Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

 

For the quarterly period ended November 28, 2009

 

OR

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from               to              

 

Commission file number 001-07832

 

 

PIER 1 IMPORTS, INC.

 

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

 

 

75-1729843

 

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification Number)

 

 

100 Pier 1 Place, Fort Worth, Texas 76102

 

(Address of principal executive offices, including zip code)

 

 

 

 

(817) 252-8000

 

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (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 registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes x. No o.

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

o

 

Accelerated filer

x

 

 

 

 

 

 

 

Non-accelerated filer

o

 

Smaller reporting company

o

 

(Do not check if a smaller reporting company)

 

 

 

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o No x

 

As of January 4, 2010, 115,588,500 shares of the registrant’s common stock, $0.001 par value, were outstanding.

 

 

 



Table of Contents

 

PIER 1 IMPORTS, INC.

 

INDEX TO QUARTERLY FORM 10-Q

 

 

 

Page

PART I. FINANCIAL INFORMATION

 

 

 

 

 

Item 1.

Financial Statements

 

 

 

Consolidated Statements of Operations for the Three and Nine Months Ended November 28, 2009 and November 29, 2008

3

 

 

Consolidated Balance Sheets as of November 28, 2009, February 28, 2009 and November 29, 2008

4

 

 

Consolidated Statements of Cash Flows for the Nine Months Ended November 28, 2009 and November 29, 2008

5

 

 

Consolidated Statement of Shareholders’ Equity for the Nine Months Ended November 28, 2009

6

 

 

Notes to Consolidated Financial Statements

7

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

21

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

31

 

 

 

Item 4.

Controls and Procedures

31

 

 

PART II. OTHER INFORMATION

 

 

 

Item 1.

Legal Proceedings

31

 

 

 

Item 1A.

Risk Factors

31

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

31

 

 

 

Item 3.

Defaults upon Senior Securities

32

 

 

 

Item 4.

Submission of Matters to a Vote of Security Holders

32

 

 

 

Item 5.

Other Information

32

 

 

 

Item 6.

Exhibits

32

 

 

Signatures

 

33

 

2



Table of Contents

 

PART I

 

Item 1.        Financial Statements.

 

PIER I IMPORTS, INC.

 

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands except per share amounts)

(unaudited)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

November 28,

 

November 29,

 

November 28,

 

November 29,

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

327,075

 

$

300,906

 

$

894,878

 

$

931,420

 

 

 

 

 

 

 

 

 

 

 

Operating costs and expenses:

 

 

 

 

 

 

 

 

 

Cost of sales (including buying and store occupancy costs)

 

207,215

 

213,015

 

608,616

 

669,788

 

Selling, general and administrative expenses

 

111,620

 

115,339

 

308,218

 

331,750

 

Depreciation and amortization

 

5,469

 

7,321

 

17,281

 

23,511

 

 

 

324,304

 

335,675

 

934,115

 

1,025,049

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

2,771

 

(34,769

)

(39,237

)

(93,629

)

 

 

 

 

 

 

 

 

 

 

Nonoperating (income) and expenses:

 

 

 

 

 

 

 

 

 

Interest and investment income

 

(392

)

(1,274

)

(1,348

)

(3,616

)

Interest expense

 

16,041

 

3,804

 

21,986

 

11,105

 

Gain on retirement of debt

 

 

 

(49,654

)

 

Other loss (income)

 

3,904

 

(632

)

(6,946

)

(1,920

)

 

 

19,553

 

1,898

 

(35,962

)

5,569

 

 

 

 

 

 

 

 

 

 

 

Loss before income taxes

 

(16,782

)

(36,667

)

(3,275

)

(99,198

)

Income tax (benefit) provision

 

(55,595

)

188

 

(55,622

)

637

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

38,813

 

$

(36,855

)

$

52,347

 

$

(99,835

)

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per share:

 

 

 

 

 

 

 

 

 

Basic and diluted

 

$

0.37

 

$

(0.41

)

$

0.55

 

$

(1.12

)

 

 

 

 

 

 

 

 

 

 

Average shares outstanding during period:

 

 

 

 

 

 

 

 

 

Basic and diluted

 

104,384

 

88,885

 

95,649

 

88,761

 

 

The accompanying notes are an integral part of these financial statements.

 

3



Table of Contents

 

PIER 1 IMPORTS, INC.

