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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, 1998.
/ / 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: 0-22793
PRICESMART, INC.
(Exact name of small business issuer in its charter)
DELAWARE 33-0628530
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
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 16, 1998 was $31,287,666, based on the last reported
sale of $15.125 per share on November 16, 1998.
As of November 16, 1998, 5,315,794 shares of Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Annual Report for fiscal year ending August 31, 1998,
are incorporated by reference into Part II of this Form 10-K.
Portions of the Company's Proxy Statement for the Annual Meeting of Stockholders
to be held on January 12, 1999 are incorporated by reference into Part III of
this Form 10-K.
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TABLE OF CONTENTS
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Part I
Item 1. Business 3
Item 2. Properties 8
Item 3. Legal Proceedings 10
Item 4. Submission of Matters to a Vote of Security Holders 10
Part II
Item 5. Market for Common Stock and Related Stockholder Matters 11
THE INFORMATION REQUIRED BY ITEM 5 IS INCORPORATED HEREIN BY REFERENCE
FROM PRICESMART'S ANNUAL REPORT FOR THE FISCAL YEAR ENDED
AUGUST 31, 1998
Item 6. Selected Financial Data 11
THE INFORMATION REQUIRED BY ITEM 6 IS INCORPORATED HEREIN BY
REFERENCE FROM PRICESMART'S ANNUAL REPORT FOR THE FISCAL YEAR
ENDED AUGUST 31, 1998
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 11
THE INFORMATION REQUIRED BY ITEM 7 IS INCORPORATED HEREIN BY
REFERENCE FROM PRICESMART'S ANNUAL REPORT FOR THE FISCAL YEAR
ENDED AUGUST 31, 1998
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 11
Item 8. Financial Statements 11
THE INFORMATION REQUIRED BY ITEM 8 IS INCORPORATED HEREIN BY
REFERENCE FROM PRICESMART'S ANNUAL REPORT FOR THE FISCAL YEAR
ENDED AUGUST 31, 1998
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 11
THE INFORMATION REQUIRED BY ITEM 9 IS INCORPORATED HEREIN BY REFERENCE FROM PRICESMART'S
ANNUAL REPORT FOR THE FISCAL YEAR ENDED AUGUST 31, 1998
Part III
Item 10. Directors and Executive Officers of the Registrant 12
THE INFORMATION REQUIRED BY ITEM 10 IS INCORPORATED HEREIN BY REFERENCE FROM PRICESMART'S
PROXY STATEMENT FOR THE ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON JANUARY 12, 1999
Item 11. Executive Compensation 12
THE INFORMATION REQUIRED BY ITEM 11 IS INCORPORATED HEREIN BY REFERENCE FROM PRICESMART'S
PROXY STATEMENT FOR THE ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON JANUARY 12, 1999
Item 12. Security Ownership of Certain Beneficial Owners and Management 12
THE INFORMATION REQUIRED BY ITEM 12 IS INCORPORATED HEREIN BY REFERENCE FROM PRICESMART'S
PROXY STATEMENT FOR THE ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON JANUARY 12, 1999
Item 13. Certain Relationships and Related Transactions 12
THE INFORMATION REQUIRED BY ITEM 13 IS INCORPORATED HEREIN BY REFERENCE FROM PRICESMART'S
PROXY STATEMENT FOR THE ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON JANUARY 12, 1999
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 13
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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 was subsequently operated under the name PQI, Inc. 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, $58.4 million of 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 and the Northern
Mariana Islands. 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.
BUSINESS STRATEGY
The Company's strategy is to focus on development of the international
merchandising business and to invest in, acquire or create new merchandising
businesses that leverage existing capabilities and provide appropriate
returns for its stockholders. Specifically, key elements of the Company's
business strategy include:
PROVIDE LOWER PRICES IN THE MARKET PLACE. The Company's principal business
philosophy is bringing lower prices to the consumer. Future development of
the Company's business will be directed to markets in which the Company can
compete effectively by lowering the costs of goods and services to consumers.
INCREASE MARKET SHARE IN DEVELOPING MARKETS. The Company believes that it is
well positioned to profit from the growth in developing markets due to its
capital resources and experience with membership stores in Latin America and
Asia. The Company has, and intends to continue, to satisfy 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, primarily focusing on
China.
AUTO REFERRAL PROGRAM STRATEGY. The Company's strategy for its Auto Referral
Program is to provide a hassle-free, high value Auto Program to Costco
members and to develop and provide the dealership network with affinity
products and services to create additional value to our customers.
In August 1998, the Company entered into an agreement to sell the Auto
Referral Program, effective November 1, 1999. The Company will continue to
own and operate the Program through the expiration of the agreement with
Costco on October 31, 1999.
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 the travel service providers in order to offer the best possible prices
on travel services to its customers. The Company will continue to operate in
an efficient manner 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.
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INTERNATIONAL MERCHANDISING BUSINESSES
The Company owns and manages international merchandising businesses which own
and license membership stores using the trade name "PriceSmart" and, in
certain markets, "PriceCostco". The Company currently has a license agreement
for the operation of one store in the Northern Mariana Islands and the
Company owns a 51% interest in a Panama joint venture that has opened two
stores in Panama. The Company also has a licensing arrangement with an
entrepreneur in the Peoples Republic of China currently operating two
membership stores.
In July 1998, the Company entered into an agreement with a Guatemalan
headquartered company to form a new joint venture that plans to open two
PriceSmart membership shopping warehouses in Guatemala. PriceSmart owns 66%
of this venture.
In September 1998, the Company entered into an agreement with PSC, S.A., a
Panamanian company whose stockholders are Latin American businessmen, to open
a total of nine PriceSmart membership shopping warehouses in Costa Rica, the
Dominican Republic, El Salvador, Honduras, and Nicaragua. PriceSmart owns 60%
of this venture.
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, the 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 that
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 that varies
by market from $25 to $35.
Typically, the Company enters into licensing and technology transfer
agreements with either a joint venture company (whose stockholders are local
business people) as licensees or with local business people as licensees 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 the local
business people 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 $7.5 million from operations of the Auto
Referral Program during fiscal year 1998.
Pursuant to an agreement with Costco, the Company has the exclusive right to
provide auto referral program services to Costco members. In August 1998, the
Company entered into an agreement to sell the Auto Referral Program,
effective November 1, 1999. The Company will continue to own and operate the
Program through the expiration of the agreement with Costco on October 31,
1999.
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 $5.8 million from the Travel Program during fiscal
1998.
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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.
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 re-position the business. 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 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 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 3 fiscal years ended August 31, 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 had developed, and the Company operated on
a test basis, three PriceSmart Service Centers in Ralphs stores located in
San Diego, California. The Service Centers offered 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. The Company operated the Service Centers
throughout the test period, which expired on May, 13, 1998. The relationship
was terminated at that time.
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, 1998, the carrying value of the City Notes was approximately $22.0
million. The City Notes carry interest rates which range from 8% 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 $22.0 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 also holds another
note receivable with a carrying value of approximately $3.8 million as of
August 31, 1998.
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 local store operations and, in certain markets, Makro,
Carrefour, Wal-Mart, and Costco. 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.
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
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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 147 employees, 52 of which are assigned to
the Company's international merchandising business, 45 to the Auto Referral
and Travel Programs, and 50 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.
The individuals employed in the cruise division of the Company's Travel
Program are members of a union. The Company currently has a collective
bargaining agreement with such union with a one year term, renewable year to
year. 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.
FACTORS WHICH MAY AFFECT FUTURE PERFORMANCE
RISKS INHERENT IN INTERNATIONAL OPERATIONS. The Company increasingly will be
subject to risks inherent in conducting international business as the Company
expands its international merchandising businesses, in particular its
PriceSmart membership store concept. Such risks include the imposition of
governmental controls, the need to comply with a wide variety of foreign and
U.S. export laws, political and economic instability, trade restrictions,
ability to source local merchandise, changes in tariffs and taxes, longer
payment cycles typically associated with international sales, and greater
difficulty and costs of administering business overseas.
Success of the international business is subject to additional factors,
including the availability of suitable sites, the negotiation of acceptable
lease or purchase terms for such sites, permitting and regulatory compliance,
the ability to meet construction schedules, the ability to hire and train
qualified management and store personnel, the financial and other
capabilities of the Company's licensees and business partners, and general
economic and business conditions. There can be no assurance that any of these
factors will not have a material adverse effect on the Company's business,
financial condition or results of operations. See "BUSINESS - International
Merchandising Businesses."
INTERNATIONAL OPERATIONS; DEPENDENCY ON FOREIGN LICENSEES AND BUSINESS
PARTNERS AND ASSOCIATED RISKS. Several of the risks associated with the
international merchandising business will be within the control (in whole or
in part) of the Company's licensees and business partners or may be affected
by the acts or omissions of such licensees and business partners. Certain of
the Company's licensees and business partners have had limited experience
operating membership stores that sell consumer goods. There can be no
assurance that the Company's PriceSmart membership store concept will be
implemented effectively or that they will be successful in their respective
markets. In the event one or more licensees or business partners are
displeased with their relationship with the Company, such licensees or
business partners could seek to terminate their relationships with the
Company or make claims against the Company alleging that the Company acted,
or failed to act, in a manner that damaged such licensees or business
partners. In addition, the Company has experienced contractual problems with
its licensee in China, which, if not resolved to the Company's satisfaction,
could result in termination of the Company's relationship with such licensee.
There can be no assurance that a dissatisfied licensee or business partner
would not file litigation, that the Company would
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prevail if any such litigation were filed or that such litigation would not
have a material adverse effect of the Company's business, financial condition
and results of operation. See "BUSINESS - International Merchandising
Businesses."
TRAVEL PROGRAM DEPENDENT ON TRAVEL PROVIDERS. The Company's Travel Program is
dependent upon certain travel providers, wholesalers and high volume travel
agencies for access to reduced-price travel products. Such access enables the
Company to price its travel services more competitively. The Company's
agreements with travel providers, wholesalers and high volume travel agencies
generally can be cancelled or modified upon relatively short notice. The loss
of a contract, changes in the Company's pricing agreements or commission
schedules or more restricted access to reduced-price travel products would
have a material adverse effect on the Company's Travel Program. See "BUSINESS
- - Travel Program."
RELIANCE ON COSTCO FOR TRAVEL PROGRAM. The Company currently operates its
Travel Program at Costco warehouses, and the Company offers the program to
Costco members. The Company's rights to conduct the Travel Program at Costco
warehouses are set forth in an Agreement Concerning Transfer of Certain
Assets (the "Asset Transfer Agreement") with Costco. Pursuant to the Asset
Transfer Agreement, the Company's rights to operate such programs at Costco
warehouses terminate automatically on October 31, 1999 unless earlier
terminated by the Company pursuant to an early termination provision. There
can be no assurance that the Company and Costco will agree to extend the
Company's rights to conduct the Travel Program beyond October 31, 1999 or
that the Company will be able to develop sufficient alternatives to Costco
for operating its Travel Program. See "BUSINESS - Relationship with Costco."
COMPETITION. Each of the Company's Merchandising Businesses faces competition
unique to its line of business. The Company's international merchandising
businesses compete with exporters, wholesalers, other membership/warehouse
merchandisers, local retailers and trading companies in various international
markets. 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.
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. See
"BUSINESS - Competition."
NOTES RECEIVABLE. The Company holds the City Notes. Repayment of each City
Note by the relevant municipality is generally made based on that
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 $22 million of such notes
represents management's estimate of discounted cash flow from the City Notes.
Management's analysis of the discounted cash flows from the City Notes
assumes no payment at maturity, because, under the terms of most of the City
Notes, the unpaid balance of the note is forgiven at its maturity date.
Consequently, there can be no assurance that the full stated principal amount
of the City Notes will be repaid.
CONTROL OF PRICESMART BY CERTAIN STOCKHOLDERS. Robert E. Price, who is
Chairman of the Board of PriceSmart, and Sol Price, a significant stockholder
of PriceSmart and father of Robert E. Price, beneficially owned as of
November 16, 1998 an aggregate of 2,437,027 shares, or approximately 46%, of
the outstanding PriceSmart Common Stock. As a result, these stockholders will
effectively control the outcome of all matters submitted to the Company's
stockholders for approval, including the election of directors. In addition,
such ownership could discourage acquisition of Company Common Stock by
potential investors, and could have an anti-takeover effect, possibly
depressing the trading price of Company Common Stock.
DEPENDENCE ON KEY PERSONNEL The Company is dependent on the efforts of its
executive management team. While the Company believes that it could find
replacements for these key personnel, the loss of their services could have a
temporary adverse effect on the operations of the Company.
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 the remaining
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.
8
<PAGE>
The table set forth below describes the portfolio of Properties held by the
Company as of August 31, 1998. Amounts shown for annual minimum rents are
based on executed leases as of August 31, 1998. 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, 1998
Gross Net Book Annual
Leasable Value Minimum
Land Area (sq. ft.) Percent 8/31/98 Rent
Acreage (In 000's) Leased (In 000's) (In 000's)
----------- ----------------- ------------------ ------------ --------------
<S> <C> <C> <C> <C> <C>
PROPERTIES WITH BUILDINGS
Mesa/Broadway, AZ 2.7 24.2 100% $ 1,228 $ 201
Riverside/Third St., CA 4.9 17.9 100% 673 151
Milwaukee, WI (leased) 8.8 115.0 100% -- --
----------- ----------------- ------------------ ------------ --------------
Subtotal 16.4 157.1 100% 1,901 352
UNIMPROVED LAND
Sterling, VA 2.5 -- -- 1,189 --
Carlsbad, CA 1.8 -- -- 926 --
East Mesa/Superstition Springs, AZ 3.5 -- -- 195 --
Fountain Valley, CA 2.5 -- -- 475 --
Denver/Westminister, CO 2.8 -- -- 310 --
Denver/Aurora, CO 1.0 -- -- 115 --
----------- ----------------- ------------------ ------------ --------------
Subtotal 14.1 -- -- 3,210 --
Provision for Asset Impairments -- -- -- (225) --
----------- ----------------- ------------------ ------------ --------------
Total 30.5 157.1 100% $ 4,886 $ 352
---- ----- ---- -------- -----
---- ----- ---- -------- -----
</TABLE>
SUBSEQUENT AND PENDING REAL ESTATE TRANSACTIONS. Subsequent to year-end, the
Company sold the Riverside/Third Street property for $.9 million of net
proceeds. The Company is currently under contract to sell six (6) properties,
which sales are expected to generate $3.6 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 twelve (12)
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
9
<PAGE>
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 $15,000 and $30,000 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 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 biphenyl) 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 $25,700 per month 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. 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 1998. The Company's Annual Meeting of
Stockholders is scheduled for 10:00 a.m. on January 12, 1999, at the San
Diego Hilton Beach and Tennis Resort in San Diego, California. Matters to be
voted on will be included in the Company's proxy statement to be filed with
the Securities and Exchange Commission and distributed to stockholders prior
to the meeting.
10
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The information required by Item 5 is incorporated herein by reference to
page 36 of PriceSmart's Annual Report for the fiscal year ended August 31,
1998.
ITEM 6. SELECTED FINANCIAL DATA
The information required by Item 6 is incorporated herein by reference to
page 14 of PriceSmart's Annual Report for the fiscal year ended August 31,
1998.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information required by Item 7 is incorporated herein by reference to
pages 15 to 19 of PriceSmart's Annual Report for the fiscal year ended August
31, 1998.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable.
ITEM 8. FINANCIAL STATEMENTS
The information required by Item 8 is incorporated herein by reference to
pages 20 to 35 of PriceSmart's Annual Report for the fiscal year ended August
31, 1998.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The information required by Item 9 is incorporated herein by reference to
page 36 of PriceSmart's Annual Report for the fiscal year ended August 31,
1998.
11
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 is incorporated herein by reference from
PriceSmart's Proxy Statement for the Annual Meeting of Stockholders to be
held on January 12, 1999.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated herein by reference from
PriceSmart's Proxy Statement for the Annual Meeting of Stockholders to be
held on January 12, 1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated herein by reference from
PriceSmart's Proxy Statement for the Annual Meeting of Stockholders to be
held on January 12, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated herein by reference from
PriceSmart's Proxy Statement for the Annual Meeting of Stockholders to be
held on January 12, 1999.
12
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following financial statements are incorporated by reference into
Part II, Item 8 of this Form 10-K from the annual report
Report of Independent Auditors
Consolidated Balance Sheets as of August 31, 1998 and 1997
Consolidated Statements of Operations for each of the three years ended
August 31, 1998, 1997 and 1996
Consolidated Statements of Stockholders' Equity for each of the three
years ended August 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for each of the three years August
31, 1998, 1997 and 1996
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 1998.
(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
13
<PAGE>
SCHEDULE II
PRICESMART, INC.
VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE OF ADDITIONS
BEGINNING OF CHARGED TO COSTS BALANCE AT
PERIOD AND EXPENSES DEDUCTIONS END OF PERIOD
------------ ---------------- ---------- -------------
<S> <C> <C> <C> <C>
PROVISIONS FOR ASSET IMPAIRMENTS
Year ended August 31, 1996 $ -- $ 8,042 $ -- $ 8,042
Year ended August 31, 1997 8,042 2,000 (5,247)(1) 4,795
Year ended August 31, 1998 4,795 -- (4,570)(2) 225
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Year ended August 31, 1997 $ -- $ 1,000 $ -- $ 1,000
Year ended August 31, 1998 1,000 116 (702)(3) 414
</TABLE>
(1) Deductions from asset impairments related to the sale of seven properties
and the recovery of prior year write-down of land.
(2) Deductions from asset impairments related to the sale of six properties.
(3) Deductions from allowance for doubtful accounts primarily related to the
recovery of prior year write down on accounts receivable.
14
<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 24, 1998 PRICESMART, INC.
By: /s/ GILBERT A. PARTIDA
----------------------
Title 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 of the Board November 24, 1998
- -----------------------
Robert E. Price
/s/ GILBERT A. PARTIDA President and Chief November 24, 1998
- ----------------------- Executive Officer
Gilbert A. Partida (Principal Executive
Officer)
/s/ KAREN J. RATCLIFF Executive Vice President, November 24, 1998
- ----------------------- Chief Financial Officer
Karen J. Ratcliff (Principal Financial and
Accounting Officer)
/s/ RAFAEL E. BARCENAS Director November 24, 1998
- -----------------------
Rafael E. Barcenas
/s/ KATHERINE L. HENSLEY Director November 24, 1998
- -----------------------
Katherine L. Hensley
/s/ LEON C. JANKS Director November 24, 1998
- -----------------------
Leon C. Janks
/s/ LAWRENCE B. KRAUSE Director November 24, 1998
- -----------------------
Lawrence B. Krause
15
<PAGE>
PRICESMART, INC.
EXHIBIT INDEX AND EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
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 C. Ratcliff
10.14(9) Employment Agreement dated March 31, 1998 between the Company and
Thomas D. Martin
10.15(9) Employment Agreement dated August 19, 1998 between the Company and
Kurt A. May
10.16(9) Members' Agreement dated September 14, 1998 between the Company and
PSMT Caribe, Inc.
10.17(9) Auto Referral Purchase Agreement dated August 18, 1998 between the
Company and Affinity Development Group Incorporated
13.1(9) Portions of the Company's Annual Report to Stockholders for the
year ended August 31, 1998
21.1(7) Subsidiaries of PriceSmart, Inc.
23.1(9) Consent of Ernst & Young LLP, Independent Auditors
27.1(9) Financial Data Schedule
99(8) Employment Agreement dated December 15, 1997 between the Company and
Gilbert A. Partida
</TABLE>
(1) Incorporated by reference to the Current Report on Form 8-K filed
September 12, 1997 by Price Enterprises, Inc.
(2) Incorporated by reference to the Annual Report on Form 10-K for the year
ended August 31, 1997 filed with the Commission on November 26, 1997.
(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.
(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.
(8) Incorporated by reference to Exhibit 99 to the Quarterly Report on
Form 10-Q of PriceSmart, Inc. for the quarter ended February 28, 1998
filed with the Commission on April 14, 1998.
(9) Filed herewith.
16
<PAGE>
EXHIBIT 10.14
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered
into as of March 31, 1998, by and between PriceSmart, Inc., a Delaware
corporation ("Employer"), and Thomas Martin, ("Executive").
RECITALS
A. Employer currently employs and desires to continue to employ
Executive as Senior Vice President of Employer.
B. Executive desires to retain 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
EMPLOYMENT AND DUTIES
1.1 POSITION AND DUTIES. Executive shall serve as Senior 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 him
by the Chief Executive Officer or the Board of Directors of Employer.
Executive shall discharge his duties in a diligent and professional manner.
1.2 OUTSIDE BUSINESS ACTIVITIES PRECLUDED. During his employment,
Executive shall devote his 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
<PAGE>
services of any kind or engage in any other business activity, with or
without compensation, that would interfere with the performance of his duties
under this Agreement. Executive shall not, without the prior written consent
of Employer, engage in any activity adverse to Employer's interests.
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 he 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
COMPENSATION
2.1 SALARY. For Executive's services hereunder, Employer shall pay as
base salary to Executive the amount of $155,000 during each year of the
Employment Term. Said salary shall be payable in equal installments in
conformity with Employer's normal payroll period. Executive shall receive
such salary increases, if any, as Employer, in its sole discretion, shall
determine.
2.2 BONUS. During the Employment Term Executive shall be entitled to
participate in Employer's Bonus Plan.
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. Employer
may from time to time in its sole discretion grant such additional
compensation or benefits to Executive as it deems proper and desirable.
2
<PAGE>
2.4 EXPENSES. During the term of his employment hereunder, Executive
shall be entitled to receive prompt reimbursement for all reasonable
business-related expenses incurred by him, 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.
2.5 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.
ARTICLE III
TERM OF EMPLOYMENT
3.1 TERM. The term of Executive's employment hereunder shall commence
on April 1, 1998 and shall continue until March 31, 2000 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 his resignation
ninety (90) days in advance; provided, however, that the Employer 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 his resignation as determined by Employer.
3.4 TERMINATION FOR CAUSE. Prior to the expiration of the Employment
Term, Executive's employment may be terminated for Cause by 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 his duties or obligations hereunder;
3
<PAGE>
(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 his stated duties; (e) willful violation of any law, rule or
regulation which materially adversely affects his ability to discharge his
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 his death. In the event that by
reason of injury, illness or other physical or mental impairment Executive
shall be: (a) completely unable to perform his services hereunder for more
than three (3) consecutive months, or (b) unable to perform his 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 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 the remainder of the Employment
Term, payable in equal installments in conformity with Employer's normal
payroll period. During the period of this
4
<PAGE>
severance pay, 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 his 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 his 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.
5
<PAGE>
ARTICLE VI
GENERAL PROVISIONS
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 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 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
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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. 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 his 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
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Address for Executive:
________________________
________________________
________________________
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.
