form10q.htm

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
  
FORM 10-Q
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended May 31, 2009
 
OR
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                to              
 
COMMISSION FILE NUMBER 0-22793
  
PriceSmart, Inc.
(Exact name of registrant as specified in its charter)
 
Delaware
33-0628530
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
9740 Scranton Road, San Diego, CA 92121
(Address of principal executive offices)
 
(858) 404-8800
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days.
 
Yes   þ
No   ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
Yes   þ
No   ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer   ¨      
  Accelerated filer   þ
Non-accelerated filer   ¨
Smaller Reporting Company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes   ¨
No   þ

 The registrant had 29,650,112 shares of its common stock, par value $0.0001 per share, outstanding at July 6, 2009.


PRICESMART, INC.
 
INDEX TO FORM 10-Q
 
     
   
Page
 
     
        1
     
 
        2
     
 
        3
     
 
        4
     
 
        5
     
 
       7
     
       27
     
       38
     
       39
   
 
     
       40
     
       40
     
       40
     
       40
     
       40
     
       40
     
       41
 


i



PART I—FINANCIAL INFORMATION
 
ITEM 1.                      FINANCIAL STATEMENTS

PriceSmart, Inc.’s (“PriceSmart” or the “Company”) unaudited consolidated balance sheet as of May 31, 2009, the consolidated balance sheet as of August 31, 2008, the unaudited consolidated statements of income for the three and nine months ended May 31, 2009 and May 31, 2008, the unaudited consolidated statements of stockholders' equity for the nine months ended May 31, 2009 and May 31, 2008, and the unaudited consolidated statements of cash flows for the nine months ended May 31, 2009 and May 31, 2008, are included elsewhere herein. Also included herein are the unaudited notes to the unaudited consolidated financial statements.
 

1

PRICESMART, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED—AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
 
   
May 31,
 2009
    
August 31,
2008
  
ASSETS
            
Current Assets:
            
Cash and cash equivalents
  
$
39,035
    
$
48,121
  
Short-term restricted cash
    
10
      
536
  
Receivables, net of allowance for doubtful accounts of $13 and $11 in May 2009 and August 2008, respectively
    
4,292
      
2,455
  
Merchandise inventories
    
112,990
      
113,894
  
Deferred tax asset – current
    
2,534
      
2,179
  
Prepaid expenses and other current assets
    
18,572
      
16,669
  
Notes receivable – short-term
    
—
      
2,104
  
Assets of discontinued operations
    
1,157
      
1,247
  
Total current assets
    
178,590
      
187,205
  
Long-term restricted cash
    
590
      
673
  
Property and equipment, net
    
225,423
      
199,576
  
Goodwill
    
37,741
      
39,248
  
Deferred tax assets – long-term
    
20,102
      
21,198
  
Other assets
    
3,796
      
3,512
  
Investment in unconsolidated affiliates
    
7,607
      
—
  
Total Assets
  
$
473,849
    
$
451,412
  
LIABILITIES AND STOCKHOLDERS’ EQUITY
                
Current Liabilities:
                
Short-term borrowings
    
5,795
      
3,473
  
Accounts payable
    
92,010
      
96,120
  
Accrued salaries and benefits
    
8,444
      
8,271
  
Deferred membership income
    
8,484
      
7,764
  
Income taxes payable
    
6,225
      
3,695
  
Common stock subject to put agreement
    
—
      
161
  
Other accrued expenses
    
11,409
      
11,877
  
Dividend payable
    
7,411
      
4,744
  
Long-term debt, current portion
    
3,608
      
2,737
  
Deferred tax liability – current    
 198
      
 486
  
Liabilities of discontinued operations
    
291
      
277
  
Total current liabilities
    
143,875
      
139,605
  
Deferred tax liability – long-term
    
1,360
      
2,339
  
Long-term portion of deferred rent
    
2,832
      
2,412
  
Accrued closure costs
    
3,558
      
3,489
  
Long-term income taxes payable, net of current portion
    
3,403
      
5,553
  
Long-term debt, net of current portion
    
28,919
      
23,028
  
Total liabilities
    
183,947
      
176,426
  
Minority interest
    
700
      
480
  
Stockholders’ Equity:
                
Common stock, $0.0001 par value, 45,000,000 shares authorized; 30,314,588 and 30,195,788 shares issued, respectively, and 29,659,517 and 29,615,226 shares outstanding (net of treasury shares), respectively
    
3
      
3
  
Additional paid-in capital
    
376,043
      
373,192
  
Tax benefit from stock-based compensation
    
4,388
      
4,563
  
Accumulated other comprehensive loss
    
(16,870
)
    
(12,897
)
Accumulated deficit
    
(60,244
)
    
(77,510
)
Less: treasury stock at cost; 655,071 shares as of May 31, 2009 and 580,562 shares as of August 31, 2008
    
(14,118
)
    
(12,845
)
Total stockholders’ equity
    
289,202
      
274,506
  
Total Liabilities and Stockholders’ Equity
  
$
473,849
    
$
451,412
  
 
See accompanying notes.  

2
PRICESMART, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED—AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) 
 
                         
   
          Three Months Ended
            May 31,
    
       Nine Months Ended
           May 31,
  
   
             2009
    
            2008
    
            2009
    
             2008
  
Revenues:
                        
Net warehouse club sales
  
$
299,571
    
$
277,979
    
$
926,329
    
$
811,382
  
Export
    
1,038
      
385
      
2,779
      
1,092
  
Membership income
    
4,518
      
4,094
      
13,268
      
11,811
  
Other income
    
1,417
      
1,207
      
4,169
      
3,628
  
Total revenues
    
306,544
      
283,665
      
946,545
      
827,913
  
Operating expenses:
                                
Cost of goods sold:
                                
Net warehouse club
    
255,854
      
236,074
      
790,273
      
689,918
  
Export
    
968
      
364
      
2,629
      
1,034
  
Selling, general and administrative:
                                
Warehouse club operations
    
28,197
      
26,495
      
84,025
      
75,749
  
General and administrative
    
7,989
      
7,455
      
23,341
      
22,625
  
Preopening expenses
    
344
      
9
      
443
      
996
  
Asset impairment and closure costs (income)
    
(48
) 
    
670
      
216
      
703
  
Provision for settlement of litigation, including changes in fair market value of put agreement
    
—
      
(2,042
 
)
    
—
      
1,344
  
Total operating expenses
    
293,304
      
269,025
      
900,927
      
792,369
  
Operating income
    
13,240
      
14,640
      
45,618
      
35,544
  
Other income (expense):
                                
Interest income
    
76
      
254
      
317
      
1,013
  
Interest expense
    
(685
)
    
(437
)
    
(1,875
)
    
(950
)
Other income (expense), net
    
26
      
(131
)
    
