PriceSmart
Annual Report 2017

Plain-text annual report

B u s i n e s s M e m b e r Diamond Member 2017 Annual Repor t November 14, 2017 Dear PriceSmart Stockholders: For the fiscal year ending August 31, 2017, our company recorded sales of $2.9 billion, a 3.2% increase compared to the prior year of $2.8 billion. Earnings per share for fiscal 2017 were $2.98 per share compared to $2.92 per share a year earlier. We ended the year with a strong balance sheet: $162 million in cash and equivalents and a .15:1 debt to equity ratio. With the recent opening of our seventh location in Costa Rica, there are now 40 PriceSmart warehouse clubs operating in 13 countries with combined sales of $3.0 billion. Construction is proceeding on what will be our fourth location in the Dominican Republic scheduled to open in the spring of 2018. In addition, we have other locations in various stages of negotiation and due diligence. We look forward to announcing future locations as soon as all permits have been approved. We are also in various stages of improving existing PriceSmart warehouse clubs to better serve our members either by increasing the size of our buildings, adding parking, or both in Guatemala, Panama, Costa Rica and Jamaica. mm During the year we strengthened our distribution and logistics operation. In April, we acquired a 325,000 square foot cross-dock facility in Miami built to support our growth and increase productivity in the shipment of U.S. merchandise to our markets. More recently we leased a 160,000 square foot distribution center in Costa Rica with a planned move in date of spring 2018 to reduce costs as we handle an increasing level of merchandise directly shipping to our markets. In addition to receiving full containers and truckloads of vendor specific products for redistribution to PriceSmart locations in Central America, this distribution center will have a packaging department and an area for fulfilling online orders. We are evaluating the benefits of opening additional distribution centers in our larger markets as we evolve our logistics strategy. We are also beginning to identify an expanded assortment of products and services for our more than 3 million PriceSmart cardholders. We recently introduced special pricing on car rentals from Hertz and we are piloting our first two optical departments. We are also preparing to launch an updated and improved online shopping platform that will focus on both business products for our business members and other merchandise for all of our members. Our company is not only implementing a strategy to augment our traditional “brick and mortar” business with online shopping, we are addressing the required technology improvements needed in our back office. We will soon be approving a major investment as we move to a new ERP, the computer technology required to operate a business of our size and complexity. Not only do we need to address our ERP, we recognize the importance of full d utilization of technology to create back office and operational efficiencies and to take advantage of our data to better serve our members in the future. We continue to research expansion opportunities into new Latin American markets. Our hesitancy for expanding to new countries has been our concern about the availability of real estate sites to locate PriceSmart locations. We are working to identify sites that can fit our needs. Our management team, along with the entire 8,000 member team of PriceSmart employees, are doing an outstanding job dedicating their working lives to the success of PriceSmart and supporting the values we hold dear. We want to especially recognize our Chief Financial Officer, John Heffner, who has announced that he will be retiring in 2018. John has served as our CFO for 14 years, arriving at PriceSmart in 2003 when our company was living through very tough times. John’s leadership and commitment during those difficult days and ever since has contributed immensely to our company’s growth and success. We will miss John and thank him for his years of service. Along with operating our warehouse club business, we are actively involved in strengthening the social fabric in the countries where we operate PriceSmart warehouse clubs. With the financial support of Price Philanthropies, the Price family’s private foundation, we provide the entire school needs for over 100,000 children in countries where PriceSmart warehouse clubs are located. We also make annual donations to nearly 200 social service agencies. As we go forward in fiscal year 2018 and beyond, we expect to capitalize on the many opportunities to improve and grow our business by adhering to the basic warehouse club values and practices and continuing to innovate and evolve our business template. On behalf of myself, our CEO Jose Luis Laparte, and our Board of Directors, best wishes for a wonderful holiday season and a healthy and happy New Year. Sincerely, Robert E. Price PRICESMART, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND OTHER INFORMATION August 31, 2017 Selected Financial Data Management’s Discussion and Analysis of Financial Condition and Results of Operations Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets as of August 31, 2017 and 2016 Consolidated Statements of Income for each of the three years in the period ended August 31, 2017 Consolidated Statements of Comprehensive Income for each of the three years in the period ended August 31, 2017 Consolidated Statements of Stockholders' Equity for each of the three years in the period ended August 31, 2017 Consolidated Statements of Cash Flows for each of the three years in the period ended August 31, 2017 Notes to Consolidated Financial Statements Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Additional Information Directors & Officers of PriceSmart, Inc. Page 1 3 32 33 35 36 37 38 F-40 76 79 80 i PRICESMART, INC. SELECTED FINANCIAL DATA The selected consolidated financial data presented below is derived from the Company's consolidated financial statements and accompanying notes. This selected financial data should be read in conjunction with “Management's Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and accompanying notes thereto included elsewhere in this report. 2017 Years Ended August 31, 2015 (in thousands, except income per common share) 2014 2016 2013 OPERATING RESULTS DATA: Net warehouse club sales Export sales Membership income Other income Total revenues Total cost of goods sold Total selling, general and administrative Preopening expenses Loss (gain) on disposal of assets Operating income Total other income (expense) Income before provision for income taxes and income (loss) of unconsolidated affiliates Provision for income taxes Income (loss) of unconsolidated affiliates Net income INCOME PER COMMON SHARE - BASIC: Basic net income per share INCOME PER COMMON SHARE - DILUTED: Diluted net income per share Weighted average common shares - basic $ 2,910,062 34,244 47,743 4,579 2,996,628 2,519,752 338,642 44 1,961 136,229 (3,486) $ 2,820,740 33,813 45,781 4,842 2,905,176 2,449,626 316,474 1,191 1,162 136,723 (5,483) $ 2,721,132 33,279 43,673 4,519 2,802,603 2,352,839 297,656 3,737 2,005 146,366 (9,770) $ 2,444,314 31,279 38,063 3,911 2,517,567 2,113,664 262,420 3,331 1,445 136,707 (2,458) $ 2,239,266 23,059 33,820 3,667 2,299,812 1,929,428 240,924 1,525 889 127,046 (3,835) 132,743 (42,018) (1) 90,724 $ 131,240 (42,849) 332 88,723 $ 136,596 (47,566) 94 89,124 $ 134,249 (41,372) 9 92,886 $ 123,211 (38,942) (4) 84,265 2.98 $ 2.92 $ 2.95 $ 3.07 $ 2.78 2.98 30,020 $ 2.92 29,928 $ 2.95 29,848 $ 3.07 29,747 $ 2.78 29,647 $ $ $ Weighted average common shares - diluted 30,023 29,933 29,855 29,757 29,657 1 SELECTED FINANCIAL DATA- (Continued) BALANCE SHEET DATA: Cash and cash equivalents Restricted cash Total assets Long-term debt Total PriceSmart stockholders’ equity Dividends paid on common stock(1) 2017 2016 As of August 31, 2015 (in thousands) 2014 2013 $ 162,434 3,278 $ $ 1,177,514 106,297 $ 708,767 $ 21,285 $ $ 199,522 3,194 $ $ 1,096,735 88,107 $ 638,071 $ 21,274 $ $ $ $ $ $ $ 157,072 1,525 991,224 90,534 566,584 21,126 $ $ $ $ $ $ 137,098 29,366 937,338 91,439 548,265 21,144 $ $ $ $ $ $ 121,874 40,759 826,039 73,020 481,049 18,133 (1) On February 1, 2017, February 3, 2016, February 4, 2015, January 23, 2014, and November 27, 2012, the Company declared cash dividends on its common stock. 2 Management's Discussion and Analysis of Financial Condition and Results of Operations tt r This annual report on Form 10-K contains forward-looking statements concerning PriceSmart Inc.'s ("PriceSmart", the "Company" or "we") anticipated future revenues and earnings, adequacy of future cash flows, proposed warehouse club openings, the Company's performance relative to competitors and related matters. These forward-looking statements include, but are not limited to, statements containing the words “expect,” “believe,” “will,” “may,” “should,” “project,” “estimate,” “anticipated,” “scheduled,” and like expressions, and the negative thereof. These statements are subject to risks and uncertainties that could cause actual results to differ materially, including the following risks: our financial performance is dependent on international operations, which exposes us to various risks; any failure by us to manage our widely dispersed operations could adversely affect our business; we face significant competition; future sales growth depends, in part, on our ability to successfully open new warehouse clubs and grow sales in our existing locations; we might not identify in a timely manner or effectively respond to changes in consumer preferences for merchandise, which could adversely affect our relationship with members, demand for our products and market share; although we offer limited online shopping to our members in certain markets, our sales could be adversely affected if one or more major international online retailers were to enter our markets or if other competitors were t o offer a superior online experience; failure to grow our e-commerce business through the integration of physical and digital retail or otherwise, and the cost of our increasing e-commerce investments, may materially adversely affect our market position, net d risks sales and financial performance; our profitability is vulnerable to cost increases; we face difficulties in the shipment of, an inherent in the importation of, merchandise to our warehouse clubs; we are exposed to weather and other natural disaster risks that might not be adequately compensated by insurance; negative economic conditions could adversely impact our business in various respects; our failure to maintain our brand and reputation could adversely affect our results of operations; we face the risk of exposure to product liability claims, a product recall and adverse publicity; we are subject to risks associated with possible changes in our relationships with third parties with which we do business, as well as the performance of such third parties; we could be subject to additional tax liabilities or subject to reserves on the recoverability of tax receivables; we face the possibility of operational interruptions related to union work stoppages; we are subject to volatility in foreign currency exchange rates and limits on our ability to convert foreign currencies into U.S. dollars; we face compliance risks related to our international operations; we rely extensively on computer systems to process transactions, summarize results and manage our business. Failure to adequately maintain our systems and disruptions in our systems could harm our business and adversely affect our results of operations; we may experience difficulties implementing our new global enterprise resource planning system; any failure by us to maintain the security of the information that we hold relating to our company, members, employees and vendors, whether as a result of cybersecurity attacks on our information systems, failure of internal controls, employee negligence or malfeasance or otherwise, could damage our reputation with members, employees, vendors and others, could disrupt our operations, could cause us to incur substantial additional costs and to become subject to litigation and could materially adversely affect our operating results; we are subject to payment related risks; failure to attract and retain qualified employees, increases in wage and benefit costs, changes in laws and other labor issues could materially adversely affect our financial performance; changes in accounting standards and assumptions, projections, estimates and judgments by management related to complex accounting matters could significantly affect our financial condition and results of operations; a few of our stockholders own approximately 25.3% of our uu voting stock as of August 31, 2017, which may make it difficult to complete some corporate transactions without their support and may impede a change in control. The risks described above as well as the other risks detailed in the Company’s U.S. Securities and Exchange Commission (“SEC”) reports, including the Company’s Annual Report on Form 10-K filed for the fiscal year ended August 31, 2017 filed on October 26, 2017, pursuant to the Securities Exchange Act of 1934, see “Part I - Item 1A - Risk Factors,” could materially and adversely affect our business, financial condition and results of operations. These risks are not the only risks that the Company faces. The Company could also be affected by additional factors that apply to all companies operati ng ff globally and in the U.S., as well as other risks that are not presently known to the Company or that the Company currently considers to be immaterial. 3 Our business consists primarily of operating international membership shopping warehouse clubs similar to, but smaller in size than, warehouse clubs in the United States. We operate in 13 countries/territories that are located in Latin America and the Caribbean. Our ownership in all operating subsidiaries as of August 31, 2017 is 100%, and they are presented on a consolidated basis. The number of warehouse clubs in operation as of August 31, 2017 for each country or territory are as follows: a Country/Territory Colombia Costa Rica Panama Trinidad Dominican Republic Guatemala Honduras El Salvador Nicaragua Aruba Barbados U.S. Virgin Islands Jamaica Totals Number of Number of Warehouse Clubs Warehouse Clubs in Operation as of in Operation as of August 31, 2017 August 31, 2016 6 6 5 4 3 3 3 2 2 1 1 1 1 38 7 6 5 4 3 3 3 2 2 1 1 1 1 39 Actual and Anticipated warehouse club openings in fiscal year 2018 — 1 — — 1 — — — — — — — — 2 We constructed and opened a new warehouse club in Chia, Colombia, in September 2016 (fiscal year 2017) on land we acquired in May 2015, bringing the total of warehouse clubs operating in Colombia to seven. In April 2015, we acquired land in Managua, Nicaragua. We constructed and then opened a warehouse club on this site in November 2015 of fiscal year 2016 bringing the total number of warehouse clubs operating in Nicaragua to two. On February 1, 2017, we acquired land in Santa Ana, Costa Rica upon which we opened a new warehouse club on October 5, 2017, fiscal year 2018. This new warehouse club brings the number of PriceSmart warehouse clubs operating in Costa Rica to seven. In June 2017, we acquired land in Santo Domingo, Dominican Republic. We are currently building a warehouse club on this site that we expect to open in the spring of calendar year 2018. This will bring the number of PriceSmart warehouse clubs operating in Dominican Republic to four. We continue to explore other potential sites for future warehouse clubs in Central America, the Caribbean and Colombia. Our warehouse clubs and local distribution centers are located in Latin America and the Caribbean, and our corporate headquarters, U.S. buying operations and regional distribution centers are located primarily in the United States. Our operating segments are the United States, Central America, the Caribbean and Colombia. General Market Factors Our sales and profits vary from market to market depending on general economic factors, including GDP growth; consumer spending patterns; foreign currency exchange rates; political policies and social conditions; local demographic characteristics (such as population growth); the number of years PriceSmart has operated in a particular market; and the level of retail and wholesale competition in that market. Currency fluctuations can be the largest variable affecting our overall sales and profit performance, as we experienced in fiscal year 2015 and 2016, as many of our markets are susceptible to foreign currency exchange rate volatility. During fiscal year 2017, approximately 77% of our net warehouse sales were in markets whose functional currency is other than the U.S. dollar. Of these sales, approximately 52% were comprised of sales of products we purchased in U.S. dollars. f Currency fluctuations within our Colombia market adversely affected our consolidated results of operations in prior fiscal years. Major changes in the value of the Colombian peso (“COP”) relative to the U.S. dollar negatively impacted sales and margins in that market during fiscal years 2015 and 2016. For example, in fiscal year 2016, the devaluation of the Colombian peso against the U.S. dollar resulted in decreased U.S. dollar reported warehouse club sales for that market, after translation, by approximately 26% when compared to fiscal year 2015, following an approximately 60% devaluation that occurred in fiscal year 2015. A devaluation of the COP not only reduces the value of sales and membership income that is generated in Colombia when 4 translated to U.S. dollars for our consolidated results, but also increases the local currency price of imported merchandise, whichww impacts demand for a significant portion of the Company’s merchandise offering. This, along with the fact that we are still relatively new in the Colombian market, and the sophisticated level of competition in that market, impacted overall business performance resulting in an operating loss in Colombia in fiscal years 2015 and 2016. A stabilization of the currency during fiscal year 2017 has contributed to improving business conditions in Colombia, resulting in good sales growth and a return to operating profitability in our Colombia segment. Certain of our Central American and Caribbean markets have experienced some slowing of overall economic activity during the fiscal year which may continue to impact the level of consumer spending in the coming months. In particular, Trinidad’s economy, with its dependence on oil and gas exports as a major source of income and resulting government policy to manage its foreign exchange reserves, has been experiencing overall difficult economic conditions with a corresponding impact on consumer spending. Other countries where general market conditions have provided a difficult operating environment which USVI where Hurricanes Irma and Maria had a severe impact we expect may continue into fiscal year 2018 include Barbados, and on the infrastructure of the island. r Our capture of retail and wholesale sales can vary from market to market due to competition and the availability of other shopping options for our members. In larger, more developed countries, such as Costa Rica, Panama and Colombia, customers have many alternatives available to them to satisfy their shopping needs, and therefore, our market share is less than in other smaller countries, such as Jamaica and Nicaragua, where consumers have a limited number of shopping options. Demographic characteristics within each of our markets can also affect both the overall level of sales and also future sales growth opportunities. Island countries such as Aruba, Barbados and the U.S. Virgin Islands offer us limited upside for sales growth given their overall market size. Countries with a smaller upper and middle class consumer population, such as Honduras, El Salvador, Jamaica and Nicaragua, also have a more limited potential opportunity for sales growth as compared to more developed countries with larger upper and middle class consumer populations. Political and other factors in each of our markets may have significant effects on our business. For example, when national elections are being held, the political situation can introduce uncertainty about how the leadership change may impact the economy and affect near-term consumer spending. The need for increased tax revenue in certain countries can cause changes in tax policies affecting consumer’s personal tax rates, and/or added consumption taxes, such as VAT (value-added taxes) effectively raising the prices of various products. From time to time we have experienced a lack of availability of U.S. dollars in certain markets (U.S. dollar illiquidity). This impedes our ability to convert local currencies obtained through warehouse sales into U.S. dollars to settle the U.S. dollar liabilities associated with our imported products, increasing our foreign exchange exposure to any devaluation of the local currency relative to the U.S. dollar. During fiscal year 2017 and continuing into fiscal year 2018, we experienced this situation in Trinidad (“TT”). We have been and continue to work with our banks in Trinidad to source tradable currencies (including Euros and Canadian dollars), but until the central bank in Trinidad makes more U.S. dollars available, this illiquidity condition is likely to continue. During part of the first half of fiscal year 2017 we limited shipments of merchandise to Trinidad from our distribution center in Miami to levels that generally aligned with our Trinidad subsidiary’s ability to source U.S. dollars to pay for that merchandise. This resulted in a reduced level of shipments, which negatively affected sales in the second quarter, particularly December, although by less than our initial estimate. These actions did not impact the level of merchandise we obtain locally in Trinidad. Starting in the third quarter of fiscal year 2017, we were able to improve our sourcing of tradeable currencies, which, in addition to other steps we took, allowed for a more normalized flow of imported merchandise during the third and fourth fiscal quarters. As of August 31, 2017, our Trinidad subsidiary had net U.S. dollar denominated assets of approximately $4.0 million. However, the illiquidity situation remains in the Trinidad market, and we could face similar issues in sourcing U.S. dollars during the first and second quarters of fiscal year 2018, which may require us to limit shipments from the U.S. to Trinidad in line with our ability to exchange Trinidad dollars for tradeable currencies to manage our exposure to any potential devaluation. u Business Strategy Our business strategy is to operate membership warehouse clubs in Latin America and the Caribbean. We sell a limited number of high volume products and services across a broad range of categories to business and families at the lowest possible prices. PriceSmart members pay an annual membership fee, and that fee, combined with volume purchasing and operating efficiencies throughout the supply chain, enable us to operate our business very efficiently with lower margins and prices than conventional retail stores and wholesale suppliers. ff While our traditional membership warehouse club strategy continues to work well in our markets, we recognize that technology is having an increasingly profound impact on shopping habits throughout the world. We believe our business strategy needs to be broadened to respond to changes in shopping habits so our members will have the shopping experience they desire. 5 Our longer range strategic objective is to combine the traditional membership warehouse club “brick and mortar” business with online shopping to provide the best shopping experience possible for our members. Current and Future Management Actions Generally, our operating efficiencies, earnings and cash flow improve as sales increase. Higher sales provide greater purchasing power which often translates into lower cost of merchandise from our suppliers and lower prices for our members. Higher sales, coupled with continuous efforts to improve efficiencies through our distribution network and within our warehouse clubs, also give us the opportunity to leverage our operating costs and reduce prices for our members. u We seek to grow sales by increasing transaction size and shopping frequency of our members by providing high quality, differentiated merchandise at a good value. We also grow sales by attracting new members and improving the capacity of our through physical expansions f existing warehouse clubs to serve the growing membership base and level of of the building or adding additional parking or improving the flow of merchandise to and within the warehouse club. Sales growt h w is also achieved when we add new warehouse clubs with a corresponding increase in members in those markets that can support that growth. Sales during fiscal year 2017 were positively impacted by the addition of a new warehouse club that opened in Chia, Colombia in September 2016, fiscal year 2017. Although we recognize that opening new warehouse club locations in certain existing markets can have adverse short-term implications for comparable store growth, as the new warehouse club will often attract sales from existing locations, each decision to add a location in an existing market is based on a long-term outlook. Overall, for fiscal year 2017, net warehouse sales increased 3.2% when compared to fiscal year 2016. Finally, in the future we believe that technology supported online sales will constitute a significant opportunity to grow sales. sales in those locations One of the distinguishing features of the warehouse club format is the role membership plays, both in terms of pricing and member loyalty. Membership fees are considered a component of overall gross margin and therefore allow us to reduce merchandise prices. In most of our markets, the annual membership fee is the equivalent of U.S. $35 for both business members and non-business “Diamond” members. In Colombia, the membership fee has been 65,000 (COP) (including VAT) since our initial entrance into the Colombian market. The Colombian peso (COP) was trading at approximately 2,000 COP to $1.00 US dollar at that time. More recently, the Colombian peso has been trading at approximately 3,000 COP to $1.00 US dollar so that the converted membership price in U.S. dollars decreased from approximately U.S. $30 to approximately U.S. $20. In February, we raised the membership fee in Colombia to 75,000 COP moving the converted membership price to approximately U.S. $25. In addition to the standard warehouse club membership, we have offered in Costa Rica what we call Platinum membership since 2012 for $75. A Platinum membership earns a 2% rebate on annual purchases up to a maximum $500 rebate per year. In September, fiscal year 2018, we introduced the Platinum membership in Panama and plan on adding a Platinum membership level in the Dominican Republic in the next few months. We are considering expanding Platinum membership to other PriceSmart markets and may do so during fiscal year 2018. Logistics and distribution efficiencies are an important part of what allows us to deliver high quality merchandise at low prices to our members. We acquire a significant amount of merchandise internationally, which we receive primarily at our Miami distribution centers. In January 2017, we purchased a distribution center in Medley, Miami-Dade County, Florida, into which we transferred our Miami dry distribution center activities from a leased facility during the third quarter of fiscal year 2017. This new distribution facility will increase our ability to efficiently receive, handle and distribute merchandise. We then ship the merchandise either directly to our warehouse clubs or to regional distribution centers located in some of our larger markets. Our ability to efficiently receive, handle and distribute merchandise to the point where our members put that merchandise into their shopping carts has a significant impact on our level of operating expenses and ultimately how low we can price our merchandise. We continue to explore ways to improve efficiency, reduce costs and ensure a good flow of merchandise to our warehouse clubs. As we continue to refine our logistics and distribution infrastructure, we are investing in regional distribution centers. We r ecently rr entered into a long-term lease for a 107,640 square foot distribution center in Costa Rica, with the expectation that this distribution center will improve the merchandise flow and in-stock conditions in our warehouse clubs, reduce merchandise costs and facilitat e online sales to our members in Costa Rica. u Purchasing land and constructing warehouse clubs is generally our largest ongoing capital investment. Securing land for warehouse club locations is challenging within our markets, especially in Colombia, because suitable sites at economically feasible prices are difficult to find. While our preference is to own rather than lease real estate, we have entered into real estate leases in certain cases (most recently our Bogota, Colombia site) and will likely do so in the future. Real estate ownership provides a number of advantages as compared to leasing, including lower operating expenses, flexibility to expand or otherwise enhance our buildings, long-term control over the use of the property and the residual value that the real estate may have in future years. In order to secure warehouse club locations, we occasionally have purchased more land than is actually needed for the warehouse club facility. To the extent that we acquire property in excess of what is needed for a particular warehouse club, we generally have looked to either sell or develop the excess property. Excess land at Alajuela (Costa Rica) and Brisas (Panama) is being developed by joint ventures formed by us and the sellers of the property. We are employing a similar development strategy for the excess land at the San Fernando, Trinidad and Arroyo Hondo, Dominican Republic locations where the properties are ff 6 fully owned by us. The profitable sale or development of real estate not required to operate a warehouse club is highly dependent on real estate market conditions. We are currently engaged in the selection of a new global enterprise resource planning system (ERP) and evaluating other technology-related investments with the long-term objective of offering our members a seamless multi-channel experience. f To oversee our efforts to identify and adopt new technologies that can help us better serve our members, our Board of Directors t has approved a new sub-committee within our Board, the Innovation Committee. The committee members include Board Chairman Robert Price as Chairman of the committee, our CEO Jose Luis Laparte and two other members of our Board. The Board of Directors has designated an incremental $3.0 to $5.0 million of technology-related spending for fiscal year 2018 for evaluation and selection of the ERP vendor and to fund a newly established team to direct our technology investment and preopening spending to develop a new online business that we hope to launch during the summer of 2018. Substantially all of this spending for fiscal year 2018 will be recorded as expenses on the statement of income that will impact earnings during the upcoming fiscal year as we pursue these long-term initiatives, which will likely require further investments beyond the current fiscal year. Financial highlights for the fourth quarter of fiscal year 2017 included: (cid:120) Net warehouse club sales increased 3.6% over the comparable prior year period. We ended the quarter with 39 warehouse (cid:120) clubs compared to 38 warehouse clubs at the end of the fourth quarter of fiscal year 2016. Comparable warehouse club sales (that is, sales in the warehouse clubs that have been open for greater than 13 1/2 calendar months) for the 13 weeks ended September 3, 2017 increased 1.9%. (cid:120) Membership income for the fourth quarter of fiscal year 2017 increased 5.3% to $12.2 million. (cid:120) Warehouse gross profits (net warehouse club sales less associated cost of goods sold) in the quarter increased 2.4% over the prior-year period, and warehouse gross profits as a percent of net warehouse club sales were 14.6%, a decrease of 1 basis point (0.01%) from the same period last year. (cid:120) Operating income for the fourth quarter of fiscal year 2017 was $30.8 million, a decrease of $2.0 million compared to the fourth quarter of fiscal year 2016. (cid:120) Our effective tax rate increased in the fourth quarter of fiscal year 2017 to 33.9% from 30.4% in the fourth quarter of fiscal year 2016. (cid:120) Net income for the fourth quarter of fiscal year 2017 was $19.8 million, or $0.64 per diluted share, compared to $22.3 million, or $0.74 per diluted share, in the fourth quarter of fiscal year 2016. Financial highlights for fiscal year 2017 included: (cid:120) Net warehouse club sales increased 3.2% over the comparable prior year period. We ended the year with 39 warehouse clubs compared to 38 warehouse clubs at the end of the fiscal year 2016. Comparable warehouse club sales (that is, sales in the warehouse clubs that have been open for greater than 13 1/2 calendar months) for the 52 weeks ended September 3, 2017 increased 1.5%. (cid:120) Membership income for the fiscal year 2017 increased 4.3% to $47.7 million. (cid:120) Warehouse gross profits (net warehouse club sales less associated cost of goods sold) increased 4.8% over the same prior year period and warehouse gross profits as a percent of net warehouse club sales were 14.5%, an increase of 23 basis points (0.23%) from the same period last year. f (cid:120) Operating income for fiscal year 2017 was $136.2 million, a decrease of $494,000 million compared to fiscal year 2016. Currency exchange transactions in the current year resulted in a $1.2 million gain compared to an $899,000 net loss (cid:120) from currency exchange transactions last year. The effective tax rate for fiscal year 2017 is 31.7%, as compared to the effective tax rate for fiscal year 2016 of 32.6%. (cid:120) (cid:120) Net income for fiscal year 2017 was $90.7 million, or $2.98 per diluted share, compared to $88.7 million, or $2.92 per diluted share, in the prior year. Financial highlights for fiscal year 2016 included: (cid:120) Net warehouse club sales increased 3.7% over the comparable prior year period. (cid:120) Comparable warehouse club sales (that is, sales in the warehouse clubs that have been open for greater than 13 1/2 calendar months) for the 53 weeks ended September 4, 2016 decreased 0.8%. (cid:120) Membership income for the fiscal year 2016 increased 4.8% to $45.8 million. (cid:120) Warehouse gross profits (net warehouse club sales less associated cost of goods sold) increased 0.8% over the prior year period and warehouse gross profits as a percent of net warehouse club sales were 14.3%, a decrease of 40 basis points (0.40%) from the same period last year. (cid:120) Operating income for fiscal year 2016 was $136.7 million, a decrease of $(9.6) million compared to fiscal year 2015. (cid:120) We had a $(900,000) net loss from currency exchange transactions in the current year compared to a $(4.4) million net loss from currency exchange transactions last year. 7 (cid:120) The effective tax rate for fiscal year 2016 is 32.6%, as compared to the effective tax rate for fiscal year 2015 of 34.8%. This reduction in the effective tax rate contributed approximately $0.06 per diluted share for the twelve-month period. (cid:120) Net income for fiscal year 2016 was $88.7 million, or $2.92 per diluted share, compared to $89.1 million, or $2.95 per diluted share, in the prior year. Comparison of Fiscal Year 2017 to 2016 and Fiscal Year 2016 to 2015 The following discussion and analysis compares the results of operations for each of the three fiscal years ended August 31, 2017, 2016, and 2015 and should be read in conjunction with the consolidated financial statements and the accompanying notes included elsewhere in this report. Unless otherwise noted, all tables present U.S. dollar amounts in thousands. Certain percentages presented are calculated using actual results prior to rounding. Our operations consist of four reportable segments: Central America, the Caribbean, Colombia and the United States. The Company’s reportable segments are based on management’s organization of these locations into operating segments by general