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<SEC-DOCUMENT>0000950134-03-008665.txt : 20030529
<SEC-HEADER>0000950134-03-008665.hdr.sgml : 20030529
<ACCEPTANCE-DATETIME>20030529141927
ACCESSION NUMBER: 0000950134-03-008665
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 5
CONFORMED PERIOD OF REPORT: 20030301
FILED AS OF DATE: 20030529
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: 03723181
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: PIER 1 IMPORTS INC/GA
DATE OF NAME CHANGE: 19840729
FORMER COMPANY:
FORMER CONFORMED NAME: NEWCORP INC
DATE OF NAME CHANGE: 19800423
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<FILENAME>d06302e10vk.txt
<DESCRIPTION>FORM 10-K
<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 1, 2003.
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)
<Table>
<S> <C>
DELAWARE 75-1729843
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
301 COMMERCE STREET, SUITE 600
FORT WORTH, TEXAS 76102
(Address of principal executive offices) (Zip Code)
Company's telephone number, including area code: (817) 252-8000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -------------------
COMMON STOCK, $1 PAR VALUE NEW YORK STOCK EXCHANGE
</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]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes X No
--- ---
As of May 27, 2003, the approximate aggregate market value of voting
stock held by non-affiliates of the Registrant was $1,651,000,000 using the
closing sales price on this day of $19.10. 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 27, 2003, 89,782,994 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 1, 2003 in Parts I and II hereof and;
2) Registrant's Proxy Statement for the 2003 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(R).
References to "The Pier" relate to the Company's retail locations in the United
Kingdom operating under the name The Pier(R). References to "Cargokids" relate
to the Company's retail locations operating under the name Cargokids!(R).
From the end of fiscal 1998 through the end of fiscal 2003, the Company
expanded its specialty retail operations from 763 to 1,074 worldwide retail
stores. In fiscal 2003, the Company continued to execute its expansion plans by
opening 90 net new Pier 1 stores and seven net new Cargokids 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 new stores and close approximately 30 to 35 stores in
North America in fiscal 2004. A majority of the stores expected to close in
fiscal 2004 are anticipated to be replaced with more favorable locations within
the same market. Cargokids expects to open up to approximately 25 new stores,
with three to five stores relocating to more upscale retail centers.
Set forth below is a list by city of Pier 1 stores opened in North
America in fiscal 2003:
<Table>
<S> <C> <C>
Acton, MA Greensboro, NC (2 locations) Orange, CA
Anjou, QC Halifax, NS Orem, UT
Ankeny, IA Hamilton, NJ Paso Robles, CA
Asheville, NC Hemet, CA Pensacola, FL
Atlanta, GA Hickory, NC Phoenix, AZ
Aurora, CO Hiram, GA Pocatello, ID
Avon, OH Houston, TX (2 locations) Prescott, AZ
Bakersfield, CA Howell, MI Red Deer, AB
Bossier City, LA Huntersville, NC Redding, CA
Burleson, TX Huntsville, AL Regina, SK
Butler, PA Ithaca, NY Richmond, VA
Capitola, CA Kanata, ON Riverdale, UT
Cartersville, GA Kansas City, MO Rock Hill, SC
Charlotte, NC Kelso, WA Saint Dorothee Laval, QC
Cheektowaga, NY La Grange, IL Saint Jerome, QC
Chesterfield, MI Lachenaie, QC Salem, OR
Chino, CA Laguna Niguel, CA San Diego, CA
Columbus, GA Lake Charles, LA Santee, CA
Columbus, OH Lansing, MI (2 locations) Saratoga Springs, NY
Commack, NY Las Vegas, NV Saskatoon, SK
Cumming, GA Lee's Summit, MO Springfield, NJ
Cuyahoga Falls, OH Lincoln, NE Sudbury, ON
Denver, CO Long Beach, CA Tukwila, WA
Denville, NJ Los Gatos, CA Turlock, CA
Dubuque, IA Manasquan, NJ Vacaville, CA
Easton, MD Markham, ON Valparaiso, IN
Edmonton, AB Matthews, NC Ventura, CA
Exton, PA McDonough, GA Virginia Beach, VA
Fenton, MO McHenry, IL Warner Robins, GA
Flanders, NJ Minot, ND Washington, PA
Florence, AL Mississauga, ON Wenatchee, WA
Flower Mound, TX Modesto, CA Weymouth, MA
Flowood, MS Moncton, NB Windsor, ON
Foley, AL North Brunswick, NJ Winter Haven, FL
Fountain Hills, AZ North Olmsted, OH Wyoming, MI
Frankfort, KY North Vancouver, BC Youngstown, OH
Gig Harbor, WA Novato, CA Ypsilanti, MI
</Table>
Set forth below is a list by city of Cargokids stores opened in North
America in fiscal 2003:
<Table>
<S> <C> <C>
Charlotte, NC Huntersville, NC Peachtree City, GA
Greensboro, NC Marietta, GA Sterling, VA
Houston, TX Matthews, NC
</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.
<PAGE>
The Pier, a subsidiary of the Company located in the United Kingdom,
operates 25 retail stores offering decorative home furnishings and related items
in a setting similar to Pier 1 stores. The Pier operates a distribution facility
near London, England. Additionally, The Pier has an online store at pier.co.uk.
During fiscal 2003, The Pier opened two new stores in England, set in a "store
within a store" format located in existing Home Base stores. The Pier expects to
open approximately five new stores in fiscal 2004 with up to four planned as
"store within a store" formats. Also, upgrades are expected to some existing
locations, warehouse facilities and the head office in the U.K. during fiscal
2004.
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 value of the Mexican peso, which had
reduced its profitability in the past. In fiscal 2003, Sears Mexico opened one
new store offering Pier 1 merchandise. As of March 1, 2003, Pier 1 merchandise
was offered in 17 Sears Mexico stores. Expansion plans for fiscal 2004 include
two new stores and one relocated 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 1, 2003, seven of these stores offered Pier 1 merchandise. The
Company has no immediate plans for further expansion in Puerto Rico but may
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 and Cargokids proprietary credit cards. As of March
1, 2003, the Company, through the Bank, had over 5,800,000 proprietary
cardholders with approximately 1,203,000 active accounts (accounts with a
purchase within the previous 12 months). Sales on the Company's proprietary
credit card accounted for 26.2% of total U.S. store sales in fiscal 2003. The
Company continues to increase overall sales on its proprietary credit card by
opening new accounts and developing customer loyalty through marketing
promotions targeted to cardholders, including 90-day deferred payment options on
larger purchases.
Pier 1 has an e-commerce website at pier1.com. More than 2,000
merchandise items are offered for sale to customers, along with gift cards, an
online clearance store, a furniture guide and a Bridal & Gift Registry program.
Pier 1's website allows customers to shop online, view Pier 1's entire line of
furniture, 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 formed a new subsidiary, New Cargo
Furniture, Inc., which acquired certain assets and assumed certain liabilities
of Cargo Furniture, Inc. and now operates under the name Cargokids. Cargokids is
a 25-store retailer of children's furniture and accessories. Cargokids utilizes
a website at cargokids.com to attract customers and provide information
regarding placing orders and store locations. The Company will continue its
expansion plans for Cargokids in fiscal 2004 by opening approximately 25 new
stores.
(b) Financial Information about Industry Segments.
In fiscal 2003, the Company operated principally 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
"Cargokids" 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 1, 2003, the Company operated 940 Pier 1 stores in 48 states
of the United States and 60 Pier 1 stores in eight Canadian provinces, and
supported eight franchised stores in eight states of the U.S. Additionally, the
Company operated 25 stores in the United Kingdom under the name The Pier and 25
Cargokids stores located in six states of the U.S. 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
17 Sears Mexico stores and in seven Sears Puerto Rico stores. Company-operated
Pier 1 stores in the United States and Canada average approximately 9,400 gross
square feet,
<PAGE>
which includes an average of approximately 7,600 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 2003, net sales of the Company totaled $1,754.9 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
at least 1,500 locations. For fiscal 2004, the Company plans to open
approximately 115 new stores, while closing approximately 30 to 35 stores. The
majority of the stores closed will be relocated to more favorable locations
within the same markets. Plans for fiscal 2004 include the opening of
approximately 25 new Cargokids stores and closing of three to five stores. The
Company expects Cargokids to begin to expand nationally as a value-oriented
retailer of home furnishings for children and families and plans to expand
Cargokids to a 250 to 300-store concept over the next decade. The Company
currently has no plans to expand outside of the United States, Canada and
Mexico.
Pier 1 offers a diverse selection of products consisting of over 4,000
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 38% of Pier
1's total North American retail sales in fiscal year 2003, 39% in fiscal 2002
and 40% in fiscal 2001. 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 24%
to Pier 1's total North American retail sales in fiscal year 2003, 23% in fiscal
2002 and 22% in fiscal year 2001. These items are imported from approximately 40
countries and include brass, marble and wood items, as well as lamps, vases,
dried and silk flowers, baskets, wall decorations and numerous other decorative
items. A majority of these products are handcrafted from natural materials.
HOUSEWARES - This product group is imported mainly from the Far East
and Europe and includes ceramics, dinnerware and other functional and decorative
items. These goods accounted for approximately 13% of Pier 1's total North
American retail sales in fiscal year 2003, and 12% in fiscal 2002 and 2001.
BED & BATH - This product group is imported mainly from India, Turkey,
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
years 2003 and 2002, and 17% in fiscal 2001.
SEASONAL - This product group consists of merchandise for celebrating
holidays and spring/summer entertaining and is imported mainly from Europe,
Taiwan, China, the Philippines and India. These items accounted for
approximately 7% of Pier 1's total North American retail sales in fiscal year
2003, 8% in fiscal 2002 and 9% in fiscal year 2001.
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 2003, 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 28% from merchandise produced
in Indonesia, Thailand, Brazil, Italy, the Philippines and Mexico. The remaining
26% 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 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 may 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
<PAGE>
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 Cargokids operations give it the opportunity to
address the underserved children's furniture and accessories market.
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 two federally registered service marks under which its Cargokids
stores do business. These registrations are numbered 948,076 and 1,620,518 for
the mark PIER 1 IMPORTS(R), 1,104,059 for the mark PIER 1(R), 1,348,743 for the
mark CARGO(R) and 2,693,478 for the mark CARGOKIDS!(R). Additionally, certain
subsidiaries of the Company have registered and have applications pending for
the registration of Pier 1 and Cargokids trademarks and service marks in the
United States and in numerous foreign countries.
On March 1, 2003, Pier 1 employed approximately 17,400 associates in
North America, of which approximately 7,900 were full-time employees and 9,500
were part-time employees.
A wholly owned foreign subsidiary of the Company incorporated under the
laws of Hong Kong manages 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.
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.
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.
Under U.S. 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 that 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 matters
forming the basis for the designations.
The United States may employ other measures 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 may seek similar
products from other countries.
(d) Available Information.
The Company makes available free of charge through its Internet website
address (www.pier1.com) its annual reports on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K, and amendments to those reports filed
with the Securities and Exchange Commission pursuant to Section 13(a) of the
Securities Exchange Act of 1934 as soon as reasonably practicable after it
electronically files such material with, or furnishes such material to, the
Securities and Exchange Commission.
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
<PAGE>
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, conflicts or war involving the United States or
its allies or trading partners, labor strikes, 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 availability
and proper functioning of technology and communications systems supporting the
Company's key business processes, 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 source, ship and deliver
items from foreign countries to its U.S. distribution centers at reasonable
prices and rates and 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.
Item 2. Properties.
The Company leases approximately 220,000 square feet of office space
for its Pier 1 corporate office and leases approximately 13,000 square feet of
additional office space for its Cargokids subsidiary. Both corporate office
facilities are located in Fort Worth, Texas. In March 2002, the Company
purchased land in Fort Worth, Texas for construction of new headquarters for the
relocation of the Company's corporate office. Construction began in January 2003
and the new facility is expected to be completed in the fall of 2004. Total cost
of the new headquarters, including land, is expected to be approximately $90
million. The Pier leases approximately 12,000 square feet of office space in the
U.K. for its corporate office.
