<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_____________________
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED NOVEMBER 30, 1997
COMMISSION FILE NUMBER 0-22793
PRICESMART, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 33-0628530
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4649 MORENA BOULEVARD
SAN DIEGO, CALIFORNIA 92117
(Address of principal executive offices)
(619) 581-4530
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES_X_ NO___
The registrant had 5,908,235 common shares, par value
$.0001, outstanding at January 9, 1998.
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PRICESMART, INC.
INDEX TO FORM 10-Q
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS PAGE
----
Consolidated Balance Sheets...................................... 3
Consolidated Statements of Operations............................ 4
Consolidated Statements of Cash Flows............................ 5
Notes to Consolidated Financial Statements....................... 6-7
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................... 8-11
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS................................................ 12
ITEM 2 - CHANGES IN SECURITIES............................................ 12
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES.................................. 12
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS.......................................................... 12
ITEM 5 - OTHER INFORMATION................................................ 12
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K................................. 12
2
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
PRICESMART, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
NOVEMBER 30, AUGUST 31,
1997 1997
---- ----
(unaudited)
ASSETS
Current assets:
Cash and equivalents............................. $ 858 $58,383
Investments, available for sale.................. 57,773 -
Accounts receivable, net......................... 7,395 4,806
Merchandise inventories.......................... 9,104 5,518
Prepaid expenses and other current assets........ 1,058 578
Property held for sale, net...................... 14,686 19,913
---------- ----------
Total current assets............................... 90,874 89,198
Property and equipment:
Land 2,250 2,250
Building and improvements 5,872 4,578
Fixtures and equipment 7,098 4,712
---------- ----------
15,220 11,540
Less accumulated depreciation.................... (2,173) (1,946)
---------- ----------
13,047 9,594
Other assets:
City notes receivable............................ 22,582 23,052
Other notes receivable........................... 4,034 4,041
---------- ----------
26,616 27,093
---------- ----------
TOTAL ASSETS $130,537 $125,885
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank borrowings.................................. $ 2,972 $ -
Accounts payable, trade.......................... 6,942 4,901
Accrued expenses................................. 3,106 4,813
Other current liabilities........................ 4,063 3,563
---------- ----------
Total current liabilities.......................... 17,083 13,277
Minority interest.................................. 5,457 5,436
STOCKHOLDERS' EQUITY
Common stock, $.0001 par value, 15,000,000 shares
authorized, 5,908,235 shares issued and
outstanding.................................... 1 1
Additional paid-in capital....................... 107,171 107,171
Unrealized gains on investments.................. 123 -
Retained earnings................................ 702 -
---------- ----------
Total Stockholders' Equity......................... 107,997 107,172
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $130,537 $125,885
---------- ----------
---------- ----------
See accompanying notes.
3
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PRICESMART, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
3 MONTHS ENDED 16 WEEKS ENDED
NOVEMBER 30, DECEMBER 22,
1997 1996
-------------- --------------
REVENUES
Sales:
International............................. $ 18,168 $17,315
Electronic Shopping....................... - 546
International royalties and other fees...... 593 902
Auto referral, travel and other programs.... 3,107 3,462
--------- -------
TOTAL REVENUES................................ 21,868 22,225
EXPENSES
Cost of goods sold:
International............................. 16,957 16,446
Electronic Shopping....................... - 1,173
Selling, general and administrative:
International............................. 2,732 2,587
Electronic Shopping....................... - 3,253
Auto referral, travel and other programs.. 2,785 2,717
Corporate administrative expenses......... 547 490
--------- -------
TOTAL EXPENSES................................ 23,021 26,666
--------- -------
OPERATING LOSS................................ (1,153) (4,441)
OTHER
Real estate operations, net............... 363 (72)
Interest income........................... 1,516 728
Minority interest......................... (24) (155)
--------- -------
TOTAL OTHER................................... 1,855 501
--------- -------
Income (loss) before benefit for income taxes. 702 (3,940)
Benefit for income taxes...................... - (1,615)
--------- -------
NET INCOME (LOSS)............................. $ 702 $(2,325)
--------- -------
--------- -------
NET INCOME (LOSS) PER SHARE................... $ .12 $ (.39)
Weighted average shares outstanding........... 6,079 ... 5,908
See accompanying notes.
