1 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 3, 2001. OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES - --- EXCHANGE ACT OF 1934 For the transition period from to ----- ----- Commission File No. 1-7832 PIER 1 IMPORTS, INC. (Exact name of Company as specified in its charter) DELAWARE 75-1729843 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 301 COMMERCE STREET, SUITE 600 FORT WORTH, TEXAS 76102 (Address of principal executive offices) (Zip Code) Company's telephone number, including area code: (817) 252-8000 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered ------------------- --------------------- COMMON STOCK, $1 PAR VALUE NEW YORK STOCK EXCHANGE Securities registered pursuant to Section 12(g) of the Act: NONE Indicate by check mark whether the Company (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Company was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ---- ---- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of the Company's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] As of May 2, 2001, the approximate aggregate market value of voting stock held by non-affiliates of the Registrant was $1,089,600,000 using the closing sales price on this day of $11.66. 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 2, 2001, 96,365,006 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 3, 2001 in Parts I and II hereof and; 2) Registrant's Proxy Statement for the 2001 Annual Meeting in Part III hereof.

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3 PART I Item 1. Business. (a) General Development of Business. Throughout this document, references to the "Company" include Pier 1 Imports, Inc. and its consolidated subsidiaries. References to "Pier 1" relate to the Company's retail locations operating under the name Pier 1 Imports. References to "The Pier" relate to the Company's retail locations in the United Kingdom operating under the name The Pier. References to "Cargo" relate to the Company's retail locations operating under the name Cargo Furniture and Home. From fiscal 1996 through fiscal 2001, the Company expanded its specialty retail operations from 688 to 899 worldwide retail stores. In fiscal 2001, the Company continued to execute its expansion plan in North America by opening a net 41 new Pier 1 stores and acquiring a 21-store retail chain, Cargo. Subject to changes in the retail environment, availability of suitable store sites and adequate financing, Pier 1 plans to open approximately 85 new stores and close approximately 25 stores in North America in fiscal 2002, depending upon lease renewal negotiations, relocation space availability and general economic conditions. Almost all of the stores expected to close in fiscal 2002 are anticipated to be replaced with a more favorable location within the same market. Cargo and The Pier are not expected to open any new stores during fiscal 2002. Set forth below is a list by city of Pier 1 stores opened in North America in fiscal 2001: Aventura, FL Lynnwood, WA Baytown, TX Manassas, VA Bel Air, MD Mobile, AL Benton Harbor, MI Morgantown, WV Birmingham, AL Muskegon, MI Bozeman, MT New Bern, NC Burlington, NC Norwalk, CT Calgary, AB Norwood, OH Camarillo, CA Old Saybrook, CT Cleveland, TN Orlando, FL Concord, NC Park City, UT Edmonton, AB Rancho Santa Margarita, CA Elizabethtown, KY Rochester, NY Elmhurst, IL Rockwall, TX Eugene, OR Round Rock, TX Fairfax, VA Sanford, NC Fairview Heights, IL Shrewsbury, PA Findlay, OH Skokie, IL Fond Du Lac, WI South Charleston, WV Fort Wayne, IN Southbury, CT Fremont, CA Springfield, MO Frisco, TX Stroudsburg, PA Glen Allen, VA Taylor, MI Goshen, IN Tonawanda, NY Greeley, CO Troy, MI Greenwood, SC Vancouver, BC Hagerstown, MD Vestal, NY Hanover, PA Warsaw, IN Jacksonville, NC West Bend, WI Jonesboro, AR Westerly, RI Kokomo, IN Winchester, VA Laredo, TX Winter Park, FL Las Cruces, NM During fiscal 2001, Pier 1 completed its program to remodel and remerchandise store interiors to improve the visual merchandising of its products in Pier 1 stores. This program, which upgraded more than 90% of the stores, included store improvements such as better lighting, wider aisles, a more open view for ease of shopping and greater use of "lifestyle merchandising" by grouping products in home-use settings. A remodeling program, directed at refurbishing older stores, supported this remerchandising effort. The Company expects to continue to remodel and remerchandise store interiors as management deems necessary. 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. On February 21, 2001, the Company acquired certain assets and assumed certain liabilities of Cargo Furniture, Inc. for $3,931,000, including cash acquired. These assets and liabilities were included in the Company's balance sheet as 2

4 of March 3, 2001. Due to the timing of the acquisition, the newly formed corporation operating under the name of Cargo Furniture and Home had no impact on the Company's fiscal 2001 results of operations. Cargo is a 21-store retailer and wholesaler of youth and casual lifestyle furniture, gifts and home decor. Cargo stores are located in Texas, Virginia, Maryland, Georgia, Oklahoma, and Kansas with distribution facilities in Fort Worth, TX and Chase City, Virginia. Cargo utilizes a web site at cargohome.com to attract customers and provide information regarding placing orders and store locations. The Company owns 90% of the capital stock of The Pier, located in the United Kingdom, which operates 23 retail stores offering decorative home furnishings and related items in a setting similar to Pier 1 stores. At the end of fiscal 2001, the Company's net investment in The Pier was $19.4 million. During fiscal 2001, The Pier opened two new stores in England, bringing total retail operations to 19 stores in England, three stores in Scotland, and one store in Wales. Additionally, The Pier opened a new online store at pier.co.uk. The Pier expects to close one store and upgrade several existing locations in the U.K. during fiscal 2002. The Pier operates two distribution facilities near London, England. During fiscal 1994, the Company initiated an arrangement to supply Sears de Mexico S.A. ("Sears Mexico") with Pier 1 merchandise to be sold in a "store within a store" format in certain Sears Mexico stores. 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 2001, Sears Mexico opened one new store offering Pier 1 merchandise. As of March 3, 2001, Pier 1 merchandise was offered in 13 Sears Mexico stores. Expansion plans for fiscal 2002 include three new stores in Mexico. The Company entered into a product distribution agreement with Sears Roebuck de Puerto Rico, Inc. ("Sears Puerto Rico") in fiscal 1996 for Sears Puerto Rico to market and sell Pier 1 merchandise in a "store within a store" format in certain Sears Puerto Rico stores. Sears Puerto Rico operates a total of ten stores in Puerto Rico, and as of March 3, 2001, seven of these stores offered Pier 1 merchandise. The Company has no immediate plans for further expansion in Puerto Rico but would consider future sites. In fiscal 1996, a wholly-owned subsidiary of the Company entered into a franchise agreement with Akatsuki Printing Co., Ltd. and Skylark Co., Ltd. (collectively "Akatsuki") to develop Pier 1 retail stores in Japan. At the end of fiscal 2001, Akatsuki operated nine Pier 1 stores in Tokyo, its surrounding areas and other metropolitan markets. Akatsuki has informed the Company that it will not seek to renew its current franchise agreement beyond its expiration date of March 31, 2002 and will, at or prior to that time, close all of its licensed Pier 1 stores in Japan. In fiscal 1998, the Company purchased a credit card bank in Omaha, Nebraska, now operating under the name of Pier 1 National Bank (the "Bank"). The Bank holds the credit card accounts for the Pier 1 proprietary credit card. As of March 3, 2001, Pier 1, through the Bank, had over 4,500,000 proprietary cardholders with approximately 1,131,000 active accounts (accounts with a purchase within the previous 12 months). Sales on the Pier 1 proprietary credit card accounted for 28.9% of total U.S. store sales in fiscal 2001. Pier 1 continues to expand its proprietary credit card business by attracting new accounts with a discounted first-time purchase, periodic deferred payment options and enhanced customer loyalty through targeted promotions. Cargo is initiating its own proprietary credit card in September 2001 and will also utilize this bank. In June 2000, Pier 1 launched its e-commerce website at pier1.com. More than 2,000 merchandise items are offered for sale to customers, along with gift certificates, an online clearance store and a Bridal & Gift Registry program. Pier 1's web site allows customers to shop online, make changes or additions to gift registries and offers the ease of returning internet purchases to their neighborhood Pier 1 store. This website is also being utilized as a marketing channel to reach new customers. (b) Financial Information about Industry Segments. In fiscal 2001, the Company operated in one business segment consisting of the retail sale of imported decorative home furnishings, gifts and related items. Financial information with respect to the Company's business is found in the Company's Consolidated Financial Statements, which are incorporated by reference into Item 8 herein. (c) Narrative Description of Business. The specialty retail operations of the Company consist of three chains of retail stores operating under the names "Pier 1 Imports", "The Pier", and "Cargo" selling a wide variety of furniture, decorative home furnishings, dining and kitchen goods, bath and bedding accessories and other specialty items for the home. On March 3, 2001, the Company operated 791 Pier 1 stores in 48 states of the United States and 35 Pier 1 stores in four Canadian provinces, and supported nine franchised stores in nine states of the U.S. Additionally, the Company operated 23 stores in the United Kingdom under the name The Pier and 21 Cargo stores located in six states of the United States. The Company supplies merchandise and licenses the Pier 1 Imports name to Sears Mexico and Sears Puerto 3

5 Rico, which sell Pier 1 merchandise in a "store within a store" format in 13 Sears Mexico stores and in seven Sears Puerto Rico stores. There were nine franchised stores operating in Tokyo, its surrounding areas and other metropolitan markets as of March 3, 2001. The Company-operated Pier 1 stores in the United States and Canada average approximately 7,500 square feet of retail selling space. The stores are generally freestanding units located near major shopping centers or malls in all major U.S. metropolitan areas and many of the primary smaller markets. In fiscal 2001, net sales of the Company totaled $1,411.5 million. Pier 1 stores generally have their highest sales volumes during November and December, reflecting the holiday selling season. Pier 1's growth strategy for the future is to expand its North American store base to more than 1,200 locations. Immediate plans to achieve this expansion include, for fiscal 2002, the opening of approximately 85 new stores while closing approximately 25 stores, the majority of which will be relocated to more favorable locations within the same markets. In the next few years, the Company expects Cargo to begin to expand nationally as a value-oriented retailer of home furnishings for children and families. The Company plans to grow Cargo to a 200- to 300-store concept over the next ten years. The Company currently has no plans to expand outside of the United States, Canada, and Mexico. Pier 1 offers a diverse selection of products consisting of nearly 5,000 items imported from over 50 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 group constituted approximately 40% Pier 1's of total North American retail sales in fiscal year 2001, 38% in fiscal 2000 and 35% in fiscal 1999. 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 22% to Pier 1's total North American retail sales in fiscal years 2001 and 2000 and contributed 23% in fiscal 1999. These items are imported from approximately 40 countries and include brass, marble and wood items, as well as lamps, vases, dried and silk flowers, baskets, wall decorations and numerous other decorative items. A majority of these products are handcrafted from natural materials. HOUSEWARES - This product group is imported mainly from the Far East and Europe and includes ceramics, dinnerware and other functional and decorative items. These goods accounted for approximately 12% of Pier 1's total North American retail sales in fiscal years 2001 and 2000, and 13% of sales in fiscal 1999. BED & BATH - This product group is imported mainly from India, the United Kingdom, Italy, Thailand and China, and is also obtained from domestic sources. The group includes bath and fragrance products, candles and bedding. These goods accounted for approximately 17% of Pier 1's total North American retail sales in fiscal year 2001, 18% in fiscal 2000 and 19% in fiscal 1999. SEASONAL - This product group consists of merchandise to celebrate holiday and spring/summer entertaining and is imported mainly from Europe, Canada, Taiwan, China and India. These items accounted for approximately 9% of Pier 1's total North American retail sales in fiscal year 2001, and 10% in fiscal years 2000 and 1999. 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 2001, Pier 1 sold merchandise imported from over 50 different countries with 34% of its sales from merchandise produced in China, 10% from merchandise produced in India and 25% from merchandise produced in Indonesia, Mexico, Thailand, the Philippines and Italy. The remaining 31% 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 has six regional distribution centers located in or near Baltimore, Maryland, Chicago, Illinois, Columbus, Ohio, Fort Worth, Texas, Ontario, California and Savannah, Georgia and leases additional space from time to time. Imported merchandise and a portion of domestic purchases are delivered to the distribution centers, unpacked and made available for shipment to the various stores in each center's region. Due to the time delays involved in procuring merchandise from foreign suppliers, Pier 1 maintains a substantial inventory to assure a sufficient supply of products in its stores. The Company is in the highly competitive specialty retail business and primarily competes with small specialty sections of large department stores, home furnishing stores, small specialty import stores and discount stores. Management believes that its stores compete on the basis of price, merchandise assortment, merchandise visual presentation and customer service. The Company also believes its Pier 1 stores enjoy a competitive edge over competing retailers due to greater name recognition, established vendor relationships and the extent and variety of the merchandise 4

