form10q.htm
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
  
FORM 10-Q
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended February 28, 2011
 
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 29,897,996 shares of its common stock, par value $0.0001 per share, outstanding at March 31, 2011.



 
 
 
 
 
 
 
 



PRICESMART, INC.
 
INDEX TO FORM 10-Q
 
     
   
Page
 
 
 
     
        1
     
 
        2
     
 
        3
     
 
        4
     
 
        5
     
 
        6
     
        32
     
        50
     
        51
   
 
     
        52
     
        52
     
        52
     
        53
     
        53
     
        53
     
        54


 
 
 
 
 
i
 
 


 PART I—FINANCIAL INFORMATION
 
ITEM 1.                      FINANCIAL STATEMENTS

PriceSmart, Inc.’s (“PriceSmart” or the “Company”) unaudited consolidated balance sheet as of February 28, 2011 and the consolidated balance sheet as of August 31, 2010, the unaudited consolidated statements of income for the three- and six-month periods ended February 28, 2011 and 2010, the unaudited consolidated statements of equity and the unaudited consolidated statements of cash flows for the six months ended February 28, 2011 and 2010, 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)

   
February 28,
        
   
2011
    
August 31,
  
   
(Unaudited)
    
2010
  
ASSETS
            
Current Assets:
            
Cash and cash equivalents
$
70,659
    
$
  73,346
  
Short-term restricted cash
  
1,240
      
  1,240
  
Receivables, net of allowance for doubtful accounts of $16 and $15 as of February 28, 2011 and August 31, 2010, respectively.
  
3,167
      
  2,855
  
Merchandise inventories
  
151,692
      
  131,190
  
Deferred tax assets – current
  
4,086
      
  3,639
  
Prepaid expenses and other current assets
  
24,031
      
  21,879
  
Assets of discontinued operations
  
803
      
  692
  
Total current assets
  
255,678
      
  234,841
  
Long-term restricted cash
  
13,670
      
  5,640
  
Property and equipment, net
  
280,919
      
  265,544
  
Goodwill
  
37,533
      
  37,471
  
Deferred tax assets – long term
  
15,344
      
  16,637
  
Other assets
  
4,301
      
  4,341
  
Investment in unconsolidated affiliates
  
8,061
      
  8,091
  
Total Assets
$
615,506
    
$
  572,565
  
LIABILITIES AND EQUITY
              
Current Liabilities:
              
Short-term borrowings
$
2,984
    
$
  3,551
  
Accounts payable
  
142,567
      
  124,401
  
Accrued salaries and benefits
  
9,442
      
  10,911
  
Deferred membership income
  
11,014
      
  9,729
  
Income taxes payable
  
6,216
      
  6,615
  
Other accrued expenses
  
11,490
      
  12,095
  
Dividends payable
  
8,969
      
—
  
Long-term debt, current portion
  
7,761
      
  7,715
  
Deferred tax liability – current
  
425
      
  357
  
Liabilities of discontinued operations
  
212
      
  109
  
Total current liabilities
  
201,080
      
  175,483
  
Deferred tax liability – long-term
  
1,718
      
  1,198
  
Long-term portion of deferred rent
  
3,744
      
  3,272
  
Long-term income taxes payable, net of current portion
  
3,361
      
  3,564
  
Long-term debt, net of current portion
  
54,185
      
  53,005
  
Total liabilities
  
264,088
      
  236,522
  
Equity:
              
Common stock, $0.0001 par value, 45,000,000 shares authorized; 30,688,399 and 30,624,666 shares issued and 29,896,805 and 29,897,909 shares outstanding (net of treasury shares) as of February 28, 2011 and August 31, 2010, respectively.
  
3
      
  3
  
Additional paid-in capital
  
381,436
      
  379,368
  
Tax benefit from stock-based compensation
  
5,371
      
  4,490
  
Accumulated other comprehensive loss
  
(16,565
)
    
  (16,672
)
Accumulated deficit
  
(746
)
    
  (15,578
)
Less: treasury stock at cost; 791,594 and 726,757 shares as of February 28, 2011 and August 31, 2010, respectively.
  
(18,081
)
    
  (15,568
)
Total PriceSmart stockholders’ equity and total equity
  
351,418
      
  336,043
  
Total Liabilities and Equity
$
615,506
    
$
  572,565
  
See accompanying notes.  


