form10k.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark One)
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x ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For
the fiscal year ended August 31, 2008
OR
¨ TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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Commission
File Number: 000-22793
PRICESMART,
INC.
(Exact
name of registrant as specified in its charter)
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DELAWARE
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33-0628530
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(State
of other jurisdiction of
incorporation
or organization)
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(I.R.S.
Employer
Identification
Number)
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9740
SCRANTON RD, SAN DIEGO, CA 92121
(Address
of principal executive offices, Zip Code)
Registrant’s
telephone number, including area code: (858) 404-8800
Securities
registered pursuant to Section 12(b) of the Act: None
Securities
registered pursuant to Section 12(g) of the Act:
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Common
Stock, $0.0001 Par Value
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Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes ¨ No x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Act. Yes ¨ No x
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports); and (2) has been subject to
such filing requirements for the past
90 days. Yes x No ¨
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the
best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer, or a smaller reporting company.
See the definition of “large accelerated filer,” “accelerated filer” and
“smaller reporting Company” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer ¨
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Accelerated
filer x
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Non-accelerated
filer ¨ (Do not check
if a smaller reporting company)
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Smaller
reporting company ¨
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Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes ¨ No x
The
aggregate market value of the Registrant’s voting stock held by non-affiliates
of the Registrant as of February 29, 2008 was $357,548,126, based on the
last reported sale of $24.26 per share on February 29, 2008.
As of
November 5, 2008, a total of 29,608,772 shares of Common Stock were
outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the Company’s Annual Report for the fiscal year ended August 31, 2008
are incorporated by reference into Part II of this
Form
10-K.
Portions
of the Company’s definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on January 28, 2009 are incorporated by reference
into Part III of this Form 10-K.
PRICESMART,
INC.
ANNUAL
REPORT ON FORM 10-K FOR
THE
FISCAL YEAR ENDED AUGUST 31, 2008
TABLE
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This Form
10-K contains forward-looking statements concerning PriceSmart, Inc.'s
(“PriceSmart” or the “Company”) anticipated future revenues and earnings,
adequacy of future cash flow and related matters. These forward-looking
statements include, but are not limited to, statements containing the words
“expect,” “believe,” “will,” “may,” “should,” “project,” “estimate,” “scheduled”
and like expressions, and the negative thereof. These statements are subject to
risks and uncertainties that could cause actual results to differ materially
from the statements, including foreign exchange risks, political or economic
instability of host countries, and competition as well as those risks described
in the Company's U.S. Securities and Exchange Commission reports, including the
risk factors referenced in this Form 10-K. See Part I, Item 1A “Risk
Factors.”
PriceSmart's
business consists primarily of international membership shopping warehouse clubs
similar to, but smaller in size than, warehouse clubs in the United States. The
number of warehouse clubs in operation, as of August 31, 2008 and 2007, the
Company's ownership percentages and basis of presentation for financial
reporting purposes by each country or territory are as follows:
Country/Territory
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Number
of
Warehouse Clubs
in Operation (as of
August 31,
2008)
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Number
of
Warehouse Clubs
in Operation (as of
August 31,
2007)
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Ownership (as of
August 31,
2008)
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Basis
of
Presentation
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Panama
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4
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4
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100%
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Consolidated
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Costa
Rica
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4
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4
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100%
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Consolidated
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Dominican
Republic
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2
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2
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100%
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Consolidated
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Guatemala
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3
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2
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100%
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Consolidated
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El
Salvador
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2
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2
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100%
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Consolidated
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Honduras
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2
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2
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100%
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Consolidated
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Trinidad
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3
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2
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95%
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Consolidated
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Aruba
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1
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1
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100%
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Consolidated
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Barbados
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1
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1
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100%
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Consolidated
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U.S.
Virgin Islands
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1
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1
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100%
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Consolidated
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Jamaica
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1
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1
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100%
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Consolidated
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Nicaragua
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1
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1
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100%
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Consolidated
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Totals
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25
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23
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In
November and December 2007 (fiscal year 2008), the Company opened its third
warehouse clubs in each of Guatemala and Trinidad. Also during the second
quarter of fiscal year 2008, the Company acquired the remaining 49% of minority
interest in PriceSmart Nicaragua, increasing the Company’s ownership to
100%. In addition, during the fourth quarter of fiscal year 2008, the
Company acquired the remaining 10% of minority interest in PriceSmart Aruba,
increasing its ownership to 100%.
As of
August 31, 2008, the total number of consolidated warehouse clubs in operation
was 25 operating in 11 countries and one U.S. territory, in comparison to 23
consolidated warehouse clubs operating in 11 countries and one U.S. territory at
the end of August 2007. The average age of the warehouse clubs included in
continuing operations was 86 months and 80 months as of the end of fiscal year
2008 and fiscal year 2007, respectively.
The
Company announced on October 1, 2008 that it had entered into agreements to
acquire properties in Panama and Costa Rica for the construction of new
warehouse clubs. In Costa Rica, this will bring the number of
warehouse clubs in that country to five. In Panama, the Company will
relocate an existing warehouse club to this new site and close the existing
warehouse club after the relocation has been completed. The Company
is completing due diligence reviews on two sites, one in Trinidad and the second
one in the Dominican Republic as to which the Company has entered into a
purchase agreement (subject to due diligence contingencies) and an option
agreement, respectively. In addition, the Company is closely examining
Colombia as a potential new market for multiple PriceSmart warehouse clubs.
Related to the recently acquired sites in Panama and Costa Rica, the Company
purchased a 50% interest in additional land adjacent to the warehouse club sites
which will be developed as community shopping centers by the joint
venture. The Company will continue to consider the acquisition of
additional land adjacent to new PriceSmart locations with or without a
joint-venture (JV) partner.
In
addition to the warehouse clubs operated directly by the
Company. There is one warehouse club in operation in Saipan,
Micronesia licensed to and operated by local business people, from which the
Company earns a royalty fee.
International
Warehouse Club Business
The
Company owns and operates U.S.-style membership shopping warehouse clubs through
majority or wholly owned ventures operating in Central America and the Caribbean
using the trade name “PriceSmart.” In addition, there is one warehouse club in
operation in Saipan, Micronesia licensed to and operated by local business
people, from which the Company earns a royalty fee. The warehouse clubs sell
basic consumer goods to individuals and businesses, sales are typically
comprised of approximately 48% U.S.-sourced merchandise and approximately 52%
locally sourced merchandise, with an emphasis on quality and low prices. By
offering low prices on brand name and private label merchandise, the warehouse
clubs seek to generate sufficient sales volumes to operate profitably at
relatively low gross profit margins.
The
Company acquires its U.S. and Asian sourced merchandise from suppliers and
routes it directly to our warehouse clubs or to the Company’s consolidation
points (“distribution centers”). The goods are allocated for container-based
shipment via ocean freight from the distribution centers to our individual
warehouse clubs. This maximizes freight volume per shipment and handling
efficiencies, thereby lowering supply chain costs.
The
typical no-frills warehouse club-type buildings range in size from 48,000 to
78,000 square feet and are located primarily in urban areas to take advantage of
dense populations and relatively higher levels of disposable income. Product
selection includes perishable foods and basic consumer products. Ancillary
services include food services, bakery, tire centers, and photo centers. The
shopping format includes an annual membership fee.
Business
Strategy
PriceSmart's
mission is to efficiently operate U.S.-style membership warehouse clubs in
Central America and the Caribbean that sell high quality merchandise at low
prices to PriceSmart members and that provide fair wages and benefits to
PriceSmart employees, as well as a fair return to PriceSmart stockholders. The
Company delivers U.S. brand-name and locally sourced products to its small
business and consumer members in a warehouse club format that provides high
value to its members. By focusing on providing exceptional value on quality
merchandise in a low cost operating environment, the Company seeks to grow sales
volume and increase membership which in turn will allow for further
efficiencies, resulting in price reductions and improved value to our
members.
Membership
Policy
PriceSmart
believes that membership reinforces customer loyalty. In addition, membership
fees provide a continuing source of revenue, which allows us to continue
lowering prices for the members. PriceSmart has two types of members: Business
and Diamond (individual).
Business
owners and managers qualify for Business membership. PriceSmart promotes
Business membership through its merchandise selection and its marketing programs
primarily targeting small businesses like restaurants, hotels and convenience
stores. Business members pay an annual membership fee of approximately $25 for a
primary and spouse membership card and approximately $10 for additional add-on
membership cards. Diamond (individual) members pay an annual membership fee of
approximately $20 and approximately $10 for an add-on membership
card.
The
Company recognizes membership income over the term of the membership, which is
12 months. Deferred membership income is presented separately on the
consolidated balance sheet and totaled $7.8 million and $6.6 million as of
August 31, 2008 and 2007, respectively. PriceSmart's membership agreements
contain an explicit right to refund if its customers are dissatisfied with their
membership. The Company's historical rate of membership fee refunds has been
approximately 0.5% of membership income.
Expansion
Plans
In the
past, the Company rapidly expanded into new countries and markets as part of its
strategy to gain volume buying benefits and to move quickly into underserved
areas. The Company is currently focusing its management attention on improving
the operations of its current locations and believes that its existing portfolio
provides the opportunity for improved sales and profitability. However, the
Company continues to evaluate various options for expansion, particularly in the
countries in which it has already established a strong market presence. In that
regard, the Company announced on October 1, 2008 that it had entered into
agreements to acquire properties in Panama and Costa Rica for the construction
of new warehouse clubs. In Costa Rica, this will bring the number of
warehouse clubs in that country to five. In Panama, the Company will
relocate an existing warehouse club to this new site and close the existing
warehouse club after the relocation has been completed. The Company
is conducting due diligence reviews on two sites, one in Trinidad and the second
one in the Domincan Republic, under purchase a argeement (subject to due
diligence contingencies) and an option to purchase agreement respectively.
In addition, the Company is closely examining Colombia as a potential new
market for multiple PriceSmart warehouse clubs. Related to the recently acquired
sites in Panama and Costa Rica, the Company purchased a 50% interest in
additional land adjacent to the warehouse club sites which will be developed as
community shopping centers by the joint venture. The Company will
continue to consider the acquisition of additional land adjacent to new
PriceSmart locations with or without a JV partner.
Warehouse
Club Closings and Asset Impairment
During
fiscal year 2006, the Company recorded $1.8 million in asset impairment and
closure costs, which were primarily due to the write-down of the buildings and
land that previously housed warehouse clubs, one in Honduras and one in the
Dominican Republic. The Company’s original San Pedro Sula, Honduras
location was vacated and the warehouse club was relocated to a new site which
was acquired during fiscal year 2006 in another section of the city. The
charge in the Dominican Republic relates to the previously closed warehouse club
in East Santo Domingo.
During
fiscal year 2007, the Company recorded $1.6 million in asset impairment and
closure costs. These costs were primarily due to the write down of the vacated
San Pedro Sula, Honduras location and the loss on the sale of the East Santo
Domingo, Dominican Republic location. In addition there were closure costs
recorded in Guatemala for the closed Plaza warehouse, and closure costs in the
Dominican Republic and Honduras incurred in operating and preparing the
respective properties for sale. In September 2007 (fiscal year 2008), the
Company finalized the sale of the vacated San Pedro Sula, Honduras location at
the net book value of the asset.
During
fiscal year 2008, the Company recorded approximately $1.1 million in asset
impairment and closure costs. These were primarily due to the write
down of bulk packaging equipment for approximately $449,000, as this packaging
is now substantially performed in vendor installations. In addition,
the Company recorded closing costs in Guatemala for the closed Plaza warehouse,
and closure costs in Honduras associated with the final closure and sale of the
San Pedro Sula club warehouse location. The major effect on these
closure costs was the revaluation of the Guatemala Plaza lease liability for
approximately $605,000 to reflect the increase in rental costs over the
remaining period of the lease. Interest related to income generated
from the note receivable related to the sale of the East Side Santo Domingo club
warehouse which was located in the Dominican Republic is also included within
the Asset impairment and closure costs reported in fiscal year
2008.
Discontinued
Operations
With the
disposition of the Company's interest in PSMT Philippines, Inc. in fiscal 2005
this entity, as well as the Company's Guam operation, which was closed in fiscal
2004, qualify for treatment as “discontinued operations” in the Company's
consolidated financial statements. The prior periods have been reclassified for
comparative purposes.
International
Licensee Business
The
Company had one warehouse club in operation in Saipan, Micronesia licensed to
and operated by local business people at the end of fiscal year 2008, through
which the Company earns a royalty fee.
Intellectual
Property Rights
It is the
Company's policy to obtain appropriate proprietary rights protection for
trademarks by filing applications for registration eligible trademarks with the
U.S. Patent and Trademark Office, and in certain foreign countries. In addition,
the Company relies on copyright and trade secret laws to protect its proprietary
rights. The Company attempts to protect its trade secrets and other proprietary
information through agreements with its joint ventures, employees, consultants
and suppliers and other similar measures. There can be no assurance, however,
that the Company will be successful in protecting its proprietary rights. While
management believes that the Company's trademarks, copyrights and other
proprietary know-how have significant value, changing technology and the
competitive marketplace make the Company's future success dependent principally
upon its employees' technical competence and creative skills for continuing
innovation.
There can
be no assurance that third parties will not assert claims against the Company
with respect to existing and future trademarks, trade names, domain names, sales
techniques or other intellectual property matters. In the event of litigation to
determine the validity of any third-party's claims, such litigation could result
in significant expense to the Company and divert the efforts of the Company's
management, whether or not such litigation is concluded in favor of the
Company.
In August
1999, the Company and Associated Wholesale Grocers, Inc. (“AWG”) entered into an
agreement regarding the trademark “PriceSmart” and related marks containing the
name “PriceSmart.” The Company agreed not to use the “PriceSmart” mark or any
related marks containing the name “PriceSmart” in connection with the sale or
offer for sale of any goods or services within AWG's territory of operations,
including the following ten states: Kansas, Missouri, Arkansas, Oklahoma,
Nebraska, Iowa, Texas, Illinois, Tennessee and Kentucky. The Company, however,
may use the mark “PriceSmart” or any mark containing the name “PriceSmart” on
the internet or any other global computer network whether within or outside such
territory, and in any national advertising campaign that cannot reasonably
exclude the territory, and the Company may use the mark in connection with
various travel services. AWG has agreed not to oppose any trademark applications
filed by the Company for registration of the mark “PriceSmart” or related marks
containing the name “PriceSmart,” and AWG has further agreed not to bring any
action for trademark infringement against the Company based upon the Company's
use outside the territory (or with respect to the permitted uses inside the
territory) of the mark “PriceSmart” or related marks containing the name
“PriceSmart.”
Employees
As of
August 31, 2008, the Company and its consolidated subsidiaries had a total
of 4,200 employees. Approximately 94.4% of the Company's employees were employed
outside of the United States.
Seasonality
Historically,
the Company's merchandising businesses have experienced holiday retail
seasonality in their markets. In addition to seasonal fluctuations, the
Company's operating results fluctuate quarter-to-quarter as a result of economic
and political events in markets served by the Company, the timing of holidays,
weather, the timing of shipments, product mix, and currency effects on the cost
of U.S.-sourced products which may make these products more or less expensive in
local currencies and therefore more or less affordable. Because of such
fluctuations, the results of operations of any quarter are not indicative of the
results that may be achieved for a full fiscal year or any future quarter. In
addition, there can be no assurance that the Company's future results will be
consistent with past results or the projections of securities
analysts.
In
evaluating our business, you should consider the following discussion of risk
factors, in addition to other information contained in this report as well as
our other public filings with the Securities and Exchange
Commission.
The Company's financial performance
is dependent on international operations, which exposes it to various
risks. The Company's international operations account for nearly all of
the Company's total sales. The Company's financial performance is subject to
risks inherent in operating and expanding the Company's international membership
business, which include: (i) changes in and interpretation of tariff and
tax laws and regulations, as well as inconsistent enforcement of laws and
regulations; (ii) the imposition of foreign and domestic governmental
controls; (iii) trade restrictions; (iv) greater difficulty and costs
associated with international sales and the administration of an international
merchandising business; (v) thefts and other crimes; (vi) limitations
on U.S. company ownership in certain foreign countries; (vii) product
registration, permitting and regulatory compliance; (viii) volatility in
foreign currency exchange rates; (ix) the financial and other capabilities
of the Company's joint venturers and licensees; and (x) general political
as well as economic and business conditions.
Any failure by the Company to manage
its widely dispersed operations could adversely affect the Company's business.
As of August 31, 2008, the Company had in operation 25 consolidated
warehouse clubs in 11 countries and one U.S. territory (four in Panama; four in
Costa Rica; three each in Guatemala and Trinidad; two each in the Dominican
Republic, El Salvador and Honduras; and one each in Aruba, Barbados, Jamaica,
Nicaragua and the United States Virgin Islands). The success of the Company's
business will depend to a significant degree on the Company's ability to
(i) efficiently operate warehouse clubs on a profitable basis and
(ii) maintain positive comparable warehouse club sales growth in the
applicable markets. In addition, the Company will need to continually evaluate
the adequacy of the Company's existing personnel, systems and procedures,
including warehouse management and financial and inventory control. Moreover,
the Company will be required to continually analyze the sufficiency of the
Company's inventory distribution channels and systems and may require additional
facilities in order to support the Company's operations. The Company may not
adequately anticipate all the changing demands that will be imposed on these
systems. An inability or failure to retain effective warehouse personnel or to
update the Company's internal systems or procedures as required could have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company faces significant
competition. The Company's international merchandising businesses compete
with exporters, wholesalers, local retailers and trading companies in various
international markets. Some of the Company's competitors may have greater
resources, buying power and name recognition. There can be no assurance that
additional competitors will not decide to enter the markets in which the Company
operates or that the Company's existing competitors will not compete more
effectively against the Company. The Company may be required to implement price
reductions in order to remain competitive should any of the Company's
competitors reduce prices in any of the Company's markets. Moreover, the
Company's ability to operate profitably in its markets, particularly small
markets, may be adversely affected by the existence or entry of competing
warehouse clubs or discount retailers.
The Company faces difficulties in
the shipment of and inherent risks in the importation of merchandise to its
warehouse clubs. The Company's warehouse clubs typically import half or
more of the merchandise that they sell, which originates from various countries
and is transported over great distances, typically over water, which results in:
(i) substantial lead times needed between the procurement and delivery of
product, thus complicating merchandising and inventory control methods;
(ii) the possible loss of product due to theft or potential damage to, or
destruction of, ships or containers delivering goods; (iii) product
markdowns as a result of it being cost prohibitive to return merchandise upon
importation; (iv) product registration, tariffs, customs and shipping
regulation issues in the locations the Company ships to and from; and
(v) substantial ocean freight and duty costs. Moreover, each country in
which the Company operates has different governmental rules and regulations
regarding the importation of foreign products. Changes to the rules and
regulations governing the importation of merchandise may result
in additional delays, costs or barriers in the Company's deliveries of products
to its warehouse clubs or product it selects to import. For example, several of
the countries in which the Company's warehouse clubs are located have imposed
restrictions on the importation of some U.S. beef products because of concerns
about Bovine Spongiform Encephalopathy (BSE), commonly referred to as “mad cow
disease.” As a result of these restrictions, the sales of U.S. beef products may
be impaired for the duration of these restrictions and may continue following
the lifting of these restrictions because of perceptions about the safety of
U.S. beef among people living in these countries. In addition, only a limited
number of transportation companies service the Company's regions. The inability
or failure of one or more key transportation companies to provide transportation
services to the Company, any collusion among the transportation companies
regarding shipping prices or terms, changes in the regulations that govern
shipping tariffs or the importation of products, or any other disruption in the
Company's ability to transport the Company's merchandise could have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company is exposed to weather
and other risks associated with international operations. The Company's
operations are subject to the volatile weather conditions and natural disasters
such as earthquakes and hurricanes, which are encountered in the regions in
which the Company's warehouse clubs are located and which could result in
significant damage to, or destruction of, or temporary closure of, the Company's
warehouse clubs. For example, during September 2004, while no damage was
sustained from the multiple hurricanes in the Caribbean, a total of eight days
of sales were lost due to selected warehouse club closures resulting from heavy
rains, local flooding and government advisories to stay off the roads. Losses
from business interruption may not be adequately compensated by insurance and
could have a material adverse effect on the Company's business, financial
condition and results of operations.
General economic conditions could
adversely impact our business in various respects. A further slowdown in
the U.S. economy or other economic conditions affecting discretionary consumer
spending, such as employment rates, business conditions, inflation fuel and
energy costs, consumer debt levels, lack of available credit, interest rates,
tax rates, consumer spending patterns, customer preferences and other economic
factors in each of the Company's foreign markets may adversely affect our
business by reducing overall consumer purchasing power and could negatively
impact the Company's growth, sales and profitability. In addition, a significant
decline in these economies may lead to increased governmental ownership or
regulation of the economy, higher interest rates, increased barriers to entry
such as higher tariffs and taxes, and reduced demand for goods manufactured in
the United States. Factors such as reduced expatriate remittances,
reduced tourism, and less foreign investment could negatively impact Central
America and the Caribbean. The current global general economic instability, the
potential for further economic dislocations, the potential impact of a
recession, the potential for failures or realignments of financial institutions
and the related impact on available credit could have a material adverse effect
on the Company's business, financial condition and results of
operations.
A few of the Company's stockholders
own nearly one-half of the Company's voting stock, which may make it difficult
to complete some corporate transactions without their support and may impede a
change in control. A group comprised of Robert E. Price, who is the
Company’s Chairman of the Board and Chief Executive Officer, Jose Luis Laparte,
the Company’s President, Sol Price, a significant stockholder of the Company and
father of Robert E. Price, Jack McGrory, Murray Galinson, Keene Wolcott, members
of our Board of Directors, and affiliates of these individuals, including Price
Charities, and The Price Group, LLC filed an amended Schedule 13D reflecting
that their collective ownership approximates 48% of the Company’s outstanding
shares of common stock and stating their intention to act as a group with
respect to voting of the Company’s common stock. As a result of their beneficial
ownership, these stockholders have the ability to significantly affect the
outcome of all matters submitted to the Company's stockholders for approval,
including the election of directors. In addition, this ownership could
discourage the acquisition of the Company's common stock by potential investors
and could have an anti-takeover effect, possibly depressing the trading price of
the Company's common stock.
The loss of key personnel could harm
the Company's business. The Company depends to a large extent on the
performance of its senior management team and other key employees, such as U.S.
expatriates in certain locations where the Company operates, for strategic
business direction. The loss of the services of any members of the Company's
senior management or other key employees could have a material adverse effect on
the Company's business, financial condition and results of
operations.
The Company is subject to volatility
in foreign currency exchange rates. The Company, primarily through
majority or wholly owned subsidiaries, conducts operations in Central America
and the Caribbean, and as such is subject to both economic and political
instabilities that cause volatility in foreign currency exchange rates or weak
economic conditions. As of August 31, 2008, the Company had a total of 25
consolidated warehouse clubs operating in 11 foreign countries and one U.S.
territory, 18 of which operate under currencies other than the U.S. dollar. For
fiscal year 2008, approximately 79% of the Company's net warehouse club sales
were in foreign currencies. The Company may enter into additional foreign
countries in the future or open additional locations in existing countries,
which may increase the percentage of net warehouse sales denominated in foreign
currencies.
Foreign
currencies in most of the countries where the Company operates have historically
devalued against the U.S. dollar and are expected to continue to devalue. For
example, the Dominican Republic experienced a net currency devaluation of 81%
between the end of fiscal year 2002 and the end of fiscal year 2003 and 13%
(significantly higher at certain points of the year) between the end of fiscal
year 2003 and the end of fiscal year 2004. Foreign exchange transaction gains
(losses), including repatriation of funds, which are included as part of the
costs of goods sold in the consolidated statement of income, for fiscal years
2008, 2007 and 2006 were approximately ($1.6 million), $5,000 and ($1.5
million), respectively.
The Company faces the
risk of exposure to product liability claims, a product recall and adverse
publicity. The Company markets and
distributes products purchased from third-party suppliers and products
prepared by the Company for resale, including meat, dairy and other food
products which exposes the Company to the risk of product liability claims, a
product recall and adverse publicity. The Company may inadvertently redistribute
food products or prepare food products that are contaminated, which may result
in illness, injury or death if the contaminants are not eliminated by processing
at the foodservice or consumer level. The Company generally seeks contractual
indemnification and insurance coverage from its major suppliers for product
purchased from third-party suppliers and carries product liability insurance for
product prepared by the Company. However, if the Company does not have adequate
insurance or contractual indemnification available, product liability claims
relating to products that are contaminated or otherwise harmful could have a
material adverse effect on the Company's ability to successfully market its
products and on the Company's business, financial condition and results of
operations. In addition, even if a product liability claim is not successful or
is not fully pursued, the negative publicity surrounding a product recall or any
assertion that the Company's products caused illness or injury could have a
material adverse effect on the Company's reputation with existing and potential
customers and on the Company's business, financial condition and results of
operations.
Potential future
impairments under Financial Accounting Standards Board Statement of Financial
Accounting Standard No. 144 (“SFAS 144”), “Accounting for the Impairment or
Disposal of Long-Lived Assets” could adversely affect the Company's future
results of operations and financial position. In accordance with SFAS
144, “Accounting for the Impairment or Disposal of Long-Lived Assets,”
long-lived assets are assessed for impairment annually or whenever events or
changes in circumstances indicate that the carrying amount of the asset may not
be recoverable. An impairment loss would be measured and recognized if the sum
of the expected future discounted cash flows is less than the carrying amount of
the asset. If the carrying amount of the asset were determined to be impaired,
an impairment loss to write-down the carrying value of the asset to fair value
by using quoted market prices, when available, would be required. When a quoted
market price is not available, an estimated fair value would be determined
through other valuation techniques. The Company has used projected cash flows
discounted to reflect the expected commercial, competitive and other factors
related to its long-lived assets and comparisons to similar asset sales and
valuations by others to estimate the fair value of its intangible assets. These
future tests may result in a determination that these assets have been impaired.
If at any time the Company determines that an impairment has occurred, it will
be required to reflect the impaired value as a charge, resulting in a reduction
in earnings in the quarter such impairment is identified and a corresponding
reduction in our net asset value.
For
example, in fiscal year 2008 the Company was required to take an impairment
charge pursuant to SFAS No. 144 of approximately $449,000 on bulk packaging
equipment located in its club warehouses. This was due to the
Company’s decision to outsource the bulk packaging of product. The
Company was also required to take an impairment charge pursuant to SFAS
No. 144 on the old San Pedro Sula, Honduras warehouse site in fiscal year
2007 of approximately $897,000. This was due to the revised fair valuation of
the land and building as a result of the disposal agreement. In addition, the
Company recorded a $2.6 million impairment charge related to the write down of
the Company's interest in its Mexico joint venture as a result of the disposal
agreement. A
material reduction in earnings resulting from such a charge could cause the
Company to fail to be profitable in the period in which the charge is taken or
otherwise to fail to meet the expectations of investors and securities analysts,
which could cause the price of the Company's stock to decline.
Write-offs pursuant to Financial
Accounting Standards Board Statement of Financial Accounting Standard
No. 142 (“SFAS 142”), “Goodwill and Other Intangible Assets” could
adversely affect the Company's future results of operations and financial
position. Under statement of Financial Accounting Standard No. 142,
“Goodwill and Other Intangible Assets,” goodwill and intangible assets deemed to
have indefinite lives are not amortized but instead are subject to annual
impairment tests in accordance with the Statement. As of August 31, 2008,
the Company had goodwill of approximately $39.2 million, net of accumulated
amortization originating prior to the adoption of SFAS 142. The Company
performed its impairment test on goodwill as of August 31, 2008 and
August 31, 2007, and no impairment losses were recorded. In the future, the
Company will test for impairment at least annually. Such tests may result in a
determination that these assets have been impaired. If at any time the Company
determines that an impairment has occurred, the Company will be required to
reflect the impaired value as a part of operating income, resulting in a
reduction in earnings in the period such impairment is identified and a
corresponding reduction in the Company's net asset value. A material reduction
in earnings resulting from such a charge could cause the Company to fail to be
profitable or increase the amount of its net loss in the period in which the
charge is taken or otherwise to fail to meet the expectations of investors and
securities analysts, which could cause the price of the Company's stock to
decline.
The Company faces increased
compliance risks associated with compliance with Section 404 of the
Sarbanes-Oxley Act of 2002. Like many smaller public companies, the
Company faces a significant impact from required compliance with
Section 404 of the Sarbanes-Oxley Act of 2002. Section 404 requires
management of public companies to evaluate, and the independent auditors to
attest to the effectiveness of internal control over financial reporting and the
evaluation performed by management. The Securities and Exchange Commission has
adopted rules implementing Section 404 for public companies as well as
disclosure requirements. The Public Company Accounting Oversight Board, or
PCAOB, has adopted documentation and attestation standards that the independent
auditors must follow in conducting its attestation under
Section 404.
Our
internal control over financial reporting is designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally
accepted accounting principles and include those policies and procedures that:
(1) pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect our transactions and the dispositions of our
assets; (2) provide reasonable assurance that our transactions are recorded
as necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles and that our receipts and expenditures
are being made only in accordance with appropriate authorizations; and
(3) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use or disposition of our assets that could have a
material effect on our financial statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Therefore, even those systems determined to be
effective can provide only reasonable assurance with respect to financial
statement preparation and presentation.
Any
failure to effectively implement new or improved internal controls, or to
resolve difficulties encountered in their implementation, could harm the
Company's operating results, cause it to fail to meet reporting obligations,
result in management being required to give a qualified assessment of the
Company's internal controls over financial reporting or the Company's
independent auditors providing an adverse opinion regarding their attestation of
the effectiveness of the Company’s internal controls over financial reporting.
Any such result could cause investors to lose confidence in the Company's
reported financial information, which could have a material adverse effect on
the Company's stock price.
If remediation costs or hazardous
substance contamination levels at certain properties for which the Company
maintains financial responsibility exceed management’s current expectations, the
Company’s financial condition and results of operations could be adversely
impacted. In connection with its spin-off from Price Enterprises, Inc.
(“PEI”) in 1997, the Company agreed to indemnify PEI for all of PEI's
liabilities (including indemnification obligations for environmental
liabilities) arising out of PEI's prior ownership of certain properties. The
Company's ownership of real properties and its agreement to indemnify PEI could
subject it to certain environmental liabilities. Certain of these properties are
located in areas of current or former industrial activity, where environmental
contamination may have occurred. For example, PEI sold an unimproved, 12.9-acre
site located in Meadowlands, New Jersey in August 1995. A prior owner used this
site as a debris disposal area. Elevated levels of heavy metals (including a
small area contaminated with polychlorinated biphenyl) and petroleum
hydrocarbons are present in soil at the Meadowlands site. To date, the Company
has not been advised that PEI has been notified by any governmental authority,
and is not otherwise aware, of any material noncompliance, liability or claim
relating to hazardous or toxic substances or petroleum products in connection
with the Meadowlands site. Nevertheless, PEI's previous ownership of the
Meadowlands site creates the potential of liability for remediation costs
associated with groundwater beneath the site. The Company also retains certain
environmental indemnification obligations with respect to a parcel of land in
Silver City, New Mexico, which PEI sold in March 1996 but agreed to retain
responsibility for certain environmental matters. This site contains petroleum
hydrocarbons in the soil and groundwater. There are no known receptors
(groundwater users) down gradient of the Silver City site and the extent of soil
and groundwater contamination is limited and has been reducing in mass and
extent under naturally attenuating processes. The Company is continuing to
monitor the soil and groundwater at this property under supervision of local
authorities. If the Company were to incur costs for remediating contamination at
the Meadowlands or Silver City sites (or any other site for which the Company
maintains environmental responsibility) which exceed management’s current
expectations, the Company’s financial condition and results of operations could
be adversely impacted.
Available
Information
The PriceSmart, Inc. website or
internet address is www.pricesmart.com. On this website the Company makes
available, free of charge, its annual report on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K and any amendments to those reports, and
the annual report to the security holders as soon as reasonably practicable
after electronically filing such material with or furnishing it to the U.S.
Securities and Exchange Commission (SEC). The Company’s SEC reports can be
accessed through the investor relations section of its website under “SEC
Filings.” All of the Company’s filings with the SEC may also be obtained at
the SEC’s Public Reference Room at Room 1580, 100 F Street NE, Washington, DC
20549. For information regarding the operation of the SEC’s Public Reference
Room, please contact the SEC at 1-800-SEC-0330. Additionally, the SEC maintains
an internet site that contains reports, proxy and information statements and
other information regarding issuers that file electronically with the SEC at
www.sec.gov. The Company makes
available its annual report on Form 10-K and its annual Proxy Statement for the
fiscal year 2008 at the internet address http://materials.proxyvote.com/741511 as soon as reasonably practicable
after electronically filing such material with or furnishing it to the
SEC.
None.
At
August 31, 2008, PriceSmart operated 25 membership warehouse
clubs.
Number
of warehouse clubs
|
|
Own land
and building
|
|
Lease land
and/or building
|
|
Anticipated
warehouse
club
openings
|
CENTRAL
AMERICA
|
|
|
|
|
|
|
Panama
|
|
3
|
|
1
|
|
—
(3)
|
Guatemala
|
|
1
|
|
2
|
|
—
|
Costa
Rica
|
|
4
|
|
—
|
|
1(4)
|
El
Salvador
|
|
2
|
|
—
|
|
—
|
Honduras
|
|
1
|
|
1
|
|
—
|
Nicaragua
|
|
1
|
|
—
|
|
—
|
CARIBBEAN
|
|
|
|
|
|
|
Dominican
Republic
|
|
2
|
|
—
|
|
—
|
Aruba
|
|
—
|
|
1
|
|
—
|
Barbados(2)
|
|
1
|
|
—
|
|
—
|
Trinidad
|
|
2
|
|
1
|
|
—
|
U.S.
Virgin Islands
|
|
—
|
|
1
|
|
—
|
Jamaica
|
|
1
|
|
—
|
|
—
|
Total
|
|
18
|
|
7(1)
|
|
1
|
(1) Former clubs located in Guam and
Guatemala are not included; these warehouse clubs were closed in fiscal
2004 and 2003, respectively. The respective land and building is currently
subleased to third-parties
|
(2) The Company acquired the land and
building formerly leased in Barbados on November 15, 2007 (fiscal year
2008).
|
(3) An existing PriceSmart warehouse
club in Panama City, Panama (known as the Los Pueblos club) will be
relocated to a new site (Brisas) in fiscal 2010 and the Company will close
the existing warehouse club after the relocation has been
completed.
|
(4) This warehouse club is expected
to open in the spring of 2009
(Alajuela).
|
At
August 31, 2008, our warehouse clubs occupied approximately a total of
1,577,755 square feet of which 410,249 square feet were on leased property. The
following is a summary of the warehouse clubs located on leased
property:
Location
(1)
|
|
Facility
Type
|
|
Date
Opened
|
|
Approximate
Square
Footage
|
|
Current
Lease
Expiration
Date
|
|
Remaining
Options
to
Extend
|
Via
Brazil, Panama
|
|
Warehouse
Club
|
|
December 4, 1997
|
|
68,696
|
|
October
31, 2026
|
|
10
years
|
Miraflores, Guatemala
|
|
Warehouse
Club
|
|
April
8, 1999
|
|
66,059
|
|
December 31, 2020
|
|
5
years
|
Pradera, Guatemala
|
|
Warehouse
Club
|
|
May
29, 2001
|
|
48,438
|
|
May
28, 2025
|
|
5 year option/
indefinite periods
|
Tegucigalpa, Honduras
|
|
Warehouse
Club
|
|
May
31, 2000
|
|
64,735
|
|
May
30, 2020
|
|
none
|
Oranjestad,
Aruba
|
|
Warehouse
Club
|
|
March
23, 2001
|
|
54,229
|
|
March
23, 2021
|
|
10
years
|
Port of Spain, Trinidad
|
|
Warehouse
Club
|
|
December
5, 2001
|
|
54,046
|
|
July
5, 2031
|
|
none
|
St.
Thomas, U.S.V.I.
|
|
Warehouse
Club
|
|
May
4, 2001
|
|
54,046
|
|
February
28, 2020
|
|
10
years
|
Barbados
|
|
Storage
Facility
|
|
May
5, 2006
|
|
4,800
|
|
April
30, 2009
|
|
1
year
|
San
Diego, CA
|
|
Corporate
Headquarters
|
|
April
1, 2004
|
|
35,000
|
|
March
31, 2011
|
|
5
years
|
Miami,
FL
|
|
Distribution
Facility
|
|
March
1, 2008
|
|
200,709
|
|
August
31, 2018
|
|
10
years
|
Miami,
FL
|
|
Distribution
Facility
|
|
September
1, 2001
|
|
31,575
|
|
February
28, 2010
|
|
18
months
|
(1)
|
Former
clubs located in Guam and Guatemala are not included; these warehouse
clubs were closed in fiscal 2004 and 2003, respectively. The respective
land and building is currently subleased to
third-parties.
|
In the ordinary
course of business, the Company is periodically named as a defendant in various
lawsuits, claims and pending actions and is exposed to tax risks (other than
income tax). The principal risks that the Company insures against are workers’
compensation, general liability, vehicle liability, property damage, employment
practices, errors and omissions, fiduciary liability and fidelity losses. If a
potential loss arising from these lawsuits, claims, actions and non-income tax
issues is probable and reasonably estimable, the Company records the estimated
liability based on circumstances and assumptions existing at the time in
accordance with Statement of Financial Accounting Standards (SFAS) No. 5,
“Accounting for Contingencies.” While the Company believes the recorded
liabilities are adequate, there are inherent limitations in the estimation
process whereby future actual losses may exceed projected losses, which could
materially adversely affect the Company’s results of operations or financial
condition.