(36
)
    
(209
)
Total other income (expense)
    
(583
)
    
(314
)
    
(1,594
)
    
(146
)
Income from continuing operations before provision for income taxes, loss of unconsolidated affiliates and minority interest
    
12,657
      
14,326
      
44,024
      
35,398
  
Provision for income taxes
    
(3,960
)
    
(3,675
)
    
(11,697
)
    
(8,286
)
Loss of unconsolidated affiliates
    
(8
)
    
—
      
(20
)
    
—
  
Minority interest
    
(61
)
    
(76
)
    
(211
)
    
(368
)
Income from continuing operations
    
8,628
      
10,575
      
32,096
      
26,744
  
Income (loss) from discontinued operations, net of tax
    
55
      
26
      
(27
)
    
71
  
Net income
  
$
8,683
    
$
10,601
    
$
32,069
    
$
26,815
  
Basic income per share:
                                
Continuing operations
  
$
0.30
    
$
0.37
    
$
1.11
    
$
0.93
  
Discontinued operations, net of tax
  
$
—
    
$
—
    
$
—
    
$
—
  
Net income
  
$
0.30
    
$
0.37
    
$
1.11
    
$
0.93
  
Diluted income per share:
                                
Continuing operations
  
$
0.30
    
$
0.36
    
$
1.10
    
$
0.91
  
Discontinued operations, net of tax
  
$
—
    
$
—
    
$
—
    
$
—
  
Net income
  
$
0.30
    
$
0.36
    
$
1.10
    
$
0.91
  
Shares used in per share computations:
                                
Basic
    
29,010
      
28,914
      
28,929
      
28,848
  
Diluted
    
29,202
      
29,224
      
29,164
      
29,316
  
Dividends per share
  
$
—
    
$
—
    
$
0.50
    
$
0.32
  

See accompanying notes.

3

PRICESMART, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(UNAUDITED—AMOUNTS IN THOUSANDS)
  
             
Tax Benefit From Stock-
  
Accumulated Other
              
Total
         
Additional
  
based
  
Compre-
  
Accum-
          
Stock-
 
Common Stock
  
Paid-In
  
Compen-
  
hesive
  
ulated
  
Treasury Stock
  
holder’s
 
Shares
  
Amount
  
Capital
  
sation
  
Loss
  
Deficit
  
Shares
  
Amount
  
Equity
Balance at August 31, 2007
  29,815
  
$          3
  
$        369,848
  
$           3,970
  
$              (12,343)
  
$   (106,087)
  
             476
  
$ (10,075)
  
$ 245,316
Purchase of treasury stock
—
  
—
  
—
  
—
  
—
  
—
  
45
  
(1,405)
  
(1,405)
Issuance of restricted stock awards
350
  
—
  
—
  
—
  
—
  
—
  
—
  
—
  
—
Forfeiture of restricted stock awards
(11)
  
—
  
—
  
—
  
—
  
—
  
—
  
—
  
—
Exercise of stock options
62
  
—
  
921
  
—
  
—
  
—
  
—
  
—
  
921
Stock-based compensation
—
  
—
  
1,774
  
762
  
—
  
—
  
—
  
—
  
2,536
Common stock subject to put agreement
—
  
—
  
(1,693)
  
—
  
—
  
—
  
—
  
—
  
(1,693)
Dividend payable to stockholders
—
  
—
  
—
  
—
  
—
  
(4,751)
  
—
  
—
  
(4,751)
Dividend paid to stockholders
                    
(4,785)
          
(4,785)
Change in fair value of interest rate swaps
—
  
—
  
—
  
—
  
32
  
—
  
—
  
—
  
32
Net income
—
  
—
  
—
  
—
  
—
  
26,815
  
—
  
—
  
26,815
Translation adjustment
—
  
—
  
—
  
—
  
(107)
  
—
  
—
  
—
  
(107)
Comprehensive income
— 
  
—
  
—
  
— 
  
— 
  
— 
  
— 
  
— 
  
26,740
Balance at May 31, 2008
30,216
  
$ 3
  
$ 370,850
  
$ 4,732
  
$  (12,418)
  
$   (88,808)
  
521
  
$  (11,480)
  
262,879
                                   
                                   
Balance at August 31, 2008
30,196
  
$ 3
  
$   373,192
  
$ 4,563
  
 $ (12,897)
  
$   (77,510)
  
580
  
$  (12,845)
  
$ 274,506
Purchase of treasury stock
—
  
—
  
—
  
—
  
—
  
—
  
68
  
(1,112)
  
(1,112)
Issuance of restricted stock awards
104
  
—
  
—
  
—
  
—
  
—
  
—
  
—
  
—
Forfeiture of restricted stock awards
(18)
  
—
  
—
  
—
  
—
  
—
  
—
  
—
  
—
Exercise of stock options
33
  
—
  
210
  
—
  
—
  
—
  
—
  
—
  
210
Stock-based compensation
—
  
—
  
2,480
  
(175)
  
—
  
—
  
—
  
—
  
2,305
Common stock subject to put agreement
—
  
—
  
161
  
—
  
—
  
—
  
—
  
—
  
161
Purchase of treasury stock for PSC settlement
—
  
—
  
—
  
—
  
—
  
—
  
7
  
(161)
  
(161)
Dividend payable to stockholders
—
  
—
  
—
  
—
  
—
  
(7,411)
  
—
  
—
  
(7,411)
Dividend paid to stockholders
—
  
—
  
—
  
—
  
—
  
(7,392)
  
—
  
—
  
(7,392)
Change in fair value of interest rate swaps
—
  
—
  
—
  
—
  
(621)
  
—
  
—
  
—
  
(621)
Net income
—
  
—
  
—
  
—
  
—
  
32,069
  
—
  
—
  
32,069
Translation adjustment
—
  
—
  
—
  
—
  
(3,352)
  
—
  
—
  
—
  
(3,352)
Comprehensive income
                                
28,096
Balance at May 31, 2009
30,315
  
$ 3
  
$ 376,043
  
$   4,388
  
$ (16,870)
  
$  (60,244)
  
655
  
$  (14,118)
  
$ 289,202

See accompanying notes.
 