 
 
 
2
 
 

PRICESMART, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED—AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
 
   
Three Months Ended
    
Six Months Ended
  
   
February 28,
    
February 28,
  
   
2011
      
2010
    
2011
    
2010
  
Revenues:
                          
Net warehouse club sales
$
440,263
    
$
358,893
    
$
817,595
    
$
667,545
  
Export sales
  
1,872
      
 1,006
      
3,280
      
1,593
  
Membership income
  
5,576
      
4,827
      
11,001
      
9,476
  
Other income
  
1,906
      
1,396
      
3,813
      
2,926
  
Total revenues
  
449,617
      
366,122
      
835,689
      
681,540
  
Operating expenses:
                              
Cost of goods sold:
                              
Net warehouse club
  
374,573
      
304,867
      
692,386
      
566,584
  
Export
  
1,758
      
935
      
3,102
      
1,489
  
Selling, general and administrative:
                              
Warehouse club operations
  
37,239
      
31,041
      
72,373
      
60,274
  
General and administrative
  
8,874
      
8,667
      
17,684
      
16,235
  
Pre-opening expenses
  
(15
)
    
175
      
388
      
286
  
Total operating expenses
  
422,429
      
345,685
      
785,933
      
644,868
  
Operating income
  
27,188
      
20,437
      
49,756
      
36,672
  
Other income (expense):
                              
Interest income
  
239
      
122
      
367
      
338
  
Interest expense
  
(1,071
)
    
(634
)
    
(2,028
)
    
(1,264
)
Other income (expense), net
  
(260
)
    
(10
)
    
(303
)
    
(7
)
Total other expense
  
(1,092
)
    
(522
)
    
(1,964
)
    
(933
)
Income from continuing operations before provision for income taxes and loss of unconsolidated affiliates
  
 
26,096
      
 
19,915
      
47,792
      
35,739
  
Provision for income taxes
  
(8,049
)
    
(6,190
)
    
(14,894
)
    
(11,592
)
Loss of unconsolidated affiliates
  
(37
)
    
(3
)
    
(42
)
    
(5
)
Income from continuing operations
  
18,010
      
13,722
      
32,856
      
24,142
  
Income (loss) from discontinued operations, net of tax
  
(93
)
    
35
      
(86
)
    
44
  
Net income
  
17,917
      
13,757
      
32,770
      
24,186
  
Net income attributable to noncontrolling interest
  
—
      
(60
)
    
—
      
(112
)
Net income attributable to PriceSmart
$
17,917
    
$
13,697
    
$
32,770
    
$
24,074
  
                               
Net income attributable to PriceSmart:
                              
Income from continuing operations
  
18,010
      
13,662
      
32,856
      
24,030
  
Income (loss) from discontinued operations, net of tax
  
(93
)
    
35
      
(86
)
    
44
  
 
$
17,917
    
$
13,697
    
$
32,770
    
$
24,074
  
Net income per share attributable to PriceSmart and available for distribution:
                              
Basic net income per share from continuing operations
$
0.60
    
$
0.46
    
$
1.11
    
$
0.81
  
Basic net income (loss) per share from discontinued operations, net of tax
 
$
 
—
    
 
$
 
—
    
$
—
    
$
—
  
Basic net income per share
$
0.60
    
$
0.46
    
$
1.11
    
$
0.81
  
                               
Diluted net income per share from continuing operations
$
0.60
    
$
0.46
    
$
1.11
    
$
0.81
  
Diluted net income (loss) per share from discontinued operations, net of tax
 
$
 
—
    
 
$
 
—
    
$
—
    
$
—
  
Diluted net income per share
$
0.60
    
$
0.46
    
$
1.11
    
$
0.81
  
Shares used in per share computations:
                              
Basic
  
29,414
      
29,222
      
29,385
      
29,163
  
Diluted
  
29,423
      
29,250
      
29,392
      
29,206
  
Dividends per share
$
0.60
    
$
0.50
    
$
0.60
    
$
0.50
  
 
See accompanying notes.

