<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended May 31, 2000
Or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _________________to ________________
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. [X] Yes [ ] No
The registrant had 6,238,264 shares of its common stock, par value $.0001
per share, outstanding at July 7, 2000.
Page 1
<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 as of May 31, 2000
(Unaudited) and August 31, 1999 3
Condensed Consolidated Statements of Operations (Unaudited)
for the three and nine months ended May 31, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the nine months ended May 31, 2000 and 1999 5
Condensed Consolidated Statements of Stockholders' Equity (Unaudited)
for the nine months ended May 31, 2000 6
PriceSmart, Inc. Notes to Condensed Consolidated Financial Statements
(Unaudited) 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 19
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 20
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 20
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 20
ITEM 5. OTHER INFORMATION 20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 20
</TABLE>
Page 2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PRICESMART, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
May 31, August 31,
2000 1999
------------- --------------
ASSETS (Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 28,253 $ 14,957
Marketable securities 5,453 17,627
Receivables, net of allowance for doubtful accounts 4,743 4,149
Merchandise inventories 46,861 25,919
Prepaid expenses and other current assets 2,305 2,681
City notes receivable, current portion -- 2,500
Property held for sale, net 1,652 2,126
------------- --------------
Total current assets 89,267 69,959
OTHER ASSETS:
Property and equipment, net 105,454 48,507
Goodwill, net 5,227 --
Restricted cash 7,500 10,195
Deposits on land purchases -- 2,112
City notes receivable, less current portion -- 17,006
Notes receivable and other 4,921 4,295
------------- --------------
TOTAL ASSETS $ 212,369 $ 152,074
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 24,438 $ 24,679
Accrued expenses 5,561 1,760
Deferred membership income 3,251 1,998
Current portion of long-term debt 8,229 707
Other accrued expenses 2,134 3,369
------------- --------------
Total current liabilities 43,613 32,513
Long-term debt 44,076 7,787
------------- --------------
Total liabilities 87,689 40,300
------------- --------------
Minority interest 16,107 17,913
Commitments and contingencies -- --
STOCKHOLDERS' EQUITY:
Preferred stock, $.0001 par value, 2,000,000 shares authorized,
none issued -- --
Common stock, $.0001 par value, 15,000,000 shares authorized,
and 6,048,607 and 5,991,256 shares issued at May 31, 2000
and August 31, 1999, respectively 1 1
Additional paid-in capital 121,112 111,483
Notes receivable for common stock (998) (950)
Deferred compensation (830) (1,282)
Accumulated other comprehensive loss (242) (453)
Accumulated deficit (1,723) (864)
Less: Treasury stock at cost, 556,818 and 907,898 shares at
May 31, 2000 and August 31, 1999, respectively (8,747) (14,074)
------------- --------------
Total stockholders' equity 108,573 93,861
------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 212,369 $ 152,074
============= ==============
</TABLE>
See accompanying notes.
Page 3
<PAGE>
PRICESMART, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED - AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
May 31, May 31,
--------------------------------- -------------------------------
2000 1999 2000 1999
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Revenues:
Sales:
Net warehouse $ 72,604 $ 21,423 $ 198,545 $ 55,085
Export -- 1,385 421 5,713
Membership fees and royalties 2,010 770 5,786 1,628
Travel and auto programs -- 2,231 3,964 9,173
--------------- --------------- --------------- ---------------
Total revenues 74,614 25,809 208,716 71,599
--------------- --------------- --------------- ---------------
Expenses:
Cost of goods sold:
Net warehouse 63,484 18,843 173,654 48,183
Export -- 1,340 405 5,534
Selling, general and administrative:
Warehouse operations 8,629 2,301 22,771 5,921
General and administrative 4,599 3,827 13,063 10,899
Travel and auto -- 1,368 1,520 6,030
Preopening expenses 1,679 1,512 4,969 2,224
--------------- --------------- --------------- ---------------
Total expenses 78,391 29,191 216,382 78,791
--------------- --------------- --------------- ---------------
Operating loss (3,777) (3,382) (7,666) (7,192)
--------------- --------------- --------------- ---------------
Other:
Interest income 768 931 2,699 3,444
Interest expense (842) -- (1,650) --
Other income (expense) 77 (153) (79) 242
Gain on sale:
Travel and auto programs 1,133 798 1,133 798
City notes 3,948 -- 3,948 --
Real estate properties -- 122 -- 1,258
Minority interest 394 312 843 219
--------------- --------------- --------------- ---------------
Total other 5,478 2,010 6,894 5,961
--------------- --------------- --------------- ---------------
Income (loss) before provision for
income taxes 1,701 (1,372) (772) (1,231)
Provision for income taxes -- 42 87 134
--------------- --------------- --------------- ---------------
Net income (loss) $ 1,701 $ (1,414) $ (859) $ (1,365)
=============== =============== =============== ===============
Earnings (loss) per share:
Basic $ 0.32 $ (0.28) $ (0.17) $ (0.27)
=============== =============== =============== ===============
Diluted $ 0.28 $ (0.28) $ (0.17) $ (0.27)
=============== =============== =============== ===============
Shares used in per share computation:
Basic 5,392 5,044 5,196 5,137
--------------- --------------- --------------- ---------------
Diluted 5,987 5,044 5,196 5,137
--------------- --------------- --------------- ---------------
</TABLE>
See accompanying notes.
