UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED NOVEMBER 30, 1999
Or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _________________to ________________
COMMISSION FILE NUMBER 0-22793
PRICESMART, INC.
(Exact name of registrant as specified in its charter)
Delaware 33-0628530
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
4649 Morena Boulevard
San Diego, California 92117
(Address of principal executive offices)
(858) 581-4530
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [ X] Yes [ ] No
The registrant had 5,097,619 shares of its common stock, par value $.0001
per share, outstanding at December 29, 1999.
PRICESMART, INC.
INDEX TO FORM 10-Q
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS PAGE
----
Condensed Consolidated Balance Sheets as of November 30, 1999
(Unaudited) and August 31, 1999.............................................. 3
Condensed Consolidated Statements of Operations (Unaudited)
for the three months ended November 30, 1999 and November 30, 1998........... 4
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the three months ended November 30, 1999 and November 30, 1998........... 5
Condensed Consolidated Statements of Stockholders' Equity (Unaudited)
for the three months ended November 30, 1999................................. 6
PriceSmart, Inc. Notes to Consolidated Financial Statements (Unaudited)...... 7-11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.......................................... 12-15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK.................................................................. 16
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS............................................................. 17
ITEM 2. CHANGES IN SECURITIES AND USE
OF PROCEEDS.................................................................. 17
ITEM 3. DEFAULTS UPON SENIOR SECURITIES............................................... 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS.......................................................... 17
ITEM 5. OTHER INFORMATION............................................................. 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.............................................. 17
Page 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PRICESMART, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
November 30, August 31,
1999 1999
--------------- -------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 10,163 $ 14,957
Marketable securities 5,554 17,627
Receivables, net of allowance for doubtful accounts 2,122 4,149
City notes receivable, current portion 2,500 2,500
Merchandise inventories 38,089 25,919
Prepaid expenses and other current assets 2,972 2,681
Property held for sale,net 2,124 2,126
--------- ---------
Total current assets 63,524 69,959
OTHER ASSETS:
Property and equipment, net 70,307 48,507
Restricted cash 7,337 10,195
Deposits on land purchases -- 2,112
City notes receivable, less current portion 16,635 17,006
Notes receivable and other 3,942 4,295
--------- ---------
TOTAL ASSETS $ 161,745 $ 152,074
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank borrowings $ -- $ 707
Long-term debt, current portion 860 --
Accounts payable 27,463 24,679
Accrued salaries and benefits 1,472 1,760
Deferred membership income 3,054 1,998
Other accrued expenses 4,992 3,369
--------- ---------
Total current liabilities 37,841 32,513
Long-term debt, less current portion 13,169 7,787
--------- ---------
Total Liabilities 51,010 40,300
Minority interest 18,969 17,913
Commitments and contingencies
STOCKHOLDERS' EQUITY:
Preferred stock, $.0001 par value, 2,000,000 shares authorized, none issued -- --
Common stock, $.0001 par value, 15,000,000 shares authorized,
6,002,656 and 5,991,256 shares issued at November 30, 1999
and August 31, 1999, respectively 1 1
Additional paid-in capital 111,677 111,483
Notes receivable from stockholders (950) (950)
Deferred compensation (1,132) (1,282)
Accumulated other comprehensive loss (124) (453)
Accumulated deficit (3,632) (864)
Less: Treasury stock at cost, 907,898 shares at November 30, 1999
and August 31,1999 (14,074) (14,074)
--------- ---------
Total stockholders' equity 91,766 93,861
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 161,745 $ 152,074
--------- ---------
--------- ---------
See accompanying notes.