The Company leases the majority of its retail stores, its warehouses
and other office space. At March 1, 2003, the present value of the Company's
minimum future operating lease commitments discounted at 10% totaled
approximately $838 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 1, 2003:
United States (company-owned)
<Table>
<S> <C> <C> <C> <C> <C>
Alabama 16 Kentucky 11 North Dakota 4
Alaska 1 Louisiana 15 Ohio 38
Arizona 19 Maryland 20 Oklahoma 5
Arkansas 7 Massachusetts 24 Oregon 11
California 105 Michigan 34 Pennsylvania 39
Colorado 21 Minnesota 16 Rhode Island 4
Connecticut 19 Mississippi 7 South Carolina 15
Delaware 4 Missouri 19 South Dakota 2
Florida 63 Montana 5 Tennessee 18
Georgia 31 Nebraska 5 Texas 70
Hawaii 2 Nevada 6 Utah 9
Idaho 4 New Hampshire 5 Virginia 31
Illinois 42 New Jersey 26 Washington 24
Indiana 21 New Mexico 5 West Virginia 5
Iowa 9 New York 44 Wisconsin 17
Kansas 8 North Carolina 33 Wyoming 1
United States (franchised)
Arizona 1 Nevada 1 Texas 1
Kentucky 1 New Hampshire 1 Vermont 1
Maine 1 Oklahoma 1
Canada (company-owned)
Alberta 7 New Brunswick 1 Quebec 12
British Columbia 8 Nova Scotia 1 Saskatchewan 2
Manitoba 1 Ontario 28
</Table>
The Pier's retail operations consist of 20 stores in England, four
stores in Scotland, and one store in Wales. At the end of fiscal 2003, Cargokids
had four stores in Georgia, one store in Kansas, one store in Maryland, four
stores in North Carolina, five stores in Virginia and ten stores in Texas.
<PAGE>
As of March 1, 2003, 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 1,143,000 sq. ft. Leased
Chicago, Illinois 514,000 sq. ft Owned
Columbus, Ohio 527,000 sq. ft. Leased
Fort Worth, Texas 582,000 sq. ft. Owned
Ontario, California 747,000 sq. ft. Leased
Savannah, Georgia 548,000 sq. ft. Owned/Leased
</Table>
The Company also leases approximately 100,000 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 Cargokids' operations.
The Company is currently leasing additional space under short-term agreements.
In support of its long-range growth plan, the Company has continued to expand
its distribution facilities. In fiscal 2003, the Company built a new
distribution center to replace its owned property along with the two locations
it previously leased in Savannah. The new facility is approximately 785,000
square feet expandable to 1,000,000 square feet as needed. The transition to the
new facility was completed in March 2003. In May 2003, the Company entered into
a sale-leaseback transaction on the Savannah distribution center whereby the
facility was sold for its approximate book value. The resulting lease qualified
for operating lease treatment under Statement of Financial Accounting Standards
No. 13, "Accounting for Leases." In April 2003, Cargokids leased an additional
111,000 square feet of warehouse space adjacent to its existing facility.
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 1, 2003; 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 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 2003 fiscal year.
Executive Officers of the Company
MARVIN J. GIROUARD, age 63, has served as Chairman and Chief Executive
Officer of the Company since March 1999 and has been a member of the Executive
Committee since December 1998. He has been a Director of the Company since
August 1988. From June 1998 to February 1999, Mr. Girouard served as President
and Chief Executive Officer of the Company and from August 1988 to June 1998 he
served as President and Chief Operating Officer of the Company. From May 1985
until August 1988, he served as Senior Vice President of Merchandising of Pier 1
Imports (U.S.), Inc.
CHARLES H. TURNER, age 46, has served as Executive Vice President of
Finance since April 2002 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 48, has served as Executive Vice President of
Stores of the Company since April 2002. 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 48, has served as Executive Vice President of
Merchandising of the Company since April 2002. 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 57, has served as Executive Vice President of
Legal Affairs since April 2002 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.
<PAGE>
PHIL E. SCHNEIDER, age 51, has served as Executive Vice President of
Marketing of the Company since April 2002. 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 52, has served as Executive Vice President of
Logistics and Allocations of the Company since April 2002. 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 55, has served as Executive Vice President
of Human Resources of the Company since April 2002. 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 1, 2003
and to the section entitled "Equity Compensation Plan Information" set forth in
the Company's Proxy Statement for its 2003 Annual Meeting of Shareholders.
The Company's common stock is traded on the New York Stock Exchange. As
of May 19, 2003, there were approximately 40,000 shareholders of record of the
Company's common stock.
During fiscal 2003, the Company repurchased over four million shares of
its outstanding common stock. In March 2003, the Board of Directors authorized
the repurchase of up to $150 million of the Company's common stock. This
authorization replaced the previously authorized $67.6 million that remained
available for repurchase at March 27, 2003. 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 debt covenant restrictions and its corporate
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 2003, the Company
paid cash dividends totaling approximately $19.5 million, or $.21 per share. The
Company's Board of Directors currently expects to continue to pay cash dividends
in fiscal 2004, but intends to retain most of its future earnings for the
expansion of the Company's business. The Company paid a cash dividend of $.06
per share on May 21, 2003. 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 1, 2003.
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 1, 2003.
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 1, 2003.
<PAGE>
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 1, 2003:
Consolidated Statements of Operations for the Years
Ended March 1, 2003, March 2, 2002 and March 3, 2001
Consolidated Balance Sheets at March 1, 2003 and March 2, 2002
Consolidated Statements of Cash Flows for the Years
Ended March 1, 2003, March 2, 2002 and March 3, 2001
Consolidated Statements of Shareholders' Equity for
the Years Ended March 1, 2003, March 2, 2002
and March 3, 2001
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 years ended March 1, 2003 and March 2, 2002.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
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 2003
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 2003 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 "Corporate Governance, Board Structure, Director Compensation and Stock
Ownership - Board Meetings, Committees and Fees" set forth in the Company's
Proxy Statement for its 2003 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 "Corporate Governance, Board Structure,
Director Compensation and Stock Ownership - Security Ownership of Management"
and the section entitled "Executive Compensation - Equity Compensation Plan
Information" set forth in the Company's Proxy Statement for its 2003 Annual
Meeting of Shareholders.
Item 13. Certain Relationships and Related Transactions.
None.
Item 14. Controls and Procedures.
<PAGE>
As of March 1, 2003, pursuant to the requirements of Rules 13a-15 and
15d-15 of the Securities Exchange Act of 1934, an evaluation was performed under
the supervision and with the participation of the Company's management,
including the Chairman of the Board and Chief Executive Officer ("CEO") and the
Executive Vice President, Chief Financial Officer and Treasurer ("CFO"), of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. Based on that evaluation, the Company's management, including
the CEO and CFO, concluded that the Company's disclosure controls and procedures
were effective as of March 1, 2003. There have been no significant changes in
the Company's internal controls or in other factors that could significantly
affect internal controls subsequent to March 1, 2003.
Item 15. Principal Accountant Fees and Services.
Information required by this Item is incorporated by reference to the
sections entitled "Other Business - Independent Auditor Fees" and "Other
Business - Pre-approval of Nonaudit Fees" set forth in the Company's Proxy
Statement for its 2003 Annual Meeting of Shareholders.
PART IV
Item 16. 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 1, 2003, March 2, 2002 and March 3, 2001
Consolidated Balance Sheets at March 1, 2003 and March 2,
2002
Consolidated Statements of Cash Flows for the Years Ended
March 1, 2003, March 2, 2002 and March 3, 2001
Consolidated Statements of Shareholders' Equity for the
Years Ended March 1, 2003, March 2, 2002 and
March 3, 2001
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 April 11, 2003, the Company furnished a Current Report on
Form 8-K containing an earnings release that reported results of
operations for the quarter and year ended March 1, 2003.
<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 27, 2003 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 27, 2003
- --------------------------- Chief Executive Officer
Marvin J. Girouard
/s/ Charles H. Turner Executive Vice President, May 27, 2003
- --------------------------- Chief Financial Officer and Treasurer
Charles H. Turner
/s/ Susan E. Barley Principal Accounting Officer May 27, 2003
- ---------------------------
Susan E. Barley
/s/ John H. Burgoyne Director May 27, 2003
- ---------------------------
John H. Burgoyne
/s/ Dr. Michael R. Ferrari Director May 27, 2003
- ---------------------------
Dr. Michael R. Ferrari
/s/ James M. Hoak, Jr. Director May 27, 2003
- ---------------------------
James M. Hoak, Jr.
/s/ Karen W. Katz Director May 27, 2003
- ---------------------------
Karen W. Katz
/s/ Tom M. Thomas Director May 27, 2003
- ---------------------------
Tom M. Thomas
</Table>
<PAGE>
CERTIFICATIONS
I, Marvin J. Girouard, certify that:
1. I have reviewed this annual report on Form 10-K of Pier 1 Imports, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
the registrant's board of directors (or persons performing the equivalent
functions):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: May 27, 2003 By: /s/ Marvin J. Girouard
--------------------- -------------------------------------
Marvin J. Girouard,
Chairman of the Board
and Chief Executive Officer
I, Charles H. Turner, certify that:
1. I have reviewed this annual report on Form 10-K of Pier 1 Imports, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
<PAGE>
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
the registrant's board of directors (or persons performing the equivalent
functions):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: May 27, 2003 By: /s/ Charles H. Turner
--------------------- -------------------------------------
Charles H. Turner,
Executive Vice President,
Chief Financial Officer and Treasurer
<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.
10.13.1* Senior Management Bonus Plan as Amended April 5, 2002,
incorporated herein by reference to Appendix B, page B-1, of the
Company's Proxy Statement for the fiscal year ended March 2,
2002.
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.
10.14.3 Second Amendment to the Revolving Credit Agreement, dated April
6, 2000, incorporated herein by reference to Exhibit 10.14.3 to
the Company's Form 10-Q for the quarter ended June 1, 2002.
10.14.4 Third Amendment to the Revolving Credit Agreement, dated April
24, 2002, incorporated herein by reference to Exhibit 10.14.4 to
the Company's Form 10-Q for the quarter ended June 1, 2002.
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.
10.15.1* The 1999 Stock Plan as Amended April 5, 2002, incorporated
herein by reference to Appendix A, page A-1, of the Company's
Proxy Statement for the fiscal year ended March 2, 2002.
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 1,
2003.
21 Roster of Subsidiaries of the Company.
23 Consent of Independent Auditors.
99.1 Management's certifications required pursuant to Sec. 906 of the
Sarbanes-Oxley Act of 2002.
