Edgar Filing: PRICESMART INC

form10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended February 28, 2009

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

COMMISSION FILE NUMBER 0-22793

PriceSmart, Inc.

(Exact name of registrant as specified in its charter)


Delaware	33-0628530
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

9740 Scranton Road, San Diego, CA 92121

(Address of principal executive offices)

(858) 404-8800

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days.

Yes þ

No ¨

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

Large accelerated filer ¨

Accelerated filer þ

Non-accelerated filer ¨

Smaller Reporting Company ¨

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

Yes ¨

No þ

The registrant had 29,580,825 shares of its common stock, par value $0.0001 per share, outstanding at March 27, 2009.

PRICESMART, INC.

INDEX TO FORM 10-Q


		Page
PART I—FINANCIAL INFORMATION

ITEM 1.	FINANCIAL STATEMENTS	1

	CONSOLIDATED BALANCE SHEETS AS OF AUGUST 31, 2008 AND FEBRUARY 28, 2009 (UNAUDITED)	2

	UNAUDITED CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE AND SIX MONTHS ENDED FEBRUARY 29, 2008 AND FEBRUARY 28, 2009	3

	UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE SIX MONTHS ENDED FEBRUARY 29, 2008 AND FEBRUARY 28, 2009	4

	UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED FEBRUARY 29, 2008 AND FEBRUARY 28, 2009	5

	NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS	7

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	31

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	43

ITEM 4.	CONTROLS AND PROCEDURES	43

PART II—OTHER INFORMATION

ITEM 1.	LEGAL PROCEEDINGS	44

ITEM 1A.	RISK FACTORS	44

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	44

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	44

ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	45

ITEM 5.	OTHER INFORMATION	45

ITEM 6.	EXHIBITS	46

PART I—FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PriceSmart, Inc.’s (“PriceSmart” or the “Company”) unaudited consolidated balance sheet as of February 28, 2009, the consolidated balance sheet as of August 31, 2008, the unaudited consolidated statements of income for the six months ended February 28, 2009 and February 29, 2008, the unaudited consolidated statements of stockholders equity for the six months ended February 28, 2009 and February 29, 2008, and the unaudited consolidated statements of cash flows for the six months ended February 28, 2009 and February 29, 2008, are included elsewhere herein. Also included herein are the unaudited notes to the unaudited consolidated financial statements.

PRICESMART, INC.

CONSOLIDATED BALANCE SHEETS

(UNAUDITED—AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)

	February 28, 2009			August 31, 2008
ASSETS
Current Assets:
Cash and cash equivalents	$	29,888		$	48,121
Short-term restricted cash		9,500			536
Receivables, net of allowance for doubtful accounts of $6 and $11 in February 2009 and August 2008, respectively		3,765			2,455
Merchandise inventories		120,753			113,894
Deferred tax asset – current		2,083			2,179
Prepaid expenses and other current assets		18,931			16,669
Notes receivable – short term		2,006			2,104
Assets of discontinued operations		882			1,247
Total current assets		187,808			187,205
Long-term restricted cash		583			673
Property and equipment, net		217,934			199,576
Goodwill		37,902			39,248
Deferred tax assets – long term		19,984			21,198
Other assets		3,805			3,512
Investment in unconsolidated affiliates		7,610			—
Total Assets	$	475,626		$	451,412
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Short-term borrowings		3,659			3,473
Accounts payable		102,430			96,120
Accrued salaries and benefits		7,466			8,271
Deferred membership income		8,707			7,764
Income taxes payable		6,055			3,695
Common stock subject to put agreement		—			161
Other accrued expenses		13,626			11,877
Dividend payable		7,392			4,744
Long-term debt, current portion		3,616			2,737
Liabilities of discontinued operations		249			277
Deferred tax liability – current		114			486
Total current liabilities		153,314			139,605
Deferred tax liability – long term		1,339			2,339
Long-term portion of deferred rent		2,695			2,412
Accrued closure costs		3,611			3,489
Long-term income taxes payable, net of current portion		3,471			5,553
Long-term debt, net of current portion		30,101			23,028
Total liabilities		194,531			176,426
Minority interest		636			480
Stockholders’ Equity:
Common stock, $0.0001 par value, 45,000,000 shares authorized; 30,244,086 and 30,195,788 shares issued, respectively, and 29,591,125 and 29,615,226 shares outstanding (net of treasury shares), respectively		3			3
Additional paid-in capital		375,120			373,192
Tax benefit from stock-based compensation		4,420			4,563
Accumulated other comprehensive loss		(16,096	)		(12,897	)
Accumulated deficit		(68,907	)		(77,510	)
Less: treasury stock at cost; 652,961 shares as of February 28, 2009 and 580,562 shares as of August 31, 2008		(14,081	)		(12,845	)
Total stockholders’ equity		280,459			274,506
Total Liabilities and Stockholders’ Equity	$	475,626		$	451,412

See accompanying notes.

PRICESMART, INC.

CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED—AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)


	Three Months Ended						Six Months Ended
	February 28,			February 29,			February 28,			February 29,
	2009			2008			2009			2008
Revenues:
Sales:
Net warehouse club	$	328,240		$	288,216		$	626,758		$	533,405
Export		905			340			1,742			707
Membership income		4,425			3,975			8,749			7,717
Other income		1,223			1,313			2,753			2,426
Total revenues		334,793			293,844			640,002			544,255
Operating expenses:
Cost of goods sold:
Net warehouse club		279,993			245,333			534,419			453,844
Export		861			320			1,661			669
Selling, general and administrative:
Warehouse club operations		28,544			26,024			55,829			49,251
General and administrative		7,812			7,870			15,352			15,186
Preopening expenses		99			215			99			987
Asset impairment and closure costs		16			14			264			33
Provision for settlement of litigation, including changes in fair market value of put agreement		—			3,386			—			3,386
Total operating expenses		317,325			283,162			607,624			523,356
Operating income		17,468			10,682			32,378			20,899
Other income (expense):
Interest income		115			364			241			774
Interest expense		(609	)		(470	)		(1,190	)		(529	)
Other income (expense), net		(42	)		(37	)		(62	)		(84	)
Total other income (expense)		(536	)		(143	)		(1,011	)		161
Income from continuing operations before provision for income taxes, loss of unconsolidated affiliate and minority interest		16,932			10,539			31,367			21,060
Provision for income taxes		(4,090	)		(890	)		(7,737	)		(4,605	)
Loss of unconsolidated affiliate		(7	)		—			(12	)		—
Minority interest		(85	)		(160	)		(150	)		(290	)
Income from continuing operations		12,750			9,489			23,468			16,165
Income (loss) from discontinued operations, net of tax		(63	)		27			(81	)		45
Net income	$	12,687		$	9,516		$	23,387		$	16,210
Basic income per share:
Continuing operations	$	0.44		$	0.33		$	0.81		$	0.56
Discontinued operations, net of tax	$	—		$	—		$	—		$	—
Net income	$	0.44		$	0.33		$	0.81		$	0.56
Diluted income per share:
Continuing operations	$	0.43		$	0.33		$	0.80		$	0.56
Discontinued operations, net of tax	$	—		$	—		$	—		$	—
Net income	$	0.43		$	0.33		$	0.80		$	0.56
Shares used in per share computations:
Basic		28,916			28,848			28,888			28,815
Diluted		29,179			29,233			29,145			29,207
Dividends per share	$	0.50		$	0.32		$	0.50		$	0.32

See accompanying notes.

