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EX-32.1 - CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, CEO - PRICESMART INCex32_1.htm
EX-10.2 - TWENTY-FOURTH AMENDMENT TO EMPLOYMENT AGREEMENT BETWEEN THE COMPANY AND RMG - PRICESMART INCex10_2.htm
EX-10.7 - ADDENDUM NO. 2 TO PURCHASE AGREEMENT BETWEEN PRICESMART COLOMBIA S.A.S. AND CEMENTOS ARGOS S.A. - PRICESMART INCex10_7.htm
EX-31.2 - CERTIFICATION PURSUANT TO SECTION 302, CFO - PRICESMART INCex31_2.htm
EX-10.6 - ADDENDUM NO. 1 TO PURCHASE AGREEMENT BETWEEN PRICESMART COLOMBIA S.A.S. AND CEMENTOS ARGOS S.A. - PRICESMART INCex10_6.htm
EX-10.3 - LOAN AGREEMENT BETWEEN PRICESMART COLOMBIA, S.A.S. AND CITIBANK, N.A. - PRICESMART INCex10_3.htm
EX-32.2 - CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, CFO - PRICESMART INCex32_2.htm
EX-10.5 - PURCHASE AGREEMENT BETWEEN PRICESMART COLOMBIA S.A.S. AND CEMENTOS ARGOS S.A. - PRICESMART INCex10_5.htm
EX-10.1 - FIFTEENTH AMENDMENT TO EMPLOYMENT AGREEMENT BETWEEN THE COMPANY AND JLL - PRICESMART INCex10_1.htm
EX-10.4 - DEPOSIT BETWEEN PRICESMART, INC. AND CITIBANK, N.A. NEW YORK - PRICESMART INCex10_4.htm
EX-31.1 - CERTIFICATION PURSUANT TO SECTION 302, CEO - PRICESMART INCex31_1.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
  
FORM 10-Q
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended November 30, 2010
 
OR
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                to              
 
COMMISSION FILE NUMBER 0-22793
  
PriceSmart, Inc.
(Exact name of registrant as specified in its charter)
 
Delaware
33-0628530
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
9740 Scranton Road, San Diego, CA 92121
(Address of principal executive offices)
 
(858) 404-8800
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days.
 
Yes   þ
No   ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
Yes   ¨
No   ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions 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
Non-accelerated filer   ¨
Smaller Reporting Company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes   ¨
No   þ
 
 The registrant had 29,897,244 shares of its common stock, par value $0.0001 per share, outstanding at December 31, 2010.


 
 
 
 

 


PRICESMART, INC.
 
INDEX TO FORM 10-Q
 
     
   
Page
 
 
 
     
        1
     
 
        2
     
 
        3
     
 
        4
     
 
        5
     
 
        6
     
        31
     
        44
     
        45
   
 
     
        46
     
        46
     
        47
     
        47
     
        47
     
        47
     
        48


 
 
 
i

 

 
ITEM 1.                      FINANCIAL STATEMENTS

PriceSmart, Inc.’s (“PriceSmart” or the “Company”) unaudited consolidated balance sheet as of November 30, 2010 and the consolidated balance sheet as of August 31, 2010, the unaudited consolidated statements of income for the three  months  ended November 30, 2010 and 2009, the unaudited consolidated statements of equity for the three months ended November 30, 2010 and 2009, and the unaudited consolidated statements of cash flows for the three months ended November 30, 2010 and 2009, are included herein. Also included herein are the notes to the unaudited consolidated financial statements.

 
1

 


CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)

   
November 30,
       
   
2010
   
August 31,
 
   
(Unaudited)
   
2010
 
ASSETS
           
Current Assets:
           
Cash and cash equivalents
$
48,454
   
$
  73,346
 
Short-term restricted cash
 
1,240
     
  1,240
 
Receivables, net of allowance for doubtful accounts of $17 and $15 as of November 30 and August 31, 2010, respectively.
 
3,669
     
  2,855
 
Merchandise inventories
 
169,355
     
  131,190
 
Deferred tax assets – current
 
4,494
     
  3,639
 
Prepaid expenses and other current assets
 
25,400
     
  21,879
 
Assets of discontinued operations
 
924
     
  692
 
Total current assets
 
253,536
     
  234,841
 
Long-term restricted cash
 
13,631
     
  5,640
 
Property and equipment, net
 
277,467
     
  265,544
 
Goodwill
 
37,445
     
  37,471
 
Deferred tax assets – long term
 
15,361
     
  16,637
 
Other assets
 
4,369
     
  4,341
 
Investment in unconsolidated affiliates
 
8,092
     
  8,091
 
Total Assets
$
609,901
   
$
  572,565
 
LIABILITIES AND EQUITY
             
Current Liabilities:
             
Short-term borrowings
$
3,972
   
$
  3,551
 
Accounts payable
 
143,813
     
  124,401
 
Accrued salaries and benefits
 
10,798
     
  10,911
 
Deferred membership income
 
9,999
     
  9,729
 
Income taxes payable
 
4,054
     
  6,615
 
Other accrued expenses
 
12,805
     
  12,095
 
Long-term debt, current portion
 
7,734
     
  7,715
 
Deferred tax liability – current
 
409
     
  357
 
Liabilities of discontinued operations
 
115
     
  109
 
Total current liabilities
 
193,699
     
  175,483
 
Deferred tax liability – long-term
 
1,554
     
  1,198
 
Long-term portion of deferred rent
 
3,525
     
  3,272
 
Long-term income taxes payable, net of current portion
 
3,654
     
  3,564
 
Long-term debt, net of current portion
 
55,783
     
  53,005
 
Total liabilities
 
258,215
     
  236,522
 
Equity:
             
Common stock, $0.0001 par value, 45,000,000 shares authorized; 30,625,666 and 30,624,666 shares issued and 29,898,909 and 29,897,909 shares outstanding (net of treasury shares) as of November 30 and August 31, 2010, respectively.
 
3
     
  3
 
Additional paid-in capital
 
380,307
     
  379,368
 
Tax benefit from stock-based compensation
 
4,489
     
  4,490
 
Accumulated other comprehensive loss
 
(16,820
)
   
  (16,672
)
Accumulated deficit
 
(725
)
   
  (15,578
)
Less: treasury stock at cost; 726,757 and 726,757 shares as of November 30 and August 31, 2010, respectively.
 
(15,568
)
   
  (15,568
)
Total PriceSmart stockholders’ equity and total equity
 
351,686
     
  336,043
 
Total Liabilities and Equity
$
609,901
   
$
  572,565
 
See accompanying notes.  

 
2

 

CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED—AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

   
Three Months Ended
 
   
November 30,
 
   
2010
   
2009
 
Revenues:
           
Net warehouse club sales
 
$
377,331
   
$
308,653
 
Export sales
   
1,409
     
587
 
Membership income
   
5,425
     
4,649
 
Other income
   
1,907
     
1,530
 
Total revenues
   
386,072
     
315,419
 
Operating expenses:
               
Cost of goods sold:
               
Net warehouse club
   
317,813
     
261,717
 
Export
   
1,344
     
554
 
Selling, general and administrative:
               
Warehouse club operations
   
35,133
     
29,234
 
General and administrative
   
8,810
     
7,568
 
Pre-opening expenses
   
403
     
111
 
Total operating expenses
   
363,503
     
299,184
 
Operating income
   
22,569
     
16,235
 
Other income (expense):
               
Interest income
   
129
     
215
 
Interest expense
   
(956
)
   
(630
)
Other income (expense), net
   
(46
)
   
4
 
Total other expense
   
(873
)
   
(411
)
Income from continuing operations before provision for income taxes and loss of unconsolidated affiliates
   
21,696
     
15,824
 
Provision for income taxes
   
(6,845
)
   
(5,401
)
Loss of unconsolidated affiliates
   
(5
)
   
(2
)
Income from continuing operations
   
14,846
     
10,421
 
Income from discontinued operations, net of tax
   
7
     
9
 
Net income
   
14,853
     
10,430
 
Net income attributable to noncontrolling interest
   
     
(53
)
Net income attributable to PriceSmart
 
$
14,853
   
$
10,377
 
                 
Net income attributable to PriceSmart:
               
Income from continuing operations
   
14,846
     
10,368
 
Income (loss) from discontinued operations, net of tax
   
7
     
9
 
   
$
14,853
   
$
10,377
 
Net income per share attributable to PriceSmart and available for distribution:
               
Basic net income per share from continuing operations
 
$
0.50
   
$
0.35
 
Basic net income (loss) per share from discontinued operations, net of tax
 
$
0.00
   
$
0.00
 
Basic net income per share
 
$
0.50
   
$
0.35
 
                 
Diluted net income per share from continuing operations
 
$
0.50
   
$
0.35
 
Diluted net income (loss) per share from discontinued operations, net of tax
 
$
0.00
   
$
0.00
 
Diluted net income per share
 
$
0.50
   
$
0.35
 
Shares used in per share computations:
               
Basic
   
29,356
     
29,105
 
Diluted
   
29,362
     
29,163
 
Dividends per share
 
$
0.00
   
$
0.00
 

See accompanying notes.

