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.
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
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
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
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
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
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
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
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
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
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
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
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
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
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