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EX-10.3 - FOURTEENTH AMENDMENT TO EMPLOYMENT AGREEMENT - PRICESMART INCex10_3.htm
EX-10.1 - TENTH AMENDMENT TO EMPLOYMENT AGREEMENT - PRICESMART INCex10_1.htm
EX-32.1 - CERTIFICATION PURSUANT TO 18 U.S.C CEO - PRICESMART INCex32_1.htm
EX-10.5 - SIXTEENTH AMENDMENT TO EMPLOYMENT AGREEMENT - PRICESMART INCex10_5.htm
EX-10.8 - TWENTY-FOURTH AMENDMENT TO EMPLOYMENT AGREEMENT - PRICESMART INCex10_8.htm
EX-32.2 - CERTIFICATION PURSUANT TO 18 U.S.C CFO - PRICESMART INCex32_2.htm
EX-10.6 - SEVENTEENTH AMENDMENT TO EMPLOYMENT AGREEMENT - PRICESMART INCex10_6.htm
EX-10.9 - SCOTIABANK EL SALVADOR LOAN - PRICESMART INCex10_9.htm
EX-31.1 - CERTIFICATION PURSUANT TO SECTION 302 CEO - PRICESMART INCex31_1.htm
EX-10.4 - FIFTEENTH AMENDMENT TO EMPLOYMENT AGREEMENT - PRICESMART INCex10_4.htm
EX-31.2 - CERTIFICATION PURSUANT TO SECTION 302 CFO - PRICESMART INCex31_2.htm
EX-10.7 - EIGHTEENTH AMENDMENT TO EMPLOYMENT AGREEMENT - PRICESMART INCex10_7.htm
EX-10.2 - THIRTEENTH AMENDMENT TO EMPLOYMENT AGREEMENT - PRICESMART INCex10_2.htm




UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
  
FORM 10-Q
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended February 28, 2010
 
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.
 
Yes   þ
No   ¨
 
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).
 
Yes   þ
No   ¨

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).

Yes   ¨
No   þ
 
 The registrant had 29,751,377 shares of its common stock, par value $0.0001 per share, outstanding at March 31, 2010.

 
 
 

 
PRICESMART, INC.
 
INDEX TO FORM 10-Q
 
     
   
Page
 
 
 
     
        1
     
 
        2
     
 
        3
     
 
        4
     
 
        5
     
 
        7
     
        34
     
        50
     
        51
   
 
     
        52
     
        52
     
        52
     
        52
     
        53
     
        53
     
        54
 
 
 
i

 
 
 

 

PriceSmart, Inc.’s (“PriceSmart” or the “Company”) unaudited consolidated balance sheet as of February 28, 2010, the consolidated balance sheet as of August 31, 2009, the unaudited consolidated statements of income for the three and six month periods ended February 28, 2010 and 2009, the unaudited consolidated statements of equity for the six months ended February 28, 2010 and 2009, and the unaudited consolidated statements of cash flows for the six months ended February 28, 2010 and 2009, are included elsewhere herein. Also included herein are the notes to the unaudited consolidated financial statements.
 
1

 
 
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
     
N
       
   
February 28, 2010
(Unaudited)
   
August 31,
2009
 
ASSETS
             
Current Assets:
             
Cash and cash equivalents
 
$
63,047
   
$
44,193
 
Short-term restricted cash
   
     
10
 
Receivables, net of allowance for doubtful accounts of $8 and $10 as of February 28, 2010 and August 31, 2009, respectively
   
2,454
     
2,187
 
Merchandise inventories
   
124,077
     
115,841
 
Deferred tax assets – current
   
2,800
     
2,618
 
Prepaid expenses and other current assets
   
15,982
     
19,033
 
Assets of discontinued operations
   
820
     
900
 
Total current assets
   
209,180
     
184,782
 
Long-term restricted cash
   
823
     
732
 
Property and equipment, net
   
251,398
     
231,798
 
Goodwill
   
37,455
     
37,538
 
Deferred tax assets – long term
   
19,168
     
20,938
 
Other assets
   
3,982
     
3,927
 
Investment in unconsolidated affiliates
   
8,097
     
7,658
 
Total Assets
 
$
530,103
   
$
487,373
 
LIABILITIES AND EQUITY
               
Current Liabilities:
               
Short-term borrowings
 
$
4,344
   
$
2,303
 
Accounts payable
   
113,097
     
101,412
 
Accrued salaries and benefits
   
7,878
     
8,831
 
Deferred membership income
   
9,490
     
8,340
 
Income taxes payable
   
5,785
     
5,942
 
Other accrued expenses
   
8,718
     
10,022
 
Dividends payable
   
7,429
     
 
Long-term debt, current portion
   
6,002
     
4,590
 
Deferred tax liability – current
   
200
     
189
 
Liabilities of discontinued operations
   
109
     
299
 
Total current liabilities
   
163,052
     
141,928
 
Deferred tax liability – long-term
   
1,091
     
1,026
 
Long-term portion of deferred rent
   
2,902
     
2,673
 
Long-term income taxes payable, net of current portion
   
3,545
     
3,458
 
Long-term debt, net of current portion
   
47,127
     
37,120
 
Total liabilities
   
217,717
     
186,205
 
Equity:
               
Common stock, $0.0001 par value, 45,000,000 shares authorized; 30,463,930 and 30,337,109 shares issued and 29,741,523 and 29,681,031 shares outstanding (net of treasury shares) as of February 28, 2010 and August 31, 2009, respectively.
   
3
     
3
 
Additional paid-in capital
   
380,147
     
377,210
 
Tax benefit from stock-based compensation
   
4,724
     
4,547
 
Accumulated other comprehensive loss
   
(17,108
)
   
(17,230
)
Accumulated deficit
   
(40,786
)
   
(49,998
)
Less: treasury stock at cost; 722,407 and 656,078 shares as of February 28, 2010 and August 31, 2009, respectively.
   
(15,460
)
   
(14,134
)
Total PriceSmart stockholders’ equity
   
311,520
     
300,398
 
Noncontrolling interest
   
866
     
770
 
Total equity
   
312,386
     
301,168
 
Total Liabilities and Equity
 
$
530,103
   
$
487,373
 
 
See accompanying notes.  
 
