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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934. (Mark One)
/X/ Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [NO FEE REQUIRED] for the fiscal year ended
August 31, 1997.
/ / Transitional report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [NO FEE REQUIRED] for the transition period from
___________ to ____________.
COMMISSION FILE NUMBER: ______
PRICESMART, INC.
(Exact name of small business issuer in its charter)
DELAWARE 33-0628530
(State of other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
4649 Morena Blvd., San Diego, CA 92117
(Address of principal executive offices, Zip Code)
Registrant's telephone number, including area code: (619) 581-4530
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.0001 PAR VALUE
(Title of Class)
Indicate by check mark whether the issuer (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act during the
preceding 12 months, and (2) has been subject to such filing requirements for
the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K contained herein, and will not be contained, to the best of
the Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of November 14, 1997 was approximately $41,783,088.
As of November 14, 1997, 5,908,235 shares of Common Stock were outstanding.
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TABLE OF CONTENTS
PAGE
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Part I
Item 1. Business 3
Item 2. Properties 9
Item 3. Legal Proceedings 11
Item 4. Submission of Matters to a Vote of Security Holders 11
Part II
Item 5. Market for Common Stock and Related Stockholders Matters 12
Item 6. Selected Financial Data 13
Item 7. Management's Discussion and Analysis of Financial Condition and 14
Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 17
Item 8. Financial Statements 18
Item 9. Changes In and Disagreements with Accountants on Accounting and 32
Financial Disclosure
Part III
Item 10. Directors and Executive Officers of the Registrant 33
Item 11. Executive Compensation 37
Item 12. Security Ownership of Certain Beneficial Owners and Management 44
Item 13. Certain Relationships and Related Transactions 46
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports in Form 8-K 47
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PART I
ITEM 1. BUSINESS
PriceSmart, Inc. ("PriceSmart" or the "Company") was formed in August 1994
as a subsidiary of Price Enterprises, Inc. ("Price Enterprises" or "PEI") in
connection with the spin off of PEI from Costco Companies, Inc. ("Costco"),
formerly Price/Costco, Inc. PEI began to operate as a separate company from
Costco effective August 29, 1994 and became a separate publicly-traded company
on December 21, 1994. PriceSmart initially operated under the name Price Quest,
Inc. and until recently was operating under the name PQI, Inc.; however, the
Company changed its name to PriceSmart, Inc. effective June 30, 1997 in
anticipation of the spin-off of the Company from PEI.
In June 1997, the PEI Board of Directors approved, in principle, a plan
to separate PEI's core real estate business from the merchandising businesses
it operated through a number of subsidiaries. These merchandising businesses
included international merchandising businesses and domestic merchandising
businesses consisting of an auto referral program (the "Auto Referral
Program") and a travel program (the "Travel Program"). To effect such
separation, PEI first transferred to the Company, through a series of
preliminary transactions, the merchandising businesses, certain properties
formerly held for sale by PEI, all but $40 million of PEI's cash, and certain
notes receivable. PEI then distributed on August 29, 1997 to PEI's existing
stockholders all of the Company's outstanding Common Stock through a special
dividend (the "Distribution").
The Company's international merchandising businesses focus on emerging
consumer markets in Latin America and Asia. The Company licenses, and in Panama
owns through a joint venture, membership stores using the trade name
"PriceSmart" in most markets and "PriceCostco" in Panama, the Northern Mariana
Islands and Guam. The Company's Auto Referral Program and Travel Program offer
discounts on new cars and on travel services to Costco members pursuant to an
agreement with Costco under which the Company is the exclusive provider of such
programs to Costco's members. The Company also operates, on a test basis, a
goods and services business ("Services Program"), located within several Ralphs
Grocery Company ("Ralphs") stores in San Diego, California.
BUSINESS STRATEGY
The Company's strategy is to develop its existing merchandising businesses
and to invest in, acquire or create new merchandising businesses consistent with
the experience and talents of its management. Specifically, key elements of the
Company's business strategy include:
PROVIDE LOWER PRICES IN THE MARKETPLACE. Overriding all of the Company's
businesses is a philosophy of bringing lower prices to the consumer. Future
development of the Company's business will be directed to market opportunities
for lowering the costs of goods and services to consumers.
INCREASE MARKET SHARE IN DEVELOPING MARKETS. The Company believes that it
is well positioned to take advantage of growth in developing markets due to its
capital resources and experience with membership stores in Latin America and
Asia. The Company intends to take advantage of the growing demand for consumer
goods in such markets by entering into additional joint venture relationships
with local business people and opening additional membership stores through such
joint ventures, principally in Latin America. The Company intends to continue
to expand its business in Asia with additional outlets in existing licensee
markets. The Company may also enter into additional license arrangements in
other Asia markets.
DEVELOP AFFINITY MARKETING PROGRAMS. The Company's strategy for its
domestic merchandising businesses is to establish and operate businesses that
offer preferred pricing on products or services to customers of another company.
The Company has established such an affinity relationship with Costco, pursuant
to which the Company offers its Auto Referral and Travel Programs to Costco
members. The Company has also established, on a test basis, such an affinity
relationship with Ralphs. The Company may also explore similar strategic
relationships with other companies.
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AUTO REFERRAL PROGRAM STRATEGY. The Company's strategy for its Auto
Referral Program is to provide an efficient marketing system for participating
auto dealers to sell cars, thereby enabling those auto dealers to offer
preferred prices to consumers belonging to affinity groups.
TRAVEL PROGRAM STRATEGY. The Company's strategy for its Travel Program is
to provide low prices on travel services for consumers who are customers of
other companies with which the Company has established affinity relationships.
The Company plans to maintain and enhance its relationships with travel service
providers in order to offer the best possible prices on travel services to its
customers. The Company will continue to operate as efficiently as possible by
referring its customers directly to travel service providers whenever possible.
The Company currently provides direct customer service for its cruise program
because the Company has concluded that such an approach offers its cruise
customers the best combination of service and value.
SERVICES PROGRAM STRATEGY. The Company's strategy for its Services Program
is to make available to the consumer certain services and related products, at
low prices. If successful, the Services Program, which is currently in a
testing period, would be operated through PriceSmart Service Centers located
within Ralphs supermarkets and potentially other retail outlets.
INTERNATIONAL MERCHANDISING BUSINESSES
The Company owns and manages international merchandising businesses
which license and, in some cases, own membership stores using the trade name
"PriceSmart" in most markets and "Price Costco" in a limited number of other
markets. The Company has entered into a license agreement for the operation
of one store in the Northern Mariana Islands and another store in Guam, and
the Company owns a 51% interest in a Panama joint venture that has opened one
store in Panama and plans to open an additional store in Panama in early
December 1997. The Company has also entered into licensing arrangements with
entrepreneurs in the Peoples Republic of China, Indonesia and the
Philippines. The Company's licensees in Asia currently operate a total of
three stores (two in Indonesia and one in the Peoples Republic of China) and
a store in the Philippines is scheduled to open in December 1997.
The international stores sell basic consumer goods with an emphasis on
quality, low prices and efficient operations. By offering low prices on brand
name and private label merchandise, such stores seek to generate sales volumes
high enough to enable the stores to operate profitably at relatively low gross
margins. The typical stores are no-frills warehouse-type buildings which range
in size from 40,000 to 65,000 square feet. Stores are generally located in urban
areas to take advantage of dense populations and relatively higher levels of
disposable income. Product selection includes perishable foods and basic
consumer products. The target customers are consumers and small businesses. The
shopping format includes an annual membership fee which varies by market from
$25 to $35.
Typically, the Company enters into licensing and technology transfer
agreements with local business people and provides licensees with the
Company's know-how package, which includes training and management support,
as well as access to the Company's computer software systems. The license
also includes the right to use the "PriceSmart" mark and certain other
trademarks. The Company and its licensees also enter into product sourcing
agreements. The Company believes that its licensees have been interested in
obtaining such licenses for a variety of reasons, including the track record
of the Company's management team, the opportunity to purchase U.S.-sourced
products, the benefits of the Company's modern distribution techniques and
the opportunity to obtain exclusive rights to use the Company's trademarks in
the region.
AUTO REFERRAL PROGRAM
The Company's Auto Referral Program offers its approximately 1600
participating dealers an efficient method for marketing their cars. In return,
these car dealers agree to sell cars to qualifying consumers at preferred
prices. The Company generates revenues from its Auto Referral Program primarily
from advertising fees charged to participating dealers. The Company generated
revenues of $7.1 million from operations of the Auto Referral Program during
fiscal year 1997.
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Pursuant to an agreement with Costco, the Company has the exclusive right
to provide auto referral program services to Costco members. This agreement
expires October 31, 1999. As a result of the expected termination of the Costco
agreement, the Company is making efforts to market its auto program to other
affinity groups. The Company has made some preliminary efforts to market the
Auto Referral Program to Ralphs' customers. It is too early to determine if the
Ralphs efforts or the Company's other marketing efforts will be successful.
Major changes are taking place in the way car dealers market and sell cars.
The most significant changes relate to a consolidation of car dealerships
resulting in a more efficient marketplace. In addition, cars are being marketed
for sale via the Internet. As cars become more expensive, more consumers are
leasing cars. Finally, the introduction of "mega lots" for marketing used cars
has significantly altered the way used cars are sold. It remains to be seen
how, and if, the Company will be able to position itself in this changing
marketplace. During this fiscal year, the Company will continue to investigate
ways to transition from the Costco relationship and to adapt to the changing
auto sales and marketing environment.
TRAVEL PROGRAM
The Company's Travel Program offers discounted prices on airline tickets,
cruises, travel packages, car rentals and hotels to Costco members. The
Company's operating strategy is based on generating large sales volume rather
than high margins on individual sales. The Company has been successful in
obtaining discounts not available to most travel agencies because of the large
volume of reservations made through the Company's Travel Program. The Company's
strategy allows it to satisfy its customers' demands for low-price travel
products, while the Company benefits from the higher commissions and additional
incentives available to high-volume travel agencies. The Company has limited the
scope of its Travel Program to products on which it can offer discounts to its
customers.
The Company's Travel Program generates revenues from commissions as a
function of sales and co-op promotions from certain suppliers, including car
rental companies and hotels. In addition, the Company has entered into
agreements with certain travel service providers for the payment of override
commissions above the standard commissions the Company receives. Under such
agreements, additional commissions are generally awarded if the volume of sales
exceeds certain agreed upon thresholds. The Company generated commission
revenues of $4.5 million from the Travel Program during fiscal 1997.
Pursuant to an agreement with Costco, the Company has the exclusive right
to provide car rental, cruise, hotel room discount programs and prepackaged
travel arrangements to Costco members. This agreement expires October 31, 1999.
As a result of the expected termination of the Costco agreement, the Company is
making efforts to market its Travel Program to other affinity groups. The
Company has made some preliminary efforts to market the Travel Program to
Ralphs' customers. It is too early to determine if the Ralphs efforts or the
Company's other marketing efforts will be successful.
The U.S. travel industry is a highly fragmented industry comprised of
numerous small agencies, but trending towards large volume agencies, according
to a 1996 Travel Weekly U.S. travel agency survey. In contrast to 1985, when
smaller agencies were responsible for 62% of all U.S. travel agency revenues, in
1995 such agencies were responsible for only 41% of all U.S. travel agency
revenues.
The Company believes that its Travel Program is well positioned to take
advantage of anticipated future growth in the travel industry. The Company has
established relationships with travel providers, wholesalers and travel
agencies. As in the case of the Auto Referral Program, the major challenge for
the Travel Program will be to find new sales opportunities to replace the Costco
business when the Costco agreement expires in October 1999.
RELATIONSHIP WITH COSTCO
PEI, Costco and certain of their respective subsidiaries, including the
Company, entered into an Agreement Concerning Transfer of Certain Assets (the
"Asset Transfer Agreement") in connection with the settlement of litigation
arising from the spin-off of PEI from Costco and the prior merger between The
Price Company and
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Costco Wholesale Corporation. A final settlement of IN RE PRICE/COSTCO
SHAREHOLDER LITIGATION, Case No. C-94-1874C, was reached in November 1996 and
approved by the United States District Court for the Western District of
Washington in April 1997, as a result of which the Asset Transfer Agreement
became effective. Pursuant to the Asset Transfer Agreement, Costco assigned
its 49% interests in PEI's Price Global Trading, L.L.C. ("Price Global") and
Price Quest, L.L.C. ("Price Quest") subsidiaries to other subsidiaries of
PEI, making such entities wholly owned indirect subsidiaries of PEI. PEI and
Costco also agreed in the Asset Transfer Agreement to eliminate all
noncompete and operating agreements and to terminate all trademark and
license agreements between the parties, subject to certain exceptions.
Under the Asset Transfer Agreement, Costco has agreed to refrain from
conducting membership store businesses in the Northern Mariana Islands and Guam
through the earlier of October 31, 1999 or termination of the Company's license
with Joeten Enterprises, Inc. and has agreed to refrain from conducting
membership store businesses in Panama through the earlier of October 31, 1999 or
termination of the Company's license with PriceCostco Panama, S.A. Pursuant to
a License Agreement with Costco, which was modified by the Asset Transfer
Agreement, the Company has an exclusive (including against Costco), royalty-free
license in the Northern Mariana Islands and Guam to use "Price Club" and
"PriceCostco" marks in connection with the development, operation, advertising
and promotion of the Company's business activities in such areas, subject to
certain restrictions on the use of the marks and quality control and
confidentiality provisions. The Company currently owns rights to the name
"PriceCostco" in Panama, and the Company has agreed, subject to the outcome of
trademark applications in Panama, to transfer to Costco its rights to the name
"PriceCostco." If the Company transfers such rights to Costco, Costco will
license back to the Company the right to use the name "PriceCostco" in Panama
upon the same terms as the Northern Mariana Islands and Guam licenses. The Asset
Transfer Agreement, however, requires the Company to use diligent and reasonable
efforts to negotiate with its licensee in the Northern Mariana Islands and Guam
and Price Global's joint venture partner in Panama to terminate such licensees'
rights to use the "Price Club" and "PriceCostco" names and marks by October 3,
1998, or, if that does not occur, at the earliest possible date before December
12, 2009 for the Northern Mariana Islands and Guam and December 21, 2015 for
Panama. The Company's rights to use such names and marks in Panama are further
subject to the outcome of trademark application proceedings in Panama, which
could result in earlier termination of the Company's rights.
The Asset Transfer Agreement also gives the Company the exclusive right to
operate its Auto Referral Program and Travel Program in certain Costco
warehouses, through advertisements published in "The Costco Connection" and
through promotional materials linked to and from Costco's Internet home page.
The Company currently operates its Auto Referral and Travel Programs in
approximately 200 Costco warehouses. The Asset Transfer Agreement provides for
the expansion of the Auto Referral Program and the Travel Program into as many
as ten additional Costco warehouses (to the extent they exist) in each of the
fiscal years ended August 1997, 1998 and 1999. Costco has the right to select
the warehouses for expansion, subject to the Company's reasonable consent. The
agreement requires Costco to provide sufficient space to display a brochure rack
and to use its best efforts to provide sufficient space to display an
automobile. Costco also is required to maintain and stock the brochure rack and
to provide security for the rack and for any displayed automobiles. The
Company's rights under the Asset Transfer Agreement to conduct the Auto Referral
and Travel Programs in Costco warehouses, through "The Costco Connection" and
through Costco's Internet home page will extend until October 31, 1999 unless
earlier terminated by the Company upon 60 days prior written notice to Costco.
The Asset Transfer Agreement requires the Company to pay Costco, for the
Auto Referral Program, 20% of the gross revenues derived from the Costco Auto
Program Internet site linked to and from Costco's Internet home page and 55% of
the gross revenues derived from all other advertising or promotion via Costco
warehouses, "The Costco Connection" or other media which utilize the "Costco"
name or mark. Likewise, the Asset Transfer Agreement requires the Company to pay
Costco, for car rentals, hotel bookings and other travel services other than
vacation packages and cruises, 15% of the received commissions derived from any
advertising or promotion via Costco warehouses, "The Costco Connection," the
Costco Travel Program Internet site linked to and from Costco's Internet home
page or other media which use the "Costco" name or mark. For vacation packages
and cruises, the Company is required to pay Costco 1% of the net sales derived
from any such advertising or promotion. The Company is required to use "Costco
Auto Program" and "Costco Travel Program" marks in connection with the sales and
promotional activities described above.
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The Asset Transfer Agreement does not limit the Company's ability to own or
operate any automobile related or travel service related businesses as long as
such businesses do not use the names or marks "PriceCostco," "PriceClub" or
"Costco" and do not operate, through October 31, 1999, from locations owned or
operated by Sam's Warehouse Club, BJ's Wholesale Club or Wal-Mart or any of
their affiliates. Costco has the right under the Asset Transfer Agreement to
sell automobiles (but not by referral to a third party) and vacation packages
(but not cruises) and airline tickets directly to its members. Costco also may
investigate and experiment with other concepts in auto and travel businesses.
Costco has agreed in the Asset Transfer Agreement that PEI and its
downstream affiliates may use the name "Price" in a "PriceSmart" mark, but PEI
and its downstream affiliates may not use a "PriceSmart" mark in connection with
a club business or other membership activity named "PriceSmart" in the United
States, Canada or Mexico; provided that the limitations on the Company's rights
to use the "PriceSmart" name in the United States, Canada and Mexico terminate
24 months after Costco and its downstream affiliates discontinue their use of
the names "PriceCostco" and "Price Club."
SERVICES PROGRAM-RELATIONSHIP WITH RALPHS
In August 1997, PEI and Ralphs entered into a Memorandum of Agreement
("Memorandum"), which PEI has assigned to the Company. Pursuant to the
Memorandum, the Company and Ralphs have developed, and the Company now operates
on a test basis, three PriceSmart Service Centers in Ralphs stores located in
San Diego, California. The Company intends to continue to operate these Service
Centers throughout the test period, which expires on March 31, 1998. The
Service Centers offer Ralphs customers the following services: same-day and next
day photo processing, copying, faxing, key making, binding, Federal Express
shipping, TicketMaster, Western Union money orders and money transfers, and
internet access to the Company's Travel Program and Auto Referral Program.
Pursuant to the Memorandum, the Company is responsible for the supervision of
the business, advancement of funds, acquisition of goods and services to be
sold, employment of personnel and certain related tasks, as well as primary
responsibility for the development of the business. Ralphs' responsibilities
include providing a minimum of 208 square feet in certain stores, facility
maintenance and services, promotional assistance and certain operational
assistance. All profits earned or losses incurred by the business during the
test period are allocated 51% to the Company and 49% to Ralphs; provided,
however, that in no event will Ralphs bear more than $150,000 of losses. The
Company and Ralphs have also agreed to certain non-competition restrictions,
applicable during the test period.
The Company and Ralphs intend to expand the business if it is successful
during the test period, and if the Company and Ralphs so agree, to other Ralphs
stores and to transfer the business to a new joint venture. The joint venture
would be owned 51% by the Company and 49% by Ralphs; however, no joint venture
agreement has been fully negotiated or executed.
CITY NOTES AND OTHER NOTES RECEIVABLE.
The Company owns certain notes receivable from various municipalities and
agencies (the "City Notes") and certain other notes receivable. As of August 31,
1997, the carrying value of the City Notes was approximately $23.1 million. The
City Notes carry interest rates which range from 7% to 10%. Repayment of each
City Note is generally based on the relevant municipality's allocation of sales
tax revenues generated by retail businesses located on a particular property
associated with such City Note. For accounting purposes, the carrying value of
$23.1 million of such notes represents management's estimate of discounted cash
flow from the City Notes. Management's analysis of the discounted cash flow
from the City Notes assumes no payment at maturity, because, under the terms of
the City Notes, the unpaid balance of the note is forgiven at its maturity date.
If actions taken by Costco, such as closure or relocation of a particular Costco
warehouse, would entitle the governmental agency to withhold payment, the
Company would be entitled to cause Costco to purchase such City Note at an
amount equal to 72% of the June 5, 1994 book balance, less any subsequent
principal repayments, plus all accrued and unpaid interest from June 5, 1994.
The Company holds certain other notes receivable with a carrying value of
approximately $4.0 million as of August 31, 1997.
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COMPETITION
Each of the Company's businesses faces competition unique to its line of
business. The Company's international merchandising businesses compete with
exporters, wholesalers and trading companies in various international markets.
Specifically, the Company's international merchandising businesses compete with
Makro, Carrefour, Wal-Mart, Costco and local chain store operations. The
Company's Auto Referral Program competes with affinity programs offered by
several companies such as Wal-Mart; Internet vehicle buying services such as
Auto By Tel; and automobile brokerage firms. The Company's Travel Program
competes with a variety of other providers of travel and travel-related products
and services, including telemarketing travel companies, traditional travel
agencies and various on-line services available on the Internet. The Company's
Services Program competes with various providers of services offered by the
Services Program, including supermarkets, drugstores, mass retailers and
speciality stores.
Many of the Company's current and potential competitors have longer
operating histories, greater name recognition and significantly greater
financial and marketing resources than the Company. Such competitors could
undertake more aggressive and costly marketing campaigns than the Company, which
may adversely affect the Company's marketing strategies, which, in turn, could
have a material adverse effect on the Company's business, results of operations
or financial condition. There can be no assurance that the Company can compete
successfully against current or future competitors nor can there be any
assurance that competitive pressures faced by the Company will not result in
loss of market share or otherwise will not materially adversely affect its
business, results of operations and financial condition.
INTELLECTUAL PROPERTY RIGHTS
It is the Company's policy to obtain appropriate proprietary rights
protection for trademarks and significant new technologies acquired or developed
by the Company. In addition, the Company relies on copyright and trade secret
laws to protect its proprietary rights. The Company attempts to protect its
trade secrets and other proprietary information through agreements with
employees, consultants and suppliers, and other similar measures. There can be
no assurance, however, that the Company will be successful in protecting its
proprietary rights. While management believes that the Company's trademarks,
copyrights and other proprietary know-how have significant value, changing
technology and the competitive marketplace make the Company's future success
dependent principally upon its employees' technical competence and creative
skills for continuing innovation.
There can be no assurance that third parties will not assert claims against
the Company with respect to existing and future trademarks, trade names and
sales techniques. In the event of litigation to determine the validity of any
third party's claims, such litigation could result in significant expense to the
Company and divert the efforts of the Company's management, whether or not such
litigation is determined in favor of the Company.
The Company has filed applications to register the mark "PriceSmart" in the
U.S. Patent and Trademark Office, and in certain foreign countries; however,
because of objections by one or more parties, there can be no assurance that the
Company will obtain such registrations or that the Company has proprietary
rights to the mark. In addition, as noted above, the Company has limited rights
to use the "PriceCostco" name in connection with its international merchandising
businesses and certain Costco marks with its Auto Referral and Travel Programs.
The Asset Transfer Agreement requires the Company to attempt to phase out the
use of the "PriceCostco" name and related marks in the Northern Mariana Islands,
Guam and Panama. See "--International Merchandising Businesses."
EMPLOYEES
The Company employs approximately 173 employees, 81 of which are assigned
to the Company's international merchandising businesses, 52 to the Auto Referral
and Travel Programs, 27 to the Services Program and 13 in corporate
administrative activities. The Company believes that its future prospects will
depend, in part, on its ability to continue to attract and retain skilled
management personnel.
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The individuals employed in the cruise division of the Company's Travel
Program are members of a union. The Company currently is negotiating a
collective bargaining agreement with such union. The Company has never
experienced any business interruption as a result of labor disputes. The Company
believes that its relations with its employees are good.
SEASONALITY
The Company's businesses are subject to traditional retail sales trends
associated with the calendar year-end holiday season.
ITEM 2. PROPERTIES
PROPERTIES HELD FOR SALE. In connection with the Distribution, PEI
transferred to the Company certain properties historically held for sale by PEI
(the "Properties"). The Company anticipates selling such properties within the
next twelve months. Proceeds from sales of such properties will be used to fund
the Company's businesses and the Company's general working capital requirements.
The table set forth below describes the portfolio of Properties held by the
Company immediately following the Distribution. Amounts shown for annual minimum
rents are based on executed leases as of August 31, 1997. Due to the nature of
real estate investments, actual rental income may differ from amounts shown in
this table.
<TABLE>
<CAPTION>
Leases in Effect as of August 31, 1997
-------------------------------------------------------------------------
Gross Net Book Annual
Leasable Value Minimum
Land Area (sq.ft) Percent 8/31/97 Rent
Acreage (In 000's) Leased (In 000's) (In 000's)
--------- ------------ ---------- ------------ -----------
<S> <C> <C> <C> <C> <C>
PROPERTIES WITH BUILDINGS
Bakersfield, CA . . . . . . . . . . . . . 15.7 143.5 74% $6,470 $ 809
Worcester, MA . . . . . . . . . . . . . . 11.4 115.0 100% 5,784 690
Mesa/Broadway, AZ . . . . . . . . . . . . 2.7 24.2 100% 1,236 201
Riverside/Third St., CA . . . . . . . . . 4.9 17.9 100% 388 --
Milwaukee, WI (leased). . . . . . . . . . 8.8 115.0 100% -- --
---------- ------------ ---------- ------------ -----------
Subtotal. . . . . . . . . . . . . . . . 43.5 415.6 91% 13,878 1,700
UNIMPROVED LAND
Fresno, CA. . . . . . . . . . . . . . . . 15.0 -- -- 3,680 --
Richmond, VA. . . . . . . . . . . . . . . 11.7 -- -- 1,457 --
Sterling, VA. . . . . . . . . . . . . . . 2.5 -- -- 1,057 --
Carlsbad, CA. . . . . . . . . . . . . . . 1.8 -- -- 926 --
East Mesa/Superstition Springs, AZ. . . . 18.7 -- -- 981 --
Fountain Valley, CA . . . . . . . . . . . 2.5 -- -- 475 --
Rancho Cucamonga, CA. . . . . . . . . . . .9 -- -- 405 --
Tucson, AZ. . . . . . . . . . . . . . . . 6.6 -- -- 400 --
Denver/Westminister, CO . . . . . . . . . 2.8 -- -- 310 --
Denver/Aurora, CO . . . . . . . . . . . . 1.0 -- -- 115 --
---------- ------------ ---------- ------------ -----------
Subtotal. . . . . . . . . . . . . . . . 63.5 9,806 --
Deferred rents and leasing costs, net. . . . . -- -- -- 1,024 --
Provision for Asset Impairments. . . . . . . . -- -- -- (4,795) --
---------- ------------ ---------- ------------ -----------
Total. . . . . . . . . . . . . . . . . . . . . 107.0 415.6 91% $ 19,913 $1,700
---------- ------------ ---------- ------------ -----------
---------- ------------ ---------- ------------ -----------
</TABLE>
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SUBSEQUENT AND PENDING REAL ESTATE TRANSACTIONS. Subsequent to year end,
the Company sold the Bakersfield property for $5.2 million net sales proceeds.
The Company is currently under contract to sell five (5) properties, which sales
are expected to generate $2.65 million of net proceeds. The Company anticipates
no significant gains or losses from these sales. The Company expects such
transactions to be completed within the next six (6) months; however, given the
nature of such sales activities, there can be no assurance that these potential
sales will be completed by their expected dates or that such proceeds will be
fully realized.
ENVIRONMENTAL MATTERS. The Company has agreed to indemnify PEI for all of
PEI's liabilities (including obligations to indemnify Costco with respect to
environmental liabilities) arising out of PEI's prior ownership of the
Properties and the real properties transferred by Costco to PEI that have been
sold prior to the Distribution. The Company's ownership of real properties and
its agreement to indemnify PEI could subject it to certain environmental
liabilities. As discussed below, certain Properties are located in areas of
current or former industrial activity, where environmental contamination may
have occurred.
Under various Federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real estate may be
required to investigate and remediate releases or threatened releases of
hazardous or toxic substances or petroleum products located at such property,
and may be held liable to a governmental entity or to third parties for property
damage and for investigation and remediation costs incurred by such parties in
connection with the contamination. Under certain of these laws, liability may be
imposed without regard to whether the owner knew of or caused the presence of
the contaminants. These costs may be substantial, and the presence of such
substances, or the failure to remediate properly the contamination on such
property, may adversely affect the owner's ability to sell or lease such
property or to borrow money using such property as collateral. Certain Federal
and state laws require the removal or encapsulation of asbestos-containing
material in poor condition in the event of remodeling or renovation. Other
Federal, state and local laws have been enacted to protect sensitive
environmental resources, including threatened and endangered species and
wetlands. Such laws may restrict the development and diminish the value of
property which is inhabited by an endangered or threatened species, is
designated as critical habitat for an endangered or threatened species or is
characterized as wetlands.