 

CONSOLIDATED BALANCE SHEETS

(in thousands except share amounts)

(unaudited)

 

 

 

November 28,

 

February 28,

 

November 29,

 

 

 

2009

 

2009

 

2008

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents, including temporary investments of $59,322, $142,523 and $105,897, respectively

 

$

74,549

 

$

155,798

 

$

117,438

 

Accounts receivable, net

 

23,664

 

17,566

 

22,776

 

Inventories

 

339,599

 

316,331

 

398,724

 

Income tax receivable

 

56,915

 

2,149

 

2,788

 

Prepaid expenses and other current assets

 

42,929

 

41,883

 

46,099

 

Total current assets

 

537,656

 

533,727

 

587,825

 

 

 

 

 

 

 

 

 

Other properties, net of accumulated depreciation of $433,805, $432,412 and $427,702, respectively

 

59,638

 

85,135

 

95,977

 

Other noncurrent assets

 

33,654

 

36,600

 

38,655

 

 

 

$

 630,948

 

$

655,462

 

$

722,457

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

75,300

 

$

80,695

 

$

98,372

 

Gift cards and other deferred revenue

 

43,758

 

47,332

 

51,407

 

Accrued income taxes payable

 

4,750

 

4,434

 

5,123

 

Other accrued liabilities

 

117,289

 

101,350

 

113,445

 

Total current liabilities

 

241,097

 

233,811

 

268,347

 

 

 

 

 

 

 

 

 

Long-term debt

 

35,400

 

184,000

 

184,000

 

Other noncurrent liabilities

 

85,598

 

93,390

 

98,511

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

Common stock, $0.001 par, 500,000,000 shares authorized, 125,232,000, 100,779,000 and 100,779,000 issued, respectively

 

125

 

101

 

101

 

Paid-in capital

 

269,539

 

214,004

 

224,792

 

Retained earnings

 

159,188

 

106,841

 

136,259

 

Cumulative other comprehensive income (loss)

 

457

 

(1,195

)

(1,880

)

Less — 10,020,000, 10,905,000 and 11,661,000 common shares in treasury, at cost, respectively

 

(160,456

)

(175,490

)

(187,673

)

 

 

268,853

 

144,261

 

171,599

 

Commitments and contingencies

 

 

 

 

 

 

$

 630,948

 

$

655,462

 

$

722,457

 

 

The accompanying notes are an integral part of these financial statements.

 

4



Table of Contents

 

PIER 1 IMPORTS, INC

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

 

 

Nine Months Ended

 

 

 

November 28,

 

November 29,

 

 

 

2009

 

2008

 

Cash flow from operating activities:

 

 

 

 

 

Net income (loss)

 

$

52,347

 

$

(99,835

)

Adjustments to reconcile to net cash (used in) provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

25,048

 

33,643

 

Loss on disposal of fixed assets

 

202

 

94

 

Loss on impairment of fixed assets

 

 

4,606

 

Stock-based compensation expense

 

2,861

 

4,215

 

Deferred compensation

 

2,875

 

3,156

 

Lease termination expense

 

7,439

 

4,557

 

Amortization of deferred gains

 

(5,880

)

(4,795

)

Gain on retirement of convertible bonds

 

(49,654

)

 

Charges related to the conversion of 9% Convertible Notes

 

18,308

 

 

Other

 

3,486

 

(1,509

)

Changes in cash from:

 

 

 

 

 

Inventories

 

(23,268

)

12,985

 

Accounts receivable, prepaid expenses and other current assets

 

(3,415

)

(11,659

)

Income taxes receivable

 

(54,766

)

13,847

 

Accounts payable and accrued expenses

 

(4,825

)

(28,697

)

Accrued income taxes payable

 

316

 

(931

)

Defined benefit plan liabilities

 

(1,754

)

(89

)

Make whole interest provision on 9% Convertible Notes

 

(13,782

)

 

Other noncurrent assets

 

(313

)

291

 

Other noncurrent liabilities

 

(18

)

(770

)

Net cash used in operating activities

 

(44,793

)

(70,891

)

 

 

 

 

 

 

Cash flow from investing activities:

 

 

 

 

 

Capital expenditures

 

(3,229

)

(11,326

)

Proceeds from disposition of properties

 

717

 

102,455

 

Proceeds from sale of restricted investments

 

3,440

 

1,483

 

Purchase of restricted investments

 

(3,200

)

(944

)

Collection of notes receivable

 

1,500

 

1,500

 

Net cash (used in) provided by investing activities

 

(772

)

93,168

 

 

 

 

 

 

 

Cash flow from financing activities:

 

 

 

 

 

Proceeds from stock options exercised, stock purchase plan and other, net

 

317

 

1,728

 

Retirement of convertible bonds

 

(31,593

)

 

Debt issuance costs

 

(4,408

)

 

Net cash (used in) provided by financing activities

 

(35,684

)

1,728

 

 

 

 

 

 

 

Change in cash and cash equivalents

 

(81,249

)

24,005

 

Cash and cash equivalents at beginning of period

 

155,798

 

93,433

 

Cash and cash equivalents at end of period

 

$

74,549

 

$

117,438

 

 

The accompanying notes are an integral part of these financial statements.