4
PRICESMART, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED—AMOUNTS IN THOUSANDS)

   
Nine Months Ended
May 31,
  
   
2009
    
2008
  
Operating Activities:
            
Income from continuing operations
  
$
32,096
    
$
26,744
  
Adjustments to reconcile income from continuing operations to net cash provided by operating activities:
                
Depreciation and amortization
    
9,700
      
8,365
  
Allowance for doubtful accounts
    
2
      
10
  
Asset impairment and closure costs
    
74
      
525
  
Loss on sale of property and equipment
    
13
      
197
  
Release from (deposit to) escrow account due to settlement of litigation
    
256
      
(100
)
Provision for settlement of litigation
    
—
      
648
  
Deferred income taxes
    
(701
)
    
1,613
  
Minority interest
    
211
      
368
  
Loss of unconsolidated affiliates
    
20
      
—
  
Excess tax deficiency (benefit) on stock-based compensation
    
175
 
    
(762
)
Stock-based compensation
    
2,480
      
1,774
  
Change in operating assets and liabilities:
                
Change in accounts receivable, prepaid expenses, other current assets, accrued salaries and benefits, deferred membership and other accruals
    
(3,485
)
    
(9,344
)
Merchandise inventories
    
904
      
(16,183
)
Accounts payable
    
(4,110
)
    
9,663
  
Net cash provided by continuing operating activities
    
37,635
      
23,518
  
Net cash provided by (used in) discontinued operating activities
    
57
      
(139
)
Net cash provided by operating activities
    
37,692
      
23,379
  
Investing Activities:
                
Additions to property and equipment
    
(35,595
)
    
(20,453
)
Deposits to escrow account for land acquisitions (including settlement of litigation)
    
—
      
(656
)
Proceeds from disposal of property and equipment
    
91
      
2,897
  
Collection of note receivable from sale of closed warehouse club in the Dominican Republic
    
2,104
      
—
  
Proceeds from sale of unconsolidated affiliate
    
—
      
2,000
  
Acquisition of business, net of cash acquired
    
(2,856
)
    
(11,913
)
Purchase of Nicaragua minority interest
    
—
      
(10,200
)
Purchase of interest in Costa Rica joint venture
    
(2,635
)
    
—
  
Capital contribution to Costa Rica joint venture
    
(377
)
    
—
  
Purchase of interest in Panama joint venture
    
(4,616
)
    
—
  
Net cash used in continuing investing activities
    
(43,884
)
    
(38,325
)
Net cash used in discontinued investing activities
    
(9
)
    
(8
)
Net cash flows used in investing activities
    
(43,893
)
    
(38,333
)
Financing Activities:
                
Proceeds from bank borrowings
    
28,982
      
15,813
  
Repayment of bank borrowings
    
(19,898
)
    
(5,608
)
Cash dividend payments
    
(12,136
)
    
(9,463
)
Release of restricted cash
    
—
      
8,005
  
Excess tax (deficiency) benefit on stock-based compensation
    
(175
)
    
762
  
Purchase of treasury stock for PSC settlement
    
(161
)
    
—
  
Proceeds from exercise of stock options
    
210
      
921
  
Purchase of treasury shares
    
(1,112
)
    
(1,405
)
Net cash (used in) provided by financing activities
    
(4,290
)
    
9,025
  
Effect of exchange rate changes on cash and cash equivalents
    
1,405
      
(29
)
Net decrease in cash and cash equivalents
    
(9,086
)
    
(5,958
)
Cash and cash equivalents at beginning of period
    
48,121
      
32,065
  
Cash and cash equivalents at end of period
  
$
39,035
    
$
26,107
  

5


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

   
Nine Months Ended
May 31,
  
   
2009
    
2008
  
Supplemental disclosure of cash flow information:
            
    Cash paid during the period for:
            
        Interest, net of amounts capitalized
  
$
1,905
    
$
420
  
        Income taxes
  
$
10,138
    
$
7,487
  
        PSC Settlement expenses
   $
—
     $
6,050
  
        Acquisition of land and permanent easement related to PSC Settlement
   $ 
—
     $ 
1,125
  
Supplemental disclosure of non-cash financing activities:
                
    Dividends declared but not paid
  
$
7,411
    
$
4,751
  

 
6
 

 
PRICESMART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
May 31, 2009

NOTE 1 – COMPANY OVERVIEW AND BASIS OF PRESENTATION

PriceSmart, Inc.’s (“PriceSmart” or the “Company”) business consists primarily of international membership shopping warehouse clubs similar to, but smaller in size than, warehouse clubs in the United States. As of May 31, 2009, the Company had 26 consolidated warehouse clubs in operation in 11 countries and one U.S. territory (five in Costa Rica, four in Panama, three each in Guatemala and Trinidad, two each in Dominican Republic, El Salvador, and Honduras and one each in Aruba, Barbados, Jamaica, Nicaragua and the United States Virgin Islands), of which the Company owns substantially all of the corresponding legal entities (see Note 2-Summary of Significant Accounting Policies). There was one warehouse club in operation in Saipan, Micronesia licensed to and operated by local business people as of May 31, 2009. The Company primarily operates in three segments based on geographic area.

Basis of Presentation - The unaudited consolidated interim financial statements have been prepared in accordance with the instructions to Form 10-Q for interim financial reporting pursuant to the rules and regulations of the U.S. Securities and Exchange Commission ("SEC"). These unaudited consolidated interim financial statements should be read in conjunction with the consolidated financial statements and notes included in the Company’s annual report filed on Form 10-K for the fiscal year ended August 31, 2008. The unaudited consolidated interim financial statements include the accounts of PriceSmart, Inc., a Delaware corporation, and its subsidiaries. Intercompany transactions between the Company and its subsidiaries have been eliminated in consolidation.
 
       In connection with the Company’s accounting for income taxes pursuant to Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes," ("SFAS 109") the Company made certain reclassifications between deferred tax assets and deferred tax liabilities and separately stated current deferred tax assets and liabilities on the consolidated balance sheet as of August 31, 2008. These reclassifications resulted in a $730,000 decrease to deferred tax assets-long-term, a $963,000 increase to deferred tax liabilities-long-term, and a $1.5 million increase to total assets and total liabilities.  The purpose of these balance sheet reclassifications is to allow comparability of our consolidated balance sheets for the periods being presented as a result of a review of the current portion of deferred tax.

 
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation - The unaudited consolidated interim 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. The unaudited consolidated interim financial statements have been prepared by the Company without audit, pursuant to the rules and regulations of the SEC, and reflect all adjustments (consisting of normal recurring adjustments) that are, in the opinion of management, necessary to fairly present the financial position, results of operations, and cash flows for the interim periods presented. Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") have been condensed or omitted pursuant to such SEC rules and regulations. Management believes that the disclosures made are adequate to make the information presented not misleading. The results for interim periods are not necessarily indicative of the results for the full year.
 
