U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934.
(Mark One) /X/ Annual report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the fiscal year ended
August 31, 1999.
/ / Transitional report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the transition period from
_______ to ________.
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COMMISSION FILE NUMBER: 0-22793
PRICESMART, INC.
(Exact name of small business issuer in its charter)
DELAWARE 33-0628530
(State of other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
4649 MORENA BLVD., SAN DIEGO, CA 92117
(Address of principal executive offices, Zip Code)
Registrant's telephone number, including area code: (858) 581-4530 Securities registered pursuant to Section 12(b) of the Act: NONE |
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.0001 PAR VALUE
(Title of Class)
Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. / /
The aggregate market value of the voting stock held by non-affiliates of the Registrant as of November 23, 1999 was $99,350,213, based on the last reported sale of $38.50 per share on November 23, 1999.
As of November 23, 1999, total of 5,094,758 shares of Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Annual Report for fiscal year ending August 31, 1999, are incorporated by reference into Part II of this Form 10-K.
Portions of the Company's Proxy Statement for the Annual Meeting of Stockholders to be held on January 19, 2000 are incorporated by reference into Part III of this Form 10-K.
TABLE OF CONTENTS
PAGE
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Part I
Item 1. Business 3
Item 2. Properties 9
Item 3. Legal Proceedings 10
Item 4. Submission of Matters to a Vote of Security Holders 10
Part II
Item 5. Market for Common Stock and Related Stockholder Matters 11
THE INFORMATION REQUIRED BY ITEM 5 IS INCORPORATED HEREIN BY
REFERENCE FROM PRICESMART'S ANNUAL REPORT FOR THE FISCAL YEAR ENDED
AUGUST 31, 1999
Item 6. Selected Financial Data 11
THE INFORMATION REQUIRED BY ITEM 6 IS INCORPORATED HEREIN BY
REFERENCE FROM PRICESMART'S ANNUAL REPORT FOR THE FISCAL YEAR ENDED
AUGUST 31, 1999
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 11
THE INFORMATION REQUIRED BY ITEM 7 IS INCORPORATED HEREIN BY
REFERENCE FROM PRICESMART'S ANNUAL REPORT FOR THE FISCAL YEAR ENDED
AUGUST 31, 1999
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 11
THE INFORMATION REQUIRED BY ITEM 7A IS INCORPORATED HEREIN BY
REFERENCE FROM PRICESMART'S ANNUAL REPORT FOR THE FISCAL YEAR ENDED
AUGUST 31, 1999
Item 8. Financial Statements 11
THE INFORMATION REQUIRED BY ITEM 8 IS INCORPORATED HEREIN BY
REFERENCE FROM PRICESMART'S ANNUAL REPORT FOR THE FISCAL YEAR ENDED
AUGUST 31, 1999
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 11
Part III
Item 10. Directors and Executive Officers of the Registrant 12
THE INFORMATION REQUIRED BY ITEM 10 IS INCORPORATED HEREIN BY
REFERENCE FROM PRICESMART'S PROXY STATEMENT FOR THE ANNUAL MEETING OF
STOCKHOLDERS TO BE HELD ON JANUARY 19, 2000
Item 11. Executive Compensation 12
THE INFORMATION REQUIRED BY ITEM 11 IS INCORPORATED HEREIN BY
REFERENCE FROM PRICESMART'S PROXY STATEMENT FOR THE ANNUAL MEETING OF
STOCKHOLDERS TO BE HELD ON JANUARY 19, 2000
Item 12. Security Ownership of Certain Beneficial Owners and Management 12
THE INFORMATION REQUIRED BY ITEM 12 IS INCORPORATED HEREIN BY
REFERENCE FROM PRICESMART'S PROXY STATEMENT FOR THE ANNUAL MEETING OF
STOCKHOLDERS TO BE HELD ON JANUARY 19, 2000
Item 13. Certain Relationships and Related Transactions 12
THE INFORMATION REQUIRED BY ITEM 13 IS INCORPORATED HEREIN BY
REFERENCE FROM PRICESMART'S PROXY STATEMENT FOR THE ANNUAL MEETING OF
STOCKHOLDERS TO BE HELD ON JANUARY 19, 2000
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 13
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PART I
ITEM 1. BUSINESS
This Form 10-K contains forward-looking statements concerning the Company's anticipated future revenues and earnings, adequacy of future cash flow, expected year 2000 readiness 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 those risks described in the Company's SEC reports, including the risk factors referenced in this Form 10-K. See "Business Factors Which May Affect Future Performance."
PriceSmart, Inc. ("PriceSmart" or the "Company") owns and operates 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 August 31, 1999, there were five warehouses in operation of which the Company owns a majority interest. Also, there were five warehouses in operation (four in China and one in Saipan) licensed by the Company, but owned and operated by local business people. Additionally, the Company operates a domestic travel business. The Company's travel business generates most of its revenue through an agreement with Costco Companies, Inc. ("Costco") that expires November 30, 1999. The Company currently is engaged in discussions with Costco to extend the agreement through February 2000, but there can be no assurance the agreement will be extended. The Company operated a domestic auto referral business, marketed primarily to Costco members, until April 1, 1999, when the auto referral business was sold.
In June 1997, the Price Enterprises, Inc. ("PEI") Board of Directors approved 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 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 investment properties, except for current corporate income tax assets and liabilities.
BUSINESS STRATEGY
The Company's strategy is to focus on development of the international merchandising business and to invest in, acquire or create new merchandising businesses that leverage existing capabilities and provide appropriate returns for its stockholders. Specifically, key elements of the Company's business strategy include:
PROVIDE LOWER PRICES IN THE MARKET PLACE. The Company's principal business philosophy is to bring lower prices to the consumer. Future development of the Company's business will be directed to markets in which the Company can compete effectively by lowering the costs of goods and services to consumers.
INCREASE MARKET SHARE IN DEVELOPING MARKETS. The Company believes that it is well positioned to profit from the growth in developing markets due to its capital resources and experience with membership warehouses in Latin America and Asia. The Company intends to continue to satisfy the growing demand for consumer goods in such markets by entering into additional joint venture relationships with local business people and opening additional membership warehouses through existing and additional joint ventures, principally in Latin America and Caribbean countries.
INTERNATIONAL MERCHANDISING BUSINESSES
The Company owns and operates U.S.-style membership shopping warehouses under joint venture arrangements in Latin America using the trade name "PriceSmart" and, in certain markets, "PriceCostco". During fiscal 1999, the Company opened three new US-style membership shopping warehouses under joint venture arrangements in Latin America; one in Guatemala (April 1999), one in Costa Rica (June 1999) and one in El Salvador (August 1999) bringing the total number of warehouses owned under joint venture arrangements to five as of August 31, 1999. The Company's licensee in China opened two warehouses in China during fiscal 1999 bringing the total number of licensee warehouses to five as of August 31, 1999, through which the Company sells product (export sales) and earns royalties and other fees in connection with certain licensing and technology transfer agreements.
Subsequent to fiscal 1999, the Company opened two additional warehouses under joint venture arrangements; one in Honduras (September 1999) and one in Panama (November 1999).
The warehouses sell basic consumer goods with an emphasis on quality, low prices and efficient operations. By offering low prices on brand name and private label merchandise, the warehouses seek to generate sufficient sales volumes to operate profitably at relatively low gross margins. The typical no-frills warehouse-type buildings range in size from 45,000 to 55,000 square feet and are located in urban areas to take advantage of dense populations and relatively higher levels of disposable income. Product selection includes perishable foods and basic consumer products. The target customers are consumers and small businesses. The shopping format includes an annual membership fee that varies by market from $20 to $30.
Typically, the Company enters into licensing and technology transfer agreements with either a joint venture company (whose minority stockholders are local business people) or with local business people as licensees pursuant to which the Company provides the Company's know-how package, which includes training and management support, as well as access to the Company's computer software systems. The license also includes the right to use the "PriceSmart" mark and certain other trademarks. The Company and its licensees also enter into product sourcing agreements. The Company believes that the local business people have been interested in entering into such joint ventures and obtaining such licenses for a variety of reasons, including the track record of the Company's management team, the opportunity to purchase U.S.-sourced products, the benefits of the Company's modern distribution techniques and the opportunity to obtain exclusive rights to use the Company's trademarks in the region.
TRAVEL PROGRAM
The Company's Travel Program offers discounted prices on airline tickets, cruises, travel packages, car rentals and hotels, primarily to Costco members. The Company's Travel Program generates most of its revenue through an agreement with Costco that expires November 30, 1999. The Company currently is engaged in discussions with Costco to extend the agreement through February 2000, but there can be no assurance the agreement will be extended.
EXPANSION PLANS
The Company's expansion plans focus on opening new stores in foreign markets,
typically through joint venture arrangements, primarily in Latin America and
Caribbean countries. The Company believes such foreign markets offer
significant opportunities for growth because they are often characterized by
(i) significant geographic and logistical barriers to entry, (ii) existing
higher-priced local competitors with minimal experience with modern operating
processes in purchasing, distribution, merchandising and information
technologies, and (iii) a demand for U.S. brand-name products that are not
currently widely available in such markets.
In July 1998, the Company entered into an agreement with a Guatemalan headquartered company to form a new joint venture for a minimum of two PriceSmart membership shopping warehouses in Guatemala. PriceSmart owns 66% of this venture. The first warehouse opened in April 1999.
In September 1998, the Company entered into an agreement with PSC, S.A., whose stockholders are Latin American businessmen, to open a minimum of nine PriceSmart membership shopping warehouses in Costa Rica, the Dominican Republic, El Salvador, Honduras, and Nicaragua. PriceSmart owns 60% of this venture. The first two stores under this agreement opened in Costa Rica (June 1999) and El Salvador (August 1999).
During fiscal 1999, the Company entered into an agreement with investors from The Republic of Trinidad and Tobago to open a minimum of two PriceSmart membership shopping warehouses in Trinidad. The Company owns 60% of this venture.
RELATIONSHIP WITH COSTCO
PEI, Costco and certain of their respective subsidiaries, including the Company, entered into an Agreement Concerning Transfer of Certain Assets (the "Asset Transfer Agreement") in connection with the settlement of litigation arising from the spin-off of PEI from Costco and the prior merger between The Price Company and Costco.
PEI and Costco agreed in the Asset Transfer Agreement to eliminate all noncompete and operating agreements and to terminate all trademark and license agreements between the parties, subject to certain exceptions. Costco agreed to refrain from conducting membership store businesses in the Northern Mariana Islands, Guam and Panama through October 31, 1999. The Company has an exclusive royalty-free right (including against Costco), in the Northern Mariana Islands and Guam to use "Price Club" and "PriceCostco" marks, and in Panama to use the "PriceCostco" mark, in connection with the development, operation, advertising and promotion of the Company's business activities in such areas, subject to certain restrictions. The Asset Transfer Agreement, however, requires the Company to use diligent and reasonable efforts to negotiate with its licensee in the Northern Mariana Islands, Guam and Panama to terminate such right to use the "Price Club" and "PriceCostco" names and marks at the earliest possible date before December 12, 2009 for the Northern Mariana Islands and Guam and December 21, 2015 for Panama.
The Company's right to use such names and marks in Panama are further subject to the outcome of trademark application proceedings in Panama, which could result in earlier termination of the Company's rights. The Company expects to change the name of its warehouses in Panama from "PriceCostco" to "PriceSmart" during fiscal 2000.
The Asset Transfer Agreement also gives the Company the exclusive right to operate its Travel Program in certain Costco warehouses. The Company's right under the Asset Transfer Agreement to conduct the Travel Program in Costco warehouses expires November 30, 1999. The Company currently is engaged in discussions with Costco to extend the agreement through February 2000, but there can be no assurance the agreement will be extended. The Asset Transfer Agreement requires the Company to pay Costco, for car rentals, hotel bookings and other travel services other than vacation packages and cruises, 15% of the received commissions derived from any advertising or promotion via Costco warehouses. For vacation packages and cruises, the Company is required to pay Costco 1% of the net sales. The Company is required to use "Costco Travel Program" marks in connection with sales and promotional activities in Costco warehouses.
Costco has agreed in the Asset Transfer Agreement that PEI and its downstream affiliates may use the name "Price" in a "PriceSmart" mark, but PEI and its downstream affiliates may not use a "PriceSmart" mark in connection with a club business or other membership activity named "PriceSmart" in the United States, Canada or Mexico; provided that the limitations on the Company's rights to use the "PriceSmart" name in the United States, Canada and Mexico terminate 24 months after Costco and its downstream affiliates discontinue their use of the names "PriceCostco" and "Price Club."
CITY NOTES RECEIVABLE
The Company owns certain notes receivable from various municipalities and agencies (the "City Notes"). As of August 31, 1999, the carrying value of the City Notes was approximately $19.5 million. The City Notes carry interest rates that range from 8% to 10%. Repayment of each City Note is generally based on the relevant municipality's allocation of sales tax revenues generated by retail businesses located on a particular property associated with such City Note. For accounting purposes, the carrying value of $19.5 million of such notes represents management's estimate of discounted cash flow from the City Notes based on the stated interest rate and remaining term of the notes. Management's analysis of the discounted cash flow from the City Notes assumes no payment at maturity, because, under the terms of the City Notes, the unpaid balance of the note is forgiven at its maturity date. If actions taken by Costco, such as closure or relocation of a particular Costco warehouse, would entitle the governmental agency to withhold payment, the Company would be entitled to cause Costco to purchase such City Note at an amount equal to 72% of the June 5, 1994 book balance, less any subsequent principal repayments, plus all accrued and unpaid interest from June 5, 1994.
The Company is currently considering selling the City Notes to a third party or may use the notes as collateral on a bank loan. If realized, the proceeds from either the sale or collateral of the City Notes may be used to fund the Company's expansion plans. See "BUSINESS - Expansion Plans."
COMPETITION
The Company's international merchandising businesses compete with exporters, retailers, wholesalers and trading companies in various international markets. Specifically, the Company's international merchandising businesses compete with local store operations and, in certain markets may compete with other international retailers. The Company's Travel Program competes with a variety of other providers of travel and travel-related products and services, including telemarketing travel companies, traditional travel agencies and various on-line services available on the internet.
Many of the Company's current and potential competitors have longer operating histories, greater name recognition and significantly greater financial and marketing resources than the Company. Such competitors could undertake more aggressive and costly marketing campaigns than the Company, which may adversely affect the Company's marketing strategies, which, in turn, could have a material adverse effect on the Company's business, results of operations or financial condition. There can be no assurance that the Company can compete successfully against current or future competitors nor can there be any assurance that competitive pressures faced by the Company will not result in loss of market share or otherwise will not materially adversely affect its business, results of operations and financial condition.
INTELLECTUAL PROPERTY RIGHTS
It is the Company's policy to obtain appropriate proprietary rights protection for trademarks and significant new technologies acquired or developed by the Company. In addition, the Company relies on copyright and trade secret laws to protect its proprietary rights. The Company attempts to protect its trade secrets and other proprietary information through agreements with its joint venturers, employees, consultants and suppliers, and other similar measures. There can be no assurance, however, that the Company will be successful in protecting its proprietary rights. While management believes that the Company's trademarks, copyrights and other proprietary know-how have significant value, changing technology and the competitive marketplace make the Company's future success dependent principally upon its employees' technical competence and creative skills for continuing innovation.
There can be no assurance that third parties will not assert claims against the Company with respect to existing and future trademarks, trade names and sales techniques. In the event of litigation to determine the validity of any third party's claims, such litigation could result in significant expense to the Company and divert the efforts of the Company's management, whether or not such litigation is determined in favor of the Company.
The Company has filed applications to register under various classifications the mark "PriceSmart" in the U.S. Patent and Trademark Office, and in certain foreign countries; however, because of objections by one or more parties, there can be no assurance that the Company will obtain such registrations or that the Company has proprietary rights to the mark. In addition, as noted above, the Company has limited rights to use the "PriceCostco" name in connection with its international merchandising businesses and certain Costco marks with its Travel Program. The Asset Transfer Agreement requires the Company to attempt to phase out the use of the "PriceCostco" name and related marks in the Northern Mariana Islands, Guam and Panama. See "Business - Relationship with Costco."
In August 1999, the Company and Associated Wholesale Grocers, Inc. ("AWG") entered into an agreement regarding the trademark "PriceSmart" and related marks containing the name "PriceSmart". The Company has agreed not to use the "PriceSmart" mark or any related marks containing the name "PriceSmart" in connection with the sale or offer for sale of any goods or services within AWG's territory of operations, including the following ten states: Kansas, Missouri, Arkansas, Oklahoma, Nebraska, Iowa, Texas, Illinois, Tennessee and Kentucky. The Company, however, may use the mark "PriceSmart" or any mark containing the name "PriceSmart" on the internet or any other global computer network whether within or outside said territory, and in any national advertising campaign that cannot reasonably exclude the territory, and the Company may use the mark in connection with various travel services. AWG has agreed not to oppose any trademark applications filed by the Company for registration of the mark "PriceSmart" or related marks containing the name "PriceSmart", and AWG has further agreed not to bring any action for trademark infringement against the Company based upon the Company's use outside the territory (or with respect to the permitted uses inside the territory) of the mark "PriceSmart" or related marks containing the name "PriceSmart."
EMPLOYEES
As of August 31, 1999 the Company employed approximately 145 employees, 58 of which are assigned to the Company's international merchandising business, 33 to the travel business and 54 in corporate administrative activities. The Company believes that its future prospects will depend, in part, on its ability to continue to attract and retain skilled management personnel.
The individuals employed in the cruise division of the Company's travel business are members of a union. The Company currently has a collective bargaining agreement with such union with a one-year term, renewable year to year. The Company has never experienced any business interruption as a result of labor disputes. The Company believes that its relations with its employees are good.
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.
FACTORS WHICH MAY AFFECT FUTURE PERFORMANCE
RISKS INHERENT IN INTERNATIONAL OPERATIONS. The Company will be increasingly subject to risks inherent in operating and expanding its international membership concept. Such risks include the imposition of governmental controls, the need to comply with a wide variety of foreign regulations and U.S. export laws, political and economic instability, trade restrictions, ability to source local merchandise, changes in tariffs and taxes, longer payment cycles typically associated with international sales, and greater difficulty and costs of administering business overseas.
Success of the international business is subject to additional factors, including limitations on U.S. Company ownership in foreign countries, the availability of suitable sites, the negotiation of acceptable lease or purchase terms for such sites, permitting and regulatory compliance, the ability to meet construction schedules, the ability to hire and train qualified management and store personnel, the financial and other capabilities of the Company's licensees and business partners, and general political as well as economic and business conditions. There can be no assurance that any of these factors will not have a material adverse effect on the Company's business, financial condition or results of operations. See "BUSINESS - International Merchandising Businesses."
DEPENDENCY ON FOREIGN LICENSEES AND BUSINESS PARTNERS AND ASSOCIATED RISKS. Several of the risks associated with the international merchandising business will be within the control (in whole or in part) of the Company's licensees and business partners or may be affected by the acts or omissions of such licensees and business partners. Certain of the Company's licensees and business partners have had limited experience operating membership stores that sell consumer goods. There can be no assurance that the Company's PriceSmart membership store concept will be implemented effectively or that they will be successful in their respective markets. In the event one or more licensees or business partners are displeased with their relationship with the Company, such licensees or business partners could seek to terminate their relationships with the Company or make claims against the Company alleging that the Company acted, or failed to act, in a manner that damaged such licensees or business partners. There can be no assurance that a dissatisfied licensee or business partner would not file litigation, that the Company would prevail if any such litigation were filed or that such litigation would not have a material adverse effect of the Company's business, financial condition and results of operation. See "BUSINESS - International Merchandising Businesses."
ABILITY TO MANAGE GROWTH. The Company began an aggressive growth strategy in fiscal 1999 through the completion of joint venture agreements in Latin America and the Caribbean that intend to open six to ten new warehouses in fiscal 2000. The success of this strategy will depend to a significant degree on the Company's ability to (i) expand its operations through the opening of new warehouses, (ii) operate new warehouses on a profitable basis, and (iii) maintain positive comparable warehouse net sales. The Company operated five warehouses as of August 31, 1999 and plans to open an additional six to ten new warehouses by the end of fiscal 2000, which represents a significant increase in the number of warehouses opened and operated by the Company. These new markets may present operational, competitive, regulatory and merchandising challenges that are similar to, or different from those currently encountered by the Company. There can be no assurance that the Company will be able to adapt its operations to support these expansion plans or that the Company's new warehouses will be profitable.
The Company's ability to open new warehouses on a timely basis will also depend on a number of factors, some of which may be beyond the Company's control, including the ability to (i) locate suitable warehouse sites, (ii) negotiate acceptable lease or acquisition terms, (iii) construct sites timely, and (iv) obtain financing timely and with satisfactory terms. Additionally, the Company relies significantly on the skill and expertise of its joint venture partners and on-site warehouse managers. The Company will be required to hire, train and retain skilled managers and personnel to support its growth, and may experience difficulties hiring employees who possess the training and experience necessary to operate the Company's new warehouses, particularly in foreign markets where language, education and cultural factors may impose particular challenges. Further, the Company has encountered, and may continue to encounter, substantial delays, increased expenses or loss of potential sites due to the complexities, cultural differences and local political issues associated with the regulatory and permitting processes in the foreign markets in which the Company intends to locate its warehouses. There can be no assurance that the Company will be able to open the planned number of new warehouses according to its schedule or that it will be able to continue to attract, develop and retain the personnel necessary to pursue its growth strategy. Failure to do so could have a material adverse effect on the Company's business, financial condition and operating results.
The Company will need to continually evaluate the adequacy of its existing systems and procedures, including warehouse management, financial and inventory control and distribution systems. Moreover, as the Company grows, it will need to continually analyze the sufficiency of its inventory distribution methods and may require additional facilities in order to support its planned growth. There can be no assurance that the Company will adequately anticipate all the changing demands that its expanding operations will impose on such systems. Failure to update its internal systems or procedures as required could have a material adverse effect on the Company's business, financial condition and operating results.