The
Company did not submit any matters to a vote of security holders during the
fourth quarter of fiscal year 2008.
The
information required by Item 5 is incorporated herein by reference to
PriceSmart's Annual Report to Stockholders for the fiscal year ended
August 31, 2008 under the heading “Market for Registrant’s Common Equity,
Related Stockholder Matters and Issuer Purchases of Equity
Securities.”
The
information required by Item 6 is incorporated herein by reference to
PriceSmart's Annual Report to Stockholders for the fiscal year ended
August 31, 2008 under the heading “Selected Financial Data.”
The
information required by Item 7 is incorporated herein by reference to
PriceSmart's Annual Report to Stockholders for the fiscal year ended
August 31, 2008 under the heading “Management's Discussion and Analysis of
Financial Condition and Results of Operations.”
The
information required by Item 7A is incorporated herein by reference to
PriceSmart's Annual Report to Stockholders for the fiscal year ended
August 31, 2008 under the heading “Quantitative and Qualitative Disclosures
about Market Risk.”
The
information required by Item 8 is incorporated herein by reference to
PriceSmart's Annual Report to Stockholders for the fiscal year ended
August 31, 2008 under the heading “Financial Statements and Supplementary
Data.”
None.
(a)
Evaluation of disclosure controls and procedures.
As of
August 31, 2008, under the supervision and with the participation of the
Company’s management, including the Company’s Principal Executive Officer and
Principal Accounting Officer, the Company carried out an evaluation of the
effectiveness of the design and operation of the Company’s disclosure controls
and procedures as defined in Exchange Act Rules 13a-15(f) and 15d-15(f). These
disclosure controls and procedures are designed to provide reasonable assurance
that the information required to be disclosed by the Company in its periodic
reports with the SEC is recorded, processed, summarized and reported within the
time periods specified by the SEC’s rules and forms, and that the information is
accumulated and communicated to the Company’s management, including the
principal executive officer and principal accounting officer, as appropriate to
allow timely decisions regarding required disclosure. The design of any
disclosure controls and procedures also is based in part on certain assumptions
about the likelihood of future events, and there can be no assurance that any
design will succeed in achieving its stated goals under all potential future
conditions.
Based
upon their evaluation, the Principal Executive Officer and Principal Accounting
Officer concluded that the Company’s disclosure controls and procedures are
effective at the reasonable assurance level.
(b)
Management’s report on internal control over financial reporting
Internal
control over financial reporting refers to the process designed by, or under the
supervision of, our chief executive officer and chief financial officer, and
effected by our board of directors, management and other personnel, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
U.S. generally accepted accounting principles, and includes those policies and
procedures that: (1) pertain to the maintenance of records that in
reasonable detail accurately and fairly reflect the transactions and
dispositions of our assets; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial
statements in accordance with U.S. generally accepted accounting principles and
that our receipts and expenditures are being made only in accordance with
authorizations of our management and directors; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition,
use or disposition of the company’s assets that could have a material effect on
the financial statements.
Internal
control over financial reporting cannot provide absolute assurance of achieving
financial reporting objectives because of its inherent limitations. Internal
control over financial reporting is a process that involves human diligence and
compliance and is subject to lapses in judgment and breakdowns resulting from
human failures. Internal control over financial reporting also can be
circumvented by collusion or improper management override. Because of such
limitations, there is a risk that material misstatements may not be prevented or
detected on a timely basis by internal control over financial reporting.
However, these inherent limitations are known features of the financial
reporting process. Therefore, it is possible to design into the process
safeguards to reduce, though not eliminate, this risk.
Management
is responsible for establishing and maintaining adequate internal control over
our financial reporting, as such term is defined in Rule 13a-15(f) under
the Exchange Act. Under the supervision and with the participation of our
management, including our chief executive officer and chief financial officer,
we conducted an evaluation of the effectiveness of our internal control over
financial reporting. Management has used the framework set forth in the report
entitled “Internal Control—Integrated Framework” published by the Committee of
Sponsoring Organizations of the Treadway Commission to evaluate the
effectiveness of our internal control over financial reporting. Based on its
evaluation, management has concluded that our internal control over financial
reporting was effective as of August 31, 2008, the end of our most recent
fiscal year. Ernst & Young LLP, our independent registered public
accounting firm, has issued an attestation report on the effectiveness of our
internal control over financial reporting as of August 31, 2008, as stated
in their report which is included herein.
(c)
Changes in internal control over financial reporting.
There
have been no changes in the Company’s internal control over financial reporting,
during the fourth quarter of the fiscal year ended August 31, 2008 that
have materially affected or are reasonably likely to affect, the Company’s
internal control over financial reporting.
Report
of Independent Registered Public Accounting Firm
The Board
of Directors and Stockholders of PriceSmart, Inc.
We have
audited PriceSmart, Inc.’s internal control over financial reporting as of
August 31, 2008, based on criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (the COSO criteria). PriceSmart, Inc.’s management is responsible for
maintaining effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over financial reporting
included in the accompanying Management’s Report on Internal Control over
Financial Reporting. Our responsibility is to express an opinion on the
company’s internal control over financial reporting based on our
audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our
opinion, PriceSmart, Inc. maintained, in all material respects, effective
internal control over financial reporting as of August 31, 2008, based on the
COSO criteria.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the 2008 consolidated financial statements of
PriceSmart, Inc. and our report dated November 6, 2008 expressed an unqualified
opinion thereon.
/s/ Ernst
& Young LLP
San
Diego, California
November
6, 2008
Not
applicable.
PriceSmart
has adopted a code of ethics that applies to its Chief Executive Officer, Chief
Financial Officer, Principal Accounting Officer and Controller, and to all of
its other officers, directors, employees and agents. The code of ethics is
available on PriceSmart's web site at
http://pricesmart.com/Investor/Corporate-Governance/Conduct.aspx. PriceSmart
intends to disclose on its website future amendments to, or waivers from,
certain provision of its code of ethics within four business days following the
date of such amendment or waiver.
The
additional information required by Item 10 is incorporated herein by
reference from PriceSmart's definitive Proxy Statement for the Annual Meeting of
Stockholders under the headings “Election of Directors,” “Information Regarding
Directors,” “Executive Officers of the Company” and “Compliance with
Section 16(a) of the Exchange Act.”
The
information required by Item 11 is incorporated herein by reference from
PriceSmart's definitive Proxy Statement for the Annual Meeting of Stockholders
under the headings “Information Regarding the Board,” and “Executive
Compensation and Other Information.”
The
information required by Item 12 is incorporated herein by reference from
PriceSmart's definitive Proxy Statement for the Annual Meeting of Stockholders
under the headings “Securities Ownership of Certain Beneficial Owners and
Management” and “Equity Compensation Plan Information.”
The
information required by Item 13 is incorporated herein by reference from
PriceSmart's definitive Proxy Statement for the Annual Meeting of Stockholders
under the heading “Certain Transactions.”
The
information required by Item 14 is incorporated herein by reference from
PriceSmart's definitive Proxy Statement for the Annual Meeting of Stockholders
under the heading “Independent Registered Public Accounting Firm.”
(a) The
documents listed in the following table, which are included in our Annual Report
to Stockholders, are incorporated herein by reference to the portions of this
Annual Report on Form 10-K filed as Exhibit 13.1 hereto.
(1) and
(2) Financial Statements
Index to
Consolidated Financial Statements
Report of
Independent Registered Public Accounting Firm
Consolidated
Balance Sheets
Consolidated
Statements of Income
Consolidated
Statements of Stockholders’ Equity
Consolidated
Statements of Cash Flows
Notes to
Consolidated Financial Statements
Schedules
not included herein have been omitted because they are not applicable or the
required information is included in the consolidated financial statements or
notes thereto.
(3) The
following exhibits are filed as part of this Form 10-K and this list includes
the Exhibit Index.
|
|
Exhibit
Number
|
Description
|
3.1(1)
|
Amended
and Restated Certificate of Incorporation of the
Company.
|
|
|
3.2(33)
|
Certificate
of Amendment of Amended and Restated Certificate of Incorporation of the
Company.
|
|
|
3.3(10)
|
Certificate
of Amendment of Amended and Restated Certificate of Incorporation of the
Company.
|
|
|
3.4(1)
|
Amended
and Restated Bylaws of the Company.
|
|
|
3.5(34)
|
Amendment
to Amended and Restated Bylaws of the Company.
|
|
|
4.1(36)
|
Specimen
of Common Stock certificate.
|
|
|
10.1(1)**
|
1997
Stock Option Plan of PriceSmart, Inc.
|
|
|
10.2(2)
|
Agreement
Concerning Transfer of Certain Assets dated as of November 1996 by and
among Price Enterprises, Inc., Costco Companies, Inc. and certain of their
respective subsidiaries.
|
10.2(a)(39)
|
Settlement
Agreement and General Release of All Claims, entered into on August 5,
2005, by and among William Go, E-Class Corporation, PSMT Philippines,
Inc., National Import and Export Company, San Marino International
Corporation, Arcadia International Corporation, Christine Merchandising,
Inc. and PriceSmart, Inc.
|
|
|
10.2(b)(48)
|
International
Loan Swap Agreement with Citibank, N.A. dated as of February 13,
2008.
|
|
|
10.2(c)(48)
|
Settlement
Agreement and Release entered into as of February 8, 2008 by and among
PriceSmart, Inc. and PSMT entities (collectively known as PriceSmart) and
PSC, S.A. and PSC entities (collectively known as “PSC
Parties”).
|
|
|
10.3(a)(3)**
|
Employment
Agreement dated September 20, 1994 between Price Enterprises, Inc. and
Robert M. Gans.
|
|
|
10.3(b)(4)**
|
Third
Amendment to Employment Agreement dated April 28, 1997 between Price
Enterprises, Inc. and Robert M. Gans.
|
|
|
10.3(c)(1)**
|
Fourth
Amendment to Employment Agreement dated as of September 2, 1997 between
the Company and Robert M. Gans.
|
|
|
10.3(d)(5)**
|
Fifth
Amendment to Employment Agreement dated as of March 31, 1999 between the
Company and Robert M. Gans.
|
Exhibit
Number
|
Description
|
10.3(e)(6)**
|
Sixth
Amendment to Employment Agreement dated as of November 22, 1999
between the Company and Robert M. Gans.
|
|
|
10.3(f)(6)**
|
Seventh
Amendment to Employment Agreement dated as of July 18, 2000 between the
Company and Robert M. Gans.
|
|
|
10.3(g)(7)**
|
Eighth
Amendment to Employment Agreement dated as of September 26, 2001 between
the Company and Robert M. Gans.
|
|
|
10.3(h)(7)**
|
Amendment
of Employment Agreement dated as of October 16, 2001 between the Company
and Robert M. Gans.
|
|
|
10.3(i)(8)**
|
Ninth
Amendment to Employment Agreement dated as of November 19, 2002 between
the Company and Robert M. Gans.
|
|
|
10.3(j)(9)**
|
Tenth
Amendment to Employment Agreement dated as of January 22, 2003 between the
Company and Robert M. Gans
|
|
|
10.3(k)(30)**
|
Eleventh
Amendment to Employment Agreement dated as of July 24, 2003 between the
Company and Robert M. Gans.
|
|
|
10.3(l)(46)**
|
Twelfth
Amendment to Employment Agreement dated as of September 24, 2004 between
the Company and Robert M. Gans.
|
|
|
10.3(m)(37)**
|
Thirteenth
Amendment to Employment Agreement dated as of February 10, 2005 between
the Company and Robert M. Gans.
|
|
|
10.3(n)(40)
|
Fourteenth
Amendment to Employment Agreement dated as of September 26, 2005 between
the Company and Robert M. Gans.
|
|
|
10.3(o)(42)
|
Fifteenth
Amendment to Employment Agreement dated as of March 1, 2006 between the
Company and Robert M. Gans.
|
|
|
10.3(p)(47)
|
Sixteenth
Amendment to Employment Agreement dated as of September 25, 2006 between
the Company and Robert M. Gans.
|
|
|
10.3(q)(44)
|
Seventeenth
Amendment to Employment Agreement dated as of January 1, 2007 between the
Company and Robert M. Gans.
|
|
|
10.3(r)(50)
|
Eighteenth
Amendment to Employment Agreement dated as of October 1, 2007 between the
Company and Robert M. Gans.
|
|
|
10.3(s)(48)
|
Nineteenth
Amendment to Employment Agreement dated as of January 1, 2008 between the
Company and Robert M. Gans.
|
|
|
10.3(t)*
|
Twentieth
Amendment to Employment Agreement dated as of October 1, 2008 between the
Company and Robert M. Gans.
|
|
|
10.4(11)
|
Tax
Sharing Agreement dated as of August 26, 1997 between the Company and
Price Enterprises, Inc.
|
|
|
10.5(12)**
|
Form
of Indemnity Agreement.
|
|
|
10.6(1)**
|
Assignment
and Assumption of Employment Agreement dated August 29, 1997 between the
Company and Price Enterprises, Inc.
|
|
|
10.8(a)(16)**
|
Employment
Agreement dated March 31, 1998 between the Company and Thomas D.
Martin.
|
|
|
10.8(b)(5)**
|
First
Amendment to Employment Agreement between the Company and Thomas D.
Martin, dated March 31, 1999.
|
|
|
10.8(c)(6)**
|
Second
Amendment of Employment Agreement between the Company and Thomas D.
Martin, dated November 22, 1999.
|
|
|
10.8(d)(13)**
|
Third
Amendment of Employment Agreement between the Company and Thomas Martin
dated January 11, 2000.
|
Exhibit
Number
|
Description
|
|
10.8(e)(17)**
|
Fourth
Amendment of Employment Agreement between the Company and Thomas Martin
dated January 24, 2001.
|
|
|
|
|
10.8(f)(7)**
|
Amendment
of Employment Agreement between the Company and Thomas Martin dated
October 16, 2001.
|
|
|
|
|
10.8(g)(14)**
|
Fifth
Amendment of Employment Agreement between the Company and Thomas Martin,
dated January 16, 2002.
|
|
|
|
|
10.8(h)(30)**
|
Sixth
Amendment of Employment Agreement between the Company and Thomas Martin,
dated January 22, 2003.
|
|
|
|
|
10.8(i)(34)**
|
Seventh
Amendment to Employment Agreement between the Company and Thomas Martin,
dated March 15, 2004.
|
|
|
|
|
10.8(j)(38)**
|
Eighth
Amendment to Employment Agreement between the Company and Thomas Martin,
dated March 3, 2005.
|
|
|
|
|
10.8(k)(42)
|
Ninth
Amendment to Employment Agreement between the Company and Thomas Martin
dated March 1, 2006.
|
|
|
|
|
10.8(l)(44)
|
Tenth
Amendment to Employment Agreement between the Company and Thomas Martin
dated January 1, 2007.
|
|
|
|
|
10.8(m)(45)
|
Eleventh
Amendment to Employment Agreement between the Company and Thomas Martin
dated March 1, 2007.
|
|
|
|
|
10.8(n)(48)
|
Twelfth
Amendment to Employment Agreement between the Company and Thomas Martin
dated January 1, 2008.
|
|
|
|
|
10.8(o)(49)
|
Thirteenth
Amendment to Employment Agreement between the Company and Thomas Martin
dated March 1, 2008.
|
|
|
|
|
10.9(19)**
|
1998
Equity Participation Plan of PriceSmart, Inc.
|
|
|
|
|
10.12(18)
|
Trademark
Agreement between the Company and Associated Wholesale Grocers, Inc.,
dated August 1, 1999.
|
|
|
|
|
10.20(a)(6)
|
Registration
Rights Agreement dated as of June 5, 2000 by and among the Company and the
Shareholders of PSC, S.A.
|
|
|
|
|
10.23(17)
|
Master
Agreement between the Company and Payless ShoeSource Holdings, Ltd., dated
November 27, 2000.
|
|
|
|
|
10.29(a)(14)**
|
Employment
Agreement between the Company and William Naylon, dated January 16,
2002.
|
|
|
|
|
10.29(b)(9)**
|
First
Amendment of Employment Agreement between the Company and William J.
Naylon, dated January 22, 2003.
|
|
|
|
|
10.29(c)(33)**
|
Second
Amendment to Employment Agreement between the Company and William Naylon,
dated February 1, 2004.
|
|
|
|
|
10.29(d)(37)**
|
Third
Amendment to Employment Agreement dated as of February 16, 2005 by and
between the Company and William Naylon.
|
|
|
|
|
10.29(e)(41)
|
Fourth
Amendment to Employment Agreement dated as of January 11, 2006 by and
between the Company and William Naylon.
|
|
|
|
|
10.29(f)(42)
|
Fifth
Amendment to Employment Agreement dated as of March 1, 2006 by and between
the Company and William Naylon.
|
|
|
|
|
10.29(g)(44)
|
Sixth
Amendment to Employment Agreement dated as of January 1, 2007 by and
between the Company and William Naylon.
|
|
|
|
|
10.29(h)(48)
|
Seventh
Amendment to Employment Agreement dated as of January 1, 2008 by and
between the Company and William Naylon.
|
|
|
|
|
10.30(a)(7)**
|
Employment
Agreement between the Company and John D. Hildebrandt, dated as of June 1,
2001.
|
Exhibit
Number
|
Description
|
10.30(b)(7)**
|
Amendment
to Employment Agreement between the Company and John Hildebrandt, dated as
of October 16, 2001.
|
|
|
10.30(c)(14)**
|
First
Amendment of Employment Agreement between the Company and John
Hildebrandt, dated January 16, 2002.
|
|
|
10.30(d)(30)**
|
Second
Amendment of Employment Agreement between the Company and John
Hildebrandt, dated January 22, 2003.
|
|
|
10.30(e)(34)**
|
Third
Amendment to Employment Agreement between the Company and John
Hildebrandt, dated March 15, 2004.
|
|
|
10.30(f)(38)**
|
Fourth
Amendment to Employment Agreement dated March 9, 2005 between the Company
and John Hildebrandt.
|
|
|
10.30(g)(42)
|
Fifth
Amendment to Employment Agreement dated March 1, 2006 between the Company
and John Hildebrandt.
|
|
|
10.30(h)(44)
|
Sixth
Amendment to Employment Agreement dated January 1, 2007 between the
Company and John Hildebrandt.
|
|
|
10.30(i)(45)
|
Seventh
Amendment to Employment Agreement dated March 1, 2007 between the Company
and John Hildebrandt.
|
|
|
10.30(j)(48)
|
Eighth
Amendment to Employment Agreement dated January 1, 2008 between the
Company and John Hildebrandt.
|
|
|
10.30(k)(49)
|
Ninth
Amendment to Employment Agreement dated March 1, 2008 between the Company
and John Hildebrandt.
|
|
|
10.33(22)**
|
2001
Equity Participation Plan of PriceSmart, Inc.
|
|
|
10.43(a)(8)**
|
Employment
Agreement dated as of January 11, 2000 between the Company and Edward
Oats.
|
|
|
10.43(b)(8)**
|
First
Amendment to Employment Agreement between the Company and Edward Oats,
dated January 24, 2001.
|
|
|
10.43(c)(8)**
|
Amendment
to Employment Agreement between the Company and Edward Oats, dated October
16, 2001.
|
|
|
10.43(d)(8)**
|
Second
Amendment to Employment Agreement between the Company and Edward Oats,
dated January 16, 2002.
|
|
|
10.43(e)(30)**
|
Third
Amendment to Employment Agreement between the Company and Edward Oats,
dated November 19, 2002.
|
|
|
10.43(f)(30)**
|
Fourth
Amendment to Employment Agreement between the Company and Edward Oats,
dated January 22, 2003.
|
|
|
10.43(g)(34)**
|
Fifth
Amendment to Employment Agreement between the Company and Edward Oats,
dated March 15, 2004.
|
|
|
10.43(g)(38)**
|
Sixth
Amendment to Employment Agreement dated March 9, 2005 between the Company
and Edward Oats.
|
|
|
10.43(h)(42)
|
Seventh
Amendment to Employment Agreement dated March 1, 2006 between the Company
and Edward Oats.
|
|
|
10.43(i)(44)
|
Eighth
Amendment to Employment Agreement dated January 1, 2007 between the
Company and Edward Oats.
|
|
|
10.43(j)(45)
|
Ninth
Amendment to Employment Agreement dated March 1, 2007 between the Company
and Edward Oats.
|
|
|
10.43(k)(48)
|
Tenth
Amendment to Employment Agreement dated January 1, 2008 between the
Company and Edward Oats.
|
|
|
10.43(l)(49)
|
Eleventh
Amendment to Employment Agreement dated March 1, 2008 between the Company
and Edward Oats.
|
|
|
10.44(a)(8)**
|
Employment
Agreement dated as of January 11, 2000 between the Company and Brud
Drachman.
|
Exhibit
Number
|
Description
|
10.44(b)(8)**
|
First
Amendment to Employment Agreement between the Company and Brud Drachman,
dated January 24, 2001.
|
|
|
10.44(c)(8)**
|
Second
Amendment to Employment Agreement between the Company and Brud Drachman,
dated June 1, 2001.
|
|
|
10.44(d)(8)**
|
Amendment
to Employment Agreement between the Company and Brud Drachman, dated
October 16, 2001.
|
|
|
10.44(e)(8)**
|
Third
Amendment to Employment Agreement between the Company and Brud Drachman,
dated January 16, 2002.
|
|
|
10.44(f)(30)**
|
Fourth
Amendment to Employment Agreement between the Company and Brud Drachman,
dated November 19, 2002.
|
|
|
10.44(g)(30)**
|
Fifth
Amendment to Employment Agreement between the Company and Brud Drachman,
dated January 22, 2003.
|
|
|
10.44(h)(34)**
|
Sixth
Amendment to Employment Agreement between the Company and Brud Drachman,
dated March 15, 2004.
|
|
|
10.44(h)(38)**
|
Seventh
Amendment to Employment Agreement dated March 9, 2005 between the Company
and Brud Drachman.
|
|
|
10.44(i)(42)
|
Eighth
Amendment to Employment Agreement dated March 1, 2006 between the Company
and Brud Drachman.
|
|
|
10.44(j)(44)
|
Ninth
Amendment to Employment Agreement dated January 1, 2007 between the
Company and Brud Drachman.
|
|
|
10.44(k)(45)
|
Tenth
Amendment to Employment Agreement dated March 1, 2007 between the Company
and Brud Drachman.
|
|
|
10.44(l)(48)
|
Eleventh
Amendment to Employment Agreement dated January 1, 2008 between the
Company and Brud Drachman.
|
|
|
10.44(m)(49)
|
Twelfth
Amendment to Employment Agreement dated March 1, 2008 between the Company
and Brud Drachman.
|
|
|
10.46(27)**
|
2002
Equity Participation Plan of PriceSmart, Inc.
|
|
|
10.54(a)(35)**
|
Employment
Agreement by and between the Company and Jose Luis Laparte, dated as of
June 3, 2004.
|
|
|
10.54(b)(35)**
|
First
Amendment to Employment Agreement by and between the Company and Jose Luis
Laparte, dated as of August 2, 2004.
|
|
|
10.54(c)(40)
|
Second
Amendment to Employment Agreement between the Company and Jose Luis
Laparte, dated as of September 26, 2005.
|
|
|
10.54(d)(42)
|
Third
Amendment to Employment Agreement between the Company and Jose Luis
Laparte, dated as of March 1, 2006.
|
|
|
10.54(e)(47)
|
Fourth
Amendment to Employment Agreement between the Company and Jose Luis
Laparte dated as of September 25, 2006.
|
|
|
10.54(f)(44)
|
Fifth
Amendment to Employment Agreement between the Company and Jose Luis
Laparte dated as of January 1, 2007.
|
|
|
10.54(g)(50)
|
Sixth
Amendment to Employment Agreement between the Company and Jose Luis
Laparte dated as of October 1, 2007.
|
|
|
10.54(h)(50)
|
Seventh
Amendment to Employment Agreement between the Company and Jose Luis
Laparte dated as of October 31, 2007.
|
|
|
10.54(i)(48)
|
Eighth
Amendment to Employment Agreement between the Company and Jose Luis
Laparte dated as of January 1, 2008.
|
|
|
10.54(j)*
|
Ninth
Amendment to Employment Agreement between the Company and Jose Luis
Laparte dated as of October 1, 2008.
|
|
|
Exhibit
Number
|
Description
|
|
|
10.68(38)
|
Stock
Purchase Agreement dated April 19, 2005 between the Company and The Price
Group, LLC, the Sol and Helen Price Trust and the Robert and Allison Price
Trust.
|
|
|
10.70(40)
|
Stock
Purchase Agreement dated November 11, 2005 between the Company and Big Box
Sales Ltd.
|
|
|
10.71(c)(44)
|
Acquisition
of Fractional Interest on Jet, dated January 23, 2007, between the Company
and PFD Ivanhoe, Inc.
|
|
|
10.71(d)(48)
|
Lease
Agreement between Flagler Development Company, LLC and PriceSmart,
Inc.
|
|
|
10.71(e)(48)
|
Promissory
Note entered into between PSMT Barbados and Citibank, N.A. dated November
15, 2007.
|
|
|
10.71(f)(48)
|
Loan
Agreement entered into between PSMT Barbados and Citicorp Merchant Bank
Limited dated November 15, 2007.
|
|
|
10.72(a)(40)
|
Stock
Purchase Agreement, dated as of October 6, 2005, by and between
PriceSmart, Inc. and the Sol and Helen Price Trust.
|
|
|
10.72(b)(43)
|
Restricted
Stock Award Agreement, dated December 7, 2006, between the Company and
Jose Luis Laparte.
|
|
|
13.1*
|
Portions
of the Company’s Annual Report to Stockholders for the year ended August
31, 2008.
|
|
|
21.1*
|
Subsidiaries
of the Company.
|
|
|
23.1*
|
Consent
of Independent Registered Public Accounting Firm.
|
|
|
31.1*
|
Certification
of Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
31.2*
|
Certification
of Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
32.1*#
|
Certifications
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
32.2*#
|
Certifications
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002.
|
*
|
Filed
herewith as an exhibit.
|
**
|
Management
contract or compensatory plan or arrangement required to be filed as an
exhibit to this Annual Report on Form
10-K.
|
#
|
These
certifications are being furnished solely to accompany this Report
pursuant to 18 U.S.C. 1350, and are not being filed for purposes of
Section 18 of the Securities Exchange Act of 1934, as amended, and
are not to be incorporated by reference into any filing of PriceSmart,
Inc. whether made before or after the date hereof, regardless of any
general incorporation language in such
filing.
|
(1)
|
Incorporated
by reference to the Company’s Annual Report on Form 10-K for the year
ended August 31, 1997 filed with the Commission on November 26,
1997.
|
(2)
|
Incorporated
by reference to Exhibit 10.2 to the Company’s Registration Statement on
Form 10 filed with the Commission on July 3,
1997.
|
(3)
|
Incorporated
by reference to Exhibit 10.14 to Amendment No. 1 to the Registration
Statement on Form S-4 of Price Enterprises, Inc. filed with the Commission
on November 3, 1994.
|
(4)
|
Incorporated
by reference to Exhibit 10.4 to the Quarterly Report on Form 10-Q of Price
Enterprises, Inc. for the quarter ended June 8, 1997 filed with the
Commission on July 17, 1997.
|
(5)
|
Incorporated
by reference to the Company’s Quarterly Report on Form 10-Q for the
quarter ended May 31, 1999 filed with the Commission on July 15,
1999.
|
(6)
|
Incorporated
by reference to the Company’s Annual Report on Form 10-K for the year
ended August 31, 2000 filed with the Commission on November 29,
2000.
|
(7)
|
Incorporated
by reference to the Company’s Annual Report on Form 10-K for the year
ended August 31, 2001 filed with the Commission on November 29,
2001.
|
(8)
|
Incorporated
by reference to the Company’s Annual Report on Form 10-K for the year
ended August 31, 2002 filed with the Commission on November 29,
2002.
|
(9)
|
Incorporated
by reference to the Company’s Quarterly Report on Form 10-Q for the
quarter ended February 28, 2003 filed with the Commission on
April 14, 2003.
|
(10)
|
Incorporated
by reference to the Company’s Annual Report on Form 10-K for the year
ended August 31, 2003 filed with the Commission on November 23,
2004.
|
(11)
|
Incorporated
by reference to the Current Report on Form 8-K filed September 12,
1997 by Price Enterprises, Inc.
|
(12)
|
Incorporated
by reference to Exhibit 10.8 to Amendment No. 1 to the Company’s
Registration Statement on Form 10 filed with the Commission on
August 1, 1997.
|
(13)
|
Incorporated
by reference to the Company’s Quarterly Report on Form 10-Q for the
quarter ended February 29, 2000 filed with the Commission on
April 11, 2000.
|
(14)
|
Incorporated
by reference to the Company’s Quarterly Report on Form 10-Q for the
quarter ended May 31, 2002 filed with the Commission on July 15,
2002.
|
(15)
|
Incorporated
by reference to the Current Report on Form 8-K filed with the Commission
on April 1, 2003.
|
(16)
|
Incorporated
by reference to the Company’s Annual Report on Form 10-K for the year
ended August 31, 1998 filed with the Commission on November 25,
1998.
|
(17)
|
Incorporated
by reference to the Company’s Quarterly Report on Form 10-Q for the
quarter ended February 28, 2001 filed with the Commission on
April 16, 2001.
|
(18)
|
Incorporated
by reference to the Company’s Annual Report on Form 10-K for the year
ended August 31, 1999 filed with the Commission on November 29,
1999.
|
(19)
|
Incorporated
by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form
10-Q for the quarter ended February 28, 1999 filed with the
Commission on April 14, 1999.
|
(20)
|
Incorporated
by reference to the Current Report on Form 8-K filed with the Commission
on September 5, 2003.
|
(21)
|
Incorporated
by reference to the Company’s Quarterly Report on Form 10-Q for the
quarter ended May 31, 2000 filed with the Commission on July 17,
2000.
|
(22)
|
Incorporated
by reference to Exhibit A to the definitive Proxy Statement dated
December 7, 2001 for the Company’s 2002 Annual Meeting of
Stockholders filed with the Commission on December 10,
2001.
|
(23)
|
Incorporated
by reference to the Company’s Quarterly Report on Form 10-Q for the
quarter ended February 28, 2002 filed with the Commission on
April 15, 2002.
|
(24)
|
Incorporated
by reference to the Company’s Registration Statement on Form S-3 filed
with the Commission on April 18,
2002.
|
(25)
|
Incorporated
by reference to the Company’s Registration Statement on Form S-3 filed
with the Commission on July 19,
2002.
|
(26)
|
Incorporated
by reference to the Company’s Registration Statement on Form S-3 filed
with the Commission on October 25,
2002.
|
(27)
|
Incorporated
by reference to Exhibit A to the definitive Proxy Statement dated
December 11, 2002 for the Company’s 2003 Annual Meeting of
Stockholders filed with the Commission on December 11,
2002.
|
(28)
|
Incorporated
by reference to the Company’s Quarterly Report on Form 10-Q for the
quarter ended May 31, 2003 filed with the Commission on July 15,
2003.
|
(29)
|
Incorporated
by reference to the Current Report on Form 8-K filed with the Commission
on September 5, 2003.
|
(30)
|
Incorporated
by reference to the Company’s Annual Report on Form 10-K for the year
ended August 31, 2003 filed with the Commission on December 16,
2003.
|
(31)
|
Incorporated
by reference to the Quarterly Report on Form 10-Q for the quarter ended
November 30, 2003 filed with the Commission on January 14,
2004.
|
(32)
|
Incorporated
by reference to the Current Report on Form 8-K filed with the Commission
on July 26, 2004.
|
(33)
|
Incorporated
by reference to the Company’s Quarterly Report on Form 10-Q for the
quarter ended February 29, 2004 filed with the Commission on
April 14, 2004.
|
(34)
|
Incorporated
by reference to the Company’s Quarterly Report on Form 10-Q for the
quarter ended May 31, 2004 filed with the Commission on July 15,
2004.
|
(35)
|
Incorporated
by reference to the Current Report on Form 8-K filed with the Commission
on October 8, 2004.
|
(36)
|
Incorporated
by reference to the Company’s Registration Statement on Form S-3 filed
with the Commission on December 2,
2004.
|
(37)
|
Incorporated
by reference to the Company’s Quarterly Report on Form 10-Q for the
quarter ended February 28, 2005 filed with the Commission on
April 14, 2005.
|
(38)
|
Incorporated
by reference to the Company’s Quarterly Report on Form 10-Q for the
quarter ended May 31, 2005 filed with the Commission on June 15,
2005.
|
(39)
|
Incorporated
by reference to the Company’s Current Report on Form 8-K filed with the
Commission on August 18, 2005.
|
(40)
|
Incorporated
by reference to the Company’s Quarterly Report on Form 10-Q for the
quarter ended November 30, 2005 filed with the Commission on
January 14, 2006.
|
(41)
|
Incorporated
by reference to the Company’s Quarterly Report on Form 10-Q for the
quarter ended February 29, 2006 filed with the Commission on
April 14, 2006.
|
(42)
|
Incorporated
by reference to the Company’s Quarterly Report on Form 10-Q for the
quarter ended May 31, 2006 filed with the Commission on July 14,
2006.
|
(43)
|
Incorporated
by reference to the Company’s Quarterly Report on Form 10-Q for the
quarter ended November 30, 2006 filed with the Commission on
January 9, 2007.
|
(44)
|
Incorporated
by reference to the Company’s Quarterly Report on Form 10-Q for the
quarter ended February 28, 2007 filed with the Commission on
April 9, 2007.
|
(45)
|
Incorporated
by reference to the Company’s Quarterly Report on Form 10-Q for the
quarter ended May 31, 2007 filed with the Commission on July 3,
2007.
|
(46)
|
Incorporated
by reference to the Company’s Quarterly Report on Form 10-Q for the
quarter ended November 30, 2004 filed with Commission on January 14,
2005.
|
(47)
|
Incorporated
by reference to the Company’s Annual Report on Form 10-K for the year
ended August 31, 2006 filed with the Commission on November 13,
2006.
|
(48)
|
Incorporated
by reference to the Company’s Quarterly Report on Form 10-Q for the
quarter ended February 29, 2008 filed with the Commission on April 9,
2008.
|
(49)
Incorporated by
reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended
May 31, 2008 filed
|
with
the Commission on July 10, 2008.
|
(50)
|
Incorporated by reference to the
Company’s Annual Report on Form 10-K/A amendment 2 for the year ended
August 31, 2007 filed with the Commission on July 11,
2008.
|
Schedules
not included herein have been omitted because they are not applicable or the
required information is included in the consolidated financial statements or
notes thereto.
(b) Financial
Statement Schedules
1)
|
Schedule
II – Valuation and Qualifying Accounts and Reserves for each of the three
years in the period ended August 31,
2008.
|
SCHEDULE
II
PRICESMART,
INC.
VALUATION
AND QUALIFYING ACCOUNTS
(amounts
in thousands)
|
|
Balance at
Beginning
of
Period
|
|
|
Charged
(credited)
to
Costs and
Expenses
|
|
|
Deductions
|
|
|
Balance at
End of
Period
|
|
Allowance
for doubtful accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended August 31, 2006
|
|
$ |
2,260 |
|
|
$ |
(4 |
) |
|
$ |
(2,065 |
)(1) |
|
$ |
191 |
|
Year
ended August 31, 2007
|
|
|
191 |
|
|
|
(52 |
) |
|
|
(136 |
) |
|
|
3 |
|
Year
ended August 31, 2008
|
|
|
3 |
|
|
|
625 |
(2) |
|
|
(617 |
) |
|
|
11 |
|
(1)
|
Deduction
principally consists of China royalty write-off of $2.0 million in fourth
quarter of fiscal year 2006, which had been previously reserved in prior
years.
|
(2)
|
Expenses
and deduction principally consist of $530,000 write-off of PSC receivables
as part of the PSC legal
settlement.
|
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant has duly caused this Annual Report on Form 10-K to be
signed on its behalf by the undersigned, thereunto duly authorized.
Dated:
November 12, 2008
|
PRICESMART,
INC.
|
|
|
|
|
By:
|
|
|
|
Robert
E. Price
|
|
|
Chairman
of the Board and
|
|
|
Chief
Executive Officer
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this Annual Report
on Form 10-K has been signed by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature
|
Title
|
Date
|
/s/ ROBERT
E. PRICE
|
Chairman
of the Board and Chief
|
November 12,
2008
|
Robert
E. Price
|
Executive
Officer
|
|
|
(Principal
Executive Officer)
|
|
|
|
|
/s/ JOHN
M. HEFFNER
|
Executive
Vice President and Chief
|
November 12,
2008
|
John
M. Heffner
|
Financial
Officer
|
|
|
(Principal
Financial Officer and
|
|
|
Chief
Accounting Officer)
|
|
|
|
|
/s/ GONZALO
BARRUTIETA
|
Director
|
November 12,
2008
|
Gonzalo
Barrutieta
|
|
|
|
|
|
|
Director
|
November 12,
2008
|
Murray
L. Galinson
|
|
|
|
|
|
/s/ KATHERINE
L. HENSLEY
|
Director
|
November 12,
2008
|
Katherine
L. Hensley
|
|
|
|
|
|
/s/ LEON
C. JANKS
|
Director
|
November 12,
2008
|
Leon
C. Janks
|
|
|
|
|
|
/s/ LAWRENCE
B. KRAUSE
|
Director
|
November 12,
2008
|
Lawrence
B. Krause
|
|
|
|
|
|
/s/ JOSE
LUIS LAPARTE
|
President
and Director
|
November 12,
2008
|
Jose
Luis Laparte
|
|
|
|
|
|
/s/ JACK
MCGRORY
|
Director
and Executive Vice President – Real
|
November 12,
2008
|
Jack
McGrory
|
Estate
and Development
|
|
|
|
|
/s/ KEENE
WOLCOTT
|
Director
|
November 12,
2008
|
Keene
Wolcott
|
|
|
Exhibit
13.1
PRICESMART,
INC.
