Pier 1 2007 Annual Report Download - page 51

Company had an agreement with a third party to provide certain credit card processing and related credit
services, while the Company maintained control over credit policy decisions and customer service standards.
Net proprietary credit card income was included in selling, general and administrative expenses on the
Company’s statements of operations. The following information presents a summary of the Company’s
proprietary credit card results for each of the last three fiscal years on a managed basis (in thousands):
2007
(1)
2006 2005
Income:
Finance charge income, net of debt service costs ........... $20,127 $ 27,351 $ 25,118
Other income ..................................... 118 189 114
20,245 27,540 25,232
Costs:
Processing fees.................................... 11,565 13,907 14,982
Bad debts........................................ 3,449 6,457 7,026
15,014 20,364 22,008
Net proprietary credit card income . . ................... $ 5,231 $ 7,176 $ 3,224
Gross proprietary credit card receivables at year-end .......... $ — $147,271 $134,326
(1) Fiscal 2007 income and costs include activity through November 21, 2006, when the Company completed the sale of its proprietary
credit card operations.
The Company began securitizing its entire portfolio of proprietary credit card receivables (the “Receiv-
ables”) in fiscal 1997. On a daily basis during all periods presented above, except the period from September 6,
2006 through March 3, 2007, the Company sold all of its proprietary credit card receivables, except an
immaterial amount of those that failed certain eligibility criteria, to a special-purpose wholly owned subsidiary,
Funding. The Receivables were then transferred from Funding to the Master Trust. In exchange for the
Receivables, the Company received cash and retained a residual interest in the Master Trust. These cash
payments were funded from undistributed principal collections on the Receivables that were previously sold to
the Master Trust.
Funding was capitalized by the Company as a special-purpose wholly owned subsidiary and was subject
to certain covenants and restrictions, including a restriction from engaging in any business or activity unrelated
to acquiring and selling interests in receivables. The Master Trust issued beneficial interests that represented
undivided interests in the assets of the Master Trust. Neither Funding nor the Master Trust was consolidated in
the Company’s financial statements. Under U.S. generally accepted accounting principles, if the structure of a
securitization meets certain requirements, such transactions are accounted for as sales of receivables. As the
Company’s securitizations met such requirements, they were accounted for as sales. Gains or losses resulting
from the daily sales of Receivables to Funding were not material during fiscal 2007, 2006 or 2005. The
Company’s exposure to deterioration in the performance of the Receivables was limited to its retained
beneficial interest in the Master Trust. As such, the Company had no corporate obligation to reimburse
Funding, the Master Trust or purchasers of any certificates issued by the Master Trust for credit losses from
the Receivables.
As a result of the securitization, the Master Trust had $100,000,000 of outstanding 2001-1 Class A
Certificates issued to a third party through September 6, 2006. The 2001-1 Class A Certificates bore interest at
a floating rate equal to the rate on commercial paper issued by the third party plus a credit spread. As of
February 25, 2006, this rate was 5.1%. Funding continued to retain the residual interest in the Master Trust
and held $13,636,000 in 2001-1 Class B Certificates at February 25, 2006, which were subordinated to the
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Pier 1 Imports, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)