 
 
 
 
 
3
 
 
 
 

PRICESMART, INC.
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
    
—
      
—
      
—
      
—
      
—
      
—
      
66
      
(1,326
)
    
(1,326
)
    
—
      
(1,326
)
Issuance of restricted stock awards
    
15
      
—
      
—
      
—
      
—
      
—
      
—
      
—
      
—
      
—
      
—
  
Forfeiture of restricted stock awards
    
(3
)
    
—
      
—
      
—
      
—
      
—
      
—
      
—
      
—
      
—
      
—
  
Exercise of stock options
    
115
      
—
      
701
      
—
      
—
      
—
      
—
      
—
      
701
      
—
      
701
  
Stock-based compensation
    
—
      
—
      
1,840
      
177
      
—
      
—
      
—
      
—
      
2,017
      
—
      
2,017
  
Dividend payable to stockholders
    
—
      
—
      
—
      
—
      
—
      
(7,429
)
    
—
      
—
      
(7,429
)
    
—
      
(7,429
)
Dividend paid to stockholders
    
—
      
—
      
—
      
—
      
—
      
(7,433
)
    
—
      
—
      
(7,433
)
    
—
      
(7,433
)
Stockholder contribution
    
—
      
—
      
396
      
—
      
—
      
—
      
—
      
—
      
396
      
—
      
396
  
Change in fair value of interest rate swaps
    
—
      
—
      
—
      
—
      
(44
)
    
—
      
—
      
—
      
(44
)
    
—
      
(44
)
Net income
    
—
      
—
      
—
      
—
      
—
      
24,074
      
—
      
—
      
24,074
      
112
      
24,186
  
Translation adjustment
    
—
      
—
      
—
      
—
      
166
 
    
—
      
—
      
—
      
166
      
(16
)
    
150
  
Comprehensive income
                                                                    
24,196
      
96
      
24,292
  
Balance at February 28, 2010
    
30,464
    
$
3
    
$
380,147
    
$
4,724
    
$
(17,108
)
  
$
(40,786
)
    
722
    
$
(15,460
)
  
$
311,520
    
$
866
    
$
312,386
  
                                                                                         
Balance at August 31, 2010
    
30,625
    
$
3
    
$
379,368
    
$
4,490
    
$
(16,672
)
  
$
(15,578
)
    
727
    
$
(15,568
)
  
$
336,043
    
$
—
    
$
336,043
  
Purchase of treasury stock
    
—
      
—
      
—
      
—
      
—
      
—
      
65
      
(2,513
)
    
(2,513
)
    
—
      
(2,513
)
Issuance of restricted stock awards
    
62
      
—
      
—
      
—
      
—
      
—
      
—
      
—
      
—
      
—
      
—
  
Forfeiture of restricted stock awards
    
(2
)
    
—
      
—
      
—
      
—
      
—
      
—
      
—
      
—
      
—
      
—
  
Exercise of stock options
    
4
      
—
      
104
      
—
      
—
      
—
      
—
      
—
      
104
      
—
      
104
  
Stock-based compensation
    
—
      
—
      
1,964
      
881
      
—
      
—
      
—
      
—
      
2,845
      
—
      
2,845
  
Dividend payable to stockholders
    
—
      
—
      
—
      
—
      
—
      
(8,969
)
    
—
      
—
      
(8,969
)
    
—
      
(8,969
)
Dividend paid to stockholders
    
—
      
—
      
—
      
—
      
—
      
(8,969
)
    
—
      
—
      
(8,969
)
    
—
      
(8,969
)
Change in fair value of interest rate swaps
    
—
      
—
      
—
      
—
      
137
      
—
 
    
—
      
—
      
137
      
—
      
137
  
Net income
    
—
      
—
      
—
      
—
      
—
      
32,770
      
—
      
—
      
32,770
      
—
      
32,770
  
Translation adjustment
    
—
      
—
      
—
      
—
      
(30
)
    
—
      
—
      
—
      
(30
)
    
—
      
(30
)
Comprehensive income
                                                                    
32,877
      
—
      
32,877
  
Balance at February 28, 2011
    
30,689
    
$
3
    
$
381,436
    
$
5,371
    
$
(16,565
)
  
$
(746
)
    
792
    
$
(18,081
)
  
$
351,418
    
$
—
    
$
351,418
  
 
See accompanying notes.
  
