-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EZkR9IVt0DfcYGMa/SwPYVjeAcbTsO5XIHayhCiFo9JxGLgNQPpgYGRig+YMIbGf 71fK0cvm4HH8c9kXTfR/Hw== 0000912057-02-015062.txt : 20020416 0000912057-02-015062.hdr.sgml : 20020416 ACCESSION NUMBER: 0000912057-02-015062 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20020228 FILED AS OF DATE: 20020415 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PRICESMART INC CENTRAL INDEX KEY: 0001041803 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-VARIETY STORES [5331] IRS NUMBER: 330628530 STATE OF INCORPORATION: DE FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-22793 FILM NUMBER: 02610732 BUSINESS ADDRESS: STREET 1: 4649 MORENA BLVD CITY: SAN DIEGO STATE: CA ZIP: 92117 BUSINESS PHONE: 6195814530 MAIL ADDRESS: STREET 1: 4649 MORENA BLVD CITY: SAN DIEGO STATE: CA ZIP: 92117 10-Q 1 a2076221z10-q.htm FORM 10-Q
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended February 28, 2002

o	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 incorporation or organization)		(I.R.S. Employer 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. ý Yes o No

The registrant had 6,383,915 shares of its common stock, par value $.0001 per share, outstanding at April 5, 2002.

PRICESMART, INC.

INDEX TO FORM 10-Q

		Page
PART I—FINANCIAL INFORMATION
ITEM 1.	FINANCIAL STATEMENTS	3
	Condensed Consolidated Balance Sheets	15
	Condensed Consolidated Statements of Operations	16
	Condensed Consolidated Statements of Cash Flows	17
	Condensed Consolidated Statements of Shareholders' Equity	18
	Notes to Condensed Consolidated Financial Statements	19
ITEM 2.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	3
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	9
PART II—OTHER INFORMATION
ITEM 1.	LEGAL PROCEEDINGS	11
ITEM 2.	CHANGES IN SECURITIES AND USE OF PROCEEDS	11
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	11
ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	11
ITEM 5.	OTHER INFORMATION	12
ITEM 6.	EXHIBITS AND REPORTS ON FORM 8-K	13

PART I—FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PriceSmart, Inc.'s ("PriceSmart" or the "Company") unaudited condensed consolidated balance sheet as of February 28, 2002, the condensed consolidated balance sheet as of August 31, 2001, and the unaudited condensed consolidated statements of operations and cash flows for the three and six months ended February 28, 2002 and February 28, 2001 and statements of shareholders' equity for the six months ended February 28, 2002 are included elsewhere herein. Also included within are notes to the unaudited condensed consolidated financial statements.

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," "scheduled," and like expressions, and the negative thereof. These statements are subject to risks and uncertainties that could cause actual results to differ materially, including the following risks: the Company's financial performance is dependent on international operations, including the imposition of governmental controls and general political, economic and business conditions; any failure by the Company to manage its growth could adversely affect its business; the Company faces significant competition; the Company may encounter difficulties in the shipment of goods to its warehouses; the success of the Company's business requires effective assistance from local business people with whom the Company has established strategic relationships; the Company is exposed to weather and other risks associated with international operations; declines in the economies of the countries in which the Company operates its warehouse stores would harm its business; substantial control of the Company's voting stock by a few of the Company's shareholders may make it difficult to complete some corporate transactions without their support and may prevent a change in control; the loss of key personnel could harm the Company's business; and the Company is subject to volatility in foreign currency exchange; 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 Exchange Act on November 29, 2001 as amended January 10, 2002 and February 14, 2002.

The following discussion and analysis compares the results of operations for the three and six months ended February 28, 2002 (fiscal 2002) and February 28, 2001 (fiscal 2001), and should be read in conjunction with the condensed consolidated financial statements and the accompanying notes included within.

As of February 28, 2002, the Company had 24 warehouse stores in operation in ten countries and one U.S. territory (four in Panama, three each in Guatemala, Costa Rica and the Dominican Republic, two each in El Salvador, Honduras, Trinidad and the Philippines and one each in Aruba, Barbados and the U.S. Virgin Islands), of which the Company owns at least a majority interest. Subsequent to February 28, 2002, the Company opened two additional warehouses, one in Guam and one in the Philippines.

On January 15, 2002, the Company entered into a joint venture agreement with Grupo Gigante, S.A. de C.V. ("Gigante") to initially open four PriceSmart warehouse clubs in Mexico, the first two to open before the end of the calendar year. The Company and Gigante have each agreed to each contribute $20 million each and will each own 50% of the operations in Mexico, and will be accounted for under the equity method of accounting. Gigante also purchased 15,000 shares of the Series A Preferred Stock, for $15 million, and was also issued warrants to purchase 200,000 shares of the Company's common stock. At February 28, 2002, none of these warrants have been exercised.

During the first six months of fiscal 2002, the Company opened two new US-style membership shopping warehouses (one in the first quarter and one in the second quarter), bringing the total number of warehouse stores in operation to 24 as of February 28, 2002. During the first six months of fiscal 2001, the Company opened one new US-style membership shopping warehouse, bringing the total number of warehouse stores in operation to 17 as of February 28, 2001. Also, there were ten warehouse stores in operation (nine in China and one in Saipan, Micronesia) licensed to and operated by local business people at the end of the second quarter of fiscal 2002, versus six licensed warehouse stores (five in China and one in Saipan, Micronesia) at the end of the second quarter of fiscal 2001.

In the fourth quarter of fiscal 2001, the Company increased its ownership from 62.5% to 90% in the operations in Trinidad. Results from operations of the minority interests have been included, based on sole ownership, in the financial results of the Company since the date of the transaction.

The Company seeks to establish significant market share in metropolitan areas in emerging market countries by rapidly saturating these areas with second and third warehouse locations. For the 13 and 26 weeks ended March 3, 2002, comparable warehouse sales increased 1.6% and 1.5%, respectively from the prior year's periods. Comparable warehouse sales during the second quarter and fiscal year-to-date were mitigated by new warehouse openings in existing metropolitan markets. The average life of the 24 and 17 warehouses in operation at the end of February 28, 2002 and 2001 was 22 and 16 months, respectively.

COMPARISON OF THE THREE MONTHS ENDED FEBRUARY 28, 2002 AND 2001

Net warehouse sales increased 39.0% to $168.6 million in the second quarter of fiscal 2002, from $121.3 million in the second quarter of fiscal 2001. The increase is primarily attributable to the opening of seven new warehouses since the end of the second quarter of fiscal 2001, and an increase in comparable warehouse sales. The Company benefits from seasonal holiday sales in the second quarter of each fiscal year, primarily in the month of December.

The Company's warehouse gross profit margins (defined as net warehouse sales less associated cost of goods sold) in the second quarter of fiscal 2002 decreased to 14.4% from 14.6% in the second quarter of fiscal 2001. The decrease in gross profit margins of twenty basis points is primarily from a reduction in sales penetration in the Company's 17 warehouses operating in Latin America of higher margin U.S. non-food items over the prior period as members spent more on lower margin food items and necessities. This decrease was partially offset from higher margin Caribbean markets attained by the Company's five warehouses operating in Aruba, Barbados, Trinidad and the U.S. Virgin Islands, the majority of which were not in operation in the prior year second quarter.

Export sales represent U.S. merchandise exported to the Company's licensee warehouses operating in Asia. Export sales in the second quarter of fiscal 2002 were $285,000 compared to none in the second quarter of fiscal 2001. As the Company continues to expand into the Asian region with majority-owned and operated stores, associated export sales to its licensees in Asia are also anticipated to increase and currently the Company expects export sales to be $1.5 million in fiscal 2002. The gross margin percentage on export sales was 1.8% in the second quarter of fiscal 2002, and is based on the varying agreements with licensees and the type of merchandise sourced. Historically, export gross margin percentages have not exceeded 4%.

Membership fees and other revenue, including royalties earned from licensees, increased to $4.8 million in the second quarter of fiscal 2002 from $3.4 million in the second quarter of fiscal 2001. Membership fees and other income (which includes rental income, advertising revenues and vendor promotions) increased to $4.5 million, or 2.7% of net warehouse sales, in the second quarter of fiscal 2002 from $3.0 million, or 2.5% of net warehouse sales, in the second quarter of fiscal 2001. The increase in amounts between periods was primarily a result of the seven new warehouse openings between the periods presented, which resulted in an increase in the total memberships to 537,000 from 448,000, or an increase of 20.0%, and increases in rental and advertising revenues.