4
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PRICESMART, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
3 MONTHS ENDED 16 WEEKS ENDED
NOVEMBER 30, DECEMBER 22,
1997 1996
-------------- --------------
OPERATING ACTIVITIES
Net income (loss)............................ $ 702 $ (2,325)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization.............. 227 651
Income tax benefit......................... - (1,615)
Minority interest.......................... 21 155
Change in accounts receivable and other
assets................................... (6,655) (16,125)
Change in accounts payable and other
liabilities.............................. 834 9,602
Change in property held for sale........... 5,227 2,973
-------- --------
Net cash flows provided by (used in)
operating activities..................... 356 (6,684)
INVESTING ACTIVITIES
Purchases of investments available for
sale..................................... (68,249) -
Sales of investments available for sale.... 10,599 -
Additions to property and equipment........ (3,680) (1,612)
Payments of notes receivable............... 477 517
-------- --------
Net cash flows (used in) investing
activities............................... (60,853) (1,095)
FINANCING ACTIVITIES
Proceeds from bank borrowings.............. 2,972 -
Net investment by PEI...................... - 4,148
Contributions by Panama JV partner......... - 3,631
-------- --------
Net cash flows provided by financing
activities............................... 2,972 7,779
-------- --------
Net decrease in cash......................... (57,525) -
-------- --------
Cash and cash equivalents at beginning of
period................................... 58,383 -
-------- --------
Cash and cash equivalents at end of period... $ 858 $ -
-------- --------
-------- --------
See accompanying notes.
5
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PRICESMART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
November 30, 1997
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. There are a
total of five stores licensed to and owned by in-country business people and
one store owned 51% by the Company. Additionally, the Company operates
domestic auto referral and travel businesses marketed to Costco members.
PriceSmart was formed in August 1994 as a subsidiary of Price Enterprises,
Inc. ("PEI") and initially operated under the name Price Quest, Inc. and
until recently was operating under the name PQI, Inc. However, the Company
changed its name to PriceSmart, Inc. effective June 30, 1997 in anticipation
of the spin-off of the Company from PEI.
In June 1997, the PEI Board of Directors approved, in principle, a plan to
separate PEI's core real estate business from the merchandising businesses it
operated through a number of subsidiaries. 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 accompanying financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the 3 months ended November 30, 1997
are not necessarily indicative of the results that may be expected for the
year ending August 31, 1998. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
PriceSmart, Inc. annual report on Form 10-K for the year ended August 31,
1997.
6
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PRICESMART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Certain amounts in the prior period financial statements have been
reclassified to conform to the current presentation.
FISCAL YEAR
Effective September 1, 1997, the Company changed its reporting periods to 12
months, ending August 31 with each quarter consisting of 3 months. Prior to
the change, the Company generally reported 13 periods (ending on the Sunday
closest to August 31) of 4 weeks each, with the first quarter consisting of
16 weeks, and each remaining quarter consisting of 12 weeks.
NOTE 2 - INVESTMENTS AVAILABLE FOR SALE
Investments available for sale are comprised of U.S. treasury securities and
obligations of U.S. government agencies with an average maturity of 2 years
and an average yield of 6%.
NOTE 3 - RECENT ACCOUNTING PRONOUNCEMENT
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings per Share" (SFAS No. 128). SFAS No. 128 establishes new
standards for computing and presenting earnings per share (EPS) for entities
with publicly-held common stock. The Company is required to adopt SFAS No.
128 in its second quarter ending February 28, 1998, following the December
15, 1997 effective date. Under the new method, basic and diluted earnings
per share will not be materially different than net income (loss) per share
as presented herein.
