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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 November 30, 2004

OR

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

For the transition period from                  to                 

COMMISSION FILE NUMBER 0-22793

PriceSmart, Inc.

(Exact name of registrant as specified in its charter)

9740 Scranton Road

San Diego, California 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  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 17,525,607 shares of its common stock, par value $.0001 per share, outstanding at December 31, 2004.

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PRICESMART, INC.

INDEX TO FORM 10-Q

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PART I—FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS

The Company’s unaudited consolidated balance sheet as of November 30, 2004, the consolidated balance sheet as of August 31, 2004, the unaudited consolidated statements of operations for the three months ended November 30, 2004 and 2003, the unaudited consolidated statements of cash flows for the three months ended November 30, 2004 and 2003, and the unaudited consolidated statements of stockholders’ equity for the three months ended November 30, 2004 are included elsewhere herein. Also included within are notes to the unaudited consolidated financial statements.

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

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 SEC 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 quarters ended November 30, 2004 (fiscal 2005) and November 30, 2003 (fiscal 2004), and should be read in conjunction with the consolidated financial statements and the accompanying notes included within.

PriceSmart’s business consists primarily of international membership shopping warehouse clubs similar to, but smaller in size than, warehouse clubs in the United States. The number of warehouse clubs in operation as of November 30, 2004 and 2003, the Company’s ownership percentages and basis of presentation for financial reporting purposes by each country or territory are as follows:

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During fiscal 2004, the Company opened a new U.S.-style membership shopping warehouse club in the Philippines and closed its warehouse club in Guam. No warehouse clubs were opened or closed during the first quarter of fiscal 2005. As a result, there were 26 consolidated warehouse clubs in operation, operating in twelve countries and one U.S. territory as of November 30, 2004, in comparison to 26 consolidated warehouse clubs in operation, operating in twelve countries and two U.S. territories at the end of the first quarter of fiscal 2004. During the quarter, the Company announced that it had entered into an agreement to acquire land in San Jose, Costa Rica for a planned fourth location in that market which the Company plans to open in the second half of calendar year 2005. The average life of the 26 warehouse clubs in operation as of November 30, 2004 was 50 months. The average life of the 26 warehouse clubs in operation as of November 30, 2003 was 40 months.

In addition to the warehouse clubs operated directly by the Company or through joint ventures, there was one warehouse club in operation in Saipan, Micronesia licensed to and operated by local business people, through which the Company earns a licensee fee. Subsequent to the end of the first fiscal quarter of 2005, the Company terminated the license agreement with its China licensee, under which the China licensee operated 11 warehouse clubs, and recorded no licensing revenue in the quarter.

COMPARISON OF THE THREE MONTHS ENDED NOVEMBER 30, 2004 AND 2003

Net warehouse sales increased 6.5% to $153.0 million in the first quarter of fiscal 2005, from $143.7 million in the first quarter of fiscal 2004. The Company experienced sales growth in all three of its market segments, Central America, Caribbean, and Philippines, due primarily to improvements in merchandising resulting in a higher average sale per transaction. The Caribbean experienced the highest year-over-year growth at 17.7%, with all Caribbean countries registering positive growth and the most significant sales increases in the Dominican Republic and Barbados. Similarly, all Central American countries experienced positive sales growth compared to the first quarter of fiscal 2004, except Honduras. Sales in the Philippines grew 6.3% in the current quarter compared to the same period last year but that was entirely a result of having four warehouse clubs in operation in the first quarter of fiscal 2005 compared to three clubs in the first quarter of fiscal 2004. Philippines sales were negatively impacted in the quarter by difficulties in the importation of U.S. merchandise into the country. Those issues were largely resolved in late November 2004.

Same-warehouse club sales, which are for warehouse clubs open at least 12 full months, increased 7.0% for the 13 weeks ending December 5, 2004 compared to the same period a year earlier.

The Company’s warehouse gross profit margin percentage (defined as net warehouse sales less associated cost of goods sold divided by net warehouse sales) in the first quarter of fiscal 2005 increased to 15.4% from 12.6% in the first quarter of fiscal 2004. Warehouse margin percent during the quarter as compared to the year earlier was positively impacted by (1) improvements in the merchandise and operating efforts of the Company, and (2) currency movements in certain markets (primarily the Dominican Republic) resulting in a beneficial foreign exchange year-over-year impact of approximately $2.0 million. Excluding foreign exchange gains or losses in the periods presented, the Company’s gross margin percentage would have been approximately 14.8% and 13.4% for the first quarter of fiscal year 2005 and the first quarter of fiscal year 2004, respectively.