2

 
 

CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED—AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
   
             Three Months Ended
   
              Six Months Ended
 
   
              February 28,
   
     February 28,
   
    February 28,
   
            February 28,
 
   
           2010
   
             2009
   
         2010
   
           2009
 
Revenues:
                       
Net warehouse club sales
 
$
358,893
   
$
328,240
   
$
667,545
   
$
626,758
 
Export sales
   
1,006
     
905
     
1,593
     
1,742
 
Membership income
   
4,827
     
4,425
     
9,476
     
8,749
 
Other income
   
1,396
     
1,223
     
2,926
     
2,753
 
Total revenues
   
366,122
     
334,793
     
681,540
     
640,002
 
Operating expenses:
                               
Cost of goods sold:
                               
Net warehouse club
   
304,867
     
279,993
     
566,584
     
534,419
 
Export
   
935
     
861
     
1,489
     
1,661
 
Selling, general and administrative:
                               
Warehouse club operations
   
31,041
     
28,544
     
60,274
     
55,829
 
General and administrative
   
8,667
     
7,812
     
16,235
     
15,352
 
Pre-opening expenses
   
175
     
99
     
286
     
99
 
Asset impairment and closure costs
   
     
16
     
     
264
 
Total operating expenses
   
345,685
     
317,325
     
644,868
     
607,624
 
Operating income
   
20,437
     
17,468
     
36,672
     
32,378
 
Other income (expense):
                               
Interest income
   
122
     
115
     
338
     
241
 
Interest expense
   
(634
)
   
(609
)
   
(1,264
)
   
(1,190
)
Other expense, net
   
(10
)
   
(42
)
   
(7
)
   
(62
)
Total other expense
   
(522
)
   
(536
)
   
(933
)
   
(1,011
)
Income from continuing operations before provision for income taxes, and loss of unconsolidated affiliates
   
19,915
     
16,932
     
35,739
     
31,367
 
Provision for income taxes
   
(6,190
)
   
(4,090
)
   
(11,592
)
   
(7,737
)
Loss of unconsolidated affiliates
   
(3
)
   
(7
)
   
(5
)
   
(12
)
Income from continuing operations
   
13,722
     
12,835
     
24,142
     
23,618
 
Income (loss) from discontinued operations, net of tax
   
35
     
(63
)
   
44
     
(81
)
Net income
   
13,757
     
12,772
     
24,186
     
23,537
 
Net loss attributable to noncontrolling interest
   
(60
)
   
(85
)
   
(112
)
   
(150
)
Net income attributable to PriceSmart
 
$
13,697
   
$
12,687
   
$
24,074
   
$
23,387
 
                                 
Net income attributable to PriceSmart:
                               
Income from continuing operations
   
13,662
     
12,750
     
24,030
     
23,468
 
Income (loss) from discontinued operations, net of tax
   
35
     
(63
)
   
44
     
(81
)
   
$
13,697
   
$
12,687
   
$
24,074
   
$
23,387
 
Net income per share attributable to PriceSmart and available for distribution:
                               
Basic net income per share from continuing operations
 
$
0.46
   
$
0.43
   
$
0.81
   
$
0.80
 
Basic net income per share from discontinued operations, net of tax
 
$
   
$
   
$
   
$
 
Basic net income per share
 
$
0.46
   
$
0.43
   
$
0.81
   
$
0.80
 
                                 
Diluted net income per share from continuing operations
 
$
0.46
   
$
0.43
   
$
0.81
   
$
0.79
 
Diluted net income per share from discontinued operations, net of tax
 
$
   
$
   
$
   
$
 
Diluted net income per share
 
$
0.46
   
$
0.43
   
$
0.81
   
$
0.79
 
Shares used in per share computations:
                               
Basic
   
29,222
     
28,916
     
29,163
     
28,888
 
Diluted
   
29,250
     
29,179
     
29,206
     
29,145
 
Dividends per share
 
$
0.50
   
$
0.50
   
$
0.50
   
$
0.50
 
See accompanying notes.

 
 
 
3

 
 
 

CONSOLIDATED STATEMENTS OF EQUITY
(UNAUDITED—AMOUNTS IN THOUSANDS)  
 
 
                     
Tax Benefit
   
Accum-
                                     
                     
From
   
ulated
                     
Total
             
                     
Stock-
   
Other
                     
PriceSmart
             
               
Additional
   
based
   
Compre-
   
Accum-
               
Stock-
   
Non-
       
   
Common Stock
   
Paid-in
   
Compen-
   
hensive
   
ulated
   
Treasury Stock
   
holders'
   
Controlling
   
Total
 
   
Shares
   
Amount
   
Capital
   
sation
   
Loss
   
Deficit
   
Shares
   
Amount
   
Equity
   
Interest
   
Equity
 
Balance at August 31, 2008
   
30,196
   
$
3
   
$
373,192
   
$
4,563
   
$
(12,897
)
 
$
(77,510
)
   
580
   
$
(12,845
)
 
$
274,506
   
$
480
   
$
274,986
 
Purchase of treasury stock
   
     
     
     
     
     
     
66
     
(1,075
)
   
(1,075
)
   
     
(1,075
)
Issuance of restricted stock awards
   
54
     
     
     
     
     
     
     
     
     
     
 
Forfeiture of restricted stock awards
   
(17
)
   
     
     
     
     
     
     
     
     
     
 
Exercise of stock options
   
11
     
     
75
     
     
     
     
     
     
75
     
     
75
 
Stock-based compensation
   
     
     
1,692
     
(143
)
   
     
     
     
     
1,549
     
     
1,549
 
Common stock subject to put agreement
   
     
     
161
     
     
     
     
     
     
161
     
     
161
 
Purchase of treasury stock for PSC settlement
   
     
     
     
     
     
     
7
     
(161
)
   
(161
)
   
     
(161
)
Dividend payable to stockholders
   
     
     
     
     
     
(7,392
)
   
     
     
(7,392
)
   
     
(7,392
)
Dividend paid to stockholders
   
     
     
     
     
     
(7,392
)
   
     
     
(7,392
)
   
     
(7,392
)
Change in fair value of interest rate swaps
   
     
     
     
     
(554
)
   
     
     
     
(554
)
   
     
(554
)
Net income
   
     
     
     
     
     
23,387
     
     
     
23,387
     
150
     
23,537
 
Translation adjustment
   
     
     
     
     
(2,645
)
   
     
     
     
(2,645
)
   
6
     
(2,639
)
Comprehensive income
                                                                   
20,188
     
156
     
20,344
 
Balance at February 28, 2009
   
30,244
   
$
3
   
$
375,120
   
$
4,420
   
$
(16,096
)  
$
(68,907
)
   
653
   
$
(14,081
)
 
$
280,459
   
$
636
   
$
281,095
 
                                                                                         
Balance at August 31, 2009
   
30,337
   
$
3
   
$
377,210
   
$
4,547
   
$
(17,230
)
 
$
(49,998
)
   
656
   
$
(14,134
)
 
$
300,398
   
$
770
   
$
301,168
 
Purchase of treasury stock
   
     
     
     
     
     
     
66
     
(1,326
)
   
(1,326
)
   
     
(1,326
)
Issuance of restricted stock awards
   
15
     
     
     