The table below indicates the Company’s percentage ownership of and basis of presentation for each subsidiary as of May 31, 2009:   

 
Subsidiary
  
Countries
  
Ownership
  
Basis of Presentation
 
PriceSmart, Aruba
  
Aruba
  
100.0%
  
Consolidated
 
PriceSmart, Barbados
  
Barbados
  
100.0%
  
Consolidated
 
PSMT Caribe, Inc.:
            
 
     Costa Rica
  
Costa Rica
  
100.0%
  
Consolidated
 
     Dominican Republic
  
Dominican Republic
  
100.0%
  
Consolidated
 
     El Salvador
  
El Salvador
  
100.0%
  
Consolidated
 
     Honduras
  
Honduras
  
100.0%
  
Consolidated
 
PriceSmart, Guam
  
Guam
  
100.0%
  
Consolidated (1)
 
PriceSmart, Guatemala
  
Guatemala
  
100.0%
  
Consolidated
 
PriceSmart, Jamaica
  
Jamaica
  
100.0%
  
Consolidated
 
PriceSmart, Nicaragua
  
Nicaragua
  
100.0%
  
Consolidated
 
PriceSmart, Panama
  
Panama
  
100.0%
  
Consolidated
 
PriceSmart, Trinidad
  
Trinidad
  
  95.0%
  
Consolidated
 
PriceSmart, U.S. Virgin Islands
  
U.S. Virgin Islands
  
100.0%
  
Consolidated
 
GolfPark Plaza, S.A.
  
Panama
  
  50.0%
  
Equity (2)
 
Price Plaza Alajuela PPA, S.A.
  
Costa Rica
  
  50.0%
  
Equity (2)
 
Newco 2
  
Costa Rica
  
  50.0%
  
Equity (2)
 
(1)
 Entity is treated as discontinued operations in the consolidated financial statements.
(2)
 Purchase of joint venture interest during the first quarter of fiscal year 2009.

 
7
PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
 
Use of Estimates – The preparation of financial statements in conformity with U.S. Generally Accepted Accounting Principles ("U.S. GAAP"), as defined in SFAS No. 162, "The Hierarchy of Generally Accepted Accounting Principles" ("SFAS 162"), 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 restricted cash of approximately $10,000 consists of an export bond for the Mexico Distribution Center location.  Long-term restricted cash represents deposits with federal regulatory agencies in Costa Rica and Panama for approximately $590,000.
 
Merchandise Inventories – Merchandise inventories, which include merchandise for resale, are valued at the lower of cost (average cost) or market. The Company provides for estimated inventory losses and obsolescence between physical inventory counts on the basis of a percentage of sales. The provision is adjusted periodically to reflect the trend of actual physical inventory count results, with physical inventories occurring primarily in the second and fourth fiscal quarters. In addition, the Company may be required to take markdowns below the carrying cost of certain inventory to expedite the sale of such merchandise.
 
Allowance for Doubtful Accounts – The Company generally does not extend credit to its members, but may do so for specific wholesale, government, other large volume members and for subtenants. The Company maintains an allowance for doubtful accounts based on assessments as to the probability of collection of specific customer accounts, the aging of accounts receivable, and general economic conditions.  

Property and Equipment – Property and equipment are stated at 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 and an economic penalty would be suffered if the election was not exercised. The sale or purchase of property and equipment is recognized upon legal transfer of property. For property and equipment sales, if any long-term notes are carried by the Company as part of the sales terms, the sale is reflected at the net present value of current and future cash streams.
 
Lease Accounting – Certain of the Company's operating leases where the Company is the lessee (see Revenue Recognition policy for lessor accounting) provide for minimum annual payments that increase over the life of the lease. The aggregate minimum annual payments are expensed on the straight-line basis beginning when the Company takes possession of the property and extending over the term of the related lease including renewal options where the exercise of the option is reasonably assured and an economic penalty would be suffered if the election was not exercised. The amount by which straight-line rent exceeds actual lease payment requirements in the early years of the leases is accrued as deferred rent and reduced in later years when the actual cash payment requirements exceed the straight-line expense. The Company also accounts in its straight-line computation for the effect of any “rental holidays.” In addition to the minimum annual payments, in certain locations, the Company pays additional contingent rent based on a contractually stipulated percentage of sales.
 
Fair Value Measurements – In accordance with SFAS No. 157, “Fair Value Measurements,” as amended by Financial Accounting Standards Staff Position (FSP) No. 157-1, "Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements that Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13," FSP 157-2, "Effective Date of FASB Statement No. 157," FSP 157-3, "Determining the Fair Value of Financial Assets when the Market for That Asset Is Not Active" and FSP FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (together referred to as SFAS 157), the Company measures the fair value for all financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis or on a nonrecurring basis during the reporting period. The Company measures fair value for interest rate swaps and for put contracts. Although the Company adopted the provisions of SFAS 157 for nonfinancial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis, no such assets or liabilities existed at the balance sheet dates. The Company, in accordance with FSP 157-2, delayed implementation of SFAS 157 for all nonfinancial assets and liabilities recognized or disclosed at fair value in the financial statements on a nonrecurring basis. Nonfinancial nonrecurring assets and liabilities included on the Company’s balance sheets include items such as goodwill and long lived assets that are measured at fair value after taking into account impairment charges, if any are deemed necessary.  The Company measures fair value of assets when triggering events occur in accordance with the provisions of SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” and SFAS 142, "Goodwill and Other Intangible Assets",  for business units and for goodwill impairment. The Company will adopt FSP FAS 157-4 in the fourth quarter of fiscal year 2009.

 
8
PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
 
SFAS 157 defines the fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. SFAS 157 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs when measuring fair value. The standard describes three levels of inputs:

Level 1: Quoted market prices in active markets for identical assets or liabilities, primarily consisting of financial instruments, such as money market mutual funds, whose value is based on quoted market prices.  The Company did not revalue any assets or liabilities utilizing Level 1 inputs at the balance sheet dates. The amount invested in money market mutual funds as of May 31, 2009 and August 31, 2008 was $4.0 million and $22.5 million, respectively.

Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data, normally including assets and liabilities with observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. The Company's Level 2 assets and liabilities at the balance sheet dates primarily included cash flow hedges (interest rate swaps) and pricing of assets in connection with the acquisition of a business.  Valuation methodologies are based on “consensus pricing” using market prices from a variety of industry-standard data providers or pricing that considers various assumptions, including time value, yield curve, volatility factors, credit spreads, default rates, loss severity, current market and contractual prices for the underlying instruments or debt, broker and dealer quotes, as well as other relevant economic measures. All are observable in the market or can be derived principally from or corroborated by observable market data for which the Company typically receives independent external valuation information. The fair value of interest rate swaps as of May 31, 2009 and August 31, 2008 was ($629,000) and ($8,000), respectively.
 
Level 3: Unobservable inputs that are not corroborated by market data. This is normally composed of assets or liabilities where their fair value inputs are unobservable or not available, including situations involving limited market activity, where determination of fair value requires significant judgment or estimation.  The Company did not revalue any assets or liabilities utilizing Level 3 inputs at the balance sheet dates.

