10-Q 1 a10-q.txt 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended May 31, 2000 Or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________________to ________________ COMMISSION FILE NUMBER 0-22793 PRICESMART, INC. (Exact name of registrant as specified in its charter) Delaware 33-0628530 State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 4649 Morena Boulevard San Diego, California 92117 (Address of principal executive offices) (858) 581-4530 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No The registrant had 6,238,264 shares of its common stock, par value $.0001 per share, outstanding at July 7, 2000. Page 1 PRICESMART, INC. INDEX TO FORM 10-Q PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS Page ---- Condensed Consolidated Balance Sheets as of May 31, 2000 (Unaudited) and August 31, 1999 3 Condensed Consolidated Statements of Operations (Unaudited) for the three and nine months ended May 31, 2000 and 1999 4 Condensed Consolidated Statements of Cash Flows (Unaudited) for the nine months ended May 31, 2000 and 1999 5 Condensed Consolidated Statements of Stockholders' Equity (Unaudited) for the nine months ended May 31, 2000 6 PriceSmart, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 14 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 19 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS 20 ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 20 ITEM 3. DEFAULTS UPON SENIOR SECURITIES 20 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 20 ITEM 5. OTHER INFORMATION 20 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 20
Page 2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS PRICESMART, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
May 31, August 31, 2000 1999 ------------- -------------- ASSETS (Unaudited) CURRENT ASSETS: Cash and cash equivalents $ 28,253 $ 14,957 Marketable securities 5,453 17,627 Receivables, net of allowance for doubtful accounts 4,743 4,149 Merchandise inventories 46,861 25,919 Prepaid expenses and other current assets 2,305 2,681 City notes receivable, current portion -- 2,500 Property held for sale, net 1,652 2,126 ------------- -------------- Total current assets 89,267 69,959 OTHER ASSETS: Property and equipment, net 105,454 48,507 Goodwill, net 5,227 -- Restricted cash 7,500 10,195 Deposits on land purchases -- 2,112 City notes receivable, less current portion -- 17,006 Notes receivable and other 4,921 4,295 ------------- -------------- TOTAL ASSETS $ 212,369 $ 152,074 ============= ============== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 24,438 $ 24,679 Accrued expenses 5,561 1,760 Deferred membership income 3,251 1,998 Current portion of long-term debt 8,229 707 Other accrued expenses 2,134 3,369 ------------- -------------- Total current liabilities 43,613 32,513 Long-term debt 44,076 7,787 ------------- -------------- Total liabilities 87,689 40,300 ------------- -------------- Minority interest 16,107 17,913 Commitments and contingencies -- -- STOCKHOLDERS' EQUITY: Preferred stock, $.0001 par value, 2,000,000 shares authorized, none issued -- -- Common stock, $.0001 par value, 15,000,000 shares authorized, and 6,048,607 and 5,991,256 shares issued at May 31, 2000 and August 31, 1999, respectively 1 1 Additional paid-in capital 121,112 111,483 Notes receivable for common stock (998) (950) Deferred compensation (830) (1,282) Accumulated other comprehensive loss (242) (453) Accumulated deficit (1,723) (864) Less: Treasury stock at cost, 556,818 and 907,898 shares at May 31, 2000 and August 31, 1999, respectively (8,747) (14,074) ------------- -------------- Total stockholders' equity 108,573 93,861 ------------- -------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 212,369 $ 152,074 ============= ==============
See accompanying notes. Page 3 PRICESMART, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED - AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended Nine Months Ended May 31, May 31, --------------------------------- ------------------------------- 2000 1999 2000 1999 --------------- --------------- --------------- --------------- Revenues: Sales: Net warehouse $ 72,604 $ 21,423 $ 198,545 $ 55,085 Export -- 1,385 421 5,713 Membership fees and royalties 2,010 770 5,786 1,628 Travel and auto programs -- 2,231 3,964 9,173 --------------- --------------- --------------- --------------- Total revenues 74,614 25,809 208,716 71,599 --------------- --------------- --------------- --------------- Expenses: Cost of goods sold: Net warehouse 63,484 18,843 173,654 48,183 Export -- 1,340 405 5,534 Selling, general and administrative: Warehouse operations 8,629 2,301 22,771 5,921 General and administrative 4,599 3,827 13,063 10,899 Travel and auto -- 1,368 1,520 6,030 Preopening expenses 1,679 1,512 4,969 2,224 --------------- --------------- --------------- --------------- Total expenses 78,391 29,191 216,382 78,791 --------------- --------------- --------------- --------------- Operating loss (3,777) (3,382) (7,666) (7,192) --------------- --------------- --------------- --------------- Other: Interest income 768 931 2,699 3,444 Interest expense (842) -- (1,650) -- Other income (expense) 77 (153) (79) 242 Gain on sale: Travel and auto programs 1,133 798 1,133 798 City notes 3,948 -- 3,948 -- Real estate properties -- 122 -- 1,258 Minority interest 394 312 843 219 --------------- --------------- --------------- --------------- Total other 5,478 2,010 6,894 5,961 --------------- --------------- --------------- --------------- Income (loss) before provision for income taxes 1,701 (1,372) (772) (1,231) Provision for income taxes -- 42 87 134 --------------- --------------- --------------- --------------- Net income (loss) $ 1,701 $ (1,414) $ (859) $ (1,365) =============== =============== =============== =============== Earnings (loss) per share: Basic $ 0.32 $ (0.28) $ (0.17) $ (0.27) =============== =============== =============== =============== Diluted $ 0.28 $ (0.28) $ (0.17) $ (0.27) =============== =============== =============== =============== Shares used in per share computation: Basic 5,392 5,044 5,196 5,137 --------------- --------------- --------------- --------------- Diluted 5,987 5,044 5,196 5,137 --------------- --------------- --------------- ---------------
