UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(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, 20032004
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number: 000-22793
PRICESMART, INC.
(Exact name of registrant as specified in its charter)
DELAWARE | 33-0628530 | |
(State of other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) |
4649 MORENA BLVD.,9740 SCRANTON RD, SAN DIEGO, CA 9211792121
(Address of principal executive offices, Zip Code)
Registrant’s telephone number, including area code: (858) 581-4530404-8800
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 | The |
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
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. ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes ¨ No x
The aggregate market value of the Registrant’s voting stock held by non-affiliates of the Registrant as of February 28, 200329, 2004 was $71,216,847,$27,250,527, based on the last reported sale of $15.87$7.05 per share on February 28, 2003.27, 2004.
As of December 5, 2003,November 12, 2004, a total of 7,362,00515,301,736 shares of Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company’s Annual Report for the fiscal year ended August 31, 20032004 are incorporated by reference into Part II of this Form 10-K.
Portions of the Company’s definitive Proxy Statement for the Annual Meeting of Stockholders to be held on January 8, 2004February 25, 2005 are incorporated by reference into Part III of this Form 10-K.
ANNUAL REPORT ON FORM 10-K
For the Year Ended August 31, 20032004
TABLE OF CONTENTS
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PART I | ||||||
Item 1. | 1 | |||||
Item 2. | ||||||
Item 3. | ||||||
Item 4. | ||||||
PART II | ||||||
Item 5. | ||||||
Item 6. | ||||||
Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |||||
Item 7A. | ||||||
Item 8. | ||||||
Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 15 | ||||
Item 9A. | Controls and Procedures | 15 | ||||
PART III | ||||||
Item 10. | Directors and Executive Officers of the Registrant | 16 | ||||
Item | 16 | |||||
Item 12. | ||||||
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| Security Ownership of Certain Beneficial Owners and Management | |||||
Item 13. | ||||||
Item 14. | ||||||
PART IV | ||||||
Item 15. | Exhibits, Financial Statement Schedules and Reports on Form 8-K |
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This Form 10-K contains forward-looking statements concerning PriceSmart, Inc.’s (“PriceSmart” or the “Company”) anticipated future revenues and earnings, adequacy of future cash flow and related matters. These forward-looking statements include, but are not limited to, statements containing the words “expect,” “believe,” “will,” “may,” “should,” “project,” “estimate,” “scheduled” 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 Securities and Exchange Commission reports, including the risk factors referenced in this Form 10-K. See “Factors That May Affect Future Performance.”
PriceSmart’s business consists primarily of international membership shopping warehouse clubs similar to, but smaller in size than, warehouse clubs in the United States. The number of warehouse clubs in operation, as of August 31, 20022004 and August 31, 2003, anticipated openings for fiscal 2004, the Company’s ownership percentages and basis of presentation for financial reporting purposes by each country or territory are as follows:
Country/Territory | Number of Warehouse Clubs in Operation (as of August 31, 2002) | Number of Warehouse Clubs in Operation (as of August 31, 2003) | Anticipated Warehouse Club Openings in Fiscal 2004 | Ownership (as of August 31, 2003) | Basis of Presentation | Number of Warehouse Clubs in Operation (as of August 31, 2004) | Number of Warehouse Clubs in Operation (as of August 31, 2003) | Ownership (as of August 31, 2004) | Basis of Presentation | |||||||||||
Panama | 4 | 4 | — | 100 | % | Consolidated | 4 | 4 | 100 | % | Consolidated | |||||||||
Costa Rica | 3 | 3 | — | 100 | % | Consolidated | 3 | 3 | 100 | % | Consolidated | |||||||||
Dominican Republic | 3 | 2 | — | 100 | % | Consolidated | 2 | 2 | 100 | % | Consolidated | |||||||||
Guatemala | 3 | 2 | — | 66 | % | Consolidated | 2 | 2 | 66 | % | Consolidated | |||||||||
Philippines | 3 | 3 | 1 | 52 | % | Consolidated | 4 | 3 | 52 | % | Consolidated | |||||||||
El Salvador | 2 | 2 | — | 100 | % | Consolidated | 2 | 2 | 100 | % | Consolidated | |||||||||
Honduras | 2 | 2 | — | 100 | % | Consolidated | 2 | 2 | 100 | % | Consolidated | |||||||||
Trinidad | 2 | 2 | — | 90 | % | Consolidated | 2 | 2 | 90 | % | Consolidated | |||||||||
Aruba | 1 | 1 | — | 90 | % | Consolidated | 1 | 1 | 90 | % | Consolidated | |||||||||
Barbados | 1 | 1 | — | 100 | % | Consolidated | 1 | 1 | 100 | % | Consolidated | |||||||||
Guam | 1 | 1 | — | 100 | % | Consolidated | — | 1 | 100 | % | Consolidated | |||||||||
U.S. Virgin Islands | 1 | 1 | — | 100 | % | Consolidated | 1 | 1 | 100 | % | Consolidated | |||||||||
Jamaica | — | 1 | — | 67.5 | % | Consolidated | 1 | 1 | 67.5 | % | Consolidated | |||||||||
Nicaragua | — | 1 | — | 51 | % | Consolidated | 1 | 1 | 51 | % | Consolidated | |||||||||
Totals | 26 | 26 | 1 | 26 | 26 | |||||||||||||||
Mexico | — | 3 | — | 50 | % | Equity | 3 | 3 | 50 | % | Equity | |||||||||
Grand Totals | 26 | 29 | 1 | 29 | 29 | |||||||||||||||
During fiscal 2003,2004, the Company opened threea new U.S.-style membership shopping warehouse clubs (one eachclub in the Philippines Jamaica and Nicaragua), and as part of a 50/50 joint venture with Grupo Gigante, S.A. de C.V. (“Gigante”), the Company also opened three new U.S.-style membership shopping warehouse clubs in Mexico. The Company also closed three warehouse clubs during the fourth quarter of fiscal 2003 (one each in Guatemala, Dominican Republic and the Philippines). Subsequent to fiscal 2003, the Company announced the planned closure of the Guamits warehouse club by December 31, 2003.in Guam. At the end of fiscal 2003,2004, the total number of consolidated warehouse clubs in operation was 26, operating in 12 countries and one U.S. territory in comparison to 26 warehouse clubs operating in 12 countries and two U.S. territories in comparison toat the end of fiscal 2003, and 26 consolidated warehouse clubs operating in ten countries and two U.S. territories at the end of fiscal 2002 and 222002. The average life of the 26 warehouse clubs operating in ten countries and one U.S. territory at the endoperation as of fiscal 2001.August 31, 2004 was 47 months. The average life of the 26 warehouse clubs in operation as of August 31, 2003 was 36 months. The average lifeCompany anticipates opening a new warehouse club in San Jose, Costa Rica sometime in the second half of the 262005. The Company had three additional warehouse clubs in operationMexico as part of a 50/50 joint venture with Grupo Gigante, S.A. de C.V. as of August 31, 2002 was 27 months.
In addition to the warehouse clubs operated directly by the Company or through joint ventures, there were fourteen12 warehouse clubs in operation (13(11 in China and one in Saipan, Micronesia) licensed to and operated by local business people, through which the Company had been primarily earnsearning a licensee fee on a per warehouse club basis (see “International Licensee Business”), at the end of fiscal 2003,2004, compared to eleven14 licensed warehouse clubs at the end of fiscal 2002.2003.
International Warehouse Club Business
The Company owns and operates U.S.-style membership shopping warehouse clubs through majority or wholly owned ventures operating in Latin America, the Caribbean and Asia using the trade name “PriceSmart.” In fiscal 2003, the Company opened six new U.S.-style membership shopping warehouse clubs, one warehouse club each in the Philippines (November 2002), Jamaica (March 2003) and Nicaragua (July 2003), and through its 50/50 joint venture three warehouse clubs in Mexico (two in November 2002 and one in March 2003), bringing the total number of warehouse clubs in operation to 29 operating in 13 countries and two U.S. territories as of August 31, 2003.
The warehouse clubs sell basic consumer goods, to individuals and businesses, typically comprised of approximately 50%45% U.S.-sourced merchandise and approximately 50%55% locally sourced merchandise, with an emphasis on quality and low prices. By offering low prices on brand name and private label merchandise, the warehouse clubs seek to generate sufficient sales volumes to operate profitably at relatively low gross profit margins. The typical no-frills warehouse club-type buildings range in size from 40,000 to 50,000 square feet of selling space and are located primarily in urban areas to take advantage
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of dense populations and relatively higher levels of disposable income. Product selection includes perishable foods and basic consumer products. Ancillary services include food services, bakery, tire centers, photo centers, pharmacy and optical departments. The shopping format generally includes an annual membership fee that averagesof approximately $25.
Typically, when entering a new market the Company enters into licensing and technology transfer agreements with a newly created joint venture company (whose majority stockholder is the Company and whose minority stockholders are local business people) pursuant to which the Company provides its know-how package, which includes training and management support, as well as access to the Company’s computer software systems and distribution channels. The license also includes the right to use the “PriceSmart” mark and certain other trademarks. 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 successful track record of the Company’s management team and its smaller format membership clubs, 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.
Business Strategy
PriceSmart’s business strategymission is to efficiently operate U.S.-style membership warehouse clubs in Latin America, the Caribbean, and Asiathe Philippines that sell high quality merchandise at low prices to PriceSmart members and that provide fair wages and benefits to PriceSmart employees andas well as a fair return to PriceSmart stockholders. The Company’s primary strategy isCompany delivers quality imported U.S. brand-name and locally sourced products to focus on development of the international merchandisingits small business and consumer members in a warehouse club format that provides the highest possible value to leverage existing capabilities. Specifically, key elements ofits members. By focusing on providing exceptional value on quality merchandise in a low cost operating environment, the Company’s business strategy include:Company seeks to grow sales volume and membership which in turn will allow for further efficiencies and price reductions and ultimately improved value to our members.
Provide Lower Prices in the Market Place. The Company’s principal business philosophy is to bring quality U.S. type products and services to the consumer at low prices. 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 purchasing power and experience with membership warehouse clubs in Latin America, the Caribbean and Asia. The Company intends to continue to satisfy the demand for U.S. consumer goods principally in Latin America, the Caribbean and Asia.
Membership Policy
PriceSmart’s membership fee structure was specifically designed to allow pricing flexibility from country to country. The Company believes that membership reinforces customer loyalty. In addition, membership fees provide a continuing source of revenue. PriceSmart has two primary types of members: Business and Diamond (individual).
Business owners and managers qualify for Business membership. PriceSmart promotes Business membership through its merchandise selection and its marketing programs primarily targeting wholesalers, institutional buyers and retailers. Business members pay an annual membership fee which approximates $25 for a primary and spouse membership card and approximately $12 for additional add-on membership cards. Individual members pay an annual membership fee which approximates $25 and an approximate fee of $12 for an add-on membership card.
The Company recognizes membership fee revenues over the term of the membership, which is 12 months. Deferred revenue is presented separately on the face of the balance sheet and totaled $4.1$4.2 million and $4.0$4.1 million as of August 31, 20032004 and 2002,2003, respectively. PriceSmart’s membership agreements contain an explicit right to refund if its customers are dissatisfied with their membership. The Company’s historical rate of membership fee refunds has been less thanapproximately 0.5% of membership income, or approximately $45,000, $42,000 $45,000 and $35,000$45,000 for each of the years ended August 31, 2004, 2003 2002 and 2001,2002, respectively.
Expansion Plans
The Company’s expansion plans focus on openingIn the past, the Company has rapidly expanded into new warehouse clubs in foreigncountries and markets primarily through majority or wholly owned ventures, primarily in Latin America, the Caribbeanas part of its strategy to gain volume buying benefits and Asia.to move quickly into underserved areas. The Company is currently focusing its management attention on improving the operations of its current locations and believes such foreign markets offer opportunitiesthat its existing portfolio provides the opportunity for growth because they are often characterized by (i) geographicimproved sales and logistical barriersprofitability. However, the Company continues to entry, (ii) existing higher-priced local competitors,identify and (iii)evaluate various options for expansion, particularly in the countries in which it has already established a demandstrong market presence. In that regard, the Company recently announced that it has acquired land in San Jose, Costa Rica for U.S. brand-name products that are not widely available in such markets. The Company anticipates openingthe future construction of a newfourth warehouse club in the Philippines in April of 2004 (third quarter of fiscal 2004).that country.