</Table>
*Management Contracts and Compensatory Plans
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-13
<SEQUENCE>3
<FILENAME>d06302exv13.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 2003 2002 2001(1) 2000 1999
----------- ---------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS:
Net sales 11.4% $ 1,754.9 1,548.6 1,411.5 1,231.1 1,138.6
Gross profit 10.8% $ 753.4 649.8 594.5 512.5 500.4
Selling, general and administrative expenses 10.7% $ 502.3 448.1 399.8 349.4 334.6
Depreciation and amortization 10.5% $ 46.4 42.8 43.2 40.0 31.1
Operating income 11.0% $ 204.7 158.8 151.5 123.2 134.7
Nonoperating (income) and expenses, net(2) $ (0.7) (0.2) 1.3 4.6 5.0
Income before income taxes 12.2% $ 205.4 159.0 150.2 118.6 129.6
Net income 12.6% $ 129.4 100.2 94.7 74.7 80.4
PER SHARE AMOUNTS
(ADJUSTED FOR STOCK SPLITS AND DIVIDENDS):
Basic earnings 14.1% $ 1.39 1.06 .98 .78 .82
Diluted earnings 15.3% $ 1.36 1.04 .97 .75 .77
Cash dividends declared 15.0% $ .21 .16 .15 .12 .12
Shareholders' equity 13.9% $ 6.93 6.20 5.52 4.60 4.12
OTHER FINANCIAL DATA:
Working capital(2) 13.6% $ 420.0 396.8 333.0 239.3 252.1
Current ratio(2) (1.8%) 2.7 2.9 3.3 2.4 2.9
Total assets 10.3% $ 967.5 862.7 735.7 670.7 654.0
Long-term debt(2) (28.6%) $ 25.0 25.4 25.0 25.0 96.0
Shareholders' equity 12.4% $ 643.9 585.7 531.9 440.7 403.9
Weighted average diluted shares
outstanding (millions) 95.3 96.2 98.0 103.3 108.9
Effective tax rate 37.0% 37.0 37.0 37.0 38.0
Return on average shareholders' equity 21.0% 17.9 19.5 17.7 20.2
Return on average total assets 14.1% 12.5 13.5 11.3 12.3
Pre-tax return on sales 11.7% 10.3 10.6 9.6 11.4
</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 year presented. Fiscal years 2000
and 1999 included interest expense on 5 3/4% convertible subordinated notes
which were primarily converted into shares of the Company's common stock in
March 2000. The reduction in fiscal 2000 working capital, current ratio and
long-term debt was the result of the Company's call of these 5 3/4% notes.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Pier 1 Imports, Inc. (together with 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 1,000 retail
locations in 50 states, Canada, Puerto Rico, the United Kingdom and Mexico as of
fiscal 2003 year-end. The Company operates stores in the United States and
Canada under the names "Pier 1 Imports" ("Pier 1") and "Cargokids!"
("Cargokids"). In the United Kingdom, retail locations operate under the name
"The Pier." The Company directly imports merchandise from over 40 countries
around the world and designs offerings that are proprietary to Pier 1 Imports.
During fiscal 2003, the Company reported record sales of $1,754.9 million and
record net income of $129.4 million, or $1.36 per diluted share. In February
2001, the Company formed a new subsidiary, New Cargo Furniture, Inc., which
acquired certain assets and assumed certain liabilities of Cargo Furniture, Inc.
and now operates under the name Cargokids. This 25-store retailer and wholesaler
of children's furniture, gifts and accessories had no impact on the Company's
fiscal 2001 operations as a result of the timing of the acquisition, but is
reflected in the Company's fiscal 2003 and 2002 year-end balance sheets and
results of operations.
FISCAL YEARS ENDED MARCH 1, 2003 AND MARCH 2, 2002
During fiscal 2003, the Company recorded net sales of $1,754.9 million, an
increase of $206.3 million, or 13.3%, over net sales of $1,548.6 for the prior
fiscal year. Comparable store sales for fiscal 2003 improved 4.7% over fiscal
2002. Net sales consisted almost entirely of sales to retail customers, net of
discounts and returns, but also included delivery service revenues and wholesale
sales and royalties received from franchise stores and joint ventures. Sales by
retail concept during fiscal years 2003, 2002 and 2001 were as follows (in
thousands):
<TABLE>
<CAPTION>
2003 2002 2001
---------- ---------- ----------
<S> <C> <C> <C>
Pier 1 Imports stores $1,677,050 $1,478,438 $1,363,197
The Pier stores 51,470 43,445 39,190
Cargokids stores 12,199 10,672 -
Internet 6,380 3,370 1,853
Other(1) 7,768 12,631 7,258
---------- ---------- ----------
Net sales $1,754,867 $1,548,556 $1,411,498
========== ========== ==========
</TABLE>
(1) Other sales consisted of wholesale sales and royalties received from
franchise stores, international joint ventures in Mexico and Puerto Rico,
and Cargokids' contract sales. Also included in amounts from fiscal 2002 and
2001 were sales to the Company's franchise stores in Japan. Fiscal 2002
results include Cargokids dealer sales, which were discontinued in fiscal
2003.
The Company believes the increase in sales was a result of a number of factors,
including a value-oriented merchandise assortment at attractive price points,
the continued focus on customer service, a successful integrated marketing
campaign focusing on the customer and a continuation of the trend toward
"cocooning" which began after the events of September 11, 2001 when consumers
began to focus spending efforts on their homes. These factors resulted in
increased traffic and transaction counts for the year. The increase in retail
sales during fiscal 2003 was slightly offset by a reduction in sales as a result
of the Company's cessation of sales to its venture partner in Japan and lower
contract sales at Cargokids as management shifted its focus to concentrate on
retail sales.
The Company's store expansion efforts also contributed to total sales growth
during fiscal 2003. The Company opened 114 and closed 24 North American Pier 1
stores during fiscal 2003, bringing the Pier 1 store count to 1,000 at year-end
compared to 910 a year ago. The Company also opened eight and closed one
Cargokids stores and opened three "store within a store" concepts at The Pier
and in Mexico. Including
<PAGE>
all worldwide locations, the Company's store count totaled 1,074 at the end of
fiscal 2003, which represents an increase of approximately 11.0% in total retail
square footage compared to the end of last fiscal year. Although sales trends
were somewhat less favorable toward the end of the year because of negative
trends in general economic conditions and consumer confidence, the Company
believes it has the financial strength to continue with its growth strategy and
expects to open a net of 100 to 105 new stores during fiscal 2004, including a
net of 80 to 85 Pier 1 stores and 20 Cargokids stores. A summary reconciliation
of the Company's stores open at the beginning of fiscal 2003, 2002 and 2001 to
the number open at the end of each period follows (openings and closings include
relocated stores):
<TABLE>
<CAPTION>
PIER 1 NORTH
AMERICAN INTERNATIONAL(1) CARGOKIDS(2) TOTAL
------------ ---------------- ------------ -------
<S> <C> <C> <C> <C>
Open at February 26, 2000 785 49 - 834
Openings 65 3 - 68
Closings (24) - - (24)
Acquisition (February 2001) - - 21 21
------ ------ ------ ------
Open at March 3, 2001 826 52 21 899
Openings 104 3 3 110
Closings (20) (9) (6) (35)
------ ------ ------ ------
Open at March 2, 2002 910 46 18 974
Openings 114 3 8 125
Closings (24) - (1) (25)
------ ------ ------ ------
Open at March 1, 2003 1,000 49 25 1,074
====== ====== ====== ======
</TABLE>
(1) International stores were located in Puerto Rico, the United Kingdom, Mexico
and Japan for fiscal 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 Cargokids.
Net sales on the Company's proprietary credit card totaled $422.5 million and
accounted for 26.2% of U.S. store sales during fiscal 2003, an increase of $10.0
million over proprietary credit card sales in the prior year of $412.5 million,
which represented 28.9% of U.S. store sales during the year. The decline in
proprietary credit card sales as a percentage of U.S. store sales resulted from
fewer new customer accounts on the proprietary card and a shift to the usage of
third-party credit cards, such as Visa and MasterCard. Proprietary credit card
customers spent an average of $153 per transaction, which was comparable to last
year. The Company continues to increase overall sales on its proprietary credit
card by opening new accounts and developing customer loyalty through marketing
promotions targeted to cardholders, including deferred payment options on larger
purchases. Although the proprietary credit card generates income, it primarily
serves as a tool for marketing and communication to the Company's most loyal
customers.
Gross profit, after related buying and store occupancy costs, expressed as a
percentage of sales, increased 90 basis points in fiscal 2003 to 42.9% from
42.0% in fiscal 2002. Merchandise margins, as a percentage of sales, increased
over 100 basis points to 55.3% in fiscal 2003 compared to 54.2% in the prior
year. Improved merchandise margins were primarily the result of decreased
freight costs and increased purchasing power with vendors. The Company expects
that margin rates for fiscal 2004 may be flat or decline slightly from fiscal
2003 rates. Store occupancy costs during fiscal 2003 increased 10 basis points
as a percentage of sales to 12.4% from 12.3% during fiscal 2002. Occupancy costs
in older, more established stores were leveraged over a higher sales base and
thus declined by 40 basis points, from 12.1% in fiscal 2002 to 11.7% in fiscal
2003. However, this leveraging was offset by somewhat higher rental costs as a
percentage of sales in newer stores because these stores' sales volumes have not
hit their sales maturity levels.
As a percentage of sales, selling, general and administrative expenses,
including marketing, improved 30 basis points to 28.6% in fiscal 2003 from 28.9%
in fiscal 2002. In total dollars, selling, general and administrative expenses
increased $54.2 million in fiscal 2003 over fiscal 2002. Expenses that normally
<PAGE>
increase proportionately with sales and number of stores, such as marketing,
store payroll, supplies and equipment rental, increased $39.7 million during the
year, yet were comparable as a percentage of sales. Store payroll and bonus
increased $29.9 million and 25 basis points as a percentage of sales from fiscal
2002. This increase was attributable largely to an increase in medical insurance
costs and to slightly less leveraging of store payroll, primarily in the fourth
quarter of fiscal 2003 when comparable store sales gains were up 0.9% for the
quarter compared to 10.2% for the year earlier period. Store payroll hours were
well managed throughout the year and the increase in productivity was offset by
a slight increase in hourly rates. Marketing expenses during fiscal 2003
increased $8.4 million over fiscal 2002, but remained flat at 4.5% of sales for
both periods. Store supplies and equipment rental for the year increased $1.5
million, a decrease of approximately 25 basis points as a percentage of sales
from fiscal 2002, primarily as a result of a redesigned program for bags, boxes
and tissue that was implemented in the first quarter of 2003. Non-variable
selling, general and administrative expenses increased $14.5 million in fiscal
2003, yet decreased 30 basis points as a percentage of sales. Home office
payroll, including bonus, increased $9.6 million, representing a 10 basis points
increase as a percentage of sales. This increase was principally the result of
higher corporate bonus accruals for fiscal 2003 compared to last year because of
increased profits compared to bonus plan amounts. All other selling, general and
administrative expenses for the year-to-date period increased $4.9 million and
declined 40 basis points as a percentage of sales.
Depreciation and amortization for fiscal 2003 was $46.4 million, representing an
increase of $3.6 million over last year's $42.8 million. This increase was
primarily the result of the increase in capital expenditures during fiscal 2003
related to new store openings and information systems technology. These
increases were partially offset by a reduction in depreciation expense for
certain assets, which became fully depreciated during the year, and for
Company-owned stores, which were sold and leased back.
In fiscal 2003, operating income improved to $204.7 million, or 11.7% of sales,
from $158.8 million, or 10.3% of sales, in fiscal 2002, an increase of 28.9% or
$45.8 million.
Interest income increased slightly to $3.0 million during fiscal 2003 compared
to $2.5 million in fiscal 2002. Although the Company had much higher average
cash and short-term investment balances this year, average interest rates were
lower, which resulted in only a slight increase in income on short-term
investments. Interest expense remained consistent at $2.3 million for both
fiscal 2003 and 2002.
The Company's effective tax rate remained constant at 37% of income before
income taxes for both fiscal 2003 and 2002.
Net income in fiscal 2003 was $129.4 million, or $1.36 per share on a diluted
basis, an increase of $29.2 million or 29.1% as compared to fiscal 2002's net
income of $100.2 million, or $1.04 per share on a diluted basis. Net income, as
a percentage of sales, improved from 6.5% in fiscal 2002 to 7.4% in fiscal 2003.
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. Comparable 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 opening 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 at the
<PAGE>
end of fiscal 2001. Including Cargokids 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
Company's 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 had stores in Japan as of the end of fiscal
year 2002.
