Edgar Filing: PRICESMART INC

PSMT-10Q Master Document Q2 FY2015

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



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

For the quarterly period ended February 28, 2015



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

For the transition period from to

COMMISSION FILE NUMBER 0-22793

PriceSmart, Inc.

(Exact name of registrant as specified in its charter)



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

9740 Scranton Road, San Diego, CA 92121

(Address of principal executive offices)

(858) 404-8800

(Registrant’s telephone number, including area code)

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



Yes ý	No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).



Yes ý	No ¨

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



Large accelerated filer ý	Accelerated filer ¨	Non-accelerated filer ¨	Smaller Reporting Company ¨

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



Yes ¨	No ý

The registrant had 30,183,492 shares of its common stock, par value $0.0001 per share, outstanding at March 31, 2015.

PRICESMART, INC.

INDEX TO FORM 10-Q



		Page
PART I - FINANCIAL INFORMATION

ITEM 1.	FINANCIAL STATEMENTS	1

	CONSOLIDATED BALANCE SHEETS AS OF FEBRUARY 28, 2015 (UNAUDITED) AND AUGUST 31, 2014	2

	CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE AND SIX MONTHS ENDED FEBRUARY 28, 2015 AND 2014 - UNAUDITED	3

	CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE THREE AND SIX MONTHS ENDED FEBRUARY 28, 2015 AND 2014 - UNAUDITED	4

	CONSOLIDATED STATEMENTS OF EQUITY FOR THE SIX MONTHS ENDED FEBRUARY 28, 2015 AND 2014 - UNAUDITED	5

	CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED FEBRUARY 28, 2015 AND 2014 - UNAUDITED	6

	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED	7

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	36

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	64

ITEM 4.	CONTROLS AND PROCEDURES	64

PART II - OTHER INFORMATION
ITEM 1.	LEGAL PROCEEDINGS	66

ITEM 1A.	RISK FACTORS	66

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	66

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	67

ITEM 4.	MINE SAFETY DISCLOSURES	67

ITEM 5.	OTHER INFORMATION	67

ITEM 6.	EXHIBITS	68

PART I—FINANCIAL INFORMATION


ITEM 1.	FINANCIAL STATEMENTS

PriceSmart, Inc.’s (“PriceSmart,” "we" or the “Company”) unaudited consolidated balance sheet as of February 28, 2015 and the consolidated balance sheet as of August 31, 2014, the unaudited consolidated statements of income for the three and six months ended February 28, 2015 and 2014, the unaudited consolidated statements of comprehensive income for the three and six months ended ended February 28, 2015 and 2014, the unaudited consolidated statements of equity for the six months ended February 28, 2015 and 2014, and the unaudited consolidated statements of cash flows for the six months ended February 28, 2015 and 2014, are included herein. Also included herein are the notes to the unaudited consolidated financial statements.

PRICESMART, INC.

CONSOLIDATED BALANCE SHEETS

(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)



	February 28, 2015			August 31, 2014
	(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents	$	119,243		$	137,098
Short-term restricted cash	1,500			2,353
Receivables, net of allowance for doubtful accounts of $5 and $0 as of February 28, 2015 and August 31, 2014, respectively	7,078			7,910
Merchandise inventories	281,256			226,383
Deferred tax assets – current	6,839			6,177
Prepaid expenses and other current assets (includes $0 and $495 as of February 28, 2015 and August 31, 2014, respectively, for the fair value of derivative instruments and $1,064 and $0 as of February 28, 2015 and August 31, 2014, respectively, for the fair value of foreign currency forward contracts)	27,068			17,260
Total current assets	442,984			397,181
Long-term restricted cash	25,428			27,013
Property and equipment, net	424,360			426,325
Goodwill	36,069			36,108
Deferred tax assets – long term	9,013			11,825
Other non-current assets (includes $6,996 and $1,095 as of February 28, 2015 and August 31, 2014, respectively, for the fair value of derivative instruments)	38,267			30,755
Investment in unconsolidated affiliates	10,245			8,863
Total Assets	$	986,366		$	938,070
LIABILITIES AND EQUITY
Current Liabilities:
Short-term borrowings	$	4,470		$	—
Accounts payable	233,266			223,559
Accrued salaries and benefits	15,288			17,799
Deferred membership income	21,992			17,932
Income taxes payable	8,359			7,718
Other accrued expenses (includes $0 and $14 as of February 28, 2015 and August 31, 2014, respectively, for the fair value of foreign currency forward contracts)	22,193			21,030
Dividends payable	10,564			—
Long-term debt, current portion	14,792			11,848
Deferred tax liability – current	137			157
Total current liabilities	331,061			300,043
Deferred tax liability – long-term	2,432			2,290
Long-term portion of deferred rent	6,107			5,591
Long-term income taxes payable, net of current portion	1,562			1,918
Long-term debt, net of current portion	90,328			79,591
Other long-term liabilities (includes $586 and $0 for the fair value of derivative instruments and $379 and $372 for the defined benefit plan as of February 28, 2015 and August 31, 2014, respectively)	965			372
Total liabilities	432,455			389,805
Equity:
Common stock, $0.0001 par value, 45,000,000 shares authorized; 30,973,256 and 30,950,701 shares issued and 30,182,541 and 30,209,917 shares outstanding (net of treasury shares) as of February 28, 2015 and August 31, 2014, respectively	3			3
Preferred stock $0.0001 par value; 2,000,000 shares authorized; no shares issued and outstanding as of February 28, 2015 and August 31, 2014	—			—
Additional paid-in capital	400,539			397,150
Tax benefit from stock-based compensation	10,962			9,505
Accumulated other comprehensive loss	(68,399		)	(49,286		)
Retained earnings	239,967			215,613
Less: treasury stock at cost; 790,715 and 740,784 shares as of February 28, 2015 and August 31, 2014, respectively	(29,161		)	(24,720		)
Total equity	553,911			548,265
Total Liabilities and Equity	$	986,366		$	938,070

See accompanying notes.

PRICESMART, INC.

CONSOLIDATED STATEMENTS OF INCOME

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



	Three Months Ended February 28,						Six Months Ended February 28,
	2015			2014			2015			2014
Revenues:
Net warehouse club sales	$	732,120		$	657,167		$	1,368,535		$	1,246,861
Export sales	6,229			6,764			14,660			12,485
Membership income	10,898			9,481			21,013			18,749
Other income	1,049			962			2,109			1,880
Total revenues	750,296			674,374			1,406,317			1,279,975
Operating expenses:
Cost of goods sold:
Net warehouse club	625,876			561,652			1,164,904			1,065,939
Export	5,934			6,423			13,961			11,864
Selling, general and administrative:
Warehouse club operations	62,041			53,203			118,251			104,975
General and administrative	14,117			13,277			27,467			24,461
Pre-opening expenses	229			340			3,378			814
Loss/(gain) on disposal of assets	391			104			363			188
Total operating expenses	708,588			634,999			1,328,324			1,208,241
Operating income	41,708			39,375			77,993			71,734
Other income (expense):
Interest income	266			193			530			374
Interest expense	(1,970		)	(886		)	(3,144		)	(1,924		)
Other income (expense), net	(1,659		)	712			(4,291		)	1,023
Total other income (expense)	(3,363		)	19			(6,905		)	(527		)
Income before provision for income taxes and income (loss) of unconsolidated affiliates	38,345			39,394			71,088			71,207
Provision for income taxes	(13,526		)	(11,116		)	(25,628		)	(21,501		)
Income (loss) of unconsolidated affiliates	16			—			22			4
Net income	24,835			$	28,278		$	45,482		49,710
Net income per share available for distribution:
Basic net income per share	$	0.82		$	0.93		$	1.50		$	1.64
Diluted net income per share	$	0.82		$	0.93		$	1.50		$	1.64
Shares used in per share computations:
Basic	29,827			29,724			29,809			29,707
Diluted	29,833			29,736			29,816			29,719
Dividends per share	$	0.70		$	0.70		$	0.70		$	0.70

See accompanying notes.

