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 August 29, 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

 

(I.R.S. Employer

incorporation or organization)

 

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 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 September 29, 2009, 90,847,878 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 Six Months Ended August 29, 2009 and August 30, 2008

3

 

 

 

 

Consolidated Balance Sheets as of August 29, 2009, February 28, 2009 and August 30, 2008

4

 

 

 

 

Consolidated Statements of Cash Flows for the Six Months Ended August 29, 2009 and August 30, 2008

5

 

 

 

 

Consolidated Statement of Shareholders’ Equity for the Six Months Ended August 29, 2009

6

 

 

 

 

Notes to Consolidated Financial Statements

7

 

 

Item 2.

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

22

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

32

 

 

 

Item 4.

Controls and Procedures

32

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

32

 

 

 

Item 1A.

Risk Factors

32

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

32

 

 

 

Item 3.

Defaults upon Senior Securities

33

 

 

 

Item 4.

Submission of Matters to a Vote of Security Holders

33

 

 

 

Item 5.

Other Information

33

 

 

 

Item 6.

Exhibits

33

 

 

 

Signatures

34

 

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

 

Six Months Ended

 

 

 

August 29,

 

August 30,

 

August 29,

 

August 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

286,674

 

$

320,494

 

$

567,803

 

$

630,514

 

 

 

 

 

 

 

 

 

 

 

Operating costs and expenses:

 

 

 

 

 

 

 

 

 

Cost of sales (including buying and store occupancy costs)

 

205,085

 

234,359

 

401,401

 

456,773

 

Selling, general and administrative expenses

 

91,041

 

107,043

 

196,598

 

216,411

 

Depreciation and amortization

 

5,852

 

7,517

 

11,812

 

16,190

 

 

 

301,978

 

348,919

 

609,811

 

689,374

 

 

 

 

 

 

 

 

 

 

 

Operating loss

 

(15,304

)

(28,425

)

(42,008

)

(58,860

)

 

 

 

 

 

 

 

 

 

 

Nonoperating (income) and expenses:

 

 

 

 

 

 

 

 

 

Interest and investment income

 

(429

)

(1,471

)

(956

)

(2,342

)

Interest expense

 

3,008

 

3,696

 

5,945

 

7,301

 

Gain on retirement of debt

 

(1,822

)

 

(49,654

)

 

Other income

 

(442

)

(656

)

(10,851

)

(1,288

)

 

 

315

 

1,569

 

(55,516

)

3,671

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

(15,619

)

(29,994

)

13,508

 

(62,531

)

Income tax provision (benefit)

 

161

 

162

 

(26

)

449

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(15,780

)

$

(30,156

)

$

13,534

 

$

(62,980

)

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per share:

 

 

 

 

 

 

 

 

 

Basic and diluted

 

$

(0.17

)

$

(0.34

)

$

0.15

 

$

(0.71

)

 

 

 

 

 

 

 

 

 

 

Average shares outstanding during period:

 

 

 

 

 

 

 

 

 

Basic and diluted

 

91,450

 

88,778

 

91,281

 

88,699

 

 

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)

 

 

 

August 29,

 

February 28,

 

August 30,

 

 

 

2009

 

2009

 

2008

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents, including temporary investments of $94,362, $142,523 and $178,936, respectively

 

$

108,539

 

$

155,798

 

$

191,114

 

Other accounts receivable, net

 

15,922

 

17,566

 

18,389

 

Inventories

 

336,298

 

316,331

 

379,050

 

Income tax receivable

 

2,430

 

2,149

 

3,345

 

Prepaid expenses and other current assets

 

41,876

 

41,883

 

45,732

 

Total current assets

 

505,065

 

533,727

 

637,630

 

 

 

 

 

 

 

 

 

Other properties, net of accumulated depreciation of $429,885, $432,412 and $422,377, respectively

 

63,764

 

85,135

 

105,052

 

Other noncurrent assets

 

37,704

 

36,600

 

42,021

 

 

 

 

 

 

 

 

 

 

 

$

 606,533

 

$

655,462

 

$

784,703

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

105,854

 