PRICESMART, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(UNAUDITED—AMOUNTS IN THOUSANDS)

				Tax Benefit From Stock-	Accum-ulated Other				Total
			Additional	based	Compre-	Accum-			Stock-
	Common Stock		Paid-In	Compen-	hesive	ulated	Treasury Stock		holder’s
	Shares	Amount	Capital	sation	Loss	Deficit	Shares	Amount	Equity
Balance at August 31, 2007	29,815	$ 3	$ 369,848	$ 3,970	$ (12,343)	$ (106,087)	476	$ (10,075)	$ 245,316
Purchase of treasury stock	—	—	—	—	—	—	43	(1,342)	(1,342)
Issuance of restricted stock awards	349	—	—	—	—	—	—	—	—
Forfeiture of restricted stock awards	(7)	—	—	—	—	—	—	—	—
Exercise of stock options	53	—	801	—	—	—	—	—	801
Tax benefit from exercise of stock options	—	—	—	860	—	—	—	—	860
Stock-based compensation	—	—	962	—	—	—	—	—	962
Common stock subject to put agreement	—	—	(16,988)	—	—	—	—	—	(16,988)
Dividend payable to stockholders	—	—	—	—	—	(9,391)	—	—	(9,391)
Mark-to-market of interest rate swap	—	—	—	—	(63)	—	—	—	(63)
Net income	—	—	—	—	—	16,210	—	—	16,210
Translation adjustment	—	—	—	—	(356)	—	—	—	(356)
Comprehensive income	—	—	—	—	—	—	—	—	15,791
Balance at February 29, 2008	30,210	$ 3	$ 354,623	$ 4,830	$ (12,762)	$ (99,268)	519	$ (11,417)	236,009


Balance at August 31, 2008	30,196	$ 3	$ 373,192	$ 4,563	$ (12,897)	$ (77,510)	580	$ (12,845)	$ 274,506
Purchase of treasury stock	—	—	—	—	—	—	66	(1,075)	(1,075)
Issuance of restricted stock awards	54	—	—	—	—	—	—	—	—
Forfeiture of restricted stock awards	(17)	—	—	—	—	—	—	—	—
Exercise of stock options	11	—	75	—	—	—	—	—	75
Stock-based compensation	—	—	1,692	(143)	—	—	—	—	1,549
Common stock subject to put agreement	—	—	161	—	—	—	—	—	161
Purchase of treasury stock for PSC settlement	—	—	—	—	—	—	7	(161)	(161)
Dividend payable to stockholders	—	—	—	—	—	(7,392)	—	—	(7,392)
Dividend paid to stockholders	—	—	—	—	—	(7,392)	—	—	(7,392)
Change in fair value of interest rate swaps	—	—	—	—	(554)	—	—	—	(554)
Net income	—	—	—	—	—	23,387	—	—	23,387
Translation adjustment	—	—	—	—	(2,645)	—	—	—	(2,645)
Comprehensive income									20,188
Balance at February 28, 2009	30,244	$ 3	$ 375,120	$ 4,420	$ (16,096)	$ (68,907)	653	$ (14,081)	$ 280,459

See accompanying notes.

PRICESMART, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED—AMOUNTS IN THOUSANDS)

	Six Months Ended
	February 28, 2009		February 29, 2008
Operating Activities:
Income from continuing operations	$	23,468	$	16,165
Adjustments to reconcile income from continuing operations to net cash provided by operating activities:
Depreciation and amortization		6,459		5,377
Allowance for doubtful accounts		(5)		8
Asset impairment and closure costs		125		—
Loss (Gain) on sale of property and equipment		42		(76)
Deposit to escrow account due to settlement of litigation		—		(6,150)
Provision for settlement of litigation		—		3,386
Deferred income taxes		80		(471)
Minority interest		150		290
Equity in earnings of unconsolidated affiliates		12		—
Tax benefit from exercise of stock options		(143)		—
Stock-based compensation		1,692		962
Change in operating assets and liabilities:
Change in accounts receivable, prepaid expenses, other current assets, accrued salaries and benefits, deferred membership and other accruals		(1,787)		(2,799)
Merchandise inventories		(6,859)		(13,322)
Accounts payable		6,311		12,122
Net cash provided by continuing operating activities		29,545		15,492
Net cash provided by (used in) discontinued operating activities		255		(81)
Net cash provided by operating activities		29,800		15,411
Investing Activities:
Additions to property and equipment		(23,585)		(16,355)
Deposits to escrow account for land acquisitions (including settlement of litigation)		—		(647)
Proceeds from disposal of property and equipment		31		2,839
Proceeds from sale of unconsolidated affiliate		—		2,000
Acquisition of business, net of cash acquired		(2,856)		(11,913)
Purchase of investment in Nicaragua minority interest		—		(10,200)
Purchase of investment in Costa Rica minority interest		(2,635)		—
Capital contribution to Costa Rica minority interest		(372)		—
Purchase of investment in Panama minority interest		(4,616)		—
Net cash used in continuing investing activities		(34,033)		(34,276)
Net cash used in discontinued investing activities		—		(66)
Net cash flows used in investing activities		(34,033)		(34,342)
Financing Activities:
Proceeds from bank borrowings		22,001		9,580
Repayment of bank borrowings		(13,864)		(996)
Cash dividend payments		(12,136)		(4,678)
(Additions to) release of restricted cash		(9,500)		8,037
Tax benefit from exercise of stock options		(143)		860
Purchase of treasury stock for PSC settlement		(161)		(1,342)
Proceeds from exercise of stock options		75		801
Purchase of treasury shares		(1,075)		—
Net cash provided by (used in) financing activities		(14,803)		12,262
Effect of exchange rate changes on cash and cash equivalents		803		516
Net decrease in cash and cash equivalents		(18,233)		(6,153)
Cash and cash equivalents at beginning of period		48,121		32,065
Cash and cash equivalents at end of period	$	29,888	$	25,912