 
 
 
3

 
 
 


CONSOLIDATED STATEMENTS OF EQUITY
(UNAUDITED—AMOUNTS IN THOUSANDS)  
 
                     
Tax Benefit
   
Accum-
                                     
                     
From
   
ulated
                     
Total
             
                     
Stock-
   
Other
                     
PriceSmart
             
               
Additional
   
based
   
Compre-
   
Accum-
               
Stock-
   
Non-
       
   
Common Stock
   
Paid-in
   
Compen-
   
hensive
   
ulated
   
Treasury Stock
   
holders'
   
Controlling
   
Total
 
   
Shares
   
Amount
   
Capital
   
sation
   
Loss
   
Deficit
   
Shares
   
Amount
   
Equity
   
Interest
   
Equity
 
Balance at August 31, 2009
   
30,337
   
$
3
   
$
377,210
   
$
4,547
   
$
(17,230
)
 
$
(49,998
)
   
656
   
$
(14,134
)
 
$
300,398
   
$
770
   
$
301,168
 
Purchase of treasury stock
   
     
     
     
     
     
     
     
(1
)
   
(1
)
   
     
(1
)
Issuance of restricted stock awards
   
15
     
     
     
     
     
     
     
     
     
     
 
Forfeiture of restricted stock awards
   
(3
)
   
     
     
     
     
     
     
     
     
     
 
Exercise of stock options
   
53
     
     
346
     
     
     
     
     
     
346
     
     
346
 
Stock-based compensation
   
     
     
770
     
62
     
     
     
     
     
832
     
     
832
 
Change in fair value of interest rate swaps
   
     
     
     
     
(71
)
   
     
     
     
(71
)
   
     
(71
)
Net income
   
     
     
     
     
     
10,377
     
     
     
10,377
     
53
     
10,430
 
Translation adjustment
   
     
     
     
     
152
     
     
     
     
152
     
(19
)
   
133
 
Comprehensive income
                                                                   
10,458
     
34
     
10,492
 
Balance at November 30, 2009
   
30,402
   
$
3
   
$
378,326
   
$
4,609
   
$
(17,149
)
 
$
(39,621
)
   
656
   
$
(14,135
)
 
$
312,033
   
$
804
   
$
312,837
 
                                                                                         
Balance at August 31, 2010
   
30,625
   
$
3
   
$
379,368
   
$
4,490
   
$
(16,672
)
 
$
(15,578
)
   
727
   
$
(15,568
)
 
$
336,043
   
$
   
$
336,043
 
Exercise of stock options
   
1
     
     
7
     
     
     
     
     
     
7
     
     
7
 
Stock-based compensation
   
     
     
932
     
(1
)
   
     
     
     
     
931
     
     
931
 
Change in fair value of interest rate swaps, net of tax
   
     
     
     
     
50
     
     
     
     
50
     
     
50
 
Net income
   
     
     
     
     
     
14,853
     
     
     
14,853
     
     
14,853
 
Translation adjustment
   
     
     
     
     
(198
)
   
     
     
     
(198
)
   
     
(198
)
Comprehensive income
                                                                   
14,705
     
     
14,705
 
Balance at November 30, 2010
   
30,626
   
$
3
   
$
380,307
   
$
4,489
   
$
(16,820
)
 
$
(725
)
   
727
   
$
(15,568
)
 
$
351,686
   
$
   
$
351,686
 

See accompanying notes.

  
 
 
 
4

 

CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED—AMOUNTS IN THOUSANDS)
   
Three Months Ended
 
   
November 30,
 
   
2010
   
2009
 
Operating Activities:
           
Net income
 
$
14,853
   
$
10,430
 
Adjustments to reconcile net income to net cash used in operating activities:
               
Depreciation and amortization
   
4,237
     
3,636
 
Allowance for doubtful accounts
   
2
     
(2
(Gain)/loss on sale of  property and equipment
   
53
     
(4
)
Deferred income taxes
   
827
     
1,036
 
Discontinued operations
   
(9
)
   
(9
Excess tax deficiency (benefit) on stock-based compensation
   
1
     
(62
Equity in losses of unconsolidated affiliates
   
5
     
2
 
Stock-based compensation
   
932
     
770
 
Change in operating assets and liabilities:
               
Change in receivables, prepaid expenses and other current assets, accrued salaries and benefits, deferred membership income and other accruals
   
(7,813
)
   
102
 
Merchandise inventories
   
(38,165
)
   
(31,549
Accounts payable
   
19,414
     
11,868
 
Net cash used in continuing operating activities
   
(5,663
)
   
(3,782
Net cash provided by (used in) discontinued operating activities
   
(218
)
   
140
 
Net cash used in operating activities
   
(5,881
)
   
(3,642
Investing Activities:
               
Purchases of property and equipment
   
(14,199
)
   
(8,625
)
Proceeds from disposal of property and equipment
   
4
     
60
 
Capital contribution to Panama joint venture
   
     
(100
)
Net cash used in continuing investing activities
   
(14,195
)
   
(8,665
)
Net cash used in discontinued investing activities
   
     
 
Net cash used in investing activities
   
(14,195
)
   
(8,665
)
Financing Activities:
               
Proceeds from bank borrowings
   
12,951
     
13,582
 
Repayment of bank borrowings
   
(9,828
)
   
(6,427
)
Addition to restricted cash
   
(8,000
)
   
 
Excess tax (deficiency) benefit on stock-based compensation
   
(1
)
   
62
 
Purchase of treasury stock
   
     
(1
)
Proceeds from exercise of stock options
   
7
     
346
 
Net cash provided by (used in) financing activities
   
(4,871
)
   
7,562
 
Effect of exchange rate changes on cash and cash equivalents
   
55
     
(409
Net increase (decrease) in cash and cash equivalents
   
(24,892
)
   
(5,154
)
Cash and cash equivalents at beginning of period
   
73,346
     
44,193
 
Cash and cash equivalents at end of period
 
$
48,454
   
$
39,039
 
 
Supplemental disclosure of cash flow information:
           
Cash paid during the period for:
           
Interest, net of amounts capitalized
 
$
1,062
   
$
698
 
Income taxes
 
$
6,805
   
$
4,197
 
 

 
 
 
 
5

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
November 30, 2010

NOTE 1 – COMPANY OVERVIEW AND BASIS OF PRESENTATION

 
PriceSmart, Inc.’s (“PriceSmart” or the “Company”) business consists primarily of international membership shopping warehouse clubs similar to, but smaller in size, than warehouse clubs in the United States.  As of November 30, 2010, the Company had 28 warehouse clubs in operation in 11 countries and one U.S. territory (five in Costa Rica, four in Panama and Trinidad, three in Guatemala and the Dominican Republic, two in El Salvador and Honduras and one each in Aruba, Barbados, Jamaica, Nicaragua and the United States Virgin Islands), of which the Company owns 100% of the corresponding legal entities (see Note 2 - Summary of Significant Accounting Policies).   The Company opened a new warehouse club in Santo Domingo, Dominican Republic (“Arroyo Hondo”) on November 5, 2010.  In November 2010, the Company through its Colombian subsidiary acquired approximately 210,000 square feet of land in Barranquilla, Colombia for approximately 12.1 billion Colombian Pesos (the equivalent of approximately $6.5 million United States Dollars as of the acquisition date.)  The Company plans to construct on this site a new membership warehouse club, expected to open during the summer of 2011.   In addition to the warehouse clubs operated directly by the Company, there is one facility in operation in Saipan, Micronesia licensed to and operated by local business people, from which the Company earns a small royalty fee.  The Company primarily operates in three segments based on geographic area.

