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 May 31, 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 has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T
(232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such
files).
|
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 29,650,112 shares of its common stock, par value
$0.0001 per share, outstanding at July 6,
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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27
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38
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39
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40
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40
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40
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40
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40
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40
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41
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PriceSmart,
Inc.’s (“PriceSmart” or the “Company”) unaudited consolidated balance sheet as
of May 31, 2009, the consolidated balance sheet as of August 31, 2008,
the unaudited consolidated statements of income for the three and nine months
ended May 31, 2009 and May 31, 2008, the unaudited consolidated statements of
stockholders' equity for the nine months ended May 31, 2009 and May 31, 2008,
and the unaudited consolidated statements of cash flows for the nine months
ended May 31, 2009 and May 31, 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)
|
|
May
31,
2009
|
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|
August
31,
2008
|
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ASSETS
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Cash
and cash equivalents
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Short-term
restricted cash
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Receivables,
net of allowance for doubtful accounts of $13 and $11 in May 2009 and
August 2008, respectively
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Deferred
tax asset – current
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Prepaid
expenses and other current assets
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Notes
receivable – short-term
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Assets
of discontinued operations
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Long-term
restricted cash
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Property
and equipment, net
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Deferred
tax assets – long-term
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Investment
in unconsolidated affiliates
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LIABILITIES
AND STOCKHOLDERS’ EQUITY
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Accrued
salaries and benefits
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Deferred
membership income
|
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Common
stock subject to put agreement
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Long-term
debt, current portion
|
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Deferred
tax liability – current |
|
|
198
|
|
|
|
486
|
|
Liabilities
of discontinued operations
|
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Total
current liabilities
|
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Deferred
tax liability – long-term
|
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Long-term
portion of deferred rent
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Long-term
income taxes payable, net of current portion
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Long-term
debt, net of current portion
|
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Common
stock, $0.0001 par value, 45,000,000 shares authorized;
30,314,588 and 30,195,788 shares issued, respectively, and 29,659,517
and 29,615,226 shares outstanding (net of treasury shares),
respectively
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Additional
paid-in capital
|
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Tax
benefit from stock-based compensation
|
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Accumulated
other comprehensive loss
|
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Less:
treasury stock at cost; 655,071 shares as of May 31, 2009 and 580,562
shares as of August 31, 2008
|
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Total
stockholders’ equity
|
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Total
Liabilities and Stockholders’ Equity
|
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|
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See
accompanying notes.
PRICESMART,
INC.
(UNAUDITED—AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE DATA)
|
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Three Months Ended
May 31,
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Nine Months Ended
May 31,
|
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2009
|
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2008
|
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2009
|
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2008
|
|
Revenues:
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Selling,
general and administrative:
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Warehouse
club operations
|
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General
and administrative
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Asset
impairment and closure costs (income)
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Provision
for settlement of litigation, including changes in fair market value of
put agreement
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Other
income (expense), net
|
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Total
other income (expense)
|
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Income
from continuing operations before provision for income taxes, loss of
unconsolidated affiliates and minority interest
|
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Provision
for income taxes
|
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|
Loss
of unconsolidated affiliates
|
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Income
from continuing operations
|
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|
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|
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|
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Income
(loss) from discontinued operations, net of tax
|
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Discontinued
operations, net of tax
|
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Diluted
income per share:
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Discontinued
operations, net of tax
|
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Shares
used in per share computations:
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See
accompanying notes.
PRICESMART,
INC.
(UNAUDITED—AMOUNTS
IN THOUSANDS)
|
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Tax
Benefit From Stock-
|
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Accumulated
Other
|
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Total
|
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Additional
|
|
based
|
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Compre-
|
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Accum-
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Stock-
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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
|
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|
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Purchase
of treasury stock
|
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|
|
|
|
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Issuance
of restricted stock awards
|
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Forfeiture
of restricted stock awards
|
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Exercise
of stock options
|
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Common
stock subject to put agreement
|
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Dividend
payable to stockholders
|
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Dividend
paid to stockholders
|
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Change
in fair value of interest rate swaps
|
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Balance
at August 31, 2008
|
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|
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|
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Purchase
of treasury stock
|
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|
Issuance
of restricted stock awards
|
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|
|
|
Forfeiture
of restricted stock awards
|
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|
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Exercise
of stock options
|
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Common
stock subject to put agreement
|
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Purchase
of treasury stock for PSC settlement
|
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Dividend
payable to stockholders
|
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Dividend
paid to stockholders
|
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|
Change
in fair value of interest rate swaps
|
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|
See
accompanying notes.
PRICESMART,
INC.
(UNAUDITED—AMOUNTS
IN THOUSANDS)
|
|
Nine
Months Ended
May
31,
|
|
|
|
2009
|
|
|
2008
|
|
Operating
Activities:
|
|
|
|
|
|
|
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 on
sale of property and equipment
|
|
|
|
|
|
|
|
|
Release
from (deposit to) escrow account due to settlement of
litigation
|
|
|
|
|
|
|
|
|
Provision
for settlement of litigation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
of unconsolidated affiliates
|
|
|
|
|
|
|
|
|
Excess
tax deficiency (benefit) on stock-based
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
Collection
of note receivable from sale of closed warehouse club in the Dominican
Republic
|
|
|
|
|
|
|
|
|
Proceeds
from sale of unconsolidated affiliate
|
|
|
|
|
|
|
|
|
Acquisition
of business, net of cash acquired
|
|
|
|
|
|
|
|
|
Purchase
of Nicaragua minority interest
|
|
|
|
|
|
|
|
|
Purchase
of interest in Costa Rica joint venture
|
|
|
|
|
|
|
|
|
Capital
contribution to Costa Rica joint venture
|
|
|
|
|
|
|
|
|
Purchase
of interest in Panama joint venture
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Release
of restricted cash
|
|
|
|
|
|
|
|
|
Excess
tax (deficiency) benefit on stock-based
compensation
|
|
|
|
|
|
|
|
|
Purchase
of treasury stock for PSC settlement
|
|
|
|
|
|
|
|
|
Proceeds
from exercise of stock options
|
|
|
|
|
|
|
|
|
Purchase
of treasury shares
|
|
|
|
|
|
|
|
|
Net
cash (used in) provided by 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)
|
|
Nine
Months Ended
May
31,
|
|
|
|
2009
|
|
|
2008
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
Interest,
net of amounts capitalized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$
|
|
|
Acquisition
of land and permanent easement related to PSC
Settlement
|
|
$
|
|
|
|
$
|
|
|
Supplemental
disclosure of non-cash financing activities:
|
|
|
|
|
|
|
|
|
Dividends
declared but not paid
|
|
|
|
|
|
|
|
|
PRICESMART,
INC.
(Unaudited)
May
31, 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 May 31, 2009, the
Company had 26 consolidated warehouse clubs in operation in 11 countries and one
U.S. territory (five in Costa Rica, four in Panama, 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 May 31, 2009. The Company primarily
operates in three segments based on geographic area.
Basis of Presentation
- The unaudited 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 unaudited 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
unaudited consolidated interim financial statements include the accounts of
PriceSmart, Inc., a Delaware corporation, and its subsidiaries. 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 unaudited 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. The
unaudited 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.
The table
below indicates the Company’s percentage ownership of and basis of presentation
for each subsidiary as of May 31, 2009:
|
Subsidiary
|
|
Countries
|
|
Ownership
|
|
Basis
of Presentation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
|
|
|
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|
|
|
|
|
|
|
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
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|
|
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|
|
|
|
|
|
|
|
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|
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|
|
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|
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|
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|
|
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.
|
PRICESMART,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Use of Estimates – The
preparation of financial statements in conformity with U.S. Generally
Accepted Accounting Principles ("U.S. GAAP"), as defined in SFAS No. 162, "The
Hierarchy of Generally Accepted Accounting Principles" ("SFAS 162"), 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 $10,000 consists of an export bond for the
Mexico Distribution Center location. Long-term restricted
cash represents deposits with federal regulatory agencies in Costa Rica and
Panama for approximately $590,000.
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.
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. 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 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," FSP
157-2, "Effective Date of FASB Statement No. 157," FSP 157-3, "Determining
the Fair Value of Financial Assets when the Market for That Asset Is Not Active"
and FSP FAS 157-4, “Determining Fair Value When
the Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly” (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. Although 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 existed at the balance sheet dates. 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 sheets 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. The
Company will adopt FSP FAS 157-4 in the fourth quarter of fiscal year
2009.