PRICESMART, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS—(Continued)

(UNAUDITED—AMOUNTS IN THOUSANDS)

	Six Months Ended
	February 28, 2009		February 29, 2008
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest, net of amounts capitalized	$	384	$	320
Income taxes	$	7,387	$	6,969
Supplemental disclosure of non-cash financing activities:
Dividends declared but not paid	$	7,392	$	9,391

PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

February 28, 2009

NOTE 1 – COMPANY OVERVIEW AND BASIS OF PRESENTATION

PriceSmart, Inc.’s (“PriceSmart” or the “Company”) business consists primarily of international membership shopping warehouse clubs similar to, but smaller in size than, warehouse clubs in the United States. As of February 28, 2009, the Company had 25 consolidated warehouse clubs in operation in 11 countries and one U.S. territory (four each in Panama and Costa Rica, three each in Guatemala and Trinidad, two each in Dominican Republic, El Salvador, and Honduras and one each in Aruba, Barbados, Jamaica, Nicaragua and the United States Virgin Islands), of which the Company owns substantially all of the corresponding legal entities (see Note 2-Summary of Significant Accounting Policies). There was one warehouse club in operation in Saipan, Micronesia licensed to and operated by local business people as of February 28, 2009. The Company principally operates in three segments based on geographic area.

Basis of Presentation - The consolidated interim financial statements have been prepared in accordance with the instructions to Form 10-Q for interim financial reporting pursuant to the rules and regulations of the U.S. Securities and Exchange Commission ("SEC"). These consolidated interim financial statements should be read in conjunction with the consolidated financial statements and notes included in the Company’s annual report filed on Form 10-K for the fiscal year ended August 31, 2008. The consolidated interim financial statements include the accounts of PriceSmart, Inc., a Delaware corporation, and its subsidiaries (“PSMT” or the “Company”). All material intercompany transactions between the Company and its subsidiaries have been eliminated in consolidation.

In connection with the Company’s accounting for income taxes pursuant to Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes", ("SFAS 109"), the Company made certain reclassifications between deferred tax assets and deferred tax liabilities and separately stated current deferred tax assets and liabilities on the consolidated balance sheet as of August 31, 2008. These reclassifications resulted in a $730,000 decrease to deferred tax assets long-term, a $963,000 increase to deferred tax liabilities long-term, and a $1.5 million increase to total assets and total liabilities. The purpose of these balance sheet reclassifications is to allow comparability of our consolidated balance sheets for the periods being presented as a result of a review of the current portion of deferred tax.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation - The consolidated interim financial statements of the Company included herein include the assets, liabilities and results of operations of the Company’s majority and wholly owned subsidiaries as listed below. All significant intercompany accounts and transactions have been eliminated in consolidation. The consolidated interim financial statements have been prepared by the Company without audit, pursuant to the rules and regulations of the SEC, and reflect all adjustments (consisting of normal recurring adjustments) that are, in the opinion of management, necessary to fairly present the financial position, results of operations, and cash flows for the interim periods presented. Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") have been condensed or omitted pursuant to such SEC rules and regulations. Management believes that the disclosures made are adequate to make the information presented not misleading. The results for interim periods are not necessarily indicative of the results for the full year.

PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The table below indicates the Company’s percentage ownership of and basis of presentation for each subsidiary as of February 28, 2009:

Subsidiary	Countries	Ownership	Basis of Presentation
PriceSmart, Aruba	Aruba	100.0%	Consolidated
PriceSmart, Barbados	Barbados	100.0%	Consolidated
PSMT Caribe, Inc.:
Costa Rica	Costa Rica	100.0%	Consolidated
Dominican Republic	Dominican Republic	100.0%	Consolidated
El Salvador	El Salvador	100.0%	Consolidated
Honduras	Honduras	100.0%	Consolidated
PriceSmart, Guam	Guam	100.0%	Consolidated (1)
PriceSmart, Guatemala	Guatemala	100.0%	Consolidated
PriceSmart, Jamaica	Jamaica	100.0%	Consolidated
PriceSmart, Nicaragua	Nicaragua	100.0%	Consolidated
PriceSmart, Panama	Panama	100.0%	Consolidated
PriceSmart, Trinidad	Trinidad	95.0%	Consolidated
PriceSmart, U.S. Virgin Islands	U.S. Virgin Islands	100.0%	Consolidated
GolfPark Plaza, S.A.	Panama	50.0%	Equity (2)
Price Plaza Alajuela PPA, S.A.	Costa Rica	50.0%	Equity (2)
Newco 2	Costa Rica	50.0%	Equity (2)

(1)	Entity is treated as discontinued operations in the consolidated financial statements.
(2)	Purchase of Joint Venture Interest during the first quarter of fiscal year 2009.

Use of Estimates – The preparation of financial statements in conformity with U.S. Generally Accepted Accounting Principles ("U.S. GAAP"), as defined in Statement of Financial Accounting Standards ("SFAS") No. 162, "The Hiearchy of Generally Accepted Accounting Principles" ("SFAS 162"), U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

Cash and Cash Equivalents – Cash and cash equivalents represent cash and short-term investments with maturities of three months or less when purchased.

Restricted Cash – Short-term restricted cash of approximately $9.5 million consists of proceeds from a bank borrowing in Trinidad, the funding of which was made on February 27, 2009 with the formal release of the funds occurring on March 10, 2009. Long-term restricted cash represents deposits with federal regulatory agencies in Costa Rica, Honduras and Panama for approximately $583,000.

Merchandise Inventories – Merchandise inventories, which include merchandise for resale, are valued at the lower of cost (average cost) or market. The Company provides for estimated inventory losses and obsolescence between physical inventory counts on the basis of a percentage of sales. The provision is adjusted periodically to reflect the trend of actual physical inventory count results, with physical inventories occurring primarily in the second and fourth fiscal quarters. In addition, the Company may be required to take markdowns below the carrying cost of certain inventory to expedite the sale of such merchandise.

Allowance for Doubtful Accounts – The Company generally does not extend credit to its members, but may do so for specific wholesale, government, other large volume members and for subtenants. The Company maintains an allowance for doubtful accounts based on assessments as to the probability of collection of specific customer accounts, the aging of accounts receivable, and general economic conditions.

Property and Equipment – Property and equipment are stated at cost. Depreciation is computed on the straight-line basis over the estimated useful lives of the assets. The useful life of fixtures and equipment ranges from three to 15 years and that of buildings from ten to 25 years. Leasehold improvements are amortized over the shorter of the life of the improvement or the expected term of the lease.

PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

In some locations, leasehold improvements are amortized over a period longer than the initial lease term as management believes it is reasonably assured that the renewal option in the underlying lease will be exercised and an economic penalty would be suffered if the election was not exercised. The sale or purchase of property and equipment is recognized upon legal transfer of property. For property and equipment sales, if any long term notes are carried by the Company as part of the sales terms, the sale is reflected at the net present value of current and future cash streams.

Lease Accounting – Certain of the Company's operating leases where the Company is the lessee (see Revenue Recognition Policy for lessor accounting) provide for minimum annual payments that increase over the life of the lease. The aggregate minimum annual payments are expensed on the straight-line basis beginning when the Company takes possession of the property and extending over the term of the related lease including renewal options where the exercise of the option is reasonably assured and an economic penalty would be suffered if the election was not exercised in some locations. The amount by which straight-line rent exceeds actual lease payment requirements in the early years of the leases is accrued as deferred rent and reduced in later years when the actual cash payment requirements exceed the straight-line expense. The Company also accounts in its straight-line computation for the effect of any “rental holidays.” In addition to the minimum annual payments, in certain locations, the Company pays additional contingent rent based on a contractually stipulated percentage of sales.

Fair Value Measurements – In accordance with Statement of Financial Accounting Standards (SFAS) No. 157, “Fair Value Measurements,” as amended by Financial Accounting Standards Staff Position (FSP) No. 157-1, "Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements that address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13" and FSP 157-2, "Effective Date of FASB Statement No. 157" and FSP 157-3, "Determining the Fair Value of Financial Assets when the Market for That Asset Is Not Active" (together referred to as SFAS 157), the Company measures the fair value for all financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis or on a nonrecurring basis during the reporting period. The Company measures fair value for interest rate swaps and for put contracts. While the Company adopted the provisions of SFAS 157 for nonfinancial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis, no such assets or liabilities exist at the balance sheet date. The Company, in accordance with FSP 157-2, delayed implementation of SFAS 157 for all nonfinancial assets and liabilities recognized or disclosed at fair value in the financial statements on a nonrecurring basis. Nonfinancial nonrecurring assets and liabilities included on the Company’s balance sheet include items such as goodwill and long lived assets that are measured at fair value after taking into account impairment charges, if any are deemed necessary. The Company measures fair value of assets when triggering events occur in accordance with the provisions of SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” and SFAS 142, "Goodwill and Other Intangible Assets", for business units and for goodwill impairment.

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

Level 1: Quoted market prices in active markets for identical assets or liabilities, primarily consisting of financial instruments, such as money market mutual funds, whose value is based on quoted market prices. The Company did not revalue any assets or liabilities utilizing level one inputs at the balance sheet date.

Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data, normally including assets and liabilities with observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. The Company's Level 2 assets and liabilities at the balance sheet date primarily include cash flow hedges (interest rate swaps), and pricing of assets in connection with the acquisition of a business. Valuation methodologies are based on “consensus pricing” using market prices from a variety of industry-standard data providers or pricing that considers various assumptions, including time value, yield curve, volatility factors, credit spreads, default rates, loss severity, current market and contractual prices for the underlying instruments or debt, broker and dealer quotes, as well as other relevant economic measures. All are observable in the market or can be derived principally from or corroborated by observable market data for which the Company typically receives independent external valuation information.

Level 3: Unobservable inputs that are not corroborated by market data. This is normally composed of assets or liabilities where their fair value inputs are unobservable or not available, including situations involving limited market activity, where determination of fair value requires significant judgment or estimation. The Company did not revalue any assets or liabilities utilizing level three inputs at the balance sheet date.

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

PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Goodwill – Goodwill, resulting from certain business combinations totaled $37.9 million at February 28, 2009 and $39.2 million at August 31, 2008. The decrease in goodwill was due to the foreign exchange translation losses. The Company reviews previously reported goodwill at the entity reporting level for impairment on an annual basis or more frequently if circumstances dictate. No impairment of goodwill has been recorded to date.

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

Revenue Recognition – The Company recognizes merchandise sales revenue when title passes to the customer. Membership income represents annual membership fees paid by the Company’s warehouse club members, which are recognized ratably over the 12-month term of the membership. The historical membership fee refunds have been minimal and, accordingly, no reserve has been established for membership refunds for the periods presented. The Company recognizes and presents revenue-producing transactions on a net basis, as defined within EITF Issue No. 06-03 (“EITF 06-03”), “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That is, Gross versus Net Presentation).” The Company recognizes gift certificates sales revenue when the certificates are redeemed. The outstanding gift certificates are reflected as other accrued liabilities in the consolidated balance sheets. Operating leases, where the Company is the lessor, with lease payments that have fixed and determinable rent increases are recognized as revenue on a straight-line basis over the lease term. The Company also accounts in its straight-line computation for the effect of any "rental holidays." Contingent rental revenue is recognized as the contingent rent becomes due per the individual lease agreements.

Cost of Goods Sold – The Company includes the cost of merchandise, food service and bakery raw materials, and one hour photo supplies in cost of goods sold. The Company also includes the external and internal distribution and handling costs for supplying such merchandise, raw materials and supplies to the warehouse clubs. External costs include inbound freight, duties, drayage, fees, insurance, and non-recoverable value-added tax related to inventory shrink, spoilage and damage. Internal costs include payroll and related costs, utilities, consumable supplies, repair and maintenance, rent expense, and building and equipment depreciation at our distribution facilities.

Vendor consideration consists primarily of volume rebates and prompt payment discounts. Volume rebates are generally linked to pre-established purchase levels and are recorded as a reduction of cost of goods sold when the achievement of these levels is confirmed by the vendor in writing or upon receipt of funds, whichever is earlier. On a quarterly basis, the Company calculates the amount of rebates recorded in cost of goods sold that relates to inventory on hand and this amount is recorded as a reduction to inventory, if significant. Prompt payment discounts are taken in substantially all cases and, therefore, are applied directly to reduce the acquisition cost of the related inventory, with the resulting impact to cost of goods sold when the inventory is sold.

Selling, General and Administrative – Selling, general and administrative costs are comprised primarily of expenses associated with warehouse operations. Warehouse operations include the operating costs of the Company's warehouse clubs, including all payroll and related costs, utilities, consumable supplies, repair and maintenance, rent expense, building and equipment depreciation, and bank and credit card processing fees. Also included in selling, general and administrative expenses are the payroll and related costs for the Company's U.S. and regional purchasing and management centers.