Export sales represent U.S. merchandise exported to the Company’s licensee warehouse operating in Saipan and direct sales to third parties through the Company’s distribution centers, which include sales to PriceSmart Mexico, an unconsolidated affiliate (see “Note 8-Related Party Transactions” in the Notes to Consolidated Financial Statements included within). Export sales in the first quarter of fiscal 2005 were $233,000 compared to $505,000 in the first quarter of fiscal 2004. The change between periods reflects a continued reduction in the direct export sales business the Company does with non-affiliated third parties or unconsolidated affiliates.

Membership fees, which are recognized into income ratably over the one-year life of the membership, increased to $2.4 million in the first quarter of fiscal 2005 compared to $2.1 million in the first quarter of fiscal 2004. In both periods membership income was 1.5% of warehouse sales. Trinidad, Dominican Republic, and Costa Rica accounted for the majority of the increase from the prior year.

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Other income consists of commission revenue, rental income, advertising revenues, construction revenue, vendor promotions and fees earned from licensees. Other income, excluding licensee fees, decreased to $1.1 million, or 0.7% of net warehouse sales, in the first quarter of fiscal 2005 from $1.6 million, or 1.1% of net warehouse sales, in the first quarter of fiscal 2004. The decrease in amounts in the current year was primarily related to a decrease in construction management revenues and vendor promotions revenue in the current year offset by an increase in non-member fee revenue, primarily in the Philippines. Licensee fees decreased to $5,000 in the first quarter of fiscal 2005 from $341,000 in the first quarter of fiscal 2004, as a result of the termination of the technology and trademark licensing agreements with the Company’s China licensee.

Warehouse club operating expenses decreased to $19.7 million, or 12.9% of net warehouse sales, in the first quarter of fiscal 2005 from $20.4 million, or 14.2% of net warehouse sales, in the first quarter of fiscal 2004. Warehouse operating expenses in the current quarter were reduced from the prior year quarter primarily as a result of the elimination of costs associated with the warehouse club in Guam which was closed in the second quarter of fiscal 2004, partially offset by increased costs for the fourth Philippines location which opened in the fourth quarter of fiscal 2004. Payroll-related costs have been reduced as a result of productivity improvement from 4.3% of sales in the first quarter of fiscal 2004 to 3.8% of sales in the current quarter. The Company has experienced increased costs for utilities (particularly in the Dominican Republic) and for credit card processing.

General and administrative expenses were $5.1 million, or 3.3% of net warehouse sales, in the first quarter of fiscal 2005 compared to $5.2 million, or 3.6% of net warehouse sales, in the first quarter of fiscal 2004. The decrease in general and administrative expense is largely attributable to reduced severance costs in the current quarter compared to the same period last year related to the departure at that time of two senior managers of the Company.

Closure costs for the first quarter of fiscal 2005 were $367,000 compared to $220,000 in the first quarter of fiscal 2004. The Company continues to incur costs related to four closed warehouse club locations while it seeks tenants or alternative uses for those facilities. In the current quarter, the Company recorded an additional provision of $148,000 associated with revised estimates of the timing and value of sub-lease opportunities for two of those locations.

Operating income for the quarter was $1.8 million compared to a loss of $4.0 million in the first quarter of fiscal 2004, a $5.8 million year over year improvement resulting from the increase in sales and improved margins.

Interest income primarily reflects earnings on cash, cash equivalent balances and restricted cash deposits securing long-term debt. Interest income was $596,000 in the first quarter of fiscal 2005 compared to $636,000 in the first quarter of fiscal 2004. The change in interest income is due to the amounts of interest-bearing instruments held by the Company throughout the periods presented and the interest rate earned on those instruments. The decrease in interest income primarily relates to lower daily cash balances and lower interest rates throughout the first quarter of fiscal 2005 in comparison to the prior year period.

Interest expense reflects borrowings by the Company’s majority or wholly owned foreign subsidiaries to finance the capital requirements of warehouse club operations and for local currency loans secured by U.S. dollar deposits in the Philippines to lessen foreign exchange risks in that country. Interest expense increased to $2.9 million in the first quarter of fiscal 2005 from $2.8 million in the first quarter of fiscal 2004. The increase is primarily attributable to an increase in the interest rates during the periods.