$

80,695

 

$

118,955

 

Gift cards and other deferred revenue

 

42,771

 

47,332

 

53,936

 

Accrued income taxes payable

 

4,494

 

4,434

 

4,500

 

Other accrued liabilities

 

101,560

 

101,350

 

109,043

 

Total current liabilities

 

254,679

 

233,811

 

286,434

 

 

 

 

 

 

 

 

 

Long-term debt

 

84,445

 

184,000

 

184,000

 

Other noncurrent liabilities

 

99,671

 

93,390

 

104,112

 

 

 

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

Common stock, $0.001 par, 500,000,000 shares authorized, 100,779,000 issued

 

101

 

101

 

101

 

Paid-in capital

 

207,576

 

214,004

 

226,855

 

Retained earnings

 

120,375

 

106,841

 

173,114

 

Cumulative other comprehensive income (loss)

 

63

 

(1,195

)

8

 

Less — 10,015,000, 10,905,000 and 11,802,000 common shares in treasury, at cost, respectively

 

(160,377

)

(175,490

)

(189,921

)

 

 

167,738

 

144,261

 

210,157

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

 606,533

 

$

655,462

 

$

784,703

 

 

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)

 

 

 

Six Months Ended

 

 

 

August 29,

 

August 30,

 

 

 

2009

 

2008

 

Cash flow from operating activities:

 

 

 

 

 

Net income (loss)

 

$

13,534

 

$

(62,980

)

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

 

 

 

 

 

Depreciation and amortization

 

16,783

 

22,988

 

Loss on disposal of fixed assets

 

156

 

68

 

Stock-based compensation expense

 

2,216

 

4,502

 

Deferred compensation

 

2,053

 

2,185

 

Lease termination expense

 

6,818

 

2,978

 

Amortization of deferred gains

 

(3,984

)

(2,819

)

Gain on retirement of convertible bonds

 

(49,654

)

 

Other

 

2,330

 

42

 

Changes in cash from:

 

 

 

 

 

Inventories

 

(19,967

)

32,659

 

Accounts receivable, prepaid expenses and other current assets

 

7,187

 

(4,770

)

Income tax receivable

 

(281

)

13,290

 

Accounts payable and accrued expenses

 

13,481

 

(5,800

)

Accrued income taxes payable

 

60

 

(723

)

Defined benefit plan liabilities

 

(1,725

)

(59

)

Other noncurrent assets

 

(299

)

(154

)

Other noncurrent liabilities

 

(18

)

(195

)

Net cash (used in) provided by operating activities

 

(11,310

)

1,212

 

 

 

 

 

 

 

Cash flow from investing activities:

 

 

 

 

 

Capital expenditures

 

(1,210

)

(7,203

)

Proceeds from disposition of properties

 

714

 

102,452

 

Proceeds from sale of restricted assets

 

3,440

 

908

 

Purchase of restricted investments

 

(3,200

)

(944

)

Net cash (used in) provided by investing activities

 

(256

)

95,213

 

 

 

 

 

 

 

Cash flow from financing activities:

 

 

 

 

 

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

 

308

 

1,256

 

Retirement of convertible bonds

 

(31,593

)

 

Debt issuance costs

 

(4,408

)

 

Net cash (used in) provided by financing activities

 

(35,693

)

1,256

 

 

 

 

 

 

 

Change in cash and cash equivalents

 

(47,259

)

97,681

 

Cash and cash equivalents at beginning of period

 

155,798

 

93,433

 

Cash and cash equivalents at end of period

 

$

108,539

 

$

191,114

 

 

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 SIX MONTHS ENDED AUGUST 29, 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

 

 

 

 

13,534

 

 

 

13,534

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pension adjustments

 

 

 

 

 

609

 

 

609

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Currency translation adjustments, net

 

 

 

 

 

649

 

 

649

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

14,792

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restricted stock compensation

 

(65

)

 

1,986

 

 

 

(1,055

)

931

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock option compensation expense

 

 

 

1,285

 

 

 

 

1,285

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock purchase plan, directors deferred, and other