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. Name: ____________________
Thomas Martin
By: _______________________
Name:______________________
Title: ____________________
8
<PAGE>
EXHIBIT 10.15
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered
into as of August 19, 1998, by and between PriceSmart, Inc., a Delaware
corporation ("Employer"), and Kurt May ("Executive").
RECITALS
A. Employer desires to employ Executive as Executive Vice
President and Chief Operating Officer 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
EMPLOYMENT AND DUTIES
1.1 POSITION AND DUTIES. Executive shall serve as Executive Vice
President and Chief Operating Officer 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 him by the Chief Executive Officer or the
Board of Directors of Employer. Executive shall discharge his duties in a
diligent and professional manner.
1.2 OUTSIDE BUSINESS ACTIVITIES PRECLUDED. During his employment,
Executive shall devote his 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
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would interfere with the performance of his duties under this Agreement.
Executive shall not, without the prior written consent of Employer, engage in
any activity adverse to Employer's interests.
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 he 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
COMPENSATION
2.1 SALARY. For Executive's services hereunder, Employer shall pay as
base salary to Executive the amount of two hundred thousand dollars
($200,000) during each year of the Employment Term. Said salary shall be
payable in equal installments in conformity with Employer's normal payroll
period.
2.2 BONUS. During the Employment Term Executive shall be entitled to
participate in Employer's Corporate Central Bonus Plan.
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 four (4) weeks in year one and five
(5) weeks in year two and thereafter, which will accrue and be paid out in
conformity with Employer's normal vacation pay practices. Employer may from
time to time in its sole discretion grant such additional compensation or
benefits to Executive as it deems proper and desirable.
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2.4 EXPENSES. During the term of his employment hereunder, Executive
shall be entitled to receive prompt reimbursement for all reasonable
business-related expenses incurred by him, 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.
2.5 STOCK OPTION PLANS. Employer has adopted The 1997 Stock Option
Plan of PriceSmart, Inc. (the "Stock Plan") and the 1998 Equity Participation
Plan of PriceSmart, Inc. (the "Equity Plan"). On the date the Employment
Term commences Executive will be granted options to purchase fifty five
thousand (55,000) shares of Employer's Common Stock, exercisable at the price
of $16.25 per share of Common Stock, with such options vesting at the rate of
twenty percent (20%) per year over a period of five (5) years and expiring
six (6) years from the date of grant. Such grant of options to purchase
fifty five thousand (55,000) 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 Plans. In addition, such
options shall be granted in accordance with and subject to all other terms,
conditions and restrictions set forth in the applicable Plan.
On the date the Employment Term commences Executive will have the right
to purchase under the Equity Plan eight thousand seven hundred fifty (8,750)
shares of the Company's Common Stock. Executive must pay in cash a minimum
of 30% of the Fair Market Value of the stock on October 19, 1998. Executive
will have ten (10) days from that date to make the minimum cash payment. The
remaining 70% of the Fair Market Value of the stock will be financed by the
Employer in a 6%, interest-only note with the principal (and unpaid interest,
if any) due and payable in six years. For each share purchased, Executive
will automatically receive the non-qualified stock option for three shares of
the Employer's Common Stock at $16.25 per share. Such grant of options to
purchase shares of Common Stock shall be
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subject in all respects to the sole discretion of the Compensation Committee
of Employer's Board of Directors, as set forth in the Equity Plan. In
addition, such options shall be granted in accordance with and subject to all
other terms, conditions and restrictions set forth in the Equity Plan. The
1998 Equity Participation Plan of PriceSmart, Inc. is subject to Shareholder
approval at the Annual Shareholder Meeting, scheduled for January 12, 1999.
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.
ARTICLE III
TERM OF EMPLOYMENT
3.1 TERM. The term of Executive's employment hereunder shall commence
on October 19, 1998 and shall continue until October 18, 2000 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 his resignation
ninety (90) days in advance; provided, however, that the Employer 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 his resignation as determined by Employer.
3.4 TERMINATION FOR CAUSE. Prior to the expiration of the Employment
Term, Executive's employment may be terminated for Cause by Employer,
immediately upon delivery of notice thereof. For these purposes, termination
for "Cause" shall mean termination because
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of Executive's (a) repeated and habitual failure to perform his 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 his stated duties; (e) willful violation of
any law, rule or regulation which materially adversely affects his ability to
discharge his 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 his death. In the event that by
reason of injury, illness or other physical or mental impairment Executive
shall be: (a) completely unable to perform his services hereunder for more
than three (3) consecutive months, or (b) unable to perform his 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 for any reason other than those set
forth in Section 3.4 or Section 3.5, Executive shall be entitled to
continuation of Executive's base salary for one (1) year, payable in equal
installments in conformity with
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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
one (1) year, payable in equal installments in conformity with Employer's
normal payroll period; provided, however, that Employer's obligation to pay
such installments after expiration of the Employment Term shall cease
concurrently with Executive having commenced comparable employment with, or
Executive receiving comparable compensation from, another employer. During
the period of this severance pay, 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 his 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 his employment during
the Employment Term. All records, files, keys, documents, and the like
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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.
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ARTICLE VI
GENERAL PROVISIONS
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 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
8
<PAGE>
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. 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 his 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:
________________________
________________________
________________________
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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.
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. Name: ____________________
Kurt May
By: _______________________
Name:______________________
Title: ____________________
10
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EXHIBIT 10.16
MEMBERS' AGREEMENT
for PSMT Caribe, Inc.
between
PRICESMART, INC.
and
PSC, S.A.
<PAGE>
MEMBERS' AGREEMENT
This Members' Agreement (this "Agreement") is entered into as of
September 14, 1998 by and between PriceSmart, Inc., a corporation organized
and existing under the laws of the State of Delaware, U.S.A. ("PriceSmart"),
and PSC, S.A., a company organized and existing under the laws of Panama
("PSC"). Each of PriceSmart and PSC are referred to in this Agreement as a
"Shareholder," and collectively as the "Shareholders."
RECITALS
WHEREAS, the Shareholders intend to establish and invest in an
International Business (Exempt) Company ("Newco") under the laws of the
British Virgin Islands to be utilized as their joint venture vehicle for the
establishment and operation of a business in Costa Rica, the Dominican
Republic, El Salvador, Honduras and Nicaragua, said business being engaged in
the sale of general merchandise, food and related products and services (the
"Merchandise Business System"), pursuant to the agreement described below;
WHEREAS, PriceSmart and its Affiliate intend to enter into, and the
Shareholders intend to cause Newco or its Affiliates to enter into, a
Licensing, Technology Transfer, Training and Sourcing Agreement (the
"Licensing Agreement"), in the form attached hereto as Attachment A, pursuant
to which PriceSmart will transfer a license to utilize certain intellectual
property owned by PriceSmart for the establishment and operation of the
Merchandise Business System, and PriceSmart and its Affiliate will provide
certain training, management support and product sourcing services; and
WHEREAS, in order to set forth certain rights and obligations of
the Shareholders relating to Newco, the parties desire to enter into this
Agreement.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual promises set forth
in this Agreement, the parties agree as follows:
1. DEFINED TERMS. Capitalized terms not defined herein have
the respective meanings ascribed to them in the Licensing Agreement.
2. FORMATION OF NEWCO.
2.1 The Shareholders shall form Newco under the laws of
the British Virgin Islands no later than November 1, 1998, under the name
PSMT Caribe, Inc. or if this name is not acceptable to the authorities of the
British Virgin Islands, such other name as may be approved by the
Shareholders.
2.2 All costs involved in the formation of Newco shall
be borne by Newco. Newco shall reimburse each Shareholder for any formation
costs incurred by such Shareholder and approved by the Board of Directors of
Newco (the "Board").
<PAGE>
3. CAPITALIZATION.
3.1 AUTHORIZED AND ISSUED CAPITAL. Newco shall have an
authorized share capital consisting of one million two hundred fifty
thousand (1,250,000) total shares, par value $1.00 per share. Such shares
shall be issued as seven hundred fifty thousand (750,000) shares of Class A
stock ("Class A Shares") and five hundred thousand (500,000) shares of Class
B stock ("Class B Shares," and, together with Class A Shares, hereinafter
referred to as the "Shares").
3.2 CAPITALIZATION.
3.2.1 The seven hundred fifty thousand (750,000)
Class A Shares shall be issued to PriceSmart. The initial capital
contributed by PriceSmart shall be three million seven hundred fifty thousand
United States Dollars (US $3,750,000), which amount shall be deposited into
an Escrow Account, in accordance with Section 3.2.3.1, below, on or before
September 18,1998. Thereafter, PriceSmart shall contribute directly to Newco
on or before November 1, 1998 and upon notification from the Board of Director
of Newco, eleven million two hundred fifty thousand United States Dollars
(US $11,250,000) and five million two hundred fifty thousand United States
Dollars (US $5,250,000), respectively.
3.2.2 The five hundred thousand (500,000) Class
B Shares shall be issued to PSC. The initial capital contributed by PSC
shall be two million five hundred thousand United States Dollars (US
$2,500,000) which amount shall be deposited into an Escrow Account in
accordance with Section 3.2.3.1, below, on or before September 18, 1998.
Thereafter, PSC shall contribute directly to Newco on or before November 1,
1998 and April 1, 1999 seven million five hundred thousand United States
Dollars (US $7,500,000) and three million five hundred thousand United
States Dollars (US $3,500,000), respectively.
3.2.3 The initial capitalization as set forth in
Sections 3.2.1 and 3.2.2 shall be paid according to the procedures set forth
below, provided however, that in the event the incorporation and registration
of Newco is not completed prior to November 1, 1998 each party shall be
entitled to the return of the capital it has so paid plus applicable interest
(net of its portion of the Escrow fees) and to terminate all obligations
arising under this Agreement.
3.2.3.1 ESCROW ACCOUNT. On or before
September 18, 1998, PriceSmart and PSC shall place three million seven
hundred fifty thousand United States Dollars (US $3,750,000) and two million
five hundred thousand United States Dollars (US $2,500,000) respectively, in
an Escrow Account managed by Chicago Title Insurance Co.
3.2.3.2 REGISTERED CAPITAL. From the funds
deposited into the aforementioned Escrow Account, the Registered Capital
shall be as to PriceSmart and PSC, seven hundred fifty thousand United States
Dollars (US $750,000) and five hundred thousand United States Dollars (US
$500,000) respectively. Concurrent with the registration of Newco, Newco
shall have all rights to the Registered Capital.
3.2.3.3 BACK TO BACK LOANS. The funds
deposited into the aforementioned Escrow Account totaling six million two
hundred fifty thousand United States
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Dollars ($6,250,000) shall be deposited in an account ("Time Deposit
Account") at a bank mutually agreeable to the Shareholders ("The Lender"),
concurrent with the incorporation and registration of Newco. Funds
contributed by PriceSmart and PSC on November 1, 1998 and when requested by the
Board of Newco as set forth in Section 3.2.1 and Section 3.2.2 above will also
be deposited in the Time Deposit Account. The Lender shall make loans to Newco
and/or OpCos (as defined in Section 4, below) in an amount equal to the funds
in the Time Deposit Account, as and when requested by Newco. The funds
deposited in the Time Deposit Account shall serve as collateral for such loans.
Interest will be paid to each Shareholder in proportion to each Shareholder's
deposit, less any and all fees and commissions owed to the Lender.
3.3 CAPITAL CALLS. In the event either Shareholder does
not (i) pay the full consideration pursuant to Section 3.2 or (ii) make full
payment in response to any future capital call by Newco, the proportionate
interest in the registered capital of Newco of such Shareholder shall be
diluted accordingly by increasing the registered capital and issuing
additional Class A Shares or Class B Shares, as appropriate, to the
Shareholder which provides the required capital. The amount of the increase
of the registered capital shall be equal to the amount of additional capital
paid in and the number of additional shares issued to the Shareholder which
provides the capital shall be increased by sufficient additional shares to
reflect each Shareholders' proportionate contribution to the capital of Newco.
3.4 ADDITIONAL FINANCING. The Shareholders acknowledge
and agree that they intend to cause and shall cause Newco and/or Landco(s)
(as defined in Section 4, below) to secure one or more loans, in the total
principal sum of approximately fifty million six hundred thousand United
States Dollars (US $50,600,000), the proceeds thereof to be used for the
anticipated construction in the Territory of nine buildings for nine
Territory Outlets.
4. PURPOSE OF NEWCO AND ANTICIPATED NEWCO AFFILIATES. The
purpose of Newco shall be to carry out the License Agreement in accordance
with the terms thereof, directly, or through Affiliates of Newco as provided
herein. The Shareholders agree to cause Newco to form two separate companies
("OpCo" and "Landco") in each of Costa Rica, the Dominican Republic, El
Salvador, Honduras and Nicaragua, to be wholly-owned (or virtually
wholly-owned where an additional owner is required by law) by Newco. The
five OpCo companies will be the entities operating the Merchandise Business
System and the five Landco companies will own or lease real estate in each
respective country.
5. LICENSING AGREEMENT. As promptly as practicable after the
formation and capitalization of Newco pursuant to this Agreement, the
Shareholders shall cause Newco to enter into the Licensing Agreement; Newco
shall then sub-license the License Agreement to each OpCo of the applicable
country, for such country (said country being the Territory under such
sublicense). Alternatively, at the request of PriceSmart, each OpCo shall
enter into the License Agreement as the direct Licensee of and for the
applicable country (which country would then be the Territory under such
direct License).
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<PAGE>
6. ADHERENCE BY NEWCO. As promptly as practicable after the
formation and capitalization of Newco pursuant to this Agreement, the
Shareholders shall cause Newco to execute this Agreement and abide by its
terms.
7. COOPERATION; BEST EFFORTS. The Shareholders agree to
cooperate and use their best efforts to take all actions necessary or
advisable to carry out all the provisions contained in, and transactions
contemplated by, this Agreement.
8. OFFICE. The registered office of Newco shall be situated in
the British Virgin Islands The principal place of business (which may act as
the registered office as well) shall be located at an address mutually
agreeable to the Shareholders.
9. MANAGEMENT AND MANAGEMENT RESPONSIBILITIES.
9.1 THE BOARD.
9.1.1 GENERAL. The responsibility for the
overall policy direction of Newco shall be vested in the Board, which shall
be comprised of five (5) directors (the "Directors"). Three (3) Directors
shall be nominees nominated by the holders of a majority of Class A Shares
(the "Class A Directors") and two (2) Directors shall be nominees nominated
by the holders of a majority of Class B Shares (the "Class B Directors").
Each director may appoint an alternate. All Directors shall be elected by the
majority vote of all the Shareholders. The holders of Class A Shares shall
vote their Shares in favor of the election of the Class B Directors, and the
holders of Class B Shares shall vote their Shares in favor of the election
of the Class A Directors. If any percentage of Share holdings by a class
decreases relative to that of the other class, then the number of such
class's Directors shall be decreased in a direct proportion to its percentage
holdings and the number of the other class's Directors shall be increased
accordingly (e.g., if Class B's percentage Share holdings decrease to less
than 40% but not less than 20% of the outstanding Shares, there would be one
(1) Class B Director and four (4) Class A Directors.) A quorum for meetings
of the Board shall exist when a majority of Directors are present.
9.1.2 TERM OF DIRECTORS. Class A Directors
shall serve at the pleasure of the holders of a majority of Class A Shares,
and Class B Directors shall serve at the pleasure of the holders of a
majority of Class B Shares.
9.1.3 VACANCIES AND REAPPOINTMENTS. In the
event that a vacancy is created on the Board at any time (including any
Director being unable to act at any time for any reason), such vacancy shall
be filled by the alternate director designated to fill the vacancy. In the
event that the designated alternate can not fill the vacancy, if the
Director whose position becomes vacant was a Class A Director the holders of
Class A Shares shall vote their Shares to elect a new Class A Director, and
if the Director whose position has become vacant was a Class B Director the
holders of a majority of Class B Shares shall vote their Shares to elect a
new Class B Director.
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9.1.4 REMOVAL OF DIRECTOR. Class A Directors
shall be removed at any time with or without cause upon written demand to the
Board from the holder of a majority of Class A Shares. Class B Directors
shall be removed at any time upon written demand to the Board from the
holders of a majority of Class B Shares.
9.1.5 POWERS OF THE BOARD. The Board shall have
all of the powers permitted to be exercised by the Board, pursuant to
applicable law, except as otherwise limited or restricted in the Articles of
Association of Newco or this Agreement.
9.1.6 ACTIONS OF THE BOARD. Actions of the
Board may be taken at any meeting at which a quorum of Directors is present
and of which notice was given to each Director at least ten (10) days prior
to such meeting. Any two Directors can require the President to call a
meeting. For purposes of this Section 9.1.6, notice is considered given to a
Director on the day in which such notice is either (i) transmitted via
facsimile to the facsimile number of such Director registered with Newco, or
(ii) deposited in overnight mail addressed to the address of such Director
registered with Newco. Except for super-majority actions required to be taken
according to the requirements set forth in Section 9.1.7 below, actions taken
by the Board at a duly noticed and called meeting shall require the
affirmative vote of a majority of the Directors present at such meeting. In
the event of an even split of votes in favor of, and opposed to, any matter
submitted for a vote of the Board, the President or, in his absence, his
designee, shall have a second, or deciding, vote. Any action which may be
taken at a duly noticed and called meeting of the Board may be taken without
a meeting if a consent in writing, setting forth the action so taken, is
signed by all then-serving Directors. The Minutes of the Board shall not be
valid and effective unless signed by the President and Secretary.
9.1.7 SUPER-MAJORITY ACTIONS. The foregoing
notwithstanding, the following actions by the Board require an affirmative
vote of at least four (4) Directors of the Board:
9.1.7.1 Approval of the Annual Business Plan,
referenced in Section 9.5 of this Agreement;
9.1.7.2 Purchases or leases of real estate by
Newco or by any Landco (or OpCo);
9.1.7.3 With the exception of the capital
required to be provided pursuant to Section 3.2 of this Agreement, calling
for capital contributions (alone or in the aggregate) exceeding Five Hundred
Thousand U.S. Dollars ($500,000);
9.1.7.4 Providing collateral or guarantees in
favor of third parties, including Shareholders;
9.1.7.5 Entering into any transactions
between Newco and any Shareholder or Affiliate of a Shareholder (not
including any Landco or OpCo);
9.1.7.6 Issuing dividends to Shareholders, in
accordance with the Dividend Policy set forth in Section 10.4; and
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9.1.7.7 Opening more than nine Territory
Outlets.
9.2 SHAREHOLDERS.
9.2.1 MEETINGS. Meetings of holders of Shares
shall be held at such times, and pursuant to such procedures (including
without limitation, with respect to notice), as are contained therefor in the
Articles of Association. The Minutes of the Shareholder Meetings and the
entries in the Shareholders Registry Book shall not be valid and effective
unless signed by both the President and the Secretary.
9.2.2 QUORUM. The quorum necessary for the
transaction of business at a duly noticed and called meeting of the holders
of Shares shall be the presence (in person or by proxy) of the holders of a
majority of all outstanding Shares.
9.2.3 ACTIONS BY THE SHAREHOLDERS. Any actions
permitted or required to be taken by the holders of Shares may be taken at
any duly noticed and called meeting of the holders of Shares at which a
quorum is present, in person or by proxy. Except as required by applicable
law, such actions shall require the approval of a majority of the Shares
present, in person or by proxy, at such meeting.
9.2.4 SUPER-MAJORITY APPROVAL. The foregoing
notwithstanding, the following actions by Newco shall require the affirmative
vote of the holders of a majority of Class A Shares and the affirmative vote
of the majority of holders of Class B Shares:
(a) Offering to sell Shares to the public; and
(b) Amending the Articles of Association.
9.3 OFFICERS.
9.3.1 PRESIDENT. Newco shall at all times
maintain a President, appointed by the Class A Directors, who shall be a
member of the Board and serve as its Chairman. The President shall coordinate
and direct the general policies of the Company. Under the authority of the
Board, the President shall have the sole discretion to conduct the business
of Newco within the parameters established in the Annual Business Plan (as
defined in Section 9.5). The President shall serve at the pleasure of the
Board. Upon removal or withdrawal of the President for any reason, the
Class A Directors shall then, and from time to time thereafter as necessary,
appoint a successor President . Among his other duties, the President shall
vote all the shares of the OpCos and Landcos, consistent with the direction
of the Board of Newco.
9.3.2 VICE PRESIDENT. Newco shall at all times
maintain a Vice President , appointed by the Class B Directors. The Vice
President shall be delegated by the President with such powers and
responsibilities as shall be required for the Vice President to fulfill all
of his obligations under applicable law. The Vice President shall serve at
the pleasure of the Board. Upon removal or withdrawal of the Vice President
for any reason, the Class B
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Directors shall then, and from time to time thereafter as necessary, appoint
a successor Vice President.
9.3.3 SECRETARY. Newco shall at all times
maintain a Secretary, appointed by the Class B Directors, who shall be a
member of the Board. The Secretary shall be delegated by the President with
such powers and responsibilities as shall be required for the Secretary to
fulfill all of his obligations under applicable law. The Secretary shall
serve at the pleasure of the Board. Upon removal or withdrawal of the
Secretary for any reason, the Class B Directors shall then, and from time to
time thereafter as necessary, appoint a successor Secretary.
9.3.4 TREASURER. Newco shall at all times
maintain a Treasurer, appointed by the Class A Directors. The Treasurer
shall be delegated by the President with such powers and responsibilities as
shall be required for the Treasurer to fulfill all of his obligations under
applicable law. The Treasurer shall serve at the pleasure of the Board.
Upon removal or withdrawal of the Treasurer for any reason, the Class A
Directors shall then, and from time to time thereafter as necessary, appoint
a successor Treasurer. The Treasurer shall file all tax returns and make all
elections required, consistent with the direction of the Board.
9.4 Intentionally Omitted.
9.5 ANNUAL BUSINESS PLAN. Annually, prior to June 30,
the President shall present to the Board a detailed business plan for Newco
(the "Annual Business Plan"). Such Annual Business Plan shall show, among
other things, as to the ensuing year, a budget for capital investment for
future projects, a budget for capital and operating expenditures in
connection with projects already underway, revenue projections and a
marketing strategy. Such Annual Business Plan shall also show, as to the
ensuing three years, the projected working capital and capital investment
needs of Newco, OpCos and Landcos. The Board shall endeavor to approve each
year's Annual Business Plan by July 31 of the preceding year. In the event
that the Annual Business Plan for any fiscal year (the "Current Year") of
Newco is not approved by the Board, for any reason, on or before July 31 of
the preceding year, then the prior year's Annual Business plan shall
automatically be deemed approved for each month of the Current Year (with a
PRO RATA portion of such plan in effect for any partial months until such
time as the Current Year's Annual Business Plan is approved).