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

Closure Costs – The Company records the costs of closing warehouse clubs as follows: severance costs are accrued in accordance with SFAS 146, “Accounting for Costs Associated with Exit or Disposal Activity;” lease obligations are accrued at the cease use date by calculating the net present value of the minimum lease payments net of the fair market value of rental income that is expected to be received for these properties from third parties; gain or loss on the sale of property, buildings and equipment is recognized based on the net present value of cash or future cash received as compensation for such upon consummation of the sale; all other costs are expensed as incurred. In fiscal year 2003, the Company closed two warehouse clubs, one each in the Dominican Republic and Guatemala. The closure costs recorded in fiscal year 2009 relate to these warehouse clubs, as the Company has subleased the property and building for the closed Guatemala warehouse club and continues to record expenses related to the location. During fiscal year 2007, the Company’s original San Pedro Sula, Honduras, location was vacated and the operation was relocated to a new site, which was acquired in fiscal year 2006 in another section of the city.

PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Contingencies and Litigation – In accordance with SFAS 5, “Accounting for Contingencies,” the Company accounts and reports for loss contingencies if (a) information available prior to issuance of the consolidated financial statements indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the consolidated financial statements and (b) the amount of loss can be reasonably estimated.

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

Foreign Currency Translation – In accordance with Statement of Financial Accounting Standards No. 52 (“SFAS 52”) “Foreign Currency Translation,” the assets and liabilities of the Company’s foreign operations are primarily translated to U.S. dollars when the functional currency in our international subsidiaries is the local currency, which in many cases is not U.S. dollars. Assets and liabilities of these foreign subsidiaries are translated to 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 gain or loss.

Monetary assets and liabilities in currencies other than the functional currency of the respective entity are revalued to the functional currency using the exchange rate on the balance sheet date. These foreign exchange transaction gains (losses), including repatriation of funds, which are included as a part of the costs of goods sold in the consolidated statements of income, for the first six months of the fiscal years 2009 and 2008 were approximately ($1.4) million and $809,000, respectively.

Stock-Based Compensation – As of February 28, 2009, the Company had four stock-based employee compensation plans which it accounts for applying Statement of Financial Accounting Standard No. 123(R) ("SFAS 123(R)"), “Share-Based Payment.” Under SFAS 123(R), the Company is required to select a valuation technique or option-pricing model that meets the criteria as stated in the standard, which includes a binomial model and the Black-Scholes model. At the present time, the Company applies the Black-Scholes model. SFAS 123(R) also requires the Company to estimate forfeitures in calculating the expense relating to stock-based compensation as opposed to only recognizing these forfeitures and the corresponding reduction in expense as they occur. The Company records as additional paid-in capital the tax savings resulting from tax deductions in excess of expense, based on the Tax Law Ordering method. In addition, SFAS 123(R) requires the Company to reflect the tax savings resulting from tax deductions in excess of expense reflected as a financing cash flow in its consolidated statement of cash flows, rather than as an operating cash flow.

The Company recognizes the tax benefits of dividends on unvested share-based payments in equity (increasing the Financial Accounting Standards (SFAS) No. 123(R) “APIC Pool” of excess tax benefits available to absorb tax deficiencies) and reclassifies those tax benefits from additional paid-in capital to the income statement when the related award is forfeited (or is no longer expected to vest) as required by Emerging Issues Task Force (“EITF”) EITF Issue No. 06-11 (“EITF 06-11”), “Accounting for Income Tax Benefits of Dividends on Share-Based Payment Award.”

Generally Accepted Accounting Principles Hierarchy – The Company identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements by applying Statement of Financial Accounting Standards No. 162, “The Hierarchy of Generally Accepted Accounting Principles” ("SFAS 162"). Hierarchal categories include category “A”- FASB Statements of Financial Accounting Standards and Interpretations, FASB Statement 133 Implementation Issues, FASB Staff Positions, and American Institute of Certified Public Accountants ("AICPA") Accounting Research Bulletins and Accounting Principles Board Opinions that are not superseded by actions of the FASB; category “B”- FASB Technical Bulletins and, if cleared by the FASB, AICPA Industry Audit and Accounting Guides and Statements of Position; category “C”- AICPA Accounting Standards, Executive Committee Practice Bulletins that have been cleared by the FASB, consensus positions of the FASB Emerging Issues Task Force ("EITF"), and the Topics discussed in Appendix D of EITF Abstracts ("EITF D-Topics"), category “D”- Implementation Guides ("Q&As") published by the FASB staff, AICPA Accounting Interpretations, AICPA Industry Audit and Accounting Guides and Statements of Position not cleared by the FASB, and practices that are widely recognized and prevalent either generally or in the industry.

PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

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

As of February 28, 2009 and August 31, 2008, the Company had $14.7 million and $15.2 million, respectively, of aggregate accruals for uncertain tax positions (“gross unrecognized tax benefits”). Of these totals, $2.5 million and $4.9 million, respectively, represent the amount of net unrecognized tax benefits that, if recognized, would favorably affect the Company’s effective income tax rate in any future period.

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

The Company expects changes in the amount of unrecognized tax benefits in the next twelve months as the result of a lapse in various statutes of limitations. For the quarter ended February 28, 2009, the Company reduced the long-term income tax payable and recorded a reduction in the income tax expense as the result of a lapse in the underlying statute of limitations totaling $967,000. The lapse of statutes of limitations in the twelve-month period ending February 28, 2010 would result in a reduction to long-term income taxes payable totaling $1.2 million.

The Company’s continuing practice is to recognize interest and/or penalties related to income tax matters in income tax expense in the long-term income tax payable caption on the balance sheet. As of February 28, 2009 and August 31, 2008 the Company had accrued $1.9 million and $3.4 million, respectively, for the payment of interest and penalties.

The Company has various audits and appeals pending in foreign jurisdictions. The Company does not anticipate that any adjustments from these audits and appeals would result in a significant change to the results of operations, financial conditions or liquidity. In February 2009, the Company received the final resolution of a pending appeal in the Dominican Republic. As a result of this resolution, the Company will pay taxes, interest, and penalty of approximately $700,000. The full amount of this cash payment was accrued to current income taxes payable as of February 28, 2009.

The Company is subject to taxation in the U.S. and various states and foreign jurisdictions. As the result of net operating loss carry forwards, the Company is subject to U.S. federal, state and local income tax examination by tax authorities for tax periods subsequent to and including fiscal year 1995. With few exceptions, the Company is no longer subject to non-U.S. income tax examination by tax authorities for tax years before fiscal year 2003. A lapse in these statutes will result in a beneficial impact on the effective tax rate.

PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Recent Accounting Pronouncements – In October 2008, the Emerging Issues Task Force (“EITF”) reached a consensus on EITF Issue No. 08-06 (“EITF 08-06”), “Equity Method Investment Accounting Considerations.” The objective of this Issue is to clarify how to account for certain transactions involving equity method investments. The Company is required to adopt EITF 08-06 on a prospective basis beginning on September 1, 2009. The Company is currently evaluating the impact, if any, this issue will have on its consolidated financial statements. However, the Company does not expect that this issue will result in a change in current practice.

In May 2008, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS 162”). This Statement identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United States ("U.S. GAAP"). This Statement is effective for financial statements issued 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, "The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles". The SEC approved the amendments in September 2008, establishing the effective date of this Statement as November 2008. The adoption of SFAS 162 did not have a material impact on the Company’s consolidated financial condition and results of operations.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities-An Amendment of FASB Statement No.133” (“SFAS 161”). This Statement requires enhanced disclosures about an entity’s derivative and hedging activities and thereby improves the transparency of financial reporting. This Statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application and also encourages, but does not require, comparative disclosures for earlier periods at initial adoption. The Company adopted SFAS 161 beginning December 1, 2008. The adoption of SFAS 161 did not have a material impact on the Company’s consolidated financial condition and results of operations.

In December 2007, the FASB issued SFAS 160, “Non-controlling Interests in Consolidated Financial Statement - An Amendment of ARB No. 51” (“SFAS 160”). SFAS 160 amends Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” establishing accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. This statement is effective for fiscal years beginning on or after December 15, 2008. Early adoption is prohibited. The Company will adopt SFAS 160 beginning on September 1, 2009. The Company is currently evaluating the impact that adoption will have on future consolidations.

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

In June 2007, the EITF reached a consensus on EITF Issue No. 06-11 (“EITF 06-11”), “Accounting for Income Tax Benefits of Dividends on Share-Based Payment Award.” EITF 06-11 requires companies to recognize the tax benefits of dividends on unvested share-based payments in equity (increasing the Financial Accounting Standards (SFAS) No. 123(R) “APIC Pool” of excess tax benefits available to absorb tax deficiencies) and reclassify those tax benefits from additional paid-in capital to the income statement when the related award is forfeited (or is no longer expected to vest). The Company is required to adopt EITF 06-11 for dividends declared after September 1, 2008. The Company opted for earlier application starting on September 1, 2007 for the income tax benefits of dividends on equity-classified employee share-based compensation that are declared in periods for which financial statements have not yet been issued. The adoption of EITF 06-11 did not have a material impact on the Company’s consolidated financial condition and results of operations.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115” (“SFAS 159”). SFAS 159 permits companies to measure many financial instruments and certain other items at fair value at specific election dates. The Company adopted SFAS 159 beginning September 1, 2008. The adoption of SFAS 159 did not have a material impact on the Company’s consolidated financial condition and results of operations.

PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 3 – DISCONTINUED OPERATIONS

In accordance with the provisions of SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the accompanying consolidated interim financial statements reflect the results of operations and financial position of the Company’s activities in the Philippines and Guam as discontinued operations. As a result of the closure of the Guam operations in December 2003 until May 2005, the Company included the results of operations from Guam in the asset impairment and closure costs line of the consolidated statement of income. Since the sale of the Philippine operations in August 2005, the results of the Philippine and Guam activities have been consolidated in the discontinued operation line of the consolidated statement of income. Management views these activities as one activity managed under a shared management structure. Cash flow activities related to the Guam discontinued operations’ leased property will terminate in September 2011, which is the end date of the lease term.

The assets and liabilities of the discontinued operations are presented in the consolidated balance sheets under the captions “Assets of discontinued operations” and “Liabilities of discontinued operations.” The underlying assets and liabilities of the discontinued operations for the periods presented are as follows (in thousands):

	February 28, 2009		August 31, 2008
Cash and cash equivalents	$	36	$	284
Accounts receivable, net		116		116
Prepaid expenses and other current assets		2		7
Other assets, non-current		728		840
Assets of discontinued operations	$	882	$	1,247
Other accrued expenses	$	249	$	277
Liabilities of discontinued operations	$	249	$	277

The Company’s former Guam operation has a deferred tax asset of $2.6 million, primarily generated from NOLs. This deferred tax asset has a 100% valuation allowance, as the Company currently has no plans that would allow it to utilize these losses. Additionally, a significant portion of these losses are limited as to future use due to the Company’s Section 382 change of ownership in October 2004.

The following table sets forth the income (loss) from discontinued operations for each period presented (in thousands):


	Three Months Ended					Six Months Ended
	February 28, 2009			February 29, 2008		February 28, 2009			February 29, 2008
Net warehouse club sales	$	—		$	—	$	—		$	—
Pre-tax income (loss) from discontinued operations		(63	)		27		(81	)		45
Income tax (provision) benefit		—			—		—			—
Income (loss) from discontinued operations	$	(63	)	$	27	$	(81	)	$	45

The pre-tax (loss) and pre-tax income from discontinued operations for the six months ended February 28, 2009 and February 29, 2008 of approximately ($81,000) and $45,000, respectively, is the net result of the subleasing activity in Guam.

PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 4 – PROPERTY AND EQUIPMENT

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

	February 28, 2009			August 31, 2008
Land	$	74,474		$	63,582
Building and improvements		130,133			130,237
Fixtures and equipment		78,392			75,137
Construction in progress		11,258			2,466
Total property and equipment, historical cost		294,257			271,422
Less: accumulated depreciation		(76,323	)		(71,846	)
Property and equipment, net	$	217,934		$	199,576

Building and improvements include net capitalized interest of $1.3 million as of both February 28, 2009 and August 31, 2008. For the six-month period ended February 28, 2009, the Company recorded approximately $3.4 million in translation adjustments that reduced the carrying value of the total property and equipment.