Page 4
<PAGE>
PRICESMART, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED - AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended
May 31,
------------------------------
2000 1999
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (859) $ (1,365)
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation 2,411 1,080
Allowance for doubtful accounts (187) 17
Income tax 87 134
Amortization of goodwill 44 --
Minority interest (841) (219)
Compensation expense recognized for stock options 452 1,085
Change in operating assets and liabilities
Restricted cash 2,695 (6,824)
Inventories (20,942) (4,328)
Accounts receivable and other assets 3 966
Accounts payable and other liabilities 3,491 10,178
------------- -------------
Net cash flows provided by (used in) operating activities (13,646) 724
INVESTING ACTIVITIES:
Purchases of marketable securities -- (39,672)
Sale of marketable securities 12,174 70,340
Additions to property and equipment (55,601) (18,839)
Payments of notes receivable 18,880 1,203
Acquisition of minority interest (12,500) --
Other 106 --
------------- -------------
Net cash flows provided by (used in) investing activities (36,941) 13,032
FINANCING ACTIVITIES:
Proceeds from property held for sale 440 1,532
Net proceeds from bank borrowings 43,811 255
Contributions by minority interest shareholders 4,619 10,311
Proceeds from exercise of stock options 2,456 547
Notes receivable for stock, net (48) --
Issuance of stock in acquisition of minority interest 12,500
Issuance of common stock -- 97
Purchase of treasury stock -- (6,605)
------------- -------------
Net cash flows provided by (used in) financing activities 63,778 6,137
Effect of exchange rate changes on cash
and cash equivalents 105 (61)
------------- -------------
Net increase in cash and cash equivalents 13,296 19,832
Cash and equivalents at beginning of period 14,957 5,639
------------- -------------
Cash and equivalents at end of period $ 28,253 $ 25,471
============= =============
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest expense, net of amounts capitalized $ 842 $ 91
Income taxes $ 111 $ 134
</TABLE>
See accompanying notes.
Page 5
<PAGE>
PRICESMART, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED MAY 31, 2000
(UNAUDITED - AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Other
Additional Notes Comprehensive
Common stock Paid-in Receivable for Deferred Income
Shares Amount Capital Stock Compensation (Loss)
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at August 31, 1999 5,991 $1 $111,483 $(950) $(1,282) $(453)
Exercise of stock options 58 1,884
Issuance of stock for acquisition of
Panama minority interest 7,745
Amortization of deferred compensation
452
Notes receivable for stock, net (48)
Net loss
Unrealized gain / loss on marketable
securities 106
Translation adjustment 105
Comprehensive loss
---------------------------------------------------------------------------------------
Balance at May 31, 2000 6,049 $1 $121,112 $(998) $ (830) $(242)
=======================================================================================
</TABLE>
<TABLE>
<CAPTION>
Less:
Retained Treasury stock Total
Earnings at Cost Stockholders'
(Deficit) Shares Amount Equity
-------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at August 31, 1999 $ (864) 908 $(14,074) $ 93,861
Exercise of stock options (44) 572 2,456
Issuance of stock for acquisition of
Panama minority interest (307) 4,755 12,500
Amortization of deferred compensation 452
Notes receivable for stock, net (48)
Net loss (859) (859)
Unrealized gain / loss on marketable
securities 106
Translation adjustment 105
--------
Comprehensive loss (648)
-------------------------------------------------------
Balance at May 31, 2000 $(1,723) 557 $ (8,747) $108,573
=======================================================
</TABLE>
See accompanying notes.
Page 6
<PAGE>
PRICESMART, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - COMPANY OVERVIEW AND BASIS OF PRESENTATION
COMPANY OVERVIEW: PriceSmart, Inc.'s ("PriceSmart" or the "Company") business
consists of international membership shopping stores similar to, but smaller
in size than, warehouse clubs in the United States. As of May 31, 2000, the
Company had twelve warehouse stores in operation (three in Panama, two each
in the Dominican Republic, Costa Rica, El Salvador, Honduras, and one in
Guatemala) of which the Company owns at least a majority interest. The
Company has owned a 100% interest in the operations in Panama since March 27,
2000. Also, there were six warehouse stores in operation (five in China and
one in Saipan) licensed to and operated by local business people.
Additionally, until March 1, 2000, the Company operated a domestic travel
business (see Note 9).
BASIS OF PRESENTATION: 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 current period presentation.
<TABLE>
<CAPTION>
Ownership Basis of Presentation
------------- ---------------------
<S> <C> <C>
Ventures Services, Inc. 100% Consolidated
PriceSmart Panama (see Note 10) 100% Consolidated
PriceSmart Guatemala 66% Consolidated
PriceSmart Trinidad 65% Consolidated
PSMT Caribe:
Costa Rica 60% Consolidated
Dominican Republic 60% Consolidated
El Salvador 60% Consolidated
Honduras 60% Consolidated
</TABLE>
The condensed consolidated interim financial statements of the Company included
herein have been prepared by the Company without audit, pursuant to the rules
and regulations of the Securities and Exchange Commission ("SEC") and reflect
all adjustments that are, in the opinion of management, necessary to fairly
present the financial position, results of operations, and cash flows for the
interim period presented. Certain information and footnote disclosures normally
included in consolidated financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted pursuant
to such SEC rules and regulations. Management believes that the disclosures made
are adequate to make the information presented not misleading. The results for
interim periods are not necessarily indicative of the results for the full year.
The interim financial statements should be read in conjunction with the
financial statements and notes thereto contained in the Company's audited
consolidated financial statements for the year ended August 31, 1999 filed on
Form 10-K.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
FISCAL YEAR: The Company's fiscal year ends August 31. The Company's fiscal
quarter ends are November 30, February 28 or in leap year February 29 and May
31.
Page 7
<PAGE>
PROPERTY AND EQUIPMENT: Property and equipment are stated at cost. Depreciation
is computed on a straight-line basis over the estimated useful lives of the
assets, as follows:
<TABLE>
<S> <C>
Building and improvements 10-20 years
Fixtures and equipment 3-7 years
</TABLE>
MERCHANDISE INVENTORIES: Merchandise inventories, which include merchandise for
resale, are valued at the lower of cost (average cost) or market.
USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes.
Actual results could differ from those estimates.
SEGMENT REPORTING: The Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information" which the
Company adopted 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 and deciding how to allocate
resources to segments. The Company principally operates under one segment in two
geographic regions.
BUSINESS COMBINATIONS: For business combinations accounted for under the
purchase method of accounting, the Company includes the results of operations of
the acquired business from the date of acquisition. Net assets of the acquired
business are recorded at their fair value at the date of acquisition. The excess
of the purchase price over the fair value of tangible net assets acquired is
included in goodwill in the accompanying condensed consolidated balance sheets,
and is being amortized over a 20 year period.
