form10q.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x
|
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
quarterly period ended February 28, 2009
OR
¨
|
TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
transition period from
to
COMMISSION
FILE NUMBER 0-22793
PriceSmart,
Inc.
(Exact
name of registrant as specified in its charter)
|
|
Delaware
|
33-0628530
|
(State
or other jurisdiction of
incorporation
or organization)
|
(I.R.S.
Employer
Identification
No.)
|
9740
Scranton Road, San Diego, CA 92121
(Address
of principal executive offices)
(858)
404-8800
(Registrant’s
telephone number, including area code)
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.
|
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definition of “accelerated filer and large
accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
|
Large
accelerated filer ¨
|
Accelerated
filer þ
|
Non-accelerated
filer ¨
|
Smaller
Reporting Company ¨
|
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange
Act).
|
The
registrant had 29,580,825 shares of its common stock, par value $0.0001
per share, outstanding at March 27,
2009.
|
PRICESMART,
INC.
INDEX
TO FORM 10-Q
|
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Page
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1
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2
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3
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4
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5
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7
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31
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43
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43
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44
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|
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44
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44
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44
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45
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45
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|
46
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PriceSmart,
Inc.’s (“PriceSmart” or the “Company”) unaudited consolidated balance sheet as
of February 28, 2009, the consolidated balance sheet as of
August 31, 2008, the unaudited consolidated statements of income for
the six months ended February 28, 2009 and February 29, 2008, the unaudited
consolidated statements of stockholders equity for the six months ended February
28, 2009 and February 29, 2008, and the unaudited consolidated statements of
cash flows for the six months ended February 28, 2009 and February 29, 2008, are
included elsewhere herein. Also included herein are the unaudited notes to the
unaudited consolidated financial statements.
PRICESMART,
INC.
(UNAUDITED—AMOUNTS
IN THOUSANDS, EXCEPT SHARE DATA)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
29,888 |
|
|
$ |
48,121 |
|
Short-term
restricted cash
|
|
|
9,500 |
|
|
|
536 |
|
Receivables,
net of allowance for doubtful accounts of $6 and $11 in February 2009 and
August 2008, respectively
|
|
|
3,765 |
|
|
|
2,455 |
|
|
|
|
120,753 |
|
|
|
113,894 |
|
Deferred
tax asset – current
|
|
|
2,083 |
|
|
|
2,179 |
|
Prepaid
expenses and other current assets
|
|
|
18,931 |
|
|
|
16,669 |
|
Notes
receivable – short term
|
|
|
2,006 |
|
|
|
2,104 |
|
Assets
of discontinued operations
|
|
|
882 |
|
|
|
1,247 |
|
|
|
|
187,808 |
|
|
|
187,205 |
|
Long-term
restricted cash
|
|
|
583 |
|
|
|
673 |
|
Property
and equipment, net
|
|
|
217,934 |
|
|
|
199,576 |
|
|
|
|
37,902 |
|
|
|
39,248 |
|
Deferred
tax assets – long term
|
|
|
19,984 |
|
|
|
21,198 |
|
|
|
|
3,805 |
|
|
|
3,512 |
|
Investment
in unconsolidated affiliates
|
|
|
7,610 |
|
|
|
— |
|
|
|
$ |
475,626 |
|
|
$ |
451,412 |
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,659 |
|
|
|
3,473 |
|
|
|
|
102,430 |
|
|
|
96,120 |
|
Accrued
salaries and benefits
|
|
|
7,466 |
|
|
|
8,271 |
|
Deferred
membership income
|
|
|
8,707 |
|
|
|
7,764 |
|
|
|
|
6,055 |
|
|
|
3,695 |
|
Common
stock subject to put agreement
|
|
|
— |
|
|
|
161 |
|
|
|
|
13,626 |
|
|
|
11,877 |
|
|
|
|
7,392 |
|
|
|
4,744 |
|
Long-term
debt, current portion
|
|
|
3,616 |
|
|
|
2,737 |
|
Liabilities
of discontinued operations
|
|
|
249 |
|
|
|
277 |
|
Deferred
tax liability – current
|
|
|
114 |
|
|
|
486 |
|
Total
current liabilities
|
|
|
153,314 |
|
|
|
139,605 |
|
Deferred
tax liability – long term
|
|
|
1,339 |
|
|
|
2,339 |
|
Long-term
portion of deferred rent
|
|
|
2,695 |
|
|
|
2,412 |
|
|
|
|
3,611 |
|
|
|
3,489 |
|
Long-term
income taxes payable, net of current portion
|
|
|
3,471 |
|
|
|
5,553 |
|
Long-term
debt, net of current portion
|
|
|
30,101 |
|
|
|
23,028 |
|
|
|
|
194,531 |
|
|
|
176,426 |
|
|
|
|
636 |
|
|
|
480 |
|
|
|
|
|
|
|
|
|
|
Common
stock, $0.0001 par value, 45,000,000 shares authorized;
30,244,086 and 30,195,788 shares issued, respectively, and 29,591,125
and 29,615,226 shares outstanding (net of treasury shares),
respectively
|
|
|
3 |
|
|
|
3 |
|
Additional
paid-in capital
|
|
|
375,120 |
|
|
|
373,192 |
|
Tax
benefit from stock-based compensation
|
|
|
4,420 |
|
|
|
4,563 |
|
Accumulated
other comprehensive loss
|
|
|
(16,096 |
) |
|
|
(12,897 |
) |
|
|
|
(68,907 |
) |
|
|
(77,510 |
) |
Less:
treasury stock at cost; 652,961 shares as of February 28, 2009 and 580,562
shares as of August 31, 2008
|
|
|
(14,081 |
) |
|
|
(12,845 |
) |
Total
stockholders’ equity
|
|
|
280,459 |
|
|
|
274,506 |
|
Total
Liabilities and Stockholders’ Equity
|
|
$ |
475,626 |
|
|
$ |
451,412 |
|
See
accompanying notes.
PRICESMART,
INC.
(UNAUDITED—AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE DATA)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February
28,
|
|
|
February
29,
|
|
|
February
28,
|
|
|
February
29,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
warehouse club
|
|
$ |
328,240 |
|
|
$ |
288,216 |
|
|
$ |
626,758 |
|
|
$ |
533,405 |
|
Export
|
|
|
905 |
|
|
|
340 |
|
|
|
1,742 |
|
|
|
707 |
|
Membership
income
|
|
|
4,425 |
|
|
|
3,975 |
|
|
|
8,749 |
|
|
|
7,717 |
|
Other
income
|
|
|
1,223 |
|
|
|
1,313 |
|
|
|
2,753 |
|
|
|
2,426 |
|
Total
revenues
|
|
|
334,793 |
|
|
|
293,844 |
|
|
|
640,002 |
|
|
|
544,255 |
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of goods sold:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
warehouse club
|
|
|
279,993 |
|
|
|
245,333 |
|
|
|
534,419 |
|
|
|
453,844 |
|
Export
|
|
|
861 |
|
|
|
320 |
|
|
|
1,661 |
|
|
|
669 |
|
Selling,
general and administrative:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warehouse
club operations
|
|
|
28,544 |
|
|
|
26,024 |
|
|
|
55,829 |
|
|
|
49,251 |
|
General
and administrative
|
|
|
7,812 |
|
|
|
7,870 |
|
|
|
15,352 |
|
|
|
15,186 |
|
Preopening
expenses
|
|
|
99 |
|
|
|
215 |
|
|
|
99 |
|
|
|
987 |
|
Asset
impairment and closure costs
|
|
|
16 |
|
|
|
14 |
|
|
|
264 |
|
|
|
33 |
|
Provision
for settlement of litigation, including changes in fair market value of
put agreement
|
|
|
— |
|
|
|
3,386 |
|
|
|
— |
|
|
|
3,386 |
|
Total
operating expenses
|
|
|
317,325 |
|
|
|
283,162 |
|
|
|
607,624 |
|
|
|
523,356 |
|
Operating
income
|
|
|
17,468 |
|
|
|
10,682 |
|
|
|
32,378 |
|
|
|
20,899 |
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
115 |
|
|
|
364 |
|
|
|
241 |
|
|
|
774 |
|
Interest
expense
|
|
|
(609 |
) |
|
|
(470 |
) |
|
|
(1,190 |
) |
|
|
(529 |
) |
Other
income (expense), net
|
|
|
(42 |
) |
|
|
(37 |
) |
|
|
(62 |
) |
|
|
(84 |
) |
Total
other income (expense)
|
|
|
(536 |
) |
|
|
(143 |
) |
|
|
(1,011 |
) |
|
|
161 |
|
Income
from continuing operations before provision for income taxes, loss of
unconsolidated affiliate and minority interest
|
|
|
16,932 |
|
|
|
10,539 |
|
|
|
31,367 |
|
|
|
21,060 |
|
Provision
for income taxes
|
|
|
(4,090 |
) |
|
|
(890 |
) |
|
|
(7,737 |
) |
|
|
(4,605 |
) |
Loss
of unconsolidated affiliate
|
|
|
(7 |
) |
|
|
— |
|
|
|
(12 |
) |
|
|
— |
|
Minority
interest
|
|
|
(85 |
) |
|
|
(160 |
) |
|
|
(150 |
) |
|
|
(290 |
) |
Income
from continuing operations
|
|
|
12,750 |
|
|
|
9,489 |
|
|
|
23,468 |
|
|
|
16,165 |
|
Income
(loss) from discontinued operations, net of tax
|
|
|
(63 |
) |
|
|
27 |
|
|
|
(81 |
) |
|
|
45 |
|
Net
income
|
|
$ |
12,687 |
|
|
$ |
9,516 |
|
|
$ |
23,387 |
|
|
$ |
16,210 |
|
Basic
income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$ |
0.44 |
|
|
$ |
0.33 |
|
|
$ |
0.81 |
|
|
$ |
0.56 |
|
Discontinued
operations, net of tax
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
Net
income
|
|
$ |
0.44 |
|
|
$ |
0.33 |
|
|
$ |
0.81 |
|
|
$ |
0.56 |
|
Diluted
income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$ |
0.43 |
|
|
$ |
0.33 |
|
|
$ |
0.80 |
|
|
$ |
0.56 |
|
Discontinued
operations, net of tax
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
Net
income
|
|
$ |
0.43 |
|
|
$ |
0.33 |
|
|
$ |
0.80 |
|
|
$ |
0.56 |
|
Shares
used in per share computations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
28,916 |
|
|
|
28,848 |
|
|
|
28,888 |
|
|
|
28,815 |
|
Diluted
|
|
|
29,179 |
|
|
|
29,233 |
|
|
|
29,145 |
|
|
|
29,207 |
|
Dividends
per share
|
|
$ |
0.50 |
|
|
$ |
0.32 |
|
|
$ |
0.50 |
|
|
$ |
0.32 |
|
See
accompanying notes.
PRICESMART,
INC.
(UNAUDITED—AMOUNTS
IN THOUSANDS)
|
|
|
|
|
|
|
Tax
Benefit From Stock-
|
|
Accum-ulated
Other
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
Additional
|
|
based
|
|
Compre-
|
|
Accum-
|
|
|
|
|
|
Stock-
|
|
Common
Stock
|
|
Paid-In
|
|
Compen-
|
|
hesive
|
|
ulated
|
|
Treasury
Stock
|
|
holder’s
|
|
Shares
|
|
Amount
|
|
Capital
|
|
sation
|
|
Loss
|
|
Deficit
|
|
Shares
|
|
Amount
|
|
Equity
|
Balance
at August 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
of treasury stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of restricted stock awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeiture
of restricted stock awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise
of stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax
benefit from exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock subject to put agreement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend
payable to stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mark-to-market
of interest rate swap
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at February 29, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at August 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
of treasury stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of restricted stock awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeiture
of restricted stock awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise
of stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock subject to put agreement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
of treasury stock for PSC settlement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend
payable to stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend
paid to stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in fair value of interest rate swaps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at February 28, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes.
PRICESMART,
INC.
(UNAUDITED—AMOUNTS
IN THOUSANDS)
|
|
Six
Months Ended
|
|
|
|
February
28, 2009
|
|
|
February
29,
2008
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
|
|
|
|
|
|
|
Adjustments
to reconcile income from continuing operations to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
|
|
|
|
|
|
Allowance
for doubtful accounts
|
|
|
|
|
|
|
|
|
Asset
impairment and closure costs
|
|
|
|
|
|
|
|
|
Loss (Gain)
on sale of property and equipment
|
|
|
|
|
|
|
|
|
Deposit
to escrow account due to settlement of litigation
|
|
|
|
|
|
|
|
|
Provision
for settlement of litigation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
in earnings of unconsolidated affiliates
|
|
|
|
|
|
|
|
|
Tax
benefit from exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Change
in accounts receivable, prepaid expenses, other current assets, accrued
salaries and benefits, deferred membership and other
accruals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by continuing operating activities
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) discontinued operating
activities
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
to property and equipment
|
|
|
|
|
|
|
|
|
Deposits
to escrow account for land acquisitions (including settlement of
litigation)
|
|
|
|
|
|
|
|
|
Proceeds from
disposal of property and equipment
|
|
|
|
|
|
|
|
|
Proceeds
from sale of unconsolidated affiliate
|
|
|
|
|
|
|
|
|
Acquisition
of business, net of cash acquired
|
|
|
|
|
|
|
|
|
Purchase
of investment in Nicaragua minority interest
|
|
|
|
|
|
|
|
|
Purchase
of investment in Costa Rica minority interest
|
|
|
|
|
|
|
|
|
Capital
contribution to Costa Rica minority interest
|
|
|
|
|
|
|
|
|
Purchase
of investment in Panama minority interest
|
|
|
|
|
|
|
|
|
Net
cash used in continuing investing activities
|
|
|
|
|
|
|
|
|
Net
cash used in discontinued investing activities
|
|
|
|
|
|
|
|
|
Net
cash flows used in investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from bank borrowings
|
|
|
|
|
|
|
|
|
Repayment
of bank borrowings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Additions
to) release of restricted cash
|
|
|
|
|
|
|
|
|
Tax
benefit from exercise of stock options
|
|
|
|
|
|
|
|
|
Purchase
of treasury stock for PSC settlement
|
|
|
|
|
|
|
|
|
Proceeds
from exercise of stock options
|
|
|
|
|
|
|
|
|
Purchase
of treasury shares
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) financing activities
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash and cash
equivalents
|
|
|
|
|
|
|
|
|
Net
decrease in cash and cash equivalents
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of period
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of period
|
|
|
|
|
|
|
|
|
PRICESMART,
INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS—(Continued)
(UNAUDITED—AMOUNTS
IN THOUSANDS)
|
|
Six
Months Ended
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
Interest,
net of amounts capitalized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of non-cash financing activities:
|
|
|
|
|
|
|
|
|
Dividends
declared but not paid
|
|
|
|
|
|
|
|
|
PRICESMART,
INC.