9.6 COMPTROLLER. The Class B Shareholders may appoint a
Comptroller, who shall be entitled to attend and observe all meetings of the
Board, provided, however, that the Comptroller shall not be a member of the
Board (and accordingly shall not have the right to vote nor be counted when
determining whether a quorum exists).
10. ACCOUNTING AND REPORTS; DIVIDEND POLICY.
10.1 ACCOUNTING AND RECORDS. Newco shall keep accurate
accounting records of all operations and, in addition to any rights to
inspection granted under British Virgin Islands law, such records shall be
open to inspection by either Shareholder, or by either Shareholder's duly
authorized representative, during business hours, so long as such Shareholder
or its Affiliate continues to hold at least Twenty-Five percent (25%) of the
Shares. Newco's
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financial records shall be audited annually pursuant to generally accepted
accounting principles at the expense of Newco by the outside auditing firm
named pursuant to Section 10.2 below. Such auditing firm shall furnish
copies of its report to Newco and to each Shareholder within thirty (30) days
after the completion thereof. The copy furnished to PriceSmart shall be in
the English language and shall be certified as accurate.
10.2 AUDITORS. The statutory auditors for Newco shall be
an internationally recognized firm of certified public accountants. The
statutory auditors for Newco initially shall be Ernst and Young.
10.3 REPORTS. Newco shall file or otherwise submit to
any government body all financial and other statements and reports required
to be so filed or submitted under applicable law.
10.4 DIVIDEND POLICY. Within ninety (90) days of the end
of each fiscal year the Board shall review the working capital and capital
investment needs of Newco, OpCos and Landcos (collectively "Capital
Requirements") as set forth in the Annual Business Plan, and the Board may
declare cash dividends to Shareholders to the extent of available funds in
excess of such Capital Requirements.
11. TRANSFERS OF SHARES.
11.1 CONSENT AND REFUSAL RIGHTS. No Shareholder may
sell, assign, or otherwise transfer (collectively, "transfer") any of its
Shares in Newco (the Shares subject to transfer being the "Subject Shares")
to any entity (a "Third Party Transfer") unless:
11.1.1 such Shareholder obtains the prior written
consent of the other Shareholder of Newco, such consent not to be
unreasonably withheld; and
11.1.2 such Shareholder first makes an
irrevocable offer (the "Transfer Offer") in writing to the other Shareholder
of Newco to transfer the Subject Shares to such other Shareholder, at the
same purchase price and on the same terms and conditions as the proposed
Third Party Transfer (the "Price, Terms and Conditions"). If within thirty
(30) days of receipt of the Transfer Offer, the offeree Shareholder notifies
the offering Shareholder in writing of its intention to accept the Transfer
Offer, the Shareholders shall promptly consummate the transfer with respect
to the Subject Shares. If the offeree Shareholder does not so notify the
offering Shareholder within such thirty (30) day period, the offering
Shareholder may, during the succeeding thirty (30) day period, consummate the
Third Party Transfer on the Price, Terms and Conditions. If at the
expiration of such succeeding thirty (30) day period the Third Party Transfer
is not so consummated, all the obligations to comply with this Section 11.1
shall again be in effect with respect to the Subject Shares.
11.2 TAG-ALONG RIGHTS. Subject to Section 11.1 and 11.5,
if, at any time, PriceSmart proposes to transfer any Shares owned by
PriceSmart to any proposed purchaser, PriceSmart shall afford PSC (and any
transferees of PSC's Shares) the opportunity to participate in such transfer
in accordance with the procedures set forth in Exhibit A.
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11.3 DRAG-ALONG RIGHTS. Notwithstanding Section 11.1,
if, at any time, PriceSmart proposes to transfer to any proposed purchaser
(including transfers to purchasers under Section 11.5 (ii) and (iii)) all of
the Shares owned by PriceSmart, PriceSmart may require, at its sole
discretion, that PSC (and any transferees of its Shares) sell all of the
Shares owned by PSC (and any transferees of its Shares) to the same proposed
purchaser for the same proportionate consideration and otherwise on the same
terms and conditions as PriceSmart proposes to transfer its Shares, in
accordance with the procedures set forth in Exhibit A.
11.4 PROHIBITED TRANSFERS. Except as provided in Section
11.5 below, no Shareholder may transfer any Shares of Newco to any of
Wal-mart Stores, Inc., SHV Holdings, N.V. (Makro), Dayton Hudson Corporation,
Kmart Corporation, The Home Depot, Inc., Office Depot, Inc., Costco
Companies, Inc., Carrefour, S.A., BJ's Wholesale Club, Inc. or their
respective Affiliates.
11.5 PERMITTED TRANSFERS. The restrictions on transfers
of Shares contained in this Section 11 (i.e., in Sections 11.1, 11.2 and
11.4) shall not apply to any transfer or series of transfers of Shares (i) by
any Shareholder to an Affiliate of such Shareholder, (ii) by PriceSmart to an
entity into which or with which PriceSmart is merged or consolidated, or
(iii) by PriceSmart to an entity acquiring substantially all the assets of
PriceSmart.
11.6 SHAREHOLDERS' AGREEMENT. No transfer of Shares
shall be permitted unless and until the transferee has become a party hereto
and assumed all applicable obligations of a "Shareholder" hereunder. The
Shareholders shall negotiate in good faith to make any amendments to this
Agreement required to reflect the change in the nature of Newco's ownership
caused by a transfer of Shares.
11.7 PLEDGES OF SHARES. No Shareholder may pledge,
mortgage, create or provide for a security interest in, or convey in trust
any Shares without the prior written consent of the other Shareholder;
provided, however, that Shares may be pledged to Banco Promerica, S.A.-Costa
Rica, Banco Promerica, S.A.-El Salvador, Banco de la Produccion, S.A., St.
Georges Bank & Trust Co. Ltd. (or to any other Bank if first approved by the
Board of Newco) as collateral for funds borrowed by a Shareholder when (but
only when) those funds are thereupon contributed as capital to Newco.
11.8 CONSEQUENCES OF INAPPROPRIATE TRANSFERS. Each
Shareholder hereby renounces any rights under any applicable law which may
preclude the enforcement of Sections 11.1, 11.2, 11.3 or 11.4. If
notwithstanding the provisions of this Section 11 a Shareholder transfers any
of its Shares in violation of Sections 11.1, 11.2. 11.3 or 11.4, then, in
addition to and not in lieu of any other available remedies, such Shareholder
shall be required to pay to the other Shareholder the sum of one million
dollars ($1,000,000) or 10% of the total capitalization of Newco, whichever
amount is greater.
12. BUY-SELL RIGHTS UPON IMPASSE.
12.1 IMPASSES. As provided in Sections 9.1.7 and 9.2.4
of this Agreement, action by the Board and by the Shareholders with respect
to certain specified matters
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require super-majority approval. Any such proposition which does not receive
super-majority approval shall be deemed defeated, except that if at any time
the Board or Shareholders (as applicable) reaches such an impasse on an issue
with respect to Newco's rights or obligations (as distinguished from the
rights or obligations between the Shareholders themselves) which impasse, if
unresolved, precludes the continuing performance by Newco under any contract
to which it is a party or the operation of any significant part of Newco's
business and such impasse is not resolved within five (5) days thereafter,
the issue shall immediately be referred jointly to the chief executive of
PriceSmart and the chief executive of PSC for resolution. If these
individuals are unable to agree upon a resolution within five (5) days after
referral of such impasse to them, then an impasse is deemed to have been
reached and the Buy-Sell provisions of this Section 12 of this Agreement
shall become applicable.
12.2 At any time ten (10) days after an impasse is
reached either Shareholder (the "Offeror Shareholder") shall have the right,
exercisable by written notice (the "Buy-Sell Offer") to the other Shareholder
(the "Offeree Shareholder"), to offer to buy all of the Offeree Shareholder's
Shares at the Fair Market Value (as described in Exhibit B) and upon the
terms and conditions specified in the Buy-Sell Offer.
12.3 The Offeree Shareholder must elect by written notice
to the Offeror Shareholder within thirty (30) days after receipt of the
Buy-Sell Offer, either (i) to sell the Offeree Shareholder's Shares to the
Offeror Shareholder at the Fair Market Value and upon the terms and
conditions specified in the Buy-Sell Offer, or (ii) to purchase the Offeror
Shareholder's Shares at a per Share purchase price equal to the per Share
price contemplated in the Buy-Sell Offer, plus 5% of such per Share price.
12.4 If the Offeree Shareholder elects clause (i) of
Section 12.3, the Shareholders will, as promptly as practicable, prepare,
execute and deliver such documents and take such other actions as may be
required to effect the sale of Shares contemplated in clause (i) of Section
12.3.
12.5 If the Offeree Shareholder elects clause (ii) of
Section 12.3, the offer made thereunder shall be deemed to be a new Buy-Sell
Offer by the Offeree Shareholder under Section 12.2. If the Offeror
Shareholder then elects clause (i) of Section 12.3, the Offeror Shareholder
will sell its Shares to the Offeree Shareholder under Section 12.4. If,
however, the Offeror Shareholder elects under clause (ii) of Section 12.3 to
offer to purchase the Offeree Shareholder's Shares at a per Share price equal
to 105% of the Offeree Shareholder's proposed per Share purchase price, such
offer shall be deemed a new Buy-Sell Offer by the Offeror Shareholder under
Section 12.2, whereupon the Offeree Shareholder shall have the right either
to sell or to offer to buy at a per Share price equal to 105% of the Offeror
Shareholder's new per Share price. This process will continue until one
Shareholder, in response to a Buy-Sell Offer, elects clause (i) of Section
12.3 and sells its Shares to the other Shareholder hereunder.
13. OPTION TO PURCHASE UPON TERMINATION.
13.1 At any time within (30) days following the
termination of this Agreement by a Shareholder pursuant to Section 14.2, such
Shareholder or its nominee shall
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have the right, but not the obligation, to elect to purchase all of the other
Shareholder's Shares, said election to be made by the service of written
notice thereof to such other Shareholder (the "Option Notice"). The purchase
price for such Shares shall be at the lower of their (i) Fair Market Value
(as described in Exhibit B) or (ii) stock purchase price paid by such other
Shareholder plus other total contributed capital by such other Shareholder
plus interest on such amount accruing from the date of such other
Shareholder's acquisition of such Shares at a rate per annum equal to the
prime lending rate of Bank of America, N.A. as of the Option Notice date.
13.2 Upon delivery by a Shareholder of the Option Notice
under this Section 13, the Shareholders will, as promptly as practicable,
prepare, execute and deliver such documents and take such other actions as
may be required to promptly effect the transfer of Shares contemplated hereby.
14. TERMINATION.
14.1 TERMINATION OF LICENSING AGREEMENT. This Agreement
shall terminate immediately upon termination of the Licensing Agreement for
any reason. Upon termination of this Agreement pursuant to this Section
14.1, Newco shall dissolve and liquidate its assets.
14.2 TERMINATION BY SHAREHOLDER. This Agreement may be
terminated upon written notice, effective immediately, by either Shareholder
(in which event Section 13 of this Agreement shall become applicable) if any
of the following occur:
14.2.1 A receiver is appointed for the other
Shareholder or its property; the other Shareholder becomes unable to pay its
debts as they mature in the ordinary course of business or makes an
assignment for the benefit of creditors; or any proceedings are commenced
against the other Shareholder under any bankruptcy, insolvency or debtor
relief law and such proceedings are not vacated or set aside within sixty
(60) days from the date of commencement thereof;
14.2.2 The other Shareholder materially breaches
or fails to perform any obligation or covenant in this Agreement and fails to
cure such breach or failure within ten (10) days following notice thereof by
the Shareholder; provided, that if such breach or failure cannot be cured
within such ten (10) day period, then the other Shareholder shall not be
deemed to be in breach hereunder if it has commenced a cure within such ten
(10) day period and the other Shareholder diligently completes such cure as
soon as possible, and within a thirty (30) day period; or
14.2.3 The other Shareholder materially breaches
or fails to perform any obligation or covenant in this Agreement for the
third time during any twelve (12) month period.
14.2.4 Any Shareholder elects to terminate this
Agreement under Section 3.2.3, above.
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14.3 ACQUISITION OF ALL SHARES. This Agreement shall
terminate immediately upon the acquisition of all of the outstanding Shares
of Newco by either Shareholder.
14.4 EFFECT OF TERMINATION. Upon termination or
expiration of this Agreement for any reason, all obligations of the parties
hereunder shall terminate prospectively forthwith (other than those set forth
in Sections 13, 14, 15, 16 and 19, which shall survive indefinitely or as
specified therein).
15. CONFIDENTIALITY. During the term of the Licensing Agreement
and for three (3) years thereafter, PSC and its Affiliates shall maintain in
strict confidence all information they have obtained or shall obtain from
Newco or PriceSmart or its Affiliates, pursuant to this Agreement, the
Licensing Agreement or otherwise, relating to the business, operations,
properties, assets, products, condition (financial or otherwise),
liabilities, employee relations, customers, suppliers, prospects, technology,
or trade secrets of Newco or PriceSmart or its Affiliates; except to the
extent such information (i) is in the public domain through no act or
omission of the disclosing party, (ii) is required to be disclosed by law, or
(iii) is independently learned by the disclosing party outside of this
relationship ("Confidential Information"). PSC agrees to (i) cause its
directors, officers, senior management personnel, as well as its employees,
agents or representatives who may have access to Confidential Information
relating to Newco or PriceSmart to enter into an appropriate written
confidentiality and proprietary rights agreement, in the form attached hereto
as Exhibit C, prior to disclosing to such individuals any such Confidential
Information, and (ii) immediately deny access to such Confidential
Information to any individual who breaches such agreement. Newco and
PriceSmart shall each be a third party beneficiary of each such agreement.
PSC shall use its best efforts to protect the Confidential Information, and
shall not use the Confidential Information for its own benefit or the benefit
of any other person or entity, except as may be specifically permitted in
this Agreement or the Licensing Agreement.
16. NON-COMPETITION. In order to preserve for the benefit of
PriceSmart the value of Confidential Information relating to PriceSmart, PSC
agrees that neither it, its shareholders, its Affiliates nor their respective
directors, officers and other management personnel ("Key Employees") shall
engage in, be employed by, consult for or invest in a business which is
similar to or competes with the Merchandise Business System, including, among
other things, discount stores, warehouse stores, and hypermarkets, during the
term of the Licensing Agreement and for three (3) years thereafter; provided,
however, that: (i) Key Employees and the shareholders of PSC may continue to
engage in, be employed by, consult for and invest in any business where such
engagement, employment, consultation or investing relationship exists as of
the date of this Agreement. It shall be the obligation of PSC, no later than
ninety (90) days following the date hereof, to procure from all of its
shareholders, Affiliates and Key Employees their written agreement to abide
by this covenant in the form attached hereto as Exhibit D or in another form
acceptable to PriceSmart, and PriceSmart shall be a third party beneficiary
of each such agreement.
17. PUBLIC OFFERING. In the event the Shareholders vote, in
accordance with Section 9.2.4 of this Agreement, to offer to sell the Shares
of Newco to the public, all Shares
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(whether Class A Shares or Class B Shares) shall be offered for sale on an
equal basis, and upon the effective date of the public offering all Shares
shall be deemed to be Class A Shares and all Directors shall be deemed to be
Class A Directors. PriceSmart and PSC agree that at least once per year they
will in good faith review the status of the business of Newco as well as the
public market to determine whether appropriate financial circumstances exist to
offer the Shares of Newco to the public; if so they will take all appropriate
action to so offer the Shares to the public.
18. CONFORMITY WITH LAWS. No Shareholder shall, or shall cause
Newco to, through or by their respective agents, employees, representatives
or otherwise, directly or indirectly make, give or promise any payment or
other thing of value to any person for any purpose, or commit any other act,
which is unlawful under the laws of the United States, including without
limitation, the U.S. Foreign Corrupt Practices Act.
19. DISPUTE RESOLUTION; ARBITRATION.
19.1 All disputes and claims concerning the validity,
interpretation, performance, termination and/or breach of this Agreement
("Dispute(s)") shall be referred for final resolution to arbitration in
Miami, Florida, USA under the UNCITRAL Rules ("Rules") as administered by the
American Arbitration Association. All proceedings shall be conducted in the
English language. The parties hereby agree that arbitration hereunder shall
be the parties' exclusive remedy and that the arbitration decision and award,
if any, shall be final, binding upon, and enforceable against, the parties,
and may be confirmed by the judgment of a court of competent jurisdiction.
In the event of any conflict between the Rules and this paragraph, the
provisions of this paragraph shall govern.
19.2 Notwithstanding the above, a party may bring court
proceedings against any other party (i) to obtain preliminary injunctive
relief pending completion of arbitration, or (ii) as part of litigation
commenced by a third party. The parties hereby submit to personal
jurisdiction in the State of Florida, U.S.A.
19.3 The prevailing party in any arbitration or court
proceeding shall be awarded its reasonable attorneys' fees against the
non-prevailing party or parties.
20. NO WITHHOLDINGS AND DEDUCTIONS. All payments to be made by
a Shareholder under this Agreement shall be made free and clear and without
subtraction of any taxes, deductions, withholdings, conversion fees, wire
transfer fees or offset of any kind. All such taxes and fees shall be the
responsibility of the entity making the payment. No party may offset, deduct
or withhold amounts owed it by the other party. Any withholding taxes
imposed by any jurisdiction are the responsibility of, and shall be paid by,
the entity making the payment.
21. CONFLICT. If there occurs a conflict between or among this
Agreement or the Bylaws, the prevailing provisions, as between the parties,
shall be: FIRST, those contained in the Agreement and, SECOND, those
contained in the Articles of Association to the extent not inconsistent with
this Agreement.
22. RELATIONSHIP OF THE PARTIES. This Agreement shall not make
any party an agent of any other party for any purpose, and Newco shall not be
deemed an agent for either party, or either party an agent for Newco. This
Agreement does not create a partnership and the Shareholders are not liable
as partners. No party shall have the right or authority to assume,
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create or enlarge any obligation or commitment on behalf of any other party
and shall not represent itself having the authority to bind any other party
in any manner.
23. ASSIGNMENT. Except as expressly permitted by this
Agreement, no party shall assign, delegate, or otherwise transfer any of its
rights or obligations under this Agreement without the prior written consent
of the other party. PSC may, without the prior written consent of
PriceSmart, assign, delegate or otherwise transfer any of its rights or
obligations under this Agreement to an Affiliate of PSC. PriceSmart may,
without the prior written consent of PSC assign, delegate, or otherwise
transfer any of its rights or obligations under this Agreement to (i) an
Affiliate, (ii) an entity into which or with which PriceSmart is merged or
consolidated, or (iii) an entity acquiring substantially all the assets of
PriceSmart.
24. AMENDMENTS. Amendments to or modifications of this
Agreement may be made only by mutual agreement of the parties in writing and
shall be subject to whatever Governmental Approvals are required by
applicable law.
25. EXPENSES. Each of the parties shall bear its own expenses
incurred in connection with the negotiation, execution and delivery of this
Agreement.
26. NO WAIVER. The failure of any party to insist upon the
strict observance and performance of the terms of this Agreement shall not be
deemed a waiver of other obligations hereunder, nor shall it be considered a
future or continuing waiver of the same terms.
27. NOTICE. All notices and other communications under the
Agreement shall be in writing, shall be delivered by facsimile transmission,
air courier service, in person or by registered or certified mail with return
receipt requested, and shall be deemed to have been duly given on the date of
any receipt or record maintained by the service or person making delivery.
Delivery shall be to the address set forth below or such other address or
facsimile number as may hereafter be furnished in writing by either party to
the other. The current address for each party is set forth below the
signatures, hereinbelow.
28. VALIDITY OF AGREEMENT. In the event any provision of this
Agreement is held by a court having proper jurisdiction to be for any reason
unenforceable or invalid, the remaining provisions of this Agreement shall
continue to remain in full force and effect.
29. APPLICABLE LAW. This Agreement shall be interpreted in
accordance with, and all questions concerning the validity, performance or
breach of this Agreement shall be governed by, the laws of the State of
Florida, U.S.A.
30. LANGUAGE. The official version of this Agreement is in the
English language, and shall govern over any non-English translations.
31. INTERESTED PARTY TRANSACTIONS. The Shareholders agree that
Newco may negotiate and enter into agreements with, and otherwise deal with,
a Shareholder or its Affiliate (each, an "Interested Party Transaction").
The Shareholders agree that (a) the involvement of the interested party in
the Interested Party Transaction shall not be, and shall not be deemed to be,
a conflict of interest vis-a-vis such Shareholder's participation in the
business and management of
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Newco, and (b) the participation of the interested party, with respect to
Newco's negotiation, execution and performance of such Interested Party
Transaction, shall not be prohibited or otherwise hindered by virtue of its
interest in such transaction. In particular, the Shareholders acknowledge
and agree that Newco shall enter the Licensing Agreement with PriceSmart and
that PriceSmart's rights under Section 6.3 of the License Agreement include
the exclusive right to determine the schedule (including the timing and
country location) of the establishment and opening of certain Territory
Outlets. In addition, each of the Shareholders acknowledge and agree that
when it is necessary for PriceSmart to purchase goods or services for the
Merchandise Business Systems, which goods or services are produced by a
shareholder of PSC to the standards required by PriceSmart, such shareholder
shall have the right to provide such goods or services provided that the
price thereof meets or beats any competitive bid. Further, PriceSmart will
allow the shareholders of PSC to purchase merchandise from PriceSmart, for
sale within a particular country (where such merchandise is available in
PriceSmart's inventory), with the purchase price being the same net landed
cost which is charged to the OpCo in the subject country; provided, however,
that the law permits the shareholders to agree, and the shareholders shall
agree not to sell such merchandise below that OpCo's selling prices..
32. PRESS RELEASES. No Shareholder or Affiliate thereof shall
issue any press release or make any public announcement concerning the
transactions contemplated hereby without the prior written consent of the
other Shareholder.
33. INTEGRATION. This Agreement is the only agreement between
the parties with respect to the subject matter contained herein. This
Agreement supersedes all prior oral or written understandings, agreements and
offers between the parties related to such subject matter.
34. AUTHORIZATION.
34.1 PRICESMART, INC. PriceSmart represents and warrants
that it is a corporation duly organized and existing and is in good standing
under the laws of the State of Delaware, U.S.A.; that the persons signing
this agreement in behalf of PriceSmart have been validly authorized to do so;
that no other action is requisite to the execution and delivery of this
Agreement by PriceSmart; that no consents or waivers of or by any third party
are necessary to permit consummation by PriceSmart of the transactions
contemplated herein; and that this Agreement has been, and all documents to
be delivered by PriceSmart, will be authorized and properly executed and
constitute or will constitute, as appropriate, the valid and binding
obligations of PriceSmart, enforceable in accordance with their terms.