RELIANCE ON COSTCO FOR TRAVEL BUSINESS. The Company's travel business generates most of its revenue through an agreement with Costco that expires November 30, 1999. The Company currently is engaged in discussions with Costco to extend the agreement through February 2000, but there can be no assurance the agreement will be extended.
COMPETITION. The Company's merchandising businesses face competition unique to its line of business. The Company's international merchandising businesses compete with exporters, wholesalers, other membership merchandisers, local retailers and trading companies in various international markets. The Company's travel business competes with a variety of other providers of travel and travel-related products and services, including telemarketing travel companies, traditional travel agencies and various on-line services available on the Internet. See "BUSINESS - Competition."
NOTES RECEIVABLE. The Company holds the City Notes. Repayment of each City Note by the relevant municipality is generally made based on that municipality's allocation of sales tax revenues generated by retail businesses located on a particular property associated with such City Note. For accounting purposes, the carrying value of $19.5 million of such notes represents management's estimate of discounted cash flow from the City Notes. Management's analysis of the discounted cash flows from the City Notes assumes no payment at maturity, because, under the terms of most of the City Notes, the unpaid balance of the note is forgiven at its maturity date. Consequently, there can be no assurance that the full stated principal amount of the City Notes will be repaid. See "BUSINESS - City Notes."
CONTROL OF PRICESMART BY CERTAIN STOCKHOLDERS. Robert E. Price, who is Chairman of the Board of PriceSmart, and Sol Price, a significant stockholder of PriceSmart and father of Robert E. Price, beneficially owned as of November 23, 1999 an aggregate of 2,368,048 shares, or approximately 46.5%, of the outstanding PriceSmart common stock. As a result, these stockholders
will effectively control the outcome of all matters submitted to the Company's stockholders for approval, including the election of directors. In addition, such ownership could discourage acquisition of the Company's common stock by potential investors, and could have an anti-takeover effect, possibly depressing the trading price of the Company's common stock.
DEPENDENCE ON KEY PERSONNEL. The Company is dependent on the efforts of its executive management team. The loss of the services of any executive could have an adverse effect on the operations of the Company.
FOREIGN CURRENCY RISKS. The Company, through its joint ventures, 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. For fiscal 1999, 28% of the Company's net warehouse sales were in foreign currencies. This amount is expected to increase significantly in fiscal 2000 to nearly 70%. The Company plans to open warehouses in additional foreign countries that may involve similar economic and political risks as well as challenges that may be 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.
Foreign currencies in most of the Latin American and Caribbean countries have historically devalued against the U.S. dollar and 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 August 31, 1999, the Company had $4.5 million in NDF's expiring at different dates through November 19, 1999. 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 in, significant risk from unexpected devaluation of local currencies exist.
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.
Additionally, the Company has contacted and will continue to contact significant vendors, suppliers, financial institutions and other third party providers upon which its business depends in an effort to determine such providers' year 2000 readiness. The Company evaluates the potential business impact of non-responsive or non-compliant providers and endeavors to make contingency plans as needed. These efforts are designed to minimize the impact to the Company should these providers fail to remediate their year 2000 issues. The Company can give no assurances that such providers or such contingency plans will be successful in resolving all year 2000 issues, and the failure of such providers to comply on a timely basis could have an adverse effect on the Company.
The total cost of the year 2000 project is not expected to exceed $100,000. The costs of the year 2000 project are based on management's best estimates, which are derived utilizing numerous assumptions. However, there can be no guarantee that these estimates will be achieved and actual results could differ materially from the estimates. Specific factors that might cause material differences include, but are not limited to, the availability and cost of trained personnel, the ability to locate and correct all relevant computer codes, and similar uncertainties.
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, 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.
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 March 1999.
ITEM 2. PROPERTIES
WAREHOUSE PROPERTIES. The Company owns or leases all of the warehouse locations and land through its joint ventures, of which it owns a majority interest. The following is a summary of the warehouse locations by country that were operational at August 31, 1999:
Location Date Opened Ownership / Lease -------- ----------- ----------------- Costa Rica: San Jose June 25, 1999 Own land and building El Salvador: Santa Elena August 26, 1999 Own land and building Guatemala: Mira Flores April 8, 1999 Lease land and building Panama: Los Pueblos October 25, 1996 Own land and building Via Brasil December 4, 1997 Lease land and building |
Subsequent to August 31, 1999, the Company opened two warehouses. The first opened on September 29, 1999, and is located in San Pedro Sula, Honduras, of which the Company owns the land and the building. The second opened on November 11, 1999 in El Dorado, Panama of which the Company leases the land and building.
PROPERTIES HELD FOR SALE. In connection with the Distribution, PEI transferred to the Company certain properties historically held for sale by PEI (the "Properties"). The Properties include improved and unimproved land and totaled $2.1 million as of August 31, 1999. The Company is currently in the process of, or under contract to sell, all of the remaining properties held for sale. The anticipated sales are expected to generate $2.0 million of net proceeds, with no significant gains or losses. Proceeds from sales of such properties will be used to fund the Company's businesses and general working capital requirements. The Company expects such transactions to be completed within the next twelve months; however, given the nature of such sales activities, there can be no assurance that these potential sales will be completed by then or that such proceeds will be fully realized.
ENVIRONMENTAL MATTERS. The Company has agreed to indemnify PEI for all of PEI's liabilities (including obligations to indemnify Costco with respect to environmental liabilities) arising out of PEI's prior ownership of the Properties and the real properties transferred by Costco to PEI that have been sold prior to the Distribution. The Company's ownership of real properties and its agreement to indemnify PEI could subject it to certain environmental liabilities. As discussed below, certain Properties are located in areas of current or former industrial activity, where environmental contamination may have occurred.
Under various federal, state and local environmental laws, ordinances and regulations, a current or previous owner or operator of real estate may be required to investigate and remediate releases or threatened releases of hazardous or toxic substances or petroleum products located at such property, and may be held liable to a governmental entity or to third parties for property damage and for investigation and remediation costs incurred by such parties in connection with the contamination. Under certain of these laws, liability may be imposed without regard to whether the owner knew of or caused the presence of the contaminants. These costs may be substantial, and the presence of such substances, or the failure to remediate properly the contamination on such property, may adversely affect the owner's ability to sell or lease such property or to borrow money using such property as collateral. Certain federal and state laws require the removal or encapsulation of asbestos-containing material in poor condition in the event of remodeling or renovation. Other federal, state and local laws have been enacted to protect sensitive environmental resources, including threatened and endangered species and wetlands. Such laws may restrict the development and diminish the value of property that is inhabited by an endangered or threatened species, is designated as critical habitat for an endangered or threatened species or is characterized as wetlands.
In 1994, Costco engaged environmental consultants to conduct Phase I assessments (involving investigation without soil sampling or groundwater analysis) at each of the properties that Costco transferred to PEI in 1994, including the Properties. The Company is unaware of any environmental liability or noncompliance with applicable environmental laws or regulations arising out of the Properties or the real properties transferred by Costco to PEI and sold prior to the Distribution that the Company believes would have a material adverse effect on its business, assets or results of operations. Nevertheless, there can be no assurance that the Company's knowledge is complete with regard to, or that the Phase I assessments have identified, all material environmental liabilities.
The Company is aware of certain environmental issues, which the Company does not expect to have a material adverse effect on the Company's business assets or results of operation, relating to three properties transferred from Costco to PEI that were sold prior to the Distribution. The Company has agreed to indemnify PEI for environmental liabilities arising out of such properties. The Company has
reserved approximately $15,000 and $30,000 with respect to potential environmental liabilities arising from PEI's prior ownership of the Phoenix (Fry's) property and Silver City property, respectively, discussed below. The Company has not taken a reserve with respect to the Meadowlands property. Set forth below are summaries of certain environmental matters relating to the properties already sold.
Phoenix (Fry's). The Phoenix (Fry's) site is a 37.1 acre site located in Phoenix, Arizona. The Phoenix (Fry's) site is located within the West Van Buren Study Area (the "WVBSA"). Volatile organic compounds ("VOCs") and petroleum hydrocarbons are present in groundwater in the WVBSA. To date, PEI (as successor to Costco) has not been identified as a potentially responsible party ("PRP") for the WVBSA. On March 8, 1995, PEI sold the Phoenix (Fry's) site, and retained responsibility for certain environmental matters. Investigations conducted in connection with the sale of the property revealed some hydrocarbon contamination in an area previously occupied by a fuel pump island. Seven underground fuel storage tanks were removed in 1989. The Arizona Department of Environmental Quality is requiring some additional testing prior to granting closure of the site. PEI's prior ownership of the Phoenix (Fry's) site creates the potential of liability for remediation costs associated with groundwater beneath the site. Costco previously agreed to indemnify and hold PEI harmless in respect of one-half of all environmental liabilities relating to the Phoenix (Fry's) site. Costco has continued to pay its share of the ongoing investigation costs associated with this site. PEI and the Company lack sufficient information about the activity of WVBSA PRPs to form an estimate of the equitable share of total liability, if any, that could be allocated to PEI for its previous ownership of this site.
Although designated by Arizona law as a "study area," the WVBSA is not a federal CERCLA site and is not listed on the National Properties List ("NPL"). Immediately to the east of the WVBSA, however, is the East Washington Study Area (the "EWSA"), which is listed on the NPL. VOCs are also present in groundwater in the EWSA. If the contamination plumes from the WVBSA and the EWSA merge, the possibility exists that the two study areas will be merged into one Federal CERCLA site.
Meadowlands. The Meadowlands site is an unimproved, 12.9 acre site located in Meadowlands, New Jersey. A prior owner used this site as a debris disposal area. Elevated levels of heavy metals (including a small area contaminated with polychlorinated biphenyl) and petroleum hydrocarbons are present in soil at the Meadowlands site. PEI, however, has not been notified by any governmental authority, and is not otherwise aware, of any material noncompliance, liability or claim relating to hazardous or toxic substances or petroleum products in connection with the Meadowlands site. PEI sold the Meadowlands site on August 11, 1995. Nevertheless, PEI's previous ownership of the Meadowlands site creates the potential of liability for remediation costs associated with groundwater beneath the site.
Silver City. The Silver City site contains or has contained petroleum hydrocarbons in the soil and groundwater. On March 20, 1996, PEI sold the Silver City site and retained responsibility for certain environmental matters. PEI is continuing to remediate the soil and groundwater at this property under supervision of local authorities.
CORPORATE HEADQUARTERS. The Company maintains its headquarters at 4649 Morena Blvd., San Diego, California 92117. The Company leases 42,000 square feet of office space from PEI at a rate $25,700 per month pursuant to a triple net lease. The term of the current lease is two years, commencing September 1, 1999, with four renewal options of two years each. The Company believes that its existing facilities are adequate to meet its current needs and that suitable additional or alternative space will be available on commercially reasonable terms as needed.
ITEM 3. LEGAL PROCEEDINGS
From time to time the Company is involved in legal proceedings, claims and litigation arising in the ordinary course of business. Management believes, however, that the ultimate outcome of all such matters should not have a material adverse effect on the Company's financial position or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters to a vote of security holders during the fourth quarter of fiscal 1999. The Company's Annual Meeting of Stockholders is scheduled for 10:00 a.m. on January 19, 2000, at the Hilton San Diego Mission Valley in San Diego, California. Matters to be voted on will be included in the Company's proxy statement to be filed with the Securities and Exchange Commission and distributed to stockholders prior to the meeting.
PART II
ITEM 5. MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The information required by Item 5 is incorporated herein by reference to page 34 of PriceSmart's Annual Report for the fiscal year ended August 31, 1999.
ITEM 6. SELECTED FINANCIAL DATA
The information required by Item 6 is incorporated herein by reference to page 12 of PriceSmart's Annual Report for the fiscal year ended August 31, 1999.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information required by Item 7 is incorporated herein by reference to pages 13 to 16 of PriceSmart's Annual Report for the fiscal year ended August 31, 1999.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The information required by Item 7A is incorporated herein by reference to page 17 of PriceSmart's Annual Report for the fiscal year ended August 31, 1999.
ITEM 8. FINANCIAL STATEMENTS
The information required by Item 8 is incorporated herein by reference to pages 18 to 33 of PriceSmart's Annual Report for the fiscal year ended August 31, 1999.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 is incorporated herein by reference from PriceSmart's Proxy Statement for the Annual Meeting of Stockholders to be held on January 19, 2000.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated herein by reference from PriceSmart's Proxy Statement for the Annual Meeting of Stockholders to be held on January 19, 2000.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated herein by reference from PriceSmart's Proxy Statement for the Annual Meeting of Stockholders to be held on January 19, 2000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated herein by reference from PriceSmart's Proxy Statement for the Annual Meeting of Stockholders to be held on January 19, 2000.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following financial statements are incorporated by reference into Part II, Item 8 of this Form 10-K from the annual report
Report of Independent Auditors
Consolidated Balance Sheets as of August 31, 1999 and 1998
Consolidated Statements of Operations for each of the three years ended August 31, 1999, 1998 and 1997
Consolidated Statements of Stockholders' Equity for each of the three years ended August 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for each of the three years August 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
(b) Reports on Form 8-K: No reports on Form 8-K were filed during the fourth quarter of fiscal 1999.
(c) See Exhibit Index and Exhibits attached to this report
(d) Financial Statement Schedules
See "Schedule II: Valuation and Qualifying Accounts" attached to this report
SCHEDULE II
PRICESMART, INC.
VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
Balance at
Beginning of Charged to Costs Balance at
Period and Expenses Deductions End of Period
---------------- ------------------- ----------------- ----------------
PROVISIONS FOR ASSET IMPAIRMENTS
Year ended August 31, 1997 8,042 2,000 (5,247) (1) 4,795
Year ended August 31, 1998 4,795 - (4,570) (2) 225
Year ended August 31, 1999 225 - (225) -
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Year ended August 31, 1997 - 1,000 - 1,000
Year ended August 31, 1998 1,000 116 (702) (3) 414
Year ended August 31, 1999 414 305 (275) 444
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(1) Deductions from asset impairments related to the sale of seven properties and the recovery of prior year write-down of land.
(2) Deductions from asset impairments related to the sale of six properties.
(3) Deductions from allowance for doubtful accounts primarily related to the recovery of prior year write down on accounts receivable.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: November 29, 1999 PRICESMART, INC.
By: /s/ GILBERT A. PARTIDA
------------------------------
Title President and Chief
-------------------
Executive Officer
-----------------
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Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ ROBERT E. PRICE Chairman of the Board November 29, 1999
-------------------
Robert E. Price
/s/ GILBERT A. PARTIDA President and Chief November 29, 1999
---------------------- Executive Officer
Gilbert A. Partida (Principal Executive
Officer)
/s/ ALLAN C. YOUNGBERG Executive Vice President, November 29, 1999
---------------------- Chief Financial Officer
Allan C. Youngberg (Principal Financial and
Accounting Officer)
/s/ RAFAEL E. BARCENAS Director November 29, 1999
---------------------
Rafael E. Barcenas
/s/ KATHERINE L. HENSLEY Director November 29, 1999
-----------------------
Katherine L. Hensley
/s/ LEON C. JANKS Director November 29, 1999
----------------
Leon C. Janks
/s/ LAWRENCE B. KRAUSE Director November 29, 1999
---------------------
Lawrence B. Krause
/s/ JAMES F. CAHILL Director November 29, 1999
------------------
James F. Cahill
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PRICESMART, INC.
EXHIBIT INDEX AND EXHIBITS
Exhibit
Number Description
------- -----------
2.1(1) Distribution Agreement dated as of August 26, 1997 between
the Company and Price Enterprises, Inc.
3.1(2) Amended and Restated Certificate of Incorporation of
PriceSmart, Inc.
3.2(2) Amended and Restated Bylaws of PriceSmart, Inc.
10.1(2) 1997 Stock Option Plan of PriceSmart, Inc.
10.2(3) Agreement Concerning Transfer of Certain Assets dated
as of November 1996 by and among Price Enterprises, Inc.,
Costco Companies, Inc. and certain of their respective
subsidiaries
10.3(a)(4) Employment Agreement dated September 20, 1994 between
Price Enterprises, Inc. and Robert M. Gans
10.3(b)(5) Third Amendment to Employment Agreement dated April 28,
1997 between Price Enterprises, Inc. and Robert M. Gans
10.3(c)(2) Fourth Amendment to Employment Agreement dated as of
September 2, 1997 between the Company and Robert M. Gans
10.3(d)(12) Fifth Amendment to Employment Agreement dated as of March
31, 1999 between the Company and Robert M. Gans
10.4(1) Employee Benefits and Other Employment Matters Allocation
Agreement dated as of August 26, 1997 between the Company
and Price Enterprises, Inc.
10.5(1) Tax Sharing Agreement dated as of August 26, 1997 between
the Company and Price Enterprises, Inc.
10.6(1) Asset Management and Disposition Agreement dated as of
August 26, 1997 between the Company and Price Enterprises,
Inc.
10.7(6) Form of Indemnity Agreement
10.8(1) Transitional Services Agreement dated as of August 26,
1997 between the Company and Price Enterprises, Inc.
10.9(2) Assignment and Assumption of Employment Agreement dated
August 29, 1997 between the Company and Price Enterprises,
Inc.
10.10(a)(2) Employment Agreement dated as of September 29, 1997
between the Company and Karen C. Ratcliff
10.10(b)(13) First Amendment of Employment Agreement between the
Company and Karen J. Ratcliff, dated March 31, 1999
10.10(c)(15) Second Amendment of Employment Agreement between the
Company and Karen J. Ratcliff, dated September 1, 1999
10.11(7) Employment Agreement dated December 15, 1997 between the
Company and Gilbert A. Partida
10.12(a)(8) Employment Agreement dated March 31, 1998 between the
Company and Thomas D. Martin
10.12(b)(14) First Amendment to Employment Agreement between Company
and Thomas D. Martin, dated March 31, 1999
10.13(8) Employment Agreement dated August 19, 1998 between the
Company and Kurt A. May
10.14(8) Members' Agreement dated September 14, 1998 between the
Company and PSMT Caribe, Inc. 10.15(8) Auto Referral
Purchase Agreement dated August 18, 1998 between the
Company and Affinity Development Group Incorporated
10.16(a)(9) Promissory Note (Includes schedule showing certain
borrowers, dates of Notes, amounts of Notes and dates of
Pledge Agreements)
10.16(b)(15) First Amendment to Promissory Note between the Company and
Kevin C. Breen, dated June 1, 1999.
10.16(c)(15) First Amendment to Promissory Note between the Company and
Ron deHarte, dated June 1, 1999.
10.16(d)(15) First Amendment to Promissory Note between the Company and
Brud Drachman, dated June 1, 1999.
10.16(e)(15) First Amendment to Promissory Note between the Company and
Thomas D. Martin, dated June 1, 1999.
10.16(f)(15) First Amendment to Promissory Note between the Company and
Kurt A. May, dated June 1, 1999.
10.16(g)(15) First Amendment to Promissory Note between the Company and
Bill Naylon, dated June 1, 1999.
10.16(h)(15) First Amendment to Promissory Note between the Company and
Ed Oats, dated June 1, 1999.
10.16(i)(15) First Amendment to Promissory Note between the Company and
Karen J. Ratcliff, dated June 1, 1999.
10.16(j)(15) Promissory Note between the Company and Allan C.
Youngberg, dated July 27, 1999
10.17(a)(10) Pledge Agreement (Includes schedule showing certain
borrowers, dates of Notes, amounts of Notes and number of
pledged shares)
10.17(b)(15) Pledge Agreement between the Company and Allan C.
Youngberg, dated July 27, 1999
10.18(11) 1998 Equity Participation Plan of PriceSmart, Inc.
10.19(a)(15) Employment Agreement dated as of July 23, 1999 between the
Company and Allan C. Youngberg
10.19(b)(15) First Amendment of Employment Agreement between the
Company and Allan C. Youngberg, dated July 26, 1999
10.20(a)(15) Employment Agreement dated as of March 31, 1998 between
the Company and K. C. Breen
10.20(b)(15) First Amendment of Employment Agreement between the
Company and K. C. Breen, dated March 31, 1999
10.20(c)(15) Second Amendment of Employment Agreement between the
Company and K. C. Breen, dated October 1, 1999
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PRICESMART, INC.
EXHIBIT INDEX AND EXHIBITS (CONTINUED)
Exhibit
Number Description
------ -----------
10.21(15) Trademark Agreement between the Company and Associated
Wholesale Grocers, Inc., dated August 1, 1999
11.1(15) Computation of Net Loss Per Common Share (Basic and
Diluted)
13.1(15) Portions of the Company's Annual Report to Stockholders
for the year ended August 31, 1999
21.1(15) Subsidiaries of PriceSmart, Inc.
23.1(15) Consent of Ernst & Young LLP, Independent Auditors
27.1(15) Financial Data Schedule
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Incorporated by reference sources:
(1) Incorporated by reference to the Current Report on Form 8-K filed September 12, 1997 by Price Enterprises, Inc.
(2) Incorporated by reference to the Annual Report on Form 10-K for the year ended August 31, 1997 filed with the Commission on November 26, 1997.
(3) Incorporated by reference to Exhibit 10.2 to the Company's Registration Statement on Form 10 filed July 3, 1997.
(4) Incorporated by reference to Exhibit 10.14 to Amendment No. 1 to the Registration Statement on Form S-4 of Price Enterprises, Inc. filed with the Commission on November 3, 1994.
(5) Incorporated by reference to Exhibit 10.4 to the Quarterly Report on Form 10-Q of Price Enterprises, Inc. for the quarter ended June 8, 1997 filed with the Commission on July 17, 1997.