ACCOUNTING PRONOUNCEMENTS: In June 1998, the Financial Accounting Standards
Board ("FASB") issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The new Statement requires all
derivatives to be recorded on the balance sheet at fair value and establishes
accounting treatment for three types of hedges: hedges of changes in the fair
value of assets, liabilities, or firm commitments; hedges of the variable
cash flows of forecasted transactions; and hedges of foreign currency
exposures of net investments in foreign operations. The Company is analyzing
the implementation requirements and currently is in the process of
determining the impact, if any, on the results of operations or financial
position after the adoption of Statement No. 133.
In March 2000, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 44 ("FIN 44"), Accounting of Certain Transactions
involving Stock Compensation an interpretation of APB Opinion No. 25 ("APB
25"). FIN 44 clarifies the application of APB 25 for (a) the definition of
employee for purposes of applying APB 25, (b) the criteria for determining
whether a plan qualifies as a noncompensatory plan, (c) the accounting
consequence of various modifications to the terms of a previously fixed stock
option or award, and (d) the accounting for an exchange of stock compensation
awards in a business combination.
FIN 44 is effective July 1, 2000, but certain conclusions cover specific events
that occur after either December 15, 1998, or January 12, 2000. Management
believes that the impact of FIN 44 will not have a material effect on the
financial position or results of operations of the Company.
Page 8
<PAGE>
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
May 31, August 31,
2000 1999
--------------- ---------------
<S> <C> <C>
PROPERTY AND EQUIPMENT:
Land $ 27,833 $ 8,709
Building and improvements 32,169 20,413
Fixtures and equipment 29,994 16,724
Construction in progress 22,332 7,124
--------------- --------------
112,328 52,970
Less: accumulated depreciation (6,874) (4,463)
--------------- --------------
Property and equipment, net $ 105,454 $ 48,507
=============== ==============
</TABLE>
NOTE 4 - EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share is computed based on the weighted average shares
outstanding in the period. Diluted earnings (loss) per share includes the effect
of dilutive securities (options) except where their inclusion is antidilutive.
Computation of Net Income (Loss) Per Common Share (Basic and Diluted)
(Unaudited - amounts in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
May 31, May 31,
------------------------------ -----------------------------
2000 1999 2000 1999
-------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income (loss) used for basic
and diluted computation $ 1,701 $ (1,414) $ (859) $ (1,365)
============== ============ ============ ============
Weighted average number of
Common shares outstanding 5,392 5,044 5,196 5,137
Add:
Assumed exercise of those options
that are common stock equivalents 595 -- -- --
-------------- ------------ ------------ ------------
Adjusted shares outstanding used
for diluted computation 5,987 5,044 5,196 5,137
============== ============ ============ ============
Earnings (loss) per share:
Basic $ 0.32 $ (0.28) $ (0.17) $ (0.27)
============== ============ ============ ============
Diluted $ 0.28 $ (0.28) $ (0.17) $ (0.27)
============== ============ ============ ============
</TABLE>
All of the assumed exercises of company stock options into common shares are
excluded from diluted loss per share since their effect is antidilutive.
Page 9
<PAGE>
NOTE 5 - COMPREHENSIVE INCOME (LOSS)
During the first quarter of fiscal 1999, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income" which 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
which includes the Company's unrealized gains or losses on marketable securities
and foreign currency translation adjustments.
Consolidated comprehensive income (loss) was as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
May 31, May 31,
------------------------------ -----------------------------
2000 1999 2000 1999
-------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income (loss) $ 1,701 $ (1,414) $ (859) $ (1,365)
Unrealized gain / loss
on marketable securities 3 60 106 558
Foreign currency translation adjustments 64 (60) 105 (60)
-------------- ------------ ------------ ------------
Comprehensive income (loss) $ 1,768 $ (1,414) $ (648) $ 867
============== ============ ============ ============
</TABLE>
NOTE 6 - LOAN AGREEMENTS
In May 1999, the Company, through its joint venture arrangement in Costa Rica,
entered into a loan agreement with Banco Bilbao Vizcaya, S.A. for $3.8 million.
The term of the loan is for three years and requires quarterly interest payments
at 14%. The loan matures on May 31, 2002, at which time the principal amount is
due. The loan is secured by a collateral deposit of $3.8 million contributed by
the Company and its joint venture arrangement in Costa Rica, which earns
interest of 13.75% per annum.
In October 1999, the Company, through its joint venture arrangement in Costa
Rica, entered into a loan agreement with CitiBank, N.A. for $5.9 million. The
term of the loan is for five years and interest is calculated on the basis of
six-month LIBOR rate plus 4.0% (10.16% at May 31, 2000). Minimum principal
payments of approximately $215,000 are due quarterly, with the remaining balance
of approximately $1.6 million due at the end of the loan. The loan is
collateralized by certain land, building, fixtures and equipment of the Costa
Rica joint venture and guaranteed up to 60% by the Company and up to 40% from
the Company's joint venture partner. The loan is also subject to certain
financial and operating covenants.
In December 1999, the Company, through its joint venture arrangement in El
Salvador, entered into a loan agreement with CitiBank, N.A. for $5.0 million.
The term of the loan is for five years and interest is calculated on the basis
of three-month LIBOR rate per annum plus 4.0% (10.11% at May 31, 2000). Interest
payments are required to be made on a monthly basis. Minimum principal payments
of $218,750 are due quarterly, with approximately $1.5 million due at the end of
the loan term. The loan is collateralized by certain land, building, fixtures
and equipment of the El Salvador joint venture and guaranteed up to 60% by the
Company and up to 40% from the Company's joint venture partner. The loan is also
subject to certain financial and operating covenants.
In December 1999, the Company, through its subsidiary in Panama, entered into a
debt agreement with The Chase Manhattan Bank for $11.3 million. Advances will be
through a secured revolving credit facility through November 20, 2000.
Outstanding borrowings under the facility at November 20, 2000 will be converted
to a secured five-year term loan. Interest on the debt agreement is calculated
on the basis of three-month LIBOR rate plus 1.75% (7.86% at May 31, 2000).
Payments are made on a monthly basis, interest only while a revolving credit
facility and interest plus principal payments of $188,333 after the loan is
converted to a term loan. The loan is collateralized by certain land and
building of the underlying warehouses and guaranteed by the Company. As of May
31, 2000, the Company had borrowings of $7.5 million under the revolving credit
facility. The loan is also subject to certain financial and operating covenants.