(Unaudited)
February
28, 2009
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 February 28, 2009,
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 substantially all of the corresponding legal
entities (see Note 2-Summary of Significant Accounting Policies). There was
one warehouse club in operation in Saipan, Micronesia licensed to and operated
by local business people as of February 28, 2009. The Company principally
operates in three segments based on geographic area.
Basis of Presentation
- The consolidated interim financial statements have been
prepared in accordance with the instructions to Form 10-Q for interim financial
reporting pursuant to the rules and regulations of the U.S. Securities and
Exchange Commission ("SEC"). These consolidated interim financial
statements should be read in conjunction with the consolidated financial
statements and notes included in the Company’s annual report filed on Form 10-K
for the fiscal year ended August 31, 2008. The consolidated interim financial
statements include the accounts of PriceSmart, Inc., a Delaware corporation, and
its subsidiaries (“PSMT” or the “Company”). All material intercompany
transactions between the Company and its subsidiaries have been eliminated in
consolidation.
In connection with the Company’s
accounting for income taxes pursuant to Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes", ("SFAS
109"), the Company made certain reclassifications between deferred tax assets
and deferred tax liabilities and separately stated current deferred tax assets
and liabilities on the consolidated balance sheet as of August 31, 2008. These
reclassifications resulted in a $730,000 decrease to deferred tax assets
long-term, a $963,000 increase to deferred tax liabilities long-term, and a $1.5
million increase to total assets and total liabilities. The purpose
of these balance sheet reclassifications is to allow comparability of our
consolidated balance sheets for the periods being presented as a result of a
review of the current portion of deferred tax.
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation -
The consolidated interim 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
intercompany accounts and transactions have been eliminated in consolidation.
The consolidated interim financial statements have been prepared by the Company
without audit, pursuant to the rules and regulations of the SEC, and
reflect all adjustments (consisting of normal recurring adjustments) that are,
in the opinion of management, necessary to fairly present the financial
position, results of operations, and cash flows for the interim periods
presented. Certain information and footnote disclosures normally included in
consolidated financial statements prepared in accordance with U.S. generally
accepted accounting principles ("U.S. GAAP") have been condensed or omitted
pursuant to such SEC rules and regulations. Management believes that the
disclosures made are adequate to make the information presented not misleading.
The results for interim periods are not necessarily indicative of the results
for the full year.
PRICESMART,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The table
below indicates the Company’s percentage ownership of and basis of presentation
for each subsidiary as of February 28, 2009:
|
Subsidiary
|
|
Countries
|
|
Ownership
|
|
Basis
of
Presentation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PriceSmart,
U.S. Virgin Islands
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Price
Plaza Alajuela PPA, S.A.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Entity
is treated as discontinued operations in the consolidated financial
statements.
|
(2)
|
Purchase
of Joint Venture Interest during the first quarter of fiscal year
2009.
|
Use of Estimates – The
preparation of financial statements in conformity with U.S. Generally
Accepted Accounting Principles ("U.S. GAAP"), as defined in Statement of
Financial Accounting Standards ("SFAS") No. 162, "The Hiearchy of Generally
Accepted Accounting Principles" ("SFAS 162"), 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 of approximately $9.5 million consists of proceeds from a bank
borrowing in Trinidad, the funding of which was made on February 27, 2009 with
the formal release of the funds occurring on March 10,
2009. Long-term restricted cash represents deposits with federal
regulatory agencies in Costa Rica, Honduras and Panama for approximately
$583,000.
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 Doubtful
Accounts – The Company generally does not extend credit to its
members, but may do so for specific wholesale, government, other large volume
members and for subtenants. 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.
PRICESMART, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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 and an economic penalty
would be suffered if the election was not 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 the Company's 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 the Company takes possession of the property and extending
over the term of the related lease including renewal options where the exercise
of the option is reasonably assured and an economic penalty would be
suffered if the election was not exercised 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,” as amended by Financial Accounting
Standards Staff Position (FSP) No. 157-1, "Application of FASB Statement
No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements that
address Fair Value Measurements for Purposes of Lease Classification or
Measurement under Statement 13" and FSP 157-2, "Effective Date of
FASB Statement No. 157" and FSP 157-3, "Determining the Fair Value of Financial
Assets when the Market for That Asset Is Not Active" (together referred to as
SFAS 157), the Company measures the fair value for all financial assets and
liabilities that are recognized or disclosed at fair value in the financial
statements on a recurring basis or on a nonrecurring basis during the reporting
period. The Company measures fair value for interest rate swaps and for put
contracts. While the Company adopted the provisions of SFAS 157 for nonfinancial
assets and liabilities that are recognized or disclosed at fair value in the
financial statements on a recurring basis, no such assets or liabilities exist
at the balance sheet date. The Company, in accordance with FSP 157-2, delayed
implementation of SFAS 157 for all nonfinancial assets and liabilities
recognized or disclosed at fair value in the financial statements on a
nonrecurring basis. Nonfinancial nonrecurring assets and liabilities included on
the Company’s balance sheet include items such as goodwill and long lived assets
that are measured at fair value after taking into account impairment charges, if
any are deemed necessary. The Company measures fair value of
assets when triggering events occur in accordance with the provisions of SFAS
144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” and SFAS
142, "Goodwill and Other Intangible Assets", for business units and for
goodwill impairment.
SFAS 157
defines the fair value as the price that would be received to sell an asset or
paid to transfer a liability (an exit price) in an orderly transaction between
market participants at the measurement date. SFAS 157 also establishes a fair
value hierarchy, which requires an entity to maximize the use of observable
inputs when measuring fair value. The standard describes three levels of
inputs:
Level 1:
Quoted market prices in active markets for identical assets or liabilities,
primarily consisting of financial instruments, such as money market mutual
funds, whose value is based on quoted market prices. The Company did
not revalue any assets or liabilities utilizing level one inputs at the balance
sheet date.
Level 2:
Observable market based inputs or unobservable inputs that are corroborated by
market data, normally including assets and liabilities with observable inputs
other than Level 1 prices, such as quoted prices for similar assets or
liabilities; or other inputs that are observable or can be corroborated by
observable market data for substantially the full term of the assets or
liabilities. The Company's Level 2 assets and liabilities at the balance sheet
date primarily include cash flow hedges (interest rate swaps), and pricing of
assets in connection with the acquisition of a business. Valuation
methodologies are based on “consensus pricing” using market prices from a
variety of industry-standard data providers or pricing that considers various
assumptions, including time value, yield curve, volatility factors, credit
spreads, default rates, loss severity, current market and contractual prices for
the underlying instruments or debt, broker and dealer quotes, as well as other
relevant economic measures. All are observable in the market or can be derived
principally from or corroborated by observable market data for which the Company
typically receives independent external valuation information.
Level 3:
Unobservable inputs that are not corroborated by market data. This is normally
composed of assets or liabilities where their fair value inputs are unobservable
or not available, including situations involving limited market activity, where
determination of fair value requires significant judgment or
estimation. The Company did not revalue any assets or liabilities
utilizing level three inputs at the balance sheet date.
Valuation
techniques utilized in the fair value measurement of assets and liabilities
presented on the Company’s balance sheet were not changed from previous practice
during the reporting period. The Company discloses the valuation
techniques and any change in method of such within the body of each footnote on
an annual basis in accordance with SFAS 157.
PRICESMART,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Goodwill – Goodwill, resulting
from certain business combinations totaled $37.9 million at February 28, 2009
and $39.2 million at August 31, 2008. The decrease in goodwill was due to
the foreign exchange translation losses. 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 12—Interest Rate
Swaps).
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 cost and rent) as incurred.
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. The closure
costs recorded in fiscal year 2009 relate to these warehouse clubs, as the
Company has subleased the property and building for the closed Guatemala
warehouse club and continues to record expenses related to the location. 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.
PRICESMART,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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 recorded in fiscal year 2008 a liability for a common stock put
agreement (see Note 14—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 recorded in fiscal
year 2008 a year-to-date expense for the fair value of the put agreement granted
as part of the legal settlement with the PSC Parties, determined as of June 11,
2008 of fiscal year 2008. On September 9, 2008 (fiscal year 2009), the
Company recorded the final settlement of the liability.
Foreign Currency Translation –
In accordance with Statement of Financial Accounting Standards No. 52
(“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 U.S. dollars. 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 average
rates of exchange in effect during the period. The corresponding translation
gains and losses are recorded as a component of accumulated other comprehensive
gain 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, which are included as a part of the
costs of goods sold in the consolidated statements of income, for the first six
months of the fiscal years 2009 and 2008 were approximately ($1.4) million and
$809,000, respectively.
Stock-Based Compensation – As
of February 28, 2009, the Company had four stock-based employee compensation
plans which it accounts for applying Statement of Financial Accounting
Standard No. 123(R) ("SFAS 123(R)"), “Share-Based Payment.” Under SFAS 123(R),
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 applies the
Black-Scholes model. SFAS 123(R) 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
123(R) 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.
The
Company recognizes 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 reclassifies 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) as required by Emerging Issues Task Force (“EITF”) EITF
Issue No. 06-11 (“EITF 06-11”), “Accounting for Income Tax Benefits of
Dividends on Share-Based Payment Award.”
Generally Accepted Accounting
Principles Hierarchy – The Company identifies the
sources of accounting principles and the framework for selecting the principles
to be used in the preparation of financial statements by applying Statement of
Financial Accounting Standards No. 162, “The Hierarchy of Generally
Accepted Accounting Principles” ("SFAS 162"). Hierarchal categories
include category “A”- FASB Statements of Financial Accounting Standards and
Interpretations, FASB Statement 133 Implementation Issues, FASB Staff Positions,
and American Institute of Certified Public Accountants ("AICPA") Accounting
Research Bulletins and Accounting Principles Board Opinions that are not
superseded by actions of the FASB; category “B”- FASB Technical
Bulletins and, if cleared by
the FASB, AICPA Industry Audit and Accounting Guides and Statements of Position;
category “C”- AICPA Accounting Standards, Executive Committee Practice Bulletins
that have been cleared by the FASB, consensus positions of the FASB Emerging
Issues Task Force ("EITF"), and the Topics discussed in Appendix D of
EITF Abstracts ("EITF D-Topics"), category “D”- Implementation Guides
("Q&As") published by the FASB staff, AICPA Accounting
Interpretations, AICPA Industry Audit and Accounting Guides and Statements of
Position not cleared by the FASB, and practices that are widely recognized and
prevalent either generally or in the industry.
PRICESMART,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Income Taxes – The Company is
required to file federal and state income 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 federal, state and international 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 income tax
positions taken by the Company (“uncertain tax positions”) and therefore require
the Company to pay additional taxes. As required under applicable accounting
rules, the Company therefore accrues an amount for its estimate of additional
income tax liability, including interest and penalties, which the Company could
incur as a result of the ultimate or effective resolution of the uncertain tax
positions. The Company reviews and updates the accrual for uncertain tax
positions as more definitive information becomes available from taxing
authorities, completion of tax audits, expiration of statute of limitations, or
upon occurrence of other events.
The
Company accounts for uncertain income tax positions based on the provisions of
FASB Interpretation 48,
Accounting for Uncertainty in Income Taxes (“FIN 48”), which requires the
Company to accrue for the estimated additional amount of taxes for the uncertain
tax positions when the uncertain tax position does not meet the more likely than
not standard for sustaining the position.
As of
February 28, 2009 and August 31, 2008, the Company had $14.7 million and $15.2
million, respectively, of aggregate accruals for uncertain tax positions (“gross
unrecognized tax benefits”). Of these totals, $2.5 million and $4.9 million,
respectively, represent the amount of net unrecognized tax benefits that, if
recognized, would favorably affect the Company’s effective income tax rate in
any future period.
The
Company records the aggregate accrual for uncertain tax positions as a component
of current or long-term income taxes payable and the offsetting amounts as a
component of the Company’s net deferred tax assets and liabilities. These
liabilities are generally classified as long-term even if the underlying statute
of limitation will expire in the following twelve months. The Company classifies
these liabilities as current if it expects to settle them in cash in the next
twelve months. The Company has classified $918,000 as current income taxes
payable as of February 28, 2009.
The
Company expects changes in the amount of unrecognized tax benefits in the
next twelve months as the result of a lapse in various statutes of
limitations. For the quarter ended February 28, 2009, the Company reduced the
long-term income tax payable and recorded a reduction in the income tax
expense as the result of a lapse in the underlying statute of limitations
totaling $967,000. The lapse of statutes of limitations in the twelve-month
period ending February 28, 2010 would result in a reduction to long-term income
taxes payable totaling $1.2 million.
The
Company’s continuing practice is to recognize interest and/or penalties related
to income tax matters in income tax expense in the long-term income tax payable
caption on the balance sheet. As of February 28, 2009 and August 31, 2008 the
Company had accrued $1.9 million and $3.4 million, respectively, for the payment
of interest and penalties.