Valuation techniques utilized in the fair value measurement of assets and liabilities presented on the Company’s balance sheets were not changed from previous practice during the reporting period.  The Company discloses the valuation techniques and any change in method of such within the body of each footnote on an annual basis in accordance with SFAS 157.

Goodwill – Goodwill resulting from certain business combinations totaled $37.7 million at May 31, 2009 and $39.2 million at August 31, 2008. The decrease in goodwill was due to the foreign exchange translation losses. The Company reviews previously reported goodwill at the entity reporting level for impairment on an annual basis or more frequently if circumstances dictate. No impairment of goodwill has been recorded to date.

Derivative Instruments and Hedging Activities – Derivative instruments and hedging activities are accounted for under SFAS 133, “Accounting for Derivative Instruments and Hedging Activities.” Interest rate swaps are accounted for as cash flow hedges. Under cash flow hedging, the effective portion of the fair value of the derivative, calculated as the net present value of the future cash flows, is deferred on the consolidated balance sheet in accumulated other comprehensive loss. If any portion of an interest rate swap were determined to be an ineffective hedge, the gains or losses from changes in market value would be recorded directly in the consolidated statements of income. Amounts recorded in accumulated other comprehensive loss are released to earnings in the same period that the hedged transaction impacts consolidated earnings. (See Note 12—Interest Rate Swaps). 

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 sheets.  Operating leases, where the Company is the lessor, with lease payments that have fixed and determinable rent increases are recognized as revenue on a straight-line basis over the lease term. The Company also accounts in its straight-line computation for the effect of any "rental holidays." Contingent rental revenue is recognized as the contingent rent becomes due per the individual lease agreements.
  
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, whichever is earlier. On a quarterly basis, the Company calculates the amount of rebates recorded in cost of goods sold that relates to inventory on hand and this amount is 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.
 
9
PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

Closure Costs – The Company records the costs of closing warehouse clubs as follows: severance costs are accrued in accordance with SFAS 146, “Accounting for Costs Associated with Exit or Disposal Activity;” lease obligations are accrued at the cease use date by calculating the net present value of the minimum lease payments net of the fair market value of rental income that is expected to be received for these properties from third parties; gain or loss on the sale of property, buildings and equipment is recognized based on the net present value of cash or future cash received as compensation for such upon consummation of the sale; all other costs are expensed as incurred. In fiscal year 2003, the Company closed two warehouse clubs, one each in the Dominican Republic and Guatemala. The closure costs recorded in fiscal year 2009 relate to these warehouse clubs, as the Company has subleased the property and building for the closed Guatemala warehouse club and continues to record expenses related to the location. During fiscal year 2007, the Company’s original San Pedro Sula, Honduras 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 SFAS 5, “Accounting for Contingencies,” the Company accounts and reports for loss contingencies if (a) information available prior to issuance of the consolidated financial statements indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the consolidated financial statements and (b) the amount of loss can be reasonably estimated.  

Common Stock Put Agreement – The Company recorded in fiscal year 2008 a liability for a common stock put agreement (see Note 14—PSC Settlement). The Company utilized the Black-Scholes method to determine the fair value of the put agreement, taking the fair market value of the common stock, time to expiration of the put agreement, volatility of the common stock and the risk-free interest rate over the term of the put agreement as part of the fair market valuation. The Company recorded in fiscal year 2008 a year-to-date expense for the fair value of the put agreement determined as of June 11, 2008 of fiscal year 2008. On September 9, 2008 (fiscal year 2009), the Company recorded the final settlement of the liability.

Foreign Currency Translation – In accordance with SFAS No. 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 the U.S. dollar. Assets and liabilities of these foreign subsidiaries are translated to U.S. dollars at the exchange rate on the balance sheet dates 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 statements of income, for the first nine months of the fiscal years 2009 and 2008 were approximately ($1.3) million and $1.6 million, respectively.

Stock-Based Compensation – As of May 31, 2009, the Company had four stock-based employee compensation plans which it accounts for applying SFAS No. 123(R) ("SFAS 123(R)"), “Share-Based Payment.” Under SFAS 123(R), 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 applies the Black-Scholes model.  SFAS 123(R) 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. The Company records as additional paid-in capital the tax savings resulting from tax deductions in excess of expense, based on the Tax Law Ordering method. In addition, SFAS 123(R) requires the Company to reflect the tax savings resulting from tax deductions in excess of expense presented as a financing cash flow in its consolidated statement of cash flows, rather than as an operating cash flow.

The Company recognizes the tax benefits of dividends on unvested share-based payments in equity (increasing the SFAS 123(R) “APIC Pool” of excess tax benefits available to absorb tax deficiencies) and reclassifies 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) as required by Emerging Issues Task Force (“EITF”) EITF Issue No. 06-11 (“EITF 06-11”), “Accounting for Income Tax Benefits of Dividends on Share-Based Payment Award.”
 
      Generally Accepted Accounting Principles Hierarchy – The Company identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements by applying SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” ("SFAS 162").  Hierarchal categories include category “A”- FASB Statements of Financial Accounting Standards and Interpretations, FASB Statement 133 Implementation Issues, FASB Staff Positions, and American Institute of Certified Public Accountants ("AICPA") Accounting Research Bulletins and Accounting Principles Board Opinions that are not superseded by actions of  the FASB; category “B”- FASB Technical Bulletins and, if cleared by the FASB, AICPA Industry Audit and Accounting Guides and Statements of Position; category “C”- AICPA Accounting Standards, Executive Committee Practice Bulletins that have been cleared by the FASB, consensus positions of the FASB Emerging Issues Task Force ("EITF"), and the Topics discussed in Appendix D  of EITF Abstracts ("EITF D-Topics"), category “D”- Implementation Guides ("Q&As") published by the FASB staff, AICPA  Accounting Interpretations, AICPA Industry Audit and Accounting Guides and Statements of Position not cleared by the FASB, and practices that are widely recognized and prevalent either generally or in the industry.

10
PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
 
Income Taxes – The Company is required to file federal and state income tax returns in the United States and various other tax returns in foreign jurisdictions. The preparation of these tax returns requires the Company to interpret the applicable tax laws and regulations in effect in such jurisdictions, which could affect the amount of tax paid by the Company. The Company, in consultation with its tax advisors, bases its tax returns on interpretations that are believed to be reasonable under the circumstances. The tax returns, however, are subject to routine reviews by the various federal, state and international taxing authorities in the jurisdictions in which the Company files its returns. As part of these reviews, a taxing authority may disagree with respect to the income tax positions taken by the Company (“uncertain tax positions”) and therefore require the Company to pay additional taxes. As required under applicable accounting rules, the Company therefore accrues an amount for its estimate of additional income tax liability, including interest and penalties, which the Company could incur as a result of the ultimate or effective resolution of the uncertain tax positions. The Company reviews and updates the accrual for uncertain tax positions as more definitive information becomes available from taxing authorities or upon completion of tax audits, expiration of statute of limitations, or the occurrence of other events.

