Pier 1 2007 Annual Report Download - page 43

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considered not to be permanently reinvested abroad. Taxes on this portion of cumulative currency translation
adjustments were insignificant in fiscal 2007.
Concentrations of risk — The Company has some degree of risk concentration with respect to sourcing
the Company’s inventory purchases. However, the Company believes alternative sources of products could be
procured over a relatively short period of time. Pier 1 sells merchandise imported from over 40 different
countries, with 35% of its sales derived from merchandise produced in China, 14% derived from merchandise
produced in Indonesia, 13% derived from merchandise produced in India, 13% derived from merchandise
produced in the United States and 21% derived from merchandise produced in Brazil, Thailand, Italy, the
Philippines, Vietnam and Mexico. The remaining 4% of sales was from merchandise produced in various
Asian, European, Central American, South American and African countries.
Financial instruments — The fair value of financial instruments is determined by reference to various
market data and other valuation techniques as appropriate. There were no assets or liabilities other than the
6.375% convertible senior notes with a fair value significantly different from the recorded value as of March 3,
2007 and February 25, 2006. The fair value of these notes was $156,712,000 based on quoted market values
as of March 3, 2007, and approximated the recorded value of $165,000,000 as of February 25, 2006. Changes
in the market interest rates affect the fair value of the Company’s fixed rate notes, but do not affect the
Company’s financial position, results of operations or cash flows related to these instruments.
Risk management instruments: The Company may utilize various financial instruments to manage
interest rate and market risk associated with its on- and off-balance sheet commitments.
The Company hedges certain commitments denominated in foreign currencies through the purchase of
forward contracts. The forward contracts are purchased only to cover specific commitments to buy merchan-
dise for resale. The Company also uses contracts to hedge its exposure associated with the repatriation of
funds from its Canadian operations. At March 3, 2007, and February 25, 2006 there were no outstanding
contracts to hedge exposure associated with the Company’s merchandise purchases denominated in foreign
currencies or the repatriation of Canadian funds. For financial accounting purposes, the Company does not
designate such contracts as hedges. Thus, changes in the fair value of both types of forward contracts would
be included in the Company’s consolidated statements of operations. Both the changes in fair value and
settlement of these contracts are included in cost of sales for forwards related to merchandise purchases and in
selling, general and administrative expense for the contracts associated with the repatriation of Canadian
funds.
The Company enters into forward foreign currency exchange contracts with major financial institutions
and continually monitors its positions with, and the credit quality of, these counterparties to such financial
instruments. The Company does not expect non-performance by any of the counterparties, and any losses
incurred in the event of non-performance would not be material.
Beneficial interest in securitized receivables — Prior to the expiration of its agreement to securitize its
proprietary credit card receivables on September 6, 2006, the Company securitized its entire portfolio of
proprietary credit card receivables. During most of fiscal 2007, and all of fiscal 2006 and 2005, the Company
sold all of its proprietary credit card receivables, except those that failed certain eligibility requirements, to
Funding, a special-purpose wholly owned subsidiary, which transferred the receivables to the Pier 1 Imports
Credit Card Master Trust (the “Master Trust”). Neither Funding nor the Master Trust were consolidated by the
Company as the Master Trust met the requirements of a qualifying special-purpose entity under Statement of
Financial Accounting Standards (“SFAS”) No. 140. The Master Trust issued beneficial interests that represent
undivided interests in the assets of the Master Trust consisting of the transferred receivables and all cash flows
from collections of such receivables. The beneficial interests included certain interests retained by Funding,
which were represented by Class B Certificates, and the residual interest in the Master Trust (the excess of the
principal amount of receivables held in the Master Trust over the portion represented by the certificates sold to
41
Pier 1 Imports, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)