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Warehouse Club Closings and Asset Impairment
During fiscal 2003, the Company closed three warehouse clubs, one each in Dominican Republic, Ortigas, Metro Manila, Philippines and Guatemala. The Company also closed its warehouse clubs were closed June 15, 2003, August 3,club in Guam on December 24, 2003 and its Commerce, California distribution center on August 15, 2003, respectively.31, 2004. The decision to close thesethe warehouse clubs resulted from the determination that the locations were not conducive to the successful operation of a PriceSmart warehouse club.
TheAs a result of the closures mentioned above, during fiscal 2003, the Company recorded closure costs and asset impairment charges of $7.2 million related to those warehouse clubs closed as of August 31, 2003. The impairment chargeImpairment charges of $1.9 million were included in the $7.2 million, reflecting the difference between the carrying value and the fair value of those long-lived assets (building improvements and fixtures and equipment) that were not expected to be utilized at future warehouse club locations. Also during fiscal 2003, the Company recorded non-cash asset impairment charges of $4.5 million to write-down long-lived assets related to underperforming warehouse clubs in Guam (subsequently closed in fiscal 2004) and the United States Virgin Islands. These charges also reflected the difference between the carrying value and fair value of those long-lived assets that arewere not expected to be utilized at future warehouse club locations. The fair value of long-lived assets was based on estimated selling prices for similar assets.
During fiscal 2003,2004, the Company recorded approximately $3.5 million of additional closure costs related to the four closed warehouse clubs and one closed distribution center. The Company also recorded approximately $3.2 million in non-cash asset impairment charges of $4.5 million to write down long-lived assets related to underperforming warehouse clubs in Guam and the United States Virgin Islands. Subsequent to August 31, 2003, the Company announced the planned closurewrite-down of the Guam warehouse club as of December 31, 2003. The impairment charges reflect the difference between the carrying value and fair value of those long-lived assets that are not expected to be utilizedthe building at futurethe closed warehouse club locations.in the Philippines. This charge results from revised cash flow estimates regarding the marketability of the land and building for this location. The original estimate regarding the market price of leasing these assets was derived from negotiations that discontinued during the second quarter of fiscal 2004. At that time, the Company believed the price being offered was a reasonable estimate of market value. However, during the third quarter an offer was received at a significantly lower price; therefore, the Company revised its estimates downward.
AcquisitionDuring the fourth quarter of Minority Interests
Aruba:On June 24, 2002, the Company entered into an agreement to acquire an additional 30% interest in the PriceSmart Aruba majority owned subsidiary, which previously had been 60% owned by the Company. The purchase price of the 30% interest consisted of 9,353 shares of PriceSmart common stock and the assumption of
capital contributions outstanding of $1.3 million, net of the minority interest acquired. In addition, under the agreement, the Company has a two-year option, beginning on May 25,fiscal 2004, to purchase the remaining 10% interest in the Aruba entity at a purchase price of $677,000, increasing at a 10% annual rate beginning on May 25, 2004.
Barbados:On June 24, 2002, the Company entered into agreements to acquire the remaining interests in the PriceSmart Barbados majority owned subsidiary, which previously had been 51% owned by the Company. The purchase price of the 49% interest consisted of 38,455 shares of PriceSmart common stock, cash payments totaling $500,000, and the assumption of capital contributions outstanding of $1.7 million, net of the minority interest acquired. Under the agreements, the Company also guaranteed the existing promissory notes of approximately $1.7 million payable to the former minority stockholders by the Barbados subsidiary, which are due on May 4, 2004 and had an aggregate remaining principal amount due of approximately $855,000 as of August 31, 2003.
Trinidad:On July 24, 2001, the Company entered into agreements to acquire an additional 27.5% interest in the PriceSmart Trinidad majority owned subsidiary, which previously had been 62.5% owned by the Company. The purchase price of the 27.5% interest consisted of: (a) 20,115 shares of PriceSmart common stock; (b) a 9% interest in the PriceSmart Barbados subsidiary; (c) a 17.5% interest in the PriceSmart Jamaica subsidiary; (d) a promissory note of $314,000; (e) forgiveness of a note receivable due to the Companyhistorical operating losses and management’s assessment as to the inability to recover the full carrying amount of $317,000 and (f) the assumption of capital contributions outstanding of $340,000, net of the minority interest acquired. As a result of this additional interest acquired,its investment in PSMT Mexico, S.A. de C.V., the Company increasedrecorded charge of $3.1 million to reduce the Company’s “investment in unconsolidated affiliate.” The Company is a 50% shareholder in PSMT Mexico, S.A. de C.V. and accounts for its guaranty proportionately forinvestment under the outstanding long-term debt related to the Trinidad operations.equity accounting method.
Panama:On March 27, 2000, the Company entered into an agreement to acquire the remaining interest in the PriceSmart Panama majority owned subsidiary, which previously had been 51% owned by the Company and 49% owned by BB&M International Trading Group (“BB&M”), whose principals are several Panamanian businessmen, including Rafael Barcenas, a director of PriceSmart. In exchange for BB&M’s 49% interest, the Company issued to BB&M’s principals 306,748 shares of PriceSmart common stock. As a result of this acquisition, the Company increased its guaranty for the outstanding long-term debt related to the Panama operations to 100%.
Under the stock purchase agreement relating to the Panama acquisition, the Company agreed to redeem the shares of the Company’s common stock issued to BB&M at a price of $46.86 per share following the one-year anniversary of the completion of the acquisition upon the request of BB&M’s principals. On April 5, 2001, the Company redeemed 242,144 shares of its common stock, for an aggregate of approximately $11.4 million in cash, resulting in an incremental goodwill adjustment of approximately $1.1 million. The Company agreed to redeem, at its option for cash or additional stock, the remaining 64,604 shares following the second anniversary of the completion of the acquisition at the price of $46.86 per share upon the holders’ request.
On March 28, 2002, the holders of the remaining 64,604 shares of the Company’s common stock requested redemption of these shares for the agreed upon price of $46.86 per share. In lieu of redeeming the shares, at the request of the Company, the holders sold their shares on the open market. The Company then paid the holders approximately $1.0 million in cash, representing the difference between the agreed upon price of $46.86 per share and the average selling price of $30.99 per share obtained by the holders, resulting in an incremental goodwill adjustment of approximately $411,000.
Caribe:On July 7, 2000, the Company entered into an agreement to acquire the remaining interests in the PSMT Caribe, Inc. majority owned subsidiary, which previously had been 60% owned by the Company. PSMT Caribe, Inc. is the holding company formed by PriceSmart and PSC, S.A. (a Panamanian company, of which Edgar Zurcher, a director of the Company, owns a 9.1% interest) to hold their respective interests in the PriceSmart membership warehouse clubs operating in Costa Rica, El Salvador, Honduras and the Dominican Republic. As consideration for the acquisition of the 40% interest, PriceSmart issued to PSC, S.A. 679,500 shares
of PriceSmart common stock, half of which were restricted from sale for one year. As a result of this acquisition, the Company has increased its guaranty for the outstanding long-term debt related to the warehouse clubs operating in Costa Rica, El Salvador, Honduras and the Dominican Republic to 100%.
Results from operations of the acquired minority interests have been included in the consolidated financial results of the Company from the initial dates of the transactions described above. As a result of the acquisitions, the Company will recognize a greater percentage of the cash flow and results from operations for each subsidiary.
International Licensee Business
The Company had fourteen12 warehouse clubs in operation (13(11 in China and one in Saipan, Micronesia) licensed to and operated by local business people at the end of fiscal 2003,2004, through which the Company had been primarily earnsearning license fees on a per warehouse club basis, and also receivesearns other fees in connection with certain licensing and technology transfer agreements and sales of products purchased from the Company.
The Company entered into licensing and technology agreements withDuring the licensees, pursuant to whichsecond fiscal quarter of 2004, representatives of the Company provides its know-how package, which includes training and management support. The license includes the right to use the “PriceSmart” mark and certain other trademarks. The Company and its licensees also enter into product sourcing agreements through whichChina licensee held discussions with regards to payments to be made by the licensee to the Company sells merchandiseunder the PRC Technology License Agreement (Amended) entered into in February 2001. In this regard, the licensee has failed to satisfy certain of these payment obligations, has asked the Company to relieve it from some of the payment obligations and has sought related modifications to the licensees at varying margins. The Company believes thatparties’ relationship. During the licensees have been interested in entering into such arrangements and obtaining such licenses for a variety of reasons, including the successful track recordpendency of the Company’s management team and its smaller format membership clubs,parties’ discussions, the opportunityCompany agreed to purchase U.S.-sourced products,a temporary moratorium on certain payment obligations. In October 2004, the benefitsCompany concluded that, in view of the Company’s modern distribution techniques and the opportunity to obtain exclusive rights to use the Company’s trademarks in the region.
Relationship with Costco
In November 1996, Price Enterprises, Inc. (“PEI”), PEI, Costco Companies, Inc. (“Costco”) and certainlack 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 litigationsubstantive progress arising from the spin-offparties’ discussions, it should proceed with sending a notice of PEI from Costcodefault relating to the licensee’s non-payment. Accordingly, on October 7, 2004, the Company issued a notice of default to the licensee, demanding the payment of $1,403,845 within 30 days for previously unbilled license fees and interest. As of November 18, 2004 such payment has not been received. Accordingly, 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 andcurrently plans to terminate all trademark and license agreements between the parties, subject to certain exceptions. Costco agreed to refrain from conducting membership warehouse club businesses inPRC Technology License Agreement (Amended), as well as the Northern Mariana Islands, Guam and Panama through October 31, 1999. The CompanyPRC Trademark License Agreement which also has an exclusive royalty-free right (including against Costco) in the Northern Mariana Islands to use the “Price Club” and “PriceCostco” marks in connection with the development, operation, advertising and promotion of the Company’s business activities in such area, 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 to terminate such right to use the “Price Club” and “PriceCostco” names and marks at the earliest possible date before December 12, 2009.
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.” However,been entered into by the Company and Costco have further agreed that Costco will not object to the Company’s uselicensee. As a result of the “PriceSmart” name in Mexico, andabove, the Company willhas fully reserved the outstanding receivable by recording a bad debt expense of $0.6 million and did not object to Costco’s use ofrecord revenue from this license relationship in the “Price Club” or “Price Costco” name in Mexico.
In June 1997, the PEI Board of Directors approved a plan to separate PEI’s core real estate business from its merchandising businesses. 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.fourth quarter.
Intellectual Property Rights
It is the Company’s policy to obtain appropriate proprietary rights protection for trademarks by filing applications for registrable marks with the U.S. Patent and Trademark Office, and in certain foreign countries. 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.
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There can be no assurance that third parties will not assert claims against the Company with respect to existing and future trademarks, trade names, sales techniques or other intellectual property matters. 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.
While the Company has registered under various classifications the mark “PriceSmart” in several countries, certain registration applications remain pending; because of objections by one or more parties, there can be no assurance that the Company will obtain all such registrations or that the Company has proprietary rights to the marks.
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 such 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, 2003,2004, the Company and its consolidated subsidiaries had a total of 3,7523,314 employees. Approximately 94% of the Company’s employees were employed outside of the United States.
Seasonality
Historically, the Company’s merchandising businesses have experienced 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, the 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 That May Affect Future Performance
The Company had a substantial net loss in fiscal 2003 and 2004 and may continue to incur losses in future periods. The Company incurred a net loss availablelosses attributable to common stockholders of approximately $32.1 million in fiscal 2003, including asset impairment and closing cost charges of approximately $11.7 million, and expects to incur net lossesapproximately $33.3 million in fiscal 2004.2004, including $9.8 million of asset impairment and closing charges. The Company is seeking ways to improve sales, margins, expense controls and inventory management. The Company believes these efforts willmanagement in an effort to return the Company to profitability. The Company is also seeking to reduce its carrying costs by seeking alternative uses for, disposing of or leasing buildings and fixtures from its closed warehouse clubs. However, if these efforts fail to adequately reduce costs, or if the Company’s sales are less than it projects, the Company may continue to incur losses in future periods.
The Company believes it will have adequate cashis required to meetcomply with financial covenants governing its operating and capital needs for fiscal 2004.outstanding indebtedness.The Company has estimatedUnder the timing and amountsterms of cash receipts and disbursements during fiscal 2004, and it believes it will have adequate cashdebt agreements to meet its operating and capital needs for fiscal 2004. However, if its assumptions about cash generation and usage are incorrect,which the Company may be forced to withhold payment toand/or one or more of its lenders and others and to file for bankruptcy protection. Ifwholly owned or majority owned subsidiaries are parties, the Company is forced to seek bankruptcy protection because of its inability to make required payments, the Company’s common stock may become worthlessmust comply with specified financial maintenance covenants, which include among others, current ratio, debt service, interest coverage and an investment in the common stock would be lost.