 

5



Table of Contents

 

PIER 1 IMPORTS, INC.

 

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

FOR THE NINE MONTHS ENDED NOVEMBER 28, 2009

(in thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

Cumulative

 

 

 

 

 

 

 

Common Stock

 

 

 

 

 

Other

 

 

 

Total

 

 

 

Outstanding

 

 

 

Paid-in

 

Retained

 

Comprehensive

 

Treasury

 

Shareholders’

 

 

 

Stock

 

Amount

 

Capital

 

Earnings

 

Income (Loss)

 

Stock

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance February 28, 2009

 

89,874

 

$

101

 

$

 214,004

 

$

 106,841

 

$

(1,195

)

$

 (175,490

)

$

144,261

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

52,347

 

 

 

52,347

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pension adjustments

 

 

 

 

 

716

 

 

716

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Currency translation adjustments

 

 

 

 

 

936

 

 

936

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

53,999

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restricted stock compensation

 

(71

)

 

2,371

 

 

 

(1,151

)

1,220

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock option compensation expense

 

 

 

1,641

 

 

 

 

1,641

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock purchase plan, directors deferred, and other

 

957

 

 

(15,868

)

 

 

16,185

 

317

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adoption of new accounting guidance on convertible debt

 

 

 

2,818

 

 

 

 

2,818

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beneficial Conversion Feature of 9% Convertible Notes

 

 

 

3,343

 

 

 

 

3,343

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Conversion of 9% Notes

 

24,453

 

24

 

61,230

 

 

 

 

61,254

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance November 28, 2009

 

115,213

 

$

125

 

$

 269,539

 

$

 159,188

 

$

457

 

$

 (160,456

)

$

268,853

 

 

The accompanying notes are an integral part of these financial statements.

 

6



Table of Contents

 

PIER 1 IMPORTS, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED NOVEMBER 28, 2009

AND NOVEMBER 29, 2008

(unaudited)

 

Throughout this report, references to the “Company” include Pier 1 Imports, Inc. and all its consolidated subsidiaries.  The accompanying unaudited financial statements should be read in conjunction with the Form 10-K for the year ended February 28, 2009.  All adjustments that are, in the opinion of management, necessary for a fair presentation of the financial position as of November 28, 2009, and the results of operations and cash flows for the three and nine months ended November 28, 2009 and November 29, 2008 have been made and consist only of normal recurring adjustments, except as otherwise described herein.  The results of operations for the three and nine months ended November 28, 2009 and November 29, 2008, are not indicative of results to be expected for the fiscal year because of, among other things, seasonality factors in the retail business.  Historically, the strongest sales of the Company’s products have occurred during the holiday season beginning in November and continuing through December.  The Company conducts business as one operating segment.  The classification of certain amounts previously reported in the consolidated balance sheets and consolidated statements of cash flows for the nine months ended November 29, 2008, has been modified to conform to the November 28, 2009 method of presentation.

 

Note 1 — Earnings (loss) per share

 

Basic earnings (loss) per share amounts were determined by dividing net income (loss) by the weighted average number of common shares outstanding for the period.  Diluted earnings (loss) per share amounts were similarly computed, but would have included the effect, if dilutive, of the Company’s weighted average number of stock options outstanding and shares of unvested restricted stock.  As the effect would have been antidilutive, all 12,048,869 and 12,933,535 stock options outstanding and shares of unvested restricted stock were excluded from the computation of the third quarter and year-to-date earnings (loss) per share for fiscal 2010 and fiscal 2009, respectively.  Additionally, the common stock issuable under the Company’s convertible notes prior to their conversion and the related interest expense were also excluded from the diluted earnings per share calculation as the effect would have been antidilutive.  Earnings (loss) per share for the three and nine months ended November 28, 2009 and November 29, 2008 was calculated as follows (in thousands except per share amounts):

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

November 28,

 

November 29,

 

November 28,

 

November 29,

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

 

 

 

 

 

 

 

 

Net income (loss), basic and diluted

 

$

38,813

 

$

(36,855

)

$

52,347

 

$

(99,835

)

 

 

 

 

 

 

 

 

 

 

Average shares outstanding:

 

