<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, 1998
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 5,033,980 shares of its common stock, par value $.0001 per
share, outstanding at January 8, 1999.
<PAGE>
PRICESMART, INC.
INDEX TO FORM 10-Q
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
ITEM 1 - FINANCIAL STATEMENTS PAGE
----
<S> <C>
Condensed Consolidated Balance Sheets............................ 3
Condensed Consolidated Statements of Operations.................. 4
Condensed Consolidated Statements of Cash Flows.................. 5
Notes to Condensed Consolidated Financial Statements............. 6-7
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................... 8-11
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK................................................ 12
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
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
PRICESMART, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNT IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
NOVEMBER 30, AUGUST 31,
1998 1998
------------ ----------
(Unaudited) (Note)
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 52,380 $ 8,643
Marketable securities 4,609 56,133
Receivables, net 4,989 6,503
Merchandise inventories 8,004 9,160
Prepaid expenses and other current assets 670 965
Property held for sale, net 4,217 4,886
-------- --------
Total current assets 74,869 86,290
Property and equipment:
Land 4,481 2,250
Building and improvements 8,004 6,905
Fixtures and equipment 7,106 6,659
-------- --------
19,591 15,814
Less accumulated depreciation (3,187) (2,841)
-------- --------
16,404 12,973
Other assets:
City notes receivable 21,182 21,501
Other notes receivable 3,804 3,812
-------- --------
24,986 25,313
-------- --------
TOTAL ASSETS $116,259 $124,576
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank borrowings $ - $ 3,782
Accounts payable, trade 5,440 5,463
Other payables and accrued expenses 7,731 6,622
-------- --------
Total current liabilities 13,171 15,867
Minority interest 6,392 5,628
Stockholders' Equity
Preferred stock, $.0001 par value, 2,000,000
shares authorized, none issued - -
Common stock, $.0001 par value, 15,000,000
shares authorized, 5,038,180 and 5,453,603
shares issued and outstanding, net of 977,614
and 550,000 shares in treasury, respectively 1 1
Additional paid-in capital 93,894 100,230
Notes receivable from stockholders (783) (697)
Accumulated other comprehensive income 38 519
Retained earnings 3,546 3,028
-------- --------
Total Stockholders' Equity 96,696 103,081
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $116,259 $124,576
-------- --------
-------- --------
</TABLE>
Note: The balance sheet at August 31, 1998 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements.
See accompanying notes.
3
<PAGE>
PRICESMART, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED - AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NOVEMBER 30,
-------------------------------
1998 1997
------------ ------------
<S> <C> <C>
REVENUES
International sales $18,427 $18,168
International royalties and other income 357 593
Auto referral, travel and other programs 3,237 3,107
------- -------
TOTAL REVENUES 22,021 21,868
EXPENSES
International cost of goods sold 16,282 16,957
Selling, general and administrative:
International 3,812 2,546
Auto referral, travel and other programs 2,596 2,754
Corporate administrative expenses 1,006 764
------- -------
TOTAL EXPENSES 23,696 23,021
------- -------
OPERATING LOSS (1,675) (1,153)
OTHER
Real estate operations, net 293 363
Interest income and realized gains on
sales of marketable securities 1,933 1,516
Minority interest (22) (24)
------- -------
TOTAL OTHER 2,204 1,855
Income before provision for income taxes 529 702
Provision for income taxes 11 -
------- -------
NET INCOME $ 518 $ 702
------- -------
------- -------
EARNINGS PER SHARE
Basic $ 0.10 $ 0.12
------- -------
------- -------
Diluted $ 0.10 $ 0.12
------- -------
------- -------
SHARES USED IN PER SHARE COMPUTATION
Basic 5,309 5,908
------- -------
------- -------
Diluted 5,412 6,079
------- -------
------- -------
</TABLE>
See accompanying notes.