34.2 PSC, S.A. PSC represents and warrants that it is a
sociedad anonomia, duly organized and existing and is in good standing under
the laws of the country of Panama; that the persons signing this agreement in
behalf of PSC have been validly authorized to do so; that no other action is
requisite to the execution and delivery of this Agreement by PSC; that no
consents or waivers of or by any third party are necessary to permit
consummation by the PSC of the transactions contemplated herein; that this
Agreement has been and all documents to be delivered by PSC, will be
authorized and properly executed and constitute or will constitute, as
appropriate, the valid and binding obligations of PSC, enforceable in
accordance with their terms; that the shareholders of PSC are those persons
and entities identified in Schedule 1 to this
15
<PAGE>
Agreement; and that each shareholder of PSC shall not be permitted to sell,
assign or otherwise transfer any of its shares in PSC: (i) to any person or
entity which engages in a business which is similar to or competes with the
Merchandise Business System; and (ii) without the prior written consent of
PriceSmart, said consent not be unreasonably withheld and being premised upon
the proposed transferee's: a) financial ability and status; b) moral
character and standing in the proposed transferee's business community; and
c) relationship with the countries in which Newco (or its subsidiaries)
intends to conduct business.
IN WITNESS WHEREOF the parties hereto have executed this Members'
Agreement as of the date first written above.
PRICESMART: PSC:
PRICESMART, INC. PSC, S.A.
By: ______________________________ By: ______________________________
Print Name: ___________________ Print Name:_______________________
Print Title: ___________________ Print Title:______________________
Address: 4649 Morena Blvd. Address:________________________
San Diego, CA 92117 ________________________
Fax Number: (619) 581-4707 ________________________
Fax Number: ___________________
WITNESSETH:
____________________________________
Mario Sebastian Rappaccioli McGregor
____________________________________
Vicente de Jesus Carrion
____________________________________
Edgar Zurcher
NEWCO:
PSMT Caribe, Inc.
By: ______________________________
Print Name:_______________________
Print Title:______________________
Address:_______________________
_______________________
Fax Number:____________________
16
<PAGE>
SCHEDULE 1
SHAREHOLDERS OF PSC, S.A.
<TABLE>
<S> <C>
Caribbean Capital Corporation 9.09%
Los Minos, Santo Domingo
Dominican Republic
Edgar Zurcher 9.09%
C1, Avenida 9 & 11
No. 959
San Jose Costa Rica
Inversiones San Sebastian, S.A. 9.09%
Santo Domingo 150 Baras Arriba
Managua, Nicaragua
Ramiro Ortiz Mayorga 9.09%
Managua, Nicaragua
Tiendas Carrion, S.A. 9.09%
C/O Financiera Promerica
Barrio Los Andes
11 Avenida, 13 Calle Noroeste
San Pedro Sula, Honduras
Hayes Investment Inc. 9.09%
C/O Financiera Promerica
Barrio Los Andes
11 Avenida, 13 Calle Noroeste
San Pedro Sula, Honduras
Promerica Capital Market, S.A. 45.46%
Apto 1289-1200
San Jose, Costa Rica
</TABLE>
17
<PAGE>
EXHIBIT A
I. PROCEDURE APPLICABLE TO TAG-ALONG RIGHTS
1. PSC (and any transferees of its Shares) shall have the right to
transfer, at the same price per share and upon identical terms and
conditions as the proposed transfer by PriceSmart, any or all of the
Shares owned by PSC (and any transferees of its Shares). At the time
any transfer to a proposed purchaser is proposed, PriceSmart shall
give notice to PSC (and any transferees of its Shares) of its right to
sell Shares hereunder (the "TAG-ALONG TRANSFER NOTICE") which notice
shall set forth the name and address of the proposed purchaser and
state the number of Shares proposed to be transferred, the proposed
offering price, the proposed date of any such transfer (the "TAG-ALONG
TRANSFER DATE") and any other material terms and conditions of the
proposed transfer.
2. In the event that PSC (and any transferees of its Shares) wishes to
participate in the transfer, it shall provide written notice (the
"TAG-ALONG NOTICE") to PriceSmart no less than ten (10) days prior to
the Tag-Along Transfer Date; PROVIDED PriceSmart shall deliver the
Tag-Along Transfer Notice at least twenty (20) days prior to the
Tag-Along Transfer Date. The Tag-Along Notice shall set forth the
number of Shares that PSC (and any transferees of its Shares) elects
to include in the transfer. The Tag-Along Notice given by PSC (and
any transferees of its Shares) shall constitute its binding agreement
to transfer such Shares on the terms and conditions and for the same
consideration per Share applicable to the transfer by PriceSmart.
3. If a Tag-Along Notice is not received by PriceSmart prior to the
expiration of the ten-day period specified above, then PriceSmart
shall have the right to transfer the number of Shares specified in the
Tag-Along Transfer Notice to the proposed purchaser without any
participation by PSC (or any transferees of its Shares), but only on
terms and conditions which are no more favorable to PriceSmart in any
material respect than as stated in the Tag-Along Transfer Notice and
only if such transfer occurs on a date within one hundred twenty (120)
days of the Tag-Along Transfer Date.
4. In connection with a transfer of Shares under Section 11.2, PSC (and
any transferees of its Shares) shall not be required to make any
representation or warranty other than as to (i) ownership and the
absence of liens with respect to its Shares and as to its existence
and the authority for, and the validity and binding effect of, any
agreements entered into by PSC (and any transferees of its Shares) in
connection with such transfer, and (ii) the same representations and
warranties with regard to the company and its businesses as are made
by PriceSmart in connection with such transfer.
A-1
<PAGE>
II. PROCEDURE APPLICABLE TO DRAG-ALONG RIGHTS
1. At the time any transfer to a proposed purchaser is proposed and
PriceSmart intends to require PSC (and any transferees of its Shares)
to transfer its Shares pursuant to Section 11.3, PriceSmart shall give
notice to PSC (and any transferees of its Shares) of its intent to
require PSC (and any transferees of its Shares) to sell its Shares
hereunder (the "DRAG-ALONG TRANSFER NOTICE"), which notice shall set
forth the name and address of the proposed purchaser and state the
number of Shares proposed to be transferred by each of PriceSmart and
PSC (and any transferees of its Shares), the proposed offering price,
the proposed date of any such transfer (the "DRAG-ALONG TRANSFER
DATE") and any other material terms and conditions of the proposed
transfer.
2. PriceSmart shall deliver the Drag-Along Transfer Notice at least
twenty (20) days prior to the Drag-Along Transfer Date. Upon the
closing of the transaction, PSC (and any transferees of its Shares)
shall be obligated to transfer its Shares on the terms and conditions
set forth in the Drag-Along Transfer Notice.
3. In connection with a transfer of Shares under Section 11.3, PSC (and
any transferees of its Shares) shall not be required to make any
representation or warranty other than as to (i) ownership and the
absence of liens with respect to its Shares and as to the existence of
PSC (and any transferees of its Shares) and the authority for, and the
validity and binding effect of, any agreements entered into by PSC
(and any transferees of its Shares) in connection with such transfer,
and (ii) the same representations and warranties with regard to the
Company and its businesses as are made by PriceSmart in connection
with such transfer.
4. PSC (and any transferees of its Shares) shall not be obligated to
participate in any such transfer unless PSC (and any transferees of
its Shares) is provided an opinion of counsel, which opinion and
counsel shall be reasonably satisfactory to PSC (and any transferees
of its Shares) (x) to the effect that such transfer is not in
violation of applicable laws and (y) as to any other matters to PSC
(and any transferees of its Shares) may reasonably request that are
customary in such transactions, or, if PSC (and any transferees of its
Shares) is not provided with an opinion with respect to any matters
contemplated by this clause (y), then PriceSmart shall (in addition to
the indemnification contemplated below) indemnify PSC (and any
transferees of its Shares) for such matters contemplated by this
clause (y) as PSC (and any transferees of its Shares) shall reasonably
request.
A-2
<PAGE>
EXHIBIT B
FAIR MARKET VALUE
APPRAISAL PROCEDURE. For purposes of Section 12 and Section 13
above, the value of the Shares (the "Fair Market Value") shall be determined
as set forth below:
(i) Within seven (7) days after a Shareholder makes a Buy-Sell
Offer under Section 12, or serves the Option Notice under
Section 13, each Shareholder will appoint one independent
and qualified appraiser to appraise the value of the Shares;
(ii) The Fair Market Value of the Shares will be the average of
the two appraisals.
B-1
<PAGE>
EXHIBIT C
EMPLOYEE'S CONFIDENTIAL INFORMATION AGREEMENT ("AGREEMENT")
In consideration of my employment or continued employment by
_______________ _______________ (hereinafter "the company") and in
consideration of the salary, wages or other compensation to be paid for my
services during such employment, I hereby agree as follows:
1. As used in this Agreement the term "confidential information" means
information relating to the business, operations, properties, assets,
products, condition (financial or otherwise), liabilities, employee
relations, customers, suppliers, prospects, technology, or trade secrets of
Newco and PriceSmart, Inc. or its affiliates; except to the extent such
information (i) is in the public domain through no act or omission by me;
(ii) is required to be disclosed by law, or (iii) is independently learned
by me outside of my employment by the company.
2. During the term of my employment by the company, I will not, except as my
duties to the company may require, disclose any confidential information to
others.
3. After the term of my employment by the company, I will not disclose any
confidential information to others unless such disclosure first has been
authorized in writing by Newco and PriceSmart, Inc.
4. On termination of my employment by the company, or at any time it may so
request, I will promptly deliver to the company all copies of any
memoranda, notes, records, reports, manuals, catalogs, price lists or other
documents relating to or containing any confidential information which I
possess or may have under my control.
5. This Agreement shall be binding upon and inure to the benefit of the
parties hereto, their successors and assigns, and to the benefit of Newco
and PriceSmart, Inc., each of whom may enforce it as a "third party
beneficiary."
6. Damages are an inadequate remedy for a breach of this Agreement. I,
therefore, agree that should a breach or threatened breach of this
Agreement occur, the company and/or Newco and/or PriceSmart, Inc. may
without prejudice to any other remedies which they may have, immediately
obtain and enforce injunctive relief prohibiting me from violating this
Agreement.
C-1
<PAGE>
7. This is the only agreement between these parties on this subject matter.
8. This Agreement can be modified or rescinded only by a writing signed by
both parties, as well as by Newco and PriceSmart, Inc.
I have read the foregoing, agree thereto, and hereby acknowledge receipt
of a copy of this Agreement.
_____________________________
Signature of Employee
WITNESS:
________________________________
By _____________________________
Title _________________________ Date __________________
C-2
<PAGE>
EXHIBIT D
KEY EMPLOYEE'S CONFIDENTIALITY AND NON-COMPETITION AGREEMENT
("AGREEMENT")
In consideration of my employment or continued employment by
________________ ________________ (hereinafter "the company") and in
consideration of the salary, wages or other compensation to be paid for my
services during such employment, I hereby agree as follows:
1. As used in this Agreement the term "confidential information" means
information relating to the business, operations, properties, assets,
products, condition (financial or otherwise), liabilities, employee
relations, customers, suppliers, prospects, technology, or trade secrets of
PriceSmart, Inc. or its affiliates; except to the extent such information
(i) is in the public domain through no act or omission by me; (ii) is
required to be disclosed by law, or (iii) is independently learned by me
outside of my employment by the company.
2. During the term of my employment by the company, I will not, except as my
duties to the company may require, disclose any confidential information to
others.
3. After the term of my employment by the company, I will not disclose any
confidential information to others unless such disclosure first has been
authorized in writing by the company and by PriceSmart, Inc.
4. On termination of my employment by the company, or at any time it may so
request, I will promptly deliver to the company all copies of any
memoranda, notes, records, reports, manuals, catalogs, price lists or other
documents relating to or containing any confidential information which I
possess or may have under my control.
5. I am familiar with the Merchandise Business System licensed by PriceSmart
to Newco under the agreement between them dated [__________], 1998. I
agree that during the term of my employment by the company and for three
years thereafter, I shall not engage in, be employed by, consult for or
invest in a business which is similar to or competitive with the
Merchandise Business System, including among other things, discount stores,
warehouse stores, and hypermarkets.
6. This Agreement shall be binding upon and inure to the benefit of the
parties hereto, their successors and assigns, and to the benefit of
PriceSmart, Inc. who may enforce it as a "third party beneficiary."
7. Damages are an inadequate remedy for a breach of this Agreement. I,
therefore, agree that should a breach or threatened breach of this
Agreement occur, the company
D-1
<PAGE>
and/or PriceSmart, Inc. may without prejudice to any other remedies
which they may have, immediately obtain and enforce injunctive relief
prohibiting me from violating this Agreement.
8. This is the only agreement between these parties on this subject matter.
9. This Agreement can be modified or rescinded only by a writing signed by
both parties and by PriceSmart, Inc.
I have read the foregoing, agree thereto, and hereby acknowledge receipt
of a copy of this Agreement.
_____________________________
Signature of Employee
WITNESS:
______________________________
By ___________________________
Title _______________________ Date __________________
D-2
<PAGE>
ATTACHMENT A
TO
MEMBERS' AGREEMENT
FOR
PSMT CARIBE, INC.
<PAGE>
LICENSING, TECHNOLOGY TRANSFER,
TRAINING AND SOURCING AGREEMENT
among
PRICESMART, INC., VENTURES SERVICES, INC.
and
PSMT Caribe, Inc.
<PAGE>
LICENSING, TECHNOLOGY TRANSFER, TRAINING
AND SOURCING AGREEMENT
TABLE OF CONTENTS
Page
----
RECITALS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
AGREEMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2. LICENSE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
3. COMPUTER SOFTWARE SYSTEMS . . . . . . . . . . . . . . . . . . . . . . 3
4. TECHNICAL SUPPORT SERVICE . . . . . . . . . . . . . . . . . . . . . . 5
5. CONSIDERATION FOR LICENSE AND RIGHTS AND REIMBURSEMENT OF EXPENSES. . 5
6. ADDITIONAL DUTIES OF LICENSEE . . . . . . . . . . . . . . . . . . . . 6
7. MERCHANDISING . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
8. PROTECTION OF INTELLECTUAL PROPERTY RIGHTS. . . . . . . . . . . . . . 10
9. INDEMNITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
10. CONFIDENTIAL INFORMATION AND NON-COMPETITION. . . . . . . . . . . . . 11
11. TERM. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
12. TERMINATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
13. ARBITRATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
14. REPRESENTATIONS AND WARRANTIES OF LICENSEE. . . . . . . . . . . . . . 14
15. GENERAL PROVISIONS. . . . . . . . . . . . . . . . . . . . . . . . . . 14
i
<PAGE>
LICENSING, TECHNOLOGY TRANSFER, TRAINING
AND SOURCING AGREEMENT
This Licensing, Technology Transfer, Training and Sourcing Agreement
(this "Agreement") is entered into by and among PriceSmart, Inc., a corporation
organized and existing under the laws of the State of Delaware, U.S.A.
("PriceSmart"), Ventures Services, Inc., a corporation organized and existing
under the laws of the State of Delaware, U.S.A., and a wholly-owned subsidiary
of PriceSmart ("VSI"), and PSMT Caribe, Inc., an International Business
(Exempt) Company organized and existing under the laws of the British Virgin
Islands ("Licensee"), effective as of _____________ ("Effective Date").
RECITALS
WHEREAS, PriceSmart owns the rights to certain intellectual property
for the design, establishment and operation of a business engaged in the sale of
general merchandise, food and related products and services (the "Merchandise
Business System");
WHEREAS, PriceSmart and PSC, S.A, a company organized and existing
under the laws of Panama, have entered into a Shareholders' Agreement (the
"Shareholders' Agreement") establishing Licensee as their joint venture vehicle
to implement the Merchandise Business System in Costa Rica, the Dominican
Republic, El Salvador, Honduras and Nicaragua (collectively, the "Territory");
WHEREAS, in order to accomplish such implementation, Licensee desires
that PriceSmart and VSI provide to Licensee a license to establish the
Merchandise Business System in the Territory and the right to receive certain
merchandising and technical support from PriceSmart and VSI, and PriceSmart and
VSI are willing to provide such rights to Licensee, subject to the terms and
conditions set forth below.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual promises set forth in
this Agreement, the parties to this Agreement agree as follows:
1. DEFINITIONS.
As used in this Agreement, the following terms shall have the following
meanings:
1.1 "AFFILIATE" of any Person shall mean any entity or person
which is owned directly or indirectly fifty percent (50%) or more by the Person,
which holds an interest, directly or indirectly of fifty percent (50%) or more
in the Person, or which has a common owner with the Person which owner has
directly or indirectly, fifty percent (50%) or more of both the Person and the
Affiliate.
2
<PAGE>
1.2 "BUSINESS PLAN" shall mean a three (3) PriceSmart Year
operating plan, prepared by Licensee with assistance from PriceSmart or its
Affiliates, for the establishment and operation of the Merchandise Business
System in the Territory, including projections of financing, capital investment,
revenues, cash flows and expenses.
1.3 "COMPUTER SOFTWARE SYSTEMS" means certain computer software
systems for merchandising, membership, point of sale, and accounting
applications, capable of performing management information systems functions for
the operation of the Merchandise Business System.
1.4 "GOVERNMENTAL APPROVAL" means any permission, authorization,
order or expiration of waiting period following filing or notification, of any
instrumentality of the government(s) of the Territory that is required in order
for the parties to this Agreement to carry out all provisions of this Agreement.
1.5 "PERSON" shall mean any individual, organization
(unincorporated or incorporated), association, trust, entity or partnership.
1.6 "PRICESMART INTELLECTUAL PROPERTY" means all intangible
proprietary rights owned by or controlled by PriceSmart relating to the
ownership and operation of the Merchandise Business System or affinity programs,
with respect to the Territory, including, PriceSmart Trademarks, copyrights,
trade dress, trademarks or service marks, private labels and brand names,
whether registered or unregistered, trade secrets and technical expertise.
1.7 "PRICESMART QUARTER" means, during a PriceSmart Year, the
following periods: September 1 through November 30 (the "First Quarter");
December 1 through February 28 (or February 29 if a leap year) (the "Second
Quarter"); March 1 through May 31 (the "Third Quarter"); and June 1 through
August 31 (the "Fourth Quarter").
1.8 "PRICESMART TRADEMARKS" means the trademarks and service
marks, whether registered or unregistered, or the subject of pending
applications, listed on Exhibit A, and all counterparts thereof in the language
of the Territory.
1.9 "PRICESMART YEAR" means the period which begins on September
1 of each calendar year and ends on August 31 of the following calendar year.
1.10 "TERRITORY OUTLET" means a store established and operated in
the Territory by Licensee using the Merchandise Business System.
1.11 "YEAR" means each twelve-month period from the Effective
Date and from each anniversary thereof.
3
<PAGE>
2. LICENSE.
2.1 EXCLUSIVE LICENSE; CONDITIONS. Subject to the terms and
conditions of this Agreement, and to the terms of existing agreements to which
PriceSmart and its Affiliates may be parties, PriceSmart hereby grants to
Licensee an exclusive license to use in the Territory and for the Merchandise
Business System only, such of the PriceSmart Intellectual Property as is
required, in the reasonable judgment of PriceSmart, to develop and operate the
Territory Outlets for so long as this Agreement shall remain in effect;
PROVIDED, the use of PriceSmart Trademarks is only in the manner and format as
provided in the PriceSmart Identity Guidelines (the "Guidelines") constituting
Exhibit B, or in such other manner and format as PriceSmart may advise Licensee
in writing. PriceSmart reserves the right to change at any time and from time
to time the PriceSmart Trademarks licensed hereunder, as required by law or in
response to a bona fide claim against the PriceSmart Trademarks, and in such
event will reimburse Licensee for its costs incurred in effecting such change.
2.2 RESTRICTIONS. All rights of PriceSmart not granted by
PriceSmart hereunder are reserved to PriceSmart. Any use by Licensee of
PriceSmart Intellectual Property beyond the rights herein granted shall be a
material breach of this Agreement by Licensee. This license shall remain in
effect for the term of this Agreement only. Licensee shall not sub-license any
PriceSmart Intellectual Property or any other rights granted in this Agreement,
provided, however, that with the prior written consent of PriceSmart (not to be
unreasonably withheld), Licensee may sub-license the rights and obligations
arising under this Agreement to wholly-owned or virtually wholly-owned
subsidiaries of Licensee.
2.3 BUSINESS EXPANSION. PriceSmart will from time to time
review expansion of the Merchandise Business System, to include new products and
services (including but not limited to banking and the sale of pharmaceuticals)
and the exclusive license granted herein shall be applicable to new products and
services so included.
3. COMPUTER SOFTWARE SYSTEMS.
3.1 ACCESS. Subject to the terms of PriceSmart's agreement with
J.D. Edwards & Company, PriceSmart shall provide to Licensee, for use solely in
connection with the operation of Territory Outlets during the term of this
Agreement, access to the Computer Software Systems for the purposes of data
entry and report generation. The access provided to Licensee under this Section
3.1 shall not be deemed to be a sub-license of the Computer Software Systems.
Licensee shall not have access to the source code and object code for the
Computer Software Systems.
In addition to access to the Computer Software Systems,
PriceSmart shall provide the following supplemental services related to the San
Diego-based Computer Software Systems:
- Processing with systems support and software maintenance;
- Disaster recovery services;
- Offsite data storage for back-up data;
4
<PAGE>
- Hard disk data storage capacity;
- English language help desk 8 hours daily on working days;
and
- Ten concurrent users on J.D. Edwards & Company system.
Licensee shall reimburse the expenses incurred by PriceSmart
in providing such services as follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------------
Number of Territory Outlets Annual Reimbursement Sum (US$)
----------------------------------------------------------------------
<S> <C>
1 Territory Outlet $ 30,000
2-5 Territory Outlets Add $ 15,000 per Territory Outlet
----------------------------------------------------------------------
</TABLE>
Payment of the reimbursement sum for each Territory Outlet shall be due and
payable on the opening date of such Territory Outlet. At each subsequent annual
anniversary of such date, the reimbursement sum for each such Territory Outlet
shall be due and payable on such anniversary date based on the number of
Territory Outlets operating on such anniversary date. PriceSmart may increase
the amount of the reimbursement sums payable on any anniversary date by an
amount not exceeding 5% of the sums payable on the previous anniversary date.
3.2 MODIFICATIONS. As between PriceSmart and Licensee, the
Computer Software Systems and all modifications, enhancements and derivative
works made to or based on the Computer Software Systems or applicable computer
hardware by either party shall at all times remain the property of PriceSmart.
All modifications, enhancements or derivative works made to or based on the
Computer Software Systems as may be desired by Licensee shall be made by
PriceSmart in its sole discretion.
3.3 INITIAL INSTALLATION AND TRAINING. PriceSmart shall assist
in the initial installation of equipment to access the Computer Software
Systems. Licensee shall pay all costs relating to such installation.