See accompanying notes. Page 4 PRICESMART, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED - AMOUNTS IN THOUSANDS)
Nine Months Ended May 31, ------------------------------ 2000 1999 ------------- ------------- OPERATING ACTIVITIES: Net loss $ (859) $ (1,365) Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation 2,411 1,080 Allowance for doubtful accounts (187) 17 Income tax 87 134 Amortization of goodwill 44 -- Minority interest (841) (219) Compensation expense recognized for stock options 452 1,085 Change in operating assets and liabilities Restricted cash 2,695 (6,824) Inventories (20,942) (4,328) Accounts receivable and other assets 3 966 Accounts payable and other liabilities 3,491 10,178 ------------- ------------- Net cash flows provided by (used in) operating activities (13,646) 724 INVESTING ACTIVITIES: Purchases of marketable securities -- (39,672) Sale of marketable securities 12,174 70,340 Additions to property and equipment (55,601) (18,839) Payments of notes receivable 18,880 1,203 Acquisition of minority interest (12,500) -- Other 106 -- ------------- ------------- Net cash flows provided by (used in) investing activities (36,941) 13,032 FINANCING ACTIVITIES: Proceeds from property held for sale 440 1,532 Net proceeds from bank borrowings 43,811 255 Contributions by minority interest shareholders 4,619 10,311 Proceeds from exercise of stock options 2,456 547 Notes receivable for stock, net (48) -- Issuance of stock in acquisition of minority interest 12,500 Issuance of common stock -- 97 Purchase of treasury stock -- (6,605) ------------- ------------- Net cash flows provided by (used in) financing activities 63,778 6,137 Effect of exchange rate changes on cash and cash equivalents 105 (61) ------------- ------------- Net increase in cash and cash equivalents 13,296 19,832 Cash and equivalents at beginning of period 14,957 5,639 ------------- ------------- Cash and equivalents at end of period $ 28,253 $ 25,471 ============= ============= Supplemental disclosure of cash flow information Cash paid during the period for: Interest expense, net of amounts capitalized $ 842 $ 91 Income taxes $ 111 $ 134
See accompanying notes. Page 5 PRICESMART, INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE NINE MONTHS ENDED MAY 31, 2000 (UNAUDITED - AMOUNTS IN THOUSANDS)
Other Additional Notes Comprehensive Common stock Paid-in Receivable for Deferred Income Shares Amount Capital Stock Compensation (Loss) --------------------------------------------------------------------------------------- Balance at August 31, 1999 5,991 $1 $111,483 $(950) $(1,282) $(453) Exercise of stock options 58 1,884 Issuance of stock for acquisition of Panama minority interest 7,745 Amortization of deferred compensation 452 Notes receivable for stock, net (48) Net loss Unrealized gain / loss on marketable securities 106 Translation adjustment 105 Comprehensive loss --------------------------------------------------------------------------------------- Balance at May 31, 2000 6,049 $1 $121,112 $(998) $ (830) $(242) =======================================================================================
Less: Retained Treasury stock Total Earnings at Cost Stockholders' (Deficit) Shares Amount Equity ------------------------------------------------------- Balance at August 31, 1999 $ (864) 908 $(14,074) $ 93,861 Exercise of stock options (44) 572 2,456 Issuance of stock for acquisition of Panama minority interest (307) 4,755 12,500 Amortization of deferred compensation 452 Notes receivable for stock, net (48) Net loss (859) (859) Unrealized gain / loss on marketable securities 106 Translation adjustment 105 -------- Comprehensive loss (648) ------------------------------------------------------- Balance at May 31, 2000 $(1,723) 557 $ (8,747) $108,573 =======================================================
See accompanying notes. Page 6 PRICESMART, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 1 - COMPANY OVERVIEW AND BASIS OF PRESENTATION COMPANY OVERVIEW: PriceSmart, Inc.'s ("PriceSmart" or the "Company") business consists of international membership shopping stores similar to, but smaller in size than, warehouse clubs in the United States. As of May 31, 2000, the Company had twelve warehouse stores in operation (three in Panama, two each in the Dominican Republic, Costa Rica, El Salvador, Honduras, and one in Guatemala) of which the Company owns at least a majority interest. The Company has owned a 100% interest in the operations in Panama since March 27, 2000. Also, there were six warehouse stores in operation (five in China and one in Saipan) licensed to and operated by local business people. Additionally, until March 1, 2000, the Company operated a domestic travel business (see Note 9). BASIS OF PRESENTATION: The condensed consolidated financial statements include the assets, liabilities and results of operations of the Company and its majority owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Certain amounts in the prior period condensed consolidated financial statements have been reclassified to conform to current period presentation.
