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 May 31, 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 29,896,744 shares of its common stock, par value $0.0001 per share, outstanding at June 30, 2011.

 
 
 
 
 
 
 
 
 
 
 

PRICESMART, INC.
 
INDEX TO FORM 10-Q
 
     
   
Page
 
 
 
     
        1
     
 
        2
     
 
        3
     
 
        4
     
 
        5
     
 
        6
     
        26
     
        46
     
        47
   
 
     
        48
     
        48
     
        49
     
        49
     
        49
     
        49
     
        50

 
 
 
 
 
 
 
i
 
 
 



 PART I—FINANCIAL INFORMATION
 
ITEM 1.                      FINANCIAL STATEMENTS

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

   
May 31,
        
   
2011
    
August 31,
  
   
(Unaudited)
    
2010
  
ASSETS
            
Current Assets:
            
Cash and cash equivalents
$
65,846
    
$
  73,346
  
Short-term restricted cash
  
1,240
      
  1,240
  
Receivables, net of allowance for doubtful accounts of $13 and $15 as of May 31, 2011 and August 31, 2010, respectively
  
3,865
      
  2,855
  
Merchandise inventories
  
167,687
      
  131,190
  
Deferred tax assets – current
  
4,491
      
  3,639
  
Prepaid expenses and other current assets
  
27,969
      
  21,879
  
Assets of discontinued operations
  
507
      
  692
  
Total current assets
  
271,605
      
  234,841
  
Long-term restricted cash
  
20,590
      
  5,640
  
Property and equipment, net
  
281,389
      
  265,544
  
Goodwill
  
37,465
      
  37,471
  
Deferred tax assets – long term
  
14,452
      
  16,637
  
Other assets
  
4,127
      
  4,341
  
Investment in unconsolidated affiliates
  
8,063
      
  8,091
  
Total Assets
$
637,691
    
$
  572,565
  
LIABILITIES AND EQUITY
              
Current Liabilities:
              
Short-term borrowings
$
4,642
    
$
  3,551
  
Accounts payable
  
137,756
      
  124,401
  
Accrued salaries and benefits
  
11,904
      
  10,911
  
Deferred membership income
  
10,950
      
  9,729
  
Income taxes payable
  
7,141
      
  6,615
  
Other accrued expenses
  
10,865
      
  12,095
  
Dividends payable
  
8,970
      
—
  
Long-term debt, current portion
  
7,767
      
  7,715
  
Deferred tax liability – current
  
429
      
  357
  
Liabilities of discontinued operations
  
194
      
  109
  
Total current liabilities
  
200,618
      
  175,483
  
Deferred tax liability – long-term
  
1,824
      
  1,198
  
Long-term portion of deferred rent
  
3,895
      
  3,272
  
Long-term income taxes payable, net of current portion
  
3,087
      
  3,564
  
Long-term debt, net of current portion
  
60,030
      
  53,005
  
Total liabilities
  
269,454
      
  236,522
  
Equity:
              
Common stock, $0.0001 par value, 45,000,000 shares authorized; 30,691,147 and 30,624,666 shares issued and 29,896,954 and 29,897,909 shares outstanding (net of treasury shares) as of May 31, 2011 and August 31, 2010, respectively.
  
3
      
  3
  
Additional paid-in capital
  
382,588
      
  379,368
  
Tax benefit from stock-based compensation
  
5,366
      
  4,490
  
Accumulated other comprehensive loss
  
(17,091
)
    
  (16,672
)
Retained earnings (accumulated deficit)
  
15,543
      
  (15,578
)
Less: treasury stock at cost; 794,193 and 726,757 shares as of May 31, 2011 and August 31, 2010, respectively.
  
(18,172
)
    
  (15,568
)
Total PriceSmart stockholders’ equity and total equity
  
368,237
      
  336,043
  
Total Liabilities and Equity
$
637,691
    
$
  572,565
  
See accompanying notes.