     
     
     
     
     
     
     
 
Forfeiture of restricted stock awards
   
(3
)
   
     
     
     
     
     
     
     
     
     
 
Exercise of stock options
   
115
     
     
701
     
     
     
     
     
     
701
     
     
701
 
Stock-based compensation
   
     
     
1,840
     
177
     
     
     
     
     
2,017
     
     
2,017
 
Dividend payable to stockholders
   
     
     
     
     
     
(7,429
)
   
     
     
(7,429
)
   
     
(7,429
)
Dividend paid to stockholders
   
     
     
     
     
     
(7,433
)
   
     
     
(7,433
)
   
     
(7,433
)
Stockholder contribution
   
     
     
396
     
     
     
     
     
     
396
     
     
396
 
Change in fair value of interest rate swaps, net of tax
   
     
     
     
     
(44
)
   
     
     
     
(44
)
   
     
(44
)
Net income
   
     
     
     
     
     
24,074
     
     
     
24,074
     
112
     
24,186
 
Translation adjustment
   
     
     
     
     
166
     
     
     
     
166
     
(16
)
   
150
 
Comprehensive income
                                                                   
24,196
     
96
     
24,292
 
Balance at February 28, 2010
   
30,464
   
$
3
   
$
380,147
   
$
4,724
   
$
(17,108
)
 
$
(40,786
)
   
722
   
$
(15,460
)
 
$
311,520
   
$
866
   
$
312,386
 
See accompanying notes.


 
 
 
4

 
 
 

CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED—AMOUNTS IN THOUSANDS)
   
Six Months Ended
 
   
February 28, 2010
   
February 28,
2009
 
Operating Activities:
           
Net income
 
$
24,186
   
$
23,537
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
   
7,263
     
6,459
 
Allowance for doubtful accounts
   
(2
)
   
(5
)
Asset impairment and closure costs
   
     
125
 
Loss on sale of  property and equipment
   
17
     
42
 
Deferred income taxes
   
1,841
     
(206
)
Discontinued operations
   
(44
)
   
81
 
Equity in losses of unconsolidated affiliates
   
5
     
12
 
Excess tax benefit on stock-based compensation
   
(177
)
   
143
 
Stock-based compensation
   
1,840
     
1,692
 
Change in operating assets and liabilities:
               
Change in receivables, prepaid expenses and other current assets, accrued salaries and benefits, deferred membership income and other accruals
   
1,738
 
   
(1,787
)
Merchandise inventories
   
(8,236
)
   
(6,859
)
Accounts payable
   
11,685
     
6,311
 
Net cash provided by continuing operating activities
   
40,116
     
29,545
 
Net cash provided by discontinued operating activities
   
314
     
255
 
Net cash provided by operating activities
   
40,430
     
29,800
 
Investing Activities:
               
Additions to property and equipment
   
(26,644
)
   
(26,441
)
Proceeds from disposal of property and equipment
   
49
     
31
 
Purchase of interest in Costa Rica joint ventures
   
     
(2,635
)
Capital contribution to Costa Rica joint ventures
   
     
(372
)
Purchase of interest in Panama joint venture
   
     
(4,616
)
Capital contribution to Panama joint venture
   
(433
)
   
 
Net cash used in continuing investing activities
   
(27,028
)
   
(34,033
)
Net cash used in discontinued investing activities
   
     
 
Net cash flows used in investing activities
   
(27,028
)
   
(34,033
)
Financing Activities:
               
Proceeds from bank borrowings
   
26,083
     
22,001
 
Repayment of bank borrowings
   
(12,549
)
   
(13,864
)
Cash dividend payments
   
(7,433
)
   
(12,136
)
Stockholder contribution
   
396
     
 
Additions to restricted cash
   
     
(9,500
)
Excess tax benefit (deficiency) on stock-based compensation
   
177
     
(143
)
Purchase of treasury stock for PSC settlement
   
     
(161
)
Proceeds from exercise of stock options
   
701
     
75
 
Purchase of treasury shares
   
(1,326
)
   
(1,075
)
Net cash provided by (used in) financing activities
   
6,049
     
(14,803
)
Effect of exchange rate changes on cash and cash equivalents
   
(597
)
   
803
 
Net increase (decrease) in cash and cash equivalents
   
18,854
     
(18,233
)
Cash and cash equivalents at beginning of period
   
44,193
     
48,121
 
Cash and cash equivalents at end of period
 
$
63,047
   
$
29,888
 

 
 
 
 
 
5

 
 
 


PRICESMART, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS—(Continued)
(UNAUDITED—AMOUNTS IN THOUSANDS)

   
Six Months Ended
 
   
February 28, 2010
   
February 28, 2009
 
Supplemental disclosure of cash flow information:
           
Cash paid during the period for:
           
Interest, net of amounts capitalized
 
$
1,161
   
$
384
 
Income taxes
 
$
8,880
   
$
7,387
 
Supplemental disclosure of non-cash financing activities:
               
Dividends declared but not paid
 
$
7,429
   
$
7,392
 
 
 
 
 
 
 
 
6

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
February 28, 2010

NOTE 1 – COMPANY OVERVIEW AND BASIS OF PRESENTATION

PriceSmart, Inc.’s (“PriceSmart” or the “Company”) business consists primarily of international membership shopping warehouse clubs similar to, but smaller in size than, warehouse clubs in the United States. As of February 28, 2010, 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).  In addition to the warehouse clubs operated directly by the Company (or through a joint venture in the case of Trinidad), there is one facility in operation in Saipan, Micronesia licensed to and operated by local business people, from which the Company earns a royalty fee.  The Company primarily operates in three segments based on geographic area.

Basis of Presentation - The interim consolidated 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 interim consolidated 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, 2009. The interim consolidated 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 February 2010 the Financial Accounting Standards Board (“FASB”) issued revised guidance establishing general accounting standards and disclosure of subsequent events. The Company, in accordance with this guidance, evaluated subsequent events through the date and time these financial statements were issued. 

The Company has utilized net income as the starting point on the consolidated statements of cash flows for the periods presented, in order to reconcile net income to cash flows from operating activities as required by the indirect method.  Prior disclosures reconciled income from continuing operations to cash flows from operating activities.  This change had no effect on cash from operating activities.
 
    Reclassifications - As a result of the application of a new accounting pronouncement for noncontrolling interests in consolidated entities, as discussed below in Recent Accounting Pronouncements, the Company:

·  
Reclassified to noncontrolling interest, a component of total equity, $770,000 at August 31, 2009, which was previously reported as minority interest on the consolidated balance sheet.   A new subtotal, "Total PriceSmart stockholders’ equity", refers to the equity attributable to stockholders of PriceSmart; and

·  
Reported as separate captions within the consolidated statements of income:  "Net income attributable to noncontrolling interest" and "Net income attributable to PriceSmart."