PRICESMART, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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 1 inputs at the
balance sheet dates. The amount invested in money market mutual funds as of May
31, 2009 and August 31, 2008 was $4.0 million and $22.5 million,
respectively.
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
dates primarily included 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. The fair value of
interest rate swaps as of May 31, 2009 and August 31, 2008 was ($629,000) and
($8,000), respectively.
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 3 inputs at the balance sheet dates.
Valuation
techniques utilized in the fair value measurement of assets and liabilities
presented on the Company’s balance sheets 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.
Goodwill – Goodwill resulting
from certain business combinations totaled $37.7 million at May 31, 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.
PRICESMART,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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.
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 utilized 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 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 SFAS No. 52 “Foreign Currency Translation,”
the assets and liabilities of the Company’s foreign operations are primarily
translated to U.S. dollars when the functional currency in our international
subsidiaries is the local currency, which in many cases is not the U.S.
dollar. Assets and liabilities of these foreign subsidiaries are translated to
U.S. dollars at the exchange rate on the balance sheet dates 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 nine
months of the fiscal years 2009 and 2008 were approximately ($1.3) million and
$1.6 million, respectively.
Stock-Based Compensation – As
of May 31, 2009, the Company had four stock-based employee compensation plans
which it accounts for applying SFAS 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 presented 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 SFAS 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 SFAS 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 or upon completion of tax audits, expiration of statute of
limitations, or the 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 May
31, 2009 and August 31, 2008, the Company had $13.7 million and $15.2 million,
respectively, of aggregate accruals for uncertain tax positions (“gross
unrecognized tax benefits”). Of these totals, $2.0 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 had classified $918,000 as current income taxes
payable as of February 28, 2009. In March 2009, the Company paid
approximately $679,000 and reversed the remainder of the accrued liability in
the amount of approximately $239,000.
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 May 31, 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 $147,000. For the nine months ended May 31, 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 $2.1 million. The lapse of statutes of limitations in
the twelve-month period ending May 31, 2010 would result in a reduction to
long-term income taxes payable totaling $692,000.
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 May 31, 2009 and August 31, 2008, the
Company had accrued $1.4 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. In
March 2009, the Company paid the assessment in the amount of approximately
$679,000.
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.
Recent Accounting
Pronouncements – In June
2009, the FASB issued SFAS No. 168 "The FASB Accounting Standards Codification
and the Hierarchy of Generally Accepted Accounting Principles". This
Statement establishes the FASB Accounting Standards
Codification, ("Codification") as the single source of
authoritative GAAP to be applied by nongovernmental entities, except for
the rules and interpretive releases of the SEC under authority of federal
securities laws, which are sources of authoritative GAAP for SEC
registrants. All guidance contained in the Codification carries an equal
level of authority. The Company is required to adopt this
standard in the first quarter of fiscal year 2010.
PRICESMART,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
In May 2009, the FASB issued SFAS No. 165, “Subsequent
Events” (SFAS 165), which establishes general standards of accounting for and
disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. The
Company is required to adopt SFAS 165 prospectively to both interim and annual
financial periods ending after June 15, 2009. The adoption of
the standard is not expected to result in a change in current practice.
In
April 2009, three FASB Staff Positions (FSPs) were issued addressing fair
value of financial instruments: FSP FAS 157-4, “Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly”; FSP FAS 115-2,
“Recognition and Presentation of Other Than Temporary Impairments”; and FSP FAS
107-1,”Interim Disclosure about Fair Value of Financial Instruments.” The
Company will adopt these FSPs in its fourth quarter of fiscal year
2009. The adoption of these FSPs is not expected to have a
material impact on the Company’s consolidated financial condition and results of
operations.
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 FASB issued 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 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 permitted 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 Statements - 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 unaudited
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 statements 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 operations line
of the consolidated statements 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):
|
|
May
31,
2009
|
|
|
August
31,
2008
|
|
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
May 31,
|
|
|
Nine Months Ended
May 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax
income (loss) from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax (provision) benefit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
pre-tax income (loss) from discontinued operations for the nine months
ended May 31, 2009 and May 31, 2008 of approximately ($27,000) and $71,000,
respectively, is the net result of the subleasing activity in Guam.
NOTE
4 – PROPERTY AND EQUIPMENT
Property
and equipment consist of the following (in thousands):
|
|
May
31,
2009
|
|
|
August
31,
2008
|
|
|
|
|
|
|
|
|
|
|
Building
and improvements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
property and equipment, historical cost
|
|
|
|
|
|
|
|
|
Less:
accumulated depreciation
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
|
|
|
|
|
|
Building and
improvements include net capitalized interest of $1.3 million as of both May 31,
2009 and August 31, 2008. For the nine-month period ended May
31, 2009, the Company recorded approximately $3.1 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 two-level warehouse club and lease portions of the lot which
will bring the number of warehouse clubs in that country to four. This new
warehouse club is expected to be open by the end of calendar year
2009. 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 constructed a new PriceSmart warehouse club, which is the Company’s
fifth in Costa Rica. The new PriceSmart warehouse club opened 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 development of new warehouse club sites, the
expansion of existing warehouse clubs and warehouse distribution center
expansion in Central America, the Caribbean and the
United States. Construction costs within these segments for the
nine-month period ended May 31, 2009 were approximately $9.9 million, $6.6
million and $356,000, respectively. In addition, the Company continued to
acquire fixtures and equipment for new warehouse club sites, the expansion
of
existing warehouse clubs and warehouse distribution center expansion in Central
America, the Caribbean and the United States. The
Company acquired fixtures and equipment for approximately $6.3 million,
$2.7 million and $596,000, respectively, in these segments for the nine months
ended May 31, 2009. The Company acquired approximately $1.3
million of software and computer hardware for the first nine months of fiscal
year 2009.
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):
|
|
$ |
4,965 |
|
Building
and improvements
|
|
|
6,948 |
|
|
|
|
85 |
|
Total
property and equipment
|
|
$ |
11,998 |
|
In fiscal
year 2008, the Company also capitalized approximately $23.6 million in building
and improvements, fixtures and equipment and construction in progress, primarily
related to the new warehouse club openings in Guatemala (November 2007) and
Trinidad (December 2007) and continued improvements in the Company’s other
warehouse club locations.
Depreciation
expense for the first nine months of fiscal years 2009 and 2008 was
approximately $9.7 million and $8.4
million, respectively.
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 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
May 31,
|
|
|
Nine Months Ended
May 31,
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock grants(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
average common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Restricted
stock was issued to certain employees in the three and nine
month periods ended May 31, 2009 and May 31, 2008, respectively. The
dilutive effect of the restricted stock issued is 1,318 shares for the
nine-month period ended May 31, 2009. The effect of restricted stock
issued for the three month period ended May 31, 2009 was
anti-dilutive. The dilutive effect of the restricted stock
issued is 3,706 for the nine-month period ended May 31,
2008. No restricted stock was issued during the three month
period ended May 31, 2008.
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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 at 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 nine months ended May 31, 2009 and May 31, 2008 were primarily due to
weaker foreign currencies.
Retained
Earnings Not Available for Distribution
As of May
31, 2009 and August 31, 2008, included in retained earnings of certain
subsidiaries are legal reserves of approximately $2.0 million and $1.0 million,
respectively, which cannot be distributed as dividends by the Company's
subsidiaries to the Company according to statutory
regulations.