Warehouse operating expenses increased to $18.0 million, or 10.7% of net warehouse sales, in the second quarter of fiscal 2002 from $12.1 million, or 10.0% of net warehouse sales, in the second quarter of fiscal 2001. The increase in warehouse operating expenses is attributable to the seven new warehouses opened since the second quarter of fiscal 2001. The increase in operating expenses as a percentage of net warehouse sales is primarily attributable to the higher operating costs realized in the first year of operations from the Caribbean and Philippine markets. As the Caribbean and Philippine markets mature, the Company expects to realize period-over-period efficiencies in these markets by fiscal year end, as in the Company's Latin American operations. In the prior year, the Company incurred approximately $120,000 in net losses related to an earthquake and subsequent aftershocks that occurred on January 13, 2001 in Central America impacting two warehouses operating in El Salvador. Net warehouse sales for the El Salvadorian operations were not impacted and did not have a materially adverse impact on the overall financial operating results of the Company.

General and administrative expenses were $4.2 million, or 2.5% of net warehouse sales, in the second quarter of fiscal 2002 compared with $4.4 million, or 3.6% of net warehouse sales, in the second quarter of fiscal 2001. As a percentage of net warehouse sales, general and administrative expenses have declined due to the increase in comparable warehouse sales previously noted. General and administrative expenses are expected to remain relatively constant for the remainder of fiscal 2002.

Settlement and related expenses of $1.7 million in fiscal 2002 reflect a settlement agreement entered into with a former Licensee on February 15, 2002 (see "Note 5—Commitments and Contingencies" in the Notes to Condensed Consolidated Financial Statements included within).

Pre-opening expenses, which represent expenses incurred before a warehouse store is in operation, increased to $742,000 in the second quarter of fiscal 2002 from $704,000 in the second quarter of fiscal 2001. The Company had one warehouse opening in the second quarter of fiscal 2002 with two openings subsequent to the quarter end, compared to none in second quarter 2001 with one opening subsequent to the quarter end.

Interest income reflects earnings primarily on cash and cash equivalents and certain secured notes receivable from buyers of formerly owned properties. Interest income was $798,000 in the second quarter of fiscal 2002 compared to $910,000 in the second quarter of fiscal 2001. The change in interest income is due to the decrease in amounts of interest-bearing instruments held by the Company between the periods presented and the interest rate earned on those instruments.

Interest expense primarily reflects borrowings by the Company's majority or wholly owned foreign subsidiaries to finance the capital requirements of new warehouse store operations. Interest expense increased to $2.3 million in the second quarter of fiscal 2002 from $1.9 million in the second quarter of fiscal 2001. The increase is attributable to an increase in the amount of debt held by the Company between the periods presented and associated interest expense incurred on the amounts borrowed within the periods presented. Also, interest expense has been slightly offset by a reduction in prime lending rates between periods presented.

In the second quarter of fiscal 2001, the Company sold excess real estate properties owned by its wholly owned foreign subsidiaries in the Dominican Republic, Costa Rica and its majority owned

foreign subsidiary in Trinidad. The sale of the excess land resulted in a gain of $648,000, of which the Company's share was $505,000.

Minority interest relates to an allocation of the joint venture income or losses to the minority interest shareholders' respective interests.

The Company recorded income tax provisions of $854,000 (33% effective rate) and $591,000 (19% effective rate) for the three months ended February 28, 2002 and 2001, respectively. Beginning in fiscal 2001, due to the Company's rapid expansion in fiscal 2000 within existing markets and new markets and the positive impact on its earnings, management reassessed, based on both positive and negative evidence, reducing valuation allowances previously established against certain foreign net deferred tax assets as the Company believes the benefit of these losses will be realized.

Preferred dividends of $191,000 reflect the issuance of 20,000 shares of Series A Preferred Stock on January 17, 2002, which have 8% dividends that are cumulative and paid quarterly.

COMPARISON OF THE SIX MONTHS ENDED FEBRUARY 28, 2002 AND 2001

Net warehouse sales increased 37.4% to $311.4 million in the first half of fiscal 2002, from $226.6 million in the first half of fiscal 2001. The increase is primarily attributable to the opening of seven new warehouses since the end of the second quarter of fiscal 2001, and an increase in comparable warehouse sales. The Company benefits from seasonal holiday sales primarily in December of each fiscal year.

The Company's warehouse gross profit margins (defined as net warehouse sales less associated cost of goods sold) in the first half of fiscal 2002 increased to 14.5% from 14.2% in the first half of fiscal 2001. The increase in gross profit margins of thirty basis points is primarily from higher margin Caribbean markets attained from the Company's five warehouses in Aruba, Barbados, Trinidad and the U.S. Virgin Islands, the majority of which opened subsequent to the end of the second quarter of fiscal 2001. This increase was partially offset by a reduction in sales penetration in the second quarter primarily in the Company's 17 warehouses operating in Latin America of higher margin U.S. non-food items over the prior year period as members spent more on lower margin food items and necessities.

Export sales represent U.S. merchandise exported to the Company's licensee warehouses operating in Asia. Export sales in the first half of fiscal 2002 were $714,000 compared to none in the first half of fiscal 2001. As the Company continues to expand into the Asian region with majority-owned and operated stores, associated export sales to its licensees in Asia are also anticipated to increase and currently the Company expects export sales to be $1.5 million in fiscal 2002. The gross margin percentage on export sales was 2.8% in the first half of fiscal 2002, and is based on the varying agreements with licensees and the type of merchandise sourced. Historically, export gross margin percentages have not exceeded 4.0%.

Membership fees and other revenue, including royalties earned from licensees, increased to $9.2 million in the first half of fiscal 2002 from $6.6 million in the first half of fiscal 2001. Membership fees and other income (which includes rental income, advertising revenues and vendor promotions) increased to $8.6 million, or 2.8% of net warehouse sales, in the first half of fiscal 2002 from $5.9 million, or 2.6% of net warehouse sales, in the first half of fiscal 2001. The increase in amounts between periods was primarily a result of the seven new warehouse openings between the periods presented, which resulted in an increase in the total memberships to 537,000 from 448,000, or an increase of 20.0%, and increases in rental and advertising revenues.

Warehouse operating expenses increased to $34.9 million, or 11.2% of net warehouse sales, in the first half of fiscal 2002 from $23.4 million, or 10.3% of net warehouse sales, in the first half of fiscal 2001. The increase in warehouse operating expenses is attributable to the seven new warehouses opened since the first half of fiscal 2001. The increase in operating expenses as a percentage of net

warehouse sales is primarily attributable to the higher operating costs realized in the first year of operations from the Caribbean and Philippine markets. As the Caribbean and Philippine markets mature, the Company expects to realize period-over-period efficiencies in these markets by fiscal year end, as in the Company's Latin American operations. In the prior year, the Company incurred approximately $120,000 in net losses related to an earthquake and subsequent aftershocks that occurred on January 13, 2001 in Central America impacting two warehouses operating in El Salvador. Net warehouse sales for the El Salvadorian operations were not impacted and did not have a materially adverse impact on the overall financial operating results of the Company.

General and administrative expenses were $8.6 million, or 2.8% of net warehouse sales, in the half of fiscal 2002 compared with $8.7 million, or 3.8% of net warehouse sales, in the half of fiscal 2001. As a percentage of net warehouse sales, general and administrative expenses have declined due to the increase in comparable warehouse sales previously noted. General and administrative expenses are expected to remain relatively constant for the remainder of fiscal 2002.

Pre-opening expenses, which represent expenses incurred before a warehouse store is in operation, increased to $1.6 million in the first half of fiscal 2002 from $1.2 million in the first half of fiscal 2001. Pre-opening expenses have increased as a result of opening two new warehouses within the first half of fiscal 2002 with two operating subsequent to the period end, compared to one new warehouse opening with one opening subsequent to the period end over the same six-month period in the prior fiscal year.

Interest income reflects earnings primarily on cash and cash equivalents and certain secured notes receivable from buyers of formerly owned properties. Interest income was $1.6 million in the first half of fiscal 2002 compared to $1.7 million in the first half of fiscal 2001. The change in interest income is due to the decrease in amounts of interest-bearing instruments held by the Company between the periods presented and the interest rate earned on those instruments.

Interest expense primarily reflects borrowings by the Company's majority or wholly owned foreign subsidiaries to finance the capital requirements of new warehouse store operations. Interest expense increased to $4.6 million in the first half of fiscal 2002 from $3.9 million in the first half of fiscal 2001. The increase is attributable to an increase in the amount of debt held by the Company between the periods presented and associated interest expense incurred on the amounts borrowed within the periods presented. Also, interest expense has been slightly offset by a reduction in prime lending rates between periods presented.

In the first half of fiscal 2001, the Company sold excess real estate properties owned by its wholly owned foreign subsidiaries in the Dominican Republic, Costa Rica and its majority owned foreign subsidiary in Trinidad. The sale of the excess land resulted in a gain of $1.8 million, of which the Company's share was $1.3 million.

Minority interest relates to an allocation of the joint venture income (losses) to the minority interest shareholders' respective interests.

The Company recorded income tax provisions of $1.1 million (27% effective rate) and $477,000 (12% effective rate) for the six months ended February 28, 2002 and 2001, respectively. Beginning in fiscal 2001, due to the Company's rapid expansion in fiscal 2000 within existing markets and new markets and the positive impact on its earnings, management reassessed, based on both positive and negative evidence, reducing valuation allowances previously established against certain foreign net deferred tax assets as the Company believes the benefit of these losses will be realized.