 
 
 
 
 
2
 
 
 


PRICESMART, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED—AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
 
   
Three Months Ended
    
Nine Months Ended
  
   
May 31,
    
May 31,
  
   
2011
      
2010
    
2011
    
2010
  
Revenues:
                          
Net warehouse club sales
$
421,637
    
$
341,215
    
$
1,239,232
    
$
1,008,760
  
Export sales
  
1,890
      
868
      
5,170
      
2,461
  
Membership income
  
5,824
      
5,056
      
16,825
      
14,532
  
Other income
  
1,797
      
1,477
      
5,610
      
4,404
  
Total revenues
  
431,148
      
348,616
      
1,266,837
      
1,030,157
  
Operating expenses:
                              
Cost of goods sold:
                              
Net warehouse club
  
358,535
      
288,289
      
1,050,921
      
854,873
  
Export
  
1,804
      
825
      
4,906
      
2,314
  
Selling, general and administrative:
                              
Warehouse club operations
  
38,819
      
31,834
      
111,192
      
92,109
  
General and administrative
  
9,293
      
8,752
      
26,977
      
24,987
  
Pre-opening expenses
  
284
      
840
      
672
      
1,126
  
Total operating expenses
  
408,735
      
330,540
      
1,194,668
      
975,409
  
Operating income
  
22,413
      
18,076
      
72,169
      
54,748
  
Other income (expense):
                              
Interest income
  
300
      
122
      
667
      
460
  
Interest expense
  
(984
)
    
(595
)
    
(3,012
)
    
(1,859
)
Other income (expense), net
  
1,838
      
(240
)
    
1,535
      
(247
)
Total other income (expense)
  
1,154
      
(713
)
    
(810
)
    
(1,646
)
Income from continuing operations before provision for income taxes and loss of unconsolidated affiliates
  
23,567
      
 
17,363
      
71,359
      
53,102
  
Provision for income taxes
  
(7,199
)
    
(5,309
)
    
(22,093
)
    
(16,901
)
Loss of unconsolidated affiliates
  
(3
)
    
(6
)
    
(45
)
    
(11
)
Income from continuing operations
  
16,365
      
12,048
      
49,221
      
36,190
  
Income (loss) from discontinued operations, net of tax
  
(75
)
    
(4
)
    
(161
)
    
40
  
Net income including noncontrolling interest
  
16,290
      
12,044
      
49,060
      
36,230
  
Net (loss) attributable to noncontrolling interest
  
—
      
(20
)
    
—
      
(132
)
Net income attributable to PriceSmart
$
16,290
    
$
12,024
    
$
49,060
    
$
36,098
  
                               
Net income per share attributable to PriceSmart and available for distribution:
                              
Basic net income per share from continuing operations
$
0.55
    
$
0.40
    
$
1.65
    
$
1.21
  
Basic net income (loss) per share from discontinued operations, net of tax
 
$
—
    
 
$
 
—
    
$
—
    
$
—
  
Basic net income per share
$
0.55
    
$
0.40
    
$
1.65
    
$
1.21
  
                               
Diluted net income per share from continuing operations
$
0.55
    
$
0.40
    
$
1.65
    
$
1.21
  
Diluted net income (loss) per share from discontinued operations, net of tax
 
$
—
    
 
$
 
—
    
$
—
    
$
—
  
Diluted net income per share
$
0.55
    
$
0.40
    
$
1.65
    
$
1.21
  
Shares used in per share computations:
                              
Basic
  
29,493
      
29,336
      
29,422
      
29,221
  
Diluted
  
29,502
      
29,345
      
29,430
      
29,253
  
Dividends per share
$
0.00
    
$
0.00
    
$
0.60
    
$
0.50
  
 
See accompanying notes.
 
 
 
 
 
 
 
3
 
 
 

PRICESMART, INC.
CONSOLIDATED STATEMENTS OF EQUITY
(UNAUDITED—AMOUNTS IN THOUSANDS)    
                     
Tax Benefit
    
Accum-
                                      
                     
From
    
ulated
    
Retained
                
Total
              
                     
Stock-
    
Other
    
Earnings
                
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
    
—
      
—
      
—
      
—
      
—
      
—
      
69
      
(1,388
)
    
(1,388
)
    
—
      
(1,388
)
Issuance of restricted stock awards
    
111
      
—
      
—
      
—
      
—
      
—
      
—
      
—
      
—
      
—
      
—
  
Forfeiture of restricted stock awards
    
(5
)
    
—
      
—
      
—
      
—
      
—
      
—
      
—
      
—
      
—
      
—
  
Exercise of stock options
    
138
      
—
      
836
      
—
      
—
      
—
      
—
      
—
      
836
      
—
      
836
  
Stock-based compensation
    
—
      
—
      
2,829
      
(46
)
    
—
      
—
      
—
      
—
 
    
2,783
      
—
      
2,783
  
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
  
Acquisition of 5% minority interest
    
—
      
—
      
(2,914
)
    
—
      
—
      
—
      
—
      
—
      
(2,914
)
    
(886
)
    