Page 3
PRICESMART, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED - AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
For the Three Months
Ended November 30,
-------------------------
1999 1998
------------ ----------
REVENUES
SALES:
Net warehouse $ 50,482 $ 16,118
Export 275 2,309
Membership, royalties and fees 1,411 357
Auto, travel and other programs 1,821 3,237
-------- --------
TOTAL REVENUES 53,989 22,021
EXPENSES:
COST OF GOODS SOLD:
Net warehouse 44,039 14,038
Export 266 2,244
Selling, general and administrative 11,346 7,229
Preopening expenses 2,385 185
-------- --------
TOTAL EXPENSES 58,036 23,696
-------- --------
OPERATING LOSS (4,047) (1,675)
OTHER:
Interest income, net 790 1,322
Other income (expenses) (187) 904
Minority interest 676 (22)
-------- --------
TOTAL OTHER 1,279 2,204
Income (loss) before provision for income taxes (2,768) 529
Provision for income taxes -- 11
-------- --------
NET INCOME (LOSS) $ (2,768) $ 518
-------- --------
-------- --------
EARNINGS (LOSS) PER SHARE:
Basic $ (0.54) $ 0.10
-------- --------
-------- --------
Diluted $ (0.54) $ 0.10
-------- --------
-------- --------
SHARES USED IN PER SHARE COMPUTATION:
Basic 5,087 5,309
-------- --------
-------- --------
Diluted 5,087 5,412
-------- --------
-------- --------
See accompanying notes.
Page 4
PRICESMART, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED - AMOUNTS IN THOUSANDS)
For the Three Months
Ended November 30,
------------------------------
1999 1998
------------- -----------
OPERATING ACTIVITIES
Net income (loss) $ (2,768) $ 518
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation 851 346
Allowance for doubtful accounts (83) 14
Income tax charge -- 11
Minority interest (676) 764
Compensation expense recognized for stock options 150 --
Change in operating assets and liabilities
Restricted cash 2,858 (2,804)
Accounts receivable and other assets (10,349) 2,975
Accounts payable and other liabilities 5,175 1,086
-------- --------
Net cash flows provided by (used in) operating activities (4,842) 2,910
INVESTING ACTIVITIES
Purchases of marketable securities -- (4,529)
Sales of marketable securities 12,073 55,538
Additions to property and equipment (20,539) (3,777)
Payments of notes receivable 724 327
Other 297 --
-------- --------
Net cash flows provided by (used in) investing activities (7,445) 47,559
FINANCING ACTIVITIES
Proceeds from property held for sale -- 669
Proceeds (repayment) from bank borrowings, net 5,535 (3,782)
Contributions by minority interest shareholders 1,732 --
Proceeds from exercise of stock options 194 30
Issuance of common stock -- 38
Purchases of treasury stock -- (6,491)
-------- --------
Net cash flows provided by (used in) financing activities 7,461 (9,536)
Effect of exchange rate changes on cash
and cash equivalents 32 --
-------- --------
Net increase (decrease) in cash and cash equivalents (4,794) 40,933
Cash and equivalents at beginning of period 14,957 5,639
-------- --------
Cash and equivalents at end of period $ 10,163 $ 46,572
-------- --------
-------- --------
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest $ 210 $ 28
Income Taxes $ 336 $ 54
See accompanying notes.
Page 5
PRICESMART, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED NOVEMBER 30, 1999
(UNAUDITED - AMOUNTS IN THOUSANDS)
Additional Notes Receivable
Common stock Paid-in from Deferred
Shares Amount Capital Stockholders Compensation
---------------- --------- -------------- -------------
Balance at August 31, 1999 5,991 $ 1 $111,483 $ (950) $ (1,282)
Exercise of stock options 12 194
Amortization of deferred
compensation 150
Net loss
Unrealized gain on marketable
securities
Translation adjustment
Comprehensive loss
Balance at November 30, 1999 6,003 $ 1 $111,677 $ (950) $ (1,132)
Other Less:
Comprehensive Retained Treasury stock Total
Income Earnings at Cost Stockholders'
(Loss) (Deficit) Shares Amount Equity
------------- ----------- ------ -------------- --------------
Balance at August 31, 1999 $ (453) $ (864) 908 $ (14,074) $ 93,861
Exercise of stock options 194
Amortization of deferred
compensation 150
Net loss (2,768) (2,768)
Unrealized gain on marketable
securities 297 297
Translation adjustment 32 32
-----------
Comprehensive loss (2,439)
-------------------------------------------------------------------
Balance at November 30, 1999 $ (124) $(3,632) 908 $ (14,074) $ 91,766
===================================================================
See accompanying notes.