On September 24, 2008, PriceSmart acquired 13,162 square meters of real estate in Panama City, Panama, upon which the Company plans to construct and relocate an existing PriceSmart Warehouse Club (see Note 13-Acquisition of Business). Typically, PriceSmart land requirements are approximately 20,000 square meters; however, the new Panama City location will be constructed on two levels, with parking at grade level and the building on the second level. The existing PriceSmart warehouse club in Panama City, Panama (known as the Los Pueblos Club) will be relocated to this new site, and the Company will thereby continue to operate four warehouse clubs in Panama. It is currently anticipated that the new PriceSmart warehouse club will open in fiscal year 2010. In December 2008, the Company acquired approximately 31,000 square meters of land in Trinidad upon which it will construct a new warehouse club which will bring the number of warehouse clubs in that country to four. This new warehouse club is expected to be open in the first quarter of fiscal year 2010. Additionally, on September 29, 2008 PriceSmart acquired 21,576 square meters of real estate in Alajuela, Costa Rica (near San Jose), upon which the Company is constructing a new PriceSmart warehouse club, which will be its fifth in Costa Rica. It is currently anticipated that the new PriceSmart warehouse club will open in April of fiscal year 2009. These acquisitions contributed the following property (in thousands):

Land Costa Rica	$	3,724
Land Panama		2,856
Land Trinidad		4,519
Total land acquired	$	11,099

The Company continued with the expansion of existing warehouse clubs, warehouse distribution center expansion and the development of the land sites acquired for the opening of warehouse club sites in Panama and Costa Rica. Construction in process and fixtures and equipment increased during the first six months of fiscal year 2009 due to these activities. The Company used $5.8 million for construction in process and acquisition of fixtures and equipment for the Alajuela, Costa Rica warehouse club, $904,000 for construction in process and acquisition of fixtures and equipment for the Panama warehouse club and $732,000 for construction in process for the San Fernando, Trinidad warehouse club. The Company utilized approximately $3.1 million for expansion of its distribution center in Miami, the expansion of the Nicaragua warehouse club and the expansion of the warehouse club in Aruba. The Company utilized approximately $1.3 million for acquisition of fixtures and equipment in Trinidad and $3.3 million for the acquisition of fixtures and equipment and leasehold improvements in its other warehouse club locations.

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

Land	$	4,965
Building and improvements		6,948
Fixtures and equipment		85
Total property and equipment	$	11,998

In fiscal year 2008, the Company also capitalized approximately $23.6 million in building and improvements, fixtures and equipment and construction in progress, primarily related to the new warehouse club openings in Guatemala (November 2007) and Trinidad (December 2007) and continued improvements in the Company’s other warehouse club locations.

Depreciation expense for the first six months of fiscal years 2009 and 2008 was approximately $6.5 million and, $5.4 million, respectively.

PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 5 – EARNINGS PER SHARE

Basic income per share is computed based on the weighted average common shares outstanding in the period. Diluted net income (loss) per share is computed using the treasury stock method to calculate the weighted average number of common shares and, if dilutive, potential common shares outstanding during the period. Potential dilutive common shares include unvested restricted shares and the incremental common shares issuable upon the exercise of stock options and warrants, less shares from assumed proceeds. The assumed proceeds calculation includes actual proceeds to be received from the employee upon exercise, the average unrecognized compensation cost during the period and any tax benefits that will be credited upon exercise to additional paid-in capital. The following table presents the calculation of the basic income per share and the diluted income per share (in thousands, except per share data):


	Three Months Ended				Six Months Ended
	February 28, 2009		February 29, 2008		February 28, 2009		February 29, 2008
Net income	$	12,687	$	9,516	$	23,387	$	16,210
Determination of shares:
Average common shares outstanding		28,916		28,848		28,888		28,815
Assumed conversion of:
Stock options		108		140		106		142
Restricted stock grant (1)		155		245		151		250
Diluted average common shares outstanding		29,179		29,233		29,145		29,207

Basic income per share	$	0.44	$	0.33	$	0.81	$	0.56
Diluted income per share	$	0.43	$	0.33	$	0.80	$	0.56

(1)

Restricted stock was issued to certain employees in the three and six month periods ended February 28, 2009 and February 29, 2008, respectively. The dilutive effect of the restricted stock issued is 1,052 shares and 190 shares for the three and six month periods ended February 28, 2009, respectively. The dilutive effect of the restricted stock issued is 3,192 and 878 for the three and six month periods ended February 29, 2008, respectively.

NOTE 6 – STOCKHOLDERS’ EQUITY

Dividends

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

On January 24, 2008, the Company’s Board of Directors declared a cash dividend in the total amount of $0.32 per share, of which $0.16 per share was paid on April 30, 2008 to stockholders of record as of the close of business on April 15, 2008 and $0.16 per share was paid on October 31, 2008 to stockholders of record as of the close of business on October 15, 2008.

On February 7, 2007, the Company’s Board of Directors declared a cash dividend, in the total amount of $0.32 per share, of which $0.16 per share was paid on April 30, 2007 to stockholders of record as of the close of business on April 15, 2007 and $0.16 per share was paid on October 31, 2007 to stockholders of record as of the close of business on October 15, 2007.

The Company anticipates the ongoing payment of semi-annual dividends in subsequent periods, although the actual declaration of future dividends, the amount of such dividends, and the establishment of record and payment dates is subject to final determination by the Board of Directors in its discretion, after its review of the Company’s financial performance and anticipated capital requirements.

Accumulated Other Comprehensive Loss

Accumulated other comprehensive loss reported on the Company’s consolidated balance sheets consists of foreign currency translation adjustments and unrealized gains and losses on interest rate swaps. The unfavorable translation adjustments during the six months ended February 28, 2009 and February 29, 2008 were primarily due to weaker foreign currencies.

Retained Earnings Not Available for Distribution

As of February 28, 2009 and August 31, 2008, included in retained earnings of certain subsidiaries are legal reserves of approximately $1.8 million and $1.0 million, respectively, which cannot be distributed as dividends by the Company's subsidiaries to the Company according to statutory regulations.

PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 7 – STOCK OPTION AND EQUITY PARTICIPATION PLANS

On January 28, 2009, the stockholders of the Company approved an amendment to the 2001 equity participation plan expanding the eligibility provisions under the plan to permit the award of restricted stock units to non-employee directors and authorizing an increase to the number of shares of common stock reserved for issuance from 350,000 to 400,000. An amendment to the 2002 equity participation plan was also approved to increase the number of shares of common stock reserved for issuance from 750,000 to 1,250,000.

The following table summarizes the components of the stock-based compensation expense for the three and six months ended February 28, 2009 and February 29, 2008 (in thousands), which are included in general and administrative expenses and warehouse expenses in the consolidated statement of income:

		Three Months Ended				Six Months Ended
		February 28, 2009		February 29, 2008		February 28, 2009		February 29, 2008
Vesting of options granted to employees and directors	$	13	$	37	$	40	$	67
Vesting of restricted stock grants		906		347		1,652		895
Stock-based compensation expense	$	919	$	384	$	1,692	$	962

The following table summarizes stock options outstanding as of February 28, 2009, as well as the activity during the six months then ended:

	Shares		Weighted Average Exercise Price
Shares subject to outstanding options at August 31, 2008		280,130	$	9.23
Granted		5,000		16.34
Exercised		(11,200)		6.71
Forfeited or expired		(13,485)		15.08
Shares subject to outstanding options at February 28, 2009		260,445	$	9.17

As of February 28, 2009, options to purchase 242,245 shares were exercisable and there were 946,319 shares of the Company's common stock reserved for future issuance, of which 665,874 shares are available for future grants. The following table summarizes information about stock options outstanding and options exercisable as of February 28, 2009:

Range of Exercise Prices		Outstanding as of February 28, 2009		Weighted-Average Remaining Contractual Life		Weighted-Average Exercise Price		Exercisable as of February 28, 2009		Weighted-Average Exercise Price as of February 28, 2009
$	6.13 – $8.90		219,445		1.06	$	6.29		217,445	$	6.28
	8.91 – 17.87		13,000		4.61		16.15		3,200		16.04
	17.88 – 20.00		6,000		0.22		20.00		6,000		20.00
	20.01 – 39.00		22,000		2.83		30.77		15,600		33.70
$	6.13 – $39.00		260,445		1.36	$	9.17		242,245	$	8.51

The aggregate intrinsic value and weighted average remaining contractual term of options exercisable at February 28, 2009 was $2.2 million and 1.1 years, respectively. The aggregate intrinsic value and weighted average remaining contractual term of options outstanding at February 28, 2009 was $2.3 million and 1.4 years, respectively. The intrinsic value of a stock option is the amount by which the market value of the underlying stock exceeds the exercise price.

PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants issued in the first six months of fiscal years 2009 and 2008:

	Six Months Ended
	February 28, 2009	February 29, 2008
Risk free interest rate	2.02%	3.25%
Expected life	5 years	5 years
Expected volatility	53.55%	47.83%
Expected divided yield	1.8%	1.2%

Cash proceeds from stock options exercised, tax benefits related to stock options exercised and the intrinsic value related to total stock options exercised during the six months ended February 28, 2009 and February 29, 2008 are summarized in the following table (in thousands):

	Six Months Ended
	February 28, 2009		February 29, 2008
Proceeds from stock options exercised	$	75	$	801
Tax benefit related to stock options exercised		143		64
Intrinsic value of stock options exercised	$	124	$	717

In fiscal year 2006, the Company began granting restricted stock. The restricted stock grants vest over a five-year period, with the unvested portion being forfeited if the employee leaves the Company before the vesting period is completed. Restricted stock grant activity for the six months ending February 28, 2009 and February 29, 2008 was as follows:

	Six Months Ended
	February 28, 2009	February 29, 2008
Grants outstanding at August 31, 2008 and August 31, 2007, respectively	748,860	566,250
Granted	53,855	349,850
Cancelled	(16,757)	(7,415)
Vested	(187,374)	(124,600)
Grants outstanding at February 28, 2009 and February 29, 2008, respectively	598,584	784,085

The remaining unrecognized compensation cost related to unvested options and restricted stock grants at February 28, 2009 and February 29, 2008 was approximately $9.0 million and $12.1 million, respectively, and the weighted-average period of time over which this cost will be recognized is 3.5 years and 3.5 years, respectively.

On April 17, 2008 the Board of Directors approved an amendment to the 2001 Plan to authorize the award of restricted stock units to independent directors, subject to approval of the amendment by the Company’s stockholders at the next annual meeting of stockholders. The Board also awarded restricted stock units to the independent directors which vest at the rate of 20% per year commencing on March 29, 2008, subject to stockholder approval of the amendment. On January 28, 2009, the stockholders approved an amendment to the 2001 equity participation plan expanding eligibility provisions under the plan to permit the award of restricted stock units to non-employee directors.

PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Total restricted stock units activity, relating to the 2001 Plan for the six months ended February 28, 2009 and February 29, 2008 was as follows:

	Six Months Ended
	February 28, 2009	February 29, 2008
Grants outstanding at August 31, 2008 and August 31, 2007, respectively	20,000	—
Granted	—	—
Grants outstanding at February 28, 2009 and February 29, 2009, respectively	20,000	—

In fiscal year to date 2009 and 2008, the Company repurchased 65,945 and 42,720 shares respectively of common stock from employees for approximately $1.1 million and $1.3 million, respectively, based on the stock price at that date of repurchase to cover the employees’ minimum statutory tax withholding requirements related to the vesting of restricted stock grants and exercise of stock options.

NOTE 8 – ASSET IMPAIRMENT AND CLOSURE COSTS FOR CONTINUING OPERATIONS

During fiscal year 2003, the Company closed two warehouse clubs, one each in the Dominican Republic and Guatemala. The Company closed its Commerce, California distribution center on August 31, 2004. In fiscal year 2007, the Company closed its San Pedro Sula, Honduras location which was subsequently sold and relocated to a new site which was acquired in fiscal year 2006 in another section of the city. During fiscal year 2008, the Company recorded an impairment charge of approximately $449,000 of bulk packaging equipment that was unusable. For the first six months of fiscal year 2009, the Company has recorded a credit for impairment charge of approximately ($5,000) due to the sale of previously impaired bulk equipment.

A reconciliation of the changes and related liabilities derived from the closed warehouse clubs as of February 28, 2009 is as follows (in thousands):


	Liability as of August 31, 2008			Charged to Expense			Cash (Paid)/ Received		Non-cash Amounts		Liability as of February 28, 2009
Lease obligations	$	3,677	(1)	$	201	(2)	$	(76)	$	—	$	3,802	(3)
Asset impairment		—			(5)	(4)		5	—			—
Other associated costs		—			68			(68)		—		—
Total	$	3,677		$	264		$	(139)	$	—	$	3,802

(1)	Amount includes $3.5 million of accrued closure costs and $188,000 of short-term lease obligations (included within other accrued expenses) on the consolidated balance sheet as of August 31, 2008.
(2)	Amount of additional lease obligations due to increase in rent for closed warehouse club in Guatemala (fiscal year 2009).
(3)	Amount includes $3.6 million of accrued closure costs and $191,000 of short-term lease obligations (included within other accrued expenses) on the consolidated balance sheet as of February 28, 2009.
(4)	Gain on sale of previously impaired equipment.

NOTE 9 – LEASES

The Company is committed under non-cancelable operating leases for rental of facilities and land. These leases expire or become subject to renewal between February 28, 2009 and 2031.

As of February 28, 2009, our warehouse club buildings occupied a total of approximately 1,577,755 square feet of which 410,249 square feet were on leased property. The following is a summary of the warehouse clubs and Company facilities located on leased property:

Location (1)		Facility Type		Date Opened		Approxi-mate Square Footage		Current Lease Expiration Date		Remaining Option(s) to Extend
Via Brazil, Panama		Warehouse Club		December 4, 1997