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS AND
OTHER
INFORMATION
AUGUST
31, 2008
|
Page
|
|
2
|
|
|
|
3
|
|
|
|
18
|
|
|
|
19
|
|
|
|
20
|
|
|
|
21
|
|
|
|
22
|
|
|
|
24
|
|
|
|
53
|
|
|
|
54
|
|
|
|
57
|
PRICESMART,
INC.
The
selected consolidated financial data presented below for the five years ended
August 31, 2008 is derived from the Company's consolidated financial
statements and accompanying notes. This selected financial data should be read
in conjunction with “Management's Discussion and Analysis of Financial Condition
and Results of Operations” and the consolidated financial statements and
accompanying notes thereto included elsewhere in this report.
|
|
Years
Ended August 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(in
thousands, except earnings (loss) per share)
|
|
OPERATING
RESULTS DATA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
warehouse club sales
|
|
$
|
1,097,510
|
|
|
$
|
869,102
|
|
|
$
|
719,576
|
|
|
$
|
604,994
|
|
|
$
|
530,262
|
|
Export
sales
|
|
|
1,498
|
|
|
|
1,016
|
|
|
|
63
|
|
|
|
425
|
|
|
|
1,052
|
|
Membership
income
|
|
|
16,042
|
|
|
|
13,857
|
|
|
|
11,520
|
|
|
|
9,424
|
|
|
|
7,939
|
|
Other
income
|
|
|
4,826
|
|
|
|
4,826
|
|
|
|
3,514
|
|
|
|
3,982
|
|
|
|
4,938
|
|
Total
revenues
|
|
|
1,119,876
|
|
|
|
888,801
|
|
|
|
734,673
|
|
|
|
618,825
|
|
|
|
544,191
|
|
Cost
of goods sold
|
|
|
933,714
|
|
|
|
738,279
|
|
|
|
611,497
|
|
|
|
517,005
|
|
|
|
456,716
|
|
Selling,
general and administrative
|
|
|
134,214
|
|
|
|
115,123
|
|
|
|
102,863
|
|
|
|
95,671
|
|
|
|
92,944
|
|
Preopening
expenses
|
|
|
1,010
|
|
|
|
373
|
|
|
|
349
|
|
|
|
99
|
|
|
|
—
|
|
Asset
impairment and closure costs
|
|
|
1,142
|
|
|
|
1,550
|
|
|
|
1,834
|
|
|
|
11,361
|
|
|
|
1,236
|
|
Provision
for settlement of pending litigation
|
|
|
1,370
|
|
|
|
5,500
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Operating
income (loss)
|
|
|
48,426
|
|
|
|
27,976
|
|
|
|
18,130
|
|
|
|
(5,311
|
)
|
|
|
(6,705
|
)
|
Net
interest and other income (expense)(1)
|
|
|
(598
|
)
|
|
|
523
|
|
|
|
(1,383
|
)
|
|
|
(4,625
|
)
|
|
|
(5,716
|
)
|
Income
(loss) from continuing operations before provision for income taxes,
losses (including impairment charges) of unconsolidated affiliate and
minority interest
|
|
|
47,828
|
|
|
|
28,499
|
|
|
|
16,747
|
|
|
|
(9,936
|
)
|
|
|
(12,421
|
)
|
Provision
for income taxes
|
|
|
(9,124
|
)
|
|
|
(12,337
|
)
|
|
|
(8,112
|
)
|
|
|
(9,140
|
)
|
|
|
(4,236
|
)
|
Losses
(including impairment charges in 2007, 2005 and 2004) of unconsolidated
affiliate(2)
|
|
|
—
|
|
|
|
(2,903
|
)
|
|
|
(97
|
)
|
|
|
(4,368
|
)
|
|
|
(4,828
|
)
|
Minority
interest
|
|
|
(494
|
)
|
|
|
(476
|
)
|
|
|
(354
|
)
|
|
|
566
|
|
|
|
697
|
|
Income
(loss) from continuing operations
|
|
|
38,210
|
|
|
|
12,783
|
|
|
|
8,184
|
|
|
|
(22,878
|
)
|
|
|
(20,788
|
)
|
Discontinued
operations income (loss), net of tax
|
|
|
(104
|
)
|
|
|
143
|
|
|
|
3,674
|
|
|
|
(19,459
|
)
|
|
|
(9,194
|
)
|
Net
income (loss)
|
|
|
38,106
|
|
|
|
12,926
|
|
|
|
11,858
|
|
|
|
(42,337
|
)
|
|
|
(29,982
|
)
|
Preferred
dividends
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(648
|
)
|
|
|
(3,360
|
)
|
Deemed
dividend on exchange of common stock for preferred stock
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(20,647
|
)
|
|
|
—
|
|
Net
income (loss) available (attributable) to common
stockholders
|
|
$
|
38,106
|
|
|
$
|
12,926
|
|
|
$
|
11,858
|
|
|
$
|
(63,632
|
)
|
|
$
|
(33,342
|
)
|
EARNINGS
(LOSS) PER COMMON SHARE - BASIC:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
|
$
|
1.32
|
|
|
$
|
0.44
|
|
|
$
|
0.30
|
|
|
$
|
(1.13
|
)
|
|
$
|
(2.85
|
)
|
Discontinued
operations, net of tax
|
|
$
|
—
|
|
|
$
|
0.01
|
|
|
$
|
0.13
|
|
|
$
|
(0.96
|
)
|
|
$
|
(1.26
|
)
|
Preferred
and deemed dividends
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(1.06
|
)
|
|
$
|
(0.46
|
)
|
Net
earnings (loss) per common share
|
|
$
|
1.32
|
|
|
$
|
0.45
|
|
|
$
|
0.43
|
|
|
$
|
(3.15
|
)
|
|
$
|
(4.57
|
)
|
EARNINGS
(LOSS) PER COMMON SHARE - DILUTED:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
|
$
|
1.30
|
|
|
$
|
0.44
|
|
|
$
|
0.30
|
|
|
$
|
(1.13
|
)
|
|
$
|
(2.85
|
)
|
Discontinued
operations, net of tax
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
0.13
|
|
|
$
|
(0.96
|
)
|
|
$
|
(1.26
|
)
|
Preferred
and deemed dividends
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(1.06
|
)
|
|
$
|
(0.46
|
)
|
Net
earnings (loss) per common share
|
|
$
|
1.30
|
|
|
$
|
0.44
|
|
|
$
|
0.43
|
|
|
$
|
(3.15
|
)
|
|
$
|
(4.57
|
)
|
Weighted
average common shares - basic
|
|
|
28,860
|
|
|
|
28,534
|
|
|
|
27,332
|
|
|
|
20,187
|
|
|
|
7,290
|
|
Weighted
average common shares - diluted
|
|
|
29,210
|
|
|
|
29,243
|
|
|
|
27,735
|
|
|
|
20,187
|
|
|
|
7,290
|
|
|
|
As
of August 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(in
thousands)
|
|
BALANCE
SHEET DATA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
48,121
|
|
|
$
|
32,065
|
|
|
$
|
39,995
|
|
|
$
|
30,147
|
|
|
$
|
32,910
|
|
Short-term
restricted cash
|
|
|
536
|
|
|
|
8,046
|
|
|
|
7,651
|
|
|
|
7,331
|
|
|
|
7,255
|
|
Total
assets
|
|
|
449,963
|
|
|
|
395,419
|
|
|
|
359,043
|
|
|
|
319,854
|
|
|
|
376,008
|
|
Long-term
debt (including related party)(3)
|
|
|
23,028
|
|
|
|
8,008
|
|
|
|
13,252
|
|
|
|
23,915
|
|
|
|
82,172
|
|
Stockholders’
equity
|
|
|
274,506
|
|
|
|
245,316
|
|
|
|
234,619
|
|
|
|
198,273
|
|
|
|
127,879
|
|
Dividends
paid on common stock(4)
|
|
|
9,463
|
|
|
|
4,659
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
(1)
|
Net
interest and other income (expense) includes interest income and expense
and gains and losses on disposal of
assets.
|
(2)
|
Includes
impairment charges of $2.6 million, $1.1 million and $3.1 million, in
fiscal years 2007, 2005 and 2004,
respectively.
|
(3)
|
Long-term
debt, net of current portion.
|
(4)
|
On
January 24, 2008 and February 5, 2007, the Company declared a cash
dividend on its common stock (see Note
6).
|
PRICESMART,
INC.
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This
Annual Report contains forward-looking statements concerning the Company's
anticipated future revenues and earnings, adequacy of future cash flow and
related matters. These forward-looking statements include, but are not limited
to, statements containing the words “expect,” “believe,” “will,” “may,”
“should,” “project,” “estimate,” “scheduled,” and like expressions, and the
negative thereof. These statements are subject to risks and uncertainties that
could cause actual results to differ materially, including the following risks:
the Company's financial performance is dependent on international operations;
any failure by the Company to manage its widely dispersed operations could
adversely affect its business; although the Company has taken steps to
significantly improve its internal controls, there may be material weaknesses or
significant deficiencies that the Company has not yet identified; the Company
faces significant competition; the Company may encounter difficulties in the
shipment of and inherent risks in the importation of merchandise to its
warehouse clubs; the Company is exposed to weather and other risks associated
with international operations; declines in the economies of the countries in
which the Company operates its warehouse clubs would harm its business; a few of
the Company's stockholders have control over the Company's voting stock, which
will make it difficult to complete some corporate transactions without their
support and may prevent a change in control; the loss of key personnel could
harm the Company's business; the Company is subject to volatility in foreign
currency exchange; the Company faces the risk of exposure to product liability
claims, a product recall and adverse publicity; a determination that the
Company's long-lived or intangible assets have been impaired could adversely
affect the Company's future results of operations and financial position; and
the Company faces compliance risks associated with Section 404 of the
Sarbanes-Oxley Act of 2002; as well as the other risks detailed in the Company's
SEC reports, including the Company's Form 10-K for the fiscal year ended
August 31, 2008 filed pursuant to the Securities Exchange Act of
1934.
The
following discussion and analysis compares the results of operations for each of
the three fiscal years ended August 31, 2008 and should be read in
conjunction with the consolidated financial statements and the accompanying
notes included elsewhere in this report.
PriceSmart's mission is to efficiently
operate U.S.-style membership warehouse clubs in Central America and the
Caribbean that sell high quality merchandise at low prices to PriceSmart members
and that provide fair wages and benefits to PriceSmart employees as well as a
fair return to PriceSmart stockholders. The Company delivers U.S. brand-name and
locally sourced products to its small business and consumer members in a
warehouse club format that provides, high value to its members. By focusing on
providing exceptional value on quality merchandise in a low cost operating
environment, the Company seeks to grow sales volume and membership which in turn
will allow for further efficiencies and price reductions and ultimately improved
value to our members.
PriceSmart's
business consists primarily of international membership shopping warehouse clubs
similar to, but smaller in size than, warehouse clubs in the United States. The
number of warehouse clubs in operation, as of August 31, 2008 and
August 31, 2007 and the Company's ownership percentages and basis of
presentation for financial reporting purposes by each country or territory are
as follows:
Country/Territory
|
|
Number
of
Warehouse
Clubs
in
Operation (as of
August 31,
2008)
|
|
Number
of
Warehouse Clubs
in Operation (as of
August 31,
2007)
|
|
Ownership (as of
August 31,
2008)
|
|
Basis
of
Presentation
|
Panama
|
|
4
|
|
4
|
|
100%
|
|
Consolidated
|
Costa
Rica
|
|
4
|
|
4
|
|
100%
|
|
Consolidated
|
Dominican
Republic
|
|
2
|
|
2
|
|
100%
|
|
Consolidated
|
Guatemala
|
|
3
|
|
2
|
|
100%
|
|
Consolidated
|
El
Salvador
|
|
2
|
|
2
|
|
100%
|
|
Consolidated
|
Honduras
|
|
2
|
|
2
|
|
100%
|
|
Consolidated
|
Trinidad
|
|
3
|
|
2
|
|
95%
|
|
Consolidated
|
Aruba
|
|
1
|
|
1
|
|
100%
|
|
Consolidated
|
Barbados
|
|
1
|
|
1
|
|
100%
|
|
Consolidated
|
U.S.
Virgin Islands
|
|
1
|
|
1
|
|
100%
|
|
Consolidated
|
Jamaica
|
|
1
|
|
1
|
|
100%
|
|
Consolidated
|
Nicaragua
|
|
1
|
|
1
|
|
100%
|
|
Consolidated
|
Totals
|
|
25
|
|
23
|
|
|
|
|
In Honduras, the Company
completed construction and relocated its San Pedro Sula warehouse club to a
new site, which is also located in San Pedro Sula. The opening at the new site
took place on November 4, 2006 (fiscal year 2007). During fiscal year 2007,
the Company purchased land in Guatemala and Trinidad, where it completed
construction and opened new warehouse clubs in November and December 2007
(fiscal year 2008), respectively.
During
fiscal year 2008, as a result of the PSC Settlement, the Company purchased the
remaining 49% minority interest of its Nicaragua subsidiary from PSC. Also,
during the fourth quarter of fiscal year 2008, the Company acquired the
remaining 10% minority interest of its Aruba subsidiary from Nithyananda
Enterprises, thereby increasing its ownership percentage in its Aruba subsidiary
to 100%.
At the
end of August 2008, the total number of consolidated warehouse clubs in
operation was 25 operating in 11 countries and one U.S. territory, in comparison
to 23 warehouse clubs operating in 11 countries and one U.S. territory at the
end of August 2007. The average age of the 25 warehouse clubs included in
continuing operations was 86 months as of the end of fiscal year 2008 and the
average age of the 23 warehouse clubs included in continuing operations was 80
months as of the end of fiscal year 2007.
In
addition to the warehouse clubs operated directly by the Company, there is one
warehouse club in operation in Saipan, Micronesia licensed to and operated by
local business people, from which the Company earns a royalty fee.
In
general, the Company’s earnings improve and cash flows from operations increase
as sales increase. Although the Company’s cost of goods sold is largely
variable with sales, a portion of the Company’s selling, general and
administrative expenses rise relatively slowly in relation to sales
increases. Therefore, the Company prioritizes initiatives that it expects
will have the greatest impact on increasing sales. Looking forward to
the next several quarters, the following items are likely to have an impact on
business and the results of operations:
General
Economic Factors
·
|
The
economic slowdown in the U.S. will likely have a negative impact on the
economies in PriceSmart’s markets. Factors such as reduced
expatriate remittances, reduced tourism, and less foreign investment could
negatively impact Central American and the Caribbean. In
addition, increased fuel and food prices will reduce consumer purchasing
power and could negatively impact discretionary spending on
non-consumables.
|
·
|
Many
PriceSmart markets are susceptible to foreign exchange rate
volatility. Exchange rate changes either increase or decrease the
cost of imported products. Approximately 48% of the Company’s net
warehouse sales are comprised of products imported into the markets where
PriceSmart warehouse clubs are located. The Company purchases
these goods in dollar-denominated transactions, while approximately 79% of
the Company's net warehouse sales are in foreign currencies. In
general, local currencies in PriceSmart markets have gradually declined
relative to the dollar. Declines in local currencies relative to the
dollar effectively increase the cost to the Company’s members of imported
products. However, appreciation in local currencies make
imported products more affordable. There is no way to
accurately forecast how currencies may trade in the future.
PriceSmart monitors movements in currency rates and makes adjustments to
pricing of U.S. merchandise from time to
time.
|
·
|
Inflation
rates continue to be high in certain markets, with the highest
annual rate in Nicaragua at a reported 14% per year. Inflation
has had and may continue to have a positive impact on Company sales,
particularly basic food commodities. However, inflation can also
reduce consumer purchasing power which could negatively impact sales as
well increase the Company’s expenses, particularly wages and
utilities.
|
Current
and Future Management Actions
·
|
The
Company’s strategy is to continually seek ways to reduce prices for
its members. This involves improving purchasing and lowering
operating expenses. The strong growth in sales that the Company has
experienced during the last three years has improved the Company’s buying
power and has resulted in leveraging of costs. This allows for
reduced prices, thereby providing better value to PriceSmart
members.
|
·
|
In
March 2008, the Company signed a lease for a larger dry distribution
center in Miami, Florida. The additional space will permit the
Company to more efficiently service the PriceSmart locations and to
realize efficiencies in distribution operating expenses. In
addition, the Company recently added space to its existing leased frozen
and refrigerated distribution center which will meet the Company’s
projected capacity needs for the next 18 months, during which time we will
evaluate the need to relocate to a larger
facility.
|
·
|
The
Company offers a co-branded credit card to PriceSmart members in Central
America. The Company anticipates that as more members obtain and use the
card, there will be additional expense savings. Also, the
Company recently entered into an agreement to introduce a co-branded
credit card to the PriceSmart locations in the Caribbean to reduce
expenses and to provide a benefit to PriceSmart
members.
|
·
|
Based
on the success of previously expanding the size of certain PriceSmart
buildings, two additional PriceSmart locations will be expanded in Aruba
and Nicaragua by an average of 7,500 square feet each in the first part of
FY2009. These expansions will result in larger sales areas to
support additional sales.
|
·
|
The
Company continues to evaluate sites for additional PriceSmart
locations. Although a specific target for new warehouse club
openings in fiscal years 2010 and beyond has not been set, management
believes that there are opportunities to add locations in certain
PriceSmart markets. In that regard, the Company announced on October
1, 2008 that it had entered into agreements to acquire properties in
Panama and Costa Rica for the construction of new warehouse
clubs. In Costa Rica, this will bring the number of warehouse
clubs in that country to five. This is expected to be completed during
fiscal year 2009. In Panama, the Company will relocate an existing
warehouse club to this new site and close down the existing site after
relocation has occurred. This is expected to be completed
during fiscal year 2010. The Company is conducting due diligence reviews
on two sites, one in Trinidad and the second one in the Dominican
Republic, as to which the Company has entered into a purchase agreement
(subject to due diligence contingencies) and an option to purchase
agreement, respectively. In addition, the Company is closely
examining Colombia as a potential new market for multiple PriceSmart
warehouse clubs.
|
·
|
The
Company’s policy is to own its real estate wherever possible because of
the lower operating expenses associated with ownership and because
PriceSmart’s successful business enhances real estate values. Related
to the recently acquired sites in Panama and Costa Rica, the Company
purchased a 50% interest in additional land adjacent to the warehouse club
sites which will be developed as community shopping centers. The Company
will continue to consider the acquisition of additional land adjacent to
new PriceSmart locations with or without a Joint-Venture (JV)
partner.
|
Key items
for fiscal year 2008 included:
·
|
Net
warehouse sales increased 26.3% over the prior year, resulting from a
20.1% increase in comparable warehouse club sales (that is, sales in
warehouse clubs that have been open for greater than 13.5 months) and the
opening of two new warehouse clubs, one in November 2007 and one in
December 2007.
|
·
|
Membership
income for fiscal year 2008 increased 15.8% to $16.0 million as a result
of a 13% increase in membership accounts from August 31, 2007 to August
31, 2008, continued strong renewal rates at 85% and a 3% increase in the
average membership fee.
|
·
|
Gross
profits (net warehouse sales less cost of merchandise) increased 25.4%
over the prior year due to increased warehouse sales, and gross margin
decreased 11 basis points as a percent of net warehouse sales resulting
from reduced prices for enhanced value to our
members.
|
·
|
Selling,
general and administrative expenses as a percentage of net warehouse sales
improved 102 basis points, as increased sales offset the cost increases
associated with wages, utilities, credit cards, supplies, and expenses
related to repairs and maintenance of our warehouse
clubs.
|
·
|
Operating
income for the fiscal year was $48.4 million, which included $1.1 million
in asset impairment and closure costs, and a $1.4 million charge related
to the final settlement with PSC,
S.A.
|
·
|
Net
income attributable to common stockholders for the fiscal year was $38.1
million, or $1.30 per diluted
share.
|
Comparison
of Fiscal Year 2008 and Fiscal Year 2007
Net
warehouse club sales increased 26.3% to $1.098 billion in fiscal year 2008 from
$869.1 million in fiscal year 2007. The Company's sales were positively impacted
by a continued favorable economic environment in most of its markets during the
year despite the difficulties experienced by retailers in the U.S. market. The
Company believes that sales growth also reflects the Company’s efforts in the
selection and value of the merchandise carried in the clubs and the value that
we bring to our members which has also resulted in a growing membership base.
Approximately two-thirds of the sales growth experienced from fiscal year 2007
to fiscal year 2008 resulted from increased transactions. The other portion of
sales growth is attributable to growth in the value of the average transaction
by our members. Inflationary pressures in certain food commodities
partially contributed to some of this increase in average transaction value,
although given the broad range of products offered and the introduction of new
merchandise items throughout the year, it would be difficult for management to
estimate a specific impact of inflation on the average transaction value of the
Company. Warehouse clubs in all countries registered increased sales
from fiscal year 2007 to fiscal year 2008. The Company opened two new
warehouse clubs in the period: one in Guatemala which opened on
November 14, 2007 and one in Trinidad which opened on December 13,
2007. Together they accounted for approximately 539 basis points of growth in
net warehouse club sales.
The
following table indicates the percent growth in net warehouse club sales in the
segments in which the Company operates.
|
|
Fiscal
Years Ended August 31,
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
% of Net
Revenue
|
|
|
Amount
|
|
|
% of Net
Revenue
|
|
|
Increase
|
|
|
Change
|
|
|
|
(Dollar
amounts in thousands)
|
|
Central
America
|
|
$ |
656,612 |
|
|
|
59.8 |
% |
|
$ |
529,150 |
|
|
|
60.9 |
% |
|
$ |
127,462 |
|
|
|
24.1 |
% |
Caribbean
|
|
|
440,898 |
|
|
|
40.2 |
% |
|
|
339,952 |
|
|
|
39.1 |
% |
|
|
100,946 |
|
|
|
29.7 |
% |
|
|
$ |
1,097,510 |
|
|
|
100.0 |
% |
|
$ |
869,102 |
|
|
|
100.0 |
% |
|
$ |
228,408 |
|
|
|
26.3 |
% |
Comparable
warehouse club sales, which are for warehouse clubs open at least 13½ full
months, increased 20.1% for the 52-week period ended August 31, 2008, compared
to the same 52-week period last year. The Company reports comparable warehouse
sales on a “same week” basis with 13 weeks in each quarter beginning on a Monday
and ending on a Sunday. The periods are established at the beginning of the
fiscal year to provide as close a match as possible to the calendar month that
is used for financial reporting purposes. This approach equalizes the number of
weekend days and week days in each period for improved sales comparison, as the
Company experiences higher warehouse club sales on the weekends. Further, each
of the warehouse clubs used in the calculations was open for at least 13½
calendar months before its results for the current period were compared with its
results for the prior period. For example, the sales related to the new
warehouse club opened in Guatemala on November 14, 2007 will not be used in
the calculation of comparable warehouse club sales until the month of January
2009. Similarly, the new warehouse club opened in Trinidad on December 13,
2007 will not be used in the calculation of comparable warehouse club sales
until the month of February 2009.
The
following table indicates the approximate percentage of net sales accounted for
by each major category of items sold by the Company during the fiscal years
ended August 31, 2008, 2007 and 2006:
|
|
Fiscal
Years Ended
August 31,
|
|
|
|
2008
|
|
|
2007
|
|
Sundries (including
candy, snack foods, health and beauty aids, tobacco, alcoholic beverages,
soft drinks, cleaning and paper products and pet supplies)
|
|
|
31 |
% |
|
|
31 |
% |
Food (including dry and
fresh foods)
|
|
|
44 |
% |
|
|
42 |
% |
Hardlines (including
major appliances, electronics, hardware, office supplies, garden and
patio, sporting goods, business machines and automotive
supplies)
|
|
|
14 |
% |
|
|
16 |
% |
Softlines (including
apparel, domestics, cameras, jewelry, housewares, media, toys, home
furnishings, and small appliances)
|
|
|
9 |
% |
|
|
9 |
% |
Other (including
one-hour photo and food court)
|
|
|
2 |
% |
|
|
2 |
% |
|
|
|
100 |
% |
|
|
100 |
% |
The
higher percentage of net sales associated with Food in the fiscal year 2008,
compared to fiscal year 2007 partially reflects the impact of inflation on
commodity food products relative to Hardlines and Softlines which experienced
less inflationary pressures.
The
Company’s warehouse club gross profit margin (defined as net warehouse club
sales, less associated cost of goods sold) for fiscal year 2008 increased $33.4
million to $165.2 million, or 15.1% of net warehouse club sales, from $131.8
million, or 15.2% of net warehouse club sales for fiscal 2007. The increase in
warehouse club gross profit margin dollars was primarily due to higher sales in
the current fiscal year as compared to the prior fiscal year. As a percentage of
sales, warehouse gross profit declined by approximately 11 basis points for
fiscal year 2008, compared to fiscal year 2007, as reduced foreign currency
exchange losses and improvements in merchandise distribution and shrink results
were offset by targeted reductions in merchandise margins to provide greater
value to PriceSmart members through lower prices.
Export
sales were $1.5 million for fiscal year 2008, compared to export sales of $1.0
million for fiscal year 2007, due primarily to direct sales to institutional
customers (primarily retailers) in the Philippines for which the Company earns a
margin of approximately 5% of those sales.
Membership
income, which is recognized into income ratably over the one-year life of the
membership, increased 15.8% to $16.0 million, or 1.5% of net warehouse sales, in
fiscal year 2008, compared to $13.9 million, or 1.6% of net warehouse sales, in
fiscal year 2007. Total membership accounts as of the end of fiscal year 2008
were approximately 604,000, an increase of approximately 69,000 accounts over
the end of fiscal year 2007. The principal reasons for the increase in
membership levels has been the Company’s ability to maintain membership
retention levels at 85% combined with an increase in the membership base at our
existing warehouse locations and the new members added with the opening of the
two new warehouse clubs.
Other
income consists of commission revenue, rental income, advertising revenue,
construction revenue, fees for in-store product demonstrations, and fees earned
from licensees. Other income for both fiscal years was $4.8
million. Included in the results for fiscal year 2007 was $500,000 in
non-recurring income recognized in the second quarter of fiscal year 2007
related to the marketing fees earned on the Company’s co-branded credit card
agreement with Banco Promerica.
Warehouse
club operating expenses increased 18.0% to $103.9 million, or 9.5% of warehouse
sales, for fiscal year 2008 from $88.0 million, or 10.1% of warehouse sales, in
fiscal year 2007. The addition of the two new warehouse clubs added a total of
$4.4 million to warehouse club operating costs during fiscal year 2008, compared
to fiscal year 2007. The increase in warehouse club operating expenses excluding
the two new warehouse clubs resulted from increased payroll related expenses
of $5.7 million, higher bank and credit card fees primarily related to
higher sales of $1.8 million, and increased operating costs for utilities,
repair and maintenance, and supplies of $2.7 million. The Company also
incurred higher depreciation expense of $911,000 related to capital expenditures
over the year, including the acquisition of the company that had leased to the
Company the real estate upon which the PriceSmart Barbados warehouse club
is located, which was offset by a related reduction in rent expense of
$574,000.
General and administrative
expenses increased to $30.3 million, or 2.8% of net warehouse sales, for fiscal
year 2008 from $27.1 million, or 3.1% of net warehouse sales, in fiscal year
2007. The Company incurred increased costs $872,000 for salaries and
related benefits, including ex-pat costs, for the Company’s corporate
headquarters and U.S. buying operation. Professional fees, primarily related to
the litigation and ultimate settlement with the Promerica entities discussed
below and tax consulting services resulted in increased costs of $1.7 million in
fiscal year 2008, compared to fiscal year 2007. In addition, fiscal
year 2007 results included the release of a $200,000 reserve in excess of
estimated claims.
Expenses
incurred before a warehouse club is in operation are captured in pre-opening
expenses. Pre-opening expenses in fiscal year 2008 were $1.0 million related to
the opening of the two new warehouse clubs, Guatemala and Trinidad. In the prior
fiscal year, pre-opening expense was $373,000, of which $256,000 was primarily
associated with the opening of the relocated San Pedro Sula, Honduras location.
The remainder was related to the new Guatemala and Trinidad warehouse clubs
which opened in November and December 2007, respectively (fiscal year
2008).
Asset
impairment and closure costs for fiscal year 2008 were $1.1 million, compared to
$1.6 million in fiscal year 2007. Contributing to the expense in the current
fiscal year is a $605,000 non-cash charge to recognize a decrease in the net
present value of future cash flows over the remaining lease life for the closed
but subleased Guatemala Plaza location as a result of a rent increase to the
Company from the landlord and approximately $205,000 in other expenses related
to the Guatemala Plaza location. In addition, the Company took a
$449,000 non-cash charge to write-down the net book value of certain equipment
related to in-club bulk packaging. This results from the fact that
the Company is now able to purchase pre-packaged items at competitive prices
from its suppliers, thereby freeing up merchandise space and reducing labor
costs within the club. Impairment and closure costs were lowered
during fiscal year 2008 by approximately $127,000 in interest income related to
the note receivable on the Dominican Republic sale of the East Side Santo
Domingo warehouse. Asset impairment and closure costs in the prior fiscal year
resulted from a further write-down of the value of the original San Pedro Sula,
Honduras warehouse club which was vacated in early fiscal year 2007 in favor of
a new club that was built in another section of the city. The further write-down
of $897,000 in fiscal year 2007 was a result of entering into an agreement to
sell the location for $2.5 million. The sale of which was completed in September
2007 (fiscal year 2008). The Company incurred approximately $128,000 in
additional closure costs during the fiscal year 2007 related to the vacating of
the San Pedro Sula warehouse site. Net closure costs of $315,000 were incurred
in the Dominican Republic related to the sale of the East Side Santo Domingo
warehouse for the fiscal year 2007.
Included
in the results for fiscal year 2008 are pre-tax charges and income tax benefits
related to the Company’s settlement of previously announced disputes pursuant to
a Settlement Agreement and Release with PSC, S.A. (PSC) and related entities
dated February 8, 2008, net of a $5.5 million reserve established in the
fourth quarter of fiscal year 2007. The amount of the reserve was equal to
management’s estimate at that time of the potential impact of a global
settlement on PriceSmart’s net income. In fiscal year 2008, the Company recorded
an additional pre-tax charge of $1.3 million associated with the final
settlement for costs incurred in excess of the initial $5.5 million reserved in
fiscal year 2007. An income tax benefit was also recorded of
approximately $1.7 million as a result of the approximately $6.8 million
recorded in settlement cost. When the Company originally accrued for
the settlement cost, the Company was not able to estimate the tax benefit
component of the settlement cost with an adequate level of
certainty. In addition for the fiscal year 2008, the Company recorded
approximately $120,000 in costs to record the fair value of a put right given to
PSC as partial consideration for the settlement.
Operating
income for fiscal year 2008 was $48.4 million, or 4.4% of warehouse sales,
compared to $28.0 million, or 3.2% of warehouse sales, in fiscal year
2007.
Interest
income reflects earnings on cash and cash equivalent balances and, until October
of fiscal year 2008, restricted cash deposits securing working capital lines of
credit. Interest income was $1.2 million in fiscal year 2008, compared to $1.6
million in fiscal year 2007. The decrease reflects generally lower interest
rates associated with cash on deposit in the current year, compared to last
year.
Interest
expense reflects borrowings by the Company’s majority or wholly owned foreign
subsidiaries to finance the capital requirements of warehouse club operations
and on-going working capital requirements. Interest expense increased to $1.4
million in fiscal year 2008, from $788,000 in fiscal year 2007, resulting from
an increase in debt held by the Company to finance the land purchase and
subsequent construction of the new warehouse club in Guatemala and to finance
the purchase of the company that had leased to the Company the real estate upon
which the PriceSmart Barbados warehouse club is located.
During
fiscal year 2008, the Company incurred current tax expense of $15.5 million and
recognized a net deferred tax benefit of $6.4 million, resulting in a net tax
expense of $9.1 million. During fiscal year 2007, the Company
incurred current tax expense of $13.4 million and recognized a net deferred tax
benefit of $1.1 million, resulting in net tax expense of $12.3
million. The effective tax rate for fiscal year 2008 is
approximately 19%, as compared to the effective tax rate for fiscal year 2007 of
approximately 43%. The decrease in the effective tax rates between
fiscal years is primarily attributable to: (i) during fiscal year 2008, there is
a significant increase in non-U.S. pre-tax income, which is taxed at statutory
rates that are generally 4% to 9% lower than the U.S. statutory tax rate; (ii)
the Company reversed approximately $3.5 million of valuation allowances during
fiscal year 2008 as a result of the improvement in the operations of certain of
the foreign subsidiaries, which had a 7% benefit on the fiscal year 2008
effective tax rate; and (iii) the Company recorded $5.5 million of settlement
expenses during fiscal year 2007, which was not tax effected due to the
preliminary nature of this accrual, which represents 7% of the effective tax
rate during fiscal year 2007.
In August
2007 (fiscal year 2007), the Company agreed to sell its 50% interest in PSMT
Mexico, S.A. de C.V. to Grupo Gigante for $2.0 million. The
transaction was finalized on October 31, 2007 (fiscal year
2008). There was no net impact to fiscal year 2008 results from the
unconsolidated affiliate as the Company wrote down the value on its balance
sheet during fiscal year 2007. The fiscal year 2007 write-down included
$892,000 related to the amounts carried as “Investment in unconsolidated
subsidiaries,” and $1.7 million in accumulated unrealized loss associated with
currency changes recorded as “Accumulated other comprehensive loss” on the
consolidated balance sheet. The Company was relieved of all its obligations
under letters of credit granted in favor of Mexican tax authorities totaling
$1.9 million in connection with this disposal.
Minority
interest is the allocation of the joint venture income or loss to the minority
stockholders’ respective interest. Minority interest stockholders’ respective
share of net income was $494,000 in fiscal year 2008. In the same period last
year, the joint ventures for which there was a minority stockholder interest was
$476,000. During the second quarter of fiscal year 2008, the Company acquired
the 49% ownership interest of the minority shareholder in its Nicaragua
subsidiary. As a result, the Company now recognizes 100% of that
subsidiary’s income or loss. During the fourth quarter of fiscal year
2008, the Company acquired the 10% minority interest of its Aruba subsidiary
from Nithyananda Enterprises, thereby increasing its ownership percentage in its
Aruba subsidiary to 100%. As a result, the Company now records
100% of these subsidiary’s income or loss.
Income
from continuing operations for fiscal year 2008 was $38.2 million, compared to
$12.8 million in the same period last year.
Income
from discontinued operations, net of tax are the consolidated income and
expenses associated with those operations within the Company that were closed or
disposed of and which meet the criteria for such a treatment. Discontinued
operations include the costs associated with the Company’s previously closed
warehouse location in Guam which is leased to a subtenant. The
Company recognized a loss of $104,000 in fiscal year 2008, primarily related to
a payroll tax related matter. In fiscal year 2007, the Company
recognized income of $143,000 related to the sublease of the location offset by
continuing expenses.