Page 6
PRICESMART, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
November 30, 1999
NOTE 1 - COMPANY OVERVIEW AND BASIS OF PRESENTATION
COMPANY OVERVIEW
PriceSmart, Inc. ("PriceSmart" or the "Company") owns and operates
merchandising businesses. The Company's primary business is international
merchandising consisting of membership shopping stores similar to, but smaller
in size than, warehouse clubs in the United States. As of November 30, 1999,
there were seven warehouse stores in operation (three in Panama, and one each in
Guatemala, Costa Rica, El Salvador and Honduras) of which the Company owns a
majority interest. Also, there were five warehouse stores in operation (four in
China and one in Saipan) licensed to and operated by local business people.
Additionally, the Company operates a domestic travel business marketing
primarily to Costco Companies, Inc. ("Costco") members.
BASIS OF PRESENTATION
The condensed consolidated financial statements include the assets,
liabilities and results of operations of the Company and its majority owned
subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation. Certain amounts in the prior period condensed
consolidated financial statements have been reclassified to conform to current
period presentation.
- -------------------------------------------------------------------------------
Ownership Basis of Presentation
Ventures Services, Inc. 100% Consolidated
PB Real Estate, S.A. 51% Consolidated
Price Costco de Panama, S.A. 51% Consolidated
PriceSmart (Guatemala), S.A. 66% Consolidated
PSMT Caribe, Inc. 60% Consolidated
PSMT Trinidad/Tobago LTD 65% Consolidated
- -------------------------------------------------------------------------------
The condensed consolidated interim financial statements of the Company
included herein have been prepared by the Company without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission (the
"Commission") and reflect all adjustments that are, in the opinion of
management, necessary to fairly present the financial position, results of
operations, and cash flows for the interim period presented. Certain information
and footnote disclosures normally included in consolidated financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such SEC rules and regulations. Management
believes that the disclosures made are adequate to make the information
presented not misleading. The results for interim periods are not necessarily
indicative of the results for the full year. The interim financial statements
should be read in conjunction with the financial statements and notes thereto
contained in the Company's audited consolidated financial statements for the
year ended August 31, 1999 filed on Form 10-K.
Page 7
PriceSmart, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
FISCAL YEAR
The Company's fiscal year ends August 31. The Company's fiscal quarter ends
are November 30, February 28 or in leap year February 29 and May 31. Fiscal 1999
refers to the fiscal year ended August 31, 1999.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed on a
straight-line basis over the estimated useful lives of the assets, as follows:
Building and improvements 10-25 years
Fixtures and equipment 3-7 years
MERCHANDISE INVENTORIES
Merchandise inventories, which include merchandise for resale, are valued
at the lower of cost (average cost) or market.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
SEGMENT REPORTING
The Financial Accounting Standards Board issued SFAS No. 131, "Disclosures
About Segments of an Enterprise and Related Information" which the Company
adopted in fiscal 1999. SFAS No. 131 amends the requirements to report financial
and descriptive information about its reportable operating segments. The
financial information is required to be reported on the basis that is used
internally for evaluating the segment performance and deciding how to allocate
resources to segments. The Company principally operates under one segment in two
geographic regions.
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
November 30, August 31,
1999 1999
-------------- ---------------
PROPERTY AND EQUIPMENT
Land $ 17,195 $ 8,709
Building and improvements 36,703 27,537
Fixtures and equipment 21,723 16,724
-------------- --------------
75,621 52,970
Less accumulated depreciation (5,314) (4,463)
-------------- --------------
Property and equipment, net $ 70,307 $ 48,507
-------------- --------------
-------------- --------------
Page 8
PriceSmart, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
NOTE 4 - EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share is computed based on the weighted average
shares outstanding in the period. Diluted earnings (loss) per share includes the
effect of dilutive securities (options) except where their inclusion is
antidilutive.
