THIRD AMENDMENT TO CREDIT AGREEMENT

Exhibit 10.1

THIRD AMENDMENT TO CREDIT AGREEMENT

This Third Amendment to Credit Agreement (this “ Third Amendment ”) is made as of July 30, 2009 by and among

PIER 1 IMPORTS (U.S.), INC. (in such capacity, the “ Borrower ”), a Delaware corporation with its principal executive offices at 100 Pier 1 Place, Fort Worth, Texas 76102;

BANK OF AMERICA, N.A. , a national banking association with offices at 100 Federal Street, Boston, Massachusetts 02110, as administrative agent (in such capacity, the “ Administrative Agent ”) for its own benefit and the benefit of the other Credit Parties;

BANK OF AMERICA, N.A. , a national banking association with offices at 100 Federal Street, Boston, Massachusetts 02110, as collateral agent (in such capacity, the “ Collateral Agent ”) for its own benefit and the benefit of the other Credit Parties;

The LENDERS party hereto;

WELLS FARGO RETAIL FINANCE, LLC , a Delaware limited liability company with offices at One Boston Place - 19th Floor, Boston, Massachusetts 02109, as syndication agent; and

JPMORGAN CHASE BANK, N.A. , a national banking association with offices at 2200 Ross Avenue, 9 ^th Floor, Dallas, Texas 75201, as documentation agent;

in consideration of the mutual covenants herein contained and benefits to be derived herefrom.  

WITNESSETH

WHEREAS, the Borrower, the Lenders, the Administrative Agent, and the Collateral Agent, among others, entered into a Credit Agreement dated as of November 22, 2005, as amended by that certain First Amendment to Credit Agreement dated as of July 28, 2006 and by that certain Second Amendment to Credit Agreement dated as of May 31, 2007 (collectively, the “ Credit Agreement ”);

WHEREAS, the parties desire to further amend the terms and conditions of the Credit Amendment as set forth herein.

NOW THEREFORE, it is hereby agreed as follows:

1.        Definitions . All capitalized terms used herein and not otherwise defined shall have the same meaning herein as in the Credit Agreement.

2.        Amendment to Article I .  The provisions of Article I of the Credit Agreement are hereby amended as follows:

(a)                The definition of “Applicable Margin” is hereby deleted in its entirety and the following substituted in its stead:

          “ “ Applicable Margin ” means:  

(a)       From and after the Third Amendment Effective Date until the first Adjustment Date after the Third Amendment Effective Date, the percentages set forth in Level II of the Pricing Grid below; and

(b)       On the first day of each January, April, July and October of each year (each, an “ Adjustment Date ”), commencing October 1, 2009, the Applicable Margin shall be determined from such Pricing Grid based upon Average Daily Availability for the most recently ended three month period immediately preceding such Adjustment Date; provided that notwithstanding anything to the contrary set forth herein, upon the occurrence of an Event of Default, the Administrative Agent may, and at the direction of the Required Lenders shall, immediately increase the Applicable Margin to that set forth in Level I (even if the Average Daily Availability requirements for a different Level have been met, without limiting the right of the Administrative Agent or the Required Lenders to charge interest at the Default Rate as provided in Section 2.12); provided further if the Borrowing Base Certificates are at any time restated or otherwise revised (including as a result of an audit) or if the information set forth in any Borrowing Base Certificates otherwise proves to be false or incorrect such that the Applicable Margin would have been higher than was otherwise in effect during any period, without constituting a waiver of any Default or Event of Default arising as a result thereof, interest due under this Agreement shall be immediately recalculated at such higher rate for any applicable periods and shall be due and payable on demand.

(b)                The definition of “Borrowing Base” is hereby amended by deleting clauses (iv) and (v) thereof and substituting the following in its stead:

“(iv)     Intentionally Omitted.

(v)       the then amount of all Availability Reserves.”

(c)           The definition of “Capital Stock” is hereby deleted in its entirety and the following substituted in its stead:

“ “ Capital Stock ” means, as to any Person that is a corporation, the authorized shares of such Person’s capital stock, including all classes of common, preferred, voting and nonvoting capital stock, and, as to any Person that is not a corporation or an individual, the membership or other ownership interests in such Person, including, without limitation, the right to share in profits and losses, the right to receive distributions of cash and other property, and the right to receive allocations of items of income, gain, loss, deduction and credit and similar items from such Person, whether or not such interests include voting or similar rights entitling the holder thereof to exercise control over such Person, collectively with, in any such case, all warrants, options and other rights to purchase or otherwise acquire, and all other instruments convertible into or exchangeable for, any of the foregoing; provided that in no event shall any Indebtedness (or instrument representing any Indebtedness) that is convertible into or exchangeable for any of the foregoing constitute “Capital Stock” (unless and until so converted or exchanged) or otherwise be considered a right to acquire “Capital Stock” for any purpose of this Agreement.”

