Exhibit 13.1
PRICESMART, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
OTHER INFORMATION
AUGUST 31, 2007
1
SELECTED FINANCIAL DATA
The selected consolidated financial data presented below for the five years ended August 31, 2007 is derived from the Company’s consolidated financial statements and accompanying notes. This selected financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and accompanying notes thereto included elsewhere in this report.
Years Ended August 31, | ||||||||||||||||||||
2007 | 2006 | 2005 | 2004 | 2003 | ||||||||||||||||
(in thousands, except earnings (loss) per share) | ||||||||||||||||||||
OPERATING RESULTS DATA: | ||||||||||||||||||||
Net warehouse club sales | $ | 869,102 | $ | 719,576 | $ | 604,994 | $ | 530,262 | $ | 525,970 | ||||||||||
Export sales | 1,016 | 63 | 425 | 1,052 | 7,039 | |||||||||||||||
Membership income | 13,857 | 11,520 | 9,424 | 7,939 | 6,995 | |||||||||||||||
Other income | 4,826 | 3,514 | 3,982 | 4,938 | 5,991 | |||||||||||||||
Total revenues | 888,801 | 734,673 | 618,825 | 544,191 | 545,995 | |||||||||||||||
Cost of goods sold | 738,279 | 611,497 | 517,005 | 456,716 | 462,694 | |||||||||||||||
Selling, general and administrative | 115,123 | 102,863 | 95,671 | 92,944 | 88,471 | |||||||||||||||
Preopening expenses | 373 | 349 | 99 | — | 1,966 | |||||||||||||||
Asset impairment and closure costs | 1,550 | 1,834 | 11,361 | 1,236 | 7,087 | |||||||||||||||
Provision for settlement of pending litigation | 5,500 | — | — | — | — | |||||||||||||||
Operating income (loss) | 27,976 | 18,130 | (5,311 | ) | (6,705 | ) | (14,223 | ) | ||||||||||||
Net interest and other income (expense)(1) | 523 | (1,383 | ) | (4,625 | ) | (5,716 | ) | (6,922 | ) | |||||||||||
Income (loss) from continuing operations before (provision) benefit for income taxes, losses (including impairment charges) of unconsolidated affiliate and minority interest | 28,499 | 16,747 | (9,936 | ) | (12,421 | ) | (21,145 | ) | ||||||||||||
Provision for income taxes | (12,337 | ) | (8,112 | ) | (9,140 | ) | (4,236 | ) | (225 | ) | ||||||||||
Losses (including impairment charges in 2007, 2005 and 2004) of unconsolidated affiliate(3) | (2,903 | ) | (97 | ) | (4,368 | ) | (4,828 | ) | (2,967 | ) | ||||||||||
Minority interest | (476 | ) | (354 | ) | 566 | 697 | 3,114 | |||||||||||||
Income (loss) from continuing operations | 12,783 | 8,184 | (22,878 | ) | (20,788 | ) | (21,223 | ) | ||||||||||||
Discontinued operations income (expense) net of tax | 143 | 3,674 | (19,459 | ) | (9,194 | ) | (9,003 | ) | ||||||||||||
Net income (loss) | 12,926 | 11,858 | (42,337 | ) | (29,982 | ) | (30,226 | ) | ||||||||||||
Preferred dividends | — | — | (648 | ) | (3,360 | ) | (1,854 | ) | ||||||||||||
Deemed dividend on exchange of common stock for preferred stock | — | — | (20,647 | ) | — | — | ||||||||||||||
Net income (loss) available (attributable) to common stockholders | $ | 12,926 | $ | 11,858 | $ | (63,632 | ) | $ | (33,342 | ) | $ | (32,080 | ) | |||||||
EARNINGS (LOSS) PER COMMON SHARE - BASIC: | ||||||||||||||||||||
Income (loss) from continuing operations | $ | 0.44 | $ | 0.30 | $ | (1.13 | ) | $ | (2.85 | ) | $ | (3.09 | ) | |||||||
Discontinued operations, net of tax | $ | 0.01 | $ | 0.13 | $ | (0.96 | ) | $ | (1.26 | ) | $ | (1.31 | ) | |||||||
Preferred and deemed dividends | $ | — | $ | — | $ | (1.06 | ) | $ | (0.46 | ) | $ | (0.27 | ) | |||||||
Net earnings (loss) per common share | $ | 0.45 | $ | 0.43 | $ | (3.15 | ) | $ | (4.57 | ) | $ | (4.67 | ) | |||||||
EARNINGS (LOSS) PER COMMON SHARE - DILUTED: | ||||||||||||||||||||
Income (loss) from continuing operations | $ | 0.44 | $ | 0.30 | $ | (1.13 | ) | $ | (2.85 | ) | $ | (3.09 | ) | |||||||
Discontinued operations, net of tax | $ | 0.00 | $ | 0.13 | $ | (0.96 | ) | $ | (1.26 | ) | $ | (1.31 | ) | |||||||
Preferred and deemed dividends | $ | — | $ | — | $ | (1.06 | ) | $ | (0.46 | ) | $ | (0.27 | ) | |||||||
Net earnings (loss) per common share | $ | 0.44 | $ | 0.43 | $ | (3.15 | ) | $ | (4.57 | ) | $ | (4.67 | ) | |||||||
Weighted average common shares - basic | 28,534 | 27,332 | 20,187 | 7,290 | 6,865 | |||||||||||||||
Weighted average common shares - diluted | 29,243 | 27,735 | 20,187 | 7,290 | 6,865 | |||||||||||||||
As of August 31, | ||||||||||||||||||||
2007 | 2006 | 2005 | 2004 | 2003 | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
BALANCE SHEET DATA: | ||||||||||||||||||||
Cash and cash equivalents | $ | 32,065 | $ | 39,995 | $ | 30,147 | $ | 32,910 | $ | 9,828 | ||||||||||
Short-term restricted cash | 8,046 | 7,651 | 7,331 | 7,255 | 7,180 | |||||||||||||||
Total assets | 395,419 | 359,043 | 319,854 | 376,008 | 391,958 | |||||||||||||||
Long-term debt (including related party)(4) | 8,008 | 13,252 | 23,915 | 82,172 | 70,644 | |||||||||||||||
Stockholders’ equity | 245,316 | 234,619 | 198,273 | 127,879 | 159,419 | |||||||||||||||
Dividends paid on common stock(2) | 4,659 | — | — | — | — |
(1) | Net interest and other income (expense) includes interest income and expense and gains and losses on disposal of assets. |
(2) | On February 5, 2007, the Company declared a cash dividend on its common stock (see Note 6). |
(3) | Includes impairment charges of $2.6 million, $1.1 million and $3.1 million, in fiscal years 2007, 2005 and 2004, respectively. |
(4) | Long-term debt net of current portion. |
2
Quantitative and Qualitative Disclosures about Market Risk
The Company, primarily through majority or wholly owned subsidiaries, conducts operations primarily in Central America and the Caribbean, and as such is subject to both economic and political instabilities that cause volatility in foreign currency exchange rates or weak economic conditions. As of August 31, 2007, the Company had a total of 23 consolidated warehouse clubs operating in 11 foreign countries and one U.S. territory, 16 of which operate under currencies other than the U.S. dollar. For fiscal year 2007, approximately 78% of the Company’s net warehouse club sales were in foreign currencies. Also, as of August 31, 2007, the Company had a 50/50 joint venture accounted for under the equity method of accounting, which operates under the Mexican Peso. The Company may enter into additional foreign countries in the future or open additional locations in existing countries, which may increase the percentage of net warehouse sales denominated in foreign currencies.
Foreign currencies in most of the countries where the Company operates have historically devalued against the U.S. dollar and are expected to continue to devalue. For example, the Dominican Republic experienced a currency devaluation of approximately 81% between the end of the fiscal year ended August 31, 2002 and the end of the year ended August 31, 2003 and 13% (significantly higher at certain points of the year) between the year ended August 31, 2003 and the year ended August 31, 2004. There can be no assurance that the Company will not experience any other materially adverse effects on the Company’s business, financial condition, operating results, cash flow or liquidity, from currency devaluations in other countries, as a result of the economic and political risks of conducting an international merchandising business.
3
The following is a listing of the countries or territories where the Company currently operates and their respective currencies, as of August 31, 2007:
Country/Territory | Number of Warehouse Clubs In Operation | Anticipated Warehouse Club Openings in FY 2008 | Currency | |||
Panama | 4 | — | U.S. Dollar | |||
Costa Rica | 4 | — | Costa Rican Colon | |||
Dominican Republic | 2 | — | Dominican Republic Peso | |||
Guatemala | 2 | 1 | Guatemalan Quetzal | |||
El Salvador | 2 | — | U.S. Dollar | |||
Honduras | 2 | — | Honduran Lempira | |||
Trinidad | 2 | 1 | Trinidad Dollar | |||
Aruba | 1 | — | Aruba Florin | |||
Barbados | 1 | — | Barbados Dollar | |||
U.S. Virgin Islands | 1 | — | U.S. Dollar | |||
Jamaica | 1 | — | Jamaican Dollar | |||
Nicaragua | 1 | — | Nicaragua Cordoba Oro | |||
Totals | 23 | 2 | ||||
4
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of PriceSmart, Inc.
We have audited the accompanying consolidated balance sheets of PriceSmart, Inc. as of August 31, 2007 and 2006, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended August 31, 2007. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of PriceSmart, Inc. at August 31, 2007 and 2006, and the consolidated results of its operations and its cash flows for each of the three years in the period ended August 31, 2007, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of PriceSmart, Inc.’s internal control over financial reporting as of August 31, 2007, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated November 23, 2007 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
San Diego, California
November 23, 2007
5
CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share data)
August 31, | ||||||||
2007 | 2006 | |||||||
ASSETS | ||||||||
Current Assets: | ||||||||
Cash and cash equivalents | $ | 32,065 | $ | 39,995 | ||||
Short-term restricted cash | 8,046 | 7,651 | ||||||
Receivables, net of allowance for doubtful accounts of $3 and $191 in 2007 and 2006, respectively | 2,705 | 3,599 | ||||||
Merchandise inventories | 95,979 | 77,432 | ||||||
Prepaid expenses and other current assets | 15,777 | 8,985 | ||||||
Assets of discontinued operations | 1,380 | 1,594 | ||||||
Total current assets | 155,952 | 139,256 | ||||||
Long-term restricted cash | 477 | 531 | ||||||
Notes receivable | 2,086 | — | ||||||
Property and equipment, net | 179,985 | 162,029 | ||||||
Goodwill | 31,652 | 31,870 | ||||||
Deferred tax assets | 19,535 | 20,183 | ||||||
Other assets | 3,732 | 1,903 | ||||||
Investment in unconsolidated affiliate | 2,000 | 3,271 | ||||||
Total Assets | $ | 395,419 | $ | 359,043 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current Liabilities: | ||||||||
Short-term borrowings | $ | 3,301 | $ | 158 | ||||
Accounts payable | 80,633 | 65,520 | ||||||
Accounts payable to unconsolidated affiliate | — | 381 | ||||||
Accrued salaries and benefits | 6,962 | 5,765 | ||||||
Deferred membership income | 6,634 | 5,780 | ||||||
Income taxes payable | 4,593 | 4,098 | ||||||
Accrued reserve for settlement of pending litigation | 5,500 | — | ||||||
Other accrued expenses | 18,564 | 15,194 | ||||||
Dividend payable | 4,678 | — | ||||||
Long-term debt, current portion | 1,411 | 5,417 | ||||||
Liabilities of discontinued operations | 151 | 130 | ||||||
Total current liabilities | 132,427 | 102,443 | ||||||
Deferred tax liability | 1,474 | 1,101 | ||||||
Deferred rent | 1,977 | 1,730 | ||||||
Accrued closure costs | 3,072 | 3,226 | ||||||
Long-term debt, net of current portion | 8,008 | 13,252 | ||||||
Total liabilities | 146,958 | 121,752 | ||||||
Minority interest | 3,145 | 2,672 | ||||||
Commitments and contingencies | ||||||||
Stockholders’ Equity: | ||||||||
Common stock, $0.0001 par value, 45,000,000 shares authorized; 29,815,435 and 29,404,457 shares issued and 29,339,211 and 28,966,294 shares outstanding (net of treasury shares), respectively | 3 | 3 | ||||||
Additional paid-in capital | 369,848 | 364,132 | ||||||
Tax benefit from stock-based compensation | 3,970 | 3,509 | ||||||
Accumulated other comprehensive loss | (12,343 | ) | (13,883 | ) | ||||
Accumulated deficit | (106,087 | ) | (109,676 | ) | ||||
Less: treasury stock at cost; 476,224 and 438,163 shares, respectively | (10,075 | ) | (9,466 | ) | ||||
Total stockholders’ equity | 245,316 | 234,619 | ||||||
Total Liabilities and Stockholders’ Equity | $ | 395,419 | $ | 359,043 | ||||
See accompanying notes.
6
CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands, except per share data)
Years Ended August 31, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
Revenues: | ||||||||||||
Sales: | ||||||||||||
Net warehouse club | $ | 869,102 | $ | 719,576 | $ | 604,994 | ||||||
Export | 1,016 | 63 | 425 | |||||||||
Membership income | 13,857 | 11,520 | 9,424 | |||||||||
Other income | 4,826 | 3,514 | 3,982 | |||||||||
Total revenues | 888,801 | 734,673 | 618,825 | |||||||||
Operating expenses: | ||||||||||||
Cost of goods sold: | ||||||||||||
Net warehouse club | 737,317 | 611,411 | 516,611 | |||||||||
Export | 962 | 86 | 394 | |||||||||
Selling, general and administrative: | ||||||||||||
Warehouse club operations | 88,029 | 78,784 | 73,361 | |||||||||
General and administrative | 27,094 | 24,079 | 22,310 | |||||||||
Preopening expenses | 373 | 349 | 99 | |||||||||
Asset impairment and closure costs | 1,550 | 1,834 | 11,361 | |||||||||
Provision for settlement of pending litigation | 5,500 | — | — | |||||||||
Total operating expenses | 860,825 | 716,543 | 624,136 | |||||||||
Operating income (loss) | 27,976 | 18,130 | (5,311 | ) | ||||||||
Other income (expense): | ||||||||||||
Interest income | 1,628 | 1,959 | 1,754 | |||||||||
Interest expense | (788 | ) | (3,191 | ) | (5,385 | ) | ||||||
Other expense, net | (317 | ) | (151 | ) | (994 | ) | ||||||
Total other income (expense) | 523 | (1,383 | ) | (4,625 | ) | |||||||
Income (loss) from continuing operations before provision for income taxes, loss of unconsolidated affiliate and minority interest | 28,499 | 16,747 | (9,936 | ) | ||||||||
Provision for income taxes | (12,337 | ) | (8,112 | ) | (9,140 | ) | ||||||
Loss (including impairment charges of $2.6 million and $1.1 million in 2007 and 2005, respectively) of unconsolidated affiliate | (2,903 | ) | (97 | ) | (4,368 | ) | ||||||
Minority interest | (476 | ) | (354 | ) | 566 | |||||||
Income (loss) from continuing operations | 12,783 | 8,184 | (22,878 | ) | ||||||||
Discontinued operations income (expense), net of tax | 143 | 3,674 | (19,459 | ) | ||||||||
Net income (loss) | 12,926 | 11,858 | (42,337 | ) | ||||||||
Preferred dividends | — | — | (648 | ) | ||||||||
Deemed dividend on exchange of common stock for preferred stock | — | — | (20,647 | ) | ||||||||
Net income (loss) available to (attributable to) common stockholders | $ | 12,926 | $ | 11,858 | $ | (63,632 | ) | |||||
Basic income (loss) per share: | ||||||||||||
Continuing operations | $ | 0.44 | $ | 0.30 | $ | (1.13 | ) | |||||
Discontinued operations, net of tax | $ | 0.01 | $ | 0.13 | $ | (0.96 | ) | |||||
Preferred and deemed dividends | $ | — | $ | — | $ | (1.06 | ) | |||||
Net income (loss) per share available to (attributable to) common stockholders | $ | 0.45 | $ | 0.43 | $ | (3.15 | ) | |||||
Diluted income (loss) per share: | ||||||||||||
Continuing operations | $ | 0.44 | $ | 0.30 | $ | (1.13 | ) | |||||
Discontinued operations, net of tax | $ | 0.00 | $ | 0.13 | $ | (0.96 | ) | |||||
Preferred and deemed dividends | $ | — | $ | — | $ | (1.06 | ) | |||||
Net income (loss) per share available to (attributable to) common stockholders | $ | 0.44 | $ | 0.43 | $ | (3.15 | ) | |||||
Shares used in per share computations: | ||||||||||||
Basic | 28,534 | 27,332 | 20,187 | |||||||||
Diluted | 29,243 | 27,735 | 20,187 | |||||||||
Cash dividends per share | $ | 0.32 | $ | 0.00 | $ | 0.00 | ||||||
See accompanying notes.