geographic location, which are used by management and the Company's chief operating decision maker in setting up management lines of responsibility, providing support services, and making operational decisions and assessments of financial performance. Segment amounts are presented after converting to U.S. dollars and consolidating eliminations. From time to time, we revise the measurement of each segment's operating income, including certain corporate overhead allocations, and other measures as determined by the information regularly reviewed by our chief operating decision maker. When we do so, the previous period amounts and balances are reclassified to conform to the current period's presentation. Growth We measure our growth primarily by the amount of the period-over-period growth in our net warehouse sales, our comparable warehouse club sales (which include the impact of e-commerce sales) and our membership income. At times, we make strategic investments that are focused on the long-term growth of the Company. These investments can impact near-term results; such as an opening of a new warehouse club in a market which can reduce reported comparable warehouse sales due to the cannibalization of sales from existing warehouse clubs; or negatively impact operating profit and net income, as fixed costs are added in advance of achieving full projected sales. ww Net Warehouse Club Sales The following tables indicate the net warehouse club sales in the reportable segments in which we operate, and the percentage growth in net warehouse club sales by segment during fiscal years 2017, 2016 and 2015. Years Ended August 31, 2017 August 31, 2016 Central America Caribbean Colombia Net warehouse club sales Amount $ 1,756,716 815,264 338,082 $ 2,910,062 % of net sales 60.4 % $ 28.0 % 11.6 % 100.0 % $ Increase/ (decrease) from prior year 29,954 (12,842) 72,210 89,322 Change Amount 1.7 % $ 1,726,762 828,106 (1.6) % 265,872 27.2 % 3.2 % $ 2,820,740 % of net sales 61.2 % 29.4 % 9.4 % 100.0 % Years Ended August 31, 2016 August 31, 2015 Central America Caribbean Colombia Net warehouse club sales Amount $ 1,726,762 828,106 265,872 $ 2,820,740 % of net sales 61.2 % $ 29.4 % 9.4 % 100.0 % $ Increase/ (decrease) from prior year 130,859 18,826 (50,077) 99,608 Change Amount 8.2 % $ 1,595,903 809,280 2.3 % 315,949 (15.8) % 3.7 % $ 2,721,132 % of net sales 58.6 % 29.7 % 11.6 % 100.0 % 8 Comparison of 2017 and 2016 Overall net warehouse sales growth of 3.2% for fiscal year 2017 compared to fiscal year 2016 resulted from a 2.8% increase in transactions and a 1.0% increase in average ticket. Net warehouse sales in our Central America segment increased 1.7% for fiscal year 2017. General weakness in Costa Rica, our largest market in that segment, resulted in negative growth there of 2.6%. All other Central American countries recorded positive growth in warehouse sales for the twelve-month period, with Panama, Guatemala, and Honduras all recording sales growth of between 4-5%. Our Caribbean segment had a full-year sales decline of 1.6% driven largely by sales decreases in Trinidad, our largest market in that segment. The difficult economic environment there continues to negatively impact consumer spending, and earlier in the year, we restricted shipments of U.S. goods for a period of three months as a result of currency illiquidity in the market. Trinidad net warehouse club sales for fiscal year 2017 declined 4.8% compared to fiscal year 2016. The Company is not currently limiting shipments to Trinidad, but illiquidity concerns remain, which may again cause us to restrict shipments in the future. Net warehouse sales in our Colombia segment reported growth with the addition of our new Chia club on September 1, 2016 contributing to an overall net warehouse club sales growth of 27.2% for the twelve-month peri od. With the stabilization of the exchange rate between the Colombian peso and the U.S. dollar over the past eighteen months, we have seen an improving sales picture in all of our warehouse clubs in Colombia. This, coupled with our efforts to source high quality merchandise from local suppliers, resulted in a 15.2% increase in transactions in the fiscal year and average ticket growth of 10.4%. During fiscal year 2016, the average exchange rate was 3,070 pesos to the dollar, and in the current fiscal year, the rate was 2,983. f Comparison of 2016 and 2015 Net warehouse sales growth resulted from a 6.2% increase in transactions and a 2.4% decrease in the average sale. Net warehouse sales growth in Central America was positively impacted by the openings of two new warehouse clubs, one in Panama (June 2015) and one in Nicaragua (November 2015). All other Central American countries without additional warehouse clubs also recorded positive sales growth in fiscal year 2016 compared to fiscal year 2015. The Caribbean segment had no new warehouse clubs opened in the comparable periods and recorded a 2.3% increase in net warehouse sales. A significant increase in the number of products subject to Value Added Taxes starting in February in Trinidad and currency devaluations in both Trinidad and the Dominican Republic (the Company’s two largest markets in the Caribbean segment) resulted in a negative sales growth in the second half of the fiscal year compared to the same period last year. f Net warehouse sales in Colombia were significantly impacted during the fiscal year by the devaluation of the Colombian peso relative to the U.S. dollar. The strength of the U.S. dollar causes the price of imported merchandise to increase in Colombian pesos, which reduces sales volumes of those products. In addition, net warehouse sales made in Colombian pesos when translated yielded 26% fewer U.S. dollars in the fiscal year compared to the year ago period. Net warehouse sales in local currency (COP) for fiscal year 2016 grew 6.0%, reflecting the addition of three new warehouse clubs for fiscal year 2016 compared to fiscal year 2015 and a stabilizing currency exchange rate in the fourth fiscal quarter of fiscal year 2016. Net Warehouse Club Sales by Category The following table indicates the approximate percentage of net sales accounted for by each major category of items sold us during the fiscal years ended August 31, 2017, 2016 and 2015. Sundries (including health and beauty aids, tobacco, alcoholic beverages, soft drinks, cleaning and paper products and pet supplies) Hardlines (including major appliances, small appliances, electronics, hardware, office supplies, garden and patio, sporting goods, business machines and automotive supplies) Softlines (including apparel, domestics, cameras, jewelry, housewares, media, toys and home furnishings) Other (including food court) Years Ended August 31, 2016 2015 2017 27 % 53 % 11 % 7 % 2 % 100 % 27 % 53 % 11 % 7 % 2 % 100 % 26 % 54 % 12 % 6 % 2 % 100 % 9 Comparison of 2017 to 2016 The mix of sales by major category did not change between fiscal year 2017 and 2016. Comparison of 2016 to 2015 There was a slight shift in the mix of sales by major category between fiscal year 2016 and 2015, with a slight decrease in food and hardlines compared to the other categories. These categories were impacted more by price compression and the effect of devaluation in Colombia than the other merchandise categories. Comparable Sales We report comparable warehouse club sales on a “same week” basis with 13 weeks in each quarter beginning on a Monday and ending on a Sunday. The periods are established at the beginning of the fiscal year to provide as close a match as possible to the calendar month and quarter that is used for financial reporting purposes. This approach equalizes the number of weekend days and weekdays in each period for improved sales comparison, as we experience higher warehouse club sales on the weekends. Approximately every five years, the Company uses a 53-week year and a six-week “August” to account for the fact that 52 weeks is only 364 days. For fiscal year 2016, we used a 53-week year and a six-week “August.” Further, each of the warehouse clubs used in the calculations was open for at least 13 ½ calendar months before its results for the current period were compared with its results for the prior period. For example, sales related to the warehouse club opened in Colombia on September 1, 2016 will not be used in the calculation of comparable sales until November 2017. Sales transacted through our e-commerce platform are included in our calculation of comparable warehouse sales. The following tables indicate the comparable net warehouse club sales in the reportable segments in which we operate, u and the percentage growth in net warehouse club sales by segment during fiscal years 2017 and 2016. Central America Caribbean Colombia Consolidated segments Comparison of 2017 to 2016 Years Ended August 31, 2017 % Increase in comparable net warehouse sales August 31, 2016 % Increase in comparable net warehouse sales 1.4 % (1.2) % 10.2 % 1.5 % 1.6 % 1.8 % (22.9) % (0.8) % Comparable warehouse club sales for those warehouse clubs that were open for at least 13 ½ months for some or all of the 52-week period ended September 3, 2017 grew 1.5%. Colombia recorded the highest comparable warehouse club sales, despite some cannibalized sales resulting from the opening of the new warehouse club in Chia, Colombia which is not yet included in the calculation of comparable sales. Often times, new warehouse clubs that we open are not far from existing warehouse clubs u that are included in the calculation for comparable warehouse club sales, as was the case in Colombia. The new warehouse clubs attract new members from areas not previously served by us, but they also create the opportunity for some existing members, particularly those who now find the new clubs closer to their homes, to shop at the new locations. This transfer of sales from existing warehouse clubs that are included in the calculation of comparable warehouse club sales to new warehouse clubs that are not included in the calculation can have an adverse impact on reported comparable warehouse club sales. The Caribbean segment experienced negative comparable net warehouse sales primarily due to the economic downturn in Trinidad. We expect to experience a continued softness in the Trinidad economy during fiscal year 2018. The Central America segment experienced low single digit growth in comparable sales primarily due to the general weakness in the Costa Rica market. Comparison of 2016 to 2015 Comparable warehouse club sales for those warehouse clubs that were open for at least 13 ½ months for some or all of the 53 week period ending September 4, 2016 decreased 0.8%, compared to the same 53-week period in the prior year. Comparable warehouse sales were negatively impacted by the devaluation of the Colombian peso from the prior-year period. Six warehouse clubs in Colombia are included in the calculation of comparable warehouse sales. Excluding those warehouse clubs, the 53-week comparable warehouse sales for the other 30 warehouse clubs open for at least 13 ½ months increased 1.7%. We opened a new warehouse club west of Panama City, Panama in June 2015 and one in Managua, Nicaragua in November 2015. 10 Membership Income Years Ended August 31, 2017 Increase/ (decrease) from prior year Amount Membership income - Central America Membership income - Caribbean Membership income - Colombia Membership income - Total $ $ $ 29,832 11,864 6,047 47,743 $ Number of accounts - Central America Number of accounts - Caribbean Number of accounts - Colombia Number of accounts - Total 829,735 391,411 321,693 1,542,839 1,264 250 448 1,962 29,307 (1,800) 24,908 52,415 Membership income % to net warehouse club sales 1.7 % $ 1.5 1.8 1.6 % $ % Change 4.4 % 2.2 8.0 4.3 % 3.7 % (0.5) 8.4 3.5 % Years Ended August 31, 2016 Increase (decrease) from prior year Amount Membership income - Central America Membership income - Caribbean Membership income - Colombia Membership income - Total $ $ $ 28,568 11,614 5,599 45,781 $ 2,373 574 (839) 2,108 Membership income % to net warehouse club sales 1.7 % $ 1.4 2.1 1.6 % $ % Change 9.1 % 5.2 (13.0) 4.8 % Number of accounts - Caribbean Number of accounts - Colombia Number of accounts - Total Comparison of 2017 to 2016 800,428 393,211 296,785 1,490,424 45,097 16,664 (57,522) 4,239 6.0 % 4.4 (16.2) 0.3 % August 31, 2016 Amount 28,568 11,614 5,599 45,781 800,428 393,211 296,785 1,490,424 August 31, 2015 Amount 26,195 11,040 6,438 43,673 755,331 376,547 354,307 1,486,185 Membership income is recognized ratably over the one-year life of the membership. The increase in membership income primarily reflects a growth in membership accounts for which income is recognized during the last twelve months. The average number of member accounts during the fiscal year was 3.0% higher than the year before. The income recognized per average member account increased 1.5%. In February 2017, we increased the annual membership fee in Colombia by 15.4% to the equivalent of U.S. $25 (at the year-end exchange rate of 2,937 Colombian pesos per U.S. dollar), which had the effect of increasing the membership income per average membership account in Colombia by 5.1%. The growth in membership accounts from the end of fiscal year 2016 to the end of the current fiscal year in Colombia was primarily attributable to the new warehouse club in Chia which opened on September 1, 2016. The Company’s twelve- month renewal rate for the period ended August 31, 2017 improved to 85% from 80% for the twelve months ended August 31, 2016. Comparison of 2016 to 2015 The increase in membership income primarily reflects a growth in membership accounts for which income is recognized during fiscal year 2016. The average number of member accounts during the fiscal year was 7.6% higher than the year before. The income recognized per average member account decreased 0.3%, which primarily reflects the effect of the impact of devaluation in Colombia on the translation of membership fees in local currency to U.S. dollars. In Colombia, the membership is priced in Colombian pesos (COP). At the August 2016 exchange rate, a membership in Colombia yielded approximately $19 11 compared to approximately $35 in most other countries. We ended the fiscal year with a renewal rate of 80% for the twelve- month period ended August 31, 2016. ww During fiscal year 2016, the Company experienced a net growth in membership accounts of 4,239 accounts, or 0.3%. Colombia’s membership accounts during the fiscal year declined 57,522, while the other countries grew by 61,761 accounts. The decrease in overall accounts in Colombia was due to the first anniversary date for a large number of accounts associated with the three warehouse clubs in Colombia that opened in October and November 2015 and the low renewal rate for those accounts. The opening of these three warehouse clubs in fiscal year 2015 resulted in approximately 124,000 expiring accounts in October, November and December from the record number of new member sign-ups experienced at the opening of these clubs. As expected, we experienced a low renewal rate for those expiring accounts due to a historically low renewal rate for first year members across our markets, the distance of our warehouse clubs in Bogota and Medellin to where certain members live, and the impact of price increases on imported products due to the Colombian peso devaluation. While we continue to see new member sign-ups in Colombia, and an improving renewal rate of current members in Colombia, the twelve-month renewal rate is impacted by those non-renewals earlier in the fiscal year. The Company’s twelve-month renewal rate for the period ended August 31, 2016 declined to 80% from 86% for the twelve months ended August 31, 2015. Excluding Colombia, the twelve-month renewal rate was 87% as of August 31, 2016, consistent with 87% in August 2015, November 2015, and February 2016. Results of Operations Results of Operations Consolidated Results of Operations Consolidated (Amounts in thousands, except percentages and number of warehouse clubs) Net warehouse club sales Warehouse club sales gross margin Warehouse club gross margin percentage Total revenues Percentage change from prior period Total comparable warehouse club sales increase (decrease) Total gross margin Gross margin percentage to total revenues Selling, general and administrative Selling, general and administrative percentage of total revenues Operating income - Central America Operating income - Caribbean Operating income - Colombia Operating Income - United States Reconciling Items (3) Operating income - Total Operating income as a percentage of total revenues Warehouse clubs at period end Warehouse club square feet at period end August 31, 2017 Years Ended August 31, 2016 August 31, 2015 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 2,910,062 422,916 14.5 % 2,996,628 3.1 % 1.5 % 476,876 15.9 % 340,647 11.4 % 134,826 47,190 4,932 10,436 (61,155) 136,229 4.5 % 39 2,926 2,820,740 403,374 14.3 % 2,905,176 3.7 % (0.8)% 455,550 15.7 % 318,827 $ $ $ $ $ 11.0 % $ 135,232 51,450 $ (5,403)(1) $ 10,970 (2) $ $ (55,526) $ 136,723 4.7 % 38 2,836 2,721,132 400,058 14.7 % 2,802,603 11.3 % 2.7 % 449,764 16.0 % 303,398 10.8 % 129,555 48,856 (1,846) 28,789 (58,988) 146,366 5.2 % 37 2,671 (1) The decrease in operating income for the Colombia segment in fiscal year 2016 compared to fiscal year 2015 was primarily a result of a 26.0% average decrease in the value of the Colombian peso versus the U.S. dollar during fiscal year 2016. (2) The decrease in operating income for the United States Operations in fiscal year 2016 compared to fiscal year 2015 was primarily a result of the increase in operating expenses related to intercompany transactions with the Company’s Colombia subsidiary of approximately $10.9 million. (3) Certain revenues, operating costs and inter-company charges included in the United States segment are not allocated to the segments within this presentation, as it is impractical to do so, and they appear as reconciling items to reflect the amount eliminated on consolidation of intersegment transactions. f 12 Comparison of 2017 to 2016 Warehouse Club gross margin as a percent of net warehouse sales increased 23 basis points (0.23%) to 14.5% for the twelve months ended August 31, 2017 compared to the same twelve month period a year ago due to increased margins in Colombia, resulting from improving market conditions and business performance. Warehouse Club gross margins in Colombia increased 273 basis points (2.73%). Warehouse Club gross margins in Central America and the Caribbean were approximately equal to the same period a year ago. Selling, general, and administrative expenses consist of warehouse club operations, general and administrative expenses, pre-opening expenses, and loss/(gain) on disposal of assets. In total, selling, general and administrative expenses increased $21.8 million to 11.4% of sales compared to 11.0% of sales in fiscal year 2016. Warehouse club operations expense was 9.2% of sales compared 8.9% a year ago. Low or negative comparable warehouse club sales growth, particularly in Trinidad and Costa Rica, contributed to an overall increase in warehouse expense as a percent of sales in Central America and the Caribbean. Colombia had a 50 basis point (0.50%) improvement in warehouse club operations expense as a percent of sales compared to fiscal year 2016. General and administrative expenses grew 8.8% to 2.4% of sales compared to a year ago at 2.2% of sales resulting from increased staffing in our buying department, information technology costs and costs associated with the relocation of an executive to our San Diego headquarters. Expenses incurred before a warehouse club is in operation are captured in pre-opening expenses, which in fiscal year 2016 included the preopening expenses for Chia, Colombia and Masaya, Nicaragua. f tt Operating income of $136.2 million was $494,000 below last year. Higher net warehouse sales and membership income and increased warehouse club gross margins resulted in a $10.3 million increase in operating profit in Colombia compared to a year ago. Operating income decreased $406,000 in Central America and $4.3 million in the Caribbean on the low or negative sales growth experienced in those segments. Comparison of 2016 to 2015 For the twelve months ended August 31, 2016, total gross margin as a percent of sales was 40 basis points (0.40%) lower than the twelve months ended August 31, 2015. Total gross margin as a percent of total consolidated revenues decreased 41 basis points (0.41%) in Colombia from the year ago period largely as a result of pricing actions we took during the year to provide value on imported goods to our members. Total gross margins as a percent of sales in the non-Colombia markets were in aggregate 1 basis points (0.01%) higher. This was largely due to increased margins in Central America segment offset by higher level of markdowns, reduced endcap activity and higher per unit distribution costs. Selling, general and administrative expenses increased 15 basis points (0.15%) year-over-year when compared to total revenues. The Company incurred the expenses associated with five new warehouse clubs for all or a portion of fiscal year 2016 compared to fiscal year 2015. The combination of lower first year sales and resulting higher expense ratio for new warehouse clubs compared to more mature clubs, and the cannibalization of sales from an existing nearby club without the proportionate decrease in expenses, resulted in an overall 7 basis point (0.07%) increase in warehouse operations expense as a percent of net warehouse sales. Additionally, added staffing to support the Company’s growth, most notably in the buying and information technology areas, and increased deferred compensation expense associated with stock awards granted in the first quarter, added $3.0 million of selling, general and administrative expense in fiscal year 2016 compared to fiscal year 2015. During the first and second quarters of fiscal year 2016, pre-opening expenses were related to the warehouse club opened in Managua, Nicaragua during November 2015, and during the third and fourth quarters, pre-opening expenses incurred were related to the new warehouse club opened in Chia, Colombia on September 1, 2016. This resulted in flat spending for both pre- opening and asset disposal costs, when compared to total revenue, year-over-year. Interest Expense Years Ended August 31, 2017 August 31, 2016 Increase/ (decrease) from prior year 645 (394) 635 886 $ $ Amount 4,991 1,982 (1,082) 5,891 Amount $ $ 5,636 1,588 (447) 6,777 $ $ Interest expense on loans Interest expense related to hedging activity Capitalized interest Net interest expense 13 Interest expense on loans Capitalized interest Net interest expense Years Ended August 31, 2016 August 31, 2015 Increase/ (decrease) from prior year $ 187 (709) (27) (549) $ Amount 4,804 2,691 (1,055) 6,440 Amount $ $ 4,991 1,982 (1,082) 5,891 $ $ Interest expense reflects borrowings by PriceSmart, Inc. and our wholly owned foreign subsidiaries to finance new land acquisition and construction for new warehouse clubs, warehouse club expansions, and distribution centers, the capital requirements of warehouse club operations and ongoing working capital requirements. Comparison of 2017 to 2016 Net interest expense for fiscal year 2017 increased from a year ago, with an increase in long-term debt, primarily to finance the acquisition of the distribution center in Miami, Florida and an additional loan within our Trinidad subsidiary as part efforts to improve liquidity. Additionally, a decrease in interest capitalized year-over-year, due to lower levels of construction activities, also accounted for the increased interest expense. These increases were partially offset by the decrease in interest expense related to hedging activity due to the retirement of loans and their related cross-currency interest rate hedges for our Colombia subsidiary. r Comparison of 2016 to 2015 Net interest expense for the twelve-months ended August 31, 2016 decreased from the prior fiscal year due to a decrease in interest expense from hedging activity. This was primarily related to the decrease in the volatility in interest rates for the interest rates related to the hedged loans. This decrease was partially offset by an increase in interest expense related the net increase of new loans for approximately $11.6 million year-on year. n Other Income (Expense), net Other income consists of currency gain or loss and proceeds from insurance reimbursements. Years Ended August 31, 2017 Increase/ (decrease) from prior year Amount August 31, 2016 %Change Amount Other income (expense), net $ 1,482 $ 2,381 (264.8) % $ (899) Years Ended August 31, 2016 Increase/ (decrease) from prior year Amount August 31, 2015 %Change Amount Other income (expense), net $ (899) $ 3,489 (79.5) % $ (4,388) Monetary assets and liabilities denominated in currencies other than the functional currency of the respective entity (primarily U.S. dollars) are revalued to the functional currency using the exchange rate on the balance sheet date. These foreign exchange transaction gain (losses), including repatriation of funds, are recorded as currency gain or losses. t Receipts from insurance reimbursements up to the amount of the losses recognized are considered recoveries. These recoveries are accounted for when they are probable of receipt. Insurance recoveries are not recognized prior to the recognition 14 of the related cost. Anticipated proceeds in excess of the amount of loss recognized are considered gains and are subject to gain contingency guidance. Anticipated proceeds in excess of a loss recognized in the financial statements are not recognized until all contingencies related to the insurance claim are resolved. Comparison of 2017 to 2016 For the twelve-month period, we had a net gain associated with foreign currency transactions of approximately $1.2 million compared to an approximate $899,000 net loss in fiscal year 2016. This net gain resulted from the revaluation of net U.S. dollar assets in certain markets where the local functional currency devalued against the U.S. dollar, and from exchange transactions, net of any exchange reserve movements. We also continue to incur higher transaction costs associated with converting TT dollars into available tradeable currencies such as Euros or Canadian dollars before converting them to U.S. dollars, which partially offset the gains resulting from revaluations. While that situation continues in Trinidad, we have taken that additional cost into consideration in our pricing model. During the fourth quarter of fiscal year 2017, we recorded income for approximately $241,000 due to an insurance recovery for losses recognized in fiscal year 2015. Comparison of 2016 to 2015 We had a net loss associated with foreign currency transactions of approximately $899,000 for fiscal year 2016 compared to a net loss of approximately $4.4 million for fiscal year 2015. The improvement in fiscal year 2016 compared to 2015 is mostly related to Colombia where we took a number of actions to mitigate any large exposures to the Colombian peso, including increased capitalization of the Colombian subsidiary, which allows for timely payments by the Colombia subsidiary for merchandise and fixed assets shipped by PriceSmart, Inc. to Colombia. We experienced increased volatility of currencies within our other markets that largely offset each other. r Provision for Income Taxes Current tax expense Net deferred tax provision (benefit) Provision for income taxes Effective tax rate Current tax expense Net deferred tax provision (benefit) Provision for income taxes Effective tax rate Years Ended August 31, 2017 August 31, 2016 Increase/ (decrease) from prior year 4,891 $ (5,722) (831) $ Amount 44,865 (2,847) 42,018 31.7 % $ $ Amount 39,974 2,875 42,849 32.6 % Years Ended August 31, 2016 August 31, 2015 Increase/ (decrease) from prior year $ $ (4,620) (97) (4,717) $ $ Amount 44,594 2,972 47,566 Amount 39,974 2,875 42,849 32.6 % 34.8 % $ $ $ $ 15 Comparison of 2017 to 2016 For fiscal year 2017, the effective tax rate was 31.7%. The decrease in the effective rate versus the prior year was primarily attributable to the following factors: 1. The favorable impact of 1.3% due predominantly to the non-recurrence in fiscal year 2017 of the adverse impact in the prior year from setting up a valuation allowance against the deferred tax assets of the Company’s Barbados subsidiary; 2. A decrease in fiscal year 2017 in the magnitude of an intercompany transaction between PriceSmart, Inc. and our Colombian subsidiary in support of PriceSmart’s ongoing market development and growth in Colombia compared to fiscal year 2016. Reduction to this intercompany transaction, year over year, resulted in a comparatively unfavorable impact on the effective tax rate of 0.9% due to less reductions to taxable income in the U.S. and less reciprocal increase in taxable income in our Colombia subsidiary in fiscal year 2017 compared to fiscal year 2016. u This income did not generate income tax expense in Colombia, because the additional taxable income in Colombia was fully offset by the reversal of valuation allowances on accumulated net losses in that subsidiary. We expect the decrease of the favorable impact to the consolidated Company’s effective tax rate over the next several quarters to continue; and 3. The comparably favorable impact of 1.4% resulting from improved financial results in the Company’s Colombia subsidiary for which no tax benefit was recognized, net of adjustment to valuation allowance. Comparison of 2016 to 2015 For fiscal year 2016, the effective tax rate was 32.6%. The decrease in the effective rate versus the prior year was primarily attributable to an intercompany transaction between PriceSmart, Inc. and our Colombian subsidiary in support of PriceSmart’s ongoing market development and growth in Colombia. This intercompany transaction resulted in a favorable impact on the effective tax rate of 3% due to reductions to taxable income in the U.S. and a resulting increase in taxable income in our Colombia subsidiary. This income did not generate income tax expense in Colombia, because the additional taxable income in Colombia was fully offset by the reversal of valuation allowances on accumulated net losses in that subsidiary. We expect a similar favorable impact to the consolidated Company’s effective tax rate over the next several quarters. Additionally, in comparison to the prior year, there was an offsetting unfavorable impact of 1.5% due to the establishment of a valuation allowance against the deferred tax assets of the Company’s Barbados subsidiary. While the Company’s forecasts indicate profitability for the immediate and foreseeable future, the existence of negative objective evidence from recent years established the need for a valuation allowance of approximately $2.0 million in order to reduce deferred tax assets to amounts expected to be realized. u Other Comprehensive Income (Loss) Summary of Changes in Other Comprehensive Income (loss) Years Ended August 31, 2017 (Decrease) from August 31, 2016 (Decrease) from August 31, 2015 Foreign currency translation adjustments $ (108,539) $ (6,297) 6.2 % $ (102,242) $ (1,702) 1.7 % $ (100,540) Amount prior year % Change Amount prior year % Change Amount plan Derivative Instruments Total (442) (1,078) $ (110,059) $ (127) 316 (6,108) 40.3 % (22.7)% (315) (1,394) 5.9 % $ (103,951) $ (202) (535) (2,439) 178.8 % 62.3 % (113) (859) 2.4 % $ (101,512) Comparison of 2017 to 2016 Other comprehensive income/(loss) for fiscal years 2017 and 2016 resulted primarily from foreign currency translation adjustments related to the assets and liabilities and the translation of the statements of income related to revenue, costs and expenses of our subsidiaries whose functional currency is not the U.S. dollar. When the functional currency in our international subsidiaries is the local currency and not U.S. dollars, the assets and liabilities of such subsidiaries are translated to U.S. dollars at the exchange rate on the balance sheet date, and revenue, costs and expenses are translated at average rates of exchange in 16 effect during the period. The corresponding translation gains and losses are recorded as a component of accumulated other comprehensive income or loss. These adjustments will not affect net income until the sale or liquidation of the underlying investment. The reported other comprehensive income or loss reflects the unrealized increase or de crease in the value in U.S. dollars of the net assets of the subsidiaries as of the date of the balance sheet, which will vary from period to period as exchange rates fluctuate. During fiscal year 2017, the largest translation adjustments were related to the translation of the Costa Rica, Dominican Republic and Nicaragua subsidiaries’ balance sheets and statements of income that required us to record losses to comprehensive net income on translation of approximately $6.8 million. ff t LIQUIDITY AND CAPITAL RESOURCES Financial Position and Cash Flow We require cash to fund our operating expenses and working capital requirements, including the investment in merchandise inventories, acquisition of land and construction of new warehouse clubs and distribution centers, expansion of existing warehouse clubs and distribution centers, acquisitions of fixtures and equipment, routine upgrades and maintenance of fixtures and equipment within existing warehouse clubs, investments in joint ventures in Panama and Costa Rica to own and operate commercial retail centers located adjacent to the new warehouse clubs, the purchase of treasury stock upon the vesting of restricted stock awards and payment of dividends to stockholders. Our primary sources for funding these requirements are cash and cash equivalents on hand, cash generated from operations and bank borrowings. We evaluate on a regular basis whether we may need to borrow additional funds to cover any shortfall in our ability to generate sufficient cash from operations to mee t our operating and capital requirements. As such, we may enter into or obtain additional loans and/or credit facilities to provide additional liquidity when necessary. In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230)—Restricted Cash. This ASU addresses the diversity in practice that exists regarding the classification and the presentation of changes in restricted cash on the statement of cash flows. The amendments in ASU No. 2016-18 require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. Thus, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and the end-of-period total amounts set forth on the statement of cash flows. The Company early adopted this ASU, and has accordingly updated its liquidity analysis to reflect the change. d t The following table summarizes the cash and cash equivalents held by our foreign subsidiaries and domestically (in thousands). Repatriation of cash and cash equivalents held by foreign subsidiaries may require us to accrue and pay taxes. We have no plans at this time to repatriate cash through the payment of cash dividends by our foreign subsidiaries to our domestic operations and, therefore, have not accrued taxes that would be due from repatriation. Cash and cash equivalents held by foreign subsidiaries Cash and cash equivalents held domestically Total cash and cash equivalents August 31, 2017 139,270 26,442 165,712 $ $ August 31, 2016 163,247 39,469 202,716 $ $ From time to time we have experienced a lack of availability of U.S. dollars in certain markets (U.S. dollar illiquidity). This impedes our ability to convert local currencies obtained through warehouse sales into U.S. dollars to settle the U.S. dollar liabilities associated with our imported products, increasing our foreign exchange exposure to any devaluation of the local currency relative to the U.S. dollar. During fiscal year 2017 and continuing into fiscal year 2018, we experienced this situation in Trinidad (“TT”). We have been and continue to work with our banks in Trinidad to source tradable currencies (including Euros and Canadian dollars), but until the central bank in Trinidad makes more U.S. dollars available, this illiquidity condition is likely to continue. During part of the first half of fiscal year 2017, we limited shipments of merchandise to Trinidad from our distribution center in Miami to levels that generally aligned with our Trinidad subsidiary’s ability to source U.S. dollars to pay for that merchandise. This resulted in a reduced level of shipments, which negatively affected sales in the second quarter, particularly December, although by less than our initial estimate. These actions did not impact the level of merchandise we obtain locally in Trinidad. Starting in the third quarter of fiscal year 2017, we were able to improve our sourcing of tradeable currencies, which, in addition to other steps we took, allowed for a more normalized flow of imported merchandise during the third and fourth fiscal quarters. As of August 31, 2017, our Trinidad subsidiary had net U.S. dollar denominated assets of approximately $4.0 million. However, the illiquidity situation remains in the Trinidad market, and we could face similar issues in sourcing U.S. dollars during the first and second quarters of fiscal year 2018, which may require us to limit shipments from the U.S. to Trinidad in line with our ability to exchange Trinidad dollars for tradeable currencies to manage our exposure to any potential devaluation. 