Basis of Presentation - The interim consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q for interim financial reporting pursuant to the rules and regulations of the U.S. Securities and Exchange Commission ("SEC").  These interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Company’s annual report filed on Form 10-K for the fiscal year ended August 31, 2010.  The interim consolidated financial statements include the accounts of PriceSmart, Inc., a Delaware corporation, and its subsidiaries.  Intercompany transactions between the Company and its subsidiaries have been eliminated in consolidation.

In accordance with the Financial Accounting Standards Board’s (“FASB”) revised guidance establishing general accounting standards and disclosure of subsequent events, the Company has evaluated subsequent events through the date and time these financial statements were issued. 

The Company has utilized net income, rather than net income from continuing operations, as the starting point on the consolidated statements of cash flows for the periods presented, in order to reconcile net income to net cash flows from operating activities as required by the indirect method.  Therefore, prior periods have been reclassified to conform to current year presentation.  This change had no effect on cash from operating activities.


 
6

 

PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation - The interim consolidated financial statements of the Company included herein include the assets, liabilities and results of operations of the Company’s majority and wholly owned subsidiaries as listed below. All significant intercompany accounts and transactions have been eliminated in consolidation. The interim consolidated financial statements have been prepared by the Company without audit, pursuant to the rules and regulations of the SEC, and reflect all adjustments (consisting of normal recurring adjustments) that are, in the opinion of management, necessary to fairly present the financial position, results of operations, and cash flows for the interim periods presented. Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") have been condensed or omitted pursuant to such SEC rules and regulations. Management believes that the disclosures made are adequate to make the information presented not misleading. The results for interim periods are not necessarily indicative of the results for the full year.

The table below indicates the Company’s percentage ownership of and basis of presentation for each subsidiary as of November 30, 2010:  

 
Subsidiary
 
Countries
 
Ownership
 
Basis of Presentation
 
PriceSmart, Aruba
 
Aruba
 
100.0%
 
Consolidated
 
PriceSmart, Barbados
 
Barbados
 
100.0%
 
Consolidated
 
PriceSmart, Colombia
 
Colombia
 
100.0%
 
Consolidated(1)
 
PSMT Caribe, Inc.:
           
 
     Costa Rica
 
Costa Rica
 
100.0%
 
Consolidated
 
     Dominican Republic
 
Dominican Republic
 
100.0%
 
Consolidated
 
     El Salvador
 
El Salvador
 
100.0%
 
Consolidated
 
     Honduras
 
Honduras
 
100.0%
 
Consolidated
 
PriceSmart, Guam
 
Guam
 
100.0%
 
Consolidated(2)
 
PriceSmart, Guatemala
 
Guatemala
 
100.0%
 
Consolidated
 
PriceSmart Holdings, Inc.
 
St. Lucia
 
100.0%
 
Consolidated(3)
 
PriceSmart, Jamaica
 
Jamaica
 
100.0%
 
Consolidated
 
PriceSmart, Nicaragua
 
Nicaragua
 
100.0%
 
Consolidated
 
PriceSmart, Panama
 
Panama
 
100.0%
 
Consolidated
 
PriceSmart Exempt SRL
 
Barbados
 
100.0%
 
Consolidated(3)
 
PriceSmart, Trinidad
 
St. Lucia/Trinidad
 
100.0%
 
Consolidated(4)
 
PriceSmart, U.S. Virgin Islands
 
U.S. Virgin Islands
 
100.0%
 
Consolidated
 
GolfPark Plaza, S.A.
 
Panama
 
  50.0%
 
Equity(5)
 
Price Plaza Alajuela PPA, S.A.
 
Costa Rica
 
  50.0%
 
Equity(5)
 
Newco2
 
Costa Rica
 
  50.0%
 
Equity(5)
 
(1)
During fiscal year 2010, the Company created this subsidiary to record the investment and costs associated with the construction of membership warehouse clubs in Colombia.
(2)
Entity is treated as discontinued operations in the consolidated financial statements.
(3)
These subsidiaries act as investment and holding companies for the Company’s subsidiaries in Trinidad and Jamaica.
(4)
The Company acquired the remaining 5% ownership in May 2010, fiscal year 2010.  (See Note 12 - Acquisition of Noncontrolling Interest).
(5)
Purchases of joint venture interests during the first quarter of fiscal year 2009 are recorded as investment in unconsolidated affiliates on the consolidated balance sheets. (See Note 13 – Unconsolidated Affiliates)

Use of Estimates – The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.  
 
Variable Interest Entities –  The Company reviews and determines at the start of each arrangement, or subsequently if a reconsideration event occurs, whether any of its investments in joint ventures are a Variable Interest Entity (“VIE”) and whether it must consolidate a VIE and/or disclose information about its involvement in a VIE. The Company has determined that the joint ventures for GolfPark Plaza, Price Plaza Alajuela and Newco2 are VIEs.  The Company has determined that it is not the primary beneficiary of the VIEs and, therefore, has accounted for these entities under the equity method.  

Cash and Cash Equivalents – Cash and cash equivalents represent cash and short-term investments with maturities of three months or less when purchased.
 
Restricted Cash – As of November 30, 2010, the Company had short-term restricted cash of approximately $1.2 million.  This consisted of the current portion of a certificate of deposit maintained by the Company’s Honduras subsidiary with the Banco Del Pais related to the loan agreement entered into by the subsidiary with Banco del Pais.  The Company has long-term restricted cash of approximately $13.6 million. This consisted of approximately $4.8 million for the long-term portion of the Banco Del Pais certificate of deposit, $8.0 million for a time deposit pledged by the Company for the establishment of a loan entered into by the Company’s Colombia subsidiary and deposits made directly with federal regulatory agencies and within banking institutions in compliance with federal regulatory requirements in Costa Rica and Panama of approximately $831,000.
 
 
7

 
PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
 
Merchandise Inventories – Merchandise inventories, which include merchandise for resale, are valued at the lower of cost (average cost) or market. The Company provides for estimated inventory losses and obsolescence between physical inventory counts on the basis of a percentage of sales.  The provision is adjusted periodically to reflect the trend of actual physical inventory count results, with physical inventories occurring primarily in the second and fourth fiscal quarters.  In addition, the Company may be required to take markdowns below the carrying cost of certain inventory to expedite the sale of such merchandise.
 
Allowance for Doubtful Accounts – The Company generally does not extend credit to its members, but may do so for specific wholesale, government, other large volume members and for subtenants. The Company maintains an allowance for doubtful accounts based on assessments as to the probability of collection of specific customer accounts, the aging of accounts receivable, and general economic conditions.

Property and Equipment – Property and equipment are stated at historical cost. Depreciation is computed on the straight-line basis over the estimated useful lives of the assets. The useful life of fixtures and equipment ranges from three to 15 years and that of buildings from ten to 25 years. Leasehold improvements are amortized over the shorter of the life of the improvement or the expected term of the lease. In some locations, leasehold improvements are amortized over a period longer than the initial lease term as management believes it is reasonably assured that the renewal option in the underlying lease will be exercised as an economic penalty may be incurred if the option is not exercised. The sale or purchase of property and equipment is recognized upon legal transfer of property. For property and equipment sales, if any long term notes are carried by the Company as part of the sales terms, the sale is reflected at the net present value of current and future cash streams.
 
Acquisition of Business – The Company’s business combinations, where the Company acquires control of one or more businesses, are accounted for under the acquisition 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.

Changes in the Company’s ownership interest in subsidiaries, while the Company retains controlling financial interest in the subsidiary, are accounted for as an equity transaction. No gain or loss is recognized in consolidated net income or comprehensive income. The carrying amount of the noncontrolling interest is adjusted to reflect the change in the Company’s ownership interest in the subsidiary.  Any difference between the fair value of the consideration received or paid and the book value of the noncontrolling interest is recognized in equity attributable to the parent.

Lease Accounting – Certain of the Company's operating leases where the Company is the lessee (see Revenue Recognition Policy for lessor accounting), provide for minimum annual payments that increase over the life of the lease. The aggregate minimum annual payments are expensed on the straight-line basis beginning when the Company takes possession of the property and extending over the term of the related lease including renewal options when the exercise of the option is reasonably assured as an economic penalty may be incurred if the option is 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” and lessor-paid tenant improvements. In addition to the minimum annual payments, in certain locations, the Company pays additional contingent rent based on a contractually stipulated percentage of sales.