Preferred dividends of $191,000 reflect the issuance of 20,000 shares of Series A Preferred Stock on January 17, 2002, which have 8% dividends that are cumulative and paid quarterly.

LIQUIDITY AND CAPITAL RESOURCES

The Company's primary capital requirements are the financing of land, construction and equipment costs associated with new warehouse stores, plus the cost of pre-opening and working capital requirements.

Net cash flows provided by (used in) operating activities was $(4.4) million and $3.7 million in the first half of fiscal 2002 and 2001, respectively. The decrease of $8.1 million is primarily a result of an increase in building inventories and other current asset increases related to opening additional warehouses, an increase in restricted cash to secure additional borrowings and a payment made to settle litigation in the Philippines. These increases in use of cash were offset by higher operating profitability in the first half of fiscal 2002 compared to the prior year period.

Net cash used in investing activities was $16.1 million and $8.7 million in the first half of fiscal 2002 and 2001, respectively, and relates primarily to additions to property and equipment for new warehouses. In the first half of fiscal 2002, the Company opened two warehouses, with a third opening subsequent to the quarter end, compared to one warehouse opening in the first half of fiscal 2001, which accounts for the increase in additions to property and equipment between periods presented. In the first half of fiscal 2001, the Company sold excess real estate surrounding certain warehouse properties and did not make any similar sales in the first half of fiscal 2002.

Net cash provided by financing activities was $32.4 million and $2.6 million in the first half of fiscal 2002 and 2001, respectively. The increase between years of $29.8 million resulted from the issuance of preferred stock of $19.9 million, an overall increase in the change in net bank borrowings of $8.0 million and an increase in the proceeds from the exercise of stock options of $1.7 million.

On January 17, 2002, the Company issued 20,000 shares of Series A Preferred Stock for $20 million with net proceeds of $19.9 million. Each share is convertible, at the holder's option, into one share of the Company's common stock at the conversion price of $37.50. The terms of the Series A Preferred Stock specify an annual cash dividend rate of 8.0%, payable quarterly in arrears. The shares are redeemable on or after January 17, 2007, in whole or in part, at the option of the Company, at a redemption price equal to the liquidation preference, or $1,000 per share plus accumulated and unpaid dividends to the redemption date. On January 17, 2012, each share of Series A Preferred Stock that has not been converted or redeemed will automatically be converted into one fully paid and nonassessable share of common stock. The Company also issued warrants to purchase 200,000 shares of the Company's common stock. The warrants are exercisable at $37.50 per share of common stock through January 17, 2003. At February 28, 2002, none of these warrants have been exercised.

Subsequent to the end of the quarter, on April 12, 2002, the Company entered into an agreement with International Finance Corporation ("IFC") to issue 300,000 shares of the Company's common stock to IFC in a private placement for an aggregate purchase price of approximately $10 million. The closing of the sale is conditioned on, among other things, the effectiveness of a resale shelf registration statement to be filed by the Company with respect to the shares. No condition to completing the sale is within the control of IFC. Subject to satisfaction of the conditions to closing, the closing will occur within five business days following the effectiveness of the registration statement. In addition to the requirement that the Company file a shelf registration statement, the agreement also provides IFC with piggyback registration rights giving IFC the right to require the Company to register IFC's shares in the event the Company registers any shares in connection with an underwritten public offering, subject to underwriters' cut-back limitations. The Company also has granted IFC preemptive rights to purchase its pro rata share of any equity securities that the Company proposes to sell and issue, except for shares issued in connection with certain stock options, business combinations, changes in capital stock,

underwritten public offerings and financing transactions. Proceeds of the sale of common stock to IFC are expected to be used for capital expenditures and working capital requirements related to future warehouse expansion.

In connection with the sale of common stock to IFC, on April 12, 2002, IFC and Gilbert A. Partida, the president and chief executive officer of the Company, entered into a co-sale agreement, under which Mr. Partida granted IFC the opportunity to participate in any subsequent sale by Mr. Partida of his shares of the Company's common stock in connection with a change of control transaction, so long as Mr. Partida serves as an officer of the Company. A "change in control transaction" includes any transaction which would result in a person or group of persons, other than Robert E. Price, Sol Price or the Price Family Charitable Fund, becoming the beneficial owner of more than 25% of the total voting power of all classes of the Company's stock that are normally entitled to vote in the election of directors.

In fiscal 2002, the Company's current intention is to spend an aggregate amount of between $30 million to $35 million for land, building and equipment for four warehouse openings (two of which opened during the first six months and another two were opened subsequent to February 28, 2002). While no more additional warehouse openings are planned for the remainder of the fiscal year ending August 31, 2002, the Company intends to open up to four new locations before the calendar year ending December 31, 2002. Actual capital expenditures for new warehouse locations and operations may vary from estimated amounts depending on the number of new warehouses actually opened, business conditions and other risks and uncertainties to which the Company and its businesses are subject. The Company, primarily through its foreign subsidiaries, intends to increase bank borrowings between $10 million to $20 million during fiscal 2002, depending on the number of stores opened, and to use these proceeds, along with the proceeds from the sale of the $20 million convertible preferred stock, $10 million from the sale of common stock, contributions from joint venture partners as well as excess cash and cash generated from existing operations, to finance these expenditures.

The Company believes that borrowings under its current and future credit facilities, together with its other sources of liquidity, 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, obtain additional credit facilities or reduce the number of anticipated warehouse openings. Furthermore, the Company has and will continue to consider sources of capital, including the sale of equity or debt securities to strengthen its financial position and liquidity. There can be no assurance that such financing alternatives will be available under favorable terms, if at all.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company, through its majority or wholly owned subsidiaries, conducts foreign operations primarily in Central America, the Caribbean and Asia, and as such is subject to both economic and political instabilities that cause volatility in foreign currency exchange rates or weak economic conditions. As of February 28, 2002, the Company had a total of 24 warehouses operating in ten foreign countries and one U.S. territory. 19 of the 24 warehouses operate under foreign currencies other than the U.S. dollar. For the six months ended February 28, 2002, approximately 84% of the Company's net warehouse sales were in foreign currencies.

The Company plans to enter into additional foreign countries in the future, 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, the effect from any one-currency devaluation may not significantly impact the overall financial or operating results of the Company. However, there can be no assurance that the Company will not experience a materially adverse effect on the Company's business,

financial condition, operating results, cash flow or liquidity, 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 majority or wholly owned subsidiaries were $3.7 million and $962,000 as of February 28, 2002 and August 31, 2001, respectively.

Foreign currencies in most of the countries where the Company operates have historically devalued against the U.S. dollar and are expected to continue to devalue. The Company manages foreign currency risks at times by hedging currencies through non-deliverable forward exchange contracts, or NDFs, that are generally for durations of six months or less and no physical exchange of currency occurs at maturity (only the resulting gain or loss). The premium associated with each NDF is amortized on a straight-line basis over the term of the NDF, and mark-to-market amounts and realized gains or losses are recognized on the settlement date in cost of goods sold. The related receivables or liabilities with counterparties to the NDFs are recorded in the consolidated balance sheet. As of February 28, 2002, the Company had NDFs outstanding of $1.2 million, $1.0 million and $1.5 million which expired on March 6, 2002, April 2, 2002 and April 12, 2002, respectively. The mark-to-market unrealized losses as of February 28, 2002 on the NDFs outstanding were approximately $17,000, $9,000 and $16,000, respectively. For the six months ended February 28, 2002, realized losses were approximately $147,000 from NDFs previously entered into. The Company may continue to purchase NDFs in the future to mitigate foreign exchange losses, but due to the volatility and lack of derivative financial instruments in the countries in which the Company operates, significant risk from unexpected devaluation of local currencies exist. Foreign exchange transaction losses realized, which are included as a part of the costs of goods sold in the consolidated statement of operations, for the six months ended February 28, 2002 (including the cost of the NDFs), were $593,000.

The Company is also exposed to changes in interest rates on various bank loan facilities. A hypothetical 100 basis point adverse change in interest rates along the entire interest rate yield curve could adversely affect the Company's pretax net income by approximately $888,000 on an annualized basis.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, the Company is subject to legal proceedings and claims arising 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, operating results, cash flow or liquidity.

Item 2. Changes in Securities and Use of Proceeds

The shares of Series A Preferred Stock and the warrants were sold to Grupo Gigante, S.A. de C.V., institutional investors and entities affiliated with Sol Price, a significant stockholder of the Company, in a private placement pursuant to Rule 506 under the Securities Act of 1933. The purchasers have represented to the Company that they are accredited investors, the shares were acquired for their own account and not with a view to any distribution thereof to the public 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

The Company's Annual Meeting of Stockholders was held on January 16, 2002 at the Hilton San Diego Mission Valley in San Diego, California. Stockholders of record at the close of business on November 20, 2001 were entitled to notice of and to vote in person or by proxy at the Annual Meeting. As of the record date there were 6,292,220 shares outstanding and entitled to vote. The matter

presented for vote received the required votes for approval and had the following total votes for and withheld, as noted below.