PRICESMART, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED—AMOUNTS IN THOUSANDS)



	Three Months Ended February 28,						Six Months Ended February 28,
	2015			2014			2015			2014
Net income	$	24,835		$	28,278		$	45,482		$	49,710
Other Comprehensive Income, net of tax:
Foreign currency translation adjustments ⁽¹⁾	$	(10,906	)	$	(13,661	)	$	(22,557	)	$	(12,372	)
Defined benefit pension plan:
Net gain (loss) arising during period	(13		)	8			(24		)	11
Total defined benefit pension plan	(13		)	8			(24		)	11
Unrealized gains/(losses) on change in fair value of interest rate swaps⁽²⁾	1,225			1,065			3,468			922
Other comprehensive income (loss)	(9,694		)	(12,588		)	(19,113		)	(11,439		)
Comprehensive income	$	15,141		$	15,690		$	26,369		$	38,271

⁽¹⁾

Translation adjustments arising in translating the financial statements of a foreign entity have no effect on the income taxes of that foreign entity. They may, however, affect: (a) the amount, measured in the parent entity's reporting currency, of withholding taxes assessed on dividends paid to the parent entity and (b) the amount of taxes assessed on the parent entity by the government of its country. The Company has determined that the reinvestment of earnings of its foreign subsidiaries are indefinite because of the long-term nature of the Company's foreign investment plans. Therefore, deferred taxes are not provided for on translation adjustments related to non-remitted earnings of the Company's foreign subsidiaries.

⁽²⁾ See Note 9 - Derivative Instruments and Hedging Activities.

See accompanying notes.

PRICESMART, INC.

CONSOLIDATED STATEMENTS OF EQUITY

(UNAUDITED—AMOUNTS IN THOUSANDS)



	Common Stock				Additional Paid-in Capital		Tax Benefit From Stock Based Compen-sation		Accumulated Other Compre-hensive Income(Loss)			Retained Earnings			Treasury Stock				Total
	Shares		Amount		Additional Paid-in Capital		Tax Benefit From Stock Based Compen-sation		Accumulated Other Compre-hensive Income(Loss)			Retained Earnings			Shares	Amount			Equity
Balance at August 31, 2013	30,924		$	3	$	390,581	$	8,016	$	(41,475	)	$	143,871		690	$	(19,947	)	$	481,049
Purchase of treasury stock	—		—		—		—		—			—			48	(4,548		)	(4,548		)
Issuance of restricted stock award	16		—		—		—		—			—			—	—			—
Forfeiture of restricted stock awards	(1	)	—		—		—		—			—			—	—			—
Exercise of stock options	5		—		118		—		—			—			—	—			118
Stock-based compensation	—		—		3,321		1,345		—			—			—	—			4,666
Dividend paid to stockholders	—		—		—		—		—			(10,570		)	—	—			(10,570		)
Dividend payable to stockholders	—		—		—		—		—			(10,593		)	—	—			(10,593		)
Net income	—		—		—		—		—			49,710			—	—			49,710
Other comprehensive income (loss)	—		—		—		—		(11,439		)	—			—	—			(11,439		)
Balance at February 28, 2014	30,944		$	3	$	394,020	$	9,361	$	(52,914	)	$	172,418		738	$	(24,495	)	$	498,393

Balance at August 31, 2014	30,951		$	3	$	397,150	$	9,505	$	(49,286	)	$	215,613		741	$	(24,720	)	$	548,265
Purchase of treasury stock	—		—		—		—		—			—			50	(4,441		)	(4,441		)
Issuance of restricted stock award	20		—		—		—		—			—			—	—			—
Forfeiture of restricted stock awards	—		—		—		—		—			—			—	—			—
Exercise of stock options	3		—		49		—		—			—			—	—			49
Stock-based compensation	—		—		3,340		1,457		—			—			—	—			4,797
Dividend paid to stockholders	—		—		—		—		—			(10,564		)	—	—			(10,564		)
Dividend payable to stockholders	—		—		—		—		—			(10,564		)	—	—			(10,564		)
Net income	—		—		—		—		—			45,482			—	—			45,482
Other comprehensive income (loss)	—		—		—		—		(19,113		)	—			—	—			(19,113		)
Balance at February 28, 2015	30,974		$	3	$	400,539	$	10,962	$	(68,399	)	$	239,967		791	$	(29,161	)	$	553,911

See accompanying notes.

PRICESMART, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED—AMOUNTS IN THOUSANDS)



	Six Months Ended February 28,
	2015			2014
Operating Activities:
Net income	$	45,482		$	49,710
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization	16,433			13,793
Allowance for doubtful accounts	5			6
(Gain)/loss on sale of property and equipment	363			188
Deferred income taxes	2,478			1,857
Excess tax benefit on stock-based compensation	(1,457		)	(1,345		)
Equity in (gains) of unconsolidated affiliates	(22		)	(4		)
Stock-based compensation	3,340			3,321
Change in operating assets and liabilities:
Change in receivables, prepaid expenses and other current assets, accrued salaries and benefits, deferred membership income and other accruals	(7,836		)	(12,839		)
Merchandise inventories	(54,873		)	(19,058		)
Accounts payable	8,031			81
Net cash provided by (used in) operating activities	11,944			35,710
Investing Activities:
Additions to property and equipment	(42,160		)	(58,096		)
Deposits for land purchase option agreements	(348		)	(850		)
Proceeds from disposal of property and equipment	40			42
Investment in joint ventures	(1,360		)	(750		)
Net cash provided by (used in) investing activities	(43,828		)	(59,654		)
Financing Activities:
Proceeds from bank borrowings	41,447			—
Repayment of bank borrowings	(16,658		)	(12,012		)
Cash dividend payments	(10,564		)	(10,570		)
Release of restricted cash	2,920			8,000
Excess tax benefit on stock-based compensation	1,457			1,345
Purchase of treasury stock	(4,441		)	(4,548		)
Proceeds from exercise of stock options	49			118
Net cash provided by (used in) financing activities	14,210			(17,667		)
Effect of exchange rate changes on cash and cash equivalents	(181		)	(4,926		)
Net increase (decrease) in cash and cash equivalents	(17,855		)	(46,537		)
Cash and cash equivalents at beginning of period	137,098			121,874
Cash and cash equivalents at end of period	$	119,243		$	75,337

Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest, net of amounts capitalized	$	2,755		$	1,893
Income taxes	$	22,212		$	22,326
Supplemental non-cash item:
Dividends declared but not paid	$	10,564		$	10,593

PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

February 28, 2015

NOTE 1 – COMPANY OVERVIEW AND BASIS OF PRESENTATION

PriceSmart, Inc.’s (“PriceSmart” or the “Company”) business consists primarily of international membership shopping warehouse clubs similar to, but smaller in size than, warehouse clubs in the United States. As of February 28, 2015, the Company had 36 consolidated warehouse clubs in operation in 12 countries and one U.S. territory (six in Costa Rica and Colombia; four in Panama and Trinidad; three in Guatemala, Honduras and the Dominican Republic; two in El Salvador; and one each in Aruba, Barbados, Jamaica, Nicaragua and the United States Virgin Islands), of which the Company owns 100% of the corresponding legal entities (see Note 2 - Summary of Significant Accounting Policies). During October 2013, the Company opened its sixth membership warehouse club in Costa Rica in La Union, Cartago, and in May 2014, the Company opened its third warehouse club in Honduras in Tegucigalpa, the Company's second in the capital city. In January 2014, the Company acquired land in Pereira, Colombia and in the city of Medellin, Colombia and leased land in the city of Bogota, Colombia. The Company built new warehouse clubs at these three sites, and opened the Bogota location in October 2014 and opened the other two sites in November 2014. Together with the three warehouse clubs that were operating prior to these openings in Colombia (one in Barranquilla and two in Cali), these three new clubs brought the number of PriceSmart warehouse clubs operating in Colombia to six. In September 2014, the Company acquired land in La Chorrera ("Costa Verde"), west of Panama City, Panama, on which the Company's fifth PriceSmart warehouse club in Panama is scheduled to open in the summer of 2015. The Company continues to explore other potential sites for future warehouse clubs in Central America, the Caribbean and Colombia. The warehouse club sales and membership sign-ups experienced with the opening of the warehouse clubs in Colombia have reinforced the Company's belief that there could be a market for additional PriceSmart warehouse clubs in other Colombian cities.

Basis of Presentation - The interim consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q for interim financial reporting pursuant to the rules and regulations of the U.S. Securities and Exchange Commission ("SEC"). These interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended August 31, 2014 (the “2014 Form 10-K”). The interim consolidated financial statements include the accounts of PriceSmart, Inc., a Delaware corporation, and its subsidiaries. Inter-company transactions between the Company and its subsidiaries have been eliminated in consolidation.

The Company has evaluated subsequent events through the date and time these financial statements were issued.

Reclassifications to consolidated balance sheet recorded during fiscal year 2015 for fiscal year 2014 - Certain reclassifications to the consolidated balance sheet have been made to prior fiscal year amounts to conform to the presentation in the current fiscal year. These reclassifications relate to the presentation of certain income tax receivables (see note 2). The table below summarizes these reclassifications.