Page 10
<PAGE>
In January 2000, the Company established an $8.0 million revolving line of
credit with Bank of America, N.A. providing for cash advances and for up to $1
million of letters of credit. The term of the revolving line of credit expires
in December 2000 and interest is calculated on the basis of Bank of America,
N.A.'s prime rate, or LIBOR plus one percentage point. The revolving line of
credit is secured by marketable securities of the Company. As of May 31, 2000,
the Company has full availability under the revolving line of credit and no
draws on the line have been made to date.
In January 2000, the Company, through its joint venture arrangement in the
Dominican Republic, entered into two separate line of credit facilities of $2.0
million each, both of which are due in six months. Interest on both credit
facilities is calculated on the basis of six-month LIBOR plus 4.25% (10.41% at
May 31, 2000) and is payable monthly. As of May 31, 2000, the full amount was
drawn on the facilities for general working capital.
In February 2000, the Company, through its joint venture arrangement in Costa
Rica, entered into a loan agreement with the Commercial International Bank &
Trust Co. Ltd. for $3.9 million. As of May 31, 2000, the Company has borrowed
$2.8 million under the loan agreement. The remaining amount was drawn in June
following the opening of the Heredia, Costa Rica store. The term of the loan
is for five years and interest is calculated on the basis of the prime rate
per annum plus 2.0% (10.75% at May 31, 2000). Interest payments are required
to be made on a monthly basis. Minimum principal payments of $139,286 are due
quarterly, with approximately $1.1 million due at the end of the loan term.
The loan is collateralized by certain land, building, fixtures and equipment
of the Costa Rica joint venture and guaranteed up to 60% by the Company and
up to 40% from the Company's joint venture partner. The loan is also subject
to certain financial and operating covenants.
In February 2000, the Company, through its joint venture arrangement in the
Dominican Republic, entered into a loan agreement with Banco Nacional de
Credito, S.A. for $4.2 million. The term of the loan is for five years and
interest is calculated on the basis of six-month LIBOR rate per annum plus
5.645% (11.8% at May 31, 2000). Interest payments are required to be made on a
monthly basis. Minimum principal payments of $207,650 are due quarterly. The
loan is collateralized by certain land, building, fixtures and equipment of the
Dominican Republic joint venture and guaranteed up to 60% by the Company and up
to 40% from the Company's joint venture partner. The loan is also subject to
certain financial and operating covenants.
In February 2000, the Company, through its joint venture arrangement in
Honduras, entered into a loan agreement with CitiBank, N.A. for $3.5 million
(proceeds from the loan were received subsequent to May 31, 2000). The term of
the loan is for five years and interest is calculated on the basis of
three-month LIBOR rate per annum plus 5.125% (11.24% at May 31, 2000). Interest
payments are required to be made on a monthly basis. Minimum principal payments
of $140,000 are due quarterly, with approximately $800,000 due at the end of the
loan term. The loan is collateralized by certain land, building, fixtures and
equipment of the Honduras joint venture and guaranteed up to 60% by the Company
and up to 40% from the Company's joint venture partner. The loan is also subject
to certain financial and operating covenants.
In March 2000, the Company, through its joint venture arrangements in the
Dominican Republic, entered into a 180-day bridge loan, which converts to a
five-year term loan, with Banco Dominicano del Progreso, S.A. for $7.0 million.
Interest on the bridge loan is 11.5% and three month LIBOR plus 4.5% on the term
loan. Interest payments are required to be made on a monthly basis. Minimum
principal payments of $350,000 are due quarterly. The loan is collateralized by
certain land, building, fixtures and equipment of the Dominican Republic joint
venture and guaranteed up to 60% by the Company and up to 40% from the Company's
joint venture partner. The loan is also subject to certain financial and
operating covenants.
In April 2000, the Company, through its joint venture arrangement in El
Salvador, entered into a loan agreement with Banco Bilbao Vizcaya, S.A. for $3.8
million. The term of the loan is payable upon demand and requires quarterly
interest payments at 11.5%. The loan is secured by a collateral deposit of $3.8
million contributed by the Company and its joint venture arrangement in El
Salvador, which earns interest of 11.25% per annum.
Page 11
<PAGE>
In April 2000, the Company, through its joint venture arrangements in Guatemala,
entered into a 180-day bridge loan, with Banco Uno, N.A., for $2.0 million. As
of May 31, 2000, $1.1 million was drawn on the bridge loan. Interest on the
bridge loan is 10.0%. Interest payments are required to be made on a monthly
basis.
In May 2000, the Company, through its joint venture arrangement in Costa Rica,
entered into a loan agreement with the Banex for $5.9 million. As of May 31,
2000, the Company has borrowed the full amount under the loan agreement. The
term of the loan is for five years and interest is calculated on the basis of
basis of six-month LIBOR rate per annum plus 5.645% (11.8% at May 31, 2000).
Interest payments are required to be made on a monthly basis. Minimum principal
payments of approximately $295,000 are due quarterly beginning in May 2001. The
loan is collateralized by certain land, building, fixtures and equipment of the
Costa Rica joint venture and guaranteed up to 60% by the Company and up to 40%
from the Company's joint venture partner. The loan is also subject to certain
financial and operating covenants.
All loans will be, or are fully guaranteed by the Company subsequent to any
minority interest purchases (see Note 10 and Note 11).
NOTE 7 - COMMITMENTS AND CONTINGENCIES
From time to time, the Company is subject to legal proceedings and claims in the
ordinary course of business. The Company currently is not aware of any such
legal proceedings or claims that it believes will have, individually or in the
aggregate, a material adverse effect on its business, financial condition or
operating results.
NOTE 8 - CITY NOTE SALE
On April 5, 2000, the Company entered into an agreement to sell ten notes
receivable from various municipalities and agencies, known as the "City Notes"
(see "Note 5 - City Notes Receivable" in the notes to the Company's audited
consolidated financial statements for the year ended August 31, 1999 filed on
Form 10-K), to the Price Family Charitable Trust ("Trust"), a California Trust.