The
Company has various audits and appeals pending in foreign jurisdictions. The
Company does not anticipate that any adjustments from these audits and appeals
would result in a significant change to the results of operations, financial
conditions or liquidity. In February 2009, the Company received the
final resolution of a pending appeal in the Dominican Republic. As a
result of this resolution, the Company will pay taxes, interest, and penalty of
approximately $700,000. The full amount of this cash payment was
accrued to current income taxes payable as of February 28, 2009.
The
Company is subject to taxation in the U.S. and various states and foreign
jurisdictions. As the result of net operating loss carry forwards, the Company
is subject to U.S. federal, state and local income tax examination by tax
authorities for tax periods subsequent to and including fiscal year 1995. With
few exceptions, the Company is no longer subject to non-U.S. income tax
examination by tax authorities for tax years before fiscal year 2003. A lapse in
these statutes will result in a beneficial impact on the effective tax
rate.
PRICESMART,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Recent Accounting
Pronouncements – In October 2008, the Emerging Issues Task Force (“EITF”)
reached a consensus on EITF Issue No. 08-06 (“EITF 08-06”), “Equity Method
Investment Accounting Considerations.” The objective of this
Issue is to clarify how to account for certain transactions involving equity
method investments. The Company is required to adopt EITF 08-06 on a prospective
basis beginning on September 1, 2009. The Company is currently evaluating
the impact, if any, this issue will have on its consolidated financial
statements. However, the Company does not expect that this issue will
result in a change in current practice.
In
May 2008, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards (“SFAS”) No. 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 in the United States ("U.S. GAAP"). 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 SEC approved the amendments in September
2008, establishing the effective date of this Statement as November
2008. The adoption of SFAS 162 did not have a material
impact on the Company’s consolidated financial condition and results of
operations.
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 adopted SFAS
161 beginning December 1, 2008. The adoption of SFAS 161 did not have a
material impact on the Company’s consolidated financial condition and results of
operations.
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 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 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 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 results of operations.
In
February 2007, the FASB issued 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 adopted SFAS 159 beginning September 1,
2008. The adoption of SFAS 159 did not have a material impact on the
Company’s consolidated financial condition and results of
operations.
PRICESMART,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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
interim financial statements reflect the results of operations and
financial position of the Company’s activities in the Philippines and Guam as
discontinued operations. As a result of the closure of the Guam
operations in December 2003 until May 2005, the Company included
the results of operations from Guam in the asset impairment and closure costs
line of the consolidated statement of income. Since the sale of the Philippine
operations in August 2005, the results of the Philippine and Guam
activities have been 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 in 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):
|
|
February
28, 2009
|
|
|
|
|
Cash
and cash equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid
expenses and other current assets
|
|
|
|
|
|
|
|
|
Other
assets, non-current
|
|
|
|
|
|
|
|
|
Assets
of discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
of discontinued operations
|
|
|
|
|
|
|
|
|
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.
The
following table sets forth the income (loss) from discontinued
operations for each period presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
February
28,
2009
|
|
|
February
29,
2008
|
|
|
February
28,
2009
|
|
|
February
29,
2008
|
|
Net
warehouse club sales
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
Pre-tax
income (loss) from discontinued operations
|
|
|
(63 |
) |
|
|
27 |
|
|
|
(81 |
) |
|
|
45 |
|
Income
tax (provision) benefit
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Income
(loss) from discontinued operations
|
|
$ |
(63 |
) |
|
$ |
27 |
|
|
$ |
(81 |
) |
|
$ |
45 |
|
The
pre-tax (loss) and pre-tax income from discontinued operations for the six
months ended February 28, 2009 and February 29, 2008 of approximately ($81,000)
and $45,000, respectively, is the net result of the subleasing activity in
Guam.
PRICESMART,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
NOTE
4 – PROPERTY AND EQUIPMENT
Property
and equipment consist of the following (in thousands):
|
|
February
28, 2009
|
|
|
August
31, 2008
|
|
|
|
$ |
74,474 |
|
|
$ |
63,582 |
|
Building
and improvements
|
|
|
130,133 |
|
|
|
130,237 |
|
|
|
|
78,392 |
|
|
|
75,137 |
|
|
|
|
11,258 |
|
|
|
2,466 |
|
Total
property and equipment, historical cost
|
|
|
294,257 |
|
|
|
271,422 |
|
Less:
accumulated depreciation
|
|
|
(76,323 |
) |
|
|
(71,846 |
) |
Property
and equipment, net
|
|
$ |
217,934 |
|
|
$ |
199,576 |
|
Building
and improvements include net capitalized interest of $1.3 million as of both
February 28, 2009 and August 31, 2008. For the six-month period
ended February 28, 2009, the Company recorded approximately $3.4 million in
translation adjustments that reduced the carrying value of the total property
and equipment.
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 relocate
an existing PriceSmart Warehouse Club (see Note 13-Acquisition of
Business). Typically, PriceSmart land requirements are approximately
20,000 square meters; however, the new Panama City location will be constructed
on two levels, with parking at grade level and the building on the second
level. The 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 fiscal year 2010. In December 2008, the Company acquired
approximately 31,000 square meters of land in Trinidad upon which it will
construct a new warehouse club which will bring the number of warehouse clubs in
that country to four. This new warehouse club is expected to be open in the
first quarter of fiscal year 2010. 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 is constructing 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 April of fiscal
year 2009. These acquisitions contributed the following property (in
thousands):
|
|
$ |
3,724 |
|
|
|
|
2,856 |
|
|
|
|
4,519 |
|
|
|
$ |
11,099 |
|
The
Company continued with the expansion of existing warehouse clubs, warehouse
distribution center expansion and the development of the land sites acquired for
the opening of warehouse club sites in Panama and Costa
Rica. Construction in process and fixtures and equipment increased
during the first six months of fiscal year 2009 due to these
activities. The Company used $5.8 million for construction in
process and acquisition of fixtures and equipment for the Alajuela, Costa Rica
warehouse club, $904,000 for construction in process and acquisition of fixtures
and equipment for the Panama warehouse club and $732,000 for construction in
process for the San Fernando, Trinidad warehouse club. The Company
utilized approximately $3.1 million for expansion of its distribution center in
Miami, the expansion of the Nicaragua warehouse club and the expansion of
the warehouse club in Aruba. The Company utilized approximately $1.3 million for
acquisition of fixtures and equipment in Trinidad and $3.3 million for the
acquisition of fixtures and equipment and leasehold improvements in its
other warehouse club locations.
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):
|
|
|
Building
and improvements
|
|
|
|
|
|
Total
property and equipment
|
|
|
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 the first six months of fiscal years 2009 and 2008 was approximately
$6.5 million and, $5.4 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 net income (loss) per share is computed using
the treasury stock method to calculate the weighted average number of common
shares and, if dilutive, potential common shares outstanding during the period.
Potential dilutive common shares include unvested restricted shares and the
incremental common shares issuable upon the exercise of stock options and
warrants, less shares from assumed proceeds. The assumed proceeds calculation
includes actual proceeds to be received from the employee upon exercise, the
average unrecognized compensation cost during the period and any tax benefits
that will be credited upon exercise to additional paid-in capital. The
following table presents the calculation of the basic income per share and the
diluted income per share (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
February
28,
2009
|
|
|
February
29,
2008
|
|
|
February
28,
2009
|
|
|
February
29,
2008
|
|
Net
income
|
|
$ |
12,687 |
|
|
$ |
9,516 |
|
|
$ |
23,387 |
|
|
$ |
16,210 |
|
Determination
of shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
common shares outstanding
|
|
|
28,916 |
|
|
|
28,848 |
|
|
|
28,888 |
|
|
|
28,815 |
|
Assumed
conversion of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
108 |
|
|
|
140 |
|
|
|
106 |
|
|
|
142 |
|
Restricted stock grant (1)
|
|
|
155 |
|
|
|
245 |
|
|
|
151 |
|
|
|
250 |
|
Diluted
average common shares outstanding
|
|
|
29,179 |
|
|
|
29,233 |
|
|
|
29,145 |
|
|
|
29,207 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
income per share
|
|
$ |
0.44 |
|
|
$ |
0.33 |
|
|
$ |
0.81 |
|
|
$ |
0.56 |
|
Diluted
income per share
|
|
$ |
0.43 |
|
|
$ |
0.33 |
|
|
$ |
0.80 |
|
|
$ |
0.56 |
|
(1)
|
Restricted
stock was issued to certain employees in the three and six
month periods ended February 28, 2009 and February 29, 2008,
respectively. The dilutive effect of the restricted stock issued is 1,052
shares and 190 shares for the three and six month periods ended
February 28, 2009, respectively. The dilutive effect of the restricted
stock issued is 3,192 and 878 for the three and six month
periods ended February 29, 2008,
respectively.
|
NOTE 6 – STOCKHOLDERS’
EQUITY
Dividends
On
January 29, 2009, the Company’s Board of Directors declared a cash dividend
in the total amount of $0.50 per share, of which $0.25 per share was paid on
February 27, 2009 to stockholders of record as of the close of business on
February 13, 2009 and $0.25 per share is payable on August 31,
2009 to stockholders of record as of the close of business on August 14,
2009.
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
consists of foreign currency translation adjustments and unrealized gains and
losses on interest rate swaps. The unfavorable translation adjustments
during the six months ended February 28, 2009 and February 29, 2008 were
primarily due to weaker foreign currencies.
Retained
Earnings Not Available for Distribution
As of
February 28, 2009 and August 31, 2008, included in retained earnings of certain
subsidiaries are legal reserves of approximately $1.8
million and $1.0 million, respectively, which cannot be
distributed as dividends by the Company's subsidiaries to the Company according
to statutory regulations.
PRICESMART,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
NOTE 7 – STOCK OPTION AND EQUITY
PARTICIPATION PLANS
On
January 28, 2009, the stockholders of the Company approved an amendment to the
2001 equity participation plan expanding the eligibility provisions under the
plan to permit the award of restricted stock units to non-employee directors and
authorizing an increase to the number of shares of common stock reserved for
issuance from 350,000 to 400,000. An amendment to the 2002 equity participation
plan was also approved to increase the number of shares of common stock reserved
for issuance from 750,000 to 1,250,000.
The
following table summarizes the components of the stock-based compensation
expense for the three and six months ended February 28, 2009 and February 29,
2008 (in thousands), which are included in general and administrative expenses
and warehouse expenses in the consolidated statement of income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vesting
of options granted to employees and directors
|
|
|
|
|
|
|
|
|
|
|
|
|
Vesting
of restricted stock grants
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following table summarizes stock options outstanding as of February 28, 2009, as
well as the activity during the six months then ended:
|
|
Shares
|
|
Weighted Average
Exercise Price
|
Shares
subject to outstanding options at August 31,
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
subject to outstanding options at February 28, 2009
|
|
|
|
|
|
|
As of
February 28, 2009, options to purchase 242,245 shares were exercisable and there
were 946,319 shares of the Company's common stock reserved for future
issuance, of which 665,874 shares are available for future grants. The
following table summarizes information about stock options outstanding and
options exercisable as of February 28, 2009:
Range
of
Exercise
Prices
|
|
|
Outstanding as
of
February 28, 2009
|
|
|
Weighted-Average
Remaining
Contractual
Life
|
|
|
Weighted-Average
Exercise
Price
|
|
|
Exercisable as
of February
28, 2009
|
|
|
Weighted-Average
Exercise
Price
as
of February 28, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
aggregate intrinsic value and weighted average remaining contractual term of
options exercisable at February 28, 2009 was $2.2 million and 1.1 years,
respectively. The aggregate intrinsic value and weighted average
remaining contractual term of options outstanding at February 28, 2009 was $2.3
million and 1.4 years, respectively. The intrinsic value of a stock
option is the amount by which the market value of the underlying stock exceeds
the exercise price.
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 issued in the first six months of fiscal years 2009
and 2008:
|
Six
Months Ended
|
|
February
28,
2009
|
|
February
29,
2008
|
Risk
free interest rate
|
2.02%
|
|
3.25%
|
Expected
life
|
5
years
|
|
5
years
|
Expected
volatility
|
53.55%
|
|
47.83%
|
Expected
divided yield
|
1.8%
|
|
1.2%
|
Cash
proceeds from stock options exercised, tax benefits related to stock options
exercised and the intrinsic value related to total stock options exercised
during the six months ended February 28, 2009 and February 29, 2008 are
summarized in the following table (in thousands):
|
|
Six
Months Ended
|
|
|
|
February
28, 2009
|
|
|
February
29, 2008
|
|
Proceeds
from stock options exercised
|
|
$ |
75 |
|
|
$ |
801 |
|
Tax
benefit related to stock options exercised
|
|
|
143 |
|
|
|
64 |
|
Intrinsic
value of stock options exercised
|
|
$ |
124 |
|
|
$ |
717 |
|
In fiscal
year 2006, the Company began granting restricted stock. The restricted stock
grants vest over a five-year period, with the unvested portion being forfeited
if the employee leaves the Company before the vesting period is completed.
Restricted stock grant activity for the six months ending February 28, 2009
and February 29, 2008 was as follows:
|
|
Six
Months Ended
|
|
|
February
28, 2009
|
|
|
February
29,
2008
|
Grants
outstanding at August 31, 2008 and August 31, 2007,
respectively
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grants
outstanding at February 28, 2009 and February 29, 2008,
respectively
|
|
|
|
|
|
The
remaining unrecognized compensation cost related to unvested options and
restricted stock grants at February 28, 2009 and February 29, 2008 was
approximately $9.0 million and $12.1 million, respectively, and the
weighted-average period of time over which this cost will be recognized is
3.5 years and 3.5 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
vest at the rate of 20% per year commencing on March 29, 2008,
subject to stockholder approval of the amendment. On January 28, 2009, the
stockholders approved an amendment to the 2001 equity participation plan
expanding eligibility provisions under the plan to permit the award of
restricted stock units to non-employee directors.