Additionally, as part of the initial training described in Section 4.1 below,
VSI will train Licensee's users of the Computer Software Systems.
3.4 REIMBURSEMENT. Licensee shall reimburse PriceSmart for any
amounts which it is required to pay to the licensor of the Computer Software
Systems in order to allow Licensee to access such Computer Software Systems.
Licensee shall pay for any and all changes, modifications and enhancements made
to the Computer Software Systems after the initial installation of such systems,
whether by PriceSmart or its agents, to customize them for Licensee's use.
3.5 DATA LINK. Licensee shall be solely responsible for
providing and maintaining the data communications link to provide remote access,
as approved by PriceSmart,
5
<PAGE>
between the computer system in San Diego, California which operates the Computer
Software Systems and the Licensee computer terminal equipment in the Territory.
Licensee shall bear the costs associated with obtaining, installing and
maintaining such data communications link and computer terminal equipment in the
Territory.
3.6 CONFIDENTIALITY AND OTHER TERMS. Subject to the consent of
J.D. Edwards & Company, on the Effective Date Licensee shall execute a
confidentiality/non-disclosure agreement with J.D. Edwards & Company concerning
the Computer Software Systems in the form attached hereto as Exhibit C, if
required by J.D. Edwards & Company. Licensee agrees that it shall be bound by
the terms and conditions of the Software License Agreement attached hereto as
Exhibit D (as may be revised or amended from time to time) with respect to the
Computer Software Systems; PROVIDED, that Licensee shall not be deemed to
receive any rights or benefits under such agreement by agreeing to be bound by
its terms. All of Licensee's rights to access the Computer Software Systems
shall arise pursuant to this Agreement.
3.7 LIMITATION OF DAMAGES. PriceSmart shall in no event be
liable to Licensee for any loss of profits, incidental damages or consequential
damages arising from or relating to the Computer Software Systems.
4. TECHNICAL SUPPORT SERVICE.
4.1 VSI and/or its Affiliates shall supply to Licensee such
training and management support as is outlined on Exhibit E. Licensee shall
reimburse the costs and expenses of such training and management support, as is
set forth in Exhibit E.
5. CONSIDERATION FOR LICENSE AND RIGHTS AND
REIMBURSEMENT OF EXPENSES.
5.1 REIMBURSEMENT OF EXPENSES. Any expenses reasonably required
in connection with the implementation and support of the Merchandise Business
System (other than expenses referenced in Section 3 and 4 of this Agreement)
shall be subject to the mutual consent of PriceSmart and Licensee, which consent
shall not be unreasonably withheld. To the extent PriceSmart advances such
expenses, Licensee shall promptly reimburse PriceSmart for such advances. In
addition, PriceSmart (or VSI, as the case may be) shall invoice Licensee each
month for any reimbursement of expenses owed under Section 3 or Section 4, and
Licensee shall remit payment to PriceSmart (or VSI, as the case may be) within
fourteen (14) days of receipt of each such invoice.
5.2 GROSS SALES ROYALTY. For the exclusive right to use the
PriceSmart Intellectual Property in the Territory pursuant to the license
granted in Section 2.1 above, Licensee shall pay to PriceSmart one-half of one
percent (0.5%) of the Gross Sales of all Territory Outlets and all other
applications of the Merchandise Business System (the "Gross Sales Royalty").
"Gross Sales" shall mean all receipts from sales of products, services, affinity
programs and memberships, rental of products, and all revenue otherwise received
by Licensee in
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connection with the Merchandise Business System (including gross receipts on
consigned goods and services).
5.3 DAILY SALES INFORMATION. At the end of every business day
(I.E., every day on which any Territory Outlet is open), Licensee will transmit
information for each warehouse gathered by the Point of Sale System to the MIS
Department of PriceSmart. Information to be transmitted daily will include:
sales by department and in total, transaction counts and item counts.
5.4 PAYMENT OF ROYALTIES. Based on the aggregate of the daily
sales information transmitted to PriceSmart for each PriceSmart Quarter,
Licensee shall pay the Gross Sales Royalty for such PriceSmart Quarter in United
States Dollars, with local currency being converted to United States Dollars in
accordance with Section 5.6. Payment by Licensee shall be made in full no later
than the fifteenth (15th) day of the PriceSmart Quarter subsequent to the
particular PriceSmart Quarter for which the Gross Sales Royalty is being
remitted.
5.5 METHOD OF PAYMENT. All payments made by Licensee to
PriceSmart under this Agreement shall be made by wire transfer, as PriceSmart
shall direct in United States Dollars. Any amounts not paid when due shall bear
interest at a rate that is four percent (4%) per annum above the prime lending
rate of Bank of America, N.A., compounded daily until paid in full.
5.6 CURRENCY EXCHANGE. For purposes of payment of the Gross
Sales Royalty pursuant to Section 5.4, the sales amounts for each business day
shall be converted between the local currency and the United States Dollar at
the prevailing sell rate on such day, as quoted by Bloomberg L.P. at 9:00 a.m.
New York City time on such day. For all other purposes under this Agreement,
conversion between the local currency and the United States Dollar shall be at
the prevailing sell rate on the day payment is due (or, if earlier, on the day
payment is made), as quoted by Bloomberg L.P. at 9:00 a.m. New York City time on
such day: provided, however, that if the payment due is reimbursement for
expenses paid by PriceSmart, VSI or their Affiliates, then such reimbursement
shall be at the prevailing sell rate on the date such expenses were incurred.
6. ADDITIONAL DUTIES OF LICENSEE.
6.1 COMPLIANCE WITH BUSINESS PLAN. Within thirty (30) days
following the Effective Date, with the assistance of PriceSmart or its
Affiliates, Licensee shall complete the Business Plan and provide it to
PriceSmart. In addition, during the final month of each PriceSmart Year,
Licensee shall provide to PriceSmart (i) the Business Plan, updated and revised
to cover the subsequent three (3) PriceSmart Years, and (ii) the budget of
Licensee for the subsequent one (1) PriceSmart Year, and Licensee shall use its
best efforts to comply with the Business Plan and such budget.
6.2 TERRITORY OUTLETS' NAME. Subject to Section 2.1, all
Territory Outlets shall be operated under the name "PriceSmart." The name and
its counterpart in the language of the
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Territory shall remain the exclusive property of PriceSmart, and shall be
considered part of the PriceSmart Intellectual Property.
6.3 OBSERVANCE OF PRICESMART SCHEDULE, POLICIES AND CORRECTIVE
ACTION. PriceSmart shall have the exclusive right to determine the schedule for
the establishment and opening dates of Territory Outlets and the location of
each Territory Outlet, it being understood that PriceSmart intends to establish
and open two stores in each of Costa Rica, the Dominican Republic, El Salvador
and Honduras, with the establishment and opening of a ninth store in Nicaragua
as an additional objective, subject to further review and analysis..
Additionally, in so establishing and operating Territory Outlets, and to protect
the goodwill of the PriceSmart Trademarks, Licensee shall comply with all
reasonable policies and standards established by PriceSmart for operation of a
Territory Outlet, including, but not limited to, the Guidelines, and those
Policies, Procedures, Construction Guidelines and Quality Standards described in
Exhibit F, as may be supplemented and amended from time to time by PriceSmart in
its reasonable discretion.
6.4 COMPLIANCE WITH LAWS; TAXES. In establishing and operating
Territory Outlets, Licensee shall observe and abide by all applicable laws,
ordinances, regulations, and licensing requirements of any governmental or
quasi-governmental entity. Licensee shall prepare and file, at its own expense,
all filings required by applicable tax and other laws in the Territory, and
shall pay all taxes required to be paid in connection with the establishment and
operation of Territory Outlets, their property and the income derived therefrom.
Licensee shall be responsible for the registration of this Agreement, if
required by law. Licensee agrees to comply with PriceSmart's policies on
ethical business conduct. Licensee shall not give anything of value to any
government official to obtain or retain business. Licensee understands the
provisions of the United States Foreign Corrupt Practices Act, and shall comply
with such law. Any failure to so comply shall be a material breach of this
Agreement.
6.5 INSURANCE. Licensee will obtain and maintain, at its
expense, a policy or policies of property, general liability and products
liability insurance, with endorsements naming as an additional insured
PriceSmart and its Affiliates. The policy or policies shall be in such amounts,
with such companies and containing such other provisions which shall be
satisfactory to PriceSmart. All such policies shall provide that the coverage
thereunder shall not be terminated without at least thirty (30) days' prior
written notice to PriceSmart and the other additional insureds. Licensee shall
provide copies of certificates of insurance to PriceSmart evidencing compliance
with this Section.
6.6 RECORDS. Licensee will maintain, in the English language,
complete financial and other records of all transactions involving the Territory
Outlets and this Agreement for at least five (5) years after each such record
has been created. All records shall be filed in such a way that PriceSmart
shall be able to access and use such records.
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6.7 INSPECTIONS. Licensee shall allow PriceSmart to inspect the
Territory Outlets from time to time to ensure the quality of the services
offered in connection with the PriceSmart Trademarks. At least once each
PriceSmart Year at the reasonable request of PriceSmart, Licensee shall submit
to PriceSmart for its approval a representative array of Licensee's goods,
advertisements and promotional materials ("Materials") bearing the PriceSmart
Trademarks. PriceSmart shall have two (2) weeks after receipt of such Materials
to approve or reject such Materials. If PriceSmart does not approve or reject
such Materials within such two (2) week period, the Materials shall be deemed
approved. After approval of any Materials by PriceSmart, the quality of all
goods, advertisements or promotional materials bearing the PriceSmart Trademarks
shall not materially depart from such approved quality.
6.8 INJUNCTIVE RELIEF. Licensee acknowledges that damages would
be an inadequate remedy for any breach of the provisions of Section 6.3.
Therefore, the obligations of Licensee hereunder shall be specifically
enforceable and PriceSmart shall be entitled to an injunction, or other
equitable relief from any court of competent jurisdiction, restraining any party
from committing any violations of the provisions of Section 6.3, and should such
injunction or decree issue in favor of any party, such party shall also be
entitled to all costs, expenses, and fees (including, without limitation,
attorneys' fees) incurred in connection with such action. Such remedies shall
be cumulative and not exclusive, and shall be in addition to any other remedy
any party may have.
6.9 VISAS AND WORK PERMITS. Licensee shall be responsible to
assure availability of visas and work permits from the governments of the
Territory to enable personnel of PriceSmart and VSI to perform their respective
rights and obligations hereunder.
6.10 MEMBERSHIP CARDS; RECIPROCAL MEMBERSHIPS. In the event that
Licensee utilizes memberships for its customers at the Territory Outlets,
Licensee shall issue membership cards to its members, and shall design its
membership cards in the manner as described in the Guidelines. PriceSmart and
Licensee agree to permit reciprocal shopping privileges between members of the
Territory Outlets and members of any other outlets licensed or operated by
PriceSmart.
7. MERCHANDISING.
7.1 PRODUCT SOURCING. PriceSmart shall be Licensee's exclusive
supplier of merchandise purchased from suppliers located in the United States or
from suppliers elsewhere with which PriceSmart deals and which are on a written
list of suppliers provided by PriceSmart to Licensee on an annual basis.
Licensee agrees to resell merchandise purchased hereunder in the Territory only.
7.2 OTHER SUPPLIERS. The foregoing notwithstanding, Licensee
may purchase merchandise directly from U.S. suppliers or from the listed non
U.S. suppliers on the following conditions:
7.2.1 Licensee must provide to PriceSmart a written
notice and a copy of an open bona fide written offer from such suppliers to sell
such merchandise on a landed basis,
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specifying the identity of the proposed supplier, the exact product description,
quality and manufacturing specifications and the exact proposed price and terms
of sale and payment; and
7.2.2 PriceSmart shall have the right to match such
offer to Licensee with merchandise meeting or beating such product description,
quality, price and terms from the same or another source of supply, by written
notice given to Licensee within forty eight (48) hours of receipt by PriceSmart
of Licensee's notice and such offer to sell. If PriceSmart fails to give such
written notice that it will match the offer, Licensee may purchase directly,
with no payment to PriceSmart on such sale.
7.3 PRECLUDED SUPPLIERS. Licensee agrees not to deal with any
supplier which does business with PriceSmart without PriceSmart's prior written
consent. Licensee shall not purchase merchandise or services from an entity
owned in any part, directly or indirectly, by any of Walmart Stores, Inc., SHV
Holdings, N.V. (Makro), Dayton Hudson Corporation, Kmart Corporation, The Home
Depot, Inc., Office Depot, Inc., Costco Companies, Inc., Carrefour, S.A., BJ's
Wholesale Club, Inc. and each of their receptive affiliates, without
PriceSmart's prior written consent.
7.4 RELATED SERVICES. In connection with sales of merchandise
to Licensee, PriceSmart will also: provide a menu of products to be approved by
Licensee for import into the Territory and will establish pricing and terms with
the vendors of such products; provide replenishment services to manage planned
inventory levels; assist in developing plans, controlling inventories, and
presenting new products and/or programs; negotiate ocean shipments on behalf of
Licensee, as requested by Licensee; assist in preparation and sourcing of
documents required to import to the Territory products sold by PriceSmart;
assist in the selection of an import broker and in establishing an in-Territory
distribution, storage and handling system for imported goods, as requested by
Licensee; utilize its systems to assist Licensee in assuring net landed costs
are accurate and include all costs; and recommend selling prices and initial
mark-ups on individual products designed to achieve overall margin goals
(however, Licensee shall set its resale prices in its own discretion).
7.5 ADDITIONAL SERVICES. In the event Licensee requests
PriceSmart to assist Licensee in the sourcing or shipment of merchandise not
sold by PriceSmart (pursuant to Section 7.2) Licensee shall pay to PriceSmart a
reasonable fee for such service, the amount of such fee to be agreed upon at the
time of such request.
7.6 PRICES; TERMS OF SALE. All prices for merchandise shall be
set by PriceSmart to constitute reimbursement of all of PriceSmart's direct
costs to deliver the merchandise to Buyer at the agreed location of an FCA
basis, as described herein, plus a services payment equal to two percent (2%) of
such costs. Each billing for goods sold to Licensee by PriceSmart shall include
the services payment charge. All sales will be on FCA terms, as defined in
Incoterms, 1990 edition.
7.7 ORDERING OF MERCHANDISE AND PAYMENT. Licensee shall order
and pay for merchandise purchased from PriceSmart in accordance with procedures
set forth in Exhibit G.
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8. PROTECTION OF INTELLECTUAL PROPERTY RIGHTS.
8.1 FILINGS. PriceSmart shall have the exclusive right to file
and maintain any and all trademark and other registrations required to protect
PriceSmart Intellectual Property and the Computer Software Systems in the
Territory. Licensee shall cooperate with PriceSmart in such filings.
8.2 OWNERSHIP. Licensee acknowledges that, as between it and
PriceSmart, the Computer Software Systems, all PriceSmart Trademarks and all
other PriceSmart Intellectual Property are owned by PriceSmart. Any use by
Licensee of PriceSmart Intellectual Property shall inure to the exclusive
benefit of PriceSmart.
8.3 DERIVATIVE WORKS. Licensee shall not, and will not permit
any other person under its control to, copy, make derivations of or adapt any
portion of the Computer Software Systems or any PriceSmart Intellectual
Property, except with the prior written consent of PriceSmart.
8.4 USE. Licensee shall not use, and will not permit any other
person to use, any PriceSmart Trademarks or PriceSmart's trade names, or any
service marks, trade names or trademarks confusingly similar thereto, except
with the express prior written consent of PriceSmart, and then solely in
connection with Licensee's establishment and operation of Territory Outlets and
the advertising and promotion of such Territory Outlets.
8.5 NOTICE. Licensee shall use any PriceSmart Trademarks in
compliance with PriceSmart's instructions, and with the "TM" or "-Registered
Trademark-" designation or such other notice or identification as is specified
by PriceSmart.
8.6 THIRD PARTY INFRINGEMENT.
8.6.1 In the event that any person or entity is
infringing or is making any use of any portion of the Computer Software Systems
or any PriceSmart Intellectual Property, PriceSmart shall promptly decide
whether or not to institute any legal action against any alleged infringer of
PriceSmart's Intellectual Property or the Computer Software Systems in the
Territory (an "Infringer").
8.6.2 Licensee shall cooperate fully with PriceSmart in
any legal action taken by PriceSmart and, if requested by PriceSmart, and at
PriceSmart's expense, be a co-plaintiff, assign its right to PriceSmart, or take
such steps to allow PriceSmart to enforce the legal rights of both parties;
PriceSmart shall reimburse Licensee for any losses incurred by Licensee as a
result of Licensee being a co-plaintiff at PriceSmart's request, except to the
extent such losses arise out of or relate to the conduct of the Territory
Outlets or any other activity of Licensee. Licensee shall not take action on
behalf of PriceSmart Intellectual Property against an Infringer without
PriceSmart's prior written consent.
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9. INDEMNITIES.
9.1 LICENSEE INDEMNITY AND HOLD HARMLESS. Licensee hereby
indemnifies PriceSmart, its Affiliates, officers, directors, shareholders,
employees and representatives (each, a "PriceSmart Indemnified Party") against,
and releases and holds each PriceSmart Indemnified Party harmless from, any and
all claims, costs, losses, damages, liabilities and expenses incurred by such
party, including, without limitation, settlement costs and reasonable attorneys'
fees and disbursements, arising out of or relating to the conduct of Territory
Outlets or any other activity of Licensee.
9.2 PRICESMART INDEMNITY AND HOLD HARMLESS. PriceSmart hereby
indemnifies Licensee, its Affiliates, officers, directors, shareholders,
employees and representatives (each, a "Licensee Indemnified Party") against,
and releases and holds each Licensee Indemnified Party harmless from, any and
all claims, costs, losses, damages, liabilities and expenses incurred by such
party, including, without limitation, settlement costs and reasonable attorneys'
fees and disbursements, arising out of activities of PriceSmart unrelated to the
Territory Outlets.
9.3 SURVIVAL. The indemnity obligations in this Section 9 shall
survive expiration or termination of this Agreement for any reason.
10. CONFIDENTIAL INFORMATION AND NON-COMPETITION.
10.1 CONFIDENTIALITY. During the term of the Agreement and for
three (3) years thereafter, Licensee and its Affiliates shall maintain in strict
confidence all information Licensee or its Affiliates have obtained or shall
obtain from PriceSmart or its Affiliates, pursuant to this Agreement or
otherwise, relating to the business, operations, properties, assets, products,
condition (financial or otherwise), liabilities, employee relations, customers,
suppliers, prospects, technology, or trade secrets of PriceSmart or its
respective Affiliates; except to the extent such information (i) is in the
public domain through no act or omission of the disclosing party; (ii) is
required to be disclosed by law, or (iii) is independently learned by the
disclosing party outside of this relationship ("Confidential Information").
Neither Licensee nor its Affiliates shall issue any press release or make any
public announcement concerning the transactions contemplated hereby without the
prior written consent of PriceSmart. Licensee agrees to (i) cause the
employees, agents or representatives of Licensee who may have access to
Confidential Information relating to PriceSmart to enter into an appropriate
written confidentiality and proprietary rights agreement, in a form reasonably
acceptable to PriceSmart prior to disclosing any such Confidential Information
to such employees, agents or representatives, and (ii) immediately deny access
to such Confidential Information to any individual who breaches such agreement.
PriceSmart shall be a third party beneficiary of each such agreement. Licensee
shall use its best efforts to protect the Confidential Information, and shall
not use the Confidential Information for its own benefit or the benefit of any
other person or entity, except as may be specifically permitted in this
Agreement.
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10.2 NON-COMPETITION.
10.2.1 In order to preserve for the benefit of PriceSmart
the value of Confidential Information relating to PriceSmart, Licensee agrees
that neither it, its Affiliates nor the Key Employees shall engage in, be
employed by, consult for or invest in a business which is similar to or competes
with the Merchandise Business System, including, among other things, discount
stores, warehouse stores, and hypermarkets, during the term of this Agreement
and for three (3) years thereafter; provided, however, that: (i) Key Employees
and the Affiliates of Licensee may continue to engage in, be employed by,
consult for and invest in any business where such engagement, employment,
consultation or investing relationship exists as of the date of this Agreement.
"Key Employees" as used herein means employees who hold the following positions:
Operations/Store Manager, Administrative/Accounting Supervisor, Merchandise
Buyer, Information Systems Supervisor, Front End Manager, Receiving Manager,
Membership/Marketing Manager and Merchandise Manager.
10.2.2 It shall be the obligation of Licensee, no later
than ninety (90) days following the Effective Date, to procure from all Key
Employees and Affiliates their written agreement to abide by the covenant set
forth in Section 10.2.1 in a form reasonably acceptable to PriceSmart, and
PriceSmart shall be a third party beneficiary of each such agreement.
11. TERM.
11.1 Unless terminated earlier pursuant to Section 12, this
Agreement shall have a term consisting of twenty (20) years commencing on the
Effective Date.
12. TERMINATION.
12.1 TERMINATION BY EITHER PARTY. This Agreement may be
terminated upon written notice, immediately, by either party if any of the
following occur:
12.1.1 The other party becomes unable to pay its
debts as they mature in the ordinary course of business or makes an assignment
for the benefit of creditors;
12.1.2 The other party materially breaches or fails
to perform any obligation or covenant in this Agreement and fails to cure such
breach or failure within ten (10) days following notice thereof by the party;
provided, that if such breach or failure cannot be cured within such ten (10)
day period, then the other party shall not be deemed to be in breach hereunder
if it has commenced a cure within such ten (10) day period and the other party
diligently completes such cure as soon as possible, and within a sixty (60) day
period; or
12.1.3 The other party materially breaches or fails
to perform any obligation or covenant in this Agreement for the third time
during any twelve (12) month period.
12.2 TERMINATION BY PRICESMART. This Agreement may be terminated
upon written notice, effective immediately, by PriceSmart if either of the
following shall occur:
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12.2.1 The Shareholders' Agreement is terminated by
PriceSmart; or
12.2.2 Licensee fails for any reason in any
PriceSmart Year to have average Gross Sales per Territory Outlet, for those
Territory Outlets which are at least 4,000 square meters in size and which
have been open for at least twelve (12) consecutive months, of at least
US$20,000,000; provided, however, that a Territory Outlet may be excluded
from the determination of average Gross Sales per Territory Outlet where such
Territory Outlet has been materially affected by fire, flood, earthquake,
war, epidemic, freight embargoes, or unusually severe weather.
