Attached files
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark
One)
|
|
x ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the fiscal year ended August 31, 2009
OR
¨ TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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Commission
File Number: 000-22793
PRICESMART,
INC.
(Exact
name of registrant as specified in its charter)
DELAWARE
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33-0628530
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(State
of other jurisdiction of
incorporation
or organization)
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(I.R.S.
Employer
Identification
Number)
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9740
SCRANTON RD, SAN DIEGO, CA 92121
(Address
of principal executive offices, Zip Code)
Registrant’s
telephone number, including area code: (858) 404-8800
Securities
registered pursuant to Section 12(b) of the Act: None
Securities
registered pursuant to Section 12(g) of the Act:
Common
Stock, $0.0001 Par Value
|
Indicate
by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities
Act. Yes ¨ No þ
|
Indicate
by check mark if the registrant is not required to file reports pursuant
to Section 13 or 15(d) of the
Act. Yes ¨ No þ
|
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or
any amendment to this Form 10-K. ¨
|
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer, or a smaller reporting
company. See the definition of “large accelerated filer,” “accelerated
filer” and “smaller reporting Company” in Rule 12b-2 of the Exchange Act.
(Check one):
|
Large
accelerated filer ¨
|
Accelerated
filer þ
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Non-accelerated
filer ¨
(Do not check if a smaller reporting company)
|
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
aggregate market value of the Registrant’s voting and non-voting common equity
held by non-affiliates of the Registrant as of the last day of the Registrant's
most recently completed second fiscal quarter was $251,537,285, based on the
last reported sale price of the $16.72 per share on the NASDAQ Global Select
Market on February 28, 2009.
As of October 30, 2009,
29,714,033
shares of Common Stock were outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the Company’s Annual Report for the fiscal year ended August 31, 2009
are incorporated by reference into Part II of this Form
10-K.
Portions
of the Company’s definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on January 27, 2010 are incorporated by reference
into Part III of this Form 10-K.
PRICESMART,
INC.
ANNUAL
REPORT ON FORM 10-K FOR
THE
FISCAL YEAR ENDED AUGUST 31, 2009
TABLE
OF CONTENTS
Page
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i
PART
I
This Form
10-K contains forward-looking statements concerning PriceSmart, Inc.'s
(“PriceSmart” or the “Company”) anticipated future revenues and earnings,
adequacy of future cash flow and related matters. These forward-looking
statements include, but are not limited to, statements containing the words
“expect,” “believe,” “will,” “may,” “should,” “project,” “estimate,” “scheduled”
and like expressions, and the negative thereof. These statements are subject to
risks and uncertainties that could cause actual results to differ materially
from the statements, including foreign exchange risks, political or economic
instability of host countries, and competition as well as those risks described
in the Company's U.S. Securities and Exchange Commission reports, including the
risk factors referenced in this Form 10-K. See Part I, Item 1A “Risk
Factors.”
PriceSmart's
business consists primarily of international membership shopping warehouse clubs
similar to, but smaller in size than, warehouse clubs in the United States. The
number of warehouse clubs in operation, as of August 31, 2009 and 2008, the
Company's ownership percentages and basis of presentation for financial
reporting purposes by each country or territory are as follows:
Country/Territory
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Number
of
Warehouse Clubs
in Operation (as of
August 31,
2009)
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Number
of
Warehouse Clubs
in Operation (as of
August 31,
2008)
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Ownership (as of
August 31,
2009)
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Basis
of
Presentation
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||||
Panama
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4
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4
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100%
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Consolidated
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||||
Costa
Rica
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5
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4
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100%
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Consolidated
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||||
Dominican
Republic
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2
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2
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100%
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Consolidated
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||||
Guatemala
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3
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3
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100%
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Consolidated
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||||
El
Salvador
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2
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2
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100%
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Consolidated
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||||
Honduras
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2
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2
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100%
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Consolidated
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||||
Trinidad
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3
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3
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95%
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Consolidated
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||||
Aruba
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1
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1
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100%
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Consolidated
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||||
Barbados
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1
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1
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100%
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Consolidated
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||||
U.S.
Virgin Islands
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1
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1
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100%
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Consolidated
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||||
Jamaica
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1
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1
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100%
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Consolidated
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||||
Nicaragua
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1
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1
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100%
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Consolidated
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||||
Totals
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26
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25
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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 August 2009 and 2008, the total number of the Company’s 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
August 31, 2009 and 2008 was 94 months and 86 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 facility in operation
in Saipan, Micronesia licensed to and operated by local business people, from
which the Company earns a royalty fee.
1
International
Warehouse Club Business
The
Company owns and operates U.S.-style membership shopping warehouse clubs through
majority or wholly owned ventures operating in Central America and the Caribbean
using the trade name “PriceSmart.” In addition, there is one facility in
operation in Saipan, Micronesia licensed to and operated by local business
people, from which the Company earns a royalty fee. The warehouse clubs sell
basic high quality consumer goods at low prices to individuals and businesses.
Sales are typically comprised of approximately 48% U.S. and Asian sourced
merchandise and approximately 52% locally sourced merchandise. By offering low
prices on brand name and private label merchandise, the warehouse clubs seek to
generate sufficient sales volumes to operate profitably at relatively low gross
profit margins.
The
Company ships its U.S. and Asian sourced merchandise directly to our warehouse
clubs or to the Company’s consolidation points (“distribution centers”). The
goods are allocated for container-based shipment via ocean freight from the
distribution centers to our individual warehouse clubs thereby maximizing
freight volume per shipment in order to lower supply chain
costs.
The
typical no-frills warehouse club-type buildings range in size from 48,000 to
78,000 square feet and are located primarily in urban areas to take advantage of
dense populations and relatively higher levels of disposable income. Product
selection includes perishable foods and basic consumer products. Ancillary
services include food courts, tire centers, and photo centers. All shoppers
pay an annual membership fee.
Business
Strategy
PriceSmart's
mission is to efficiently operate U.S.-style membership warehouse clubs in
Central America and the Caribbean that sell high quality merchandise at low
prices to PriceSmart members and that provide fair wages and benefits to
PriceSmart employees, as well as a fair return to PriceSmart stockholders. The
Company sells U.S. brand-name, private label, and locally sourced products to
its small business and consumer members in a warehouse club format providing
high value to its members. By focusing on providing high value on quality
merchandise in a low cost operating environment, the Company seeks to grow sales
volume and increase membership which in turn will allow for further
efficiencies, resulting in price reductions and improved value to our
members.
Membership
Policy
PriceSmart
believes that membership reinforces customer loyalty. In addition, membership
fees provide a continuing source of revenue, which is passed on to our members
in the form of lower prices on merchandise. PriceSmart has two types of members:
Business and Diamond (individual).
Businesses
qualify for Business membership. PriceSmart promotes Business membership by
selling institutional products and through its marketing programs primarily
targeting small businesses like restaurants, hotels and convenience stores.
Business members pay an annual membership fee of approximately $25 for a primary
and secondary membership card and approximately $10 for additional add-on
membership cards. Diamond (individual) members pay an annual membership fee of
approximately $20 and approximately $10 for an add-on membership card.
Currently, the average fee per membership account is approximately
$29.
The
Company recognizes membership income over the 12 month term of the membership.
Deferred membership income is presented separately on the consolidated balance
sheet and totaled $8.3 million and $7.8 million as of August 31, 2009 and
2008, respectively. PriceSmart's membership agreements contain an explicit right
to refund if its customers are dissatisfied with their membership. The Company's
historical rate of membership fee refunds has been approximately 0.5% of
membership income.
Expansion
Plans
The
Company is currently focusing its management attention on improving the
operations of its current locations and believes that its existing sites provide
the opportunity for improved sales and profitability. However, the Company
continues to evaluate various options for expansion, particularly in the
countries in which it has already established a strong market presence. In that
regard, the Company announced on October 1, 2008 that it had entered into
agreements to acquire properties in Panama and Costa Rica for the construction
of new warehouse clubs. 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 close (and subsequently lease) the existing warehouse club after the
relocation has been completed, which is expected in the spring of
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 and an adjacent commercial center which will bring the number of
warehouse clubs in that country to four. This new warehouse club is
expected to be open in the spring of 2010. The Company was not
successful in completing the acquisition of the land in the Dominican Republic
on which it had an option to purchase. The Company is currently
seeking an alternative site in the Santo Domingo, Dominican Republic market.
In addition, the Company is closely examining Colombia as a potential new
market for multiple PriceSmart warehouse clubs. Related to the acquired sites in
Panama and Costa Rica, the Company purchased a 50% interest in additional land
adjacent to the warehouse club sites which will be developed as community
shopping centers by the joint venture.
2
Warehouse
Club Closings and Asset Impairment
During
fiscal year 2007, the Company recorded $1.6 million in asset impairment and
closure costs. These costs were primarily due to the write down of the vacated
San Pedro Sula, Honduras location and the loss on the sale of the East Side
Santo Domingo, Dominican Republic location. In addition there were closure costs
recorded in Guatemala for the closed Plaza warehouse, and closure costs in the
Dominican Republic and Honduras incurred in operating and preparing the
respective properties for sale. In September 2007 (fiscal year 2008), the
Company finalized the sale of the vacated San Pedro Sula, Honduras location at
the net book value of the asset.
During
fiscal year 2008, the Company recorded approximately $1.1 million in asset
impairment and closure costs. These were primarily due to the write
down of bulk packaging equipment for approximately $449,000, as this packaging
is now substantially performed in vendor installations. In addition,
the Company recorded closing costs in Guatemala for the closed Plaza warehouse
club. The major costs associated with this location was the
revaluation of the Guatemala Plaza lease liability for approximately $605,000 to
reflect the increase in rental costs over the remaining period of the
lease. In addition the Company recorded additional closure costs in
Honduras, associated with the final closure and sale of the San Pedro
Sula warehouse club location, and Guatemala for approximately
$205,000. The Company recorded interest income generated from the
note receivable related to the sale of the East Side Santo Domingo warehouse
club which was located in the Dominican Republic for approximately $127,000 that
is also included within the asset impairment and closure costs reported in
fiscal year 2008.
During
fiscal year 2009, the Company recorded a gain of approximately $249,000 in asset
impairment and closure costs. These were primarily due to the
transfer of all rights and obligations of the subleased location in Guatemala
for the closed “Plaza warehouse” for which the Company recorded a gain of
approximately $651,000 and interest income of approximately $144,000 from the
note receivable related to the East Side Santo Domingo warehouse
club located in the Dominican Republic. These were offset by
costs of approximately $377,000 associated with the sublease of the
closed Guatemala Plaza warehouse club incurred prior to the transfer of all
rights and obligations. The Company also recorded impairment charges
of approximately $169,000 related to the write down to market value
of other discontinued equipment.
Discontinued
Operations
With the
disposition of the Company's interest in PSMT Philippines, Inc. in fiscal 2005,
this entity, as well as the Company's Guam operation, which was closed in fiscal
2004, qualify for treatment as “discontinued operations” in the Company's
consolidated financial statements. The Company presents these operations under
discontinued operations for all periods presented.
International
Licensee Business
There
is one facility in operation in Saipan, Micronesia licensed to and
operated by local business people at the end of fiscal year 2009, through which
the Company earns a royalty fee.
Intellectual
Property Rights
It is the
Company's policy to obtain appropriate proprietary rights protection for
trademarks by filing applications for registration eligible trademarks with the
U.S. Patent and Trademark Office, and in certain foreign countries. In addition,
the Company relies on copyright and trade secret laws to protect its proprietary
rights. The Company attempts to protect its trade secrets and other proprietary
information through agreements with its joint ventures, employees, consultants
and suppliers and other similar measures. There can be no assurance, however,
that the Company will be successful in protecting its proprietary rights. While
management believes that the Company's trademarks, copyrights and other
proprietary know-how have significant value, changing technology and the
competitive marketplace make the Company's future success dependent principally
upon its employees' technical competence and creative skills for continuing
innovation.
There can
be no assurance that third parties will not assert claims against the Company
with respect to existing and future trademarks, trade names, domain names, sales
techniques or other intellectual property matters. In the event of litigation to
determine the validity of any third-party's claims, such litigation could result
in significant expense to the Company and divert the efforts of the Company's
management, whether or not such litigation is concluded in favor of the
Company.
In August
1999, the Company and Associated Wholesale Grocers, Inc. (“AWG”) entered into an
agreement regarding the trademark “PriceSmart” and related marks containing the
name “PriceSmart.” The Company agreed not to use the “PriceSmart” mark or any
related marks containing the name “PriceSmart” in connection with the sale or
offer for sale of any goods or services within AWG's territory of operations,
including the following ten states: Kansas, Missouri, Arkansas, Oklahoma,
Nebraska, Iowa, Texas, Illinois, Tennessee and Kentucky. The Company, however,
may use the mark “PriceSmart” or any mark containing the name “PriceSmart” on
the internet or any other global computer network whether within or outside such
territory, and in any national advertising campaign that cannot reasonably
exclude the territory, and the Company may use the mark in connection with
various travel services. AWG has agreed not to oppose any trademark applications
filed by the Company for registration of the mark “PriceSmart” or related marks
containing the name “PriceSmart,” and AWG has further agreed not to bring any
action for trademark infringement against the Company based upon the Company's
use outside the territory (or with respect to the permitted uses inside the
territory) of the mark “PriceSmart” or related marks containing the name
“PriceSmart.”
Competition
The Company’s international
merchandising business competes with other membership warehouse operators and a
wide range of international, regional, national and local retailers and
wholesalers, including supermarkets, supercenters, general merchandise chains
and specialty chains. The Company’s industry is highly competitive,
based on factors such as price, merchandise quality and selection, warehouse
location and member service. Some of the Company’s competitors may
have greater resources, buying power and name recognition. Additional
competitors might decide to enter the markets in which the Company operates, and
the Company’s existing competitors might compete more effectively against the
Company. The Company might be required to implement price reductions in order to
remain competitive if any of the Company’s competitors reduce prices in any of
the Company’s markets.
3
Employees
As of
August 31, 2009, the Company and its consolidated subsidiaries had a total
of 4,385 employees. Approximately 95% of the Company's employees were employed
outside of the United States.
Seasonality
Historically,
the Company's merchandising businesses have experienced holiday retail
seasonality in their markets. In addition to seasonal fluctuations, the
Company's operating results fluctuate quarter-to-quarter as a result of economic
and political events in markets served by the Company, the timing of holidays,
weather, the timing of shipments, product mix, and currency effects on the cost
of U.S.-sourced products which may make these products more or less expensive in
local currencies and therefore more or less affordable. Because of such
fluctuations, the results of operations of any quarter are not indicative of the
results that may be achieved for a full fiscal year or any future quarter. In
addition, there can be no assurance that the Company's future results will be
consistent with past results or the projections of securities
analysts.
In
evaluating our business, you should consider the following discussion of risk
factors, in addition to other information contained in this report as well as
our other public filings with the U.S. Securities and Exchange
Commission.
The Company's financial performance
is dependent on international operations, which exposes it to various
risks. The Company's international operations account for nearly all of
the Company's total sales. The Company's financial performance is subject to
risks inherent in operating and expanding the Company's international membership
business, which include: (i) changes in and interpretation of tariff and
tax laws and regulations, as well as inconsistent enforcement of laws and
regulations; (ii) the imposition of foreign and domestic governmental
controls; (iii) trade restrictions; (iv) greater difficulty and costs
associated with international sales and the administration of an international
merchandising business; (v) thefts and other crimes; (vi) limitations
on U.S. company ownership in certain foreign countries; (vii) product
registration, permitting and regulatory compliance; (viii) volatility in
foreign currency exchange rates; (ix) the financial and other capabilities
of the Company's joint venturers and licensees; and (x) general political
as well as economic and business conditions. For example, Honduras
has experienced a period of political unrest resulting in street demonstrations
and government mandated curfews which caused the Company’s Honduras operations
to experience some disruption, with store hours being reduced consistent with
the curfews. Sales, banking transactions and merchandise shipments
have not been materially affected. However, a situation similar to
that which occurred in Honduras could happen elsewhere and result in disruption
of the Company’s sales, banking transactions, operations, merchandise shipments,
and currency exchange rates, any of which could have a material adverse effect
on the Company's business and results of operations.
Any failure by the Company to manage
its widely dispersed operations could adversely affect the Company's business.
As of August 31, 2009, the Company had in operation 26 warehouse
clubs in 11 countries and one U.S. territory (five in Costa Rica; four in
Panama; three each in Guatemala and Trinidad; two each in the Dominican
Republic, El Salvador and Honduras; and one each in Aruba, Barbados, Jamaica,
Nicaragua and the United States Virgin Islands). The Company will
need to continually evaluate the adequacy of the Company's existing personnel,
systems and procedures, including warehouse management and financial and
inventory control. Moreover, the Company will be required to continually analyze
the sufficiency of the Company's inventory distribution channels and systems and
may require additional or expanded facilities in order to support the Company's
operations. The Company may not adequately anticipate all the changing demands
that will be imposed on these systems. Any inability or failure to retain
effective personnel or to update the Company's internal systems or procedures as
required could have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company faces significant
competition. The Company's international merchandising businesses compete
with exporters, wholesalers, local retailers and trading companies in various
international markets. Some of the Company's competitors may have greater
resources, buying power and name recognition. There can be no assurance that
additional competitors will not decide to enter the markets in which the Company
operates or that the Company's existing competitors will not compete more
effectively against the Company. The Company may be required to implement price
reductions in order to remain competitive should any of the Company's
competitors reduce prices in any of the Company's markets. Moreover, the
Company's ability to operate profitably in its markets, particularly small
markets, may be adversely affected by the existence or entry of competing
warehouse clubs or discount retailers.
The Company faces difficulties in
the shipment of and inherent risks in the importation of merchandise to its
warehouse clubs. The Company's warehouse clubs typically import half or
more of the merchandise that they sell, which originates from various countries
and is transported over great distances, typically over water, which results in:
(i) substantial lead times needed between the procurement and delivery of
product, thus complicating merchandising and inventory control methods;
(ii) the possible loss of product due to theft or potential damage to, or
destruction of, ships or containers delivering goods; (iii) product
markdowns as a result of it being cost prohibitive to return merchandise upon
importation; (iv) product registration, tariffs, customs and shipping
regulation issues in the locations the Company ships to and from; and
(v) substantial ocean freight and duty costs. Moreover, each country in
which the Company operates has different governmental rules and regulations
regarding the importation of foreign products. Changes to the rules and
regulations governing the importation of merchandise may result
in additional delays, costs or barriers in the Company's deliveries of products
to its warehouse clubs or may affect the type of products it selects to import.
In addition, only a limited number of transportation companies service the
Company's regions. The inability or failure of one or more key transportation
companies to provide transportation services to the Company, any collusion among
the transportation companies regarding shipping prices or terms, changes in the
regulations that govern shipping tariffs or the importation of products, or any
other disruption in the Company's ability to transport the Company's merchandise
could have a material adverse effect on the Company's business, financial
condition and results of operations.
4
The Company is exposed to weather
and other risks associated with international operations. The Company's
operations are subject to the volatile weather conditions and natural disasters
such as earthquakes and hurricanes, which are encountered in the regions in
which the Company's warehouse clubs are located and which could result in
significant damage to, or destruction of, or temporary closure of, the Company's
warehouse clubs. Warehouse club closures associated with heavy rains, local
flooding and government advisories to stay off the roads during a natural
disaster, such as a hurricane, could result in many days of lost sales. Losses
from business interruption may not be adequately compensated by insurance and
could have a material adverse effect on the Company's business, financial
condition and results of operations.
General economic conditions could
adversely impact our business in various respects. A further slowdown in
the U.S. and international economies or other economic conditions affecting
discretionary consumer spending, such as employment rates, business conditions,
inflation, fuel and energy costs, consumer debt levels, lack of available
credit, interest rates, tax rates, consumer spending patterns, customer
preferences and other economic factors in each of the Company's foreign markets
may adversely affect our business by reducing overall consumer purchasing power
and could negatively impact the Company's growth, sales and profitability. In
addition, a significant decline in the economies of the countries in which
our warehouse clubs are located may lead to increased governmental
ownership or regulation of the economy, higher interest rates, increased
barriers to entry such as higher tariffs and taxes, and reduced demand for goods
manufactured in the United States. Factors such as declining
expatriate remittances, reduced tourism, and less foreign investment could
negatively impact the economies of Central America and the Caribbean. The
current general global economic instability, the potential for further
economic dislocations, the impact of the current global recession and its
duration, the potential for failures or realignments of financial institutions
and the related impact on available credit could have a material adverse effect
on the Company's business, financial condition and results of
operations.
A few of the Company's stockholders
own nearly 40% of the Company's voting stock, which may make it difficult to
complete some corporate transactions without their support and may impede a
change in control. Robert E. Price, the Company’s Chairman of the Board
and Chief Executive Officer, and Sol Price, a significant stockholder of
the Company and father of Robert E. Price, and affiliates of these
individuals, including Price Charities, and The Price Group, LLC,
collectively beneficially own approximately 39.8% of the
Company’s outstanding shares of common stock. As a result of their beneficial
ownership, these stockholders have the ability to significantly affect the
outcome of all matters submitted to the Company's stockholders for approval,
including the election of directors. In addition, this ownership could
discourage the acquisition of the Company's common stock by potential investors
and could have an anti-takeover effect, possibly depressing the trading price of
the Company's common stock.
The loss of key personnel could harm
the Company's business. The Company depends to a large extent on the
performance of its senior management team and other key employees, such as U.S.
expatriates in certain locations where the Company operates. The loss of the
services of any members of the Company's senior management or other key
employees could have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company is subject to volatility
in foreign currency exchange rates. The Company, primarily through
majority or wholly owned subsidiaries, conducts operations in Central America
and the Caribbean, and as such is subject to both economic and political
instabilities that cause volatility in foreign currency exchange rates or weak
economic conditions. As of August 31, 2009, the Company had a total of 26
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 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, Jamaica experienced a net currency devaluation of over 23% between the
end of fiscal year 2008 and the end of fiscal year 2009 and Guatemala
experienced an 11% devaluation over that same period. Foreign exchange
transaction gains (losses), including repatriation of funds, which are included
as part of the costs of goods sold in the consolidated statements of income, for
fiscal years 2009, 2008 and 2007 were approximately ($1.5 million), $1.6 million
and $5,000, respectively.
The Company faces the risk of
exposure to product liability claims, a product recall and adverse publicity.
The Company markets and distributes products purchased from third-party
suppliers and products prepared by the Company for resale, including meat,
dairy and other food products which exposes the Company to the risk of product
liability claims, a product recall and adverse publicity. The Company may
inadvertently redistribute food products or prepare food products that are
contaminated, which may result in illness, injury or death if the contaminants
are not eliminated by processing at the food service or consumer level. The
Company generally seeks contractual indemnification and insurance coverage from
its major suppliers for product purchased from third-party suppliers and carries
product liability insurance for product prepared by the Company. However, if the
Company does not have adequate insurance or contractual indemnification
available, product liability claims relating to products that are contaminated
or otherwise harmful could have a material adverse effect on the Company's
ability to successfully market its products and on the Company's business,
financial condition and results of operations. In addition, even if a product
liability claim is not successful or is not fully pursued, the negative
publicity surrounding a product recall or any assertion that the Company's
products caused illness or injury could have a material adverse effect on the
Company's reputation with existing and potential customers and on the Company's
business, financial condition and results of operations.
5
Potential future impairments under
Financial Accounting Standards Board Statement of Financial Accounting Standard
No. 144 (“SFAS 144”), “Accounting for the Impairment or Disposal of
Long-Lived Assets” could adversely affect the Company's future results of
operations and financial position. In accordance with SFAS 144,
long-lived assets are assessed for impairment annually or whenever events or
changes in circumstances indicate that the carrying amount of the asset may not
be recoverable. An impairment loss would be measured and recognized if the sum
of the expected future discounted cash flows is less than the carrying amount of
the asset. If the carrying amount of the asset were determined to be impaired,
an impairment loss to write-down the carrying value of the asset to fair value
by using quoted market prices, when available, would be required. When a quoted
market price is not available, an estimated fair value would be determined
through other valuation techniques. The Company has used projected cash flows
discounted to reflect the expected commercial, competitive and other factors
related to its long-lived assets and comparisons to similar asset sales and
valuations by others to estimate the fair value of its intangible assets. These
future tests may result in a determination that these assets have been impaired.
If at any time the Company determines that an impairment has occurred, it will
be required to reflect the impaired value as a charge, resulting in a reduction
in earnings in the quarter such impairment is identified and a corresponding
reduction in our net asset value.
For
example, in fiscal year 2008 the Company was required to take an impairment
charge pursuant to SFAS 144 of approximately $449,000 on bulk packaging
equipment located in its warehouse clubs. This was due to the
Company’s decision to outsource the bulk packaging of product. The Company was
also required to take an impairment charge pursuant to SFAS 144 on the old
San Pedro Sula, Honduras warehouse site in fiscal year 2007 of approximately
$897,000. This was due to the revised fair valuation of the land and building as
a result of the disposal agreement. In addition, in fiscal year 2007, the
Company recorded a $2.6 million impairment charge related to the write down of
the Company's interest in its Mexico joint venture as a result of the disposal
agreement. A material reduction in earnings resulting from such a charge could
cause the Company to fail to be profitable in the period in which the charge is
taken or otherwise to fail to meet the expectations of investors and securities
analysts, which could cause the price of the Company's stock to
decline.
Write-offs pursuant to Financial
Accounting Standards Board Statement of Financial Accounting Standard
No. 142 (“SFAS 142”), “Goodwill and Other Intangible Assets” could
adversely affect the Company's future results of operations and financial
position. In accordance with SFAS 142, goodwill and intangible
assets deemed to have indefinite lives are not amortized but instead are subject
to annual impairment tests. As of August 31, 2009, the Company had goodwill
of approximately $37.5 million, net of accumulated amortization originating
prior to the adoption of SFAS 142. The Company performed its impairment test on
goodwill as of August 31, 2009 and August 31, 2008, and no impairment
losses were recorded. In the future, the Company will test for impairment at
least annually. Such tests may result in a determination that these assets have
been impaired. If at any time the Company determines that an impairment has
occurred, the Company will be required to reflect the impaired value as a part
of operating income, resulting in a reduction in earnings in the period such
impairment is identified and a corresponding reduction in the Company's net
asset value. A material reduction in earnings resulting from such a charge could
cause the Company to fail to be profitable or increase the amount of its net
loss in the period in which the charge is taken or otherwise to fail to meet the
expectations of investors and securities analysts, which could cause the price
of the Company's stock to decline.
The Company faces increased
compliance risks associated with compliance with Section 404 of the
Sarbanes-Oxley Act of 2002. Section 404 requires management of
public companies to evaluate, and the independent auditors to attest to, the
effectiveness of internal control over financial reporting. Our internal
controls over financial reporting are designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally
accepted accounting principles and include those policies and procedures that:
(1) pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect our transactions and the dispositions of our
assets; (2) provide reasonable assurance that our transactions are recorded
as necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles and that our receipts and expenditures
are being made only in accordance with appropriate authorizations; and
(3) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use or disposition of our assets that could have a
material effect on our financial statements. Because of their inherent
limitations, internal controls over financial reporting may not prevent or
detect misstatements. Therefore, even those systems determined to be effective
can provide only reasonable assurance with respect to financial statement
preparation and presentation.
Any
failure to effectively implement new or improved internal controls, or to
resolve difficulties encountered in their implementation, could harm the
Company's operating results, cause it to fail to meet reporting obligations,
result in management being required to give a qualified assessment of the
Company's internal controls over financial reporting or the Company's
independent auditors providing an adverse opinion regarding their attestation of
the effectiveness of the Company’s internal controls over financial reporting.
Any such result could cause investors to lose confidence in the Company's
reported financial information, which could have a material adverse effect on
the Company's stock price.
If remediation costs or hazardous
substance contamination levels at certain properties for which the Company
maintains financial responsibility exceed management’s current expectations, the
Company’s financial condition and results of operations could be adversely
impacted. In connection with its spin-off from Price Enterprises, Inc.
(“PEI”) in 1997, the Company agreed to indemnify PEI for all of PEI's
liabilities (including indemnification obligations for environmental
liabilities) arising out of PEI's prior ownership of certain properties. The
Company's ownership of real properties and its agreement to indemnify PEI could
subject it to certain environmental liabilities. Certain of these properties are
located in areas of current or former industrial activity, where environmental
contamination may have occurred. For example, PEI sold an unimproved, 12.9-acre
site located in Meadowlands, New Jersey in August 1995. A prior owner used this
site as a debris disposal area. Elevated levels of heavy metals (including a
small area contaminated with polychlorinated biphenyl) and petroleum
hydrocarbons are present in soil at the Meadowlands site. To date, the Company
has not been advised that PEI has been notified by any governmental authority,
and is not otherwise aware, of any material noncompliance, liability or claim
relating to hazardous or toxic substances or petroleum products in connection
with the Meadowlands site. Nevertheless, PEI's previous ownership of the
Meadowlands site creates the potential of liability for remediation costs
associated with groundwater beneath the site. The Company also retains certain
environmental indemnification obligations with respect to a parcel of land in
Silver City, New Mexico, which PEI sold in March 1996 but agreed to retain
responsibility for certain environmental matters. This site contains petroleum
hydrocarbons in the soil and groundwater. There are no known receptors
(groundwater users) down gradient of the Silver City site and the extent of soil
and groundwater contamination is limited and has been reducing in mass and
extent under naturally attenuating processes. The Company continues to monitor
the soil and groundwater at this property as may be required by local
authorities. If the Company were to incur costs for remediating contamination at
the Meadowlands or Silver City sites (or any other site for which the Company
maintains environmental responsibility) which exceed management’s current
expectations, the Company’s financial condition and results of operations could
be adversely impacted.
6
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 stockholders 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 will make available its annual report on Form 10-K and its
annual Proxy Statement for the fiscal year 2009 at the internet address http://materials.proxyvote.com/741511
as soon as reasonably practicable after electronically filing such material with
or furnishing it to the SEC.
None.
At
August 31, 2009, PriceSmart operated 26 membership warehouse
clubs.
Number
of warehouse clubs
|
Own land
and building
|
Lease land
and/or building
|
Anticipated
warehouse
club
openings in FY 2010
|
|||
CENTRAL
AMERICA
|
||||||
Panama
|
3
|
1
|
—
(3)
|
|||
Guatemala
|
1
|
2
|
—
|
|||
Costa
Rica
|
5
|
—
|
—
|
|||
El
Salvador
|
2
|
—
|
—
|
|||
Honduras
|
1
|
1
|
—
|
|||
Nicaragua
|
1
|
—
|
—
|
|||
CARIBBEAN
|
||||||
Dominican
Republic
|
2
|
—
|
—
|
|||
Aruba
|
—
|
1
|
—
|
|||
Barbados(2)
|
1
|
—
|
—
|
|||
Trinidad
|
2
|
1
|
1(4)
|
|||
U.S.
Virgin Islands
|
—
|
1
|
—
|
|||
Jamaica
|
1
|
—
|
—
|
|||
Total
|
19
|
7(1)
|
1
|
(1)
|
The
former club located in Guam is not included; this warehouse club was
closed in fiscal year 2004. The respective land and building is currently
subleased to a third-party. On June 3, 2009, the Company
finalized an agreement to transfer all lessor rights and lessee
obligations for the property known as Guatemala Plaza.
|
(2)
|
The
Company acquired the land and building formerly leased in Barbados on
November 15, 2007 (fiscal year 2008).
|
(3)
|
An
existing PriceSmart warehouse club in Panama City, Panama (known as the
Los Pueblos club) will be relocated to a new site (Brisas) in the spring
of 2010 and the Company will close the existing warehouse club after the
relocation has been completed.
|
(4)
|
This
warehouse club is expected to open in the spring of 2010 (San
Fernando).
|
At
August 31, 2009, the Company's warehouse clubs 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)(3)
|
Facility
Type
|
Date
Opened
|
Approximate
Square
Footage
|
Current
Lease
Expiration
Date
|
Remaining
Option(s)
to
Extend
|
|||||
Via
Brazil, Panama
|
Warehouse
Club
|
December 4, 1997
|
68,696
|
October
31, 2026
|
10
years
|
|||||
Miraflores, Guatemala
|
Warehouse
Club
|
April
8, 1999
|
66,059
|
December 31, 2020
|
5
years
|
|||||
Pradera, Guatemala
|
Warehouse
Club
|
May
29, 2001
|
48,438
|
May
28, 2021
|
none
|
|||||
Tegucigalpa, Honduras
|
Warehouse
Club
|
May
31, 2000
|
64,735
|
May
30, 2020
|
none
|
|||||
Oranjestad,
Aruba
|
Warehouse
Club
|
March
23, 2001
|
54,229
|
March
23, 2021
|
10
years
|
|||||
Port of Spain, Trinidad
|
Warehouse
Club
|
December
5, 2001
|
54,046
|
July
5, 2031
|
none
|
|||||
St.