1.: To elect directors for the ensuing year, to serve until the next Annual Meeting of Stockholders and until their successors are elected and have qualified:

	Votes For	Votes Against or Withheld
Rafael E. Barcenas	5,283,405	141,067
James F. Cahill	5,360,805	63,667
Murray L. Galinson	5,363,280	61,192
Katherine L. Hensley	5,362,605	61,867
Leon C. Janks	5,362,655	61,817
Lawrence B. Krause	5,363,027	61,445
Jack McGrory	5,362,991	61,481
Gilbert A. Partida	5,357,680	66,792
Robert E. Price	5,351,133	73,339
Edgar A. Zurcher	5,283,398	141,074

2.: To approve the adoption of The 2001 Equity Participation Plan of PriceSmart, Inc. and the reservation of 350,000 shares of the Company's Common Stock for issuance thereunder:

Votes For		Votes Against or Withheld		Abstentions		Broker Nonvotes
3,563,862		246,546		45,945		2,405,867

Item 5. Other Information

On April 12, 2002, the Company entered into an agreement with International Finance Corporation ("IFC") to issue 300,000 shares of the Company's common stock to IFC in a private placement for an aggregate purchase price of approximately $10 million. The closing of the sale is conditioned on, among other things, the effectiveness of a resale shelf registration statement to be filed by the Company with respect to the shares. No condition to completing the sale is within the control of IFC. Subject to satisfaction of the conditions to closing, the closing will occur within five business days following the effectiveness of the registration statement. In addition to the requirement that the Company file a shelf registration statement, the agreement also provides IFC with piggyback registration rights giving IFC the right to require the Company to register IFC's shares in the event the Company registers any shares in connection with an underwritten public offering, subject to underwriters' cut-back limitations. The Company also has granted IFC preemptive rights to purchase its pro rata share of any equity securities that the Company proposes to sell and issue, except for shares issued in connection with certain stock options, business combinations, changes in capital stock, underwritten public offerings and financing transactions. Proceeds of the sale of common stock to IFC are expected to be used for capital expenditures and working capital requirements related to future warehouse expansion.

than 25% of the total voting power of all classes of the Company's stock that are normally entitled to vote in the election of directors.

Item 6. Exhibits and Reports on Form 8-K

(a): Exhibits:

		3.1		Amended and Restated Certificate of Incorporation of PriceSmart, Inc. (incorporated by reference to PriceSmart's Annual Report on Form 10-K for the year ended August 31, 1997 filed with the Securities and Exchange Commission on November 26, 1997).
		3.2		Certificate of Designations, Preferences and Relative, Participating, Optional and Other Special Rights of 8% Series A Cumulative Convertible Redeemable Preferred Stock and Qualifications, Limitations and Restrictions Thereof dated January 15, 2002 (incorporated by reference to PriceSmart's Current Report on Form 8-K filed with Securities and Exchange Commission on January 24, 2002).
		10.1		Shareholders' Agreement for PSMT Mexico, S.A. de C.V. dated as of January 15, 2002 between PriceSmart and Grupo Gigante, S.A. de C.V. (incorporated by reference to PriceSmart's Current Report on Form 8-K filed with Securities and Exchange Commission on January 24, 2002).
		10.2		Series A Preferred Stock and Warrant Purchase Agreement dated as of January 15, 2002 between PriceSmart and Grupo Gigante, S.A. de C.V. (incorporated by reference to PriceSmart's Current Report on Form 8-K filed with Securities and Exchange Commission on January 24, 2002).
		10.3		Common Stock Purchase Warrant dated January 17, 2002 issued to Grupo Gigante, S.A. de C.V. (incorporated by reference to PriceSmart's Current Report on Form 8-K filed with Securities and Exchange Commission on January 24, 2002).
		10.4		Series A Preferred Stock Purchase Agreement dated as of January 18, 2002 between PriceSmart and the Investors Listed on Exhibit A Thereto (incorporated by reference to PriceSmart's Current Report on Form 8-K filed with Securities and Exchange Commission on January 24, 2002).
		10.5		Right of First Refusal Agreement by and among Grupo Gigante, S.A. de C.V. and Robert E. Price, Sol Price, The Price Family Charitable Fund, The Price Group LLC, the Robert and Allison Price Trust, the Robert & Allison Price Charitable Remainder Trust, the Price Family Charitable Trust and the Sol and Helen Price Trust dated as of January 15, 2002 (incorporated by reference to PriceSmart's Current Report on Form 8-K filed with Securities and Exchange Commission on January 24, 2002).
		10.6		Loan agreement by and between Banco Bilbao Vizcaya, S.A. and PRICMARLANCO, S.A. (Costa Rica) dated January 10, 2002 for $3.75 million.
		10.7		Loan agreement by Global Bank and PSMT Philippines, Inc. dated November 27, 2001 for $2.5 million.

(b): Reports on Form 8-K:

On January 24, 2001, the Company filed a Form 8-K under Item 5 announcing a joint venture in Mexico.

On February 19, 2002, the Company filed a Form 8-K under Item 5 announcing a settlement agreement resolving all aspects of a dispute between PriceSmart and its former licensee in the Philippines. Under the terms of the agreement, (i) the Company paid to the former licensee

$1.0 million on February 20, 2002 and will pay $500,000 on September 1, 2002; (ii) the Company will buy certain equipment which had been used in the former licensed business that is in good operating and useable condition, as determined by the Company, at 70% of its original purchase price (maximum payment by the Company for this equipment to be approximately $1.0 million); (iii) the former licensee will relinquish all claims to the "PriceSmart" name and will neither compete with nor impede the Company's operations; and (iv) all litigation is terminated and all claims of the former licensee against the Company will be fully released.

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.
Date:	April 15, 2002	/s/ GILBERT A. PARTIDA Gilbert A. Partida President and Chief Executive Officer
Date:	April 15, 2002	/s/ ALLAN C. YOUNGBERG Allan C. Youngberg Executive Vice President, Chief Financial Officer

PRICESMART, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)

		February 28, 2002			August 31, 2001
		(Unaudited)
ASSETS
CURRENT ASSETS:
	Cash and cash equivalents	$	35,460		$	26,280
	Receivables, net of allowance for doubtful accounts of $127 and $58 in February 28, 2002 and August 31, 2001, respectively		7,774			6,134
	Merchandise inventories		83,562			71,297
	Prepaid expenses and other current assets		9,344			6,249
	Property held for sale		726			726

Total current assets			136,866			110,686
	Restricted cash		28,019			24,207
	Property and equipment, net		176,880			163,200
	Goodwill, net		20,128			20,128
	Deferred tax asset		2,729			2,357
	Notes receivable and other		3,854			3,502

TOTAL ASSETS		$	368,476		$	324,080

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
	Short-term borrowings	$	26,996		$	22,205
	Accounts payable		73,746			60,789
	Accrued salaries and benefits		3,739			3,551
	Deferred membership income		4,147			4,371
	Other accrued expenses		7,244			8,716
	Long-term debt, current portion		6,427			6,842

Total current liabilities			122,299			106,474
Long-term debt, net of current portion			82,415			79,303

Total liabilities			204,714			185,777
Minority interest			11,298			8,193
Commitments and contingencies			—			—
SHAREHOLDERS' EQUITY:
	Preferred stock, $.0001 par value, 2,000,000 shares authorized, Series A convertible preferred stock designated—20,000 shares; 20,000 and 0 shares issued and outstanding at February 28, 2002 and August 31, 2001, respectively		19,916			—
	Common stock, $.0001 par value, 15,000,000 shares authorized, 6,942,435 and 6,928,690 shares issued and outstanding at February 28, 2002 and August 31, 2001, respectively		1			1
	Additional paid-in capital		150,365			150,906
	Notes receivable from shareholders		(769	)		(769	)
	Deferred compensation		(201	)		(307	)
	Accumulated other comprehensive loss		(3,687	)		(962	)
	Accumulated deficit		(220	)		(2,924	)
	Less: Treasury stock at cost, 569,720 and 697,167 shares at February 28, 2002 and August 31, 2001, respectively		(12,941	)		(15,835	)

Total shareholders' equity			152,464			130,110

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY		$	368,476		$	324,080

See accompanying notes.