12.3 EFFECT OF TERMINATION. Subject to the other provisions of
this Section 12, upon termination or expiration of this Agreement for any
reason:
12.3.1 The licenses referred to in Section 2.1, the
rights of access referred to in Section 3.1 and the services referred to in
Sections 4 and 7 shall terminate forthwith and automatically;
12.3.2 Each party shall return to the other all
proprietary and confidential information obtained from such other party in
connection with this Agreement and shall forthwith pay to the other all amounts
due hereunder;
12.3.3 Licensee shall cease forthwith to use any
Computer Software Systems, PriceSmart Trademarks, and other PriceSmart
Intellectual Property and shall return all materials, written or otherwise,
delivered by PriceSmart to Licensee in connection with this Agreement; and
12.3.4 All obligations of the parties hereunder
shall terminate prospectively forthwith (other than those set forth in
Sections 5, 6.6, 6.7, 6.8, 8, 9, 10, 13 and 15, which shall survive indefinitely
or as specified therein).
12.4 LEGAL REMEDIES. The termination or expiration of this
Agreement shall not affect the legal rights or remedies of either party arising
from any material breach of this Agreement prior to such termination.
13. ARBITRATION.
13.1 Except for injunctive relief under Sections 6.8, 9 and
10, all disputes and claims concerning the validity, interpretation,
performance, termination and/or breach of this Agreement ("Dispute(s)") shall be
referred for final resolution to arbitration in Miami, Florida, U.S.A. under
UNCITRAL Rules as administered by the American Arbitration Association (the
"Rules"). All proceedings shall be conducted in the English language. The
parties hereby agree that arbitration hereunder shall be the parties' exclusive
remedy and that the arbitration decision and award, if any, shall be final,
binding upon, and enforceable against, the parties, and may be
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confirmed by the judgment of a court of competent jurisdiction. In the event of
any conflict between the Rules and this paragraph, the provisions of this
paragraph shall govern.
13.2 Notwithstanding the above, a party may bring court
proceedings against any other party (i) to obtain preliminary injunctive relief
pending completion of arbitration, or (ii) as part of litigation commenced by a
third party. The parties hereby submit to personal jurisdiction in the State of
Florida. The prevailing party in any arbitration or court proceeding shall be
awarded its reasonable attorneys' fees against the non-prevailing party or
parties.
14. REPRESENTATIONS AND WARRANTIES.
14.1 Licensee represents and warrants to PriceSmart as follows:
Licensee is a corporation duly organized, validly existing and in good standing
under the laws of the British Virgin Islands is qualified to operate a retail
sales business in the Territory and is qualified to lease and own real estate in
the Territory under the laws of the Territory. Licensee has full corporate
power and authority to execute and deliver this Agreement, consummate the
transactions contemplated hereby and perform its obligations hereunder.
15. GENERAL PROVISIONS.
15.1 NO WITHHOLDINGS AND DEDUCTIONS. Licensee shall make all
payments free and clear and without subtraction of any taxes, deductions,
withholdings, conversion fees, wire transfer fees or offset of any kind. All
such taxes and fees shall be Licensee's responsibility. Licensee may not
offset, deduct or withhold amounts owed it by PriceSmart. Any withholding taxes
imposed by any jurisdiction are the responsibility of Licensee and shall be paid
by Licensee. Time is of the essence on all payments due under this Agreement.
15.2 RELATIONSHIP OF THE PARTIES. Neither party hereto is an
agent or representative of the other party. Both parties acknowledge that the
relationship of Licensee to PriceSmart shall be and at all times remain one of
an independent contractor. Except as otherwise provided herein, neither party
shall have the right or authority to assume, create or enlarge any obligations
or commitment on behalf of the other party and shall not represent itself as
having the authority to bind the other party in any manner.
15.3 ASSIGNMENT. Neither party shall assign, delegate or
otherwise transfer any of its rights or obligations under this Agreement without
the prior written consent of the other party, PROVIDED, that PriceSmart may,
without Licensee's prior written consent, assign, delegate or otherwise transfer
any of its rights or obligations under this Agreement to (i) an Affiliate, (ii)
an entity into which or with which PriceSmart is merged or consolidated, or
(iii) an entity acquiring substantially all the assets of PriceSmart.
15.4 AMENDMENTS. Amendments to this Agreement may be made only
by mutual agreement of the parties in writing.
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15.5 EXPENSES. Each of the parties shall bear its own expenses
incurred in connection with the negotiation, execution and delivery of this
Agreement.
15.6 NO WAIVER. The failure of either party to insist upon the
strict observance and performance of the terms of this Agreement shall not be
deemed a waiver of other obligations hereunder, nor shall it be considered a
future or continuing waiver of the same terms.
15.7 NOTICE. All notices and other communications under the
Agreement shall be in writing, shall be delivered by facsimile transmission, air
courier service, in person or by registered or certified mail with return
receipt requested, and shall be deemed to have been duly given on the date of
any receipt or record maintained by the service or person making delivery.
Delivery shall be to the address set forth below or such other address or
facsimile number as may hereafter be furnished in writing by either party to the
other. The current address for each party is set forth below the signatures,
hereinbelow.
15.8 VALIDITY OF AGREEMENT. In the event any provision, or
portion thereof, of this Agreement is held by a court having proper jurisdiction
to be for any reason unenforceable or invalid, the remaining provisions, or
portions thereof, of this Agreement shall continue to exist and shall remain in
full force and effect.
15.9 APPLICABLE LAW. This Agreement shall be interpreted in
accordance with, and all questions concerning the validity, interpretation,
performance or breach of this Agreement shall be governed by, the laws of the
State of Florida, U.S.A.
15.10 LANGUAGE. The official version of this Agreement is in
the English language, and shall govern over any non-English translations.
15.11 INTEGRATION. This Agreement is the only agreement
between the parties with respect to the subject matter contained herein. This
Agreement supersedes all prior oral or written understandings, agreements and
offers between the parties related to such subject matter.
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IN WITNESS WHEREOF, the parties, having full power and authority to enter
into this Agreement, have executed this Agreement as of the following Effective
Date: [_________], 1998.
LICENSEE: PSMT Caribe, Inc.
By
--------------------------------
-----------------------------------
(Print Name and Title)
---------------------------
---------------------------
---------------------------
Fax Number:
PRICESMART: PRICESMART, INC.
By
--------------------------------
-----------------------------------
(Print Name and Title)
4649 Morena Blvd.
San Diego, CA 92117
Fax Number: (619) 581-4707
VSI:
(As to Sections 1, 4, 5.1, 5.5,
5.6, 6.8, 12, 13 and 15) VENTURES SERVICES, INC.
By
--------------------------------
-----------------------------------
(Print Name and Title)
4649 Morena Blvd.
San Diego, CA 92117
Fax Number: (619) 581-4707
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EXHIBIT 10.17
August 18, 1998
Mr. Jeff Skeen
President and CEO
Affinity Development Group Incorporated
5764 Pacific Center Blvd., Suite 108
San Diego, California 92121
Re: PURCHASE AGREEMENT
Dear Jeff:
This Purchase Agreement (this "AGREEMENT") sets forth the
respective rights and obligations of Affinity Development Group Incorporated
("ADG") and PriceSmart, Inc. ("PRICESMART") with respect to ADG's acquisition
of certain assets comprising PriceSmart's automobile advertising/referral
business (the "BUSINESS"), as follows:
1. ASSET PURCHASE. Subject to the terms and conditions of this
Agreement, PriceSmart hereby sells, conveys, transfers and agrees to deliver
to ADG, and ADG hereby acquires and agrees to accept delivery of, those
assets related to the Business set forth on EXHIBIT A attached hereto (the
"ASSETS"), free and clear of all liens and encumbrances. The Assets shall be
delivered to ADG on the earlier of (i) November 1, 1999 or (ii) five (5)
business days after the date when PriceSmart ceases to operate the Business
in Price Club or Costco Wholesale membership warehouse clubs, as described in
the Agreement Concerning Transfer of Certain Assets between and among
Price/Costco, Inc., Price Enterprises, Inc. and various other parties entered
into in November 1996 (the "COSTCO AGREEMENT"). The date when the Assets are
actually delivered to ADG is referred to herein as the "DELIVERY DATE."
2. CASH PAYMENTS. ADG will make the following cash payments in
immediately available funds to PriceSmart: (i) $1,275,400.00 (One Million
Two Hundred Seventy-Five Thousand Four Hundred U.S. Dollars), payable
concurrently with the execution of this Agreement, (ii) $150,000 (One Hundred
Fifty Thousand U.S. Dollars), payable concurrently with the execution of this
Agreement by the transfer hereby of all of ADG's right, title and interest in
the $150,000 cash deposit previously paid to PriceSmart pursuant to the
letter agreement dated July 22, 1998 by and between ADG and PriceSmart, and
(iii) an amount equal to the "net working capital" (defined as total accounts
receivable MINUS total accounts payable) of the Business at September 1,
1998, payable on September 30, 1998. PriceSmart shall refund to ADG an
amount equal to the Net Working Capital of the Business as of the Delivery
Date, provided that the refund shall not exceed the Net Working Capital
amount established on September 1, 1998. PriceSmart shall pay such refund to
ADG within twenty (20) business days of the Delivery Date. In the event that
at any time prior to October 31, 1999, PriceSmart ceases to operate the
Business in Price Club or Costco Wholesale membership warehouse clubs,
PriceSmart shall refund to ADG an amount equal to the product of $76,814
(Seventy-Six Thousand Eight Hundred Fourteen U.S. Dollars) times the number
of full calendar months remaining until October 31, 1999. PriceSmart shall
pay such refund to ADG within ten (10) business days after the occurrence of
such event.
3. PROFITS INTEREST. Within forty-five (45) days following the
last day of each calendar month during the period from September 1, 1998
until the Delivery Date (including for any partial calendar month ending on
the Delivery Date if the delivery date is any date other than November 1,
1999.) PriceSmart will pay to ADG in immediately available funds an amount
equal to the actual Net Profits (as defined below) earned by the Business (as
operated by PriceSmart) during such month
<PAGE>
Mr. Jeff Skeen
August 18, 1998
Page 2
accompanied by a statement setting forth in reasonable detail the computation
of the Net Profits for such month, including a break-out of the amounts
remitted to Price/Costco, Inc. For purposes of this Agreement, "NET PROFITS"
means gross sales MINUS operating expenses (including, without limitation,
all amounts payable to Price/Costco, Inc. during such period under the Costco
Agreement, all charges, if any, for uncollectable accounts, and allocations
to the Business of overhead expenses by PriceSmart in an amount not to exceed
the provisions for such overhead set forth in the Annual Budget). Operating
expenses shall not include any expenses incurred in defending or settling
third party claims, including pending or threatened litigation,
employee-related claims or claims of governmental authorities, including any
taxes assessed for any period prior to the date of this Agreement
(collectively, "CLAIMS"), in each instance if and to the extent such Claim
arises from or relates to conduct, events or circumstances occurring prior to
the date of this Agreement. PriceSmart may offset against the Net Profits
payments any amounts then-owed to PriceSmart by ADG.
4. OPERATING CONSIDERATIONS. PriceSmart shall operate the Business
from the date hereof until the Delivery Date only in the ordinary course of
business consistent with past custom and practice and in accordance in all
material respects with the annual budget (the "ANNUAL BUDGET") for the Business
attached hereto as EXHIBIT B, subject to any good-faith reductions in the
expenses set forth in the Annual Budget in response to any material diminution
in the revenues projected in the Annual Budget or PriceSmart's good-faith
determination to terminate the Price/Costco programs. Without limiting the
foregoing, PriceSmart shall (i) use commercially reasonable efforts to collect
on all accounts receivable consistent with past custom and practice, (ii) not
incur operating expenses that exceed in any material respect any of the line
items in the Annual Budget and not incur operating expenses that exceed the
Annual Budget, (iii) cause the budgeted full-time equivalents ("FTEs") to devote
substantially all of their time to the Business (unless the FTEs are budgeted
only on a part-time basis), and (iv) regularly consult with and consider the
advice of ADG concerning the marketing, dealer network, product offerings and
overall strategy for the Business. Notwithstanding the foregoing, the parties
acknowledge and agree that (i) PriceSmart is obligated to operate the Business
in accordance with the Costco Agreement and (ii) PriceSmart may incur such
expenses and take such actions as may be deemed necessary, in its sole
discretion, to comply with its obligations under the Costco Agreement, and such
expenses shall be taken into account in computing the Net Profits under Section
3 above. ADG shall not take any action which impairs or conflicts with, or
could reasonably be expected to impair or conflict with, PriceSmart's
performance of its obligations under the Costco Agreement. Not more than once
each calendar quarter, ADG and its representatives shall have the right, at
their sole expense, upon reasonable notice and during normal business hours, to
inspect and audit the books and records of PriceSmart relating to the Business.
PriceSmart agrees that it will not amend or modify the Costco Agreement in any
way which materially adversely affects the Business or the results of the
operations thereof, without the prior written consent of ADG, which will not be
unreasonably withheld or delayed. Subject to the refund obligations of
PriceSmart in Section 2, nothing in this Agreement shall be construed so as to
limit or prevent PriceSmart from terminating the Price/Costco programs of the
Business or the Costco Agreement in its sole discretion.
5. EMPLOYEE MATTERS. (a) ADG shall offer employment, as of the
Delivery Date, to each of the employees of the Business listed on EXHIBIT C
attached hereto (each an "EMPLOYEE" and collectively, the "EMPLOYEES") at the
same salary or hourly rates being paid by PriceSmart. ADG agrees
<PAGE>
Mr. Jeff Skeen
August 18, 1998
Page 3
to establish for the Employees a severance pay plan identical to the current
PriceSmart severance pay plan and to grant to each Employee at the
commencement of his or her employment with ADG credit for his or her years of
tenure as an employee of PriceSmart and its predecessors, as if he or she had
been so employed by ADG; PROVIDED, that ADG may modify the subsequent accrual
of severance from and after the date of employment by ADG consistent with
ADG's severance plans. The years of tenure and severance liability for each
Employee as of June 30, 1998 is set forth next to each Employee's name on
EXHIBIT C. ADG hereby assumes the current and future severance liability for
each Employee, and ADG agrees to indemnify, defend and hold harmless
PriceSmart for any claims, liabilities, damages, costs and expenses
(including reasonable attorneys' fees and costs) incurred or suffered by
PriceSmart in connection with any actual or threatened claims by any Employee
for unpaid severance pay. Subject to applicable law, PriceSmart shall
provide reasonable notice to ADG prior to terminating any Employee prior to
the Delivery Date.
(b) The parties agree that immediately following the execution of
this Agreement, Mr. Walt Green shall be provided office space at ADG's
facilities at no charge to PriceSmart. Promptly following the execution of
this Agreement, ADG, with assistance from Mr. Green, will furnish and
properly equip, at ADG's sole expense, office space for the sales Employees
of the Business, who will be housed at ADG's facilities at no charge to
PriceSmart upon completion of such offices. The remaining Employees of the
Business will move over to ADG's facilities at no charge to PriceSmart at a
date prior to the Delivery Date to be mutually agreed upon by ADG and
PriceSmart. Notwithstanding the foregoing, until the Delivery Date, the
Employees shall be under the supervision and control of PriceSmart, and
subject to the employment rules, policies and guidelines of PriceSmart,
regardless of where housed. ADG shall provide a working environment for the
Employees that complies with all applicable state and federal laws and
regulations, including without limitation, all Americans with Disabilities
Act (ADA) requirements, and shall provide an environment that is free from
sexual harassment and discrimination against any and all protected classes of
individuals.
6. EXPANSION OF THE BUSINESS AND SUPPORT OF ADG PROGRAMS. (a)
The parties acknowledge and agree that the operation of the Business in
accordance with the Costco Agreement shall be the first priority of the
Employees prior to the Delivery Date. Subject to the preceding sentence,
PriceSmart agrees to make the Employees available, upon the reasonable
request of ADG, to work with ADG and its employees to develop and implement
new programs and products relating to the Business and to assist in training
ADG's employees in the operation of the Business. Any costs, expenses or
liabilities (including the costs of any materials, supplies, overtime pay or
additional personnel) which are incurred as a result of the expansion and
support activities contemplated by this Section 6 (other than activities
related to the Price/Costco programs of the Business) and which are not
otherwise included in the Annual Budget or treated as operating expenses of
the Business under Section 3, shall be the sole responsibility of ADG, and
ADG agrees to promptly reimburse PriceSmart for any such costs, expenses or
liabilities.
(b) PriceSmart hereby grants to ADG an irrevocable, exclusive
(except as against PriceSmart for the sole purpose of operating the
Business), worldwide, royalty-free, right and license, to use the Assets,
including without limitation, the auto dealer database of the Business, in
connection with the development, promotion, advertising and establishment by
ADG of auto buying clubs or affinity
<PAGE>
Mr. Jeff Skeen
August 18, 1998
Page 4
clubs to be operated under any trademark or service mark other than the
trademarks, service marks and brand names of Price/Costco, Inc. and its
affiliates or PriceSmart, Inc. and its affiliates. Upon execution of this
Agreement, PriceSmart shall deliver to ADG an electronic version of all of
the databases of the Business (it being understood that such databases do not
include information regarding individual automobile buyers under the programs
of the Business) and shall provide to ADG access to any underlying
documentation requested by ADG to exercise its rights under this license.
ADG acknowledges and agrees that the license granted under this Section 6(b)
does not include a right to sublicense or otherwise sell or transfer the
information in the databases of the Business prior to the Delivery Date.
7. ACKNOWLEDGMENTS. (a) ADG hereby acknowledges and agrees that
(i) the Assets do not include all of the equipment, materials or personnel
necessary to conduct the Business as a stand-alone entity, (ii) neither
PriceSmart nor its successors have any rights, express or implied, to operate
the Business in Price Club or Costco Wholesale membership warehouse clubs, to
link to PriceCostco's Internet web site or to use any trademarks or service
marks of Price/Costco, Inc. or its affiliates, at any time after October 31,
1999, (iii) PriceSmart makes no representation or warranty, express or
implied, regarding its rights to operate the Business in Price Club or Costco
Wholesale membership warehouse clubs or to link to PriceCostco's Internet web
site prior to the Delivery Date, (iv) PriceSmart makes no representation or
warranty, express or implied, that the actual operating results of the
Business prior to the Delivery Date will meet or exceed the projected results
set forth in the Annual Budget or that any level of Net Profits will actually
be earned by the Business, and (v) ADG shall have no rights to own or use any
trademarks, service marks, trade names, domain names, brand names or trade
dress of PriceSmart or its affiliates or Price/Costco, Inc. or its
affiliates, including without limitation, PriceSmart, PriceCostco, Price Club
and Costco Wholesale.
(b) PriceSmart hereby represents and warrants that: (i)
PriceSmart has remitted all payments owed to Price/Costco, Inc. in connection
with the Business prior to the date of this Agreement, (ii) as of the date
hereof, Price/Costco, Inc. has not notified PriceSmart of any breach of the
Costco Agreement, and (iii) as of the date hereof, Price/Costco, Inc. does
not have any right, title or interest, including any lien or encumbrance, on
any of the Assets.
8. NO OTHER ASSETS OR LIABILITIES. Except for the Assets
specifically listed on EXHIBIT A, ADG is not acquiring any other assets,
tangible or intangible, of PriceSmart or its affiliates. Except as provided
in Sections 5 and 6 above, ADG is not assuming any liabilities or obligations
of PriceSmart or its affiliates, whether liquidated or unliquidated, known or
unknown, including without limitation, any contracts with dealers or other
vendors relating to the Price/Costco program. Notwithstanding the foregoing,
ADG shall be responsible for all costs, expenses, liabilities and obligations
arising from or relating to the operations of the Business from and after the
Delivery Date. Each of the parties shall pay all of their respective costs
and expenses incurred in negotiating and preparing this Agreement and closing
the transactions contemplated hereby. Each party shall pay any sale,
transfer, income, use and other tax as payable by it, whether or not due at
the Delivery Date, as a result of the transfer of the Assets.
9. PUBLIC STATEMENTS AND PRESS RELEASES. Neither ADG nor any of
its affiliates shall make, issue or release any public announcement, press
release, statement or acknowledgment of the
<PAGE>
Mr. Jeff Skeen
August 18, 1998
Page 5
existence of or the terms and conditions of this Agreement, without the prior
written consent of PriceSmart.
10. INDEPENDENT CONTRACTORS. In the performance of all of their
obligations pursuant to this Agreement, it is mutually understood and agreed
that each party, at all times, shall act and perform as an independent
contractor, and not as an agent, partner, joint venturer or otherwise. No
party shall have any authority to act for, enter into an agreement on behalf
of, or obligate in any other manner, any of the parties hereto, individually
or collectively.
11. MISCELLANEOUS. The provisions of this Agreement contain the
entire agreement between the parties and supersede all prior agreements,
written or oral, between the parties, including without limitation, the
deposit letter agreement between ADG and PriceSmart dated July 22, 1998. No
provision of this Agreement may be released, discharged, supplemented,
amended or waived in any manner except by an instrument in writing signed by
the parties. THE CONSTRUCTION AND PERFORMANCE OF THIS AGREEMENT WILL BE
GOVERNED BY THE LAWS OF THE STATE OF CALIFORNIA, WITHOUT REGARD TO CONFLICTS
OF LAW PRINCIPLES. No assignment of this Agreement or of any rights or
obligations of a party hereunder shall be valid without the prior written
consent of the other party. This Agreement shall be binding upon the parties
and their respective successors and permitted assigns. None of the
provisions of this Agreement shall be for the benefit of or enforceable by
any third party. The language in this Agreement shall in all cases be
construed as a whole and in accordance with its fair meaning. This Agreement
shall not be construed for or against either party as a result of the initial
preparation or drafting by a party of any provision hereof.
Please indicate your acceptance of the terms and provisions of this
Agreement by signing this Agreement in the space designated below.
Sincerely,
Gilbert A. Partida
President and CEO
PriceSmart, Inc.
<PAGE>
Mr. Jeff Skeen
August 18, 1998
Page 6
ACCEPTED AND AGREED: Dated August 18, 1998
AFFINITY DEVELOPMENT GROUP INCORPORATED
By: /s/ Jeff Skeen
-------------------
President & CEO
By: /s/ Gilbert A. Partida
----------------------
Title: President and Chief Executive Officer
<PAGE>
Exhibit 13.1
Annual Report Page 14
SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
Prior to fiscal year 1997, the Company operated as certain subsidiaries of
PEI. Accordingly, the financial data of the Company during each of the four
fiscal years ended August 31, 1997 included herein has been prepared on a
historical basis as though the Company had been a stand-alone business
operating 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 Company has independently owned and operated its businesses
throughout fiscal 1998.
The following table sets forth selected historical financial data of
the Company for the five fiscal years ended August 31, 1998. The selected
historical financial data as of August 31, 1998, 1997, 1996, and 1995, and
for each of the four years ended August 31, 1998, have been derived from the
audited financial statements of the Company. The selected historical
financial data as of August 31, 1994 has been derived from the unaudited
books and records of the Company, and in the opinion of management, includes
all adjusting entries (consisting of only normal and recurring adjustments)
necessary to present fairly the information set forth therein.