(d)          The definition of “Consolidated EBITDA” is hereby deleted in its entirety and the following substituted in its stead:

“ “ Consolidated EBITDA ” means, with respect to any Person for a twelve (12) Fiscal Month period, the sum (without duplication) of (a) Consolidated Net Income for such period, plus (b) depreciation and amortization for such period, plus (c) provisions for Taxes based on income that were deducted in determining Consolidated Net Income for such period, plus (d) Consolidated Interest Expense that was deducted in determining Consolidated Net Income for such period, plus (e) any other non-cash charges, including any write offs or write downs, reducing Consolidated Net Income for such period ( provided that any such non-cash charges shall be treated as cash charges in any future period in which the cash disbursement attributable thereto are made and such cash disbursement in such future period shall be subtracted from Consolidated EBITDA in such future period, and excluding amortization of a prepaid cash item that was paid in a prior period to the extent such cash item was deducted in calculating Consolidated EBITDA in period when paid) minus (f) extraordinary gains for such period.”

(e)          The definition of “Debt Service Charges” is hereby amended by adding the following sentence at the end of such definition:

“Notwithstanding anything to the contrary herein contained, prepayments of principal of the Convertible Notes or any Refinancing Indebtedness, in each case to the extent such prepayments are permitted hereunder, shall be excluded in the determination of Debt Service Charges.”

(f)           The definition of “Line Fee” is hereby deleted in its entirety and the following substituted in its stead:

“ “ Line Fee ” means  a fee equal to 0.50% per annum (on the basis of actual days elapsed in a year of 360 days) of the average daily balance of the difference between (x) each Lender’s Commitment and (y) the sum of (i) such Lender’s Commitment Percentage of the principal amount of Loans then outstanding, net of any Swingline Loans, and (ii) such Lender’s Commitment Percentage of the then Letter of Credit Outstandings for each day commencing on the date hereof and ending on but excluding the Termination Date.”

(g)          The definition of “Permitted Acquisition” is hereby amended by deleting clause (g) thereof in its entirety and substituting the following in its stead:

“(g)      If any Loans are then outstanding or, on a pro forma and projected basis (which projections shall be reasonably satisfactory to the Administrative Agent), for the subsequent twelve month period are anticipated to be outstanding, the Payment Conditions shall have been satisfied.”

(h)          The definition of “Permitted Dividends” is hereby amended by deleting clauses (d), (e) and (f) in their entirety and substituting the following new clauses (d) and (e) in their stead:

“(d)      Restricted Payments for the purpose of repurchasing or redeeming Capital Stock in an amount not to exceed $40,000,000 in the aggregate from and after the Third Amendment Effective Date and prior to the Maturity Date, so long as (i) no Event of Default has occurred or shall occur after giving effect to such Restricted Payment, and (ii) if the Restricted Payment is to be funded in whole or in part with proceeds of Loans: (A) Availability (on a projected and pro forma basis for the twelve months following such Restricted Payment) will be equal to or greater than thirty-five percent (35%) of the lesser of the Revolving Credit Ceiling or the Borrowing Base after giving effect to such Restricted Payment and to all Debt Service Charges coming due for the twelve months following such Restricted Payment, (B) the Consolidated Fixed Charge Coverage Ratio will be equal to or greater than 1.10:1.00, in each case after giving effect to such Restricted Payments and as projected on a pro forma basis for the twelve months following such Restricted Payments, and (C) the Borrower shall have provided projections to the Administrative Agent, in form and substance satisfactory to the Administrative Agent, evidencing the satisfaction of the conditions described in clauses (ii)(A) and (ii)(B) above; and

“(e)      Restricted Payments other than those described in clause (d) above, so long as (i) no Event of Default has occurred or shall occur after giving effect to such Restricted Payment, and (ii) if the Restricted Payment is to be funded in whole or in part with proceeds of Loans: (A) Availability (on a projected and pro forma basis for the twelve months following such Restricted Payment) will be equal to or greater than thirty-five percent (35%) of the lesser of the Revolving Credit Ceiling or the Borrowing Base after giving effect to such Restricted Payment and to all Debt Service Charges coming due for the twelve months following such Restricted Payment, (B) the Consolidated Fixed Charge Coverage Ratio will be equal to or greater than 1.10:1.00, in each case after giving effect to such Restricted Payments and as projected on a pro forma basis for the twelve months following such Restricted Payments, and (C) the Borrower shall have provided projections to the Administrative Agent, in form and substance satisfactory to the Administrative Agent, evidencing the satisfaction of the conditions described in clauses (ii)(A) and (ii)(B) above.”