At August 31, 2003, the Company had cash of $17.7 million, and its net working capital was in a deficit position of $12.0 million. The Company has developed plans to manage its cash resources that include controlling expenditures and timely and effective management of its inventory and other asset procurements. The Company also continues to pursue financing alternatives. However, the Company may not obtain additional financing on terms that are acceptable to the Company, or at all.
leverage ratios. As of August 31, 20032004, the Company was out ofin compliance with financialall of these covenants, contained inexcept for the following: (i) current ratio and cash flow to debt agreements covering an aggregateservice and projected debt service ratio for a $5.0 million note (with a remaining balance of $23.3$4.1 million), however, the Company repaid the remaining balance of this note on of September 15, 2004; (ii) debt service ratio for a $11.3 million note (with a remaining balance of indebtedness. The$2.6 million), for which the Company has obtainedrequested but not yet received a written waivers covering $11.1waiver of its noncompliance; (iii) interest cost/EBIT (earnings before interest and taxes) ratio for a $6.0 million note (with a remaining balance of this indebtedness$4.0 million), for which the Company has requested but not yet received a written waiver of its noncompliance; and currently expects(iv) debt to receive
4
equity ratio for a $7.0 million note (with a remaining balance of $3.9 million), for which the Company has requested, but not yet received, a written waivers of the balance.waiver. The Company also has $30.6$27.9 million of indebtedness outstanding that, allows the lender to accelerate the indebtedness upon a default by the Company under other indebtedness, allows the lender to accelerate the indebtedness and prohibits the Company from incurring additional indebtedness.
If the Company fails to obtain the outstanding waivers or to comply with the covenants governing its indebtedness, in the future, the lenders may elect to accelerate the Company’s indebtedness and foreclose on the collateral pledged to secure the indebtedness. In addition, if the Company fails to comply with the covenants governing its indebtedness, the Company may need additional financing in order to service or extinguish the indebtedness. Some of the Company’s vendors also extend trade credit to the Company and allow payment for products upon delivery. If these vendors extend less credit to the Company or require pre-payment for products, the Company’s cash requirements and financing needs may increase further. The Company may not be able to obtain financing or refinancing on terms that are acceptable to the Company, or at all.
The Company’s financial performance is dependent on international operations, which exposes it to various risks. The Company’s international operations account for nearly all of the Company’s total sales. The Company’s financial performance is subject to risks inherent in operating and expanding the Company’s international membership business, which include: (i) changes in tariffs and taxes,interpretation of tariff and tax laws and regulations, as well as inconsistent enforcement of laws and regulations, (ii) the imposition of foreign and domestic governmental controls, (iii) trade restrictions, (iv) greater difficulty and costs associated with international sales and the administration of an international merchandising business, (v) thefts and other crimes, (vi) limitations on U.S. company ownership in foreign countries, (vii) product registration, permitting and regulatory compliance, (viii)
volatility in foreign currency exchange rates, (ix) the financial and other capabilities of the Company’s joint venturers and licensees, and (x) general political as well as economic and business conditions.
Any failure by the Company to manage its growthwidely dispersed operations could adversely affect the Company’s business. The Company began an aggressive growth strategy in April 1999, opening 20 new warehouse clubs over a two and a half year period, resultingperiod. As of August 31, 2004, the Company had in a total of 22operation 26 consolidated warehouse clubs operating in ten12 countries and one U.S. territory at the end of fiscal 2001 (12 months ended August 31, 2001). The Company also opened four additional new warehouse clubs in fiscal 2002 and six additional new warehouse clubs in fiscal 2003, three of which were opened through the Company’s 50/50 joint venture, resulting in a total of 32 new warehouse clubs (before the exclusion of recent closures) operating in 13 countries and two U.S. territories since 1999. The Company anticipates opening one new warehouse in the third quarter of fiscal 2004 in Aseana City, Metropolitan Manila, Philippines.
During fiscal 2003, the Company’s warehouse on the east side of Santo Domingo, Dominican Republic was closed on June 15, 2003, and a search for a new location in Santo Domingo has commenced. Also, the Company closed a warehouse operating in the Philippines, in Pasig City, Metropolitan Manila, on August 3, 2003 and closed a warehouse operating in Guatemala City, Guatemala on August 15, 2003. As of August 31, 2003, the Company had in operation 29 warehouse clubs in 13 countries and two U.S. territories (four in Panama; three each in Costa Rica, MexicoPanama and the Philippines; three in Costa Rica; two each in the Dominican Republic, Guatemala, El Salvador, Honduras and Trinidad; and one each in Aruba, Barbados, Guam, Jamaica, Nicaragua and the United States Virgin Islands). Subsequent to fiscal 2003, theThe Company announced that it would be closing itsopened one new warehouse currently operatingclub in Guam. The last day of operations is scheduled to be December 31, 2003. Management continually evaluates individual warehouse performance, and additional warehouse closures may occur.Aseana City, Metropolitan Manila, Philippines in early June 2004.
The success of the Company’s strategybusiness will depend to a significant degree on the Company’s ability to (i) efficiently operate warehouse clubs on a profitable basis and (ii) obtain and maintain positive comparable warehouse club sales growth in the applicable markets. Some markets may present operational, competitive, regulatory and merchandising challenges that are similar to, or different from, those previously encountered by the Company. Also, the Company might not be able to adapt the Company’s operations to support expansion, and warehouse clubs may not achieve the profitability necessary for the Company to receive an acceptable return on investment.
In addition, the Company will need to continually evaluate the adequacy of the Company’s existing personnel, systems and procedures, including warehouse management and financial and inventory control and distribution channels and systems.control. Moreover, the Company will be required to continually analyze the sufficiency of the Company’s inventory distribution methodschannels and systems and may require additional facilities in order to support the Company’s operations. The Company may not adequately anticipate all the changing demands that will be imposed on these systems. The Company’sAn inability or failure to retain effective warehouse personnel or to update the Company’s internal systems or procedures as required could have a material adverse effect on the Company’s business, financial condition and results of operations.
The Company’s auditors have indicated toAlthough the Company that they believehas taken and continues to take steps to improve significantly its internal controls, there weremay be material weaknesses inor significant deficiencies that the Company’s internal controls for the year ended August 31, 2003.Company has not yet identified. In connection withSubsequent to the completion of its audit of, and the issuance of an unqualified report on the Company’s financial statements for the year ended August 31, 2003, Ernst & Young LLP advisedissued the Company that it plans to deliver a management letter identifying deficiencies that existed in the design or operation of the Company’s internal controls that it considersconsidered to be material weaknesses in the effectiveness of the Company’s internal controls pursuant to standards established by the American Institute of Certified Public Accountants. The deficiencies to be reported by Ernst & Young LLP areindicated that the Company’s internal controls relating to revenue recognition weredid not designedfunction properly to prevent the recordation of net warehouse sales that failed to satisfy the requirements of SEC Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements,” and the Company’s internal controls failed to identify that the Philippines and Guam subsidiaries failed to perform internal control functions to reconcile their accounting records to supporting detail on a timely basis. These internalmaterial control weaknesses were identified during fiscal 2003 by the Company and brought to the attention of Ernst & Young LLP and the Audit Committee of the Company’s Board of Directors.
The Company has taken steps to strengthen control processes in order to identify and rectify past accounting errors and to prevent the situations that resulted in the need to restate prior period financial statements from recurring. See “Item 9A. Controls and Procedures” for a discussion of these remedial measures. These measures may not completely eliminate the material weaknesses in the Company’s internal controls identified toby the Company and by Ernst & Young LLP, and the Company may have additional material weaknesses or significant deficiencies in its internal controls that neither Ernst & Young LLP nor the Company’s management has yet identified. The existenceIf
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any such material weakness were to exist, the Company may not be able to prevent or detect a material misstatement of oneits annual or more material weaknessesinterim consolidated financial statements. Further, despite its efforts to improve its internal control structure, the Company may not be entirely successful in remedying internal control deficiencies that were previously identified. Any failure to timely remediate control gaps discovered in the implementation of Section 404 of the Sarbanes-Oxley Act of 2002 or significant deficienciesotherwise could result in errorsharm our operating results and cause investors to lose confidence in the Company’s consolidatedreported financial statements, and substantial costs and resources may be required to rectify any internal control deficiencies.information, which could have a material adverse effect on the Company’s stock price.
The Company is currently defending several stockholder lawsuits.litigation relating to its financial restatement. Following the announcement of the restatement of its financial results for fiscal year 2002 and the first three quarters of fiscal 2003 in November 2003, the Company has received notice of foursix class action lawsuits filed against it and certain of its former directors and officers purportedly brought on behalf of certain of its current and former stockholders.holders of the Company’s common stock, and a seventh class action lawsuit filed against it and certain of its former directors and officers purportedly on behalf of certain holders of the Company’s Series A preferred stock and a class of common stock purchasers. These suits generally allege that the Company issued false and misleading statements during fiscal years 2002 and 2003 in violation of federal securities laws. All of the federal securities actions were consolidated by an order dated September 9, 2004, which also appointed a lead plaintiff on behalf of the proposed class of common stock purchasers. The lead plaintiff is to file a consolidated complaint in late November 2004, and the Company will have until late January 2005 to move to dismiss or otherwise respond to the consolidated complaint.
On September 3, 2004, the Company entered into a Stipulation of Settlement with respect to the action brought on behalf of a purported sub-class of plaintiffs comprised of unaffiliated purchasers of the Company’s Series A Preferred Stock. On November 8, 2004 the settlement was approved. Terms of the settlement include: (i) dismissal of the Series A Preferred lawsuit; (ii) the entry of an order releasing claims that were or could have been brought by the Series A subclass arising out of or relating to the purchase or ownership of the Series A preferred stock; (iii) the Series A Preferred subclass will be offered the opportunity to exchange their Series A preferred stock for shares of the Company’s common stock valued at such purpose at a price of $10.00 per share; and (iv) the payment by the Company of attorneys’ fees and costs in the amount of $325,000 (to be funded by the Company’s director and officer liability insurance policy).
If the Company chooses to settle these suitsthe remaining consolidated class action lawsuit without going to trial, it may be required to pay the plaintiffs a substantial sum in the form of damages. Alternatively, if these remaining cases go to trial and the Company is ultimately adjudged to have violated federal securities laws, the Company may incur substantial losses as a result of an award of damages to the plaintiffs. In addition,
On September 3, 2004, the Company is party toalso entered into a Stipulation of Settlement for a stockholder derivative suit purportedly brought on the Company’s own behalf against its current and former directors and officers, alleging among other things, breaches of fiduciary duty. The same complaint also alleges that various officers and directors violated California insider trading laws when they sold shares of the Company’s stock in 2002 because of their alleged knowledge of the accounting issues that caused the restatement. In the Stipulation of Settlement, the parties agreed that the prosecution and pendency of the litigation was a factor in the Company’s agreement to seek to implement the Financial Program announced by the Company on September 3, 2004. On November 12, 2004, the settlement was approved. Terms of the settlement include: (i) dismissal with prejudice of the derivative lawsuit; (ii) the entry of a judgment containing a release for the benefit of defendants; and (iii) payment by the Company of attorneys’ fees and costs in the amount of $325,000 (to be funded by the Company’s director and officer liability insurance policy).
The United States Securities and Exchange Commission has informed the Company that it is conducting an investigation into the circumstances surrounding the restatement.
The indemnification provisions contained in the Company’s Certificate of Incorporation and indemnification agreements between the Company and its current and former directors and officers require the Company to indemnify its current and former directors and officers who are named as defendants against the allegations contained in these suits unless the Company determines that indemnification is unavailable because the applicable current or former director or officer failed to meet the applicable standard of conduct set forth in those documents. RegardlessWhile the Company has directors and officers liability insurance (subject to a $1.0 million retention and a 20% co-pay provision), the Company has been informed that its insurance carriers are reserving all of their rights and defenses under the policy (including the right to deny coverage) and it is otherwise uncertain whether the insurance will be sufficient to cover all damages that the Company may be required to pay. Further, regardless of coverage and the ultimate outcome of these suits, however, litigation of this type is expensive and will require that the Company devote substantial resources and management attention to defend these proceedings. Moreover, the mere presence of these lawsuits may materially harm the Company’s business and reputation.