17 Our cash flows are summarized as follows (in thousands): Net cash provided by (used in) operating activities Net cash provided by (used in) financing activities Effect of exchange rates Net increase (decrease) in cash and cash equivalents $ August 31, 2017 122,856 (135,217) (21,805) (2,838) (37,004) $ $ $ Years Ended August 31, 2016 141,531 (78,175) (16,460) (2,777) 44,119 August 31, 2015 109,582 (89,082) (16,955) (11,412) (7,867) $ $ Our operating activities provided cash for all periods presented as summarized below: Net income Adjustments to reconcile net income to net cash provided from (used in) operating activities: Depreciation and amortization (Gain) loss on sale of property and equipment Deferred income taxes Stock-based compensation expenses Other non-cash operating activities Proceeds from settlement of derivatives Net non-cash related expenses Net income from operating activities reconciled for non-cash operating activities Changes in operating assets and liabilities not including merchandise inventories Changes in merchandise inventories Net cash provided by (used in) operating activities August 31, 2017 Years Ended August 31, 2016 August 31, 2015 Increase/ (Decrease) 2017 to 2016 2016 to 2015 $ 90,724 $ 88,723 $ 89,124 $ 2,001 $ (401) 46,292 39,794 34,445 1,961 (2,845) 9,524 1,162 2,875 8,511 2,005 2,972 4,763 1 (325) (94) 6,498 799 (5,720) 1,013 326 5,349 (843) (97) 3,748 (231) — 54,933 $ — 52,017 $ 8,543 52,634 $ $ — 2,916 $ (8,543) (617) 145,657 140,740 141,758 4,917 (1,018) 5,238 16,523 8,616 (11,285) 7,907 (28,039) (15,732) (40,792) (12,307) 25,060 $ 122,856 $ 141,531 $ 109,582 $ (18,675) $ 31,949 Net income from operating activities reconciled for non-cash operating activities increased approximately $4.9 million for the twelve-months ended August 31, 2017 over the same period last year. This was primarily a result of a year-over-year increases in net income of approximately $2.0 million and a year-over-year increase in non-cash adjustments of approximately $2.9 million. The increase in non-cash adjustment was primarily the result of the increase in depreciation and amortization due to the opening in fiscal year 2017 of a new warehouse club in Colombia, a new distribution center in Miami and continued n expansion of existing facilities combined with the normal ongoing additions to fixtures and equipment. Additionally the non- cash related expenses also increased due to stock-based compensation expenses for approximately $1.0 million associated with stock awards granted in the first quarter. These were offset by year-on-year decreases in non-cash adjustments related to the increase in deferred income taxes for approximately $5.7 million. The increase in deferred tax assets was primarily the result of the non-recurrence of a valuation allowance established against the net deferred tax assets of the Company’s Barbados subsidiary in fiscal year 2016; an increase in foreign tax credit generation related to our offshore warehouse club operations; and a decrease in U.S. foreign tax credit utilization related to tax deduction timing. t Net income from operating activities reconciled for non-cash operating activities decreased approximately $1.0 million for the twelve-months ended August 31, 2016 over the same period last year. This was primarily a result of a year-over-year decrease in net income of approximately $400,000 and a year-on-year decrease in non-cash adjustments of approximately $617,000. The decrease in non-cash adjustment was primarily the result of proceeds from settlements of derivatives recorded in fiscal year 2015 for approximately $8.5 million, with no proceeds being recorded during fiscal year 2016. This decrease to net 18 non-cash related expenses was partially offset by increases in depreciation expenses for approximately $5.3 million and increases in stock-based compensation expenses for approximately $3.7 million associated with stock awards granted in the first quarter of fiscal year 2016. The increase in depreciation is due to new warehouse club investments and the continued ongoing capital improvements to existing warehouse clubs. Our use of cash in investing activities for the period presented is summarized below: Land acquisitions Deposits for land purchase option agreements Warehouse club expansion, construction, and land improvements Acquisition of fixtures and equipment Proceeds from disposals of property and equipment Capital contribution to joint ventures Net cash flows used by (provided in) investing activities August 31, 2017 Years Ended August 31, 2016 August 31, 2015 $ 30,199 $ 3,161 $ 16,780 Increase/ (Decrease) 2017 to 2016 27,038 $ 2016 to 2015 $ (13,619) 300 442 (1,095) (142) 1,537 57,685 47,410 (377) — 33,064 41,475 (86) 119 45,414 26,991 (368) 1,360 24,621 (12,350) 5,935 14,484 (291) (119) 282 (1,241) $ 135,217 $ 78,175 $ 89,082 $ 57,042 $ (10,907) Net cash used in investing activities increased in fiscal year 2017 compared to fiscal year 2016 by approximately $57.0 million. This was primarily due to an increase in cash expenditures related to the acquisition of a distribution center in Medley, Miami-Dade County, Florida in January 2017, construction activities for a warehouse club in Santa Ana, Costa Rica that opened in October 2017, construction activities for a warehouse club in the Santa Domingo, Dominican Republic that we plan to open in the spring of 2018 and construction activities for a warehouse club in Chia, Colombia that opened in September 2016. The Company also used cash for the acquisition of land in Costa Rica and the Dominican Republic. An n increase in overall warehouse a club expansion activities, related to warehouse expansions in Guatemala, Honduras and El Salvador during fiscal year 2017 also increased year-over-year investing activities. Net cash used in investing activities decreased in fiscal year 2016 compared to fiscal year 2015 by approximately $10.9 million primarily due to decreases in cash expended for the purchase of land, the decrease in expenditures for warehouse club expansion, and a lower level of construction and land improvement activities during fiscal year 2016. These decreases were partially offset by period-over-period increases in the acquisition of fixtures and equipment and deposits for land purchase option agreements. During fiscal year 2016, expenditures for warehouse club expansions and for fixtures and equipment were associated with the construction of the completed warehouse club in Managua, Nicaragua that opened in November 2015 and construction activities of a warehouse club in Chia, Colombia, during fiscal year 2016. Net cash used in investing activities in fiscal year 2015 consisted of cash expended for the construction and completion of warehouse clubs in Bogota, Colombia ("Salitre"), Pereira, Colombia, and Medellin, Colombia and the additions of fixtures and equipment for these warehouse clubs. Additionally, we constructed a warehouse club in Panama during the first nine months of fiscal year 2015. Acquisition of fixtures and equipment increased year-over-year by approximately $14.4 million. This was primarily due to the continued normal ongoing capital expenditures for the upgrade and replacement of equipment and building and leasehold improvements. r r As of August 31, 2017, we had commitments for capital expenditures for new warehouse club construction for approximately $7.9 million related to our building of warehouse clubs in Santa Ana, Costa Rica and Santo Domingo, Dominican Republic. We expect to spend between $120.0 million and $140.0 million in capital expenditures for ongoing replacement of ng warehouse clubs and land acquisitions during fiscal equipment, building/leasehold improvements, expansion projects on existi year 2018. Future capital expenditures will be dependent on the timing of future land purchases and/or warehouse club construction activity. x We have entered into land purchase option agreements within our subsidiaries that have not been recorded as a commitments, for which we have recorded deposits of approximately $600,000. The land purchase option agreements can generally be canceled at our sole option with the deposits being fully refundable up and until all permits are issued. We also entered into a land lease option in one of our markets, for which no deposits have been made. We do not have a timetable of when or if we will exercise these land purchase/lease options, due to the uncertainty related to the completion of our due diligence reviews. Our due diligence reviews include evaluations of the legal status of the property, the zoning and permitting issues related to acquiring approval for the construction and operation of a warehouse club and any other issues related to the property itself 19 that could render the property unsuitable or limit the property's economic viability as a warehouse club site. If all of these r purchase option agreements are exercised, the cash use for the acquisition of land would be approximately $20.8 million. We may enter into additional land purchase option agreements in the future. In January 2017, the Company finalized its acquisition of a distribution center in Medley, Miami-Dade County, Florida, for a total purchase price of approximately $46.0 million and the Company transferred its Miami dry distribution center activities previously located in its leased facilities to this location. This was completed during the third quarter of fiscal year 2017. The Company has terminated and intends to continue to terminate leases with respect to portions of the existing leased Miami distribution facilities or enter into sublease agreements for portions of the leased facilities. Net cash provided by (used in) financing activities for the period presented is summarized below: August 31, 2017 Years Ended August 31, 2016 August 31, 2015 Increase/ (Decrease) 2017 to 2016 2016 to 2015 New bank loans offset by regularly scheduled payments on existing bank loans (loan activities) New short-term bank loans, offset by payments Repayment of long-term debt with cross-currency and/or interest rate swaps Cash dividend payments Proceeds from exercise of stock options and the tax benefit related to stock-based compensation Purchase of treasury stock related to vesting of restricted stock Net cash (used in)/provided by financing activities $ 31,638 $ (2,155) $ 22,072 (1) $ 33,793 $ (24,227) (16,501) 9,613 9,521 (26,114) 92 (13,333)(2) (21,285) — (21,274) (24,000)(2) (21,126) (13,333) (11) 24,000 (148) 869 690 1,255 (3,193) (3,334) (4,677) 179 141 (565) 1,343 $ (21,805) $ (16,460) $ (16,955) $ (5,345) $ 495 (1) New bank loans offset by establishment of certificates of deposit held against loans and regularly scheduled payments on existing bank loans. (2) Early pay down of long-term loans. Net cash from long-term and short-term loan activities decreased approximately $5.7 million in fiscal year 2017 when compared to fiscal year 2016, with an overall increase in cash due to long-term and short-term loan activities for the year of approximately $1.8 million. This increase in cash from long-term and short-term loan activities was primarily comprised of the addition of a new loan for approximately $35.7 million related to the acquisition of the Miami distribution center and a new loan within our Trinidad subsidiary for approximately $12.0 million. These additional loan amounts were offset by regularly scheduled long-term loan payments of $16.1 million, additional net payments of approximately $16.5 million on short-term loans and the early pay down of a loan within our Panama subsidiary for approximately $13.3 million. Net cash provided by long-term and short-term loan activities decreased approximately $27.1 million in fiscal year 2016 over fiscal year 2015. We received cash during fiscal year 2016 from short-term borrowings for approximately $28.9 million and cash from additional long-term loans entered into by our subsidies of approximately $14.4 million. This increase in cash was offset by repayments of long-term loans of approximately $2.8 million and regularly scheduled loan payments of $13.7 million. Additional payments for approximately $19.3 million on the short-term loans were recorded. This activity accounted for an overall increase in cash provided by long-term and short-term loan activities of approximately $7.5 million. r 20 Contractual Obligations Contractual obligations Long-term debt and interest(1) Operating leases(2) Additional capital contribution commitments to joint ventures(3) Data recovery services(4) Distribution center services(5) Medley, Miami Dry Distribution Center Exit Obligation(6) Warehouse club construction commitments (7) Total $ $ Less than 1 Year 1 to 3 Years Payments due in: 4 to 5 Years After 5 Years 18,358 11,596 $ 34,406 22,807 $ 20,907 18,509 $ 32,626 116,066 $ 884 372 152 — 466 304 — — — — — — Total 106,297 168,978 884 838 456 57 7,891 39,310 $ — — 57,983 $ — — 39,416 $ — — 148,692 $ 57 7,891 285,401 (1) Long-term debt includes debt with both fixed and variable interest rates. We have used rates as of August 31, 2017 to calculate future estimated payments related to the variable rate items. For the portion of the loans subject to interest rate swaps and cross-currency interest rate swaps, we have used the fixed interest rate as set by the interest rate swaps. (2) Operating lease obligations have been reduced by approximately $928,000 to reflect the amounts net of sublease income. Operating lease obligations include $4.9 million of lease payment obligations for the prior leased Miami distribution center. For the purposes of calculating the minimum lease payments, no reduction was considered for the potential sub-lease income the Company could receive during the remaining lease term. This potential sub-lease income was considered, however, for the purposes of calculating the exit obligation of $57,000 recorded on the balance sheet as of August 31, 2017. Projected income from any executed sub-leases would be used to reduce the amount reported as minimum lease payments. (3) Amounts shown are the contractual capital contribution requirements for our investment in the joint ventures that we have agreed to make; however, the parties intend to seek alternate financing for these projects. The parties may mutually agree on changes to the project, which could increase or decrease the amount of contributions each party is required to provide. uu (4) Amounts shown are the minimum payments under our off-site data recovery services agreement. (5) Amounts shown are the minimum payments under distribution center service agreements for Mexico City. (6) r In January 2017, the Company purchased a distribution center in Medley, Miami-Dade County, Florida. The Company transferred its Miami dry distribution center activities that were previously in a leased facility to the new facility, during the third quarter of fiscal year 2017. As part of this transaction, the Company has recorded an exit obligation related to the lease of the previous distribution center. Some portions of the vacated previously leased space were subleased (and subsequently returned to the landlord) while the remainder remains available for sublease. As part of the subleases the Company has agreed to execute and deliver to the landlord of the leased facility a letter of credit (“LOC”) in the amount of $500,000 which entitles the landlord to draw on the LOC based on a decreasing scale over four years, if certain conditions occur related to nonpayment by the new tenant. Although this agreement is considered a guarantee, in measuring the fair value, the Company considers the risk and probability of default by the third party tenant as not likely nor probable, based on the Company’s review of the third party tenant’s financial position as well as the third party’s considerable capital investment into the leased facility. Therefore, the Company has not recorded a liability for this guarantee, nor included a related commitment in the above chart. (7) The amounts shown represent contractual obligations for construction services not yet rendered. Off-Balance Sheet Arrangements The Company does not have any off-balance sheet arrangements that have had, or are reasonably likely to have, a material current or future effect on its financial condition or consolidated financial statements. Repurchase of Equity Securities and Reissuance of Treasury Shares At the vesting dates for restricted stock awards to our employees, we repurchase a portion of the shares that have vested at the prior day's closing price per share, with the funds used to pay the employees' minimum statutory tax withholding requirements related to the vesting of restricted stock awards. We do not have a stock repurchase program. Shares of common stock repurchased by us are recorded at cost as treasury stock and result in the reduction of stockholders’ equity in our consolidated balance sheets. We may reissue these treasury shares. When treasury shares are reissued, we use the first in/first out (“FIFO”) cost method for determining cost of the reissued shares. If the issuance price is higher than the cost, the excess of the issuance price over the cost is credited to additional paid-in capital (“APIC”). If the issuance price is lower than the cost, the difference is first charged against any credit balance in APIC from treasury stock and the balance is charged to retained earnings. 21 The following table summarizes the shares repurchased during fiscal years 2017, 2016 and 2015: Shares repurchased August 31, 2017 Years Ended August 31, 2016 August 31, 2015 38,634 3,193 $ 43,171 3,334 $ 52,396 4,677 $ We have reissued treasury shares as part of our stock-based compensation programs. t However, as summarized below, we did not reissue any treasury shares during the fiscal years 2017, 2016 and 2015. Dividends The following table summarizes the dividends declared and paid during fiscal years 2017, 2016 and 2015. Declared 2/3/2017 2/3/2016 2/4/2015 First Payment Record Date Date Paid Second Payment Date Paid Record Date Amount Amount $ 0.70 2/15/2017 2/28/2017 $ 0.35 8/15/2017 8/31/2017 $ 0.35 $ 0.70 2/15/2016 2/29/2016 $ 0.35 8/15/2016 8/31/2016 $ 0.35 $ 0.70 2/13/2015 2/27/2015 $ 0.35 8/14/2015 8/31/2015 $ 0.35 Amount We anticipate the ongoing payment of semi-annual dividends in subsequent periods, although the actual declaration of a 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. n Financing Activities Financing Activities In August 2017, the Company’s Panama subsidiary paid off outstanding loan principal balance of U.S. $13.3 million under loan agreement entered into with Scotiabank. The Company’s subsidiary also settled the interest rate swap that it had entered into with Scotiabank related to this loan. On March 31, 2017, the Company's Trinidad subsidiary entered into a loan agreement with Citibank, N.A. The agreement provides for a US $12.0 million loan to be repaid in eight quarterly principal payments plus interest. The interest rate is set at the 90 day LIBOR rate plus 3%. The loan was funded on March 31, 2017. On January 27, 2017 the Company entered into a 10-year real estate secured loan with MUFG Union Bank, N.A. (“Union Bank”). The loan establishes a credit facility of up to 75% LTV of the acquired property at a variable interest rate of 30- day LIBOR plus 1.7% for a ten-year term, with monthly principal and interest payments, maturing in 2027. The monthly principal and interest payments begin in April 2019. An initial loan amount of $35.7 million was funded on January 27, 2017. The Company entered into an interest rate hedge on November 7, 2016 with Union Bank for $35.7 million, the notional amount. The Company will receive variable 30-day LIBOR plus 1.7% and pay fixed (3.65%), with an effective date of March 1, 2017 and maturity date of March 1, 2027. f On May 31, 2016, the Company's Trinidad subsidiary entered into a loan agreement with First Caribbean International Bank (“FCIB”). The agreement supplements the outstanding loan facility agreement between the same parties. The amount outstanding under the original loan was approximately $2.8 million as of May 31, 2016. The agreement provides for a U.S. $7.0 million loan to be repaid in 60 monthly principal payments plus interest, and balloon payment of $2.0 million due on the repayment date. The interest rate is set at the 90 day LIBOR rate plus 2.75%. The $7.0 million loan was funded and the pre- existing $2.8 million dollar loan was paid in full on June 8, 2016. On September 18, 2015, the Company's Costa Rica subsidiary entered into a loan agreement with Banco BAC San Jose S.A. The agreement establishes a credit facility for 3.955 billion Costa Rican Colones ("CRC") (approximately U.S. $7.4 million) with a fixed interest rate of 7.5% for the first two years, and a rate of 3.0% over the rate of interest used by individual commercial banks as a basis for their lending rates as published by the Central Bank of Costa Rica for the remainder of the term. The loan term is for seven years with a twelve-month grace period on principal repayment. Monthly interest is due beginning with the first month and monthly principal payments are due after the twelve-month grace period ends. The loan was funded on September 30, 2015. 22 Derivatives We are exposed to certain risks relating to our ongoing business operations. One risk managed by us using derivative instruments is interest rate risk. To manage interest rate exposure, we enter into hedging transactions (interest rate swaps) using derivative financial instruments. The objective of entering into interest rate swaps is to eliminate the variability of cash flows in the interest payments associated with variable-rate LIBOR loans over the life of the loans. As changes in interest rates impac t the future cash flow of interest payments, the hedges provide a synthetic offset to interest rate movements. ff r In addition, we are exposed to foreign currency and interest rate cash flow exposure related to non-functional currency long-term debt of two of our wholly owned subsidiaries. To manage foreign currency and interest rate cash flow exposure, these subsidiaries enter into cross-currency interest rate swaps that convert their U.S. dollar denominated floating interest payments to functional currency fixed interest payments during the life of the hedging instrument. As changes in foreign exchange and interest rates impact the future cash flow of interest payments, the hedges are intended to offset changes in cash flows attributable to interest rate and foreign exchange movements. We are also exposed to foreign-currency exchange-rate fluctuations on U.S. dollar denominated liabilities within our international subsidiaries whose functional currency is other than the U.S. dollar. We manage these fluctuations, in part, through the use of non-deliverable forward foreign-exchange contracts that are intended to offset changes in cash flow attributable to currency exchange movements. The contracts are intended primarily to economically address exposure to U.S. dollar merchandise inventory expenditures made by our international subsidiaries whose functional currency is other than the U.S. dollar. We seek to mitigate foreign-currency exchange-rate risk with the use of these contracts and do not intend to engage in speculative transactions. Currently, these contracts do not contain any credit-risk-related contingent features. These contracts do not qualify for derivative hedge accounting. The forward currency hedges are not effective cash flow hedges because the notional amount and maturity date of the forward contract does not coincide with the accounts payable balance and due dates. The hedge ineffectiveness is measured by use of the “hypothetical derivative method,” and we record the changes in the fair value of the forward contract related to the re-measurement of the payable at spot exchange rates as exchange rate gains or losses. The implied interest rate included within the forward contract is reflected in earnings as interest expense. u t For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income (loss) and reclassified into earnings in the same period or periods during which the hedged transaction is determined to be ineffective. There were no such amounts for the periods reported herein. 23 The following table summarizes agreements for which we recorded cash flow hedge accounting transactions during the twelve months ended August 31, 2017: Subsidiary PriceSmart, Inc Date Entered into 7-Nov-16 Costa Rica 28-Aug-15 Derivative Financial Counter- party MUFG Union Bank, N.A. ("Union Bank") Citibank, N.A. ("Citi") Honduras 24-Mar-15 Citibank, N.A. El Salvador 16-Dec-14 Colombia 10-Dec-14 Panama 9-Dec-14 Honduras 23-Oct-14 ("Citi") Bank of Nova Scotia ("Scotiabank") Citibank, N.A. ("Citi") Bank of Nova Scotia ("Scotiabank") Citibank, N.A. ("Citi") Derivative Financial Instruments Interest rate swap Cross currency interest rate swap Cross currency interest rate swap Interest rate swap Cross currency interest rate swap Interest rate swap Cross currency interest rate swap Panama Panama Panama 1-Aug-14 Bank of Nova Scotia ("Scotiabank") 22-May-14 Bank of Nova Scotia ("Scotiabank") 22-May-14 Bank of Nova Scotia ("Scotiabank") Interest rate swap Interest rate swap Interest rate swap Initial US$ Notional Amount Bank US$ loan Held with 35,700,000 Union Bank 7,500,000 Citibank, N.A. 8,500,000 Citibank, N.A. 4,000,000 Bank of Nova Scotia 15,000,000 Citibank, N.A. 10,000,000 Bank of Nova Scotia 5,000,000 Citibank, N.A. 5,000,000 Bank of Nova Scotia 19,800,000 Bank of Nova Scotia 3,970,000 Bank of Nova Scotia Floating Leg (swap counter- party) Variable rate 1-month Libor plus 1.7% Variable rate 3-month Libor plus 2.50% Variable rate 3-month Libor plus 3.25% Variable rate 30-day Libor plus 3.5% Variable rate 3-month Libor plus 2.8% Variable rate 30-day Libor plus 3.5% Variable rate 3-month Libor plus 3.5% Variable rate 30-day Libor plus 3.5% Variable rate 30-day Libor plus 3.5% Variable rate 30-day Libor plus 3.5% $ $ $ $ $ $ $ $ $ $ Fixed Rate for PSMT Subsidiary Settlement Dates 3.65 % 1st day of each month beginning on April 1, 2017 7.65 % 28th day of August, November, February, and May beginning on November 30, 2015 10.75 % 24th day of March, June, September, and December beginning on June 24, 2015 4.78 % 29th day of each month beginning on December 29, 2014 8.25 % 4th day of March, June, Sept, Dec. beginning on March 4, 2015 5.16 % 28th day of each month beginning December 29, 2014 11.6 % 22nd day of January, April, July, and October beginning on January 22, 2015 Effective Period of swap March 1, 2017 - March 1, 2027 August 28, 2015 - August 28, 2020 March 24,2015 - March 20, 2020 December 1, 2014 - August 29, 2019 December 4, 2014 - December 3, 2019 November 28, 2014 - November 29, 2019 October 22, 2014 - October 22, 2017 4.89 % 21st day of each month beginning on September 22, 2014 4.98 % 4th day of each month beginning on June 4, 2014 4.98 % 4th day of each month beginning on June 4, 2014 August 21, 2014 - August 21, 2019 Settled on August 31, 2017 May 5, 2014 - April 4, 2019 We measure 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 during the reporting period. We have designated the interest rate swaps and cross- currency interest rate swap agreements as hedging instruments and have accounted for them under hedge accounting rules. Derivatives listed on the table below were designated as cash flow hedging instruments. The table summarizes the effect of the fair value of interest rate swap and cross-currency interest rate swap derivative instruments that qualify for derivative hedge accounting and its associated tax effect on accumulated other comprehensive (income) / loss (in thousands, except footnote data): Derivatives designated as cash flow hedging instruments Cross-currency interest rate swaps Interest rate swaps Cross-currency interest rate swaps Net fair value of derivatives designated as hedging instruments Balance Sheet Location Other non-current assets Other long-term liabilities Other long-term liabilities August 31, 2017 Net Tax Effect Fair Value Net OCI August 31, 2016 Net Tax Effect Fair Value Net OCI $ 2,547 (950) 1,597 $ 3,224 (1,248) 1,976 (231) 80 (151) (448) (451) 135 (316) (1,066) 115 320 (333) (746) $ 1,865 $ (735) $ 1,130 $ 1,710 $ (813) $ 897 From time to time, we enter into non-deliverable forward exchange contracts. These contracts are treated for accounting purposes as fair value contracts and do not qualify for derivative hedge accounting. As of August 31, 2017 the Company did not have any open non-deliverable forward foreign-exchange contracts. 24 The following table summarizes the fair value of foreign currency forward contracts that do not qualify for derivative hedge accounting (in thousands): Derivatives designated as fair value hedging instruments Foreign currency forward contracts Foreign currency forward contracts Net fair value of derivatives designated as hedging instruments that do not qualify for hedge accounting Short-Term Borrowings and Long-Term Debt August 31, 2017 August 31, 2016 Balance Sheet Location Other current assets Other accrued expenses Balance Sheet Location Other current assets Other accrued expenses Fair Value $ — — — Fair Value $ 34 (144) $ (110) Short-term borrowings consist of lines of credit which are secured by certain assets of the Company and its subsidiaries, which, in some cases, are guaranteed by the Company. The following table summarizes the balances of total facilities, facilities used and facilities available (in thousands): Total Amount of Facilities Short-term Borrowings Letters of Credit Facilities Available Weighted average interest rate August 31, 2017 August 31, 2016 $ $ 69,000 65,000 $ $ — $ $ 16,534 966 9,224 $ $ 68,034 39,242 — % 10.1 % Facilities Used As of August 31, 2017 and 2016, the Company had approximately $40.0 million of short-term facilities in the U.S. that require compliance with certain quarterly financial covenants. As of August 31, 2017 and 2016, the Company was in compliance with respect to these covenants. Each of the facilities expires annually and is normally renewed. The following table provides the changes in our long-term debt for the twelve months ended August 31, 2017: (Amounts in thousands) Balances as of August 31, 2016 incurred during the period: MUFG Union Bank Trinidad subsidiary Repayments of long-term debt: Repayment of loan by Panama subsidiary Regularly scheduled loan payments Translation adjustments on foreign-currency debt of subsidiaries whose functional currency is not the U.S. dollar (2) Balances as of August 31, 2017 Current portion of long- term debt Long-term debt (net of current portion) Total $ 14,565 $ 73,542 $ 88,107 (1) — 6,000 (2,000) (225) 35,700 6,000 (11,333) (15,837) 35,700 12,000 (13,333) (16,062) 18 18,358 $ $ (133) 87,939 $ (115) 106,297 (3) (1) The carrying amount on non-cash assets assigned as collateral for this total was $102.4 million. No cash assets were assigned as collateral for this total. (2) These foreign currency translation adjustments are recorded within Other comprehensive income. (3) The carrying amount on non-cash assets assigned as collateral for this total was $128.4 million. No cash assets were assigned as collateral for this total. As of August 31, 2017, the Company had approximately $85.6 million of long-term loans in Trinidad, Panama, El Salvador, Honduras, Costa Rica, Barbados and Colombia that require these subsidiaries to comply with certain annual or quarterly financial covenants, which include debt service and leverage ratios. As of August 31, 2017, the Company was in compliance with all covenants or amended covenants. As of August 31, 2016, the Company had approximately $76.0 million of long-term loans in Trinidad, Panama, El Salvador, Honduras, Costa Rica, Barbados and Colombia that require these subsidiaries to comply with certain annual or quarterly 25 financial covenants, which include debt service and leverage ratios. As of August 31, 2016, the Company was in compliance with all covenants or amended covenants. Critical Accounting Estimates The preparation of our consolidated financial statements requires that management make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Some of our accounting policies require management to make difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Management continues to review its accounting policies and evaluate its estimates, including those related to contingencies and litigation, income taxes, value added taxes, and long-lived assets. We base our estimates on historical experience and on other assumptions that management believes to be reasonable under the present circumstances. Using different uu estimates could have a material impact on our financial condition and results of operations. Income Taxes: We account for income taxes using the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences and carry- forwards are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is established when necessary to reduce deferred tax assets to amounts expected to be realized. As of August 31, 2017, we evaluated our deferred tax assets and liabilities and determined that a valuation allowance was necessary for certain foreign deferred tax asset balances, primarily because of the existence of significant negative objective evidence, such as the fact that certain subsidiaries are in a cumulative loss position for the past three years, indicating that certain net operating loss carry-forward periods are not sufficient to realize the related deferred tax assets. We and our subsidiaries are 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 us to interpret the applicable tax laws and regulations in effect in such jurisdictions, which could affect the amount of tax we pay. In consultation with our tax advisors, we base our tax returns on interpretations that we believed to be reasonable under the circumstances. The tax returns, however, are subject to routine reviews by the various federal, state and foreign taxing authorities in the jurisdictions in which we or one of our subsidiaries file tax returns. As part of these reviews, a taxing authority may disagree with respect to the income tax positions we have taken (“uncertain tax positions”) and, therefore, require us or one of our subsidiaries to pay additional taxes. We accrue an amount for our estimate of probable additional income tax liability. In certain cases, the impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more likely than not to be sustained upon audit by the relevant tax authority. An uncertain income tax position will not be recognized if it has less than 50% likelihood of being sustained. This requires significant judgment, the use of estimates, and the interpretation and application of complex tax laws. When facts and circumstances change, we reassess these probabilities and record any changes in the consolidated financial statements as appropriate. There were no material changes in our uncertain income tax positions for the periods ended on August 31, 2017 and 2016. During the fourth quarter of fiscal year 2017, one of the Company’s subsidiaries received assessments claiming $2.6 million of taxes, penalties and interest related to withholding taxes on certain charges for services rendered by the Company. In addition, this subsidiary received assessments totaling $5.3 million for lack of deductibility of the underlying service charges due to the lack of withholding. Based on the Company's interpretation of local law, rulings and jurisprudence (including Supreme Court precedents with respect to the deductibility assessment), the Company expects to prevail in both instances and has not recorded a provision for these