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
(openings and closings include relocated stores):
<TABLE>
<CAPTION>
PIER 1 NORTH
AMERICAN INTERNATIONAL(1) CARGOKIDS(2) TOTAL
------------ ---------------- ------------ -------
<S> <C> <C> <C> <C>
Open at February 27, 1999 752 54 - 806
Openings 63 5 - 68
Closings (30) (10) - (40)
---- ---- ---- ----
Open at February 26, 2000 785 49 - 834
Openings 65 3 - 68
Closings (24) - - (24)
Acquisition (February 2001) - - 21 21
---- ---- ---- ----
Open at March 3, 2001 826 52 21 899
Openings 104 3 3 110
Closings (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 Cargokids.
Sales on the Company's proprietary credit card for fiscal 2002 were $412.5
million compared to $377.0 million in fiscal 2001 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 the prior
year. The Company continued to encourage sales on its proprietary credit card by
opening new accounts, including accounts on Cargokids' new proprietary credit
card, and developed customer loyalty through marketing promotions specifically
targeted to cardholders, including deferred payment options on larger purchases.
Although the proprietary credit card generated income, it primarily served as a
tool for marketing and communication to 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% in fiscal 2001.
Merchandise margins for fiscal year 2002 were 54.2%, relatively flat when
compared to the prior fiscal year. Although sales in the first half of fiscal
2002 consisted of more promotional merchandise 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 in fiscal 2001. This increase was primarily
attributable to the effect of leveraging fixed 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 in fiscal 2001. 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
<PAGE>
decreased 20 basis points as a percentage of sales, which was largely the result
of a decrease in store bonuses that were 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 insurance costs, workers'
compensation, and general insurance expenses, and the impact of Cargokids'
expenditures in fiscal 2002 with no corresponding expense in fiscal 2001. 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, in the prior 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 fiscal 2002 compared to the prior 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.
LIQUIDITY AND CAPITAL RESOURCES
Cash and temporary investments were $242.1 million at the end of fiscal 2003, an
increase of $6.5 million over the fiscal 2002 year-end balance of $235.6
million. Operating activities generated $176.2 million of cash versus $244.3
million last year and served as the Company's primary source of operating cash
for the fiscal year. The decline in cash generated from operating activities was
primarily the result of an increase of $57.9 million in inventories during the
fiscal year compared to a decline of $34.8 million in inventory levels during
fiscal 2002. Inventory growth resulted primarily from the addition of 100 net
new stores, including Cargokids and all other worldwide locations. The Company
believes its inventory levels are well positioned with North American Pier 1
inventory per retail square foot of $41 at fiscal 2003 year-end, up 8% from last
year and down 15% from fiscal 2001 year-end. Increases in accounts payable and
accrued liabilities provided cash of $29.8 million. These increases were the
result of several factors, including growth in the liability for unredeemed gift
cards, higher expense for taxes, insurance and other accruals due primarily to
the increased number of stores this year and higher bonus accruals based on the
Company's strong sales and profitability this year.
Net cash used in investing activities totaled $88.6 million during fiscal 2003
versus last year's $10.5 million. Of that amount, capital expenditures were
$99.0 million and consisted primarily of capital additions related to new Pier 1
stores of $34.7 million, land purchases and other construction-related costs for
the Company's new headquarters and Savannah, Georgia distribution facility
totaling $13.4 million and $21.8 million, respectively, and other additions of
$29.1 million primarily for remodeling and investing in existing stores,
<PAGE>
software application development and technology infrastructure improvements.
Cash proceeds from the disposition of properties were $6.3 million, which
included $5.7 million in proceeds from the sale-leaseback of six Company-owned
properties in the fourth quarter of fiscal 2003. See Note 9 of the Notes to
Consolidated Financial Statements for additional discussion of the
sale-leaseback transactions. The Company's beneficial interest in securitized
receivables was $40.5 million at the end of fiscal 2003, a $4.1 million decrease
from the fiscal 2002 year-end balance of $44.6 million. This decline resulted
from a decrease in the total preferred card receivables portfolio from $140.7
million at fiscal 2002 year-end to $136.3 million at the end of fiscal 2003 as
total sales for the fourth quarter of fiscal 2003 on the preferred card were
lower than for the same quarter of fiscal 2002. Preferred card sales as a
percentage of U.S. store sales declined to 21.2% in the fourth quarter of fiscal
2003 from 23.6% for the same quarter last year and declined to 26.2%
year-to-date in fiscal 2003 from 28.9% in fiscal 2002. See Note 2 of the Notes
to Consolidated Financial Statements for additional discussion of the beneficial
interest in securitized receivables.
During fiscal 2003, the Company paid $78.5 million to repurchase 4,396,700
common shares under the Board of Directors-approved stock buyback program at a
weighted average price of $17.85, including fees. Subsequent to the end of
fiscal 2003, 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 previous authorization. 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, debt
covenant restrictions and consideration of its corporate credit ratings. During
the fiscal year, the Company paid dividends totaling $19.5 million, an increase
of $4.4 million over dividends paid during fiscal 2002. During the fourth
quarter of fiscal 2003, the Company increased its quarterly cash dividend to
$.06 per share from $.05 per share. Subsequent to the end of fiscal 2003, the
Company declared a quarterly cash dividend of $.06 per share payable on May 21,
2003 to shareholders of record on May 7, 2003. The Company expects to continue
to pay cash dividends in fiscal 2004, but to retain most of its future earnings
for expansion of the Company's business. Other financing activities, primarily
the exercise of stock options by employees, provided cash of $17.3 million
during fiscal 2003.
For fiscal 2003, 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, all of which
was available at fiscal 2003 year-end. The Company had no borrowings on this
facility during fiscal 2003. The facility expires in November 2003 and the
Company expects to renew this facility or replace it with a comparable facility
before its expiration. Additionally, the Company has a $120 million short-term
line of credit, which is primarily used to issue merchandise letters of credit.
At fiscal 2003 year-end, approximately $59.9 million had been utilized, leaving
$60.1 million available. The Company also has $36.5 million in credit lines used
to issue other special-purpose letters of credit, all of which were fully
utilized at fiscal 2003 year-end. Of the $36.5 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 2.7 to 1 at fiscal 2003 year-end compared to 2.9 to 1 at fiscal 2002
year-end.
<PAGE>
A summary of the Company's contractual cash commitments and other commercial
commitments as of March 1, 2003 is listed below (in thousands):
<TABLE>
<CAPTION>
Amount of Commitment Expiration Per Period
-------------------------------------------------
Less Than 1 to 3 3 to 5 More Than
Total 1 Year Years Years 5 Years
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Operating leases $1,262,321 $ 185,169 $ 340,193 $ 279,798 $ 457,161
Merchandise letters of credit 59,856 59,856 - - -
Standby letters of credit 36,508 36,508 - - -
Long-term debt 25,393 393 - - 25,000
---------- ---------- ---------- ---------- ----------
Total $1,384,078 $ 281,926 $ 340,193 $ 279,798 $ 482,161
========== ========== ========== ========== ==========
</TABLE>
The present value of total existing minimum operating lease commitments
discounted at 10% was $837.7 million at fiscal 2003 year-end. The Company plans
to continue to fund these commitments from cash generated from the operations of
the Company.
The Company's securitization transaction provides a portion 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 Pier 1
Imports Credit Card Master Trust (the "Master Trust"). However, should the
balance of the underlying credit card receivables held by the Master Trust
decline to a level that the Class A Certificates were insufficiently
collateralized, the Master Trust would be contractually required to repay a
portion of the Class A Certificates from daily collections. At the end of fiscal
2003, the underlying credit card receivables held by the Master Trust were
$136.3 million and would have had to fall below $117.5 million before a
repayment would have been required. This repayment would only be to the extent
necessary to maintain the required ratio of receivables to the Class A
Certificates as set forth in the securitization agreement. In addition, should
the Master Trust be out of compliance with its required performance measures,
such as payment rate, returns and fraud, excess portfolio yield and minimum
transferor's interest, this would trigger an early amortization event. Such an
event would eliminate the securitization as a source of funding for the Company.
These performance measures would have to deteriorate significantly from their
current levels to result in such an early amortization event. If either an early
amortization event occurred or the Company was required to consolidate the
Master Trust due to a change in accounting rules, the Company's statement of
operations for fiscal 2003 would not have been materially different than its
reported results. An early amortization event would require the repayment of the
$100 million in the Company's funding, whereas the consolidation of the Master
Trust would result in an increase of approximately $100 million in both the
Company's assets and liabilities as of March 1, 2003.
The Company plans to open approximately 115 new Pier 1 stores during fiscal year
2004 and plans to close approximately 30 to 35 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 continue with expansion plans
for Cargokids and expects to open approximately 25 locations and close
approximately five locations during fiscal 2004. New store buildings and land
will be financed primarily through operating leases. Total capital expenditures
for fiscal 2004 are expected to be approximately $120 to $125 million. Of this
amount, the Company expects to spend approximately $45 to $50 million on store
development, $45 million on costs related to construction of the Company's new
headquarters, $20 million on information systems enhancements and $10 million on
additions related to the Company's distribution centers. The Company expects the
final $32 million in construction costs for the new headquarters to be spent in
fiscal 2005. Initially the Company plans to pay for the new headquarters with
operating funds and may mortgage all or part of it, or enter into a
sale-leaseback arrangement depending on interest rates and the Company's cash
position. The Company expects to enter into a sale-leaseback transaction on the
Savannah distribution
<PAGE>
center during fiscal 2004 and anticipates that the resulting lease will qualify
for operating lease treatment. Proceeds related to the expected sale-leaseback
are anticipated to be approximately $23 million, which is expected to be greater
than or equal to the Company's cost basis in the distribution center.
In summary, the Company's primary uses of cash in fiscal 2003 were to fund
operating expenses and satisfy inventory requirements; provide for new and
existing store development; fund capital additions related to the new
distribution center, new corporate headquarters and information systems
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 2004.
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:
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 and
gift certificates 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.
COMPARABLE STORE SALES - Stores included in the comparable store sales
(sometimes referred to as "same-store" sales) calculation are those stores that
were opened prior to the beginning of the preceding fiscal year and are still
open. Also included are stores that were 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 or gap in
timing between the opening of one store and the closing of the existing store.
Stores that are expanded or renovated are excluded from the comparable store
sales calculation during the period they are closed for such remodeling. When
these stores re-open for business, they are included in the comparable 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 comparable store. Sales over the Internet
are included and clearance stores are omitted from the comparable store sales
calculation. Also, Cargokids was not included in the operations of the Company
for fiscal 2001 and was not included in the comparable store sales calculation
for fiscal 2002.
BENEFICIAL INTEREST IN SECURITIZED RECEIVABLES - The Company securitizes its
entire portfolio of proprietary credit card receivables. During fiscal 2003,
2002 and 2001, the Company sold all of its proprietary credit card receivables,
except those that failed certain eligibility requirements, to a special-purpose
wholly owned subsidiary, Pier 1 Funding, LLC ("Funding"), which transferred the
receivables to the Pier 1 Imports Credit Card Master Trust (the "Master Trust").
Neither Funding nor the Master Trust is consolidated by the Company as they meet
the requirements of qualifying special-purpose entities under Statement of
Financial Accounting Standards 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
<PAGE>
principal amount of receivables held in the Master Trust over the portion
represented by the certificates sold to third-party 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 pricing to service the receivables sold.
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 using management's best
estimates of key assumptions including credit losses and payment rates. As of
March 1, 2003 and 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 performed assuming a hypothetical 20% adverse
change in both interest rates and credit losses resulted in an immaterial impact
on the fair value of the Company's beneficial interest. 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 being determined on a
weighted average inventory method. Cost is calculated based upon the actual
landed cost of an item at the time it is received in the Company's warehouse
using actual vendor invoices and also includes the cost of warehousing and
transporting product to the stores. Calculations of the carrying value of
inventory are made on an item-by-item basis and to the extent that the cost of
an item exceeds the current selling price, provisions are made to reduce the
carrying amount of the item. The Company reviews its inventory levels in order
to identify slow-moving merchandise and uses merchandise markdowns to clear such
merchandise. Markdowns are recorded to reduce the value of such slow-moving
merchandise as needed. Since the determination of carrying value of inventory
involves both estimation and judgment with regard to costs and market values,
differences in these estimates could result in valuations that differ from the
recorded asset.