(6) Incorporated by reference to Exhibit 10.8 to Amendment No. 1 to the Company's Registration Statement on Form 10 filed with the Commission on August 1, 1997.
(7) Incorporated by reference to Exhibit 10.13 to the Quarterly Report on Form 10-Q of PriceSmart, Inc. for the quarter ended February 28, 1998 filed with the Commission on April 14, 1998.
(8) Incorporated by reference to the Annual Report on Form 10-K for the year ended August 31, 1998 filed with the Commission on November 25, 1998.
(9) Incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q of Price Enterprises, Inc. for the quarter ended November 30, 1998 filed with the Commission on January 14, 1999.
(10) Incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q of Price Enterprises, Inc. for the quarter ended November 30, 1998 filed with the Commission on January 14, 1999.
(11) Incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q of Price Enterprises, Inc. for the quarter ended February 28, 1999 filed with the Commission on April 14, 1999.
(12) Incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q of Price Enterprises, Inc. for the quarter ended May 31, 1999 filed with the Commission on July 15, 1999.
(13) Incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q of Price Enterprises, Inc. for the quarter ended May 31, 1999 filed with the Commission on July 15, 1999.
(14) Incorporated by reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q of Price Enterprises, Inc. for the quarter ended May 31, 1999 filed with the Commission on July 15, 1999.
(15) Filed herewith.
SECOND AMENDMENT TO EMPLOYMENT AGREEMENT
This Second Amendment to Employment Agreement is made and entered into as of September 1, 1999, by and between PriceSmart, Inc., a Delaware corporation ("Employer") and Karen Ratcliff ("Executive").
RECITALS
A) On September 29, 1997, an Employment Agreement was made and entered into by and between Employer and Executive.
B) On March 31, 1999, a First Amendment to Employment Agreement was made and entered into by and between Employer and Executive.
C) Employer and Executive now desire to further amend the Employment Agreement, as set forth hereinbelow:
AGREEMENT
1. The first sentence of Section 1.1 of the Agreement, which provides:
Executive shall serve as Chief Financial Officer and Executive Vice- President of Employer.
is hereby amended, effective as of July 27, 1999, to provide as follows:
Executive shall serve as Executive Vice President - Finance of Employer.
2. The first sentence of Section 2.1 of the Employment Agreement, which provides:
For Executive's services hereunder, Employer shall pay as base salary to Executive the amount of $135,000 during each year of the Employment Term.
is hereby amended, effective as of July 23, 1999, to provide as follows:
For Executive's services hereunder, Employer shall pay as base salary to Executive the amount of $155,000 during each year of the Employment Term.
3. All other terms of the Employment Agreement shall remain unaltered and fully effective.
Executed in San Diego, California, as of the date first written above.
EXECUTIVE EMPLOYER
PRICESMART, INC.
Karen Ratcliff By: /s/ GILBERT A. PARTIDA
----------------------------
-------------------------------
/s/ KAREN RATCLIFF Name: GILBERT A. PARTIDA
----------------------------
Its: PRESIDENT AND CEO
----------------------------
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Exhibit 10.16(b)
FIRST AMENDMENT
TO
PROMISSORY NOTE
WHEREAS, the undersigned, Kevin C. Breen ("Borrower") previously executed that certain Promissory Note in favor of PriceSmart, Inc., a Delaware corporation (the "Company") in the principal amount of $84,087.50 (the "Note");
WHEREAS, in order to amend the Note in certain respects, the Company and Borrower hereby agree as follows effective as of June 1, 1999.
I.
The first sentence of the first full paragraph of the note is hereby amended in its entirety to read as follows:
FOR VALUE RECEIVED, the undersigned Kevin C. Breen (the "Borrower") promises to pay PriceSmart, Inc., a Delaware corporation, (the "Company"), or order, the principal amount of eight four thousand eighty seven dollars and fifty cents ($84,087.50) with interest from the date hereof on the unpaid principal balance under this Note at the rate of five and eighty-five one hundredths percent (5.85%) per annum (on the basis of a 360-day year and the actual number of days elapsed).
II.
The twelfth full paragraph of the Note shall be amended in its entirety to read as follows:
Notwithstanding anything to the contrary contained in this Note or in the Pledge Agreement, Borrower hereby agrees that upon the occurrence of a default under this Note or the Pledge Agreement, the Company, in enforcing its rights and remedies hereunder and under the Pledge Agreement and any other documents and instruments executed by Borrower in connection herewith, shall have recourse to, and the right to proceed against, Borrower and any of his assets in connection with such default.
Except as expressly provided in this Amendment, all of the terms, covenants, conditions, restrictions and other provisions contained in the Note shall remain in full force and effect.
BORROWER
/s/ Kevin C. Breen |
Exhibit 10.16(c)
FIRST AMENDMENT
TO
PROMISSORY NOTE
WHEREAS, the undersigned, Ron deHarte ("Borrower") previously executed that certain Promissory Note in favor of PriceSmart, Inc., a Delaware corporation (the "Company") in the principal amount of $67,812.50 (the "Note");
WHEREAS, in order to amend the Note in certain respects, the Company and Borrower hereby agree as follows effective as of June 1, 1999.
I.
The first sentence of the first full paragraph of the Note is hereby amended in its entirety to read as follows:
FOR VALUE RECEIVED, the undersigned Ron deHarte (the "Borrower") promises to pay to PriceSmart, Inc., a Delaware corporation, (the "Company"), or order, the principal amount of sixty seven thousand eight hundred twelve dollars and fifty cents ($67,812.50) with interest from the date hereof on the unpaid principal balance under this Note at the rate of five and eighty-five one hundredths percent (5.85%) per annum (on the basis of a 360-day year and the actual number of days elapsed).
II.
The twelfth full paragraph of the Note shall be amended in its entirety to read as follows:
Notwithstanding anything to the contrary contained in this Note or in the Pledge Agreement, Borrower hereby agrees that upon the occurrence of a default under this Note or the Pledge Agreement, the Company, in enforcing its rights and remedies hereunder and under the Pledge Agreement and any other documents and instruments executed by Borrower in connection herewith, shall have recourse to, and the right to proceed against, Borrower and any of his assets in connection with such default.
Except as expressly provided in this Amendment, all of the terms, covenants, conditions, restrictions and other provisions contained in the Note shall remain in full force and effect.
BORROWER
/s/ Ron deHarte |
Exhibit 10.16(d)
FIRST AMENDMENT
TO
PROMISSORY NOTE
WHEREAS, the undersigned, Brud Drachman ("Borrower") previously executed that certain Promissory Note in favor of PriceSmart, Inc., a Delaware corporation (the "Company") in the principal amount of $19,357 (the "Note");
WHEREAS, in order to amend the Note in certain respects, the Company and Borrower hereby agree as follows effective as of June 1, 1999.
I.
The first sentence of the first full paragraph of the Note is hereby amended in its entirety to read as follows:
FOR VALUE RECEIVED, the undersigned Brud Drachman (the "Borrower") promises to pay to PriceSmart, Inc., a Delaware corporation, (the "Company"), or order, the principal amount of nineteen thousand three hundred fifty seven dollars ($19,357) with interest from the date hereof on the unpaid principal balance under this Note at the rate of five and eighty-five one hundredths percent (5.85%) per annum (on the basis of a 360-day year and the actual number of days elapsed).
II.
The twelfth full paragraph of the Note shall be amended in its entirety to read as follows:
Notwithstanding anything to the contrary contained in this Note or in the Pledge Agreement, Borrower hereby agrees that upon the occurrence of a default under this Note or the Pledge Agreement, the Company, in enforcing its rights and remedies hereunder and under the Pledge Agreement and any other documents and instruments executed by Borrower in connection herewith, shall have recourse to, and the right to proceed against, Borrower and any of his assets in connection with such default.
Except as expressly provided in this Amendment, all of the terms, covenants, conditions, restrictions and other provisions contained in the Note shall remain in full force and effect.
BORROWER
/s/ Brud Drachman |
Exhibit 10.16(e)
FIRST AMENDMENT
TO
PROMISSORY NOTE
WHEREAS, the undersigned, Thomas D. Martin ("Borrower") previously executed that certain Promissory Note in favor of PriceSmart, Inc., a Delaware corporation (the "Company") in the principal amount of $108,500 (the "Note");
WHEREAS, in order to amend the Note in certain respects, the Company and Borrower hereby agree as follows effective as of June 1, 1999.
I.
The first sentence of the first full paragraph of the Note is hereby amended in its entirety to read as follows:
FOR VALUE RECEIVED, the undersigned Thomas D. Martin (the "Borrower") promises to pay to PriceSmart, Inc., a Delaware corporation, (the "Company"), or order, the principal amount of one hundred eight thousand five hundred dollars ($108,500) with interest from the date hereof on the unpaid principal balance under this Note at the rate of five and eighty-five one hundredths percent (5.85%) per annum (on the basis of a 360-day year and the actual number of days elapsed).
II.
The twelfth full paragraph of the Note shall be amended in its entirety to read as follows:
Notwithstanding anything to the contrary contained in this Note or in the Pledge Agreement, Borrower hereby agrees that upon the occurrence of a default under this Note or the Pledge Agreement, the Company, in enforcing its rights and remedies hereunder and under the Pledge Agreement and any other documents and instruments executed by Borrower in connection herewith, shall have recourse to, and the right to proceed against, Borrower and any of his assets in connection with such default.
Except as expressly provided in this Amendment, all of the terms, covenants, conditions, restrictions and other provisions contained in the Note shall remain in full force and effect.
BORROWER
/s/ Thomas D. Martin |
Exhibit 10.16(f)
FIRST AMENDMENT
TO
PROMISSORY NOTE
WHEREAS, the undersigned, Kurt A. May ("Borrower") previously executed that certain Promissory Note in favor of PriceSmart, Inc., a Delaware corporation (the "Company") in the principal amount of $86,516 (the "Note");
WHEREAS, in order to amend the Note in certain respects, the Company and Borrower hereby agree as follows effective as of June 1, 1999.
I.
The first sentence of the first full paragraph of the Note is hereby amended in its entirety to read as follows:
FOR VALUE RECEIVED, the undersigned Kurt A. May (the "Borrower") promises to pay to PriceSmart, Inc., a Delaware corporation, (the "Company"), or order, the principal amount of eighty six thousand five hundred sixteen dollars ($86,516) with interest from the date hereof on the unpaid principal balance under this Note at the rate of five and eighty-five one hundredths percent (5.85%) per annum (on the basis of a 360-day year and the actual number of days elapsed).
II.
The twelfth full paragraph of the Note shall be amended in its entirety to read as follows:
Notwithstanding anything to the contrary contained in this Note or in the Pledge Agreement, Borrower hereby agrees that upon the occurrence of a default under this Note or the Pledge Agreement, the Company, in enforcing its rights and remedies hereunder and under the Pledge Agreement and any other documents and instruments executed by Borrower in connection herewith, shall have recourse to, and the right to proceed against, Borrower and any of his assets in connection with such default.
Except as expressly provided in this Amendment, all of the terms, covenants, conditions, restrictions and other provisions contained in the Note shall remain in full force and effect.
BORROWER
/s/ Kurt A. May ---------------------------- Kurt A. May |
Exhibit 10.16(g)
FIRST AMENDMENT
TO
PROMISSORY NOTE
WHEREAS, the undersigned, Bill Naylon ("Borrower") previously executed that certain Promissory Note in favor of PriceSmart, Inc., a Delaware corporation (the "Company") in the principal amount of $81,375 (the "Note");
WHEREAS, in order to amend the Note in certain respects, the Company and Borrower hereby agree as follows effective as of June 1, 1999.
I.
The first sentence of the first full paragraph of the Note is hereby amended in its entirety to read as follows:
FOR VALUE RECEIVED, the undersigned Bill Naylon (the "Borrower") promises to pay to PriceSmart, Inc., a Delaware corporation, (the "Company"), or order, the principal amount of eighty one thousand three hundred seventy five dollars ($81,375) with interest from the date hereof on the unpaid principal balance under this Note at the rate of five and eighty-five one hundredths percent (5.85%) per annum (on the basis of a 360-day year and the actual number of days elapsed).
II.
The twelfth full paragraph of the Note shall be amended in its entirety to read as follows:
Notwithstanding anything to the contrary contained in this Note or in the Pledge Agreement, Borrower hereby agrees that upon the occurrence of a default under this Note or the Pledge Agreement, the Company, in enforcing its rights and remedies hereunder and under the Pledge Agreement and any other documents and instruments executed by Borrower in connection herewith, shall have recourse to, and the right to proceed against, Borrower and any of his assets in connection with such default.
Except as expressly provided in this Amendment, all of the terms, covenants, conditions, restrictions and other provisions contained in the Note shall remain in full force and effect.
BORROWER
/s/ Bill Naylon |
Exhibit 10.16(h)
FIRST AMENDMENT
TO
PROMISSORY NOTE
WHEREAS, the undersigned, Ed Oats ("Borrower") previously executed that certain Promissory Note in favor of PriceSmart, Inc., a Delaware corporation (the "Company") in the principal amount of $12,803 (the "Note");
WHEREAS, in order to amend the Note in certain respects, the Company and Borrower hereby agree as follows effective as of June 1, 1999.
I.
The first sentence of the first full paragraph of the Note is hereby amended in its entirety to read as follows:
FOR VALUE RECEIVED, the undersigned Ed Oats (the "Borrower") promises to pay to PriceSmart, Inc., a Delaware corporation, (the "Company"), or order, the principal amount of twelve thousand eight hundred three dollars ($12,803) with interest from the date hereof on the unpaid principal balance under this Note at the rate of five and eighty-five one hundredths percent (5.85%) per annum (on the basis of a 360-day year and the actual number of days elapsed).
II.
The twelfth full paragraph of the Note shall be amended in its entirety to read as follows:
Notwithstanding anything to the contrary contained in this Note or in the Pledge Agreement, Borrower hereby agrees that upon the occurrence of a default under this Note or the Pledge Agreement, the Company, in enforcing its rights and remedies hereunder and under the Pledge Agreement and any other documents and instruments executed by Borrower in connection herewith, shall have recourse to, and the right to proceed against, Borrower and any of his assets in connection with such default.
Except as expressly provided in this Amendment, all of the terms, covenants, conditions, restrictions and other provisions contained in the Note shall remain in full force and effect.
BORROWER
/s/ Ed Oats |
Exhibit 10.16(i)
FIRST AMENDMENT
TO
PROMISSORY NOTE
WHEREAS, the undersigned, Karen J. Ratcliff ("Borrower") previously executed that certain Promissory Note in favor of PriceSmart, Inc., a Delaware corporation (the "Company") in the principal amount of $94,937.50 (the "Note");
WHEREAS, in order to amend the Note in certain respects, the Company and Borrower hereby agree as follows effective as of June 1, 1999.
I.
The first sentence of the first full paragraph of the Note is hereby amended in its entirety to read as follows:
FOR VALUE RECEIVED, the undersigned Karen J. Ratcliff (the "Borrower") promises to pay to PriceSmart, Inc., a Delaware corporation, (the "Company"), or order, the principal amount of ninety four thousand nine hundred thirty seven dollars and fifty cents ($94,937.50) with interest from the date hereof on the unpaid principal balance under this Note at the rate of five and eighty-five one hundredths percent (5.85%) per annum (on the basis of a 360-day year and the actual number of days elapsed).
II.
The twelfth full paragraph of the Note shall be amended in its entirety to read as follows:
Notwithstanding anything to the contrary contained in this Note or in the Pledge Agreement, Borrower hereby agrees that upon the occurrence of a default under this Note or the Pledge Agreement, the Company, in enforcing its rights and remedies hereunder and under the Pledge Agreement and any other documents and instruments executed by Borrower in connection herewith, shall have recourse to, and the right to proceed against, Borrower and any of his assets in connection with such default.
Except as expressly provided in this Amendment, all of the terms, covenants, conditions, restrictions and other provisions contained in the Note shall remain in full force and effect.
BORROWER
/s/ Karen J. Ratcliff |
Exhibit 10.16(j)
PROMISSORY NOTE
$149,978 San Diego, California July 27, 1999
FOR VALUE RECEIVED, the undersigned, Allan C. Youngberg (the "Borrower") promises to pay to PriceSmart, Inc., a Delaware corporation, (the "Company"), or order, the principal amount of one hundred forty nine thousand nine hundred seventy eight dollars ($149,978) with interest from the date hereof on the unpaid principal balance under this Note at the rate of five and eighty five one hundredth percent (5.85%) per annum (on the basis of a 360-day year and the actual number of days elapsed). The principal amount of this Note shall be due and payable on or before the earlier of six years from the date of this Note, or the date on which the indebtedness under this Note is accelerated as provided for under this Note or the Pledge Agreement (as defined below). The interest payable under this Note shall be payable in bi-monthly installments throughout the term of this Note. Any accrued and unpaid interest under this Note shall be due and payable concurrently with principal.
Borrower agrees that, while Borrower is employed by the Company, all bi-monthly interest payments under this Note shall be made to the company or its order in regular bi-monthly payroll deductions, beginning August 20, 1999. All payments under this Note shall be made to the Company or its order in lawful money of the United States of America at the offices of the Company at its then principal place of business or at such other place as the Company or any holder hereof shall designate for such purpose from time to time.
Each payment under this Note shall be applied in the following order: (i) to the payment of costs and expenses provided for under this Note or the Pledge Agreement; (ii) to the
payment of accrued and unpaid interest; and (iii) to the payment of outstanding principal. The Company and each holder hereof shall have the continuing and exclusive right to apply or reverse and reapply any and all payments under this Note.
This Note may be prepaid in whole or in part at any time, after five (5) days written notice of Borrower's intention to make any such prepayment, which notice shall specify the date and amount of such prepayment. Any prepayment shall be without penalty except that interest shall be paid to the date of payment on the principal amount prepaid. After any partial prepayment hereunder, interest shall be computed on the principal balance due after deducting the principal portion of such prepayment. Any such partial prepayment shall be applied against the principal due at maturity.
Upon the occurrence of a default under this Note or the Pledge Agreement, including, without limitation, failure to make any principal or interest payment by the stated maturity date (whether by acceleration, notice of prepayment or otherwise), interest shall thereafter accrue on the entire unpaid principal balance under this Note, including without limitation any delinquent interest which has been added to the principal amount due under this Note pursuant to the terms hereof, at the rate set forth herein. In addition, upon the occurrence of a default under this Note or the Pledge Agreement the holder of this Note may, at its option, without notice to or demand upon Borrower or any other party, declare immediately due and payable the entire principal balance hereof together with all accrued and unpaid interest thereon, plus any other amounts then owing pursuant to this Note or the Pledge Agreement, whereupon the same shall be immediately due and payable. On each anniversary of the date of any default under this Note and while such default is continuing, all interest which has become payable and is then delinquent shall, without curing the default under this Note by reason of such delinquency, be
added to the principal amount due under this Note, and shall thereafter bear interest at the same rate as is applicable to principal, with interest on overdue interest to bear interest, in each case to the fullest extent permitted by applicable law, both before and after default, maturity, foreclosure, judgment and the filing of any petition in a bankruptcy proceeding. Notwithstanding anything in this Note to the contrary, in no event shall interest be charged under this Note which would violate any applicable law, and if the interest set forth in this Note would violate any law it shall be reduced to an amount which would not violate any law.
This Note is secured under that certain Pledge Agreement, dated as of July 27, 1999, by and between Borrower and the Company (as amended, modified or supplemented from time to time, the "PLEDGE AGREEMENT"). Reference is hereby made to the Pledge Agreement for a description of the nature and extent of the security for this Note and the rights with respect to such security of the holder of this Note. Nothing herein shall be deemed to limit the rights of the Company under this Note or the Pledge Agreement, all of which rights and remedies are cumulative.
No waiver or modification of any of the terms of this Note shall be valid or binding unless set forth in a writing specifically referring to this Note and signed by a duly authorized officer of the Company or any holder of this Note, and then only to the extent specifically set forth therein.
If any default occurs in any payment due under this Note, Borrower and all guarantors and endorsers hereof, and their successors and assigns, promise to pay any expenses, including attorneys' fees, incurred by each holder hereof in collecting or attempting to collect the indebtedness under this Note, whether or not any action or proceeding is commenced. None of the provisions hereof and none of the holder's rights or remedies under this Note on account of
any past or future defaults shall be deemed to have been waived by the holder's acceptance of any past due payments or by any indulgence granted by the holder to Borrower.
Notwithstanding anything to the contrary herein, if Borrower's employment with the Company shall be terminated for any reason, the outstanding principal and accrued but unpaid interest under this Note shall become immediately due and payable.
Borrower and all guarantors and endorsers hereof, and their successors and assigns, hereby waive presentment, demand, diligence, protest and notice of every kind (except such notices as may be required under the Pledge Agreement), and agree that they shall remain liable for all amounts due under this Note notwithstanding any extension of time or change in the terms of payment of this Note granted by any holder hereof, any change, alteration or release of any property now or hereafter securing the payment hereof or any delay or failure by the holder hereof to exercise any rights under this Note or the Pledge Agreement. Borrower and all guarantors and endorsers hereof, and their successors and assigns, hereby waive the right to plead any and all statutes of imitation as a defense to a demand under this Note to the full extent permitted by law.
This Note shall inure to the benefit of the company, its successors and assigns and shall bind the heirs, executors, administrators, successors and assigns of Borrower. Each reference herein to powers or rights of the company shall also be deemed a reference to the same power or right of such assignees, to the extent of the interest assigned to them.
Notwithstanding anything to the contrary contained in this Note or in the Pledge Agreement, Borrower hereby agrees that upon the occurrence of a default under this Note or the Pledge Agreement, the company, in enforcing its rights and remedies hereunder and under the Pledge Agreement and any other documents and instruments executed by Borrower in connection
herewith, shall have recourse to, and the right to proceed against, Borrower and any of his assets in connection with such default.