Fair Value Measurements – The Company measures the fair value for all financial and nonfinancial assets and liabilities that are recognized or disclosed at fair value in the consolidated financial statements on a recurring or nonrecurring basis.  The Company measures the fair value for interest rate swaps on a recurring basis.  The nonfinancial assets and liabilities are recognized at fair value subsequent to initial recognition when there is evidence of impairment.  There were no material non-financial assets and liabilities deemed impaired and measured at fair value on a nonrecurring basis for the three-month period ended November 30, 2010.

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

Valuation techniques utilized in the fair value measurement of assets and liabilities presented on the Company’s consolidated balance sheets were not changed from previous practice during the reporting period.  The Company discloses the valuation techniques and any change in method of such within the body of each footnote.

 
8

 
PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
          
      The following table summarizes financial assets and liabilities measured and recorded at fair value on a recurring basis in the Company’s consolidated balance sheet as of November 30, 2010 (in thousands): 
 
Assets and Liabilities:
 
Quoted Prices in Active Markets for Identical Assets (Level 1)
   
Significant Other Observable Inputs (Level 2)
   
Significant Unobservable Inputs (Level 3)
 
Total
 
Other accrued expenses
 
 $
   
$
702
   
$
   
$
702
 
Total 
 
 $
   
 $
702
   
 $
   
 $
702
 

 
  The fair value of derivatives is disclosed in further detail in Note 11 - Interest Rate Swaps.  
 
     As of November 30, 2010 and August 31, 2010, the Company had no significant measurements of financial assets or liabilities at fair value on a nonrecurring basis.
 
Goodwill – Goodwill resulting from certain business combinations totaled $37.4 million at November 30, 2010 and $37.5 million as of August 31, 2010.  Foreign exchange translation gains and losses related to this balance sheet caption accounted for the change during the three month period ended November 30, 2010. The Company reviews previously reported goodwill at the entity reporting level for impairment on an annual basis or more frequently if circumstances dictate.  No impairment of goodwill has been recorded to date.

Derivative Instruments and Hedging Activities – Derivative instruments and hedging activities consist of interest rate swaps.  Interest rate swaps are accounted for as cash flow hedges. Under cash flow hedging, the effective portion of the fair value of the derivative, calculated as the net present value of the future cash flows, is deferred on the consolidated balance sheets in accumulated other comprehensive loss. If any portion of an interest rate swap were determined to be an ineffective hedge, the gains or losses from changes in market value would be recorded directly in the consolidated statements of income. Amounts recorded in accumulated other comprehensive loss are released to earnings in the same period that the hedged transaction impacts consolidated earnings. (See Note 11—Interest Rate Swaps.)
 
Revenue Recognition – The Company recognizes merchandise sales and export 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.  Membership refunds are prorated over the remaining term of the membership, accordingly, no refund reserve is required to be established for the periods presented.  The Company recognizes and presents revenue-producing transactions on a net of tax basis.  The Company recognizes gift certificates sales revenue when the certificates are redeemed. The outstanding gift certificates are reflected as "Other accrued expenses" in the consolidated balance sheets. These gift certificates generally have a one-year stated expiration date from the date of issuance.  The Company periodically reviews unredeemed outstanding gift certificates, and the gift certificates that have expired are recognized as “Revenues: Other Income” on the consolidated statements of income. Operating leases, where the Company is the lessor, with lease payments that have fixed and determinable rent increases are recognized as revenue on a straight-line basis over the lease term. The Company also accounts in its straight-line computation for the effect of any "rental holidays." Contingent rental revenue is recognized as the contingent rent becomes due per the individual lease agreements.

Cost of Goods Sold – The Company includes the cost of merchandise, food service and bakery raw materials, and one hour photo supplies in cost of goods sold. The Company also includes the external and internal distribution and handling costs for supplying such merchandise, raw materials and supplies to the warehouse clubs. External costs include inbound freight, duties, drayage, fees, insurance, and non-recoverable value-added tax related to inventory shrink, spoilage and damage. Internal costs include payroll and related costs, utilities, consumable supplies, repair and maintenance, rent expense, and building and equipment depreciation at its distribution facilities.
  
Vendor consideration consists primarily of volume rebates, time limited product promotions and prompt payment discounts. Volume rebates are generally linked to pre-established purchase levels and are recorded as a reduction of cost of goods sold when the achievement of these levels is confirmed by the vendor in writing or upon receipt of funds, whichever is earlier. On a quarterly basis, the Company calculates the amount of rebates recorded in cost of goods sold that relates to inventory on hand and this amount is reclassified as a reduction to inventory, if significant. Product promotions are generally linked to coupons that provide for reimbursement to the Company from vendor rebates for the product being promoted.  The Company records the reduction in cost of goods sold on a transactional basis for these programs.  Prompt payment discounts are taken in substantially all cases, and therefore, are applied directly to reduce the acquisition cost of the related inventory, with the resulting effect recorded to cost of goods sold when the inventory is sold.
 
 
9

 
PRICESMART, INC.

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

Asset Impairment Costs –  The Company periodically evaluates its long-lived assets for indicators of impairment. Management's judgments are based on market and operational conditions at the time of the evaluation and can include management's best estimate of future business activity.  These periodic evaluations could cause management to conclude that impairment factors exist, requiring an adjustment of these assets to their then-current fair value.  Future business conditions and/or activity could differ materially from the projections made by management causing the need for additional impairment charges.
 
Closure Costs – The Company records the costs of closing warehouse clubs as follows:  severance costs that are determined to be an arrangement for one-time employee termination benefits are accrued at the date the plan of termination has received management authority and approval, the plan identifies the number of employees, job classification, functions, locations and expected completion dates, the plan establishes the terms of the severance, and management has deemed it unlikely that significant changes to the plan will be made.  In addition the plan must have been communicated to employees (referred to as the communication date).  Lease obligations are accrued at the cease use date by calculating the net present value of the minimum lease payments net of the fair market value of rental income that is expected to be received for these properties from third parties. Gain or loss on the sale of property, buildings and equipment is recognized based on the cash or net present value of future cash to be received as compensation upon consummation of the sale. All other costs are expensed as incurred. 

Contingencies and Litigation –  The Company accounts and reports for loss contingencies if (a) information available prior to issuance of the consolidated financial statements indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the consolidated financial statements and (b) the amount of loss can be reasonably estimated.  

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 the Company’s international subsidiaries is the local currency and not U.S. dollars. Assets and liabilities of these foreign subsidiaries are translated to U.S. dollars at the exchange rate on the balance sheet date, and revenue, costs and expenses are translated at average rates of exchange in effect during the period. The corresponding translation gains and losses are recorded as a component of accumulated other comprehensive income or loss.  These adjustments will affect net income upon the sale or liquidation of the underlying investment.

Monetary assets and liabilities in currencies other than the functional currency of the respective entity are revalued to the functional currency using the exchange rate on the balance sheet date. These foreign exchange transaction gains (losses), including repatriation of funds, which are included as a part of costs of goods sold in the consolidated statements of income. For the first three months of fiscal years 2011 and 2010, the Company recorded approximately $378,000 and $383,000 in foreign exchange gains, respectively.

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

Income Taxes – The Company is required to file federal and state income tax returns in the United States and various other tax returns in foreign jurisdictions. The preparation of these tax returns requires the Company to interpret the applicable tax laws and regulations in effect in such jurisdictions, which could affect the amount of tax paid by the Company. The Company, in consultation with its tax advisors, bases its tax returns on interpretations that are believed to be reasonable under the circumstances. The tax returns, however, are subject to routine reviews by the various federal, state and international taxing authorities in the jurisdictions in which the Company files its returns. As part of these reviews, a taxing authority may disagree with respect to the income tax positions taken by the Company (“uncertain tax positions”) and, therefore, require the Company to pay additional taxes. As required under applicable accounting rules, the Company accrues an amount for its estimate of additional income tax liability, including interest and penalties, which the Company could incur as a result of the ultimate or effective resolution of the uncertain tax positions. The Company reviews and updates the accrual for uncertain tax positions as more definitive information becomes available from taxing authorities, upon completion of tax audits, upon expiration of statutes of limitation, or upon occurrence of other events.
 