The Company recognizes known inventory losses, shortages and damages when
incurred and makes a provision for estimated shrinkage. The amount of the
provision is estimated based on historical experience using the results of its
physical inventories. Inventory is physically counted at all locations at least
once each year, at which time actual results are reflected in the financial
statements. Physical counts were taken at substantially all stores and
distribution centers during fiscal 2003. Although inventory shrink rates have
not fluctuated significantly in recent years, should actual rates differ from
the Company's estimates, revisions to the inventory shrink expense may be
required. Most inventory purchases and commitments are made in U.S. dollars.
INSURANCE PROVISION - The Company is self-insured with respect to medical
coverage offered to eligible employees except that claims in excess of $150,000
per occurrence per year are covered by a purchased insurance policy. The Company
records a provision for claims that have been incurred but not reported. Such
claim amounts are estimated based on historical average claims per month and on
the average historical lag time between the covered event and the time it is
paid by the Company. The liability for medical claims incurred but not reported
at March 1, 2003 was $2.8 million.
The Company maintains insurance for workers' compensation claims with a
deductible of $500,000 per claim. The liability recorded for such claims is
determined by estimating the total future claims cost for events that occurred
prior to the balance sheet date. The estimates consider historical claims
development factors as well as information obtained from and projections made by
the Company's insurance carrier and underwriters. The recorded liability for
workers' compensation claims at March 1, 2003 was $7.8 million.
<PAGE>
The assumptions made in determining the above estimates are reviewed continually
and the liability adjusted accordingly as new facts are revealed. Changes in
circumstances and conditions affecting the assumptions used in determining the
liabilities could cause actual results to differ from the Company's recorded
amounts.
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. A valuation allowance is recorded to reduce the
carrying amounts of deferred tax assets unless it is more likely than not that
such assets will be realized. If different assumptions had been used, the
Company's tax expense, assets and liabilities could have varied from recorded
amounts. If actual results differ from estimated results or if the Company
adjusts these assumptions in the future, the Company may need to adjust its
deferred tax assets or liabilities, which could impact its effective tax rate.
In accordance with Accounting Principles Board 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.
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. The Company uses such contracts to hedge exposures to changes in
foreign currency exchange rates associated with purchases denominated in foreign
currencies, primarily euros and British pounds. 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 as such contracts are not
designated as hedges under Statement of Financial Accounting Standards No. 133.
Forward contracts, which hedge merchandise purchases, generally have maturities
not exceeding six months, and contracts which hedge the repatriation of Canadian
funds have maturities not exceeding eighteen months. At March 1, 2003, 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 1.5 million euros and 9.0 million Canadian dollars,
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 1, 2003. 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 2, 2002.
IMPACT OF INFLATION AND CHANGING PRICES
Inflation has not had a significant impact on the operations of the Company
during the preceding three years.
<PAGE>
IMPACT OF NEW ACCOUNTING STANDARDS
In the first quarter of fiscal 2003, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets,"
which superseded Accounting Principles Board ("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 for impairment upon adoption and on an
annual basis thereafter. The Company completed the transitional and annual
impairment tests during fiscal 2003 and concluded that goodwill was not
impaired. The adoption of SFAS No. 142 during the first quarter of fiscal 2003
did not have a material impact on the Company's consolidated balance sheets or
its statements of operations, shareholders' equity and cash flows. Both the
Company's goodwill and intangible assets with finite useful lives had immaterial
balances as of March 1, 2003 and March 2, 2002. The impact of the
non-amortization provisions of SFAS No. 142, if applied at the beginning of
fiscal year 2001, would have resulted in net income for fiscal 2002 and 2001 of
$100,499,000 and $94,740,000 versus reported net income of $100,209,000 and
$94,650,000, respectively. Basic earnings per share would have remained at $1.06
and $.98 and diluted earnings per share would have remained at $1.04 and $.97
for fiscal 2002 and fiscal 2001, respectively.
In the first quarter of fiscal 2003, the Company also adopted SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," which replaced
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." SFAS 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 extends 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 adoption of SFAS No. 144 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 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No.
146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS
No. 146 requires that certain costs associated with exit or disposal activities
be recognized when incurred rather than at the date of commitment to an exit or
disposal plan. This statement also nullifies the guidance in Emerging Issues
Task Force Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." The provisions of SFAS No. 146 are
effective for exit or disposal activities initiated after December 31, 2002. The
adoption of SFAS No. 146 did not have a material impact on the Company's
consolidated balance sheets or its statements of operations, shareholders'
equity and cash flows.
In December 2002, the FASB issued Statement No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure, an Amendment of FASB Statement No.
123." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based
Compensation," to provide alternative methods of transition for a voluntary
change to the fair value method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the disclosure requirements of
SFAS No. 123 to require more prominent disclosures about the method of
accounting for stock-based compensation and the effect of the method used on
reported results in both annual and interim financial statements. The transition
and annual disclosure provisions of SFAS No. 148 are effective for fiscal years
ending after December 15, 2002. The interim disclosure provisions are effective
for financial reports containing financial statements for interim periods
beginning after December 15, 2002. The Company has adopted the annual disclosure
provisions of SFAS No. 148 and
<PAGE>
enhanced its disclosures related to the accounting for stock-based employee
compensation. See Note 1 and Note 7 of the Notes to Consolidated Financial
Statements.
In January 2003, the FASB issued Financial Interpretation No. 46, "Consolidation
of Variable Interest Entities" ("FIN 46"). This interpretation addresses
consolidation by business enterprises of variable interest entities with certain
defined characteristics. This interpretation applies to the first fiscal year or
interim period beginning after June 15, 2003 to variable interest entities in
which an enterprise holds a variable interest created or obtained before
February 1, 2003. For variable interest entities created after January 31, 2003,
the consolidation requirement provisions of FIN 46 shall be applied immediately.
The Company has no variable interest entities that would be subject to the
consolidation provisions of FIN 46 and thus will not have an impact on its
consolidated balance sheets or its statements of operations, shareholders'
equity or 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, the war with Iraq and its duration, further
conflicts in the Middle East, labor strikes, 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 source, ship and deliver items from foreign countries to its U.S.
distribution centers at reasonable prices and rates and in a 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 1, 2003 and March 2, 2002, and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended March 1, 2003. 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 1, 2003 and March 2, 2002, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
March 1, 2003, in conformity with accounting principles generally accepted in
the United States.
/s/ Ernst & Young LLP
Fort Worth, Texas
April 4, 2003
<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 1, 2003 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
-----------------------------------------
2003 2002 2001
----------- ----------- -----------
<S> <C> <C> <C>
Net sales $ 1,754,867 $ 1,548,556 $ 1,411,498
Operating costs and expenses:
Cost of sales (including buying and
store occupancy costs) 1,001,462 898,795 817,043
Selling, general and administrative
expenses 502,319 448,127 399,755
Depreciation and amortization 46,432 42,821 43,184
----------- ----------- -----------
1,550,213 1,389,743 1,259,982
----------- ----------- -----------
Operating income 204,654 158,813 151,516
Nonoperating (income) and expenses:
Interest and investment income (3,047) (2,484) (1,854)
Interest expense 2,327 2,300 3,130
----------- ----------- -----------
(720) (184) 1,276
----------- ----------- -----------
Income before income taxes 205,374 158,997 150,240
Provision for income taxes
75,988 58,788 55,590
----------- ----------- -----------
Net income $ 129,386 $ 100,209 $ 94,650
=========== =========== ===========
Earnings per share:
Basic $ 1.39 $ 1.06 $ .98
=========== =========== ===========
Diluted $ 1.36 $ 1.04 $ .97
=========== =========== ===========
Dividends declared per share: $ .21 $ .16 $ .15
=========== =========== ===========
Average shares outstanding during period:
Basic 92,871 94,414 96,306
=========== =========== ===========
Diluted 95,305 96,185 97,952
=========== =========== ===========
</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>
2003 2002
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash, including temporary investments of $225,882
and $213,488, respectively $ 242,114 $ 235,609
Beneficial interest in securitized receivables 40,538 44,620
Other accounts receivable, net of allowance for
doubtful accounts of $236 and $275, respectively 11,420 6,205
Inventories 333,350 275,433
Prepaid expenses and other current assets 36,179 43,286
--------- ---------
Total current assets 663,601 605,153
Properties, net 254,503 209,954
Other noncurrent assets 49,383 47,565
--------- ---------
$ 967,487 $ 862,672
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 393 $ 356
Accounts payable 76,742 78,961
Gift cards, gift certificates and merchandise credits
outstanding 37,924 29,288
Accrued income taxes payable 25,798 29,738
Other accrued liabilities 102,732 70,053
--------- ---------
Total current liabilities 243,589 208,396
Long-term debt 25,000 25,356
Other noncurrent liabilities 54,962 43,264
Shareholders' equity:
Common stock, $1.00 par, 500,000,000 shares
authorized, 100,779,000 issued 100,779 100,779
Paid-in capital 144,247 140,190
Retained earnings 539,776 429,910
Cumulative other comprehensive income (loss) (2,210) (4,702)
Less - 10,045,000 and 7,362,000 common shares
in treasury, at cost, respectively (138,656) (80,521)
--------- ---------
643,936 585,656
Commitments and contingencies - -
--------- ---------
$ 967,487 $ 862,672
========= =========
</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
-----------------------------------
2003 2002 2001
--------- --------- ---------
<S> <C> <C> <C>
Cash flow from operating activities:
Net income $ 129,386 $ 100,209 $ 94,650
Adjustments to reconcile to net cash
provided by operating activities:
Depreciation and amortization 46,432 42,821 43,184
Loss on disposal of fixed assets 3,311 4,205 6,514
Deferred compensation 4,484 3,697 2,072
Deferred taxes 18,748 (2,238) 735
Tax benefit from options exercised by employees 6,867 628 1,494
Other 10,679 3,523 2,959
Change in cash from:
Inventories (57,917) 34,804 (39,127)
Other accounts receivable and other current assets (14,362) (8,213) (5,847)
Accounts payable and accrued expenses 29,819 65,420 4,786
Other noncurrent assets (759) (32) (3,521)
Other noncurrent liabilities (500) (500) (390)
--------- --------- ---------
Net cash provided by operating activities 176,188 244,324 107,509
--------- --------- ---------
Cash flow from investing activities:
Capital expenditures (99,042) (57,925) (42,745)
Proceeds from disposition of properties 6,330 16,682 353
Acquisitions, net of cash acquired - - (3,917)
Beneficial interest in securitized receivables 4,082 30,783 (21,583)
--------- --------- ---------
Net cash used in investing activities (88,630) (10,460) (67,892)
--------- --------- ---------
Cash flow from financing activities:
Cash dividends (19,520) (15,134) (14,494)
Purchases of treasury stock (78,474) (44,137) (34,270)
Proceeds from stock options exercised, stock purchase
plan and other, net 17,305 13,463 5,627
Borrowings under long-term debt - 712 82,500
Repayments of long-term debt (364) - (82,515)
--------- --------- ---------
Net cash used in financing activities (81,053) (45,096) (43,152)
--------- --------- ---------
Change in cash and cash equivalents 6,505 188,768 (3,535)
Cash and cash equivalents at beginning of year 235,609 46,841 50,376
--------- --------- ---------
Cash and cash equivalents at end of year $ 242,114 $ 235,609 $ 46,841
========= ========= =========
Supplemental cash flow information:
Interest paid $ 2,065 $ 2,493 $ 3,171
========= ========= =========
Income taxes paid $ 54,711 $ 35,951 $ 58,302
========= ========= =========
</TABLE>
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.