7
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ITEM 2 . MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion contains forward-looking statements that involve
risk and uncertainties. The Company's actual results could differ materially
from those discussed herein. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed hereunder, as
well as those discussed under the caption "Risk Factors" in the Registration
Statement on Form 10 filed pursuant to the Securities Exchange Act of 1934,
as amended, on July 3, 1997, as amended by Amendment No. 1 to Form 10 filed on
August 1, 1997 and Amendment No. 2 to Form 10 filed on August 13, 1997.
The following discussion and analysis compares the results of operations for
the first quarter of fiscal 1998, ended November 30, 1997 to the first
quarter of fiscal 1997, ended December 22, 1996.
Effective September 1, 1997, the Company changed its reporting periods to 12
months, with each quarter consisting of 3 months. Prior to the change, the
Company generally reported 13 periods of 4 weeks each, with the first quarter
consisting of 16 weeks, and each remaining quarter consisting of 12 weeks.
As a result of the change in reporting periods, the discussion and analysis
below compare 91 days of operations in Q1 fiscal 1998 to 112 days of
operations for Q1 fiscal 1997 (a 19% reduction in days of operations). The
longer fiscal 1997 first quarter also includes more days of the holiday
season compared to fiscal 1998.
INTERNATIONAL SALES
International Sales Percent Change
------------------- --------------
1st Quarter - FY 1998 $18,168 5%
1st Quarter - FY 1997 17,315 -
Net sales for Q1 fiscal 1998 increased over Q1 fiscal 1997 primarily due to a
full quarter of operations in fiscal 1998 for the Panama City location
compared to a partial quarter in fiscal 1997 (opened October 1996) and sales
made to two licensed locations that opened subsequent to Q1 fiscal 1997.
These increases were partially offset by the shorter reporting period in Q1
fiscal 1998 discussed above and sales of the export trading business
eliminated in fiscal 1997.
GROSS MARGIN
International Percent Change Percent of Sales
------------- -------------- ----------------
1st Quarter - FY 1998 $1,211 39% 6.67%
1st Quarter - FY 1997 869 - 5.02%
The international gross margin increased in Q1 fiscal 1998 compared to Q1
fiscal 1997 due to a full quarter of operations for the Panama City location
which operates at a higher gross margin than that earned on exports of
U.S.-sourced products. This increase was partially offset by decreased
shipments of U.S.-sourced products to foreign licensees.
The electronic shopping program was discontinued during fiscal 1997.
Electronic shopping cost of goods sold for Q1 of fiscal 1997 includes
inventory write-downs of $.7 million.
8
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OTHER REVENUES
International Auto Referral,
Royalties & Percent Travel and Other Percent
Fees Change Programs Change
---- ------ -------- ------
1st Quarter - FY 1998 $ 593 (34%) $3,107 (10%)
1st Quarter - FY 1997 902 - 3,462 -
International Royalties and Fees decreased in Q1 fiscal 1998 compared to Q1
fiscal 1997 primarily due to a decrease in non-recurring store opening fees
and the timing of new membership fees in Panama in October 1996. This
decrease was partially offset by higher royalties on increased sales at
licensee locations.
Revenues in Q1 fiscal 1998 from Auto Referral, Travel and other programs
decreased primarily due to the shorter reporting period discussed above.
SELLING, GENERAL & ADMINISTRATIVE
Auto Referral,
Percent Travel and Other Percent
International Change Programs Change
------------- ------- ---------------- -------
1st Quarter - FY 1998 $2,732 6% $2,785 3%
1st Quarter - FY 1997 2,587 - 2,717 -
Selling, general and administrative expenses for International in Q1 fiscal
1998 were comparable to Q1 fiscal 1997 as increased expenses of the Panama
location, open for the full quarter of fiscal 1998, were partially offset by
a reduction in central expenses.
Selling, general and administrative expenses for Electronic Shopping in Q1
fiscal 1997 includes a charge of $1.8 million for fixture and equipment
write-downs and certain other reserves resulting from the decision to
eliminate this business.