Minority interest relates to the allocation of the joint venture income or loss to the minority stockholders’ respective ownership share. In the first quarter of fiscal 2004, those joint ventures collectively recorded an operating loss resulting in a $512,000 allocation of that loss to the minority shareholders’ interests. A major change between the two periods is that the Company is now recognizing 100% of the losses of the Philippine joint venture, as the minority stockholders’ interests in that joint venture have been reduced to zero as a result of

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the prior accumulated losses. Minority interest, therefore, no longer contains the allocation of the current period’s loss in the Philippines. The remaining joint ventures, in total, recorded a profit resulting in an allocation of those profits to the minority shareholders of $87,000 in the first quarter of 2005.

The company recorded an income tax provision of $705,000 and an income tax benefit of $52,000 for the three months ended November 30, 2004 and 2003, respectively. These amounts represent the net effect of income tax expense in certain subsidiaries and income tax credits for those companies generating losses, whose recoverability were more likely than not as of August 31, 2004 and 2003, respectively. Due to the current interplay of income and losses within the different subsidiaries, the Company does not believe that the resulting effective tax rate is an adequate measurement tool at this time.

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 of the unconsolidated joint venture’s results from operations.

Preferred dividend of $648,000 reflects dividends on the Company’s preferred stock for the first quarter of fiscal 2005, which were accrued but not paid. During the quarter, as part of the Financial Program discussed below, the holders of the Series A and Series B Preferred Stock converted their preferred shares to common stock. Dividend expense ceased to accrue on the Preferred Stock as of their respective conversion dates, resulting in a $192,000 reduction in dividend expense from the year earlier period.

LIQUIDITY AND CAPITAL RESOURCES

Financial Position and Cash Flow

The Company’s primary capital requirements in the quarter were associated with the operating working capital needs of the Company, particularly those associated with the acquisition of merchandise in advance of the holiday shopping period. In addition, the Company acquired land in San Jose, Costa Rica for the planned construction of a fourth Costa Rican location.

The Company improved its working capital position (defined as current assets less current liabilities) as of November 30, 2004 compared to both August 30, 2004 and November 30, 2003. As of November 30, 2004, the Company had negative working capital of $4.3 million compared to negative working capital of $15.5 million at the end of August 2004 and negative $18.0 million at the end of November 2003. The improvement in the current quarter was largely attributable to the conversion of approximately $20 million in related-party borrowings to common stock as part of the Financial Program. Further, the conversion of accrued but unpaid dividends as part of the Series A and Series B Preferred stock conversion reduced other accrued expenses by $4.5 million, thereby decreasing the Company’s current liabilities without a corresponding impact on current assets.

Net cash flows used in operating activities were $5.0 million and $1.6 million in the first quarters of fiscal 2005 and 2004, respectively. The increased use of $3.4 million is primarily due to an increase in cash used to build merchandise inventories during the quarter as compared to the same period last year offset by a $4.4 million reduction in the net loss for the Company. In the current quarter, the Company made a $23.8 million investment in inventories, particularly U.S. merchandise, offset by financing via accounts payable totaling $13.6 million, resulting in a net cash use of $10.2 million. In the same period last year, inventory levels grew $400,000 and accounts payables decreased by $800,000, resulting in a net cash use of $1.2 million.

Net cash used in investing activities was $4.9 million and $2.0 million in the first quarters of fiscal 2005 and 2004, respectively. The increase in the use of cash of approximately $2.9 million resulted from $3.0 million for the purchase of land in San Jose Costa Rica for a planned fourth warehouse club location plus an increase in capital additions for equipment and improvements in existing warehouse clubs.

Net cash used in financing activities was $12.1 million in the first quarter of fiscal 2005. The Company converted $45.0 million in related-party obligations plus accrued interest to common stock as described below

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under the heading, “Financing Activities.” Long term debt of $14.2 million was retired which released $6.4 million in restricted cash that was being used as partial collateral for those loans, and $4.0 million was used for principal payments toward the various short and long term debt facilities of the Company.