Discontinued
operations, net of taxes are comprised of the following:
|
|
Fiscal
Year Ended
2008
|
|
|
Fiscal
Year Ended
2007
|
|
Guam
pre-tax (loss) income from operations
|
|
$ |
(104 |
) |
|
$ |
151 |
|
Philippines
pre-tax (loss) income from operations
|
|
|
— |
|
|
|
(8 |
) |
Income
(loss) before income taxes
|
|
|
(104 |
) |
|
|
143 |
|
Income
tax (provision) benefit
|
|
|
— |
|
|
|
— |
|
Discontinued
operations (loss) income, net of tax
|
|
$ |
(104 |
) |
|
$ |
143 |
|
Comparison
of Fiscal Year 2007 and Fiscal Year 2006
Net
warehouse club sales increased 20.8% to $869.1 million in fiscal year 2007 from
$719.6 million in fiscal year 2006. The Company's sales were positively impacted
by a generally strong economic environment in its markets as well as ongoing
improvements in the selection and value of the merchandise carried in the clubs
and a growing membership base. Approximately 50% of the sales growth experienced
from fiscal year 2006 to fiscal year 2007 resulted from increased transactions,
which is in line with the growth in membership accounts. The other portion of
sales growth is attributable to growth in the value of the average transaction
by our members. Warehouse clubs in all countries registered increased sales from
fiscal year 2006 to fiscal year 2007. The Company opened a new warehouse
club in Costa Rica in November of 2005, which contributed approximately 69 basis
points of growth as a result of being open for a full 12 months in fiscal year
2007 compared to 9 1/2 months in fiscal year 2006. The following table indicates
the percent growth in net warehouse club sales in the segments in which the
Company operates.
|
|
Fiscal
Years Ended August 31,
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
(Dollar
amounts in thousands)
|
|
|
|
Amount
|
|
|
% of Net
Revenue
|
|
|
Amount
|
|
|
% of Net
Revenue
|
|
|
Increase
|
|
|
Change
|
|
Central
America
|
|
$ |
529,150 |
|
|
|
60.9 |
% |
|
$ |
439,501 |
|
|
|
61.0 |
% |
|
$ |
89,649 |
|
|
|
20.4 |
% |
Caribbean
|
|
|
339,952 |
|
|
|
39.1 |
% |
|
|
280,075 |
|
|
|
39.0 |
% |
|
|
59,877 |
|
|
|
21.4 |
% |
|
|
$ |
869,102 |
|
|
|
100.0 |
% |
|
$ |
719,576 |
|
|
|
100.0 |
% |
|
$ |
149,526 |
|
|
|
20.8 |
% |
Comparable
warehouse club sales, which are for warehouse clubs open at least 13 1/2 full
months, increased 20.1% for the 52-week period ended September 2, 2007,
compared to the same period last year. The Company reports comparable warehouse
sales on a “same week” basis with 13 weeks in each quarter beginning on a Monday
and ending on a Sunday. The periods are established at the beginning of the
fiscal year to provide as close a match as possible to the calendar month that
is used for financial reporting purposes. This approach equalizes the number of
weekend days and week days in each period for improved sales comparison, as the
Company experiences higher warehouse club sales on the weekends. Further, each
of the warehouse clubs used in the calculations was open for at least 13 1/2
calendar months before its results for the current period were compared with its
results for the prior period. For example, the sales related to the new
warehouse club opened in Costa Rica on November 18, 2005 were not used in
the calculation of same-warehouse-club sales until the month of February
2007.
The
following table indicates the approximate percentage of net sales accounted for
by each major category of items sold by the Company during the fiscal years
ended August 31, 2007, 2006 and 2005:
|
|
Fiscal
Years Ended
August 31,
|
|
|
|
2007
|
|
|
2006
|
|
Sundries (including
candy, snack foods, health and beauty aids, tobacco, alcoholic beverages,
soft drinks, cleaning and paper products and pet supplies)
|
|
|
31 |
% |
|
|
30 |
% |
Food (including dry and
fresh foods)
|
|
|
42 |
% |
|
|
43 |
% |
Hardlines (including
major appliances, electronics, hardware, office supplies, garden and
patio, sporting goods, business machines and automotive
supplies)
|
|
|
16 |
% |
|
|
16 |
% |
Softlines (including
apparel, domestics, cameras, jewelry, housewares, media, toys, home
furnishings, and small appliances)
|
|
|
9 |
% |
|
|
9 |
% |
Other (including
one-hour photo and food court)
|
|
|
2 |
% |
|
|
2 |
% |
|
|
|
100 |
% |
|
|
100 |
% |
The Company's warehouse
club gross profit margin (defined as net warehouse club sales less associated
cost of goods sold) for fiscal year 2007 increased $23.6 million to $131.8
million, or 15.2% of net warehouse sales, from $108.2 million, or 15.0% of net
warehouse sales for fiscal year 2006. The increase in warehouse gross profit
margin dollars was primarily due to higher sales in the current fiscal year as
compared to the prior fiscal year. As a percentage of sales, warehouse gross
profit improved approximately 13 basis points. Merchandise inventory management
and operational control activities which resulted in a small improvement in
merchandise margins as a percentage of sales were offset by value-added tax
contingencies related to the past disposal of inventory in certain countries.
Foreign exchange-related expense contributed 20 basis points of improvement as
the Company recorded a relatively small loss in fiscal year 2007 of
approximately $5,000 compared to a currency related loss of $1.5 million in
fiscal year 2006.
Export
sales were $1.0 million for fiscal year 2007, compared to export sales of
$63,000 for fiscal year 2006, due primarily to direct sales to institutional
customers (primarily retailers) in the Philippines for which the Company earns a
margin of approximately 5% of those sales.
Membership
income, which is recognized into income ratably over the one-year life of the
membership, increased 20.3% to $13.9 million, or 1.6% of net warehouse sales, in
fiscal year 2007 compared to $11.5 million, or 1.6% of net warehouse sales, in
fiscal year 2006. The increase in membership income reflects both an 11%
increase in the number of membership accounts, a 6% increase in the average
membership fee from the end of fiscal year 2006 to the end of fiscal year 2007
and a membership renewal rate of 83%. Total membership accounts as of the end of
fiscal year 2007 were approximately 535,000, an increase of approximately 55,000
accounts over the end of fiscal year 2006. The principal reasons for the
increase in membership levels has been the Company’s ability to maintain
membership retention levels combined with an increase in the membership base as
at our existing warehouse locations.
Other
income consists of commission revenue, rental income, advertising revenue,
construction management revenue, fees for in-store product demonstrations, and
fees earned from licensees. Other income in fiscal year 2007 was $4.8 million,
compared to $3.5 million in fiscal year 2006. Contributing to the increase was
$500,000 in non-recurring income recognized in the third quarter of fiscal year
2007 related to the marketing fees earned on the Company’s co-branded credit
card agreement with Banco Promerica. In addition, increased income was
attributable to higher rental income and construction management
income.
Warehouse
club operating expenses increased 11.7% to $88.0 million, or 10.1% of warehouse
sales, for fiscal year 2007 from $78.8 million, or 10.9% of warehouse sales, in
fiscal year 2006. The increase in warehouse club operating expenses resulted
from increased payroll-related expenses including ex-pat costs $4.1 million,
higher bank and credit card fees related to higher sales $1.7 million, and
increased operating costs for utilities, repair and maintenance, and supplies
$1.2 million. In addition, depreciation expense increased $239,000 resulting
from capital investments made in Honduras (San Pedro Sula) and Panama (Via
Brasil). The Company also experienced higher costs related to professional
services, primarily related to tax advisory and audit services $703,000 within
the countries in which it operates. Across all spending categories, the
inclusion of a full year’s costs associated with the new club in Costa Rica,
which opened on November 18, 2005, resulted in $572,000 of increased
warehouse club operating expenses in fiscal year 2007, compared to fiscal year
2006.
General
and administrative expenses increased to $27.1 million, or 3.1% of net warehouse
sales, for fiscal year 2007 from $24.1 million, or 3.3% of net warehouse sales,
in fiscal year 2006. The increased costs were a result of increased salaries and
related benefits for the Company’s corporate headquarters and U.S. buying
operation $2.4 million as well as increased professional costs associated with
tax advisory services, legal support, and audit related services
$867,000.
Expenses
incurred before a warehouse club is in operation are captured in pre-opening
expenses. Pre-opening expenses in fiscal year 2007 were $373,000, of which
$256,000 was primarily associated with the opening of the relocated San Pedro
Sula, Honduras location. The remainder related to the new Trinidad and Guatemala
warehouse clubs which opened in November and December 2007 (fiscal year 2008).
Pre-opening expense of $349,000 in the prior fiscal year was associated with the
opening of the Company’s fourth warehouse club in Costa Rica.
Asset
impairment and closure costs for fiscal year 2007 were $1.6 million compared to
$1.8 million in fiscal year 2006. Asset impairment and closure costs in fiscal
year 2007 were impacted by the Company taking a further write-down of the value
of the original San Pedro Sula, Honduras warehouse club which was vacated in
early fiscal year 2007 in favor of a new club that was built in another section
of the city. The further write-down of $897,000 was a result of entering into an
agreement to sell the location for $2.5 million which was completed in September
2007 (fiscal year 2008). The Company incurred approximately $128,000 in
additional closure costs during the fiscal year 2007 related to the vacating of
the San Pedro Sula warehouse site. Net closure costs of $315,000 were incurred
in the Dominican Republic related to the sale of the East Side Santo Domingo
warehouse for the fiscal year 2007. The remaining asset impairment and closure
costs during fiscal year 2007 related to the on-going operating costs of the
closed location in Guatemala Plaza of approximately $210,000. In fiscal year
2006, asset impairment and closure costs were primarily due to the write-down of
the real estate assets in Honduras and the Dominican Republic. The impairment
charge of $785,000 taken at the end of fiscal year 2006 reduced book value of
the vacated Honduras site to the then-expected market value as a buyer or
leasing opportunity was pursued. In the Dominican Republic, the Company’s
previously closed warehouse club had been on the market for three years. As a
result, the Company took an additional $813,000 impairment charge based upon
management’s revised assessment of the market value of that asset.
In the
fourth quarter of fiscal year 2007, the Company established a reserve of $5.5
million related to a potential settlement of litigation with PSC, S.A. and
related entities. The amount of the reserve was equal to management’s then
current estimate of the potential impact of a global settlement on PriceSmart’s
fiscal year 2007 consolidated net income. The amount of the reserve was based
upon various factors, including tax considerations that were subject to
management’s estimates and judgments.
Operating
income for fiscal year 2007 was $28.0 million, or 3.2% of warehouse sales,
compared to $18.1 million, or 2.5% of warehouse sales, in fiscal year
2006.
Interest
income reflects earnings on cash and cash equivalent balances and restricted
cash deposits securing working capital lines of credit. Interest income was $1.6
million in fiscal year 2007 compared to $2.0 million in fiscal year 2006. The
decrease reflects generally lower average cash balances on deposits in the
current period compared to a year ago offset by higher interest rates associated
with cash on deposit.
Interest
expense reflects borrowings by the Company’s majority or wholly owned foreign
subsidiaries to finance the capital requirements of warehouse club operations
and ongoing working capital requirements. Interest expense decreased to $788,000
in fiscal year 2007 from $3.2 million in fiscal year 2006, resulting from a
reduction in debt held by the Company.
During
fiscal year 2007, the Company incurred current tax expense of $13.4 million and
recognized a net deferred tax benefit of $1.1 million, resulting in a net tax
expense of $12.3 million. During fiscal year 2006, the Company incurred
current tax expense of $6.4 million and recognized a net deferred tax expense of
$1.7 million, resulting in net tax expense of $8.1 million.
The effective tax rate for fiscal year 2007 is approximately 43%, as compared to
the effective tax rate for fiscal year 2006 of approximately 48%. The
decrease in the effective tax rates between fiscal years is primarily
attributable to a significant increase in non-U.S. pre-tax income during fiscal
year 2007, which is taxed at statutory rates that are generally 4% to 9% lower
than the U.S. statutory tax rate.
Equity of
unconsolidated affiliate represents the Company's 50% share of losses from its
Mexico joint venture. The joint venture is accounted for under the equity method
of accounting in which the Company reflects its proportionate share of income or
loss. On February 28, 2005, the Company and Grupo Gigante S.A. closed the
warehouse club operations of PSMT Mexico, S.A. de C.V. The joint venture sold
two of the three locations consisting of land and buildings in September 2005
for an aggregate price of $11.2 million. In August 2007, the Company agreed to
sell its interest in PSMT Mexico, S.A. de C.V. to Grupo Gigante for $2.0
million. The transaction was finalized on October 31, 2007. Consequently,
the Company wrote down the value on its balance sheet. The write-down includes
$892,000 related to the amounts carried as “Investment in unconsolidated
subsidiaries,” and $1.7 million in accumulated unrealized loss associated with
currency changes recorded as “Accumulated other comprehensive loss” on the
consolidated balance sheet. While the Company believes that the value of the
investment as indicated on the consolidated balance sheet would over time be
realized, there were concerns about the Company’s control of the actions
necessary to achieve those outcomes given that a substantial portion of the
realizable assets related to refunds from the Mexican tax authorities for
pre-paid taxes. The Company, with the concurrence of the Board of Directors,
concluded that it was in the Company’s best interest to complete the divestment
of its Mexico holdings and reduce its involvement in activities not related to
the future growth of the membership warehouse business in its targeted
markets.
Minority
interest is the allocation of the joint venture income or loss to the minority
stockholders’ respective interest. Minority interest stockholders’ respective
share of net income was $476,000 in fiscal year 2007. In the same period last
year, the joint ventures for which there was a minority stockholder interest was
$354,000. During the third quarter of fiscal year 2006, the Company acquired the
7.5% ownership interest of the one remaining shareholder in its Jamaica
subsidiary after having acquired the 25% interest of two other minority
stockholders in the first fiscal quarter. As a result, the Company now
recognizes 100% of that subsidiary’s income or loss. The Company also acquired
an additional 5% ownership in its Trinidad subsidiary in the second quarter of
fiscal year 2006, increasing its ownership percentage to 95% from
90%.
Income
from continuing operations for fiscal year 2007 was $12.8 million compared to
$8.2 million in fiscal year 2006.
Discontinued
operations income (loss), net of tax are the consolidated income and expenses
associated with those warehouse clubs within the Company that were closed or
disposed of and which meet the criteria for such treatment. Discontinued
operations includes PSMT Philippines which was disposed of effective
August 12, 2005, and the costs associated with the Company’s previously
closed warehouse location in Guam. In fiscal year 2007, the Company recognized
income net of tax of $143,000 from discontinued operations. In fiscal year 2006,
the Company recognized income net of tax of $3.7 million from discontinued
operations, primarily related to the $5.8 million reversal of a provision
against recoverability of loan principal and accrued interest receivable related
to that loan, from PSMT Philippines which was collected during the
year.
Discontinued
operations, net of taxes are comprised of the following:
|
|
Fiscal
Years Ended
August
31,
|
|
|
|
2007
|
|
|
2006
|
|
Guam
pre-tax income (loss) from operations
|
|
$ |
151 |
|
|
$ |
73 |
|
Philippines
pre-tax (loss) income from operations
|
|
|
(8 |
) |
|
|
5,704 |
|
Pre-tax
loss on divestiture
|
|
|
— |
|
|
|
— |
|
Income
(loss) before income taxes and minority interest
|
|
|
143 |
|
|
|
5,777 |
|
Income
tax (provision) benefit
|
|
|
— |
|
|
|
(2,103 |
) |
Discontinued
operations income (loss), net of tax
|
|
$ |
143 |
|
|
$ |
3,674 |
|
Liquidity
and Capital Resources
Financial
Position and Cash Flow
The
Company had $48.1 million in consolidated cash and cash equivalents as of
August 31, 2008, compared to $32.1 million in consolidated cash and cash
equivalents as of August 31, 2007. The Company used a portion of the cash
from its reserves and cash generated by operations and financing activities to
retire debt, acquire significant real estate assets, and pay dividends in the
current twelve month period.
Net cash
flows provided by operating activities were $43.7 million in fiscal year 2008,
compared to cash provided by operating activities of $31.8 million in fiscal
year 2007. Income from continuing operations improved by $25.4 million to $38.2
million in fiscal year 2008 compared to $12.8 million in fiscal year
2007. Income from continuing operations in fiscal year 2008 included
three non-cash charges totaling $1.6 million: (i) increase in accrued closure
costs and other accrued liabilities of $605,000 to reflect the increase in
monthly rent, (ii) impairment charges associated with the write-down of bulk
packaging equipment for $449,000, and (iii) the write down of PSC-related debt
for the settlement agreement of approximately $530,000. Changes in
operating assets and liabilities, most notably the payment of the amount
reserved in fiscal year 2007 for settlement of pending litigation, additions of
merchandise inventory to support higher sales and the addition of two warehouse
club operations, resulted in the use of $8.4 million of cash in fiscal year
2008. Income from continuing operations in fiscal year 2007 included two
non-cash charges totaling $8.1 million: (i) reserve for settlement of pending
litigation for $5.5 million and (ii) impairment charges associated with
unconsolidated affiliate for $2.6 million. Changes in operating assets and
liabilities, most notably additions to merchandise inventory to support higher
sales, resulted in the use of $1.9 million of cash in fiscal year
2007.
Net cash
used in investing activities was $41.5 million and $30.7 million in fiscal years
2008 and 2007, respectively. In fiscal year 2008, the additions to
property and equipment totaled $23.6 million, primarily associated with the
completion and new warehouse club openings in Guatemala (November 2007) and
Trinidad (December 2007) and continued improvements in the Company’s other
warehouse club locations for approximately $22.3 million. In addition, the
Company recorded the purchase of the acquisition of a land parcel at the Zapote,
Costa Rica warehouse club site from PSC for $1.0 million. The Company also
recorded the purchase of easement rights relating to properties adjacent to the
PriceSmart warehouse club in Managua, Nicaragua for $250,000. The
Company used approximately $10.5 million for the acquisition of the 49% minority
interest in the Nicaragua club warehouse as part of the PSC legal settlement and
the acquisition of the 5% minority interest in the Aruba club
warehouse. In addition, the Company used approximately $11.9 million
for the acquisition of the company that had leased to it the real estate and
building upon which the Barbados warehouse club is located. The Company used
approximately $660,000 for deposits made into escrow accounts for the potential
future acquisition of land for future club warehouse sites and for potential
payments related to the PSC settlement. The Company generated approximately $5.1
million in cash from investing activities primarily from the sales of its
investment in its Mexico subsidiary and the San Pedro Sula warehouse building in
Honduras. The use of cash in fiscal year 2007 resulted primarily from
the additions to property and equipment which totaled $30.9 million,
primarily associated with the purchase of land in Guatemala and Trinidad for the
construction of two new locations for approximately $12.8 million, and the
subsequent construction related costs for initial stages of building those two
clubs, the completion of construction of the Company’s Honduras warehouse
locations for approximately $3.9 million, the expansion of the Company’s Via
Brasil location in Panama City, Panama for approximately $1.0 million, and the
purchase of an interest in an aircraft for $658,000.
Financing
activities provided net cash flow of $13.6 million in fiscal year 2008,
primarily as a result of obtaining new bank loans and payments on bank loans for
a net effect of $16.3 million of cash provided and the release of restricted
cash previously held as collateral for a line of credit with a bank of $8.0
million, offset by payments of $9.5 million for dividends, $1.4 million used in
the purchase of treasury stock related to the exercise of stock grants, and $1.3
million used in the purchase of treasury stock related to the PSC legal
settlement. During fiscal year 2007, financing activities used net
cash of $7.3 million, primarily as a result of repaying the $17.1 million
balance on the long-term debt held by the International Finance Corporation,
which included a prepayment of principal in the amount of $14.9 million in
September 2006 in addition to the Company’s regularly scheduled principal
payment of $2.2 million. This was offset by the Company establishing a new
long term loan in Guatemala for $8.9 million, to finance the acquisition of the
land and the construction of that new warehouse club. The Company paid a cash
dividend to common stockholders totaling $4.7 million during the year. The
Company drew down from its available lines of short-term loans, with $3.3
million representing the net total amount of the draw down during the
year.
Financing
Activities
On
November 15, 2007, the Company obtained a long-term loan of $4.5 million
from Citibank N.A. and a loan of 9.0 million Barbados dollars (equivalent
to $4.5 million U.S. dollars) from Citicorp Merchant Bank Ltd., to finance the
purchase of the company that had leased to it the real estate and building upon
which the Company’s Barbados warehouse club is located. In addition, the Company
drew down approximately $722,000 in additional short-term loans from its
facilities in Guatemala. On February 13, 2008, the Company entered into an
interest rate swap agreement with Citicorp Merchant Bank for a notional amount
of $4.5 million. This swap agreement was entered into to fix the interest rate
of the $4.5 million loan with Citibank N.A. The loan has a variable interest
rate of LIBOR plus a margin of 1.5%. Under the swap agreement, the Company will
pay a fixed rate of 5.22% for a term of approximately five years (February 18,
2008 through May 15, 2013). On August 26, 2008 the Company
obtained a long-term note of $9.0 million from the Royal Bank of Trinidad and
Tobago Ltd. (RBTT). During fiscal year 2007, the Company repaid the
remaining $17.1 million balance on the long-term debt held by the International
Finance Corporation, which included a prepayment of principal in the amount of
$14.9 million in September 2006, in addition to the Company’s regularly
scheduled principal payment of $2.2 million. A new long-term loan was
established in Guatemala totaling $8.9 million, secured by the land and building
of the new warehouse club to finance the land acquisition and construction of
that club. The Company accessed certain short-term debt facilities in the amount
of $3.3 million at the close of the period for working capital financing
purposes.
Short-Term
Borrowings and Long-Term Debt
As of
August 31, 2008 and 2007, the Company, together with its majority or wholly
owned subsidiaries, had $3.5 million and $3.3 million outstanding in short-term
borrowings, respectively.
The
Company has a bank credit agreement for up to $10.0 million, which can be used
as a line of credit or to issue letters of credit. As of August 31, 2008,
letters of credit totaling $700,000 were outstanding under this facility,
leaving availability under this facility of $9.3 million.
As of
August 31, 2008 and 2007, the Company, together with its majority or wholly
owned subsidiaries, had $25.8 million and $9.4 million, respectively,
outstanding in long-term borrowings. The Company's long-term debt is
collateralized by certain land, buildings, fixtures, equipment to which the debt
relates and guaranteed by the Company up to its respective ownership percentage.
The carrying amount of the non-cash assets assigned as collateral for long-term
debt was $32.2 million and $9.7 million as of August 31, 2008 and 2007,
respectively. Certain obligations under leasing arrangements are
collateralized by the underlying asset being leased.
During
the first quarter of fiscal year 2007, the Company repaid the remaining $17.1
million balance on the long-term debt held by the International Finance
Corporation, which included a prepayment of principal in the amount of $14.9
million.
Contractual
Obligations
As of
August 31, 2008, the Company's commitments to make future payments under
long-term contractual obligations were as follows (in thousands):
|
|
Payments
Due by Period
|
|
Contractual obligations
|
|
Total
|
|
|
Less than
1
Year
|
|
|
1
to 3
Years
|
|
|
4
to 5
Years
|
|
|
After
5
Years
|
|
Long-term
debt(1)
|
|
$ |
25,765 |
|
|
$ |
2,737 |
|
|
$ |
5,432 |
|
|
$ |
5,415 |
|
|
$ |
12,181 |
|
Operating
leases(2)(3)((4)
|
|
|
94,797 |
|
|
|
6,395 |
|
|
|
11,728 |
|
|
|
10,971 |
|
|
|
65,703 |
|
Total
|
|
$ |
120,562 |
|
|
$ |
9,132 |
|
|
$ |
17,160 |
|
|
|
16,386 |
|
|
$ |
77,884 |
|
(1)
|
Amounts
shown are for the principal portion of the long-term debt payment
only.
|
(2)
|
Amounts
shown exclude future operating lease payments due for the closed warehouse
clubs in Guatemala and Guam. The net liability related to Guatemala
is approximately $3.7 million and is recorded on the consolidated balance
sheet under the captions “Other accrued expenses” and “Accrued closure
costs.” The projected minimum payments excluded for Guam are approximately
$3.4 million; however sublease income for this location is also
approximately $3.4 million, yielding no net projected
obligation.
|
(3)
|
Operating
lease obligations have been reduced by approximately $545,000 to reflect
the amount net of sublease income.
|
(4)
|
Amounts
include an equipment lease for IT
equipment.
|
Critical
Accounting Estimates
The
preparation of the Company's consolidated financial statements requires that
management make estimates and judgments that affect the financial position and
results of operations. Management continues to review its accounting policies
and evaluate its estimates, including those related to contingencies and
litigation, deferred taxes, merchandise inventories, goodwill, long-lived
assets, stock-based compensation and warehouse closure costs. The Company bases
its estimates on historical experience and on other assumptions that management
believes to be reasonable under the present circumstances. These accounting
policies, under different conditions or using different estimates, could show
materially different results on the Company's financial condition and results of
operations.
Contingencies and Litigation:
In the ordinary course of business, the Company is periodically named as a
defendant in various lawsuits, claims and pending actions and is exposed to tax
risks (other than income tax). The principal risks that the Company insures
against are workers’ compensation, general liability, vehicle liability,
property damage, employment practices, errors and omissions, fiduciary liability
and fidelity losses. If a potential loss arising from these lawsuits, claims,
actions and non-income tax issues is probable and reasonably estimable, the
Company records the estimated liability based on circumstances and assumptions
existing at the time in accordance with Statement of Financial Accounting
Standards (SFAS) No. 5, “Accounting for Contingencies.” While the Company
believes the recorded liabilities are adequate, there are inherent limitations
in the estimation process whereby future actual losses may exceed projected
losses, which could materially adversely affect the Company’s results of
operations or financial condition.
Income Taxes: A valuation
allowance is recorded to reduce deferred tax assets to the amount that is more
likely than not to be realized. As of August 31, 2008, the Company
evaluated its deferred tax assets and liabilities and determined that, in
accordance with SFAS No. 109, “Accounting for Income Taxes,” a valuation
allowance is necessary for certain foreign deferred tax asset balances,
primarily because of the existence of significant negative objective evidence,
such as the fact that certain subsidiaries are in a cumulative loss position for
the past three years, and the determination that certain net operating loss
carryforward periods are not sufficient to realize the related deferred tax
assets. The Company factored into its analysis the inherent risk of forecasting
revenue and expenses over an extended period of time and also considered the
potential risks associated with its business. As a result of this review, the
Company concluded that a valuation allowance was required with respect
to deferred tax assets for certain subsidiaries, as well as certain
U.S. deferred tax assets. The Company also determined that valuation
allowances previously recorded should be reversed for three of its subsidiaries,
primarily because of the existence of significant positive, objective evidence,
such as cumulative taxable income in recent years, changes in operational
efficiencies, and overall market improvement. The reversal of
previously recorded valuation allowances resulted in a net tax benefit of $3.5
million for the fiscal year ended August 31, 2008.
The
Company had federal and state tax net operating loss carry-forwards, or NOLs, at
August 31, 2008 of approximately $51.8 million and $8.4 million,
respectively. In calculating the tax provision, and assessing the likelihood
that the Company will be able to utilize the deferred tax assets, the Company
considered and weighed all of the evidence, both positive and negative, and both
objective and subjective. The Company factored in the inherent risk of
forecasting revenue and expenses over an extended period of time and considered
the potential risks associated with its business. Because of the Company’s U.S.
income from continuing operations and based on projections of future taxable
income in the United States, the Company was able to determine that there was
sufficient positive evidence to support the conclusion that it was more likely
than not that the Company would be able to realize substantially all of its U.S.
NOLs by generating taxable income during the carry-forward period. However, if
the Company does not achieve its projections of future taxable income in the
United States, the Company could be required to take a charge to earnings
related to the recoverability of these deferred tax assets. Due to the deemed
change of ownership (as defined in section 382 of the Internal Revenue Code) in
October 2004, there are annual limitations in the amount of U.S. profits that
may be offset by NOLs. The NOLs generated prior to the deemed ownership change
date, as well as a significant portion of the losses generated as a result of
the PSMT Philippines disposal in August 2005, are limited on an annual basis.
The Company does not believe this will impact the recoverability of these NOLs.
However, due to their shorter recovery period and limitations applicable under
section 383 of the Internal Revenue code regarding changes of ownership, the
Company has maintained valuation allowances on U.S. foreign tax credits
(generated before the date of the deemed ownership change) and all capital loss
carry-forwards.
The
Company is required to file federal and state tax returns in the United States
and various other tax returns in foreign jurisdictions. The preparation of these
tax returns requires the Company to interpret the applicable tax laws and
regulations in effect in such jurisdictions, which could affect the amount of
tax paid by the Company. The Company, in consultation with its tax advisors,
bases its tax returns on interpretations that are believed to be reasonable
under the circumstances. The tax returns, however, are subject to routine
reviews by the various taxing authorities in the jurisdictions in which the
Company files its returns. As part of these reviews, a taxing authority may
disagree with respect to the interpretations the Company used to calculate its
tax liability and therefore require the Company to pay additional taxes and
associated penalties and interest.
Beginning
on September 1, 2007, the Company accrues an amount for its estimate of
probable additional income tax liability in accordance with the new provisions
of FASB Interpretation No. 48, “Accounting for Uncertainty in Income
Taxes—An Interpretation of FASB Statement No. 109” (“FIN 48”). Under FIN
48, the impact of an uncertain income tax position on the income tax return must
be recognized at the largest amount that is more-likely-than-not to be sustained
upon audit by the relevant tax authority. An uncertain income tax position will
not be recognized if it has less than 50% likelihood of being sustained. As of
August 31, 2008, the Company has classified uncertain income tax positions
as $5.6 million in long-term income taxes payable and approximately $63,000 in
long-term deferred tax liabilities. The classification of income tax liability
as current, as opposed to long-term, occurs when the Company expects to make a
cash payment in the following 12 months. The Company has classified
$933,000 as current income taxes payable.
Merchandise Inventory: The
Company records its inventory at the lower of cost (average cost) or market. The
Company provides for estimated inventory losses between physical inventory
counts on the basis of a percentage of sales. The provision is adjusted monthly
to reflect the trend of actual physical inventory count results, with physical
inventories occurring primarily in the second and fourth fiscal quarters. In
addition, the Company monitors slow-moving inventory to determine if provisions
should be taken for expected markdowns below the carrying cost of certain
inventory to expedite the sale of such merchandise.
Goodwill: Statement of
Financial Accounting Standards No. 142, “Accounting for Goodwill and Other
Intangible Assets,” requires that the Company annually test goodwill for
impairment based on a comparison of fair values to the carrying values of its
reporting units (subsidiaries). The determination of fair value for a reporting
unit involves the use of assumptions and estimates such as the future
performance of the operations of the reporting unit and discount rates used to
determine the current value of expected future cash flows of the reporting unit.
Any change in these assumptions and estimates, and other factors such as
inflation rates, competition and general economic conditions, could cause the
calculated fair value of the operating unit to decrease
significantly.
Long-lived Assets: The
Company periodically evaluates its long-lived assets for indicators of
impairment. Management's judgments are based on market and operational
conditions at the time of the evaluation and can include management's best
estimate of future business activity. These periodic evaluations could cause
management to conclude that impairment factors exist, requiring an adjustment of
these assets to their then-current fair market value consistent with SFAS 144,
“Accounting for the Impairment or Disposal of Long-Lived Assets.” Future
business conditions and/or activity could differ materially from the projections
made by management causing the need for additional impairment charges. The
Company recorded an impairment charge of approximately $449,000 in fiscal year
2008 to write-down the long-lived assets utilized for bulk packaging in the
Central America and Caribbean business segments after the Company moved toward
outsourcing the bulk packaging. The Company recorded an impairment
charge of approximately $897,000 in fiscal year 2007 to write-down the
long-lived assets of the San Pedro Sula, Honduras location as a result of
vacating the warehouse location and moving to another section of the
city. The Company also recorded approximately $813,000 and $785,000
in impairment charges in fiscal year 2006 to write-down the long-lived assets at
the closed Dominican Republic warehouse, and San Pedro Sula closed warehouse,
respectively.
Stock-Based Compensation: The
Company applies Statement of Financial Accounting Standards (SFAS)
No. 123R, “Share-Based Payment” for all employee stock–based compensation.
Under SFAS 123R, the Company is required to select a valuation technique or
option-pricing model that meets the criteria as stated in the standard, which
includes a binomial model and the Black-Scholes model. Valuation techniques used
for employee share options and similar instruments estimate the fair value of
those instruments at a single point in time (for example, at the grant date).
The assumptions used in a fair value measurement are based on expectations at
the time the measurement is made, and those expectations reflect the information
that is available at the time of measurement. The fair value of those
instruments will change over time as factors used in estimating their fair value
subsequently change, for instance, as share prices fluctuate, risk-free interest
rates change, dividend streams are modified or forfeiture rates
change. Changes in the fair value of those instruments are a normal
economic process to which any valuable resource is subject and do not indicate
that the expectations on which previous fair value measurements were based were
incorrect. The fair value of those instruments at a single point in time is not
a forecast of what the estimated fair value of those instruments may be in the
future. At the present time, the Company uses the Black-Scholes model. A change
in the model used or in the assumptions used in the Black-Scholes model could
impact the expenses we record under SFAS 123R.
Warehouse Closure Costs: The
Company provides estimates for warehouse club closing costs when it is
appropriate to do so based on the applicable accounting principles. The Company
has established lease obligation liabilities for its closed leased warehouse
clubs. The lease obligations are based on the present value of the rent
liabilities, reduced by the estimated income from the subleasing of these
properties. The Company is continually evaluating the adequacy of its closed
warehouse club lease obligations based upon the status of existing or potential
subleasing activity and makes appropriate adjustments to the lease obligations
as a result of these evaluations. In fiscal year 2008 after evaluation of the
Guatemala Plaza closed location the Company recorded an additional closure cost
of approximately $605,000 for additional lease obligations as a result of a
rental increase. Future circumstances may result in the Company’s actual future
closing costs or the amount recognized upon sale or sublease of the property to
differ materially from the original estimates.
Recent
Accounting Pronouncements
In May
2008, the Financial Accounting Standards Board (“FASB”) issued SFAS 162, “The
Hierarchy of Generally Accepted Accounting Principles” (“SFAS 162”). This
Statement identifies the sources of accounting principles and the framework for
selecting the principles to be used in the preparation of financial statements
of nongovernmental entities that are presented in conformity with generally
accepted accounting principles (GAAP) in the United States (the GAAP hierarchy).
This Statement is effective for financial statements issued 60 days following
the SEC’s approval of the Public Company Accounting Oversight Board amendments
to AU Section 411, The Meaning of Present Fairly in Conformity With
Generally Accepted Accounting Principles. The Company will adopt SFAS 162 within
60 days following the SEC’s approval of the Public Company Accounting Oversight
Board amendments to AU Section 411. The Company is currently evaluating the
impact, if any, the pronouncement will have on its consolidated financial
statements however, the Company does not expect that this Statement will result
in a change in current practice.
In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities-an amendment of FASB Statement No.133” (“SFAS
161”). This Statement requires enhanced disclosures about an entity’s derivative
and hedging activities and thereby improves the transparency of financial
reporting. This Statement is effective for financial statements issued for
fiscal years and interim periods beginning after November 15, 2008, with
early application and also encourages, but does not require, comparative
disclosures for earlier periods at initial adoption. The Company will adopt SFAS
161 beginning December 1, 2008. The Company is currently evaluating the
impact, if any, the pronouncement will have on its consolidated financial
statements.
In
December 2007, the FASB issued SFAS 160, “Non-controlling Interests in
Consolidated Financial Statement- an amendment of ARB No. 51” (“SFAS 160”).
SFAS 160 amends Accounting Research Bulletin No. 51, “Consolidated
Financial Statements,” establishing accounting and reporting standards for the
non-controlling interest in a subsidiary and for the deconsolidation of a
subsidiary. This statement is effective for fiscal years beginning on or after
December 15, 2008. Early adoption is prohibited. The Company will adopt
SFAS 160 beginning on September 1, 2009. The Company is currently
evaluating the impact that adoption will have on future
consolidations.
In
December 2007, the FASB issued Statement of Financial Accounting Standards (SFAS
) No. 141(R), “Business Combinations” (“SFAS 141(R)”). SFAS 141(R) replaces
SFAS No. 141, “Business Combinations,” retaining the fundamental
requirements of SFAS 141(R) and expanding the scope to apply the same method of
accounting to all transactions or events in which one entity obtains control
over one or more other businesses. This statement applies prospectively to
business combinations or acquisitions after the beginning of the first annual
reporting period beginning on or after December 15, 2008. An entity may not
apply this standard before this date. The Company will adopt SFAS 141(R) on
September 1, 2009.
In June
2007, the Emerging Issues Task Force (“EITF”) reached a consensus on EITF Issue
No. 06-11 (“EITF 06-11”), “Accounting for Income Tax Benefits of Dividends
on Share-Based Payment Award.” EITF 06-11 requires companies to recognize the
tax benefits of dividends on unvested share-based payments in equity (increasing
the Financial Accounting Standards (SFAS) No. 123(R) “APIC Pool” of excess
tax benefits available to absorb tax deficiencies) and reclassify those tax
benefits from additional paid-in capital to the income statement when the
related award is forfeited (or is no longer expected to vest). The Company is
required to adopt EITF 06-11 for dividends declared after September 1,
2008. The Company opted for earlier application starting on September 1,
2007 for the income tax benefits of dividends on equity-classified employee
share-based compensation that are declared in periods for which financial
statements have not yet been issued. The adoption of EITF 06-11 did not have a
material impact on the Company’s consolidated financial condition and operating
results.
In
February 2007, the FASB issued Statement of Financial Accounting Standards (SFAS
) No. 159, “The Fair Value Option for Financial Assets and Financial
Liabilities, including an amendment of FASB Statement No. 115” (“SFAS
159”). SFAS 159 permits companies to measure many financial instruments and
certain other items at fair value at specific election dates. The Company is
required to adopt SFAS 159 beginning September 1, 2008. The Company is
currently evaluating the impact, if any, the pronouncement will have on its
consolidated financial statements.
Seasonality
Historically,
the Company's merchandising businesses have experienced holiday retail
seasonality in their markets. In addition to seasonal fluctuations, the
Company's operating results fluctuate quarter-to-quarter as a result of economic
and political events in markets served by the Company, the timing of holidays,
weather, the timing of shipments, product mix, and currency effects on the cost
of U.S.-sourced products which may make these products more or less expensive in
local currencies and therefore more or less affordable. Because of such
fluctuations, the results of operations of any quarter are not indicative of the
results that may be achieved for a full fiscal year or any future quarter. In
addition, there can be no assurance that the Company's future results will be
consistent with past results or the projections of securities
analysts.