	August 31, 2014 balance sheet line item as previously reported		Amount reclassified Dr/(Cr)			August 31, 2014 balance sheet line item as currently reported
Prepaid expenses and other current assets	22,570		$	(5,310	)	17,260
Other non-current assets	27,593		3,162			30,755
Accounts payable	(225,761	)	2,202			(223,559	)
Income taxes payable	(7,664	)	(54		)	(7,718	)
Net amount of reclassifications			$	—

PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation – The interim consolidated financial statements of the Company included herein include the assets, liabilities and results of operations of the Company’s wholly owned subsidiaries and the Company's investment in, and the Company's share of the income (loss) of, joint ventures recorded under the equity method. All significant inter-company accounts and transactions have been eliminated in consolidation. The interim consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the SEC, and reflect all adjustments (consisting of normal recurring adjustments) that are, in the opinion of management, necessary to fairly present the financial position, results of operations, and cash flows for the periods presented. The results for interim periods are not necessarily indicative of the results for the full year. As of February 28, 2015, all of the Company's subsidiaries were wholly owned. Additionally, the Company's ownership interest in real estate development joint ventures as of February 28, 2015 is listed below:



Real Estate Development Joint Ventures	Countries	Ownership		Basis of Presentation
GolfPark Plaza, S.A.	Panama	50.0	%	Equity⁽¹⁾
Price Plaza Alajuela PPA, S.A.	Costa Rica	50.0	%	Equity⁽¹⁾


⁽¹⁾	Joint venture interests are recorded as investment in unconsolidated affiliates on the consolidated balance sheets.

Use of Estimates – The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

Variable Interest Entities – The Company reviews and determines at the start of each arrangement, or subsequently if a reconsideration event occurs, whether any of its investments in joint ventures are a Variable Interest Entity (“VIE”) and whether it must consolidate a VIE and/or disclose information about its involvement in a VIE. The Company has determined that the joint ventures for GolfPark Plaza (Panama) and Price Plaza Alajuela (Costa Rica) are VIEs. The Company has determined that it is not the primary beneficiary of the VIEs and, therefore, has accounted for these entities under the equity method.

Cash and Cash Equivalents – Cash and cash equivalents represent cash and short-term investments with maturities of three months or less when purchased and proceeds due from credit and debit card transactions, which are generally settled within a few days of the underlying transaction.

Restricted Cash – The changes in restricted cash are disclosed within the consolidated statement of cash flows based on the nature of the restriction. The following table summarizes the restricted cash reported by the Company (in thousands):

PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)



	February 28, 2015		August 31, 2014
Short-term restricted cash:
Restricted cash for Honduras loan	$	—	$	1,200
Restricted cash for land purchase option agreements	1,443		1,095
Other short-term restricted cash ⁽¹⁾	57		58
Total short-term restricted cash	$	1,500	$	2,353

Long-term restricted cash:
Restricted cash for Honduras loan	$	—	$	1,720
Restricted cash for Colombia bank loans	24,000		24,000
Other long-term restricted cash ⁽¹⁾	1,428		1,293
Total long-term restricted cash	$	25,428	$	27,013

Total restricted cash	$	26,928	$	29,366


⁽¹⁾	Other short-term and long-term restricted cash consists mainly of cash deposits held within banking institutions in compliance with federal regulatory requirements in Costa Rica and Panama.

Tax Receivables - The Company pays Value Added Tax (“VAT”) or similar taxes (“input VAT”), income taxes, and other taxes within the normal course of its business in most of the countries in which it operates related to the procurement of merchandise and/or services it acquires and/or on estimated sales and taxable income. The Company also collects VAT or similar taxes on behalf of the government (“output VAT”) for merchandise and/or services it sells. If the output VAT exceeds the input VAT, then the difference is remitted to the government, usually on a monthly basis. If the input VAT exceeds the output VAT, this creates a VAT receivable. In some countries where the Company operates, the governments have implemented additional collection procedures, such as requiring credit card processors to remit a portion of sales processed via credit card directly to the government as advance payments of VAT and/or income tax. In the case of VAT these procedures alter the natural offset of input and output VAT and generally leave the Company with a net VAT receivable, forcing the Company to process significant refund claims on a recurring basis. With respect to income taxes paid, if the estimated income taxes paid or withheld exceed the actual income tax due this creates an income tax receivable. The Company either requests a refund of these tax receivables or applies the balance to expected future tax payments. These refund or offset processes can take anywhere from several months to several years to complete.

In most countries where the Company operates, the tax refund process is defined and structured with regular refunds or offsets. However, in two countries the respective governments have alleged that there is no defined process in the law to allow them to refund VAT receivables. The Company together with its tax and legal advisers is currently appealing these interpretations in court and expects to prevail. In some of these countries, where there is recent favorable jurisprudence, the government has recently begun an audit to verify the amount of the respective VAT receivables as a required precursor to any refund. The balance of the VAT receivable in these countries was $6.3 million and $5.7 million as of February 28, 2015 and August 31, 2014, respectively. In another country in which we have warehouse clubs, beginning in fiscal year 2015, a new minimum income tax mechanism took effect, which requires the Company to pay taxes based on a factor of sales rather than income. This will likely result in the Company having to make income tax payments substantially in excess of those due based on taxable income. The current rules (which the Company has appealed) do not allow the Company to obtain a refund or offset this excess income tax against other taxes. Due to the timing of these rules, as of February 28, 2015, the Company currently has an outstanding income tax receivable of $178,000 in this country; and there were deferred tax assets of approximately $1.1 million outstanding as of that date. The Company has not placed any type of allowance on the recoverability of these tax receivables or deferred income taxes because the Company believes that it has a more likely than not chance to succeed in its appeal on the matter.

PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The Company's policy for classification and presentation of VAT receivables, income tax receivables and other tax receivables is as follows:

•Short-term VAT and Income tax receivables, recorded as Other current assets: This classification is used for any countries where the Company's subsidiary has generally demonstrated the ability to recover the VAT or income tax receivable within one year. The Company also classifies as short-term any approved refunds or credit notes to the extent that the Company expects to receive the refund or use the credit notes within one year.

•Long-term VAT and Income tax receivables, recorded as Other non-current assets: This classification is used for amounts not approved for refund or credit in countries where the Company's subsidiary has not demonstrated the ability to obtain refunds within one year and/or for amounts which are subject to outstanding disputes. An allowance is provided against VAT and income tax receivable balances in dispute when the Company does not expect to eventually prevail in its recovery.

The following table summarizes the VAT receivables reported by the Company (in thousands):



	February 28, 2015		August 31, 2014
Prepaid expenses and other current assets	$	8,013	$	3,565
Other non-current assets	19,035		17,115
Total amount of VAT receivable reported	$	27,048	$	20,680

The following table summarizes the Income tax receivables reported by the Company (in thousands):



	February 28, 2015		August 31, 2014
Prepaid expenses and other current assets	$	2,803	$	1,916
Other non-current assets	7,633		7,218
Total amount of income tax receivable reported	$	10,436	$	9,134

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

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

Fair Value Measurements – The Company measures the fair value for all financial and nonfinancial assets and liabilities that are recognized or disclosed at fair value in the consolidated financial statements on a recurring or nonrecurring basis. The fair value of an asset is the price at which the asset could be sold in an orderly transaction between unrelated, knowledgeable and willing parties able to engage in the transaction. A liability’s fair value is defined as the amount that would be paid to transfer the

PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

liability to a new obliger in a transaction between such parties, not the amount that would be paid to settle the liability with the creditor.

The Company has established a three-tier fair value hierarchy, which prioritizes the inputs used in measuring and revaluing fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. The Company was not required to revalue any assets or liabilities utilizing Level 1 or Level 3 inputs at the balance sheet dates. The Company's Level 2 assets and liabilities revalued at the balance sheet dates, on a recurring basis, primarily included cash flow hedges (interest rate swaps and cross-currency interest rate swaps) and forward foreign exchange contracts. In addition, the Company utilizes Level 2 inputs in determining the fair value of long-term debt. The Company has elected not to revalue long-term debt because this debt will be settled at the carrying value and not at the fair market value. The Company did not make any significant transfers in and out of Level 1 and Level 2 fair value tiers during the periods reported on herein.

Non-financial assets and liabilities are revalued and recognized at fair value subsequent to initial recognition when there is evidence of impairment. For the periods reported, no impairment of such non-financial assets was recorded.

The disclosure of fair value of certain financial assets and liabilities recorded at cost is as follows:

Cash and cash equivalents: The carrying value approximates fair value due to the short maturity of these instruments.

Short-term restricted cash: The carrying value approximates fair value due to the short maturity of these instruments.

