georgia.
The Pier, a subsidiary of the Company located in the United Kingdom,
operates 23 retail stores offering decorative home furnishings and related items
in a setting similar to Pier 1 stores. Additionally, The Pier has established an
online store at pier.co.uk. The Pier does not expect to open any new stores in
fiscal 2003; however, the Company will be reviewing specific opportunities for
new stores throughout the year. Also, upgrades are expected to several existing
locations in the U.K. during fiscal 2003. The Pier operates two distribution
facilities near London, England.
The Company has 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. In fiscal 1998, the Company amended its
agreement with Sears Mexico to an arrangement that substantially insulates the
Company from currency fluctuations in the
<PAGE>
value of the Mexican peso, which had reduced its profitability in the past. In
fiscal 2002, Sears Mexico opened three new stores offering Pier 1 merchandise.
As of March 2, 2002, Pier 1 merchandise was offered in 16 Sears Mexico stores.
Expansion plans for fiscal 2003 include one new store, one relocated store and
one remodeled store in Mexico.
The Company has a product distribution agreement with Sears Roebuck de
Puerto Rico, Inc. ("Sears Puerto Rico") which allows 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 ten stores, and as of
March 2, 2002, 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. and Skylark Co., Ltd.
(collectively "Akatsuki") to develop Pier 1 retail stores in Japan. Early in
fiscal 2002, Akatsuki informed the Company that it would not seek to renew its
current franchise agreement. Prior to the close of fiscal year 2002, the
remaining nine stores were closed and the franchise agreement with Akatsuki
expired without any additional costs or further obligations required of the
Company.
The Company owns a credit card bank in Omaha, Nebraska, operating under
the name Pier 1 National Bank (the "Bank"). The Bank holds the credit card
accounts for both the Pier 1 proprietary credit card and Cargo's new proprietary
credit card initiated in September 2001. As of March 2, 2002, the Company,
through the Bank, had over 5,100,000 proprietary cardholders with approximately
1,205,000 active accounts (accounts with a purchase within the previous 12
months). Sales on the Company's proprietary credit card accounted for 28.9% of
total U.S. store sales in fiscal 2002. The Company continues to expand its
proprietary credit card business by attracting new accounts with a discounted
first-time purchase, periodic deferred payment options and enhanced customer
loyalty through targeted promotions.
Pier 1 has an e-commerce website at pier1.com. More than 1,500
merchandise items are offered for sale to customers, along with gift cards, an
online clearance store and a Bridal & Gift Registry program. Pier 1's web site
allows customers to shop online, make changes or additions to gift registries
and easily return internet purchases to their neighborhood Pier 1 store. This
website is also being utilized as a marketing channel to reach new customers.
In February 2001, the Company acquired certain assets and assumed
certain liabilities of Cargo Furniture, Inc. and formed New Cargo Furniture,
Inc. Cargo is an 18-store retailer and wholesaler of youth and casual lifestyle
furniture, gifts and home decor. Cargo utilizes a website at cargohome.com to
attract customers and provide information regarding placing orders and store
locations. The Company will begin its expansion plans for Cargo in fiscal 2003
by opening eight to twelve new stores.
(b) Financial Information about Industry Segments.
In fiscal 2002, the Company operated in one business segment consisting
of the retail sale of imported decorative home furnishings, gifts 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 the Company consist of three chains
of retail stores operating under the names "Pier 1 Imports", "The Pier", and
"Cargo" 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 March 2, 2002, the Company operated 866 Pier 1 stores in 48 states
of the United States and 44 Pier 1 stores in five Canadian provinces, and
supported eight franchised stores in eight states of the U.S. Additionally, the
Company operated 23 stores in the United Kingdom under the name The Pier and 18
Cargo stores located in five states of the United States. The Company supplies
merchandise and licenses the Pier 1 Imports name to Sears Mexico and Sears
Puerto Rico, which sell Pier 1 merchandise in a "store within a store" format in
16 Sears Mexico stores and in seven Sears Puerto Rico stores. Company-operated
Pier 1 stores in the United States and Canada average approximately 7,500 square
feet of retail selling space. The stores are generally freestanding units
located near shopping centers or malls in all major U.S. metropolitan areas and
many of the primary smaller markets. In fiscal 2002, net sales of the Company
totaled $1,548.6 million. Pier 1 stores generally have their highest sales
volumes during November and December as a result of the holiday selling season.
Pier 1's growth strategy is to expand its North American store base to
more than 1,500 locations. Immediate plans to achieve this expansion include,
for fiscal 2003, the opening of 115 to 120 new stores while closing
approximately 30 stores, the majority of which will be relocated to more
favorable locations within the same markets. In the next few years, the Company
expects Cargo to begin to expand nationally as a value-oriented retailer of home
furnishings for children and families. The Company plans to grow Cargo to a 200-
to 300-store concept over the next ten years. The Company currently has no plans
to expand outside of the United States, Canada and Mexico.
<PAGE>
Pier 1 offers a diverse selection of products consisting of nearly
5,000 items imported from over 40 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, furniture pads
and pillows to be used on patios and in living, dining, kitchen and bedroom
areas, and in sun rooms. The product group constituted approximately 39% of Pier
1's total North American retail sales in fiscal year 2002, 40% in fiscal 2001
and 38% in fiscal 2000. These goods are imported from a variety of countries
such as Italy, Malaysia, Brazil, 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 2002, and 22% in
fiscal years 2001 and 2000. 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 12% of Pier 1's total North
American retail sales in fiscal years 2002, 2001 and 2000.
BED & BATH - This product group is imported mainly from India, the
United Kingdom, Italy, Thailand and China, and is also obtained from domestic
sources. The group includes bath and fragrance products, candles and bedding.
These goods accounted for approximately 18% of Pier 1's total North American
retail sales in fiscal year 2002, 17% in fiscal 2001 and 18% in fiscal 2000.
SEASONAL - This product group consists of merchandise for celebrating
holidays and spring/summer entertaining and is imported mainly from Europe,
Canada, Taiwan, China and India. These items accounted for approximately 8% of
Pier 1's total North American retail sales in fiscal year 2002, 9% in fiscal
2001 and 10% in fiscal year 2000.
Pier 1 merchandise largely consists of items that require a significant
degree of handcraftsmanship and are mostly imported directly from foreign
suppliers. For the most part, the imported merchandise is handcrafted in cottage
industries and small factories. Pier 1 is not dependent on any particular
supplier and has enjoyed long-standing relationships with many vendors. In
selecting the source of a product, Pier 1 considers quality, dependability of
delivery and cost. During fiscal 2002, Pier 1 sold merchandise imported from
over 40 different countries with 35% of its sales from merchandise produced in
China, 11% from merchandise produced in India and 29% from merchandise produced
in Indonesia, Thailand, Brazil, Italy, the Philippines and Mexico. The remaining
25% of sales was from merchandise produced in various Asian, European, Central
American, South American and African countries or was obtained from U.S.
manufacturers.
Pier 1 operates six regional distribution centers located in or near
Baltimore, Maryland; Chicago, Illinois; Columbus, Ohio; 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 each center's region. Due to the time delays involved in
procuring merchandise from foreign suppliers, Pier 1 maintains a substantial
inventory to assure a sufficient supply of products in its stores.
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, visual presentation of its merchandise and customer service. The
Company also believes its Pier 1 stores enjoy a competitive edge over competing
retailers due to greater name recognition, established vendor relationships and
the extent and variety of the merchandise offered. While other retail stores
change their items less frequently, Pier 1 differentiates itself by offering an
array of unique and frequently changing products. The Company believes that its
Cargo operations give it the opportunity to address the underserved children's
furniture and accessories market.
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 typically orders merchandise from four to twelve months
in advance of delivery and pays for the merchandise at the time it is loaded for
transport to designated U.S. and international destinations. Fluctuations in
foreign currency exchange rates, restrictions on the convertibility of the
dollar and other currencies, duties, taxes and other charges on imports, dock
strikes, 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 also have a material adverse effect on the results of
operations of the Company. Freight costs contribute a substantial amount to the
cost of imported merchandise.
<PAGE>
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 World Trade Organization provides a
framework for international trade matters and includes a process for the
resolution of trade disputes among the member countries. In recent years, the
dispute resolution process of the World Trade Organization has been utilized to
resolve disputes regarding market access between the European Union, the United
States and other countries. In some instances these trade disputes have led to
the threat by countries of sanctions against each other, which have included
import prohibitions and increases in duty rates on imported items. 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 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 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 and impose sanctions in the form of quotas or increased duties. On
previous occasions, the U.S. Trade Representative has identified certain
countries which supply merchandise to the Company as priority foreign countries.
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 from a country, resulting
in higher import duties on products from that country. 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, through certain of its wholly-owned subsidiaries, owns
three federally registered service marks under which its Pier 1 Imports stores
do business and one federally registered service mark under which its Cargo
stores do business. These registrations are numbered 948,076 and 1,620,518 for
the mark PIER 1 IMPORTS, 1,104,059 for the mark PIER 1 and 1,348,743 for the
mark CARGO. Additionally, certain subsidiaries of the Company have registered
and have applications pending for the registration of Pier 1 and Cargo
trademarks and service marks in the United States and in numerous foreign
countries.
On March 2, 2002, Pier 1 employed approximately 17,100 associates in
North America, of which approximately 8,000 were full-time employees and 9,100
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 effects of terrorist attacks or other
acts of war, weather conditions that may affect sales, volatility of fuel and
utility costs, the general strength of the economy and levels of consumer
spending, consumer confidence, the availability of new sites for expansion along
with sufficient labor to facilitate growth, 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 a timely fashion. The foregoing risks and
uncertainties are in addition to others discussed elsewhere in this report. The
Company assumes no obligation to update or otherwise revise its forward-looking
statements even if experience or future changes make it clear that any projected
results expressed or implied will not be realized.
<PAGE>
Item 2. Properties.
The Company leases approximately 203,000 square feet of office space
for its Pier 1 corporate office and leases approximately 13,000 square feet of
additional office space for its Cargo subsidiary. Both corporate office
facilities are located in Fort Worth, Texas. The Company is planning
construction of a new corporate office for the relocation of both corporate
offices. The new facility is expected to be completed in the fourth quarter of
fiscal 2005.
The Company leases the majority of its retail stores, its warehouses
and other office space. At March 2, 2002, the present value of the Company's
minimum future operating lease commitments discounted at 10% totaled
approximately $752 million. The Company currently owns and leases distribution
space of approximately four million square feet. The Company also acquires
temporary distribution space from time to time through short-term leases.
The following table shows the distribution of Pier 1's North American
stores by state and province as of March 2, 2002:
United States
<Table>
<S> <C> <C> <C> <C> <C>
Alabama 14 Kentucky 10 North Dakota 3
Alaska 1 Louisiana 14 Ohio 37
Arizona 16 Maryland 19 Oklahoma 5
Arkansas 7 Massachusetts 22 Oregon 11
California 91 Michigan 29 Pennsylvania 37
Colorado 19 Minnesota 16 Rhode Island 5
Connecticut 19 Mississippi 6 South Carolina 14
Delaware 4 Missouri 16 South Dakota 2
Florida 62 Montana 5 Tennessee 18
Georgia 26 Nebraska 4 Texas 66
Hawaii 2 Nevada 5 Utah 8
Idaho 3 New Hampshire 5 Virginia 29
Illinois 42 New Jersey 21 Washington 21
Indiana 20 New Mexico 5 West Virginia 5
Iowa 7 New York 41 Wisconsin 17
Kansas 8 North Carolina 28 Wyoming 1
Canada
Alberta 5 Manitoba 1 Quebec 8
British Columbia 7 Ontario 23
</Table>
The Pier's retail operations consist of 19 stores in England, three
stores in Scotland, and one store in Wales. At the end of fiscal 2002, Cargo had
two stores in Georgia, one store in Kansas, two stores in Missouri, four stores
in Virginia and nine stores in Texas.
As of March 2, 2002, Pier 1 owned or leased the following warehouse
properties in or near the following cities:
<Table>
<Caption>
Owned/Leased
Location Approx. Sq. Ft. Facility
- -------- --------------- ------------
<S> <C> <C>
Baltimore, Maryland 796,000 sq. ft. Leased
Chicago, Illinois 514,000 sq. ft Owned
Columbus, Ohio 527,000 sq. ft. Leased
Fort Worth, Texas 566,000 sq. ft. Owned
Ontario, California 747,000 sq. ft. Leased
Savannah, Georgia 548,000 sq. ft. Owned/Leased
</Table>
The Company also leases approximately 98,000 square feet of warehouse
space in the United Kingdom for The Pier's operations and approximately 123,000
square feet of warehouse space in the United States for Cargo's operations. The
Company is currently leasing additional space under short-term agreements. In
support of its long-range growth plan, the Company is expanding its distribution
facilities. The Company will be building a new distribution center to replace
its owned property along with the two locations it currently leases in Savannah.
The new facility is expected to be approximately 770,000 square feet, with
projected occupancy in the first quarter of calendar year 2004.
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 March 2, 2002; however, the Company considers them to be
either ordinary and routine in nature or immaterial in amount. While a certain
number of the lawsuits involve substantial amounts, management, after
consultation with counsel, does not currently expect such litigation will have a
material adverse effect on the Company's financial
<PAGE>
position, results of operations or liquidity. The Company intends to vigorously
defend itself against the claims asserted 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 2002 fiscal year.
Executive Officers of the Company
MARVIN J. GIROUARD, age 62, 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 the Company's Senior Vice President of
Merchandising.
CHARLES H. TURNER, age 45, has recently been promoted to Executive Vice
President of Finance and has served as Chief Financial Officer and Treasurer of
the Company since August 1999. He served as Senior Vice President of Finance of
the Company from August 1999 to April 2002. He served as Senior Vice President
of Stores of the Company from August 1994 to August 1999, and served as
Controller and Principal Accounting Officer of the Company from January 1992 to
August 1994.