Quantitative
and Qualitative Disclosures about Market Risk
The
Company, primarily through majority or wholly owned subsidiaries, conducts
operations primarily in Central America and the Caribbean, and as such is
subject to both economic and political instabilities that cause volatility in
foreign currency exchange rates or weak economic conditions. As of
August 31, 2008, the Company had a total of 25 consolidated warehouse clubs
operating in 11 foreign countries and one U.S. territory, 18 of which operate
under currencies other than the U.S. dollar. For fiscal year 2008, approximately
79% of the Company's net warehouse club sales were in foreign currencies. The
Company may enter into additional foreign countries in the future or open
additional locations in existing countries, which may increase the percentage of
net warehouse sales denominated in foreign currencies.
Foreign
currencies in most of the countries where the Company operates have historically
devalued against the U.S. dollar and are expected to continue to devalue. For
example, the Dominican Republic experienced a currency devaluation of
approximately 81% between the end of the fiscal year ended August 31, 2002
and the end of the year ended August 31, 2003 and 13% (significantly higher
at certain points of the year) between the year ended August 31, 2003 and
the year ended August 31, 2004. There can be no assurance that the Company
will not experience any other materially adverse effects on the Company's
business, financial condition, operating results, cash flow or liquidity, from
currency devaluations in other countries, as a result of the economic and
political risks of conducting an international merchandising
business.
Foreign
exchange transaction gains/(losses), which are included as a part of the costs
of goods sold in the consolidated statement of income, were approximately ($1.6
million) and $5,000 for the year ended August 31, 2008 and 2007,
respectively. Translation adjustment gains/(losses) from the Company’s share of
non-U.S. denominated majority or wholly owned subsidiaries and investment in
affiliate, resulting from the translation of the assets and liabilities of these
companies into U.S. dollars were ($546,000) and $1.5 million for the year ended
August 31, 2008 and August 31, 2007, respectively. As of August
31, 2008, loss on fair value on interest rate swap designated as an effective
hedge recorded in Accumulated Other Comprehensive loss was approximately
$8,000.
The following is a listing
of the countries or territories where the Company currently operates and their
respective currencies, as of August 31, 2008:
Country/Territory
|
|
Number
of
Warehouse Clubs
In
Operation
|
|
Anticipated Warehouse
Club
Openings
in
FY 2009
|
|
Currency
|
Panama
|
|
4
|
|
—(2)
|
|
U.S.
Dollar
|
Costa
Rica
|
|
4
|
|
1(3)
|
|
Costa
Rican Colon
|
Dominican
Republic
|
|
2
|
|
—
|
|
Dominican
Republic Peso
|
Guatemala
|
|
3
|
|
—
|
|
Guatemalan
Quetzal
|
El
Salvador
|
|
2
|
|
—
|
|
U.S.
Dollar
|
Honduras
|
|
2
|
|
—
|
|
Honduran
Lempira
|
Trinidad
|
|
3
|
|
—
|
|
Trinidad
Dollar
|
Aruba
|
|
1
|
|
—
|
|
Aruba
Florin
|
Barbados
|
|
1
|
|
—
|
|
Barbados
Dollar
|
U.S.
Virgin Islands
|
|
1
|
|
—
|
|
U.S.
Dollar
|
Jamaica
|
|
1
|
|
—
|
|
Jamaican
Dollar
|
Nicaragua
|
|
1
|
|
—
|
|
Nicaragua
Cordoba Oro
|
Totals
|
|
25
(1)
|
|
1
|
|
|
(1)
|
The
Company opened two warehouse clubs in fiscal year 2008, one each in
Guatemala and Trinidad.
|
(2)
|
An
existing PriceSmart warehouse club in Panama City, Panama (known as the
Los Pueblos club) will be relocated to a new site (Brisas) in fiscal 2010
and the Company will close the existing warehouse club after the
relocation has been completed.
|
(3)
|
This warehouse
club is expected to open in the spring of 2009
(Alajuela).
|
Report
of Independent Registered Public Accounting Firm
The Board
of Directors and Stockholders of PriceSmart, Inc.
We have
audited the accompanying consolidated balance sheets of PriceSmart, Inc. as of
August 31, 2008 and 2007, and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the three years in the period
ended August 31, 2008. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of PriceSmart, Inc. at
August 31, 2008 and 2007, and the consolidated results of its operations and its
cash flows for each of the three years in the period ended August 31, 2008, in
conformity with U.S. generally accepted accounting principles.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), PriceSmart, Inc.’s internal control over
financial reporting as of August 31, 2008, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated November 6, 2008
expressed an unqualified opinion thereon.
/s/ Ernst
& Young LLP
San
Diego, California
November
6, 2008
PRICESMART,
INC.
(amounts
in thousands, except share data)
|
|
August
31,
|
|
|
|
2008
|
|
|
2007
|
|
ASSETS
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
48,121 |
|
|
$ |
32,065 |
|
Short-term
restricted cash
|
|
|
536 |
|
|
|
8,046 |
|
Receivables,
net of allowance for doubtful accounts of $11 and $3 in 2008 and 2007,
respectively
|
|
|
2,455 |
|
|
|
2,705 |
|
Merchandise
inventories
|
|
|
113,894 |
|
|
|
95,979 |
|
Prepaid
expenses and other current assets
|
|
|
16,669 |
|
|
|
15,777 |
|
Notes
receivable – short term
|
|
|
2,104 |
|
|
|
— |
|
Assets
of discontinued operations
|
|
|
1,247 |
|
|
|
1,380 |
|
Total
current assets
|
|
|
185,026 |
|
|
|
155,952 |
|
Long-term
restricted cash
|
|
|
673 |
|
|
|
477 |
|
Notes
receivable
|
|
|
— |
|
|
|
2,086 |
|
Property
and equipment, net
|
|
|
199,576 |
|
|
|
179,985 |
|
Goodwill
|
|
|
39,248 |
|
|
|
31,652 |
|
Deferred
tax assets
|
|
|
21,928 |
|
|
|
19,535 |
|
Other
assets
|
|
|
3,512 |
|
|
|
3,732 |
|
Investment
in unconsolidated affiliate
|
|
|
— |
|
|
|
2,000 |
|
Total
Assets
|
|
$ |
449,963 |
|
|
$ |
395,419 |
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
Short-term
borrowings
|
|
$ |
3,473 |
|
|
$ |
3,301 |
|
Accounts
payable
|
|
|
96,120 |
|
|
|
80,633 |
|
Accrued
salaries and benefits
|
|
|
8,271 |
|
|
|
6,962 |
|
Deferred
membership income
|
|
|
7,764 |
|
|
|
6,634 |
|
Income
taxes payable
|
|
|
3,695 |
|
|
|
4,593 |
|
Accrued
reserve for settlement of pending litigation
|
|
|
— |
|
|
|
5,500 |
|
Common
stock subject to put agreement
|
|
|
161 |
|
|
|
— |
|
Other
accrued expenses
|
|
|
11,877 |
|
|
|
18,564 |
|
Dividend
payable
|
|
|
4,744 |
|
|
|
4,678 |
|
Long-term
debt, current portion
|
|
|
2,737 |
|
|
|
1,411 |
|
Liabilities
of discontinued operations
|
|
|
277 |
|
|
|
151 |
|
Total
current liabilities
|
|
|
139,119 |
|
|
|
132,427 |
|
Deferred
tax liability
|
|
|
1,376 |
|
|
|
1,474 |
|
Long
term portion of deferred rent
|
|
|
2,412 |
|
|
|
1,977 |
|
Accrued
closure costs
|
|
|
3,489 |
|
|
|
3,072 |
|
Long-term
income taxes payable, net of current portion
|
|
|
5,553 |
|
|
|
— |
|
Long-term
debt, net of current portion
|
|
|
23,028 |
|
|
|
8,008 |
|
Total
liabilities
|
|
|
174,977 |
|
|
|
146,958 |
|
Minority
interest
|
|
|
480 |
|
|
|
3,145 |
|
Stockholders’
Equity:
|
|
|
|
|
|
|
|
|
Common
stock, $0.0001 par value, 45,000,000 shares authorized; 30,195,788 and
29,815,435 shares issued and 29,615,226 and 29,339,211 shares outstanding
(net of treasury shares), respectively
|
|
|
3 |
|
|
|
3 |
|
Additional
paid-in capital
|
|
|
373,192 |
|
|
|
369,848 |
|
Tax
benefit from stock-based compensation
|
|
|
4,563 |
|
|
|
3,970 |
|
Accumulated
other comprehensive loss
|
|
|
(12,897 |
) |
|
|
(12,343 |
) |
Accumulated
deficit
|
|
|
(77,510 |
) |
|
|
(106,087 |
) |
Less:
treasury stock at cost; 580,562 and 476,224 shares,
respectively
|
|
|
(12,845 |
) |
|
|
(10,075 |
) |
Total
stockholders’ equity
|
|
|
274,506 |
|
|
|
245,316 |
|
Total
Liabilities and Stockholders’ Equity
|
|
$ |
449,963 |
|
|
$ |
395,419 |
|
See
accompanying notes.
PRICESMART,
INC.
(amounts
in thousands, except per share data)
|
|
Years
Ended August 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Sales:
|
|
|
|
|
|
|
|
|
|
Net
warehouse club
|
|
$ |
1,097,510 |
|
|
$ |
869,102 |
|
|
$ |
719,576 |
|
Export
|
|
|
1,498 |
|
|
|
1,016 |
|
|
|
63 |
|
Membership
income
|
|
|
16,042 |
|
|
|
13,857 |
|
|
|
11,520 |
|
Other
income
|
|
|
4,826 |
|
|
|
4,826 |
|
|
|
3,514 |
|
Total
revenues
|
|
|
1,119,876 |
|
|
|
888,801 |
|
|
|
734,673 |
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of goods sold:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
warehouse club
|
|
|
932,294 |
|
|
|
737,317 |
|
|
|
611,411 |
|
Export
|
|
|
1,420 |
|
|
|
962 |
|
|
|
86 |
|
Selling,
general and administrative:
|
|
|
|
|
|
|
|
|
|
|
|
|
Warehouse
club operations
|
|
|
103,887 |
|
|
|
88,029 |
|
|
|
78,784 |
|
General
and administrative
|
|
|
30,327 |
|
|
|
27,094 |
|
|
|
24,079 |
|
Preopening
expenses
|
|
|
1,010 |
|
|
|
373 |
|
|
|
349 |
|
Asset
impairment and closure costs
|
|
|
1,142 |
|
|
|
1,550 |
|
|
|
1,834 |
|
Provision
for settlement of litigation, including changes in fair value and put
agreement
|
|
|
1,370 |
|
|
|
5,500 |
|
|
|
— |
|
Total
operating expenses
|
|
|
1,071,450 |
|
|
|
860,825 |
|
|
|
716,543 |
|
Operating
income
|
|
|
48,426 |
|
|
|
27,976 |
|
|
|
18,130 |
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
1,193 |
|
|
|
1,628 |
|
|
|
1,959 |
|
Interest
expense
|
|
|
(1,445 |
) |
|
|
(788 |
) |
|
|
(3,191 |
) |
Other
expense, net
|
|
|
(346 |
) |
|
|
(317 |
) |
|
|
(151 |
) |
Total
other income (expense)
|
|
|
(598 |
) |
|
|
523 |
|
|
|
(1,383 |
) |
Income
from continuing operations before provision for income taxes, loss of
unconsolidated affiliate and minority interest
|
|
|
47,828 |
|
|
|
28,499 |
|
|
|
16,747 |
|
Provision
for income taxes
|
|
|
(9,124 |
) |
|
|
(12,337 |
) |
|
|
(8,112 |
) |
Loss
(including impairment charges of $2.6 million in 2007) of unconsolidated
affiliate
|
|
|
— |
|
|
|
(2,903 |
) |
|
|
(97 |
) |
Minority
interest
|
|
|
(494 |
) |
|
|
(476 |
) |
|
|
(354 |
) |
Income
from continuing operations
|
|
|
38,210 |
|
|
|
12,783 |
|
|
|
8,184 |
|
Discontinued
operations income (loss), net of tax
|
|
|
(104 |
) |
|
|
143 |
|
|
|
3,674 |
|
Net
income (loss) attributable to common stockholders
|
|
$ |
38,106 |
|
|
$ |
12,926 |
|
|
$ |
11,858 |
|
Basic
income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$ |
1.32 |
|
|
$ |
0.44 |
|
|
$ |
0.30 |
|
Discontinued
operations, net of tax
|
|
$ |
— |
|
|
$ |
0.01 |
|
|
$ |
0.13 |
|
Net
income
|
|
$ |
1.32 |
|
|
$ |
0.45 |
|
|
$ |
0.43 |
|
Diluted
income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$ |
1.30 |
|
|
$ |
0.44 |
|
|
$ |
0.30 |
|
Discontinued
operations, net of tax
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
0.13 |
|
Net
income (loss) per share available to common stockholders
|
|
$ |
1.30 |
|
|
$ |
0.44 |
|
|
$ |
0.43 |
|
Shares
used in per share computations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
28,860 |
|
|
|
28,534 |
|
|
|
27,332 |
|
Diluted
|
|
|
29,210 |
|
|
|
29,243 |
|
|
|
27,735 |
|
Dividends
per share
|
|
$ |
0.32 |
|
|
$ |
0.32 |
|
|
$ |
— |
|
See
accompanying notes.
PRICESMART,
INC.
(amounts
in thousands)
|
|
Common
Stock
|
|
|
Additional
|
|
|
Tax benefit
from stock-
based
|
|
|
Notes
Receivable
from
|
|
|
Accum-
ulated
other
compre-
|
|
|
Accum-
|
|
|
Treasury
Stock
|
|
|
Total
stock-
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Paid-in
Capital
|
|
|
compen-
sation
|
|
|
stock-
holders
|
|
|
hensive
loss
|
|
|
ulated
deficit
|
|
|
Shares
|
|
|
Amount
|
|
|
holders’
equity
|
|
Balance
at August 31, 2005
|
|
|
26,031 |
|
|
$ |
3 |
|
|
$ |
339,644 |
|
|
$ |
3,379 |
|
|
$ |
(29 |
) |
|
$ |
(13,757 |
) |
|
$ |
(121,534 |
) |
|
|
434 |
|
|
$ |
(9,433 |
) |
|
$ |
198,273 |
|
Shares
issued
|
|
|
169 |
|
|
|
— |
|
|
|
1,500 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,500 |
|
Rights
offering
|
|
|
2,385 |
|
|
|
— |
|
|
|
19,017 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
19,017 |
|
Warrant
exercise
|
|
|
200 |
|
|
|
— |
|
|
|
1,400 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,400 |
|
Donated
services
|
|
|
— |
|
|
|
— |
|
|
|
16 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
16 |
|
Issuance
of restricted stock awards
|
|
|
566 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Forfeiture
of restricted stock awards
|
|
|
(25 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Exercise
of stock options
|
|
|
78 |
|
|
|
— |
|
|
|
497 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
497 |
|
Stock-based
compensation
|
|
|
— |
|
|
|
— |
|
|
|
2,058 |
|
|
|
130 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,188 |
|
Mark
to market of employee restricted stock
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1 |
) |
Repayment
of notes receivable and reacquisition of common stock
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
30 |
|
|
|
— |
|
|
|
— |
|
|
|
4 |
|
|
|
(33 |
) |
|
|
(3 |
) |
Net
income
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
11,858 |
|
|
|
— |
|
|
|
— |
|
|
|
11,858 |
|
Translation
adjustment
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(126 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(126 |
) |
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,732 |
|
Balance
at August 31, 2006
|
|
|
29,404 |
|
|
|
3 |
|
|
|
364,132 |
|
|
|
3,509 |
|
|
|
— |
|
|
|
(13,883 |
) |
|
|
(109,676 |
) |
|
|
438 |
|
|
|
(9,466 |
) |
|
|
234,619 |
|
Purchase
of treasury stock
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
38 |
|
|
|
(609 |
) |
|
|
(609 |
) |
Issuance
of restricted stock awards
|
|
|
164 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Forfeiture
of restricted stock awards
|
|
|
(31 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Exercise
of stock options
|
|
|
278 |
|
|
|
— |
|
|
|
3,949 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3,949 |
|
Stock-based
compensation
|
|
|
— |
|
|
|
— |
|
|
|
1,767 |
|
|
|
461 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,228 |
|
Dividend
payable to stockholders
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(4,678 |
) |
|
|
— |
|
|
|
— |
|
|
|
(4,678 |
) |
Dividend
paid to stockholders
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(4,659 |
) |
|
|
— |
|
|
|
— |
|
|
|
(4,659 |
) |
Net
income
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
12,926 |
|
|
|
— |
|
|
|
— |
|
|
|
12,926 |
|
Translation
adjustment
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,540 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,540 |
|
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,466 |
|
Balance
at August 31, 2007
|
|
|
29,815 |
|
|
|
3 |
|
|
|
369,848 |
|
|
|
3,970 |
|
|
|
— |
|
|
|
(12,343 |
) |
|
|
(106,087 |
) |
|
|
476 |
|
|
|
(10,075 |
) |
|
|
245,316 |
|
Purchase
of treasury stock
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
46 |
|
|
|
(1,429 |
) |
|
|
(1,429 |
) |
Issuance
of restricted stock awards
|
|
|
334 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Forfeiture
of restricted stock awards
|
|
|
(15 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Exercise
of stock options
|
|
|
62 |
|
|
|
— |
|
|
|
921 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
921 |
|
Stock-based
compensation
|
|
|
— |
|
|
|
— |
|
|
|
2,579 |
|
|
|
593 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3,172 |
|
Common
stock subject to put agreement
|
|
|
— |
|
|
|
— |
|
|
|
(161 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(161 |
) |
Purchase
of treasury stock for PSC settlement
|
|
|
— |
|
|
|
— |
|
|
|
(115 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
58 |
|
|
|
(1,341 |
) |
|
|
(1,456 |
) |
Cost
to record fair market value of put for PSC settlement
|
|
|
— |
|
|
|
— |
|
|
|
120 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
120 |
|
Dividend
payable to stockholders
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(4,744 |
) |
|
|
— |
|
|
|
— |
|
|
|
(4,744 |
) |
Dividend
paid to stockholders
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(4,785 |
) |
|
|
— |
|
|
|
— |
|
|
|
(4,785 |
) |
Mark-to-market
of interest rate swap
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(8 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(8 |
) |
Net
income
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
38,106 |
|
|
|
— |
|
|
|
— |
|
|
|
38,106 |
|
Translation
adjustment
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(546 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(546 |
) |
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,552 |
|
Balance
at August 31, 2008
|
|
|
30,196 |
|
|
$ |
3 |
|
|
$ |
373,192 |
|
|
$ |
4,563 |
|
|
$ |
— |
|
|
$ |
(12,897 |
) |
|
$ |
(77,510 |
) |
|
|
580 |
|
|
$ |
(12,845 |
) |
|
$ |
274,506 |
|
See
accompanying notes.
PRICESMART,
INC.
(amounts
in thousands)
|
|
Years
Ended August 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Operating
Activities:
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$ |
38,210 |
|
|
$ |
12,783 |
|
|
$ |
8,184 |
|
Adjustments
to reconcile income from continued operations to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
11,370 |
|
|
|
9,449 |
|
|
|
9,618 |
|
Allowance
for doubtful accounts
|
|
|
625 |
|
|
|
(188 |
) |
|
|
(4 |
) |
Asset
impairment and closure costs
|
|
|
1,054 |
|
|
|
1,550 |
|
|
|
1,834 |
|
Reserve
for settlement of pending litigation
|
|
|
— |
|
|
|
5,500 |
|
|
|
— |
|
Loss
on sale of property and equipment
|
|
|
217 |
|
|
|
323 |
|
|
|
— |
|
Cancellation
of note receivable from stockholder
|
|
|
— |
|
|
|
— |
|
|
|
(119 |
) |
Mark
to market of shareholder note receivable
|
|
|
— |
|
|
|
— |
|
|
|
(1 |
) |
Deferred
income taxes
|
|
|
(1,898 |
) |
|
|
(578 |
) |
|
|
791 |
|
Minority
interest
|
|
|
494 |
|
|
|
476 |
|
|
|
354 |
|
Tax
benefit from stock-based compensation
|
|
|
(593 |
) |
|
|
(485 |
) |
|
|
(130 |
) |
Equity
in losses of unconsolidated affiliate, including impairment charges of
$2.6 million in 2007
|
|
|
— |
|
|
|
2,903 |
|
|
|
97 |
|
Stock-based
compensation
|
|
|
2,579 |
|
|
|
1,767 |
|
|
|
2,058 |
|
Change
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in accounts receivable, prepaid, other current assets, accrued salaries,
deferred membership and other accruals
|
|
|
(6,019 |
) |
|
|
1,936 |
|
|
|
5,107 |
|
Merchandise
inventories
|
|
|
(17,915 |
) |
|
|
(18,547 |
) |
|
|
(11,713 |
) |
Accounts
payable and accounts payable to and advances received from related
party
|
|
|
15,487 |
|
|
|
14,733 |
|
|
|
8,478 |
|
Net
cash provided by continuing activities
|
|
|
43,611 |
|
|
|
31,622 |
|
|
|
25,554 |
|
Net
cash provided by (used in) discontinued activities
|
|
|
107 |
|
|
|
196 |
|
|
|
(905 |
) |
Net
cash provided by operating activities
|
|
|
43,718 |
|
|
|
31,818 |
|
|
|
24,649 |
|
Investing
Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
to property and equipment
|
|
|
(23,571 |
) |
|
|
(30,913 |
) |
|
|
(32,631 |
) |
Deposits
to escrow account for land acquisitions (including settlement of
litigation)
|
|
|
(660 |
) |
|
|
— |
|
|
|
— |
|
Sale
of land
|
|
|
— |
|
|
|
— |
|
|
|
446 |
|
Proceeds
from disposition of property and equipment
|
|
|
3,071 |
|
|
|
60 |
|
|
|
— |
|
Acquisition
of business, net of cash acquired
|
|
|
(11,913 |
) |
|
|
— |
|
|
|
— |
|
Purchase
of Jamaica minority interest
|
|
|
— |
|
|
|
— |
|
|
|
(2,402 |
) |
Purchase
of Trinidad minority interest
|
|
|
— |
|
|
|
— |
|
|
|
(300 |
) |
Return
of investment in unconsolidated affiliate
|
|
|
2,000 |
|
|
|
— |
|
|
|
2,800 |
|
Purchase
of Nicaragua minority interest
|
|
|
(10,200 |
) |
|
|
— |
|
|
|
— |
|
Purchase
of Aruba minority interest
|
|
|
(300 |
) |
|
|
— |
|
|
|
— |
|
Net
cash used in continuing activities
|
|
|
(41,573 |
) |
|
|
(30,853 |
) |
|
|
(32,087 |
) |
Net
cash provided by discontinued activities
|
|
|
48 |
|
|
|
161 |
|
|
|
4,868 |
|
Net
cash flows used in investing activities
|
|
|
(41,525 |
) |
|
|
(30,692 |
) |
|
|
(27,219 |
) |
Financing
Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from bank borrowings
|
|
|
25,813 |
|
|
|
14,422 |
|
|
|
37 |
|
Repayment
of bank borrowings, net of proceeds from warrant exercise in
2006
|
|
|
(9,488 |
) |
|
|
(20,528 |
) |
|
|
(10,790 |
) |
Issuance
of common stock in connection with rights offering
|
|
|
— |
|
|
|
— |
|
|
|
19,017 |
|
Proceeds
from related party borrowings
|
|
|
— |
|
|
|
— |
|
|
|
12,500 |
|
Repayment
of related party borrowings
|
|
|
— |
|
|
|
— |
|
|
|
(12,500 |
) |
Cash
dividend payments
|
|
|
(9,463 |
) |
|
|
(4,659 |
) |
|
|
— |
|
Release
of (addition to) restricted cash
|
|
|
7,974 |
|
|
|
(341 |
) |
|
|
194 |
|
Issuance
of common stock
|
|
|
— |
|
|
|
— |
|
|
|
1,500 |
|
Tax
benefit from stock-based compensation
|
|
|
593 |
|
|
|
485 |
|
|
|
130 |
|
Purchase
of treasury stock - excluding PSC settlement
|
|
|
(1,429 |
) |
|
|
(609 |
) |
|
|
(3 |
) |
Purchase
of treasury stock- PSC settlement
|
|
|
(1,341 |
) |
|
|
— |
|
|
|
— |
|
Proceeds
from exercise of stock options
|
|
|
921 |
|
|
|
3,949 |
|
|
|
497 |
|
Repayment
of notes receivable from stockholders
|
|
|
— |
|
|
|
— |
|
|
|
119 |
|
Net
cash provided by (used in) financing activities
|
|
|
13,580 |
|
|
|
(7,281 |
) |
|
|
10,701 |
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
283 |
|
|
|
(1,775 |
) |
|
|
1,717 |
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
16,056 |
|
|
|
(7,930 |
) |
|
|
9,848 |
|
Cash
and cash equivalents at beginning of year
|
|
|
32,065 |
|
|
|
39,995 |
|
|
|
30,147 |
|
Cash
and cash equivalents at end of year
|
|
$ |
48,121 |
|
|
$ |
32,065 |
|
|
$ |
39,995 |
|
PRICESMART,
INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS—(Continued)
(amounts
in thousands)
|
|
Years
Ended August 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
|
|
Interest,
net of amounts capitalized
|
|
$ |
485 |
|
|
$ |
1,041 |
|
|
$ |
2,790 |
|
Income
taxes
|
|
$ |
12,918 |
|
|
$ |
9,927 |
|
|
$ |
1,914 |
|
PSC
settlement expenses
|
|
$ |
6,050 |
|
|
$ |
— |
|
|
$ |
— |
|
Acquisition
of land and permanent easement related to PSC settlement
|
|
$ |
1,125 |
|
|
$ |
— |
|
|
$ |
— |
|
Notes
receivable from sale of East Side Santo Domingo, Dominican Republic
(amount includes short term portion of Notes receivable for
$121,000)
|
|
$ |
— |
|
|
$ |
2,207 |
|
|
$ |
— |
|
Dividends
declared but not paid
|
|
$ |
4,744 |
|
|
$ |
4,678 |
|
|
$ |
— |
|
PRICESMART,
INC.
NOTE
1 – COMPANY OVERVIEW AND BASIS OF PRESENTATION
PriceSmart,
Inc.’s (“PriceSmart” or the “Company”) business consists primarily of
international membership shopping warehouse clubs similar to, but smaller in
size than, warehouse clubs in the United States. As of August 31,
2008, the Company had 25 consolidated warehouse clubs in operation in 11
countries and one U.S. territory (four each in Panama and Costa Rica, three each
in Guatemala and Trinidad, two each in Dominican Republic, El Salvador, and
Honduras and one each in Aruba, Barbados, Jamaica, Nicaragua and the United
States Virgin Islands), of which the Company owns at least a majority
interest. There was one warehouse club in operation in Saipan, Micronesia
licensed to and operated by local business people as of August 31,
2008. The Company principally operates in three segments based on
geographic area.
Basis of Presentation - The
consolidated financial statements have been prepared in accordance with U.S.
generally accepted accounting principles.
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation –
The consolidated financial statements of the Company included herein include the
assets, liabilities and results of operations of the Company's majority and
wholly-owned subsidiaries as listed below. All significant inter-company
accounts and transactions have been eliminated in consolidation. The table below
shows the Company's percentage ownership of, and basis of presentation for, each
subsidiary as of August 31, 2008.
|
|
Ownership
|
|
Basis
of
Presentation
|
PriceSmart
Aruba (1)
|
|
|
100.0 |
% |
Consolidated
|
PriceSmart
Barbados
|
|
|
100.0 |
% |
Consolidated
|
PSMT
Caribe, Inc.:
|
|
|
|
|
|
Costa
Rica
|
|
|
100.0 |
% |
Consolidated
|
Dominican
Republic
|
|
|
100.0 |
% |
Consolidated
|
El
Salvador
|
|
|
100.0 |
% |
Consolidated
|
Honduras
|
|
|
100.0 |
% |
Consolidated
|
PriceSmart
Guam(2)
|
|
|
100.0 |
% |
Consolidated
|
PriceSmart
Guatemala
|
|
|
100.0 |
% |
Consolidated
|
PriceSmart
Jamaica
|
|
|
100.0 |
% |
Consolidated
|
PriceSmart
Nicaragua(3)
|
|
|
100.0 |
% |
Consolidated
|
PriceSmart
Panama
|
|
|
100.0 |
% |
Consolidated
|
PriceSmart
Trinidad
|
|
|
95.0 |
% |
Consolidated
|
PriceSmart
U.S. Virgin Islands
|
|
|
100.0 |
% |
Consolidated
|
|
(1)The
Company purchased the remaining 10% minority interest in Aruba, thereby
increasing its ownership percentage to 100%, during the fiscal year
2008.
|
|
(2)Entity
is treated as discontinued operations in the consolidated financial
statements.
|
|
(3)The
Company purchased the remaining 49% minority interest in Nicaragua,
thereby increasing its ownership percentage to 100%, during the fiscal
year 2008.
|
PRICESMART,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Use of Estimates – The
preparation of financial statements in conformity with United States generally
accepted accounting principles (“U.S. GAAP”) requires management to make
estimates and assumptions that affect the amounts reported in the consolidated
financial statements and accompanying notes. Actual results could differ from
those estimates.
Cash and Cash Equivalents –
Cash and cash equivalents represent cash and short-term investments with
maturities of three months or less when purchased.
Restricted Cash – Short-term
restricted cash primarily consisted of approximately $128,000 for deposits into
escrow accounts for use in the settlement of the lawsuit filed by the PSC
Parties (see Note 16—PSC Settlement) and approximately $408,000 in deposits into
escrow accounts for the possible use of land purchase in
Trinidad. Long-term restricted cash represents deposits with
federal regulatory agencies in Costa Rica, Honduras and Panama for approximately
$548,000 and a $125,000 deposit into an escrow account for use in the settlement
of the lawsuit filed by the PSC Parties.
Merchandise Inventories –
Merchandise inventories, which include merchandise for resale, are valued at the
lower of cost (average cost) or market. The Company provides for estimated
inventory losses and obsolescence between physical inventory counts on the basis
of a percentage of sales. The provision is adjusted periodically to reflect the
trend of actual physical inventory count results, with physical inventories
occurring primarily in the second and fourth fiscal quarters. In addition, the
Company may be required to take markdowns below the carrying cost of certain
inventory to expedite the sale of such merchandise.
Allowance for Bad Debt – The
Company generally does not extend credit to its members, but may do so for
specific wholesale, government or other large volume members. The Company
maintains an allowance for doubtful accounts based on assessments as to the
probability of collection of specific customer accounts, the aging of accounts
receivable, and general economic conditions.
Property and Equipment –
Property and equipment are stated at cost. Depreciation is computed on
the straight-line basis over the estimated useful lives of the assets. The
useful life of fixtures and equipment ranges from three to 15 years and that of
buildings from ten to 25 years. Leasehold improvements are amortized over the
shorter of the life of the improvement or the expected term of the lease. In
some locations, leasehold improvements are amortized over a period longer than
the initial lease term as management believes it is reasonably assured that the
renewal option in the underlying lease will be exercised. The sale or purchase
of property and equipment is recognized upon legal transfer of property. For
property and equipment sales, if any long term notes are carried by the Company
as part of the sales terms, the sale is reflected at the net present value of
current and future cash streams.
Lease Accounting – Certain of
our operating leases, where the Company is the lessee (see Revenue Recognition
Policy for lessor accounting) provide for minimum annual payments that increase
over the life of the lease. The aggregate minimum annual payments are expensed
on the straight-line basis beginning when we take possession of the property and
extending over the term of the related lease including renewal options in some
locations. The amount by which straight-line rent exceeds actual lease payment
requirements in the early years of the leases is accrued as deferred rent and
reduced in later years when the actual cash payment requirements exceed the
straight-line expense. The Company also accounts in its straight-line
computation for the effect of any “rental holidays.” In addition to the minimum
annual payments, in certain locations, the Company pays additional contingent
rent based on a contractually stipulated percentage of sales.
Fair Value Measurements – In
accordance with Statement of Financial Accounting Standards (SFAS) No. 157,
“Fair Value Measurements,” the Company measures the fair value of assets and
liabilities on a non-recurring basis. The Company measures fair value of assets
when impairment issues arise in accordance with the provisions of SFAS 144,
“Accounting for the Impairment or Disposal of Long-Lived Assets,” for business
units (for goodwill impairment), for interest rate swaps, and stock put
contracts. The Company uses fair value measurements based on quoted prices in
active markets for identical assets or liabilities (Level 1), significant other
observable inputs (Level 2) or unobservable inputs for assets or liabilities
(Level 3), depending on the nature of the item being valued. The Company
discloses on a yearly basis the valuation techniques and discloses any change in
method of such within the body of each footnote.
PRICESMART,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Goodwill – Goodwill, resulting
from certain business combinations totaled $39.2 million at August 31, 2008
and $31.7 million at August 31, 2007. The increase in goodwill was due to
the acquisition of minority interests in Nicaragua and Aruba for approximately
$7.5 million and a foreign exchange translation gain in Guatemala for
approximately $220,000 and a foreign exchange loss in Jamaica for
approximately $77,000. The Company reviews previously reported goodwill at the
entity reporting level for impairment on an annual basis or more frequently if
circumstances dictate. No impairment of goodwill has been recorded to date.
Derivative Instruments and Hedging
Activities – Derivative instruments and hedging activities are accounted
for under SFAS 133, “Accounting for Derivative Instruments and Hedging
Activities.” Interest rate swaps are accounted for as cash flow hedges. Under
cash flow hedging, the effective portion of the fair value of the derivative,
calculated as the net present value of the future cash flows, is deferred on the
consolidated balance sheet in accumulated other comprehensive loss. If any
portion of an interest rate swap were determined to be an ineffective hedge, the
gains or losses from changes in market value would be recorded directly in the
consolidated statements of income. Amounts recorded in accumulated other
comprehensive loss are released to earnings in the same period that the hedged
transaction impacts consolidated earnings. See Note 14—Interest Rate
Swap.
Revenue Recognition – The
Company recognizes merchandise sales revenue when title passes to the customer.
Membership income represents annual membership fees paid by the Company’s
warehouse club members, which are recognized ratably over the 12-month term of
the membership. The historical membership fee refunds have been minimal and,
accordingly, no reserve has been established for membership refunds for the
periods presented. The Company recognizes and presents revenue-producing
transactions on a net basis, as defined within EITF Issue No. 06-03 (“EITF
06-03”), “How Taxes Collected from Customers and Remitted to Governmental
Authorities Should Be Presented in the Income Statement (That is, Gross versus
Net Presentation).” The Company recognizes gift certificates sales revenue when
the certificates are redeemed. The outstanding gift certificates are reflected
as other accrued liabilities in the consolidated balance
sheets. Operating leases, where the Company is the lessor, with lease
payments that have fixed and determinable rent increases are recognized as
revenue on a straight-line basis over the lease term. The Company also accounts
in its straight-line computation for the effect of any "rental holidays."
Contingent rental revenue is recognized as the contingent rent becomes due per
the individual lease agreements.
Cost of Goods Sold – The
Company includes the cost of merchandise, food service and bakery raw materials,
and one hour photo supplies in cost of goods sold. The Company also includes the
external and internal distribution and handling costs for supplying such
merchandise, raw materials and supplies to the warehouse clubs. External costs
include inbound freight, duties, drayage, fees, insurance, and non-recoverable
value-added tax related to inventory shrink, spoilage and damage. Internal costs
include payroll and related costs, utilities, consumable supplies, repair and
maintenance, rent expense, and building and equipment depreciation at our
distribution facilities.
Vendor
consideration consists primarily of volume rebates and prompt payment discounts.
Volume rebates are generally linked to pre-established purchase levels and are
recorded as a reduction of cost of goods sold when the achievement of these
levels is confirmed by the vendor in writing or upon receipt of funds, whichever
is earlier. On a quarterly basis, the Company calculates the amount of rebates
recorded in cost of goods sold that relates to inventory on hand and this amount
is recorded as a reduction to inventory, if significant. Prompt payment
discounts are taken in substantially all cases and, therefore, are applied
directly to reduce the acquisition cost of the related inventory, with the
resulting impact to cost of goods sold when the inventory is sold.
Selling, General and
Administrative – Selling, general and administrative costs are comprised
primarily of expenses associated with warehouse operations. Warehouse operations
include the operating costs of the Company's warehouse clubs, including all
payroll and related costs, utilities, consumable supplies, repair and
maintenance, rent expense, building and equipment depreciation, and bank and
credit card processing fees. Also included in selling, general and
administrative expenses are the payroll and related costs for the Company's U.S.
and regional purchasing and management centers.
Pre-Opening Costs – The
Company expenses pre-opening costs (the costs of start-up activities, including
organization costs, and rent) as incurred.
PRICESMART,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Closure Costs – The Company
records the costs of closing warehouse clubs as follows: severance costs are
accrued in accordance with SFAS 146, “Accounting for Costs Associated with Exit
or Disposal Activity;” lease obligations are accrued at the cease use date by
calculating the net present value of the minimum lease payments net of the fair
market value of rental income that is expected to be received for these
properties from third parties; gain or loss on the sale of property, buildings
and equipment is recognized based on the net present value of cash or future
cash received as compensation for such upon consummation of the sale; all other
costs are expensed as incurred. In fiscal year 2003, the Company closed two
warehouse clubs, one each in the Dominican Republic and Guatemala. During fiscal
year 2007, the Company’s original San Pedro Sula, Honduras, location was vacated
and the operation was relocated to a new site, which was acquired in fiscal year
2006 in another section of the city. The closure costs recorded in fiscal year
2008 relate to these warehouse clubs.