The Company expects to incur substantial legal and other professional service costs. The Company has and will continue to incur substantial legal and other professional service costs in connection with the stockholder lawsuits and responding to the inquiries of the SEC. The amount of any future costs in this respect cannot be determined at this time.
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The Company faces significant competition. The Company’s international merchandising businesses compete with exporters, wholesalers, other membership merchandisers, local retailers and trading companies in various international markets. Some of the Company’s competitors may have greater resources, buying power and name recognition. There can be no assurance that the Company’sadditional competitors will not decide to enter the markets in which the Company operates or expects to enter, or that the Company’s existing competitors will not compete more effectively against the Company. The Company may be required to implement price reductions in order to remain competitive should any of the Company’s competitors reduce prices in any of the Company’s markets. Moreover, the Company’s ability to operate profitably in new markets, particularly small markets, may be adversely affected by the existence or entry of competing warehouse clubs or discount retailers.
The Company faces difficulties in the shipment of and inherent risks in the importation of merchandise to its warehouse clubs. The Company’s warehouse clubs import approximately 50%45% of the inventoriesmerchandise that they sell, which originate from varying countries and are transported over great distances, typically over water, which results in: (i) substantial lead times needed between the procurement and delivery of product, thus complicating merchandising and inventory control methods, as well as expense controls, (ii) the possible loss of product due to theft or potential damage to, or destruction of, ships or containers delivering goods, (iii) product markdowns as a result of it being cost
prohibitive to return merchandise upon importation, (iv) product registration, tariffs, customs and shipping regulation issues in the locations the Company ships to and from, and (v) substantial ocean freight and duty costs. Moreover, each country in which the Company operates has differingdifferent governmental rules and regulations regarding the importation of foreign products. Changes to the rules and regulations governing the importation of merchandise may result in additional delays or barriers in the Company’s deliveries of products to its warehouse clubs or product it selects to import. For example, several of the countries in which the Company’s warehouse clubs are located have imposed restrictions on the importation of some U.S. beef products because of concerns about Bovine Spongiform Encephalopathy (BSE), commonly referred to as “mad cow disease.” As a result of these restrictions, the sales of U.S. beef products may be impaired for the duration of these restrictions and may continue following the lifting of these restrictions because of perceptions about the safety of U.S. beef among people living in these countries. In addition, only a limited number of transportation companies service the Company’s regions. The inability or failure of one or more key transportation companies to provide transportation services to the Company, any collusion among the transportation companies regarding shipping prices or terms, changes in the regulations that govern shipping tariffs or the importation of products, or any other disruption in the Company’s ability to transport the Company’s merchandise could have a material adverse effect on the Company’s business, financial condition and results of operations.
The success of the Company’s business requires effective assistance from local business people. As a result, existing disputes with minority interest shareholders or other disputes with local business people withupon whom the Company has established strategic relationships.depends could adversely affect the Company’s business. Several of the risks associated with the Company’s international merchandising business may be within the control (in whole or in part) of local business people with whom it has established formal and informal strategic relationships or may be affected by the acts or omissions of these local business people. For example, the Company has a relationship with one of its minority interest shareholders in the Philippines, by which it utilizes the minority shareholder’s importation and exportation businesses for the movement of merchandise inventories both to and from the Asian regions to its warehouse clubs operating in Asia. In some cases, these local business people previously held minority interests in joint venture arrangements and now hold shares of the Company’s common stock. No assurances can be provided that these local business people will effectively help the Company in their respective markets. The failure of these local business people to assist the Company in their local markets could harm the Company’s business, financial condition and results of operations.
In July 2003, the Company’s 34% minority interest shareholder in the Company’s Guatemalan operations (PriceSmart (Guatemala) S.A.) contended, among other things, that both the Company and the minority interest shareholder are currently entitled to receive a 15% return upon respective capital investments in the Guatemalan operations. The Company has reviewed the claim and other pertinent information in relationship to the Guatemalan joint venture agreement, as amended, and does not concur with the minority shareholder’s conclusion. The Guatemalan minority shareholder continues to assert a right to receive a 15% annual return on its capital investment. In addition, the minority shareholder has advised the Company that it believes that PriceSmart (Guatemala), S.A. has been inappropriately charged by the Company with regard to various fees, expenses and certain related matters. The Company has responded that it disagrees with virtually all of these additional assertions, and the minority shareholder has advised that it may commission an audit with regard to such matters. The Company expects that it and the Guatemalan minority shareholder will continue to review these matters and discuss their differences, but there can be no assurance of mutually acceptable resolution via negotiation of these matters or that any resolution will not have a material adverse effect on the Company’s business and results of operations.
In addition, the Company’s two minority shareholders in the Philippines (which together comprise a 48% ownership interest in the Company’s Philippine operations (PSMT Philippines, Inc.)) have taken the position that an “impasse” of the Board of Directors of PSMT Philippines, Inc. has been reached. These minority shareholders have therefore sought to invoke the “buy-sell” provisions of the parties’ Shareholders’ Agreement (pursuant to which one shareholder may offer to purchase the interest of the other shareholders (at an appraised value) at which point the offeree
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shareholder may make a counter offer and the process continues until an offer is accepted). The Company contends, among other things, that pursuant to the terms of the Shareholders’ Agreement no “impasse” can be reached (and hence the buy-sell provisions do not become applicable) until after the respective shareholders’ principal representatives have met to discuss pending issues. It is currently anticipated that the Company and the Philippine minority shareholders will continue to review these matters and discuss differences, but there can be no assurance of a mutually acceptable resolution via negotiation of these matters or that any resolution will not have a material adverse effect on the Company’s business and results of operations.
Also, the Company has an agreementagreements with BancaBanco Promerica and Banco Promericaits affiliates (collectively “Promerica”) inby which the Company and Promerica have issued co-branded credit cards, used primarily in its Latin American segment, that do not requirereduce the costs to the Company to payof credit card processing fees associated with the use of these cards in its warehouse clubs. Mr. Edgar Zurcher, who is a director of the Company, is also Chairman of the Board of Banca Promerica (Costa Rica) and is also a director of Banco Promerica (El Salvador) (collectively “Promerica”). If, for any reason, the Company were unable to continue to offer the co-branded credit card and if the Company was unable to promptly enter into a similar program with another credit card service provider, the result would be an increase in the Company’s costs and potentially a negative effect on sales.
The Company is exposed to weather and other risks associated with international operations. The Company’s operations are subject to the volatile weather conditions and natural disasters such as earthquakes, typhoons and hurricanes, which are encountered in the regions in which the Company’s warehouse clubs are located or are planned to be located, and which could result in delays in construction or result in significant damage to, or destruction of, or temporary closure of the Company’s warehouse clubs. For example, during September 2004, while no damage was sustained from the Company’s two warehouse clubsmultiple hurricanes in El Salvador have experienced minimal inventory loss and disruptionthe Caribbean, a total of their businesses as a resulteight days of earthquakes that have occurred. Also, the Company’ssales were lost due to selected warehouse club in Guam has experienced typhoons that resulted in minimal business interruptionsclosures resulting from heavy rains, local flooding and property losses.government advisories to stay off the roads. Losses from business interruption may not be adequately compensated by insurance and could have a material adverse effect on the Company’s business, financial condition and results of operations.
Further declinesDeclines in the economies of the countries in which the Company operates its warehouse clubs would harm its business. The success of the Company’s operations depends to a significant extent on a number of factors that affect discretionary consumer spending, including employment rates, business conditions, consumer spending patterns and customer preferences and other economic factors in each of the Company’s foreign markets. Adverse changes in these factors, and the resulting adverse impact on discretionary consumer spending, would affect the Company’s growth, sales and profitability. In Latin America and Southeast Asia, in particular, several countries are suffering recessions and economic instability. As a result, sales, gross profit margins and membership renewals have been negatively impacted in the current year, and in the event these factors continue,
sales, gross profit margins and membership renewals may continue to be adversely affected. In addition, a worsening ofsignificant decline in these economies may lead to increased governmental ownership or regulation of the economy, higher interest rates, increased barriers to entry such as higher tariffs and taxes, and reduced demand for goods manufactured in the United States. Any further declinegeneral instability in the national or regional economies of the foreign countries, in which the Company currently operates, or will operate in the future, could have a material adverse effect on the Company’s business, financial condition and results of operations.
A few of the Company’s stockholders have substantial control over the Company’s voting stock, which maywill make it difficult to complete some corporate transactions without their support and may prevent a change in control.control. As of August 31, 2003,October 29, 2004, Robert E. Price, who is the Company’s Interim President and Chief Executive Officer and Chairman of the Board and Interim Chief Executive Officer, and Sol Price, a significant stockholder of the Company and father of Robert E. Price, together with their affiliates, comprise a group that may be deemed to beneficially owned approximately 47.1%own 62.0% of the Company’s outstanding common stock and approximately 8.3% of the Company’s outstanding shares of Series A Preferred Stock, which is convertible, at the holder’s option, into approximately 1% of the Company’s outstanding common stock. In addition, on July 9, 2003, entities affiliated with Messrs. Robert Price and Sol Price purchased 22,000 shares ofBecause the Company’s Series B Preferred Stock for angroup may be deemed to beneficially own, in the aggregate, purchase price of $22 million. Messrs. Robert Price and Sol Price beneficially owned all of the outstanding Series B Preferred Stock, which is convertible, at the holder’s option, into approximately 13.0% of the Company’s outstanding common stock. Subsequent to the end of fiscal 2003, Messrs. Robert Price and Sol Price purchased an aggregate of 500,000 sharesmore than 50.0% of the Company’s common stock, for an aggregate purchase pricePriceSmart is a “controlled company” within the meaning of $5.0 million.Nasdaq Marketplace Rule 4350(c)(5). As a result of their beneficial ownership, these stockholders may effectivelyhave the ability to control the outcome of all matters submitted to the Company’s stockholders for approval, including the election of directors. In addition, this ownership could discourage the 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.
The loss of key personnel could harm the Company’s business. The Company depends to a large extent on the performance of its senior management team and other key employees, such as U.S. ex-patriots in certain locations where the Company operates, for strategic business direction. The loss of the services of any members of the Company’s senior management or other key employees could have a material adverse effect on the Company’s business, financial condition and results of operations.
The Company is subject to volatility in foreign currency exchange. The Company, primarily through majority or wholly owned subsidiaries, conducts operations primarily in Latin America, the Caribbean and Asia, and as such is subject to both economic and political instabilities that cause volatility in foreign currency exchange rates or weak economic conditions. As of August 31, 2003,2004, the Company had a total of 26 consolidated warehouse clubs operating in 12 foreign countries and twoone U.S. territories, 18territory, 19 of which operate under currencies other than the U.S. dollar. For fiscal 2003, 2004,
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approximately 74%78% of the Company’s net warehouse sales were in foreign currencies. Also, as of August 31, 2003,2004, the Company had three warehouse clubs in Mexico, through a 50/50 joint venture accounted for under the equity method of accounting, which operate under the Mexican Peso. The Company may enter into additional foreign countries in the future or open additional locations in existing countries, which willmay increase the percentage of net warehouse sales denominated in foreign currencies.
Foreign currencies in most of the countries where the Company operates have historically devalued against the U.S. dollar and are expected to continue to devalue. For example, the Dominican Republic experienced a net currency devaluation of 81% between the end of fiscal 2002 and the end of fiscal 2003. The Company manages foreign currency risks2003 and 13% (significantly higher at times by hedging currencies through non-deliverable forward exchange contracts (“NDFs”) that are generally for durations of six months or less and that do not provide for physical exchange of currency at maturity (only the resulting gain or loss). The premium associated with each NDF is amortized on a straight-line basis over the termcertain points of the NDF,year) between the end of fiscal 2003 and mark-to-market amounts and realized gains or losses are recognized on the settlement date in costend of goods sold. The related receivables or liabilities with counterparties to the NDFs are recorded in the consolidated balance sheet. As of August 31, 2003, the Company had no outstanding NDFs and no unrelated mark-to-market unrealized amounts. Additionally, no realized losses were incurred for twelve months ending August 31, 2003, as no NDFs were entered into during the period. Although
the Company has not purchased any NDFs subsequent to August 31, 2003, it may purchase NDFs in the future to mitigate foreign exchange losses. However, due to the volatility and lack of derivative financial instruments in the countries in which the Company operates, significant risk from unexpected devaluation of local currencies exists.fiscal 2004. Foreign exchange transaction losses, realized, including repatriation of funds, which are included as a part of the costs of goods sold in the consolidated statement of operations, for fiscal 2004, 2003 2002 and 2001 (including the cost of the NDFs)2002 were approximately $579,000, $605,000 and $1.2 million, and $718,000, respectively.