These reclassifications did not have a material impact on the Company’s previously reported results of operations, financial position or cash flows.


 
7

 

PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation - The interim consolidated financial statements of the Company included herein include the assets, liabilities and results of operations of the Company’s majority and wholly owned subsidiaries as listed below. All significant intercompany accounts and transactions have been eliminated in consolidation. The interim consolidated 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 February 28, 2010:  

 
Subsidiary
 
Countries
 
Ownership
 
Basis of Presentation
 
PriceSmart, Aruba
 
Aruba
 
100.0%
 
Consolidated
 
PriceSmart, Barbados
 
Barbados
 
100.0%
 
Consolidated
 
PriceSmart, Colombia
 
Colombia
 
100.0%
 
Consolidated(1)
 
PSMT Caribe, Inc.:
           
 
     Costa Rica
 
Costa Rica
 
100.0%
 
Consolidated
 
     Dominican Republic
 
Dominican Republic
 
100.0%
 
Consolidated
 
     El Salvador
 
El Salvador
 
100.0%
 
Consolidated
 
     Honduras
 
Honduras
 
100.0%
 
Consolidated
 
PriceSmart, Guam
 
Guam
 
100.0%
 
Consolidated(2)
 
PriceSmart, Guatemala
 
Guatemala
 
100.0%
 
Consolidated
 
PriceSmart, Jamaica
 
Jamaica
 
100.0%
 
Consolidated
 
PriceSmart, Nicaragua
 
Nicaragua
 
100.0%
 
Consolidated
 
PriceSmart, Panama
 
Panama
 
100.0%
 
Consolidated
 
PriceSmart, Trinidad
 
Trinidad
 
  95.0%
 
Consolidated
 
PriceSmart, U.S. Virgin Islands
 
U.S. Virgin Islands
 
100.0%
 
Consolidated
 
GolfPark Plaza, S.A.
 
Panama
 
  50.0%
 
Equity(3)
 
Price Plaza Alajuela PPA, S.A.
 
Costa Rica
 
  50.0%
 
Equity(3)
 
Newco2
 
Costa Rica
 
  50.0%
 
Equity(3)
 
(1)
For the six month period ended February 28, 2010, this entity had no activity.
(2)
Entity is treated as discontinued operations in the consolidated financial statements.
(3)
Purchases of joint venture interests during the first quarter of fiscal year 2009 recorded as investment in unconsolidated affiliates on the consolidated balance sheets.
 
Use of Estimates – The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.  
 
Variable Interest Entities –  The Company reviews and determines at the start of each arrangement or subsequently if a reconsideration event occurs whether any of its investments in joint ventures are a Variable Interest Entity (“VIE”), and whether it must consolidate a VIE and/or disclose information about its involvement in a VIE. The Company has determined that the joint ventures for GolfPark Plaza, Price Plaza Alajuela and Newco2 are VIEs.  The Company has determined that it is not the primary beneficiary of the VIEs and, therefore, has accounted for these entities under the equity method.  
 
Cash and Cash Equivalents – Cash and cash equivalents represent cash and short-term investments with maturities of three months or less when purchased.
 

 
8

 

PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Restricted Cash – As of February 28, 2010 the Company had no short-term restricted cash.  Long-term restricted cash represents deposits directly with federal regulatory agencies and within banking institutions in compliance with federal regulatory requirements in Costa Rica and Panama for approximately $823,000.
 
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 historical 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 as an economic penalty may be incurred if the option is 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 as an economic penalty may be incurred if the option is not exercised in some locations. The amount by which straight-line rent exceeds actual lease payment requirements in the early years of the leases is accrued as deferred rent and reduced in later years when the actual cash payment requirements exceed the straight-line expense. The Company also accounts in its straight-line computation for the effect of any “rental holidays.” In addition to the minimum annual payments, in certain locations, the Company pays additional contingent rent based on a contractually stipulated percentage of sales.
 
Fair Value Measurements – The Company measures the fair value for all financial and nonfinancial assets and liabilities that are recognized or disclosed at fair value in the consolidated financial statements on a recurring basis or on a nonrecurring basis during the reporting period.  The Company measures fair value for interest rate swaps on a recurring basis.  As of the balance sheet dates, there were no other financial assets for which the Company measures fair value.  As of the balance sheet dates, there were no nonfinancial assets and liabilities that are recognized or disclosed at fair value in the consolidated financial statements measured on a recurring basis.  The Company measures at fair value nonfinancial assets and liabilities recognized or disclosed in the consolidated financial statements on a nonrecurring basis, such as goodwill and long-lived assets, that require measurement at fair value after taking into account impairment charges (if any) that are deemed necessary.  Also included as nonfinancial assets and liabilities measured on a nonrecurring basis are those initially measured at fair value in a business combination or other new basis event, but not measured at fair value in subsequent periods.  

The Company has established a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. The Company was not required to revalue any assets or liabilities utilizing Level 1 or Level 3 inputs at the balance sheet dates.  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 business acquisitions prior to fiscal year 2010.   The Company did not make any significant transfers in and out of Level 1 and Level 2 fair value measurements.


 
9

 

PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Valuation techniques utilized in the fair value measurement of assets and liabilities presented on the Company’s consolidated 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.

Goodwill – Goodwill resulting from certain business combinations totaled $37.5 million at February 28, 2010 and August 31, 2009.  Foreign exchange translation gains and losses have largely offset themselves during the six month period ended February 28, 2010. 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 consist of interest rate swaps.  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 sheets 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.)

Components of Equity Attributable to PriceSmart and Noncontrolling Interests – The Company reports its noncontrolling interests in consolidated subsidiaries as a component of equity separate from the Company’s equity. The accumulated other comprehensive loss consists of foreign currency translation adjustments.

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 of tax basis.  The Company recognizes gift certificates sales revenue when the certificates are redeemed. The outstanding gift certificates are reflected as "Other accrued expenses" in the consolidated balance sheets. These gift certificates generally have a one-year stated expiration date from the date of issuance.  The Company periodically reviews unredeemed outstanding gift certificates, and the gift certificates that have expired are recognized as “Revenues-Other Income”  on the consolidated statements of income. 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, time limited product promotions 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. Product promotions are generally linked to coupons that provide for reimbursement to the Company from vendor rebates for the product being promoted.  The Company records the reduction in cost of goods sold on a transactional basis for these programs.  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.
 

 
10

 

PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Selling, General and Administrative – Selling, general and administrative costs are comprised primarily of expenses associated with warehouse operations. Warehouse operations include the operating costs of the Company's warehouse clubs, including all payroll and related costs, utilities, consumable supplies, repair and maintenance, rent expense, building and equipment depreciation, and bank and credit card processing fees. Also included in selling, general and administrative expenses are the payroll and related costs for the Company's U.S. and regional purchasing and management centers.
 