<TABLE>
<CAPTION>
Fiscal Years (1)
---------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Merchandise sales (2) $ 81,100 $ 59,042 $ 36,211 $ 66,573 53,015
International royalties and fees 2,720 3,139 2,164 553 --
Auto, travel and other program revenues 13,368 12,194 9,875 8,769 5,846
Cost of goods sold (2) 74,684 55,947 34,644 62,756 49,449
Selling, general and administrative (3) 26,854 26,607 31,069 33,337 15,095
Operating loss (4,350) (8,179) (17,463) (20,198) (5,683)
Real estate operations, net income (loss) (4) 1,532 (1,480) (8,359) (2,238) (16,354)
Interest and other income, net (5) 5,960 2,717 7,663 6,031 6,636
Income (loss) before provision (benefit)
for income taxes 3,142 (6,942) (18,159) (16,405) (15,401)
Net income (loss) 3,028 (24,843) (11,423) (12,517) (9,087)
EARNINGS PER SHARE:
Basic (6) $ 0.51 $ (4.20) $ (1.93) $ (2.12) $ (1.54)
Diluted (6) 0.50 (4.20) (1.93) (2.12) (1.54)
BALANCE SHEET DATA:
Cash and equivalents $ 8,643 $ 58,383 $ -- $ -- $ --
Marketable securities 56,133 -- -- -- --
Total assets 124,576 125,885 97,981 107,085 188,431
Stockholders' equity (7) 103,081 107,172 86,990 92,556 129,389
</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) Prior to fiscal year 1998, PEI provided administrative services to the
Company. Amounts allocated to the Company for corporate administrative
expenses for fiscal years 1997, 1996, 1995, and 1994 were $1,065, $1,350,
$1,363, and $752, respectively.
(4) Real estate operations relate to properties held for sale which were
transferred to PriceSmart in connection with the Distribution and reflect
rental revenue, rental expenses, gain or loss on sales of properties and
provisions for asset impairment related to these properties.
(5) Interest and other income includes interest income, loss on sale of
investment, equity in the income and losses of international joint ventures
and minority interest of partners in merchandising joint venture businesses.
(6) For each of the fiscal years 1994 through 1997, earnings per share is
based on the 5,908,235 shares issued in connection with the Distribution.
(7) Prior to fiscal year 1998, stockholders' equity represents the net assets
transferred and the earnings of the businesses and assets comprising
PriceSmart on a historical basis.
<PAGE>
Annual Report Page 15
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, 1998, 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.
<TABLE>
<CAPTION>
AUGUST 31,
---------------------
STORE LOCATIONS 1998 1997 1996
--------------- ---- ---- ----
<S> <C> <C> <C>
Joint Ventures 2 1 --
Licensees 3 5 2
---- ---- ----
Total 5 6 2
</TABLE>
The Company had three new locations open in fiscal 1998: one under a
joint venture arrangement in Panama and two owned and operated by
licensees, one in China and one in the Philippines.
The Asian financial crisis resulted in store closures in Guam
and the Philippines and the termination of the Indonesian licensing
arrangement (two stores).
The Company recently completed two new joint venture arrangements to
open a total of 11 new stores in six Latin America countries. See -
"Liquidity and Capital Resources."
MERCHANDISE SALES
<TABLE>
<CAPTION>
INTERNATIONAL ELECTRONIC SHOPPING
------------------------------------------------- -------------------
STORE PERCENT EXPORT PERCENT PERCENT
SALES CHANGE SALES CHANGE SALES CHANGE
----- ------- ------ ------- ----- -------
<S> <C> <C> <C> <C> <C> <C>
Fiscal 1998 $48,287 122% $32,813 (10%) $ -- (100%)
Fiscal 1997 21,750 100% 36,335 43% 957 (91%)
Fiscal 1996 -- -- 25,441 -- 10,670 --
</TABLE>
STORE SALES -- During fiscal 1998, store sales increased due to the opening
of a second store in Panama in December 1997 and increased sales from the
first Panama store, which was open for the full year. During 1997, store
sales were from the first store which opened in Panama in October 1996.
EXPORT SALES -- During fiscal 1998, export sales to licensees and trade sale
customers decreased, primarily due to the Asian economic crisis, and the
decision in 1997 to discontinue the export trading business, which had been
selling U.S.-sourced goods to customers in Hong Kong and Mexico. Export sales
decreased to licensees in Guam, Indonesia and the first China location. The
decreased sales were partially offset by sales to new locations in
Philippines and China, and increased sales to Saipan.
During fiscal 1997, export sales increased primarily due to sales to
new licensee stores in Indonesia (2 stores), and China and increased sales to
Saipan and Guam.
ELECTRONIC SHOPPING SALES -- Electronic shopping sales were reduced to zero
in fiscal 1998, because the business was discontinued in fiscal 1997. Fiscal
1997 sales declined sharply from 1996 because the business was closed in
January 1997.
MERCHANDISE GROSS MARGIN
<TABLE>
<CAPTION>
INTERNATIONAL ELECTRONIC SHOPPING
--------------------------------------------------------------------------- ----------------------------------
STORE PERCENT PERCENT OF EXPORT PERCENT PERCENT PERCENT PERCENT
GROSS MARGIN CHANGE SALES GROSS MARGIN CHANGE OF SALES GROSS MARGIN CHANGE OF SALES
------------ ------- ---------- ------------ ------- -------- ------------ ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fiscal 1998 $5,671 140% 11.7% $ 745 (52%) 2.3% $ -- (100%) --
Fiscal 1997 2,364 100% 10.9% 1,567 58% 4.3% (836) (245%) (87.4%)
Fiscal 1996 -- -- -- 992 -- 3.9% 575 -- 5.4%
</TABLE>
STORE GROSS MARGIN -- During fiscal 1998, store gross margin dollars and
percentage increased primarily due to higher store sales.
<PAGE>
EXPORT GROSS MARGIN -- During fiscal 1998, export gross margin percentage
decreased by 2% due to lower export sales that have higher gross margin
percentage.
During fiscal 1997, export gross margin increased due to higher
export sales, described above, and due to a slightly higher gross margin
percentage.
ELECTRONIC SHOPPING GROSS MARGIN -- During fiscal 1997, gross margin was
negatively impacted by reserves of $0.9 million associated with markdowns to
sell certain returned and discontinued merchandise.
OTHER REVENUES
<TABLE>
<CAPTION>
INTERNATIONAL AUTO REFERRAL,
ROYALTIES PERCENT TRAVEL AND PERCENT
& FEES CHANGE OTHER PROGRAMS CHANGE
------------- -------------- -------------- -------
<S> <C> <C> <C> <C>
Fiscal 1998 $ 2,720 (13%) $13,368 10%
Fiscal 1997 3,139 45% 12,194 23%
Fiscal 1996 2,164 -- 9,875 --
</TABLE>
During fiscal 1998, international royalties and fees decreased due to reduced
know-how and construction fee income; partially offset by increased royalty
income generated from higher store sales at licensed locations and increased
membership income from Panama. Increased sales for the Auto Referral, Travel
and other programs was due to increased Auto Referral advertising revenue
resulting from more Costco locations, and increased travel commissions on car
rentals and cruises.
During fiscal 1997, international royalties and fees increased
primarily as a result of the newly established licensee operations in 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.
SELLING, GENERAL AND ADMINISTRATIVE
<TABLE>
<CAPTION>
AUTO REFERRAL,
PERCENT ELECTRONIC PERCENT TRAVEL AND PERCENT
INTERNATIONAL CHANGE SHOPPING CHANGE OTHER PROGRAMS CHANGE
------------- ------- ---------- ------- -------------- -------
<S> <C> <C> <C> <C> <C> <C>
Fiscal 1998 $12,773 12% $ -- (100%) $10,552 7%
Fiscal 1997 11,400 39% 4,296 (64%) 9,846 4%
Fiscal 1996 8,196 -- 12,098 -- 9,425 --
</TABLE>
During fiscal 1998, international expenses increased due to the addition of a
second store in Panama (opened December 1997) and a full year of operations
for the first Panama location (opened October 1996). These increased expenses
were partially offset by decreases in home office international expenses,
including the reversal of $.7 million of prior year's reserve for doubtful
accounts receivable. Auto Referral, Travel Program and other expenses
increased by 7% as a result of additional staffing and related overhead
expense required to support the 10% increase in revenues. Electronic shopping
expenses were eliminated in fiscal 1998 due to discontinuing the business in
fiscal 1997.
During fiscal 1997, international expenses increased 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 began to decline
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.
<PAGE>
CORPORATE ADMINISTRATIVE EXPENSES
<TABLE>
<CAPTION>
PERCENT
AMOUNTS CHANGE CHANGE
-------- ------ -------
<S> <C> <C> <C>
Fiscal 1998 $ 3,529 $ 2,464 231%
Fiscal 1997 1,065 (285) (21)%
Fiscal 1996 1,350 -- --
</TABLE>
During fiscal 1998, corporate administrative expenses increased due to
additional salaries, benefits and other expenses associated with becoming a
separate, publicly held company and increased marketing salaries and related
expenses. Prior to fiscal 1998, the Company 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.
REAL ESTATE OPERATIONS (NET)
<TABLE>
<CAPTION>
PROVISION
GAIN FOR ASSET
REVENUES EXPENSES ON SALES IMPAIRMENT TOTAL
-------- -------- -------- ---------- -----
<S> <C> <C> <C> <C> <C>
Fiscal 1998 $ 1,791 $(1,185) $926 $ - $ 1,532
Fiscal 1997 3,031 (2,900) 389 (2,000) (1,480)
Fiscal 1996 2,798 (3,355) 240 (8,042) (8,359)
</TABLE>
Real estate operations relate to properties held for sale which were
transferred to the Company in connection with the Distribution and reflect
rental revenue, operating expenses, gain or loss on sales of properties and
provisions for asset impairment related to these properties. The Company
expects the remaining properties to be sold during fiscal 1999.
The increase in net income from real estate operations in fiscal 1998
was primarily due to increased gains on sales of properties and no additional
provision for asset impairment. The improvement also reflects reduced
operating expenses resulting from the disposition of non-income producing
properties. During fiscal 1997 and 1996, the non-cash charges for provision
for asset impairment reflected in the table above were taken to write down
the carrying value of real estate properties which were 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
marketable securities, cash balances, City Notes and certain secured notes
receivable from buyers of formerly owned properties. During fiscal 1998,
interest income increased primarily due to increased balances in cash and
marketable securities. Interest income for fiscal 1997 declined primarily as
a result of principal repayments of specific City Notes during fiscal 1997.
MINORITY INTEREST. For fiscal 1998 and 1997, minority interest relates to an
allocation of the Panama joint venture earnings to the 49% partner in this
venture. During fiscal 1996, 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 which were funded with
stockholder advances by the Company and borrowings from PEI.
PROVISION (BENEFIT) FOR INCOME TAXES. The Company's provision for income
taxes decreased to $114,000 in fiscal 1998 from $17.9 million in fiscal 1997.
In fiscal 1998, the provision for income taxes relates to foreign taxes on
the profit of the Company's Panama joint venture. 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. As of August 31,
1998, the Company has Federal and California net operating loss carryforwards
of approximately $29 million and $10 million, respectively. The Federal and
California tax loss carryforwards will begin expiring in 2010 and 2001,
respectively, unless previously utilized.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by (used in) the Company's operations for the fiscal years
ended August 31, 1998, 1997 and 1996 was $(1.6) million, $2.6 million and
$(7.9) million, respectively.
The Company expects to satisfy short-term liquidity requirements
through its cash and marketable securities, cash from operations of the
Company's businesses, and principal and interest payments on the City Notes
and other note receivable. The Company also expects to generate cash from
sales of the properties held for sale. Certain borrowings by the Company's
joint ventures, secured by assets of the joint ventures discussed below, are
anticipated.
In 1998, the Company announced programs to repurchase up to 700,000
shares of the Company's common stock. Prior to year-end, 550,000 shares under
this program had been repurchased at a cost to the Company of $8.6 million.
In September 1998, the Company repurchased the remaining 150,000 shares for
$2.3 million.
In November 1998, the Company announced that it would use up to an
additional $5.0 million to repurchase shares of the Company's common stock
from time to time in blocks of 50,000 shares or more.
In July 1998, the Company entered into an agreement with a Guatemalan
headquartered company to form a new joint venture that plans to open two
PriceSmart membership shopping warehouses in Guatemala. It is anticipated
that the stores will be built in a "build to suit" arrangement with local
landowners. The total cost of the project is approximately $6.7 million of
which $4.6 million has been contributed in cash by the partners and $2.1
million will be borrowed. PriceSmart owns 66% of this venture.
In September 1998, the Company entered into a joint venture agreement
with PSC, S.A., whose stockholders are Latin American businessmen, to open
nine PriceSmart membership shopping warehouses in Costa Rica, the Dominican
Republic, El Salvador, Honduras, and Nicaragua. The total cost of the project
is approximately $84.4 million of which $33.8 million will be contributed in
cash by the partners and $50.6 million will be borrowed. PriceSmart owns 60%
of this venture.
In September 1998, the Company made a $5.9 million, five year term
loan to its Panama joint venture. The loan yields interest at a rate of
3-month LIBOR + 1 3/4%. Loan proceeds were used to repay Panama's bank
borrowings of $3.7 million, with the remaining portion to be used in future
business opportunities.
Additionally, the Company estimates that it will spend approximately
$.3 million for central office fixtures and equipment, and $10 million for
business opportunities that may arise. Actual capital expenditures,
investment in merchandising businesses and net proceeds realized from
property sales for fiscal 1999 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 its cash balances, marketable securities
and net cash provided by operating activities, principal and interest
payments on notes receivable and sales of its properties held for sale and
bank borrowings 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.
In August 1998, the company entered into an agreement to sell the
Company's Auto Referral Program, effective November 1, 1999. The Company will
continue to own and operate the Program through October 31, 1999 delivering
automotive referral services to Costco members. The Program was sold for a
net gain of $.4 million.
Certain Asian markets served by the Company have experienced a
significant devaluation of local currencies relative to the U.S. dollar.
Because the Company transacts its business in the Asian markets in U.S.
dollars, the Company does not bear exchange rate risk. However, devaluation
of local currencies relative to the U.S. dollar causes U.S. merchandise to be
less affordable, and generally has a negative impact on the Company's sales
of U.S.-sourced goods to the affected markets, location sales and royalty
income. The Company's licensees in Indonesia and Guam were particularly
affected by the economic crisis, which largely contributed to the
cancellation of the Indonesian license agreement and the closing of the Guam
store in fiscal 1998. Neither of these issues resulted in a material economic
loss to the Company.
The Company has an immaterial risk of loss in certain markets most
affected by the Asian economic downturn discussed above, as these are
licensing arrangements.
In November 1998, Honduras and Nicaragua were severely damaged by a
hurricane. It is unclear to what extent the storm damage will impact the
Company's planned expansion in these countries.
SEASONALITY
Historically, the Company's merchandising businesses have experienced
moderate holiday retail seasonality in their markets. In addition to seasonal
fluctuations, the Company's operating results fluctuate quarter-to-quarter as
a result of economic and political events in markets served by the Company,
the timing of holidays, weather, timing
<PAGE>
of shipments, product mix, and cost of U.S.-sourced products. Because of such
fluctuations, the results of operations of any quarter are not indicative of
the results that may be achieved for a full fiscal year or any future
quarter. In addition, there can be no assurance that the Company's future
results will be consistent with past results or the projections of securities
analysts.
IMPACT OF YEAR 2000
The year 2000 issue results from computer programs and hardware being written
with two digits rather than four digits to define the applicable year. As a
result, there is a risk that date sensitive software may recognize a date
using "00" as the year 1900, rather than the year 2000. This potentially
could result in system failure or miscalculations causing disruptions of
operations, including a temporary inability to process transactions or engage
in normal business activities.
The Company has already received letters of year 2000 compliance from
its key hardware and software vendors regarding the Company's core
transaction processing systems, including both the point of sale and back
room processes. In addition, the Company plans to conduct its own internal
testing of year 2000 compliance by February 1999. Further, certain custom
programs are planned to be modified by February 1999. The total cost of the
year 2000 project is not expected to exceed $100,000, which excludes the cost
of the recently purchased hardware and software, which was already 2000
compliant.
The Company plans to initiate formal communications with its
significant suppliers and customers regarding year 2000 compliance. However,
the Company's systems interface with its suppliers is minimal, which makes
the Company less vulnerable.
The costs of the year 2000 project and the estimated completion date
are based on management's best estimates, which are derived utilizing
numerous assumptions. However, there can be no guarantee that these estimates
will be achieved and actual results could differ materially from the
estimates. Specific factors that might cause material differences include,
but are not limited to, the availability and cost of trained personnel, the
ability to locate and correct all relevant computer codes, and similar
uncertainties.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable.
<PAGE>
Annual Report Page 20
FINANCIAL STATEMENTS
PRICESMART, INC.
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Report of Independent Auditors.................................... 21
Consolidated Balance Sheets as of August 31, 1998 and 1997........ 22
Consolidated Statements of Operations for the years ended
August 31, 1998, 1997 and 1996............................... 23
Consolidated Statements of Stockholders' Equity for the years
ended August 31, 1998, 1997 and 1996......................... 24
Consolidated Statements of Cash Flows for the years ended
August 31, 1998, 1997 and 1996............................... 25
Notes to Consolidated Financial Statements........................ 26 - 35
<PAGE>
REPORT OF ERNST & YOUNG LLP, 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, 1998 and 1997 and the related
consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended August 31, 1998.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements 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, 1998 and 1997 and the
consolidated results of its operations and its cash flows for each of
the three years in the period ended August 31, 1998 in conformity with
generally accepted accounting principles.
/s/ Ernst & Young, LLP
San Diego, California
October 16, 1998
<PAGE>
PRICESMART, INC.
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
AUGUST 31,
---------------------
1998 1997
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 8,643 $ 58,383
Marketable securities 56,133 --
Receivables, net of allowance for doubtful accounts of
$414 and $1,000 in 1998 and 1997, respectively 6,503 4,806
Merchandise inventories 9,160 5,518
Prepaid expenses and other current assets 965 578
Property held for sale, net 4,886 19,913
-------- --------
Total current assets 86,290 89,198
Property and equipment:
Land 2,250 2,250
Building and improvements 6,905 4,578
Fixtures and equipment 6,659 4,712
-------- --------
15,814 11,540
Less accumulated depreciation (2,841) (1,946)
-------- --------
Property and equipment, net 12,973 9,594
Other assets:
City notes receivable 21,501 23,052
Other notes receivable 3,812 4,041
-------- --------
TOTAL ASSETS $124,576 $125,885
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank borrowings $ 3,782 $ --
Accounts payable, trade 5,463 4,901
Other payables and accrued expenses 6,622 8,376
-------- --------
Total current liabilities 15,867 13,277
Minority interest 5,628 5,436
Commitments
Stockholders' equity
Preferred stock, $.0001 par value, 2,000,000 shares
authorized, none issued -- --
Common stock, $.0001 par value, 15,000,000 shares
authorized, 5,453,603 shares outstanding in 1998 and
5,908,235 shares outstanding in 1997, net of 550,000
shares in treasury in 1998 1 1
Additional paid-in capital 100,230 107,171
Notes receivable from stockholders (697) --
Unrealized gains on marketable securities 519 --
Retained earnings 3,028 --
-------- --------
Total stockholders' equity 103,081 107,172
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $124,576 $125,885
-------- --------
-------- --------
</TABLE>
See accompanying notes.
<PAGE>
PRICESMART, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED AUGUST 31,
-------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
REVENUES
Sales:
International $ 81,100 $ 58,085 $ 25,541
Electronic shopping -- 957 10,670
International royalties and other fees 2,720 3,139 2,164
Auto referral, travel and other programs 13,368 12,194 9,875
-------- -------- --------
TOTAL REVENUES 97,188 74,375 48,250
EXPENSES
Cost of goods sold:
International 74,684 54,154 24,549
Electronic shopping -- 1,793 10,095
Selling, general and administrative:
International 12,773 11,400 8,196
Electronic shopping -- 4,296 12,098
Auto referral, travel, and other programs 10,552 9,846 9,425
Corporate administrative expenses 3,529 1,065 1,350
-------- -------- --------
TOTAL EXPENSES 101,538 82,554 65,713
-------- -------- --------
OPERATING LOSS (4,350) (8,179) (17,463)
OTHER
Real estate operations, net 1,532 (1,480) (8,359)
Interest income 6,152 2,776 3,076
Minority interest (192) (59) 4,587
-------- -------- --------
TOTAL OTHER 7,492 1,237 (696)
-------- -------- --------
Income (loss) before provision (benefit) for
income taxes 3,142 (6,942) (18,159)
Provision (benefit) for income taxes 114 17,901 (6,736)
-------- -------- --------
NET INCOME (LOSS) $ 3,028 $(24,843) $(11,423)
-------- -------- --------
-------- -------- --------
Earnings (loss) per share
Basic $ 0.51 $ (4.20) $ (1.93)
-------- -------- --------
-------- -------- --------
Diluted $ 0.50 $ (4.20) $ (1.93)
-------- -------- --------
-------- -------- --------
Shares used in per share computation
Basic 5,912 5,908 5,908
-------- -------- --------
-------- -------- --------
Diluted 6,062 5,908 5,908
-------- -------- --------
-------- -------- --------
</TABLE>
See accompanying notes.
<PAGE>
PRICESMART, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE YEARS ENDED AUGUST 31, 1998
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
NOTES UNREALIZED
ADDITIONAL RECEIVABLE GAINS ON
COMMON STOCK PAID-IN FROM MARKETABLE RETAINED
SHARES AMOUNT CAPITAL STOCKHOLDERS SECURITIES EARNINGS TOTAL
------ ------ ---------- ------------ ---------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Investment by PEI at August 31, 1995 5,908 $ 1 $ 92,555 $ -- $ -- $ -- $ 92,556
Net loss (11,423) -- -- -- (11,423)
Net return to 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 return to PEI -- -- 45,025 -- -- -- 45,025
------- --------- --------- --------- --------- --------- ---------
Balance at August 31, 1997 5,908 1 107,171 -- -- -- 107,172
Issuance of common stock for cash
and notes receivable 71 -- 1,093 (697) -- -- 396
Exercise of stock options 25 -- 214 -- -- -- 214
Purchase of treasury stock (550) -- (8,643) -- -- -- (8,643)
Stock based compensation -- -- 395 -- -- -- 395
Unrealized gains on marketable
securities -- -- -- -- 519 -- 519
Net income -- -- -- -- -- 3,208 3,028
------- --------- --------- --------- --------- --------- ---------
Balance at August 31, 1998 5,454 $ 1 $ 100,230 $ (697) $ 519 $ 3,028 $ 103,081
------- --------- --------- --------- --------- --------- ---------
------- --------- --------- --------- --------- --------- ---------
</TABLE>
See accompanying notes.