 
10

 

PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

As of November 30, 2010 and August 31, 2010, the Company had $13.5 million and $13.6 million, respectively, of aggregate accruals for uncertain tax positions (“gross unrecognized tax benefits”). Of these totals, $2.1 million and $2.0 million, respectively, represent the amount, as of these dates, of net unrecognized tax benefits that, if recognized, would favorably affect the Company’s effective income tax rate in any future period.

The Company records the aggregate accrual for uncertain tax positions as a component of current or long-term income taxes payable and the offsetting amounts as a component of the Company’s net deferred tax assets and liabilities. These liabilities are generally classified as long-term, even if the underlying statute of limitation will expire in the following twelve months. The Company classifies these liabilities as current if it expects to settle them in cash in the next twelve months. As of November 30, 2010 and August 31, 2010, the Company did not expect to make cash payments for these liabilities in the respective following 12 months.
 
The Company expects changes in the amount of unrecognized tax benefits in the next twelve months as the result of a lapse in various statutes of limitations. For the three months ended November 30, 2010 and 2009, the Company did not record a net reduction in income tax expense as the result of a lapse in the underlying statute of limitations. The lapse of statutes of limitation in the twelve-month period ending November 30, 2011 would result in a reduction to long-term income taxes payable totaling $1.0 million.

The Company’s continuing practice is to recognize interest and/or penalties related to income tax matters in income tax expense. Any such items that are unpaid at the balance sheet date and not projected to be paid within the following 12 months are reflected in the long-term income tax payable caption on the consolidated balance sheets. As of November 30, 2010 and August 31, 2010, the Company had accrued $1.6 million and $1.5 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 condition or liquidity.

Tax expense for the first quarter of fiscal year 2011 was $6.8 million on pre-tax income of $21.7 million, as compared to $5.4 million of tax expense on pre-tax income of $15.8 million for the first quarter fiscal year 2010. The effective tax rate for the first quarter of fiscal year 2011 is 31.6% as compared to 34.1% for first quarter of fiscal year 2010. The decrease in the effective tax rate is primarily attributable to a benefit from the re-measurement of the U.S. deferred tax assets of $437,000 due to a change in the U.S. statutory tax rate that is applicable to the current year, from 34% to 35%.
 
 
The Company is subject to taxation in the U.S. and various states and foreign jurisdictions. The Company is generally no longer subject to income tax examinations by tax authorities in its major jurisdictions except for the fiscal years subject to audit as set forth in the table below:

Tax Jurisdiction
 
Fiscal Years Subject to Audit
U.S. federal
 
1995 through 2001 and 2003 through 2010
California (U.S.)
 
2000 through 2001 and 2004 through 2010
Florida (U.S.)
 
2000 through 2001 and 2003 through 2010
Aruba
 
2002 to the present
Barbados
 
2002 to the present
Costa Rica
 
2007 to the present
Dominican Republic
 
2006 to the present
El Salvador
 
2007 to the present
Guatemala
 
2006 to the present
Honduras
 
2006 to the present
Jamaica
 
2004 to the present
Mexico
 
2006 to the present
Nicaragua
 
2007 to the present
Panama
 
2007 to the present
Trinidad
 
2004 to the present
U.S. Virgin Islands
 
2001 to the present
Colombia
 
2009 to the present


 
 
 
11

 


PRICESMART, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Recent Accounting Pronouncements

FASB ASC 310
 
In July 2010, the Financial Accounting Standards Board (“FASB”), issued amended guidance with regard to disclosures about the credit quality of financing receivables and the allowance for credit losses.  This update is intended to provide additional information to assist financial statement users in assessing an entity’s credit risk exposures and evaluating the adequacy of its allowance for credit losses by providing disclosures that facilitate financial statement users’ evaluation of the nature of credit risk inherent in the entity’s portfolio of financing receivables, how that risk is analyzed and assessed in arriving at the allowance for credit losses, and the changes and reasons for those changes in the allowance for credit losses. The Company is required to adopt this amended guidance on the disclosures as of the end of a reporting period and it is effective for interim and annual reporting periods ending on or after December 15, 2010.  The adoption of this guidance on disclosures will not have an impact on the Company’s consolidated financial statements or disclosures with regard to financing receivables.
 
FASB ASC 810

In January 2010, the FASB issued a clarification of scope with regard to accounting for noncontrolling interest in consolidation.  The Company adopted the original guidance as of the beginning of its annual reporting period beginning on September 1, 2009 (fiscal year 2010) and for all subsequent interim and annual periods.  The adoption of this amendment did not have a material effect on the Company’s financial position or results of operations.  In May 2010, the Company purchased the remaining 5% noncontrolling interest of its Trinidad subsidiary.  The Company recorded the change in the ownership interest as an equity transaction, adjusting additional paid-in capital for the difference between the fair value of consideration paid less the book value of the noncontrolling interest (see Note 12 - Acquisition of Noncontrolling Interest).
 
FASB ASC 810

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

 
12

 
PRICESMART, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
 
NOTE 3 – DISCONTINUED OPERATIONS

In accordance with FASB guidance on accounting for the impairment or disposal of long-lived assets the accompanying consolidated financial statements reflect the results of operations and financial position of the Company’s activities in Guam as discontinued operations.  Following the closure of the Guam operations in December 2003, the Company included the results of operations from Guam in the asset impairment and closure costs line of the consolidated statements of income through May 2005. However, after the sale of the Philippine operations in August 2005, the results of the Philippines and Guam activities have been consolidated in the discontinued operations line of the consolidated statements of income. Management views these activities as one activity managed under a shared management structure. Cash flow activities related to the Guam discontinued operations’ leased property will terminate in August 2011, which is the end date of the lease term.

The assets and liabilities of the discontinued operations are presented in the consolidated balance sheets under the captions “Assets of discontinued operations” and “Liabilities of discontinued operations.” The underlying assets and liabilities of the discontinued operations for the periods presented are as follows (in thousands):

  
 
November 30,
2010
   
August 31,
2010
 
Cash and cash equivalents
 
$
376
   
$
41
 
Accounts receivable, net
   
199
     
219
 
Prepaid expenses and other current assets
   
39
     
39
 
Other assets
   
310
     
393
 
Assets of discontinued operations
 
$
924
   
$
692
 
Other accrued expenses
 
$
115
   
$
109
 
Liabilities of discontinued operations
 
$
115
   
$
109
 
 
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 by the Company.
 
The following table sets forth the income (loss) from the discontinued operations of each period presented, in thousands.

   
Three Months Ended
 
   
November 30,
 
   
2010
   
2009
 
Net warehouse club sales
 
$
   
$
 
Pre-tax income (loss) from discontinued operations
   
7
     
9
 
Provision for income taxes
   
     
 
Income (loss) from discontinued operations, net of tax
 
$
7
   
$
9
 
 
The income (loss) from discontinued operations, net of tax for the three months ended November 30, 2010 and 2009 of approximately $7,000 and $9,000, respectively, is the net result of the subleasing activity in Guam. 
 
 
13

 
PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 
NOTE 4 – PROPERTY AND EQUIPMENT

Property and equipment consist of the following (in thousands):
   
November 30,
2010
   
August 31,
2010
 
Land
 
$
87,536
   
$
81,187
 
Building and improvements
   
172,586
     
171,828
 
Fixtures and equipment
   
90,509
     
88,090
 
Construction in progress
   
19,800
     
13,683
 
      Total property and equipment, recorded at historical cost
   
370,431
     
354,788
 
Less: accumulated depreciation
   
(92,964
)
   
(89,244
)
Property and equipment, net
 
$
277,467
   
$
265,544
 

Building and improvements includes net capitalized interest of approximately $3.1 million and $3.2 million as of November 30, 2010 and August 31, 2010, respectively. Construction in progress includes capitalized interest of $636,000 and $445,000 as of November 30, 2010 and August 31, 2010, respectively.  For the first three months of fiscal year 2011, the Company recorded approximately $138,000 in translation adjustments that decreased the carrying value of the total property and equipment for the period.  For the fiscal year 2010, the Company recorded approximately $267,000 in translation adjustments that increased the carrying value of the total property and equipment for the period.
 
In November 2010, the Company through its Colombian subsidiary acquired approximately 210,000 square feet of land in Barranquilla, Colombia for approximately 12.1 billion Colombian Pesos (the equivalent of approximately $6.5 million United States Dollars as of the acquisition date).  The Company plans to construct on this site a new membership warehouse club, expected to open during the summer of 2011.  The Company initially paid approximately $4.3 million in November 2010, and upon the completion of certain improvements, expected to occur by March 2011, the Company will then make the final payment of approximately $2.2 million.
 