(3,800
)
Change in fair value of interest rate swaps
    
—
      
—
      
—
      
—
      
13
      
—
      
—
      
—
      
13
      
—
      
13
  
Net income
    
—
      
—
      
—
      
—
      
—
      
36,098
      
—
      
—
      
36,098
      
132
      
36,230
  
Translation adjustment
    
—
      
—
      
—
      
—
      
265
      
—
      
—
      
—
      
265
 
    
(16
)
    
249
 
Comprehensive income
                    
  24
                                              
36,400
      
(770
)
    
36,516
  
Balance at May 31, 2010
    
30,581
    
$
3
    
$
378,381
    
$
4,501
    
$
(16,952
)
  
$
(28,762
)
    
725
    
$
(15,522
)
  
$
321,649
    
$
—
    
$
321,649
  
                                                                                         
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
    
—
      
—
      
—
      
—
      
—
      
—
      
67
      
(2,604
)
    
(2,604
)
    
—
      
(2,604
)
Issuance of restricted stock awards
    
66
      
—
      
—
      
—
      
—
      
—
      
—
      
—
      
—
      
—
      
—
  
Forfeiture of restricted stock awards
    
(6
)
    
—
      
—
      
—
      
—
      
—
      
—
      
—
      
—
      
—
      
—
  
Exercise of stock options
    
6
      
—
      
144
      
—
      
—
      
—
      
—
      
—
      
144
      
—
      
144
  
Stock-based compensation
    
—
      
—
      
3,076
      
876
      
—
      
—
      
—
      
—
      
3,952
      
—
      
3,952
  
Dividend payable to stockholders
    
—
      
—
      
—
      
—
      
—
      
(8,970
)
    
—
      
—
      
(8,970
)
    
—
      
(8,970
)
Dividend paid to stockholders
    
—
      
—
      
—
      
—
      
—
      
(8,969
)
    
—
      
—
      
(8,969
)
    
—
      
(8,969
)
Change in fair value of interest rate swaps
    
—
      
—
      
—
      
—
      
(23
)
    
—
      
—
      
—
      
(23
)
    
—
      
(23
)
Net income
    
—
      
—
      
—
      
—
      
—
      
49,060
      
—
      
—
      
49,060
      
—
      
49,060
  
Translation adjustment
    
—
      
—
      
—
      
—
      
(396
)
    
—
      
—
      
—
      
(396
)
    
—
      
(396
)
Comprehensive income
                                                                    
48,641
      
—
      
48,641
  
Balance at May 31, 2011
    
30,691
    
$
3
    
$
382,588
    
$
5,366
    
$
(17,091
)
  
$
15,543
      
794
    
$
(18,172
)
  
$
368,237
    
$
—
    
$
368,237
  
 
See accompanying notes.

  
 
 
 
 
 
 
 
4
 
 
 
 
 



PRICESMART, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED—AMOUNTS IN THOUSANDS)
   
Nine Months Ended
  
   
May 31,
  
   
2011
    
2010
  
Operating Activities:
            
Net income
  
$
49,060
    
$
36,230
  
Adjustments to reconcile net income to net cash provided by operating activities:
                
Depreciation and amortization
    
13,675
      
11,191
  
Allowance for doubtful accounts
    
(2
)
    
(4
)
Loss on sale of  property and equipment
    
299
      
254
  
Gain on sale of excess real estate in Panama
    
(1,249
)
    
—
  
Deferred income taxes
    
2,907
      
2,329
  
Discontinued operations
    
161
 
    
(40
)
Excess tax (benefit) deficiency on stock-based compensation
    
(876
)
    
46
  
Equity in losses of unconsolidated affiliates
    
45
      
11
 
Stock-based compensation
    
3,076
      
2,829
  
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
    
(5,280
)
    
3,267
  
Merchandise inventories
    
(36,497
)
    
(17,218
)
Accounts payable
    
13,355
      
12,086
  
Net cash provided by (used in) continuing operating activities
    
38,674
      
50,981
  
Net cash provided by (used in) discontinued operating activities
    
108
      
142
  
Net cash provided by (used in) operating activities
    
38,782
      
51,123
  
Investing Activities:
                
Additions to property and equipment
    
(34,810
)
    
(38,162
)
Proceeds from disposal of property and equipment
    
37
      
85
  
Proceeds on sale of excess real estate in Panama
    
7,406
      
—
  
Purchase of 5% Trinidad noncontrolling interest
    
—
      
(3,800
)
Capital contribution to Panama joint venture
    
—
      
(433
)
Net cash provided by (used in) investing activities
    
(27,367
)
    