assessments. We have not provided for U.S. deferred taxes on cumulative non-U.S. undistributed earnings as we deem such earnings to be indefinitely reinvested. It is not practicable to determine the U.S. federal income tax liability that would be associated with the repatriation earnings because of the complexity of the computation. Tax Receivables: We pay Value Added Tax (“VAT”) or similar taxes (“input VAT”), income taxes, and other taxes within the normal course of our business in most of the countries in which we operate related to the procurement of merchandise and/or services we acquires and/or on sales and taxable income. We also collect VAT or similar taxes on behalf of the government (“output VAT”) for merchandise and/or services we sell. If the output VAT exceeds the input VAT, then the difference is remitted to the government, usually on a monthly basis. If the input VAT exceeds the output VAT, this creates a VAT receivable. In most countries where we operate, the governments have implemented additional collection procedures, such as requiring credit card processors to remit a portion of sales processed via credit card directly to the government as advance payments of VAT and/or income tax. In the case of VAT, these procedures alter the natural offset of input and output VAT and generally leave us with a net VAT receivable, forcing us to process significant refund claims on a recurring basis. With respect to income taxes paid, if the estimated income taxes paid or withheld exceed the actual income tax due this creates an income tax receivable. We d 26 either request a refund of these tax receivables or apply the balance to expected future tax payments. These refund or offset processes can take anywhere from several months to several years to complete. In most countries where the Company operates, the tax refund process is defined and structured with regular refunds or offsets. However, as of August 31, 2017, in one country the government has alleged there is not a clearly defined process to allow the tax authorities to refund VAT receivables. As of August 31, 2016, there were three countries that lacked a clearly defined process; however, during the third and fourth quarters of 2017, two of these countries clarified the refund mechanism, which we are currently pursuing. The Company, together with our tax and legal advisers, is currently seeking clarification in court in the country without a clearly defined process and expects to prevail. The balance of the VAT receivable in the country with undefined refund mechanisms was approximately $1.2 million and $800,000 as of August 31, 2017 and August 31, 2016, respectively. In another country in which the Company has warehouse clubs, beginning in fiscal year 2015, a new minimum income tax mechanism took effect, which requires us to pay taxes based on a percentage of sales rather than income. As a result, we are making income tax payments substantially in excess of those we would expect to pay based on taxable income. The current rules (which we have challenged in court) do not clearly allow us to obtain a refund or offset this excess income tax against other taxes. As of August 31, 2017, the Company had deferred tax assets of approximately $2.0 million in this country. Also, the Company had an income tax receivable balance of $4.3 million as of August 31, 2017 related to excess payments from fiscal year 2015 to 2017. We have not placed any type of allowance on the recoverability of these tax receivables or deferred tax assets because we believe that it is more likely than not that we will ultimately succeed in our refund requests, related appeals and/or court challenge on this matter. Our policy for classification and presentation of VAT receivables, income tax receivables and other tax receivables is as follows: (cid:120) (cid:120) Short-term VAT and Income tax receivables, recorded as Other current assets: This classification is used for any countries where our subsidiary has generally demonstrated the ability to recover the VAT or income tax receivable within one year. We also classify as short-term any approved refunds or credit notes to the extent that we expect to receive the refund or use the credit notes within one year. Long-term VAT and Income tax receivables, recorded as Other non-current assets: This classification is used for amounts not approved for refund or credit in countries where our subsidiary has not demonstrated the ability to obtain refunds within one year and/or for amounts which are subject to outstanding disputes. An allowance is provided against VAT and income tax receivable balances in dispute when we do not expect to eventually prevail in its recovery. y Long-lived Assets: We periodically evaluate our long-lived assets for indicators of impairment. Indicators that an asset may be impaired are: (cid:120) (cid:120) (cid:120) (cid:120) the asset's inability to continue to generate income from operations and positive cash flow in future periods; m loss of legal ownership or title to the asset; significant changes in its strategic business objectives and utilization of the asset(s); and the impact of significant negative industry or economic trends. Management's judgments are based on market and operational conditions at the time of the evaluation and can include management's best estimate of future business activity, which in turn drives estimates of future cash flows from these assets. These periodic evaluations could cause management to conclude that impairment factors exist, requiring an adjustment of these assets to their then-current fair market value. Future business conditions and/or activity could differ materially from the projections made by management causing the need for additional impairment charges. No impairment charges have been recorded during fiscal year 2017 related to the loss of legal ownership or title to assets; significant changes in the Company's strategic business objectives or utilization of assets; or the impact of significant negative industry or economic trends. Loss/(gain) on disposal of assets recorded during the years reported resulted from improvements to operations and normal preventive maintenance. Seasonality Historically, our merchandising businesses have experienced holiday retail seasonality in their markets. In addition to seasonal fluctuations, our operating results fluctuate quarter-to-quarter as a result of economic and political events in markets that we serve, the timing of holidays, weather, the timing of shipments, product mix, and currency effects on the cost of U.S.-sourced products which may make these products more or less expensive in local currencies and therefore more or less affordable. Because of such fluctuations, the results of operations of any quarter are not indicative of the results that may be achieved for a full fiscal year or any future quarter. In addition, there can be no assurance that our future results will be consistent with past results or the projections of securities analysts. h ff 27 Quantitative and Qualitative Disclosures about Market Risk We are exposed to market risk from changes in interest rates, foreign currency exchange rates and commodity price risk. These market risks arise in the normal course of business. We do not engage in speculative trading activities. To manage the risk arising from these exposures, we utilize interest rate swaps, cross-currency interest rate swaps, non-deliverable foreign currency forward contracts and loans denominated in foreign currencies. For a discussion of our accounting policies for derivative instruments and further disclosures, please see Notes to Consolidated Financial Statements - Note 12 - Derivative Instruments and Hedging Activities. Each market risk sensitivity analysis presented below is based on hypothetical scenarios used to calibrate potential risk and do not represent our view of future market changes. The effect of a change in a particular assumption is calculated without adjusting any other assumption. In reality, however, a change in one factor could cause a change in another factor, which may n magnify or negate other sensitivities. Interest Rate Risk We are exposed to changes in interest rates as a result of our short-term borrowings and long-term debt borrowings. We have mitigated a portion of our interest rate risk by managing the mix of fixed and variable rate debt and by entering into interest rate swaps and cross-currency interest rate swaps to hedge interest rate risk. The notional amount, interest payment and maturity dates of the swap match the terms of the associated debt. The table below provides information about our financial instruments that are sensitive to changes in interest rates. For debt obligations, the table represents the principal cash flows and related weighted-average interest rates by expected maturity dates. For interest rate swaps, including cross-currency interest rate swaps, the table represents the contractual cash flows and weighted-average interest rates by the contractual maturity date, unless otherwise noted. The notional amounts are used to calculate contractual cash flows to be exchanged under the contracts. The weighted-average variable rates are based upon prevailing market interest rates and the outstanding balances as of August 31, 2017. t Annual maturities of long-term debt and derivatives are as follow (in thousands): 2018 2019 Twelve Months Ended August 31, (Amounts in thousands) 2021 2022 2020 Thereafter Total Long-Term Debt: Long-term debt with fixed interest rate Weighted-average interest rate Long-term debt with variable interest rate Weighted-average interest rate Total long-term debt Derivatives: Interest Rate Swaps: Variable to fixed interest Weighted-average pay rate Weighted-average receive rate Cross-Currency Interest Rate Swaps: Variable to fixed interest Weighted-average pay rate Weighted-average receive rate $ $ $ $ 5,414 8.48% 12,943 4.39% 18,357 $ $ $ 4,987 8.48% 13,159 4.40% 18,146 $ $ $ 3,810 8.69% 16,700 3.63% 20,510 $ $ $ 11,248 8.40% 2,443 3.00% 13,691 $ $ $ 400 8.00% 2,566 3.00% 2,966 $ $ $ — $ 25,859 (1) —% 8.49% 32,627 3.00% 32,627 $ $ 80,438 3.59% 106,297 (1) 3,200 $ 5,067 $ 6,626 $ 1,275 $ 1,275 $ 31,981 $ 49,424 4.96% 4.73% $ 4,100 $ 9.48% 4.58% 4.97% 4.73% 4,100 9.48% 4.58% 4.88% 4.43% 3.65% 3.01% $ 10,100 $ 7,788 $ 8.50% 4.72% 9.26% 4.20% 3.65% 3.01% — —% —% 3.65% 3.01% 4.03% 3.49% $ 26,088 9.03% 4.52% —% —% (1) The Company has disclosed the future annual maturities of long-term debt, for which it has entered into cross-currency interest rate swaps, using the derivative obligation as of August 31, 2017 to estimate the future commitments. Therefore, the total annual commitments reflects these obligations, including the effect of the cross-currency interest rate swaps on the total- long term debt as disclosed on the consolidated balance sheet. Foreign Currency Risk We have foreign currency risks related to sales, operating expenses and financing transactions in currencies other than the U.S. dollar. As of August 31, 2017, we had a total of 39 consolidated warehouse clubs operating in 12 foreign countries and 28 one U.S. territory, 31 of which operate under currencies other than the U.S. dollar. Approximately 52% of our net warehouse sales are comprised of products we purchased in U.S. dollars and were sold in countries whose currencies were other than the U.S. dollar. Approximately, 77% of our net warehouse sales are in markets whose functional currency is other than the U.S. dollar. We may enter into additional foreign countries in the future or open additional locations in existing countries, which may increase the percentage of net warehouse sales denominated in foreign currencies. ff Currency exchange rate changes either increase or decrease the cost of imported products that we purchase in U.S. dollars and price in local currency. Price changes can impact the demand for those products in the market. Currency exchange rates also affect the reported sales of the consolidated company when local currency-denominated sales are translated to U.S. dollars. In addition, we revalue all U.S. dollar denominated assets and liabilities within those markets that do not use the U.S. dollar as the functional currency. These assets and liabilities include, but are not limited to, excess cash permanently reinvested offshore and the value of items shipped from the U.S. to our foreign markets. The gain or loss associated with this revaluation, net of reserves, is recorded in other income (expense). Foreign currencies in most of the countries where we operate have historically devalued against the U.S. dollar and are expected to continue to devalue. The following tables summarize by country, for those countries with functional currencies other than the U.S. dollar, the weakening of the countries' currency against the U.S. dollar (devaluation) or the strengthening of their currencies (revaluation): Country Colombia Costa Rica Dominican Republic Guatemala Honduras Jamaica Nicaragua Trinidad Revaluation/(Devaluation) Twelve Months Ended August 31, 2017 % Change 2016 % Change (0.11)% (4.19)% (3.52)% 3.47 % (2.11)% (1.59)% (5.00)% (0.58)% 5.39 % (2.99) % (2.04) % 1.65 % (4.25) % (8.27) % (5.00) % (5.60) % k We seek to manage foreign exchange risk by (1) adjusting prices on goods acquir ed in U.S. dollars on a periodic basis to maintain our target margins after taking into account changes in exchange rates; (2) obtaining local currency loans from banks within certain markets where it is economical to do so and where management believes the risk of devaluation and the level of U.S. dollar denominated liabilities warrants this action; (3) reducing the time between the acquisition of product in U.S. dollars and the settlement of that purchase in local currency; (4) maintaining a balance between assets held in local currency and in U.S. dollars; and (5) by entering into cross-currency interest rate swaps and forward currency derivatives. We have local-currency- denominated long-term loans in Costa Rica, Trinidad and Tobago, Guatemala and Barbados; we have cross-currency interest rate swaps and forward currency derivatives in Costa Rica and Colombia; we have cross-currency interest rate swaps in Honduras and we have interest rate swaps in Panama and El Salvador. Turbulence in the currency markets can have a significant impact on the value of the foreign currencies within the countries in which we operate. We report the gains or losses associated with the revaluation of these monetary assets and liabilities on our Consolidated Statements of Income under the heading “Other income (expense), net.” Future volatility and uncertainties regarding the currencies in the countries that we operate in could have a material impact on our operations in future periods. However, there is no way to accurately forecast how currencies may trade in the future and, as a result, we cannot accurately project the impact of the change in rates on our future demand for imported products, reported sales, or financial results. uu 29 We are exposed to foreign exchange risks related to U.S. dollar-denominated and other foreign-denominated cash, cash equivalents and restricted cash, to U.S. dollar-denominated intercompany debt balances and to other U.S. dollar-denominated debt/asset balances (excluding U.S. dollar-denominated debt obligations for which we hedge a portion of the currency risk inherent in the interest and principal payments), within entities whose functional currency is not the U.S. dollar. The following table discloses the net effect on other income (expense) for these U.S. dollar-denominated and other foreign-denominated accounts relative to hypothetical simultaneous currency devaluation in all the countries listed in the table above, based on ba lances as of August 31, 2017: n Gains based on change in U.S. dollar denominated and other foreign denominated cash, cash equivalents and restricted cash balances (in thousands) (Losses) based on change in U.S. dollar denominated inter- company balances (in thousands) (Losses) based on change in U.S. dollar denominated other asset/liability balances, (in thousands) Net gain (loss) $ $ $ 2,655 5,310 10,621 $ $ $ (2,369) $ (4,737) $ (9,475) $ (879) $ (1,758) $ (3,515) $ (593) (1,185) (2,369) Overall weighted negative currency movement 5% 10% 20% From time to time we have experienced a lack of availability of U.S. dollars in certain markets (U.S. dollar illiquidity). This impedes our ability to convert local currencies obtained through warehouse sales into U.S. dollars to settle the U.S. dollar liabilities associated with our imported products. During fiscal year 2017 and continuing into fiscal year 2018, we experienced this situation in Trinidad (“TT”). We are limited in our ability to convert TT dollars that we generated through sales of merchandise into U.S. dollars to settle U.S. dollar liabilities, increasing our foreign exchange exposure to any devaluation of the TT dollar. We are working with our banks to source other tradable currencies (such as Euros and Canadian dollars), but until the central bank in Trinidad makes more U.S. dollars available, this condition will continue and we plan to take steps to limit our exposure to a potential devaluation. During part of the first half of fiscal year 2017 we maintained shipments of merchandise to Trinidad from our distribution center in Miami at levels that generally aligned with our Trinidad subsidiary’s ability to pay for the merchandise in U.S. dollars. This resulted in a reduced level of shipments, which negatively affected sales in the second quarter, particularly December, although by less than our initial estimate. These actions did not impact the level of merchandise we obtain locally in Trinidad. Starting in the third quarter of fiscal year 2017, we were able to improve our sourcing of tradeable currencies, which allowed for a more normalized flow of imported merchandise during the third and fourth fiscal quarters. Due to the actions taken by us, as of August 31, 2017, our Trinidad subsidiary had net U.S. dollar denominated assets of approximat ely $4.0 million. However the illiquidity situation remains in the Trinidad market, and we expect to face similar issues in sourcing U.S. dollars during the first and second quarters of fiscal year 2018 to those we faced in the same quarters of fiscal year 201 7. r Going forward, we could again find ourselves in a net U.S. dollar denominated liability position that may require us to limit shipments from the U.S. to Trinidad in line with our ability to exchange Trinidad dollars for tradeable currencies or to reduce our exposure to a potential devaluation. If, for example, a hypothetical 20% devaluation of the Trinidad currency occurred while w e held levels of net U.S. denominated liabilities similar to those at August 31, 2016 ($18.9 million), the net effect on other expense would be approximately $3.8 million. This may result in once again limiting shipments to our Trinidad subsidiary, causing it to run out of certain merchandise, from time to time, during fiscal year 2018. x d f ff f We are also exposed to foreign exchange risks related to local-currency-denominated cash and cash equivalents, to local- currency-denominated debt obligations, to local-currency-denominated current assets and liabilities and to local-currency- denominated long-term assets and liabilities within entities whose functional currency is not the U.S. dollar. The following ta ble discloses the net effect on other comprehensive income (loss) for these local currency denominated accounts relative to hypothetical simultaneous currency devaluation in all the countries listed in the table above, based on balances as of August 31, 2017: w Other comprehensive loss on the decline in local currency denominated cash and cash equivalents and restricted cash (in thousands) Other comprehensive gain on the decline in foreign currency denominated debt obligations (in thousands) Other comprehensive loss on the decline in all other foreign currency denominated current assets net of current liabilities (in thousands) Other comprehensive loss on the decline in all other foreign currency denominated long-term assets net of long-term liabilities (in thousands) $ $ $ 3,668 7,335 14,671 $ $ $ (1,647) (3,295) (6,590) $ $ $ 9,529 19,057 38,115 $ $ $ 13,363 26,726 53,451 Overall weighted negative currency movement 5% 10% 20% 30 In addition, we are exposed to foreign currency exchange rate fluctuations associated with our U.S. dollar-denominated debt obligations that we hedge. We hedge a portion of the currency risk inherent in the interest and principal payments associa ted with this debt through the use of cross-currency interest rate swaps. The terms of these swap agreements are commensurate with the underlying debt obligations. The aggregate fair value of these swaps was in a net asset position of approximately $1.3 million at August 31, 2017 and approximately $1.2 million at August 31, 2016. A hypothetical 10% increase in the currency exchange rates underlying these swaps from the market rates at August 31, 2017 would have resulted in a further increase in the value of the swaps of approximately $654,000. Conversely, a hypothetical 10% decrease in the currency exchange rates underlying these swaps from the market rates at August 31, 2017 would have resulted in a net decrease in the value of the swaps of approximately of $574,000. y f We use non-deliverable forward foreign exchange contracts primarily to address exposure to U.S. dollar merchandise inventory expenditures made by our international subsidiaries whose functional currency is other than the U.S. dollar. Currently, these contracts do not qualify for derivative hedge accounting. The market risk related to foreign currency forward contracts is measured by estimating the potential impact of a 10% change in the value of the U.S. dollar relative to the local currency exchange rates. The net increase or decrease in the fair value of these derivative instruments are economically offset by the gains or losses on the underlying transactions. Commodity Price Risk The increasing price of oil and certain commodities could have a negative effect on our operating costs and sales. Higher oil prices can negatively impact the economic growth of the countries in which we operate, thereby reducing the buying power of our members. Higher oil prices can also increase our operating costs, particularly utilities and distribution expenses. Inflationary pressures on various commodities also may impact consumer spending. We do not currently seek to hedge commodity price risk. There have been no changes in the Company's internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) of the Exchange Act), during the fiscal year ended August 31, 2017, that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. The certifications required by Section 302 of the Sarbanes-Oxley Act of 2002 are filed as Exhibit 31.1 and 31.2 to this report. 31 Report of Independent Registered Public Accounting Firm The Board of Directors and Stockholders of PriceSmart, Inc. We have audited the accompanying consolidated balance sheets of PriceSmart, Inc. as of August 31, 2017 and 2016, and the related consolidated statements of income, comprehensive income, shareholders' equity, and cash flows for each of the three years in the period ended August 31, 2017. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. f In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of PriceSmart, Inc. at August 31, 2017 and 2016, and the consolidated results of its operations and its cash flows for each of the three years in the period ended August 31, 2017, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), PriceSmart Inc.’s internal control over financial reporting as of August 31, 2017, based on criteria established in Internal Control- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated October 26, 2017, expressed an unqualified opinion thereon. /s/ Ernst & Young LLP San Diego, California October 26, 2017 32 PRICESMART, INC. CONSOLIDATED BALANCE SHEETS (AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA) ASSETS Current Assets: Cash and cash equivalents Short-term restricted cash Receivables, net of allowance for doubtful accounts of $7 as of August 31, 2017 and $7 as of August 31, 2016, respectively Merchandise inventories Prepaid expenses and other current assets Total current assets Long-term restricted cash Property and equipment, net Goodwill Deferred tax assets Other non-current assets (includes $2,547 and $3,224 as of August 31, 2017 and August 31, 2016, respectively, for the fair value of derivative instruments) Investment in unconsolidated affiliates Total Assets LIABILITIES AND EQUITY Short-term borrowings Accounts payable Accrued salaries and benefits Deferred membership income Income taxes payable Other accrued expenses (includes $0 and $110 as of August 31, 2017 and August 31, 2016, respectively, for the fair value of foreign currency forward contracts) Long-term debt, current portion Total current liabilities Deferred tax liability Long-term portion of deferred rent Long-term income taxes payable, net of current portion Long-term debt, net of current portion Other long-term liabilities (includes $682 and $1,514 for the fair value of derivative instruments and $5,051 and $4,013 for post employment plans as of August 31, 2017 and August 31, 2016, respectively) Total Liabilities August 31, 2017 2016 $ 162,434 460 $ 6,460 310,946 510,370 2,818 557,829 35,642 15,412 199,522 518 7,464 282,907 22,143 512,554 2,676 473,045 35,637 12,258 $ $ 44,678 10,765 1,177,514 $ 49,798 10,767 1,096,735 — $ 272,248 19,151 22,100 5,044 26,483 18,358 363,384 1,812 8,914 909 87,939 16,534 267,173 19,606 20,920 4,226 24,880 14,565 367,904 1,760 8,961 970 73,542 5,789 468,747 5,527 458,664 33 Equity: Common stock $0.0001 par value, 45,000,000 shares authorized; 31,275,727 and 31,237,658 shares issued and 30,400,742 and 30,401,307 shares outstanding (net of treasury shares) as of August 31, 2017 and August 31, 2016, respectively Additional paid-in capital Tax benefit from stock-based compensation Accumulated other comprehensive loss Retained earnings Less: treasury stock at cost, 874,985 and 836,531 shares as of August 31, 2017 and August 31, 2016, respectively Total Equity Total Liabilities and Equity 3 422,762 11,486 (110,059) 420,499 3 412,369 11,321 (103,951) 351,060 (35,924) 708,767 1,177,514 $ (32,731) 638,071 1,096,735 $ See accompanying notes. 34 PRICESMART, INC. CONSOLIDATED STATEMENTS OF INCOME (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) Revenues: Net warehouse club sales Export sales Membership income Other income Total revenues Operating expenses: Cost of goods sold: Net warehouse club Export Selling, general and administrative: Warehouse club operations General and administrative Pre-opening expenses Loss/(gain) on disposal of assets Total operating expenses Operating income Other income (expense): Interest income Interest expense Other income (expense), net Total other income (expense) Income before provision for income taxes and income (loss) of unconsolidated affiliates Provision for income taxes Income (loss) of unconsolidated affiliates Net income Net income per share available for distribution: Basic net income per share Diluted net income per share Shares used in per share computations: Diluted Dividends per share Years Ended August 31, 2016 2015 2017 $ $ 2,910,062 34,244 47,743 4,579 2,996,628 $ 2,820,740 33,813 45,781 4,842 2,905,176 2,721,132 33,279 43,673 4,519 2,802,603 2,487,146 32,606 268,629 70,013 44 1,961 2,860,399 136,229 1,809 (6,777) 1,482 (3,486) 132,743 (42,018) (1) 90,724 2,417,366 32,260 252,130 64,344 1,191 1,162 2,768,453 136,723 1,307 (5,891) (899) (5,483) 131,240 (42,849) 332 88,723 2.98 2.98 30,020 30,023 0.70 $ $ $ 2.92 2.92 29,928 29,933 0.70 $ $ $ 2,321,074 31,765 241,285 56,371 3,737 2,005 2,656,237 146,366 1,058 (6,440) (4,388) (9,770) 136,596 (47,566) 94 89,124 2.95 2.95 29,848 29,855 0.70 $ $ $ $ See accompanying notes. 35 PRICESMART, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (AMOUNTS IN THOUSANDS) Net income Foreign currency translation adjustments (1) Defined benefit pension plan: Net gain (loss) arising during period Amortization of prior service cost and actuarial gains included in net periodic pensions cost Total defined benefit pension plan Derivative instruments: (2) Unrealized gains/(losses) on change in derivative obligations Unrealized gains/(losses) on change in fair value of interest rate swaps Amounts reclassified from accumulated other comprehensive income (loss) to other income (expense), for settlement of derivatives Total derivative instruments Other comprehensive income (loss) Comprehensive income Years Ended August 31, 2016 2015 2017 90,724 $ 88,723 $ 89,124 (6,297) $ (1,702) $ (50,130) (166) 39 (127) 81 254 (182) (20) (202) 65 (291) (226) 1,826 (2,598) (2,361) 828 (19) 316 (6,108) 84,616 $ — (535) (2,439) 86,284 $ (100) (1,870) (52,226) 36,898 $ $ $ Translation adjustments arising in translating the financial statements of a foreign entity have no effect on the income taxes of that foreign entity. They may, however, affect: (a) the amount, measured in the parent entity's reporting currency, of withholding taxes assessed on dividends paid to the parent entity and (b) the amount of taxes assessed on the parent entity by the government of its country. The Company has determined that the reinvestment of earnings of its foreign subsidiaries are indefinite because of the long-term nature of the Company's foreign investment plans. Therefore, deferred taxes are not provided for on translation adjustments related to non-remitted earnings of the Company's foreign subsidiaries. (2) See Note 12 - Derivative Instruments and Hedging Activities. See accompanying notes. 36 . C N I , T R A M S E C I R P Y T I U Q E F O S T N E M E T A T S D E T A D I L O S N O C ) S D N A S U O H T N I S T N U O M A ( — — 9 4 ) 7 7 6 , 4 ( 5 6 2 , 8 4 5 5 7 1 , 7 ) 6 2 1 , 1 2 ( 4 2 1 , 9 8 ) 6 2 2 , 2 5 ( 4 8 5 , 6 6 5 ) 4 3 3 , 3 ( — 0 8 1 3 7 , 9 3 2 7 , 8 8 ) 9 3 4 , 2 ( ) 4 7 2 , 1 2 ( ) 3 9 1 , 3 ( 1 7 0 , 8 3 6 — — 4 0 7 4 5 8 , 9 4 2 7 , 0 9 ) 8 0 1 , 6 ( ) 5 8 2 , 1 2 ( 7 6 7 , 8 0 7 $ ) 0 2 7 , 4 2 ( ) 7 7 6 , 4 ( $ 1 4 7 2 5 — — — — — — — — — — — — — — $ ) 7 9 3 , 9 2 ( ) 4 3 3 , 3 ( $ 3 9 7 3 4 — — — — — — — — — — — — $ ) 1 3 7 , 2 3 ( ) 3 9 1 , 3 ( $ 6 3 8 9 3 — — — — — — — — — — — — — — $ ) 4 2 9 , 5 3 ( $ 5 7 8 3 1 6 , 5 1 2 $ ) 6 8 2 , 9 4 ( $ 5 0 5 , 9 $ 0 5 1 , 7 9 3 $ 3 $ 1 5 9 0 3 , — — — — — — — — — — ) 6 2 1 , 1 2 ( 4 2 1 , 9 8 1 1 6 , 3 8 2 — ) 4 7 2 , 1 2 ( 3 2 7 , 8 8 0 6 0 , 1 5 3 — — — — — — ) 5 8 2 , 1 2 ( 4 2 7 , 0 9 9 9 4 , 0 2 4 — — — — — — — — — — — — — — ) 6 2 2 , 2 5 ( $ ) 2 1 5 , 1 0 1 ( ) 9 3 4 , 2 ( $ ) 1 5 9 , 3 0 1 ( — — — — — — — — — — ) 8 0 1 , 6 ( $ ) 9 5 0 , 0 1 1 ( — — — — — — — 6 0 2 , 1 — — — 9 4 — — — 9 6 9 , 5 — — — — — — — — — 3 3 ) 9 ( 3 — — — — $ 1 1 7 , 0 1 $ 8 6 1 , 3 0 4 $ 3 $ 8 7 9 0 3 , — — — 0 1 6 — — — — — 0 8 1 2 1 , 9 — — — — — — — — — — — 6 5 2 4 — — — — $ 1 2 3 , 1 1 $ 9 6 3 , 2 1 4 $ 3 $ 8 3 2 1 3 , — — — — — — — 5 6 1 — — — 4 0 7 9 8 6 , 9 — — — — — — — — — — — — 3 6 ) 7 3 ( 2 1 — — — — $ 6 8 4 , 1 1 $ 2 6 7 , 2 2 4 $ 3 $ 6 7 2 1 3 , l a t o T y t i u q E k c o t S y r u s a e r T t n u o m A s e r a h S d e n i a t e R s g n i n r a E d e t a l u m u c c A r e h t O e v i s n e h e r p m o C ) s s o L ( e m o c n I t i f e n e B x a T m o r F d e s a B k c o t S n o i t a s n e p m o C l a n o i t i d d A n i - d i a P l a t i p a C k c o t S n o m m o C t n u o m A s e r a h S s d r a w a k c o t s d e t c i r t s e r f o e r u t i e f r o F s r e d l o h k c o t s o t d i a p d n e d i v i D n o i t a s n e p m o c d e s a b - k c o t S s n o i t p o k c o t s f o e s i c r e x E e m o c n i t e N ) s s o l ( e m o c n i e v i s n e h e r p m o c r e h t O d r a w a k c o t s d e t c i r t s e r f o e c n a u s s I s r e d l o h k c o t s o t d i a p d n e d i v i D n o i t a s n e p m o c d e s a b - k c o t S s n o i t p o k c o t s f o e s i c r e x E 5 1 0 2 , 1 3 t s u g u A t a e c n a l a B k c o t s y r u s a e r t f o e s a h c r u P e m o c n i t e N ) s s o l ( e m o c n i e v i s n e h e r p m o c r e h t O 6 1 0 2 , 1 3 t s u g u A t a e c n a l a B k c o t s y r u s a e r t f o e s a h c r u P s d r a w a k c o t s d e t c i r t s e r f o e r u t i e f r o F d r a w a k c o t s d e t c i r t s e r f o e c n a u s s I ) s s o l ( e m o c n i e v i s n e h e r p m o c r e h t O 7 1 0 2 , 1 3 t s u g u A t a e c n a l a B s r e d l o h k c o t s o t d i a p d n e d i v i D n o i t a s n e p m o c d e s a b - k c o t S s n o i t p o k c o t s f o e s i c r e x E e m o c n i t e N 4 1 0 2 , 1 3 t s u g u A t a e c n a l a B k c o t s y r u s a e r t f o e s a h c r u P k c o t s d e t c i r t s e r f o e c n a u s s I 7 3 PRICESMART, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (AMOUNTS IN THOUSANDS) Operating Activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization Allowance for doubtful accounts (Gain)/loss on sale of property and equipment Deferred income taxes Excess tax benefit on stock-based compensation Equity in (gains) losses of unconsolidated affiliates Stock-based compensation Proceeds from the settlement of derivatives Change in operating assets and liabilities: Receivables, prepaid expenses and other current assets, accrued salaries and benefits, deferred membership income and other accruals Merchandise inventories Accounts payable Net cash provided by (used in) operating activities Investing Activities: Additions to property and equipment Deposits for land purchase option agreements Proceeds from disposal of property and equipment Capital contributions to joint ventures Net cash provided by (used in) investing activities Financing Activities: Proceeds from long-term bank borrowings Repayment of long-term bank borrowings Proceeds from short-term bank borrowings Repayment of short-term bank borrowings Repayment of long-term debt with cross-currency interest rate swaps Cash dividend payments Excess tax benefit on stock-based compensation Purchase of treasury stock Proceeds from exercise of stock options Net cash provided by (used in) financing activities Effect of exchange rate changes on cash and cash equivalents Net increase (decrease) in cash, cash equivalents, and restricted cash Cash, cash equivalents, and restricted cash at beginning of period Cash, cash equivalents, and restricted cash at end of period Supplemental disclosure of cash flow information: Cash paid during the period for: Interest, net of amounts capitalized Income taxes Years Ended August 31, 2016 2017 2015 $ 90,724 $ 88,723 $ 89,124 46,292 — 1,961 (2,845) (165) 1 9,689 — 1,894 (28,039) 3,344 122,856 (135,294) (300) 377 — (135,217) 47,700 (29,395) 678 (17,179) — (21,285) 165 (3,193) 704 (21,805) (2,838) (37,004) 202,716 165,712 $ 39,794 7 1,162 2,875 (610) (332) 9,121 — (6,679) (15,732) 23,202 141,531 (77,700) (442) 86 (119) (78,175) 14,370 (16,525) 28,927 (19,314) — (21,274) 610 (3,334) 80 (16,460) (2,777) 44,119 158,597 202,716 5,915 $ 48,530 $ 4,903 51,238 $ $ $ 34,445 — 2,005 2,972 (1,206) (94) 5,969 8,543 (7,807) (40,792) 16,423 109,582 (89,185) 1,095 368 (1,360) (89,082) 52,977 (30,905) 51,664 (42,143) (24,000) (21,126) 1,206 (4,677) 49 (16,955) (11,412) (7,867) 166,464 158,597 6,093 44,174 $ $ $ 38 The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the statement of financial position that sum to the total of the same amounts shown in the statement of cash flows: Years Ended August 31, 2016 199,522 518 2,676 2017 162,434 460 2,818 $ $ 2015 157,072 61 1,464 $ 165,712 $ 202,716 $ 158,597 Cash and cash equivalents $ Long-term restricted cash Total Cash, Cash equivalents, and restricted cash shown in statement of cash flows See accompanying notes. 