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 nine months ended May 31, 2009 and 2008 (in
thousands), which are included in general and administrative expenses and
warehouse expenses in the consolidated statement of income:
|
|
Three
Months Ended
May
31,
|
|
|
Nine
Months Ended
May
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Vesting
of options granted to employees and directors
|
|
$ |
10 |
|
|
$ |
30 |
|
|
$ |
50 |
|
|
$ |
98 |
|
Vesting
of restricted stock grants
|
|
|
737 |
|
|
|
768 |
|
|
|
2,354 |
|
|
|
1,663 |
|
Vesting
of restricted stock units
|
|
|
42 |
|
|
|
13 |
|
|
|
76 |
|
|
|
13 |
|
Stock-based
compensation expense
|
|
$ |
789 |
|
|
$ |
811 |
|
|
$ |
2,480 |
|
|
$ |
1,774 |
|
The following table summarizes
stock options outstanding as of May 31, 2009, as well as the activity during the
nine months then ended:
|
|
Shares
|
|
|
Weighted Average
Exercise Price
|
|
Shares
subject to outstanding options at August 31,
2008
|
|
|
280,130 |
|
|
$ |
9.23 |
|
|
|
|
5,000 |
|
|
|
16.34 |
|
|
|
|
(32,527 |
) |
|
|
6.44 |
|
|
|
|
(18,816 |
) |
|
|
16.36 |
|
Shares
subject to outstanding options at May 31, 2009
|
|
|
233,787 |
|
|
$ |
9.19 |
|
PRICESMART,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
As of May
31, 2009, options to purchase 215,987 shares were exercisable and there
were 871,817 shares of the Company's common stock reserved for future
issuance, of which 622,030 shares are available for future grants. The
following table summarizes information about stock options outstanding and
options exercisable as of May 31, 2009:
Range
of
Exercise
Prices
|
|
|
Outstanding as
of
May 31, 2009
|
|
|
Weighted-Average
Remaining
Contractual
Life
(in
years)
|
|
|
Weighted-Average
Exercise
Price on Options Outstanding
|
|
|
Options
Exercisable as
of May
31, 2009
|
|
|
Weighted-Average
Exercise
Price on Options Exercisable
as
of May 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
aggregate intrinsic value and weighted average remaining contractual term of
options exercisable at May 31, 2009 was $2.1 million and 0.87 years,
respectively. The aggregate intrinsic value and weighted average
remaining contractual term of options outstanding at May 31, 2009 was $2.1
million and 1.14 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.
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 nine months of fiscal years 2009
and 2008:
|
Nine
Months Ended
|
|
May
31,
2009
|
|
May
31,
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 nine months ended May 31, 2009 and May 31, 2008 was as
follows:
|
|
Nine
Months Ended
|
|
|
|
May
31,
2009
|
|
|
May
31,
2008
|
|
Grants
outstanding at August 31, 2008 and August 31, 2007,
respectively
|
|
|
748,860 |
|
|
|
566,250 |
|
|
|
|
103,950 |
|
|
|
349,850 |
|
|
|
|
(17,677 |
) |
|
|
(11,270 |
) |
|
|
|
(198,124 |
) |
|
|
(131,810 |
) |
Grants
outstanding at May 31, 2009 and May 31, 2008,
respectively
|
|
|
637,009 |
|
|
|
773,020 |
|
The
remaining unrecognized compensation cost related to unvested options and
restricted stock grants at May 31, 2009 and 2008 was approximately $8.3
million and $11.6 million, respectively, and the weighted-average period of time
over which this cost will be recognized is 3.4 years and 3.3 years,
respectively. The excess tax benefit (deficiency) on stock-based
compensation related to options and restricted stock grants for the nine months
ended May 31, 2009 and May 31, 2008 was approximately ($175,000) and $762,000
respectively.
Cash
proceeds from stock options exercised, tax benefits related to stock-based
compensation and the intrinsic value related to total stock options exercised
during the nine months ended May 31, 2009 and May 31, 2008 are summarized in the
following table (in thousands):
|
|
Nine
Months Ended
|
|
|
|
May
31,
2009
|
|
|
May
31,
2008
|
|
Proceeds
from stock options exercised
|
|
$ |
210 |
|
|
$ |
921 |
|
Intrinsic
value of stock options exercised
|
|
$ |
365 |
|
|
$ |
854 |
|
PRICESMART,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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.
Total restricted stock units activity, relating to the 2001 Plan
for the nine months ended May 31, 2009 and 2008 was as follows:
|
|
Nine
Months Ended
|
|
|
|
May
31,
2009
|
|
|
May
31,
2008
|
|
Grants
outstanding at August 31, 2008 and August 31, 2007,
respectively
|
|
|
20,000 |
|
|
|
— |
|
|
|
|
— |
|
|
|
20,000 |
|
|
|
|
(4,000
|
) |
|
|
— |
|
Grants
outstanding at May 31, 2009 and May 31, 2008,
respectively
|
|
|
16,000 |
|
|
|
20,000 |
|
In fiscal
year to date 2009 and 2008, the Company repurchased 68,055 and 45,015 shares
respectively of common stock from employees for approximately $1.1 million and
$1.4 million, respectively, based on the stock price at the 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. In fiscal year 2007, the Company
sold the East Santo Domingo warehouse club located in the Dominican Republic,
for which the Company recorded a Note receivable of approximately $2.1
million. In fiscal year 2009, the Company collected the full
outstanding balance of this note receivable. The Company subleased the
warehouse club located in Guatemala and recorded the net present value of the
closed warehouse club lease obligation (see Note 9 and Note 18 for further
detail on the lease obligation recorded and the subsequent event regarding the
closed Guatemala location). 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 for bulk packaging
equipment that was unusable. For the first nine 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 May 31, 2009 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability
as of
August 31,
2008
|
|
Charged
to
Expense
|
|
|
Cash
(Paid)/
Received
|
|
|
Non-cash
Amounts
|
|
|
Liability
as of
May
31, 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 $194,000 of short-term
lease obligations (included within other accrued expenses) on the
consolidated balance sheet as of May 31, 2009.
|
(4)
|
Gain
on sale of previously impaired
equipment.
|
PRICESMART,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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, 2010 and July 5, 2031.
As
of May 31, 2009, our warehouse club buildings occupied a total of
approximately 1,656,332 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
|
|
Approximate
Square
Footage
|
|
Current
Lease
Expiration
Date
|
|
Remaining
Option(s)
to
Extend
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Barbados
|
|
Storage
Facility
|
|
May
5, 2006
|
|
4,800
|
|
May
31, 2011
|
|
1
year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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. See Note 18 regarding the subsequent event for the closed
Guatemala location.
|
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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Operating
lease obligations have been reduced by approximately $753,000 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 sheets under the captions “Other accrued expenses” and “Accrued
closure costs.” See Note 18 for subsequent event with regard to the closed
Guatemala location.
|
(3)
|
The
total excludes payments for the discontinued operations in
Guam. The projected minimum payments excluded for Guam are
approximately $2.2 million; projected sublease income for this location is
approximately $2.6 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.
|
Certain
obligations under leasing arrangements are collateralized by the underlying
asset being leased.
The
Company has operating lease agreements for rental of land and/or building space
for properties it owns. The following is a schedule of future minimum rental
income on non-cancelable operating leases from owned property as of May 31, 2009
(in thousands):
Periods
ended May 31,
|
|
Amount
|
|
|
|
$ |
1,824 |
|
|
|
|
1,630 |
|
|
|
|
1,148 |
|
|
|
|
956 |
|
|
|
|
923 |
|
|
|
|
7,116 |
|
|
|
$ |
13,597 |
|
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 non-income tax filing
positions, the Company accrues charges for probable and estimable
exposures. The Company believes it has accrued for probable and estimable
exposures in accordance with SFAS 5, "Accounting for Contingencies." As
of May 31, 2009 and August 31, 2008, the Company had recorded within other
accrued expenses a total of $2.3 million and $2.5 million, respectively, for
various non-income tax related tax 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 non-income tax filing positions. Due to these
limitations future actual losses may 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.
The Company contracts
for distribution center services in Panama and Mexico. The contracts
for these distribution center services expire on August 31, 2009 and December
31, 2011, respectively. Future minimum service commitments related to
these contracts for the periods less than one year and for one year to
three years are approximately $185,000 and $197,000, respectively.
PRICESMART,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
NOTE 11 – SHORT-TERM BORROWINGS AND
LONG-TERM DEBT
As of May
31, 2009 and August 31, 2008, the Company had bank credit agreements and
lines of credit for $25.0 million and $19.3 million, 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 in the borrowing
subsidiary. Each of the facilities expires during the year
and is normally renewed. As of May 31, 2009 and August 31, 2008,
borrowings, lines and letters of credit totaling approximately $6.0 million and
$4.1 million, respectively, were outstanding under these facilities, leaving
approximately $19.0 million and $15.2 million respectively available for
borrowings. Of these outstanding amounts as of May 31, 2009 and August 31,
2008, the Company, together with its majority or wholly owned subsidiaries, had
$5.8 million and $3.5 million, respectively, outstanding in short-term
borrowings, at a weighted-average interest rates of 7.2% and 8.8%,
respectively.