- -------------------------------------------------------------------------------
Computation of Net Income (Loss) Per Common Share (Basic and Diluted)
(Unaudited - amounts in thousands, except share data)
For the Three Months
Ended November 30,
-----------------------------------
1999 1998
--------------- ---------------
Net income (loss) used for basic
and diluted computation $ (2,768) $ 518
--------------- ---------------
--------------- ---------------
Weighted average number of
Common shares outstanding 5,086,797 5,309,285
Add:
Assumed exercise of those options
that are common stock equivalents -- 102,455
--------------- ---------------
Adjusted shares outstanding used
for diluted computation 5,086,797 5,411,740
--------------- ---------------
--------------- ---------------
Earnings (loss) per share:
Basic $ (0.54) $ 0.10
--------------- ---------------
--------------- ---------------
Diluted $ (0.54) $ 0.10
--------------- ---------------
--------------- ---------------
For the three months ended November 30, 1999 all of the assumed company
stock options of 631,841 shares are excluded from diluted loss per share since
their effect is antidilutive.
- -------------------------------------------------------------------------------
Page 9
PriceSmart, Inc.
Notes to Consolidated Financial Statements (Continued)
NOTE 5 - COMPREHENSIVE INCOME (LOSS)
During the first quarter of fiscal 1999, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income" which requires the disclosure of all components
of comprehensive income, including net income and other comprehensive income.
Comprehensive income is defined as the change in equity during a period from
transactions and other events and circumstances generated from non-owner sources
which includes the Company's unrealized gains or losses on marketable securities
and foreign currency translation adjustments. Consolidated comprehensive income
(loss) was as follows (in thousands):
For the Three Months
Ended November 30,
---------------------------
1999 1998
---------- ---------
Net income (loss) $ (2,768) $ 518
Unrealized gains on marketable securities 297 38
Foreign currency translation adjustments 32 --
---------- ---------
Comprehensive income (loss) $ (2,439) $ 556
---------- ---------
---------- ---------
NOTE 6 - LOAN AGREEMENT
In October 1999, the Company, through its joint venture arrangement in
Costa Rica, entered into a loan agreement with Citibank, N.A. for $5.9
million. The term of the loan is for five years and interest is calculated on
the basis of six month LIBOR rate plus 4.0% (10.1575% at November 30, 1999).
Minimum principal payments of approximately $215,000 are due quarterly, with
the remaining balance of approximately $1.6 million due at the end of the
loan term. The loan is collaterallized by the land, building, fixtures and
equipment of the Costa Rica joint venture and guaranteed up to 60% by the
Company and up to 40% from the Company's joint venture partner, PSC, S.A. The
loan is also subject to certain financial and operating covenants.
NOTE 7 - SUBSEQUENT EVENTS
In January 2000, the Company established an $8.0 million revolving line of
credit with Bank of America, N.A. providing for cash advances and for up to $1
million of letters of credit. The term of the revolving line of credit expires
in December 2000 and interest is calculated on the basis of Bank of America,
N.A.'s prime rate, IBOR plus one percentage point, or LIBOR plus one percentage
point. The revolving line of credit is secured by marketable securities of the
Company. The Company has full availability under the revolving line of credit
and no draws on the line have been made.
In December 1999, the Company, through its joint venture arrangement in El
Salvador, entered into a loan agreement with Citibank, N.A. for $5.0 million.
The term of the loan is for five years and interest is calculated on the basis
of three month LIBOR rate per annum plus 4.0%. Interest payments are required to
be made on a monthly basis. Minimum principal payments of $218,750 are due
quarterly, with approximately $1.5 million due and payable at the end of the
loan term. The loan is collaterallized by the land, building, fixtures and
equipment of the El Salvador joint venture and guaranteed up to 60% by the
Company and up to 40% from the Company's joint venture partner, PSC, S.A. The
loan is also subject to certain financial and operating covenants.
Page 10
PriceSmart, Inc.