(42,310
)
Financing Activities:
                
Proceeds from bank borrowings
    
40,066
      
35,460
  
Repayment of bank borrowings
    
(32,176
)
    
(19,119
)
Cash dividend payments
    
(8,969
)
    
(7,433
)
Addition to restricted cash
    
(14,920
)
    
(6,000
)
Stockholder contribution
    
—
      
396
  
Excess tax benefit (deficiency) on stock-based compensation
    
876
      
(46
)
Purchase of treasury stock
    
(2,604
)
    
(1,388
)
Proceeds from exercise of stock options
    
144
      
836
  
Net cash provided by (used in) financing activities
    
(17,583
)
    
2,706
  
Effect of exchange rate changes on cash equivalents
    
(1,332
)
    
(621
)
Net increase (decrease) in cash and cash equivalents
    
(7,500
)
    
10,898
  
Cash and cash equivalents at beginning of year
    
73,346
      
44,193
  
Cash and cash equivalents at the end of year
  
$
65,846
    
$
55,091
  
Supplemental disclosure of cash flow information:
            
Dividends declared but not paid
  
8,970
    
7,429
  
Cash paid during the period for:
            
Interest, net of amounts capitalized
  
$
2,767
    
$
1,836
  
Income taxes
  
$
16,130
    
$
13,661
  
See accompanying notes.

 
 
 
 
 
 
 
 
5
 
 
 



PRICESMART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
May 31, 2011

NOTE 1 – COMPANY OVERVIEW AND BASIS OF PRESENTATION

 
PriceSmart, Inc.’s (“PriceSmart” or the “Company”) business consists primarily of operating international membership shopping warehouse clubs similar to, but smaller in size than, warehouse clubs in the United States.  As of May 31, 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.  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 in early August 2011.  In May 2011, the Company entered into an option agreement to acquire approximately 131,524 square feet of land in Cali, Colombia for approximately 10.2 billion Colombian Pesos (the equivalent of approximately U.S. $5.6 million), upon which the Company will construct a warehouse club.  The final U.S. dollar price will depend on the conversion rate applicable on the date of final sale.  The transaction, which is subject to certain contingencies, is currently planned to close in the first quarter of fiscal year 2012.  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 subsidiaries, which are currently wholly owned.  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.

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.  

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 Company measures the fair value for interest rate swaps and cross currency 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 and cross-currency interest rate swaps).  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.


 
 
 
7
 
 
 

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

Valuation techniques utilized in the fair value measurement of assets and liabilities presented on the Company’s consolidated balance sheets were not changed from previous practice during the reporting period.  The Company discloses the valuation techniques and any change in method of such within the body of each footnote.
         
                 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 May 31, 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 – (Interest rate swaps)
  
$
—
    
$
583
    
$
—
  
$
583
  
Other accrued expenses – (Cross-currency interest rate swap)
    
—
      
161
      
—
    
161
  
Total 
  
$
—
    
$
744
    
$
—
  
$
744
  

The fair value of derivatives is disclosed in further detail in Note 10 - Derivative Instruments and Hedging Activities.  
 
As of May 31, 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 May 31, 2011 and August 31, 2010.  Foreign exchange translation gains and losses related to this balance sheet caption largely offset each other for the nine-month period ended May 31, 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 and a cross currency interest rate swap.  Interest rate swaps and the cross-currency interest rate swap 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 10— Derivative Instruments and Hedging Activities.)

Pre-Opening Costs – The Company expenses pre-opening costs (the costs of start-up activities, including organization costs and rent) as incurred.

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 and other expenses in the consolidated statements of income. For the first nine months of fiscal years 2011 and 2010, the Company recorded approximately $940,000 and $1.5 million in foreign exchange gains, respectively.

 

 
 
 
8
 
 
 

PRICESMART, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
 
 
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.  There were no material changes in the Company’s uncertain income tax positions for the three- and nine-month periods ending May 31, 2011 and 2010.

The following table summarizes the relationship between pre-tax income and income tax for the period presented:

   
Three Months Ended
    
Three Months Ended
    
Nine Months Ended
    
Nine Months Ended
  
   
May 31, 2011
    
May 31, 2010
    
May 31, 2011
    
May 31, 2010
  
Provision for income taxes
  
$
7,199
    
$
5,309
    
$
22,093
    
$
16,901
  
Income from continuing operations before provision for income taxes and loss of unconsolidated affiliates
    
23,567
      
17,363
      
71,359
      
53,102
  
% of income tax
    
30.55
%
    
30.58
%
    
30.96
%
    
31.83
%

For the first nine months of fiscal year 2011, the decrease in the effective tax rate versus the prior year was primarily attributable to a benefit of $437,000 from an increase in the value of U.S. deferred tax assets due to an increase in the U.S. statutory tax rate from 34% to 35% that is applicable to the current year and a benefit of $326,000 from tax exempt capital gains.