 

 

 

 

 

 

 

 

Basic and diluted

 

104,384

 

88,885

 

95,649

 

88,761

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per share:

 

 

 

 

 

 

 

 

 

Basic and diluted

 

$

0.37

 

$

(0.41

)

$

0.55

 

$

(1.12

)

 

7



Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

Note 2 — Comprehensive income (loss)

 

The components of comprehensive income (loss) for the three and nine months ended November 28, 2009 and November 29, 2008 were as follows (in thousands):

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

November 28,

 

November 29,

 

November 28,

 

November 29,

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

38,813

 

$

(36,855

)

$

52,347

 

$

(99,835

)

Currency translation adjustments

 

287

 

(2,223

)

936

 

(3,354

)

Pension adjustments

 

107

 

335

 

716

 

1,101

 

 

 

 

 

 

 

 

 

 

 

Total comprehensive income (loss)

 

$

39,207

 

$

(38,743

)

$

53,999

 

$

(102,088

)

 

Note 3 — Stock-based compensation

 

The Company accounts for share-based compensation transactions in accordance with the applicable accounting guidance which requires all companies to measure and recognize compensation expense at an amount equal to the fair value of share-based payments granted under compensation arrangements.  The fair values for options granted during the respective periods were estimated as of the date of grant using the Black-Scholes option-pricing model and are amortized on a straight-line basis as compensation expense over the vesting periods of the options.  For the three and nine months ended November 28, 2009, the Company recorded stock-based compensation expense related to stock options and restricted stock of $645,000, or less than $0.01 per share, and $2,861,000, or $0.03 per share, respectively.  For the three and nine months ended November 29, 2008, the Company recorded stock-based compensation expense (benefit) related to stock options and restricted stock of ($287,000), or less than ($0.01) per share, and $4,215,000, or $0.05 per share, respectively.  During the third quarter of fiscal 2009, the Company reversed $1,420,000 in stock-based compensation expense related to a performance stock option grant, which was no longer considered probable to vest.  The Company recognized no net tax benefit related to stock-based compensation during the first nine months of fiscal 2010 or fiscal 2009 as a result of the Company’s valuation allowance on all deferred tax assets in both years.

 

As of November 28, 2009, there was approximately $1,911,000 of total unrecognized compensation expense related to unvested stock option awards that is expected to be recognized over a weighted average period of 1.6 years and $1,515,000 of total unrecognized compensation expense related to restricted stock that is expected to be recognized over a weighted average period of 1.1 years.

 

Note 4 — Costs associated with exit activities

 

As part of the ordinary course of business, the Company terminates leases prior to their expiration when certain stores or distribution center facilities are closed or relocated as deemed necessary by the evaluation of its real estate portfolio.  These decisions are based on store profitability, lease renewal obligations, relocation space availability, local market conditions and prospects for future profitability. In connection with these lease terminations, the Company has recorded estimated liabilities in accordance with applicable accounting guidance.  At the time of closure, neither the write-off of fixed assets nor the write-down of inventory related to such stores was material.  Additionally, employee severance costs associated with these closures were not significant.  The estimated liabilities were recorded based upon the Company’s remaining lease obligations less estimated subtenant rental income.  Revisions during the periods presented related to changes in estimated buyout terms or subtenant receipts expected on closed facilities.  Expenses related to lease termination obligations are included in selling, general and administrative expenses in the Company’s

 

8



Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

consolidated statements of operations.  The following table represents a rollforward of the liability balances for the nine months ended November 28, 2009 and November 29, 2008 related to these closures (in thousands):

 

 

 

Nine Months Ended

 

 

 

November 28,

 

November 29,

 

 

 

2009

 

2008

 

 

 

 

 

 

 

Beginning of period

 

$

4,998

 

$

5,628

 

 

 

 

 

 

 

Original charges

 

4,708

 

3,839

 

Revisions

 

2,731

 

718

 

Cash payments

 

(6,792

)

(4,192

)

 

 

 

 

 

 

End of period

 

$

5,645

 

$

5,993

 

 

Total costs of lease terminations related to store closures are currently anticipated to be approximately $8,000,000 for fiscal 2010.  Of this amount, the Company incurred $621,000 in lease termination costs in the third quarter of fiscal 2010 and $7,439,000 for the year-to-date period.