The Company faces the risk of exposure to product liability claims, a product recall and adverse publicity. The Company markets and distributes products, including meat, dairy and other food products, from third-party suppliers, which exposes the Company to the risk of product liability claims, a product recall and adverse publicity. For example, the Company may inadvertently redistribute food products that are contaminated, which may result in illness, injury or death if the contaminants are not eliminated by processing at the foodservice or consumer level. The Company generally seeks contractual indemnification and insurance coverage from its suppliers. However, if the Company does not have adequate insurance or contractual indemnification available, product liability claims relating to products that are contaminated or otherwise harmful could have a material adverse effect on the Company’s ability to successfully market its products and on the Company’s business, financial condition and results of operations. In addition, even if a product liability claim is not successful or is not fully pursued, the negative publicity surrounding a product recall or any assertion that the Company’s products caused illness or injury could have a material adverse effect on the Company’s reputation with existing and potential customers and on the Company’s business, financial condition and results of operations.
The adoption of the Financial Accounting Standards Board Statement of Financial Accounting Standard No. 142, “Goodwill and Other Intangible Assets” could adversely affect the Company’s future results of operations and financial position.position. In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 142, “Goodwill and Other Intangible Assets,” which was adopted by the Company, effective September 1, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with the Statement. As of August 31, 2002, the Company had goodwill of approximately $23.1 million. The Company performed its impairment test on goodwill as of August 31, 2004 and August 31, 2003, and no impairment losses were recorded. In the future, the Company will test for impairment at least annually. Such tests may result in a determination that these assets have been impaired. If at any time the Company determines that an impairment has occurred, the Company will be required to reflect the impairment chargeimpaired value as a part of operating income, resulting in a reduction in earnings in the period such impairment is identified and a corresponding reduction in the Company’s net asset value. A material reduction in earnings resulting from such a charge could cause the Company to fail to be profitable or increase the amount of its net loss in the period in which the charge is taken or otherwise to fail to meet the expectations of investors and securities analysts, which could cause the price of the Company’s stock to decline.
The Company faces increased costs and compliance risks associated with compliance with Section 404 of the Sarbanes-Oxley Act of 2002. Like many smaller public companies, the Company faces a significant impact from required compliance with Section 404 of the Sarbanes-Oxley Act of 2002. Section 404 requires management of public companies to evaluate, and the independent auditors to attest to the effectiveness of internal control over financial reporting and the evaluation performed by management. The Securities and Exchange Commission has adopted rules implementing Section 404 for public companies as well as disclosure requirements. The Public Company Accounting Oversight Board, or PCAOB, has adopted documentation and attestation standards that the independent auditors must follow in conducting its attestation under Section 404. The Company is currently preparing for, and incurring significant expenses related to compliance with Section 404, which for fiscal year 2005 has been estimated at approximately $1.7 million. However, it cannot be assured that the Company and its advisors have adequately projected the cost or duration of implementation or planned sufficient personnel for the project, and more costs and time could be incurred than currently anticipated. Moreover, there can be no assurance that the Company will be able to effectively meet all of the requirements of Section 404 as currently known to the Company in the currently mandated timeframe. Any failure to effectively implement new or improved internal controls, or to resolve difficulties encountered in their implementation, could harm the Company’s operating results, cause it to fail to meet reporting obligations, result in management’s being required to give a qualified assessment of the Company’s internal controls over financial reporting or the Company’s independent auditors’ providing an adverse opinion regarding management’s assessment. Any such result could cause investors to lose confidence in the Company’s reported financial information, which could have a material adverse effect on the Company’s stock price.
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Warehouse Club Properties. The Company, through its majority or wholly owned ventures or equity joint venture, owns and/or leases properties in each country or territory in which it operates warehouse clubs. All buildings, both owned and leased, are constructed by independent contractors. The following is a summary of warehouse club locations currently owned and/or leased by country or territory:
Country / Territory | Date Opened or Anticipated | Date Closed | Ownership / Lease | |||
Panama: | ||||||
Los Pueblos | October 25, 1996 | Own land and building | ||||
Via Brazil | December 4, 1997 | Lease land and building | ||||
El Dorado | November 11, 1999 | Lease land and building | ||||
David | June 15, 2000 | Own land and building | ||||
Guatemala: | ||||||
Mira Flores | April 8, 1999 | Lease land and building | ||||
Guatemala City | August 24, 2000 | August 15, 2003 | Lease land and building | |||
Pradera | May 29, 2001 | Lease land and building | ||||
Costa Rica: | ||||||
Zapote | June 25, 1999 | Own land and building | ||||
Escazu | May 12, 2000 | Own land and building | ||||
Heredia | June 30, 2000 | Own land and building | ||||
Moravia | Second half, calendar 2005 | Will own land and building | ||||
Dominican Republic: | ||||||
Santo Domingo | December 10, 1999 | Own land and building | ||||
Santiago | December 14, 1999 | Own land and building | ||||
East Santo Domingo | October 12, 2000 | June 15, 2003 | Own land and building | |||
El Salvador: | ||||||
Santa Elena | August 26, 1999 | Own land and building | ||||
San Salvador | April 13, 2000 | Own land and building | ||||
Honduras: | ||||||
San Pedro Sula | September 29, | Own land and building | ||||
Tegucigalpa | May 31, 2000 | Lease land and building | ||||
Aruba: | ||||||
Oranjestad | March 23, 2001 | Lease land and building | ||||
Barbados: | ||||||
Bridgetown | August 31, 2001 | Lease land and building | ||||
Philippines: | ||||||
Fort Bonifacio | May 18, 2001 | Lease land | ||||
Ortigas | November 8, 2001 | August 3, 2003 | Lease land | |||
Congressional | March 15, 2002 | Lease land | ||||
Alabang | November 16, 2002 | Lease land | ||||
Aseana |
| Lease land (1) | ||||
Trinidad: | ||||||
Chaguanas | August 4, 2000 | Own land and building | ||||
Port of Spain | December 5, 2001 | Lease land | ||||
U.S. Virgin Islands: | ||||||
St. Thomas | May 4, 2001 | Lease land | ||||
Guam: | ||||||
Barrigada | March 8, 2002 | December 24, 2003 | Lease land and building | |||
Jamaica: | ||||||
Kingston |
| Own land and building | ||||
Nicaragua: | ||||||
Managua | July 25, 2003 | Own land and building | ||||
Mexico: | ||||||
Irapuato | November 14, 2002 | Own land and building(2) | ||||
Celaya | November 16, 2002 | Own land and building(2) | ||||
Queretaro | March 1, 2003 | Own land and building(2) | ||||
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(1) | The Company constructed, at its expense, the building on land that it leases. |
(2) | Warehouse clubs are operated through a 50/50 joint venture which is accounted for under the equity method. |
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Corporate Headquarters. The Company maintains its headquarters at 4649 Morena Blvd.,9740 Scranton Road, San Diego, California 92117-3650.92121-1745. The Company leases 42,000approximately 35,000 square feet of office space from Price Legacy Corporation at a rate $27,817$47,115 per month, pursuant towith a triple net lease.2% annual increase. The current term expires on AugustMarch 31, 2005, and the Company has two remaining renewal options of two years each.2011. The Company also leases a 32,387 square foot facility in Commerce, California at a rate of $15,804$16,546 per month that expires on May 31, 2005. The use of the Commerce, California facility was discontinued on August 31, 2004, resulting in a charge of $149,000 to the financial statements ended as of the same date. Additionally, the Company leases two facilities in Miami, Florida. The first is an 85,000 square foot facility leased at a rate of $37,721$43,370 per month that expires on May 31, 2004.June 30, 2005. The second is a 24,700 square foot facility leased at a rate of $24,238$29,601 per month that expires on May 31, 2004.February 28, 2006. 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.
Properties Held For Sale. In connection with the Distribution, PEI transferred to the Company certain properties historically held for sale by PEI (the “Properties”), which have since been sold. During fiscal 2002, the Company sold the remaining Property for a loss of $82,000. Proceeds from the sale of this remaining Property were used to fund the Company’s businesses and general working capital requirements. As the Property was held for sale, the net results of the real estate operations are included in other income (expense) on the consolidated statements of operations. The net results for fiscal 2003, 2002 and 2001 were not material.
Environmental Matters. The Company agreed to indemnify PEIPrice Enterprises, Inc. (“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 Propertiescertain properties and the real properties transferred by Costco to PEI that PEI sold prior to the Distribution.special dividend of the Company’s common stock by PEI on August 29, 1997 (“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, financial condition, operating results, cash flow or liquidity, relating to three properties transferred from Costco to PEI that were sold prior to the Distribution. The Company agreed to indemnify PEI for environmental liabilities arising out of such properties. Set forth below are summaries of certain environmental matters relating to these properties.
Meadowlands.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. To date, the Company has not been advised that PEI has 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.City: The Silver City site contains petroleum hydrocarbons in the soil and groundwater. There are no known receptors (groundwater users) down gradient of the Silver City site and the extent of soil and groundwater contamination is limited. On March 20, 1996, PEI sold the Silver City site and retained responsibility for certain environmental matters. The Company is continuing to remediate the soil and groundwater at this property under supervision of local authorities.
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From time to time, the Company and its subsidiaries are subject to legal proceedings and claims in the ordinary course of business, including those identified below. The Company evaluates such matters on a case by case basis, and vigorously contests any such legal proceedings or claims which the Company believes are without merit.
OnFollowing the announcement of the restatement of its financial results for fiscal year 2002 and the first three quarters of fiscal 2003 in November 10, 2003, the Company announced it would be restating its financial statements for the fiscal year ending August 31, 2002 and for the first nine months ending May 31, 2003. Subsequent to the announcement, four separatereceived notice of six class action complaints have beenlawsuits filed against the Companyit and twocertain of its former directors and officers in the United States District Court for the Southern District of California for alleged violations of federal securities laws. The complaints purport to be class actionspurportedly brought on behalf of purchaserscertain of its current and former holders of the Company’s common stock, between December 20, 2001 and a seventh class action lawsuit filed against it and certain of its former directors and officers purportedly on behalf of certain holders of the Company’s Series A preferred stock and a class of common stock purchasers. These suits generally allege that the Company issued false and misleading statements during fiscal years 2002 and 2003 in violation of federal securities laws. All of the federal securities actions were consolidated by an order dated September 9, 2004, which also appointed a lead plaintiff on behalf of the proposed class of common stock purchasers. The lead plaintiff is to file a consolidated complaint in late November 7, 2003 (the “class period”)2004, and seek damages and attorney’s fees.the Company will have until late January 2005 to move to dismiss or otherwise respond to the consolidated complaint.
On December 5, 2003, a shareholder derivative complaint was filed againstSeptember 3, 2004, the Company asentered into a nominal defendant,Stipulation of Settlement with respect to the membersaction brought on behalf of a purported sub-class of plaintiffs comprised of unaffiliated purchasers of the Company’s Series A Preferred Stock. On November 8, 2004 the settlement was approved. Terms of the settlement include: (i) dismissal of the Series A Preferred lawsuit; (ii) the entry of an order releasing claims that were or could have been brought by the Series A subclass arising out of or relating to the purchase or ownership of the Series A preferred stock; (iii) the Series A Preferred subclass will be offered the opportunity to exchange their Series A preferred stock for shares of the Company’s common stock valued at such purpose at a price of $10.00 per share; and (iv) the payment by the Company of attorneys’ fees and costs in the amount of $325,000 (to be funded by the Company’s director and officer liability insurance policy).
If the Company chooses to settle the remaining consolidated class action lawsuit without going to trial, it may be required to pay the plaintiffs a substantial sum in the form of damages. Alternatively, if these remaining cases go to trial and the Company is ultimately adjudged to have violated federal securities laws, the Company may incur substantial losses as a result of an award of damages to the plaintiffs.
On September 3, 2004, the Company also entered into a Stipulation of Settlement for a stockholder derivative suit purportedly brought on the Company’s own behalf against its current and former directors and officers, alleging among other things, breaches of fiduciary duty. The same complaint also alleges that various officers and directors violated California insider trading laws when they sold shares of the Company’s stock in 2002 because of their alleged knowledge of the accounting issues that caused the restatement. In the Stipulation of Settlement, the parties agreed that the prosecution and pendency of the litigation was a factor in the Company’s agreement to seek to implement the Financial Program announced by the Company on September 3, 2004. On November 12, 2004, the settlement was approved. Terms of the settlement include: (i) dismissal with prejudice of the derivative lawsuit; (ii) the entry of a judgment containing a release for the benefit of defendants; and (iii) payment by the Company of attorneys’ fees and costs in the amount of $325,000 (to be funded by the Company’s director and officer liability insurance policy).