6 offered. While other retail stores change their items less frequently, Pier 1 differentiates itself by offering an array of unique and frequently changing products. The Company believes that the Cargo acquisition gives it the opportunity to address the underserved children's furniture and accessories market. As a retailer of imported merchandise, the Company is subject to certain risks that typically do not affect retailers of domestically produced merchandise. The Company typically orders merchandise from four to twelve months in advance of delivery and pays for the merchandise at the time it is loaded for transport to designated U.S. and international destinations. Dock strikes, fluctuations in foreign currency exchange rates, restrictions on the convertibility of the dollar and other currencies, duties, taxes and other charges on imports, import quota systems and other restrictions generally placed on foreign trade can affect the price, delivery and availability of ordered merchandise. The inability to import products from certain countries or the imposition of significant tariffs could 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. Pier 1 negotiated new ocean freight carrier contracts in fiscal 2000 which should stabilize its ocean freight rates through fiscal 2002. The United States and more than 100 other countries culminated seven years of negotiations with an agreement which became effective January 1, 1995 to reduce, over time, tariff and non-tariff barriers to world trade in goods and services and established the World Trade Organization to replace the General Agreement on Tariffs and Trade. The World Trade Organization provides a framework for international trade matters and includes a process for the resolution of trade disputes among the member countries. In recent years, the dispute resolution process of the World Trade Organization has been utilized to resolve disputes regarding market access between the European Union, the United States and other countries. In some instances these trade disputes have led to the threat by countries of sanctions against each other, which have included import prohibitions and increases in duty rates on imported items. The Company considers any agreement that reduces tariff and non-tariff barriers in international trade beneficial to its business in the United States and around the world. Currently, China is not a member of the World Trade Organization but has been negotiating with the United States, the European Union and other members of the World Trade Organization on an accession agreement acceptable to the World Trade Organization members. Presently, the U.S. maintains the trade status of normal trade relations ("NTR") with China providing, among other things, favorable import duty rates for goods coming into the U.S. However, the President and/or Congress may revoke the NTR status when the decision on the annual NTR extension is considered by the President and Congress beginning in June 2001. The debate in Congress to permit the extension of NTR status to China may be more heated and less certain this year than in previous years. The 1988 Omnibus Trade and Competitiveness Act was signed into law amending the Trade Act of 1974. This legislation was enacted partly in response to a perceived decline in U.S. global competitiveness and the continuing presence of unfair trade practices that limit U.S. exporters' access to foreign markets. Under the law, the office of the U.S. Trade Representative may investigate unfair trade practices of countries around the world. These investigations may lead to sanctions, which could take the form of quotas or increased duties on imports into the U.S. The U.S. Trade Representative is required to take action within 30 days (subject to being postponed for 180 days) after the conclusion of its investigation of countries alleged to have committed unfair trade practices. Upon a determination that a country has committed an unfair trade practice, the U.S. Trade Representative may designate the subject country a priority foreign country and impose sanctions in the form of quotas or increased duties. On previous occasions, the U.S. Trade Representative has identified certain countries which supply merchandise to the Company as priority foreign countries. These designations, however, were rescinded after the U.S. Trade Representative and the countries reached agreements regarding the basis for the designations. The United States employs other measures besides this trade legislation to implement its international trade policies and objectives. For example, the United States may withdraw most favored nation status from a country, resulting in higher import duties on products from that country. Any type of sanction on imports is likely to increase the Company's import costs or limit the availability of products purchased from sanctioned countries. In that case, the Company will seek similar products from other countries. The Company, through certain of its wholly-owned subsidiaries, owns three federally registered service marks under which its Pier 1 Imports stores do business and one federally registered service mark under which its Cargo stores do business. These registrations are numbered 948,076 and 1,620,518 for the mark PIER 1 IMPORTS, 1,104,059 for the mark PIER 1 and 1,348,743 for the mark CARGO. Additionally, certain subsidiaries of the Company have registered and have applications pending for the registration of Pier 1 and Cargo trademarks and service marks in the United States and in numerous foreign countries. On March 3, 2001, Pier 1 employed approximately 14,600 associates in North America, of which approximately 6,500 were full-time employees and 8,100 were part-time employees. The Company maintains a wholly-owned foreign subsidiary incorporated under the laws of Hong Kong to manage certain merchandise procurement, export and financial service functions. Also, a wholly-owned foreign subsidiary incorporated under the laws of Bermuda owns the right to license and to franchise the Company's trademarks and service marks outside the United States, Canada and Puerto Rico. 5

7 Certain statements contained in Item 1, Item 7 and elsewhere in this report may constitute "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934. The Company may also make forward-looking statements in other reports filed with the Securities and Exchange Commission and in material delivered to the Company's shareholders. Forward-looking statements provide current expectations of future events based on certain assumptions. These statements encompass information that does not directly relate to any historical or current fact and often may be identified with words such as "anticipates," "believes," "expects," "estimates," "intends," "plans," "projects" and other similar expressions. Management's expectations and assumptions regarding planned store openings, financing of Company obligations from operations and other future results are subject to risks, uncertainties and other factors that could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements. Risks and uncertainties that may affect Company operations and performance include, among others, weather conditions that may affect sales, volatility of fuel and utility costs, the general strength of the economy and levels of consumer spending, consumer confidence, the availability of new sites for expansion along with sufficient labor to facilitate growth, the strength of new home construction and sales of existing homes, the ability of the Company to import merchandise from foreign countries without significantly restrictive tariffs, duties or quotas and the ability of the Company to ship items from foreign countries at reasonable rates in a timely fashion. The foregoing risks and uncertainties are in addition to others discussed elsewhere in this report. The Company assumes no obligation to update or otherwise revise its forward-looking statements even if experience or future changes make it clear that any projected results expressed or implied will not be realized. Item 2. Properties. The Company leases approximately 195,000 square feet of office space for its Pier 1 corporate office and leases approximately 10,200 square feet of additional office space for its Cargo subsidiary. Both corporate office facilities are located in Fort Worth, Texas. The Company leases almost all of its retail stores, its warehouses and other office space. At March 3, 2001, the present value of the Company's minimum future operating lease commitments discounted at 10% totaled approximately $625 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 3, 2001: United States - ------------- Alabama 12 Montana 5 Alaska 1 Nebraska 4 Arizona 14 Nevada 4 Arkansas 6 New Hampshire 5 California 86 New Jersey 18 Colorado 18 New Mexico 5 Connecticut 16 New York 38 Delaware 3 North Carolina 23 Florida 61 North Dakota 3 Georgia 25 Ohio 34 Hawaii 2 Oklahoma 5 Idaho 3 Oregon 10 Illinois 38 Pennsylvania 30 Indiana 19 Rhode Island 5 Iowa 7 South Carolina 12 Kansas 7 South Dakota 2 Kentucky 9 Tennessee 17 Louisiana 13 Texas 61 Maryland 18 Utah 7 Massachusetts 19 Virginia 26 Michigan 28 Washington 19 Minnesota 15 West Virginia 4 Mississippi 6 Wisconsin 14 Missouri 13 Wyoming 1 Canada - ------ Alberta 4 Ontario 22 British Columbia 3 Quebec 6 6

8 As of March 3, 2001, Pier 1 owned or leased the following warehouse properties: Owned/Leased Location Approx. Sq. Ft. Facility - -------- --------------- ------------ Baltimore, Maryland 796,000 sq. ft. Leased Chicago, Illinois 514,000 sq. ft Owned Columbus, Ohio 527,000 sq. ft. Leased Fort Worth, Texas 512,000 sq. ft. Owned Ontario, California 747,000 sq. ft. Leased Savannah, Georgia 548,000 sq. ft. Owned The Company also leases approximately 93,000 square feet of warehouse space in the United Kingdom for The Pier's operations and approximately 74,000 square feet of warehouse space in the United States for Cargo's operations. The Company is currently leasing additional space under short-term agreements and believes its distribution facilities are sufficient for the next two years. 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 3, 2001; 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 2001 fiscal year. Executive Officers of the Company MARVIN J. GIROUARD, age 61, has served as Chairman and Chief Executive Officer of the Company since March 1999 and has been a member of the Executive Committee since December 1998. He has been a Director of the Company since August 1988. From June 1998 to February 1999, Mr. Girouard served as President and Chief Executive Officer of the Company and from August 1988 to June 1998 he served as President and Chief Operating Officer of the Company. From May 1985 until August 1988, he served as the Company's Senior Vice President of Merchandising. CHARLES H. TURNER, age 44, has served as Senior Vice President of Finance, Chief Financial Officer and Treasurer of the Company since August 1999. 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 46, has served as Senior Vice President of Stores of the Company since September 1999. 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 46, has served as Senior Vice President of Merchandising of the Company since May 1995. He served as Vice President of Divisional Merchandising of Pier 1 Imports (U.S.), Inc. from May 1993 to May 1995 and served as Director of Divisional Merchandising of Pier 1 Imports (U.S.), Inc. from July 1991 to May 1993. J. RODNEY LAWRENCE, age 55, has served as Senior Vice President of Legal Affairs and Secretary of the Company since June 1992, and served as Vice President of Legal Affairs and Secretary of the Company from November 1985 to June 1992. PHIL E. SCHNEIDER, age 49, has served as Senior Vice President of Marketing of the Company since May 1993 and served as Vice President of Advertising of Pier 1 Imports (U.S.), Inc. from January 1988 to May 1993. DAVID A. WALKER, age 50, has served as Senior Vice President of Logistics and Allocations of the Company since September 1999. 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. 7

9 E. MITCHELL WEATHERLY, age 53, has served as Senior Vice President of Human Resources of the Company since June 1992 and served as Vice President of Human Resources of the Company from June 1989 to June 1992 and of Pier 1 Imports (U.S.), Inc. from August 1985 to June 1992. The officers of the Company are appointed by the Board of Directors, hold office until their successors are elected and qualified and/or until their earlier death, resignation or removal. None of the above executive officers has any family relationship with any other of such officers. None of such officers was selected pursuant to any arrangement or understanding between him and any other person. PART II 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 3, 2001. The Company's common stock is traded on the New York Stock Exchange. As of May 2001, there were approximately 35,000 shareholders of record of the Company's common stock. During fiscal 2001, the Company repurchased nearly 3.3 million shares of its outstanding common stock. In December 2000, the Board of Directors approved the repurchase of an additional five million shares of the Company's common stock. As of May 23, 2001, one million shares of the Company's common stock had been repurchased in fiscal 2002, leaving approximately 5.8 million shares available for repurchase under the approved Board of Directors stock buyback program. Future repurchases of common stock will be made through open market or private transactions from time to time depending on prevailing market conditions, the Company's available cash and the Company's consideration of any loan covenant restrictions and its credit ratings. In March 2000, the Company redeemed its $39.2 million outstanding principal amount of 5 3/4% convertible subordinated notes originally due October 1, 2003. The notes were redeemable at 103% of par on March 23, 2000 or convertible into the Company's common stock at a price of $8.22 per share. Prior to redemption, the Company converted $39,164,000 of the notes into 4,764,450 shares of the Company's common stock and redeemed $15,000 of the notes for cash. 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 2001, the Company paid cash dividends totaling approximately $14.5 million, or $.15 per share. The Company's Board of Directors currently expects to continue to pay cash dividends in fiscal 2002, but intends to retain most of its future earnings for the expansion of the Company's business. The Company paid a cash dividend of $.04 per share on May 16, 2001. 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 3, 2001. 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 3, 2001. 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 3, 2001. 8

10 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 3, 2001: Consolidated Statements of Operations for the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999 Consolidated Balance Sheets at March 3, 2001 and February 26, 2000 Consolidated Statements of Cash Flows for the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999 Consolidated Statements of Shareholders' Equity for the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999 Notes to Consolidated Financial Statements Report of Independent Auditors The unaudited quarterly information required by this Item is incorporated by reference to the section entitled "Market Price and Dividend Information" set forth in the Company's Annual Report to Shareholders for the fiscal year ended March 3, 2001 and February 26, 2000. 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 2001 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 2001 Annual Meeting of Shareholders. Item 11. Executive Compensation. The information required by this Item is incorporated herein by reference to the section entitled "Executive Compensation" set forth in the Company's Proxy Statement for its 2001 Annual Meeting of Shareholders. Item 12. Security Ownership of Certain Beneficial Owners and Management. The information required by this Item is incorporated herein by reference to the section entitled "Election of Directors - Security Ownership of Management" set forth in the Company's Proxy Statement for its 2001 Annual Meeting of Shareholders. Item 13. Certain Relationships and Related Transactions. None. 9

11 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. (a) List of consolidated financial statements, schedules and exhibits filed as part of this report. 1. Financial Statements Consolidated Statements of Operations for the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999 Consolidated Balance Sheets at March 3, 2001 and February 26, 2000 Consolidated Statements of Cash Flows for the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999 Consolidated Statements of Shareholders' Equity for the Years Ended March 3, 2001, February 26, 2000 and February 27, 1999 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. None. 10

12 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: May 30, 2001 PIER 1 IMPORTS, INC. By: /s/ Marvin J. Girouard --------------------------- Marvin J. Girouard, Chairman and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated. Signature Title Date - --------- ----- ---- /s/ Marvin J. Girouard Chairman and May 30, 2001 - --------------------------- Chief Executive Officer Marvin J. Girouard /s/ Charles H. Turner Senior Vice President, May 30, 2001 - --------------------------- Chief Financial Officer and Treasurer Charles H. Turner /s/ Susan E. Barley Principal Accounting Officer May 30, 2001 - --------------------------- Susan E. Barley /s/ John H. Burgoyne Director May 30, 2001 - --------------------------- John H. Burgoyne /s/ Dr. Michael R. Ferrari Director May 30, 2001 - --------------------------- Dr. Michael R. Ferrari /s/ James M. Hoak, Jr. Director May 30, 2001 - --------------------------- James M. Hoak, Jr. /s/ Sally F. McKenzie Director May 30, 2001 - --------------------------- Sally F. McKenzie /s/ Tom M. Thomas Director May 30, 2001 - --------------------------- Tom M. Thomas

13 EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION - ------ ----------- 3(i) Certificate of Incorporation and Amendments thereto incorporated herein by reference to Exhibit 3(i) to Registrant's Form 10-Q for the quarter ended May 30, 1998. 3(ii) Bylaws of the Company, Restated as of December 7, 1994, incorporated herein by reference to Exhibit 3(ii) to the Company's Form 10-Q for the quarter ended November 26, 1994. 4.1 Rights Agreement dated December 9, 1994, between the Company and First Interstate Bank, N.A., as rights agent, incorporated herein by reference to Exhibit 4 to the Company's Registration Statement on Form 8-A, Reg. No. 1-7832, filed December 20, 1994. 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. 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.