7
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY FOR THE THREE YEARS ENDED AUGUST 31, 2007
(amounts in thousands)
Preferred Stock - Series A & Series B | Common Stock | Additional Paid-in Capital | Tax benefit from stock- based compen- sation | Notes receivable from stock- holders | Accum- ulated ot her compre- hensive loss | Accum- ulated deficit | Treasury | Total stock- holders’ equity | |||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||
Balance at August 31, 2004 | 42 | $ | 41,889 | 7,776 | $ | 1 | $ | 168,323 | $ | 3,379 | $ | (33 | ) | $ | (18,314 | ) | $ | (57,902 | ) | 436 | $ | (9,464 | ) | $ | 127,879 | ||||||||||||||||||
Dividends on preferred stock | — | — | — | — | — | — | — | — | (648 | ) | — | — | (648 | ) | |||||||||||||||||||||||||||||
Deemed dividend on exchange of common stock for preferred stock | — | — | — | — | 20,647 | — | — | — | (20,647 | ) | — | — | — | ||||||||||||||||||||||||||||||
Financial Program, exchange of common stock for preferred stock | (42 | ) | (41,889 | ) | 10,185 | 1 | 91,751 | — | — | — | — | — | — | 49,863 | |||||||||||||||||||||||||||||
Donated services | — | — | — | — | 71 | — | — | — | — | — | — | 71 | |||||||||||||||||||||||||||||||
Exercise of warrants | — | — | 200 | — | 1,808 | — | — | — | — | — | — | 1,808 | |||||||||||||||||||||||||||||||
Shares issued for Guatemala minority interest purchase | — | — | 825 | — | 5,495 | — | — | — | — | — | — | 5,495 | |||||||||||||||||||||||||||||||
Contributed capital from significant stockholders for Guatemala minority interest purchase | — | — | — | — | 1,105 | — | — | — | — | — | — | 1,105 | |||||||||||||||||||||||||||||||
Rights offering | — | — | 6,905 | 1 | 48,417 | — | — | — | — | — | — | 48,418 | |||||||||||||||||||||||||||||||
Exercise of stock options | — | — | 1 | — | (16 | ) | — | — | — | — | (2 | ) | 31 | 15 | |||||||||||||||||||||||||||||
Shares issued for land purchase | — | — | 139 | — | 1,113 | — | — | — | — | — | — | 1,113 | |||||||||||||||||||||||||||||||
Mark to market of employee restricted stock | — | — | — | — | — | — | 4 | — | — | — | — | 4 | |||||||||||||||||||||||||||||||
Disposal of Philippine subsidiary | — | — | — | — | — | — | — | 900 | — | — | — | 900 | |||||||||||||||||||||||||||||||
Amortization of deferred compensation | — | — | — | — | 930 | — | — | — | — | — | — | 930 | |||||||||||||||||||||||||||||||
Net loss | — | — | — | — | — | — | — | — | (42,337 | ) | — | — | (42,337 | ) | |||||||||||||||||||||||||||||
Translation adjustment | — | — | — | — | — | — | — | 3,657 | — | — | — | 3,657 | |||||||||||||||||||||||||||||||
Comprehensive loss | — | — | — | — | — | — | — | — | — | — | — | (38,680 | ) | ||||||||||||||||||||||||||||||
Balance at August 31, 2005 | — | — | 26,031 | 3 | 339,644 | 3,379 | (29 | ) | (13,757 | ) | (121,534 | ) | 434 | (9,433 | ) | 198,273 | |||||||||||||||||||||||||||
Shares issued | — | — | 169 | — | 1,500 | — | — | — | — | — | — | 1,500 | |||||||||||||||||||||||||||||||
Rights offering | — | — | 2,385 | — | 19,017 | — | — | — | — | — | — | 19,017 | |||||||||||||||||||||||||||||||
Warrant exercise | — | — | 200 | — | 1,400 | — | — | — | — | — | — | 1,400 | |||||||||||||||||||||||||||||||
Donated services | — | — | — | — | 16 | — | — | — | — | — | — | 16 | |||||||||||||||||||||||||||||||
Issuance of restricted stock awards | — | — | 566 | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||
Forfeiture of restricted stock awards | — | — | (25 | ) | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||
Exercise of stock options | — | — | 78 | — | 497 | — | — | — | — | — | — | 497 | |||||||||||||||||||||||||||||||
Stock-based compensation | — | — | — | — | 2,058 | 130 | — | — | — | — | — | 2,188 | |||||||||||||||||||||||||||||||
Mark to market of employee restricted stock | — | — | — | — | — | — | (1 | ) | — | — | — | — | (1 | ) | |||||||||||||||||||||||||||||
Repayment of notes receivable and reacquisition of common stock | — | — | — | — | — | — | 30 | — | — | 4 | (33 | ) | (3 | ) | |||||||||||||||||||||||||||||
Net income | — | — | — | — | — | — | — | — | 11,858 | — | — | 11,858 | |||||||||||||||||||||||||||||||
Translation adjustment | — | — | — | — | — | — | — | (126 | ) | — | — | — | (126 | ) | |||||||||||||||||||||||||||||
Comprehensive income | 11,732 | ||||||||||||||||||||||||||||||||||||||||||
Balance at August 31, 2006 | — | — | 29,404 | 3 | 364,132 | 3,509 | — | (13,883 | ) | (109,676 | ) | 438 | (9,466 | ) | 234,619 | ||||||||||||||||||||||||||||
Purchase of treasury stock | — | — | — | — | — | — | — | — | — | 38 | (609 | ) | (609 | ) | |||||||||||||||||||||||||||||
Issuance of restricted stock awards | — | — | 164 | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||
Forfeiture of restricted stock awards | — | — | (31 | ) | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||
Exercise of stock options | — | — | 278 | — | 3,949 | — | — | — | — | — | — | 3,949 | |||||||||||||||||||||||||||||||
Stock-based compensation | — | — | — | — | 1,767 | 461 | — | — | — | — | — | 2,228 | |||||||||||||||||||||||||||||||
Dividend payable to stockholders | — | — | — | — | — | — | — | — | (4,678 | ) | — | — | (4,678 | ) | |||||||||||||||||||||||||||||
Dividend paid to stockholders | — | — | — | — | — | — | — | — | (4,659 | ) | — | — | (4,659 | ) | |||||||||||||||||||||||||||||
Net income | — | — | — | — | — | — | — | — | 12,926 | — | — | 12,926 | |||||||||||||||||||||||||||||||
Translation adjustment | — | — | — | — | — | — | — | 1,540 | — | — | — | 1,540 | |||||||||||||||||||||||||||||||
Comprehensive income | 14,466 | ||||||||||||||||||||||||||||||||||||||||||
Balance at August 31, 2007 | — | $ | — | 29,815 | $ | 3 | $ | 369,848 | $ | 3,970 | $ | — | $ | (12,343 | ) | $ | (106,087 | ) | 476 | $ | (10,075 | ) | $ | 245,316 | |||||||||||||||||||
See accompanying notes.
8
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
Years Ended August 31, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
Operating Activities: | ||||||||||||
Income (loss) from continuing operations | $ | 12,783 | $ | 8,184 | $ | (22,878 | ) | |||||
Adjustments to reconcile income (loss) to net cash provided by operating activities: | ||||||||||||
Depreciation and amortization | 9,449 | 9,618 | 9,487 | |||||||||
Allowance for doubtful accounts | (188 | ) | (4 | ) | 1,249 | |||||||
Asset impairment and closure costs | 1,550 | 1,834 | 11,361 | |||||||||
Reserve for settlement of pending litigation | 5,500 | |||||||||||
Loss from disposition of property and equipment | 323 | — | — | |||||||||
Cancellation of note receivable from stockholder | — | (119 | ) | — | ||||||||
Mark to market of shareholder note receivable | — | (1 | ) | 4 | ||||||||
Deferred income taxes | (1,063 | ) | 1,661 | 3,789 | ||||||||
Minority interest | 476 | 354 | (566 | ) | ||||||||
Equity in losses of unconsolidated affiliate, including impairment charges of $2.6 million and $1.1 million in 2007 and 2005, respectively | 2,903 | 97 | 4,368 | |||||||||
Stock-based compensation | 1,767 | 2,058 | 930 | |||||||||
Change in operating assets and liabilities: | ||||||||||||
Change in accounts receivable, prepaid, other current assets, accrued salaries, deferred membership and other accruals | 1,936 | 5,107 | 5,814 | |||||||||
Merchandise inventories | (18,547 | ) | (11,713 | ) | (9,362 | ) | ||||||
Accounts payable and accounts payable to and advances received from related party | 14,733 | 8,478 | 6,953 | |||||||||
Net cash provided by continuing activities | 31,622 | 25,554 | 11,149 | |||||||||
Net cash provided by (used in) discontinued activities | 196 | (905 | ) | (5,487 | ) | |||||||
Net cash provided by operating activities | 31,818 | 24,649 | 5,662 | |||||||||
Investing Activities: | ||||||||||||
Additions to property and equipment | (30,913 | ) | (32,631 | ) | (10,755 | ) | ||||||
Sale of land | — | 446 | — | |||||||||
Proceeds from disposition of property and equipment | 60 | — | — | |||||||||
Purchase of Jamaica minority interest | — | (2,402 | ) | — | ||||||||
Purchase of Trinidad minority interest | — | (300 | ) | — | ||||||||
Return of investment in unconsolidated affiliate | — | 2,800 | — | |||||||||
Net cash used in continuing activities | (30,853 | ) | (32,087 | ) | (10,755 | ) | ||||||
Net cash provided by discontinued activities | 161 | 4,868 | — | |||||||||
Net cash flows used in investing activities | (30,692 | ) | (27,219 | ) | (10,755 | ) | ||||||
Financing Activities: | ||||||||||||
Proceeds from bank borrowings | 14,422 | 37 | 59,123 | |||||||||
Repayment of bank borrowings, net of proceeds from warrant exercise in 2006 and 2005 | (20,528 | ) | (10,790 | ) | (109,833 | ) | ||||||
Issuance of common stock in connection with rights offering | — | 19,017 | 48,418 | |||||||||
Proceeds from related party borrowings | — | 12,500 | 3,000 | |||||||||
Repayment of related party borrowings | — | (12,500 | ) | (3,000 | ) | |||||||
Cash dividend payments | (4,659 | ) | — | — | ||||||||
Restricted cash | (341 | ) | 194 | 17,101 | ||||||||
Issuance of common stock | — | 1,500 | — | |||||||||
Tax benefit from exercise of stock options | 485 | 130 | — | |||||||||
Issuance costs of common stock | — | — | (763 | ) | ||||||||
Purchase of treasury stock | (609 | ) | (3 | ) | — | |||||||
Proceeds from exercise of stock options | 3,949 | 497 | 16 | |||||||||
Repayment of notes receivable from stockholders | — | 119 | — | |||||||||
Net cash (used in) provided by continuing activities | (7,281 | ) | 10,701 | 14,062 | ||||||||
Net cash used in discontinued activities | — | — | (12,247 | ) | ||||||||
Net cash (used in) provided by financing activities | (7,281 | ) | 10,701 | 1,815 | ||||||||
Effect of exchange rate changes on cash and cash equivalents | (1,775 | ) | 1,717 | 515 | ||||||||
Net (decrease) increase in cash and cash equivalents | (7,930 | ) | 9,848 | (2,763 | ) | |||||||
Cash and cash equivalents at beginning of year | 39,995 | 30,147 | 32,910 | |||||||||
Cash and cash equivalents at end of year | $ | 32,065 | $ | 39,995 | $ | 30,147 | ||||||
9
PRICESMART, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS—(Continued)
(amounts in thousands)
Years Ended August 31, | ||||||||||
2007 | 2006 | 2005 | ||||||||
Supplemental disclosure of cash flow information: | ||||||||||
Cash paid during the period for: | ||||||||||
Interest | $ | 1,041 | $ | 2,790 | $ | 5,450 | ||||
Income taxes | $ | 9,927 | $ | 1,914 | $ | 1,722 | ||||
Supplemental disclosure of non-cash financing activities related to: Financial Program: | ||||||||||
Issuance of common stock for: | ||||||||||
Series A Preferred Stock and accrued dividend | $ | — | $ | — | $ | 22,231 | ||||
Series B Preferred Stock | $ | — | $ | — | $ | 22,000 | ||||
Bridge loan and accrued interest | $ | — | $ | — | $ | 25,318 | ||||
Advance payment on real estate and accrued interest | $ | — | $ | — | $ | 5,192 | ||||
Purchase order financing and accrued interest | $ | — | $ | — | $ | 15,586 | ||||
Warrant exercise | $ | — | $ | 1,400 | $ | 1,808 | ||||
Issuance costs on preferred stock exchange to Additional Paid-in Capital | $ | — | $ | — | $ | (111 | ) | |||
Accrued dividends on Series B Preferred Stock converted to Additional Paid-in Capital | $ | — | $ | — | $ | 2,298 | ||||
Issuance of common stock for purchase of Guatemala minority interest | $ | — | $ | — | $ | 5,495 | ||||
Contributed capital from significant stockholders for purchase of Guatemala minority interest | $ | — | $ | — | $ | 1,105 | ||||
Issuance of common stock for purchase of land | $ | — | $ | — | $ | 1,113 | ||||
Notes receivable from sale of East Side Santo Domingo, Dominican Republic (amount includes short term portion of Notes Receivable for $121,000) | $ | 2,207 | $ | — | $ | — | ||||
Dividends declared but not paid | $ | 4,678 | $ | — | $ | — | ||||
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – COMPANY OVERVIEW AND BASIS OF PRESENTATION
PriceSmart, Inc.’s (“PriceSmart” or the “Company”) business consists primarily of international membership shopping warehouse clubs similar to, but smaller in size than, warehouse clubs in the United States. As of August 31, 2007, the Company had 23 consolidated warehouse clubs in operation in 11 countries and one U.S. territory (four each in Panama and Costa Rica, two each in Dominican Republic, El Salvador, Guatemala, Honduras and Trinidad and one each in Aruba, Barbados, Jamaica, Nicaragua and the United States Virgin Islands), of which the Company owns at least a majority interest. There was one warehouse club in operation in Saipan, Micronesia licensed to and operated by local business people as of August 31, 2007. The Company principally operates in three segments based on geographic area.