The Company continued with the development of new warehouse club sites and the expansion of existing warehouse clubs in Latin America and the Caribbean.  Construction costs within these two segments for the three months ended November 30, 2010 were approximately $513,000 and $3.8 million, respectively.  The Company continued its expansion of the Miami warehouse, recording costs related to the expansion of approximately $151,000 for the first three months of fiscal year 2011.  In addition, the Company continued to acquire fixtures and equipment for new warehouse club sites, the expansion of existing warehouse clubs and corporate offices in Latin America, the Caribbean and the United States.  The Company acquired fixtures and equipment for approximately $1.3 million, $3.4 million and $102,000, respectively, in these segments for the three months ended November 30, 2010.  The Company acquired approximately $567,000 of software and computer hardware during the three months ended November 30, 2010.

During the first three months ended November 30, 2009, the Company continued with the development of new warehouse club sites and the expansion of existing warehouse clubs in Latin America and the Caribbean.  Construction costs within these two segments for the three months ended November 30, 2009 were approximately $1.8 million and $3.4 million, respectively. In addition, the Company continued to acquire fixtures and equipment for new warehouse club sites, the expansion of existing warehouse clubs and corporate offices in Latin America, the Caribbean and the United States.  The Company acquired fixtures and equipment for approximately $1.5 million, $1.4 million and $34,000, respectively, in these segments for the three months ended November 30, 2009.  The Company acquired approximately $574,000 of software and computer hardware during the three months ended November 30, 2009.
 
Depreciation and amortization expense for the first three months of fiscal years 2011 and 2010 was approximately $4.2 million and $3.6 million, respectively.

 
 
 
14

 


PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 5 – EARNINGS PER SHARE
 
Basic net income per share is computed by dividing the net income attributable to PriceSmart for the period by the weighted average number of common shares outstanding during the period. Diluted net income per share is computed by dividing the net income attributable to PriceSmart for the period by the weighted average number of common and common equivalent shares outstanding during the period. The Company excludes stock options from the calculation of diluted net income per share when the combined exercise price, average unamortized fair values and assumed tax benefits upon exercise are greater than the average market price for the Company’s common stock because their effect is anti-dilutive.

Effective September 1, 2009, the Company adopted FASB guidance which addresses whether instruments granted in share-based payment transactions are participating securities and, therefore, have a potential dilutive effect on earnings per share (“EPS”).  The following table sets forth the computation of net income per share for the three months ended November 30, 2010 and 2009 (in thousands, except per share amounts):

   
Three Months Ended
 
   
November 30,
 
   
2010
   
2009
 
Net income from continuing operations attributable to PriceSmart
  $ 14,846     $ 10,368  
Less: Earnings and dividends allocated to unvested stockholders
    (277 )     (218 )
Basic undistributed net earnings available to common stockholders from continuing operations attributable to PriceSmart
    14,569       10,150  
Net earnings available to common stockholders from continuing operations attributable to PriceSmart
  $ 14,569     $ 10,150  
Net earnings (loss) available to common stockholders from discontinued operations 
  $ 7     $ 9  
Basic weighted average shares outstanding
    29,356       29,105  
Add dilutive effect of stock options (two-class method)
    6       58  
Diluted average shares outstanding
    29,362       29,163  
Basic income per share from continuing operations attributable to PriceSmart
  $ 0.50     $ 0.35  
Diluted income per share from continuing operations attributable to PriceSmart
  $ 0.50     $ 0.35  
Basic income (loss) per share from discontinued operations
  $ 0.00     $ 0.00  
Diluted income (loss) per share from discontinued operations
  $ 0.00     $ 0.00  



 
 
 
15

 

PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
 
NOTE 6 – EQUITY
 
Dividends

No dividends were declared by the Company’s Board of Directors during the first three months of fiscal year 2011.

On January 27, 2010, the Company’s Board of Directors declared a cash dividend in the total amount of $0.50 per share, of which $0.25 per share was paid on February 26, 2010 to stockholders of record as of the close of business on February 15, 2010 and $0.25 per share was paid on August 31, 2010 to stockholders of record as of the close of business on August 13, 2010.

On January 29, 2009, the Company’s Board of Directors declared a cash dividend in the total amount of $0.50 per share, of which $0.25 per share was paid on February 27, 2009 to stockholders of record as of the close of business on February 13, 2009 and $0.25 per share was paid on August 31, 2009 to stockholders of record as of the close of business on August 14, 2009.

The Company anticipates the ongoing payment of semi-annual dividends in subsequent periods, although the actual declaration of future dividends, the amount of such dividends, and the establishment of record and payment dates is subject to final determination by the Board of Directors at its discretion, after its review of the Company’s financial performance and anticipated capital requirements.

Stockholder Contribution

No stockholder contributions were recorded for the first three months of fiscal years 2011 and 2010.

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

Accumulated Other Comprehensive Loss

Accumulated other comprehensive loss reported on the Company’s consolidated balance sheets consists of foreign currency translation adjustments of approximately $16.3 million and $16.2 million and unrealized losses on interest rate swaps (net of tax) of approximately $526,000 and $576,000 as of November 30, 2010 and August 31, 2010, respectively.  The unfavorable translation adjustments during the first three months of fiscal year 2011 of approximately $198,000 were primarily due to weaker foreign currencies. The $50,000 decrease in unrealized losses was mainly due to the change in the fair value of the interest rate swaps from fiscal year 2010 to November 30, 2010. The favorable translation adjustments of approximately $670,000 during fiscal year 2010 were due to a weaker U.S. dollar.

Retained Earnings Not Available for Distribution
 
As of November 30, 2010 and August 31, 2010, the accumulated deficit included retained earnings designated as legal reserves of approximately $3.5 million and $3.2 million, respectively, at various subsidiaries, which cannot be distributed as dividends to PriceSmart, Inc. according to applicable statutory regulations. 

 

 
 
 
16

 


PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 7 – STOCK OPTION AND EQUITY PARTICIPATION PLANS
 
In August 1997, the Company adopted the 1997 Stock Option Plan of PriceSmart, Inc. (the “1997 Plan”) for the benefit of its eligible employees, consultants and independent directors. Under the 1997 Plan, 700,000 shares of the Company's common stock are authorized for issuance.  The Compensation Committee of the Board of Directors administers the 1997 Plan with respect to options granted to employees or consultants of the Company, and the full Board of Directors administers the Plan with respect to director options. Options issued under the 1997 Plan typically vest over five years and expire in six years.

In July 1998, the Company adopted the 1998 Equity Participation Plan of PriceSmart, Inc. (the “1998 Plan”) for the benefit of its eligible employees, consultants and independent directors. The 1998 Plan authorizes 700,000 shares of the Company's common stock for issuance. Options issued under the 1998 Plan typically vest over five years and expire in six years. The 1998 Plan also allows restricted stock awards and restricted stock units, 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, which was approved at the Company’s annual meeting of stockholders in January 2009. 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, that was approved at the Company’s annual meeting of stockholders in January 2009. 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 and restricted stock units, which typically vest over five years.

In November 2002, the Company adopted the 2002 Equity Participation Plan of PriceSmart, Inc. (the “2002 Plan”) for the benefit of its eligible employees, consultants and independent directors. The 2002 Plan initially authorized 250,000 shares of the Company’s common stock for issuance. At the 2006 Annual Meeting, the stockholders of the Company approved a proposal to amend the 2002 Equity Participation Plan of PriceSmart, Inc. to increase the number of shares of Common Stock reserved for issuance under the 2002 Plan from 250,000 to 750,000. 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 and restricted stock units, which typically vest over five years.

As of November 30, 2010 and August 31, 2010, an aggregate of 497,539 shares and 493,539 shares, respectively, were available for future grants under all of the Company’s stock option and equity incentive plans.

The three types of equity awards offered by the Company are stock options (“options”), restricted stock awards (“RSA”) and restricted stock units (“RSU”).  The cost of these awards is the respective estimated fair value at the grant date.  Compensation related to options is accounted for by applying the valuation technique based on the Black-Scholes model.  Compensation related to RSAs and RSUs is based on using the closing stock price from the day prior to the grant date with the application of an estimated forfeiture rate.  The Company recognizes the compensation cost related to these awards over the requisite service period of five years, graded ratably at the rate of 20% per year over the five-year period.  The Company utilizes “modified grant-date accounting” for true-ups, due to actual forfeitures, at the vesting dates.