PRICESMART,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Total
restricted stock units activity, relating to the 2001 Plan for the six months
ended February 28, 2009 and February 29, 2008 was as follows:
|
|
|
Six
Months Ended
|
|
|
|
|
February
28,
2009
|
|
|
February
29,
2008
|
|
Grants
outstanding at August 31, 2008 and August 31, 2007,
respectively
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grants
outstanding at February 28, 2009 and February 29, 2009,
respectively
|
|
|
|
|
|
|
|
In fiscal
year to date 2009 and 2008, the Company repurchased 65,945 and 42,720 shares
respectively of common stock from employees for approximately $1.1 million and
$1.3 million, 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 and exercise of stock
options.
NOTE
8 – 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 Company closed its Commerce,
California distribution center on August 31, 2004. In fiscal
year 2007, the Company closed its San Pedro Sula, Honduras location which was
subsequently sold and relocated to a new site which was acquired in fiscal year
2006 in another section of the city. During fiscal year 2008, the
Company recorded an impairment charge of approximately $449,000 of
bulk packaging equipment that was unusable. For the first six months of fiscal
year 2009, the Company has recorded a credit for impairment charge of
approximately ($5,000) due to the sale of previously impaired bulk
equipment.
A
reconciliation of the changes and related liabilities derived from the closed
warehouse clubs as of February 28, 2009 is as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability
as of
August 31,
2008
|
|
|
Charged
to
Expense
|
|
|
Cash
(Paid)/
Received
|
|
|
Non-cash
Amounts
|
|
|
Liability
as of
February
28, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Amount
includes $3.5 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.
|
(2)
|
Amount
of additional lease obligations due to increase in rent for closed
warehouse club in Guatemala (fiscal year 2009).
|
(3)
|
Amount
includes $3.6 million of accrued closure costs and $191,000 of short-term
lease obligations (included within other accrued expenses) on the
consolidated balance sheet as of February 28, 2009.
|
(4)
|
Gain
on sale of previously impaired
equipment.
|
NOTE
9 – 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
February 28, 2009 and 2031.
As
of February 28, 2009, our warehouse club buildings occupied a total of
approximately 1,577,755 square feet of which 410,249 square feet were on
leased property. The following is a summary of the warehouse clubs and Company
facilities located on leased property:
Location (1)
|
|
Facility
Type
|
|
Date
Opened
|
|
Approxi-mate
Square
Footage
|
|
Current
Lease
Expiration
Date
|
|
Remaining
Option(s)
to
Extend
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Former
clubs located in Guam and Guatemala are not included; these warehouse
clubs were closed in fiscal years 2004 and 2003, respectively. The
respective land and building are currently subleased to
third-parties.
|
Future
minimum lease commitments for facilities under these leases with an initial term
in excess of one year are as follows (in thousands):
Periods
Ended February 28,
|
|
Open
Locations
(1)
|
|
|
Closed
Location
(2)
|
|
|
|
$ |
6,239 |
|
|
$ |
392 |
|
|
|
|
5,771 |
|
|
|
345 |
|
|
|
|
5,322 |
|
|
|
321 |
|
|
|
|
5,517 |
|
|
|
321 |
|
|
|
|
5,578 |
|
|
|
321 |
|
|
|
|
57,283 |
|
|
|
3,573 |
|
|
|
$ |
85,710 |
|
|
$ |
5,273 |
|
(1)
|
Operating
lease obligations have been reduced by approximately $543,000 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 $2.7 million; sublease income for this location is
approximately $2.9 million, yielding no net projected
obligation.
|
The
Company also has an equipment lease (IBM). The Company’s annual future
minimum lease payments are approximately $107,000; this lease expires on
November 30, 2010.
|
PRICESMART,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The
Company has operating lease agreements for rental of land and/or building space
for properties it owns which the Company is recognizing rental income. The
following is a schedule of future minimum rental income on non-cancelable
operating leases as of February 28, 2009 (in thousands):
Periods
ended February 28,
|
|
Amount
in thousands
|
|
|
|
$ |
1,667 |
|
|
|
|
1,440 |
|
|
|
|
1,015 |
|
|
|
|
813 |
|
|
|
|
786 |
|
|
|
|
6,916 |
|
|
|
$ |
12,637 |
|
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.
The
Company accrues an amount for its estimate of probable additional income tax
liability in accordance with the 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.
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 February 28, 2009, the Company believes it has accrued
for probable and estimable exposures. As of February 28, 2009, and August 31,
2008, the Company had recorded within other accrued expenses a total of $2.1
million and $2.5 million, respectively, for various non-income tax related
contingencies.
While the
Company believes the recorded liabilities are adequate, there are inherent
limitations in projecting the outcome of litigation, and in
the estimation processes of probable additional income tax liability in
accordance with the provisions of FIN 48 and in evaluating the exposure
associated with various tax filing positions, exclusive of accounting for income
taxes. Due to these limitations future actual losses my exceed
projected losses, which could materially adversely affect the Company's
operating results or financial condition.
See Note
15-Unconsolidated Affiliates for a description of additional capital
contributions that may be required in connection with joint ventures to develop
commercial centers adjacent to PriceSmart warehouse clubs in Panama and Costa
Rica.
NOTE 11 – SHORT-TERM BORROWINGS AND
LONG-TERM DEBT
As of
February 28, 2009 and August 31, 2008, the Company, together with its
majority or wholly owned subsidiaries, had $3.7 million and $3.5 million,
respectively, outstanding in short-term borrowings, at a weighted-average
interest rates of 10.3% and 8.8%, 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. Each of the facilities expire during the
year and are normally renewed. As of February 28, 2009 and August 31,
2008, the Company had approximately $6.3 million and $5.8 million available on
these facilities, respectively. Additionally, the Company has bank
credit agreements for up to $10.0 million, which can be used as lines of credit
or to issue letters of credit. As of February 28, 2009, lines and letters
of credit totaling approximately $40,000 were outstanding under these
facilities, leaving availability of approximately $10.0 million.
PRICESMART,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
As of
February 28, 2009 and August 31, 2008, the Company, together with its majority
or wholly owned subsidiaries, had $33.7 million and $25.8 million, respectively,
outstanding in long-term borrowings. Of this amount, approximately
$415,000 relates to a loan from Prico Enterprises (see Note 15-Unconsolidated
Affiliates). As of February 28, 2009 and August 31, 2008, $8.1 million and $8.5
million, respectively, relate to loans that require the Barbados entity to
comply with certain annual financial covenants, which include debt service and
leverage ratios. During the current quarter, the Company detected that it was
not in compliance with the exact covenants described in the underlying
contracts. However, the bank has provided a written commitment to work with the
Company during the third quarter to modify the contractual language to better
reflect the original intent of this covenant. In the meantime, the Company has
obtained a written waiver from the bank with respect to said non-compliance. 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 during the term of the debt. The
carrying amount of the non-cash assets assigned as collateral for long-term debt
was $46.2 million and $32.2 million as of February 28, 2009 and August 31, 2008,
respectively.
NOTE
12 – INTEREST RATE SWAPS
The
Company is exposed to certain risks relating to its ongoing business operations.
The primary risk managed by the Company using derivative instruments
is interest rate risk. To manage interest rate exposure, the
Company entered into hedge transactions (interest rate swaps) using derivative
financial instruments. The objective of entering into interest rate
swaps is to eliminate the changes (variability) of cash flows in the LIBOR
interest payments associated with variable-rate loans over the life of the
loans. As changes in interest rates impact the future cash flow of
interest payments, the hedges provide a synthetic offset to interest rate
movements.
For
derivative instruments that are designated and qualify as a cash flow hedge, the
effective portion of the gain or loss on the derivative is reported as a
component of other comprehensive income and reclassified into earnings in the
same period or periods during which the hedged transaction affects earnings.
Gains and losses on the derivative representing either
hedge ineffectiveness or hedge components excluded from the assessment of
effectiveness are recognized in current earnings.
On
November 20, 2008, the Company entered into an interest rate swap agreement with
the Royal Bank of Trinidad & Tobago LTD ("RBTT") for a notional amount of
$8.9 million. This swap agreement was entered into in order to fix the interest
rate of a $9.0 million loan. The loan has a variable interest rate of one year
LIBOR plus a margin of 2.75%. Under the swap agreement, the Company will pay a
fixed rate of 7.05% for a term of approximately five years (until September 26,
2013). The notional amount of $8.9 million is scheduled to amortize to $4.5
million over the term of the swap. The LIBOR reset dates for the $9.0 million of
term loan debt and the notional amount of $8.9 million on the interest rate swap
are effective annually on August 26. As the interest rate swap is fixed at
7.05%, the difference between the actual floating rate (one year LIBOR plus
margin of 2.75%) and the fixed rate of 7.05% applied against the notional amount
of the swap each month is paid to or received from RBTT.
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 on a $4.5 million loan
obtained in Barbados dollars. 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 (until 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 semi-annually is paid to or received
from Citibank N.A.
PRICESMART,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
For
derivative instruments that are designated and qualify as a fair value hedge,
the gain or loss on the derivative as well as the offsetting loss or gain on the
hedged item attributable to the hedged risk are recognized in current earnings.
For the six months ended February 28, 2009 and February 29, 2008, the
Company included the gain or loss on the hedged items (that is, fixed-rate
borrowings) in the same line item—interest expense—as the offsetting loss or
gain on the related interest rate swaps as follows (in thousands):
Income
Statement Classification
|
|
Interest
expense
on
Swaps
|
|
|
Interest
expense
on
Borrowings
|
|
Interest
expense for the six months ended February 28, 2009
|
|
$ |
351 |
|
|
$ |
295 |
|
Interest
expense for the six months ended February 29, 2008
|
|
$ |
69 |
|
|
$ |
83 |
|
The total
notional amount of the Company’s pay-fixed/receive-variable interest rate swaps
was as follows (in thousands):
|
|
Notional
Amount
|
|
|
Notional
Amount
|
|
Floating Rate Payer (Swap
Counterparty)
|
|
as
of February 28, 2009
|
|
|
as
of August 31,
2008
|
|
|
|
$ |
8,550 |
|
|
$ |
- |
|
|
|
$ |
4,050 |
|
|
$ |
4,275 |
|
|
|
$ |
12,600 |
|
|
$ |
4,275 |
|
In
accordance with Statement of Financial Accounting Standards (SFAS) No. 157,
“Fair Value Measurements" (“SFAS 157”), the Company measures the fair value for
all financial assets and liabilities that are recognized or disclosed at fair
value in the financial statements on a recurring basis or on a nonrecurring
basis during the reporting period as further described within Note
2. The following tables summarize the effect of the fair valuation of
derivative instruments (in thousands):
|
|
|
|
|
|
|
|
Derivatives
designated as hedging instruments under Statement
133
|
|
|
|
|
|
|
|
|
|
|
|
$ |
562 |
|
|
|
$ |
8 |
|
Total derivatives designated as hedging instruments under Statement 133
(2)
|
|
|
$ |
562 |
|
|
|
$ |
8 |
|
(1)
|
The
effective portion of the interest rate swaps was recorded as a
debit to accumulated other comprehensive loss for $562,000 as of February
28, 2009. |
(2)
|
There
were no derivatives not designated as hedging instruments under Statement
133.
|
The effect of
derivative instruments on the consolidated income statement for the three
and six months ended February
28, 2009 and February 29, 2008 (in thousands):
|
|
|
Amount
of Gain or (Loss) Recognized in Income on
Derivatives
|
|
|
|
|
|
|
|
Derivatives
in Statement 133 Fair Value Hedging Relationships
|
Location
of Gain or (Loss) recognized in Income on Derivative
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income/(expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
respective periods there were no amounts recorded for gain or (loss) on interest
rate swaps recognized on the consolidated statement of income deemed to be
ineffective. The Company recognizes the fair value of interest rate swaps in
accumulated other comprehensive loss as they are cash flow hedges in accordance
with Statement 133.
PRICESMART,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
NOTE
13 – 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
September 2008 (fiscal year 2009), the Company acquired all the common shares of
Weinar Resources Inc. Weinar Resources' only asset (it has no
known liabilities) was 13,102 square meters of land located in Panama City,
Panama, upon which the Company plans to construct and relocate an
existing 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, with parking at grade level and the
building on the second level. The 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 fiscal year 2010. The Company acquired Weinar
Resources for approximately $2.9 million. The fair values of the land
acquired 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 2 inputs under SFAS No. 157, "Fair Value Measurements" to determine
the pricing of the assets. The Company negotiated and determined the fair
value of the land utilizing market conditions and comparable pricing in
estimating the fair value. 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.”
NOTE
14 – 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
resolved 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, required 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 was able
to require the Company to purchase at $25 per share any of those
shares that remained 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.
PRICESMART,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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 in fiscal year 2008. On
September 9, 2008, (fiscal year 2009), the Company completed the purchase of the
remaining 6,454 shares for approximately $161,000.
Payments made
by the Company pursuant to the settlement agreement for items (i), (ii), (iii),
and (iv) were approximately $17.9 million from available operating funds in
fiscal year 2008. Of this amount, $350,000 was deposited into escrow and was
recorded as restricted cash, as final release of these funds was subject to
performance by the PSC Parties of certain actions. On August 31, 2008
approximately $250,000 remained held in escrow. As of February 28, 2009, fiscal
year 2009, no amounts remain held in escrow. Additional non-cash
expenses pursuant to this agreement included the write-off of PSC related
accounts receivable that totaled approximately $530,000 in fiscal year
2008. 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 in fiscal year 2008. Cash expenses incurred for
escrow fees related to the settlement for approximately $16,500 were also
recorded in fiscal year 2008. No additional cash or non-cash expenditures were
incurred during the first six months of fiscal year 2009.
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.