In 1994, Costco engaged environmental consultants to conduct Phase I
assessments (involving investigation without soil sampling or groundwater
analysis) at each of the properties that Costco transferred to PEI in 1994,
including the Properties. The Company is unaware of any environmental liability
or noncompliance with applicable environmental laws or regulations arising out
of the Properties or the real properties transferred by Costco to PEI and sold
prior to the Distribution that the Company believes would have a material
adverse effect on its business, assets or results of operations. Nevertheless,
there can be no assurance that the Company's knowledge is complete with regard
to, or that the Phase I assessments have identified, all material environmental
liabilities.
The Company is aware of certain environmental issues, which the Company
does not expect to have a material adverse effect on the Company's business
assets or results of operation, relating to three properties transferred from
Costco to PEI that were sold prior to the Distribution. The Company has agreed
to indemnify PEI for environmental liabilities arising out of such properties.
The Company has reserved approximately $85,000 and $90,000 with respect to
potential environmental liabilities arising from PEI's prior ownership of the
Phoenix (Fry's) property and Silver City property, respectively, discussed
below. The Company has not taken a reserve with respect to the Meadowlands
property. Set forth below are summaries of certain environmental matters
relating to the properties already sold.
Phoenix (Fry's). The Phoenix (Fry's) site is a 37.1 acre site located in
Phoenix, Arizona. The Phoenix (Fry's) site is located within the West Van Buren
Study Area (the "WVBSA"). Volatile organic compounds ("VOCs") and petroleum
hydrocarbons are present in groundwater in the WVBSA. To date, PEI (as successor
to Costco) has not been identified as a potentially responsible party ("PRP")
for the WVBSA. On March 8, 1995, PEI sold the Phoenix (Fry's) site, and retained
responsibility for certain environmental matters. Investigations conducted in
connection with the sale of the property revealed some hydrocarbon contamination
in an area previously occupied by a fuel pump island. Seven underground fuel
storage tanks were removed in 1989. The Arizona Department of Environmental
Quality is requiring some additional testing prior to granting closure of the
site. PEI's prior ownership of the Phoenix (Fry's) site creates the potential of
liability for remediation costs associated with groundwater beneath the site.
Costco previously agreed to indemnify and hold PEI harmless in respect of
one-half
10
<PAGE>
of all environmental liabilities relating to the Phoenix (Fry's) site. Costco
has continued to pay its share of the ongoing investigation costs associated
with this site. PEI and the Company lack sufficient information about the
activity of WVBSA PRPs to form an estimate of the equitable share of total
liability, if any, that could be allocated to PEI for its previous ownership of
this site.
Although designated by Arizona law as a "study area," the WVBSA is not a
federal CERCLA site and is not listed on the National Properties List ("NPL").
Immediately to the east of the WVBSA, however, is the East Washington Study Area
(the "EWSA"), which is listed on the NPL. VOCs are also present in groundwater
in the EWSA. If the contamination plumes from the WVBSA and the EWSA merge, the
possibility exists that the two study areas will be merged into one Federal
CERCLA site.
Meadowlands. The Meadowlands site is an unimproved, 12.9 acre site located
in Meadowlands, New Jersey. A prior owner used this site as a debris disposal
area. Elevated levels of heavy metals (including a small area contaminated with
polychlorinated byphenyls) and petroleum hydrocarbons are present in soil at the
Meadowlands site. PEI, however, has not been notified by any governmental
authority, and is not otherwise aware, of any material noncompliance, liability
or claim relating to hazardous or toxic substances or petroleum products in
connection with the Meadowlands site. PEI sold the Meadowlands site on August
11, 1995. Nevertheless, PEI's previous ownership of the Meadowlands site creates
the potential of liability for remediation costs associated with groundwater
beneath the site.
Silver City. The Silver City site contains or has contained petroleum
hydrocarbons in the soil and groundwater. On March 20, 1996, PEI sold the Silver
City site and retained responsibility for certain environmental matters. PEI is
continuing to remediate the soil and groundwater at this property under
supervision of local authorities.
CORPORATE HEADQUARTERS. The Company maintains its headquarters at 4649
Morena Blvd., San Diego, California 92117. The Company leases 42,000 square feet
of office space from PEI at a rate of $.60 per month per square foot pursuant to
a triple net lease. The initial term of the lease is two years, commencing
September 1, 1997, with five renewal options of two years each. During the first
year, PEI will not charge rent to the Company on 6,000 square feet of space. The
Company believes that its existing facilities are adequate to meet its current
needs and that suitable additional or alternative space will be available on
commercially reasonable terms as needed.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings other than various
claims and lawsuits arising in the ordinary course of its business which, in the
opinion of the Company's management, are not individually or in the aggregate
material to its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters to a vote of security holders during
the fourth quarter of fiscal 1997.
11
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is quoted and traded on the Nasdaq National
Market the symbol "PSMT." The Common Stock began trading on the Nasdaq National
Market on September 2, 1997 and has been traded on the Nasdaq National Market
since such date. As of November 18, 1997, there were approximately 631 holders
of record of the Common Stock.
The Company has never declared a cash dividend on its Common Stock and does
not anticipate doing so in the foreseeable future.
12
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA (IN THOUSANDS)
The Company historically operated as certain subsidiaries of PEI. As a
result of the Distribution, the Company now independently owns and operates its
businesses. Accordingly, the financial data of the Company included herein has
been prepared on an historical basis as though the Company has been a
stand-alone business operating, during all periods presented, the businesses and
the assets acquired as a result of the Distribution. See Footnote 1 of
"PriceSmart, Inc., Notes to Consolidated Financial Statements" included in this
report for a description of the businesses and the assets included in
PriceSmart's historical financial statements.
The following table sets forth selected historical financial data of the
Company for the five fiscal years ended August 31, 1997. The selected historical
financial data as of August 31, 1997, 1996 and 1995 and for each of the three
years ended August 31, 1997 have been derived from the audited financial
statements of the Company. The selected historical financial data as of
August 31, 1994 and 1993 and for each of the two years ended August 31, 1994
have been derived from the unaudited books and records of the Company, and in
the opinion of management, include all adjusting entries (consisting of only
normal and recurring adjustments) necessary to present fairly the information
set forth therein.
<TABLE>
<CAPTION>
FISCAL YEARS (1)
----------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Income Statement Data
Merchandise sales (2). . . . . . . . . . . . . . $59,042 $36,211 $66,573 $53,015 $28,671
International royalties and fees . . . . . . . . 3,139 2,164 553 - -
Auto, travel and other program revenues. . . . . 12,194 9,875 8,769 5,846 3,713
Cost of goods sold (2) . . . . . . . . . . . . . 55,947 34,644 62,756 49,449 27,233
Selling, general and administrative (3). . . . . 26,607 31,069 33,337 15,095 7,745
Operating loss . . . . . . . . . . . . . . . . . (8,179) (17,463) (20,198) (5,683) (2,594)
Real estate operations, net income (loss) (4). . (1,480) (8,359) (2,238) (16,354) 684
Interest and other income, net (5) . . . . . . . 2,717 7,663 6,031 6,636 4,649
Income (loss) before provision (benefit) for
income taxes . . . . . . . . . . . . . . . . . (6,942) (18,159) (16,405) (15,401) 2,739
Net income (loss). . . . . . . . . . . . . . . . (24,843) (11,423) (12,517) (9,087) 1,616
Balance Sheet Data
Cash and cash equivalents. . . . . . . . . . . . 58,383 - - - -
Total assets . . . . . . . . . . . . . . . . . . 125,885 97,981 107,085 188,431 135,698
Stockholders' equity (6) . . . . . . . . . . . . . 107,172 86,990 92,556 129,389 106,781
</TABLE>
(1) Effective September 1, 1997, the Company changed its 52/53 week fiscal year
which ends on the Sunday nearest August 31 to a fiscal year end of August
31. For ease of presentation, all fiscal years in this report are referred
to as having ended on August 31.
(2) Merchandise sales and cost of goods sold relate to international and
electronic merchandising businesses.
(3) PEI historically provided administrative services to the Company. Amounts
allocated to the Company for corporate administrative expenses for fiscal
years 1997, 1996, 1995, 1994 and 1993 were $1,065, $1,350, $1,363, $752 and
$705, respectively.
(4) Real estate operations relates to properties held for sale which were
transferred to PriceSmart in connection with the Distribution and reflects
rental revenue, rental expenses, gain or loss on sale of properties and
provisions for asset impairment related to these properties.
13
<PAGE>
(5) Interest and other income includes interest income, loss on sale of
investment, equity in the losses of international joint ventures and
minority interest of partners in merchandising joint venture businesses.
(6) Stockholders' equity represents the net assets transferred and the earnings
of the businesses and assets comprising PriceSmart on an historical basis.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis compares the results of operations
for the three fiscal years ended August 31, 1997, and should be read in
conjunction with the consolidated financial statements and the accompanying
notes included elsewhere in this report. All dollar amounts are in thousands.
MERCHANDISE SALES
INTERNATIONAL PERCENT ELECTRONIC PERCENT
SALES CHANGE SHOPPING SALES CHANGE
----- ------ -------------- ------
Fiscal 1997 . . . $58,085 127% $ 957 -91%
Fiscal 1996 . . . 25,541 -35% 10,670 -61%
Fiscal 1995 . . . 39,343 - 27,230 -
During fiscal 1997, international sales increased due to the opening of the
Panama City location in October 1996, the sales of which are reflected in the
Company's consolidated financial statements, and due to increases in the sales
of U.S.-sourced products to licensees operating existing and new stores in
Saipan, Guam, China (Beijing) and Indonesia. With respect to the electronic
shopping business, sales during fiscal 1997 declined sharply as a result of the
Company's decision to discontinue such business in January 1997.
During fiscal 1996, international sales declined primarily due to the
elimination of the export trading business which had been selling U.S.-sourced
goods to customers in Hong Kong and Mexico. Such export sales declined from
$33.7 million in fiscal 1995 to $2.2 million in fiscal 1996. Offsetting much of
this decline in international sales were shipments to the Saipan licensee which
rose from $5.7 million in fiscal 1995 to $23.4 million in fiscal 1996. With
respect to the electronic shopping business, sales declined significantly in
fiscal 1996 largely due to the discontinuance of display samples of merchandise
at the Costco locations that participated in the kiosk-based merchandising
program.
MERCHANDISE GROSS MARGIN
<TABLE>
<CAPTION>
PERCENT PERCENT OF ELECTRONIC PERCENT PERCENT OF
INTERNATIONAL CHANGE SALES SHOPPING CHANGE SALES
------------- ------ ----- -------- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Fiscal 1997 . . . . . . $3,931 296% 6.77% $(836) -245% -87.36%
Fiscal 1996 . . . . . . 992 -32% 3.88% 575 -76% 5.39%
Fiscal 1995 . . . . . . 1,456 - 3.70% 2,361 - 8.67%
</TABLE>
During fiscal 1997, international gross margins increased due to the
opening in October 1996 of the Panama City location, which operates at a higher
gross margin than earned on exports of U.S.-sourced products, and due to
increased shipments of U.S.-sourced products to foreign licensees. With respect
to electronic shopping, gross margins were negatively impacted by reserves of
$0.9 million associated with markdowns to sell certain returned and discontinued
merchandise.
14
<PAGE>
During fiscal 1996, the amount of international gross margin declined
primarily due to the elimination of the export trading business, offset by gross
margins earned on shipments to the Saipan licensee. With respect to the
electronic shopping business, gross margins declined due to the significant
reduction in sales and reserves of $1.0 million associated with markdowns to
sell certain returned and discontinued merchandise.
OTHER REVENUES
INTERNATIONAL AUTO REFERRAL,
ROYALTIES PERCENT TRAVEL AND PERCENT
& FEES CHANGE OTHER PROGRAMS CHANGE
------ ------ -------------- ------
Fiscal 1997 . . . . . . $3,139 45% $12,194 23%
Fiscal 1996 . . . . . . 2,164 291% 9,875 13%
Fiscal 1995 . . . . . . 553 - 8,769 -
During fiscal 1997, international royalties and fees increased primarily as
a result of the newly established licensee operations in Indonesia and China
(Beijing). With respect to the Auto Referral, Travel and other programs,
increases in cruise sales to Costco members and increases in car rental referral
commissions accounted for substantially all of the revenue increase.
During fiscal 1996, international royalties and fees increased primarily as
a result of the newly established licensee operations in Saipan and Guam, as
well as certain fees for the Indonesia and China (Beijing) license arrangements.
With respect to the Auto Referral and Travel programs, commissions from the
newly established car rental referral program more than offset revenue
reductions incurred when the Company discontinued its airline ticketing program
in February 1995.
SELLING, GENERAL AND ADMINISTRATIVE
<TABLE>
<CAPTION>
AUTO REFERRAL,
PERCENT ELECTRONIC PERCENT TRAVEL AND OTHER PERCENT
INTERNATIONAL CHANGE SHOPPING CHANGE PROGRAMS CHANGE
------------- ------ -------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C>
Fiscal 1997 . . . . . . . . . $11,400 39% $4,296 -64% $9,846 4%
Fiscal 1996 . . . . . . . . . 8,196 47% 12,098 -31% 9,425 6%
Fiscal 1995 . . . . . . . . . 5,567 - 17,546 - 8,861 -
</TABLE>
During fiscal 1997, international expenses rose largely due to increased
staffing, higher travel expenses to support the needs of licensees in Indonesia
and China (Beijing), establishment of a reserve for doubtful accounts and
expenses related to the Company's pursuit of international licensing
opportunities in additional countries. At the end of fiscal 1996, expenses
associated with the electronic shopping program declined significantly upon the
expiration of certain contractual obligations to pay Costco $4.5 million per
year for marketing-related activities and location rent expense. Auto Referral
and Travel Program expenses were generally consistent with the prior year's
comparable period as expansion of the car rental referral and Costco cruise
programs did not generate any significant increase in expenses.
During fiscal 1996, international expenses increased primarily as a result
of redirecting much of the Price Club Mexico merchandising support group towards
new international markets. Prior to the Company's sale of its investment in
Price Club Mexico in April 1995, expenses associated with these employees were
generally reimbursed by Price Club Mexico. With respect to the electronic
shopping programs, expenses associated with the Costco kiosk-based program were
significantly reduced when display samples and in-store sales staffing were
discontinued during fiscal 1996 and when central office staffing was reduced. In
addition, electronic shopping expenses for fiscal 1995 reflected approximately
$2.3 million of equipment and fixture write-downs related to the decision to
remodel the display sample areas within the Costco locations. Auto and travel
program expenses were
15
<PAGE>
generally consistent with the prior year's comparable period as expense
reductions associated with discontinuing the airline ticketing program were
offset by increased costs for cruise sales support and by costs to develop the
car rental referral program.
CORPORATE ADMINISTRATIVE EXPENSES
PERCENT
AMOUNT CHANGE CHANGE
------ ------ -------
Fiscal 1997 . . . . . . . . . . . . . $1,065 $(285) -21%
Fiscal 1996 . . . . . . . . . . . . . 1,350 (13) - 1%
Fiscal 1995 . . . . . . . . . . . . . 1,363 - -
The Company historically operated as certain subsidiaries of PEI. Certain
general and administrative costs of PEI were allocated to the Company,
principally based on PEI's specific identification of individual cost items or
otherwise based upon estimated levels of effort devoted by its general and
administrative departments to individual entities or relative measures of size
of entities. During fiscal 1997, corporate expenses decreased primarily due to a
decrease in legal fees, while fiscal 1996 expenses were essentially unchanged
from prior year levels.
REAL ESTATE OPERATIONS (NET)
<TABLE>
<CAPTION>
PROVISION
GAIN(LOSS) FOR ASSET
REVENUES EXPENSES ON SALES IMPAIRMENT TOTAL
-------- -------- --------- ---------- -----
<S> <C> <C> <C> <C> <C>
Fiscal 1997. . . . . . . $3,031 $(2,900) $389 $(2,000) $(1,480)
Fiscal 1996. . . . . . . 2,798 (3,355) 240 (8,042) (8,359)
Fiscal 1995. . . . . . . 2,868 (3,530) 24 (1,600) (2,238)
</TABLE>
Real estate operations relates to properties held for sale which were
transferred to the Company in connection with the Distribution and reflects
rental revenue, rental expenses, gain or loss on sale of properties and
provisions for asset impairment related to these properties.
Real estate financial operations were generally consistent in the years
presented. During fiscal 1997, 1996 and 1995, the noncash charges for
provision for asset impairment reflected in the table above were taken to
write down the carrying value of real estate properties which are being held
for sale and which are expected to generate net sales proceeds below their
book values.
OTHER
INTEREST INCOME. Interest income for the Company reflects earnings on City
Notes and certain secured notes receivable from buyers of formerly owned
properties. Interest income for fiscal 1997 declined primarily as a result of
principal repayments of specific City Notes during fiscal 1997.
LOSSES FROM MEXICO JOINT VENTURE. During fiscal 1995, losses from the
Price Club Mexico business of approximately $2.4 million were allocated to the
Company's 25.5% interest in the business. While the business had previously
reported operating profits, the peso devaluations that began in December 1994
lead to significant deterioration of the business' financial performance that
continued through the sale of the Company's investment and beyond. In addition,
during fiscal 1995, the Company recognized a pretax loss of approximately $2.6
million on the sale of its interest in Price Club Mexico to Costco in
April 1995.
MINORITY INTEREST. During fiscal 1996 and 1995, minority interest
represents the allocation of losses on the international merchandising business
to Costco until the time that the cumulative amount of such losses equaled the
cumulative amount of Costco's capital contributions. Once the book value of
Costco's investment reached zero during the third quarter of fiscal 1996, the
Company began to absorb 100% of losses from these joint ventures
16
<PAGE>
which were funded with stockholder advances by the Company and borrowings from
PEI. For fiscal 1997, minority interest relates to an allocation of the Panama
joint venture earnings to the 49% partner in this venture.
PROVISION (BENEFIT) FOR INCOME TAXES. In fiscal 1997, deferred tax assets
of approximately $22.0 million were charged to income tax expense because the
realization of deferred tax assets is no longer more likely than not, and
therefore, a valuation allowance was established. During the first quarter of
fiscal 1996, Price Quest and Price Global Trading were restructured as limited
liability companies and subsequent to that date have been treated as
partnerships for income tax purposes. As a result of this change, the Company's
effective income tax benefit rate rose to 37.1% for fiscal 1996. During fiscal
1995, the income tax provision was negatively impacted by the nondeductible
losses from its investment in the Company's Price Quest, Price Global Trading
and Price Club Mexico businesses. As a result, the effective income tax benefit
rate was only 23.7% for fiscal 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company historically financed its operations primarily from PEI's real
estate business. Cash provided by (used in) the Company's operations for the
fiscal years ended August 31, 1997, 1996 and 1995 was $9.1 million, $(8.1)
million and $(18.9) million, respectively.
While the Company is well positioned to finance its business activities
through a variety of sources, it expects to satisfy short-term liquidity
requirements through the cash distributed to the Company prior to the
Distribution, cash from operations of the Company's businesses, and principal
and interest payments on the City Notes and other notes receivable. The Company
also expects to generate cash from sales of the Properties, and the cash flow
that may ultimately be generated by sales of these properties represents a major
source of additional capital resources.
The Company's working capital requirements are not expected to exceed $30
million over the next 12 months. During fiscal 1998, the Company estimates that
it will spend approximately $10 million in the international merchandising
businesses, $5 million in affinity-service businesses and $15 million for
business opportunities that may arise. Actual capital expenditures, investment
in merchandising businesses and gross proceeds realized from property sales for
fiscal 1998 may vary from estimated amounts depending on business conditions and
other risks and uncertainties to which the Company and its businesses are
subject.
The Company believes that the Company's cash balances and net cash
provided by operating activities, principal and interest payments on notes
receivable and sales of its Properties will be sufficient to meet its working
capital expenditure requirements for at least the next 12 months. Management
intends to invest the Company's cash in excess of current operating
requirements in short-term, interest-bearing, investment-grade securities.
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable.
17
<PAGE>
ITEM 8 - FINANCIAL STATEMENTS
PRICESMART, INC.
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . . 19
Consolidated Balance Sheets as of August 31, 1997 and 1996 . . . . . . . 20
Consolidated Statements of Operations for the years ended
August 31, 1997, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . 21
Consolidated Statements of Stockholders' Equity for the years
ended August 31, 1997, 1996 and 1995 . . . . . . . . . . . . . . . . . 22
Consolidated Statements of Cash Flows for the years ended
August 31, 1997, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . 23
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . 24
18
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
PriceSmart, Inc.
We have audited the accompanying consolidated balance sheets of PriceSmart,
Inc. as of August 31, 1997 and 1996 and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended August 31, 1997. Our audits also include the financial
statement schedule listed in the Index at Item 14(d). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of PriceSmart,
Inc. at August 31, 1997 and 1996 and the consolidated results of its operations
and its cash flows for each of the three years in the period ended August 31,
1997 in conformity with generally accepted accounting principles. Also, in our
opinion, the financial statement schedule of PriceSmart, Inc. referred to above,
when considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
San Diego, California /s/ Ernst & Young LLP
October 16, 1997
19
<PAGE>
PRICESMART, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
AUGUST 31, AUGUST 31,
1997 1996
---- ----
ASSETS
Current assets:
Cash and equivalents . . . . . . . . . . . . . $ 58,383 $ -
Accounts receivable, less allowance for
doubtful accounts of $1,000
at August 31, 1997 . . . . . . . . . . . . . 4,806 5,506
Merchandise inventories. . . . . . . . . . . . 5,518 2,011
Prepaid expenses and other current assets. . . 578 1,854
Property held for sale, net. . . . . . . . . . 19,913 28,507
-------- --------
Total current assets . . . . . . . . . . . . . . 89,198 37,878
Property and equipment:
Land . . . . . . . . . . . . . . . . . . . . . 2,250 -
Building and improvements. . . . . . . . . . . 4,578 1,844
Fixtures and equipment . . . . . . . . . . . . 4,712 5,647
-------- --------
11,540 7,491
Less accumulated depreciation. . . . . . . . . (1,946) (3,347)
-------- --------
9,594 4,144
Other assets:
City notes receivable. . . . . . . . . . . . . 23,052 29,091
Other notes receivable . . . . . . . . . . . . 4,041 6,617
Deferred income taxes. . . . . . . . . . . . . - 20,251
-------- --------
27,093 55,959
-------- --------
TOTAL ASSETS $125,885 $ 97,981
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade. . . . . . . . . . . . $ 4,901 $ 3,883
Accrued expenses . . . . . . . . . . . . . . . 4,813 3,166
Other current liabilities. . . . . . . . . . . 3,563 2,197
-------- --------
Total current liabilities. . . . . . . . . . . . 13,277 9,246
Minority interest. . . . . . . . . . . . . . . . 5,436 1,745
STOCKHOLDERS' EQUITY
Common stock, $.0001 par value, 15,000,000
shares authorized, 5,908,235 shares issued
and outstanding at August 31, 1997
and 1996 . . . . . . . . . . . . . . . . . . 1 1
Additional paid-in capital . . . . . . . . . . 107,171 86,989
-------- --------
Total Stockholders' Equity . . . . . . . . . . . 107,172 86,990
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $125,885 $ 97,981
-------- --------
-------- --------
See accompanying notes.
20
<PAGE>
See accompanying notes.
PRICESMART, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED AUGUST 31,
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
REVENUES
Sales:
International . . . . . . . . . . . . . . . $ 58,085 $ 25,541 $ 39,343
Electronic shopping . . . . . . . . . . . . 957 10,670 27,230
International royalties and other fees . . . . 3,139 2,164 553
Auto referral, travel and other programs . . . 12,194 9,875 8,769
--------- --------- ---------
TOTAL REVENUES . . . . . . . . . . . . . . . . . 74,375 48,250 75,895
EXPENSES
Cost of goods sold:
International . . . . . . . . . . . . . . . 54,154 24,549 37,887
Electronic shopping . . . . . . . . . . . . 1,793 10,095 24,869
Selling, general and administrative:
International . . . . . . . . . . . . . . . 11,400 8,196 5,567
Electronic shopping . . . . . . . . . . . . 4,296 12,098 17,546
Auto referral, travel and other programs. . 9,846 9,425 8,861
Corporate administrative expenses . . . . . 1,065 1,350 1,363
--------- --------- ---------
TOTAL EXPENSES . . . . . . . . . . . . . . . . . 82,554 65,713 96,093
--------- --------- ---------
OPERATING LOSS . . . . . . . . . . . . . . . . . (8,179) (17,463) (20,198)
OTHER
Real estate operations, net. . . . . . . . . . (1,480) (8,359) (2,238)
Interest income. . . . . . . . . . . . . . . . 2,776 3,076 2,832
Losses from Mexico joint venture . . . . . . . - - (4,988)
Minority interest. . . . . . . . . . . . . . . (59) 4,587 8,187
--------- --------- ---------
TOTAL OTHER. . . . . . . . . . . . . . . . . . . 1,237 (696) 3,793
--------- --------- ---------
Loss before provision (benefit) for
income taxes . . . . . . . . . . . . . . . . . (6,942) (18,159) (16,405)
Provision (benefit) for income taxes . . . . . . 17,901 (6,736) (3,888)
--------- --------- ---------
NET LOSS . . . . . . . . . . . . . . . . . . . . $(24,843) $(11,423) $(12,517)
--------- --------- ---------
--------- --------- ---------
NET LOSS PER SHARE . . . . . . . . . . . . . . . $ (4.20) $ (1.93) $ (2.12)
</TABLE>
See accompanying notes.
21
<PAGE>
PRICESMART, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL
COMMON STOCK PAID-IN
SHARES AMOUNT CAPITAL TOTAL
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investment by PEI at August 31, 1994 . . . 5,908 $1 $129,388 $129,389
Net loss . . . . . . . . . . . . . . - - (12,517) (12,517)
Net return to PEI. . . . . . . . . . - - (24,316) (24,316)
- ------------------------------------------------------------------------------------------------------
Investment by PEI at August 31, 1995 . . . 5,908 1 92,555 92,556
Net loss . . . . . . . . . . . . . . - - (11,423) (11,423)
Net investment by PEI. . . . . . . . - - 5,857 5,857
- ------------------------------------------------------------------------------------------------------
Investment by PEI at August 31, 1996 . . . 5,908 1 86,989 86,990
Net loss . . . . . . . . . . . . . . - - (24,843) (24,843)
Net investment by PEI. . . . . . . . - - 45,025 45,025
- ------------------------------------------------------------------------------------------------------
Balance at August 31, 1997 . . . . . . . . 5,908 $1 $107,171 $107,172
- ------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
22
<PAGE>
PRICESMART, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED AUGUST 31,
----------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . $ (24,843) $ (11,423) $ (12,517)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization. . . . . . . . . . . . . 1,374 2,259 2,295
Provision for asset impairments. . . . . . . . . . . . 2,000 8,042 1,600
Provision for doubtful accounts. . . . . . . . . . . . 1,000 - -
Losses from Mexico joint venture . . . . . . . . . . . - - 4,988
Income tax (benefit) charge. . . . . . . . . . . . . . 17,901 (6,736) (3,888)
Minority interest. . . . . . . . . . . . . . . . . . . 59 (4,587) (8,187)
Change in accounts receivable and other assets . . . . (180) 4,332 (26,696)
Change in accounts payable and other liabilities . . . 5,241 209 24,231
Change in property held for sale . . . . . . . . . . . 6,594 (190) (705)
---------- ---------- ----------
Net cash flows provided by (used in) operating activities 9,146 (8,094) (18,879)
INVESTING ACTIVITIES
Additions to property and equipment. . . . . . . . . . (8,131) (2,560) (3,480)
Proceeds from sale of property and equipment . . . . . 97 147 -
Proceeds from Mexico joint venture . . . . . . . . . . - - 4,000
Investment in Mexico joint venture . . . . . . . . . . - - (3,883)
Additions to notes receivable. . . . . . . . . . . . . - (1,337) -
Payments of notes receivable . . . . . . . . . . . . . 8,614 3,105 2,897
---------- ---------- ----------
Net cash flows provided by (used in) investing activities. 580 (645) (466)
FINANCING ACTIVITIES
Net investment by PEI. . . . . . . . . . . . . . . . . 45,025 6,994 6,850
Costco equity contributions to subsidiaries. . . . . . - - 12,495
Contributions by Panama JV partner . . . . . . . . . . 3,632 1,745 -
---------- ---------- ----------
Net cash flows provided by financing activities. . . . . . 48,657 8,739 19,345
---------- ---------- ----------
Net increase in cash . . . . . . . . . . . . . . . . . . . 58,383 - -
---------- ---------- ----------
Cash and cash equivalents at beginning of year . . . . . . - - -
---------- ---------- ----------
Cash and cash equivalents at end of year . . . . . . . . . $ 58,383 $ - $ -
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See accompanying notes.