 
 
 
17

 


PRICESMART, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following table summarizes the components of the stock-based compensation expense for first three months of fiscal years 2011 and 2010 (in thousands), which are included in general and administrative expense and warehouse club operations in the consolidated statements of income:

   
Three Months Ended
 
   
November 30,
 
   
2010
   
2009
 
Options granted to directors
 
$
13
   
$
10
 
Restricted stock awards
   
897
     
744
 
Restricted stock units
   
22
     
16
 
Stock-based compensation expense
 
$
932
   
$
770
 
 
The following tables summarize stock options outstanding and stock options activity relating to the 1997 Plan, 1998 Plan, 2001 Plan and the 2002 Plan as of November 30, 2010 and 2009 as follows:

   
Shares
   
Weighted Average Exercise Price
 
Shares subject to outstanding options at August 31, 2010
   
35,200
   
$
20.99
 
Granted
   
     
 
Exercised
   
(1,000
)
   
7.63
 
Forfeited or expired
   
(4,000
)
   
34.33
 
Shares subject to outstanding options at November 30, 2010
   
30,200
   
$
19.67
 


   
Shares
   
Weighted Average Exercise Price
 
Shares subject to outstanding options at August 31, 2009
   
179,998
   
$
10.02
 
Granted
   
     
 
Exercised
   
(59,150
)
   
6.20
 
Forfeited or expired
   
     
 
Shares subject to outstanding options at November 30, 2009
   
120,848
   
$
11.89
 



The following table summarizes information about stock options outstanding and options exercisable as of November 30, 2010:

Range of
Exercise Prices
   
Outstanding as
of November 30, 2010
   
Weighted-Average
Remaining
Contractual Life
(in years)
   
Weighted-Average
Exercise Price on  Options Outstanding
   
Options Exercisable as
of November 30, 2010
   
Weighted-Average
Exercise Price
on Options
Exercisable as of
November 30, 2010
 
$
8.18 – $15.66
     
6,200
     
1.80
   
$
13.01
     
4,000
   
$
12.67
 
 
15.66 – 20.01
     
14,000
     
4.10
     
17.98
     
3,400
     
16.57
 
 
20.02 – 32.13
     
10,000
     
2.31
     
26.16
     
5,800
     
28.01
 
$
8.18 – $32.13
     
30,200
     
3.03
   
$
19.67
     
13,200
   
$
20.42
 
 



 
18

 


PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The aggregate intrinsic value and weighted average remaining contractual term of options exercisable at November 30, 2010 was approximately $129,000 and 1.9 years, respectively.  The aggregate intrinsic value and weighted average remaining contractual term of options outstanding at November 30, 2010 was approximately $309,000 and 3.0 years, respectively.

Cash proceeds from stock options exercised and the intrinsic value related to total stock options exercised during the three months ended November 30, 2010 and 2009 are summarized in the following table (in thousands):

   
Three Months Ended
November 30,
 
   
2010
   
2009
 
Proceeds from stock options exercised
 
$
7
   
 $
346
 
Intrinsic value of stock options exercised
 
$
23
   
 $
768
 

The Company began issuing restricted stock awards in fiscal year 2006 and restricted stock units in fiscal year 2008. The restricted stock awards 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 awards and units activity for the three months ended November, 2010 and 2009 was as follows:

   
Three Months Ended
November 30,
 
   
2010
   
2009
 
Grants outstanding at beginning of period
   
558,821
     
618,250
 
Granted
   
     
14,800
 
Forfeited
   
     
(3,274
)
Vested
   
     
(112
)
Grants outstanding at end of period
   
558,821
     
629,664
 

The following table summarizes the weighted average grant date fair value for restricted stock awards and units for first three months of fiscal years 2011 and 2010:

   
Three Months Ended November 30,
 
Weighted Average Grant Date Fair Value
 
2010
   
2009
 
Restricted stock awards and units granted
 
$
   
$
18.74
 
Restricted stock awards and units vested
 
$
   
$
17.75
 
Restricted stock awards and units forfeited
 
$
   
$
19.00
 

The total fair market value of restricted stock awards and units vested during the three months ended November 30, 2009 was approximately $2,000.

The remaining unrecognized compensation cost related to unvested options, restricted stock awards and units at November 30, 2010 and 2009 was approximately $7.7 million and $7.2 million, respectively, and the weighted-average period of time over which this cost will be recognized is 2.9 years and 3.0 years, respectively.  The excess tax benefit (deficiency) on stock-based compensation related to options, restricted stock awards and units for the three months ended November 30, 2010 and 2009 was approximately ($1,000) and $62,000, respectively.

During the three months ended November 30, 2009 the Company repurchased 34 shares of common stock from employees for approximately $1,000 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 awards.  The Company expects to continue this practice going forward.  The Company did not repurchase shares of common stock from employees during the three months ended November 30, 2010.  


 
 
 
19

 


PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


NOTE 8 – LEASES

The Company is committed under non-cancelable operating leases for the rental of facilities and land.  As of November 30, 2010, the Company’s warehouse clubs occupied a total of approximately 1,850,805 square feet of which 420,647 square feet were on leased property. The following is a summary of the warehouse clubs and Company facilities located on leased property:

       
Approximate
   
Remaining
       
Square
 
Current Lease
Option(s)
Location (1)
Facility Type
Date Opened
 
Footage
 
Expiration Date
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
   
64,627
 
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
Chaguanas, Trinidad
Container Parking
April 1, 2010
   
65,340
 
March 31, 2015
none
Santo Domingo, Dominican Republic
Central Offices
June 1, 2010
   
2,002
 
May 31, 2015
1 year
Bogota, Colombia
Central Offices
October 21, 2010
   
4,100
 
December 20, 2012
none
San Diego, CA(2)
Corporate Headquarters
April 1, 2004
   
35,000
 
August 31, 2015
5 years
Miami, FL(3)
Distribution Facility
March 1, 2008
   
274,652
 
July 31, 2021
10 years
Miami, FL
Distribution Facility
September 1, 2001
   
36,575
 
June 30, 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 negotiated a lease extension commencing on April 1, 2010 for a total of 65 months ending on August 31, 2015 for its corporate headquarters site.
(3)
The Company renegotiated its existing lease for its primary distribution center in Miami, extending the term and adding approximately 74,000 square feet of warehouse space adjacent to this facility following related construction activities expected to be completed in the second half of fiscal 2011.


The following table summarizes the components of rental expense charged for operating leases of open locations for the three months ended November 30, 2010 and 2009 (in thousands):  

   
Three Months Ended
 
   
November 30,
 
   
2010
   
2009
 
Minimum rental payments
 
$
1,647
   
$
1,701
 
Deferred rent accruals
   
253
     
110
 
Total straight line rent expense
   
1,900
     
1,811
 
Contingent rental payments
   
450
     
356
 
Common maintenance area expense
   
179
     
197
 
Rental expense
 
$
2,529
   
$
2,364
 

 
 
20

 
PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
 
Future minimum lease commitments for facilities under these leases with an initial term in excess of one year are as follows (in thousands):
 
Periods Ended November 30,
 
Open
Locations(1)
 
2011
 
$
  6,454
 
2012
   
  6,685
 
2013
   
  6,718
 
2014
   
  6,790
 
2015
   
  6,674
 
Thereafter
   
  47,966
 
Total (2)
 
$
  81,287
 
 
(1)
Operating lease obligations have been reduced by approximately $428,000 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 $741,000; however, sublease income for this location is projected to be approximately $890,000, yielding no net projected obligation.

Certain obligations under leasing arrangements are collateralized by the underlying asset being leased.
 
The following table summarizes the components of rental income recorded for operating leases for the three months ended November 30, 2010 and 2009 (in thousands): 

   
Three Months Ended
 
   
November 30,
 
   
2010
   
2009
 
Minimum rental payments
 
$
724
   
$
590
 
Deferred rent accruals
   
20
     
16
 
Total straight line rent income
   
744
     
606
 
Contingent rental payments
   
19
     
25
 
Common maintenance area income
   
14
     
13
 
Rental income
 
$
777
   
$
644
 

 
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 with an initial term in excess of one year from owned property as of November 30, 2010 (in thousands):

Periods ended November 30,
 
Amount
 
2011
 
$
  2,354
 
2012
   
  1,843
 
2013
   
  1,717
 
2014
   
  1,576
 
2015
   
  1,497
 
Thereafter
   
  8,314
 
Total
 
$
  17,301
 
 

 
 
21

 
PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
 
NOTE 9 – 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 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 certain cases, 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 (See Note 2 - Summary of Significant Accounting Policies - Income Taxes). 