ROBERT A. ARLAUSKAS, age 47, has recently been promoted to Executive
Vice President of Stores of the Company. He served as Senior Vice President of
Stores of the Company from September 1999 to April 2002. He served as Vice
President of West Zone Operations of Pier 1 Imports (U.S.), Inc. from August
1995 to September 1999, and served as Director of West Zone Operations of Pier 1
Imports (U.S.), Inc. from June 1993 to August 1995.
JAY R. JACOBS, age 47, has recently been promoted to Executive Vice
President of Merchandising of the Company. He served as Senior Vice President of
Merchandising of the Company from May 1995 to April 2002. 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 1993.
J. RODNEY LAWRENCE, age 56, has recently been promoted to Executive
Vice President of Legal Affairs and has served as Secretary of the Company since
November 1985. He served as Senior Vice President of Legal Affairs of the
Company from June 1992 to April 2002, and served as Vice President of Legal
Affairs of the Company from November 1985 to June 1992.
PHIL E. SCHNEIDER, age 50, has recently been promoted to Executive Vice
President of Marketing of the Company. He served as Senior Vice President of
Marketing of the Company from May 1993 to April 2002, and served as Vice
President of Advertising of Pier 1 Imports (U.S.), Inc. from January 1988 to May
1993.
DAVID A. WALKER, age 51, has recently been promoted to Executive Vice
President of Logistics and Allocations of the Company. He served as Senior Vice
President of Logistics and Allocations of the Company from September 1999 to
April 2002. He served as Vice President of Planning and Allocations of Pier 1
Imports (U.S.), Inc. from January 1994 to September 1999, and served as Director
of Merchandise Services of Pier 1 Imports (U.S.), Inc. from October 1989 to
January 1994.
E. MITCHELL WEATHERLY, age 54, has been promoted to Executive Vice
President of Human Resources of the Company. He served as Senior Vice President
of Human Resources of the Company from June 1992 to April 2002, 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 or with any director of the Company. None of such
officers was selected pursuant to any arrangement or understanding between him
and any other person.
PART II
Item 5. Market for the Company's Common Equity and Related Stockholder Matters.
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 March 2, 2002.
<PAGE>
The Company's common stock is traded on the New York Stock Exchange. As
of May 2002, there were approximately 40,000 shareholders of record of the
Company's common stock.
During fiscal 2002, the Company repurchased over four million shares of
its outstanding common stock. In April 2002, the Board of Directors authorized
the repurchase of up to $150 million of the Company's common stock. This
authorization replaced the previously authorized 2.8 million shares that were
remaining for repurchase at the end of fiscal 2002. Future repurchases 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 credit
ratings.
Certain of the Company's existing loan agreements require the Company
to maintain specified financial ratios and limit certain investments and
distributions to shareholders, including cash dividends, loans to shareholders
and repurchases of the Company's common stock. During fiscal 2002, the Company
paid cash dividends totaling approximately $15.1 million, or $.16 per share. The
Company's Board of Directors currently expects to continue to pay cash dividends
in fiscal 2003, but intends to retain most of its future earnings for the
expansion of the Company's business. The Company paid a cash dividend of $.05
per share on May 22, 2002. 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 March 2, 2002.
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 March 2, 2002.
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 March 2, 2002.
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 described below and
notes thereto set forth in the Company's Annual Report to Shareholders for the
fiscal year ended March 2, 2002:
Consolidated Statements of Operations for the Years
Ended March 2, 2002, March 3, 2001 and
February 26, 2000
Consolidated Balance Sheets at March 2, 2002 and March 3, 2001
Consolidated Statements of Cash Flows for the Years
Ended March 2, 2002, March 3, 2001 and
February 26, 2000
Consolidated Statements of Shareholders' Equity for
the Years Ended March 2, 2002, March 3, 2001
and February 26, 2000
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 March 2, 2002 and March 3, 2001.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
<PAGE>
PART III
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 -
Nominees for Directors" set forth in the Company's Proxy Statement for its 2002
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 2002 Annual
Meeting of Shareholders.
No director or nominee for director of the Company has any family
relationship with any other director or nominee or with any executive officer of
the Company.
Item 11. Executive Compensation.
The information required by this Item is incorporated herein by
reference to the section entitled "Executive Compensation" and the section
entitled "Election of Directors - Board Meetings, Committees and Fees" set forth
in the Company's Proxy Statement for its 2002 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" and the section entitled "Executive Compensation - Equity
Compensation Plan Information" set forth in the Company's Proxy Statement for
its 2002 Annual Meeting of Shareholders.
Item 13. Certain Relationships and Related Transactions.
None.
PART IV
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 March 2, 2002, March 3, 2001 and
February 26, 2000
Consolidated Balance Sheets at March 2, 2002 and
March 3, 2001
Consolidated Statements of Cash Flows for the Years
Ended March 2, 2002, March 3, 2001 and
February 26, 2000
Consolidated Statements of Shareholders' Equity for
the Years Ended March 2, 2002, March 3, 2001
and February 26, 2000
Notes to Consolidated Financial Statements
Report of Independent Auditors
2. Financial Statement Schedules
Schedules 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.
On February 12, 2002, the Company filed a Current Report on
Form 8-K, in compliance with fair disclosure regulations.
<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 30, 2002 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.
<Table>
<Caption>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Marvin J. Girouard Chairman and May 30, 2002
- --------------------------- Chief Executive Officer
Marvin J. Girouard
/s/ Charles H. Turner Executive Vice President, May 30, 2002
- --------------------------- Chief Financial Officer and Treasurer
Charles H. Turner
/s/ Susan E. Barley Principal Accounting Officer May 30, 2002
- ---------------------------
Susan E. Barley
/s/ John H. Burgoyne Director May 30, 2002
- ---------------------------
John H. Burgoyne
/s/ James D. Carreker Director May 30, 2002
- ---------------------------
James D. Carreker
/s/ Dr. Michael R. Ferrari Director May 30, 2002
- ---------------------------
Dr. Michael R. Ferrari
/s/ James M. Hoak, Jr. Director May 30, 2002
- ---------------------------
James M. Hoak, Jr.
/s/ Karen W. Katz Director May 30, 2002
- ---------------------------
Karen W. Katz
/s/ Tom M. Thomas Director May 30, 2002
- ---------------------------
Tom M. Thomas
</Table>
<PAGE>
EXHIBIT INDEX
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
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.
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.
10.2.1* Amendments to the Company's Supplemental Executive Retirement
Plan, incorporated herein by reference to Exhibit 10.2.1 to the
Company's Form 10-K for the fiscal year ended March 3, 2001.
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.
10.11.3 Amendment No. 4 to the Pooling and Servicing Agreement,
incorporated herein by reference to Exhibit 10.11.3 to the
Company's Form 10-K for the fiscal year ended March 3, 2001.
</Table>
<PAGE>
<Table>
<S> <C>
10.11.4 Amendment No. 5 to the Pooling and Services Agreement dated as
of February 12, 1997 by and among Pier 1 Funding, L.L.C., Pier 1
Imports (U.S.), Inc., as servicer, and Wells Fargo Bank
Minnesota, National Association as trustee, incorporated herein
by reference to Exhibit 10.11.4 to the Company's Form 10-Q for
the quarter ended September 1, 2001.
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.
10.14.1 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.
10.14.2 First Amendment to the Revolving Credit Agreement, dated
December 30, 1999, incorporated herein by reference to Exhibit
10.14.2 to the Company's Form 10-K for the fiscal year ended
February 26, 2000.
10.15* The Company's 1999 Stock Option Plan, effective June 24, 1999,
incorporated herein by reference to Exhibit 10.1 to the
Company's Form 10-Q for the quarter ended August 28, 1999.
10.16* Forms of Director and Employee Stock Option Agreements,
incorporated herein by reference to Exhibit 10.2 to the
Company's Form 10-Q for the quarter ended August 28, 1999.
10.17 Certificate Purchase Agreement among Pier 1 Funding, L.L.C.,
Pier 1 Imports (U.S.), Inc., the purchasers named therein and
Morgan Guaranty Trust Company of New York, as administrative
agent, incorporated herein by reference to Exhibit 10.17 to the
Company's Form 10-Q for the quarter ended September 1, 2001.
10.18 Repurchase Agreements relating to the cancellation of Series
1997-1 Class A Certificates, incorporated herein by reference to
Exhibit 10.18 to the Company's Form 10-Q for the quarter ended
September 1, 2001.
13 Annual Report to Shareholders for the fiscal year ended March 2,
2002.
21 Roster of Subsidiaries of the Company.
23 Consent of Independent Auditors.
</Table>
*Management Contracts and Compensatory Plans
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-13
<SEQUENCE>3
<FILENAME>d97269exv13.txt
<DESCRIPTION>ANNUAL REPORT TO SHAREHOLDERS
<TEXT>
<PAGE>
EXHIBIT 13
FINANCIAL SUMMARY
($ in millions except per share amounts)
<Table>
<Caption>
4-Year
Compound Year Ended
Annual --------------------------------------------------------------
Growth Rate 2002 2001(1) 2000 1999 1998
----------- --------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS:
Net sales 9.5% $ 1,548.6 1,411.5 1,231.1 1,138.6 1,075.4
Gross profit 8.9% $ 649.8 594.5 512.5 500.4 461.5
Selling, general and administrative expenses 9.1% $ 448.1 399.8 349.4 334.6 315.8
Depreciation and amortization 15.7% $ 42.8 43.2 40.0 31.1 23.9
Operating income 6.9% $ 158.8 151.5 123.2 134.7 121.7
Nonoperating (income) and expenses, net (2) $ (0.2) 1.3 4.6 5.0 (2.3)
Income before income taxes 6.4% $ 159.0 150.2 118.6 129.6 124.0
Net income 6.5% $ 100.2 94.7 74.7 80.4 78.0
PER SHARE AMOUNTS
(ADJUSTED FOR STOCK SPLITS AND DIVIDENDS):
Basic earnings 8.3% $ 1.06 .98 .78 .82 .77
Diluted earnings 9.6% $ 1.04 .97 .75 .77 .72
Cash dividends declared 15.5% $ .16 .15 .12 .12 .09
Shareholders' equity 12.4% $ 6.20 5.52 4.60 4.12 3.89
OTHER FINANCIAL DATA:
Working capital (3) 9.0% $ 396.8 333.0 239.3 252.1 280.8
Current ratio (3) (3.2)% 2.9 3.3 2.4 2.9 3.3
Total assets 7.2% $ 862.7 735.7 670.7 654.0 653.4
Long-term debt (3) (31.4)% $ 25.4 25.0 25.0 96.0 114.9
Shareholders' equity 10.5% $ 585.7 531.9 440.7 403.9 392.7
Weighted average diluted shares
outstanding (millions) 96.2 98.0 103.3 108.9 112.9
Effective tax rate 37.0% 37.0 37.0 38.0 37.1
Return on average shareholders' equity 17.9% 19.5 17.7 20.2 21.8
Return on average total assets 12.5% 13.5 11.3 12.3 12.8
Pre-tax return on sales 10.3% 10.6 9.6 11.4 11.5
</Table>
(1) Fiscal 2001 consisted of a 53-week year. All other fiscal years presented
reflect 52-week years.
(2) Nonoperating (income) and expenses, net, were comprised of interest expense
and interest and investment income in each fiscal year presented, and in
addition, included net recoveries associated with trading activities in
fiscal 1998.
(3) The reduction in fiscal 2000 working capital, current ratio and long-term
debt was the result of the Company's call of its outstanding 5 3/4%
convertible subordinated notes. The notes were primarily converted into
shares of the Company's common stock in March 2000. Excluding the
reclassification of the 5 3/4% notes from long-term to short-term, working
capital would have been $278.5 million with a current ratio of 3.0 to 1 at
fiscal 2000 year-end.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Pier 1 Imports, Inc. and its consolidated subsidiaries (the "Company") is one of
North America's largest specialty retailers of unique decorative home
furnishings, gifts and related items, with over 950 stores in 48 states, Canada,
Puerto Rico, the United Kingdom and Mexico as of fiscal 2002 year-end. The
Company directly imports merchandise from over 40 countries around the world and
designs offerings that are proprietary to Pier 1 Imports. During fiscal 2002,
the Company reported record sales of $1,548.6 million and record net income of
$100.2 million, or $1.04 per diluted share. In February 2001, the Company
acquired certain assets and assumed certain liabilities of Cargo Furniture, Inc.
and formed New Cargo Furniture, Inc. ("Cargo"). Cargo, an 18-store retailer and
wholesaler of casual lifestyle furniture, gifts and home decor, had no impact on
the Company's fiscal 2001 operations due to the timing of the acquisition, but
is reflected in the Company's fiscal 2002 and 2001 year-end balance sheets and
fiscal 2002 results of operations.
FISCAL YEARS ENDED MARCH 2, 2002 AND MARCH 3, 2001
During the 52-week period of fiscal 2002, net sales increased $137.1 million, or
9.7%, to $1,548.6 million. Net sales for the 53-week period of fiscal 2001 were
$1,411.5 million. Same-store sales for fiscal 2002 improved 4.5% over the prior
year, excluding the 53rd week of sales in fiscal 2001. Despite a slow start in
sales growth during the first half of the fiscal year, the Company began to see
improvements in customer traffic, average ticket and customer conversion in the
third quarter. These sales trends began after the events of September 11th when
consumers shifted their spending away from travel and entertainment and began
making purchases for their homes. In addition to this change in consumer
behavior, the Company believes that its value-oriented merchandising efforts and
the success of its marketing campaign contributed to the sales increases
experienced during fiscal 2002.
The Company's accelerated new store growth plans in North America also
contributed to sales growth during fiscal 2002. The Company opened 104 and
closed 20 North American Pier 1 stores during the fiscal year. The North
American Pier 1 store count totaled 910 at the end of fiscal 2002 compared to
826 a year ago. Including Cargo and all other worldwide locations, the Company's
store count totaled 974 at the end of fiscal year 2002 compared to 899 at the
end of fiscal year 2001. Prior to the close of fiscal year 2002, the franchise
agreement with Akatsuki Printing Co., Ltd. and Skylark Co., Ltd. expired without
any additional costs or further obligations to the Company. As a result, the
Company no longer has stores in Japan.
