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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended May 31, 2003

OR

For the transition period from                          to                         

Commission File Number 000-22793

PriceSmart, Inc.

(Exact name of registrant as specified in its charter)

4649 Morena Boulevard

San Diego, California 92117

(Address of principal executive offices)

(858) 581-4530

(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  x  No  ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).  Yes  ¨ No  x

The registrant had 6,871,913 shares of its common stock, par value $.0001 per share, outstanding at June 30, 2003.

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PRICESMART, INC.

INDEX TO FORM 10-Q

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PART I—FINANCIAL INFORMATION

PriceSmart, Inc.’s (“PriceSmart” or the “Company”) unaudited condensed consolidated balance sheet as of May 31, 2003, the condensed consolidated balance sheet as of August 31, 2002, the unaudited condensed consolidated statements of operations for the three and nine months ended May 31, 2003 and 2002, the unaudited condensed consolidated statements of cash flows for the nine months ended May 31, 2003 and 2002, and the unaudited condensed consolidated statements of stockholders’ equity for the nine months ended May 31, 2003 are included elsewhere herein. Also included within are notes to the unaudited condensed consolidated financial statements.

This Form 10-Q contains forward-looking statements concerning PriceSmart’s anticipated future revenues and earnings, adequacy of future cash flow and related matters. These forward-looking statements include, but are not limited to, statements or phrases such as “believe,” “will,” “expect,” “anticipate,” “estimate,” “intend,” “plan,” and “would” and like expressions, and the negative thereof. Forward-looking statements are not guarantees of performance. These statements are subject to risks and uncertainties that could cause actual results to differ materially from the statements, including foreign exchange risks, political or economic instability of host countries, and competition as well as those risks described in the Company’s Securities and Exchange Commission reports, including the risk factors referenced in this Form 10-Q. See “Part II—Item 5—Factors That May Affect Future Performance.”

The following discussion and analysis compares the results of operations for the three and nine months ended May 31, 2003 (fiscal 2003) and May 31, 2002 (fiscal 2002), and should be read in conjunction with the condensed consolidated financial statements and the accompanying notes included elsewhere herein.

PriceSmart’s business consists primarily of international membership shopping warehouses similar to, but smaller in size than, warehouse clubs in the United States. The number of warehouses in operation as of May 31, 2002 and 2003, the Company’s ownership percentages and basis of presentation for financial reporting purposes by each country or territory are as follows:

The Company’s business strategy is to operate warehouses in Latin America, the Caribbean, and Asia that sell high quality merchandise at low prices to our members, provide fair wages and benefits to our employees and a fair return to our stockholders.

During the first nine months of fiscal 2003, the Company opened two new U.S.-style membership shopping warehouses (one in the Philippines and one in Jamaica), and as part of a 50/50 joint venture with Grupo Gigante, S.A. de C.V. (“Gigante”), the Company also opened three new U.S.-style membership shopping warehouses in Mexico. During the first nine months of fiscal 2002, the Company opened four new U.S.-style membership shopping warehouses (one in Trinidad, one in Guam and two in the Philippines). The average life of the 28 and 26 warehouses in operation at the end of May 31, 2003 and 2002 was 31 and 24 months, respectively.

Additionally, there were twelve licensed warehouses in operation at the end of the third quarter of fiscal 2003, compared to eleven licensed warehouses at the end of the third quarter of fiscal 2002.

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COMPARISON OF THE THREE MONTHS ENDED MAY 31, 2003 AND 2002

Net warehouse sales increased 4.7% to $163.8 million in the third quarter of fiscal 2003, from $156.4 million in the third quarter of fiscal 2002. Excluding $15.2 million in wholesale telephone card sales in the Philippines (which began in September of 2002 and were discontinued in May 2003), net warehouse sales decreased 4.9% to $148.6 million from $156.4 million over the prior year quarter. Management believes net warehouse sales excluding wholesale telephone card sales provides a better measure of ongoing operations and a more meaningful comparison of past and present operating results than total net warehouse sales because wholesale phone card sales were made only for a limited time, were discontinued in May 2003 and fell outside of the Company’s core business of operating international membership warehouse stores. The decrease of $7.8 million in net warehouse sales, excluding wholesale telephone card sales, consists primarily of a decrease of $4.7 million in sales in the Dominican Republic due to a currency devaluation of 57% since May 31, 2002, lower sales from certain warehouses operating in Latin America and the Philippines due to factors including an undersupply of certain merchandise, less wholesale sales, and an excess of slow-moving merchandise over the third quarter of fiscal 2002. This decrease was partially offset by sales from two new warehouses opened since the end of the third quarter of fiscal 2002 and slight increases in the Caribbean warehouses over the prior year quarter.

Same-store sales (or same-warehouse sales), which are for warehouses open at least 12 full months, increased 0.1% for the 13 weeks ended June 1, 2003, compared to the same period last year. Excluding the wholesale telephone card sales, comparative same-warehouse sales decreased 9.9%.

Emerging Issues Task Force Issue No. 02-16 (“EITF 02-16”), “Accounting by a Customer (Including a Reseller) for Certain Consideration Received by a Vendor,” addresses how a reseller should account for cash consideration received from a vendor. Under this provision, effective for arrangements entered into or modified after December 31, 2002, cash consideration that reimburses costs incurred by the customer to sell the vendor’s products should be characterized as a reduction of those costs. If the cash consideration exceeds the costs being reimbursed, the excess should be characterized as a reduction of cost of sales. The adoption of the provisions of EITF 02-16 did not result in any changes in the Company’s reported results, but certain consideration which had been classified as other income in prior years is now reflected as a reduction of cost of sales. As permitted by the transition provisions of EITF 02-16, other income and cost of sales in prior periods have been reclassified to conform to the current period presentation. This resulted in a decrease in other income and an offsetting decrease in net warehouse cost of goods sold of $246,000 and $808,000 in the third quarter of fiscal 2003 and 2002, respectively.