 
 
 
 
 
4
 
 


PRICESMART, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED—AMOUNTS IN THOUSANDS)
   
Six months ended
  
   
February 28,
  
   
2011
    
2010
  
Operating Activities:
            
Net income
  
$
32,770
    
$
24,186
  
Adjustments to reconcile net income to net cash provided by operating activities:
                
Depreciation and amortization
    
8,836
      
7,263
  
Allowance for doubtful accounts
    
1
      
(2
)
Loss on sale of  property and equipment
    
353
      
17
  
Deferred income taxes
    
2,316
      
1,841
  
Discontinued operations
    
(86
)
    
(44
)
Excess tax benefit on stock-based compensation
    
(881
)
    
(177
)
Equity in losses of unconsolidated affiliates
    
42
      
5
  
Stock-based compensation
    
1,964
      
1,840
 
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
    
(5,391
)
    
1,738
  
Merchandise inventories
    
(20,502
)
    
(8,236
)
Accounts payable
    
18,166
      
11,685
  
Net cash provided by continuing operating activities
    
37,588
      
40,116
  
Net cash provided by discontinued operating activities
    
77
      
314
  
Net cash provided by operating activities
    
37,665
      
40,430
  
Investing Activities:
                
Additions to property and equipment
    
(21,635
)
    
(26,644
)
Proceeds from disposal of property and equipment
    
142
      
49
  
Capital contribution to Panama joint venture
    
—
      
(433
)
Net cash used in investing activities
    
(21,493
)
    
(27,028
)
Financing Activities:
                
Proceeds from bank borrowings
    
25,464
      
26,083
  
Repayment of bank borrowings
    
(25,095
)
    
(12,549
)
Cash dividend payments
    
(8,969
)
    
(7,433
)
Addition to restricted cash
    
(8,000
)
    
—
  
Stockholder contribution
    
—
      
396
  
Excess tax benefit on stock-based compensation
    
881
      
177
  
Purchase of treasury stock
    
(2,513
)
    
(1,326
)
Proceeds from exercise of stock options
    
104
      
701
  
Net cash provided by (used in) financing activities
    
(18,128
)
    
6,049
  
Effect of exchange rate changes on cash equivalents
    
(731
)
    
(597
)
Net (decrease) increase in cash and cash equivalents
    
(2,687
)
    
18,854
  
Cash and cash equivalents at beginning of year
    
73,346
      
44,193
  
Cash and cash equivalents at the end of year
  
$
70,659
    
$
63,047
  
Supplemental disclosure of cash flow information:
            
Cash paid during the period for:
            
Interest, net of amounts capitalized
  
$
1,893
    
$
1,161
  
Income taxes
  
$
11,504
    
$
8,880
  
Dividends declared but not paid
    
8,969
      
7,429
  
 
See accompanying notes.



 
 
 
 
 
 
5
 
 


PRICESMART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
February 28, 2011

NOTE 1 – COMPANY OVERVIEW AND BASIS OF PRESENTATION

 
PriceSmart, Inc.’s (“PriceSmart” or the “Company”) business consists primarily of international membership shopping warehouse clubs similar to, but smaller in size than, warehouse clubs in the United States.  As of February 28, 2011, 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 U.S. $6.5 million as of the acquisition date).  The Company is currently constructing 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.  These segments are the United States, the Caribbean, and Latin America.

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. 



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

 The table below indicates the Company’s percentage ownership of and basis of presentation for each subsidiary as of February 28, 2011:  

 
Subsidiary
  
Country
  
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 interim 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 interim 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.  

 
 
 
 
 
7
 
 

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

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 February 28, 2011, 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 $13.7 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 $860,000.
 
Merchandise Inventories – Merchandise inventories, which include merchandise for resale, are valued at the lower of cost (average cost) or market. The Company provides for estimated inventory losses and obsolescence between physical inventory counts on the basis of a percentage of sales.  The provision is adjusted periodically to reflect the trend of actual physical inventory count results, with physical inventories occurring primarily in the second and fourth fiscal quarters.  In addition, the Company may be required to take markdowns below the carrying cost of certain inventory to expedite the sale of such merchandise.
 
Allowance for Doubtful Accounts – The Company generally does not extend credit to its members, but may do so for specific wholesale, government, other large volume members and for tenants or 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 identifiable 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.


 
 
 
 
 
8
 
 

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

 
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. 