Contingencies and
Litigation – In
accordance with SFAS 5, “Accounting for Contingencies,” the Company
accounts and reports for loss contingencies if (a) information available
prior to issuance of the consolidated financial statements indicates that it is
probable that an asset had been impaired or a liability had been incurred at the
date of the consolidated financial statements and (b) the amount of loss
can be reasonably estimated.
Common Stock Put Agreement –
The Company has recorded in the second and third quarters of fiscal year 2008 a
liability for common stock put agreement (see Note 16—PSC Settlement). The
Company utilizes the Black-Scholes method to determine the fair value of the put
agreement, taking the fair market value of the common stock, time to expiration
of the put agreement, volatility of the common stock and the risk-free interest
rate over the term of the put agreement as part of the fair market valuation.
The Company has recorded as a year-to-date expense the fair value of the put
agreement granted as part of the legal settlement with the PSC Parties (see Note
16—PSC Settlement), determined as of June 11, 2008.
Foreign Currency Translation –
In accordance with SFAS 52 “Foreign Currency Translation,” the assets and
liabilities of the Company’s foreign operations are primarily translated to U.S.
dollars when the functional currency in our international subsidiaries is the
local currency, which in many cases is not the U.S. dollar. Assets and
liabilities of these foreign subsidiaries are translated to U.S. dollars at the
exchange rate on the balance sheet date and revenue, costs and expenses are
translated at weighted-average rates of exchange in effect during the period.
The corresponding translation gains and losses are recorded as a component of
accumulated other comprehensive income or loss.
Monetary
assets and liabilities in currencies other than the functional currency of the
respective entity are revalued to the functional currency using the exchange
rate on the balance sheet date. These foreign exchange transaction gains
(losses), including repatriation of funds are included as a part of the costs of
goods sold in the consolidated statement of income. For fiscal years
2008, 2007 and 2006 these amounts were approximately ($1.6 million), $5,000 and
($1.5 million) respectively.
Stock-Based Compensation – As
of August 31, 2008, the Company had four stock-based employee compensation
plans. In the first quarter of fiscal year 2006, the Company adopted Statement
of Financial Accounting Standards (SFAS) No. 123R, “Share-Based Payment,”
which revises SFAS 123, “Accounting for Stock-Based Compensation.” The Company
had adopted the fair value based method of recording stock options consistent
with SFAS 123 for all employee stock options granted subsequent to fiscal year
2002. Specifically, the Company adopted SFAS 123 using the “prospective method”
with guidance provided from SFAS No. 148, “Accounting for Stock-Based
Compensation-Transition and Disclosure an Amendment of FASB Statement
No. 123.” All employee stock option grants made or re-priced since the
beginning of fiscal year 2003 have been expensed over the related stock option
vesting period based on the fair value at the date the options are granted.
Prior to fiscal year 2003, the Company applied Accounting Principles Board
Opinion (APB) No. 25, “Accounting for Stock Issued to Employees,” and
related interpretations in accounting for stock options. Because the Company
granted stock options to employees at exercise prices equal to fair market value
on the date of grant, no compensation cost was recognized for option grants in
periods prior to fiscal year 2003.
PRICESMART,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Under
SFAS 123R, the Company is required to select a valuation technique or
option-pricing model that meets the criteria as stated in the standard, which
includes a binomial model and the Black-Scholes model. At the present time, the
Company is continuing to use the Black-Scholes model. The adoption of SFAS 123R,
applying the “modified prospective method,” as elected by the Company, requires
the Company to value stock options granted prior to its adoption of SFAS 123
under the fair value method and expense these amounts over the stock options
remaining vesting period. This has resulted in the Company expensing
approximately $288,000, and $965,000 in fiscal years 2007 and 2006
respectively. No such amounts were expensed in fiscal year
2008. SFAS 123R also requires the Company to estimate forfeitures in
calculating the expense relating to stock-based compensation as opposed to only
recognizing these forfeitures and the corresponding reduction in expense as they
occur. The Company records as additional paid-in capital the tax savings
resulting from tax deductions in excess of expense, based on the Tax Law
Ordering method. In addition, SFAS 123R requires the Company to reflect the tax
savings resulting from tax deductions in excess of expense reflected as a
financing cash flow in its consolidated statement of cash flows, rather than as
an operating cash flow.
Recent Accounting
Pronouncements –
In May 2008, the Financial
Accounting Standards Board (“FASB”) issued SFAS 162, “The Hierarchy of Generally
Accepted Accounting Principles” (“SFAS 162”). This Statement identifies the
sources of accounting principles and the framework for selecting the principles
to be used in the preparation of financial statements of nongovernmental
entities that are presented in conformity with generally accepted accounting
principles (GAAP) in the United States (the GAAP hierarchy). This Statement is
effective for financial statements issued 60 days following the SEC’s approval
of the Public Company Accounting Oversight Board amendments to AU
Section 411, The Meaning of Present Fairly in Conformity With Generally
Accepted Accounting Principles. The Company will adopt SFAS 162 within 60 days
following the SEC’s approval of the Public Company Accounting Oversight Board
amendments to AU Section 411. The Company is currently evaluating the
impact, if any, the pronouncement will have on its consolidated financial
statements however, the Company does not expect that this Statement will result
in a change in current practice.
In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities-an amendment of FASB Statement No.133” (“SFAS
161”). This Statement requires enhanced disclosures about an entity’s derivative
and hedging activities and thereby improves the transparency of financial
reporting. This Statement is effective for financial statements issued for
fiscal years and interim periods beginning after November 15, 2008, with
early application and also encourages, but does not require, comparative
disclosures for earlier periods at initial adoption. The Company will adopt SFAS
161 beginning December 1, 2008. The Company is currently evaluating the
impact, if any, the pronouncement will have on its consolidated financial
statements.
In
December 2007, the FASB issued SFAS 160, “Non-controlling Interests in
Consolidated Financial Statement- an amendment of ARB No. 51” (“SFAS 160”).
SFAS 160 amends Accounting Research Bulletin No. 51, “Consolidated
Financial Statements,” establishing accounting and reporting standards for the
non-controlling interest in a subsidiary and for the deconsolidation of a
subsidiary. This statement is effective for fiscal years beginning on or after
December 15, 2008. Early adoption is prohibited. The Company will adopt
SFAS 160 beginning on September 1, 2009. The Company is currently
evaluating the impact that adoption will have on future
consolidations.
In
December 2007, the FASB issued Statement of Financial Accounting Standards (SFAS
) No. 141(R), “Business Combinations” (“SFAS 141(R)”). SFAS 141(R) replaces
SFAS No. 141, “Business Combinations,” retaining the fundamental
requirements of SFAS 141(R) and expanding the scope to apply the same method of
accounting to all transactions or events in which one entity obtains control
over one or more other businesses. This statement applies prospectively to
business combinations or acquisitions after the beginning of the first annual
reporting period beginning on or after December 15, 2008. An entity may not
apply this standard before this date. The Company will adopt SFAS 141(R) on
September 1, 2009.
PRICESMART,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
In June
2007, the Emerging Issues Task Force (“EITF”) reached a consensus on EITF Issue
No. 06-11 (“EITF 06-11”), “Accounting for Income Tax Benefits of Dividends
on Share-Based Payment Award.” EITF 06-11 requires companies to recognize the
tax benefits of dividends on unvested share-based payments in equity (increasing
the Financial Accounting Standards (SFAS) No. 123(R) “APIC Pool” of excess
tax benefits available to absorb tax deficiencies) and reclassify those tax
benefits from additional paid-in capital to the income statement when the
related award is forfeited (or is no longer expected to vest). The Company is
required to adopt EITF 06-11 for dividends declared after September 1,
2008. The Company opted for earlier application starting on September 1,
2007 for the income tax benefits of dividends on equity-classified employee
share-based compensation that are declared in periods for which financial
statements have not yet been issued. The adoption of EITF 06-11 did not have a
material impact on the Company’s consolidated financial condition and operating
results.
In
February 2007, the FASB issued Statement of Financial Accounting Standards (SFAS
) No. 159, “The Fair Value Option for Financial Assets and Financial
Liabilities, including an amendment of FASB Statement No. 115” (“SFAS
159”). SFAS 159 permits companies to measure many financial instruments and
certain other items at fair value at specific election dates. The Company is
required to adopt SFAS 159 beginning September 1, 2008. The Company is
currently evaluating the impact, if any, the pronouncement will have on its
consolidated financial statements.
NOTE
3 – DISCONTINUED OPERATIONS
In
accordance with the provisions of SFAS No. 144, “Accounting for the
Impairment or Disposal of Long-Lived Assets,” the accompanying consolidated
financial statements reflect the results of operations and financial position of
the Company’s activities in the Philippines and Guam as discontinued operations.
Following its closure in December 2003, the Company had previously included the
results of operations from Guam in the asset impairment and closure costs line
of the consolidated statement of income. The results of the Philippine and Guam
activities are consolidated in the discontinued operation line of the
consolidated statement of income. Management views these activities as one
activity managed under a shared management structure. Cash flow activities
related to the Guam discontinued operations’ leased property will terminate
approximately September 2011, which is the end date of the lease
term.
The
assets and liabilities of the discontinued operations are presented in the
consolidated balance sheets under the captions “Assets of discontinued
operations” and “Liabilities of discontinued operations.” The underlying assets
and liabilities of the discontinued operations for the periods presented are as
follows (in thousands):
|
|
August
31,
|
|
|
|
2008
|
|
|
2007
|
|
Cash
and cash equivalents
|
|
$ |
284 |
|
|
$ |
45 |
|
Accounts
receivable, net
|
|
|
116 |
|
|
|
441 |
|
Prepaid
expenses and other current assets
|
|
|
7 |
|
|
|
6 |
|
Other
assets
|
|
|
840 |
|
|
|
888 |
|
Assets
of discontinued operations
|
|
$ |
1,247 |
|
|
$ |
1,380 |
|
Other
accrued expenses
|
|
$ |
277 |
|
|
$ |
151 |
|
Liabilities
of discontinued operations
|
|
$ |
277 |
|
|
$ |
151 |
|
The Company’s former Guam
operation has a deferred tax asset of $2.6 million, primarily generated from
NOLs. This deferred tax asset has a 100% valuation allowance, as the Company
currently has no plans that would allow it to utilize these losses.
Additionally, a significant portion of these losses are limited as to future use
due to the Company’s Section 382 change of ownership in October 2004.
PRICESMART,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The
following table sets forth the income (loss) from the discontinued operations of
each period presented, in thousands.
|
|
Years
Ended August 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Net
warehouse club sales
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
Pre-tax
income (loss) from operations
|
|
|
(104 |
) |
|
|
143 |
|
|
|
5,777 |
|
Income
tax (provision) benefit
|
|
|
— |
|
|
|
— |
|
|
|
(2,103 |
) |
Net
income (loss)
|
|
$ |
(104 |
) |
|
$ |
143 |
|
|
$ |
3,674 |
|
The
pre-tax loss from discontinued operations for the twelve months ended
August 31, 2008 of $104,000 is the net result of the subleasing activity in
Guam and an accrual for a payroll tax related issue. The pre-tax income from
operations for the twelve months ended August 31, 2006 includes
approximately $5.8 million from the reversal of a portion of the provision
against recoverability of loan principal and accrued interest receivable from
PSMT Philippines which was collected in December 2005 and July 2006 as final
settlement on outstanding amounts due and the net results of the subleasing
activity in Guam.
NOTE
4 – PROPERTY AND EQUIPMENT, NET
Property
and equipment, net consisted of the following (in thousands):
|
|
August 31,
|
|
|
|
2008
|
|
|
2007
|
|
Land
|
|
$ |
63,582 |
|
|
$ |
58,924 |
|
Building
and improvements
|
|
|
130,237 |
|
|
|
109,706 |
|
Fixtures
and equipment
|
|
|
75,137 |
|
|
|
66,275 |
|
Construction
in progress
|
|
|
2,466 |
|
|
|
10,790 |
|
Total
property and equipment, historical cost
|
|
|
271,422 |
|
|
|
245,695 |
|
Less:
accumulated depreciation
|
|
|
(71,846 |
) |
|
|
(65,710 |
) |
Property
and equipment, net
|
|
$ |
199,576 |
|
|
$ |
179,985 |
|
Building
and improvements include net capitalized interest of $1.3 million as of both
August 31, 2008 and 2007.
In October 2007 (fiscal
year 2008), the Company acquired the company that had leased to it the real
estate and building upon which the Barbados warehouse club is located for
approximately $12.0 million. This acquisition contributed the following property
and equipment (in thousands):
Land
|
|
$ |
4,965 |
|
Building
and improvements
|
|
|
6,948 |
|
Fixtures
and equipment
|
|
|
85 |
|
Total
property and equipment
|
|
$ |
11,998 |
|
In fiscal
year 2008, the Company also capitalized approximately $23.6 million in building
and improvements, fixtures and equipment and construction in progress, primarily
related to the new warehouse club openings in Guatemala (November 2007) and
Trinidad (December 2007) and continued improvements in the Company’s other
warehouse club locations.
Depreciation expense for fiscal years 2008, 2007 and 2006 was
approximately $11.4 million, $9.5 million and $9.2 million, respectively.
PRICESMART,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
NOTE
5 – EARNINGS PER SHARE
Basic
income per share is computed based on the weighted average common shares
outstanding in the period. Diluted income per share is computed based on the
weighted average common shares outstanding in the period and the effect of
dilutive securities (options, warrants and restricted stock), except where the
inclusion is anti-dilutive (in thousands, except per share data):
|
|
Years
Ended August 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Net
income:
|
|
$ |
38,106 |
|
|
$ |
12,926 |
|
|
$ |
11,858 |
|
Determination
of shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
common shares outstanding
|
|
|
28,860 |
|
|
|
28,534 |
|
|
|
27,332 |
|
Assumed
conversion of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Put
agreement(1)
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Stock
options
|
|
|
136 |
|
|
|
135 |
|
|
|
64 |
|
Warrants(2)
|
|
|
— |
|
|
|
— |
|
|
|
4 |
|
Restricted
stock grant(3)
|
|
|
214 |
|
|
|
574 |
|
|
|
335 |
|
Diluted
average common shares outstanding
|
|
|
29,210 |
|
|
|
29,243 |
|
|
|
27,735 |
|
Net
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
income per share
|
|
$ |
1.32 |
|
|
$ |
0.45 |
|
|
$ |
0.43 |
|
Diluted
income per share
|
|
$ |
1.30 |
|
|
$ |
0.44 |
|
|
$ |
0.43 |
|
|
(1)The
effect of the put agreement entered into as part of the settlement with
the PSC Parties (see Note 16) was anti-dilutive during the period.
Therefore, no values were reflected in the computation of diluted earnings
per share.
|
|
(2)A
warrant for 400,000 shares of common stock at an exercise price of $7 per
share was issued in January 2005, at which time 200,000 shares were
immediately exercised. The remaining 200,000 shares were exercised
November 30, 2005.
|
|
(3)Restricted
stock was issued to certain employees in fiscal years 2008, 2007 and 2006.
The dilutive effect of these issues was 4,207, 10,721 and 45,491,
respectively, within the year of
issue.
|
PRICESMART,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
NOTE
6 – STOCKHOLDERS’ EQUITY
On
January 24, 2008, the Company’s Board of Directors declared a cash dividend
in the total amount of $0.32 per share, of which $0.16 per share was paid on
April 30, 2008 to stockholders of record as of the close of business on
April 15, 2008 and $0.16 per share was paid on October 31,
2008 to stockholders of record as of the close of business on October 15,
2008. On February 7, 2007, the Company’s Board of Directors declared a cash
dividend, in the total amount of $0.32 per share, of which $0.16 per share was
paid on April 30, 2007 to stockholders of record as of the close of
business on April 15, 2007 and $0.16 per share was paid on October 31,
2007 to stockholders of record as of the close of business on October 15,
2007.
The
Company anticipates the ongoing payment of semi-annual dividends in subsequent
periods, although the actual declaration of future dividends, the amount of such
dividends, and the establishment of record and payment dates is subject to final
determination by the Board of Directors in its discretion, after its review of
the Company’s financial performance and anticipated capital
requirements.
Accumulated Other Comprehensive
Loss
Accumulated other comprehensive loss reported on the Company’s consolidated
balance sheets consist of foreign currency translation adjustments and
unrealized gains and losses on interest rate swap. The unfavorable
translation adjustments during fiscal years 2008 and 2006 were primarily due to
weaker foreign currencies. The favorable translation adjustment during 2007 was
primarily due to stronger foreign currencies.
Retained
Earnings Not Available for Distribution
As of
August 31, 2008, and 2007, included in retained earnings are legal reserves of
approximately $1 million and $550,000, respectively, which cannot be distributed
as dividends according to statutory regulations applicable to various
subsidiaries.
NOTE
7 – RETIREMENT PLAN
PriceSmart
offers a defined contribution retirement and 401(k) plan to its U.S. employees,
which allows employees to enroll in the plan after 90 days of employment.
Enrollment in these plans begins on the first of the month following the
employee's eligibility. The Company makes nondiscretionary contributions to the
401(k) plan equal to 100% of the participant's contribution up to an annual
maximum of 4% of base compensation that a participant contributes to the plan.
Employer contributions to the 401(k) plan to its U.S. employees were $445,000,
$396,000, and $293,000 during fiscal years 2008, 2007, and 2006, respectively.
The Company has defined contribution plans for its employees in Panama, Costa
Rica, Trinidad, and Jamaica and contributes a percentage of the respective
employee’s salary. Amounts expensed under these plans were $354,000, $317,000
and $265,000 during fiscal years 2008, 2007 and 2006, respectively.
NOTE
8 – STOCK OPTION AND EQUITY PARTICIPATION PLANS
In August
1997, the Company adopted the 1997 Stock Option Plan of PriceSmart, Inc. (the
“1997 Plan”) for the benefit of its eligible employees, consultants and
independent directors. Under the 1997 Plan, 700,000 shares of the Company's
common stock are authorized for issuance.
The
Compensation Committee of the Board of Directors administers the 1997 Plan with
respect to options granted to employees or consultants of the Company, and the
full Board of Directors administers the Plan with respect to director options.
Options issued under the 1997 Plan typically vest over five years and expire in
six years.
PRICESMART,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
In July
1998, the Company adopted the 1998 Equity Participation Plan of PriceSmart, Inc.
(the “1998 Plan”) for the benefit of its eligible employees, consultants and
independent directors. The 1998 Plan authorizes 700,000 shares of the Company's
common stock for issuance. Options issued under the 1998 Plan typically vest
over five years and expire in six years. The 1998 plan also allows restricted
stock awards, which typically vest over five years.
In August
1998, four of the Company's officers and an entity affiliated with a fifth
officer purchased an aggregate of 29,324 shares of Common Stock pursuant to the
stock purchase feature of the 1998 Plan. These officers delivered to the Company
promissory notes in the aggregate amount of $317,000. In April 2000, an
additional officer purchased 3,738 shares of Common Stock pursuant to the stock
purchase feature of the 1998 Plan and delivered to the Company a promissory note
in the amount of $150,000. The promissory notes delivered by the first five
borrowers initially were non-recourse notes, bore interest at a rate of
6% per annum and had terms of six years. These notes were amended in June
1999 to become recourse notes, bearing interest at a rate of 5.85%. The sixth
officer's note also was a recourse note, with a six-year term bearing interest
at a rate of 5.85%.
In August
2004, upon the maturity of their respective promissory notes, the first five
borrowers paid all remaining principal and interest due under the notes by
delivering an aggregate of 22,195 shares of Common Stock valued at $7.56 per
share (the closing price of the Common Stock on August 6, 2004) and paid an
aggregate of $150,000 in cash. Each of the first five officers received cash
bonuses in August 2004 and used the after-tax proceeds of the bonus to pay the
cash portion of the repayments described above. As of August 31, 2004, one
such note remained outstanding (not yet due) with a balance of approximately
$150,000, related to the purchase of 3,738 shares. Following the repayment noted
above, the Company determined that the loan underlying this remaining note
should be treated under variable accounting, and, therefore this loan was
marked to market, resulting in a charge of $117,000 and $4,000 in fiscal
years 2004 and 2005, respectively. The Company ceased extending new loans (or
modifying existing loans) to any director or executive officer effective as of
July 30, 2002. In April 2006, the one outstanding loan was repaid. The
borrower repaid the outstanding principal and interest due under the note by
delivering 3,738 shares of common stock valued at $8.83 per share (the closing
price of the common stock on April 19, 2006) and paid $119,000 in cash. The
borrower received a cash bonus in April 2006 and used the after-tax proceeds of
the bonus to pay the cash portion of the repayment.
In
November 2001, the Company adopted the 2001 Equity Participation Plan of
PriceSmart, Inc. (the “2001 Plan”) for the benefit of its eligible employees,
consultants and independent directors. The 2001 Plan authorizes 350,000 shares
of the Company’s common stock for issuance. Options issued under the 2001 Plan
typically vest over five years and expire in six years. The 2001 plan also
allows restricted stock awards, which typically vest over five
years.
In
November 2002, the Company adopted the 2002 Equity Participation Plan of
PriceSmart, Inc. (the “2002 Plan”) for the benefit of its eligible employees,
consultants and independent directors. The 2002 Plan authorized 250,000 shares
of the Company’s common stock for issuance. At the 2006 Annual Meeting, the
stockholders of the Company approved a proposal to amend the 2002 Equity
Participation Plan of PriceSmart, Inc. to increase the number of shares of
Common Stock reserved for issuance under the 2002 Plan from 250,000 to 750,000
(the “Amendment”). Options issued under the 2002 Plan typically vest over five
years and expire in six years. The 2002 plan also allows restricted sotck
awards, which typically vest over five years.
Effective
April 23, 2003, the Company’s Board of Directors approved the re-pricing of
all unexercised stock options held by employees of the Company (not including
directors’ stock options) with exercise prices greater than $20 to $20 per
share. The affected options covered a total of 507,510 shares of common stock
with a weighted average exercise price of $36.19 per share. Under the provisions
of SFAS 123 and subsequent guidance issued under SFAS 148, a non-cash charge
related to vested options of $833,000 was recognized and included in stock
compensation expense for the year ended August 31, 2003.
In fiscal
year 2004, 151,000 options of the 507,510 re-priced stock options, expired or
were cancelled. As a result, the Company recorded a reduction of the
compensation expense of $43,000 and a reduction in deferred compensation of
$278,000. The Company recognized the expense relating to re-priced stock options
of $107,000, $465,000 and $421,000 in fiscal years 2006, 2005 and 2004,
respectively. All other terms and conditions of the options remain the
same.
PRICESMART,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The
following table summarizes the components of the stock-based compensation
expense for the 12 months ended August 31, 2008, 2007 and 2006 (in
thousands), which are included in general and administrative expense and
warehouse expenses in the consolidated statement of income:
|
|
Years
Ended August 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Options
granted to employees and directors
|
|
$ |
126 |
|
|
$ |
318 |
|
|
$ |
1,423 |
|
Restricted
grants
|
|
|
2,453 |
|
|
|
1,196 |
|
|
|
528 |
|
Option
re-pricings
|
|
|
— |
|
|
|
253 |
|
|
|
107 |
|
Stock-based
compensation expense
|
|
$ |
2,579 |
|
|
$ |
1,767 |
|
|
$ |
2,058 |
|
Total
stock option activity relating to the 1997 Plan, 1998 Plan, 2001 Plan and 2002
Plan was as follows:
|
|
Shares
|
|
|
Weighted Average
Exercise Price
|
|
Shares
subject to outstanding options at August 31, 2005
|
|
|
824,350 |
|
|
$ |
13.39 |
|
Granted
|
|
|
6,000 |
|
|
|
8.18 |
|
Exercised
|
|
|
(77,809 |
) |
|
|
6.33 |
|
Forfeited
or expired
|
|
|
(55,591 |
) |
|
|
19.27 |
|
Shares
subject to outstanding options at August 31, 2006
|
|
|
696,950 |
|
|
$ |
13.66 |
|
Granted:
|
|
|
9,000 |
|
|
|
16.00 |
|
Exercised
|
|
|
(278,008 |
) |
|
|
14.31 |
|
Forfeited
or expired
|
|
|
(53,127 |
) |
|
|
19.93 |
|
Shares
subject to outstanding options at August 31, 2007
|
|
|
374,815 |
|
|
$ |
12.35 |
|
Granted:
|
|
|
8,000 |
|
|
|
23.61 |
|
Exercised
|
|
|
(61,685 |
) |
|
|
14.93 |
|
Forfeited
or expired
|
|
|
(41,000 |
) |
|
|
32.03 |
|
Shares
subject to outstanding options at August 31, 2008
|
|
|
280,130 |
|
|
$ |
9.23 |
|
As of
August 31, 2008, options to purchase 238,730 shares were exercisable and
there were 424,617 shares of the Company's common stock reserved for future
issuance, of which 144,487 shares are available for future grants. The
following table summarizes information about stock options outstanding and
options exercisable at August 31, 2008:
Range
of
Exercise
Prices
|
|
|
Outstanding as
of
Aug. 31,
2008
|
|
|
Weighted-Average
Remaining
Contractual
Life
|
|
|
Weighted-Average
Exercise
Price
|
|
|
Exercisable as
of Aug. 31, 2008
|
|
|
Weighted-Average
Exercise
Price
As
of Aug. 31,
2008
|
|
$ |
6.13 – $8.18 |
|
|
|
230,130 |
|
|
|
2.41 |
|
|
$ |
6.29 |
|
|
|
206,130 |
|
|
$ |
6.27 |
|
|
8.19 – 8.90 |
|
|
|
5,000 |
|
|
|
1.18 |
|
|
|
8.90 |
|
|
|
2,000 |
|
|
|
8.90 |
|
|
8.91 – 17.87 |
|
|
|
8,000 |
|
|
|
4.30 |
|
|
|
16.04 |
|
|
|
1,600 |
|
|
|
16.04 |
|
|
17.88 – 20.00 |
|
|
|
15,000 |
|
|
|
0.52 |
|
|
|
19.17 |
|
|
|
15,000 |
|
|
|
19.17 |
|
|
20.01 – 39.00 |
|
|
|
22,000 |
|
|
|
3.33 |
|
|
|
30.77 |
|
|
|
14,000 |
|
|
|
34.86 |
|
$ |
6.13 – $39.00 |
|
|
|
280,130 |
|
|
|
2.41 |
|
|
$ |
9.23 |
|
|
|
238,730 |
|
|
$ |
8.84 |
|
The
aggregate intrinsic value and weighed average remaining contractual term of
options exercisable at August 31, 2008 was $4.3 million and 2.2 years,
respectively. The aggregate intrinsic value and weighed average
remaining contractual term of options outstanding at August 31, 2008 was $4.9
million and 2.4 years, respectively.
PRICESMART,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The fair
value of each option grant is estimated on the date of grant using the
“Black-Scholes” option-pricing model with the following weighted average
assumptions used for grants in fiscal years 2008, 2007 and 2006:
|
|
Years
Ended August 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Risk
free interest rate
|
|
|
3.25 |
% |
|
|
4.62 |
% |
|
|
4.35 |
% |
Expected
life
|
|
5 years
|
|
|
5 years
|
|
|
5 years
|
|
Expected
volatility
|
|
|
47.74 |
% |
|
|
46.18 |
% |
|
|
43.96 |
% |
Expected
dividend yield
|
|
|
1.2 |
% |
|
|
0 |
%(1) |
|
|
0 |
% |
(1) No new stock options were
issued in fiscal year 2007 after dividends were declared in the second quarter
of fiscal year 2007.
The
weighted-average per share fair value of the stock options granted during 2008,
2007, and 2006 was $10.76, $7.46, and $3.64 respectively. The total intrinsic
value of options exercised during the years ended August 31, 2008, 2007, and
2006 was $854,000, $2.5 million, and $354,000 respectively. The intrinsic value
of a stock option is the amount by which the market value of the underlying
stock exceeds the exercise price.
Cash
proceeds from stock options exercised during fiscal year 2008, 2007 and 2006
were approximately $921,000, $3.9 million and $497,000,
respectively.
In fiscal
year 2006, the Company began issuing Restricted Stock Grants. The Restricted
Stock Grants vest over a five year period and are forfeited if the employee
leaves the Company before the vesting period is completed. Restricted Stock
Grant activity for the three years ending August 31, 2008 was as
follows:
|
|
Grants
|
|
Granted:
|
|
|
565,900 |
|
Cancelled:
|
|
|
(25,200 |
) |
Grants
outstanding at August 31, 2006
|
|
|
540,700 |
|
Granted:
|
|
|
164,050 |
|
Cancelled
|
|
|
(31,080 |
) |
Vested
|
|
|
(107,420 |
) |
Grants
outstanding at August 31, 2007
|
|
|
566,250 |
|
Granted:
|
|
|
333,745 |
|
Cancelled
|
|
|
(15,077 |
) |
Vested
|
|
|
(136,058 |
) |
Grants
outstanding at August 31, 2008
|
|
|
748,860 |
|
The remaining
unrecognized compensation cost related to unvested options and restricted stock
grants at August 31, 2008 and 2007 was approximately $9.7 million and $5.3
million, respectively, and the weighted-average period of time over which this
cost will be recognized is 3.9 years and 3.8 years, respectively.
On
April 17, 2008 the Board of Directors approved an amendment to
the 2001 Plan to authorize the award of restricted stock units to
independent directors, subject to approval of the amendment by the Company’s
stockholders at the next annual meeting of stockholders. The Board
also awarded restricted stock units to the independent directors which
will vest at the rate of 20% per year commencing on March 29, 2008,
subject to stockholder aproval of the amendment. The Company has not
considered these restricted stock units outstanding in determining stock
compensation expense, the balance of shares issued, average common shares
outstanding and the dilutive average of common stock outstanding.
PRICESMART,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Total
restricted stock units activity, relating to the 2001 Plan for the year ending
December 31, 2008 was as follows:
|
|
RSU’s
|
|
Outstanding
at August 31, 2007
|
|
|
— |
|
Granted*
|
|
|
20,000 |
|
Grants
outstanding at August 31, 2008
|
|
|
20,000 |
|
|
*Pending
approval of amendment to 2001 Plan by the Company’s
stockholders.
|
In fiscal
year 2008 and 2007, the Company repurchased 46,053 and 38,061 shares
respectively of common stock from employees for approximately $1.4 million and
$609,000, respectively, based on the stock price at that date of repurchase to
cover the employees’ minimum statutory tax withholding requirements related to
the vesting of restricted stock grants.
NOTE
9 – ASSET IMPAIRMENT AND CLOSURE COSTS FOR CONTINUING OPERATIONS
During
fiscal year 2003, the Company closed two warehouse clubs, one each in the
Dominican Republic and Guatemala. The decision to close the warehouse clubs
resulted from the determination that the locations were not conducive to the
successful operation of a PriceSmart warehouse club.
During
fiscal year 2006, asset impairment and closure costs were $1.8 million, which
were primarily due to the write-down of two real estate assets of the Company,
one in Honduras and one in the Dominican Republic. The Company’s original
San Pedro Sula, Honduras location was vacated and the operation was relocated to
a new site which was acquired during the year in another section of the
city. The impairment charge of $785,000 reduced the book value of the
vacated site to the expected market value as a buyer or leasing opportunity was
pursued. Also, during fiscal year 2006, the Company recorded an additional
$813,000 impairment charge related to the previously closed warehouse club in
Dominican Republic based upon management’s revised assessment of the market
value of that asset. The method for determining fair value for both locations
was based on a quoted market price, and/or expected cash flows.
During
fiscal year 2007, asset impairment and closure costs were $1.6 million, which
were primarily due to the closed Dominican Republic location and the original
San Pedro Sula, Honduras location. In fiscal year 2007, the Company sold the
East Santo Domingo, Dominican Republic location for the approximate book value
of $2.5 million. As part of the sale, the Company assumed notes receivable for a
total of approximately $2.2 million. However, a net loss on this disposal of
$360,000 was recorded to reflect the broker commission and the imputed interest
on the notes receivable, which will be collected over a 24 month period,
beginning four months after the sale date. The short and long term carrying
value of the notes receivable on the balance sheet was $2.2 million as of
August 31, 2007. During the fourth quarter of fiscal year 2007, the Company
recorded a reduction of $65,000 to closure costs for interest earned on the note
issued for the sale of the East Santo Domingo location. Also during fiscal year
2007, the Company recorded $897,000 of asset impairment charges to reduce the
San Pedro Sula assets to the expected market value. Additional closure costs for
this location of $128,000 were recorded in fiscal year 2007. Lastly, the Company
recorded additional closure costs of $210,000 for the closed warehouse in
Guatemala.
During
fiscal year 2008, asset impairment and closure costs were approximately $1.1
million, which were primarily due to the closed warehouse clubs and the disposal
of bulk packaging equipment. Closure costs incurred in fiscal year
2008 consisted of $810,000 in additional closure costs for the closed warehouse
club in Guatemala, which consisted of $605,000 of additional lease obligations
due to a rent increase and $205,000 of other associated costs. The Company also
recorded a $127,000 reduction to closure costs for interest earned on the note
issued for the sale of the East Santo Domingo, Dominican Republic location and
recorded $10,000 of additional closure costs for the original warehouse club in
San Pedro Sula, Honduras which was vacated and relocated to a new site in fiscal
year 2006. In addition, in the fourth quarter of fiscal year 2008 the Company
recorded an impaiment charge of approximately $449,000 with respect to bulk
packaging equipment that was unusable. The Company fully impaired the total
value of the bulk equipment that was unusable.
PRICESMART,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
A
reconciliation of the movements in the charges and related liabilities derived
from the closed warehouse clubs in 2006, 2007 and 2008 is as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability
as of August 31,
2005
|
|
|
|
|
|
|
|
|
|
Liability
as of August 31,
2006
|
|
|
|
|
|
|
|
|
|
Liability
as of August 31,
2007
|
|
|
|
|
|
|
|
|
|
|
|
Liability
as of August 31,
2008
|
|
Lease
obligations
|
$ |
3,712 |
|
$ |
— |
|
$ |
(246 |
) |
|
$ |
— |
|
|
$ |
3,466 |
|
$ |
— |
|
$ |
(240 |
) |
|
$ |
— |
|
|
$ |
3,226 |
(1) |
|
$ |
605 |
(2) |
|
$ |
(154 |
) |
|
$ |
— |
|
|
$ |
3,677 |
(3) |
Asset
impairment
|
|
— |
|
|
1,598 |
|
|
— |
|
|
|
(1,598 |
) |
|
|
— |
|
|
897 |
|
|
— |
|
|
|
(897 |
) |
|
|
— |
|
|
|
449 |
|
|
|
— |
|
|
|
(449 |
) |
|
|
— |
|
Sale
of land & building
|
|
— |
|
|
— |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
295 |
|
|
— |
|
|
|
(295 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Other
associated costs
|
|
85
|
|
|
236
|
|
|
(280 |
) |
|
|
(5 |
) |
|
|
36
|
|
|
358
|
|
|
(358 |
) |
|
|
(36 |
) |
|
|
—
|
|
|
|
88
|
|
|
|
(88 |
) |
|
|
— |
|
|
|
—
|
|
Total
|
$ |
3,797
|
|
$ |
1,834
|
|
$ |
(526 |
) |
|
$ |
(1,603 |
) |
|
$ |
3,502
|
|
$ |
1,550
|
|
$ |
(598 |
) |
|
$ |
(1,228 |
) |
|
$ |
3,226
|
|
|
$ |
1,142
|
|
|
$ |
(242 |
) |
|
$ |
(449 |
) |
|
$ |
3,677
|
|
1) Amount
includes $3,072 million of Accrued closure costs and $154,000 of
short-term lease obligations (included within Other accrued expenses) on
the
Consolidated
Balance Sheet as of August 31, 2007.
|
2) Amount
of additional lease obligations due to increase in rent for closed
warehouse club in Guatemala.
|
3) Amount
includes $3,489 million of Accrued closure costs and $188,000 of
short-term lease obligations (included within Other accrued expenses) on
the
Consolidated
Balance Sheet as of August 31,
2008.
|
NOTE
10 – COMMITMENTS AND CONTINGENCIES
From time to time, the
Company and its subsidiaries are subject to legal proceedings, claims and
litigation arising in the ordinary course of business, the outcome of which, in
the opinion of management, would not have a material adverse effect on the
Company. The Company evaluates such matters on a case by case basis, and
vigorously contests any such legal proceedings or claims which the Company
believes are without merit.
The
Company is required to file federal and state tax returns in the United States
and various other tax returns in foreign jurisdictions. The preparation of these
tax returns requires the Company to interpret the applicable tax laws and
regulations in effect in such jurisdictions, which could affect the amount of
tax paid by the Company. The Company, in consultation with its tax advisors,
bases its tax returns on interpretations that are believed to be reasonable
under the circumstances. The tax returns, however, are subject to routine
reviews by the various taxing authorities in the jurisdictions in which the
Company files its returns. As part of these reviews, a taxing authority may
disagree with respect to the interpretations the Company used to calculate its
tax liability and therefore require the Company to pay additional
taxes.
As of
August 31, 2008, the Company in accordance with its accounting policy recorded
the reclassification of approximately $101,000 from additional paid in capital
to a liability account, common stock subject to put agreement, pursuant to the
settlement agreement with PSC, S.A. and related entities for the remaining 6,454
shares remaining to be purchased.