As of May
31, 2009 and August 31, 2008, the Company, together with its majority or wholly
owned subsidiaries had $32.5 million and $25.8 million, respectively,
outstanding in long-term borrowings. Of this amount, approximately
$421,000 relates to a loan from Prico Enterprises (see Note 15-Unconsolidated
Affiliates). As of May 31, 2009 and August 31, 2008, $7.6 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 second quarter, the Company determined that it was
not in compliance with the covenants described in the underlying contracts for a
certain location. However, the bank has provided written commitments to work
with the Company 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 such 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 $44.6 million and $32.2 million as of May 31, 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
an effective date of October 9, 2008 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
entered into on August 26, 2008. 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 loan 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 is paid to or received from RBTT monthly.
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 on November 15, 2007. 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 loan 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 is paid to or received from
Citibank N.A. semi-annually.
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 gain or loss on the
hedged item attributable to the hedged risk are recognized in current earnings.
For the nine months ended May 31, 2009 and May 31, 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 gain or loss 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 nine months ended May 31, 2009
|
|
|
|
|
|
|
|
|
Interest
expense for the nine months ended May 31, 2008
|
|
|
|
|
|
|
|
|
PRICESMART,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The total notional amount of the Company’s
pay-fixed/receive-variable interest rate swaps was as follows (in
thousands):
Floating Rate Payer (Swap
Counterparty)
|
|
Notional
Amount as of May 31, 2009
|
|
|
Notional Amount as of August
31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In
accordance with 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):
|
|
Liability
Derivatives
|
|
|
|
May
31,
2009
|
|
August
31,
2008
|
|
Derivatives
designated as hedging instruments under Statement 133
|
|
Balance
Sheet Location
|
|
Fair
Value
|
|
Balance
Sheet Location
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives designated as hedging instruments under Statement 133
(2)
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The
effective portion of the interest rate swaps was recorded as a
debit to accumulated other comprehensive loss for $629,000 as of May 31,
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 nine months ended May 31, 2009 and May 31, 2008 (in
thousands):
|
|
|
Amount
of Gain or (Loss) Recognized in Income on Derivatives
|
|
|
|
|
Three
Months Ended
May
31,
|
|
|
Nine
Months Ended
May
31,
|
|
Derivatives
in Statement 133 Fair Value Hedging Relationships
|
Location
of Gain or (Loss) recognized in Income on Derivative
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Interest
income/(expense)
|
|
$ |
(36 |
) |
|
$ |
8 |
|
|
$ |
(93 |
) |
|
$ |
11 |
|
|
|
|
$ |
(36 |
) |
|
$ |
8 |
|
|
$ |
(93 |
) |
|
$ |
11 |
|
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.
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 had no
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.
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 charged 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 May 31, 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 nine 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 nine months and for the entire fiscal year 2008, additional
reserves of approximately $1.3 million were recorded 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
nine months of fiscal year 2009.
|
|
•
|
For
the first nine months and for the entire fiscal year 2008, the Company
recorded approximately $120,000 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 nine
months of fiscal year 2009.
|
|
•
|
For
the first nine months and for the entire fiscal year 2008, the Company in
accordance with the Company’s accounting policy recorded the
reclassification of approximately $1.7 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 nine 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 May 31, 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 May 31, 2009, the Company made additional capital
contributions of approximately $377,000. 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 original investment in the
joint venture. The interest on the loan is amortized monthly with the interest
charged to interest expense and the resulting liability credited to the loan
payable balance. The loan balance as of May 31, 2009 is approximately
$421,000. 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 May 31, 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.
The
summarized financial information of the unconsolidated affiliates is as follows
(in thousands):
|
|
May
31,
2009
|
|
|
August
31,
2008
|
|
|
|
$ |
53 |
|
|
$ |
— |
|
|
|
|
15,305 |
|
|
|
— |
|
|
|
|
33 |
|
|
|
— |
|
|
|
$ |
— |
|
|
$ |
— |
|
|
|
Three
Months Ended
May
31,
|
|
|
Nine
Months Ended
May
31,
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PRICESMART,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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 additional private planes 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, Robert Price, Jack McGrory and
Sherry Bahrambeygui are officers 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 former member of the Board of Directors and a former employee
of the Company. Under the "original use agreement," if the passengers are
solely Company personnel, 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. If the
passengers are not solely PriceSmart, Inc. personnel, the Company has an
agreement to reimburse PFD Ivanhoe for use of other aircraft based on the
amounts the passengers would have paid if they had flown a commercial airline if
one or more of the passengers is a member of the Price Group (including Robert
E. Price). The Company paid approximately $16,000 and $77,000 for
the nine months ended May 31, 2009 and May 31, 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 nine 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.
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 April 30, 2009.
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 nine months of fiscal year 2009 and 2008, the Company
sold approximately $52,000 and $38,000, respectively, of supplies to Price
Charities, a charitable group affiliated with Robert E. Price and Sol
Price.
Relationships with Price Plaza
Alajuela PPA, S.A.: During the first nine months of fiscal year 2009, the
Company collected approximately $31,000 for advisory and construction services
fees.
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 nine months of fiscal year 2009, the operating
income of the United States, Central America and Caribbean Operations does not
contain charges related to the PSC litigation and the PSC Settlement,
including the put agreement. For the nine-month period ended May 31,
2008 and for the entire fiscal year ended August 31, 2008, the Central American
and Caribbean operating income includes $1.3 million of charges related to
the PSC Settlement (see Note 14-PSC Settlement). The Company has
adjusted information related to its Operating income and Income from continuing
operations segments, for the nine months ended May 31, 2008 and the fiscal year
ended August 31, 2008. These adjustments relate to the support
charges charged by the United States Operations to the Central and Caribbean
Operations. The adjustments allocate these charges into the Central America and
Caribbean Operations from the United States Operations. The Company has also
adjusted information related to its identifiable assets 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") as disclosed in Note 1, for the fiscal year ended August
31, 2008. Information related to our segments for the nine
months ended May 31, 2009 and adjusted May 31, 2008, and the fiscal year ended
August 31, 2008 is as follows (in thousands):
|
|
United
States
Operations
|
|
|
Central
American
Operations
|
|
|
Caribbean
Operations
|
|
|
Total
|
|
Nine
Months Ended May 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset
impairment and closure (costs) income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from discontinued operations, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
of discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended May 31, 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PRICESMART,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
NOTE
18 – SUBSEQUENT EVENTS
On June 3,
2009 Pricesmart (Guatemala), Sociedad Anonima (“PSG”), a wholly owned
subsidiary of the Company, finalized an agreement with Inversiones Minalo,
Sociedad Anonima (“IMSA”) to transfer all rights and obligations as landlord for
the property known as Guatemala Plaza. PSG paid IMSA approximately
$3.5 million to transfer to IMSA the risks and costs as a consequence of IMSA
assuming the rights and obligations as the landlord. The
Guatemala Plaza warehouse was vacated by PSG in fiscal year 2003. PSG was
obligated to pay rent under a lease agreement for the warehouse with
Inmobiliaria San Antonio, Sociedad Anonima (“ISA”) and subleased the space
to a tenant, Tiendas Carrion, Sociedad Anonima (“TCSA”). PSG, in accordance
with SFAS 146 “Accounting for Costs Associated with Exit or Disposal Activity,”
applied the guidance on accounting for costs to terminate an operating lease and
as such has recorded closing costs for the net present value of future cash
flows of approximately $3.8 million for which long-term and short-term lease
liability accounts have been carried. The settlement of this
obligation will result in approximately $651,000 of operating income in the
fourth quarter of fiscal year 2009, which will be recorded in
the closure costs line in the statement of
income.
PRICESMART,
INC.
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 nine month periods ended May 31, 2009 (fiscal year 2009) and May
31, 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 May 31, 2009 and May 31, 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
May
31, 2009)
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Number
of
Warehouse Clubs
in Operation (as of
May
31, 2008)
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Ownership (as of
May
31, 2009)
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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 May 2009 and 2008, the total number of the Company’s consolidated
warehouse clubs in operation was 26 and 25, respectively, operating in 11
countries and one U.S. territory. The average age of the 26 and 25 warehouse
clubs in operation as of May 31, 2009 and May 31, 2008 was 91 months and 83
months, respectively.