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.
         
              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 February 28, 2011 (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
  
$
—
    
$
586
    
$
—
    
$
586
  
Total 
  
$
—
    
$
586
    
$
—
    
$
586
  

    The fair value of derivatives is disclosed in further detail in Note 11 - Interest Rate Swaps.  
 
    As of February 28, 2011 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 $37.5 million as of February 28, 2011 and  August 31, 2010.  Foreign exchange translation gains and losses related to this balance sheet caption largely offset each other for the six-month period ended February 28, 2011. 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 under revenues as "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.

 
 
 
 
 
9
 
 

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

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.
  
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 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, are included as a part of costs of goods sold in the consolidated statements of income. For the first six months of fiscal years 2011 and 2010, the Company recorded approximately $832,000 and $770,000 in foreign exchange gains, respectively.
 
 
10
 
PRICESMART, INC.
 
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
 
 
Stock-Based Compensation – The three types of equity awards offered by the Company are stock options (“options”), restricted stock awards (“RSA”) and restricted stock units (“RSU”).  Compensation related to options is accounted for by applying the valuation technique based on the Black-Scholes model. Compensation related to RSA's and RSU's is based on the fair market value at the time of grant with the application of an estimated forfeiture rate. Upon vesting, the Company records compensation expense for the previously estimated forfeiture on equity 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.

RSA's 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.  RSU's are not issued nor outstanding until vested and do not have the cash dividend and voting rights of common stock.  However, the Company has paid dividend equivalents to the employees with unvested RSU's equal to the cash dividend for the dividends declared in this fiscal year.  The providing of dividend equivalents on RSU's is subject to the annual review and final determination by the board of directors at their discretion.

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.

The Company accounts for uncertain income tax positions by accruing for the estimated additional amount of taxes for the uncertain tax positions when the uncertain tax position does not meet the more likely than not standard for sustaining the position.
 
As of February 28, 2011 and August 31, 2010, the Company had $13.4 million and $13.6 million, respectively, of aggregate accruals for uncertain tax positions (“gross unrecognized tax benefits”). Of these totals, $1.9 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 February 28, 2011 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 six months ended February 28, 2011 and 2010, the Company did not record any significant net reductions 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 February 28, 2012 would result in a reduction to long-term income taxes payable totaling $663,000.

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 February 28, 2011 and August 31, 2010, the Company had accrued $1.5 million in each period 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 Company's results of operations, financial condition or liquidity.

Tax expense for the first six months of fiscal year 2011 was $14.9 million on pre-tax income of $47.8 million, as compared to $11.6 million of tax expense on pre-tax income of $35.7 million for the first six months of fiscal year 2010. The effective tax rate for the first six months of fiscal year 2011 is 31.2% as compared to 32.4% for the first six months of fiscal year 2010. The decrease in the effective tax rate is primarily attributable to a benefit from a $437,000 increase in the value of U.S. deferred tax assets due to a change in the U.S. statutory tax rate that is applicable to the current year, from 34% to 35%.
 
 
 
 
 
11
 
 

PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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
  
2008 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
  
2005 to the present
Mexico
  
2006 to the present
Nicaragua
  
2007 to the present
Panama
  
2008 to the present
Trinidad
  
2004 to the present
U.S. Virgin Islands
  
2001 to the present
Colombia
  
2009 to the present

Recent Accounting Pronouncements

FASB ASC 350

In December 2010, the Financial Accounting Standards Board (“FASB”), issued amended guidance concerning testing for impairment of goodwill where an entity has one or more reporting units whose carrying value is zero or negative.  The amended guidance requires the entity to perform a test to measure the amount, if any, of impairment to goodwill by comparing the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill.  The Company is required to adopt this amended guidance for fiscal years or interim periods beginning after December 15, 2011.  The Company does not expect that adoption of the amended guidance will have an impact on the Company’s consolidated financial statements or disclosures to those financial statements.

FASB ASC 805

In December 2010, the FASB issued amended guidance concerning disclosures of pro forma information for business combinations.  The amended guidance requires that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period. The amended guidance also expands the supplemental pro forma disclosures to include a description of and the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings.  The Company is required to adopt this amended guidance for fiscal years or interim periods beginning after December 15, 2011.  The Company does not expect that adoption of the amended guidance will have an impact on the Company’s consolidated financial statements or disclosures to those financial statements.

