MAIL STOP 03-08
March 30, 2005
Robert E. Price
Chairman of the Board and Interim CEO
PriceSmart, Inc.
9740 Scranton Rd
San Diego, CA 92121-1745
RE: PriceSmart, Inc.
Registration Statement on Form S-1
Commission File No. 333-123076
Filed on March 2, 2005
Dear Mr. Price:
We have reviewed your filing and have the following comments.
Where indicated, we think you should revise your document in
response
to these comments. If you disagree, we will consider your
explanation as to why our comment is inapplicable or a revision is
unnecessary. Please be as detailed as necessary in your
explanation.
In some of our comments, we may ask you to provide us with
supplemental information so we may better understand your
disclosure.
After reviewing this information, we may or may not raise
additional
comments.
Please understand that the purpose of our review process is
to
assist you in your compliance with the applicable disclosure
requirements and to enhance the overall disclosure in your filing.
We look forward to working with you in these respects. We welcome
any questions you may have about our comments or on any other
aspect
of our review. Feel free to call us at the telephone numbers
listed
at the end of this letter.
FORM S-1
Item 7. Management`s Discussion and Analysis of Financial
Condition
and Results of Operations, page 14
General
1. Where you identify intermediate causes of changes in your
operating results, also describe the reasons underlying the
intermediate causes. For example, you indicate that the increase
in
net warehouse club sales from the first quarter 2004 to the first
quarter 2005 is primarily due to improvements in merchandising.
Please explain the merchandising improvements you implemented and
why
these improvements led to higher average sale per transaction
figures. As another example, where you discuss the fluctuations
in
your "losses of unconsolidated affiliates" line item, you indicate
that the fluctuations are a result of fluctuations in the
underlying
earnings/losses of your equity method investees. Please revise to
explain the reasons for the fluctuations in the earnings/losses of
your equity method investees. See SEC Release No. 33-8350.
2. Where you describe two or more business reasons that
contributed
to a material change in a financial statement line item between
periods, please quantify the extent to which each change
contributed
to the overall change in that line item. For example, with
respect
to the change in your warehouse club operating expenses from the
first quarter 2004 to the first quarter 2005, please quantify the
extent to which the changes are attributable to the various
contributing factors. See Item 303(a) of Regulation S-K and SEC
Release No. 33-8350.
3. We note your disclosure that comparable warehouse club sales
include sales for those warehouse clubs open at least 12 full
months.
Does this mean that a store open for 1 month in the prior period
and
11 months in the current period is included in comparable
warehouse
club sales? If so, please tell us why you believe this measure
represents your "comparable" warehouse club sales. Also revise
your
disclosure to clarify that the measure could be skewed by stores
only
open a short period of time in the prior period. Also disclose
whether there have been any revisions to your methodology for
calculating comparable warehouse club sales in the last three
years.
Finally, please expand your disclosure of how you calculate the
change in comparable store sales from period to period to include
how
you treat stores that were closed during the period
4. Please tell us why your comparable warehouse club sales data on
page 17 uses a cut-off date of September 5, 2004 and covers a 53-
week
period while the comparative data for the prior year uses a cut-
off
date of August 31, 2003, your fiscal year-end, and a 52-week
period.
Comparison of First Quarter 2005 to First Quarter 2004, page 15
5. You disclose on page 16 that other income, excluding licensee
fees, decreased to $1.1 million in the first quarter of fiscal
2005
from $1.6 million in the first quarter of fiscal 2004. It
appears,
however, that both of these amounts include licensee fee income.
Please revise or advise.
6. Your presentation on page 15 of your warehouse gross margin
excluding the impact of foreign exchange gains and losses
represents
a non-GAAP measure subject to the disclosure and reconciliation
requirements in Item 10(e) of Regulation S-K. Please consider
revising your discussion so that you quantify and discuss the
impact
of foreign exchange gains and losses on your gross margin without
presenting your gross margin excluding the impact of such charges.
Otherwise, if you intend to retain this non-GAAP measure in your
filing, please note that you must meet the burden of demonstrating
the usefulness of this and any other non-GAAP measure which
excludes
recurring type items. In this regard, you will need to disclose
the
following information in your filing:
* The manner in which you use the non-GAAP measure to conduct or
evaluate your business;
* The economic substance behind your decision to use such a
measure;
* The material limitations associated with use of the non-GAAP
financial measure as compared to the use of the most directly
comparable GAAP financial measure;
* The substantive reasons why you believe the non-GAAP financial
measure provides useful information to investors.