As a
result of the executed legal settlement with PSC, S.A. and related entities, the
following items were recorded:
|
•
|
For
the first six months and for the entire fiscal year 2008, additional
reserves of approximately $1.2 million and $1.3 million were recorded
respectively for costs associated with the settlement incurred in excess
of the initial $5.5 million reserve established in fiscal year 2007
relating to 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. No additional reserves were
established for the first six months of fiscal year
2009.
|
|
•
|
For
the first six months and for the entire fiscal year 2008, the Company
recorded approximately $2.2 million and $120,000, respectively for the
cost associated with the market valuation of the put
agreement. No additional costs to record the fair value of the
put arrangement were recorded for the first six months of fiscal year
2009.
|
|
•
|
For
the first six months and for the entire fiscal year 2008, the Company in
accordance with the Company’s accounting policy recoded the
re-classification of approximately $17.0 million and $161,000,
respectively, from additional paid in capital to a liability account,
common stock subject to put agreement. On September 9, 2008,
fiscal year 2009, the Company recorded the final settlement of the
liability.
|
|
•
|
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. The Company did not record any tax benefits or
liabilities due to the put settlement during the first six months of
fiscal year 2009.
|
PRICESMART,
INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS—(Continued)
NOTE
15 – UNCONSOLIDATED AFFILIATES
The
Company's investments in unconsolidated affiliates are accounted for under the
Accounting Principles Board Opinion 18, "The Equity Method of Accounting for
Investments in Common Stock ("APB 18") and the Financial Accounting Standards
Board Interpretation 46(R), "Consolidation of Variable Interest Entities" ("FIN
46(R)"). APB 18 establishes that investments in common stock are initially
recorded as an investment in the stock of an investee at cost, and are adjusted
for the carrying amount of the investment to recognize the investor's share of
the earnings or losses of the investee after the date of acquisition. FIN
46(R) defines how to identify variable interest entities and how an enterprise
assesses its interests in a variable interest entity to decide whether to
consolidate that entity or to reflect its investment in that entity's common
stock utilizing the equity method of accounting. This interpretation requires
existing unconsolidated variable interest entities to be consolidated by their
primary beneficiaries if the entities do not effectively disperse risks among
parties involved.
On
September 24, 2008 the Company entered into an agreement with an entity
controlled by local Panamanian businessmen, Fundacion Tempus Fugit S.A.
("FIDAU") to jointly own and operate a commercial retail center adjacent to its
new PriceSmart warehouse club, with the Company and FIDAU each owning a 50%
interest in the entity Golf Park Plaza, S.A. The Company
recorded an initial investment in Golf Park Plaza of approximately
$4.6 million. The Company and FIDAU have each agreed to contribute at
least $2.5 million of additional capital to the project. However, the
parties intend to seek alternate financing for the project, which would reduce
the amount of additional capital each party would be required to
provide. In addition, the parties may mutually agree on changes to
the project, which may also reduce the amount of capital each party is required
to contribute. As of February 28, 2009, no additional capital contributions
have been made by the Company. On September 24, 2008,
Golf Park Plaza acquired 38,331 square meters of real estate, upon
which a retail center will be constructed.
On
September 29, 2008 the Company entered into an agreement with an entity
controlled by local Costa Rican businessmen, JB Enterprises ("JBE"), to jointly
own and operate a commercial retail center adjacent to the anticipated new
PriceSmart warehouse club in Alajuela, Costa Rica with the Company and JBE each
owning a 50% interest in the joint venture Price Plaza Alajuela, S.A.
("PPA"). The Company recorded an initial investment in PPA of approximately $2.2
million. The Company and JBE have each agreed to contribute at least $2.0
million of additional capital to the project. However, the parties
intend to seek alternate financing for the project, which would reduce the
amount of additional capital each party would be required to
provide. In addition, the parties may mutually agree on changes to
the project, which may also reduce the amount of capital each party is required
to contribute. As of February 28, 2009, the Company made additional capital
contributions of approximately $372,000. On September 29, 2008,
PPA acquired 21,576 square meters of real estate, upon which the retail
center will be constructed.
On
September 29, 2008 the Company entered into a second agreement with an
entity controlled by local Costa Rican businessmen, Prico Enterprises ("Prico"),
to jointly own property adjacent to the anticipated new PriceSmart warehouse
club in Alajuela and the retail center to be owned and operated by PPA,
with the Company and Prico each owning a 50% interest in the joint venture. The
Company recorded an initial investment in the joint venture of
approximately $424,000. The Company obtained a three year, zero interest loan
from Prico to finance the acquisition of its minority interest for
approximately $475,000. The Company has recorded the discounted present value of
this loan of approximately $409,000 as part of its investment in the joint
venture. The Company has reflected this amount as a long-term
debt within its balance sheet. As a result of the loan, the
shares of the Company are held within a trust, established as part of the loan
agreement with Prico. On September 29, 2008, 4,996 square meters
of real estate were acquired by this entity. As of February 28, 2009 there are
no commitments to make additional capital contributions to this joint
venture.
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 as indicated in Accounting Principles Board
Opinion ("APB") No. 18, "The Equity Method of Accounting for Investments in
Common Stock" ("APB 18").
On
October 31, 2007 (fiscal year 2008), 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. The Company had previously 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. 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.
PRICESMART,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The
summarized financial information of the unconsolidated affiliates is as follows
(in thousands):
|
|
February
28,
2009
|
|
|
August
31,
2008
|
|
|
|
$ |
440 |
|
|
$ |
— |
|
|
|
|
14,938 |
|
|
|
— |
|
|
|
|
25 |
|
|
|
— |
|
|
|
$ |
— |
|
|
$ |
— |
|
NOTE
16 – RELATED-PARTY TRANSACTIONS
Use of Private Plane: On
February 23, 2007, the Company entered into an agreement with PFD Ivanhoe,
Inc. to purchase its 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. From time to time, members of the Company’s
management use a private plane owned in part by PFD Ivanhoe 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. Mr. Sol Price is a significant stockholder of the Company
and is the father of Mr. Robert E. Price the Company's Chairman and Chief
Executive Officer. Mr. Galinson is a member of the Company's Board of
Directors and Mr. McGrory is a member of the Board of Directors and an employee
of the Company. If the passengers are solely Company personnel, then the
Company reimburses PFD Ivanhoe for a portion of the fixed management fee and
additional expenses 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. The Company reimbursed PFD Ivanhoe 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 Director of The Price Group (including Robert
E. Price). The Company paid approximately $14,000 and $55,000 for the six
months ended February 28, 2009 and February 29, 2008, respectively, for these
services.
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 (see
Note 14 – PSC Settlement), Mr. Zurcher resigned from the Company’s board of
directors on February 8, 2008. 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. Mr. Zucher is a
partner in a law firm that the Company utilizes in certain legal matters. The
Company incurred approximately $1,000 of legal expenses with this firm during
the first six months of fiscal year 2008. 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 in rental income for this space during the first six months of fiscal
year 2008. Mr. Zurcher is also a director of Banco Promerica, from
which the Company has recorded approximately $148,000 of rental income during
the six months of fiscal year 2008 for space leased to it by the Company.
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.
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
owned approximately 1.7 million shares of common stock of the Company as of
December 31, 2008. In addition, Gonzalo Barrutieta who has served
as 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.
Relationships with Price Charities:
During the first six months of fiscal year 2009 and 2008, the Company
sold approximately $34,000 and $9,000, respectively of supplies to Price
Charities, a charitable group affiliated with Robert E. Price and Sol
Price.
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.
PRICESMART,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
NOTE
17 – SEGMENT REPORTING
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 the first six months of fiscal year
2009, the United States, Central American and Caribbean Operations operating
income do not contain charges related to the settlement litigation and the put
agreement pursuant to the PSC Settlement. For the six-month period ended
February 29, 2008 and for the entire fiscal year ended August 31, 2008, the
United States Operations operating income includes $2.2 million and $120,000,
respectively, of charges related to put agreement pursuant to the PSC
Settlement (see Note 14-PSC Settlement). For the six-month period
ended February 29, 2008 and for the entire fiscal year ended August 31,
2008, the Central American and Caribbean operating income includes $1.2
million of charges related related to the PSC settlement (see Note
14-PSC Settlement). Information related to our segments for the six months ended
February 28, 2009 and February 29, 2008, and the fiscal year ended August 31,
2008 is as follows (in thousands):
|
|
United
States
Operations
|
|
|
Central
American
Operations
|
|
|
Caribbean
Operations
|
|
|
Total
|
|
Six
Months Ended February 28, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset
impairment and closure (costs) income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from discontinued operations, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
of discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
Months Ended February 29, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset
impairment and closure (costs) income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax (expense) benefit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from discontinued operations, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
of discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended August 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset
impairment and closure (costs) income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from discontinued operations, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
of discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable
assets |
|
|
61,876 |
|
|
|
254,333 |
|
|
|
135,204 |
|
|
|
451,413 |
|
PRICESMART,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
NOTE
18 – SUBSEQUENT EVENTS
On
February 27, 2009, the Company entered into a fixed 6.77% interest rate loan
agreement with First Caribbean International Bank of Trinidad & Tobago for
an amount of $9.5 million to be paid over a 10 year term. The
loan was funded on February 27, 2008 and the funds were deposited into a call
deposit account pending the Company’s providing a letter of legal
opinion. The Company recorded the receipt of these funds into the
call deposit account as short term restricted cash as of February 28,
2009. The Company provided the letter on March 10, 2009, and the
funds were made available and transferred into the Company’s operating
accounts.
PRICESMART,
INC.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
This
quarterly report on Form 10-Q 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 Annual Report on Form 10-K filed for
the fiscal year ended August 31, 2008 filed November 12, 2008 pursuant
to the Securities Exchange Act of 1934. See “Part II – Item 1A – Risk
Factors.”
The
following discussion and analysis compares the results of operations for the
three and six month periods ended February 28, 2009 (fiscal year 2009) and
February 29, 2008 (fiscal year 2008), and should be read in conjunction with the
consolidated financial statements and the accompanying notes included
herein.
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 February 28, 2009 and February 29,
2008 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
February
28, 2009)
|
|
Number
of
Warehouse Clubs
in Operation (as of
February
29, 2008)
|
|
Ownership (as of
February
28, 2009)
|
|
Basis
of
Presentation
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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 part of a litigation settlement, the Company purchased the
remaining 49% minority interest of its Nicaragua subsidiary from PSC, S.A.
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 February 2009 and 2008, the total number of the Company’s consolidated
warehouse clubs in operation was 25 operating in 11 countries and one U.S.
territory. The average age of the 25 warehouse clubs in operation as of February
28, 2009 and February 29, 2008 was 92 months and 80 months,
respectively.
In
addition to the warehouse clubs operated directly by the Company or through
joint ventures, 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
the Company's business and the results of operations:
General
Economic Factors
·
|
The
economic slowdown in the U.S. and other major world economies is having a
negative impact on the economies of most of those countries where
PriceSmart operates. Published reports indicate that GDP growth rates for
2009 are projected to moderate considerably compared to that experienced
over the past two years. Flat or declining expatriate remittances, falling
U.S. demand for exports from Central America (particularly affecting the maquila export
sector
in Guatemala and Honduras), and reduced
tourism from the U.S. and Europe are all contributing to recessionary
pressures and falling consumer confidence in many of the
Company’s markets. Reduced
overall consumer spending has and will likely continue to affect sales for
the Company.
|
·
|
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. Products imported for sale in PriceSmart markets are
purchased in U.S. dollars, but approximately 79% of the Company's net
warehouse sales are in foreign currencies. In general, local currencies in
PriceSmart markets have 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 makes 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.
|
Current
and Future Management Actions
·
|
Management
is carefully monitoring the economic environment in the Company’s markets
and the resulting shift in member demand toward more consumable
merchandise purchases. In this respect, we are carefully monitoring
invetory mix and levels, while maintaining our pricing leadership position
and aggresively pursuing buying
opportunities.
|
·
|
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.
|
·
|
A
year ago, the Company signed a lease for a larger dry distribution
center in Miami, Florida. The additional space has permitted the
Company to more efficiently service the PriceSmart warehouse
club locations and to realize efficiencies in distribution operating
expenses. In addition, the Company added space to its existing
leased frozen and refrigerated distribution center which will meet the
Company’s projected capacity needs for at least the next year, during
which time the Company 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 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. The
Company introduced the co-branded program in three markets
(Dominican
Republic, Trinidad,
and Barbados)
in the first six
months of
fiscal year 2009 and expects to have the program implemented in
Jamaica and
USVI during
the third quarter of
fiscal year 2009.
|
·
|
Based
on the success of previously expanding the size of certain PriceSmart
buildings, two additional PriceSmart locations are
being expanded
in Aruba and Nicaragua by
an average of 7,500 square feet each. These expansions
will result in larger sales areas to support additional
sales. Construction
is proceeding with expected completion during fiscal
year 2009.
|
·
|
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. The
new Costa
Rica warehouse
club is planned to open in April 2009. In Panama, the Company
will relocate an existing warehouse club to this new site and plans to
sell or lease the existing site after relocation has
occurred. This
is expected to be completed during fiscal year 2010. In December
2008, the Company acquired approximately 31,000 square meters of land in
Trinidad upon which it will construct a new warehouse club which will
bring the number of warehouse clubs in that country to four. This
new warehouse club is expected to be open in the first quarter of fiscal
year 2010. In
addition, the Company is conducting a due diligence review on a site in
the Dominican
Republic,
as to which the Company has entered into an option to purchase
agreement. Finally, the Company
continues to examine 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 a
successful PriceSmart warehouse club enhances real estate
values. In acquiring suitable sites for new warehouse clubs, the
Company sometimes is required to purchase a land parcel that is
larger than what is typically needed for the warehouse club
itself. In those cases, the Company may utilize the
additional land for commercial real estate developments. For example,
related to the recently acquired sites in Panama and Costa Rica, the
Company purchased a 50% interest in the joint ventures that will own and
develop additional land adjacent to the warehouse club sites
as commercial shopping centers. With respect to the recent Trinidad
site acquisition, the Company is planning to develop approximately 50% of
that site for retail shops.
|
Key items for the first six months of
fiscal year 2009 included:
·
|
Net
warehouse club sales increased 17.5% over the prior year, resulting from a
14.4% 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 the first six months of fiscal year 2009 increased 13.4% to
$8.7 million as a result of a 9% increase in membership accounts from
February 29, 2008 to February 28, 2009, continued strong renewal rates at
84% and a 2.4% increase in the average membership
fee.
|
·
|
Gross
profits (net warehouse club sales less cost of goods sold) increased 16.1%
over the prior year due to increased warehouse sales, and gross margin
decreased 18 basis points as a percent of net warehouse sales resulting
primarily from the effect of foreign exchange rate
movements.
|
·
|
Selling,
general and administrative expenses as a percentage of net warehouse club
sales improved 72 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 first six months of fiscal year was $32.4 million, which
included approximately $264,000 in asset impairment and closure costs, and
$99,000 of pre-opening
expenses.
|
·
|
Net
income for the first six months of fiscal year 2009 was $23.4 million, or
$0.80 per diluted share.
|
COMPARISON
OF THE THREE MONTHS ENDED FEBRUARY 28, 2009 AND FEBRUARY 29, 2008
Net
warehouse club sales increased 13.9% to $328.2 million in the second quarter of
fiscal year 2009 from $288.2 million in the second quarter of fiscal year 2008.