FASB ASC 310
 
In July 2010, the 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. In December 2010, the FASB amended the effective date of this guidance that now requires the Company to adopt this amended guidance on the disclosures for interim and annual periods ending after June 15, 2011.  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.
 
 
 
12
 
PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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.

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 are expected to terminate in August 2011, which is the end date of the lease term.

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

  
  
February 28,
2011
    
August 31,
2010
  
Cash and cash equivalents
  
$
32
    
$
41
  
Accounts receivable, net
    
508
      
219
  
Prepaid expenses and other current assets
    
39
      
39
  
Other assets
    
224
      
393
  
Assets of discontinued operations
  
$
803
    
$
692
  
Other accrued expenses
  
$
212
    
$
109
  
Liabilities of discontinued operations
  
$
212
    
$
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. 


 
 
 
 
 
13
 
 

PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following table sets forth the income (loss) from the discontinued operations of each period presented, in thousands.

   
Three Months Ended
      
Six Months Ended
  
   
February 28,
      
February 28,
  
   
2011
      
2010
      
2011
      
2010
  
Net warehouse club sales
$
—
    
$
—
    
$
—
    
$
—
  
Pre-tax income (loss) from discontinued operations
  
(93
)
    
35
      
(86
)
    
44
  
Provision for income taxes
  
—
      
—
      
—
      
—
  
Income (loss) from discontinued operations, net of tax
$
(93
)
  
$
35
    
$
(86
)
  
$
44
  
 
The income (loss) from discontinued operations, net of tax is the net result of the subleasing activity in Guam. 

NOTE 4 – PROPERTY AND EQUIPMENT

Property and equipment consist of the following (in thousands):
   
February 28,
2011
    
August 31,
2010
  
Land
  
$
88,409
    
$
81,187
  
Building and improvements
    
184,612
      
171,828
  
Fixtures and equipment
    
94,048
      
88,090
  
Construction in progress
    
10,207
      
13,683
  
      Total property and equipment, recorded at historical cost
    
377,276
      
354,788
  
Less: accumulated depreciation
    
(96,357
)
    
(89,244
)
Property and equipment, net
  
$
280,919
    
$
265,544
  

Building and improvements includes net capitalized interest of approximately $3.7 million and $3.2 million as of February 28, 2011 and August 31, 2010, respectively. Construction in progress includes capitalized interest of $149,000 and $445,000 as of February 28, 2011 and August 31, 2010, respectively.  For the first six months of fiscal year 2011, the Company recorded approximately $916,000 in translation adjustments that decreased the carrying value of the total property and equipment for the period.  The Company recorded approximately $275,000 in translation adjustments for the six-month period ended February 28, 2010, which decreased the carrying value of the total property and equipment .
 
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 U.S. $6.5 million as of the acquisition date).  The Company is currently constructing on this site a new membership warehouse club, expected to open during the summer of 2011.  The Company initially paid the equivalent of approximately $4.3 million in November 2010, and upon the completion of certain improvements, expected to occur in April 2011, the Company will then make the final payment of the equivalent of approximately $2.2 million.  The Company acquired an additional 195 square meters of land as a result of finalization of land boundaries between its Costa Rica, Alajuela, warehouse club and the joint venture Price Plaza Alajuela for approximately $38,000 during the first six months of fiscal year 2011.  The Company also recorded land improvements at its Arroyo Hondo, Dominican Republic warehouse club for approximately $771,000 during the first six months of fiscal year 2011.
 
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 six months ended February 28, 2011 were approximately $4.9 million and $3.3 million, respectively.  The Company continued its expansion of the Miami distribution center, recording costs related to the expansion of approximately $1.4 million for the first six 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 $1.8 million, $4.2 million and $34,000, respectively, in these segments for the six months ended February 28, 2011.  The Company acquired approximately $885,000 of software and computer hardware during the six months ended February 28, 2011.