23
<PAGE>
PRICESMART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
FORMATION OF THE COMPANY
PriceSmart, Inc. ("PriceSmart" or the "Company") was formed in August 1994
as a subsidiary of Price Enterprises, Inc. ("Price Enterprises" or "PEI") in
connection with the spin off of PEI from Costco Companies, Inc. ("Costco"),
formerly Price/Costco, Inc. PEI began to operate as separate company from
Costco effective August 29, 1994 and became a separate publicly-traded company
on December 21, 1994. PriceSmart initially operated under the name Price Quest,
Inc. and until recently was operating under the name PQI, Inc.; however, the
Company changed its name to PriceSmart, Inc. effective June 30, 1997 in
anticipation of the spin-off of the Company from PEI.
In June 1997, the PEI Board of Directors determined to separate PEI's core
real estate business and the merchandising businesses it operated through a
number of subsidiaries. The merchandising businesses include international
merchandising businesses, domestic merchandising businesses consisting of an
auto referral program (the "Auto Referral Program") and a travel program (the
"Travel Program"). To effect such separation, PEI first transferred to the
Company, through a series of preliminary transactions, the assets listed below.
PEI then distributed on August 29, 1997 all of the Company's Common Stock pro
rata to PEI's existing stockholders through a special dividend (the
"Distribution").
The following assets were transferred to PriceSmart pursuant to the
Distribution:
- Interest in essentially all businesses which historically formed the
merchandising business segment of PEI, primarily the international
merchandising businesses, and the Auto Referral and the Travel
programs.
- Certain real estate properties held for sale.
- Notes receivable from various municipalities and agencies ("City
Notes") and certain secured notes receivable from buyers of properties
formerly owned by PEI.
- Cash and cash equivalents of approximately $58.4 million.
- All other assets and liabilities not specifically associated with
PEI's portfolio of 27 investment properties ("Investment Portfolio"),
except for current corporate income tax assets and liabilities.
BASIS OF PRESENTATION
These financial statements present the financial position, results of
operations, and cash flows for the Company as if it were a separate entity from
PEI for all periods presented. PEI's historical basis in the assets and
liabilities of the Company have been carried over. Changes in additional
paid-in capital represent the net income (loss) of the Company plus the net
change in cash and non-cash items transferred between the Company and PEI prior
to distribution.
The consolidated financial statements include the assets, liabilities and
operations transferred to the Company in connection with the Distribution. All
significant intercompany accounts and transactions have been eliminated.
The Company's operations are primarily in the merchandising business. The
international merchandising business licenses warehouse stores in Guam, the
Northern Mariana Islands and Asia and, in one case, has a 51% ownership in a
warehouse store in Panama. The Company's auto referral and travel programs
offer discounts on new cars and on travel services to Costco members.
Prior to the Distribution, the Company operated as certain subsidiaries of
PEI, utilizing PEI's centralized systems for cash management, payroll, employee
benefit plans, insurance and administrative services. Certain operating
expenses, capital expenditures and other cash requirements of the Company were
paid by PEI and charged directly or allocated to the Company, principally based
on PEI's specific identification of individual entities or relative measures of
size of entities. Such allocated amounts are included in corporate
administrative expenses and were $1.1 million, $1.4 million and $1.4 million for
each of the years ended August 31, 1997, 1996 and 1995, respectively. In the
opinion of management, the methods for allocating corporate administrative
expenses and other direct costs are reasonable. It is not practical to estimate
the costs that would have been incurred by the Company if it had operated on a
stand-alone basis.
24
<PAGE>
PRICESMART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
FISCAL YEAR
Effective September 1, 1997, the Company changed its 52/53 week fiscal year
which ends on the Sunday nearest August 31 to a fiscal year end of August 31.
For ease of presentation, all fiscal years in this report are referred to as
having ended on August 31.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of less
than three months when purchased to be cash and cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed on a
straight-line basis over the estimated useful lives of the assets, as follows:
Building and improvements. . . . . . . . . . . . . . . . . 10-25 years
Fixtures and equipment . . . . . . . . . . . . . . . . . . 3-7 years
MERCHANDISE INVENTORIES
Merchandise inventories, which include merchandise for resale and display
samples, are valued at the lower of cost (average cost) or market.
REVENUE RECOGNITION
The Company recognizes international sales upon either shipment or arrival
at destination, based on agreement. Revenues from the auto referral program are
recognized on a monthly basis when billed, pursuant to contracts which are
generally month-to-month. Revenues from travel programs are recognized as
services are performed.
INCOME TAXES
Income taxes have been provided for in accordance with SFAS No. 109,
"Accounting for Income Taxes." That standard requires companies to account for
deferred taxes using the asset and liability method. Accordingly, deferred
income taxes are provided to reflect temporary differences between financial and
tax reporting, including asset write-downs of real estate and related assets,
accelerated tax depreciation methods, and international fees. Additionally,
deferred taxes were transferred to the Company as a result of the Costco spin
out in 1994.
The Company was included in the consolidated Federal and in various
combined state tax returns of PEI. The Company was allocated the benefit of its
tax net operating losses used in PEI's consolidated or combined tax returns.
Benefits realized by PEI were not paid to the Company but were deemed to be
reductions in PEI's investment in the Company.
ASSET IMPAIRMENT
Beginning with fiscal 1996, the Company adopted SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," SFAS No. 121 requires impairment losses to be recorded on long-lived assets
used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less than
the assets' carrying amount. No such indicators of impairment were present in
fiscal 1997 and 1996. SFAS No. 121 also addresses the accounting for long-lived
assets that are expected to be disposed of. The Company estimated the sales
value, net of related selling costs, on its real estate properties which are
being held for sale and recorded impairment losses of $2.0 million and $8.0
million in fiscal 1997 and 1996 respectively. Impairment losses of $1.6 million
in fiscal 1995 were based on a risk adjusted discounted cash flow to estimate
fair value. See Note 3.
25
<PAGE>
PRICESMART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
CONCENTRATION OF CREDIT RISK
The Company sells its merchandise primarily to its international licensees.
Credit is generally extended based on letters of credit.
STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board issued
"Accounting for Stock-Based Compensation" ("SFAS No. 123") which is effective
for fiscal years beginning after December 1995. Under SFAS No. 123, stock-based
compensation expense is measured using either the intrinsic-value method as
prescribed by Accounting Principle Board Opinion No. 25 or the fair-value method
described in SFAS No. 123. The Company adopted SFAS No. 123 in fiscal 1997 using
the intrinsic-value method; accordingly, there has been no effect on the
Company's financial position or results of operations.
CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and all majority owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
OWNERSHIP BASIS OF PRESENTATION
- --------------------------------------------------------------------------------
PB Real Estate 51% Consolidated
Ventures Services, Inc. 100% Consolidated
PriceCostco Panama 51% Consolidated
Mexico Clubs, LLC 51% Consolidated (Sold in fiscal 1995)
Price Club Mexico 50% Equity Method (Sold in fiscal 1995)
- --------------------------------------------------------------------------------
AUTHORIZED STOCK
The Company's authorized stock consists of 15 million shares of $0.0001 par
value common stock and 2 million shares of $0.0001 par value preferred stock.
No preferred stock has been issued.
NET LOSS PER SHARE
Net loss per share for all periods presented is based on the 5,908,235
shares issued in connection with the Distribution.
26
<PAGE>
PRICESMART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
NOTE 3 - PROPERTY HELD FOR SALE
Property held for sale primarily includes former membership warehouse club
facilities and unimproved land, which the Company expects to dispose of in the
next twelve months. Property held for sale consists of the following (in
thousands):
AUGUST 31, AUGUST 31,
1997 1996
---- ----
Land and land improvements . . . . . . . . . . . $16,181 $23,667
Building and improvements. . . . . . . . . . . . 10,120 16,110
Construction in progress . . . . . . . . . . . . - 520
Deferred rents . . . . . . . . . . . . . . . . . 601 547
Deferred leasing costs, net. . . . . . . . . . . 423 346
--------- ---------
27,325 41,190
Accumulated depreciation . . . . . . . . . . . . (2,617) (4,641)
Provision for asset impairments:
Unimproved land. . . . . . . . . . . . . . . (755) (2,665)
Properties with buildings. . . . . . . . . . (4,040) (5,377)
--------- ---------
(4,795) (8,042)
--------- ---------
$19,913 $28,507
--------- ---------
--------- ---------
Because the properties are held for sale, the net results of the real
estate operations are presented on the combined statement of operations, and
consist of the following (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED AUGUST 31,
----------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Rental income. . . . . . . . . . . . . . . . . . $3,031 $2,798 $2,868
Gains on sales of real estate. . . . . . . . . . 389 240 24
-------- -------- --------
Total revenue. . . . . . . . . . . . . . . . 3,420 3,038 2,892
Operating, maintenance and administrative. . . . 1,690 1,724 1,427
Property taxes . . . . . . . . . . . . . . . . . 672 857 884
Depreciation and amortization. . . . . . . . . . 538 774 1,219
Provision for asset impairments. . . . . . . . . 2,000 8,042 1,600
-------- -------- --------
Total expenses . . . . . . . . . . . . . . . 4,900 11,397 5,130
-------- -------- --------
Real estate operations, net. . . . . . . . . . . $ (1,480) $ (8,359) $ (2,238)
-------- -------- --------
-------- -------- --------
</TABLE>
Provision for asset impairments represent noncash charges taken to
write-down the carrying value of real estate properties which are being held for
sale or redevelopment, and which are expected to generate net sales proceeds
below their book values. In 1995, the provision for asset impairments was
directly written off against the related properties held for sale.
The Company determines the estimated carrying value of properties held for
sale based upon the expected net sales proceeds to be received, taking into
consideration existing sales contracts, past and current sales negotiations and
relevant market data.
Certain properties held for sale generate future minimum rental income of
approximately $1.7 million per year. These properties are leased under
noncancelable leases with remaining terms ranging from less than one year to 17
years.
27
<PAGE>
PRICESMART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
NOTE 4 - CITY NOTES RECEIVABLE
The City Notes include amounts loaned to municipalities and agencies to
facilitate real property acquisition and improvements and carry interest rates
which range from 7% to 10%. Repayment of the majority of these notes is
generally based on that municipality's allocation of sales tax revenues
generated by retail businesses located on a particular property associated with
such City Note. City Note repayments are calculated in accordance with specific
revenue sharing agreements; and, under the terms of most City Notes, the unpaid
balance of the note is forgiven on its maturity date. The carrying values of
these notes was established when PEI was spun out from Costco. The carrying
values are evaluated by the Company in accordance with Statement of Financial
Accounting Standards (SFAS) No. 114, "Accounting by Creditors for Impairment of
a Loan." Interest income is recognized based upon the stated interest rates of
the various notes and amounted to $2.1 million, $2.5 million and $2.7 million
for the years ended August 31, 1997, 1996 and 1995 respectively. At August 31,
1997 and 1996, the aggregate stated principal value plus compounded interest
amounted to $67 million and $71 million, respectively. As a result, the total
carrying value of the City Notes is less than the stated principal value and
interest by $44 million and $42 million, respectively. As of August 31, 1997,
twelve City Notes were outstanding with maturity dates ranging from 1999-2028.
NOTE 5 - PROFIT SHARING AND 401(k) PLAN
Substantially all of the employees of the Company are participants in
PriceSmart's defined contribution profit sharing and 401(k) plan. Profit sharing
contributions, if any, are based on a discretionary amount determined by the
Board of Directors and are allocated to each participant based on the relative
compensation of the participant, subject to certain limitations, to the
compensation of all participants. The Company makes a matching 401(k)
contribution equal to 50% of the participant's contribution up to an annual
maximum matching contribution of $250.
Profit sharing contributions of approximately $406,000, $158,000 and
$504,000 were made for the benefit of PriceSmart plan participants during fiscal
1997, 1996, and 1995, respectively. Employer contributions to the 401(k) plan
were approximately $24,000, $31,000 and $31,000 during fiscal 1997, 1996 and
1995, respectively.
NOTE 6 - STOCK OPTION PLANS
On August 6, 1997, the Company adopted the 1997 Stock Option Plan of
PriceSmart, Inc. (the "Plan") for the benefit of its eligible employees,
consultants and independent directors. The Plan authorizes 700,000 shares of
the Company's common stock for issuance. The Compensation Committee of the
Board administers the Plan with respect to grants to employees or consultants of
the Company and the full Company Board administers the Plan with respect to
director options. At August 31, 1997, there were no options granted under this
Plan.
Certain employees and directors of the Company participated in PEI stock
option plans. Upon consummation of the Distribution, the unvested PEI options
held by these individuals were cancelled. To replace those cancelled options,
the Company will grant options to purchase PriceSmart common stock at share
amounts and prices per share so that the employees and directors will be in
substantially the same economic position as they were prior to the Distribution.
The following is a summary of the replacement options the Company plans to
issue subsequent to August 31, 1997.
<TABLE>
<CAPTION>
Weighted Average Weighted Average
Range of Weighted Average Remaining Options Exercise Price of
Exercise Prices Options Exercise Price Life in Years Exercisable Options Exercisable
- --------------- ------- -------------- ------------- ----------- -------------------
<S> <C> <C> <C> <C> <C>
$8.59 - 9.49 329,688 $8.65 3.35 - -
$10.68 - 14.69 17,364 $11.67 4.00 - -
------------
347,052 $8.80 3.39 - -
------------
------------
</TABLE>
The weighted-average fair value per option granted during 1997 and 1996
were $3.48 and $2.69, respectively.
28
<PAGE>
Pro forma information regarding net income is required by SFAS 123, and has
been determined as if the Company had accounted for its employee stock options
under the fair value method prescribed by SFAS 123. The fair value of these
options was estimated at the date of grant using the "Black-Scholes" method with
the following weighted average assumptions for 1997 and 1996: risk-free interest
rate of 6%; no annual dividend; volatility factor of the expected market price
of the Company's common stock of 26.54%; and an expected option life of three
years. The effect of applying the "Black-Scholes" method of SFAS 123 to options
granted in 1997 and 1996 did not result in pro forma net income amounts that are
materially different from amounts reported. Accordingly, such pro forma
information is not presented herein.
NOTE 7 - INCOME TAXES
The provision (benefit) for income taxes consist of the following (in
thousands):
YEARS ENDED AUGUST 31,
1997 1996 1995
---------- ---------- ----------
Current:
Federal............................ $ (3,612) $(3,431) $ (161)
State.............................. - (807) (262)
---------- ---------- ----------
(3,612) (4,238) (423)
Deferred:
Federal............................ 20,945 (1,935) (3,513)
State.............................. 568 (563) 48
---------- ---------- ----------
21,513 (2,498) (3,465)
---------- ---------- ----------
Total provision (benefit)............... $ 17,901 $ (6,736) $ (3,888)
---------- ---------- ----------
---------- ---------- ----------
A reconciliation between the Federal statutory rate and the effective tax
rate follows (in thousands):
YEARS ENDED AUGUST 31,
1997 1996 1995
Federal taxes at the statutory rate..... $ (2,430) $(6,355) $(5,742)
State taxes, net of federal benefit..... (416) (1,091) (638)
Tax losses of 51% owned subsidiaries.... 708 1,538
Valuation allowance..................... 20,683 - -
Price Club Mexico operations............ - - 893
All other, net.......................... 64 2 61
---------- ---------- ----------
Total provision (benefit).......... $ 17,901 $(6,736) $(3,888)
---------- ---------- ----------
---------- ---------- ----------
The significant components of deferred income taxes are attributable to the
following temporary differences (in thousands):
AUGUST 31, AUGUST 31,
1997 1996
---------- ----------
Deferred tax assets:
Real estate properties............................ $6,961 $10,217
City notes receivable............................. 12,535 11,756
Net operating losses.............................. 5,437 5,437
International revenues and expenses............... 228 241
Inventory and equipment reserves.................. - 304
All other, net.................................... 1,913 470
--------- ---------
Total deferred tax assets.................... 27,074 28,425
Deferred tax liabilities:
Deferred rental income............................ (261) (214)
Deferred state income taxes....................... (693) (1,261)
--------- ---------
Total deferred tax liabilities............... (954) (1,475)
Valuation allowance................................... (26,120) (5,437)
--------- ---------
Net deferred tax assets...................... - $21,513
--------- ---------
--------- ---------
29
<PAGE>
PRICESMART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
As a result of the Distribution, the Company is no longer a member of the
PEI consolidated or combined group for Federal or state income tax purposes. As
such, realization of deferred tax assets is no longer more likely than not and
therefore a valuation allowance was established for the net amount of deferred
tax assets at August 31, 1997.
At August 31, 1997 and 1996, the Company had combined net operating loss
(NOL) carryforwards of approximately $13.7 million for Federal income tax
purposes which may be applied against future taxable income. A valuation
allowance was established for potential tax benefit of these NOL carryforwards
as the certainty of their ultimate utilization is not sufficient to allow for
deferred tax assets to be recorded. These NOL carryforwards will expire in 2009
unless previously utilized.
During fiscal 1996, deferred tax assets of $351,000, representing Costco's
interest in such assets, was offset against Costco's minority interest in Price
Quest, L.L.C. In addition, a short-term deferred tax asset of $1.3 million is
included in current assets at August 31, 1996.
NOTE 8 - SALE OF INTEREST IN MEXICO JOINT VENTURE
In April 1995, the Company completed the sale of its interest in the Mexico
joint venture in return for cash of $4.0 million and cancellation of debt of
$30.5 million. The sale of the interest in the Mexico joint venture resulted in
a $2.6 million loss ($2.1 million after-tax) which is included in losses from
Mexico joint venture in fiscal 1995.
The investment by PEI at August 31, 1994 is net of a charge of $1.7 million
for the accumulated foreign currency translation related to the Company's
investment in the Mexico joint venture.
NOTE 9 - RELATED PARTY TRANSACTIONS
As a result of the Distribution to stockholders of the Company and for the
purpose of governing certain of the ongoing relationships between the Company
and PEI after the Distribution, and to provide mechanisms for an orderly
transition, the Company and PEI have entered into various agreements, and will
adopt policies, as described below.
The Company and PEI have entered into an Asset Management and Disposition
Agreement dated as of August 26, 1997 calling for PEI to provide asset
management services with respect to certain properties distributed to the
Company. As consideration for such services, the Company will pay PEI
management fees, leasing fees, disposition fees and developer's fees. Such
agreement has a two-year term; provided that either the Company or PEI may
terminate the agreement upon 60 days written notice.
The Company and PEI have entered into a Transitional Services Agreement
dated as of August 26, 1997 pursuant to which the Company and PEI will provide
certain services to one another. Fees for such transitional services (which
shall not include real estate management services) will reflect the costs of
providing such services, which may include cash management services, certain
accounting services, litigation management or any other similar services that
the Company or PEI may require. The Transitional Services Agreement will
terminate on December 31, 1997 unless extended in writing by the parties.
The Company and PEI have entered into a Tax Sharing Agreement dated as of
August 26, 1997 defining the parties' rights and obligations with respect to tax
returns and tax liabilities for taxable years and other taxable periods ending
on or before the Distribution Date. In general, PEI will be responsible for (i)
filing all Federal and state income tax returns of the Company, PEI and any of
their subsidiaries for all taxable years ending on or before or including the
Distribution Date and (ii) paying the taxes relating to such returns to the
extent attributable to pre-Distribution Date periods.
30
<PAGE>
PRICESMART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
NOTE 10 - GEOGRAPHIC AREAS AND MAJOR CUSTOMERS
YEAR ENDED
AUGUST 31,
1997
Revenues:
United States............................................... $ 51,806
Latin America............................................... 22,569
-----------
$ 74,375
-----------
-----------
Operating income (loss):
United States............................................... $ (8,299)
Latin America............................................... 120
-----------
$ (8,179)
-----------
-----------
Identifiable assets:
United States............................................... $ 113,749
Latin America............................................... 12,136
-----------
$ 125,885
-----------
-----------
Foreign operations were not significant in fiscal 1996 and 1995. The Latin
American operations consist of a 51% interest in a joint venture in Panama whose
currency is the U.S. dollar.
Export sales were approximately $58.1 million, $25.5 million and $39.3
million for the years ended August 31, 1997, 1996 and 1995, respectively.
Approximately 37% of revenues in the year ended August 31, 1997, 48% of revenues
in the year ended August 31, 1996 and 27% of revenues in the year ended
August 31, 1995 were from a single customer.
31
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
32
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
BOARD OF DIRECTORS AND COMMITTEES OF THE BOARD
The Company's Board of Directors is comprised of six directors: Robert E.
Price, Jeffrey S. Halis, Katherine L. Hensley, Leon C. Janks, Lawrence B. Krause
and Gilbert A. Partida. Such directors will serve until the next Annual Meeting
of Stockholders of the Company and until their respective successors have been
duly elected and qualified.
The table below indicates the name, position with the Company and age of
each Director.
NAME POSITION WITH PRICESMART AGE
Robert E. Price Chairman of the Board, President and Chief 54
Executive Officer
Jeffrey S. Halis Director 42
Katherine L. Hensley Director 60
Leon C. Janks Director 47
Lawrence B. Krause Director 67
Gilbert A. Partida Director 35
Robert E. Price has been Chairman of the Board, President and Chief
Executive Officer of the Company since the Distribution and has held the same
positions with the Company since July 1994. Mr. Price is also Chairman of the
Board of PEI and has held that position since July 1994. Mr. Price was also
President and Chief Executive Officer of PEI from July 1994 until the
Distribution. Mr. Price was Chairman of the Board of Costco from October 1993
to December 1994. From 1976 to October 1993, he was Chief Executive Officer and
a director of The Price Company ("TPC"). Mr. Price served as Chairman of the
Board of TPC from January 1989 to October 1993, and its President from 1976
until December 1990.
Jeffrey S. Halis has been a director of the Company since November 1997.
He is the founder of Tyndall Partners, L.P., a Delaware limited partnership,
which is a significant stockholder of the Company. He has been a director of
Kinder-Care Learning Centers (1993-1997) and is currently a director of Enstar
Group, a publicly held company.
Katherine L. Hensley has been a director of the Company since July 1997 and
served as a director of PEI from December 1994 until the Distribution. She is a
lawyer and a retired partner of the law firm of O'Melveny & Myers in Los
Angeles, California. Ms. Hensley joined O'Melveny & Myers in 1978 and was a
partner from 1986 to February 1992. Ms. Hensley is a trustee of Security First
Trust, an open-end investment management company registered under the Investment
Company Act of 1940.
Leon C. Janks has been a director of the Company since July 1997 and served
as a director of PEI from March 1995 until the Distribution. He has been a
partner in the accounting firm of Alder, Green & Hasson in Los Angeles,
California since 1980. Mr. Janks has extensive experience in domestic and
international business serving a wide variety of clients in diverse businesses.
Lawrence B. Krause has been a director of the Company since July 1997. Mr.
Krause has been a Professor and the Director of the Korea-Pacific Program at the
Graduate School of International Relations and Pacific Studies at the University
of California, San Diego since 1986. He became a Professor Emeritus in 1997. Mr.
Krause also serves on advisory boards for a number of institutions including the
Institute for International Economics, the Korea Economic Institute, the
Committee on Asian Economic Studies and the U.S. National Committee for Pacific
Economic Cooperation.
33
<PAGE>
Gilbert A. Partida has been a director of the Company since July 1997. Mr.
Partida is President and Chief Executive Officer of the Greater San Diego
Chamber of Commerce, a position he has held since January 1993. Prior to joining
the Chamber of Commerce, Mr. Partida was an attorney with the law firm of Gray,
Cary, Ames & Frye in San Diego, California from 1987 to 1992.
COMMITTEES OF THE BOARD OF DIRECTORS OF THE COMPANY
AUDIT COMMITTEE. The Audit Committee consists of Messrs. Janks, Partida
and Price. The Audit Committee reviews the annual audits of the Company's
independent public accountants, reviews and evaluates internal accounting
controls, recommends the selection of the Company's independent public
accountants, reviews and passes upon (or ratifies) related party transactions,
and conducts such reviews and examinations as it deems necessary with respect to
the practices and policies of, and the relationship between, the Company and its
independent public accountants.
COMPENSATION COMMITTEE. The Compensation Committee consists of Ms. Hensley
and Messrs. Krause and Partida. The Compensation Committee reviews salaries,
bonuses and stock options of senior officers of the Company, and administers the
Company's executive compensation policies and stock option plans.
NOMINATING COMMITTEE. The Nominating Committee consists of Ms. Hensley and
Mr. Price. The Nominating Committee recommends candidates to fill vacancies on
the Board of Directors or any committee thereof, which vacancies may be created
by the departure of any directors, or the expansion of the number of members of
the Board. The Nominating Committee gives appropriate consideration to qualified
persons recommended by stockholders for nomination as Directors provided that
such recommendations are accompanied by information sufficient to enable the
Nominating Committee to evaluate the qualifications of the nominee.
EXECUTIVE COMMITTEE. The Executive Committee consists of Messrs. Price and
Janks and Ms. Hensley. The Executive Committee has all powers and rights
necessary to exercise the full authority of the Board of Directors in the
management of the business and affairs of the Company, except as provided in the
Delaware General Corporation Law or the Bylaws of the Company.
FINANCE COMMITTEE. The Finance Committee consists of Messrs. Janks, Krause
and Partida. The Finance Committee reviews and makes recommendations with
respect to (i) annual budgets, (ii) investments, (iii) financing arrangements
and (iv) the creation, incurrence, assumption or guaranty by the Company of any
indebtedness, obligation or liability, except, in each case, for any such
transactions entered into in the ordinary course of business of the Company.
COMPENSATION OF THE BOARD OF DIRECTORS
Each non-employee director of the Company receives $20,000 per year for
serving on the Board of Directors and an additional $5,000 per year for serving
as chairman of any committee of the Company Board. In addition, non-employee
directors who serve on committees of the Company Board (in a capacity other than
chairman of a committee) receive $500 for each meeting attended. The chairman or
vice chairman of any committee may receive additional compensation to be fixed
by the Company Board. Each director is eligible to receive stock grants and
stock options pursuant to the PriceSmart Stock Option Plan.
Directors also receive reimbursement for travel expenses incurred in
connection with their duties as directors.
34
<PAGE>
EXECUTIVE OFFICERS
Set forth below are the names, positions and ages of the executive officers
of the Company:
NAME POSITION WITH PRICESMART AGE
Robert E. Price..... Chairman of the Board, President and Chief 54
Executive Officer
Robert M. Gans...... Executive Vice President, Secretary and General 48
Counsel
Karen J. Ratcliff... Executive Vice President and Chief Financial 45
Officer
Theodore Wallace.... Executive Vice President and Chief Operating 48
Officer
Robert E. Price has been Chairman of the Board, President and Chief
Executive Officer of the Company since the Distribution and has held the same
positions with the Company since July 1994. Mr. Price is also Chairman of the
Board of PEI and has held that position since July 1994. Mr. Price was also
President and Chief Executive Officer of PEI from July 1994 until the
Distribution. Mr. Price was Chairman of the Board of Costco from October 1993 to
December 1994. From 1976 to October 1993, he was Chief Executive Officer and a
director of TPC. Mr. Price served as Chairman of the Board of TPC from January
1989 to October 1993, and its President from 1976 until December 1990.
Robert M. Gans has been Executive Vice President, Secretary and General
Counsel of the Company since the Distribution. From October 17, 1994 until the
Distribution, Mr. Gans had been Executive Vice President and General Counsel of
PEI. Mr. Gans graduated from the UCLA School of Law in 1975 and actively
practiced law in private practice from 1975 until 1994. From 1988 until October
1994, Mr. Gans was the senior member of the law firm of Gans, Blackmar &
Stevens, A.P.C., of San Diego, California.