 

955

 

 

(15,860

)

 

 

16,168

 

308

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adoption of FSP on Convertible Notes

 

 

 

2,818

 

 

 

 

2,818

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beneficial Conversion Feature of 9% Convertible Notes

 

 

 

3,343

 

 

 

 

3,343

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance August 29, 2009

 

90,764

 

$

101

 

$

207,576

 

$

120,375

 

$

63

 

$

(160,377

)

$

167,738

 

 

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 SIX MONTHS ENDED AUGUST 29, 2009

AND AUGUST 30, 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 August 29, 2009, and the results of operations and cash flows for the three and six months ended August 29, 2009 and August 30, 2008 have been made and consist only of normal recurring adjustments, except as otherwise described herein.  The results of operations for the three and six months ended August 29, 2009 and August 30, 2008, respectively, 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 have been modified to conform to the August 29, 2009 method of presentation.

 

Note 1 – 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, shares of unvested restricted stock and the Company’s convertible notes.  As the effect would have been antidilutive, substantially all 11,642,143 and 13,284,048 stock options outstanding and shares of unvested restricted stock were excluded from the computation of the second 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 and the related interest expense were also excluded from the diluted earnings per share calculation as the effect would have been antidilutive during both periods presented.  Earnings (loss) per share for the three and six months ended August 29, 2009 and August 30, 2008 was calculated as follows (in thousands except per share amounts):

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

August 29,

 

August 30,

 

August 29,

 

August 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

Net income (loss), basic and diluted

 

$

(15,780

)

$

(30,156

)

$

13,534

 

$

(62,980

)

 

 

 

 

 

 

 

 

 

 

Average shares outstanding:

 

 

 

 

 

 

 

 

 

Basic and diluted

 

91,450

 

88,778

 

91,281

 

88,699

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per share:

 

 

 

 

 

 

 

 

 

Basic and diluted

 

$

(0.17

)

$

(0.34

)

$

0.15

 

$

(0.71

)

 

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 six months ended August 29, 2009 and August 30, 2008 were as follows (in thousands):

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

August 29,

 

August 30,

 

August 29,

 

August 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

Net income (loss)

 

$

(15,780

)

$

(30,156

)

$

13,534

 

$

(62,980

)

Currency translation adjustments, net

 

(911

)

(1,075

)

649

 

(1,131

)

Pension adjustments

 

108

 

566

 

609

 

766

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss)

 

$

(16,583

)

$

(30,665

)

$

14,792

 

$

(63,345

)

 

Note 3 — Stock-based compensation

 

The Company accounts for share-based compensation in accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”).  SFAS 123R 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 six months ended August 29, 2009, the Company recorded stock-based compensation expense related to stock options and restricted stock of $980,000, or $0.01 per share, and $2,216,000, or $0.02 per share, respectively.  For the three and six months ended August 30, 2008, the Company recorded stock-based compensation expense related to stock options and restricted stock of $2,150,000, or $0.02 per share, and $4,502,000, or $0.05 per share, respectively.  The Company recognized no net tax benefit related to stock-based compensation during the first half 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 August 29, 2009 there was approximately $2,303,000 of total unrecognized compensation expense related to unvested stock option awards that is expected to be recognized over a weighted average period of 1.4 years and $1,849,000 of total unrecognized compensation expense related to restricted stock that may be recognized over a weighted average period of 1.4 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 the Company’s real estate portfolio.  These decisions are based on 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 SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.”  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 consolidated statements of operations.

 

8



Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

The following table represents a rollforward of the liability balances for the six months ended August 29, 2009 and August 30, 2008 related to these closures (in thousands):

 

 

 

Six Months Ended

 

 

 

August 29,

 

August 30,

 

 

 

2009

 

2008

 

 

 

 

 

 

 

Beginning of period

 

$

4,998

 

$

5,628

 

 

 

 

 

 

 

Original charges

 

4,679

 

2,782

 

Revisions

 

2,139

 

196

 

Cash payments

 

(5,779

)

(2,455

)

 

 

 

 

 

 

End of period

 

$

6,037

 

$

6,151

 

 

Total costs of lease terminations related to store closures are currently anticipated to be approximately $9,100,000 for fiscal 2010.  Of this amount, the Company incurred $2,233,000 in lease termination costs in the second quarter of fiscal 2010 and $6,818,000 for the year-to-date period.