The Company accounts for uncertain income tax positions based on the provisions of FASB Interpretation 48, Accounting for Uncertainty in Income Taxes (“FIN 48”), which requires the Company to accrue for the estimated additional amount of taxes for the uncertain tax positions when the uncertain tax position does not meet the more likely than not standard for sustaining the position.

As of May 31, 2009 and August 31, 2008, the Company had $13.7 million and $15.2 million, respectively, of aggregate accruals for uncertain tax positions (“gross unrecognized tax benefits”). Of these totals, $2.0 million and $4.9 million, respectively, represent the amount of net unrecognized tax benefits that, if recognized, would favorably affect the Company’s effective income tax rate in any future period.

The Company records the aggregate accrual for uncertain tax positions as a component of current or long-term income taxes payable and the offsetting amounts as a component of the Company’s net deferred tax assets and liabilities. These liabilities are generally classified as long-term even if the underlying statute of limitation will expire in the following twelve months. The Company classifies these liabilities as current if it expects to settle them in cash in the next twelve months. The Company had classified $918,000 as current income taxes payable as of February 28, 2009.  In March 2009, the Company paid approximately $679,000 and reversed the remainder of the accrued liability in the amount of approximately $239,000.

The Company expects changes in the amount of unrecognized tax benefits in the next twelve months as the result of a lapse in various statutes of limitations. For the quarter ended May 31, 2009, the Company reduced the long-term income tax payable and recorded a reduction in the income tax expense as the result of a lapse in the underlying statute of limitations totaling $147,000. For the nine months ended May 31, 2009, the Company reduced the long-term income tax payable and recorded a reduction in the income tax expense as the result of a lapse in the underlying statute of limitations totaling $2.1 million.  The lapse of statutes of limitations in the twelve-month period ending May 31, 2010 would result in a reduction to long-term income taxes payable totaling $692,000.

The Company’s continuing practice is to recognize interest and/or penalties related to income tax matters in income tax expense in the long-term income tax payable caption on the balance sheet. As of May 31, 2009 and August 31, 2008, the Company had accrued $1.4 million and $3.4 million, respectively, for the payment of interest and penalties.

 The Company has various audits and appeals pending in foreign jurisdictions. The Company does not anticipate that any adjustments from these audits and appeals would result in a significant change to the results of operations, financial conditions or liquidity.  In February 2009, the Company received the final resolution of a pending appeal in the Dominican Republic.  In March 2009, the Company paid the assessment in the amount of approximately $679,000.
 
The Company is subject to taxation in the U.S. and various states and foreign jurisdictions. As the result of net operating loss carry forwards, the Company is subject to U.S. federal, state and local income tax examination by tax authorities for tax periods subsequent to and including fiscal year 1995. With few exceptions, the Company is no longer subject to non-U.S. income tax examination by tax authorities for tax years before fiscal year 2003. A lapse in these statutes will result in a beneficial impact on the effective tax rate.

Recent Accounting Pronouncements – In June 2009, the FASB issued SFAS No. 168 "The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles".  This Statement establishes the FASB Accounting Standards Codification, ("Codification") as the single source of authoritative GAAP to be applied by nongovernmental entities, except for the rules and interpretive releases of the SEC under authority of federal securities laws, which are sources of authoritative GAAP for SEC registrants. All guidance contained in the Codification carries an equal level of authority.  The Company is required to adopt this standard in the first quarter of fiscal year 2010.
 
11
PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
 
In May 2009, the FASB issued SFAS No. 165, “Subsequent Events” (SFAS 165), which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued.  The Company is required to adopt SFAS 165 prospectively to both interim and annual financial periods ending after June 15, 2009.  The adoption of the standard is not expected to result in a change in current practice.
 
In April 2009, three FASB Staff Positions (FSPs) were issued addressing fair value of financial instruments: FSP FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly”; FSP FAS 115-2, “Recognition and Presentation of Other Than Temporary Impairments”; and FSP FAS 107-1,”Interim Disclosure about Fair Value of Financial Instruments.” The Company will adopt these FSPs in its fourth quarter of fiscal year 2009.  The adoption of  these FSPs is not expected to have a material impact on the Company’s consolidated financial condition and results of operations.
 
 In October 2008, the Emerging Issues Task Force (“EITF”) reached a consensus on EITF Issue No. 08-06 (“EITF 08-06”), “Equity Method Investment Accounting Considerations.” The objective of this Issue is to clarify how to account for certain transactions involving equity method investments. The Company is required to adopt EITF 08-06 on a prospective basis beginning on September 1, 2009. The Company is currently evaluating the impact, if any, this issue will have on its consolidated financial statements.  However, the Company does not expect that this issue will result in a change in current practice.

 In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS 162”). This Statement identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with U.S. GAAP. This Statement is effective for financial statements issued 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, "The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles." The SEC approved the amendments in September 2008, establishing the effective date of this Statement as November 2008.  The adoption of  SFAS 162 did not have a material impact on the Company’s consolidated financial condition and results of operations.
 
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities-An Amendment of FASB Statement No. 133” (“SFAS 161”). This Statement requires enhanced disclosures about an entity’s derivative and hedging activities and thereby improves the transparency of financial reporting. This Statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application permitted and also encourages, but does not require, comparative disclosures for earlier periods at initial adoption. The Company adopted SFAS 161 beginning December 1, 2008. The adoption of SFAS 161 did not have a material impact on the Company’s consolidated financial condition and results of operations.
 
In December 2007, the FASB issued SFAS 160, “Non-controlling Interests in Consolidated Financial Statements - An Amendment of ARB No. 51” (“SFAS 160”). SFAS 160 amends Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” establishing accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. This statement is effective for fiscal years beginning on or after December 15, 2008. Early adoption is prohibited. The Company will adopt SFAS 160 beginning on September 1, 2009. The Company is currently evaluating the impact that adoption will have on future consolidations. 

      In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (“SFAS 141(R)”). SFAS 141(R) replaces SFAS No. 141, “Business Combinations,” retaining the fundamental requirements of SFAS 141 and expanding the scope to apply the same method of accounting to all transactions or events in which one entity obtains control over one or more other businesses. This statement applies prospectively to business combinations or acquisitions after the beginning of the first annual reporting period beginning on or after December 15, 2008. An entity may not apply this standard before this date. The Company will adopt SFAS 141(R) on September 1, 2009.
 
In June 2007, the 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 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 did not have a material impact on the Company’s consolidated financial condition and results of operations.

In February 2007, the FASB issued 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 adopted SFAS 159 beginning September 1, 2008.  The adoption of SFAS 159 did not have a material impact on the Company’s consolidated financial condition and results of operations.