Pre-Opening Costs – The Company expenses pre-opening costs (the costs of start-up activities, including organization costs and rent) as incurred.

Asset Impairment Costs –  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. Future business conditions and/or activity could differ materially from the projections made by management causing the need for additional impairment charges.

Closure Costs – The Company records the costs of closing warehouse clubs as follows:  severance costs that are determined to be an arrangement for one-time employee termination benefits are accrued at the date the plan of termination has received management authority and approval, the plan identifies the number of employees, job classification, functions, locations and expected completion dates, the plan establishes the terms of the severance, and management has deemed it unlikely that significant changes to the plan will be made.  In addition the plan must have been communicated to employees (referred to as the communication date).  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 cash or net present value of future cash to be received as compensation upon consummation of the sale. All other costs are expensed as incurred. 

Contingencies and Litigation –  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 13—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 an expense for the fair value of the put agreement granted as part of the legal settlement with the PSC Parties.  On September 9, 2008 (fiscal year 2009), the Company recorded the final settlement of the related liability.
 
Foreign Currency Translation – The assets and liabilities of the Company’s foreign operations are primarily translated to U.S. dollars when the functional currency in our international subsidiaries is the local currency, which in many cases is not U.S. dollars. Assets and liabilities of these foreign subsidiaries are translated to U.S. dollars at the exchange rate on the balance sheet date, and revenue, costs and expenses are translated at average rates of exchange in effect during the period. The corresponding translation gains and losses are recorded as a component of accumulated other comprehensive income or loss.  These adjustments will affect net income upon the sale or liquidation of the underlying investment.

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 costs of goods sold in the consolidated statements of income, for the first six months of fiscal years 2010 and 2009 were approximately $770,000 and ($1.3) million, respectively.


 
11

 

PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Stock-Based Compensation – Compensation related to stock options is accounted for by applying the valuation technique based on the Black-Scholes model. Compensation related to stock awards is based on the fair market value at the time of grant with the application of an estimated forfeiture rate, as opposed to only recognizing these forfeitures and the corresponding reduction in expense as they occur. Upon vesting, the Company records compensation expense for the previously estimated forfeiture on stock awards no longer under risk of forfeiture. The Company records as additional paid-in capital the tax savings resulting from tax deductions in excess of expense for stock-based compensation, based on the Tax Law Ordering method.  In addition, the Company reflects the tax saving resulting from tax deductions in excess of expense as a financing cash flow in its consolidated statement of cash flows, rather than as operating cash flows.

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 accrues an amount for its estimate of additional income tax liability, including interest and penalties, which the Company could incur as a result of the ultimate or effective resolution of the uncertain tax positions. The Company reviews and updates the accrual for uncertain tax positions as more definitive information becomes available from taxing authorities, completion of tax audits, expiration of statute of limitations, or upon occurrence of other events.

The Company accounts for uncertain income tax positions by accruing for the estimated additional amount of taxes for the uncertain tax positions when the uncertain tax position does not meet the more likely than not standard for sustaining the position.

As of February 28, 2010 and August 31, 2009, the Company had $13.6 million and $13.9 million, respectively, of aggregate accruals for uncertain tax positions (“gross unrecognized tax benefits”). Of these totals, $2.1 million and $2.0 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. As of February 28, 2010 and August 31, 2009, the Company did not expect to make cash payments for these liabilities in the respective following 12 months.

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 three and six months ended February 28, 2010, 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 $157,000 and $206,000, respectively. The lapse of statutes of limitations in the twelve-month period ending February 28, 2011 would result in a reduction to long-term income taxes payable totaling $1.2 million.

The Company’s continuing practice is to recognize interest and/or penalties related to income tax matters in income tax expense in the long-term income tax payable caption on the consolidated balance sheets. As of February 28, 2010 and August 31, 2009, the Company had accrued $1.5 million and $1.4 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.
 

 
12

 


PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Tax expense for the first six months of fiscal year 2010 was $11.6 million on pre-tax income of $35.7 million, as compared to $7.7 million of tax expense on pre-tax income of $31.4 million for the first six months of fiscal year 2009. The effective tax rate for the first six months of fiscal year 2010 is 32.4% as compared to 24.7% for the first six months of fiscal year 2009. The increase in the effective tax rate is primarily attributable to the following factors: (i) a significant increase in U.S. pre-tax income relative to non-U.S. pre-tax income, which is taxed at a statutory rate that is generally 4% to 9% higher than the foreign statutory tax rates; and (ii) the Company reversed approximately $206,000 of  previously accrued income tax liability for uncertain tax positions due to a lapse in various statues of limitations in the first six months of fiscal year 2010, as compared to  a reversal of approximately $2.0 million in the first six months of fiscal year 2009.

The Company is subject to taxation in the U.S. and various states and foreign jurisdictions. The Company is generally no longer subject to income tax examinations by tax authorities in its major jurisdictions except for the fiscal years subject to audit as set forth in the table below:

Tax Jurisdiction
 
Fiscal Years Subject to Audit
U.S. federal
 
1995 through 1998, 2000 through 2001, and 2005 through 2009
California (U.S.)
 
2000 through 2001 and 2005 to the present
Florida(U.S.)
 
2000 through 2001 and 2005 to the present
Aruba
 
2002 to the present
Barbados
 
2001 to the present
Costa Rica
 
2007 to the present
Dominican Republic
 
2006 to the present
El Salvador
 
2006 to the present
Guatemala
 
2005 to the present
Honduras
 
2005 to the present
Jamaica
 
2003 to the present
Mexico
 
2006 to the present
Nicaragua
 
2006 to the present
Panama
 
2007 to the present
Trinidad
 
2003 to the present
U.S. Virgin Islands
 
2001 to the present

Recent Accounting Pronouncements
 
FASB ASC 855

In February 2010, the FASB amended its guidance removing the requirement for a Securities and Exchange Commission (“SEC”) filer to disclose a date through which subsequent events have been evaluated in both issued and revised financial statements.  This amendment is effective upon issuance date of February 24, 2010.  The Company adopted this amendment as of February 28, 2010.  The adoption of this amendment did not have a material effect on the Company’s financial position or results of operations.

FASB ASC 810

In January 2010, the FASB issued a clarification of scope with regard to accounting for noncontrolling interest in consolidation.  The Company adopted the original guidance as of the beginning of its annual reporting period beginning on September 1, 2009 (fiscal year 2010) and for all subsequent interim and annual periods.  The adoption of this amendment did not have a material effect on the Company’s financial position or results of operations.