In
addition to the warehouse clubs operated directly by the Company (or through a
joint venture in the case of Trinidad), 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. 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 to both the retail and wholesale
member.
· Many
PriceSmart markets are susceptible to foreign exchange rate volatility. Exchange
rate changes either increase or decrease the cost of imported products.
Approximately 47% 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
· Due
to the slowing economic environment in the Company’s markets, management has
noted a shift in member demand toward more consumable merchandise purchases. In
this respect, the Company is carefully monitoring inventory mix and
levels, while maintaining its pricing leadership position and aggressively
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 over
the last three years has improved the Company’s buying power and has resulted in
leveraging of costs. This allows for reduced prices, thereby
providing better value to PriceSmart members.
· In
fiscal year 2008, 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
in partnership with a bank in the region. The program allows for
savings in credit card processing fees when the co-branded card is used at the
warehouse club as well as provides benefits to club
members. Management anticipates that as more members obtain and use
the card, the Company will see increased savings related to credit card
costs. Also, over the past nine months the Company introduced the
co-branded program in its Caribbean markets, except for Aruba, in partnership with a bank
in that region. The initial response from members has been good, and
management expects to grow the use of the co-branded card in those markets in
the future resulting in reduced credit card processing fees and increased value
for members.
· Based
on the success of previously expanding the size of certain PriceSmart
buildings, the Company has been working on expanding two additional warehouse
clubs over the past nine months. The expansion of
the warehouse club in Nicaragua was completed in April 2009 and the club
is now operating with the additional sales floor space of approximately 8,600
square feet. The expansion of the warehouse club in Aruba is in
progress, the Fresh food area expansion consisting of perishable
merchandise was completed in February 2009, adding approximately 1,400 square
feet and the expansion on the building to add more sales floor space is
expected to be completed by the end of July 2009, which will add
approximately 9,000 square feet.
· 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. The new Costa Rica warehouse club, the
fifth PriceSmart warehouse club in that country, opened 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 is
currently constructing 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 by the end of calendar year 2009. 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.
Assuming that all conditions are met and the land is acquired, the Company
plans to construct and open a third warehouse club in the Dominican Republic in
the second half of calendar year 2010. 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 historically has enhanced
adjacent 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, the Company purchased a 50% interest in the joint ventures that
own and will develop additional land adjacent to the new warehouse club sites in
Panama and Costa Rica as commercial shopping centers. With respect to the
Trinidad site acquisition, the Company is planning to develop approximately 50%
of that site for retail shops.
Key items for the first nine months
of fiscal year 2009 included:
· Net
warehouse club sales increased 14.2% over the prior year, resulting from a 11.6%
increase in comparable warehouse club sales for the 39 weeks ended May 31, 2009
(that is, sales in warehouse clubs that have been open for greater than 13.5
months) and the opening of three new warehouse clubs, two of which were
open for just a portion of the nine months ended May 31, 2008 (one opened in
November 2007 and one in December 2007) and one opened in the current nine month
period (April 2009).
· Membership
income for the first nine months of fiscal year 2009 increased 12.3% to $13.3
million as a result of a 9% increase in membership accounts from May 31, 2008 to
May 31, 2009, continued strong renewal rates at 84% and a 2% increase in the
average membership fee.
· Gross
profits (net warehouse club sales less associated cost of goods sold) increased
12.0% over the prior year due to increased warehouse sales, and gross margin
decreased 28 basis points as a percent of net warehouse sales partially related
to the effect of foreign exchange rate movements and more competitive
pricing.
· Selling,
general and administrative expenses as a percentage of net warehouse club sales
improved 53 basis points, as higher sales offset increased operating costs of
the warehouse clubs (including wages, utilities, and repairs and maintenance)
and the additional costs associated with the three warehouse clubs opened in
fiscal years 2008 and 2009.
· Operating
income for the first nine months of fiscal year 2009 was $45.6 million, which
included approximately $216,000 in asset impairment and closure costs, and
$443,000 of pre-opening expenses.
· Net
income for the first nine months of fiscal year 2009 was $32.1 million, or $1.10
per diluted share.
COMPARISON
OF THE THREE MONTHS ENDED MAY 31, 2009 AND MAY 31, 2008
Net
warehouse club sales increased 7.8% to $299.6 million in the third quarter of
fiscal year 2009 from $278.0 million in the third quarter of fiscal year 2008.
The sales growth reflects the Company’s ongoing efforts in the selection and
value of the merchandise carried in the clubs. Sales transactions grew 11% in
the third quarter of fiscal year 2009, compared to the same period last year,
which the Company believes reflects that members continue to find value in the
quality and price of items offered by PriceSmart despite the challenging
economic conditions present in most of the markets. However, the
average dollar value of those transactions decreased 3% indicating both a shift
in buying from higher ticket discretionary items (such as appliances,
electronics, and furniture) to food and consumable products; and is also a
likely reflection of reduced overall buying power and a reduction in sales to
the Company's wholesale members. Food and consumable sales grew
11.5%, and non-consumable product sales decreased 5.2%. The addition of the new
club in Costa Rica, which opened on April 17, 2009, accounted for approximately
2% of the overall sales growth in the quarter compared to the same quarter a
year ago, although some of those sales were from existing members who would have
previously shopped at one of the other four Costa Rican clubs.
|
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Warehouse
Club Sales for the
Three
Months Ended
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May
31, 2009
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May
31, 2008
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Amount
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% of Net
Revenue
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Amount
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% of Net
Revenue
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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 6.2% for the 13-week period ended May 31, 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 used in the calculation of comparable warehouse club sales until the
month of February 2009. The new warehouse club opened in Costa Rica
on April 17, 2009 will not be used in the calculation until July
2010.
The
Company’s warehouse gross profit margin (defined as net warehouse club sales,
less associated cost of goods sold) in the third quarter of fiscal year 2009
increased $1.8 million to $43.7 million, or 14.6% of net warehouse club sales,
from $41.9 million, or 15.1% of net warehouse club sales, in the third quarter
of fiscal year 2008. The increase in warehouse gross profit margin dollars was
largely due to higher sales. As a percentage of sales, warehouse net profit
margin decreased 48 basis points resulting from a combination of competitive
pricing actions across most merchandise categories, most notably hard-lines, and
the year over year effects of foreign exchange. Last year, in the
third quarter of fiscal year 2008 the Company recognized a 29 basis point gain
to gross profit margin related to foreign currency exchange
effects. The change in the merchandise mix of sales did not itself
have a measureable impact on gross profit margin as a percent of
sales.
Membership
income, which is recognized into income ratably over the one-year life of the
membership, increased 10.4% to $4.5 million, or 1.5% of net warehouse club
sales, in the third quarter of fiscal year 2009 compared to $4.1 million, or
1.5% of net warehouse club sales, in the third quarter of fiscal year 2008. The
increase in membership income reflects both a 9% increase in the number of
membership accounts and a 1.8% increase in the average membership fee. The
membership renewal rate for the 12-month periods ended May 31, 2009 and May 31,
2008 was 84%. Total membership accounts as of May 31, 2009 were approximately
641,000, an increase of approximately 55,000 accounts over the end of May
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 $1.4 million in the third quarter of fiscal year
2009, compared to $1.2 million in the third quarter of fiscal year
2008.
Warehouse
club operating expenses increased 6.4% to $28.2 million, or 9.4% of net
warehouse club sales, in the third quarter of fiscal year 2009 from $26.5
million, or 9.5% of net warehouse club sales, in the third quarter of fiscal
year 2008. Of the $1.7 million increase, $1.0 million related to
increased payroll-related expenses, including stock compensation expense and
$366,000 related to increased operating costs for repair and
maintenance, security services and supplies. Utilities costs
decreased $383,000, or 13%, resulting from reduced utility rates. Marketing
costs increased $94,000 primarily as a result of the launch costs associated
with the Company’s Caribbean co-branded credit card in the third quarter of
fiscal year 2009. The overall program has been successful with credit card
costs declining $111,000 and as a percentage of warehouse sales, declining ten
basis points in the third quarter of fiscal year 2009, compared with the third
quarter of fiscal year 2008. Depreciation expense
increased $163,000 from the third quarter of fiscal year 2008 related to the new
Costa Rica warehouse club and on-going capital investments made in the existing
warehouse clubs, including expansions in Aruba and Nicaragua.