14 10.12* Form of Deferred Compensation Agreement, between the Company and senior executive officers, incorporated herein by reference to Exhibit 10.1 to the Company's Form 10-Q for the quarter ended November 29, 1997. 10.13* Senior Management Annual Bonus Plan, incorporated herein by reference to Exhibit 10.1 to the Company's Form 10-Q for the quarter ended May 31, 1997. 10.14.1 Revolving Credit Agreement, dated November 12, 1998, among the Company, certain of its subsidiaries, NationsBank, N.A., Bank One, Texas, N.A., and Wells Fargo Bank (Texas), National Association, incorporated herein by reference to Exhibit 10.1 to the Company's Form 10-Q for the quarter ended November 28, 1998. 10.14.2 First Amendment to the Revolving Credit Agreement, dated December 30, 1999, incorporated herein by reference to Exhibit 10.14.2 to the Company's Form 10-K for the fiscal year ended February 26, 2000. 10.15* The Company's 1999 Stock Option Plan, effective June 24, 1999, incorporated herein by reference to Exhibit 10.1 to the Company's Form 10-Q for the quarter ended August 28, 1999. 10.16* Forms of Director and Employee Stock Option Agreements, incorporated herein by reference to Exhibit 10.2 to the Company's Form 10-Q for the quarter ended August 28, 1999. 13 Annual Report to Shareholders for the fiscal year ended March 3, 2001. 21 Roster of Subsidiaries of the Company. 23 Consent of Independent Auditors. *Management Contracts and Compensatory Plans

1 EXHIBIT 10.2.1 FIRST AMENDMENT TO THE PIER 1 IMPORTS, INC. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN AS RESTATED WHEREAS, PIER 1 IMPORTS, INC. (the "Company") has heretofore adopted the PIER 1 IMPORTS, INC. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN; and WHEREAS, such plan was restated on January 1, 1996, (the restated plan herein referred to as the "Plan"); and WHEREAS, the Company desires to amend the Plan's definition of "Employer" contained in Section 2.8 of the Plan to include within such definition wholly owned non-corporate business trust(s) of the Company; NOW, THEREFORE pursuant to Section 8.1 of the Plan, effective October 1, 1996, the Plan is amended as follows: 1. Section 2.8 of the Plan is amended to read as follows: Employer. "Employer" means any of Pier 1, its subsidiaries, including a business trust directly or indirectly wholly owned by Pier 1, and each of their respective successors. IN WITNESS WHEREOF, the Company has caused this Amendment to be executed as of the stated effective date. PIER 1 IMPORTS, INC., a Delaware corporation By: ---------------------------------- E. Mitchell Weatherly Senior Vice President

2 PIER 1 IMPORTS, INC. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN 1996 RESTATEMENT AMENDMENT NO. 2 This Amendment No. 2 to the restated Pier 1 Imports, Inc. Supplemental Executive Retirement Plan, originally effective May 1, 1986 and restated as of January 1, 1996, as amended October 11, 1996 and June 26, 1997 (the "Plan"), is made on this 26th day of September, 2000, by Pier 1 Imports, Inc., a Delaware corporation (the "Company"). WHEREAS, the Company desires to eliminate the restriction on the maximum amount of the Supplemental Retirement Benefit payable annually to any Participant under the Plan; and WHEREAS, pursuant to Section 8.1 of the Plan, the Board of Directors of the Company may amend the Plan at any time, in whole or in part; NOW, THEREFORE, the Plan is hereby amended as follows: FIRST: Section 4.1 of the Plan is hereby amended to read in its entirety as follows: 4.1 BENEFIT Upon separation from employment, a Participant shall receive a Supplemental Retirement Benefit from this Plan which, along with the Participant's benefits from primary Social Security, shall equal approximately fifty percent (50%) of the Participant's Highest Average Compensation. The computation of said Supplemental Retirement Benefit shall be made in accordance with the following provisions of this Article IV. SECOND: This Amendment No. 2 shall be effective as of September 26, 2000, and shall not operate or be construed to alter, modify or amend the Plan except as expressly set forth herein. The terms and provisions of the Plan, as expressly amended hereby, shall remain in full force and effect. IN WITNESS WHEREOF, the Company has caused this Amendment No. 2 to be executed as of September 26, 2000. PIER 1 IMPORTS, INC. By: ---------------------------- J. Rodney Lawrence Senior Vice President

1 EXHIBIT 10.11.3 AMENDMENT NO. 4 TO POOLING AND SERVICING AGREEMENT This AMENDMENT NO. 4, dated as of March 30, 2001, to POOLING AND SERVICING AGREEMENT, dated as of February 12, 1997, as amended by Amendment No. 1, dated as of May 30, 1997, Amendment No. 2, dated as of October 29, 1997, and Amendment No. 3, dated as of January 13, 1998 (the Pooling and Servicing Agreement, as amended by Amendments No. 1, No. 2 and No. 3, is herein referred to as the "Agreement"), among PIER 1 FUNDING, LLC, a Delaware limited liability company and successor to Pier 1 Funding, Inc., a Delaware corporation, as Transferor (the "Transferor"), PIER 1 IMPORTS, INC., a Delaware corporation, as Servicer (the "Servicer"), and THE CHASE MANHATTAN BANK, a New York banking Association and successor to Texas Commerce Bank National Association, as Trustee (the "Trustee"). WHEREAS, the Transferor, the Servicer and the Trustee have entered into the Agreement and wish to further amend the Agreement; NOW, THEREFORE, in consideration of the foregoing and of the mutual covenants herein contained, the parties hereto hereby agree as follows: SECTION 1. Defined Terms. "Effective Date" means the earlier of March 31, 2001, or the first date on which each of the parties hereto shall have executed and delivered to the others one or more counterparts of this Amendment. Unless otherwise defined herein, the terms used herein shall have the meanings assigned to such terms in, or incorporated by reference to the Agreement. SECTION 2. Amendments to the Agreement. The Agreement is hereby amended, effective on the Effective Date, as follows: (a) Section 1.1 of the Agreement shall be amended in the definition of "Cash Equivalents" by: (1) appending to the end of the first phrase of such definition beginning after the word "evidence" the following phrase: , the maturity dates of which shall not be later than the expected distribution dates of the funds: and (2) amending and restating clause (h) to read as follows:

2 any other relatively risk-free investments (excluding options) approved in writing by each Rating Agency which would not cause the Trust to become an "investment company" within the meaning of the Investment Company Act. (b) Section 2.10 of the Agreement shall be amended by: (1) appending the following proviso to the end of the first sentence thereof prior to subsection (a): ; provided, however, that the reassignment of Removed Accounts may be effected no more frequently than once in any 30-day period: and (2) deleting subclause (x) from clause (ii) of Section 2.10(e) such that clause (ii) shall read in its entirety as follows: (ii) a random selection procedure was used by the Transferor in selecting the Removed Accounts or Participation Interests; (c) Section 9.2(a) of the Agreement shall be amended by deleting the fourth and fifth sentences preceding the end of Section 9.2(a) and inserting in their place the following sentence: In the case of an Insolvency Event only, the Transferor or any of its Affiliates shall be permitted to bid for the Receivables and, additionally, shall have the right to match any bid by a third person and be granted the right to purchase the Receivables at such matched bid price. (d) Section 12.4 of the Agreement relating to Defeasance shall be deleted in its entirety. (e) Section 13.1(a) of the Agreement shall be amended by amending and restating clause (ix) thereof and the following proviso to read as follows: (ix) adding any provision to, changing in any manner or eliminating any provision of, this Agreement or any Supplement, or modifying in any manner the rights of Certificateholders of any Series then issued and outstanding; provided, however, in each case that (x) the Transferor shall have delivered to the Trustee an Officer's Certificate to the effect that the Transferor reasonably believes that such action shall not adversely affect in any material respect the interests of any Investor Certificateholder and that such amendment shall not significantly change the permitted activities of the Trust or result in the disallowance of sales accounting treatment of the transfer of the Receivables to the Trust under generally accepted accounting principles as provided in then existing accounting literature, (y) except with respect to clauses (i) and (ii), the Rating Agency Condition shall have been 2

3 satisfied with respect to any such amendment and (z) a Tax Opinion is delivered in connection with any such amendment. SECTION 3. Execution in Counterparts. This Amendment may be executed in any number of counterparts and by different parties hereto on separate counterparts, each of which counterparts, when so executed and delivered, shall be deemed to be an original and all of which counterparts, taken together, shall constitute but one and the same Amendment. SECTION 4. Consents; Binding Effect. The execution and delivery by the Transferor, the Servicer and the Trustee of this Amendment shall constitute the written consent of each of them, as required by Section 13.1 of the Agreement, to this Amendment. On the Effective Date, this Amendment shall be binding upon, and inure to the benefit of, the parties hereto and their respective successors and assigns. SECTION 5. Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State of New York. SECTION 6. Severability of Provisions. Any provision of this Amendment which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof or affecting the validity or enforceability of such provision in any other jurisdiction. SECTION 7. Captions. The captions in this Amendment are for convenience of reference only and shall not define or limit any of the terms or provisions hereof. SECTION 8. Agreement to Remain in Full Force and Effect. Except as amended hereby, the Agreement shall remain in full force and effect and is hereby ratified, adopted and confirmed in all respects. This Amendment shall be deemed to be an amendment to the Agreement. All references in the Agreement to "this Agreement," "hereunder," "hereof," "herein" or words of like import, and all references to the Agreement in any other agreement or document shall hereafter be deemed to refer to the Agreement as amended hereby. 3

4 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to executed as of the date and year first above written. PIER 1 IMPORTS (U.S.), INC., as Servicer By ------------------------------------- J. Rodney Lawrence Senior Vice President PIER 1 FUNDING, LLC, as Transferor By ------------------------------------- J. Gregory Coffey Vice President THE CHASE MANHATTAN BANK, as Trustee By ------------------------------------- Alan Lai Vice President 4

1 EXHIBIT 13 FINANCIAL SUMMARY ($ in millions except per share amounts) 4-Year Compound Year Ended Annual ----------------------------------------------------------- Growth Rate 2001(1) 2000 1999 1998 1997 ----------- --------- ------- ------- ------- ------ SUMMARY OF OPERATIONS: Net sales 10.5% $ 1,411.5 1,231.1 1,138.6 1,075.4 947.1 Gross profit 11.5% $ 594.5 512.5 500.4 461.5 384.5 Selling, general and administrative expenses 9.9% $ 399.8 349.4 334.6 315.8 274.5 Depreciation and amortization 21.5% $ 43.2 40.0 31.1 23.9 19.8 Operating income 13.8% $ 151.5 123.2 134.7 121.7 90.2 Nonoperating (income) and expenses, net(2) (39.8%) $ 1.3 4.6 5.0 (2.3) 9.9 Income before income taxes and extraordinary charges 16.9% $ 150.2 118.6 129.6 124.0 80.3 Income before extraordinary charges 18.4% $ 94.7 74.7 80.4 78.0 48.2 Extraordinary charges from early retirement of debt, net of income tax benefit $ -- -- -- -- 4.1 Net income 21.1% $ 94.7 74.7 80.4 78.0 44.1 PER SHARE AMOUNTS (ADJUSTED FOR STOCK SPLITS AND DIVIDENDS): Basic earnings before extraordinary charges 18.3% $ .98 .78 .82 .77 .50 Basic earnings 20.8% $ .98 .78 .82 .77 .46 Diluted earnings before extraordinary charges 19.9% $ .97 .75 .77 .72 .47 Diluted earnings 21.9% $ .97 .75 .77 .72 .44 Cash dividends declared 21.0% $ .15 .12 .12 .09 .07 Shareholders' equity 13.4% $ 5.52 4.60 4.12 3.89 3.34 OTHER FINANCIAL DATA: Working capital(3) 11.5% $ 333.0 239.3 252.1 280.8 215.3 Current ratio(3) 2.4% 3.3 2.4 2.9 3.3 3.0 Total assets 6.6% $ 735.7 670.7 654.0 653.4 570.3 Long-term debt (31.6%) $ 25.0 25.0 96.0 114.9 114.5 Shareholders' equity 13.3% $ 531.9 440.7 403.9 392.7 323.0 Weighted average diluted shares outstanding (millions) 96.3 95.8 98.1 101.1 96.8 Effective tax rate(4) 37.0% 37.0 38.0 37.1 40.0 Return on average shareholders' equity 5.1% 19.5% 17.7 20.2 21.8 16.0 Return on average total assets 14.0% 13.5% 11.3 12.3 12.8 8.0 Pre-tax return on sales(5) 5.7% 10.6% 9.6 11.4 11.5 8.5 (1) Fiscal 2001 consisted of a 53-week year. All other fiscal years presented reflect 52-week years. (2) Nonoperating (income) and expenses, net, were comprised of interest expense and interest and investment income in each fiscal year presented, and in addition, included net recoveries associated with trading activities in fiscal 1998. (3) The reduction in fiscal 2000 working capital and current ratio was the result of the Company's call of its outstanding 5 3/4% convertible subordinated notes. The notes were primarily converted into shares of the Company's common stock in March 2000. Excluding the reclassification of the 5 3/4% notes from long-term to short-term, working capital would have been $278.5 million with a current ratio of 3.0 to 1 at fiscal 2000 year-end. (4) No income tax expense was provided on the net recoveries associated with trading activities, which resulted in a lower effective tax rate in fiscal 1998. (5) Calculated before fiscal 1997 extraordinary charges from the early retirement of debt, net of income tax benefit. 1