Basis of Presentation – The consolidated financial statements have been prepared on a going concern basis. The Company has an accumulated deficit of $106.1 million as of August 31, 2007. However, for the twelve months ended August 31, 2007, the Company had net income available to common stockholders of $12.9 million and generated cash flow from operating activities of $31.8 million. The Company’s ability to fund its operations and service debt during fiscal year 2007 has improved following the implementation and completion of the Financial Program as described in Note 11 – Financial Program and improvements in the underlying business operations. As a result, the Company prepaid $14.9 million of its long-term debt during fiscal year 2007. In addition, the Company was able to fund increases in its inventory, which contributed to the increase of sales year over year. In the fourth quarter of fiscal year 2007, the Company obtained $8.9 million in long-term debt to finance the acquisition of land and the construction of a third warehouse club in Guatemala.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation – The consolidated financial statements of the Company included herein include the assets, liabilities and results of operations of the Company’s majority and wholly-owned subsidiaries as listed below. All significant inter-company accounts and transactions have been eliminated in consolidation. The table below shows the Company’s percentage ownership of, and basis of presentation for, each subsidiary as of August 31, 2007.
Ownership | Basis of | ||||
PriceSmart Aruba | 90.0 | % | Consolidated | ||
PriceSmart Barbados | 100.0 | % | Consolidated | ||
PSMT Caribe, Inc.: | |||||
Costa Rica | 100.0 | % | Consolidated | ||
Dominican Republic | 100.0 | % | Consolidated | ||
El Salvador | 100.0 | % | Consolidated | ||
Honduras | 100.0 | % | Consolidated | ||
PriceSmart Guam | 100.0 | % | Consolidated(1) | ||
PriceSmart Guatemala | 100.0 | % | Consolidated | ||
PriceSmart Jamaica | 100.0 | % | Consolidated | ||
PriceSmart Mexico | 50.0 | % | Equity | ||
PriceSmart Nicaragua | 51.0 | % | Consolidated | ||
PriceSmart Panama | 100.0 | % | Consolidated | ||
PriceSmart Trinidad | 95.0 | % | Consolidated | ||
PriceSmart U.S. Virgin Islands | 100.0 | % | Consolidated |
(1) | Entity is treated as discontinued operations in the consolidated financial statements. |
11
PRICESMART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Use of Estimates – The preparation of financial statements in conformity with United States generally accepted accounting principles (“U.S. GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
Cash and Cash Equivalents – Cash and cash equivalents represent cash and short-term investments with maturities of three months or less when purchased.
Restricted Cash – Short-term and long-term restricted cash primarily represents time deposits that are pledged as collateral for the Company’s revolving line of credit. Long-term restricted cash represents deposits with Federal Regulatory agencies in Costa Rica and Panama.
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 Bad Debt – The Company generally does not extend credit to its members, but may do so for specific wholesale, government or other large volume members. 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. If the credit worthiness of a specific customer deteriorates, the Company’s estimates could change and it could have a material impact on the Company’s reported results.
Property and Equipment –Property and equipment are stated at cost. Depreciation is computed on the straight-line basis over the estimated useful lives of the assets. The useful life of fixtures and equipment ranges from three to 15 years and that of buildings from ten to 25 years. Leasehold improvements are amortized over the shorter of the life of the improvement or the expected term of the lease. 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.
The sale or purchase of property and equipment is recognized upon legal transfer of property. For property and equipment sales, if any long term notes are carried by the Company as part of the sales terms, the sale is reflected at the net present value of current and future cash streams.
Lease Accounting –Certain of our operating leases 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 we take possession of the property and extending over the term of the related lease including renewal options in some locations. 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. In addition to the minimum annual payments, in certain locations, the Company pays additional rent based on a contractually stipulated percentage of sales.
Goodwill – Goodwill, resulting from certain business combinations totaled $31.7 million at August 31, 2007 and $31.9 million at August 31, 2006. The decrease in goodwill was due to the foreign exchange translation losses in Guatemala and Jamaica for $71,000 and $147,000, respectively. 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.
12
PRICESMART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Revenue Recognition –The Company recognizes merchandise sales revenue when title passes to the customer. Membership income represents annual membership fees paid by the Company’s warehouse club members, which are recognized ratably over the 12-month term of the membership. The historical membership fee refunds have been minimal and, accordingly, no reserve has been established for membership refunds for the periods presented. The Company recognizes and presents revenue-producing transactions on a net basis, as defined within EITF Issue No. 06-03 (“EITF 06-03”), “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That is, Gross versus Net Presentation).” The Company recognizes gift certificates sales revenue when the certificates are redeemed. The outstanding gift certificates are reflected as other accrued liabilities in the consolidated balance sheet.
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 our distribution facilities.
Vendor consideration consists primarily of volume rebates and prompt payment discounts. Volume rebates are generally linked to pre-established purchase levels and are recorded as a reduction of cost of goods sold when the achievement of these levels is confirmed by the vendor in writing or upon receipt of funds. On a quarterly basis, the Company calculates the amount of rebates recorded in cost of goods sold that relates to inventory on hand and this amount is recorded as a reduction to inventory, if significant. Prompt payment discounts are taken in substantially all cases and, therefore, are applied directly to reduce the acquisition cost of the related inventory, with the resulting impact to cost of goods sold when the inventory is sold.
Selling, General and Administrative – Selling, general and administrative costs are comprised primarily of expenses associated with warehouse operations. Warehouse operations include the operating costs of the Company’s warehouse clubs, including all payroll and related costs, utilities, consumable supplies, repair and maintenance, rent expense, building and equipment depreciation, and bank and credit card processing fees. Also included in selling, general and administrative expenses are the payroll and related costs for the Company’s U.S. and regional purchasing and management centers.
Pre-Opening Costs – The Company expenses pre-opening costs (the costs of start-up activities, including organization costs, and rent) as incurred.
Closure Costs –The Company records the costs of closing warehouse clubs as follows: severance costs are accrued when a termination and benefit plan is communicated to the employees; 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 could be received for these properties from third parties; gain or loss on the sale of property, buildings and equipment is recognized based on the net present value of cash or future cash received as compensation for such; all other costs are expensed as incurred. The Company closed one warehouse club during fiscal year 2004 and two warehouse clubs during fiscal year 2003. During the first quarter of fiscal year 2007, the Company’s original San Pedro Sula location was vacated and the operation was relocated to a new site, which was acquired in fiscal year 2006 in another section of the city.
Contingencies and Litigation –In accordance with Statement of Financial Accounting Standards (SFAS) No. 5, “Accounting for Contingencies,” in the fourth quarter of fiscal year 2007, the Company established a reserve of $5.5 million related to a potential settlement of pending litigation. The amount of the reserve is equal to the management’s current estimate of the potential impact of a global settlement on PriceSmart’s fiscal year 2007 consolidated net income. The amount of the reserve is based upon various factors, including tax considerations, that are subject to management’s current estimates and judgments.
13
PRICESMART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
No agreements have been executed and there is no guarantee that a settlement will be ultimately reached as discussions may continue or may be abandoned altogether if the Company determines that a final settlement will not be reached on terms that are in the best interest of the Company and its stockholders. In the event a settlement is reached, the final cost of a settlement may differ from the reserve taken.
Foreign Currency Translation– In accordance with Statement of Financial Accounting Standards No. 52 (“SFAS 52”) “Foreign Currency Translation,” the assets and liabilities of the Company’s foreign operations are primarily translated to U.S. dollars when the functional currency in our international subsidiaries is the local currency, which in many cases is not U.S. dollars. Assets and liabilities of these foreign subsidiaries are translated to US 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 gain or loss.
Monetary assets and liabilities in currencies other than the functional currency of the respective entity are revalued to the functional currency using the exchange rate on the balance sheet date. These foreign exchange transaction gains (losses), including repatriation of funds, which are included as a part of the costs of goods sold in the consolidated statement of operations, for fiscal years 2007, 2006 and 2005 were approximately $5,000, $(1.5) million and $551,000 respectively.
Stock-Based Compensation – As of August 31, 2007, the Company had four stock-based employee compensation plans. In the first quarter of fiscal year 2006, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 123R, “Share-Based Payment,” which revises SFAS 123, “Accounting for Stock-Based Compensation.” The Company had adopted the fair value based method of recording stock options consistent with SFAS 123 for all employee stock options granted subsequent to fiscal year 2002. Specifically, the Company adopted SFAS 123 using the “prospective method” with guidance provided from SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure an Amendment of FASB Statement No. 123.” All employee stock option grants made or re-priced since the beginning of fiscal year 2003 have been or will be expensed over the related stock option vesting period based on the fair value at the date the options are granted. Prior to fiscal year 2003, the Company applied Accounting Principles Board Opinion (APB) No. 25, “Accounting for Stock Issued to Employees,” and related interpretations in accounting for stock options. Because the Company granted stock options to employees at exercise prices equal to fair market value on the date of grant, no compensation cost was recognized for option grants in periods prior to fiscal year 2003.
Under SFAS 123R, the Company is required to select a valuation technique or option-pricing model that meets the criteria as stated in the standard, which includes a binomial model and the Black-Scholes model. At the present time, the Company is continuing to use the Black-Scholes model. The adoption of SFAS 123R, applying the “modified prospective method,” as elected by the Company, requires the Company to value stock options granted prior to its adoption of SFAS 123 under the fair value method and expense these amounts over the stock options remaining vesting period. This has resulted in the Company expensing approximately $288,000 and $965,000 in fiscal years 2007 and 2006, respectively. SFAS 123R also requires the Company to estimate forfeitures in calculating the expense relating to stock-based compensation as opposed to only recognizing these forfeitures and the corresponding reduction in expense as they occur. In addition, SFAS 123R requires the Company to reflect the tax savings resulting from tax deductions in excess of expense reflected as a financing cash flow in its statement of cash flows, rather than as an operating cash flow as in prior periods.
14
PRICESMART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The fair value of each option grant is estimated on the date of grant using the “Black-Scholes” option-pricing model with the following weighted average assumptions used for grants in fiscal years 2007, 2006 and 2005:
Years Ended August 31, | |||||||||
2007 | 2006 | 2005 | |||||||
Risk free interest rate | 4.62 | % | 4.35 | % | 3.69 | % | |||
Expected life | 5 years | 5 years | 5 years | ||||||
Expected volatility | 46.18 | % | 43.96 | % | 45.34 | % | |||
Expected dividend yield | 0 | %(1) | 0 | % | 0 | % |
(1) | No new stock options have been issued after dividends were declared in the second quarter of fiscal year 2007. |
The following table illustrates the effect on net income (loss) and income (loss) per share if the fair value based method had been applied to all outstanding and unvested awards each period (in thousands, except per share data):
Years Ended August 31, | ||||||||||
2007 | 2006 | 2005 | ||||||||
Net income (loss) as reported(1) | $ | 12,926 | $ | 11,858 | $ | (63,632 | ) | |||
Add: Stock-based employee compensation expense included in reported net loss, net of related tax effect | 930 | |||||||||
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects(2) | (2,442 | ) | ||||||||
Net income (loss), including stock-based employee compensation | $ | 12,926 | $ | 11,858 | $ | (65,144 | ) | |||
Income (loss) per share: | ||||||||||
Basic—as reported in prior years(1) | $ | $ | (3.15 | ) | ||||||
Basic—including stock-based employee compensation | $ | 0.45 | $ | 0.43 | $ | (3.23 | ) | |||
Diluted—as reported in prior years(1) | $ | $ | (3.15 | ) | ||||||
Diluted—including stock-based employee compensation | $ | 0.44 | $ | 0.43 | $ | (3.23 | ) |
(1) | Net income (loss) and net income (loss) per share as reported for periods prior to fiscal year 2006 only included stock-based compensation expense for stock options issued or re-priced during fiscal year 2003 to fiscal year 2005. |
(2) | Total stock-based compensation expense for 2005 is calculated based on the pro forma application of SFAS 123. |
During fiscal year 2007, the Company made restricted stock awards covering 164,050 shares of the Company’s common stock which vest annually over a five-year period. During fiscal year 2006, the Company made restricted stock awards covering 565,900 shares of the Company’s common stock which vest annually over a five-year period.
The remaining unrecognized compensation cost related to unvested stock-based compensation awards at August 31, 2007 and at August 31, 2006 was approximately $5.3 million and $4.6 million, respectively, and the weighted-average period of time over which this cost will be recognized is 3.8 years and 3.9 years, respectively. The weighted-average fair value of the stock options granted during 2007 and 2006 was $7.46 and $3.64, respectively.
15
PRICESMART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following table summarizes the components of the stock-based compensation expense for the 12 months ended August 31, 2007, 2006 and 2005 (in thousands), which are included in general and administrative expense and warehouse expenses in the consolidated statement of operations:
Years Ended August 31, | |||||||||
2007 | 2006 | 2005 | |||||||
Options granted to employees | $ | 318 | $ | 1,423 | $ | 465 | |||
Restricted grants | 1,196 | 528 | — | ||||||
Option re-pricings | 253 | 107 | 465 | ||||||
Stock-based compensation expense | $ | 1,767 | $ | 2,058 | $ | 930 | |||
Accounting Pronouncements – In June 2007, the Emerging Issues Task Force (“EITF”) reached a consensus on EITF Issue No. 06-11 (“EITF 06-11”), “Accounting for Income Tax Benefits of Dividends on Share-Based Payment Award.” EITF 06-11 requires companies to recognize the tax benefits of dividends on unvested share-based payments in equity (increasing the Financial Accounting Standards (SFAS) No. 123(R) “APIC Pool” of excess tax benefits available to absorb tax deficiencies) and reclassify those tax benefits from additional paid-in capital to the income statement when the related award is forfeited (or is no longer expected to vest). The Company is required to adopt EITF 06-11 for dividends declared after September 1, 2008. The Company has opted for earlier application starting on September 1, 2007 for the income tax benefits of dividends on equity-classified employee share-based compensation that are declared in periods for which financial statements have not yet been issued. The adoption of EITF 06-11 will not have a material impact on the Company’s consolidated financial condition and operating results.
In February 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (SFAS ) No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115” (“SFAS 159”). SFAS 159 permits companies to measure many financial instruments and certain other items at fair value at specific election dates. The Company will adopt SFAS 159 beginning September 1, 2008. The Company is currently evaluating the impact, if any, the interpretation will have on its consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” (“SFAS 157”) establishes a framework for measuring fair value in generally accepted accounting principles (GAAP) and expands disclosures about fair value measurements. SFAS 157 simplifies and codifies related guidance within GAAP. The Company adopted SFAS 157 on September 1, 2007. The adoption of SFAS 157 is not expected to have a material impact on the Company’s consolidated financial condition and operating results.