Thomas, U.S.V.I.
|
Warehouse
Club
|
May
4, 2001
|
54,046
|
February
28, 2020
|
10
years
|
|||||
Barbados
|
Storage
Facility
|
May
5, 2006
|
4,800
|
May
31, 2011
|
1
year
|
|||||
Chaguanas,
Trinidad
|
Employee
Parking
|
May
1, 2009
|
4,944
|
April
30, 2024
|
none
|
|||||
San
Diego, CA
|
Corporate
Headquarters
|
April
1, 2004
|
35,000
|
March
31, 2011
|
5
years
|
|||||
Miami,
FL
|
Distribution
Facility
|
March
1, 2008
|
200,709
|
August
31, 2018
|
10
years
|
|||||
Miami,
FL (2)
|
Distribution
Facility
|
September
1, 2001
|
36,575
|
February
28, 2011
|
none
|
(1)
|
The
former club located in Guam is not included; this warehouse club was
closed in fiscal year 2004. The land and building are currently
subleased to a third-party.
|
(2)
|
The
Company entered into a new lease amendment with respect to this
property providing for an expansion of 5,000 square feet. This
lease was renewed on August 31, 2009 and was effective September 1,
2009.
|
(3)
|
The
Company finalized an agreement on June 3, 2009 to transfer all lessor
rights and lessee obligations for the property where the former
Guatemala Plaza warehouse club was located. The Guatemala
warehouse club was closed in fiscal year 2003 and had been
subleased.
|
7
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. 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 Board No. 5,
“Accounting for Contingencies.” For potential income tax related
issues the Company records estimated liabilities in accordance with Financial
Accounting Standards Board Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes.” 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 have a material adverse effect on the
Company’s financial condition and results of operations.
The
Company did not submit any matters to a vote of security holders during the
fourth quarter of fiscal year 2009.
8
PART
II
Item 5. Market for Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities
The
information required by Item 5 is incorporated herein by reference to
PriceSmart's Annual Report to Stockholders for the fiscal year ended
August 31, 2009 under the heading “Market for Registrant’s Common Equity,
Related Stockholder Matters and Issuer Purchases of Equity
Securities.”
Item 6. Selected Financial Data
The
information required by Item 6 is incorporated herein by reference to
PriceSmart's Annual Report to Stockholders for the fiscal year ended
August 31, 2009 under the heading “Selected Financial Data.”
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
The
information required by Item 7 is incorporated herein by reference to
PriceSmart's Annual Report to Stockholders for the fiscal year ended
August 31, 2009 under the heading “Management's Discussion and Analysis of
Financial Condition and Results of Operations.”
Item 7A. Quantitative and Qualitative Disclosures about
Market Risk
The
information required by Item 7A is incorporated herein by reference to
PriceSmart's Annual Report to Stockholders for the fiscal year ended
August 31, 2009 under the heading “Quantitative and Qualitative Disclosures
about Market Risk.”
Item 8. Financial Statements and Supplementary
Data
The
information required by Item 8 is incorporated herein by reference to
PriceSmart's Annual Report to Stockholders for the fiscal year ended
August 31, 2009 under the heading “Financial Statements and Supplementary
Data.”
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
None.
9
Item 9A. Controls and Procedures
(a)
Evaluation of disclosure controls and procedures.
As of
August 31, 2009, under the supervision and with the participation of the
Company’s management, including the Company’s principal executive officer and
principal accounting officer, the Company carried out an evaluation of the
effectiveness of the design and operation of the Company’s disclosure controls
and procedures as defined in Exchange Act Rules 13a-15(e) and 15d-15(e). These
disclosure controls and procedures are designed to provide reasonable assurance
that the information required to be disclosed by the Company in its periodic
reports with the SEC is recorded, processed, summarized and reported within the
time periods specified by the SEC’s rules and forms, and that the information is
accumulated and communicated to the Company’s management, including the
principal executive officer and principal accounting officer, as appropriate to
allow timely decisions regarding required disclosure. The design of any
disclosure controls and procedures also is based in part on certain assumptions
about the likelihood of future events, and there can be no assurance that any
design will succeed in achieving its stated goals under all potential future
conditions.
Based
upon their evaluation, the principal executive officer and principal accounting
officer concluded that the Company’s disclosure controls and procedures are
effective at the reasonable assurance level.
(b)
Management’s report on internal control over financial reporting
Internal
control over financial reporting refers to the process designed by, or under the
supervision of, our chief executive officer and chief financial officer, and
effected by our board of directors, management and other personnel, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
U.S. generally accepted accounting principles, and includes those policies and
procedures that: (1) pertain to the maintenance of records that in
reasonable detail accurately and fairly reflect the transactions and
dispositions of our assets; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial
statements in accordance with U.S. generally accepted accounting principles and
that our receipts and expenditures are being made only in accordance with
authorizations of our management and directors; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition,
use or disposition of the company’s assets that could have a material effect on
the financial statements.
Internal
control over financial reporting cannot provide absolute assurance of achieving
financial reporting objectives because of its inherent limitations. Internal
control over financial reporting is a process that involves human diligence and
compliance and is subject to lapses in judgment and breakdowns resulting from
human failures. Internal control over financial reporting also can be
circumvented by collusion or improper management override. Because of such
limitations, there is a risk that material misstatements may not be prevented or
detected on a timely basis by internal control over financial reporting.
However, these inherent limitations are known features of the financial
reporting process. Therefore, it is possible to design into the process
safeguards to reduce, though not eliminate, this risk.
Management
is responsible for establishing and maintaining adequate internal control over
our financial reporting, as such term is defined in Rule 13a-15(f) under
the Exchange Act. Under the supervision and with the participation of our
management, including our chief executive officer and chief financial officer,
we conducted an evaluation of the effectiveness of our internal control over
financial reporting. Management has used the framework set forth in the report
entitled “Internal Control—Integrated Framework” published by the Committee of
Sponsoring Organizations of the Treadway Commission to evaluate the
effectiveness of our internal control over financial reporting. Based on its
evaluation, management has concluded that our internal control over financial
reporting was effective as of August 31, 2009, the end of our most recent
fiscal year. Ernst & Young LLP, our independent registered public
accounting firm, has issued an attestation report on the effectiveness of our
internal control over financial reporting as of August 31, 2009, as stated
in their report which is included herein.
(c)
Changes in internal control over financial reporting.
There
have been no changes in the Company’s internal control over financial reporting
(as defined in Rules 13a-15(f) or 15d-15(f) of the Exchange Act), during the
fiscal year ended August 31, 2009 that have materially affected or are
reasonably likely to affect, the Company’s internal control over financial
reporting.
The certifications required by Section 302 of the Sarbanes-Oxley
Act of 2002 are filed as Exhibit 31.1 and 31.2 to this report.
Item 9B. Other Information
Not
applicable.
10
Report
of Independent Registered Public Accounting Firm
The Board
of Directors and Stockholders of PriceSmart, Inc.
We have
audited PriceSmart, Inc.’s internal control over financial reporting as of
August 31, 2009, based on criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (the COSO criteria). PriceSmart, Inc.’s management is responsible for
maintaining effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over financial reporting
included in the accompanying Management’s Report on Internal Control over
Financial Reporting. Our responsibility is to express an opinion on the
company’s internal control over financial reporting based on our
audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our
opinion, PriceSmart, Inc. maintained, in all material respects, effective
internal control over financial reporting as of August 31, 2009, based on the
COSO criteria.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the 2009 consolidated financial statements of
PriceSmart, Inc. and our report dated November 9, 2009 expressed an unqualified
opinion thereon.
/s/ Ernst
& Young LLP
San
Diego, California
November
9, 2009
11
PART
III
Item 10. Directors and Executive Officers of the
Registrant
PriceSmart
has adopted a code of ethics that applies to its Chief Executive Officer, Chief
Financial Officer, Principal Accounting Officer and Controller, and to all of
its other officers, directors, employees and agents. The code of ethics is
available on PriceSmart's web site at
http://pricesmart.com/Investor/Corporate-Governance/Conduct.aspx. PriceSmart
intends to disclose on its website future amendments to, or waivers from,
certain provision of its code of ethics within four business days following the
date of such amendment or waiver.
The
additional information required by Item 10 is incorporated herein by
reference from PriceSmart's definitive Proxy Statement for the Annual Meeting of
Stockholders under the headings “Election of Directors,” “Information Regarding
Directors,” “Executive Officers of the Company” and “Compliance with
Section 16(a) of the Exchange Act.”
Item 11. Executive Compensation
The
information required by Item 11 is incorporated herein by reference from
PriceSmart's definitive Proxy Statement for the Annual Meeting of Stockholders
under the headings “Information Regarding the Board,” and “Executive
Compensation and Other Information.”
Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters
The
information required by Item 12 is incorporated herein by reference from
PriceSmart's definitive Proxy Statement for the Annual Meeting of Stockholders
under the headings “Securities Ownership of Certain Beneficial Owners and
Management” and “Equity Compensation Plan Information.”
Item 13. Certain Relationships and Related
Transactions
The
information required by Item 13 is incorporated herein by reference from
PriceSmart's definitive Proxy Statement for the Annual Meeting of Stockholders
under the heading “Certain Transactions.”
Item 14. Principal Accountant Fees and
Services
The
information required by Item 14 is incorporated herein by reference from
PriceSmart's definitive Proxy Statement for the Annual Meeting of Stockholders
under the heading “Independent Registered Public Accounting Firm.”
12
PART
IV
(a) The
documents listed in the following table, which are included in our Annual Report
to Stockholders, are incorporated herein by reference to the portions of this
Annual Report on Form 10-K filed as Exhibit 13.1 hereto.
(1) and
(2) Financial Statements
Index to
Consolidated Financial Statements
Report of
Independent Registered Public Accounting Firm
Consolidated
Balance Sheets
Consolidated
Statements of Income
Consolidated
Statements of Stockholders’ Equity
Consolidated
Statements of Cash Flows
Notes to
Consolidated Financial Statements
Schedules
not included herein have been omitted because they are not applicable or the
required information is included in the consolidated financial statements or
notes thereto.
(3) The
following exhibits are filed as part of this Form 10-K and this list includes
the Exhibit Index.
Exhibit
Number
|
Description
|
3.1(1)
|
Amended
and Restated Certificate of Incorporation of the
Company.
|
3.2(33)
|
Certificate
of Amendment of Amended and Restated Certificate of Incorporation of the
Company.
|
3.3(10)
|
Certificate
of Amendment of Amended and Restated Certificate of Incorporation of the
Company.
|
3.4(1)
|
Amended
and Restated Bylaws of the Company.
|
3.5(34)
|
Amendment
to Amended and Restated Bylaws of the Company.
|
4.1(36)
|
Specimen
of Common Stock certificate.
|
10.1(1)
|
1997
Stock Option Plan of PriceSmart, Inc.
|
10.2(2)
|
Agreement
Concerning Transfer of Certain Assets dated as of November 1996 by and
among Price Enterprises, Inc., Costco Companies, Inc. and certain of their
respective subsidiaries.
|
10.2(a)(39)
|
Settlement
Agreement and General Release of All Claims, entered into on August 5,
2005, by and among William Go, E-Class Corporation, PSMT Philippines,
Inc., National Import and Export Company, San Marino International
Corporation, Arcadia International Corporation, Christine Merchandising,
Inc. and PriceSmart, Inc.
|
10.2(b)(48)
|
International
Loan Swap Agreement with Citibank, N.A. dated as of February 13,
2008.
|
10.2(c)(48)
|
Settlement
Agreement and Release entered into as of February 8, 2008 by and among
PriceSmart, Inc. and PSMT entities (collectively known as PriceSmart) and
PSC, S.A. and PSC entities (collectively known as “PSC
Parties”).
|
10.2(d)(53)
|
Loan
Facility Agreement between PriceSmart (Trinidad) Limited and First
Caribbean International Bank (Trinidad & Tobago) Limited dated
February 19, 2009.
|
10.2(e)*
|
Loan
Agreement dated August 13, 2009 between PriceSmart, SA. and the Bank
of Nova Scotia.
|
10.3(a)(3)
|
Employment
Agreement between Price Enterprises, Inc. and Robert M. Gans, dated
September 20, 1994.
|
10.3(b)(4)
|
Third
Amendment to Employment Agreement between Price Enterprises, Inc. and
Robert M. Gans, dated April 28, 1997.
|
10.3(c)(1)
|
Fourth
Amendment to Employment Agreement between the Company and Robert M. Gans,
dated as of September 2, 1997.
|
10.3(d)(5)
|
Fifth
Amendment to Employment Agreement between the Company and Robert M. Gans,
dated as of March 31, 1999.
|
13
Exhibit
Number
|
Description
|
10.3(e)(6)
|
Sixth
Amendment to Employment Agreement between the Company and Robert M. Gans,
dated as of November 22, 1999.
|
||
10.3(f)(6)
|
Seventh
Amendment to Employment Agreement between the Company and Robert M. Gans,
dated as of July 18, 2000.
|
||
10.3(g)(7)
|
Eighth
Amendment to Employment Agreement between the Company and Robert M. Gans,
dated as of September 26, 2001.
|
||
10.3(h)(7)
|
Amendment
of Employment Agreement between the Company and Robert M. Gans, dated as
of October 16, 2001.
|
||
10.3(i)(8)
|
Ninth
Amendment to Employment Agreement between the Company and Robert M. Gans,
dated as of November 19, 2002.
|
||
10.3(j)(9)
|
Tenth
Amendment to Employment Agreement between the Company and Robert M. Gans,
dated as of January 22, 2003.
|
||
10.3(k)(30)
|
Eleventh
Amendment to Employment Agreement between the Company and Robert M. Gans,
dated as of July 24, 2003.
|
||
10.3(l)(46)
|
Twelfth
Amendment to Employment Agreement between the Company and Robert M. Gans,
dated as of September 24, 2004.
|
||
10.3(m)(37)
|
Thirteenth
Amendment to Employment Agreement between the Company and Robert M. Gans,
dated as of February 10, 2005.
|
||
10.3(n)(40)
|
Fourteenth
Amendment to Employment Agreement between the Company and Robert M. Gans,
dated as of September 26, 2005.
|
||
10.3(o)(42)
|
Fifteenth
Amendment to Employment Agreement between the Company and Robert M. Gans,
dated as of March 1, 2006.
|
||
10.3(p)(47)
|
Sixteenth
Amendment to Employment Agreement between the Company and Robert M. Gans,
dated as of September 25, 2006.
|
||
10.3(q)(44)
|
Seventeenth
Amendment to Employment Agreement between the Company and Robert M. Gans,
dated as of January 1, 2007.
|
||
10.3(r)(50)
|
Eighteenth
Amendment to Employment Agreement between the Company and Robert M. Gans,
dated as of October 1, 2007.
|
||
10.3(s)(48)
|
Nineteenth
Amendment to Employment Agreement between the Company and Robert M. Gans,
dated as of January 1, 2008.
|
||
10.3(t)(51)
|
Twentieth
Amendment to Employment Agreement between the Company and Robert M. Gans,
dated as of October 1, 2008.
|
||
10.3(u)(52)
|
Twenty
First Amendment to Employment Agreement between the Company and Robert M.
Gans, dated as of November 13, 2008.
|
||
10.3(v)(53)
|
Twenty
Second Amendment to Employment Agreement between the Company and Robert M.
Gans, dated as of January 1, 2009.
|
||
10.4(11)
|
Tax
Sharing Agreement between the Company and Price Enterprises, Inc. dated as
of August 26, 1997.
|
||
10.5(12)
|
Form
of Indemnity Agreement.
|
||
10.6(1)
|
Assignment
and Assumption of Employment Agreement between the Company and Price
Enterprises, Inc. dated August 29, 1997.
|
||
10.8(a)(16)
|
Employment
Agreement between the Company and Thomas D. Martin, dated March 31,
1998.
|
||
10.8(b)(5)
|
First
Amendment to Employment Agreement between the Company and Thomas D.
Martin, dated March 31, 1999.
|
||
10.8(c)(6)
|
Second
Amendment of Employment Agreement between the Company and Thomas D.
Martin, dated November 22, 1999.
|
||
10.8(d)(13)
|
Third
Amendment of Employment Agreement between the Company and Thomas Martin
dated January 11, 2000.
|
10.8(e)(17)
|
Fourth
Amendment of Employment Agreement between the Company and Thomas Martin
dated January 24, 2001.
|
|
10.8(f)(7)
|
Amendment
of Employment Agreement between the Company and Thomas Martin dated
October 16, 2001.
|
|
10.8(g)(14)
|
Fifth
Amendment of Employment Agreement between the Company and Thomas Martin,
dated January 16, 2002.
|
|
10.8(h)(30)
|
Sixth
Amendment of Employment Agreement between the Company and Thomas Martin,
dated January 22, 2003.
|
|
10.8(i)(34)
|
Seventh
Amendment to Employment Agreement between the Company and Thomas Martin,
dated March 15, 2004.
|
14
Exhibit
Number
|
Description
|
10.8(j)(38)
|
Eighth
Amendment to Employment Agreement between the Company and Thomas Martin,
dated March 3, 2005.
|
|
10.8(k)(42)
|
Ninth
Amendment to Employment Agreement between the Company and Thomas Martin
dated March 1, 2006.
|
|
10.8(l)(44)
|
Tenth
Amendment to Employment Agreement between the Company and Thomas Martin
dated January 1, 2007.
|
|
10.8(m)(45)
|
Eleventh
Amendment to Employment Agreement between the Company and Thomas Martin
dated March 1, 2007.
|
|
10.8(n)(48)
|
Twelfth
Amendment to Employment Agreement between the Company and Thomas Martin
dated January 1, 2008.
|
|
10.8(o)(49)
|
Thirteenth
Amendment to Employment Agreement between the Company and Thomas Martin
dated March 1, 2008.
|
|
10.8(p)(52)
|
Fourteenth
Amendment to Employment Agreement between the Company and Thomas Martin
dated November 13, 2008.
|
|
10.8(q)(53)
|
Fifteenth
Amendment to Employment Agreement between the Company and Thomas Martin
dated January 1, 2009.
|
|
10.8(r)(54)
|
Sixteenth
Amendment to Employment Agreement between the Company and Thomas Martin
dated March 1, 2009.
|
|
10.10(52)
|
Letter
Agreement between RBTT Bank Ltd. And PriceSmart (Trinidad) Limited dated
November 20, 2008.
|
|
10.11(52)
|
Shareholders’
Agreement between Pricsmarlandco, S.A. and JB Enterprises Inc.dated
September 29, 2008.
|
|
10.12(52)
|
Shareholder
Agreement between Fundacion Tempus Fugit and PriceSmart Panama, S.A.
dated September 24, 2008.
|
|
10.9(19)
|
1998
Equity Participation Plan of PriceSmart, Inc.
|
|
10.12(18)
|
Trademark
Agreement between the Company and Associated Wholesale Grocers, Inc.,
dated August 1, 1999.
|
|
10.23(17)
|
Master
Agreement between the Company and Payless ShoeSource Holdings, Ltd., dated
November 27, 2000.
|
|
10.29(a)(14)
|
Employment
Agreement between the Company and William Naylon, dated January 16,
2002.
|
|
10.29(b)(9)
|
First
Amendment of Employment Agreement between the Company and William J.
Naylon, dated January 22, 2003.
|
|
10.29(c)(33)
|
Second
Amendment to Employment Agreement between the Company and William Naylon,
dated February 1, 2004.
|
|
10.29(d)(37)
|
Third
Amendment to Employment Agreement between the Company and William Naylon,
dated as of February 16, 2005.
|
|
10.29(e)(41)
|
Fourth
Amendment to Employment Agreement between the Company and William Naylon,
dated as of January 11, 2006.
|
|
10.29(f)(42)
|
Fifth
Amendment to Employment Agreement between the Company and William Naylon,
dated as of March 1, 2006.
|
|
10.29(g)(44)
|
Sixth
Amendment to Employment Agreement between the Company and William Naylon,
dated as of January 1, 2007.
|
|
10.29(h)(48)
|
Seventh
Amendment to Employment Agreement between the Company and William Naylon,
dated as of January 1, 2008.
|
|
10.29(i)(52)
|
Eighth
Amendment to Employment Agreement between the Company and William Naylon,
dated as of November 13, 2008.
|
|
10.29(j)(53)
|
Ninth
Amendment to Employment Agreement between the Company and William Naylon,
dated as of January 1, 2009.
|
|
10.30(a)(7)
|
Employment
Agreement between the Company and John D. Hildebrandt, dated as of June 1,
2001.
|
10.30(b)(7)
|
Amendment
to Employment Agreement between the Company and John Hildebrandt, dated as
of October 16, 2001.
|
10.30(c)(14)
|
First
Amendment of Employment Agreement between the Company and John
Hildebrandt, dated January 16, 2002.
|
10.30(d)(30)
|
Second
Amendment of Employment Agreement between the Company and John
Hildebrandt, dated January 22, 2003.
|
15
Exhibit
Number
|
Description
|
10.30(e)(34)
|
Third
Amendment to Employment Agreement between the Company and John
Hildebrandt, dated March 15, 2004.
|
10.30(f)(38)
|
Fourth
Amendment to Employment Agreement between the Company and John
Hildebrandt, dated March 9, 2005.
|
10.30(g)(42)
|
Fifth
Amendment to Employment Agreement between the Company and John
Hildebrandt, dated March 1, 2006.
|
10.30(h)(44)
|
Sixth
Amendment to Employment Agreement between the Company and John
Hildebrandt, dated January 1, 2007.
|
10.30(i)(45)
|
Seventh
Amendment to Employment Agreement between the Company and John
Hildebrandt, dated March 1, 2007.
|
10.30(j)(48)
|
Eighth
Amendment to Employment Agreement between the Company and John
Hildebrandt, dated January 1, 2008.
|
10.30(k)(49)
|
Ninth
Amendment to Employment Agreement between the Company and John
Hildebrandt, dated March 1, 2008.
|
10.30(l)(52)
|
Tenth
Amendment to Employment Agreement between the Company and John
Hildebrandt, dated November 13, 2008.
|
10.30(m)(53)
|
Eleventh
Amendment to Employment Agreement between the Company and John
Hildebrandt, dated January 1, 2009.
|
10.30(n)(54)
|
Twelfth
Amendment to Employment Agreement between the Company and John
Hildebrandt, dated March 1, 2009.
|
10.30(m)(54)
|
Thirteenth
Amendment to Employment Agreement between the Company and John
Hildebrandt, dated April 1, 2009.
|
10.33(22)
|
2001
Equity Participation Plan of PriceSmart, Inc.
|
10.43(a)(8)
|
Employment
Agreement between the Company and Edward Oats dated as of January 11,
2000.
|
10.43(b)(8)
|
First
Amendment to Employment Agreement between the Company and Edward Oats,
dated January 24, 2001.
|
10.43(c)(8)
|
Amendment
to Employment Agreement between the Company and Edward Oats, dated October
16, 2001.
|
10.43(d)(8)
|
Second
Amendment to Employment Agreement between the Company and Edward Oats,
dated January 16, 2002.
|
10.43(e)(30)
|
Third
Amendment to Employment Agreement between the Company and Edward Oats,
dated November 19, 2002.
|
10.43(f)(30)
|
Fourth
Amendment to Employment Agreement between the Company and Edward Oats,
dated January 22, 2003.
|
10.43(g)(34)
|
Fifth
Amendment to Employment Agreement between the Company and Edward Oats,
dated March 15, 2004.
|
10.43(g)(38)
|
Sixth
Amendment to Employment Agreement between the Company and Edward Oats,
dated March 9, 2005.
|
10.43(h)(42)
|
Seventh
Amendment to Employment Agreement between the Company and Edward Oats,
dated March 1, 2006.
|
10.43(i)(44)
|
Eighth
Amendment to Employment Agreement between the Company and Edward Oats,
dated January 1, 2007.
|
10.43(j)(45)
|
Ninth
Amendment to Employment Agreement between the Company and Edward Oats,
dated March 1, 2007.
|
10.43(k)(48)
|
Tenth
Amendment to Employment Agreement between the Company and Edward Oats,
dated January 1, 2008.
|
10.43(l)(49)
|
Eleventh
Amendment to Employment Agreement between the Company and Edward Oats,
dated March 1, 2008.
|
10.43(m)(52)
|
Twelfth
Amendment to Employment Agreement between the Company and Edward Oats,
dated November 13, 2008.
|
10.43(n)(54)
|
Thirteenth
Amendment to Employment Agreement between the Company and Edward Oats,
dated March 1, 2009.
|
10.44(a)(8)
|
Employment
Agreement between the Company and Brud Drachman, dated as of January 11,
2000.
|
10.44(b)(8)
|
First
Amendment to Employment Agreement between the Company and Brud Drachman,
dated January 24, 2001.
|
10.44(c)(8)
|
Second
Amendment to Employment Agreement between the Company and Brud Drachman,
dated June 1, 2001.
|
16
Exhibit
Number
|
Description
|
10.44(d)(8)
|
Amendment
to Employment Agreement between the Company and Brud Drachman, dated
October 16, 2001.
|
10.44(e)(8)
|
Third
Amendment to Employment Agreement between the Company and Brud Drachman,
dated January 16, 2002.
|
10.44(f)(30)
|
Fourth
Amendment to Employment Agreement between the Company and Brud Drachman,
dated November 19, 2002.
|
10.44(g)(30)
|
Fifth
Amendment to Employment Agreement between the Company and Brud Drachman,
dated January 22, 2003.
|
10.44(h)(34)
|
Sixth
Amendment to Employment Agreement between the Company and Brud Drachman,
dated March 15, 2004.
|
10.44(h)(38)
|
Seventh
Amendment to Employment Agreement between the Company and Brud Drachman,
dated March 9, 2005.
|
10.44(i)(42)
|
Eighth
Amendment to Employment Agreement between the Company and Brud Drachman,
dated March 1, 2006.
|
10.44(j)(44)
|
Ninth
Amendment to Employment Agreement between the Company and Brud Drachman,
dated January 1, 2007.
|
10.44(k)(45)
|
Tenth
Amendment to Employment Agreement between the Company and Brud Drachman,
dated March 1, 2007.
|
10.44(l)(48)
|
Eleventh
Amendment to Employment Agreement between the Company and Brud Drachman,
dated January 1, 2008.
|
10.44(m)(49)
|
Twelfth
Amendment to Employment Agreement between the Company and Brud Drachman,
dated March 1, 2008.
|
10.44(n)(52)
|
Thirteenth
Amendment to Employment Agreement between the Company and Brud Drachman,
dated November 13, 2008.
|
10.44(o)(53)
|
Fourteenth
Amendment to Employment Agreement between the Company and Brud Drachman,
dated January 1, 2009.
|
10.44(o)(54)
|
Fifteenth
Amendment to Employment Agreement between the Company and Brud Drachman,
dated March 1, 2009.
|
10.46(27)
|
2002
Equity Participation Plan of PriceSmart, Inc.
|
10.54(a)(35)
|
Employment
Agreement by and between the Company and Jose Luis Laparte, dated as of
June 3, 2004.
|
10.54(b)(35)
|
First
Amendment to Employment Agreement by and between the Company and Jose Luis
Laparte, dated as of August 2, 2004.
|
10.54(c)(40)
|
Second
Amendment to Employment Agreement between the Company and Jose Luis
Laparte, dated as of September 26, 2005.
|
10.54(d)(42)
|
Third
Amendment to Employment Agreement between the Company and Jose Luis
Laparte, dated as of March 1, 2006.
|
10.54(e)(47)
|
Fourth
Amendment to Employment Agreement between the Company and Jose Luis
Laparte dated as of September 25, 2006.
|
10.54(f)(44)
|
Fifth
Amendment to Employment Agreement between the Company and Jose Luis
Laparte dated as of January 1, 2007.
|
10.54(g)(50)
|
Sixth
Amendment to Employment Agreement between the Company and Jose Luis
Laparte dated as of October 1, 2007.
|
10.54(h)(50)
|
Seventh
Amendment to Employment Agreement between the Company and Jose Luis
Laparte dated as of October 31, 2007.
|
10.54(i)(48)
|
Eighth
Amendment to Employment Agreement between the Company and Jose Luis
Laparte dated as of January 1, 2008.
|
10.54(j)(51)
|
Ninth
Amendment to Employment Agreement between the Company and Jose Luis
Laparte dated as of October 1, 2008.
|
10.54(k)(52)
|
Tenth
Amendment to Employment Agreement between the Company and Jose Luis
Laparte dated as of November 13, 2008.
|
10.54(l)(53)
|
Eleventh
Amendment to Employment Agreement between the Company and Jose Luis
Laparte dated as of January 1,
2009.
|
10.70(40)
|
Stock
Purchase Agreement between the Company and Big Box Sales Ltd. dated
November 11, 2005.
|
10.71(c)(44)
|
Acquisition
of Fractional Interest on Jet between the Company and PFD Ivanhoe, Inc.
dated January 23, 2007.
|
17
Exhibit
Number
|
Description
|
10.71(d)(48)
|
Lease
Agreement between Flagler Development Company, LLC and PriceSmart,
Inc.
|
10.71(e)(48)
|
Promissory
Note entered into between PSMT Barbados and Citibank, N.A. dated November
15, 2007.
|
10.71(f)(48)
|
Loan
Agreement entered into between PSMT Barbados and Citicorp Merchant Bank
Limited dated November 15, 2007.
|
10.72(b)(43)
|
Restricted
Stock Award Agreement between the Company and Jose Luis Laparte dated
December 7, 2006.
|
13.1*
|
Portions
of the Company’s Annual Report to Stockholders for the year ended August
31, 2009.
|
21.1*
|
Subsidiaries
of the Company.
|
23.1*
|
Consent
of Independent Registered Public Accounting Firm.
|
31.1*
|
Certification
of Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
31.2*
|
Certification
of Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
32.1*#
|
Certifications
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
|
32.2*#
|
Certifications
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
|
*
|
Filed
herewith as an exhibit.
|
**
|
Management
contract or compensatory plan or arrangement required to be filed as an
exhibit to this Annual Report on Form
10-K.
|
#
|
These
certifications are being furnished solely to accompany this Report
pursuant to 18 U.S.C. 1350, and are not being filed for purposes of
Section 18 of the Securities Exchange Act of 1934, as amended, and
are not to be incorporated by reference into any filing of PriceSmart,
Inc. whether made before or after the date hereof, regardless of any
general incorporation language in such
filing.
|
(1)
|
Incorporated
by reference to the Company’s Annual Report on Form 10-K for the year
ended August 31, 1997 filed with the Commission on November 26,
1997.
|
(2)
|
Incorporated
by reference to Exhibit 10.2 to the Company’s Registration Statement on
Form 10 filed with the Commission on July 3,
1997.
|
(3)
|
Incorporated
by reference to Exhibit 10.14 to Amendment No. 1 to the Registration
Statement on Form S-4 of Price Enterprises, Inc. filed with the Commission
on November 3, 1994.
|
(4)
|
Incorporated
by reference to Exhibit 10.4 to the Quarterly Report on Form 10-Q of Price
Enterprises, Inc. for the quarter ended June 8, 1997 filed with the
Commission on July 17, 1997.
|
(5)
|
Incorporated
by reference to the Company’s Quarterly Report on Form 10-Q for the
quarter ended May 31, 1999 filed with the Commission on July 15,
1999.
|
(6)
|
Incorporated
by reference to the Company’s Annual Report on Form 10-K for the year
ended August 31, 2000 filed with the Commission on November 29,
2000.
|
(7)
|
Incorporated
by reference to the Company’s Annual Report on Form 10-K for the year
ended August 31, 2001 filed with the Commission on November 29,
2001.