The Company believes that sales growth reflects the Company’s ongoing efforts in
the selection and value of the merchandise carried in the clubs and the value
that we bring to our members. Net warehouse sales were strong despite an
economic slow-down in most of the Company’s markets. Sales of food and
consumable products grew 18%, and non-consumable product sales grew 0.4%
reflecting an ongoing shift in buying toward less discretionary purchases. The
growth in sales in the quarter was largely driven by increased transactions
resulting from both an increase in the number of membership accounts from a year
ago and an increase in the frequency of shopping per member account. In the
second quarter of fiscal year 2009, increased transactions accounted for
approximately 82% of the sales growth with the increase in the average
transaction value accounting for approximately 18% of the sales growth. The
impact of having an additional club in operation for most of the quarter
–Trinidad, which opened on December 13, 2007 - accounted for approximately 1.4%
of the overall sales growth in the quarter compared to the same quarter a year
ago.
|
|
Warehouse
Club Sales for the
Three
Months Ended
|
|
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|
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|
February
28, 2009
|
|
|
February
29, 2008
|
|
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Amount
|
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|
% of Net
Revenue
|
|
|
Amount
|
|
|
% of Net
Revenue
|
|
|
Increase
|
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|
Change
|
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(Dollar
amounts in thousands)
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Comparable
warehouse club sales, which are for warehouse clubs open at least 13 1/2 full
months, increased 14.3% for the 13-week period ended February 28, 2009, compared
to the same period last year. The Company reports comparable warehouse club
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 Guatemala on November 14, 2007 were not 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 was not be used in the calculation of comparable warehouse club sales until
the month of February 2009.
The
Company’s warehouse gross profit margin (defined as net warehouse club sales,
less associated cost of goods sold) in the second quarter of fiscal year 2009
increased $5.3 million to $48.2 million, or 14.7% of net warehouse club sales,
from $42.9 million, or 14.9% of net warehouse club sales. The increase in
warehouse gross profit margin dollars was largely due to higher sales. As a
percentage of sales, warehouse net profit margin decreased primarily related to
foreign currency exchange effects. In the current quarter, the Company recorded
$714,000 (0.22% of sales) in foreign exchange related costs compared to $225,000
(.08% of sales) in foreign exchange related gains in the second quarter of
fiscal year 2008. The countries which accounted for the majority of the
year-over-year change were Guatemala, Costa Rica, and Jamaica.
Membership
income, which is recognized into income ratably over the one-year life of the
membership, increased 11.3% to $4.4 million, or 1.4% of net warehouse club
sales, in the second quarter of fiscal year 2009 compared to $4.0 million, or
1.4% of net warehouse club sales, in the second quarter of fiscal year 2008. The
increase in membership income reflects both a 9% increase in the number of
membership accounts, and a 1.7% increase in the average membership fee. The
membership renewal rate for the 12-month periods ended February 28, 2009 and
February 29, 2008 was 84%. Total membership accounts as of February 28, 2009
were approximately 627,000, an increase of approximately 54,000 accounts
over the end of February 2008.
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 was $1.2 million in the second quarter of fiscal
year 2009, compared to $1.3 million in the second quarter of fiscal year
2008.
Warehouse
club operating expenses increased 9.7% to $28.5 million, or 8.7% of net
warehouse club sales, in the second quarter of fiscal year 2009 from $26.0
million, or 9.0% of net warehouse club sales, in the second quarter of fiscal
year 2008. Of the $2.5 million increase, $1.3 million related to
increased payroll-related expenses, including stock compensation expense and
$281,000 related to increased operating costs for repair and maintenance, and
supplies. Utilities costs decreased $310,000, or 11%, resulting from reduced
utility rates in the countries. Marketing costs increased $115,000 primarily as
a result of the launch costs associated with the Company’s co-branded credit
card in the second quarter of fiscal year 2009. The program has been
successful with credit card costs as a percentage of warehouse sales declining
eight basis points when compared to the second quarter of fiscal year 2008
with the second quarter of fiscal year 2008 in the markets where the
co-branded card is offered. Depreciation
expense increased $562,000 from the second quarter of fiscal year 2008 related
to on-going capital investments made in the existing warehouse clubs, including
expansions in Aruba and Nicaragua and the acquisition in November 2007 of the
Barbados warehouse club which had formerly been
leased.
General
and administrative expenses were $7.8 million, or 2.4% of net warehouse club
sales, for the second quarter of fiscal year 2009, compared to $7.9 million, or
2.7% of net warehouse club sales, in the second quarter of fiscal year 2008. The
Company experienced increased costs related to salaries and related benefits for
its corporate and US buying operation, including stock compensation expense
totaling $771,000. These costs were offset by a $725,000 reduction in
professional fees, primarily related to the then-pending litigation with the
Company's former credit card provider and related entities and tax consulting
services incurred in the second quarter of fiscal year 2008. Expenses incurred
before a warehouse club is in operation are captured in pre-opening expenses.
Pre-opening expenses in the second quarter of fiscal year 2009 were $99,000
related to the new warehouse club in Costa Rica which is scheduled to open in
April 2009. Pre-opening expenses in the second quarter of fiscal year 2008 of
$215,000 were primarily associated with the new warehouse club in
Trinidad.
Included
in the results for the second quarter of fiscal year 2008 were pre-tax charges
and income tax benefits related to the Company’s settlement of disputes pursuant
to a Settlement Agreement and Release with PSC, S.A. 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 the second quarter of fiscal year 2008, the Company
recorded an additional pre-tax charge of $3.4 million, offset by a benefit to
provision for income tax of $1.7 million, resulting in a net reduction in net
income in the quarter of $1.7 million. Included in the pre-tax charge of $3.4
million, and not affecting the income tax benefit, was a charge of $2.2 million
related specifically to the fair market value of put rights granted by the
Company to PSC as part of the overall settlement. The closing price of the
Company’s common stock on February 29, 2008 was $24.26. The Settlement
Agreement and Release provided 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, required 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 $25.00 per share any of those shares which remained unsold at the
conclusion of that period. The value of the put rights was initially measured at
February 8, 2008 (the date of the settlement) and modified as of
February 29, 2008 (the end of the fiscal quarter) based on the closing
price of PriceSmart’s common stock on that date using the Black-Scholes method
of valuation and applied to 679,500 shares that were subject to the put rights.
The Company continued to employ “mark to market” accounting in valuing the put
rights.
These
matters were settled during fiscal year 2008 and no additional charges have been
realized or are expected to be realized in fiscal year 2009.
Operating
income for the quarter was $17.5 million, or 5.3% of net warehouse club sales,
compared to $10.7 million, or 3.7% of net warehouse club sales, in the second
quarter of fiscal year 2008.
Interest
income reflects earnings on cash and cash equivalent balances and restricted
cash deposits securing either long-term debt or working capital lines of credit.
Interest income was $115,000 in the second quarter of fiscal year 2009, compared
to $364,000 in the second quarter of fiscal year 2008. The decrease primarily
reflects lower interest rates associated with cash on deposit in the current
period compared to a year ago.
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
$609,000 in the second quarter of fiscal year 2009, from $470,000 in the second
quarter of fiscal year 2008, resulting from an increase in debt held by the
Company. In addition, a portion of the fiscal year 2008 interest was
capitalized as it related to the construction of new warehouse
clubs.
Tax expense
for the second quarter of fiscal year 2009 was $4.1 million on pre-tax income of
$16.9 million, as compared to $890,000 of tax expense on pre-tax
income of $10.5 million for the second quarter of fiscal year 2008. The
effective tax rate for the second quarter of fiscal year 2009 is 24.2% as
compared
to 8.5% for the second quarter of fiscal year 2008. The effective tax rate for
the second quarter of fiscal year 2009 of 24.2% reflects the benefit of the
reversal of previously accrued income tax liability for uncertain tax positions
due to a lapse in various statutes of limitations for the second quarter of
fiscal year 2009 in the amount of $967,000. The effective tax rate for the
second quarter of fiscal year 2008 of 8.5% was the result of the following
factors (i) the Company recorded the net tax benefit of approximately $1.7
million due to the PSC Settlement applicable to fiscal year 2008, and (ii) the
Company recorded a reversal of previously accrued income tax liability for
uncertain tax positions due to a lapse in various statutes of limitations for
the second quarter of fiscal year 2008 in the amount of $1.0 million. The
increase in the effective tax rate is a combination of the factors detailed for
each year relative to the overall pre-tax income, which increased $6.5
million in the second quarter of fiscal year 2009 as compared to the second
quarter of fiscal year 2008.
For the
second quarter of fiscal year 2009, the Company reported approximately $7,000 in
losses from its unconsolidated affiliates in Costa Rica and Panama. This was
primarily due to legal and administrative start up costs incurred by the joint
ventures described below under the heading "Liquidity and Capital
Resources-Financing Activities." The joint ventures are accounted for under the
equity method of accounting in which the Company reflects its proportionate
share of income or loss.
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 $85,000 in the second quarter of fiscal year 2009. In
the same period last year, the joint ventures for which there was a minority
stockholder interest generated income of which $160,000 was allocated to the
minority stockholders’ interest. Minority interest in fiscal year
2008 included the 49% Nicaragua interest that was purchased in fiscal year 2008
as part of the PSC Settlement.
Income
from continuing operations for the second quarter of fiscal year 2009 was $12.8
million, compared to $9.5 million in the same quarter last year.
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. In the second quarter of fiscal year fiscal year 2009, the Company
recognized a loss of $63,000. In the same period in fiscal year 2008, the
Company recognized income of $27,000. In both cases these amounts
related to the closed Guam location, which is subleased to a tenant, net of
expenses.
|
COMPARISON
OF THE SIX MONTHS ENDED FEBRUARY 28, 2009 AND FEBRUARY 29,
2008
|
Net
warehouse club sales increased 17.5% to $626.8 million in the first six months
of fiscal year 2009, from $533.4 million in the first six months of fiscal year
2008. In general, the Company’s sales continue to grow despite a slowing
economic environment in the markets in which its warehouse clubs operate,
primarily due to a growing membership base and sales growth of consumable
merchandise. In addition, the Company opened two new warehouse clubs
in the first six months of fiscal year 2008: one in Guatemala which opened on
November 14, 2007, and one in Trinidad which opened on December 13,
2007. This resulted in having 25 clubs in operation during the full
first six-months of fiscal year 2009, compared to the equivalent of 24
during the same six-month period in fiscal year 2008. The following
table indicates the percent growth in net warehouse club sales in the Company’s
Central America and Caribbean segments:
|
|
Warehouse
Club Sales for the
Six
Months Ended
|
|
|
|
|
|
|
|
|
|
February
28, 2009
|
|
|
February
29, 2008
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
% of Net
Revenue
|
|
|
Amount
|
|
|
% of Net
Revenue
|
|
|
Increase
|
|
|
Change
|
|
|
|
(Dollar
amounts in thousands)
|
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|
Same-warehouse
club sales, which include warehouse clubs open at least 13 1/2 full months,
increased 14.4% for the 26 weeks ended February 28, 2009, compared to the same
period a year earlier. 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 calculation was open at least 13 1/2 calendar months
before its results for the current period were compared to its results for the
prior period. For example, the sales related to the new warehouse club opened in
Guatemala on November 14, 2007 was 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 was not be used
in the calculation of comparable warehouse club sales until the month of
February 2009.
The
Company’s warehouse club gross profit margin (defined as net warehouse club
sales, less associated cost of goods sold) in the first six months of fiscal
year 2009 increased $12.7 million to $92.3 million, or 14.7% of net warehouse
sales, from $79.6 million, or 14.9% of net warehouse sales in the prior period.
The increase in warehouse gross profit margin dollars was primarily due to
higher sales in the current period as compared to the prior period. As a
percentage of sales, warehouse club gross profit margin in the first six months
of fiscal year 2009 was 18 basis points below that in the first six months of
fiscal year 2008 as year-on-year negative foreign currency exchange effects
exceeded the offset from improvements in merchandise distribution costs and
shrink results. In the current six-month period, the Company recorded $1.4
million (.22% of sales) in foreign exchange related costs, compared to a foreign
exchange related gain of $809,000 (.16% of sales) in the same six-month period
of fiscal year 2008.
Membership
income, which is recognized into income ratably over the one-year life of the
membership, increased 13.4% to $8.7 million in the first six months of fiscal
year 2009, compared to $7.7 million in the first six months of fiscal year 2008.
