NOTE 6 – MATTERS CONCERNING SHAREHOLDERS' EQUITY

Stock Incentive Plan — The Pier 1 Imports, Inc. 2015 Stock Incentive Plan (“2015 Plan”) was approved by the shareholders on June 25, 2015. The aggregate number of shares available for issuance under the 2015 Plan included (i) a new authorization of 2,500,000 shares, plus (ii) 2,507,407 shares that remained available for grant under the Pier 1 Imports, Inc. 2006 Stock Incentive Plan (“2006 Plan”) as of June 25, 2015, increased by the number of shares subject to outstanding awards under the 2006 Plan as of June 25, 2015, which was 3,009,974 shares that cease for any reason to be subject to such awards (other than by reason of exercise or settlement of the awards to the extent that they are exercised for or settled in vested and non-forfeitable shares of common stock or that are withheld for payment of applicable employment taxes and/or withholding obligations of an award), plus (iii) 4,000,000 shares approved by the shareholders on June 22, 2017, in the First Amendment to the 2015 Plan, subject to adjustment in the event of stock splits and certain other corporate events. As of March 3, 2018, there were a total of 6,023,157 shares available for issuance under the 2015 Plan.

Equity awarded to President and Chief Executive Officer — Alasdair B. James joined the Company during the first quarter of fiscal 2018 as President and Chief Executive Officer (“CEO”) and received equity awards of stock options and restricted stock. A portion of the equity awards were granted as an employment inducement award and were not under the 2015 Plan. The stock options, valued at approximately $1,000,000 (based on the closing price of the Company’s common stock on the grant date and Black-Scholes modeling), have a ten-year term, an exercise price equal to $6.68, and will vest 25% on the third anniversary of the grant date, 25% on the fourth anniversary of the grant date and 50% on the fifth anniversary of the grant date, subject to Mr. James’ continued employment.

The restricted stock consisted of two grants. The first grant was time-based restricted stock valued at approximately $500,000 on the grant date that will cliff vest after three years. The second grant had a value of approximately $2,000,000 on the grant date with 25% of the grant being time-based shares that will vest 33%, 33%, and 34% each year over a three-year period beginning on the first anniversary of the award date, and 75% of the grant being performance-based shares that may vest following the end of fiscal 2020 if the Company achieves certain targeted levels of performance measures established in fiscal 2018. The performance-based shares are subject to an increase or decrease of 10% based on the total shareholder return of the Company compared to the peer group (“TSR Modifier”). The number of restricted shares awarded was based on a 30-day trailing average of the closing price of the Company’s common stock and vesting is subject to continued employment.

Restricted stock awarded to certain employees — During fiscal 2018, the Company awarded long-term incentive awards under the 2015 Plan to certain employees. Fiscal 2018 long-term incentive awards were comprised of restricted stock grants that were divided between time-based and performance-based awards. The time-based shares vest 33%, 33% and 34% each year over a three-year period beginning on the first anniversary of the award date provided that the participant is employed on the vesting date. The performance-based shares may vest following the end of fiscal 2020 if the Company achieves certain targeted levels of performance measures established in fiscal 2018. The performance-based shares are subject to the TSR Modifier described above. Vesting of the performance-based shares is conditioned upon the participant being employed on the date of filing of the Company’s fiscal 2020 Annual Report on Form 10-K with the Securities and Exchange Commission.

Restricted stock compensation expense — Compensation expense for restricted stock was $3,612,000, $8,180,000 and $4,978,000 in fiscal 2018, 2017 and 2016, respectively. Fiscal 2017 includes additional expense of $3,908,000 for the accelerated vesting of unvested restricted stock awards for the former CEO. In accordance with accounting guidelines, the Company expenses time-based shares over the requisite service period. For performance-based awards, expense is recognized based on the probability of the Company achieving performance targets. For fiscal 2018, 2017 and 2016 the target levels of performance measures were not achieved and all or a portion of eligible shares did not vest. As of March 3, 2018, there was $23,989,000 of total unrecognized compensation expense related to restricted stock that may be recognized over a weighted average period of 1.5 years. The total fair value of restricted stock awards vested was $2,112,000, $3,671,000 and $2,510,000 in fiscal 2018, 2017 and 2016, respectively.

The Company realized a total tax benefit related to stock-based compensation of $736,000, $1,783,000 and $1,270,000 during fiscal years 2018, 2017 and 2016, respectively. For fiscal years 2017 and 2016, $312,000 and $585,000 were recorded as excess tax benefits, respectively. There was no excess tax benefit recorded for fiscal 2018. See Note 7 of the Notes to Consolidated Financial Statements for additional discussion of income taxes.

As of March 3, 2018 and February 25, 2017, the Company had 4,049,614 and 2,710,011 unvested shares of restricted stock outstanding, respectively. During fiscal 2018, 2,973,896 shares of restricted stock were awarded, 310,312 shares of restricted stock vested, and 1,323,981 shares of restricted stock were forfeited. The weighted average fair market value at the date of grant of the restricted stock shares awarded during fiscal 2018 was $6.27 per share.

Stock options — Options were granted at exercise prices equal to the fair market value of the Company’s common stock on the date of grant. Except for the stock options granted to the CEO described above, options currently exercisable issued under both the 2006 Plan and the 2015 Plan vest over a period of four years. Stock options have a term of ten years from the grant date and will be fully vested upon death, disability or retirement of the associate. The Compensation Committee of the Board of Directors serves as the administrative committee of the 2006 Plan and 2015 Plan and has the discretion to take certain actions with respect to stock options, such as accelerating the vesting, upon certain corporate changes (as defined in the 2006 Plan and 2015 Plan).