Sol Price (a principal stockholder of PriceSmart, Inc.) and Robert Price (a
principal stockholder and Chairman of the Board of PriceSmart, Inc.)
are trustee and successor trustee, respectively, of the Trust.
The Company recognized a gain of approximately $3.9 million arising from this
transaction. The aggregate purchase price to be paid by the Trust for the City
Notes is $22.5 million. Through May 31, 2000, the Company has sold eight of the
City Notes to the Trust for $18.3 million, with the remaining amount of $4.2
million reflected in accounts receivable at the end of the quarter. Subsequent
to the quarter, the Company received consents to assignment for the two
remaining notes from the respective municipalities/agencies that issued the
original notes, and sold the remaining two notes to the Trust.
NOTE 9 - SALE OF TRAVEL BUSINESS
On March 1, 2000, the Company sold its travel business for $1.5 million to
Club-4U Inc. under an asset purchase agreement ("purchase agreement").
Club-4U Inc., a California corporation, is owned by Sol Price who is a
principal stockholder of the Company. Under the purchase agreement, Club-4U
Inc. acquired the assets primarily used in connection with the travel
businesses, subject to liabilities under the travel business existing
contracts, resulting in a gain of approximately $1.1 million.
NOTE 10 - ACQUISITION OF PANAMA MINORITY INTEREST
In March 2000, the Company entered into an agreement to acquire sole ownership
of the PriceSmart Panama business, which previously had been 51% owned by the
Company and 49% owned by BB&M International Trading Group ("BB&M"), whose
principals are several Panamanian businessmen, including Rafael Barcenas, a
Director of PriceSmart. In return for BB&M's 49% interest, PriceSmart agreed to
convey to BB&M's principals 306,748 shares of PriceSmart common stock (which
is restricted from being sold for one year).
In accordance with APB Opinion No. 16, "Business Combinations", all identifiable
assets were assigned a portion of the their respective fair values at the date
of acquisition. The excess of the purchase price over the fair value of net
assets acquired is included in goodwill, net of amortization, in the
accompanying condensed
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consolidated balance sheets and is being amortized over a period of 20 years.
Results from the Panama operations have been included, based on sole ownership,
in the financial results of the Company from the closing date of the
transaction, which occurred on March 27, 2000. As a result of this acquisition,
PriceSmart, Inc. has increased its guarantee for the outstanding loans related
to the Panama operations to 100% (see Note 6).
NOTE 11 - SUBSEQUENT EVENTS
ACQUISITION OF CARIBE MINORITY INTEREST:
In July 2000, the Company acquired the remaining 40% interest in PSMT Caribe,
Inc. PSMT Caribe is the offshore joint venture formed by PriceSmart and PSC,
S.A. (a Panamanian company with shareholders representing five Central
American and Caribbean countries) to hold their respective interests in the
PriceSmart membership warehouse clubs operating in Costa Rica, El Salvador,
Honduras and the Dominican Republic.
In return for the 40% interest in PSMT Caribe, PriceSmart issued to PSC
679,500 shares of PriceSmart common stock, half of which is restricted from
sale for one year. PSMT Caribe currently consists of membership-shopping
warehouses operating in Costa Rica, El Salvador, Honduras and the Dominican
Republic. The acquisition of all the stock held by PSC, which was completed
on July 7, 2000, will be accounted for under the purchase method of
accounting. As a result of this acquisition, PriceSmart, Inc. has increased
its guarantee for the outstanding loans related to the warehouses operating
in Costa Rica, El Salvador, Honduras and the Dominican Republic to 100% (see
Note 6).
ADDITIONAL LOANS:
In June 2000, the Company, through its joint venture arrangement in Honduras,
entered into a line of credit facility of $2.5 million, which is due in six
months. Interest on the credit facility is calculated on the basis of 12.5%
annually and is payable monthly. The full amount was drawn on the facilities
for general working capital.
In June 2000, the Company, through its joint venture arrangement in Trinidad,
entered into a loan agreement with the Royal Merchant Bank and Finance Company
Limited for $6.0 million, $3.0 million of which was drawn down on closing. The
term of the loan is for five years and interest is calculated on the basis of
LIBOR plus 4% rate per annum. Interest payments are required to be made on a
monthly basis. Minimum principal payments of $300,000 are due quarterly. The
loan is collateralized by certain land, building, fixtures and equipment of the
Trinidad joint venture and guaranteed by the Company up to its ownership
percentage. The loan is also subject to certain financial and operating
covenants.
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This Quarterly Report contains forward-looking statements concerning the
Company's anticipated future revenues and earnings, adequacy of future cash flow
and related matters. (These forward-looking statements include, but are not
limited to, statements containing the words "expect", "believe", "will", "may",
"should", "project", "estimate", and like expressions, and the negative
thereof). These statements are subject to risks and uncertainties that could
cause actual results to differ materially from the statements, including foreign
exchange risks, political or economic instability of host countries, and
competition, as well as the other risks described in the Company's SEC reports,
including the Company's Form 10-K filed pursuant to the Securities and Exchange
Act of 1934 on November 29, 1999.
The following discussion and analysis compares the results of operations for
each of the fiscal quarters ended May 31, 2000 and May 31, 1999, and should be
read in conjunction with the condensed consolidated financial statements and the
accompanying notes included within this report.
In the first quarter of fiscal 2000, the Company opened two new US-style
membership shopping warehouses in Latin America; one in Honduras (September
1999) and one in Panama (November 1999). In the second quarter of fiscal 2000,
the Company opened two additional new US-style membership shopping warehouses in
the Dominican Republic (both in December 1999). In the third quarter of fiscal
2000, the Company opened three additional US-style membership shopping
warehouses, one in El Salvador (April 2000), one in Honduras (May 2000) and one
in Costa Rica (May 2000), bringing the total number of warehouses in operation
to twelve as of May 31, 2000, compared to two warehouses at the end of the same
period last year. Also, there were six warehouse stores in operation (five in
China and one in Saipan) licensed to and operated by local business people at
the end of the third quarter of fiscal 2000, versus four licensed warehouse
stores (three in China and one in Saipan, Micronesia) at the end of the third
quarter of fiscal 1999.
