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EX-10.4 - EXHIBIT 10.4 - PRICESMART INCexhibit104q3fy015.htm
EX-10.3 - EXHIBIT 10.3 - PRICESMART INCexhibit103q3fy2015.htm
EX-10.1 - EXHIBIT 10.1 - PRICESMART INCexhibit101q3fy2015.htm
EX-10.2 - EXHIBIT 10.2 - PRICESMART INCexhibit102q3fy2015.htm
EX-31.1 - EXHIBIT 31.1 - PRICESMART INCexhibit311certificationq3f.htm
EX-31.2 - EXHIBIT 31.2 - PRICESMART INCexhibit312certificationq3f.htm
EX-32.1 - EXHIBIT 32.1 - PRICESMART INCexhibit321certificationofc.htm
EX-31.2 - EXHIBIT 31.2 - PRICESMART INCexhibit322certificationofc.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
  
FORM 10-Q
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended May 31, 2015
 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   ý
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 ý
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 ý
Accelerated filer   ¨ 
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   ý
 The registrant had 30,182,249 shares of its common stock, par value $0.0001 per share, outstanding at June 30, 2015.



PRICESMART, INC.

INDEX TO FORM 10-Q

 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


i


 PART I—FINANCIAL INFORMATION


ITEM 1.
FINANCIAL STATEMENTS

PriceSmart, Inc.’s (“PriceSmart,” "we" or the “Company”) unaudited consolidated balance sheet as of May 31, 2015 and the consolidated balance sheet as of August 31, 2014, the unaudited consolidated statements of income for the three and nine months ended May 31, 2015 and 2014, the unaudited consolidated statements of comprehensive income for the three and nine months ended May 31, 2015 and 2014, the unaudited consolidated statements of equity for the nine months ended May 31, 2015 and 2014, and the unaudited consolidated statements of cash flows for the nine months ended May 31, 2015 and 2014, are included herein. Also included herein are the notes to the unaudited consolidated financial statements.

1

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



 
May 31,
2015
 
August 31, 2014
 
(Unaudited)
 
ASSETS
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
145,593

 
$
137,098

Short-term restricted cash
16,249

 
2,353

Receivables, net of allowance for doubtful accounts of $2 and $0 as of May 31, 2015 and August 31, 2014, respectively
8,261

 
7,910

Merchandise inventories
266,184

 
226,383

Deferred tax assets – current
7,520

 
6,177

Prepaid expenses and other current assets (includes $4,425 and $495 as of May 31, 2015 and August 31, 2014, respectively, for the fair value of derivative instruments)
31,055

 
17,260

Total current assets
474,862

 
397,181

Long-term restricted cash
9,489

 
27,013

Property and equipment, net
442,723

 
426,325

Goodwill
35,965

 
36,108

Deferred tax assets – long term
7,178

 
11,825

Other non-current assets (includes $3,736 and $1,095 as of May 31, 2015 and August 31, 2014, respectively, for the fair value of derivative instruments)
35,651

 
30,755

Investment in unconsolidated affiliates
10,315

 
8,863

Total Assets
$
1,016,183

 
$
938,070

LIABILITIES AND EQUITY
 
 
 
Current Liabilities:
 
 
 
Accounts payable
240,426

 
223,559

Accrued salaries and benefits
18,767

 
17,799

Deferred membership income
21,244

 
17,932

Income taxes payable
8,769

 
7,718

Other accrued expenses (includes $0 and $14 as of May 31, 2015 and August 31, 2014, respectively, for the fair value of foreign currency forward contracts)
27,916

 
21,030

Dividends payable
10,564

 

Long-term debt, current portion
26,956

 
11,848

Deferred tax liability – current
130

 
157

Total current liabilities
354,772

 
300,043

Deferred tax liability – long-term
2,458

 
2,290

Long-term portion of deferred rent
6,374

 
5,591

Long-term income taxes payable, net of current portion
1,406

 
1,918

Long-term debt, net of current portion
74,852

 
79,591

Other long-term liabilities (includes $1,497 and $0 for the fair value of derivative instruments and $389 and $372 for the defined benefit plan as of May 31, 2015 and August 31, 2014, respectively)
1,886

 
372

Total liabilities
441,748

 
389,805

Equity:
 
 
 
Common stock, $0.0001 par value, 45,000,000 shares authorized; 30,969,402 and 30,950,701 shares issued and 30,177,979 and 30,209,917 shares outstanding (net of treasury shares) as of May 31, 2015 and August 31, 2014, respectively
3

 
3

Preferred stock $0.0001 par value; 2,000,000 shares authorized; no shares issued and outstanding as of May 31, 2015 and August 31, 2014

 

Additional paid-in capital
401,821

 
397,150

Tax benefit from stock-based compensation
10,725

 
9,505

Accumulated other comprehensive loss
(70,056
)
 
(49,286
)
Retained earnings
261,162

 
215,613

Less: treasury stock at cost; 791,423 and 740,784 shares as of May 31, 2015 and August 31, 2014, respectively
(29,220
)
 
(24,720
)
Total equity
574,435

 
548,265

Total Liabilities and Equity
$
1,016,183

 
$
938,070

See accompanying notes.

2


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

 
Three Months Ended May 31,
 
Nine Months Ended May 31,
 
2015
 
2014
 
2015
 
2014
Revenues:
 
 
 
 
 
 
 
Net warehouse club sales
$
675,314

 
$
597,885

 
$
2,043,849

 
$
1,844,746

Export sales
9,465

 
6,577

 
24,126

 
19,062

Membership income
11,189

 
9,552

 
32,202

 
28,301

Other income
1,135

 
1,023

 
3,244

 
2,903

Total revenues
697,103

 
615,037

 
2,103,421

 
1,895,012

Operating expenses:
 
 
 
 
 
 
 
Cost of goods sold:
 
 
 
 
 
 
 
Net warehouse club
578,868

 
509,684

 
1,743,772

 
1,575,623

Export
8,992

 
6,246

 
22,953

 
18,110

Selling, general and administrative:
 
 
 
 
 
 
 
Warehouse club operations
60,754

 
53,617

 
179,006

 
158,592

General and administrative
14,214

 
12,604

 
41,681

 
37,065

Pre-opening expenses
33

 
1,125

 
3,411

 
1,939

Loss/(gain) on disposal of assets
724

 
558

 
1,087

 
746

Total operating expenses
663,585

 
583,834

 
1,991,910

 
1,792,075

Operating income
33,518

 
31,203

 
111,511

 
102,937

Other income (expense):
 
 
 
 
 
 
 
Interest income
283

 
202

 
813

 
576

Interest expense
(1,615
)
 
(1,043
)
 
(4,759
)
 
(2,967
)
Other income (expense), net
(311
)
 
489

 
(4,602
)
 
1,512

Total other income (expense)
(1,643
)
 
(352
)
 
(8,548
)
 
(879
)
Income before provision for income taxes and income (loss) of unconsolidated affiliates
31,875

 
30,851

 
102,963

 
102,058

Provision for income taxes
(10,750
)
 
(9,534
)
 
(36,378
)
 
(31,035
)
Income (loss) of unconsolidated affiliates
70

 
3

 
92

 
7

Net income
21,195

 
$
21,320

 
$
66,677

 
71,030

Net income per share available for distribution:
 
 
 
 
 
 
 
Basic net income per share
$
0.70

 
$
0.70

 
$
2.20

 
$
2.35

Diluted net income per share
$
0.70

 
$
0.70

 
$
2.20

 
$
2.34

Shares used in per share computations:
 
 
 
 
 
 
 
Basic
29,883

 
29,784

 
29,834

 
29,733

Diluted
29,888

 
29,792

 
29,841

 
29,743

Dividends per share
$

 
$

 
$
0.70

 
$
0.70



See accompanying notes.