2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Pier 1 Imports, Inc. (the "Company") is one of North America's largest specialty retailers of unique decorative home furnishings, gifts and related items, with nearly 900 stores in 48 states, Canada, Puerto Rico, the United Kingdom, Mexico and Japan as of fiscal 2001 year-end. The Company directly imports merchandise from over 50 countries around the world and designs proprietary offerings that become exclusive Pier 1 Imports offerings. In February 2001, the Company acquired certain assets and assumed certain liabilities of Cargo Furniture, Inc. ("Cargo"). Cargo, a 21-store retailer and wholesaler of casual lifestyle furniture, gifts and home decor, had no impact on the Company's fiscal 2001 operations due to the timing of the acquisition, but is reflected in the Company's fiscal 2001 year-end balance sheet. During fiscal 2001, the Company reported record sales of $1,411.5 million and net income of $94.7 million, or $.97 per diluted share. FISCAL YEARS ENDED MARCH 3, 2001 AND FEBRUARY 26, 2000 During fiscal 2001, the Company recorded net sales of $1,411.5 million, an increase of $180.4 million, or 14.7%, over net sales of $1,231.1 million for the prior fiscal year. Due to the Company's fiscal calendar, fiscal 2001 consisted of a 53-week year, while fiscal 2000 and 1999 were 52-week years. Same-store sales for fiscal 2001 improved 7.8% excluding the 53rd week of sales activity. The Company's new advertising campaign, proprietary credit card and other promotions and continued focus on a value pricing initiative, which began in fiscal 2000, resulted in higher customer traffic, average purchases per customer and conversion ratios during fiscal 2001. The Company's continued efforts to expand by opening new stores also contributed to sales growth during fiscal 2001. The Company opened 65 new stores and closed 24 stores in North America during fiscal 2001, bringing the Pier 1 North American store count up to 826 at year-end. With the addition of Cargo, the store count worldwide, including North America, Puerto Rico, the United Kingdom, Mexico and Japan, totaled 899 at the end of fiscal 2001 compared to 834 at the end of fiscal 2000. Increased use of the Company's proprietary credit card added to the Company's sales growth during fiscal 2001. Sales on the proprietary credit card were $377.0 million and accounted for 28.9% of U.S. store sales during fiscal 2001, an increase of $76.5 million over proprietary credit card sales in the prior year of $300.5 million, which represented 26.3% of U.S. store sales during that year. Proprietary credit credit card customers spent an average of $152 per transaction in fiscal 2001 compared to $142 per transaction in fiscal 2000. The Company attributes the growth in sales on the card to continued efforts to open new accounts, deferred payment options offered with furniture promotions and enhanced customer loyalty through targeted promotions. Gross profit, after related buying and store occupancy costs, expressed as a percentage of sales, increased 50 basis points in fiscal 2001 to 42.1% from 41.6% in fiscal 2000. Merchandise margins, as a percentage of sales, declined from 54.6% in fiscal 2000 to 54.2% in fiscal 2001, a decrease of 40 basis points. The decrease was a result of management's concerted decision to continue to give value back to customers by offering unique merchandise at affordable prices. In addition, the effect of a full year of price reductions taken as a result of the value pricing initiative started in May 1999 and continuing throughout fiscal 2000 created downward pressure on fiscal 2001 merchandise margins. This decline was also due in part to higher freight rates during the first half of fiscal 2001 as compared to the same period in fiscal 2000. The decreases in merchandise margins were more than offset by the leveraging of relatively fixed rental costs over a higher sales base. Store occupancy costs improved 90 basis points as a percentage of sales from 13.0% in fiscal 2000 to 12.1% in fiscal 2001. As a percentage of sales, selling, general and administrative expenses, including marketing, improved 10 basis points to 28.3% in fiscal 2001 from 28.4% in fiscal 2000. In total dollars, selling, general and administrative expenses for fiscal 2001 increased $50.4 million over the prior fiscal year. Expenses that normally increase proportionately with sales and number of stores, such as marketing, store payroll, supplies 2

3 and equipment rental, increased by $34.3 million, but as a percentage of sales declined nearly 20 basis points to 20.2% this fiscal year. Marketing as a percentage of sales decreased 20 basis points as a result of reduced spending on newspaper and magazine advertisements, along with leveraging marketing expenditures over a higher sales base. As a percentage of sales, the decrease in marketing expenses was offset by a 10 basis point increase in store payroll when comparing the two fiscal years. This increase was largely attributable to store bonuses awarded based on sales gains. All other selling, general and administrative expenses increased by $16.0 million, and increased 10 basis points as a percentage of sales. This increase was primarily due to an increase in information technology and other non-store salaries, partially offset by effective management of other administrative expenses and a reduction in net credit card costs. Depreciation and amortization increased by $3.2 million to $43.2 million in fiscal 2001 primarily because of the Company's increased capital expenditures throughout fiscal 2001 and 2000, especially expenditures on technology-related assets which tend to have relatively short useful lives. In fiscal 2001, operating income for the year improved to $151.5 million or 10.7% of sales, from $123.2 million or 10.0% of sales in fiscal 2000, an increase of 23.0% or $28.3 million. Interest income decreased slightly to $1.9 million in fiscal 2001 from $2.3 million in fiscal 2000 due to lower average cash balances during the current fiscal year. Interest expense was $3.1 million in fiscal 2001 compared to $6.9 million in fiscal 2000, a decline of $3.8 million. The decrease in interest expense was primarily due to the repurchase of $28.6 million of the Company's 5 3/4% convertible subordinated notes during fiscal 2000 and the retirement of the remaining $39.2 million of these notes during the first quarter of fiscal 2001. See Note 5 of the Notes to Consolidated Financial Statements. The Company's effective tax rate remained constant at 37% of income before income taxes for both fiscal 2001 and 2000. Net income in fiscal 2001 was $94.7 million, or $.97 per share on a diluted basis, an increase of $20.0 million, or 26.7% as compared to fiscal 2000's net income of $74.7 million, or $.75 per share on a diluted basis. Net income, as a percentage of sales, improved from 6.1% in fiscal 2000 to 6.7% in fiscal 2001. FISCAL YEARS ENDED FEBRUARY 26, 2000 AND FEBRUARY 27, 1999 During fiscal 2000, net sales increased $92.5 million to $1,231.1 million, or 8.1% above the sales level achieved in fiscal 1999. Same-store sales for fiscal 2000 grew 2.7%. The growth in sales was largely attributable to a net increase of 33 new North American stores in fiscal 2000. In fiscal 1999, the Company began to experience a slow down in same-store sales growth, with same-store sales growth of 3.2%, a trend that continued into the first and second quarters of fiscal 2000. The lower same-store sales gains were believed to be the result of an overly aggressive pricing strategy that was not well received by customers. As a result, the Company initiated a new value pricing strategy in the first quarter of fiscal 2000. This strategy was geared toward reducing prices to a more competitive level in certain merchandise categories, especially in decorative accessories and housewares. Throughout fiscal year 2000, the Company reduced prices on approximately 15% of its merchandise. In addition, the Company began focusing its buying strategy to include more basic merchandise at competitive price points, without sacrificing quality, style or gross margin rates. The results of the Company-initiated value pricing strategy were very positive for the latter half of fiscal 2000, a trend that continued into fiscal 2001. Net sales increases in fiscal 2000 were driven by sales of furniture, which delivered a 16.2% increase over the previous fiscal year. Additionally, the Company experienced increases for fiscal 2000 in housewares of 9.6%, bed and bath of 5.0% and decorative accessories of 3.9% over the results of fiscal 1999. Net new store openings in fiscal 2000 were the primary contributor to sales growth in fiscal 2000 over fiscal 1999. The Company opened 63 new stores and closed 30 stores in North America during fiscal 2000, bringing the North American store count to 785 at the end of the 2000 fiscal year. Stores worldwide, including 3

4 North America, Puerto Rico, the United Kingdom, Mexico and Japan, totaled 834 at the end of the 2000 fiscal year compared to 805 at the end of the 1999 fiscal year. The Company's proprietary credit card was another important contributor to sales growth, with sales totaling $300.5 million for fiscal 2000. This represented an increase of $24.3 million, or 8.8%, over proprietary credit card sales of $276.2 million for fiscal 1999. During fiscal 2000, proprietary credit card sales accounted for 26.3% of total U.S. store sales compared to 26.0% for the prior fiscal year. Proprietary credit card customers spent an average of $142 per transaction in fiscal 2000 compared to $134 per transaction in fiscal 1999. The Company continued to grow sales on the proprietary credit card by opening new accounts and enhancing customer loyalty with marketing promotions targeted to cardholders. Gross profit in fiscal 2000 totaled $512.5 million, an increase of $12.1 million, or 2.4%, over fiscal 1999. Expressed as a percentage of sales, the Company's gross profit, after related buying and store occupancy costs, decreased 240 basis points to 41.6% in fiscal 2000 from 44.0% in fiscal 1999. Merchandise margins, as a percentage of sales, decreased 160 basis points to 54.6% in fiscal 2000 from 56.2% in fiscal 1999. The decline in merchandise margins was principally the result of higher ocean freight rates coupled with the value pricing of selected merchandise categories. The Company negotiated new carrier contracts during fiscal 2000 that should stabilize ocean freight rates until fiscal 2002. The Company's new value pricing strategy introduced at the beginning of fiscal 2000 also created downward pressure on margins for a majority of the year. Store occupancy costs, as a percentage of sales, increased to 13.0% during fiscal 2000 from 12.2% in fiscal 1999. This increase was primarily caused by two separate sale-leaseback transactions. In June 1998, the Company sold and leased back 25 store properties that it previously owned, which generated rental expense for those stores during the first half of fiscal 2000 compared to the first half of fiscal 1999. The Company also sold and leased back an additional 12 store properties in September 1999. As a result of these sale-leaseback transactions, the Company experienced a reduction in depreciation expense, which is not classified as a component of store occupancy costs. Selling, general and administrative expenses, including marketing, as a percentage of sales, were 28.4% for fiscal 2000, a 100 basis point decrease from the 29.4% for fiscal 1999. In total dollars, selling, general and administrative expenses for fiscal 2000 increased $14.8 million over the prior fiscal period. Expenses that normally increase proportionately with sales and number of stores, such as store payroll, equipment rental, supplies and marketing expenses, increased $13.6 million, but declined 50 basis points as a percentage of sales from 20.9% last fiscal year to 20.4% this fiscal year. The slight increase in marketing expenditures was moderated by well-controlled store salaries and other store expenses. In fiscal 1999, the Company replaced leased point of sale equipment with purchased equipment, resulting in a decrease in equipment rental expense and an increase in depreciation expense for fiscal 2000. All other selling, general and administrative expense increased $1.2 million, but also declined 50 basis points as a percentage of sales to 8.0% for fiscal 2000. The dollar increase was largely the result of a nonrecurring credit of $1.8 million received in fiscal 1999 as a settlement on a receivable previously deemed uncollectible. Excluding the effect of the nonrecurring item from fiscal 1999, other expenses declined for fiscal 2000, primarily as a result of lower non-store payroll costs, as a percentage of sales, coupled with a reduction in net credit card costs. Depreciation and amortization expense for fiscal 2000 was $40.0 million, or 3.2% of sales, compared to $31.1 million, or 2.7% of sales, for fiscal 1999. Increased depreciation expense for fiscal 2000 was primarily the result of increased investments in capital expenditures throughout fiscal 2000 and 1999, the largest of which was the replacement of leased store point of sale equipment with purchased equipment during fiscal 1999. As a result, in fiscal 2000 the Company recorded a full year of depreciation expense on the fiscal 1999 capital expenditures compared to only a partial year of depreciation expense in fiscal 1999. Partially offsetting the increased expense was a reduction of depreciation expense on the stores which the Company opted to sell and lease back in the third quarter of fiscal 2000 and the second quarter of fiscal 1999. Operating income declined $11.5 million to $123.2 million, or 10.0% of sales, in fiscal 2000 from $134.7 million, or 11.8% of sales, in fiscal 1999. 4