Karen J. Ratcliff has been Executive Vice President and Chief Financial
Officer of the Company since September 1997. From October 1995 to September
1997, Ms. Ratcliff operated a financial advisory firm in Orange County. From
January 1991 to August 1995, Ms. Ratcliff worked for a publicly traded company,
Vans, Inc., serving first as Vice President and Controller and, subsequently, as
Vice President and Chief Financial Officer. Ms. Ratcliff also spent a number of
years working at the Securities and Exchange Commission in Washington, D.C. and
at KPMG Peat Marwick. Ms. Ratcliff graduated from California State University
at Dominguez Hills in 1983 with Bachelor of Science Degrees in Accounting and
Business Information Systems and is a Certified Public Accountant.
Theodore Wallace has been Executive Vice President and Chief Operating
Officer of the Company since the Distribution. From November 1994 until the
Distribution, Mr. Wallace had been an Executive Vice President of PEI and served
as Chief Executive Officer of Price Ventures, Inc., a former subsidiary of PEI
("Price Ventures"). From October 1993 to November 1994, Mr. Wallace was
Executive Vice President of Costco overseeing international expansion into the
Pacific Rim and other markets. Mr. Wallace became an Executive Vice President of
TPC in 1984 and, from 1988 until Fall 1992, he was Chief Operating Officer (East
Coast) of TPC. He was a director of TPC from October 1988 to October 1993. He
joined TPC as a warehouse manager in September 1977 and was its Vice President
of Operations from 1983 to 1988.
35
<PAGE>
CERTAIN OTHER OFFICERS
Set forth below are the names, positions and ages of certain significant
employees of the Company, all of whom transferred from PEI to the Company
concurrently with the Distribution:
NAME POSITION WITH PRICESMART AGE
Kevin C. Breen........ Senior Vice President, Operations 37
Daniel L. Brockman.... Senior Vice President, Finance 43
Connie M. Depew....... Vice President, Service Centers 40
Edward H. Depew, III.. Vice President, Distribution and Logistics 52
Glen C. Dobi.......... Vice President, Travel Program 37
Brud E. Drachman...... Vice President, Construction 43
Walt H. Green......... Vice President, Auto Program 55
Thomas L. Hammer...... Senior Vice President, Buying and Merchandising 43
Thomas D. Martin...... Senior Vice President, Merchandising 41
William J. Naylon, Jr. Vice President, Operations 35
Joseph J. Tebo........ Senior Vice President, International Business 61
Kevin C. Breen had been Executive Vice President of Price Ventures since
February 1997, overseeing operational and construction management areas for the
international merchandising business. Prior to joining PEI as Vice President in
August 1994, Mr. Breen served as Vice President of Costco with responsibility
for managing the 17-location region in Southern Los Angeles and Orange County.
From September 1991 until the merger with Costco, he was Vice President of TPC
with regional operations responsibilities. Mr. Breen began his career with TPC
in March 1979 and became a warehouse manager in December 1984.
Daniel L. Brockman had been with PEI since October 1994, initially as the
Director of Internal Audit. Mr. Brockman later became the Chief Financial
Officer of PEI's Price Global, Price Quest and Price Ventures subsidiaries
and held such positions until the Distribution was consummated. From 1989 to
1994, Mr. Brockman worked for TPC and Costco in a variety of financial
executive positions, including Director of Internal Audit, Director of
Finance and Director of Financial Planning. Mr. Brockman graduated from San
Diego State University with a B.S. in Accounting in 1977 and is a Certified
Public Accountant.
Connie M. Depew had been with PEI since its inception in August 1994 as the
Director of Warehouse Operations. From February 1983 to August 1994, Ms. Depew
worked for TPC and Costco where she worked in various warehouse administrative
roles and ultimately Warehouse Manager for Signal Hill. Prior to joining TPC,
Ms. Depew worked as an internal auditor for FedMart.
Edward H. Depew, III had been with PEI since its inception in August 1994,
and was responsible for export distribution and transportation worldwide. Prior
to joining PEI, Mr. Depew worked for Costco as Vice President of International
Distribution, focusing on Costco's Mexican and Korean operations. From 1989 to
1993, Mr. Depew was Vice President of West Coast distribution for TPC. Mr. Depew
possesses over 25 years of experience in warehousing and transportation
management.
Glen C. Dobi joined PEI in August 1994 as the Director of PriceCostco
Realty, overseeing an affinity-based business offering home selling services to
Costco members. During 1995, the program was discontinued and Mr. Dobi began to
work for the Costco Travel Program, a program he currently manages. From
September 1991 to 1994, Mr. Dobi worked for TPC and Costco where he was a
financial analyst for TPC's chief financial officer. Mr. Dobi graduated from the
University of Texas with an MBA degree and a B.S. degree in engineering.
Brud E. Drachman had been with PEI since August 1994, overseeing design,
construction and facility equipment procurement for the international
merchandising businesses. Mr. Drachman's previous international experience was
with Costco, focusing on Mexico and Korea development. He joined TPC in 1987 as
Project Manager and participated in a variety of domestic projects. Mr. Drachman
graduated from San Diego State University with a B.A. degree in political
science in 1978.
36
<PAGE>
Walt H. Green had been with PEI since its inception in August 1994 as the
Director of the Auto Referral Program. From November 1988 to August 1994, Mr.
Green worked for TPC and Costco where he worked as an automotive products buyer.
Prior to joining TPC, Mr. Green spent seven years with Select-A-Car, Inc. as a
customer representative and manager for a related business at a local credit
union location. Mr. Green graduated from the University of Wisconsin with a B.A.
degree in marketing and economics in 1967.
Thomas L. Hammer had been Executive Vice President of Price Ventures since
February 1997, overseeing the buying and merchandising areas for the
international merchandising business, with specific focus on U.S.-sourced brand
name and private label goods. Prior to joining PEI as Vice President in July
1994, Mr. Hammer served as Vice President of Costco, overseeing the
merchandising area of Price Club Mexico. He joined TPC in July 1983 as a buyer
and has served in various management roles in TPC's buying offices.
Thomas D. Martin had been Executive Vice President of Price Ventures since
February 1997, directing merchandising strategies and product sourcing for its
international merchandising business, in addition to managing its trading
company activities. Prior to joining PEI as Vice President in July 1994, Mr.
Martin served as Vice President of Costco and directed the merchandising efforts
for Price Club Korea and PriceCostco Saipan. He joined TPC in May 1977 and has
served in various management roles in both buying and store operations for TPC.
William J. Naylon Jr. joined PEI in October 1995 as Managing Director for
PriceSmart Indonesia. Mr. Naylon has been stationed in Indonesia since February
1996 overseeing the start up and development of the Indonesia licensee's
headquarters and first two PriceSmart outlets. Prior to joining PEI, Mr. Naylon
was the warehouse manager of the Westbury, New York Price Club. Mr. Naylon began
his career with TPC in 1985.
Joseph J. Tebo had been the President of Price Ventures since November 14,
1994. From May 1994 to November 1994, Mr. Tebo was President of the Tebo Group,
an international retail consulting firm. From January 1990 to April 1994, Mr.
Tebo was President and Chief Executive Officer of AM/PM International, a wholly
owned subsidiary of Atlantic Richfield Company (ARCO), which has developed
licensing and joint venture arrangements for AM/PM convenience stores in 10
countries throughout the Pacific Rim and the Americas.
ITEM 11. EXECUTIVE COMPENSATION
Prior to the Distribution, the individuals serving as the Company's chief
executive officer and the two next most highly compensated executive officers
(the "Named Executive Officers") were employed by PEI. The following Summary
Compensation Table sets forth a summary of the compensation paid during the past
three fiscal years by PEI to these individuals. The compensation amounts in the
following tables represent all compensation paid to each such individual in
connection with his position with PEI.
37
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
NAME AND PRINCIPAL ------------------------------------------ -------------------
- ------------------ OTHER ANNUAL SECURITIES UNDERLYING ALL OTHER
POSITION(S)(4) YEAR SALARY($) BONUS($) COMPENSATION($)(1) OPTIONS/ SARS(#) COMPENSATION($)(2)
- -------------- ---- --------- -------- ------------------ ---------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Robert E. Price, 1997 225,000 0 0 0 9,750
President and Chief 1996 225,000 0 0 0 4,422
Executive Officer 1995 243,340 0 0 0 9,500
Theodore Wallace, 1997 200,000 0 0 0 9,750
Executive Vice- 1996 200,000 0 0 0 3,960
President and Chief 1995 215,191 0 100,000(3) 100,000 9,500
Operating Officer
Robert M. Gans, 1997 175,000 40,000 0 0 9,750
Executive Vice- 1996 150,000 35,000 0 0 250
President, Secretary 1995 132,693 25,000 0 75,000 0
and General Counsel
</TABLE>
(1) Except as otherwise indicated, perquisites to each officer did not
exceed the lesser of $50,000 or 10% of the total salary and bonus for
such officer.
(2) The amounts shown for fiscal 1997 constitute contributions to The Price
Enterprises Profit Sharing and 401(k) Plan and PEI's 401(k) matching
contribution of $250 for fiscal 1997 on behalf of each Named Executive
Officer. The amounts shown for fiscal 1996 constitute contributions to
The Price Enterprises Profit Sharing and 401(k) Plan for the period of
September 4, 1995 through December 31, 1995, and the Company's 401(k)
matching contribution of $250 for fiscal 1996 on behalf of each Named
Executive Officer. During fiscal 1996, the "plan year" for The Price
Enterprises Profit Sharing and 401(k) Plan was converted to a calendar
year from a fiscal year.
(3) Amount constitutes a retention bonus paid to Mr. Wallace for agreeing to
transfer employment from Costco to PEI in fiscal 1995.
(4) The Named Executive Officers resigned as officers of PEI on August 29,
1997, and became officers of the Company. The current executive
officers of the Company are described above under the heading "Executive
Officers."
No stock options were granted to the Named Executive Officers during fiscal
1997 and no stock options were outstanding as of the end of such year. Messrs.
Wallace and Gans, however, received on October 8, 1997 non-qualified stock
options to purchase shares of the Company's Common Stock, containing
substantially equivalent terms as the unvested options to purchase shares of PEI
common stock held by such individuals prior to the Distribution, which unvested
options were cancelled upon these individuals' termination of employment from
PEI. The exercise price of and the number of shares covered by these
replacement options were set to preserve the aggregate spread in value
attributed to such unvested PEI options which had been held by such individuals.
In addition, on October 8, 1997, Mr. Gans was granted options to purchase an
additional 10,000 shares of Common Stock.
38
<PAGE>
INDEMNIFICATION AGREEMENTS
The Company has entered into indemnification agreements with its directors
and certain officers (each, an "Indemnified Person"). An Indemnified Person is
specifically indemnified and held harmless under such agreements for costs and
expenses, including without limitation, damages, judgments, amounts paid in
settlement, reasonable costs of investigation, reasonable attorneys' fees, costs
of investigative, judicial or administrative proceedings or appeals, costs or
attachment of similar bonds, fines, penalties, and excise taxes assessed with
respect to employee benefit plans actually and reasonably incurred in connection
with a threatened, pending or completed claim, action, suit or proceeding by
reason of the fact that (i) he or she is or was a director, officer, employee
and/or agent of the Company; or (ii) is or was serving as a director, officer,
employee, trustee and/or agent of another corporation or entity at the request
of the Company. To qualify for indemnification, the claim must not be: (i) based
solely upon an Indemnified Person's gaining in fact any personal profit or
advantage to which he or she was not legally entitled; (ii) an accounting for
profits made from the purchase or sale of securities pursuant to Section 16(b)
of the Exchange Act; and (iii) based solely upon knowingly fraudulent,
deliberately dishonest, or willful misconduct on the part of the Indemnified
Person. The Company will indemnify the Indemnified Person to the extent that (i)
the Indemnified Person gives the Company prompt written notice of any claim;
(ii) expenses have not been advanced pursuant to Article Eighth of the Company's
Amended and Restated Certificate of Incorporation; (iii) the Indemnified Person
has not already received payment pursuant to collectible insurance policies; and
(iv) indemnification is not unlawful.
Under such indemnification agreements, the Company will advance costs and
expenses incurred by the Indemnified Person in advance of the final disposition
of an action, suit or proceeding if he or she undertakes to repay amounts
advanced if it is ultimately determined by a court of competent jurisdiction
that he or she is not entitled to be indemnified by the Company. The Company
will advance costs and expenses related to defending or investigating an action,
suit or proceeding unless a determination is made that (i) the Indemnified
Person did not act in good faith and in a manner he or she reasonably believed
to be in or not opposed to the best interests of the Company; (ii) the
Indemnified Person intentionally breached his or her duty to the Company or its
stockholders; (iii) with respect to any criminal action or proceeding, the
Indemnified Person had reasonable cause to believe his or her conduct was
unlawful. Such determination will be made by a majority vote of a quorum of the
Board consisting of directors not a party to the suit, action or proceeding, by
a written opinion of independent legal counsel, by the stockholders or by a
final, nonappealable adjudication in a court of competent jurisdiction. If the
Company advances costs and expenses of any action, suit or proceeding, the
Company reserves the right to assume the defense of such action, suit or
proceeding upon written notice to the Indemnified Person of its intention to do
so. After delivery of such notice, the Company shall not be liable for any costs
or expenses incurred by the Indemnified Person in retaining separate counsel
unless (i) the employment of separate counsel was previously authorized by the
Company; (ii) the Indemnified Person reasonably concludes that joint
representation would entail a conflict of interest; or (iii) the Company shall
not, in fact, have employed counsel to assume the defense of such action, suit
or proceeding. The indemnification provisions and provisions for advancing
expenses in such agreements are expressly not exclusive of any other rights of
indemnification or advancement of expenses pursuant to the Delaware General
Corporation Law ("DGCL") and the Company's Certificate of Incorporation and
Bylaws.
PRICESMART STOCK OPTION PLAN
In August 1997, the Company adopted the 1997 PriceSmart Stock Option Plan
of PriceSmart, Inc. (the "PriceSmart Stock Option Plan"). The PriceSmart Stock
Option Plan was approved by PEI as sole stockholder of the Company as of August
7, 1997. The principal purposes of the PriceSmart Stock Option Plan are to
provide incentives for officers, employees and consultants of the Company and
its subsidiaries through the granting of options ("Options"), thereby
stimulating their personal and active interest in the Company's development and
financial success, and inducing them to remain in the Company's employ. In
addition to Options granted to officers, employees or consultants, the
PriceSmart Stock Option Plan provides for formula grants of Options ("Director
Options") to the Company's independent non-employee directors.
Under the PriceSmart Stock Option Plan, not more than 700,000 shares of
Common Stock (or the equivalent in other equity securities) are authorized for
issuance upon exercise of Options. Furthermore, the maximum number of shares
which may be subject to Options granted under the PriceSmart Stock Option Plan
to
39
<PAGE>
any individual in any calendar year cannot exceed 125,000. The Company has
granted to certain executive officers and other employees, Options to purchase
shares of Common Stock.
The principal features of the PriceSmart Stock Option Plan are summarized
below.
ADMINISTRATION. The Compensation Committee of the Board (the "Committee")
administers the PriceSmart Stock Option Plan with respect to grants to employees
or consultants of the Company and the full Company Board administers the
PriceSmart Stock Option Plan with respect to Director Options. The Committee
consists of three members of the Company Board, each of whom is a "non-employee
director" for purposes of Rule 16b-3 under the Securities Exchange Act of 1934,
as amended ("Rule 16b-3"), and, with respect to Options which are intended to
constitute performance-based compensation under Section 162(m) of the Internal
Revenue Code of 1986, as amended (the "Code"), an "outside director" for the
purposes of Section 162(m) of the Code. Subject to the terms and conditions of
the PriceSmart Stock Option Plan, the Company Board or Committee has the
authority to select the persons to whom Options are to be granted, to determine
the number of shares to be subject thereto and the terms and conditions thereof,
and to make all other determinations and to take all other actions necessary or
advisable for the administration of the PriceSmart Stock Option Plan. Similarly,
the Company Board has discretion to determine the terms and conditions of
Director Options and to interpret and administer the PriceSmart Stock Option
Plan with respect to Director Options. The Committee (and the Company Board) are
also authorized to adopt, amend and rescind rules relating to the administration
of the PriceSmart Stock Option Plan.
ELIGIBILITY. Options under the PriceSmart Stock Option Plan may be granted
to individuals who are then officers or other employees of the Company or any of
its present or future subsidiaries. Such Options also may be granted to
consultants of the Company selected by the Company Board or Committee for
participation in the PriceSmart Stock Option Plan. Non-employee directors of the
Company will be granted NQSOs (as defined herein) pursuant to the formula grant
provisions of the PriceSmart Stock Option Plan.
OPTIONS UNDER THE PRICESMART OPTION PLAN. The PriceSmart Option Plan
provides that the Committee may grant or issue stock Options. Each grant will
be set forth in a separate agreement with the person receiving the award and
will indicate the type, terms and conditions of the grant.
Nonqualified Stock Options ("NQSOs") will provide for the right to purchase
Common Stock at a specified price which, except with respect to NQSOs intended
to qualify as performance-based compensation under Section 162(m) of the Code,
may be less than fair market value on the date of grant (but not less than par
value), and usually will become exercisable (in the discretion of the Company
Board or Committee) in one or more installments after the grant date, subject to
the participant's continued employment with the Company and/or subject to the
satisfaction of individual or Company performance targets established by the
Company Board or Committee. NQSOs may be granted for any term specified by the
Company Board or Committee.
Incentive Stock Options ("ISOs") will be designed to comply with the
provisions of the Code and will be subject to certain restrictions contained in
the Code. Among such restrictions, ISOs must have an exercise price not less
than the fair market value of a share of Common Stock on the date of grant, may
only be granted to employees, must expire within a specified period of time
following the optionee's termination of employment, and must be exercised within
the ten years after the date of grant. ISOs may be subsequently modified to
disqualify them from treatment as ISOs. In the case of an ISO granted to an
individual who owns (or is deemed to own) at least 10% of the total combined
voting power of all classes of stock of the Company, the PriceSmart Stock Option
Plan provides that the exercise price must be at least 110% of the fair market
value of a share of Common Stock on the date of grant and the ISO must expire
upon the fifth anniversary of the date of its grant.
SECURITIES LAWS AND FEDERAL INCOME TAXES. The PriceSmart Stock Option Plan
is intended to conform to the extent necessary with all provisions of the
Securities Act and the Exchange Act, and any and all regulations and rules
promulgated by the Securities and Exchange Commission thereunder, including
without limitation Rule 16b-3. The PriceSmart Stock Option Plan has been and
will be administered, and Options have been and will be granted, and may be
exercised, only in such a manner as to conform to such laws, rules and
regulations. To the extent permitted by applicable law, the PriceSmart Stock
Option Plan and Options granted thereunder shall be deemed amended to the extent
necessary to conform to such laws, rules and regulations.
40
<PAGE>
Under current federal tax laws, in general, recipients of grants of NQSO's
under the PriceSmart Stock Option Plan are taxable under Section 83 of the Code
upon their receipt of Common Stock or cash with respect to such grants and,
subject to Section 162(m) of the Code, the Company will be entitled to an income
tax deduction with respect to the amounts taxable to such recipients. Under
Sections 421 and 422 of the Code, recipients of ISOs are generally not taxable
on their receipt of Common Stock upon their exercise of ISOs if the ISOs and
option stock are held for certain minimum holding periods and, in such event,
the Company is not entitled to income tax deductions with respect to such
exercises. Participants in the PriceSmart Stock Option Plan will be provided
with detailed information regarding the tax consequences relating to the various
types of grants under the plan.
In general, under Section 162(m) of the Code ("Section 162(m)"), income
tax deductions of publicly-held corporations may be limited to the extent total
compensation (including base salary, annual bonus, stock option exercises and
non-qualified benefits paid) for certain executive officers exceeds $1 million
(less the amount of any "excess parachute payments" as defined in Section 280G
of the Code) in any one year. However, under Section 162(m), the deduction
limit does not apply to certain "performance-based compensation" established by
an independent compensation committee which is adequately disclosed to, and
approved by, stockholders. In particular, stock options will satisfy the
"performance-based compensation" exception if the options are granted by a
qualifying compensation committee, the plan sets the maximum number of shares
that can be granted to any person within a specified period and the compensation
is based solely on an increase in the stock price after the grant date (i.e.,
the option exercise price is equal to or greater than the fair market value of
the stock subject to the award on the grant date). Under a Section 162(m)
transition rule for compensation plans of corporations which are privately held
and which become publicly held, the Stock Option Plan will not be subject to
Section 162(m) until the earlier of (i) the material modification of the Stock
Option Plan; (ii) the issuance of all employer stock and other compensation that
has been allocated under the Stock Option Plan; or (iii) the first meeting of
stockholders at which directors are to be elected that occurs after December 31,
1999 (the "Transition Date").
The Company has attempted to structure the Stock Option Plan in such a
manner that, after the Transition Date, subject to obtaining stockholder
approval for the stock options, the remuneration attributable to stock options
which meet the other requirements of Section 102(m) will not be subject to the
$1,000,000 limitation. The Company has not, however, requested a ruling from
the IRS or an opinion of counsel regarding this issue.
PROFIT SHARING AND 401(k) PLAN
PEI and the Company have taken all action necessary or appropriate to
permit the Company to become a sponsor of and to permit employees of the Company
to participate in the PEI Plan. The PEI Plan is a profit-sharing plan designed
to be a "qualified" plan under applicable provisions of the Code, covering all
employees who have completed one year of service, as defined in the PEI Plan.
Under the PEI Plan, each of PEI and the Company may, in its discretion, make
annual contributions with respect to its employees which shall not exceed for
each participant the lesser of: (a) 25% of the participant's compensation for
such year, or (b) the greater of (i) 25% of the defined benefit dollar
limitation then in effect under section 415(b)(1) of the Code or (ii) $30,000.
In addition, participants may make voluntary contributions. The PEI Plan also
permits employees to defer (in accordance with section 401(k) of the Code) a
portion of their salary and contribute those deferrals to the PEI Plan.
All participants in the PEI Plan are fully vested in their voluntary
contributions and earnings thereon. Vesting in the remainder of a participant's
account is based upon his or her years of service with the Company, PEI, Costco,
TPC and certain affiliated parties. A participant initially is 20% vested after
the completion of two years of service, and an additional 20% vested after the
completion of each of his or her next four years of service, so that the
participant is 100% vested after the completion of six years of service.
A participant becomes fully vested in his or her entire account upon
retirement due to permanent disability, attainment of age 65 or death. In
addition, the PEI Plan provides that the Board of Directors of the Company may
at any time declare the PEI Plan partially or completely terminated with respect
to the employees of the Company in which event the account of each participant
with respect to whom the PEI Plan is terminated will become fully vested.
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PEI and the Company will jointly sponsor the PEI Plan until 30 days after
written notice from either party to the other requesting an end to joint
sponsorship of the PEI Plan (the "Cut-Off Date"). Effective as of the Cut-Off
Date, either PEI or the Company will take all action necessary to establish and
administer a new profit sharing and 401(k) plan (the "New Plan"), which would be
expected to have terms and conditions substantially similar to the PEI Plan.
The New Plan will be a split up of that portion of the PEI Plan which is
attributable to employees of PEI or the Company, as the case may be. Board of
Directors of each PEI and the Company also has the right at any time to
discontinue contributions to the PEI Plan. If PEI or the Company fails to make
one or more substantial contributions to the PEI Plan for any period of three
consecutive years in each year of which PEI or the Company realized substantial
current earnings, such failure will automatically be deemed a complete
discontinuance of contributions. In the event of such a complete discontinuance
of contributions, the account of each participant will become fully vested.
EMPLOYMENT CONTRACTS
Mr. Gans entered into an employment agreement with PEI for a term of three
years commencing October 17, 1994. Pursuant to his agreement, Mr. Gans received
a base annual salary of $150,000 through fiscal year 1996. This base salary was
increased by PEI's Compensation Committee to $175,000 beginning fiscal year
1997. On April 28, 1997 the term of the employment agreement was extended to
October 16, 1998. PEI assigned Mr. Gans' employment agreement to the Company
pursuant to the assignment provisions contained in the agreement, and on
September 2, 1997 the term of the employment agreement was extended to October
16, 2000. Under the agreement, Mr. Gans may not engage in any activities, with
or without compensation, that would interfere with the performance of his duties
or that would be adverse to the Company's interests, without the prior written
consent of the Company. The agreement provides that Mr. Gans will be eligible to
participate in the Company's bonus plan and receive all other benefits offered
to officers under the Company's standard company benefits practices and plans.
Mr. Gans may terminate his agreement at any time on 90 days prior written
notice. The Company may terminate the agreement for cause upon immediate notice
thereof, or upon the death or disability of Mr. Gans. In the event that the
Company terminates the agreement for any reason other than cause, Mr. Gans shall
be entitled, for the remainder of the term of the agreement, to the continuation
of his base salary payable in conformity with the Company's normal payroll
period, and to inclusion in the stock option plan, profit sharing and 401(k)
plan and medical plans of the Company for the remainder of the term of the
agreement. The foregoing severance benefits are the exclusive benefits that
would be payable to Mr. Gans by reason of his termination, and the Company is
not obligated to segregate any assets or procure any investment in order to fund
such severance benefits. The agreement also contains confidentiality provisions
and other terms and conditions customary to executive employment agreements.
Ms. Ratcliff entered into an employment agreement with the Company for a
term of two years commencing September 29, 1997. Pursuant to this Agreement,
Ms. Ratcliff will serve as Executive Vice President and Chief Financial Officer
of the Company at a base annual salary of $135,000 during the term of the
agreement. The agreement also anticipates that Ms. Ratcliff will receive
options to purchase 50,000 shares of the Company's Common Stock under the
PriceSmart Stock Option Plan, subject to the Compensation Committee granting
such options at its sole discretion, such options to be exercisable at 20% per
year over a five-year period. Under the agreement, Ms. Ratcliff may not engage
in any activities, with or without compensation, that would interfere with the
performance of her duties or that would be adverse to the Company's interests,
without the prior written consent of the Company. The agreement provides that
Ms. Ratcliff will be eligible to participate in the Company's bonus plan and
receive all other benefits offered to officers under the Company's standard
company benefits practices and plans. Ms. Ratcliff may terminate her agreement
at any time on 90 days prior written notice. The Company may terminate the
agreement for cause upon immediate notice thereof, or upon the death or
disability of Ms. Ratcliff. In the event that the Company terminates the
agreement for any reason other than cause, Ms. Ratcliff shall be entitled to the
continuation of her base salary payable in conformity with the Company's normal
payroll period for six months or for the remainder of the employment term,
whichever is longer, and if the agreement is not terminated then, upon
expiration of the employment term, Ms. Ratcliff shall be entitled to
continuation of her base salary for six months, payable in conformity with the
Company's normal payroll period. The foregoing severance benefits are the
exclusive benefits that would be payable to Ms. Ratcliff by reason of her
termination, and the Company is not obligated to segregate any assets or procure
any investment in order to fund such severance benefits. The
42
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agreement also contains confidentiality provisions and other terms and
conditions customary to executive employment agreements.
43
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the number of shares of Company Common Stock
owned as of November 14, 1997 by (i) the Named Executive Officers (as
hereinafter defined) and directors of the Company, (ii) all of the Company's
executive officers and directors as a group and (iii) all other stockholders
known by the Company to own beneficially more than five percent of the Common
Stock. A list of the individuals who are the executive officers of the Company
is set forth under the heading "Executive Officers" in "Item 10. Directors and
Executive Officers of the Registrant." Except as otherwise indicated, each
individual named is expected to have sole investment and voting power with
respect to the securities shown.
Amount and
Nature of
Beneficial Percent
Name and Address(1) Ownership Beneficially
- ------------------- --------- Owned
-----
Robert E. Price................................... 1,281,903(2) 21.7%
Jeffrey S. Halis.................................. 518,125(3) 8.8%
Katherine L. Hensley.............................. 2,787(4) *
Leon C. Janks..................................... 0(5) *
Lawrence B. Krause................................ 300(6) *
Gilbert A. Partida................................ 0(7) *
Robert M. Gans.................................... 7,163(8) *
Karen J. Ratcliff................................. 0(9) *
Theodore Wallace.................................. 17,372(10) *
Sol Price......................................... 2,116,601(11) 35.8%
All Executive Officers and Directors as a group
(nine persons)................................... 1,827,650(12) 30.8%
* Less than 1% beneficially owned.