<PAGE>
A summary reconciliation of the Company's stores open at the beginning of fiscal
2002, 2001 and 2000 to the number open at the end of each period follows:
<Table>
<Caption>
PIER 1 NORTH
AMERICAN INTERNATIONAL(1) CARGO(2) TOTAL
------------ ---------------- -------- -----
<S> <C> <C> <C> <C>
Open at February 27, 1999 752 54 -- 806
Openings (3) 63 5 -- 68
Closings (3) (30) (10) -- (40)
------------ ---------------- -------- -----
Open at February 26, 2000 785 49 -- 834
Openings (3) 65 3 -- 68
Closings (3) (24) -- -- (24)
Acquisition (February 2001) -- -- 21 21
------------ ---------------- -------- -----
Open at March 3, 2001 826 52 21 899
Openings (3) 104 3 3 110
Closings (3) (20) (9) (6) (35)
------------ ---------------- -------- -----
Open at March 2, 2002 910 46 18 974
============ ================ ======== =====
</Table>
(1) International stores were located in Puerto Rico, the United Kingdom,
Mexico and Japan for fiscal 2000 and 2001. All Japan locations were closed
by fiscal 2002 year-end.
(2) The Company's results of operations for fiscal 2001 were not affected by
the acquisition of Cargo.
(3) Openings and closings include stores which were relocated.
Sales on the Company's proprietary credit card for fiscal 2002 were $412.5
million compared to $377.0 million last year and accounted for 28.9% of U.S.
store sales for both fiscal periods. Proprietary credit card customers spent an
average of $153 per transaction, which was comparable to last year. The Company
continues to encourage sales on its proprietary credit card by opening new
accounts, including accounts on Cargo's new proprietary credit card, and
developing customer loyalty through marketing promotions specifically targeted
to cardholders, including deferred payment options on larger purchases. Although
the proprietary credit card generates income, it primarily serves as a marketing
and communication tool for the Company's most loyal customers.
Gross profit, after related buying and store occupancy costs, expressed as a
percentage of sales, was 42.0% for fiscal 2002 compared to 42.1% a year ago.
Merchandise margins for fiscal year 2002 remained unchanged at 54.2% of sales
when compared to last fiscal year. Although the first half of fiscal 2002 was
more promotional as a result of soft economic conditions, the second half of
fiscal 2002 yielded sales with a more favorable blend of regular-priced
merchandise and promotional items and merchandise margins rebounded accordingly.
Store occupancy costs were 12.3% of sales in fiscal 2002 versus 12.1% of sales
last fiscal year. This increase was primarily attributable to the effect of
leveraging occupancy costs over an additional week of sales in fiscal year 2001
versus fiscal year 2002. This increase was also the result of additional store
rental expense due to the sale and subsequent leaseback of six store properties
previously owned by the Company. These sale-leaseback transactions also
resulted, although to a lesser extent, in a reduction of depreciation expense,
which is not classified as a component of store occupancy costs.
As a percentage of sales, selling, general and administrative expenses,
including marketing, increased 60 basis points to 28.9% of sales for fiscal year
2002 from 28.3% of sales a year ago. Expenses that normally increase
proportionately with sales and number of stores, such as store payroll,
equipment rental, supplies and marketing expenses, were well controlled and
declined 50 basis points to 19.7% of sales. Store payroll decreased 20 basis
points as a percentage of sales, which was largely the result of a decrease in
store bonuses that are awarded based on sales gains over the prior year.
Marketing as a percentage of sales decreased 10 basis points, to 4.5% of sales,
due to lower television advertising rates negotiated by the Company. All other
selling, general and administrative expenses increased 110 basis points to 9.3%
of sales for the fiscal year. These increases were largely the result of
increases in non-store payroll, medical, workers' compensation, and general
insurance expenses, and the impact of Cargo's expenditures this year
<PAGE>
with no corresponding expense last year. The increases in non-store payroll
resulted primarily from an enhancement to the field management structure in the
first quarter of fiscal 2002 to provide for future growth.
Depreciation and amortization expense for fiscal 2002 was $42.8 million, or 2.8%
of sales, compared to $43.2 million, or 3.1% of sales, last fiscal year. The
decrease was primarily the result of store point of sale equipment, which became
fully depreciated in March 2001, along with the sale of eight store properties
previously owned, six of which were subsequently leased back by the Company.
Operating income improved to $158.8 million, or 10.3% of sales, in fiscal 2002
from $151.5 million, or 10.7% of sales, in fiscal 2001.
Interest income increased $0.6 million, or 10 basis points as a percentage of
sales, to $2.5 million due to considerably higher average cash and investment
balances during the current fiscal year compared to last fiscal year, partially
offset by a decrease in interest rates. Interest expense was $2.3 million in
fiscal year 2002 compared to $3.1 million in fiscal year 2001, a 10 basis point
reduction. The decline in interest expense was due to lower average interest
rates on a relatively fixed long-term debt balance along with no borrowings
under the Company's revolving credit facility during fiscal 2002 compared to
several months of outstanding balances on the revolver during fiscal 2001.
The Company's effective tax rate remained constant at 37% of income before
income taxes for both fiscal 2002 and 2001.
Fiscal 2002 net income totaled $100.2 million, representing 6.5% of sales, or
$1.04 per share on a diluted basis. In fiscal 2001, net income was 6.7% of sales
and totaled $94.7 million, or $.97 per share on a diluted basis.
FISCAL YEARS ENDED MARCH 3, 2001 AND FEBRUARY 26, 2000
During fiscal 2001, the Company recorded net sales of $1,411.5 million, an
increase of $180.4 million, or 14.7%, over net sales of $1,231.1 million for the
prior fiscal year. Fiscal 2001 consisted of a 53-week year, while fiscal 2000
and 1999 were 52-week years. Same-store sales for fiscal 2001 improved 7.8%,
excluding the 53rd week of sales. The Company believes that its new advertising
campaign, proprietary credit card and other promotions, and continued focus on a
value pricing initiative, which began in fiscal 2000, resulted in higher
customer traffic, average purchases per customer and conversion ratios during
fiscal 2001.
The Company's continued efforts to expand by opening new stores also contributed
to sales growth during fiscal 2001. The Company opened 65 new stores and closed
24 stores in North America during fiscal 2001, bringing the Pier 1 North
American store count up to 826 at year-end. With the addition of Cargo, the
store count worldwide, including North America, Puerto Rico, the United Kingdom,
Mexico and Japan, totaled 899 at the end of fiscal 2001 compared to 834 at the
end of fiscal 2000. A summary reconciliation of the Company's stores open at the
beginning of fiscal 2001, 2000 and 1999 to the number open at the end of each
period follows:
<PAGE>
<Table>
<Caption>
PIER 1 NORTH
AMERICAN INTERNATIONAL(1) CARGO(2) TOTAL
------------ ---------------- -------- -----
<S> <C> <C> <C> <C>
Open at February 28, 1998 719 45 -- 764
Openings (3) 63 11 -- 74
Closings (3) (30) (2) -- (32)
------------ ---------------- -------- -----
Open at February 27, 1999 752 54 -- 806
Openings (3) 63 5 -- 68
Closings (3) (30) (10) -- (40)
------------ ---------------- -------- -----
Open at February 26, 2000 785 49 -- 834
Openings (3) 65 3 -- 68
Closings (3) (24) -- -- (24)
Acquisition (February 2001) -- -- 21 21
------------ ---------------- -------- -----
Open at March 3, 2001 826 52 21 899
============ ================ ======== =====
</Table>
(1) International stores were located in Puerto Rico, the United Kingdom,
Mexico and Japan.
(2) The Company's results of operations for fiscal 2001 were not affected by
the acquisition of Cargo.
(3) Openings and closings include stores which were relocated.
Increased use of the Company's proprietary credit card added to the Company's
sales growth during fiscal 2001. Sales on the proprietary credit card were
$377.0 million and accounted for 28.9% of U.S. store sales during fiscal 2001,
an increase of $76.5 million over proprietary credit card sales in the prior
year of $300.5 million, which represented 26.3% of U.S. store sales during that
year. Proprietary credit card customers spent an average of $152 per transaction
in fiscal 2001 compared to $142 per transaction in fiscal 2000. The Company
attributed the growth in sales on the card to continued efforts to open new
accounts, deferred payment options offered to cardholders during furniture
promotions, and enhanced customer loyalty through targeted promotions.
Gross profit, after related buying and store occupancy costs, expressed as a
percentage of sales, increased 50 basis points in fiscal 2001 to 42.1% from
41.6% in fiscal 2000. Merchandise margins, as a percentage of sales, declined
from 54.6% in fiscal 2000 to 54.2% in fiscal 2001, a decrease of 40 basis
points. The decrease was a result of management's concerted decision to continue
to give value back to customers by offering unique merchandise at affordable
prices. In addition, the effect of a full year of price reductions taken as a
result of the value pricing initiative started in May 1999 which continued
throughout fiscal 2000 created downward pressure on fiscal 2001 merchandise
margins. This decline was also due in part to higher freight rates during the
first half of fiscal 2001 as compared to the same period in fiscal 2000. The
decreases in merchandise margins were more than offset by the leveraging of
relatively fixed rental costs over a higher sales base, which included an
additional week of sales in fiscal 2001. Store occupancy costs improved 90 basis
points as a percentage of sales from 13.0% in fiscal 2000 to 12.1% in fiscal
2001.
As a percentage of sales, selling, general and administrative expenses,
including marketing, improved 10 basis points to 28.3% in fiscal 2001 from 28.4%
in fiscal 2000. In total dollars, selling, general and administrative expenses
for fiscal 2001 increased $50.4 million over the prior fiscal year. Expenses
that normally increase proportionately with sales and number of stores, such as
marketing, store payroll, supplies and equipment rental, increased by $34.3
million, but as a percentage of sales declined nearly 20 basis points to 20.2%
this fiscal year. Marketing as a percentage of sales decreased 20 basis points
as a result of reduced spending on newspaper and magazine advertisements, along
with leveraging marketing expenditures over a higher sales base. As a percentage
of sales, the decrease in marketing expenses was offset by a 10 basis point
increase in store payroll when comparing the two fiscal years. This increase was
largely attributable to store bonuses awarded based on sales gains. All other
selling, general and administrative expenses increased by $16.0 million, and
increased 10 basis points as a percentage of sales. This increase was primarily
due to an increase in information technology and other non-store salaries,
partially offset by effective management of other administrative expenses and a
reduction in net credit card costs.
<PAGE>
Depreciation and amortization increased by $3.2 million to $43.2 million in
fiscal 2001 primarily because of the Company's increased capital expenditures
throughout fiscal 2001 and 2000, especially expenditures on technology-related
assets which tend to have relatively short useful lives.
In fiscal 2001, operating income for the year improved to $151.5 million or
10.7% of sales, from $123.2 million or 10.0% of sales in fiscal 2000, an
increase of 23.0% or $28.3 million.
Interest income decreased slightly to $1.9 million in fiscal 2001 from $2.3
million in fiscal 2000 due to lower average cash balances during the current
fiscal year. Interest expense was $3.1 million in fiscal 2001 compared to $6.9
million in fiscal 2000, a decline of $3.8 million. The decrease in interest
expense was primarily due to the repurchase of $28.6 million of the Company's
5 3/4% convertible subordinated notes during fiscal 2000 and the retirement of
the remaining $39.2 million of these notes during the first quarter of fiscal
2001. See Note 5 of the Notes to Consolidated Financial Statements.
The Company's effective tax rate remained constant at 37% of income before
income taxes for both fiscal 2001 and 2000.
Net income in fiscal 2001 was $94.7 million, or $.97 per share on a diluted
basis, an increase of $20.0 million, or 26.7%, as compared to fiscal 2000's net
income of $74.7 million, or $.75 per share on a diluted basis. Net income, as a
percentage of sales, improved from 6.1% in fiscal 2000 to 6.7% in fiscal 2001.
LIQUIDITY AND CAPITAL RESOURCES
The Company ended fiscal year 2002 with $235.6 million of cash compared to $46.8
million a year ago. Total cash generated from operations was $244.3 million
compared to $107.5 million last year. Net income, adjusted for non-cash and
non-operating related items, was $147.0 million and served as the Company's
primary source of operating cash for the fiscal year. The Company's reduction in
inventory levels provided cash of $34.8 million compared to a use of cash in the
prior fiscal year of $39.1 million. The Company's ability to better manage
inventory levels resulted in higher inventory turns and lower overall
inventories this year compared to last year, with only a slight decline in
average inventory per store. After a successful January clearance event,
inventory levels were well positioned at the end of fiscal 2002 enabling a
smooth transition into the spring selling season. Increases in accounts payable
and accrued liabilities provided cash of $66.0 million. These increases were
primarily the result of an increase in merchandise-related accounts payable,
increased sales of the Company's gift cards and increases in federal and state
income taxes payable resulting from a change in the timing of tax payments.
During fiscal 2002, the Company spent a net of $10.5 million on investing
activities. Capital expenditures were $57.9 million, a majority of which was
used for new and existing store development and investments in the Company's
information systems. The Company opened a record 104 new Pier 1 stores in North
America, as well as three international stores, and relocated three existing
Cargo stores, which together accounted for $27.9 million of the total amount
expended for capital purchases. The Company remodeled five stores in fiscal 2002
at a cost of $5.1 million. Continuing with its commitment to invest in current
store locations, the Company spent an additional $4.5 million to improve floor
plans and upgrade fixtures on existing stores. The Company also spent $16.7
million on computer software and other system enhancements, including a new
financial system, warehouse management system and customer relations management
system. Proceeds from disposition of properties totaled $16.7 million, which
included $12.6 million in proceeds from the sale-leaseback of six Company-owned
properties throughout fiscal 2002. See Note 9 of the Notes to Consolidated
Financial Statements for additional discussion of the sale-leaseback
transactions.