Long-term restricted cash: Long-term restricted cash primarily consists of auto renewable 3-12 month certificates of deposit, which are held as collateral on our long-term debt. The carrying value approximates fair value due to the short maturity of the underlying certificates of deposit.

Accounts receivable: The carrying value approximates fair value due to the short maturity of these accounts.

Short-term debt: The carrying value approximates fair value due to the short maturity of these instruments.

Long-term debt: The fair value of debt is generally measured using a discounted cash flow analysis based on current market interest rates for similar types of financial instruments. These inputs are not quoted prices in active markets but they are either directly or indirectly observable; therefore, they are classified as Level 2 inputs. The carrying value and fair value of the Company’s debt as of February 28, 2015 and August 31, 2014 is as follows (in thousands):



	February 28, 2015				August 31, 2014
	Carrying Value		Fair Value		Carrying Value		Fair Value
Long-term debt, including current portion	$	105,120	$	105,600	$	91,439	$	92,893

Derivatives Instruments and Hedging Activities - The Company uses derivative financial instruments for hedging and non-trading purposes to manage its exposure to changes in interest and currency exchange rates. In using derivative financial instruments for the purpose of hedging the Company’s exposure to interest and currency exchange rate risks, the contractual terms of a hedged instrument closely mirror those of the hedged item, providing a high degree of risk reduction and correlation. Contracts that are effective at meeting the risk reduction and correlation criteria (effective hedge) are recorded using hedge accounting. If a derivative financial instrument is an effective hedge, changes in the fair value of the instrument will be offset in accumulated other comprehensive income (loss) until the hedged item completes its contractual term. If any portion of the hedge is deemed ineffective, the change in fair value of the hedged assets or liabilities will be immediately recognized in earnings during the period. Instruments that do not meet the criteria for hedge accounting, or contracts for which the Company has not elected hedge accounting, are valued at fair value with unrealized gains or losses reported in earnings during the period of the change. Valuation techniques utilized in the fair value measurement of assets and liabilities presented on the Company’s consolidated balance sheets were not changed from previous practice during the reporting period. The Company seeks to manage counterparty risk associated

PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

with these contracts by limiting transactions to counterparties with which the Company has an established banking relationship. There can be no assurance, however, that this practice effectively mitigates counterparty risk.

Cash Flow Instruments. The Company is a party to receive floating interest rate, pay fixed-rate interest rate swaps to hedge the interest rate risk of certain U.S. dollar denominated debt within its international subsidiaries. The swaps are designated as cash flow hedges of interest expense risk. These instruments are considered effective hedges and are recorded using hedge accounting. The Company is also a party to receive variable interest rate, pay fixed interest rate cross-currency interest rate swaps to hedge the interest rate and currency exposure associated with the expected payments of principal and interest of U.S. denominated debt within its international subsidiaries whose functional currency is other than the U.S dollar. The swaps are designated as cash flow hedges of the currency risk related to payments on the U.S. denominated debt. These instruments are also considered to be effective hedges and are recorded using hedge accounting. Under cash flow hedging, the effective portion of the fair value of the derivative, calculated as the net present value of the future cash flows, is deferred on the consolidated balance sheets in accumulated other comprehensive loss. If any portion of an interest rate swap is determined to be an ineffective hedge, the gains or losses from changes in fair value would be recorded directly in the consolidated statements of income. Amounts recorded in accumulated other comprehensive loss are released to earnings in the same period that the hedged transaction impacts consolidated earnings. See Note 9 - Derivative Instruments and Hedging Activities for information on the fair value of interest rate swaps and cross-currency interest rate swaps as of February 28, 2015 and August 31, 2014.

Fair Value Instruments. The Company is exposed to foreign-currency exchange rate fluctuations in the normal course of business. The Company is also exposed to foreign-currency exchange rate fluctuations on U.S. dollar denominated liabilities within its international subsidiaries whose functional currency is other than the U.S. dollar. The Company manages these fluctuations, in part, through the use of non-deliverable forward foreign-exchange contracts that are intended to offset changes in cash flow attributable to currency exchange movements. The contracts are intended primarily to economically address exposure to U.S. dollar merchandise inventory expenditures made by the Company’s international subsidiaries whose functional currency is other than the U.S. dollar. Currently, these contracts are treated for accounting purposes as fair value instruments and do not qualify for derivative hedge accounting, and as such the Company does not apply derivative hedge accounting to record these transactions. As a result, these contracts are valued at fair value with unrealized gains or losses reported in earnings during the period of the change. The Company seeks to mitigate foreign-currency exchange-rate risk with the use of these contracts and does not intend to engage in speculative transactions. These contracts do not contain any credit-risk-related contingent features and are limited to less than one year in duration. See Note 9 - Derivative Instruments and Hedging Activities for information on the fair value of open, unsettled forward foreign-exchange contracts as of February 28, 2015 and August 31, 2014.

The following tables summarize financial assets and liabilities measured and recorded at fair value on a recurring basis in the Company’s consolidated balance sheet as of February 28, 2015 and August 31, 2014 (in thousands) for derivatives that qualify for hedge accounting:



Assets and Liabilities as of February 28, 2015	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)		Total
Other non-current assets - (Cross-currency interest rate swaps)	—		6,996			—		6,996
Other long-term liabilities – (Interest rate swaps)	—		(340		)	—		(340		)
Other long-term liabilities – (Cross-currency interest rate swaps)	—		(246		)	—		(246		)
Total	$	—	$	6,410		$	—	$	6,410

PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)



Assets and Liabilities as of August 31, 2014	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Prepaid expenses and other current assets (Cross-currency interest rate swaps)	$	—	$	495	$	—	$	495
Other non-current assets - (Cross-currency interest rate swaps)	—		970		—		970
Other non-current assets - (Interest rate swaps)	—		125		—		125
Total	$	—	$	1,590	$	—	$	1,590



Assets and Liabilities as of February 28, 2015	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Prepaid expenses and other current assets (Foreign currency forward contracts)	$	—	$	1,064	$	—	$	1,064
Other accrued expenses (Foreign currency forward contracts)	—		—		—		—
Net fair value of derivatives designated as hedging instruments that do not qualify for hedge accounting	$	—	$	1,064	$	—	$	1,064



Assets and Liabilities as of August 31, 2014	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)		Total
Prepaid expenses and other current assets (Foreign currency forward contracts)	$	—	$	—		$	—	$	—
Other accrued expenses (Foreign currency forward contracts)	—		(14		)	—		(14		)
Net fair value of derivatives designated as hedging instruments that do not qualify for hedge accounting	$	—	$	(14	)	$	—	$	(14	)

Goodwill – The table below presents goodwill resulting from certain business combinations as of February 28, 2015 and August 31, 2014 (in thousands). The change in goodwill is a result of foreign exchange translation losses.



	February 28, 2015		August 31, 2014		Change
Goodwill	$	36,069	$	36,108	$	(39	)

PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The Company reviews goodwill at the entity level for impairment. The Company first reviews qualitative factors for each reporting unit, in determining if an annual goodwill test is required. If the Company's review of qualitative factors indicates a requirement for a test of goodwill impairment, the Company then will assess whether the carrying amount of a reporting unit is greater than zero and exceeds its fair value established during the Company's prior test of goodwill impairment ("established fair value"). If the carrying amount of a reporting unit at the entity level is greater than zero and its established fair value exceeds its carrying amount, goodwill of the reporting unit is considered not impaired. If either the carrying amount of the reporting unit is not greater than zero or if the carrying amount of the entity exceeds its established fair value, the Company performs a second test to determine whether goodwill has been impaired and to calculate the amount of that impairment.

Revenue Recognition – The Company recognizes merchandise sales revenue when title passes to the customer. Membership income represents annual membership fees paid by the Company’s warehouse club members, which are recognized ratably over the 12-month term of the membership. Membership refunds are prorated based on the remaining term of the membership; accordingly, no refund reserve is required to be established for the periods presented. The Company recognizes and presents revenue-producing transactions on a net of value added/sales tax basis.

The Company began offering Platinum memberships in Costa Rica during fiscal year 2013, which provides members with a 2% rebate on most items, up to an annual maximum of $500.00. Platinum members can apply this rebate to future purchases at the warehouse club at the end of the annual membership period. The Company records this 2% rebate as a reduction of revenue at the time of the sales transaction. Accordingly, the Company has reduced warehouse sales and has accrued a liability within other accrued expenses. The rebate expires within six months of the membership renewal date. However, the Company has determined that in the absence of relevant historical experience, the Company is not able to make a reasonable estimate of rebate redemptions and accordingly has assumed a 100% redemption rate. The Company periodically reviews expired unused rebates outstanding, and the expired unused rebates are recognized as Revenues: Other income on the consolidated statements of income.