In the event that any one or more provisions of this Note shall be held to be illegal, invalid or otherwise unenforceable, the same shall not affect any other provision of this Note and the remaining provisions of this Note shall remain in full force of effect.
This Note shall be governed by the construed in accordance with the laws of the State of California, without giving effect to the principles therof relating to conflicts of law.
IN WITNESS WHEREOF, Borrower has caused this Note to be duly executed as of the day and year first written above.
/s/ Allan C. Youngberg ---------------------- Allan C. Youngberg |
Exhibit 10.17(b)
PLEDGE AGREEMENT
This Pledge Agreement is made and entered into as of July 27, 1999, between Allan C. Youngberg (Borrower"), and PriceSmart, Inc., a Delaware corporation (the "Company").
RECITALS
A. The Company has loaned to Borrower $149,978 as evidenced by a promissory note dated as of July 27, 1999 (the "Note"), which was used by Borrower to purchase an aggregate of 3,658 shares of the Company's common stock (the "Pledged Shares") pursuant to the terms of The 1998 Equity Participation Plan of PriceSmart, Inc.
B. Borrower desires to grant a security interest in the Pledged Shares to the Company to secure payment of the Note.
AGREEMEMT
Now, therefore, in consideration of the above recitals and the mutual covenants hereinafter set forth, the parties hereto agree as follows:
1. CREATION OF SECURITY INTEREST. Borrower hereby grants to the Company a security interest in all of Borrower's right, title and interest in and to the following collateral (the "Collateral") to secure the payment and performance by the Borrower of all obligations owed to the Company pursuant to the Note, this Agreement and any extensions, modifications and renewals thereof:
(a) The Pledged Shares;
(b) All securities, certificates and instruments representing or evidencing ownership of the Collateral hereunder, and all proceeds and products of any
Collateral hereunder, including without limitation, stock, cash, property or other dividends, securities, rights and other property now or hereafter at any time or from time to time received, receivable or otherwise distributed or distributable in respect of or in exchange for any or all of such Collateral; and
(c) Any substituted or additional Collateral required to be supplied under the terms of this Pledge Agreement.
2. BORROWER'S REPRESENTATION AND WARRANTIES. Borrower represents and warrants:
(a) Borrower is (or to the extent that this Pledge Agreement states that the Collateral is to be acquired after the date hereof, will be) the sole owner of the Collateral; that the security interest hereunder in the Collateral is a first, prior and perfected security interest; that there are no security interests, liens or encumbrances upon, or adverse claims of title to, or any other interest whatsoever in, the Collateral or any portion thereof except that created by this Pledge Agreement; and that no financing statement covering the Collateral or any portion thereof exists or is on file in any public office; and
(b) Borrower has full right, power and authority to enter into this Pledge Agreement and no consent of, or registration or filing with, any person or entity, including the California Corporations Commissioner or any other governmental officer or entity, is required.
3. COVENANTS OF BORROWER. Borrower covenants that:
(a) Borrower will deliver to the Company each item of Collateral hereunder immediately upon Borrower's acquisition thereof, and will defend the Collateral
against all claims and demands of all persons at any time claiming the same or any interest therein; and
(b) If, while this Pledge Agreement is in effect, any stock dividend, stock split, reclassification, readjustment, reorganization, merger, consolidation or other change in the capital structure is declared or made, or proposed to be declared or made, by the Company or any issuer of the Collateral, all substituted and additional securities issued with respect to the Collateral shall be endorsed in blank by Borrower promptly upon receipt thereof or otherwise appropriately transferred to the Company in negotiable form, and all certificates or instruments evidencing such securities shall be delivered to the Company to be held under the terms of this Pledge Agreement in the same manner as and as part of the Collateral. Borrower shall have the right to exercise any subscription or other rights with respect to any Collateral, with the prior written approval of such exercise by the Company; provided, however, that any securities which may be issued upon exercise of any such rights shall be delivered to the Company, with any necessary stock power, endorsed in blank and with signatures guaranteed, to be included in the Collateral.
4. DEFAULTS AND REMEDIES.
(a) The occurrence of any one or more of the following events or conditions affecting Borrower shall constitute a default under this Pledge Agreement:
(i) Borrower fails to pay any indebtedness, perform any obligation required to be performed by her, or discharge her liability to the Company in accordance with the terms of the Note; or
(ii) Borrower fails to perform any obligation under this Agreement.
(b) Upon the occurrence of a default hereunder, the Company may, at its option, without notice to or demand upon Borrower, do any one or more of the following:
(i) Exercise any or all of the rights and remedies provided for by the applicable Uniform Commercial Code, specifically including, without limitation, the right to recover the attorneys' fees incurred by the Company in the enforcement of this Pledge Agreement or in connection with Borrower's redemption of the Collateral;
(ii) Sell the Collateral, or any portion thereof, at any public or private sale or on any securities exchange or other recognized market, for cash, upon credit or for future delivery, as the Company shall deem appropriate;
(iii) Enforce one or more remedies hereunder, successively or concurrently, and such action shall not operate to estop or prevent the Company from pursuing any other or further remedy it may have.
5. MISCELLANEOUS PROVISIONS.
(a) NOTICES. Notices, requests and other communications hereunder shall be in writing and may be delivered personally or sent by telegram, telex or first class mail to the parties addressed as follows:
To Borrower: Allan C. Youngberg
------------------
------------------
To the Company: PriceSmart, Inc.
4649 Morena Blvd.
San Diego, CA 92117
Attn: Mr. Robert M. Gans
|
Such notices, requests and other communications sent as provided hereinabove shall be effective when received by the addressee thereof, but if sent by registered or certified mail, postage prepaid, shall be effective exactly three (3) business days after being deposited in the United States mail. The parties hereto may change their addresses by giving notice thereof to the other parties hereto in conformity with this section.
(b) HEADINGS. The various headings in this Pledge Agreement are inserted for convenience only and shall not affect the meaning or interpretation of this Pledge Agreement or any provision hereof.
(c) CHOICE OF LAW. This Pledge Agreement shall be construed in accordance with and all disputes hereunder shall be governed by the laws of the State of California, without giving effect to the conflicts of law principals thereof.
(d) AMENDMENTS. This Pledge Agreement or any provision hereof may be changed, waived, or terminated only by a statement in writing signed by the party against which such change, waiver or termination is sought to be enforced.
(e) NO WAIVER. No delay in enforcing or failure to enforce any right under this Pledge Agreement by the Company shall constitute a waiver by the Company of such right. No waiver by the Company of any default hereunder shall be effective unless in writing, nor shall any waiver operate as a waiver of any other default or of the same default on a future occasion.
(f) TIME OF THE ESSENCE. Time is of the essence of each provision of this Pledge Agreement of which time is an element.
(g) BINDING AGREEMENT. All rights of the Company hereunder shall inure to the benefit of its successors and assigns. Borrower shall not assign any of its interest under this Pledge Agreement without the prior written consent of the Company. Any purported assignment inconsistent with this provision shall, at the option of the Company, be null and void.
(h) DEFINITIONS. All terms not defined herein shall have the meaning set forth in the applicable Uniform Commercial Code, except where the context otherwise requires.
(i) ENTIRE AGREEMENT. This Pledge Agreement, together with any other agreement executed in connection herewith, is intended by the parties as a final expression of their agreement and is intended as a complete and exclusive statement of the terms and conditions thereof. Acceptance of or acquiescence in a course of performance rendered under this Pledge Agreement shall not be relevant to determine the meaning of this Pledge Agreement even though the accepting or acquiescing party had knowledge of the nature of the performance and opportunity for objection.
(j) ATTORNEY'S FEES. If any legal action, arbitration or other proceedings is brought for the enforcement of this Pledge Agreement, or because of an alleged dispute, breach or default in connection with any of the provisions of this Pledge Agreement, each of the parties hereto shall be responsible for payment of any attorneys' fees and other costs incurred by them in that action or proceeding, without regard to whomever is the prevailing party in such action or proceeding.
(k) SEVERABILITY. If any provision of this Pledge Agreement should be found to be invalid or unenforceable, all of the other provisions shall nonetheless remain in full force and effect to the maximum extent permitted by law.
(i) POWER OF ATTORNEY. Borrower hereby appoints and constitutes the Company as Borrower's attorney-in-fact for purposes of (i) collecting any Collateral, and (ii) conveying any item of Collateral to any purchaser thereof. This power of attorney is coupled with an interest and is irrevocable by Borrower.
(m) COUNTERPARTS. This Pledge Agreement may be executed in one or more counterparts, each of which shall be deemed an original but all of which shall together constitute one and the same agreement.
(n) TERMINATION OF PLEDGE. This Pledge Agreement and the security interest and pledge hereunder shall not terminate until the full and final payment and performance of all indebtedness and obligations secured hereunder. At such time, the Company shall reassign and deliver to Borrower all of the Collateral hereunder which has not been sold, disposed of, retained or applied by the Company in accordance with the terms hereof. Such reassignment and redelivery shall be without warranty by or recourse to the Company, and shall be at the expense of Borrower. Without limiting the generality of the foregoing, the security interest and pledge hereunder shall not be terminated by the transfer of any of the Collateral hereunder from the Company to Borrower, or any person designated by Borrower, for the purpose of ultimate sale/ exchange, presentation, collection, renewal or registration of transfer or for any other purpose.
(o) RELEASE OF COLLATERAL. Borrower shall be permitted to sell any of the shares of Collateral and the Company shall release such shares from Borrower's
pledge hereunder; provided, however, that Borrower shall pay to the Company the net (after-tax) proceeds from the sale of such shares.
IN WITNESS WHEREOF, the parties hereto have caused this Pledge Agreement to be duly executed the day and year first above written.
PRICESMART, INC. BORROWER By: /s/ Robert M. Gans /s/ Allan C. Youngberg ------------------------------- ----------------------------------- |
Exhibit 10.19(a)
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into as of the 23rd day of July, 1999, by and between PriceSmart, Inc., a Delaware corporation ("Employer"), and Allan C. Youngberg ("Executive").
RECITALS
A. Employer desires to employ Executive as Executive Vice President and Chief Financial Officer of Employer.
B. Executive desires to accept such position upon the terms and subject to the conditions herein provided.
TERMS AND CONDITIONS
NOW, THEREFORE, in consideration of the foregoing premises and mutual covenants and conditions hereinafter set forth, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto agree as follows:
ARTICLE I
EMPLOYMENT AND DUTIES
1.1 POSITION AND DUTIES. Executive shall serve as Executive Vice President and Chief Financial Officer of Employer. Executive shall have such duties and authority as are customary for, and commensurate with, such position, and such other related duties and authority as may from time to time be delegated or assigned to him by the Chief Executive Officer or the Board of Directors of Employer. Executive shall discharge his duties in a diligent and professional manner.
1.2 OUTSIDE BUSINESS ACTIVITIES PRECLUDED. During his employment, Executive shall devote his full energies, interest, abilities and productive time to the performance of this Agreement. Executive shall not, without the prior written consent of Employer, perform other services of any kind or engage in any other business activity,
with or without compensation, that would interfere with the performance of his duties under this Agreement. Executive shall not, without the prior written consent of Employer, engage in any activity adverse to Employer's interests.
1.3 PLACE OF EMPLOYMENT. Unless the parties agree otherwise in writing, during the Employment Term (as defined in Section 3.1 below) Executive shall perform the services he is required to perform under this Agreement at Employer's offices located in San Diego, California; provided, however, that Employer may from time to time require Executive to travel temporarily to other locations on Employer's business.
ARTICLE II
COMPENSATION
2.1 SALARY. For Executive's services hereunder, Employer shall pay as base salary to Executive the amount of $190,000 during each year of the Employment Term. Said salary shall be payable in equal installments in conformity with Employer's normal payroll period. Executive's salary shall be reviewed by Employer's Board of Directors from time to time at its discretion, and Executive shall receive such salary increases, if any, as Employer's Board of Directors, in its sole discretion, shall determine.
2.2 BONUS. In addition to the salary set forth in Section 2.1 above, during the Employment Term Executive shall participate in Employer's bonus plan for executive management personnel. All decisions regarding said bonus plan shall be made in the sole discretion of Employer's Board of Directors, or the Compensation Committee thereof.
2.3 OTHER BENEFITS. Executive shall be entitled to participate in and receive benefits under Employer's standard company benefits practices and plans for officers of Employer, including medical insurance, long-term disability, life insurance, profit sharing and retirement plan, and Employer's other plans, subject to and on a basis consistent with the terms, conditions and overall administration of such practices and plans.
Additionally, Executive shall be entitled to three weeks' paid vacation each year, which will accrue and be paid out in conformity with Employer's normal vacation pay practices; Employer may in its sole discretion grant such additional compensation or benefits to Executive from time to time as Employer deems proper and desirable.
2.4 EXPENSES. During the term of his employment hereunder, Executive shall be entitled to receive prompt reimbursement for all reasonable business-related expenses incurred by him, in accordance with the policies and procedures from time to time adopted by Employer, provided that Executive properly accounts for such business expenses in accordance with Employer policy. Additionally, Executive shall be entitled to a relocation allowance of up to $25,000. The allowance may be used under the following three criteria: (i) closing expenses on Executive's home in Seattle, Washington; (ii) moving expenses; and (iii) temporary accommodation expenses. Expenses of this type will be reimbursed to Executive upon Executive's submission of the original receipts. Should Executive's employment with the Employer be terminated (voluntarily by Executive) within the first year of the Employment Term, Executive will be responsible for reimbursing Employer in the amount equal to what was reimbursed to Executive.
2.5 STOCK OPTION PLAN. Employer has adopted The 1997 Stock Option Plan of PriceSmart, Inc. and The 1998 Equity Participation Plan of PriceSmart, Inc. The parties anticipate that Executive will receive options to purchase 50,000 shares of Employer's Common Stock, exercisable at a price equal to the fair market value of the Common Stock at the time of grant, with such options vesting at the rate of twenty percent (20%) per year over a period of five (5) years and expiring six (6) years from the date of grant. Such anticipated grant of options to purchase 50,000 shares of Common Stock shall be subject in all respects to the sole discretion of the Compensation Committee of Employer's Board of Directors, as set forth in the applicable Plan. In
addition, such options shall be granted in accordance with and subject to all other terms, conditions and restrictions set forth in the applicable Plan.
2.6 STOCK LOAN. Executive shall be entitled to receive a loan from Employer, in the amount of $150,000, to be used by Executive to purchase Employer's Common Stock (at its then-current fair market value). Executive may borrow said funds at any time during the first thirty (30) days of the Employment Term. The loan shall be a fully-recourse loan, secured by the purchased stock, and shall bear interest at the rate of [6%]; interest payments shall be made by Executive twice per month, with all principal and any remaining interest due and payable in six years.
2.7 DEDUCTIONS AND WITHHOLDINGS. All amounts payable or which become payable under any provision of this Agreement shall be subject to any deductions authorized by Executive and any deductions and withholdings required by law.
ARTICLE III
TERM OF EMPLOYMENT
3.1 TERM. The term of Executive's employment hereunder shall commence on August 13, 1999 and shall continue until August 12, 2001, unless sooner terminated or extended as hereinafter provided (the "Employment Term").
3.2 EXTENSION OF TERM. The Employment Term may be extended by written amendment to this Agreement signed by both parties.
3.3 EARLY TERMINATION BY EXECUTIVE. Executive may terminate this Agreement at any time by giving Employer written notice of his resignation ninety (90) days in advance; provided, however, that the Board of Directors may determine upon receipt of such notice that the effective date of such resignation shall be immediate or some time prior to the expiration of the ninety-day notice period. Executive's employment shall terminate as of the effective date of his resignation as determined by the Board of Directors.
3.4 TERMINATION FOR CAUSE. Prior to the expiration of the Employment Term, Executive's employment may be terminated for Cause by Employer, immediately upon delivery of notice thereof. For these purposes, termination for "Cause" shall mean termination because of Executive's (a) repeated and habitual failure to perform his duties or obligations hereunder; (b) engaging in any act that has a direct, substantial and adverse effect on Employer's interests; (c) personal dishonesty, willful misconduct, or breach of fiduciary duty involving personal profit; (d) intentional failure to perform his stated duties; (e) willful violation of any law, rule or regulation which materially adversely affects his ability to discharge his duties or has a direct, substantial and adverse effect on Employer's interests; (f) any material breach of this contract by Executive; or (g) conduct authorizing termination under Cal. Labor Code Section 2924.
3.5 TERMINATION DUE TO DEATH OR DISABILITY. Executive's employment
hereunder shall terminate immediately upon his death. In the event that by
reason of injury, illness or other physical or mental impairment Executive shall
be: (a) completely unable to perform his services hereunder for more than three
(3) consecutive months, or (b) unable to perform his services hereunder for
fifty percent (50%) or more of the normal working days throughout six (6)
consecutive months, then Employer may terminate Executive's employment hereunder
immediately upon delivery of notice thereof. Executive's beneficiaries, estate,
heirs, representatives, or assigns, as appropriate, shall be entitled to the
proceeds, if any, due under any Employer-paid life insurance policy held by
Executive, as determined by and in accordance with the terms of any such policy,
as well as any vested benefits and accrued vacation benefits.
ARTICLE IV
BENEFITS AFTER TERMINATION OF EMPLOYMENT
4.1 BENEFITS UPON TERMINATION. Upon termination of this Agreement under
Section 3.3 (Early Termination by Executive), Section 3.4 (Termination for
Cause) or Section 3.5 (Termination Due to Death or Disability), all salary and
benefits of Executive hereunder shall cease immediately. Upon termination of
this Agreement by Employer, at any time during the period August 13, 1999 to
August 12, 2000, for any reason other than those set forth in Section 3.4 or
Section 3.5, Executive shall be entitled to the continuation of Executive's base
salary for the remainder of the Employment Term, payable in equal installments
in conformity with Employer's normal payroll period. Upon termination of this
Agreement by Employer, at any time after August 12, 2000, for any reason other
than those set forth in Section 3.4 or Section 3.5, Executive shall be entitled
to the continuation of Executive's base salary for one (1) year, payable in
equal installments in conformity with Employer's normal payroll period. If this
Agreement is not terminated, then, upon expiration of the Employment Term, and
if Executive's employment by Employer does not thereafter continue upon mutually
agreeable terms, Executive shall be entitled to continuation of Executive's base
salary for one (1) year, payable in equal installments in conformity with
Employer's normal payroll period; provided, however, that Employer's obligation
to pay such installments after expiration of the Employment Term shall be
reduced by the amount of employment compensation (if any) received by Executive
from a subsequent employer of Executive during said one (1) year. During the
period of this severance pay, Executive shall cooperate with Employer in
providing for the orderly transition of Executive's duties and responsibilities
to other individuals, as reasonably request by Employer.
4.2 RIGHTS AGAINST EMPLOYER. The benefits payable under this Article IV are exclusive, and no amount shall become payable to any person (including the Executive) by reason of termination of employment for any reason, with or without Cause, except
as provided in this Article IV. Employer shall not be obligated to segregate any of its assets or procure any investment in order to fund the benefits payable under this Article IV.
ARTICLE V
CONFIDENTIAL INFORMATION
5.1 Executive acknowledges that Employer holds as confidential, and Executive may have access to during the Employment Term, certain information and knowledge respecting the intimate and confidential affairs of Employer in the various phases of its business, including, but not limited to, trade secrets, data and know-how, improvements, inventions, techniques, marketing plans, strategies, forecasts, pricing information, and customer lists. During his employment by Employer and thereafter, Executive shall not directly or indirectly disclose such information to any person or use any such information, except as required in the course of his employment during the Employment Term. All records, files, keys, documents, and the like relating to Employer's business, which Executive shall prepare, copy or use, or come into contact with, shall be and remain Employer's sole property, shall not be removed from Employer's premises without its written consent, and shall be returned to Employer upon the termination of this Agreement.
ARTICLE VI
GENERAL PROVISIONS
6.1 ENTIRE AGREEMENT. This Agreement contains the entire understanding and sole and entire agreement between the parties with respect to the subject matter hereof, and supersedes any and all prior agreements, negotiations and discussions between the parties hereto with respect to the subject matter covered hereby. Each party to this Agreement acknowledges that no representations, inducements, promises or agreements, oral or otherwise, have been made by any party, or anyone acting on
behalf of any party, which are not embodied herein, and that no other agreement, statement or promise not contained in this Agreement shall be valid or binding. This Agreement may not be modified or amended by oral agreement, but rather only by an agreement in writing signed by Employer and by Executive which specifically states the intent of the parties to amend this Agreement.
6.2 ASSIGNMENT AND BINDING EFFECT. Neither this Agreement nor the rights or obligations hereunder shall be assignable by the Executive. Employer may assign this Agreement to any successor or affiliate of Employer, and upon such assignment any such successor or affiliate shall be deemed substituted for Employer upon the terms and subject to the conditions hereof. In the event of any merger of Employer or the transfer of all (or substantially all) of Employer's assets, the provisions of this Agreement shall be binding upon, and inure to the benefit of, the surviving business entity or the business entity to which such assets shall be transferred.
6.3 ARBITRATION. The parties hereto agree that any and all disputes
(contract, tort, or statutory, whether under federal, state or local law)
between Executive and Employer (including Employer's employees, officers,
directors, stockholders, members, managers and representatives) arising out
of Executive's employment with Employer, the termination of that employment,
or this Agreement, shall be submitted to final and binding arbitration. Such
arbitration shall take place in the County of San Diego, and may be compelled
and enforced according to the California Arbitration Act (Code of Civil
Procedure Sections 1280 ET SEQ.). Unless the parties mutually agree
otherwise, such arbitration shall be conducted before the American
Arbitration Association, according to its Commercial Arbitration Rules.
Judgment on the award the arbitrator renders may be entered in any court
having jurisdiction over the parties. Arbitration shall be initiated in
accordance with the Commercial Arbitration Rules of the American Arbitration
Association.