3


PRICESMART, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED—AMOUNTS IN THOUSANDS)

 
Three Months Ended May 31,
 
Nine Months Ended May 31,
 
2015
 
2014
 
2015
 
2014
Net income
$
21,195

 
$
21,320

 
$
66,677

 
$
71,030

Other Comprehensive Income, net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustments (1)
$
(1,684
)
 
$
3,929

 
$
(24,241
)
 
$
(8,443
)
     Defined benefit pension plan:
 
 
 
 
 
 
 
Net gain (loss) arising during period
(11
)
 
5

 
(35
)
 
16

     Total defined benefit pension plan
(11
)
 
5

 
(35
)
 
16

Unrealized gains/(losses) on change in fair value of interest rate swaps(2)
38

 
(1,343
)
 
3,506

 
(421
)
Other comprehensive income (loss)
(1,657
)
 
2,591

 
(20,770
)
 
(8,848
)
Comprehensive income
$
19,538

 
$
23,911

 
$
45,907

 
$
62,182


(1)
Translation adjustments arising in translating the financial statements of a foreign entity have no effect on the income taxes of that foreign entity. They may, however, affect: (a) the amount, measured in the parent entity's reporting currency, of withholding taxes assessed on dividends paid to the parent entity and (b) the amount of taxes assessed on the parent entity by the government of its country. The Company has determined that the reinvestment of earnings of its foreign subsidiaries are indefinite because of the long-term nature of the Company's foreign investment plans. Therefore, deferred taxes are not provided for on translation adjustments related to non-remitted earnings of the Company's foreign subsidiaries.
(2) See Note 9 - Derivative Instruments and Hedging Activities.


See accompanying notes.


4


PRICESMART, INC.
CONSOLIDATED STATEMENTS OF EQUITY
(UNAUDITED—AMOUNTS IN THOUSANDS)  

 
Common Stock
 
Additional Paid-in Capital
 
Tax Benefit
From
Stock Based Compen-sation
 
Accumulated
Other
Compre-hensive
Income(Loss)
 
Retained
Earnings
 
Treasury Stock
 
Total
 
Shares
 
Amount
 
 
 
 
 
Shares
 
Amount
 
Equity
Balance at August 31, 2013
30,924

 
$
3

 
$
390,581

 
$
8,016

 
$
(41,475
)
 
$
143,871

 
690

 
$
(19,947
)
 
$
481,049

Purchase of treasury stock

 

 

 

 

 

 
49

 
(4,601
)
 
(4,601
)
Issuance of restricted stock award
20

 

 

 

 

 

 

 

 

Forfeiture of restricted stock awards
(1
)
 

 

 

 

 

 

 

 

Exercise of stock options
5

 

 
118

 

 

 

 

 

 
118

Stock-based compensation

 

 
4,870

 
1,473

 

 

 

 

 
6,343

Dividend paid to stockholders

 

 

 

 

 
(10,570
)
 

 

 
(10,570
)
Dividend payable to stockholders

 

 

 

 

 
(10,593
)
 

 

 
(10,593
)
Net income

 

 

 

 

 
71,030

 

 

 
71,030

Other comprehensive income (loss)

 

 

 

 
(8,848
)
 

 

 

 
(8,848
)
Balance at May 31, 2014
30,948

 
$
3

 
$
395,569

 
$
9,489

 
$
(50,323
)
 
$
193,738

 
739

 
$
(24,548
)
 
$
523,928

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at August 31, 2014
30,951

 
$
3

 
$
397,150

 
$
9,505

 
$
(49,286
)
 
$
215,613

 
741

 
$
(24,720
)
 
$
548,265

Purchase of treasury stock

 

 

 

 

 

 
50

 
(4,500
)
 
(4,500
)
Issuance of restricted stock award
25

 

 

 

 

 

 

 

 

Forfeiture of restricted stock awards
(9
)
 

 

 

 

 

 

 

 

Exercise of stock options
3

 

 
49

 

 

 

 

 

 
49

Stock-based compensation

 

 
4,622

 
1,220

 

 

 

 

 
5,842

Dividend paid to stockholders

 

 

 

 

 
(10,564
)
 

 

 
(10,564
)
Dividend payable to stockholders

 

 

 

 

 
(10,564
)
 

 

 
(10,564
)
Net income

 

 

 

 

 
66,677

 

 

 
66,677

Other comprehensive income (loss)

 

 

 

 
(20,770
)
 

 

 

 
(20,770
)
Balance at May 31, 2015
30,970

 
$
3

 
$
401,821

 
$
10,725

 
$
(70,056
)
 
$
261,162

 
791

 
$
(29,220
)
 
$
574,435

 


See accompanying notes.

5


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

 
Nine Months Ended May 31,
 
2015
 
2014
Operating Activities:
 
 
 
Net income
$
66,677

 
$
71,030

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
25,173

 
20,932

Allowance for doubtful accounts
2

 
6

(Gain)/loss on sale of property and equipment
1,087

 
746

Deferred income taxes
3,388

 
1,869

Excess tax benefit on stock-based compensation
(1,220
)
 
(1,473
)
Equity in (gains) of unconsolidated affiliates
(92
)
 
(7
)
Stock-based compensation
4,622

 
4,870

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
(9,101
)
 
(11,246
)
Merchandise inventories
(39,801
)
 
(13,280
)
Accounts payable
15,003

 
2,746

Net cash provided by (used in) operating activities
65,738

 
76,193

Investing Activities:
 
 
 
Additions to property and equipment
(63,041
)
 
(82,774
)
Deposits for land purchase option agreements
903

 
(850
)
Proceeds from disposal of property and equipment
67

 
78

Investment in joint ventures
(1,360
)
 
(750
)
Net cash provided by (used in) investing activities
(63,431
)
 
(84,296
)
Financing Activities:
 
 
 
Proceeds from bank borrowings
45,477

 
37,734

Repayment of bank borrowings
(27,783
)
 
(17,390
)
Cash dividend payments
(10,564
)
 
(10,570
)
Release of restricted cash
2,920

 
8,000

Excess tax benefit on stock-based compensation
1,220

 
1,473

Purchase of treasury stock
(4,500
)
 
(4,601
)
Proceeds from exercise of stock options
49

 
118

Net cash provided by (used in) financing activities
6,819

 
14,764

Effect of exchange rate changes on cash and cash equivalents
(631
)
 
(4,776
)
Net increase (decrease) in cash and cash equivalents
8,495

 
1,885

Cash and cash equivalents at beginning of period
137,098

 
121,874

Cash and cash equivalents at end of period
$
145,593

 
$
123,759

 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
Cash paid during the period for:
 
 
 
Interest, net of amounts capitalized
$
4,391

 
$
2,508

Income taxes
$
33,583

 
$
33,308

Supplemental non-cash item:
 
 
 
Dividends declared but not paid
$
10,564

 
$
10,593


6


PRICESMART, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
May 31, 2015
 
NOTE 1 – COMPANY OVERVIEW AND BASIS OF PRESENTATION
 
PriceSmart, Inc.’s (“PriceSmart” or the “Company”) business consists primarily of international membership shopping warehouse clubs similar to, but smaller in size than, warehouse clubs in the United States.  As of May 31, 2015, the Company had 36 consolidated warehouse clubs in operation in 12 countries and one U.S. territory (six in Costa Rica and Colombia; four in Panama and Trinidad; three in Guatemala, Honduras and the Dominican Republic; two in El Salvador; 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). During October 2013, the Company opened its sixth membership warehouse club in Costa Rica in La Union, Cartago, and in May 2014, the Company opened its third warehouse club in Honduras in Tegucigalpa, the Company's second in the capital city. In January 2014, the Company acquired land in Pereira, Colombia and in the city of Medellin, Colombia and leased land in the city of Bogota, Colombia. The Company built new warehouse clubs at these three sites, and opened the Bogota location in October 2014 and opened the other two sites in November 2014. Together with the three warehouse clubs that were operating prior to these openings in Colombia (one in Barranquilla and two in Cali), these three new clubs brought the number of PriceSmart warehouse clubs operating in Colombia to six. In September 2014, the Company acquired land in La Chorrera ("Costa Verde"), west of Panama City, Panama, on which the Company opened its fifth PriceSmart warehouse club in Panama in June 2015. In April 2015, the Company acquired land in Managua, Nicaragua on which the Company's second warehouse club in Nicaragua is scheduled to open late in 2015. The Company continues to explore other potential sites for future warehouse clubs in Central America, the Caribbean and Colombia. The warehouse club sales and membership sign-ups experienced with the opening of the warehouse clubs in Colombia have reinforced the Company's belief that there could be a market for additional PriceSmart warehouse clubs in other Colombian cities.