As a percent of net warehouse club sales, membership income was 1.4% of sales in
the current six month period and in the same six month period last fiscal
year. Total membership accounts at the end of February 2009 were approximately
627,000, an increase of approximately 54,000 accounts compared to the end of
February 2008. The Company experienced year-over-year membership growth in all
of its markets. The membership renewal rate for the 12 months ended February
2009 and February 2008 was 84%.
Export
sales were $1.7 million for the first six months of fiscal year 2009, compared
to export sales of $707,000 for the first six months of fiscal year 2008. The
increase resulted primarily from the increase in direct sales to institutional
customers (primarily retailers) in the Philippines in the current period for
which the Company receives a margin of approximately 5%.
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 in the first six months of fiscal year 2009 was
$2.8 million, compared to $2.4 million in the same period a year ago. The
increase was primarily due to the Company recording deferred rental income of
$279,000 based upon a revised calculation which is not expected to impact future
periods.
Warehouse
club operating expenses increased to $55.8 million, or 8.9% of net warehouse
club sales, in the first six months of fiscal year 2009 from $49.3 million, or
9.2% of net warehouse club sales, in the first six months of fiscal year 2008.
The increase in warehouse club operating expenses resulted from increased
payroll related expenses ($3.4 million), increased operating costs for
utilities, repair and maintenance, and supplies ($986,000). The Company also
incurred increased higher depreciation expense ($1.0 million) as a result of
capital expenditures over the year, including the construction of two new
warehouse clubs, Guatemala and Trinidad, which began operation in November and
December of fiscal year 2008, respectively. Across all spending categories, the
addition of the two new warehouse clubs added a total of $1.8
million to warehouse club operating costs during the six month period
compared to the first six months of fiscal year 2008. While credit
card costs increased $361,000 during the first six months, the cost as
a percentage of sales decreased eight basis points reflecting the
positive impact of the co-brand programs in place.
General
and administrative expenses were $15.4 million, or 2.4% of net warehouse club
sales, in the first six months of fiscal year 2009, compared to $15.2 million,
or 2.8% of net warehouse club sales, in the first six months of fiscal year
2008. The Company incurred increased costs ($1.5 million) for salaries and
related benefits, including ex-pat costs, for the Company’s corporate
headquarters and U.S. buying operation, offset by a reduction in legal fees
related to pending litigation in fiscal year 2008 and tax and audit related
services (in total $1.2 million).
Expenses
incurred before a warehouse club is in operation are captured in pre-opening
expenses. Pre-opening expenses in the current six-month period of $99,000
related to the upcoming (April) opening of the new warehouse club in Costa Rica.
Pre-opening expense of $987,000 in the prior six-month period were primarily
related to opening of the two new warehouse clubs, Guatemala and
Trinidad.
Asset
impairment and closure costs for the first six months of fiscal year 2009 were
$264,000, compared to $33,000 in the first six months of fiscal year 2008. The
Company incurred a charge in the first quarter to recognize an increase in the
net present value of future net payment obligations over the remaining lease
life of the closed, but subleased, Guatemala Plaza location as a result of
a rent increase to the Company from the landlord.
Included
in the results for the first six months of fiscal year 2008 are pre-tax charges
and income tax benefits related to the Company’s settlement of disputes pursuant
to a Settlement Agreement and Release with PSC, S.A. 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 the second quarter of fiscal year 2008, the Company
recorded an additional pre-tax charge of $3.4 million, offset by a benefit to
provision for income tax of $1.7 million, resulting in a net reduction in net
income in the quarter of $1.7 million. Included in the pre-tax charge of $3.4
million, and not affecting the income tax benefit, is a charge of $2.2 million
related specifically to the fair market value of put rights granted by the
Company to PSC as part of the overall settlement. These
matters were settled during fiscal year 2008 and no additional charges have been
realized or are expected to be realized in fiscal year 2009.
Operating
income for the first six months of fiscal year 2009 was $32.4 million, or 5.2%
of warehouse sales, compared to $20.9 million, or 3.9% of warehouse sales, in
the first six months of fiscal year 2008.
Interest
income reflects earnings on cash and cash equivalent balances and restricted
cash deposits securing working capital lines of credit. Interest income was
$241,000 in the first six months of fiscal year 2009, compared to $774,000 in
the first six months of fiscal year 2008. The decrease reflects generally lower
interest rates associated with cash on deposit in the current period compared to
the year ago period.
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 increased to $1.2
million in the first half of fiscal year 2009 from $529,000 in the first half of
fiscal year 2008, resulting from an increase in debt held by the Company to
finance the purchase of the company that had leased to the Company the real
estate upon which the Barbados PriceSmart is located and to finance the purchase
of land in Costa Rica (for a new club) and Panama (for a club
relocation).
Tax
expense for the first six months of fiscal year 2009 was $7.7 million on pre-tax
income from continuing operations of $31.4 million, compared to $4.6 million of
tax expense recorded in the first six months of fiscal year 2008 on a pre-tax
income from continuing operations of $21.1 million. The increase in the
effective tax rate to 24.7% in the first six months of fiscal year 2009 from
21.9% in the first six months of fiscal year 2008 is the result of the following
factors: (i) net reversal of $2.0 million of income tax contingencies for the
first six months of fiscal year 2009 related to the closing of applicable
statutes of limitation as compared to $1.0 million for the first six months of
fiscal year 2008; and (ii) a net tax benefit of approximately $1.7 million
recorded due to the PSC settlement for the first six months of fiscal year 2008
and is not applicable to fiscal year 2009. Additionally,
certain subsidiaries generated pre-tax income for which cash taxes will not
apply as the result of net operating loss utilization for which the Company
currently has valuation allowances applied. The Company is assessing the need
for certain of the valuation allowances based on profitability history and other
factors, which may result in a reversal of such valuation allowance and a
resulting credit to income in a future period.
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 $150,000 in the first six months of fiscal year 2009. In
the same period last year, the joint ventures for which there was a minority
stockholder interest generated income, of which $290,000 was allocated to the
minority stockholders’ interest. 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 records 100% of that
subsidiary’s income or loss.
Income
from continuing operations for the first half of fiscal year 2009 was $23.5
million, compared to $16.2 million in the same period last year.
Discontinued
operations include the costs associated with the Company’s previously closed
warehouse location in Guam. In the first six months of fiscal year 2009, the
Company incurred a loss of $(81,000) versus a gain of $45,000 in the first six
months of fiscal year 2008, resulting from the closed Guam location, which is
leased to a subtenant, net of expenses.
LIQUIDITY
AND CAPITAL RESOURCES
Financial Position and Cash
Flow
The Company’s capital flows during the first six months
of fiscal year 2009 were primarily associated with investing and financing
activities. Investing activities consisted of those associated with
the acquisition and development of property for new warehouse clubs and joint
venture investments to own and operate commercial retail centers located
adjacent to the new warehouse clubs. These activities consisted
primarily of properties acquired and warehouse club development in Panama (Los
Pueblos), Costa Rica (Alajuela) and Trinidad (San Fernando). In Costa
Rica, this will bring the number of warehouse clubs in that country to five. The
new Costa Rica warehouse club is expected to be completed and open in April
2009. In Panama, the Company will relocate an existing warehouse club
to this new site and plans to sell or lease the existing site after
relocation has occurred. This
is expected to be completed during fiscal year 2010. In
December 2008, the Company acquired approximately 31,000 square meters of land
in Trinidad upon which it will construct a new warehouse club which will bring
the number of warehouse clubs in that country to four. This
new warehouse club is expected to be open in the first quarter of fiscal year
2010. Investments in joint ventures were in Panama and Costa
Rica. Financing activities were primarily related to the payment of
dividends and bank borrowings. Operating activities contributed cash to
operations through net income during the period. The acquisition of merchandise
for the new warehouse clubs was offset by the Company’s use of trade
payable accounts.
The
Company had $29.9 million in consolidated cash and cash equivalents as of
February 28, 2009, compared to $25.9 million in consolidated cash and cash
equivalents as of February 29, 2008. In addition, the Company had
$9.5 million in short-term restricted cash as of February 28, 2009 related to
proceeds from a long term loan funded on February 27, 2009. The
Company recorded the receipt of these funds as short-term restricted cash
pending the Company’s providing a letter of legal opinion.
Net cash
provided by operating activities was $29.8 million in the first six months of
fiscal year 2009, compared to cash provided by operating activities of $15.4
million in the first six months of fiscal year 2008. The improvement in
operating cash flows in the current period compared to the same period last year
was primarily a result of improved net income of approximately $7.3 million.
Other adjustments to reconcile net income to net cash provided
additional cash of $5.1 million, compared to the same period last
year. Cash contributed by discontinued operations was approximately
$300,000.
Net cash
used in investing activities was $34.0 million and $34.3 million in the first
six months of fiscal years 2009 and 2008, respectively. Additions to property
and equipment, including acquisition of business of approximately $26.4 million
in the six month period were principally related to the purchase of land in
Alajuela, Costa Rica for $3.7 million, land in Panama for $2.9 million, the
acquisition of a small parcel of land adjacent to an existing warehouse club in
Costa Rica for approximately $142,000 and land in Trinidad for $4.5
million. The Company used $5.8 million for construction in process and
acquisition of fixtures and equipment for the Alajuela, Costa Rica warehouse
club, $904,000 for construction in process and acquisition of fixtures and
equipment for the Panama warehouse club and $732,000 for construction in process
for the San Fernando, Trinidad warehouse club. The Company utilized
approximately $3.1 million for expansion of its distribution center in Miami,
the expansion of the Nicaragua warehouse club and the expansion of the
warehouse club in Aruba. The Company utilized approximately $1.3 million for
acquisition of fixtures and equipment in Trinidad and $3.3 million for the
acquisition of fixtures and equipment and leasehold and building improvements in
multiple warehouse club locations. The Company also utilized cash for investing
activities for the purchase of 50% interest in joint ventures located in Costa
Rica and Panama for approximately $7.6 million. In the first six
months of fiscal year 2008, additions to property and equipment totaled
$16.4 million, primarily associated with the completion of the warehouse clubs
in Guatemala and Trinidad. The Company also used $10.2 million for the
acquisition of the 49% minority interest in the Nicaragua 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 generated approximately $4.8
million in cash from investing activities in the first six months of the fiscal
year 2008, primarily from the sale of its investment in its Mexico subsidiary
and the San Pedro Sula warehouse building in Honduras.
Net cash
used in financing activities for the first six months of fiscal year
2009 was $14.8 million, consisting primarily of $12.1 million
used for payments of cash dividends to stockholders on
October 31, 2008 and February 27, 2009. The Company received approximately
$186,000 of net cash from short-term loans and used cash of approximately $1.4
million for the scheduled payments of interest and principal on long-term loans.
The Company used approximately $1.2 million to repurchase shares of
restricted stock upon vesting to fund associated tax witholdings. The
Company obtained a long-term loan for approximately $9.5 million in
February 2009 from a commercial bank in Trinidad. This amount
was recorded as restricted cash pending commitments by the Company to provide a
letter of legal opinion. The restriction was lifted on March 10, 2009
after the Company provided the letter subsequent to February 28,
2009. For the first six months of fiscal year 2008, financing
activities provided cash of $12.3 million, primarily as a result of acquiring
bank loans for $9.6 million and the release of restricted cash previously held
as collateral for bank loans of $8.0 million, offset by payments of $4.7 million
for dividends.
Financing
Activities
On
September 29, 2008 the Company as part of its investment in a joint venture with
Prico Enterprises S.A. entered into a three year, zero interest loan with Prico
Enterprises. The face value of the loan is for approximately $475,000. The
Company has recorded the discounted present value of the note, approximately
$415,000 as long-term debt. The purpose of the joint venture is to acquire
and develop land adjacent to the Alajuela, Costa Rica warehouse club. Both the
Company and Prico Enterprises were aware that the development of this land may
not take place within a year; therefore, Prico Enterprises agreed to loan the
Company the purchase cost of the 50% of the common stock in the joint
venture.
On
November 20, 2008, the Company entered into an interest rate swap agreement with
the Royal Bank of Trinidad & Tobago LTD ("RBTT") for a notional amount of
$8.9 million. This swap agreement was entered into in order to fix the interest
rate of a $9.0 million loan. The loan has a variable interest rate of one year
LIBOR plus a margin of 2.75%. Under the swap agreement, the Company will pay a
fixed rate of 7.05% for a term of approximately five years (until September 26,
2013). The notional amount of $8.9 million is scheduled to amortize to $4.5
million over the term of the swap. The LIBOR reset dates for the $9.0 million of
term loan debt and the notional amount of $8.9 million on the interest rate swap
are effective annually on August 26. As the interest rate swap is fixed at
7.05%, the difference between the actual floating rate (one year LIBOR plus
margin of 2.75%) and the fixed rate of 7.05% applied against the notional amount
of the swap each month is paid to or received from RBTT.
On
February 27, 2009, the Company entered into a 6.77% interest fixed rate loan
agreement with First Caribbean International Bank of Trinidad & Tobago for
an amount of $9.5 million to be paid over a 10 year term. The
loan was funded on February 27, 2008 and the funds were deposited into a call
deposit account pending the Company’s providing a legal opinion. The
Company recorded the receipt of these funds into the call deposit account as
short term restricted cash as of February 28,
2009. The Company provided the letter on March 10, 2009 and the funds
were made available and transferred into the Company’s working
accounts.
Short-Term
Borrowings and Long-Term Debt
As of
February 28, 2009, the Company, together with its majority or wholly owned
subsidiaries, had $3.7 million outstanding in short-term borrowings. As of
August 31, 2008, the Company, together with its majority or wholly owned
subsidiaries, had $3.5 million in short-term borrowings.