12
 PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
 
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 unaudited consolidated interim financial statements reflect the results of operations and financial position of the Company’s activities in the Philippines and Guam as discontinued operations. As a result of the closure of the Guam operations in December 2003 until May 2005, the Company included the results of operations from Guam in the asset impairment and closure costs line of the consolidated statements of income. Since the sale of the Philippine operations in August 2005, the results of the Philippine and Guam activities have been consolidated in the discontinued operations line of the consolidated statements of income. Management views these activities as one activity managed under a shared management structure. Cash flow activities related to the Guam discontinued operations’ leased property will terminate in September 2011, which is the end date of the lease term.

The assets and liabilities of the discontinued operations are presented in the consolidated balance sheets under the captions “Assets of discontinued operations” and “Liabilities of discontinued operations.” The underlying assets and liabilities of the discontinued operations for the periods presented are as follows (in thousands):
 
   
May 31,
 2009
    
August 31,
2008
  
Cash and cash equivalents
  
$
27
    
$
284
  
Accounts receivable, net
    
424
      
116
  
Prepaid expenses and other current assets
    
40
      
7
  
Other assets, non-current
    
666
      
840
  
Assets of discontinued operations
  
$
1,157
    
$
1,247
  
Other accrued expenses
  
$
291
    
$
277
  
Liabilities of discontinued operations
  
$
291
    
$
277
  
 
The Company’s former Guam operation has a deferred tax asset of $2.6 million, primarily generated from NOLs. This deferred tax asset has a 100% valuation allowance, as the Company currently has no plans that would allow it to utilize these losses. Additionally, a significant portion of these losses are limited as to future use due to the Company’s Section 382 change of ownership in October 2004.
 
The following table sets forth the income (loss) from discontinued operations for each period presented (in thousands):
                         
   
      Three Months Ended
         May 31,
    
       Nine Months Ended
           May 31,
  
   
          2009
    
           2008
    
           2009
    
             2008
  
Net warehouse club sales
  
$
—
    
$
—
    
$
—
    
$
—
  
Pre-tax income (loss) from discontinued operations
    
55
      
26
      
(27
)
    
71
  
Income tax (provision) benefit
    
—
      
—
      
—
      
—
  
Income (loss) from discontinued operations
  
$
55
    
$
26
    
$
(27
)
  
$
71
  
 
The pre-tax income (loss) from discontinued operations for the nine months ended May 31, 2009 and May 31, 2008 of approximately ($27,000) and $71,000, respectively, is the net result of the subleasing activity in Guam.

NOTE 4 – PROPERTY AND EQUIPMENT

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

   
May 31,
 2009
    
August 31,
 2008
  
Land
  
$
74,659
    
$
63,582
  
Building and improvements
    
138,285
      
130,237
  
Fixtures and equipment
    
80,669
      
75,137
  
Construction in progress
    
10,009
      
2,466
  
      Total property and equipment, historical cost
    
303,622
      
271,422
  
Less: accumulated depreciation
    
(78,199
)
    
(71,846
)
Property and equipment, net
  
$
225,423
    
$
199,576
  
 
    Building and improvements include net capitalized interest of $1.3 million as of both May 31, 2009 and August 31, 2008.  For the nine-month period ended May 31, 2009, the Company recorded approximately $3.1 million in translation adjustments that reduced the carrying value of the total property and equipment.
 
13
 
    On September 24, 2008, PriceSmart acquired 13,162 square meters of real estate in Panama City, Panama, upon which the Company plans to construct and relocate an existing PriceSmart Warehouse Club (see Note 13-Acquisition of Business).  Typically, PriceSmart land requirements are approximately 20,000 square meters; however, the new Panama City location will be constructed on two levels, with parking at grade level and the building on the second level.  The existing PriceSmart warehouse club in Panama City, Panama (known as the Los Pueblos Club) will be relocated to this new site, and the Company will thereby continue to operate four warehouse clubs in Panama. It is currently anticipated that the new PriceSmart warehouse club will open in fiscal year 2010. In December 2008, the Company acquired approximately 31,000 square meters of land in Trinidad upon which it will construct a new two-level warehouse club and lease portions of the lot which will bring the number of warehouse clubs in that country to four. This new warehouse club is expected to be open by the end of calendar year 2009. Additionally, on September 29, 2008 PriceSmart acquired 21,576 square meters of real estate in Alajuela, Costa Rica (near San Jose), upon which the Company constructed a new PriceSmart warehouse club, which is the Company’s fifth in Costa Rica. The new PriceSmart warehouse club opened in April of fiscal year 2009. These acquisitions contributed the following property (in thousands):
 
Land Costa Rica
   $ 3,724  
Land Panama
     2,856  
Land Trinidad
     4,519  
Total land acquired
   $ 11,099  

The Company continued with the development of new warehouse club sites, the expansion of existing warehouse clubs and warehouse distribution center expansion in Central America, the Caribbean and the United States.  Construction costs within these segments for the nine-month period ended May 31, 2009 were approximately $9.9 million, $6.6 million and $356,000, respectively. In addition, the Company continued to acquire fixtures and equipment for new warehouse club sites, the expansion of existing warehouse clubs and warehouse distribution center expansion in Central America, the Caribbean and the United States.  The Company acquired fixtures and equipment for approximately $6.3 million, $2.7 million and $596,000, respectively, in these segments for the nine months ended May 31, 2009.  The Company acquired approximately $1.3 million of software and computer hardware for the first nine months of fiscal year 2009.

In October 2007 (fiscal year 2008), the Company acquired the company that had leased to it the real estate and building upon which the Barbados warehouse club is located for approximately $12.0 million. This acquisition contributed the following property and equipment (in thousands):

Land
   $ 4,965  
Building and improvements
     6,948  
Fixtures and equipment
     85  
Total property and equipment
   $ 11,998  
 
In fiscal year 2008, the Company also capitalized approximately $23.6 million in building and improvements, fixtures and equipment and construction in progress, primarily related to the new warehouse club openings in Guatemala (November 2007) and Trinidad (December 2007) and continued improvements in the Company’s other warehouse club locations.
    
    Depreciation expense for the first nine months of fiscal years 2009 and 2008 was approximately $9.7 million and $8.4 million, respectively.
 