The Company recognizes gift certificate sales revenue when the certificates are redeemed. The outstanding gift certificates are reflected as other accrued expenses in the consolidated balance sheets. These gift certificates generally have a one-year stated expiration date from the date of issuance. However, the absence of a large volume of transactions for gift certificates impairs the Company's ability to make a reasonable estimate of the redemption levels for gift certificates. Therefore, the Company assumes a 100% redemption rate that is the equivalent of no breakage prior to expiration of the gift certificate. The Company periodically reviews unredeemed outstanding gift certificates, and the gift certificates that have expired are recognized as Revenues: Other income on the consolidated statements of income.

Operating leases, where the Company is the lessor, with lease payments that have fixed and determinable rent increases are recognized as revenue on a straight-line basis over the expected lease term. The Company also accounts in its straight-line computation for the effect of any "rental holidays." Contingent rental revenue is recognized as the contingent rent becomes due per the individual lease agreements.

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

Vendor consideration consists primarily of volume rebates, time-limited product promotions, slotting fees, demonstration reimbursements and prompt payment discounts. Volume rebates that are not threshold-based are incorporated into the unit cost of merchandise reducing the inventory cost and cost of goods sold. Volume rebates that are threshold-based are recorded as a reduction to cost of good sold when the Company achieves established purchase levels that are confirmed by the vendor in writing or upon receipt of funds. On a quarterly basis, the Company calculates the amount of rebates recorded in cost of goods sold that relates to inventory on hand and this amount is reclassified as a reduction to inventory. Product promotions are generally linked to coupons that provide for reimbursement to the Company from vendor rebates for the product being promoted. Slotting fees are related to consideration received by the Company from vendors for preferential "end cap" placement of the vendor's products within the warehouse club. Demonstration reimbursements are related to consideration received by the Company from vendors for the in-store promotion of the vendors' products. The Company records the reduction in cost of goods sold on a transactional basis for

PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

these programs. Prompt payment discounts are taken in substantially all cases, and therefore, are applied directly to reduce the acquisition cost of the related inventory, with the resulting effect recorded to cost of goods sold when the inventory is sold.

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

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

Asset Impairment Costs – The Company periodically evaluates its long-lived assets for indicators of impairment. Management's judgments are based on market and operational conditions at the time of the evaluation and can include management's best estimate of future business activity. These periodic evaluations could cause management to conclude that impairment factors exist, requiring an adjustment of these assets to their then-current fair value. Future business conditions and/or activity could differ materially from the projections made by management causing the need for additional impairment charges.

Contingencies and Litigation – The Company records and reserves for loss contingencies if (a) information available prior to issuance of the consolidated financial statements indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the consolidated financial statements and (b) the amount of loss can be reasonably estimated. If one or both criteria for accrual are not met, but there is at least a reasonable possibility that a loss will occur, the Company does not record and reserve for a loss contingency but describes the contingency within a note and provides detail, when possible, of the estimated potential loss or range of loss. If an estimate cannot be made, a statement to that effect is made.

Foreign Currency Translation – The assets and liabilities of the Company’s foreign operations are translated to U.S. dollars when the functional currency in the Company’s international subsidiaries is the local currency and not U.S. dollars. Assets and liabilities of these foreign subsidiaries are translated to U.S. dollars at the exchange rate on the balance sheet date, and revenue, costs and expenses are translated at average rates of exchange in effect during the period. The corresponding translation gains and losses are recorded as a component of accumulated other comprehensive income or loss. These adjustments will affect net income upon the sale or liquidation of the underlying investment. Monetary assets and liabilities denominated in currencies other than the functional currency of the respective entity (primarily U.S. dollars) are revalued to the functional currency using the exchange rate on the balance sheet date. These foreign exchange transaction gains (losses), including transactions recorded involving these monetary assets and liabilities, are recorded as Other income (expense) in the consolidated statements of income. The following table summarizes the amounts recorded for the three and six month period ending February 28, 2015 and 2014 (in thousands):



	Three Months Ended					Six Months Ended
	February 28, 2015			February 28, 2014		February 28, 2015			February 28, 2014
Currency gain (loss)	$	(1,659	)	$	712	$	(4,291	)	$	1,023

Income Taxes –The Company accounts for income taxes using the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributed to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences and carry-forwards are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is established when necessary to reduce deferred tax assets to amounts expected to be realized.

The Company and its subsidiaries are required to file federal and state income tax returns in the United States and various other tax returns in foreign jurisdictions. The preparation of these tax returns requires the Company to interpret the applicable tax laws and regulations in effect in such jurisdictions, which could affect the amount of tax paid by the Company. The Company, in consultation with its tax advisors, bases its tax returns on interpretations that are believed to be reasonable under the circumstances. The tax returns, however, are subject to routine reviews by the various federal, state and foreign taxing authorities in the jurisdictions in which the Company or one of its subsidiaries files tax returns. As part of these reviews, a taxing authority may disagree with

PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

respect to the income tax positions taken by the Company (“uncertain tax positions”) and, therefore, require the Company or one of its subsidiaries to pay additional taxes.

The Company accrues an amount for its estimate of probable additional income tax liability. In certain cases, the impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant tax authority. An uncertain income tax position will not be recognized if it has less than 50% likelihood of being sustained. This requires significant judgment, the use of estimates, and the interpretation and application of complex tax laws. When facts and circumstances change, the Company reassesses these probabilities and records any changes in the consolidated financial statements as appropriate. There were no material changes in the Company's uncertain income tax positions for the periods ended on February 28, 2015 and August 31, 2014. However, during the fiscal year 2014, the Company was required to make payments of $4.2 million to the governments in two countries with respect to various income tax cases that it is currently appealing, but in which the Company believes it will eventually prevail. These amounts have been recorded in the balance sheet as Other non-current assets, as the Company considers this a payment on account and expects to get a refund thereof upon eventually prevailing on these cases, but is unsure of the timing thereof. Furthermore, during the first quarter of fiscal year 2015, one of the Company’s subsidiaries received provisional assessments claiming $2.6 million of taxes, penalties and interest related to withholding taxes on certain charges for services rendered by the Company. In addition, this subsidiary received provisional assessments totaling $5.2 million for lack of deductibility of the underlying service charges due to the lack of withholding. Based on the Company's interpretation of local law, rulings and jurisprudence (including Supreme Court precedents with respect to the deductibility assessment), the Company expects to prevail in both instances and has not recorded a provision for these assessments.

The Company has not provided for U.S. deferred taxes on cumulative non-U.S. undistributed earnings as such earnings are deemed by the Company to be indefinitely reinvested. It is not practicable to determine the U.S. federal income tax liability that would be associated with such earnings because of the complexity of the computation.

The following tables present a reconciliation of the effective tax rate for the periods presented:



	Three Months Ended				Six Months Ended
	February 28, 2015		February 28, 2014		February 28, 2015		February 28, 2014
Federal tax provision at statutory rates	35.0	%	35.0	%	35.0	%	35.0	%
State taxes, net of federal benefit	0.3		0.2		0.4		0.3
Differences in foreign tax rates	(5.0	)	(5.3	)	(4.8	)	(4.8	)
Permanent items and other adjustments	3.8		(1.7	)	3.5		(0.2	)
Increase (decrease) in foreign valuation allowance	1.2		—		2.0		(0.1	)
Provision for income taxes	35.3	%	28.2	%	36.1	%	30.2	%

The variance in the effective tax rate for the three-month period ended on February 28, 2015 compared to the same period of the prior year was primarily attributable to the unfavorable impact of 4.2% resulting from an increased taxable loss incurred in the Company’s Colombia subsidiary for which no tax benefit was recognized net of adjustment to valuation allowance and the non-recurrence of a favorable impact of 2.0% in the prior period from the tax effect of changes in foreign currency value.

The variance in the effective tax rate for the six month period ended February 28, 2015 compared to the prior year was primarily attributable to the unfavorable impact of 4.7% resulting from an increased taxable loss incurred in the Company’s Colombia subsidiary for which no tax benefit was recognized net of adjustment to valuation allowance and the non-recurrence of a favorable impact of 1.1% in the prior period from the tax effect of changes in foreign currency value.

PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Recent Accounting Pronouncements

FASB ASC 606 ASU 2014-09 - Revenue from contracts with customers.

In May 2014, the FASB issued amended guidance on contracts with customers to transfer goods or services or contracts for the transfer of nonfinancial assets, unless those contracts are within the scope of other standards (e.g., insurance contracts or lease contracts). The guidance requires an entity to recognize revenue on contracts with customers relating to the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance requires that an entity depict the consideration by applying the following steps:

Step 1: Identify the contract(s) with a customer.
Step 2: Identify the performance obligations in the contract.
Step 3: Determine the transaction price.
Step 4: Allocate the transaction price to the performance obligations in the contract.
Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.