The
Company has bank credit agreements that provide for borrowings of up to $20.0
million, which can be used as lines of credit or to issue letters of credit. As
of February 28, 2009, lines and letters of credit totaling approximately
$3.7 million were outstanding under these facilities, leaving approximately
$16.3 million available for borrowing.
As of
February 28, 2009 and August 31, 2008, the Company, together with its
majority or wholly owned subsidiaries, had $33.7 million and $25.8 million,
respectively, outstanding in long-term borrowings. Of this amount as of February
28, 2009, approximately $415,000 relates to the loan from Prico Enterprises
described above. The increase during the current period primarily relates to the
addition of a long term loan for approximately $9.5 million offset by the
normally scheduled payments of interest and principal for approximately $1.4
million. The carrying amount of the non-cash assets assigned as collateral for
long-term debt was $46.2 million and $32.2 million as of February 28, 2009 and
August 31, 2008, respectively. Certain obligations under leasing
arrangements are collateralized by the underlying asset being
leased.
Contractual
Obligations
As of
February 28, 2009, the Company's commitments to make future payments under
long-term contractual obligations were as follows (in thousands):
|
Payments
due in:
|
|
Contractual
obligations
|
Total
|
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Less than
1
Year
|
|
1
to 3
Years
|
|
4
to 5
Years
|
|
After
5
Years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
leases (2)(3)(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
capital contribution commitments to joint-ventures (5)
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
|
|
(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 $3.8 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
$2.7 million; sublease income for this location is also approximately $2.9
million, yielding no net projected obligation.
|
(3)
|
Operating
lease obligations have been reduced by approximately $543,000 to reflect
the amount net of sublease income.
|
(4)
|
Amounts
include an equipment lease for IT equipment.
|
(5)
|
Amounts
shown are the contractual capital contribution requirements for the
Company's investment in the joint ventures discussed above in Current and
Future Management Activities.
|
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 February 28, 2009, 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 had federal and state tax net operating loss carry-forwards, or NOLs, at
February 28, 2009 of approximately $49.9 million and $8.2 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. income 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.
The
Company accrues an amount for its estimate of probable additional income tax
liability in accordance with the 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 February 28, 2009, the
Company has classified uncertain income tax positions as $3.5 million in
long-term income taxes payable and approximately $44,000 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 cash payment in
the following 12 months. The Company has classified $918,000 as
current income taxes payable as of February 28, 2009.
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 has not recorded any significant impairment charges
during the six months of fiscal year 2009.
Stock-Based Compensation: As
of February 28, 2009, the Company had four stock-based employee compensation
plans which it accounts for applying Statement of Financial Accounting
Standard No. 123(R) ("SFAS 123(R)"), “Share-Based Payment.” Under SFAS 123(R),
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 applies the
Black-Scholes model. SFAS 123(R) 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
123(R) 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.
The
Company recognizes 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 reclassifies 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) as required by Emerging Issues Task Force (“EITF”) EITF
Issue No. 06-11 (“EITF 06-11”), “Accounting for Income Tax Benefits of
Dividends on Share-Based Payment Award.”
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 first six months of fiscal year 2009, after
evaluation of the Guatemala Plaza closed location the Company recorded an
additional closure cost of approximately $201,000 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
October 2008, the Emerging Issues Task Force (“EITF”) reached a consensus on
EITF Issue No. 08-06 (“EITF 08-06”), “Equity Method Investment Accounting
Considerations.” The objective of this
Issue is to clarify how to account for certain transactions involving equity
method investments. The Company is required to adopt EITF 08-06 on a prospective
basis beginning on September 1, 2009. The Company is currently evaluating
the impact, if any, this issue will have on its consolidated financial
statements. However, the Company does not expect that this issue will
result in a change in current practice.
In
May 2008, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards (“SFAS”) No. 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 in the United States ("U.S. GAAP"). 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 SEC approved the amendments in September
2008, establishing the effective date of this Statement as November
2008. The adoption of SFAS 162 did not have a material
impact on the Company’s consolidated financial condition and results of
operations.
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 adopted SFAS
161 beginning December 1, 2008. The adoption of SFAS 161 did not have a
material impact on the Company’s consolidated financial condition and results of
operations.
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 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 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 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 results of operations.
In
February 2007, the FASB issued 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 adopted SFAS 159 beginning September 1,
2008. The adoption of SFAS 159 did not have a material impact on the
Company’s consolidated financial condition and results of
operations.
|
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 February 28,
2009, 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 the first six months of fiscal year 2009,
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.
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 ($1.4
million) and $809,000 for the six months of fiscal year 2009 and 2008,
respectively. Translation adjustment gains/(losses) from the Company’s share of
non-U.S. denominated majority or wholly owned subsidiaries and investment in
affiliates, resulting from the translation of the assets and liabilities of
these companies into U.S. dollars were approximately ($2.6 million) and
($356,000) for the first six months of fiscal year 2009 and 2008,
respectively.
The
following is a listing of the countries or territories where the Company
currently operates and their respective currencies, as of February 28,
2009:
Country/Territory
|
|
Number
of
Warehouse Clubs
In
Operation
|
|
Anticipated Warehouse
Club
Openings
in
FY 2009/2010
|
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Currency
|
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(1)
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The
Company opened two warehouse clubs in fiscal year 2008, one each in
Guatemala and Trinidad.
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(2)
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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 year
2010. The Company plans to sell or lease the existing warehouse club
after the relocation has been completed.
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(3)
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This warehouse
club is expected to open in the third quarter of fiscal
year 2009 (Alajuela).
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(4)
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This
warehouse club is expected to open in the fall of 2009 (San
Fernando).
|
We
maintain disclosure controls and procedures that are designed to provide
reasonable assurance that information required to be disclosed in our Exchange
Act reports is recorded, processed, summarized and reported within the timelines
specified in the Securities and Exchange Commission’s rules and forms, and that
such information is accumulated and communicated to our management, including
our Chief Executive Officer and Chief Financial Officer, as appropriate, to
allow timely decision regarding required disclosure. In designing and evaluating
the disclosure controls and procedures, management recognized that any controls
and procedures, no matter how well designed and operated, can only provide
reasonable assurance of achieving the desired control objectives, and in
reaching a reasonable level of assurance, management necessarily was required to
apply its judgment in evaluating the cost-benefit relationship of possible
controls and procedures. Also, we have investments in certain
unconsolidated entities. Because we do not control or mange those
entities, our control procedures with respect to those entities were
substantially more limited than those we maintain with respect to our
consolidated subsidiaries.
In the
ordinary course of business, we review our system of internal control over
financial reporting and make changes to our systems and processes to improve
controls and increase efficiency, while ensuring that we maintain an effective
internal control environment. Changes may include such activities as
implementing new, more efficient systems and automating manual
processes.
As
required by SEC Rules 13a-15(e) or 15d-15(e), we carried out an evaluation as of
the end of the period covered by this Quarterly Report on Form 10-Q, under the
supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures. Based on the
foregoing, our Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures were effective at the reasonable
assurance level.
There has
been no change in our internal controls over financial reporting (as defined in
Rules 13a-15(f) or 15d-15(f) of the Exchange Act) during our most recently
completed fiscal quarter that has materially affected, or is reasonably likely
to materially affect, our internal controls over financial
reporting.
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.
In
addition to the other information set forth in this Quarterly Report on Form
10-Q, the reader should carefully consider the factors discussed in Part I,
“Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year
ended August 31, 2008. There have been no material changes in the Company's
risk factors from those disclosed in Part I, Item 1A, of the
Company's Annual Report on Form 10-K for the fiscal year ended
August 31, 2008.
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 made
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.
ITEM 2. UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a) Recent
Sales of Unregistered Securities; Use of Proceeds from Registered
Securities
During the quarterly period ended
February 28, 2009, the Company issued securities in transactions that were not
registered under the Securities Act of 1933, as amended (the
“Act”). On January 28, 2009, the Company issued 22,350 restricted
shares of its common stock to three officers of the Company, none of whom is one
of the Company’s “named executive officers.” The sale of such
securities were deemed to be exempt from registration under the Securities Act
in reliance on Section 4(2) of the Securities Act, as amended, or Regulation D
promulgated thereunder. The recipients of such securities are
“accredited investors” and appropriate legends were affixed to the instruments
representing such securities issued.
(b) None.
(c) Purchases
of Equity Securities by the Issuer and Affiliated Purchasers
ISSUER
PURCHASES OF EQUITY SECURITIES
|
Total Number of
Shares
(or Units)
Purchased
|
|
Average Price Paid
per Share
(or Unit)
|
|
Total Number of
Shares
(or Units)
Purchased as Part of
Publicly Announced
Plans or Programs
|
|
Maximum Number (or
Approximate
Dollar
Value)
of Shares (or Units) That May Yet be Purchased
Under the Plans or Program
|
December 1,
2008 — December 31, 2008
|
9,979
|
|
$
|
17.52
|
|
—
|
|
—
|
January 1,
2009 — January 31, 2009
|
55,966
|
|
|
16.13
|
|
—
|
|
—
|
February 1,
2009 — February 28, 2009
|
—
|
|
|
—
|
|
—
|
|
—
|
Total
|
65,945
|
|
$
|
16.34
|
|
—
|
|
—
|
|
DEFAULTS
UPON SENIOR SECURITIES
|
None.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY
HOLDERS
|
The
Company’s Annual Meeting of Stockholders was held on January 28, 2009 at
the Company’s headquarters, 9740 Scranton Road, San Diego, CA, 92121.
Stockholders of record at the close of business on January 28, 2009 were
entitled to notice of and to vote in person or by proxy at the Annual Meeting.
As of the record date there were 29,608,772 shares outstanding and entitled to
vote. The matters presented for vote received the required votes for approval
and had the following total votes for, against and withheld.
1. To
elect directors for the ensuing year, to serve until the next Annual Meeting of
Stockholders and until their successors are elected and qualified:
|
|
|
|
Votes
For
|
Votes
Withheld
|
Gonzalo
Barrutieta
|
26,759,465
|
141,527
|
Murray
L. Galinson
|
26,692,228
|
208,764
|
Katherine
L. Hensley
|
25,626,544
|
1,274,448
|
Leon
C. Janks
|
25,626,544
|
1,274,448
|
Lawrence
B. Krause
|
25,626,222
|
1,274,770
|
Jose
Luis Laparte
|
26,690,552
|
210,440
|
Jack
McGrory
|
26,689,409
|
211,583
|
Robert
E. Price
|
21,195,990
|
5,705,002
|
Keene
Wolcott
|
26,765,417
|
135,575
|
|
|
|
2. To
approve an amendment to the 2001 Equity Participation Plan of PriceSmart,
Inc:
i.
|
expanding
the eligibility provisions under such plan to permit the award of
restricted stock units under such plan, in addition to stock options, to
our non-employee directors; and
|
ii.
|
authorizing
an increase to the number of shares of Common Stock reserved for issuance
from 350,000 to 400,000.
|
|
|
For
|
|
|
Against
|
|
|
Abstain
|
|
Broker
Non-Votes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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3.
|
To
approve an amendment to the 2002 Equity Participation Plan of PriceSmart,
Inc. authorizing an increase to the number of shares of Common
Stock reserved for issuance from 750,000 to
1,250,000:
|
|
|
For
|
|
|
Against
|
|
|
Abstain
|
|
Broker
Non-Votes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
None.
(a) Exhibits:
|
|
3.1(1)
|
Amended
and Restated Certificate of Incorporation of the
Company.
|
|
|
3.2(2)
|
Certificate
of Amendment of Amended and Restated Certificate of Incorporation of the
Company.
|
|
|
3.3(3)
|
Certificate
of Amendment of Amended and Restated Certificate of Incorporation of the
Company.
|
|
|
3.4(1)
|
Amended
and Restated Bylaws of the Company.
|
|
|
10.1*
|
Ninth
Amendment to Employment Agreement between the Company and William Naylon,
dated January 1, 2009.
|
|
|
10.2*
|
Eleventh
Amendment to Employment Agreement between the Company and Jose Luis
Laparte dated January 1, 2009.
|
|
|
10.3*
|
Eleventh
Amendment to Employment Agreement between the Company and John Hildebrandt
dated January 1, 2009.
|
|
|
10.4*
|
Fourteenth
Amendment to Employment Agreement between the Company and Brud Drachman
dated January 1, 2009.
|
|
|
10.5*
|
Fifteenth
Amendment to Employment Agreement between the Company and Thomas D. Martin
dated January 1, 2009.
|
|
|
10.6*
|
Twenty
Second Amendment to Employment Agreement between the Company and Robert M.
Gans dated January 1, 2009.
|
|
|
10.7
|
Loan
Facility Agreement between PriceSmart (Trinidad) Limited and First
Caribbean International Bank (Trinidad & Tobago) Limited dated
February 19, 2009. |
|
|
31.1
|
Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
|
31.2
|
Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
|
32.1**
|
Certification
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
32.2**
|
Certification
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002.
|
*
|
Identifies
management contract or compensatory plan or
arrangement.
|
|
|
**
|
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 the Company’s Quarterly Report on Form 10-Q for the
quarter ended February 29, 2004 filed with the Commission on April 14,
2004.
|
|
|
(3)
|
Incorporated
by reference to the Company’s Annual Report on Form 10-K for the year
ended August 31, 2004 filed with the Commission on November 24,
2004.
|
|
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
|
|
|
|
|
PRICESMART,
INC.
|
|
|
|
|
Date:
April 9, 2009
|
|
By:
|
/s/ ROBERT
E. PRICE
|
|
|
|
Robert
E. Price
|
|
|
|
Chairman
of the Board and
|
|
|
|
Chief
Executive Officer
|
|
|
|
|
Date:
April 9, 2009
|
|
By:
|
/s/ JOHN
M. HEFFNER
|
|
|
|
John
M. Heffner
|
|
|
|
Executive
Vice President and Chief Financial Officer
|
|
|
|
(Principal
Financial Officer and
|
|
|
|
Chief
Accounting Officer)
|