39 PRICESMART, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 – COMPANY OVERVIEW AND BASIS OF PRESENTATION PriceSmart, Inc.’s (“PriceSmart,” the “Company,” or "we") business consists primarily of international membership shopping warehouse clubs similar to, but smaller in size than, warehouse clubs in the United States. As of August 31, 2017, the Company had 39 consolidated warehouse clubs in operation in 12 countries and one U.S. territory (seven in Colombia; six in Costa Rica; five in Panama; four in Trinidad; three each in Guatemala, Honduras and the Dominican Republic; two each in El Salvador and Nicaragua; and one each in Aruba, Barbados, Jamaica, and the United States Virgin Islands), of which the Company owns 100% of the corresponding legal entities (see Note 2 - Summary of Significant Accounting Policies). The Company opened a new warehouse club in Chia, Colombia in September 2016, fiscal year 2017, bringing the total of warehouse clubs operating in Colombia to seven. The Company opened a new warehouse club in Managua, Nicaragua in November 2015, fiscal year 2016, bringing the total of warehouse clubs operating in Nicaragua to two. In February 2017 the Company acquired land in Santa Ana, Costa Rica upon which the Company opened a new warehouse club on October 5, 2017. This new warehouse club brings the number of PriceSmart warehouse clubs operating in Costa Rica to seven. In June 2017, the Company acquired land in Santo Domingo, Dominican Republic. The Company is currently building a warehouse club on this site that the Company expects to open in the spring of calendar year 2018. This will bring the number of PriceSmart warehouse clubs operating in Dominican Republic to four. The Company continues to explore other potential sites for future warehouse clubs in Central America, the Caribbean and Colombia. Basis of Presentation - The consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles. The consolidated financial statements include the accounts of PriceSmart, Inc., a Delaware corporation, and its subsidiaries. Intercompany transactions between the Company and its subsidiaries have been eliminated in consolidation. NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation – The consolidated financial statements of the Company included herein include the assets, liabilities and results of operations of the Company’s wholly owned subsidiaries and the investments and operating results of joint ventures recorded under the equity method. All significant inter-company accounts and transactions have been eliminated in consolidation. The consolidated financial statements have been prepared by the Company 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 periods presented. As of August 31, 2017, all of the Company's subsidiaries were wholly owned. Additionally, the Company's ownership interest in real estate development joint ventures as of August 31, 2017 is listed below: Real Estate Development Joint Ventures GolfPark Plaza, S.A. Price Plaza Alajuela PPA, S.A. Countries Panama Costa Rica Ownership 50.0 % 50.0 % Basis of Presentation Equity(1) Equity(1) (1) Joint venture interests are recorded as investment in unconsolidated affiliates on the consolidated balance sheets. ff Use of Estimates – The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Variable Interest Entities – The Company reviews and determines at the start of each arrangement, or subsequently if a reconsideration event occurs, whether any of its investments in joint ventures constitute a Variable Interest Entity (“VIE”) and whether it must consolidate a VIE and/or disclose information about its involvement in a VIE. The Company has determined that the joint ventures for GolfPark Plaza, S.A. and Plaza Price Alajuela PPA, S.A. are VIEs. The Company has determined that it is not the primary beneficiary of the VIEs and, therefore, has accounted for these entities under the equity method. n Cash and Cash Equivalents – Cash and cash equivalents represent cash and short-term investments with maturities of three months or less when purchased and proceeds due from credit and debit card transactions, which are generally settled within a few days of the underlying transaction. – F-40 PRICESMART, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Restricted Cash – The changes in restricted cash are disclosed within the consolidated statement of cash flows based n on the nature of the restriction. The following table summarizes the restricted cash reported by the Company (in thousands): Short-term restricted cash: Restricted cash for land purchase option agreements Other short-term restricted cash Total short-term restricted cash Long-term restricted cash: Other long-term restricted cash (1) Total long-term restricted cash Total restricted cash August 31, 2017 August 31, 2016 $ $ $ $ $ 300 160 460 2,818 2,818 3,278 $ $ $ $ $ 442 518 2,676 2,676 3,194 (1) Other long-term restricted cash consists mainly of cash deposits held within banking institutions in compliance with federal regulatory requirements in Costa Rica and Panama. Tax Receivables – The Company pays Value Added Tax (“VAT”) or similar taxes (“input VAT”), income taxes, and other taxes within the normal course of its business in most of the countries in which it operates related to the procurement o f f merchandise and/or services it acquires and/or on sales and taxable income. The Company also collects VAT or similar taxes on behalf of the government (“output VAT”) for merchandise and/or services it sells. If the output VAT exceeds the input VAT, then the difference is remitted to the government, usually on a monthly basis. If the input VAT exceeds the output VAT, this creates a VAT receivable. In most countries where the Company operates, the governments have implemented additional collection procedures, such as requiring credit and debit card processors to remit a portion of sales processed via credit and debit card directly to the government as advance payments of VAT and/or income tax. In the case of VAT, these procedures alter the natural offset of input and output VAT and generally leave the Company with a net VAT receivable, forcing the Company to process significant refund claims on a recurring basis. With respect to income taxes paid, if the estimated income taxes paid or withheld exceed the actual income tax due, this creates an income tax receivable. The Company either requests a refund of these tax receivables or applies the balance to expected future tax payments. These refund or offset processes can take anywhere from several months to several years to complete. f f In most countries where the Company operates, the tax refund process is defined and structured with regular refunds or offsets. However, as of August 31, 2017, in one country the government has alleged there is not a clearly defined process to allow the tax authorities to refund VAT receivables. As of August 31, 2016, there were three countries that lacked a clearly defined process; however, during the third and fourth quarters of 2017, two of these countries clarified the refund mechanism, which we are currently pursuing. The Company, together with our tax and legal advisers, is currently seeking clarification in court in the remaining country without a clearly defined process and expects to prevail. The balance of the VAT receivable in the country with undefined refund mechanisms was approximately $1.2 million and $800,000 as of August 31, 2017 and August 31, 2016, respectively. In another country in which the Company operates warehouse clubs, a new minimum income tax mechanism took effect in fiscal year 2015, which requires the Company to pay taxes based on a percentage of sales rather than income. As a result, the Company is making income tax payments substantially in excess of those it would expect to pay based on taxable income. The current rules (which the Company has challenged in court) do not clearly allow the Company to obtain a refund or to offset this excess income tax against other taxes. As of August 31, 2017, the Company had deferred tax assets of approximate ly t $2.0 million in this country. Also, the Company had an income tax receivable balance of $4.3 million as of August 31, 2017 related to excess payments from fiscal years 2015 to 2017. The Company has not placed any type of allowance on the recoverability of these tax receivables or deferred tax assets because the Company believes that it is more likely than not that it will ultimately succeed in its refund requests, related appeals and/or court challenge on this matter. The Company's policy for classification and presentation of VAT receivables, income tax receivables and other tax AA receivables is as follows: (cid:120) Short-term VAT and income tax receivables, recorded as Other current assets: This classification is used for any countries where the Company's subsidiary has generally demonstrated the ability to recover the VAT or income tax receivable within one year. The Company also classifies as short-term any approved refunds or credit notes to the extent that the Company expects to receive the refund or use the credit notes within one year. F-41 PRICESMART, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (cid:120) Long-term VAT and income tax receivables, recorded as Other non-current assets: This classification is used for amounts not approved for refund or credit in countries where the Company's subsidiary has not demonstrated the ability to obtain refunds within one year and/or for amounts which are subject to outstanding disputes. An allowance is provided against VAT and income tax receivable balances in dispute when the Company does not expect to eventually prevail in its recovery. The Company does not currently have any allowances provided against VAT and income tax receivables. The following table summarizes the VAT receivables reported by the Company (in thousands): Prepaid expenses and other current assets Other non-current assets Total amount of VAT receivable reported August 31, 2017 August 31, 2016 $ $ 6,650 24,904 31,554 $ $ 1,635 32,502 34,137 The following table summarizes the income tax receivables reported by the Company (in thousands): Prepaid expenses and other current assets Other non-current assets Total amount of income tax receivable reported August 31, 2017 August 31, 2016 $ $ 6,403 10,492 16,895 $ $ 6,402 10,376 16,778 – Lease Accounting – Certain of the Company's operating leases wher e the Company is the lessee (see "Revenue Recognition Policy" for lessor accounting) provide for minimum annual payments that increase over the life of the lease. The aggregate minimum annual payments are expensed on the straight-line basis beginning when the Company takes possession of the property and extending over the term of the related lease including renewal options when the exercise of the option is reasonably assured as an economic penalty may be incurred if the option is not exercised. The amount by which straight-line rent exceeds actual lease payment requirements in the early years of the leases is accrued as deferred rent and reduced in later years when the actual cash payment requirements exceed the straight-line expense. The Company also accounts in its straight-line computation for the effect of any “rental holidays” and lessor-paid tenant improvements. In addition to the minimum annual payments, in certain locations, the Company pays additional contingent rent based on a contractually stipulated percentage of sales. 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. f Stock Based Compensation – The Company offers three types of equity awards: stock options (“options”), restricted stock awards (“RSAs”) and restricted stock unit (“RSUs”). Compensation related to options is accounted for by applying the valuation technique based on the Black-Scholes model. Compensation related to RSAs and RSUs is based on the fair market value at the time of grant with the application of an estimated forfeiture rate. The Company recognizes the compensation cost related to these awards over the requisite service period as determined by the grant, amortized ratably or on a straight line basis over the life of the grant. The Company utilizes “modified grant-date accounting” for true-ups due to actual forfeitures at the vesting dates. The Company records the tax savings resulting from tax deductions in excess of expense for stock-based compensation as additional paid-in capital and the tax deficiency resulting from stock-based compensation in excess of the related tax deduction as a reduction in paid-in capital, based on the Tax Law Ordering method. In addition, the Company reflects the tax savings (deficiency) resulting from the taxation of stock-based compensation as a financing cash flow in its consolidated statement of cash flows, rather than as an operating cash flow. RSAs have the same cash dividend and voting rights as other common stock and are considered to be currently issued and outstanding shares of common stock. Shares of common stock subject to RSUs are not issued nor outstanding until vested, and RSUs do not have the same dividend and voting rights as common stock. However, all outstanding RSUs have accompanying dividend equivalents, requiring payment to the employees and directors with unvested RSUs of amounts equal to the dividend they would have received had the shares of common stock underlying the RSUs been actually issued and outstanding. Payments of dividend equivalents to employees are recorded as compensation expense. F-42 PRICESMART, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Exit or Disposal Cost Obligations – In January 2017, the Company purchased a distribution center in Medley, Miami- Dade County, Florida. The Company transferred its Miami dry distribution center activities that were previously in a leased facility to the new facility during the third quarter of fiscal year 2017. As part of this transaction, the Company has recorded an exit obligation related to the lease of the previous distribution center. The obligation consists of the costs associated with the exit or disposal activity measured initially at its fair value as of May 1, 2017, the date on which the obligation was incurred. The se costs are primarily comprised of the costs to terminate the operating lease and other associated costs, including costs to consolidate or close facilities, net of any potential sub-lease income the Company could receive during the remaining lease term. In periods subsequent to initial measurement, changes to the exit obligation, including any changes resulting from a revision to either the timing or the amount of estimated cash flows over the remaining lease period, is measured using the credit-adjusted risk-free rate that was used to measure the initial obligation. During the third quarter of fiscal year 2017, the Company initially recorded an obligation related to this exit activity for approximately $496,000 within other long-term liabilities. The Company’s exit obligation recorded as of August 31, 2017 is approximately $57,000. Exit costs of approximately $1.4 million were recorded to net warehouse club cost of goods sold for the twelve months ended August 31, 2017. f Fair Value Measurements – The Company measures the fair value for all financial and nonfinancial assets and liabilities that are recognized or disclosed at fair value in the consolidated financial statements on a recurring or nonrecurr ing basis. The fair value of an asset is the price at which the asset could be sold in an orderly transaction between unrelated, knowledgeable and willing parties able to engage in the transaction. A liability’s fair value is defined as the amount that would parties, not the amount that would be paid to settle y be paid to transfer the liability to a new obligor in a transaction between such the liability with the creditor. t The Company has established a three-tier fair value hierarchy, which prioritizes the inputs used in measuring and revaluing fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. The Company was not required to revalue any assets or liabilities utilizing Level 1 or Level 3 inputs at the balance sheet dates. The Company's Level 2 assets and liabilities revalued at the balance sheet dates, on a recurring basis, consisted of cash flow hedges (interest rate swaps and cross-currency interest rate swaps) and forward foreign exchange contracts. In addition, the Company utilizes Level 2 inputs in determining the fair value of long-term debt. The Company has elected not to revalue long-term debt because this debt will be settled at the carrying value and not at the fair market value. The Company did not make any significant transfers in and out of Level 1 and Level 2 fair value tiers during the periods reported on herein. n Nonfinancial assets and liabilities are revalued and recognized at fair value subsequent to initial recognition when there is evidence of impairment. For the periods reported, no impairment of such nonfinancial assets was recorded. The disclosure of fair value of certain financial assets and liabilities recorded at cost is as follows: Cash and cash equivalents: The carrying value approximates fair value due to the short maturity of these instruments. Short-term restricted cash: The carrying value approximates fair value due to the short maturity of these instruments. Long-term restricted cash: Long-term restricted cash primarily consists of auto renewable 3-12 month certificates of deposit, which are held as collateral against our long-term debt. The carrying value approximates fair value due to the maturity of the underlying certificates of deposit within the normal operating cycle of the Company. Accounts receivable: The carrying value approximates fair value due to the short maturity of these accounts. Short-term VAT and Income tax receivables: The carrying value approximates fair value due to the short maturity of these accounts. Long-term VAT and income tax receivables: The fair value of long-term receivables would normally be measured using a discounted cash flow analysis based on the current market interest rates for similar types of financial instruments, with an estimate of the time these receivables are expected to be outstanding. The Company is not able to provide an estimate as to the time these receivables, owed to the Company by various government agencies, are expected to be outstanding; therefore, the Company has not presented a fair value on the long-term VAT and income tax receivables. Short-term debt: The carrying value approximates fair value due to the short maturity of these instruments. F-43 PRICESMART, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Long-term debt: The fair value of debt is generally measured using a discounted cash flow analysis based on current market interest rates for similar types of financial instruments. These inputs are not quoted prices in active markets but they are either directly or indirectly observable; therefore, they are classified as Level 2 inputs. The carrying value and fair value of the Company’s debt as of August 31, 2017 and August 31, 2016 is as follows (in thousands): August 31, 2017 August 31, 2016 Carrying Value Fair Value(1) Carrying Value Fair Value Long-term debt, including current portion $ 106,297 $ 102,911 $ 88,107 $ 85,654 (1) The Company has disclosed the fair value of long-term debt, including debt for which it has entered into cross-currency interest rate swaps, using the derivative obligation as of August 31, 2017 to estimate the fair value of long-term debt, which includes the effects that the cross-currency interest rate swaps have had on the fair value of long-term debt. Derivative Instruments and Hedging Activities – The Company uses derivative financial instruments for hedging and non- trading purposes to manage its exposure to changes in interest rates and currency exchange rates. In using derivative financial instruments for the purpose of hedging the Company’s exposure to interest rates and currency exchange rate risks, the contractual terms of a hedged instrument closely mirror those of the hedged item, providing a high degree of risk reduction and correlation. Contracts that are effective at meeting the risk reduction and correlation criteria (effective hedge) are recorded using hedge accounting. If a derivative financial instrument is an effective hedge, changes in the fair value of the instrument will be offset in accumulated other comprehensive income (loss) until the hedged item completes its contractual term. If any portion of the hedge is deemed ineffective, the change in fair value of the hedged assets or liabilities will be immediately recognized in earnings during the period. Instruments that do not meet the criteria for hedge accounting, or contracts for which the Company has not elected hedge accounting, are valued at fair value with unrealized gains or losses reported in earnings during the period of the change. The Company did not change valuation techniques utilized in the fair value measurement of assets and liabilities presented on the Company’s consolidated balance sheets during the reporting period. The Company seeks to manage counterparty risk associated with these contracts by limiting transactions to counterparties with which the Company has an established banking relationship. There can be no assurance, however, that this practice effectively mitigates counterparty risk. r Cash Flow Instruments. The Company is a party to receive floating interest rate, pay fixed-rate interest rate swaps to hedge the interest rate risk of certain U.S. dollar denominated debt within its international subsidiaries. The swaps are designated as cash flow hedges of interest expense risk. These instruments are considered effective hedges and are recorded using hedge accounting. The Company is also a party to receive variable interest rate, pay fixed interest rate cross-currency interest rate swaps to hedge the interest rate and currency exposure associated with the expected payments of principal and interest of U.S. denominated debt within its international subsidiaries whose functional currency is other than the U.S dollar. The swaps are ff designated as cash flow hedges of the currency risk related to payments on the U.S. denominated debt. These instruments are also considered to be effective hedges and are recorded using hedge accounting. Under cash flow hedging, the effective portion of the fair value of the derivative, calculated as the net present value of the future cash flows, is deferred on the consolidated balance sheets in accumulated other comprehensive loss. If any portion of an interest rate swap is determined to be an ineffective hedge, the gains or losses from changes in fair 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 - Derivative Instruments and Hedging Activities for information on the fair value of interest rate swaps and cross-currency interest rate swaps as of August 31, 2017 and August 31, 2016. Fair Value Instruments. The Company is exposed to foreign-currency exchange rate fluctuations in the normal course of business. This includes exposure to foreign-currency exchange rate fluctuations on U.S. dollar-denominated liabilities within the Company’s international subsidiaries whose functional currency is other than the U.S. dollar. The Company manages these fluctuations, in part, through the use of non-deliverable forward foreign-exchange contracts that are intended to offset changes in cash flows attributable to currency exchange movements. The contracts are intended primarily to economically address exposure to U.S. dollar merchandise inventory expenditures made by the Company’s international subsidiaries whose functional currency is other than the U.S. dollar. Currently, these contracts are treated for accounting purposes as fair value instruments and do not qualify for derivative hedge accounting, and as such the Company does not apply derivative hedge accounting to record these transactions. As a result, these contracts are valued at fair value with unrealized gains or losses reported in earnings during the period of the change. The Company seeks to mitigate foreign-currency exchange-rate risk with the use of these contracts and does not intend to engage in speculative transactions. These contracts do not contain any credit-risk-related contingent features and are limited to less than one year in duration. See Note 12 - Derivative Instruments and Hedging Activities for information on the fair value of open, unsettled forward foreign-exchange contracts as of August 31, 2017 and August 31, 2016. F-44 PRICESMART, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) The following table summarizes financial assets and liabilities measured and recorded at fair value on a recurring basis in the Company’s consolidated balance sheet as of August 31, 2017 and August 31, 2016 (in thousands) for derivatives that qualify for hedge accounting: Assets and Liabilities as of August 31, 2017 Other non-current assets – (Cross-currency interest rate swaps) Other long-term liabilities – (Interest rate swaps) Other long-term liabilities – (Cross-currency interest rate swaps) Total Assets and Liabilities as of August 31, 2016 Other non-current assets – (Cross-currency interest rate swaps) Other long-term liabilities – (Interest rate swaps) Other long-term liabilities – (Cross-currency interest rate swaps) Total Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) $ $ — $ — — — $ 2,547 (231) (451) 1,865 $ $ — $ — — — $ Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) $ $ — $ — — — $ 3,224 (448) (1,066) 1,710 $ $ — $ — — — $ Total 2,547 (231) (451) 1,865 Total 3,224 (448) (1,066) 1,710 Goodwill – The table below presents goodwill resulting from certain business combinations as of August 31, 2017 and August 31, 2016 (in thousands). The change in goodwill is a result of foreign exchange translation losses. Goodwill August 31, 2017 August 31, 2016 Change $ 35,642 $ 35,637 $ 5 The Company reviews goodwill at the reporting unit for impairment. The Company first reviews qualitative factors for each reporting unit in determining if an annual goodwill test is required. If the Company's review of qualitative factors indicates a requirement for a test of goodwill impairment, because it is more likely than not that an impairment of goodwill may exist, the Company then will assess whether the carrying amount of a reporting unit is greater than the estimated fair value. If the carrying amount of a reporting unit is greater than zero and its estimated fair value exceeds its carrying amount, goodwill of the reporting rr g amount unit is considered not impaired. If either the carrying amount of the reporting unit is not greater than zero or if the carryin of the entity exceeds its estimated fair value, the Company performs a second test to determine whether goodwill has been impaired and to calculate the amount of that impairment. The Company was not required to perform the second step for any reporting units in 2017 or 2016. f 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. Membership refunds are prorated over the remaining term of the membership; accordingly, no refund reserve is required to be established for the periods presented. The Company recognizes and presents revenue-producing transactions on a net of value added/sales tax basis. The Company began offering Platinum memberships in Costa Rica during fiscal year 2013, which provide members with a 2% rebate on most items, up to an annual maximum of $500. Platinum members can apply this rebate to future purchases at the warehouse club at the end of the annual membership period. The Company records this 2% rebate as a reduction of revenue at the time of the sales transaction. Accordingly, the Company has reduced warehouse sales and has accrued a liability within other accrued expenses. The rebate is issued annually to Platinum members on March 1 and expires August 31. Any rebate F-45 PRICESMART, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) amount not redeemed by August 31 is recognized as breakage revenue. The Company periodically reviews expired unused rebates outstanding, and the expired unused rebates are recognized as Revenues: Other income on the consolidated statements of income. The Company has determined that breakage revenue is insignificant; therefore, it records 100% of the Platinum membership liability at the time of sale, rather than estimating breakage. In September of fiscal year 2018, we introduced the Platinum membership in Panama and plan on adding a Platinum membership level in the Dominican Republic in the next few months. We are considering expanding Platinum membership to other PriceSmart markets and may do so during fiscal year 2018. The Company recognizes gift certificate sales revenue when the certificates are redeemed. The outstanding gift certificates are reflected as other accrued expenses in the consolidated balance sheets. These gift certificates generally have a one-year stated expiration date from the date of issuance. However, the absence of a large volume of transactions for gift certificates impairs the Company's ability to make a reasonable estimate of the redemption levels for gift certificates; therefore, the Company assumes a 100% redemption rate prior to expiration of the gift certificate. The Company periodically reviews unredeemed outstanding gift certificates, and the gift certificates that have expired are recognized as Revenues: Other income on the consolidated statements of income. ff 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. Insurance Reimbursements – Receipts from insurance reimbursements up to the amount of the losses recognized are considered recoveries. These recoveries are accounted for when they are probable of receipt. Insurance recoveries are not recognized prior to the recognition of the related cost. Anticipated proceeds in excess of the amount of loss recognized are considered gains and are subject to gain contingency guidance. Anticipated proceeds in excess of a loss recognized in the financial statements are not recognized until all contingencies related to the insurance claim are resolved. a 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 in cost of goods sold the external and internal distribution and handling costs for supplying 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 the Company's distribution facilities and payroll and other direct costs for in-store demonstrations. t Vendor consideration consists primarily of volume rebates, time-limited product promotions, slotting fees, demonstration reimbursements and prompt payment discounts. Volume rebates that are not threshold based are incorporated into the unit cost of merchandise reducing the inventory cost and cost of goods sold. Volume rebates that are threshold based are recorded as a reduction to cost of goods sold when the Company achieves established purchase levels that are confirmed by the vendor in writing or upon receipt of funds. On a quarterly basis, the Company calculates the amount of rebates recorded in cost of goods sold that relates to inventory on hand and this amount is reclassified as a reduction to inventory, if significant. Product promotions are generally linked to coupons that provide for reimbursement to the Company from vendor rebates for the product being promoted. Slotting fees are related to consideration received by the Company from vendors for preferential "end cap" placement of the vendor's products within the warehouse club. Demonstration reimbursements are related to consideration received by the Company from vendors for the in store promotion of the vendors' products. The Company records the reduction in cost of goods sold on a transactional basis for these programs. Prompt payment discounts are taken in substantially all cases, and therefore, are applied directly to reduce the acquisition cost of the related inventory, with the resulting effect recorded to cost of goods sold when the inventory is sold. Selling, General and Administrative – Selling, general and administrative costs are comprised primarily of expenses associated with warehouse operations. Warehouse operations include the operating costs of the Company's warehouse clubs, including all payroll and related costs, utilities, consumable supplies, repair and maintenance, rent expense, building and equipment depreciation, and bank and credit card processing fees. Also included in selling, general and administrative expenses are the payroll and related costs for the Company's U.S. and regional purchasing and management centers. Pre-Opening Costs – The Company expenses pre-opening costs (the costs of start-up activities, including organization costs and rent) as incurred. Asset Impairment Costs – The Company periodically evaluates its long-lived assets for indicators of impairment. Management's judgments are based on market and operational conditions at the time of the evaluation and can include management's best estimate of future business activity. These periodic evaluations could cause management to conclude that F-46 PRICESMART, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) impairment factors exist, requiring an adjustment of these assets to their then-current fair value. Future business conditions and/or activity could differ materially from the projections made by management causing the need for additional impairment charges. Contingencies and Litigation – The Company records and reserves 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. If one or both criteria for accrual are not met, but there is at least a reasonable possibility that a loss will occur, the Company does not record and reserve for a loss contingency but describes the contingency within a note and provides detail, when possible, of the estimated potential loss or range of loss. If an estimate cannot be made, a statement to that effect is made. Foreign Currency Translation – The assets and liabilities of the Company’s foreign operations are translated to U.S. dollars when the functional currency in the Company’s international subsidiaries is the local currency and not U.S. dollars. Assets and liabilities of these foreign subsidiaries are translated to U.S. dollars at the exchange rate on the balance sheet date, and revenue, costs and expenses are translated at average rates of exchange in effect during the period. The corresponding translation gains and losses are recorded as a component of accumulated other comprehensive income or loss. These adjustments will affect net income upon the sale or liquidation of the underlying investment. Monetary assets and liabilities denominated in currencies other than the functional currency of the respective entity (primarily U.S. dollars) are revalued to the functional currency using the exchange rate on the balance sheet date. These foreign exchange transaction gains (losses), including transactions recorded e. t involving these monetary assets and liabilities, are recorded as Other income (expense) in the consolidated statements of incom The following table summarizes the amounts recorded for the twelve month periods ending August 31, 2017, 2016, and 2015 (in thousands): Currency gain (loss) Years Ended August 31, 2016 2015 2017 $ 1,241 $ (899) $ (4,388) Income Taxes – The Company accounts for income taxes using the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributed to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences and carry-forwards are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is established when necessary to reduce deferred tax assets to amounts expected to be realized. The Company and its subsidiaries are 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 foreign taxing authorities in the jurisdictions in which the Company or one of its subsidiaries files tax 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 or one of its subsidiaries to pay additional taxes. The Company accrues an amount for its estimate of probable additional income tax liability. In certain cases, the impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more-likely-than- not to be sustained upon audit by the relevant tax authority. An uncertain income tax position will not be recognized if it has less than 50% likelihood of being sustained. This requires significant judgment, the use of estimates, and the interpretation and application of complex tax laws. When facts and circumstances change, the Company reassesses these probabilities and records any changes in the consolidated financial statements as appropriate. There were no material changes in the Company's uncertain income tax positions for the periods ended on August 31, 2017 and August 31, 2016. See Note 9 – for income tax details. ff The Company has not provided for U.S. deferred taxes on cumulative non-U.S. undistributed earnings as such earnings are deemed by the Company to be indefinitely reinvested. It is not practicable to determine the U.S. federal income tax liability that would be associated with such earnings because of the complexity of the computation. F-47 PRICESMART, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Recent Accounting Pronouncements – Not Yet Adopted FASB ASC 815 ASU 2017-12 Derivatives and Hedging - Targeted Improvements to Accounting for Hedging Activities The FASB has issued Accounting Standards Update (ASU) No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, which aims to improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. The amendments in this ASU better align an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. To satisfy that objective, the amendments expand and refine hedge accounting for both non-financial and financial risk components, and align the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. Additionally, the amendments (1) permit hedge accounting for risk components in hedging relationships involving non- financial risk and interest rate risk; (2) change the guidance for designating fair value hedges of interest rate risk and for measuring the change in fair value of the hedged item in fair value hedges of interest rate risk; (3) continue to allow an entity to exclude option premiums and forward points from the assessment of hedge effectiveness; and (4) permit an entity to exclude the portion of the change in fair value of a currency swap that is attributable to a cross-currency basis spread from the assessment of hedge effectiveness. The amendments in this ASU are effective for annual periods beginning after December 15, 2018 and interim periods within those annual periods. The Company will evaluate the impact adoption of this guidance may have on the Company’s consolidated financial statements. n FASB ASC 715 ASU 2017-09 - Compensation—Stock Compensation (Topic 718)—Scope of Modification Accounting The FASB has issued Accounting Standards Update (ASU) No. 