In September 2006, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin (SAB) No. 108, Section N, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.” Section N provides guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatement for the purpose of a materiality assessment. The Company adopted SAB No. 108 on September 1, 2007. The adoption of SAB No. 108 is not expected to have a material impact on the Company’s consolidated financial condition and operating results.
In July 2006, the FASB issued FASB Interpretation (FIN) No. 48, “Accounting for Uncertainty in Income Taxes an Interpretation of FASB 109,” which provides guidance associated with the recognition and measurement of tax positions and related reporting and disclosure requirements. The Company is required to adopt the provisions of FIN 48 no later than fiscal years beginning after December 15, 2006. The Company will adopt FIN 48 effective September 1, 2007. The Company is currently evaluating the impact, if any, the interpretation will have on its consolidated financial statements.
16
PRICESMART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
In June 2006, the EITF reached a consensus on EITF Issue No. 06-03 (“EITF 06-03”), “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That is, Gross versus Net Presentation).” EITF 06-03 provides that the presentation of taxes assessed by a governmental authority that is directly imposed on a revenue-producing transaction between a seller and a customer on either a gross basis (included in revenues and costs) or on a net basis (excluded from revenues) is an accounting policy decision that should be disclosed. The Company adopted EITF 06-03 on September 1, 2006 as required. The Company recognizes and presents revenue-producing transactions on a net basis, as defined within EITF Issue No. 06-03. The adoption of EITF 06-03 did not have a material impact on the Company’s consolidated financial condition and operating results.
In October 2005, the FASB issued FASB Staff Position (“FSP”) 13-1, “Accounting for Rental Costs Incurred during a Construction Period.” The guidance requires the rental costs for ground or building operating leases during the construction period be recognized as rental expenses. The guidance permits either retroactive or prospective treatment for periods beginning after December 15, 2005. The Company has prospectively changed its policy from capitalization to expensing beginning in the third quarter of fiscal year 2006. The adoption of this FSP did not have a material impact on the Company’s consolidated financial statements, as no warehouse clubs were built on leased land in fiscal year 2006.
In May 2005, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (SFAS) No. 154, “Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3.” SFAS 154 requires retrospective application to prior periods’ financial statements for changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS 154 also requires that retrospective application of a change in accounting principle be limited to the direct effects of the change. Indirect effects of a change in accounting principle, such as a change in non-discretionary profit-sharing payments resulting from an accounting change, should be recognized in the period of the accounting change. SFAS 154 also requires that a change in depreciation, amortization, or depletion method for long-lived, non-financial assets be accounted for as a change in accounting estimate affected by a change in accounting principle. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. Early adoption is permitted for accounting changes and corrections of errors made in fiscal years beginning after the date this Statement is issued. The Company adopted SFAS 154 as of September 1, 2007 as required. The adoption of SFAS 154 did not have a material impact on the Company’s consolidated financial condition and operating results.
In March 2005, the FASB issued FASB Interpretation (FIN ) No. 47, “Accounting for Conditional Asset Retirement Obligations,” which requires an entity to recognize a liability for the fair value of a conditional asset retirement obligation when incurred if the liability’s fair value can be reasonably estimated. The Company adopted the provisions of FIN 47 in the fourth quarter of fiscal year 2006. The adoption of this Interpretation did not have a material impact on the Company’s consolidated financial position, results of operations, or cash flows.
NOTE 3 – DISCONTINUED OPERATIONS
In accordance with the provisions of SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, the accompanying consolidated financial statements reflect the results of operations and financial position of the Company’s activities in the Philippines and Guam as discontinued operations. Following its closure in December 2003, the Company had previously included the results of operations from Guam in the asset impairment and closure costs line of the consolidated statement of operations. However, due to the shared management structure, as the Philippines and Guam activities were viewed as one activity, following the disposal of the Philippines operations in August 2005, the results of the Philippines and Guam activities were consolidated in the discontinued operations line of the consolidated statement of operations.
17
PRICESMART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The assets and liabilities of the discontinued operations are presented in the consolidated balance sheets under the captions “Assets of discontinued operations” and “Liabilities of discontinued operations.” The underlying assets and liabilities of the discontinued operations for the periods presented are as follows (in thousands):
August 31, 2007 | August 31, 2006 | |||||
Cash and cash equivalents | $ | 45 | $ | 110 | ||
Accounts receivable, net | 441 | 429 | ||||
Prepaid expenses and other current assets | 6 | — | ||||
Other assets | 888 | 1,055 | ||||
Assets of discontinued operations | $ | 1,380 | $ | 1,594 | ||
Other accrued expenses | $ | 151 | $ | 130 | ||
Liabilities of discontinued operations | $ | 151 | $ | 130 | ||
The Company’s former Guam operation has a deferred tax asset of $2.7 million, primarily generated from NOLs. This deferred tax asset has a 100% valuation allowance, as the Company currently has no plans that would allow it to utilize these losses. Additionally, a significant portion of these losses are limited as to future use due to the Company’s Section 382 change of ownership in October 2004.
The following table sets forth the income (loss) from the discontinued operations of each period presented, in thousands.
Years Ended August 31, | |||||||||||
2007 | 2006 | 2005 | |||||||||
Net warehouse club sales | $ | — | $ | — | $ | 59,937 | |||||
Pre-tax income (loss) from operations | 143 | 5,777 | (4,306 | ) | |||||||
Pre-tax loss on disposal | — | — | (24,827 | ) | |||||||
Income tax (provision) benefit | — | (2,103 | ) | 9,674 | |||||||
Net income (loss) | $ | 143 | $ | 3,674 | $ | (19,459 | ) | ||||
The pre-tax income from operations for the twelve months ended August 31, 2007 of $143,000 is the net result of the subleasing activity in Guam. The pre-tax income from operations for the twelve months ended August 31, 2006 includes approximately $5.8 million from the reversal of a portion of the provision against recoverability of loan principal and accrued interest receivable from PSMT Philippines which was collected in December 2005 and July 2006 as final settlement on outstanding amounts due and the net results of the subleasing activity in Guam.
18
PRICESMART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
NOTE 4 – PROPERTY AND EQUIPMENT, NET
Property and equipment, net consisted of the following (in thousands):
August 31, | ||||||||
2007 | 2006 | |||||||
Land | $ | 58,924 | $ | 48,820 | ||||
Building and improvements | 109,706 | 105,123 | ||||||
Fixtures and equipment | 66,275 | 61,304 | ||||||
Construction in progress | 10,790 | 6,207 | ||||||
245,695 | 221,454 | |||||||
Less: accumulated depreciation | (65,710 | ) | (59,425 | ) | ||||
Property and equipment, net | $ | 179,985 | $ | 162,029 | ||||
Building and improvements include net capitalized interest of $1.3 million and $1.2 million as of August 31, 2007 and 2006, respectively.
In February 2006, the Company purchased two parcels of land next to the Via Brazil, Panama City warehouse location for approximately $3.0 million and $400,000, respectively. In July 2006, the Company sold the second portion of the land adjacent to the warehouse club for approximately $400,000 for a net gain/loss of zero.
In December 2006, the Company sold the land and building of the closed warehouse club in East Santo Domingo, Dominican Republic.
In March 2007, the Company purchased land in Fraijanes, Guatemala and Mausica, Trinidad for the construction of two new warehouse clubs for approximately $6.7 million and $3.7 million, respectively. The warehouse clubs are under construction and scheduled to open in November and December 2007 (fiscal year 2008), respectively.
19
PRICESMART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
NOTE 5 – EARNINGS (LOSS) PER SHARE
Basic income (loss) per share is computed based on the weighted average common shares outstanding in the period. Diluted income (loss) per share is computed based on the weighted average common shares outstanding in the period and the effect of dilutive securities (options, preferred stock, warrants and rights), except where the inclusion is anti-dilutive (in thousands, except per share data):
Years Ended August 31, | ||||||||||
2007 | 2006 | 2005 | ||||||||
Income (loss) available to (attributable to) common stockholders: | $ | 12,926 | $ | 11,858 | $ | (63,632 | ) | |||
Determination of shares: | ||||||||||
Average common shares outstanding | 28,534 | 27,332 | 20,187 | |||||||
Assumed conversion of: | ||||||||||
Stock options(1) | 135 | 64 | — | |||||||
Warrants(2) | — | 4 | — | |||||||
Rights(3) | — | — | — | |||||||
Restricted stock grant(4) | 574 | 335 | — | |||||||
Diluted average common shares outstanding | 29,243 | 27,735 | 20,187 | |||||||
Net income (loss) available to (attributable to) common stockholders: | ||||||||||
Basic income (loss) per share | $ | 0.45 | $ | 0.43 | $ | (3.15 | ) | |||
Diluted income (loss) per share | $ | 0.44 | $ | 0.43 | $ | (3.15 | ) |
(1) | Stock options representing 85,834 shares were excluded due to their anti-dilutive effects for the year ended August 31, 2005. No options were excluded for fiscal year 2006 or fiscal year 2007. |
(2) | A warrant for 400,000 shares of common stock at an exercise price of $7 per share was issued in January 2005, at which time 200,000 shares were immediately exercised. The remaining 200,000 shares were exercised November 30, 2005. These shares were excluded in 2005 due to their anti-dilutive effects. |
(3) | As of August 31, 2007 and 2006, there were no rights outstanding. As of August 31, 2005, there were 6,098,043 rights outstanding with an exercise price of $8.00 per share for the potential issuance of 9,147,065 shares of common stock. |
(4) | Restricted stock was issued to certain employees in the second and third quarter of fiscal year 2007. The dilutive effects of which is 107,461 shares as of the year ended August 31, 2007. Restricted stock was issued to certain employees in the second and third quarters of fiscal year 2006, the dilutive effects of which is 466,282 shares as of the year ended August 31, 2007. |
NOTE 6 – DIVIDENDS
On February 5, 2007 the Company’s Board of Directors declared a cash dividend in the total amount of $0.32 per share, of which, $0.16 per share was paid on April 30, 2007 to stockholders of record as of the close of business on April 15, 2007 and $0.16 per share was paid on October 31, 2007 to stockholders of record as of the close of business on October 15, 2007.
The Company anticipates the ongoing payment of semi-annual dividends in subsequent periods, although the actual declaration of future dividends, the amount of such dividends, and the establishment of record and payment dates is subject to final determination by the Board of Directors in its discretion, after its review of the Company’s financial performance and anticipated capital requirements.
20
PRICESMART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
NOTE 7 – RETIREMENT PLAN
PriceSmart offers a defined contribution retirement and 401(k) plans to its U.S. employees, which allows employees to enroll in the plan after 90 days of employment. Enrollment in these plans begins on the first of the month following the employee’s eligibility. The Company makes nondiscretionary contributions to the 401(k) plan equal to 100% of the participant’s contribution up to an annual maximum of 4% of base compensation that a participant contributes to the plan. Employer contributions to the 401(k) plan were $396,000, $293,000, and $255,000 during fiscal years 2007, 2006, and 2005, respectively. The Company has defined contribution plans for its employees in Panama, Costa Rica, Trinidad, and Jamaica and contributes a percentage of the respective employee’s salary. Amounts expensed under these plans were $317,000, $265,000 and $179,000 during fiscal years 2007, 2006 and 2005, respectively.
NOTE 8 – STOCK OPTION AND EQUITY PARTICIPATION PLANS
In August 1997, the Company adopted the 1997 Stock Option Plan of PriceSmart, Inc. (the “1997 Plan”) for the benefit of its eligible employees, consultants and independent directors. Under the 1997 Plan, 700,000 shares of the Company’s common stock are authorized for issuance. The Compensation Committee of the Board of Directors administers the 1997 Plan with respect to grants to employees or consultants of the Company, and the full Board of Directors administers the Plan with respect to director options. Options issued under the 1997 Plan typically vest over five years and expire in six years. Certain employees and directors of the Company participated in the Price Enterprises, Inc. (“PEI”) stock option plan. Upon consummation of the spin-off of the Company from PEI, the unvested PEI options held by these individuals were canceled. To replace those canceled options, the Company granted options to purchase PriceSmart common stock at share amounts and prices per share so that the employees and directors were in substantially the same economic position as they were prior to the spin-off.
In July 1998, the Company adopted the 1998 Equity Participation Plan of PriceSmart, Inc. (the “1998 Plan”) for the benefit of its eligible employees, consultants and independent directors. The 1998 Plan authorizes 700,000 shares of the Company’s common stock for issuance. Options issued under the 1998 Plan typically vest over five years and expire in six years.
In August 1998, four of the Company’s officers and an entity affiliated with a fifth officer purchased an aggregate of 29,324 shares of Common Stock pursuant to the stock purchase feature of the 1998 Plan. These officers delivered to the Company promissory notes in the aggregate amount of $317,000. In April 2000, an additional officer purchased 3,738 shares of Common Stock pursuant to the stock purchase feature of the 1998 Plan and delivered to the Company a promissory note in the amount of $150,000. The promissory notes delivered by the first five borrowers initially were non-recourse notes, bore interest at a rate of 6% per annum and had terms of six years. These notes were amended in June 1999 to become recourse notes, bearing interest at a rate of 5.85%. The sixth officer’s note also was a recourse note, with a six-year term bearing interest at a rate of 5.85%.
In August 2004, upon the maturity of their respective promissory notes, the first five borrowers paid all remaining principal and interest due under the notes by delivering an aggregate of 22,195 shares of Common Stock valued at $7.56 per share (the closing price of the Common Stock on August 6, 2004) and paid an aggregate of $150,000 in cash. Each of the first five officers received cash bonuses in August 2004 and used the after-tax proceeds of the bonus to pay the cash portion of the repayments described above. As of August 31, 2004, one such note remained outstanding (not yet due) with a balance of approximately $150,000, related to the purchase of 3,738 shares. Following the repayment noted above, the Company determined that the loan underlying this remaining note should be treated under variable accounting, and, therefore this loan has been marked to market as of August 31, 2005, resulting in a charge of $117,000 and $4,000 in fiscal years 2004 and 2005, respectively. The Company ceased extending new loans (or modifying existing loans) to any director or executive officer effective as of July 30, 2002. In April 2006, the one outstanding loan was repaid. The borrower repaid the outstanding principal and interest due under the note by delivering 3,738 shares of common stock valued at $8.83 per share (the closing price of the common stock on April 19, 2006) and paid $119,000 in cash. The borrower received a cash bonus in April 2006 and used the after-tax proceeds of the bonus to pay the cash portion of the repayment.
21
PRICESMART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
In November 2001, the Company adopted the 2001 Equity Participation Plan of PriceSmart, Inc. (the “2001 Plan”) for the benefit of its eligible employees, consultants and independent directors. The 2001 Plan authorizes 350,000 shares of the Company’s common stock for issuance. Options issued under the 2001 Plan typically vest over five years and expire in six years.
In November 2002, the Company adopted the 2002 Equity Participation Plan of PriceSmart, Inc. (the “2002 Plan”) for the benefit of its eligible employees, consultants and independent directors. The 2002 Plan authorized 250,000 shares of the Company’s common stock for issuance. At the 2006 Annual Meeting, the stockholders of the Company approved a proposal to amend the 2002 Equity Participation Plan of PriceSmart, Inc. to increase the number of shares of Common Stock reserved for issuance under the 2002 Plan from 250,000 to 750,000 (the “Amendment”). Options issued under the 2002 Plan typically vest over five years and expire in six years. The 2002 plan also allows for the stock grants, which typically vest over five years.