Beginning
on September 1, 2007, the Company accrues an amount for its estimate of
probable additional income tax liability in accordance with the new provisions
of FASB Interpretation No. 48, “Accounting for Uncertainty in Income
Taxes—An Interpretation of FASB Statement No. 109” (“FIN 48”). Under FIN
48, the impact of an uncertain income tax position on the income tax return must
be recognized at the largest amount that is more-likely-than-not to be sustained
upon audit by the relevant tax authority. An uncertain income tax position will
not be recognized if it has less than 50% likelihood of being sustained. Income
tax contingencies are discussed within Note 11 – Income Taxes.
In
evaluating the exposure associated with various tax filing positions, exclusive
of accounting for income taxes, the Company accrues charges for probable and
estimable exposures. At August 31, 2008, the Company believes it has accrued for
probable and estimable exposures. As of August 31, 2008 and 2007, the Company
had recorded within other accrued expenses a total of $2.5 million and $3.1
million, respectively, for various non-income tax related
contingencies.
PRICESMART,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
NOTE
11 – INCOME TAXES
Income
from continuing operations before provision for income taxes, loss of
unconsolidated affiliate and minority interest includes the following components
(in thousands):
|
|
Years
Ended August 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
United
States
|
|
$ |
5,680 |
|
|
$ |
10,003 |
|
|
$ |
15,629 |
|
Foreign
|
|
|
42,148 |
|
|
|
18,496 |
|
|
|
1,118 |
|
Income
from continuing operations before provision for income taxes, loss of
unconsolidated affiliate and minority interest
|
|
$ |
47,828 |
|
|
$ |
28,499 |
|
|
$ |
16,747 |
|
Significant
components of the income tax provision are as follows (in
thousands):
|
|
Years
Ended August 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Current:
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
$ |
642 |
|
|
$ |
2,641 |
|
|
$ |
1,553 |
|
Foreign
|
|
|
14,818 |
|
|
|
10,759 |
|
|
|
4,898 |
|
Total
|
|
|
15,460 |
|
|
|
13,400 |
|
|
|
6,451 |
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
|
11,595 |
|
|
|
(13,292 |
) |
|
|
2,063 |
|
Foreign
|
|
|
751 |
|
|
|
2,002 |
|
|
|
(3,096 |
) |
Valuation
Allowance (U.S.)
|
|
|
(12,587 |
) |
|
|
12,299 |
|
|
|
365 |
|
Valuation
Allowance (Foreign)
|
|
|
(6,095 |
) |
|
|
(2,072 |
) |
|
|
2,329 |
|
Total
|
|
|
(6,336 |
) |
|
|
(1,063 |
) |
|
|
1,661 |
|
Provision
for income taxes
|
|
$ |
9,124 |
|
|
$ |
12,337 |
|
|
$ |
8,112 |
|
The reconciliation of income tax
computed at the Federal statutory tax rate to the provision for income taxes is
as follows (in thousands):
|
|
Years
Ended August 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Federal
tax provision at statutory rates
|
|
$ |
16,261 |
|
|
$ |
9,689 |
|
|
$ |
5,694 |
|
State
taxes, net of Federal benefit
|
|
|
92 |
|
|
|
(643 |
) |
|
|
395 |
|
Differences
in foreign tax rates and permanent items
|
|
|
(933 |
) |
|
|
(6,936 |
) |
|
|
(671 |
) |
Increase
(decrease) in U.S valuation allowance
|
|
|
(201 |
) |
|
|
12,299 |
|
|
|
365 |
|
Increase
(decrease) in Foreign valuation allowance
|
|
|
(6,095 |
) |
|
|
(2,072 |
) |
|
|
2,329 |
|
Provision
for income taxes
|
|
$ |
9,124 |
|
|
$ |
12,337 |
|
|
$ |
8,112 |
|
PRICESMART,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Significant
components of the Company’s deferred tax assets as of August 31, 2008 and
2007 are shown below (in thousands):
|
|
August 31,
|
|
|
|
2008
|
|
|
2007
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
U.S.
net operating loss carry-forward
|
|
$ |
10,975 |
|
|
$ |
18,087 |
|
U.S.
capital loss carry-forward
|
|
|
7,442 |
|
|
|
16,723 |
|
U.S.
timing differences and AMT credits
|
|
|
679 |
|
|
|
328 |
|
Deferred
compensation
|
|
|
1,599 |
|
|
|
1,510 |
|
Foreign
tax credits
|
|
|
3,808 |
|
|
|
1,730 |
|
Foreign
deferred taxes
|
|
|
16,060 |
|
|
|
24,020 |
|
Total
deferred tax assets
|
|
|
40,563 |
|
|
|
62,398 |
|
U.S.
valuation allowance
|
|
|
(8,350 |
) |
|
|
(20,937 |
) |
Foreign
valuation allowance
|
|
|
(10,285 |
) |
|
|
(21,926 |
) |
Net
deferred tax assets
|
|
$ |
21,928 |
|
|
$ |
19,535 |
|
As of
August 31, 2008 and 2007, the Company had deferred tax liabilities of $1.4
million and $1.5 million, respectively, arising from timing differences in
certain subsidiaries.
The
effective tax rate for fiscal year 2008 is approximately 19%, as compared to the
effective tax rate for fiscal year 2007 of approximately 43%. The
decrease in the effective tax rates between fiscal years is primarily
attributable to: (i) during fiscal year 2008, there is a significant increase in
non-U.S. pre-tax income, which is taxed at statutory rates that are generally 4%
to 9% lower than the U.S. statutory tax rate; (ii) the Company reversed
approximately $3.5 million of valuation allowances during fiscal year 2008 as
the result of the improvement in the operations of certain of the foreign
subsidiaries, which has a 7% benefit on the fiscal year 2008 effective tax
rate; and (iii) the Company recorded $5.5 million of settlement expenses during
fiscal year 2007, which were not tax effected due to the preliminary nature
of this accrual the impact of which resulted in a 7% charge to the effective tax
rate during fiscal year 2007.
During
fiscal year 2008, management concluded that a valuation allowance continues to
be necessary for certain foreign deferred tax asset balances, primarily because
of the existence of significant negative objective evidence, such as the fact
that certain subsidiaries are in a cumulative loss position for the past three
years, and the determination that certain net operating loss carryforward
periods are not sufficient to realize the related deferred tax assets. The
Company factored into its analysis the inherent risk of forecasting revenue and
expenses over an extended period of time and also considered the potential risks
associated with its business. As a result of this review, the Company concluded
that a valuation allowance was required with respect to deferred tax assets for
certain subsidiaries, as well as certain U.S. deferred tax
assets. The Company also determined that valuation allowances
previously recorded should be reversed for three of its subsidiaries, primarily
because of the existence of significant positive, objective evidence, such as
cumulative taxable income in recent years, changes in operational efficiencies,
and overall market improvement. The reversal of previously recorded
valuation allowances resulted in a net tax benefit of $3.5 million for the
fiscal year ended August 31, 2008. Accordingly, the Company had net
foreign deferred tax assets of $5.8 million and $2.1 million as of
August 31, 2008 and 2007, respectively.
The
Company has federal and state tax net operating loss carry-forwards, or NOLs, at
August 31, 2008 of approximately $51.8 million and $8.4 million,
respectively. The federal and state tax loss carry-forwards generally expire
during periods ranging from 2010 through 2025 and 2015 through 2025,
respectively, unless previously utilized. Generally for U.S. federal
and U.S. Virgin Islands tax reporting purposes, the statute of limitations is
three-years from the date of filing of the income tax return. If and
to the extent the tax year resulted in a taxable loss, the statute is extended
to three-years from the filing date of the income tax return in which the carry
forward tax loss was used to offset taxable income in the carry forward
year. In calculating the tax provision, and assessing the
likelihood that the Company will be able to utilize the deferred tax assets, the
Company considered and weighed all of the evidence, both positive and negative,
and both objective and subjective. The Company factored in the inherent risk of
forecasting revenue and expenses over an extended period of time and considered
the potential risks associated with its business. Because of the Company's U.S.
income from continuing operations and based on projections of future taxable
income in the U.S., the Company was able to determine that there was sufficient
positive evidence to support the conclusion that it was more likely than not
that the Company would be able to realize substantially all of its U.S. NOLs by
generating taxable income during the carry-forward period. However, if the
Company does not achieve its projections of future taxable income in the U.S.,
the Company could be required to take a charge to earnings related to the
recoverability of these deferred tax assets.
PRICESMART,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The
Company has determined that due to a deemed change of ownership (as defined in
Section 382 of the Internal Revenue Code) in October 2004, there will be
annual limitations in the amount of U.S. profits that may be offset by NOLs. The
NOLs generated prior to the deemed ownership change date, as well as a
significant portion of the losses generated as a result of the PSMT Philippines
disposal in August 2005, will be limited on an annual basis. The Company does
not believe this will impact the recoverability of these NOLs.
As of
August 31, 2008, the Company also has foreign tax credits that expire from
2011 through 2017 of $3.8 million. Due to their shorter recovery period and
limitations applicable under section 383 of the Internal Revenue code regarding
changes of ownership, the Company has valuation allowances of $1.0 million on
U.S. foreign tax credit carry-forwards generated before the date of the deemed
ownership change.
The
Company also has capital loss carry-forwards expiring in 2010, 2011, and 2012 of
$30.2 million, resulting from the PSMT Philippines disposal, the impairment
provision for its investment in Mexico, and the cessation of operations in Guam.
As these capital losses can only be used to offset capital gains and the Company
has no current plans to be able to use these capital losses, a full valuation
allowance has been recorded against them.
The
Company does not provide for income taxes which would be payable if
undistributed earnings of its foreign subsidiaries were remitted, because the
Company considers these earnings to be permanently reinvested. As of
August 31, 2008 and 2007, the undistributed earnings of these foreign
subsidiaries are approximately $42.2 million and $20.6 million, respectively.
Upon distribution of those earnings in the form of dividends or otherwise, the
Company would be subject to both U.S. income taxes and withholding taxes payable
to the foreign countries, but would also be able to offset unrecognized foreign
tax credits. Determination of the amount of unrecognized deferred U.S. income
tax liability is not practicable because of the complexities associated with its
hypothetical calculation; however, the Company does not believe the amount would
be material.
Effective
September 1, 2007, the Company was required to adopt and implement the
provisions of FIN 48, which requires the Company to accrue for the estimated
additional amount of taxes for uncertain income tax positions if the likelihood
of sustaining the tax position does not meet the more likely than not standard
for recognition of tax benefits. The Company reclassified uncertain
tax positions from other accrued expenses to long-term income taxes payable but
did not recognize a cumulative adjustment to the beginning balance of retained
earnings in the consolidated financial statements.
A
reconciliation of the beginning and ending amount of unrecognized tax benefits
is as follows (in thousands):
Balance
at September 1, 2007
|
|
$ |
16,156 |
|
Additions
based on tax positions related to the current year
|
|
|
581 |
|
Reductions
for tax positions of prior years
|
|
|
(93 |
) |
Settlements
|
|
|
(49 |
) |
Expiration
of the statute of limitations for the assessment of taxes
|
|
|
(1,359 |
) |
Balance
at August 31, 2008
|
|
$ |
15,236 |
|
As of
August 31, 2008, the liability for income taxes associated with uncertain
tax benefits was $15.2 million and can be reduced by $10.3 million of tax
benefits associated with state income taxes and other timing adjustments which
are recorded as deferred income taxes pursuant to FIN 48. The net amount of $4.9
million, if recognized, would favorably affect the Company’s financial
statements and favorably affect the Company’s effective income tax
rate.
The
Company expects changes in the amount of unrecognized tax benefits in the next
12 months as the result of a lapse in various statutes of limitations. The
lapse of statutes of limitations in the 12-month period ending August 31, 2009
is expected to result in a reduction to long-term income taxes payable totaling
$2.7 million.
PRICESMART,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The
Company recognizes interest and/or penalties related to income tax matters in
income tax expense. As of August 31, 2008 and 2007, the Company had accrued
$3.4 million and $3.1 million, respectively, (before income tax benefit) for the
payment of interest and penalties.
The
Internal Revenue Service field examination of tax year 2005 (fiscal year 2006)
is complete and resulted in no changes by the Service. The Company
has various appeals pending before tax courts in its subsidiaries’
jurisdictions. Any possible settlement could increase/(decrease)
earnings but is not expected to be significant. Audit outcomes and the timing of
audit settlements are subject to significant uncertainty.
The
Company or one of its subsidiaries files income tax returns in the US federal
jurisdiction and various states and foreign jurisdictions. The Company is
generally no longer subject to income tax examinations by tax authorities in its
major jurisdictions except for the fiscal years subject to audit as set forth in
the table below:
|
|
Fiscal
Years Subject to Audit
|
U.S.
federal
|
|
1995
through 1998, 2000 through 2001, and 2005 through 2008
|
California
(U.S.)
|
|
2000
through 2001 and 2005 through 2008
|
Florida(U.S.)
|
|
2000
through 2001 and 2005 through 2008
|
Aruba
|
|
2000
to the present
|
Barbados
|
|
1999
to the present
|
Costa
Rica
|
|
2005
to the present
|
Dominican
Republic
|
|
2005
to the present
|
El
Salvador
|
|
2005
to the present
|
Guatemala
|
|
2004
to the present
|
Honduras
|
|
2005
to the present
|
Jamaica
|
|
2002
to the present
|
Mexico
|
|
2006
to the present
|
Nicaragua
|
|
2005
to the present
|
Panama
|
|
2006
to the present
|
Trinidad
|
|
2002
to the present
|
U.S.
Virgin Islands
|
|
2001
to the present
|
Generally
for U.S. federal and U.S. Virgin Islands tax reporting purposes, the statute of
limitations is three-years from the date of filing of the income tax
return. If and to the extent the tax year resulted in a taxable loss,
the statute is extended to three-years from the filing date of the income tax
return in which the carry forward tax loss was used to offset taxable income in
the carry forward year. Given that historical losses in these
jurisdictions and the Section 382 change in control limitations on the use of
the tax loss carry forwards there is uncertainty and significant variation as to
when a tax year is no longer subject to audit.
Cash
amounts paid during fiscal year 2008, 2007 and 2006 for income taxes were $12.9
million, $9.9 million, and $1.9 million respectively.
NOTE
12 – DEBT
As of
August 31, 2008 and 2007, the Company, together with its majority or
wholly-owned subsidiaries, had $3.5 million and $3.3 million, respectively,
outstanding in short-term borrowings, at a weighted-average interest rates of
8.8% and 8.0%, respectively, which are secured by certain assets of the Company
and its subsidiaries and are guaranteed by the Company up to its respective
ownership percentage, as listed below (in thousands). Each of the facilities
expires during the year and is typically renewed. As of August 31, 2008 and
2007, the Company had approximately $5.8 million and $3.9 million available on
these facilities, respectively. Additionally, the Company has a bank credit
agreement, secured by short-term restricted cash, for up to $10.0 million, which
can be used as a line of credit or to issue letters of credit. As of
August 31, 2008, letters of credit totaling $700,000 were outstanding under
this facility, leaving availability under this facility of $9.3
million.
PRICESMART,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Long-term
debt consists of the following (in thousands):
|
|
August 31,
|
|
|
|
2008
|
|
|
2007
|
|
Note
due July 2017, 9.0% in 2008 and 2007
|
|
$ |
8,232 |
|
|
$ |
8,886 |
|
Note
due November 2014 (six-month LIBOR + 1.5%), 6.24% in 2008(1)
|
|
|
4,050 |
|
|
|
— |
|
Note
due November 2014, 7.94% in 2008(1)
|
|
|
4,466 |
|
|
|
— |
|
Note
due August 2010, 6.5% in 2008 and 2007
|
|
|
17 |
|
|
|
33 |
|
Note
due February 2018 (1 year LIBOR + 2.7%), 6.03% in 2008 and
2007
|
|
|
9,000 |
|
|
|
500 |
|
Total
|
|
|
25,765 |
|
|
|
9,419 |
|
Less:
current portion
|
|
|
2,737 |
|
|
|
1,411 |
|
Long-term
debt
|
|
$ |
23,028 |
|
|
$ |
8,008 |
|
(1)
These loans relate to the acquisition of the Real Estate and Building upon
which the Barbados warehouse club is located. Under the terms
of these agreements, the Barbados entity must comply with certain
financial covenants, which include debt service and leverage
ratios.
|
As of
August 31, 2008 and 2007, the Company, together with its majority or wholly
owned subsidiaries, had $25.8 million and $9.4 million, respectively,
outstanding in long-term borrowings. The Company's long-term debt is
collateralized by certain land, buildings, fixtures, equipment and shares of
each respective subsidiary and guaranteed by the Company up to its respective
ownership percentage. The carrying amount of the non-cash assets assigned as
collateral for long-term debt was $32.2 million and $9.7 million as of
August 31, 2008 and 2007, respectively. Certain obligations under leasing
arrangements are collateralized by the underlying asset being
leased.
Annual
maturities of long-term debt during the next five fiscal years are as follows
(in thousands):
Years
Ended August 31,
|
|
Amount
|
|
2009
|
|
$ |
2,737 |
|
2010
|
|
|
2,725 |
|
2011
|
|
|
2,707 |
|
2012
|
|
|
2,707 |
|
2013
|
|
|
2,707 |
|
Thereafter
|
|
|
12,182 |
|
Total
|
|
$ |
25,765 |
|
PRICESMART,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
NOTE
13 – LEASES
The
Company is committed under non-cancelable operating leases for rental of
facilities and land. These leases expire or become subject to renewal between
2009 and 2031. The following table summarizes the components of rental
expense charged for operating leases of open locations for the 12 months ended
August 31, 2008, 2007 and 2006 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum
rental payments
|
|
$ |
5,587 |
|
|
$ |
5,163 |
|
|
$ |
4,172 |
|
Deferred
rent accruals
|
|
|
757 |
|
|
|
454 |
|
|
|
372 |
|
Total
straight line rent expense
|
|
|
6,344 |
|
|
|
5,617 |
|
|
|
4,544 |
|
Contingent
rental payments
|
|
|
2,148 |
|
|
|
3,068 |
|
|
|
3,713 |
|
Rental
expense
|
|
$ |
8,492 |
|
|
$ |
8,685 |
|
|
$ |
8,257 |
|
As
of August 31, 2008, our warehouse clubs occupied approximately a total
of 1,577,755 square feet of which 410,249 square feet were on leased property.
The following is a summary of the warehouse clubs located on leased
property:
|
|
|
|
|
|
|
|
|
Approximate
Square
Footage
|
Current
Lease
Expiration
Date
|
Remaining
Options
to
Extend
|
Via
Brazil, Panama
|
Warehouse
Club
|
December 4, 1997
|
68,696
|
October
31, 2026
|
10
years
|
Miraflores, Guatemala
|
Warehouse
Club
|
April
8, 1999
|
66,059
|
December 31, 2020
|
5
years
|
Pradera, Guatemala
|
Warehouse
Club
|
May
29, 2001
|
48,438
|
May
28, 2025
|
5 year option/
indefinite periods
|
Tegucigalpa, Honduras
|
Warehouse
Club
|
May
31, 2000
|
64,735
|
May
30, 2020
|
none
|
Oranjestad,
Aruba
|
Warehouse
Club
|
March
23, 2001
|
54,229
|
March
23, 2021
|
10
years
|
Port of Spain, Trinidad
|
Warehouse
Club
|
December
5, 2001
|
54,046
|
July
5, 2031
|
none
|
St.
Thomas, U.S.V.I.
|
Warehouse
Club
|
May
4, 2001
|
54,046
|
February
28, 2020
|
10
years
|
Barbados
|
Storage
Facility
|
May
5, 2006
|
4,800
|
April
30, 2009
|
1
year
|
San
Diego, CA
|
Corporate
Headquarters
|
April
1, 2004
|
35,000
|
March
31, 2011
|
5
years
|
Miami,
FL
|
Distribution
Facility
|
March
1, 2008
|
200,709
|
August
31, 2018
|
10
years
|
Miami,
FL
|
Distribution
Facility
|
September
1, 2001
|
31,575
|
February
28, 2010
|
18
months
|
(1)
|
Former
clubs located in Guam and Guatemala are not included; these warehouse
clubs were closed in fiscal 2004 and 2003, respectively. The respective
land and building are currently subleased to
third-parties.
|
PRICESMART,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Future
minimum lease commitments for facilities under these leases with an initial term
in excess of one year are as follows (in thousands):
Years
Ended August 31,
|
|
Open
Locations
(1)
|
|
|
Closed
Location(2)
|
|
2009
|
|
$ |
6,287 |
|
|
$ |
367 |
|
2010
|
|
|
6,034 |
|
|
|
355 |
|
2011
|
|
|
5,560 |
|
|
|
296 |
|
2012
|
|
|
5,419 |
|
|
|
296 |
|
2013
|
|
|
5,553 |
|
|
|
296 |
|
Thereafter
|
|
|
65,703 |
|
|
|
3,560 |
|
Total
(3)
|
|
$ |
94,556 |
|
|
$ |
5,170 |
|
(1)
|
Operating
lease obligations have been reduced by approximately $545,000 to reflect
sub-lease income.
|
(2)
|
The
net present value of the closed Guatemala warehouse club lease obligation
(net of expected sublease income) has been recorded on the consolidated
balance sheet under the captions “Other accrued expenses” and “Accrued
closure costs.”
|
(3)
|
The
total excludes payments for the discontinued operations in Guam. The
projected minimum payments excluded for Guam are approximately $3.4
million, however sublease income for this location is also approximately
$3.4 million, yielding no net projected
obligation.
|
The
Company also has one equipment lease (IBM). The Company’s annual future payment
for this lease is approximately $107,000; this lease expires on November 30,
2010.
The
Company has operating lease agreements for rental of excess building space for
which the Company is recognizing rental income.
The
following is a schedule of future minimum rental income on non-cancelable
operating leases as of August 31, 2008:
Years
Ended August 31,
|
|
Amount
in thousands
|
|
2009
|
|
$ |
1,632 |
|
2010
|
|
|
1,569 |
|
2011
|
|
|
1,241 |
|
2012
|
|
|
845 |
|
2013
|
|
|
806 |
|
Thereafter
|
|
|
7,303 |
|
Total
|
|
$ |
13,396 |
|
NOTE
14 – INTEREST RATE SWAP
On
February 13, 2008, the Company entered into an interest rate swap agreement
with Citibank N.A. for a notional amount of $4.5 million. This swap agreement
was entered into in order to fix the interest rate of a $4.5 million loan
obtained for the Barbados real estate acquisition, as disclosed in
Note 12. The loan has a variable interest rate of LIBOR plus a margin of 1.5%.
Under the swap agreement, the Company will pay a fixed rate of 5.22% for a term
of approximately five years (February 18, 2008 through May 15, 2013). The
notional amount of $4.5 million is scheduled to amortize to $2.25 million over
the term of the swap. The LIBOR reset dates for the $4.5 million of term loan
debt and the notional amount of $4.5 million on the interest rate swap are
effective semi-annually on November 15 and May 15. As the interest
rate swap is fixed at 5.22%, the difference between the actual floating rate
(six month LIBOR plus margin of 1.5%) and the fixed rate of 5.22% applied
against the notional amount of the swap each semester is paid to or received
from Citibank N.A.
PRICESMART,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
As of
August 31, 2008 the receive-variable/pay-fixed interest rate swap was designated
as an effective cash flow hedge. The fair value recorded in Accumulated
Other Comprehensive loss was approximately $8,000, and the net interest
settlement payment due to Citibank N.A. was $12,000. The fair value of this
interest rate swap has been measured in accordance with Level 2 inputs
of quoted prices in active markets for similar assets adjusted for location and
market conditions and as of August 31, 2008, is as follows (amounts in
thousands):
|
|
Notional
Amount
|
|
|
(Loss)
on
Fair
Value as of
|
|
|
|
August
31, 2008
|
|
|
August
31, 2008
|
|
Receive
variable-rate, pay fixed-rate interest rate swaps designated as cash flow
hedge
|
|
$ |
4,275 |
|
|
$ |
(8 |
) |
Total
|
|
$ |
4,275 |
|
|
$ |
(8 |
) |
NOTE
15 – ACQUISITION OF BUSINESS
The
Company’s business combinations are accounted for under the purchase method of
accounting, and include the results of operations of the acquired business from
the date of acquisition. Net assets of the acquired business are recorded at
their fair value at the date of the acquisition. Any excess of the purchase
price over the fair value of tangible net assets acquired is included in
goodwill in the accompanying consolidated balance sheets.
In
October 2007, the Company acquired all of the common shares of Regan Lodge, the
company that had leased to it the real estate and building upon which the
Barbados warehouse club is located. The Company acquired this company for
approximately $12.0 million. The fair values of the assets acquired and the
liabilities assumed in connection with the acquisition were estimated in
accordance with SFAS No. 141, “Business Combinations” utilizing valuation
techniques consistent with the market approach, utilizing observable inputs
defined as Level 3 inputs to determine the pricing of the assets. The
Company used a third-party valuation firm to assist management in estimating
these fair values. No goodwill was recorded for this acquisition and no other
intangible assets were acquired that would require fair value estimates under
SFAS No. 142, “Goodwill and Other Intangible Assets.”
The
purchase price was allocated as follows to the fair values of the net tangible
assets acquired (in thousands):
Land
|
|
$ |
4,965 |
|
Building
and improvements
|
|
|
6,948 |
|
Fixtures
and equipment
|
|
|
85 |
|
Other
Assets
|
|
|
14 |
|
Liabilities
|
|
|
(170 |
) |
Total
Purchase Price, Net of Cash
|
|
|
11,842 |
|
Cash
Acquired
|
|
|
156 |
|
Total
Purchase Price
|
|
$ |
11,998 |
|
The
primary operations of the company acquired was the leasing of the real estate
and building upon which the Barbados warehouse club is located. Upon
acquisition, these operations will cease; therefore, no pro-forma financial
statements of income are required to be presented.
PRICESMART,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
NOTE
16 – PSC SETTLEMENT
On
February 11, 2008 the Company announced that it had entered into a
Settlement Agreement and Release with PSC, S.A. (“PSC”), Tecnicard, Inc. and
Banco de la Produccion, and their affiliates (collectively “PSC Parties”), which
resolves the previously disclosed disputes that had been pending between the
Company and the PSC Parties. The terms of the Settlement Agreement and Release
include: (i) a dismissal of all pending litigation and a mutual release of
all claims; (ii) the Company’s acquisition of PSC’s 49% interest in PSMT
Nicaragua (BVI), Inc. resulting in the Company being the sole owner of the
PriceSmart Nicaragua business; (iii) termination of other agreements
between the Company and the PSC Parties resulting in, among other things, banks
affiliated with the PSC parties vacating the PriceSmart warehouses by mid-April
2008; (iv) certain real estate conveyances between the parties relating to
properties adjacent to the PriceSmart warehouse clubs in Managua, Nicaragua and
Zapote, San Jose, Costa Rica, including the Company’s acquisition from PSC of a
land parcel at the Zapote site and the Company’s conveyance to PSC of two land
parcels at the Managua site; and (v) an agreement that, subject to PSC’s
commercially reasonable efforts to sell, during a 60 day period commencing
February 8, 2008, 679,500 shares of the Company’s common stock held by PSC
at a price at or above $25 per share, the Company and PSC would enter into a Put
Agreement covering any of the 679,500 shares that PSC owned at the end of such
period. The Put Agreement, in turn, would require PSC to use commercially
reasonable efforts to sell the shares subject to the Put Agreement during a
period of 60 days from the date of the Put Agreement. At the end of such period,
PSC could require the Company to purchase at $25 per share any of those shares
which may remain unsold at the conclusion of that period. Edgar A. Zurcher, who
had been a director of the Company since November 2000, is President and a
director of PSC, S.A. As required by the terms of the Settlement Agreement and
Release, Mr. Zurcher resigned from the Company’s board of directors on
February 8, 2008.
As of
April 9, 2008, the date of the Put Agreement, PSC held 330,708 shares of
the Company’s common stock. The Put Agreement required PSC to use commercially
reasonable efforts to sell these remaining shares during a 60 day period
commencing as of the date of the Put Agreement. At the conclusion of such
period, and subject to the terms and conditions of the Put Agreement, PSC could
require the Company to purchase at $25.00 per share any of those shares that PSC
had not successfully sold. On June 11, 2008, PSC notified the Company
that 64,739 shares remained unsold and it intended to exercise its right under
the Put Agreement with respect to those remaining shares. The Company
as of August 31, 2008 repurchased 58,285 of these shares with 6,454 shares
remaining to be purchased. The Company recorded the purchase of these
shares as a purchase of treasury stock at the average market value on the day of
purchase. The Company recorded approximately $1.3 million purchase of
treasury stock related to the PSC settlement in fiscal year 2008. The
difference between the average market value used to record treasury stock and
the $25.00 put price was changed to additional paid in capital. The
amount charged was approximately $115,000. On September 9, 2008, (fiscal year
2009), the Company completed the purchase of the remaining 6,454
shares.
Payments
made by the Company pursuant to the settlement agreement for items (i), (ii),
(iii), and (iv) were $17.9 million from available operating funds. Of this
amount, $350,000 was deposited into escrow and was recorded as restricted cash,
as final release of these funds is subject to performance by the PSC Parties of
certain actions. As of August 31, 2008 approximately $250,000 remains held in
escrow. Additional non-cash expenses pursuant to this agreement included the
write-off of PSC related accounts receivable that total approximately
$530,000. The Company incurred additional non-cash expenses of
approximately $56,000 for the write-off of fixed assets and other assets related
to the PSC settlement. Cash expenses incurred for escrow fees related
to the settlement for approximately $16,500 were also recorded.
In
accordance with SFAS 5, “Accounting for Contingencies,” in the fourth
quarter of fiscal year 2007, the Company established a reserve of $5.5 million
related to the potential settlement of this pending litigation. The amount of
the reserve was equal to management’s estimate of the potential impact of a
global settlement on the Company’s consolidated net income.
PRICESMART,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
As a
result of the executed legal settlement with PSC, S.A. and related entities, the
following items were recorded:
|
•For
the fiscal year 2008, additional reserves of approximately $1.3 million
were recorded for costs associated with the settlement for costs incurred
in excess of the initial $5.5 million reserve established in fiscal year
2007, for both the cash and non-cash settlement costs pursuant to the
elements of the settlement agreement described at clauses (i) and
(iii) of the description of the settlement agreement and release with
PSC, S.A. and related entities.
|
|
•For
the fiscal year 2008, the Company recorded approximately $120,000 in costs
to record the fair value of the put
arrangement.
|
|
•As
of August 31, 2008, in accordance with the Company’s accounting
policy, the Company recorded the re-classification of approximately
$161,000 from additional paid in capital to a liability account, common
stock subject to put agreement, pursuant to item (v) of the
description of the settlement agreement and release with PSC, S.A. and
related entities for the remaining 6,454 shares remaining to be
purchased.
|
|
•In
the fiscal year 2008, the Company recorded an income tax benefit of
approximately $1.7 million as a result of the approximately $6.8 million
recorded for settlement costs pursuant to item (i) and (iii) of
the settlement agreement and release with PSC, S.A. and related entities.
In fiscal year 2007, when the Company originally accrued for the
settlement cost, the Company was not able to estimate the tax benefit
component of the settlement cost with an adequate level of
certainty.
|
Pursuant
to the elements of the agreement described at items (ii) and
(iv) above, the Company has recorded the following
transactions. These transactions were an element of the settlement
agreement, but were not part of the measurement used to determine the amount of
the settlement of the preexisting relationship. Therefore these
transactions had no effect on any settlement gain or loss recognized and
recorded within the Company’s statement of income:
|
•The
Company’s acquisition of PSC’s 49% interest in PSMT Nicaragua (BVI), Inc.,
resulted in the Company being the sole owner of the PriceSmart Nicaragua
business. The Company’s business combinations are accounted for under SFAS
141, “Business Combinations.” An acquisition of a minority interest in a
subsidiary is considered a step acquisition. As of the date of the step
acquisition, the historical basis of the minority interest balance of the
selling minority shareholder is reduced to the extent of the percentage
interest sold. Net assets of the acquired business are recorded at their
fair value at the date of the acquisition. The excess of the purchase
price over the fair value of tangible net assets acquired is included in
goodwill in the accompanying consolidated balance sheets. The Company
recorded the purchase of the remaining 49% minority interest of its
Nicaragua subsidiary in February 2008. The consideration provided in
connection with this acquisition consisted of $10.2 million. The purchase
price of $10.2 million was allocated to minority interest for
approximately $3.1 million and to goodwill for approximately $7.1 million,
in accordance with SFAS 141. The Company determined the fair value
measurement for this transaction by utilizing valuation techniques
consistent with the market approach, utilizing observable inputs defined
as Level 3 inputs to determine the pricing of the
assets.
|
|
•The
Company recorded the purchase of the acquisition of a land parcel at the
Zapote, Costa Rica warehouse club site from PSC for $1.0 million. The
Company also recorded the purchase of easement rights relating to
properties adjacent to the PriceSmart warehouse club in Managua, Nicaragua
for $250,000. The Company determined the fair value measurement for this
transaction by utilizing valuation techniques consistent with the market
approach, utilizing observable inputs defined as Level 2 inputs of quoted
prices in active markets for similar assets adjusted for location and
market conditions.
|
PRICESMART,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
NOTE
17 – RELATED-PARTY TRANSACTIONS
Sale of Common Stock: In
October 2005, Sol and Helen Price Trust, a trust affiliated with Sol Price (a
significant shareholder in the Company), purchased 168,539 shares of common
stock of the Company at a price of $8.90 per share for a total purchase price of
$1.5 million.
Relationship with SD Revitalization:
During the fourth quarter of fiscal year 2006, the Company sold
approximately $34,000 of school supplies to SD Revitalization, a charitable
group affiliated with Robert E. Price and Sol Price. The Company did not
sell any school supplies to this charitable group in fiscal year 2007 or
2008.
Relationship with PS Ivanhoe:
On October 24, 2005, the Company borrowed $12.5 million from PS Ivanhoe,
LLC, a California limited liability company (“PS Ivanhoe”), which is managed by
the Price Group pursuant to a Promissory Note (the “Note”). The Note bears
interest at a rate of 8% per annum and has a term of two years. All unpaid
principal and accrued interest was due and payable in full on October 23,
2007 (the “Maturity Date”). Any amounts outstanding under the Note from and
after the Maturity Date bear interest at a rate equal to the lesser of
12% per annum or the maximum interest rate allowed by law. To secure the
Company’s obligations under the Note, the Company and PS Ivanhoe entered into a
Pledge and Security Agreement pursuant to which the Company granted to PS
Ivanhoe a security interest in all of the issued and outstanding shares of stock
(and all ownership rights with respect thereto) in PriceSmart Real Estate, S.A.,
the Company’s wholly owned Panamanian subsidiary. On June 13, 2006, the
promissory note entered with PS Ivanhoe was repaid. The Company paid
approximately $642,000 in interest on the promissory note.
Use of Private Plane: From
time to time members of the Company’s management have had access to use private
planes covered within an “original use agreement” and a secondary “Citation XLS
aircraft agreement.” The planes used with respect to these agreements are owned
in part by PFD Ivanhoe, Inc. (“PFD Ivanhoe”) and are used by the Company to
travel to business meetings in Central America and the Caribbean. The Price
Group owns 100% of the stock of PFD Ivanhoe, and Sol Price is an officer of PFD
Ivanhoe. The Price Group’s members include Sol Price, Robert E. Price, Murray
Galinson and Jack McGrory. As noted above, Sol Price is a significant
stockholder in the Company. Robert Price is the Company's Chairman and
Chief Executive Officer. Mr Galinson and Mr. McGrory are members of the
Board of Directors and Mr. McGrory is an employee of the Company. The
“original use agreement” was in place through February 23, 2007 and covered
the use of all planes. After February 23, 2007 this agreement
continued in place for all planes with the exception of the Citation XLS
Aircraft which is now covered under a separate “Citation XLS aircraft
agreement.” Under the “original use agreement” if the passengers are solely
PriceSmart, Inc. personnel, then the Company reimburses PFD Ivanhoe for a
portion of the fixed management fee and additional expenses incurred by PFD
Ivanhoe incurred as a result of the hours flown including direct charges
associated with the use of the plane, landing fees, catering and international
fees. If the passengers are not solely PriceSmart, Inc. personnel, the
Company has an agreement to reimburse PFD Ivanhoe for use of other aircraft
based on the amounts the passengers would have paid if they had flown a
commercial airline if one or more of the passengers is a member of the Price
Group (including Robert E. Price). The Company paid approximately
$77,000, $158,000, and $205,000 for fiscal years ended August 31,
2008, 2007, and 2006, respectively, for these services. On February 23,
2007, the Company entered into the “Citation XLS aircraft agreement” with PFD
Ivanhoe to purchase its six and one quarter percent (6.25%) undivided
interest in a Citation XLS Aircraft for approximately $658,000. This entitles
the Company to 50 hours of flight time per year.