The amendments in this ASU are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. This amendment is to be either retrospectively adopted to each prior reporting period presented or retrospectively with the cumulative effect of initially applying this ASU recognized at the date of initial application. Adoption of this guidance is not expected to have a material impact on the Company's consolidated financial statements.

PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 3 – PROPERTY AND EQUIPMENT

Property and equipment are stated at historical cost. The historical cost of acquiring an asset includes the costs incurred to bring it to the condition and location necessary for its intended use. Depreciation is computed on the straight-line basis over the estimated useful lives of the assets. The useful life of fixtures and equipment ranges from three to 15 years and that of certain components of building improvements and buildings from 10 to 25 years. Leasehold improvements are amortized over the shorter of the life of the improvement or the expected term of the lease. In some locations, leasehold improvements are amortized over a period longer than the initial lease term where management believes it is reasonably assured that the renewal option in the underlying lease will be exercised as an economic penalty may be incurred if the option is not exercised. The sale or purchase of property and equipment is recognized upon legal transfer of property. For property and equipment sales, if any long-term notes are carried by the Company as part of the sales terms, the sale is reflected at the net present value of current and future cash streams.

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



	February 28, 2015			August 31, 2014
Land	$	126,658		$	124,082
Building and improvements	274,401			244,485
Fixtures and equipment	156,857			148,143
Construction in progress	24,068			55,664
Total property and equipment, historical cost	581,984			572,374
Less: accumulated depreciation	(157,624		)	(146,049		)
Property and equipment, net	$	424,360		$	426,325

Depreciation and amortization expense (in thousands):



	Three Months Ended February 28,				Six Months Ended February 28,
	2015		2014		2015		2014
Depreciation and amortization expense	$	8,636	$	7,139	$	16,433	$	13,793

The Company capitalizes interest on expenditures for qualifying assets over a period that covers the duration of the activities required to get the asset ready for its intended use, provided that expenditures for the asset have been made and interest cost is being incurred. Interest capitalization continues as long as those activities and the incurrence of interest cost continues. The amount capitalized in an accounting period is determined by applying the capitalization rate (average interest rate) to the average amount of accumulated expenditures for the qualifying asset during the period. The capitalization rates are based on the interest rates applicable to borrowings outstanding during the period.

Total interest capitalized (in thousands):



	As of February 28, 2015		As of August 31, 2014
Total interest capitalized	$	7,106	$	6,542

Total interest capitalized (in thousands):



	Three Months Ended February 28,				Six Months Ended February 28,
	2015		2014		2015		2014
Interest capitalized	$	147	$	194	$	763	$	493

The Company recorded within accounts payable and other accrued expenses approximately $100,000 and $1.6 million, respectively, as of February 28, 2015 and $2.9 million and $1.2 million, respectively, as of August 31, 2014 of liabilities related to the acquisition and/or construction of property and equipment.

PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 4 – EARNINGS PER SHARE

The Company presents basic and diluted net income per share using the two-class method. The two-class method is an earnings allocation formula that treats a participating security as having rights to earnings that otherwise would have been available to common stockholders and that determines basic net income per share for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings that would have been available to common stockholders. A participating security is defined as a security that may participate in undistributed earnings with common stock. The Company’s capital structure includes securities that participate with common stock on a one-for-one basis for distribution of dividends. These are the restricted stock awards authorized within the 2002 and 2013 Equity Participation Plans/Equity Incentive Awards Plan of the Company and restricted stock units authorized within the 2001, 2002 and 2013 Equity Participation Plans/Equity Incentive Awards Plan. The Company determines the diluted net income per share by using the more dilutive of the two class-method or the treasury stock method and by including the basic weighted average of outstanding stock options in the calculation of diluted net income per share under the two-class method and including all potential common shares assumed issued in the calculation of diluted net income per share under the treasury stock method.

The following table sets forth the computation of net income per share for the three and six months ended February 28, 2015 and 2014 (in thousands, except per share amounts):



	Three Months Ended February 28,						Six Months Ended February 28,
	2015			2014			2015			2014
Net income	$	24,835		$	28,278		$	45,482		$	49,710
Less: Allocation of income to unvested stockholders	(259		)	(504		)	(580		)	(932		)
Net earnings available to common stockholders	$	24,576		$	27,774		$	44,902		$	48,778
Basic weighted average shares outstanding	29,827			29,724			29,809			29,707
Add dilutive effect of stock options (two-class method)	6			12			7			12
Diluted average shares outstanding	29,833			29,736			29,816			29,719
Basic net income per share	$	0.82		$	0.93		$	1.50		$	1.64
Diluted net income per share	$	0.82		$	0.93		$	1.50		$	1.64

NOTE 5 – STOCKHOLDERS’ EQUITY

Dividends

The following table summarizes the dividends declared and paid during fiscal year 2015 and 2014.

First Payment

Second Payment

Declared

Amount

Record Date

Date Paid

Date Payable

Amount

Record Date

Date Paid

Date Payable

Amount

2/4/15

0.70

2/13/15

2/27/15

N/A

0.35

8/14/15

N/A

8/31/15

0.35

1/23/14

0.70

2/14/14

2/28/14

N/A

0.35

8/15/14

8/29/14

N/A

0.35

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

PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Comprehensive Income and Accumulated Other Comprehensive Loss

The following tables disclose the effects of each component of other comprehensive income (loss), net of tax (in thousands):



	Six Months Ended February 28, 2015
	Foreign currency translation adjustments			Defined benefit pension plans			Derivative Instruments		Total
Beginning balance, September 1, 2014	$	(50,410	)	$	113		$	1,011	$	(49,286	)
Other comprehensive income (loss)	(22,557		)	(24		)	3,468		(19,113		)
Ending balance, February 28, 2015	$	(72,967	)	$	89		$	4,479	$	(68,399	)



	Six Months Ended February 28, 2014
	Foreign currency translation adjustments			Defined benefit pension plans			Derivative Instruments		Total
Beginning balance, September 1, 2013	$	(42,321	)	$	(152	)	$	998	$	(41,475	)
Other comprehensive income (loss)	(12,372		)	11			922		(11,439		)
Ending balance, February 28, 2014	$	(54,693	)	$	(141	)	$	1,920	$	(52,914	)



	Twelve Months Ended August 31, 2014
	Foreign currency translation adjustments			Defined benefit pension plans				Derivative Instruments				Total
Beginning balance, September 1, 2013	$	(42,321	)	$	(152	)		$	998			$	(41,475	)
Other comprehensive income (loss)	(8,089		)	260				101				(7,728		)
Amounts reclassified from accumulated other comprehensive income (loss)	—			5			⁽²⁾	(88		)	^{(1) (3)}	(83		)
Ending balance, August 31, 2014	$	(50,410	)	$	113			$	1,011			$	(49,286	)


⁽¹⁾	See Note 9 - Derivative Instruments and Hedging Activities.


⁽²⁾	Amounts reclassified from accumulated other comprehensive income (loss) related to the minimum pension liability are included in warehouse club operations in the Company's Consolidated Statements of Income.


⁽³⁾	Amounts reclassified from accumulated other comprehensive income (loss) for settlement of derivative instruments are included in other income (expense), net in the Company's Consolidated Statements of Income.

Retained Earnings Not Available for Distribution

The following table summarizes retained earnings designated as legal reserves of various subsidiaries which cannot be distributed as dividends to PriceSmart, Inc. according to applicable statutory regulations (in thousands):



	February 28, 2015		August 31, 2014
Retained earnings not available for distribution	$	4,916	$	4,556

PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 6 – STOCK BASED COMPENSATION

The three types of equity awards offered by the Company are stock options (“options”), restricted stock awards (“RSAs”) and restricted stock units (“RSUs”). Compensation related to options is accounted for by applying the valuation technique based on the Black-Scholes model. Compensation related to RSAs and RSUs is based on the fair market value at the time of grant with the application of an estimated forfeiture rate. The Company recognizes the compensation cost related to these awards over the requisite service period as determined by the grant, amortized ratably or on a straight line basis over the life of the grant. The Company utilizes “modified grant-date accounting” for true-ups due to actual forfeitures at the vesting dates. The Company records the tax savings resulting from tax deductions in excess of expense for stock-based compensation as additional paid-in capital and the tax deficiency resulting from stock-based compensation in excess of the related tax deduction as a reduction in paid-in capital, based on the Tax Law Ordering method. In addition, the Company reflects the tax savings (deficiency) resulting from the taxation of stock-based compensation as a financing cash flow in its consolidated statement of cash flows, rather than as an operating cash flow.