 

Note 5 — Long-term debt and available credit

 

Long-term debt is summarized as follows at November 28, 2009 and November 29, 2008 (in thousands):

 

 

 

November 28,

 

November 29,

 

 

 

2009

 

2008

 

 

 

 

 

 

 

6.375% Convertible Senior Notes

 

$

16,577

 

165,000

 

Less Debt Discount

 

(177

)

 

 

 

16,400

 

165,000

 

 

 

 

 

 

 

Industrial Revenue Bonds

 

19,000

 

19,000

 

 

 

 

 

 

 

Long-term debt

 

$

35,400

 

$

184,000

 

 

During the first quarter of fiscal 2010, a foreign subsidiary of the Company purchased $78,941,000 of the Company’s outstanding 6.375% convertible senior notes due 2036 (the “6.375% Notes”) in privately negotiated transactions at a purchase price of $27,399,000, including accrued interest.  The Company recognized a gain of $47,811,000 in connection with this transaction.  During August 2009, the $78,941,000 in 6.375% Notes were retired by the Company.

 

During the second quarter of fiscal 2010, the Company entered into separate privately negotiated exchange agreements under which it retired $64,482,000 of the Company’s outstanding 6.375% Notes.  Under the exchange agreements, the exchanging holders received $61,255,000 in aggregate principal of the Company’s new 9% convertible senior notes due 2036 (the “9% Notes”).  In addition to this exchange, the Company also purchased $5,000,000 of the outstanding 6.375% Notes for $4,750,000 in cash.  The Company recognized a net gain of $1,843,000 related to these transactions during the second quarter of fiscal 2010. Currently $16,577,000 of the Company’s 6.375% Notes remain outstanding.  The fair value of the 6.375% Notes was $15,662,000 and $116,969,000 based on quoted market values as of November 28, 2009 and November 29, 2008, respectively.

 

During the third quarter of fiscal 2010, all $61,255,000 of the Company’s recently issued 9% Notes converted into shares of the Company’s common stock.  The 9% Notes were convertible into shares of

 

9



Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

the Company’s common stock at a conversion rate of 399.2016 shares for each $1,000 principal amount, representing a conversion price of $2.5050 per share.  The Company issued 24,453,065 shares of common stock as a result of the complete conversion of the 9% Notes.  Interest on the outstanding balance of the 9% Notes was payable at a rate of 9% per year and all accrued interest was paid to the holders at the time of conversion.  During the quarter, the Company incurred non-operating charges of $18,308,000 to record amortization of the remaining debt issuance costs and debt discounts of $13,616,000, and a $4,692,000 derivative fair value adjustment, as discussed in more detail below.

 

The 9% Notes contained make-whole interest provisions.  During the third quarter of fiscal 2010, all of the holders voluntarily converted their 9% Notes into common stock and pursuant to the indenture, received additional make-whole interest at that time equal to 2.5 years of interest.  The cash payment of make-whole interest totaled $13,782,000. The Company separately accounted for the additional interest payment feature of the 9% Notes as an embedded derivative instrument.  For the purpose of accounting for the 9% Notes, the fair value of this embedded derivative upon issuance reduced the carrying value of the debt and was reflected as a debt discount.  This potential interest payout was initially recorded at its estimated fair value as both a $9,090,000 derivative liability and a $9,090,000 discount to the 9% Notes.  The potential interest payout fair value measurement fell within the Level 3 fair value hierarchy.  Level 3 measurements are model-driven valuations in which one or more significant inputs or value-drivers are unobservable.  The fair value of the potential interest payout was determined based on the probability of when holders of the 9% Notes would convert their notes into shares of the Company’s common stock and assumptions regarding the Company’s common stock price.  During the third quarter, the fair value of this derivative for the make-whole interest provision was adjusted to its current fair value of $13,782,000, which resulted in a $4,692,000 charge to other nonoperating expense during the period.

 

The 9% Notes also included a beneficial conversion feature because the price of the Company’s common stock on the issuance date of the notes exceeded the effective conversion price.  In accordance with applicable accounting guidance, the Company recorded a $3,343,000 discount to the 9% Notes and a $3,343,000 addition to paid-in-capital representing the intrinsic value of the beneficial conversion feature.

 

The two underlying features described above resulted in a total debt discount of $12,433,000 and an initial carrying amount of the 9% Notes on the Company’s balance sheet of $48,822,000 compared to a face amount of $61,255,000.  When the notes were converted into common stock during the third quarter, the remaining unamortized debt discount and debt issuance costs of $13,616,000 were charged to interest expense at that time.