Financing Activities

The Company concluded another phase of its previously announced financial restructuring plan (the “Financial Program”) during the quarter (See “Note 6-Financial Program” in the Notes to Consolidated Financial Statements included herein). The Company converted $22 million of the Series B Cumulative Convertible Redeemable Preferred Stock into shares of common stock valued for such purposes at $10 per share. The Company also converted a $25 million bridge loan plus accrued interest, the $5 million real estate advance for the subsequently cancelled sale of the Santiago, Dominican Republic land and building plus accrued interest and $14.9 million of purchase order financing plus accrued interest from The Price Group, LLC to common stock valued for such purposes at $8 per share. The Price Group, LLC is affiliated with Robert E. Price, Interim Chief Executive Officer, Chairman of the Board of Directors and a significant stockholder of PriceSmart and Sol Price, a significant stockholder of PriceSmart. Directors Robert E. Price, James F. Cahill, Murray L. Galinson and Jack McGrory are co-managers of The Price Group, LLC and collectively own a significant interest in that entity. In addition, as part of a separate transaction, the Company converted $20 million of the Series A Cumulative Convertible Redeemable Preferred Stock plus accrued dividends to common stock valued for such purpose at $10 per share.

During the quarter ended November 30, 2004, as part of the financial restructuring plan, the Company purchased a $10.2 million long-term note of its Philippine subsidiary from the International Finance Corporation (IFC) and paid off the outstanding balance of $3.75 million on a long-term note to the Overseas Private Investment Corporation (OPIC). The Company simultaneously obtained the release of $6.8 million in restricted cash being held as partial collateral for those loans as part of the Financial Program.

On November 5, 2004, the Company entered into a short-term loan agreement for $3.0 million for a period of 90 days at a rate of 5% with The Price Group, LLC. This short-term loan was repaid on January 10, 2005.

Short-Term Borrowings and Long-Term Debt

As of November 30, 2004, the Company, together with its majority or wholly owned subsidiaries, had $13.9 million outstanding in short-term borrowings, which are secured by certain assets of the Company and its subsidiaries and are guaranteed by the Company up to its respective ownership percentage. Each of the facilities expires during the year and is typically renewed. As of November 30, 2004, the Company had approximately $6.6 million available on these facilities.

Additionally, the Company has a bank credit agreement for up to $7.5 million, which can be used as a line of credit or to issue letters of credit. As of November 30, 2004, letters of credit and lines of credit totaling $6.5 million were outstanding under this facility, leaving availability under this facility of $1.0 million.

As of November 30, 2004, the Company, together with its majority or wholly owned subsidiaries, had $79.9 million outstanding in long-term borrowings. The Company’s long-term debt is collateralized by certain land, building, fixtures, equipment and shares of each respective subsidiary and guaranteed by the Company up to its respective ownership percentage, except for approximately $24.7 million as of November 30, 2004, which is secured by collateral deposits included in restricted cash on the balance sheet and letters of credit. Certain obligations under leasing arrangements are collateralized by the underlying asset being leased.

Under the terms of debt agreements to which the Company and/or one or more of its wholly owned or majority owned subsidiaries are parties, the Company must comply with specified financial maintenance covenants, which include among others, current ratio, debt service, interest coverage and leverage ratios. As of

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November 30, 2004, the Company was in compliance with all of these covenants, except for the following: (i) debt service ratio for a $11.3 million note (with an outstanding balance of $2.1 million at November 30, 2004), for which the Company has requested, but not yet received, a written waiver of its noncompliance for the quarters ending August 31, 2004 and November 30, 2004; (ii) interest cost/EBIT (earnings before interest and taxes) ratio for a $6.0 million note (with an outstanding balance of $3.9 million at November 30, 2004), for which the Company has requested and received, a written waiver of its noncompliance for the quarters ending August 31, 2004 and November 30, 2004; (iii) debt to equity ratio for a $7.0 million note (with an outstanding balance of $3.9 million at November 30, 2004), for which the Company has requested, but not yet received, a written waiver of its noncompliance for the quarters ending August 31, 2004 and November 30, 2004 and (iv) debt service ratio for a $3.5 million note (with an outstanding balance of $1.0 million at November 30, 2004), for which the Company has requested, but not yet received, a written waiver of its noncompliance for the quarter ending November 30, 2004. For the waivers requested, but not yet received, the Company believes that the waivers will be approved and waived for the periods requested. Additionally, the Company has debt agreements, with an aggregate principal amount outstanding as of November 30, 2004 of $26.5 million that, among other things, allow the lender to accelerate the indebtedness upon a default by the Company under other indebtedness and prohibit the Company from incurring additional indebtedness unless the Company is in compliance with specified financial ratios. As of November 30, 2004, the Company did not satisfy these ratios. As a result, the Company is prohibited from incurring additional indebtedness and would need to obtain a waiver from the lender as a condition to incurring additional indebtedness. If the Company is unsuccessful in obtaining the necessary waivers or fails to comply with these financial covenants in future periods, the lenders may elect to accelerate the indebtedness described above and foreclose on the collateral pledged to secure the indebtedness. The Company believes that, primarily as a result of the Financial Program, it has sufficient financial resources to pay-down any of the above obligations which have maintenance covenant noncompliance as of November 30, 2004. Accordingly, the aforementioned obligations are reflected in the accompanying balance sheet under the original contractual maturities.