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting, which seeks to provide clarity, reduce diversity in practice, and reduce cost and complexity when applying the guidance in Topic 718, Compensation—Stock Compensation, regarding a change to the terms or conditions of a share-based payment award. This ASU provides guidance concerning which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. Specifically, an entity is to account for the effects of a modification, unless all of the following are satisfied: (1) the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the modified award is the same as the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the original award immediately before the original award is modified; (2) the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified; and (3) the classification of the modified award as an equity instrument or as a liability instrument is the same as the classification of the original award immediately before the original award is modified. The amendments in this ASU are effective for annual periods beginning after December 15, 2017 and interim periods within those annual periods. Early adoption is permitted. The Company will evaluate the impact adoption of this guidance may have on the Company’s consolidated financial statements. ff FASB ASC 715 ASU 2017-07- Compensation—Retirement Benefits (Topic 715) Pension Cost and Net Periodic Postretirement Benefit Cost — — Improving the Presentation of Net Periodic In March 2017, the FASB issued ASU No. 2017-07, Compensation—Retirement Benefits (Topic 715) — Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This ASU is designed to improve t guidance related to the presentation of defined benefit costs in the income statement. In particular, ASU 2017-07 requires that an employer report the service cost component in the same line item(s) as other compensation costs arising from services rendered by the pertinent employees during the period. The amendments in this ASU are effective for annual periods beginning after December 15, 2017 and interim periods within those annual periods. Early adoption is permitted. The Company will evaluate the impact adoption of this guidance may have on the Company’s consolidated financial statements. — n n FASB ASC 350 ASU 2017-04- Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment In January 2017, the FASB issued Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This ASU simplifies the manner in which an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Under the amendments in this ASU, an entity should (1) perform its annual or interim n goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount, and (2) recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, with the understanding that the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. F-48 PRICESMART, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Additionally, ASU 2017-04 requires any reporting unit with a zero or negative carrying amount to perform Step 2 of the goodwill impairment test. The amendments in this ASU are effective for annual periods beginning after December 15, 2019. The Company will evaluate the impact adoption of this guidance may have on the Company’s consolidated financial statements. FASB ASC 740 ASU 2016-16- Income Taxes (Topic 740)—Intra-Entity Transfers of Assets Other Than Inventory — In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740)—Intra-Entity Transfers of Assets Other Than Inventory. Currently, U.S. GAAP prohibits recognizing current and deferred income tax consequences for an intra- entity asset transfer until the asset has been sold to an outside party. ASU 2016-16 states that an entity should recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The amendments in this ASU are effective for annual periods beginning after December 15, 2017 and interim periods within those annual periods. Early adoption is permitted. The amendments should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Company will evaluate the impact adoption of this guidance may have on the Company’s consolidated financial statements. FASB ASC 230 ASU 2016-15- Statement of Cash Flows (Topic 230)—Classification of Certain Cash Receipts and Cash Payments (a consensus of the FASB Emerging Issues Task Force) r In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This ASU addresses stakeholders’ concerns regarding diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows under Topic 230, Statement of Cash Flows, and Other Topics. In particular, ASU No. 2016-15 addresses eight specific cash flow issues in an effort to reduce this diversity in practice: (1) debt prepayment or debt extinguishment costs; (2) settlement of zero-coupon bonds; (3) contingent consideration payments made after a business combination; (4) proceeds from the settlement of insurance claims; (5) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; (6) distributions received from equity method investees; (7) beneficial interests in securitization transactions; and (8) separately identifiable cash flows and application of the predominance principle. The amendments in this ASU are effective for annual periods beginning after December 15, 2017 and interim periods within those annual periods. Early adoption is permitted. The amendments in this ASU should be applied using a retrospective transition method to each period presented. If it is impracticable to apply the amendments retrospectively for some of the issues, the amendments for those issues would be applied prospectively as of the earliest date practicable. The Company will evaluate the impact adoption of this guidance may have on the Company's consolidated financial statements. FASB ASC 718 ASU 2016-09 - Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting In March 2016, the FASB issued new guidance on stock compensation intended to simplify accounting for share-based payment transactions. The guidance will change accounting for income taxes, forfeitures, and minimum statutory tax withholding requirements. The new standard is effective for fiscal years and interim periods within those years beginning after December 15, 2016, with early adoption permitted. The Company plans to adopt this guidance at the beginning of its first quarter of fiscal year 2018. (cid:120) (cid:120) (cid:120) The Company has evaluated the amendments requiring recognition of excess tax benefits and tax deficiencies in the income statement and will apply this approach prospectively. Under the treasury method for calculating earnings per share, the excess tax benefit/deficiencies will no longer be used to determine the diluted net income per share. The Company determined that the adoption of this guidance will not have a material effect on the result of operations and the calculation of earnings per share. The Company has used the two-step method for the diluted net income per share calculation over the last several years. The Company has evaluated the amendments related to the presentation of employee taxes paid on the statement of cash flows when an employer withholds shares to meet the minimum statutory withholding requirement and will apply this approach retrospectively. The Company determined that the adoption of this guidance will not have a material effect on the consolidated statements of cash flows. The Company has evaluated the amendments related to the timing of when excess tax benefits are recognized, the effect of minimum statutory withholding requirements, forfeitures, and intrinsic value and will apply this methodology using a modified retrospective transition method. The Company has elected to eliminate recording a forfeiture rate on the expense recorded. The elimination of the forfeiture rate requires recording a cumulative- effect adjustment by reducing retained earnings and incr easing Additional Paid in Capital, at the beginning of f the year of adoption, which is September 1, 2017, for the service periods already incurred for unvested shares. F-49 PRICESMART, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) FASB ASC 842 ASU 2016-02 -Leases (Topic 842): Amendments to the FASB Accounting Standards Codification In February 2016, the FASB issued guidance codified in ASC 842, Leases, which supersedes the guidance in ASC 840, Leases. ASC 842 will be effective for the Company on September 1, 2019, and the Company expects to apply the transition practical expedients allowed by the standard. Note 11 – “Leases” provides details on the Company’s current lease arrangements. While the Company continues to evaluate the provisions of ASC 842 to determine how it will be affected, the primary effect will be to require recording right-of-use assets and corresponding lease obligations for current operating leases. The Company expects the adoption of this guidance to have a material impact on the Company's consolidated balance sheets, but not on the consolidated statements of income or cash flows. FASB ASC 330 ASU 2015-11 -Inventory (Topic 330): Simplifying the Measurement of Inventory In July 2015, the FASB issued guidance that will require an entity to measure in-scope inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. This amendment applies to entities, like the Company, that measure inventory value using the average cost method. The amendments in this ASU more closely align the measurement of inventory in GAAP with the measurement of inventory in International Financial Reporting Standards. The amendment in this ASU is effective on a prospective basis for public entities for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early application is permitted as of the beginning of an interim or annual reporting period. The Company determined that the adoption of this guidance will not have a material effect on the Company's consolidated financial statements. FASB ASC 606 ASU 2014-09 - Revenue from Contracts with Customers In May 2014, the Financial Accounting Standards Board (FASB) issued new guidance on the recognition of revenue from contracts with customers. The guidance combines the requirements for reporting revenue and requires disclosures sufficient to describe the nature, amount, timing, and uncertainty of revenue and cash flows arising from these contracts. Transition is permitted either retrospectively or as a cumulative effect adjustment as of the date of adoption. The new standard is effective for fiscal years and interim periods within those years beginning after December 15, 2017. The Company plans to adopt this guidance at the beginning of its first quarter of fiscal year 2019. The Company is evaluating the impact of adoption of this guidance on alln potentially significant revenue transactions that will be impacted by the new standard on the Company's consolidated financial statements and related disclosures as a result of adopting this standard. Recent Accounting Pronouncements Adopted FASB ASC 230 ASU 2016-18- Statement of Cash Flows (Topic 230)—Restricted Cash — In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230)—Restricted Cash. This ASU addresses the diversity in practice that exists regarding the classification and the presentation of changes in restricted cash on the statement of cash flows. The amendments in ASU No. 2016-18 require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. Thus, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and the end-of-period total amounts set forth on the statement of cash flows. The amendments in this ASU are effective for annual periods beginning after December 15, 2017 and interim periods within those fiscal years and will be applied using a retrospective transition method to each period presented. The Company early adopted this ASU as of August 31, 2017. The adoption of this ASU impacted the presentation of cash flows with inclusion of restricted cash flows for each of the presented periods. mm f FASB ASC 740 ASU 2015-17 -Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes In November 2015, the FASB issued amended guidance eliminating the requirement for organizations to present deferred tax liabilities and assets as current and noncurrent in a classified balance sheet. Instead, organizations will be required to classify all deferred tax assets and liabilities as noncurrent. The amendment in this ASU is effective on a prospective or retrospective basis for public entities for fiscal years and interim periods within those annual periods beginning after December 15, 2016. Early adoption is allowed. The Company F-50 PRICESMART, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) retrospectively adopted this amended guidance during the second quarter of fiscal year 2016 and now presents all deferred taxes as either long-term assets or long-term liabilities. The Company’s fiscal year 2016 Annual Report on Form 10-K and Quarterly Reports on Form 10-Q presented the restatement of quarterly and annual periods for fiscal year 2015 to reflect the impact to the Consolidated Balance Sheets. FASB ASC 350 ASU 2015-05 - Customers Accounting for Fees Paid in a Cloud Computing Arrangement In April 2015, the FASB issued amended guidance about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The amendments do not change the accounting for a customer’s accounting for service contracts. The amendments in this ASU are effective for public entities for annual periods, including interim periods within those annual periods, beginning after December 15, 2015. Early adoption was permitted. An entity was able to adopt the amendments either: (1) prospectively to all arrangements entered into or materially modified after the effective date; or (2) retrospectively. The Company adopted this amended guidance as of September 1, 2016. Adoption of this guidance did not generate a change in accounting principle, changes in financial statement line items, or the requirement to prospectively or retrospectively adopt a method of transition. r NOTE 3 – PROPERTY AND EQUIPMENT Property and equipment are stated at historical cost. The historical cost of acquiring an asset includes the costs incurred to bring it to the condition and location necessary for its intended use. 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 c ertain components of building improvements and buildings from 10 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 where management believes it is reasonably assured that the renewal option in the underlying lease will be exercised because an economic penalty may be incurred if the option is not exercised. The sale or purchase of property and equipment is recognized upon legal transfer of property. m Property and equipment consist of the following (in thousands): Land Building and improvements Fixtures and equipment Construction in progress Total property and equipment, historical cost Less: accumulated depreciation Property and equipment, net Depreciation and amortization expense (in thousands): August 31, 2017 161,579 382,236 198,147 40,224 782,186 (224,357) 557,829 $ $ August 31, 2016 131,896 305,420 186,409 46,861 670,586 (197,541) 473,045 $ $ Years Ended August 31, 2016 2015 2017 Depreciation and amortization expense $ 46,292 $ 39,794 $ 34,445 The Company capitalizes interest on expenditures for qualifying assets over a period that covers the duration of the activities required to get the asset ready for its intended use, provided that expenditures for the asset have been made and interest cost is being incurred. Interest capitalization continues as long as those activities and the incurrence of interest cost continue. The amount capitalized in an accounting period is determined by applying the Company’s consolidated capitalization rate (average interest rate) to the average amount of accumulated expenditures for the qualifying asset, for each country, during the period. The capitalization rates are based on the interest rates applicable to borrowings outstanding during the period. F-51 PRICESMART, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Total interest capitalized (in thousands): Total interest capitalized Total interest capitalized (in thousands): Interest capitalized Balance as of August 31, 2017 August 31, 2016 $ 8,262 $ 7,380 Years Ended August 31, 2016 2015 2017 $ 447 $ 1,082 $ 1,055 A summary of asset disposal activity for fiscal years 2017, 2016 and 2015 is as follows (in thousands): Fiscal Year 2017 Fiscal Year 2016 Fiscal Year 2015 Historical Cost $ $ $ 19,774 7,578 11,740 Accumulated Depreciation 17,436 $ 6,330 $ 9,367 $ Proceeds from disposal Gain/(Loss) recognized $ $ $ 377 86 368 $ $ $ (1,961) (1,162) (2,005) The Company constructed a new warehouse club on land acquired in May 2015 in Chia, Colombia that opened in September 2016, fiscal year 2017, bringing the total of warehouse clubs operating in Colombia to seven. On December 4, 2015 the Company signed an option to acquire two properties and then swap them for 59,353 square feet of land adjacent to the Company’s San Pedro Sula warehouse club in Honduras. The parcels of land exchanged are all undeveloped contiguous land parcels that make them similar in all respects. The transaction was completely nonmonetary in nature, and the transaction did not generate any gain recognition. The accounting basis of the new property equals $1.9 million (the net book value of the real estate exchanged). The Company exercised this option and completed the swap during May 2016. The Company will use the acquired land to expand the parking lot for the San Pedro Sula warehouse club. In January 2017, the Company finalized its acquisition of a distribution center in Medley, Miami-Dade County, Florida, for a total purchase price of approximately $46.0 million. The Company transferred its Miami dry distribution center activities previously located in its leased facilities to this new facility. This was completed during the third quarter of fiscal year 2017. n The Company also recorded within accounts payable and other accrued expenses approximately $612,000 and $3.1 million, respectively, as of August 31, 2017 and $476,000 and $1.5 million, respectively, as of August 31, 2016 of liabilities related to the acquisition and/or construction of property and equipment. NOTE 4 – EARNINGS PER SHARE The Company presents basic net income per share using the two-class method. The two-class method is an earnings allocation formula that treats a participating security as having rights to earnings that otherwise would have been available to common stockholders and that determines basic net income per share for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings that would have been availablea to common stockholders. A participating security is defined as a security that may pa rticipate in undistributed earnings with common stock. The Company’s capital structure includes securities that participate with common stock on a one-for-one basis for distribution of dividends. These are the restricted stock awards and restricted stock units authorized within the 2013 Equity Incentive Award Plan. The Company determines the diluted net income per share by using the more dilutive of the two class- method or the treasury stock method and by including the basic weighted average of outstanding stock options in the calculation of diluted net income per share under the two-class method and including all potential common shares assumed issued in the calculation of diluted net income per share under the treasury stock method. u F-52 PRICESMART, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) The following table sets forth the computation of net income per share for the twelve months ended August 31, 2017, 2016 and 2015 (in thousands, except per share amounts): Net income Net earnings available to common stockholders Basic weighted average shares outstanding Add dilutive effect of stock options (two-class method) Diluted average shares outstanding Basic net income per share Diluted net income per share NOTE 5 – STOCKHOLDERS’ EQUITY Dividends Years Ended August 31, 2016 2015 2017 90,724 (1,321) 89,403 30,020 3 30,023 2.98 2.98 $ $ $ $ 88,723 (1,431) 87,292 29,928 5 29,933 2.92 2.92 $ $ $ $ 89,124 (1,137) 87,987 29,848 7 29,855 2.95 2.95 $ $ $ $ The following table summarizes the dividends declared and paid during fiscal years 2017, 2016 and 2015. First Payment Second Payment Declared 2/3/2017 2/3/2016 2/4/2015 Record Date Date Paid Record Date Date Paid Amount Amount $ 0.70 2/15/2017 2/28/2017 $ 0.35 8/15/2017 8/31/2017 $ 0.35 $ 0.70 2/15/2016 2/29/2016 $ 0.35 8/15/2016 8/31/2016 $ 0.35 8/31/2015 $ 0.35 2/27/2015 $ 0.35 8/14/2015 2/13/2015 Amount $ 0.70 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. F-53 PRICESMART, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Comprehensive Income and Accumulated Other Comprehensive Loss The following table discloses the changes in each component of other comprehensive income (loss), net of tax (in thousands): Foreign currency translation adjustments Defined benefit pension plans (Amounts in thousands and net of income taxes) Balances as of August 31, 2014 Other comprehensive income (loss) Amounts reclassified from accumulated other comprehensive income (loss) Balances as of August 31, 2015 Other comprehensive income (loss) Amounts reclassified from accumulated other comprehensive income (loss) Balances as of August 31, 2016 Other comprehensive income (loss) Amounts reclassified from accumulated other comprehensive income (loss) Balances as of August 31, 2017 $ $ $ $ (50,410) $ (50,130) — (100,540) $ (1,702) — (102,242) $ (6,297) — (108,539) $ Derivative Instruments 1,011 (1,770)(1) (100)(1)(3) (859) (535)(1) — (1)(3) (1,394) 316 (1) — (1)(3) $ $ $ 113 65 (291)(2) (113) (182) (20)(2) (315) (166) 39 (2) (442) $ (1,078) Total (49,286) (51,835) (391) (101,512) (2,419) (20) (103,951) (6,147) 39 (110,059) $ $ $ $ (1) See Note 12 – “Derivative Instruments and Hedging Activities.” (2) Amounts reclassified from accumulated other comprehensive income (loss) related to the minimum pension liability are included in warehouse club operations in the Company's consolidated statements of income. (3) Amounts reclassified from accumulated other comprehensive income (loss) for settlement of derivative instruments are included in other income (expense), net in the Company's consolidated statements of income. Retained Earnings Not Available for Distribution The following table summarizes retained earnings designated as legal reserves of various subsidiaries which cannot be distributed as dividends to PriceSmart, Inc. according to applicable statutory regulations (in thousands): Retained earnings not available for distribution NOTE 6 – POST EMPLOYMENT PLANS Defined Contribution Plans August 31, 2017 August 31, 2016 $ 6,459 $ 5,926 PriceSmart offers a defined contribution 401(k) retirement plan to its U.S. employees, including warehouse club employees in the U.S. Virgin Islands, which auto-enrolls employees in the plan immediately on the first day of employment. The Company makes nondiscretionary contributions to the 401(k) plan with a 4% “Company Contribution” based on the employee’s salary regardless of the employee’s own contributions to the plan up to the IRS maximum allowed. Effective January 1, 2016, the Company also makes nondiscretionary contributions to the 401(k) plan to the non-officer employees that defer up to 2% of their salary. Employer contributions to the 401(k) plan for the Company's U.S. employees were $1.8 million, $1.7 million and $1.3 million during fiscal years 2017, 2016 and 2015, respectively. PriceSmart also offers and/or is implementing defined contribution retirement plans in most of its subsidiaries. The Company makes nondiscretionary contributions to these plans based on the employee’s salary, regardless of the employee’s own contributions to the plan, up to the maximum allowed. The expenses associated with the plans for the Company’s non-U.S. employees were $3.1 million, $3.1 million and $1.8 million during fiscal years 2017, 2016, and 2015, respectively. F-54 PRICESMART, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Defined Benefit Plans The Company's subsidiaries located in three countries are parties to unfunded post-employment benefit plans, (defined benefit plans), in which the subsidiary is required to pay a specified benefit upon retirement, voluntary departure or death of the employee. The amount of the benefit is predetermined by a formula based on the employee's earnings history, tenure of service and age. Because the obligation to provide benefits arises as employees render the services necessary to earn the benefits pursuant to the terms of the plan, the Company recognizes the cost of providing the benefits over the projected employee service periods. These payments are only due if an employee reaches certain thresholds, such as tenure and/or age. Therefore, these plans are treated as defined benefit plans. For these defined benefit plans, the Company has engaged actuaries to assist with estimating the current costs associated with these future benefits. The liabilities for these unfunded plans are recorded as non-current liabilities. f The following table summarizes the amount of the funding obligation and the line items in which it is recorded on the consolidated balance sheets as of August 31, 2017 and 2016 and consolidated statements of income for the fiscal years ended August 31, 2017, 2016 and 2015 (in thousands): Other Long-Term Liability Accumulated Other Comprehensive Loss August 31, 2017 2016 2017 2016 Operating Expenses Year Ended August 31, 2016 2017 2015 Start of period Service cost Interest cost Prior service cost (amortization) Actuarial gains/(losses) Totals $ $ (882) $ 88 (80) (196) (1,070) $ (807) $ 234 (51) — (258) (882) $ 465 $ — — (55) 240 650 $ $ 172 — — 35 258 465 (1) $ — $ 119 80 55 (45) 209 $ — $ 35 52 56 (87) 56 $ — 192 21 (232) (91) (110) (1) The Company has recorded a deferred tax (liability)/asset of $208,000 and $150,000 as of August 31, 2017 and 2016, respectively, relating to the unrealized expense on defined benefit plans. The Company also recorded accumulated other comprehensive income (loss), net of tax, for $(442,000) and $(315,000) as of August 31, 2017 and 2016, respectively. The valuation assumptions used to calculate the liability for the defined benefit plans differ based on the country where the plan applies. These assumptions are summarized as follows: Valuation Assumptions: Discount rate Future salary escalation Percentage of employees assumed to withdraw from Company without a benefit (“turnover”) Percentage of employees assumed to withdraw from Company with a benefit (“disability”) Year Ended August 31, 2017 2016 3.5% to 10.5% 3.0% to 5.0% 3.5% to 10.8% 3.0% to 5.5% 3.9% to 19.5% 4.0% to 19.5% 0.5% to 6.0% 0.5% to 11.4% For the fiscal year ending August 31, 2018, the Company expects to recognize, as components of net periodic benefit cost, the following amounts currently recorded in accumulated other comprehensive income (in thousands): Prior service cost Actuarial gain/loss Expected Recognition Year Ended August 31, 2018 $ $ 55 31 86 F-55 PRICESMART, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Other Post-Employment Benefit Plans Some of the Company’s subsidiaries are parties to funded and unfunded post-employment benefit plans based on services that the employees have rendered. These plans require the Company to pay a specified benefit on retirement, voluntary departure or death of the employee, or monthly payments to an external fund manager. The amount of these payments is predetermined by a formula based on the employee's earnings history and tenure of service. Because the obligation to provide benefits arises as employees render the services necessary to earn the benefits pursuant to the terms of the plan, the cost associated with providing the benefits is recognized as the employee provides those services. The employees' rights to receive payment on these plans are not dependent on their reaching certain thresholds like age or tenure. Therefore, these plans are not treated as defined benefit plans. For these post-employment benefit plans, the Company has accrued liabilities that are recorded as accrued salaries and benefits and other long-term liabilities. The following table summarizes the amounts recorded on the balance sheet and amounts aa expensed on the consolidated statements of income (in thousands): Accrued Salaries and Benefits Other Long-Term Liability Restricted Cash Held (1) Operating Expenses 2017 2016 2017 Years Ended August 31, 2017 2016 2016 2017 2016 2015 Other Post- Employment Plans $ 425 $ 358 $ 2,720 $ 2,395 $ 2,493 $ 2,188 $ 1,017 $ 1,026 $ 1,722 (1) With some locations, local statutes require the applicable Company subsidiary to deposit cash in its own name with designated fund managers. The funds earn interest which the Company recognizes as interest income. NOTE 7 – STOCK BASED COMPENSATION The three types of equity awards offered by the Company are stock options (“options”), restricted stock awards (“RSAs”) and restricted stock units (“RSUs”). Compensation related to options is accounted for by applying the valuation technique based on the Black-Scholes model. Compensation related to RSAs and RSUs is based on the fair market value at the time of grant with the application of an estimated forfeiture rate. The Company recognizes the compensation cost related to these awards over the requisite service period as determined by the grant, amortized ratably or on a straight line basis over the life of the grant. The Company utilizes “modified grant-date accounting” for true-ups due to actual forfeitures at the vesting dates. The Company records the tax savings resulting from tax deductions in excess of expense for stock-based compensation as additional paid-in capital and the tax deficiency resulting from stock-based compensation in excess of the related tax deduction as a reduction in paid-in capital, based on the Tax Law Ordering method. In addition, the Company reflects the tax savings (deficiency) resulting from the taxation of stock-based compensation as a financing cash flow in its consolidated statement of cash flows, rather than as operating cash flows. r RSAs have the same cash dividend and voting rights as other common stock and are considered to be currently issued and outstanding shares of common stock. Shares of common stock subject to RSUs are not issued nor outstanding until vested, and RSUs do not have the same dividend and voting rights as common stock. However, all outstanding RSUs have accompanying dividend equivalents, requiring payment to the employees and directors with unvested RSUs of amounts equal to the dividend they would have received had the shares of common stock underlying the RSUs been actually issued and outstanding. Payments of dividend equivalents to employees and directors are recorded as compensation expense and as director fees, respectively. The Company adopted the 2013 Equity Incentive Award Plan (the "2013 Plan") for the benefit of its eligible employees, consultants and non-employee directors on January 22, 2013. The 2013 Plan provides for awards covering up to (1) 600,000 shares of common stock plus (2) the number of shares that remained available for issuance as of January 22, 2013 under three equity participation plans previously maintained by the Company. The number of shares reserved for issuance under the 2013 Plan increases during the term of the plan by the number of shares relating to awards outstanding under the 2013 Plan or any of the prior plans that expire, or are forfeited, terminated, canceled or repurchased, or are settled in cash in lieu of shares. However, F-56 PRICESMART, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) in no event will more than an aggregate of 1,233,897 shares of the Company’s common stock be issued under the 2013 Plan. The following table summarizes the shares authorized and shares available for future grants: f Shares authorized for issuance as of August 31, 2017 (including shares originally authorized for issuance under prior plans) 944,905 2013 Plan Shares available to grant August 31, 2017 637,822 August 31, 2016 615,889 The following table summarizes the components of the stock-based compensation expense for the twelve-month periods ended August 31, 2017, 2016 and 2015 (in thousands), which are included in general and administrative expense and warehouse club operations in the consolidated statements of income: Options granted to directors Restricted stock units Stock-based compensation expense Remaining unrecognized compensation cost (in thousands) Weighted average period of time over which this cost will be recognized r (years) Years Ended August 31, 2016 2015 2017 $ $ 18 7,301 2,370 9,689 $ $ 72 7,103 1,946 9,121 $ $ 86 4,599 1,284 5,969 August 31, 2017 Balance as of August 31, 2016 August 31, 2015 $ 26,382 $ 32,380 $ 18,421 3 4 5 August 31, 2017 Years Ended August 31, 2016 August 31, 2015 Excess tax benefit (deficiency) on stock-based compensation (in thousands) $ 165 $ 610 $ 1,206 The Company began issuing restricted stock awards in fiscal year 2006 and restricted stock units in fiscal year 2008. The restricted stock awards and units vest from a one-year to ten-year period and the unvested portion of the award is forfeited if the employee or non-employee director leaves the Company before the vesting period is completed. Restricted stock awards and units activity for the twelve-months ended August 31, 2017, 2016 and 2015 was as follows: Grants outstanding at beginning of period Forfeited Vested Grants outstanding at end of period August 31, 2017 509,880 56,724 (40,023) (122,213) 404,368 Years Ended August 31, 2016 366,021 276,530 (1,372) (131,299) 509,880 August 31, 2015 488,416 36,382 (10,738) (148,039) 366,021 F-57 PRICESMART, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) The following table summarizes the weighted average per share grant date fair value for restricted stock awards and units for fiscal years 2017, 2016 and 2015: Weighted Average Grant Date Fair Value Restricted stock awards and units granted Restricted stock awards and units vested Restricted stock awards and units forfeited August 31, 2017 Years Ended August 31, 2016 August 31, 2015 $ $ $ 87.43 77.85 77.19 $ $ $ 84.69 71.19 $ $ — $ 88.40 45.20 65.67 The following table summarizes the total fair market value of restricted stock awards and units vested for the period (in thousands): August 31, 2017 Years Ended August 31, 2016 August 31, 2015 Total fair market value of restricted stock awards and units vested (in thousands) $ 10,135 $ 10,139 $ 13,192 At the vesting dates of restricted stock awards, the Company repurchases shares at the prior day's closing price per share, with the funds used to pay the employees' minimum statutory tax withholding requirements. The Company expects to continue this practice going forward. The following table summarizes this activity during the period: Shares repurchased August 31, 2017 Years Ended August 31, 2016 August 31, 2015 38,634 3,193 $ 43,171 3,334 $ 52,396 4,677 $ The Company reissues treasury shares as part of its stock-based compensation programs. There have been not been any reissuances of treasury shares during