6.4 NO WAIVER. No waiver of any term, provision or condition of this Agreement, whether by conduct or otherwise, in any one or more instances shall be deemed or be construed as a further or continuing waiver of any such term, provision or condition, or as a waiver of any other term, provision or condition of this Agreement.
6.5 GOVERNING LAW; RULES OF CONSTRUCTION. This Agreement has been negotiated and executed in, and shall be governed by and construed in accordance with the laws of, the State of California. Captions of the several Articles and Sections of this Agreement are for convenience of reference only, and shall not be considered or referred to in resolving questions of interpretation with respect to this Agreement.
6.6 NOTICES. Any notice, request, demand or other communication required or permitted hereunder shall be deemed to be properly given when personally served in writing, or when deposited in the United States mail, postage pre-paid, addressed to Employer or Executive at his last known address. Each party may change its address by written notice in accordance with this Section.
Address for Employer:
PriceSmart, Inc.
4649 Morena Boulevard
San Diego, CA. 92117
Address for Executive:
2025 E. Lake Sammamish Pkwy SE
Issaquah, WA. 98029
6.7 SEVERABILITY. The provisions of this Agreement are severable. If any provision of this Agreement shall be held to be invalid or otherwise unenforceable, in whole or in part, the remainder of the provisions or enforceable parts hereof shall not be affected thereby and shall be enforced to the fullest extent permitted by law.
6.8 ATTORNEYS' FEES. In the event of any arbitration or litigation brought to enforce or interpret any part of this Agreement, the prevailing party shall be entitled to
recover reasonable attorneys' fees, as well as all other litigation costs and expenses as an element of damages.
IN WITNESS WHEREOF, this Agreement has been executed and delivered by the parties hereto as of the date first above written.
EMPLOYER EXECUTIVE PRICESMART, INC. Name: /s/ ALLAN C. YOUNGBERG By: /s/ Gilbert A. Partida Name: Gilbert A. Partida |
Title: President and CEO
Exhibit 10.19(b) July 26, 1999
Gilbert Partida
President & CEO
PriceSmart, Inc.
4649 Morena Blvd.
San Diego, CA. 92117
Dear Gil:
Please be advised that the effective start date of my employment with PriceSmart, Inc. shall be July 27, 1999.
Very Truly Yours,
/s/ Allan C. Youngberg |
Agreed:
/s/ Gilbert A. Partida Gilbert A. Partida Dated: July 26, 1999 |
cc: Bob Gans
Exhibit 10.20(a)
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into as of March 31, 1998, by and between PriceSmart, Inc., a Delaware corporation ("Employer"), and K.C. Breen ("Executive").
RECITALS
A. Employer currently employs and desires to continue to employ Executive as Senior Vice President of Employer.
B. Executive desires to retain such position upon the terms and subject to the conditions herein provided.
TERMS AND CONDITIONS
NOW, THEREFORE, in consideration of the foregoing premises and mutual covenants and conditions hereinafter set forth, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto agree as follows:
ARTICLE I
EMPLOYMENT AND DUTIES
1.1 POSITION AND DUTIES. Executive shall serve as Senior Vice President of Employer. Executive shall have such duties and authority as are customary for, and commensurate with, such position, and such other related duties and authority as may from time to time be delegated or assigned to him by the Chief Executive Officer or the Board of Directors of Employer. Executive shall discharge his duties in a diligent and professional manner.
1.2 OUTSIDE BUSINESS ACTIVITIES PRECLUDED. During his employment, Executive shall devote his full energies, interest, abilities and productive time to the performance of this Agreement. Executive shall not, without the prior written consent of Employer, perform other services of any kind or engage in any other business activity, with or without compensation, that
would interfere with the performance of his duties under this Agreement. Executive shall not, without the prior written consent of Employer, engage in any activity adverse to Employer's interests.
1.3 PLACE OF EMPLOYMENT. Unless the parties agree otherwise in writing, during the Employment Term (as defined in Section 3.1 below) Executive shall perform the services he is required to perform under this Agreement at Employer's offices located in San Diego, California; provided, however, that Employer may from time to time require Executive to travel temporarily to other locations on Employer's business.
ARTICLE II
COMPENSATION
2.1 SALARY. For Executive's services hereunder, Employer shall pay as base salary to Executive the amount of $150,000 during each year of the Employment Term. Said salary shall be payable in equal installments in conformity with Employer's normal payroll period. Executive shall receive such salary increases, if any, as Employer, in its sole discretion, shall determine.
2.2 BONUS. During the Employment Term Executive shall be entitled to participate in Employer's Bonus Plan.
2.3 OTHER BENEFITS. Executive shall be entitled to participate in and receive benefits under Employer's standard company benefits practices and plans for officers of Employer, including medical insurance, long-term disability, life insurance, profit sharing and retirement plan, and Employer's other plans, subject to and on a basis consistent with the terms, conditions and overall administration of such practices and plans. Employer may from time to time in its sole discretion grant such additional compensation or benefits to Executive as it deems proper and desirable.
2.4 EXPENSES. During the term of his employment hereunder, Executive shall be entitled to receive prompt reimbursement for all reasonable business-related expenses incurred by him, in accordance with the policies and procedures from time to time adopted by Employer, provided that Executive properly accounts for such business expenses in accordance with Employer policy.
2.5 DEDUCTIONS AND WITHHOLDINGS. All amounts payable or which become payable under any provision of this Agreement shall be subject to any deductions authorized by Executive and any deductions and withholdings required by law.
ARTICLE III
TERM OF EMPLOYMENT
3.1 TERM. The term of Executive's employment hereunder shall commence on April 1, 1998 and shall continue until March 31, 2000 unless sooner terminated or extended as hereinafter provided (the "Employment Term").
3.2 EXTENSION OF TERM. The Employment Term may be extended by written amendment to this Agreement signed by both parties.
3.3 EARLY TERMINATION BY EXECUTIVE. Executive may terminate this Agreement at any time by giving Employer written notice of his resignation ninety (90) days in advance; provided, however, that the Employer may determine upon receipt of such notice that the effective date of such resignation shall be immediate or some time prior to the expiration of the ninety day notice period. Executive's employment shall terminate as of the effective date of his resignation as determined by Employer.
3.4 TERMINATION FOR CAUSE. Prior to the expiration of the Employment Term, Executive's employment may be terminated for Cause by Employer, immediately upon delivery of notice thereof. For these purposes, termination for "Cause" shall mean termination because of Executive's (a) repeated and habitual failure to perform his duties or obligations hereunder;
(b) engaging in any act that has a direct, substantial and adverse effect on Employer's interests; (c) personal dishonesty, willful misconduct, or breach of fiduciary duty involving personal profit; (d) intentional failure to perform his stated duties; (e) willful violation of any law, rule or regulation which materially adversely affects his ability to discharge his duties or has a direct, substantial and adverse effect on Employer's interests; (f) any material breach of this contract by Executive; or (g) conduct authorizing termination under Cal. Labor Code Section 2924.
3.5 TERMINATION DUE TO DEATH OR DISABILITY. Executive's employment hereunder shall terminate immediately upon his death. In the event that by reason of injury, illness or other physical or mental impairment Executive shall be: (a) completely unable to perform his services hereunder for more than three (3) consecutive months, or (b) unable to perform his services hereunder for fifty percent (50%) or more of the normal working days throughout six (6) consecutive months, then Employer may terminate Executive's employment hereunder immediately upon delivery of notice thereof. Executive's beneficiaries, estate, heirs, representatives, or assigns, as appropriate, shall be entitled to the proceeds, if any, due under any Employer-paid life insurance policy held by Executive, as determined by and in accordance with the terms of any such policy, as well as any vested benefits and accrued vacation benefits.
ARTICLE IV
BENEFITS AFTER TERMINATION OF EMPLOYMENT
4.1 BENEFITS UPON TERMINATION. Upon termination of this Agreement under Section 3.3 (Early Termination by Executive), Section 3.4 (Termination for Cause) or Section 3.5 (Termination Due to Death or Disability), all salary and benefits of Executive hereunder shall cease immediately. Upon termination of this Agreement by Employer for any reason other than those set forth in Section 3.4 or Section 3.5, Executive shall be entitled to the continuation of Executive's base salary for the remainder of the Employment Term, payable in equal installments in conformity with Employer's normal payroll period. During the period of this
severance pay, Executive shall cooperate with Employer in providing for the orderly transition of Executive's duties and responsibilities to other individuals, as reasonably requested by Employer.
4.2 RIGHTS AGAINST EMPLOYER. The benefits payable under this Article IV are exclusive, and no amount shall become payable to any person (including the Executive) by reason of termination of employment for any reason, with or without Cause, except as provided in this Article IV. Employer shall not be obligated to segregate any of its assets or procure any investment in order to fund the benefits payable under this Article IV.
ARTICLE V
CONFIDENTIAL INFORMATION
5.1 Executive acknowledges that Employer holds as confidential, and Executive may have access to during the Employment Term, certain information and knowledge respecting the intimate and confidential affairs of Employer in the various phases of its business, including, but not limited to, trade secrets, data and know-how, improvements, inventions, techniques, marketing plans, strategies, forecasts, pricing information, and customer lists. During his employment by Employer and thereafter, Executive shall not directly or indirectly disclose such information to any person or use any such information, except as required in the course of his employment during the Employment Term. All records, files, keys, documents, and the like relating to Employer's business, which Executive shall prepare, copy or use, or come into contact with, shall be and remain Employer's sole property, shall not be removed from Employer's premises without its written consent, and shall be returned to Employer upon the termination of this Agreement.
ARTICLE VI
GENERAL PROVISIONS
6.1 ENTIRE AGREEMENT. This Agreement contains the entire understanding and sole and entire agreement between the parties with respect to the subject matter hereof, and supersedes any and all prior agreements, negotiations and discussions between the parties hereto with respect to the subject matter covered hereby. Each party to this Agreement acknowledges that no representations, inducements, promises or agreements, oral or otherwise, have been made by any party, or anyone acting on behalf of any party, which are not embodied herein, and that no other agreement, statement or promise not contained in this Agreement shall be valid or binding. This Agreement may not be modified or amended by oral agreement, but rather only by an agreement in writing signed by Employer and by Executive which specifically states the intent of the parties to amend this Agreement.
6.2 ASSIGNMENT AND BINDING EFFECT. Neither this Agreement nor the rights or obligations hereunder shall be assignable by Executive. Employer may assign this Agreement to any successor or affiliate of Employer, and upon such assignment any such successor or affiliate shall be deemed substituted for Employer upon the terms and subject to the conditions hereof. In the event of any merger of Employer or the transfer of all (or substantially all) of Employer's assets, the provisions of this Agreement shall be binding upon, and inure to the benefit of, the surviving business entity or the business entity to which such assets shall be transferred.
6.3 ARBITRATION. The parties hereto agree that any and all disputes
(contract, tort, or statutory, whether under federal, state or local law)
between Executive and Employer (including Employer's employees, officers,
directors, stockholders, members, managers and representatives) arising out
of Executive's employment with Employer, the termination of that employment,
or this Agreement, shall be submitted to final and binding arbitration. Such
arbitration shall take place in the County of San Diego, and may be compelled and enforced according to the California Arbitration Act (Code of Civil Procedure Sections 1280 ET SEQ.). Unless the parties mutually agree otherwise, such arbitration shall be conducted before the American Arbitration Association, according to its Commercial Arbitration Rules. Judgment on the award the arbitrator renders may be entered in any court having jurisdiction over the parties. Arbitration shall be initiated in accordance with the Commercial Arbitration Rules of the American Arbitration Association.
6.4 NO WAIVER. No waiver of any term, provision or condition of this Agreement, whether by conduct or otherwise, in any one or more instances shall be deemed or be construed as a further or continuing waiver of any such term, provision or condition, or as a waiver of any other term, provision or condition of this Agreement.
6.5 GOVERNING LAW; RULES OF CONSTRUCTION. This Agreement has been negotiated and executed in, and shall be governed by and construed in accordance with the laws of, the State of California. Captions of the several Articles and Sections of this Agreement are for convenience of reference only, and shall not be considered or referred to in resolving questions of interpretation with respect to this Agreement.
6.6 NOTICES. Any notice, request, demand or other communication required or permitted hereunder shall be deemed to be properly given when personally served in writing, or when deposited in the United States mail, postage pre-paid, addressed to Employer or Executive at his last known address. Each party may change its address by written notice in accordance with this Section.
Address for Employer:
PriceSmart, Inc.
4649 Morena Boulevard
San Diego, CA. 92117
Address for Executive:
6.7 SEVERABILITY. The provisions of this Agreement are severable. If any provision of this Agreement shall be held to be invalid or otherwise unenforceable, in whole or in part, the remainder of the provisions or enforceable parts hereof shall not be affected thereby and shall be enforced to the fullest extent permitted by law.
6.8 ATTORNEYS' FEES. In the event of any arbitration or litigation brought to enforce or interpret any part of this Agreement, the prevailing party shall be entitled to recover reasonable attorneys' fees, as well as all other litigation costs and expenses as an element of damages.
IN WITNESS WHEREOF, this Agreement has been executed and delivered by the parties hereto as of the date first above written.
EMPLOYER EXECUTIVE
PRICESMART, INC. Name: K.C. Breen
/s/ K.C. Breen
By: /s/ Gilbert A. Partida
Name: Gilbert A. Partida
|
Title: President and CEO
Exhibit 10.20(b)
FIRST AMENDMENT TO EMPLOYMENT AGREEMENT
This First Amendment to Employment Agreement is made and entered into as of March 31, 1999, by and between PriceSmart, Inc., a Delaware corporation ("Employer") and K.C. Breen ("Executive").
RECITALS
A) On March 31, 1998 an Employment Agreement was made and entered into by and between Employer and Executive.
B) Employer and Executive now desire to amend the Employment Agreement, as set forth hereinbelow:
AGREEMENT
1) Section 4.1 of the Employment Agreement, which provides:
Upon termination of this Agreement under Section 3.3 (Early Termination
by Executive), Section 3.4 (Termination for Cause) or Section 3.5
(Termination Due to Death or Disability), all salary and benefits of
Executive hereunder shall cease immediately. Upon termination of this
Agreement by Employer for any reason other than those set forth in
Section 3.4 or Section 3.5, Executive shall be entitled to the
continuation of Executive's base salary for the remainder of the
Employment Term, payable in equal installments in conformity with
Employer's normal payroll period. During the period of this severance
pay, Executive shall cooperate with Employer in providing for the
orderly transition of Executive's duties and responsibilities to other
individuals, as reasonably requested by Employer.
is hereby amended, effective as of March 31, 1999, to provide as follows:
Upon termination of this Agreement under Section 3.3 (Early Termination
by Executive), Section 3.4 (Termination for Cause) or Section 3.5
(Termination Due to Death or Disability), all salary and benefits of
Executive hereunder shall cease immediately. Upon termination of this
Agreement by Employer for any reason other than those set forth in
Section 3.4 or Section 3.5, Executive shall be entitled to the
continuation of Executive's base salary for one (1)
year, payable in equal installments in conformity with Employer's normal payroll period. If this Agreement is not terminated, then, upon expiration of the Employment Term, and if Executive's employment by Employer does not thereafter continue upon mutually agreeable terms, Executive shall be entitled to continuation of Executive's base salary for one (1) year, payable in equal installments in conformity with Employer's normal payroll period; provided, however, that Employer's obligation to pay such installments after expiration of the Employment Term shall be reduced by the amount of employment compensation (if any) received by Executive from a subsequent employer of Executive during said one (1) year. During the period of this severance pay, Executive shall cooperate with Employer in providing for the orderly transition of Executive's duties and responsibilities to other individuals, as reasonably request by Employer.
2) All other terms of the Employment Agreement shall remain unaltered and fully effective.
Executed in San Diego, California, as of the date first written above.
EXECUTIVE EMPLOYER
PRICESMART, INC.
K.C. Breen By: /s/ Gilbert A. Partida
/s/ K.C. Breen
Name: Gilbert A. Partida
Its: President and CEO
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Exhibit 10.20(c)
SECOND AMENDMENT TO EMPLOYMENT AGREEMENT
This Second Amendment to Employment Agreement is made and entered into as of October 1, 1999, by and between PriceSmart, Inc., a Delaware corporation ("Employer") and K.C. Breen ("Executive").
RECITALS
A) On March 31, 1998 an Employment Agreement was made and entered into by and between Employer and Executive.
B) On March 31, 1999, a First Amendment to Employment Agreement was made and entered into by and between Employer and Executive.
C) Employer and Executive now desire to amend the Employment Agreement, as set forth hereinbelow:
AGREEMENT
1) The first sentence in Section 1.1 of the Agreement, which provides:
Executive shall serve as Senior Vice-President of Employer.
Is hereby amended, effective as of October 1, 1999, to provide as follows:
Executive shall serve as Executive Vice-President of Employer.
2) The first sentence in Section 2.1 of the Employment Agreement, which provides:
For Executive's services hereunder, Employer shall pay as base salary to Executive the amount of $150,000 during each year of the Employment Term.
is hereby amended, effective as of October 1, 1999, to provide as follows:
For Executive's services hereunder, Employer shall pay as base salary to Executive the amount of $155,000 during each year of the Employment Term.
3) All other terms of the Employment Agreement shall remain unaltered and fully effective.
Executed in San Diego, California, as of the date first written above.
EXECUTIVE EMPLOYER
PRICESMART, INC.
K.C. Breen By: /s/ Gilbert A. Partida
/s/ K.C. Breen
Name: Gilbert A. Partida
Its: President and CEO
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Exhibit 10.21
AGREEMENT
THIS AGREEMENT is entered into this 1st day of August, 1999, by and between Associated Wholesale Grocers, Inc. ("AWG") and PriceSmart, Inc. ("PriceSmart").
WHEREAS, PriceSmart has pending applications to register the trademark "PRICEMART" and related marks containing the word "PRICESMART" in the Principal Register of the U.S. Patent and Trademark Office;
WHEREAS, AWG has filed two Notices of Opposition ("Oppositions"), Opposition No. 108,749 and Opposition No. 108,828, in the U.S. Patent and Trademark Office before the Trademark Trial and Appeal Board, contesting PriceSmart's applications and has obtained extensions of time to file oppositions to other PriceSmart applications;
WHEREAS, AWG is the registered owner of a federal registration for the trademark PRICESMART used for retail grocery store services in International Class 42, Registration No. 1,362,625;
WHEREAS, AWG filed its Opposition because of concerns that the use of the trademark PRICESMART by PriceSmart could lead to confusion or mistake among consumers trying to differentiate between PriceSmart's products and services sold or provided under the trademark PRICESMART and related marks and AWG's services provided under the trademark PRICEMART;
WHEREAS, PriceSmart denies its use of the trademark PRICESMART or related marks is likely to cause confusion or mistake; and
WHEREAS, AWG and PriceSmart now desire to resolve, settle, and compromise the matter at issue in the Oppositions.
NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledge, AWG and PriceSmart hereby agree as follows:
1. a. PriceSmart will not use the mark PRICESMART or any related marks containing the word PRICESMART in connection with the sale, or offer for sale, of any goods or services within AWG's territory of operations ("Territory"), with the limited exception in Paragraph 2, below, Territory being defined as follows:
The Territory comprised of the following ten (10) states: Kansas, Missouri, Arkansas, Oklahoma, Nebraska, Iowa, Texas, Illinois, Tennessee, and Kentucky.
b. Nothing in this Agreement to the contrary shall in any way or manner limit or prohibit the use by PriceSmart of the mark PRICESMART or any mark containing the word
PRICESMART (unless the other words or designs of the mark infringe on other marks first adopted and used by AWG) on the Internet or any other global computer network whether within or outside of the Territory, or any national advertising campaign that cannot reasonably exclude the Territory, and AWG agrees that such use does not infringe any rights of AWG.
2. PriceSmart may use the mark PRICESMART or any mark containing the word PRICESMART (unless the other words or designs of the mark infringe on other marks first adopted and used by AWG) in connection with the services of airline and cruise ship reservation services, automobile rental services, vacation packaging services of making travel and lodging arrangements, reservation for hotels or temporary lodging, and referral services for vehicle purchasing, financing, leasing, parts supplies and repair services within the Territory as defined above in Paragraph 1, provided that these services are not sold or offered for sale on the premises of any supermarket, grocery store, discount store, supercenter or convenience store, that sells grocery products. This prohibition is intended to apply to, but not be limited to, discount stores, supercenters and wholesale clubs, such as K-Mart, Wal-Mart, Super Target and Sams. Notwithstanding the foregoing, the parties expressly acknowledge that the services discussed above may be offered in hotels using the PRICESMART mark, notwithstanding the fact that hotels may carry some grocery products in their lobby shops. Furthermore, the parties acknowledge that nothing contained in this Agreement shall preclude PriceSmart from offering the services described in this Paragraph 2 within the Territory under any mark other than PRICESMART unless such other mark infringes on other marks first adopted and used by AWG.
3. AWG shall withdraw its Oppositions to PriceSmart's pending applications as soon as is practical following the execution of this Agreement by AWG and PriceSmart filing a joint stipulation of dismissal.
4. AWG will not oppose any other trademark applications, already filed or filed in the future, for registration of the mark PRICESMART or related marks containing the word PRICESMART (unless the other words or designs of the mark infringe on other marks first adopted and used by AWG).
5. AWG will not bring an action for trademark infringement against PriceSmart based on PriceSmart's use, or otherwise contest or oppose PriceSmart's use, outside the Territory, or the limited use in the Territory pursuant to Paragraphs 1 and 2, above, of the mark PRICESMART or
related marks containing the word PRICESMART (unless the other words or designs of the mark infringe on other marks first adopted and used by AWG).
6. If either party becomes aware of any confusion between AWG's mark PRICESMART and PriceSmart's mark PRICESMART or related marks, the parties will negotiate in good faith in an effort to eliminate any possibility of further confusion.