General
and administrative expenses were $8.0 million, or 2.7% of net warehouse club
sales, for the third quarter of fiscal year 2009, compared to $7.5 million, or
2.7% of net warehouse club sales, in the third quarter of fiscal year 2008
primarily related to increased expenses for salaries and associated
benefits for the Company's corporate and US buying operation,
including stock compensation expense totaling $394,000.
Expenses
incurred before a warehouse club is in operation are captured in pre-opening
expenses. Pre-opening expenses in the third quarter of fiscal year 2009 were
$344,000 related to the new warehouse club in Costa Rica which opened in April
2009.
Included
in the results for the third quarter of fiscal year 2008 was a credit of $2.1
million based on the re-measurement of the fair market value of the previously
disclosed put rights granted to PSC, S.A. and related entities as of May 31,
2008 and net of additional costs incurred as part of the PSC legal
settlement. A total of 64,739 shares of the
Company's common stock from the original 679,500 shares that were subject
to the put right were not sold during the period from February 8, 2008 to May
31, 2008. Applying the Black-Scholes method of valuation to the
remaining shares at the May 31, 2008 closing stock price of $23.45, the fair
market value of the put right at the end of the third quarter of fiscal year
2008 was $94,000. The Company had recorded a charge of $2.2 million
in the second quarter of fiscal year 2008 to reflect the value of the put rights
at the end of that quarter. The put right expired on June 11, 2008
and the Company agreed to acquire the remaining 64,739 shares at a price of
$25.00. 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.
Asset impairment and closure
costs (income) for the third quarter of fiscal year 2009 were ($48,000) compared
to $670,000 in the third quarter of fiscal year 2008. The 2009 activity
relates to a credit of ($92,000) relating to interest income from the note
receivable in the Dominican Republic, offset by $44,000 in net charges for the
closed but subleased Plaza Guatemala location recorded for the third
quarter of fiscal year 2009. In fiscal year 2008, a $640,000
non-cash charge was recorded to recognize a decrease in net present value
of future cash flows over the remaining lease life for the closed but subleased
Plaza Guatemala location as a result of a rent increase to the Company from the
landlord. Subsequent to May 31, 2009, the Company reached an agreement with the
landlord to buy itself out of the remaining term of the lease, whereby
the Company was released from any further obligations under the lease for this
site.
Operating
income for the quarter was $13.2 million, or 4.4% of net warehouse club sales,
compared to $14.6 million, or 5.3% of net warehouse club sales, in the third
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 $76,000 in the third quarter of fiscal year 2009, compared
to $254,000 in the third 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
$685,000 in the third quarter of fiscal year 2009, from $437,000 in the third
quarter of fiscal year 2008, resulting from an increase in debt held by the
Company to finance the acquisition of land and the subsequent construction of
announced new warehouse clubs.
Tax expense for the third
quarter of fiscal year 2009 was $4.0 million on pre-tax income of $12.7 million,
as compared to $3.7 million on pre-tax income of $14.3 million for the third
quarter of fiscal year 2008. The increase in the effective tax rate
to 31.3% in the third quarter of fiscal year 2009 from 25.7% in the third
quarter of fiscal year 2008 is primarily the result of $2.1 million of pre-tax
income arising from a non-taxable gain recorded upon reversal of a reserve
previously established in connection with the put arrangement due to the PSC
settlement in fiscal year 2008. In addition, the increase is also the result of
certain subsidiaries generating pre-tax income, but utilizing net operating
losses with a full valuation allowance in the same period of fiscal year 2008 as
many of these valuation allowances were reversed in the fourth quarter of
2008.
For the third quarter of
fiscal year 2009, the Company reported approximately $8,000 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 $61,000 in the third 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 $76,000 was allocated to the
minority stockholders’ interest.
Income
from continuing operations for the third quarter of fiscal year 2009 was $8.6
million compared to $10.6 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 third quarter of fiscal year 2009, the Company recognized income of
$55,000. In the same period in fiscal year 2008, the Company recognized income
of $26,000. In both cases these amounts related to the closed Guam
location, which is subleased to a tenant, net of expenses.
|
COMPARISON OF THE NINE MONTHS
ENDED MAY 31, 2009 AND MAY 31,
2008
|
Net
warehouse club sales increased 14.2% to $926.3 million in the first nine months
of fiscal year 2009, from $811.4 million in the first nine months of fiscal year
2008. In general, the Company’s sales continue to grow although at a slower pace
in the most recent months compared to earlier in the fiscal year due to a
slowing economic environment in the markets in which its warehouse clubs
operate. Warehouse sales growth is primarily due to a growing
membership base and the opening of three new warehouse clubs over the period
from November 2007 to the present. The Company opened two new
warehouse clubs in the first nine months of fiscal year 2008: one in Guatemala
which opened on November 14, 2007, and one in Trinidad which opened on
December 13, 2007. On April 17, 2009 the Company opened a third warehouse
club, this one in Alajuela, Costa Rica. 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
Nine
Months Ended
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May
31, 2009
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May
31, 2008
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Amount
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% of Net
Revenue
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Amount
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% of Net
Revenue
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|
|
Increase
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Change
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(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 11.6% for the 39 weeks ended May 31, 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 were not used in the calculation of
comparable warehouse club sales until the month of January 2009. Similarly,
the sales related to the warehouse club opened in Trinidad on
December 13, 2007 were not used in the calculation of comparable warehouse
club sales until the month of February 2009. The sales related to
the warehouse club opened in Costa Rica on April 17, 2009 will not be used
in the calculation until July 2010.
The
Company’s warehouse club gross profit margin (defined as net warehouse club
sales, less associated cost of goods sold) in the first nine months of fiscal
year 2009 increased $14.6 million to $136.1 million, or 14.7% of net warehouse
sales, from $121.5 million, or 15.0% 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 nine months
of fiscal year 2009 was 28 basis points below that in the first nine months of
fiscal year 2008 as actions to maintain competitive pricing and year-on-year
negative foreign currency exchange effects exceeded the offset from improvements
in merchandise distribution costs and shrink results. In the current
nine-month period, the Company recorded $1.3 million (0.14% of sales) in foreign
exchange related costs, compared to a foreign exchange related gain of $1.6
million (0.20% of sales) in the same nine-month period of fiscal year
2008.
Membership
income, which is recognized into income ratably over the one-year life of the
membership, increased 12.7% to $13.3 million in the first nine months of fiscal
year 2009 compared to $11.8 million in the first nine months of fiscal year
2008. As a percent of net warehouse club sales, membership income was 1.4% of
sales in the current nine-month period and 1.5% in the same nine-month
period last fiscal year. Total membership accounts at the end of May 2009 were
approximately 641,000, an increase of approximately 55,000 accounts compared to
the end of May 2008. The Company experienced year-over-year membership growth in
all of its markets. The membership renewal rate for the twelve months ended May
2009 and May 2008 was 84%.
Export
sales were $2.8 million for the first nine months of fiscal year 2009 compared
to export sales of $1.1 million for the first nine 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 nine months of fiscal year 2009 was
$4.2 million, compared to $3.6 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 $84.0 million, or 9.1% of net warehouse
club sales, in the first nine months of fiscal year 2009 from $75.7 million, or
9.3% of net warehouse club sales, in the first nine months of fiscal year 2008.
The increase in warehouse club operating expenses resulted from increased
payroll related expenses including stock compensation expense of $4.4 million
and increased operating costs of $1.2 million for security services, repair
and maintenance, and supplies. The Company also incurred higher
depreciation expense of $1.2 million as a result of capital expenditures over
the year, including the construction of two new warehouse clubs, one each in
Guatemala and Trinidad, which began operation in November and December of fiscal
year 2008, respectively, and a third new warehouse club in Costa Rica which
opened in April 2009. While credit card costs increased $250,000 during the
first nine months, the cost as a percentage of sales decreased eight
basis points reflecting the positive impact of the co-branded programs in place
including the program introduced in the Caribbean region over the past nine
months. Marketing expenses, primarily associated with the launch of
the Caribbean credit card program, increased $107,000.
General
and administrative expenses were $23.3 million, or 2.5% of net warehouse club
sales, in the first nine months of fiscal year 2009, compared to $22.6 million,
or 2.8% of net warehouse club sales, in the first nine months of fiscal year
2008. The Company incurred increased costs of $1.9 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 totaling $1.1 million.
Expenses
incurred before a warehouse club is in operation are captured in pre-opening
expenses. Pre-opening expenses in the first nine months of fiscal year
2009 were $443,000 related to the new warehouse club in Costa Rica which opened
in April 2009.
Asset
impairment and closure costs for the first nine months of fiscal year 2009 were
$216,000 compared to $703,000 in the first nine months of fiscal year 2008. The
Company incurred a charge in the first quarter of fiscal year 2009 of
approximately $201,000 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. In the first nine months of fiscal year 2008, the
expense is largely attributable to a $640,000 non-cash charge to recognize an
increase in the net present value of future cash out flows over the remaining
lease life for the closed but subleased Guatemala Plaza location, as a
result of a rent increase to the Company from the
landlord. Subsequent to May 31, 2009, the Company reached an
agreement with the landlord to buy itself out of the remaining term of the
lease, whereby the Company was released from any further obligations under
the lease for this site.
Included
in the results for the first nine 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. Through the first nine months of fiscal year 2008, the
Company recorded additional pre-tax charges of $1.3 million and benefits to
provision for income tax of $1.7 million resulting from the terms of the final
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 nine months of fiscal year 2009 was $45.6 million, or 4.9%
of warehouse sales, compared to $35.5 million, or 4.4% of warehouse sales, in
the first nine months of fiscal year 2008.
Interest
income reflects earnings on cash and cash equivalent balances and last year
included restricted cash deposits securing working capital lines of credit.
Interest income was $317,000 in the first nine months of fiscal year 2009,
compared to $1.0 million in the first nine months of fiscal year 2008. The
decrease reflects lower interest rates associated with cash on deposit in the
current period compared to the period 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,
the expansion of certain warehouse clubs, the acquisition of land and subsequent
construction of new warehouse clubs, and ongoing working capital requirements.
Interest expense increased to $1.9 million in the first half of fiscal year 2009
from $950,000 in the first half of fiscal year 2008, resulting from an increase
in debt held by the Company.
Tax expense for the first nine
months of fiscal year 2009 was $11.7 million on pre-tax income from continuing
operations of $44.0 million, compared to $8.3 million of tax expense recorded in
the first nine months of fiscal year 2008 on a pre-tax income from continuing
operations of $35.4 million. The increase in the effective tax rate to
26.6% in the first nine months of fiscal year 2009 from 23.4% in the first nine
months of fiscal year 2008 is the result of the net of the following factors:
(i) the Company has overall increase in pre-tax income of $8.6 million, which is
taxed at statutory rates of approximately 25% - 33.3%; and (ii) a net tax
benefit of approximately $1.7 million recorded due to the PSC settlement for the
first nine months of fiscal year 2008, which is not applicable to fiscal year
2009.
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 $211,000 in the first nine 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 $368,000 was allocated to the
minority stockholders’ interest. During the third 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 nine months of fiscal year
2009 was $32.1 million, compared to $26.7 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 nine months of fiscal year 2009, the Company incurred a loss
of $(27,000) versus a gain of $71,000 in the first nine 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 cash flows during the first nine months of fiscal year 2009
were associated with operating, 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 opened on April 17,
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 by the end of calendar year
2009. Investments in joint ventures were in Panama and Costa
Rica. Financing activities were primarily related to the payment of
dividends, proceeds received from bank borrowings, payment on bank borrowings
and the purchase of treasury stock related to restricted stock vesting to fund
the associated tax witholdings. Operating activities contributed
cash to operations through net income during the period.
The
Company had $39.0 million in consolidated cash and cash equivalents as of May
31, 2009, compared to $26.1 million in consolidated cash and cash equivalents as
of May 31, 2008.
Net cash
provided by operating activities was $37.7 million in the first nine months of
fiscal year 2009, compared to cash provided by operating activities of $23.4
million in the first nine 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 income from continuing operations of
approximately $5.4 million. Other adjustments to reconcile income from
continuing operations to net cash provided additional cash of
$8.9 million, compared to the same period last year. This was
primarily the result of a decrease in cash use for inventory and other assets
and liabilities of approximately $22.9 million, offset by the use of cash to
lower trade accounts payable by approximately $13.8
million. The increase between periods of cash contributed by
discontinued operations was approximately $196,000.
Net cash
used in investing activities was $43.9 million and $38.3 million in the first
nine months of fiscal years 2009 and 2008, respectively. Additions to property
and equipment, including acquisition of business of approximately $38.5 million
in the nine-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, and
land in Trinidad for $4.5 million. The Company continued with the
development of new warehouse club sites, the expansion of existing warehouse
clubs and warehouse distribution center expansion in Central America, the
Caribbean and the United States. Construction costs within these
segments for the nine-month period ended May 31, 2009 were approximately $9.8
million, $6.6 million and $356,000, respectively. In addition the
Company continued to acquire Fixtures and Equipment for new warehouse club
sites, the expansion of existing warehouse clubs and warehouse distribution
center expansion in Central America, the Caribbean and the
United States. The Company utilized approximately $6.3 million,
$2.7 million and $596,000, respectively for the nine months ended May 31, 2009
for these items. The Company utilized approximately $1.3 million for
the acquisition of software and computer hardware for the first nine months of
fiscal year 2009. The Company released approximately $408,000 in
restricted cash, previously held as a deposit for land purchases, which lowered
the the cash used in investing activities. The Company also utilized cash
for investing activities for the purchase of 50% interest in joint ventures
located in Costa Rica and Panama and for additional capital contributions for
such joint ventures of approximately $7.6 million. The
Company collected a $2.1 million note receivable from the sale of a
warehouse club in the Dominican Republic. In the first nine months of
fiscal year 2008, additions to property and equipment totaled $20.5
million, primarily associated with the completion of the warehouse clubs in
Guatemala and Trinidad and $4.1 million associated with building and lease
improvements and the acquisition of fixtures at various warehouse locations. 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 $4.9 million in cash from investing activities
in the first nine 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 nine months of fiscal year
2009 was $4.3 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
$2.3 million of net cash from short-term loans and approximately $6.8
million from long-term loans. The Company used approximately $1.1
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. For the first nine months of fiscal year 2008, financing
activities provided cash of $9.0 million, primarily as a result of acquiring
bank loans and payments on bank loans for a net effect of $10.2 million of cash
provided and the release of restricted cash previously held as collateral for
bank loans of $8.0 million, offset by payments of $9.5 million for dividends and
$1.4 million used in the purchase of Treasury stock.
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
$409,000, as long-term debt. The interest on the loan is
amortized monthly with the interest charged to interest expense and the
resulting liability credited to the loan payable balance. The loan
balance at May 31, 2009 is approximately $421,000. 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
loan 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 is paid to or received from RBTT monthly.
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 on 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 on that date.
The Company has entered into two
interest rate swap agreements, one on February 13, 2008 (fiscal year 2008) and
one on November 30, 2008 (fiscal year 2009). Under these swap
agreements the Company will pay a fixed rate interest charge for a term
approximately over the variable rate loans being hedged. In
accordance with 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.
Accordingly, the Company has designated the two interest rate swap agreements as
hedging instruments. The following table summarizes the effect of the
fair valuation of derivative instruments designated as hedging instruments (in
thousands):
|
Liability
Derivatives
|
|
|
May
31,
2009
|
|
August
31,
2008
|
|
Derivatives
designated as hedging instruments under Statement 133
|
Balance
Sheet Location
|
|
Fair
Value
|
|
Balance
Sheet Location
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives designated as hedging instruments under Statement
133 (2)
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The
effective portion of the interest rate swaps was recorded as a
debit to accumulated other comprehensive loss for $629,000 as of May 31,
2009.
|
(2)
|
There
were no derivatives not designated as hedging instruments under Statement
133.
|
Short-Term
Borrowings and Long-Term Debt
As of May 31,
2009, the Company, together with its majority or wholly owned subsidiaries, had
$5.8 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 $25.0 million,
which can be used as lines of credit or to issue letters of credit. As of May
31, 2009, lines and letters of credit totaling approximately
$6.0 million were outstanding under these facilities, leaving approximately
$19.0 million available for borrowing.