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>
Common Stock
Outstanding Paid-in Retained
Shares Amount Capital Earnings
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance February 26, 2000 93,821 $ 100,779 $ 155,711 $ 264,678
Comprehensive income:
Net income - - - 94,650
Other comprehensive income,
net of tax:
Currency translation
adjustments - - - -
Comprehensive income
Purchases of treasury stock (3,269) - - -
Restricted stock amortization - - - -
Exercise of stock options, stock
purchase plan and other 825 - (1,774) (25)
Cash dividends ($.15 per share) - - - (14,494)
Conversion of 5 3/4% convertible debt 4,764 - (14,513) -
------- --------- --------- ---------
Balance March 3, 2001 96,141 100,779 139,424 344,809
------- --------- --------- ---------
Comprehensive income:
Net income - - - 100,209
Other comprehensive income,
net of tax:
Currency translation
adjustments - - - -
Comprehensive income
Purchases of treasury stock (4,021) - - -
Restricted stock amortization - - - -
Exercise of stock options, stock
purchase plan and other 1,269 - 766 26
Cash dividends ($.16 per share) - - - (15,134)
------- --------- --------- ---------
Balance March 2, 2002 93,389 100,779 140,190 429,910
------- --------- --------- ---------
Comprehensive income:
Net income - - - 129,386
Other comprehensive income,
net of tax:
Minimum pension liability
adjustments - - - -
Currency translation
adjustments - - - -
Comprehensive income
Purchases of treasury stock (4,397) - - -
Exercise of stock options, stock
purchase plan and other 1,693 - 4,057 -
Cash dividends ($.21 per share) - - - (19,520)
------- --------- --------- ---------
Balance March 1, 2003 90,685 $ 100,779 $ 144,247 $ 539,776
======= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
Cumulative
Other Total
Comprehensive Treasury Unearned Shareholders'
Income (Loss) Stock Compensation Equity
------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Balance February 26, 2000 $ (1,536) $ (78,668) $ (301) $ 440,663
Comprehensive income:
Net income - - - 94,650
Other comprehensive income,
net of tax:
Currency translation
adjustments (1,579) - - (1,579)
---------
Comprehensive income 93,071
---------
Purchases of treasury stock - (34,270) - (34,270)
Restricted stock amortization - - 216 216
Exercise of stock options, stock
purchase plan and other - 9,119 - 7,320
Cash dividends ($.15 per share) - - - (14,494)
Conversion of 5 3/4% convertible debt - 53,886 - 39,373
--------- --------- --------- ---------
Balance March 3, 2001 (3,115) (49,933) (85) 531,879
--------- --------- --------- ---------
Comprehensive income:
Net income - - - 100,209
Other comprehensive income,
net of tax:
Currency translation
adjustments (1,587) - - (1,587)
---------
Comprehensive income 98,622
---------
Purchases of treasury stock - (44,137) - (44,137)
Restricted stock amortization - - 85 85
Exercise of stock options, stock
purchase plan and other - 13,549 - 14,341
Cash dividends ($.16 per share) - - - (15,134)
--------- --------- --------- ---------
Balance March 2, 2002 (4,702) (80,521) - 585,656
--------- --------- --------- ---------
Comprehensive income:
Net income - - - 129,386
Other comprehensive income,
net of tax:
Minimum pension liability
adjustments (909) - - (909)
Currency translation
adjustments 3,401 - - 3,401
---------
Comprehensive income 131,878
---------
Purchases of treasury stock - (78,474) - (78,474)
Exercise of stock options, stock
purchase plan and other - 20,339 - 24,396
Cash dividends ($.21 per share) - - - (19,520)
--------- --------- --------- ---------
Balance March 1, 2003 $ (2,210) $(138,656) $ - $ 643,936
========= ========= ========= =========
</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 28% derived from merchandise produced in Indonesia,
Thailand, Brazil, Italy, the Philippines and Mexico. The remaining 26% 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, through a newly-formed subsidiary, New Cargo
Furniture, Inc. ("Cargokids"), completed its acquisition of certain assets and
assumption of certain liabilities of Cargo Furniture, Inc. for $3,931,000,
including cash acquired, on February 21, 2001. This acquisition had no
significant effect on the Company's fiscal 2001 operations. Cargokids is a
retailer and wholesaler of children's furniture, gifts and accessories. This
acquisition was accounted for under the purchase method of accounting, and
ultimately resulted in goodwill of $4,386,000, which was amortized using the
straight-line method over 20 years through fiscal 2002, at which time
amortization ceased 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. Cargokids' operations for fiscal 2003 and 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 2003 presentation.
These reclassifications had no effect on net income, total assets, total
liabilities or shareholders' equity as previously reported.
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 2003 and 2002 consisted of 52-week years and fiscal 2001 was a 53-week
year. Fiscal 2003 ended March 1, 2003, fiscal 2002 ended March 2, 2002 and
fiscal 2001 ended March 3, 2001.
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 other comprehensive income. As of March 1, 2003, March 2,
2002 and March 3, 2001, the Company had
<PAGE>
balances of $1,301,000, $4,702,000 and $3,115,000, respectively, in cumulative
translation adjustments. The adjustment for currency translation during fiscal
2003 resulted in other comprehensive income of $3,401,000, and the adjustments
for fiscal 2002 and 2001 resulted in other comprehensive expense of $1,587,000
and $1,579,000, respectively.
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 assets or liabilities with a fair value significantly different
from the recorded value as of March 1, 2003 and March 2, 2002.
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 1, 2003, 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 1.5 million
euros and 9.0 million Canadian dollars, respectively. For financial accounting
purposes, the Company has not designated such contracts as hedges. Thus, changes
in the fair value of both types of 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 - The Company securitizes its
entire portfolio of proprietary credit card receivables. During fiscal 2003,
2002 and 2001, the Company sold all of its proprietary credit card receivables,
except those that failed certain eligibility requirements, to a special-purpose
wholly owned subsidiary, Pier 1 Funding, LLC ("Funding"), which transferred the
receivables to the Pier 1 Imports Credit Card Master Trust (the "Master Trust").
Neither Funding nor the Master Trust is consolidated by the Company as they meet
the requirements of qualifying special-purpose entities 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 third-party 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 pricing to service the receivables sold.
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 using management's best
estimates of key assumptions including credit losses and payment rates. As of
March 1, 2003 and 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 performed assuming a hypothetical 20% adverse
change in both interest rates and credit losses resulted in an immaterial impact
on the fair value of the Company's beneficial interest. Although not anticipated
by the Company, a significant deterioration in the financial condition of the
Company's credit
<PAGE>
card holders, interest rates, or other economic conditions could result in other
than temporary losses on the beneficial interest in future periods.
INVENTORIES - Inventories are comprised of finished merchandise and are stated
at the lower of average cost or market, cost being determined on a weighted
average inventory method. Cost is calculated based upon the actual landed cost
of an item at the time it is received in the Company's warehouse using actual
vendor invoices and also includes the cost of warehousing and transporting
product to the stores.
PROPERTIES, MAINTENANCE AND REPAIRS - Buildings, equipment, furniture and
fixtures, and leasehold 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 and three to ten years for equipment, furniture and fixtures.
Depreciation 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 $45,011,000, $41,047,000 and $41,882,000 in fiscal 2003,
2002 and 2001, respectively.
Expenditures for maintenance, repairs and renewals that 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 and gift certificates
is deferred until redemption.
ADVERTISING COSTS - Advertising costs are expensed the first time the
advertising takes place. Advertising costs were $72,256,000, $64,414,000 and
$59,721,000 in fiscal 2003, 2002 and 2001, respectively. Prepaid advertising at
the end of fiscal years 2003 and 2002 was $3,682,000 and $2,303,000,
respectively, consisting primarily of production costs for television
commercials and related talent fees for advertisements planned to air in late
spring and early fall.
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. A valuation allowance is recorded
to reduce the carrying amounts of deferred tax assets unless it is more likely
than not that such assets will be realized. 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 under the intrinsic
value method 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.
<PAGE>
The following table illustrates the effect on net income and earnings per share
if the fair value-based method had been applied to all outstanding awards in
each period (in thousands except per share amounts):
<TABLE>
<CAPTION>
2003 2002 2001
--------- --------- ---------
<S> <C> <C> <C>
Net income, as reported $ 129,386 $ 100,209 $ 94,650
Plus stock-based employee compensation expense included
in reported net income, net of related tax effects - 54 136
Less total stock-based employee compensation expense
determined under fair value-based method,
net of related tax effects (6,275) (4,400) (3,213)
--------- --------- ---------
Pro forma net income $ 123,111 $ 95,863 $ 91,573
========= ========= =========
Pro forma earnings per share:
Basic $ 1.33 $ 1.02 $ .95
========= ========= =========
Diluted $ 1.30 $ 1.00 $ .93
========= ========= =========
</TABLE>
See Note 7 of the Notes to Consolidated Financial Statements for additional
discussion related to the accounting for stock-based employee compensation.
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>
2003 2002 2001
-------- -------- --------
<S> <C> <C> <C>
Net income (basic and diluted) $129,386 $100,209 $ 94,650
======== ======== ========
Average shares outstanding:
Basic 92,871 94,414 96,306
Plus assumed exercise of stock
options 2,434 1,771 1,325
Plus assumed conversion of the
5 3/4% subordinated notes - - 321
-------- -------- --------
Diluted 95,305 96,185 97,952
======== ======== ========
Earnings per share:
Basic $ 1.39 $ 1.06 $ .98
======== ======== ========
Diluted $ 1.36 $ 1.04 $ .97
======== ======== ========
</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 2003,
2002 and 2001, there were 3,036,300, 433,800 and 1,078,200, respectively, stock
options outstanding with exercise prices greater than the average market price
of the Company's common shares.
ADOPTION OF NEW ACCOUNTING STANDARDS - In the first quarter of fiscal 2003, the
Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets," which
superseded 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
for impairment upon adoption and on an annual basis thereafter. The Company
completed the transitional and annual impairment tests during fiscal 2003 and
concluded that goodwill was not impaired. The adoption of SFAS No. 142 during
the first quarter of fiscal 2003 did not have a material impact on the Company's
consolidated balance sheets or its statements of operations, shareholders'
equity and cash flows. Both the Company's goodwill and intangible assets with
finite useful lives had immaterial balances as of March 1, 2003 and March 2,
2002. The impact of the non-amortization provisions of SFAS No. 142, if applied
at the beginning of fiscal year 2001, would have resulted in net income for
fiscal 2002 and 2001 of $100,499,000 and $94,740,000 versus reported net income
of $100,209,000 and $94,650,000, respectively. Basic earnings per share would
have remained at $1.06 and $.98 and diluted earnings per share would have
remained at $1.04 and $.97 for fiscal 2002 and fiscal 2001, respectively.
In the first quarter of fiscal 2003, the Company also adopted SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," which replaced
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." SFAS 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 extends 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 adoption of SFAS No. 144 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 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No.
146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS
No. 146 requires that certain costs associated with exit or disposal activities
be recognized when incurred rather than at the date of commitment to an exit or
disposal plan. This statement also nullifies the guidance in Emerging Issues
Task Force Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." The provisions of SFAS No. 146 are
effective for exit or disposal activities initiated after December 31, 2002. The
adoption of SFAS No. 146 did not have a material impact on the Company's
consolidated balance sheets or its statements of operations, shareholders'
equity and cash flows.
In December 2002, the FASB issued Statement No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure, an Amendment of FASB Statement No.
123." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based
Compensation," to provide alternative methods of transition for a voluntary
change to the fair value method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the disclosure requirements of
SFAS No. 123 to require more prominent disclosures about the method of
accounting for stock-based compensation and the effect of the method used on
reported results in both annual and interim financial statements. The transition
and annual disclosure provisions of SFAS No. 148 are effective for fiscal years
ending after December 15, 2002. The interim disclosure provisions are effective
for financial reports containing financial statements for interim periods
beginning after December 15, 2002. The Company has adopted the annual disclosure
provisions of SFAS No. 148 and enhanced disclosures related to the accounting
for stock-based employee compensation are provided above and in Note 7 of the
Notes to the Consolidated Financial Statements.
In January 2003, the FASB issued Financial Interpretation No. 46, "Consolidation
of Variable Interest Entities" ("FIN 46"). This interpretation addresses
consolidation by business enterprises of variable interest entities with certain
defined characteristics. This interpretation applies to the first fiscal year or
interim period beginning after June 15, 2003 to variable interest entities in
which an enterprise holds a variable interest created or obtained before
February 1, 2003. For variable interest entities created after January 31, 2003,
the consolidation requirement provisions of FIN 46 shall be applied immediately.
The Company has no variable interest entities that would be subject to the
consolidation provisions of FIN 46 and thus will not have an impact on its
consolidated balance sheets or its statements of operations, shareholders'
equity or cash flows.
NOTE 2 - PROPRIETARY CREDIT CARD INFORMATION
The Company's proprietary credit card receivables were generated under
open-ended revolving credit accounts issued by its 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 2003 year-end, the Company had approximately 5,848,000 proprietary
cardholders and approximately 1,203,000 customer credit accounts considered
active (accounts with a purchase within the previous 12 months). The Company's
proprietary credit card sales accounted for 26.2% of total U.S. store sales in
fiscal 2003. Net proprietary credit card income was included in selling, general
and administrative expenses on the Company's statements of operations. 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>
2003 2002 2001
-------- -------- --------
<S> <C> <C> <C>
Income:
Finance charge income, net of
debt service costs $ 25,344 $ 24,124 $ 21,759
Insurance and other income 230 231 253
-------- -------- --------
25,574 24,355 22,012
-------- -------- --------
Costs:
Processing fees 14,324 14,197 13,608
Bad debts 8,570 6,977 5,285
-------- -------- --------
22,894 21,174 18,893
-------- -------- --------
Net proprietary credit card
income $ 2,680 $ 3,181 $ 3,119
======== ======== ========
Proprietary credit card sales $422,489 $412,469 $377,045
======== ======== ========
Costs as a percent of proprietary
credit card sales 5.42% 5.13% 5.01%
======== ======== ========
Gross proprietary credit card
receivables at year-end $136,331 $140,713 $122,876
======== ======== ========
Proprietary credit card sales as a
percent of total U.S. store sales 26.2% 28.9% 28.9%
======== ======== ========
</TABLE>
The Company began securitizing its entire portfolio of proprietary credit card
receivables (the "Receivables") in fiscal 1997. On a daily basis during all
periods presented above, the Company sold all of its proprietary credit card
receivables, except those that failed certain eligibility criteria, to a
special-purpose wholly-owned subsidiary, Pier 1 Funding, LLC ("Funding"). The
Receivables were then transferred from Funding to the Pier 1 Imports Credit Card
Master Trust (the "Master Trust"). In exchange for the Receivables, the Company
received cash and retained a residual interest in the Master Trust. These cash
payments were funded from undistributed principal collections on the Receivables
that were previously sold to the Master Trust.
Funding was capitalized by the Company as a special-purpose wholly owned
subsidiary and 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 issues beneficial interests
that represent undivided interests in the assets of the Master Trust. Neither
Funding nor the Master Trust is consolidated in the Company's financial
statements. Under generally accepted accounting principles, if the structure of
a securitization meets certain requirements, such transactions are accounted for
as sales of receivables. As the Company's securitizations met such requirements,
they were accounted for as sales. Gains or losses resulting from the sales of
Receivables were not material during fiscal 2003, 2002 or 2001. 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.
In the initial securitization, the Company sold all of its Receivables to
Funding, which transferred the Receivables to the Master Trust. The Master Trust
then sold $50.0 million of Series 1997-1 Class A Certificates to third parties,
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 issued by the
Master Trust, which were subordinated to the Class A Certificates. Funding also
retained the residual interest in the Master Trust. In exchange for its
Receivables, the Company received cash and a beneficial interest in the Master
Trust, which were passed through Funding.
<PAGE>
In September 2001, the Master Trust negotiated the purchase of the $50.0 million
in 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 $100.0 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 plus a credit
spread. As of March 1, 2003 and March 2, 2002, these rates were 1.3% and 1.8%,
respectively. 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 and do not bear interest.
The 2001-1 Class A Certificates have a revolving period of 364 days, which can
be extended by mutual consent of Funding and the third-party holder, and expires
in September 2003. The Company does not provide recourse to third-party
investors that purchase these debt securities issued by the Master Trust.
However, should the balance of the underlying credit card receivables held by
the Master Trust decline to a level that the Class A Certificates were
insufficiently collateralized, the Master Trust would be contractually required
to repay a portion of the Class A Certificates from daily collections. At the
end of fiscal 2003, the underlying credit card receivables held by the Master
Trust were $136.3 million and would have had to fall below $117.5 million before
a repayment would have been required. This repayment would only be to the extent
necessary to maintain the required ratio of receivables to the Class A
Certificates as set forth in the securitization agreement. In addition, should
the Master Trust be out of compliance with its required performance measures,
such as payment rate, returns and fraud, excess portfolio yield, and minimum
transferor's interest, this would trigger an early amortization event. Such an
event would require the Master Trust to repay the Class A Certificates. These
performance measures would have to deteriorate significantly to result in such
an early amortization event.
As a result of this securitization transaction in fiscal 2002, the Company
effectively sold a portion of its beneficial interest for net proceeds of $49.2
million. Cash flows received by the Company from the Master Trust for each of
the last three fiscal years are as follows (in thousands):
<TABLE>
<CAPTION>
2003 2002 2001
--------- --------- ---------
<S> <C> <C> <C>
Proceeds from collections reinvested
in revolving securitizations $ 381,065 $ 366,228 $ 347,404
========= ========= =========
Proceeds from new securitizations $ - $ 49,226 $ -
========= ========= =========
Servicing fees received $ 2,186 $ 2,381 $ 2,189
========= ========= =========
Cash flows received on retained interests $ 118,260 $ 172,473 $ 199,619
========= ========= =========
</TABLE>
As of March 1, 2003 and March 2, 2002, the Company had $40.5 million and $44.6
million, respectively, in beneficial interests (comprised primarily of principal
and interest related to the underlying Receivables) in the Master Trust. 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 2003 and 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 1, 2003 and March 2, 2002. 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.
<PAGE>
NOTE 3 - PROPERTIES
Properties are summarized as follows at March 1, 2003 and March 2, 2002 (in
thousands):
<TABLE>
<CAPTION>
2003 2002
--------- ---------
<S> <C> <C>
Land $ 27,284 $ 16,458
Buildings 61,713 51,747
Equipment, furniture and fixtures 242,501 211,741
Leasehold improvements 201,099 179,614
Computer software 34,395 26,713
Projects in progress 12,268 4,062
--------- ---------
579,260 490,335
Less accumulated depreciation and
amortization 324,757 280,381
--------- ---------
Properties, net $ 254,503 $ 209,954
========= =========
</TABLE>
NOTE 4 - OTHER ACCRUED LIABILITIES AND NONCURRENT LIABILITIES
The following is a summary of other accrued liabilities and noncurrent
liabilities at March 1, 2003 and March 2, 2002 (in thousands):
<TABLE>
<CAPTION>
2003 2002
-------- --------
<S> <C> <C>
Accrued payroll and other
employee-related liabilities $ 46,907 $ 36,999
Accrued taxes, other than income 18,158 16,815
Other 37,667 16,239
-------- --------
Other accrued liabilities $102,732 $ 70,053
======== ========
Accrued average rent $ 20,985 $ 19,230
Postretirement benefits 20,670 14,701
Other 13,307 9,333
-------- --------
Other noncurrent liabilities $ 54,962 $ 43,264
======== ========
</TABLE>
<PAGE>
NOTE 5 - LONG-TERM DEBT AND AVAILABLE CREDIT
Long-term debt is summarized as follows at March 1, 2003 and March 2, 2002 (in
thousands):
<TABLE>
<CAPTION>
2003 2002
-------- --------
<S> <C> <C>
Industrial revenue bonds $ 25,000 $ 25,000
Other 393 712
-------- --------
25,393 25,712
Less - portion due within one year 393 356
-------- --------
Long-term debt $ 25,000 $ 25,356
======== ========
</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 2.9% and 3.8% for fiscal 2003 and 2002,
respectively.
In November 2001, the Company executed a note payable in the original principal
amount of (pound)500,000. 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; the first payment was made June 2002
and the final payment is due April 2003. At March 1, 2003, the outstanding
balance of this note was $393,000.
Long-term debt matures as follows (in thousands):
<TABLE>
<CAPTION>
Long-term
Fiscal Year Debt
- ----------- ---------
<S> <C>
2004 $ 393
2005 -
2006 -
2007 -
2008 -
Thereafter 25,000
-------
Total long-term debt $25,393
=======
</TABLE>
The Company has a $125 million unsecured credit facility, all of which was
available at fiscal 2003 year-end. 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. The Company had no
borrowings under this facility during fiscal 2003 or fiscal 2002. The facility
expires in November 2003 and the Company expects to renew this facility or
replace it with a comparable facility before its expiration.
The Company has a $120 million short-term line of credit, which is primarily
used to issue merchandise letters of credit. At fiscal 2003 year-end,
approximately $59.9 million had been utilized for letters of credit, leaving
$60.1 million available. The Company also has $36.5 million in credit lines used
to issue other special-purpose letters of credit, all of which were fully
utilized at fiscal 2003 year-end. Of the $36.5 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.
<PAGE>
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 $1,760,000, $1,734,000 and $1,790,000 in fiscal
2003, 2002 and 2001, 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 may be limited under Section 401(k) of the Internal
Revenue Code. The Company's expense for this non-qualified plan was not
significant for fiscal 2003, 2002 and 2001.
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 $2,689,000, $2,488,000 and $1,850,000 in fiscal 2003, 2002 and 2001,
respectively.
The Plans are not funded and thus have no plan assets. However, a trust has been
established for the purpose of setting aside funds to be used to settle the
pension obligations upon retirement or death of the participants. The trust
assets are invested in short-term money market funds earning average rates of
return of 1.7%, 3.4% and 6.3% in fiscal 2003, 2002 and 2001, respectively. The
invested assets were $5,249,000 and $4,661,000 at March 1, 2003 and March 2,
2002, respectively. The trust and the Company own and are the beneficiaries of
various increasing whole life insurance contracts on most of the participants in
the Plans. Life insurance contracts owned by the trust had net cash surrender
values totaling $12,131,000 at March 1, 2003 and $11,625,000 at March 2, 2002,
and had net death benefits of $25,926,000 at the respective policy year-ends.
Company-owned life insurance contracts had net cash surrender balances of
$2,103,000 at March 1, 2003 and $2,050,000 at March 2, 2002, and net death
benefits of $7,306,000 at the respective policy year-ends.