In addition to the above guidance, please ensure that you provide
a
reconciliation, preferably in tabular form, which reconciles the
non-
GAAP measure to your gross margin as calculated in accordance with
GAAP. For further guidance, see Item 10(e) of Regulation S-K and
questions 8 and 9 of the Staff`s Frequently Asked Questions
Regarding
the Use of Non-GAAP Financial Measures, available at www.sec.gov.
Liquidity and Capital Resources, page 21
7. You indicate on page 14 that you plan to open a warehouse club
in
Costa Rica during the second half of calendar year 2005 and
disclose
on page 15 that you terminated the license agreement with your
China
licensee subsequent to the end of the first fiscal quarter of
2005.
You also state on page 31 that you completed the closure of your
PSMT
Mexico, S.A. de C.V. warehouse club operations during fiscal year
2005. If material, please quantify the estimated impact on your
future results of operations and cash flows of each of these
items.
Contractual Obligations, page 26
8. Please revise your tabular disclosure of contractual
obligations
to include estimated interest payments on your debt. Since the
table
is aimed at increasing transparency of cash flow, we believe these
payments should be included in the table. A footnote to the table
should provide appropriate disclosure regarding how you estimated
the
interest payments. If you choose not to include these payments, a
footnote to the table should clearly identify the excluded item
and
provide any additional information that is material to an
understanding of your cash requirements. See Item 303(a)(5) of
Regulation S-K and footnote 46 to SEC Release No. 33-8350.
Critical Accounting Estimates, page 26
9. Please revise the discussion of your critical accounting
policies
and estimates to focus on the assumptions and uncertainties that
underlie your critical accounting estimates, rather than
duplicating
the accounting policy disclosures in the financial statement
footnotes. Discuss the sensitivity of reported results to changes
in
your assumptions, judgments, and estimates, including the
likelihood
of obtaining materially different results if different assumptions
were applied. For example, please describe in more detail the
methodology and assumptions or estimates you use to evaluate long-
lived assets for impairment, including how you determine fair
value.
Additionally, in view of the asset impairment charges you recorded
in
fiscal years 2003 and 2004, discuss how sensitive the amount of
the
impairment loss would be to changes in your assumptions and
judgments. Also indicate the likelihood of additional impairments
in
the future.
Consolidated Annual Financial Statements
Balance Sheets, page F-3
10. Since you have shares in treasury stock, the number of common
shares issued should not equal the number of common shares
outstanding as you have disclosed on the face of your balance
sheet.
Please revise the number of shares issued as of each balance sheet
date to include both shares outstanding and those held in
treasury.
Notes to Consolidated Annual Financial Statements
General
11. Please provide us with your significance tests under Rule 3-09
of
Regulation S-X for fiscal years 2004 and 2003 for your equity
method
investment in PSMT Mexico, S.A. de C.V. Please ensure that any
impairment write-down or other activity related to this investment
is
included in your significance computations. If your response
indicates your investment does not meet the Rule 3-09 significance
levels, please provide the summarized financial information
required
by Rule 4-08(g) of Regulation S-X.
Note 2 - Summary of Significant Accounting Policies, page F-8
12. Please disclose the types of expenses that you include in the
cost of goods sold line items and the types of expenses that you
include in the selling, general and administrative expenses line
items. In doing so, please disclose specifically whether you
include
inbound freight charges, purchasing and receiving costs,
inspection
costs, internal transfer costs, and the other costs of your
distribution network in cost of goods sold. If you currently
exclude
a significant portion of these costs from cost of goods sold,
please
provide cautionary disclosure in MD&A that your gross margins may
not
be comparable to others, since some entities include the costs
related to their distribution network in cost of goods sold and
others like you exclude all or a portion of them from gross
margin,
including them instead in a line item such as selling, general and
administrative expenses. To the extent the excluded costs are
material to your operating results, quantify these amounts in
MD&A.
13. We note your disclosure that consideration received from
vendors
is classified as a reduction of cost of goods sold pursuant to
EITF
02-16. Please disclose the nature of the various types of
consideration you receive from your vendors and the terms of the
arrangements under which you receive such consideration. To the
extent that any of your allowances or credits are receivable only
if
you complete a specified cumulative level of purchases or remain a
customer for a specified time period, please disclose whether you
record the allowances or credits as progress is made toward
earning
the allowance or credit, or whether the allowances or credits are
only recognized upon achievement of milestones. Please also
revise
your MD&A to discuss the changes in these payments between periods
and how they impacted the related statement of operations line
items.