Notes to Consolidated Financial Statements (Continued)
In January 2000, the Company, through its joint venture arrangement in
Panama, entered into a debt agreement with The Chase Manhattan Bank for $11.3
million. Advances will be through a secured revolving credit facility through
November 20, 2000. Borrowings under the facility at November 20, 2000 will be
converted to a secured five year term loan. Interest on the debt agreement is
calculated on the basis of three month LIBOR rate plus 1.75%. Payments shall be
made on a monthly basis, interest only while a revolving credit facility and
interest plus principal payments of $188,333 during the term of the loan. The
loan is collaterallized by the land and building of the underlying warehouses
and guaranteed up to 51% by the Company and up to 49% from the Company's joint
venture partner. The loan is also subject to certain financial and operating
covenants.
In January 2000, the Company, through its joint venture arrangement in the
Dominican Republic, entered into two separate line of credit facilities of $2.0
million each, both of which are due in six months. Interest on both credit
facilities is calculated on the basis of six month LIBOR plus 4.25% payable
monthly. The full amount was drawn on the facilities for general working
capital.
Page 11
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This Quarterly Report contains forward-looking statements concerning the
Company's anticipated future revenues and earnings, adequacy of future cash flow
and related matters. (These forward-looking statements include, but are not
limited to, statements containing the words "expect", "believe", "will", "may",
"should", "project", "estimate", and like expressions, and the negative
thereof.) These statements are subject to risks and uncertainties that could
cause actual results to differ materially from the statements, including foreign
exchange risks, political or economic instability of host countries, and
competition, as well as those risks described in the Company's SEC reports,
including the Company's Form 10-K filed pursuant to the Securities and Exchange
Act of 1934 on November 29, 1999.
The following discussion and analysis compares the results of operations
for each of the fiscal quarters ended November 30, 1999 and 1998, and should be
read in conjunction with the condensed consolidated financial statements and the
accompanying notes included within this report.
In the first quarter of fiscal 2000, the Company opened two new US-style
membership shopping warehouses under joint venture arrangements in Latin
America; one in Honduras (September 1999) and one in Panama (November 1999),
bringing the total number of warehouses in operation under joint venture
arrangements to seven as of November 30, 1999. In mid December 1999 two
additional warehouses were opened in the Dominican Republic. At the end of the
first quarter of fiscal 1999, the Company had a total of two warehouses in
operation under joint venture arrangements. Also, there were five warehouse
stores in operation (four in China and one in Saipan) licensed to and operated
by local business people at the end of the first quarter of fiscal 2000, versus
three licensed warehouse stores (two in China and one in Saipan, Micronesia) at
the end of the first quarter of fiscal 1999.
Net warehouse sales (from the Company's joint venture locations in Latin
America) increased 214% to $50.5 million for the three months ended November 30,
1999 from $16.1 million for the three months ended November 30, 1998. The
increase quarter over quarter was a result of two new warehouses opened during
the first quarter of fiscal 2000 and three new warehouses opened during fiscal
1999.
The Company's warehouse gross margins (operating under joint venture
arrangements) for the three months ended November 30, 1999 decreased slightly to
12.8% from 12.9% for the three months ended November 30, 1998.
Export sales to the Company's licensee warehouses in Asia decreased to
$275,000 for the three months ended November 30, 1999 from $2.3 million for the
three months ended November 30, 1998. The decrease in export sales to Asian
licensee warehouses between fiscal quarters was primarily due to a change in the
mix of licensee warehouses and the overall volume of licensee exported sales.
The Company's export sales gross margin for the three months ended November
30, 1999 was 3.3% compared to 2.8% for the three months ended November 30, 1998.
The change in gross margin percentage quarter over quarter is attributable to
the varying agreements with its licensees that the Company can earn.
Membership, royalties and fees increased to $1.4 million for the three
months ended November 30, 1999 from $357,000 for the three months ended November
30, 1998. Membership fees (including other warehouse income) increased to $1.2
million for the three months ended November 30, 1999 from $48,000 for the three
months ended November 30, 1998. The increase quarter over quarter was primarily
a result of the new Latin American warehouse openings and an increase in the
average memberships per warehouse.