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 on Form 10-K for the fiscal year ended August 31, 2014 (the “2014 Form 10-K”).  The interim consolidated financial statements include the accounts of PriceSmart, Inc., a Delaware corporation, and its subsidiaries.  Inter-company transactions between the Company and its subsidiaries have been eliminated in consolidation.

The Company has evaluated subsequent events through the date and time these financial statements were issued. 

Reclassifications to consolidated balance sheet recorded during fiscal year 2015 for fiscal year 2014 - Certain reclassifications to the consolidated balance sheet have been made to prior fiscal year amounts to conform to the presentation in the current fiscal year. These reclassifications relate to the presentation of certain income tax receivables (see note 2). The table below summarizes these reclassifications.
 
 
 
 
 
 
 
August 31, 2014 balance sheet line item as previously reported
 
Amount reclassified Dr/(Cr)
 
August 31, 2014 balance sheet line item as currently reported
Prepaid expenses and other current assets
22,570

 
$
(5,310
)
 
17,260

Other non-current assets
27,593

 
3,162

 
30,755

Accounts payable
(225,761
)
 
2,202

 
(223,559
)
Income taxes payable
(7,664
)
 
(54
)
 
(7,718
)
Net amount of reclassifications
 
 
$

 
 




7


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


NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation – The interim consolidated financial statements of the Company included herein include the assets, liabilities and results of operations of the Company’s wholly owned subsidiaries and the Company's investment in, and the Company's share of the income (loss) of, joint ventures recorded under the equity method.  All significant inter-company accounts and transactions have been eliminated in consolidation. The interim consolidated financial statements have been prepared by the Company 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 periods presented. The results for interim periods are not necessarily indicative of the results for the full year. As of May 31, 2015, all of the Company's subsidiaries were wholly owned. Additionally, the Company's ownership interest in real estate development joint ventures as of May 31, 2015 is listed below:
Real Estate Development Joint Ventures
 
Countries
 
Ownership
 
Basis of Presentation
GolfPark Plaza, S.A.
 
Panama
 
50.0
%
 
Equity(1)
Price Plaza Alajuela PPA, S.A.
 
Costa Rica
 
50.0
%
 
Equity(1)
 
(1)
Joint venture interests are recorded as investment in unconsolidated affiliates on the consolidated balance sheets.

Use of Estimates – The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.  
 
Variable Interest Entities –  The Company reviews and determines at the start of each arrangement, or subsequently if a reconsideration event occurs, whether any of its investments in joint ventures are a Variable Interest Entity (“VIE”) and whether it must consolidate a VIE and/or disclose information about its involvement in a VIE. The Company has determined that the joint ventures for GolfPark Plaza (Panama) and Price Plaza Alajuela (Costa Rica) 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 and proceeds due from credit and debit card transactions, which are generally settled within a few days of the underlying transaction.

8


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



Restricted Cash –   The changes in restricted cash are disclosed within the consolidated statement of cash flows based on the nature of the restriction. The following table summarizes the restricted cash reported by the Company (in thousands):
 
May 31, 2015
 
August 31, 2014
Short-term restricted cash:
 
 
 
Restricted cash for Honduras loan
$

 
$
1,200

Restricted cash for land purchase option agreements
192

 
1,095

Restricted cash for Colombia bank loans
16,000

 

Other short-term restricted cash (1)
57

 
58

Total short-term restricted cash
$
16,249

 
$
2,353

 
 
 
 
Long-term restricted cash:
 
 
 
Restricted cash for Honduras loan
$

 
$
1,720

Restricted cash for Colombia bank loans
8,000

 
24,000

Other long-term restricted cash (1)
1,489

 
1,293

Total long-term restricted cash
$
9,489

 
$
27,013

 
 
 
 
Total restricted cash
$
25,738

 
$
29,366


(1)
Other short-term and long-term restricted cash consists mainly of cash deposits held within banking institutions in compliance with federal regulatory requirements in Costa Rica and Panama.
    
Tax Receivables - The Company pays Value Added Tax (“VAT”) or similar taxes (“input VAT”), income taxes, and other taxes within the normal course of its business in most of the countries in which it operates related to the procurement of merchandise and/or services it acquires and/or on estimated sales and taxable income. The Company also collects VAT or similar taxes on behalf of the government (“output VAT”) for merchandise and/or services it sells. If the output VAT exceeds the input VAT, then the difference is remitted to the government, usually on a monthly basis. If the input VAT exceeds the output VAT, this creates a VAT receivable. In some countries where the Company operates, the governments have implemented additional collection procedures, such as requiring credit card processors to remit a portion of sales processed via credit card directly to the government as advance payments of VAT and/or income tax. In the case of VAT, these procedures alter the natural offset of input and output VAT and generally leave the Company with a net VAT receivable, forcing the Company to process significant refund claims on a recurring basis. With respect to income taxes paid, if the estimated income taxes paid or withheld exceed the actual income tax due this creates an income tax receivable. The Company either requests a refund of these tax receivables or applies the balance to expected future tax payments. These refund or offset processes can take anywhere from several months to several years to complete.
    
In most countries where the Company operates, the tax refund process is defined and structured with regular refunds or offsets. However, in two countries the governments have alleged that there is no defined process in the law to allow them to refund VAT receivables. The Company, together with its tax and legal advisers, is currently appealing these interpretations in court and expects to prevail. In one of these countries, where there is recent favorable jurisprudence, the government recently performed an audit to verify the amount of the respective VAT receivables as a required precursor to any refund. The balance of the VAT receivable in these countries was $6.3 million and $5.7 million as of May 31, 2015 and August 31, 2014, respectively. In another country in which we have warehouse clubs, beginning in fiscal year 2015, a new minimum income tax mechanism took effect, which requires the Company to pay taxes based on a factor of sales rather than income. As a result, the Company is making income tax payments substantially in excess of those it would expect to pay based on taxable income. The current rules (which the Company has appealed) do not allow the Company to obtain a refund or offset this excess income tax against other taxes. As of May 31, 2015, the Company currently has an outstanding income tax receivable of $509,000 in this country; and there were deferred tax assets of approximately $1.4 million outstanding as of that date. The Company has not placed any type of allowance on the recoverability of these tax receivables or deferred income taxes, because the Company believes that it has a more likely than not chance to succeed in its appeal on the matter.
    

9


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



The Company's policy for classification and presentation of VAT receivables, income tax receivables and other tax receivables is as follows:

Short-term VAT and Income tax receivables, recorded as Other current assets: This classification is used for any countries where the Company's subsidiary has generally demonstrated the ability to recover the VAT or income tax receivable within one year. The Company also classifies as short-term any approved refunds or credit notes to the extent that the Company expects to receive the refund or use the credit notes within one year.

Long-term VAT and Income tax receivables, recorded as Other non-current assets: This classification is used for amounts not approved for refund or credit in countries where the Company's subsidiary has not demonstrated the ability to obtain refunds within one year and/or for amounts which are subject to outstanding disputes. An allowance is provided against VAT and income tax receivable balances in dispute when the Company does not expect to eventually prevail in its recovery.
    