 

Note 5 — Long-term debt

 

The following table represents a summary of the Company’s outstanding long-term debt as of August 29, 2009 (in thousands):

 

Face Value of 9% Senior Convertible Notes

 

61,255

 

Less Debt Discount for Make-Whole Interest

 

(8,897

)

Less Debt Discount for Beneficial Conversion Feature

 

(3,277

)

 

 

$

49,081

 

 

 

 

 

Face Value of 6.375% Senior Convertible Notes

 

16,577

 

Less Debt Discount for FSP APB 14-1

 

(213

)

 

 

$

16,364

 

 

 

 

 

Industrial Revenue Bonds

 

$

19,000

 

 

 

 

 

Total Long-term Debt

 

$

84,445

 

 

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”) 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 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 $128,535,000 based on quoted market values as of August 29, 2009 and August 30, 2008, respectively.  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.

 

9



Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

The 9% Notes are convertible, in multiples of $1,000 principal amount, at the option of the holder at any time on or prior to the earlier of the stated maturity or, in certain circumstances, the date the Company terminates the holder’s voluntary conversion right, as described below. The 9% Notes may be converted into shares of the Company’s common stock at an initial conversion rate of 399.2016 common shares per $1,000 principal amount, representing a conversion price of $2.5050 per share.  Interest is payable semi-annually in arrears on February 15 and August 15 each year, and will accrue at the rate of 9%.  The 9% Notes are fully and unconditionally guaranteed, on a joint and several basis, by all of the Company’s material domestic consolidated subsidiaries.  As of August 29, 2009, the maximum number of shares of the Company’s common stock issuable under the indenture governing the 9% Notes is 24,492,246.

 

The 9% Notes contain a make-whole interest provision.  If the holders voluntarily convert their 9% Notes into common stock at any time prior to termination of the voluntary conversion period, they will receive additional interest at that time equal to the lesser of 2.5 years of interest or the regularly scheduled interest that would have been paid through February 15, 2013.  As of August 29, 2009, the maximum payout of additional interest, assuming voluntary conversion of all outstanding 9% Notes, was $13,782,000.  The Company may elect in certain circumstances, upon at least 30 days notice, to terminate the voluntary conversion option on the 9% Notes if the sale price of the Company’s common stock exceeds 125% of the conversion price ($3.1313) for at least 20 days in any 30 trading day period.  In such event, a notice will be mailed to the 9% Note holders stating the termination date.  Any holders who elect to convert after the notice is mailed and prior to this termination date will receive (in addition to the conversion shares) additional interest at that time equal to the lesser of 1.5 years of interest or the regularly scheduled interest that would have been paid through February 13, 2013.  As of August 29, 2009, the maximum payout of additional interest, assuming conversion of all outstanding 9% Notes during the notice period for termination of the voluntary conversion, was $8,269,000.

 

The holders of the 9% Notes can, at their option, require the Company to purchase the 9% Notes on February 15, 2013, February 15, 2016, February 15, 2021, February 15, 2026 and February 15, 2031.  The purchase price payable will be equal to 100% of the principal amount of the notes to be purchased plus any accrued and unpaid interest.  Any notes purchased by the Company will be paid in cash.

 

The 9% Notes may be redeemed by the Company on or after February 15, 2012 for cash, upon notice to the holders, for a price equal to 100% of the principal amount of the notes to be redeemed plus any accrued and unpaid interest.

 

The 9% Notes contain a provision designed to prevent or limit a conversion, if such a conversion is by a holder of 5% or more of the Company’s common stock or will cause a holder to have 5% or more total common stock ownership of the Company.  This provision may be waived for any individual holder at the discretion of the Company.