(1) The address for all persons listed, other than Sol Price is c/o
PriceSmart, Inc., 4649 Morena Boulevard, San Diego, California 92117.
The address for Sol Price is c/o The Price Entities, 7979 Ivanhoe Avenue,
Suite 520, La Jolla, California 92037.
(2) 1,281,903 shares are beneficially owned by Robert E. Price. Of such
shares, 655,500 shares are held through trusts of which Mr. Price is a
trustee. Mr. Price disclaims beneficial ownership of 625,125 shares
which are held by the Price Family Charitable Fund, of which Mr. Price
is a Director.
(3) 518,125 shares are beneficially owned by Jeffrey S. Halis. Of such
shares, 308,525 shares are owned by Tyndall Partners, L.P., a Delaware
limited partnership; 128,925 shares are owned by Tyndall Institutional
Partners, L.P., a Delaware limited partnership; 49,625 shares are owned
by Madison Avenue Partners, L.P., a Delaware limited partnership; 29,800
shares are owned by Halo International, Ltd., a company organized under
the laws of the Cayman Islands; and 1,250 shares are owned individually
by Mr. Halis. Pursuant to the Agreement of Limited Partnership of each
of Tyndall Partners, L.P., Tyndall Institutional Partners, L.P., and
Madison Avenue Partners, L.P., and the Investment Management Agreement
of Halo International, Ltd., Mr. Halis possesses sole voting and
investment control over all securities owned by the entities names
above. Excludes 3,000 shares subject to non-qualified stock options
which are not presently exercisable and which will not be exercisable
within 60 days of the date of this table.
(4) Includes 2,621 shares subject to non-qualified stock options which will
become exercisable within 60 days of the date of this table. Excludes
8,241 shares subject to non-qualified stock options which are not
presently exercisable and which will not be exercisable within 60 days
of the date of this table.
(5) Excludes 10,862 shares subject to non-qualified stock options which are
not presently exercisable and which will not be exercisable within 60
days of the date of this table.
(6) Excludes 3,000 shares subject to non-qualified stock options which are
not presently exercisable and which will not be exercisable within 60
days of the date of this table.
44
<PAGE>
(7) Excludes 3,000 shares subject to non-qualified stock options which are
not presently exercisable and which will not be exercisable within 60
days of the date of this table.
(8) Includes 7,163 shares subject to non-qualified stock options which will
become exercisable within 60 days of the date of this table. Excludes
49,312 shares subject to non-qualified stock options which are not
presently exercisable and which will not be exercisable within 60 days
of the date of this table.
(9) Excludes 50,000 shares subject to non-qualified stock options which are
not presently exercisable and which will not be exercisable within 60
days of the date of this table.
(10) Includes 9,550 shares subject to non-qualified stock options which will
become exercisable within 60 days of the date of this table. Excludes
52,416 shares subject to non-qualified stock options which are not
presently exercisable and which will not be exercisable within 60 days
of the date of this table.
(11) Includes 1,446,164 shares held through trusts of which Mr. Price is a
trustee. Mr. Price disclaims beneficial ownership of 625,125 shares
which are held by the Price Family Charitable Fund, of which Mr. Price
is a Director. Mr. Price also disclaims beneficial ownership of 45,312
shares which are held by certain trusts of which Mr. Price is a
co-trustee.
(12) See notes (2) through (10) above.
45
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has engaged in certain transactions which indirectly benefit
PEI. Sol Price, who beneficially owns approximately 36% of the Company's
outstanding Common Stock, is the father of Robert E. Price, the Chairman of the
Board, President and Chief Executive Officer of the Company. Sol Price
beneficially owns approximately 36% of PEI's common stock. Robert E. Price, who
beneficially owns approximately 22% of the Company's outstanding Common Stock,
also beneficially owns approximately 22% of PEI's common stock and is PEI's
Chairman of the Board.
For the purpose of governing certain of the ongoing relationships between
the Company and PEI after the Distribution and to provide mechanisms for an
orderly transaction, the Company and PEI entered into the various agreements,
and have adopted the policies described below.
The Company and PEI entered into a Distribution Agreement, which provides
for, among other things, (i) the division between the Company and PEI of certain
assets and liabilities; (ii) the Distribution; and (iii) certain other
agreements governing the relationship between the Company and PEI following the
Distribution.
The Company and PEI have entered into an Asset Management and Disposition
Agreement dated as of August 26, 1997 calling for PEI to provide asset
management services with respect to the Properties. Among other things, PEI
will collect rents and pay operating expenses, maintain and repair such
Properties, prepare month-end financial statements, hire brokers and prepare
brokers' agreements, lease available space within such Properties and dispose of
such Properties. As consideration for such services, the Company will pay PEI
management fees based on annual rents from such Properties, leasing fees based
on the gross leasable floor areas of each such Properties, disposition fees
based on percentages of the sales prices for Properties that are sold and a
developer's fee of 3% of all "hard" construction costs managed by PEI on behalf
of the Company. Such agreement has a two-year term; provided that either the
Company or PEI may terminate the agreement upon 60 days written notice.
PEI and the Company have entered into a Transitional Services Agreement
dated as of August 26, 1997 pursuant to which the Company and PEI will provide
certain services to one another. The fees for such transitional services (which
shall not include real estate management services) will be based on hourly rates
designed to reflect the costs (including indirect costs) of providing such
services. The transitional services to be provided to PEI and to the Company
pursuant to such agreement may include cash management services, certain
accounting services, litigation management or any other similar services that
PEI or the Company may require. The Transitional Services Agreement will
terminate on December 31, 1997 unless extended in writing by the parties.
The Company and PEI have entered into a Tax Sharing Agreement dated as of
August 26, 1997 defining the parties' rights and obligations with respect to tax
returns and tax liabilities, including, in particular, Federal and state income
tax returns and liabilities, for taxable years and other taxable periods ending
on or before the date the Distribution was consummated (the "Distribution
Date"). In general, PEI will be responsible for (i) filing all Federal and
state income tax returns of PEI, the Company and any of their subsidiaries for
all taxable years ending on or before or including the Distribution Date and
(ii) paying the taxes relating to such returns (including any deficiencies
proposed by applicable taxing authorities), to the extent attributable to
pre-Distribution Date periods. The Company and PEI will each be responsible for
filing its own returns and paying its own taxes for post-Distribution Date
periods.
The ongoing relationships between PEI and the Company may present certain
conflict situations for Robert E. Price who serves as Chairman of the Board,
President and Chief Executive Officer of the Company and Chairman of the
Board of PEI. Mr. Price and certain other officers and directors of the
Company also own shares of common stock in both PEI and the Company. The
Company and PEI will adopt appropriate policies and procedures to be followed
by the Board of Directors of each company to limit the involvement of Mr.
Price (or such other officers and directors having a significant ownership
interest in the companies) in conflict situations, including matters relating
to contractual relationships or litigation between PEI and the Company. Such
procedures include requiring Mr. Price to abstain from voting as a director
of both companies with respect to matters that present a significant conflict
of interest between the companies.
46
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following financial statements are included in Part II, Item 8 of this
Form 10-K
Report of Independent Auditors
Consolidated Balance Sheets as of August 31, 1997 and 1996
Consolidated Statements of Operations for each of the three years ended
August 31, 1997, 1996 and 1995
Consolidated Statements of Stockholders' Equity for each of the three years
ended August 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for each of the three years August
31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
(b) Reports on Form 8-K: No reports on Form 8-K were filed during the fourth
quarter of fiscal 1997.
(c) See Exhibit Index and Exhibits attached to this report
(d) Financial Statement Schedules
See "Schedule II: Valuation and Qualifying Accounts" attached to this
report
47
<PAGE>
Schedule II
PRICESMART, INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance of Additions
Beginning of Charged to Costs Balance at
Provisions for Asset Impairments Period and Expenses Deductions End of Period
-------------------------------- ------ ------------ ---------- -------------
<S> <C> <C> <C> <C>
Year ended August 31, 1995 $ - $1,600,000 $(1,600,000)(1) $ -
Year ended August 31, 1996 - 8,042,000 - 8,042,000
Year ended August 31, 1997 8,042,000 2,000,000 (5,247,000)(2) 4,795,000
</TABLE>
(1) Provision for asset impairments was directly written off against the
related properties held for sale.
(2) Deductions from asset impairments related to the sale of seven properties
and the recovery of prior year write-down of land.
48
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: November 25, 1997 PRICESMART, INC.
By: /s/ ROBERT E. PRICE
--------------------------------------
Title Chairman, President and Chief
--------------------------------------
Executive Officer
--------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ Robert E. Price Chairman, President and November 25, 1997
- ------------------------- Chief Executive Officer
Robert E. Price (Principal Executive
Officer)
/s/ Karen J. Ratcliff Executive Vice President, November 25, 1997
- ------------------------- Chief Financial Officer
Karen J. Ratcliff (Principal Financial and
Accounting Officer)
/s/Jeffrey S. Halis Director November 25, 1997
- -------------------------
Jeffrey S. Halis
/s/Katherine L. Hensley Director November 25, 1997
- -------------------------
Katherine L. Hensley
/s/Leon C. Janks Director November 25, 1997
- -------------------------
Leon C. Janks
/s/Lawrence B. Krause Director November 25, 1997
- -------------------------
Lawrence B. Krause
/s/Gilbert A. Partida Director November 25, 1997
- -------------------------
Gilbert A. Partida
49
<PAGE>
PRICESMART, INC.
EXHIBIT INDEX AND EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------ -----------
2.1(1) Distribution Agreement dated as of August 26, 1997 between the
Company and Price Enterprises, Inc.
3.1(2) Amended and Restated Certificate of Incorporation of PriceSmart,
Inc.
3.2(2) Amended and Restated Bylaws of PriceSmart, Inc.
10.1(2) 1997 Stock Option Plan of PriceSmart, Inc.
10.2(3) Agreement Concerning Transfer of Certain Assets dated as of
November 1996 by and among Price Enterprises, Inc., Costco
Companies, Inc. and certain of their respective subsidiaries
10.3(4) Employment Agreement dated September 20, 1994 between Price
Enterprises, Inc. and Robert M. Gans
10.4(1) Employee Benefits and Other Employment Matters Allocation Agreement
dated as of August 26, 1997 between the Company and Price
Enterprises, Inc.
10.5(1) Tax Sharing Agreement dated as of August 26, 1997 between the
Company and Price Enterprises, Inc.
10.6(1) Asset Management and Disposition Agreement dated as of August 26,
1997 between the Company and Price Enterprises, Inc.
10.7(5) Third Amendment to Employment Agreement dated April 28, 1997 between
Price Enterprises, Inc. and Robert M. Gans
10.8(6) Form of Indemnity Agreement
10.9(1) Transitional Services Agreement dated as of August 26, 1997 between
the Company and Price Enterprises, Inc.
10.10(2) Assignment and Assumption of Employment Agreement dated August 29,
1997 between the Company and Price Enterprises, Inc.
10.11(2) Fourth Amendment to Employment Agreement dated as of September 2,
1997 between the Company and Robert M. Gans
10.12(2) Employment Agreement dated as of September 29, 1997 between the
Company and Karen Ratcliff
21.1(7) Subsidiaries of PriceSmart, Inc.
23.1(2) Consent of Ernst & Young LLP, Independent Auditors
27.1(2) Financial Data Schedule
- -----------------
(1) Incorporated by reference to the Current Report on Form 8-K filed
September 12, 1997 by Price Enterprises, Inc.
(2) Filed herewith.
(3) Incorporated by reference to Exhibit 10.2 to the Company's Registration
Statement on Form 10 filed July 3, 1997.
(4) Incorporated by reference to Exhibit 10.14 to Amendment No. 1 to the
Registration Statement on Form S-4 of Price Enterprises, Inc. filed with
the Commission on November 3, 1994.
(5) Incorporated by reference to Exhibit 10.4 to the Quarterly Report on
Form 10-Q of Price Enterprises, Inc. for the quarter ended June 8, 1997
filed with the Commission on July 17, 1997.
(6) Incorporated by reference to Exhibit 10.8 to Amendment No. 1 to the
Company's Registration Statement on Form 10 filed with the Commission on
August 1, 1997.
<PAGE>
(7) Incorporated by reference to Exhibit 21.1 to Amendment No. 2 to the
Company's Registration Statement on Form 10 filed with the Commission on
August 13, 1997.
<PAGE>
EXHIBIT 3.1
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
PRICESMART, INC.
PRICESMART, INC., a corporation organized and existing under and by virtue
of the General Corporation Law of the State of Delaware (the "Corporation"),
DOES HEREBY CERTIFY:
1. The Corporation's original Certificate of Incorporation was filed on
August 17, 1994. An amendment to said Certificate of Incorporation was filed
on November 27, 1995 changing the name of the Corporation to PQI, Inc. A
further amendment to said Certificate of Incorporation was filed on June 30,
1997 changing the name of the Corporation to PriceSmart, Inc.
2. That by action taken by unanimous written consent of the Board of
Directors on July 29, 1997, resolutions were duly adopted setting forth a
proposed amendment and restatement of the Certificate of Incorporation of
the Corporation, declaring said amendment and restatement to be advisable
and directing its officers to submit said amendment and restatement to the
sole stockholder of the Corporation for consideration thereof. The
resolution setting forth the proposed amendment and restatement is as
follows:
"THEREFORE, BE IT RESOLVED, that the Certificate of Incorporation of the
Corporation is hereby amended to read in its entirety as follows, subject to
the required consent of the sole stockholder of the corporation:
FIRST: The name of the Corporation is PriceSmart, Inc. (hereinafter the
"Corporation").
SECOND: The address of the registered office of the Corporation in the
State of Delaware is 1209 Orange Street, in the City of Wilmington, County
of New Castle. The name of its registered agent at that address is The
Corporation Trust Company.
THIRD: The purpose of the Corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General
Corporation Law of the State of Delaware (the "GCL").
FOURTH: The total number of shares of stock which the Corporation shall
have the authority to issue is 17,000,000, which shall consist of 15,000,000
shares of Common Stock, each having a par value of $.0001 (the "Common
Stock") and 2,000,000 shares of Preferred Stock, each having a par value of
$.0001 (the "Preferred Stock").
The Board of Directors is hereby authorized from time to time to provide
by resolution for the issuance of shares of preferred stock in one of more
series not exceeding in the aggregate the number of shares of Preferred
Stock authorized by this Certificate of Incorporation, as amended from time
to time; and to determine with respect to each such series the voting
powers, if any (which voting powers, if granted, may be full or limited),
designations, preference and relative, participating, optional or other
special rights, and the qualifications, limitations or restrictions relating
thereto, including without limiting the generality of the foregoing, the
voting rights relating to shares of Preferred Stock of any series (which may
be one of more votes per share or a fraction of a vote per share, which may
vary over time and which may be applicable generally or only upon the
happening and continuance of stated events or conditions), the rate of
dividend to which holders of Preferred Stock of any series may be entitled
(which may be cumulative or noncumulative), the rights of holders of
Preferred Stock of any series in the event of liquidation, dissolution or
winding up of the affairs of the Corporation, the rights, if any, of holders
of Preferred Stock of any series to convert or exchange such shares of
Preferred Stock of such series for shares of any other class or series of
capital stock or for any other securities, property or assets of the
Corporation or any subsidiary (including the determination of the
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<PAGE>
price or prices or the rate or rates applicable to such rights to convert or
exchange and the adjustment thereof, the time or times during which the
right to convert or exchange shall be applicable and the time or times
during which a particular price or rate shall be applicable), whether or not
the shares of that series shall be redeemable, and, if so, the terms and
conditions of such redemption, including the date or dates upon or after
which they shall be redeemable, and the amount per share payable in case of
redemption, which amount may vary under different conditions and at
different redemption dates, and whether any shares of that series shall be
redeemed pursuant to a retirement or sinking fund or otherwise and the terms
and conditions of such obligation.
Before the Corporation shall issue any shares of Preferred Stock of any
series, a certificate setting forth a copy of the resolution or resolutions
of the Board of Directors, fixing the voting powers, designations,
preferences, the relative, participating, optional or other rights, if any,
and the qualifications, limitations and restrictions, if any, relating to
the shares of Preferred Stock of such series, and the number of shares of
Preferred Stock of such series authorized by the Board of Directors to be
issued shall be made under seal of the Corporation and signed by and shall
be filed and a copy thereof recorded in the manner prescribed by the GCL.
The Board of Directors is further authorized to increase or decrease (but
not below the number of such shares of such series then outstanding) the
number of shares of any series subsequent to the issuance of shares of that
series.
FIFTH: The following provisions are inserted for the management of the
business and the conduct of the affairs of the Corporation, and for further
definition, limitation and regulation of the powers of the Corporation and
of its directors and stockholders:
(a) The business and affairs of the Corporation shall be managed by
or under the direction of the Board of Directors.
(b) The directors shall have concurrent power with the stockholders
to make, alter, amend, change, add to or repeal the Bylaws of the
Corporation.
(c) The number of directors of the Corporation shall be as from time
to time fixed by, or in the manner provided in, the Bylaws of the
Corporation. The election of directors need not be by written ballot
unless the Bylaws so provide.
(d) In addition to the powers and authority hereinbefore or by
statute expressly conferred upon them, the directors are hereby empowered
to exercise all such powers and do all such acts and things as may be
exercised or done by the Corporation, subject, nevertheless, to the
provisions of the GCL, this Certificate of Incorporation, and any Bylaws
adopted by the stockholders; PROVIDED, HOWEVER, that no Bylaws hereafter
adopted by the stockholders shall invalidate any prior act of the
directors which would have been valid if such Bylaws had not been
adopted.
SIXTH: Meetings of stockholders may be held within or without the State
of Delaware, as the Bylaws may provide. The books of the Corporation may be
kept (subject to any provision contained in the GCL) outside the State of
Delaware at such place or places as may be designated from time to time by
the Board of Directors or in the Bylaws of the Corporation.
SEVENTH: The Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Certificate of Corporation in the
manner now or hereafter prescribed by statute, and all rights conferred upon
stockholders herein are granted subject to this reservation.
EIGHTH: (a) Subject to Article EIGHTH (c), the Corporation shall
indemnify any person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (other than an
action by or in the right of the Corporation) by reason of the fact that he
is or was a director or officer of the Corporation, or is or was serving at
the request of the Corporation as a director, officer, employee or
2
<PAGE>
agent of another corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with such action, suit or
proceeding if he acted in good faith and in a manner he reasonably believed
to be in or not opposed to the best interests of the Corporation, and, with
respect to any criminal action or proceeding, had no reasonable cause to
believe his conduct was unlawful. The termination of any action, suit or
proceeding by judgment, order, settlement, conviction, or upon a plea of
nolo contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which
he reasonably believed to be in or not opposed to the best interests of the
Corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that his conduct was unlawful.
(b) Subject to Article EIGHTH (c), the Corporation shall indemnify
any person who was or is a party or is threatened to be made a party to
any threatened, pending or completed action or suit by or in the right of
the Corporation to procure a judgment in its favor by reason of the fact
that he is or was a director or officer of the Corporation, or is or was
serving at the request of the Corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he
acted in good faith and in a manner he reasonably believed to be in or
not opposed to the best interests of the Corporation; except that no
indemnification shall be made in respect of any claim, issue or matter as
to which such person shall have been adjudged to be liable to the
Corporation unless and only to the extent that the Court of Chancery or
the court in which such action or suit was brought shall determine upon
application that, despite the adjudication of liability but in view of
all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the Court of Chancery or
such other court shall deem proper.
(c) Any indemnification under this Article EIGHTH (unless ordered by
a court) shall be made by the Corporation only as authorized in the
specific case upon a determination that indemnification of the director
or officer is proper in the circumstances because he has met the
applicable standard of conduct set forth in Article EIGHTH (a) or Article
EIGHTH (b), as the case may be. Such determination shall be made (i) by
the Board of Directors by a majority vote of a quorum consisting of
directors who were not parties to such action, suit or proceeding, or
(ii) if such a quorum is not obtainable, or, even if obtainable, a quorum
of disinterested directors so directs, by independent legal counsel in a
written opinion, or (iii) by the stockholders. To the extent, however,
that a present or former director or officer of the Corporation has been
successful on the merits or otherwise in defense of any action, suit or
proceeding referred to in Article EIGHTH (a) or Article EIGHTH (b), or in
defense of any claim, issue or matter therein, he shall be indemnified
against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection therewith, without the necessity of
authorization in the specific case.
(d) Notwithstanding any contrary determination in the specific case
under Article EIGHTH (c), and notwithstanding the absence of any
determination thereunder, any present or former director or officer of
the Corporation may apply to any court of competent jurisdiction in the
State of Delaware for indemnification to the extent otherwise permissible
under Article EIGHTH (a) and Article EIGHTH (b). The basis of such
indemnification by a court shall be a determination by such court that
indemnification of such person is proper in the circumstances because he
has met the applicable standards of conduct set forth in Article EIGHTH
(a) or Article EIGHTH (b), as the case may be. Neither a contrary
determination in the specific case under Article EIGHTH (c) nor the
absence of any determination thereunder shall be a defense
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to such application or create a presumption that such person seeking
indemnification has not met any applicable standard of conduct. Notice of
any application for indemnification pursuant to this Article EIGHTH (d)
shall be given to the Corporation promptly upon the filing of such
application. If successful, in whole or in part, such person seeking
indemnification shall also be entitled to be paid the expense of
prosecuting such application.
(e) Expenses incurred by a person who is or was a director or officer
of the Corporation in defending or investigating a threatened or pending
action, suit or proceeding shall be paid by the Corporation in advance of
the final disposition of such action, suit or proceeding upon receipt of
an undertaking by or on behalf of such person to repay such amount if it
shall ultimately be determined that he is not entitled to be indemnified
by the Corporation as authorized in this Article EIGHTH.
(f) The indemnification and advancement of expenses provided by or
granted pursuant to this Article EIGHTH shall not be deemed exclusive of
any other rights to which those seeking indemnification or advancement of
expenses may be entitled under any Bylaw, agreement, contract, vote of
stockholders or disinterested directors or pursuant to the direction
(howsoever embodied) of any court of competent jurisdiction or otherwise,
both as to action in his official capacity and as to action in another
capacity while holding such office, it being the policy of the
Corporation that indemnification of the persons specified in Article
EIGHTH (a) and Article EIGHTH (b) shall be made to the fullest extent
permitted by law. The provisions of this Article EIGHTH shall not be
deemed to preclude the indemnification of any person who is not specified
in Article EIGHTH (a) or Article EIGHTH (b) but whom the Corporation has
the power or obligation to indemnify under the provisions of the GCL, or
otherwise.
(g) The Corporation may purchase and maintain insurance on behalf of
any person who is or was a director or officer of the Corporation, or is
or was serving at the request of the Corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise against any liability
asserted against him and incurred by him in any such capacity, or arising
out of his status as such, whether or not the Corporation would have the
power or the obligation to indemnify him against such liability under the
provisions of this Article EIGHTH or Section 145 of the GCL.
(h) For purposes of this Article EIGHTH, references to "the
Corporation" shall include, in addition to the resulting corporation, any
constituent corporation (including any constituent of a constituent)
absorbed in a consolidation or merger which, if its separate existence
had continued, would have had power and authority to indemnify its
directors or officers, so that any person who is or was a director or
officer of such constituent corporation, or is or was serving at the
request of such constituent corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise, shall stand in the same
position under the provisions of this Article EIGHTH with respect to the
resulting or surviving corporation as he would have with respect to such
constituent corporation if its separate existence had continued. For
purposes of this Article EIGHTH, references to "fines" shall include any
excise taxes assessed on a person with respect to an employee benefit
plan; and references to "serving at the request of the Corporation" shall
include any service as a director, officer, employee or agent of the
Corporation which imposes duties on, or involves services by, such person
with respect to an employee benefit plan, its participants or
beneficiaries; and a person who acted in good faith and in a manner he
reasonably believed to be in the interest of the participants and
beneficiaries of an employee benefit plan shall be deemed to have acted
in a manner "not opposed to the best interests of the Corporation" as
referred to in this Article EIGHTH. For purposes of any determination
under Article EIGHTH (c), a person shall be deemed to have acted in good
faith in a manner he reasonably believed to be in or not opposed to the
best interests of the Corporation, or, with respect to any criminal
action or proceeding, to
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have had no reasonable cause to believe his conduct was unlawful, if his
action is based on the records or books of account of the Corporation or
another enterprise, or on information supplied to him by the officers of
the Corporation or another enterprise in the course of their duties, or
on the advice of legal counsel for the Corporation or another enterprise
or on information or records given or reports made to the Corporation or
another enterprise by an independent certified public accountant or by an
appraiser or other expert selected with reasonable care by the
Corporation or another enterprise. The term "another enterprise" is used
in this Article EIGHTH (h) shall mean any other corporation or any
partnership, joint venture, trust, employee benefit plan or other
enterprise of which such person is or was serving at the request of the
Corporation as a director, officer, employee or agent. The provisions of
this Article EIGHTH (h) shall not be deemed to be exclusive or to limit
in any way the circumstances in which a person may be deemed to have met
the applicable standard of conduct set forth in Article EIGHTH (a) or
(b), as the case may be.
(i) The indemnification and advancement of expenses provided by, or
granted pursuant to, this Article EIGHTH shall, unless otherwise provided
when authorized or ratified, continue as to a person who has ceased to be
a director or officer of the Corporation and shall inure to the benefit
of the heirs, executors and administrators of such a person.
(j) Notwithstanding anything contained in this Article EIGHTH to the
contrary, except for proceedings to enforce rights to indemnification
(which shall be governed by Article EIGHTH (d)), the Corporation shall
not be obligated to indemnify any person in connection with a proceeding
(or part, thereof) initiated by such person unless such proceeding (or
part thereof) was authorized or consented to by the Board of Directors of
the Corporation.
(k) The Corporation may, to the extent authorized from time to time
by the Board of Directors, provide rights to indemnification and to the
advancement of expenses to employees and agents of the Corporation
similar to those conferred in this Article EIGHTH to directors and
officers of the Corporation.
NINTH: No director shall be personally liable to the Corporation or any
of its stockholders for monetary damages for breach of fiduciary duty as a
director, except for liability (i) for any breach of the director's duty of
loyalty to the Corporation or its stockholders, (ii) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) pursuant to Section 174 of the GCL, or (iv) for any
transaction from which the director derived an improper personal benefit.
Any repeal or modification of this Article NINTH by the stockholders of the
Corporation shall not adversely affect any right or protection of a director
of the Corporation existing at the time of such repeal or modification with
respect to acts or omissions occurring prior to such repeal or
modification."
3. That thereafter, by consent of the sole stockholder of all of the issued
and outstanding shares of stock of the Corporation in accordance with Section
228 of the General Corporation Law of the State of Delaware, all of the shares
of the Corporation were voted in favor of the amendment.
4. That said Amended and Restated Certificate of Incorporation was duly
adopted in accordance with the provisions of Sections 242 and 245 of the General
Corporation Law of the State of Delaware.
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IN WITNESS WHEREOF, PRICESMART, INC. has caused this Certificate to be
signed by Robert E. Price, its President and Daniel T. Carter, its
Secretary, this 29th day of August, 1997.
PRICESMART, INC.
a Delaware corporation
By: /s/ Robert E. Price
-------------------------------
Name: Robert E. Price
Title: President
ATTEST
/s/ Daniel T. Carter
- -------------------------------
Name: Daniel T. Carter
Title: Secretary
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EXHIBIT 3.2
AMENDED AND RESTATED
BYLAWS OF
PRICESMART, INC.
(HEREINAFTER CALLED THE "CORPORATION")
ARTICLE I
OFFICES
SECTION 1. REGISTERED OFFICE. The registered office of the Corporation
shall be established and maintained in the City of Wilmington, County of New
Castle, State of Delaware.
SECTION 2. OTHER OFFICES. The Corporation may also have offices at such
other places both within and without the State of Delaware as the Board of
Directors may from time to time determine.
ARTICLE II
MEETINGS OF STOCKHOLDERS
SECTION 1. PLACE OF MEETINGS. Meetings of the stockholders for the
election of directors or for any other purpose shall be held at such time and
place, either within or without the State of Delaware, as shall be designated
from time to time by the Board of Directors and stated in the notice of the
meeting or in a duly executed waiver of notice thereof.