The following table summarizes the VAT receivables reported by the Company (in thousands):
 
May 31, 2015
 
August 31, 2014
Prepaid expenses and other current assets
$
5,632

 
$
3,565

Other non-current assets
18,494

 
17,115

Total amount of VAT receivable reported
$
24,126

 
$
20,680


The following table summarizes the Income tax receivables reported by the Company (in thousands):
 
May 31, 2015
 
August 31, 2014
Prepaid expenses and other current assets
$
3,339

 
$
1,916

Other non-current assets
8,819

 
7,218

Total amount of income tax receivable reported
$
12,158


$
9,134


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 expected 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 expected 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.

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.

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 fair value of an asset is the price at which the asset could be sold in an orderly transaction between unrelated, knowledgeable and willing parties able to engage in the transaction. A liability’s fair value is defined as the amount that would be paid to transfer the

10


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


liability to a new obliger in a transaction between such parties, not the amount that would be paid to settle the liability with the creditor.

The Company has established a three-tier fair value hierarchy, which prioritizes the inputs used in measuring and revaluing 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 revalued at the balance sheet dates, on a recurring basis, primarily included cash flow hedges (interest rate swaps and cross-currency interest rate swaps) and forward foreign exchange contracts.  In addition, the Company utilizes Level 2 inputs in determining the fair value of long-term debt.  The Company has elected not to revalue long-term debt because this debt will be settled at the carrying value and not at the fair market value.  The Company did not make any significant transfers in and out of Level 1 and Level 2 fair value tiers during the periods reported on herein.
 
Non-financial assets and liabilities are revalued and recognized at fair value subsequent to initial recognition when there is evidence of impairment.   For the periods reported, no impairment of such non-financial assets was recorded.

The disclosure of fair value of certain financial assets and liabilities recorded at cost is as follows:
 
Cash and cash equivalents: The carrying value approximates fair value due to the short maturity of these instruments.

Short-term restricted cash: The carrying value approximates fair value due to the short maturity of these instruments.

Long-term restricted cash: Long-term restricted cash primarily consists of auto renewable 3-12 month certificates of deposit, which are held as collateral on our long-term debt. The carrying value approximates fair value due to the short maturity of the underlying certificates of deposit.

Accounts receivable:  The carrying value approximates fair value due to the short maturity of these accounts.
 
Short-term debt: The carrying value approximates fair value due to the short maturity of these instruments.
 
Long-term debt: The fair value of debt is generally measured using a discounted cash flow analysis based on current market interest rates for similar types of financial instruments.  These inputs are not quoted prices in active markets but they are either directly or indirectly observable; therefore, they are classified as Level 2 inputs. The carrying value and fair value of the Company’s debt as of May 31, 2015 and August 31, 2014 is as follows (in thousands):
 
 
May 31, 2015
 
August 31, 2014
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
Long-term debt, including current portion
$
101,808

 
$
103,047

 
$
91,439

 
$
92,893


Derivatives Instruments and Hedging Activities - The Company uses derivative financial instruments for hedging and non-trading purposes to manage its exposure to changes in interest and currency exchange rates.  In using derivative financial instruments for the purpose of hedging the Company’s exposure to interest and currency exchange rate risks, the contractual terms of a hedged instrument closely mirror those of the hedged item, providing a high degree of risk reduction and correlation. Contracts that are effective at meeting the risk reduction and correlation criteria (effective hedge) are recorded using hedge accounting.   If a derivative financial instrument is an effective hedge, changes in the fair value of the instrument will be offset in accumulated other comprehensive income (loss) until the hedged item completes its contractual term.  If any portion of the hedge is deemed ineffective, the change in fair value of the hedged assets or liabilities will be immediately recognized in earnings during the period.   Instruments that do not meet the criteria for hedge accounting, or contracts for which the Company has not elected hedge accounting, are valued at fair value with unrealized gains or losses reported in earnings during the period of the change.  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 seeks to manage counterparty risk associated

11


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


with these contracts by limiting transactions to counterparties with which the Company has an established banking relationship. There can be no assurance, however, that this practice effectively mitigates counterparty risk.
    
Cash Flow Instruments. The Company is a party to receive floating interest rate, pay fixed-rate interest rate swaps to hedge the interest rate risk of certain U.S. dollar denominated debt within its international subsidiaries. The swaps are designated as cash flow hedges of interest expense risk.  These instruments are considered effective hedges and are recorded using hedge accounting.  The Company is also a party to receive variable interest rate, pay fixed interest rate cross-currency interest rate swaps to hedge the interest rate and currency exposure associated with the expected payments of principal and interest of U.S. denominated debt within its international subsidiaries whose functional currency is other than the U.S dollar. The swaps are designated as cash flow hedges of the currency risk related to payments on the U.S. denominated debt.  These instruments are also considered to be effective hedges and are recorded using hedge accounting.  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 is determined to be an ineffective hedge, the gains or losses from changes in fair 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 9 - Derivative Instruments and Hedging Activities for information on the fair value of interest rate swaps and cross-currency interest rate swaps as of May 31, 2015 and August 31, 2014.

Fair Value Instruments. The Company is exposed to foreign-currency exchange rate fluctuations in the normal course of business. The Company is also exposed to foreign-currency exchange rate fluctuations on U.S. dollar denominated liabilities within its international subsidiaries whose functional currency is other than the U.S. dollar.  The Company manages these fluctuations, in part, through the use of non-deliverable forward foreign-exchange contracts that are intended to offset changes in cash flow attributable to currency exchange movements.  The contracts are intended primarily to economically address exposure to U.S. dollar merchandise inventory expenditures made by the Company’s international subsidiaries whose functional currency is other than the U.S. dollar. Currently, these contracts are treated for accounting purposes as fair value instruments and do not qualify for derivative hedge accounting, and as such the Company does not apply derivative hedge accounting to record these transactions. As a result, these contracts are valued at fair value with unrealized gains or losses reported in earnings during the period of the change. The Company seeks to mitigate foreign-currency exchange-rate risk with the use of these contracts and does not intend to engage in speculative transactions. These contracts do not contain any credit-risk-related contingent features and are limited to less than one year in duration. See Note 9 - Derivative Instruments and Hedging Activities for information on the fair value of open, unsettled forward foreign-exchange contracts as of May 31, 2015 and August 31, 2014.

The following tables summarize financial assets and liabilities measured and recorded at fair value on a recurring basis in the Company’s consolidated balance sheet as of May 31, 2015 and August 31, 2014 (in thousands) for derivatives that qualify for hedge accounting: 
 
Assets and Liabilities as of May 31, 2015
 
Quoted Prices in Active Markets for Identical Assets
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
Total
Prepaid expenses and other current assets (Cross-currency interest rate swaps)
 
$

 
$
4,425

 
$

 
$
4,425

Other non-current assets - (Cross-currency interest rate swaps)
 

 
3,736

 

 
3,736

Other long-term liabilities – (Interest rate swaps)
 

 
(419
)
 

 
(419
)
Other long-term liabilities – (Cross-currency interest rate swaps)
 

 
(1,078
)
 

 
(1,078
)
Total 
 
$

 
$
6,664

 
$

 
$
6,664







12


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


Assets and Liabilities as of August 31, 2014
 
Quoted Prices in Active Markets for Identical Assets
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
Total
Prepaid expenses and other current assets (Cross-currency interest rate swaps)
 
$

 
$
495

 
$

 
$
495

Other non-current assets - (Cross-currency interest rate swaps)
 

 
970

 

 
970

Other non-current assets - (Interest rate swaps)
 

 
125

 

 
125

Other long-term liabilities – (Interest rate swaps)
 

 

 

 

Other long-term liabilities – (Cross-currency interest rate swaps)
 

 

 

 