Contractual Obligations

As of November 30, 2004, the Company’s commitments to make future payments under long-term contractual obligations were as follows (amounts in thousands):

Critical Accounting Estimates

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 and impairment of long-lived assets. 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 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, 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.

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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. 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.

Allowance for Bad Debt:    Credit is extended to a portion of the Company’s 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 formerly utilized 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. As of November 30, 2004, the Company had a total of approximately $645,000 in net receivables due from the minority interest shareholder’s importation and exportation businesses, which is included in accounts receivable on the 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.

Stock-Based Compensation:    As of November 30, 2004, the Company had four stock-based employee compensation plans. Beginning September 1, 2002, the Company adopted the fair value based method of recording stock options contained in Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation,” which is considered the preferable accounting method for stock-based employee compensation. Beginning September 1, 2002, all future employee stock option grants will be expensed over the stock option vesting period based on the fair value at the date the options are granted. Historically, and through August 31, 2002, the Company had applied Accounting Principles Board Opinion No. 25 and related interpretations in accounting for its stock option plans.

Deferred Taxes:    A valuation allowance is recorded to reduce deferred tax assets to the amount that is more likely than not to be realized. As of November 30, 2004, the Company evaluated its deferred tax assets and liabilities and determined that, in accordance with Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes,” a valuation allowance is necessary for certain foreign deferred tax asset balances, primarily because of the existence of significant negative objective evidence, such as the fact that certain countries are in a cumulative loss position for the past three years.

The Company has a federal and state tax net operating loss carry-forward at August 31, 2004 of approximately $40.5 million and $6.7 million, respectively. In calculating the tax provision, and assessing the likelihood that the Company will be able to utilize the deferred tax assets, the Company considered and weighed all of the evidence, both positive and negative, and both objective and subjective. The Company factored in the inherent risk of forecasting revenue and expenses over an extended period of time and considered the potential risks associated with its business. Because of the Company’s history of U.S. income and based on projections of future taxable income in the U.S., the Company was able to determine that there was sufficient positive evidence to support the conclusion that it was more likely than not that the Company would be able to realize the U.S. deferred tax assets by generating taxable income during the carry-forward period. However, due to their shorter recovery period, the Company has maintained valuation allowances on U.S. foreign tax credits and capital loss carryforwards.

As a result of significant losses in many of the Company’s foreign subsidiaries at November 30, 2004, the Company has concluded that full valuation allowances are necessary in all but two of its subsidiaries. The Company has factored in the inherent risk of forecasting revenue and expenses over an extended period of time and also considered the potential risks associated with its business. There was insufficient positive evidence to overcome the existence of the negative objective evidence of cumulative losses. As a result, management concluded that it was more likely than not that the deferred tax assets would not be realized in these subsidiaries.

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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

During December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement No. 123R, “Share-Based Payment” (“SFAS 123R”), which requires companies to measure and recognize compensation expense for all stock-based payments at fair value. Stock-based payments include stock option grants. The Company grants options to purchase common stock to some of its employees and directors under various plans at prices equal to the market value of the stock on the dates the options were granted. SFAS 123R is effective for all interim or annual periods beginning after June 15, 2005. Early adoption is encouraged and retroactive application of the provisions of FAS 123R to the beginning of the fiscal year that includes the effective date is permitted, but not required. The Company has not yet adopted this pronouncement and is currently evaluating the expected impact that the adoption of SFAS 123R will have on its consolidated financial position, results of operations and cash flows.

ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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 November 30, 2004, the Company had a total of 26 consolidated warehouse clubs operating in 12 foreign countries and one U.S. territory (excluding the three warehouse clubs owned in Mexico through its 50/50 joint venture). Nineteen of the 26 warehouse clubs operate under currencies other than the U.S. dollar. For the quarters ended November 30, 2004 and 2003, approximately 79% and 76%, respectively, of the Company’s net warehouse sales were in foreign currencies. The Company may enter into additional foreign countries in the future or open additional locations in existing countries, which may involve similar economic and political risks as well as challenges that are different from those currently encountered by the Company. 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 approximately 81% during fiscal 2003 and approximately 13% during 2004. There can be no assurance that the Company will not experience any other materially adverse effect 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.

Foreign exchange transaction gains/(losses), which are included as a part of the costs of goods sold in the consolidated statement of operations, were approximately $843,000 and $(1.2) million for the three months ended November 30, 2004 and 2003, respectively. Translation adjustment gains/(losses) from the Company’s share of non-U.S. denominated majority or wholly owned subsidiaries and investment in affiliate, resulting from the translation of the assets and liabilities of the subsidiaries into U. S. dollars were $1.1 million and $(4.3) million for the quarter and year ended November 30, 2004 and August 31, 2004, respectively. Foreign exchange gains/(losses) were positively impacted by $786,000 relating to the Dominican Republic. The Dominican Republic experienced a favorable currency revaluation of approximately 35% between the quarter ended November 30, 2003 and the quarter ended November 30, 2004.

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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 November 30, 2004:

The Company is exposed to changes in interest rates on various debt facilities. A hypothetical 100 basis point adverse change in interest rates along the entire interest rate yield curve could adversely affect the Company’s pre-tax net loss (excluding any minority interest impact) by approximately $560,000 on an annualized basis.

Philippines Sales Trends and Projected Losses

The Company’s Philippines operations, consisting of four warehouse clubs in Metro Manila (along with one former and currently unoccupied warehouse club), are performing well below management’s expectation, with sales growth below plan, resulting in operating losses and negative cash flow over the past year (including the most recent fiscal quarter). The Company believes that two primary reasons for these results are: (i) the business has not been adequately capitalized; and (ii) the distribution of U.S. merchandise to the Philippines has not been maintained at a sufficiently consistent level. Currently, the Company is experiencing significant difficulties with the timely customs clearance of U.S. merchandise. However, the Company continues to believe that the Philippines could be a viable and profitable market for PriceSmart and continues its efforts to improve the business there. There is no guarantee, however, that the Company will be successful in these efforts, and operating losses and negative cash flow could continue for the foreseeable future.

Public Company Compliance Costs and Considerations

The Company incurs certain costs associated with being a publicly traded company. Beginning with fiscal year 2005, the direct and indirect costs associated with Sarbanes-Oxley Section 404 compliance will add significantly to that cost. The expenses associated with implementing the additional processes and procedures necessary for Section 404 compliance and the fiscal year 2005 required attestation of those controls have been estimated at approximately $1.9 million, several times the entire cost of the fiscal 2004 year-end audit. The cost of initial implementation and on-going compliance is particularly high for the Company due to the multiple geographic areas in which it operates (12 countries and one U.S. territory). Moreover, Section 404 compliance will inevitably result in a diversion of management time and attention from other duties.

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The Company is monitoring the cost of operating as a public company to determine whether, in the Company’s judgment, the direct and indirect costs outweigh the benefits to the Company and its stockholders. If the Company concludes as a result of this review that these costs, including but not limited to the new costs of compliance with Section 404, outweigh the benefits of remaining as a publicly reporting company, management and the board of directors may, over the next several months, begin to consider alternatives to remaining a public company. The Company understands that several other companies are evaluating similar questions. Alternatives that the Company could consider and evaluate would include:

While the Company sometimes has engaged in discussions with minority partners in some locations as to sales of those locations, the Company has not engaged in any substantive discussions regarding these alternatives with any affiliated or unaffiliated third parties nor has the Company retained investment bankers, appraisers or other advisors. The Company does not know whether if it were to engage in any exploration of alternatives that it would be able to find any potential acquirer that would be willing to buy the company at a price that the board of directors and stockholders would find acceptable. Consequently, while the Company believes it may become appropriate to consider the possibility of such a transaction, it is not in a position to evaluate the likelihood that any such proposal will be made or, even if a proposal were to be made, whether a transaction would be consummated. Any such proposal would depend on a number of factors at a future time, including the Company’s business and prospects, its operating and financial performance in the interim and the market price for the Company’s securities.