The United States Securities and Exchange Commission has informed the Company that it is conducting an investigation into the circumstances surrounding the restatement.
The indemnification provisions contained in the Company’s Certificate of Incorporation and indemnification agreements between the Company and its current and former directors and officers require the Company to indemnify its current and former directors and officers who are named as defendants against the allegations contained in these suits unless the Company determines that indemnification is unavailable because the applicable current or former director or officer failed to meet the applicable standard of conduct set forth in those documents. While the Company has directors and officers liability insurance (subject to a $1.0 million retention and a 20% co-pay provision), the Company has been informed that its insurance carriers are reserving all of their rights and defenses under the policy (including the right to deny coverage) and it is otherwise uncertain whether the insurance will be sufficient to cover all damages that the Company may be required to pay. Further, regardless of coverage and the ultimate outcome of these suits, litigation of this type is expensive and will require that the Company devote substantial resources and management attention to defend these proceedings. Moreover, the mere presence of these lawsuits may materially harm the Company’s business and reputation. The Company has and will continue to incur substantial legal and other professional service costs in connection with the stockholder lawsuits and responding to the inquiries of the SEC. The amount of any future costs in this respect cannot be determined at this time.
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In July 2003, the Company’s 34% minority interest shareholder in the Company’s Guatemalan operations (PriceSmart (Guatemala) S.A.) contended, among other things, that both the Company and the minority interest shareholder are currently entitled to receive a 15% return upon respective capital investments in the Guatemalan operations. The Company has reviewed the claim and other pertinent information in relationship to the Guatemalan joint venture agreement, as amended, and does not concur with the minority shareholder’s conclusion. The Guatemalan minority shareholder continues to assert a right to receive a 15% annual return on its capital investment. In addition, the minority shareholder has advised the Company that it believes that PriceSmart (Guatemala), S.A. has been inappropriately charged by the Company with regard to various fees, expenses and certain related matters. The Company has responded that it disagrees with virtually all of these additional assertions, and the minority shareholder has advised that it may commission an audit with regard to such matters. The Company expects that it and the Guatemalan minority shareholder will continue to review these matters and discuss their differences, but there can be no assurance of mutually acceptable resolution via negotiation of these matters or that any resolution will not have a material adverse effect on the Company’s business and results of operations.
In addition, the Company’s two minority shareholders in the Philippines (which together comprise a 48% ownership interest in the Company’s Philippine operations (PSMT Philippines, Inc.)) have taken the position that an “impasse” of the Board of Directors two former officers and three current officers inof PSMT Philippines, Inc. has been reached. These minority shareholders have therefore sought to invoke the Superior Court“buy-sell” provisions of the Stateparties’ Shareholders’ Agreement (pursuant to which one shareholder may offer to purchase the interest of California, Countythe other shareholders (at an appraised value) at which point the offeree shareholder may make a counter offer and the process continues until an offer is accepted). The Company contends, among other things, that pursuant to the terms of San Diego. The derivative complaint purportedly alleges claims for breachthe Shareholders’ Agreement no “impasse” can be reached (and hence the buy-sell provisions do not become applicable) until after the respective shareholders’ principal representatives have met to discuss pending issues. It is currently anticipated that the Company and the Philippine minority shareholders will continue to review these matters and discuss differences, but there can be no assurance of fiduciary duty, abusea mutually acceptable resolution via negotiation of control, gross mismanagement, wasted corporate assets, unjust enrichmentthese matters or that any resolution will not have a material adverse effect on the Company’s business and violationsresults of California Corporations Code.operations.
The Company believes that the ultimate resolution of any such legal proceedings or claims will not have a material adverse effect on its business, financial condition, operating results, cash flow or liquidity. However, such matters are inherently unpredictable and it is possible that the ultimate outcome could have a material adverse effect on its business, financial condition, operating results, cash flow or liquidity in any particular period by the resolution of one or more of these contingencies.
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 2003. 2004. However, a Special Meeting of the Company’s Stockholders was held on October 29, 2004 at the Company’s headquarters and the following Financial Program was approved:
A private placement of an aggregate of 3,164,726 shares of the Company’s common stock, par value $.0001 per share (“Common Stock”), at a price of $8 per share, to The Price Group, LLC, a California limited liability company (the “Price Group”), to be funded through the conversion of a $25.0 million bridge loan, together with accrued and unpaid interest, extended to the Company by the Price Group in August 2004.
The issuance of an aggregate of 2,200,000 shares of Common Stock to the Sol and Helen Price Trust, the Price Family Charitable Fund, the Robert and Allison Price Charitable Remainder Trust, the Robert and Allison Price Trust 1/10/75 (collectively, the “Price Trusts”) and the Price Group (collectively, with the Price Trusts, the “Series B Holders”) in exchange for all of the outstanding shares of the Company’s 8% Series B Cumulative Convertible Redeemable Preferred Stock, par value $.0001 per share (the “Series B Preferred Stock”).
The issuance of an aggregate of 2,597,200 shares Common Stock, valued for such purpose at a price of $8 per share, to the Price Group in exchange for up to $20.0 million of current obligations, plus accrued and unpaid interest, owed by the Company to the Price Group.
The issuance of up to 15,787,001 shares of Common Stock in connection with a rights offering pursuant to rights to be distributed to the holders of outstanding shares of Common Stock.
The issuance of up to 3,125,000 shares of Common Stock, at a price of $8 per share, to the Price Group to ensure that the above-mentioned rights offering generates at least $25.0 million in proceeds.
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The issuance of up to 2,223,817 shares of Common Stock associated with an offer to exchange Common Stock, valued for such purpose at a price of $10 per share, to the holders of all of the shares of the Company’s 8% Series A Cumulative Convertible Redeemable Preferred Stock, par value $.0001 per share (the “Series A Preferred Stock”), in exchange for all of the outstanding shares of the Series A Preferred Stock at its initial stated value of $20.0 million plus all accrued and unpaid dividends.
An amendment to the Amended and Restated Certificate of Incorporation of the Company to increase the number of authorized shares of Common Stock from 20,000,000 to 45,000,000 shares.
The Company’s Annual Meeting of Stockholders is currently scheduled for 10:00 a.m. on January 8, 2004,February 25, 2005, at the Hilton San Diego Mission Valley in San Diego, California. Matters to be voted on will be included in the Company’s definitive proxy statement to be filed with the Securities and Exchange Commission and distributed to stockholders prior to the meeting.
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Item 5.Market for Common Stock and Related Stockholder Matters
The information required by Item 5 is incorporated herein by reference to PriceSmart’s Annual Report for the fiscal year ended August 31, 20032004 under the heading “Market for Common Stock and Related Stockholder Matters.”
Item 6.Selected Financial Data
The information required by Item 6 is incorporated herein by reference to PriceSmart’s Annual Report for the fiscal year ended August 31, 20032004 under the heading “Selected Financial Data.”
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 PriceSmart’s Annual Report for the fiscal year ended August 31, 20032004 under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Item 7A.Quantitative and Qualitative Disclosures about Market Risk
The information required by Item 7A is incorporated herein by reference to PriceSmart’s Annual Report for the fiscal year ended August 31, 20032004 under the heading “Quantitative and Qualitative Disclosures about Market Risk.”
The information required by Item 8 is incorporated herein by reference to PriceSmart’s Annual Report for the fiscal year ended August 31, 20032004 under the heading “Financial Statements.”
Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its reports pursuant to the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules, and forms, and that such information is accumulated and communicated to the Company’s management, including its Interim Chief Executive Officer and Interim Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
In connection with the completion of its audit of, and the issuance of an unqualified report on, the Company’s financial statements for the year ended August 31, 2003, Ernst & Young LLP advised the Company that it plans to deliver a management letter identifying deficiencies that existed in the design or operation of the Company’s internal controls that it considers to be material weaknesses in the effectiveness of the Company’s internal controls pursuant to standards established by the American Institute of Certified Public Accountants. A “material weakness” is a reportable condition in which the design or operation of one or more of the specific internal control components does not reduce to a relatively low level the risk that errors or fraud in amounts that would be material in relation to the consolidated financial statements being audited may occur and not be
detected within a timely period by employees in the normal course of performing their assigned functions. Ernst & Young LLP advised the Audit Committee of the Company’s Board of Directors that its management letter would address the following two material weaknesses:
1. The Company’s internal controls relating to revenue recognition were not designed properly to prevent the recordation of net warehouse sales that failed to satisfy SAB 101’s requirements; and
2. The Company’s Philippines and Guam subsidiaries failed to perform internal control functions to reconcile their accounting records to supporting detail on a timely basis.
Ernst & Young LLP has discussed the areas of weakness described above with the Audit Committee. The Audit Committee is taking an active role in responding to the deficiencies identified by Ernst & Young LLP, including overseeing management’s implementation of the remedial measures described below with the goal of identifying and rectifying past accounting errors and preventing the situations that resulted in the need to restate prior period financial statements from recurring. To this end, the Company has implemented or is implementing the following measures:
Management believes the new controls and procedures address the conditions identified by Ernst & Young LLP as material weaknesses. The Company plans to continue to monitor the effectiveness of its internal controls and procedures on an ongoing basis and will take further action, as appropriate.
As required by SEC Rule 13a-15(b), the Company carried out an evaluation, under the supervision and with the participation of its management, including itsthe Interim Chief Executive Officer and Interimthe Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as
of the end of the year covered by this report. Based on the foregoing, its Interim Chief Executive Officer and Interim Chief Financial Officer determined that deficiencies identified by Ernst & Young LLP caused its disclosure controls and procedures not to bewere effective at a reasonable assurance level. However, the Interim Chief Executive Officer and Interim Chief Financial Officer noted that the Company is actively seeking to remedy the deficiencies identified herein and did not note any other material weaknesses or significant deficiencies in the Company’s disclosure controls and procedures during their evaluation.
Other than general improvementThere has been no change in the Company’s performance of standardized controls and closing procedures, and the establishment of a group of accounting personnel in San Diego to assist and monitor the Philippines and Guam accounting matters, there were no changes in the Company’s internal controls over financial reporting during suchthe most recent fiscal quarter that has materially affected, or areis reasonably likely to materially affect, the Company’s internal controls over financial reporting. However, the Company believes the measures it currently is implementing to improve its internal controls are reasonably likely to have a material impact on its internal controls over financial reporting in future periods.
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Item 10.Directors and Executive Officers of the Registrant
PriceSmart has adopted a code of ethics that applies to its Interim Chief Executive Officer, Chief Financial Officer, principal accounting officer and controller, and to all of its other officers, directors, employees and agents. The code of ethics is available on PriceSmart’s web site at http://www.pricesmart.com/IR/Investors.htm. PriceSmart intends to disclose future amendments to, or waivers from, certain provision of its code of ethics on the above website within five business days following the date of such amendment or waiver.
The additional information required by Item 10 is incorporated herein by reference from PriceSmart’s definitive Proxy Statement for the Annual Meeting of Stockholders to be held on January 8, 2004currently scheduled for February 25, 2005 under the headings “Election of Directors,” “Information Regarding Directors,” “Executive Officers of the Company” and “Compliance with Section 16(a) of the Exchange Act.”
Item 11.Executive Compensation
The information required by Item 11 is incorporated herein by reference from PriceSmart’s definitive Proxy Statement for the Annual Meeting of Stockholders to be held on January 8, 2004currently scheduled for February 25, 2005 under the headings “Information Regarding the Board,” “Executive Compensation and Other Information” and “Performance Graph.”
Item 12.Security Ownership of Certain Beneficial Owners and Management
The information required by Item 12 is incorporated herein by reference from PriceSmart’s definitive Proxy Statement for the Annual Meeting of Stockholders to be held on January 8, 2004currently scheduled for February 25, 2005 under the headings “Securities Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information.”
Item 13.Certain Relationships and Related Transactions
The information required by Item 13 is incorporated herein by reference from PriceSmart’s definitive Proxy Statement for the Annual Meeting of Stockholders to be held on January 8, 2004currently scheduled for February 25, 2005 under the heading “Certain Transactions.”
Item 14.Principal Accountant Fees and Services
The information required by Item 14 is incorporated herein by reference from PriceSmart’s definitive Proxy Statement for the Annual Meeting of Stockholders to be held on January 8, 2004currently scheduled for February 25, 2005 under the heading “Independent Accountants.”