 

Effective March 1, 2009, the Company adopted the new guidance on “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)”, which clarifies that issuers of convertible debt instruments that may be settled wholly or partially in cash upon conversion should separately account for the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods.  The 6.375% Notes are convertible into cash and, if applicable, shares of the Company’s common stock.  In accordance with the new guidance, the Company estimated the fair value of the debt component of the 6.375% Notes as of the date of their issuance using an income approach by discounting the present value of future payments associated with the notes, assuming no conversion features.  The Company did not apply the provisions of the new guidance retrospectively on its 6.375% Notes as it determined that the effect on prior periods was not material.  The impact of adoption representing the remaining value of the equity component of the 6.375% Notes as of the beginning of the fiscal year was $2,818,000, recorded as a reduction in carrying value of the notes and an increase in additional paid-in capital.  This amount was to be amortized as interest expense over the remaining life of the 6.375% Notes, or through February 2011. However, as a result of the retirement and exchange of the majority of the 6.375% Notes as discussed above, the Company’s gain on the transactions included the write-off of a portion of this unamortized discount.  As of November 28, 2009, the remaining unamortized discount related to the 6.375% Notes totaled $177,000.

 

10



Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

As a result of the put feature of the 6.375% Notes, the Company anticipates that the remainder of the 6.375% Notes will have to be repaid on or before February 15, 2011.  The Notes are included in fiscal 2011 long-term debt maturities in the table below.  Long-term debt matures as follows (in thousands):

 

 

 

Long-term

 

Fiscal Year

 

Debt

 

 

 

 

 

2010

 

 

2011

 

16,577

 

2012

 

 

2013

 

 

2014

 

 

Thereafter

 

19,000

 

 

 

35,577

 

Debt discount

 

(177

)

Total long-term debt

 

$

35,400

 

 

Effective July 30, 2009, the Company amended its secured credit facility which matures in May 2012.  The amendment reduced the total commitment amount to $300,000,000, removed real estate from eligibility for inclusion in the calculation of the borrowing base, increased applicable interest rate spreads and redefined permitted uses, liens, indebtedness, acquisitions, and restricted payments.  In addition, the amendment updated certain provisions to allow for the refinance or repurchase of the balance of the Company’s 6.375% Notes and 9% Notes, as well as repurchases of the Company’s outstanding common stock.  As of November 28, 2009, the Company had no outstanding cash borrowings and had utilized $96,799,000 in letters of credit and bankers’ acceptances.  Should the availability under this facility be less than $30,000,000, the Company will be required to comply with a fixed charge coverage ratio as stated in the agreement.  As of November 28, 2009, the Company’s calculated borrowing base was $273,390,000.  After excluding the required minimum of $30,000,000 and the $96,799,000 in utilized letters of credit and bankers’ acceptances from the borrowing base, $146,591,000 remained available for cash borrowings.

 

Note 6 — Condensed financial statements

 

The Company’s 6.375% Notes are and the 9% Notes were both fully and unconditionally guaranteed, on a joint and several basis, by all of the Company’s material domestic consolidated subsidiaries (the “Guarantor Subsidiaries”).  The subsidiaries that do not guarantee such Notes are comprised of the Company’s foreign subsidiaries and certain other insignificant domestic consolidated subsidiaries (the “Non-Guarantor Subsidiaries”).  Each of the Guarantor Subsidiaries is wholly owned.  In lieu of providing separate audited financial statements for the Guarantor Subsidiaries, condensed consolidating financial information is presented below.

 

11



Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS

Three Months Ended November 28, 2009

(in thousands)

(unaudited)

 

 

 

Pier 1
Imports, Inc.

 

Guarantor
Subsidiaries

 

Non-
Guarantor
Subsidiaries

 

Eliminations

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

 

$

325,168

 

$

2,854

 

$

(947

)

$

327,075

 

Cost of sales (including buying and store occupancy costs)

 

 

205,667

 

2,495

 

(947

)

207,215

 

Selling, general and administrative (including depreciation and amortization)

 

349

 

116,563

 

177

 

 

117,089

 

Operating income (loss)

 

(349

)

2,938

 

182

 

 

2,771

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonoperating expenses

 

16,699

 

2,853

 

1

 

 

19,553

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

(17,048

)

85

 

181

 

 

(16,782

)

Provision (benefit) for income taxes

 

 

(55,614

)

19

 

 

(55,595

)

Net income (loss) after income taxes

 

(17,048

)

55,699

 

162

 

 

38,813

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) from subsidiaries

 

55,861

 

162

 

 

(56,023

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

38,813

 

$

55,861

 

$

162

 

$

(56,023

)

$

38,813

 

 

CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS

Three Months Ended November 29, 2008

(in thousands)

(unaudited)

 

 

 

Pier 1
Imports, Inc.