fiscal years 2017, 2016 and 2015, respectively. Due to the substantial shift from the use of stock options to restricted stock awards and units, the Company believes stock option activity is no longer significant and that any further disclosure on options is not necessary. n NOTE 8 – COMMITMENTS AND CONTINGENCIES Legal Proceedings From time to time, the Company and its subsidiaries are subject to legal proceedings, claims and litigation arising in the ordinary course of business and property ownership. The Company evaluates such matters on a case by case basis, and vigorously contests any such legal proceedings or claims which the Company believes are without merit. The Company establishes an accrual for legal proceedings if and when those matters reach a stage where they present loss contingencies that are both probable and reasonably estimable. In such cases, there may be a possible exposure to loss in excess of any amounts accrued. The Company monitors those matters for developments that would affect the likelihood of a loss and the accrued amount, if any, thereof, and adjusts the amount as appropriate. If the loss contingency at issue is not both probable and reasonably estimable, the Company does not establish an accrual, but will continue to monitor the matter for developments that will make the loss contingency both t probable and reasonably estimable. If it is at least a reasonable possibility that a material loss will occur, the Company will provide disclosure regarding the contingency. The Company believes that the final disposition of the pending legal proceedings, is possible, claims and litigation will not have a material adverse effect on its financial position, results of operations or liquidity. It however, that the Company's future results of operations for a particular quarter or fiscal year could be impacted by changes in circumstances relating to such matters. n F-58 PRICESMART, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Taxes The Company is required to file federal and state tax returns in the United States and various other tax returns in foreign jurisdictions. The preparation of these tax returns requires the Company to interpret the applicable tax laws and regulations in effect in such jurisdictions, which could affect the amount of tax paid by the Company. The Company, in consultation with its tax advisors, bases its tax returns on interpretations that are believed to be reasonable under the circumstances. The tax returns, however, are subject to routine reviews by the various taxing authorities in the jurisdictions in which the Company files its returns. As part of these reviews, a taxing authority may disagree with respect to the interpretations the Company used to calculate its tax liability and therefore require the Company to pay additional taxes. uu The Company accrues an amount for its estimate of probable additional income tax liability. In certain cases, the impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more-likely-than- not to be sustained upon audit by the relevant tax authority. An uncertain income tax position will not be recognized if it has less than 50% likelihood of being sustained (see Note 9 - Income Taxes for additional information). t In evaluating the exposure associated with various non-income tax filing positions, the Company accrues for probable and estimable exposures for non-income tax related tax contingencies. As of August 31, 2017 and 2016, the Company has recorded within other accrued expenses a total of $3.4 million and $4.0 million, respectively, for various non-income tax related tax contingencies. While the Company believes the recorded liabilities are adequate, there are inherent limitations in projecting the outcome of litigation, in estimating probable additional income tax liability taking into account uncertain tax positions and in evaluating the probable additional tax associated with various non-income tax filing positions. As such, the Company is unable to make a reasonable estimate of the sensitivity to change of estimates affecting its recorded liabilities. As additional information becomes available, the Company assesses the potential liability and revises its estimates as appropriate. Other Commitments The Company is committed under non-cancelable operating leases for the rental of facilities and land (see Note 11 “Leases”). In January 2017, the Company purchased a distribution center in Medley, Miami-Dade County, Florida. The Company transferred its Miami dry distribution center activities that were previously in the leased facility to the new facility during the third quarter of fiscal year 2017. Some portions of the vacated previously leased space were subleased (and subsequently returned to the landlord) while the remainder remains available for sublease. As part of the subleases the Company has agreed es f to execute and deliver to the landlord of the leased facility a letter of credit (“LOC”) in the amount of $500,000 which entitl the landlord to draw on the LOC based on a decreasing scale over four years, if certain conditions occur related to nonpayment by the new tenant. Although this agreement is considered a guarantee, in measuring the fair value, the Company considers the risk and probability of default by the third party tenant as not likely nor probable, based on the Company’s review of the third party tenant’s financial position as well as the third party’s considerable capital investment into the leased facility. Therefore, the Company has not recorded a liability for this guarantee. u f The Company is also committed to non-cancelable construction services obligations for various warehouse club developments and expansions. As of August 31, 2017, the Company had approximately $7.9 million in contractual obligations for construction services not yet rendered. The Company has entered into land purchase option agreements that have not been recorded as commitments, for which the Company has recorded within restricted cash and deposits approximately $600,000. The land purchase option agreements can be canceled at the sole option of the Company. The Company does not have a timetable of when or if it will exercise these land purchase options, due to the uncertainty related to the completion of the Company's due diligence reviews. The Company's due diligence reviews include evaluations of the legal status of each property, the zoning and permitting issues related to acquiring approval for the construction and operation of a warehouse club and any other issues related to the property itself that could render the property unsuitable or limit the property's economic viability as a warehouse club site. If the purchase option agreements are exercised, the cash use would be approximately $20.8 million. q f See Note 14 – “Unconsolidated Affiliates” for a description of additional capital contributions that may be required in connection with joint ventures to develop commercial centers adjacent to PriceSmart warehouse clubs in Panama and Costa Rica. f F-59 PRICESMART, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) The Company contracts for distribution center services in Mexico. The contract for this distribution center's services expires on August 31, 2020, with the applicable fees and rates to be reviewed at the beginning of each calendar year. Future minimum service commitments related to this contract through the end of the contract term are approximately $456,000. NOTE 9 – INCOME TAXES Income from continuing operations before provision for income taxes and loss of unconsolidated affiliates includes the following components (in thousands): United States Foreign Income from continuing operations before provision for income taxes and loss of unconsolidated affiliates $ $ Years Ended August 31, 2016 2017 24,773 107,970 $ 25,533 105,707 $ 2015 41,694 94,902 132,743 $ 131,240 $ 136,596 Significant components of the income tax provision are as follows (in thousands): Current: U.S. Foreign Total Deferred: U.S. Foreign Valuation allowance charge Total Provision for income taxes Years Ended August 31, 2016 2017 2015 $ $ $ $ $ 12,185 32,680 44,865 $ $ (2,584) $ (1,750) 1,487 (2,847) $ $ 42,018 9,269 30,705 39,974 832 (82) 2,125 2,875 42,849 $ $ $ $ $ 10,918 33,676 44,594 3,941 (3,100) 2,131 2,972 47,566 The reconciliation of income tax computed at the Federal statutory tax rate to the provision for income taxes is as follows (in percentages): Federal tax provision at statutory rates State taxes, net of federal benefit Differences in foreign tax rates Permanent items and other adjustments Increase in foreign valuation allowance Provision for income taxes Years Ended August 31, 2016 35.0 % 2017 35.0 % 2015 35.0 % 0.3 (5.2) 1.5 0.1 0.2 (5.6) 2.0 1.0 0.4 (4.2) 2.3 1.3 31.7 % 32.6 % 34.8 % F-60 PRICESMART, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Significant components of the Company’s deferred tax assets as of August 31, 2017 and 2016 are shown below (in thousands): Deferred tax assets: U.S. net operating loss carryforward Foreign tax credits Deferred compensation U.S. timing differences and alternative minimum tax credits Foreign net operating losses Foreign timing differences: Depreciation and amortization Deferred income Gross deferred tax assets U.S. deferred tax liabilities (depreciation and other timing differences) Foreign deferred tax liabilities netted against deferred tax assets U.S. valuation allowance Foreign valuation allowance Net deferred tax assets August 31, 2017 2016 $ $ 1,684 3,794 1,633 3,042 10,247 3,871 9,514 4,037 37,822 (3,646) (4,744) (488) (13,532) 15,412 $ $ 3,226 185 1,706 2,846 13,414 3,807 8,923 3,606 37,713 (3,944) (8,848) (652) (12,011) 12,258 As of August 31, 2017 and 2016, the Company had net deferred tax liabilities of $1.8 million at the end of each period, arising from timing differences in certain subsidiaries. For fiscal year 2017, the effective tax rate was 31.7%. The decrease in the effective rate versus the prior year was primarily attributable to the following factors: (i) Decrease in fiscal year 2017 in the magnitude of an intercompany transaction between PriceSmart, Inc. and our Colombian subsidiary in support of PriceSmart’s ongoing market development and growth in Colombia compared to fiscal year 2016. Reduction to this intercompany transaction, year over year, resulted in a comparatively unfavorable impact on the effective tax rate of 0.9% due to less reductions to taxable income in the U.S. and less reciprocal increase in taxable income in our Colombia subsidiary in fiscal year 2017 compared to fiscal year 2016. This income did not generate income tax expense in Colombia, because the additional taxable income in Colombia was fully offset by the reversal of valuation allowances on accumulated net losses in that subsidiary. The Company expects the decrease of the favorable impact to the consolidated Company’s effective tax rate over the next several quarters to continue; (ii) The comparably favorable impact of 1.4% resulting from improved financial results in the Company’s Colombia subsidiary for which no tax benefit was recognized, net of adjustment to valuation allowance and; (iii) The favorable impact of 1.3% due predominantly to the non-recurrence of the impact from setting up a valuation allowance against the deferred tax assets of the Company’s Barbados subsidiary in the prior year. For fiscal year 2017, management concluded that a valuation allowance continues to be necessary for certain U.S. and foreign deferred tax assets, primarily because of the existence of negative objective evidence, such as the fact that certain subsidiaries are in a cumulative loss position for the past three years, and the determination that certain net operating loss carryforward periods are not sufficient to realize the related deferred tax assets. The Company factored into its analysis the inherent risk of forecasting revenue and expenses over an extended period of time and also considered the potential risks associated with its business. Additionally, while the Company continues to forecast profitability for its Barbados subsidiary for the immediate and foreseeable future, in fiscal year 2016, due to the existence of negative objective evidence from recent years, the Company established a valuation allowance of approximately $2.0 million to reduce deferred tax assets to amounts expected to be realized. The Company had net foreign deferred tax assets of $9.4 million and $8.9 million as of August 31, 2017 and 2016, respectively. ff f The Company had U.S. federal and state tax NOLs at August 31, 2017 of approximately $3.4 million and $5.5 million, respectively. The federal and state NOLs generally expire during periods ranging from 2017 through 2027, unless previously utilized. In calculating the tax provision and assessing the likelihood that the Company will be able to utilize the deferred tax F-61 PRICESMART, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) assets, the Company considered and weighed all of the evidence, both positive and negative, and both objective and subjective. The Company factored in the inherent risk of forecasting revenue and expenses over an extended period of time and considered the potential risks associated with its business. Using the Company's U.S. income from continuing operations and projections of future taxable income in the U.S., the Company was able to determine that there was sufficient positive evidence to support the conclusion that it was more likely than not that the Company would be able to realize substantially all of its U.S. NOLs by generating sufficient taxable income during the carry-forward period. However, the Company maintains a valuation allowance on substantially all of its state NOLs due to the adoption of single sales factor apportionment in California, which significantly reduces taxable income in that state. The Company has determined that due to a deemed change of ownership (as defined in Section 382 of the Internal Revenue Code) in October 2004, there will be annual limitations in the amount of U.S. taxable income of approximately $3.5 million that may be offset by NOLs. The Company does not believe this will impact the recoverability of these NOLs. The Company does not provide for income taxes which would be payable if undistributed earnings of its foreign subsidiaries were remitted to the U.S., because the Company considers these earnings to be permanently reinvested as management has no plans to repatriate undistributed earnings and profits of foreign affiliates. As of August 31, 2017 and 2016, the undistributed earnings of these foreign subsidiaries are approximately $544.6 million and $472.5 million, respectively. Upon distribution of those earnings in the form of dividends or otherwise, the Company would be subject to both U.S. income taxes and withholding taxes payable to the foreign countries, but would also be able to offset unrecognized foreign tax credits. Determination of the amount of unrecognized deferred U.S. income tax liability is not practicable because of the complexities associated with its hypothetical calculation. The Company accrues for the estimated additional amount of taxes for uncertain income tax positions if the likelihood of sustaining the tax position does not meet the more-likely-than-not-standard for recognition of tax benefits. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands): Balance at beginning of fiscal year Additions based on tax positions related to the current year Settlements Expiration of the statute of limitations for the assessment of taxes Balance at end of fiscal year Years Ended August 31, 2016 2017 2015 $ $ 7,754 36 (65) (31) 7,694 $ $ 8,159 — — (405) 7,754 $ $ 8,786 — — (627) 8,159 As of August 31, 2017, the liability for income taxes associated with uncertain tax benefits was $7.7 million and can be reduced by $7.0 million of tax benefits associated with timing adjustments that are recorded as deferred tax assets and liabilities. The net amount of $700,000, if recognized, would favorably affect the Company's financial statements and favorably affect the Company's effective income tax rate. The Company expects changes in the amount of unrecognized tax benefits in the next 12 months as the result of a lapse in various statutes of limitations. The lapse of statutes of limitations in the twelve-month period ending August 31, 2018 could result in a total income tax benefit amounting up to $26,000. The Company recognizes interest and/or penalties related to income tax matters in income tax expense. As of August 31, 2017 and 2016, the Company had accrued $214,000 and $370,000, respectively, for the payment of interest and penalties (before income tax benefit). The Company has various appeals pending before tax courts in its subsidiaries' jurisdictions. Any possible settlement could increase or decrease earnings but is not expected to be significant. Audit outcomes and the timing of audit settlements are subject to significant uncertainty. One of the Company’s subsidiaries received assessments claiming $2.6 million of taxes, penalties and interest related to withholding taxes on certain charges for services rendered by the Company. In addition, this subsidiary received assessments totaling $5.3 million for lack of deductibility of the underlying service charges due to the lack of withholding. Based on a review of the Company's tax advisers' interpretation of local law, rulings and jurisprudence (including Supreme Court precedents with respect to the deductibility assessment), the Company expects to prevail in both instances and has not recorded a provision for these assessments. However, the Company had to submit these amounts as advanced payments to the government while it appeals. F-62 PRICESMART, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) In another country in which the Company has warehouse clubs, beginning in fiscal year 2015, a new minimum income tax mechanism took effect, which requires the Company to pay taxes based on a percentage of sales rather than income. As a result, the Company is making income tax payments substantially in excess of those it would expect to pay based on taxable income. The current rules (which the Company has challenged in court) do not clearly allow the Company to obtain a refund or to offset this excess income tax against other taxes. As of August 31, 2017, the Company had deferred tax assets of approximately $2.0 million in this country. Also, the Company had an income tax receivable balance of $4.3 million as of August 31, 2017 related to excess payments from fiscal years 2015 and 2017. The Company has not placed any type of allowance on the recoverability of these tax receivables or deferred tax assets, because the Company believes that it is more likely than not that it will succeed in its refund request and/or court challenge on this matter. The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. The Company is generally no longer subject to income tax examinations by tax authorities in its major jurisdictions except for the fiscal years subject to audit as set forth in the table below: Tax Jurisdiction U.S. federal California (U.S.) (state return) Florida(U.S.) (state return) Aruba Barbados Costa Rica Colombia Dominican Republic El Salvador Guatemala Honduras Jamaica Mexico Nicaragua Panama Trinidad U.S. Virgin Islands Spain Fiscal Years Subject to Audit 2000 to 2005, 2007, 2014 to the present 2005 and 2013 to the present 2014 to the present 2012 to the present 2011 to the present 2011 to the present 2012 and 2014 to the present 2011 to 2012 and 2014 to the present 2009 to 2010 and 2014 to the present 2009, 2012 to the present 2012 to the present 2011 to the present 2012 to the present 2013 to the present 2014 to the present 2011 to the present 2001 to the present 2013 to the present Generally for U.S. federal and U.S. Virgin Islands tax reporting purposes, the statute of limitations is three years from the date of filing of the income tax return. If and to the extent the tax year resulted in a taxable loss, the statute is extended to three years from the filing date of the income tax return in which the carryforward tax loss was used to offset taxable income in the carryforward year. Given the historical losses in these jurisdictions and the Section 382 change in control limitations on the audit. ff use of the tax loss carryforwards, there is uncertainty and significant variation as to when a tax year is no longer subject to NOTE 10 – DEBT Short-term borrowings consist of lines of credit which are secured by certain assets of the Company and its subsidiaries, which, in some cases, are guaranteed by the Company. The following table summarizes the balances of total facilities, facilities used and facilities available (in thousands): Total Amount of Facilities Short-term Borrowings Letters of Credit Facilities Available Weighted average interest rate August 31, 2017 August 31, 2016 $ $ 69,000 65,000 $ $ — $ $ 16,534 966 9,224 $ $ 68,034 39,242 — % 10.1 % Facilities Used As of August 31, 2017 and August 31, 2016, the Company had approximately $40.0 million of short-term facilities in the U.S. that require compliance with certain quarterly financial covenants. As of August 31, 2017 and August 31, 2016, the Company was in compliance with respect to these covenants. Each of the facilities expires annually and is normally renewed. F-63 PRICESMART, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) The following table provides the changes in long-term debt for the twelve months ended August 31, 2017: (Amounts in thousands) Balances as of August 31, 2016 incurred during the period: MUFG Union Bank Trinidad subsidiary Repayments of long-term debt: Repayment of loan by Panama subsidiary Regularly scheduled loan payments Translation adjustments on foreign-currency debt of subsidiaries whose functional currency is not the U.S. dollar (2) Balances as of August 31, 2017 Current portion of long- term debt Long-term debt (net of current portion) Total $ 14,565 $ 73,542 $ 88,107 (1) — 6,000 (2,000) (225) 35,700 6,000 (11,333) (15,837) 35,700 12,000 (13,333) (16,062) 18 18,358 $ $ (133) 87,939 $ (115) 106,297 (3) (1) The carrying amount on non-cash assets assigned as collateral for these loans was $102.4 million. No cash assets were assigned as collateral for these loans. (2) These foreign currency translation adjustments are recorded within Other comprehensive income. (3) The carrying amount on non-cash assets assigned as collateral for these loans was $128.4 million. No cash assets were assigned as collateral for these loans as of August 31, 2017. In August 2017, the Company’s Panama subsidiary paid off the outstanding principal balance of U.S. $13.3 million on a loan agreement entered into with Scotiabank. The Company’s subsidiary also settled the interest rate swap that it had entered into with Scotiabank related to this loan. d On March 31, 2017, the Company's Trinidad subsidiary entered into a loan agreement with Citibank, N.A. The agreement provides for a $12.0 million loan to be repaid in eight quarterly principal payments plus interest. The interest rate is set at the 90 day LIBOR rate plus 3%. The loan was funded on March 31, 2017. In January 2017, the Company finalized its acquisition of a distribution center in Medley, Miami-Dade County, Florida for a total purchase price of approximately $46.0 million. The Company transferred its Miami distribution center activities previously located in leased facilities to the new distribution center during the third quarter of fiscal year 2017. To finance the r acquisition of this property, the Company entered into a 10-year real estate secured loan with MUFG Union Bank, N.A. (“Union Bank”) for $35.7 million in January 2017. This loan has a variable interest rate of 30-day LIBOR plus 1.7%, with monthly principal and interest payments maturing in 2027. The monthly principal and interest payments begin in April 2019. The Company also entered into an interest rate hedge with Union Bank for $35.7 million, the notional amount. Under the hedge, the Company will receive variable interest equal to 30-day LIBOR plus 1.7% and pay fixed interest at a rate of 3.65%, with an effective date of March 1, 2017 and maturity date of March 1, 2027. F-64 PRICESMART, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) The following table provides a summary of the long-term loans entered into by the Company: Loans entered into by the Company's subsidiaries with a balloon payment due at the end of the loan term and with non-cash assets assigned as collateral and with/without established debt covenants Loans entered into by the Company's subsidiaries for which the subsidiary has entered into an interest rate swap with non-cash assets assigned as collateral and with/without established debt covenants Loans entered into by the Company's subsidiaries with non-cash assets assigned as collateral and with/without established debt covenants Loans entered into by the Company's subsidiaries for which the subsidiary has entered into a cross-currency interest rate swap with non-cash assets assigned as collateral and with/without established debt covenants Total long-term debt Less: current portion Long-term debt, net of current portion August 31, 2017 August 31, 2016 $ 18,200 $ 21,945 49,424 17,585 21,088 106,297 18,358 87,939 $ $ 32,258 9,717 24,187 88,107 14,565 73,542 As of August 31, 2017, the Company had approximately $85.6 million of long-term loans in Trinidad, Panama, El Salvador, Honduras, Costa Rica, Barbados and Colombia that require these subsidiaries to comply with certain annual or quarterly financial covenants, which include debt service and leverage ratios. As of August 31, 2017, the Company was in compliance with all covenants or amended covenants. As of August 31, 2016, the Company had approximately $76.0 million of long-term loans in Trinidad, Panama, El Salvador, Honduras, Costa Rica, Barbados, and Colombia that require these subsidiaries to comply with certain annual or quarterly financial covenants, which include debt service and leverage ratios. As of August 31, 2016, the Company was in compliance with all covenants or amended covenants. Annual maturities of long-term debt are as follows (in thousands): t Years Ended August 31, 2018 2019 2020 2021 2022 Thereafter Total Amount 18,358 16,279 18,127 17,941 2,966 32,626 106,297 $ $ F-65 PRICESMART, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) NOTE 11 – LEASES The Company is committed under non-cancelable operating leases for the rental of facilities and land. These leases expire or become subject to renewal between December 31, 2017 and January 29, 2044. As of August 31, 2017, the Company’s warehouse clubs occupied a total of approximately 2,925,731 square feet of which 522,131 square feet were on leased property. The following is a summary of the warehouse clubs and Company facilities located on leased property: Facility Type Location Warehouse Club Salitre, Colombia Warehouse Club Via Brazil, Panama Miraflores, Guatemala Warehouse Club Pradera, Guatemala Warehouse Club Tegucigalpa, Honduras Warehouse Club Oranjestad, Aruba Warehouse Club Port of Spain, Trinidad Warehouse Club Warehouse Club St. Thomas, U.S.V.I. Storage Facility Barbados Employee Parking Chaguanas, Trinidad Container Parking Chaguanas, Trinidad Storage and Distribution Facility Jamaica Date Opened October 29, 2014 December 4, 1997 April 8, 1999 May 29, 2001 May 31, 2000 March 23, 2001 December 5, 2001 May 4, 2001 December 1, 2012 May 1, 2009 April 1, 2010 Approximate Square Footage Current Lease Expiration Date 98,566 January 29, 2044 68,696 October 31, 2026 68,977 December 31, 2020 48,438 May 28, 2021 64,735 May 30, 2020 64,627 March 23, 2021 54,046 54,046 12,517 November 30, 2025 July 5, 2031 February 28, 2020 4,944 April 30, 2024 65,340 March 31, 2025 Remaining Option(s) to Extend 20 years 10 years 5 years none none 10 years none 10 years 3 years none none September 1, 2012 17,000 July 14, 2019 2 years Santo Domingo, Dominican Republic Bogota, Colombia San Diego, CA (1) Miami, FL(2) Miami, FL Panama Costa Rica Costa Rica (3) Panama Trinidad(4) Central Offices June 1, 2010 2,002 January 14, 2021 5 years October 21, 2010 Central Offices Corporate Headquarters April 1, 2004 Dry Distribution Facility March 1, 2008 Cold Distribution Facility August 1, 2016 Central Offices Storage and Distribution Facility Distribution Facility and Parking Lot Distribution Facility Storage and Distribution Facility January 28, 2013 August 18, 2014 August 14, 2017 March 26, 2018 November 4, 2014 9,707 December 31, 2017 45,826 May 31, 2026 July 31, 2021 206,041 100,295 December 31, 2027 17,975 December 12, 2028 none 5 years none none 15 years 37,674 January 27, 2019 3 years 233,794 March 25, 2038 10 years 4,874 August 13, 2020 2 years 17,110 August 17, 2017 none (2) (1) On October 31, 2016, the contract to sub-lease 2,799 square feet of space to a third party expired. The Company has since occupied all 2,799 square feet of space as an expansion to its Corporate Headquarters and included the additional square feet in the table above. In January 2017, the Company purchased a distribution center in Medley, Miami-Dade County, Florida. The Company transferred its Miami dry distribution center activities that were previously in the leased facility to the new facility during the third quarter of fiscal year 2017. Some portions of the vacated space were subleased (and subsequently returned to the landlord) while the remainder remains available for sublease. In June 2017, the Company executed a contract to acquire 233,794 square feet of space for a regional distribution center and parking lot. Delivery date is expected to be March 26, 2018 and June 26, 2018, respectively. (3) t (4) Although the Company’s lease agreement for the Trinidad storage and distribution facility expired on August 17, 2017, the Company continues to occupy the space as an agreement for a one-year renewal has been reached with the landlord, pending execution of the contract. The Company has also included this one-year lease as part of the minimum lease commitments. F-66 PRICESMART, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) The following table summarizes the components of rental expense charged for operating leases of open locations for fiscal years 2017, 2016 and 2015 (in thousands): Minimum rental payments Total straight line rent expense Contingent rental payments Common area maintenance expense Rental expense Years Ended August 31, 2017 2016 2015 11,223 (80) 11,143 3,320 1,174 15,637 $ $ 9,986 1,363 11,349 3,208 1,369 15,926 $ $ 10,074 1,355 11,429 3,137 1,321 15,887 $ $ Future minimum lease commitments for facilities under these leases with an initial term in excess of one year are as follows (in thousands): Years Ended August 31, 2018 2019 2020 2021 2022 Thereafter Total $ Leased Locations(1) 11,596 11,715 11,093 9,615 8,894 116,066 $ 168,979 (2)(3) (1) Operating lease obligations have been reduced by approximately $928,000 to reflect sub-lease income. Certain obligations under leasing arrangements are collateralized by the underlying asset being leased. (2) As of August 31, 2016, total future minimum lease commitments were $120.9 million. The increase during fiscal year 2017 is primarily related to the extension of an existing lease within the Company’s Guatemala subsidiary for its Pradera location. The subsidiary signed an extension on November 25, 2016, extending the lease termination date from May 31, 2021 to November 30, 2043. The lease extension included the real property at this location currently used by the Company and added additional square footage in the same shopping center to the lease. This has effectively provided the Company with possession of substantially all of the real property available at that location. The Company plans to expand and upgrade the current warehouse club and parking areas and to improve access into and out from the location. (3) Future minimum lease payments include $3.2 million of lease payment obligations for the prior leased Miami distribution center. For the purposes of calculating the minimum lease payments, no reduction was considered for the potential sub-lease income the Company could receive during the remaining lease term. This potential sub-lease income was considered, however, for the purposes of calculating the exit obligation of $57,000 recorded on the balance sheet as of August 31, 2017. Projected income for any executed sub-leases would be used to reduce the amount reported as minimum lease payments. The following table summarizes the components of rental income recorded for operating leases for fiscal years 2017, 2016 and 2015 (in thousands): Minimum rental receipts Deferred rent accruals Total straight line rent income Contingent rental receipts Common maintenance area income Rental income Years Ended August 31, 2016 2017 2015 2,654 (17) 2,637 121 141 2,899 $ $ 2,735 56 2,791 112 151 3,054 $ $ 2,873 47 2,920 86 148 3,154 $ $ F-67 PRICESMART, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) f The Company is the landlord for rental of land and/or building space for propertie s it owns. The following is a schedule of future minimum rental income on non-cancelable operating leases with an initial term in excess of one year from owned property as of August 31, 2017 (in thousands): Years Ended August 31, 2018 2019 2020 2021 2022 Thereafter Total Amount 2,427 2,103 1,835 1,562 941 4,407 13,275 $ $ NOTE 12 – DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES The Company is exposed to interest rate risk relating to its ongoing business operations. To manage interest rate exposure, the Company enters into hedge transactions (interest rate swaps) using derivative financial instruments. The objective of entering into interest rate swaps is to eliminate the variability of cash flows in the LIBOR interest payments associated with variable-rate loans over the life of the loans. As changes in interest rates impact the future cash flow of interest payments, the hedges provide a synthetic offset to interest rate movements. In addition, the Company is exposed to foreign currency and interest rate cash flow exposure related to a non-functional currency long-term debt held by various of its wholly owned subsidiaries. To manage this foreign currency and interest rate cas h u flow exposures, the Company’s subsidiaries enter into cross-currency interest rate swaps that convert its U.S. dollar denominated floating interest payments to functional currency fixed interest payments during the life of the hedging instrument. As changes in foreign exchange and interest rates impact the future cash flow of interest paymen ts, the hedge is intended to offset changes in cash flows attributable to interest rate and foreign exchange movements. t These derivative instruments (cash flow hedging instruments) are designated and qualify as cash flow hedges, with the effective portion of the gain or loss on the derivative reported as a component of other comprehensive income (loss) and reclassified into earnings in the same period or periods during which the hedged transaction is determined to be ineffective. There were no such amounts recorded for ineffectiveness for the periods reported herein related to the interest rate or cross-currency interest rate swaps of long-term debt. The Company is exposed to foreign-currency exchange-rate fluctuations in the normal course of business, including foreign-currency exchange-rate fluctuations on U.S. dollar denominated liabilities within its international subsidiaries whose functional currency is other than the U.S. dollar. The Company manages these fluctuations, in part, through the use of non- deliverable forward foreign-exchange contracts that are intended to offset changes in cash flow attributable to currency exchange movements. These contracts are intended primarily to economically address exposure to U.S. dollar merchandise inventory expenditures made by the Company’s international subsidiaries whose functional currency is other than the U.S. dollar. Currently, these contracts do not qualify for derivative hedge accounting. The Company seeks to mitigate foreign-currency exchange-rate risk with the use of these contracts and does not intend to engage in speculative transactions. These contracts do not contain any credit-risk-related contingent features. Cash Flow Hedges As of August 31, 2017, all of the Company’s interest rate swap and cross-currency interest rate swap derivative financial instruments are designated and qualify as cash flow hedges. The Company formally documents the hedging