As of March 2, 2002, the Company's beneficial interest in securitized
receivables decreased $30.8 million from the balance at fiscal 2001 year-end.
During the third quarter of fiscal 2002, the Company completed a new credit card
securitization transaction through the Pier 1 Imports Credit Card Master Trust
(the "Master
<PAGE>
Trust"). The Master Trust is not consolidated by the Company as it is a
qualifying special-purpose entity under Statement of Financial Accounting
Standards ("SFAS") No. 140, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities." The Master Trust issued $100 million
in trust certificates to a third party, which bear interest at a floating rate
equal to the rate on commercial paper issued by the third party. As of the end
of fiscal year 2002, this rate was 1.81%. In conjunction with this transaction,
the Master Trust retired $50 million in previously issued certificates, which
bore interest at a fixed rate of 6.74% and were scheduled to mature in May 2002.
After the retirement of these certificates, the new transaction provided the
Company with net proceeds of approximately $49 million. The sale of the
additional $50 million of retained interest contributed to this decrease in
beneficial interest in securitized receivables, but was partially offset by
increases subsequent to the sale of the retained interest due to increased sales
on the Company's proprietary credit card. The Company has continued to
experience payment rates comparable to last fiscal year on its proprietary
credit card receivables. See Note 2 of the Notes to Consolidated Financial
Statements.
During fiscal 2002, the Company paid $44.1 million to repurchase 4,020,500
common shares under the Board of Directors-approved stock buyback program at an
average price of $10.98, including fees. Subsequent to the end of fiscal 2002,
the Company announced that its Board of Directors authorized share repurchases
of up to $150 million of the Company's common stock. This authorization replaced
the previously authorized 2.8 million shares that were remaining for repurchase
at the end of fiscal 2002. These repurchases will be made in open market or
private transactions over the next two to three years depending on prevailing
market conditions, the Company's available cash, loan covenant restrictions and
consideration of its corporate credit ratings. During the year, the Company
continued to pay dividends and $15.1 million of cash was expended for dividend
payments during fiscal 2002. Also, subsequent to the end of the fiscal year, the
Company declared an increased quarterly cash dividend of $.05 per share payable
on May 22, 2002 to shareholders of record on May 8, 2002. The Company expects to
continue to pay cash dividends in fiscal 2003, but to retain most of its future
earnings for expansion of the Company's business. Other financing activities,
primarily the exercise of stock options, provided cash of $14.2 million during
fiscal 2002.
At fiscal 2002 year-end, the Company's sources of working capital were cash flow
from operations, sales of proprietary credit card receivables and bank lines of
credit. The bank facilities include a $125 million credit facility, which
expires in November 2003, all of which was available at fiscal 2002 year-end.
The Company had no borrowings on this facility during fiscal 2002. Additionally,
the Company has a $120 million short-term line of credit, which is primarily
used to issue merchandise letters of credit. At fiscal 2002 year-end,
approximately $64.6 million had been utilized, leaving $55.4 million available.
The Company also has $28.7 million in credit lines used to issue other
special-purpose letters of credit, all of which were fully utilized at fiscal
2002 year-end. Of the $28.7 million in special-purpose letters of credit, $25.6
million related to the Company's industrial revenue bonds. See Note 5 of the
Notes to Consolidated Financial Statements. Most of the Company's loan
agreements require the Company to maintain certain financial ratios and limit
certain investments and distributions to shareholders, including cash dividends
and repurchases of common stock. The Company's current ratio was 2.9 to 1 at
fiscal 2002 year-end compared to 3.3 to 1 at fiscal 2001 year-end.
A summary of the Company's other commercial commitments as of March 2, 2002 is
listed below (in thousands):
<PAGE>
<Table>
<Caption>
Amount of Commitment
Expiration Per Period
---------------------
Total Amounts Less Than 1 to 3
Committed 1 Year Years
------------- --------- -------
<S> <C> <C> <C>
Merchandise letters of credit $ 64,640 $ 64,640 $ --
Standby letters of credit 28,740 3,175 25,565
------------- --------- -------
Total other commercial
commitments $ 93,380 $ 67,815 $25,565
============= ========= =======
</Table>
A summary of the Company's contractual cash commitments as of March 2, 2002 is
listed below (in thousands):
<Table>
<Caption>
Long-term Operating
Fiscal Year Debt Leases
- ----------- --------- -----------
<S> <C> <C>
2003 $ 356 $ 162,315
2004 356 158,525
2005 -- 145,608
2006 -- 132,855
2007 -- 118,102
Thereafter 25,000 426,946
--------- -----------
Total contractual
cash commitments $ 25,712 $ 1,144,351
========= ===========
</Table>
The present value of total existing minimum operating lease commitments
discounted at 10% was $751.9 million at fiscal 2002 year-end. The Company plans
to continue to fund these commitments from operating cash flow.
The Company's securitization transaction accounts for a significant source of
its funding, with a face amount of outstanding debt securities (the Class A
Certificates) assumed by third parties of $100 million. The Company does not
provide recourse to third party investors that purchase the debt securities
issued by the Master Trust. However, should the performance of the underlying
credit card receivables held by the Master Trust deteriorate to a level that the
Company's retained subordinated interests were insufficient to collateralize the
Class A Certificates, the Master Trust would be contractually required to begin
repayment of the Class A Certificates thereby limiting the amount of receivables
that could be sold to the Master Trust and limiting the securitization as a
source of funding. However, this repayment would only be required to the extent
that the Master Trust was out of compliance with its required performance
measures. The performance measures that could trigger this repayment, such as
payment rate, returns and fraud, portfolio yield, and minimum transferor's
interest, would have to decline significantly to result in such an early
amortization event. In addition, if the Company was required to consolidate the
Master Trust due to a change in accounting rules, the Company's operations for
fiscal 2002 would not have been materially different than its reported results
and both its assets and liabilities would have increased by approximately $100
million as of March 2, 2002.
The Company plans to open approximately 115 to 120 new Pier 1 stores during
fiscal year 2003 and plans to close approximately 30 stores as their leases
expire or otherwise end. A majority of the store closings are planned
relocations within the same markets. In addition, the Company will begin its
expansion plans for
<PAGE>
Cargo and will open eight to ten locations during fiscal 2003. New store
buildings and land will be financed primarily through operating leases. Total
capital expenditures for fiscal 2003 are expected to be approximately $85
million. Of this amount, the Company expects to spend approximately $43 million
on store development, $15 million on the replacement of its Savannah
distribution facility, net of estimated proceeds from the disposal of the
current facility, $15 million on information systems and $12 million on the land
and other costs related to construction of the Company's new headquarters.
In summary, the Company's primary uses of cash in fiscal 2002 were to fund
operating expenses, provide for new and existing store development and
repurchase common stock of the Company. Historically, the Company has financed
its operations primarily from internally generated funds and borrowings under
the Company's credit facilities. The Company believes that the funds provided
from operations, available lines of credit and sales of its proprietary credit
card receivables will be sufficient to finance working capital and capital
expenditure requirements throughout fiscal year 2003.
CRITICAL ACCOUNTING POLICIES
The preparation of the Company's consolidated financial statements in accordance
with accounting principles generally accepted in the United States requires the
use of estimates that affect the reported value of assets, liabilities, revenues
and expenses. These estimates are based on historical experience and various
other factors that are believed to be reasonable under the circumstances, the
results of which form the basis for the Company's conclusions. The Company
continually evaluates the information used to make these estimates as the
business and the economic environment changes. Actual results may differ from
these estimates under different assumptions or conditions. The use of estimates
is pervasive throughout the consolidated financial statements, but the
accounting policies and estimates considered most critical are as follows:
BENEFICIAL INTEREST IN SECURITIZED RECEIVABLES - In February 1997, the Company
sold all of its proprietary credit card receivables to a special-purpose
wholly-owned subsidiary, Pier 1 Funding, Inc., predecessor to Pier 1 Funding,
LLC ("Funding"), which transferred the receivables to the Pier 1 Imports Credit
Card Master Trust (the "Master Trust"). The Master Trust is not consolidated by
the Company as it meets the requirements of a qualifying special-purpose entity
under SFAS No. 140. The Master Trust issues beneficial interests that represent
undivided interests in the assets of the Master Trust consisting of the
transferred receivables and all cash flows from collections of such receivables.
The beneficial interests include certain interests retained by Funding, which
are represented by Class B Certificates, and the residual interest in the Master
Trust (the excess of the principal amount of receivables held in the Master
Trust over the portion represented by the certificates sold to investors and the
Class B Certificates). Gain or loss on the sale of receivables depends in part
on the previous carrying amount of the financial assets involved in the
transfer, allocated between the assets sold and the retained interests based on
their relative fair value at the date of transfer. The beneficial interest in
the Master Trust is accounted for as an available-for-sale security. The Company
estimates the fair value of its beneficial interest in the Master Trust, both
upon initial securitization and thereafter, based on the present value of future
expected cash flows estimated using management's best estimates of key
assumptions including credit losses and timeliness of payments. Although not
anticipated by the Company, a significant deterioration in the financial
condition of the Company's credit card holders, interest rates, or other
economic conditions could result in other than temporary losses on the
beneficial interest in future periods.
INVENTORIES - The Company's inventory is comprised of finished merchandise and
is stated at the lower of average cost or market; cost is determined on a
weighted average method. Calculations of the carrying value of inventory are
made on an item-by-item basis. The Company reviews its inventory levels in order
to identify slow-moving merchandise and uses merchandise markdowns to clear such
merchandise. Reserves are established to reduce the value of such slow-moving
merchandise. The Company records inventory shrink expense based upon known
inventory losses plus unknown losses estimated by reviewing historical
experience of the results of its physical inventories. Although inventory shrink
rates have not fluctuated significantly in recent years, should actual inventory
shrink rates differ from the Company's estimates,
<PAGE>
revisions to the inventory shrink expense may be required. Most inventory
purchases and commitments are made in U.S. dollars.
INCOME TAXES - The Company records income tax expense using the liability method
for taxes. The Company is subject to income tax in many jurisdictions, including
the United States, various states and localities, and foreign countries. The
process of determining tax expense by jurisdiction involves the calculation of
actual current tax expense, together with the assessment of deferred tax expense
resulting from differing treatment of items for tax and financial accounting
purposes. Deferred tax assets and liabilities are recorded in the Company's
consolidated balance sheets.
In accordance with Accounting Principles Board ("APB") Opinion No. 23, 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. The Company intends these
earnings to be indefinitely reinvested in international operations. If future
events require that certain assets associated with these earnings be repatriated
to the United States, an additional tax provision will be required.
Determination of the amount of additional taxes that would be payable if such
earnings were not considered indefinitely reinvested is not practical due to the
complexities in tax laws and the assumptions that would have to be made.
REVENUE RECOGNITION - The Company recognizes revenue upon customer receipt or
delivery for retail sales, including sales under deferred payment promotions on
its proprietary credit card. Credit card receivable deferrals are for
approximately 90 days and have historically resulted in no significant increases
in bad debt losses arising from such receivables. Revenue from gift cards, gift
certificates and merchandise credits is deferred until redemption. The Company
records an allowance for estimated merchandise returns based on historical
experience and other known factors. Should actual returns differ from the
Company's estimates and current provision for merchandise returns, revisions to
the estimated merchandise returns may be required.
SAME-STORE SALES - Stores included in the same-store sales calculation are those
stores opened prior to the beginning of the preceding fiscal year and that are
still open. Also included are stores that are relocated during the year within a
specified distance serving the same market, where there is not a significant
change in store size and where there is not a significant overlap between the
opening of one store and the closing of the existing store. Stores that are
expanded or renovated are excluded from the same-store sales calculation during
the period they are closed for such remodeling. When these stores re-open for
business, they are included in the same-store sales calculation in the first
full month after the re-opening if there is no significant change in store size.
If there is a significant change in store size, the store continues to be
excluded from the calculation until it meets the Company's established
definition of a same-store. Sales over the internet are included, but clearance
stores are omitted from the same-store sales calculation. Also, Cargo was not
included in the operations of the Company for fiscal 2001 and was not included
in the same-store sales calculation for fiscal 2002.
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, does not use them for trading
purposes, and is not a party to any leveraged derivatives.
The Company periodically enters into forward foreign currency exchange 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 the
EMU euro and British pounds, associated with purchases denominated in foreign
currencies. The Company also uses contracts to hedge its exposure associated
with repatriation of funds from its Canadian operations. Changes in the fair
value of the derivatives are included in the Company's consolidated statements
of operations. Forward contracts, which hedge merchandise purchases, generally
have maturities not exceeding six months, and contracts which hedge the
repatriation of
<PAGE>
Canadian funds have maturities not exceeding eighteen months. At March 2, 2002,
the notional amount of the Company's forward foreign currency exchange contracts
and contracts to hedge its exposure associated with the repatriation of Canadian
funds totaled approximately $3.9 and $12.2 million, respectively.
The Company manages its exposure to changes in interest rates by optimizing the
use of variable and fixed rate debt. The Company had $25.0 million of variable
rate borrowings at March 2, 2002. A hypothetical 10% adverse change in interest
rates 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 did not materially change from March 3, 2001.
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 the first quarter of fiscal 2002, the Company adopted SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which was
amended by SFAS No. 137 and SFAS No. 138. This statement establishes accounting
and reporting guidelines for derivatives and requires the Company to record all
derivatives as assets or liabilities on the balance sheet at fair value. The
Company's use of derivatives is primarily limited to forward foreign currency
exchange contracts, which the Company uses to mitigate exposures to changes in
foreign currency exchange rates. The Company also uses contracts which hedge the
repatriation of Canadian funds. Upon adoption of SFAS No. 133, the Company did
not designate such derivatives as hedging instruments; thus, the changes in the
fair value of the derivatives have been included in the consolidated statements
of operations. Prior to adoption, the Company deferred all gains and losses on
its derivative contracts and recognized such gains and losses as an adjustment
to the transaction price. The adoption of SFAS No. 133 has not had a material
impact on the Company's consolidated balance sheets or its statements of
operations, shareholders' equity and cash flows.
The Company adopted SFAS No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" in the first quarter of
fiscal 2002. This statement established new conditions for a securitization to
be accounted for as a sale of receivables, changed the requirements for an
entity to be a qualifying special-purpose entity, and modified the conditions
for determining whether a transferor has relinquished control over transferred
assets. SFAS No. 140 also requires additional disclosures related to securitized
financial assets and retained interests in securitized financial assets. See
Note 2 of the Notes to Consolidated Financial Statements. Prior to adoption, the
Company made the necessary amendments to its securitization agreements and
continues to receive sale treatment for its securitized proprietary credit card
receivables. The implementation of SFAS No. 140 did not have a material impact
on the Company's consolidated balance sheets or its statements of operations,
shareholders' equity and cash flows.
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
141, "Business Combinations," which supersedes APB Opinion No. 16, "Business
Combinations," and SFAS No. 38, "Accounting for Preacquisition Contingencies of
Purchased Enterprises." Statement No. 141 eliminates the pooling-of-interests
method of accounting for business combinations and requires all such
transactions to be accounted for under the purchase method. This statement also
addresses the initial recognition and measurement of goodwill and other
intangible assets acquired in a business combination and is effective for all
business combinations initiated after June 30, 2001. The adoption of SFAS No.
141 did not have a material impact on the Company's consolidated balance sheets
or its statements of operations, shareholders' equity and cash flows.
In June 2001, the FASB also issued SFAS No. 142, "Goodwill and Other Intangible
Assets," which supersedes APB Opinion No. 17, "Intangible Assets." This
statement addresses the initial recognition and measurement of intangible assets
acquired outside of a business combination and the accounting for goodwill and
other intangible assets subsequent to their acquisition. SFAS No. 142 also
provides that
<PAGE>
intangible assets with finite useful lives be amortized and that goodwill and
intangible assets with indefinite lives will not be amortized, but will rather
be tested on an annual basis for impairment. The Company is required to adopt
SFAS No. 142 for its fiscal year beginning March 3, 2002. The Company has
analyzed the implementation requirements and does not anticipate that the
adoption of SFAS No. 142 will have a material impact on the Company's
consolidated balance sheets or its statements of operations, shareholders'
equity and cash flows.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," which replaces SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
Statement No. 144 retains the fundamental provisions of SFAS No. 121 with
additional guidance on estimating cash flows when performing a recoverability
test, requires that a long-lived asset to be disposed of other than by sale be
classified as "held and used" until it is disposed of, and establishes more
restrictive criteria to classify an asset as "held for sale." SFAS No. 144 also
supersedes APB Opinion No. 30, "Reporting the Results of Operations - Reporting
the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions" regarding the disposal of a
segment of a business and would extend the reporting of a discontinued operation
to a "component of an entity" and requires the operating losses thereon to be
recognized in the period in which they occur. The Company is required to adopt
SFAS No. 144 for its fiscal year beginning March 3, 2002. The Company has
analyzed the implementation requirements and does not anticipate that the
adoption of SFAS No. 144 will have a material impact on the Company's
consolidated balance sheets or its statements of operations, shareholders'
equity and cash flows.
FORWARD-LOOKING STATEMENTS
Certain matters discussed in this annual report, other than historical
information, may constitute "forward-looking statements" that are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those described in the forward-looking statements. 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 effects of terrorist
attacks or other acts of war, weather conditions that may affect sales, the
general strength of the economy and levels of consumer spending, the
availability of new sites for expansion along with sufficient labor to
facilitate growth, 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 annual report. The Company assumes no obligation to
update or otherwise revise its forward-looking statements even if experience or
future changes make it clear that any projected results expressed or implied
will not be realized.
<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 March 2, 2002 and March 3, 2001, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
three years in the period ended March 2, 2002. 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 auditing standards generally accepted
in the United States. 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 March 2, 2002 and March 3, 2001, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
March 2, 2002, in conformity with accounting principles generally accepted in
the United States.
/s/ Ernst & Young LLP
Fort Worth, Texas
April 8, 2002
<PAGE>
REPORT OF MANAGEMENT
To our shareholders:
Management is responsible for the preparation and the integrity of the
accompanying consolidated financial statements and related notes, which have
been prepared in accordance with accounting principles generally accepted in the
United States and include amounts based upon our estimates and judgments, as
required. The consolidated financial statements have been audited by Ernst &
Young LLP, independent certified public accountants. The accompanying
independent auditors' report expresses an independent professional opinion on
the fairness of presentation of management's financial statements.
The Company maintains a system of internal controls over financial reporting. We
believe this system provides reasonable assurance that transactions are executed
in accordance with management authorization and that such transactions are
properly recorded and reported in the financial statements, that assets are
properly safeguarded and accounted for, and that records are maintained so as to
permit preparation of financial statements in accordance with accounting
principles generally accepted in the United States. The Company also has
instituted policies and guidelines, which require employees to maintain a high
level of ethical standards.
In addition, the Board of Directors exercises its oversight role with respect to
the Company's internal control systems primarily through its Audit Committee.
The Audit Committee consists solely of outside directors and meets periodically
with management, the Company's internal auditors and the Company's independent
auditors to review internal accounting controls, audit results, financial
reporting, and accounting principles and practices. The Company's independent
and internal auditors have full and free access to the Audit Committee with and
without management's presence. Although no cost-effective internal control
system will preclude all errors and irregularities, we believe our controls as
of and for the year ended March 2, 2002 provide reasonable assurance that the
consolidated financial statements are reliable.
/s/ Marvin J. Girouard
Marvin J. Girouard
Chairman of the Board
and Chief Executive Officer
/s/ Charles H. Turner
Charles H. Turner
Executive Vice President,
Chief Financial Officer and Treasurer
<PAGE>
PIER 1 IMPORTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share amounts)
<Table>
<Caption>
Year Ended
------------------------------------------------
2002 2001 2000
------------ ------------ ------------
<S> <C> <C> <C>
Net sales $ 1,548,556 $ 1,411,498 $ 1,231,095
Operating costs and expenses:
Cost of sales (including buying and
store occupancy costs) 898,795 817,043 718,547
Selling, general and administrative
expenses 448,127 399,755 349,394
Depreciation and amortization 42,821 43,184 39,973
------------ ------------ ------------
1,389,743 1,259,982 1,107,914
------------ ------------ ------------
Operating income 158,813 151,516 123,181
Nonoperating (income) and expenses:
Interest and investment income (2,484) (1,854) (2,349)
Interest expense 2,300 3,130 6,918
------------ ------------ ------------
(184) 1,276 4,569
------------ ------------ ------------
Income before income taxes 158,997 150,240 118,612
Provision for income taxes 58,788 55,590 43,887
------------ ------------ ------------
Net income $ 100,209 $ 94,650 $ 74,725
============ ============ ============
Earnings per share:
Basic $ 1.06 $ .98 $ .78
============ ============ ============
Diluted $ 1.04 $ .97 $ .75
============ ============ ============
Dividends declared per share: $ .16 $ .15 $ .12
============ ============ ============
Average shares outstanding during period:
Basic 94,414 96,306 95,766
============ ============ ============
Diluted 96,185 97,952 103,297
============ ============ ============
</Table>
The accompanying notes are an integral part of these financial statements.
<PAGE>
PIER 1 IMPORTS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands except share amounts)
<Table>
<Caption>
2002 2001
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash, including temporary investments of $213,488
and $31,142, respectively $ 235,609 $ 46,841
Beneficial interest in securitized receivables 44,620 75,403
Other accounts receivable, net of allowance for
doubtful accounts of $275 and $295, respectively 6,205 8,370
Inventories 275,433 310,704
Prepaid expenses and other current assets 43,286 35,748
---------- ----------
Total current assets 605,153 477,066
Properties, net 209,954 212,066
Other noncurrent assets 47,565 46,578
---------- ----------
$ 862,672 $ 735,710
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 356 $ --
Accounts payable and accrued liabilities 208,040 144,110
---------- ----------
Total current liabilities 208,396 144,110
Long-term debt 25,356 25,000
Other noncurrent liabilities 43,264 34,721
Shareholders' equity:
Common stock, $1.00 par, 500,000,000 shares
authorized, 100,779,000 issued 100,779 100,779
Paid-in capital 140,190 139,424
Retained earnings 429,910 344,809
Cumulative other comprehensive income (4,702) (3,115)
Less - 7,362,000 and 4,619,000 common shares
in treasury, at cost, respectively (80,521) (49,933)
Less - unearned compensation -- (85)
---------- ----------
585,656 531,879
Commitments and contingencies -- --
---------- ----------
$ 862,672 $ 735,710
========== ==========
</Table>
The accompanying notes are an integral part of these financial statements.
<PAGE>
PIER 1 IMPORTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands except share amounts)
<Table>
<Caption>
Year Ended
------------------------------------------
2002 2001 2000
---------- ---------- ----------
<S> <C> <C> <C>
Cash flow from operating activities:
Net income $ 100,209 $ 94,650 $ 74,725
Adjustments to reconcile to net cash
provided by operating activities:
Depreciation and amortization 42,821 43,184 39,973
Loss on disposal of fixed assets 4,205 6,514 5,828
Deferred compensation 3,697 2,072 1,543
Deferred taxes (2,238) 735 1,724
Other (1,707) (184) 1,938
Change in cash from:
Inventories 34,804 (39,127) (10,133)
Other accounts receivable and other current assets (2,983) (5,847) 586
Accounts payable and accrued expenses 66,048 6,280 8,962
Other noncurrent assets (32) (378) (2,382)
Other noncurrent liabilities (500) (390) (911)
---------- ---------- ----------
Net cash provided by operating activities 244,324 107,509 121,853
---------- ---------- ----------
Cash flow from investing activities:
Capital expenditures (57,925) (42,745) (48,219)
Proceeds from disposition of properties 16,682 353 19,425
Net cost from disposition of
Sunbelt Nursery Group, Inc. properties -- -- (439)
Acquisitions, net of cash acquired -- (3,917) --
Beneficial interest in securitized receivables 30,783 (21,583) (12,820)
---------- ---------- ----------
Net cash used in investing activities (10,460) (67,892) (42,053)
---------- ---------- ----------
Cash flow from financing activities:
Cash dividends (15,134) (14,494) (11,504)
Purchases of treasury stock (44,137) (34,270) (31,806)
Proceeds from stock options exercised, stock purchase
plan and other, net 13,463 5,627 4,148
Borrowings under long-term debt 712 82,500 4,035
Repayments of long-term debt -- (82,515) (36,242)
---------- ---------- ----------
Net cash used in financing activities (45,096) (43,152) (71,369)
---------- ---------- ----------
Change in cash and cash equivalents 188,768 (3,535) 8,431
Cash and cash equivalents at beginning of year 46,841 50,376 41,945
---------- ---------- ----------
Cash and cash equivalents at end of year $ 235,609 $ 46,841 $ 50,376
========== ========== ==========
Supplemental cash flow information:
Interest paid $ 2,493 $ 3,171 $ 7,137
========== ========== ==========
Income taxes paid $ 35,951 $ 58,302 $ 40,883
========== ========== ==========
During fiscal 2001, the Company issued 4,764,450 shares of its common stock upon the conversion of $39,164,000
principal amount of 5 3/4% convertible subordinated notes.
</Table>
The accompanying notes are an integral part of these financial statements.
<PAGE>
PIER 1 IMPORTS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands except per share amounts)
<Table>
<Caption>
Cumulative
Common Stock Other
------------------------ Paid-in Retained Comprehensive Treasury
Shares Amount Capital Earnings Income Stock
--------- --------- --------- --------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance February 27, 1999 97,672 $ 100,779 $ 159,631 $ 201,457 $ (1,850) $ (54,654)
Comprehensive income:
Net income -- -- -- 74,725 -- --
Other comprehensive income,
net of tax:
Currency translation
adjustments -- -- -- -- 314 --
Comprehensive income
Purchases of treasury stock (4,393) -- -- -- -- (31,806)
Restricted stock forfeits and amortization (83) -- 709 -- -- (1,392)
Exercise of stock options, stock
purchase plan and other 625 -- (4,629) -- -- 9,184
Cash dividends ($.12 per share) -- -- -- (11,504) -- --
--------- --------- --------- --------- ------------- ---------
Balance February 26, 2000 93,821 100,779 155,711 264,678 (1,536) (78,668)
--------- --------- --------- --------- ------------- ---------
Comprehensive income:
Net income -- -- -- 94,650 -- --
Other comprehensive income,
net of tax:
Currency translation
adjustments -- -- -- -- (1,579) --
Comprehensive income
Purchases of treasury stock (3,269) -- -- -- -- (34,270)
Restricted stock amortization -- -- -- -- -- --
Exercise of stock options, stock
purchase plan and other 825 -- (1,774) (25) -- 9,119
Cash dividends ($.15 per share) -- -- -- (14,494) -- --
Conversion of 5 3/4% convertible debt 4,764 -- (14,513) -- -- 53,886
--------- --------- --------- --------- ------------- ---------
Balance March 3, 2001 96,141 100,779 139,424 344,809 (3,115) (49,933)
--------- --------- --------- --------- ------------- ---------
Comprehensive income:
Net income -- -- -- 100,209 -- --
Other comprehensive income,
net of tax:
Currency translation
adjustments -- -- -- -- (1,587) --
Comprehensive income
Purchases of treasury stock (4,021) -- -- -- -- (44,137)
Restricted stock amortization -- -- -- -- -- --
Exercise of stock options, stock
purchase plan and other 1,269 -- 766 26 -- 13,549
Cash dividends ($.16 per share) -- -- -- (15,134) -- --
--------- --------- --------- --------- ------------- ---------
Balance March 2, 2002 93,389 $ 100,779 $ 140,190 $ 429,910 $ (4,702) $ (80,521)
========= ========= ========= ========= ============= =========
<Caption>
Total
Unearned Shareholders'
Compensation Equity
------------ -------------
<S> <C> <C>
Balance February 27, 1999 $ (1,469) $ 403,894
Comprehensive income:
Net income -- 74,725
Other comprehensive income,
net of tax:
Currency translation
adjustments -- 314
-------------
Comprehensive income 75,039
-------------
Purchases of treasury stock -- (31,806)
Restricted stock forfeits and amortization 1,168 485
Exercise of stock options, stock
purchase plan and other -- 4,555
Cash dividends ($.12 per share) -- (11,504)
------------ -------------
Balance February 26, 2000 (301) 440,663
------------ -------------
Comprehensive income:
Net income -- 94,650
Other comprehensive income,
net of tax:
Currency translation
adjustments -- (1,579)
-------------
Comprehensive income 93,071
-------------
Purchases of treasury stock -- (34,270)
Restricted stock amortization 216 216
Exercise of stock options, stock
purchase plan and other -- 7,320
Cash dividends ($.15 per share) -- (14,494)
Conversion of 5 3/4% convertible debt -- 39,373
------------ -------------
Balance March 3, 2001 (85) 531,879
------------ -------------
Comprehensive income:
Net income -- 100,209
Other comprehensive income,
net of tax:
Currency translation
adjustments -- (1,587)
-------------
Comprehensive income 98,622
-------------
Purchases of treasury stock -- (44,137)
Restricted stock amortization 85 85
Exercise of stock options, stock
purchase plan and other -- 14,341
Cash dividends ($.16 per share) -- (15,134)
------------ -------------
Balance March 2, 2002 $ -- $ 585,656
============ =============
</Table>
The accompanying notes are an integral part of these financial statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION - Pier 1 Imports, Inc. is one of North America's largest specialty
retailers of imported decorative home furnishings, gifts and related items, with
retail stores located in the United States, Canada, Puerto Rico, the United
Kingdom and Mexico. 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 sells
merchandise imported from over 40 different countries, with 35% of its sales
derived from merchandise produced in China, 11% derived from merchandise
produced in India and 29% derived from merchandise produced in Indonesia,
Thailand, Brazil, Italy, the Philippines and Mexico. The remaining 25% of sales
was from merchandise produced in various Asian, European, Central American,
South American and African countries or was obtained from U.S. manufacturers.
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 Pier 1 Funding, LLC, 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.
ACQUISITIONS - The Company completed its acquisition of certain assets and
assumption of certain liabilities of Cargo Furniture, Inc. and formed New Cargo
Furniture, Inc. ("Cargo") for $3,931,000, including cash acquired, on February
21, 2001. These assets and liabilities were included in the Company's
consolidated balance sheet as of March 3, 2001; however, this acquisition had no
effect on the Company's fiscal 2001 operations. Cargo is a retailer and
wholesaler of casual lifestyle furniture, gifts and home decor with a focus on
children's furniture. This acquisition was accounted for under the purchase
method of accounting, and ultimately resulted in goodwill of $4,386,000, which
has been amortized using the straight-line method over 20 years through fiscal
2002, at which time amortization ceases due to the adoption of Statement of
Financial Accounting Standards ("SFAS") No. 142. The pro forma effect on the
Company's results of operations, as if the acquisition had been completed at the
beginning of fiscal 2001, was not significant. Cargo's operations for fiscal
2002 are fully consolidated with the Company's results.
USE OF ESTIMATES - Preparation of the financial statements in conformity with
accounting principles generally accepted in the United States 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 2002 presentation.
FISCAL PERIODS - The Company utilizes 5-4-4 (week) quarterly accounting periods
with the fiscal year ending on the Saturday nearest the last day of February.
Fiscal 2002 and 2000 consisted of 52-week years and fiscal 2001 was a 53-week
year. Fiscal 2002 ended March 2, 2002, fiscal 2001 ended March 3, 2001 and
fiscal 2000 ended February 26, 2000.
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.
<PAGE>
FINANCIAL INSTRUMENTS - The fair value of financial instruments is determined by
reference to various market data and other valuation techniques as appropriate.
There were no significant assets or liabilities with a fair value different from
the recorded value as of March 2, 2002 and March 3, 2001.
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 currencies through
the purchase of forward contracts. The forward contracts are purchased only to
cover specific commitments to buy merchandise for resale. The Company also uses
contracts to hedge its exposure associated with the repatriation of funds from
its Canadian operations. At March 2, 2002, the notional amount of the Company's
forward foreign currency exchange contracts and contracts to hedge its exposure
associated with repatriation of Canadian funds totaled approximately $3.9
million and $12.2 million, respectively. For financial accounting purposes, the
Company has not designated such contracts as hedges. Thus, changes in the fair
value of both of these forward contracts are included in the Company's
consolidated statements of operations.
The Company enters into forward foreign currency exchange contracts with major
financial institutions and continually monitors its positions with, and the
credit quality of, these counterparties to such 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.
BENEFICIAL INTEREST IN SECURITIZED RECEIVABLES - In February 1997, the Company
sold all of its proprietary credit card receivables to a special-purpose
wholly-owned subsidiary, Pier 1 Funding, Inc., predecessor to Pier 1 Funding,
LLC ("Funding"), which transferred the receivables to the Pier 1 Imports Credit
Card Master Trust (the "Master Trust"). The Master Trust is not consolidated by
the Company as it meets the requirements of a qualifying special-purpose entity
under SFAS No. 140. The Master Trust issues beneficial interests that represent
undivided interests in the assets of the Master Trust consisting of the
transferred receivables and all cash flows from collections of such receivables.
The beneficial interests include certain interests retained by Funding, which
are represented by Class B Certificates, and the residual interest in the Master
Trust (the excess of the principal amount of receivables held in the Master
Trust over the portion represented by the certificates sold to investors and the
Class B Certificates).
Gain or loss on the sale of receivables depends in part on the previous carrying
amount of the financial assets involved in the transfer, allocated between the
assets sold and the retained interests based on their relative fair value at the
date of transfer. A servicing asset or liability was not recognized in the
Company's credit card securitizations (and thus was not considered in the gain
or loss computation) since the Company received adequate compensation relative
to current market servicing prices to service the receivables sold. Initial
transaction costs for credit card securitizations were deferred and are being
amortized over the expected life of the securitization.
The beneficial interest in the Master Trust is accounted for as an
available-for-sale security. The Company estimates fair value of its beneficial
interest in the Master Trust, both upon initial securitization and thereafter,
based on the present value of future expected cash flows estimated using
management's best estimates of key assumptions including credit losses and
timeliness of payments. As of March 2, 2002, the Company's assumptions included
credit losses of 5% of the outstanding balance and expected payment within a
six-month period using a discount rate of 15% to calculate the present value of
the future cash flows. A sensitivity analysis was performed assuming a
hypothetical 20% adverse change in both interest rates and credit losses which
had an immaterial impact on the fair value of the Company's beneficial interest.
INVENTORIES - Inventories are comprised of finished merchandise and are stated
at the lower of average cost or market; cost is determined 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, generally thirty
years for buildings
<PAGE>
and three to seven years for equipment, furniture and fixtures. Amortization of
improvements to leased properties is based upon the shorter of the remaining
primary lease term or the estimated useful lives of such assets. Depreciation
costs were $41,047,000, $41,882,000 and $38,672,000 in fiscal 2002, 2001 and
2000, respectively.
Expenditures for maintenance, repairs and renewals, which do not materially
prolong the original 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.
REVENUE RECOGNITION - Revenue is recognized upon customer receipt or delivery
for retail sales, including sales under deferred payment promotions on the
Company's proprietary credit card. An allowance has been established to provide
for estimated merchandise returns. Revenue from gift cards, gift certificates
and merchandise credits is deferred until redemption.
ADVERTISING COSTS - Advertising costs are expensed the first time the
advertising takes place. Advertising costs were $64,414,000, $59,721,000 and
$54,970,000 in fiscal 2002, 2001 and 2000, respectively. Prepaid advertising at
the end of fiscal years 2002 and 2001 was $2,303,000 and $2,086,000,
respectively, consisting primarily of production costs for advertisements not
yet run.
INCOME TAXES - The Company records income tax expense using the liability method
for taxes. 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.
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 on the date of grant. The Company
accounts 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 amounts were 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. To determine
diluted earnings per share, interest and amortization of debt issue costs
related to the subordinated notes, net of any applicable taxes, have been added
back to net income to reflect assumed conversions.
The following earnings per share calculations reflect the effect of the
Company's conversion of its 5 3/4% convertible subordinated notes, which were
primarily converted, without interest, on or before March 23, 2000. Earnings per
share amounts are calculated as follows (in thousands except per share amounts):
<PAGE>
<Table>
<Caption>
2002 2001 2000
---------- ---------- ----------
<S> <C> <C> <C>
Net income $ 100,209 $ 94,650 $ 74,725
Plus interest and debt issue costs, net
of tax, on the assumed conversion
of the 5 3/4% subordinated notes -- -- 2,237
---------- ---------- ----------
Diluted net income $ 100,209 $ 94,650 $ 76,962
========== ========== ==========
Average shares outstanding:
Basic 94,414 96,306 95,766
Plus assumed exercise of stock
options 1,771 1,325 644
Plus assumed conversion of the
5 3/4% subordinated notes -- 321 6,887
---------- ---------- ----------
Diluted 96,185 97,952 103,297
========== ========== ==========
Earnings per share:
Basic $ 1.06 $ .98 $ .78
========== ========== ==========
Diluted $ 1.04 $ .97 $ .75
========== ========== ==========
</Table>
Stock 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 the effect would be antidilutive. At the end of fiscal years 2002,
2001 and 2000, there were 433,800, 1,078,200 and 1,157,025, respectively, stock
options outstanding with exercise prices greater than the average market price
of the Company's common shares.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS - In the first quarter of fiscal
2002, the Company adopted SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities," which was amended by SFAS No. 137 and SFAS No. 138.
This statement establishes accounting and reporting guidelines for derivatives
and requires the Company to record all derivatives as assets or liabilities on
the balance sheet at fair value. The Company's use of derivatives is primarily
limited to forward foreign currency exchange contracts, which the Company uses
to mitigate exposures to changes in foreign currency exchange rates. The Company
also uses contracts which hedge the repatriation of Canadian funds. Upon
adoption of SFAS No. 133, the Company did not designate such derivatives as
hedging instruments; thus, the changes in the fair value of the derivatives have
been included in the consolidated statement of operations. Prior to adoption,
the Company deferred all gains and losses on its derivative contracts and
recognized such gains and losses as an adjustment to the transaction price. The
adoption of SFAS No. 133 has not had a material impact on the Company's
consolidated balance sheets or its statements of operations, shareholders'
equity and cash flows.
The Company adopted SFAS No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" in the first quarter of
fiscal 2002. This statement established new conditions for a securitization to
be accounted for as a sale of receivables, changed the requirements for an
entity to be a qualifying special-purpose entity, and modified the conditions
for determining whether a transferor has relinquished control over transferred
assets. SFAS No. 140 also requires additional disclosures related to securitized
financial assets and retained interests in securitized financial assets. See
Note 2 of the Notes to Consolidated Financial Statements. Prior to adoption, the
Company made the necessary amendments to its securitization agreements and
continues to receive sale treatment for its securitized proprietary credit card
receivables. The implementation of SFAS No. 140 did not have a material impact
on the Company's consolidated balance sheets or its statements of operations,
shareholders' equity and cash flows.
<PAGE>
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
141, "Business Combinations," which supersedes Accounting Principles Board
("APB") Opinion No. 16, "Business Combinations," and SFAS No. 38, "Accounting
for Preacquisition Contingencies of Purchased Enterprises." Statement No. 141
eliminates the pooling-of-interests method of accounting for business
combinations and requires all such transactions to be accounted for under the
purchase method. This statement also addresses the initial recognition and
measurement of goodwill and other intangible assets acquired in a business
combination and is effective for all business combinations initiated after June
30, 2001. The adoption of SFAS No. 141 did not have a material impact on the
Company's consolidated balance sheets or its statements of operations,
shareholders' equity and cash flows.
In June 2001, the FASB also issued SFAS No. 142, "Goodwill and Other Intangible
Assets," which supersedes APB Opinion No. 17, "Intangible Assets." This
statement addresses the initial recognition and measurement of intangible assets
acquired outside of a business combination and the accounting for goodwill and
other intangible assets subsequent to their acquisition. SFAS No. 142 also
provides that intangible assets with finite useful lives be amortized and that
goodwill and intangible assets with indefinite lives will not be amortized, but
will rather be tested on an annual basis for impairment. The Company is required
to adopt SFAS No. 142 for its fiscal year beginning March 3, 2002. The Company
has analyzed the implementation requirements and does not anticipate that the
adoption of SFAS No. 142 will have a material impact on the Company's
consolidated balance sheets or its statements of operations, shareholders'
equity and cash flows.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," which replaces SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
Statement No. 144 retains the fundamental provisions of SFAS No. 121 with
additional guidance on estimating cash flows when performing a recoverability
test, requires that a long-lived asset to be disposed of other than by sale be
classified as "held and used" until it is disposed of, and establishes more
restrictive criteria to classify an asset as "held for sale." SFAS No. 144 also
supersedes APB Opinion No. 30, "Reporting the Results of Operations - Reporting
the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions" regarding the disposal of a
segment of a business and would extend the reporting of a discontinued operation
to a "component of an entity" and requires the operating losses thereon to be
recognized in the period in which they occur. The Company is required to adopt
SFAS No. 144 for its fiscal year beginning March 3, 2002. The Company has
analyzed the implementation requirements and does not anticipate that the
adoption of SFAS No. 144 will have a material impact on the Company's
consolidated balance sheets or its statements of operations, shareholders'
equity and cash flows.
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 2002 year-end, the Company had approximately 5,178,000 proprietary
cardholders and approximately 1,205,000 customer credit accounts considered
active (accounts with a purchase within the previous 12 months). The Company's
proprietary credit card sales accounted for 28.9% of total U.S. store sales in
fiscal 2002. Net proprietary credit card income is included in selling, general
and administrative expenses on the Company's statements of operations. The
Company has sold virtually all of its proprietary credit card receivables. The
following information presents a summary of the Company's proprietary credit
card results for each of the last three fiscal years on a managed basis (in
thousands):
<PAGE>
<Table>
<Caption>
2002 2001 2000
-------- -------- --------
<S> <C> <C> <C>
Income:
Finance charge income, net of
debt service costs $ 24,124 $ 21,759 $ 16,780
Insurance and other income 231 253 287
-------- -------- --------
24,355 22,012 17,067
-------- -------- --------
Costs:
Processing fees 14,197 13,608 10,763
Bad debts 6,977 5,285 4,664
-------- -------- --------
21,174 18,893 15,427
-------- -------- --------
Net proprietary credit card
income $ 3,181 $ 3,119 $ 1,640
======== ======== ========
Proprietary credit card sales $412,469 $377,045 $300,462
======== ======== ========
Costs as a percent of proprietary
credit card sales 5.13% 5.01% 5.13%
======== ======== ========
Gross proprietary credit card
receivables at year-end $140,713 $122,876 $100,095
======== ======== ========
Proprietary credit card sales as a
percent of total U.S. store sales 28.9% 28.9% 26.3%
======== ======== ========
</Table>
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.,
predecessor to Pier 1 Funding, LLC ("Funding"), which transferred the
Receivables to the Pier 1 Imports Credit Card Master Trust (the "Master Trust").
The Master Trust issues beneficial interests that represent undivided interests
in the assets of the Master Trust consisting of the Receivables and all cash
flows from collections of the Receivables. On a daily basis, the Company sells
to Funding and Funding transfers 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 previously undistributed
principal collections from the Receivables in the Master Trust) and retains
residual interests in the Master Trust. Cash flows received from the Master
Trust for each of the last three fiscal years are as follows (in thousands):
<Table>
<Caption>
2002 2001 2000
-------- -------- --------
<S> <C> <C> <C>
Proceeds from collections reinvested
in revolving securitizations $366,228 $347,404 $303,340
======== ======== ========
Proceeds from new securitizations $ 49,226 $ -- $ --
======== ======== ========
Servicing fees received $ 2,381 $ 2,189 $ 1,820
======== ======== ========
Cash flows received on retained interests $172,473 $199,619 $147,314
======== ======== ========
</Table>
Gains or losses resulting from the sales of the Company's proprietary credit
card receivables were not material in any of the periods presented. The
Company's exposure to deterioration in the performance of the receivables is
limited to its retained beneficial interest in the Master Trust. As such, the
Company has no corporate obligation to reimburse Funding, the Master Trust or
purchasers of any certificates issued by the Master Trust for credit losses from
the Receivables.
<PAGE>
Funding was capitalized by the Company as a special-purpose wholly-owned
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 receivables. The Master Trust is not consolidated with the
Company.
In the initial sale of the Receivables, the Company sold all of its Receivables
and received cash and beneficial interests in the Master Trust. The Master Trust
sold to third parties $50.0 million of Series 1997-1 Class A Certificates, which
bore interest at 6.74% and were scheduled to mature in May 2002. Funding
retained $14.1 million of Series 1997-1 Class B Certificates, which were
subordinated to the Class A Certificates. Funding also retained the residual
interest in the Master Trust.
In September 2001, the Master Trust negotiated the purchase of all of the Series
1997-1 Class A Certificates from their holders. Subsequently the Master Trust
retired both the Series 1997-1 Class A and Class B Certificates in connection
with the issuance of $100 million in 2001-1 Class A Certificates to a third
party. The 2001-1 Class A Certificates bear interest at a floating rate equal to
the rate on commercial paper issued by the third party. As of March 2, 2002,
this rate was 1.81%. Funding continued to retain the residual interest in the
Master Trust and $9.3 million in 2001-1 Class B Certificates, which are
subordinated to the 2001-1 Class A Certificates. As a result of this
securitization transaction, the Company effectively sold a portion of its
beneficial interest for net proceeds of $49.2 million. As of March 2, 2002 and
March 3, 2001, the Company had $44.6 million and $75.4 million, respectively, in
beneficial interests (comprised primarily of principal and interest related to
the underlying Receivables) in the Master Trust.
Under generally accepted accounting principles, if the structure of the
securitization meets certain requirements, these transactions are accounted for
as sales of receivables. As the Company's securitizations met such requirements
as discussed above, they were accounted for as sales. Gains or losses from sales
of these receivables were not material during fiscal 2002, 2001 and 2000. The
Company expects no material impact on net income in future years as a result of
the sales of receivables, although the precise amounts will be dependent on a
number of factors such as interest rates and levels of securitization.
NOTE 3 - PROPERTIES
Properties are summarized as follows at March 2, 2002 and March 3, 2001 (in
thousands):
<Table>
<Caption>
2002 2001
-------- --------
<S> <C> <C>
Land $ 16,458 $ 22,353
Buildings 51,747 59,716
Equipment, furniture and fixtures 238,454 207,956
Leasehold interests and improvements 183,676 171,021
-------- --------
490,335 461,046
Less accumulated depreciation and
amortization 280,381 248,980
-------- --------
Properties, net $209,954 $212,066
======== ========
</Table>
<PAGE>
NOTE 4 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES/OTHER NONCURRENT LIABILITIES
The following is a summary of accounts payable and accrued liabilities and other
noncurrent liabilities at March 2, 2002 and March 3, 2001 (in thousands):
<Table>
<Caption>
2002 2001
-------- --------
<S> <C> <C>
Trade accounts payable $ 78,961 $ 52,637
Accrued payroll and other
employee-related liabilities 36,999 33,685
Accrued taxes, other than income 16,815 15,576
Gift cards, gift certificates and
merchandise credits outstanding 29,288 18,989
Accrued income taxes payable 29,738 7,786
Other 16,239 15,437
-------- --------
Accounts payable and
accrued liabilities $208,040 $144,110
======== ========
Accrued average rent $ 19,230 $ 17,590
Other 24,034 17,131
-------- --------
Other noncurrent liabilities $ 43,264 $ 34,721
======== ========
</Table>
NOTE 5 - LONG-TERM DEBT AND AVAILABLE CREDIT
Long-term debt is summarized as follows at March 2, 2002 and March 3, 2001 (in
thousands):
<Table>
<Caption>
2002 2001
------- -------
<S> <C> <C>
Industrial revenue bonds $25,000 $25,000
Other 712 --
------- -------
25,712 25,000
Less - portion due within one year 356 --
------- -------
Long-term debt $25,356 $25,000
======= =======
</Table>
In fiscal 1987, the Company entered into industrial revenue development bond
loan agreements aggregating $25 million. Proceeds were used to construct three
warehouse distribution facilities. The loan agreements and related tax-exempt
bonds mature in the year 2026. The Company's interest rates on the loans are
based on the bond interest rates, which are market driven, reset weekly and are
similar to other tax-exempt municipal debt issues. The Company's weighted
average interest rates were 3.8% and 5.7% for fiscal 2002 and 2001,
respectively.
In September 1996, the Company issued $86.3 million principal amount of 5 3/4%
convertible subordinated notes due October 1, 2003. The notes were 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 stock splits. The Company had the option to redeem the notes, in
whole or in part, on or after October 2, 1999, at a redemption price (expressed
as a percentage of principal amount) of 103% of par value which was scheduled to
decline annually to 100% of par value at the maturity date. Interest on the
notes was payable semiannually on April 1 and October 1 of each year. In
February 2000, the Company announced its intention to call the remaining $39.2
million outstanding principal amount of these notes for redemption on March 23,
2000. The notes were convertible into common stock of the Company at any time
<PAGE>
prior to the close of business on March 22, 2000, at a conversion price of $8.22
per share. During March 2000, the Company converted $39,164,000 of the notes
into 4,764,450 shares of the Company's common stock and redeemed $15,000 of the
notes for cash at a redemption price of 103% of par value. The conversion and
redemption of these notes during fiscal 2001 reduced the Company's debt by $39.2
million and increased its capitalization by $39.4 million. Accordingly, these
notes are not detailed in the above schedule as the notes were fully redeemed at
fiscal 2001 year-end.
In November 2001, the Company executed a note payable in the original principal
amount of Pound Sterling500,000. The note bears interest at 4.0% per annum and
has a maturity date of April 2003. Interest is payable in semiannual
installments and principle is payable in two installments, June 2002 and April
2003. At March 2, 2002, this note was valued at $712,000.
Long-term debt matures as follows (in thousands):
<Table>
<Caption>
Long-term
Fiscal Year Debt
- ----------- ---------
<S> <C>
2003 $ 356
2004 356
2005 --
2006 --
2007 --
Thereafter 25,000
---------
Total long-term debt $ 25,712
=========
</Table>
The Company has a $125 million unsecured credit facility available, which
expires in November 2003. The interest rate on borrowings against this facility
is determined based upon a spread from LIBOR that varies depending upon either
the Company's senior debt rating or leverage ratio. All of the $125 million
revolving credit facility was available at fiscal 2002 year-end. The Company had
no borrowings under this facility during fiscal 2002. The weighted average
interest rate on borrowings outstanding for fiscal 2001 was 7.2%.
The Company has a $120 million short-term line of credit, which is primarily
used to issue merchandise letters of credit. At fiscal 2002 year-end,
approximately $64.6 million had been utilized for letters of credit, leaving
$55.4 million available. The Company also has $28.7 million in credit lines used
to issue other special-purpose letters of credit, all of which were fully
utilized at fiscal 2002 year-end. Of the $28.7 million in special-purpose
letters of credit, $25.6 million related to the Company's industrial revenue
bonds.
Most of the Company's loan agreements require that the Company maintain certain
financial ratios and limit specific payments and equity distributions including
cash dividends, loans to shareholders and repurchases of common stock. The
Company is in compliance with all debt covenants.
NOTE 6 - EMPLOYEE BENEFIT PLANS
The Company offers a qualified, defined contribution employee retirement plan
to all its full- and part-time personnel who are at least 18 years old and have
been employed for a minimum of six months. Employees contributing 1% to 5% of
their compensation receive a matching Company contribution of up to 3%. Company
contributions to the plan were $1,734,000, $1,790,000 and $1,753,000 in fiscal
2002, 2001 and 2000, 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 2002, 2001 and 2000.
<PAGE>
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 $2,488,000, $1,850,000 and $1,409,000 in fiscal 2002, 2001 and 2000,
respectively.
Measurement of plan assets and obligations for the Plans are calculated as of
each fiscal year-end. The discount rates used to determine the actuarial present
value of projected benefit obligations under such plans were 7.25% and 7.50% as
of March 2, 2002 and March 3, 2001, respectively. The assumed weighted average
rate increase in future compensation levels under such plans was 5.0% as of both
March 2, 2002 and March 3, 2001. The following provides a reconciliation of
benefit obligations and funded status of the Plans as of March 2, 2002 and March
3, 2001 (in thousands):
<Table>
<Caption>
2002 2001
-------- --------
<S> <C> <C>
Change in projected benefit obligation:
Projected benefit obligation, beginning of year $ 12,962 $ 8,944
Service cost 569 434
Interest cost 1,055 779
Actuarial loss 1,278 --
Plan amendments -- 2,805
-------- --------
Projected benefit obligation, end of year $ 15,864 $ 12,962
======== ========
Reconciliation of funded status:
Funded status $(15,864) $(12,962)
Unrecognized net loss 1,338 60
Unrecognized net transitional obligation -- 2
Unrecognized prior service cost 7,086 7,948
-------- --------
Accrued pension cost (7,440) (4,952)
Additional minimum liability (3,980) (5,663)
-------- --------
Accrued benefit liability $(11,420) $(10,615)
======== ========
Amounts recognized in the balance sheets:
Accrued benefit liability $(11,420) $(10,615)
Intangible asset 3,980 5,663
-------- --------
Net amount recognized $ (7,440) $ (4,952)
======== ========
</Table>
Net periodic benefit cost included the following actuarially determined
components during fiscal 2002, 2001 and 2000 (in thousands):
<Table>
<Caption>
2002 2001 2000
------ ------ ------
<S> <C> <C> <C>
Service cost $ 569 $ 434 $ 459
Interest cost 1,055 779 543
Amortization of unrecognized prior service cost 862 635 374
Amortization of net obligation at transition 2 2 2
Recognized net actuarial loss -- -- 31
------ ------ ------
$2,488 $1,850 $1,409
====== ====== ======
</Table>
NOTE 7 - MATTERS CONCERNING SHAREHOLDERS' EQUITY
STOCK PURCHASE PLAN - Substantially all employees and directors are eligible to
participate in the Pier 1 Imports, Inc. Stock Purchase Plan under which the
Company's common stock is purchased on behalf of employees at market prices
through regular payroll deductions. Each employee participant may contribute up
<PAGE>
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 $985,000,
$921,000 and $954,000 in fiscal years 2002, 2001 and 2000, respectively.
RESTRICTED STOCK GRANT PLANS - In fiscal 1998, the Company issued 238,500
shares 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 fiscal
1998 restricted stock grant vested over a four-year period of continued
employment. The fair value at the date of grant of these restricted stock shares
was expensed over the aforementioned vesting period. The fair value at the date
of grant of the restricted shares granted in fiscal 1998 was $3,000,000. Shares
not vested were returned to the plan if employment was terminated for any
reason. To date, 107,184 shares have been returned to the plan.
In fiscal 1991, the Company issued 726,804 shares of its common stock to key
officers pursuant to a Restricted Stock Grant Plan, which provided for the
issuance of up to 1,037,214 shares. These shares vested, and the fair value at
the date of grant was expensed, over a ten-year period of continued employment.
Unvested shares are returned to the plan upon employment termination. As of
March 2, 2002, 407,742 shares have been returned to the plan. In fiscal 2000,
the Restricted Stock Grant Plan was terminated by the Board of Directors and is
no longer available for issuance of common stock to key officers. The final
vesting period was March 2000.
Total compensation expense for both of the restricted stock grant plans was
$85,000, $216,000 and $485,000 for fiscal 2002, 2001 and 2000, respectively.
STOCK OPTION PLANS - In June 1999, the Company adopted the Pier 1 Imports, Inc.
1999 Stock Plan (the "Plan"). The Plan will ultimately replace the Company's two
previous stock option plans, which were the 1989 Employee Stock Option Plan (the
"Employee Plan") and the 1989 Non-Employee Director Stock Option Plan (the
"Director Plan").
The Plan provides for the granting of options to directors and employees with
an exercise price not less than the fair market value of the common stock on the
date of the grant. Options may be either Incentive Stock Options authorized
under Section 422 of the Internal Revenue Code or non-qualified options, which
do not qualify as Incentive Stock Options. Current director compensation
provides for non-qualified options covering 6,000 shares to be granted once each
year to each non-employee director. Additionally, the Plan authorizes a Director
Deferred Stock Program. As the program is currently implemented by the Board of
Directors, each director must defer a minimum of 50% and may defer up to 100% of
the director's cash fees into a deferred stock account. The amount deferred
receives a 50% matching contribution from the Company. The Plan provides that a
maximum of 7,000,000 shares of common stock may be issued under the Plan, of
which not more than 250,000 may be issued in exchange for deferred stock units.
Options issued to non-director employees vest equally over a period of four
years while directors' options are fully vested at the date of issuance.
Additionally, employee options will fully vest upon retirement or, under certain
conditions, a change in control of the Company. As of March 2, 2002 and March 3,
2001, respectively, there were 1,026,978 and 3,520,887 shares available for
grant under the Plan, of which 171,673 and 200,381 may be used for deferred
stock issuance. Additionally, outstanding options covering 894,200 and 429,600
shares were exercisable and 78,327 and 49,619 shares were issuable in exchange
for deferred stock units at fiscal years ended 2002 and 2001, respectively. The
Plan will expire in June 2009, and the Board of Directors may at any time
suspend or terminate the Plan or amend the Plan, subject to certain limitations.
Under the Employee Plan, options may be granted to qualify as Incentive Stock
Options under Section 422 of the Internal Revenue Code or as non-qualified
options. Most options issued under the Employee Plan vest over a period of four
to five years. As of March 2, 2002 and March 3, 2001, outstanding options
covering 2,303,198 and 2,318,042 shares were exercisable and 932,684 and 878,059
shares were available for grant, respectively. The Employee Plan expires in June
2004. The Director Plan expired in fiscal 2000. As of March 2, 2002 and March 3,
2001, outstanding options covering 48,264 and 61,764 shares, respectively, were
exercisable under the Director Plan. Due to the expiration of the Director Plan
during fiscal 2000, no shares
<PAGE>
are available for future grants. Both plans were 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 March 2, 2002 is as follows:
<Table>
<Caption>
Weighted Exercisable Shares
Weighted Average --------------------------------
Average Fair Value Weighted
Exercise at Date Number of Average
Shares Price of Grant Shares Exercise Price
-------------- ------------ --------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Outstanding at February 27, 1999 4,597,830 $ 9.20 1,810,819 $ 6.66
Options granted 2,379,500 6.20 $ 3.18
Options exercised (134,936) 4.63
Options cancelled or expired (793,187) 10.63
------------
Outstanding at February 26, 2000 6,049,207 7.94 2,214,717 7.28
Options granted 1,589,000 10.49 5.31
Options exercised (569,326) 5.38
Options cancelled or expired (351,900) 8.47
------------
Outstanding at March 3, 2001 6,716,981 8.73 2,809,406 8.07
Options granted 2,711,500 8.32 4.59
Options exercised (937,619) 7.06
Options cancelled or expired (314,125) 9.90
------------
Outstanding at March 2, 2002 8,176,737 8.74 3,245,662 8.81
============
</Table>
For shares outstanding at March 2, 2002:
<Table>
<Caption>
Weighted Weighted
Weighted Average Average
Average Remaining Shares Exercise Price -
Total Exercise Contractual Currently Exercisable
Ranges of Exercise Prices Shares Price Life Exercisable Shares
- ------------------------- ----------- ----------- ------------- ------------- ----------------
<S> <C> <C> <C> <C> <C>
$2.85 - $ 8.19 2,732,912 $ 5.96 5.82 1,794,112 $ 5.89
$8.26 - $ 8.50 3,026,475 8.29 9.15 289,600 8.49
$9.08 - $18.50 2,417,350 12.45 7.51 1,161,950 13.39
</Table>
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 2002, 2001 and 2000 have been estimated
as of the date of grant using the Black-Scholes or a similar option pricing
model with the following weighted average assumptions for 2002, 2001 and 2000,
respectively: risk-free interest rates of 3.75%, 5.68% and 5.79%, expected stock
price volatility of 60.25%, 55.86% and 51.50%, expected dividend yields of 0.8%,
1.0% and 1.0% 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 except per share amounts):
<PAGE>
<Table>
<Caption>
2002 2001 2000
------------ ------------ ------------
<S> <C> <C> <C>
Pro forma net income $ 95,863 $ 91,573 $ 72,317
============ ============ ============
Pro forma basic
earnings per share $ 1.02 $ .95 $ .76
============ ============ ============
Pro forma diluted
earnings per share $ 1.00 $ .93 $ .72
============ ============ ============
</Table>
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 2002, 2001 and 2000
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) ten days following a public announcement that a person
or group of affiliated or associated persons have acquired beneficial ownership
of 15% or more of the outstanding common stock or (ii) ten business days (or
such later date as determined by the Board of Directors) following the
commencement of, or announcement of an intention to make, a tender or exchange
offer the consummation of which would result in beneficial ownership by a person
or group of 15% or more of the outstanding common stock. If the Company were
acquired in a merger or other business combination transaction or 50% or more of
its consolidated assets or earning power were sold, proper provision would be
made so that each Right would entitle its holder to purchase, upon the exercise
of the Right at the then current exercise price (currently the exercise price is
$14.81), 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 March 2, 2002, the Company had
approximately 114,416,000 shares reserved for future issuances under the stock
plans and the share purchase rights plan.
<PAGE>
NOTE 8 - INCOME TAXES
The provision for income taxes for each of the last three fiscal years consists
of (in thousands):
<Table>
<Caption>
2002 2001 2000
---------- ---------- ----------
<S> <C> <C> <C>
Federal:
Current $ 56,207 $ 50,455 $ 39,463
Deferred (2,110) 583 355
State:
Current 3,909 3,368 1,890
Deferred (128) 152 1,370
Foreign:
Current 910 1,032 809
---------- ---------- ----------
$ 58,788 $ 55,590 $ 43,887
========== ========== ==========
</Table>
Deferred tax assets and liabilities at March 2, 2002 and March 3, 2001 are
comprised of the following (in thousands):
<Table>
<Caption>
2002 2001
---------- ----------
<S> <C> <C>
Deferred tax assets:
Inventory $ 2,166 $ 1,727
Deferred compensation 9,129 7,292
Accrued average rent 8,476 7,784
Losses on a foreign subsidiary 3,948 3,301
Self insurance reserves 2,408 910
Fixed assets, net -- 795
Other 2,470 2,326
---------- ----------
28,597 24,135
Valuation allowance (3,948) (3,301)
---------- ----------
Total deferred tax assets 24,649 20,834
---------- ----------
Deferred tax liabilities:
Fixed assets, net (1,577) --
---------- ----------
Total deferred tax liabilities (1,577) --
---------- ----------
Net deferred tax assets $ 23,072 $ 20,834
========== ==========
</Table>
The Company has settled and closed all Internal Revenue Service ("IRS")
examinations of the Company's tax returns for all years through fiscal 1999. An
IRS audit of fiscal years 2000 and 2001 is expected to begin in the first
quarter of fiscal year 2003. For financial reporting purposes, a valuation
allowance exists at March 2, 2002 to offset the deferred tax asset relating to
the losses of a foreign subsidiary.
Undistributed earnings of the Company's non-U.S. subsidiaries amounted to
approximately $22.6 million at March 2, 2002. These earnings are considered to
be indefinitely reinvested and, accordingly, no additional U.S. income taxes or
non-U.S. withholding taxes have been provided. Determination of the amount of
additional taxes that would be payable if such earnings were not considered
indefinitely reinvested is not practical.
The difference between income taxes at the statutory federal income tax rate of
35% in fiscal 2002, 2001 and 2000, and income tax reported in the consolidated
statements of operations is as follows (in thousands):
<PAGE>
<Table>
<Caption>
2002 2001 2000
---------- ---------- ----------
<S> <C> <C> <C>
Tax at statutory federal
income tax rate $ 55,649 $ 52,584 $ 41,514
State income taxes, net of
federal benefit 3,387 3,200 2,526
Work opportunity tax credit,
foreign tax credit and
R&E credit (202) (207) (283)
Net foreign income taxed
at lower rates (101) (1,048) (960)
Other, net 55 1,061 1,090
---------- ---------- ----------
$ 58,788 $ 55,590 $ 43,887
========== ========== ==========
</Table>
NOTE 9 - COMMITMENTS AND CONTINGENCIES
LEASES - The Company leases certain property consisting principally of retail
stores, warehouses and material handling and office equipment under leases
expiring through the year 2021. 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 statements of operations.
During fiscal 2002, the Company sold certain store properties for $12.6 million.
These stores were leased back from unaffiliated third parties for periods of
approximately ten years. The resulting leases are being accounted for as
operating leases. The Company deferred gains of $5.1 million in fiscal 2002 on
these sale-leaseback transactions; the gains are being amortized over the
initial lives of the leases. Future minimum lease commitments of these operating
leases are included in the summary below of the Company's operating leases. The
Company had no sale-leaseback transactions in fiscal 2001.
At March 2, 2002, the Company had the following minimum lease commitments in the
years indicated (in thousands):
<Table>
<Caption>
Operating
Fiscal year Leases
- ----------- ------------
<S> <C>
2003 $ 162,315
2004 158,525
2005 145,608
2006 132,855
2007 118,102
Thereafter 426,946
------------
Total lease commitments $ 1,144,351
============
Present value of total
operating lease commitments at 10% $ 751,919
============
</Table>
Rental expense incurred was $159,461,000, $144,035,000 and $131,835,000,
including contingent rentals of $921,000, $979,000 and $794,000, based upon a
percentage of sales, and net of sublease incomes totaling $1,191,000, $2,650,000
and $2,141,000 in fiscal 2002, 2001 and 2000, respectively.
<PAGE>
LEGAL MATTERS - There are various 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 matters is not
determinable at March 2, 2002; 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 10 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data for the years ended March 2, 2002 and March
3, 2001 are set forth below (in thousands except per share amounts):
<Table>
<Caption>
Three Months Ended
-------------------------------------------------------
Fiscal 2002 6/2/2001 9/1/2001 12/1/2001 3/2/2002
- ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $ 325,387 357,248 387,360 478,561
Gross profit $ 134,914 137,539 165,408 211,900
Net income $ 12,345 13,802 25,046 49,016
Basic earnings per share $ .13 .15 .27 .53
Diluted earnings per share $ .13 .14 .26 .51
</Table>
<Table>
<Caption>
Three Months Ended
-------------------------------------------------------
Fiscal 2001 5/27/2000 8/26/2000 11/25/2000 3/3/2001
- ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $ 299,528 337,991 343,493 430,486
Gross profit $ 126,646 135,616 147,160 185,033
Net income $ 16,877 17,715 23,569 36,489
Basic earnings per share $ .17 .18 .25 .38
Diluted earnings per share $ .17 .18 .24 .38
</Table>
<PAGE>
MARKET PRICE AND DIVIDEND INFORMATION
The Company's common stock is traded on the New York Stock Exchange. The
following tables show the high and low closing sale prices on such Exchange, as
reported in the consolidated transaction reporting system, and the dividends
paid per share, for each quarter of fiscal 2002 and 2001.
<Table>
<Caption>
Market Price
-------------------------- Cash Dividends
Fiscal 2002 High Low per Share(1)
- ----------- --------- -------- --------------
<S> <C> <C> <C>
First quarter $ 14.5500 $ 11.1000 $ .04
Second quarter 12.6500 10.3000 .04
Third quarter 14.7000 8.1300 .04
Fourth quarter 20.2400 14.5000 .04
</Table>
<Table>
<Caption>
Market Price
-------------------------- Cash Dividends
Fiscal 2001 High Low per Share(1)
- ----------- --------- --------- --------------
<S> <C> <C> <C>
First quarter $ 11.8750 $ 7.8750 $ .03
Second quarter 12.7500 8.5000 .04
Third quarter 14.0000 10.4375 .04
Fourth quarter 13.8750 8.1875 .04
</Table>
(1) For restrictions on the payments of dividends, see Management's
Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-21
<SEQUENCE>4
<FILENAME>d97269exv21.txt
<DESCRIPTION>ROSTER OF SUBSIDIARIES OF THE COMPANY
<TEXT>
<PAGE>
EXHIBIT 21
ROSTER OF SUBSIDIARIES OF THE COMPANY
<Table>
<S> <C>
Pier 1 Assets, Inc., a Delaware corporation
New Cargo Furniture, Inc., a Delaware corporation
Pier 1 Licensing, Inc., a Delaware corporation
Pier 1 Imports (U.S.), Inc., a Delaware corporation
Pier 1 Funding, LLC, a Delaware limited liability company
Pier 1 Value Services, LLC, a Virginia limited liability company
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
</Table>
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23
<SEQUENCE>5
<FILENAME>d97269exv23.txt
<DESCRIPTION>CONSENT OF INDEPENDENT AUDITORS
<TEXT>
<PAGE>
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 8, 2002, included in the 2002
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. 333-34100, No. 333-88323, 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
report dated April 8, 2002, with respect to the consolidated financial
statements of Pier 1 Imports, Inc. incorporated by reference in the Annual
Report (Form 10-K) for the year ended March 2, 2002.
/s/ Ernst & Young LLP
Fort Worth, Texas
May 28, 2002
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
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