 
 
 
 
 
14
 
 
PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

During the first six months of fiscal year 2010, the Company acquired approximately 30,000 square meters of real estate in Northwest Santo Domingo, Dominican Republic, for approximately $6.7 million upon which the Company constructed a new warehouse club ("Arroyo Hondo").  The Company recorded during the first six months of fiscal year 2010 the costs associated 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 six months ended February 28, 2010 were approximately $5.9 million and $7.0 million, respectively. In addition, the Company continued to acquire fixtures and equipment for new warehouse club sites, the expansion of existing warehouse clubs and corporate offices in Latin America, the Caribbean and the United States.  The Company acquired fixtures and equipment for approximately $3.4 million, $2.9 million and $115,000, respectively, in these segments for the six months ended February 28, 2010.  The Company acquired approximately $686,000 of software and computer hardware during the six months ended February 28, 2010.
 
Depreciation and amortization expense for the first six months of fiscal years 2011 and 2010 was approximately $8.8 million and $7.3 million, respectively.

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

Effective September 1, 2009, the Company adopted FASB guidance which addresses whether instruments granted in share-based payment transactions are participating securities and, therefore, have a potential dilutive effect on earnings per share (“EPS”).  The following table sets forth the computation of net income per share for the six months ended February 28, 2011 and 2010 (in thousands, except per share amounts):

 

   
Three Months Ended
    
Six Months Ended
  
   
February 28,
    
February 28,
  
   
2011
    
2010
    
2011
    
2010
  
Net income from continuing operations attributable to PriceSmart
$
18,010
$
13,662
  $
32,856
  
$
24,030
  
Less: Earnings and dividends allocated to unvested stockholders
  
(239
)
  
(200
)
  
(371
)
  
(380
)
Dividend distribution to common stockholders
  
(17,691
)
  
(14,649
)
  
(17,691
)
  
(14,649
)
Basic undistributed net earnings available to common stockholders from continuing operations attributable to PriceSmart
  
 
80
    
 
(1,187
 
)
  
14,794
    
9,001
  
Add: Net undistributed earnings allocated and reallocated to unvested stockholders (two-class method) and dividend distribution
   $
 
17,691
     $
 
14,649
    $
17,691
  
$
14,649
  
Net earnings available to common stockholders from continuing operations attributable to PriceSmart 
   $
 
17,771
   $
 
13,462
    $
32,485
  
$
23,650
  
Net earnings (loss) available to common stockholders from discontinued operations
  
 
(93
 
)
  
 
35
    
(86
)
  
44
  
Basic weighted average shares outstanding
  
29,414
    
29,222
    
29,385
    
29,163
  
Add dilutive effect of stock options (two-class method)
  
9
    
28
    
7
    
43
  
Diluted average shares outstanding
  
29,423
    
29,250
    
29,392
    
29,206
  
Basic income per share from continuing operations attributable to PriceSmart
   $
 
0.60
   $
 
0.46
    $
1.11
  
$
0.81
  
Diluted income per share from continuing operations attributable to PriceSmart
 $
 
0.60
     $
 
0.46
    $
1.11
  
$
0.81
  
Basic income (loss) per share from discontinued operations
 $
0.00
   $
0.00
    $
0.00
  
$
0.00
  
Diluted income (loss) per share from discontinued operations
 $
0.00
   $
0.00
    $
0.00
  
$
0.00
  
 
 
 
 
 
15
 
 


PRICESMART, INC.

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

On January 19, 2011, the Company’s Board of Directors declared a cash dividend in the total amount of $0.60 per share, of which $0.30 per share was paid on February 28, 2011 to stockholders of record as of the close of business on February 15, 2011 and $0.30 per share is payable on August 31, 2011 to stockholders of record as of the close of business on August 15, 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.

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 six months of fiscal year 2011.

 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 $16.1 million and $16.2 million and unrealized losses on interest rate swaps (net of tax) of approximately $439,000 and $576,000 as of February 28, 2011 and August 31, 2010, respectively.  The unfavorable translation adjustments during the first six months of fiscal year 2011 of approximately $30,000 were primarily due to weaker foreign currencies. The $137,000 decrease in unrealized losses was mainly due to the change in the fair value of the interest rate swaps from fiscal year 2010 to February 28, 2011. 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 February 28, 2011 and August 31, 2010, the accumulated deficit included retained earnings designated as legal reserves of approximately $3.9 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
 
The Company has adopted four stock option and equity participation plans for the benefit of its eligible employees, consultants and independent directors.  The 1997 Stock Option Plan of PriceSmart, Inc. authorizes 700,000 shares of the Company's common stock 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.  The 1998, 2001 and 2002 Equity Participation Plans of PriceSmart, Inc., as amended, authorize 2,350,000 shares of the Company’s common stock for issuance.  Options issued under all four plans typically vest over five years and expire in six years.  The 1998, 2001 and 2002 plans also allow restricted stock awards and restricted stock units, which typically vest over five years.  As of February 28, 2011 and August 31, 2010, an aggregate of 404,574 shares and 493,539 shares, respectively, were available for future grants under all of the Company’s stock option and equity incentive plans.
 