Total 
 
$

 
$
1,590

 
$

 
$
1,590


The following tables summarize financial assets and liabilities measured and recorded at fair value on a recurring basis in the Company’s consolidated balance sheet as of May 31, 2015 and August 31, 2014 (in thousands) for derivatives that do not qualify for hedge accounting: 
Assets and Liabilities as of May 31, 2015
 
Quoted Prices in Active Markets for Identical Assets
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
Total
Prepaid expenses and other current assets (Foreign currency forward contracts)
 
$

 
$

 
$

 
$

Other accrued expenses (Foreign currency forward contracts)
 

 

 

 

Net fair value of derivatives designated as hedging instruments that do not qualify for hedge accounting
 
$

 
$

 
$

 
$


Assets and Liabilities as of August 31, 2014
 
Quoted Prices in Active Markets for Identical Assets
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
Total
Prepaid expenses and other current assets (Foreign currency forward contracts)
 
$

 
$

 
$

 
$

Other accrued expenses (Foreign currency forward contracts)
 

 
(14
)
 

 
(14
)
Net fair value of derivatives designated as hedging instruments that do not qualify for hedge accounting
 
$

 
$
(14
)
 
$

 
$
(14
)

Goodwill – The table below presents goodwill resulting from certain business combinations as of May 31, 2015 and August 31, 2014 (in thousands).  The change in goodwill is a result of foreign exchange translation losses.


13


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


 
May 31, 2015
 
August 31, 2014
 
Change
Goodwill
$
35,965

 
$
36,108

 
$
(143
)


The Company reviews goodwill at the entity level for impairment. The Company first reviews qualitative factors for each reporting unit, in determining if an annual goodwill test is required. If the Company's review of qualitative factors indicates a requirement for a test of goodwill impairment, the Company then will assess whether the carrying amount of a reporting unit is greater than zero and exceeds its fair value established during the Company's prior test of goodwill impairment ("established fair value"). If the carrying amount of a reporting unit at the entity level is greater than zero and its established fair value exceeds its carrying amount, goodwill of the reporting unit is considered not impaired. If either the carrying amount of the reporting unit is not greater than zero or if the carrying amount of the entity exceeds its established fair value, the Company performs a second test to determine whether goodwill has been impaired and to calculate the amount of that impairment.
 
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.  Membership refunds are prorated based on 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 value added/sales tax basis.  

The Company began offering Platinum memberships in Costa Rica during fiscal year 2013, which provides members with a 2% rebate on most items, up to an annual maximum of $500.00. Platinum members can apply this rebate to future purchases at the warehouse club at the end of the annual membership period.  The Company records this 2% rebate as a reduction of revenue at the time of the sales transaction. Accordingly, the Company has reduced warehouse sales and has accrued a liability within other accrued expenses. The rebate expires within six months of the membership renewal date. However, the Company has determined that in the absence of relevant historical experience, the Company is not able to make a reasonable estimate of rebate redemptions and accordingly has assumed a 100% redemption rate. The Company periodically reviews expired unused rebates outstanding, and the expired unused rebates are recognized as Revenues: Other income on the consolidated statements of income.
The Company recognizes gift certificate 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. However, the absence of a large volume of transactions for gift certificates impairs the Company's ability to make a reasonable estimate of the redemption levels for gift certificates. Therefore, the Company assumes a 100% redemption rate that is the equivalent of no breakage prior to expiration of the gift certificate. 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 expected 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.

Insurance Reimbursements- Receipts from insurance reimbursements up to the amount of the losses recognized are considered recoveries. These recoveries are accounted for when they are probable of receipt. Insurance recoveries are not recognized prior to the recognition of the related cost.  Anticipated proceeds in excess of the amount of loss recognized are considered a gains and are subject to gain contingency guidance. Anticipated proceeds in excess of a loss recognized in the financial statements are not be recognized until all contingencies related to the insurance claim are resolved.

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 in cost of goods sold the external and internal distribution and handling costs for supplying 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, building and equipment depreciation at its distribution facilities and payroll and other direct costs for in-store demonstrations.
  

14


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


Vendor consideration consists primarily of volume rebates, time-limited product promotions, slotting fees, demonstration reimbursements and prompt payment discounts. Volume rebates that are not threshold-based are incorporated into the unit cost of merchandise reducing the inventory cost and cost of goods sold. Volume rebates that are threshold-based are recorded as a reduction to cost of goods sold when the Company achieves established purchase levels that are confirmed by the vendor in writing or upon receipt of funds. 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. Product promotions are generally linked to coupons that provide for reimbursement to the Company from vendor rebates for the product being promoted.  Slotting fees are related to consideration received by the Company from vendors for preferential "end cap" placement of the vendor's products within the warehouse club. Demonstration reimbursements are related to consideration received by the Company from vendors for the in-store promotion of the vendors' products. 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.
 
Selling, General and Administrative – Selling, general and administrative costs are comprised primarily of expenses associated with warehouse club operations. Warehouse club 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.
 
Contingencies and Litigation –  The Company records and reserves 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.  If one or both criteria for accrual are not met, but there is at least a reasonable possibility that a loss will occur, the Company does not record and reserve for a loss contingency but describes the contingency within a note and provides detail, when possible, of the estimated potential loss or range of loss. If an estimate cannot be made, a statement to that effect is made.
 
Foreign Currency Translation – The assets and liabilities of the Company’s foreign operations are 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 denominated in currencies other than the functional currency of the respective entity (primarily U.S. dollars) are revalued to the functional currency using the exchange rate on the balance sheet date. These foreign exchange transaction gains (losses), including transactions recorded involving these monetary assets and liabilities, are recorded as Other income (expense) in the consolidated statements of income.

The following table summarizes the amounts recorded for the three and nine month periods ending May 31, 2015 and 2014 (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
May 31, 2015
 
May 31, 2014
 
May 31, 2015
 
May 31, 2014
Currency gain (loss)
$
(311
)
 
$
489

 
$
(4,602
)
 
$
1,512


Income Taxes –The Company accounts for income taxes using the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributed to differences between the

15


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


financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences and carry-forwards are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.  A valuation allowance is established when necessary to reduce deferred tax assets to amounts expected to be realized.

The Company and its subsidiaries are 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 foreign taxing authorities in the jurisdictions in which the Company or one of its subsidiaries files tax 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 or one of its subsidiaries 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. This requires significant judgment, the use of estimates, and the interpretation and application of complex tax laws. When facts and circumstances change, the Company reassesses these probabilities and records any changes in the consolidated financial statements as appropriate.   There were no material changes in the Company's uncertain income tax positions for the periods ended on May 31, 2015 and August 31, 2014. However, during the fiscal year 2014, the Company was required to make payments of $4.2 million to the governments in two countries with respect to income tax cases that it is currently appealing and believes it will eventually prevail. These amounts have been recorded in the balance sheet as Other non-current assets, as the Company considers this a payment on account and expects to get a refund thereof upon eventually prevailing on these cases, but is unsure of the timing thereof. Furthermore, during the first quarter of fiscal year 2015, one of the Company’s subsidiaries received provisional assessments claiming $2.5 million of taxes, penalties and interest related to withholding taxes on certain charges for services rendered by the Company.  In addition, this subsidiary received provisional assessments totaling $5.2 million for lack of deductibility of the underlying service charges due to the lack of withholding.  Based on the Company's interpretation of local law, rulings and jurisprudence (including Supreme Court precedents with respect to the deductibility assessment), the Company expects to prevail in both instances and has not recorded a provision for these assessments. Also, in another country, beginning in fiscal year 2015, a new minimum income tax mechanism took effect, which requires the Company to pay taxes based on a factor of sales rather than income. As a result, the Company is making income tax payments substantially in excess of those we would expect to pay based on taxable income. The current rules (which the Company has appealed) do not allow the Company to obtain a refund or offset this excess income tax against other taxes. As of May 31, 2015, the Company currently has an outstanding income tax receivable of $509,000 in this country; and there were deferred tax assets of approximately $1.4 million outstanding as of that date. The Company has not placed any type of allowance on the recoverability of these tax receivables or deferred income taxes, because the Company believes that it has a more likely than not chance to succeed in its appeal on the matter.