7. If AWG becomes aware of any use of the mark PRICESMART or related marks which violates Paragraphs 1 and/or 2 above, AWG will give written notice to PriceSmart of the improper use. Such improper use is considered a material breach of this Agreement. PriceSmart will have thirty (30) days to cure this breach. If PriceSmart fails to cure this breach within thirty (30) days, AWG may terminate this Agreement and take any further actions deemed appropriate including, but not limited to, monetary damages, injunctive relief and seeking cancellation of any or all PRICESMART Registrations.
8. This Agreement is binding upon the parties hereto as well as their respective affiliates, assigns and successors.
9. This Agreement constitutes the entire agreement between the parties with respect to the subject mater of this Agreement and replaces any prior oral or written agreement between the parties involving the same subject matter.
10. This Agreement may not be modified, altered or changed in any manner whatsoever except by an instrument in writing executed by the parties.
11. In any legal action between the parties hereto concerning this Agreement, the prevailing party shall be entitled to recover reasonable attorneys fees and costs.
IN WITNESS WHEREOF, the parties have executed this Agreement effective the date first written above.
ASSOCIATED WHOLESALE PRICESMART, INC.
GROCERS, INC
By: /s/ David M. Carter By: /s/ Robert M. Gans
--------------------------- ------------------------------
Title: President & CEO Title: Senior Vice President
------------------------ ---------------------------
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Exhibit 11.1
PRICESMART, INC.
COMPUTATION OF NET INCOME OR LOSS PER COMMON SHARE (BASIC AND
DILUTED) (AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
Years Ended August 31,
----------------------------------------------
----------------------------------------------
1999 1998 1997
-------------- -------------- -------------
-------------- -------------- -------------
Net income (loss) used for basic and
diluted computation $ (3,892) $ 3,028 $(24,843)
-------------- -------------- -------------
-------------- -------------- -------------
Weighted average number of
common shares outstanding 5,119,911 5,912,375 5,908,235
Add:
Assumed exercise of those options
that are common stock equivalents - 150,085 -
-------------- -------------- -------------
Adjusted shares outstanding used for
diluted computation 5,119,911 6,062,460 5,908,235
Earnings per share:
Basic $ (0.76) $ 0.51 $ (4.20)
Diluted $ (0.76) $ 0.50 $ (4.20)
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[PRICESMART REVERSE OUT]
SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT EARNINGS (LOSS) PER SHARE)
The following table sets forth selected consolidated financial data of the Company for the five fiscal years ended August 31, 1999.
SELECTED CONSOLIDATED FINANCIAL DATA
(AMOUNTS IN THOUSANDS, EXCEPT EARNINGS (LOSS) PER SHARE)
FISCAL YEARS ENDED AUGUST 31 (1)
1999 1998 1997 (2) 1996 (2) 1995 (2)
--------- --------- --------- ---------- ----------
INCOME STATEMENT DATA:
Net warehouse sales $ 89,184 $ 48,287 $ 21,750 $ -- $ --
Export sales 6,773 32,813 37,292 36,211 66,573
Membership, royalties and fees 2,008 2,720 3,139 2,164 553
Auto, travel and other programs 10,907 13,368 12,194 9,875 8,769
--------- --------- --------- ---------- ----------
Total revenues 108,872 97,188 74,375 48,250 75,895
Cost of goods sold 84,638 74,684 55,947 34,644 62,756
Selling, general and administrative (3) 32,021 26,421 25,993 31,069 33,337
Preopening expenses 4,949 433 614 -- --
--------- --------- --------- ---------- ----------
Operating loss (12,736) (4,350) (8,179) (17,463) (20,198)
Interest and other income (expenses), net(4) 9,034 7,492 1,237 (696) 3,793
--------- --------- --------- ---------- ----------
Income (loss) before provision
for income taxes (3,702) 3,142 (6,942) (18,159) (16,405)
Net income (loss) $ (3,892) $ 3,028 $ (24,843) $ (11,423) $ (12,517)
EARNINGS (LOSS) PER SHARE:
Basic (5) $ (0.76) $ 0.51 $ (4.20) $ (1.93) $ (2.12)
Diluted (5) (0.76) 0.50 (4.20) (1.93) (2.12)
BALANCE SHEET DATA:
Cash and cash equivalents $ 14,957 $ 5,639 $ 58,383 $ -- $
Marketable securities 17,627 56,133 -- -- --
Total assets 152,074 124,576 125,885 97,981 107,085
Long-term debt 7,787 -- -- -- --
Stockholders' equity (6) 93,861 103,081 107,172 86,990 92,556
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(1) Effective September 1, 1997, the Company changed its 52/53 week fiscal year
which ends on the Sunday nearest August 31 to a fiscal year end of August
31. For ease of presentation, all fiscal years in this report are referred
to as having ended on August 31.
(2) Prior to fiscal year 1998, the Company operated as certain subsidiaries of Price Enterprises, Inc. ("PEI"). Accordingly, the financial data of the Company during each of the three fiscal years ended August 31, 1997 has been prepared as though the Company had been a stand-alone business. See Note 1 of "Notes to Consolidated Financial Statements" included in this report.
(3) Prior to fiscal year 1998, PEI provided administrative services to the Company. Amounts allocated to the Company for corporate administrative expenses for fiscal years 1997, 1996, and 1995 were $1,065, $1,350, and $1,363, respectively.
(4) Interest and other income (expenses), net include interest income, gains and losses on sale of assets, interest on bank borrowings of joint venture businesses and minority interest of shareholders in joint venture businesses.
(5) For each of the fiscal years 1995 through 1997, loss per share is based on
the 5,908,235 shares issued in connection with the Distribution. (See Note
1 "Notes to Consolidated Financial Statements.")
(6) Prior to fiscal year 1998, stockholders' equity represents the net assets transferred and the earnings of the businesses and assets comprising PriceSmart, Inc. on a historical basis.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Annual Report contains forward-looking statements concerning the Company's anticipated future revenues and earnings, adequacy of future cash flow, expected year 2000 readiness, 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 those 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.
The following discussion and analysis compares the results of operations for each of the three fiscal years ended August 31, 1999, and should be read in conjunction with the consolidated financial statements and the accompanying notes included elsewhere in this report.
In fiscal 1999, the Company opened three new US-style membership shopping warehouses under joint venture arrangements in Latin America; one in Guatemala (April 1999), one in Costa Rica (June 1999) and one in El Salvador (August 1999), bringing a total of five warehouses under joint venture arrangements as of August 31, 1999. Our licensee in China opened two warehouses during fiscal 1999 bringing the total number of licensee warehouses to five as of August 31, 1999. In fiscal 1998, the Company opened one new US-style membership shopping warehouse under a joint venture arrangement in Panama and two warehouses were opened by licensees, one in China and one in the Philippines. The Asian financial crisis resulted in four licensee owned and operated warehouse closures (one in Guam, one in the Philippines, and two in Indonesia) during fiscal 1998.
Net warehouse sales (from the Company's joint venture locations in Latin America) increased 85% to $89.2 million in fiscal 1999 from $48.3 million in fiscal 1998. The increase was a result of three new warehouses opened during fiscal 1999 and a full year of operations related to a warehouse opened in December 1997. Net warehouse sales increased 122% to $48.3 million in fiscal 1998 from $21.8 million in fiscal 1997. The increase was due to the opening of a second warehouse in December 1997 and a full year of operations from a warehouse opened in October 1996. During fiscal 1997, warehouse sales of $21.8 million were from the Company's first warehouse that opened in Panama in October 1996.
The Company's warehouse gross margins for fiscal 1999 increased to 12.4% from 11.7% and 10.9% for the fiscal years 1998 and 1997, respectively. The increases in warehouse gross margin was primarily due to the Company's increased sales from higher margin ancillary businesses including food services, photo processing and bakery departments.
Export sales to the Company's licensee warehouses in Asia decreased 79% to $6.8 million in fiscal 1999 from $32.8 million in fiscal 1998. The decrease was primarily due to the closure of licensee owned and operated locations in fiscal 1998 that exceeded the additional sales to two new licensee warehouses opened in China in fiscal 1999. Export sales decreased 10% to $32.8 million in fiscal 1998 from $36.3 million in fiscal 1997. The decrease was primarily due to the Asian economic crisis, and the decision in fiscal 1997 to discontinue the export trading business, which had been selling U.S.-sourced goods to customers in Hong Kong and Mexico.
The Company's export sales gross margin for fiscal 1999 was 3.2% compared to 2.3% and 4.3% for fiscal years 1998 and 1997, respectively. The change in gross margin year over year was due to the volume of sales to licensees with varying agreements to the margin the Company can earn.
Membership, royalties and fees decreased to $2.0 million in fiscal 1999 from $2.7 million and $3.1 million in fiscal 1998 and 1997, respectively. Membership fees (including other warehouse income) increased 30% to $1.3 million in fiscal year 1999 from $1.0 million in fiscal 1998. The increase was a result of the new Latin American warehouses and an increase in average memberships per warehouse. Membership fees (including other warehouse income) increased 39% to $1.0 million in fiscal 1998 from $717,000 in fiscal 1997 due to one new warehouse opened in fiscal 1998. Royalties and fees decreased to $674,000 in fiscal 1999 from $1.7 million and $2.4 million for fiscal 1998 and 1997, respectively. The decreases were a result of reduced sales to licensees as disclosed above.
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Auto, travel and other program revenues decreased 18% to $10.9 million in fiscal 1999 from $13.4 million in fiscal 1998. The decrease was due to the sale of the auto referral business in mid fiscal 1999, partially offset by an increase in travel program revenues. The travel program generates most of its revenue through an agreement with Costco Companies, Inc. ("Costco") that expires November 30, 1999. The Company currently is engaged in discussions with Costco to extend the agreement through February 2000, but there can be no assurance the agreement will be extended. However, in anticipation of the expiration of the Costco travel service contract, the Company has entered into agreements with Farmers Insurance Group and 20th Century Insurance Group, pursuant to which the Company will offer discount travel services to new customers, employees and agents. Auto, travel and other program revenues increased 2% to $13.4 million in fiscal 1998 from $13.2 million in fiscal 1997.
Selling, general and administrative expenses include the operating expenses related to the Company's warehouse operations; operating expenses related to the auto, travel and other programs and corporate administrative expenses. Selling, general and administrative expenses increased to $32.0 million in fiscal 1999 from $26.4 million in fiscal 1998. Warehouse operating expenses increased in fiscal 1999 primarily due to three new warehouses opened during fiscal 1999 and a full year operations from one warehouse opened in fiscal 1998. Corporate administrative expenses increased in fiscal 1999 to support the Company's planned expansion through the opening of six to ten additional warehouses in fiscal 2000. Selling, general and administrative expenses increased in fiscal 1998 to $26.4 million from $26.0 million in fiscal 1997. The increase was primarily from a second warehouse opened in December 1997 and a full year of operations for a warehouse opened in fiscal 1997, and was reduced by the reversal of a prior year's reserve for doubtful accounts receivable in the amount of $702,000.
Preopening expenses increased to $5.0 million in fiscal 1999 from $433,000 in fiscal 1998 as a result of opening three warehouses in fiscal 1999 and costs incurred during fiscal 1999 relating to additional warehouses scheduled to open in fiscal 2000. Preopening expenses in fiscal 1998 declined to $433,000 from $614,000 in fiscal 1997. One warehouse was opened in each of these years.
Interest income, net, reflects earnings on marketable securities, cash and cash equivalent balances, City Notes (See "Notes to Consolidated Financial Statements") and certain secured notes receivable from buyers of formerly owned properties and reduced by interest expense on bank borrowings at the Company's joint ventures. Interest income, net, decreased to $5.1 million in fiscal 1999 from $6.2 million in fiscal 1998 primarily due to decreased balances in cash and cash equivalents and marketable securities as a result of the Company's use of cash to finance the Company's expansion and increased interest expense on bank borrowing during fiscal 1999 at the Company's joint ventures. Interest income, net, increased to $6.2 million in fiscal 1998 from $2.8 million in fiscal 1997 primarily due to increased balances in cash and cash equivalents and marketable securities.
Other income increased to $3.0 million for fiscal 1999 from $1.5 million in fiscal 1998. The increase was due to gain on the sale of marketable securities of $959,000 and a $798,000 gain on the sale of the Company's auto referral business, offset by a decline in profits from the Company's real estate operations which is expected to end in fiscal 2000. For fiscal 1998, other income was $1.5 million compared to other expense of $1.5 million in fiscal 1997. The change between years was a result of gain on disposition of properties held for sale in fiscal 1998, and a non-cash charge for provision for asset impairment of $2.0 million in fiscal 1997.
Minority interest relates to an allocation of the joint venture income (losses) to the minority interest shareholders respective interest.
Provision for income taxes increased to $190,000 in fiscal 1999 from $114,000 in fiscal 1998. The provision for income taxes relates to foreign taxes on the Company's respective share of profit of the Company's Panama joint venture. No deferred tax benefit has been recognized on net operating losses. Because the realization of such deferred tax assets is not certain, a full valuation allowance was established. As of August 31, 1999, the Company had Federal and State net operating loss carryforwards of approximately $29.4 million and $11.1 million, respectively. The Federal and California tax loss carryforwards will begin expiring in 2010 and 2001, respectively, unless previously utilized.
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LIQUIDITY AND CAPITAL RESOURCES
The Company's primary capital requirement is the financing of land acquisition, construction and equipment costs for new warehouses plus the cost of preopening and working capital requirements, through investments in foreign joint ventures.
During fiscal 1999, the Company entered into a joint venture agreement with PSC, S.A., whose stockholders are Latin American businessmen, to open a minimum of nine PriceSmart membership shopping warehouses in Costa Rica, Dominican Republic, El Salvador, Honduras, and Nicaragua. The total cost of the project is projected at $80.6 million of which $33.8 million was contributed in cash by the shareholders (including the Company) and $46.8 million is to be borrowed. The Company is currently negotiating the terms of the required financing facilities. PriceSmart owns 60% of this venture. The Company opened its first two stores under this agreement in Costa Rica (June 1999) and El Salvador (August 1999).
During fiscal 1999, the Company entered into a joint venture agreement with investors from The Republic of Trinidad and Tobago to open a minimum of two 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 shareholders (including the Company) and $12.0 million is to be borrowed. The Company owns 60% of this venture.
During fiscal 1999, the Company repurchased 150,000 shares of its common stock for $2.2 million, completing a 700,000 share repurchase program initiated during fiscal 1998 in conjunction with the 1998 Equity Participation Plan. Repurchased shares were added to the Company's treasury shares. The Company also announced that it would use up to an additional $5.0 million to repurchase shares of the Company's common stock. During fiscal 1999, the Company repurchased 283,614 shares under this program for $4.4 million.
In December 1998, the Company's Guatemalan subsidiary entered into a three-year bank term loan with a principal amount of approximately $4.0 million. The loan requires quarterly payments of interest at 14%. The loan matures on December 10, 2001, at which time the principal amount is due. The loan is secured by aggregate collateral deposits of approximately $4.0 million contributed by the Company and the minority interest shareholder.
In May 1999, Pricsmarlandco, S.A., a wholly-owned subsidiary of PSMT Caribe, Inc., entered into a three-year bank term loan with a principal amount of approximately $3.8 million. The loan requires quarterly payments of interest at three-month LIBOR plus .25% (5.3938% as of August 31, 1999) through September 15, 1999, then 14% thereafter. The loan matures on May 31, 2002, at which time the principal amount is due. The loan is secured by a collateral deposit of approximately $3.8 million contributed by PSMT Caribe, Inc.
During fiscal 2000, management's current intention is to spend an aggregate of approximately $91.0 million (through its foreign joint ventures) for expansion in Latin America and the Caribbean to open up to ten new warehouses. 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. The Company, through its foreign joint ventures, intends to borrow approximately $61.0 million during fiscal 2000 to finance these expenditures which will be secured by the land, building, equipment and inventories at the new warehouses. The Company is currently evaluating several financing proposals and believes that the financing facilities for the new warehouse locations will be completed as required. The balance of these expenditures will be financed through a combination of cash, cash equivalents, marketable securities, cash from operations of the Company's businesses, payments from the City Notes and other note receivables.
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SEASONALITY
Historically, the Company's merchandising businesses have experienced moderate holiday retail seasonality in their markets. In addition to seasonal fluctuations, the Company's operating results fluctuate quarter-to-quarter as a result of economic and political events in markets served by the Company, the timing of holidays, weather, timing of shipments, product mix, and 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 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.
Additionally, the Company has contacted and will continue to contact significant vendors, suppliers, financial institutions and other third party providers upon which its business depends in an effort to determine such providers' year 2000 readiness. The Company evaluates the potential business impact of non-responsive or non-compliant providers and endeavors to make contingency plans as needed. These efforts are designed to minimize the impact to the Company should these providers fail to remediate their year 2000 issues. The Company can give no assurances that such providers or such contingency plans will be successful in resolving all year 2000 issues, and the failure of such providers to comply on a timely basis could have an adverse effect on the Company.
The total cost of the year 2000 project is not expected to exceed $100,000. The costs of the year 2000 project are based on management's best estimates, which are derived utilizing numerous assumptions. However, there can be no guarantee that these estimates will be achieved and actual results could differ materially from the estimates. Specific factors that might cause material differences include, but are not limited to, the availability and cost of trained personnel, the ability to locate and correct all relevant computer codes, and similar uncertainties.
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, 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.
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 March 1999.
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company, through its joint ventures, 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. For fiscal 1999, 28% of the Company's net warehouse sales were in foreign currencies. This amount is expected to increase significantly in fiscal 2000, to nearly 70%. 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 $245,000 for fiscal 1999.
Revenue generated in Asia through export sales to licensees declined significantly as a result of economic instability in this region during fiscal 1999. Further declines in export sales to Asia are not expected due to the opening of two new licensee warehouses in China during fiscal 1999.
Foreign currencies in most of the Latin American and Caribbean countries have historically devalued against the U.S. dollar and 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 August 31, 1999, the Company had $4.5 million in NDF's expiring at different dates through November 19, 1999. The cost associated with these contracts through August 31, 1999 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 during fiscal 1999 (including the cost of the NDF's) was approximately $538,000. The Company had no foreign exchange transactions prior to fiscal 1999.
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FINANCIAL STATEMENTS
PRICESMART, INC.
INDEX TO FINANCIAL STATEMENTS
PAGE
Report of Independent Auditors............................................... 19
Consolidated Balance Sheets as of August 31, 1999 and 1998................... 20
Consolidated Statements of Operations for the years ended
August 31, 1999, 1998 and 1997............................................... 21
Consolidated Statements of Stockholders' Equity for the years
ended August 31, 1999, 1998 and 1997.................................... 22
Consolidated Statements of Cash Flows for the years ended
August 31, 1999, 1998 and 1997.......................................... 23
Notes to Consolidated Financial Statements................................ 24-33
18
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REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS AND STOCKHOLDERS
PRICESMART, INC.
We have audited the accompanying consolidated balance sheets of PriceSmart, Inc. as of August 31, 1999 and 1998 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended August 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of PriceSmart, Inc. at August 31, 1999 and 1998 and the consolidated results of its operations and its cash flows for each of the three years in the period ended August 31, 1999 in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
San Diego, California
November 3, 1999
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PRICESMART, INC.
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
August 31,
-----------------
1999 1998
--------- ---------
ASSETS
Current assets
Cash and cash equivalents $ 14,957 $ 5,639
Marketable securities 17,627 56,133
Receivables, net of allowance for doubtful accounts of
$444 and $414 in 1999 and 1998, respectively 4,149 6,503
City notes receivable, current portion 2,500 2,500
Merchandise inventories 25,919 9,160
Prepaid expenses and other current assets 2,681 965
Properties held for sale, net 2,126 4,886
--------- ---------
Total current assets 69,959 85,786
Property and equipment:
Land 8,709 2,250
Building and improvements 27,537 6,905
Fixtures and equipment 16,724 6,659
--------- ---------
52,970 15,814
Less accumulated depreciation (4,463) (2,841)
--------- ---------
Property and equipment, net 48,507 12,973
Other assets:
Restricted cash 10,195 3,004
Deposits on land purchases 2,112 --
City notes receivable, less current portion 17,006 19,001
Note receivable and other 4,295 3,812
--------- ---------
TOTAL ASSETS $ 152,074 $ 124,576
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank borrowings $ 707 $ 3,782
Accounts payable 24,679 6,405
Accrued salaries and benefits 1,760 1,779
Deferred membership income 1,998 --
Other accrued expenses 3,369 3,901
--------- ---------
Total current liabilities 32,513 15,867
Long-term debt 7,787 --
--------- ---------
Total Liabilities 40,300 15,867
Minority interest 17,913 5,628
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, 5,991,256 and 6,003,603 shares
issued in 1999 and 1998, respectively 1 1
Additional paid-in capital 111,483 108,873
Notes receivable from stockholders (950) (697)
Deferred compensation (1,282) --
Accumulated other comprehensive income (loss) (453) 519
Retained earnings (deficit) (864) 3,028
Less: Treasury stock at cost
907,898 and 550,000 shares
in 1999 and 1998, respectively (14,074) (8,643)
--------- ---------
Total stockholders' equity 93,861 103,081
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 152,074 $ 124,576
--------- ---------
--------- ---------
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See accompanying notes.