RSAs have the same cash dividend and voting rights as other common stock and are considered to be currently issued and outstanding shares of common stock. Shares of common stock underlying RSUs are not issued nor outstanding until the RSUs vest and RSUs do not have the same dividend and voting rights as common stock. However, all outstanding RSUs have accompanying dividend equivalents, requiring payment to the employees and directors with unvested RSUs of amounts equal to the dividend they would have received had the shares of common stock underlying the RSUs been actually issued and outstanding. Payments of dividend equivalents to employees are recorded as compensation expense.

The Company adopted the 2013 Equity Incentive Award Plan (the "2013 Plan") for the benefit of its eligible employees, consultants and non-employee directors on January 22, 2013. The 2013 Plan provides for awards covering up to (1) 600,000 shares of common stock plus (2) the number of shares that remained available for issuance as of January 22, 2013 under three equity participation plans previously maintained by the Company. The number of shares reserved for issuance under the 2013 Plan increases during the term of the plan by the number of shares relating to awards outstanding under the 2013 Plan or any of the prior plans that expire, or are forfeited, terminated, canceled or repurchased, or are settled in cash in lieu of shares and decreases due to award releases or option exercises. As of October 31, 2014, no more than an aggregate of 1,332,540 shares of the Company’s common stock will be issued under the 2013 Plan. The following table summarizes the shares authorized and shares available for future grants:



		Shares available to grant
	Shares authorized for issuance as of October 31, 2014 (including shares originally authorized for issuance under the prior plans)	February 28, 2015	August 31, 2014
2013 Plan	888,353	854,864	821,124

The following table summarizes the components of the stock-based compensation expense (in thousands), which are included in general and administrative expense and warehouse club operations in the consolidated statements of income:



	Three Months Ended February 28,				Six Months Ended February 28,
	2015		2014		2015		2014
Options granted to directors	$	9	$	7	$	37	$	37
Restricted stock awards	1,454		1,634		2,703		2,783
Restricted stock units	321		250		600		501
Stock-based compensation expense	$	1,784	$	1,891	$	3,340	$	3,321

PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following table summarizes other information related to stock-based compensation:



	February 28,
	2015		2014
Remaining unrecognized compensation cost (in thousands)	$	18,045	$	23,520
Weighted average period of time over which this cost will be recognized (years)	6		6
Excess tax benefit (deficiency) on stock-based compensation (in thousands)	$	1,457	$	1,345

The Company began issuing restricted stock awards in fiscal year 2006 and restricted stock units in fiscal year 2008. The restricted stock awards and units vest over a five to ten year period, and the unvested portion of the award is forfeited if the employee or non-employee director leaves the Company before the vesting period is completed. Restricted stock awards and units activity for the period was as follows:



	Six Months Ended February 28,
	2015		2014
Grants outstanding at beginning of period	488,416		623,424
Granted	16,911		8,316
Forfeited	(720	)	(1,732	)
Vested	(136,779	)	(135,371	)
Grants outstanding at end of period	367,828		494,637

The following table summarizes the weighted average per share grant date fair value for restricted stock awards and units for the period:



	Six Months Ended February 28,
Weighted Average Grant Date Fair Value	2015		2014
Restricted stock awards and units granted	$	89.85	$	112.37
Restricted stock awards and units vested	$	44.21	$	39.71
Restricted stock awards and units forfeited	$	40.40	$	49.37

The following table summarizes the total fair market value of restricted stock awards and units vested for the period (in thousands):



	Six Months Ended February 28,
	2015		2013
Total fair market value of restricted stock awards and units vested	$	12,166	$	12,749

PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

At the vesting dates of restricted stock awards, the Company repurchases shares at the prior day's closing price per share, with the funds used to pay the employees' minimum statutory tax withholding requirements. The Company expects to continue this practice going forward. The following table summarizes this activity during the period:



	Six Months Ended February 28,
	2015		2014
Shares repurchased	49,931		48,291
Cost of repurchase of shares (in thousands)	$	4,441	$	4,548

The Company reissues treasury shares as part of its stock-based compensation programs. The following table summarizes the treasury shares reissued:



	Six Months Ended February 28,
	2015	2014
Reissued treasury shares	—	—

The following table summarizes the stock options outstanding:



	February 28, 2015	August 31, 2014
Stock options outstanding	20,000	23,000

Due to the substantial shift from the use of stock options to restricted stock awards and units, the Company believes stock option activity is no longer significant and that any further disclosure on options is not necessary.

PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

NOTE 7 – COMMITMENTS AND CONTINGENCIES

Legal Proceedings

From time to time, the Company and its subsidiaries are subject to legal proceedings, claims and litigation arising in the ordinary course of business and property ownership. The Company evaluates such matters on a case by case basis, and vigorously contests any such legal proceedings or claims which the Company believes are without merit. The Company establishes an accrual for legal proceedings if and when those matters reach a stage where they present loss contingencies that are both probable and reasonably estimable. In such cases, there may be a possible exposure to loss in excess of any amounts accrued. The Company monitors those matters for developments that would affect the likelihood of a loss and the accrued amount, if any, thereof, and adjusts the amount as appropriate. If the loss contingency at issue is not both probable and reasonably estimable, the Company does not establish an accrual, but will continue to monitor the matter for developments that will make the loss contingency both probable and reasonably estimable. If it is at least a reasonable possibility that a material loss will occur, the Company will provide disclosure regarding the contingency. The Company believes that the final disposition of the pending legal proceedings, claims and litigation will not have a material adverse effect on its financial position, results of operations or liquidity. It is possible, however, that the Company's future results of operations for a particular quarter or fiscal year could be impacted by changes in circumstances relating to such matters.

Taxes

The Company is required to file federal and state tax returns in the United States and various other tax returns in foreign jurisdictions. The preparation of these tax returns requires the Company to interpret the applicable tax laws and regulations in effect in such jurisdictions, which could affect the amount of tax paid by the Company. The Company, in consultation with its tax advisors, bases its tax returns on interpretations that are believed to be reasonable under the circumstances. The tax returns, however, are subject to routine reviews by the various taxing authorities in the jurisdictions in which the Company files its returns. As part of these reviews, a taxing authority may disagree with respect to the interpretations the Company used to calculate its tax liability and therefore require the Company to pay additional taxes.

In evaluating the exposure associated with various non-income tax filing positions, the Company accrues for probable and estimable exposures for non-income tax related tax contingencies. As of February 28, 2015 and August 31, 2014, the Company had recorded within other accrued expenses a total of $3.0 million and $3.1 million for various non-income tax related tax contingencies.

While the Company believes the recorded liabilities are adequate, there are inherent limitations in projecting the outcome of litigation, in estimating probable additional income tax liability taking into account uncertain tax positions and in evaluating the probable additional tax associated with various non-income tax filing positions. As such, the Company is unable to make a reasonable estimate of the sensitivity to change of estimates affecting its recorded liabilities. As additional information becomes available, the Company assesses the potential liability and revises its estimates as appropriate.

During fiscal year 2014, the Company was required to make tax payments with respect to various income tax cases that it is currently appealing, and during the first quarter of fiscal year 2015, the Company received provisional tax assessments with respect to deductibility and withholdings. These payments and assessments are discussed in further detail within Note 2, Income Taxes.

PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Other Commitments

The Company is committed under non-cancelable operating leases for the rental of facilities and land. Future minimum lease commitments for facilities under these leases with an initial term in excess of one year are as follows (in thousands):



Years ended February 28,	Open Locations⁽¹⁾
2016	$	7,309
2017	9,785
2018	10,355
2019	10,326
2020	10,260
Thereafter	81,442
Total	$	129,477


⁽¹⁾	Operating lease obligations have been reduced by approximately $372,000 to reflect sub-lease income. Certain obligations under leasing arrangements are collateralized by the underlying asset being leased.

The Company is also committed to non-cancelable construction services obligations for various warehouse club developments and expansions. As of February 28, 2015 the Company has approximately $4.5 million in contractual obligations for construction services not yet rendered.

The Company has entered into land purchase option agreements that have not been recorded as commitments, for which the Company has recorded within the balance sheet approximately $1.6 million in restricted cash deposits and prepaid expenses. The land purchase option agreements can be canceled at the sole option of the Company. The Company does not have a time table of when or if it will exercise these land purchase options, due to the uncertainty related to the completion of the Company's due diligence review. The Company's due diligence review includes evaluations of the legal status of the property, the zoning and permitting issues related to acquiring approval for the construction and operation of a warehouse club and any other issues related to the property itself that could render the property unsuitable or limit the property's economic viability as a warehouse club site. If the purchase option agreements are all exercised, the cash use would be approximately $21.4 million.