Item 15.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 under the respective headings from the annual report: |
Report of Ernst & Young LLP, Independent AuditorsRegistered Public Accounting Firm
Consolidated Balance Sheets as of August 31, 20032004 and 20022003
Consolidated Statements of Operations for the three years ended August 31, 20032004
Consolidated Statements of Stockholders’ Equity for the three years ended August 31, 20032004
Consolidated Statements of Cash Flows for the three years ended August 31, 20032004
Notes to Consolidated Financial Statements
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(b) | Reports on Form 8-K: |
On September 5, 2003,July 26, 2004, the Company filed a Form 8-K under Items 5, 7, and 710 announcing that James F. Cahill, Vice-Chairman of the Board of Directors, will assume the additional position of Interim Chief Financial Officer of PriceSmart, Inc., replacing Allan Youngberg who ceased employment with the Company and resigned from the Company’s Board of Directors effective August 31, 2003.
On September 12, 2003,approved an amendment to the Company filed a Form 8-K under Item 9 announcing that the Board of Directors of PriceSmart, Inc. has determined not to declare a dividend on the 8% Series A Cumulative Convertible Redeemable Preferred Stock (the “Series A Preferred Stock”) for the current quarter. Also, no dividends may be declared or paid on the 8% Series B Cumulative Convertible Redeemable Preferred Stock (the “Series B Preferred Stock”) until full cumulative dividends have been declaredPurchase Order Financing Agreement dated July 21, 2004 and paid on the Series A Preferred Stock. Instead, dividends on the Series A Preferred Stock and the Series B Preferred Stock will accrue in accordancewaived inconsistencies with the termsCompanies Code of the Certificates of Designations for the Series A Preferred StockBusiness Conduct and Series B Preferred Stock.
On November 10, 2003 the Company filed a Form 8-K under Items 5 and 7 regarding the restatement of its financial statements for fiscal 2002 and the first three quarters of fiscal 2003.Ethics.
(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
(amounts in thousands)
Balance at Beginning of Period | Charged to Costs and Expenses | Deductions | Balance at End of Period | ||||||||||
Allowance for doubtful accounts: | |||||||||||||
Year ended August 31, 2001 | $ | 41 | $ | 248 | $ | (231 | ) | $ | 58 | ||||
Year ended August 31, 2002 | 58 | 197 | (72 | ) | 183 | ||||||||
Year ended August 31, 2003 | 183 | 1,009 | (494 | ) | 698 |
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.17
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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.
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PRICESMART, INC.
EXHIBIT INDEX AND EXHIBITS
Exhibit Number | Description | |
3.1(1) | Amended and Restated Certificate of Incorporation of the Company. | |
Certificate of Amendment of Amended and Restated Certificate of Incorporation of the Company. | ||
3.3(12) | Certificate of Amendment of Amended and Restated Certificate of Incorporation of the Company. | |
3.4(1) | Amended and Restated Bylaws of the Company. | |
Amended and Restated Bylaws of the Company. | ||
3.6(2) | Certificate of Designations, Preferences and Relative, Participating, Optional and Other Special Rights of 8% Series A Cumulative Convertible Redeemable Preferred Stock and Qualifications, Limitations and Restrictions Thereof dated January 15, 2002. | |
Certificate of Designations, Preferences and Relative, Participating, Optional and Other Special Rights of 8% Series B Cumulative Convertible Redeemable Preferred Stock and Qualifications, Limitations and Restrictions Thereof dated July 8, 2003. | ||
10.1(1)* | 1997 Stock Option Plan of PriceSmart, Inc. | |
10.2(4) | 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)(5)* | Employment Agreement dated September 20, 1994 between Price Enterprises, Inc. and Robert M. Gans. | |
10.3(b)(6)* | Third Amendment to Employment Agreement dated April 28, 1997 between Price Enterprises, Inc. and Robert M. Gans. | |
10.3(c)(1)* | Fourth Amendment to Employment Agreement dated as of September 2, 1997 between the Company and Robert M. Gans. | |
10.3(d)(7)* | Fifth Amendment to Employment Agreement dated as of March 31, 1999 between the Company and Robert M. Gans. | |
10.3(e)(8)* | Sixth Amendment to Employment Agreement dated as of November 22, 1999 between the Company and Robert M. Gans. | |
10.3(f)(8)* | Seventh Amendment to Employment Agreement dated as of July 18, 2000 between the Company and Robert M. Gans. | |
10.3(g)(9)* | Eighth Amendment to Employment Agreement dated as of September 26, 2001 between the Company and Robert M. Gans. | |
10.3(h)(9)* | Amendment of Employment Agreement dated as of October 16, 2001 between the Company and Robert M. Gans. | |
10.3(i)(10)* | Ninth Amendment to Employment Agreement dated as of November 19, 2002 between the Company and Robert M. Gans. | |
10.3(j)(11)* | Tenth Amendment to Employment Agreement dated as of January 22, 2003 between the Company and Robert M. Gans | |
10.3(k) | Eleventh Amendment to Employment Agreement dated as of July 24, 2003 between the Company and Robert M. Gans. | |
10.4(13) | Tax Sharing Agreement dated as of August 26, 1997 between the Company and Price Enterprises, Inc. | |
10.5(14)* | Form of Indemnity Agreement. | |
10.6(1)* | Assignment and Assumption of Employment Agreement dated August 29, 1997 between the Company and Price Enterprises, Inc. | |
10.7(a) |
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Severance Agreement and Release of Claims dated March 31, 2003 between PriceSmart, Inc. and Gilbert A. Partida. | ||
Independent Contractor Agreement effective April 1, 2003 between PriceSmart, Inc. and Gilbert A. Partida. | ||
10.8(a) | Employment Agreement dated March 31, 1998 between the Company and Thomas D. Martin. |
10.8(b)(7)* | First Amendment to Employment Agreement between the Company and Thomas D. Martin, dated March 31, 1999. | |
10.8(c)(8)* | Second Amendment of Employment Agreement between the Company and Thomas D. Martin, dated November 22, 1999. | |
10.8(d) | Third Amendment of Employment Agreement between the Company and Thomas Martin dated January 11, 2000. | |
10.8(e) | Fourth Amendment of Employment Agreement between the Company and Thomas Martin dated January 24, 2001. | |
10.8(f)(9)* | Amendment of Employment Agreement between the Company and Thomas Martin dated October 16, 2001. | |
10.8(g) | Fifth Amendment of Employment Agreement between the Company and Thomas Martin, dated January 16, 2002. | |
10.8(h) | Sixth Amendment of Employment Agreement between the Company and Thomas Martin, dated January 22, 2003. | |
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1998 Equity Participation Plan of PriceSmart, Inc. | ||
Severance Agreement and Release of Claims dated September 4, 2003 between PriceSmart, Inc. and Allan C. Youngberg. | ||
Independent Contractor Agreement effective September 1, 2003 between PriceSmart, Inc. and Allan C. Youngberg. | ||
Severance Agreement and Release of Claims between the Company and Kevin C. Breen, dated March 3, 2003. | ||
Trademark Agreement between the Company and Associated Wholesale Grocers, Inc., dated August 1, 1999. | ||
Loan Agreement by and between CitiBank and PRICSMARLANDCO, S.A., Prismar de Costa Rica. S.A., PSMT Caribe, Inc., the Company, P.S.C., S.A., and Venture Services, Inc. dated October 12, 1999 for $5.9 million. |
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Loan agreement by and between CitiBank, N.A. and Imobiliaria PriceSmart, S.A. de C.V., PriceSmart El Salvador, S.A. de C.V., PSMT Caribe, Inc., the Company, P.S.C., S.A., and Venture Services, Inc. dated December 21, 1999 for $5.0 million. | ||
Loan agreement by and between The Chase Manhattan Bank and the Company and PB Real Estate, S.A. dated December 20, 1999 for $11.3 million (in Spanish). | ||
Loan agreement by and between The Chase Manhattan Bank and the Company and PB Real Estate, S.A. dated December 20, 1999 for $11.3 million (in English). | ||
Line of Credit for 180 days between Banco Del Progresso, S.A. and PriceSmart Dominicana, S.A. dated December 23, 1999 for $2.0 million (in Spanish). | ||
Line of Credit for 180 days between Banco Del Progresso and PriceSmart Dominicana, S.A. dated December 23, 1999 for $2.0 million (in English). | ||
Loan agreement by and between CitiBank, N.A. and Inmobiliaria PriceSmart Honduras dated February 25, 2000 for $3.5 million. | ||
Loan Agreement by and between Banco Bilbao Vizcaya, S.A. and PRICSMARLANDCO, S.A. dated May 27, 1999 for $3.75 million. | ||
Promissory Note with Banco Bilbao Vizcaya, S.A. and Inmobiliaria PriceSmart S.A. DE C.V. (El Salvador) dated April 26, 2000 for $3.75 million. | ||
Registration Rights Agreement dated as of June 5, 2000 by and among the Company and the Shareholders of PSC, S.A. | ||
Promissory Note between the Company and John Hildebrandt, dated April 18, 2000. | ||
Loan agreement by and between Royal Merchant Bank and Finance Company Limited and PSMT Trinidad/Tobago Limited dated June 21, 2000 for $3.5 million. | ||
Master Agreement between the Company and Payless ShoeSource Holdings, Ltd., dated November 27, 2000. | ||
Licensee Agreement – PRC Technology License Agreement, as amended, between the Company and Novont Holdings Co., LTD. and Novont Inc., dba Timetone International Group and Cheng Cheng Import Export Co., Ltd., dated February 28, 2001. |
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Supplemental Agreement to the PRC Technology License Agreement (Amended), dated June 2001. | ||
Loan Agreement among the Company, PSMT Caribe, Inc., PSMT Trinidad/Tobago Limited, and International Finance Corporation, dated January 26, 2001 for $22.0 million. | ||
Loan Agreement among the Company, PSMT Caribe, Inc., PSMT Trinidad/Tobago Limited, and International Finance Corporation, dated January 26, 2001 for $10.0 million. | ||
Amended and Restated C Loan Agreement among the Company, PSMT Caribe, PSMT Trinidad and the IFC, dated September 15, 2004. | ||
10.26(b)(37) | Amendment No. 2 to the IFC Loan Agreement among the Company, PSMT Caribe, Inc., PSMT Trinidad and the IFC, dated September 15, 2004. | |
10.27(19) | Escrow Account Agreement among the Company, International Finance Corporation and The Bank of New York, dated January 26, 2001 for $7.5 million. | |
Loan Agreement among the Company, PSMT Caribe, Inc., Prismar de Costa Rica, S.A., Pricsmarlandco, S.A. and Overseas Private Investment Corporation, dated August 17, 2001 for $5 million. | ||
Employment Agreement between the Company and William Naylon, dated January 16, 2002. | ||
First Amendment of Employment Agreement between the Company and William J. Naylon, dated January 22, 2003. | ||
Second Amendment to Employment Agreement between the Company and William Naylon, dated February 1, 2004. | ||
10.30(a)(9)* | Employment Agreement between the Company and John D. Hildebrandt, dated as of June 1, 2001. | |
Amendment to Employment Agreement between the Company and John Hildebrandt, dated as of October 16, 2001. | ||
First Amendment of Employment Agreement between the Company and John Hildebrandt, dated January 16, 2002. | ||
Second Amendment of Employment Agreement between the Company and John Hildebrandt, dated January 22, 2003. | ||
Loan Agreement between Metropolitan Bank and Trust Company and PSMT Philippines Inc., dated September 14, 2001, for 250 million pesos. | ||
DSR Agreement among the Company, The Bank of New York, and Overseas Private Investment Corporation, dated August 17, 2001. | ||
2001 Equity Participation Plan of PriceSmart, Inc. |
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Shareholders’ Agreement for PSMT Mexico, S.A. de C.V. dated as of January 15, 2002 between the Company and Grupo Gigante, S.A. de C.V. | ||
First Amendment to Shareholders’ Agreement between the Company and Grupo Gigante, S.A. de C.V. dated January 31, 2002. | ||
10.34(c)(35) | Second Amendment to Shareholders’ Agreement between the Company Grupo Gigante, S.A. de C.V. dated November 7, 2003. | |
10.35(2) | Series A Preferred Stock and Warrant Purchase Agreement dated as of January 15, 2002 between the Company and Grupo Gigante, S.A. de C.V. | |
Series A Preferred Stock Purchase Agreement dated as of January 18, 2002 between the Company and the Investors Listed on Exhibit A Thereto. | ||
Loan agreement by and between Banco Bilbao Vizcaya, S.A. and PRICMARLANCO, S.A. (Costa Rica) dated January 10, 2002 for $3.75 million. | ||
Common Stock Purchase Agreement dated as of April 12, 2002 between the Company and International Finance Corporation. | ||
Stock Purchase Agreement dated as of June 24, 2002 among the Company, Green Hill Investments, Inc. and PSMT (Barbados) Inc. |