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PRICESMART, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Years Ended August 31,
-----------------------------------
1999 1998 1997
--------- --------- ---------
REVENUES:
SALES:
Net warehouse $ 89,184 $ 48,287 $ 21,750
Export 6,773 32,813 36,335
Other -- -- 957
Membership, royalties and fees 2,008 2,720 3,139
Auto, travel and other programs 10,907 13,368 12,194
--------- --------- ---------
TOTAL REVENUES 108,872 97,188 74,375
EXPENSES:
COST OF GOODS SOLD:
Net warehouse 78,081 42,616 19,386
Export 6,557 32,068 34,768
Other -- -- 1,793
Selling, general and administrative 32,021 26,421 25,993
Preopening expenses 4,949 433 614
--------- --------- ---------
TOTAL EXPENSES 121,608 101,538 82,554
--------- --------- ---------
OPERATING LOSS (12,736) (4,350) (8,179)
OTHER:
Interest income, net 5,114 6,152 2,776
Other income (expenses) 3,007 1,532 (1,480)
Minority interest 913 (192) (59)
--------- --------- ---------
TOTAL OTHER 9,034 7,492 1,237
Income (loss) before provision for income taxes (3,702) 3,142 (6,942)
Provision for income taxes 190 114 17,901
--------- --------- ---------
NET INCOME (LOSS) $ (3,892) $ 3,028 $ (24,843)
--------- --------- ---------
--------- --------- ---------
Earnings (loss) per share:
Basic $ (0.76) $ 0.51 $ (4.20)
--------- --------- ---------
--------- --------- ---------
Diluted $ (0.76) $ 0.50 $ (4.20)
--------- --------- ---------
--------- --------- ---------
Shares used in per share computation:
Basic 5,120 5,912 5,908
--------- --------- ---------
--------- --------- ---------
Diluted 5,120 6,062 5,908
--------- --------- ---------
--------- --------- ---------
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See accompanying notes.
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PRICESMART, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE YEARS ENDED AUGUST 31, 1999
(AMOUNTS IN THOUSANDS)
Common Stock Additional Notes
------------- paid-in receivable from Deferred
Shares Amount capital stockholders compensation
------ ------- -------- ------------- -------------
Investment by PEI at
August 31, 1996 5,908 $ 1 $ 86,989 $ -- $ --
Net Loss -- -- (24,843) -- --
Net return to PEI -- -- 45,025 -- --
------- -------- --------- -------- ---------
Balance at August 31, 1997 5,908 1 107,171 -- --
Issuance of common stock for
cash and notes receivable 71 -- 1,093 (697) --
Exercise of stock options 25 -- 214 -- --
Purchase of treasury stock -- -- -- -- --
Stock based compensation -- -- 395 -- --
Net Income -- -- -- -- --
Unrealized gain on
marketable securities -- -- -- -- --
Comprehensive income -- -- -- -- --
------- -------- --------- -------- ---------
Balance at August 31, 1998 6,004 1 108,873 (697) --
Issuance of common stock for
cash and notes receivable 16 -- 424 (387) --
Exercise of stock options 51 -- 585 -- --
Purchase of treasury stock -- -- -- -- --
Cancellation of notes receivable
from stockholders (4) -- (65) 126 --
Payment on notes receivable
from stockholder -- -- -- 8 --
Deferred compensation related
to grant of stock options -- -- 2,355 -- (2,355)
Amortization of deferred
compensation -- -- -- -- 1,073
Compensation expense related to
the issuance of common stock -- -- 485 -- --
Retirement of common
stock held in treasury (76) -- (1,174) -- --
Net loss -- -- -- -- --
Unrealized loss on marketable
securities -- -- -- -- --
Translation adjustments -- -- -- -- --
Comprehensive loss -- -- -- -- --
------- -------- --------- -------- ---------
Balance at August 31, 1999 5,991 $ 1 $ 111,483 $ (950) $ (1,282)
------- -------- --------- -------- ---------
------- -------- --------- -------- ---------
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Less
Other Treasury Stock
Comprehensive Retained at cost Total
income earnings --------------------- stockholders'
(loss) (deficit) Shares Amount equity
---------- -------- ------- ------- ---------
Investment by PEI at
August 31, 1996 $-- $-- $-- $ -- $ 86,990
Net Loss -- -- -- -- (24,843)
Net return to PEI -- -- -- -- 45,025
------- -------- --------- -------- ---------
Balance at August 31, 1997 -- -- -- -- 107,172
Issuance of common stock for
cash and notes receivable -- -- -- -- 396
Exercise of stock options -- -- -- -- 214
Purchase of treasury stock -- -- 550 (8,643) (8,643)
Stock based compensation -- -- -- -- 395
Net Income -- 3,028 -- -- 3,028
Unrealized gain on
marketable securities 519 -- -- -- 519
---------
Comprehensive income -- -- -- -- 3,547
------- -------- --------- -------- ---------
Balance at August 31, 1998 519 3,028 550 (8,643) 103,081
Issuance of common stock for
cash and notes receivable -- -- -- -- 37
Exercise of stock options -- -- -- -- 585
Purchase of treasury stock -- -- 434 (6,605) (6,605)
Cancellation of notes receivable
from stockholders -- -- -- -- 61
Payment on notes receivable
from stockholder -- -- -- -- 8
Deferred compensation related
to grant of stock options -- -- -- -- --
Amortization of deferred
compensation -- -- -- -- 1,073
Compensation expense related to
the issuance of common stock -- -- -- -- 485
Retirement of common
stock held in treasury -- -- (76) 1,174 --
Net loss -- (3,892) -- -- (3,892)
Unrealized loss on marketable
securities (727) -- -- -- (727)
Translation adjustments (245) -- -- -- (245)
---------
Comprehensive loss -- -- -- -- (4,864)
------- -------- --------- -------- ---------
Balance at August 31, 1999 $ (453) $ (864) 908 $(14,074) $ 93,861
------- -------- --------- -------- ---------
------- -------- --------- -------- ---------
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See accompanying notes.
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PRICESMART, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
Years Ended August 31,
---------------------------------------
1999 1998 1997
------ ----- ------
OPERATING ACTIVITIES
Net income (loss) $ (3,892) $ 3,028 $(24,843)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation 1,622 1,409 1,374
Provision for asset impairments -- -- 2,000
Allowance for doubtful accounts 30 (586) 1,000
Net loss on disposition of property and equipment -- 111 --
Income tax charge 190 114 17,901
Minority interest (1,096) 192 59
Compensation expense recognized for stock options 1,558 395 --
Change in operating assets and liabilities
Restricted cash (7,191) (3,004) --
Accounts receivable and other assets (18,778) (5,140) (180)
Accounts payable and other liabilities 19,721 (1,104) 5,241
Other (137) (44) --
--------- -------- --------
Net cash flows provided by (used in) operating activities (7,973) (4,629) 2,552
INVESTING ACTIVITIES
Purchases of marketable securities (44,638) (86,378) --
Sales of marketable securities 82,417 30,801 --
Additions to property and equipment (37,156) (5,094) (8,034)
Payments of notes receivable 2,027 1,780 8,614
--------- -------- --------
Net cash flows provided by (used in) investing activities 2,650 (58,891) 580
FINANCING ACTIVITIES
Proceeds from sale of properties 2,760 15,027 6,594
Proceeds from bank borrowings, net 4,712 3,782 --
Contributions by minority interest shareholders 14,547 -- 3,632
Distributions to minority shareholders (1,029) -- --
Proceeds from exercise of stock options 585 214 --
Issuance of common stock 37 396 --
Payment on notes receivable from stockholders 8 -- --
Purchases of treasury stock (6,605) (8,643) --
Other (129) -- --
Net investment by PEI -- -- 45,025
--------- -------- --------
Net cash flows provided by financing activities 14,886 10,776 55,251
Effect of exchange rate changes on cash and cash equivalents (245) -- --
--------- -------- --------
Net increase (decrease) in cash and cash equivalents 9,318 (52,744) 58,383
Cash and cash equivalents at beginning of year 5,639 58,383 --
Cash and cash equivalents at end of year $ 14,957 $ 5,639 $ 58,383
--------- -------- --------
--------- -------- --------
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest $ 143 $ -- $ --
Income taxes $ 129 $ 21 $ 2
|
See accompanying notes.
[PRICESMART REVERSE OUT]
PRICESMART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
FORMATION OF THE COMPANY
PriceSmart, Inc. ("PriceSmart" or the "Company") owns and operates merchandising businesses. The Company's primary business is international merchandising consisting of membership shopping stores similar to, but smaller in size than, warehouse clubs in the United States. As of August 31, 1999, there were five warehouse stores in operation (two in Panama, and one each in Guatemala, Costa Rica and El Salvador) of which the Company owns a majority interest. Also, there were five warehouse stores in operation (four in China and one in Saipan) licensed to and operated by local 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 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 investment properties, except for current corporate income tax assets and liabilities.
BASIS OF PRESENTATION
The consolidated financial statements include the assets, liabilities and
results of operations of the Company and its majority owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
-----------------------------------------------------------------------------------------------------------
Ownership Basis of Presentation
Ventures Services, Inc. 100% Consolidated
PB Real Estate, S.A. 51% Consolidated
Price Costco de Panama, S.A. 51% Consolidated
PriceSmart (Guatemala), S.A. 66% Consolidated
PSMT Caribe, Inc. 60% Consolidated
PSMT Trinidad/Tobago LTD 60% Consolidated
-----------------------------------------------------------------------------------------------------------
|
The consolidated financial statements prior to fiscal 1998 present the Company as if it were a separate entity from PEI. PEI's historical basis in the assets and liabilities of the Company have been carried over. Changes in additional paid-in capital represent the net income (loss) of the Company and PEI prior to distribution. Certain amounts in the prior period consolidated financial statements have been reclassified to conform to the current period presentation.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
FISCAL YEAR
Effective September 1, 1997, the Company changed its reporting periods to 12 months ending August 31, with each quarter consisting of three months. Prior to the change, the Company generally reported 13 periods (ending on the Sunday closest to August 31) of four weeks each, with the first quarter consisting of 16 weeks, and each remaining quarter consisting of 12 weeks.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents represent cash and short-term investments with
maturities of three months or less when purchased.
RESTRICTED CASH
Restricted cash represents time deposits that are pledged as collateral for
majority-owned subsidiary loans and amounts deposited in escrow for future asset
acquisitions.
[PRICESMART REVERSE OUT]
PRICESMART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
MARKETABLE SECURITIES
In accordance with Statement of Financial Accounting Standards (SFAS) No. 115,
"Accounting for Certain Debt and Equity Securities", marketable securities are
classified as available-for-sale. Available-for-sale securities are carried at
fair value, with unrealized gains and losses reported in a separate component of
the stockholders' equity. The amortized cost of securities is adjusted for
amortization of premiums and accretion of discounts to maturity. Such
amortization is included in interest income. Realized gains and losses in value
judged to be other-than-temporary, if any, on available-for-sale securities are
included in interest income. The cost of securities sold is based on the
specific identification method. Interest and dividends on securities classified
as available-for-sale are included in interest income. The Company now invests
its excess cash primarily in corporate bonds and investment grade debt
securities of U.S. government agencies. Management has established guidelines
relative to diversification and maturities that are intended to maintain safety
and liquidity.
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:
Building and improvements 10-25 years Fixtures and equipment 3-7 years
MERCHANDISE INVENTORIES
Merchandise inventories, which include merchandise for resale, are valued at the
lower of cost (average cost) or market.
REVENUE RECOGNITION
The Company recognizes sales revenue when title passes to the customer.
Revenues from the auto referral program were recognized on a monthly basis
when billed, pursuant to contracts that are generally month-to-month.
Revenues from travel programs are recognized as services are performed.
Membership fee income represents annual membership fees paid by the Company's
warehouse members.
INCOME TAXES
Income taxes have been provided for in accordance with SFAS No. 109, "Accounting
for Income Taxes." This standard requires companies to account for deferred
taxes using the asset and liability method. Accordingly, deferred income taxes
are provided to reflect temporary differences between financial and tax
reporting. In fiscal year 1997, the Company was included in the consolidated
Federal and in various combined state tax returns of PEI. The Company was
allocated the benefit of its tax net operating losses used in PEI's consolidated
or combined tax returns. Benefits realized by PEI were not paid to the Company
but were deemed to be reductions in PEI's investment in the Company.
ASSET IMPAIRMENT
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of", requires impairment losses to be recorded
on long-lived assets used in operations when indicators of impairment are
present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amount. No such indicators of
impairment were present in the fiscal years presented. SFAS No. 121 also
addresses the accounting for long-lived assets that are expected to be disposed
of. The Company estimates the sales value, net of related selling costs, on its
real estate properties which are being held for sale. Impairment losses of $2.0
million were recorded in fiscal 1997. No impairment losses were recorded in
fiscal 1999 and 1998. See Note 4.
[PRICESMART REVERSE OUT]
PRICESMART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
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.
CONCENTRATION OF CREDIT RISK
The Company's export sales are to licensees in Asia and are secured by letters
of credit.
STOCK-BASED COMPENSATION
SFAS No. 123, "Accounting for Stock-Based Compensation", establishes the use of
fair value based method for stock-based compensation arrangements, under which
compensation is determined using the fair value of stock-based compensation
determined as of the grant date, and is recognized over the periods in which the
related services are rendered. SFAS No. 123 also permits companies to elect to
continue using the current intrinsic value accounting method specified in
Accounting Principles Board Opinion (APB) No. 25 to account for stock-based
compensation. The Company has decided to retain the current intrinsic value
based method, and has disclosed the pro forma effect of using the fair value
based method for its stock-based compensation.
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 is computed based
on the weighted average shares outstanding in the period and the effect of
dilutive securities (options) except where their inclusion is antidilutive.
--------------------------------------------------------------------------------------------------------------------
COMPUTATION OF NET INCOME (LOSS) PER COMMON SHARE (BASIC AND DILUTED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
Years Ended August 31,
---------------------------------------------
1999 1998 1997
---------- ---------- ----------
Net income (loss) used for basic and
diluted computation $ (3,892) $ 3,028 $ (24,843)
---------- ---------- ----------
---------- ---------- ----------
Weighted average number of common
shares outstanding 5,119,911 5,912,375 5,908,235
Add:
Assumed exercise of those options
that are common stock equivalents - 150,085 -
---------- ---------- ----------
Adjusted shares outstanding used for
diluted computation 5,119,911 6,062,460 5,908,235
---------- ---------- ----------
---------- ---------- ----------
Earnings (loss) per share:
Basic $ (0.76) $ 0.51 $ (4.20)
---------- ---------- ----------
---------- ---------- ----------
Diluted $ (0.76) $ 0.50 $ (4.20)
---------- ---------- ----------
---------- ---------- ----------
--------------------------------------------------------------------------------------------------------------------
|
[PRICESMART REVERSE OUT]
PRICESMART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
PRE-OPENING COSTS
The Company adopted Statement of Position ("SOP") 98-5, "Reporting on the Costs
of Start-up Activities" in 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 consolidated financial statements. For fiscal
years 1999, 1998, and 1997, pre-opening costs totaled $5.0 million, $433,000 and
$614,000, respectively.
FOREIGN CURRENCY TRANSLATION
In accordance with SFAS No. 52 "Foreign Currency Translation", the assets and
liabilities of the Company's foreign operations are translated to U.S. dollars
using the exchange rates at balance sheet date and revenues and expenses are
translated at average rates prevailing during the period. Fiscal 1999
translations resulted in a translation adjustment loss of approximately
$245,000.
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.
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.
NOTE 3 - MARKETABLE SECURITIES
The following is a summary of marketable securities classified as
available-for-sale as of August 31, 1999 and 1998 (in thousands).
--------------------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Values
----------- ---------- ---------- ------------
1999
Asset backed bonds $ 3,570 $ - $ (44) $ 3,526
Commercial company bonds 14,265 - (164) 14,101
----------- ---------- ---------- ------------
Total $ 17,835 $ - $ (208) $ 17,627
----------- ---------- ---------- ------------
1998
U.S. Government securities $ 55,614 $ 519 $ - $ 56,133
--------------------------------------------------------------------------------------------------------------------
|
The fair value of the marketable securities is based on quoted market prices for
the same or similar type issues. For fiscal 1999, gross realized gains were $2.4
million and gross realized losses were $1.5 million, netting to a realized gain
of $959,000. Gross realized gains and losses for fiscal 1998 were not material.
As of August 31, 1999, the average maturity of outstanding marketable
securities was 21 months and $13.2 million had maturities that exceeded
twelve months.
[PRICESMART REVERSE OUT]
PRICESMART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
NOTE 4 - PROPERTY HELD FOR SALE
Property held for sale primarily includes improved and unimproved land, which
the Company expects to dispose of in the next twelve months. Property held for
sale totaled $2.1 million and $4.9 million as of August 31, 1999 and 1998,
respectively.
As the properties are held for sale, the net results of the real estate operations are included in other income (expense) on the consolidated statements of operations, and totaled $1.3 million, $1.5 million and a loss of $1.5 million during fiscal 1999, 1998, and 1997, respectively.
During fiscal 1997, the Company incurred a $2.0 million provision for an asset impairment to write-down the carrying value of real estate properties held for sale.
NOTE 5 - CITY NOTES RECEIVABLE
The City Notes, with interest rates ranging from 8% to 10%, represent amounts
loaned to U.S. municipalities and agencies to facilitate real property
acquisition and improvements. Repayment of the majority of these notes is
generally based on that municipality's allocation of sales tax revenues
generated by retail businesses located on the particular property associated
with such City Note. City Note repayments are calculated in accordance with
specific revenue sharing agreements, and, under the term of most City Notes, the
unpaid balance of the note is forgiven on its maturity date. The carrying values
of these notes were established when PEI was spun out from Costco. The carrying
values are evaluated by the Company in accordance with SFAS No. 114, "Accounting
by Creditors for Impairment of a Loan." Interest income is recognized based upon
the stated interest rates and amounted to $1.7 million, $1.9 million and $2.1
million for the years ended August 31, 1999, 1998 and 1997, respectively. At
August 31, 1999 and 1998, the aggregate stated principal value plus compounded
interest amounted to $74 million and $71 million, respectively. As a result, the
total carrying value of the City Notes at August 31, 1999 and 1998 is less than
the stated principal and interest by $54 million and $50 million, respectively.
As of August 31, 1999, eleven City Notes were outstanding with maturity dates
ranging from 2003 to 2028.
NOTE 6 - RETIREMENT PLAN
PriceSmart offers a defined contribution retirement and 401(k) plans to
employees. Employees become eligible for these plans after one year of
employment. Enrollment in these plans begins on the first of the month following
the employee's one-year anniversary date. Retirement contributions, if any, are
based on a discretionary amount determined by the Board of Directors and are
allocated to each participant based on the relative compensation of the
participant, subject to certain limitations. The Company makes a matching 401(k)
contribution equal to 50% of the participant's contribution up to an annual
maximum matching contribution of $250. Profit sharing contributions were
approximately $361,000, $363,000, and $406,000 for fiscal 1999, 1998, and 1997,
respectively. Employer contributions to the 401(k) plan were approximately
$27,000, $26,000, and $24,000 during fiscal 1999, 1998, and 1997, respectively.
NOTE 7 - STOCK OPTION PLAN AND EQUITY PARTICIPATION PLAN
On August 6, 1997, the Company adopted the 1997 Stock Option Plan of PriceSmart,
Inc. (the "1997 Plan") for the benefit of its eligible employees, consultants
and independent directors. Under the 1997 Plan, 700,000 shares of the Company's
common stock are authorized for issuance. The Compensation Committee of the
Board of Directors administers the 1997 Plan with respect to grants to employees
or consultants of the Company, and the full Company Board of Directors
administers the Plan with respect to director options. Options issued under the
1997 Plan typically vest over five years and expire in six years. Certain
employees and directors of the Company participated in the PEI stock option
plan. Upon consummation of the Distribution, the unvested PEI options held by
these individuals were canceled. To replace those canceled options, the Company
granted options to purchase PriceSmart common stock at share amounts and prices
per share so that the employees and directors were in substantially the same
economic position as they were prior to the Distribution.
In January 1999, the Company adopted the 1998 Equity Participation Plan (the "Equity Plan") for the benefit of its eligible employees, consultants and independent directors. The Equity Plan authorizes 700,000 shares of the Company's common stock for issuance. Options issued under the Equity Plan typically vest over five years and expire in six years. The Equity Plan also allows the Company to make loans to participants for the purchase of shares. As of August 31, 1999, outstanding loans were approximately $950,000. The loans are with full recourse and interest is payable semi-monthly at 5.85% with the principal due in six years.
[PRICESMART REVERSE OUT]
PRICESMART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
Total stock option activity relating to the 1997 Plan and Equity Plan was as follows:
--------------------------------------------------------------------------------------------------------------------
Weighted
Average
Shares Exercise Price
---------- --------------
Balance at August 31, 1997 - $ -
Granted 734,500 13.39
Exercised (24,801) 8.63
Cancelled (75,963) 10.40
--------- --------
Balance at August 31, 1998 633,736 13.94
Granted 729,185 19.45
Exercised (51,253) 11.43
Cancelled (116,867) 15.17
--------- --------
Balance at August 31, 1999 1,194,801 $ 17.29
--------------------------------------------------------------------------------------------------------------------
|
As of August 31, 1999 and 1998, options to purchase 256,367 and 41,662 shares, respectively were exercisable. As of August 31, 1999, there were 1,241,555 shares of Common Stock reserved for future issuance. The following table summarizes information about stock options outstanding at August 31, 1999:
--------------------------------------------------------------------------------------------------------------------
Outstanding Weighted-Average Weighted- Exercisable Weighted-
Range of as of Remaining Average as of Average
Exercise Prices 8/31/99 Contractual Life Exercise Price 8/31/99 Exercise Price
------------------- ----------- ---------------- -------------- ------------ ---------------
$ 7.79 - $11.68 204,139 2.1 $ 8.80 111,106 $ 8.81
11.68 - 15.58 407,977 4.9 15.43 78,036 15.41
15.58 - 19.47 444,185 4.6 17.36 67,225 17.48
19.47 - 23.36 25,000 5.5 20.00 - -
35.04 - 38.94 113,500 5.9 37.82 -
------------------- ----------- ---------------- -------------- ------------ ---------------
$ 7.79 - $38.94 1,194,801 4.4 $17.29 256,367 $13.09
--------------------------------------------------------------------------------------------------------------------
|
The weighted-average fair value of the stock options granted during 1999, 1998, and 1997 were $13.16, $5.04, and $3.48, respectively.