The Company has not provided for U.S. deferred taxes on cumulative non-U.S. undistributed earnings as such earnings are deemed by the Company to be indefinitely reinvested. It is not practicable to determine the U.S. federal income tax liability that would be associated with such earnings because of the complexity of the computation.    
    
    

16


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


The following tables present a reconciliation of the effective tax rate for the periods presented:
 
 
Three Months Ended
 
Nine Months Ended
 
May 31, 2015
 
May 31, 2014
 
May 31, 2015
 
May 31, 2014
Federal tax provision at statutory rates
35.0
 %
 
35.0
 %
 
35.0
 %
 
35.0
 %
State taxes, net of federal benefit
0.3

 
0.3

 
0.4

 
0.3

Differences in foreign tax rates
(5.3
)
 
(7.1
)
 
(5.0
)
 
(5.5
)
Permanent items and other adjustments
2.2

 
4.5

 
3.1

 
1.2

Increase (decrease) in foreign valuation allowance
1.5

 
(1.8
)
 
1.8

 
(0.6
)
Provision for income taxes
33.7
 %
 
30.9
 %
 
35.3
 %
 
30.4
 %

The variance in the effective tax rate for the three-month period ended on May 31, 2015 compared to the same period of the prior year was primarily attributable to the following factors: (i) the unfavorable impact of 3.8% resulting from an increased taxable loss incurred in the Company’s Colombia subsidiary for which no tax benefit was recognized, net of adjustment to valuation allowance; (ii) the unfavorable impact of 1.0% due to the relative increase in U.S. taxable income at a higher statutory tax rate compared to tax rates in foreign jurisdictions; (iii) the favorable impact of 1.2% resulting from reversals of income tax liability for uncertain tax positions; and (iv) the non-recurrence of the favorable impact of 0.6% in the prior period from the tax effect of changes in foreign currency value.

The variance in the effective tax rate for the nine-month period ended May 31, 2015 compared to the prior year was primarily attributable to the unfavorable impact of 4.2% resulting from an increased taxable loss incurred in the Company’s Colombia subsidiary for which no tax benefit was recognized, net of adjustment to valuation allowance, and the non-recurrence of a favorable impact of 0.6% in the prior period from the tax effect of changes in foreign currency value.

Recent Accounting Pronouncements

FASB ASC 606 ASU 2014-09 - Revenue from contracts with customers.

In May 2014, the FASB issued amended guidance on contracts with customers to transfer goods or services or contracts for the transfer of nonfinancial assets, unless those contracts are within the scope of other standards (e.g., insurance contracts or lease contracts). The guidance requires an entity to recognize revenue on contracts with customers relating to the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance requires that an entity depict the consideration by applying the following steps:

Step 1: Identify the contract(s) with a customer.
Step 2: Identify the performance obligations in the contract.
Step 3: Determine the transaction price.
Step 4: Allocate the transaction price to the performance obligations in the contract.
Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.

The amendments in this ASU are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. This amendment is to be either retrospectively adopted to each prior reporting period presented or retrospectively with the cumulative effect of initially applying this ASU recognized at the date of initial application. Adoption of this guidance is not expected to have a material impact on the Company's consolidated financial statements.     

FASB ASC 350 ASU 2015-05 - Customers accounting for fees paid in a cloud computing arrangement

In April 2015, the FASB issued amended guidance on about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license

17


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


element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The amendments do not change the accounting for a customer’s accounting for service contracts.

The amendments in this ASU are effective for public entities for annual periods, including interim periods within those annual periods, beginning after December 15, 2015. Early adoption is permitted. An entity can elect to adopt the amendments either: (1) prospectively to all arrangements entered into or materially modified after the effective date; or (2) retrospectively. Adoption of this guidance is not expected to have a material impact on the Company's consolidated financial statements.

 

NOTE 3 – PROPERTY AND EQUIPMENT

Property and equipment are stated at historical cost. The historical cost of acquiring an asset includes the costs incurred to bring it to the condition and location necessary for its intended use. 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 certain components of building improvements and buildings from 10 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 where 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.

Property and equipment consist of the following (in thousands):
 
May 31, 2015
 
August 31, 2014
Land
$
135,044

 
$
124,082

Building and improvements
279,245

 
244,485

Fixtures and equipment
163,629

 
148,143

Construction in progress
29,055

 
55,664

Total property and equipment, historical cost
606,973

 
572,374

Less: accumulated depreciation
(164,250
)
 
(146,049
)
Property and equipment, net
$
442,723

 
$
426,325


Depreciation and amortization expense (in thousands):
 
Three Months Ended May 31,
 
Nine Months Ended May 31,
 
2015
 
2014
 
2015
 
2014
Depreciation and amortization expense
$
8,740

 
$
7,139

 
$
25,173

 
$
20,932

    
The Company capitalizes interest on expenditures for qualifying assets over a period that covers the duration of the activities required to get the asset ready for its intended use, provided that expenditures for the asset have been made and interest cost is being incurred. Interest capitalization continues as long as those activities and the incurrence of interest cost continues. The amount capitalized in an accounting period is determined by applying the capitalization rate (average interest rate) to the average amount of accumulated expenditures for the qualifying asset during the period. The capitalization rates are based on the interest rates applicable to borrowings outstanding during the period.
Total interest capitalized (in thousands):
 
As of May 31, 2015
 
As of August 31, 2014
Total interest capitalized
$
7,064

 
$
6,542


18


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


    
Total interest capitalized (in thousands):
 
Three Months Ended May 31,
 
Nine Months Ended May 31,
 
2015
 
2014
 
2015
 
2014
Interest capitalized
$
148

 
$
452

 
$
911

 
$
945


The Company also purchased land in Chia, a city north of Bogota, Colombia for which it recorded other accrued expenses of approximately $8.6 million in May 2015. Payment for this land purchase was made on June 2, 2015. The Company made this land acquisition per the terms of an expiring purchase agreement. The Company has not yet received all permits necessary to begin construction and to operate a warehouse club. As such, the Company does not have a definitive date for when it could construct or open a warehouse club on that site.

The Company also recorded within accounts payable and other accrued expenses approximately $700,000 and $9.8 million, respectively, as of May 31, 2015 and $2.9 million and $1.2 million, respectively, as of August 31, 2014 of liabilities related to the acquisition and/or construction of property and equipment.


NOTE 4 – EARNINGS PER SHARE
 
The Company presents basic and diluted net income per share using the two-class method.   The two-class method is an earnings allocation formula that treats a participating security as having rights to earnings that otherwise would have been available to common stockholders and that determines basic net income per share for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings that would have been available to common stockholders.   A participating security is defined as a security that may participate in undistributed earnings with common stock.  The Company’s capital structure includes securities that participate with common stock on a one-for-one basis for distribution of dividends.  These are the restricted stock awards authorized within the 2002 and 2013 Equity Participation Plans/Equity Incentive Awards Plan of the Company and restricted stock units authorized within the 2001, 2002 and 2013 Equity Participation Plans/Equity Incentive Awards Plan.  The Company determines the diluted net income per share by using the more dilutive of the two class-method or the treasury stock method and by including the basic weighted average of outstanding stock options in the calculation of diluted net income per share under the two-class method and including all potential common shares assumed issued in the calculation of diluted net income per share under the treasury stock method.