See Note 10 - Unconsolidated Affiliates for a description of additional capital contributions that may be required in connection with joint ventures to develop commercial centers adjacent to PriceSmart warehouse clubs in Panama and Costa Rica.

The Company contracts for distribution center services in Mexico. The contract for this distribution center's services was renewed on December 31, 2015 for an additional three years, with the applicable fees and rates to be reviewed at the beginning of each calendar year. Future minimum service commitments related to this contract through the end of the contract term is approximately $414,000.

NOTE 8 – DEBT

Short-term borrowings consist of lines of credit which are secured by certain assets of the Company and its subsidiaries and in some cases are guaranteed by the Company as summarized below (in thousands):



			Facilities Used
	Total Amount of Facilities		Short-term Borrowings		Letters of Credit		Facilities Available		Weighted average interest rate
February 28, 2015	$	59,387	$	4,470	$	380	$	54,537	5.86	%
August 31, 2014	$	61,869	$	—	$	436	$	61,433	N/A

PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

As of February 28, 2015, we had approximately $40.0 million of short-term facilities in the U.S. that require us to comply with certain quarterly financial covenants, which include debt service and leverage ratios. As of February 28, 2015 and August 31, 2014, we were in compliance with respect to these covenants. Each of the facilities expires annually and is normally renewed.

The following table provides the changes in our long-term debt for the six months ended February 28, 2015:



(Amounts in millions)	Current Portion of Long-term debt			Long-term debt			Total
Balances as of August 31, 2014	$	11,848		$	79,591		$	91,439		⁽¹⁾
Proceeds from long-term debt incurred during the period:
Panama subsidiary	1,000			9,000			10,000
Honduras subsidiary	1,600			6,750			8,350
Colombia subsidiary	1,500			13,500			15,000
Trinidad subsidiary	907			2,720			3,627
Repayments of long-term debt:
Repayment of loan by Honduras subsidiary, originally entered into on January 12, 2012 with Scotiabank El Salvador, S.A.	(3,200		)	—			(3,200		)
Partial repayment of loan by Honduras subsidiary, originally entered into on March 7, 2014 with Banco de America Central Honduras, S.A.	—			(5,000		)	(5,000		)
Repayment of loan by Honduras subsidiary, originally entered into on March 6, 2010 with Banco del Pais, S.A.	(87		)	—			(87		)
Repayment of loan by Trinidad subsidiary, originally entered into on August 26, 2008 with Royal Bank of Trinidad and Tobago, Ltd.	(900		)	(2,325		)	(3,225		)
Regularly scheduled loan payments	(579		)	(4,567		)	(5,146		)
Reclassifications of long-term debt	2,850			(2,850		)	—
Translation adjustments on foreign-currency debt of subsidiaries whose functional currency is not the U.S. dollar ⁽²⁾	(147		)	(6,491		)	(6,638		)
Balances as of February 28, 2015	$	14,792		$	90,328		$	105,120		⁽³⁾


⁽¹⁾	The carrying amount cash assets assigned as collateral for this total was $24.6 million and the carrying amount on non-cash assets assigned as collateral for this total was $84.2 million.


⁽²⁾	These foreign currency translation adjustments are recorded within Other comprehensive income.


⁽³⁾	The carrying amount cash assets assigned as collateral for this total was $24.0 million and the carrying amount on non-cash assets assigned as collateral for this total was $103.5 million.

As of February 28, 2015, the Company had approximately $78.3 million of long-term loans in Trinidad, Panama, El Salvador, Honduras and Colombia that require these subsidiaries to comply with certain annual or quarterly financial covenants, which include debt service and leverage ratios. As of February 28, 2015, we were in compliance with all covenants or amended covenants.

As of August 31, 2014, we had approximately $62.5 million of long-term loans in Trinidad, Panama, El Salvador, Honduras and Colombia that require these subsidiaries to comply with certain annual or quarterly financial covenants, which include debt service and leverage ratios. As of August 31, 2014, we were in compliance with all covenants or amended covenants.

PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Annual maturities of long-term debt are as follows (in thousands):



Twelve months ended February 28,	Amount
2016	$	14,792
2017	29,679
2018	12,626
2019	12,176
2020	32,021
Thereafter	3,826
Total	$	105,120

NOTE 9 – DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

The Company is exposed to certain risks relating to its ongoing business operations. One risk managed by the Company using derivative instruments is interest rate risk. To manage interest rate exposure, the Company enters into hedge transactions (interest rate swaps) using derivative financial instruments. The objective of entering into interest rate swaps is to eliminate the variability of cash flows in the LIBOR interest payments associated with variable-rate loans over the life of the loans. As changes in interest rates impact the future cash flow of interest payments, the hedges provide a synthetic offset to interest rate movements.

In addition, the Company is exposed to foreign currency and interest rate cash flow exposure related to non-functional currency long-term debt of two of our wholly owned subsidiaries. To manage foreign currency and interest rate cash flow exposure, these subsidiaries enter into cross-currency interest rate swaps that convert their U.S. dollar denominated floating interest payments to functional currency fixed interest payments during the life of the hedging instrument. As changes in foreign exchange and interest rates impact the future cash flow of interest payments, the hedges are intended to offset changes in cash flows attributable to interest rate and foreign exchange movements.

These derivative instruments (cash flow hedging instruments) are designated and qualify as cash flow hedges, with the effective portion of the gain or loss on the derivative reported as a component of other comprehensive income (loss) and reclassified into earnings in the same period or periods during which the hedged transaction is determined to be ineffective. There were no such amounts recorded for ineffectiveness for the periods reported herein related to the interest rate or cross-currency interest rate swaps of long-term debt.

The Company is exposed to foreign-currency exchange-rate fluctuations in the normal course of business, particularly in the case of U.S. dollar denominated liabilities within its international subsidiaries whose functional currency is other than the U.S. dollar. The Company manages these fluctuations, in part, through the use of non-deliverable forward foreign-exchange contracts that are intended to offset changes in cash flow attributable to currency exchange movements. These contracts are intended primarily to economically address exposure to U.S. dollar merchandise inventory expenditures made by the Company’s international subsidiaries whose functional currency is other than the U.S. dollar. Currently, these contracts do not qualify for derivative hedge accounting. The Company seeks to mitigate foreign-currency exchange-rate risk with the use of these contracts and does not intend to engage in speculative transactions. These contracts do not contain any credit-risk-related contingent features.

Cash Flow Hedges

The Company formally documents the hedging relationships for its derivative instruments that qualify for hedge accounting. As of February 28, 2015, all of the Company’s interest rate swap and cross-currency interest rate swap derivative financial instruments are designated and qualify as cash flow hedges. The cross-currency interest rate swap agreements convert the Company's subsidiary's foreign currency United States dollar denominated floating interest payments on long-term debt to the functional currency fixed interest payments during the life of the hedging instrument. As changes in foreign exchange and interest rates impact the future cash flow of interest payments, the hedge is intended to offset changes in cash flows attributable to interest rate and foreign currency exchange movements. Various subsidiaries entered into interest rate swap agreements that fix the interest rate over the life of the underlying loans. These derivative financial instruments were also designated and qualified as cash flow hedges.

PRICESMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following table summarizes agreements for which the Company has recorded cash flow hedge accounting transactions during the six months ended February 28, 2015:

Subsidiary

Date Entered into

Derivative Financial Counter-party

Derivative Financial Instruments

Initial
US$ Notional Amount

Bank US$ loan Held with

Floating Leg (swap counter-party)

Fixed Rate for PSMT Subsidiary

Settlement Dates

Effective Period of swap

El Salvador

16-Dec-14

Bank of Nova Scotia ("Scotiabank")

Interest rate swap

4,000,000

Bank of Nova Scotia

Variable rate 30-day Libor plus 3.5%

4.78

29th day of each month beginning on December 29, 2014

December 01, 2014 - August 29, 2019

Colombia

10-Dec-14

Citibank, N.A. ("Citi")

Cross currency interest rate swap

15,000,000

Citibank, N.A.

Variable rate 3-month Libor plus 2.8%

8.25

4th day of March, June, Sept, Dec. beginning on March 4, 2015

December 4, 2014 - December 3, 2019

Panama

9-Dec-14

Bank of Nova Scotia ("Scotiabank")

Interest rate swap

10,000,000

Bank of Nova Scotia

Variable rate 30-day Libor plus 3.5%

5.159

28th day of each month beginning December 29, 2014

November 28, 2014 - November 29, 2019

Honduras