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.

The following table summarizes the components of the stock-based compensation expense for the three- and six-month periods ended February 28, 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
      
Six Months Ended
  
   
February 28,
      
February 28,
  
   
2011
    
2010
      
2011
      
2010
  
Options granted to directors
$
8
  
$
4
    
$
20
    
$
15
  
Restricted stock awards
  
988
    
1,050
      
1,885
      
1,793
  
Restricted stock units
  
37
    
16
      
59
      
32
  
Stock-based compensation expense
$
1,033
  
$
1,070
    
$
1,964
    
$
1,840
  
 
The following tables summarize stock options outstanding and stock options activity relating to the 1997 Plan, 1998 Plan, 2001 Plan and the 2002 Plan for the six months ended February 28, 2011 and 2010 as follows:

   
Shares
    
Weighted Average Exercise Price
  
Shares subject to outstanding options at August 31, 2010
    
35,200
    
$
21.00
  
Granted
    
6,000
      
40.40
  
Exercised
    
(4,000
)
    
26.00
  
Forfeited or expired
    
(4,000
)
    
34.33
  
Shares subject to outstanding options at February 28, 2011
    
33,200
    
$
22.29
  


 
 
 
17
 
 

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


   
Shares
    
Weighted Average Exercise Price
  
Shares subject to outstanding options at August 31, 2009
    
179,998
    
$
10.02
  
Granted
    
6,000
      
20.01
  
Exercised
    
(115,295
)
    
6.25
  
Forfeited or expired
    
(9,000
)
    
32.29
  
Shares subject to outstanding options at February 28, 2010
    
61,703
    
$
14.79
  


The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants issued in the first six months of fiscal years 2011 and 2010:
 
   
Six months ended
February 28,
  
   
2011
    
2010
  
Risk free interest rate
     2.10 %     2.71 %
Expected life
  
6 years
    
5 years
  
Expected volatility
     53.57 %     53.25 %
Expected dividend yield
     1.5 %     2.5 %


The following table summarizes information about stock options outstanding and options exercisable as of February 28, 2011:
 
Range of
Exercise Prices
    
Outstanding as
of February 28, 2011
    
Weighted-Average
Remaining
Contractual Life
(in years)
    
Weighted-Average
Exercise Price on  Options Outstanding
    
Options Exercisable as
of February 28, 2011
    
Weighted-Average
Exercise Price
on Options
Exercisable as of
February 28, 2011
  
$
8.18 - $15.66
      
6,200
      
1.55
    
$
13.01
      
5,400
    
$
12.61
  
 
15.67 - 20.01
      
14,000
      
3.85
      
17.98
      
5,600
      
17.27
  
 
20.02 - 40.40
      
13,000
      
6.17
      
31.36
      
4,200
      
23.61
  
$
8.18 - $40.40
      
33,200
      
4.33
    
$
22.29
      
15,200
    
$
17.37
  
 
 
The aggregate intrinsic value and weighted average remaining contractual term of options exercisable at February 28, 2011 was approximately $245,000 and 2.5 years, respectively.  The aggregate intrinsic value and weighted average remaining contractual term of options outstanding at February 28, 2011 was approximately $414,000 and 4.3 years, respectively.

Cash proceeds from stock options exercised and the intrinsic value related to total stock options exercised during the six months ended February 28, 2011 and 2010 are summarized in the following table (in thousands):

   
Six months ended
February 28,
  
   
2011
    
2010
  
Proceeds from stock options exercised
  
$
104
    
$
701
  
Intrinsic value of stock options exercised
  
$
44
    
$
1,542
  


 
 
 
18
 
 

PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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 six months ended February 28, 2011 and 2010 was as follows:

   
Six months ended