In evaluating the exposure associated with various non-income tax filing positions, the Company accrues charges for probable and estimable exposures.  As of November 30, 2010 and August 31, 2010, the Company had recorded within other accrued expenses a total of $2.1 million, respectively for both periods, 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 more likely than not additional income tax liability in accounting for uncertain tax positions and in evaluating the probable additional tax associated with various non-income tax filing positions.  As such, the Company is unable to make a reasonable estimate of the sensitivity to change of estimates affecting its recorded liabilities.  As additional information becomes available, the Company assesses the potential liability and revises its estimates as appropriate.  While the Company believes the recorded liabilities are adequate, there are inherent limitations in the estimation process whereby actual losses may exceed estimated losses.
 
See Note 13 - 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 contract for this distribution center's services expire on December 31, 2011.  Future minimum service commitments related to this contract for the periods less than one year and for one to three years is approximately $125,000 and $10,000, respectively.
 
During fiscal year 2010, the Company was made aware of a potential permitting issue involving the Alajuela warehouse club, located in Costa Rica.  The construction of that club and its related facilities included the construction of a water retention basin ("WRB") on property owned by Hacienda Santa Anita(1) ("HSA").  This WRB is used to slow the flow of water runoff from property owned by the Company (the Alajuela warehouse club), property owned by the joint venture Plaza Price Alajuela ("PPA"), and property owned by HSA, as it is discharged into the municipal drainage system. After certain administrative and court proceedings related to the original construction permit for the club and its facilities, the Company was advised by the Municipality of Alajuela ("MA") that the MA required the construction and proper operation of a set of complementary improvements to the WRB.  These improvements consist of digging a network of dirt canals on HSA property to capture and conduct surface waters from these properties to the WRB.  HSA required the Company to sign an indemnification agreement before this work was performed, whereby the Company guarantees that it will purchase at fair market value the land held by HSA in the event HSA is not allowed to develop that land due to the construction of the canals.  The Company has estimated the current fair value of the land to be approximately $4.1 millionSeparately, the Costa Rican Health Ministry (“HM”) has recently required that the Company either close the WRB, or undertake an extensive set of improvements to the WRB which the Company believes to be impractical, expensive and unnecessary. As a result, the Company is attempting to meet with appropriate representatives of the HM. If the HM is unwilling to retract its current requirements, the Company may have to undertake various other efforts to redirect the flow of water, the total cost of which is currently undetermined. The Company has not recorded a liability for any of these matters as of November 30, 2010 or August 31, 2010.
 
(1)
Hacienda Santa Anita is a locally based business related to J.B Enterprises (a Panamanian business entity). On September 29, 2008, the Company entered into a joint venture with J.B. Enterprises, known as Plaza Price Alajuela, to jointly own and operate a commercial retail center adjacent to the Alajuela warehouse club, with each owning a 50% interest in the joint venture.
 
 
 
22

 
 
PRICESMART, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
 
 NOTE 10 – SHORT-TERM BORROWINGS AND LONG-TERM DEBT

As of November 30, 2010 and August 31, 2010, the Company had bank credit agreements and lines of credit for $28.0 million and $27.9 million, respectively, which are secured by certain assets of the Company and its subsidiaries and are guaranteed by the Company. Each of the facilities expire during the year and is normally renewed.  As of November 30, 2010 and August 31, 2010, borrowings, lines and letters of credit totaling approximately $4.2 million and $4.0 million, respectively, were outstanding under these facilities, leaving approximately $23.8 million and $23.9 million, respectively, available for borrowings. Of these outstanding amounts as of November 30, 2010 and August 31, 2010, the Company, together with its subsidiaries, had $4.0 million and $3.6 million, respectively, outstanding in short-term borrowings, at weighted-average interest rates of 8.7% and 8.8%, respectively.
 
Long-term debt consists of the following (in thousands):
   
November 30,
   
August 31,
 
   
2010
   
2010
 
Note due July 2017, 9.0% fixed rate(5)
 
$
5,697
   
$
5,858
 
Note due November 2017, (six-month LIBOR + 1.5%) 2.12% current Rate(3) (5) (6)
   
3,150
     
3,375
 
Note due November 2017, (BB Prime rate – 2%) 5.85% current rate
   
     
3,334
 
Note due September 2014, 5.5% fixed rate(1) (5) (6)
   
7,067
     
7,267
 
Note due August 2018, (1 year LIBOR + 2.75%) 3.62% current rate(3) (5)
   
6,975
     
7,200
 
Note due February 2016, 6.71% fixed rate(1) (5) (6)
   
7,837
     
8,075
 
Note due August 2014, 5.5% fixed rate(1) (5) (6)
   
8,750
     
9,000
 
Note due January 2015, 5.5%  fixed rate (1) (5) (6)
   
5,500
     
5,650
 
Note due March 2015, (Variable interest of 11.25%, to be periodically reviewed)11.25% current rate(2)
   
5,211
     
5,511
 
Note due August 2015, (Yr-1 5.0% Fixed rate, Yrs 2-3 5.5% Fixed rate and Yrs 4-5 Prime rate + 2.5%) 5.0% current rate(1) (5)
   
4,875
     
5,000
 
Note due November 2015, (six-month LIBOR + 2.4%) 2.85% current rate(4)
   
8,000
     
 
Note due September 2011, ($475,000 three year, zero interest, discounted loan) (7)(8)
   
455
     
450
 
Total long-term debt
   
63,517
     
60,720
 
Less: current portion(8)
   
7,734
     
7,715
 
Long-term debt, net of current portion
 
$
55,783
   
$
53,005
 

(1)
Loan contains a balloon payment due at the end of the loan term.
(2)
As collateral for this loan, the Company’s Honduras subsidiary entered into an agreement with Banco Del Pais to open and maintain a certificate of deposit for $6.0 million with an initial interest rate of 3.88%.  The certificate of deposit is automatically renewable by Banco Del Pais on an annual basis for the net amortized outstanding balance on the loan.
(3)
The Company has entered into an interest rate swap agreement to eliminate the changes (variability) of the interest payments on these loans.  (See Note 11 - Interest Rate Swaps).
(4)
On November 1, 2010, the Company’s Colombia subsidiary entered into a loan agreement with Citibank, N.A. in New York.  The agreement establishes a credit facility for $16.0 million to be disbursed in two tranches of $8.0 million each.  The interest rate is set at the 6 month LIBOR rate plus 2.4%.  The loan term is five years with interest only payments and a balloon payment at maturity.  The credit facility is renewable for an additional five year period at PriceSmart, Colombia's option.  As collateral for this credit facility, the Company entered into an agreement with Citibank, N.A. to open and maintain a certificate of deposit equal to the amount outstanding on the loan with an initial interest rate of 6 month LIBOR plus 1.66%.  
(5)
As of November 30, 2010 and August 31, 2010, approximately $49.9 million and $54.8 million, respectively, of the Company's long-term debt was collateralized by certain land, buildings, fixtures, equipment and shares of each respective subsidiary. The carrying amount of the non-cash assets assigned as collateral for long-term debt was $89.8 million and $87.4 million as of November 30, 2010 and August 31, 2010, respectively.
(6)
As of November 30, 2010 and August 31, 2010, approximately $32.3 million and $36.7 million, respectively, relate to loans held by the Company’s subsidiaries in Trinidad, Barbados, Panama, El Salvador and Honduras that require these subsidiaries to comply with certain annual or quarterly financial covenants which include debt service and leverage ratios.  As of November 30, 2010 and August 31, 2010, the Company was in compliance with respect to these covenants.
(7)
The note due on September 2011 was reclassified to long-term debt, current portion for the reporting period ended on November 30, 2010.
(8)
As of November 30, 2010 and August 31, 2010, approximately $455,000 and $450,000, respectively, of the Company’s long-term debt, current portion was collateralized by shares that the Company owns in the joint venture, Newco2 (see Note 13 - Unconsolidated Affiliates).