5 During fiscal 2000, net interest expense was $4.6 million compared to $5.0 million for the prior year. The decline in net interest expense was primarily the result of the repurchases of the Company's 5 3/4% convertible subordinated notes of $28.6 million in fiscal 2000 and $18.3 million in fiscal 1999. The Company's effective income tax rate for fiscal 2000 was 37% compared to 38% for fiscal 1999. The decline in the estimated effective income tax rate was attributable to a reduction in state income taxes. Fiscal 2000 net income totaled $74.7 million, representing 6.1% of sales, or $.75 per share on a diluted basis. In fiscal 1999, net income was 7.1% of sales and totaled $80.4 million, or $.77 per share on a diluted basis. LIQUIDITY AND CAPITAL RESOURCES As of the end of fiscal 2001, the Company's cash and temporary investments totaled $46.8 million compared to $50.4 million in fiscal 2000. Operating activities generated $110.1 million of cash versus $119.6 million last year. Increased inventory levels were the primary reason for the reduction in operating cash flow. Inventory levels were anticipated to be higher when compared to last year as a result of furniture promotions planned in the first quarter of fiscal 2002 along with an increase in store count for fiscal 2001. The Company opened 41 net North American stores during fiscal 2001 compared to 33 net new stores in fiscal 2000. Additionally, the Company plans to open 31 stores during the first half of fiscal 2002 compared to 19 stores opened during the first half of fiscal 2001. Net cash used in investing activities totaled $70.4 million during fiscal 2001 versus last year's $39.8 million. Of that amount, capital expenditures were $45.3 million and were used primarily for new and existing store development. The Company opened 65 new stores in North America and three international retail locations, requiring $20.1 million of the total amounts expended for capital purchases. The Company remodeled 22 stores in fiscal 2001 at a cost of $6.4 million. Continuing with its commitment to invest in current store locations, the Company spent $5.1 million to improve floor plans and upgrade fixtures on existing stores. The Company also spent $7.6 million for technical resources and other system enhancements. During fiscal 2001, the Company continued to experience favorable sales trends on its proprietary credit card resulting in a net increase of $21.6 million in its beneficial interest in securitized receivables. This increase was primarily the result of the Company's recent "no payment, no finance charge" promotion in February 2001. The Company offered similar promotions on three separate occasions throughout fiscal 2001 versus one promotion offered in October of fiscal 2000. Additionally, the Company invested $3.9 million in the acquisition of Cargo. During fiscal 2001, the Company paid $34.3 million to repurchase 3,269,500 common shares under the Board of Directors-approved stock buyback program. In December 2000, the Board of Directors approved the repurchase of an additional five million shares of the Company's common stock. As of the end of the fiscal year, slightly less than 6.8 million shares remain authorized for repurchase. The Company expects that 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, loan covenant restrictions and consideration of its corporate credit ratings. Cash used for dividends increased $3.0 million to $14.5 million in total as a result of the Company's 33% increase of its quarterly cash dividend in June 2000 to $.04 per share paid in fiscal 2001 from $.03 per share paid in fiscal 2000. Subsequent to fiscal 2001, the Company declared a cash dividend of $.04 per share payable on May 16, 2001 to shareholders of record on May 2, 2001. The Company expects to continue to pay cash dividends, in fiscal 2002, but to retain most of its future earnings for expansion of the Company's business. Other financing activities, primarily the exercise of stock options, provided cash of $5.6 million during fiscal 2001. In March 2000, the Company redeemed its $39.2 million outstanding principal amount of 5 3/4% convertible subordinated notes originally due October 1, 2003. The notes were redeemable at 103% of par on March 23, 2000 or convertible into the Company's common stock at a price of $8.22 per share. Prior to redemption, the Company converted $39,164,000 of the notes into 4,764,450 shares of the Company's common stock and redeemed $15,000 of the notes for cash. 5

6 At fiscal 2001 year-end, the Company's sources of working capital were cash flow from operations, sales of proprietary credit card receivables and bank lines of credit. The bank facilities include a $125 million credit facility which expires in 2003, all of which was available at fiscal 2001 year-end. Borrowings and repayments on this facility totaled $82.5 million for fiscal year 2001. Additionally, the Company has other long-term and short-term bank facilities used principally for the issuance of letters of credit totaling $148.9 million, of which $73.5 million was available at fiscal 2001 year-end. 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 3.3 to 1 at fiscal 2001 year-end compared to 2.4 to 1 at fiscal 2000 year-end. Excluding the effect of the call of the Company's 5 3/4% convertible subordinated notes, which resulted in a reclassification of these notes from long-term to short-term, the current ratio would have been 3.0 to 1 at fiscal 2000 year-end. The Company's minimum operating lease commitments expected for fiscal 2002 total $139.6 million. The present value of total existing minimum operating lease commitments discounted at 10% is $625.0 million. The Company plans to continue to fund these commitments from operating cash flow. The Company's inventory purchases are made almost entirely in U.S. dollars. When purchase commitments are denominated in foreign currencies, the Company may enter into forward foreign exchange contracts, when they are available, in order to manage its exposure to foreign currency fluctuations. During fiscal 2002, the Company plans to open approximately 85 new stores and remodel or expand approximately ten existing stores. The Company also plans to close approximately 25 stores during fiscal 2002 as their leases expire or otherwise end, the majority of which will be relocated to more favorable locations within the same markets. The new store buildings and land will be financed primarily through operating leases. Total capital expenditures for fiscal 2002 are expected to be $55 to $60 million, with $36 million projected for store development and $18 million planned for information systems that will provide infrastructure and support for growth. The Company's working capital requirements for fiscal 2002 are not expected to increase significantly versus fiscal 2001 working capital. In summary, the Company's primary uses of cash in fiscal 2001 were to fund operating expenses, satisfy inventory requirements, provide for new and existing store development and repurchase common stock of the Company. Historically, the Company has financed its operations primarily from internally generated funds and borrowings under the Company's credit facilities. The Company believes that the funds provided from operations, available lines of credit and sales of its proprietary credit card receivables will be sufficient to finance working capital and capital expenditure requirements through the end of fiscal year 2002. MARKET RISK DISCLOSURES Market risks relating to the Company's operations result primarily from changes in foreign exchange rates and interest rates. The Company has only limited involvement with derivative financial instruments, does not use them for trading purposes and is not a party to any leveraged derivatives. The Company periodically enters into forward foreign exchange contracts to hedge some of its foreign currency exposure. The Company uses such contracts to hedge exposures to changes in foreign currency exchange rates, primarily Italian Lira, Canadian Dollars and British Pounds, associated with purchases denominated in foreign currencies. Gains and losses on these contracts have been deferred and recognized as an adjustment of the transaction price when it occurs. Forward contracts generally have maturities not exceeding six months. At March 3, 2001, the notional amount of the Company's foreign currency derivative instruments totaled approximately $2.4 million with a negligible fair market value. 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 3, 2001. A hypothetical 10% adverse change in interest rates would have a negligible impact on the Company's earnings and cash flows. 6

7 Collectively, the Company's exposure to these market risk factors was not significant and did not materially change from February 26, 2000. IMPACT OF INFLATION AND CHANGING PRICES Inflation has not had a significant impact on the operations of the Company during the preceding three years. IMPACT OF NEW ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities", which was amended by SFAS No. 137 and SFAS No. 138. This statement establishes accounting and reporting guidelines for derivatives and requires the Company to record all derivatives as assets or liabilities on the balance sheet at fair value. This statement is effective for the Company beginning in fiscal 2002. 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. However, the Company periodically enters into forward foreign exchange contracts to hedge some of its foreign currency exposure. The Company uses such contracts to hedge exposures to changes in foreign currency exchange rates associated with purchases denominated in foreign currencies. The Company has analyzed the implementation requirements and does not anticipate that the adoption of SFAS No. 133 will have a material impact on the Company's consolidated balance sheets or statements of operations, shareholders' equity and cash flows. In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." This statement replaces, in its entirety, SFAS No. 125 issued in June 1996. The new statement is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001, and is not to be applied retroactively to financial statements for prior periods. SFAS No. 140 establishes new conditions for a securitization to be accounted for as a sale of receivables, changes the requirements for an entity to be a qualifying special-purpose entity and modifies under what conditions a transferor has retained effective control over transferred assets. The new statement also requires additional disclosures for fiscal years ending after December 15, 2000 relating to securitized financial assets and retained interests in securitized financial assets. These disclosures are included in Note 2 of the Notes of Consolidated Financial Statements. The Company has analyzed the new requirements of SFAS No. 140, made the necessary amendments to its securitization agreements and believes that it will continue to receive sale treatment for its securitized proprietary credit card receivables. Therefore, the Company does not anticipate that the implementation of SFAS No. 140 will have a material impact on the Company's consolidated balance sheets or statements of operations, shareholders' equity and cash flows. FORWARD-LOOKING STATEMENTS Certain matters discussed in this annual report, other than historical information, may constitute "forward-looking statements" that are subject to certain risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. The Company may also make forward-looking statements in other reports filed with the Securities and Exchange Commission and in material delivered to the Company's shareholders. Forward-looking statements provide current expectations of future events based on certain assumptions. These statements encompass information that does not directly relate to any historical or current fact and often may be identified with words such as "anticipates," "believes," "expects," "estimates," "intends," "plans," "projects" and other similar expressions. Management's expectations and assumptions regarding planned store openings, financing of Company obligations from operations and other future results are subject to risks, uncertainties and other factors that could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements. Risks and uncertainties that may affect Company operations and performance include, among others, weather conditions that may affect sales, the general strength of the economy and levels of consumer 7

8 spending, the availability of new sites for expansion along with sufficient labor to facilitate growth, the strength of new home construction and sales of existing homes, the ability of the Company to import merchandise from foreign countries without significantly restrictive tariffs, duties or quotas and the ability of the Company to ship items from foreign countries at reasonable rates in timely fashion. The foregoing risks and uncertainties are in addition to others discussed elsewhere in this annual report. The Company assumes no obligation to update or otherwise revise its forward-looking statements even if experience or future changes make it clear that any projected results expressed or implied will not be realized. 8

9 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 3, 2001 and February 26, 2000, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended March 3, 2001. 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 3, 2001 and February 26, 2000, and the consolidated results of its operations and its cash flows for each of the three years in the period ended March 3, 2001, in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP Fort Worth, Texas April 10, 2001 9

10 PIER 1 IMPORTS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands except per share amounts) Year Ended ----------------------------------------- 2001 2000 1999 ----------- ----------- ----------- Net sales $ 1,411,498 $ 1,231,095 $ 1,138,590 Operating costs and expenses: Cost of sales (including buying and store occupancy) 817,043 718,547 638,173 Selling, general and administrative expenses 399,755 349,394 334,629 Depreciation and amortization 43,184 39,973 31,130 ----------- ----------- ----------- 1,259,982 1,107,914 1,003,932 ----------- ----------- ----------- Operating income 151,516 123,181 134,658 Nonoperating (income) and expenses: Interest and investment income (1,854) (2,349) (2,868) Interest expense 3,130 6,918 7,916 ----------- ----------- ----------- 1,276 4,569 5,048 ----------- ----------- ----------- Income before income taxes 150,240 118,612 129,610 Provision for income taxes 55,590 43,887 49,253 ----------- ----------- ----------- Net income $ 94,650 $ 74,725 $ 80,357 =========== =========== =========== Basic earnings per share $ .98 $ .78 $ .82 =========== =========== =========== Diluted earnings per share $ .97 $ .75 $ .77 =========== =========== =========== The accompanying notes are an integral part of these financial statements. 10