SECTION 2. ANNUAL MEETINGS. The Annual Meetings of Stockholders shall be
held on such date and at such time as shall be designated from time to time by
the Board of Directors and stated in the notice of the meeting, at which meeting
the stockholders shall elect Directors in the manner provided in the Certificate
of Incorporation and in the Bylaws, and transact such other business as may
properly be brought before the meeting. Written notice of the Annual Meeting
stating the place, date and hour of the meeting shall be given to each
stockholder entitled to vote at such meeting not less than ten nor more than
sixty days before the date of the meeting.
SECTION 3. SPECIAL MEETINGS. Unless otherwise prescribed by law or by the
Certificate of Incorporation, Special Meetings of Stockholders, for any purpose
or purposes may be called by either (i) the Chairman, (ii) the Vice Chairman,
(iii) the President, (iv) any Vice President, (v) the Secretary or (vi) any
Assistant Secretary, if there be one, and shall be called by any such officer at
the request in writing by a majority of the entire Board of Directors, or at the
request in writing of stockholders owning a majority of the capital stock of the
Corporation issued and outstanding and entitled to vote. Such request ball state
the purpose or purposes of the proposed meeting. Written notice of a Special
Meeting stating the place, date and hour of the meeting and the purpose or
purposes for which the meeting is called shall be given not less than ten nor
more than sixty days before the date of the meeting to each stockholder entitled
to vote at such meeting.
SECTION 4. QUORUM. Except as otherwise provided by law or by the
Certificate of Incorporation, the holders of a majority of the capital stock
issued and outstanding and entitled to vote thereat, present in person or
represented by proxy, shall constitute a quorum at all meetings of the
stockholders for the transaction of business. A quorum, once established, shall
not be broken by the withdrawal of enough votes to leave less than a quorum and
the votes present may continue to transact business until adjournment. If,
however, such quorum shall not be present or represented at any meeting of the
stockholders, the stockholders entitled to vote thereat, present in person or
represented by proxy, shall have power to adjourn the meeting from time to time,
without notice other than announcement at the meeting, until a quorum shall be
present or represented. At such adjourned meeting at which a quorum shall be
present or represented, any business may be transacted which might have been
transacted at the meeting as originally noticed. If the adjournment is for more
than thirty days, or if after the adjournment a new record date is
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fixed for the adjourned meeting, a notice of the adjourned meeting shall be
given to each stockholder entitled to vote at the meeting.
SECTION 5. VOTING. Unless otherwise required by law, the Certificate of
Incorporation or these Bylaws, any question brought before any meeting of
stockholders shall be decided by the vote of the holders of a majority of the
stock represented and entitled to vote thereat. Each stockholder represented at
a meeting of stockholders shall be entitled to cast one vote for each share of
the capital stock entitled to vote thereat held by such stockholder. Such votes
may be cast in person or by proxy but no proxy shall be voted on or after three
years from its date, unless such proxy provides for a longer period. The Board
of Directors, in its discretion, or the officer of the Corporation presiding at
a meeting of stockholders, in his discretion, may require that any votes cast at
such meeting shall be cast by written ballot.
SECTION 6. CONSENT OF STOCKHOLDERS IN LIEU OF MEETING. Unless otherwise
provided in the Certificate of Incorporation, any action required or permitted
to be taken at any Annual or Special Meeting of Stockholders of the Corporation,
may be taken without a meeting, without prior notice and without a vote, if a
consent in writing, setting forth the action so taken, shall be signed by the
holders of outstanding stock having not less than the minimum number of votes
that would be necessary to authorize or take such action at a meeting at which
all shares entitled to vote thereon were present and voted. Prompt notice of the
taking of the corporate action without a meeting by less than unanimous written
consent shall be given to those stockholders who have not consented in writing.
SECTION 7. LIST OF STOCKHOLDERS ENTITLED TO VOTE. The officer of the
Corporation who has charge of the stock ledger of the Corporation shall prepare
and make, at least ten days before every meeting of stockholders, a complete
list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open to
the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten days prior to the
meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder of the Corporation who is
present.
SECTION 8. STOCK LEDGER. The stock ledger of the Corporation shall be the
only evidence as to who are the stockholders entitled to examine the stock
ledger, the list required by Section 7 of this Article II or the books of the
Corporation, or to vote in person or by proxy at any meeting of stockholders.
ARTICLE III
DIRECTORS
SECTION 1. NUMBER AND ELECTION OF DIRECTORS. The Board of Directors shall
consist of three or more members, the exact number of which shall be fixed from
time to time by the Board of Directors. Except as provided in Section 2 of this
Article, directors shall be elected by a plurality of the votes cast at Annual
Meetings of Stockholders, and each director so elected shall hold office until
the Annual Meeting in which his term expires and until his successor is duly
elected and qualified, or until his earlier resignation or removal. Any director
may resign at any time upon written notice to the Corporation. Directors need
not be stockholders.
SECTION 2. VACANCIES. Vacancies, and newly created directorships resulting
from any increase in the authorized number of directors, may be filled by a
majority of the directors then in office, though less than a quorum, or by a
sole remaining director. The directors so chosen shall hold office until the
next annual election of directors and until their successors are duly elected
and qualified, or until their earlier resignation or removal. If there are no
directors in office, then an election of directors may be held in the manner
provided by statute.
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SECTION 3. DUTIES AND POWERS. The business of the Corporation shall be
managed by or under the direction of the Board of Directors which may exercise
all such powers of the Corporation and do all such lawful acts and things as are
not by statute or by the Certificate of Incorporation or by these Bylaws
directed or required to be exercised or done by the stockholders.
SECTION 4. MEETINGS. The Board of Directors of the Corporation may hold
meetings, both regular and special, either within or without the State of
Delaware. Regular meetings of the Board of Directors may be held without notice
at such time and at such place as may from time to time be determined by the
Board of Directors. Special meetings of the Board of Directors may be called by
the Chairman, the Vice Chairman, the President, or any director. Notice thereof
stating the place, date and hour of the meeting shall be given to each director
either by mail, telephone, facsimile or telegram not less than forty-eight (48)
hours before the date of the meeting.
SECTION 5. QUORUM. Except as may be otherwise specifically provided by
law, the Certificate of Incorporation or these Bylaws, at all meetings of the
Board of Directors a majority of the entire Board of Directors shall constitute
a quorum for the transaction of business. The act of a majority of the directors
present at any meeting at which there is a quorum shall be the act of the Board
of Directors. If a quorum shall not be present at any meeting of the Board of
Directors, the directors present thereat may adjourn the meeting from time to
time without notice other than announcement at the meeting, until a quorum shall
be present.
SECTION 6. ACTIONS OF BOARD. Unless otherwise provided by the Certificate
of Incorporation or these Bylaws, any action required or permitted to be taken
at any meeting of the Board of Directors or of any committee thereof may be
taken without a meeting, if all the members of the Board of Directors or
committee, as the case may be, consent thereto in writing, and the writing or
writings are filed with the minutes of proceedings of the Board of Directors or
committee.
SECTION 7. MEETINGS BY MEANS OF CONFERENCE TELEPHONE. Unless otherwise
provided by the Certificate of Incorporation or these Bylaws, members of the
Board of Directors of the Corporation, or any committee designated by the Board
of Directors, may participate in a meeting of the Board of Directors or such
committee by means of a conference telephone or similar communications equipment
by means of which all persons participating in the meeting can hear each other,
and participation in a meeting pursuant to this Section 7 shall constitute
presence in person at such meeting.
SECTION 8. COMMITTEES. The Board of Directors may, by resolution passed by
a majority of the entire Board of Directors, designate one or more committees,
each committee to consist of one or more of the Directors of the Corporation.
The Board of Directors may designate one or more directors as alternate members
of any committee, who may replace any absent or disqualified member at any
meeting of any such committee. Any committee, to the extent allowed by law and
provided in these Bylaws or the resolution establishing such committee, shall
have and may exercise all the powers and authority of the Board of Directors in
the management of the business and affairs of the Corporation; but no committee
shall have the power or authority in reference to amending the Certificate of
Incorporation, adopting an agreement of merger or consolidation, recommending to
the stockholders the sale, lease or exchange of all or substantially all of the
Corporation's property and assets, recommending to the stockholders a
dissolution of the Corporation or a revocation of a dissolution, or amending the
Bylaws of the Corporation; and, unless the resolution or the Certificate of
Incorporation expressly so provides, no committee shall have the power or
authority to declare a dividend or to authorize the issuance of stock. Each
committee shall keep regular minutes and report to the Board of Directors when
required.
SECTION 9. COMPENSATION. The directors may be paid their expenses, if any,
of attendance at each meeting of the Board of Directors and may be paid a fixed
sum for attendance at each meeting of the Board of Directors or a stated salary
as director. No such payment shall preclude any director from serving the
Corporation in any other capacity and receiving compensation therefor. Members
of special or standing committees may be allowed like compensation for attending
committee meetings.
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SECTION 10. INTERESTED DIRECTORS. No contract or transaction between the
Corporation and one or more of its directors or officers, or between the
Corporation and any other corporation, partnership, association, or other
organization in which one or more of its directors or officers are directors or
officers, or have a financial interest, shall be void or voidable solely for
that reason, or solely because the director or officer is present at or
participates in the meeting of the Board of Directors or committee thereof which
authorizes the contract or transaction, or solely because his or their votes are
counted for such purpose if (i) the material facts as to his or their
relationship or interest and as to the contract or transaction are disclosed or
are known to the Board of Directors or the committee, and the Board of Directors
or committee in good faith authorizes the contract or transaction by the
affirmative votes of a majority of the disinterested directors, even though the
disinterested directors be less than a quorum; or (ii) the material facts as to
his or their relationship or interest and as to the contract or transaction are
disclosed or are known to the stockholders entitled to vote thereon and the
contract or transaction is specifically approved in good faith by vote of the
stockholders; or (iii) the contract or transaction is fair as to the Corporation
as of the time it is authorized, approved or ratified by the Board of Directors,
a committee thereof or the stockholders. Common or interested directors may be
counted in determining the presence of a quorum at a meeting of the Board of
Directors or of a committee which authorizes the contract or transaction. Any
such contract or transaction shall be made on commercially reasonable terms
substantially equivalent to terms available from third parties in an
arm's-length transaction in the competitive marketplace.
ARTICLE IV
OFFICERS
SECTION 1. GENERAL. The executive officers of the Corporation shall be
chosen by the Board of Directors and shall include a Chairman of the Board of
Directors, a President and Chief Executive Officer, a Secretary and a Chief
Financial Officer. The Board of Directors, in its discretion, may also choose
one or more Executive Vice Presidents (each of whom shall also be an executive
officer), a Treasurer (who shall also be an executive officer) and Vice
Presidents, Assistant Secretaries, Assistant Treasurers and other officers. Any
number of offices may be held by the same person, unless otherwise prohibited by
law, the Certificate of Incorporation or these Bylaws. The officers of the
Corporation need not be stockholders of the Corporation nor, except in the case
of the Chairman of the Board of Directors and the Vice Chairman of the Board of
Directors, need such officers be directors of the Corporation.
SECTION 2. ELECTION. The Board of Directors at its first meeting held
after each Annual Meeting of Stockholders shall elect the officers of the
Corporation who shall hold their offices for such terms and shall exercise such
powers and perform such duties as shall be determined from time to time by the
Board of Directors; and all officers of the Corporation shall hold office until
their successors are chosen and qualified, or until their earlier resignation or
removal. Any officer elected by the Board of Directors may be removed at any
time by the affirmative vote of a majority of the entire Board of Directors. Any
vacancy occurring in any office of the Corporation shall be filled by a majority
of the entire Board of Directors. The salaries of all executive officers of the
Corporation shall be fixed by the Board of Directors.
SECTION 3. CHAIRMAN OF THE BOARD OF DIRECTORS. The Chairman of the Board
of Directors shall preside at all meetings of the stockholders and of the Board
of Directors. Except where by law the signature of the President is required,
the Chairman of the Board of Directors shall possess the same power as the
President to sign all contracts, certificates and other instruments of the
Corporation which may be authorized by the Board of Directors. During the
absence or disability of the President, the Chairman of the Board of Directors
shall exercise all the powers and discharge all the duties of the President. The
Chairman of the Board of Directors shall also perform such other duties and may
exercise such other powers as from time to time may be assigned to him by these
Bylaws or by the Board of Directors. The Chairman of the Board of Directors may
only be appointed or removed by a majority of the entire Board of Directors.
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SECTION 4. VICE CHAIRMAN OF THE BOARD OF DIRECTORS. The Vice Chairman of
the Board of Directors shall, in the absence or disability of the Chairman of
the Board of Directors, preside at meetings of the stockholders and the Board of
Directors. The Vice Chairman of the Board of Directors shall also perform such
other duties and may exercise such other powers as from time to time may be
assigned to him by these Bylaws or by the Board of Directors.
SECTION 5. PRESIDENT. The President shall, subject to the control of the
Board of Directors, have general supervision of the business of the Corporation
and shall see that all orders and resolutions of the Board of Directors are
carried into effect. He shall execute all bonds, mortgages, contracts and other
instruments of the Corporation requiring a seal, under the seal of the
Corporation, except where required or permitted by law to be otherwise signed
and executed and except that the other officers of the Corporation may sign and
execute documents when so authorized by these Bylaws, the Board of Directors or
the President. In the absence or disability of the Chairman of the Board of
Directors or the Vice Chairman of the Board of Directors, or if there be none,
the President shall preside at all meetings of the stockholders and the Board of
Directors. The President shall be the Chief Executive Officer of the
Corporation. The President shall also perform such other duties and may exercise
such other powers as from time to time may be assigned to him by these Bylaws or
by the Board of Directors. The President may only be appointed or removed by a
majority of the entire Board of Directors.
SECTION 6. EXECUTIVE VICE PRESIDENTS AND VICE PRESIDENTS. At the request
of the President or in his absence or in the event of his inability or refusal
to act (and if there be no Chairman of the Board of Directors), the Senior
Executive Vice President, and then the Executive Vice President or the Executive
Vice Presidents if there is more than one (in the order designated by the Board
of Directors) shall perform the duties of the President, and when so acting,
shall have all the powers of and be subject to all the restrictions upon the
President. Each Vice President (including Senior Executive and Executive Vice
Presidents) shall perform such other duties and have such other powers as the
Board of Directors from time to time may prescribe. If there be no Chairman of
the Board of Directors and no Vice President, the Board of Directors shall
designate the officer of the Corporation who, in the absence of the President or
in the event of the inability or refusal of the President to act, shall perform
the duties of the President, and when so acting, shall have all the powers of
and be subject to all the restrictions upon the President.
SECTION 7. SECRETARY. The Secretary shall attend all meetings of the Board
of Directors and all meetings of stockholders and record all the proceedings
thereat in a book or books to be kept for that purpose; the Secretary shall also
perform like duties for the standing committees when required. The Secretary
shall give, or cause to be given, notice of all meetings of the stockholders and
special meetings of the Board of Directors, and shall perform such other duties
as may be prescribed by the Board of Directors or President, under whose
supervision he or she shall be. If the Secretary shall be unable or shall refuse
to cause to be given notice of all meetings of the stockholders and special
meetings of the Board of Directors, and if there be no Assistant Secretary, then
either the Board of Directors or the President may choose another officer to
cause such notice to be given. The Secretary shall have custody of the seal of
the Corporation and the Secretary or any Assistant Secretary, if there be one,
shall have authority to affix the same to any instrument requiring it and when
so affixed, it may be attested by the signature of the Secretary or by the
signature of any such Assistant Secretary. The Board of Directors may give
general authority to any other officer to affix the seal of the Corporation and
to attest the affixing by his signature. The Secretary shall see that all books,
reports, statements, certificates and other documents and records required by
law to be kept or filed are properly kept or filed, as the case may be.
SECTION 8. CHIEF FINANCIAL OFFICER. The Chief Financial Officer shall also
serve as the Treasurer unless Treasurer shall be separately appointed by the
Board of Directors and shall have the custody of the corporate funds and
securities and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the Corporation and shall deposit all moneys
and other valuable effects in the name and to the credit of the Corporation in
such depositories as may be designated by the Board of Directors. The Chief
Financial Officer shall disburse the funds of the Corporation as may be ordered
by the Board of
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Directors, taking proper vouchers for such disbursements, and shall render to
the President and the Board of Directors, at its regular meetings, or when the
Board of Directors so requires, an account of all his transactions as Chief
Financial Officer and of the financial condition of the Corporation.
SECTION 9. ASSISTANT SECRETARIES. Except as may be otherwise provided in
these Bylaws, Assistant Secretaries, if there be any, shall perform such duties
and have such powers as from time to time may be assigned to them by the Board
of Directors, the President, any Vice President, if there be one, or the
Secretary, and in the absence of the Secretary or in the event of his disability
or refusal to act, shall perform the duties of the Secretary, and when so
acting, shall have all the powers of and be subject to all the restrictions upon
the Secretary.
SECTION 10. ASSISTANT TREASURERS. Assistant Treasurers, if there be any,
shall perform such duties and have such powers as from time to time may be
assigned to them by the Board of Directors, the President, any Vice President if
there be one, or the Treasurer, and in the absence of the Treasurer or in the
event of his disability or refusal to act, shall perform the duties of the
Treasurer, and when so acting, shall have all the powers of and be subject to
all the restrictions upon the Treasurer.
SECTION 11. OTHER OFFICERS. Such other officers as the Board of Directors
may choose shall perform such duties and have such powers as from time to time
may be assigned to them by the Board of Directors. The Board of Directors may
delegate to any other officer of the Corporation the power to choose such other
officers and to prescribe their respective duties and powers.
ARTICLE V
STOCK
SECTION 1. FORM OF CERTIFICATES. Every holder of stock in the Corporation
shall be entitled to have a certificate signed, in the name of the Corporation
(i) by the Chairman or Vice Chairman of the Board of Directors, or the President
or a Vice President and (ii) by the Treasurer or an Assistant Treasurer, or the
Secretary or an Assistant Secretary of the Corporation, certifying the number of
shares owned by him in the Corporation. If the Corporation shall be authorized
to issue more than one class of stock or more than one series of any class, the
designations, preferences and relative, participating, optional or other special
rights of each class of stock or series thereof and the qualifications,
limitations, or restrictions of such preferences and/or rights shall be set
forth in full or summarized on the face or back of the certificate which the
Corporation shall issue to represent such class or series of stock, provided
that, except as otherwise provided in section 202 of the General Corporation Law
of Delaware, in lieu of the foregoing requirements, there may be set forth on
the face or back of the certificate which the Corporation shall issue to
represent such class or series of stock, a statement that the Corporation will
furnish without charge to each stockholder who so requests the powers,
designations, preferences and relative, participating, optional or other special
rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights.
SECTION 2. SIGNATURES. Where a certificate is countersigned by (i) a
transfer agent other than the Corporation or its employee, or (ii) a registrar
other than the Corporation or its employee, any other signature on the
certificate may be a facsimile. In case any officer, transfer agent or registrar
who has signed, or whose facsimile signature has been placed upon a certificate
shall have ceased to be such officer, transfer agent or registrar before such
certificate is issued, it may be issued by the Corporation with the same effect
as if he were such officer, transfer agent or registrar at the date of issue.
SECTION 3. LOST CERTIFICATES. The Board of Directors may direct a new
certificate to be issued in place of any certificate theretofore issued by the
Corporation alleged to have been lost, stolen or destroyed, upon the making of
an affidavit of that fact by the person claiming the certificate of stock to be
lost stolen or destroyed (unless otherwise authorized by the Board). When
authorizing such issue of a new certificate, the Board of Directors may, in its
discretion and as a condition precedent to the issuance
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thereof, require the owner of such lost, stolen or destroyed certificate, or his
legal representative, to advertise the same in such manner as the Board of
Directors shall require and/or to give the Corporation a bond in such sum as it
may direct as indemnity against any claim that may be made against the
Corporation with respect to the certificate alleged to have been lost, stolen or
destroyed.
SECTION 4. TRANSFERS. Stock of the Corporation shall be transferable in
the manner prescribed by law and in these Bylaws. Transfers of stock shall be
made on the books of the Corporation only by the person named in the certificate
or by his attorney lawfully constituted in writing and upon the surrender of the
certificate therefor, which shall be cancelled before a new certificate shall be
issued.
SECTION 5. RECORD DATE. In order that the Corporation may determine the
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, or entitled to express consent to corporate action in
writing without a meeting, or entitled to receive payment of any dividend or
other distribution or allotment of any rights, or entitled to exercise any
rights in respect of any change, conversion or exchange of stock, or for the
purpose of any other lawful action, the Board of Directors may fix, in advance,
a record date, which shall not be more than sixty days nor less than ten days
before the date of such meeting, nor more than sixty days prior to any other
action. A determination of stockholders of record entitled to notice of or to
vote at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for the
adjourned meeting.
SECTION 6. BENEFICIAL OWNERS. The Corporation shall be entitled to
recognize the exclusive right of a person registered on its books as the owner
of shares to receive dividends, and to vote as such owner, and to hold liable
for calls and assessments a person registered on its books as the owner of
shares, and shall not be bound to recognize any equitable or other claim to or
interest in such share or shares on the part of any other person, whether or not
it shall have express or other notice thereof, except as otherwise provided by
law.
ARTICLE VI
NOTICES
SECTION 1. NOTICES. Whenever written notice is required by law, the
Certificate of Incorporation or these Bylaws, to be given to any director,
member of a committee or stockholder, such notice may be given by mail,
addressed to such director, member of a committee or stockholder, at his address
as it appears on the records of the Corporation, with postage thereon prepaid,
and such notice shall be deemed to be given at the time when the same shall be
deposited in the United States mail. Written notice may also be given personally
or by telegram, telex, facsimile or cable, in which event notice shall be deemed
given upon receipt.
SECTION 2. WAIVERS OF NOTICE. Whenever any notice is required by law, the
Certificate of Incorporation or these Bylaws, to be given to any director,
member of a committee or stockholder, a waiver thereof in writing, signed, by
the person or persons entitled to said notice, whether before or after the time
stated therein, shall be deemed equivalent thereto. Neither the business
transacted or to be transacted at, nor the purpose of any meeting need be
specified in any written waiver of notice thereof.
ARTICLE VII
GENERAL PROVISIONS
SECTION 1. DIVIDENDS. Dividends upon the capital stock of the Corporation,
subject to the provisions of the Certificate of Incorporation, if any, may be
declared by the Board of Directors at any regular or special meeting, and may be
paid in cash, in property, or in shares of the capital stock. Before payment of
any dividend, there may be set aside out of any funds of the Corporation
available for dividends such sum or sums as the Board of Directors from time to
time, in its absolute discretion, deems
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proper as a reserve or reserves to meet contingencies, or for equalizing
dividends, or for repairing or maintaining any property of the Corporation, or
for any proper purpose, and the Board of Directors may modify or abolish any
such reserve.
SECTION 2. DISBURSEMENTS. All checks or demands for money and notes of the
Corporation shall be signed by such officer or officers or such other person or
persons as the Board of Directors may from time to time designate.
SECTION 3. FISCAL YEAR. The fiscal year of the Corporation shall be fixed
by resolution of the Board of Directors.
SECTION 4. CORPORATE SEAL. The corporate seal shall have inscribed thereon
the name of the Corporation, the year of its organization and the words
"Corporate Seal, Delaware." The seal may be used by causing it or a facsimile
thereof to be impressed or affixed or reproduced or otherwise.
ARTICLE VIII
INDEMNIFICATION
The power, right and obligation of the Corporation to indemnify any director
or officer of the Corporation and employees and agents of the Corporation shall
be as set forth in Article EIGHTH of the Certificate of Incorporation. All
directors and officers of the Corporation shall be entitled to indemnification
as set forth in the Certificate of Incorporation.
ARTICLE IX
AMENDMENTS
SECTION 1. These Bylaws may be altered, amended or repealed, in whole or in
part, or new Bylaws may be adopted by the stockholders or by the Board of
Directors; provided, however, that notice of such alteration, amendment, repeal
or adoption of new Bylaws be contained in the notice of such meeting of
stockholders or Board of Directors as the case may be. All such amendments must
be approved by either the holders of a majority of the outstanding capital stock
entitled to vote thereon or by a majority of the entire Board of Directors.
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EXHIBIT 10.1
THE 1997 STOCK OPTION PLAN
OF
PRICESMART, INC.
PriceSmart, Inc., a Delaware corporation, has adopted The 1997 Stock
Option Plan of PriceSmart, Inc. (this "Plan"), effective August 29, 1997, for
the benefit of its eligible employees, consultants and directors.
The purposes of this Plan are as follows:
(1) To provide an additional incentive for directors, key Employees and
consultants to further the growth, development and financial success of the
Company by personally benefiting through the ownership of Company stock which
recognizes such growth, development and financial success.
(2) To enable the Company to obtain and retain the services of directors,
key Employees and consultants considered essential to the long range success of
the Company by offering them an opportunity to own stock in the Company which
will reflect the growth, development and financial success of the Company.
ARTICLE I
DEFINITIONS
1.1 GENERAL. Wherever the following terms are used in this Plan they shall
have the meanings specified below, unless the context clearly indicates
otherwise.
1.2 AWARD LIMIT. "Award Limit" shall mean 125,000 shares of Common Stock,
as adjusted pursuant to Section 7.3.
1.3 BOARD. "Board" shall mean the Board of Directors of the Company.
1.4 CODE. "Code" shall mean the Internal Revenue Code of 1986, as amended.
1.5 COMMITTEE. "Committee" shall mean the Compensation Committee of the
Board, or another committee or subcommittee of the Board, appointed as provided
in Section 6.1.
1.6 COMMON STOCK. "Common Stock" shall mean the common stock of the
Company, par value $.0001 per share.
1.7 COMPANY. "Company" shall mean PriceSmart, Inc., a Delaware
corporation.
1.8 CORPORATE TRANSACTION. "Corporate Transaction" shall mean any of the
following stockholder-approved transactions to which the Company is a party:
(a) a merger or consolidation in which the Company is not the surviving
entity, except for a transaction the principal purpose of which is to change
the State in which the Company is incorporated, form a holding company or
effect a similar reorganization as to form whereupon this Plan and all
Options are assumed by the successor entity;
(b) the sale, transfer, exchange or other disposition of all or
substantially all of the assets of the Company, in complete liquidation or
dissolution of the Company in a transaction not covered by the exceptions to
clause (a), above; or
(c) any reverse merger in which the Company is the surviving entity but
in which securities possessing more than fifty percent (50%) of the total
combined voting power of the Company's outstanding securities are
transferred or issued to a person or persons different from those who held
such securities immediately prior to such merger.
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1.9 DIRECTOR. "Director" shall mean a member of the Board.
1.10 DISTRIBUTION. "Distribution" shall mean the distribution of Common
Stock to the stockholders of Price Enterprises, Inc.
1.11 EMPLOYEE. "Employee" shall mean any officer or other employee (as
defined in accordance with Section 3401(c) of the Code) of the Company, or of
any corporation which is a Subsidiary.
1.12 EXCHANGE ACT. "Exchange Act" shall mean the Securities Exchange Act
of 1934, as amended.
1.13 FAIR MARKET VALUE. "Fair Market Value" of a share of Common Stock as
of a given date shall be (i) the closing price of a share of Common Stock on the
principal exchange on which shares of Common Stock are then trading, if any (or
as reported on any composite index which includes such principal exchange), on
the trading day previous to such date, or if shares were not traded on the
trading day previous to such date, then on the next preceding date on which a
trade occurred, or (ii) if Common Stock is not traded on an exchange but is
quoted on Nasdaq or a successor quotation system, the closing price of a share
of Common Stock on the trading day previous to such date as reported by Nasdaq
or such successor quotation system; or (iii) if Common Stock is not publicly
traded on an exchange and not quoted on Nasdaq or a successor quotation system,
the Fair Market Value of a share of Common Stock as established by the Committee
(or the Board, in the case of Options granted to Independent Directors) acting
in good faith.
1.14 INCENTIVE STOCK OPTION. "Incentive Stock Option" shall mean an option
which conforms to the applicable provisions of Section 422 of the Code and which
is designated as an Incentive Stock Option by the Committee.
1.15 INDEPENDENT DIRECTOR. "Independent Director" shall mean a member of
the Board who is not an Employee of the Company.
1.16 NON-QUALIFIED STOCK OPTION. "Non-Qualified Stock Option" shall mean
an Option which is not designated as an Incentive Stock Option by the Committee.