The Company has recorded deferred compensation of $2.4 million in connection with the grants of certain stock options to employees during fiscal 1999. A total of 552,291 options were issued at a price lower than market on date of grant. On date of grant the market price was $20.25 while 81,250 options were issued with an exercise price of $16.25, 446,041 options were issued with an exercise price of $15.50 and 25,000 options were issued with an exercise price of $14.75. The deferred compensation will be amortized ratably over the vesting period of the respective options.
Pro forma information regarding net income is required by SFAS No. 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method prescribed by SFAS No. 123. The fair value of each option grant is estimated on the date of grant using the "Black-Scholes" option pricing model with the following weighted average assumptions used for grants in fiscal 1999, 1998, and 1997:
--------------------------------------------------------------------------------------------------------------------
1999 1998 1997
------- ------- -------
Risk free interest rate 6% 6% 6%
Expected life 6 years 3 years 3 years
Expected volatility 42.7% 31.5% 26.5%
Expected dividend yield 0% 0% 0%
--------------------------------------------------------------------------------------------------------------------
|
For the purpose of pro forma disclosures, the estimated fair value of the options granted is amortized to expense over the options' vesting period. The Company's pro forma information for the years ended August 31, 1999, 1998, and 1997 were as follows:
[PRICESMART REVERSE OUT]
PRICESMART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------------------------------------------
1999 1998 1997
------- ------- -------
Pro forma net income (loss)
(in thousands) $ (5,072) $ 2,558 $ (25,002)
Pro forma earnings (loss)
per share diluted $ (0.99) $ 0.42 $ (4.23)
--------------------------------------------------------------------------------------------------------------------
|
The pro forma effect on net loss for 1999 and 1997 and on net income for 1998 is not likely to be representative of the pro forma effect on reported earnings in future years.
NOTE 8 - INCOME TAXES
Significant components of the income tax provision are as follows (in
thousands):
--------------------------------------------------------------------------------------------------------------------
Years Ended August 31,
--------------------------------------------------
1999 1998 1997
------- ------- -------
Current:
Federal $ - $ - $ (3,612)
State - - -
Foreign 190 114 -
------- ------- -------
190 114 (3,612)
Deferred:
Federal - - 20,945
State - - 568
Foreign - - -
------- ------- -------
- - 21,513
------- ------- -------
Total Provision $ 190 $ 114 $17,901
------- ------- -------
------- ------- -------
--------------------------------------------------------------------------------------------------------------------
|
The reconciliation of income tax computed at the Federal statutory tax rate to the provision for income taxes is as follows (in thousands):
--------------------------------------------------------------------------------------------------------------------
1999 1998 1997
------- ------- -------
Federal taxes at statutory rates $ (1,259) $ 1,068 $ (2,430)
State taxes, net of Federal benefit (222) 188 (416)
Tax losses (income) of majority owned subsidiaries 650 (130) -
Increase (decrease) in valuation allowance
for deferred tax assets 918 (1,027) 20,683
All other, net 103 15 64
--------- ------- --------
Total provision $ 190 $ 114 $ 17,901
--------- ------- --------
--------- ------- --------
--------------------------------------------------------------------------------------------------------------------
|
Significant components of the Company's tax assets as of August 31, 1999, and 1998 are shown below. A valuation allowance of $24.9 million at August 31, 1999, has been recognized to offset the deferred tax assets as realization of such assets is uncertain (in thousands).
[PRICESMART REVERSE OUT]
PRICESMART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------------------------------------------
August 31,
-------------------------------
1999 1998
---------- ---------
Deferred tax assets:
City notes receivable $ 11,710 $ 11,615
Net operating losses 11,198 10,567
International revenues and expenses 112 127
Real estate properties - 18
Deferred compensation 427 -
All other, net 1,678 1,677
---------- ---------
Total deferred tax assets 25,125 24,004
Deferred tax liabilities:
Unrealized gains on marketable securities (207) (207)
---------- ---------
Total deferred tax liabilities (207) (207)
Valuation allowance (24,918) (23,797)
---------- ---------
Net deferred tax assets $ - $ -
---------- ---------
---------- ---------
--------------------------------------------------------------------------------------------------------------------
|
As of August 31, 1999, the Company has Federal and State net operating loss carryforwards of approximately $29.4 million and $11.1 million, respectively. The Federal and State tax loss carryforwards will begin expiring in 2010 and 2001, respectively, unless previously utilized.
Pursuant to Section 382 of the Internal Revenue Code, annual use of the Company's net operating loss carryforwards will be limited because of cumulative changes in ownership of more than 50% which occurred during 1995. However, the Company does not believe such change will have a material impact upon utilization of these carryforwards.
NOTE 9 - BANK LOANS
In December 1998, the Company's Guatemalan subsidiary entered into a three-year
bank term loan with a principal amount of approximately $4.0 million. The loan
requires quarterly payments of interest at 14%. The loan matures on December 10,
2001, at which time the principal amount is due. The loan is secured by
aggregate collateral deposits of approximately $4.0 million contributed by the
Company and the minority interest shareholder.
In May 1999, a wholly-owned subsidiary of PSMT Caribe, Inc., entered into a three-year bank term loan with a principal amount of approximately $3.8 million. The loan requires quarterly payments of interest at three-month LIBOR plus .25% (5.3938% as of August 31, 1999) through September 15, 1999, then 14% thereafter. The loan matures on May 31, 2002, at which time the principal amount is due. The loan is secured by a collateral deposit of approximately $3.8 million contributed by PSMT Caribe, Inc.
In February 1999, a wholly owned subsidiary of PSMT Caribe, Inc. entered into a short-term bank loan with a principal amount of $707,000 and an annual interest rate of 13%. The loan was repaid in October 1999.
During fiscal 1998, the Company's Panama subsidiary entered into a seven-year bank term loan with a principal amount of $4.2 million. The loan required minimum monthly payments including principal and interest of $50,000. Interest was payable at LIBOR plus 1.75%. The loan was secured by land and a building of the Panama subsidiary. The loan was repaid in full during fiscal 1999.
NOTE 10 - COMMITMENTS
The Company has entered into non-cancelable operating leases for retail and
administrative office facilities. These leases expire or become subject to
renewal between 2001 and 2019. Rental expense charged to operations under
operating leases totaled approximately $1.4 million and $580,000 for fiscal
years 1999 and 1998, respectively. Future minimum lease commitments for
facilities under these leases are payable as follows (in thousands):
[PRICESMART REVERSE OUT]
PRICESMART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------------------------------------------
Fiscal Year Amount
----------- ----------
2000 $ 2,025
2001 2,196
2002 1,935
2003 2,032
2004 2,085
Thereafter 32,698
----------
Total $ 42,971
----------
----------
--------------------------------------------------------------------------------------------------------------------
|
NOTE 11 - SALE OF AUTO REFERRAL PROGRAM
In August 1998, the Company entered into an agreement to sell its auto referral
business effective November 1, 1999. On March 29, 1999, the Company entered into
an amendment to the purchase agreement to change the closing date of the sale to
April 1, 1999. The Company operated the auto referral business through March 31,
1999. The sale resulted in a net gain of $798,000 which is reported in other
income in the consolidated statements of operations for the year ended August
31, 1999.
NOTE 12 - RELATED PARTY TRANSACTIONS
As a result of the Distribution to stockholders of the Company and for the
purpose of governing certain of the ongoing relationships between the Company
and PEI after the Distribution, and to provide mechanisms for an orderly
transition, the Company and PEI entered into various agreements. As a result of
these agreements, the Company paid $1.1 million to PEI during fiscal 1999 and
$1.2 million and $1.6 million during fiscal 1998 and 1997, respectively.
In fiscal 1998, the Company sold a 15-acre property to PEI for $4.0 million resulting in a realized gain of $293,000. In fiscal 1999, the Company sold to PEI a 2.5 acre parcel of real estate for $320,000, resulting in a realized gain of $68,000. The sale prices were based on independent appraisals.
In August 1998, the Company repurchased 200,000 shares of common stock from the Sol and Helen Price Trust, of which Sol Price is the trustee, at a price of $15.00 per share.
NOTE 13 - GEOGRAPHIC AREAS AND MAJOR CUSTOMERS (IN THOUSANDS)
--------------------------------------------------------------------------------------------------------------------
Years Ended August 31,
---------------------------------------------------------
1999 1998 1997
----------- ------------ ----------
Revenues:
United States $ 18,933 $ 47,709 $ 51,806
Latin America 89,939 49,479 22,569
----------- ------------ ----------
$ 108,872 $ 97,188 $ 74,375
----------- ------------ ----------
Operating income (loss):
United States $ (9,684) $ (4,741) $ (8,299)
Latin America (3,052) 391 120
----------- ------------ ----------
$ (12,736) $ (4,350) $ (8,179)
----------- ------------ ----------
Identifiable Assets:
United States $ 52,787 $ 103,778
Latin America 99,287 20,798
----------- ------------
$ 152,074 $ 124,576
----------- ------------
--------------------------------------------------------------------------------------------------------------------
|
The Latin American operations for fiscal 1999 consist of the five warehouse stores, of which the Company owns a majority interest in each, as disclosed in Note 1. In fiscal 1998 and 1997, Latin American operations consisted solely of a 51% interest in a joint venture in Panama.
[PRICESMART REVERSE OUT]
PRICESMART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
Export sales to Asian licensees were approximately $6.8 million, $32.8 million, and $36.3 million for fiscal 1999, 1998, and 1997, respectively. Revenues attributable to a single customer represented approximately 6%, 28%, and 37% of total revenues for fiscal 1999, 1998, and 1997, respectively.
NOTE 14 - FOREIGN CURRENCY INSTRUMENTS
PriceSmart transacts business in various foreign currencies, primarily Latin
American currencies. The Company has established revenue and balance sheet
hedging programs to protect against reductions in value and volatility of future
cash flows caused by changes in foreign exchange rates. The Company had currency
forward contracts with notional amounts totaling $4.5 million in these hedging
programs as of August 31, 1999.
These instruments are not recorded on the balance sheet. However, if the
instruments were recorded based on their fair values, the effect on net income
(loss) for fiscal 1999 would have been immaterial.
[PRICESMART REVERSE OUT]
PRICESMART, INC.
MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's common stock has been quoted and traded on the NASDAQ National market under the symbol "PSMT" since September 2, 1997. As of November 16, 1999, there were approximately 517 holders of record of the Common Stock.
--------------------------------------------------------------------------------------------------------------------
Dates Stock Price
------------------ --------------------
From To High Low
------ ------- ------- --------
1998 CALENDAR QUARTERS
First Quarter 9/2/97 11/30/97 18.875 15.250
Second Quarter 12/1/97 2/28/98 17.875 16.125
Third Quarter 3/1/98 5/31/98 16.625 15.250
Fourth Quarter 6/1/98 8/31/98 17.563 14.000
1999 CALENDAR QUARTERS
First Quarter 9/1/98 11/30/98 17.500 14.125
Second Quarter 12/1/98 2/28/99 23.000 15.625
Third Quarter 3/1/99 5/31/99 28.625 18.000
Fourth Quarter 6/1/99 8/31/99 46.125 24.500
2000 CALENDAR QUARTERS
First Quarter 9/1/99 11/10/99 42.750 34.500
--------------------------------------------------------------------------------------------------------------------
|
The Company has never declared a cash dividend on its Common Stock and does not anticipate doing so in the foreseeable future.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
[PRICESMART REVERSE OUT]
DIRECTORS
The table below indicates the name, position with the Company and age of each
director:
NAME POSITION WITH THE COMPANY AGE Robert E. Price Chairman of the Board 57 Gilbert A. Partida President, Chief Executive Officer and Director 37 Rafael E. Barcenas Director 55 Katherine L. Hensley Director 62 Leon C. Janks Director 50 Lawrence B. Krause Director 69 James F. Cahill Director 44 |
ROBERT E. PRICE has been Chairman of the Board of the Company since July 1994 and served as President and Chief Executive Officer of the Company from July 1994 until January 1998. Mr. Price also served as Chairman of the Board of Price Enterprises, Inc. ("PEI"), from July 1994 until November 1999 and was President and Chief Executive Officer of PEI from July 1994 until September 1997. Mr. Price was Chairman of the Board of Price/Costco, Inc. ("Costco") from October 1993 to December 1994. From 1976 to October 1993, he was Chief Executive Officer and a director of The Price Company ("TPC"). Mr. Price served as Chairman of the Board of TPC from January 1989 to October 1993, and as its President from 1976 until December 1990.
GILBERT A. PARTIDA has been a director of the Company since July 1997 and has been President and Chief Executive Officer of the Company since January 1998. Mr. Partida was President and Chief Executive Officer of the Greater San Diego Chamber of Commerce from January 1993 until December 1997. Prior to joining the Chamber of Commerce, Mr. Partida was an attorney with the law firm of Gray, Cary, Ames & Frye in San Diego, California from 1987 to 1992.
RAFAEL E. BARCENAS has been a director of the Company since April 1998. Mr. Barcenas has also been a director and officer of PriceCostco de Panama, S.A., and P.B. Real Estate, S.A., which are subsidiaries of the Company, since their formation in September 1995 and July 1997, respectively. Additionally, Mr. Barcenas has been a principal of BB&M International Trading Group, a Panamanian company (which is the 49% owner of both PriceCostco de Panama, S.A. and P. B. Real Estate, S.A.) since March 1995. Mr. Barcenas also has been Vice President of Boyd, Barcenas, S.A., the largest advertising agency in Panama, since April 1971.
KATHERINE L. HENSLEY has been a director of the Company since July 1997 and served as a director of PEI from December 1994 until July 1997. She is a lawyer and a retired partner of the law firm of O'Melveny & Myers in Los Angeles, California. Ms. Hensley joined O'Melveny & Myers in 1978 and was a partner from 1986 to February 1992. Ms. Hensley is a trustee of Security First Trust, an open-end investment management company registered under the Investment Company Act of 1940.
LEON C. JANKS has been a director of the Company since July 1997 and served as a director of PEI from March 1995 until July 1997. He has been a partner in the accounting firm of Alder, Green & Hasson in Los Angeles, California since 1980. Mr. Janks also serves on the board of directors of Expert Ease Software, Inc., a privately held corporation. Mr. Janks has extensive experience in domestic and international business serving a wide variety of clients in diverse businesses and is a Certified Public Accountant.
LAWRENCE B. KRAUSE has been a director of the Company since July 1997. Mr. Krause has been a Professor and the Director of the Korea-Pacific Program at the Graduate School of International Relations and Pacific Studies at the University of California, San Diego since 1986. He became a Professor Emeritus in 1997. Mr. Krause also serves on advisory boards for a number of institutions including the Institute for International Economics, the Korea Economic Institute, the Committee on Asian Economic Studies and the U.S. National Committee for Pacific Economic Cooperation.
JAMES F. CAHILL has been a director of the Company since November 1999 and has served as a director of PEI since August, 1997. Additionally, Mr. Cahill has been Executive Vice President of Price Entities since January 1987; in this position he has been responsible for the oversight and investment activities of the financial portfolio of Sol Price, founder of TPC and related entities. Prior to 1987 Mr. Cahill was employed by TPC for ten years, with his last position being Vice president of Operations.
[PRICESMART REVERSE OUT]
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company and their ages as of November 16, 1999 are
as follows:
NAME POSITION WITH THE COMPANY AGE Gilbert A. Partida President and Chief Executive Officer 37 Kevin C. Breen Executive Vice President-- Operations 39 Robert M. Gans Executive Vice President, Secretary and General Counsel 50 Thomas D. Martin Executive Vice President-- Merchandising 43 Kurt A. May Executive Vice President and Chief Operating Officer 46 Allan C. Youngberg Executive Vice President and Chief Financial Officer 47 |
GILBERT A. PARTIDA has been a director of the Company since July 1997 and has been President and Chief Executive Officer of the Company since January 1998. Mr. Partida was President and Chief Executive Officer of the Greater San Diego Chamber of Commerce from January 1993 until December 1997. Prior to joining the Chamber of Commerce, Mr. Partida was an attorney with the law firm of Gray, Cary, Ames & Frye in San Diego, California from 1987 to 1992.
KEVIN C. BREEN has been Executive Vice President of the Company since September 1999 and served as Senior Vice President of the Company from August 1997 to August 1999. Mr. Breen previously served as Executive Vice President of Price Ventures, Inc., a subsidiary of PEI, from February 1997 until August 1997, overseeing operational and construction management areas for the international merchandising business. Prior to joining PEI as Vice President in August 1994, Mr. Breen served as Vice President of Costco from October 1993 to December 1994 and had served in various management roles for TCP.
ROBERT M. GANS has been Executive Vice President, General Counsel and Secretary of the Company since August 1997 and was Executive Vice President and General Counsel of PEI from October 1994 until July 1997. Mr. Gans graduated from the UCLA School of Law in 1975 and actively practiced law in private practice from 1975 until 1994. From 1988 until October 1994, Mr. Gans was the senior member of the law firm of Gans, Blackmar & Stevens, A.P.C., of San Diego, California.
THOMAS D. MARTIN has been Executive Vice President of the Company since October 1998 and served as Senior Vice President of the Company from August 1997 to September 1998. Mr. Martin previously had served as Vice President of PEI from August 1994 until July 1997, directing merchandising strategies and product sourcing for its international merchandising business, in addition to managing its trading company activities. Prior to joining PEI as Vice President in August 1994, Mr. Martin served as Vice President of Costco from October 1993 to December 1994 and had served in various management roles for TPC.
KURT A. MAY has been Executive Vice President and Chief Operating Officer of the Company since October 1998. Prior to joining PriceSmart, Mr. May was employed by GTE Corporation for twenty-three years, serving in a wide range of functional disciplines including his most recent role as Area President of GTE Wireless since 1995.
ALLAN C. YOUNGBERG has been Executive Vice President and Chief Financial Officer of the Company since July 1999. From January 1993 until July 1999, Mr. Youngberg had been Executive Vice President, Chief Financial Officer, Secretary and Treasurer of Cost-U-Less, Inc. Prior to joining Cost-U-Less, Mr. Youngberg was President and shareholder of Youngberg & Schumacher, P.S., a certified public accounting firm in Bellevue, Washington, which Mr. Youngberg founded in 1984 and sold in December 1992. Mr. Youngberg is a Certified Public Accountant.
Exhibit 21.1
LIST OF SUBSIDIARIES OF PRICESMART, INC.
The following table sets forth a list of the Company's subsidiaries as of August 31, 1999:
Name Jurisdiction of Ownership DBA
---- Incorporation or --------- ----
Organization
---------------
Ventures Services, Inc. Delaware 100% PriceSmart
PriceCostco
PB Real Estate, S.A. Panama 51% -
Price Costco de Panama, S.A. Panama 51% PriceSmart
PriceCostco
PriceSmart (Guatemala), S.A. Guatemala 66% PriceSmart
PSMT Caribe, Inc. British Virgin Islands 60% PriceSmart
PSMT Trinidad/Tobago LTD Trinidad 60% PriceSmart
|
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form 10-K) of PriceSmart, Inc. of our report dated November 3, 1999, included in the 1999 Annual Report to Stockholders of PriceSmart, Inc.
Our audits also included the financial statement schedule of PriceSmart, Inc. listed in Item 14(a). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
We also consent to the incorporation by reference in the Registration Statements (Form S-8's No. 333-38345 and No. 333-61067) pertaining to the 1997 Stock Option Plan of PriceSmart, Inc. and the 1998 Equity Participation Plan of PriceSmart, Inc. of our report dated November 3, 1999, with respect to the consolidated financial statements of PriceSmart, Inc. incorporated by reference in its Annual Report on Form 10-K for the year ended August 31, 1999 and the related financial statement schedule included therein, filed with the Securities and Exchange Commission.
ERNST & YOUNG LLP
San Diego, California
November 29, 1999
| ARTICLE 5 |
| THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS AS OF AND FOR THE FISCAL YEAR ENDED AUGUST 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS AS INCLUDED IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K, EXHIBIT 13.1. |
| MULTIPLIER: 1,000 |
| CURRENCY: U.S. DOLLARS |
| PERIOD TYPE | YEAR |
| FISCAL YEAR END | AUG 31 1999 |
| PERIOD START | SEP 01 1998 |
| PERIOD END | AUG 31 1999 |
| EXCHANGE RATE | 1 |
| CASH | 14,957 |
| SECURITIES | 17,627 |
| RECEIVABLES | 4,593 |
| ALLOWANCES | (444) |
| INVENTORY | 25,919 |
| CURRENT ASSETS | 69,959 |
| PP&E | 52,970 |
| DEPRECIATION | (4,463) |
| TOTAL ASSETS | 152,074 |
| CURRENT LIABILITIES | 32,513 |
| BONDS | 0 |
| PREFERRED MANDATORY | 0 |
| PREFERRED | 0 |
| COMMON | 1 |
| OTHER SE | 93,860 |
| TOTAL LIABILITY AND EQUITY | 152,074 |
| SALES | 95,957 |
| TOTAL REVENUES | 108,872 |
| CGS | 84,638 |
| TOTAL COSTS | 121,608 |
| OTHER EXPENSES | (3,920) |
| LOSS PROVISION | 0 |
| INTEREST EXPENSE | (5,114) |
| INCOME PRETAX | (3,702) |
| INCOME TAX | 190 |
| INCOME CONTINUING | (3,892) |
| DISCONTINUED | 0 |
| EXTRAORDINARY | 0 |
| CHANGES | 0 |
| NET INCOME | (3,892) |
| EPS BASIC | (0.76) |
| EPS DILUTED | (0.76) |