|
(8)
|
Incorporated
by reference to the Company’s Annual Report on Form 10-K for the year
ended August 31, 2002 filed with the Commission on November 29,
2002.
|
(9)
|
Incorporated
by reference to the Company’s Quarterly Report on Form 10-Q for the
quarter ended February 28, 2003 filed with the Commission on
April 14, 2003.
|
(10)
|
Incorporated
by reference to the Company’s Annual Report on Form 10-K for the year
ended August 31, 2003 filed with the Commission on November 23,
2004.
|
(11)
|
Incorporated
by reference to the Current Report on Form 8-K filed September 12,
1997 by Price Enterprises, Inc.
|
(12)
|
Incorporated
by reference to Exhibit 10.8 to Amendment No. 1 to the Company’s
Registration Statement on Form 10 filed with the Commission on
August 1, 1997.
|
(13)
|
Incorporated
by reference to the Company’s Quarterly Report on Form 10-Q for the
quarter ended February 29, 2000 filed with the Commission on
April 11, 2000.
|
(14)
|
Incorporated
by reference to the Company’s Quarterly Report on Form 10-Q for the
quarter ended May 31, 2002 filed with the Commission on July 15,
2002.
|
(15)
|
Incorporated
by reference to the Current Report on Form 8-K filed with the Commission
on April 1, 2003.
|
(16)
|
Incorporated
by reference to the Company’s Annual Report on Form 10-K for the year
ended August 31, 1998 filed with the Commission on November 25,
1998.
|
(17)
|
Incorporated
by reference to the Company’s Quarterly Report on Form 10-Q for the
quarter ended February 28, 2001 filed with the Commission on
April 16, 2001.
|
(18)
|
Incorporated
by reference to the Company’s Annual Report on Form 10-K for the year
ended August 31, 1999 filed with the Commission on November 29,
1999.
|
(19)
|
Incorporated
by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form
10-Q for the quarter ended February 28, 1999 filed with the
Commission on April 14, 1999.
|
(20)
|
Incorporated
by reference to the Current Report on Form 8-K filed with the Commission
on September 5, 2003.
|
18
(21)
|
Incorporated
by reference to the Company’s Quarterly Report on Form 10-Q for the
quarter ended May 31, 2000 filed with the Commission on July 17,
2000.
|
(22)
|
Incorporated
by reference to Exhibit A to the definitive Proxy Statement dated
December 7, 2001 for the Company’s 2002 Annual Meeting of
Stockholders filed with the Commission on December 10,
2001.
|
(23)
|
Incorporated
by reference to the Company’s Quarterly Report on Form 10-Q for the
quarter ended February 28, 2002 filed with the Commission on
April 15, 2002.
|
(24)
|
Incorporated
by reference to the Company’s Registration Statement on Form S-3 filed
with the Commission on April 18,
2002.
|
(25)
|
Incorporated
by reference to the Company’s Registration Statement on Form S-3 filed
with the Commission on July 19,
2002.
|
(26)
|
Incorporated
by reference to the Company’s Registration Statement on Form S-3 filed
with the Commission on October 25,
2002.
|
(27)
|
Incorporated
by reference to Exhibit A to the definitive Proxy Statement dated
December 11, 2002 for the Company’s 2003 Annual Meeting of
Stockholders filed with the Commission on December 11,
2002.
|
(28)
|
Incorporated
by reference to the Company’s Quarterly Report on Form 10-Q for the
quarter ended May 31, 2003 filed with the Commission on July 15,
2003.
|
(29)
|
Incorporated
by reference to the Current Report on Form 8-K filed with the Commission
on September 5, 2003.
|
(30)
|
Incorporated
by reference to the Company’s Annual Report on Form 10-K for the year
ended August 31, 2003 filed with the Commission on December 16,
2003.
|
(31)
|
Incorporated
by reference to the Quarterly Report on Form 10-Q for the quarter ended
November 30, 2003 filed with the Commission on January 14,
2004.
|
(32)
|
Incorporated
by reference to the Current Report on Form 8-K filed with the Commission
on July 26, 2004.
|
(33)
|
Incorporated
by reference to the Company’s Quarterly Report on Form 10-Q for the
quarter ended February 29, 2004 filed with the Commission on
April 14, 2004.
|
(34)
|
Incorporated
by reference to the Company’s Quarterly Report on Form 10-Q for the
quarter ended May 31, 2004 filed with the Commission on July 15,
2004.
|
(35)
|
Incorporated
by reference to the Current Report on Form 8-K filed with the Commission
on October 8, 2004.
|
(36)
|
Incorporated
by reference to the Company’s Registration Statement on Form S-3 filed
with the Commission on December 2,
2004.
|
(37)
|
Incorporated
by reference to the Company’s Quarterly Report on Form 10-Q for the
quarter ended February 28, 2005 filed with the Commission on
April 14, 2005.
|
(38)
|
Incorporated
by reference to the Company’s Quarterly Report on Form 10-Q for the
quarter ended May 31, 2005 filed with the Commission on June 15,
2005.
|
(39)
|
Incorporated
by reference to the Company’s Current Report on Form 8-K filed with the
Commission on August 18, 2005.
|
(40)
|
Incorporated
by reference to the Company’s Quarterly Report on Form 10-Q for the
quarter ended November 30, 2005 filed with the Commission on
January 14, 2006.
|
(41)
|
Incorporated
by reference to the Company’s Quarterly Report on Form 10-Q for the
quarter ended February 28, 2006 filed with the Commission on
April 14, 2006.
|
(42)
|
Incorporated
by reference to the Company’s Quarterly Report on Form 10-Q for the
quarter ended May 31, 2006 filed with the Commission on July 14,
2006.
|
(43)
|
Incorporated
by reference to the Company’s Quarterly Report on Form 10-Q for the
quarter ended November 30, 2006 filed with the Commission on
January 9, 2007.
|
(44)
|
Incorporated
by reference to the Company’s Quarterly Report on Form 10-Q for the
quarter ended February 28, 2007 filed with the Commission on
April 9, 2007.
|
(45)
|
Incorporated
by reference to the Company’s Quarterly Report on Form 10-Q for the
quarter ended May 31, 2007 filed with the Commission on July 3,
2007.
|
(46)
|
Incorporated
by reference to the Company’s Quarterly Report on Form 10-Q for the
quarter ended November 30, 2004 filed with Commission on January 14,
2005.
|
(47)
|
Incorporated
by reference to the Company’s Annual Report on Form 10-K for the year
ended August 31, 2006 filed with the Commission on November 13,
2006.
|
(48)
|
Incorporated
by reference to the Company’s Quarterly Report on Form 10-Q for the
quarter ended February 29, 2008 filed with the Commission on April 9,
2008.
|
(49)
Incorporated by
reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended
May 31, 2008 filed
|
with
the Commission on July 10, 2008.
|
(50)
|
Incorporated
by reference to the Company’s Annual Report on Form 10-K/A amendment 2 for
the year ended August 31, 2007 filed with the Commission on July 11,
2008.
|
(51)
|
Incorporated
by reference to the Company’s Annual Report on Form 10-K for the year
ended August 31, 2008 filed with the Commission on November 12,
2008.
|
(52)
|
Incorporated
by reference to the Company’s Quarterly Report on Form 10-Q/A for the
quarter ended November 30, 2008 filed with the Commission on January 14,
2009.
|
(53)
|
Incorporated
by reference to the Company’s Quarterly Report on Form 10-Q for the
quarter ended February 28, 2009 filed with the Commission on April 9,
2009.
|
(54)
|
Incorporated
by reference to the Company’s Quarterly Report on Form 10-Q for the
quarter ended May 31, 2009 filed with the Commission on July 10,
2009.
|
Schedules
not included herein have been omitted because they are not applicable or the
required information is included in the consolidated financial statements or
notes thereto.
(b) Financial
Statement Schedules
1)
|
Schedule
II – Valuation and Qualifying Accounts and Reserves for each of the three
years in the period ended
|
August 31, 2008.
19
SCHEDULE
II
PRICESMART,
INC.
VALUATION
AND QUALIFYING ACCOUNTS
(amounts
in thousands)
Balance at
Beginning
of
Period
|
Charged
(credited)
to
Costs and
Expenses
|
Deductions
|
Balance at
End of
Period
|
|||||||||||
Allowance
for doubtful accounts:
|
||||||||||||||
Year
ended August 31, 2007
|
$
|
191
|
$
|
(52
|
)
|
$
|
(136
|
)
|
$
|
3
|
||||
Year
ended August 31, 2008
|
3
|
625
|
(1)
|
(617
|
)
|
11
|
||||||||
Year
ended August 31, 2009
|
11
|
44
|
(45
|
)
|
10
|
(1)
|
Expenses
and deduction principally consist of $530,000 write-off of receivables
pursuant to a Settlement Agreement and Release with PSC, S.A.
(“PSC”).
|
20
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant has duly caused this Annual Report on Form 10-K to be
signed on its behalf by the undersigned, thereunto duly authorized.
Dated:
November 9, 2009
|
PRICESMART,
INC.
|
|
By:
|
/s/ ROBERT
E. PRICE
|
|
Robert
E. Price
|
||
Chairman
of the Board and
|
||
Chief
Executive Officer
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this Annual Report
on Form 10-K has been signed by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature
|
Title
|
Date
|
/s/ ROBERT
E. PRICE
|
Chairman
of the Board and Chief
|
November 9,
2009
|
Robert
E. Price
|
Executive
Officer
|
|
(Principal
Executive Officer)
|
||
/s/ JOHN
M. HEFFNER
|
Executive
Vice President and Chief
|
November 9,
2009
|
John
M. Heffner
|
Financial
Officer
|
|
(Principal
Financial Officer and
|
||
Principal
Accounting Officer)
|
||
/s/ GONZALO
BARRUTIETA
|
Director
|
November 9,
2009
|
Gonzalo
Barrutieta
|
||
/s/ KATHERINE
L. HENSLEY
|
Director
|
November 9,
2009
|
Katherine
L. Hensley
|
||
/s/ LEON
C. JANKS
|
Director
|
November 9,
2009
|
Leon
C. Janks
|
||
/s/ LAWRENCE
B. KRAUSE
|
Director
|
November 9,
2009
|
Lawrence
B. Krause
|
||
/s/ JOSE
LUIS LAPARTE
|
President
and Director
|
November 9,
2009
|
Jose
Luis Laparte
|
||
/s/ KEENE
WOLCOTT
|
Director
|
November 9,
2009
|
Keene
Wolcott
|
||
/s/ EDGAR
ZURCHER
|
Director
|
November 9,
2009
|
Edgar
Zurcher
|
21
Exhibit
13.1
PRICESMART,
INC.
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS AND
OTHER
INFORMATION
AUGUST
31, 2009
Page
|
|
i
PRICESMART,
INC.
The
selected consolidated financial data presented below is derived from the
Company's consolidated financial statements and accompanying notes. This
selected financial data should be read in conjunction with “Management's
Discussion and Analysis of Financial Condition and Results of Operations” and
the consolidated financial statements and accompanying notes thereto included
elsewhere in this report.
Years
Ended August 31,
|
||||||||||||||||||||
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
(in
thousands, except income (loss) per common share)
|
||||||||||||||||||||
OPERATING
RESULTS DATA:
|
||||||||||||||||||||
Net
warehouse club sales
|
$
|
1,224,331
|
$
|
1,097,510
|
$
|
869,102
|
$
|
719,576
|
$
|
604,994
|
||||||||||
Export
sales
|
3,679
|
1,498
|
1,016
|
63
|
425
|
|||||||||||||||
Membership
income
|
17,903
|
16,042
|
13,857
|
11,520
|
9,424
|
|||||||||||||||
Other
income
|
5,715
|
4,826
|
4,826
|
3,514
|
3,982
|
|||||||||||||||
Total
revenues
|
1,251,628
|
1,119,876
|
888,801
|
734,673
|
618,825
|
|||||||||||||||
Cost
of goods sold
|
1,048,039
|
933,714
|
738,279
|
611,497
|
517,005
|
|||||||||||||||
Selling,
general and administrative
|
145,839
|
134,214
|
115,123
|
102,863
|
95,671
|
|||||||||||||||
Preopening
expenses
|
515
|
1,010
|
373
|
349
|
99
|
|||||||||||||||
Asset
impairment and closure costs (gains)
|
(249
|
)
|
1,142
|
1,550
|
1,834
|
11,361
|
||||||||||||||
Provision
for settlement of pending litigation
|
—
|
1,370
|
5,500
|
—
|
—
|
|||||||||||||||
Operating
income (loss)
|
57,484
|
48,426
|
27,976
|
18,130
|
(5,311
|
)
|
||||||||||||||
Net
interest and other income (expense)(1)
|
(1,782
|
)
|
(598
|
)
|
523
|
(1,383
|
)
|
(4,625
|
)
|
|||||||||||
Income
(loss) from continuing operations before provision for income taxes,
losses (including impairment charges) of unconsolidated affiliates and
minority interest
|
55,702
|
47,828
|
28,499
|
16,747
|
(9,936
|
)
|
||||||||||||||
Provision
for income taxes
|
(13,069
|
)
|
(9,124
|
)
|
(12,337
|
)
|
(8,112
|
)
|
(9,140
|
)
|
||||||||||
Losses
(including impairment charges in 2007 and 2005) of unconsolidated
affiliates(2)
|
(21
|
)
|
—
|
(2,903
|
)
|
(97
|
)
|
(4,368
|
)
|
|||||||||||
Minority
interest
|
(265
|
)
|
(494
|
)
|
(476
|
)
|
(354
|
)
|
566
|
|||||||||||
Income
(loss) from continuing operations
|
42,347
|
38,210
|
12,783
|
8,184
|
(22,878
|
)
|
||||||||||||||
Discontinued
operations income (loss), net of tax
|
(28
|
)
|
(104
|
)
|
143
|
3,674
|
(19,459
|
)
|
||||||||||||
Net
income (loss)
|
42,319
|
38,106
|
12,926
|
11,858
|
(42,337
|
)
|
||||||||||||||
Preferred
dividends
|
—
|
—
|
—
|
—
|
(648
|
)
|
||||||||||||||
Deemed
dividend on exchange of common stock for preferred
stock
|
—
|
—
|
—
|
—
|
(20,647
|
)
|
||||||||||||||
Net
income (loss) available (attributable) to common
stockholders
|
$
|
42,319
|
$
|
38,106
|
$
|
12,926
|
$
|
11,858
|
$
|
(63,632
|
)
|
|||||||||
INCOME (LOSS)
PER COMMON SHARE -BASIC:
|
||||||||||||||||||||
Income
(loss) from continuing operations
|
$
|
1.46
|
$
|
1.32
|
$
|
0.44
|
$
|
0.30
|
$
|
(1.13
|
)
|
|||||||||
Discontinued
operations, net of tax
|
$
|
—
|
$
|
—
|
$
|
0.01
|
$
|
0.13
|
$
|
(0.96
|
)
|
|||||||||
Preferred
and deemed dividends
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
(1.06
|
)
|
|||||||||
Basic
net income (loss) per common share
|
$
|
1.46
|
$
|
1.32
|
$
|
0.45
|
$
|
0.43
|
$
|
(3.15
|
)
|
|||||||||
INCOME (LOSS)
PER COMMON SHARE -DILUTED:
|
||||||||||||||||||||
Income
(loss) from continuing operations
|
$
|
1.45
|
$
|
1.30
|
$
|
0.44
|
$
|
0.30
|
$
|
(1.13
|
)
|
|||||||||
Discontinued
operations, net of tax
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
0.13
|
$
|
(0.96
|
)
|
|||||||||
Preferred
and deemed dividends
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
(1.06
|
)
|
|||||||||
Diluted
net income (loss) per common share
|
$
|
1.45
|
$
|
1.30
|
$
|
0.44
|
$
|
0.43
|
$
|
(3.15
|
)
|
|||||||||
Weighted
average common shares - basic
|
28,959
|
28,860
|
28,534
|
27,332
|
20,187
|
|||||||||||||||
Weighted
average common shares - diluted
|
29,181
|
29,210
|
29,243
|
27,735
|
20,187
|
1
PRICESMART,
INC.
SELECTED
FINANCIAL DATA- (Continued)
As
of August 31,
|
||||||||||||||||||||
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
(in
thousands)
|
||||||||||||||||||||
BALANCE
SHEET DATA:
|
||||||||||||||||||||
Cash
and cash equivalents
|
$
|
44,193
|
$
|
48,121
|
$
|
32,065
|
$
|
39,995
|
$
|
30,147
|
||||||||||
Short-term
restricted cash
|
10
|
536
|
8,046
|
7,651
|
7,331
|
|||||||||||||||
Total
assets
|
487,373
|
451,412
|
395,419
|
359,043
|
319,854
|
|||||||||||||||
Long-term
debt (including related party)(3)
|
37,120
|
23,028
|
8,008
|
13,252
|
23,915
|
|||||||||||||||
Stockholders’
equity
|
300,398
|
274,506
|
245,316
|
234,619
|
198,273
|
|||||||||||||||
Dividends
paid on common stock(4)
|
14,807
|
9,463
|
4,659
|
—
|
—
|
(1)
|
Net interest and other income
(expense) includes interest income and expense and gains and losses on
disposal of assets.
|
(2)
|
Includes
impairment charges of $2.6 million and $1.1 million in fiscal years 2007
and 2005, respectively.
|
(3)
|
Long-term debt, net of current
portion.
|
(4)
|
On January 29, 2009, January 24,
2008 and February 7, 2007, the Company declared a cash dividend on its
common stock.
|
2
PRICESMART,
INC.
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This
Annual Report contains forward-looking statements concerning the Company's
anticipated future revenues and earnings, adequacy of future cash flow and
related matters. These forward-looking statements include, but are not limited
to, statements containing the words “expect,” “believe,” “will,” “may,”
“should,” “project,” “estimate,” “scheduled,” and like expressions, and the
negative thereof. These statements are subject to risks and uncertainties that
could cause actual results to differ materially, including the following risks:
the Company's financial performance is dependent on international operations;
any failure by the Company to manage its widely dispersed operations could
adversely affect its business; although the Company has taken steps to
significantly improve its internal controls, there may be material weaknesses or
significant deficiencies that the Company has not yet identified; the Company
faces significant competition; the Company may encounter difficulties in the
shipment of and inherent risks in the importation of merchandise to its
warehouse clubs; the Company is exposed to weather and other risks associated
with international operations; declines in the economies of the countries in
which the Company operates its warehouse clubs would harm its business; a few of
the Company's stockholders have control over the Company's voting stock, which
will make it difficult to complete some corporate transactions without their
support and may prevent a change in control; the loss of key personnel could
harm the Company's business; the Company is subject to volatility in foreign
currency exchange; the Company faces the risk of exposure to product liability
claims, a product recall and adverse publicity; a determination that the
Company's long-lived or intangible assets have been impaired could adversely
affect the Company's future results of operations and financial position; and
the Company faces compliance risks associated with Section 404 of the
Sarbanes-Oxley Act of 2002; as well as the other risks detailed in the Company's
U.S. Securities and Exchange Commission (“SEC”) reports, including the Company's
Form 10-K for the fiscal year ended August 31, 2009 filed pursuant to the
Securities Exchange Act of 1934.
The
following discussion and analysis compares the results of operations for each of
the three fiscal years ended August 31, 2009, 2008 and 2007 and should be
read in conjunction with the consolidated financial statements and the
accompanying notes included elsewhere in this report.
PriceSmart's
mission is to efficiently operate U.S.-style membership warehouse clubs in
Central America and the Caribbean that sell high quality merchandise at low
prices to PriceSmart members and that provide fair wages and benefits to
PriceSmart employees as well as a fair return to PriceSmart stockholders. The
Company delivers U.S. brand-name and locally sourced products to its small
business and consumer members in a warehouse club format that provides high
value to its members. By focusing on providing exceptional value on quality
merchandise in a low cost operating environment, the Company seeks to grow sales
volume and membership which in turn will allow for further efficiencies and
price reductions and ultimately improved value to our
members.
PriceSmart's
business consists primarily of international membership shopping warehouse clubs
similar to, but smaller in size than, warehouse clubs in the United States. The
number of warehouse clubs in operation as of August 31, 2009
and 2008, the Company's ownership percentages and basis of
presentation for financial reporting purposes by each country or territory are
as follows:
Country/Territory
|
Number
of
Warehouse
Clubs
in
Operation (as of
August
31, 2009)
|
Number
of
Warehouse Clubs
in Operation (as of
August 31,
2008)
|
Ownership (as of
August 31,
2009)
|
Basis
of
Presentation
|
||||
Panama
|
4
|
4
|
100%
|
Consolidated
|
||||
Costa
Rica
|
5
|
4
|
100%
|
Consolidated
|
||||
Dominican
Republic
|
2
|
2
|
100%
|
Consolidated
|
||||
Guatemala
|
3
|
3
|
100%
|
Consolidated
|
||||
El
Salvador
|
2
|
2
|
100%
|
Consolidated
|
||||
Honduras
|
2
|
2
|
100%
|
Consolidated
|
||||
Trinidad
|
3
|
3
|
95%
|
Consolidated
|
||||
Aruba
|
1
|
1
|
100%
|
Consolidated
|
||||
Barbados
|
1
|
1
|
100%
|
Consolidated
|
||||
U.S.
Virgin Islands
|
1
|
1
|
100%
|
Consolidated
|
||||
Jamaica
|
1
|
1
|
100%
|
Consolidated
|
||||
Nicaragua
|
1
|
1
|
100%
|
Consolidated
|
||||
Totals
|
26
|
25
|
3
During
fiscal year 2008, as a part of the Company’s settlement of disputes pursuant to
a Settlement Agreement and Release with PSC, S.A. (“PSC”) and related entities
dated February 8, 2008, the Company purchased the remaining 49% minority
interest of its Nicaragua subsidiary from PSC. Also, during the fourth quarter
of fiscal year 2008, the Company acquired the remaining 10% minority interest of
its Aruba subsidiary from Nithyananda Enterprises, thereby increasing its
ownership percentage in its Aruba subsidiary to 100%.
During
fiscal year 2009, the Company acquired property and completed the construction
of a new Costa Rica warehouse club, the fifth warehouse club in that country,
which opened in April 2009.
At the
end of August 2009, the total number of warehouse clubs in operation was 26
operating in 11 countries and one U.S. territory, in comparison to 25 warehouse
clubs operating in 11 countries and one U.S. territory at the end of August
2008. The average age of the 26 warehouse clubs included in continuing
operations was 94 months as of the end of fiscal year 2009 and the average age
of the 25 warehouse clubs included in continuing operations was 86 months as of
the end of fiscal year 2008.
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
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 assembly
(“maquila”) export sector in Guatemala, Honduras and the Dominican Republic),
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 retail and wholesale members.
· During
fiscal year 2009, the Company experienced a reduced level of sales growth
beginning in January 2009 with reported monthly comparable warehouse club sales
growth of 18% in January declining in the subsequent months to less than 1% in
August 2009. This sales growth reduction occurred 9 to 12 months
after similar trends were reported by the major U.S. retailers. While
the Company cannot know for certain, an economic recovery in the retail sector
in the Company’s markets may similarly lag behind any recovery that might be
experienced in the U.S. over the next year.
· Many
PriceSmart markets are susceptible to foreign currency exchange rate volatility.
Currency exchange rate changes either increase or decrease the cost of imported
products and can have an effect on the reported sales of the consolidated
company when local currency denominated sales are translated to U.S. dollars.
Approximately 48% of the Company’s net warehouse sales are comprised of products
imported into the markets where PriceSmart warehouse clubs are located. Products
imported for sale in PriceSmart markets are purchased in U.S. dollars, but
approximately 79% of the Company's net warehouse sales are in foreign
currencies. In general, local currencies in PriceSmart markets
have declined relative to the dollar. Declines in local currencies relative
to the dollar effectively increase the cost to the Company’s members of imported
products, while 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. With
respect to locally acquired merchandise sold in the Company’s warehouse clubs,
which accounts for approximately 52% of net warehouse sales, a decline in local
currency rates relative to the U.S. dollar will decrease the reported year over
year sales of the Company when expressed in U.S.
dollars. Conversely, a strengthening of local currency rates relative
to the U.S. dollar will increase the reported year over year sales.
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, reducing supply chain costs
for the movement of merchandise from the U.S. to its warehouse clubs, and
lowering operating expenses within the warehouse clubs and corporate
headquarters. 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.
· The
Company entered into a new lease amendment with respect to this property
providing for an expansion of 5,000 square feet of 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. This lease
was renewed on August 31, 2009 and was effective September 1, 2009. 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.
4
· 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 providing 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. During fiscal year 2009 the Company introduced the
co-branded program in its Caribbean markets, except for Aruba, in partnership
with a bank in that region. The Company has been pleased with the
initial response from members, and management expects to grow the use of the
co-branded cards 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 during fiscal year 2009. The expansion of
the warehouse club in Nicaragua was completed in April 2009 and the club
is now operating with additional sales floor space of approximately 8,600 square
feet. The expansion of the warehouse club in Aruba was completed in
September 2009, fiscal year 2010, adding approximately 9,000 square feet of
sales floor space.
· 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 the spring of 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 open in the spring of
2010. The
Company was not successful in completing the acquisition of the land in the
Dominican Republic on which it had an option to purchase. The Company is
currently seeking an alternative site in the Santo Domingo, Dominican
Republic market. 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 fiscal year 2009 included:
· Net
warehouse club sales increased 11.6% over the prior year, resulting from a 8.7%
increase in comparable warehouse club sales for the 52 weeks ended August 31,
2009 (that is, sales in warehouse clubs that have been open for greater than 13
1/2 calendar months), the opening of a new warehouse club in Costa Rica in April
2009, and the full year effect of the opening of two new warehouse clubs,
which were open for just a portion of the twelve months ended August 31, 2008
(one opened in November 2007 and one in December 2007).
· Membership
income for fiscal year 2009 increased 11.6% to $17.9 million as a result of a 8%
increase in membership accounts from August 31, 2008 to August 31, 2009,
continued strong renewal rates at 84% and a 1.4% increase in the average
membership fee.
· Gross
profits (net warehouse club sales less associated cost of goods sold) increased
8.8% over the prior year due to increased warehouse sales, and gross margin
decreased 37 basis points as a percent of net warehouse sales largely related to
the effect of foreign exchange rate movements and more competitive
pricing.
· Selling,
general and administrative expenses as a percentage of net warehouse sales
improved 32 basis points, as higher sales offset increased operating costs of
the warehouse clubs (including wages, supplies, security costs, and repairs and
maintenance), the additional costs associated with full year operating costs for
the two warehouse clubs opened in fiscal year 2008 and the cost of the new
warehouse club that opened in April 2009.
· Operating
income for fiscal year 2009 was $57.5 million, which included approximately
$249,000 in asset impairment and closure costs gains, and $515,000 of
pre-opening expenses.
· Net
income for fiscal year 2009 was $42.3 million, or $1.45 per diluted
share.
5
Comparison
of Fiscal Year 2009 and Fiscal Year 2008
Net
warehouse club sales increased 11.6% to $1.2 billion in fiscal year 2009 from
$1.1 billion in fiscal year 2008. The Company experienced greater sales
growth in the first half of the fiscal year compared to that experienced in the
second half of the fiscal year. This is partly due to the inclusion
of two warehouse clubs opened in November and December of 2008, but also
reflects the economic slowdown within the countries in which we operate during
the second half of the fiscal year, despite the addition of a new warehouse club
opened in April 2009. The Company experienced year over year sales growth of 21.9%
in the first quarter, 14.1% in the second quarter, 8.0% in the third quarter,
and 4.3% in the fourth quarter of fiscal year 2009. For the full
year, sales transactions grew 12.1%,
compared to fiscal year 2008, which the Company believes reflects that its
members continue to find value in the quality and price of items offered by
PriceSmart in spite of the challenging economic conditions present in most of
the markets. However, the average dollar value of those transactions
decreased 0.5%
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 likely a reflection of reduced overall buying
power. Food and consumable sales grew 15.6%, and non-consumable
product sales decreased 1.9%. The full year inclusion of the two warehouse clubs
opened in November and December 2008, respectively, added approximately 2%
to the overall sales growth in the fiscal year. Also, the addition of
the new club in Costa Rica, which opened on April 17, 2009, accounted for
approximately 1.4% of the overall sales growth during the year compared to 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.
The
following table indicates the percent growth in net warehouse club sales in the
segments in which the Company operates.
Fiscal
Years Ended August 31,
|
||||||||||||||||||||||||
2009
|
2008
|
|||||||||||||||||||||||
Amount
|
% of Net
Revenue
|
Amount
|
% of Net
Revenue
|
Increase
|
Change
|
|||||||||||||||||||
(Dollar
amounts in thousands)
|
||||||||||||||||||||||||
Central
America
|
$
|
724,964
|
59.2
|
%
|
$
|
656,612
|
59.8
|
%
|
$
|
68,351
|
10.4
|
%
|
||||||||||||
Caribbean
|
499,367
|
40.8
|
%
|
440,898
|
40.2
|
%
|
58,470
|
13.3
|
%
|
|||||||||||||||
$
|
1,224,331
|
100.0
|
%
|
$
|
1,097,510
|
100.0
|
%
|
$
|
126,821
|
11.6
|
%
|
Comparable
warehouse club sales, which are for warehouse clubs open at least 13
1/2 calendar months, increased 8.7% for the 52-week period ended August 30,
2009 compared to the same 52-week period last year. The Company reports
comparable warehouse sales on a “same week” basis with 13 weeks in each quarter
beginning on a Monday and ending on a Sunday. The periods are established at the
beginning of the fiscal year to provide as close a match as possible to the
calendar month that is used for financial reporting purposes. This approach
equalizes the number of weekend days and weekdays 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 sales related to the new 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
new warehouse club opened in Costa Rica on April 17, 2009 will not be used in
the calculation until July 2010.
The
following table indicates the approximate percentage of net sales accounted for
by each major category of items sold by the Company during the fiscal years
ended August 31, 2009 and 2008:
Fiscal
Years Ended
August 31,
|
||||||||
2009
|
2008
|
|||||||
Sundries (including
candy, snack foods, health and beauty aids, tobacco, alcoholic beverages,
soft drinks, cleaning and paper products and pet
supplies)
|
32
|
%
|
31
|
%
|
||||
Food (including dry and
fresh foods)
|
46
|
%
|
44
|
%
|
||||
Hardlines (including
major appliances, electronics, hardware, office supplies, garden and
patio, sporting goods, business machines and automotive
supplies)
|
13
|
%
|
14
|
%
|
||||
Softlines (including
apparel, domestics, cameras, jewelry, housewares, media, toys, home
furnishings, and small appliances)
|
8
|
%
|
9
|
%
|
||||
Other (including
one-hour photo and food court)
|
1
|
%
|
2
|
%
|
||||
100
|
%
|
100
|
%
|
6
The
higher percentage of net sales associated with food in fiscal year 2009,
compared to fiscal year 2008, largely reflects the impact of the shift
in our members' purchases from higher ticket discretionary items (such
as, appliances, electronics, and furniture) to food and consumable
products.
The
Company’s warehouse gross profit margin (defined as net warehouse club sales,
less associated cost of goods sold) for fiscal year 2009 increased $14.6 million
to $179.8 million, or 14.7% of net warehouse club sales, from $165.2 million, or
15.1% of net warehouse club sales in fiscal year 2008. The increase in warehouse
gross profit margin dollars was largely due to higher sales in the current
fiscal year as compared to the prior fiscal year. As a percentage of
sales, warehouse gross profit margin decreased 37 basis points resulting from a
combination of competitive pricing actions across most merchandise categories,
most notably hardlines, and the year over year effects of foreign currency
exchange. In fiscal year 2008 the Company recognized a 15 basis point
gain to gross profit margin related to foreign currency exchange
effects. In fiscal year 2009, the Company recognized a 12 basis point
reduction to gross profit margin resulting from a general devaluation in the
currencies in which the Company operates and the net effect on the U.S. dollar
denominated liabilities held in those countries, particularly Guatemala and
Jamaica. The change in the merchandise mix of sales did not itself
have a measureable impact on gross profit margin as a percent of
sales.