The Company’s warehouse gross margins (defined as net warehouse sales less associated cost of goods sold) in the third quarter of fiscal 2003 decreased to $17.8 million, or 10.8% of net sales, from $22.8 million, or 14.6% of net sales, in the third quarter of fiscal 2002. The decrease of $5.0 million in gross profit margins, or 380 basis points, resulted primarily from a charge of $2.0 million related to an inventory write-down of slow-moving inventory, $1.0 million from the Dominican Republic’s 57% currency devaluation, lower merchandise prices and overall lower sales. This decrease was partially offset by $243,000 in gross margins related to wholesale telephone card sales. In the event that these factors continue, sales and gross profit margins may continue to be adversely affected. Management believes that the merchandise changes and lowering of prices are necessary to increase membership renewals, increase future sales performance and resulting gross margin dollars. However, there can be no assurances that these recent changes will result in increased membership or that lower prices will translate into higher sales and increased margin dollars.

Export sales represent U.S. merchandise exported to the Company’s licensee warehouses operating in Saipan, direct sales to third parties and sales to PriceSmart Mexico, an unconsolidated affiliate (see “Note 11-Related Party Transactions” in the Notes to Condensed Consolidated Financial Statements included within). Export sales in the third quarter of fiscal 2003 were $2.3 million compared to $667,000 in the third quarter of fiscal 2002. The increase is primarily due to greater sales to third parties, including sales of $493,000 to PriceSmart Mexico.

The Company’s export sales gross profit margins for the third quarter of fiscal 2003 were 3.5% compared to 2.4% in the third quarter of fiscal 2002. The increase in gross profit margins was due to higher margins on third party sales (excluding Mexico). The gross profit margins from sales to the Company’s Saipan licensee and sales to PriceSmart Mexico are approximately 2.6% and 2.1%, respectively.

Membership income, which is recognized into income ratably over the one-year life of the membership, decreased 12.5% to $2.1 million, or 1.3% of net warehouse sales, in the third quarter of fiscal 2003 compared to $2.4 million, or 1.5% of net warehouse sales, in the third quarter of fiscal 2002. The decrease is attributable to a lower membership fee structure in certain markets and reductions in membership renewal rates. This decrease was partially offset by the two additional warehouse openings since the end of the third quarter of fiscal 2002, which have increased the overall membership base. Total membership accounts, which constitute non-expired memberships, increased to 465,000 at the end of the third quarter of fiscal 2003 from 460,000 at the end of the third quarter of fiscal 2002.

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Other income consists of rentals, advertising, vendor promotions, construction revenue, and fees earned from licensees. Other income, excluding licensee fees, decreased to $1.0 million, or 0.6% of net warehouse sales, in the third quarter of fiscal 2003 from $2.1 million, or 1.3% of net warehouse sales, in the third quarter of fiscal 2002. The decrease relates to less income from vendor promotions, rentals, advertising and construction revenues. Licensee fees increased to $310,000 in the third quarter of fiscal 2003 from $303,000 in the third quarter of fiscal 2002 due to the additional licensee warehouse in operation since the prior year.

Warehouse operating expenses increased to $20.8 million, or 12.7% of net warehouse sales, in the third quarter of fiscal 2003 from $19.0 million, or 12.1% of net warehouse sales, in the third quarter of fiscal 2002. The increase in warehouse operating expenses is attributable to the two new warehouses opened since the third quarter of fiscal 2002 and an increase in utilities, repairs and maintenance and bad debt expenses primarily related to wholesale receivables at existing warehouses.

General and administrative expenses were $5.3 million, or 3.2% of net warehouse sales, in the third quarter of fiscal 2003 compared to $4.8 million, or 3.1% of net warehouse sales, in the third quarter of fiscal 2002. General and administrative expenses increased by $473,000 primarily as a result of a $350,000 charge related to the early termination of the Company’s foreign property insurance program in favor of a new policy with comparative annual premium savings of $1.2 million. The new policy has increased limits and reduced deductibles related to earthquake, wind and fire coverage, over the policy that was cancelled. The remainder of the increase is due to increases in salaries and increased professional fees over the prior year period. These increases were partially offset by reductions in travel expenses.

Severance costs of $1.1 million in the third quarter of 2003 relate to the Company’s former President and Chief Executive Officer, an Executive Vice President of Operations and Senior Vice President of Marketing, each of whom left the Company in the third quarter of fiscal 2003.

Option re-pricing expenses of $833,000 in the third quarter of fiscal 2003 represents a non-cash charge related to the repricing of all unexercised stock options held by employees of the Company with exercise prices greater than $20 to $20 per share on April 23, 2003. The affected options covered a total of 507,510 shares of common stock with a weighted average exercise price of $36.19 per share. The Company also recorded a deferred compensation charge of $1.5 million, which will be amortized over the remaining vesting periods of the options.