Page 12
Auto, travel and other program revenues decreased to $1.8 million for the
three months ended November 30, 1999 from $3.2 million for the three months
ended November 30, 1998. The decrease was due to the sale of the auto referral
business in mid fiscal 1999, partially offset by an increase in travel program
revenues. The travel program generates most of its revenue through an agreement
with Costco Companies, Inc. ("Costco"). The Company recently extended the
agreement with Costco through February 2000, but there can be no assurance the
agreement will be further extended. However, in anticipation of the expiration
of the Costco travel service contract, the Company has entered into several
agreements, which have included Farmers Insurance Group and 20th Century
Insurance Group, pursuant to which the Company will offer discount travel
services to new customers, employees and agents.
Selling, general and administrative expenses include the operating expenses
related to the Company's warehouse operations; operating expenses related to the
auto, travel and other programs and corporate administrative expenses. Selling,
general and administrative expenses increased to $11.3 million for the three
months ended November 30, 1999 from $7.2 million for the three months ended
November 30, 1998. Warehouse operating expenses increased for the three months
ended November 30, 1999 primarily due to the new warehouses opened. Corporate
administrative expenses have increased to support the Company's planned
expansion of opening six to ten additional warehouses throughout fiscal 2000,
two of which opened in the first quarter of fiscal 2000 and two of which opened
during the second quarter of fiscal 2000.
Preopening expenses, which represent expenses incurred before a store is
opened, increased to $2.4 million for the three months ended November 30, 1999
from $185,000 for the three months ended November 30, 1998. The increase in
pre-opening expenses is a result of the Company's planned expansion of
warehouses throughout Latin America.
Interest income, net, reflects earnings on marketable securities, cash and
cash equivalent balances, city notes receivable and certain secured notes
receivable from buyers of formerly owned properties and is reduced by interest
expense on bank borrowings at the Company's joint ventures. Interest income,
net, decreased to $790,000 for the three months ended November 30, 1999 from
$1.3 million for the three months ended November 30, 1998 primarily due to
decreased balances in cash and cash equivalents and marketable securities as a
result of the use of cash to finance the Company's expansion and increased
interest expense on bank borrowing during the first quarter of fiscal 2000.
Other income (expense), consists primarily of gain or losses on the sale of
marketable securities and the results from the Company's real estate operations.
For the three months ended November 30, 1999, other expense was $187,000 and
consists of a net loss on the sale of marketable securities of $123,000 and a
loss from the real estate operations of $64,000. For the three months ended
November 30, 1998, other income was $904,000, and consists of a net gain on the
sale of marketable securities of $611,000 and income from the real estate
operations of $293,000. The Company expects to wind down its remaining real
estate operations in fiscal 2000 as it sells its remaining properties held for
sale.
Minority interest relates to an allocation of the joint venture income
(losses) to the minority interest shareholders respective interest.
The provision for income taxes relates to foreign taxes on the Company's
respective share of profit of the Company's Panama joint venture. No deferred
tax benefit has been recognized on net operating losses. Because the realization
of such deferred tax assets is not certain, a full valuation allowance was
established.
Page 13
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary capital requirement is the financing of land
acquisition, construction and equipment costs for new warehouses plus the cost
of pre-opening and working capital requirements, through investments in foreign
joint ventures.
During fiscal 2000, management's current intention is to spend an aggregate
of approximately $91.0 million (primarily through its foreign joint ventures)
for expansion in Latin America and the Caribbean to open up to ten new
warehouses. However, actual capital expenditures for new warehouse locations and
operations may vary from estimated amounts depending on the number of new
warehouses opened, business conditions and other risks and uncertainties to
which the Company and its businesses are subject. The Company, primarily through
its foreign joint ventures, intends to borrow approximately $64.0 million during
fiscal 2000 to finance these expenditures which will be secured by the land,
building, equipment and inventories at the new warehouses.
In October 1999, the Company's Costa Rican subsidiary entered into a
five-year bank term loan with Citibank with a principal amount of
approximately $5.9 million. The loan requires the principal payment of twenty
quarterly installments of approximately $215,000, starting January 2000, and
the final payment of approximately $1.6 million in October 2004. In addition,
the loan requires monthly payments of interest at six-month LIBOR plus four
percentage points (10.1575% as of November 30, 1999).