Export
sales were $3.7 million for fiscal year 2009, compared to export sales of $1.5
million for fiscal year 2008, due primarily to direct sales to institutional
customers (primarily retailers) in the Philippines for which the Company earns a
margin of approximately 5% of those sales.
Membership
income, which is recognized into income ratably over the one-year life of the
membership, increased 11.6% to $17.9 million, or 1.5% of net warehouse sales, in
fiscal year 2009 compared to $16.0 million, or 1.5% of net warehouse sales, in
fiscal year 2008. The increase in membership income reflects both a 8% increase
in the number of membership accounts and a 1.4% increase in the average
membership fee. Total membership accounts as of the end of fiscal year 2009 were
approximately 651,000, an increase of approximately 47,000 accounts over the end
of fiscal year 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 for fiscal year 2009 was $5.7 million compared to
$4.8 million in fiscal year 2008. The increase was due to increased fees
for in-store product demonstrations and rental
income.
Warehouse
club operating expenses increased 10.7% to $115.0 million, or 9.4% of warehouse
sales, for fiscal year 2009 from $103.9 million, or 9.5% of warehouse sales, in
fiscal year 2008. The increase in warehouse club operating expenses
resulted from increased payroll related expenses, including stock compensation
expense of $5.1 million, and increased operating costs for security services,
repairs and maintenance, and supplies of $1.4 million. The Company
also incurred increased depreciation expense of $2.5 million. This was a result
of the full year depreciation of the capital expenditures incurred in developing
the two new warehouse clubs, one each in Guatemala and Trinidad, when they began
operations in November and December of fiscal year 2008, respectively, and the
depreciation of new warehouse club in Costa Rica beginning when it opened in
April 2009. In addition, the Company began depreciation for on-going capital
investments made in the existing warehouse clubs, including expansions in Aruba
and Nicaragua. While credit card costs increased $185,000 during fiscal year
2009, 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 during fiscal year
2009. Marketing expenses, primarily associated with the launch of the
Caribbean credit card program, increased $189,000. The
Company incurred a charge of $628,000 to write-off the accumulated costs,
including a non-refundable deposit, associated with the expected acquisition of
a land parcel in the Dominican Republic.
General
and administrative expenses increased to $30.9 million, or 2.5% of net warehouse
sales, for fiscal year 2009 from $30.3 million, or 2.8% of net warehouse sales,
in fiscal year 2008. The Company incurred increased costs of $2.8 million
for salaries and related benefits, including expatriate costs and deferred
compensation for the Company’s corporate headquarters and U.S. buying operation,
offset by a reduction of approximately $2.3 million related to a reduction of
approximately $900,000 in legal fees related to the PSC litigation and a
reduction of approximately $1.4 million related to audit, tax, and other
professional services.
Expenses
incurred before a warehouse club is in operation are captured in pre-opening
expenses. Pre-opening expenses for fiscal year 2009 were $515,000 related to the
new warehouse club in Costa Rica which opened in April 2009. Pre-opening
expenses of $1.0 million in the prior year were primarily related to opening of
the two new warehouse clubs, one each in Guatemala and Trinidad.
7
The
Company recorded a gain for asset impairment and closure costs for fiscal year
2009 of approximately $249,000, compared to cost of $1.1 million in fiscal year
2008. Closure costs in the current fiscal year were primarily due to
gains of approximately $651,000 recorded in connection with the buy out of the
Company's obligation under the lease for the closed “Plaza warehouse” in
Guatemala and interest income of approximately $144,000 from the
note receivable related to the East Side Santo Domingo club warehouse located in
the Dominican Republic. This was offset by costs of
approximately $377,000 associated with the subleased Guatemala location
incurred before the transfer of the rights and obligations of this
lease/sub-lease. Asset impairment costs were recorded for
approximately $169,000 related to the write down to market value of equipment
used in material handling that the Company has determined will not be utilized
within its operations, the write down of point of sale hardware and the write
down of bulk packaging equipment. Asset impairment and closure costs
in fiscal year 2008 were recorded to reflect a non-cash charge to recognize a
decrease in the net present value of future cash flows over the remaining lease
life for the closed but subleased Guatemala Plaza location as a result of a rent
increase to the Company from the landlord for approximately $605,000 and
approximately $205,000 in other expenses related to the Guatemala Plaza
location. In addition, the Company took a $449,000 non-cash charge to
write-down the net book value of certain equipment related to in-club bulk
packaging. This results from the fact that the Company is now able to
purchase pre-packaged items at competitive prices from its suppliers, thereby
freeing up merchandise space and reducing labor costs within the
clubs. Impairment and closure costs were lowered during fiscal year
2008 by approximately $127,000 of interest income related to the note receivable
on the Dominican Republic sale of the East Side Santo Domingo
warehouse.
Included
in the results of fiscal year 2008 are pre-tax charges and income tax benefits
related to the PSC Settlement, net of a $5.5 million reserve established in the
fourth quarter of fiscal year 2007. The amount of the reserve was equal to
management’s estimate at that time of the potential impact of a global
settlement on PriceSmart’s net income. In fiscal year 2008, the Company recorded
an additional pre-tax charge of $1.3 million with the final settlement for costs
incurred in excess of the initial $5.5 million reserved in fiscal year
2007. An income tax benefit was also recorded of approximately $1.7
million as a result of the approximately $6.8 million recorded in settlement
cost. When the Company originally accrued for the settlement cost,
the Company was not able to estimate the tax benefit component of the settlement
cost with an adequate level of certainty. In addition, for fiscal
year 2008, the Company recorded approximately $120,000 in costs to record the
fair value of a put right given to PSC as partial consideration for the
settlement. There were no charges recorded in fiscal year 2009
related to the Company’s settlement agreement with PSC.
Operating
income for fiscal year 2009 was $57.5 million, or 4.7% of warehouse sales,
compared to $48.4 million, or 4.4% of warehouse sales, in fiscal year
2008.
Interest
income reflects earnings on cash and cash equivalent balances and restricted
cash deposits and, until October of fiscal year 2009, restricted cash deposits
securing working capital lines of credit. Interest income was $457,000 in fiscal
year 2009, compared to $1.2 million in fiscal year 2008. The decrease reflects
generally lower interest rates associated with cash on deposit in the current
year compared to last year.
Interest
expense reflects borrowings by the Company’s majority or wholly owned foreign
subsidiaries to finance the capital requirements of warehouse club operations
and on-going working capital requirements. Interest expense increased to $1.7
million in fiscal year 2009, from $1.4 million in fiscal year 2008, resulting
from an increase in debt held by the Company to finance the acquisition of land
and the subsequent construction of new warehouse clubs.
During
fiscal year 2009, the Company incurred current tax expense of $14.0 million and
recognized a net deferred tax benefit of $922,000, resulting in a net tax
expense of $13.1 million. During fiscal year 2008, the Company
incurred current tax expense of $15.5 million and recognized a net deferred tax
benefit of $6.4 million, resulting in net tax expense of $9.1
million. The effective tax rate for fiscal year 2009 is
approximately 23.5%, as compared to the effective tax rate for fiscal year 2008
of approximately 19.1%. For the
fiscal year 2009, the Company recorded non-recurring adjustments to tax expense
including (i) $2.8 million for the reversal of previously recorded valuation
allowances; (ii) $2.2 million for the reversal of income tax contingencies due
to the expiration of the statute of limitations; and (iii) $1.1 million of other
adjustments. For the fiscal year 2008, the Company recorded
non-recurring adjustments to tax expense including (i) $3.5 million for the
reversal of previously recorded valuation allowances; (ii) $1.7 million for the
reversal of income tax contingencies due to the expiration of the statute of
limitations; and (iii) $1.7 million related to the PSC settlement. The reversals
of valuation allowances referred to above are a result of improvement in the
operations of certain foreign subsidiaries.
For
fiscal year 2009, the Company reported approximately $21,000 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 $265,000 in fiscal year 2009. In the same period last
year, the joint ventures for which the minority stockholders' respective
share was $494,000. During the second quarter of fiscal year 2008, the
Company acquired the 49% ownership interest of the minority shareholder in its
Nicaragua subsidiary. As a result, the Company now recognizes 100% of that
subsidiary’s income or loss. During the fourth quarter of fiscal year
2008, the Company acquired the 10% minority interest of its Aruba subsidiary,
thereby increasing its ownership percentage in its Aruba subsidiary to
100%. As a result, the Company now records 100% of these
subsidiaies income or loss. The adjusted minority interest for fiscal year
2008, assuming the minority interests were acquired as of the beginning
of the fiscal year, would be approximately $267,000.
Income
from continuing operations for fiscal year 2009 was $42.3 million, compared to
$38.2 million in the same period last year.
8
Income
from discontinued operations, net of tax reflects the consolidated income
and expenses associated with those operations within the Company that were
closed or disposed of and which meet the criteria for such a treatment.
Discontinued operations include the costs associated with the Company’s
previously closed warehouse location in Guam which is leased to a
subtenant. The Company recognized a loss of $28,000 in fiscal year
2009 related to the continuing expenses offset by sublease income. In
fiscal year 2008, the Company recognized a loss of $104,000 primarily related to
a payroll tax related matter derived from the former club warehouse operations
in Guam.
Comparison
of Fiscal Year 2008 and Fiscal Year 2007
Net
warehouse club sales increased 26.3% to $1.1 billion in fiscal year 2008 from
$869.1 million in fiscal year 2007. The Company's sales were positively impacted
by a continued favorable economic environment in most of its markets during the
year despite the difficulties experienced by retailers in the U.S. market. The
Company believes that sales growth also reflects the Company’s efforts in the
selection and value of the merchandise carried in the clubs and the value that
we bring to our members which has also resulted in a growing membership base.
Approximately two-thirds of the sales growth experienced from fiscal year 2007
to fiscal year 2008 resulted from increased transactions. The other portion of
sales growth is attributable to growth in the value of the average transaction
by our members. Inflationary pressures in certain food commodities
partially contributed to some of this increase in average transaction value,
although given the broad range of products offered and the introduction of new
merchandise items throughout the year, it would be difficult for management to
estimate a specific impact of inflation on the average transaction value of the
Company. Warehouse clubs in all countries registered increased sales
from fiscal year 2007 to fiscal year 2008. The Company opened two new
warehouse clubs in the period: one in Guatemala which opened on
November 14, 2007 and one in Trinidad which opened on December 13,
2007. Together they accounted for approximately 539 basis points of growth in
net warehouse club sales.
The
following table indicates the percent growth in net warehouse club sales in the
segments in which the Company operates.
Fiscal
Years Ended August 31,
|
||||||||||||||||||||||||
2008
|
2007
|
|||||||||||||||||||||||
Amount
|
% of Net
Revenue
|
Amount
|
% of Net
Revenue
|
Increase
|
Change
|
|||||||||||||||||||
(Dollar
amounts in thousands)
|
||||||||||||||||||||||||
Central
America
|
$
|
656,612
|
59.8
|
%
|
$
|
529,150
|
60.9
|
%
|
$
|
127,462
|
24.1
|
%
|
||||||||||||
Caribbean
|
440,898
|
40.2
|
%
|
339,952
|
39.1
|
%
|
100,946
|
29.7
|
%
|
|||||||||||||||
$
|
1,097,510
|
100.0
|
%
|
$
|
869,102
|
100.0
|
%
|
$
|
228,408
|
26.3
|
%
|
Comparable
warehouse club sales, which are for warehouse clubs open at least 13 1/2
calendar months, increased 20.1% for the 52-week period ended August 31, 2008
compared to the same 52-week period last year. The Company reports comparable
warehouse sales on a “same week” basis with 13 weeks in each quarter beginning
on a Monday and ending on a Sunday. The periods are established at the beginning
of the fiscal year to provide as close a match as possible to the calendar month
that is used for financial reporting purposes. This approach equalizes the
number of weekend days and weekdays 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 sales related to the new
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
following table indicates the approximate percentage of net sales accounted for
by each major category of items sold by the Company during the fiscal years
ended August 31, 2008 and 2007:
Fiscal
Years Ended
August 31,
|
||||||||
2008
|
2007
|
|||||||
Sundries (including
candy, snack foods, health and beauty aids, tobacco, alcoholic beverages,
soft drinks, cleaning and paper products and pet
supplies)
|
31
|
%
|
31
|
%
|
||||
Food (including dry and
fresh foods)
|
44
|
%
|
42
|
%
|
||||
Hardlines (including
major appliances, electronics, hardware, office supplies, garden and
patio, sporting goods, business machines and automotive
supplies)
|
14
|
%
|
16
|
%
|
||||
Softlines (including
apparel, domestics, cameras, jewelry, housewares, media, toys, home
furnishings, and small appliances)
|
9
|
%
|
9
|
%
|
||||
Other (including
one-hour photo and food court)
|
2
|
%
|
2
|
%
|
||||
100
|
%
|
100
|
%
|
9
The
higher percentage of net sales associated with food in fiscal year 2008,
compared to fiscal year 2007 partially reflects the impact of inflation on
commodity food products relative to hardlines and softlines which experienced
less inflationary pressures.
The
Company’s warehouse club gross profit margin (defined as net warehouse club
sales, less associated cost of goods sold) for fiscal year 2008 increased $33.4
million to $165.2 million, or 15.1% of net warehouse club sales, from $131.8
million, or 15.2% of net warehouse club sales for fiscal 2007. The increase in
warehouse club gross profit margin dollars was primarily due to higher sales in
the current fiscal year as compared to the prior fiscal year. As a percentage of
sales, warehouse gross profit declined by approximately 11 basis points for
fiscal year 2008, compared to fiscal year 2007, as reduced foreign currency
exchange losses and improvements in merchandise distribution and shrink results
were offset by targeted reductions in merchandise margins to provide greater
value to PriceSmart members through lower prices.
Export
sales were $1.5 million for fiscal year 2008 compared to export sales of $1.0
million for fiscal year 2007, due primarily to direct sales to institutional
customers (primarily retailers) in the Philippines for which the Company earns a
margin of approximately 5% of those sales.
Membership
income, which is recognized into income ratably over the one-year life of the
membership, increased 15.8% to $16.0 million, or 1.5% of net warehouse sales, in
fiscal year 2008 compared to $13.9 million, or 1.6% of net warehouse sales, in
fiscal year 2007. Total membership accounts as of the end of fiscal year 2008
were approximately 604,000, an increase of approximately 69,000 accounts over
the end of fiscal year 2007. The principal reasons for the increase in
membership levels has been the Company’s ability to maintain membership
retention levels at 85% combined with an increase in the membership base at our
existing warehouse locations and the new members added with the opening of the
two new warehouse clubs.
Other
income consists of commission revenue, rental income, advertising revenue,
construction revenue, fees for in-store product demonstrations, and fees earned
from licensees. Other income for both fiscal years was $4.8
million. Included in the results for fiscal year 2007 was $500,000 in
non-recurring income recognized in the second quarter of fiscal year 2007
related to the marketing fees earned on the Company’s co-branded credit card
agreement with Banco Promerica.
Warehouse
club operating expenses increased 18.0% to $103.9 million, or 9.5% of warehouse
sales, for fiscal year 2008 from $88.0 million, or 10.1% of warehouse sales, in
fiscal year 2007. The addition of the two new warehouse clubs added a total of
$4.4 million to warehouse club operating costs during fiscal year 2008 compared
to fiscal year 2007. The increase in warehouse club operating expenses excluding
the two new warehouse clubs resulted from increased payroll related expenses
of $5.7 million, higher bank and credit card fees primarily related to
higher sales of $1.8 million and increased operating costs for utilities,
repairs and maintenance, and supplies of $2.7 million. The Company also
incurred higher depreciation expense of $911,000 related to capital expenditures
over the year, including the acquisition of the company that had leased to the
Company the real estate upon which the PriceSmart Barbados warehouse club
is located, which was offset by a related reduction in rent expense of
$574,000.
General
and administrative expenses increased to $30.3 million, or 2.8% of net warehouse
sales, for fiscal year 2008 from $27.1 million, or 3.1% of net warehouse sales,
in fiscal year 2007. The Company incurred increased costs of $872,000
for salaries and related benefits, including expatriate costs, for the Company’s
corporate headquarters and U.S. buying operation. Professional fees, primarily
related to the litigation and ultimate settlement with the Promerica entities
discussed below, and tax consulting services resulted in increased costs of $1.7
million in fiscal year 2008 compared to fiscal year 2007. In
addition, fiscal year 2007 results included the release of a $200,000 reserve in
excess of estimated claims.
Expenses
incurred before a warehouse club is in operation are captured in pre-opening
expenses. Pre-opening expenses in fiscal year 2008 were $1.0 million related to
the opening of the two new warehouse clubs in Guatemala and Trinidad. In the
prior fiscal year, pre-opening expenses were $373,000, of which $256,000 was
primarily associated with the opening of the relocated San Pedro Sula, Honduras
location. The remainder was related to the new Guatemala and Trinidad warehouse
clubs which opened in November and December 2007, respectively (fiscal year
2008).
Asset
impairment and closure costs for fiscal year 2008 were $1.1 million, compared to
$1.6 million in fiscal year 2007. Contributing to the expense in fiscal year
2008 was a $605,000 non-cash charge to recognize a decrease in the net
present value of future cash flows over the remaining lease life for the closed
but subleased Guatemala Plaza location as a result of a rent increase to the
Company from the landlord and approximately $205,000 in other expenses related
to the Guatemala Plaza location. In addition, the Company took a
$449,000 non-cash charge to write-down the net book value of certain equipment
related to in-club bulk packaging. This results from the fact that
the Company is now able to purchase pre-packaged items at competitive prices
from its suppliers, thereby freeing up merchandise space and reducing labor
costs within the club. Impairment and closure costs were lowered
during fiscal year 2008 by approximately $127,000 in interest income related to
the note receivable on the Dominican Republic sale of the East Side Santo
Domingo warehouse. Asset impairment and closure costs in the prior fiscal year
resulted from a further write-down of the value of the original San Pedro Sula,
Honduras warehouse club which was vacated in early fiscal year 2007 in favor of
a new club that was built in another section of the city. The further write-down
of $897,000 in fiscal year 2007 was a result of entering into an agreement to
sell the location for $2.5 million. The sale of which was completed in September
2007 (fiscal year 2008). The Company incurred approximately $128,000 in
additional closure costs during fiscal year 2007 related to the vacating of the
San Pedro Sula warehouse site. Net closure costs of $315,000 were incurred in
the Dominican Republic related to the sale of the East Side Santo Domingo
warehouse for fiscal year 2007.
Included
in the results for fiscal year 2008 are pre-tax charges and income tax benefits
related to the Company’s settlement of previously announced disputes pursuant to
the PSC Settlement, net of a $5.5 million reserve established in the fourth
quarter of fiscal year 2007. The amount of the reserve was equal to management’s
estimate at that time of the potential impact of a global settlement on
PriceSmart’s net income. In fiscal year 2008, the Company recorded an additional
pre-tax charge of $1.3 million associated with the final settlement for costs
incurred in excess of the initial $5.5 million reserved in fiscal year
2007. An income tax benefit was also recorded of approximately $1.7
million as a result of the approximately $6.8 million recorded in settlement
cost. When the Company originally accrued for the settlement cost,
the Company was not able to estimate the tax benefit component of the settlement
cost with an adequate level of certainty. In addition in fiscal year
2008, the Company recorded approximately $120,000 in costs to record the fair
value of a put right given to PSC as partial consideration for the
settlement.
10
Operating
income for fiscal year 2008 was $48.4 million, or 4.4% of warehouse sales,
compared to $28.0 million, or 3.2% of warehouse sales, in fiscal year
2007.
Interest
income reflects earnings on cash and cash equivalent balances and, until October
2007 (fiscal year 2008), restricted cash deposits securing working capital
lines of credit. Interest income was $1.2 million in fiscal year 2008, compared
to $1.6 million in fiscal year 2007. The decrease reflects generally lower
interest rates associated with cash on deposit in fiscal year 2008, compared
to fiscal year 2007.
Interest
expense reflects borrowings by the Company’s majority or wholly owned foreign
subsidiaries to finance the capital requirements of warehouse club operations
and on-going working capital requirements. Interest expense increased to $1.4
million in fiscal year 2008, from $788,000 in fiscal year 2007, resulting from
an increase in debt held by the Company to finance the land purchase and
subsequent construction of the new warehouse club in Guatemala and to finance
the purchase of the company that had leased to the Company the real estate upon
which the PriceSmart Barbados warehouse club is located.
During
fiscal year 2008, the Company incurred current tax expense of $15.5 million and
recognized a net deferred tax benefit of $6.4 million, resulting in a net tax
expense of $9.1 million. During fiscal year 2007, the Company
incurred current tax expense of $13.4 million and recognized a net deferred tax
benefit of $1.1 million, resulting in net tax expense of $12.3
million. The effective tax rate for fiscal year 2008 is
approximately 19%, as compared to the effective tax rate for fiscal year 2007 of
approximately 43%. The decrease in the effective tax rates between
fiscal years is primarily attributable to: (i) during fiscal year 2008,
there was a significant increase in non-U.S. pre-tax income, which is taxed
at statutory rates that are generally 4% to 9% lower than the U.S. statutory tax
rate; (ii) the Company reversed approximately $3.5 million of valuation
allowances during fiscal year 2008 as a result of the improvement in the
operations of certain foreign subsidiaries, which had a 7% benefit on the fiscal
year 2008 effective tax rate; and (iii) the Company recorded $5.5 million of
settlement expenses during fiscal year 2007, which was not tax effected due to
the preliminary nature of this accrual, which represents 7% of the effective tax
rate during fiscal year 2007.
In
August 2007 (fiscal year 2007), the Company agreed to sell its 50% interest in
PSMT Mexico, S.A. de C.V. to Grupo Gigante for $2.0 million. The
transaction was finalized on October 31, 2007 (fiscal year
2008). There was no net impact to fiscal year 2008 results from the
unconsolidated affiliate as the Company wrote down the value on its balance
sheet during fiscal year 2007. The fiscal year 2007 write-down included $892,000
related to the amounts carried as “Investment in unconsolidated subsidiaries,”
and $1.7 million in accumulated unrealized loss associated with currency changes
recorded as “Accumulated other comprehensive loss” on the consolidated balance
sheet. The Company was relieved of all its obligations under letters of credit
granted in favor of Mexican tax authorities totaling $1.9 million in connection
with this disposal.
Minority
interest is the allocation of the joint venture income or loss to the minority
stockholders’ respective interest. Minority interest stockholders’ respective
share of net income was $494,000 in fiscal year 2008. In the same period last
year, the minority stockholders' interest was $476,000. During the second
quarter of fiscal year 2008, the Company acquired the 49% ownership interest of
the minority shareholder in its Nicaragua subsidiary. As a result, the Company
now recognizes 100% of that subsidiary’s income or loss. During
the fourth quarter of fiscal year 2008, the Company acquired the 10% minority
interest of its Aruba subsidiary from Nithyananda Enterprises, thereby
increasing its ownership percentage in its Aruba subsidiary to
100%. As a result, the Company now records 100% of these
subsidiaries' income or loss.
Income
from continuing operations for fiscal year 2008 was $38.2 million compared to
$12.8 million in the same period last year.
Income
from discontinued operations, net of tax are the consolidated income and
expenses associated with those operations within the Company that were closed or
disposed of and which meet the criteria for such a treatment. Discontinued
operations include the costs associated with the Company’s previously closed
warehouse location in Guam which is leased to a subtenant. The Company
recognized a loss of $104,000 in fiscal year 2008, primarily related to a
payroll tax related matter. In fiscal year 2007, the Company
recognized income of $143,000 related to the sublease of the Guam location
offset by continuing expenses.
Discontinued
operations, net of taxes are comprised of the following in
thousands:
Fiscal
Year Ended
2008
|
Fiscal
Year Ended
2007
|
|||||||
Guam
pre-tax (loss) income from operations
|
$
|
(104
|
)
|
$
|
151
|
|||
Philippines
pre-tax (loss) income from operations
|
—
|
(8
|
)
|
|||||
Income
(loss) before income taxes
|
(104
|
)
|
143
|
|||||
Income
tax (provision) benefit
|
—
|
—
|
||||||
Discontinued
operations (loss) income, net of tax
|
$
|
(104
|
)
|
$
|
143
|
11
Liquidity
and Capital Resources
Financial
Position and Cash Flow
The
Company had $44.2 million in consolidated cash and cash equivalents as of
August 31, 2009, compared to $48.1 million in consolidated cash and cash
equivalents as of August 31, 2008. The Company used a portion of its
cash and cash equivalents and cash generated by operations and financing
activities for the acquisition and development of property for new warehouse
clubs and for investments in joint ventures in Panama and Costa Rica 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 (Brisas), Costa Rica (Alajuela) and
Trinidad (San Fernando). The new Costa Rica warehouse club opened on
April 17, 2009, increasing the number of warehouse clubs in that country
to five. In Panama, the Company will relocate an existing warehouse club to the
new site and plans to sell or lease the existing site after relocation
has occurred. This is expected to be
completed during the spring of 2010. In December 2008, the Company
acquired approximately 31,000 square meters of land in Trinidad upon which it
will construct a new warehouse club which will bring the number of warehouse
clubs in that country to four. This new warehouse club is
expected to be open in the spring of 2010.
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 from officers and employees upon the vesting of restricted stock to
fund the associated tax withholdings. Operating activities
contributed cash to operations through net income during the
period.
Net cash
flows provided by operating activities were approximately $55.4 million in
fiscal year 2009, compared to cash provided by operating activities of $43.6
million in fiscal year 2008. Income from continuing operations
improved by $4.1 million to $42.3 million in fiscal year 2009, compared to $38.2
million in fiscal year 2008. In fiscal year 2009, net cash provided by
continuing operations included cash use of approximately $3.1 million used to
pay down and release the Company from the lease liability for the Guatemala,
Plaza location, the related adjustments to net cash for gains related to the pay
down of the lease liability for the Guatemala Plaza location, and asset
impairment and closure costs. Changes in operating assets and
liabilities resulted in the use of approximately $100,000 of cash in fiscal
year 2009. Income from continuing operations in fiscal year 2008
included three non-cash charges totaling $1.6 million: (i) increase in accrued
closure costs and other accrued liabilities of $605,000 to reflect the increase
in monthly rent, (ii) impairment charges associated with the write-down of bulk
packaging equipment for $449,000, and (iii) the write down of PSC-related
debt in connection with the settlement of approximately
$530,000. Changes in operating assets and liabilities, most notably
the payment of the amount reserved in fiscal year 2007 for settlement of pending
litigation, additions of merchandise inventory to support higher sales and the
addition of two warehouse club operations, resulted in the use of $8.5 million
of cash in fiscal year 2008.
Net cash
used in investing activities was approximately $54.8 million and $41.4 million
in fiscal years 2009 and 2008, respectively. Additions to property
and equipment used approximately $49.3 million of cash in fiscal year
2009, including for 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 also continued with the development of new
warehouse club sites and the expansion of existing warehouse clubs in Central
America and the Caribbean and the expansion of the warehouse distribution center
in the United States. Construction costs within these segments
for fiscal year 2009 were approximately $12.3 million, $12.7 million and
$300,000, respectively. Fixtures and equipment expenditures within
these segments for fiscal year 2009 were $7.0 million, $4.1 million and
$845,000, respectively. The Company utilized approximately $1.4
million for the acquisition of software and computer hardware in fiscal year
2009. The Company released approximately $400,000 of restricted cash,
previously held as a deposit for land purchases, which lowered the cash used in
investing activities. The Company also used approximately $7.7 million
of 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. The Company collected a $2.1 million
note receivable from the sale of a warehouse club in the Dominican
Republic. In fiscal year 2008, the additions to property and
equipment totaled $23.6 million, primarily associated with the completion and
new warehouse club openings in Guatemala (November 2007) and Trinidad (December
2007) and continued improvements in the Company’s other warehouse club locations
for approximately $22.3 million. In addition, the Company recorded
the purchase of the acquisition of a land parcel at the Zapote, Costa Rica
warehouse club site from PSC for $1.0 million. The Company also recorded the
purchase of easement rights relating to properties adjacent to the PriceSmart
warehouse club in Managua, Nicaragua for $250,000. The Company used
approximately $10.2 million for the acquisition of the 49% minority interest in
the Nicaragua club warehouse as part of the PSC settlement and approximately
$300,000 for the acquisition of the 5% minority interest in the Aruba club
warehouse. In addition, the Company used approximately $11.9 million
for the acquisition of the company that had leased to it the real estate and
building upon which the Barbados warehouse club is located. The Company used
approximately $660,000 for deposits made into escrow accounts for the potential
future acquisition of land for future club warehouse sites and for potential
payments related to the PSC settlement. The Company generated approximately $5.1
million in cash from investing activities primarily from the sales of its
investment in its Mexico subsidiary and the San Pedro Sula warehouse building in
Honduras subsequent to relocating that warehouse club to a new
site.
Net cash
used in financing activities was approximately $4.1 million in fiscal
year 2009, primarily as a result of obtaining new bank loans and payments on
bank loans for a net effect of $16.2 million of cash provided and net proceeds
and tax benefits from stock options of $523,000 of cash
provided. This was offset by payments of $19.6 million for dividends,
$1.1 million used in the purchase of treasury stock from officers and
employees upon the vesting of restricted stock and $161,000 used in the
purchase of treasury stock related to the
PSC settlement. In fiscal year 2008, financing activities
provided a net increase in cash of $13.6 million, primarily as a result of
obtaining new bank loans and payments on bank loans for a net effect of $16.3
million of cash provided and the release of restricted cash previously held as
collateral for a line of credit with a bank of $8.0 million, offset by payments
of $9.5 million for dividends, $1.4 million used in the purchase of treasury
stock from officers and employees upon the vesting of restricted stock and $1.3
million used in the purchase of treasury stock related to the PSC
settlement.
12
Financing
Activities
In the
first quarter of fiscal year 2009, as part of its investment in a joint venture
with Prico Enterprises S.A. the Company borrowed approximately $475,000 from
Prico Enterprises to fund the purchase price of 50% of the common stock in the
joint venture pursuant to a three year zero interest loan. The
common stock is held in a trust until payment is due, September 29, 2011.
The Company recorded the discounted present value of the note as
long-term debt. The deemed 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
August 31, 2009 is approximately $428,000. 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.
In the
first quarter of fiscal year 2009, the Company’s Trinidad subsidiary 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 London
Interbank Offered Rate (“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 a 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.
In the
second quarter of fiscal year 2009, the Company’s Trinidad subsidiary entered
into a 6.77% fixed interest rate loan agreement with First Caribbean
International Bank of Trinidad & Tobago for a notional amount of $9.5
million to be paid over a 10 year term.
In the
fourth quarter of fiscal year 2009, the Company’s Panama subsidiary entered into
a loan agreement with The Bank of Nova Scotia for a notional amount of $10.0
million to be paid over a five year term. The variable interest rate
is set at the greater of 7.5% or 30 day LIBOR plus 4%. The interest
rate resets every 30 days.
The
Company, through its subsidiaries, has entered into two interest rate swap
agreements, one effective beginning in each of fiscal years 2008
and 2009. Under these swap agreements the Company will pay a
fixed interest rate charge for a term approximately over the variable rate loans
being hedged. In accordance with Statement of Financial Accounting
Standards (“SFAS”) No. 157, “Fair Value Measurements” (“SFAS 157”), the Company
measures the fair value for all financial assets and liabilities that are
recognized or disclosed at fair value in the financial statements on a recurring
basis or on a nonrecurring basis during the reporting
period. 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
|
||||||||||
August
31,
|
||||||||||
2009
|
2008
|
|||||||||
Derivatives
designated as hedging instruments under Statement 133
|
Balance
Sheet Location
|
Fair
Value
|
Balance
Sheet Location
|
Fair
Value
|
||||||
Interest
Rate Swaps(1)
|
Other
Accrued Expenses
|
$
|
625
|
Other
Accrued Expenses
|
$
|
8
|
||||
Total derivatives designated as hedging instruments under Statement 133
(2)
|
$
|
625
|
$
|
8
|
(1)
|
The effective portion of
the interest rate swaps was recorded as a debit to accumulated
other comprehensive loss for $464,000 net of tax, as of August 31,
2009.
|
(2)
|
There were no derivatives not
designated as hedging instruments under Statement
133.
|
In the
first quarter of fiscal year 2008, the Company’s Barbados subsidiary obtained a
long-term loan of $4.5 million from Citibank N.A. and a loan of
$9.0 million Barbados dollars (equivalent to $4.5 million U.S. dollars)
from Citicorp Merchant Bank Ltd., to finance the purchase of the company that
had leased to it the real estate and building upon which the Company’s Barbados
warehouse club is located. In addition, the Company drew down approximately
$722,000 in additional short-term loans from its facilities in Guatemala. In the
second quarter of fiscal year 2008, the Company’s Barbados subsidiary
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 to fix the interest
rate of the $4.5 million loan with Citibank N.A. The loan has a variable
interest rate of LIBOR plus a margin of 1.5%. Under the swap agreement, the
Company will pay a fixed rate of 5.22% for a term of approximately five
years. In the fourth quarter of fiscal year 2008, the Company
obtained a long-term note of $9.0 million
from RBTT.