relationships for its derivative instruments that qualify for hedge accounting. F-68 PRICESMART, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) The following table summarizes agreements for which the Company has recorded cash flow hedge accounting transactions during the twelve months ended August 31, 2017: Subsidiary PriceSmart, Inc Date Entered into 7-Nov-16 Costa Rica 28-Aug-15 Derivative Financial Counter- party MUFG Union Bank, N.A. ("Union Bank") Citibank, N.A. ("Citi") Honduras 24-Mar-15 Citibank, N.A. El Salvador 16-Dec-14 Colombia 10-Dec-14 Panama 9-Dec-14 Honduras 23-Oct-14 ("Citi") Bank of Nova Scotia ("Scotiabank") Citibank, N.A. ("Citi") Bank of Nova Scotia ("Scotiabank") Citibank, N.A. ("Citi") Derivative Financial Instruments Interest rate swap Cross currency interest rate swap Cross currency interest rate swap Interest rate swap Cross currency interest rate swap Interest rate swap Cross currency interest rate swap Panama Panama Panama 1-Aug-14 Bank of Nova Scotia ("Scotiabank") 22-May-14 Bank of Nova Scotia ("Scotiabank") 22-May-14 Bank of Nova Scotia ("Scotiabank") Interest rate swap Interest rate swap Interest rate swap Initial US$ Notional Amount Bank US$ loan Held with 35,700,000 Union Bank 7,500,000 Citibank, N.A. 8,500,000 Citibank, N.A. 4,000,000 Bank of Nova Scotia 15,000,000 Citibank, N.A. 10,000,000 Bank of Nova Scotia 5,000,000 Citibank, N.A. 5,000,000 Bank of Nova Scotia 19,800,000 Bank of Nova Scotia 3,970,000 Bank of Nova Scotia $ $ $ $ $ $ $ $ $ $ Floating Leg (swap counter- party) Variable rate 1-month Libor plus 1.7% Variable rate 3-month Libor plus 2.50% Variable rate 3-month Libor plus 3.25% Variable rate 30-day Libor plus 3.5% Variable rate 3-month Libor plus 2.8% Variable rate 30-day Libor plus 3.5% Variable rate 3-month Libor plus 3.5% Variable rate 30-day Libor plus 3.5% Variable rate 30-day Libor plus 3.5% Variable rate 30-day Libor plus 3.5% Fixed Rate for PSMT Subsidiary Settlement Dates 3.65 % 1st day of each month beginning on April 1, 2017 7.65 % 28th day of August, November, February, and May beginning on November 30, 2015 10.75 % 24th day of March, June, September, and December beginning on June 24, 2015 4.78 % 29th day of each month beginning on December 29, 2014 8.25 % 4th day of March, June, Sept, Dec. beginning on March 4, 2015 5.16 % 28th day of each month beginning December 29, 2014 11.6 % 22nd day of January, April, July, and October beginning on January 22, 2015 Effective Period of swap March 1, 2017 - March 1, 2027 August 28, 2015 - August 28, 2020 March 24,2015 - March 20, 2020 December 1, 2014 - August 29, 2019 December 4, 2014 - December 3, 2019 November 28, 2014 - November 29, 2019 October 22, 2014 - October 22, 2017 4.89 % 21st day of each month beginning on September 22, 2014 4.98 % 4th day of each month beginning on June 4, 2014 4.98 % 4th day of each month beginning on June 4, 2014 August 21, 2014 - August 21, 2019 Settled on August 31, 2017 May 5, 2014 - April 4, 2019 For the twelve-month periods ended August 31, 2017, 2016 and 2015, the Company included the gain or loss on the hedged items (that is, variable-rate borrowings) in the same line item—interest expense—as the offsetting gain or loss on the related interest rate swaps as follows (in thousands): Income Statement Classification Interest expense for the year ended August 31, 2017 31, 2016 Interest expense for the year ended August 31, 2015 Interest expense on borrowings(1) 3,605 $ 3,087 $ 2,205 $ $ $ $ Cost of swaps (2) 1,588 1,982 2,827 $ $ $ Total 5,193 5,069 5,032 (1) This amount is representative of the interest expense recognized on the underlying hedged transactions. (2) This amount is representative of the interest expense recognized on the interest rate swaps designated as cash flow hedging d instruments. F-69 PRICESMART, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) The total notional balance of the Company’s pay-fixed/receive-variable interest rate swaps and cross-currency interest rate swaps was as follows (in thousands): Floating Rate Payer (Swap Counterparty) Union Bank Citibank N.A. Scotiabank Total Notional Amount as of August 31, 2017 August 31, 2016 $ $ 35,700 26,088 13,724 75,512 $ $ — 30,188 32,258 62,446 The following table summarizes the fair value of interest rate swap and cross-currency interest rate swap derivative instruments that qualify for derivative hedge accounting (in thousands, except footnote data): Derivatives designated as cash flow hedging instruments Cross-currency interest rate swaps Interest rate swaps Cross-currency interest rate swaps Net fair value of derivatives designated as hedging instruments Fair Value Instruments Balance Sheet Location Other non-current assets Other long-term liabilities Other long-term liabilities August 31, 2017 Net Tax Effect Fair Value Net OCI August 31, 2016 Net Tax Effect Fair Value Net OCI $ 2,547 (950) 1,597 $ 3,224 (1,248) 1,976 (231) 80 (151) (448) (451) 135 (316) (1,066) 115 320 (333) (746) $ 1,865 $ (735) $ 1,130 $ 1,710 $ (813) $ 897 The Company has entered into non-deliverable forward foreign-exchange contracts. These contracts are treated for accounting purposes as fair value contracts and do not qualify for derivative hedge accounting. The use of non-deliverable forward foreign-exchange contracts is intended to offset changes in cash flow attributable to currency exchange movements. These contracts are intended primarily to economically hedge exposure to U.S. dollar merchandise inventory expenditures made by the Company’s international subsidiaries whose functional currency is other than the U.S. dollar. ff As of August 31, 2017 the Company did not have any open non-deliverable forward foreign-exchange contracts. For the twelve-month periods ended August 31, 2017, 2016 and 2015, the Company included in its consolidated statements of income the forward derivative (gain) or loss on the non-deliverable forward foreign-exchange contracts as follows (in thousands): Income Statement Classification Other income (expense), net on the consolidated balance sheet at August 31, 2017 or 2016. NOTE 13 – RELATED-PARTY TRANSACTIONS Years Ended August 31 2016 2017 2015 $ (387) $ (166) $ 6,533 e were no significant related assets or liabilities recorded Use of Private Plane: From time to time members of the Company’s management use private planes owned in part by La Jolla Aviation, Inc. to travel to business meetings in Latin America and the Caribbean. La Jolla Aviation, Inc. is solely owned by The Robert and Allison Price Trust, and Robert Price the Company's Chairman of the Board, is a Director and Officer of La Jolla Aviation, Inc. The Company has reimbursed La Jolla Aviation for such travel at the hourly rate of the Company's private aircraft for such travel. The Company incurred expenses of approximately $182,000 and $225,000 for the years ended August 31, 2016 and 2015, respectively, for these services. The Company did not use these services during the twelve months ended August 31, 2017. f F-70 PRICESMART, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Relationship with Aseprismar: Aseprismar is a PriceSmart employee association located in Costa Rica that purchases discarded packaging materials received by the Company from incoming shipments of merchandise. The Company recorded approximately $128,000, $123,000 and $157,000 in other income from the sale of packaging materials to Aseprismar for the years ended August 31, 2017, 2016 and 2015, respectively. In addition, the Company also contracts with Aseprismar for freight transportation between the Company's Costa Rica warehouse clubs. The Company incurred approximately $66,000, $80,000 and $35,000 for freight expense with Aseprismar for the years ended August 2017, 2016 and 2015. Relationship with Francisco Velasco: Francisco Velasco is the Executive Vice President, General Counsel, Secretary and Chief Ethics and Compliance Officer for the Company. As part of his employment agreement dated July 2016, the Company purchased his home in Chicago, IL, in July based on its appraised value for approximately $625,000. The Company also leased the property back to Francisco Velasco for $2,500 a month until he relocated to San Diego, CA. The Company also reimbursed Francisco Velasco for the monthly lease payments. For the year ended August 31, 2016, the Company charged and then reimbursed approximately $2,500. There were no charges or reimbursements made during the year ended August 31, 2017. The Company intends to sell this property. Relationships with Edgar Zurcher: Edgar Zurcher is a director of the Company. Mr. Zurcher is a partner in a law firm that the Company utilizes in certain legal matters. The Company incurred approximately $82,000, $26,000 and $18,000 in legal expenses with this firm for the years ended August 31, 2017, 2016 and 2015, respectively. Mr. Zurcher is also a director of a company that owns 40% of Payless ShoeSource Holdings, Ltd., which rents retail space from the Company. The Company recorded approximately $1.5 million in rental income for this space during the year ended August 31, 2017 and $1.4 million for each of the fiscal years ended, 2016 and 2015. Additionally, Mr. Zurcher is a director of Molinos de Costa Rica S.A. The Company paid approximately $636,000, $502,000 and $496,000 for products purchased from this entity during the years ended August 31, 2017, 2016 and 2015, respectively. Also, Mr. Zurcher is a director of Roma Prince S.A. PriceSmart purchased products from this entity for approximately $1.1 million, $1.2 million and $1.3 million for the years ended August 31, 2017, 2016 and 2015, respectively. Relationship with Gonzalo Barrutieta: Gonzalo Barrutieta is a director of the Company. Mr. Barrutieta is also a member of the Board of Directors of Office Depot Mexico, S.A. de C.V., which operates OD Panama, S.A. ("ODP"), which rents retail space from the Company. The Company has recorded approximately $277,000, $272,000 and $266,000 in rental income and common area maintenance charges for this space during the years ended August 31, 2017, 2016 and 2015, respectively. In addition, on December 11, 2015, the Company's joint venture Golf Park Plaza, S.A. ("GPP") transferred final ownership of land to ODP, following its execution of the related purchase option. The deed was recorded with the relevant agencies in Panama during February 2016. ODP had on July 15, 2011 (fiscal year 2011), entered into a 30 year operating lease, with an option to buy, for approximately 26,000 square feet of land owned by GPP. The option to purchase the land had a three-year limit beginning in April 2013. As part of this transaction, ODP: (i) made an initial deposit to GPP in the sum of approximately $545,000 at the its building was completed and time of signing the agreement; (ii) paid a second deposit of approximately $436,000 at the time its store opened to the public; (iii) paid monthly rent per the lease clause of the agreement which the Company recognized on a straight line basis; and (iv) contracted to pay an additional $109,000, less rental payments of $39,000 previously applied per the lease clause, when ODP exercised its option to purchase the land. GPP recorded rental income of approximately $1,000 and $106,000, during the fiscal years ended August 31, 2016 and 2015, respectively. GPP recorded a gain, net of tax, on the sale of the land of approximately $851,000 during February 2016. f Relationships with Price Family Charitable Organizations: During the years ended August 31, 2017, 2016 and 2015, the Company sold approximately $393,000, $427,000 and $371,000, respectively, of supplies to Price Philanthropies Foundation. Robert Price, Chairman of the Company's Board of Directors, is the Chairman of the Board and President of Price Philanthropies Foundation and Price Charities. Sherry S. Bahrambeygui, a director of the Company and Vice Chair of the Board, serves as Executive Vice President, Secretary and Vice Chairman of the Boards of Price Charities, fka San Diego Revitalization Corp., and Price Philanthropies Foundation. The Company also participated initially with Price Charities, a charitable non-profit public benefit corporation, in a charitable program known as “Aprender y Crecer” ("Learn and Grow”) by allowing PriceSmart members to donate money in the warehouse clubs to that program. Beginning January 1, 2015, the Aprender y Crecer program was transferred from Price Charities to Price Philanthropies Foundation. Since 2015, the Company has participated with Price Philanthropies and selected vendors where the vendors channel donations through the Company based on a percentage of sales of their products within the warehouse clubs. The Company collaborated with Price Charities, Price Philanthropies Foundation and local charitable groups to use these donations to acquire and deliver supplies to schools in the communities surrounding PriceSmart clubs. Vendors send their donations to PriceSmart, which records them as a liability for donations received. The liability for donations received, but not yet applied to the purchase of school supplies was approximately $102,000 and $139,000 as of August 31, 2017 and 2016, respectively. y Relationships with Mitchell G. Lynn: Mr. Lynn has been a director of the Company since November 2011. Mr. Lynn is the founder, limited partner and a general partner of CRI 2000, LP, dba Combined Resources International ("CRI"), which designs, F-71 PRICESMART, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) develops and manufactures consumer products for domestic and international wholesale distribution, primarily through warehouse clubs. The Company paid approximately $437,000, $625,000 and $353,000 for products purchased from this entity during the years ended August 31, 2017, 2016 and 2015, respectively. Mr. Lynn is also a founder, limited partner and a general partner of ECR4Kids, LP ("ECR") which designs, manufactures and sells educational/children's products to wholesale dealers. The Company paid approximately $8,000, $3,000 and $31,000 for products purchased from this entity during the years ended August 31, 2017, 2016 and 2015, respectively. Mr. Lynn is also associated with Procuro, Inc., which is a services company that specializes in Cold Chain Management solutions. Mr. Lynn owns less than one percent of the issued and outstanding Procuro, Inc. shares and cannot significantly influence Procuro, Inc. The Company paid to Procuro, Inc. approximately $71,000, $95,000 and $76,000 for products purchased from this entity during the years ended August 31, 2017, 2016 and 2015, respectively. Relationship with Golf Park Plaza, S.A.: Golf Park Plaza, S.A. is a real estate joint venture located in Panama entered into by the Company in 2008 (see Note 14 - Unconsolidated Affiliate). On December 12, 2013, the Company entered into a lease agreement for approximately 17,976 square feet (1,670 square meters) of land with Golf Park Plaza, S.A. upon which the Company constructed its central offices in Panama. The lease term is for 15 years with three options to renew for five years each at the Company's discretion. The monthly lease expense is approximately $8,800. For the twelve months ended August 31, 2017, 2016 and 2015, the Company recognized rent expense of $105,700 for this lease for each such fiscal year. Relationships with Pierre Mignault: Pierre Mignault was elected to the Board of Directors, effective August 1, 2015. Mr. Mignault has been a consultant for the Company since September 2009, serving as an independent sourcing agent with Canadian suppliers. In his role as an independent sourcing agent, Mr. Mignault received commissions of $224,000, $208,000 and $154,000 from certain vendors related to the sale of product to the Company in fiscal years 2017, 2016 and 2015, respectively. In his role as consultant for the Company, he earned $60,000 in each year for the twelve months ended August 31, 2017, 2016 and 2015. NOTE 14 – UNCONSOLIDATED AFFILIATES The Company determines whether any of the joint ventures in which it has made investments is a Variable Interest Entity (“VIE”) at the start of each new venture and if a reconsideration event has occurred. At this time, the Company also considers whether it must consolidate a VIE and/or disclose information about its involvement in a VIE. A reporting entity must consolidate a VIE if that reporting entity has a variable interest (or combination of variable interests) that will absorb a majority of the VIE's expected losses, receive a majority of the VIE's expected residual returns, or both. A reporting entity must consider the rights and obligations conveyed by its variable interests and the relationship of its variable interests with variable interests held by other parties to determine whether its variable interests will absorb a majority of a VIE's expected losses, receive a majority of the VIE's expected residual returns, or both. The reporting entity that consolidates a VIE is called the primary beneficiary of that VIE. In 2008, the Company entered into real estate joint ventures to jointly own and operate separate commercial retail centers adjacent to warehouse clubs in Panama (Golf Park Plaza, S.A.) and Costa Rica (Plaza Alajuela, S.A.). Due to the initial nature of the joint ventures and the continued commitments for additional financing, the Company determined these joint ventures are VIEs. Since all rights, obligations and the power to direct the activities of a VIE that most significantly impact the VIE's economic performance is shared equally by both parties within each joint venture, the Company has determined that it is not the primary beneficiary of the VIEs and, therefore, has accounted for these entities under the equity method. Under the equity method, the Company's investments in unconsolidated affiliates are initially recorded as an investment in the stock of an investee at cost and are adjusted for the carrying amount of the investment to recognize the investor's share of the earnings or losses of the investee after the date of the initial investment. On December 12, 2013, the Company entered into a lease agreement for approximately 17,976 square feet (1,670 square meters) of land with Golf Park Plaza, S.A. upon which the Company constructed its central offices in Panama. Construction of the offices was completed in October 2014. The lease term is for 15 years with three options to renew for five years each at the Company's discretion. The Company recognized $105,700 in rent expense for the fiscal years ended August 31, 2017, 2016 and 2015. On December 11, 2015, the Company's joint venture Golf Park Plaza, S.A. ("GPP") transferred final ownership of land to OD Panama, S.A. ("ODP"), which is operated by Office Depot Mexico, S.A. de C.V., following its execution of the related purchase option. The deed was recorded with the relevant agencies in Panama during February 2016. ODP had on July 15, 2011 (fiscal year 2011), entered into a 30 year operating lease, with an option to buy, for approximately 26,000 square feet of land owned by GPP. The option to purchase the land had a three-year limit beginning in April 2013. As part of this transaction, ODP: (i) made an initial deposit to GPP in the sum of approximately $545,000 at the time of signing the agreement; (ii) paid a second deposit of approximately $436,000 at the time its building was completed and its store opened to the public; (iii) paid monthly F-72 PRICESMART, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) rent per the lease clause of the agreement which the Company recognized on a straight line basis; and (iv) contracted to pay an additional $109,000, less rental payments of $39,000 previously applied per the lease clause, when ODP exercised its option to purchase the land. ODP opened its store in April of 2013. GPP recorded rental income on a straight line basis for approximately $106,000, $72,000 and $12,000 during the fiscal years ended August 31, 2015, 2014 and 2013, respectively. During fiscal year 2016 GPP recorded rental income for approximately $1,000. GPP recorded a gain, net of tax, on the sale of the land for approximately $851,000 during February 2016. Gonzalo Barrutieta, who is a director of the Company, is also a member of the Board of Directors of Office Depot Mexico, S.A. de C.V., which operates ODP. The table below summarizes the Company’s interest in these VIEs and the Company’s maximum exposure to loss as a result of its involvement with these VIEs as of August 31, 2017 (in thousands): % Ownership Initial Investment Additional Investments Net (Loss)/Income Inception to Date Company’s Variable Interest in Entity Commitment to Future Additional Investments(1) Company's Maximum Exposure to Loss in Entity(2) 50 % $ 50 % $ 4,616 $ 2,193 6,809 $ 2,402 $ 1,236 3,638 $ 294 $ 24 318 $ 7,312 $ 3,453 10,765 $ 99 $ 785 884 $ 7,411 4,238 11,649 Entity GolfPark Plaza, S.A. Price Plaza Alajuela, S.A. Total (1) The parties intend to seek alternate financing for the project, which could reduce the amount of investments each party would be required to provide. The parties may mutually agree on changes to the project, which could increase or decrease the amount of contributions each party is required to provide. (2) The maximum exposure is determined by adding the Company’s variable interest in the entity and any explicit or implicit arrangements that could require the Company to provide additional financial support. The summarized financial information of the unconsolidated affiliates is as follows (in thousands): Current assets Noncurrent assets Current liabilities Noncurrent liabilities Net income (loss) NOTE 15 – SEGMENTS August 31, 2017 August 31, 2016 $ $ $ $ 1,221 11,207 226 26 $ $ $ $ 663 11,752 219 16 Years Ended August 31, 2016 2015 2017 $ (1) $ 332 $ 94 The Company and its subsidiaries are principally engaged in the international operation of membership shopping in 39 warehouse clubs located in 13 countries/territories that are located in Central America, the Caribbean and Colombia. In addition, the Company operates distribution centers and corporate offices in the United States. The Company has aggregated its warehouse clubs, distribution centers and corporate offices into reportable segments. The Company’s reportable segments are based on management’s organization of these locations into operating segments by general geographic location, used by management and the Company's chief operating decision maker in setting up management lines of responsibility, providing support services, and making operational decisions and assessments of financial performance. Segment amounts are presented after converting to U.S. dollars and consolidating eliminations. Certain revenues, operating costs and inter-company charges included in the United States segment are not allocated to the segments within this presentation, as it is impractical to do so, and they appear as reconciling items to reflect the amount eliminated on consolidation of intersegment transactions. From time to time, the Company revises the measurement of each segment's operating income and net income, including certain corporate overhead allocations, and other measures as determined by the information regularly reviewed by the Company's chief operating decision maker. When the Company does so, the previous period amounts and balances are reclassified to conform to the current period's presentation. The following tables summarize by segment certain revenues, operating costs and balance sheet items (in thousands): F-73 PRICESMART, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Years Ended August 31, 2017 Revenue from external customers Intersegment revenues Depreciation and amortization Operating income (loss) Interest income from external sources Interest income from intersegment sources Interest expense from external sources Interest expense from intersegment sources Provision for income taxes Net income (loss) Long-lived assets (other than deferred tax assets) Goodwill Investment in unconsolidated affiliates Total assets Capital expenditures, net Years Ended August 31, 2016 Revenue from external customers Intersegment revenues Depreciation and amortization Operating income (loss) Interest income from external sources Interest income from intersegment sources Interest expense from external sources Interest expense from intersegment sources Provision for income taxes Net income (loss) Goodwill Investment in unconsolidated affiliates Total assets Capital expenditures, net Years Ended August 31, 2015 Revenue from external customers Intersegment revenues Depreciation and amortization Operating income (loss) Interest income from external sources Interest income from intersegment sources Interest expense from external sources Interest expense from intersegment sources Provision for income taxes Net income (loss) Long-lived assets (other than deferred tax assets) Goodwill Investment in unconsolidated affiliates Total assets Capital expenditures, net United States Operations Central American Operations Caribbean Operations Colombia Operations Reconciling Items(1) Total $ 34,244 $ 1,789,889 $ 827,920 $ 344,575 $ — $ 2,996,628 110 (1,143,432) 1,138,526 6,653 10,436 13 739 762 42 9,560 3,893 70,353 — — 147,650 56,229 — 20,252 134,826 914 882 4,127 1,106 4,796 10,205 47,190 740 546 548 990 23,368 107,797 7,654 38,403 9,182 4,932 142 — 1,340 34 1,436 1,786 296,915 122,616 126,206 31,118 10,765 4,524 — — — 544,683 303,234 181,947 50,977 26,586 3,232 — (61,155) — (2,167) — (2,172) — (61,155) — — — — — 1,086,677 4,775 10,970 (2) — 18,673 5,941 9,907 135,232 51,450 25 2,519 — 61 10,047 935 (2) 802 944 4,823 2,059 23,227 381 554 547 1,854 8,697 — (1,092,618) 6,439 (5,403) 99 — 521 49 878 — (55,526) — (4,017) — (4,023) — 107,396 43,114 (7,196) (55,526) — — 100,744 8,617 31,091 10,767 4,546 — — — 515,478 287,088 193,425 29,375 11,402 30,300 — — — — — 46,292 136,229 1,809 — 6,777 — 42,018 90,724 616,090 35,642 10,765 1,177,514 137,024 — 39,794 136,723 1,307 — 5,891 — 42,849 88,723 536,286 35,637 10,767 1,096,735 79,694 $ 33,885 $ 1,758,853 $ 840,648 $ 271,790 $ — $ 2,905,176 $ 33,320 $ 1,625,567 $ 821,047 $ 322,669 $ — $ 2,802,603 1,107,592 2,733 28,789 79 3,142 5 126 15,548 13,551 15,391 — — 89,133 1,655 — 15,115 5,626 9,605 129,555 48,856 811 282 4,147 1,204 24,618 114 556 607 1,966 6,787 — (1,113,218) 6,992 (1,846) 54 — 1,681 684 613 — (58,988) — (3,980) — (3,980) — 101,190 41,130 (7,759) (58,988) 255,576 107,746 105,290 31,211 10,317 4,660 — — — 491,155 239,272 171,664 54,735 10,619 24,172 — — — — — — 34,445 146,366 1,058 — 6,440 — 47,566 89,124 484,003 35,871 10,317 991,224 91,181 F-74 Long-lived assets (other than deferred tax assets) 19,222 271,039 108,426 137,599 PRICESMART, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (1) The reconciling items reflect the amount eliminated on consolidation of intersegment transactions. (2)The decrease in operating income and net income for the United States Operations in fiscal year 2016 compared to fiscal year 2015 was primarily a result of the increase in operating expenses related to intercompany transactions with the Company’s Colombia subsidiary of approximately $10.9 million. This activity results in reductions to taxable income in the U.S. that lowered the provision for income taxes by approximately $3.9 million. NOTE 16 – SUBSEQUENT EVENTS The Company has evaluated all events subsequent to the balance sheet date of August 31, 2017 through the date of issuance of these consolidated financial statements and has determined that, except as set forth below, there are no subsequent events that require disclosure. Non-deliverable forward foreign-exchange contracts The Company’s Colombia subsidiary has entered into five forward exchange contracts for approximately $5.0 million with settlement dates of November and December 2017. NOTE 17 – QUARTERLY FINANCIAL INFORMATION (UNAUDITED) Summarized quarterly financial information for fiscal years 2017, 2016 and 2015 is as follows (in thousands, except per share data): Fiscal Year 2017 Total net warehouse club and export sales Total cost of goods sold Net income Basic net income per share Diluted net income per share Fiscal Year 2016 Total net warehouse club and export sales Total cost of goods sold Net income Basic net income per share Diluted net income per share Fiscal Year 2015 Total net warehouse club and export sales Total cost of goods sold Net income Basic net income per share Diluted net income per share Three Months Ended, Year Ended, Nov 30, 2016 Feb 28, 2017 May 31, 2017 Aug 31, 2017 Aug 31, 2017 2,944,306 $ 2,519,752 $ 90,724 $ 2.98 $ 2.98 $ 717,174 $ 617,598 $ 18,838 $ 0.62 $ 0.62 $ 780,445 $ 667,563 $ 27,219 $ 0.90 $ 0.90 $ 719,874 $ 615,920 $ 19,798 $ 0.64 $ 0.64 $ 726,813 $ 618,671 $ 24,869 $ 0.82 $ 0.82 $ Three Months Ended, Year Ended, Nov 30, 2015 Feb 29, 2016 May 31, 2016 Aug 31, 2016 Aug 31, 2016 2,854,553 $ 2,449,626 $ 88,723 $ 2.92 $ 2.92 $ 691,638 $ 597,242 $ 16,837 $ 0.55 $ 0.55 $ 698,316 $ 596,644 $ 22,272 $ 0.74 $ 0.74 $ 765,536 $ 657,725 $ 25,942 $ 0.85 $ 0.85 $ 699,063 $ 598,015 $ 23,672 $ 0.78 $ 0.78 $ Three Months Ended, Year Ended, Nov 30, 2014 Feb 28, 2015 May 31, 2015 Aug 31, 2015 Aug 31, 2015 2,754,411 $ 2,352,839 $ 89,124 $ 2.95 $ 2.95 $ 684,780 $ 587,860 $ 21,195 $ 0.70 $ 0.70 $ 686,436 $ 586,114 $ 22,447 $ 0.75 $ 0.75 $ 738,349 $ 631,810 $ 24,835 $ 0.82 $ 0.82 $ 644,846 $ 547,055 $ 20,647 $ 0.68 $ 0.68 $ F-75 PRICESMART, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The Company's common stock has been quoted and traded on the NASDAQ Global Select Market under the symbol “PSMT” since September 2, 1997. As of October 18, 2017, there were approximately 23,510 holders of record of the common stock. 2017 FISCAL QUARTERS First Quarter Second Quarter Third Quarter Fourth Quarter 2016 FISCAL QUARTERS First Quarter Second Quarter Third Quarter Fourth Quarter Dates Stock Price From To High Low 9/1/2016 12/1/2016 3/1/2017 6/1/2017 11/30/2016 $ 2/29/2017 5/31/2017 8/31/2017 9/1/2015 12/1/2015 3/1/2016 6/1/2016 11/30/2015 $ 2/29/2016 5/31/2016 8/31/2016 $ $ 92.40 92.15 93.60 89.20 97.26 93.80 88.95 94.28 80.35 82.50 85.85 80.50 76.65 70.11 78.00 76.00 76  The graph below matches PriceSmart, Inc.'s cumulative 5-Year total shareholder return on common stock with the cumulative total returns of the NASDAQ Composite index and the NASDAQ Retail Trade index. The graph tracks the performance of a $100 investment in our common stock and in each index (with the reinvestment of all dividends) from 8/31/2012 to 8/31/2017. COMPAPP RISON OF 5 YEAR CUMULATIVAA E TOTATT L RETURN* Among PriceSmart, Inc., the NASDAQ Composite Index and the NASDAQ Retail Trade Index $300 $250 $200 $150 $100 $50 $0 8/12 8/13 8/14 8/15 8/16 8/17 PriceSmart, Inc. NASDAQ Composite NASDAQ Retail Trade *$100 invested on 8/31/12 in stock or index, including reinvestment of dividends. Fiscal year ending August 31. PriceSmart, Inc. NASDAQ Composite NASDAQ Retail Trade 8/12 100.00 100.00 100.00 8/13 8/14 118.38 118.95 117.24 124.37 154.14 135.84 8/15 118.91 162.16 175.92 8/16 117.91 178.11 210.55 8/17 115.63 221.23 242.10 The stock price performance included in this graph is not necessarily indicative of future stock price performance. Recent Sales of Unregistered Securities There were no sales of unregistered securities during the year ended August 31, 2017. 77 Dividends Declared 2/3/2017 2/3/2016 2/4/2015 First Payment Record Date 2/15/2017 Date Paid Second Payment Date Paid Record Date 8/15/2017 Amount $ 0.70 Amount 8/31/2017 $ 0.35 $ 0.70 2/15/2016 2/29/2016 $ 0.35 8/15/2016 8/31/2016 $ 0.35 8/31/2015 $ 0.35 Amount 2/28/2017 $ 0.35 2/27/2015 $ 0.35 2/13/2015 8/14/2015 $ 0.70 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. Repurchase of Equity Securities Upon vesting of restricted stock awarded by the Company to employees, the Company repurchases shares and withholds the amount of the repurchase payment to cover employees’ tax withholding obligations. As set forth in the table below, during fiscal year 2017, the Company repurchased a total of 38,634 shares in the indicated months. These were the only repurchases of equity securities made by the Company during fiscal year 2017. The Company does not have a stock repurchase program. Period September 1, 2016 - September 30, 2016 November 1, 2016 - November 30, 2016 December 1, 2016 - December 31, 2016 January 1, 2017 - January 31, 2017 February 1, 2017 - February 29, 2017 March 1, 2017 - March 31, 2017 April 1, 2017 - April 30, 2017 May 1, 2017 - May 31, 2017 June 1, 2017 - June 30, 2017 July 1, 2017 - July 31, 2017 August 1, 2017 - August 31, 2017 Total (a) Total Number of Shares Purchased (b) Average Price Paid Per Share — — — — 82.96 84.70 91.30 — — — 84.65 81.10 82.66 — $ — — — 23,283 108 771 — — — 2,398 12,074 38,634 $ (c) Total Number of Shares Purchased as Part of Publicly Publicly Announced Plans or Programs (d) Maximum Number of Shares That May Yet Be Purchased Under the Plans or Programs — — — — — — — — — — — — — N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A 78 ADDITIONAL INFORMATION Corporate Offices 9740 Scranton Road San Diego, CA 92121 (858) 404-8800 Stock Exchange Listing NASDAQ Global Select Market Stock Symbol: PSMT Annual Meeting Wednesday, January 24, 2018 at 10:00 AM PriceSmart, Inc. Corporate Headquarters 9740 Scranton Road San Diego, CA 92121 Transfer Agent Computershare Shareowner Services LLC 480 Washington Blvd. Jersey City, NJ 07310 Telephone: (888) 867-6003 TDD for Hearing Impaired: (800) 952-9245 Outside U.S.: (201) 680-6578 Independent Registered Public Accounting Firm Ernst & Young LLP 4370 La Jolla Village Drive, Suite 500 San Diego, CA 92122 PriceSmart's annual reports to the Securities and Exchange Commission on Form 10-K and any quarterly reports on Form 10-Q, as amended, will be provided free of charge upon written request to Investor Relations, PriceSmart, Inc., 9740 Scranton Road., San Diego, CA 92121. Internet users can access PriceSmart's web site at http://www.pricesmart.com. 79 DIRECTORS & OFFICERS OF PRICESMART, INC. Chairman of the Board Director Director Director Director Director Director Director Director Director Chief Executive Officer & President Executive Vice President - Real Estate Executive Vice President - Chief Merchandising Officer Executive Vice President - Logistics and Distribution Executive Vice President - Construction & Facilities Executive Vice President & Chief Financial Officer Executive Vice President - Operations Executive Vice President & Chief Operating Officer Executive Vice President - Information Technology Executive Vice President - General Counsel, Chief Ethics & Compliance Officer, and Secretary Robert E. Price Sherry Bahrambeygui Gonzalo Barrutietaa Gordon Hanson n Leon Janks Jose Luis Laparte Mitch Lynn n Gary Malino Pierre Mignault t r Edgar Zurcher Jose Luis Laparte Rodrigo Calvo Jesus Von Chong Frank Diaz Brud E. Drachman John M. Heffnerr John D. Hildebrandt William J. Naylon n Laura Santana Francisco Velasco a Catherine D. Alvarez-Smith Ana Luisa Bianchi Bob Coulson n J. Ernesto Grijalva Paul Kovaleski Jose Lopez Jose Luis Marin Michael L. McCleary y Alberto Morales Atul Patel Chris Souhrada Pedro Vera a J. Phillip Wilson n Benjamin M. Woods Senior Vice President - International Controller Senior Vice President - Merchandising – Latin America Local Senior Vice President - Merchandising – Nonfoods Senior Vice President - Legal Affairs – Latin America/Caribbean ff Senior Vice President - Other Business Senior Vice President - Merchandising – Fresh Foods Senior Vice President - Marketing & Member Services Senior Vice President - Corporate Controller Senior Vice President - Human Resources Senior Vice President - Treasurer Senior Vice President - Operations – ES/GT/HN/CR Senior Vice President - South America Senior Vice President - Merchandising – U.S. Hardlines Senior Vice President - US/Caribbean Fresh Foods n Alexa Bodden Linda C. Brickson n u Guadalupe Cefalu Eduardo Franceschi Jonathan Mendozaa Michelle Obediente Kelly Orme Emma Reyes Ronald Rodriquez Christina Santmyre Eric Torres Melissa Twoheyy Vice President - Membership & Marketing - CAM/Colombia Vice President - U.S. Controller Vice President - Forecasting & Planning Vice President - Operations – Panama/Nicaragua Vice President - Construction & Facilities Vice President - Merchandising – Regional Foods Vice President – Merchandising – Electronics Vice President - International Logistics & Trade Compliance Vice President - Logistics Vice President - Distribution Vice President - Facility Maintenance & Equipment Vice President – Merchandising – US Foods 80 ® 

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