FASB ASC 820

In January 2010, the FASB amended guidance and issued a clarification with regard to disclosure requirements about fair market value measurement.  A reporting entity is required to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers.  In addition, for measurements utilizing significant unobservable inputs, a reporting entity should present separately information about purchases, sales, issuances, and settlements. The Company adopted this guidance beginning with the interim reporting period ended February 28, 2010.  The adoption of this amendment did not have a material effect on the Company’s financial position or results of operations.

 
13

 

PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FASB ASC 810

In December 2009, the FASB amended guidance and changes on how a reporting entity determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated.  The determination of whether a reporting entity is required to consolidate another entity is based on, among other things, the other entity’s purpose and design, and the Company’s ability to direct the activities that most significantly impact the other entity’s economic performance.  The guidance also requires a reporting entity to provide additional disclosures about its involvement with variable interest entities and any significant changes in risk exposure due to that involvement.  A reporting entity will be required to disclose how its involvement with a variable interest entity affects the reporting entity’s financial statements. The Company is required to adopt this guidance as of the beginning of its first annual reporting period that begins after November 15, 2009, which will be fiscal year 2011 for the Company.  Early adoption is not permitted.  The adoption of the standard is not expected to have a material impact on the Company's consolidated financial statements.

FASB ASC 105

In June 2009, the FASB established the FASB Accounting Standards Codification (“ASC” or the “Codification”).   The Codification supersedes all existing accounting standard documents and will become the single source of authoritative non-governmental U.S. GAAP. All other accounting literature not included within the Codification will be considered non-authoritative. The Company adopted the Codification effective September 1, 2009. The adoption of the Codification did not have a material effect on the Company’s financial position or results of operations.
 
FASB ASC 810

In June 2009, the FASB issued guidance that amends and replaces the quantitative-based risks and rewards calculation for determining which enterprise, if any, has a controlling financial interest in a variable interest entity and that requires ongoing reassessments of whether an enterprise is the primary beneficiary of a variable interest entity.  It also requires the elimination of the quantitative approach for determining the primary beneficiary of a variable interest entity and amends certain guidance for determining whether an entity is a variable interest entity requiring enhanced disclosure that will provide users of financial statements with more transparent information about an enterprise’s involvement in a variable interest entity.  Additionally, an enterprise is required to assess whether it has an implicit financial responsibility to ensure that a variable interest entity operates as designed when determining whether it has the power to direct the activities of the variable interest entity that most significantly impact the entity’s economic performance.  The Company is required to adopt this guidance as of the beginning of its first annual reporting period that begins on September 1, 2010 (fiscal year 2011) and for all subsequent interim and annual periods.  The adoption of the standard is not expected to have a material impact on its consolidated financial statements.
 
FASB ASC 855

In May 2009, the FASB issued guidance that 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 adopted this guidance as of August 31, 2009. The adoption of this guidance did not have a material effect on the Company’s financial position or results of operations.
 
FASB ASC 820

In April 2009, the FASB amended guidance on determining the fair value of assets and liabilities when the volume and level of activity for the asset or liability have significantly decreased and identifying transactions that are not orderly. In addition, the FASB set the effective date of guidance for FASB ASC 820 for the recognition and presentation of other than temporary impairments and interim disclosure about fair value of financial instruments. The Company adopted the guidance in the fourth quarter of fiscal year 2009.  The adoption of this guidance did not have a material impact on the Company’s consolidated financial condition and results of operations.
 

 
14

 

PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

FASB ASC 825

 In April 2009, the FASB amended guidance on interim disclosures related to the fair value of financial instruments, which the Company adopted on a prospective basis beginning September 1, 2009. This guidance extends the disclosure requirements to interim financial statements of publicly traded companies, and requires the inclusion of those disclosures in summarized financial information at interim reporting periods. The adoption of this guidance did not have a material effect on the Company’s financial position or results of operations.

FASB ASC 323

In October 2008, the FASB amended guidance on equity method investment accounting considerations.  The objective of this guidance is to clarify how to account for certain transactions involving equity method investments. These transactions are the initial investment, decrease in investment value and change in ownership or degree of influence.  The Company was required to adopt this amended guidance on a prospective basis beginning on September 1, 2009. Because this guidance relates specifically to transactions for which the Company accounted for the transactions as required by the guidance or for transactions that were not applicable to the Company, there was no impact on the Company’s consolidated financial statements as a result of the adoption of this guidance.
 
FASB ASC 260

In June 2008, the FASB issued guidance on determining whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share (“EPS”) under the two-class method.  The two-class method of computing EPS is an earnings allocation formula that determines EPS for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings that would have been available to common stockholders.  The terms of the Company’s restricted stock awards provide a non-forfeitable right to receive dividend equivalent payments on unvested awards. As such, these awards are considered participating securities under the new guidance.  Effective September 1, 2009, the Company adopted this guidance and applied such guidance retrospectively to all periods presented (see Note 5 - Earnings Per Share).
 
FASB ASC 815

In March 2008, the FASB issued guidance requiring enhanced disclosures regarding derivative instruments and hedging activities.  This guidance requires enhanced disclosures about an entity’s derivative and hedging activities, including: (a) the manner in which an entity uses derivative instruments; (b) the manner in which derivative instruments and related hedged items are accounted for; and (c) the effect of derivative instruments and related hedged items on an entity’s financial position, financial performance, and cash flows. The Company adopted this guidance beginning December 1, 2008. The adoption of this guidance did not have a material effect on the Company’s financial position or results of operations.
 
FASB ASC 805

In December 2007, the FASB changed the requirements for an acquirer’s recognition and measurement of the assets acquired and liabilities assumed in a business combination, including the treatment of contingent consideration, pre-acquisition contingencies, transaction costs, in-process research and development and restructuring costs. In addition, changes in an acquired entity’s deferred tax assets and uncertain tax positions after the measurement period will impact income tax expense.  The Company adopted this guidance prospectively effective September 1, 2009. The Company has not entered into any business combinations subsequent to adoption.
 
FASB ASC 810

In December 2007, the FASB amended existing guidance requiring that noncontrolling interests be reported as a component of equity, that net income attributable to the parent and to the noncontrolling interest be separately identified in the income statement, that changes in a parent’s ownership interest while the parent retains its controlling interest be accounted for as equity transactions, and that any retained noncontrolling equity investment be initially measured at fair value upon the deconsolidation of a subsidiary.  The Company adopted these new requirements retrospectively to prior periods at the beginning of its first quarter of fiscal year 2010.  


 
15

 

PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 3 – DISCONTINUED OPERATIONS

In accordance with FASB guidance on accounting for the impairment or disposal of long-lived assets the accompanying consolidated financial statements reflect the results of operations and financial position of the Company’s activities in the Philippines and Guam as discontinued operations.  As a result of the closure of the Guam operations in December 2003, the Company included the results of operations from Guam in the asset impairment and closure costs line of the consolidated statements of income through May 2005. 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 August 2011, which is the end date of the lease term.