Pre-opening expenses, which represent expenses incurred before a warehouse store is in operation, increased to $649,000 in the third quarter of fiscal 2003 from $610,000 in the third quarter of fiscal 2002. The Company had one warehouse opening in the third quarter of fiscal 2003, and anticipates opening its first warehouse operating in Managua, Nicaragua in the fourth quarter of fiscal 2003 (July 2003), compared to two openings in the third quarter of fiscal 2002, with no new additional openings in the fourth quarter of fiscal 2002.

Interest income reflects earnings on cash and cash equivalents, restricted cash deposits securing long-term debt and marketable securities. Interest income was $791,000 in the third quarter of fiscal 2003 compared to $766,000 in the third quarter of fiscal 2002. The increase primarily relates to interest earned on increased restricted cash deposits, partially offset by lower interest earned on lower excess cash and cash equivalents throughout the third quarter of fiscal 2003 over the prior year quarter.

Interest expense reflects borrowings by the Company’s majority or wholly owned foreign subsidiaries to finance the capital requirements of new warehouse store operations. Interest expense increased to $2.9 million in the third quarter of fiscal 2003 from $2.5 million in the third quarter of fiscal 2002. The increase is attributable to an increase in the amount of debt held by the Company and its subsidiaries between the periods presented offset by a reduction in lending rates between the periods.

Equity of unconsolidated affiliate represents the Company’s 50% share of losses from its Mexico joint venture. The joint venture is accounted for under the equity method of accounting, in which the Company reflects its proportionate share of income or loss. Two warehouses were opened in Mexico in November 2002 with a third opened in March 2003. Losses from the Mexico joint venture for the third quarter of fiscal 2003 were $1.8 million, of which the Company’s share was $905,000. Income from the Mexico joint venture for the third quarter of fiscal 2002 was $166,000, of which the Company’s share was $83,000. The income primarily relates to interest income as capital contributions had been made, and minimal expenses incurred, in the third quarter of fiscal 2002.

Minority interest relates to the allocation of the joint venture (income) or loss to the minority stockholders’ respective interests. Minority interest respective share of net losses were $838,000 and $119,000 for the third quarter of fiscal 2003 and 2002, respectively.

The Company recorded an income tax benefit of $2.1 million and a provision of $268,000 (17% effective rate) for the three months ended May 31, 2003 and 2002, respectively. The change between the periods presented is primarily a result of the income tax benefit related to the net loss incurred during the third quarter of fiscal 2003. The Company has incurred losses in several countries in which it operates,

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and the related deferred tax assets associated with those losses may require a valuation allowance if profitability is not achieved in the near future.

Preferred dividends of $400,000 for each of the three months ended May 31, 2003 and 2002 reflect the payment of dividends on 20,000 shares of Series A Preferred Stock issued on January 22, 2002, which accrue 8% annual dividends that are cumulative and payable in cash.

COMPARISON OF THE NINE MONTHS ENDED MAY 31, 2003 AND 2002

Net warehouse sales increased 8.8% to $508.9 million for the nine months ended May 31, 2003, from $467.8 million for the nine months ended May 31, 2002. Excluding $23.9 million in wholesale telephone card sales in the Philippines (which began in September of 2002 and were discontinued in May 2003) net warehouse sales increased 3.7% to $485.1 million from $467.8 million over the prior year period. Management believes net warehouse sales excluding wholesale telephone card sales provides a better measure of ongoing operations and a more meaningful comparison of past and present operating results than total net warehouse sales because wholesale phone card sales were made only for a limited time, were discontinued in May 2003 and fell outside of the Company’s core business of operating international membership warehouse stores. The increase of $17.3 million in net warehouse sales, excluding wholesale telephone card sales, resulted primarily from sales from two new warehouses opened subsequent to the end of the third quarter of fiscal 2002 and from a full nine months of sales from four warehouses that began operations during the same nine month period last year. This increase was offset by lower than anticipated holiday sales, a decrease of $3.1 million in sales in the Dominican Republic due to a currency devaluation of 57% since May 31, 2002, lower sales from certain warehouses operating in Latin America and the Philippines due to factors including an undersupply of certain merchandise, less wholesale sales, and an excess of slow-moving merchandise over the same nine month period last year.

Same-warehouse sales, which are for warehouses open at least 12 full months, decreased 0.4% for the 39 weeks ended June 1, 2003, compared to the same period last year. Excluding the wholesale telephone card sales, comparative same-warehouse sales decreased 5.1%.

Emerging Issues Task Force Issue No. 02-16, “Accounting by a Customer (Including a Reseller) for Certain Consideration Received by a Vendor,” addresses how a reseller should account for cash consideration received from a vendor. Under this provision, effective for arrangements entered into or modified after December 31, 2002, cash consideration that reimburses costs incurred by the customer to sell the vendor’s products should be characterized as a reduction of those costs. If the cash consideration exceeds the costs being reimbursed, the excess should be characterized as a reduction of cost of sales. The adoption of the provisions of EITF 02-16 did not result in any changes in the Company’s reported results, but certain consideration which had been classified as other income in prior years is now reflected as a reduction of cost of sales. As permitted by the transition provisions of EITF 02-16, other income and cost of sales in prior periods have been reclassified to conform to the current period presentation. This resulted in a decrease in other income and an offsetting decrease in net warehouse cost of goods sold of $1.5 million and $1.7 million for the nine months ended May 31, 2003 and 2002, respectively.