A summary of stock option transactions related to the Company’s stock option grants during the three fiscal years is as follows:

						Weighted		Exercisable Shares
				Weighted		Average				Weighted
				Average		Fair Value				Average
				Exercise		at Date of		Number		Exercise
	Shares			Price		Grant		of Shares		Price
Outstanding at February 28, 2015		1,448,548		$	8.09				1,419,712	$	7.86
Options granted		15,500			14.04	$	3.98
Options exercised		(77,500	)		7.46
Options cancelled or expired		(176,000	)		14.06
Outstanding at February 27, 2016		1,210,548			7.34				1,176,974		7.06
Options granted		23,000			6.99		2.85
Options exercised		(966,500	)		6.71
Options cancelled or expired		(142,248	)		10.57
Outstanding at February 25, 2017		124,800			8.50				107,800		8.22
Options granted		320,469			6.68		3.21
Options exercised		—			—
Options cancelled or expired		(40,000	)		7.77
Outstanding at March 3, 2018		405,269			7.13				73,250		8.76

For options outstanding at March 3, 2018:					Weighted
					Average				Weighted
			Weighted		Remaining				Average
			Average		Contractual		Shares		Exercise Price-
	Total		Exercise		Life (in		Currently		Exercisable
Ranges of Exercise Prices	Shares		Price		years)		Exercisable		Shares
$4.24 — $6.59		19,500	$	5.38		4.72		10,000	$	4.24
$6.68 — $11.47		371,569		6.83		7.95		52,725		7.68
$14.04 — $23.19		14,200		17.43		5.94		10,525		18.43

As of March 3, 2018, the weighted average remaining contractual term for outstanding and exercisable options was 7.7 years and 1.4 years, respectively. There was no aggregate intrinsic value for outstanding or exercisable options at fiscal 2018 year end. The total intrinsic value of options exercised for fiscal years 2017 and 2016 was approximately $1,137,000 and $430,000, respectively. The intrinsic value of a stock option is the amount by which the market value of the underlying stock exceeds the exercise price of the option. There were no options exercised in fiscal year 2018.

At March 3, 2018, there was approximately $863,000 of total unrecognized compensation expense related to unvested stock option awards, which is expected to be recognized over a weighted average period of 4.1 years. The fair value of the stock options is amortized as compensation expense over the vesting periods of the options. The Company recorded stock-based compensation expense related to stock options of approximately $197,000, $48,000 and $87,000 in fiscal 2018, 2017 and 2016, respectively.

Director deferred stock units — The 2015 Plan and certain prior plans authorize director deferred stock unit awards to non-employee directors. Directors can elect to defer all or a portion of their director's cash fees into a deferred stock unit account. The annual retainer fees deferred (other than committee chairman and chairman of the board annual retainers) received a 25% matching contribution from the Company in the form of director deferred stock units. There were 707,500 shares and 532,100 shares deferred, but not delivered, as of March 3, 2018 and February 25, 2017, respectively. During fiscal 2018, approximately 175,400 director deferred stock units were granted, no units were delivered and no units were cancelled. Compensation expense for the director deferred stock awards was $806,000, $834,000 and $800,000 in fiscal 2018, 2017 and 2016, respectively.

Stock purchase plan — Substantially all Company associates and all non-employee directors are eligible to participate in the Pier 1 Imports, Inc. Stock Purchase Plan under which the Company's common stock is purchased on behalf of participants at market prices through regular payroll deductions. Each associate may contribute up to 20% of the eligible portions of compensation, and non-employee directors may contribute up to 100% of their director compensation. The Company contributes an amount equal to 25% of the participant’s contributions. Company contributions to the plan were $351,000, $363,000 and $424,000 in fiscal years 2018, 2017 and 2016, respectively.

Preferred Stock — As of March 3, 2018, the Company’s restated certificate of incorporation authorized 20,000,000 shares of preferred stock having a par value of $1.00 per share to be issued. No such shares have been issued.

Dividends — The Company paid cash dividends of $22,294,000, $22,501,000 and $23,672,000 in fiscal years 2018, 2017 and 2016, respectively. On April 18, 2018, subsequent to year end, the Company announced that the Board of Directors had determined to discontinue the Company’s common stock dividend.

Shares reserved for future issuances — As of March 3, 2018, the Company had approximately 7,135,909 shares of common stock reserved for future issuances under the stock plans. This amount includes stock options outstanding, director deferred stock units and shares available for future grant.

Share repurchase plan — The following table summarizes the Company’s total repurchases of its common stock under the $200 million board-approved share repurchase program announced on April 10, 2014 (“April 2014 program”), for each of the last three fiscal years:

Shares Purchased

Date Program Announced

Authorized

Amount

Fiscal

2018

Fiscal

2017

Fiscal

2016

Weighted

Average

Cost

Remaining

Available as of

March 3, 2018

Apr. 10, 2014

200,000,000

1,926,602

1,794,053

7,460,935

10.58

⁽¹⁾

26,610,135

⁽¹⁾	Represents weighted average cost for all share repurchases under the April 2014 program.

On April 18, 2018, subsequent to year end, the Company announced that the Board of Directors had determined to discontinue share repurchases at the present time under the April 2014 program.