Short-Term
Borrowings and Long-Term Debt
As of
August 31, 2009 and 2008, the Company, together with its majority or wholly
owned subsidiaries, had $2.3 million and $3.5 million outstanding in short-term
borrowings, respectively.
The
Company has bank credit agreements that provide for borrowings of up to $24.9
million, which can be used as lines of credit or to issue letters of credit. As
of August 31, 2009, lines and letters of credit totaling approximately
$2.5 million were outstanding under these facilities, leaving approximately
$22.4 million available for borrowing.
13
As of
August 31, 2009 and August 31, 2008, the Company, together with its
majority or wholly owned subsidiaries, had $41.7 million and $25.8 million,
respectively, outstanding in long-term borrowings. Of this amount, as of August
31, 2009, approximately $428,000 relates to the loan from Prico
Enterprises. The increase during the current period primarily relates to the
addition of two long-term loans for approximately $9.5 million and $10.0
million, offset by the normally scheduled payments of interest and principal for
approximately $3.6 million. The carrying amount of the non-cash assets assigned
as collateral for long-term debt was $61.0 million and $32.2 million as of
August 31, 2009 and 2008, respectively.
As of
August 31, 2009 and 2008, $7.6 million and $8.5 million, respectively,
relate to loans that require the Barbados subsidiary 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 covenants described in the underlying contracts. As such, during
the fourth quarter, the bank and the Company amended the existing covenant
agreement to modify the contractual language to better reflect the original
intent of these covenants. The Company obtained a written waiver from the bank
with respect to any non-compliance for fiscal year 2008. The Company was in
compliance with respect to these amended covenants for fiscal year 2009.
As of
August 31, 2009 and 2008, $8.1 million and $9.0 million, respectively,
relate to loans that require the Trinidad subsidiary to comply with certain
annual financial covenants, which include debt service and leverage ratios. The
Company was in compliance with respect to these amended covenants for fiscal
year 2009 and 2008.
During
the fourth quarter of fiscal year 2009, the Company obtained a $10 million loan
that requires the Panama subsidiary to comply with certain quarterly financial
covenants, which include debt service and leverage ratios beginning in the first
quarter of fiscal year 2010. The Company has no covenant requirements for this
loan for the year ended August 31, 2009.
Contractual
Obligations
As of
August 31, 2009, the Company's 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
|
|||||||||||||||
Long-term
debt (1)
|
$
|
4,584
|
$
|
9,595
|
$
|
14,168
|
$
|
13,363
|
$
|
41,710
|
||||||||||
Operating
leases (2)(3)
|
6,472
|
11,449
|
11,275
|
50,752
|
79,948
|
|||||||||||||||
Additional
capital contribution commitments to
joint
ventures (4)
|
4,096
|
—
|
—
|
—
|
4,096
|
|||||||||||||||
Equipment
lease(5)
|
106
|
27
|
—
|
—
|
133
|
|||||||||||||||
Distribution
center services(6)
|
125
|
166
|
—
|
—
|
291
|
|||||||||||||||
Total
|
$
|
15,383
|
$
|
21,237
|
$
|
25,443
|
$
|
64,115
|
$
|
126,178
|
(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
club in Guam. The projected minimum payments excluded for Guam are
approximately $1.9 million; sublease income for this location is also
approximately $2.3 million, yielding no net projected
obligation.
|
(3)
|
Operating
lease obligations have been reduced by approximately $706,000 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 that the Company has agreed to,
however the parties intend to seek alternate financing for these
projects.
|
(5)
|
Certain
obligations under leasing arrangements are collateralized by the
underlying asset being leased.
|
(6)
|
Amounts
shown are the contractual distribution center services agreements for
Mexico City. The minimum payment includes only the fixed portion of each
contract.
|
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. Using different
estimates could have a material impact 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 SFAS No. 5, “Accounting for
Contingencies.” While the Company believes the recorded liabilities are
adequate, there are inherent limitations in the estimation process whereby
future actual losses may exceed projected losses, which could materially
adversely affect the Company’s results of operations or financial
condition.
14
Income Taxes: A valuation
allowance is recorded to reduce deferred tax assets to the amount that is more
likely than not to be realized. As of August 31, 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 U.S. and foreign deferred tax asset balances,
primarily because of the existence of significant negative objective evidence,
such as the fact that certain subsidiaries are in a cumulative loss position for
the past three years, and the determination that certain net operating loss
carryforward periods are not sufficient to realize the related deferred tax
assets. The Company factored into its analysis the inherent risk of forecasting
revenue and expenses over an extended period of time and also considered the
potential risks associated with its business. As a result of this review, the
Company concluded that a valuation allowance was required with respect
to deferred tax assets for certain subsidiaries, as well as certain
U.S. deferred tax assets. The Company also determined that valuation
allowances previously recorded should be reversed for certain of its
subsidiaries, primarily because of the existence of significant positive
objective evidence, such as specific tax planning, changes in operational
efficiencies and overall market improvement. The reversal of
previously recorded valuation allowances resulted in a net tax benefit of $2.8
million for the fiscal year ended August 31, 2009.
The
Company had federal and state tax net operating loss carryforwards (“NOLs”), at
August 31, 2009 of approximately $36.0 million and $10.4 million,
respectively. In calculating the tax provision, and assessing the likelihood
that the Company will be able to utilize the deferred tax assets, the Company
considered and weighed all of the evidence, both positive and negative, and both
objective and subjective. The Company factored in the inherent risk of
forecasting revenue and expenses over an extended period of time and considered
the potential risks associated with its business. Using the Company’s U.S.
income from continuing operations and 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 carryforward period. However, if the
Company does not achieve its projections of future taxable income in the United
States, the Company could be required to take a charge to earnings related to
the recoverability of these deferred tax assets. Due to the deemed change of
ownership (as defined in section 382 of the Internal Revenue Code) in October
2004, there are annual limitations in the amount of U.S. profits that may be
offset by NOLs. The NOLs generated prior to the deemed ownership change date, as
well as a significant portion of the losses generated as a result of the PSMT
Philippines disposal in August 2005, are limited on an annual basis. The Company
does not believe this will impact the recoverability of these NOLs. Conversely,
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
carryforwards.
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 new provisions of FASB Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes—An Interpretation of FASB Statement
No. 109” (“FIN 48”). Under FIN 48, the impact of an uncertain income tax
position on the income tax return must be recognized at the largest amount that
is more-likely-than-not to be sustained upon audit by the relevant tax
authority. An uncertain income tax position will not be recognized if it has
less than 50% likelihood of being sustained. As of August 31, 2009, the
Company has classified uncertain income tax positions as $3.5 million in
long-term income taxes payable and approximately $19,000 in long-term deferred
tax liabilities. The classification of income tax liability as current, as
opposed to long-term, occurs when the Company expects to make a cash payment in
the following 12 months. As of August 31, 2009 and August 31, 2008,
the Company had recorded $0 and $933,000, respectively, 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
$254,000.
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: SFAS 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 No. 144,
“Accounting for the Impairment or Disposal of Long-Lived Assets” ("SFAS 144").
Future business conditions and/or activity could differ materially from the
projections made by management causing the need for additional impairment
charges. In fiscal year 2008 the Company recorded approximately
$449,000 of impairment charges on bulk packaging equipment located in
its warehouse clubs. This was due to the Company’s decision to
outsource the bulk packaging of product. The Company was also required to take
an impairment charge pursuant to SFAS 144 on the old San Pedro Sula,
Honduras warehouse site in fiscal year 2007 of approximately $897,000. This was
due to the revised fair valuation of the land and building as a result of the
disposal agreement. In addition, the Company recorded a $2.6 million impairment
charge related to the write down of the Company's interest in its Mexico joint
venture as a result of the disposal agreement.
15
Stock-Based Compensation: As
of August 31, 2009, the Company had four stock-based employee compensation plans
which it accounts for in accordance with SFAS No. 123(R), “Share-Based
Payment” ("SFAS 123(R)"). 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.
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 establishes lease obligation liabilities for
its closed leased warehouse clubs when required. The lease
obligations are based on the present value of the rent liabilities, reduced by
the estimated income from the subleasing of these properties. The
Company is continually evaluating the adequacy of its closed warehouse club
lease obligations based upon the status of existing or potential subleasing
activity and makes appropriate adjustments to the lease obligations as a result
of these evaluations. In fiscal year 2009 the Company recorded a
$418,000 gain in closure costs. This consisted of $651,000
to record a gain for the lease buy out of Guatemala plaza and $144,000 in
closure cost gain to record interest income related to the note
issued for the sale of the East Side Santo Domingo, Dominican Republic
location. This note was paid in full during the third quarter of
fiscal year 2009. This was offset by additional recorded costs of
$377,000 for other associated closure costs incurred.
Recent
Accounting Pronouncements
In June
2009, the Financial Accounting Standards Board (“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 Generally Accepted Accounting Principles (“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 June
2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No.
46(R)” (“FIN 46(R)”), “Consolidation of Variable Interest Entities - An
Interpretation of ARB No. 51” ("SFAS 167"). This statement amends FIN
46(R) to replace the quantitative-based risks and rewards calculation for
determining which enterprise, if any, has a controlling financial interest in a
variable interest entity and requires on going 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 whither 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 SFAS 167 as of the beginning of its first annual reporting
period that begins on September 01, 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.
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 was required to adopt SFAS
165 prospectively to both interim and annual financial periods ending after
June 15, 2009. The adoption of the standard did not have a
material impact on its consolidated financial statements.
In
April 2009, four 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 157-2,
“Effective Date of FASB Statement No. 157;” 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 adopted these
FSPs in the fourth quarter of fiscal year 2009. The adoption
of these FSPs did not 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, “Equity Method Investment Accounting Considerations”
("EITF 08-06"). 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 June
2008, the FASB issued FSP EITF 03-6-1, “Determining Whether Instruments Granted
in Share-Based Payment Transactions Are Participating Securities” ("FSP EITF
03-6-1"). This FSP addresses 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 described
in SFAS No. 128, “Earnings per Share.” The Company is
required to adopt FSP EITF 03-6-1 effective for financial statements issued for
fiscal years beginning after December 15, 2008, and interim periods within those
years. The Company will adopt this FSP with its November
30, 2009 filing, and if applicable, all prior-period EPS data presented will be
adjusted retrospectively to conform with the provisions of this FSP. The
Company is currently evaluating the impact, if any, this issue will have on its
consolidated financial statements.
16
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,” ("SFAS 141") 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, “Accounting for Income Tax Benefits of Dividends on
Share-Based Payment Award” (EIFT 06-11"). EITF 06-11 requires companies to
recognize the tax benefits of dividends on unvested share-based payments in
equity (increasing SFAS 123(R)’s “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.
Seasonality
Historically,
the Company's merchandising businesses have experienced holiday retail
seasonality in their markets. In addition to seasonal fluctuations, the
Company's operating results fluctuate quarter-to-quarter as a result of economic
and political events in markets served by the Company, the timing of holidays,
weather, the timing of shipments, product mix, and currency effects on the cost
of U.S.-sourced products which may make these products more or less expensive in
local currencies and therefore more or less affordable. Because of such
fluctuations, the results of operations of any quarter are not indicative of the
results that may be achieved for a full fiscal year or any future quarter. In
addition, there can be no assurance that the Company's future results will be
consistent with past results or the projections of securities
analysts.
17
Quantitative
and Qualitative Disclosures about Market Risk
The
Company, primarily through majority or wholly owned subsidiaries, conducts
operations primarily in Central America and the Caribbean, and as such is
subject to both economic and political instabilities that cause volatility in
foreign currency exchange rates or weak economic conditions. As of
August 31, 2009, the Company had a total of 26 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 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, Jamaica experienced a net currency devaluation of over 23% between the
end of fiscal year 2008 and the end of fiscal year 2009 and Guatemala
experienced an 11% devaluation over that same period. 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 ($1.5
million) and $1.6 million for the year ended August 31, 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
affiliate, resulting from the translation of the assets and liabilities of these
companies into U.S. dollars were ($3.9 million) and ($546,000) for the year
ended August 31, 2009 and August 31, 2008, respectively. For the
fiscal years ended August 31, 2009 and 2008, loss on fair value on interest rate
swap designated as an effective hedge recorded in Accumulated Other
Comprehensive loss was approximately ($456,000) net of tax and ($8,000),
respectively.
The
following is a listing of the countries or territories where the Company
currently operates and their respective currencies, as of August 31,
2009:
Country/Territory
|
Number
of
Warehouse Clubs
In
Operation
|
Anticipated Warehouse
Club
Openings
in
FY 2010
|
Currency
|
|||
Panama
|
4
|
—(2)
|
U.S.
Dollar
|
|||
Costa
Rica
|
5
|
—
|
Costa
Rican Colon
|
|||
Dominican
Republic
|
2
|
—
|
Dominican
Republic Peso
|
|||
Guatemala
|
3
|
—
|
Guatemalan
Quetzal
|
|||
El
Salvador
|
2
|
—
|
U.S.
Dollar
|
|||
Honduras
|
2
|
—
|
Honduran
Lempira
|
|||
Trinidad
|
3
|
1(3)
|
Trinidad
Dollar
|
|||
Aruba
|
1
|
—
|
Aruba
Florin
|
|||
Barbados
|
1
|
—
|
Barbados
Dollar
|
|||
U.S.
Virgin Islands
|
1
|
—
|
U.S.
Dollar
|
|||
Jamaica
|
1
|
—
|
Jamaican
Dollar
|
|||
Nicaragua
|
1
|
—
|
Nicaragua
Cordoba Oro
|
|||
Totals
|
26 (1)
|
1
|
(1)
|
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.
|
(2)
|
An
existing PriceSmart warehouse club in Panama City, Panama (known as the
Los Pueblos club) will be relocated to a new site (Brisas) in the spring
of 2010, and the Company will close the existing warehouse club after the
relocation has been completed.
|
(3)
|
This
warehouse club is expected to open in the spring of 2010 (San
Fernando).
|
18
The Board
of Directors and Stockholders of PriceSmart, Inc.
We have
audited the accompanying consolidated balance sheets of PriceSmart, Inc. as of
August 31, 2009 and 2008, and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the three years in the period
ended August 31, 2009. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of PriceSmart, Inc. at
August 31, 2009 and 2008, and the consolidated results of its operations and its
cash flows for each of the three years in the period ended August 31, 2009, in
conformity with U.S. generally accepted accounting
principles.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), PriceSmart, Inc.’s internal control over
financial reporting as of August 31, 2009, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated November 9, 2009
expressed an unqualified opinion thereon.
/s/ Ernst
& Young LLP
San
Diego, California
November
9, 2009
19
PRICESMART,
INC.
(amounts
in thousands, except share data)
August
31,
|
||||||||
2009
|
2008
|
|||||||
ASSETS
|
||||||||
Current
Assets:
|
||||||||
Cash
and cash equivalents
|
$
|
44,193
|
$
|
48,121
|
||||
Short-term
restricted cash
|
10
|
536
|
||||||
Receivables,
net of allowance for doubtful accounts of $10 and $11 in 2009 and 2008,
respectively
|
2,187
|
1,474
|
||||||
Merchandise
inventories
|
115,841
|
113,894
|
||||||
Deferred
tax asset – current
|
2,618
|
2,179
|
||||||
Prepaid
expenses and other current assets
|
19,033
|
17,650
|
||||||
Short-term
notes receivable
|
—
|
2,104
|
||||||
Assets
of discontinued operations
|
900
|
1,247
|
||||||
Total
current assets
|
184,782
|
187,205
|
||||||
Long-term
restricted cash
|
732
|
673
|
||||||
Property
and equipment, net
|
231,798
|
199,576
|
||||||
Goodwill
|
37,538
|
39,248
|
||||||
Deferred
tax assets – long term
|
20,938
|
21,198
|
||||||
Other
assets
|
3,927
|
3,512
|
||||||
Investment
in unconsolidated affiliates
|
7,658
|
—
|
||||||
Total
Assets
|
$
|
487,373
|
$
|
451,412
|
||||
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
Current
Liabilities:
|
||||||||
Short-term
borrowings
|
$
|
2,303
|
$
|
3,473
|
||||
Accounts
payable
|
101,412
|
96,120
|
||||||
Accrued
salaries and benefits
|
8,831
|
8,271
|
||||||
Deferred
membership income
|
8,340
|
7,764
|
||||||
Income
taxes payable
|
5,942
|
3,695
|
||||||
Common
stock subject to put agreement
|
—
|
161
|
||||||
Other
accrued expenses
|
10,022
|
11,877
|
||||||
Dividend
payable
|
—
|
4,744
|
||||||
Long-term
debt, current portion
|
4,590
|
2,737
|
||||||
Deferred
tax liability – current
|
189
|
486
|
||||||
Liabilities
of discontinued operations
|
299
|
277
|
||||||
Total
current liabilities
|
141,928
|
139,605
|
||||||
Deferred
tax liability – long-term
|
1,026
|
2,339
|
||||||
Long
term portion of deferred rent
|
2,673
|
2,412
|
||||||
Accrued
closure costs
|
—
|
3,489
|
||||||
Long-term
income taxes payable, net of current portion
|
3,458
|
5,553
|
||||||
Long-term
debt, net of current portion
|
37,120
|
23,028
|
||||||
Total
liabilities
|
186,205
|
176,426
|
||||||
Minority
interest
|
770
|
480
|
||||||
Stockholders’
Equity:
|
||||||||
Common
stock, $0.0001 par value, 45,000,000 shares authorized; 30,337,109 and
30,195,788 shares issued and 29,681,031 and 29,615,226 shares outstanding
(net of treasury shares), respectively
|
3
|
3
|
||||||
Additional
paid-in capital
|
377,210
|
373,192
|
||||||
Tax
benefit from stock-based compensation
|
4,547
|
4,563
|
||||||
Accumulated
other comprehensive loss
|
(17,230
|
)
|
(12,897
|
)
|
||||
Accumulated
deficit
|
(49,998
|
)
|
(77,510
|
)
|
||||
Less:
treasury stock at cost; 656,078 and 580,562 shares,
respectively
|
(14,134
|
)
|
(12,845
|
)
|
||||
Total
stockholders’ equity
|
300,398
|
274,506
|
||||||
Total
Liabilities and Stockholders’ Equity
|
$
|
487,373
|
$
|
451,412
|
See
accompanying notes.
20
PRICESMART,
INC.
(amounts
in thousands, except per share data)
Years
Ended August 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Revenues:
|
||||||||||||
Net
warehouse club sales
|
$
|
1,224,331
|
$
|
1,097,510
|
$
|
869,102
|
||||||
Export
sales
|
3,679
|
1,498
|
1,016
|
|||||||||
Membership
income
|
17,903
|
16,042
|
13,857
|
|||||||||
Other
income
|
5,715
|
4,826
|
4,826
|
|||||||||
Total
revenues
|
1,251,628
|
1,119,876
|
888,801
|
|||||||||
Operating
expenses:
|
||||||||||||
Cost
of goods sold:
|
||||||||||||
Net
warehouse club
|
1,044,555
|
932,294
|
737,317
|
|||||||||
Export
|
3,484
|
1,420
|
962
|
|||||||||
Selling,
general and administrative:
|
||||||||||||
Warehouse
club operations
|
114,957
|
103,887
|
88,029
|
|||||||||
General
and administrative
|
30,882
|
30,327
|
27,094
|
|||||||||
Pre-opening
expenses
|
515
|
1,010
|
373
|
|||||||||
Asset
impairment and closure costs (gains)
|
(249
|
)
|
1,142
|
1,550
|
||||||||
Provision
for settlement of litigation, including changes in fair market value of
put agreement
|
—
|
1,370
|
5,500
|
|||||||||
Total
operating expenses
|
1,194,144
|
1,071,450
|
860,825
|
|||||||||
Operating
income
|
57,484
|
48,426
|
27,976
|
|||||||||
Other
income (expense):
|
||||||||||||
Interest
income
|
457
|
1,193
|
1,628
|
|||||||||
Interest
expense
|
(1,700
|
)
|
(1,445
|
)
|
(788
|
)
|
||||||
Other
expense, net
|
(539
|
)
|
(346
|
)
|
(317
|
)
|
||||||
Total
other income (expense)
|
(1,782
|
)
|
(598
|
)
|
523
|
|||||||
Income
from continuing operations before provision for income taxes, loss of
unconsolidated affiliates and minority interest
|
55,702
|
47,828
|
28,499
|
|||||||||
Provision
for income taxes
|
(13,069
|
)
|
(9,124
|
)
|
(12,337
|
)
|
||||||
Loss
(including impairment charges of $2.6 million in 2007) of unconsolidated
affiliates
|
(21
|
)
|
—
|
(2,903
|
)
|
|||||||
Minority
interest
|
(265
|
)
|
(494
|
)
|
(476
|
)
|
||||||
Income
from continuing operations
|
42,347
|
38,210
|
12,783
|
|||||||||
Income
(loss) from discontinued operations, net of tax
|
(28
|
)
|
(104
|
)
|
143
|
|||||||
Net
income
|
$
|
42,319
|
$
|
38,106
|
$
|
12,926
|
||||||
|
||||||||||||
Basic
net income per share from continuing operations
|
$
|
1.46
|
$
|
1.32
|
$
|
0.44
|
||||||
Basic
net income (loss) per share from discontinued operations, net of
tax
|
$
|
—
|
$
|
—
|
$
|
0.01
|
||||||
Basic
net income per share
|
$
|
1.46
|
$
|
1.32
|
$
|
0.45
|
||||||
|
||||||||||||
Diluted
net income per share from continuing operations
|
$
|
1.45
|
$
|
1.30
|
$
|
0.44
|
||||||
Diluted
net income (loss) per share from discontinued operations, net of
tax
|
$
|
—
|
$
|
—
|
$
|
—
|
||||||
Diluted
net income per share
|
$
|
1.45
|
$
|
1.30
|
$
|
0.44
|
||||||
Shares
used in per share computations:
|
||||||||||||
Basic
|
28,959
|
28,860
|
28,534
|
|||||||||
Diluted
|
29,181
|
29,210
|
29,243
|
|||||||||
Dividends
per share
|
$
|
0.50
|
$
|
0.32
|
$
|
0.32
|
See
accompanying notes.
21
PRICESMART,
INC.
FOR
THE THREE YEARS ENDED AUGUST 31, 2009
(amounts
in thousands)
Tax | ||||||||||||||||||||||||||||||||
benefit | Accum- | |||||||||||||||||||||||||||||||
from | ulated | |||||||||||||||||||||||||||||||
stock- | other | Total | ||||||||||||||||||||||||||||||
Additional | based | compre- | Accum- | stock- | ||||||||||||||||||||||||||||
Common
Stock
|
Paid-in
|
compen-
|
hensive
|
ulated
|
Treasury
Stock
|
holders’
|
||||||||||||||||||||||||||
Shares
|
Amount
|
Capital
|
sation
|
loss
|
deficit
|
Shares
|
Amount
|
equity
|
||||||||||||||||||||||||
Balance
at August 31, 2006
|
29,404
|
$ |
3
|
$ |
364,132
|
$ |
3,509
|
$ |
(13,883
|
)
|
$ |
(109,676
|
)
|
438
|
$ |
(9,466
|
)
|
$ |
234,619
|
|||||||||||||
Purchase
of treasury stock
|
—
|
—
|
—
|
—
|
—
|
—
|
38
|
(609
|
)
|
(609
|
)
|
|||||||||||||||||||||
Issuance
of restricted stock awards
|
164
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
|||||||||||||||||||||||
Forfeiture
of restricted stock awards
|
(31
|
)
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
||||||||||||||||||||||
Exercise
of stock options
|
278
|
—
|
3,949
|
—
|
—
|
—
|
—
|
—
|
3,949
|
|||||||||||||||||||||||
Stock-based
compensation
|
—
|
—
|
1,767
|
461
|
—
|
—
|
—
|
—
|
2,228
|
|||||||||||||||||||||||
Dividend
payable to stockholders
|
—
|
—
|
—
|
—
|
—
|
(4,678
|
)
|
—
|
—
|
(4,678
|
)
|
|||||||||||||||||||||
Dividend
paid to stockholders
|
—
|
—
|
—
|
—
|
—
|
(4,659
|
)
|
—
|
—
|
(4,659
|
)
|
|||||||||||||||||||||
Net
income
|
—
|
—
|
—
|
—
|
—
|
12,926
|
—
|
—
|
12,926
|
|||||||||||||||||||||||
Translation
adjustment
|
—
|
—
|
—
|
—
|
1,540
|
—
|
—
|
—
|
1,540
|
|||||||||||||||||||||||
Comprehensive
income
|
14,466
|
|||||||||||||||||||||||||||||||
Balance
at August 31, 2007
|
29,815
|
$ |
3
|
$ |
369,848
|
$ |
3,970
|
$ |
(12,343
|
)
|
$ |
(106,087
|
)
|
476
|
$ |
(10,075
|
)
|
$ |
245,316
|
|||||||||||||
Purchase
of treasury stock
|
—
|
—
|
—
|
—
|
—
|
—
|
46
|
(1,429
|
)
|
(1,429
|
)
|
|||||||||||||||||||||
Issuance
of restricted stock awards
|
334
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
|||||||||||||||||||||||
Forfeiture
of restricted stock awards
|
(15
|
)
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
||||||||||||||||||||||
Exercise
of stock options
|
62
|
—
|
921
|
—
|
—
|
—
|
—
|
—
|
921
|
|||||||||||||||||||||||
Stock-based
compensation
|
—
|
—
|
2,579
|
593
|
—
|
—
|
—
|
—
|
3,172
|
|||||||||||||||||||||||
Common
stock subject to put agreement
|
—
|
—
|
(161
|
)
|
—
|
—
|
—
|
—
|
—
|
(161
|
)
|
|||||||||||||||||||||
Purchase
of treasury stock for PSC settlement
|
—
|
—
|
(115
|
)
|
—
|
—
|
—
|
58
|
(1,341
|
)
|
(1,456
|
)
|
||||||||||||||||||||
Cost
to record fair market value of put for PSC
settlement
|
—
|
—
|
120
|
—
|
—
|
—
|
—
|
—
|
120
|
|||||||||||||||||||||||
Dividend
payable to stockholders
|
—
|
—
|
—
|
—
|
—
|
(4,744
|
)
|
—
|
—
|
(4,744
|
)
|
|||||||||||||||||||||
Dividend
paid to stockholders
|
—
|
—
|
—
|
—
|
—
|
(4,785
|
)
|
—
|
—
|
(4,785
|
)
|
|||||||||||||||||||||
Change
in fair value of interest rate swaps
|
—
|
—
|
—
|
—
|
(8
|
)
|
—
|
—
|
—
|
(8
|
)
|
|||||||||||||||||||||
Net
income
|
—
|
—
|
—
|
—
|
—
|
38,106
|
—
|
—
|
38,106
|
|||||||||||||||||||||||
Translation
adjustment
|
—
|
—
|
—
|
—
|
(546
|
)
|
—
|
—
|
—
|
(546
|
)
|
|||||||||||||||||||||
Comprehensive
income
|
37,552
|
|||||||||||||||||||||||||||||||
Balance
at August 31, 2008
|
30,196
|
$
|
3
|
$
|
373,192
|
$
|
4,563
|
$
|
(12,897
|
)
|
$
|
(77,510
|
)
|
580
|
$
|
(12,845
|
)
|
$
|
274,506
|
|||||||||||||
Purchase
of treasury stock
|
—
|
—
|
—
|
—
|
—
|
—
|
69
|
(1,128
|
)
|
(1,128
|
)
|
|||||||||||||||||||||
Issuance
of restricted stock award
|
88
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
|||||||||||||||||||||||
Forfeiture
of restricted stock awards
|
(33
|
)
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
||||||||||||||||||||||
Exercise
of stock options
|
86
|
—
|
559
|
—
|
—
|
—
|
—
|
—
|
559
|
|||||||||||||||||||||||
Stock-based
compensation
|
—
|
—
|
3,298
|
(16
|
)
|
—
|
—
|
—
|
—
|
3,282
|
||||||||||||||||||||||
Common
stock subject to put agreement
|
—
|
—
|
161
|
—
|
—
|
—
|
—
|
161
|
||||||||||||||||||||||||
Purchase
of treasury stock for PSC settlement
|
—
|
—
|
—
|
—
|
—
|
—
|
7
|
(161
|
)
|
(161
|
)
|
|||||||||||||||||||||
Dividend
paid to stockholders
|
—
|
—
|
—
|
—
|
—
|
(14,807
|
)
|
—
|
—
|
(14,807
|
)
|
|||||||||||||||||||||
Change
in fair value of interest rate swaps, net of tax
|
—
|
—
|
—
|
—
|
(456
|
)
|
—
|
—
|
—
|
(456
|
)
|
|||||||||||||||||||||
Net
income
|
—
|
—
|
—
|
—
|
42,319
|
—
|
—
|
42,319
|
||||||||||||||||||||||||
Translation
adjustment
|
—
|
—
|
—
|
—
|
(3,877
|
)
|
—
|
—
|
—
|
(3,877
|
)
|
|||||||||||||||||||||
Comprehensive
income
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
37,986
|
|||||||||||||||||||||||
Balance
at August 31, 2009
|
30,337
|
$ |
3
|
$ |
377,210
|
$ |
4,547
|
$ |
(17,230
|
)
|
$ |
(49,998
|
)
|
656
|
$ |
(14,134
|
)
|
$ |
300,398
|
See
accompanying notes.
22
PRICESMART,
INC.