The Company’s warehouse gross margins (defined as net warehouse sales less associated cost of goods sold) for the nine months ended May 31, 2003 decreased to $67.9 million, or 13.3% of net sales, from $68.8 million, or 14.7% of net sales, for the nine months ended May 31, 2002. The decrease of $900,000 in gross profit margins, or 140 basis points, resulted primarily from a charge of $2.0 million in the third quarter of fiscal 2003 related to an inventory write-down of slow-moving inventory, $1.3 million from the Dominican Republic’s 57% currency devaluation, lower merchandise prices and overall lower sales. This decrease was partially offset by $338,000 in gross margins related to wholesale telephone card sales and higher gross margins on increased sales levels due to the additional warehouse openings over the same nine month period last year. In the event that these factors continue, sales and gross profit margins may continue to be adversely affected. Management believes that the merchandise changes and lowering of prices are necessary to increase membership renewals, increase future sales performance and resulting gross margin dollars. However, there can be no assurances that these recent changes will result in increased membership or that lower prices will translate into higher sales and increased margin dollars.

Export sales represent U.S. merchandise exported to the Company’s licensee warehouse operating in Saipan, direct sales to third parties and sales to PriceSmart Mexico, an unconsolidated affiliate (see “Note 11-Related Party Transactions” in the Notes to Condensed Consolidated Financial Statements included within). Export sales for the nine months ended May 31, 2003 were $6.0 million compared to $1.4 million for the nine months ended May 31, 2002. The increase is primarily due to greater sales to third parties, including sales of $1.8 million to PriceSmart Mexico.

The Company’s export sales gross margins for the nine months ended May 31, 2003 were 4.4% compared to 2.6% for the nine months ended May 31, 2002. The increase in gross profit margins was due to higher margins on third party sales (excluding Mexico). The gross profit margins from sales to the Company’s Saipan licensee and sales to PriceSmart Mexico are approximately 2.5% and 1.4%, respectively.

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Membership income, which is recognized into income ratably over the one-year life of the membership, decreased 4.1% to $6.5 million, or 1.3% of net warehouse sales, for the nine months ended May 31, 2003 compared to $6.8 million, or 1.5% of net warehouse sales, for the nine months ended May 31, 2002. The decrease is attributable to a lower membership fee structure in certain markets and reductions in membership renewal rates. This decrease was partially offset by the two additional warehouse openings since the end of the third quarter of fiscal 2002, which have increased the overall membership base. Total membership accounts, which constitute non-expired memberships, increased to 465,000 at the end of the third quarter of fiscal 2003 from 460,000 at the end of the third quarter of fiscal 2002.

Other income consists of rentals, advertising, vendor promotions, construction revenue, and fees earned from licensees. Other income, excluding licensee fees, decreased to $4.2 million, or 0.8% of net warehouse sales, for the nine months ended May 31, 2003, from $5.4 million, or 1.2% of net warehouse sales, for the nine months ended May 31, 2002. The decrease relates to less income from vendor promotions, rentals, advertising and construction revenues. Licensee fees increased to $935,000 for the nine months ended May 31, 2003 from $860,000 for the nine months ended May 31, 2002 due to the additional licensee warehouse in operation since the prior year.

Warehouse operating expenses increased to $59.3 million, or 11.6% of net warehouse sales, for the nine months ended May 31, 2003 from $53.9 million, or 11.5% of net warehouse sales, for the nine months ended May 31, 2002. The increase in warehouse operating expenses is attributable to the two new warehouses opened since the third quarter of fiscal 2002, a full nine months of operations from four warehouses that began operations during the same nine month period last year, and an increase in utilities, repairs and maintenance and bad debt expenses primarily related to wholesale receivables at existing warehouses.

General and administrative expenses were $14.5 million, or 2.8% of net warehouse sales, for the nine months ended May 31, 2003 compared to $13.4 million, or 2.9% of net warehouse sales, for the nine months ended May 31, 2002. General and administrative expenses have increased by $1.1 million primarily as a result of a $350,000 charge related to the early termination of the Company’s foreign property insurance program in favor of a new policy with comparative annual premium savings of $1.2 million. The new policy has increased limits and reduced deductibles related to earthquake, wind and fire coverage, over the policy that was cancelled. The remainder of the increase is due to increases in salaries and increased professional fees over the prior year period. These increases were partially offset by reductions in travel expenses.

Severance costs of $1.1 million relate to the Company’s former President and Chief Executive Officer, an Executive Vice President of Operations and Senior Vice President of Marketing, each of whom left the Company in the third quarter of fiscal 2003.

Option re-pricing expenses of $833,000, which occurred in the third quarter of fiscal 2003, represents a non-cash charge related to the repricing of all unexercised stock options held by employees of the Company with exercise prices greater than $20 to $20 per share on April 23, 2003. The affected options covered a total of 507,510 shares of common stock with a weighted average exercise price of $36.19 per share. The Company also recorded a deferred compensation charge of $1.5 million, which will be amortized over the remaining vesting periods of the options.

Settlement and related expenses of $1.7 million in fiscal 2002 reflect a settlement agreement entered into with a former Philippine licensee of the Company on February 15, 2002.

Pre-opening expenses, which represent expenses incurred before a warehouse store is in operation, decreased to $1.5 million for the nine months ended May 31, 2003, from $2.2 million for the nine months ended May 31, 2002. The Company had two warehouse openings during the nine months ended May 31, 2003 (not including the three warehouses opened in Mexico as part of a 50/50 joint venture), and anticipates opening its first warehouse operating in Managua, Nicaragua in the fourth quarter of fiscal 2003 (July 2003). This compares to four warehouse openings during the nine months ended May 31, 2002, with no new additional openings in the fourth quarter of fiscal 2002.