Also, if you receive cooperative advertising fees from your
vendors,
please disclose the amount of cooperative advertising funds netted
against each statement of operations expense line item for each
period presented. Finally, we note your disclosure in MD&A that
"other income" revenues include advertising revenues and vendor
promotions. Please help us understand how this disclosure is
consistent with your financial statement footnote disclosure
regarding vendor promotions and tell us why your classification of
any vendor promotions as revenues is appropriate under GAAP. Also
tell us whether advertising revenues relate to cooperative
advertising amounts received from vendors, and if so, tell us how
your classification of such vendor payments as revenues is
acceptable
under EITF 02-16.
14. Please disclose the total amount charged to advertising
expense
for each period presented and the line item in which these amounts
are included. See paragraph 49 of SOP 93-7.
15. We note your disclosure that leasehold improvements are
amortized
over a period longer than the initial lease term as management
believes it is "probable" that the renewal options in the
underlying
leases will be exercised. Please revise your disclosure to
clarify,
if true, that leasehold improvements are amortized over a period
to
include renewal options only to the extent exercise of the renewal
options is "reasonably assured," as that term is contemplated in
SFAS
13. Please note that reasonably assured is a higher standard
than
probable. If leasehold improvements are amortized over renewal
periods that are not reasonably assured of being exercised, please
tell us how you plan to revise your financial statements to comply
with GAAP.
Note 4 - Earnings (Loss) Per Share, page F-13
16. Please disclose the securities that could potentially dilute
basic EPS in the future that were not included in the computation
of
diluted EPS because to do so would have been anti-dilutive for the
periods presented. See paragraph 40(c) of SFAS 128.
Note 6 - Stock Option Plan and Equity Participation Plan, page F-
13
17. Your Summary Compensation Table on page 45 indicates that your
interim CEO does not receive any compensation for his services.
Please supplementally tell us how you account for his donated
services, including whether the fair value of these services is
expensed and treated as contributed capital and why or why not.
Please reference the applicable authoritative literature which
supports your accounting.
Note 8 - Asset Impairment and Closure Costs, page F-15
18. We note that you closed four warehouse clubs during the fiscal
year 2003-2004 timeframe, including your only warehouse club in
Guam.
Please tell us supplementally what consideration you gave to
showing
the closure of any or all of these warehouse clubs as discontinued
operations pursuant to SFAS 144. Also refer to EITF 03-13, as
applicable.
Note 9 - Commitments and Contingencies, page F-16
19. You indicate that the ultimate resolution of the legal
proceedings and claims will not have a material adverse effect on
your financial condition, operating results, cash flow or
liquidity.
This statement appears to be inconsistent with certain of your
other
disclosures, such as your statements that "there can be no
assurance...that any resolution will not have a material adverse
effect" on your company and that you "may incur substantial losses
as
a result of an award of damages to the plaintiffs." To the extent
it
is reasonably possible you will incur losses in excess of recorded
amounts related to these contingent liabilities, please provide
the
applicable disclosures in accordance with SFAS 5, including the
amount or range of reasonably possible losses in excess of
recorded
amounts. Alternatively, if no amount of loss in excess of
recorded
amounts is believed to be reasonably possible, please state this
in
your disclosure. Refer to paragraph 9 of SFAS 5. See also the
guidance provided in SAB Topic 5-Y and SOP 96-1. Please also
disclose your policy for recording expected insurance recoveries
related to your contingent liabilities and confirm that you do not
net expected insurance recoveries against the related liabilities.
Note 12 - Debt, page F-23
20. Please disclose the weighted-average interest rate on your
short-
term borrowings outstanding as of the date of each balance sheet
presented. See Rule 5-02(19)(b) of Regulation S-X.
21. Please disclose the carrying amount of assets pledged as
collateral under your short and long-term debt obligations. See
paragraphs 18-19 of SFAS 5 and Rule 4-08(b) of Regulation S-X.
22. We note that as of August 31, 2004 and November 30, 2004, you
were in violation of several debt covenants for which you had not
received waivers. We also note that violation of such covenants
makes certain of your debt callable. Yet it appears you have
classified the related debt obligations according to their
original
contractual maturities. Considering relevant accounting guidance,
such as SFAS 78 and EITF 86-30, please supplementally explain to
us
in detail why each of the borrowings where you were in violation
of
debt covenants at period end should not be classified as current
liabilities.