(amounts
in thousands)
Years
Ended August 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Operating
Activities:
|
||||||||||||
Income
from continuing operations
|
$
|
42,347
|
$
|
38,210
|
$
|
12,783
|
||||||
Adjustments
to reconcile income from continuing operations to net cash provided by
operating activities:
|
||||||||||||
Depreciation
and amortization
|
13,898
|
11,370
|
9,449
|
|||||||||
Allowance
for doubtful accounts
|
(1
|
)
|
625
|
(188
|
)
|
|||||||
Asset
impairment and closure costs
|
74
|
1,054
|
1,550
|
|||||||||
Gain
on Guatemala Plaza lease buyout
|
(651
|
)
|
—
|
—
|
||||||||
Cash
paid for Guatemala Plaza lease buyout
|
(3,100
|
)
|
—
|
—
|
||||||||
Provision
for settlement of litigation
|
—
|
—
|
5,500
|
|||||||||
Loss
on sale of property and equipment
|
509
|
217
|
323
|
|||||||||
Release
from escrow account due to settlement of litigation
|
256
|
—
|
—
|
|||||||||
Deferred
income taxes
|
(1,805
|
)
|
(1,898
|
)
|
(578
|
)
|
||||||
Minority
interest
|
265
|
494
|
476
|
|||||||||
Excess
tax deficiency (benefit) on stock-based compensation
|
16
|
(593
|
)
|
(485
|
)
|
|||||||
Equity
in losses of unconsolidated affiliates, including impairment charges of
$2.6 million in 2007
|
21
|
—
|
2,903
|
|||||||||
Stock-based
compensation
|
3,298
|
2,579
|
1,767
|
|||||||||
Change
in operating assets and liabilities:
|
||||||||||||
Change
in accounts receivable, prepaid, other current assets, accrued salaries,
deferred membership and other accruals
|
(3,422
|
)
|
(6,140
|
)
|
4,143
|
|||||||
Merchandise
inventories
|
(1,947
|
)
|
(17,915
|
)
|
(18,547
|
)
|
||||||
Accounts
payable and accounts payable to and advances received from related
party
|
5,293
|
15,487
|
14,733
|
|||||||||
Net
cash provided by continuing
operating activities
|
55,051
|
43,490
|
33,829
|
|||||||||
Net
cash provided by discontinued operating activities
|
307
|
107
|
196
|
|||||||||
Net
cash provided by operating activities
|
55,358
|
43,597
|
34,025
|
|||||||||
Investing
Activities:
|
||||||||||||
Additions
to property and equipment
|
(49,347
|
)
|
(23,571
|
)
|
(30,913
|
)
|
||||||
Deposits
to escrow account for land acquisitions (including settlement of
litigation)
|
—
|
(660
|
)
|
—
|
||||||||
Proceeds
from disposal of property and equipment
|
181
|
3,071
|
60
|
|||||||||
Collection
(issuance) of note receivable from sale of closed warehouse club in the
Dominican Republic
|
2,104
|
121
|
(2,207
|
)
|
||||||||
Acquisition
of business, net of cash acquired
|
—
|
|
(11,913
|
)
|
—
|
|||||||
Proceeds
from sale of unconsolidated affiliate
|
—
|
2,000
|
—
|
|||||||||
Purchase
of Nicaragua minority interest
|
—
|
(10,200
|
)
|
—
|
||||||||
Purchase
of Aruba minority interest
|
—
|
(300
|
)
|
—
|
||||||||
Purchase
of interest in Costa Rica joint venture
|
(2,637
|
)
|
—
|
—
|
||||||||
Capital
contribution to Costa Rica joint venture
|
(377
|
)
|
—
|
—
|
||||||||
Purchase
of interest in Panama joint venture
|
(4,616
|
)
|
—
|
—
|
||||||||
Capital
contribution to Panama joint venture
|
(50
|
)
|
—
|
—
|
||||||||
Net
cash used in continuing investing activities
|
(54,742
|
)
|
(41,452
|
)
|
(33,060
|
)
|
||||||
Net
cash (used in) provided by discontinued investing
activities
|
(9
|
)
|
48
|
161
|
||||||||
Net
cash flows used in investing activities
|
(54,751
|
)
|
(41,404
|
)
|
(32,899
|
)
|
||||||
Financing
Activities:
|
||||||||||||
Proceeds
from bank borrowings
|
40,119
|
25,813
|
14,422
|
|||||||||
Repayment
of bank borrowings
|
(23,926
|
)
|
(9,488
|
)
|
(20,528
|
)
|
||||||
Cash
dividend payments
|
(19,551
|
)
|
(9,463
|
)
|
(4,659
|
)
|
||||||
Release
of (addition to) restricted cash
|
—
|
7,974
|
(341
|
)
|
||||||||
Excess
tax (deficiency) benefit on stock-based compensation
|
(16
|
)
|
593
|
485
|
||||||||
Purchase
of treasury stock - excluding PSC settlement
|
(1,128
|
)
|
(1,429
|
)
|
(609
|
)
|
||||||
Purchase
of treasury stock- PSC settlement
|
(161
|
)
|
(1,341
|
)
|
—
|
|||||||
Proceeds
from exercise of stock options
|
539
|
921
|
3,949
|
|||||||||
Net
cash provided by (used in) financing activities
|
(4,124
|
) |
13,580
|
(7,281
|
)
|
|||||||
Effect
of exchange rate changes on cash and cash
equivalents
|
(411
|
)
|
283
|
(1,775
|
)
|
|||||||
Net
(decrease) increase in cash and cash equivalents
|
(3,928
|
)
|
16,056
|
(7,930
|
)
|
|||||||
Cash
and cash equivalents at beginning of year
|
48,121
|
32,065
|
39,995
|
|||||||||
Cash
and cash equivalents at end of year
|
$
|
44,193
|
$
|
48,121
|
$
|
32,065
|
23
PRICESMART,
INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS—(Continued)
(amounts
in thousands)
Years
Ended August 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Supplemental
disclosure of cash flow information:
|
||||||||||||
Cash
paid during the period for:
|
||||||||||||
Interest,
net of amounts capitalized
|
$
|
1,579
|
$
|
485
|
$
|
1,041
|
||||||
Income
taxes
|
$
|
13,009
|
$
|
12,918
|
$
|
9,927
|
||||||
PSC
settlement expenses
|
$
|
—
|
$
|
6,050
|
$
|
—
|
||||||
Acquisition
of land and permanent easement related to PSC
settlement
|
$
|
—
|
$
|
1,125
|
$
|
—
|
||||||
Dividends
declared but not paid
|
$
|
—
|
$
|
4,744
|
$
|
4,678
|
24
PRICESMART,
INC.
NOTE
1 – COMPANY OVERVIEW AND BASIS OF PRESENTATION
PriceSmart,
Inc.’s (“PriceSmart” or the “Company”) business consists primarily of
international membership shopping warehouse clubs similar to, but smaller in
size than, warehouse clubs in the United States. As of August 31, 2009, the
Company had 26 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 is one
warehouse club in operation in Saipan, Micronesia licensed to and operated by
local business people as of August 31, 2009. The Company primarily
operates in three segments based on geographic area.
Basis of Presentation - The
consolidated financial statements have been prepared in accordance with U.S.
generally accepted accounting principles. The 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 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.
The Company also made certain
reclassifications between receivables, net of allowance for doubtful accounts
and prepaid expenses and other current assets on the consolidated balance sheet
as of August 31, 2008. These reclassifications resulted in a $981,000 decrease
to receivables, net of allowance for doubtful accounts and a $981,000 increase
to prepaid expenses and other current assets. 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 the
reclassification of the value added taxes to be consistent with the presentation
in all locations.
In May 2009 the
Financial Accounting Standards Board (FASB) issued SFAS No. 165,
“Subsequent Events,” ("SFAS 165") which establishes general accounting standards
and disclosure for subsequent events. We adopted SFAS 165 during the fourth
quarter of fiscal 2009. In accordance with SFAS 165, we have
evaluated subsequent events through the date and time these financial statements
were issued on November 9,
2009.
25
PRICESMART,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation –
The consolidated financial statements of the Company included herein include the
assets, liabilities and results of operations of the Company's majority and
wholly-owned subsidiaries as listed below. All significant intercompany accounts
and transactions have been eliminated in consolidation. The table below shows
the Company's percentage ownership of, and basis of presentation for, each
subsidiary as of August 31, 2009.
Subsidiary
|
Countries
|
Ownership
|
Basis
of Presentation
|
||||
PriceSmart,
Aruba
|
Aruba
|
100.0%
|
Consolidated
|
||||
PriceSmart,
Barbados
|
Barbados
|
100.0%
|
Consolidated
|
||||
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
(1)
|
||||
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
(2)
|
||||
Price
Plaza Alajuela PPA, S.A.
|
Costa
Rica
|
50.0%
|
Equity
(2)
|
||||
Newco2
|
Costa
Rica
|
50.0%
|
Equity
(2)
|
(1)
|
Entity
is treated as discontinued operations in the consolidated financial
statements.
|
(2)
|
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. 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.
Variable Interest
Entities – The
Company reviews and determines annually whether any of its investments in joint
ventures are Variable Interest Entities (“VIE”), and whether it must consolidate
a VIE and/or disclose information about its involvement in a VIE. The Company has determined that
through August 31, 2009 the joint ventures for GolfPark Plaza, Price Plaza
Alajuela and Newco2 are VIE's. The Company has determined that it is not
the principle beneficiary of the VIE's 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.
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 $732,000.
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 tenants. 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.
26
PRICESMART,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
In some
locations, leasehold improvements are amortized over a period longer than the
initial lease term as management believes it is reasonably assured that the
renewal option in the underlying lease will be exercised and an economic penalty
would be suffered if the election were 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 a 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 were 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 the amended 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. 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 has adopted 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 consolidated balance sheets include items such as goodwill and
long-lived assets that are measured at fair value after taking into account
impairment charges in
the second step of a goodwill impairment test if any are deemed
necessary. Also included as nonfinancial nonrecurring assets
and liabilities 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 measures fair value of nonfinancial
assets and nonfinancial liabilities when triggering events occur in accordance
with the provisions of SFAS No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets” ("SFAS 144"), and SFAS No. 142, "Goodwill and
Other Intangible Assets" ("SFAS 142"), for business units and for goodwill
impairment and if a business combination or other new basis event has
occurred.
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 funds,
whose value is based on quoted market prices. The Company was not
required to revalue any assets or liabilities utilizing Level 1 inputs
at the balance sheet dates. The amount invested in money market mutual funds and
recorded as cash equivalents as of August 31, 2009 and 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.
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 $37.5 million at August 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.
27
PRICESMART,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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, “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 expenses 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, repairs and
maintenance, rent expense, and building and equipment depreciation at its
distribution facilities.
Vendor
consideration consists primarily of volume rebates and prompt payment discounts.
Volume rebates are generally linked to pre-established purchase levels and are
recorded as a reduction of cost of goods sold when the achievement of these
levels is confirmed by the vendor in writing or upon receipt of funds, whichever
is earlier. On a quarterly basis, the Company calculates the amount of rebates
recorded in cost of goods sold that relates to inventory on hand and this amount
is recorded as a reduction to inventory, if significant. Prompt payment
discounts are taken in substantially all cases and, therefore, are applied
directly to reduce the acquisition cost of the related inventory, with the
resulting impact to cost of goods sold when the inventory is
sold.
Selling, General and
Administrative – Selling, general
and administrative costs are comprised primarily of expenses associated with
warehouse operations. Warehouse operations include the operating
costs of the Company's warehouse clubs, including all payroll and related costs,
utilities, consumable supplies, repair and maintenance, rent expense, building
and equipment depreciation, and bank and credit card processing fees. Also
included in selling, general and administrative expenses are the payroll and
related costs for the Company's U.S. and regional purchasing and management
centers.
Pre-Opening Costs – The
Company expenses pre-opening costs (the costs of start-up activities, including
organization cost and rent) as incurred.
Closure Costs – The Company
records the costs of closing warehouse clubs as follows: severance costs are
accrued in accordance with SFAS No. 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 cost gain recorded in fiscal year 2009 is
related to these two warehouse clubs. In Guatemala the Company
continued to sublease the property and building for the closed Guatemala
warehouse club and continued to record expenses and rental income related to the
location in fiscal year 2009. The Company finalized an agreement in
the fourth quarter of fiscal year 2009 to buy out its obligations for this
lease. The Company recorded a gain of approximately $651,000 from
this transaction. The net closure costs gain reported for the closed
Guatemala location in fiscal year 2009 was approximately $274,000. In
the Dominican Republic, the Company recorded approximately $144,000 in interest
income related to the note receivable recorded for the sale of the land and
building in fiscal year 2007. This note receivable was paid in full
during the third quarter of fiscal year 2009. 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.
28
PRICESMART,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Common Stock Put Agreement –
The Company recorded in fiscal year 2008 a liability for a common stock put
agreement (see Note 16—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 weighted-average rates of exchange in effect during the period.
The corresponding translation gains and losses are recorded as a component of
accumulated other comprehensive income or loss.
Monetary
assets and liabilities in currencies other than the functional currency of the
respective entity are revalued to the functional currency using the exchange
rate on the balance sheet date. These foreign exchange transaction gains
(losses), including repatriation of funds are included as a part of the costs of
goods sold in the consolidated statements of income. For fiscal years
2009, 2008 and 2007, these amounts were approximately ($1.5 million), $1.6
million and $5,000, respectively.
Stock-Based Compensation – As of August 31, 2009, the Company
had four stock-based employee compensation plans which it accounts for in
accordance with SFAS No. 123(R), “Share-Based Payment” ("SFAS 123(R)").
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 statements 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 Issue No. 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 BASB; 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.
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 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
August 31, 2009 and 2008, the Company had $13.9 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.
29
PRICESMART,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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 limitations 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 August 31, 2009 and 2008, the Company
had recorded $0 and $933,000, respectively, 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
$254,000.
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 twelve months ended August 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 $2.2 million. The lapse of
statutes of limitations in the twelve-month period ending August 31, 2010 would
result in a reduction to long-term income taxes payable totaling
$821,000.
The
Company’s continuing practice is to recognize interest and/or penalties related
to income tax matters in income tax expense and in the long-term income
taxes payable caption on the consolidated balance sheets. As of August 31,
2009 and 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 carryforwards, 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 2002.
Lapses in applicable statutes of limitations will result in a
beneficial impact on the effective tax rate.
Recent Accounting
Pronouncements – In June 2009, the Financial Accounting Standards
Board (“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 Generally Accepted Accounting Principles (“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 June
2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No.
46(R)” (“FIN 46(R)”), “Consolidation of Variable Interest Entities - An
Interpretation of ARB No. 51” (“SFAS 167”). This statement amends FIN 46(R) to
replace the quantitative-based risks and rewards calculation for determining
which enterprise, if any, has a controlling financial interest in a variable
interest entity and requires on-going 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
SFAS 167 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.
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 was required to adopt SFAS
165 prospectively to both interim and annual financial periods ending after
June 15, 2009. The adoption of the standard did not have a
material impact on its consolidated financial statements.
In
April 2009, four 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 157-2,
“Effective Date of FASB Statement No. 157”; 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 adopted these
FSPs in the fourth quarter of fiscal year 2009. The adoption
of these FSPs did not 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, “Equity Method Investment Accounting Considerations”
("EITF 08-06"). 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.
30
PRICESMART,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
In June
2008, the FASB issued FSP EITF 03-6-1, “Determining Whether Instruments Granted
in Share-Based Payment Transactions Are Participating Securities” ("FSP EITF
03-6-1"). This FSP addresses 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 described
in SFAS No. 128, “Earnings per Share.” The Company is
required to adopt FSP EITF 03-6-1 effective for financial statements issued for
fiscal years beginning after December 15, 2008, and interim periods within those
years. The Company will adopt this FSP beginning with the
quarter ending November 30, 2009, and if applicable, all prior-period EPS data
presented will be adjusted retrospectively to conform with the provisions of
this FSP. The Company is currently evaluating the impact, if any, this
issue will have on its consolidated financial statements.
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 is intended to improve 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” ("SFAS 141"), 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, “Accounting for Income Tax Benefits of Dividends on
Share-Based Payment Award” ("EITF 06-11"). EITF 06-11 requires companies
to recognize the tax benefits of dividends on unvested share-based payments in
equity (increasing SFAS 123(R)’s “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.
NOTE
3 – DISCONTINUED OPERATIONS
In
accordance with the provisions of SFAS 144, “Accounting for the Impairment
or Disposal of Long-Lived Assets,” the accompanying consolidated financial
statements reflect the results of operations and financial position of the
Company’s activities in the Philippines and Guam as discontinued
operations. 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 until 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.
31
PRICESMART,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The
assets and liabilities of the discontinued operations are presented in the
consolidated balance sheets under the captions “Assets of discontinued
operations” and “Liabilities of discontinued operations.” The underlying assets
and liabilities of the discontinued operations for the periods presented are as
follows (in thousands):
August
31,
|
||||||||
2009
|
2008
|
|||||||
Cash
and cash equivalents
|
$
|
28
|
$
|
284
|
||||
Accounts
receivable, net
|
223
|
116
|
||||||
Prepaid
expenses and other current assets
|
46
|
7
|
||||||
Other
assets, non-current
|
603
|
840
|
||||||
Assets
of discontinued operations
|
$
|
900
|
$
|
1,247
|
||||
Other
accrued expenses
|
$
|
299
|
$
|
277
|
||||
Liabilities
of discontinued operations
|
$
|
299
|
$
|
277
|
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 the discontinued operations of
each period presented, in thousands.
Years
Ended August 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Net
warehouse club sales
|
$
|
—
|
$
|
—
|
$
|
—
|
||||||
Pre-tax
income (loss) from discontinued operations
|
(28
|
)
|
(104
|
)
|
143
|
|||||||
Income
tax (provision) benefit
|
—
|
—
|
—
|
|||||||||
Income
(loss) from discontinued operations
|
$
|
(28
|
)
|
$
|
(104
|
)
|
$
|
143
|
The
pre-tax loss from discontinued operations for the twelve months ended
August 31, 2009 of $28,000 is the net result of the subleasing activity in
Guam.
NOTE
4 – PROPERTY AND EQUIPMENT, NET
Property
and equipment, net consisted of the following (in thousands):
August 31,
|
||||||||
2009
|
2008
|
|||||||
Land
|
$
|
74,506
|
$
|
63,582
|
||||
Building
and improvements
|
139,639
|
130,237
|
||||||
Fixtures
and equipment
|
80,680
|
75,137
|
||||||
Construction
in progress
|
16,253
|
2,466
|
||||||
Total
property and equipment, historical cost
|
311,078
|
271,422
|
||||||
Less:
accumulated depreciation
|
(79,280
|
)
|
(71,846
|
)
|
||||
Property
and equipment, net
|
$
|
231,798
|
$
|
199,576
|
Building
and improvements include net capitalized interest of $1.4 million and $1.3
million for the fiscal years ended August 31, 2009 and 2008,
respectively. Construction in progress includes capitalized interest of $595,000
for the year ended August 31, 2009. The Company did not record any
capitalized interest to construction in progress during fiscal year 2008. For
the twelve month period ended August 31, 2009, the Company recorded
approximately $2.9 million in translation adjustments that reduced the carrying
value of the total property and equipment.
32
PRICESMART,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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 the spring of 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 open in the spring of 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. 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
|
The
Company continued with the development of new warehouse club sites, the
expansion of existing warehouse clubs and warehouse distribution center
expansions in Central America, the Caribbean and the
United States. Construction costs within these segments for the
year ended August 31, 2009 were approximately $12.5 million, $12.7 million and
$300,000, 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 expansions in Central
America, the Caribbean and the United States. The
Company acquired fixtures and equipment for approximately $7.0 million,
$4.1 million and $845,000, respectively, in these segments for the year ended
August 31, 2009. The Company acquired approximately $1.4 million
of software and computer hardware during 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 was recorded within
Barbados as follows (in thousands):
Land
|
$
|
4,965
|
||
Building
and improvements
|
6,948
|
|||
Fixtures
and equipment
|
85
|
|||
Total
property and equipment
|
$
|
11,998
|
Depreciation
and amortization expense for fiscal years 2009, 2008 and 2007 was approximately
$13.9 million, $11.4 million and $9.5 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):
Years
Ended August 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Net
income:
|
$
|
42,319
|
$
|
38,106
|
$
|
12,926
|
||||||
Determination
of shares:
|
||||||||||||
Average
common shares outstanding
|
28,959
|
28,860
|
28,534
|
|||||||||
Assumed
conversion of:
|
||||||||||||
Stock
options
|
98
|
136
|
135
|
|||||||||
Restricted
stock grants(1)
|
124
|
214
|
574
|
|||||||||
Diluted
average common shares outstanding
|
29,181
|
29,210
|
29,243
|
|||||||||
Basic
income per share
|
$
|
1.46
|
$
|
1.32
|
$
|
0.45
|
||||||
Diluted
income per share
|
$
|
1.45
|
$
|
1.30
|
$
|
0.44
|
(1)
|
Restricted
stock was issued to certain employees in
the twelve-month periods ended August 31, 2009 and 2008. The
dilutive effect of the restricted stock issued is approximately 2,364
shares and 4,202 shares for the twelve-month periods ended August 31, 2009
and 2008, respectively.
|
33
PRICESMART,
INC.
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 was paid 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 of approximately $16.8
million and approximately $12.9 million and unrealized losses on
interest rate swaps (net of tax) of approximately $464,000 and $8,000 as of
August 31, 2009 and 2008, respectively. The unfavorable translation
adjustments during the twelve months ended August 31, 2009 and August 31, 2008
were primarily due to weaker foreign currencies.
Retained
Earnings Not Available for Distribution
As of
August 31, 2009 and 2008, retained earnings include legal reserves of
approximately $2.2 million and $1.0 million, respectively, at various
subsidiaries, which cannot be distributed as dividends to PriceSmart,
Inc. according to applicable statutory regulations.
NOTE
7 – RETIREMENT PLAN
PriceSmart
offers a defined contribution retirement and 401(k) plan to its U.S. employees,
which allows employees to enroll in the plan after 90 days of employment.
Enrollment in these plans begins on the first of the month following the
employee's eligibility. The Company makes nondiscretionary contributions to the
401(k) plan equal to 100% of the participant's contribution up to an annual
maximum of 4% of base compensation that a participant contributes to the plan.
Employer contributions to the 401(k) plan for its U.S. employees were $486,000,
$445,000, and $396,000 during fiscal years 2009, 2008, and 2007, respectively.
The Company has defined contribution plans for its employees in Panama, Costa
Rica, Trinidad, and Jamaica and contributes a percentage of the respective
employees' salary. Amounts contributed under these plans were $413,000,
$354,000 and $317,000 during fiscal years 2009, 2008 and 2007,
respectively.
NOTE
8 – STOCK OPTION AND EQUITY PARTICIPATION PLANS
In August
1997, the Company adopted the 1997 Stock Option Plan of PriceSmart, Inc. (the
“1997 Plan”) for the benefit of its eligible employees, consultants and
independent directors. Under the 1997 Plan, 700,000 shares of the Company's
common stock are authorized for issuance.
The
Compensation Committee of the Board of Directors administers the 1997 Plan with
respect to options granted to employees or consultants of the Company, and the
full Board of Directors administers the Plan with respect to director options.
Options issued under the 1997 Plan typically vest over five years and expire in
six years.
In July
1998, the Company adopted the 1998 Equity Participation Plan of PriceSmart, Inc.
(the “1998 Plan”) for the benefit of its eligible employees, consultants and
independent directors. The 1998 Plan authorizes 700,000 shares of the Company's
common stock for issuance. Options issued under the 1998 Plan typically vest
over five years and expire in six years. The 1998 plan also allows restricted
stock awards, which typically vest over five years.
In
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.
34
PRICESMART,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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.
The
following table summarizes the components of the stock-based compensation
expense for the 12 months ended August 31, 2009, 2008 and 2007 (in
thousands), which are included in general and administrative expense and
warehouse expenses in the consolidated statements of income:
Years
Ended August 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Vesting
of options granted to employees and directors
|
$
|
60
|
$
|
126
|
$
|
318
|
||||||
Vesting
of restricted stock grants
|
3,165
|
2,453
|
1,196
|
|||||||||
Vesting
of restricted stock units
|
93
|
—
|
—
|
|||||||||
Option
re-pricing
|
—
|
—
|
253
|
|||||||||
Stock-based
compensation expense
|
$
|
3,318
|
$
|
2,579
|
$
|
1,767
|
The
following table summarizes stock options activity relating to the 1997 Plan,
1998 Plan, 2001 amended Plan and 2002 Plan as follows:
Shares
|
Weighted Average
Exercise Price
|
|||||
Shares
subject to outstanding options at August 31,
2006
|
696,950
|
$
|
13.66
|
|||
Granted
|
9,000
|
16.00
|
||||
Exercised
|
(278,008
|
)
|
14.31
|
|||
Forfeited
or expired
|
(53,127
|
)
|
19.93
|
|||
Shares
subject to outstanding options at August 31,
2007
|
374,815
|
$
|
12.35
|
|||
Granted
|
8,000
|
23.61
|
||||
Exercised
|
(61,685
|
)
|
14.93
|
|||
Forfeited
or expired
|
(41,000
|
)
|
32.03
|
|||
Shares
subject to outstanding options at August 31,
2008
|
280,130
|
$
|
9.23
|
|||
Granted
|
5,000
|
16.34
|
||||
Exercised
|
(85,647
|
)
|
6.29
|
|||
Forfeited
or expired
|
(19,485
|
)
|
16.60
|
|||
Shares
subject to outstanding options at August 31,
2009
|
179,998
|
$
|
10.02
|
As of
August 31, 2009, options to purchase 179,998 shares were outstanding and
637,298 shares were available for future grants. The following table
summarizes information about stock options outstanding and options exercisable
as of August 31, 2009:
Range
of
Exercise
Prices
|
Outstanding as
of
August 31, 2009
|
Weighted-Average
Remaining
Contractual
Life
(in
years)
|
Weighted-Average
Exercise
Price on Options Outstanding
|
Options
Exercisable as
of August
31, 2009
|
Weighted-Average
Exercise
Price
on
Options
Exercisable
as of
August
31, 2009
|
|||||||||||||||||
$
|
6.13
– $8.90
|
144,998
|
0.63
|
$
|
6.32
|
142,998
|
$
|
6.30
|
||||||||||||||
8.91
– 20.00
|
13,000
|
4.11
|
16.15
|
3,200
|
16.04
|
|||||||||||||||||
20.01
– 39.00
|
22,000
|
2.33
|
30.77
|
15,600
|
33.70
|
|||||||||||||||||
$
|
6.13
– $39.00
|
179,998
|
1.09
|
$
|
10.02
|
161,798
|
$
|
9.13
|
35
PRICESMART,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The
aggregate intrinsic value and weighted average remaining contractual term of
options exercisable at August 31, 2009 was approximately $1.5 million and 0.74
years, respectively. The aggregate intrinsic value and weighted
average remaining contractual term of options outstanding at August 31, 2009 was
approximately $1.5 million and 1.1 years, respectively.
The fair
value of each option grant is estimated on the date of grant using the
“Black-Scholes” option-pricing model with the following weighted average
assumptions used for grants in fiscal years 2009, 2008 and 2007:
Years
Ended August 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Risk
free interest rate
|
2.02
|
%
|
3.25
|
%
|
4.62
|
%
|
||||||
Expected
life
|
5 years
|
5 years
|
5 years
|
|||||||||
Expected
volatility
|
53.55
|
%
|
47.74
|
%
|
46.18
|
%
|
||||||
Expected
dividend yield
|
1.8
|
%
|
1.2
|
%
|
0
|
%(1)
|
(1)
|
No
new stock options were issued in fiscal year 2007 after dividends were
declared in the second quarter of fiscal year
2007.
|
The
weighted-average per share fair value of the stock options granted during 2009,
2008, and 2007 was $6.78, $10.76, and $7.46 respectively.
The
Company began issuing Restricted Stock Grants in fiscal year 2006 and Restricted
Stock Units in fiscal year 2008. The Restricted Stock Grants and Units vest over
a five year period and are forfeited if the employee or non-employee Director
leaves the Company before the vesting period is completed. Restricted Stock
Grants and Units activity for the three years ending August 31, 2009, 2008 and
2007 was as follows:
Grants
|
||||
Grants
outstanding at August 31, 2006
|
540,700
|
|||
Granted
|
164,050
|
|||
Cancelled
|
(31,080
|
)
|
||
Vested
|
(107,420
|
)
|
||
Grants
outstanding at August 31, 2007
|
566,250
|
|||
Granted
|
333,745
|
|||
Cancelled
|
(15,077
|
)
|
||
Vested
|
(136,058
|
)
|
||
Grants
outstanding at August 31, 2008
|
748,860
|
|||
Granted
|
104,510
|
|||
Cancelled
|
(32,836
|
)
|
||
Vested
|
(202,284
|
)
|
||
Grants
outstanding at August 31, 2009
|
618,250
|
The
remaining unrecognized compensation cost related to unvested
options, restricted stock grants and restricted stock units at August
31, 2009 and 2008 was approximately $7.8 million and $9.7 million,
respectively, and the weighted-average period of time over which this cost
will be recognized is 3.2 years and 3.9 years, respectively. The excess
tax benefit (deficiency) on stock-based compensation related to
options, restricted stock grants and restricted stock units for the twelve
months ended August 31, 2009 and 2008 was approximately ($16,000) and $593,000,
respectively.
Cash
proceeds from stock options exercised and the intrinsic value related to total
stock options exercised during the fiscal years ended August 31, 2009, 2008 and
2007 are summarized in the following table (in thousands):
Years
Ended August 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Proceeds
from stock options exercised
|
$
|
559
|
$
|
921
|
$
|
3,949
|
||||||
Intrinsic
value of stock options exercised
|
$ |
917
|
$ |
854
|
$ |
2,500
|
In fiscal
years 2009 and 2008, the Company repurchased 69,062 and 46,053 shares of common
stock, respectively, 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. The Company expects to continue this
practice for fiscal year 2010.
36
PRICESMART,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
NOTE
9 – ASSET IMPAIRMENT AND CLOSURE COSTS FOR CONTINUING OPERATIONS
During
fiscal year 2003, the Company closed two warehouse clubs, one each in the
Dominican Republic and Guatemala. The decision to close the warehouse clubs
resulted from the determination that the locations were not conducive to the
successful operation of a PriceSmart warehouse club.
During
fiscal year 2007, asset impairment and closure costs were $1.6 million, which
were primarily due to the closed Dominican Republic location and the original
San Pedro Sula, Honduras location. In fiscal year 2007, the Company sold the
East Side Santo Domingo, Dominican Republic location for the approximate book
value of $2.5 million. As part of the sale, the Company assumed notes receivable
for a total of approximately $2.2 million. However, a net loss on this disposal
of $360,000 was recorded to reflect the broker commission and the imputed
interest on the notes receivable, which was to be collected over a 24
month period, beginning four months after the sale date. The short and long term
carrying value of the notes receivable on the balance sheet was $2.2 million as
of August 31, 2007. During the fourth quarter of fiscal year 2007,
the Company recorded a reduction of $65,000 to closure costs for interest earned
on this note. In fiscal year 2009, the Company collected the full outstanding
balance of this note receivable. Also during fiscal year 2007, the Company
recorded $897,000 of asset impairment charges to reduce the San Pedro Sula
assets to the expected market value. Additional closure costs for this location
of $128,000 were recorded in fiscal year 2007. Lastly, the Company recorded
additional closure costs of $210,000 for the closed warehouse in
Guatemala.
During
fiscal year 2008, asset impairment and closure costs were approximately $1.1
million, which were primarily due to the closed warehouse clubs and the disposal
of bulk packaging equipment. Closure costs incurred in fiscal year
2008 consisted of $810,000 in additional closure costs for the closed warehouse
club in Guatemala, which consisted of $605,000 of additional lease obligations
due to a rent increase and $205,000 of other associated costs. The Company also
recorded a $127,000 reduction to closure costs for interest earned on the note
issued for the sale of the East Side Santo Domingo, Dominican Republic location
and recorded $10,000 of additional closure costs for the original warehouse club
in San Pedro Sula, Honduras which was vacated and relocated to a new site in
fiscal year 2006. In addition, in the fourth quarter of fiscal year 2008, the
Company recorded an impairment charge of approximately $449,000 with respect to
bulk packaging equipment that was unusable. The Company fully impaired the total
value of the bulk equipment that was unusable.
During
fiscal year 2009, asset impairment and closure costs (gains) were approximately
($249,000), which were primarily due to the gain on the Guatemala Plaza
lease buy out and impairment of discontinued equipment. The
Company recorded closure cost (gains) of approximately ($418,000) in fiscal year
2009. These closure costs (gains) consisted of ($651,000) to record a gain for
the lease buy out of Guatemala plaza, $201,000 of additional lease obligations
due to a rent increase and $176,000 of other associated costs. The Company also
recorded ($144,000) in closure cost gains for interest income related to the
note issued for the sale of the East Side Santo Domingo, Dominican Republic
location. The note was paid in full during the third quarter of fiscal year
2009. The Company recorded approximately $169,000 in impairment costs for the
impairment of POS hardware, slip sheets, and bulk packaging
equipment.