In December 1999, the Company, through its joint venture arrangement in El
Salvador, entered into a loan agreement with Citibank, N.A. for $5.0 million.
The term of the loan is for five years and interest is calculated on the basis
of three month LIBOR rate per annum plus 4.0%. Interest payments are required to
be made on a monthly basis. Minimum principal payments of $218,750 are due
quarterly, with approximately $1.5 million due and payable at the end of the
loan term. The loan is collaterallized by the land, building, fixtures and
equipment of the El Salvador joint venture and guaranteed up to 60% by the
Company and up to 40% from the Company's joint venture partner, PSC, S.A. The
loan is also subject to certain financial and operating covenants.
In January 2000, the Company, through its joint venture arrangement in
Panama, entered into a debt agreement with The Chase Manhattan Bank for $11.3
million. Advances will be through a secured revolving credit facility through
November 20, 2000. Borrowings under the facility at November 20, 2000 will be
converted to a secured five year term loan. Interest on the debt agreement is
calculated on the basis of three month LIBOR rate plus 1.75%. Payments shall be
made on a monthly basis, interest only while a revolving credit facility and
interest plus principal payments of $188,333 during the term of the loan. The
loan is collaterallized by the land and building of the underlying warehouses
and guaranteed up to 51% by the Company and up to 49% from the Company's joint
venture partner. The loan is also subject to certain financial and operating
covenants.
In January 2000, the Company, through its joint venture arrangement in the
Dominican Republic, entered into two separate line of credit facilities of $2.0
million each, both of which are due in six months. Interest on both credit
facilities is calculated on the basis of six month LIBOR plus 4.25% payable
monthly. The full amount was drawn on the facilities for general working
capital.
In January 2000, the Company entered into a one-year line of credit
agreement with Bank of America with an amount of $8.0 million. Interest is
payable monthly at Bank of America's Prime Rate. All principal is due on the
expiration date (December 31, 2000) of the line of credit. Corporate bonds and
money market mutual funds based on an 80% advance rate for corporate bonds and a
90% advance rate for money market mutual funds secure advances against the line
of credit.
In addition to the above borrowings, the Company is currently evaluating
several financing proposals and believes that the financing facilities for the
new warehouse locations will be completed as required. The balance of these
expenditures will be financed through a combination of cash, cash equivalents,
marketable
Page 14
securities, cash from operations of the Company's businesses, payments from the
city notes and other note receivables.
The Company believes that borrowings under its current credit facilities,
together with its other sources of liquidity described above, will be sufficient
to meet its working capital and capital expenditure requirements for the
foreseeable future. However, if such sources of liquidity are insufficient to
satisfy the Company's liquidity requirements, the Company may need to sell
equity or debt securities or obtain additional credit facilities. There can be
no assurance that such financing alternatives will be available under favorable
terms, if at all.
SEASONALITY
Historically, the Company's merchandising businesses have experienced
moderate holiday retail seasonality in their markets. In addition to seasonal
fluctuations, the Company's operating results fluctuate quarter-to-quarter as a
result of economic and political events in markets served by the Company, the
timing of holidays, weather, timing of shipments, product mix, and currency
effects on the cost of U.S.-sourced products which may make these products more
expensive in local currencies and less affordable. Because of such fluctuations,
the results of operations of any quarter are not indicative of the results that
may be achieved for a full fiscal year or any future quarter. In addition, there
can be no assurance that the Company's future results will be consistent with
past results or the projections of securities analysts.
IMPACT OF YEAR 2000
The year 2000 issue results from computer programs and hardware being
written with two digits rather than four digits to define the applicable year.
As a result, there is a risk that date sensitive software may recognize a date
using "00" as the year 1900, rather than the year 2000. This potentially could
result in system failure or miscalculations causing disruptions of operations,
including a temporary inability to process transactions or engage in normal
business activities.