<PAGE>
PRICESMART, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED AUGUST 31,
--------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 3,028 $(24,843) $(11,423)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation 1,409 1,374 2,259
Provision for asset impairments -- 2,000 8,042
Provision for doubtful accounts (586) 1,000 --
Net loss on disposition of property and equipment 111 -- --
Income tax (benefit) charge 114 17,901 (6,736)
Minority interest 192 59 (4,587)
Stock-based compensation 395 -- --
Change in operating assets and liabilities
Accounts receivable and other assets (5,140) (180) 4,332
Accounts payable and other liabilities (1,104) 5,241 209
Other (44) -- --
-------- -------- --------
Net cash flows provided by (used in) operating activities (1,625) 2,552 (7,904)
INVESTING ACTIVITIES
Purchases of marketable securities (86,378) -- --
Sales of marketable securities 30,801 -- --
Additions to property and equipment (5,094) (8,131) (2,560)
Proceeds from sale of property and equipment -- 97 147
Additions to notes receivable -- -- (1,337)
Payments of notes receivable 1,780 8,614 3,105
-------- -------- --------
Net cash flows provided by (used in) investing activities (58,891) 580 (645)
FINANCING ACTIVITIES
Change in property held for sale 15,027 6,594 (190)
Proceeds from bank borrowings 3,782 -- --
Proceeds from exercise of stock options 214 -- --
Issuance of common stock for cash and notes receivable 396 -- --
Purchases of treasury stock (8,643) -- --
Net investments by PEI -- 45,025 6,994
Contributions by Panama JV partner -- 3,632 1,745
-------- -------- --------
Net cash flows provided by financing activities 10,776 55,251 8,549
-------- -------- --------
Net increase (decrease) in cash (49,740) 58,383 --
Cash and equivalents at beginning of year 58,383 -- --
-------- -------- --------
Cash and equivalents at end of year $ 8,643 $ 58,383 $ --
-------- -------- --------
-------- -------- --------
</TABLE>
See accompanying notes.
<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") owns and operates certain
merchandising businesses. The Company's primary business is international
merchandising consisting of membership shopping stores similar to, but
smaller in size than, warehouse clubs in the United States. As of August 31,
1998, there were three stores licensed to and owned by in-country business
people and two stores owned 51% by the Company. Additionally, the Company
operates domestic auto referral and travel businesses marketed to Costco
members.
In June 1997, the Price Enterprises, Inc. (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. 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").
Assets transferred to PriceSmart were comprised of: (i) the
merchandising business segment of PEI; (ii) certain real estate properties
held for sale (the "Properties"); (iii) notes receivable from various
municipalities and agencies ("City Notes") and certain secured notes
receivable from buyers of properties; (iv) cash and cash equivalents of
approximately $58.4 million; and (v) all other assets and liabilities not
specifically associated with PEI's portfolio of 27 investment properties,
except for current corporate income tax assets and liabilities.
BASIS OF PRESENTATION
The consolidated financial statements include the assets, liabilities and
results of operations of the Company and its majority owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
<TABLE>
<CAPTION>
OWNERSHIP BASIS OF PRESENTATION
--------- ---------------------
<S> <C> <C>
Ventures Services, Inc. 100% Consolidated
PB Real Estate, S.A. 51% Consolidated
Price Costco de Panama, S.A. 51% Consolidated
</TABLE>
The financial statements prior to fiscal 1998 present the Company as if it
were a separate entity from PEI. 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.
Certain amounts in the prior period financial statements have been
reclassified to conform to the current presentation.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
FISCAL YEAR
Effective September 1, 1997, the Company changed its reporting periods to 12
months ending August 31, with each quarter consisting of three months. Prior
to the change, the Company generally reported 13 periods (ending on the
Sunday closest to August 31) of four weeks each, with the first quarter
consisting of 16 weeks, and each remaining quarter consisting of 12 weeks.
CASH AND EQUIVALENTS
Cash and equivalents represent cash and short term highly liquid investments
with maturities of three months or less when purchased.
<PAGE>
PRICESMART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
MARKETABLE SECURITIES
In accordance with Statement of Financial Accounting Standards (SFAS) No.
115, "Accounting for Certain Debt and Equity Securities," marketable
securities are classified as available-for-sale. Available-for-sale
securities are carried at fair value, with the unrealized gains and losses
reported in a separate component of stockholders' equity. The amortized cost
of securities in the category is adjusted for amortization of premiums and
accretion of discounts to maturity. Such amortization is included in interest
income. Realized gains and losses in value judged to be other-than-temporary,
if any, on available-for-sale securities are included in interest income. The
cost of securities sold is based on the specific identification method.
Interest and dividends on securities classified as available-for-sale are
included in interest income.
The Company invests its excess cash primarily in investment grade
debt instruments, marketable debt securities of U.S. government agencies, and
high grade commercial paper. Management has established guidelines relative
to diversification and maturities that maintain safety and liquidity.
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 are valued at the
lower of cost (average cost) or market.
REVENUES RECOGNITION
The Company recognizes international sales when title passes to the customer.
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 off in 1994.
In fiscal year 1997, 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
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," 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 1998 and 1997.
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. No impairment losses were recorded in
fiscal 1998. See Note 4.
<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
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.
CAPITAL 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. In August 1998, the Board of Directors
authorized the repurchase of up to 700,000 shares of its common stock. At
August 31, 1998, 550,000 shares have been repurchased at an aggregate cost of
$8.6 million.
EARNINGS (LOSS) PER SHARE
In the second quarter of fiscal year 1998, the Company adopted SFAS No. 128,
Earnings per Share. SFAS No. 128 replaced the previously reported primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants, and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. Shares used in computing diluted earnings per share
include 150,000 shares related to the dilutive effect of stock options. In
fiscal years 1997 and 1996, loss per share amounts are based on the 5,908,235
shares issued in connection with the Distribution.
COMPREHENSIVE INCOME AND SEGMENT INFORMATION
The Financial Accounting Standards Board issued SFAS No. 130, "Reporting
Comprehensive Income" and SFAS No. 131, "Segment Information" which are
required reporting for the Company in fiscal 1999. SFAS No. 130 requires that
all components of comprehensive income including net income be reported in
the financial statements in the period in which they are recognized.
Comprehensive income is defined as the change in equity during a period from
transactions and other events and circumstances. The impact of adopting SFAS
No. 130 cannot be determined at this time. SFAS No. 131 amends the
requirements to report financial and descriptive information about its
reportable operating segments. The financial information is required to be
reported on the basis that is used internally for evaluating the segment
performance. The Company does not believe that SFAS No. 131 will have a
material impact on income or financial statement presentation.
PRE-OPENING COSTS
The Company capitalizes pre-opening costs related to store openings and
amortizes these costs over twelve months. As of August 31, 1998 and 1997,
capitalized pre-opening costs totaled $129,000 and $243,000, respectively.
The Company is required to adopt Statement of Position 98-5 "Reporting on the
Costs of Start-up Activities" in fiscal 2000. The statement requires that
pre-opening costs be charged to expense as incurred, and will have the impact
of accelerating expense recognition in the year of adoption by a yet
undetermined amount.
<PAGE>
PRICESMART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
NOTE 3 -- MARKETABLE SECURITIES
The following is a summary of short-term investments classified as marketable
securities as of August 31, 1998 (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUES
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Government Securities $55,614 $519 $ -- $56,133
</TABLE>
Gross realized gains and losses were not material during fiscal 1998. As of
August 31, 1998, the average maturity for these marketable securities is 17
months.
NOTE 4 -- 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):
<TABLE>
<CAPTION>
AUGUST 31,
--------------------
1998 1997
-------- --------
<S> <C> <C>
Land and land improvements $ 3,811 $ 16,181
Building and improvements 1,894 10,120
Deferred rents -- 601
Deferred leasing costs, net -- 423
-------- --------
5,705 27,325
Accumulated depreciation (594) (2,617)
Provision for asset impairments:
Unimproved land -- (755)
Properties with buildings (225) (4,040)
-------- --------
(225) (4,795)
-------- --------
Property held for sale, net $ 4,886 $ 19,913
</TABLE>
Because the properties are held for sale, the net results of the real estate
operations are presented on the consolidated statement of operations, and
consist of the following (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED AUGUST 31,
--------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Rental income $ 1,791 $ 3,031 $ 2,798
Gains on sales of real estate 926 389 240
-------- -------- --------
Total revenue 2,717 3,420 3,038
Operating, maintenance and administrative 642 1,690 1,724
Property taxes 421 672 857
Depreciation and amortization 122 538 774
Provision for asset impairments -- 2,000 8,042
-------- -------- --------
Total expenses 1,185 4,900 11,397
-------- -------- --------
Real estate operations, net $ 1,532 $ (1,480) $ (8,359)
</TABLE>
<PAGE>
PRICESMART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
Provision for asset impairments represent non-cash charges 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.
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 $.4 million per year. These properties are leased
under noncancelable leases with remaining terms ranging from 4 years to 9
years.
NOTE 5 -- 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 8% 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 $1.9 million, $2.1
million, $2.5 million for the years ended August 31, 1998, 1997 and 1996,
respectively. At August 31, 1998 and 1997, the aggregate stated principal
value plus compounded interest amounted to $71 million and $67 million ,
respectively. As a result, the total carrying value of the City Notes is less
than the stated principal value and interest by $50 million and $44 million,
respectively. As of August 31, 1998, twelve City Notes were outstanding with
maturity dates ranging from 1999-2028.
NOTE 6 - 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. 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 $363,000,
$406,000, and $158,000 were made for the benefit of PriceSmart plan
participants during fiscal 1998, 1997, and 1996, respectively. Employer
contributions to the 401(k) plan were approximately $26,000, $24,000, and
$31,000 during fiscal 1998, 1997, and 1996, respectively.
NOTE 7 - STOCK OPTION PLAN AND EQUITY PARTICIPATION PLAN
On August 6, 1997, the Company adopted the 1997 Stock Option Plan of
PriceSmart, Inc. (the "1997 Plan") for the benefit of its eligible employees,
consultants and independent directors. Under the 1997 Plan, 700,000 shares of
the Company's common stock are authorized 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. Options issued under
the 1997 Plan typically vest over 5 years and expire in 6 years.
Certain employees and directors of the Company participated in the
PEI stock option plan. Upon consummation of the Distribution, the unvested
PEI options held by these individuals were canceled. To replace those
canceled options, the Company granted options to purchase PriceSmart common
stock at share amounts and prices per share so that the employees and
directors were in substantially the same economic position as they were prior
to the Distribution.
<PAGE>
PRICESMART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
Stock option activity relating to the 1997 Plan was as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
SHARES EXERCISE PRICE
------ --------------
<S> <C> <C>
Balance at August 31, 1997 -- $ --
Granted 734,500 13.39
Exercised (24,801) 8.63
Cancelled (75,963) 10.40
------- ---------
Balance at August 31, 1998 633,736 13.94
</TABLE>
As of August 31, 1998, options to purchase 41,662 shares were exercisable
under the 1997 Plan. As of August 31, 1998, there were 675,199 shares of
Common Stock reserved for future issuance in connection with the 1997 Plan.
The following table summarizes information about stock options
outstanding at August 31, 1998:
<TABLE>
<CAPTION>
OUTSTANDING WEIGHTED-AVERAGE EXERCISABLE
RANGE OF AS OF REMAINING WEIGHTED-AVERAGE AS OF WEIGHTED-AVERAGE
EXERCISE PRICES 08/31/98 CONTRACTUAL LIFE EXERCISE PRICE 08/31/98 EXERCISE PRICE
- --------------- ---------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$7.15 - $8.94 216,177 2.4 $ 8.59 32,146 $ 8.59
8.94 - 10.73 35,893 5.4 9.49 8,273 9.65
10.73 - 12.52 7,093 4.3 11.74 412 11.69
14.30 - 16.09 5,409 7.5 15.21 417 14.69
16.09 - 17.88 369,164 5.3 17.53 414 17.88
- -------------- ------- --- --------- ------ ---------
$7.15 - $17.88 633,736 4.3 $ 13.94 41,662 $ 8.98
</TABLE>
The weighted-average fair value of the stock options granted during 1998,
1997, and 1996 were $5.04, $3.48 and $2.69, respectively.
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 each option grant is estimated on the date of grant using the
"Black-Scholes" option pricing model with the following weighted average
assumptions used for grants in fiscal 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Risk free interest rate 6% 6% 6%
Expected life 3 years 3 years 3 years
Expected volatility 31.5% 26.5% 26.5%
Expected dividend yield 0% 0% 0%
</TABLE>
For purposes of pro forma disclosures, the estimated fair value of the
options granted is amortized to expense over the options' vesting period. The
Company's pro forma information for the years ended August 31, 1998, 1997,
1996 follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Pro forma net income (loss)
(in thousands) $2,558 $(25,002) $(11,580)
Pro forma income (loss)
per share (diluted) $ 0.42 $ (4.23) $ (1.96)
</TABLE>
The pro forma effect on net income for 1998 and net loss for 1997 and 1996 is
not likely to be representative of the pro forma effect on reported income or
loss in future years because these amounts reflect less than full vesting of
options granted during these periods.
<PAGE>
PRICESMART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
In August 1998, the Company adopted, subject to stockholder approval, the
1998 Equity Participation Plan (the "Equity 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. Options
issued under the 1998 Equity Plan typically vest over 5 years and expire in 6
years. As of August 31, 1998 options to purchase 446,041 shares have been
granted, subject to stockholder approval, at an exercise price of $15.50 per
share. The stock option data presented above does not include the options to
be granted under the Equity Plan.
The Equity Plan also allows the Company to make loans to
participants for the purchase of shares or exercise of options. As of August
31, 1998 officer loans outstanding were $697,000. Interest is payable
semi-monthly at 6% with the principal due in six years.
NOTE 8 -- INCOME TAXES
Significant components of the income tax (benefit) provision are as follows
(in thousands):
<TABLE>
<CAPTION>
YEARS ENDED AUGUST 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Current:
Federal $ -- $ (3,612) $ (3,431)
State -- -- (807)
Foreign 114 -- --
-------- -------- --------
114 (3,612) (4,238)
Deferred:
Federal -- 20,945 (1,935)
State -- 568 (563)
Foreign -- -- --
-------- -------- --------
-- 21,513 (2,498)
-------- -------- --------
Total provision (benefit) $ 114 $ 17,901 $ (6,736)
</TABLE>
The reconciliation of income tax computed at the federal statutory tax rate
to the provision (benefit) for income taxes is as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED AUGUST 31,
---------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Federal taxes at the statutory rate $ 1,068 $ (2,430) $ (6,355)
State taxes, net of federal benefit 188 (416) (1,091)
Tax losses (income) of 51% owned subsidiaries (130) -- 708
Increase (decrease) in valuation allowance
for deferred tax assets (1,027) 20,683 --
All other, net 15 64 2
-------- -------- --------
Total provision (benefit) $ 114 $ 17,901 $ (6,736)
</TABLE>
<PAGE>
PRICESMART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
Significant components of the Company's tax assets as of August 31, 1998 and
1997 are shown below. A valuation allowance has been recognized to offset the
deferred tax assets as realization of such assets is uncertain (in thousands).
<TABLE>
<CAPTION>
AUGUST 31,
-------------------
1998 1997
---- ----
<S> <C> <C>
Deferred tax assets:
Real estate properties $ 18 $ 6,961
City notes receivable 11,615 12,535
Net operating losses 10,567 5,437
International revenues and expenses 127 228
All other, net 1,677 1,913
-------- --------
Total deferred tax assets 24,004 27,074
Deferred tax liabilities:
Deferred rental income -- (261)
Deferred state income taxes -- (693)
Unrealized gains on marketable securities (207) --
-------- --------
Total deferred tax liabilities (207) (954)
Valuation allowance (23,797) (26,120)
-------- --------
Net deferred tax assets $ -- $ --
</TABLE>
As of August 31, 1998, the Company has federal and California net operating
loss carryforwards of approximately $29 million and $10 million,
respectively. The federal and California tax loss carryforwards will begin
expiring in 2010 and 2001, respectively, unless previously utilized.
Pursuant to Section 382 of the Internal Revenue Code, annual use of the
Company's net operating loss carryforwards will be limited because of
cumulative changes in ownership of more than 50% which occurred during 1995.
However, the Company does not believe such change will have a material impact
upon utilization of these carryforwards.
NOTE 9 -- BANK LOAN
During fiscal 1998, the Company's Panama subsidiary entered into a seven year
bank term loan with an original principal amount of $4.2 million. The loan
required minimum monthly payments including principal and interest of
$50,000. Interest was payable at LIBOR plus 1.75%. The loan was secured by
Panama land and building. Subsequent to August 31, 1998, the loan was repaid
in full.
NOTE 10 -- COMMITMENTS
The Company leases one of its facilities in Panama under an operating lease
which expires in March 2008. Rent expense totaled $580,000 for the year ended
August 31, 1998. Future annual lease payments are as follows for each of the
next five fiscal years (in thousands):
<TABLE>
<S> <C>
1999 $ 750
2000 750
2001 750
2002 750
2003 788
Thereafter 3,712
------
Total $7,500
</TABLE>
<PAGE>
PRICESMART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
NOTE 11 -- SALE OF AUTO REFERRAL PROGRAM
In August 1998, the Company entered into an agreement to sell the Auto
Referral Program, effective November 1, 1999. The Company will continue to
own and operate the Program through October 31, 1999, delivering automotive
referral services to Costco members.
NOTE 12 -- 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
have adopted 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 pays 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 paid PEI
$225,000 in fiscal 1998 in connection with this agreement.
The Company and PEI entered into a Transitional Services Agreement
dated as of August 26, 1997 pursuant to which the Company and PEI provided
certain services to one another. Fees for such transitional services (which
do not include real estate management services) 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 required. There were no significant costs associated with
this agreement in fiscal 1998. The Transitional Services Agreement expired
June 30, 1998.
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
was 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.
The Company leases 42,000 square feet of office space from PEI to
house the Company's headquarters. The Company pays $25,704 per month pursuant
to a two-year lease commencing on August 26, 1997 with five renewal options
of two years each. On December 1, 1997, the Company and PEI entered into an
Office Services Agreement which provided that the Company would provide
certain office services (such as receptionist, mail room, telecommunications
and voice mail, utilities and copy services) to PEI, which occupies space in
the same building, for $13,450 per month for the first nine months and $7,600
per month for the last twelve months of the term of the agreement. On June 1,
1998, PEI and the Company terminated the Office Services Agreement and
amended the headquarters lease to provide that PEI would provide office
services to the Company for a fee based on a percentage of PEI's estimated
expenses for providing such services.
In fiscal 1998, the Company sold a 15-acre property to PEI, for
$3,950,000 resulting in a realized gain of $293,000. The sales price was
based on an independent appraisal.
In August 1998, the Company repurchased 200,000 shares of common
stock from the Sol and Helen Price Trust, of which Sol Price is trustee, at a
price of $15.00 per share.
<PAGE>
PRICESMART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
NOTE 13 -- GEOGRAPHIC AREAS AND MAJOR CUSTOMERS (IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended August 31,
---------------------
1998 1997
---- ----
<S> <C> <C>
Revenues:
United States $ 47,709 $ 51,806
Latin America 49,479 22,569
--------- ---------
$ 97,188 $ 74,375
--------- ---------
--------- ---------
Operating income (loss):
United States $ (4,741) $ (8,299)
Latin America 391 120
--------- ---------
$ (4,350) $ (8,179)
--------- ---------
--------- ---------
Identifiable assets:
United States $ 103,778 $ 113,749
Latin America 20,798 12,136
--------- ---------
$ 124,576 $ 125,885
--------- ---------
--------- ---------
</TABLE>
The Latin American operations consist of a 51% interest in a joint venture in
Panama whose currency is the U.S. dollar. Foreign operations were not
significant in fiscal 1996.
Export sales were approximately $32.8 million, $36.3 million and
$25.2 million for fiscal 1998, 1997 and 1996, respectively. Approximate
revenues attributable to a single customer represented 28%, 37% and 48% of
total revenues for fiscal 1998, 1997 and 1996, respectively.
<PAGE>
Annual Report Page 36.
MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock has been quoted and traded on the NASDAQ National
market under the symbol "PSMT" since September 2, 1997. As of November 16, 1998,
there were approximately 564 holders of record of the Common Stock.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
CALENDAR QUARTER - 1997
Third Quarter
(beginning 9/2/97) 18.250 15.250
Fourth Quarter 18.875 15.750
CALENDAR QUARTER - 1998
First Quarter 17.875 16.000
Second Quarter 17.000 15.250
Third Quarter
(through 8/31/98) 17.563 14.000
</TABLE>
The Company has never declared a cash dividend on its Common Stock and does not
anticipate doing so in the foreseeable future.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report
(Form 10-K) of PriceSmart, Inc. of our report dated October 16, 1998, included
in the 1998 Annual Report to Stockholders of PriceSmart, Inc.
Our audits also included the financial statement schedule of
PriceSmart, Inc. listed in Item 14(a). This schedule is the responsibility of
the Company's management. Our responsibility is to express an opinion based on
our audits. In our opinion, the financial statement schedule 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.
We also consent to the incorporation by reference in the Registration
Statements (Form S-8's No. 333-38345 and No. 333-61067) pertaining to the 1997
Stock Option Plan of PriceSmart, Inc. and the 1998 Equity Participation Plan of
PriceSmart, Inc. of our report dated October 16, 1998, with respect to the
consolidated financial statements of PriceSmart, Inc. incorporated by reference
in its Annual Report on Form 10-K for the year ended August 31, 1998 and the
related financial statement schedule included therein, filed with the Securities
and Exchange Commission.
/s/ ERNST & YOUNG LLP
San Diego, California
November 23, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-START> SEP-01-1997
<PERIOD-END> AUG-31-1998
<CASH> 8,643
<SECURITIES> 56,133
<RECEIVABLES> 32,230
<ALLOWANCES> (414)
<INVENTORY> 9,160
<CURRENT-ASSETS> 86,290
<PP&E> 15,814
<DEPRECIATION> (2,841)
<TOTAL-ASSETS> 124,576
<CURRENT-LIABILITIES> 15,867
<BONDS> 0
0
0
<COMMON> 1
<OTHER-SE> 103,080
<TOTAL-LIABILITY-AND-EQUITY> 124,576
<SALES> 81,100
<TOTAL-REVENUES> 97,188
<CGS> 74,684
<TOTAL-COSTS> 101,538
<OTHER-EXPENSES> (1,340)
<LOSS-PROVISION> (586)
<INTEREST-EXPENSE> (6,152)
<INCOME-PRETAX> 3,142
<INCOME-TAX> 114
<INCOME-CONTINUING> 3,028
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,028
<EPS-PRIMARY> 0.51
<EPS-DILUTED> 0.50
</TABLE>