Ownership Basis of Presentation ------------- --------------------- Ventures Services, Inc. 100% Consolidated PriceSmart Panama (see Note 10) 100% Consolidated PriceSmart Guatemala 66% Consolidated PriceSmart Trinidad 65% Consolidated PSMT Caribe: Costa Rica 60% Consolidated Dominican Republic 60% Consolidated El Salvador 60% Consolidated Honduras 60% Consolidated
The condensed consolidated interim financial statements of the Company included herein have been prepared by the Company without audit, pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") and reflect all adjustments that are, in the opinion of management, necessary to fairly present the financial position, results of operations, and cash flows for the interim period presented. Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such SEC rules and regulations. Management believes that the disclosures made are adequate to make the information presented not misleading. The results for interim periods are not necessarily indicative of the results for the full year. The interim financial statements should be read in conjunction with the financial statements and notes thereto contained in the Company's audited consolidated financial statements for the year ended August 31, 1999 filed on Form 10-K. NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES FISCAL YEAR: The Company's fiscal year ends August 31. The Company's fiscal quarter ends are November 30, February 28 or in leap year February 29 and May 31. Page 7 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 10-20 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. BUSINESS COMBINATIONS: For business combinations accounted for under the purchase method of accounting, the Company includes the results of operations of the acquired business from the date of acquisition. Net assets of the acquired business are recorded at their fair value at the date of acquisition. The excess of the purchase price over the fair value of tangible net assets acquired is included in goodwill in the accompanying condensed consolidated balance sheets, and is being amortized over a 20 year period. ACCOUNTING PRONOUNCEMENTS: In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities." The new Statement requires all derivatives to be recorded on the balance sheet at fair value and establishes accounting treatment for three types of hedges: hedges of changes in the fair value of assets, liabilities, or firm commitments; hedges of the variable cash flows of forecasted transactions; and hedges of foreign currency exposures of net investments in foreign operations. The Company is analyzing the implementation requirements and currently is in the process of determining the impact, if any, on the results of operations or financial position after the adoption of Statement No. 133. In March 2000, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 44 ("FIN 44"), Accounting of Certain Transactions involving Stock Compensation an interpretation of APB Opinion No. 25 ("APB 25"). FIN 44 clarifies the application of APB 25 for (a) the definition of employee for purposes of applying APB 25, (b) the criteria for determining whether a plan qualifies as a noncompensatory plan, (c) the accounting consequence of various modifications to the terms of a previously fixed stock option or award, and (d) the accounting for an exchange of stock compensation awards in a business combination. FIN 44 is effective July 1, 2000, but certain conclusions cover specific events that occur after either December 15, 1998, or January 12, 2000. Management believes that the impact of FIN 44 will not have a material effect on the financial position or results of operations of the Company. Page 8 NOTE 3 - PROPERTY AND EQUIPMENT Property and equipment consist of the following (in thousands):
May 31, August 31, 2000 1999 --------------- --------------- PROPERTY AND EQUIPMENT: Land $ 27,833 $ 8,709 Building and improvements 32,169 20,413 Fixtures and equipment 29,994 16,724 Construction in progress 22,332 7,124 --------------- -------------- 112,328 52,970 Less: accumulated depreciation (6,874) (4,463) --------------- -------------- Property and equipment, net $ 105,454 $ 48,507 =============== ==============
NOTE 4 - EARNINGS (LOSS) PER SHARE Basic earnings (loss) per share is computed based on the weighted average shares outstanding in the period. Diluted earnings (loss) per share includes the effect of dilutive securities (options) except where their inclusion is antidilutive. Computation of Net Income (Loss) Per Common Share (Basic and Diluted) (Unaudited - amounts in thousands, except per share data)
Three Months Ended Nine Months Ended May 31, May 31, ------------------------------ ----------------------------- 2000 1999 2000 1999 -------------- ------------ ------------ ------------ Net income (loss) used for basic and diluted computation $ 1,701 $ (1,414) $ (859) $ (1,365) ============== ============ ============ ============ Weighted average number of Common shares outstanding 5,392 5,044 5,196 5,137 Add: Assumed exercise of those options that are common stock equivalents 595 -- -- -- -------------- ------------ ------------ ------------ Adjusted shares outstanding used for diluted computation 5,987 5,044 5,196 5,137 ============== ============ ============ ============ Earnings (loss) per share: Basic $ 0.32 $ (0.28) $ (0.17) $ (0.27) ============== ============ ============ ============ Diluted $ 0.28 $ (0.28) $ (0.17) $ (0.27) ============== ============ ============ ============
All of the assumed exercises of company stock options into common shares are excluded from diluted loss per share since their effect is antidilutive. Page 9 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):
Three Months Ended Nine Months Ended May 31, May 31, ------------------------------ ----------------------------- 2000 1999 2000 1999 -------------- ------------ ------------ ------------ Net income (loss) $ 1,701 $ (1,414) $ (859) $ (1,365) Unrealized gain / loss on marketable securities 3 60 106 558 Foreign currency translation adjustments 64 (60) 105 (60) -------------- ------------ ------------ ------------ Comprehensive income (loss) $ 1,768 $ (1,414) $ (648) $ 867 ============== ============ ============ ============
NOTE 6 - LOAN AGREEMENTS In May 1999, the Company, through its joint venture arrangement in Costa Rica, entered into a loan agreement with Banco Bilbao Vizcaya, S.A. for $3.8 million. The term of the loan is for three years and requires quarterly interest payments at 14%. The loan matures on May 31, 2002, at which time the principal amount is due. The loan is secured by a collateral deposit of $3.8 million contributed by the Company and its joint venture arrangement in Costa Rica, which earns interest of 13.75% per annum. In October 1999, the Company, through its joint venture arrangement in Costa Rica, entered into a loan agreement with CitiBank, N.A. for $5.9 million. The term of the loan is for five years and interest is calculated on the basis of six-month LIBOR rate plus 4.0% (10.16% at May 31, 2000). Minimum principal payments of approximately $215,000 are due quarterly, with the remaining balance of approximately $1.6 million due at the end of the loan. The loan is collateralized by certain land, building, fixtures and equipment of the Costa Rica joint venture and guaranteed up to 60% by the Company and up to 40% from the Company's joint venture partner. The loan is also subject to certain financial and operating covenants. In December 1999, the Company, through its joint venture arrangement in El Salvador, entered into a loan agreement with CitiBank, N.A. for $5.0 million. The term of the loan is for five years and interest is calculated on the basis of three-month LIBOR rate per annum plus 4.0% (10.11% at May 31, 2000). Interest