 

If the Company undergoes a fundamental change, as defined by the indenture, then the holder can require the Company to purchase all or a portion of the notes for a purchase price in cash equal to 100% of the principal amount of the notes plus any accrued and unpaid interest.  A fundamental change is deemed to have occurred at the time after the notes are originally issued when any of the following events occur: (1) certain changes in beneficial ownership of the Company’s common equity as described in the indenture, (2) certain share exchanges, consolidations, mergers, or assets transactions as described in the indenture, (3) “Continuing Directors” as defined in the indenture ceasing to constitute at least a majority of the Company’s board of directors, (4) the Company’s stockholders approving any plan or proposal for the Company’s liquidation or dissolution, or (5) the Company’s common stock is neither listed on a national securities exchange nor quoted on an established electronic over-the-counter trading market in the United States.

 

In accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”), the Company has separately accounted for the additional interest payment features of the 9% Notes discussed above as an embedded derivative instrument (make-whole provision).  The embedded derivative was measured at fair value and is included in the accompanying consolidated balance sheets in other long term liabilities.

 

10



Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

Changes in the fair value of the embedded derivative are recognized in earnings.  The derivative liability will be revalued quarterly and changes in its fair value will be recorded as other income or expense.  For the purpose of accounting for the 9% Notes issued in the exchange offer, the fair value of the 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 falls within the Level 3 fair value hierarchy under SFAS No. 157 “Fair Value” (“SFAS 157”).  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 9% Note holders will convert to the Company’s common stock and assumptions regarding the Company’s stock price.

 

The 9% Notes also include 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.  The debt discount is being amortized as interest expense using the effective interest method through February 15, 2013.  If the notes are converted into common stock before the debt discount is fully amortized, the remaining portion of the discount will be expensed at the time of conversion.  The fair value of the 9% Notes was $78,155,000 based on quoted market values as of August 29, 2009.

 

Effective March 1, 2009, the Company adopted Financial Accounting Standards Board (“FASB”) Staff Position (“FSP”) APB 14-1, “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 FSP APB 14-1, 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 FSP APB 14-1 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 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 will be amortized as interest expense over the remaining life of the 6.375% Notes, or through February 2011. 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 August 29, 2009, the unamortized discount related to the 6.375% Notes totaled $213,000.

 

11



Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

Long-term debt matures as follows (in thousands):

 

 

 

Long-term

 

Fiscal Year

 

Debt

 

 

 

 

 

2010

 

 

2011

 

16,577

 

2012

 

 

2013

 

61,255

 

2014

 

 

Thereafter

 

19,000

 

 

 

96,832

 

Debt discount

 

(12,387

)

Total long-term debt

 

$

84,445

 

 

Effective July 30, 2009, the Company amended its secured credit facility which matures in May 2012.  The amendment reduces the total commitment amount to $300,000,000, removes real estate from eligibility for inclusion in the calculation of the borrowing base, increases applicable interest rate spreads and redefines permitted uses, liens, indebtedness, acquisitions, and restricted payments.  In addition, the amendment updates certain provisions to allow for the refinance or repurchase of the balance of 6.375% Notes and 9% Notes, as well as repurchases of the Company’s common stock.  As of August 29, 2009, the Company had no outstanding cash borrowings and had utilized $113,948,000 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 August 29, 2009, the Company’s calculated borrowing base was $267,441,000.  After excluding the required minimum of $30,000,000 and the $113,948,000 in utilized letters of credit and bankers’ acceptances from the borrowing base, $123,493,000 remained available for cash borrowings.

 

Note 6 — Condensed financial statements

 

The Company’s 6.375% Notes and its 9% Notes are 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 financial statements for the Guarantor Subsidiaries, condensed consolidating financial information is presented below.

 

12



Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS

Three Months Ended August 29, 2009

(in thousands)

(unaudited)

 

 

 

Pier 1
Imports, Inc.