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ITEM 4.    CONTROLS AND PROCEDURES

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its reports pursuant to the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Interim Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As required by SEC Rule 13a-15(b), the Company carried out an evaluation, under the supervision and with the participation of its management, including the Interim Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the quarter covered by this report. Based on the foregoing, its Interim Chief Executive Officer and Chief Financial Officer determined that disclosure controls and procedures were effective at a reasonable assurance level.

There has been no change in internal controls over financial reporting during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, internal controls over financial reporting.

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PART II—OTHER INFORMATION

ITEM 1.    LEGAL PROCEEDINGS

From time to time the Company and its subsidiaries are subject to legal proceedings and claims in the ordinary course of business, including those identified below. The Company evaluates such matters on a case by case basis, and vigorously contests any such legal proceedings or claims which the Company believes are without merit.

Following the announcement of the restatement of its financial results for fiscal year 2002 and the first three quarters of fiscal 2003 in November 2003, the Company received notice of six class action lawsuits filed in the United States District Court, Southern District of California against it and certain of its former directors and officers purportedly brought on behalf of certain current and former holders of the Company’s common stock, and a seventh class action lawsuit filed against it and certain of its former directors and officers purportedly on behalf of certain holders of the Company’s Series A Preferred Stock and a class of common stock purchasers. These suits generally allege that the Company issued false and misleading statements during fiscal years 2002 and 2003 in violation of federal securities laws. All of the federal securities actions were consolidated by an order dated September 9, 2004, which also appointed a lead plaintiff on behalf of the proposed class of common stock purchasers. The lead plaintiff filed a consolidated complaint on November 29, 2004, and the Company will have until February 4, 2005 to move to dismiss or otherwise respond to the consolidated complaint.

On September 3, 2004, the Company entered into a Stipulation of Settlement with respect to the action brought on behalf of a purported sub-class of plaintiffs comprised of unaffiliated purchasers of the Company’s Series A Preferred Stock. On November 8, 2004 the settlement was approved. Pursuant to the settlement, this action has been dismissed and the Court has entered an order releasing claims that were or could have been brought by the sub-class, arising out of or relating to the purchase or ownership of the Company’s Series A Preferred Stock. As a term of the settlement, members of the Series A Preferred sub-class were offered the opportunity to exchange their shares of Series A Preferred Stock, together with accrued and unpaid dividends thereon, for shares of the Company’s common stock valued for such purposes at a price of $10.00 per share. All members of the sub-class accepted the offer and exchanged their shares. The Company paid attorney’s fees and costs to counsel for the sub-class in the amount of $325,000, which was covered by the Company’s directors and officers insurance carrier.

If the Company chooses to settle the remaining consolidated class action lawsuit without going to trial, it may be required to pay the plaintiffs a substantial sum in the form of damages. Alternatively, if these remaining cases go to trial and the Company is ultimately adjudged to have violated federal securities laws, the Company may incur substantial losses as a result of an award of damages to the plaintiffs.

On September 3, 2004, the Company also entered into a Stipulation of Settlement for a stockholder derivative suit purportedly brought on the Company’s own behalf in San Diego County Superior Court against its current and former directors and officers, alleging among other things, breaches of fiduciary duty. The same complaint also alleged that various officers and directors violated California insider trading laws when they sold shares of the Company’s stock in 2002 because of their alleged knowledge of the accounting issues that caused the restatement. In the Stipulation of Settlement, the parties agreed that the prosecution and pendency of the litigation was a factor in the Company’s agreement to seek to implement the Financial Program announced by the Company on September 3, 2004. The Court approved the settlement and entered final judgment on November 12, 2004, which dismissed the lawsuit with prejudice and included a release for the benefit of defendants. As a term of the settlement, the Company has paid attorney’s fees to plaintiff’s counsel in the amount of $325,000, which was covered by the Company’s directors and officers insurance carrier.