NOTE 5 – EARNINGS PER SHARE

Basic income per share is computed based on the weighted average common shares outstanding in the period. Diluted net income per share is computed using the treasury stock method to calculate the weighted average number of common shares and, if dilutive, potential common shares outstanding during the period. Potential dilutive common shares include unvested restricted shares and the incremental common shares issuable upon the exercise of stock options and warrants, less shares from assumed proceeds. The assumed proceeds calculation includes actual proceeds to be received from the employee upon exercise, the average unrecognized compensation cost during the period and any tax benefits that will be credited upon exercise to additional paid-in capital.  The following table presents the calculation of the basic income per share and the diluted income per share (in thousands, except per share data):  
   
         Three Months Ended
             May 31,
    
      Nine Months Ended
         May 31,
  
   
2009
    
2008
    
2009
    
2008
  
Net income
  
$
8,683
    
$
10,601
    
$
32,069
    
$
26,815
  
Determination of shares:
                                
Average common shares outstanding
    
29,010
      
28,914
      
28,929
      
28,848
  
Assumed conversion of:
                                
   Stock options
    
98
      
129
      
103
      
138
  
   Restricted stock grants(1)
    
94
      
181
      
132
      
330
  
Diluted average common shares outstanding
    
29,202
      
29,224
      
29,164
      
29,316
  
                                 
Basic income per share
 
$
0.30
    
$
0.37
    
$
1.11
    
$
0.93
  
Diluted income per share
 
$
0.30
    
$
0.36
    
$
1.10
    
$
0.91
  
 
(1)
Restricted stock was issued to certain employees in the three and nine month periods ended May 31, 2009 and May 31, 2008, respectively. The dilutive effect of the restricted stock issued is 1,318 shares for the nine-month period ended May 31, 2009. The effect of restricted stock issued for the three month period ended May 31, 2009 was anti-dilutive.  The dilutive effect of the restricted stock issued is 3,706 for the nine-month period ended May 31, 2008.  No restricted stock was issued during the three month period ended May 31, 2008.

14
PRICESMART, INC.

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

On January 29, 2009, the Company’s Board of Directors declared a cash dividend in the total amount of $0.50 per share, of which $0.25 per share was paid on February 27, 2009 to stockholders of record as of the close of business on February 13, 2009 and $0.25 per share is payable on August 31, 2009 to stockholders of record as of the close of business on August 14, 2009.

On January 24, 2008, 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, 2008 to stockholders of record as of the close of business on April 15, 2008 and $0.16 per share was paid on October 31, 2008 to stockholders of record as of the close of business on October 15, 2008.

On February 7, 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 at its discretion, after its review of the Company’s financial performance and anticipated capital requirements.

 Accumulated Other Comprehensive Loss

Accumulated other comprehensive loss reported on the Company’s consolidated balance sheets consists of foreign currency translation adjustments and unrealized gains and losses on interest rate swaps.  The unfavorable translation adjustments during the nine months ended May 31, 2009 and May 31, 2008 were primarily due to weaker foreign currencies.
 
Retained Earnings Not Available for Distribution
 
As of May 31, 2009 and August 31, 2008, included in retained earnings of certain subsidiaries are legal reserves of approximately $2.0 million and $1.0 million, respectively, which cannot be distributed as dividends by the Company's subsidiaries to the Company according to statutory regulations.   
  
NOTE 7 – STOCK OPTION AND EQUITY PARTICIPATION PLANS 
 
On January 28, 2009, the stockholders of the Company approved an amendment to the 2001 equity participation plan expanding the eligibility provisions under the plan to permit the award of restricted stock units to non-employee directors and authorizing an increase to the number of shares of common stock reserved for issuance from 350,000 to 400,000. An amendment to the 2002 equity participation plan was also approved to increase the number of shares of common stock reserved for issuance from 750,000 to 1,250,000.

The following table summarizes the components of the stock-based compensation expense for the three and nine months ended May 31, 2009 and 2008 (in thousands), which are included in general and administrative expenses and warehouse expenses in the consolidated statement of income:
 
   
Three Months Ended
 May 31,
    
Nine Months Ended
May 31,
  
   
2009
    
2008
    
2009
    
2008
  
Vesting of options granted to employees and directors
   $ 10     $ 30     $ 50     $ 98  
Vesting of restricted stock grants
     737       768       2,354       1,663  
Vesting of restricted stock units
     42       13       76       13  
Stock-based compensation expense
   $ 789     $ 811     $ 2,480     $ 1,774  
 
      The following table summarizes stock options outstanding as of May 31, 2009, as well as the activity during the nine months then ended:
 
   
Shares
    
Weighted Average
Exercise Price
  
Shares subject to outstanding options at August 31, 2008
     280,130     $ 9.23  
Granted
     5,000       16.34  
Exercised
     (32,527 )     6.44  
Forfeited or expired
     (18,816 )     16.36  
Shares subject to outstanding options at May 31, 2009
     233,787     $ 9.19  

15
 PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
 
As of May 31, 2009, options to purchase 215,987 shares were exercisable and there were 871,817 shares of the Company's common stock reserved for future issuance, of which 622,030 shares are available for future grants. The following table summarizes information about stock options outstanding and options exercisable as of May 31, 2009:
 
Range of
Exercise Prices
    
Outstanding as
of May 31, 2009
    
Weighted-Average
Remaining
Contractual Life
(in years)
    
Weighted-Average
Exercise Price on  Options Outstanding
    
Options Exercisable as
of May 31, 2009
    
Weighted-Average
Exercise Price on Options Exercisable
as of May 31, 2009
  
$
6.13 – $8.90
      
197,787
      
0.80
    
$
6.29
      
196,187
    
$
6.27
  
 
8.91 – 20.00
      
14,000
      
4.07
      
16.31
      
4,200
      
16.58
  
 
20.01 – 39.00
      
22,000
      
2.35
      
30.77
      
15,600
      
33.70
  
$
6.13 – $39.00
      
233,787
      
1.14
    
$
9.19
      
215,987
    
$
8.45
  
 
The aggregate intrinsic value and weighted average remaining contractual term of options exercisable at May 31, 2009 was $2.1 million and 0.87 years, respectively.   The aggregate intrinsic value and weighted average remaining contractual term of options outstanding at May 31, 2009 was $2.1 million and 1.14 years, respectively.  The intrinsic value of a stock option is the amount by which the market value of the underlying stock exceeds the exercise price.
 
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants issued in the first nine months of fiscal years 2009 and 2008:
 
 
Nine Months Ended
 
May 31,
2009
  
May 31,
2008
Risk free interest rate
2.02%
  
3.25%
Expected life
5 years
  
5 years
Expected volatility
53.55%
  
47.74%
Expected divided yield
1.8%
  
1.2%

      In fiscal year 2006, the Company began granting restricted stock. The restricted stock grants vest over a five-year period, with the unvested portion being forfeited if the employee leaves the Company before the vesting period is completed. Restricted stock grant activity for the nine months ended May 31, 2009 and May 31, 2008 was as follows:
 
<
   
Nine Months Ended
  
   
May 31,
 2009
    
May 31,
2008
  
Grants outstanding at August 31, 2008 and August 31, 2007, respectively
     748,860       566,250