PRICESMART, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED—AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)

			Three Months Ended February 28,						Six Months Ended February 28,
			2002			2001			2002			2001
Revenues:
	Sales:
		Net warehouse	$	168,618		$	121,305		$	311,369		$	226,558
		Export		285			—			714			—
	Membership fees and other income			4,793			3,405			9,161			6,558

Total revenues				173,696			124,710			321,244			233,116

Expenses:
	Cost of goods sold:
		Net warehouse		144,389			103,592			266,263			194,307
		Export		280			—			694			—
	Selling, general and administrative:
		Warehouse operations		18,032			12,072			34,868			23,350
		General and administrative		4,246			4,388			8,627			8,711
	Settlement and related expenses			1,720			—			1,720			—
	Goodwill amortization			—			243			—			485
	Preopening expenses			742			704			1,590			1,181

Total expenses				169,409			120,999			313,762			228,034

Operating income				4,287			3,711			7,482			5,082

Other income (expense):
	Interest income			798			910			1,590			1,741
	Interest expense			(2,284	)		(1,906	)		(4,625	)		(3,884	)
	Other income (expense)			5			(9	)		(15	)		(9	)
	Gain on sale of real estate properties			—			648			—			1,776
	Minority interest			(180	)		(249	)		(441	)		(869	)

Total other expense				(1,661	)		(606	)		(3,491	)		(1,245	)

Income before provision for income taxes				2,626			3,105			3,991			3,837
Provision for income taxes				854			591			1,096			477

Net income				1,772			2,514			2,895			3,360
Preferred dividends				191			—			191			—

Net income available to common shareholders			$	1,581		$	2,514		$	2,704		$	3,360

Earnings per share:
	Basic		$	0.25		$	0.40		$	0.43		$	0.53
	Fully diluted		$	0.24		$	0.38		$	0.41		$	0.50
Average common shares outstanding:
	Basic			6,312			6,323			6,284			6,293
	Fully diluted			6,613			6,696			6,602			6,716

See accompanying notes.

PRICESMART, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED—AMOUNTS IN THOUSANDS)

			Six Months Ended February 28,
			2002			2001
OPERATING ACTIVITIES
Net income			$	2,895		$	3,360
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
	Depreciation			6,170			4,063
	Goodwill amortization			—			485
	Gain on sale of real estate			—			(1,776	)
	Allowance for doubtful accounts			69			20
	Income tax provision			1,096			477
	Minority interest			440			869
	Compensation expense recognized for stock options			106			186
	Change in operating assets and liabilities:
		Restricted cash		(3,812	)		213
		Inventories and other current assets		(21,561	)		(4,939	)
		Accounts payable and other liabilities		11,162			784
		Settlement and related expenses		(1,000	)		—

Net cash flows provided by (used in) operating activities				(4,435	)		3,742
INVESTING ACTIVITIES
	Additions to property and equipment			(19,850	)		(17,037	)
	Payments of notes receivable, net			3,768			3,992
	Proceeds from sale of real estate			—			3,339
	Proceeds from property held for sale			—			926
	Other			—			62

Net cash flows used in investing activities				(16,082	)		(8,718	)
FINANCING ACTIVITIES
	Proceeds from bank borrowings			93,110			6,089
	Repayments of bank borrowings			(85,622	)		(6,578	)
	Contributions by minority interest shareholders			2,665			2,391
	Issuance of preferred stock			19,916			—
	Proceeds from exercise of stock options			2,353			699

Net cash flows provided by financing activities				32,422			2,601
Effect of exchange rate changes on cash and cash equivalents				(2,725	)		(161	)

Net increase (decrease) in cash and cash equivalents				9,180			(2,536	)
Cash and equivalents beginning of period				26,280			24,503

Cash and equivalents end of period			$	35,460		$	21,967

Supplemental disclosure of cash flow information
	Cash paid during the period for:
		Interest, net of amounts capitalized	$	3,981		$	3,543
		Income taxes	$	862		$	729

See accompanying notes.

PRICESMART, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

FOR THE SIX MONTHS ENDED FEBRUARY 28, 2002

(UNAUDITED—AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)

																							Less: Treasury Stock
	Preferred Stock			Common Stock							Notes Receivable from Shareholders
	Preferred Stock			Common Stock				Additional Paid-in Capital						Deferred Compensation			Other Comprehensive Loss			Accumulated deficit								Total Shareholders' Equity
	Shares	Amount		Shares		Amount		Additional Paid-in Capital						Deferred Compensation			Other Comprehensive Loss			Accumulated deficit			Shares		Amount			Total Shareholders' Equity
Balance at August 31, 2001	—	$	—	6,929		$	1	$	150,906		$	(769	)	$	(307	)	$	(962	)	$	(2,924	)	697		$	(15,835	)	$	130,110
Issuance of series A convertible preferred stock	20		19,916	—			—		—			—			—			—			—		—			—		$	19,916
Dividends on preferred stock	—		—	—			—		—			—			—			—			(191	)	—			—		$	(191	)
Exercise of stock options	—		—	33			—		(84	)		—			—			—			—		(107	)		2,437		$	2,353
Issuance of stock in exchange for minority interest	—		—	(20	)		—		(457	)		—			—			—			—		(20	)		457		$	—
Amortization of deferred compensation	—		—	—			—		—			—			106			—			—		—			—		$	106
Net income	—		—	—			—		—			—			—			—			2,895		—			—		$	2,895
Translation adjustment	—		—	—			—		—			—			—			(2,725	)		—		—			—		$	(2,725	)

Comprehensive income	—		—	—			—		—			—			—			—			—		—			—		$	170

Balance at February 28, 2002	20	$	19,916	6,942		$	1	$	150,365		$	(769	)	$	(201	)	$	(3,687	)	$	(220	)	570		$	(12,941	)	$	152,464

See accompanying notes.

PRICESMART, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

February 28, 2002

NOTE 1—COMPANY OVERVIEW AND BASIS OF PRESENTATION

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 February 28, 2002, the Company had 24 warehouse stores in operation in ten countries and one U.S. territory (four in Panama, three each in Guatemala, Costa Rica and the Dominican Republic, two each in El Salvador, Honduras, Trinidad and the Philippines and one each in Aruba, Barbados and the U.S. Virgin Islands) of which the Company owns at least a majority interest. In fiscal 2001, the Company increased its ownership from 62.5% to 90% in the operations in Trinidad (see Note 7). In addition, there were ten warehouse stores in operation (nine in China and one in Saipan, Micronesia) licensed to and operated by local business people as of February 28, 2002.

NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION: The condensed consolidated interim financial statements of the Company included herein include the assets, liabilities and results of operations of the Company's majority and wholly owned subsidiaries as listed below. All significant intercompany accounts and transactions have been eliminated in consolidation. The condensed consolidated interim financial statements have been prepared by the Company without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the "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 accounting principles generally accepted in the United States 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, 2001 filed on Form 10-K as amended January 10, 2002 and February 14, 2002.

		Ownership		Basis of Presentation
Ventures Services, Inc.		100.0	%	Consolidated
PriceSmart Panama		100.0	%	Consolidated
PriceSmart US Virgin Islands		100.0	%	Consolidated
PriceSmart Guam		100.0	%	Consolidated
PriceSmart Guatemala		66.0	%	Consolidated
PriceSmart Trinidad (see Note 7)		90.0	%	Consolidated
PriceSmart Aruba		60.0	%	Consolidated
PriceSmart Barbados		51.0	%	Consolidated
PriceSmart Jamaica		67.5	%	Consolidated
PriceSmart Philippines		52.0	%	Consolidated
PriceSmart Mexico		50.0	%	Equity
PSMT Caribe, Inc.:
	Costa Rica	100.0	%	Consolidated
	Dominican Republic	100.0	%	Consolidated
	El Salvador	100.0	%	Consolidated
	Honduras	100.0	%	Consolidated

USE OF ESTIMATES: The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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.

CASH AND CASH EQUIVALENTS: Cash and cash equivalents represent cash and short-term investments with maturities of three months or less when purchased.

RESTRICTED CASH: Restricted cash represents time deposits that are pledged as collateral for majority-owned subsidiary loans and amounts deposited in escrow for future asset acquisitions.

MERCHANDISE INVENTORIES: Merchandise inventories, which include merchandise for resale, are valued at the lower of cost (average cost) or market.

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		3-15 years

REVENUE RECOGNITION: The Company recognizes sales revenue when title passes to the customer. Membership fee income represents annual membership fees paid by the Company's warehouse members, which are recognized over the 12-month term of the membership. The historical membership fee refunds have been minimal and, accordingly, no reserve has been established for membership refunds for the periods presented.

FOREIGN CURRENCY TRANSLATION: In accordance with SFAS No. 52 "Foreign Currency Translation", the assets and liabilities of the Company's foreign operations are translated to U.S. dollars using the exchange rates at the balance sheet date and revenues and expenses are translated at average rates prevailing during the period. Related translation adjustments are recorded as a component of accumulated comprehensive income.

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 consolidated balance sheets.

ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING TRANSACTIONS: In fiscal 2001, the Company adopted Financial Accounting Standards Board ("FASB") Statements No. 133 ("SFAS 133") pertaining to the accounting for derivatives and hedging activities. SFAS 133 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 adoption of SFAS 133 did not have a material impact on the Company's consolidated financial statements.