The United States Securities and Exchange Commission has informed the Company that it is conducting an investigation into the circumstances surrounding the restatement.

The indemnification provisions contained in the Company’s Certificate of Incorporation and indemnification agreements between the Company and its current and former directors and officers require the

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Company to indemnify its current and former directors and officers who are named as defendants against the allegations contained in these suits unless the Company determines that indemnification is unavailable because the applicable current or former director or officer failed to meet the applicable standard of conduct set forth in those documents. While the Company has directors and officers liability insurance (subject to a $1.0 million retention and a 20% co-pay provision), the Company has been informed that its insurance carriers are reserving all of their rights and defenses under the policy (including the right to deny coverage) and it is otherwise uncertain whether the insurance will be sufficient to cover all damages that the Company may be required to pay. Further, regardless of coverage and the ultimate outcome of these suits, litigation of this type is expensive and will require that the Company devote substantial resources and management attention to defend these proceedings. Moreover, the mere presence of these lawsuits may materially harm the Company’s business and reputation. The Company has and will continue to incur substantial legal and other professional service costs in connection with the stockholder lawsuits and responding to the inquiries of the SEC. The amount of any future costs in this respect cannot be determined at this time.

In July 2003, the Company’s 34% minority interest shareholder in the Company’s Guatemalan subsidiary (PriceSmart (Guatemala) S.A.) contended, among other things, that both the Company and the minority interest shareholder are currently entitled to receive a 15% annual return upon respective capital investments in the Guatemalan subsidiary. The Company has reviewed the claim and other pertinent information in relationship to the Guatemalan joint venture agreement, as amended, and does not concur with the minority shareholder’s conclusion. The Guatemalan minority shareholder continues to assert a right to receive a 15% annual return on its capital investment. In addition, the minority shareholder has advised the Company that it believes that PriceSmart (Guatemala), S.A. has been inappropriately charged by the Company with regard to various fees, expenses and certain related matters. The Company responded that it disagrees with virtually all of these additional assertions, and the minority shareholder advised that it may commission an audit with regard to such matters. On December 13, 2004, the Company filed a Demand for Arbitration against the Guatemala minority shareholder under the UNCITRAL Rules as administered by the American Arbitration Association. By that Demand, the Company seeks a declaratory judgment that the Company has properly charged fees and expenses and that neither the Company nor the minority interest shareholder is entitled to receive a 15% annual return on capital investment. The Demand also requests a declaratory judgment with respect to certain matters relating to the operation and governance of PriceSmart (Guatemala), S.A.

In addition, the Company’s two minority shareholders in the Philippines (which together comprise a 48% ownership interest in the Company’s Philippine operations (PSMT Philippines, Inc.)) have taken the position that an “impasse” of the Board of Directors of PSMT Philippines, Inc. has been reached. These minority shareholders have therefore sought to invoke the “buy-sell” provisions of the parties’ Shareholders’ Agreement (pursuant to which one shareholder may offer to purchase the interest of the other shareholders (at an appraised value) at which point the offeree shareholder may make a counter offer and the process continues until an offer is accepted). The Company contends, among other things, that pursuant to the terms of the Shareholders’ Agreement no “impasse” has been reached (and hence the buy-sell provisions do not become applicable). On December 23, 2004, the Company filed in the San Diego Superior Court a Complaint against William Go (a principal of one of the minority shareholders) and two companies affiliated with William Go, seeking to recover principal and interest due and owing to the Company of at least $781,000, as well as an accounting with regard to sums paid by the Company to William Go and the affiliated companies, and related relief. Additionally, on December 29, 2004, William Go and the E-Class Corporation (which owns 38% of PSMT Philippines, Inc.) filed with the Trial Court in Pasig City, Manila, a Complaint against those Directors of PSMT Philippines, Inc. who are appointees of the Company. The Complaint contends that the Company inappropriately transferred funds of PSMT Philippines, Inc. to the Company or otherwise inappropriately charged expenses to PSMT Philippines, Inc. The Complaint seeks an accounting and damages, as well as a temporary restraining order and/or preliminary injunction, and the appointment of receiver/management committee. The Company intends to vigorously defend this action through defendants as and when they are duly served and believes that the claims are without merit. On January 11, 2005 plaintiffs’ application for a temporary restraining order was denied, and a hearing on plaintiffs’ application for a preliminary injunction was set for January 17, 2005.

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