Note 14 - Convertible Preferred Stock, page F-29
23. Please tell us supplementally how you allocated the proceeds
of
the Series A Preferred Stock between the detachable warrants and
the
convertible preferred stock. Ensure your response addresses how
your
allocation method complies with the requirement in paragraph 5 of
EITF 00-27 that you allocate the proceeds to the warrants and the
convertible preferred stock on a relative fair value basis.
Please
also show us how you further allocated the value of the
convertible
preferred stock between the preferred stock and the conversion
feature in the stock. Ensure your allocation to the conversion
feature takes into consideration the effective (as opposed to
stated)
conversion rate of the preferred stock. Also note we would expect
the value assigned to both the detachable warrants and the
embedded
conversion feature, i.e., the total discount on the preferred
stock
issuance, to be recognized as a reduction of net income available
to
common shareholders over the minimum period from the date of
issuance
to the date at which the warrants are exercisable and the
preferred
shares are convertible. Please tell us how your accounting
complies
with this expectation.
Note 16 - Segments, page F-30
24. Based on your disclosures, it appears that you have identified
four SFAS 131 reportable segments, based on differences in the
geographic areas of your warehouse stores. If our understanding
is
incorrect, please advise. Otherwise, please revise your statement
that you operate your company "as a single reportable segment
based
on geographic area" to clarify accordingly. Refer to paragraph
26.a.
of SFAS 131. Please also revise to disclose depreciation and
amortization expense by reportable segment (refer to paragraph
27.e.
of SFAS 131) and to provide the applicable disclosures required by
paragraph 28 of SFAS 131.
25. Based on your disclosures, we understand that your warehouse
sales consist of several categories of products and services, such
as
perishable foods, basic consumer products, food services, bakery
services, tire center services, photo center services, pharmacy
services, and optical services. Please revise your filing to
provide
the revenue disclosures by product and service group required by
paragraph 37 of SFAS 131. If you believe that other product and
service categories are more appropriate, please advise.
As appropriate, please amend your registration statement in
response to these comments. You may wish to provide us with
marked
copies of the amendment to expedite our review. Please furnish a
cover letter with your amendment that keys your responses to our
comments and provides any requested supplemental information.
Detailed cover letters greatly facilitate our review. Please
understand that we may have additional comments after reviewing
your
amendment and responses to our comments.
We urge all persons who are responsible for the accuracy and
adequacy of the disclosure in the filings reviewed by the staff to
be
certain that they have provided all information investors require
for
an informed decision. Since the company and its management are in
possession of all facts relating to a company`s disclosure, they
are
responsible for the accuracy and adequacy of the disclosures they
have made.
Notwithstanding our comments, in the event the company
requests
acceleration of the effective date of the pending registration
statement, it should furnish a letter, at the time of such
request,
acknowledging that:
* should the Commission or the staff, acting pursuant to delegated
authority, declare the filing effective, it does not foreclose the
Commission from taking any action with respect to the filing;
* the action of the Commission or the staff, acting pursuant to
delegated authority, in declaring the filing effective, does not
relieve the company from its full responsibility for the adequacy
and
accuracy of the disclosure in the filing; and
* the company may not assert staff comments and the declaration of
effectiveness as a defense in any proceeding initiated by the
Commission or any person under the federal securities laws of the
United States.
In addition, please be advised that the Division of
Enforcement
has access to all information you provide to the staff of the
Division of Corporation Finance in connection with our review of
your
filing or in response to our comments on your filing.
We will consider a written request for acceleration of the
effective date of the registration statement as a confirmation of
the
fact that those requesting acceleration are aware of their
respective
responsibilities under the Securities Act of 1933 and the
Securities
Exchange Act of 1934 as they relate to the proposed public
offering
of the securities specified in the above registration statement.
We
will act on the request and, pursuant to delegated authority,
grant
acceleration of the effective date.
We direct your attention to Rules 460 and 461 regarding
requesting acceleration of a registration statement. Please allow
adequate time after the filing of any amendment for further review
before submitting a request for acceleration. Please provide this
request at least two business days in advance of the requested
effective date.
If you have any questions regarding these comments, please
direct them to Staff Accountant Andrew Blume at (202) 824-5455.
In
his absence, direct your questions to Robyn Manuel at (202) 942-
7786
or George F. Ohsiek, Jr. at (202) 942-2905. Any other questions
regarding disclosure issues may be directed to me at (202) 942-
1900.
Sincerely,
H. Christopher Owings
Assistant Director