1.17 OPTION. "Option" shall mean a stock option granted under Article III
of this Plan. An Option granted under this Plan shall, as determined by the
Committee, be either a Non-Qualified Stock Option or an Incentive Stock Option;
PROVIDED, HOWEVER, that Options granted to Independent Directors and consultants
shall be Non-Qualified Stock Options.
1.18 OPTIONEE. "Optionee" shall mean an Employee, consultant or
Independent Director granted an Option under this Plan.
1.19 PLAN. "Plan" shall mean The 1997 Stock Option Plan of PriceSmart,
Inc.
1.20 QDRO. "QDRO" shall mean a qualified domestic relations order as
defined by the Code or Title I of the Employee Retirement Income Security Act of
1974, as amended, or the rules thereunder.
1.21 RULE 16B-3. "Rule 16b-3" shall mean that certain Rule 16b-3 under the
Exchange Act, as such Rule may be amended from time to time.
1.22 SECTION 162(M) PARTICIPANT. "Section 162(m) Participant" shall mean
any key Employee designated by the Committee as a key Employee whose
compensation for the fiscal year in which the key Employee is so designated or a
future fiscal year may be subject to the limit on deductible compensation
imposed by Section 162(m) of the Code.
1.23 SUBSIDIARY. "Subsidiary" shall mean any corporation in an unbroken
chain of corporations beginning with the Company if each of the corporations
other than the last corporation in the unbroken chain then owns stock possessing
50 percent or more of the total combined voting power of all classes of stock in
one of the other corporations in such chain.
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1.24 TERMINATION OF CONSULTANCY. "Termination of Consultancy" shall mean
the time when the engagement of an Optionee as a consultant to the Company or a
Subsidiary is terminated for any reason, with or without cause, including, but
not by way of limitation, by resignation, discharge, death or retirement; but
excluding terminations where there is a simultaneous commencement of employment
with the Company or any Subsidiary. The Committee, in its absolute discretion,
shall determine the effect of all matters and questions relating to Termination
of Consultancy, including, but not by way of limitation, the question of whether
a Termination of Consultancy resulted from a discharge for good cause, and all
questions of whether a particular leave of absence constitutes a Termination of
Consultancy. Notwithstanding any other provision of this Plan, the Company or
any Subsidiary has an absolute and unrestricted right to terminate a
consultant's service at any time for any reason whatsoever, with or without
cause, except to the extent expressly provided otherwise in writing.
1.25 TERMINATION OF DIRECTORSHIP. "Termination of Directorship" shall mean
the time when an Optionee who is an Independent Director ceases to be a Director
for any reason, including, but not by way of limitation, a termination by
resignation, failure to be elected, death or retirement. The Board, in its sole
and absolute discretion, shall determine the effect of all matters and questions
relating to Termination of Directorship with respect to Independent Directors.
1.26 TERMINATION OF EMPLOYMENT. "Termination of Employment" shall mean the
time when the employee-employer relationship between an Optionee and the Company
or any Subsidiary is terminated for any reason, with or without cause,
including, but not by way of limitation, a termination by resignation,
discharge, death, disability or retirement; but excluding (i) terminations where
there is a simultaneous reemployment or continuing employment of an Optionee by
the Company or any Subsidiary, (ii) at the discretion of the Committee,
terminations which result in a temporary severance of the employee-employer
relationship, and (iii) at the discretion of the Committee, terminations which
are followed by the simultaneous establishment of a consulting relationship by
the Company or a Subsidiary with the former employee. The Committee, in its
absolute discretion, shall determine the effect of all matters and questions
relating to Termination of Employment, including, but not by way of limitation,
the question of whether a Termination of Employment resulted from a discharge
for good cause, and all questions of whether a particular leave of absence
constitutes a Termination of Employment; PROVIDED, HOWEVER, that, unless
otherwise determined by the Committee in its discretion, a leave of absence,
change in status from an employee to an independent contractor or other change
in the employee-employer relationship shall constitute a Termination of
Employment if, and to the extent that with respect to Incentive Stock Options,
such leave of absence, change in status or other change interrupts employment
for the purposes of Section 422(a)(2) of the Code and the then applicable
regulations and revenue rulings under said Section. Notwithstanding any other
provision of this Plan, the Company or any Subsidiary has an absolute and
unrestricted right to terminate an Employee's employment at any time for any
reason whatsoever, with or without cause, except to the extent expressly
provided otherwise in writing.
ARTICLE II
SHARES SUBJECT TO PLAN
2.1 SHARES SUBJECT TO PLAN.
(a) The shares of stock subject to Options shall be Common Stock. The
aggregate number of such shares which may be issued upon exercise of such
Options or rights or upon any such awards under the Plan shall not exceed
700,000. The shares of Common Stock issuable upon exercise of such Options may
be either previously authorized but unissued shares or treasury shares.
(b) The maximum number of shares which may be subject to Options granted
under the Plan to any individual in any fiscal year shall not exceed the Award
Limit. To the extent required by Section 162(m) of the Code, shares subject to
Options which are canceled continue to be counted against the Award Limit
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and if, after grant of an Option, the price of shares subject to such Option is
reduced, the transaction is treated as a cancellation of the Option and a grant
of a new Option and both the Option deemed to be canceled and the Option deemed
to be granted are counted against the Award Limit.
2.2 ADD-BACK OF OPTIONS. If any Option to acquire shares of Common Stock
under this Plan expires or is canceled without having been fully exercised, or
is exercised in whole or in part for cash as permitted by this Plan, the number
of shares subject to such Option but as to which such Option was not exercised
prior to its expiration, cancellation or exercise may again be optioned
hereunder, subject to the limitations of Section 2.1. Furthermore, any shares
subject to Options which are adjusted pursuant to Section 7.3 and become
exercisable with respect to shares of stock of another corporation shall be
considered cancelled and may again be optioned hereunder, subject to the
limitations of Section 2.1. Shares of Common Stock which are delivered by the
Optionee or withheld by the Company upon the exercise of any Option under this
Plan, in payment of the exercise price thereof, may again be optioned hereunder,
subject to the limitations of Section 2.1. Notwithstanding the provisions of
this Section 2.2, no shares of Common Stock may again be optioned if such action
would cause an Incentive Stock Option to fail to qualify as an incentive stock
option under Section 422 of the Code.
ARTICLE III
GRANTING OF OPTIONS
3.1 ELIGIBILITY. Any Employee or consultant selected by the Committee
pursuant to Section 3.4(a)(i) shall be eligible to be granted an Option. Each
Independent Director of the Company shall be eligible to be granted Options at
the times and in the manner set forth in Section 3.4(d).
3.2 DISQUALIFICATION FOR STOCK OWNERSHIP. No person may be granted an
Incentive Stock Option under this Plan if such person, at the time the Incentive
Stock Option is granted, owns stock possessing more than ten percent (10%) of
the total combined voting power of all classes of stock of the Company or any
then existing Subsidiary or parent corporation (within the meaning of Section
422 of the Code) unless such Incentive Stock Option conforms to the applicable
provisions of Section 422 of the Code.
3.3 QUALIFICATION OF INCENTIVE STOCK OPTIONS. No Incentive Stock Option
shall be granted to any person who is not an Employee.
3.4 GRANTING OF OPTIONS
(a) The Committee shall from time to time, in its absolute discretion, and
subject to applicable limitations of this Plan:
(i) Determine which Employees are key Employees and select from among
the key Employees or consultants (including Employees or consultants who
have previously received Options under this Plan) such of them as in its
opinion should be granted Options;
(ii) Subject to the Award Limit, determine the number of shares to be
subject to such Options granted to the selected key Employees or
consultants;
(iii) Subject to Section 3.3, determine whether such Options are to be
Incentive Stock Options or Non-Qualified Stock Options and whether such
Options are to qualify as performance-based compensation as described in
Section 162(m)(4)(C) of the Code; and
(iv) Determine the terms and conditions of such Options, consistent with
this Plan; PROVIDED, HOWEVER, that the terms and conditions of Options
intended to qualify as performance-based compensation as described in
Section 162(m)(4)(C) of the Code shall include, but not be limited to, such
terms and conditions as may be necessary to meet the applicable provisions
of Section 162(m) of the Code.
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(b) Upon the selection of a key Employee or consultant to be granted an
Option, the Committee shall instruct the Chief Executive Officer of the Company
to issue the Option and may impose such conditions on the grant of the Option as
it deems appropriate. Without limiting the generality of the preceding sentence,
the Committee may, in its discretion and on such terms as it deems appropriate,
require as a condition on the grant of an Option to an Employee or consultant
that the Employee or consultant surrender for cancellation some or all of the
unexercised Options or other rights which have been previously granted to him
under this Plan or otherwise. An Option, the grant of which is conditioned upon
such surrender, may have an Option price lower (or higher) than the exercise
price of such surrendered Option or other award, may cover the same (or a lesser
or greater) number of shares as such surrendered Option or other award, may
contain such other terms as the Committee deems appropriate, and shall be
exercisable in accordance with its terms, without regard to the number of
shares, price, exercise period or any other term or condition of such
surrendered Option or other award.
(c) Any Incentive Stock Option granted under this Plan may be modified by
the Committee to disqualify such option from treatment as an "incentive stock
option" under Section 422 of the Code.
(d) During the term of the Plan, each person who is an Independent Director
as of the date of the the Distribution automatically shall be granted (i) an
Option to purchase three thousand (3,000) shares of Common Stock (subject to
adjustment as provided in Section 7.3) on the 26th day after the Distribution
and (ii) an Option to purchase one thousand (1,000) shares of Common Stock
(subject to adjustment as provided in Section 7.3) on the date of each annual
meeting of stockholders after such Distribution at which the Independent
Director is reelected to the Board. During the term of the Plan, a person who is
initially elected to the Board after the consummation of the Distribution and
who is an Independent Director at the time of such initial election
automatically shall be granted (i) an Option to purchase three thousand (3,000)
shares of Common Stock (subject to adjustment as provided in Section 7.3) on the
date of such initial election and (ii) an Option to purchase one thousand
(1,000) shares of Common Stock (subject to adjustment as provided in Section
7.3) on the date of each annual meeting of stockholders after such initial
election at which the Independent Director is reelected to the Board. In
addition, the Board shall grant Options ("Replacement Options") to each
Independent Director who is a member of the Board of Directors of Price
Enterprises, Inc., a Delaware corporation ("PEI"), and whose PEI stock options
terminate unexercised as a result of the Independent Director's resignation from
such Board of Directors in order to become a member of the Board, in an amount
and upon terms and conditions which provide the Independent Director with
Replacement Options with a value which is comparable to the value of the
terminated PEI options, as determined by the Board. Members of the Board who are
employees of the Company who subsequently retire from the Company and remain on
the Board will not receive an initial Option grant pursuant to clause (i) of the
preceding sentence, but to the extent that they are otherwise eligible, will
receive, after retirement from employment with the Company, Options as described
in clause (ii) of the preceding sentence.
ARTICLE IV
TERMS OF OPTIONS
4.1 OPTION AGREEMENT. Each Option shall be evidenced by a written Stock
Option Agreement, which shall be executed by the Optionee and an authorized
officer of the Company and which shall contain such terms and conditions as the
Committee (or the Board, in the case of Options granted to Independent
Directors) shall determine, consistent with this Plan. Stock Option Agreements
evidencing Options intended to qualify as performance-based compensation as
described in Section 162(m)(4)(C) of the Code shall contain such terms and
conditions as may be necessary to meet the applicable provisions of Section
162(m) of the Code. Stock Option Agreements evidencing Incentive Stock Options
shall contain such terms and conditions as may be necessary to meet the
applicable provisions of Section 422 of the Code.
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4.2 OPTION PRICE. The price per share of the shares subject to each Option
shall be set by the Committee; PROVIDED, HOWEVER, that such price shall be no
less than the par value of a share of Common Stock, unless otherwise permitted
by applicable state law, and (i) in the case of Options intended to qualify as
performance-based compensation as described in Section 162(m)(4)(C) of the Code,
such price shall not be less than 100% of the Fair Market Value of a share of
Common Stock on the date the Option is granted; (ii) in the case of Incentive
Stock Options such price shall not be less than 100% of the Fair Market Value of
a share of Common Stock on the date the Option is granted (or the date the
Option is modified, extended or renewed for purposes of Section 424(h) of the
Code); (iii) in the case of Incentive Stock Options granted to an individual
then owning (within the meaning of Section 424(d) of the Code) more than 10% of
the total combined voting power of all classes of stock of the Company or any
Subsidiary or parent corporation thereof (within the meaning of Section 422 of
the Code), such price shall not be less than 110% of the Fair Market Value of a
share of Common Stock on the date the Option is granted (or the date the Option
is modified, extended or renewed for purposes of Section 424(h) of the Code);
and (iv) in the case of Options granted to Independent Directors, such price
shall equal 100% of the Fair Market Value of a share of Common Stock on the date
the Option is granted; PROVIDED, HOWEVER, that the price of each share subject
to each Option granted to Independent Directors on the date of the Distribution
shall equal the average of the trading price for the Common Stock for the twenty
days commencing on the sixth day after the effective date of the Distribution.
4.3 OPTION TERM. The term of an Option shall be set by the Committee in
its discretion; PROVIDED, HOWEVER, that, (i) in the case of Options granted to
Independent Directors, the term shall be ten (10) years from the date the Option
is granted, without variation or acceleration hereunder, but subject to Section
5.6, and (ii) in the case of Incentive Stock Options, the term shall not be more
than ten (10) years from the date the Incentive Stock Option is granted, or five
(5) years from such date if the Incentive Stock Option is granted to an
individual then owning (within the meaning of Section 424(d) of the Code) more
than 10% of the total combined voting power of all classes of stock of the
Company or any Subsidiary or parent corporation thereof (within the meaning of
Section 422 of the Code). Except as limited by requirements of Section 422 of
the Code and regulations and rulings thereunder applicable to Incentive Stock
Options, the Committee may extend the term of any outstanding Option in
connection with any Termination of Employment or Termination of Consultancy of
the Optionee, or amend any other term or condition of such Option relating to
such a termination.
4.4 OPTION VESTING
(a) The period during which the right to exercise an Option in whole or in
part vests in the Optionee shall be set by the Committee and the Committee may
determine that an Option may not be exercised in whole or in part for a
specified period after it is granted; PROVIDED, HOWEVER, that, unless the
Committee otherwise provides in the terms of the Option or otherwise, no Option
shall be exercisable by any Optionee who is then subject to Section 16 of the
Exchange Act within the period ending six months and one day after the date the
Option is granted; and PROVIDED, FURTHER, that Options granted to Independent
Directors, other than Replacement Options, shall become exercisable in
cumulative annual installments of 25% on each of the first, second, third and
fourth anniversaries of the date of Option grant, without variation or
acceleration hereunder except as provided in Section 7.3(b). At any time after
grant of an Option, the Committee may, in its sole and absolute discretion and
subject to whatever terms and conditions it selects, accelerate the period
during which an Option (except an Option granted to an Independent Director)
vests.
(b) No portion of an Option which is unexercisable at Termination of
Employment, Termination of Directorship or Termination of Consultancy, as
applicable, shall thereafter become exercisable, except as may be otherwise
provided by the Committee in the case of Options granted to Employees or
consultants either in the Stock Option Agreement or by action of the Committee
following the grant of the Option.
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(c) To the extent that the aggregate Fair Market Value of stock with respect
to which "incentive stock options" (within the meaning of Section 422 of the
Code, but without regard to Section 422(d) of the Code) are exercisable for the
first time by an Optionee during any calendar year (under the Plan and all other
incentive stock option plans of the Company and any parent or subsidiary
corporation (within the meaning of Section 422 of the Code) of the Company)
exceeds $100,000, such Options shall be treated as Non-Qualified Options to the
extent required by Section 422 of the Code. The rule set forth in the preceding
sentence shall be applied by taking Options into account in the order in which
they were granted. For purposes of this Section 4.4(c), the Fair Market Value of
stock shall be determined as of the time the Option with respect to such stock
is granted.
4.5 CONSIDERATION. In consideration of the granting of an Option, the
Optionee shall agree, in the written Stock Option Agreement, to remain in the
employ of (or to consult for or to serve as an Independent Director of, as
applicable) the Company or any Subsidiary for a period of at least six months
(or such shorter period as may be fixed in the Stock Option Agreement or by
action of the Committee following grant of the Option) after the Option is
granted (or, in the case of an Independent Director, until the next annual
meeting of stockholders of the Company). Nothing in this Plan or in any Stock
Option Agreement hereunder shall confer upon any Optionee any right to continue
in the employ of, or as a consultant for, the Company or any Subsidiary, or as a
director of the Company, or shall interfere with or restrict in any way the
rights of the Company and any Subsidiary, which are hereby expressly reserved,
to discharge any Optionee at any time for any reason whatsoever, with or without
good cause.
ARTICLE V
EXERCISE OF OPTIONS
5.1 PARTIAL EXERCISE. An exercisable Option may be exercised in whole or
in part. However, an Option shall not be exercisable with respect to fractional
shares and the Committee (or the Board, in the case of Options granted to
Independent Directors) may require that, by the terms of the Option, a partial
exercise be with respect to a minimum number of shares.
5.2 MANNER OF EXERCISE. All or a portion of an exercisable Option shall be
deemed exercised upon delivery of all of the following to the Secretary of the
Company or his office:
(a) A written notice complying with the applicable rules established by the
Committee (or the Board, in the case of Options granted to Independent
Directors) stating that the Option, or a portion thereof, is exercised. The
notice shall be signed by the Optionee or other person then entitled to exercise
the Option or such portion of the Option;
(b) Such representations and documents as the Committee (or the Board, in
the case of Options granted to Independent Directors), in its absolute
discretion, deems necessary or advisable to effect compliance with all
appli-cable provisions of the Securities Act of 1933, as amended, and any other
federal or state securities laws or regulations. The Committee or Board may, in
its absolute discretion, also take whatever additional actions it deems
appropriate to effect such compliance including, without limitation, placing
legends on share certificates and issuing stop-transfer notices to agents and
registrars;
(c) In the event that the Option shall be exercised pursuant to Section 7.1
by any person or persons other than the Optionee, appropriate proof of the right
of such person or persons to exercise the Option; and
(d) Full cash payment to the Secretary of the Company for the shares with
respect to which the Option, or portion thereof, is exercised. However, the
Committee (or the Board, in the case of Options granted to Independent
Directors), may in its discretion (i) allow a delay in payment up to thirty (30)
days from the date the Option, or portion thereof, is exercised; (ii) allow
payment, in whole or in part, through the delivery of shares of Common Stock
owned by the Optionee, duly endorsed for transfer to the
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Company with a Fair Market Value on the date of delivery equal to the aggregate
exercise price of the Option or exercised portion thereof; (iii) allow payment,
in whole or in part, through the surrender of shares of Common Stock then
issuable upon exercise of the Option having a Fair Market Value on the date of
Option exercise equal to the aggregate exercise price of the Option or exercised
portion thereof; (iv) allow payment, in whole or in part, through the delivery
of property of any kind which constitutes good and valuable consideration; (v)
allow payment, in whole or in part, through the delivery of a full recourse
promissory note bearing interest (at no less than such rate as shall then
preclude the imputation of interest under the Code) and payable upon such terms
as may be prescribed by the Committee or the Board; (vi) allow payment, in whole
or in part, through the delivery of a notice that the Optionee has placed a
market sell order with a broker with respect to shares of Common Stock then
issuable upon exercise of the Option, and that the broker has been directed to
pay a sufficient portion of the net proceeds of the sale to the Company in
satisfaction of the Option exercise price; or (vii) allow payment through any
combination of the consideration provided in the foregoing subparagraphs (ii),
(iii), (iv), (v) and (vi). In the case of a promissory note, the Committee (or
the Board, in the case of Options granted to Independent Directors) may also
prescribe the form of such note and the security to be given for such note. The
Option may not be exercised, however, by delivery of a promissory note or by a
loan from the Company when or where such loan or other extension of credit is
prohibited by law.
5.3 CONDITIONS TO ISSUANCE OF STOCK CERTIFICATES. The Company shall not be
required to issue or deliver any certificate or certificates for shares of stock
purchased upon the exercise of any Option or portion thereof prior to
fulfillment of all of the following conditions, any one of which may be issued
by the Company, in its discretion:
(a) The admission of such shares to listing on all stock exchanges on which
such class of stock is then listed;
(b) The completion of any registration or other qualification of such shares
under any state or federal law, or under the rulings or regulations of the
Securities and Exchange Commission or any other governmental regulatory body
which the Committee or Board shall, in its absolute discretion, deem necessary
or advisable;
(c) The obtaining of any approval or other clearance from any state or
federal governmental agency which the Committee (or Board, in the case of
Options granted to Independent Directors) shall, in its absolute discretion,
determine to be necessary or advisable;
(d) The lapse of such reasonable period of time following the exercise of
the Option as the Committee (or Board, in the case of Options granted to
Independent Directors) may establish from time to time for reasons of
administrative convenience; and
(e) Subject to Section 5.2(d), the receipt by the Company of full payment
for such shares, including payment of any applicable withholding tax.
5.4 RIGHTS AS STOCKHOLDERS. The holders of Options shall not be, nor have
any of the rights or privileges of, stockholders of the Company in respect of
any shares purchasable upon the exercise of any part of an Option unless and
until certificates representing such shares have been issued by the Company to
such holders.
5.5 OWNERSHIP AND TRANSFER RESTRICTIONS. The Committee (or Board, in the
case of Options granted to Independent Directors), in its absolute discretion,
may impose such restrictions on the ownership and transferability of the shares
purchasable upon the exercise of an Option as it deems appropriate. Any such
restriction shall be set forth in the respective Stock Option Agreement and may
be referred to on the certificates evidencing such shares. The Committee may
require the Employee to give the Company prompt notice of any disposition of
shares of Common Stock acquired by exercise of an Incentive Stock Option within
(i) two years from the date of granting (including the date the Option is
modified, extended or renewed for purposes of Section 424(h) of the Code) such
Option to such Employee or (ii) one year
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after the transfer of such shares to such Employee. The Committee may direct
that the certificates evidencing shares acquired by exercise of an Option refer
to such requirement to give prompt notice of disposition.
5.6 LIMITATIONS ON EXERCISE OF OPTIONS GRANTED TO INDEPENDENT
DIRECTORS. No Option granted to an Independent Director may be exercised to any
extent by anyone after the first to occur of the following events:
(a) The expiration of twelve (12) months from the date of the Optionee's
death;
(b) the expiration of twelve (12) months from the date of the Optionee's
Termination of Directorship by reason of his permanent and total disability
(within the meaning of Section 22(e)(3) of the Code);
(c) the expiration of three (3) months from the date of the Optionee's
Termination of Directorship for any reason other than such Optionee's death or
his permanent and total disability, unless the Optionee dies within said
three-month period; or
(d) The expiration of ten years from the date the Option was granted.
ARTICLE VI
ADMINISTRATION
6.1 COMPENSATION COMMITTEE. The Compensation Committee (or another
committee or a subcommittee of the Board assuming the functions of the Committee
under this Plan) shall consist solely of two or more Independent Directors
appointed by and holding office at the pleasure of the Board, each of whom is
both a "non-employee director" as defined by Rule 16b-3 and an "outside
director" for purposes of Section 162(m) of the Code. Appointment of Committee
members shall be effective upon acceptance of appointment. Committee members may
resign at any time by delivering written notice to the Board. Vacancies in the
Committee may be filled by the Board.
6.2 DUTIES AND POWERS OF COMMITTEE. It shall be the duty of the Committee
to conduct the general administration of this Plan in accordance with its
provisions. The Committee shall have the power to interpret this Plan and the
agreements pursuant to which Options are granted or awarded, and to adopt such
rules for the administration, interpretation, and application of this Plan as
are consistent therewith and to interpret, amend or revoke any such rules.
Notwithstanding the foregoing, the full Board, acting by a majority of its
members in office, shall conduct the general administration of the Plan with
respect to Options granted to Independent Directors. Any such grant or award
under this Plan need not be the same with respect to each Optionee. Any such
interpretations and rules with respect to Incentive Stock Options shall be
consistent with the provisions of Section 422 of the Code. In its absolute
discretion, the Board may at any time and from time to time exercise any and all
rights and duties of the Committee under this Plan except with respect to
matters which under Rule 16b-3 or Section 162(m) of the Code, or any regulations
or rules issued thereunder, are required to be determined in the sole discretion
of the Committee.
6.3 MAJORITY RULE; UNANIMOUS WRITTEN CONSENT. The Committee shall act by a
majority of its members in attendance at a meeting at which a quorum is present
or by a memorandum or other written instrument signed by all members of the
Committee.
6.4 COMPENSATION; PROFESSIONAL ASSISTANCE; GOOD FAITH ACTIONS. Members of
the Committee shall receive such compensation, if any, for their services as
members as may be determined by the Board. All expenses and liabilities which
members of the Committee incur in connection with the administration of this
Plan shall be borne by the Company. The Committee may, with the approval of the
Board, employ attorneys, consultants, accountants, appraisers, brokers, or other
persons. The Committee, the Company and the Company's officers and Directors
shall be entitled to rely upon the advice, opinions or valuations of any such
persons. All actions taken and all interpretations and determinations made by
the Committee
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or the Board in good faith shall be final and binding upon all Optionees, the
Company and all other interested persons. No members of the Committee or Board
shall be personally liable for any action, determination or interpretation made
in good faith with respect to this Plan or Options, and all members of the
Committee and the Board shall be fully protected by the Company in respect of
any such action, determination or interpretation.
ARTICLE VII
MISCELLANEOUS PROVISIONS
7.1 NOT TRANSFERABLE. Options under this Plan may not be sold, pledged,
assigned, or transferred in any manner other than by will or the laws of descent
and distribution or pursuant to a QDRO, unless and until such options have been
exercised, or the shares underlying such options have been issued, and all
restrictions applicable to such shares have lapsed. No Option or interest or
right therein shall be liable for the debts, contracts or engagements of the
Optionee or his successors in interest or shall be subject to disposition by
transfer, alienation, anticipation, pledge, encumbrance, assignment or any other
means whether such disposition be voluntary or involuntary or by operation of
law by judgment, levy, attachment, garnishment or any other legal or equitable
proceedings (including bankruptcy), and any attempted disposition thereof shall
be null and void and of no effect, except to the extent that such disposition is
permitted by the preceding sentence.
During the lifetime of the Optionee, only he may exercise an Option (or any
portion thereof) granted to him under the Plan, unless it has been disposed of
pursuant to a QDRO. After the death of the Optionee, any exercisable portion of
an Option may, prior to the time when such portion becomes unexercisable under
the Plan or the applicable Stock Option Agreement or other agreement, be
exercised by his personal representative or by any person empowered to do so
under the deceased Optionee's will or under the then applicable laws of descent
and distribution.
7.2 AMENDMENT, SUSPENSION OR TERMINATION OF THIS PLAN. Except as otherwise
provided in this Section 7.2, this Plan may be wholly or partially amended or
otherwise modified, suspended or terminated at any time or from time to time by
the Board or the Committee. However, without approval of the Company's
stockholders given within twelve months before or after the action by the Board
or the Committee, no action of the Board or the Committee may, except as
provided in Section 7.3, increase the limits imposed in Section 2.1 on the
maximum number of shares which may be issued under this Plan, and no action of
the Board or the Committee may be taken that would otherwise require stockholder
approval as a matter of applicable law, regulation or rule. Furthermore, no
modification of the Award Limit shall be effective prior to the approval of the
Company's stockholders. No amendment, suspension or termination of this Plan
shall, without the consent of the holder of Options, alter or impair any rights
or obligations under any Options theretofore granted or awarded, unless the
award itself otherwise expressly so provides. No Options may be granted or
awarded during any period of suspension or after termination of this Plan, and
in no event may any Incentive Stock Option be granted under this Plan after the
first to occur of the following events:
(a) The expiration of ten years from the date the Plan is adopted by the
Board; or
(b) The expiration of ten years from the date the Plan is approved by the
Company's stockholders under Section 7.4.
7.3 CHANGES IN COMMON STOCK OR ASSETS OF THE COMPANY, ACQUISITION OR
LIQUIDATION OF THE COMPANY AND OTHER CORPORATE EVENTS.