COMPARISON OF THE THREE MONTHS ENDED MAY 31, 2000 AND MAY 31, 1999
Net warehouse sales increased 239% to $72.6 million for the three months ended
May 31, 2000 from $21.4 million for the three months ended May 31, 1999. The
increase was a result of seven new warehouses opened in this fiscal year
bringing the total number of warehouses in operation to 12 (three of which
opened during the third quarter of fiscal 2000) compared with three in operation
(one warehouse opened in the third quarter of fiscal 1999) at the end of the
same period last year.
The Company's warehouse gross margins for the three months ended May 31, 2000
increased to 12.6% from 12.0% for the three months ended May 31, 1999. With the
opening of the Guatemala location in the third quarter of fiscal 1999, lower
prices at the warehouse decreased overall margins in the prior year quarter in
comparison to the current year. Warehouse margins for the quarter ended
May 31, 2000 were comparable with year to date margin of 12.5%.
There were no export sales to the Company's licensee warehouses in Asia
during the three months ended May 31, 2000, compared to $1.4 million for the
three months ended May 31, 1999, as no requests for purchases were received
from the Company's licensees. The Company anticipates only minimal export
sales in the future.
Membership fees and royalties increased 160% to $2.0 million for the three
months ended May 31, 2000 from $770,000 for the three months ended May 31, 1999.
Membership fees (including other warehouse income) increased 203% to $1.8
million for the three months ended May 31, 2000 from $595,000 for the three
months ended May 31, 1999. The increase quarter over quarter was primarily a
result of the new warehouse openings and an increase in new memberships at
existing warehouses.
The travel business was sold on March 1, 2000 (See Note 9 - Sale of Travel
Business in the notes to the Condensed Consolidated Financial Statements), and
the auto referral business was sold in April 1999.
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Warehouse operating expenses increased to $8.6 million, or 11.9% of net
warehouse sales, for the three months ended May 31, 2000 from $2.3 million,
or 10.7% of net warehouse sales, for the three months ended May 31, 1999. The
increase in operating expenses is attributable to the increase in warehouse
stores in operation currently versus the prior year quarter. Warehouse
operating expenses as a percentage of net warehouse sales have increased and
is attributable to the higher costs realized during the first year from the
new warehouses in operation.
General and administrative expenses have increased to $4.6 million, or 6.3%
of net warehouse sales, for the three months ended May 31, 2000 from $3.8
million, or 17.9% of net warehouse sales, for the same three-month period a
year ago. General and administrative expenses have increased between periods
to support planned expansion efforts. As a percentage of sales, general and
administrative expenses have declined with new warehouse openings and the
resulting increase in net warehouse sales.
Travel and auto selling, general and administrative expenses represent those
expenses incurred by both the travel and auto businesses to operate their
respective programs. The travel business was sold March 1, 2000 and the auto
referral business was sold in April 1999, accounting for the change between the
quarterly periods presented.
Preopening expenses, which represent expenses incurred before a warehouse
store is opened, increased to $1.7 million for the three months ended May 31,
2000 from $1.5 million for the three months ended May 31, 1999. The increase
in preopening expenses is a result of the Company's expansion.
Interest income reflects earnings on marketable securities, cash and cash
equivalent balances, city notes receivable and certain secured notes
receivable from buyers of formerly owned properties. Interest income
decreased to $768,000 for the three months ended May 31, 2000 from $931,000
for the three months ended May 31, 1999 primarily due to decreased balances
in these interest bearing accounts as a result of the use of cash to finance
the Company's expansion.
Interest expense reflects borrowings by the Company's foreign subsidiaries
for the new warehouses, and was $842,000 (net of capitalized interest of
$285,000) for the three months ended May 31, 2000. In the prior year's
quarter, the Company had no borrowings.
Minority interest relates to an allocation of the joint venture income (losses)
to the minority interest shareholders respective interest.
On March 1, 2000, the Company sold its travel business for $1.5 million to
Club-4U Inc. under an asset purchase agreement ("purchase agreement").
Club-4U Inc., a California corporation, is owned by Sol Price who is a
principal stockholder of the Company. Under the purchase agreement, Club-4U
Inc. acquired the assets primarily used in connection with the travel
businesses, subject to liabilities under the travel business existing
contracts, resulting in a gain of approximately $1.1 million recognized in
the third quarter of fiscal 2000.
On April 5, 2000, the Company entered into an agreement to sell ten notes
receivable from various municipalities and agencies, known as the "City
Notes" (see "Note 5 - City Notes Receivable" in the notes to the Company's
audited consolidated financial statements for the year ended August 31, 1999
filed on Form 10-K), to the Price Family Charitable Trust, a California
Trust. Sol Price (a principal stockholder of PriceSmart, Inc.) and Robert
Price (a principal stockholder and Chairman of the Board of PriceSmart, Inc.)
are trustee and successor trustee, respectively, of the Trust. The aggregate
purchase price for the City Notes is $22.5 million that resulted in a gain of
$3.9 million arising from this transaction recognized in the third quarter of
fiscal 2000.
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The Company's auto referral program was sold effective April 1, 1999 with a
resulting realized gain of approximately $798,000 recognized in the third
quarter of fiscal 1999. Also during the third quarter of fiscal 1999, the
Company sold certain real estate properties resulting in a gain of $122,000.
The provision for income taxes relates to taxes on foreign operations. No
deferred tax benefit has been recognized on net operating losses and start up
costs for PriceSmart, Inc. or any of its subsidiaries. Because the
realization of such deferred tax assets is not certain, a full valuation
allowance was established. As a result, net operating losses during the
preopening periods of the foreign operations were utilized to offset income
tax on the net income for the current quarter.
COMPARISON OF THE NINE MONTHS ENDED MAY 31, 2000 AND MAY 31, 1999
Net warehouse sales increased 260% to $198.5 million for the nine months
ended May 31, 2000 from $55.1 million for the nine months ended May 31, 1999.
The increase was a result of seven new warehouses opened in this fiscal year,
bringing the total number of warehouses in operation to 12 compared to three
in operation at May 31, 1999.