(i)           The definition of “Permitted Encumbrances” is hereby amended by deleting the phrase “; and” at the end of clause (aa) thereof, re-lettering clause (bb) thereof as clause (dd), and inserting the following new clauses (bb) and (cc) therein:

“(bb)     Liens to secure any Refinancing Indebtedness, provided that such Liens shall be subject at all times to the terms of an intercreditor agreement in form and substance acceptable to the Administrative Agent in its sole reasonable discretion;

(cc)      Liens consisting of deposits in the ordinary course of business in an aggregate amount not to exceed $1,000,000 at any time outstanding; and”

(j)           The definition of “Permitted Indebtedness” is hereby amended by deleting the phrase “; and” at the end of clause (s) thereof, re-lettering clause (t) thereof as clause (u), and inserting the following new clause (t) therein:

“(t)      Any Refinancing Indebtedness; and”

(k)           The definition of “Prime Rate” is hereby deleted in its entirety and the following substituted in its stead:

“ “ Prime Rate ” means, for any day, the highest of: (a) the variable annual rate of interest then most recently announced by Bank of America at its head office in Charlotte, North Carolina as its “Prime Rate”; (b) the Federal Funds Effective Rate in effect on such day plus ½ of 1% (0.50%) per annum; and (c) the Adjusted LIBO Rate for an Interest Period of one month, plus 1% per annum.  The Prime Rate is a reference rate and does not necessarily represent the lowest or best rate being charged to any customer.  If for any reason the Administrative Agent shall have determined (which determination shall be conclusive absent manifest error) that it is unable to ascertain the Federal Funds Effective Rate for any reason, including the inability or failure of the Administrative Agent to obtain sufficient quotations thereof in accordance with the terms hereof, the Prime Rate shall be determined without regard to clause (b) of the first sentence of this definition, until the circumstances giving rise to such inability no longer exist.  If for any reason the Administrative Agent, in accordance with Section 2.10 hereof, shall have determined (which determination shall be conclusive absent manifest error) that adequate and reasonable means do not exist for ascertaining the Adjusted LIBO Rate for an Interest Period of one month, the Prime Rate shall be determined without regard to clause (c) of the first sentence of this definition, until the circumstances giving rise to such inability no longer exist.  Any change in the Prime Rate due to a change in Bank of America’s Prime Rate, the Adjusted LIBO Rate (after the expiration of the Interest Period previously used in determining the Prime Rate) or the Federal Funds Effective Rate shall be effective on the effective date of such change in Bank of America’s Prime Rate, the Adjusted LIBO Rate (after the expiration of the Interest Period previously used in determining the Prime Rate) or the Federal Funds Effective Rate, respectively.”  

(l)           The definition of “Revolving Credit Ceiling” is hereby deleted in its entirety and the following substituted in its stead:

“ “ Revolving Credit Ceiling ” means $300,000,000, as such amount may be increased or reduced in accordance with the terms of this Agreement.”

(m)          The definitions of “FMV”, “Deed of Trust”, “Eligible Real Estate”, “FIRREA”, “Real Estate Advance Rate”, “Realty Reserves”, “Title Insurance Company”, and “Title Insurance Policy” are hereby deleted in their entirety wherever the same shall appear.

(n)           The following new definitions are added to Article I in appropriate alphabetical order:

(i)       “ “ Payment Conditions ” means, with respect to any transaction, (i) no Event of Default has occurred or shall occur after giving effect to such transaction, (ii) Availability will be equal to or greater than thirty percent (30%) of the lesser of the Revolving Credit Ceiling or the Borrowing Base after giving effect to such transaction and as projected on a pro forma basis for the nine months following such transaction, and (iii) the Borrower shall have provided projections to the Administrative Agent, in form and substance satisfactory to the Administrative Agent, evidencing the satisfaction of the conditions described in clauses (i) and (ii) above.”

(ii)      “ “ Refinancing Indebtedness ” means any Indebtedness or any guaranty by a Loan Party thereof, in each case issued in exchange for, or the Net Proceeds of which are used to extend, refinance, renew, replace, defease or refund (collectively, to “ refinance ”), the Convertible Notes; provided , that (a) the face amount of such Refinancing Indebtedness does not exceed the face amount of the Convertible N