DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

6 Months Ended

Feb. 29, 2012

Derivative Instruments And Hedging Activities [Abstract]

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

NOTE 9 – DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

The Company is exposed to certain risks relating to its ongoing business operations. One risk managed by the Company using derivative instruments is interest rate risk.  To manage interest rate exposure, the Company’s subsidiaries have entered 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 the non-functional currency long-term debt of one of its wholly owned subsidiaries. To manage this foreign currency and interest rate cash flow exposure, the Company’s subsidiary entered into cross-currency interest rate swaps that convert its non-functional currency denominated variable interest payments to functional currency fixed interest payments during the life of the hedging instruments.  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 currency exchange movements.

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. The Company is also exposed to 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

The Company formally documents the hedging relationships for its derivative instruments that qualify for hedge accounting. As of February 29, 2012 and August 31, 2011, all of the Company’s interest rate swap and cross-currency interest rate swaps derivative financial instruments are designated and qualify as cash flow hedges.  The Company has procedures in place in order to monitor and control the use of derivative financial instruments and ensure they are not used for trading or speculative purposes.  The Company’s Colombia subsidiary entered into five cross-currency interest rate swap agreements.  The cross-currency interest rate swap agreements convert the Company's foreign currency United States dollar denominated floating interest payments on long-term debt 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 hedge is intended to offset changes in cash flows attributable to interest rate and foreign currency exchange movements.  The Company’s Trinidad and Barbados subsidiaries entered into interest rate swap agreements that fix the interest rate over the life of the underlying loans.

The following table summarizes these agreements:

Subsidiary	Date entered into	Derivative Financial Counter-party	Derivative Financial Instruments	Initial US Notional Amount		Bank US loan Held with	Floating Leg (swap counter-party)	Fixed Rate for PSMT Subsidiary		Settlement Reset Date	Effective Period
Colombia	21-Feb-12	Bank of Nova Scotia	Cross currency interest rate swap	$	8,000,000	Bank of Nova Scotia	Variable rate 3-month Libor plus 0.6%	6.02	%	February, May, August and November beginning on May 22, 2012	February 21, 2012 – February 21, 2017
Colombia	17-Nov-11	Bank of Nova Scotia	Cross currency interest rate swap	$	8,000,000	Citibank, N.A.	Variable rate 6-month Eurodollar Libor plus 2.4%	5.85	%	May 3, 2012 and semi-annually thereafter	November 3, 2011 - November 3, 2013
Colombia	21-Oct-11	Bank of Nova Scotia	Cross currency interest rate swap	$	2,000,000	Bank of Nova Scotia	Variable rate 3-month Libor plus 0.7%	5.30	%	January, April, July and October, beginning on October 29, 2011	July 29, 2011 - April 1, 2016
Colombia	21-Oct-11	Bank of Nova Scotia	Cross currency interest rate swap	$	6,000,000	Bank of Nova Scotia	Variable rate 3-month Libor plus 0.7%	5.45	%	March, June, September and December, beginning on October 29, 2011	September 29, 2011 - April 1, 2016
Colombia	5-May-11	Bank of Nova Scotia	Cross currency interest rate swap	$	8,000,000	Bank of Nova Scotia	Variable rate 3-month Libor plus 0.7%	6.09	%	January, April, July and October, beginning on July 5, 2011	April 1, 2011 - April 1, 2016
Trinidad	20-Nov-08	Royal Bank of Trinidad & Tobago	Interest rate swaps	$	8,900,000	Royal Bank of Trinidad & Tobago	Variable rate 1-year Libor plus 2.75%	7.05	%	Annually on August 26	September 25, 2008 - September 26, 2013
Barbados	13-Feb-08	Citibank, N.A.	Interest rate swaps	$	4,500,000	Citibank, N.A.	Variable rate 9-month Libor plus 1.5%	5.22	%	Semi-annually on November 15 and May 15	November 15, 2007 - November 14, 2012

For the three and six month periods ended February 29, 2012 and February 28, 2011, the Company included the gain or loss on the interest rate and cross-currency interest rate 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 on Borrowings	Loss on Swaps		Interest expense
Interest expense for the three months ended February 29, 2012	$	196	$	308	$	504
Interest expense for the three months ended February 28, 2011	$	71	$	92	$	163
Interest expense for the six months ended February 29, 2012	$	339	$	556	$	895
Interest expense for the six months ended February 28, 2011	$	146	$	188	$	334

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)		Notional Balance as of February 29, 2012	Notional Balance as of August 31, 2011
RBTT	$	5,850	$	6,300
Scotiabank		32,000		8,000
Citibank N.A.		2,700		2,925
Total	$	40,550	$	17,225

The following table summarizes the fair value of interest rate swaps and cross-currency interest rate swaps derivative instruments (in thousands):

	Derivatives
	February 29, 2012			August 31, 2011
Derivatives designated as cash flow hedging instruments	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Interest rate swaps(1)	Other long-term liabilities	$	383	Other long-term  liabilities	$	544
Cross currency interest rate swaps(2)	Other long-term liabilities		1,816	Other long-term liabilities		340
Net fair value of derivatives designated as hedging instruments(3)		$	2,199		$	884

(1)	The effective portion of the interest rate swaps was recorded as a loss to Accumulated other comprehensive loss for $287,000 and $408,000 net of tax, as of February 29, 2012 and August 31, 2011, respectively.  The Company has recorded a deferred tax asset amount of $96,000 and $136,000 as of February 29, 2012 and August 31, 2011, respectively.
(2)	The effective portion of the cross currency interest rate swaps was recorded to Accumulated other comprehensive loss for $1.8 million and $340,000 as of February 29, 2012 and August 31, 2011, respectively.  The Company has recorded a valuation allowance on the related deferred tax asset.
(3)	Derivatives listed on the above table were designated as cash flow hedging instruments.

Fair Value Instruments

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 are 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. The Company’s Colombia subsidiary entered into the following forward foreign exchange contracts.

The following table summarizes these agreements:

Subsidiary	Date entered into	Derivative Financial Counter-party	Derivative Financial Instruments	Notional Amount (in thousands)		Settlement Date	Effective Period
Colombia	09-Feb-12	Bank of Nova Scotia	Forward foreign exchange contracts	$	1,000	April 9, 2012	February 9, 2012- April 9, 2012
Colombia	28-Feb-12	Bank of Nova Scotia	Forward foreign exchange contracts	$	1,000	April 28, 2012	February 28, 2012- April 28, 2012

The amount of these forward foreign exchange contracts fair value and transaction gains or losses recognized in interest income and other were nominal for the six months ended February 29, 2012.  The Company did not have any forward foreign exchange contracts for the six months ended February 28, 2011 nor as of August 31, 2011.