Selling, general and administrative expenses for Auto Referral, Travel and
other program expenses in Q1 fiscal 1998 were comparable with Q1 fiscal 1997.
CORPORATE AND ADMINISTRATIVE EXPENSE
Amount Percent Change
------ --------------
1st Quarter - FY 1998 $547 12%
1st Quarter - FY 1997 490 -
Corporate and Administrative Expense for Q1 fiscal 1998 reflects the actual
costs incurred for corporate administration. In Q1 fiscal 1997, the Company
was operated as certain subsidiaries of Price Enterprises, Inc. ("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.
The 12% increase in expense is due to the addition of management and
incremental expenses associated with becoming a separate, publicly held
company.
9
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REAL ESTATE OPERATIONS (NET)
Gain (Loss)
Revenues Expenses On Sales Total
-------- -------- -------- -----
1st Quarter - FY 1998 $680 $(429) $109 $363
1st Quarter - FY 1997 799 (871) - ( 72)
Real estate operations relate to properties held for sale which were
transferred to the Company in connection with the Distribution and reflect
rental revenue, rental expenses, gain or loss on sale of properties and
provisions for asset impairment related to these properties.
The improvement is primarily due to the disposition of non-income producing
properties in Q4 of fiscal 1997 and due to the gain on sale of a property in
Q1 of fiscal 1998.
INTEREST INCOME
Interest income for the company reflects earnings on invested cash, earnings
on City Notes and certain secured notes receivable from buyers of formerly
owned properties. Interest income for fiscal 1998 increased primarily as a
result of larger invested cash balances.
LIQUIDITY AND CAPITAL RESOURCES
While the Company is well positioned to finance its business activities
through a variety of sources, it expects to satisfy short-term liquidity
requirements through the cash distributed to the Company prior to the
Distribution, cash from operations of the Company's businesses, and principal
and interest payments on the City Notes and other notes receivable. The
Company also expects to generate cash from sales of Properties held for sale,
and the cash flow that may ultimately be generated by sales of these
properties represents a major source of additional capital resources.
The Company's working capital requirements are not expected to exceed $30
million during fiscal 1998. The Company estimates that it will spend
approximately $10 million in the international merchandising businesses, $5
million in affinity-service businesses and $15 million for business
opportunities that may arise. Actual capital expenditures, investment in
merchandising businesses and gross proceeds realized from property sales for
fiscal 1998 may vary from estimated amounts depending on business conditions
and other risks and uncertainties to which the Company and its businesses are
subject.
The Company believes that the Company's cash balances and net cash provided
by operating activities, principal and interest payments on notes receivable
and sales of its Properties will be sufficient to meet its working capital
expenditure requirements for at least fiscal 1998. Management has invested
the Company's cash in excess of current operating requirements in short-term,
interest-bearing, investment-grade securities.
Certain Asian markets served by the Company have recently experienced a
significant devaluation of local currencies relative to the US dollar;
particularly in Indonesia and the Philippines. Because the Company transacts
its business in U.S. dollars, exchange rate risk is not at issue. 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 has an immaterial risk of loss in the countries most affected by
the economic downturn discussed above, as these are licensing arrangements.
It is, however, unclear to what extent this economic situation will impact
future results of operations.
10
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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 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.
11
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PART II - OTHER INFORMATION
- --------------------------------
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27.1 Financial Data Schedule
(b) No reports on Form 8-K were filed for the 3 months
ended November 30, 1997
12
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SIGNATURES
Pursuant to the requirements 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.
PRICESMART, INC.
REGISTRANT
Date: January 13, 1998 /s/ Robert E. Price
-------------------
Robert E. Price
CHAIRMAN
Date: January 13, 1998 /s/ Gil Partida
---------------
Gil Partida
PRESIDENT & CHIEF EXECUTIVE OFFICER
Date: January 13, 1998 /s/ Karen J. Ratcliff
---------------------
Karen J. Ratcliff
EXECUTIVE VICE PRESIDENT,
CHIEF FINANCIAL OFFICER
13
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