The Company's warehouse gross margins were 12.5% for the nine months ended
May 31, 2000 and 1999. Despite having opened seven new warehouses in the
first nine months of fiscal 2000, which usually results in lower margins at
new warehouses during initial entry into a market offset against higher
margins attained in ancillary businesses (including the company's Ventajas
magazine, rental income, food service, baking and photo centers) as a result
of increased sales and revenues from these services.
Export sales to the Company's licensee warehouses in Asia decreased to
$421,000 for the nine months ended May 31, 2000 from $5.7 million for the
nine months ended May 31, 1999, as minimal purchases were received from the
Company's licensees. The Company anticipates only minimal export sales in the
future.
Membership fees and royalties increased 263% to $5.8 million for the nine
months ended May 31, 2000 from $1.6 million for the nine months ended May 31,
1999. Membership fees (including other warehouse income) increased 472% to
$4.5 million for the nine months ended May 31, 2000 from $787,000 for the
nine months ended May 31, 1999. The increase between periods is a result of
the new warehouse openings and an increase in new memberships at existing
warehouses in addition to lower membership income recognized in the first
three quarters of last year as the Company transitioned from the cash method
to deferred method in accounting for membership income.
Travel and auto program revenues were $4.0 million for the nine months ended May
31, 2000 compared to $9.2 million for the nine months ended May 31, 1999. For
the nine months ended May 31, 2000, travel revenue was $4.0 million compared to
$4.6 million for the same period last year. The travel business was sold on
March 1, 2000 (see Note 9 - Sale of Travel Business in the notes to the
Condensed Consolidated Financial Statements), and the auto referral business was
sold in April 1999.
Warehouse operating expenses increased to $22.8 million, or 11.5% of net
warehouse sales, for the nine months ended May 31, 2000 from $5.9 million, or
10.7% of net warehouse sales, for the nine months ended May 31, 1999. The
increase in operating expenses is attributable to the increase in warehouse
stores in operation currently compared to the same period last year.
Warehouse operating expenses as a percentage of net warehouse sales have
increased and is attributable to the higher costs realized during the first
year from the new warehouses in operation.
General and administrative expenses have increased to $13.1 million, or 6.6%
of net warehouse sales, for the nine months ended May 31, 2000 from $10.9
million, or 19.8% of net warehouse sales, for the same nine-month period a
year ago. General and administrative expenses have increased between periods
to support planned expansion efforts and one time process improvements in
building the infrastructure to support the rapid growth. As a percentage of
sales, general and administrative expenses have declined due to higher sales
from added warehouse openings.
Travel and auto selling, general and administrative expenses represent those
expenses incurred by both the travel and auto businesses to operate their
respective programs. The travel business was sold March 1, 2000 and the auto
referral business was sold in April 1999, accounting for the change between the
quarterly periods presented.
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Preopening expenses, which represent expenses incurred before a warehouse store
is opened, increased to $5.0 million for the nine months ended May 31, 2000 from
$2.2 million for the nine months ended May 31, 1999. The increase in preopening
expenses is a result of the Company's expansion.
Interest income reflects earnings on marketable securities, cash and cash
equivalent balances, city notes receivable and certain secured notes
receivable from buyers of formerly owned properties. Interest income
decreased to $2.7 million for the nine months ended May 31, 2000 from $3.4
million for the nine months ended May 31, 1999 primarily due to decreased
balances in these interest bearing accounts as a result of the use of cash to
finance the Company's expansion.
Interest expense reflects borrowings by the Company's foreign subsidiaries
for the new warehouses, and was $1.7 million (net of capitalized interest of
$285,000) for the nine months ended May 31, 2000. At the end of the same
period one year ago, the Company had no borrowings.
Minority interest relates to an allocation of the joint venture income (losses)
to the minority interest shareholders respective interest.
On March 1, 2000, the Company sold its travel business for $1.5 million to
Club-4U Inc. under an asset purchase agreement ("purchase agreement").
Club-4U Inc., a California corporation, is owned by Sol Price who is a
principal stockholder of the Company. Under the purchase agreement, Club-4U
Inc. acquired the assets primarily used in connection with the travel
businesses, subject to liabilities under the travel business existing
contracts, resulting in a gain of approximately $1.1 million recognized in
the third quarter of fiscal 2000.
On April 5, 2000, the Company entered into an agreement to sell ten notes
receivable from various municipalities and agencies, known as the "City
Notes" (see "Note 5 - City Notes Receivable" in the notes to the Company's
audited consolidated financial statements for the year ended August 31, 1999
filed on Form 10-K), to the Price Family Charitable Trust, a California
Trust. Sol Price (a principal stockholder of PriceSmart, Inc.) and Robert
Price (a principal stockholder and Chairman of the Board of PriceSmart, Inc.)
are trustee and successor trustee, respectively, of the Trust. The aggregate
purchase price for the City Notes is $22.5 million that resulted in a gain of
$3.9 million arising from this transaction recognized in the third quarter of
fiscal 2000.
The Company's auto referral program was sold effective April 1, 1999 with a
resulting realized gain of approximately $798,000 recognized in fiscal 1999
through May 31, 1999. Also during fiscal 1999, the Company sold certain real
estate properties resulting in a gain of approximately $1.3 million through
May 31, 1999.
The provision for income taxes relates to taxes on foreign operations. No
deferred tax benefit has been recognized on net operating losses and start up
costs. Because the realization of such deferred tax assets is not certain, a
full valuation allowance was established.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary capital requirement is the financing of land
acquisition, construction and equipment costs for new international
warehouses plus the cost of pre-opening and working capital requirements.
Management plans to spend an aggregate of approximately $80 million during
fiscal 2000, for expansion in Latin America and the Caribbean to open eleven
new stores in fiscal 2000. However, actual capital expenditures for new
warehouse locations and operations may vary from estimated amounts depending
on the number of new warehouses opened, business conditions and other risks
and uncertainties to which the Company and its businesses are subject.
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As of May 31, 2000, the Company had entered into financing arrangements
(commencing in fiscal 1999) totaling approximately $68.2 million ($42.9
million in term loans and $25.3 million in bridge loans and lines of credit).