11 PIER 1 IMPORTS, INC. CONSOLIDATED BALANCE SHEETS (in thousands except share amounts) 2001 2000 --------- --------- ASSETS Current assets: Cash, including temporary investments of $31,142 and $39,898, respectively $ 46,841 $ 50,376 Beneficial interest in securitized receivables 75,403 53,820 Other accounts receivable, net of allowance for doubtful accounts of $295 and $44, respectively 8,370 5,637 Inventories 310,704 268,906 Prepaid expenses and other current assets 35,748 36,541 --------- --------- Total current assets 477,066 415,280 Properties, net 211,751 213,032 Other assets 46,893 42,398 --------- --------- $ 735,710 $ 670,710 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Notes payable and current portion of long-term debt $ -- $ 39,179 Accounts payable and accrued liabilities 144,110 136,787 --------- --------- Total current liabilities 144,110 175,966 Long-term debt 25,000 25,000 Other noncurrent liabilities 34,721 29,081 Shareholders' equity: Common stock, $1.00 par, 500,000,000 shares authorized, 100,779,000 issued 100,779 100,779 Paid-in capital 139,424 155,711 Retained earnings 344,809 264,678 Cumulative other comprehensive income (3,115) (1,536) Less - 4,619,000 and 6,949,000 common shares in treasury, at cost, respectively (49,933) (78,668) Less - unearned compensation (85) (301) --------- --------- 531,879 440,663 Commitments and contingencies --------- --------- $ 735,710 $ 670,710 ========= ========= 11

12 PIER 1 IMPORTS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands except share amounts) Year Ended ----------------------------------- 2001 2000 1999 --------- --------- --------- Cash flow from operating activities: Net income $ 94,650 $ 74,725 $ 80,357 Adjustments to reconcile to net cash provided by operating activities: Depreciation and amortization 43,184 39,973 31,130 Deferred taxes and other 9,137 11,033 (2,575) Change in cash from: Inventories (39,127) (10,133) (24,103) Accounts receivable and other current assets (5,847) 586 2,500 Accounts payable and accrued expenses 6,280 8,962 12,826 Other assets, liabilities and other, net 1,738 (5,528) (4,409) --------- --------- --------- Net cash provided by operating activities 110,015 119,618 95,726 --------- --------- --------- Cash flow from investing activities: Capital expenditures (45,251) (45,984) (78,055) Proceeds from disposition of properties 353 19,425 36,408 Net cost from disposition of Sunbelt Nursery Group, Inc. properties -- (439) (597) Acquisitions, net of cash acquired (3,917) -- (4,235) Beneficial interest in securitized receivables (21,583) (12,820) 3,145 --------- --------- --------- Net cash used in investing activities (70,398) (39,818) (43,334) --------- --------- --------- Cash flow from financing activities: Cash dividends (14,494) (11,504) (11,522) Purchases of treasury stock (34,270) (31,806) (65,777) Proceeds from issuance of long-term debt 82,500 4,035 -- Repayments of long-term debt (82,515) (36,242) (20,325) Proceeds from stock options exercised, stock purchase plan and other, net 5,627 4,148 6,448 --------- --------- --------- Net cash used in financing activities (43,152) (71,369) (91,176) --------- --------- --------- Change in cash and cash equivalents (3,535) 8,431 (38,784) Cash and cash equivalents at beginning of year 50,376 41,945 80,729 --------- --------- --------- Cash and cash equivalents at end of year $ 46,841 $ 50,376 $ 41,945 ========= ========= ========= - ---------------------------------------------------------------------------------------------------- Supplemental cash flow information: Interest paid $ 3,171 $ 7,137 $ 7,929 ========= ========= ========= Income taxes paid $ 58,302 $ 40,883 $ 43,084 ========= ========= ========= 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. 12

13 PIER 1 IMPORTS, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (in thousands except per share amounts) Cumulative Other Total Common Paid-in Retained Comprehensive Treasury Unearned Shareholders' Stock Capital Earnings Income Stock Compensation Equity --------- --------- --------- ------------- --------- ------------ ------------- Balance February 28, 1998 $ 67,903 $ 166,824 $ 165,345 $ (1,108) $ (3,149) $ (3,084) $ 392,731 Comprehensive income: Net income -- -- 80,357 -- -- -- 80,357 Other comprehensive income, net of tax: Currency translation adjustments -- -- -- (742) -- -- (742) --------- Comprehensive income 79,615 --------- Purchases of treasury stock -- -- -- -- (65,777) -- (65,777) Restricted stock forfeits and amortization -- -- -- -- -- 1,758 1,758 Exercise of stock options, stock purchase plan and other -- (7,308) -- -- 14,272 -- 6,964 Cash dividends ($.12 per share) -- -- (11,522) -- -- -- (11,522) Three for two stock split 32,866 -- (32,723) -- -- (143) -- Conversion of 5 3/4% convertible debt 10 115 -- -- -- -- 125 --------- --------- --------- --------- --------- --------- --------- Balance February 27, 1999 100,779 159,631 201,457 (1,850) (54,654) (1,469) 403,894 --------- --------- --------- --------- --------- --------- --------- Comprehensive income: Net income -- -- 74,725 -- -- -- 74,725 Other comprehensive income, net of tax: Currency translation adjustments -- -- -- 314 -- -- 314 --------- Comprehensive income 75,039 --------- Purchases of treasury stock -- -- -- -- (31,806) -- (31,806) Restricted stock forfeits and amortization -- 709 -- -- (1,392) 1,168 485 Exercise of stock options, stock purchase plan and other -- (4,629) -- -- 9,184 -- 4,555 Cash dividends ($.12 per share) -- -- (11,504) -- -- -- (11,504) --------- --------- --------- --------- --------- --------- --------- Balance February 26, 2000 100,779 155,711 264,678 (1,536) (78,668) (301) 440,663 --------- --------- --------- --------- --------- --------- --------- Comprehensive income: Net income -- -- 94,650 -- -- -- 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 forfeits and amortization -- -- -- -- -- 216 216 Exercise of stock options, stock purchase plan and other -- (1,774) (25) -- 9,119 -- 7,320 Cash dividends ($.15 per share) -- -- (14,494) -- -- -- (14,494) Conversion of 5 3/4% convertible debt -- (14,513) -- -- 53,886 -- 39,373 --------- --------- --------- --------- --------- --------- --------- Balance March 3, 2001 $ 100,779 $ 139,424 $ 344,809 $ (3,115) $ (49,933) $ (85) $ 531,879 ========= ========= ========= ========= ========= ========= ========= The accompanying notes are an integral part of these financial statements. 13

14 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, Mexico and Japan. Concentrations of risk with respect to sourcing the Company's inventory purchases are limited due to the large number of vendors or suppliers and their geographic dispersion around the world. The Company sources its largest amount of imported inventory from China. Management believes that alternative merchandise could be obtained from manufacturers in other countries over time. BASIS OF CONSOLIDATION - The consolidated financial statements of Pier 1 Imports, Inc. and its consolidated subsidiaries (the "Company") include the accounts of all subsidiary companies except Pier 1 Funding, LLC, which is a non-consolidated, bankruptcy remote, securitization subsidiary. See Note 2 of the Notes to Consolidated Financial Statements. Material intercompany transactions and balances have been eliminated. ACQUISITIONS - The Company completed its acquisition of certain assets and assumption of certain liabilities of Cargo Furniture, Inc. ("Cargo") for $3,931,000, including cash acquired, on February 21, 2001. These assets and liabilities were included in the Company's consolidated balance sheet as of March 3, 2001; however, this acquisition had no effect on the Company's fiscal 2001 operations. Cargo is a 21-store retailer and wholesaler of casual lifestyle furniture, gifts and home decor with a focus on children's furniture. This acquisition was accounted for under the purchase method of accounting, and resulted in goodwill of $2,843,000 which will be amortized using the straight-line method over 20 years. 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. USE OF ESTIMATES - Preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. 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 2001 consisted of a 53-week year and fiscal 2000 and 1999 were 52-week years. Fiscal 2001 ended March 3, 2001, fiscal 2000 ended February 26, 2000 and fiscal 1999 ended February 27, 1999. CASH AND CASH EQUIVALENTS - The Company considers all highly liquid investments with an original maturity date of three months or less to be cash equivalents. The effect of foreign currency exchange rate fluctuations on cash is not material. TRANSLATION OF FOREIGN CURRENCIES - Assets and liabilities of foreign operations are translated into U.S. dollars at fiscal year-end exchange rates. Income and expense items are translated at average exchange rates prevailing during the year. Translation adjustments arising from differences in exchange rates from period to period are included as a separate component of shareholders' equity and are included in comprehensive income. FINANCIAL INSTRUMENTS - The fair value of financial instruments is determined by reference to various market data and other valuation techniques as appropriate. Unless otherwise disclosed, the fair values of financial instruments approximate their recorded values. Risk management instruments: The Company may utilize various financial instruments to manage interest rate and market risk associated with its on- and off-balance sheet commitments. 14

15 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; any gains or losses on such contracts are included in the cost of the merchandise purchased. The Company enters into forward foreign exchange contracts with major financial institutions and continually monitors its positions with, and the credit quality of, these counterparties to its off-balance sheet financial instruments. The Company does not expect non-performance by any of the counterparties, and any losses incurred in the event of non-performance would not be material. BENEFICIAL INTEREST IN SECURITIZED RECEIVABLES - In February 1997, the Company sold all of its proprietary credit card receivables to a special purpose wholly-owned subsidiary, Pier 1 Funding, Inc., predecessor to Pier 1 Funding, LLC ("Funding"), which transferred the receivables to the Pier 1 Imports Credit Card Master Trust (the "Master Trust"). The Master Trust issues beneficial interests in the Master Trust that represent undivided interests in the assets of the Master Trust consisting of the transferred receivables and all proceeds of such receivables. The beneficial interests in the Master Trust include the interests retained by Funding which are represented by the Class B Certificates ($14.1 million) and the residual interest in the Master Trust (the excess of the principal amount of receivables held in the Master Trust over the portion represented by the certificates sold to investors and the Class B Certificates). The Company estimates fair value of its beneficial interest in the Master Trust based on the present value of future expected cash flows estimated using management's best estimates of the key assumptions including credit losses and timeliness of payments. INVENTORIES - Inventories are comprised primarily of finished merchandise and are stated at the lower of average cost or market; cost is determined principally on a weighted average method. PROPERTIES, MAINTENANCE AND REPAIRS - Buildings, equipment, furniture and fixtures, and leasehold interests and improvements are carried at cost less accumulated depreciation. Depreciation is computed using the straight-line method over estimated remaining useful lives of the assets ranging from three to thirty years. Depreciation costs were $41,882,000, $38,672,000 and $30,014,000 in fiscal 2001, 2000 and 1999, respectively. Amortization of improvements to leased properties is based upon the shorter of the remaining lease term or the estimated useful lives of such assets. Expenditures for maintenance, repairs and renewals which do not materially prolong the useful lives of the assets are charged to expense as incurred. In the case of disposals, assets and the related depreciation are removed from the accounts and the net amount, less proceeds from disposal, is credited or charged to income. REVENUE RECOGNITION - The Company recognizes revenue at the point of sale or at the time the merchandise is shipped to the customer. Revenue from gift cards, gift certificates and merchandise credits is deferred until redemption. ADVERTISING COSTS - All advertising costs are expensed the first time the advertising takes place. Advertising costs were $59,721,000, $54,970,000 and $47,491,000 in fiscal 2001, 2000 and 1999, respectively. The amounts of prepaid advertising at the end of fiscal years 2001 and 2000 were $2,086,000 and $727,000, respectively. INCOME TAXES - Income tax expense is based on the liability method. Under this method, deferred tax assets and liabilities are recognized based on differences between financial statement and tax bases of assets and liabilities using presently enacted tax rates. Deferred federal income taxes, net of applicable foreign tax credits, are not provided on the undistributed earnings of foreign subsidiaries to the extent the Company intends to permanently reinvest such earnings abroad. 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 15

16 of grant. The Company continues to account for stock option grants and restricted stock grants in accordance with Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and, accordingly, recognizes no compensation expense for the stock option grants. EARNINGS PER SHARE - Basic earnings per share 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): 2001 2000 1999 -------- -------- -------- Net income $ 94,650 $ 74,725 $ 80,357 Plus interest and debt issue costs, net of tax, on the assumed conversion of the 5 3/4% subordinated notes -- 2,237 3,083 -------- -------- -------- Diluted net income $ 94,650 $ 76,962 $ 83,440 ======== ======== ======== Average shares outstanding: Basic 96,306 95,766 98,120 Plus assumed exercise of stock options 1,325 644 1,101 Plus assumed conversion of the 5 3/4% subordinated notes 321 6,887 9,643 -------- -------- -------- Diluted 97,952 103,297 108,864 ======== ======== ======== Earnings per share: Basic $ .98 $ .78 $ .82 ======== ======== ======== Diluted $ .97 $ .75 $ .77 ======== ======== ======== 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 2001, 2000 and 1999, there were 1,078,200, 1,157,025 and 1,543,500, respectively, stock options outstanding with exercise prices greater than the average market price of the Company's common shares. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS - In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities", which was amended by SFAS No. 137 and SFAS No. 138. This statement establishes accounting and reporting guidelines for derivatives and requires the Company to record all derivatives as assets or liabilities on the balance sheet at fair value. This statement is effective for the Company beginning in fiscal 2002. 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. However, the Company periodically enters into forward foreign exchange contracts to hedge some of its 16