Interest income reflects earnings on cash and cash equivalents, restricted cash deposits securing long-term debt and marketable securities. Interest income was $2.2 million for the nine months ended May 31, 2003 compared to $2.4 million for the nine months ended May 31, 2002. The decrease in interest income primarily relates to lower daily cash balances and lower interest rates throughout the first nine months of fiscal 2003 in comparison to the prior year period. This decrease was partially offset by interest income earned on increased restricted cash deposits over the prior year period.

Interest expense reflects borrowings by the Company’s majority or wholly owned foreign subsidiaries to finance the capital requirements of new warehouse store operations. Interest expense increased to $7.9 million for the nine months ended May 31, 2003 from $7.2 million for the nine months ended May 31, 2002. The increase is attributable to an increase in the amount of debt held by the Company and its subsidiaries between the periods presented offset by a reduction in lending rates between the periods.

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Equity of unconsolidated affiliate represents the Company’s 50% share of losses from its Mexico joint venture. The joint venture is accounted for under the equity method of accounting, in which the Company reflects its proportionate share of income or loss. Two warehouses were opened in Mexico in November 2002 with a third opened in March 2003. Losses from the Mexico joint venture for the first nine months of fiscal 2003 were $4.6 million, of which the Company’s share was $2.3 million. Income from the Mexico joint venture for the first nine months of fiscal 2002 was $166,000, of which the Company’s share was $83,000. The income primarily relates to interest income as capital contributions had been made, and minimal expenses incurred, in the third quarter of fiscal 2002.

Minority interest relates to the allocation of the joint venture (income) or loss to the minority stockholders’ respective interests. Minority interest respective share of net losses were $697,000 compared to income of $322,000 for the nine months ended May 31, 2003 and 2002, respectively.

The Company recorded an income tax benefit of $477,000 and a provision of $1.4 million (24% effective rate) for the nine months ended May 31, 2003 and 2002, respectively. The change between the periods presented is primarily a result of the income tax benefit related to the net loss incurred during the third quarter of fiscal 2003. The Company has incurred losses in several countries in which it operates, and the related deferred tax assets associated with those losses may require a valuation allowance if profitability is not achieved in the near future.

Preferred dividends of $1.2 million and $591,000 for the nine months ended May 31, 2003 and 2002, respectively, reflect the payment of dividends on 20,000 shares of Series A Preferred Stock issued on January 22, 2002, which accrue 8% annual dividends that are cumulative and payable in cash.

LIQUIDITY AND CAPITAL RESOURCES

Financial Position and Cash Flow

The Company had negative working capital of $5.3 million as of May 31, 2003, compared to positive working capital of $14.9 million as of August 31, 2002. The decrease in working capital since August 31, 2002 of $20.2 million was primarily due to a decrease in cash of $8.9 million, marketable securities of $3.0 million, inventory of $8.8 million, other accrued expenses of $1.2 million, and additional capital investment of $9.0 million in the Company’s Mexico joint venture. These decreases were offset by an increase in prepaid assets of $3.5 million, short-term borrowings of $1.7 million and the current portion of long-term debt of $5.4 million.

Net cash flows provided by (used in) operating activities were $12.5 million and $(9.1) million for the nine months ended May 31, 2003 and 2002, respectively. The increase of $21.6 million resulted primarily from an increase of $28.0 million due to reductions of inventories, depreciation and amortization of $1.8 million, an increase in compensation expense recognized for stock options of $852,000, and a net increase in accounts receivable, prepaids, other current assets, accrued salaries, deferred membership and other accruals of $7.2 million. This increase was partially offset by a net loss from the equity interest of unconsolidated affiliate of $6.1 million and a decrease in minority interest of $1.0 million.

Net cash used in investing activities was $27.3 million and $37.7 million for the nine months ended May 31, 2003 and 2002, respectively. The decrease in current year investing activities of $10.4 million resulted from reduced spending on property and equipment of $7.8 million over the prior year, a change in marketable securities of $6.0 million, $1.0 million less invested in the unconsolidated affiliate in the current year over the prior year period, and $1.0 million in the prior year period related to the repurchase of common stock associated with the Panama redemptive right acquisition. This decrease was offset by a change in notes receivable of $4.8 million due to receipts of notes receivable of $3.8 million in the prior year, which was offset by the issuance of $1.0 million in the current year of a note receivable to the Company’s unconsolidated joint venture in Mexico, and a decrease in proceeds from the sale of real estate of $696,000 in the prior year.

Net cash provided by financing activities was $12.5 million and $41.8 million for the nine months ended May 31, 2003 and 2002, respectively. The decrease of approximately $29.3 million resulted from proceeds from the issuance of $10.0 million of common stock and $19.9 million of preferred stock and $3.2 million of proceeds from the exercise of stock options in the prior year, the use of $10.1 million in restricted cash and dividends paid on preferred stock of $876,000 over the prior year period, and a decrease in contributions by minority interest shareholders of $880,000 over the prior year. These decreases were offset by an increase in net bank borrowings of $13.2 million and the sale of treasury stock of $2.4 million to PSC, S.A. in connection with the new Nicaragua joint venture in the current year.

Net effect of exchange rate changes on cash and cash equivalents was $(6.6) million and $(2.4) million for the nine months ended May 31, 2003 and 2002, respectively. The increased negative foreign exchange impact of $4.2 million resulted primarily from a significant devaluation of the Dominican Republic Peso over the prior year period, and by continued devaluations of the foreign currencies in most of the countries where the Company operates, which have all historically devalued against the U.S.

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dollar. As a result of the economic crisis in the Dominican Republic, there continues to be a risk of further devaluation and availability of U.S. dollars to settle intercompany transactions.

Warehouse Expansion and Closures

The Company’s primary capital requirements are for the financing of land, construction, equipment, pre-opening expenses and working capital requirements associated with new and existing warehouses. For fiscal 2003, the Company currently intends to spend an aggregate of $23.0 million in capital expenditures (excluding $9 million in capital contributions made to the Company’s unconsolidated Mexico joint venture) for new warehouses.

For the first nine months of fiscal 2003, the Company spent approximately $20.2 million in capital expenditures (excluding Mexico) related to the construction of new warehouse openings. The Company, through its majority owned subsidiaries, currently anticipates opening a total of three new warehouses in fiscal 2003. To date the Company has opened two new warehouses (one in the Philippines in November 2002 and one in Jamaica in March 2003), and currently has two additional warehouses under construction in Nicaragua and the Philippines. The Company anticipates opening its first warehouse in Managua, Nicaragua in the fourth quarter of fiscal 2003 (July 2003), and another warehouse in the Philippines, to be located in Aseana City, Metropolitan Manila, is now anticipated to open in the first quarter of fiscal 2004. Actual capital expenditures for new warehouses may vary from estimated amounts depending on the number of new warehouses actually opened, business conditions and other risks and uncertainties to which the Company and its businesses are subject.

Subsequent to the third quarter of fiscal 2003, the Company’s warehouse on the east side of Santo Domingo, Dominican Republic was closed, and a search for a new location in Santo Domingo has commenced. Closing costs have been estimated at $525,000, which will be recognized in the fourth quarter. Also, the Company announced on July 9, 2003 that it will be closing its warehouse currently operating in the Philippines, in Pasig City, Metropolitan Manila, on August 3, 2003. Closing costs for the Pasig City warehouse have not yet been quantified but all such estimated costs will be recognized in the fourth quarter of 2003. Management is evaluating individual warehouse performance, and additional warehouse closures may occur.

During the first nine months of fiscal 2003, the Company and Gigante each contributed $9.0 million in capital for a total capital investment of $40 million in the 50/50 Mexico joint venture, which is accounted for under the equity method of accounting. The Company currently does not anticipate making any additional capital contributions to the Mexico joint venture for the remainder of fiscal 2003 but will have receivables due from the Mexico joint venture in the ordinary course of business, of which approximately $1.7 million was due to the Company as of May 31, 2003. The $1.7 million includes a $1.0 million note receivable, which the Company anticipates being repaid within a period of one year. The remainder of the receivables relates to merchandise and other services rendered to the Mexico joint venture in the ordinary course of business. Since inception, the joint venture has opened a total of three warehouses in Mexico (two in November 2002 and one in March 2003) and has spent approximately $28.9 million in capital expenditures. Any decision to add additional warehouses will be based upon the three warehouses currently in operation achieving specific sales and expense benchmarks. As of May 31, 2003, the Mexico joint venture had approximately $2.4 million of cash on hand.

The Company, primarily through its foreign subsidiaries (excluding Mexico), has increased long-term bank borrowings by approximately $15.4 million during fiscal 2003, including $10.0 million in loans secured by restricted cash deposits for foreign exchange hedging purposes, and has used these proceeds to finance its working capital and capital expenditure requirements, and does not anticipate additional borrowings in the fourth quarter of fiscal 2003.

The Company believes that borrowings under its current and future credit facilities and recent sale of $22 million of preferred stock (described below), together with its other sources of liquidity, will be sufficient to meet its working capital and capital expenditure requirements for the foreseeable future. However, if such sources of liquidity are insufficient to satisfy the Company’s liquidity requirements, the Company may need to sell equity or debt securities, obtain additional credit facilities or reduce the number of anticipated warehouse openings. Furthermore, the Company has and will continue to consider sources of capital, including reducing restricted cash and the sale of equity (see “Financing Activities”) or debt securities, to strengthen its financial position and liquidity. There can be no assurance that such financing alternatives will be available under favorable terms, if at all.

Financing Activities

On January 22, 2002, the Company issued 20,000 shares of Series A Preferred Stock (“Series A Preferred Stock”) and warrants to purchase 200,000 shares of common stock (that expired unexercised on January 17, 2003) for an aggregate of $20 million, with net proceeds of $19.9 million. The Series A Preferred Stock is convertible, at the option of the holder at any time, or automatically on January 17, 2012, into shares of the Company’s common stock at the conversion price of $37.50, subject to customary anti-dilution adjustments. The Series A Preferred Stock accrues a cumulative preferred dividend at an annual rate of 8%, payable quarterly in cash. The shares are redeemable on or after January 17, 2007, in whole or in part, at the option of the

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Company, at a redemption price equal to the liquidation preference, or $1,000 per share plus accumulated and unpaid dividends to the redemption date. As of May 31, 2003, none of the shares of Series A Preferred Stock had been converted.

On September 26, 2002, in connection with the new joint venture in Nicaragua, the Company sold 79,313 shares of the Company’s common stock to PSC, S.A. in a private placement for an aggregate purchase price and net proceeds to the Company of approximately $2.4 million to be used for capital expenditures and working capital requirements related to future warehouse expansion.

Subsequent to the end of the third quarter, on July 9, 2003, entities affiliated with Robert E. Price, President and Chief Executive Officer, Chairman of the Board of Directors and a significant stockholder of PriceSmart, and entities affiliated with Sol Price, a significant stockholder of PriceSmart, purchased an aggregate of 22,000 shares of PriceSmart’s 8% Series B Cumulative Convertible Redeemable Preferred Stock (“Series B Preferred Stock”), a new series of preferred stock, for an aggregate purchase price of $22 million. The Series B Preferred Stock is convertible at the option of the holder at any time, or automatically on July 9, 2013, into shares of PriceSmart’s common stock at a conversion price of $20.00 per share, subject to customary anti-dilution adjustments; accrues a cumulative preferential dividend at an annual rate of 8%, payable quarterly in cash; and may be redeemed by PriceSmart at any time on or after July 9, 2008. PriceSmart is required to register with the Securities and Exchange Commission the shares of common stock issuable upon conversion of the Series B Preferred Stock.

Subsequent to the end of the third quarter, on June 11, 2003, an entity affiliated with Mr. S. Price made an advance payment of $5.0 million for the Series B Preferred Stock. The Company and the affiliate of Mr. S. Price agreed that if the private placement of Series B Preferred Stock was not completed by July 10, 2003, the Company would refund the advance with accrued interest of 8% per annum.

Short-Term Borrowings and Debt

As of May 31, 2003, the Company, through its majority or wholly owned subsidiaries, had $25.3 million outstanding in short-term borrowings through 13 separate facilities, which are secured by certain assets of its subsidiaries and are guaranteed by the Company up to its respective ownership percentages in the subsidiaries. Each of the facilities expires during the year and typically is renewed. As of May 31, 2003, the Company had approximately $7.5 million available on the facilities.

The Company’s long-term debt is collateralized by certain land, building, fixtures and equipment of each respective subsidiary and guaranteed by the Company up to its respective ownership percentages in the subsidiaries, except for approximately $32.1 million as of May 31, 2003, which is secured by collateral deposits for the same amount and which deposits are included in restricted cash on the condensed consolidated balance sheet.

Under the terms of each of its debt agreements, the Company must comply with certain covenants, which include, among others, current, debt service, interest coverage and leverage ratios. The Company is in compliance with all of these covenants, except for the current ratio for a $5.0 million note, the current ratio and interest coverage ratio for a $6.0 million note, and the debt service ratio and interest coverage ratio for a $3.5 million note. The Company has obtained the necessary waivers for these notes through August 31, 2003.

Pursuant to the terms of a bank credit agreement, the Company can issue up to $7.0 million of standby letters of credit. Fees are paid up front and charges are paid as incurred. As of May 31, 2003, there were outstanding letters of credit in the amount of $3.8 million.

Contractual Obligations

As of May 31, 2003, the Company’s commitments to make future payments under long-term contractual obligations were as follows (amounts in thousands):

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Significant Accounting Policies

The preparation of the Company’s financial statements requires that management make estimates and judgments that affect the financial position and results of operations. Management continues to review its accounting policies and evaluate its estimates, including those related to merchandise inventory, impairment of long-lived assets and warehouse closing costs. The Company bases its estimates on historical experience and on other assumptions that management believes to be reasonable under the present circumstances.

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 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, which occur 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 Bad Debt: Credit is extended to a portion of our members as part of the Company’s wholesale business and to third-party wholesalers for direct sales. The Company maintains an allowance for doubtful accounts based on assessments as to the collectibility of specific customer accounts, the aging of accounts receivable, and general economic conditions. Additionally, the Company utilizes the importation and exportation businesses of one of the minority interest shareholders in the Company’s Philippines subsidiary for the movement of merchandise inventories both to and from the Asian regions to its warehouses operating in Asia. As of May 31, 2003, the Company had a total of $2.0 million in net receivables due from the minority interest shareholder’s importation and exportation businesses, which is included in accounts receivable on the condensed consolidated financial statements. If the credit worthiness of a specific customer or the minority interest shareholder deteriorates, the Company’s estimates could change and it could have a material impact on the Company’s reported results.

Impairment of Long-lived Assets: 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. Future events could cause management to conclude that impairment factors exist, requiring an adjustment of these assets to their then-current fair market value. The Company will provide estimates for warehouse closing costs when it is appropriate to do so based on accounting principles generally accepted in the United States. Future circumstances may result in the Company’s actual future closing costs or the amount recognized upon the sale of the property differing substantially from the estimates.

Stock-Based Compensation: As of May 31, 2003, the Company had four stock-based employee compensation plans. Prior to September 1, 2002, the Company accounted for those plans under the recognition and measurement provisions of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. Effective September 1, 2002, the Company adopted the fair value recognition provisions of Statement of Financial Accounting Standards No. 123 (“SFAS 123”), “Accounting for Stock-Based Compensation,” prospectively, with guidance provided from SFAS No. 148 (“SFAS 148”) “Accounting for Stock-Based Compensation – Transition and Disclosure,” to all employee awards granted, modified or settled after September 1, 2002. Awards under the Company’s plans typically vest over five years and expire in six years. The cost related to stock-based employee compensation included in the determination of net income for the three and nine months ended May 31, 2003 and 2002 is less than that which would have been recognized if the fair value based method had been applied to all awards since the original effective date of SFAS 123. For the three and nine months ended May 31, 2003, the Company recognized stock compensation costs of $947,000 and $1.0 million, respectively, versus stock compensation costs of $53,000 and $159,000 for the three and nine months ended May 31, 2002, respectively (see “Note 2 – Summary of Significant Accounting Policies – Stock-Based Compensation” in the Notes to Condensed Consolidated Financial Statements included within).