Recent Accounting Pronouncements

FASB ASC 220

In June 2011, the FASB issued guidance to amend the presentation of comprehensive income to allow an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements.  In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. The guidance eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders' equity.  The amended guidance is effective for annual and interim periods within those years beginning after December 15, 2011, and is to be applied retrospectively. The Company will adopt this guidance at the beginning of its first quarter of fiscal year 2013.  Adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.

FASB ASC 820

In May 2011, the FASB issued guidance to amend the requirements related to fair value measurement which changes the wording used to describe many requirements in GAAP for measuring fair value and for disclosing information about fair value measurements. Additionally, the amendments clarify the FASB’s intent about the application of existing fair value measurement requirements. The amended guidance is effective for interim and annual periods beginning after December 15, 2011, and is applied prospectively. The Company will adopt this guidance at the beginning of its first quarter of fiscal year 2013.  Adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.

 
 
 
 
 
 
 
9
 
 
 

FASB ASC 310
 
In February 2011, the FASB temporarily delayed the effective date of amended guidance regarding disclosures about troubled debt, the credit quality of financing receivables and the allowance for credit losses.   This amended guidance is intended to provide additional information to assist financial statement users in assessing an entity’s credit risk exposures and evaluating the adequacy of its allowance for credit losses by providing disclosures that facilitate financial statement users’ evaluation of the nature of credit risk inherent in the entity’s portfolio of financing receivables, how that risk is analyzed and assessed in arriving at the allowance for credit losses, and the changes and reasons for those changes in the allowance for credit losses. The new effective date of this amended guidance 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.

FASB ASC 350

In December 2010, the 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 will adopt this guidance at the beginning of its third quarter  of fiscal year 2012.  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 will adopt this guidance at the beginning of its third quarter of fiscal year 2012.  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 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 consolidated 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 11 - 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 was required to adopt this guidance as of the beginning of its first annual reporting period that began 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.


 
 
 
 
 
 
 
10
 
 
 

PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


NOTE 3 – DISCONTINUED OPERATIONS

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


  
  
May 31,
2011
    
August 31,
2010
  
Cash and cash equivalents
  
$
56
    
$
41
  
Accounts receivable, net
    
301
      
219
  
Prepaid expenses and other current assets
    
64
      
39
  
Other assets
    
86
      
393
  
Assets of discontinued operations
  
$
507
    
$
692
  
Other accrued expenses
  
$
194
    
$
109
  
Liabilities of discontinued operations
  
$
194
    
$
109
  
 
The Company’s former Guam operation has a deferred tax asset of $2.6 million, primarily generated from NOLs. This deferred tax asset has a 100% valuation allowance, as the Company currently has no plans that would allow it to utilize these losses. Additionally, a significant portion of these losses are limited as to future use by the Company. 

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

   
Three Months Ended
    
Nine Months Ended
  
   
May 31,
    
May 31,
  
   
2011
    
2010
    
2011
    
2010
  
Net warehouse club sales
   $
—
     $
—
     $
—
     $
—
  
Pre-tax income (loss) from discontinued operations
     (33 )      (4 )      (119 )      40  
Provision for income taxes
     (42 )     
—
       (42 )     
—
  
Income (loss) from discontinued operations, net of tax
   $ (75 )    $ (4 )    $ (161 )    $ 40  
 
The income (loss) from discontinued operations, net of tax is the net result of the subleasing activity in Guam. 

 
11
 
 
 


PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


NOTE 4 – 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.