(a) Subject to Section 7.3(d), in the event that the Committee (or the
Board, in the case of Options granted to Independent Directors) determines that
any dividend or other distribution (whether in the form of cash, Common Stock,
other securities, or other property), recapitalization, reclassification, stock
split,
10
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reverse stock split, reorganization, merger, consolidation, split-up, spin-off,
combination, repurchase, liquidation, dissolution, or sale, transfer, exchange
or other disposition of all or substantially all of the assets of the Company
(including, but not limited to, a Corporate Transaction), or exchange of Common
Stock or other securities of the Company, issuance of warrants or other rights
to purchase Common Stock or other securities of the Company, or other similar
corporate transaction or event, in the Committee's sole discretion (or in the
case of Options granted to Independent Directors, the Board's sole discretion),
affects the Common Stock such that an adjustment is determined by the Committee
to be appropriate in order to prevent dilution or enlargement of the benefits or
potential benefits intended to be made available under the Plan or with respect
to an Option, then the Committee (or the Board, in the case of Options granted
to Independent Directors) shall, in such manner as it may deem equitable, adjust
any or all of
(i) the number and kind of shares of Common Stock (or other securities
or property) with respect to which Options may be granted under the Plan,
(including, but not limited to, adjustments of the limitations in Section
2.1 on the maximum number and kind of shares which may be issued and
adjustments of the Award Limit),
(ii) the number and kind of shares of Common Stock (or other securities
or property) subject to outstanding Options, and
(iii) the grant or exercise price with respect to any Option.
(b) Subject to Section 7.3(d), in the event of any Corporate Transaction or
other transaction or event described in Section 7.3(a) or any unusual or
nonrecurring transactions or events affecting the Company, any affiliate of the
Company, or the financial statements of the Company or any affiliate, or of
changes in applicable laws, regulations, or accounting principles, the Committee
(or the Board, in the case of Options granted to Independent Directors) in its
discretion is hereby authorized to take any one or more of the following actions
whenever the Committee (or the Board, in the case of Options granted to
Independent Directors) determines that such action is appropriate in order to
prevent dilution or enlargement of the benefits or potential benefits intended
to be made available under the Plan or with respect to any option under this
Plan, to facilitate such transactions or events or to give effect to such
changes in laws, regulations or principles:
(i) In its sole and absolute discretion, and on such terms and
conditions as it deems appropriate, the Committee (or the Board, in the case
of Options granted to Independent Directors) may provide, either by the
terms of the agreement or by action taken prior to the occurrence of such
transaction or event and either automatically or upon the optionee's
request, for either the purchase of any such Option for an amount of cash
equal to the positive difference, if any, between the amount that could have
been obtained upon the exercise of such Option and the exercise price of
such Option, or realization of the optionee's rights had such Option been
currently exercisable or payable or fully vested or the replacement of such
Option with other rights or property selected by the Committee (or the
Board, in the case of Options granted to Independent Directors) in its sole
discretion;
(ii) In its sole and absolute discretion, and on such terms and
conditions as it deems appropriate, the Committee (or the Board, in the case
of Options granted to Independent Directors) may provide, either by the
terms of such Option or by action taken prior to the occurrence of such
transaction or event, that for a specified period of time prior to such
transaction or event, such Option shall be exercisable as to all shares
covered thereby, notwithstanding anything to the contrary in (i) Section 4.4
or (ii) the provisions of such Option;
(iii) In its sole and absolute discretion, and on such terms and
conditions as it deems appropriate, the Committee (or the Board, in the case
of Options granted to Independent Directors) may provide, either by the
terms of such Option or by action taken prior to the occurrence of such
transaction or event, that upon such event, such Option be assumed by the
successor or survivor corporation, or a
11
<PAGE>
parent or subsidiary thereof, or shall be substituted for by similar Options
covering the stock of the successor or survivor corporation, or a parent or
subsidiary thereof, with appropriate adjustments as to the number and kind
of shares and prices; and
(v) In its sole and absolute discretion, and on such terms and
conditions as it deems appropriate, the Committee (or the Board, in the case
of Options granted to Independent Directors) may make adjustments in the
number and type of shares of Common Stock (or other securities or property)
subject to outstanding Options and/or in the terms and conditions of
(including the grant or exercise price), and the criteria included in,
outstanding Options and Options which may be granted in the future.
(c) Subject to Section 7.3(d) and 7.8, the Committee (or the Board, in the
case of Options granted to Independent Directors) may, in its discretion,
include such further provisions and limitations in any Option as it may deem
equitable and in the best interests of the Company.
(d) With respect to Options which are granted to Section 162(m) Participants
and are intended to qualify as performance-based compensation under Section
162(m)(4)(C), no adjustment or action described in this Section 7.3 or in any
other provision of the Plan shall be authorized to the extent that such
adjustment or action would cause the Plan to violate Section 422(b)(1) of the
Code or would cause such option to fail to so qualify under Section
162(m)(4)(C), as the case may be, or any successor provisions thereto.
Furthermore, no such adjustment or action shall be authorized to the extent such
adjustment or action would result in short-swing profits liability under Section
16 or violate the exemptive conditions of Rule 16b-3 unless the Committee (or
the Board, in the case of Options granted to Independent Directors) determines
that the option is not to comply with such exemptive conditions. The number of
shares of Common Stock subject to any option shall always be rounded to the next
whole number.
7.4 APPROVAL OF PLAN BY STOCKHOLDERS. This Plan will be submitted for the
approval of the Company's stockholders within twelve months after the date of
the Board's initial adoption of this Plan. Options may be granted prior to such
stockholder approval, provided that such Options shall not be exercisable prior
to the time when this Plan is approved by the stockholders, and provided further
that if such approval has not been obtained at the end of said twelve-month
period, all Options previously granted under this Plan shall thereupon be
canceled and become null and void.
7.5 TAX WITHHOLDING. The Company shall be entitled to require payment in
cash or deduction from other compensation payable to each Optionee of any sums
required by federal, state or local tax law to be withheld with respect to the
issuance, vesting, exercise or payment of any Option. The Committee (or the
Board, in the case of Options granted to Independent Directors) may in its
discretion and in satisfaction of the foregoing requirement allow such Optionee
to elect to have the Company withhold shares of Common Stock otherwise issuable
under such Option (or allow the return of shares of Common Stock) having a Fair
Market Value equal to the sums required to be withheld.
7.6 LOANS. The Committee may, in its discretion, extend one or more loans
to key Employees in connection with the exercise or receipt of an Option granted
under this Plan. The terms and conditions of any such loan shall be set by the
Committee.
7.7 FORFEITURE PROVISIONS. Pursuant to its general authority to determine
the terms and conditions applicable to awards under the Plan, the Committee (or
the Board, in the case of Options granted to Independent Directors) shall have
the right (to the extent consistent with the applicable exemptive conditions of
Rule 16b-3) to provide, in the terms of Options made under the Plan, or to
require the recipient to agree by separate written instrument, that (i) any
proceeds, gains or other economic benefit actually or constructively received by
the recipient upon any receipt or exercise of an Option, or upon the receipt or
resale of any Common Stock underlying such Option, must be paid to the Company,
and (ii) the Option shall terminate and any unexercised portion of such Option
(whether or not vested) shall be forfeited, if (a) a Termination of Employment,
Termination of Consultancy or Termination of Directorship
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occurs prior to a specified date, or within a specified time period following
receipt or exercise of the Option, or (b) the recipient at any time, or during a
specified time period, engages in any activity in competition with the Company,
or which is inimical, contrary or harmful to the interests of the Company, as
further defined by the Committee (or the Board, as applicable).
7.8 LIMITATIONS APPLICABLE TO SECTION 16 PERSONS AND PERFORMANCE-BASED
COMPENSATION. Notwithstanding any other provision of this Plan, this Plan, and
any Option granted to any individual who is then subject to Section 16 of the
Exchange Act, shall be subject to any additional limitations set forth in any
applicable exemptive rule under Section 16 of the Exchange Act (including any
amendment to Rule 16b-3) that are requirements for the application of such
exemptive rule. To the extent permitted by applicable law, the Plan and Options
granted hereunder shall be deemed amended to the extent necessary to conform to
such applicable exemptive rule. Furthermore, notwithstanding any other provision
of this Plan, any Option which is granted to a Section 162(m) Participant and is
intended to qualify as performance-based compensation as described in Section
162(m)(4)(C) of the Code shall be subject to any additional limitations set
forth in Section 162(m) of the Code (including any amendment to Section 162(m)
of the Code) or any regulations or rulings issued thereunder that are
requirements for qualification as performance-based compensation as described in
Section 162(m)(4)(C) of the Code, and this Plan shall be deemed amended to the
extent necessary to conform to such requirements.
7.9 EFFECT OF PLAN UPON OPTIONS AND COMPENSATION PLANS. The adoption of
this Plan shall not affect any other compensation or incentive plans in effect
for the Company or any Subsidiary. Nothing in this Plan shall be construed to
limit the right of the Company (i) to establish any other forms of incentives or
compensation for Employees, Directors or Consultants of the Company or any
Subsidiary or (ii) to grant or assume options or other rights otherwise than
under this Plan in connection with any proper corporate purpose including but
not by way of limitation, the grant or assumption of options in connection with
the acquisition by purchase, lease, merger, consolidation or otherwise, of the
business, stock or assets of any corporation, partnership, limited liability
company, firm or association.
7.10 COMPLIANCE WITH LAWS. This Plan, the granting and vesting of Options
under this Plan and the issuance and delivery of shares of Common Stock and the
payment of money under this Plan or under Options granted hereunder are subject
to compliance with all applicable federal and state laws, rules and regulations
(including but not limited to state and federal securities law and federal
margin requirements) and to such approvals by any listing, regulatory or
governmental authority as may, in the opinion of counsel for the Company, be
necessary or advisable in connection therewith. Any securities delivered under
this Plan shall be subject to such restrictions, and the person acquiring such
securities shall, if requested by the Company, provide such assurances and
representations to the Company as the Company may deem necessary or desirable to
assure compliance with all applicable legal requirements. To the extent
permitted by applicable law, the Plan and Options granted or awarded hereunder
shall be deemed amended to the extent necessary to conform to such laws, rules
and regulations.
7.11 TITLES. Titles are provided herein for convenience only and are not
to serve as a basis for interpretation or construction of this Plan.
7.12 GOVERNING LAW. This Plan and any agreements hereunder shall be
administered, interpreted and enforced under the internal laws of the State of
Delaware without regard to conflicts of laws thereof.
* * *
I hereby certify that the foregoing Plan was duly adopted by the Board of
Directors of PriceSmart, Inc. on August 6, 1997.
Executed on this 29th day of August, 1997.
/s/ Robert M. Gans
--------------------------------------
Secretary
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ASSIGNMENT AND ASSUMPTION OF EMPLOYMENT AGREEMENT
This Assignment and Assumption of Employment Agreement is made this 29th day of
August, 1997, by and between Price Enterprises, Inc., a Delaware corporation
(the "Assignor") and PriceSmart, Inc. a Delaware corporation (the "Assignee").
RECITALS
A) Assignor is a party an Employment Agreement, dated as of September 20, 1994,
an amendment to said Employment Agreement, dated as of April 11, 1996, a
second amendment to said Employment Agreement dated as of July 23, 1996 and
a third amendment to said Employment Agreement, dated as of April 28, 1997
(collectively, "Employment Agreements") which were entered into by Assignor
and Robert M. Gans.
B) Assignor and Assignee are parties to a Distribution Agreement dated August
26, 1997.
C) This instrument is executed in accordance with the terms of Section 6.2 of
the Employment Agreement and Section 6.02 of the Distribution Agreement.
AGREEMENT:
1) ASSIGNMENT AND ASSUMPTION. Assignor does hereby assign, transfer, set over
and deliver to Assignee all of Assignor's rights, benefits, duties and
obligations under the Employment Agreements, subject to all of the terms,
conditions, reservations and limitations set forth in the Employment
Agreements, and Assignee does hereby accept such assignment and agrees to
assume and discharge, in accordance with the terms thereof, all of the
burdens and obligations of Assignor contained in or pursuant to the
Employment Agreements.
2) BINDING EFFECT. This Agreement shall be binding upon and shall inure to the
benefit of the respective successors, assigns and representatives of the
parties hereto.
3) EFFECTIVE DATE. The effective date of this Agreement is August 29, 1997.
4) GOVERNING LAW. This Agreement shall be construed, interpreted and enforced
in accordance with the laws of the State of California.
Executed in San Diego, California, as of the date first written above.
PriceSmart, Inc. Price Enterprises, Inc.
By: /s/ Robert E. Price By: /s/ Joseph R. Satz
--------------------------- ---------------------------
Its: President Its: Vice Pres.
-------------------------- --------------------------
<PAGE>
FOURTH AMENDMENT TO EMPLOYMENT AGREEMENT
This Fourth Amendment to Employment Agreement was made and entered into as of
September 2, 1997, by and between PriceSmart, Inc., a Deleware Corporation
("Employer") and Robert M. Gans ("Executive").
RECITALS
A) On September 20, 1994 an Employment Agreement was made and entered into by
and between Executive and Employer's Assignor, Price Enterprises, Inc.
B) On April 11, 1996, Section 2.3 of the Employment Agreement was amended, such
that Executive became entitled to three weeks paid vacation each year.
C) On July 23, 1996, Section 2.1 of the Employment Agreement was amended, such
that Executive's annual base salary was increased to $175,000.
D) On April 28, 1997, Section 3.1 of the Employment Agreement was amended, such
that Executive's employment term was extend to October 16, 1998.
E) On August 29, 1997, the Employment Agreement and amendments thereto were
assigned by Price Enterprises, Inc. to Employer.
F) Employer and Executive now desire to further amend the Employment Agreement,
as set forth hereinbelow:
AGREEMENT
1) Section 3.1 of the Employment Agreement, which currently provides:
The term of Executive's employment hereunder shall commence on October
17, 1994 and shall continue until October 16, 1998, unless sooner
terminated or extended as hereinafter provided (the "Employment
Term").
is hereby amended to provide as follows:
The term of Executive's employment hereunder shall commence on
October 17, 1994 and shall continue until
<PAGE>
October 16, 2000, unless sooner terminated or extended as hereinafter
provided (the "Employment Term").
2) All other terms of the Employment Agreement shall remain unaltered and fully
effective.
Executed in San Diego, California, as of the date first written above.
EXECUTIVE EMPLOYER
- --------- --------
PRICESMART, INC.
Robert M. Gans By: /s/ Robert E. Price
--------------------------
/s/ Robert M. Gans Name: Robert E. Price
- -------------------------- ------------------------
Its: President
-------------------------
<PAGE>
EXHIBIT 10.12
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered
into as of the 29th day of September, 1997, by and between PriceSmart, Inc.,
a Delaware corporation ("Employer"), and Karen Ratcliff ("Executive").
RECITALS
--------
A. Employer desires to employ Executive as Chief Financial
Officer and Executive Vice-President of Employer.
B. Executive desires to accept such position upon the terms and
subject to the conditions herein provided.
TERMS AND CONDITIONS
--------------------
NOW, THEREFORE, in consideration of the foregoing premises and mutual
covenants and conditions hereinafter set forth, and for other good and
valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the parties hereto agree as follows:
ARTICLE I
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EMPLOYMENT AND DUTIES
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1.1 POSITION AND DUTIES. Executive shall serve as Chief Financial
Officer and Executive Vice-President of Employer. Executive shall have such
duties and authority as are customary for, and commensurate with, such
position, and such other related duties and authority as may from time to
time be delegated or assigned to her by the Chief Executive Officer or the
Board of Directors of Employer. Executive shall discharge her duties in a
diligent and professional manner.
1.2 OUTSIDE BUSINESS ACTIVITIES PRECLUDED. During her employment,
Executive shall devote her full energies, interest, abilities and productive
time to the performance of this Agreement. Executive shall not, without the
prior written consent of Employer, perform other services of any kind or
engage in any other business activity, with or without compensation, that
would interfere with the performance of her duties under this Agreement.
Executive shall not, without the prior written consent of Employer, engage in
any activity adverse to Employer's interests.
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1.3 PLACE OF EMPLOYMENT. Unless the parties agree otherwise in
writing, during the Employment Term (as defined in Section 3.1 below)
Executive shall perform the services she is required to perform under this
Agreement at Employer's offices located in San Diego, California; provided,
however, that Employer may from time to time require Executive to travel
temporarily to other locations on Employer's business.
ARTICLE II
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COMPENSATION
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2.1 SALARY. For Executive's services hereunder, Employer shall pay as
base salary to Executive the amount of $135,000 during each year of the
Employment Term. Said salary shall be payable in equal installments in
conformity with Employer's normal payroll period. Executive's salary shall
be reviewed by Employer's Board of Directors from time to time at its
discretion, and Executive shall receive such salary increases, if any, as
Employer's Board of Directors, in its sole discretion, shall determine.
2.2 BONUS. In addition to the salary set forth in Section 2.1 above,
during the Employment Term Executive shall participate in Employer's bonus
plan for executive management personnel. All decisions regarding said bonus
plan shall be made in the sole discretion of Employer's Board of Directors,
or the Compensation Committee thereof.
2.3 OTHER BENEFITS. Executive shall be entitled to participate in and
receive benefits under Employer's standard company benefits practices and
plans for officers of Employer, including medical insurance, long-term
disability, life insurance, profit sharing and retirement plan, and
Employer's other plans, subject to and on a basis consistent with the terms,
conditions and overall administration of such practices and plans. Executive
shall be entitled to a paid vacation of three (3) weeks each year, which will
be paid out in conformity with Employer's normal vacation pay practices.
Employer may in its sole discretion grant such
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additional compensation or benefits to Executive from time to time as
Employer deems proper and desirable.
2.4 EXPENSES. During the term of her employment hereunder, Executive
shall be entitled to receive prompt reimbursement for all reasonable
business-related expenses incurred by her, in accordance with the policies
and procedures from time to time adopted by Employer, provided that Executive
properly accounts for such business expenses in accordance with Employer
policy. Additionally, subject to Employer's prior approval (which shall not
be unreasonably withheld), Executive shall be reimbursed for reasonable
expenses incurred by Executive for ninety (90) days of interim lodging in San
Diego, CA. as well as for reasonable expenses incurred by Executive in moving
from Orange, CA. to San Diego.
2.5 STOCK OPTION PLAN. Employer has adopted The 1997 Stock Option Plan
of PriceSmart, Inc. (the "Stock Plan"). The parties anticipate that on or
about October 7, 1997 Executive will receive options to purchase 50,000
shares of Employer's Common Stock, exercisable at a price equal to the
average closing price of a share of the Common Stock for the period September
9, 1997 through October 6, 1997, with such options vesting at twenty percent
(20%) per year over a period of five (5) years and expiring six (6) years
from the date of grant. Such anticipated grant of options to purchase 50,000
shares of Common Stock shall be subject in all respects to the sole
discretion of the Compensation Committee of Employer's Board of Directors, as
set forth in the Stock Plan. In addition, such options shall be granted in
accordance with and subject to all other terms, conditions and restrictions
set forth in the Stock Plan.
2.6 DEDUCTIONS AND WITHHOLDINGS. All amounts payable or which become
payable under any provision of this Agreement shall be subject to any
deductions authorized by Executive and any deductions and withholdings
required by law.
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ARTICLE III
TERM OF EMPLOYMENT
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3.1 TERM. The term of Executive's employment hereunder shall commence
on September 29, 1997 and shall continue until September 28, 1999 unless
sooner terminated or extended as hereinafter provided (the "Employment Term").
3.2 EXTENSION OF TERM. The Employment Term may be extended by written
amendment to this Agreement signed by both parties.
3.3 EARLY TERMINATION BY EXECUTIVE. Executive may terminate this
Agreement at any time by giving Employer written notice of her resignation
ninety (90) days in advance; provided, however, that the Board of Directors
may determine upon receipt of such notice that the effective date of such
resignation shall be immediate or some time prior to the expiration of the
ninety-day notice period. Executive's employment shall terminate as of the
effective date of her resignation as determined by the Board of Directors.
3.4 TERMINATION FOR CAUSE. Prior to the expiration of the Employment
Term, Executive's employment may be terminated for Cause by the Board of
Directors of Employer, immediately upon delivery of notice thereof. For
these purposes, termination for "Cause" shall mean termination because of
Executive's (a) repeated and habitual failure to perform her duties or
obligations hereunder; (b) engaging in any act that has a direct, substantial
and adverse effect on Employer's interests; (c) personal dishonesty, willful
misconduct, or breach of fiduciary duty involving personal profit; (d)
intentional failure to perform her stated duties; (e) willful violation of
any law, rule or regulation which materially adversely affects her ability to
discharge her duties or has a direct, substantial and adverse effect on
Employer's interests; (f) any material breach of this contract by Executive;
or (g) conduct authorizing termination under Cal. Labor Code Section 2924.
3.5 TERMINATION DUE TO DEATH OR DISABILITY. Executive's employment
hereunder shall terminate immediately upon her death. In the event that by
reason of injury, illness or
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other physical or mental impairment Executive shall be: (a) completely unable
to perform her services hereunder for more than three (3) consecutive months,
or (b) unable to perform her services hereunder for fifty percent (50%) or
more of the normal working days throughout six (6) consecutive months, then
Employer may terminate Executive's employment hereunder immediately upon
delivery of notice thereof. Executive's beneficiaries, estate, heirs,
representatives, or assigns, as appropriate, shall be entitled to the
proceeds, if any, due under any Employer-paid life insurance policy held by
Executive, as determined by and in accordance with the terms of any such
policy, as well as any vested benefits and accrued vacation benefits.
ARTICLE IV
BENEFITS AFTER TERMINATION OF EMPLOYMENT
----------------------------------------
4.1 BENEFITS UPON TERMINATION. Upon termination of this Agreement
under Section 3.3 (Early Termination by Executive), Section 3.4 (Termination
for Cause) or Section 3.5 (Termination Due to Death or Disability), all
salary and benefits of Executive hereunder shall cease immediately. Upon
termination of this Agreement by Employer (prior to the expiration of the
Employment term) for any reason other than those set forth in Section 3.4 or
Section 3.5, Executive shall be entitled to the continuation of Executive's
base salary for six (6) months or for the remainder of the Employment Term,
whichever is greater, payable in equal installments in conformity with
Employer's normal payroll period. If this Agreement is not terminated, then,
upon expiration of the Employment Term, and if Executive's employment by
Employer does not thereafter continue upon mutually agreeable terms,
Executive shall be entitled to continuation of Executive's base salary for
six (6) months, payable in equal installments in conformity with Employer's
normal payroll period. Notwithstanding any of the foregoing, should Executive
commence full-time employment as a financial officer with another company
prior to the payments under this Section 4.1 becoming payable to Executive,
any payments remaining payable to Executive shall then cease. During the
period of any severance pay,
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Executive shall cooperate with Employer in providing for the orderly
transition of Executive's duties and responsibilities to other individuals,
as reasonably requested by Employer.
4.2 RIGHTS AGAINST EMPLOYER. The benefits payable under this Article
IV are exclusive, and no amount shall become payable to any person (including
the Executive) by reason of termination of employment for any reason, with or
without Cause, except as provided in this Article IV. Employer shall not be
obligated to segregate any of its assets or procure any investment in order
to fund the benefits payable under this Article IV.
ARTICLE V
CONFIDENTIAL INFORMATION
------------------------
5.1 Executive acknowledges that Employer holds as confidential, and
Executive may have access to during the Employment Term, certain information
and knowledge respecting the intimate and confidential affairs of Employer in
the various phases of its business, including, but not limited to, trade
secrets, data and know-how, improvements, inventions, techniques, marketing
plans, strategies, forecasts, pricing information, and customer lists.
During her employment by Employer and thereafter, Executive shall not
directly or indirectly disclose such information to any person or use any
such information, except as required in the course of her employment during
the Employment Term. All records, files, keys, documents, and the like
relating to Employer's business, which Executive shall prepare, copy or use,
or come into contact with, shall be and remain Employer's sole property,
shall not be removed from Employer's premises without its written consent,
and shall be returned to Employer upon the termination of this Agreement.
ARTICLE VI
GENERAL PROVISIONS
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6.1 ENTIRE AGREEMENT. This Agreement contains the entire understanding
and sole and entire agreement between the parties with respect to the subject
matter hereof, and supersedes any and all prior agreements, negotiations and
discussions between the parties
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hereto with respect to the subject matter covered hereby. Each party to this
Agreement acknowledges that no representations, inducements, promises or
agreements, oral or otherwise, have been made by any party, or anyone acting
on behalf of any party, which are not embodied herein, and that no other
agreement, statement or promise not contained in this Agreement shall be
valid or binding. This Agreement may not be modified or amended by oral
agreement, but rather only by an agreement in writing signed by Employer and
by Executive which specifically states the intent of the parties to amend
this Agreement.
6.2 ASSIGNMENT AND BINDING EFFECT. Neither this Agreement nor the
rights or obligations hereunder shall be assignable by the Executive.
Employer may assign this Agreement to any successor or affiliate of Employer,
and upon such assignment any such successor or affiliate shall be deemed
substituted for Employer upon the terms and subject to the conditions hereof.
In the event of any merger of Employer or the transfer of all (or
substantially all) of Employer's assets, the provisions of this Agreement
shall be binding upon, and inure to the benefit of, the surviving business
entity or the business entity to which such assets shall be transferred.
6.3 ARBITRATION. The parties hereto agree that any and all disputes
(contract, tort, or statutory, whether under federal, state or local law)
between Executive and Employer (including Employer's employees, officers,
directors, stockholders, members, managers and representatives) arising out
of Executive's employment with Employer, the termination of that employment,
or this Agreement, shall be submitted to final and binding arbitration. Such
arbitration shall take place in the County of San Diego, and may be compelled
and enforced according to the California Arbitration Act (Code of Civil
Procedure Sections 1280 ET SEQ.). Unless the parties mutually agree
otherwise, such arbitration shall be conducted before the American
Arbitration Association, according to its Commercial Arbitration Rules.
Judgment on the award the arbitrator renders may be entered in any court
having jurisdiction over the parties.
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Arbitration shall be initiated in accordance with the Commercial Arbitration
Rules of the American Arbitration Association.
6.4 NO WAIVER. No waiver of any term, provision or condition of this
Agreement, whether by conduct or otherwise, in any one or more instances
shall be deemed or be construed as a further or continuing waiver of any such
term, provision or condition, or as a waiver of any other term, provision or
condition of this Agreement.
6.5 GOVERNING LAW; RULES OF CONSTRUCTION. This Agreement has been
negotiated and executed in, and shall be governed by and construed in
accordance with the laws of, the State of California. Captions of the
several Articles and Sections of this Agreement are for convenience of
reference only, and shall not be considered or referred to in resolving
questions of interpretation with respect to this Agreement.
6.6 NOTICES. Any notice, request, demand or other communication
required or permitted hereunder shall be deemed to be properly given when
personally served in writing, or when deposited in the United States mail,
postage pre-paid, addressed to Employer or Executive at her last known
address. Each party may change its address by written notice in accordance
with this Section.
Address for Employer:
PriceSmart, Inc.
4649 Morena Boulevard
San Diego, CA. 92117
Address for Executive:
Karen Ratcliff
2209 Vistro Canyon Rd.
Orange, CA 92867
6.7 SEVERABILITY. The provisions of this Agreement are severable. If
any provision of this Agreement shall be held to be invalid or otherwise
unenforceable, in whole or in part, the remainder of the provisions or
enforceable parts hereof shall not be affected thereby and shall be enforced
to the fullest extent permitted by law.
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6.8 ATTORNEYS' FEES. In the event of any arbitration or litigation
brought to enforce or interpret any part of this Agreement, the prevailing
party shall be entitled to recover reasonable attorneys' fees, as well as all
other litigation costs and expenses as an element of damages.
IN WITNESS WHEREOF, this Agreement has been executed and delivered by
the parties hereto as of the date first above written.
EMPLOYER EXECUTIVE
- -------- ---------
PRICESMART, INC.
By: /s/ Robert E. Price /s/ Karen Ratcliff
-------------------------- ------------------------
Karen Ratcliff
Name: Robert E. Price
------------------------
Title: President
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EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8) pertaining to the 1997 Stock Option Plan of PriceSmart, Inc. of our report
dated October 16, 1997, with respect to the consolidated financial statements
and schedule of PriceSmart, Inc. included in its Annual Report (Form 10-K) for
the year ended August 31, 1997.
ERNST & YOUNG LLP
San Diego, California
November 25, 1997
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