STOCK BASED COMPENSATION

6 Months Ended

Feb. 29, 2012

NOTE 6 – STOCK BASED COMPENSATION

The three types of equity awards offered by the Company are stock options (“options”), restricted stock awards (“RSA's”) and restricted stock units (“RSU's”). Compensation related to options is accounted for by applying the valuation technique based on the Black-Scholes model. Compensation related to RSA's and RSU's 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 as additional paid-in capital the tax savings resulting from tax deductions in excess of expense for stock-based compensation or a reduction in paid-in capital from the tax deficiency resulting from stock-based compensation in excess of the related tax deduction, 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 operating cash flows.

RSA's 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. RSU's are not issued nor outstanding until vested and do not have the cash dividend and voting rights of common stock. However, the Company has paid dividend equivalents to the employees with unvested RSU's equal to the dividend they would have received had the shares of common stock underlying the RSU's been actually issued and outstanding. The providing of dividend equivalents on RSU's is subject to the annual review and final determination by the board of directors at its discretion. Payments of dividend equivalents to employees are recorded as compensation expense.

The Company has adopted four stock option and equity participation plans for the benefit of its eligible employees, consultants and non-employee directors. The 1997 Stock Option Plan of PriceSmart, Inc. authorizes 700,000 shares of the Company's common stock for issuance. The Compensation Committee of the Board of Directors administers the 1997 Plan with respect to options granted to employees or consultants of the Company, and the full Board of Directors administers the Plan with respect to director options. The Company no longer grants options under the 1997 Plan. The 1998, 2001 and 2002 Equity Participation Plans of PriceSmart, Inc., as amended, authorize 2,350,000 shares of the Company’s common stock for issuance. Options granted under all four plans typically vest over five years and expire in six years. The 1998, 2001 and 2002 plans also allow restricted stock awards and restricted stock units which typically vest between five to ten years. As of February 29, 2012 and August 31, 2011, an aggregate of 222,719 and 553,042 shares, respectively, were available for future grants under the 1998, 2001 and 2002 Equity Participation Plans.

The following table summarizes the components of the stock-based compensation expense for first six months of fiscal years 2012 and 2011 (in thousands), which are included in general and administrative expense and warehouse club operations in the consolidated statements of income:

	Three Months Ended				Six Months Ended
	February 29, 2012		February 28, 2011		February 29, 2012		February 28, 2011
Options granted to directors	$	22	$	8	$	40	$	20
Restricted stock awards		1,263		988		2,131		1,885
Restricted stock units		101		37		181		59
Stock-based compensation expense	$	1,386	$	1,033	$	2,352	$	1,964

The following table summarizes various concepts related to stock-based compensation as of and for the the following months:

	Six Months Ended
	February 29, 2012		February 28, 2011
Remaining unrecognized compensation cost (in thousands)	$	26,988	$	10,100
Weighted average period of time over which this cost will be recognized (years)		8.26		3.45
Excess tax benefit (deficiency) on stock-based compensation (in thousands)	$	638	$	881

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 generally vest between five to ten years 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 six-months ended February, 2012 and year ended August 31, 2011 was as follows:

	Six Months Ended			Fiscal Year Ended
	February 29,			August 31,
	2012			2011
Grants outstanding at beginning of period		436,611			558,821
Granted		366,560			95,700
Forfeited		(5,006	)		(8,231	)
Vested		(111,625	)		(209,679	)
Grants outstanding at end of period		686,540			436,611

The following table summarizes the weighted average grant date fair value for restricted stock awards and units for first six months of fiscal years 2012 and 2011:

	Six Months Ended
Weighted Average Grant Date Fair Value	February 29, 2012		February 28, 2011
Restricted stock awards and units granted	$	68.25	$	40.40
Restricted stock awards and units vested	$	23.69	$	16.49
Restricted stock awards and units forfeited	$	30.42	$	23.18

The total fair market value of restricted stock awards and units vested during the six months ended February 29, 2012 and February 28, 2011 was approximately $7.5 million and $7.4 million, respectively.

At the vesting dates, 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 related to the vesting of restricted stock awards. During the six months ended February 29, 2012 and February 28, 2011, the Company repurchased 41,910 and 64,837 shares, respectively, of common stock from employees for approximately $2.8 million and $2.5 million, respectively, based on the stock repurchase price to cover the employees’ minimum statutory tax withholding requirements related to the vesting of restricted stock awards. The Company expects to continue this practice going forward.

The Company reissued treasury shares as part of its stock-based compensation programs. During the six months ended February 29, 2012 the Company reissued 196,850 treasury shares. No treasury shares were reissued during the six-month period ended February 28, 2011.

As of February 29, 2012 and August 31, 2011, the Company had 36,000 and 30,800 stock options outstanding under its stock plans, respectively. Stock-based compensation for options represented 1.7% and 1.4% of the total stock-based compensation for the six months ended February 29, 2012 and for fiscal year 2011, respectively. 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.