4
<PAGE>
PRICESMART, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED - AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NOVEMBER 30,
-------------------------------
1998 1997
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 518 $ 702
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation 346 227
Provision for doubtful accounts 14 -
Income tax provision 11 -
Minority interest 764 21
Change in operating assets and liabilities
Accounts receivable and other assets 2,975 (6,655)
Accounts payable and other liabilities 1,086 834
------- --------
Net cash flows provided by (used in) operating activities 5,714 (4,871)
INVESTING ACTIVITIES
Purchases of marketable securities (4,529) (68,249)
Sales of marketable securities 55,538 10,599
Additions to property and equipment (3,777) (3,680)
Payments of notes receivable 327 477
------- --------
Net cash flows provided by (used in) investing activities 47,559 (60,853)
FINANCING ACTIVITIES
Change in property held for sale 669 5,227
Proceeds from (repayment of) bank borrowings (3,782) 2,972
Proceeds from exercise of stock options 30 -
Issuance of common stock for cash and notes receivable 38 -
Purchases of treasury stock (6,491) -
------- --------
Net cash flows provided by (used in) financing activities (9,536) 8,199
------- --------
Net increase (decrease) in cash 43,737 (57,525)
Cash and equivalents at beginning of period 8,643 58,383
------- --------
Cash and equivalents at end of period $52,380 $ 858
------- --------
------- --------
</TABLE>
See accompanying notes.
5
<PAGE>
PRICESMART, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
November 30, 1998
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 November
30, 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
primarily 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 accompanying financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial statements 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, 1998 are
not necessarily indicative of the results that may be expected for the year
ending August 31, 1999. For further information, refer to the consolidated
financial statements and footnotes thereto included in the PriceSmart, Inc.
annual report for the year ended August 31, 1998.
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.
Certain amounts in the prior period financial statements have been
reclassified to conform to the current presentation.
NOTE 2 - EARNINGS PER SHARE
In Q2 of fiscal 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.
Earnings per share amount for the quarter ended November 30, 1997 has been
restated to conform to the Statement 128 requirements.
6
<PAGE>
PRICESMART, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 - COMPREHENSIVE INCOME
During the first quarter of fiscal 1999, the Company adopted Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income."
SFAS No. 130 requires the disclosure of all components of comprehensive
income, including net income and other comprehensive income. Comprehensive
income is defined as the change in equity during a period from transactions
and other events and circumstances generated from non-owner sources. For the
three months ended November 30, 1998 and 1997, comprehensive income is
calculated as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended November 30,
-------------------------------
1998 1997
---- ----
<S> <C> <C>
Net income $518 $702
Unrealized gains on marketable securities 38 123
---- ----
---- ----
Comprehensive income $556 $825
---- ----
---- ----
</TABLE>
NOTE 4 - PRE-OPENING COSTS
The Company adopted Statement of Position ("SOP") 98-5 "Reporting on the
Costs of Start-up Activities" in Q1 of fiscal 1999. SOP 98-5 requires
pre-opening costs to be charged to expense as incurred. Prior to fiscal 1999,
the Company capitalized pre-opening costs related to store openings and
amortized these costs over twelve months. The adoption of SOP 98-5 did not
have a material impact on the Company's financial statements.
NOTE 5 - NEW ACCOUNTING STANDARD
The Financial Accounting Standards Board issued SFAS No. 131, "Segment
Information" which is required reporting for the Company in fiscal 1999. 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.
7
<PAGE>
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 Form 10-K
filed pursuant to the Securities Exchange Act of 1934 on November 25, 1998.
The following discussion and analysis compares the results of operations for
the first quarter of fiscal 1999, ended November 30, 1998 to the first
quarter of fiscal 1998, ended November 30, 1997. All dollar amounts are in
thousands.
MERCHANDISE SALES
<TABLE>
<CAPTION>
Store Percent Export Percent Total Percent
Sales Change Sales Change Sales Change
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
1st Quarter-Fiscal 1999 $16,118 129% $ 2,309 -79% $18,427 1%
1st Quarter-Fiscal 1998 7,052 - 11,116 - 18,168 -
</TABLE>
STORE SALES - During Q1 fiscal 1999, store sales increased due to the opening
of a second store in Panama in December 1997. During Q1 of fiscal 1998, store
sales were from the first Panama store which opened in October 1996.
EXPORT SALES - During Q1 fiscal 1999, export sales to licensees decreased,
primarily due to the Asian economic crisis. 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
on September 30, 1998 and the closing of the Guam store in August 1998.