The assets and liabilities of the discontinued operations are presented in the consolidated balance sheets under the captions “Assets of discontinued operations” and “Liabilities of discontinued operations.” The underlying assets and liabilities of the discontinued operations for the periods presented are as follows (in thousands):
 
   
February 28,
2010
   
August 31,
2009
 
Cash and cash equivalents
 
$
41
   
$
28
 
Accounts receivable, net
   
234
     
223
 
Prepaid expenses and other current assets
   
40
     
46
 
Other assets
   
505
     
603
 
Assets of discontinued operations
 
$
820
   
$
900
 
Other accrued expenses
 
$
109
   
$
299
 
Liabilities of discontinued operations
 
$
109
   
$
299
 
 
The Company’s former Guam operation has a deferred tax asset of $2.6 million, primarily generated from Net Operating Losses (“NOLs”). This deferred tax asset has a 100% valuation allowance, as the Company currently has no plans that would allow it to utilize these losses. Additionally, a significant portion of these losses are limited as to future use due to the Company’s Section 382 change of ownership in October 2004.

The following table sets forth the income (loss) from discontinued operations for each period presented (in thousands):
                         
   
        Three Months Ended
   
             Six Months Ended
 
   
             February 28,
           2010
   
          February 28,
         2009
   
 February 28,
            2010
   
     February 28,
             2009
 
Net warehouse club sales
 
$
   
$
   
$
   
$
 
Pre-tax income (loss) from discontinued operations
   
35
     
(63
)
   
44
     
(81
)
Provision for income taxes
   
     
     
     
 
Income (loss) from discontinued operations, net of tax
 
$
35
   
$
(63
)
 
$
44
   
$
(81
)
  
The income (loss) from discontinued operations, net of tax for the six months ended February 28, 2010 and 2009 of approximately $44,000 and $(81,000), respectively, is the net result of the subleasing activity in Guam. 

 
16

 

PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
 
NOTE 4 – PROPERTY AND EQUIPMENT

Property and equipment consist of the following (in thousands):

   
February 28, 2010
   
August 31,
2009
 
Land
 
$
81,284
   
$
74,506
 
Building and improvements
   
142,032
     
139,639
 
Fixtures and equipment
   
86,654
     
80,680
 
Construction in progress
   
27,986
     
16,253
 
      Total property and equipment, recorded at historical cost
   
337,956
     
311,078
 
Less: accumulated depreciation
   
(86,558
)
   
(79,280
)
Property and equipment, net
 
$
251,398
   
$
231,798
 
 
On December 22, 2009, PriceSmart acquired approximately 30,000 square meters of real estate in Northwest Santo Domingo, Dominican Republic, for approximately $6.7 million upon which the Company will construct a new warehouse club, ("Arroyo Hondo").  This club is expected to open in the fall of 2010 and will be PriceSmart’s third in the country.

Building and improvements includes net capitalized interest of approximately $1.4 million as of February 28, 2010 and August 31, 2009. Construction in progress includes capitalized interest of $1.4 million and $595,000 as of  February 28, 2010 and August 31, 2009, respectively.   For the six month period ended February 28, 2010 and the twelve month period ended August 31, 2009, the Company recorded approximately $275,000 and $2.9 million, respectively, in translation adjustments that reduced the carrying value of the total property and equipment.

The Company continued with the development of new warehouse club sites and the expansion of existing warehouse clubs in Central America and the Caribbean.  Construction costs within these two segments for the six months ended February 28, 2010 were approximately $5.9 million and $7.0 million, respectively. In addition, the Company continued to acquire fixtures and equipment for new warehouse club sites, the expansion of existing warehouse clubs and corporate offices in Central America, the Caribbean and the United States.  The Company acquired fixtures and equipment for approximately $3.4 million, $2.9 million and $115,000, respectively, in these segments for the six months ended February 28, 2010.  The Company acquired approximately $686,000 of software and computer hardware during the six months ended February 28, 2010.

During the first six months of fiscal year 2009, the Company continued with the expansion of existing warehouse clubs, warehouse distribution center expansion and the development of the land sites acquired for the opening of warehouse club sites in Panama and Costa Rica.  Construction in progress and fixtures and equipment increased during the first six months of fiscal year 2009 due to these activities.  The Company used $5.8 million for construction in progress and acquisition of fixtures and equipment for the Alajuela, Costa Rica warehouse club, $904,000 for construction in progress and acquisition of fixtures and equipment for the Panama City, Panama warehouse club and $732,000 for construction in progress for the San Fernando, Trinidad warehouse club.  The Company utilized approximately $3.1 million for expansion of its distribution center in Miami, the expansion of the Nicaragua warehouse club and the expansion of the warehouse club in Aruba. The Company utilized approximately $1.3 million for acquisition of fixtures and equipment in Trinidad and $3.3 million for the acquisition of fixtures and equipment and leasehold improvements in its other warehouse club locations.

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.  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 April 2010.  Additionally, on September 29, 2008 PriceSmart acquired 21,576 square meters of real estate in Alajuela, Costa Rica (near San Jose), upon which the Company 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. 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.  It is currently anticipated that the new PriceSmart warehouse club will open in April 2010.

 
17

 

PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

These acquisitions were recorded as property within the following countries (in thousands):

Land Costa Rica
 
$
3,724
 
Land Panama
   
2,856
 
Land Trinidad
   
4,519
 
Total land acquired
 
$
11,099
 
 
Depreciation expense for the first six months of fiscal years 2010 and 2009 was approximately $7.3 million and $6.5 million, respectively.
 
NOTE 5 – EARNINGS PER SHARE
 
Basic net income per share is computed by dividing the net income attributable to PriceSmart for the period by the weighted average number of common shares outstanding during the period. Diluted net income per share is computed by dividing the net income attributable to PriceSmart for the period by the weighted average number of common and common equivalent shares outstanding during the period. The Company excludes stock options from the calculation of diluted net income per share when the combined exercise price, average unamortized fair values and assumed tax benefits upon exercise are greater than the average market price for the Company’s common stock because their effect is anti-dilutive.