 

Guarantor
Subsidiaries

 

Non-
Guarantor
Subsidiaries

 

Eliminations

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

 

$

298,856

 

$

3,790

 

$

(1,740

)

$

300,906

 

Cost of sales (including buying and store occupancy costs)

 

 

211,351

 

3,425

 

(1,761

)

213,015

 

Selling, general and administrative (including depreciation and amortization)

 

489

 

122,107

 

64

 

 

122,660

 

Operating income (loss)

 

(489

)

(34,602

)

301

 

21

 

(34,769

)

 

 

 

 

 

 

 

 

 

 

 

 

Nonoperating (income) expenses

 

(96

)

2,153

 

(159

)

 

1,898

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

(393

)

(36,755

)

460

 

21

 

(36,667

)

Provision for income taxes

 

 

188

 

 

 

188

 

Net income (loss) after income taxes

 

(393

)

(36,943

)

460

 

21

 

(36,855

)

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) from subsidiaries

 

(36,483

)

460

 

 

36,023

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(36,876

)

$

(36,483

)

$

460

 

$

36,044

 

$

(36,855

)

 

12



Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS

Nine Months Ended November 28, 2009

(in thousands)

(unaudited)

 

 

 

Pier 1
Imports, Inc.

 

Guarantor
Subsidiaries

 

Non-
Guarantor
Subsidiaries

 

Eliminations

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

 

$

890,287

 

$

7,339

 

$

(2,748

)

$

894,878

 

Cost of sales (including buying and store occupancy costs)

 

 

605,035

 

6,403

 

(2,822

)

608,616

 

Selling, general and administrative (including depreciation and amortization)

 

1,327

 

323,907

 

265

 

 

325,499

 

Operating income (loss)

 

(1,327

)

(38,655

)

671

 

74

 

(39,237

)

 

 

 

 

 

 

 

 

 

 

 

 

Nonoperating income

 

(32,948

)

(908

)

(2,106

)

 

(35,962

)

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

31,621

 

(37,747

)

2,777

 

74

 

(3,275

)

Provision (benefit) for income taxes

 

 

(55,690

)

68

 

 

(55,622

)

Net income after income taxes

 

31,621

 

17,943

 

2,709

 

74

 

52,347

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) from subsidiaries

 

20,652

 

2,709

 

 

(23,361

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

52,273

 

$

20,652

 

$

2,709

 

$

(23,287

)

$

52,347

 

 

CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS

Nine Months Ended November 29, 2008

(in thousands)

(unaudited)

 

 

 

Pier 1
Imports, Inc.

 

Guarantor
Subsidiaries

 

Non-
Guarantor
Subsidiaries

 

Eliminations

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

 

$

925,124

 

$

11,641

 

$

(5,345

)

$

931,420

 

Cost of sales (including buying and store occupancy costs)

 

 

664,897

 

10,624

 

(5,733

)

669,788

 

Selling, general and administrative (including depreciation and amortization)

 

3,199

 

351,904

 

158

 

 

355,261

 

Operating income (loss)

 

(3,199

)

(91,677

)

859

 

388

 

(93,629

)

 

 

 

 

 

 

 

 

 

 

 

 

Nonoperating (income) expenses

 

(1,285

)

7,198

 

(344

)

 

5,569

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

(1,914

)

(98,875

)

1,203

 

388

 

(99,198

)

Provision for income taxes

 

 

627

 

10

 

 

637

 

Net income (loss) after income taxes

 

(1,914

)

(99,502

)

1,193

 

388

 

(99,835

)

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) from subsidiaries

 

(98,309

)

1,193

 

 

97,116

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(100,223

)

$

(98,309

)

$

1,193

 

$

97,504

 

$

(99,835

)

 

13



Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

CONSOLIDATING CONDENSED BALANCE SHEET

November 28, 2009

(in thousands)

(unaudited)

 

 

 

Pier 1
Imports, Inc.

 

Guarantor
Subsidiaries

 

Non-
Guarantor
Subsidiaries

 

Eliminations

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

23,147

 

$

49,201

 

$

2,201

 

$

 

$

74,549

 

Other accounts receivable, net

 

3

 

21,886

 

1,775

 

 

23,664

 

Inventories

 

 

339,599

 

 

 

339,599

 

Income tax receivable

 

 

56,433

 

482

 

 

56,915

 

Prepaid expenses and other current assets

 

265

 

42,664

 

 

 

42,929

 

Total current assets

 

23,415

 

509,783

 

4,458

 

 

537,656

 

 

 

 

 

 

 

 

 

 

 

 

 

Other properties, net

 

 

55,979

 

3,659

 

 

59,638

 

Investment in subsidiaries

 