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

   
May 31,
2011
    
August 31,
2010
  
Land
  
$
84,939
    
$
81,187
  
Building and improvements
    
187,785
      
171,828
  
Fixtures and equipment
    
87,930
      
88,090
  
Construction in progress
    
16,769
      
13,683
  
      Total property and equipment, recorded at historical cost
    
377,423
      
354,788
  
Less: accumulated depreciation
    
(96,034
)
    
(89,244
)
Property and equipment, net
  
$
281,389
    
$
265,544
  


Depreciation and amortization expense (in thousands):

   
Three Months Ended
    
Nine Months Ended
  
   
May 31,
    
May 31,
  
   
2011
    
2010
    
2011
    
2010
  
Depreciation and amortization expense
   $ 4,839     $ 3,928     $ 13,675     $ 11,191  

On April 9, 2010, the Company relocated one of its three warehouse clubs in Panama City, Panama ("Los Pueblos") to the recently completed new warehouse club ("Brisas").  The Company leased the Los Pueblos site to Juan Diaz Properties, S.A./ Ace International Hardware Corporation (“ACE”) under a lease agreement with an option to purchase.  ACE elected to exercise its option to purchase the property and on March 23, 2011 the Company’s Panama subsidiary entered into a land sale agreement with ACE.  The sales price of the property was approximately $5.3 million.   
 
On March 23, 2011, the Company’s Panama subsidiary entered into a land sale agreement with OD Panama S.A. for the sale of approximately 28,322 square feet of undeveloped land located adjacent to the Panama, Via Brasil location for approximately $2.1 million.  OD Panama S.A. will construct and maintain an Office Depot retail center at this location.  Gonzalo Barrutieta, who has served as a member of the Company's board of directors since February 2008, is also a board member of Office Depot, Mexico.

The following table summarizes the asset disposals recorded for the nine months ended May 31, 2011 (in thousands):

Disposal Activity
  
Historical Cost
    
Accumulated Depreciation
    
Impairment and Other Costs
    
Proceeds from disposal
    
Gain/(Loss) recognized
  
Sale of Property in Panama
  
$
(8,717
 )   
$
2,748
    
$
(188
 )  
$
7,406
 
  
$
1,249
  
Disposal of assets no longer in use
    
(4,365
 )     
3,892
      
137
      
37
 
    
(299
) 
   
$
(13,082
 )   
$
6,640
    
$
(51
 )   
$
7,443
    
 $
950
  

 
 
 
 
 
 
 
12
 
 
 

PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

The following table sets forth the computation of net income per share for the nine months ended May 31, 2011 and 2010 (in thousands, except per share amounts):
 
   
Three Months Ended
    
Nine Months Ended
  
   
May 31,
    
May 31,
  
   
2011
    
2010
    
2011
    
2010
  
Net income from continuing operations attributable to PriceSmart
   $ 16,365     $ 12,028     $ 49,221     $ 36,058  
Less: Earnings and dividends allocated to unvested stockholders
     (243 )     (207 )     (764 )     (597 )
Dividend distribution to common stockholders
     —       —       (17,691 )      (14,649 )
Basic undistributed net earnings available to common stockholders from continuing operations attributable to PriceSmart
     16,122       11,821       30,766       20,812  
Add: Net undistributed earnings allocated and reallocated to unvested stockholders (two-class method) and dividend distribution
   $ —     $ —     $ 17,691     $ 14,650  
Net earnings available to common stockholders from continuing operations attributable to PriceSmart 
   $ 16,122     $ 11,821     $ 48,457     $ 35,462  
Net earnings (loss) available to common stockholders from discontinued operations
     (75 )     (4 )     (161 )     40  
                                 
Basic weighted average shares outstanding
     29,493       29,336       29,422       29,221  
Add dilutive effect of stock options (two-class method)
     9       9       8       32  
Diluted average shares outstanding
     29,502       29,345       29,430       29,253  
                                 
Basic income per share from continuing operations attributable to PriceSmart
   $ 0.55     $ 0.40     $ 1.65     $ 1.21  
Diluted income per share from continuing operations attributable to PriceSmart
   $ 0.55     $ 0.40     $ 1.65     $ 1.21  
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  

Net income attributable to PriceSmart:
                              
Income from continuing operations
  
16,365
      
12,028
      
49,221
      
36,058
  
Income (loss) from discontinued operations, net of tax
  
(75
)
    
(4
)
    
(161
)
    
40
  
 
$
16,290
    
$
12,024
    
$
49,060
    
$
36,098
  

 
 
 
 
 
 
 
13
 
 
 



PRICESMART, INC.