17 foreign currency exposure. The Company uses such contracts to hedge exposures to changes in foreign currency exchange rates associated with purchases denominated in foreign currencies. The Company has analyzed the implementation requirements and does not anticipate that the adoption of SFAS No. 133 will have a material impact on the Company's consolidated balance sheets or statements of operations, shareholders' equity and cash flows. In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." This statement replaces, in its entirety, SFAS No. 125 issued in June 1996. The new statement is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001 and is not to be applied retroactively to financial statements for prior periods. SFAS No. 140 establishes new conditions for a securitization to be accounted for as a sale of receivables, changes the requirements for an entity to be a qualifying special-purpose entity and modifies under what conditions a transferor has retained effective control over transferred assets. The new statement also requires additional disclosures for fiscal years ending after December 15, 2000 relating to securitized financial assets and retained interests in securitized financial assets. These disclosures are included in Note 2 of the Notes to Consolidated Financial Statements. The Company has analyzed the new requirements of SFAS No. 140, made the necessary amendments to its securitization agreements and believes that it will continue to receive sale treatment for its securitized proprietary credit card receivables. Therefore, the Company does not anticipate that the implementation of SFAS No. 140 will have a material impact on the Company's consolidated balance sheets or statements of operations, shareholders' equity and cash flows. NOTE 2 - PROPRIETARY CREDIT CARD INFORMATION The proprietary credit card receivables, securitized as discussed below, arise primarily under open-end revolving credit accounts issued by the Company's subsidiary, Pier 1 National Bank, to finance purchases of merchandise and services offered by the Company. These accounts have various billing and payment structures, including varying minimum payment levels. The Company has an agreement with a third party to provide certain credit card processing and related credit services, while the Company maintains control over credit policy decisions and customer service standards. As of fiscal 2001 year-end, the Company had approximately 4,583,000 proprietary cardholders and approximately 1,131,000 customer credit accounts considered active (accounts with a purchase within the previous 12 months). The Company's proprietary credit card sales accounted for 28.9% of total U.S. store sales in fiscal 2001. A summary of the Company's proprietary credit card results for each of the last three fiscal years follows (in thousands): 17

18 2001 2000 1999 --------- --------- --------- Income: Finance charge income, net of debt service costs $ 21,759 $ 16,780 $ 15,117 Insurance and other income 253 287 314 --------- --------- --------- 22,012 17,067 15,431 --------- --------- --------- Costs: Processing fees 13,608 10,763 9,456 Bad debts 5,285 4,664 6,356 --------- --------- --------- 18,893 15,427 15,812 --------- --------- --------- Net proprietary credit card income (expense) $ 3,119 $ 1,640 $ (381) ========= ========= ========= Proprietary credit card sales $ 377,045 $ 300,462 $ 276,184 ========= ========= ========= Costs as a percent of proprietary credit card sales 5.01% 5.13% 5.73% ========= ========= ========= Gross proprietary credit card receivables at year-end $ 122,876 $ 100,095 $ 87,601 ========= ========= ========= Proprietary credit card sales as a percent of total U.S. store sales 28.9% 26.3% 26.0% ========= ========= ========= In February 1997, the Company securitized its entire portfolio of proprietary credit card receivables (the "Receivables"). The Company sold all existing Receivables to a special-purpose wholly-owned subsidiary, Pier 1 Funding, Inc., predecessor to Pier 1 Funding, LLC ("Funding"), which transferred the Receivables to the Pier 1 Imports Credit Card Master Trust (the "Master Trust"). The Master Trust issues beneficial interests in the Master Trust that represent undivided interests in the assets of the Master Trust consisting of the Receivables and all proceeds of the Receivables. On a daily basis, the Company sells to Funding for transfer to the Master Trust all newly generated Receivables, except those failing certain eligibility criteria, and receives as the purchase price payments of cash (funded from the amount of undistributed principal collections from the Receivables in the Master Trust) and residual interests in the Master Trust. Proceeds received from sales of such Receivables approximated $347 million, $303 million and $290 million during fiscal 2001, 2000 and 1999, respectively. Gains/losses resulting from such sales were not material in any of the periods presented above. The Company has no obligation to reimburse Funding, the Master Trust or purchasers of any certificates issued by the Master Trust for credit losses from the Receivables. Funding was capitalized by the Company as a special-purpose wholly-owned subsidiary that is subject to certain covenants and restrictions, including a restriction from engaging in any business or activity unrelated to acquiring and selling interests in receivables. The Master Trust is not consolidated with the Company. In the initial sale of the Receivables, the Company sold $84.1 million of the Receivables and received $49.6 million in cash and $34.1 million in beneficial interests in the Master Trust. The Master Trust sold to third parties $50.0 million of Series 1997-1 Class A Certificates, which bear interest at 6.74% and mature in May 2002. Funding retained $14.1 million of Series 1997-1 Class B Certificates, which are currently non-interest bearing and subordinated to the Class A Certificates. Funding also retained the residual interest in the Master Trust. As of March 3, 2001 and February 26, 2000, the Company had $75.4 million and $53.8 million, respectively, in beneficial interests (comprised primarily of principal and interest related to the underlying 18

19 Receivables) in the Master Trust. Based on estimated future cash flow projections, the fair value of the Company's retained interest approximates historical cost. Beginning in October 2001, unless prefunded through a new series of certificates, principal collections of Receivables allocable to Series 1997-1 Certificates will be used to amortize the outstanding balances of the Series 1997-1 Certificates and will not be available to fund the purchase of new receivables being transferred from the Company. Under generally accepted accounting principles, if the structure of the securitization meets certain requirements, these transactions are accounted for as sales of receivables. The Company's securitization, as discussed above, was accounted for as a sale. The Company expects no material impact on net income in future years as a result of the sale, although the precise amounts will be dependent on a number of factors such as interest rates and levels of securitization. NOTE 3 - PROPERTIES Properties are summarized as follows at March 3, 2001 and February 26, 2000 (in thousands): 2001 2000 -------- -------- Land $ 22,353 $ 22,384 Buildings 59,716 59,761 Equipment, furniture and fixtures 207,956 183,313 Leasehold interests and improvements 170,706 157,801 -------- -------- 460,731 423,259 Less accumulated depreciation and amortization 248,980 210,227 -------- -------- Properties, net $211,751 $213,032 ======== ======== NOTE 4 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES/OTHER NONCURRENT LIABILITIES The following is a summary of accounts payable and accrued liabilities and other noncurrent liabilities at March 3, 2001 and February 26, 2000 (in thousands): 2001 2000 -------- -------- Trade accounts payable $ 52,637 $ 57,203 Accrued payroll and other employee-related liabilities 33,685 23,515 Accrued taxes, other than income 15,576 13,073 Gift cards, gift certificates and merchandise credits outstanding 18,989 15,494 Accrued income taxes payable 7,786 12,152 Other 15,437 15,350 -------- -------- Accounts payable and accrued liabilities $144,110 $136,787 ======== ======== Accrued average rent $ 17,590 $ 16,260 Other 17,131 12,821 -------- -------- Other noncurrent liabilities $ 34,721 $ 29,081 ======== ======== 19

20 NOTE 5 - LONG-TERM DEBT AND AVAILABLE CREDIT Long-term debt is summarized as follows at March 3, 2001 and February 26, 2000 (in thousands): 2001 2000 ------- ------- Industrial revenue bonds $25,000 $25,000 5 3/4% convertible subordinated notes -- 39,179 ------- ------- 25,000 64,179 Less - portion due within one year -- 39,179 ------- ------- Long-term debt $25,000 $25,000 ======= ======= 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 5.7% and 4.8% for fiscal 2001 and 2000, respectively. In September 1996, the Company issued $86.3 million principal amount of 5 3/4% convertible subordinated notes due October 1, 2003. The notes were convertible at any time prior to maturity, unless previously redeemed or repurchased, into shares of common stock of the Company at a conversion price of $8.22 per share, adjusted for stock splits. The Company had the option to redeem the notes, in whole or in part, on or after October 2, 1999, at a redemption price (expressed as a percentage of principal amount) of 103% of par value which was scheduled to decline annually to 100% of par value at the maturity date. During fiscal 2000, the Company purchased and retired $28.6 million principal amount of these notes at an average price of 98.8% of par. Interest on the notes was payable semiannually on April 1 and October 1 of each year. In February 2000, the Company announced its intention to call the remaining $39.2 million outstanding principal amount of these notes for redemption on March 23, 2000. The notes were convertible into common stock of the Company at any time prior to the close of business on March 22, 2000, at a conversion price of $8.22 per share. During March 2000, the Company converted $39,164,000 of the notes into 4,764,450 shares of the Company's common stock and redeemed $15,000 of the notes for cash at a redemption price of 103% of par value. The conversion and redemption of these notes during fiscal 2001 reduced the Company's debt by $39.2 million and increased its capitalization by $39.4 million. Long-term debt matures as follows (in thousands): Long-Term Fiscal Year Debt - ----------- --------- 2002 $ -- 2003 -- 2004 -- 2005 -- 2006 -- Thereafter 25,000 ------- Total long-term debt $25,000 ======= The Company has a $125 million unsecured credit facility available, which expires in November 2003. The interest rate on these borrowings is determined based upon a spread to LIBOR that varies depending upon either the Company's senior debt rating or leverage ratio. All of the $125 million revolving credit facility was 20

21 available at fiscal 2001 year-end. The weighted average interest rate on borrowings outstanding was 7.2% for fiscal 2001. The Company had no borrowings under this facility during fiscal 2000. The Company has a $120 million short-term line of credit, which may be used to issue merchandise letters of credit. At fiscal 2001 year-end, approximately $46.5 million had been utilized, leaving $73.5 million available. The Company also has $28.9 million of other special-purpose credit lines, all of which were fully utilized at fiscal 2001 year-end. 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. NOTE 6 - FAIR VALUE OF FINANCIAL INSTRUMENTS At March 3, 2001, the Company had approximately $2.4 million of forward foreign exchange contracts outstanding with negligible fair values and with maturities ranging from one to six months. As of February 26, 2000, the fair value of the 5 3/4% convertible notes was $40.4 million compared to the recorded value of $39.2 million. The fair value of these debentures was estimated based on the quoted market value as of February 26, 2000 for the debentures. There were no other significant assets or liabilities with a fair value different from the recorded value as of March 3, 2001 and February 26, 2000. NOTE 7 - 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 $1,790,000, $1,753,000 and $1,653,000 in fiscal 2001, 2000 and 1999, respectively. In addition, a non-qualified retirement savings plan is available for the purpose of providing deferred compensation for certain employees whose benefits under the qualified plan are limited under Section 401(k) of the Internal Revenue Code. The Company's expense for this non-qualified plan was not significant for fiscal 2001, 2000 and 1999. The Company maintains supplemental retirement plans (the "Plans") for certain of its executive officers. The Plans provide that upon death, disability or reaching retirement age, a participant will receive benefits based on highest compensation and years of service. The Company recorded expenses related to the Plans of $1,850,000, $1,409,000 and $1,633,000 in fiscal 2001, 2000 and 1999, respectively. NOTE 8 - MATTERS CONCERNING SHAREHOLDERS' EQUITY STOCK SPLIT - On July 29, 1998, the Company distributed 32,866,000 common shares pursuant to a three for two stock split, effected in the form of a 50% common stock dividend, to shareholders of record on July 15, 1998. STOCK PURCHASE PLAN - Substantially all employees and directors are eligible to participate in the Pier 1 Imports, Inc. Stock Purchase Plan under which the Company's common stock is purchased on behalf of employees at market prices through regular payroll deductions. Each employee participant may contribute up to 10% of the eligible portions of compensation and directors may contribute part or all of their directors' fees. The Company contributes from 10% to 100% of the participants' contributions, depending upon length of participation and date of entry into the plan. Company contributions to the plan were $921,000, $954,000 and $1,032,000 in fiscal years 2001, 2000 and 1999, respectively. 21