Relationships with Edgar Zurcher:
Edgar Zurcher was a director of the Company from November 2000 until
February 2008. As required by the Settlement Agreement and Release,
Mr. Zurcher resigned from the Company’s board of directors on
February 8, 2008 (see Note 12 – PSC Settlement). The Company has
accordingly recorded and disclosed related-party expense or income related to
the relationships with Edgar Zurcher for the first six months of fiscal year
2008 and fiscal year 2007 and 2006. Mr. Zucher is a partner in a law firm
that the Company utilizes in certain legal matters. The Company incurred legal
expenses with this entity of approximately $1,000, $64,000 and $67,000 during
the first six months of fiscal year 2008 and for fiscal years 2007 and 2006,
respectively. Mr. Zurcher is also a director of a company that owns 40% of
Payless ShoeSource Holdings, Ltd., which rents retail space from the
Company. The Company has recorded approximately $398,000, $808,000 and
$762,000 in rental income for this space during the first six months of fiscal
year 2008 and for fiscal years 2007 and 2006,
respectively. Mr. Zurcher is also a director of Banco Promerica, from
which the Company has recorded approximately $148,000, $276,000 and $265,000 of
rental income during the first six months of fiscal year 2008 and for
fiscal
years 2007 and 2006, respectively, for space leased to it by the
Company. The Company also received approximately $647,000 and $938,000 in
incentive fees on a co-branded credit card the Company had with Banco Promerica
during fiscal years 2007 and 2006. No incentive fees were recorded in fiscal
year 2008. The Company received a one-time refund of approximately
$500,000 and $400,000 for an accumulated marketing fund related to the
co-branded credit card with Banco Promerica in fiscal years 2007 and 2006. No
refund related to the accumulated marketing fund was recorded in fiscal year
2008. On March 22, 2007, the Company informed certain entities with which
Mr. Zurcher is affiliated, that the Company was not renewing the Company’s
credit card relationship with those entities because the Company had determined
that another credit card provider was more suitable for the future needs and
expectations of its members. In response, PSC, S.A. and related entities
disputed the Company’s right to terminate. On February 11, 2008 the Company
announced that it had entered into a Settlement Agreement and Release with PSC,
S.A. (“PSC”), Tecnicard, Inc. and Banco de la Produccion, and their affiliates
(collectively “PSC Parties”), which resolves the previously disclosed disputes
that had been pending between the Company and the PSC Parties. As required by
the terms of the Settlement Agreement and Release, Mr. Zurcher resigned
from the Company’s board of directors on February 8, 2008. (See Note 16-
PSC Settlement).
PRICESMART,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Relationship with Grupo Gigante, S.A.B. de C.V. (“Gigante”): In January 2002, the
Company entered into a joint venture agreement with Gigante to initially open
four PriceSmart warehouse clubs in Mexico (“PSMT Mexico, S.A. de C.V.”). Due to
the historical operating losses and management's assessment the Company and
Gigante decided to close the warehouse club operations of PSMT Mexico, S.A. de
C.V. ("PSMT Mexico") effective February 28, 2005. The joint venture sold
two of the three warehouse clubs, consisting of land and buildings, in September
2005. On October 31, 2007, the Company sold its 50% interest in PSMT Mexico
for $2.0 million in cash to Gigante. The sales price reflected the net book
value of the Company’s investment in PSMT Mexico as of August 31,
2007. Gigante owns approximately 1.7 million shares of common stock of the
Company as of June 30, 2008. In
addition, Gonzalo Barrutieta who is a director of the Company since February,
2008, was employed in several capacities with Gigante from 1994 to 2006,
most recently as Director of Real Estate and New Business Development.
Since 1994 he has served as a member of the board of directors of
Gigante.
Relationship with PriceSmart Mexico:
The Company has purchased furniture and fixtures from the closed Mexico
warehouse clubs utilizing cash, an advance payment of $750,000 and offsetting
the $1.0 million note and other receivables owed by PriceSmart Mexico. At
August 31, 2007 and 2006, the aggregate amount of equipment purchased from
Mexico was approximately $30,000 and $2.3 million, respectively.
Relationships with Price Charities:
During fiscal year 2008, the Company sold approximately $67,000 of
supplies to Price Charities, a charitable group affiliated with Robert E. Price
and Sol Price. The Company did not sell any supplies to this charitable group in
fiscal years 2007 and 2006.
The
Company believes that each of the related-party transactions described above
were on terms that the Company could have obtained from unaffiliated third
parties.
NOTE
18 – ACQUISITION OF MINORITY INTEREST
The
Company’s business combinations are accounted for under the purchase method of
accounting, and include the results of operations of the acquired business from
the date of acquisition. Net assets of the acquired business are recorded at
their fair value at the date of the acquisition. The excess of the purchase
price over the fair value of tangible net assets acquired is included in
goodwill in the accompanying consolidated balance sheets.
During
fiscal year 2006, the Company purchased the minority interests of its Jamaica
subsidiary in order to strengthen the Company’s position for the future and
consequently increased its ownership percentage in its Jamaica subsidiary from
67.5% to 100%. The Company acquired the minority interests of its three
partners, Big Box Sales, Ltd., Chancellor Holdings Limited, and PSC, S.A., whose
ownership percentages were 15%, 10% and 7.5% respectively, on November 17,
2005, November 15, 2005, and December 23, 2005, respectively. The
consideration provided in connection with this acquisition consisted of $2.4
million in cash and forgiveness of a $413,000 note receivable. The purchase
price of $2.8 million was allocated to minority interest of $556,000, $126,000
to buildings and $2.1 million to goodwill. Also, during the second quarter of
fiscal year 2006, the Company purchased a 5% minority interest of its Trinidad
subsidiary from one of its partners and thereby increased its ownership
percentage in its Trinidad subsidiary from 90% to 95%. The consideration
provided in connection with this acquisition was $300,000, of which $132,000 was
allocated to minority interest and $168,000 was allocated to goodwill. The
goodwill related to these transactions has been allocated to the Caribbean
Operations segment.
PRICESMART,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
During
fiscal year 2008, as a result of the PSC Settlement, the Company purchased the
remaining 49% minority interest of its Nicaragua subsidiary from PSC. The
Company held 51% of the interest in Nicaragua immediately before the acquisition
and views the acquisition of the remaining 49% from PSC as a business
combination achieved in stages or a step acquisition. The
consideration provided in connection with this acquisition consisted of $10.2
million of which $3.1 million was allocated to minority interest and $7.1
million was allocated to goodwill. Also, during the fourth quarter of fiscal
year 2008, the Company acquired the 10% minority interest of its Aruba
subsidiary, Island Foods and Distributors N.V. (“IFD”), from Nithyananda
Enterprises thereby increasing its ownership percentage in its Aruba
subsidiary to 100%. The Company held 90% of the interest in IFD immediately
before the acquisition and views the acquisition of the remaining 10% from NEL
as a business combination achieved in stages or a step acquisition. The Company
set the acquisition date as June 30, 2008. The Company agreed to repair the roof
on the Aruba warehouse club as compensation for the conveyance of the 10%
interest in IFD. Therefore, the Company has recorded consideration provided as
$300,000 which is the maximum cost that the Company is committed to spend on the
roof repair. Of this amount, $313,000 was allocated to goodwill and
$13,000 to minority interest. The goodwill related to the Nicaragua and Aruba
minority interest has been allocated to the Central American Operations segment
and the Caribbean Operations segment, respectively.
NOTE
19 – UNCONSOLIDATED AFFILIATE
On
October 31, 2007, Grupo Gigante S.A. de C.V. acquired all of PriceSmart,
Inc.’s 164,046 shares or 50% interest in PSMT Mexico (a joint venture that had
previously operated three PriceSmart warehouse clubs) for $2.0 million, thereby
assuming 100% control and ownership of PSMT Mexico. Consequently the Company
recorded a $2.6 million impairment charge in fiscal year 2007, related to the
write down of the Company’s interest in its Mexico joint venture to its revised
net realizable value. The impairment charge included $1.7 million in accumulated
unrealized loss associated with currency changes recorded as “Accumulated other
comprehensive loss” on the consolidated balance sheet and $892,000 related to
the amounts carried as “Investment in unconsolidated subsidiaries.” While the
Company believes that the value of the investment previously indicated on the
consolidated balance sheet would over time have been realized, there were
concerns about the Company’s control of the actions necessary to achieve those
outcomes given that a substantial portion of the realizable assets related to
refunds from the Mexican tax authorities for pre-paid taxes. The Company,
therefore, concluded that it was in the Company’s best interest to complete the
divestment of its Mexico holdings and reduce its involvement in activities not
related to the future growth of the membership warehouse business in its
targeted markets. The Company was relieved of all its obligations under letters
of credit granted in favor of Mexican tax authorities totaling $1.9 million in
connection with this disposal. In the first quarter of fiscal year 2008, the
Company recorded a loss on disposal of $111,000 to write off the equity income
of $111,000 recognized for the first two months of the quarter. The income
included foreign currency translation gain of $129,000 and a net loss of
$18,000.
The
summarized financial information of the unconsolidated affiliate is as
follows:
|
|
As
of August 31,
|
|
|
|
2008
|
|
|
2007
|
|
Current
assets
|
|
$ |
— |
|
|
$ |
5,776 |
|
Noncurrent
assets
|
|
$ |
— |
|
|
$ |
5,788 |
|
Current
liabilities
|
|
$ |
— |
|
|
$ |
907 |
|
Noncurrent
liabilities
|
|
$ |
— |
|
|
$ |
129 |
|
|
|
Years
Ended August 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Revenues
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
88 |
|
Cost
of Goods Sold
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
20 |
|
Net
Loss
|
|
$ |
(35 |
) |
|
$ |
(590 |
) |
|
$ |
(193 |
) |
PRICESMART,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
NOTE
20 – SEGMENTS
The
Company is principally engaged in international membership shopping warehouse
clubs operating primarily in Central America and the Caribbean. The Company
operates in three segments based on geographic area and measures performance on
operating income (loss). Segment amounts are presented after converting to U.S.
dollars and consolidating eliminations. Certain revenues and operating costs
included in the United States segment have not been allocated, as it is
impractical to do so. The Mexico joint venture is not segmented for the periods
presented and is included in the United States segment. The Company's reportable
segments are based on management responsibility. For fiscal year 2008, the
United States, Central American and Caribbean Operations operating income
includes $120,000, $1.1 million, and $110,000 charge related to the settlement
litigation and the Put agreement pursuant to the PSC Settlement,
respectively. For fiscal year 2007, the Central American and
Caribbean Operations operating income includes approximately $5 million and
$500,000 charge respectively, related to the settlement litigation pursuant to
the PSC Settlement (see Note 16 – PSC Settlement).
|
|
United
States
Operations
|
|
|
Central
American
Operations
|
|
|
Caribbean
Operations
|
|
|
Total
|
|
Year
Ended August 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenue
|
|
$ |
1,564 |
|
|
$ |
670,822 |
|
|
$ |
447,490 |
|
|
$ |
1,119,876 |
|
Asset
impairment and closure cost
|
|
|
— |
|
|
|
(1,174 |
) |
|
|
32 |
|
|
|
(1,142 |
) |
Operating
income
|
|
|
3,730 |
|
|
|
28,667 |
|
|
|
16,029 |
|
|
|
48,426 |
|
Interest
income
|
|
|
883 |
|
|
|
231 |
|
|
|
79 |
|
|
|
1,193 |
|
Interest
expense
|
|
|
— |
|
|
|
(755 |
) |
|
|
(690 |
) |
|
|
(1,445 |
) |
Income
tax expense
|
|
|
(470 |
) |
|
|
(6,293 |
) |
|
|
(2,361 |
) |
|
|
(9,124 |
) |
Income
from continuing operations
|
|
|
4,044 |
|
|
|
21,468 |
|
|
|
12,698 |
|
|
|
38,210 |
|
Discontinued
operations, net of tax
|
|
|
(104 |
) |
|
|
—
|
|
|
|
—
|
|
|
|
(104 |
) |
Depreciation
and amortization
|
|
|
(806 |
) |
|
|
(6,217 |
) |
|
|
(4,347 |
) |
|
|
(11,370 |
) |
Goodwill
|
|
|
—
|
|
|
|
33,639 |
|
|
|
5,609 |
|
|
|
39,248 |
|
Assets
of discontinued operations
|
|
|
1,247 |
|
|
|
—
|
|
|
|
—
|
|
|
|
1,247 |
|
Identifiable
assets
|
|
|
58,008 |
|
|
|
254,087 |
|
|
|
137,868 |
|
|
|
449,963 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended August 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenue
|
|
$ |
1,342 |
|
|
$ |
541,866 |
|
|
$ |
345,593 |
|
|
$ |
888,801 |
|
Asset
impairment and closure cost
|
|
|
— |
|
|
|
(1,235 |
) |
|
|
(315 |
) |
|
|
(1,550 |
) |
Operating
income
|
|
|
6,231 |
|
|
|
13,281 |
|
|
|
8,464 |
|
|
|
27,976 |
|
Interest
income
|
|
|
1,292 |
|
|
|
221 |
|
|
|
115 |
|
|
|
1,628 |
|
Interest
expense
|
|
|
(261 |
) |
|
|
(354 |
) |
|
|
(173 |
) |
|
|
(788 |
) |
Income
tax expense
|
|
|
(3,930 |
) |
|
|
(6,905 |
) |
|
|
(1,502 |
) |
|
|
(12,337 |
) |
Income
(loss) from continuing operations
|
|
|
428 |
|
|
|
5,666 |
|
|
|
6,689 |
|
|
|
12,783 |
|
Discontinued
operations, net of tax
|
|
|
143 |
|
|
|
— |
|
|
|
— |
|
|
|
143 |
|
Depreciation
and amortization
|
|
|
(684 |
) |
|
|
(5,408 |
) |
|
|
(3,357 |
) |
|
|
(9,449 |
) |
Goodwill
|
|
|
— |
|
|
|
26,279 |
|
|
|
5,373 |
|
|
|
31,652 |
|
Assets
of discontinued operations
|
|
|
1,380 |
|
|
|
— |
|
|
|
— |
|
|
|
1,380 |
|
Identifiable
assets
|
|
|
60,753 |
|
|
|
225,263 |
|
|
|
109,403 |
|
|
|
395,419 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended August 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenue
|
|
$ |
130 |
|
|
$ |
449,820 |
|
|
$ |
284,723 |
|
|
$ |
734,673 |
|
Asset
impairment and closure cost
|
|
|
— |
|
|
|
(996 |
) |
|
|
(838 |
) |
|
|
(1,834 |
) |
Operating
income
|
|
|
1,678 |
|
|
|
12,963 |
|
|
|
3,489 |
|
|
|
18,130 |
|
Interest
income
|
|
|
1,555 |
|
|
|
275 |
|
|
|
129 |
|
|
|
1,959 |
|
Interest
expense
|
|
|
(802 |
) |
|
|
(1,247 |
) |
|
|
(1,142 |
) |
|
|
(3,191 |
) |
Income
tax expense
|
|
|
(5,664 |
) |
|
|
(1,783 |
) |
|
|
(665 |
) |
|
|
(8,112 |
) |
Loss
from continuing operations
|
|
|
(3,335 |
) |
|
|
9,726 |
|
|
|
1,793 |
|
|
|
8,184 |
|
Discontinued
operations, net of tax
|
|
|
3,674 |
|
|
|
— |
|
|
|
— |
|
|
|
3,674 |
|
Depreciation
and amortization
|
|
|
(587 |
) |
|
|
(5,370 |
) |
|
|
(3,661 |
) |
|
|
(9,618 |
) |
Goodwill
|
|
|
— |
|
|
|
26,350 |
|
|
|
5,520 |
|
|
|
31,870 |
|
Assets
of discontinued operations
|
|
|
1,594 |
|
|
|
— |
|
|
|
— |
|
|
|
1,594 |
|
Identifiable
assets
|
|
|
64,927 |
|
|
|
197,364 |
|
|
|
96,752 |
|
|
|
359,043 |
|
PRICESMART,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
NOTE
21 – SUBSEQUENT EVENTS (UNAUDITED)
Purchases of Real
Estate
On
September 24, 2008, PriceSmart acquired 13,162 square meters of real estate
in Panama City, Panama, upon which the Company plans to construct and operate a
new PriceSmart Warehouse Club. Typically, PriceSmart land requirements are
approximately 20,000 square meters, however the new Panama City location will be
constructed on two levels, parking at grade level and the building on the second
level. An existing PriceSmart Warehouse Club in Panama City, Panama (known as
the Los Pueblos Club) will be relocated to this new site, and the Company will
thereby continue to operate four Warehouse Clubs in Panama. It is currently
anticipated that the new PriceSmart Warehouse Club will open in the fall of
2009. The cost of the property is approximately $2.9
million.
Additionally,
on September 29, 2008 PriceSmart acquired 21,576 square meters of real
estate in Alajuela, Costa Rica (near San Jose), upon which the Company plans to
construct and operate a new PriceSmart Warehouse Club, which will be its fifth
in Costa Rica. It is currently anticipated that the new PriceSmart Warehouse
Club will open in the spring of 2009. The cost of the property is
approximately $3.7 million.
Joint
Venture Agreements
On
September 24, 2008 the Company entered into an agreement with an entity
controlled by local Panamanian businessmen to jointly own and operate a
Commercial Center adjacent to its new PriceSmart Warehouse Club, with the
Company and the Panamanian entity each owning a 50% interest in the Commercial
Center. On September 24, 2008, 38,331 square meters of real estate were
acquired, upon which the Center will be constructed. It is currently anticipated
that the Center will commence commercial operations in the fall of
2009. The Company invested approximately $4.6 million.
Additionally,
on September 29, 2008 the Company entered into an agreement with an entity
controlled by local Costa Rican businessmen to jointly own and operate a
Commercial Center adjacent to anticipated new PriceSmart Warehouse Club, with
the Company and the Costa Rican entity each owning a 50% interest in the
Commercial Center. On September 29, 2008, 21,576 square meters of real
estate were acquired, upon which the Center will be constructed. It is currently
anticipated the Center will commence commercial operations in the spring of
2009. The Company invested approximately $2.1 million.
The
Company will account for these investments under the equity method of
accounting, in which the Company reflects its proportionate share of the income
or loss from the joint venture.
PRICESMART,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
NOTE
22 – QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summarized
quarterly financial information for fiscal years 2008 and 2007 is as
follows:
Fiscal
Year 2008
|
|
Three
Months Ended,
|
|
|
Year Ended
|
|
(in
thousands, except per share data)
|
|
Nov. 30, 2007
|
|
|
Feb. 29, 2008
|
|
|
May 31, 2008
|
|
|
Aug. 31, 2008
|
|
|
Aug. 31, 2008
|
|
Total
net warehouse club and export sales
|
|
$ |
245,556 |
|
|
$ |
288,556 |
|
|
$ |
278,364 |
|
|
$ |
286,532 |
|
|
$ |
1,099,008 |
|
Cost
of goods sold
|
|
$ |
208,860 |
|
|
$ |
245,653 |
|
|
$ |
236,438 |
|
|
$ |
242,763 |
|
|
$ |
933,714 |
|
Income
from continuing operations
|
|
$ |
6,676 |
|
|
$ |
9,489 |
|
|
$ |
10,575 |
|
|
$ |
11,470 |
|
|
$ |
38,210 |
|
Discontinued
operations, net of tax
|
|
$ |
18 |
|
|
$ |
27 |
|
|
$ |
26 |
|
|
$ |
(175 |
) |
|
$ |
(104 |
) |
Net
income
|
|
$ |
6,694 |
|
|
$ |
9,516 |
|
|
$ |
10,601 |
|
|
$ |
11,295 |
|
|
$ |
38,106 |
|
Basic
income per share
|
|
$ |
0.23 |
|
|
$ |
0.33 |
|
|
$ |
0.37 |
|
|
$ |
0.39 |
|
|
$ |
1.32 |
|
Diluted
income per share
|
|
$ |
0.23 |
|
|
$ |
0.33 |
|
|
$ |
0.36 |
|
|
$ |
0.39 |
|
|
$ |
1.30 |
|
|
|
|
|
|
|
|
|
Fiscal
Year 2007
|
|
Three
Months Ended,
|
|
|
Year
Ended
|
|
(in
thousands, except per share data)
|
|
Nov.
30, 2006
|
|
|
Feb.
28, 2007
|
|
|
May
31, 2007
|
|
|
Aug.
31, 2007
|
|
|
Aug.
31, 2007
|
|
Total
net warehouse club and export sales
|
|
$ |
198,195 |
|
|
$ |
226,893 |
|
|
$ |
219,705 |
|
|
$ |
225,325 |
|
|
$ |
870,118 |
|
Cost
of goods sold
|
|
$ |
168,590 |
|
|
$ |
193,127 |
|
|
$ |
185,934 |
|
|
$ |
190,628 |
|
|
$ |
738,279 |
|
Income
(loss) from continuing operations
|
|
$ |
4,054 |
|
|
$ |
6,516 |
|
|
$ |
5,206 |
|
|
$ |
(2,993 |
) |
|
$ |
12,783 |
|
Discontinued
operations, net of tax
|
|
$ |
18 |
|
|
$ |
28 |
|
|
$ |
25 |
|
|
$ |
72 |
|
|
$ |
143 |
|
Net
income (loss)
|
|
$ |
4,072 |
|
|
$ |
6,544 |
|
|
$ |
5,231 |
|
|
$ |
(2,921 |
) |
|
$ |
12,926 |
|
Basic
income per share
|
|
$ |
0.14 |
|
|
$ |
0.23 |
|
|
$ |
0.18 |
|
|
$ |
(0.10 |
) |
|
$ |
0.45 |
|
Diluted
income per share
|
|
$ |
0.14 |
|
|
$ |
0.22 |
|
|
$ |
0.18 |
|
|
$ |
(0.10 |
) |
|
$ |
0.44 |
|
The
Company's common stock has been quoted and traded on the NASDAQ National Market
under the symbol “PSMT” since September 2, 1997. As of November 5,
2008, there were approximately 2,262 holders of record of the common
stock.
|
Dates
|
|
Stock
Price
|
|
|
From
|
To
|
|
High
|
|
|
Low
|
|
2008
CALENDAR QUARTERS
|
|
|
|
|
|
|
|
|
First
Quarter
|
9/1/07
|
11/30/07
|
|
$ |
31.80 |
|
|
$ |
22.61 |
|
Second
Quarter
|
12/1/07
|
2/29/08
|
|
|
33.30 |
|
|
|
21.66 |
|
Third
Quarter
|
3/1/08
|
5/31/08
|
|
|
29.23 |
|
|
|
21.48 |
|
Fourth
Quarter
|
6/1/08
|
8/31/08
|
|
|
25.25 |
|
|
|
18.02 |
|
|
|
|
|
|
|
|
|
|
|
|
2007
CALENDAR QUARTERS
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
9/1/06
|
11/30/06
|
|
$ |
17.91 |
|
|
$ |
11.91 |
|
Second
Quarter
|
12/1/06
|
2/28/07
|
|
|
20.64 |
|
|
|
14.01 |
|
Third
Quarter
|
3/1/07
|
5/31/07
|
|
|
20.88 |
|
|
|
13.31 |
|
Fourth
Quarter
|
6/1/07
|
8/31/07
|
|
|
26.93 |
|
|
|
19.17 |
|
Recent
Sales of Unregistered Securities
There
were no sales of unregistered securities during the quarter ended
August 31, 2008, except as reported on Current Reports on Form 8-K filed
during the quarter.
Directors
The table
below indicates the name, position with the Company and age of each
director:
Name
|
|
Position
|
|
Age
|
Robert
E. Price
|
|
Chairman
of the Board; Chief Executive Officer
|
|
66
|
Gonzalo
Barrutieta
|
|
Director
|
|
42
|
Murray
L. Galinson
|
|
Director
|
|
71
|
Katherine
L. Hensley
|
|
Director
|
|
71
|
Leon
C. Janks
|
|
Director
|
|
59
|
Lawrence
B. Krause
|
|
Director
|
|
78
|
Jose
Luis Laparte
|
|
President,
Director
|
|
42
|
Jack
McGrory
|
|
Director;
Executive Vice President – Real Estate and Development
|
|
59
|
Keene
Wolcott
|
|
Director
|
|
77
|
Information
Regarding Directors
Robert E. Price has been
Chairman of the Board of the Company since July 1994 and Chief Executive Officer
of the Company since April 2006. He served as Interim Chief Executive Officer of
the Company from April 2003 until April 2006 and also served as Interim
President of the Company from April 2003 until October 2004. Mr. Price
also served as President and Chief Executive Officer of the Company from July
1994 until January 1998. Additionally, Mr. Price served as Chairman of the
Board of Price Enterprises, Inc. (“PEI”) from July 1994 until November 1999 and
was President and Chief Executive Officer of PEI from July 1994 until September
1997. Mr. Price was Chairman of the Board of Price/Costco, Inc. (“Costco”)
from October 1993 to December 1994. From 1976 to October 1993, he was Chief
Executive Officer and a director of The Price Company (“TPC”). Mr. Price
served as Chairman of the Board of TPC from January 1989 to October 1993, and as
its President from 1976 until December 1990. Mr. Price has also been a
Manager of The Price Group since August 2000.
Gonzalo Barrutieta has been a
director of the Company since February, 2008. Mr. Barrutieta was employed in
several capacities with Grupo Gigante, S.A. de C. V. from 1994 to 2006, most
recently as Director of Real Estate and New Business Development. Since 1994, he
has served as a member of the board of directors of Grupo Gigante. From 2002
through 2005 Mr. Barrutieta was a Director of PriceSmart Mexico (formerly a
joint venture between the Company and Grupo Gigante), serving as Chief Executive
Officer of PriceSmart Mexico from 2003 to 2005. Mr. Barrutieta has also been a
Director of Hoteles Presidente since 2004, of Office Depot Mexico and Radio
Shack Mexico since 2005, and has served as President and Director of Operadora
IPC de Mexico since 2007.
Murray L. Galinson has been a
director of the Company since November 2000. Mr. Galinson served as a
director of PEI from August 1994 until November 1999 and from January 2001 until
September 2001, and served as a director of Price Legacy from September 2001 to
December 2004. Additionally, Mr. Galinson has been Chairman of the Board of
San Diego National Bank since May 1996 and has served as a director of San Diego
National Bank since its inception in 1981. Mr. Galinson also served as
President and Chief Executive Officer of San Diego National Bank from September
1984 to September 1997 and was Chairman of the Board and Chief Executive Officer
of SDNB Financial Corporation from 1985 to 1997. Mr. Galinson is the
immediate past chair of The Board of the California State University System.
Mr. Galinson has also been a Manager of The Price Group since August
2000.
Katherine L. Hensley has been
a director of the Company since July 1997 and served as a director of PEI from
December 1994 until July 1997. She is a retired partner of the law firm of
O’Melveny & Myers in Los Angeles, California. Ms. Hensley joined
O’Melveny & Myers in 1978 and was a partner from 1986 to February 1992.
From 1994 to 2000, Ms. Hensley served as a trustee of Security First Trust,
an open-end investment management company registered under the Investment
Company Act of 1940.
Leon C. Janks has been a
director of the Company since July 1997 and served as a director of PEI from
March 1995 until July 1997. He has been a partner in the accounting firm of
Green, Hasson & Janks LLP in Los Angeles, California since 1980 and
serves as its Managing Partner. Mr. Janks has extensive experience in
domestic and international business, serving a wide variety of clients in
diverse businesses, and is a certified public accountant.
Lawrence B. Krause has been a
director of the Company since July 1997. Mr. Krause has been a Professor
and the Director of the Korea-Pacific Program at the Graduate School of
International Relations and Pacific Studies at the University of California, San
Diego since 1986. He became a Professor Emeritus in 1997. Mr. Krause also
serves on the board of FFTW Funds, Inc., an open-ended management investment
company registered under the Investment Company Act of 1940, as amended, and on
advisory boards for a number of institutions including the Korea Economic
Institute, the Committee on Asian Economic Studies and the U.S. National
Committee for Pacific Economic Cooperation.
Jose Luis Laparte has been a
director of the Company since February 2008 and President of the Company since
October 2004, having served as a consultant for the Company from December 2003
to October 2004. Prior to joining the Company as a consultant, Mr. Laparte
worked more than 14 years for Wal-Mart Stores, Inc. in Mexico and the United
States in progressively responsible positions. From October 2002 through
September 2003, he served as Vice President of Sam’s International, where he
directed and managed the company’s operations, finance, sales, marketing,
product development and merchandising. From May 2000 to October 2002, he served
as Vice President, Wal-Mart de Mexico, responsible for sales and the expansion
of the Sam’s Club format in Mexico.
Jack McGrory has been a
director of the Company since November 2000 and has been Executive Vice
President – Real Estate and Development since December 2006. Mr. McGrory
served as Chairman of the Board of Price Legacy from September 2001 until
December 2004, served as President and Chief Executive Officer of Price Legacy
from October 2003 until December 2004, and was President and Chief Executive
Officer of PEI from September 1997 until November 1999. Mr. McGrory also
serves as a director of the San Diego Padres, L.P. and was its Executive Vice
President and Chief Operating Officer from September 1999 until August 2000.
From March 1991 through August 1997, Mr. McGrory served as City Manager of
San Diego. Mr. McGrory has also been a Manager of The Price Group since
August 2000.
Keene Wolcott has been a
director of the Company since October 2006. Mr. Wolcott has been President
of Wolcott Investments, Inc., a private investment company, since 1975.
Mr. Wolcott also served as a director of Price Legacy from September 2001
until December 2004 and served as a director of The Price REIT, Inc. from
January 1995 until 1998. From 1969 to 1973, Mr. Wolcott served as Chief
Executive Officer of the Colorado Corporation, which managed investor funds in
oil and gas exploration. Prior to 1969, he served as Senior Vice President of
Hayden, Stone and Company, a securities brokerage firm.
Executive
Officers
The table
below indicates the name, position and age of the executive officers of the
Company:
Name
|
|
Position
|
|
Age
|
Robert
E. Price
|
|
Chief
Executive Officer
|
|
66
|
Jose
Luis Laparte
|
|
President
|
|
42
|
John
M. Heffner
|
|
Executive
Vice President and Chief Financial Officer
|
|
54
|
Robert
M. Gans
|
|
Executive
Vice President, Secretary and General Counsel
|
|
59
|
William
J. Naylon
|
|
Executive
Vice President and Chief Operating Officer
|
|
46
|
Thomas
D. Martin
|
|
Executive
Vice President – Merchandising
|
|
52
|
Edward
Oats
|
|
Executive
Vice President – Information Technology
|
|
47
|
Brud
E. Drachman
|
|
Executive
Vice President – Construction Management
|
|
53
|
John
D. Hildebrandt
|
|
Executive
Vice President – Central America Operations
|
|
50
|
Jack
McGrory
|
|
Executive
Vice President – Real Estate and Development
|
|
59
|
Robert E. Price has been
Chairman of the Board of the Company since July 1994 and Chief Executive Officer
of the Company since April 2006, served as Interim Chief Executive Officer of
the Company from April 2003 until April 2006 and also served as Interim
President of the Company from April 2003 until October 2004. Mr. Price also
served as President and Chief Executive Officer of the Company from July 1994
until January 1998. Additionally, Mr. Price served as Chairman of the Board
of PEI from July 1994 until November 1999 and was President and Chief Executive
Officer of PEI from July 1994 until September 1997. Mr. Price was Chairman
of the Board of Costco from October 1993 to December 1994. From 1976 to October
1993, he was Chief Executive Officer and a director of TPC. Mr. Price
served as Chairman of the Board of TPC from January 1989 to October 1993, and as
its President from 1976 until December 1990.
Jose Luis Laparte has been a
director of the Company since February 2008 and President of the Company since
October 2004, and having served as a consultant for the Company from December
2003 to October 2004. Prior to joining the Company as a consultant,
Mr. Laparte worked more than 14 years for Wal-Mart Stores, Inc. in Mexico
and the United States in progressively responsible positions. From October 2002
through September 2003, he served as Vice President of Sam’s International,
where he directed and managed the company’s operations, finance, sales,
marketing, product development and merchandising. From May 2000 to October 2002,
he served as Vice President, Wal-Mart de Mexico, responsible for sales and the
expansion of the Sam’s Club format in Mexico.
John M. Heffner has been
Executive Vice President and Chief Financial Officer of the Company since
January 2004 after having served as a consultant to the Company on financial
matters from September 2003 through December 2003. From February 2000 until
August 2003, Mr. Heffner was Vice President of Finance and CFO of Kyocera
Wireless Corp. Mr. Heffner’s previous professional experience was with
Digital Equipment Corporation where he held a variety of financial management
roles over a 20 year period, and more recently with QUALCOMM Incorporated, where
he was a Vice President of Finance from July 1998 until February 2000.
Mr. Heffner is a graduate of St. Lawrence University and received an MBA
from Syracuse University.
Robert M. Gans has been
Executive Vice President, General Counsel and Secretary of the Company since
August 1997 and was Executive Vice President and General Counsel of PEI from
October 1994 until July 1997. Mr. Gans graduated from the UCLA School of
Law in 1975 and actively practiced law in private practice from 1975 until 1994.
From 1988 until October 1994, Mr. Gans was the senior member of the law
firm of Gans, Blackmar & Stevens, A.P.C., of San Diego,
California.
William J. Naylon has been
Executive Vice President and Chief Operating Officer of the Company since
January 2002. Mr. Naylon served as Executive Vice President – Merchandising
of the Company from July 2001 until January 2002 and as Senior Vice President of
the Company from March 1998 until July 2001. From September 1995 through
February 1998, Mr. Naylon was Managing Director for the Company’s licensee
warehouse club operation in Indonesia. Prior to joining the Company,
Mr. Naylon was a General Manager for Costco and had served in various
management roles for TPC.
Thomas D. Martin has been
Executive Vice President – Merchandising of the Company since October 1998
and served as Senior Vice President of the Company from August 1997 to September
1998. Mr. Martin previously served as Vice President of PEI from August
1994 until July 1997, directing merchandising strategies and product sourcing
for its international merchandising business, in addition to managing its
trading company activities. Prior to joining PEI as Vice President in August
1994, Mr. Martin served as Vice President of Costco from October 1993 to
December 1994 and had served in various management roles for TPC.
Edward Oats has been Executive
Vice President – Information Technology of the Company since November 2002 and
served as Senior Vice President – Logistics/Information Technology of the
Company from May 2000 to October 2002. Mr. Oats previously served as Vice
President of Information Technology of the Company from August 1997 to April
2000, and as International IT Manager of PEI from 1993 to 1997. From 1982 to
1993, Mr. Oats served in several positions in TPC operations and
management.
Brud E. Drachman has been
Executive Vice President – Construction Management of the Company since November
2005, served as Executive Vice President – Real Estate and Construction of the
Company from February 2005 through October 2005 and had served as Executive Vice
President – Construction and Private Label Merchandising from November 2004
until January 2005. Mr. Drachman had served as Executive Vice President –
Real Estate and Construction of the Company from November 2002 until October
2004 and served as Senior Vice President – Real Estate and Construction of the
Company from August 1998 to October 2002. Mr. Drachman previously served as
Vice President – Real Estate and Construction at PEI from August 1994 to August
1997. Prior to joining PEI in 1994, Mr. Drachman served as Project Manager
at TPC since 1987.
John D. Hildebrandt has been
Executive Vice President – Central America Operations since August 2003.
Mr. Hildebrandt served as Executive Vice President – Caribbean and Asia
Operations from July 2001 until July 2003 and served as Senior Vice President of
the Company from September 2000 until July 2001. Mr. Hildebrandt previously
served as Vice President of the Company from September 1998 until August 2000,
overseeing operations in Central America. Mr. Hildebrandt served as the
Company’s Country Manager in the Philippines and Panama from August 1997 until
August 1998, and as PEI’s Country Manager in the Philippines and Panama from
1996 until the Company was spun off from PEI in August 1997. Prior to joining
PEI as Country Manager in 1996, Mr. Hildebrandt was a Senior Operations
Manager of Costco from 1994 through 1996, and had served in various management
roles for TPC since 1979.
Jack McGrory has been a
director of the Company since November 2000 and has been Executive Vice
President – Real Estate and Development since December 2006. Mr. McGrory
served as Chairman of the Board of Price Legacy from September 2001 until
December 2004, served as President and Chief Executive Officer of Price Legacy
from October 2003 until December 2004, and was President and Chief Executive
Officer of PEI from September 1997 until November 1999. Mr. McGrory also
serves as a director of the San Diego Padres, L.P. and was its Executive Vice
President and Chief Operating Officer from September 1999 until August 2000.
From March 1991 through August 1997, Mr. McGrory served as City Manager of
San Diego. Mr. McGrory has also been a Manager of The Price Group since
August 2000.
Corporate
Offices
9740
Scranton Road
San
Diego, CA 92121
(858) 404-8800
Stock
Exchange Listing
NASDAQ
Stock Market
Stock
Symbol: PSMT
Annual
Meeting
Wednesday,
January 28, 2009 at 10:00 AM
PriceSmart,
Inc. Corporate Headquarters
9740
Scranton Road
San
Diego, CA 92121
Transfer
Agent
BNY
Mellon Shareowner Services
P.O. Box
3315
South
Hackensack, NJ 07606
Telephone:
(800) 522-6645
TDD for
Hearing Impaired: (800) 231-5469
|
Outside
U.S.: (201) 329-8660
|
Independent
Registered Public Accounting Firm
Ernst &
Young LLP
4370 La
Jolla Village Drive, Suite 500
San
Diego, CA 92122
PriceSmart's
annual reports to the Securities and Exchange Commission on Form 10-K, as
amended, and any quarterly reports on Form 10-Q, as amended, will be provided
free of charge upon written request to Investor Relations, PriceSmart, Inc.,
9740 Scranton Road., San Diego, CA 92121. Internet users can access PriceSmart's
web site at http://www.pricesmart.com.
57