 

Guarantor
Subsidiaries

 

Non-
Guarantor
Subsidiaries

 

Eliminations

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

 

$

285,132

 

$

2,364

 

$

(822

)

$

286,674

 

Cost of sales (including buying and store occupancy costs)

 

 

203,871

 

2,065

 

(851

)

205,085

 

Selling, general and administrative (including depreciation and amortization)

 

538

 

96,311

 

44

 

 

96,893

 

Operating income (loss)

 

(538

)

(15,050

)

255

 

29

 

(15,304

)

 

 

 

 

 

 

 

 

 

 

 

 

Nonoperating (income) expense

 

(49,337

)

3,005

 

(1,185

)

47,832

 

315

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

48,799

 

(18,055

)

1,440

 

(47,803

)

(15,619

)

Provision for income taxes

 

 

135

 

26

 

 

161

 

Net income (loss) after income taxes

 

48,799

 

(18,190

)

1,414

 

(47,803

)

(15,780

)

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) from subsidiaries

 

(16,776

)

1,414

 

 

15,362

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

32,023

 

$

(16,776

)

$

1,414

 

$

(32,441

)

$

(15,780

)

 

CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS

Three Months Ended August 30, 2008

(in thousands)

(unaudited)

 

 

 

Pier 1
Imports, Inc.

 

Guarantor
Subsidiaries

 

Non-
Guarantor
Subsidiaries

 

Eliminations

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

 

$

318,249

 

$

3,632

 

$

(1,387

)

$

320,494

 

Cost of sales (including buying and store occupancy costs)

 

 

232,511

 

3,338

 

(1,490

)

234,359

 

Selling, general and administrative (including depreciation and amortization)

 

2,190

 

112,320

 

50

 

 

114,560

 

Operating income (loss)

 

(2,190

)

(26,582

)

244

 

103

 

(28,425

)

 

 

 

 

 

 

 

 

 

 

 

 

Nonoperating (income) expenses

 

(283

)

1,942

 

(90

)

 

1,569

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

(1,907

)

(28,524

)

334

 

103

 

(29,994

)

Provision for income taxes

 

 

152

 

10

 

 

162

 

Net income (loss) after income taxes

 

(1,907

)

(28,676

)

324

 

103

 

(30,156

)

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) from subsidiaries

 

(28,352

)

324

 

 

28,028

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(30,259

)

$

(28,352

)

$

324

 

$

28,131

 

$

(30,156

)

 

13



Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS

Six Months Ended August 29, 2009

(in thousands)

(unaudited)

 

 

 

Pier 1
Imports, Inc.

 

Guarantor
Subsidiaries

 

Non-
Guarantor
Subsidiaries

 

Eliminations

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

 

$

565,118

 

$

4,486

 

$

(1,801

)

$

567,803

 

Cost of sales (including buying and store occupancy costs)

 

 

399,369

 

3,907

 

(1,875

)

401,401

 

Selling, general and administrative (including depreciation and amortization)

 

978

 

207,344

 

88

 

 

208,410

 

Operating income (loss)

 

(978

)

(41,595

)

491

 

74

 

(42,008

)

 

 

 

 

 

 

 

 

 

 

 

 

Nonoperating income

 

(49,647

)

(3,762

)

(2,107

)

 

(55,516

)

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

48,669

 

(37,833

)

2,598

 

74

 

13,508

 

Provision (benefit) for income taxes

 

 

(75

)

49

 

 

(26

)

Net income (loss) after income taxes

 

48,669

 

(37,758

)

2,549

 

74

 

13,534

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) from subsidiaries

 

(35,209

)

2,549

 

 

32,660

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

13,460

 

$

(35,209

)

$

2,549

 

$

32,734

 

$

13,534

 

 

CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS

Six Months Ended August 30, 2008

(in thousands)

(unaudited)

 

 

 

Pier 1
Imports, Inc.