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

       
First Payment
  
Second Payment
  
Declared
  
Amount
  
Record Date
  
Date Paid
  
Amount
  
Date Paid
  
Amount
  
Record Date
  
Payable as of
5-31-11
  
Amount
  
  1-19-11  
$
0.60
  
2-15-11
    
2-28-11
  
$
0.30
  
—
  
$
—
    
8-15-11
  
8-31-11
  
$
0.30
  
  1-27-10    
0.50
  
2-15-10
    
2-26-10
    
0.25
  
8-31-10
    
0.25
    
N/A
  
N/A
    
N/A
  


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 nine 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 $16.5 million and $16.2 million and unrealized losses on interest rate swaps (net of tax) of approximately $598,000 and $576,000 as of May 31, 2011 and August 31, 2010, respectively.  The unfavorable translation adjustments during the first nine months of fiscal year 2011 of approximately $396,000 were primarily due to weaker foreign currencies. The $23,000 increase in unrealized losses was mainly due to the change in the fair value of the interest rate swaps from fiscal year 2010 to May 31, 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 May 31, 2011 and August 31, 2010, the retained earnings (accumulated deficit) included retained earnings designated as legal reserves of approximately $4.2 million and $3.2 million, respectively, at various subsidiaries, which cannot be distributed as dividends to PriceSmart, Inc. according to applicable statutory regulations. 

 



 
 
 
 
 
 
 
14
 
 
 




PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 7 – STOCK OPTION AND EQUITY PARTICIPATION PLANS
 
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.  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 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 dividend they would have received had the shares of common stock underlying the RSU's been actually issued and outstanding.  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.  Payments of dividend equivalents to employees are recorded as compensation expense.

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 Company no longer grants options under the 1997 Plan.  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 granted 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 May 31, 2011 and August 31, 2010, an aggregate of 265,115 shares and 353,813 shares, respectively, were available for future grants under the 1998, 2001 and 2002 Equity Participation Plans.

The following table summarizes the components of the stock-based compensation expense for the three- and nine-month periods ended May 31, 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
    
Nine Months Ended
  
   
May 31,
    
May 31,
  
   
2011
    
2010
    
2011
    
2010
  
Restricted stock awards
   $ 1,030     $ 960     $ 2,915     $ 2,753  
Restricted stock units
     63       16       123       49  
Options granted to directors
     18       13       38       27  
Stock-based compensation expense
   $ 1,111     $ 989     $ 3,076     $ 2,829  
 

 
 
 
 
 
15
 
 
 

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

The following table summarizes various concepts related to stock-based compensation as of and for the nine months ended May 31, 2011 and 2010:

 
Nine Months Ended
  
 
May 31,
  
 
2011
  
2010
  
Remaining unrecognized compensation cost (in thousands)
   $ 8,969     $ 8,558  
Weighted average period of time over which this cost will be recognized
  
3.3 years
    
3.0 years
  
Excess tax benefit (deficiency) on stock-based compensation
   $ 876,000     $ (46,000 )


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 nine months ended May 31, 2011 and 2010 was as follows:
 
   
Nine Months Ended
    
Year Ended
  
   
May 31, 2011
    
August 31, 2010
  
Grants outstanding at beginning of period
  
$
558,821
    
$
618,250
  
Granted
    
88,966
      
151,930
  
Forfeited
    
(6,268
)
    
(4,971
)
Vested
    
(202,761
)
    
(206,388
)
Grants outstanding at end of period
  
$
438,758
    
$
558,821
  
 
The following table summarizes the fair value for restricted stock awards and units for first nine months of fiscal years 2011 and 2010:

   
Nine Months Ended
May 31,
  
   
2011
    
2010
  
Restricted stock awards and units granted – weighted average grant date fair value
  
$
40.40
    
$
22.78
  
Restricted stock awards and units vested – weighted average grant date fair value
  
$
16.50
    
$
16.34
  
Restricted stock awards and units vested – weighted average vesting date fair value
  
$
38.69
    
$
20.59
  
Restricted stock awards and units forfeited – weighted average grant date fair value
  
$
22.80
    
$
18.82
  

The total fair market value of restricted stock awards and units vested during the nine months ended May 31, 2011 and 2010 was approximately $7.8 million and $4.0 million, respectively.

During the nine months ended May 31, 2011 and 2010, the Company repurchased 67,436 and 68,978 shares, respectively, of common stock from employees for approximately $2.6 million and $1.7 million, respectively, based on the stock price at the date of repurchase to cover the employees’ minimum statutory tax withholding requirements related to the vesting of restricted stock awards.  The Company expects to continue this practice going forward.   

As of May 31, 2011 and August 31, 2010, the Company had 30,800 and 35,200 stock options outstanding under its stock plans, respectively.  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. 


 
 
 
 
 
16
 
 
 

PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 8 – COMMITMENTS AND CONTINGENCIES

From time to time, the Company and its subsidiaries are subject to legal proceedings, claims and litigation arising in the ordinary course of business. The Company evaluates such matters on a case by case basis, and vigorously contests any such legal proceedings or claims which the Company believes are without merit.