A
reconciliation of the movements in the charges and related liabilities derived
from the closed warehouse clubs in 2007, 2008 and 2009 is as follows (in
thousands):
Liability
as of August 31,
2006
|
Charged
to
Expense
|
Cash
Paid
|
Non-cash
Amounts
|
Liability
as of August 31,
2007
|
Charged
to
Expense
|
Cash
Paid
|
Non-cash
Amounts
|
Liability
as of August 31,
2008
|
Charged
to
Expense
|
Cash
Paid
|
Non-cash
Amounts
|
Liability
as of August 31,
2009
|
|||||||||||||||||||||||||||||||||||||||||||
Lease
Obligations
|
$ | 3,466 | $ | — | $ | (240 | ) | $ | — | $ | 3,226 | (1) | $ | 605 | (2) | $ | (154 | ) | $ | — | $ | 3,677 | (3) | $ | 39 | $ | (3,716 | ) | $ | — | $ | — | (4) | ||||||||||||||||||||||
Asset
impairment
|
— | 897 | — | (897 | ) | — | 449 | — | (449 | ) | — | 169 | — | (169 | ) | — | |||||||||||||||||||||||||||||||||||||||
Sale
of land & building
|
— | 295 | — | (295 | ) | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
Other
associated costs
|
36 | 358 | (358 | ) | (36 | ) | — | 88 | (88 | ) | — | — | (457 | ) | 457 | — | — | ||||||||||||||||||||||||||||||||||||||
Total
|
$ | 3,502 | $ | 1,550 | $ | (598 | ) | $ | (1,228 | ) | $ | 3,226 | $ | 1,142 | $ | (242 | ) | $ | (449 | ) | $ | 3,677 | $ | (249 | ) | $ | (3,259 | ) | $ | (169 | ) | $ | — |
(1)
|
Amount
includes $3.1 million of Accrued closure costs and $154,000 of short-term
lease obligations (included within Other accrued expenses) on the
Consolidated Balance Sheet as of August 31, 2007.
|
(2)
|
Amount
of additional lease obligations due to increase in rent for the closed
warehouse club in Guatemala.
|
(3)
|
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.
|
(4) |
The Company finalized an agreement on June 3, 2009 to transfer all rights and obligations as landlord for the property where the former Guatemala Plaza warehouse club was located. The lease liability as of May 31, 2009 was approximately $3.8 million. Cash paid for lease buy out was $3.1 million and gain on the lease buy out was recorded for approximately $651,000. |
37
PRICESMART,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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. Income tax contingencies
are discussed within Note 11 – Income Taxes.
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
August 31, 2009 and 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 probable
additional tax associated with various non-income tax filing
positions. Due to these limitations future actual losses may exceed
projected losses, which could have a material adverse effect on the Company's
financial condition and results of operation.
See Note
19-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 Mexico. The
contracts for these distribution center services expire on December 31,
2011. Future minimum service commitments related to these
contracts for the periods less than one year and for one year to three
years are approximately $125,000 and $166,000, respectively.
38
PRICESMART,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
NOTE
11 – INCOME TAXES
Income
from continuing operations before provision for income taxes, loss of
unconsolidated affiliates and minority interest includes the following
components (in thousands):
Years
Ended August 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
United
States
|
$
|
4,539
|
$
|
5,680
|
$
|
10,003
|
||||||
Foreign
|
51,163
|
42,148
|
18,496
|
|||||||||
Income
from continuing operations before provision for income taxes, loss of
unconsolidated affiliates and minority interest
|
$
|
55,702
|
$
|
47,828
|
$
|
28,499
|
Significant
components of the income tax provision are as follows (in
thousands):
Years
Ended August 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Current:
|
||||||||||||
U.S.
|
$
|
(659
|
)
|
$
|
642
|
$
|
2,641
|
|||||
Foreign
|
14,650
|
14,818
|
10,759
|
|||||||||
Total
|
13,991
|
15,460
|
13,400
|
|||||||||
Deferred:
|
||||||||||||
U.S.
|
1,001
|
11,595
|
(13,292
|
)
|
||||||||
Foreign
|
951
|
751
|
2,002
|
|||||||||
Valuation
Allowance (U.S.)
|
—
|
(12,587
|
)
|
12,299
|
||||||||
Valuation
Allowance (Foreign)
|
(2,874
|
)
|
(6,095
|
)
|
(2,072
|
)
|
||||||
Total
|
(922
|
)
|
(6,336
|
)
|
(1,063
|
)
|
||||||
Provision
for income taxes
|
$
|
13,069
|
$
|
9,124
|
$
|
12,337
|
As of
August 31, 2009, the Company has elected to present the reconciliation of income
tax on a percentage basis as compared to a whole dollar basis. The
reconciliation of income tax computed at the Federal statutory tax rate to the
provision for income taxes is as follows (in percentages):
Years
Ended August 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Federal
tax provision at statutory rates
|
|
34.00
|
% |
|
34.00
|
% |
|
34.00
|
% | |||
State
taxes, net of Federal benefit
|
0.11
|
0.19
|
(2.26
|
)
|
||||||||
Differences
in foreign tax rates
|
(7.03
|
)
|
2.85
|
10.91
|
||||||||
Permanent
items and other adjustments
|
1.54
|
(4.80
|
)
|
(35.25
|
)(1)
|
|||||||
Increase
(decrease) in U.S valuation allowance
|
—
|
(0.42
|
)
|
43.15
|
(1) | |||||||
Increase
(decrease) in Foreign valuation allowance
|
(5.16
|
)
|
(12.74
|
)
|
(7.27
|
)
|
||||||
Provision for income
taxes
|
|
23.46
|
% |
|
19.08
|
% |
|
43.28
|
% |
(1)
|
For
the year ended August 31, 2007, the Company has presented (35.25)% as the
rate applicable to Permanent items and other adjustments. This rate
is the sum of (36.21)% attributable to capital losses recorded as of
August 31, 2007 and 0.96% for other minor permanent adjustments. In
addition, the Company has recorded 43.15% as an increase in the U.S.
Valuation allowance, which is primarily related to the capital losses
recorded as of August 31, 2007 for which the Company considers the
possibility of utilization before expiration to not be more likely than
not.
|
39
PRICESMART,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Significant
components of the Company’s deferred tax assets as of August 31, 2009 and
2008 are shown below (in thousands):
August 31,
|
||||||||
2009
|
2008
|
|||||||
Deferred
tax assets:
|
||||||||
U.S.
net operating loss carryforward
|
$
|
10,437
|
$
|
10,975
|
||||
U.S.
capital loss carryforward
|
7,442
|
7,442
|
||||||
U.S.
timing differences and AMT credits
|
(732
|
)
|
1,836
|
|||||
Deferred
compensation
|
1,258
|
1,599
|
||||||
Foreign
tax credits
|
5,859
|
3,808
|
||||||
Foreign
deferred taxes
|
15,414
|
16,352
|
||||||
Total
deferred tax assets
|
39,678
|
40,012
|
||||||
U.S.
valuation allowance
|
(8,350
|
)
|
(8,350
|
)
|
||||
Foreign
valuation allowance
|
(7,772
|
)
|
(10,285
|
)
|
||||
Net
deferred tax assets
|
$
|
23,556
|
$
|
23,377
|
As
of August 31, 2009 and 2008, the Company had deferred tax liabilities of
$1.2 million and $2.8 million, respectively, arising from timing differences in
certain subsidiaries.
During fiscal year 2009, the Company incurred current tax expense of $14.0 million and recognized a net deferred tax benefit of $922,000, resulting in a net tax expense of $13.1 million. During fiscal year 2008, the Company incurred current tax expense of $15.5 million and recognized a net deferred tax benefit of $6.4 million, resulting in net tax expense of $9.1 million. The effective tax rate for fiscal year 2009 is approximately 23.5%, as compared to the effective tax rate for fiscal year 2008 of approximately 19.1%. For the fiscal year 2009, the Company recorded non-recurring adjustments to tax expense including (i) $2.8 million for the reversal of previously recorded valuation allowances; (ii) $2.2 million for the reversal of income tax contingencies due to the expiration of the statute of limitations; and (iii) $1.1 million of other adjustments. For the fiscal year 2008, the Company recorded non-recurring adjustments to tax expense including (i) $3.5 million for the reversal of previously recorded valuation allowances; (ii) $1.7 million for the reversal of income tax contingencies due to the expiration of the statute of limitations; and (iii) $1.7 million related to the PSC settlement. The reversals of valuation allowances referred to above are a result of improvement in the operations of certain foreign subsidiaries.
For
fiscal year 2009, management concluded that a valuation allowance continues to
be necessary for certain U.S. and foreign deferred tax asset balances, primarily
because of the existence of significant negative objective evidence, such as the
fact that certain subsidiaries are in a cumulative loss position for the past
three years, and the determination that certain net operating loss carryforward
periods are not sufficient to realize the related deferred tax assets. The
Company factored into its analysis the inherent risk of forecasting revenue and
expenses over an extended period of time and also considered the potential risks
associated with its business. As a result of this review, the Company concluded
that a valuation allowance was required with respect to deferred tax assets for
certain subsidiaries, as well as certain U.S. deferred tax
assets. The Company also determined that valuation allowances
previously recorded should be reversed for certain of its subsidiaries,
primarily because of the existence of significant positive objective evidence,
such as specific tax planning, changes in operational efficiencies, and overall
market improvement. The reversal of previously recorded valuation
allowances resulted in a net tax benefit of $2.8 million for the fiscal year
ended August 31, 2009 and $3.5 million and $122,000 for fiscal years 2008 and
2007, respectively. Accordingly, the Company had net foreign deferred
tax assets of $7.6 million and $5.8 million as of August 31, 2009 and 2008,
respectively.
The
Company has federal and state tax net operating loss carryforwards, or NOLs, at
August 31, 2009 of approximately $36.0 million and $10.4 million,
respectively. The federal and state tax loss carryforwards generally expire
during periods ranging from 2011 through 2025, unless previously
utilized. Generally for U.S. federal and U.S. Virgin Islands tax
reporting purposes, the statute of limitations is three years from the date of
filing of the income tax return. If and to the extent the tax year
resulted in a taxable loss, the statute is extended to three years from the
filing date of the income tax return in which the carryforward tax loss was used
to offset taxable income in the carryforward year. In
calculating the tax provision, and assessing the likelihood that the Company
will be able to utilize the deferred tax assets, the Company considered and
weighed all of the evidence, both positive and negative, and both objective and
subjective. The Company factored in the inherent risk of forecasting revenue and
expenses over an extended period of time and considered the potential risks
associated with its business. Using the Company's U.S. income from continuing
operations and projections of future taxable income in the U.S., the Company was
able to determine that there was sufficient positive evidence to support the
conclusion that it was more likely than not that the Company would be able to
realize substantially all of its U.S. NOLs by generating taxable income during
the carryforward period. However, if the Company does not achieve its
projections of future taxable income in the U.S., the Company could be required
to take a charge to earnings related to the recoverability of these deferred tax
assets.
The
Company has determined that due to a deemed change of ownership (as defined in
Section 382 of the Internal Revenue Code) in October 2004, there will be
annual limitations in the amount of U.S. profits that may be offset by NOLs. The
NOLs generated prior to the deemed ownership change date, as well as a
significant portion of the losses generated as a result of the PSMT Philippines
disposal in August 2005, will be limited on an annual basis. The Company does
not believe this will impact the recoverability of these NOLs.
As of
August 31, 2009, the Company also has foreign tax credits that expire from
2015 through 2019 of $5.9 million. Due to their shorter recovery
period and limitations applicable under section 383 of the Internal Revenue code
regarding changes of ownership, the Company has valuation allowances of $1.0
million on U.S. foreign tax credit carryforwards generated before the date of
the deemed ownership change.
40
PRICESMART,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The
Company also has capital loss carryforwards that expire from 2010 through
2012 of $20.9 million, resulting from the PSMT Philippines and Mexico
disposals and the cessation of operations in Guam. As these capital losses can
only be used to offset capital gains and the Company has no current plans to be
able to use these capital losses, a full valuation allowance has been recorded
against them.
The
Company does not provide for income taxes which would be payable if
undistributed earnings of its foreign subsidiaries were remitted, because the
Company considers these earnings to be permanently reinvested. As of
August 31, 2009 and 2008, the undistributed earnings of these foreign
subsidiaries are approximately $62.0
million and $42.2 million, respectively. Upon distribution of those earnings in
the form of dividends or otherwise, the Company would be subject to both U.S.
income taxes and withholding taxes payable to the foreign countries, but would
also be able to offset unrecognized foreign tax credits. Determination of
the amount of unrecognized deferred U.S. income tax liability is not practicable
because of the complexities associated with its hypothetical
calculation.
The
Company was required to adopt and implement the provisions of FIN 48, which
requires the Company to accrue for the estimated additional amount of taxes for
uncertain income tax positions if the likelihood of sustaining the tax position
does not meet the more likely than not standard for recognition of tax
benefits.
A
reconciliation of the beginning and ending amount of unrecognized tax benefits
is as follows (in thousands):
August 31,
|
||||||||
2009
|
2008
|
|||||||
Balance
at beginning of fiscal year
|
$
|
15,236
|
$
|
16,156
|
||||
Additions
based on tax positions related to the current year
|
564
|
581
|
||||||
Reductions
for tax positions of prior years
|
(600
|
)
|
(93
|
)
|
||||
Settlements
|
(448
|
)
|
(49
|
)
|
||||
Expiration
of the statute of limitations for the assessment of
taxes
|
(901
|
)
|
(1,359
|
)
|
||||
Balance
at end of fiscal year
|
$
|
13,851
|
$
|
15,236
|
As of
August 31, 2009, the liability for income taxes associated with uncertain
tax benefits was $13.9 million and can be reduced by $11.9 million of tax
benefits associated with state income taxes and other timing adjustments which
are recorded as deferred income taxes pursuant to FIN 48. The net amount of $2.0
million, if recognized, would favorably affect the Company’s financial
statements and favorably affect the Company’s effective income tax
rate.
The
Company expects changes in the amount of unrecognized tax benefits in the next
12 months as the result of a lapse in various statutes of limitations. The
lapse of statutes of limitations in the 12-month period ending August 31, 2010
is expected to result in a reduction to long-term income taxes payable totaling
$821,000.
The
Company recognizes interest and/or penalties related to income tax matters in
income tax expense. As of August 31, 2009 and 2008, the Company had accrued
$1.4 million and $3.4 million, respectively, (before income tax benefit) for the
payment of interest and penalties.
The
Company has various appeals pending before tax courts in its subsidiaries’
jurisdictions. Any possible settlement could increase/(decrease)
earnings but is not expected to be significant. Audit outcomes and the timing of
audit settlements are subject to significant uncertainty.
The
Company or one of its subsidiaries files income tax returns in the US federal
jurisdiction and various state 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 through 2009
|
|
Florida(U.S.)
|
2000
through 2001 and 2005 through 2009
|
|
Aruba
|
2002
to the present
|
|
Barbados
|
2000
to the present
|
|
Costa
Rica
|
2006
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
|
2006
to the present
|
|
Trinidad
|
2003
to the present
|
|
U.S.
Virgin Islands
|
2001
to the present
|
41
PRICESMART,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Generally for U.S. federal and U.S. Virgin Islands tax reporting
purposes, the statute of limitations is three years from the date of filing of
the income tax return. If and to the extent the tax year resulted in
a taxable loss, the statute is extended to three years from the filing date of
the income tax return in which the carryforward tax loss was used to offset
taxable income in the carryforward year. Given the historical losses
in these jurisdictions and the Section 382 change in control limitations on the
use of the tax loss carryforwards, there is uncertainty and significant
variation as to when a tax year is no longer subject to audit.
Cash
amounts paid during fiscal year 2009, 2008 and 2007 for income taxes were $13.0
million, $12.9 million, and $9.9 million, respectively.
NOTE
12 – DEBT
As of
August 31, 2009 and 2008, the Company had bank credit agreements and lines of
credit for $24.9 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 August 31, 2009 and 2008, borrowings, lines and letters of credit
totaling approximately $2.5 million and $4.1 million, respectively, were
outstanding under these facilities, leaving approximately $22.4 million and
$15.2 million, respectively, available for borrowings. Of these outstanding
amounts as of August 31, 2009 and 2008, the Company, together with its majority
or wholly owned subsidiaries, had $2.3 million and $3.5 million, respectively,
outstanding in short-term borrowings, at weighted-average interest rates of
10.0% and 8.8%, respectively.
Long-term
debt consists of the following (in thousands):
August 31,
|
||||||||
2009
|
2008
|
|||||||
Note
due July 2017, 9.0% in 2009 and 2008
|
$
|
6,552
|
$
|
8,232
|
||||
Note
due November 2014 (six-month LIBOR + 1.5%), 2.26% in 2009(1)
|
3,825
|
4,050
|
||||||
Note
due November 2014, 7.94% in 2009 and 2008(1)
|
3,780
|
4,466
|
||||||
Note
due August 2010, 6.5% in 2008
|
—
|
17
|
||||||
Note
due February 2018 (1 year LIBOR + 2.7%), 4.08% in 2009(1)
|
8,100
|
9,000
|
||||||
Note
due February 2016, 6.7% in 2009
|
9,025
|
—
|
||||||
Note
due August 2014 (greater of 30 days LIBOR + 4% or 7.5%), 7.5% in 2009(1)
|
10,000
|
—
|
||||||
Note
due September 2011
|
428
|
—
|
||||||
Total
|
41,710
|
25,765
|
||||||
Less:
current portion
|
4,590
|
2,737
|
||||||
Long-term
debt
|
$
|
37,120
|
$
|
23,028
|
(1)
|
Under
the terms of these agreements, these entities must comply with certain
financial covenants, which include debt service and leverage
ratios.
|
As of
August 31, 2009 and 2008, the Company, together with its majority or wholly
owned subsidiaries had $41.7 million and $25.8 million, respectively,
outstanding in long-term borrowings.
As of
August 31, 2009 and 2008, $7.6 million and $8.5 million, respectively,
relate to loans that require the Barbados subsidiary to comply with certain
annual financial covenants, which include debt service and leverage ratios.
During the second quarter of fiscal year 2009, the Company determined that it
was not in compliance with the covenants described in the underlying contracts
for a certain location. As such, during the fourth quarter, the bank and the
Company amended the existing agreement to modify the contractual language to
better reflect the original intent of these covenants. The Company obtained a
written waiver from the bank with respect to non-compliance for fiscal year
2008. The Company was in compliance with respect to the amended covenants for
fiscal year 2009.
As of
August 31, 2009 and 2008, $8.1 million and $9.0 million, respectively,
relate to loans that require the Trinidad subsidiary to comply with certain
annual financial covenants, which include debt service and leverage ratios. The
Company is not required to comply with any covenants.
On February
27, 2009, the Company’s Trinidad subsidiary entered into a 6.7% fixed interest
rate loan agreement with First Caribbean International Bank of Trinidad &
Tobago for a notional amount of $9.5 million to be paid over a 7 year
term, which include debt service and leverage ratios. The Company was in
compliance with respect to these covenants for fiscal year 2009.
During
the fourth quarter of fiscal year 2009, the Company's Panama
subsidiary obtained a $10 million loan that requires the Panama subsidiary
to comply with certain quarterly financial covenants, which include debt service
and leverage ratios beginning in the first quarter of fiscal year 2010. The
company had no covenant requirements for this loan for the year ended August 31,
2009.
42
PRICESMART,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The Company's long-term debt is collateralized by certain land,
buildings, fixtures, equipment and shares of each respective subsidiary and
guaranteed by the Company up to its respective ownership percentage. The
carrying amount of the non-cash assets assigned as collateral for long-term debt
was $61.0 million and $32.2 million as of August 31, 2009 and 2008,
respectively. Certain obligations under leasing arrangements are collateralized
by the underlying asset being leased.
Annual
maturities of long-term debt are as follows (in thousands):
Years
Ended August 31,
|
Amount
|
|||
2010
|
$
|
4,584
|
||
2011
|
4,584
|
|||
2012
|
5,011
|
|||
2013
|
4,584
|
|||
2014
|
9,584
|
|||
Thereafter
|
13,363
|
|||
Total
|
$
|
41,710
|
NOTE
13 – LEASES
The
Company is committed under non-cancelable operating leases for rental of
facilities and land. These leases expire or become subject to renewal between
February 28, 2011 and July 5, 2031.
As
of August 31, 2009, the Company's warehouse clubs
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)(3)
|
Facility
Type
|
Date
Opened
|
Approximate
Square
Footage
|
Current
Lease
Expiration
Date
|
Remaining
Option(s)
to
Extend
|
|||
Via
Brazil, Panama
|
Warehouse
Club
|
December 4, 1997
|
68,696 |
October
31, 2026
|
10
years
|
|||
Miraflores, Guatemala
|
Warehouse
Club
|
April
8, 1999
|
66,059 |
December 31, 2020
|
5
years
|
|||
Pradera, Guatemala
|
Warehouse
Club
|
May
29, 2001
|
48,438 |
May
28, 2021
|
none
|
|||
Tegucigalpa, Honduras
|
Warehouse
Club
|
May
31, 2000
|
64,735 |
May
30, 2020
|
none
|
|||
Oranjestad,
Aruba
|
Warehouse
Club
|
March
23, 2001
|
54,229 |
March
23, 2021
|
10
years
|
|||
Port of Spain, Trinidad
|
Warehouse
Club
|
December
5, 2001
|
54,046 |
July
5, 2031
|
none
|
|||
St.
Thomas, U.S.V.I.
|
Warehouse
Club
|
May
4, 2001
|
54,046 |
February
28, 2020
|
10
years
|
|||
Barbados
|
Storage
Facility
|
May
5, 2006
|
4,800 |
May
31, 2011
|
1
year
|
|||
Chaguanas,
Trinidad
|
Employee
Parking
|
May
1, 2009
|
4,944 |
April
30, 2024
|
none
|
|||
San
Diego, CA
|
Corporate
Headquarters
|
April
1, 2004
|
35,000 |
March
31, 2011
|
5
years
|
|||
Miami,
FL
|
Distribution
Facility
|
March
1, 2008
|
200,709 |
August
31, 2018
|
10
years
|
|||
Miami,
FL
(2)
|
Distribution
Facility
|
September
1, 2001
|
36,575 |
February
28, 2011
|
none
|
(1)
|
The
former club located in Guam is not included; this warehouse club was
closed in fiscal year 2004. The land and building are currently
subleased to a third-party.
|
(2)
|
The
Company entered into a new lease amendment with respect to this location,
providing for an expansion of 5,000 square feet. This lease was
renewed on August 31, 2009 and was effective September 1,
2009.
|
(3)
|
The
Company finalized an agreement on June 3, 2009 to transfer all lessor
rights and lessee obligations for the property where the former
Guatemala Plaza warehouse club was located. The Guatemala
warehouse club was closed in fiscal year 2003 and had been
subleased.
|
43
PRICESMART,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following table summarizes the components of rental expense charged for operating leases of open locations for each of the three years ended August 31, 2009, 2008 and 2007 (in thousands):
Years
ended August 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Minimum
rental payments
|
$
|
6,661
|
$
|
5,587
|
$
|
5,163
|
||||||
Deferred
rent accruals
|
272
|
757
|
454
|
|||||||||
Total
straight line rent expense
|
6,933
|
6,344
|
5,617
|
|||||||||
Contingent
rental payments
|
1,345
|
2,148
|
3,068
|
|||||||||
Rental
expense
|
$
|
8,278
|
$
|
8,492
|
$
|
8,685
|
Future
minimum lease commitments for facilities under these leases with an initial term
in excess of one year are as follows (in thousands):
Years
ended August 31,
|
Amount
(1)(2)
|
|||
2010
|
$
|
6,472
|
||
2011
|
5,969
|
|||
2012
|
5,480
|
|||
2013
|
5,614
|
|||
2014
|
5,661
|
|||
Thereafter
|
50,752
|
|||
Total
|
$
|
79,948
|
(1)
|
Operating
lease obligations have been reduced by approximately $706,000 to reflect
sub-lease income.
|
(2)
|
The
total excludes payments for the discontinued operations in
Guam. The projected minimum payments excluded for Guam are
approximately $1.9 million; projected sublease income for this location is
approximately $2.3 million, yielding no net projected
obligation.
|
Certain
obligations under leasing arrangements are collateralized by the underlying
asset being leased.
The
Company entered into leases as landlord 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 August 31,
2009 (in thousands):
Years
ended August 31,
|
Amount
|
|||
2010
|
$
|
1,869
|
||
2011
|
1,524
|
|||
2012
|
1,041
|
|||
2013
|
964
|
|||
2014
|
939
|
|||
Thereafter
|
6,842
|
|||
Total
|
$
|
13,179
|
44
PRICESMART,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
NOTE
14 – 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.
In the
first quarter of fiscal 2009, the Company’s Trinidad subsidiary 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 entered into in
fiscal year 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.
In the
second quarter of fiscal year 2008, the Company’s Barbados subsidiary 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 U.S. dollars in fiscal year 2008. The
loan has a variable interest rate of six-month 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 November 14, 2012). 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 a 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 twelve months ended August 31, 2009 and 2008, the Company included
the gain or loss on the hedged items (that is, variable-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 year ended August 31, 2009
|
$
|
780
|
$
|
675
|
||||
Interest
expense for the year ended August 31, 2008
|
$
|
186
|
$
|
210
|
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 August 31, 2009
|
Notional Amount as of August
31, 2008
|
||||||
RBTT
|
$
|
8,100
|
$
|
—
|
||||
Citibank
N.A.
|
$
|
3,825
|
$
|
4,275
|
||||
Total
|
$
|
11,925
|
$
|
4,275
|
In
accordance with SFAS 157, “Fair Value Measurements," 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 debt fair value is measured as the net present value of the
debt cash payments. This requires estimating the payments and the
timing of the payments and taking the discounted cash flow of these
payments. The amount and timing of the cash flows are often
determined by the debt instrument assuming no defaults. The discount
rate used to calculate the net present value of the debt is the current
risk-free rate plus the risk premium adjustment reflecting the credit rating.
The Company considered the effect of its credit risk (credit standing) on the
fair value of the liability in all periods in which the liability was measured
at fair value.
45
PRICESMART,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The
following table summarizes the effect of the fair valuation of derivative
instruments (in thousands):
Liability
Derivatives
|
||||||||||
August
31,
|
||||||||||
2009
|
2008
|
|||||||||
Derivatives
designated as hedging instruments under Statement 133
|
Balance
Sheet Location
|
Fair
Value
|
Balance
Sheet Location
|
Fair
Value
|
||||||
Interest
Rate Swaps(1)
|
Other
Accrued Expenses
|
$
|
625
|
Other
Accrued Expenses
|
$
|
8
|
||||
Total derivatives designated as hedging instruments under Statement
133 (2)
|
$
|
625
|
$
|
8
|
(1)
|
The
effective portion of the interest rate swaps was recorded as a
debit (charge) to accumulated other comprehensive loss for $464,000 net of
tax as of August 31, 2009.
|
(2)
|
There
were no derivatives not designated as hedging instruments under Statement
133.
|
The
effect of derivative instruments on the consolidated income statements for
the years ended August 31, 2009 and 2008 (in thousands):
Amount
of Gain or (Loss) Recognized in Income on Derivatives
|
|||||||||
August
31,
|
|||||||||
Derivatives
in Statement 133 Fair Value Hedging Relationships
|
Location
of Gain or (Loss) recognized in Income on Derivative
|
2009
|
2008
|
||||||
Interest
rate swaps
|
Interest
income/(expense)
|
$
|
(144
|
)
|
$
|
14
|
|||
Total
|
$
|
(144
|
)
|
$
|
14
|
For
the respective periods there were no amounts recorded for gain or (loss) on
interest rate swaps recognized on the consolidated statements 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
15 – ACQUISITION OF BUSINESS
The
Company’s business combinations are accounted for under the purchase method of
accounting and include the results of operations of the acquired business from
the date of acquisition. Net assets of the acquired business are
recorded at their fair value at the date of the acquisition. Any
excess of the purchase price over the fair value of tangible net assets acquired
is included in goodwill in the accompanying consolidated balance
sheets.
In
October 2007 (fiscal year 2008), the Company acquired all of the common shares
of Regan Lodge, the company that had leased to it the real estate and building
upon which the Barbados warehouse club is located. The Company acquired this
company for approximately $12.0 million. The fair values of the assets acquired
and the liabilities assumed in connection with the acquisition were estimated in
accordance with SFAS 141, “Business Combinations” utilizing valuation techniques
consistent with the market approach, utilizing observable inputs defined as
Level 2 inputs to determine the pricing of the assets. The Company used a
third-party valuation firm to assist management in estimating these fair
values. No goodwill was recorded for this acquisition and no other
intangible assets were acquired that would require fair value estimates under
SFAS 142, “Goodwill and Other Intangible Assets.”
The
purchase price was allocated as follows to the fair values of the net tangible
assets acquired (in thousands):
Land
|
$
|
4,965
|
||
Building
and improvements
|
6,948
|
|||
Fixtures
and equipment
|
85
|
|||
Other
Assets
|
14
|
|||
Liabilities
|
(170
|
)
|
||
Total
Purchase Price, Net of Cash
|
11,842
|
|||
Cash
Acquired
|
156
|
|||
Total
Purchase Price
|
$
|
11,998
|
The
primary operations of the company acquired were the leasing of the real estate
and building upon which the Barbados warehouse club is located. Upon
acquisition, these operations will cease; therefore, no pro-forma financial
statements of income are required to be presented.
46
PRICESMART,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
NOTE
16 – PSC SETTLEMENT
On
February 11, 2008 the Company announced that it had entered into a
Settlement Agreement and Release with PSC, S.A. (“PSC”), Tecnicard, Inc. and
Banco de la Produccion, and their affiliates (collectively “PSC Parties”), which
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.
On October 6, 2009, the Company's Board of Directors resolved to elect Mr.
Zurcher to the Board effective October 15, 2009 to fill the vacancy following
the resignation of a member of the Board.
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 August 31, 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 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 and related entities, the
following items were recorded:
|
•
|
For
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 and
related entities. No additional reserves were established for
fiscal year 2009.
|
|
•
|
For
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 Agreement were
recorded for the fiscal year 2009.
|
|
•
|
For
fiscal year 2008, the Company in accordance with the Company’s accounting
policy recorded the reclassification of approximately $161,000, 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
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 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 related to the PSC
settlement during fiscal year 2009.
|
47
PRICESMART,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
NOTE 17 – 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. Additionally, from time to time members of the
Company’s management use additional private planes owned in part by PFD Ivanhoe
or La Jolla Aviation, Inc. to travel to business meetings in Central America and
the Caribbean. The officers of PFD Ivanhoe, Inc. included Sol Price, Robert
Price and Jack McGrory, and it was solely owned by The Price Group, whose
members included Sol Price, Robert E. Price, Murray Galinson and Jack
McGrory. PFD Ivanhoe, Inc. ceased doing business in June 2009 and subsequently
was dissolved. La Jolla Aviation, Inc. began operations in July 2009. La Jolla
Aviation, Inc. is solely owned by The Robert and Allison Price Trust, and
Robert Price is a Director and Officer of La Jolla Aviation, Inc. Under
the "original use agreement," if the passengers are solely Company
personnel, the Company has reimbursed PFD Ivanhoe, and will now reimburse
La Jolla Aviation, for a portion of the fixed management fee and additional
expenses that PFD Ivanhoe incurred, and that La Jolla Aviation will incur, 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 and if one or more of the passengers is a
member of the Price Group (including Robert E. Price), the Company has
reimbursed PFD Ivanhoe, and will now reimburse La Jolla Aviation, for use
of the aircraft based on the amounts the passengers would have paid if they
had flown a commercial airline. The Company incurred expenses of approximately
$26,000, $77,000 and $158,000 for the fiscal years ending August 31, 2009,
2008 and 2007, 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 16
– PSC Settlement), Mr. Zurcher resigned from the Company’s board of
directors on February 8, 2008. On October 6, 2009, the Company’s Board of
Directors resolved to elect Mr. Zurcher to the Board effective October 15, 2009
to fill the vacancy following the resignation of a member of the Board.