22 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 vests over a four-year period of continued employment. The fair value at the date of grant of these restricted stock shares is being 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 are returned to the plan if employment is 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 vest, and the fair value at the date of grant is expensed, over a ten-year period of continued employment. Unvested shares are returned to the plan upon employment termination. As of March 3, 2001, 407,742 shares have been returned to the plan. In fiscal 2000, the Restricted Stock Grant Plan was terminated by the Board of Directors and is no longer available for issuance of common stock to key officers. The final vesting period was March 2000. Total compensation expense for both of the restricted stock grant plans was $216,000, $485,000 and $1,759,000 for fiscal 2001, 2000 and 1999, respectively. STOCK OPTION PLANS - In June 1999, the Company adopted the Pier 1 Imports, Inc. 1999 Stock Plan (the "Plan"). The Plan will ultimately replace the Company's two previous stock option plans, which were the 1989 Employee Stock Option Plan (the "Employee Plan") and the 1989 Non-Employee Director Stock Option Plan (the "Director Plan"). The Plan provides for the granting of options to directors and employees with an exercise price not less than the fair market value of the common stock on the date of the grant. Options may be either Incentive Stock Options authorized under Section 422 of the Internal Revenue Code or non-qualified options, which do not qualify as Incentive Stock Options. Current director compensation provides for non-qualified options covering 6,000 shares to be granted once each year to each non-employee director. Additionally, the Plan authorizes a Director Deferred Stock Program. As the program is currently implemented by the Board of Directors, each director must defer a minimum of 50% and may defer up to 100% of the director's cash fees into a deferred stock account. The amount deferred receives a 50% matching contribution from the Company. The Plan provides that a maximum of 7,000,000 shares of common stock may be issued under the Plan, of which not more than 250,000 may be issued in exchange for deferred stock units. Options issued to non-director employees vest equally over a period of four years while directors' options are fully vested at the date of issuance. Additionally, employee options will fully vest upon retirement or, under certain conditions, a change in control of the Company. As of March 3, 2001 and February 26, 2000, respectively, there were 3,525,887 and 4,913,638 shares available for grant under the Plan, of which 200,381 and 227,638 may be used for deferred stock issuance. Additionally, outstanding options covering 429,600 and 45,000 shares were exercisable and 49,619 and 22,362 shares were issuable in exchange for deferred stock units at fiscal years ended 2001 and 2000, 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 3, 2001 and February 26, 2000, outstanding options covering 2,318,042 and 2,107,953 shares were exercisable and 878,059 and 747,409 shares were available for grant, respectively. The Employee Plan expires in June 2004. The Director Plan expired in fiscal 2000. As of March 3, 2001 and February 26, 2000, outstanding options covering 61,764 shares were exercisable under the Director Plan. Due to 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. 22

23 A summary of stock option transactions related to the stock option plans during the three fiscal years ended March 3, 2001 is as follows (the summary reflects the effect of the three for two stock split, effected in the form of a stock dividend, distributed July 29, 1998): Weighted Exercisable Shares Weighted Average ---------------------------- Average Fair Value Weighted Exercise at Date Number of Average Shares Price of Grant Shares Exercise Price --------- -------- ---------- --------- -------------- Outstanding at February 28, 1998 3,988,949 $ 7.21 1,350,332 $ 5.16 Options granted 1,550,500 13.27 $ 5.38 Options exercised (662,889) 6.11 Options cancelled or expired (278,730) 10.72 --------- Outstanding at February 27, 1999 4,597,830 9.20 1,810,819 6.66 Options granted 2,379,500 6.20 3.18 Options exercised (134,936) 4.63 Options cancelled or expired (793,187) 10.63 --------- Outstanding at February 26, 2000 6,049,207 7.94 2,214,717 7.28 Options granted 1,584,000 10.49 5.31 Options exercised (569,326) 5.38 Options cancelled or expired (351,900) 8.47 --------- Outstanding at March 3, 2001 6,711,981 8.73 2,809,406 8.07 ========= For shares outstanding at March 3, 2001: Weighted Weighted Weighted Average Average Average Remaining Shares Exercise Price- Total Exercise Contractual Currently Exercisable Ranges of Exercise Prices Shares Price Life Exercisable Shares - ------------------------- --------- -------- ----------- ----------- --------------- $ 2.85 - $ 4.61 747,408 $ 3.91 3.59 747,408 $ 3.91 $ 5.81 - $ 5.81 1,688,350 5.81 8.53 353,350 5.81 $ 6.25 - $ 10.44 3,129,098 9.09 8.10 1,035,673 7.72 $ 10.88 - $ 18.50 1,147,125 15.16 7.11 672,975 14.40 The Company accounts for its stock options using the intrinsic value-based method of accounting prescribed by APB Opinion No. 25, but is required to disclose the pro forma effect on net income and earnings per share as if the options were accounted for using a fair value-based method of accounting. The fair values for options issued in fiscal 2001, 2000 and 1999 have been estimated as of the date of grant using the Black-Scholes or a similar option pricing model with the following weighted average assumptions for 2001, 2000 and 1999, respectively: risk-free interest rates of 5.68%, 5.79% and 5.14%, expected volatility factors of .5586, .5150 and .3655, expected dividend yields of 1.0% and weighted average expected lives of six years from date of grant to date of exercise for all options. For purposes of computing pro forma net income and earnings per share, the fair value of the stock options is amortized on a straight-line basis as compensation expense over the vesting periods of the options. The pro forma effects on net income and earnings per share are as follows (in thousands except per share amounts): 23

24 2001 2000 1999 ------- ------- ------- Pro forma net income $91,573 $72,317 $77,891 ======= ======= ======= Pro forma basic earnings per share $ .95 $ .76 $ .79 ======= ======= ======= Pro forma diluted earnings per share $ .93 $ .72 $ .74 ======= ======= ======= Option valuation models are used in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility and the average life of options. Because the Company's stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options. In addition, the pro forma net income and earnings per share amounts shown above for fiscal 2001, 2000 and 1999 do not include the effect of any grants made prior to fiscal 1996. SHARE PURCHASE RIGHTS PLAN - On December 9, 1994, the Board of Directors adopted a Share Purchase Rights Plan and declared a dividend of one common stock purchase right (a "Right") payable on each outstanding share of the Company's common stock on December 21, 1994, and authorized the issuance of Rights for subsequently issued shares of common stock. The Rights, which will expire on December 21, 2004, are initially not exercisable, and until becoming exercisable will trade only with the associated common stock. After the Rights become exercisable, each Right entitles the holder to purchase at a specified exercise price one share of common stock. The Rights will become exercisable after the earlier to occur of (i) ten days following a public announcement that a person or group of affiliated or associated persons have acquired beneficial ownership of 15% or more of the outstanding common stock or (ii) ten business days (or such later date as determined by the Board of Directors) following the commencement of, or announcement of an intention to make, a tender or exchange offer the consummation of which would result in beneficial ownership by a person or group of 15% or more of the outstanding common stock. If the Company were acquired in a merger or other business combination transaction or 50% or more of its consolidated assets or earning power were sold, proper provision would be made so that each Right would entitle its holder to purchase, upon the exercise of the Right at the then current exercise price (currently the exercise price is $14.81), that number of shares of common stock of the acquiring company having a market value of twice the exercise price of the Right. If any person or group were to acquire beneficial ownership of 15% or more of the Company's outstanding common stock, each Right would entitle its holder (other than such acquiring person whose Rights would become void) to purchase, upon the exercise of the Right at the then current exercise price, that number of shares of the Company's common stock having a market value on the date of such 15% acquisition of twice the exercise price of the Right. The Board of Directors may at its option, at any time after such 15% acquisition but prior to the acquisition of more than 50% of the Company's outstanding common stock, exchange all or part of the then outstanding and exercisable Rights (other than those held by such acquiring person whose Rights would become void) for common stock at an exchange rate per Right of one-half the number of shares of common stock receivable upon exercise of a Right. The Board of Directors may, at any time prior to such 15% acquisition, redeem all the Rights at a redemption price of $.01 per Right. SHARES RESERVED FOR FUTURE ISSUANCES - As of March 3, 2001, the Company had approximately 119,028,000 shares reserved for future issuances under the stock plans and the share purchase rights plan. NOTE 9 - INCOME TAXES The provision for income taxes for each of the last three fiscal years consists of (in thousands): 24

25 2001 2000 1999 -------- -------- -------- Federal: Current $ 50,455 $ 39,463 $ 47,007 Deferred 583 355 (2,948) State: Current 3,368 1,890 5,112 Deferred 152 1,370 (378) Foreign: Current 1,032 809 460 -------- -------- -------- $ 55,590 $ 43,887 $ 49,253 ======== ======== ======== Deferred tax assets at March 3, 2001 and February 26, 2000 are comprised of the following (in thousands): 2001 2000 -------- -------- Deferred tax assets: Inventory $ 1,727 $ 4,339 Deferred compensation 7,292 5,268 Accrued average rent 7,784 7,254 Losses on a foreign subsidiary 3,301 2,497 Self insurance reserves 910 2,049 Fixed assets, net 795 441 Other 2,326 1,637 -------- -------- 24,135 23,485 Valuation allowance (3,301) (1,916) -------- -------- Net deferred tax assets $ 20,834 $ 21,569 ======== ======== The Company has settled and closed all Internal Revenue Service ("IRS") examinations of the Company's tax returns for all years through fiscal 1999. Subsequent years are not yet under IRS audit. At February 26, 2000, the net capital loss carryforward for income tax purposes of approximately $3.2 million expired. For financial reporting purposes, a valuation allowance remains at March 3, 2001 to partially offset the deferred tax asset relating to the losses of a foreign subsidiary. Undistributed earnings of the Company's non-U.S. subsidiaries amounted to approximately $19.4 million at March 3, 2001. These earnings are considered to be indefinitely reinvested and, accordingly, no additional U.S. income taxes or non-U.S. withholding taxes have been provided. Determination of the amount of additional taxes that would be payable if such earnings were not considered indefinitely reinvested is not practical. The difference between income taxes at the statutory federal income tax rate of 35% in fiscal 2001, 2000 and 1999, and income tax reported in the consolidated statements of operations is as follows (in thousands): 25

26 2001 2000 1999 -------- -------- -------- Tax at statutory federal tax rate $ 52,584 $ 41,514 $ 45,364 State income taxes, net of federal benefit 3,200 2,526 5,832 Work opportunity tax credit, foreign tax credit and R&E credit (207) (283) (327) Net foreign income taxed at lower rates (1,048) (960) (517) Other, net 1,061 1,090 (1,099) -------- -------- -------- $ 55,590 $ 43,887 $ 49,253 ======== ======== ======== NOTE 10 - 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 2015. Most retail store locations are leased for initial terms of 10 to 15 years with varying renewal options and rent escalation clauses. Certain leases provide for additional rental payments based on a percentage of sales in excess of a specified base. The Company's lease obligations are considered operating leases, and all payments are reflected in the accompanying consolidated statements of operations. During fiscal 2000, the Company sold certain store properties for $19.3 million. These stores were leased back from unaffiliated third parties for periods of ten years. The resulting leases are being accounted for as operating leases. The Company deferred gains of $3.3 million in fiscal 2000 on these sale-leaseback transactions; the gains are being amortized over the initial lives of the leases. Future minimum lease commitments of these operating leases are included in the summary below of the Company's operating leases. The Company had no sale-leaseback transactions in fiscal 2001. At March 3, 2001, the Company had the following minimum lease commitments in the years indicated (in thousands): Operating Fiscal year Leases - ----------- --------- 2002 $139,589 2003 132,924 2004 124,574 2005 111,225 2006 99,131 Thereafter 333,485 -------- Total lease commitments $940,928 ======== Present value of total operating lease commitments at 10% $624,987 ======== Rental expense incurred was $144,035,000, $131,835,000 and $114,966,000, including contingent rentals of $979,000, $794,000 and $884,000, based upon a percentage of sales, and net of sublease incomes totaling $2,650,000, $2,141,000 and $1,511,000 in fiscal 2001, 2000 and 1999, respectively. 26

27 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 3, 2001; however, the Company considers them to be ordinary and routine in nature. The Company maintains liability insurance against most of these claims. While certain of the lawsuits involve substantial amounts, it is the opinion of management, after consultation with counsel, that the ultimate resolution of such litigation will not have a material adverse effect on the Company's financial position, results of operations or liquidity. NOTE 11 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) Summarized quarterly financial data for the years ended March 3, 2001 and February 26, 2000 are set forth below (in thousands except per share amounts): Three Months Ended ------------------------------------------------ Fiscal 2001 5/27/2000 8/26/2000 11/25/2000 3/3/2001 - ----------- --------- --------- ---------- -------- Net sales $299,528 337,991 343,493 430,486 Gross profit $126,646 135,616 147,160 185,033 Net income $ 16,877 17,715 23,569 36,489 Basic earnings per share $ .17 .18 .25 .38 Diluted earnings per share $ .17 .18 .24 .38 Three Months Ended ------------------------------------------------ Fiscal 2000 5/29/1999 8/28/1999 11/27/1999 2/26/2000 - ----------- --------- --------- ---------- -------- Net sales $261,002 291,787 298,223 380,083 Gross profit $110,083 113,212 126,029 163,224 Net income $ 12,645 11,886 16,151 34,043 Basic earnings per share $ .13 .12 .17 .36 Diluted earnings per share $ .13 .12 .16 .34 27

28 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 2001 and 2000. Market Price -------------------- Cash Dividends Fiscal 2001 High Low per Share(1) - ----------- -------- -------- -------------- First quarter $11.8750 $ 7.8750 $ .03 Second quarter 12.7500 8.5000 .04 Third quarter 14.0000 10.4375 .04 Fourth quarter 13.8750 8.1875 .04 Market Price -------------------- Cash Dividends Fiscal 2000 High Low per Share(1) - ----------- -------- -------- -------------- First quarter $11.6875 $ 7.0625 $ .03 Second quarter 12.2500 5.6875 .03 Third quarter 7.2500 5.3750 .03 Fourth quarter 9.1875 5.9375 .03 (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. 28

1 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 business trust Pier 1 National Bank, a national banking association

1 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 10, 2001, included in the 2001 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 10, 2001, 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 3, 2001. /s/ Ernst & Young LLP Fort Worth, Texas May 29, 2001