ACCOUNTING PRONOUNCEMENTS: In June 2001, the FASB issued Statements of Financial Accounting Standards No. 141 ("SFAS 141"), "Business Combinations", and No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets", effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over their useful lives (see Note 9).

Accounting for the Impairment or Disposal of Long-Lived Assets—Statement of Financial Accounting Standards No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144") was issued in August 2001 and will become effective for the Company beginning in fiscal 2003. Prior period financial statements will not be restated upon the adoption of this Statement. This Statement establishes a number of rules for the recognition, measurement and display of long-lived assets which are impaired and either held for sale or continuing use within the business. In addition, the Statement broadly expands the definition of a discontinued operation to individual reporting units or asset groupings for which identifiable cash flows exist.

RECLASSIFICATIONS: Certain prior period interim condensed consolidated financial statement amounts have been reclassified to conform to current period presentation.

NOTE 3—PROPERTY AND EQUIPMENT

Property and equipment consist of the following (amounts in thousands):

		February 28, 2002			August 31, 2001
Land		$	30,648		$	30,232
Building and improvements			101,998			87,305
Fixtures and equipment			64,990			56,135
Construction in progress			3,282			7,396

			200,918			181,068
Less: accumulated depreciation			(24,038	)		(17,868	)

	Property and equipment, net	$	176,880		$	163,200

Building and improvements includes capitalized interest costs of $364,000 and $730,000 for the six and twelve months ended February 28, 2002 and August 31, 2001, respectively.

NOTE 4—EARNINGS PER SHARE

Basic earnings per share are computed based on the weighted average common shares outstanding in the period. Diluted earnings per share is computed based on the weighted average common shares outstanding in the period and the effect of dilutive securities (options and warrants) except where the inclusion is antidilutive (amounts in thousands, except per share data):

			Three Months Ended February 28,				Six Months Ended February 28,
			2002		2001		2002		2001
Net income available to common shareholders			$	1,581	$	2,514	$	2,704	$	3,360

Determination of shares:
	Common shares outstanding			6,312		6,323		6,284		6,293
	Assumed conversion of:
		Stock options		301		373		318		423
		Preferred stock		—		—		—		—
		Warrants		—		—		—		—

Diluted average common shares outstanding				6,613		6,696		6,602		6,716

Earnings per share:
	Basic		$	0.25	$	0.40	$	0.43	$	0.53

Fully Diluted			$	0.24	$	0.38	$	0.41	$	0.50

NOTE 5—COMMITMENTS AND CONTINGENCIES

A former Licensee of the Company operating in the Philippines claimed to have the exclusive right for twenty years to own and operate warehouses licensed by the Company in the Philippines, based upon a License Agreement it had entered into with the Company in 1997. In 2001, this former Licensee filed lawsuits in both the Philippines and the United States, claiming that its License Agreement had been terminated by the Company in 1998 without justification. In both lawsuits the Company, while disputing the validity of the claim, argued that under the License Agreement arbitration in Australia was the exclusive forum for litigating any such dispute. The former Licensee vigorously opposed arbitration. The Philippine Court of Appeals rendered decisions in favor of the Company on this issue in late December 2001 and by the United States District Court for the Southern District of California on February 12, 2002.

On February 15, 2002, the Company entered into a settlement agreement with the former Licensee, resolving all claims and terminating all litigation. The terms of the settlement include the following: (i) the Company will pay to the former Licensee $1.0 million on February 18, 2002 and $500,000 on September 1, 2002; (ii) the Company will buy certain equipment which had been used in the formerly licensed business and can be utilized in the Company's Philippine operations, at 70% of its original purchase price (the maximum payment by the Company for this equipment to be approximately $1.0 million; (iii) the former Licensee will relinquish all claims to the PriceSmart name and will neither compete with nor impede the Company's operations; and (iv) all litigation is terminated and all claims of the former Licensee against the Company will be fully released.

NOTE 6—SHORT-TERM BORROWINGS AND DEBT

As of February 28, 2002, the Company, through its majority or wholly owned subsidiaries, had $27.0 million outstanding in short-term bank borrowings through 13 separate facilities, which are secured by certain assets of its subsidiaries and are guaranteed by the Company up to its respective ownership percentage. Each of the facilities expires during the year and typically is renewed. As of February 28, 2002, the Company had drawn down the full amounts for all of the facilities.

All debt is collateralized by certain land, building, fixtures and equipment of each respective subsidiary and guaranteed by the Company up to its respective ownership percentage, except for approximately $28.0 million as of February 28, 2002, which is secured by collateral deposits for the same amount and are included in restricted cash on the balance sheet.

Under the terms of each of its note agreements, the Company must comply with certain covenants which include, among others, current, debt service, interest coverage and leverage ratios. The Company is in compliance with all of these covenants, except for the current and debt-to-equity ratio for a $4.9 million note in the Company's Philippine subsidiary, and the current ratio for a $5.0 million note in the Company's Costa Rica subsidiary. The Company obtained necessary waivers for both notes for a period of one quarter.

NOTE 7—ACQUISITION OF MINORITY INTEREST

On July 24, 2001, the Company entered into agreements to acquire an additional 27.5% interest in the PriceSmart Trinidad majority owned subsidiary, which previously had been 62.5% owned by the Company. The purchase price of the 27.5% interest consisted of: (a) 20,115 shares of PriceSmart common stock; (b) a 9% interest in the PriceSmart Barbados subsidiary; (c) a 17.5% interest in the PriceSmart Jamaica subsidiary; (d) a promissory note of $314,000; (e) forgiveness of a note receivable due to the Company of $317,000 and (f) assumption of remaining contributions of $340,000 shown net of minority interest acquired. As a result of this additional interest acquired, the Company increased its guarantee proportionately for the outstanding long term debt related to the Trinidad operations. Results from operations of the acquired Trinidad minority interest have been included in the financial results of the Company since the date of the transactions. The acquisition was accounted for as purchases under SFAS 141.

NOTE 8—FOREIGN CURRENCY INSTRUMENTS

The Company transacts business primarily in various Central American and Caribbean foreign currencies. The Company, at times, enters into non-deliverable forward currency exchange contracts (NDFs) that are generally for short durations of six months or less and no physical exchange of currency occurs at maturity (only the resulting gain or loss). The premium associated with each NDF is amortized on a straight-line basis over the term of the NDF, and mark-to-market amounts and realized gains or losses are recognized on the settlement date in cost of goods sold. The related receivables or liabilities with counterparties to the NDFs are recorded in the consolidated balance sheet. As of February 28, 2002 the Company had $3.7 million in NDFs outstanding and mark-to-market unrealized losses of approximately $42,000. For the six months ended February 28, 2002, realized losses were approximately $147,000 from NDFs previously entered into.

NOTE 9—AMORTIZATION OF GOODWILL

The Company adopted Statement of Financial Accounting Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets", effective September 1, 2001. Under SFAS No. 142, goodwill is no longer amortized but reviewed for impairment annually, or more frequently if certain indicators arise.

The Company's goodwill was $20.1 million as of February 28, 2002 and August 31, 2001 and is allocated as follows (amounts in thousands):

Goodwill:
	Trinidad	$	712
	Panama		6,959
	Caribe		13,678

			21,349
Less: Accumulated amortization			(1,221	)

Goodwill, net			20,128

The Company applied the new rules on accounting for goodwill and other intangible assets effective September 1, 2001. Application of the nonamortization provisions of the Statement is expected to result in an increase in net income of approximately $1.1 million for the fiscal year ending August 31, 2002. The Company performed the first of the required impairment tests of the Company's goodwill as of February 1, 2002 and as a result, no impairment losses were recorded for the six months ended February 28, 2002. The Company will complete the final step of the transitional impairment test by the end of the fiscal year and subsequent impairment losses, if any, will be reflected as a part of operating income.

Had the Company been accounting for its goodwill under SFAS No. 142 for all periods presented, the Company's net income allocable to common shareholders (amounts in thousands) and earnings per share would have been as follows:

		Three Months Ended February 28,				Six Months Ended February 28,
		2002		2001		2002		2001
Reported net income available to common shareholders		$	1,581	$	2,514	$	2,704	$	3,360
Add back goodwill amortization, net of tax			—		243		—		485

Adjusted net income available to common shareholders		$	1,581	$	2,757	$	2,704	$	3,845

Basic earnings per share:
	Reported net income available to common shareholders	$	0.25	$	0.40	$	0.43	$	0.53
	Goodwill amortization, net of tax		—		0.04		—		0.08

	Adjusted net income available to common shareholders	$	0.25	$	0.44	$	0.43	$	0.61

Diluted earnings per share:
	Reported net income available to common shareholders	$	0.24	$	0.38	$	0.41	$	0.50
	Goodwill amortization, net of tax		—		0.03		—		0.07

	Adjusted net income available to common shareholders	$	0.24	$	0.41	$	0.41	$	0.57

NOTE 10—CONVERTIBLE PREFERRED STOCK AND WARRANTS

On January 17, 2002, the Company issued 20,000 shares of Series A Preferred Stock for $20 million with net proceeds of $19.9 million. Each share is convertible, at the holder's option, into

one share of the Company's common stock at the conversion price of $37.50. The terms of the Series A Preferred Stock specify an annual cash dividend rate of 8.0%, payable quarterly in arrears. The shares are redeemable on or after January 17, 2007, in whole or in part, at the option of the Company, at a redemption price equal to the liquidation preference, or $1,000 per share plus accumulated and unpaid dividends to the redemption date. On January 17, 2012, each share of Series A Preferred Stock that has not been converted or redeemed will automatically be converted into one fully paid and nonassessable share of common stock.

On January 17, 2002, the Company issued warrants to purchase 200,000 shares of the Company's common stock to Gigante. The warrants are exercisable at $37.50 per share of common stock through January 17, 2003. At February 28, 2002, none of these warrants have been exercised.

NOTE 11—RELATED PARTY TRANSACTIONS

On January 15, 2002, the Company entered into a joint venture agreement with Grupo Gigante, S.A. de C.V. ("Gigante") to initially open four PriceSmart warehouse clubs in Mexico. The Company and Gigante have agreed to contribute $20 million each and will each own 50% of the operations in Mexico. Gigante also purchased 15,000 shares of the Series A Preferred Stock and warrants to purchase 200,000 shares of the Company's common stock for $15 million (see Note 10). On January 17, 2002, the Company sold an aggregate of 1,650 shares of the Series A Preferred Stock (see Note 10), for $1.7 million, to entities affiliated with Mr. Sol Price, a principal stockholder of the Company. The entities affiliated with Mr. Sol Price also entered into an agreement granting Gigante a one-year right of first refusal to their shares of the Company's capital stock.

NOTE 12—SUBSEQUENT EVENTS

In March 2000, the Company entered into a Stock Purchase Agreement to acquire the remaining interest in the PriceSmart Panama majority owned subsidiary ("Panama Acquisition"), which previously had been 51% owned by the Company and 49% owned by BB&M International Trading Group ("BB&M"), whose principals are several Panamanian businessmen, including Rafael Barcenas, a director of PriceSmart. In exchange for BB&M's 49% interest, PriceSmart issued to BB&M's principals 306,748 shares of PriceSmart common stock. Under the Stock Purchase Agreement, as amended, related to the Panama Acquisition, the Company agreed to redeem the shares of the Company's common stock issued to BB&M at a price of $46.86 per share following the one-year anniversary of the completion of the acquisition upon the request of BB&M's principals.

On April 5, 2001, the Company repurchased 242,144 shares of its common stock, par value $.0001 par value per share, for an aggregate of approximately $11.4 million in cash and resulted in an incremental goodwill adjustment of approximately $1.1 million. The Company agreed to redeem, at its option for cash or additional stock, the remaining 64,604 shares following the second anniversary of the completion of the acquisition at the price of $46.86 per share upon the holders' request.

On March 28, 2002, the remaining holders of 64,604 shares of the Company's stock requested redemption of these remaining shares for the agreed upon price of $46.86 per share. The Company paid approximately $1.0 million in cash, representing the differential between the agreed upon price of $46.86 per share and the average selling price of $30.99 per share price obtained by the holders, which were sold on the open stock market at the request of the Company, and will result in an incremental goodwill adjustment of approximately $411,000.

IFC. Subject to satisfaction of the conditions to closing, the closing will occur within five business days following the effectiveness of the registration statement. In addition to the requirement that the Company file a shelf registration statement, the agreement also provides IFC with piggyback registration rights giving IFC the right to require the Company to register IFC's shares in the event the Company registers any shares in connection with an underwritten public offering, subject to underwriters' cut-back limitations. The Company also has granted IFC preemptive rights to purchase its pro rata share of any equity securities that the Company proposes to sell and issue, except for shares issued in connection with certain stock options, business combinations, changes in capital stock, underwritten public offerings and financing transactions. Proceeds of the sale of common stock to IFC are expected to be used for capital expenditures and working capital requirements related to future warehouse expansion.

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PRICESMART, INC. INDEX TO FORM 10-Q
PART I—FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