The Company has accordingly recorded and disclosed related-party expense
or income related to the relationships with Edgar Zurcher for the fiscal years
ended August 31, 2009, 2008 and 2007. Mr. Zurcher is a partner in a law
firm that the Company utilizes in certain legal matters. The Company incurred
approximately $30,000, $82,000 and $64,000 of legal expenses with this firm
during the fiscal years ended August 31, 2009, 2008 and 2007,
respectively. Mr. Zurcher is also a director of a company that owns
40% of Payless ShoeSource Holdings, Ltd., which rents retail space from the
Company. The Company has recorded approximately $1.3 million, $964,000 and
$808,000 in rental income for this space during the fiscal years ended August
31, 2009, 2008 and 2007, respectively. Additionally, Mr. Zurcher is a
director of Molinos de Costa Rica Pasta. PriceSmart paid approximately $235,000,
$175,000 and $120,000 for products purchased from this entity during the fiscal
years ended August 31, 2009, 2008 and 2007, respectively. Also, Mr. Zurcher is a
director of Roma S.A. dba Roma Prince S.A. PriceSmart purchased
products from this entity for approximately $3.8 million, $3.2
million and $2.5 million for the fiscal years ended August 31, 2009, 2008 and
2007, respectively. Mr. Zurcher is also a director of Promerica
Financial Corporation, S.A., from which the Company has recorded approximately
$148,000 and $276,000 of rental income during the fiscal years ended August 31,
2008 and 2007, respectively, for space leased to Promerica Financial
Corporation, S.A. No rental income related to Promerica Financial Corporation
S.A. was recorded in fiscal year 2009. The Company also received approximately
$938,000 in incentive fees on a co-branded credit card the Company had with
Promerica Financial Corporation, S.A. during fiscal year 2007. No incentive fees
were recorded in fiscal years 2008 and 2009. The Company received a
one-time refund of approximately $500,000 for an accumulated marketing fund
related to the co-branded credit card with Promerica Financial Corporation,
S.A. in fiscal year 2007. No refund related to the accumulated marketing
fund was recorded in fiscal years 2008 and 2009. 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 resolved the disputes that had been pending between the Company and the
PSC Parties (see Note 16 – PSC Settlement).
Relationship with Grupo Gigante,
S.A.B. de C.V. (“Gigante”) and Gonzalo Barrutieta: 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. Mr. Barrutieta is
also a member of the Board of Directors of Office Depot Mexico that
operates Office Depot Panama which rents retail space from the Company.
The Company has recorded approximately $240,000, $227,000 and $192,000 in rental
income and maintenance charges for this space during the fiscal years ended
August 31, 2009, 2008 and 2007, respectively.
Relationships with Price Charities:
During the fiscal years ended August 31, 2009 and 2008, the Company sold
approximately $77,000 and $67,000, 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 fiscal year ended August 31, 2009, the
Company earned income of approximately $31,000 for advisory and construction
services fees. The Company entered into a joint venture with JB Enterprises
(“JBE”) in fiscal year 2009 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. (see Note 19-Unconsolidated
Affiliates).
The
Company believes that each of the related-party transactions described above was
on terms that the Company could have obtained from unaffiliated
third-parties.
48
PRICESMART,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
NOTE
18 – ACQUISITION OF MINORITY INTEREST
The
Company’s business combinations are accounted for under the purchase method of
accounting, and include the results of operations of the acquired business from
the date of acquisition. Net assets of the acquired business are
recorded at their fair value at the date of the acquisition. The
excess of the purchase price over the fair value of tangible net assets acquired
is included in goodwill in the accompanying consolidated balance
sheets.
During
fiscal year 2008, as a result of the PSC settlement, the Company purchased the
remaining 49% minority interest of its Nicaragua subsidiary from PSC. The
Company held 51% of the interest in the Nicaragua subsidiary immediately
before the acquisition and views the acquisition of the remaining 49% from PSC
as a business combination achieved in stages or a step
acquisition. The consideration provided in connection with this
acquisition consisted of $10.2 million of which $3.1 million was allocated to
minority interest and $7.1 million was allocated to goodwill. Also,
during the fourth quarter of fiscal year 2008, the Company acquired the 10%
minority interest of its Aruba subsidiary, Island Foods and Distributors N.V.
(“IFD”), from Nithyananda Enterprises (“NEL”), thereby increasing its
ownership percentage in its Aruba subsidiary to 100%. The Company held 90% of
the interest in IFD immediately before the acquisition and views the acquisition
of the remaining 10% from NEL as a business combination achieved in stages or a
step acquisition. The Company set the acquisition date as June 30,
2008. The Company agreed to repair the roof on the Aruba warehouse
club as compensation for the conveyance of the 10% interest in
IFD. Therefore, the Company has recorded consideration provided as
$300,000 which is the maximum cost that the Company is committed to spend on the
roof repair. Of this amount, $313,000 was allocated to goodwill and
$13,000 to minority interest. The goodwill related to the Nicaragua and Aruba
minority interest has been allocated to the Central American Operations segment
and the Caribbean Operations segment, respectively.
There
were no acquisitions of minority interest recorded during fiscal year
2009.
49
PRICESMART,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
NOTE
19 – UNCONSOLIDATED AFFILIATES
The
Company reviews and determines annually whether any of its investments in joint
ventures are Variable Interest Entities (“VIE”), and whether it must consolidate
a VIE and/or disclose information about its involvement in a VIE. The Company has determined that
through August 31, 2009 the joint ventures for GolfPark Plaza, Price Plaza
Alajuela and Newco2 are VIE's. The Company has determined that it is not
the principle beneficiary of the VIE's and therefore has accounted for these
entities under the equity method. Under the equity method 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, GolfPark Plaza, S.A. The Company purchased a 50%
interest in Golf ParkPlaza 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 August 31, 2009, the Company made additional capital contributions of
approximately $50,000. On September 24, 2008, GolfPark Plaza acquired
38,331 square meters of real estate for the construction of a retail
center.
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 August 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 for the construction of a
retail center.
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 August 31, 2009 is
approximately $428,000. The Company has reflected this amount as 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 August 31, 2009 there are no
commitments to make additional capital contributions to this joint
venture.
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):
|
August 31,
|
||||||||
2009
|
2008
|
|||||||
Current
assets
|
$
|
22
|
$
|
—
|
||||
Noncurrent
assets
|
$
|
10,868
|
$
|
—
|
||||
Current
liabilities
|
$
|
41
|
$
|
—
|
Years
Ended August 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Net
Loss
|
$
|
(41
|
)
|
$
|
(35
|
)
|
$
|
(590
|
)
|
50
PRICESMART,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
NOTE
20 – SEGMENTS
The
Company is principally engaged in international membership shopping warehouse
clubs operating in Central America and the Caribbean. The Company
operates in three segments based on geographic area and measures performance on
operating income (loss). Segment amounts are presented after
converting to U.S. dollars and consolidating eliminations. Certain revenues and
operating costs included in the United States segment have not been allocated,
as it is impractical to do so. The Mexico joint venture is not
segmented for the periods presented and is included in the United States
segment. The Company's reportable segments are based on management
responsibility. For fiscal years ended August 31, 2008 and 2007, the
Central American and Caribbean operating income includes $1.3 million and $5.5
million, respectively, of charges related to the PSC settlement (see Note
16 - PSC Settlement). No charges were recorded in fiscal year 2009.
The Company has adjusted information related to its operating income and income
from continuing operations segments for 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
expanded its presentation to include intersegment revenue, intersegment interest
income and intersegment interest expense for the periods
presented. The Company has also adjusted information related to its
identifiable assets in
connection with the Company’s accounting for income taxes pursuant to SFAS
109, as disclosed in Note 1, for the fiscal year ended August 31,
2008.
51
PRICESMART,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
|
Information
related to our segments for the fiscal years ended August 31, 2009, 2008
and 2007 is as follows (in
thousands):
|
United
States
Operations
|
Central
American
Operations
|
Caribbean
Operations
|
Reconciling
Items(1)
|
Total
|
||||||||||||||||||||
Year
Ended August 31, 2009
|
||||||||||||||||||||||||
Revenue
from external customers
|
$
|
3,740
|
$
|
741,133
|
$
|
506,755
|
$
|
—
|
$
|
1,251,628
|
||||||||||||||
Intersegment
revenues
|
409,840
|
—
|
3,349
|
(413,189
|
)
|
—
|
||||||||||||||||||
Depreciation
and amortization
|
(983
|
)
|
(7,830
|
)
|
(5,085
|
)
|
—
|
(13,898
|
)
|
|||||||||||||||
Asset
impairment and closure (costs) gains
|
(99
|
)
|
212
|
136
|
—
|
249
|
||||||||||||||||||
Operating
income
|
3,823
|
32,601
|
21,060
|
—
|
57,484
|
|||||||||||||||||||
Interest
income from external sources
|
148
|
186
|
123
|
—
|
457
|
|||||||||||||||||||
Interest
income from intersegment sources
|
3,769
|
824
|
—
|
(4,593
|
)
|
—
|
||||||||||||||||||
Interest
expense from external sources
|
220
|
(795
|
)
|
(1,125
|
)
|
—
|
(1,700
|
)
|
||||||||||||||||
Interest
expense from intersegment sources
|
(126
|
)
|
(2,778
|
)
|
(1,689
|
)
|
4,593
|
—
|
||||||||||||||||
Income
from continuing operations before taxes
|
7,847
|
29,938
|
17,631
|
—
|
55,416
|
|||||||||||||||||||
Income
tax expense
|
(2,128
|
)
|
(9,059
|
)
|
(1,882
|
)
|
—
|
(13,069
|
)
|
|||||||||||||||
Net
income
|
5,690
|
20,879
|
15,750
|
—
|
42,319
|
|||||||||||||||||||
Assets
of discontinued operations
|
900
|
—
|
—
|
—
|
900
|
|||||||||||||||||||
Long-lived
assets (other than deferred tax assets)
|
27,309
|
159,607
|
94,737
|
—
|
281,653
|
|||||||||||||||||||
Goodwill
|
—
|
32,394
|
5,144
|
—
|
37,538
|
|||||||||||||||||||
Identifiable
assets
|
43,544
|
277,481
|
166,348
|
—
|
487,373
|
|||||||||||||||||||
Year
Ended August 31, 2008
|
||||||||||||||||||||||||
Revenue
from external customers
|
$
|
1,564
|
$
|
670,822
|
$
|
447,490
|
$
|
—
|
$
|
1,119,876
|
||||||||||||||
Intersegment
revenues
|
381,000
|
—
|
2,494
|
(383,494
|
)
|
—
|
||||||||||||||||||
Depreciation
and amortization
|
(806
|
)
|
(6,217
|
)
|
(4,347
|
)
|
—
|
(11,370
|
)
|
|||||||||||||||
Asset
impairment and closure (costs) gains
|
—
|
(1,174
|
)
|
32
|
—
|
(1,142
|
)
|
|||||||||||||||||
Operating
income
|
3,730
|
28,667
|
16,029
|
—
|
48,426
|
|||||||||||||||||||
Interest
income from external sources
|
883
|
231
|
79
|
—
|
1,193
|
|||||||||||||||||||
Interest
income from intersegment sources
|
4,516
|
1,515
|
—
|
(6,031
|
)
|
—
|
||||||||||||||||||
Interest
expense from external sources
|
11
|
(766
|
)
|
(690
|
)
|
—
|
(1,445
|
)
|
||||||||||||||||
Interest
expense from intersegment sources
|
(75
|
)
|
(3,042
|
)
|
(2,914
|
)
|
6,031
|
—
|
||||||||||||||||
Income
from continuing operations before taxes
|
8,965
|
26,234
|
12,145
|
—
|
47,334
|
|||||||||||||||||||
Income
tax expense
|
(470
|
)
|
(6,293
|
)
|
(2,361
|
)
|
—
|
(9,124
|
)
|
|||||||||||||||
Net
income
|
8,381
|
19,941
|
9,784
|
—
|
38,106
|
|||||||||||||||||||
Assets
of discontinued operations
|
1,247
|
—
|
—
|
—
|
1,247
|
|||||||||||||||||||
Long-lived
assets (other than deferred tax assets)
|
26,163
|
136,861
|
79,986
|
—
|
243,010
|
|||||||||||||||||||
Goodwill
|
—
|
33,639
|
5,609
|
—
|
39,248
|
|||||||||||||||||||
Identifiable
assets
|
61,876
|
254,333
|
135,203
|
—
|
451,412
|
|||||||||||||||||||
Year
Ended August 31, 2007
|
||||||||||||||||||||||||
Revenue
from external customers
|
$
|
1,342
|
$
|
541,866
|
$
|
345,593
|
$
|
—
|
$
|
888,801
|
||||||||||||||
Intersegment
revenues
|
301,976
|
—
|
—
|
(301,976
|
)
|
—
|
||||||||||||||||||
Depreciation
and amortization
|
(684
|
)
|
(5,408
|
)
|
(3,357
|
)
|
—
|
(9,449
|
)
|
|||||||||||||||
Asset
impairment and closure (costs) gains
|
—
|
(1,235
|
)
|
(315
|
)
|
—
|
(1,550
|
)
|
||||||||||||||||
Operating
income
|
6,231
|
13,281
|
8,464
|
—
|
27,976
|
|||||||||||||||||||
Interest
income from external sources
|
1,292
|
221
|
115
|
—
|
1,628
|
|||||||||||||||||||
Interest
income from intersegment sources
|
6,828
|
—
|
—
|
(6,828
|
)
|
—
|
||||||||||||||||||
Interest
expense from external sources
|
(261
|
)
|
(354
|
)
|
(173
|
)
|
—
|
(788
|
)
|
|||||||||||||||
Interest
expense from intersegment sources
|
—
|
(3,771
|
)
|
(3,057
|
)
|
(6,828
|
) |
—
|
||||||||||||||||
Income
from continuing operations before taxes
|
8,258
|
19,218
|
(2,205
|
)
|
—
|
25,271
|
||||||||||||||||||
Income
tax expense
|
(4,089
|
)
|
(6,720
|
)
|
(1,528
|
)
|
—
|
(12,337
|
)
|
|||||||||||||||
Net
income (loss)
|
4,161
|
12,498
|
(3,733
|
)
|
—
|
12,926
|
||||||||||||||||||
Assets
of discontinued operations
|
1,380
|
—
|
—
|
—
|
1,380
|
|||||||||||||||||||
Goodwill
|
—
|
26,279
|
5,373
|
—
|
31,652
|
|||||||||||||||||||
Identifiable
assets
|
60,753
|
225,263
|
109,403
|
—
|
395,419
|
(1)
|
The
reconciling items reflect the amount eliminated on consolidation of
intersegment transactions.
|
52
PRICESMART,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
NOTE
21 – SUBSEQUENT EVENTS
We have evaluated all
events subsequent to the balance sheet date of August 31, 2009 through the date
of issuance of these consolidated financial statements, November 9,
2009, and have determined that except as set forth below, there
are no subsequent events that require disclosure under SFAS 165.
On
September 01, 2009, the Company’s El Salvador subsidiary entered into a loan
agreement with an interest rate set at the greater of 7.5% or 30 day LIBOR plus
4% with ScotiaBank El Salvador S.A. for the amount of $8.0 million to be paid
over five years. The loan agreement contains a balloon payment at the end
of the loan term of $4.1 million.
53
PRICESMART,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
NOTE
22 – QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summarized
quarterly financial information for fiscal years 2009 and 2008 is as
follows:
Fiscal
Year 2009
|
Three
Months Ended,
|
Year Ended
|
||||||||||||||||||
(in
thousands, except per share data)
|
Nov. 30, 2008
|
Feb. 28, 2009
|
May 31, 2009
|
Aug. 31, 2009
|
Aug. 31, 2009
|
|||||||||||||||
Total
net warehouse club and export sales
|
$
|
299,354
|
$
|
329,145
|
$
|
300,609
|
$
|
298,902
|
$
|
1,228,010
|
||||||||||
Cost
of goods sold
|
|
255,226
|
|
280,854
|
|
256,822
|
|
255,137
|
|
1,048,039
|
||||||||||
Income
from continuing operations
|
|
10,717
|
|
12,750
|
|
8,628
|
|
10,252
|
|
42,347
|
||||||||||
Discontinued
operations, net of tax
|
|
(19
|
)
|
|
(63
|
)
|
|
55
|
|
(1
|
)
|
|
(28
|
)
|
||||||
Net
income
|
|
10,698
|
|
12,687
|
|
8,683
|
|
10,251
|
|
42,319
|
||||||||||
Basic
income per share
|
$
|
0.37
|
$
|
0.44
|
$
|
0.30
|
$
|
0.35
|
$
|
1.46
|
||||||||||
Diluted
income per share
|
$
|
0.37
|
$
|
0.43
|
$
|
0.30
|
$
|
0.35
|
$
|
1.45
|
||||||||||
Fiscal
Year 2008
|
Three
Months Ended,
|
Year
Ended
|
||||||||||||||||||
(in
thousands, except per share data)
|
Nov.
30, 2007
|
Feb.
29, 2008
|
May
31, 2008
|
Aug.
31, 2008
|
Aug.
31, 2008
|
|||||||||||||||
Total
net warehouse club and export sales
|
$
|
245,556
|
$
|
288,556
|
$
|
278,364
|
$
|
286,532
|
$
|
1,099,008
|
||||||||||
Cost
of goods sold
|
|
208,860
|
|
245,653
|
|
236,438
|
|
242,763
|
|
933,714
|
||||||||||
Income
from continuing operations
|
|
6,676
|
|
9,489
|
|
10,575
|
|
11,470
|
|
38,210
|
||||||||||
Discontinued
operations, net of tax
|
|
18
|
|
27
|
|
26
|
|
(175
|
)
|
|
(104
|
)
|
||||||||
Net
income
|
|
6,694
|
|
9,516
|
|
10,601
|
|
11,295
|
|
38,106
|
||||||||||
Basic
income per share
|
$
|
0.23
|
$
|
0.33
|
$
|
0.37
|
$
|
0.39
|
$
|
1.32
|
||||||||||
Diluted
income per share
|
$
|
0.23
|
$
|
0.33
|
$
|
0.36
|
$
|
0.39
|
$
|
1.30
|
The
Company's common stock has been quoted and traded on the NASDAQ Global
Select Market under the symbol “PSMT” since September 2, 1997. As of
October 30, 2009, there were approximately 3,106
holders of record of the common stock.
Dates
|
Stock
Price
|
|||||||||
From
|
To
|
High
|
Low
|
|||||||
2009
CALENDAR QUARTERS
|
||||||||||
First
Quarter
|
9/1/08
|
11/30/08
|
$
|
21.16
|
$
|
10.93
|
||||
Second
Quarter
|
12/1/08
|
2/28/09
|
20.82
|
11.09
|
||||||
Third
Quarter
|
3/1/09
|
5/31/09
|
20.94
|
15.50
|
||||||
Fourth
Quarter
|
6/1/09
|
8/31/09
|
18.66
|
14.43
|
||||||
2008
CALENDAR QUARTERS
|
||||||||||
First
Quarter
|
9/1/07
|
11/30/07
|
$
|
31.80
|
$
|
22.61
|
||||
Second
Quarter
|
12/1/07
|
2/29/08
|
33.30
|
21.66
|
||||||
Third
Quarter
|
3/1/08
|
5/31/08
|
29.23
|
21.48
|
||||||
Fourth
Quarter
|
6/1/08
|
8/31/08
|
25.25
|
18.02
|
Recent
Sales of Unregistered Securities
There
were no sales of unregistered securities during the year ended August 31,
2009, except as reported on Current Reports on Form 8-K filed during the
year.
54
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 was
paid 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.
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.
Repurchase
of Equity Securities
Upon vesting of restricted stock
awarded by us to employees, we withhold shares to cover employees’ tax
withholding obligations. As set forth in the table below, during the fourth
quarter of fiscal year 2009, we withheld a total of 1,007 shares in the
indicated months. These were the only repurchases of equity securities made by
us during the fourth quarter of fiscal year 2009. We do not have a stock
repurchase program.
Period
|
(a)
Total
Number of
Shares
Purchased
|
(b)
Average
Price
Paid
Per Share
|
(c)
Total
Number of
Shares
Purchased
as
Part of
Publicly
Announced
Plans
or Programs
|
(d)
Maximum
Number
of
Shares That May
Yet
Be Purchased
Under
the
Plans
or Programs
|
||||||||||||
June
|
— | $ | — | — | N/A | |||||||||||
July
|
1,007 | 15.96 | — | N/A | ||||||||||||
August
|
— | — | — | N/A | ||||||||||||
Total
|
1,007 | $ | 15.96 | — | N/A |
55
Directors
The table
below indicates the name, position with the Company and age of each
director:
Name
|
Position
|
Age
|
|||
Robert
E. Price
|
Chairman
of the Board; Chief Executive Officer
|
67 | |||
Gonzalo
Barrutieta
|
Director
|
43 | |||
Katherine
L. Hensley
|
Director
|
72 | |||
Leon
C. Janks
|
Director
|
60 | |||
Lawrence
B. Krause
|
Director
|
79 | |||
Jose
Luis Laparte
|
Director;
President
|
43 | |||
Keene
Wolcott
|
Director
|
78 | |||
Edgar
Zurcher
|
Director
|
58 |
Information
Regarding Directors
Robert E. Price has been
Chairman of the Board of the Company since July 1994 and Chief Executive Officer
of the Company since April 2006. He served as Interim Chief Executive Officer of
the Company from April 2003 until April 2006 and also served as Interim
President of the Company from April 2003 until October 2004. Mr. Price also
served as President and Chief Executive Officer of the Company from July 1994
until January 1998. Additionally, Mr. Price served as Chairman of the Board
of Price Enterprises, Inc. (“PEI”) from July 1994 until November 1999 and was
President and Chief Executive Officer of PEI from July 1994 until September
1997. Mr. Price was Chairman of the Board of Price/Costco, Inc. (“Costco”)
from October 1993 to December 1994. From 1976 to October 1993, he was Chief
Executive Officer and a director of The Price Company (“TPC”). Mr. Price
served as Chairman of the Board of TPC from January 1989 to October 1993, and as
its President from 1976 until December 1990. Mr. Price has been a Manager
of The Price Group, LLC since August 2000.
Gonzalo Barrutieta has been a
director of the Company since February 2008. Mr. Barrutieta was employed in
several capacities with Grupo Gigante, S.A. de C. V. from 1994 to 2006, most
recently as Director of Real Estate and New Business Development. Since 1994, he
has served as a member of the board of directors of Grupo Gigante. From 2002
through 2005, Mr. Barrutieta was a Director of PriceSmart Mexico (formerly a
joint venture between the Company and Grupo Gigante), serving as Chief Executive
Officer of PriceSmart Mexico from 2003 to 2005. Mr. Barrutieta has also been a
Director of Hoteles Presidente since 2004, of Office Depot Mexico and Radio
Shack Mexico since 2005, and has served as President and Director of Operadora
IPC de Mexico since 2007.
Katherine L. Hensley has been
a director of the Company since July 1997 and served as a director of PEI from
December 1994 until July 1997. She is a retired partner of the law firm of
O’Melveny & Myers in Los Angeles, California. Ms. Hensley joined
O’Melveny & Myers in 1978 and was a partner from 1986 to February 1992.
From 1994 to 2000, Ms. Hensley served as a trustee of Security First Trust,
an open-end investment management company registered under the Investment
Company Act of 1940.
Leon C. Janks has been a
director of the Company since July 1997 and served as a director of PEI from
March 1995 until July 1997. He has been a partner in the accounting firm of
Green, Hasson & Janks LLP in Los Angeles, California since 1980 and
serves as its Managing Partner. Mr. Janks has extensive experience in
domestic and international business, serving a wide variety of clients in
diverse businesses, and is a certified public accountant.
Lawrence B. Krause has been a
director of the Company since July 1997. Mr. Krause has been a Professor
and the Director of the Korea-Pacific Program at the Graduate School of
International Relations and Pacific Studies at the University of California, San
Diego since 1986. He became a Professor Emeritus in 1997. Mr. Krause also
serves on the board of FFTW Funds, Inc., an open-ended management investment
company registered under the Investment Company Act of 1940, and on advisory
boards for a number of institutions including the Korea Economic Institute, the
Committee on Asian Economic Studies and the U.S. National Committee for Pacific
Economic Cooperation.
Jose Luis Laparte has been a
director of the Company since February 2008 and President of the Company since
October 2004, having served as a consultant for the Company from December 2003
to October 2004. Prior to joining the Company as a consultant, Mr. Laparte
worked more than 14 years for Wal-Mart Stores, Inc. in Mexico and the United
States in progressively responsible positions. From October 2002 through
September 2003, he served as Vice President of Sam’s International, where he
directed and managed the company’s operations, finance, sales, marketing,
product development and merchandising. From May 2000 to October 2002, he served
as Vice President, Wal-Mart de Mexico, responsible for sales and the expansion
of the Sam’s Club format in Mexico.
Keene Wolcott has been a
director of the Company since October 2006. Mr. Wolcott has been President
of Wolcott Investments, Inc., a private investment company, since 1975.
Mr. Wolcott also served as a director of Price Legacy from September 2001
until December 2004 and served as a director of The Price REIT, Inc. from
January 1995 until 1998. From 1969 to 1973, Mr. Wolcott served as Chief
Executive Officer of the Colorado Corporation, which managed investor funds in
oil and gas exploration. Prior to 1969, he served as Senior Vice President of
Hayden, Stone and Company, a securities brokerage firm.
Edgar Zurcher has
been a director of the Company since October 15, 2009 and also served as a
director of the Company from November 2000 to February 2008. Mr. Zurcher has
been a partner in the law firm Zurcher, Odio & Raven in Costa Rica since
1980, which the Company uses in certain legal matters. Mr. Zurcher is also
President of PLP, S.A., as well as a director of Payless ShoeSource Holdings,
Ltd. (“Payless Shoes”). PLP, S.A. owns 40% of Payless Shoes, which rents retail
space from PriceSmart. Mr. Zurcher is also a director of Molinos de Costa
Rica Pasta and Roma S.A. dba Roma Prince S.A., from which the Company purchases
products for sale to its members at the PriceSmart warehouse clubs.
Additionally, Mr. Zurcher is a director of Promerica Financial Corporation, S.A.
which the Company received rental income and credit card fees in fiscal years
2008 and 2007.
56
Executive
Officers
The table
below indicates the name, position and age of the executive officers of the
Company:
Name
|
Position
|
Age
|
|||
Robert
E. Price
|
Chief
Executive Officer
|
67 | |||
Jose
Luis Laparte
|
President
|
43 | |||
John
M. Heffner
|
Executive
Vice President and Chief Financial Officer
|
55 | |||
Robert
M. Gans
|
Executive
Vice President, Secretary and General Counsel
|
60 | |||
William
J. Naylon
|
Executive
Vice President and Chief Operating Officer
|
47 | |||
Thomas
D. Martin
|
Executive
Vice President – Merchandising
|
53 | |||
Brud
E. Drachman
|
Executive
Vice President – Construction Management
|
54 | |||
John
D. Hildebrandt
|
Executive
Vice President – Central America Operations
|
51 |
Robert E. Price has been
Chairman of the Board of the Company since July 1994 and Chief Executive Officer
of the Company since April 2006. He served as Interim Chief Executive Officer of
the Company from April 2003 until April 2006 and also served as Interim
President of the Company from April 2003 until October 2004. Mr. Price also
served as President and Chief Executive Officer of the Company from July 1994
until January 1998. Additionally, Mr. Price served as Chairman of the Board
of Price Enterprises, Inc. (“PEI”) from July 1994 until November 1999 and was
President and Chief Executive Officer of PEI from July 1994 until September
1997. Mr. Price was Chairman of the Board of Price/Costco, Inc. (“Costco”)
from October 1993 to December 1994. From 1976 to October 1993, he was Chief
Executive Officer and a director of The Price Company (“TPC”). Mr. Price
served as Chairman of the Board of TPC from January 1989 to October 1993, and as
its President from 1976 until December 1990. Mr. Price has been a Manager
of The Price Group, LLC since August 2000.
Jose Luis Laparte has been a
director of the Company since February 2008 and President of the Company since
October 2004, having served as a consultant for the Company from December 2003
to October 2004. Prior to joining the Company as a consultant, Mr. Laparte
worked more than 14 years for Wal-Mart Stores, Inc. in Mexico and the United
States in progressively responsible positions. From October 2002 through
September 2003, he served as Vice President of Sam’s International, where he
directed and managed the company’s operations, finance, sales, marketing,
product development and merchandising. From May 2000 to October 2002, he served
as Vice President, Wal-Mart de Mexico, responsible for sales and the expansion
of the Sam’s Club format in Mexico.
John M. Heffner has been
Executive Vice President and Chief Financial Officer of the Company since
January 2004 after having served as a consultant to the Company on financial
matters from September 2003 through December 2003. From February 2000 until
August 2003, Mr. Heffner was Vice President of Finance and Chief Financial
Officer of Kyocera Wireless Corp. Mr. Heffner’s previous professional
experience was with Digital Equipment Corporation where he held a variety of
financial management roles over a 20 year period, and more recently with
QUALCOMM Incorporated, where he was a Vice President of Finance from July 1998
until February 2000.
Robert M. Gans has been
Executive Vice President, General Counsel and Secretary of the Company since
August 1997 and was Executive Vice President and General Counsel of PEI from
October 1994 until July 1997. Mr. Gans graduated from the UCLA School of
Law in 1975 and actively practiced law in private practice from 1975 until 1994.
From 1988 until October 1994, Mr. Gans was the senior member of the law
firm of Gans, Blackmar & Stevens, A.P.C., of San Diego,
California.
William J.
Naylon has been Executive Vice President and
Chief Operating Officer of the Company since January 2002. Mr. Naylon
served as Executive Vice President – Merchandising of the Company from July 2001
until January 2002 and as Senior Vice President of the Company from March 1998
until July 2001. From September 1995 through February 1998, Mr. Naylon was
Managing Director for the Company’s licensee warehouse club operation in
Indonesia. Prior to joining the Company, Mr. Naylon was a General Manager
for Costco and had served in various management roles for
TPC.
Thomas D. Martin has been
Executive Vice President – Merchandising of the Company since October 1998 and
served as Senior Vice President of the Company from August 1997 to September
1998. Mr. Martin previously served as Vice President of PEI from August
1994 until July 1997, directing merchandising strategies and product sourcing
for its international merchandising business, in addition to managing its
trading company activities. Prior to joining PEI as Vice President in August
1994, Mr. Martin served as Vice President of Costco from October 1993 to
December 1994 and had served in various management roles for
TPC.
Brud E. Drachman has been
Executive Vice President – Construction Management of the Company since November
2005, served as Executive Vice President – Real Estate and Construction of the
Company from February 2005 through October 2005 and had served as Executive Vice
President – Construction and Private Label Merchandising from November 2004
until January 2005. Mr. Drachman had served as Executive Vice President –
Real Estate and Construction of the Company from November 2002 until October
2004 and served as Senior Vice President – Real Estate and Construction of the
Company from August 1998 to October 2002. Mr. Drachman previously served as
Vice President – Real Estate and Construction at PEI from August 1994 to August
1997. Prior to joining PEI in 1994, Mr. Drachman served as Project Manager
at TPC since 1987.
John D. Hildebrandt has been
Executive Vice President – Central America and Trinidad Operations since March
2009. Mr. Hildebrandt served as Executive Vice President - Central America
Operations from August 2003 until February 2009, served as Executive Vice
President – Caribbean and Asia Operations from July 2001 until July 2003 and
served as Senior Vice President of the Company from September 2000 until July
2001. Mr. Hildebrandt previously served as Vice President of the Company
from September 1998 until August 2000, overseeing operations in Central America.
Mr. Hildebrandt served as the Company’s Country Manager in the Philippines
and Panama from August 1997 until August 1998, and as PEI’s Country Manager in
the Philippines and Panama from 1996 until the Company was spun off from PEI in
August 1997. Prior to joining PEI as Country Manager in 1996,
Mr. Hildebrandt was a Senior Operations Manager of Costco from 1994 through
1996, and had served in various management roles for TPC since
1979.
57
Corporate
Offices
9740
Scranton Road
San
Diego, CA 92121
(858) 404-8800
Stock
Exchange Listing
NASDAQ
Global Select Market
Stock
Symbol: PSMT
Annual
Meeting
Wednesday,
January 27, 2010 at 10:00 AM
PriceSmart,
Inc. Corporate Headquarters
9740
Scranton Road
San
Diego, CA 92121
Transfer
Agent
BNY
Mellon Shareowner Services
P.O. Box
3315
South
Hackensack, NJ 07606
Telephone:
(800) 522-6645
TDD for
Hearing Impaired: (800) 231-5469
|
Outside
U.S.: (201) 329-8660
|
Independent
Registered Public Accounting Firm
Ernst &
Young LLP
4370 La
Jolla Village Drive, Suite 500
San
Diego, CA 92122
PriceSmart's
annual reports to the Securities and Exchange Commission on Form 10-K, as
amended, and any quarterly reports on Form 10-Q, as amended, will be provided
free of charge upon written request to Investor Relations, PriceSmart, Inc.,
9740 Scranton Road., San Diego, CA 92121. Internet users can access PriceSmart's
web site at http://www.pricesmart.com.