The Company has experienced no year 2000 adverse effects on its internal
systems or any involved in its supply chain, including purchasing, distribution,
sales, and accounting. Also, no errors were found related to date processing
before or after January 1, 2000, including treatment of year 2000 as a leap
year. The Company will continue to monitor its hardware, software, and imbedded
systems as they are added or modified.
Additionally, the Company has contacted significant vendors, suppliers,
financial institutions and other third party providers upon which its business
depends in an effort to determine such providers' year 2000 readiness. The
Company has evaluated the potential business impact of non-responsive or
non-compliant providers and endeavors to make contingency plans as needed. These
efforts have been designed to minimize the impact to the Company in the event
these providers have failed to remediate any year 2000 issues. The Company can
give no assurances that such providers or such contingency plans will be
successful in resolving all year 2000 issues, and the failure of such providers
to comply on a timely basis could have an adverse effect on the Company.
A significant part of the Company's business is derived from its activities
in Latin America and Asia. The Company's business could be adversely impacted in
the event business activities in Latin America and Asia are disrupted due to
year 2000 issues, with the extent of such impact dependent upon the extent of
such disruption, which may vary from country to country. The Company's business
could also be adversely impacted by supply chain disruption due to vendor and
supplier business interruption. To date there has been no year 2000 adverse
effects noted in the Company's foreign operations.
Page 15
Item 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company, through its joint ventures, conducts international operations
primarily in Latin America, and as such is subject to both economic and
political instabilities that cause volatility in foreign currency exchange.
During fiscal 1999, the Company opened warehouses in three foreign countries
through joint venture arrangements. Thus far in fiscal 2000 the Company has
opened warehouses in two additional foreign countries through joint venture
arrangements. For the three months ended November 30, 1999, approximately 67% of
the Company's net warehouse sales were in foreign currencies. The Company's
future expansion plans anticipate entry into additional foreign countries, which
may involve similar economic and political risks as well as challenges that are
different from those currently encountered by the Company. The Company believes
that because its present operations and expansion plans involve numerous
countries and currencies, its exposure from any one currency devaluation would
not significantly affect operating results. Nonetheless, there can be no
assurance that the Company will not experience a materially adverse effect on
the Company's financial condition as a result of the economic and political
risks of conducting an international merchandising business.
Translation adjustments from the Company's non-U.S. denominated joint
venture arrangements in Latin America totaled $212,000 for the three months
ended November 30, 1999 compared to none for the three months ended November 30,
1998. Translation adjustments from the Company's non-U.S. denominated joint
venture arrangements in Latin America totaled $245,000 for fiscal 1999.
Revenue generated in Asia through export sales to licensees declined
significantly as a result of economic instability in this region during fiscal
1999. Further declines in export sales are not expected due to the opening of
two new licensee warehouses in China during fiscal 1999.
Foreign currencies in most of the Latin American and Caribbean countries
have historically devalued against the U.S. dollar and are expected to continue
to devalue. Managing foreign exchange is critical for operating successfully in
these markets and the Company manages its risks through a combination of hedging
currencies through Non Deliverable Forward Exchange Contracts (NDF) and internal
hedging procedures. As of November 30, 1999, the Company had $3.2 million in
NDF's expiring at different dates through January 17, 2000. The cost associated
with these contracts through November 30, 1999 was not material. The Company
will continue to purchase NDF's where necessary to mitigate foreign exchange
losses, but due to the volatility and lack of derivative financial instruments
in the countries the Company operates, significant risk from unexpected
devaluation of local currencies exist. Foreign exchange transaction losses
realized during fiscal 1999 (including the cost of the NDF's) was approximately
$538,000 and $347,000 for the three months ended November 30, 1999.
Page 16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27.1 Financial Data Schedule
(b) No reports on Form 8-K were filed for the three months ended
November 30, 1999.
Page 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PriceSmart, Inc.
REGISTRANT
Date: January 12, 2000 /s/ Gilbert A. Partida
----------------------
Gilbert A. Partida
President and Chief Executive Officer
Date: January 12, 2000 /s/ Allan C. Youngberg
----------------------
Allan C. Youngberg
Executive Vice President,
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Page 18