<TABLE>
<CAPTION>
MERCHANDISE GROSS MARGIN
Store Percent Export Percent
Gross Percent of Gross Percent of
Margin Change Sales Margin Change Sales
-------- --------- --------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
1st Quarter-Fiscal 1999 $2,080 135% 12.9% $ 65 -80% 2.8%
1st Quarter-Fiscal 1998 884 - 12.5% 327 - 2.9%
</TABLE>
STORE GROSS MARGIN - During Q1 of fiscal 1999, store gross margin dollars
increased primarily due to higher store sales with the opening of the second
Panama location. The gross margin percentage increased due to the mix of
merchandise sold in conjunction with the expansion of other businesses such
as photo processing and rotisserie chicken which have higher margins.
EXPORT GROSS MARGIN - During Q1 of fiscal 1999, export gross margin
percentage is consistent with prior year's comparable period.
<TABLE>
<CAPTION>
OTHER REVENUES
Royalties Percent Travel and Percent
& Other Income Change Other Programs Change
---------------- ----------- ---------------- ----------
<S> <C> <C> <C> <C>
1st Quarter-Fiscal 1999 $ 357 -40% $3,237 4%
1st Quarter-Fiscal 1998 593 - 3,107 -
</TABLE>
During Q1 of fiscal 1999, international royalties and other income decreased
primarily due to reduced royalty income because of lower store sales at
licensed locations.
Increased revenues for the Auto Referral, Travel and other programs were due
to increased Auto Referral advertising revenue resulting from more Costco
locations and increased travel commissions on car rentals and cruises.
8
<PAGE>
In August 1998, the Company entered into an agreement to sell its 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.
<TABLE>
<CAPTION>
SELLING, GENERAL AND ADMINISTRATIVE
Auto Referral,
Percent Travel and Percent
International Change Other Programs Change
--------------- --------- ---------------- ---------
<S> <C> <C> <C> <C>
1st Quarter-Fiscal 1999 $3,812 50% $2,596 -6%
1st Quarter-Fiscal 1998 2,546 - 2,754 -
</TABLE>
During Q1 of fiscal 1999, international expenses increased primarily due to
the addition of a second store in Panama (opened December 1997). Auto
Referral, Travel Program and other expenses decreased primarily due to the
elimination of the service center test program in May 1998.
<TABLE>
<CAPTION>
CORPORATE ADMINISTRATIVE EXPENSES
Percent
Amounts Change Change
--------- --------- --------
<S> <C> <C> <C>
1st Quarter-Fiscal 1999 $1,006 $ 242 32%
1st Quarter-Fiscal 1998 764 - -
</TABLE>
During Q1 fiscal 1999, corporate administrative expenses increased due to the
addition of a Company-wide employee bonus program and increased marketing
salaries and related expenses.
<TABLE>
<CAPTION>
REAL ESTATE OPERATIONS (NET)
Gain Net
Revenues Expenses On Sales Income
---------- --------- ---------- --------
<S> <C> <C> <C> <C>
1st Quarter-Fiscal 1999 $ 217 $(145) $ 221 $ 293
1st Quarter-Fiscal 1998 680 (426) 109 363
</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, and gain or loss on sales of properties.
The Company expects the remaining properties to be sold during fiscal 1999.
The decrease in net income from real estate operations during Q1 fiscal 1999
was primarily due to reduced revenues and operating expenses resulting from
the disposition of income-producing properties. The decrease is partially
offset by a higher gain on the sale of properties.
INTEREST INCOME AND REALIZED GAINS ON SALES OF MARKETABLE SECURITIES
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 Q1 of fiscal 1999, interest income
increased primarily due to realized gains on sales of marketable securities.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations - Liquidity and Capital Resources" for further discussion.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by (used in) the Company's operations during Q1 of fiscal 1999
and 1998 was $5.7 million, and $(4.9) 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. The Company also anticipates that the Company's
joint ventures will obtain loans secured by the assets of the joint ventures.
9
<PAGE>
In September 1998, the Company repurchased 150,000 shares of its common stock
for $2.3 million, completing the share repurchase program it initiated in
conjunction with the 1998 Equity Participation Plan. Repurchased shares will
be added to the Company's treasury shares and will be used to fund the
balance of the 700,000 shares authorized for issuance under the 1998 Equity
Participation Plan.
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. During
November 1998, the Company repurchased 277,614 shares under this program for
$4.2 million.
In September 1998, the Company entered into an 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 projected
at $84.4 million of which $33.8 million is to be contributed in cash by the
partners and $50.6 million is to 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 balance to be used in connection with future
business opportunities.
In November 1998, the Company took advantage of changing market conditions
and sold its investment portfolio, realizing a gain of $558,000. The cash
balances currently reflected on the balance sheet have been re-invested in
alignment with the Company's future cash needs.
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.
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's risk of loss in certain markets most affected by the Asian
economic downturn discussed is immaterial because the Company conducts
business in such markets through licensing arrangements rather than
Company-owned stores.
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 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
10
<PAGE>
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 March 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.
11
<PAGE>
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
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:
10.1 Promissory Note (Includes schedule showing certain
borrowers, dates of Notes, amounts of Notes and dates of
Pledge Agreements)
10.2 Pledge Agreement (Includes schedule showing certain
borrowers, dates of Notes, amounts of Notes and number
of pledged shares)
27.1 Financial Data Schedule
(b) No reports on Form 8-K were filed for the 3 months ended November
30, 1998
12
<PAGE>
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 14, 1999 /s/ Gilbert A. Partida
----------------------
Gilbert A. Partida
PRESIDENT & CHIEF EXECUTIVE OFFICER
Date: January 14, 1999 /s/ Karen J. Ratcliff
---------------------
Karen J. Ratcliff
EXECUTIVE VICE PRESIDENT,
CHIEF FINANCIAL OFFICER
13
<PAGE>
EXHIBIT 10.1
PROMISSORY NOTE
$________________ San Diego, California
August 7, 1998
FOR VALUE RECEIVED, the undersigned, _______________ (the
"Borrower") promises to pay to PriceSmart, Inc., a Delaware corporation, (the
"Company"), or order, the principal amount of __________________________
dollars ($____________) with interest from the date hereof on the unpaid
principal balance under this Note at the rate of six percent (6%) per annum
(on the basis of a 360-day year and the actual number of days elapsed). The
principal amount of this Note shall be due and payable on or before the
earlier of six years from the date of this Note, or the date on which the
indebtedness under this Note is accelerated as provided for under this Note
or the Pledge Agreement (as defined below). The interest payable under this
Note shall be payable in bi-monthly installments throughout the term of this
Note. Any accrued and unpaid interest under this Note shall be due and
payable concurrently with principal.
Borrower agrees that, while Borrower is employed by the Company,
all bi-monthly interest payments under this Note shall be made to the Company
or its order in regular bi-monthly payroll deductions, beginning
_____________________. All payments under this Note shall be made to the
Company or its order in lawful money of the United States of America at the
offices of the Company at its then principal place of business or at such
other place as the Company or any holder hereof shall designate for such
purpose from time to time.
Each payment under this Note shall be applied in the following
order: (i) to the payment of costs and expenses provided for under this Note
or the Pledge Agreement; (ii) to the payment of accrued and unpaid interest;
and (iii) to the payment of outstanding principal. The
<PAGE>
Company and each holder hereof shall have the continuing and exclusive right
to apply or reverse and reapply any and all payments under this Note.
This Note may be prepaid in whole or in part at any time, after
five (5) days written notice of Borrower's intention to make any such
prepayment, which notice shall specify the date and amount of such
prepayment. Any prepayment shall be without penalty except that interest
shall be paid to the date of payment on the principal amount prepaid. After
any partial prepayment hereunder, interest shall be computed on the principal
balance due after deducting the principal portion of such prepayment. Any
such partial prepayment shall be applied against the principal due at
maturity.
Upon the occurrence of a default under this Note or the Pledge
Agreement, including, without limitation, failure to make any principal or
interest payment by the stated maturity date (whether by acceleration, notice
of prepayment or otherwise), interest shall thereafter accrue on the entire
unpaid principal balance under this Note, including without limitation any
delinquent interest which has been added to the principal amount due under
this Note pursuant to the terms hereof, at the rate set forth herein. In
addition, upon the occurrence of a default under this Note or the Pledge
Agreement the holder of this Note may, at its option, without notice to or
demand upon Borrower or any other party, declare immediately due and payable
the entire principal balance hereof together with all accrued and unpaid
interest thereon, plus any other amounts then owing pursuant to this Note or
the Pledge Agreement, whereupon the same shall be immediately due and
payable. On each anniversary of the date of any default under this Note and
while such default is continuing, all interest which has become payable and
is then delinquent shall, without curing the default under this Note by
reason of such delinquency, be added to the principal amount due under this
Note, and shall thereafter bear
2
<PAGE>
interest at the same rate as is applicable to principal, with interest on
overdue interest to bear interest, in each case to the fullest extent
permitted by applicable law, both before and after default, maturity,
foreclosure, judgment and the filing of any petition in a bankruptcy
proceeding. Notwithstanding anything in this Note to the contrary, in no
event shall interest be charged under this Note which would violate any
applicable law, and if the interest set forth in this Note would violate any
law it shall be reduced to an amount which would not violate any law.
This Note is secured under that certain Pledge Agreement, dated as
of August 7, 1998, by and between Borrower and the Company (as amended,
modified or supplemented from time to time, the "PLEDGE AGREEMENT").
Reference is hereby made to the Pledge Agreement for a description of the
nature and extent of the security for this Note and the rights with respect
to such security of the holder of this Note. Nothing herein shall be deemed
to limit the rights of the Company under this Note or the Pledge Agreement,
all of which rights and remedies are cumulative.
No waiver or modification of any of the terms of this Note shall be
valid or binding unless set forth in a writing specifically referring to this
Note and signed by a duly authorized officer of the Company or any holder of
this Note, and then only to the extent specifically set forth therein.
If any default occurs in any payment due under this Note, Borrower
and all guarantors and endorsers hereof, and their successors and assigns,
promise to pay any expenses, including attorneys' fees, incurred by each
holder hereof in collecting or attempting to collect the indebtedness under
this Note, whether or not any action or proceeding is commenced. None of the
provisions hereof and none of the holder's rights or remedies under this Note
on account of
3
<PAGE>
any past or future defaults shall be deemed to have been waived by the
holder's acceptance of any past due payments or by any indulgence granted by
the holder to Borrower.
Notwithstanding anything to the contrary herein, if Borrower's
employment with the Company shall be terminated for any reason, the
outstanding principal and accrued but unpaid interest under this Note shall
become immediately due and payable.
Borrower and all guarantors and endorsers hereof, and their
successors and assigns, hereby waive presentment, demand, diligence, protest
and notice of every kind (except such notices as may be required under the
Pledge Agreement), and agree that they shall remain liable for all amounts
due under this Note notwithstanding any extension of time or change in the
terms of payment of this Note granted by any holder hereof, any change,
alteration or release of any property now or hereafter securing the payment
hereof or any delay or failure by the holder hereof to exercise any rights
under this Note or the Pledge Agreement. Borrower and all guarantors and
endorsers hereof, and their successors and assigns, hereby waive the right to
plead any and all statutes of limitation as a defense to a demand under this
Note to the full extent permitted by law.
This Note shall inure to the benefit of the Company, its successors
and assigns and shall bind the heirs, executors, administrators, successors
and assigns of Borrower. Each reference herein to powers or rights of the
Company shall also be deemed a reference to the same power or right of such
assignees, to the extent of the interest assigned to them.
Notwithstanding any other provision of this Note or the Pledge
Agreement, there shall be no recourse against the Borrower for any liability
to the Company arising in connection with any breach or default under this
Note or the Pledge Agreement except to the extent the same is enforced
against the Collateral (as defined in the Pledge Agreement), and the Company
shall
4
<PAGE>
look solely to the Collateral in enforcing rights and obligations under and
in connection with the Note and the Pledge Agreement.
In the event that any one or more provisions of this Note shall be
held to be illegal, invalid or otherwise unenforceable, the same shall not
affect any other provision of this Note and the remaining provisions of this
Note shall remain in full force and effect.
This Note shall be governed by and construed in accordance with the
laws of the State of California, without giving effect to the principles
thereof relating to conflicts of law.
IN WITNESS WHEREOF, Borrower has caused this Note to be duly
executed as of the day and year first written above.
________________________________________
5
<PAGE>
PROMISSORY NOTE
<TABLE>
<CAPTION>
DATE OF PLEDGE
BORROWER DATE AMOUNT AGREEMENT
---------- ------ ----------- --------------
<S> <C> <C> <C>
Robert M. Gans 8/7/98 $ 94,937.50 8/7/98
Karen J. Ratcliff 8/7/98 $ 94,937.50 8/7/98
Thomas D. Martin 8/7/98 $108,500.00 8/7/98
Kurt A. May 10/19/98 $ 86,516.00 10/19/98
</TABLE>
<PAGE>
EXHIBIT 10.2
PLEDGE AGREEMENT
This Pledge Agreement is made and entered into as of __________,
1998, between _________________ ("Borrower"), and PriceSmart, Inc., a
Delaware corporation (the "Company").
RECITALS
A. The Company has loaned to Borrower $_______________ as
evidenced by a promissory note dated as of August 7, 1998 (the "Note"), which
was used by Borrower to purchase an aggregate of ___________ shares of the
Company's common stock (the "Pledged Shares") pursuant to the terms of The
1998 Equity Participation Plan of PriceSmart, Inc.
B. Borrower desires to grant a security interest in the Pledged
Shares to the Company to secure payment of the Note.
AGREEMENT
Now, therefore, in consideration of the above recitals and the
mutual covenants hereinafter set forth, the parties hereto agree as follows:
1. CREATION OF SECURITY INTEREST. Borrower hereby grants to the
Company a security interest in all of Borrower's right, title and interest in
and to the following collateral (the "Collateral") to secure the payment and
performance by the Borrower of all obligation owed to the Company pursuant to
the Note, this Agreement and any extensions, modifications and renewals
thereof:
(a) The Pledged Shares;
(b) All securities, certificates and instruments representing or
evidencing ownership of the Collateral hereunder, and all proceeds and
products of any
<PAGE>
Collateral hereunder, including without limitation, stock, cash, property
or other dividends, securities, rights and other property now or hereafter
at any time or from time to time received, receivable or otherwise
distributed or distributable in respect of or in exchange for any or all
of such Collateral; and
(c) Any substituted or additional Collateral required to be
supplied under the terms of this Pledge Agreement.
2. BORROWER'S REPRESENTATIONS AND WARRANTIES. Borrower represents
and warrants:
(a) Borrower is (or to the extent that this Pledge Agreement
states that the Collateral is to be acquired after the date hereof, will
be) the sole owner of the Collateral; that the security interest hereunder
in the Collateral is a first, prior and perfected security interest; that
there are no security interests, liens or encumbrances upon, or adverse
claims of title to, or any other interest whatsoever in, the Collateral or
any portion thereof except that created by this Pledge Agreement; and that
no financing statement covering the Collateral or any portion thereof
exists or is on file in any public office; and
(b) Borrower has full right, power and authority to enter into
this Pledge Agreement and no consent of, or registration or filing with,
any person or entity, including the California Corporations Commissioner or
any other governmental officer or entity, is required.
3. COVENANTS OF BORROWER. Borrower covenants that:
(a) Borrower will deliver to the Company each item of Collateral
hereunder immediately upon Borrower's acquisition thereof, and will defend
the
2
<PAGE>
Collateral against all claims and demands of all persons at any time
claiming the same or any interest therein; and
(b) If, while this Pledge Agreement is in effect, any stock
dividend, stock split, reclassification, readjustment, reorganization,
merger, consolidation or other change in the capital structure is declared
or made, or proposed to be declared or made, by the Company or any issuer
of the Collateral, all substituted and additional securities issued with
respect to the Collateral shall be endorsed in blank by Borrower promptly
upon receipt thereof or otherwise appropriately transferred to the Company
in negotiable form, and all certificates or instruments evidencing such
securities shall be delivered to the Company to be held under the terms of
this Pledge Agreement in the same manner as and as part of the Collateral.
Borrower shall have the right to exercise any subscription or other rights
with respect to any Collateral, with the prior written approval of such
exercise by the Company; provided, however, that any securities which may
be issued upon exercise of any such rights shall be delivered to the
Company, with any necessary stock power, endorsed in blank and with
signatures guaranteed, to be included in the Collateral.
4. DEFAULTS AND REMEDIES.
(a) The occurrence of any one or more of the following events or
conditions affecting Borrower shall constitute a default under this Pledge
Agreement:
(i) Borrower fails to pay any indebtedness, perform any
obligation required to be performed by her, or discharge her liability
to the Company in accordance with the terms of the Note; or
(ii) Borrower fails to perform any obligation under this
3
<PAGE>
Agreement.
(b) Upon the occurrence of a default hereunder, the Company may,
at its option, without notice to or demand upon Borrower, do any one or
more of the following:
(i) Exercise any or all of the rights and remedies
provided for by the applicable Uniform Commercial Code, specifically
including, without limitation, the right to recover the attorneys'
fees incurred by the Company in the enforcement of this Pledge
Agreement or in connection with Borrower's redemption of the
Collateral;
(ii) Sell the Collateral, or any portion thereof, at any
public or private sale or on any securities exchange or other
recognized market, for cash, upon credit or for future delivery, as
the Company shall deem appropriate;
(iii) Enforce one or more remedies hereunder, successively
or concurrently, and such action shall not operate to estop or prevent
the Company from pursuing any other or further remedy it may have.
5. MISCELLANEOUS PROVISIONS.
(a) NOTICES. Notices, requests and other communications
hereunder shall be in writing and may be delivered personally or sent by
telegram, telex or first class mail to the parties addressed as follows:
To Borrower: ____________________
____________________
____________________
To the Company: PriceSmart, Inc.
4649 Morena Blvd.
San Diego, CA 92117
Attn: Mr. Robert M. Gans
4
<PAGE>
Such notices, requests and other communications sent as provided
hereinabove shall be effective when received by the addressee thereof, but
if sent by registered or certified mail, postage prepaid, shall be
effective exactly three (3) business days after being deposited in the
United States mail. The parties hereto may change their addresses by
giving notice thereof to the other parties hereto in conformity with this
section.
(b) HEADINGS. The various headings in this Pledge Agreement are
inserted for convenience only and shall not affect the meaning or
interpretation of this Pledge Agreement or any provision hereof.
(c) CHOICE OF LAW. This Pledge Agreement shall be construed in
accordance with and all disputes hereunder shall be governed by the laws of
the State of California, without giving effect to the conflicts of law
principals thereof.
(d) AMENDMENTS. This Pledge Agreement or any provision hereof
may be changed, waived, or terminated only by a statement in writing signed
by the party against which such change, waiver or termination is sought to
be enforced.
(e) NO WAIVER. No delay in enforcing or failure to enforce any
right under this Pledge Agreement by the Company shall constitute a waiver
by the Company of such right. No waiver by the Company of any default
hereunder shall be effective unless in writing, nor shall any waiver
operate as a waiver of any other default or of the same default on a future
occasion.
(f) TIME OF THE ESSENCE. Time is of the essence of each
provision of this Pledge Agreement of which time is an element.
5
<PAGE>
(g) BINDING AGREEMENT. All rights of the Company hereunder
shall inure to the benefit of its successors and assigns. Borrower shall
not assign any of its interest under this Pledge Agreement without the
prior written consent of the Company. Any purported assignment
inconsistent with this provision shall, at the option of the Company, be
null and void.
(h) DEFINITIONS. All terms not defined herein shall have the
meaning set forth in the applicable Uniform Commercial Code, except where
the context otherwise requires.
(i) ENTIRE AGREEMENT. This Pledge Agreement, together with any
other agreement executed in connection herewith, is intended by the parties
as a final expression of their agreement and is intended as a complete and
exclusive statement of the terms and conditions thereof. Acceptance of or
acquiescence in a course of performance rendered under this Pledge
Agreement shall not be relevant to determine the meaning of this Pledge
Agreement even though the accepting or acquiescing party had knowledge of
the nature of the performance and opportunity for objection.
(j) ATTORNEYS' FEES. If any legal action, arbitration or other
proceeding, is brought for the enforcement of this Pledge Agreement, or
because of an alleged dispute, breach or default in connection with any of
the provisions of this Pledge Agreement, each of the parties hereto shall
be responsible for payment of any attorneys' fees and other costs incurred
by them in that action or proceeding, without regard to whomever is the
prevailing party in such action or proceeding.
6
<PAGE>
(k) SEVERABILITY. If any provision of this Pledge Agreement
should be found to be invalid or unenforceable, all of the other provisions
shall nonetheless remain in full force and effect to the maximum extent
permitted by law.
(l) POWER OF ATTORNEY. Borrower hereby appoints and constitutes
the Company as Borrower's attorney-in-fact for purposes of (i) collecting
any Collateral, and (ii) conveying any item of Collateral to any purchaser
thereof. This power of attorney is coupled with an interest and is
irrevocable by Borrower.
(m) COUNTERPARTS. This Pledge Agreement may be executed in one
or more counterparts, each of which shall be deemed an original but all of
which shall together constitute one and the same agreement.
(n) TERMINATION OF PLEDGE. This Pledge Agreement and the
security interest and pledge hereunder shall not terminate until the full
and final payment and performance of all indebtedness and obligations
secured hereunder. At such time, the Company shall reassign and deliver to
Borrower all of the Collateral hereunder which has not been sold, disposed
of, retained or applied by the Company in accordance with the terms hereof.
Such reassignment and redelivery shall be without warranty by or recourse
to the Company, and shall be at the expense of Borrower. Without limiting
the generality of the foregoing, the security interest and pledge hereunder
shall not be terminated by the transfer of any of the Collateral hereunder
from the Company to Borrower, or any person designated by Borrower, for the
purpose of ultimate sale, exchange, presentation, collection, renewal or
registration of transfer or for any other purpose.
(o) RELEASE OF COLLATERAL. Borrower shall be permitted to sell
any of the shares of Collateral and the Company shall release such shares
from Borrower's
7
<PAGE>
pledge hereunder; provided, however, that Borrower shall pay to the
Company the net (after-tax) proceeds from the sale of such shares.
(p) EXPIRATION OF RELATED OPTION. As stated in Section 3.3 (g)
of the Non-Qualified Stock Option Agreement issued to Borrower as of August
7, 1998, the subject Option may not be exercised to any extent after the
first to occur of certain events (as specified in Section 3.3(g)), which
events include the effective date of the sale, transfer or other
disposition of any of the Pledged Shares.
IN WITNESS WHEREOF, the parties hereto have caused this Pledge
Agreement to be duly executed the day and year first above written.
PRICESMART, INC. BORROWER
By_________________________ _____________________________
8
<PAGE>
PLEDGE AGREEMENT
<TABLE>
<CAPTION>
AMOUNT
BORROWER DATE DATE OF NOTE BORROWED PLEDGED SHARES
---------- ------ ------------ ----------- --------------
<S> <C> <C> <C> <C>
Robert M. Gans 8/7/98 8/7/98 $ 94,937.50 8,750
Karen J. Ratcliff 8/7/98 8/7/98 $ 94,937.50 8,750
Thomas D. Martin 8/7/98 8/7/98 $108,500.00 10,000
Kurt A. May 10/19/98 10/19/98 $ 86,516.00 8,750
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> AUG-31-1999
<PERIOD-START> SEP-01-1998
<PERIOD-END> NOV-30-1998
<CASH> 52,380
<SECURITIES> 4,609
<RECEIVABLES> 30,379
<ALLOWANCES> (404)
<INVENTORY> 8,004
<CURRENT-ASSETS> 74,869
<PP&E> 19,591
<DEPRECIATION> (3,187)
<TOTAL-ASSETS> 116,259
<CURRENT-LIABILITIES> 13,171
<BONDS> 0
0
0
<COMMON> 1
<OTHER-SE> 96,695
<TOTAL-LIABILITY-AND-EQUITY> 116,259
<SALES> 18,427
<TOTAL-REVENUES> 22,021
<CGS> 16,282
<TOTAL-COSTS> 23,696
<OTHER-EXPENSES> 271
<LOSS-PROVISION> 14
<INTEREST-EXPENSE> (1,933)
<INCOME-PRETAX> 529
<INCOME-TAX> 11
<INCOME-CONTINUING> 518
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 518
<EPS-PRIMARY> .10
<EPS-DILUTED> .10
</TABLE>