payments are required to be made on a monthly basis. Minimum principal payments of $218,750 are due quarterly, with approximately $1.5 million due at the end of the loan term. The loan is collateralized by certain land, building, fixtures and equipment of the El Salvador joint venture and guaranteed up to 60% by the Company and up to 40% from the Company's joint venture partner. The loan is also subject to certain financial and operating covenants. In December 1999, the Company, through its subsidiary in Panama, entered into a debt agreement with The Chase Manhattan Bank for $11.3 million. Advances will be through a secured revolving credit facility through November 20, 2000. Outstanding borrowings under the facility at November 20, 2000 will be converted to a secured five-year term loan. Interest on the debt agreement is calculated on the basis of three-month LIBOR rate plus 1.75% (7.86% at May 31, 2000). Payments are made on a monthly basis, interest only while a revolving credit facility and interest plus principal payments of $188,333 after the loan is converted to a term loan. The loan is collateralized by certain land and building of the underlying warehouses and guaranteed by the Company. As of May 31, 2000, the Company had borrowings of $7.5 million under the revolving credit facility. The loan is also subject to certain financial and operating covenants. Page 10 In January 2000, the Company established an $8.0 million revolving line of credit with Bank of America, N.A. providing for cash advances and for up to $1 million of letters of credit. The term of the revolving line of credit expires in December 2000 and interest is calculated on the basis of Bank of America, N.A.'s prime rate, or LIBOR plus one percentage point. The revolving line of credit is secured by marketable securities of the Company. As of May 31, 2000, the Company has full availability under the revolving line of credit and no draws on the line have been made to date. In January 2000, the Company, through its joint venture arrangement in the Dominican Republic, entered into two separate line of credit facilities of $2.0 million each, both of which are due in six months. Interest on both credit facilities is calculated on the basis of six-month LIBOR plus 4.25% (10.41% at May 31, 2000) and is payable monthly. As of May 31, 2000, the full amount was drawn on the facilities for general working capital. In February 2000, the Company, through its joint venture arrangement in Costa Rica, entered into a loan agreement with the Commercial International Bank & Trust Co. Ltd. for $3.9 million. As of May 31, 2000, the Company has borrowed $2.8 million under the loan agreement. The remaining amount was drawn in June following the opening of the Heredia, Costa Rica store. The term of the loan is for five years and interest is calculated on the basis of the prime rate per annum plus 2.0% (10.75% at May 31, 2000). Interest payments are required to be made on a monthly basis. Minimum principal payments of $139,286 are due quarterly, with approximately $1.1 million due at the end of the loan term. The loan is collateralized by certain land, building, fixtures and equipment of the Costa Rica joint venture and guaranteed up to 60% by the Company and up to 40% from the Company's joint venture partner. The loan is also subject to certain financial and operating covenants. In February 2000, the Company, through its joint venture arrangement in the Dominican Republic, entered into a loan agreement with Banco Nacional de Credito, S.A. for $4.2 million. The term of the loan is for five years and interest is calculated on the basis of six-month LIBOR rate per annum plus 5.645% (11.8% at May 31, 2000). Interest payments are required to be made on a monthly basis. Minimum principal payments of $207,650 are due quarterly. The loan is collateralized by certain land, building, fixtures and equipment of the Dominican Republic joint venture and guaranteed up to 60% by the Company and up to 40% from the Company's joint venture partner. The loan is also subject to certain financial and operating covenants. In February 2000, the Company, through its joint venture arrangement in Honduras, entered into a loan agreement with CitiBank, N.A. for $3.5 million (proceeds from the loan were received subsequent to May 31, 2000). The term of the loan is for five years and interest is calculated on the basis of three-month LIBOR rate per annum plus 5.125% (11.24% at May 31, 2000). Interest payments are required to be made on a monthly basis. Minimum principal payments of $140,000 are due quarterly, with approximately $800,000 due at the end of the loan term. The loan is collateralized by certain land, building, fixtures and equipment of the Honduras joint venture and guaranteed up to 60% by the Company and up to 40% from the Company's joint venture partner. The loan is also subject to certain financial and operating covenants. In March 2000, the Company, through its joint venture arrangements in the Dominican Republic, entered into a 180-day bridge loan, which converts to a five-year term loan, with Banco Dominicano del Progreso, S.A. for $7.0 million. Interest on the bridge loan is 11.5% and three month LIBOR plus 4.5% on the term loan. Interest payments are required to be made on a monthly basis. Minimum principal payments of $350,000 are due quarterly. The loan is collateralized by certain land, building, fixtures and equipment of the Dominican Republic joint venture and guaranteed up to 60% by the Company and up to 40% from the Company's joint venture partner. The loan is also subject to certain financial and operating covenants. In April 2000, the Company, through its joint venture arrangement in El Salvador, entered into a loan agreement with Banco Bilbao Vizcaya, S.A. for $3.8 million. The term of the loan is payable upon demand and requires quarterly interest payments at 11.5%. The loan is secured by a collateral deposit of $3.8 million contributed by the Company and its joint venture arrangement in El Salvador, which earns interest of 11.25% per annum. Page 11 In April 2000, the Company, through its joint venture arrangements in Guatemala, entered into a 180-day bridge loan, with Banco Uno, N.A., for $2.0 million. As of May 31, 2000, $1.1 million was drawn on the bridge loan. Interest on the bridge loan is 10.0%. Interest payments are required to be made on a monthly basis. In May 2000, the Company, through its joint venture arrangement in Costa Rica, entered into a loan agreement with the Banex for $5.9 million. As of May 31, 2000, the Company has borrowed the full amount under the loan agreement. The term of the loan is for five years and interest is calculated on the basis of basis of six-month LIBOR rate per annum plus 5.645% (11.8% at May 31, 2000). Interest payments are required to be made on a monthly basis. Minimum principal payments of approximately $295,000 are due quarterly beginning in May 2001. The loan is collateralized by certain land, building, fixtures and equipment of the Costa Rica joint venture and guaranteed up to 60% by the Company and up to 40% from the Company's joint venture partner. The loan is also subject to certain financial and operating covenants. All loans will be, or are fully guaranteed by the Company subsequent to any minority interest purchases (see Note 10 and Note 11). NOTE 7 - COMMITMENTS AND CONTINGENCIES From time to time, the Company is subject to legal proceedings and claims in the ordinary course of business. The Company currently is not aware of any such legal proceedings or claims that it believes will have, individually or in the aggregate, a material adverse effect on its business, financial condition or operating results. NOTE 8 - CITY NOTE SALE On April 5, 2000, the Company entered into an agreement to