The following table sets forth the computation of net income per share for the three and nine months ended May 31, 2015 and 2014 (in thousands, except per share amounts):
 
Three Months Ended May 31,
 
Nine Months Ended May 31,
 
2015
 
2014
 
2015
 
2014
Net income
$
21,195

 
$
21,320

 
$
66,677

 
$
71,030

Less: Allocation of income to unvested stockholders
(257
)
 
(348
)
 
(856
)
 
(1,296
)
Net earnings available to common stockholders
$
20,938

 
$
20,972

 
$
65,821

 
$
69,734

Basic weighted average shares outstanding
29,883

 
29,784

 
29,834

 
29,733

Add dilutive effect of stock options (two-class method)
5

 
8

 
7

 
10

Diluted average shares outstanding
29,888

 
29,792

 
29,841

 
29,743

Basic net income per share
$
0.70

 
$
0.70

 
$
2.20

 
$
2.35

Diluted net income per share
$
0.70

 
$
0.70

 
$
2.20

 
$
2.34




19


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



NOTE 5 – STOCKHOLDERS’ EQUITY
 
Dividends

  
The following table summarizes the dividends declared and paid during fiscal year 2015 and 2014.
 
 
 
 
First Payment
 
Second Payment
Declared
 
Amount
 
Record Date
 
Date Paid
 
Date Payable
 
Amount
 
Record Date
 
Date Paid
 
Date Payable
 
Amount
2/4/15
 
$
0.70

 
2/13/15
 
2/27/15
 
N/A
 
$
0.35

 
8/14/15
 
N/A
 
8/31/15
 
$
0.35

1/23/14
 
$
0.70

 
2/14/14
 
2/28/14
 
N/A
 
$
0.35

 
8/15/14
 
8/29/14
 
N/A
 
$
0.35


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. 

Comprehensive Income and Accumulated Other Comprehensive Loss
 
The following tables disclose the effects of each component of other comprehensive income (loss), net of tax (in thousands):

 
Nine Months Ended May 31, 2015
 
Foreign currency translation adjustments
 
Defined benefit pension plans
 
Derivative Instruments
 
Total
Beginning balance, September 1, 2014
$
(50,410
)
 
$
113

 
$
1,011

 
$
(49,286
)
Other comprehensive income (loss)
(24,241
)
 
(35
)
 
3,506

 
(20,770
)
Ending balance, May 31, 2015
$
(74,651
)
 
$
78

 
$
4,517

 
$
(70,056
)
 
Nine Months Ended May 31, 2014
 
Foreign currency translation adjustments
 
Defined benefit pension plans
 
Derivative Instruments
 
Total
Beginning balance, September 1, 2013
$
(42,321
)
 
$
(152
)
 
$
998

 
$
(41,475
)
Other comprehensive income (loss)
(8,443
)

16

 
(421
)
 
(8,848
)
Ending balance, May 31, 2014
$
(50,764
)
 
$
(136
)
 
$
577

 
$
(50,323
)

20


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


 
Twelve Months Ended August 31, 2014
 
Foreign currency translation adjustments
 
Defined benefit pension plans
 
Derivative Instruments
 
Total
Beginning balance, September 1, 2013
$
(42,321
)
 
$
(152
)
 
$
998

 
$
(41,475
)
Other comprehensive income (loss)
(8,089
)

260

 
101

 
(7,728
)
Amounts reclassified from accumulated other comprehensive income (loss)

 
5

(2) 
(88
)
(1) (3) 
(83
)
Ending balance, August 31, 2014
$
(50,410
)
 
$
113

 
$
1,011

 
$
(49,286
)
(1)
See Note 9 - Derivative Instruments and Hedging Activities.
(2)
Amounts reclassified from accumulated other comprehensive income (loss) related to the minimum pension liability are included in warehouse club operations in the Company's Consolidated Statements of Income.
(3)
Amounts reclassified from accumulated other comprehensive income (loss) for settlement of derivative instruments are included in other income (expense), net in the Company's Consolidated Statements of Income.
        
Retained Earnings Not Available for Distribution
 
The following table summarizes retained earnings designated as legal reserves of various subsidiaries which cannot be distributed as dividends to PriceSmart, Inc. according to applicable statutory regulations (in thousands):
 
May 31, 2015
 
August 31, 2014
Retained earnings not available for distribution
$
4,917

 
$
4,556




21


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


NOTE 6 – STOCK BASED COMPENSATION
 
The three types of equity awards offered by the Company are stock options (“options”), restricted stock awards (“RSAs”) and restricted stock units (“RSUs”).  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 the fair market value at the time of grant with the application of an estimated forfeiture rate.  The Company recognizes the compensation cost related to these awards over the requisite service period as determined by the grant, amortized ratably or on a straight line basis over the life of the grant.  The Company utilizes “modified grant-date accounting” for true-ups due to actual forfeitures at the vesting dates.  The Company records the tax savings resulting from tax deductions in excess of expense for stock-based compensation as additional paid-in capital and the tax deficiency resulting from stock-based compensation in excess of the related tax deduction as a reduction in paid-in capital, based on the Tax Law Ordering method.  In addition, the Company reflects the tax savings (deficiency) resulting from the taxation of stock-based compensation as a financing cash flow in its consolidated statement of cash flows, rather than as an operating cash flow.

RSAs have the same cash dividend and voting rights as other common stock and are considered to be currently issued and outstanding shares of common stock.  Shares of common stock underlying RSUs are not issued nor outstanding until the RSUs vest and RSUs do not have the same dividend and voting rights as common stock.  However, all outstanding RSUs have accompanying dividend equivalents, requiring payment to the employees and directors with unvested RSUs of amounts equal to the dividend they would have received had the shares of common stock underlying the RSUs been actually issued and outstanding.  Payments of dividend equivalents to employees are recorded as compensation expense.

The Company adopted the 2013 Equity Incentive Award Plan (the "2013 Plan") for the benefit of its eligible employees, consultants and non-employee directors on January 22, 2013. The 2013 Plan provides for awards covering up to (1) 600,000 shares of common stock plus (2) the number of shares that remained available for issuance as of January 22, 2013 under three equity participation plans previously maintained by the Company. The number of shares reserved for issuance under the 2013 Plan increases during the term of the plan by the number of shares relating to awards outstanding under the 2013 Plan or any of the prior plans that expire, or are forfeited, terminated, canceled or repurchased, or are settled in cash in lieu of shares and decreases due to award releases or option exercises. No more than an aggregate of 1,332,540 shares of the Company’s common stock will be issued under the 2013 Plan. The following table summarizes the shares authorized and shares available for future grants:
 
 
 
Shares available to grant
 
Shares authorized for issuance as of October 31, 2014 (including shares originally authorized for issuance under the prior plans)
 
May 31, 2015
 
August 31, 2014
2013 Plan
888,353

 
853,774

 
821,124

    
The following table summarizes the components of the stock-based compensation expense (in thousands), which are included in general and administrative expense and warehouse club operations in the consolidated statements of income:
 
Three Months Ended May 31,
 
Nine Months Ended May 31,
 
2015
 
2014
 
2015
 
2014
Options granted to directors
$
25

 
$
27

 
$
61

 
$
64

Restricted stock awards
929

 
1,276

 
3,633

 
4,059

Restricted stock units
328

 
246

 
928

 
747

Stock-based compensation expense
$
1,282

 
$
1,549

 
$
4,622

 
$
4,870

    
    

22


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


    
The following tables summarize other information related to stock-based compensation:
 
As of May 31
 
2015
 
2014
Remaining unrecognized compensation cost (in thousands)
$
19,005

 
$
26,199

Weighted average period of time over which this cost will be recognized (years)
5

 
6


 
Nine Months Ended May 31,
 
2015
 
2014
Excess tax benefit (deficiency) on stock-based compensation (in thousands)
1,220

 
1,473


    
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 to ten year period, and the unvested portion of the award is 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 period was as follows:
 
Nine Months Ended May 31,
 
2015
 
2014
Grants outstanding at beginning of period
488,416

 
623,424

Granted
27,607

 
12,325

Forfeited
(9,618
)
 