 

Guarantor
Subsidiaries

 

Non-
Guarantor
Subsidiaries

 

Eliminations

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

 

$

626,269

 

$

7,850

 

$

(3,605

)

$

630,514

 

Cost of sales (including buying and store occupancy costs)

 

 

453,545

 

7,200

 

(3,972

)

456,773

 

Selling, general and administrative (including depreciation and amortization)

 

2,709

 

229,797

 

95

 

 

232,601

 

Operating income (loss)

 

(2,709

)

(57,073

)

555

 

367

 

(58,860

)

 

 

 

 

 

 

 

 

 

 

 

 

Nonoperating (income) expenses

 

(1,189

)

5,045

 

(185

)

 

3,671

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

(1,520

)

(62,118

)

740

 

367

 

(62,531

)

Provision for income taxes

 

 

439

 

10

 

 

449

 

Net income (loss) after income taxes

 

(1,520

)

(62,557

)

730

 

367

 

(62,980

)

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) from subsidiaries

 

(61,827

)

730

 

 

61,097

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(63,347

)

$

(61,827

)

$

730

 

$

61,464

 

$

(62,980

)

 

14



Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

CONSOLIDATING CONDENSED BALANCE SHEET

August 29, 2009

(in thousands)

(unaudited)

 

 

 

Pier 1
Imports, Inc.

 

Guarantor
Subsidiaries

 

Non-
Guarantor
Subsidiaries

 

Eliminations

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

49,259

 

$

57,040

 

$

2,240

 

$

 

$

108,539

 

Other accounts receivable, net

 

12

 

14,451

 

1,459

 

 

15,922

 

Inventories

 

 

336,241

 

57

 

 

336,298

 

Income tax receivable

 

 

1,948

 

482

 

 

2,430

 

Prepaid expenses and other current assets

 

491

 

41,385

 

 

 

41,876

 

Total current assets

 

49,762

 

451,065

 

4,238

 

 

505,065

 

 

 

 

 

 

 

 

 

 

 

 

 

Other properties, net

 

 

60,079

 

3,685

 

 

63,764

 

Investment in subsidiaries

 

(17,753

)

16,662

 

 

1,091

 

 

Other noncurrent assets

 

5,298

 

32,406

 

 

 

37,704

 

 

 

$

37,307

 

$

560,212

 

$

7,923

 

$

1,091

 

$

606,533

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

346

 

$

105,101

 

$

407

 

$

 

$

105,854

 

Intercompany payable (receivable)

 

(205,876

)

214,931

 

(9,055

)

 

 

Gift cards and other deferred revenue

 

 

42,771

 

 

 

42,771

 

Accrued income taxes payable (receivable)

 

48

 

4,613

 

(167

)

 

4,494

 

Other accrued liabilities

 

516

 

100,968

 

76

 

 

101,560

 

Total current liabilities

 

(204,966

)

468,384

 

(8,739

)

 

254,679

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

65,445

 

19,000

 

 

 

84,445

 

Other noncurrent liabilities

 

9,090

 

90,581

 

 

 

99,671

 

Shareholders’ equity (deficit)

 

167,738

 

(17,753

)

16,662

 

1,091

 

167,738

 

 

 

$

37,307

 

$

560,212

 

$

7,923

 

$

1,091

 

$

606,533

 

 

15



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

 

 

16



Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

CONSOLIDATING CONDENSED BALANCE SHEET

August 30, 2008

(in thousands)

(unaudited)

 

 

 

Pier 1
Imports, Inc.

 

Guarantor
Subsidiaries

 

Non-
Guarantor
Subsidiaries

 

Eliminations

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

116,432

 

$

52,500

 

$

22,182

 

$

 

$

191,114

 

Other accounts receivable, net

 

24

 

16,350

 

2,015

 

 

18,389

 

Inventories

 

 

379,050

 

 

 

379,050

 

Income tax receivable

 

 

2,914

 

431

 

 

3,345

 

Prepaid expenses and other current assets

 

498

 

45,234

 

 

 

45,732

 

Total current assets

 

116,954

 

496,048

 

24,628

 

 

637,630

 

 

 

 

 

 

 

 

 

 

 

 

 

Other properties, net

 

 

101,264

 

3,788

 

 

105,052

 

Investment in subsidiaries

 

83,732

 

44,452

 

 

(128,184

)

 

Other noncurrent assets

 

6,056

 

35,965

 

 

 

42,021

 

 

 

$

206,742

 

$

677,729

 

$

28,416

 

$

(128,184

)

$

784,703

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

&n