<PAGE>
Measurement of obligations for the Plans is 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 6.75% and 7.25% as of March
1, 2003 and March 2, 2002, respectively. The assumed weighted average rate
increase in future compensation levels under such plans was 5.0% as of both
March 1, 2003 and March 2, 2002. The following provides a reconciliation of
benefit obligations and funded status of the Plans as of March 1, 2003 and March
2, 2002 (in thousands):
<TABLE>
<CAPTION>
2003 2002
-------- --------
<S> <C> <C>
Change in projected benefit obligation:
Projected benefit obligation, beginning of year $ 15,864 $ 12,962
Service cost 631 569
Interest cost 1,196 1,055
Actuarial loss 2,551 1,278
-------- --------
Projected benefit obligation, end of year $ 20,242 $ 15,864
======== ========
Reconciliation of funded status:
Funded status $(20,242) $(15,864)
Unrecognized net loss 3,889 1,338
Unrecognized prior service cost 6,224 7,086
-------- --------
Accrued pension cost (10,129) (7,440)
Additional minimum liability (5,689) (3,980)
-------- --------
Accrued benefit liability $(15,818) $(11,420)
======== ========
Amounts recognized in the balance sheets:
Accrued benefit liability $(15,818) $(11,420)
Intangible asset 4,244 3,980
Accumulated other comprehensive (income) loss 909 -
-------- --------
Net amount recognized $(10,665) $ (7,440)
======== ========
Other comprehensive (income) loss
attributable to change in additional minimum
liability recognition, net of tax $ 909 $ -
======== ========
</TABLE>
Net periodic benefit cost included the following actuarially determined
components during fiscal 2003, 2002 and 2001 (in thousands):
<TABLE>
<CAPTION>
2003 2002 2001
------- ------- -------
<S> <C> <C> <C>
Service cost $ 631 $ 569 $ 434
Interest cost 1,196 1,055 779
Amortization of unrecognized prior service cost 862 862 635
Amortization of net obligation at transition - 2 2
------- ------- -------
$ 2,689 $ 2,488 $ 1,850
======= ======= =======
</TABLE>
NOTE 7 - MATTERS CONCERNING SHAREHOLDERS' EQUITY
STOCK PURCHASE PLAN - Substantially all employees 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 participant may contribute up to 10% of the eligible
portions of compensation. The Company contributes from 10% to 100% of the
participants' contributions, depending upon length of participation and date of
entry into the plan. Company contributions to the plan were $1,078,000, $985,000
and $921,000 in fiscal years 2003, 2002 and 2001, respectively.
<PAGE>
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 1, 2003, 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 restricted stock grant plans was $85,000 and
$216,000 for fiscal 2002 and 2001, respectively. There was no compensation
expense for either of these restricted stock grant plans in fiscal 2003.
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 9,000,000 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.
Employee options will fully vest upon retirement or, under certain conditions, a
change in control of the Company. As of March 1, 2003 and March 2, 2002,
respectively, there were 448,083 and 1,026,978 shares available for grant under
the Plan, of which 150,403 and 171,673 may be used for deferred stock issuance.
Additionally, outstanding options covering 1,785,275 and 894,200 shares were
exercisable and 99,597 and 78,327 shares were issuable in exchange for deferred
stock units at fiscal years ended 2003 and 2002, 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 1, 2003 and March 2, 2002, outstanding options
covering 1,645,936 and 2,303,198 shares were exercisable and 951,559 and 932,684
shares were available for grant, respectively. The Employee Plan expires in June
2004. The Director Plan expired in fiscal 2000. As of March 1, 2003 and March 2,
2002, outstanding options covering 41,176 and 48,264 shares, respectively, were
exercisable under the Director Plan. As a result of the expiration of the
Director Plan during fiscal 2000, no shares are available for future grants.
Both plans were subject to adjustments for stock dividends and certain other
changes to the Company's capitalization.
<PAGE>
A summary of stock option transactions related to the stock option plans during
the three fiscal years ended March 1, 2003 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 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
Options granted 2,814,000 20.39 9.70
Options exercised (1,469,450) 8.66
Options cancelled or expired (275,250) 9.56
----------
Outstanding at March 1, 2003 9,246,037 12.27 3,472,387 8.96
==========
</TABLE>
For shares outstanding at March 1, 2003:
<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>
$ 3.22 - $ 8.26 4,190,387 $ 7.29 7.04 1,930,687 $ 6.62
$ 8.50 - $ 18.50 2,273,150 11.54 6.51 1,505,700 11.66
$ 20.38 - $ 21.00 2,782,500 20.39 9.57 36,000 21.00
</TABLE>
<PAGE>
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. 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 fair values for options
issued in fiscal 2003, 2002 and 2001 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:
<TABLE>
<CAPTION>
2003 2002 2001
------- ------- -------
<S> <C> <C> <C>
Weighted average fair value of options granted $ 9.70 $ 4.59 $ 5.31
Risk-free interest rates 2.82% 3.75% 5.68%
Expected stock price volatility 56.98% 60.25% 55.86%
Expected dividend yields 1.5% 0.8% 1.0%
Weighted average expected lives 5 years 6 years 6 years
</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.
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 1, 2003, the Company had
approximately 112,749,000 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>
2003 2002 2001
-------- -------- --------
<S> <C> <C> <C>
Federal:
Current $ 52,175 $ 56,207 $ 50,455
Deferred 17,555 (2,110) 583
State:
Current 3,961 3,909 3,368
Deferred 1,068 (128) 152
Foreign:
Current 1,104 910 1,032
Deferred 125 - -
-------- -------- --------
$ 75,988 $ 58,788 $ 55,590
======== ======== ========
</TABLE>
Deferred tax assets and liabilities at March 1, 2003 and March 2, 2002 are
comprised of the following (in thousands):
<TABLE>
<CAPTION>
2003 2002
-------- --------
<S> <C> <C>
Deferred tax assets:
Inventory $ - $ 2,166
Deferred compensation 12,840 9,129
Accrued average rent 9,195 8,476
Losses on a foreign subsidiary 4,228 3,948
Self insurance reserves 3,485 2,408
Minimum pension liability adjustment 537 -
Foreign tax credit carryforward 325 -
Other 1,357 2,470
-------- --------
31,967 28,597
Valuation allowance (4,678) (3,948)
-------- --------
Total deferred tax assets 27,289 24,649
-------- --------
Deferred tax liabilities:
Fixed assets, net (4,380) (1,577)
Inventory (18,047) -
-------- --------
Total deferred tax liabilities (22,427) (1,577)
-------- --------
Net deferred tax assets $ 4,862 $ 23,072
======== ========
</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 began in the first quarter of fiscal
year 2003. For financial reporting purposes, a valuation allowance exists at
March 1, 2003 to offset the net deferred tax asset relating to the losses of a
foreign subsidiary and foreign tax credit carryforwards.
Undistributed earnings of the Company's non-U.S. subsidiaries amounted to
approximately $27.1 million at March 1, 2003. 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
<PAGE>
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 2003, 2002 and 2001, and income tax reported in the consolidated
statements of operations is as follows (in thousands):
<TABLE>
<CAPTION>
2003 2002 2001
-------- -------- --------
<S> <C> <C> <C>
Tax at statutory federal
income tax rate $ 71,881 $ 55,649 $ 52,584
State income taxes, net of
federal benefit 4,277 3,387 3,200
Work opportunity tax credit,
foreign tax credit and
R&E credit (67) (202) (207)
Net foreign income taxed
at lower rates (365) (101) (1,048)
Other, net 262 55 1,061
-------- -------- --------
$ 75,988 $ 58,788 $ 55,590
======== ======== ========
</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
primary 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 2003, the Company sold certain store properties for $5.7 million.
These stores were leased back from unaffiliated third parties for periods of
approximately five years. The resulting leases are being accounted for as
operating leases. The Company deferred gains of $0.4 million and recognized
losses of $0.2 million in fiscal 2003 on these sale-leaseback transactions; the
gains are being amortized over the initial primary terms of the leases. 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
primary terms of the leases. Future minimum lease commitments of these operating
leases are included in the summary below of the Company's operating leases.
<PAGE>
At March 1, 2003, the Company had the following minimum lease commitments in the
years indicated (in thousands):
<TABLE>
<CAPTION>
Operating
Fiscal Year Leases
- ----------- -----------
<S> <C>
2004 $ 185,169
2005 177,658
2006 162,535
2007 146,413
2008 133,385
Thereafter 457,161
-----------
Total lease commitments $ 1,262,321
===========
Present value of total
operating lease commitments at 10% $ 837,744
===========
</TABLE>
Rental expense incurred was $183,745,000, $159,461,000 and $144,035,000,
including contingent rentals of $816,000, $921,000 and $979,000, based upon a
percentage of sales, and net of sublease incomes totaling $507,000, $1,191,000
and $2,650,000 in fiscal 2003, 2002 and 2001, respectively.
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 1, 2003; 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 1, 2003 and March
2, 2002 are set forth below (in thousands except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------------------
Fiscal 2003 6/1/2002 8/31/2002 11/30/2002 3/1/2003
- ----------- -------- --------- ---------- --------
<S> <C> <C> <C> <C>
Net sales $ 384,429 410,902 438,501 521,035
Gross profit $ 163,993 164,929 191,760 232,723
Net income $ 22,181 22,073 31,100 54,032
Basic earnings per share $ .24 .24 .34 .59
Diluted earnings per share $ .23 .23 .33 .57
</TABLE>
<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>
<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 2003 and 2002.
<TABLE>
<CAPTION>
Market Price
-----------------
Cash Dividends per
Fiscal 2003 High Low Share(1)
- ----------- ------- ------- ------------------
<S> <C> <C> <C>
First quarter $ 23.95 $ 19.76 $ .05
Second quarter 22.54 15.20 .05
Third quarter 20.43 16.27 .05
Fourth quarter 21.20 15.35 .06
</TABLE>
<TABLE>
<CAPTION>
Market Price
-----------------
Cash Dividends per
Fiscal 2002 High Low Share(1)
- ----------- ------- ------- ------------------
<S> <C> <C> <C>
First quarter $ 14.55 $ 11.10 $ .04
Second quarter 12.65 10.30 .04
Third quarter 14.70 8.13 .04
Fourth quarter 20.24 14.50 .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>d06302exv21.txt
<DESCRIPTION>ROSTER OF SUBSIDIARIES OF THE COMPANY
<TEXT>
<PAGE>
EXHIBIT 21
ROSTER OF SUBSIDIARIES OF THE COMPANY
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 statutory trust
Pier 1 National Bank, a national banking association
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23
<SEQUENCE>5
<FILENAME>d06302exv23.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 4, 2003, included in the 2003
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 4, 2003, 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 1, 2003.
/s/ Ernst & Young LLP
Fort Worth, Texas
May 27, 2003
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99.1
<SEQUENCE>6
<FILENAME>d06302exv99w1.txt
<DESCRIPTION>MANAGEMENT'S CERTIFICATIONS PURSUANT TO SEC. 906
<TEXT>
<PAGE>
EXHIBIT 99.1
CERTIFICATIONS REQUIRED BY SEC. 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Marvin J. Girouard, the Chief Executive Officer of Pier 1 Imports, Inc.,
hereby certify that:
The annual report of Pier 1 Imports, Inc. for the period ended March 1, 2003
fully complies with the requirements of sections 13(a) and 15(d) of the
Securities Exchange Act of 1934; and
The information contained in the above-mentioned report fairly presents, in all
material respects, the financial condition and results of operations of Pier 1
Imports, Inc. for the period covered by the report.
Date: May 27, 2003 By: /s/ Marvin J. Girouard
--------------------- -------------------------------------
Marvin J. Girouard,
Chairman of the Board
and Chief Executive Officer
I, Charles H. Turner, the Chief Financial Officer of Pier 1 Imports, Inc.,
hereby certify that:
The annual report of Pier 1 Imports, Inc. for the period ended March 1, 2003
fully complies with the requirements of sections 13(a) and 15(d) of the
Securities Exchange Act of 1934; and
The information contained in the above-mentioned report fairly presents, in all
material respects, the financial condition and results of operations of Pier 1
Imports, Inc. for the period covered by the report.
Date: May 27, 2003 By: /s/ Charles H. Turner
--------------------- -------------------------------------
Charles H. Turner,
Executive Vice President,
Chief Financial Officer and Treasurer
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
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