sell ten notes receivable from various municipalities and agencies, known as the "City Notes" (see "Note 5 - City Notes Receivable" in the notes to the Company's audited consolidated financial statements for the year ended August 31, 1999 filed on Form 10-K), to the Price Family Charitable Trust ("Trust"), a California Trust. Sol Price (a principal stockholder of PriceSmart, Inc.) and Robert Price (a principal stockholder and Chairman of the Board of PriceSmart, Inc.) are trustee and successor trustee, respectively, of the Trust. The Company recognized a gain of approximately $3.9 million arising from this transaction. The aggregate purchase price to be paid by the Trust for the City Notes is $22.5 million. Through May 31, 2000, the Company has sold eight of the City Notes to the Trust for $18.3 million, with the remaining amount of $4.2 million reflected in accounts receivable at the end of the quarter. Subsequent to the quarter, the Company received consents to assignment for the two remaining notes from the respective municipalities/agencies that issued the original notes, and sold the remaining two notes to the Trust. NOTE 9 - SALE OF TRAVEL BUSINESS On March 1, 2000, the Company sold its travel business for $1.5 million to Club-4U Inc. under an asset purchase agreement ("purchase agreement"). Club-4U Inc., a California corporation, is owned by Sol Price who is a principal stockholder of the Company. Under the purchase agreement, Club-4U Inc. acquired the assets primarily used in connection with the travel businesses, subject to liabilities under the travel business existing contracts, resulting in a gain of approximately $1.1 million. NOTE 10 - ACQUISITION OF PANAMA MINORITY INTEREST In March 2000, the Company entered into an agreement to acquire sole ownership of the PriceSmart Panama business, which previously had been 51% owned by the Company and 49% owned by BB&M International Trading Group ("BB&M"), whose principals are several Panamanian businessmen, including Rafael Barcenas, a Director of PriceSmart. In return for BB&M's 49% interest, PriceSmart agreed to convey to BB&M's principals 306,748 shares of PriceSmart common stock (which is restricted from being sold for one year). In accordance with APB Opinion No. 16, "Business Combinations", all identifiable assets were assigned a portion of the their respective fair values at the date of acquisition. The excess of the purchase price over the fair value of net assets acquired is included in goodwill, net of amortization, in the accompanying condensed Page 12 consolidated balance sheets and is being amortized over a period of 20 years. Results from the Panama operations have been included, based on sole ownership, in the financial results of the Company from the closing date of the transaction, which occurred on March 27, 2000. As a result of this acquisition, PriceSmart, Inc. has increased its guarantee for the outstanding loans related to the Panama operations to 100% (see Note 6). NOTE 11 - SUBSEQUENT EVENTS ACQUISITION OF CARIBE MINORITY INTEREST: In July 2000, the Company acquired the remaining 40% interest in PSMT Caribe, Inc. PSMT Caribe is the offshore joint venture formed by PriceSmart and PSC, S.A. (a Panamanian company with shareholders representing five Central American and Caribbean countries) to hold their respective interests in the PriceSmart membership warehouse clubs operating in Costa Rica, El Salvador, Honduras and the Dominican Republic. In return for the 40% interest in PSMT Caribe, PriceSmart issued to PSC 679,500 shares of PriceSmart common stock, half of which is restricted from sale for one year. PSMT Caribe currently consists of membership-shopping warehouses operating in Costa Rica, El Salvador, Honduras and the Dominican Republic. The acquisition of all the stock held by PSC, which was completed on July 7, 2000, will be accounted for under the purchase method of accounting. As a result of this acquisition, PriceSmart, Inc. has increased its guarantee for the outstanding loans related to the warehouses operating in Costa Rica, El Salvador, Honduras and the Dominican Republic to 100% (see Note 6). ADDITIONAL LOANS: In June 2000, the Company, through its joint venture arrangement in Honduras, entered into a line of credit facility of $2.5 million, which is due in six months. Interest on the credit facility is calculated on the basis of 12.5% annually and is payable monthly. The full amount was drawn on the facilities for general working capital. In June 2000, the Company, through its joint venture arrangement in Trinidad, entered into a loan agreement with the Royal Merchant Bank and Finance Company Limited for $6.0 million, $3.0 million of which was drawn down on closing. The term of the loan is for five years and interest is calculated on the basis of LIBOR plus 4% rate per annum. Interest payments are required to be made on a monthly basis. Minimum principal payments of $300,000 are due quarterly. The loan is collateralized by certain land, building, fixtures and equipment of the Trinidad joint venture and guaranteed by the Company up to its ownership percentage. The loan is also subject to certain financial and operating covenants. Page 13 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Quarterly Report contains forward-looking statements concerning the Company's anticipated future revenues and earnings, adequacy of future cash flow and related matters. (These forward-looking statements include, but are not limited to, statements containing the words "expect", "believe", "will", "may", "should", "project", "estimate", and like expressions, and the negative thereof). These statements are subject to risks and uncertainties that could cause actual results to differ materially from the statements, including foreign exchange risks, political or economic instability of host countries, and competition, as well as the other risks described in the Company's SEC reports, including the Company's Form 10-K filed pursuant to the Securities and Exchange Act of 1934 on November 29, 1999. The following discussion and analysis compares the results of operations for each of the fiscal quarters ended May 31, 2000 and May 31, 1999, and should be read in conjunction with the condensed consolidated financial statements and the accompanying notes included within this report. In the first quarter of fiscal 2000, the Company opened two new US-style membership shopping warehouses in Latin America; one in Honduras (September 1999) and one in Panama (November 1999). In the second quarter of fiscal 2000, the Company opened two additional new US-style membership shopping warehouses in the Dominican Republic (both in December 1999). In the third quarter of fiscal 2000, the Company opened three additional US-style membership shopping warehouses, one in El Salvador (April 2000), one in Honduras (May 2000) and one in Costa Rica (May 2000), bringing the total number of warehouses in operation to twelve as of May 31, 2000, compared to two warehouses at the end of the same period last year. Also, there were six warehouse stores in operation (five in China and one in Saipan) licensed to and operated by local business people at the end of the third quarter of fiscal 2000, versus four licensed warehouse stores (three in China and one in Saipan, Micronesia) at the end of the third quarter of fiscal 1999. COMPARISON OF THE THREE MONTHS ENDED MAY 31, 2000 AND MAY 31, 1999 Net warehouse sales increased 239% to $72.6 million for the three months ended May 31, 2000 from $21.4 million for the three months ended May 31, 1999. The increase was a result of seven new warehouses opened in this fiscal year bringing the total number of warehouses in operation to 12 (three of which opened during the third quarter of fiscal 2000) compared with three in operation (one warehouse opened in the third quarter of fiscal 1999) at the end of the same period last year. The Company's warehouse gross margins for the three months ended May 31, 2000 increased to 12.6% from 12.0% for the three months ended May 31, 1999. With the opening of the Guatemala location in the third quarter of fiscal 1999, lower prices at the warehouse decreased overall margins in the prior year quarter in comparison to the current year. Warehouse margins for the quarter ended May 31, 2000 were comparable with year to date margin of 12.5%. There were no export sales to the Company's licensee warehouses in Asia during the three months ended May 31, 2000, compared to $1.4 million for the three months ended May 31, 1999, as no requests for purchases were received from the Company's licensees. The Company anticipates only minimal export sales in the future. Membership fees and royalties increased 160% to $2.0 million for the three months ended May 31, 2000 from $770,000 for the three months ended May 31, 1999. Membership fees (including other warehouse income) increased 203% to $1.8 million for the three months ended May 31, 2000 from $595,000 for the three months ended May 31, 1999. The increase quarter over quarter was primarily a result of the new warehouse openings and an increase in new memberships at existing warehouses. The travel business was sold on March 1, 2000 (See Note 9 - Sale of Travel Business in the notes to the Condensed Consolidated Financial Statements), and the auto referral business was sold in April 1999. Page 14 Warehouse operating expenses increased to $8.6 million, or 11.9% of net warehouse sales, for the three months ended May 31, 2000 from $2.3 million, or 10.7% of net warehouse sales, for the three months ended May 31, 1999. The increase in operating expenses is attributable to the increase in warehouse stores in operation currently versus the prior year quarter. Warehouse operating expenses as a percentage of net warehouse sales have increased and is attributable to the higher costs realized during the first year from the new warehouses in operation. General and administrative expenses have increased to $4.6 million, or 6.3% of net warehouse sales, for the three months ended May 31, 2000 from $3.8 million, or 17.9% of net warehouse sales, for the same three-month period a year ago. General and administrative expenses have increased between periods to support planned expansion efforts. As a percentage of sales, general and administrative expenses have declined with new warehouse openings and the resulting increase in net warehouse sales. Travel and auto selling, general and administrative expenses represent those expenses incurred by both the travel and auto businesses to operate their respective programs. The travel business was sold March 1, 2000 and the auto referral business was sold in April 1999, accounting for the change between the quarterly periods presented. Preopening expenses, which represent expenses incurred before a warehouse store is opened, increased to $1.7 million for the three months ended May 31, 2000 from $1.5 million for the three months ended May 31, 1999. The increase in preopening expenses is a result of the Company's expansion. Interest income reflects earnings on marketable securities, cash and cash equivalent balances, city notes receivable and certain secured notes receivable from buyers of formerly owned properties. Interest income decreased to $768,000 for the three months ended May 31, 2000 from $931,000 for the three months ended May 31, 1999 primarily due to decreased balances in these interest bearing accounts as a result of the use of cash to finance the Company's expansion. Interest expense reflects borrowings by the Company's foreign subsidiaries for the new warehouses, and was $842,000 (net of capitalized interest of $285,000) for the three months ended May 31, 2000. In the prior year's quarter, the Company had no borrowings. Minority interest relates to an allocation of the joint venture income (losses) to the minority interest shareholders respective interest. On March 1, 2000, the Company sold its travel business for $1.5 million to Club-4U Inc. under an asset purchase agreement ("purchase agreement"). Club-4U Inc., a California corporation, is owned by Sol Price who is a principal stockholder of the Company. Under the purchase agreement, Club-4U Inc. acquired the assets primarily used in connection with the travel businesses, subject to liabilities under the travel business existing contracts, resulting in a gain of approximately $1.1 million recognized in the third quarter of fiscal 2000. On April 5, 2000, the Company entered into an agreement to sell ten notes receivable from various municipalities and agencies, known as the "City Notes" (see "Note 5 - City Notes Receivable" in the notes to the Company's audited consolidated financial statements for the year ended August 31, 1999 filed on Form 10-K), to the Price Family Charitable Trust, a California Trust. Sol Price (a principal stockholder of PriceSmart, Inc.) and Robert Price (a principal stockholder and Chairman of the Board of PriceSmart, Inc.) are trustee and successor trustee, respectively, of the Trust. The aggregate purchase price for the City Notes is $22.5 million that resulted in a gain of $3.9 million arising from this transaction recognized in the third quarter of fiscal 2000. Page 15 The Company's auto referral program was sold effective April 1, 1999 with a resulting realized gain of approximately $798,000 recognized in the third quarter of fiscal 1999. Also during the third quarter of fiscal 1999, the Company sold certain real estate properties resulting in a gain of $122,000. The provision for income taxes relates to taxes on foreign operations. No deferred tax benefit has been recognized on net operating losses and start up costs for PriceSmart, Inc. or any of its subsidiaries. Because the realization of such deferred tax assets is not certain, a full valuation allowance was established. As a result, net operating losses during the preopening periods of the foreign operations were utilized to offset income tax on the net income for the current quarter. COMPARISON OF THE NINE MONTHS ENDED MAY 31, 2000 AND MAY 31, 1999 Net warehouse sales increased 260% to $198.5 million for the nine months ended May 31, 2000 from $55.1 million for the nine months ended May 31, 1999. The increase was a result of seven new warehouses opened in this fiscal year, bringing the total number of warehouses in operation to 12 compared to three in operation at May 31, 1999. The Company's warehouse gross margins were 12.5% for the nine months ended May 31, 2000 and 1999. Despite having opened seven new warehouses in the first nine months of fiscal 2000, which usually results in lower margins at new warehouses during initial entry into a market offset against higher margins attained in ancillary businesses (including the company's Ventajas magazine, rental income, food service, baking and photo centers) as a result of increased sales and revenues from these services. Export sales to the Company's licensee warehouses in Asia decreased to $421,000 for the nine months ended May 31, 2000 from $5.7 million for the nine months ended May 31, 1999, as minimal purchases were received from the Company's licensees. The Company anticipates only minimal export sales in the future. Membership fees and royalties increased 263% to $5.8 million for the nine months ended May 31, 2000 from $1.6 million for the nine months ended May 31, 1999. Membership fees (including other warehouse income) increased 472% to $4.5 million for the nine months ended May 31, 2000 from $787,000 for the nine months ended May 31, 1999. The increase between periods is a result of the new warehouse openings and an increase in