Effective September 1, 2009, the Company adopted FASB guidance which addresses whether instruments granted in share-based payment transactions are participating securities and, therefore, have a potential dilutive effect on earnings per share (“EPS”). This guidance was applied retrospectively to all periods presented. The following table sets forth the computation of net income per share for the three and six months ended February 28, 2010 and 2009 (in thousands, except per share amounts):

   
         Three Months Ended
 
             Six Months Ended
 
   
           February 28,
          2010
   
           February 28,
          2009
 
February 28,
2010
 
 February 28,
         2009
 
Net income from continuing operations attributable to PriceSmart
 
 $
13,662
   
$
12,750
 
 $
24,030
 
$
23,468
 
Less: Earnings and dividends allocated to unvested stockholders
   
(200
 
 
(276
)
 
(380
)
 
(485
)
Dividend distribution to common stockholders
   
(14,649
)    
(14,495
)
 
(14,649
)
 
(14,495
)
Basic undistributed net earnings available to common stockholders from continuing operations attributable to PriceSmart
   
(1,187
   
(2,021
)
 
9,001
   
8,488
 
Add: Net undistributed earnings allocated and reallocated to unvested stockholders (two-class method) and dividend distribution
   
14,649
     
14,495
   
14,649
 
 
14,496
 
Net earnings available to common stockholders from continuing operations attributable to PriceSmart
 
$
13,462
   
$
12,474
 
$
23,650
 
$
22,984
 
Net earnings (loss) available to common stockholders from discontinued operations
 
$
35
   
 $
(63
)
 $
44
 
 $
(81
)
                             
Basic weighted average shares outstanding
   
29,222
     
28,916
   
29,163
   
28,888
 
Add dilutive effect of stock options (two-class method)
   
28
     
108
   
43
   
106
 
Diluted average shares outstanding
   
29,250 
     
29,024 
   
29,206 
   
28,994
 
                             
Basic income per share from continuing operations attributable to PriceSmart
 
$
0.46
   
$
0.43
 
$
0.81
 
$
0.80
 
Diluted income per share from continuing operations attributable to PriceSmart
 
$
0.46
   
$
0.43
 
$
0.81
 
$
0.79
 
Basic income per share from discontinued operations
 
$
0.00
   
$
0.00
 
$
0.00
 
$
0.00
 
Diluted income per share from discontinued operations
 
$
0.00
   
$
0.00
 
$
0.00
 
$
0.00
 

 
 

 
18

 

PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

In previously reported periods, diluted net income per share was computed using the treasury stock method to calculate the dilutive common shares outstanding during the period.  This method resulted in diluted income per share from continuing operations attributable to PriceSmart, Inc. of $0.46 and $0.82 for the three and six month periods ended February 28, 2010 and $0.43 and $0.80 for the three and six month periods ended February 28, 2009.  
 
NOTE 6 – EQUITY
 
Dividends

On January 27, 2010, 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 26, 2010 to stockholders of record as of the close of business on February 15, 2010 and $0.25 per share is payable on August 31, 2010 to stockholders of record as of the close of business on August 13, 2010.

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 was paid on August 31, 2009 to stockholders of record as of the close of business on August 14, 2009.

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.

Stockholder Contribution

 In December 2009, Robert E. Price, the Company’s Chairman of the Board and Principal Executive Officer, contributed approximately $396,000 in capital to the Company to fund a special holiday bonus to PriceSmart’s non-management employees in memory of the Company’s founder, Sol Price.

Accumulated Other Comprehensive Loss

Accumulated other comprehensive loss reported on the Company’s consolidated balance sheets consists of foreign currency translation adjustments of approximately $16.6 million and $16.8 million and unrealized losses on interest rate swaps (net of tax) of approximately $511,000 and $464,000 as of February 28, 2010 and August 31, 2009, respectively.  The favorable translation adjustments during the six months ended February 28, 2010 of approximately $200,000 were primarily due to a weaker U.S. dollar. The unfavorable translation adjustments of approximately $3.9 million during the twelve months ended August 31, 2009 were primarily due to weaker foreign currencies.

Retained Earnings Not Available for Distribution
 
As of February 28, 2010 and August 31, 2009, retained earnings include legal reserves of approximately $2.8 million and $2.2 million, respectively, at various subsidiaries, which cannot be distributed as dividends to PriceSmart, Inc. according to applicable statutory regulations.  
 
 NOTE 7 – STOCK OPTION AND EQUITY PARTICIPATION PLANS
 
In August 1997, the Company adopted the 1997 Stock Option Plan of PriceSmart, Inc. (the “1997 Plan”) for the benefit of its eligible employees, consultants and independent directors. Under the 1997 Plan, 700,000 shares of the Company’s common stock are authorized for issuance.
 
The Compensation Committee of the Board of Directors administers the 1997 Plan with respect to options granted to employees or consultants of the Company, and the full Board of Directors administers the Plan with respect to director options. Options issued under the 1997 Plan typically vest over five years and expire in six years.

In July 1998, the Company adopted the 1998 Equity Participation Plan of PriceSmart, Inc. (the “1998 Plan”) for the benefit of its eligible employees, consultants and independent directors. The 1998 Plan authorizes 700,000 shares of the Company’s common stock for issuance. Options issued under the 1998 Plan typically vest over five years and expire in six years. The 1998 plan also allows restricted stock awards, which typically vest over five years. 

 
19

 

PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

In November 2001, the Company adopted the 2001 Equity Participation Plan of PriceSmart, Inc. (the “2001 Plan”) for the benefit of its eligible employees, consultants and independent directors. The 2001 Plan initially authorized 350,000 shares of the Company’s common stock for issuance. 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 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. Options issued under the 2001 Plan typically vest over five years and expire in six years. The 2001 plan also allows restricted stock awards, which typically vest over five years.

In November 2002, the Company adopted the 2002 Equity Participation Plan of PriceSmart, Inc. (the “2002 Plan”) for the benefit of its eligible employees, consultants and independent directors. The 2002 Plan initially authorized 250,000 shares of the Company’s common stock for issuance. At the 2006 Annual Meeting, the stockholders of the Company approved a proposal to amend the 2002 Equity Participation Plan of PriceSmart, Inc. to increase the number of shares of Common Stock reserved for issuance under the 2002 Plan from 250,000 to 750,000 (the “Amendment”). On January 28, 2009, the stockholders of the Company approved an amendment to the 2002 equity participation plan increasing the number of shares of common stock reserved for issuance from 750,000 to 1,250,000. Options issued under the 2002 Plan typically vest over five years and expire in six years. The 2002 plan also allows restricted stock awards, which typically vest over five years.

As of February 28, 2010, 628,772 shares were available for future grants.

The following table summarizes the components of the stock-based compensation expense for the three and six month periods ended February 28, 2010 and 2009 (in thousands), which are included in general and administrative expenses and warehouse club operations expenses in the consolidated statements of income:

   
Three Months Ended
   
Six Months Ended
 
   
February 28,
2010
   
February 28,
2009
   
February 28,
2010
   
February 28,
2009
 
Options granted to employees and directors
  $ 4     $ 13     $ 15     $ 40  
Restricted stock awards
    1,050       906       1,793       1,652  
Restricted stock units
    16