Effective April 23, 2003, the Company’s Board of Directors approved the re-pricing of all unexercised stock options held by employees of the Company (not including directors’ stock options) with exercise prices greater than $20 to $20 per share. The affected options covered a total of 507,510 shares of common stock with a weighted average exercise price of $36.19 per share. Under the provisions of SFAS 123 and subsequent guidance issued under SFAS 148, a non-cash charge related to vested options of $833,000 was recognized and included in stock compensation expense for the year ended August 31, 2003.
In fiscal year 2004, 151,000 options of the 507,510 re-priced stock options, expired or were cancelled. As a result, the Company recorded a reduction of the compensation expense of $43,000 and a reduction in deferred compensation of $278,000. The Company recognized the expense relating to re-priced stock options of $107,000, $465,000 and $421,000 in fiscal years 2006, 2005 and 2004, respectively. All other terms and conditions of the options remain the same.
Total stock option activity relating to the 1997 Plan, 1998 Plan, 2001 Plan and 2002 Plan was as follows:
Shares | Weighted Average Exercise Price | |||||
Shares subject to outstanding options at August 31, 2004 | 933,683 | $ | 15.02 | |||
Granted | 10,500 | 7.66 | ||||
Exercised | (3,005 | ) | 6.19 | |||
Cancelled | (116,828 | ) | 26.10 | |||
Shares subject to outstanding options at August 31, 2005 | 824,350 | $ | 13.39 | |||
Granted: | 6,000 | 8.18 | ||||
Exercised | (77,809 | ) | 6.33 | |||
Cancelled: | (55,591 | ) | 19.27 | |||
Shares subject to outstanding options at August 31, 2006 | 696,950 | $ | 13.66 | |||
Granted: | 9,000 | 16.00 | ||||
Exercised | (278,008 | ) | 14.31 | |||
Cancelled | (53,127 | ) | 19.93 | |||
Shares subject to outstanding options at August 31, 2007 | 374,815 | $ | 12.35 | |||
22
PRICESMART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
As of August 31, 2007, options to purchase 303,259 shares were exercisable and there were 1,555,196 shares of the Company’s common stock reserved for future issuance, of which 464,355 shares are available for future grants. The following table summarizes information about stock options outstanding at August 31, 2007:
Range of Exercise Prices | Outstanding as of Aug. 31, 2007 | Weighted-Average Remaining Contractual Life | Weighted-Average Exercise Price | Exercisable as of Aug. 31, 2007 | Weighted-Average Exercise Price As of Aug. 31, 2007 | |||||||
$6.13 – $8.18 | 253,765 | 3.33 | $ | 6.30 | 203,409 | $ | 6.25 | |||||
8.19 – 8.90 | 7,000 | 2.18 | 8.90 | 1,000 | 8.90 | |||||||
8.91 – 17.87 | 9,000 | 5.31 | 16.00 | 0 | 0.00 | |||||||
17.88 – 20.00 | 55,050 | .87 | 19.60 | 48,850 | 19.66 | |||||||
28.00 – 41.25 | 50,000 | 1.37 | 34.91 | 50,000 | 34.91 | |||||||
$6.13 – $41.25 | 374,815 | 2.74 | $ | 12.35 | 303,259 | $ | 13.14 |
In fiscal year 2006, the Company began issuing Restricted Stock Grants. The Restricted Stock Grants vest over a five year period and are forfeited if the employee leaves the Company before the vesting period is completed. Restricted Stock Grant activity was as follows:
Grants | |||
Granted: | 565,900 | ||
Cancelled: | (25,200 | ) | |
Grants outstanding at August 31, 2006 | 540,700 | ||
Granted: | 164,050 | ||
Cancelled | (31,080 | ) | |
Vested | (107,420 | ) | |
Grants outstanding at August 31, 2007 | 566,250 | ||
NOTE 9 – ASSET IMPAIRMENT AND CLOSURE COSTS FOR CONTINUING OPERATIONS
During fiscal year 2003, the Company closed two warehouse clubs, one each in the Dominican Republic and Guatemala and the Company also closed its Commerce, California distribution center on August 31, 2004. The decision to close the warehouse clubs resulted from the determination that the locations were not conducive to the successful operation of a PriceSmart warehouse club.
During fiscal year 2005, closure costs were $4.3 million. During the third quarter of fiscal year 2005, the Company executed a sublease agreement for its closed warehouse club in Guatemala. The sublease agreement resulted in an additional charge of $324,000 based on the new sublease terms as compared to the assumptions used to compute the original liability. The Company also recorded a non-cash charge of $892,000 for the write-off of fixed assets at the closed Guatemala warehouse club related to the subleasing activity. The Company also recorded an additional non-cash charge of $2.4 million for the write-off of fixed assets at the closed Dominican Republic warehouse club. This charge reflected management’s revised assessment of the likely net selling price for the property.
Also, during the third quarter of fiscal year 2005, the Company recorded a non-cash asset impairment charge of $7.1 million. This charge is associated with the write-down of long-lived assets (leasehold improvements and fixtures and equipment) at the Company’s U.S. Virgin Islands warehouse club operation. This charge was taken because future undiscounted cash flows expected from that operation which, while positive over the expected life of the associated long-lived assets, are not sufficient to recover the carrying value of those assets. Consequently, the carrying value of those assets was reduced to an estimated fair value as required under SFAS 144.
23
PRICESMART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
During fiscal year 2006, asset impairment and closure costs were $1.8 million, which were primarily due to the write-down of two real estate assets of the Company, one in Honduras and one in the Dominican Republic. The Company’s original San Pedro Sula, Honduras location was vacated and the operation was relocated to a new site which was acquired during the year in another section of the city. The impairment charge of $785,000 reduced the book value of the vacated site to the expected market value as a buyer or leasing opportunity was pursued. Also, during fiscal year 2006, the Company recorded an additional $813,000 impairment charge related to the previously closed warehouse club in Dominican Republic based upon management’s revised assessment of the market value of that asset. The method for determining fair value for both locations was based on a quoted market price, and/or expected cash flows.
During fiscal year 2007, asset impairment and closure costs were $1.6 million, which were primarily due to the closed Dominican Republic location and the original San Pedro Sula, Honduras location. In fiscal year 2007, the Company sold the East Santo Domingo, Dominican Republic location for the approximate book value of $2.5 million. As part of the sale, the Company assumed notes receivable for a total of approximately $2.2 million. However, a net loss on this disposal of $360,000 was recorded to reflect the broker commission and the imputed interest on the notes receivable, which will be collected over a 24 month period, beginning four months after the sale date. The long and short-term carrying value of the notes receivable on the balance sheet was $2.2 million as of August 31, 2007. During the fourth quarter of fiscal year 2007, the Company recorded a reduction of $65,000 to closure costs for interest earned on the note issued for the sale of the East Santo Domingo location. Also during fiscal year 2007, the Company recorded $897,000 of asset impairment charges to reduce the San Pedro Sula assets to the expected market value. Additional closure costs for this location of $128,000 were recorded in fiscal year 2007. Lastly, the Company recorded additional closure costs of $210,000 for the closed warehouse in Guatemala.
A reconciliation of the movements in the charges and related liabilities derived from the closed warehouse clubs in 2005, 2006 and 2007 is as follows (in thousands):
Liability as of August 31, 2004 | Charged to Expense | Cash Paid | Non-cash Amounts | Liability as of August 31, 2005 | Charged to Expense | Cash Paid | Non-cash Amounts | Liability as of August 31, 2006 | Charged to Expense | Cash Paid | Non-cash Amounts | Liability as of August 31, 2007 | |||||||||||||||||||||||||||||||||
Lease obligations | $ | 3,987 | $ | 324 | $ | (599 | ) | $ | — | $ | 3,712 | $ | — | $ | (246 | ) | $ | — | $ | 3,466 | $ | — | $ | (240 | ) | $ | — | $ | 3,226 | ||||||||||||||||
Asset impairment | — | 3,397 | — | (3,397 | ) | — | 1,598 | — | (1,598 | ) | — | 897 | — | (897 | ) | — | |||||||||||||||||||||||||||||
Sale of land & building | — | — | — | — | — | — | — | — | — | 295 | — | (295 | ) | — | |||||||||||||||||||||||||||||||
Other associated costs | 73 | 536 | (426 | ) | (98 | ) | 85 | 236 | (280 | ) | (5 | ) | 36 | 358 | (358 | ) | (36 | ) | — | ||||||||||||||||||||||||||
Total | $ | 4,060 | $ | 4,257 | $ | (1,025 | ) | $ | (3,495 | ) | $ | 3,797 | $ | 1,834 | $ | (526 | ) | $ | (1,603 | ) | $ | 3,502 | $ | 1,550 | $ | (598 | ) | $ | (1,228 | ) | $ | 3,226 | |||||||||||||
24
PRICESMART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
NOTE 10 – COMMITMENTS AND CONTINGENCIES
The Company is committed under 13 non-cancelable operating leases for rental of facilities and land. These leases expire or become subject to renewal between 2007 and 2031. Rental expense charged for operating leases of open locations totaled approximately $8.7 million, $8.3 million and $8.7 million for fiscal years 2007, 2006 and 2005, respectively. Future minimum lease commitments for facilities under these leases with an initial term in excess of one year are as follows (in thousands):
Amount
Years Ended August 31, | Open Locations | Closed Location(1) | Discontinued Operations | ||||||
2008 | $ | 6,817 | $ | 642 | $ | 400 | |||
2009 | 6,634 | 642 | 400 | ||||||
2010 | 6,309 | 642 | 400 | ||||||
2011 | 5,897 | 642 | 400 | ||||||
2012 | 5,709 | 642 | — | ||||||
Thereafter | 80,747 | 5,136 | — | ||||||
Total | $ | 112,113 | $ | 8,346 | $ | 1,600 | |||
(1) | The net present value of the closed Guatemala warehouse club lease obligation (net of expected sublease income) has been recorded on the consolidated balance sheet under the captions “Other accrued expenses” and “Accrued closure costs.” |
During fiscal year 2005, the Company sub-leased its closed location in Guatemala for $300,000 a year for the first and second year; $414,000 for the third year; with CPI increase not exceeding 3.5% each year for the fourth and fifth year; $500,000 for the sixth year; and with CPI increase each year not exceeding 3.5% each year for the remaining six years until the end of the sub-lease in 2017. For the discontinued operation in Guam, the Company sub-leased the warehouse for approximately the same amount as its rental expense, $400,000 a year, until the termination of the master lease in August 2011 at which time the sublease also ends. The Company’s annual future minimum lease commitments for the closed warehouse clubs in Guatemala and Guam are $642,000 and $400,000, respectively.
From time to time, the Company and its subsidiaries are subject to legal proceedings, claims and litigation arising in the ordinary course of business, the outcome of which, in the opinion of management, would not have a material adverse effect on the Company. The Company evaluates such matters on a case by case basis, and vigorously contests any such legal proceedings or claims which the Company believes are without merit.
On March 22, 2007, the Company notified Tecnicard, Inc. (“Tecnicard”) and Banco de la Producción, S.A. (“Banpro”) that it was terminating and would not be renewing the agreement pursuant to which Tecnicard provided co-branded and/or dual purpose credit cards to the Company’s members in several markets under a contract set to expire on April 30, 2007, nor a similar contract between Banpro and the Company’s Nicaraguan subsidiary, which contract had already expired.
By letters dated April 5, 2007 and April 10, 2007, PSC, S.A., Banco de la Producción, S.A. and Tecnicard, S.A. (the “Promerica Entities”) disputed the Company’s right to terminate either the contracts or the credit card services relationships between the parties, notwithstanding expiration of the credit card services agreements by their terms, and threatened to take legal action if the Company proceeded with the terminations.
On April 30, 2007 the Company filed with the American Arbitration Association (“AAA”) a Notice of Arbitration and Statement of Claim against the Promerica Entities. The Statement of Claim seeks a declaratory judgment that the Company has not breached any of three agreements entered into during the past seven years by the Company and one or more of the Promerica Entities and that the Company has the right to not renew the credit card relationship.
25
PRICESMART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
On or about May 16, 2007 the Promerica Entities commenced several legal proceedings against the Company. The various proceedings filed by the Promerica Entities asserted multiple causes of action for breach of contract with reference to the credit card services agreements and other agreements between the parties. The Promerica Entities also have asserted causes of actions alleging that the Company has misappropriated and inappropriately disclosed to a competing credit card company confidential or proprietary trade secrets owned by the Promerica Entities (particularly certain data related to credit card usage) and is unfairly competing with one or more of the Promerica Entities. The Promerica Entities additionally alleged that the Company breached its duty of good faith and fair dealing in 2000 by using purportedly overvalued shares of the Company’s common stock as consideration for the acquisition of PSC’s 40% interest in PSMT Caribe, Inc. The relief sought by the Promerica Entities included monetary damages as well as injunctive relief prohibiting PriceSmart from proceeding with certain commercial activities with the new credit card provider.
The following activities have occurred in relation to the various proceedings: (i) the Company’s Board has appointed the independent committee to investigate the alleged breaches of fiduciary duty and that Committee has held several meetings; (ii) the Company has removed the state court litigation filed by the Promerica Entities to federal court; (iii) the federal court held a hearing on the Promerica Entities’ Emergency Motion for Temporary Injunction on June 12-14 and August 1, 2007, and (iv) the federal court denied the Promerica Entities Emergency Motion for Temporary Injunction by Order dated September 18, 2007, stating that the Promerica Entities had failed to show a substantial likelihood of success on the merits on all but one of its claims for injunctive relief, and as for the remaining claim a damages award may be appropriate but injunctive relief is not. The Promerica Entities have filed a Notice of Appeal of the Order.
The parties have agreed to resolve in a single arbitration with the International Center for Dispute Resolution (a division of the AAA) all matters previously submitted to arbitration by either PriceSmart or the Promerica Entities. On October 23, 2007 the parties participated in a preliminary hearing with the arbitrator. At that time the arbitrator ordered that the parties submit final amended Statements of Claims by November 12, 2007 several other procedural and discovery matters were addressed, and the matter was set for evidentiary hearing on March 24, 2008.
On November 12, 2007 the Company and the Promerica Entities filed their amended claims. The Company’s amended claim supplemented its April 30 Statement of Claim by requesting additional declaratory and injunctive relief related to actual and threatened activities by PSC, pertaining to PSC’s assertion that it is entitled to have two directors appointed to the Board of Directors of the Company and to several of its subsidiaries. PriceSmart’s amended claim additionally seeks an accounting on certain obligations of the Promerica Entities, alleges that the Promerica Entities have breached two agreements, and that the Company is entitled to monetary damages in excess of $650,000 as well as attorneys fees and costs. The Promerica Entities supplemented their May 16, 2007 Demand with additional factual allegations and contentions relating to their previously alleged claims, and the assertion of two new claims. The new claims allege that the Company “violated section 10(b) of the Exchange Act and Rule 10b-5 promulgated there under” and “fraud in the inducement.” Both claims allege that PSC was misled in June 2000 when it conveyed to the Company its 679,000 shares of the Company’s common stock in return for its 49% interest in PSMT Caribe, Inc., evidently because the Company restated its consolidated financial statements in December 2003 for fiscal year 2002 and the first three quarters of fiscal year 2003. The amended claim continues to seek injunctive relief as to various activities of the Company as related to the issues in dispute and unspecified compensatory damages, as well as treble damages and attorney’s fees and costs. The Company intends to continue to diligently proceed with its amended claim filed on November 12, 2007 and to vigorously defend all of the claims asserted by the Promerica Entities.
26
PRICESMART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
PriceSmart, while vigorously defending the claims made by the Promerica Entities and diligently pursuing its own claims against the Promerica Entities, has been exploring opportunities to achieve a global resolution as an alternative to proceeding with the litigation in order to maintain management’s focus on the business and to avoid the disruptions and significant legal expenses associated with this complex litigation.
In accordance with Statement of Financial Accounting Standards (SFAS) No. 5, “Accounting for Contingencies”, in the fourth quarter of fiscal year 2007, the Company established a reserve of $5.5 million related to a potential settlement of pending litigation. The amount of the reserve is equal to management’s current estimate of the potential impact of a global settlement on PriceSmart’s fiscal year 2007 consolidated net income. The amount of the reserve is based upon various factors, including tax considerations, that are subject to management’s current estimates and judgments.
No agreements have been executed and there is no guarantee that a settlement will be ultimately reached as discussions may continue or may be abandoned altogether if the Company determines that a final settlement will not be reached on terms that are in the best interest of the Company and its stockholders. In the event a settlement is reached, the final cost of a settlement may differ from the reserve taken.
The SEC issued a formal order of private investigation on January 8, 2004 to investigate the circumstances surrounding a financial restatement associated with fiscal year 2002 and the first three quarters of fiscal year 2003. The SEC issued subpoenas to the Company for the production of documents and has taken testimony, pursuant to subpoena, from several of the Company’s present and former employees, but to the Company’s knowledge there has been no activity relating to this matter for approximately two years.
The Company operates in multiple international jurisdictions, which creates certain risks regarding the interpretation and enforcement of tax laws and regulations. In the ordinary course of a global business there are many transactions for which the ultimate tax outcome is uncertain. Some of these uncertainties arise as a consequence of inter-company arrangements to share revenue and costs. In such arrangements there are uncertainties about the amount and manner of such sharing which could ultimately result in changes once the arrangements are reviewed by taxing authorities. Although the Company believes that its approach to determining the amounts of such arrangements is reasonable, no assurance can be given that the final exposure from these matters will not be materially different than that which is reflected in the historical income tax provisions and accruals.
In evaluating the exposure associated with various tax filing positions, the Company accrues charges for probable and estimable exposures. At August 31, 2007, the Company believes it has appropriately accrued for probable exposures. To the extent the Company were to prevail in matters for which accruals have been established or be required to pay amounts in excess of reserves, the Company’s effective tax rate in a given financial statement period could be materially affected. As of August 31, 2007 and August 31, 2006, the Company had recorded within other accrued expenses a total of $10.8 million and $8.3 million, respectively, for income and other tax related contingencies.
The Company is currently evaluating the impact, if any, of the adoption of FASB Interpretation (FIN) No. 48, “Accounting for Uncertainty in Income Taxes,” which provides guidance associated with the recognition and measurement of tax positions and related reporting and disclosure requirements.
Except where indicated otherwise above, a reasonable estimate of the possible loss or range of loss cannot be made at this time for the matters described. It is possible that an unfavorable outcome of some or all of the matters, however unlikely, could result in a charge that might be material to the results of the year.
Income tax contingencies are discussed within Note 12 – Income Taxes.
27
PRICESMART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
NOTE 11 – FINANCIAL PROGRAM
On September 3, 2004, the Company announced a plan to implement a series of transactions (the “Financial Program”). The Financial Program was approved by the stockholders on October 29, 2004. The elements of the Financial Program and the status of each element are as follows:
A private placement of an aggregate of 3,164,726 shares of the Company’s common stock, at a price of $8 per share, to The Price Group, LLC, a California limited liability company (the “Price Group”), to be funded through the conversion of a $25.0 million bridge loan, together with accrued and unpaid interest, extended to the Company by the Price Group in August 2004. The private placement was completed on October 29, 2004, resulting in the issuance of 3,164,726 shares of the Company’s common stock.
The issuance of an aggregate of 2,200,000 shares of common stock to the Sol and Helen Price Trust, the Price Family Charitable Fund, the Robert and Allison Price Charitable Remainder Trust, the Robert and Allison Price Trust 1/10/75 (collectively, the “Price Trusts”) and the Price Group (collectively, with the Price Trusts, the “Series B Holders”) in exchange for all of the outstanding shares of the Company’s 8% Series B Cumulative Convertible Redeemable Preferred Stock. This exchange was completed on October 29, 2004, resulting in the issuance of 2,200,000 shares of the Company’s common stock.
The issuance of an aggregate of 2,597,200 shares of common stock, valued for such purpose at a price of $8 per share, to the Price Group in exchange for up to $20.0 million of current obligations, plus accrued and unpaid interest, owed by the Company to the Price Group. This exchange was completed on October 29, 2004, resulting in the issuance of 2,597,200 shares of the Company’s common stock.
The issuance of up to 16,052,668 shares of common stock in connection with a rights offering pursuant to rights distributed to the holders of outstanding shares of common stock, and the issuance of up to 3,125,000 shares of common stock, at a price of $8 per share, to the Price Group to ensure that the above-mentioned rights offering generates at least $25.0 million in proceeds. The $7 rights offering subscription period began on December 21, 2004 and ended on January 24, 2005. A total of 6,827,542 shares of common stock were sold during this period. The total proceeds were $47.8 million. The $8 rights offering period began on January 25, 2005 and initially expired on December 21, 2005 but was extended to January 31, 2006. A total of 2,463,614 shares of common stock were sold during the $8 rights offering period. The total proceeds for the $8 rights offering period were $19.7 million.
The issuance of up to 2,223,104 shares of common stock in an exchange of common stock, valued for such purpose at a price of $10 per share, for all of the outstanding shares of the Company’s 8% Series A Cumulative Convertible Redeemable Preferred Stock at its initial stated value of $20.0 million plus all accrued and unpaid dividends. This was completed on November 23, 2004, resulting in the issuance of 2,223,104 shares of common stock.
An amendment to the Amended and Restated Certificate of Incorporation of the Company to increase the number of authorized shares of common stock from 20,000,000 to 45,000,000 shares, which was approved by the Company’s stockholders on October 29, 2004.
In connection with the Financial Program described above, the Company and certain of it subsidiaries entered into an agreement with the International Finance Corporation (the “IFC”) in the first fiscal quarter of 2005 providing for the following: (i) the Company granted the IFC a warrant to purchase 400,000 shares of the Company’s common stock at a price of $7 per share; (ii) the Company purchased a $10.2 million loan extended by the IFC to PriceSmart Philippines, Inc.; (iii) the Company obtained a waiver of certain IFC loan covenants regarding incurring additional debt, in order to borrow the $25.0 million in the bridge loan mentioned above; (iv) $5.2 million of restricted cash pledged as collateral to certain loans was released; (v) all pre-payment penalties were waived for
28
PRICESMART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
all outstanding loans from the IFC; (vi) the net carrying costs were reduced on one loan by eliminating the IFC’s right to a percentage of the Company’s earnings, before interest, taxes, depreciation and amortization. Additionally, in connection with the Company’s transactions with the IFC, the Price Group (a related party to the Company) granted a put option giving the right to the IFC to sell 300,000 shares of Common Stock to the Price Group at a price of $12 per share between November 30, 2005 and November 30, 2006. The put option was exercised in the second quarter of fiscal year 2006 and the transaction completed in March 2006. All of the above elements were completed during the Company’s first and second quarters of fiscal year 2005. The warrant was issued in the second quarter of fiscal year 2005, and the warrant was exercised with respect to 200,000 shares of the Company’s common stock on January 26, 2005. Pursuant to the terms of the warrant, the exercise price was paid by reducing the principal amount of two of the loans extended to the Company by the IFC. As a result, long-term debt was reduced by $1.4 million. The balance of the warrant was exercised on November 30, 2005, and long-term debt was reduced by an additional $1.4 million.
NOTE 12 – INCOME TAXES
Income (loss) from continuing operations before (provision) benefit for income taxes, losses (including impairment) of unconsolidated affiliate and minority interest includes the following components (in thousands):
Years Ended August 31, | ||||||||||
2007 | 2006 | 2005 | ||||||||
United States | $ | 10,003 | $ | 15,629 | $ | 10,743 | ||||
Foreign | 18,496 | 1,118 | (20,679 | ) | ||||||
Income (loss) from continuing operations before (provision) benefit for income taxes, losses (including impairment) of unconsolidated affiliate and minority interest | $ | 28,499 | $ | 16,747 | $ | (9,936 | ) | |||
Significant components of the income tax (provision) benefit are as follows (in thousands):
Years Ended August 31, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
Current: | ||||||||||||
U.S. | $ | (2,641 | ) | $ | (1,553 | ) | $ | — | ||||
Foreign | (10,759 | ) | (4,898 | ) | (4,698 | ) | ||||||
Total | (13,400 | ) | (6,451 | ) | (4,698 | ) | ||||||
Deferred: | ||||||||||||
U.S. | 13,292 | (2,063 | ) | (4,870 | ) | |||||||
Foreign | (2,002 | ) | 3,096 | 7,802 | ||||||||
Valuation Allowance (U.S.) | (12,299 | ) | (365 | ) | 71 | |||||||
Valuation Allowance (Foreign) | 2,072 | (2,329 | ) | (7,445 | ) | |||||||
Total | 1,063 | (1,661 | ) | (4,442 | ) | |||||||
(Provision) benefit for income taxes | $ | (12,337 | ) | $ | (8,112 | ) | $ | (9,140 | ) | |||
29
PRICESMART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The reconciliation of income tax computed at the Federal statutory tax rate to the (provision) benefit for income taxes is as follows (in thousands):
Years Ended August 31, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
Federal tax (provision) benefit at statutory rates | $ | (9,689 | ) | $ | (5,694 | ) | $ | 3,378 | ||||
State taxes, net of Federal benefit | 643 | (395 | ) | (820 | ) | |||||||
Differences in foreign tax rates and permanent items | 6,936 | 671 | (4,324 | ) | ||||||||
(Increase) decrease in U.S valuation allowance | (12,299 | ) | (365 | ) | 71 | |||||||
(Increase) decrease in Foreign valuation allowance | 2,072 | (2,329 | ) | (7,445 | ) | |||||||
(Provision) benefit for income taxes | $ | (12,337 | ) | $ | (8,112 | ) | $ | (9,140 | ) | |||
Significant components of the Company’s deferred tax assets as of August 31, 2007 and 2006 are shown below (in thousands):
August 31, | ||||||||
2007 | 2006 | |||||||
Deferred tax assets: | ||||||||
U.S. net operating loss carry-forward | $ | 18,087 | $ | 19,639 | ||||
U.S. capital loss carry-forward | 16,723 | 4,410 | ||||||
U.S. timing differences and AMT credits | 328 | 22 | ||||||
Deferred compensation | 1,510 | 1,795 | ||||||
Foreign tax credits | 1,730 | 1,036 | ||||||
Foreign deferred taxes | 24,020 | 23,405 | ||||||
Total deferred tax assets | 62,398 | 50,307 | ||||||
U.S. valuation allowance | (20,937 | ) | (8,638 | ) | ||||
Foreign valuation allowance | (21,926 | ) | (21,486 | ) | ||||
Net deferred tax assets | $ | 19,535 | $ | 20,183 | ||||
As of August 31, 2007 and 2006, the Company had deferred tax liabilities of $1.5 million and $1.1 million, respectively, arising from timing differences in certain subsidiaries.
The Company operates in multiple international jurisdictions, which creates certain risks regarding the interpretation and enforcement of tax laws and regulations. In the ordinary course of a global business, there are many transactions for which the ultimate tax outcome is uncertain. Some of these uncertainties arise as a consequence of inter-company arrangements to share revenue and costs. In such arrangements, there are uncertainties about the amount and manner of such sharing which could ultimately result in changes once the arrangements are reviewed by taxing authorities. Although the Company believes that its approach to determining the amounts of such arrangements is reasonable, no assurance can be given that the final exposure from these matters will not be materially different than that which is reflected in the historical income tax provisions and accruals.
In evaluating the exposure associated with various tax filing positions, the Company accrues charges for probable and estimable exposures. At August 31, 2007, the Company believes it has appropriately accrued for probable exposures. To the extent the Company were to prevail in matters for which accruals have been established or be required to pay amounts in excess of reserves, the Company’s effective tax rate in a given financial statement period could be materially affected.
30
PRICESMART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Specific matters which have come to the Company’s attention in this respect are:
1. During fiscal year 2004, the government of Costa Rica notified the Company that it disagrees with the Company’s treatment of certain inter-company transactions and claims for a total of $1.8 million in back taxes, penalties and interest. A defense to these claims has been presented to the relevant authorities, but they remain pending and to date the Company considers that no provision is currently required.
2. As part of its ongoing assessment of the applicability of the relevant tax laws in the various countries in which it operates, the Company has determined that a potential incremental tax liability exists regarding the Company’s past treatment of certain inter-company transactions. These contingencies are updated as new information becomes available, payments are made, or statutory audit periods expire. Accordingly, the Company recognized an increase of $521,000 of tax expenses for these contingencies in fiscal year 2007 and a reduction of $389,000 of tax expenses for these contingencies in fiscal year 2006.
3. During fiscal year 2005, the Company discovered an exposure with regard to the withholding of local taxes on certain inter-company transactions in Honduras, and recognized a provision of $2.6 million. In fiscal year 2006, the Company recognized a reduction of $1.0 million of tax expense related to this exposure as the relevant authorities determined that the inter-company transactions were to be assessed at a lower tax rate than originally estimated. However, as this ruling appears to conflict with a private ruling on this matter, the Company is currently disputing this claim. The Honduras authorities also notified the Company that a VAT liability of $200,000 was owed on membership income. The Company has been advised that it is possible that this liability does not conform to statutory requirements. Therefore, the Company considers that no provision is currently required for this item.
As of August 31, 2007 and 2006, the Company had recorded within other accrued expenses a total of $10.8 million and $8.3 million, respectively, for income and other tax related contingencies.
During fiscal year 2007, the Company incurred current tax expense of $13.4 million. The Company also recognized a net deferred tax benefit of $1.1 million, primarily related to the generation of additional foreign tax credits, net of the use of NOLs in the U.S., resulting in a net tax expense of $12.3 million. During fiscal year 2006, the Company incurred current income tax expense of $6.4 million. The Company also recognized a net deferred tax expense of $1.7 million in 2006, primarily related to the use of NOLs on the U.S. income from continuing operations, resulting in a net tax expense of $8.1 million. During fiscal year 2005, the Company incurred a net tax expense of $9.1 million, which includes $4.7 million for current tax expense (primarily related to its foreign operations, including provisions for income tax contingencies) and a net deferred tax expense of $4.4 million, primarily related to the increase of a valuation allowance for foreign deferred tax assets.
During fiscal year 2007, as a result of significant losses in many of the Company’s foreign subsidiaries, management concluded that full valuation allowances were necessary with respect to several of its foreign subsidiaries. Factors considered by management include history of cumulative losses or income, projected earnings based upon current operations and determining whether the net operating loss carry-forward periods are sufficient to realize the related deferred tax assets. Based upon the weight of all the positive and negative evidence, management concluded that it is more likely than not that deferred tax assets would not be realized in certain countries. Accordingly, the Company had net foreign deferred tax assets of $2.1 million and $1.9 million as of August 31, 2007 and 2006, respectively.
The Company has federal and state tax net operating loss carry-forwards, or NOLs, at August 31, 2007 of approximately $51.8 million and $9.5 million, respectively. The Federal and state tax loss carry-forwards expire during periods ranging from 2010 through 2025 and 2015 through 2025, respectively, unless previously utilized. In calculating the tax provision, and assessing the likelihood
31
PRICESMART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
that the Company will be able to utilize the deferred tax assets, the Company considered and weighed all of the evidence, both positive and negative, and both objective and subjective. The Company factored in the inherent risk of forecasting revenue and expenses over an extended period of time and considered the potential risks associated with its business. Because of the Company’s U.S. income from continuing operations and based on projections of future taxable income in the U.S., which have increased due to the implementation of the Financial Program (as described in Note 11—Financial Program), the Company was able to determine that there was sufficient positive evidence to support the conclusion that it was more likely than not that the Company would be able to realize substantially all of its U.S. NOLs by generating taxable income during the carry-forward period. However, if the Company does not achieve its projections of future taxable income in the U.S., the Company could be required to take a charge to earnings related to the recoverability of these deferred tax assets.
Also, as a result of the Financial Program, the Company has determined that due to a deemed change of ownership (as defined in Section 382 of the Internal Revenue Code) in October 2004, there will be annual limitations in the amount of U.S. profits that may be offset by NOLs. The NOLs generated prior to the deemed ownership change date, as well as a significant portion of the losses generated as a result of the PSMT Philippines disposal in August 2005, will be limited on an annual basis. The Company does not believe this will impact the recoverability of these NOLs.
As of August 31, 2007, the Company also has foreign tax credits that expire from 2011 through 2017 of $1.7 million. Due to their shorter recovery period and limitations applicable under section 383 of the Internal Revenue code regarding changes of ownership, the Company has valuation allowances of $1.0 million on U.S. foreign tax credit carry-forwards generated before the date of the deemed ownership change.
The Company also has capital loss carry-forwards expiring in 2009, 2010, and 2012 of $45.6 million, resulting from the PSMT Philippines disposal, the impairment provision for its investment in Mexico, the cessation of operations in Guam and a tax election to dissolve the Company’s U.S. Virgin Islands subsidiary for U.S. federal income tax purposes. As these capital losses can only be used to offset capital gains and the Company has no current plans to be able to use these capital losses, a full valuation allowance has been recorded against them.
The Company does not provide for income taxes which would be payable if undistributed earnings of its foreign subsidiaries were remitted, because the Company considers these earnings to be permanently reinvested. As of August 31, 2007 and 2006, the undistributed earnings of these foreign subsidiaries are approximately $20.6 million and $17.6 million, respectively. Upon distribution of those earnings in the form of dividends or otherwise, the Company would be subject to both U.S. income taxes and withholding taxes payable to the foreign countries, but would also be able to offset unrecognized foreign tax credit carry-forwards. Determination of the amount of unrecognized deferred U.S. income tax liability is not practicable because of the complexities associated with its hypothetical calculation; however, the Company does not believe the amount would be material.
32
PRICESMART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
NOTE 13 – DEBT
As of August 31, 2007 and 2006, the Company, together with its majority or wholly-owned subsidiaries, had $3.3 million and $158,000, respectively, outstanding in short-term borrowings, at a weighted-average interest rate of 8.0% in both periods, which are secured by certain assets of the Company and its subsidiaries and are guaranteed by the Company up to its respective ownership percentage, as listed below (in thousands). Each of the facilities expires during the year and is typically renewed. As of August 31, 2007 and 2006, the Company had approximately $3.9 million and $11.0 million available on these facilities, respectively.
August 31, | ||||||
2007 | 2006 | |||||
Note due December 2007, 8% in 2007 | $ | 3,301 | $ | — | ||
Overdraft Facilities in 2006 | — | 158 | ||||
Short-term debt | $ | 3,301 | $ | 158 | ||
Additionally, the Company has a bank credit agreement, secured by short-term restricted cash, for up to $7.0 million, which can be used as a line of credit or to issue letters of credit. As of August 31, 2007, letters of credit totaling $2.5 million were outstanding under this facility, leaving availability under this facility of $4.5 million. This includes $1.9 million in letters of credit the Company established as a guarantee for estimated taxes made by Mexico tax authorities in connection with the PriceSmart warehouse operations in Mexico (“PSMT Mexico, S.A. de C.V.”). The Company was relieved of all its obligations under the letters of credit granted in favor of the Mexican tax authorities in connection with the disposal of its interest in PSMT Mexico, S.A. de C.V. as described in Note 16 – Unconsolidated Affiliate.
Long-term debt (including long-term debt, related party) consists of the following (in thousands):
August 31, | ||||||
2007 | 2006 | |||||
Note due July 2017, 9.0% in 2007 | $ | 8,886 | $ | — | ||
Note due September 2010 (six-month LIBOR + 4.0%), 9.43% in 2006 | — | 10,633 | ||||
Note due May 2011 (six-month LIBOR + 2.6%), 8.03% in 2006 | — | 6,442 | ||||
Note due August 2010, 6.5% and 5.9% in 2007 and 2006, respectively | 33 | 94 | ||||
Note due February 2008, 9.50% in 2007 and 2006 | 500 | 1,500 | ||||
Total | 9,419 | 18,669 | ||||
Less: current portion | 1,411 | 5,417 | ||||
Long-term debt | $ | 8,008 | $ | 13,252 | ||
As of August 31, 2007 and 2006, the Company, together with its majority or wholly owned subsidiaries, had $9.4 million and $18.7 million, respectively, outstanding in long-term borrowings. The Company’s long-term debt is collateralized by certain land, building, fixtures, equipment and shares of each respective subsidiary and guaranteed by the Company up to its respective ownership percentage. The carrying amount of the non-cash assets assigned as collateral for long-term debt was $9.7 million and $27.9 million as of August 31, 2007 and 2006, respectively. Certain obligations under leasing arrangements are collateralized by the underlying asset being leased.
33
PRICESMART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Annual maturities of long-term debt during the next five fiscal years are as follows (in thousands):
Years Ended August 31, | Amount | ||
2008 | $ | 1,411 | |
2009 | 927 | ||
2010 | 928 | ||
2011 | 911 | ||
Thereafter | 5,242 | ||
Total | $ | 9,419 | |
During the first quarter of fiscal year 2007, the Company repaid the remaining $17.1 million balance on the long-term debt held by the International Finance Corporation, which included a prepayment of principal in the amount of $14.9 million. In fiscal year 2007, the Company obtained $8.9 million in long-term debt to finance the acquisition of land and construction of the third warehouse club in Guatemala.
NOTE 14 – RELATED-PARTY TRANSACTIONS
Sale of Common Stock:In October 2005, Sol and Helen Price Trust, a trust affiliated with Sol Price (the Company’s majority shareholder), purchased 168,539 shares of common stock of the Company at a price of $8.90 per share for a total purchase price of $1.5 million.
Series A and Series B Preferred Stock:In January 2002, entities affiliated with Sol Price, Robert E. Price, Murray L. Galinson, Jack McGrory and James F. Cahill (who was a director of the Company from November 1999 until March 2005), purchased an aggregate of 1,650 shares of the Company’s Series A Preferred Stock for an aggregate purchase price of $1,650,000. In July 2003, entities affiliated with Sol Price, Robert E. Price, James F. Cahill, Murray L. Galinson and Jack McGrory, purchased an aggregate of 22,000 shares of the Company’s Series B Preferred Stock for an aggregate purchase price of $22,000,000. In connection with the Financial Program that was approved by the stockholders on October 29, 2004, the 1,650 shares of Series A Preferred Stock were exchanged for 183,405 shares of the Company’s common stock, and the 22,000 shares of the Series B Preferred Stock were exchanged for 2,200,000 shares of common stock.
Relationship with SD Revitalization:During the fourth quarter of fiscal year 2006, the Company sold approximately $34,000 of school supplies to SD Revitalization, a charitable group affiliated with Robert E. Price and Sol Price. The Company did not sell any school supplies to the charitable group in fiscal year 2007.
Relationship with PS Ivanhoe: On October 24, 2005, the Company borrowed $12.5 million from PS Ivanhoe, LLC, a California limited liability company (“PS Ivanhoe”), which is managed by the Price Group pursuant to a Promissory Note (the “Note”). The Note bears interest at a rate of 8% per annum and has a term of two years. All unpaid principal and accrued interest was due and payable in full on October 23, 2007 (the “Maturity Date”). Any amounts outstanding under the Note from and after the Maturity Date bear interest at a rate equal to the lesser of 12% per annum or the maximum interest rate allowed by law. To secure the Company’s obligations under the Note, the Company and PS Ivanhoe entered into a Pledge and Security Agreement pursuant to which the Company granted to PS Ivanhoe a security interest in all of the issued and outstanding shares of stock (and all ownership rights with respect thereto) in PriceSmart Real Estate, S.A., the Company’s wholly owned Panamanian subsidiary. On June 13, 2006, the promissory note entered with PS Ivanhoe was repaid. The Company paid approximately $642,000 in interest on the promissory note.
34
PRICESMART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Use of Private Plane:From time to time members of the Company’s management used a private plane owned in part by PFD Ivanhoe, Inc. (“PFD Ivanhoe”) to travel to business meetings in Central America and the Caribbean. The Price Group owns 100% of the stock of PFD Ivanhoe, and Sol Price is an officer of PFD Ivanhoe. The Price Group’s members include Sol Price, Robert E. Price, Murray Galinson and Jack McGrory (former Board member and current employee of the Company). If the passengers are solely PriceSmart, Inc. personnel, then the Company reimburses PFD Ivanhoe for a portion of the fixed management fee and additional expenses PFD Ivanhoe incurred as a result of the hours flown including direct charges associated with the use of the plane, landing fees, catering and international fees. The Company reimbursed PFD Ivanhoe based on the amounts the passengers would have paid if they had flown a commercial airline if one or more of the passengers is a Director of The Price Group (including Robert E. Price). This agreement was in place through February 23, 2007. The Company paid approximately $158,000, $205,000 and $159,000 for fiscal years ended August 31, 2007, 2006, and 2005, respectively. On February 23, 2007, the Company entered into an agreement with PFD Ivanhoe to purchase their six and one quarter percent (6.25%) undivided interest in a Citation XLS Aircraft for approximately $658,000. This entitles the Company to 50 hours of flight time per year. The Company still maintains an agreement to reimburse PFD Ivanhoe for use of other aircraft based on the amounts the passengers would have paid if they had flown a commercial airline if one or more of the passengers is a Director of the Price Group (including Robert E. Price).
Relationships with Edgar Zurcher: Edgar A. Zurcher has been a director of the Company since November 2000 and is a partner in a law firm that the Company utilizes in certain legal matters. The Company incurred legal expenses with this entity of approximately $64,000, $167,000 and $313,000 during fiscal years 2007, 2006, and 2005, respectively. Additionally, Mr. Zurcher is President and has been a director and 9.1% shareholder of PSC, S.A. which owns 40% of Payless ShoeSource Holdings, Ltd. (which rents retail space from the Company). PSC, S.A. also owns 49% of PSMT Nicaragua (BVI), Inc. and previously had owned 49% of PSMT Caribe, Inc. The Company has recorded approximately $808,000, $762,000 and $748,000 in rental income from Payless ShoeSource Holdings, Ltd. during fiscal years 2007, 2006, and 2005, respectively. Mr. Zurcher is also a director of Banco Promerica, from which the Company has recorded approximately $276,000, $265,000 and $266,000 of rental income in fiscal years 2007, 2006, and 2005, respectively, for space leased to it by the Company. The Company also received approximately $647,000, $938,000 and $747,000 in incentive fees on a co-branded credit card the Company has with Banco Promerica in fiscal years 2007, 2006, and 2005, respectively. The Company received a one-time refund of approximately $500,000, $400,000 and $0 for an accumulated marketing fund related to the co-branded credit card with Banco Promerica in the fiscal years 2007, 2006, and 2005, respectively. On March 22, 2007, the Company informed certain entities with which Mr. Zurcher is affiliated that the Company was not renewing the Company’s credit card relationship with those entities (with the possible exception of the Dominican Republic) because the Company had determined that another credit card provider was more suitable for the future needs and expectations of its members. In response, PSC, S.A. and related entities have disputed the Company’s right to terminate and not renew the credit card services relationships between the parties notwithstanding expiration of the credit card services agreements by their terms, and threatened to take legal action if the Company proceeded with the terminations. Legal proceedings then commenced, by and against the Company. See Note 10 – Commitments and Contingencies.
Relationship with PriceSmart Mexico:The Company has purchased furniture and fixtures from the closed Mexico warehouse clubs utilizing cash, an advance payment of $750,000 and offsetting the $1.0 million note and other receivables owed by PriceSmart Mexico. At August 31, 2007 and 2006, the aggregate amount of equipment purchased from Mexico was approximately $30,000 and $2.3 million, respectively.
35
PRICESMART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Relationship withGrupo Gigante, S.A.B. de C.V. (“Gigante”):In January 2002, the Company entered into a joint venture agreement with Gigante to initially open four PriceSmart warehouse clubs in Mexico (“PSMT Mexico, S.A. de C.V.”). Due to the historical operating losses and management’s assessment the Company and Gigante decided to close the warehouse club operations of PSMT Mexico, S.A. de C.V. effective February 28, 2005. The joint venture sold two of the three warehouse clubs, consisting of land and buildings, in September 2005. On October 31, 2007, subsequent to the fiscal year 2007, the Company finalized the sale of its 50% interest in PSMT Mexico, S.A. de C.V. (“PSMT Mexico”) for $2.0 million in cash to Grupo Gigante, S.A.B. de C.V. The sales price reflects the net book value of the Company’s investment in PSMT Mexico as of August 31, 2007. Grupo Gigante owns shares of common stock of the Company.
The Company believes that each of the related party transactions described above were on terms that the Company could have obtained from unaffiliated third parties.
NOTE 15 – ACQUISITION OF MINORITY INTEREST
The Company’s business combinations are accounted for under the purchase method of accounting, and include the results of operations of the acquired business from the date of acquisition. Net assets of the acquired business are recorded at their fair value at the date of the acquisition. The excess of the purchase price over the fair value of tangible net assets acquired is included in goodwill in the accompanying consolidated balance sheets.
On April 19, 2005, the Company announced that it had entered into an agreement to settle the previously disclosed disputes pertaining to the Company’s Guatemalan subsidiary. Specifically, the Company entered into an agreement with Grupo Solid (Guatemala), S.A. and Grupo Solid, S.A., the minority shareholders of the Company’s Guatemala subsidiary, whereby the parties mutually released all claims, the Company acquired the minority shareholders’ shares in PriceSmart (Guatemala), S.A., all pending litigation and the pending arbitration (as previously announced by the Company) between the minority shareholders and the Company was dismissed, and Grupo Solid, S.A. was released from its joint and several guaranty (together with the Company) of a real estate lease to which PriceSmart (Guatemala), S.A. is a party. As a result of this agreement, the Company increased its ownership in PriceSmart (Guatemala), S.A. from 66% to 100%.
The Company’s acquisition of the minority shareholders’ interests involved a two-step process. First, on April 19, 2005, the minority shareholder conveyed its 34% interest in PriceSmart (Guatemala), S.A. to the Price Group, the Sol and Helen Price Trust and the Robert and Allison Price Trust (together with the Price Group and the Sol and Helen Price Trust, the “Price Entities”), in exchange for the payment by the Price Entities to the minority shareholders of a total of $6,600,000 in cash. Second, the Price Entities transferred the 34% interest in PriceSmart (Guatemala), S.A. to the Company in exchange for a total of 825,000 shares of the Company’s common stock, valued for such purpose at a price of $8.00 per share and having a value at such valuation equal to the amount paid by the Price Entities to the minority shareholders. On April 19, 2005, the Company and the Price Entities entered into a Stock Purchase Agreement reflecting the parties’ agreement to such exchange of shares. Robert E. Price, the Company’s Chairman of the Board and Chief Executive Officer, Sol Price, a significant stockholder of the Company and father of Robert E. Price, are members and managers of the Price Group. Robert E. Price is a trustee of both trusts and Sol Price is a trustee of the Sol and Helen Price Trust. Directors Murray L. Galinson and Jack McGrory, who is also currently our Executive Vice President – Real Estate and Development, are members and managers of the Price Group.
The consideration given in connection with this acquisition consisted of $6.6 million in the issuance of common stock and $274,000 for the forgiveness of a note receivable. The purchase price of $6.9 million was allocated to settlement costs of $41,000, $350,000 to minority interest and $6.5 million to goodwill. The goodwill has been allocated to the Central American Operations segment.
36
PRICESMART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
During fiscal year 2006, the Company purchased the minority interests of its Jamaica subsidiary in order to strengthen the Company’s position for the future and consequently increased its ownership percentage in its Jamaica subsidiary from 67.5% to 100%. The Company acquired the minority interests of its three partners, Big Box Sales, Ltd., Chancellor Holdings Limited, and PSC, S.A., whose ownership percentages were 15%, 10% and 7.5% respectively, on November 17, 2005, November 15, 2005, and December 23, 2005, respectively. The consideration provided in connection with this acquisition consisted of $2.4 million in cash and forgiveness of a $413,000 note receivable. The purchase price of $2.8 million was allocated to minority interest of $556,000, $126,000 to buildings and $2.1 million to goodwill. Also, during the second quarter of fiscal year 2006, the Company purchased a 5% minority interest of its Trinidad subsidiary from one of its partners and thereby increased its ownership percentage in its Trinidad subsidiary from 90% to 95%. The consideration provided in connection with this acquisition was $300,000, of which $132,000 was allocated to minority interest and $168,000 was allocated to goodwill. The goodwill related to these transactions has been allocated to the Caribbean Operations segment.
NOTE 16 – UNCONSOLIDATED AFFILIATE
In January 2002, the Company entered into a joint venture agreement with Grupo Gigante, S.A. de C.V. (“Gigante”) to initially open four PriceSmart warehouse clubs in Mexico. The Company and Gigante contributed $20.0 million each for a total of $40.0 million, and each owned 50% of the operations in PSMT Mexico, S.A. de C.V. (“PSMT Mexico”). The Company accounts for this investment under the equity method of accounting, in which the Company reflects its proportionate share of the income or loss from the joint venture. Three warehouse clubs were eventually opened during fiscal year 2003.
During the fourth quarter of fiscal year 2004, due to the historical operating losses and management’s assessment as to the inability to recover the full carrying amount of its investment in PSMT Mexico, the Company recorded a non-cash charge of $3.1 million to reduce the Company’s “Investment in unconsolidated affiliate.”
The Company and Gigante decided to close the warehouse club operations of PSMT Mexico effective February 28, 2005. The joint venture sold two of the three warehouse clubs, consisting of land and buildings, in September 2005 for an aggregate price of $11.2 million. During the fourth quarter of fiscal year 2005, the Company recorded a non-cash charge of $1.1 million due to a re-assessment of its ability to recover the remaining carrying value of its investment in PSMT Mexico.
On October 31, 2007, Grupo Gigante S.A. de C.V. purchased all 164,046 shares held by PriceSmart, Inc. in PSMT Mexico for $2.0 million, thereby allowing Grupo Gigante S.A. de C.V. to assume 100% control and ownership of PSMT Mexico. Consequently the Company recorded $2.6 million impairment charge in fiscal year 2007, related to the write down of the Company’s interest in its Mexico joint venture to its revised net realizable value. The impairment charge included $1.7 million in accumulated unrealized loss associated with currency changes recorded as “Accumulated Other Comprehensive Loss” on the Consolidated Balance Sheet and $892,000 related to the amounts carried as “Investment in unconsolidated subsidiaries.” While the Company believes that the value of the investment as indicated on the balance sheet would over time be realized, there were concerns about the Company’s control of the actions necessary to achieve those outcomes given that a substantial portion of the realizable assets related to refunds from the Mexican tax authorities for pre-paid taxes. The Company, with the concurrence of the Board of Directors, concluded that it was in the Company’s best interest to complete the divestment of its Mexico holdings and reduce its involvement in activities not related to the future growth of the membership warehouse business in its targeted markets. The Company was relieved of all its obligations under letters of credit granted in favor of Mexican tax authorities totaling $1.9 million in connection with this disposal.
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PRICESMART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The summarized financial information of the unconsolidated affiliate is as follows:
As of August 31, | ||||||
2007 | 2006 | |||||
Current assets | $ | 5,776 | $ | 5,887 | ||
Noncurrent assets | $ | 5,788 | $ | 7,038 | ||
Current liabilities | $ | 907 | $ | 839 | ||
Noncurrent liabilities | $ | 129 | $ | — |
Years Ended August 31, | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
Revenues | $ | — | $ | 88 | $ | 25,948 | ||||||
Cost of Goods Sold | $ | — | $ | 20 | $ | 24,356 | ||||||
Net Loss | $ | (590 | ) | $ | (193 | ) | $ | (6,518 | ) |
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PRICESMART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
NOTE 17 – SEGMENTS
The Company is principally engaged in international membership shopping warehouse clubs operating primarily in Central America and the Caribbean. The Company operates in three segments based on geographic area and measures performance on operating income (loss). Segment amounts are presented after converting to U.S. dollars and consolidating eliminations. Certain revenues and operating costs included in the United States segment have not been allocated, as it is impractical to do so. The Mexico joint venture is not segmented for the periods presented and is included in the United States segment. The Company’s reportable segments are based on management responsibility.
United States Operations | Central American Operations | Caribbean Operations | Total | |||||||||||||
Year Ended August 31, 2007 | ||||||||||||||||
Total revenue | $ | 1,342 | $ | 541,866 | $ | 345,593 | $ | 888,801 | ||||||||
Asset impairment and closure cost | — | (1,235 | ) | (315 | ) | (1,550 | ) | |||||||||
Operating income | 6,231 | 13,281 | 8,464 | 27,976 | ||||||||||||
Interest income | 1,292 | 221 | 115 | 1,628 | ||||||||||||
Interest expense | (261 | ) | (354 | ) | (173 | ) | (788 | ) | ||||||||
Income tax expense | (3,930 | ) | (6,905 | ) | (1,502 | ) | (12,337 | ) | ||||||||
Income from continuing operations | 428 | 5,666 | 6,689 | 12,783 | ||||||||||||
Discontinued operations, net of tax | 143 | — | — | 143 | ||||||||||||
Depreciation and amortization | (684 | ) | (5,408 | ) | (3,357 | ) | (9,449 | ) | ||||||||
Goodwill | — | 26,279 | 5,373 | 31,652 | ||||||||||||
Assets of discontinued operations | 1,380 | — | — | 1,380 | ||||||||||||
Identifiable assets | 60,753 | 225,263 | 109,403 | 395,419 | ||||||||||||
Year Ended August 31, 2006 | ||||||||||||||||
Total revenue | $ | 130 | $ | 449,820 | $ | 284,723 | $ | 734,673 | ||||||||
Asset impairment and closure cost | — | (996 | ) | (838 | ) | (1,834 | ) | |||||||||
Operating income | 1,678 | 12,963 | 3,489 | 18,130 | ||||||||||||
Interest income | 1,555 | 275 | 129 | 1,959 | ||||||||||||
Interest expense | (802 | ) | (1,247 | ) | (1,142 | ) | (3,191 | ) | ||||||||
Income tax expense | (5,664 | ) | (1,783 | ) | (665 | ) | (8,112 | ) | ||||||||
Income (loss) from continuing operations | (3,335 | ) | 9,726 | 1,793 | 8,184 | |||||||||||
Discontinued operations, net of tax | 3,674 | — | — | 3,674 | ||||||||||||
Depreciation and amortization | (587 | ) | (5,370 | ) | (3,661 | ) | (9,618 | ) | ||||||||
Goodwill | — | 26,350 | 5,520 | 31,870 | ||||||||||||
Assets of discontinued operations | 1,594 | — | — | 1,594 | ||||||||||||
Identifiable assets | 64,927 | 197,364 | 96,752 | 359,043 | ||||||||||||
Year Ended August 31, 2005 | ||||||||||||||||
Total revenue | $ | 481 | $ | 378,888 | $ | 239,456 | $ | 618,825 | ||||||||
Asset impairment and closure cost | — | (1,710 | ) | (9,651 | ) | (11,361 | ) | |||||||||
Operating income (loss) | 685 | 4,933 | (10,929 | ) | (5,311 | ) | ||||||||||
Interest income | 1,472 | 227 | 55 | 1,754 | ||||||||||||
Interest expense | (791 | ) | (2,800 | ) | (1,794 | ) | (5,385 | ) | ||||||||
Income tax expense | (4,213 | ) | (2,690 | ) | (2,237 | ) | (9,140 | ) | ||||||||
Loss from continuing operations | (7,216 | ) | (765 | ) | (14,897 | ) | (22,878 | ) | ||||||||
Discontinued operations, net of tax | (19,459 | ) | — | — | (19,459 | ) | ||||||||||
Depreciation and amortization | (666 | ) | (5,401 | ) | (3,420 | ) | (9,487 | ) | ||||||||
Goodwill | — | 26,361 | 3,239 | 29,600 | ||||||||||||
Assets of discontinued operations | 315 | — | — | 315 | ||||||||||||
Identifiable assets | 64,138 | 165,202 | 90,514 | 319,854 |
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PRICESMART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
NOTE 18 – SUBSEQUENT EVENTS
On September 27, 2007, the Company finalized the sale for $2.5 million of the vacated San Pedro Sula, Honduras warehouse. The sales price reflects the net book value of the warehouse location as of August 31, 2007 after impairments for approximately $897,000 applied in fiscal year 2007.
As discussed in Note 16, on October 31, 2007, the Company sold its 50% interest in PSMT Mexico, S.A. de C.V. (“PSMT Mexico”) for $2.0 million in cash to Grupo Gigante, S.A.B. de C.V.
On October 31, 2007, the Company paid out to the stockholders of record, as of the close of business on October 15, 2007, approximately $4.7 million in cash dividends.
On November 15, 2007 the Company acquired the company that had leased to it the real estate upon which the Barbados PriceSmart warehouse club is located. The purchase price was $12.0 million, of which $9.0 million was financed through a long-term debt arrangement.
NOTE 19 – QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summarized quarterly financial information for fiscal years 2007 and 2006 is as follows:
Fiscal Year 2007 (in thousands, except per share data) | Three Months Ended, | Year Ended Aug. 31, 2007 | ||||||||||||||
Nov. 30, 2006 | Feb. 28, 2007 | May 31, 2007 | Aug. 31, 2007 | |||||||||||||
Total net sales | $ | 198,195 | $ | 226,893 | $ | 219,705 | $ | 225,325 | $ | 870,118 | ||||||
Cost of goods sold | $ | 168,590 | $ | 193,127 | $ | 185,934 | $ | 190,628 | $ | 738,279 | ||||||
Income (loss) from continuing operations | $ | 4,054 | $ | 6,516 | $ | 5,206 | $ | (2,993 | ) | $ | 12,783 | |||||
Discontinued operations, net of tax | $ | 18 | $ | 28 | $ | 25 | $ | 72 | $ | 143 | ||||||
Net income (loss) available to common stockholders: | $ | 4,072 | $ | 6,544 | $ | 5,231 | $ | (2,921 | ) | $ | 12,926 | |||||
Basic income (loss) per share | $ | 0.14 | $ | 0.23 | $ | 0.18 | $ | (0.10 | ) | $ | 0.45 | |||||
Diluted income (loss) per share | $ | 0.14 | $ | 0.22 | $ | 0.18 | $ | (0.10 | ) | $ | 0.44 |
Fiscal Year 2006 (in thousands, except per share data) | Three Months Ended, | Year Ended Aug. 31, 2006 | ||||||||||||||
Nov. 30, 2005 | Feb. 28, 2006 | May 31, 2006 | Aug. 31, 2006 | |||||||||||||
Total net sales | $ | 166,513 | $ | 189,573 | $ | 180,790 | $ | 182,763 | $ | 719,639 | ||||||
Cost of goods sold | $ | 142,520 | $ | 162,186 | $ | 153,626 | $ | 153,165 | $ | 611,497 | ||||||
Income from continuing operations | $ | 1,351 | $ | 3,347 | $ | 3,125 | $ | 361 | $ | 8,184 | ||||||
Discontinued operations, net of tax | $ | 654 | $ | (107 | ) | $ | 103 | $ | 3,024 | $ | 3,674 | |||||
Net income available to common stockholders: | $ | 2,005 | $ | 3,240 | $ | 3,228 | $ | 3,385 | $ | 11,858 | ||||||
Basic income per share | $ | 0.08 | $ | 0.12 | $ | 0.11 | $ | 0.12 | $ | 0.43 | ||||||
Diluted income per share | $ | 0.08 | $ | 0.12 | $ | 0.11 | $ | 0.12 | $ | 0.43 |
40
MARKET FOR COMMON EQUITY RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
The Company’s common stock has been quoted and traded on the NASDAQ National Market under the symbol “PSMT” since September 2, 1997. As of November 2, 2007, there were approximately 2,792 holders of record of the common stock.
Dates | Stock Price | |||||||||
From | To | High | Low | |||||||
2007 CALENDAR QUARTERS | ||||||||||
First Quarter | 9/1/06 | 11/30/06 | $ | 17.91 | $ | 11.91 | ||||
Second Quarter | 12/1/06 | 2/28/07 | 20.64 | 14.01 | ||||||
Third Quarter | 3/1/07 | 5/31/07 | 20.88 | 13.31 | ||||||
Fourth Quarter | 6/1/07 | 8/31/07 | 26.93 | 19.17 | ||||||
2006 CALENDAR QUARTERS | ||||||||||
First Quarter | 9/1/05 | 11/30/05 | $ | 8.70 | $ | 7.72 | ||||
Second Quarter | 12/1/05 | 2/28/06 | 8.49 | 7.80 | ||||||
Third Quarter | 3/1/06 | 5/31/06 | 12.51 | 7.55 | ||||||
Fourth Quarter | 6/1/06 | 8/31/06 | 13.46 | 10.02 |
Recent Sales of Unregistered Securities
There were no sales of unregistered securities during the quarter ended August 31, 2007, except as reported on Current Reports on Form 8-K filed during the quarter.
41