The Company is required to file federal and state tax returns in the United States and various other tax returns in foreign jurisdictions. The preparation of these tax returns requires the Company to interpret the applicable tax laws and regulations in effect in such jurisdictions, which could affect the amount of tax paid by the Company. The Company, in consultation with its tax advisors, bases its tax returns on interpretations that are believed to be reasonable under the circumstances. The tax returns, however, are subject to routine reviews by the various taxing authorities in the jurisdictions in which the Company files its returns. As part of these reviews, a taxing authority may disagree with respect to the interpretations the Company used to calculate its tax liability and therefore require the Company to pay additional taxes.

The Company accrues an amount for its estimate of probable additional income tax liability.  In certain cases, the impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant tax authority.  An uncertain income tax position will not be recognized if it has less than 50% likelihood of being sustained. 

In evaluating the exposure associated with various non-income tax filing positions, the Company accrues charges for probable and estimable exposures.  As of May 31, 2011 and August 31, 2010, the Company had recorded within other accrued expenses a total of $2.3 million and $2.1 million, respectively, for various non-income tax related tax contingencies.

While the Company believes the recorded liabilities are adequate, there are inherent limitations in projecting the outcome of litigation, and in the estimation processes of more likely than not additional income tax liability in accounting for uncertain tax positions and in evaluating the probable additional tax associated with various non-income tax filing positions.  As such, the Company is unable to make a reasonable estimate of the sensitivity to change of estimates affecting its recorded liabilities.  As additional information becomes available, the Company assesses the potential liability and revises its estimates as appropriate.  While the Company believes the recorded liabilities are adequate, there are inherent limitations in the estimation process whereby actual losses may exceed estimated losses.
 
See Note 12 - 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 expires on December 31, 2011.  Future minimum service commitments related to this contract for the period less than one year is approximately $104,000.
 
During fiscal year 2010, the Company was made aware of a potential permitting issue involving the Alajuela warehouse club, located in Costa Rica.  The construction of that club and its related facilities included the construction of a water retention basin ("WRB") on property owned by Hacienda Santa Anita(1) ("HSA").  This WRB is used to slow the flow of water runoff from property owned by the Company (the Alajuela warehouse club), property owned by the joint venture Plaza Price Alajuela ("PPA"), and property owned by HSA, as it is discharged into the municipal drainage system. After certain administrative and court proceedings related to the original construction permit for the club and its facilities, the Company was advised by the Municipality of Alajuela ("MA") that the MA required the construction and proper operation of a set of complementary improvements to the WRB.  These improvements consisted of digging a network of dirt canals on HSA property to capture and conduct surface waters from these properties to the WRB.  The Company has performed this work.  However, prior to the Company beginning this work, HSA required the Company to sign an indemnification agreement pursuant to which the Company agreed that it will purchase at fair market value the land held by HSA in the event HSA is not allowed to develop that land due to the construction of the canals.  The Company has estimated the current fair value of the land to be approximately $4.1 million.
 
 
 
 
 
17
 
 
 

PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

     
    The Company has obtained all the necessary permits allowing the WRB to remain open under the current development conditions in the adjacent properties, although the Costa Rican Health Ministry (“HM”), in granting the health permit for the WRB, has required that the Company construct a wall at part of the perimeter of the HSA property to protect the slope that supports the WRB.  The Company is currently processing the necessary permits and obtaining bids to construct this wall.  To support additional development on the PPA property, certain additional improvements to the WRB are required, as recommended by relevant professionals retained by the Company. The Company will submit applications to process the necessary permits to perform these improvements during the next dry season. No undue resistance is expected from the HM or the MA in this process, provided that the designs are supported by the same professionals who participated in the original WRB permitting efforts. The Company has not recorded a liability for any of these matters as of May 31, 2011 or August 31, 2010.
 
(1)
Hacienda Santa Anita is a locally based business related to J.B Enterprises (a Panamanian business entity). On September 29, 2008, the Company entered into a joint venture with J.B. Enterprises, known as Plaza Price Alajuela, to jointly own and operate a commercial retail center adjacent to the Alajuela warehouse club, with each owning a 50% interest in the joint venture.
   

NOTE 9 – DEBT

Short-term borrowings consist of lines of credit which are secured by certain assets of the Company and its subsidiaries and 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, 2011
$
28,029
  
$
4,642
    
$
385
    
$
23,002
      
9.