new memberships at existing warehouses in addition to lower membership income recognized in the first three quarters of last year as the Company transitioned from the cash method to deferred method in accounting for membership income. Travel and auto program revenues were $4.0 million for the nine months ended May 31, 2000 compared to $9.2 million for the nine months ended May 31, 1999. For the nine months ended May 31, 2000, travel revenue was $4.0 million compared to $4.6 million for the same period last year. The travel business was sold on March 1, 2000 (see Note 9 - Sale of Travel Business in the notes to the Condensed Consolidated Financial Statements), and the auto referral business was sold in April 1999. Warehouse operating expenses increased to $22.8 million, or 11.5% of net warehouse sales, for the nine months ended May 31, 2000 from $5.9 million, or 10.7% of net warehouse sales, for the nine months ended May 31, 1999. The increase in operating expenses is attributable to the increase in warehouse stores in operation currently compared to the same period last year. Warehouse operating expenses as a percentage of net warehouse sales have increased and is attributable to the higher costs realized during the first year from the new warehouses in operation. General and administrative expenses have increased to $13.1 million, or 6.6% of net warehouse sales, for the nine months ended May 31, 2000 from $10.9 million, or 19.8% of net warehouse sales, for the same nine-month period a year ago. General and administrative expenses have increased between periods to support planned expansion efforts and one time process improvements in building the infrastructure to support the rapid growth. As a percentage of sales, general and administrative expenses have declined due to higher sales from added warehouse openings. Travel and auto selling, general and administrative expenses represent those expenses incurred by both the travel and auto businesses to operate their respective programs. The travel business was sold March 1, 2000 and the auto referral business was sold in April 1999, accounting for the change between the quarterly periods presented. Page 16 Preopening expenses, which represent expenses incurred before a warehouse store is opened, increased to $5.0 million for the nine months ended May 31, 2000 from $2.2 million for the nine months ended May 31, 1999. The increase in preopening expenses is a result of the Company's expansion. Interest income reflects earnings on marketable securities, cash and cash equivalent balances, city notes receivable and certain secured notes receivable from buyers of formerly owned properties. Interest income decreased to $2.7 million for the nine months ended May 31, 2000 from $3.4 million for the nine months ended May 31, 1999 primarily due to decreased balances in these interest bearing accounts as a result of the use of cash to finance the Company's expansion. Interest expense reflects borrowings by the Company's foreign subsidiaries for the new warehouses, and was $1.7 million (net of capitalized interest of $285,000) for the nine months ended May 31, 2000. At the end of the same period one year ago, the Company had no borrowings. Minority interest relates to an allocation of the joint venture income (losses) to the minority interest shareholders respective interest. On March 1, 2000, the Company sold its travel business for $1.5 million to Club-4U Inc. under an asset purchase agreement ("purchase agreement"). Club-4U Inc., a California corporation, is owned by Sol Price who is a principal stockholder of the Company. Under the purchase agreement, Club-4U Inc. acquired the assets primarily used in connection with the travel businesses, subject to liabilities under the travel business existing contracts, resulting in a gain of approximately $1.1 million recognized in the third quarter of fiscal 2000. On April 5, 2000, the Company entered into an agreement to sell ten notes receivable from various municipalities and agencies, known as the "City Notes" (see "Note 5 - City Notes Receivable" in the notes to the Company's audited consolidated financial statements for the year ended August 31, 1999 filed on Form 10-K), to the Price Family Charitable Trust, a California Trust. Sol Price (a principal stockholder of PriceSmart, Inc.) and Robert Price (a principal stockholder and Chairman of the Board of PriceSmart, Inc.) are trustee and successor trustee, respectively, of the Trust. The aggregate purchase price for the City Notes is $22.5 million that resulted in a gain of $3.9 million arising from this transaction recognized in the third quarter of fiscal 2000. The Company's auto referral program was sold effective April 1, 1999 with a resulting realized gain of approximately $798,000 recognized in fiscal 1999 through May 31, 1999. Also during fiscal 1999, the Company sold certain real estate properties resulting in a gain of approximately $1.3 million through May 31, 1999. The provision for income taxes relates to taxes on foreign operations. No deferred tax benefit has been recognized on net operating losses and start up costs. Because the realization of such deferred tax assets is not certain, a full valuation allowance was established. LIQUIDITY AND CAPITAL RESOURCES The Company's primary capital requirement is the financing of land acquisition, construction and equipment costs for new international warehouses plus the cost of pre-opening and working capital requirements. Management plans to spend an aggregate of approximately $80 million during fiscal 2000, for expansion in Latin America and the Caribbean to open eleven new stores in fiscal 2000. However, actual capital expenditures for new warehouse locations and operations may vary from estimated amounts depending on the number of new warehouses opened, business conditions and other risks and uncertainties to which the Company and its businesses are subject. Page 17 As of May 31, 2000, the Company had entered into financing arrangements (commencing in fiscal 1999) totaling approximately $68.2 million ($42.9 million in term loans and $25.3 million in bridge loans and lines of credit). As of May 31, 2000, the Company had remaining availability under its financing agreements of approximately $13.8 million, which will be drawn upon for building construction and general working capital requirements as necessary. Subsequent to May 31, 2000, the Company, through its joint venture arrangement in Honduras, entered into a line of credit facility of $2.5 million, which is due in six months. Interest on the credit facility is calculated on the basis of 12.5% annually and is payable monthly. The full amount was drawn on the facilities for general working capital. Subsequent to May 31, 2000, the Company, through its joint venture arrangement in Trinidad, entered into a loan agreement with Royal Bank for $6.0 million, $3.0 million of which was drawn down on closing. The term of the loan is for five years and interest is calculated on the basis of three-month LIBOR rate per annum. Interest payments are required to be made on a monthly basis. Minimum principal payments of $300,000 are due quarterly. The loan is collateralized by certain land, building, fixtures and equipment of the Trinidad joint venture and guaranteed by the Company up to its ownership percentage. The loan is also subject to certain financial and operating covenants. In addition to the above borrowings, the Company expects to obtain financing for several new warehouse locations opened subsequent to May 31, 2000 and through August 31, 2000. The Company believes that borrowings under its current credit facilities, together with its other sources of liquidity described above, will be sufficient to meet its working capital and capital expenditure requirements for the foreseeable future. However, if such sources of liquidity are insufficient to satisfy the Company's liquidity requirements, the Company may need to sell equity or debt securities or obtain additional credit facilities or reduce the number of anticipated warehouse openings. There can be no assurance that such financing alternatives will be available under favorable terms, if at all. SEASONALITY Historically, the Company's merchandising businesses have experienced moderate holiday retail seasonality in their markets. In addition to seasonal fluctuations, the Company's operating results fluctuate quarter-to-quarter as a result of economic and political events in markets served by the Company, the timing of holidays, weather, timing of shipments, product mix, and currency effects on the cost of U.S.