Basis of Presentation: The consolidated financial statements include the assets, liabilities and results of operations of the Company’s majority and wholly owned subsidiaries that are more than 50% owned and controlled. All significant intercompany balances and transactions have been eliminated in consolidation. The Company’s 50% owned Mexico joint venture is accounted for under the equity method of accounting.

Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 143 (“SFAS 143”), “Accounting for Asset Retirement Obligations,” which became effective for the Company beginning in fiscal 2003. SFAS 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The adoption of SFAS 143 has not had a material impact on the Company’s consolidated results of operations, financial position or cash flows.

In August 2001, the FASB issued SFAS No. 144 (“SFAS 144”), “Accounting for the Impairment or Disposal of Long-Lived Assets,” which became effective for the Company beginning in fiscal 2003. Prior period financial statements will not be restated as a result of the adoption of SFAS 144. SFAS 144 establishes a number of rules for the recognition, measurement and

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reporting of long-lived assets which are impaired and either held for sale or continuing use within the business. In addition, SFAS 144 broadly expands the definition of a discontinued operation to individual reporting units or asset groupings for which identifiable cash flows exist. The adoption of SFAS 144 has not had a material impact on the Company’s consolidated results of operations, financial position or cash flows.

In July 2002, the FASB issued SFAS No. 146 (“SFAS 146”), “Accounting for Costs Associated with Exit or Disposal Activities,” which addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3 (“Issue 94-3”), “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” The principal difference between SFAS 146 and Issue 94-3 relates to SFAS 146’s requirements for recognition of a liability for a cost associated with an exit or disposal activity. SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recorded as a liability when incurred. Under Issue 94-3, a liability for an exit cost as generally defined in Issue 94-3 was recognized at the date of an entity’s commitment to an exit plan. The provisions of this statement are effective for exit or disposal activities that are initiated after December 31, 2002 with early application encouraged. The Company believes the adoption of SFAS 146 will not have a material impact on the Company’s consolidated results of operations, financial position or cash flows.

In January 2003, the FASB issued FASB Interpretation No. 46 (“Interpretation No. 46”), “Consolidation of Variable Interest Entities.” In general, a variable interest entity is a corporation, partnership, trust, or any other legal structure used for business purposes that either does not have equity investors with voting rights or has equity investors that do not provide sufficient financial resources for the entity to support its activities. Interpretation No. 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or entitled to receive a majority of the entity’s residual returns or both. The consolidation requirements of Interpretation No. 46 apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements apply to older entities in the first fiscal year or interim period beginning after June 15, 2003. Certain of the disclosure requirements apply in all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. The provisions of the interpretation are currently being evaluated, but management believes its adoption will not have a material impact on the Company’s consolidated results of operations, financial position or cash flows.

The Company, through its majority or wholly owned subsidiaries, conducts foreign operations primarily in Latin America, the Caribbean and Asia, and as such is subject to both economic and political instabilities that cause volatility in foreign currency exchange rates or weak economic conditions. As of May 31, 2003, the Company had a total of 28 warehouses operating in eleven foreign countries and two U.S. territories (excluding three warehouses owned in Mexico through its 50/50 joint venture). 20 of the 28 warehouses operate under foreign currencies other than the U.S. dollar. For both of the nine months ended May 31, 2003 and 2002, approximately 74% of the Company’s net warehouse sales were in foreign currencies. The Company anticipates opening new warehouses in existing or new foreign countries in the future, which may increase the percentage of net warehouse sales denominated in foreign currencies.

Foreign currencies in most of the countries where the Company operates have historically devalued against the U.S. dollar and are expected to continue to devalue. For example, the Dominican Republic experienced a currency devaluation of 57% between the quarter ended May 31, 2002 and the quarter ended May 31, 2003. There can be no assurance that the Company will not experience any other materially adverse effects on the Company’s business, financial condition, operating results, cash flow or liquidity, from currency devaluations in other countries, as a result of the economic and political risks of conducting an international merchandising business.

Translation adjustments from the Company’s non-U.S. denominated majority or wholly owned subsidiaries, resulting from the translation of the assets and liabilities of the subsidiaries into U.S. dollars, were $6.6 million and $5.3 million as of May 31, 2003 and August 31, 2002, respectively.

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The Company manages foreign currency risks at times by hedging currencies through non-deliverable forward exchange contracts (“NDFs”) that are generally for durations of six months or less and that do not provide for physical exchange of currency at maturity (only the resulting gain or loss). The premium associated with each NDF is amortized on a straight-line basis over the term of the NDF, and mark-to-market amounts and realized gains or losses are recognized on the settlement date in cost of goods sold. The related receivables or liabilities with counterparties to the NDFs are recorded in the consolidated balance sheet. As of May 31, 2003, the Company had no outstanding NDFs and no mark-to-market unrealized amounts. Additionally, no realized losses were incurred for the nine months ended May 31, 2003, as no NDFs were entered into during the period. Although the Company has not purchased any NDFs subsequent to May 31, 2003, it may purchase NDFs in the future to mitigate foreign exchange losses. However, due to the volatility and lack of derivative financial instruments in the countries in which the Company operates, significant risk from unexpected devaluation of local currencies exists. Foreign exchange transaction losses realized (including the cost of any NDFs), which are included as a part of the costs of goods sold in the consolidated statement of operations, were $1.7 million and $747,000 for the nine months ended May 31, 2003 and 2002, respectively.

The following is a listing of each country or territory where the Company currently operates or anticipates operating in and their respective currencies, as of May 31, 2003: