<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 MAY 31, 1999
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)
(858) 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 5,982,590 shares of its common stock, par value $.0001 per
share, outstanding at July 13, 1999.
<PAGE>
PRICESMART, INC.
INDEX TO FORM 10-Q
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
ITEM 1 - FINANCIAL STATEMENTS PAGE
----
<S> <C> <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.................................. 8-13
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK.............................................................. 13
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS.............................................................. 14
ITEM 2 - CHANGES IN SECURITIES.......................................................... 14
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES................................................ 14
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS........................................................................ 14
ITEM 5 - OTHER INFORMATION.............................................................. 14
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K............................................... 14
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
- ------------------------------
ITEM 1 - FINANCIAL STATEMENTS
PRICESMART, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED-AMOUNT IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
May 31, August 31,
1999 1998
---------------- ----------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 35,299 $ 8,643
Investments available for sale 25,068 56,133
Receivables, net 4,021 6,503
Merchandise inventories 13,488 9,160
Prepaid expenses and other current assets 2,166 965
Properties held for sale, net 3,354 4,886
------------ ------------
Total current assets 83,396 86,290
Property and equipment:
Land 7,506 2,250
Building and improvements 15,983 6,905
Fixtures and equipment 11,164 6,659
------------ ------------
34,653 15,814
Less accumulated depreciation (3,921) (2,841)
------------ ------------
30,732 12,973
Other assets:
City notes receivables 20,735 21,501
Other notes receivable 3,905 3,812
Other long-term assets 298 --
------------ ------------
24,938 25,313
------------ ------------
TOTAL ASSETS $ 139,066 $ 124,576
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank borrowings $ -- $ 3,782
Accounts payable, trade 14,708 5,463
Other payables and accrued expenses 6,664 6,622
Deferred membership income 1,025 --
------------ ------------
Total current liabilities 22,397 15,867
Long-term bank borrowings 4,037 --
Minority interest 15,720 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, 5,072,873 and 5,453,603
shares issued and outstanding, net of 908,398 and
550,000 shares in treasury, respectively 1 1
Additional paid-in capital 96,955 100,230
Deferred compensation (1,639) --
Notes receivable from stockholders (659) (697)
Accumulated other comprehensive income 591 519
Retained earnings 1,663 3,028
------------ ------------
Total stockholders' equity 96,912 103,081
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 139,066 $ 124,576
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
3
<PAGE>
PRICESMART, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED - AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Third Quarter Year-To-Date
Three Months Ended May 31, Nine Months Ended May 31,
-------------------------- -------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUES
International sales $ 22,808 $ 19,842 $ 60,798 $ 60,552
International royalties and other income 770 481 1,628 2,214
Auto referral, travel and other programs 2,231 3,324 9,173 9,729
---------- ---------- ---------- ----------
TOTAL REVENUES 25,809 23,647 71,599 72,495
EXPENSES
International cost of goods sold 20,183 17,951 53,717 55,369
Selling, general and administrative:
International 5,796 3,893 13,903 9,854
Auto referral, travel and other programs 1,526 2,672 6,660 8,197
Corporate administrative expense 1,686 941 4,511 2,252
---------- ---------- ---------- ----------
TOTAL EXPENSES 29,191 25,457 78,791 75,672
---------- ---------- ---------- ----------
OPERATING LOSS (3,382) (1,810) (7,192) (3,177)
OTHER
Real estate operations, net 153 689 1,366 1,223
Interest income and other 747 1,495 3,578 4,480
Gain on sale of auto referral business 798 -- 798 --
Minority interest 312 (12) 219 (197)
---------- ---------- ---------- ----------
TOTAL OTHER 2,010 2,172 5,961 5,506
---------- ---------- ---------- ----------
Income (loss) before provision for income taxes (1,372) 362 (1,231) 2,329
Provision for income taxes 42 19 134 175
---------- ---------- ---------- ----------
NET INCOME (LOSS) $ (1,414) $ 343 $ (1,365) $ 2,154
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
EARNINGS (LOSS) PER SHARE
Basic $ (0.28) $ 0.06 $ (0.27) $ 0.36
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Diluted $ (0.28) $ 0.06 $ (0.27) $ 0.35
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
SHARES USED IN PER SHARE COMPUTATION
Basic 5,044 5,915 5,137 5,912
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Diluted 5,044 6,058 5,137 6,072
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
4
<PAGE>
PRICESMART, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED - AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended
May 31,
---------------------------
1999 1998
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ (1,365) $ 2,154
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation 1,080 1,051
Income tax charge 134 175
Minority interest (219) 197
Compensation expense recognized for stock options 1,085 395
Change in operating assets and liabilities:
Accounts receivable and other assets (3,345) (6,250)
Accounts payable and other liabilities 10,178 (851)
------------ ------------
Net cash flows provided by (used in) operating activities 7,548 (3,129)
INVESTING ACTIVITIES
Purchases of marketable securities (39,672) (84,240)
Sales of marketable securities 70,340 20,744
Additions to property and equipment (18,839) (5,114)
Payments of notes receivable 1,203 1,316
------------ ------------
Net cash flows provided by (used in) investing activities 13,032 (67,294)
------------ ------------
FINANCING ACTIVITIES
Change in property held for sale 1,532 10,650
Proceeds from bank borrowings 255 3,932
Proceeds from minority interests 10,311 --
Proceeds from exercise of stock options 547 144
Issuance of common stock for cash and notes receivable 97 --
Purchases of treasury stock (6,605) --
------------ ------------
Net cash flows provided by financing activities 6,137 14,726
------------ ------------
EFFECT OF EXCHANGE RATES ON CASH
AND CASH EQUIVALENTS (61) --
------------ ------------
Net increase (decrease) in cash 26,656 (55,697)
Cash and equivalents at beginning of period 8,643 58,383
------------ ------------
Cash and equivalents at end of period $ 35,299 $ 2,686
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
5
<PAGE>
PRICESMART, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
May 31, 1999
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
ORGANIZATION
PriceSmart, Inc. ("PriceSmart" or the "Company") owns and operates certain
merchandising businesses. The Company's primary business is international
merchandising consisting of membership shopping warehouses similar to, but
smaller in size than, warehouse clubs in the United States. As of May 31, 1999,
there were three warehouse stores in operation (two in Panama and one in
Guatemala) of which the Company owns a majority interest of each. Also, there
were five warehouse stores in operation (four in China and one in Saipan)
licensed to and owned by in-country business people. Additionally, the Company
operates a domestic travel business and until April 1, 1999, operated a domestic
auto referral business 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 condensed consolidated 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 nine months ended May 31, 1999 are not necessarily
indicative of the results that may be expected for the year ending August 31,
1999. For further information, refer to the audited consolidated financial
statements and footnotes thereto included in the PriceSmart, Inc. annual
report for the year ended August 31, 1998.
The condensed 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 condensed consolidated financial statements
have been reclassified to conform to the current period presentation.
NOTE 2 - EARNINGS PER SHARE
During the second quarter of fiscal 1998, the Company adopted Statement of
Financial Accounting Standards ("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 exclude any dilutive effects of options,
warrants, and
6
<PAGE>
PRICESMART, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share.
NOTE 3 - MEMBERSHIP FEES
Membership fee income, which is included in international royalties and other
income, represents annual membership fees paid by the Company's warehouse
members. In the first quarter of fiscal 1999, the Company changed its method of
accounting for membership fee income from a "cash basis," which historically was
consistent with generally accepted accounting principles and industry practice,
to a "deferred basis" whereby membership fee income is recognized ratably over
the annual membership period. The cumulative effect of adopting the accounting
change as of the beginning of fiscal 1999 was not recorded because it did not
have a material effect on the Company's financial condition, cash flows or
ongoing operating results.
NOTE 4 - FOREIGN CURRENCY TRANSLATION
The assets and liabilities of the Company's foreign operations are translated to
U.S. dollars at quarter-end exchange rates, and revenues and expenses are
translated at average rates prevailing during the period. There was no material
effect from foreign currency translation adjustments during the three and nine
months ended May 31, 1999.
NOTE 5 - COMPREHENSIVE INCOME
During the first quarter of fiscal 1999, the Company adopted SFAS 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. Consolidated comprehensive income is as follows (in thousands):
<TABLE>
<CAPTION>
Third Quarter Year-To-Date
Three Months Ended May 31, Nine Months Ended May 31,
----------------------------- ----------------------------
1999 1998 1999 1998
-------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net income (loss) $ (1,414) $ 343 $ (1,365) $ 2,154
Unrealized gains on marketable securities 60 9 558 290
Foreign currency translation adjustments (60) - (60) -
-------------- ------------- ------------- -------------
- 9 498 290
-------------- ------------- ------------- -------------
Comprehensive income (loss) $ (1,414) $ 352 $ (867) $ 2,444
-------------- ------------- ------------- -------------
-------------- ------------- ------------- -------------
</TABLE>
NOTE 6 - PRE-OPENING COSTS
The Company adopted Statement of Position ("SOP") 98-5 "Reporting on the Costs
of Start-up Activities" during the first quarter 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 warehouse 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 7 - 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 Company's
Form 10-K filed pursuant to the Securities Exchange Act of 1934 on November
25, 1998.
The following discussion and analysis should be read in conjunction with the
consolidated financial statements and the notes thereto. All dollar amounts are
in thousands.
MERCHANDISE SALES
<TABLE>
<CAPTION>
Warehouse Percent Export Percent Total Percent
Sales Change Sales Change Sales Change
----------- ----------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Third Quarter - Fiscal 1999 $21,423 71% $ 1,385 -81% $22,808 15%
Third Quarter - Fiscal 1998 12,558 - 7,284 - 19,842 -
Year-To-Date - Fiscal 1999 $55,085 65% $ 5,713 -79% $60,798 0%
Year-To-Date - Fiscal 1998 33,471 - 27,081 - 60,552 -
</TABLE>
WAREHOUSE SALES - The increase in warehouse sales in the third quarter of
fiscal 1999 over the same period in fiscal 1998, was attributable to
continued growth in sales for the two warehouses in Panama and the opening of
a new warehouse in Guatemala in April 1999, which contributed approximately
$5.7 million (27%) to warehouse sales. The year-to-date increase over the
prior period is attributable to the opening of the second warehouse in Panama
during the second quarter of fiscal 1998, increased merchandising and
marketing efforts and the newly opened Guatemala location in the current
quarter of fiscal 1999.
EXPORT SALES - The decreases in export sales to Asian licensees during the third
quarter and the year-to-date periods were primarily due to the continuing
economic weakness in the region resulting in reduced export sales to existing
locations and a decrease in the number of licensee warehouses.
MERCHANDISE GROSS MARGIN
<TABLE>
<CAPTION>
Warehouse Percent Export Percent
Gross Percent of Gross Percent of
Margin Change Sales Margin Change Sales
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Third Quarter - Fiscal 1999 $ 2,580 56% 12.0% $ 45 -81% 3.2%
Third Quarter - Fiscal 1998 1,652 - 13.2% 239 - 3.3%
Year-To-Date - Fiscal 1999 $ 6,902 61% 12.5% $ 179 -80% 3.1%
Year-To-Date - Fiscal 1998 4,295 - 12.8% 888 - 3.3%
</TABLE>
WAREHOUSE GROSS MARGIN - The increase in warehouse gross margin dollars for the
third quarter and year-to-date fiscal 1999 amounts was primarily a factor of
higher sales. During the third quarter of fiscal 1999, the slight decrease in
gross margin percentage was primarily due to continued focus on competitive
pricing strategy. The year-to-date gross margin percentage was comparable to
prior year's period.
EXPORT GROSS MARGIN - Export gross margin dollars decreased over prior year's
comparable quarter and year-to-date periods primarily due to the decrease in
export sales. Export sales decreased principally due to the continuing economic
weakness in the region resulting in reduced export sales to existing locations
and a decrease in the number of licensee warehouses. The gross margin
percentages for export sales were consistent with prior year's comparable
quarter and year-to-date periods.
8
<PAGE>
OTHER REVENUES
<TABLE>
<CAPTION>
International Auto Referral,
Royalties Percent Travel and Percent
& Other Income Change Other Programs Change
------------------ ----------- ------------------ ----------
<S> <C> <C> <C> <C>
Third Quarter - Fiscal 1999 $ 770 60% $ 2,231 -33%
Third Quarter - Fiscal 1998 481 - 3,324 -
Year-To-Date - Fiscal 1999 $ 1,628 -26% $ 9,173 -6%
Year-To-Date - Fiscal 1998 2,214 - 9,729 -
</TABLE>
International royalties and other income is primarily comprised of royalties
received from licensed operations and membership fee income from warehouses
under joint venture arrangements. Beginning in fiscal 1999, the Company changed
accounting for membership fee income from a cash to deferred method, whereby
membership fee income is recognized ratably over the annual membership period.
On a pro forma basis, assuming the newly adopted accounting treatment for
deferring membership fees had been in effect in fiscal 1998, international
royalties and other income would have been $547 and $1,956 in the third quarter
and year-to-date periods, respectively; and the change over prior year periods
in international royalties and other income would have been an increase of 41%
and a decrease of 17%, respectively.
The increase in international royalties and other income for the third quarter
of fiscal 1999 over the prior year's comparable quarter was primarily from
increased membership fees attributable to the Company's warehouse expansion in
fiscal year 1999. For the nine months ended May 31, 1999, international
royalties and other income was lower due mainly to a reduction in royalty income
from lower warehouse sales at licensed locations and a reduced number of
licensed locations, even after giving effect for the change in accounting
treatment related to membership fees mentioned in the preceding paragraph.
The Company's auto referral program was sold effective April 1, 1999 with a
resulting realized gain of approximately $798,000. As a result of the sale,
revenues for both the third quarter and year-to-date periods of fiscal 1999 for
auto referral, travel and other programs decreased from the prior periods
presented.
SELLING, GENERAL AND ADMINISTRATIVE
<TABLE>
<CAPTION>
Auto Referral,
Percent Travel and Percent
International Change Other Programs Change
--------------- ----------- ----------------- -----------
<S> <C> <C> <C> <C>
Third Quarter - Fiscal 1999 $ 5,796 49% $ 1,526 -43%
Third Quarter - Fiscal 1998 3,893 - 2,672 -
Year-To-Date - Fiscal 1999 $ 13,903 41% $ 6,660 -19%
Year-To-Date - Fiscal 1998 9,854 - 8,197 -
</TABLE>
During the third quarter of fiscal 1999, international expenses increased
primarily due to expenses related to the opening of the Guatemala store, higher
expenses associated with increased sales and pre-opening costs related to sites
under construction. During the third quarter and year-to-date periods of fiscal
1999, Auto Referral, Travel Program and other expenses decreased primarily due
to the sale of the Company's auto referral program and the elimination of a
service center test program in May 1998.
9
<PAGE>
CORPORATE ADMINISTRATIVE EXPENSES
<TABLE>
<CAPTION>
Percent
Amounts Change
--------------- ---------------
<S> <C> <C>
Third Quarter - Fiscal 1999 $ 1,686 79%
Third Quarter - Fiscal 1998 941 -
Year-To-Date - Fiscal 1999 $ 4,511 100%
Year-To-Date - Fiscal 1998 2,252 -
</TABLE>
During the third quarter and year-to-date fiscal 1999, corporate administrative
expenses increased primarily due to higher compensation expense related to the
adoption of the 1998 Equity Participation Plan and corporate costs related to
the opening of new locations.
REAL ESTATE OPERATIONS (NET)
<TABLE>
<CAPTION>
Gain Net
Revenues Expenses On Sales Income
------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Third Quarter - Fiscal 1999 $ 213 $ (182) $ 122 $ 153
Third Quarter - Fiscal 1998 473 (339) 555 689
Year-To-Date - Fiscal 1999 $ 627 $ (519) $ 1,258 $ 1,366
Year-To-Date - Fiscal 1998 1,683 (1,124) 664 1,223
</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 prior to the end of fiscal 2000.
During the third quarter of fiscal 1999, gain on sales of properties was lower
than the previous year's quarter, accounting primarily for the change in real
estate net income between periods.
For the year-to-date period of fiscal 1999, the increase in net income from real
estate operations was primarily due to higher gain on the sales of properties.
The increase was partially offset by reduced revenues and operating expenses.
INTEREST INCOME AND REALIZED GAINS (LOSS) ON SALES OF MARKETABLE SECURITIES
Interest income for the Company reflects earnings on marketable securities, cash
balances, City Notes and a secured note receivable from a buyer of a formerly
owned property. During the third quarter and year-to-date periods of fiscal
1999, interest income decreased primarily due to a shift of balances of
marketable securities to cash and cash equivalents to fund joint venture
opportunities.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by (used in) the Company's operations during the first nine months
of fiscal 1999 and 1998 was $7.5 million, and $(3.1) million, respectively. The
increase in net cash from operating activities is primarily a result of a change
in net working capital between the periods presented.
Net cash provided by investing activities totaled $13.0 million for the first
nine months ended May 31, 1999, compared to net cash flows used in investing
activities of $67.3 million for the nine months ended in 1998. The change
between periods presented primarily relates to marketable securities in the
prior period maturing in the current period and held as cash and cash
equivalents. The net purchases of marketable securities for the first nine
months of fiscal 1998 was $63.5 million compared to net sales of $30.7
million for the first nine months of fiscal 1999. However, this amount was
offset for the first nine months of fiscal 1999 through additions to property
and equipment of $18.8 million compared to $5.1 million in the prior period
as the Company continues to open additional warehouses.
10
<PAGE>
Net cash provided by financing activities totaled $6.1 million in the first nine
months of fiscal 1999 compared to $14.7 million in the first nine months of
fiscal 1998. The decrease is primarily attributable to the repurchase of shares
of the Company's common stock in the current fiscal year.
In July 1998, the Company entered into an agreement with Grupo Solid
(Guatemala), S.A., a Guatemalan company, to open PriceSmart membership
shopping warehouses in Guatemala. The total remaining cost of the project is
projected at $4.4 million of which $1.0 million is to be contributed in cash
by the parties and $3.4 million is to be borrowed. PriceSmart owns 66% of
this venture. In early April 1999, the first store opened in Guatemala City,
Guatemala under this agreement.
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 $80.6
million of which $33.8 million is to be contributed in cash by the parties and
$46.8 million is to be borrowed. PriceSmart owns 60% of this venture. In June
1999, the first store opened in San Jose, Costa Rica under this
agreement.
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 the Panama joint venture's bank
borrowings of $3.7 million, with the remaining balance to be used in
connection with future business opportunities.
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 November 1998, the Company 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.
In June 1999, the Company entered into an agreement with Victor E. Mouttet
Limited, a Republic of Trinidad and Tobago company, to open PriceSmart
membership shopping warehouses in Trinidad. The total cost of the project is
projected at $20.0 million of which $8.0 million is to be contributed in cash
by the parties and $12.0 million is to be borrowed. The Company owns 65% of
this venture.
Management's current intention is to spend an aggregate of approximately $12
million through the end of fiscal year 2000 for international expansion in
Central America and the Caribbean. However, actual capital expenditures to fund
future business opportunities and operations 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 expects to satisfy short-term liquidity requirements through its
cash and marketable securities, cash from operations of the Company's
businesses, principal and interest payments on the City Notes and other note
receivables. The Company also expects to generate cash from sales of the
properties held for sale. Additionally, the Company anticipates that its
merchandising joint ventures in Latin America will obtain loans secured by the
assets of the joint ventures.
The Company believes that its cash balances, marketable securities and net cash
provided by operating activities, principal and interest payments on notes
receivable, sales of its properties held for sale and bank borrowings will be
sufficient to meet its long-term working capital expenditure requirements.
11
<PAGE>
Management intends to invest the Company's cash in excess of current operating
requirements in short-term, interest-bearing, investment-grade securities.
The Company, through its joint ventures, conducts international operations
primarily in Central America, and as such is subject to both economic and
political instabilities. Devaluation of local currencies relative to the U.S.
dollar causes U.S. merchandise to be less affordable, and generally results in 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 future expansion plans
anticipate entry into additional foreign countries, which may involve similar
additional economic or political risks as well as challenges that are different
from those currently encountered by the Company. The Company believes that
because its present operations and expansion plans involve numerous countries
and currencies, its exposure from any one currency devaluation would not
significantly affect operating results. Moreover, the Company engages in certain
operational strategies to mitigate the risks inherent in business transactions
conducted in foreign currencies. Nonetheless, there can be no assurance that the
Company will not experience a materially adverse effect on the Company's
financial condition as a result of the economic and political risks of
conducting an international merchandising business.
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.
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 received statements of year 2000 readiness from its key
hardware, software and imbedded system vendors, and has additionally conducted
internal testing of its transaction processing systems. The Company has assessed
readiness of its custom programs, has modified these programs as needed, and has
tested these modifications for year 2000 readiness. In addition to testing its
programs and systems individually, the Company has performed "end-to-end"
testing of its internal systems involved in its supply chain, including
purchasing, distribution, sales, and accounting. During this testing, no errors
were found related to date processing before or after January 1, 2000, including
treatment of year 2000 as a leap year. The Company will continue to test its
hardware, software, and imbedded systems as they are added or modified.
The Company has requested disclosure of year 2000 readiness from key vendors and
suppliers. The majority of the Company's vendors and suppliers have responded.
Second requests have been issued to the vendors/suppliers who did not respond.
The Company will evaluate the potential business impact of non-responsive or
non-compliant vendors/suppliers, and make contingency plans if needed.
The total cost of the year 2000 project is not expected to exceed $100,000,
excluding the cost of recently purchased hardware and software which was already
year 2000 ready. The costs of the year 2000 project are based on management's
best estimates, which are derived using 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.
12
<PAGE>
A significant part of the Company's business is derived from its activities in
Central America and Asia. The Company's business could be adversely impacted in
the event business activities in Central America and Asia are disrupted due to
year 2000 issues, with the extent of such impact dependent upon the extent of
such disruption, which may vary from country to country. The Company's business
could also be adversely impacted by supply chain disruption due to vendor /
supplier business interruption.
The Company has established a business continuity plan, which addresses the
potential unavailability of its hardware and software systems, facilities and
services (e.g. telephone, electricity, data communications) through a
combination of geographically diverse contracted facilities and equipment,
alternative procedures for processing transactions, system back-up and recovery
procedures, and redundant infrastructure (e.g. generators, alternative voice and
data communications methods). The business continuity plan was successfully
tested in February 1999 and March 1999 (in conjunction with year 2000 system
testing). Additionally, after evaluating vendor/supplier readiness, contingency
plans will be made to minimize supply chain disruption related to
vendor/supplier business interruption.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
13
<PAGE>
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:
Exhibit 10.1 - Fifth Amendment to Employment
Agreement between the Company
and Robert M. Gans, dated March 31,
1999
Exhibit 10.2 - First Amendment to Employment
Agreement between the Company and
Karen J. Ratcliff, dated March 31,
1999
Exhibit 10.3 - First Amendment to Employment
Agreement between the Company and
Thomas D. Martin, dated March 31,
1999
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K:
None were filed for the three months ended May 31,
1999.
14
<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: July 15, 1999 /S/ GILBERT A. PARTIDA
----------------------
Gilbert A. Partida
PRESIDENT & CHIEF EXECUTIVE OFFICER
Date: July 15, 1999 /S/ KAREN J. RATCLIFF
---------------------
Karen J. Ratcliff
EXECUTIVE VICE PRESIDENT,
CHIEF FINANCIAL OFFICER
15
<PAGE>
EXHIBIT 10.1
FIFTH AMENDMENT TO EMPLOYMENT AGREEMENT
This Fifth Amendment to Employment Agreement is made and entered into as of
March 31, 1999, by and between PriceSmart, Inc., a Delaware Corporation
("Employer") and Robert M. Gans ("Executive").
RECITALS
A) On September 20, 1994 an Employment Agreement was made and entered into by
and between Executive and Employer's Assignor, Price Enterprises, Inc.
B) On April 11, 1996, Section 2.3 of the Employment Agreement was amended,
such that Executive became entitled to three weeks paid vacation each year.
C) On July 23, 1996, Section 2.1 of the Employment Agreement was amended, such
that Executive's annual base salary was increased to $175,000.
D) On April 28, 1997, Section 3.1 of the Employment Agreement was amended,
such that Executive's employment term was extended to October 16, 1998.
E) On August 29, 1997, the Employment Agreement and amendments thereto were
assigned by Price Enterprises, Inc. to Employer.
F) On September 2, 1997, Section 3.1 of the Employment Agreement was amended,
such that Executive's employment term was extended to October 16, 2000.
G) Employer and Executive now desire to further amend the Employment
Agreement, as set forth hereinbelow:
AGREEMENT
1) Section 4.1 of the Employment Agreement, which currently provides:
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, 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, and to inclusion in Employer's Stock Plan, profit
sharing and retirement plan, and medical plan for the remainder of the
Employment Term. 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.
is hereby amended, effective October 16, 1999, to provide as follows:
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
1
<PAGE>
Section 3.4, Executive shall be entitled to the continuation of
Executive's base salary for one (1) year, payable in equal installments
in conformity with Employer's normal payroll period, and to inclusion
in Employer's Stock Plan, profit sharing and retirement plan, and
medical plan for the remainder of the Employment Term. 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 be reduced by the amount
of employment compensation (if any) received by Executive from a
subsequent employer of Executive during said one (1) year. 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 request by
Employer.
2) All other terms of the Employment Agreement shall remain unaltered and
fully effective.
Executed in San Diego, California, as of the date first written above.
EXECUTIVE EMPLOYER
PRICESMART, INC.
/s/ Robert M. Gans By: /s/ Gilbert A. Partida
- ----------------------------- -----------------------------
Robert M. Gans
Name: Gilbert A. Partida
---------------------------
Its: President and Chief Executive
Officer
----------------------------
2
<PAGE>
EXHIBIT 10.2
FIRST AMENDMENT TO EMPLOYMENT AGREEMENT
This First Amendment to Employment Agreement is made and entered into as of
March 31, 1999, by and between PriceSmart, Inc., a Delaware Corporation
("Employer") and Karen Ratcliff ("Executive").
RECITALS
A) On September 29, 1997 an Employment Agreement was made and entered into by
and between Employer and Executive.
B) Employer and Executive now desire to amend the Employment Agreement, as set
forth hereinbelow:
AGREEMENT
1) Section 3.1 of the Employment Agreement, which provides:
The term of Executive's employment hereunder shall commence on
September 29, 1997 and shall continue until September 28, 1999 unless
sooner terminated or extended as hereinafter provided (the "Employment
Term").
is hereby amended, effective immediately, to provide as follows:
The term of Executive's employment hereunder shall commence on
September 29, 1997 and shall continue until September 28, 2000 unless
sooner terminated or extended as hereinafter provided (the "Employment
Term").
2) Section 4.1 of the Employment Agreement, which provides:
Upon termination of this Agreement under Section 3.3 (Early Termination
by Executive), Section 3.4 (Termination for Cause) or Section 3.5
(Termination Due to Death or Disability), all salary and benefits of
Executive hereunder shall cease immediately. Upon termination of this
Agreement by Employer (prior to the expiration of the Employment term)
for any reason other than those set forth in Section 3.4 or Section
3.5, Executive shall be entitled to the continuation of Executive's
base salary for six (6) months or for the remainder of the Employment
Term, whichever is greater, payable in equal installments in conformity
with Employer's normal payroll period. If this Agreement is not
terminated, then, upon expiration of the Employment Term, and if
Executive's employment by Employer does not thereafter continue upon
mutually agreeable terms, Executive shall be entitled to continuation
of Executive's base salary for six (6) months, payable in equal
installments in conformity with Employer's normal payroll period.
Notwithstanding any of the foregoing, should Executive commence
full-time employment as a financial officer with another company prior
to the payments under this Section 4.1 becoming payable to Executive,
any payments remaining payable to Executive shall then cease. During
the period of 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.
is hereby amended, effective as of September 28, 1999, to provide as follows:
1
<PAGE>
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 one (1) year, payable in
equal installments in conformity with Employer's normal payroll period.
If this Agreement is not terminated, then, upon expiration of the
Employment Term, and if Executive's employment by Employer does not
thereafter continue upon mutually agreeable terms, Executive shall be
entitled to continuation of Executive's base salary for 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 be
reduced by the amount of employment compensation (if any) received by
Executive from a subsequent employer of Executive during said one (1)
year. 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 request by Employer.
3) All other terms of the Employment Agreement shall remain unaltered and
fully effective.
Executed in San Diego, California, as of the date first written above.
EXECUTIVE EMPLOYER
PRICESMART, INC.
/s/ Karen J. Ratcliff By: /s/ Gilbert A. Partida
- ----------------------------- ---------------------------
Karen J. Ratcliff
Name: Gilbert A. Partida
-------------------------
Its: President and Chief Executive
Officer
--------------------------
2
<PAGE>
EXHIBIT 10.3
FIRST AMENDMENT TO EMPLOYMENT AGREEMENT
This First Amendment to Employment Agreement is made and entered into as of
March 31, 1999, by and between PriceSmart, Inc., a Delaware Corporation
("Employer") and Thomas Martin ("Executive").
RECITALS
A) On March 31, 1998 an Employment Agreement was made and entered into by and
between Employer and Executive.
B) Employer and Executive now desire to amend the Employment Agreement, as set
forth hereinbelow:
AGREEMENT
1) Section 4.1 of the Employment Agreement, which provides:
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 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.
is hereby amended, effective as of March 31, 1999, to provide as follows:
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 one (1) year, payable in
equal installments in conformity with Employer's normal payroll period.
If this Agreement is not terminated, then, upon expiration of the
Employment Term, and if Executive's employment by Employer does not
thereafter continue upon mutually agreeable terms, Executive shall be
entitled to continuation of Executive's base salary for 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 be
reduced by the amount of employment compensation (if any) received by
Executive from a subsequent employer of Executive during said one (1)
year. 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 request by Employer.
2) All other terms of the Employment Agreement shall remain unaltered and
fully effective.
1
<PAGE>
Executed in San Diego, California, as of the date first written above.
EXECUTIVE EMPLOYER
PRICESMART, INC.
/s/ Thomas D. Martin By: /s/ Gilbert A. Partida
- ----------------------------- -----------------------------
Thomas D. Martin
Name: Gilbert A. Partida
---------------------------
Its: President and Chief Executive
Officer
----------------------------
2
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