-sourced products which may make these products more expensive in local currencies and less affordable. Because of such fluctuations, the results of operations of any quarter are not indicative of the results that may be achieved for a full fiscal year or any future quarter. In addition, there can be no assurance that the Company's future results will be consistent with past results or the projections of securities analysts. IMPACT OF YEAR 2000 The year 2000 issue results from computer programs and hardware being written with two digits rather than four digits to define the applicable year. As a result, there is a risk that date sensitive software may recognize a date using "00" as the year 1900, rather than the year 2000. This potentially could result in system failure or miscalculations causing disruptions of operations, including a temporary inability to process transactions or engage in normal business activities. The Company has experienced no year 2000 adverse effects on its internal systems or any involved in its supply chain, including purchasing, distribution, sales, and accounting. Also, no errors were found related to date processing before or after January 1, 2000, including treatment of year 2000 as a leap year. The Company will continue to monitor its hardware, software, and imbedded systems as they are added or modified. A significant part of the Company's business is derived from its activities in Latin America and Asia. The Company's business could be adversely impacted in the event business activities in Latin America and Asia are disrupted due to year 2000 issues, with the extent of such impact dependent upon the extent of such disruption, Page 18 which may vary from country to country. The Company's business could also be adversely impacted by supply chain disruption due to vendor and supplier business interruption. To date there has been no year 2000 adverse effects in the Company's foreign operations. Item 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company conducts international operations primarily in Latin America, and as such is subject to both economic and political instabilities that cause volatility in foreign currency exchange. During fiscal 1999, the Company opened warehouses in three foreign countries through joint venture arrangements. Thus far in fiscal 2000, the Company has opened warehouses in two additional foreign countries through joint venture arrangements. For the nine months ended May 31, 2000, approximately 73% of the Company's net warehouse sales were in foreign currencies. The Company's future expansion plans anticipate entry into additional foreign countries, which may involve similar economic and political risks as well as challenges that are different from those currently encountered by the Company. The Company believes that because its present operations and expansion plans involve numerous countries and currencies, its exposure from any one currency devaluation would not significantly affect operating results. Nonetheless, there can be no assurance that the Company will not experience a materially adverse effect on the Company's financial condition as a result of the economic and political risks of conducting an international merchandising business. Translation adjustments from the Company's non-U.S. denominated joint venture arrangements in Latin America totaled $136,000 for the nine months ended May 31, 2000 compared to $60,000 for the nine months ended May 31, 1999. Translation adjustments from the Company's non-U.S. denominated joint venture arrangements in Latin America totaled $245,000 for fiscal 1999. Foreign currencies in most of the Latin American and Caribbean countries have historically devalued against the U.S. dollar and most are expected to continue to devalue. Managing foreign exchange is critical for operating successfully in these markets and the Company manages its risks through a combination of hedging currencies through Non Deliverable Forward Exchange Contracts (NDF) and internal hedging procedures. As of May 31, 2000, the Company had no NDFs outstanding and the cost associated with these contracts through May 31, 2000 was not material. The Company will continue to purchase NDF's where necessary to mitigate foreign exchange losses, but due to the volatility and lack of derivative financial instruments in the countries the Company operates, significant risk from unexpected devaluation of local currencies exist. Foreign exchange transaction losses realized for the nine months ended May 31, 2000 (including the cost of the NDF's) was approximately $1.4 million and recognized in cost of goods sold. Page 19 PART II - OTHER INFORMATION Item 1. Legal Proceedings None Item 2. Changes in Securities and Use of Proceeds In April the Company issued 25,157 shares of the Company's common stock to Victor E. Mouttet Limited ("Mouttet") as consideration for its sale to us of all of its shares of PSMT Trinidad/Tobago Limited, a Republic of Trinidad and Tobago company. On March 27, 2000, the Company issued 306,748 shares of the Company's common stock to the principals of BB&M International Trading Group as consideration for BB&M's sale to us of all of its shares of our subsidiaries PriceCostco de Panama, S.A. and PB Real Estate, S.A. The issuance of the Company's common stock in connection with the transactions described above was effected pursuant to the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended (the "Securities Act"), taking into account the representations of Mouttet and the principals of BB&M that they were accredited investors and that they acquired the common stock of the Company for their own account and the absence of general solicitation or advertising. Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) List of documents filed as a part of this report: Exhibit Number Description --------- ----------------- 10.1 (a) City Note Purchase Agreement dated April 5, 2000, between the Price Family Charitable Trust and PriceSmart, Inc. 10.1 (b) Amendment to City Note City Note Purchase Agreement dated April 18, 2000, between the Price Family Charitable Trust and PriceSmart, Inc. 10.2 (a) Promissory Note with Banco Bilbao Vizcaya, S.A. and Inmobiliaria PriceSmart S.A. DE C.V. (El Salvador) dated April 26, 2000 for $3.750 million. 27.1 Financial Data Schedule. (b) Reports on Form 8-K filed for the nine months ended May 31, 2000: On June 19, 2000, the Company filed a Form 8-K under Item 5 announcing the Company has entered into a stock purchase agreement to acquire the 40% interest in PSMT Caribe, Inc. held by PSC, S.A. giving the Company sole ownership. Page 20 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PriceSmart, Inc. REGISTRANT Date: July 14, 2000 /s/ Gilbert A. Partida ------------------------------------- Gilbert A. Partida President and Chief Executive Officer Date: July 14, 2000 /s/ Allan C. Youngberg ------------------------------------- Allan C. Youngberg Executive Vice President, Chief Financial Officer Page 21