Pier 1 2007 Annual Report Download - page 31

In summary, the Company’s primary uses of cash in fiscal 2007 were to fund operating expenses; redeem
outstanding Class A Certificates at the Master Trust; provide for new and existing store development; fund
capital additions related to distribution centers and information systems development; and pay dividends. The
Company has a variety of sources for liquidity, which include available cash balances, available lines of credit,
cash surrender value of life insurance policies not restricted as to use, receipt of federal and state tax refunds,
and real estate financing options. Among the financing options being considered for Company-owned real
estate are sale or sale-leaseback transactions, traditional mortgages, and amending the secured credit facility to
include Company-owned real estate in the borrowing base. Adding real estate to the secured credit facility
would provide flexibility through additional availability under the Company’s line of credit and would reduce
the Company’s dependence on inventory levels as the determinant of the size of its borrowing base. Given the
various liquidity options available, the Company believes it has sufficient liquidity to fund operational
obligations and capital expenditure requirements throughout fiscal 2008. In addition, the Company is currently
projecting its cash and cash equivalents balance at fiscal 2008 year end to approximate its fiscal 2007 year end
balance.
OFF-BALANCE SHEET ARRANGEMENTS
Other than the operating leases and letters of credit discussed above, the Company’s only other off-
balance sheet arrangement related to the securitization of the Company’s proprietary credit card receivables.
During fiscal 2007, the Company allowed its securitization agreement to expire and subsequently sold its
proprietary credit card operations to Chase. At the time of the expiration of the securitization agreement, the
Company purchased $144.0 million of proprietary credit card receivables, previously held by the Master Trust
for $100.0 million in cash and in exchange for $44.0 million of beneficial interest. The Master Trust, upon
approval from debt security (“Class A Certificates”) holders, paid $100.0 million to redeem the Class A
Certificates that were outstanding.
Prior to the expiration of the securitization agreement, the Company sold, on a daily basis, its proprietary
credit card receivables that met certain eligibility criteria to Pier 1 Funding, LLC (“Funding”), which
transferred the receivables to the Master Trust. The Master Trust had issued $100 million face amount of
Class A Certificates to a third party. This securitization of receivables provided the Company with a portion of
its funding. However, neither Funding nor the Master Trust was consolidated in the Company’s financial
statements, and the Company had no obligation to reimburse Funding, the Master Trust or purchasers of
Class A Certificates for credit losses from the receivables. During fiscal 2006, the Company’s securitization
agreements were amended to, among other things, extend the expiration date until September 2006 and to
increase the amount of Class B Certificates required to be held by Funding. At the end of fiscal 2006, there
were $13.6 million of Class B Certificates outstanding. All Class B Certificates were settled concurrent with
the expiration of the securitization agreement. See Note 3 of the Notes to Consolidated Financial Statements
for additional information regarding the securitization of the Company’s proprietary credit card receivables.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of the Company’s consolidated financial statements in accordance with accounting
principles generally accepted in the United States requires the use of estimates that affect the reported value of
assets, liabilities, revenues and expenses. These estimates are based on historical experience and various other
factors that are believed to be reasonable under the circumstances, the results of which form the basis for the
Company’s conclusions. The Company continually evaluates the information used to make these estimates as
the business and the economic environment changes. Historically, actual results have not varied materially
from the Company’s estimates, with the exception of the impairment of long-lived assets, the early retirement
of participants in its defined benefit plans and income taxes as discussed below, and the Company does not
currently anticipate a significant change in its assumptions related to these estimates. Actual results may differ
from these estimates under different assumptions or conditions. The Company’s significant accounting policies
can be found in Note 1 of the Notes to Consolidated Financial Statements. The policies and estimates
discussed below include the financial statement elements that are either judgmental or involve the selection or
application of alternative accounting policies and are material to the Company’s financial statements. Unless
29