PART II—OTHER INFORMATION

Item 1. Legal Proceedings

Item 2. Changes in Securities and Use of Proceeds

Item 3. Defaults Upon Senior Securities

Item 4. Submission of Matters to a Vote of Security Holders

Item 5. Other Information

Item 6. Exhibits and Reports on Form 8-K

SIGNATURES
PRICESMART, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
PRICESMART, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED—AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
PRICESMART, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED—AMOUNTS IN THOUSANDS)
PRICESMART, INC. CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE SIX MONTHS ENDED FEBRUARY 28, 2002 (UNAUDITED—AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
PRICESMART, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) February 28, 2002
EX-10.6 3 a2076221zex-10_6.txt EXHIBIT 10.6 Exhibit 10.6 PROMISSORY NOTE (Demand / Term) (Base Rate / LIBOR / Fixed Rate) USD 3,750,000.00 January 10, 2002 FOR VALUE RECEIVED, the undersigned (the "Borrower") hereby promises to pay to BANCO BILBAO VIZCAYA, S.A. (the "Bank") at Elizabethan Square George Town, Grand Cayman, Cayman Islands, B.W.I., the principal sum of USD THREE MILLION SEVEN HUNDRED FIFTY THOUSAND 00/100 DOLLARS in lawful money of UNITED STATES OF AMERICA and in immediately available funds: [ ] on demand, [ ] days from date ---- [X] on April 26, 2003 -------------- [maturity date] The Borrower promises also to pay interest on the unpaid principal hereof in like money and like funds at said office from the date hereof until paid: [X] at the rate of11.25% per annum [ ] at the rate of % per annum above the Bank's floating Base Lending Rate [ ] %per annum above LIBOR MONTH(s) --- ----- provided that, on and after maturity (by acceleration or otherwise), such rate per annum shall be 2% in excess of that which would otherwise be applicable and provided further that the interest rate applicable hereunder shall at all times be the lesser of (a) the rate specified herein or (b) the maximum permitted by law. "Base Lending Rate" shall mean the rate announced by the Bank from time to time at its Grand Cayman Office as base lending rate for domestic commercial loans, such rate to change on the effective date of each change in the Base Lending Rate so announced by the Bank. Interest shall be computed on the number of days actually elapsed on the basis of a 360-day year. "LIBOR" shall mean the interest rate per annum quoted to the Bank in the London interbank borrowing market for deposits of U.S. dollars in such amount and for such duration as corresponds to the loan in question. 1 Such interest shall be payable: [ ] monthly [ ] bimonthly [X] quarterly [ ] semiannually [ ] annually [ ] at maturity only in arrears, commencing on the date of disbursement of the funds, upon any prepayment hereon (to the extent accrued on the amount thereof); at maturity (whether by acceleration or otherwise) or, if the principal hereof is due on demand, on demand; and after maturity on demand. All payments by the Borrower under this Note are to be made without any whithholding or deduction for any and all present or future taxes, duties, levies, fees or other charges and without any set-off or counter-claim whatsoever. If any deduction or witholding is required in respect of any sum payable under this Note, the Borrower shall increase the sum so that the net amount received by the Bank after the deduction of withholding (and after the payment of any tax or additional tax which is due as a consequence of the increase) shall be equal to the amount which the Bank would have been entitled to receive in the absence of any requirement to make a deduction or witholding. If in connection with any loan to which the LIBOR-based interest rate applies there shall occur any event (including but not limited to an increase in reserve requirements) which the Bank in its sole discretion determines would result in the Bank not receiving interest effective at the rate specified herein, the Borrower shall pay to the Bank, on demand, such additional amounts as may be necessary to compensate the Bank for any such deficiency. Without prejudice to the Bank's right hereunder, if for any reason it becomes unlawful or impossible for the Bank to make, maintain or fund this Note or give effect to its obligations as contemplated by this Note, or any of the obligations expressed as being assumed by the Borrower under this Note is not or ceases to be valid, legal, binding and enforceable against the Borrower in accordance with its terms, the the Bank's 2 obligations hereunder shall terminate and the Bank may, by written notice to the Borrower, terminate this Note forthwith and demand immediate payment of, and the Borrower will forthwith pay the Bank, all sums outstanding hereunder. Upon the occurrence of any of the following specified events of default -- (a) the Borrower shall default in the due and punctual payment of any interest on this Note; or (b) any representation, warranty or statement made by the Borrower herein or in writing in connection herewith, or in any certificate or financial or other statement furnished in connection herewith, shall be breached or shall prove to be untrue in any material respect on the date as of which made, or shall omit to state a material fact necessary to make such representations, warranties or statements not misleading; or (c) the Borrower shall default in the due payment of any indebtedness (direct or contingent) for borrowed money or evidenced by a bond, debenture, note or other security or by an agreement of guarantee or any holder of any such indebtedness of the Borrower (or a person acting on their behalf) shall become entitled to cause any such indebtedness to become, or any such indebtedness shall become, due prior to its stated maturity; or (d) the Borrower shall suspend or discontinue its business, or shall make an assignment for the benefit of, or composition with, creditors, or shall become insolvent or unable or generally fail to pay its debts when due; or the Borrower shall become a party or subject to any liquidation or dissolution action or proceeding with respect to the Borrower or any bankruptcy, reorganization, insolvency or other proceeding for the relief of financially distressed debtors with respect to the Borrower, or a receiver, liquidator,custodian or trustee shall be appointed for the Borrower or a substantial part of its assets and, if any of the same shall occur involuntarily as to the Borrower, it shall not be dismissed, stayed or discharged within 60 days; or if any order for relief shall be entered against the Borrower under Chapter 11 of the United States Code entitled "Bankruptcy"; or the Borrower shall take any action to effect, or which indicates its aquiescence in any of the foregoing; -- THEN due, and in any such event, and at any time thereafter if any such event of default shall then be continuing, the Bank may, by written notice to the Borrower, declare the principal of, and interest on, this Note to be, whereupon the same shall forthwith become, immediately due and payable without presentment, demand, protest or other notice of any kind. The Borrower represents and warrants that (i) all acts, filings, conditions and things required to be done and performed 3 and to have happened (including, without limitation, the obtaining of necessary governmental approvals) precedent to the issuance of this Note to constitute this Note the duly authorized, legal, valid and binding obligation of the Borrower, enforceable in accordance with its terms have been done, performed and have happened in due and strict compliance with all applicable laws; (ii) the issuance and performance of this Note will not violate any law, rule, regulation, order, decree, permit, agreement or instrument to which the Borrower is a party or is subject, or result in the imposition of any lien upon any of the Borrower's assets; and (iii) the Borrower's financial statements delivered to the Bank in connection herewith, if any, fairly present the financial condition and the results of operations of the Borrower as at the end of and for the periods covered thereby and there has been no material adverse change in the condition (financial or otherwise) of the Borrower since the date of the last financial statement delivered by the Borrower to the Bank. This Note is secured : [X] time deposits, securities and current accounts held with the Bank. [ ] pursuant to a Security Agreement between the Bank and the Borrower, dated [ ] a guaranty of , dated . --------- -------------- [ ] other security, described as follows: ----------------------------------------- (together the "collateral") If the value of the collateral falls below [the usual or agreed upon margin][166% of the aggregate principal amount of this Note] or if for any other reasons the Bank considers that the collateral provided is no longer sufficient to cover its claims, the Borrower shall on first demand from the Bank, reduce the amount of indebtedness hereunder or provide additional security to the Bank in order to reinstate the margin within the limit required by the Bank. If the Borrower fails to comply with the Bank's request to either reduce the indebtedness or provide additional security within the required time limit or, due to practical or legal grounds, it is impossible for the Bank to contact the Borrower, all of the Borrower's obligations under this Note shall immediately become due and payable in their entirety. 4 In addition to any general lien, right of set-off or similar right to which the Bank, as bankers, may be entitled by law, the Bank may at any time [after demand has been made hereunder] and without notice to the Borrower, debit any of the Borrower's accounts with the Bank with all or any part of the aggregate principal amount of all sums then outstanding under this Note and all other amounts payable by the Borrower to the Bank hereunder, notwithstanding that such debit may cause any such account to become overdrawn or cause an existing overdraft to be increased, and/or set off or transfer any sum or sums standing to the credit of any of the Borrower's accounts with the Bank, whether or not the same may result in the breaking of any fixture or notice period in relation to a credit or deposit balance, in or towards satisfaction of the Borrower's liabilities to the Bank on any other account (whether such liability is actual or contigient, primary or collateral, present or future, several or joint) or in any other respect; and if such liability or any part thereof is in different currency from any credit balance against which the Bank seeks to set it off, the Bank shall be entitled to use the currency of such credit balance for the purchase of an amount in the currency of the liability not exceeding the amount of such liability and also to pay out of such credit balance any additional sum which th Bank may be required to pay for such currency and any costs in connection with such purchase. This Note is subject to prepayment in whole or in part without premium or penalty except in the case of a LIBOR-based loan, prepayment of which may be subject to premium or penalty. The Borrower (i) waives presentment, demand, protest or notice of any kind in connection with this Note and (ii) agrees to pay to the holder hereof, on demand, all costs and expenses (including reasonable legal fees) incurred in connection with the enforcement and collection of this Note. This Note shall be construed in accordance with and governed by laws of the Cayman Islands. The Borrower agrees that any legal action or proceeding with respect to this Note against the Borrower may be brought in the courts of the Cayman Islands located in the City of George Town, Grand Cayman and that process out of said courts may be served by mail and that such service shall be deemed effected 10 days after mailing. Nothing herein shall affect the right of the Bank to serve process in any other manner permitted by law or to commence legal proceedings in any other jurisdiction. 5 Name of Borrower: By (signature): /s/ EDGAR ZURCHER -------------------------------- Print: EDGAR ZURCHER Name of Borrower: PRICSMARLANDCO, S.A. ------------------------------ Title: PRESIDENT Address: SAN JOSE, COSTA RICA --------------------------------------- jurisdiction of Incorporation/ Organization (if not an individual): COSTA RICA ----------------------------- 6 EX-10.7 4 a2076221zex-10_7.txt EXHIBIT 10.7 Exhibit 10.7 [Global Bank Letterhead Logo] November 27, 2001 PSMT PHILLIPINES, INC. 32nd Street, 5th Avenue Fort Bonifacio Global City Taguig, Metro Manila Attention: MANUEL M. DACAYAN Comptroller Dear Mr. Dacayan: We are pleased to advise that GLOBAL BANK has approved a Peso Bridge Finance Loan in favor of PSMT PHILIPPINES, INC. under the following terms and conditions: Amount : Peso equivalent of Two Million Five Hundred Thousand Dollars (US$2,500.000) Purpose : To bridge finance the partial funding requirements for the construction and operation of membership warehouse stores Security : 1) Corporate Guaranty to be executed by PriceSmart, Inc. (58%) 2) Sureties of William S. Go & spouse; and Robert C. See & spouse (32%) Interest Rate : 4.5% over the latest auction result of the average 91-days Treasure Bill rate Interest Payment : Payable monthly in arrears Term : Up to 180 days Principal : Bullet upon maturity Repayment Prepayment : Allowed without penalty Taxes : All payments to be made by the Borrower are to be made free and clear of any present and future taxes, levies, duties or other deductions of whatever nature. In particular but without limitation, all interest payments by the Borrower shall be required to be grossed up to include the applicable tax. The Borrower shall also be required to indemnify the Lender against any and all income or capital taxes, documentary stamp taxes and other registration or similar taxes or fees applicable to the Loan Agreement or other documentation or transactions contemplated therein. Please note that GLOBALBANK reserves the right to amend any and all of the foregoing terms and conditions as situations warrant. This approval shall further be subject to applicable provisions of existing bank policies, regulations and such other terms and conditions our management may impose. Availment herein shall be subject to availability of funds. To be able to activate PSMT Philippines, Inc.'s facility, we request for the submission of the following: BORROWER (PSMT PHILS. INC.): 1. Duly certified SEC Certificate of Registration, Articles of Incorporation & By-laws; 2. Board Resolution/Secretary's Certificate re: establishment of bridge loan in the amount of the peso equivalent of US$ 2,500,000 and authorizing signatories; 3. Signature cards of authorized signatories duly authenticated by corporate secretary (specimen signature cards attached) 4. Copies of 2001 CTC of the company and authorized signatories; 5. Copy of Tax Identification No.; 6. Latest Audited Financial Statements/Income Tax Returns (if available); 7. Promissory Note/Disclosure Statement (form attached); 8. Duly signed letter advice GUARANTOR (PRICESMART, INC.): 1. Board Resolution authorizing the execution of the guaranty and authorizing signatories contained in a Secretary's Certificate duly acknowledged before the Philippine Consulate; 2. Corporate Guaranty Agreement (form attached) SURETIES (WILLIAM S. GO AND ROBERT C. SEE): 1. Surety Agreement to be executed by William S. Go and spouse (form attached) 2. Surety Agreement to be executed by Robert C. See and spouse (form attached) 3. Signature cards of sureties & spouses (specimen signature cards attached) 4. Copies of 2001 CTC of the sureties & spouses; 5. Copies of 2000 Income Tax Returns of sureties Should you need clarifications on the aforecited terms and conditions as well as the documentary requirements, please feel free to call us. We look forward to a mutually beneficial relationship. Very truly yours, GLOBALBANK By: /s/ Armina P. So --------------------- ARMINA P. SO Senior Manager /s/ Edgar G. Esguerra --------------------- EDGAR G. ESGUERRA Vice President Conforme: By: /s/ Gilbert Partida -----END PRIVACY-ENHANCED MESSAGE-----