Stock Purchase Agreement dated as of June 24, 2002 between the Company and Chancellor Holdings Limited. | ||
Stock Purchase Agreement dated as of June 24, 2002 among the Company, Island Food and Distributors, N.V., and Nithyananda Ent., Ltd. | ||
Common Stock Purchase Agreement dated as of August 9, 2002 between the Company and PSC, S.A. | ||
Employment Agreement dated as of January 11, 2000 between the Company and Edward Oats. | ||
First Amendment to Employment Agreement between the Company and Edward Oats, dated January 24, 2001. | ||
Amendment to Employment Agreement between the Company and Edward Oats, dated October 16, 2001. | ||
Second Amendment to Employment Agreement between the Company and Edward Oats, dated January 16, 2002. | ||
Third Amendment to Employment Agreement between the Company and Edward Oats, dated November 19, 2002. | ||
Fourth Amendment to Employment Agreement between the Company and Edward Oats, dated January 22, 2003. | ||
Fifth Amendment to Employment Agreement between the Company and Edward Oats, dated March 15, 2004. | ||
10.44(a)(10)* | Employment Agreement dated as of January 11, 2000 between the Company and Brud Drachman. | |
First Amendment to Employment Agreement between the Company and Brud Drachman, dated January 24, 2001. | ||
Second Amendment to Employment Agreement between the Company and Brud Drachman, dated June 1, 2001. |
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Amendment to Employment Agreement between the Company and Brud Drachman, dated October 16, 2001. | ||
Third Amendment to Employment Agreement between the Company and Brud Drachman, dated January 16, 2002. | ||
Fourth Amendment to Employment Agreement between the Company and Brud Drachman, dated November 19, 2002. | ||
Fifth Amendment to Employment Agreement between the Company and Brud Drachman, dated January 22, 2003. | ||
Sixth Amendment to Employment Agreement between the Company and Brud Drachman, dated March 15, 2004. | ||
10.45(10) | Loan Agreement between the International Finance Corporation and PSMT Philippines, Inc. dated June 27, 2002 for $12.5 million. | |
2002 Equity Participation Plan of PriceSmart, Inc. | ||
Loan Agreement between Banco de Oro and PSMT Philippines, Inc. dated September 12, 2002 for $5.5 million. | ||
Promissory Note between Banco de Oro and PSMT Philippines, Inc. dated December 20, 2002 for $2.5 million. | ||
Promissory Note between Banco de Oro and PSMT Philippines, Inc. dated December 27, 2002 for $1.2 million. | ||
Loan Agreement between RBTT Bank Jamaica Limited and PriceSmart Jamaica Limited / PriceSmart, Inc. dated March 27, 2003 for $3.0 million. | ||
Loan Agreement between Metropolitan Bank and Trust Company and PSMT Philippines, Inc. dated July 1, 2003 for 66 million pesos. | ||
Credit Contract Warranted with Mortgage granted by Banco de la Produccion, S.A. and Inmobiliaria PSMT Nicaragua, S.A. dated May 20, 2003 for $3.0 million. (English translation) | ||
Credit Contract Guarantee with Mortgage and Bond granted by Banco de la Produccion, S.A. and Inmobiliaria PSMT Nicaragua, S.A. dated July 25, 2003 for $1.0 million. (English translation) | ||
10.52(38) | Common Stock Purchase Agreement by and among the Company and the Investors named therein, dated as of October 4, 2004. | |
10.53(38) | Stockholder Voting Agreement by and among the Company and the Investors named therein, dated as of October 4, 2004. |
10.54(a)(38) | Employment Agreement by and between the Company and Jose Luis Laparte, dated as of June 3, 2004. | |
10.54(b)(38) | First Amendment to Employment Agreement by and between the Company and Jose Luis Laparte, dated as of August 2, 2004. | |
10.55(37) | Letter of Understanding among the Price Group, the Company, PSMT Caribe, PSMT Trinidad, PSMT Philippines and the IFC, dated September 15, 2004. | |
10.56(37) | Assignment and Assumption Agreement between the Company and the IFC, dated September 15, 2004. | |
10.57(a)(36) | Agreement of Purchase and Sale (with Escrow Instructions) and Leaseback between the Company and The Price Group, LLC dated May 6, 2004. | |
10.57(b)(36) | Amendment to Agreement of Purchase and Sale (with Escrow Instructions) and Leaseback between the Company and The Price Group, LLC dated May 20, 2004. | |
10.57(c)(12)** | Second Amendment to Agreement of Purchase and Sale (with Escrow Instructions) and Leaseback between the Company and The Price Group, LLC dated June 1,2004. | |
10.57(d)(12)** | Third Amendment to Agreement of Purchase and Sale (with Escrow Instructions) and Leaseback between the Company and The Price Group, LLC dated July 12, 2004. | |
10.57(e)(12)** | Fourth Amendment to Agreement of Purchase and Sale (with Escrow Instructions) and Leaseback between the Company and The Price Group, LLC dated August 31, 2004. | |
10.58(a)(35) | Promissory Note between The Price Group, LLC and the Company dated February 23, 2004 for $10.0 million. | |
10.58(b)(34) | Amendment to Promissory Note dated July 21, 2004. | |
10.59(a)(35) | Purchase Order Financing Agreement by and between The Price Group, LLC and the Company dated February 9, 2004. | |
10.59(b)(34) | Amendment to Purchase Order Financing Agreement dated July 21, 2004. | |
10.60(33) | Common Stock Purchase Agreement by and Among PriceSmart, Inc. and the Investors Listed on Exhibit A Attached thereto, dated as of October 22, 2003. | |
10.61(12) | Loan Agreement by and between The Price Group, LLC, and PriceSmart, Inc. dated August 31, 2004 for $25 million. | |
10.61(a)(12) | Promissory note between The Price Group, LLC, and PriceSmart, Inc. dated August 31, 2004 for $25 million. | |
10.62(a)(35) | Put Option Agreement by and between the Company and the Sol and Helen Price Trust dated December 15, 2003. | |
10.62(b)(12) | Amendment to Put Option Agreement between the Company and the Sol and Helen Price Trust dated August 31, 2004. | |
10.63(33) | Loan Agreement between Banco Bilboa Vizcaya Argentaria (Panama), S.A. and PriceSmart Panama, S.A. dated March 31, 2003 for $3.0 million. (English Translation) | |
10.64(33) | Loan Agreement between Citibank, NA Sucursal Guatemala and PriceSmart Guatemala, S.A. dated March 1, 2003 for 18,063,750 quetzales. (English translation) | |
13.1(12) | Portions of the Company’s Annual Report to Stockholders for the year ended August 31, 2003. | |
21.1(12) | Subsidiaries of the Company. | |
23.1(12) | Consent of Ernst & Young LLP, Independent | |
31.1(12) | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2(12) | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1(12)** | ||
32.2(12)** |
* Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Annual Report on Form 10-K.
** | These certifications are being furnished solely to accompany this Report pursuant to 18 U.S.C. 1350, and are not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and are not to be incorporated by reference into any filing of PriceSmart, Inc. whether made before or after the date hereof, regardless of any general incorporation language in such filing. |
(1) | Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended August 31, 1997 filed with the Commission on November 26, 1997. |
(2) | Incorporated by reference to the Current Report on Form 8-K filed with the Commission on January 24, 2002. |
(3) | Incorporated by reference to the Current Report on Form 8-K filed with the Commission on July 10, 2003. |
(4) | Incorporated by reference to Exhibit 10.2 to the Company’s Registration Statement on Form 10 filed with the Commission on July 3, 1997. |
(5) | 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. |
(6) | 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. |
(7) | Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended May 31, 1999 filed with the Commission on July 15, 1999. |
(8) | Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended August 31, 2000 filed with the Commission on November 29, 2000. |
(9) | Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended August 31, 2001 filed with the Commission on November 29, 2001. |
(10) | Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended August 31, 2002 filed with the Commission on November 29, 2002. |
(11) | Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended February 28, 2003 filed with the Commission on April 14, 2003. |
(12) | Filed herewith. |
(13) | Incorporated by reference to the Current Report on Form 8-K filed September 12, 1997 by Price Enterprises, Inc. |
(14) | 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. |
(15) | Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended February |
Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended May 31, 2002 filed with the Commission on July 15, 2002. |
Incorporated by reference to the Current Report on Form 8-K filed with the Commission on April 1, 2003. |
Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended August 31, 1998 filed with the Commission on November 25, 1998. |
Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended February 28, 2001 filed with the Commission on April 16, 2001. |
Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended August 31, 1999 filed with the Commission on November 29, 1999. |
Incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended February 28, 1999 filed with the Commission on April 14, 1999. |
Incorporated by reference to the Current Report on Form 8-K filed with the Commission on September 5, 2003. |
Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended May 31, 2000 filed with the Commission on July 17, 2000. |
Incorporated by reference to Exhibit A to the definitive Proxy Statement dated December 7, 2001 for the Company’s 2002 Annual Meeting of Stockholders filed with the Commission on December 10, 2001. |
Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended February 28, 2002 filed with the Commission on April 15, 2002. |
Incorporated by reference to the Company’s Registration Statement on Form S-3 filed with the Commission on April 18, 2002. |
Incorporated by reference to the Company’s Registration Statement on Form S-3 filed with the Commission on July 19, 2002. |
Incorporated by reference to the Company’s Registration Statement on Form S-3 filed with the Commission on October 25, 2002. |
Incorporated by reference to Exhibit A to the definitive Proxy Statement dated December 11, 2002 for the Company’s 2003 Annual Meeting of Stockholders filed with the Commission on December 11, 2002. |
Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended May 31, 2003 filed with the Commission on July 15, 2003. |
(31) | Incorporated by reference to the Current Report on Form 8-K filed with the Commission on September 5, 2003. |
(32) | Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended August 31, 2003 filed with the Commission on December 16, 2003. |
(33) | Incorporated by reference to the Quarterly Report on Form 10-Q for the quarter ended November 30, 2003 filed with the Commission on January 14, 2004. |
(34) | Incorporated by reference to the Current Report on Form 8-K filed with the Commission on July 26, 2004. |
(35) | Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended February 29, 2004 filed with the Commission on April 14, 2004. |
(36) | Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended May 31, 2004 filed with the Commission on July 15, 2004. |
(37) | Incorporated by reference to the Current Report on Form 8-K filed with the Commission on September 20, 2004. |
(38) | Incorporated by reference to the Current Report on Form 8-K filed with the Commission on October 8, 2004. |
SCHEDULE II
PRICESMART, INC.
VALUATION AND QUALIFYING ACCOUNTS
(amounts in thousands)
Balance at Beginning of Period | Charged to Costs and Expenses | Deductions | Balance at End of Period | ||||||||||
Allowance for doubtful accounts: | |||||||||||||
Year ended August 31, 2002 | $ | 58 | $ | 197 | $ | (72 | ) | $ | 183 | ||||
Year ended August 31, 2003 | 183 | 1,009 | (494 | ) | 698 | ||||||||
Year ended August 31, 2004 | 698 | 914 | (62 | ) | 1,550 |
SIGNATURES
31Pursuant 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 24, 2004 | PRICESMART, INC. | |||
By: | /s/ ROBERT E. PRICE | |||
Robert E. Price | ||||
Chairman of the Board and | ||||
Interim Chief Executive Officer |
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 and Interim Chief Executive Officer | November 24, 2004 | ||
Robert E. Price | ||||
Vice-Chairman of the Board | November, 2004 | |||
James F. Cahill | ||||
/s/ MURRAY L. GALINSON | Director | November 24, 2004 | ||
Murray L. Galinson | ||||
/s/ KATHERINE L. HENSLEY | Director | November 24, 2004 | ||
Katherine L. Hensley | ||||
/s/ LEON C. JANKS | Director | November 24, 2004 | ||
Leon C. Janks | ||||
/s/ LAWRENCE B. KRAUSE | Director | November 24, 2004 | ||
Lawrence B. Krause | ||||
Director | November, 2004 | |||
Angel Losada M. | ||||
/s/ JACK MCGRORY | Director | November 24, 2004 | ||
Jack McGrory | ||||
Director | November, 2004 | |||
Edgar A. Zurcher |