(2,048
)
Vested
(142,370
)
 
(140,182
)
Grants outstanding at end of period
364,035

 
493,519


    
The following table summarizes the weighted average per share grant date fair value for restricted stock awards and units for the period:
 
 
Nine Months Ended May 31,
Weighted Average Grant Date Fair Value
 
2015
 
2014
Restricted stock awards and units granted
 
$
89.64

 
$
109.18

Restricted stock awards and units vested
 
$
44.42

 
$
39.47

Restricted stock awards and units forfeited
 
$
64.13

 
$
49.37


The following table summarizes the total fair market value of restricted stock awards and units vested for the period (in thousands):
 
Nine Months Ended May 31,
 
2015
 
2014
Total fair market value of restricted stock awards and units vested
$
12,624

 
$
13,222

    
    

23


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


At the vesting dates of restricted stock awards, the Company repurchases shares at the prior day's closing price per share, with the funds used to pay the employees' minimum statutory tax withholding requirements. The Company expects to continue this practice going forward. The following table summarizes this activity during the period:
 
 
Nine Months Ended May 31,
 
 
2015
 
2014
Shares repurchased
 
50,639

 
48,808

Cost of repurchase of shares (in thousands)
 
$
4,500

 
$
4,601

    
The Company reissues treasury shares as part of its stock-based compensation programs. The following table summarizes the treasury shares reissued:

 
Nine Months Ended May 31,
 
2015
 
2014
Reissued treasury shares

 


The following table summarizes the stock options outstanding: 
 
May 31, 2015
 
August 31, 2014
Stock options outstanding
20,000

 
23,000


Due to the substantial shift from the use of stock options to restricted stock awards and units, the Company believes stock option activity is no longer significant and that any further disclosure on options is not necessary. 


NOTE 7 – COMMITMENTS AND CONTINGENCIES

Legal Proceedings

From time to time, the Company and its subsidiaries are subject to legal proceedings, claims and litigation arising in the ordinary course of business and property ownership.  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 establishes an accrual for legal proceedings if and when those matters reach a stage where they present loss contingencies that are both probable and reasonably estimable. In such cases, there may be a possible exposure to loss in excess of any amounts accrued. The Company monitors those matters for developments that would affect the likelihood of a loss and the accrued amount, if any, thereof, and adjusts the amount as appropriate. If the loss contingency at issue is not both probable and reasonably estimable, the Company does not establish an accrual, but will continue to monitor the matter for developments that will make the loss contingency both probable and reasonably estimable. If it is at least a reasonable possibility that a material loss will occur, the Company will provide disclosure regarding the contingency.  The Company believes that the final disposition of the pending legal proceedings, claims and litigation will not have a material adverse effect on its financial position, results of operations or liquidity. It is possible, however, that the Company's future results of operations for a particular quarter or fiscal year could be impacted by changes in circumstances relating to such matters.


24


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


Taxes

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.

In evaluating the exposure associated with various non-income tax filing positions, the Company accrues for probable and estimable exposures for non-income tax related tax contingencies.  As of May 31, 2015 and August 31, 2014, the Company had recorded within other accrued expenses a total of $3.1 million 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, in estimating probable additional income tax liability taking into account 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.

During fiscal year 2014, the Company was required to make tax payments with respect to various income tax cases that it is currently appealing, and during the first quarter of fiscal year 2015, the Company received provisional tax assessments with respect to deductibility and withholdings. These payments and assessments are discussed in further detail within Note 2, Income Taxes.
Other Commitments

The Company is committed under non-cancelable operating leases for the rental of facilities and land. 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 May 31,
 
 
Open
Locations(1)
 
2016
 
$
7,175

 
2017
 
10,296

 
2018
 
10,333

 
2019
 
10,234

 
2020
 
10,117

 
Thereafter
 
100,902

 
Total
 
$
149,057

 

(1)
Operating lease obligations have been reduced by approximately $340,000 to reflect sub-lease income. Certain obligations under leasing arrangements are collateralized by the underlying asset being leased.

The Company is also committed to non-cancelable construction services obligations for various warehouse club developments and expansions. As of May 31, 2015 the Company has approximately $14.4 million in contractual obligations for construction services not yet rendered.


25


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


The Company has entered into a land purchase option agreement that has not been recorded as a commitment, for which the Company has recorded within the balance sheet approximately $200,000 in restricted cash deposits and prepaid expenses.  The land purchase option agreement can be canceled at the sole option of the Company.  The Company does not have a time table of when or if it will exercise this land purchase option, due to the uncertainty related to the completion of the Company's due diligence review. The Company's due diligence review includes evaluations of the legal status of the property, the zoning and permitting issues related to acquiring approval for the construction and operation of a warehouse club and any other issues related to the property itself that could render the property unsuitable or limit the property's economic viability as a warehouse club site. If the purchase option agreement is exercised, the cash use would be approximately $8.1 million.

See Note 10 - 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 was renewed on December 31, 2014 for an additional three years, with the applicable fees and rates to be reviewed at the beginning of each calendar year. Future minimum service commitments related to this contract through the end of the contract term is approximately $373,000.
    
NOTE 8 – DEBT

Short-term borrowings consist of lines of credit which are secured by certain assets of the Company and its subsidiaries and in some cases are guaranteed by the Company as summarized below (in thousands):

 
 
 
Facilities Used
 
 
 
 
 
Total Amount of Facilities
 
Short-term Borrowings
 
Letters of Credit
 
Facilities Available
 
Weighted average interest rate
May 31, 2015
$
59,237

 
$

 
$
363

 
$
58,874

 
N/A
August 31, 2014
$
61,869

 
$

 
$
436

 
$
61,433

 
N/A
     
    
As of May 31, 2015, the Company had approximately $40.0 million of short-term facilities in the U.S. that require compliance with certain quarterly financial covenants, which include debt service and leverage ratios. As of May 31, 2015 and August 31, 2014, the Company was in compliance with respect to these covenants. Each of the facilities expires annually and is normally renewed.


26


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


The following table provides the changes in long-term debt for the nine months ended May 31, 2015:
(Amounts in millions)
 
Current Portion of Long-term debt
 
Long-term debt
 
Total
 
Balances as of August 31, 2014
 
$
11,848

 
$
79,591

 
$
91,439

(1) 
Proceeds from long-term debt incurred during the period:
 
 
 
 
 
 
 
Panama subsidiary
 
1,000

 
9,000

 
10,000

 
Honduras subsidiary
 
2,450

 
14,400

 
16,850

(2) 
Colombia subsidiary
 
1,500

 
13,500

 
15,000

 
Trinidad subsidiary
 
907

 
2,720

 
3,627

 
Repayments of long-term debt:
 
 
 
 
 
 
 
Repayment of loan by Honduras subsidiary, originally entered into on January 12, 2012 with Scotiabank El Salvador, S.A.
 
(3,200
)
 

 
(3,200
)
 
Partial repayment of loan by Honduras subsidiary, originally entered into on March 7, 2014 with Banco de America Central Honduras, S.A.
 

 
(5,000
)
 
(5,000
)
 
Repayment of loan by Honduras subsidiary, originally entered into on March 7, 2014 with Banco de America Central Honduras, S.A.
 

 
(8,195
)
 
(8,195
)
 
Repayment of loan by Honduras subsidiary, originally entered into on March 6, 2010 with Banco del Pais, S.A.

(87
)



(87
)
 
Repayment of loan by Trinidad subsidiary, originally entered into on August 26, 2008 with Royal Bank of Trinidad and Tobago, Ltd.
 
(900
)
 
(2,325
)
 
(3,225
)
 
Regularly scheduled loan payments
 
(816
)
 
(7,260
)
 
(8,076
)
 
Reclassifications of long-term debt
 
15,135

 
(15,135
)