As of May 31, 2000, the Company had remaining availability under its
financing agreements of approximately $13.8 million, which will be drawn upon
for building construction and general working capital requirements as
necessary.
Subsequent to May 31, 2000, the Company, through its joint venture
arrangement in Honduras, entered into a line of credit facility of $2.5
million, which is due in six months. Interest on the credit facility is
calculated on the basis of 12.5% annually and is payable monthly. The full
amount was drawn on the facilities for general working capital.
Subsequent to May 31, 2000, the Company, through its joint venture
arrangement in Trinidad, entered into a loan agreement with Royal Bank for
$6.0 million, $3.0 million of which was drawn down on closing. The term of
the loan is for five years and interest is calculated on the basis of
three-month LIBOR rate per annum. Interest payments are required to be made
on a monthly basis. Minimum principal payments of $300,000 are due quarterly.
The loan is collateralized by certain land, building, fixtures and equipment
of the Trinidad joint venture and guaranteed by the Company up to its
ownership percentage. The loan is also subject to certain financial and
operating covenants.
In addition to the above borrowings, the Company expects to obtain financing
for several new warehouse locations opened subsequent to May 31, 2000 and
through August 31, 2000.
The Company believes that borrowings under its current credit facilities,
together with its other sources of liquidity described above, will be sufficient
to meet its working capital and capital expenditure requirements for the
foreseeable future. However, if such sources of liquidity are insufficient to
satisfy the Company's liquidity requirements, the Company may need to sell
equity or debt securities or obtain additional credit facilities or reduce the
number of anticipated warehouse openings. There can be no assurance that such
financing alternatives will be available under favorable terms, if at all.
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 currency
effects on the cost of U.S.-sourced products which may make these products more
expensive in local currencies and less affordable. 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 experienced no year 2000 adverse effects on its internal systems
or any involved in its supply chain, including purchasing, distribution, sales,
and accounting. Also, 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 monitor its hardware, software, and imbedded systems as
they are added or modified.
A significant part of the Company's business is derived from its activities in
Latin America and Asia. The Company's business could be adversely impacted in
the event business activities in Latin America and Asia are disrupted due to
year 2000 issues, with the extent of such impact dependent upon the extent of
such disruption,
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which may vary from country to country. The Company's business could also be
adversely impacted by supply chain disruption due to vendor and supplier
business interruption. To date there has been no year 2000 adverse effects in
the Company's foreign operations.
Item 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company conducts international operations primarily in Latin America,
and as such is subject to both economic and political instabilities that
cause volatility in foreign currency exchange. During fiscal 1999, the
Company opened warehouses in three foreign countries through joint venture
arrangements. Thus far in fiscal 2000, the Company has opened warehouses in
two additional foreign countries through joint venture arrangements. For the
nine months ended May 31, 2000, approximately 73% of the Company's net
warehouse sales were in foreign currencies. The Company's future expansion
plans anticipate entry into additional foreign countries, which may involve
similar economic and 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. 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.
Translation adjustments from the Company's non-U.S. denominated joint venture
arrangements in Latin America totaled $136,000 for the nine months ended May 31,
2000 compared to $60,000 for the nine months ended May 31, 1999. Translation
adjustments from the Company's non-U.S. denominated joint venture arrangements
in Latin America totaled $245,000 for fiscal 1999.
Foreign currencies in most of the Latin American and Caribbean countries have
historically devalued against the U.S. dollar and most are expected to
continue to devalue. Managing foreign exchange is critical for operating
successfully in these markets and the Company manages its risks through a
combination of hedging currencies through Non Deliverable Forward Exchange
Contracts (NDF) and internal hedging procedures. As of May 31, 2000, the
Company had no NDFs outstanding and the cost associated with these contracts
through May 31, 2000 was not material. The Company will continue to purchase
NDF's where necessary to mitigate foreign exchange losses, but due to the
volatility and lack of derivative financial instruments in the countries the
Company operates, significant risk from unexpected devaluation of local
currencies exist. Foreign exchange transaction losses realized for the nine
months ended May 31, 2000 (including the cost of the NDF's) was approximately
$1.4 million and recognized in cost of goods sold.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
In April the Company issued 25,157 shares of the Company's common
stock to Victor E. Mouttet Limited ("Mouttet") as consideration for
its sale to us of all of its shares of PSMT Trinidad/Tobago
Limited, a Republic of Trinidad and Tobago company.
On March 27, 2000, the Company issued 306,748 shares of the
Company's common stock to the principals of BB&M International
Trading Group as consideration for BB&M's sale to us of all of its
shares of our subsidiaries PriceCostco de Panama, S.A. and PB Real
Estate, S.A.
The issuance of the Company's common stock in connection with the
transactions described above was effected pursuant to the exemption
from registration provided by Section 4(2) of the Securities Act of
1933, as amended (the "Securities Act"), taking into account the
representations of Mouttet and the principals of BB&M that they were
accredited investors and that they acquired the common stock of the
Company for their own account and the absence of general
solicitation or advertising.
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) List of documents filed as a part of this report:
Exhibit
Number Description
--------- -----------------
10.1 (a) City Note Purchase Agreement dated April 5, 2000, between the
Price Family Charitable Trust and PriceSmart, Inc.
10.1 (b) Amendment to City Note City Note Purchase Agreement dated
April 18, 2000, between the Price Family Charitable Trust and
PriceSmart, Inc.
10.2 (a) Promissory Note with Banco Bilbao Vizcaya, S.A. and
Inmobiliaria PriceSmart S.A. DE C.V. (El Salvador) dated April
26, 2000 for $3.750 million.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K filed for the nine months ended May 31, 2000:
On June 19, 2000, the Company filed a Form 8-K under Item 5 announcing
the Company has entered into a stock purchase agreement to acquire the
40% interest in PSMT Caribe, Inc. held by PSC, S.A. giving the Company
sole ownership.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PriceSmart, Inc.
REGISTRANT
Date: July 14, 2000 /s/ Gilbert A. Partida
-------------------------------------
Gilbert A. Partida
President and Chief Executive Officer
Date: July 14, 2000 /s/ Allan C. Youngberg
-------------------------------------
Allan C. Youngberg
Executive Vice President,
Chief Financial Officer
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