As of May 31, 2009 and August 31,
2008, the Company, together with its majority or wholly owned subsidiaries, had
$32.5 million and $25.8 million, respectively, outstanding in long-term
borrowings. Of this amount, as of May 31, 2009, approximately $421,000 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 $2.7 million. The carrying amount of the
non-cash assets assigned as collateral for long-term debt was $44.6 million and
$32.2 million as of May 31, 2009 and August 31, 2008, respectively.
As of May 31, 2009 and August 31, 2008, $7.6 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 second quarter, the Company detected that it was not in
compliance with the exact covenants described in the underlying contracts.
However, the bank has provided written commitments to work with the Company
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.
Contractual
Obligations
As of May
31, 2009, the Company's material commitments to make future payments under
long-term contractual obligations were as follows (in thousands):
|
|
Payments
due in:
|
|
Contractual
obligations
|
|
Less than
1
Year
|
|
|
1
to 3
Years
|
|
|
4
to 5
Years
|
|
|
After
5
Years
|
|
|
Total
|
|
|
|
$ |
3,608 |
|
|
$ |
7,740 |
|
|
$ |
7,315 |
|
|
$ |
13,864 |
|
|
$ |
32,527 |
|
|
|
|
6,170 |
|
|
|
11,132 |
|
|
|
11,178 |
|
|
|
52,579 |
|
|
|
81,059 |
|
Additional
capital contribution commitments to
|
|
|
4,146 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
4,146 |
|
|
|
|
107 |
|
|
|
53 |
|
|
|
— |
|
|
|
— |
|
|
|
160 |
|
Distribution
center services(5)
|
|
|
185 |
|
|
|
197 |
|
|
|
— |
|
|
|
— |
|
|
|
382 |
|
|
|
$ |
14,216 |
|
|
$ |
19,122 |
|
|
$ |
18,493 |
|
|
$ |
66,443 |
|
|
$ |
118,274 |
|
(1)
|
Amounts
shown are for the principal portion of the long-term debt payments
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
$2.2 million; sublease income for this location is also approximately $2.6
million, yielding no net projected obligation.
|
(3)
|
Operating
lease obligations have been reduced by approximately $753,000 to reflect
the amounts net of sublease income.
|
(4)
|
Amounts
shown are the contractual capital contribution requirements for the
Company's investment in the joint ventures discussed within the MD&A
in Current and Future Management Actions.
|
(5)
|
Amounts
shown are the contractual distribution center services agreements for
Panama and Mexico City. The minimum payment includes only the fixed
portion of each contract.
|
|
Certain
obligations under leasing arrangements are collateralized by the
underlying asset being
leased. |
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 projecting the outcome of litigation and 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 May
31, 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 May 31, 2009 of approximately
$48.1 million and $9.1 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. 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 May 31, 2009, the Company has
classified uncertain income tax positions as $3.4 million in long-term income
taxes payable and approximately $42,000 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. As of February 28, 2009, the Company had classified $918,000
as current income taxes payable. In March 2009, the Company paid
approximately $679,000 and reversed the remainder of the accrued liability in
the amount of approximately $239,000.
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 first nine months of fiscal year 2009.
Stock-Based Compensation: As
of May 31, 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 the first nine 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 June 2009, the FASB
issued SFAS No. 168 "The FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles". This
Statement establishes the FASB Accounting Standards
Codification, ("Codification") as the single source of
authoritative GAAP to be applied by nongovernmental entities, except for
the rules and interpretive releases of the SEC under authority of federal
securities laws, which are sources of authoritative GAAP for SEC
registrants. All guidance contained in the Codification carries an equal
level of authority. The Company is required to adopt this
standard in the first quarter of fiscal year 2010.
In May
2009, the Financial Accounting Standards Board (FASB) issued SFAS No. 165,
“Subsequent Events” (SFAS 165), which establishes general standards of
accounting for and disclosure of events that occur after the balance sheet date
but before financial statements are issued or are available to be
issued. The Company is required to adopt SFAS 165 prospectively to
both interim and annual financial periods ending after June 15,
2009. The adoption of the standard is not expected to result in a
change in current practice.
In
April 2009, three FASB Staff Positions (FSPs) were issued addressing fair
value of financial instruments: FSP FAS 157-4, “Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly”; FSP FAS 115-2,
“Recognition and Presentation of Other Than Temporary Impairments”; and FSP FAS
107-1,”Interim Disclosure about Fair Value of Financial Instruments.” The
Company will adopt these FSPs in its fourth quarter of fiscal year
2009. The adoption of these FSPs is not expected to have a
material impact on the Company’s consolidated financial condition and results of
operations.
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 FASB issued 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 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 permitted 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 Statements - 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.
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 May 31, 2009,
the Company had a total of 26 consolidated warehouse clubs operating in 11
foreign countries and one U.S. territory, 19 of which operate under currencies
other than the U.S. dollar. For the first nine 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 ($1.3
million) and $1.6 million for the nine 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 ($3.3 million) and
($107,000) for the first nine 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 May 31,
2009:
Country/Territory
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Number
of
Warehouse Clubs
In
Operation
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Anticipated Warehouse
Club
Openings
in
FY 2009/2010
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(1)
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The
Company opened a warehouse club in fiscal year 2009 in Costa Rica and
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 by the end of calendar year 2009 (San
Fernando).
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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 manage 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 projecting
the outcome of litigation and 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.
With the exception of the risk factor discussed below, 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.
The Company's financial performance
is dependent on international operations, which exposes it to various
risks. The Company's international operations account for nearly all of
the Company's total sales. The Company's financial performance is subject to
risks inherent in operating and expanding the Company's international membership
business, which include: (i) changes in and interpretation of tariff and
tax laws and regulations, as well as inconsistent enforcement of laws and
regulations; (ii) the imposition of foreign and domestic governmental
controls; (iii) trade restrictions; (iv) greater difficulty and costs
associated with international sales and the administration of an international
merchandising business; (v) thefts and other crimes; (vi) limitations
on U.S. company ownership in certain foreign countries; (vii) product
registration, permitting and regulatory compliance; (viii) volatility in
foreign currency exchange rates; (ix) the financial and other capabilities
of the Company's joint venturers and licensees; and (x) general political
as well as economic and business conditions. For example, Honduras is
currently experiencing a period of political unrest resulting in street
demonstrations and government mandated nighttime curfews. To date, the Company’s
Honduras operations have experienced some disruption, with store hours being
reduced slightly to accommodate the curfew. Banking and merchandise
shipments have not been affected. However, the situation in Honduras
remains uncertain and further unrest could result in additional disruption of
the Company’s operations, merchandise shipments, the Honduran banking system,
and currency exchange rates, any of which could have a material adverse effect
on our business and results of operations.
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.
None.
None.
None.
None.
(a) Exhibits:
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3.1(1)
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Amended
and Restated Certificate of Incorporation of the
Company.
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3.2(2)
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Certificate
of Amendment of Amended and Restated Certificate of Incorporation of the
Company.
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3.3(3)
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Certificate
of Amendment of Amended and Restated Certificate of Incorporation of the
Company.
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3.4(1)
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Amended
and Restated Bylaws of the Company.
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10.1*
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Twelfth
Amendment to Employment Agreement between the Company and John Hildebrandt
dated March 1, 2009.
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10.2*
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Thirteenth
Amendment to Employment Agreement between the Company and John Hildebrandt
dated April 1, 2009.
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10.3*
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Thirteenth
Amendment to Employment Agreement between the Company and Edward Oats
dated March 1, 2009.
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10.4*
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Fifteenth
Amendment to Employment Agreement between the Company and Brud Drachman
dated March 1, 2009.
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10.5*
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Sixteenth
Amendment to Employment Agreement between the Company and Thomas D. Martin
dated March 1, 2009.
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31.1
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Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
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31.2
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Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
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32.1**
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Certification
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
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32.2**
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Certification
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002.
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*
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Identifies
management contract or compensatory plan or
arrangement.
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**
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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.
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(1)
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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.
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(2)
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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.
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(3)
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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.
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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.
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PRICESMART,
INC.
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Date:
July 10, 2009
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By:
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/s/ ROBERT
E. PRICE
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Robert
E. Price
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Chairman
of the Board and
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Chief
Executive Officer
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Date:
July 10, 2009
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By:
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/s/ JOHN
M. HEFFNER
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John
M. Heffner
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Executive
Vice President and Chief Financial Officer
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(Principal
Financial Officer and
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Chief
Accounting Officer)
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