38,502

 

16,824

 

 

(55,326

)

 

Other noncurrent assets

 

3,574

 

30,080

 

 

 

33,654

 

 

 

$

65,491

 

$

612,666

 

$

8,117

 

$

(55,326

)

$

630,948

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

31

 

$

75,210

 

$

59

 

$

 

$

75,300

 

Intercompany payable (receivable)

 

(220,154

)

228,969

 

(8,815

)

 

 

Gift cards and other deferred revenue

 

 

43,758

 

 

 

43,758

 

Accrued income taxes payable (receivable)

 

 

4,784

 

(34

)

 

4,750

 

Other accrued liabilities

 

361

 

116,845

 

83

 

 

117,289

 

Total current liabilities

 

(219,762

)

469,566

 

(8,707

)

 

241,097

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

16,400

 

19,000

 

 

 

35,400

 

Other noncurrent liabilities

 

 

85,598

 

 

 

85,598

 

Shareholders’ equity (deficit)

 

268,853

 

38,502

 

16,824

 

(55,326

)

268,853

 

 

 

$

65,491

 

$

612,666

 

$

8,117

 

$

(55,326

)

$

630,948

 

 

14



Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

CONSOLIDATING CONDENSED BALANCE SHEET

February 28, 2009

(in thousands)

(unaudited)

 

 

 

Pier 1
Imports, Inc.

 

Guarantor
Subsidiaries

 

Non-
Guarantor
Subsidiaries

 

Eliminations

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

61,648

 

$

62,399

 

$

31,751

 

$

 

$

155,798

 

Other accounts receivable, net

 

2

 

15,684

 

1,880

 

 

17,566

 

Inventories

 

 

316,245

 

86

 

 

316,331

 

Income tax receivable

 

 

1,667

 

482

 

 

2,149

 

Prepaid expenses and other current assets

 

100

 

41,783

 

 

 

41,883

 

Total current assets

 

61,750

 

437,778

 

34,199

 

 

533,727

 

 

 

 

 

 

 

 

 

 

 

 

 

Other properties, net

 

 

81,398

 

3,737

 

 

85,135

 

Investment in subsidiaries

 

16,125

 

45,262

 

 

(61,387

)

 

Other noncurrent assets

 

5,525

 

31,075

 

 

 

36,600

 

 

 

$

83,400

 

$

595,513

 

$

37,936

 

$

(61,387

)

$

655,462

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

116

 

$

80,288

 

$

291

 

$

 

$

80,695

 

Intercompany payable (receivable)

 

(226,635

)

234,163

 

(7,528

)

 

 

Gift cards and other deferred revenue

 

 

47,332

 

 

 

47,332

 

Accrued income taxes payable (receivable)

 

48

 

4,553

 

(167

)

 

4,434

 

Other accrued liabilities

 

610

 

100,662

 

78

 

 

101,350

 

Total current liabilities

 

(225,861

)

466,998

 

(7,326

)

 

233,811

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

165,000

 

19,000

 

 

 

184,000

 

Other noncurrent liabilities

 

 

93,390

 

 

 

93,390

 

Shareholders’ equity

 

144,261

 

16,125

 

45,262

 

(61,387

)

144,261

 

 

 

$

83,400

 

$

595,513

 

$

37,936

 

$

(61,387

)

$

655,462

 

 

15



Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

CONSOLIDATING CONDENSED BALANCE SHEET

November 29, 2008

(in thousands)

(unaudited)

 

 

 

Pier 1
Imports, Inc.

 

Guarantor
Subsidiaries

 

Non-
Guarantor
Subsidiaries

 

Eliminations

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

43,081

 

$

51,804

 

$

22,553

 

$

 

$

117,438

 

Accounts receivable, net

 

3

 

20,988

 

1,785

 

 

22,776

 

Inventories

 

 

398,724

 

 

 

398,724

 

Income tax receivable

 

 

2,329

 

459

 

 

2,788

 

Prepaid expenses and other current assets

 

124

 

45,975

 

 

 

46,099

 

Total current assets

 

43,208

 

519,820

 

24,797

 

 

587,825

 

 

 

 

 

 

 

 

 

 

 

 

 

Office building and related assets

 

 

 

 

 

 

Other properties, net

 

 

92,215

 

3,762

 

 

95,977

 

Investment in subsidiaries

 

45,381

 

45,182

 

 

(90,563

)

 

Other noncurrent assets

 

5,791

 

32,864

 

 

 

38,655

 

 

 

$

94,380

 

$

690,081

 

$

28,559

 

$

(90,563

)

$

722,457

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities: