-----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, HF6dZkPHymPwD7cvor7DWf8DyymoF14h7fUrcR6K7E2kHnSiQ1zYvx2giI5wuWe6 DzUQXdEASeYhfaPVduOe9w== 0000912057-96-025246.txt : 19961210 0000912057-96-025246.hdr.sgml : 19961210 ACCESSION NUMBER: 0000912057-96-025246 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19960901 FILED AS OF DATE: 19961108 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: PRICE/COSTCO INC CENTRAL INDEX KEY: 0000909832 STANDARD INDUSTRIAL CLASSIFICATION: 5331 IRS NUMBER: 330572969 STATE OF INCORPORATION: CA FISCAL YEAR END: 0830 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-20355 FILM NUMBER: 96657251 BUSINESS ADDRESS: STREET 1: 4649 MORENA BOULEVARD CITY: SAN DIEGO STATE: CA ZIP: 92117 BUSINESS PHONE: 6195815350 MAIL ADDRESS: STREET 1: 4241 JUTLAND DRIVE #300 CITY: SAN DIEGO STATE: CA ZIP: 92117 10-K405 1 FORM 10-K405 - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K ---------------- (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) FOR THE FISCAL YEAR ENDED SEPTEMBER 1, 1996 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) FOR THE TRANSITION PERIOD FROM TO . COMMISSION FILE NUMBER 0-20355 ------------------------ PRICE/COSTCO, INC. (Exact name of registrant as specified in its charter) DELAWARE 33-0572969 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 999 LAKE DRIVE, ISSAQUAH, WA 98027 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (206) 313-8100 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock $.01 Par Value ------------------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes _X_ No ___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by nonaffiliates of the registrant at October 31, 1996, was $3,780,185,250. The number of shares outstanding of the registrant's common stock as of October 31, 1996 was 196,576,879. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Company's Proxy Statement for the Annual Meeting of Stockholders to be held on January 29, 1997 are incorporated by reference into Part III of this Form 10-K. - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- PRICE/COSTCO, INC. ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 1, 1996
PAGE ---- PART I Item 1. Business.......................................................... 3 Item 2. Properties........................................................ 7 Item 3. Legal Proceedings................................................. 8 Item 4. Submission of Matters to a Vote of Security Holders............... 8 Item 4A. Executive Officers of the Registrant.............................. 9 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.......................................................... 10 Item 6. Selected Financial Data........................................... 11 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............................................ 14 Item 8. Financial Statements.............................................. 19 Item 9. Change in and Disagreements with Accountants on Accounting and Financial Disclosure............................................. 19 PART III Item 10. Directors and Executive Officers of the Registrant................ 19 Item 11. Executive Compensation............................................ 19 Item 12. Security Ownership of Certain Beneficial Owners and Management.... 19 Item 13. Certain Relationships and Related Transactions.................... 20 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.............................................................. 20
2 PART I ITEM 1--BUSINESS Price/Costco, Inc. ("PriceCostco" or the "Company") began operations in 1976 in San Diego, California as The Price Company ("Price"), pioneering the membership warehouse concept. Costco Wholesale Corporation ("Costco") began operations in 1983 in Seattle, Washington with a similar membership warehouse concept. PriceCostco was formed in October 1993 as a result of a merger of Price and Costco--a combination that resulted in a company which had, at that time, over $15 billion in annual sales, more than 200 warehouse clubs in operation and in excess of 40,000 employees throughout the United States and Canada (See "Note 2--Merger of Price and Costco"). In the second quarter of fiscal 1995, the Company completed the spin-off of Price Enterprises, Inc. ("Price Enterprises"), consisting of PriceCostco's discontinued non-club commercial real estate operations and certain other assets. (See "Note 3--Spin-off of Price Enterprises, Inc. and Discontinued Operations"). GENERAL PriceCostco operates membership warehouses based on the concept that offering members very low prices on a limited selection of nationally-branded and selected private label products in a wide range of merchandise categories will produce high sales volumes and rapid inventory turnover. This rapid inventory turnover, when combined with the operating efficiencies achieved by volume purchasing, efficient distribution and reduced handling of merchandise in no-frills, self-service warehouse facilities, enables PriceCostco to operate profitably at significantly lower gross margins than traditional wholesalers, discount retailers and supermarkets. PriceCostco buys virtually all of its merchandise directly from manufacturers for shipment either directly to PriceCostco's selling warehouses or to a consolidation point (depot) where various shipments are combined so as to minimize freight and handling costs. As a result, PriceCostco eliminates many of the costs associated with multiple step distribution channels, which include purchasing from distributors as opposed to manufacturers, use of central receiving, storing and distributing warehouses and storage of merchandise in locations off the sales floor. By providing this more cost effective means of distributing goods, PriceCostco meets the needs of business customers who otherwise would pay a premium for small purchases and for the distribution services of traditional wholesalers, and who cannot otherwise obtain the full range of their product requirements from any single source. In addition, these business members will often combine personal shopping with their business purchases. Individuals shopping for their personal needs are primarily motivated by the cost savings on brand name merchandise. PriceCostco's merchandise selection is designed to appeal to both the business and consumer requirements of its members by offering a wide range of nationally-branded and selected private label products, often in case, carton or multiple-pack quantities, at attractively low prices. Because of its high sales volume and rapid inventory turnover, PriceCostco generally has the opportunity to receive cash from the sale of a substantial portion of its inventory at mature warehouse operations before it is required to pay all its merchandise vendors, even though PriceCostco takes advantage of early payment terms to obtain payment discounts. As sales in a given warehouse increase and inventory turnover becomes more rapid, a greater percentage of the inventory is financed through payment terms provided by vendors rather than by working capital. PriceCostco's typical warehouse format averages approximately 127,000 square feet. Floor plans are designed for economy and efficiency in the use of selling space, in the handling of merchandise and in the control of inventory. Because shoppers are attracted principally by the availability of low prices on brand name and selected private label goods, PriceCostco's warehouses need not be located on prime commercial real estate sites or have elaborate facilities. 3 By strictly controlling the entrances and exits of its warehouses and by limiting membership to selected groups and businesses, PriceCostco has been able to limit inventory losses to less than one-half of one percent of net sales--well below those of typical discount retail operations. Losses associated with dishonored checks have also been minimal, since individual memberships are limited primarily to members of qualifying groups, and bank information from business members is verified prior to establishing a check purchase limit. Memberships are invalidated at the point of sale for those members who have issued dishonored checks to PriceCostco. PriceCostco's policy is generally to limit advertising and promotional expenses to new warehouse openings and occasional direct mail advertisements to prospective new members. These practices result in lower marketing expenses as compared to typical discount retailers and supermarkets. In connection with new warehouse openings, PriceCostco's marketing teams personally contact businesses in the area who are potential wholesale members. These contacts are supported by direct mailings during the period immediately prior to opening. Potential Gold Star (individual) members are contacted by direct mail generally distributed through credit unions, employee associations and other entities representing individuals who are eligible for Gold Star membership. After a membership base is established in an area, most new memberships result from word of mouth advertising, follow-up contact by direct mail distributed through regular payroll or other organizational communications to employee groups, and ongoing direct solicitations of prospective wholesale members. PriceCostco's warehouses generally operate on a seven-day, 68-hour week, and are open somewhat longer during the holiday season. Generally, warehouses are open weekdays between 10:00 a.m. and 8:30 p.m., with earlier closing hours on the weekend. Because these hours of operation are shorter than those of traditional discount grocery retailers and supermarkets, labor costs are lower relative to the volume of sales. Merchandise is generally stored on racks above the sales floor and displayed on pallets containing large quantities of each item, thereby reducing labor required for handling and stocking. In addition, sales are processed through centralized, automated check-out stands. Items are not individually price marked; rather, each item is bar-coded so it can be scanned into electronic cash registers. This allows price changes without remarking merchandise. Substantially all manufacturers provide special, larger package sizes and merchandise pre-marked with the item numbers and bar codes. PriceCostco's merchandising strategy is to provide the customer with a broad range of high quality merchandise at prices consistently lower than could be obtained through traditional wholesalers, discount retailers or supermarkets. An important element of this strategy is to carry only those products on which PriceCostco can provide its members significant cost savings. Items which members may request but which cannot be purchased at prices low enough to pass along meaningful cost savings are usually not carried. PriceCostco seeks to limit specific items in each product line to fast selling models, sizes and colors and therefore carries only an average of approximately 3,500 to 4,500 active stockkeeping units ("SKU's") per warehouse as opposed to discount retailers and supermarkets which normally stock 40,000 to 60,000 SKU's or more. These practices are consistent with PriceCostco's membership policies of satisfying both the business and personal shopping needs of its wholesale members, thereby encouraging high volume shopping. Many consumable products are offered for sale in case, carton or multiple-pack quantities only. Appliances, equipment and tools often feature commercial and professional models. PriceCostco's policy is to accept returns of merchandise within a reasonable time after purchase. 4 The following table indicates the approximate percentage of net sales accounted for by each major category of items sold by PriceCostco during fiscal 1996, 1995 and 1994:
1996 1995 1994 ----------- ----------- ----------- SUNDRIES (including candy, snack foods, health and beauty aids, tobacco, alcoholic beverages, soft drinks and cleaning and institutional supplies)........................................ 32% 32% 32% FOOD (including dry and fresh foods and institutionally packaged foods).................. 32 32 31 HARDLINES (including major appliances, video and audio tape, electronics, tools, office supplies, furniture and automotive supplies)............... 21 22 22 SOFTLINES (including apparel, domestics, cameras, jewelry, housewares, books and small appliances)...................................... 11 11 12 OTHER (including pharmacy, optical, one-hour photo, print shop, and hearing aid).............. 4 3 3 --- --- --- 100% 100% 100% --- --- --- --- --- ---
PriceCostco has direct buying relationships with many producers of national brand name merchandise. No significant portion of merchandise is obtained by PriceCostco from any one of these or other suppliers. PriceCostco has not experienced any difficulty in obtaining sufficient quantities of merchandise, and believes that if one or more of its current sources of supply became unavailable, it would be able to obtain alternative sources without experiencing a substantial disruption of its business. PriceCostco also purchases different national brand name or selected private label merchandise of the same product, as long as cost, quality and customer demand are comparable. PriceCostco is incorporated in the State of Delaware, and reports on a 52/53 week fiscal year, consisting of 13 four-week periods and ending on the Sunday nearest the end of August. The first, second and third quarters consist of three periods each, and the fourth quarter consists of four periods (five weeks in the thirteenth period in a 53-week year). There is no material seasonal impact on PriceCostco's operations, except an increased level of sales and earnings during the Christmas holiday season. MEMBERSHIP POLICY PriceCostco's membership format is designed to reinforce customer loyalty and provide a continuing source of membership fee revenue. PriceCostco has two primary types of members: Business and Gold Star (individual members). Businesses, including individuals with a business license, retail sales license or other evidence of business existence, may become Business members. PriceCostco promotes Business membership through its merchandise selection and its membership marketing programs. Business members generally pay an annual membership fee of $30 for the primary membership card with additional membership cards available for an annual fee of $20. Individual memberships are available to employees of federal, state and local governments, financial institutions, corporations, utility and transportation companies, public and private educational institutions, and other selected organizations. Individual members generally pay an annual membership fee of $35, which includes a spouse card. As of September 1, 1996, PriceCostco had approximately 3.4 million Business memberships and approximately 7.1 million Gold Star memberships. Members can utilize their memberships at any Price Club or Costco Wholesale location. LABOR As of September 1, 1996, PriceCostco had approximately 53,000 employees, about 50% of which were part time. Substantially all Price Club's 10,000 hourly employees in California, Maryland, New Jersey, New 5 York and one Price Club warehouse in Virginia are represented by the International Brotherhood of Teamsters. All remaining hourly Price employees and all employees of Costco are non-union. PriceCostco considers its employee relations to be good. COMPETITION The Company operates in the rapidly changing and highly competitive merchandising industry. When Price pioneered the membership warehouse club concept in 1976, the dominant companies selling comparable lines of merchandise were department stores, grocery stores and traditional wholesalers. Since then, new merchandising concepts and aggressive marketing techniques have led to a more intense and focused competitive environment. Wal-Mart and Kmart have become the largest retailers in the United States and have recently expanded into food merchandising. Target has also emerged as a significant retail competitor. Approximately 750 warehouse clubs exist across the U.S. and Canada, including the 247 warehouses operated by the Company in North America; and every major metropolitan area has some, if not several, club operations. Low cost operators selling a single category or narrow range of merchandise, such as Home Depot, Office Depot, Petsmart, Toys-R-Us, Circuit City and Barnes & Noble Books, have significant market share in their respective categories. New forms of retailing involving modern technology are boosting sales in stores such as The Sharper Image, while home shopping is becoming increasingly popular. Likewise, in the institutional food business, companies such as Smart & Final, which operates in Arizona, California and Florida, are capturing an increasingly greater share of the institutional food business from wholesale operators and others; and many supermarkets now offer food lines in bulk sizes and at prices comparable to those offered by the Company. (See "Item--7 Management's Discussion and Analysis of Financial Condition and Results of Operations") REGULATION Certain state laws require that the Company apply minimum markups to its selling prices for specific goods, such as tobacco products and alcoholic beverages, and prohibit the sale of specific goods, such as tobacco and alcoholic beverages, at different prices in one location. While compliance with such laws may cause the Company to charge somewhat higher prices than it otherwise would charge, other retailers are also typically governed by the same restrictions, and the Company believes that compliance with such laws does not have a material adverse effect on its operations. It is the policy of the Company to sell at lower than manufacturers' suggested retail prices. Some manufacturers attempt to maintain the resale price of their products by refusing to sell to the Company or to other purchasers that do not adhere to suggested retail prices. To date, the Company believes that it has not been materially affected by its inability to purchase directly from such manufacturers. Both federal and state legislation is proposed from time to time which, if enacted, would restrict the Company's ability to purchase goods or extend the application of laws enabling the establishment of minimum prices. The Company cannot predict the effect on its business of the enactment of such federal or state legislation. 6 ITEM--2 PROPERTIES WAREHOUSE PROPERTIES At September 1, 1996, PriceCostco operated warehouse clubs in 22 states, 9 Canadian provinces and the United Kingdom under the "Price Club" and "Costco Wholesale" names. The following is a summary of owned and leased warehouses by region: NUMBER OF WAREHOUSES
OWN LAND AND LEASE LAND AND/OR BUILDING BUILDING TOTAL ----------------- ----------------------- ----- UNITED STATES..................................... 156 36 192 CANADA............................................ 43 12 55 UNITED KINGDOM.................................... 5 - 5 -- --- --- Total......................................... 204 48 252 -- -- --- --- --- ---
The following schedule shows warehouse openings (net of warehouse closings) by region for the past five fiscal years and expected openings (net of closings) through December 31, 1996:
TOTAL OTHER WAREHOUSES IN OPENINGS BY FISCAL YEAR UNITED STATES CANADA INTERNATIONAL TOTAL OPERATION - - ---------------------------------------- ----------------- ------------- ----------------- ----- --------------- 1991 and prior.......................... 120 20 - 140 140 1992.................................... 27 3 - 30 170 1993.................................... 23 7 - 30 200 1994.................................... 12 7 2 21 221 1995.................................... 9 8 2 19 240 1996.................................... 1 10 1 12 252 1997 (through 12/31/96)................. 6 - - 6 258 -- -- --- --- Total............................... 198 55 5(a) 258 -- -- -- -- --- --- --- ---
- - ------------------------ (a) As of September 1, 1996, the Company operated (through a 50%-owned joint venture) thirteen warehouses in Mexico (one opened in fiscal 1992, two opened in fiscal 1993, five opened in fiscal 1994, and five opened in fiscal 1995). These warehouses are not included in the number of warehouses open in any period because the joint venture is accounted for on the equity basis and therefore its operations are not consolidated in the Company's financial statements. The Company's headquarters are located in Issaquah, Washington. Additionally, the Company maintains regional buying and administrative offices, operates regional cross-docking facilities (depots) for the consolidation and distribution of certain shipments to the warehouses and operates various processing and packaging facilities to support ancillary businesses. DISCONTINUED OPERATIONS - NON-CLUB REAL ESTATE SEGMENT As a result of the 1995 spin-off of Price Enterprises, the Company's business now consists primarily of its warehouse club operations in the United States, Canada and the United Kingdom; and the Company has ceased to have any significant real estate activities that are not directly related to its warehouse club business. 7 ITEM 3--LEGAL PROCEEDINGS On April 6, 1992, Price was served with a Complaint in an action entitled FECHT ET AL. v. THE PRICE COMPANY ET AL., Case No. 92-497, United States District Court, Southern District of California (the "Court"). Subsequently, on April 22, 1992, Price was served with a First Amended Complaint in the action. The case was dismissed without prejudice by the Court on September 21, 1992, on the grounds the plaintiffs had failed to state a sufficient claim against defendants. Subsequently, plaintiffs filed a Second Amended Complaint which, in the opinion of the Company's counsel, alleged substantially the same facts as the prior complaint. The Complaint alleged violation of certain state and federal laws during the time period prior to Price's earnings release for the second quarter of fiscal year 1992. The case was dismissed with prejudice by the Court on March 9, 1993, on grounds the plaintiffs had failed to state a sufficient claim against defendants. Plaintiffs filed an Appeal in the Ninth Circuit Court of Appeals. In an opinion dated November 20, 1995, the Ninth Circuit reversed and remanded the lawsuit. The Company believes that this lawsuit is without merit and is vigorously defending the lawsuit. The Company does not believe that the ultimate outcome of such litigation will have a material adverse effect on the Company's financial position or results of operations. On December 19, 1994, a Complaint was filed against PriceCostco in an action entitled SNYDER v. PRICE/ COSTCO, INC. ET. AL., Case No. C94-1874Z, United States District Court, Western District of Washington. On January 4, 1995, a Complaint was filed against PriceCostco in an action entitled BALSAM v. PRICE/COSTCO, INC. ET. AL., Case No. C95-0009Z, United States District Court, Western District of Washington. The Snyder and Balsam Cases were subsequently consolidated and on March 15, 1995, plaintiffs' counsel filed a First Amended And Consolidated Class Action And Derivative Complaint. On November 9, 1995, plaintiffs' counsel filed a Second Amended And Consolidated Class Action And Derivative Complaint. The Second Amended Complaint alleged violation of certain state and federal laws arising from the spin-off and Exchange Transaction and the merger between Price and Costco. In July 1996, an agreement in principle was reached to resolve the lawsuit. Subject to court approval, the resolution will involve the transfer from Price Enterprises, Inc. to the Company of certain intangible assets, including elimination of certain existing non-compete restrictions and operating agreements and the termination or amendment of certain trademark license and assignment agreements. The cash portion of the settlement will be funded by the Company's director and officer insurance coverage and by Price Enterprises. The Company will contribute no money to the settlement. In May 1996, PriceCostco reached an agreement in principle with the Environmental Protection Agency and the U.S. Department of Justice to settle an enforcement action under the Federal Clean Air Act. The action is based on claims that PriceCostco failed to maintain required documentation related to its sale of freon products. Under the terms of the proposed settlement, PriceCostco will agree to pay a civil penalty of $232,000 and to comply with federal regulations relating to the sale of ozone-depleting substances. The Company is involved from time to time in claims, proceedings and litigation arising from its business and property ownership. The Company does not believe that any such claim, proceeding or litigation, either alone or in the aggregate, will have a material adverse effect on the Company's financial position or results of operations. ITEM 4--SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company's annual meeting is scheduled for 7:30 p.m. on January 29, 1997, at the DoubleTree Paradise Valley Resort in Scottsdale, Arizona. Matters to be voted on will be included in the Company's proxy statement to be filed with the Securities and Exchange Commission and distributed to stockholders prior to the meeting. 8 ITEM 4A--EXECUTIVE OFFICERS OF THE REGISTRANT The following is a list of the names, ages and positions of the executive officers of the registrant.
NAME AGE POSITION WITH COMPANY - - ------------------------------ --- -------------------------------------------------- James D. Sinegal 60 President and Chief Executive Officer Jeffrey H. Brotman 54 Chairman of the Board Richard D. DiCerchio 53 Executive Vice President, Chief Operating Officer--Merchandising, Distribution, Construction and Marketing Richard A. Galanti 40 Executive Vice President and Chief Financial Officer Franz E. Lazarus 49 Executive Vice President--International Operations David B. Loge 54 Executive Vice President--Manufacturing and AncillaryBusinesses Walter C. Jelinek 44 Executive Vice President, Chief Operating Officer--Northern Division Edward B. Maron 69 Executive Vice President, Chief Operating Officer--Canadian Division Joseph P. Portera 43 Executive Vice President, Chief Operating Officer--Eastern Division Dennis R. Zook 47 Executive Vice President, Chief Operating Officer--Southern Division
James D. Sinegal has been President, Chief Executive Officer and a director of the Company since October 1993 upon consummation of the Merger of Costco Wholesale Corporation ("Costco") and The Price Company ("Price"). From its inception until 1993, he was President and Chief Operating Officer of Costco and served as Chief Executive Officer from August 1988 until October 1993. Mr. Sinegal is a co-founder of Costco and has been a director of Costco since its inception. Jeffrey H. Brotman is a native of the Pacific Northwest and is a 1967 graduate of the University of Washington Law School. Mr. Brotman was a founder and Chairman of the Board of the Company from its inception. Upon the consummation of the Merger, Mr. Brotman became the Vice Chairman, and has served as Chairman since the spin-off on December 21, 1994. Mr. Brotman is a founder of a number of other specialty retail chains. He is a director of Seafirst Bank, Starbucks Corp., the Sweet Factory and Garden Botanika. Richard D. DiCerchio has been Executive Vice President, Chief Operating Officer--Merchandising, Distribution, Construction and Marketing and a director of the Company since October 1993 (upon consummation of the Merger) and, until mid-August 1994, also served as Executive Vice President, Chief Operating Officer--Northern Division. He was elected Chief Operating Officer--Western Region of Costco in August 1992 and was elected Executive Vice President and director of Costco in April 1986. From June 1985 to April 1986, he was Senior Vice President, Merchandising of Costco. He joined Costco as Vice President, Operations in May 1983. Richard A. Galanti has been Executive Vice President and Chief Financial Officer of PriceCostco since the Merger and has been a Director of PriceCostco since January 1995. He was Senior Vice President, Chief Financial Officer and Treasurer of Costco since January 1985, having joined Costco as Vice President--Finance in March 1984. From 1978 to February 1984, Mr. Galanti was an Associate with Donaldson, Lufkin & Jenrette Securities Corporation. Mr. Galanti also currently serves as a director of Hollywood Entertainment Corporation. Franz E. Lazarus was named Executive Vice President--International Operations in September, 1995, prior to which he had served as Executive Vice President, Chief Operating Officer-- Northern Division of PriceCostco since August 1994 and Executive Vice President, Chief Operating Officer--Eastern Division since the Merger. He was named Executive Vice President, Chief Operating Officer--East Coast Operations of Costco in August 1992. Mr. Lazarus joined Costco in November 1983 and has held various management positions prior to his current position. 9 David B. Loge has been Executive Vice President--Manufacturing and Ancillary Businesses since August 1994. Mr. Loge joined Price as a Director of Price Club Industries in March 1989 and became Vice President of Price and President of Price Club Industries in December 1990. Prior to joining Price, he served as Vice President of Operations of Sundale Beverage in Belmont, California. Walter C. ("Craig") Jelinek has been Executive Vice President, Chief Operating Officer--Northern Division since September 1995. He had been Senior Vice President, Operations--Northwest Region since September 1992. From May 1986 to September 1994 he was Vice President, Regional Operations Manager--Los Angeles Region and has held various management positions since joining Costco in April 1984. Edward B. Maron has been Executive Vice President, Chief Operating Officer--Canadian Division of PriceCostco since the Merger. He had been Senior Vice President--Canadian Division of Costco since April 1990. He has held various management positions since joining Costco in June 1985. Joseph P. Portera has been Executive Vice President, Chief Operating Officer--Eastern Division of PriceCostco since August 1994. He was Senior Vice President, Operations--Northern California Region from October 1993 to August 1994. From August 1991 to October 1993 he was Senior Vice President, Merchandising--Non Foods of Costco, and has held various management positions since joining Costco in April 1984. Dennis R. Zook has been Executive Vice President, Chief Operating Officer--Southern Division of PriceCostco since the Merger. He was Executive Vice President of Price since February 1989. Mr. Zook became Vice President of West Coast Operations of Price in October 1988 and has held various management positions since joining Price in October 1981. PART II ITEM 5--MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Trading in PriceCostco Common Stock commenced on October 22, 1993, and is quoted on The Nasdaq Stock Market's National Market under the symbol "PCCW." In June 1996, a public offering was completed whereby 19,500,000 shares of PriceCostco Common Stock (plus an overallotment of 1,691,301 shares) were sold by Fourcar B.V., an indirect subsidiary of Carrefour S.A.. The shares were sold through a group of underwriters at $19.50 per share. As a result of this offering, Fourcar B.V. no longer owns any shares of PriceCostco Common Stock. PriceCostco received no proceeds from the sale of this stock. 10 The following table sets forth the high and low sales prices of PriceCostco Common Stock for the period January 1, 1994 through October 31, 1996. The quotations are as reported in published financial sources.
PRICECOSTCO COMMON STOCK ------------------- HIGH LOW -------- --- Calendar Quarters--1994 First Quarter................................... 21 5/8 16 7/8 Second Quarter.................................. 18 1/4 13 Third Quarter................................... 16 1/2 13 3/4 Fourth Quarter.................................. 16 3/4 12 1/2 Calendar Quarters--1995 First Quarter................................... 15 1/8 12 Second Quarter.................................. 16 5/8 13 5/16 Third Quarter................................... 19 1/2 16 1/4 Fourth Quarter.................................. 17 3/4 14 3/8 Calendar Quarters--1996 First Quarter................................... 19 1/2 14 3/4 Second Quarter.................................. 21 5/8 17 1/2 Third Quarter................................... 22 1/8 19 3/4 Fourth Quarter (through October 31, 1996)....... 22 1/8 19 1/8
On October 31, 1996, the Company had 8,324 stockholders of record. DIVIDEND POLICY PriceCostco does not pay regular dividends and does not anticipate the declaration of a cash dividend in the foreseeable future. Under its two revolving credit agreements, PriceCostco is generally permitted to pay dividends in any fiscal year up to an amount equal to 50% of its consolidated net income for that fiscal year. ITEM 6--SELECTED FINANCIAL DATA SELECTED FINANCIAL AND OPERATING DATA The following tables set forth selected financial and operating data for PriceCostco for the ten fiscal years in the period ended September 1, 1996, giving effect to the Merger using the pooling-of-interests method of accounting and treating the non-club real estate segment as a discontinued operation prior to its spin-off in 1994. This selected financial and operating data should be read in conjunction with "Item 7-- Management's Discussion and Analysis of Financial Condition and Results of Operations," and the consolidated financial statements of PriceCostco for fiscal 1996. 11 PRICE/COSTCO, INC. SELECTED CONSOLIDATED FINANCIAL DATA (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
52 WEEKS 53 WEEKS ENDED ENDED 52 WEEKS 52 WEEKS 52 WEEKS SEPTEMBER 1, SEPTEMBER 3, ENDED AUGUST ENDED AUGUST ENDED AUGUST 1996 1995 28, 1994 29, 1993 30, 1992 ------------ ------------ ------------ ------------ ------------ OPERATING DATA Revenue Net sales......................... $19,213,866 $17,905,926 $ 16,160,911 $ 15,154,685 $ 13,820,380 Membership fees and other......... 352,590 341,360 319,732 309,129 276,998 ------------ ------------ ------------ ------------ ------------ Total revenue..................... 19,566,456 18,247,286 16,480,643 15,463,814 14,097,378 Operating expenses Merchandise costs................. 17,345,315 16,225,848 14,662,891 13,751,153 12,565,463 Selling, General & Administrative.................. 1,691,187 1,555,588 1,425,549 1,314,660 1,128,898 Preopening expenses............... 29,231 25,018 24,564 28,172 25,595 Provision for estimated warehouse closing costs................... 10,000 7,500 7,500 5,000 2,000 ------------ ------------ ------------ ------------ ------------ Operating income.................. 490,723 433,332 360,139 364,829 375,422 Other income (expense) Interest expense.................. (78,078) (67,911) (50,472) (46,116) (35,525) Interest income and other......... 10,832 2,783 13,888 17,750 28,958 Provision for merger and restructuring expenses.......... -- -- (120,000) -- -- ------------ ------------ ------------ ------------ ------------ Income from continuing operations before provision for income taxes.............................. 423,477 368,204 203,555 336,463 368,855 Provision for income taxes.......... 174,684 150,963 92,657 133,620 145,833 ------------ ------------ ------------ ------------ ------------ Income from continuing operations... 248,793 217,241 110,898 202,843 223,022 Discontinued operations: Income (loss), net of tax....... -- -- (40,766) 20,404 19,385 Loss on disposal................ -- (83,363) (182,500) -- -- Extraordinary items............... -- -- -- -- -- ------------ ------------ ------------ ------------ ------------ Net income (loss)................. $ 248,793 $ 133,878 $ (112,368) $ 223,247 $ 242,407 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Per Share Data--Fully Diluted Income from continuing operations...................... $ 1.22 $ 1.05 $ 0.51 $ 0.92 $ 0.98 Discontinued Operations: Income (loss), net of tax....... -- -- (0.19) 0.08 0.08 Loss on Disposal................ -- (0.37) (0.83) -- -- Extraordinary items............... -- -- -- -- -- ------------ ------------ ------------ ------------ ------------ Net income (loss)................. $ 1.22 $ 0.68 $ (0.51) $ 1.00 $ 1.06 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Shares used in calculation........ 218,363 224,079 219,334 240,162 245,090 52 WEEKS 52 WEEKS 53 WEEKS ENDED ENDED ENDED 52 WEEKS 52 WEEKS SEPTEMBER 1, SEPTEMBER 2, SEPTEMBER 3, ENDED AUGUST ENDED AUGUST 1991 1990 1989 28, 1988 30, 1987 ------------ ------------ ------------ ------------ ------------ OPERATING DATA Revenue Net sales......................... $11,813,509 $ 9,346,099 $ 7,844,539 $ 6,042,159 $ 4,606,352 Membership fees and other......... 228,742 185,144 157,621 125,985 98,201 ------------ ------------ ------------ ------------ ------------ Total revenue..................... 12,042,251 9,531,243 8,002,160 6,168,144 4,704,553 Operating expenses Merchandise costs................. 10,755,823 8,518,951 7,168,907 5,531,626 4,198,768 Selling, General & Administrative.................. 934,120 719,446 590,465 458,013 355,178 Preopening expenses............... 16,289 11,691 11,685 6,509 12,784 Provision for estimated warehouse closing costs................... 1,850 6,000 1,609 4,000 -- ------------ ------------ ------------ ------------ ------------ Operating income.................. 334,169 275,155 229,494 167,996 137,823 Other income (expense) Interest expense.................. (26,041) (18,769) (24,583) (20,949) (13,840) Interest income and other......... 33,913 19,239 24,275 22,341 20,936 Provision for merger and restructuring expenses.......... -- -- -- -- -- ------------ ------------ ------------ ------------ ------------ Income from continuing operations before provision for income taxes.............................. 342,041 275,625 229,186 169,388 144,919 Provision for income taxes.......... 134,748 107,899 88,742 67,533 68,019 ------------ ------------ ------------ ------------ ------------ Income from continuing operations... 207,293 167,726 140,444 101,855 76,900 Discontinued operations: Income (loss), net of tax....... 11,566 6,854 3,600 -- -- Loss on disposal................ -- -- -- -- -- Extraordinary items............... -- -- -- 2,856 1,510 ------------ ------------ ------------ ------------ ------------ Net income (loss)................. $ 218,859 $ 174,580 $ 144,044 $ 104,711 $ 78,410 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Per Share Data--Fully Diluted Income from continuing operations...................... $ 0.93 $ 0.79 $ 0.69 $ 0.56 $ 0.42 Discontinued Operations: Income (loss), net of tax....... 0.05 0.03 0.02 -- -- Loss on Disposal................ -- -- -- -- -- Extraordinary items............... -- -- -- 0.02 0.01 ------------ ------------ ------------ ------------ ------------ Net income (loss)................. $ 0.98 $ 0.82 $ 0.71 $ 0.58 $ 0.43 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Shares used in calculation........ 234,202 219,532 212,772 181,336 180,887
12 PRICE/COSTCO, INC. SELECTED CONSOLIDATED FINANCIAL DATA (DOLLARS IN THOUSANDS, EXCEPT WAREHOUSE AND PER SHARE DATA)
SEPTEMBER 1, SEPTEMBER 3, AUGUST 28, AUGUST 29, AUGUST 30, 1996 1995 1994 1993 1992 ------------ ------------ ------------ ------------ ------------ BALANCE SHEET DATA Working capital (deficit)......... $ 56,710 $ 9,381 $ (113,009) $ 127,312 $ 281,592 Property and equipment, net....... 2,888,310 2,535,593 2,146,396 1,966,601 1,704,052 Total assets...................... 4,911,861 4,437,419 4,235,659 3,930,799 3,576,543 Short-term debt................... 59,928 75,725 149,340 23,093 -- Long-term debt and capital lease obligations, net................ 1,229,221 1,094,615 795,492 812,576 813,976 Stockholders' equity (a)(b)....... 1,777,798 1,530,744 1,684,960 1,796,728 1,593,943 WAREHOUSES IN OPERATION Beginning of year................. 240 221 200 170 140 Opened............................ 20 24 29 37 31 Closed............................ (8) (5) (8) (7) (1) ------------ ------------ ------------ ------------ ------------ End of Year....................... 252 240 221 200 170 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ SEPTEMBER 1, SEPTEMBER 2, SEPTEMBER 3, AUGUST 28, AUGUST 30, 1991 1990 1989 1988 1987 ------------ ------------ ------------ ------------ ------------ BALANCE SHEET DATA Working capital (deficit)......... $ 304,703 $ 14,342 $ 103,252 $ 208,569 $ 244,783 Property and equipment, net....... 1,183,432 935,767 752,912 511,784 411,590 Total assets...................... 2,986,094 2,029,931 1,740,332 1,445,814 1,205,843 Short-term debt................... -- 139,414 114,000 -- -- Long-term debt and capital lease obligations, net................ 500,440 199,506 234,017 327,760 333,503 Stockholders' equity (a)(b)....... 1,429,703 988,458 777,730 585,598 468,045 WAREHOUSES IN OPERATION Beginning of year................. 119 104 84 77 47 Opened............................ 23 19 20 10 30 Closed............................ (2) (4) -- (3) -- ------------ ------------ ------------ ------------ ------------ End of Year....................... 140 119 104 84 77 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
- - ------------------------ (a) In 1989 Price paid to its shareholders a one-time special cash dividend of $74,621 or $1.50 per share of Price Common Stock. (b) In 1989 stockholders' equity reflects a $20,100 reduction of retained earnings related to conforming Price's accounting for income tax method to Costco's accounting for income tax method as of fiscal 1989. 13 ITEM 7--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS COMPARISON OF FISCAL 1996 (52 WEEKS) AND FISCAL 1995 (53 WEEKS): (DOLLARS IN THOUSANDS, EXCEPT EARNINGS PER SHARE) Net operating results for fiscal 1996 reflect net income of $248,793, or $1.22 per share (fully diluted), as compared to a fiscal 1995 net income of $133,878, or $.68 per share (fully diluted). The fiscal 1995 results include a non-cash charge of $83,363, or $.37 per share, reflecting the final calculation for the loss on the disposal of the discontinued real estate operations following the completion of the Spin-off of Price Enterprises. CONTINUING OPERATIONS Income from continuing operations for fiscal 1996 was $248,793, or $1.22 per share, compared to income from continuing operations for fiscal 1995 of $217,241, or $1.05 per share. Net sales increased 7.3% to $19,213,866 in fiscal 1996 (a 52-week year) from $17,905,926 in fiscal 1995 (a 53-week year). This increase was due to: (i) first year sales at the 20 new warehouses opened during fiscal 1996, which increase was partially offset by eight warehouses closed during fiscal 1996 that were in operation during fiscal 1995; (ii) increased sales at 24 warehouses that were opened in fiscal 1995 and that were in operation for the entire 1996 fiscal year; and (iii) higher sales at existing locations opened prior to fiscal 1995. Changes in prices did not materially impact sales levels. Comparable sales, that is sales in warehouses open for at least a year, increased at a 5% annual rate in fiscal 1996, compared to a 2% annual rate during fiscal 1995. The improvement in comparable sales levels in fiscal 1996, as compared to fiscal 1995, reflects new marketing and merchandising efforts, including the rollout of fresh foods and various ancillary businesses to certain existing locations. Membership fees and other revenue increased 3.3% to $352,590, or 1.84% of net sales, in fiscal 1996 from $341,360, or 1.91% of net sales, in fiscal 1995. This increase is primarily due to membership sign-ups at the 20 new warehouses opened in fiscal 1996. Effective with renewals in the United States, subsequent to April 1, 1996, the Company increased the annual membership fee for its Business "Add-on" members from $15 to $20. There are currently approximately 3.4 million Business "Add-on" members. Gross margin (defined as net sales minus merchandise costs) increased 11.2% to $1,868,551, or 9.73% of net sales, in fiscal 1996 from $1,680,078, or 9.38% of net sales, in fiscal 1995. Gross margin as a percentage of net sales increased due to greater purchasing power realized since the Merger, favorable inventory shrink results, the expanded use of the Company's depot facilities, and increased sales penetration of certain higher margin ancillary businesses. The gross margin figures reflect accounting for most U.S. merchandise inventories on the last-in, first-out (LIFO) method. For fiscal 1996 there was no LIFO charge due to the use of the LIFO method compared to the first-in, first-out (FIFO) method. This compares to a $9,500 LIFO charge, or $.03 per share (fully diluted), in fiscal 1995. Selling, general and administrative expenses as a percent of net sales increased to 8.80% during fiscal 1996 from 8.69% during fiscal 1995, primarily reflecting higher expenses associated with international expansion and certain ancillary operations. In addition, as a result of a strong second half performance, the Company achieved its annual profit goals for the 1996 fiscal year, resulting in a year-over-year increase of $11.2 million in the employee bonus accrual, which covers bonuses payable to more than seven hundred management employees participating in the Company's Annual Bonus Plan. Preopening expenses totaled $29,231, or 0.15% of net sales, during fiscal 1996 and $25,018, or 0.14% of net sales, during fiscal 1995. During fiscal 1996, the Company opened 20 new warehouses compared to 24 new warehouses during fiscal 1995. Fiscal 1996 preopening expenses also included an increased level of costs associated with remodeling and expanding fresh foods and ancillary operations at existing warehouses. 14 The Company recorded a pre-tax provision for warehouse closing costs of $10,000, or $.03 per share, on an after-tax basis (fully diluted). The provision includes estimated closing costs for certain warehouses, which were or will be replaced by new warehouses, the closing of a regional office and additional costs related to warehouse clubs closed in prior years. Warehouse closing costs were $7,500 (pre-tax), or $.02 per share, in fiscal 1995. Interest expense totaled $78,078 in fiscal 1996, and $67,911 in fiscal 1995. In both fiscal years, interest expense was incurred as a result of the interest on the three series of outstanding convertible subordinated debentures and interest on borrowings on the Company's bank lines and commercial paper programs. The increase in interest expense is primarily related to higher borrowings and interest rates under the Company's bank lines and commercial paper programs and the issuance of $300,000 in Senior Notes in June 1995. Interest income and other totaled $10,832 in fiscal 1996, and $2,783 in fiscal 1995. This increase was primarily due to the Company reflecting a reduction in its share of losses in certain unconsolidated joint ventures (primarily Price Quest) and an increase in income from its joint venture with Price Club Mexico. In fiscal 1996 and 1995, the effective income tax rate on income from continuing operations before provision for income taxes was 41.25% and 41.00% respectively. COMPARISON OF FISCAL 1995 (53 WEEKS) AND FISCAL 1994 (52 WEEKS): (DOLLARS IN THOUSANDS, EXCEPT EARNINGS PER SHARE) Net operating results for fiscal 1995 reflect net income of $133,878, or $.68 per share (fully diluted), as compared to a fiscal 1994 net loss of $112,368, or $.51 per share (fully diluted). The fiscal 1995 results include a non-cash charge of $83,363, or $.37 per share, reflecting the final calculation for the loss on the disposal of the discontinued real estate operations following the completion of the Spin-off of Price Enterprises. The fiscal 1994 loss of $112,368 includes the provision for merger and restructuring costs of $120,000 pre-tax ($80,000, or $.36 per share after tax), a provision included in loss from discontinued operations of $80,500 pre-tax ($47,500, or $.22 per share after tax) arising from a change in accounting estimates caused by the Spin-off and Exchange Transaction, and a non-cash charge of $182,500, or $.83 per share, reflecting the estimated loss on disposal of the discontinued non-club real estate operations. The Exchange Transaction was completed on December 20, 1994, and the estimated loss on disposal was adjusted to actual. For a more detailed discussion of the Spin-off and Exchange Transaction, see "Note 3-- Spin-off of Price Enterprises, Inc. and Discontinued Operations." CONTINUING OPERATIONS Income from continuing operations for fiscal 1995 was $217,241, or $1.05 per share, compared to income from continuing operations for fiscal 1994 of $110,898, or $.51 per share. Excluding the $120,000 pre-tax ($80,000 after tax) merger and restructuring charge, income from continuing operations for fiscal 1994 would have been $190,898, or $.87 per share. Net sales increased 10.8% to $17,905,926 in fiscal 1995 from $16,160,911 in fiscal 1994. This increase was due to: (i) first year sales at the 24 new warehouses opened during fiscal 1995, which increase was partially offset by 5 warehouses closed during fiscal 1995 that were in operation during fiscal 1994; (ii) increased sales at 29 warehouses that were opened in 1994 and that were in operation for the entire 1995 fiscal year; (iii) higher sales at existing locations opened prior to fiscal 1994; and (iv) one additional week of sales related to having a 53-week fiscal year. Changes in prices did not materially impact sales levels. Comparable sales, that is sales in warehouses open for at least a year, increased at a 2% annual rate in fiscal 1995, compared to a negative 3% annual rate during fiscal 1994. The improvement in comparable 15 sales levels in fiscal 1995, as compared to fiscal 1994, reflects new marketing and merchandising efforts, including the rollout of fresh foods and various ancillary businesses to certain existing locations. Membership fees and other revenue increased 6.8% to $341,360, or 1.91% of net sales, in fiscal 1995 from $319,732, or 1.98% of net sales, in fiscal 1994. This increase is primarily due to membership sign-ups at the 24 new warehouses opened in fiscal 1995 and one additional week of membership fees related to having a 53-week fiscal year. Gross margin (defined as net sales minus merchandise costs) increased 12.2% to $1,680,078, or 9.38% of net sales, in fiscal 1995 from $1,498,020, or 9.27% of net sales, in fiscal 1994. Gross margin as a percentage of net sales increased due to greater purchasing power realized since the Merger and the expanded use of the Company's depot facilities. The gross margin figures reflect accounting for most U.S. merchandise inventories on the last-in, first-out (LIFO) method. For fiscal 1995 there was a $9,500 LIFO charge, or $.03 per share (fully diluted), decreasing income after tax due to the use of the LIFO method compared to the first-in, first-out (FIFO) method. This compares to a $2,600 LIFO benefit, or $.01 per share (fully diluted), in fiscal 1994. Selling, general and administrative expenses as a percent of net sales improved to 8.69% during fiscal 1995 from 8.82% during fiscal 1994, reflecting lower expense ratios resulting from improved comparable sales increases, as well as the implementation of front-end scanning and automated receiving at certain existing warehouse, partially offset by higher expenses associated with international expansion and certain ancillary operations. Preopening expenses totaled $25,018, or 0.14% of net sales, during fiscal 1995 and $24,564, or 0.15% of net sales, during fiscal 1994. During fiscal 1995, the Company opened 24 new warehouses compared to opening 29 new warehouses during fiscal 1994. Fiscal 1995 preopening expenses also included an increased level of costs associated with remodels and expanding fresh foods and ancillary operations at existing warehouses. The Company recorded a pre-tax provision for warehouse closing costs of $7,500, or $.02 per share, on an after-tax basis (fully diluted) in fiscal 1995. The provision included estimated closing costs for certain warehouses, which were or will be replaced by new warehouses, the closing of a regional office and additional costs related to warehouse clubs closed in prior years. Warehouse closing costs were also $7,500 (pre-tax), or $.02 per share, in fiscal 1994. Interest expense totaled $67,911 in fiscal 1995, and $50,472 in fiscal 1994. In both fiscal years, interest expense was incurred as a result of the interest on the convertible subordinated debentures and interest on borrowings on the Company's bank lines and commercial paper programs. Interest expense in fiscal 1995 also included interest on the $300,000 Senior Notes (as hereafter defined) issued in June, 1995. The increase in interest expense is primarily related to higher borrowings and interest rates under the Company's bank lines and commercial paper programs and the issuance of the Senior Notes. Interest income and other totaled $2,783 in fiscal 1995, and $13,888 in fiscal 1994. This decrease was primarily due to the Company reflecting its share of losses in certain unconsolidated joint ventures, the elimination of interest income on certain notes receivable that were transferred to Price Enterprises as of fiscal 1994 year-end, and an approximate $2,500 pre-tax charge representing the Company's share of foreign currency exchange losses incurred by Price Club Mexico due to Mexico's currency devaluation during fiscal 1995. The $120,000 pre-tax provision for merger and restructuring costs reflected in fiscal 1994 includes direct transaction costs, expenses related to consolidating and restructuring certain functions, the closing of certain facilities and disposal of related properties, severance and employee payouts, write-offs of certain redundant capitalized costs and certain other costs. These costs were provided for in the first quarter of fiscal 1994. For additional information see "Note 2--Merger of Price and Costco" to the consolidated financial statements. 16 In both fiscal 1995 and 1994, the effective income tax rate on income from continuing operations before provision for income taxes was 41.0% (excluding the merger and restructuring charges in fiscal 1994). DISCONTINUED OPERATIONS Income from discontinued real estate operations was not included in operating results for periods subsequent to the announcement date (fourth quarter of fiscal 1994) and through the date of disposal (second quarter of fiscal 1995). The fiscal 1994 loss on discontinued real estate operations (net of operating expenses and taxes) included the results of income-producing properties, gains on sale of property, interest income and a provision of $90,200 pre-tax, of which $80,500 pre-tax ($47,500 after tax, or $.22 per share) related to a change in calculating estimated losses for assets which were considered to be economically impaired. This change in accounting estimates resulted from the spin-off of the real estate segment assets into Price Enterprises, and Price Enterprises' decision to pursue business plans and operating strategies as a stand-alone entity which were significantly different than the strategies of the Company. Discontinued operations in fiscal 1995 included a non-cash charge of $83,363, or $.37 per share, reflecting the final calculation for the loss on disposal of the discontinued real estate operations. Fiscal 1994 included a charge of $182,500, or $.83 per share, for the estimated loss on the disposal of the discontinued real estate operations. These charges related to the transfer of the Company's commercial real estate operations, together with certain other assets, to Price Enterprises as part of the Exchange Transaction. The Exchange Transaction was completed on December 20, 1994, and the estimated loss on disposal was adjusted to actual. For a more detailed discussion of the Exchange Transaction, see "Note 3-- Spin-off of Price Enterprises, Inc. and Discontinued Operations." RECENT SALES RESULTS PriceCostco's net sales for the nine-week period ended November 3, 1996 were approximately $3,470,000, an increase of 11% from approximately $3,140,000 for the same nine-week period of the prior fiscal year. Comparable warehouse sales (sales in warehouses open for at least a year) increased by 8 percent during the nine-week period. LIQUIDITY AND CAPITAL RESOURCES (DOLLARS IN THOUSANDS) The discussion below contains forward-looking statements that involve risks and uncertainties, including those risks and uncertainties detailed in the Company's reports filed with the SEC. Actual results may differ materially. PriceCostco's primary requirement for capital is the financing of the land, building and equipment costs for new warehouses plus the costs of initial warehouse operations and working capital requirements, as well as additional capital for international expansion through investments in foreign subsidiaries and joint ventures. In fiscal 1996, cash provided from operations was approximately $426,400. In April 1996, the Company borrowed $140,000 from a group of banks under a five-year unsecured term loan. The net proceeds from the term loan were used to repay existing indebtedness incurred under the Company's Canadian and U.S. commercial paper programs. Cash flow from operations and borrowings under the Company's commercial paper programs provided the primary sources of funds for additions to property and equipment for warehouse clubs and related operations of approximately $506,800. Expansion plans for the United States and Canada during fiscal 1997 are to open 22 new warehouse clubs, including seven relocations. The Company also expects to continue expansion of its international 17 operations and plans to open one to two additional United Kingdom units through its 60%-owned subsidiary during the second half of fiscal 1997. Other markets are being assessed, particularly in the Pacific Rim, and include the planned opening of a warehouse club in Taiwan in January 1997. PriceCostco and its Mexico-based joint venture partner, Controladora Comercial Mexicana, each own a 50% interest in Price Club Mexico following the Company's acquisition of Price Enterprises' interest in Price Club Mexico in April, 1995. See "Note 4--Acquisition of Price Enterprises' Interest in Price Club Mexico" in Notes to Consolidated Financial Statements. As of September 1, 1996, Price Club Mexico operated 13 Price Club warehouses in Mexico. While there can be no assurance that current expectations will be realized, and plans are subject to change upon further review, it is management's current intention to spend an aggregate of approximately $400,000 to $420,000 during fiscal 1997 in the United States and Canada for real estate, construction, remodeling and equipment for warehouse clubs and related operations; and approximately $80,000 to $100,000 for international expansion, including the United Kingdom and other potential ventures. These expenditures will be financed with a combination of cash provided from operations, the use of cash and cash equivalents (which totaled $101,955 at September 1, 1996), short-term borrowings under revolving credit facilities and/or commercial paper facilities, and other financing sources as required. The Company has a domestic multiple-option loan facility with a group of 12 banks, which provides for borrowings of up to $500,000 or standby support for a $500,000 commercial paper program. Of this amount, $250,000 expires on January 27, 1997, and $250,000 expires on January 30, 2001. The interest rate on bank borrowings is based on LIBOR or rates bid at auction by the participating banks. At September 1, 1996, no amounts were outstanding under the loan facility or the commercial paper program. The Company expects to renew for an additional one-year term the $250,000 portion of the loan facility expiring on January 27, 1997 at substantially the same terms. In addition, a wholly-owned Canadian subsidiary has a $102,000 commercial paper program supported by a bank credit facility with three Canadian banks, of which $62,000 will expire in March 1997 and $40,000 will expire in March 1999. The interest rate on bank borrowings is based on the prime rate or the "Bankers' Acceptance" rate. At September 1, 1996, $1,053 was outstanding under the bank credit facility and $59,928 was outstanding under the Canadian commercial paper program. The Company expects to renew for an additional one-year term the $62,000 portion of the loan facility expiring in March 1997, at substantially the same terms. The Company also has separate letter of credit facilities (for commercial and standby letters of credit), totaling approximately $198,000. The outstanding commitments under these facilities at September 1, 1996 totaled approximately $156,000, including approximately $56,000 in standby letters of credit for workers' compensation requirements. On February 21, 1996, the Company filed with the Securities and Exchange Commission a shelf registration statement relating to $500,000 of senior debt securities. The registration statement was declared effective on February 29, 1996. As part of that filing, the Company announced its intention, subject to market conditions, to offer $300,000 of senior notes to refinance existing indebtedness. The Company has deferred issuance of these notes due to unfavorable interest rate market conditions. In April 1996, the Company borrowed $140,000 from a group of banks under a five-year unsecured term loan. Interest only is payable at rates based on LIBOR. Proceeds of the loan were used to retire $40,000 outstanding under the Canadian commercial paper program and $100,000 outstanding under the U.S. commercial paper program. Due to rapid inventory turnover, the Company's operations provide a higher level of supplier trade payables than generally encountered in other forms of retailing. When combined with other current liabilities, the resulting amount typically approaches the current assets needed to operate the business (e.g., merchandise inventories, accounts receivable and other current assets). At September 1, 1996, 18 working capital totaled approximately $57,000 compared to working capital of approximately $9,000 at September 3, 1995. This increase in net working capital is primarily related to an increase in cash and cash equivalents of approximately $56,000, reductions in notes payable of approximately $16,000 as long-term debt proceeds were used to refinance certain short-term borrowings, and increases in owned inventories (inventories less accounts payables) of approximately $91,000, offset by increases in accrued salaries and benefits of approximately $52,000 and increases in other current liabilities of approximately $53,000. In fiscal 1995, cash provided from operations was approximately $278,000. These funds, combined with borrowings under the Company's commercial paper program and the proceeds from the $300,000 Senior Notes offering provided the primary sources of funds for additions to property and equipment for warehouse clubs and related operations of $531,000 and other investing activities related primarily to investments in unconsolidated joint ventures of $11,500. ITEM 8--FINANCIAL STATEMENTS Financial statements of PriceCostco are as follows:
PAGE ---- Report of Independent Public Accountants.................................. 23 Consolidated Balance Sheets, as of September 1, 1996 and September 3, 1995..................................................................... 24 Consolidated Statements of Operations, for the 52 weeks ended September 1, 1996, the 53 weeks ended September 3, 1995, and the 52 weeks ended August 28, 1994.... 25 Consolidated Statements of Stockholders' Equity, for the 52 weeks ended September 1, 1996, the 53 weeks ended September 3, 1995 and the 52 weeks ended August 28, 1994..................................................................... 26 Consolidated Statements of Cash Flows, for the 52 weeks ended September 1, 1996, the 53 weeks ended September 3, 1995 and the 52 weeks ended August 28, 1994................................................................. 27 Notes to Consolidated Financial Statements................................ 28
ITEM 9--CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10--DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT For information with respect to the executive officers of the Registrant, see Item--4A "Executive Officers of the Registrant" at the end of Part I of this report. The information required by this Item concerning the Directors and nominees for Director of the Company is incorporated herein by reference to PriceCostco's Proxy Statement for its Annual Meeting of Stockholders, to be held on January 29, 1997, to be filed with the Securities and Exchange Commission within 120 days of the end of the Company's fiscal year. ITEM 11--EXECUTIVE COMPENSATION The information required by this Item is incorporated herein by reference to PriceCostco's Proxy Statement for its Annual Meeting of Stockholders, to be held on January 29, 1997, to be filed with the Securities and Exchange Commission within 120 days of the end of the Company's fiscal year. ITEM 12--SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item is incorporated herein by reference to PriceCostco's Proxy Statement for its Annual Meeting of Stockholders to be held on January 29, 1997 to be filed with the Securities and Exchange Commission within 120 days of the end of the Company's fiscal year. 19 ITEM 13--CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is incorporated herein by reference to PriceCostco's Proxy Statement for its Annual Meeting of Stockholders, to be held on January 29, 1997 to be filed with the Securities and Exchange Commission within 120 days of the end of the Company's fiscal year. PART IV ITEM 14--EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Documents filed as part of this report are as follows: 1. Financial Statements: See listing of Financial Statements included as a part of this Form 10-K on Item 8 of Part II. 2. Financial Statement Schedules--None. 3. Exhibits: The required exhibits are included at the end of the Form 10-K Annual Report and are described in the Exhibit Index immediately preceding the first exhibit. (b) No reports on Form 8-K were filed during the last quarter of the period covered by this Annual Report. 20 SIGNATURES Pursuant to the requirements of Section 13 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. November 7, 1996 Price/Costco, Inc. (Registrant) By /s/ RICHARD A. GALANTI -------------------------------------- Richard A. Galanti EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By /s/ JAMES D. SINEGAL November 7, 1996 --------------------------------------------- James D. Sinegal PRESIDENT, CHIEF EXECUTIVE OFFICER AND DIRECTOR By /s/ JEFFREY H. BROTMAN November 7, 1996 --------------------------------------------- Jeffrey H. Brotman CHAIRMAN OF THE BOARD By /s/ RICHARD D. DICERCHIO November 7, 1996 --------------------------------------------- Richard D. DiCerchio EXECUTIVE VICE PRESIDENT, CHIEF OPERATING OFFICER-- MERCHANDISING, DISTRIBUTION, CONSTRUCTION AND MARKETING AND DIRECTOR By /s/ RICHARD A. GALANTI November 7, 1996 --------------------------------------------- Richard A. Galanti EXECUTIVE VICE PRESIDENT, CHIEF FINANCIAL OFFICER AND DIRECTOR (PRINCIPAL FINANCIAL OFFICER) By /s/ DAVID S. PETTERSON November 7, 1996 --------------------------------------------- David S. Petterson SENIOR VICE PRESIDENT AND CONTROLLER (PRINCIPAL ACCOUNTING OFFICER) By /s/ HAMILTON E. JAMES November 7, 1996 --------------------------------------------- Hamilton E. James DIRECTOR
21 By /s/ RICHARD M. LIBENSON November 7, 1996 --------------------------------------------- Richard M. Libenson DIRECTOR By /s/ JOHN W. MEISENBACH November 7, 1996 --------------------------------------------- John W. Meisenbach DIRECTOR By /s/ FREDERICK O. PAULSELL November 7, 1996 --------------------------------------------- Frederick O. Paulsell DIRECTOR By /s/ JILL S. November 7, 1996 RUCKELSHAUS --------------------------------------------- Jill S. Ruckelshaus DIRECTOR
22 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Price/Costco, Inc.: We have audited the accompanying consolidated balance sheets of Price/Costco, Inc. (a Delaware corporation) and subsidiaries (PriceCostco) as of September 1, 1996 and September 3, 1995, and the related consolidated statements of operations, stockholders' equity and cash flows for the 52 weeks ended September 1, 1996, the 53 weeks ended September 3, 1995 and the 52 weeks ended August 28, 1994. These financial statements are the responsibility of PriceCostco's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of PriceCostco as of September 1, 1996 and September 3, 1995, and the results of its operations and its cash flows for the 52 weeks ended September 1, 1996, the 53 weeks ended September 3, 1995, and the 52 weeks ended August 28, 1994 in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Seattle, Washington October 8, 1996 23 PRICE/COSTCO, INC. CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS) ASSETS
SEPTEMBER 1, SEPTEMBER 3, 1996 1995 ------------- ------------- CURRENT ASSETS Cash and cash equivalents................................. $ 101,955 $ 45,688 Receivables, net.......................................... 137,467 146,665 Merchandise inventories, net.............................. 1,500,842 1,422,272 Other current assets...................................... 88,040 87,694 ------------- ------------- Total current assets.................................... 1,828,304 1,702,319 ------------- ------------- PROPERTY AND EQUIPMENT Land, land rights, and land improvements.................. 1,273,811 1,143,860 Buildings and leasehold improvements...................... 1,449,094 1,215,706 Equipment and fixtures.................................... 716,448 624,398 Construction in progress.................................. 104,183 78,071 ------------- ------------- 3,543,536 3,062,035 Less-accumulated depreciation and amortization............ (655,226) (526,442) ------------- ------------- Net property and equipment.............................. 2,888,310 2,535,593 ------------- ------------- OTHER ASSETS................................................ 195,247 199,507 ------------- ------------- $ 4,911,861 $ 4,437,419 ------------- ------------- ------------- ------------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Bank checks outstanding................................... $ 22,330 $ 12,721 Notes payable............................................. 59,928 75,725 Accounts payable.......................................... 1,220,426 1,233,128 Accrued salaries and benefits............................. 256,951 205,236 Accrued sales and other taxes............................. 84,545 91,843 Other current liabilities................................. 127,414 74,285 ------------- ------------- Total current liabilities............................... 1,771,594 1,692,938 LONG-TERM DEBT.............................................. 1,229,221 1,094,615 DEFERRED INCOME TAXES....................................... 56,734 64,293 OTHER LIABILITIES........................................... 4,168 3,991 ------------- ------------- Total liabilities....................................... 3,061,717 2,855,837 ------------- ------------- COMMITMENTS AND CONTINGENCIES MINORITY INTEREST........................................... 72,346 50,838 STOCKHOLDERS' EQUITY Preferred stock $.01 par value; 100,000,000 shares authorized; no shares issued and outstanding............ -- -- Common stock $.01 par value; 900,000,000 shares authorized; 196,436,000 and 195,164,000 shares issued and outstanding......................................... 1,964 1,952 Additional paid-in capital................................ 321,832 303,989 Accumulated foreign currency translation.................. (71,883) (52,289) Retained earnings......................................... 1,525,885 1,277,092 ------------- ------------- Total stockholders' equity................................ 1,777,798 1,530,744 ------------- ------------- $ 4,911,861 $ 4,437,419 ------------- ------------- ------------- -------------
The accompanying notes are an integral part of these balance sheets. 24 PRICE/COSTCO, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
52 WEEKS 53 WEEKS 52 WEEKS ENDED ENDED ENDED SEPTEMBER 1, SEPTEMBER 3, AUGUST 28, 1996 1995 1994 ------------- ------------- ------------- REVENUE Net sales......................................................... $ 19,213,866 $ 17,905,926 $ 16,160,911 Membership fees and other......................................... 352,590 341,360 319,732 ------------- ------------- ------------- Total revenue................................................... 19,566,456 18,247,286 16,480,643 OPERATING EXPENSES Merchandise costs................................................. 17,345,315 16,225,848 14,662,891 Selling, general and administrative............................... 1,691,187 1,555,588 1,425,549 Preopening expenses............................................... 29,231 25,018 24,564 Provision for estimated warehouse closing costs................... 10,000 7,500 7,500 ------------- ------------- ------------- Operating income................................................ 490,723 433,332 360,139 OTHER INCOME (EXPENSE) Interest expense.................................................. (78,078) (67,911) (50,472) Interest income and other......................................... 10,832 2,783 13,888 Provision for merger and restructuring expenses................... -- -- (120,000) ------------- ------------- ------------- INCOME FROM CONTINUING OPERATIONS BEFORE PROVISION FOR INCOME TAXES.............................................................. 423,477 368,204 203,555 Provision for income taxes........................................ 174,684 150,963 92,657 ------------- ------------- ------------- INCOME FROM CONTINUING OPERATIONS................................... 248,793 217,241 110,898 DISCONTINUED OPERATIONS: Loss, net of tax.................................................. -- -- (40,766) Loss on disposal.................................................. -- (83,363) (182,500) ------------- ------------- ------------- NET INCOME (LOSS)................................................... $ 248,793 $ 133,878 $ (112,368) ------------- ------------- ------------- ------------- ------------- ------------- NET INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE-- PRIMARY: Continuing operations:............................................ $ 1.24 $ 1.06 $ 0.51 ------------- ------------- ------------- ------------- ------------- ------------- FULLY DILUTED: Continuing operations:............................................ $ 1.22 $ 1.05 $ 0.51 Discontinued operations: Loss, net of tax................................................ -- -- (0.19) Loss on disposal................................................ -- (0.37) (0.83) ------------- ------------- ------------- Net income (loss)................................................. $ 1.22 $ 0.68 $ (0.51) ------------- ------------- ------------- ------------- ------------- -------------
The accompanying notes are an integral part of these financial statements. 25 PRICE/COSTCO, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE 52 WEEKS ENDED SEPTEMBER 1, 1996, THE 53 WEEKS ENDED SEPTEMBER 3, 1995 AND THE 52 WEEKS ENDED AUGUST 28, 1994 (IN THOUSANDS)
ACCUMULATED COMMON STOCK ADDITIONAL FOREIGN -------------------- PAID-IN CURRENCY RETAINED SHARES AMOUNT CAPITAL TRANSLATION EARNINGS TOTAL --------- --------- ----------- ------------ ------------ ------------ BALANCE AT AUGUST 29, 1993...................... 217,074 $ 2,171 $ 571,268 $ (32,293) $ 1,255,582 $ 1,796,728 Stock options exercised including income tax benefits.................................... 748 7 11,376 -- -- 11,383 Shares repurchased............................ (27) -- (496) -- -- (496) Net loss...................................... -- -- -- -- (112,368) (112,368) Foreign currency translation adjustment....... -- -- -- (10,287) -- (10,287) --------- --------- ----------- ------------ ------------ ------------ BALANCE AT AUGUST 28, 1994...................... 217,795 2,178 582,148 (42,580) 1,143,214 1,684,960 Stock options exercised including income tax benefits.................................... 593 6 4,071 -- -- 4,077 Shares exchanged.............................. (23,224) (232) (282,230) -- -- (282,462) Net income.................................... -- -- -- -- 133,878 133,878 Foreign currency translation adjustment....... -- -- -- (9,709) -- (9,709) --------- --------- ----------- ------------ ------------ ------------ BALANCE AT SEPTEMBER 3, 1995.................... 195,164 1,952 303,989 (52,289) 1,277,092 1,530,744 Stock options exercised including income tax benefits.................................... 1,272 12 17,843 -- -- 17,855 Net income.................................... -- -- -- -- 248,793 248,793 Foreign currency translation adjustment....... -- -- -- (19,594) -- (19,594) --------- --------- ----------- ------------ ------------ ------------ BALANCE AT SEPTEMBER 1, 1996.................... 196,436 $ 1,964 $ 321,832 $ (71,883) $ 1,525,885 $ 1,777,798 --------- --------- ----------- ------------ ------------ ------------ --------- --------- ----------- ------------ ------------ ------------
The accompanying notes are an integral part of these financial statements. 26 PRICE/COSTCO, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
52 WEEKS 53 WEEKS 52 WEEKS ENDED ENDED ENDED SEPTEMBER 1, SEPTEMBER 3, AUGUST 28, 1996 1995 1994 ------------ ------------ ----------- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss)..................................................... $ 248,793 $ 133,878 $ (112,368) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization......................................... 161,632 142,022 136,317 Net (gain) loss on sale of property and equipment and other........... 3,494 (384) 3,282 Provision for asset impairments....................................... -- -- 90,200 Loss on disposal of discontinued operations........................... -- 83,363 182,500 Decrease in deferred income taxes..................................... (4,520) (3,559) (41,623) Change in receivables, other current assets, accrued and other current liabilities......................................................... 105,156 (81,729) 64,044 Increase in merchandise inventories................................... (82,411) (160,114) (271,332) Increase (decrease) in accounts payable............................... (8,345) 155,851 205,213 Other................................................................. 2,560 9,054 (3,013) Discontinued operations, net.......................................... -- -- (5,415) ------------ ------------ ----------- Total adjustments................................................... 177,566 144,504 360,173 ------------ ------------ ----------- Net cash provided by operating activities........................... 426,359 278,382 247,805 ------------ ------------ ----------- CASH FLOWS FROM INVESTING ACTIVITIES Additions to property and equipment................................... (506,782) (530,638) (474,553) Proceeds from the sale of property and equipment...................... 4,665 7,337 15,960 Investment in unconsolidated joint ventures........................... (5,312) (11,487) (39,795) Decrease in short-term investments and restricted cash................ -- 9,268 80,848 Increase in other assets and other, net............................... (35,820) (10,932) (8,416) Discontinued operations, net.......................................... -- -- (33,721) ------------ ------------ ----------- Net cash used in investing activities................................. (543,249) (536,452) (459,677) ------------ ------------ ----------- CASH FLOWS FROM FINANCING ACTIVITIES Borrowings (repayments) under short-term credit facilities, net....... (14,354) (73,194) 130,344 Net proceeds from issuance of long-term debt.......................... 141,851 299,026 13,805 Repayments of long-term debt.......................................... (3,270) (3,194) (29,937) Changes in bank overdraft............................................. 9,835 5,668 (15,477) Proceeds from minority interests...................................... 21,832 16,603 36,557 Exercise of stock options, including income tax benefit............... 17,855 4,077 11,383 Repurchases of common stock........................................... -- -- (496) ------------ ------------ ----------- Net cash provided by financing activities............................. 173,749 248,986 146,179 ------------ ------------ ----------- EFFECT OF EXCHANGE RATE CHANGES ON CASH................................. (592) 1,134 (896) ------------ ------------ ----------- Net increase (decrease) in cash and cash equivalents.................. 56,267 (7,950) (66,589) CASH AND CASH EQUIVALENTS BEGINNING OF YEAR............................. 45,688 53,638 120,227 ------------ ------------ ----------- CASH AND CASH EQUIVALENTS END OF YEAR................................... $ 101,955 $ 45,688 $ 53,638 ------------ ------------ ----------- ------------ ------------ ----------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for: Interest (net of amount capitalized).................................. $ 65,752 $ 75,583 $ 50,787 Income taxes.......................................................... $ 163,004 $ 165,269 $ 97,685
The accompanying notes are an integral part of these financial statements. 27 PRICE/COSTCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The consolidated financial statements include the accounts of Price/Costco, Inc., a Delaware corporation, and its subsidiaries ("PriceCostco" or the "Company"). PriceCostco is a holding company which operates primarily through its major subsidiaries, The Price Company and subsidiaries ("Price"), and Costco Wholesale Corporation and subsidiaries ("Costco"). All intercompany transactions between the Company and its subsidiaries have been eliminated in consolidation. As described more fully in "Note 2-- Merger of Price and Costco", on October 21, 1993, Price and Costco became wholly-owned subsidiaries of PriceCostco. Price and Costco primarily operate cash and carry membership warehouses. PriceCostco operates membership warehouses that offer very low prices on a limited selection of nationally-branded and selected private label products in a wide range of merchandise categories in no-frills, self-service warehouse facilities. At September 1, 1996, PriceCostco operated warehouse clubs in 22 states, 9 Canadian provinces and the United kingdom under the "Price Club" and "Costco Wholesale" names. As of September 1, 1996, the Company also operated (through a 50%-owned joint venture) 13 warehouses in Mexico. The Company's investment in the Price Club Mexico joint venture and in other unconsolidated joint ventures that are less than majority owned are accounted for under the equity method. As described more fully in "Note 3--Spin-off of Price Enterprises, Inc. and Discontinued Operations," the Company treated the spin-off of its non-club real estate operations as discontinued operations in the fourth quarter of fiscal 1994. FISCAL YEARS The Company reports on a 52/53 week fiscal year basis which ends on the Sunday nearest August 31st. Fiscal year 1996 was 52 weeks; fiscal year 1995 was 53 weeks; and fiscal year 1994 was 52 weeks. CASH AND CASH EQUIVALENTS The Company considers all investments in highly liquid debt instruments maturing within 90 days after purchase as cash equivalents unless amounts are held in escrow for future property purchases or restricted by agreements. SHORT-TERM INVESTMENTS AND RESTRICTED CASH Short-term investments include highly liquid investments in United States and Canadian government obligations, along with other investment vehicles, some of which have maturities of three months or less at the time of purchase. The Company's policy is to classify these investments as short-term investments rather than cash equivalents if they are acquired and disposed of through its investment trading account, held for future property purchases, or restricted by agreement. RECEIVABLES Receivables consist primarily of vendor rebates and promotional allowances and other miscellaneous amounts due to the Company, and are net of allowance for doubtful accounts of $3,498 at September 1, 1996 and $4,628 at September 3, 1995. 28 PRICE/COSTCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) MERCHANDISE INVENTORIES Merchandise inventories are valued at the lower of cost or market as determined primarily by the retail inventory method, and are stated using the last-in, first-out (LIFO) method for substantially all U.S. merchandise inventories. The Company believes the LIFO method more fairly presents the results of operations by more closely matching current costs with current revenues. If all merchandise inventories had been valued using the first-in, first-out (FIFO) method, inventories would have been higher by $16,150 at both September 1, 1996, and September 3, 1995, and $6,650 at August 28, 1994.
SEPTEMBER 1, SEPTEMBER 3, 1996 1995 ------------ ------------ Merchandise inventories consist of: United States (primarily LIFO).................................. $1,216,131 $1,174,067 Foreign (FIFO).................................................. 284,711 248,205 ------------ ------------ Total......................................................... $1,500,842 $1,422,272 ------------ ------------ ------------ ------------
The Company provides for estimated inventory losses between physical inventory counts on the basis of a standard percentage of sales. This provision is adjusted periodically to reflect the actual shrinkage results of the physical inventory counts which generally occur in the second and fourth quarters of the Company's fiscal year. When required in the normal course of business, the Company enters into agreements securing vendor interests in inventories. At September 1, 1996, substantially no inventory was pledged as security. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation and amortization expenses are computed using the straight-line method for financial reporting purposes and by accelerated methods for tax purposes. Buildings are depreciated over twenty-five to thirty-five years; equipment and fixtures are depreciated over three to ten years; and land rights and leasehold improvements are amortized over the initial term of the lease. Interest costs incurred on property and equipment during the construction period are capitalized. The amount of interest costs capitalized related to continuing operations was approximately $5,612 in fiscal 1996, $3,275 in fiscal 1995, and $5,209 in fiscal 1994. The amount of capitalized interest relating to the discontinued real estate operations for fiscal 1994 was $1,961. GOODWILL Goodwill, included in other assets, totaled $50,746 at September 1, 1996 and $51,063 at September 3, 1995, resulting from certain previous business combinations and the purchase of Price Enterprises' interest in Price Club Mexico in March 1995. Goodwill is being amortized over 5 to 40 years using the straight-line method. Accumulated amortization was $8,815 at September 1, 1996 and $7,016 at September 3, 1995. 29 PRICE/COSTCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE The calculation of net income per common and common equivalent share for each period presented prior to the Merger reflects the issuance of 2.13 shares of PriceCostco Common Stock for each share of Price Common Stock used in such calculation and one share of PriceCostco Common Stock for each share of Costco Common Stock used in such calculation. For fiscal 1996 and 1995, the calculation eliminates interest expense, net of income taxes, on the 5 1/2% convertible subordinated debentures (primary and fully diluted) and the 6 3/4% convertible subordinated debentures (fully diluted only), and includes the additional shares issuable upon conversion of these debentures. For fiscal 1994, the 6 3/4% and 5 1/2% convertible subordinated debentures were not dilutive for either primary or fully diluted purposes. For all periods presented, the 5 3/4% convertible subordinated debentures were not dilutive for either primary or fully diluted purposes. The weighted average number of common and common equivalent shares outstanding for primary and fully diluted share calculations for fiscal 1996, 1995, and 1994 were as follows (in thousands):
1996 1995 1994 --------- --------- --------- Primary...................................................... 205,242 210,962 219,332 Fully diluted................................................ 218,363 224,079 219,334
PREOPENING EXPENSES Preopening expenses related to new warehouses, major remodels/expansions, regional offices and other startup operations are expensed as incurred. MEMBERSHIP FEES Membership fee revenue represents annual membership fees paid by substantially all of the Company's members. In accordance with industry practice, annual membership fees are recognized as income when received. FOREIGN CURRENCY TRANSLATION The accumulated foreign currency translation relates to the Company's consolidated foreign operations and its investment in the Price Club Mexico joint venture. It is determined by application of the current rate method and included in the determination of consolidated stockholders' equity at the respective balance sheet dates. INCOME TAXES The Company accounts for income taxes under the provisions of Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." That standard requires companies to account for deferred income taxes using the asset and liability method. 30 PRICE/COSTCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES FISCAL 1996 NON-CASH ACTIVITIES - None. FISCAL 1995 NON-CASH ACTIVITIES - During December 1994, the Company exchanged 23,224,028 shares of Price Enterprises common stock valued at $282,462 for an equal number of shares of Price Costco common stock. - In February 1995, the Company exchanged 3,775,972 shares of Price Enterprises common stock valued at $45,925 for an interest-bearing note receivable from Price Enterprises. - As of August 28, 1994, the net assets of Price Enterprises consisted primarily of the discontinued operations net assets of $377,085 and certain other assets. In connection with the spin-off of Price Enterprises, all of these assets were eliminated from the Company's consolidated balance sheet during fiscal 1995. For additional information see "Note 3--Spin-off of Price Enterprises, Inc. and Discontinued Operations." - In April 1995, the Company purchased Price Enterprises' 25.5% interest in Price Club Mexico for $30,500 by a partial offset to the $45,925 note receivable due from Price Enterprises. - During fiscal 1995, the Company increased its investment in certain unconsolidated joint ventures by $23,100 through reductions of accounts receivable due from those joint ventures. FISCAL 1994 NON-CASH ACTIVITIES - During fiscal 1994, the Company transferred approximately $127,055 of property and equipment and other assets to its discontinued non-club real estate operations. DERIVATIVES The Company has limited involvement with derivative financial instruments and only uses them to manage well-defined interest rate and foreign exchange risks. Forward foreign exchange contracts are used to hedge the impact of fluctuations of foreign exchange on inventory purchases. The amount of interest rate and foreign exchange contracts outstanding at year-end or in place during fiscal 1996 was immaterial to the Company's results of operations or its financial position. RECENT ACCOUNTING PRONOUNCEMENTS In March 1995, the Financial Accounting Standards Board issued Statement No. 121 ("SFAS No. 121") on accounting for the impairment of long-lived assets, certain identifiable intangibles, and goodwill related to assets to be held and used. SFAS No. 121 also establishes accounting standards for long-lived assets and certain identifiable intangibles to be disposed. The Company intends to adopt SFAS No. 121 in fiscal 1997, and has estimated a pre-tax, cumulative non-cash charge relating to the writedown of impaired long-term assets of approximately $65,000. 31 PRICE/COSTCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) In November 1995, the Financial Accounting Standards Board issued Statement No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), which established financial accounting and reporting standards for stock-based employee compensation plans. SFAS No. 123 specifies a fair value-based method of accounting for stock-based compensation plans and encourages (but does not require) entities to adopt that method in place of the provisions of APB Opinion 25, "Accounting for Stock Issued to Employees". The Company has not yet determined which method of accounting will be used or what impact the adoption of the accounting requirements of SFAS No. 123 might have on the Company's results of operations. 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 reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. NOTE 2--MERGER OF PRICE AND COSTCO On October 21, 1993, the shareholders of both Price and Costco approved the mergers of Price and Costco into PriceCostco (the "Merger"). PriceCostco was formed to effect the Merger, which qualified as a "pooling-of-interests" for accounting and financial reporting purposes. The pooling-of-interests method of accounting is intended to present as a single interest two or more common shareholder interests which were previously independent. Consequently, the historical financial statements for periods prior to the Merger were restated as though the companies had been combined. The restated financial statements were adjusted to conform the accounting policies of the separate companies. All fees and expenses related to the Merger and to the consolidation and restructuring of the combined companies were expensed as required under the pooling-of-interests accounting method. In the first quarter of fiscal 1994, the Company recorded a provision for merger and restructuring costs of $120,000 pre-tax ($80,000 after tax) related to the Merger. 32 PRICE/COSTCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 2--MERGER OF PRICE AND COSTCO (CONTINUED) Components of the $120,000 provision for merger and restructuring expenses were as follows:
AMOUNTS EXPENDED ------------------------------------ FISCAL 1994 FISCAL 1995 TOTAL ----------- ----------- ---------- Direct transaction expenses including investment banking, legal, accounting, printing, filing and other professional fees........ $ 24,548 $ -- $ 24,548 Cost of closing eight operating warehouses including property write-downs, severance, future lease costs, and other closing expenses; write-downs of abandoned warehouse projects and restructuring of redundant international expansion efforts...... 24,948 -- 24,948 Costs of consolidating central administrative functions including information systems, accounting, merchandising and human resources and costs associated with restructuring regional and warehouse support activities including merchandise re-alignment and distribution................................................ 30,178 9,300 39,478 Costs of converting management information systems, primarily merchandising, operating, membership, payroll, and sales audit........................................................... 13,904 3,969 17,873 Other expenses.................................................... 9,224 3,929 13,153 ----------- ----------- ---------- Total........................................................... $ 102,802 $ 17,198 $ 120,000 ----------- ----------- ---------- ----------- ----------- ----------
NOTE 3--SPIN-OFF OF PRICE ENTERPRISES, INC. AND DISCONTINUED OPERATIONS On July 28, 1994, PriceCostco entered into an Agreement of Transfer and Plan of Exchange (as amended and restated, the "Transfer and Exchange Agreement") with Price Enterprises, Inc. ("Price Enterprises"). Price Enterprises was an indirect, wholly-owned subsidiary of PriceCostco, formed in July 1994. The transactions contemplated by the Transfer and Exchange Agreement are referred to herein as the "Exchange Transaction." Pursuant to the Transfer and Exchange Agreement, PriceCostco offered to exchange one share of Price Enterprises Common Stock for each share of PriceCostco Common Stock, up to a maximum of 27 million shares of Price Enterprises Common Stock (the "Exchange Offer"). In the fourth quarter of fiscal 1994, the Company recorded an estimated loss on disposal of its discontinued operations (the non-club real estate segment) of $182,500 as a result of entering into the Transfer and Exchange Agreement. The loss also included the direct expenses related to the Exchange Transaction. For purposes of recording such estimated loss, the Company assumed that (i) the Exchange Offer would be fully subscribed, (ii) a per share price of Price Enterprises Common Stock of $15.25 (the closing sales price of PriceCostco Common Stock on October 24, 1994), and (iii) direct expenses and other costs related to the Exchange Transaction of approximately $15,250. The Exchange Transaction was completed on December 20, 1994, with 23,224,028 shares of PriceCostco Common Stock tendered and exchanged for an equal number of shares of Price Enterprises Common Stock. On February 9, 1995, Price Enterprises purchased from PriceCostco 3,775,972 shares of 33 PRICE/COSTCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 3--SPIN-OFF OF PRICE ENTERPRISES, INC. AND DISCONTINUED OPERATIONS (CONTINUED) Price Enterprises Common Stock, constituting all of the remaining shares of Price Enterprises Common Stock held by PriceCostco. Price Enterprises issued to PriceCostco a secured promissory note in the amount of $45,925 due in December 1996 as payment for such shares, based on an average closing sales price $12.1625 of Price Enterprises Common Stock. The price per share of Price Enterprises Common Stock represented the average closing sales price of Price Enterprises Common Stock during the 20 trading days commencing on the sixth trading day following the closing of the Exchange Offer. Based on the aggregate number of shares of Price Enterprises Common Stock (27 million shares) exchanged for PriceCostco Common Stock and sold to Price Enterprises for a secured promissory note and an average closing sales price of $12.1625 per share for Price Enterprises Common Stock, the loss on disposal of the discontinued real estate operations increased by $83,363 (27 million shares multiplied by $3.0875 per share representing the difference between the estimated and actual price per share). This non-cash charge was reflected as an additional loss on disposal of discontinued operations in the second quarter ended May 7, 1995. The following real estate-related assets were transferred to Price Enterprises: - Substantially all of the real estate properties which historically formed the non-club real estate segment of PriceCostco. - Four Price Club warehouses ("Warehouse Properties") which were adjacent to existing non-club real estate properties, which are now being leased back to PriceCostco, effective August 29, 1994, at initial collective annual rentals of approximately $8,600. - Notes receivable from various municipalities and agencies ("City Notes"). - Note receivable in the principal amount of $41,000 made by Atlas Hotels, Inc., secured by a hotel and convention center property located in San Diego, California ("Atlas Note"). In addition, PriceCostco transferred to Price Enterprises 51% of the outstanding capital stock of Price Quest, Inc. ("Price Quest") and Price Global Trading, Inc. ("Price Global"). Price Quest operated the Quest interactive electronic shopping business and provides other services to members. Price Global has the rights to develop membership warehouse club businesses in certain geographical areas specified in the Transfer and Exchange Agreement. On or about September 1, 1996, Price Quest discontinued the Quest interactive electronic shopping business in the Company's warehouses, but continues to provide other services to members, including auto referral and travel related services. As a result of the proposed resolution of the shareholder litigation arising from the spin-off and Exchange Transaction (see Note 10--"Commitments and Contingencies"), PriceCostco would retain no ownership interest in Price Quest or Price Global. PriceCostco also transferred to Price Enterprises a 25.5% interest in the Price Club Mexico joint venture. This interest was subsequently acquired from Price Enterprises in fiscal 1995. Price Club Mexico is a joint venture with Controladora Comercial Mexicana, S.A. de CV. operating Price Clubs in Mexico. See "Note 4--Acquisition of Price Enterprises' Interest in Price Club Mexico." PriceCostco and Price Enterprises entered into an unsecured revolving credit agreement under which PriceCostco agreed to advance Price Enterprises up to a maximum principal amount of $85,000. All 34 PRICE/COSTCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 3--SPIN-OFF OF PRICE ENTERPRISES, INC. AND DISCONTINUED OPERATIONS (CONTINUED) amounts have been paid under this agreement and PriceCostco no longer has any obligations to provide financing for Price Enterprises. DISCONTINUED OPERATIONS Historically, the Company treated non-club real estate investments as a separate reportable business segment. The primary assets generating operating income for the segment were non-club real estate properties, consisting of property owned directly and property owned by real estate joint venture partnerships in which the Company had a controlling interest. Real estate joint ventures related to real estate partnerships that were less than majority owned. In fiscal 1994, the Atlas Note was purchased and the related interest income was included in the non-club real estate segment. Additionally, the Warehouse Properties and City Notes transferred to Price Enterprises as of August 28, 1994 were included in the net assets of the discontinued operations as of August 28, 1994, in the accompanying consolidated balance sheet. However, the operating expenses of the Warehouse Properties and the interest income on the City Notes have not been included in the real estate segment operating results because historically these amounts have been included as part of merchandising operations and other income. The operating results and net assets of Price Quest, Price Global and the 25.5% interest in the Price Club Mexico joint venture transferred to Price Enterprises are included in continuing operations because they were not related to the discontinued real estate operations. LOSS FROM DISCONTINUED OPERATIONS Components of the loss from discontinued operations for fiscal 1994, prior to the effective date of the Exchange Transaction, were as follows:
1994 ---------- Real estate rentals............................................................... $ 29,753 Operating expenses................................................................ (17,158) Gains on sale of non-club real estate properties.................................. 6,135 Provision for asset impairments (including a change in estimate related to the Exchange Transaction)........................................................... (90,200) ---------- Operating loss.................................................................. (71,470) Interest income................................................................... 2,319 Income tax benefit................................................................ (28,385) ---------- Net loss........................................................................ $ (40,766) ---------- ----------
PROVISION FOR ASSET IMPAIRMENTS The loss on discontinued real estate operations includes a provision of $90,200 of which $80,500 ($47,500 after tax) relates to a change in calculating estimated losses for assets which are economically impaired. This change in accounting estimates results from the spin-off of the real estate segment assets into Price Enterprises and Price Enterprises' decision to pursue business plans and operating strategies as a stand-alone entity which are significantly different than the previous strategies of the Company. Price 35 PRICE/COSTCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 3--SPIN-OFF OF PRICE ENTERPRISES, INC. AND DISCONTINUED OPERATIONS (CONTINUED) Enterprises' management believes that as a separate operating business it will not have the same access to capital as the Company or generate internal funds from operations to the same extent as the Company. PriceCostco's accounting policies with respect to estimating the amount of impairments on individual real estate properties and related assets were such that impairment losses would be recorded if the carrying amount of the asset could not be recovered from estimated future cash flows on an undiscounted basis. Price Enterprises' management believed that in view of its strategies with respect to the number and nature of properties that would be selected for disposition, it would be more appropriate to estimate impairment losses based on fair values of the real estate properties as determined by appraisals and/or a risk-adjusted discounted cash flow approach. In determining impairment losses, individual real estate assets were reduced to estimated fair value, if lower than historical cost. For those assets which have an estimated fair value in excess of cost, the asset continues to be recorded at cost. The impairment losses recorded as a result of this change in accounting estimates reduced the book basis of certain of the real estate and related assets. Under the previous policy, PriceCostco and Price Enterprises had determined that a provision for asset impairments of approximately $9,700 was required relating to four properties which were under contract or in final negotiations for sale. GAINS ON SALE OF NON-CLUB REAL ESTATE PROPERTIES During fiscal 1994, the Company entered into a transaction with The Price REIT, Inc. On October 1, 1993, the Company sold a single shopping center and adjacent Price Club (which is being leased back to the Company) for $28,200. The Company recorded a $4,210 pre-tax gain in connection with this sale. RELATED PARTY TRANSACTIONS Joseph Kornwasser, a former director of PriceCostco until July 28, 1994, is a general partner and has a two-thirds ownership interest in Kornwasser and Friedman Shopping Center Properties (K & F). K & F was a partner with Price in two partnerships. As of August 28, 1994, Price's total capital contributions to the partnerships were $83,000. Aggregate cumulative distributions from these partnerships were $14,300 at August 28, 1994. Price had also entered into a Development Agreement with K & F for the development of four additional properties. As of August 28, 1994, Price's total capital expenditures for these properties were $58,000. Aggregate cumulative distributions from these properties were $4,500 at August 28, 1994. Both partnership agreements and the Development Agreement provided for a preferred return to Price on a varying scale from 9% to 10% on its invested capital after which operating cash flows or profits are distributed 75% to Price and 25% to K & F. On August 12, 1993, Mr. Kornwasser became Chief Executive Officer and director of The Price REIT. On that date, The Price REIT also obtained the right to acquire certain of the partnership interest of K & F described above. On August 28, 1994, the Company purchased both K & F's interest in the two partnerships and its rights under the Development Agreement for a total of $2,500. NOTE 4--ACQUISITION OF PRICE ENTERPRISES' INTEREST IN PRICE CLUB MEXICO In April 1995, the Company purchased Price Enterprises' 25.5% interest in Price Club Mexico for $30,500. The purchase price was paid by a partial offset of the $45,925 secured promissory note owed to 36 PRICE/COSTCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 4--ACQUISITION OF PRICE ENTERPRISES' INTEREST IN PRICE CLUB MEXICO (CONTINUED) PriceCostco by Price Enterprises (see "Note 1--Summary of Significant Accounting Policies"). As a result of the purchase, the Company owns a 50% interest in the Price Club Mexico joint venture. Controladora Comercial Mexicana owns the other 50% interest in the Price Club Mexico joint venture. In January 1995, PriceCostco assumed management responsibility over operations, merchandising and site acquisitions for Price Club Mexico. NOTE 5--DEBT SHORT-TERM BORROWINGS The Company has a domestic, multiple-option loan facility with a group of 12 banks which provides for borrowings of up to $500,000 or standby support for a $500,000 commercial paper program. Of this amount, $250,000 expires on January 27, 1997, and $250,000 expires on January 30, 2001. The interest rate on bank borrowings is based on LIBOR or rates bid at auction by the participating banks. At September 1, 1996, no amounts were outstanding under the loan facility or the commercial paper program. The Company expects to renew for an additional one-year term the $250,000 portion of the loan facility expiring on January 27, 1997, at substantially the same terms. The Company is required to maintain certain financial covenants, among other restrictions. The Company was in compliance with all requirements as of September 1, 1996. In addition, a wholly-owned Canadian subsidiary has a $102,000 commercial paper program supported by a bank credit facility with three Canadian banks of which $62,000 will expire in March 1997 and $40,000 will expire in March 1999. The interest rate on bank borrowings is based on the prime rate or the "Bankers' Acceptance" rate. At September 1, 1996, $1,053 was outstanding under the bank credit facility and $59,928 was outstanding under the Canadian commercial paper program. The Company expects to renew for an additional one-year term the $62,000 portion of the loan facility expiring in March 1997, at substantially the same terms. 37 PRICE/COSTCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 5--DEBT (CONTINUED) The weighted average borrowings, highest borrowings and interest rate under all short-term borrowing arrangements were as follows for fiscal 1996, 1995, and 1994:
MAXIMUM AMOUNT AVERAGE AMOUNT WEIGHTED AVERAGE OUTSTANDING OUTSTANDING INTEREST RATE CATEGORY OF AGGREGATE SHORT-TERM DURING THE DURING THE DURING THE BORROWINGS PERIOD PERIOD PERIOD - - --------------------------------------- ----------------- --------------- ----------------- PERIOD ENDED SEPTEMBER 1, 1996 Bank borrowings: U.S.................................. $ -- $ -- --% Canadian............................. 32,904 6,795 5.99 Commercial Paper: U.S.................................. 198,000 55,239 5.71 Canadian............................. 102,368 69,775 5.40 PERIOD ENDED SEPTEMBER 3, 1995 Bank borrowings: U.S.................................. $ -- $ -- --% Canadian............................. 9,374 1,776 8.04 Commercial Paper: U.S.................................. 468,000 215,683 5.75 Canadian............................. 23,760 3,912 5.56 PERIOD ENDED AUGUST 28, 1994 Bank borrowings: U.S.................................. $ 142,000 $ 16,786 3.46% Canadian............................. 25,369 8,072 6.47 Commercial Paper: U.S.................................. 149,340 35,655 3.92
The Company has separate letter of credit facilities (for commercial and standby letters of credit) totaling approximately $198,000. The outstanding commitments under these facilities at September 1, 1996 totaled approximately $156,000, including approximately $56,000 in standby letters for workers' compensation requirements. 38 PRICE/COSTCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 5--DEBT (CONTINUED) LONG-TERM DEBT Long-term debt at September 1, 1996 and September 3, 1995 consists of:
1996 1995 ------------ ------------ 5 3/4% Convertible subordinated debentures due May 2002........... $ 300,000 $ 300,000 6 3/4% Convertible subordinated debentures due March 2001......... 285,079 285,079 5 1/2% Convertible subordinated debentures due February 2012...... 179,338 179,338 7 1/8% Senior Notes due June 2005................................. 300,000 300,000 Unsecured note payable to banks due April 2001.................... 140,000 -- Notes payable secured by trust deeds on real estate............... 21,956 27,377 Banker's Acceptances and other.................................... 12,247 8,021 ------------ ------------ 1,238,620 1,099,815 Less current portion (included in other current liabilities)...... 9,399 5,200 ------------ ------------ Total long-term debt............................................ $ 1,229,221 $ 1,094,615 ------------ ------------ ------------ ------------
Effective upon consummation of the Merger, PriceCostco became a co-obligor under each of the convertible subordinated debentures originally issued by Price and Costco. These debentures are convertible into shares of PriceCostco. Conversion rates of Price subordinated debentures have been adjusted for the exchange ratio pursuant to the Merger. The 5 3/4% convertible subordinated debentures due May 2002 are convertible at any time prior to maturity, unless previously redeemed, into shares of PriceCostco common stock at a conversion price of $41.25 per share, subject to adjustment in certain events. Interest on the debentures is payable semiannually on November 15 and May 15. Commencing on June 1, 1995, these debentures are redeemable at the option of the Company, in whole or in part, at certain redemption prices. The 6 3/4% convertible subordinated debentures are convertible into shares of PriceCostco common stock at any time on or before March 2001, unless previously redeemed, at a conversion price of $22.54 per share, subject to adjustment in certain events. Interest on the debentures is payable semiannually on March 1 and September 1. The debentures are redeemable at the option of the Company after March 1, 1994 at certain redemption prices. During fiscal 1994 in connection with the Merger, approximately $2,421 of these debentures were purchased at their face value. The 5 1/2% convertible subordinated debentures are convertible into shares of PriceCostco common stock at a conversion price of $23.77 per share, subject to adjustment in certain events. The debentures provide for payments to an annual sinking fund in the amount of 5% of the original principal amount ($10,000), commencing February 1998, calculated to retire 70% of the principal amount prior to maturity. During fiscal 1990, the Company repurchased debentures with a face value of $20,597 and will apply this purchase to the initial sinking fund payments. Interest is payable semiannually on February 28 and August 31. 39 PRICE/COSTCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 5--DEBT (CONTINUED) The 7 1/8% Senior Notes were issued on June 7, 1995. Interest on the notes is payable semiannually on June 15 and December 15. The indentures contain limitations on the Company's and certain subsidiaries' ability to create liens securing indebtedness and to enter into certain sale leaseback transactions. In April 1996, the Company borrowed $140,000 from a group of banks under a five-year unsecured term loan. Interest only is payable quarterly at rates based on LIBOR. Proceeds of the loan were used to retire $40,000 outstanding under the Canadian commercial paper program and $100,000 outstanding under the U.S. commercial paper program. On February 21, 1996, the Company filed with the Securities and Exchange Commission a shelf registration statement relating to $500,000 of senior debt securities. The registration statement was declared effective on February 29, 1996. As part of that filing, the Company announced its intention, subject to market conditions, to offer $300,000 of senior notes to refinance existing indebtedness. The Company has deferred issuance of these notes due to unfavorable interest rate market conditions. At September 1, 1996, the fair values of the 5 3/4%, 6 3/4% and 5 1/2% convertible subordinated debentures, based on current market quotes, were approximately $275,000, $297,000, and $184,000 respectively. Early retirement of these debentures would result in the Company paying a call premium. The fair value of the 7 1/8% Senior Notes, based on market quotes on September 1, 1996, was approximately $286,000. The Senior Notes are not redeemable prior to maturity. Maturities of long-term debt during the next five fiscal years and thereafter are as follows: 1997.......................... $ 9,399 1998.......................... 3,480 1999.......................... 2,501 2000.......................... 1,922 2001.......................... 427,199 Thereafter.................... 794,119 ------------- Total....................... $ 1,238,620 ------------- -------------
NOTE 6--LEASES The Company leases land and/or warehouse buildings at 48 warehouses open at September 1, 1996 and certain other office and distribution facilities under operating leases with remaining terms ranging from 2 to 30 years. These leases generally contain one or more of the following options which the Company can exercise at the end of the initial lease term: (a) renewal of the lease for a defined number of years at the then fair market rental rate; (b) purchase of the property at the then fair market value; (c) right of first refusal in the event of a third party purchase offer. Certain leases provide for periodic rental increases based on the price indices and some of the leases provide for rents based on the greater of minimum guaranteed amounts or sales volume. Contingent rents have not been material. Additionally, the Company leases certain equipment and fixtures under short-term operating leases which permit the Company to either renew for a series of one-year terms or to purchase the equipment at the then fair market value. 40 PRICE/COSTCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 6--LEASES (CONTINUED) Aggregate rental expense for fiscal 1996, 1995, and 1994 was $55,686, $53,600, and $44,900, respectively. Future minimum payments during the next five fiscal years and thereafter under noncancelable leases with terms in excess of one year, at September 1, 1996, were as follows: 1997.......................... $ 52,341 1998.......................... 49,500 1999.......................... 46,424 2000.......................... 45,708 2001.......................... 45,813 Thereafter.................... 479,840 ------------- Total minimum payments...... $ 719,626 ------------- -------------
NOTE 7--STOCK OPTIONS AND WARRANTS Prior to the Merger, Price and Costco adopted various incentive and non-qualified stock option plans which allowed certain key employees and directors to purchase or be granted common stock of Price and Costco (collectively the Old Stock Option Plans). Options were granted for a maximum term of ten years, and were exercisable upon vesting. Options granted under these plans generally vest ratably over five to nine years. Subsequent to the Merger, new grants of options are not being made under the Old Stock Option Plans. The PriceCostco 1993 Combined Stock Grant and Stock Option Plan (the New Stock Option Plan) provides for the issuance of up to 10 million shares of the Company's common stock pursuant to the exercise of stock options or up to 1,666,666 shares through stock grants. Stock option transactions relating to the Old and New Stock Option Plans are summarized below:
STOCK OPTIONS RANGE OF (IN EXERCISE THOUSANDS) PRICE PER SHARE ------------- ---------------- Under option at August 29, 1993............................. 12,904 $ .17 - 40.17 Granted................................................... 3,320 14.00 - 19.00 Exercised................................................. (748) 1.46 - 19.00 Cancelled................................................. (785) 5.67 - 40.17 ------ Under option at August 28, 1994............................. 14,691 .17 - 40.17 Granted................................................... 3,516 12.50 - 19.00 Exercised................................................. (595) .17 - 17.49 Cancelled................................................. (1,649) 11.33 - 40.17 ------ Under option at September 3, 1995........................... 15,963 2.75 - 40.17 Granted................................................... 2,645 15.25 - 19.75 Exercised................................................. (1,278) 3.33 - 20.54 Cancelled................................................. (358) 12.50 - 40.17 ------ Under option at September 1, 1996........................... 16,972 2.75 - 40.17 ------ ------ Options exercisable at September 1, 1996.................... 8,996 ------ ------
41 PRICE/COSTCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 7--STOCK OPTIONS AND WARRANTS (CONTINUED) A foreign subsidiary of the Company has a separate stock option plan whereby employees of the subsidiary receive stock option grants of subsidiary stock. At September 1, 1996, stock option grants were approximately 1% of the subsidiary's outstanding shares. In 1986 and 1987, Price granted warrants to purchase a total of 1,065,000 shares of common stock at $17.37 per share to a joint venture partner. The warrants granted in 1987 vested over a five year period from the date of issuance and were exercisable up to eight years and one month from the grant date. A total of 532,500 warrants have been exercised. The remaining 532,500 warrants were cancelled during fiscal 1995. NOTE 8--RETIREMENT PLANS On January 1, 1995, the Company amended and restated The Price Company Retirement Plan, The Price Company 401(k) Plan and the Costco Wholesale 401(k) Plan into the PriceCostco 401(k) Retirement Plan. This new plan is available to all U.S. employees who have one year or more of service, except California union employees. The plan allows pre-tax deferral against which the Company matches 50% of the first one thousand dollars of employee contributions. In addition, the Company will provide each participant a contribution based on salary and years of service. The Company has a defined contribution plan for Canadian Price, Canadian Costco and United Kingdom Costco employees and contributes a percentage of each employee's salary. California union employees participate in a defined benefit plan sponsored by its union. The Company makes contributions based upon its union agreement. In June 1995, the Company also established a 401(k) plan for the California union employees. The plan allows pre-tax deferral against which the Company matches 50% of the first two hundred fifty dollars of employee contributions. Amounts expensed under these plans were $51,996, $37,298, and $27,859 for fiscal 1996, 1995, and 1994, respectively. The Company has defined contribution 401(k) and retirement plans only and thus has no liability for postretirement benefit obligations under the Financial Accounting Standards Board Statement No. 106 "Employer's Accounting for Postretirement Benefits Other than Pensions." 42 PRICE/COSTCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 9--INCOME TAXES The provisions for income taxes from continuing operations for fiscal 1996, 1995, and 1994 are as follows:
1996 1995 1994 ------------- ------------- -------------- Federal: Current......................................... $ 131,978 $ 102,481 $ 64,721 Deferred........................................ (4,515) (4,445) (5,920) ------------- ------------- ------- Total federal................................. 127,463 98,036 58,801 ------------- ------------- ------- State: Current......................................... 27,926 23,009 15,402 Deferred........................................ (976) 51 (963) ------------- ------------- ------- Total state................................... 26,950 23,060 14,439 ------------- ------------- ------- Foreign: Current......................................... 20,882 29,051 18,211 Deferred........................................ (611) 816 1,206 ------------- ------------- ------- Total foreign................................. 20,271 29,867 19,417 ------------- ------------- ------- Total provision for income taxes.................. $ 174,684 $ 150,963 $ 92,657 ------------- ------------- ------- ------------- ------------- -------
A reconciliation between the statutory tax rate and the effective rate from continuing operations for fiscal 1996, 1995, and 1994 is as follows:
1996 1995 1994 -------------------- -------------------- -------------------- Federal taxes at statutory rate................... $ 148,217 35.00% $ 128,871 35.0% $ 71,244 35.0% State taxes, net.................................. 17,786 4.20 15,465 4.2 8,753 4.3 Foreign taxes, net................................ 4,658 1.10 4,471 1.2 1,074 0.5 Other............................................. 4,023 .95 2,156 0.6 2,386 1.2 Tax effect of merger-related expenses............. -- -- -- -- 9,200 4.5 --------- -------- --------- -------- --------- -------- Provision at effective tax rate................... $ 174,684 41.25% $ 150,963 41.0% $ 92,657 45.5% --------- -------- --------- -------- --------- -------- --------- -------- --------- -------- --------- --------
The components of the deferred tax assets and liabilities related to continuing operations are as follows:
SEPTEMBER 1, SEPTEMBER 3, 1996 1995 ------------- ------------- Accrued liabilities.......................... $ 64,809 $ 71,109 Other........................................ 12,402 7,113 ------------- ------------- Total deferred tax assets................ 77,211 78,222 ------------- ------------- Property and equipment....................... 53,590 65,350 Merchandise inventories...................... 21,683 17,903 Other........................................ 3,220 2,353 ------------- ------------- Total deferred tax liabilities........... 78,493 85,606 ------------- ------------- Net deferred tax liabilities............. $ 1,282 $ 7,384 ------------- ------------- ------------- -------------
43 PRICE/COSTCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) The net deferred tax liabilities at September 1, 1996 and September 3, 1995 include current deferred income tax assets of $55,452 and $56,909, respectively, and non-current deferred income tax liabilities of $56,734 and $64,293, respectively. NOTE 10--COMMITMENTS AND CONTINGENCIES LEGAL PROCEEDINGS On April 6, 1992, Price was served with a Complaint in an action entitled FECHT ET AL. V. THE PRICE COMPANY ET AL., Case No. 92-497, United States District Court, Southern District of California (the "Court"). Subsequently, on April 22, 1992, Price was served with a First Amended Complaint in the action. The case was dismissed without prejudice by the Court on September 21, 1992, on the grounds the plaintiffs had failed to state a sufficient claim against defendants. Subsequently, plaintiffs filed a Second Amended Complaint which, in the opinion of the Company's counsel, alleged substantially the same facts as the prior complaint. The Complaint alleged violation of certain state and federal laws during the time period prior to Price's earnings release for the second quarter of fiscal year 1992. The case was dismissed with prejudice by the Court on March 9, 1993, on grounds the plaintiffs had failed to state a sufficient claim against defendants. Plaintiffs filed an Appeal in the Ninth Circuit Court of Appeals. In an opinion dated November 20, 1995, the Ninth Circuit reversed and remanded the lawsuit. The Company believes that this lawsuit is without merit and is vigorously defending the lawsuit. The Company does not believe that the ultimate outcome of such litigation will have a material adverse effect on the Company's financial position or results of operations. On December 19, 1994, a Complaint was filed against PriceCostco in an action entitled SNYDER V. PRICE/ COSTCO, INC. ET. AL., Case No. C94-1874Z, United States District Court, Western District of Washington. On January 4, 1995, a Complaint was filed against PriceCostco in an action entitled BALSAM V. PRICE/COSTCO, INC. ET. AL., Case No. C95-0009Z, United States District Court, Western District of Washington. The Snyder and Balsam Cases were subsequently consolidated and on March 15, 1995, plaintiffs' counsel filed a First Amended And Consolidated Class Action And Derivative Complaint. On November 9, 1995, plaintiff's counsel filed a Second Amended And Consolidated Class Action And Derivative Complaint. The Second Amended Complaint alleged violation of certain state and federal laws arising from the spin-off and Exchange Transaction and the merger between Price and Costco. In July 1996, an agreement in principle was reached to resolve the lawsuit. Subject to court approval, the resolution will involve the transfer from Price Enterprises, Inc. to the Company of certain intangible assets, including elimination of certain existing non-compete restrictions and operating agreements and termination or amendment of certain trademark license and assignment agreements. The cash portion of the settlement will be funded by the Company's director and officer insurance coverage and by Price Enterprises. The Company will contribute no money to the settlement. In May 1996, PriceCostco reached an agreement in principle with the Environmental Protection Agency and the U.S. Department of Justice to settle an enforcement action under the Federal Clean Air Act. The action is based on claims that PriceCostco failed to maintain required documentation related to its sale of freon products. Under the terms of the proposed settlement, PriceCostco will agree to pay a civil penalty of $232 and to comply with federal regulations relating to the sale of ozone-depleting substances. The Company is involved from time to time in claims, proceedings and litigation arising from its business and property ownership. The Company does not believe that any such claim, proceeding or litigation, either alone or in the aggregate, will have a material adverse effect on the Company's financial position or results of operations. 44 PRICE/COSTCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 11--GEOGRAPHIC INFORMATION The following table indicates the relative amounts of total revenue, operating income and identifiable assets for the Company during fiscal 1996, 1995 and 1994:
1996 1995 1994 ------------ ------------ ------------- Total revenue: United States................................... $ 15,709,258 $ 14,967,611 $ 13,770,316 Foreign......................................... 3,857,198 3,279,675 2,710,327 ------------ ------------ ------------- $ 19,566,456 $ 18,247,286 $ 16,480,643 ------------ ------------ ------------- ------------ ------------ ------------- Operating income: United States................................... $ 419,074 $ 357,463 $ 298,303 Foreign......................................... 71,649 75,869 61,836 ------------ ------------ ------------- $ 490,723 $ 433,332 $ 360,139 ------------ ------------ ------------- ------------ ------------ ------------- SEPTEMBER 1, SEPTEMBER 3, 1996 1995 ------------ ------------ Identifiable assets: United States................................... $ 3,885,726 $ 3,508,325 Foreign......................................... 1,026,135 929,094 ------------ ------------ $ 4,911,861 $ 4,437,419 ------------ ------------ ------------ ------------
NOTE 12--QUARTERLY FINANCIAL DATA (UNAUDITED) The tables that follow on the next two pages reflect the unaudited quarterly results of operations for fiscal 1996 and 1995. Shares used in the earnings per share calculation fluctuate by quarter depending primarily upon whether convertible subordinated debentures are dilutive during the respective period. 45 PRICECOSTCO, INC. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
52 WEEKS ENDED SEPTEMBER 1, 1996 ---------------------------------------------------------------------------- SECOND FOURTH FIRST QUARTER QUARTER 12 THIRD QUARTER QUARTER 16 TOTAL 12 WEEKS WEEKS 12 WEEKS WEEKS 52 WEEKS ------------- ------------ ------------- ------------- ------------- REVENUE Net sales....................................... $ 4,295,862 $ 4,606,070 $ 4,236,207 $ 6,075,727 $ 19,213,866 Membership fees and other....................... 87,702 82,625 75,281 106,982 352,590 ------------- ------------ ------------- ------------- ------------- Total revenue................................. 4,383,564 4,688,695 4,311,488 6,182,709 19,566,456 OPERATING EXPENSES Merchandise costs............................... 3,887,116 4,153,992 3,829,923 5,474,284 17,345,315 Selling, general and administrative expenses.... 385,973 391,943 383,387 529,884 1,691,187 Preopening expenses............................. 9,450 5,970 4,738 9,073 29,231 Provision for estimated warehouse closing costs......................................... -- -- 6,000 4,000 10,000 ------------- ------------ ------------- ------------- ------------- Operating income.............................. 101,025 136,790 87,440 165,468 490,723 OTHER INCOME (EXPENSE) Interest expense................................ (17,771) (17,501) (19,194) (23,612) (78,078) Interest income and other....................... 1,091 2,287 2,007 5,447 10,832 ------------- ------------ ------------- ------------- ------------- INCOME BEFORE PROVISION FOR INCOME TAXES.......... 84,345 121,576 70,253 147,303 423,477 Provision for income taxes...................... 34,792 50,150 28,979 60,763 174,684 ------------- ------------ ------------- ------------- ------------- NET INCOME........................................ $ 49,553 $ 71,426 $ 41,274 $ 86,540 $ 248,793 ------------- ------------ ------------- ------------- ------------- ------------- ------------ ------------- ------------- ------------- NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE-- FULLY DILUTED Net Income...................................... $ 0.25 $ 0.35 $ 0.21 $ 0.42 $ 1.22 ------------- ------------ ------------- ------------- ------------- ------------- ------------ ------------- ------------- ------------- Shares used in calculation...................... 217,311 224,737 218,336 219,084 218,363 ------------- ------------ ------------- ------------- ------------- ------------- ------------ ------------- ------------- -------------
46 PRICECOSTCO, INC. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
53 WEEKS ENDED SEPTEMBER 3, 1995 --------------------------------------------------------------------------- FIRST SECOND FOURTH QUARTER 12 QUARTER 12 THIRD QUARTER QUARTER 17 TOTAL WEEKS WEEKS 12 WEEKS WEEKS 53 WEEKS ------------ ------------ ------------- ------------- ------------- REVENUE Net sales....................................... $ 3,943,718 $ 4,230,160 $ 3,824,841 $ 5,907,207 $ 17,905,926 Membership fees and other....................... 86,205 77,162 71,397 106,596 341,360 ------------ ------------ ------------- ------------- ------------- Total revenue................................. 4,029,923 4,307,322 3,896,238 6,013,803 18,247,286 OPERATING EXPENSES Merchandise costs............................... 3,577,444 3,821,794 3,476,324 5,350,286 16,225,848 Selling, general and administrative expenses.... 350,178 358,431 345,246 501,733 1,555,588 Preopening expenses............................. 6,991 3,451 3,332 11,244 25,018 Provision for estimated warehouse closing costs......................................... -- -- -- 7,500 7,500 ------------ ------------ ------------- ------------- ------------- Operating income.............................. 95,310 123,646 71,336 143,040 433,332 OTHER INCOME (EXPENSE) Interest expense................................ (14,139) (13,480) (16,747) (23,545) (67,911) Interest income and other....................... 1,079 298 1,068 338 2,783 ------------ ------------ ------------- ------------- ------------- INCOME FROM CONTINUING OPERATIONS BEFORE PROVISION FOR INCOME TAXES................................ 82,250 110,464 55,657 119,833 368,204 Provision for income taxes...................... 33,723 45,693 23,042 48,505 150,963 ------------ ------------ ------------- ------------- ------------- INCOME FROM CONTINUING OPERATIONS................. 48,527 64,771 32,615 71,328 217,241 DISCONTINUED OPERATIONS: Loss on disposal................................ -- (83,363) -- -- (83,363) ------------ ------------ ------------- ------------- ------------- NET INCOME (LOSS)............................. $ 48,527 $ (18,592) $ 32,615 $ 71,328 $ 133,878 ------------ ------------ ------------- ------------- ------------- ------------ ------------ ------------- ------------- ------------- NET INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE--FULLY DILUTED: Continuing operations........................... $ 0.22 $ 0.31 $ 0.17 $ 0.35 $ 1.05 Discontinued operations: Loss on disposal.............................. -- (0.37) -- -- (0.37) ------------ ------------ ------------- ------------- ------------- Net Income (loss)............................... $ 0.22 $ (0.06) $ 0.17 $ 0.35 $ 0.68 ------------ ------------ ------------- ------------- ------------- ------------ ------------ ------------- ------------- ------------- Shares used in calculation...................... 239,757 224,685 196,078 217,203 224,079 ------------ ------------ ------------- ------------- ------------- ------------ ------------ ------------- ------------- -------------
47 EXHIBIT INDEX The following exhibits are filed as part of this Annual Report on Form 10-K or are incorporated herein by reference. Where an exhibit is incorporated by reference, the number which follows the description of the exhibit indicates the document to which cross reference is made. See the end of this exhibit index for a listing of cross reference documents.
EXHIBIT NO. DESCRIPTION - - ----------- ----------------------------------------------------------------------------------------------------- 2(a) Amended and Restated Agreement of Transfer and Plan of Exchange dated as of November 14, 1994 by and between Price/Costco, Inc. and Price Enterprises, Inc. (13) 3(a) Restated Certificate of Incorporation of Price/Costco, Inc. (4) 3(b) Bylaws of Price/Costco, Inc. (9) 4(a)(1) 5 1/2% Convertible Subordinated Debenture. (1) 4(a)(2) Indenture by and between Price and First Interstate Bank of California, as Trustee, with respect to the 5 1/2% Convertible Subordinated Debentures. (1) 4(a)(3) Supplemental Indenture dated as of October 21, 1993 by and among Price, PriceCostco and First Interstate Bank of California, as Trustee, with respect to the 5 1/2% Convertible Subordinated Debentures. (7) 4(a)(4) Supplemental Indenture dated as of October 22, 1993 by and among Price, PriceCostco and First Interstate Bank of California, as Trustee, with respect to the 5 1/2% Convertible Subordinated Debentures. (7) 4(b)(1) 6 3/4% Convertible Subordinated Debenture (2) 4(b)(2) Indenture by and between Price and First Interstate Bank of California, as Trustee, with respect to the 6 3/4% Convertible Subordinated Debentures (2) 4(b)(3) Supplemental Indenture dated as of October 21, 1993 by and among Price, PriceCostco and First Interstate Bank of California, as Trustee, with respect to the 6 3/4% Convertible Subordinated Debentures (7) 4(b)(4) Supplemental Indenture dated as of October 22, 1993 by and among Price, PriceCostco and First Interstate Bank of California, as Trustee, with respect to the 6 3/4% Convertible Subordinated Debentures (7) 4(b)(5) Supplemental Indenture dated as of March 12, 1996 by and among Price, PriceCostco and First Interstate Bank of California, as Trustee, with respect to the 6 3/4% Convertible Subordinated Debentures 4(c)(1) 5 3/4% Convertible Subordinated Debenture (5) 4(c)(2) Indenture dated as of May 15, 1992 between Costco and First Trust National Association, as Trustee (5) 4(c)(3) First Supplemental Indenture dated as of October 21, 1993 between Costco, PriceCostco and First Trust National Association, as Trustee (8) 4(d)(1) 7 1/8% Senior Notes and Indentures (12) 4(d)(2) Form of Indenture between Price/Costco, Inc. and American National Association, as Trustee (12) 4(e) Price/Costco, Inc. Stock Certificate (4) 10(a)(1) The Price/Costco, Inc. 1993 Combined Stock Grant and Stock Option Plan (4) 10(a)(2) Amendments to Stock Option Plans 10(b) Indemnification Agreement (13) 10(c) Special Severance Agreement (11) 10(j)(5) Agreement between The Price Company, Price Venture Mexico and Controladora Comercial Mexicana S.A. de C.V. to form a Corporate Joint Venture (7) 10(j)(6) Restated Corporate Joint Venture Agreement between The Price Company, Price Venture Mexico and Controladora Comercial Mexicana S.A. de C.V. dated March, 1995 10(z)(1) A $250,000 Short-Term Revolving Credit Agreement among Price/Costco, Inc. and a group of twelve banks dated January 31, 1994 (11) 10(z)(2) A $250,000 Extended Revolving Credit Agreement among Price/Costco, Inc. and a group of twelve banks, dated January 31, 1994 (11)
10(z)(3) A $140,000 Credit Agreement, dated as of April 11, 1996, among Price/Costco Nova Scotia Company, certain financial institutions and Canadian Imperial Bank of Commerce 12.1 Statements re computation of ratios 23.1 Consent of Arthur Andersen LLP 27.1 Financial Data Schedule
- - ------------------------ (1) Registration Statement of The Price Company on Form SE filed February 12, 1987 is hereby incorporated by reference (2) Registration Statement of The Price Company on Form S-3 (File No. 33-38966) filed February 27, 1991 is hereby incorporated by reference (3) Incorporated herein by reference to the identical exhibit filed as part of The Price Company's Form 10-K for the fiscal year ending August 31, 1991 (4) Incorporated by reference to the Registration Statement of Price/Costco, Inc. Form S-4 (File No. 33-50359) dated September 22, 1993 (5) Incorporated by reference to Costco's Registration Statement on Form S-3 (File No. 33-47750) filed May 22, 1992 (6) Incorporated by reference to Schedule 13E-4 of The Price Company and Price/Costco, Inc. filed November 4, 1993 (7) Incorporated by reference to the exhibits filed as part of Amendment No. 1 to the Registration Statement on Form 8-A of The Price Company (8) Incorporated by reference to the exhibits filed as part of Amendment No. 2 to the Registration Statement on Form 8-A of Costco (9) Incorporated by reference to the exhibits filed as part of the Annual Report on Form 10-K/A of Price/ Costco, Inc. for the fiscal year ended August 29, 1993 (10) Incorporated by reference to the exhibits filed as part of the Registration Statement on Form S-4 of Price Enterprises, Inc. (File No. 33-55481) filed on September 15, 1994 (11) Incorporated by reference to the exhibits filed as part of the Quarterly Report on Form 10-Q of Price/ Costco, Inc. for the 12 weeks ended February 13, 1994 (12) Incorporated by reference to the exhibits filed as part of the Registration Statement on Form S-3 of Price/Costco, Inc. (File No. 33-59403) filed on May 17, 1995. (13) Incorporated by reference to the exhibits filed as part of the Annual Report on Form 10-K of Price/ Costco, Inc. for the fiscal year ended August 28, 1994. EX-4.(B)(5) 2 EXHIBIT 4.(B)(5) EXHIBIT 4(b)(5) THIRD SUPPLEMENTAL INDENTURE This Third Supplemental Indenture dated as of March 12, 1996 is made with reference to the following: FACTS A. On March 7, 1991, the parties hereto or their predecessors in interest entered into the Indenture dated as of March 7, 1991 (the "Original Indenture") relating to The Price Company's 63/4% Convertible Subordinated Debentures Due 2001 (the "Debentures"). B. On June 30, 1993, First Interstate Bank of California succeeded First Interstate Bank, Ltd. as Trustee under the Original Indenture. C. The Original Indenture was amended and supplemented by Supplemental Indenture dated as of October 21, 1993 and by Supplemental Indenture dated as of October 22, 1993. The Original Indenture as so amended and supplemented, is hereinafter referred to as the "Indenture" and the Obligor under the Indenture is hereinafter referred to as the "Company." D. Section 3.03 of the Indenture provides that the Company shall mail a notice of redemption to each Debenture holder at least 30 days before a redemption date. E. Section 3.03 is inconsistent with Section 6 of the Debenture which provides for a 15 day minimum notice, instead of a 30 day minimum notice and is also inconsistent with the description of the Debentures in the February 28, 1991 Prospectus, by means of which the Debentures were offered for sale. Page 13 of the Prospectus states that notice of redemption will be mailed to each holder of Debentures to be redeemed at least 15 days before a redemption date. F. The Company has informed the Trustee that it intended a minimum 15 day notice period and has requested the Trustee to enter into this Third Supplemental Indenture to give effect to the Company's intention and to eliminate the aforesaid inconsistency. G. Section 9.01 of the Indenture allows the Company and the Trustee to enter into supplemental indentures without the consent of Debenture holders, inter alia to cure any ambiguity, defect or inconsistency. -1- AGREEMENT To eliminate the foregoing inconsistency, the parties hereto hereby agree as follows: 1. The first grammatical paragraph of Section 3.03 of the Indenture is hereby amended to read in its entirety as follows: "Section 3.03. NOTICE OF REDEMPTION. At least 15 days but not more than 60 days before a redemption date, the Company shall mail a notice of redemption to each Holder whose Securities are to be redeemed." 2. Except as expressly supplemented hereby, the Indenture is in all respects ratified and confirmed and all the terms, provisions and conditions thereof shall be and remain in full force and effect. 3. This Third Supplemental Indenture shall be governed by the laws of the State of California. 4. This Third Supplemental Indenture may be executed in any number of counterparts, each of which shall be an original, but such counterparts shall together constitute but one and the same instrument. IN WITNESS WHEREOF, the undersigned have executed this Third Supplemental Indenture as of the date first above written. THE PRICE COMPANY By: /s/ Joel Benoliel ----------------------------------------- PRICE/COSTCO, INC., as Additional Obligor Under the Indenture By: /s/ Richard A. Galanti ----------------------------------------- FIRST INTERSTATE BANK OF CALIFORNIA, as Successor Trustee to First Interstate Bank, Ltd. By: /s/ Teresa Fructuoso ----------------------------------------- -2- EX-10.(Z)(3) 3 EXHIBIT 10.(Z)(3) EXHIBIT 10.(Z)(3) U.S. $140,000,000 CREDIT AGREEMENT, dated as of April 11, 1996, among PRICE COSTCO NOVA SCOTIA COMPANY, as the Borrower, and CERTAIN COMMERCIAL LENDING INSTITUTIONS, as the Lenders, and CANADIAN IMPERIAL BANK OF COMMERCE, as the Agent for the Lenders. CREDIT AGREEMENT THIS CREDIT AGREEMENT, dated as of April 11, 1996, among PRICE COSTCO NOVA SCOTIA COMPANY, a Nova Scotia unlimited company (the "BORROWER"), the various financial institutions as are or may become parties hereto (collectively, the "LENDERS"), and CANADIAN IMPERIAL BANK OF COMMERCE ("CIBC"), as agent (the "AGENT") for the Lenders, W I T N E S S E T H: WHEREAS, the Borrower is engaged in the business of providing financing for various Affiliates of Price/Costco, Inc.; and WHEREAS, the Borrower desires to obtain Commitments from the Lenders pursuant to which Loans, in a maximum aggregate principal amount not to exceed $140,000,000, will be made to the Borrower in a single Borrowing on or before April 11, 1996; and WHEREAS, the Lenders are willing, on the terms and subject to the conditions hereinafter set forth (including ARTICLE V), to extend such Commitments and make such Loans to the Borrower; and WHEREAS, the proceeds of such Loans will be used for general corporate purposes of the Borrower; NOW, THEREFORE, the parties hereto agree as follows: ARTICLE I DEFINITIONS AND ACCOUNTING TERMS SECTION 1.1. DEFINED TERMS. The following terms (whether or not underscored) when used in this Agreement, including its preamble and recitals, shall, except where the context otherwise requires, have the following meanings (such meanings to be equally applicable to the singular and plural forms thereof): "AFFILIATE" of any Person means any other Person which, directly or indirectly, controls, is controlled by or is under common control with such Person (excluding any trustee under, or any committee with responsibility for administering, any Plan). A Person shall be deemed to be "controlled by" any other Person if such other Person possesses, directly or indirectly, power (a) to vote 10% or more of the securities (on a fully diluted basis) having ordinary voting power for the election of directors or managing general partners; or (b) to direct or cause the direction of the management and policies of such Person whether by contract or otherwise. "AGENT" is defined in the PREAMBLE and includes each other Person as shall have subsequently been appointed as the successor Agent pursuant to SECTION 9.4. "AGREEMENT" means, on any date, this Credit Agreement as originally in effect on the Effective Date and as thereafter from time to time amended, supplemented, amended and restated, or otherwise modified and in effect on such date. "ALTERNATE BASE RATE" means, on any date and with respect to all Base Rate Loans, a fluctuating rate of interest per annum equal to the higher of (a) the rate of interest most recently established by CIBC at its Domestic Office as its reference rate for Dollar loans; and (b) the Federal Funds Rate most recently determined by CIBC plus .50%. The Alternate Base Rate is not necessarily intended to be the lowest rate of interest determined by CIBC in connection with extensions of credit. Changes in the rate of interest on that portion of any Loans maintained as Base Rate Loans will take effect simultaneously with each change in the Alternate Base Rate. The Agent will give notice promptly to the Borrower and the Lenders of changes in the Alternate Base Rate. -2- "ASSIGNEE LENDER" is defined in SECTION 10.10.1. "AUTHORIZED OFFICER" means, relative to any Obligor, those of its officers whose signatures and incumbency shall have been certified to the Agent and the Lenders pursuant to SECTION 5.1.1. "BASE RATE LOAN" means a Loan bearing interest at a fluctuating rate determined by reference to the Alternate Base Rate. "BORROWER" is defined in the PREAMBLE. "BORROWING" means the Loans of the same type and, in the case of LIBO Rate Loans, having the same Interest Period made by all Lenders on the same Business Day and pursuant to the same Borrowing Request in accordance with SECTION 2.1. "BORROWING REQUEST" means a loan request and certificate duly executed by an Authorized Officer of the Borrower, substantially in the form of EXHIBIT B hereto. "BUSINESS DAY" means (a) any day which is neither a Saturday or Sunday nor a legal holiday on which banks are authorized or required to be closed in New York, New York; and (b) relative to the making, continuing, prepaying or repaying of any LIBO Rate Loans, any day on which dealings in Dollars are carried on in the London interbank market. "CAPITAL EXPENDITURES" means, for any period, the sum of (a) the aggregate amount of all expenditures of the Borrower for fixed or capital assets made during such period which, in accordance with GAAP, would be classified as capital expenditures; and (b) the aggregate amount of all Capitalized Lease Liabilities incurred during such period. -3- "CAPITALIZED LEASE LIABILITIES" means all monetary obligations of the Borrower under any leasing or similar arrangement which, in accordance with GAAP, would be classified as capitalized leases, and, for purposes of this Agreement and each other Loan Document, the amount of such obligations shall be the capitalized amount thereof, determined in accordance with GAAP, and the stated maturity thereof shall be the date of the last payment of rent or any other amount due under such lease prior to the first date upon which such lease may be terminated by the lessee without payment of a penalty. "CASH EQUIVALENT INVESTMENT" means, at any time: (a) any evidence of the Indebtedness, maturing not more than one year after such time, issued or guaranteed by the United States Government; (b) commercial paper, maturing not more than nine months from the date of issue, which is issued by (i) a corporation (other than an Affiliate of any Obligor) organized under the laws of any state of the United States or of the District of Columbia and rated A-l by Standard & Poor's Ratings Group or P-l by Moody's Investors Service, Inc., or (ii) any Lender (or its holding company); (c) any certificate of deposit or bankers acceptance, maturing not more than one year after such time, which is issued by either (i) a commercial banking institution that is a member of the Federal Reserve System and has a combined capital and surplus and undivided profits of not less than $500,000,000, or (ii) any Lender; or (d) any repurchase agreement entered into with any Lender (or other commercial banking institution of the stature referred to in CLAUSE (c)(i)) which -4- (i) is secured by a fully perfected security interest in any obligation of the type described in any of CLAUSES (a) through (c); and (ii) has a market value at the time such repurchase agreement is entered into of not less than 100% of the repurchase obligation of such Lender (or other commercial banking institution) thereunder. "CERCLA" means the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended. "CERCLIS" means the Comprehensive Environmental Response Compensation Liability Information System List. "CHANGE IN CONTROL" means (a) the acquisition by any Person or group of Persons (within the meaning of Section 13 or 14 of the Securities Exchange Act of 1934, as amended) of beneficial ownership (within the meaning of Rule 13d-3 promulgated by the Securities and Exchange Commission under said Act) of thirty percent (30%) or more of the outstanding shares of common stock of Price/Costco, Inc.; or (b) individuals who have become directors of Price/Costco, Inc. within any two (2) year period (other than by reelection to a successive term) constituting a majority of the board of directors of Price/Costco, Inc.; or (c) the failure of The Price Company to own, free and clear of all Liens or other encumbrances, at least 100% of the outstanding shares of voting stock of the Borrower on a fully diluted basis; or (d) the failure of Price/Costco, Inc. to own, free and clear of all Liens or other encumbrances, at least 100% of the outstanding shares of voting stock of The Price Company on a fully diluted basis. "CIBC" is defined in the PREAMBLE. -5- "CODE" means the Internal Revenue Code of 1986, as amended, reformed or otherwise modified from time to time. "COMMITMENT" means, relative to any Lender, such Lender's obligation to make Loans pursuant to SECTION 2.1.1. "COMMITMENT AMOUNT" means, on any date, $140,000,000, as such amount may be reduced from time to time pursuant to SECTION 2.2. "COMMITMENT TERMINATION DATE" means the earliest of (a) April 11, 2001; and (b) the date on which any Commitment Termination Event occurs. Upon the occurrence of any event described in clause (a) or (b), the Commitments shall terminate automatically and without any further action. "COMMITMENT TERMINATION EVENT" means (a) the occurrence of any Default described in CLAUSES (a) through (d) of SECTION 8.1.9 with respect to the Borrower; or (b) the occurrence and continuance of any other Event of Default and either (i) the declaration of the Loans to be due and payable pursuant to SECTION 8.3, or (ii) in the absence of such declaration, the giving of notice by the Agent, acting at the direction of the Required Lenders, to the Borrower that the Commitments have been terminated. "CONTINGENT LIABILITY" means any agreement, undertaking or arrangement by which any Person guarantees, endorses or otherwise becomes or is contingently liable upon (by direct or indirect agreement, contingent or otherwise, to provide funds for payment, -6- to supply funds to, or otherwise to invest in, a debtor, or otherwise to assure a creditor against loss) the indebtedness, obligation or any other liability of any other Person (other than by endorsements of instruments in the course of collection), or guarantees the payment of dividends or other distributions upon the shares of any other Person. The amount of any Person's obligation under any Contingent Liability shall (subject to any limitation set forth therein) be deemed to be the outstanding principal amount (or maximum principal amount, if larger) of the debt, obligation or other liability guaranteed thereby. "CONTINUATION/CONVERSION NOTICE" means a notice of continuation or conversion and certificate duly executed by an Authorized Officer of the Borrower, substantially in the form of EXHIBIT C hereto. "CONTROLLED GROUP" means all members of a controlled group of corporations and all members of a controlled group of trades or businesses (whether or not incorporated) under common control which, together with the Borrower, are treated as a single employer under Section 414(b) or 414(c) of the Code or Section 4001 of ERISA. "DEFAULT" means any Event of Default or any condition, occurrence or event which, after notice or lapse of time or both, would constitute an Event of Default. "DISCLOSURE SCHEDULE" means the Disclosure Schedule attached hereto as SCHEDULE I, as it may be amended, supplemented or otherwise modified from time to time by the Borrower with the written consent of the Agent and the Required Lenders. "DOLLAR" and the sign "$" mean lawful money of the United States. "DOMESTIC OFFICE" means, relative to any Lender, the office of such Lender designated as such below its signature hereto or designated in the Lender Assignment Agreement or such other office of a Lender (or any successor or assign of such Lender) within the United States as may be designated from time to time by notice from such Lender, as the case may be, to each other Person party hereto. -7- "EFFECTIVE DATE" means the date this Agreement becomes effective pursuant to SECTION 10.7. "ENVIRONMENTAL LAWS" means all applicable federal, state or local statutes, laws, ordinances, codes, rules, regulations and guidelines (including consent decrees and administrative orders) relating to public health and safety and protection of the environment. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, and any successor statute of similar import, together with the regulations thereunder, in each case as in effect from time to time. References to sections of ERISA also refer to any successor sections. "EVENT OF DEFAULT" is defined in SECTION 8.1. "FEDERAL FUNDS RATE" means, for any period, a fluctuating interest rate per annum equal for each day during such period to (a) the weighted average of the rates on overnight federal funds transactions with members of the Federal Reserve System arranged by federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York; or (b) if such rate is not so published for any day which is a Business Day, the average of the quotations for such day on such transactions received by CIBC from three federal funds brokers of recognized standing selected by it. "FEE LETTER" means that certain confidential letter dated March 11, 1996 among CIBC and Price/Costco, Inc. "FISCAL QUARTER" means any quarter of a Fiscal Year. "FISCAL YEAR" means any 52/53 week period ending on the Sunday nearest August 31st; references to a Fiscal Year with a number corresponding to any calendar year (E.G. the "1995 Fiscal -8- Year") refer to the Fiscal Year ending on the Sunday nearest August 31st occurring during such calendar year. "F.R.S. BOARD" means the Board of Governors of the Federal Reserve System or any successor thereto. "GAAP" is defined in SECTION 1.4. "GUARANTORS" means Price/Costco, Inc.; Costco Wholesale Corporation; and The Price Company. "GUARANTEES" means the Guaranty Agreements executed and delivered pursuant to SECTION 5.1.3, substantially in the form of EXHIBIT H hereto, as amended, supplemented, restated or otherwise modified from time to time. "HAZARDOUS MATERIAL" means (a) any "hazardous substance", as defined by CERCLA; (b) any "hazardous waste", as defined by the Resource Conservation and Recovery Act, as amended; (c) any petroleum product; or (d) any pollutant or contaminant or hazardous, dangerous or toxic chemical, material or substance within the meaning of any other applicable federal, state or local law, regulation, ordinance or requirement (including consent decrees and administrative orders) relating to or imposing liability or standards of conduct concerning any hazardous, toxic or dangerous waste, substance or material, all as amended or hereafter amended. "HEDGING OBLIGATIONS" means, with respect to any Person, all liabilities of such Person under interest rate swap agreements, interest rate cap agreements and interest rate collar agreements, and all other agreements or arrangements designed to protect such Person against fluctuations in interest rates or currency exchange rates. -9- "HEREIN", "HEREOF", "HERETO", "HEREUNDER" and similar terms contained in this Agreement or any other Loan Document refer to this Agreement or such other Loan Document, as the case may be, as a whole and not to any particular Section, paragraph or provision of this Agreement or such other Loan Document. "IMPERMISSIBLE QUALIFICATION" means, relative to the opinion or certification of any independent public accountant as to any financial statement of any Obligor, any qualification or exception to such opinion or certification (a) which is of a "going concern" or similar nature; (b) which relates to the limited scope of examination of matters relevant to such financial statement; or (c) which relates to the treatment or classification of any item in such financial statement and which, as a condition to its removal, would require an adjustment to such item the effect of which would be to cause such Obligor to be in default of any of its obligation under any Loan Document. "INCLUDING" means including without limiting the generality of any description preceding such term. "INDEBTEDNESS" of any Person means, without duplication: (a) all obligations of such Person for borrowed money and all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments; (b) all obligations, contingent or otherwise, relative to the face amount of all letters of credit, whether or not drawn, and banker's acceptances issued for the account of such Person; (c) all obligations of such Person as lessee under leases which have been or should be, in accordance with GAAP, recorded as Capitalized Lease Liabilities; -10- (d) all other items which, in accordance with GAAP, would be included as liabilities on the liability side of the balance sheet of such Person as of the date at which Indebtedness is to be determined; (e) net liabilities of such Person under all Hedging Obligations; (f) whether or not so included as liabilities in accordance with GAAP, all obligations of such Person to pay the deferred purchase price of property or services, and indebtedness (excluding prepaid interest thereon) secured by a Lien on property owned or being purchased by such Person (including indebtedness arising under conditional sales or other title retention agreements), whether or not such indebtedness shall have been assumed by such Person or is limited in recourse; and (g) all Contingent Liabilities of such Person in respect of any of the foregoing. For all purposes of this Agreement, the Indebtedness of any Person shall include the Indebtedness of any partnership or joint venture in which such Person is a general partner or a joint venturer. "INDEMNIFIED LIABILITIES" is defined in SECTION 10.3. "INDEMNIFIED PARTIES" is defined in SECTION 10.3. "INTEREST PERIOD" means, relative to any LIBO Rate Loans, the period beginning on (and including) the date on which such LIBO Rate Loan is made or continued as, or converted into, a LIBO Rate Loan pursuant to SECTION 2.3 or 2.4 and shall end on (but exclude) the day which numerically corresponds to such date one, two, three or six months thereafter (or, if such month has no numerically corresponding day, on the last Business Day of such month), as the Borrower may select in its relevant notice pursuant to SECTION 2.2 or 2.3; PROVIDED, HOWEVER, that (a) the Borrower shall not be permitted to select Interest Periods to be in effect at any one time which have -11- expiration dates occurring on more than five different dates; (b) Interest Periods commencing on the same date for Loans comprising part of the same Borrowing shall be of the same duration; (c) if such Interest Period would otherwise end on a day which is not a Business Day, such Interest Period shall end on the next following Business Day (unless, if such Interest Period applies to LIBO Rate Loans, such next following Business Day is the first Business Day of a calendar month, in which case such Interest Period shall end on the Business Day next preceding such numerically corresponding day); and (d) no Interest Period may end later than the Stated Maturity Date. "INVESTMENT" means, relative to any Person, (a) any loan or advance made by such Person to any other Person (excluding commission, travel and similar advances to officers and employees made in the ordinary course of business); (b) any Contingent Liability of such Person; and (c) any ownership or similar interest held by such Person in any other Person. The amount of any Investment shall be the original principal or capital amount thereof less all returns of principal or equity thereon (and without adjustment by reason of the financial condition of such other Person) and shall, if made by the transfer or exchange of property other than cash, be deemed to have been made in an original principal or capital amount equal to the fair market value of such property. "LENDER ASSIGNMENT AGREEMENT" means a Lender Assignment Agreement substantially in the form of EXHIBIT D hereto. -12- "LENDERS" is defined in the PREAMBLE. "LIBO RATE" is defined in SECTION 3.2.1. "LIBO RATE LOAN" means a Loan bearing interest, at all times during an Interest Period applicable to such Loan, at a fixed rate of interest determined by reference to the LIBO Rate (Reserve Adjusted). "LIBO RATE (RESERVE ADJUSTED)" is defined in SECTION 3.2.1. "LIBOR OFFICE" means, relative to any Lender, the office of such Lender designated as such below its signature hereto or designated in the Lender Assignment Agreement or such other office of a Lender as designated from time to time by notice from such Lender to the Borrower and the Agent, whether or not outside the United States, which shall be making or maintaining LIBO Rate Loans of such Lender hereunder. "LIBOR RESERVE PERCENTAGE" is defined in SECTION 3.2.1. "LIEN" means any security interest, mortgage, pledge, hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or otherwise), charge against or interest in property to secure payment of a debt or performance of an obligation or other priority or preferential arrangement of any kind or nature whatsoever. "LOAN" is defined in SECTION 2.1.1. "LOAN DOCUMENT" means this Agreement, the Notes, the Guarantees and each other relevant agreement, document or instrument delivered in connection with this Agreement and the other Loan Documents. "MARGIN" means, in the case of a LIBO Rate Loan, a per annum interest rate determined in accordance with the following table: Price/Costco, Inc.'s Credit Rating Margin (per annum) ------------- ------------------ -13- Level 1 18.5 basis points (.001850) Level 2 20.0 basis points (.002000) Level 3 22.5 basis points (.002250) Level 4 25.0 basis points (.002500) Level 5 30.0 basis points (.003000) "NOTE" means a promissory note of the Borrower payable to any Lender, in the form of EXHIBIT A hereto (as such promissory note may be amended, endorsed or otherwise modified from time to time), evidencing the aggregate Indebtedness of the Borrower to such Lender resulting from outstanding Loans, and also means all other promissory notes accepted from time to time in substitution therefor or renewal thereof. "OBLIGATIONS" means all obligations (monetary or otherwise) of the Borrower and each other Obligor arising under or in connection with this Agreement, the Notes and each other Loan Document. "OBLIGOR" means the Borrower or any other Person (other than the Agent or any Lender) obligated under any Loan Document. "ORGANIC DOCUMENT" means, relative to any Obligor, as applicable, its certificate of incorporation, its articles of incorporation, its by-laws, its memorandum of association, articles of association and all shareholder agreements, voting trusts and similar arrangements applicable to any of its authorized shares of capital stock. "PARTICIPANT" is defined in SECTION 10.10. "PBGC" means the Pension Benefit Guaranty Corporation and any entity succeeding to any or all of its functions under ERISA. "PENSION PLAN" means a "pension plan", as such term is defined in section 3(2) of ERISA, which is subject to Title IV of ERISA (other than a multiemployer plan as defined in section 4001(a)(3) of ERISA), and to which the Borrower or any corporation, trade or business that is, along with the Borrower, a member of a Controlled Group, may have liability, including any liability by reason of having been a substantial employer within the meaning of section 4063 of ERISA at any time during the -14- preceding five years, or by reason of being deemed to be a contributing sponsor under section 4069 of ERISA. "PERCENTAGE" means, relative to any Lender, the percentage set forth opposite its signature hereto or set forth in the Lender Assignment Agreement, as such percentage may be adjusted from time to time pursuant to Lender Assignment Agreement(s) executed by such Lender and its Assignee Lender(s) and delivered pursuant to SECTION 10.10. "PERSON" means any natural person, corporation, partnership, firm, association, trust, government, governmental agency or any other entity, whether acting in an individual, fiduciary or other capacity. "PLAN" means any Pension Plan or Welfare Plan. "PRICE/COSTCO, INC.'S CREDIT RATING" means a level of credit determined in accordance with the following standards: Price/Costco, Inc.'s Credit Rating shall be "Level 1" if Price/Costco, Inc. has either (a) an S&P Rating of A or better or (b) a Moody's Rating of A2 or better. Price/Costco, Inc.'s Credit Rating shall be "Level 2" if Price/Costco, Inc. does not meet the standards for a "Level 1" rating set forth above and has either (a) an S&P Rating of A- or better or (b) a Moody's Rating of A3 or better. Price/Costco, Inc.'s Credit Rating shall be "Level 3" if Price/Costco, Inc. does not meet the standards for a "Level 1" or "Level 2" rating set forth above and has either (a) an S&P Rating of BBB+ or better or (b) a Moody's Rating of Baa1 or better. Price/Costco, Inc.'s Credit Rating shall be "Level 4" if Price/Costco, Inc. does not meet the standards for a "Level 1", "Level 2" or "Level 3" rating set forth above and has either (a) an S&P Rating of BBB or better or (b) a Moody's Rating of Baa2 or better. If Price/Costco, Inc. does not meet the standards for "Level 1", "Level 2", "Level 3" or "Level 4" set forth above or fails to maintain either an S&P Rating or a Moody's Rating, then Price/Costco, Inc.'s Credit Rating shall be "Level 5". If a difference of more than one rating level exists, the rating which falls between the two shall apply. As used herein, "S&P Rating" means the implied senior unsecured debt rating given from time to time to Costco Wholesale Corporation and The Price Company (collectively, the "Rated Guarantors") by -15- Standard & Poor's Ratings Group ("S&P"). In the event that S&P does not expressly publish an implied senior unsecured debt rating for Price/Costco, Inc., the "S&P Rating" shall be deemed to be that rating which is one level higher than (i) the level of the S&P subordinated debt ratings of the Rated Guarantors if the Rated Guarantors have the same rating or (ii) in the event that the Rated Guarantors have different subordinated debt ratings, the level of the lower of such ratings. As used herein, "Moody's Rating" means the senior unsecured debt rating given from time to time to Price/Costco, Inc. by Moody's Investor Service, Inc ("Moody's"). In the event that Moody's does not expressly publish an implied senior unsecured debt rating for Price/Costco, Inc., then "Moody's Rating" shall be deemed to be that rating which is one level higher than (i) the level of the Moody's subordinated debt ratings of the Rated Guarantors if the Rated Guarantors have the same rating or (ii) in the event that the Rated Guarantors have different subordinated debt ratings, the level of the lower of such ratings. For example, if there is no implied senior unsecured debt rating for Price/Costco, Inc. from S&P and if the Rated Guarantors each have an S&P subordinated debt rating of BBB, then the S&P rating would be BBB+. As a further example, if there is no implied senior unsecured debt rating for Price/Costco, Inc. from Moody's and if one Rated Guarantor has a Moody's subordinated debt rating of Baa1 and one Rated Guarantor has a Moody's subordinated debt rating of Baa2, then the Moody's Rating would be Baa1. The Lenders acknowledge that as of the date of this Agreement, Price/Costco's Credit Rating is at Level 2. Changes in Price/Costco, Inc.'s Credit Rating shall take effect (i) in the case of Margin, at the beginning of the following Interest Period, and (ii) in the case of facility fee rate, as of the date of public announcement by either S&P or Moody's. "QUARTERLY PAYMENT DATE" means the last day of each March, June, September, and December or, if any such day is not a Business Day, the next succeeding Business Day. "RELEASE" means a "release", as such term is defined in CERCLA. -16- "REQUIRED LENDERS" means, at any time, any Lenders holding at least 60% of the then aggregate outstanding principal amount of the Notes then held by the Lenders, or, if no such principal amount is then outstanding, any Lenders having at least 60% of the Commitments. "RESOURCE CONSERVATION AND RECOVERY ACT" means the Resource Conservation and Recovery Act, 42 U.S.C. Section 690, ET SEQ., as in effect from time to time. "STATED MATURITY DATE" means April 11, 2001. "SUBORDINATED DEBT" means all unsecured Indebtedness of the Borrower for money borrowed which is subordinated, upon terms satisfactory to the Agent and the Required Lenders, in right of payment to the payment in full in cash of all Obligations. "SUBSIDIARY" means, with respect to any Person, (i) any corporation, partnership, limited liability company or other business entity of which more than 50% of the total voting power (irrespective of whether at the time any other class or classes of voting interests shall or might have voting power upon the occurrence of any contingency) is at the time directly or indirectly owned by such Person, by such Person and one or more other Subsidiaries of such Person, or by one or more other Subsidiaries of such Person and (ii) any general partnership in which such Person is a general partner. "TAXES" is defined in SECTION 4.6. "TYPE" means, relative to any Loan, the portion thereof, if any, being maintained as a Base Rate Loan or a LIBO Rate Loan. "UNITED STATES" or "U.S." means the United States of America, its fifty States and the District of Columbia. "WELFARE PLAN" means a "welfare plan", as such term is defined in section 3(1) of ERISA. SECTION 1.2. USE OF DEFINED TERMS. Unless otherwise defined or the context otherwise requires, terms for which meanings are provided in this Agreement shall have such meanings -17- when used in the Disclosure Schedule and in each Note, Borrowing Request, Continuation/Conversion Notice, Loan Document, notice and other communication delivered from time to time in connection with this Agreement or any other Loan Document. SECTION 1.3. CROSS-REFERENCES. Unless otherwise specified, references in this Agreement and in each other Loan Document to any Article or Section are references to such Article or Section of this Agreement or such other Loan Document, as the case may be, and, unless otherwise specified, references in any Article, Section or definition to any clause are references to such clause of such Article, Section or definition. SECTION 1.4. ACCOUNTING AND FINANCIAL DETERMINATIONS. Unless otherwise specified, all accounting terms used herein or in any other Loan Document shall be interpreted, all accounting determinations and computations hereunder or thereunder shall be made, and all financial statements required to be delivered hereunder or thereunder shall be prepared in accordance with, those generally accepted accounting principles ("GAAP") applied in the preparation of the financial statements referred to in SECTION 6.5. ARTICLE II COMMITMENTS, BORROWING PROCEDURES AND NOTES SECTION 2.1. COMMITMENTS. On the terms and subject to the conditions of this Agreement (including ARTICLE V), each Lender severally agrees to make Loans pursuant to the Commitments described in this SECTION 2.1. SECTION 2.1.1. COMMITMENT OF EACH LENDER. On a single Business Day occurring prior to April 11, 1996, each Lender will make Loans (relative to such Lender, and of any type, its "LOANS") to the Borrower equal to such Lender's Percentage of the aggregate amount of the Borrowing requested by the Borrower to be made on such day. The commitment of each Lender described in this SECTION 2.1.1 is herein referred to as its "COMMITMENT". There shall be only one Borrowing of Loans under this Agreement. -18- No amounts paid or prepaid with respect to any Loans may be reborrowed. SECTION 2.1.2. LENDERS NOT PERMITTED OR REQUIRED TO MAKE LOANS. No Lender shall be permitted or required to make any Loan if, after giving effect thereto, the aggregate original principal amount of all Loans (a) of all Lenders would exceed the Commitment Amount, or (b) of such Lender would exceed such Lender's Percentage of the Commitment Amount. SECTION 2.2. BORROWING PROCEDURE. By delivering a Borrowing Request to the Agent on or before 12:00, noon, New York time, on a Business Day prior to April 11, 1996, the Borrower may irrevocably request that a Borrowing of Base Rate Loans be made in a minimum amount of $5,000,000 and an integral multiple of $1,000,000. By delivering a Borrowing Request to the Agent on or before 10:30 a.m., New York time, on a Business Day prior to April 9, 1996, the Borrower may irrevocably request, on not less than three Business Days' notice, that a Borrowing of LIBO Rate Loans be made in a minimum amount of $5,000,000 and an integral multiple of $1,000,000. On the terms and subject to the conditions of this Agreement, the Borrowing shall be comprised of the type of Loans, and shall be made on the Business Day, specified in such Borrowing Request. On or before 1:00 p.m., New York time, in the case of Base Rate Loans, or 11:30 a.m., New York time, in the case of LIBO Rate Loans, on such Business Day each Lender shall deposit with the Agent same day funds in an amount equal to such Lender's Percentage of the requested Borrowing. Such deposit will be made to an account which the Agent shall specify by notice to the Lenders. To the extent funds are received from the Lenders, the Agent shall make such funds available to the Borrower by wire transfer to the accounts the Borrower shall have specified in its Borrowing Request. No Lender's obligation to make any Loan shall be affected by any other Lender's failure to make any Loan. SECTION 2.3. CONTINUATION AND CONVERSION ELECTIONS. By delivering a Continuation/Conversion Notice to the Agent on or -19- before 10:30 a.m., New York time, on a Business Day, the Borrower may from time to time irrevocably elect, on not less than three nor more than five Business Days' notice that all, or any portion in an aggregate minimum amount of $5,000,000 and an integral multiple of $1,000,000, of any Loans be, in the case of Base Rate Loans, converted into LIBO Rate Loans or, in the case of LIBO Rate Loans, be converted into a Base Rate Loan or continued as a LIBO Rate Loan (in the absence of delivery of a Continuation/ Conversion Notice with respect to any LIBO Rate Loan at least three Business Days before the last day of the then current Interest Period with respect thereto, such LIBO Rate Loan shall, on such last day, automatically convert to a LIBO Rate Loan having an Interest Period of one month, unless such LIBO Rate Loan at such time has an Interest Period of one month due to a prior automatic conversion, in which case such LIBO Rate Loan shall, on such last day, automatically convert to a Base Rate Loan); PROVIDED, HOWEVER, that (i) each such conversion or continuation shall be prorated among the applicable outstanding Loans of all Lenders, and (ii) no portion of the outstanding principal amount of any Loans may be continued as, or be converted into, LIBO Rate Loans when any Default has occurred and is continuing. SECTION 2.4. FUNDING. Each Lender may, if it so elects, fulfill its obligation to make, continue or convert LIBO Rate Loans hereunder by causing one of its branches or Affiliates (or an international banking facility created by such Lender) which is subject to the tax laws of the United States (and which would not cause the representation of such Lender in the last paragraph of Section 4.6 to be incorrect) to make or maintain such LIBO Rate Loan; PROVIDED, HOWEVER, that such LIBO Rate Loan shall nonetheless be deemed to have been made and to be held by such Lender, and the obligation of the Borrower to repay such LIBO Rate Loan shall nevertheless be to such Lender for the account of such foreign branch, Affiliate or international banking facility. In addition, the Borrower hereby consents and agrees that, for purposes of any determination to be made for purposes of SECTIONS 4.1, 4.2, 4.3 or 4.4, it shall be conclusively assumed that each Lender elected to fund all LIBO Rate Loans by purchasing, as the case may be, Dollar certificates of deposit in the U.S. or Dollar deposits in its LIBOR Office's interbank eurodollar market. -20- SECTION 2.5. NOTES. Each Lender's Loans under its Commitment shall be evidenced by a Note payable to the order of such Lender in a maximum principal amount equal to such Lender's Percentage of the original Commitment Amount. The Borrower hereby irrevocably authorizes each Lender to make (or cause to be made) appropriate notations on the grid attached to such Lender's Note (or on any continuation of such grid), which notations, if made, shall evidence, INTER ALIA, the date of, the outstanding principal of, and the interest rate and Interest Period applicable to the Loans evidenced thereby. Such notations shall be presumed correct; PROVIDED, HOWEVER, that the failure of any Lender to make any such notations shall not limit or otherwise affect any Obligations of the Borrower or any other Obligor. ARTICLE III REPAYMENTS, PREPAYMENTS, INTEREST AND FEES SECTION 3.1. REPAYMENTS AND PREPAYMENTS. The Borrower shall repay in full the unpaid principal amount of each Loan upon the Stated Maturity Date therefor. Prior thereto, the Borrower (a) may, from time to time on any Business Day, make a voluntary prepayment, in whole or in part, of the outstanding principal amount of any Loans; PROVIDED, HOWEVER, that (i) any such prepayment shall be made PRO RATA among Loans of the same type and, if applicable, having the same Interest Period of all Lenders; (ii) no such prepayment of any LIBO Rate Loan may be made on any day other than the last day of the Interest Period for such Loan; (iii) all such voluntary prepayments shall require at least three but no more than five Business Days' prior written notice to the Agent; -21- (iv) all such voluntary partial prepayments shall be in an aggregate minimum amount of $1,000,000 and an integral multiple of $500,000; and (b) shall, immediately upon any acceleration of the Stated Maturity Date of any Loans pursuant to SECTION 8.2 or SECTION 8.3, repay all Loans, unless, pursuant to SECTION 8.3, only a portion of all Loans is so accelerated. Each prepayment of any Loans made pursuant to this Section shall be without premium or penalty, except as may be required by SECTION 4.4. SECTION 3.2. INTEREST PROVISIONS. Interest on the outstanding principal amount of Loans shall accrue and be payable in accordance with this SECTION 3.2. SECTION 3.2.1. RATES. Pursuant to an appropriately delivered Borrowing Request or Continuation/Conversion Notice, the Borrower may elect that Loans comprising a Borrowing accrue interest at a rate per annum: (a) on that portion maintained from time to time as a Base Rate Loan, equal to the sum of the Alternate Base Rate from time to time in effect; and (b) on that portion maintained as a LIBO Rate Loan, during each Interest Period applicable thereto, equal to the LIBO Rate (Reserve Adjusted) for such Interest Period plus the Margin. -22- The "LIBO RATE (RESERVE ADJUSTED)" means, relative to any Loan to be made, continued or maintained as, or converted into, a LIBO Rate Loan for any Interest Period, a rate per annum (rounded upwards, if necessary, to the nearest 1/16 of 1%) determined pursuant to the following formula: LIBO RATE LIBO Rate = ------------------------------- (Reserve Adjusted) 1.00 - LIBOR Reserve Percentage The LIBO Rate (Reserve Adjusted) for any Interest Period for LIBO Rate Loans will be determined by the Agent on the basis of the LIBOR Reserve Percentage in effect on, and the applicable rates furnished to and received by the Agent from CIBC, two Business Days before the first day of such Interest Period. "LIBO RATE" means, relative to any Interest Period for LIBO Rate Loans, the rate of interest equal to the average (rounded upwards, if necessary, to the nearest 1/16 of 1%) of the rates per annum at which Dollar deposits in immediately available funds are offered to CIBC's LIBOR Office in the eurodollar interbank market as at or about 10:00 a.m. New York time two Business Days prior to the beginning of such Interest Period for delivery on the first day of such Interest Period, and in an amount approximately equal to the amount of CIBC's LIBO Rate Loan and for a period approximately equal to such Interest Period. "LIBOR RESERVE PERCENTAGE" means, relative to any Interest Period for LIBO Rate Loans, the reserve percentage (expressed as a decimal) equal to the maximum aggregate reserve requirements (including all basic, emergency, supplemental, marginal and other reserves and taking into account any transitional adjustments or other scheduled changes in reserve requirements) specified under regulations issued from time to time by the F.R.S. Board and then applicable to assets or liabilities consisting of and including "Eurocurrency Liabilities", as currently defined in Regulation D of the F.R.S. Board, having a term approximately equal or comparable to such Interest Period. All LIBO Rate Loans shall bear interest from and including the first day of the applicable Interest Period to (but not -23- including) the last day of such Interest Period at the interest rate determined as applicable to such LIBO Rate Loan. SECTION 3.2.2. POST-MATURITY RATES. After the date any principal amount of any Loan is due and payable (whether on the Stated Maturity Date, upon acceleration or otherwise), or after any other monetary Obligation of the Borrower shall have become due and payable, the Borrower shall pay, but only to the extent permitted by law, interest (after as well as before judgment) on such amounts at a rate per annum equal to the Alternate Base Rate plus a margin of 2%. SECTION 3.2.3. PAYMENT DATES. Interest accrued on each Loan shall be payable, without duplication: (a) on the Stated Maturity Date therefor; (b) on the date of any payment or prepayment, in whole or in part, of principal outstanding on such Loan; (c) with respect to Base Rate Loans, on each Quarterly Payment Date occurring after the Effective Date; (d) with respect to LIBO Rate Loans, the last day of each applicable Interest Period (and, if such Interest Period shall exceed 90 days, on the 90th day of such Interest Period); (e) with respect to any Base Rate Loans converted into LIBO Rate Loans on a day when interest would not otherwise have been payable pursuant to CLAUSE (c), on the date of such conversion; and (f) on that portion of any Loans the Stated Maturity Date of which is accelerated pursuant to SECTION 8.2 or SECTION 8.3, immediately upon such acceleration. Interest accrued on Loans or other monetary Obligations arising under this Agreement or any other Loan Document after the date such amount is due and payable (whether on the Stated Maturity Date, upon acceleration or otherwise) shall be payable upon demand. -24- SECTION 3.3. FACILITY FEES. The Borrower agrees to pay to the Agent for the account of each Lender, for the period commencing on the Effective Date and continuing through the final Commitment Termination Date, a facility fee equal to the Facility Fee Rate on such Lender's Percentage of the Loans. Such facility fees shall be payable by the Borrower in arrears on each Quarterly Payment Date, commencing with the first such day following the Effective Date, and on the Commitment Termination Date. As used herein the "Facility Fee Rate" shall be determined in accordance with the following table: Price/Costco, Inc.'s Credit Rating Facility Fee Rate (per annum) ------------- ----------------------------- Level 1 9.0 basis points (.000900) Level 2 10.0 basis points (.001000) Level 3 10.0 basis points (.001000) Level 4 12.5 basis points (.001250) Level 5 17.5 basis points (.001750) ARTICLE IV CERTAIN LIBO RATE AND OTHER PROVISIONS SECTION 4.1. LIBO RATE LENDING UNLAWFUL. If any Lender shall determine (which determination shall, upon notice thereof to the Borrower and the Lenders, be conclusive and binding on the Borrower) that the introduction of or any change in or in the interpretation of any law makes it unlawful, or any central bank or other governmental authority asserts that it is unlawful, for such Lender to make, continue or maintain any Loan as, or to convert any Loan into, a LIBO Rate Loan, the obligations of all Lenders to make, continue, maintain or convert any such Loans shall, upon such determination, forthwith be suspended until such Lender shall notify the Agent that the circumstances causing such suspension no longer exist, and all LIBO Rate Loans shall automatically convert into Base Rate Loans at the end of the then current Interest Periods with respect thereto or sooner, if required by such law or assertion. -25- SECTION 4.2. DEPOSITS UNAVAILABLE. If the Agent shall have determined that (a) Dollar deposits in the relevant amount and for the relevant Interest Period are not available to CIBC in its relevant market; or (b) by reason of circumstances affecting CIBC's relevant market, adequate means do not exist for ascertaining the interest rate applicable hereunder to LIBO Rate Loans, then, upon notice from the Agent to the Borrower and the Lenders, the obligations of all Lenders under SECTION 2.2 and SECTION 2.3 to make or continue any Loans as, or to convert any Loans into, LIBO Rate Loans shall forthwith be suspended until the Agent shall notify the Borrower and the Lenders that the circumstances causing such suspension no longer exist. SECTION 4.3. INCREASED LIBO RATE LOAN COSTS, ETC. The Borrower agrees to reimburse each Lender for any increase in the cost to such Lender of, or any reduction in the amount of any sum receivable by such Lender in respect of, making, continuing or maintaining (or of its obligation to make, continue or maintain) any Loans as, or of converting (or of its obligation to convert) any Loans into, LIBO Rate Loans. Such Lender shall promptly notify the Agent and the Borrower in writing of the occurrence of any such event, such notice to state, in reasonable detail, the reasons therefor and the additional amount required fully to compensate such Lender for such increased cost or reduced amount. Such additional amounts shall be payable by the Borrower directly to such Lender within five days of its receipt of such notice, and such notice shall be presumed correct. SECTION 4.4. FUNDING LOSSES. In the event any Lender shall incur any loss or expense (including any loss or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by such Lender to make, continue or maintain any portion of the principal amount of any Loan as, or to convert any portion of the principal amount of any Loan into, a LIBO Rate Loan) as a result of -26- (a) any conversion or repayment or prepayment of the principal amount of any LIBO Rate Loans on a date other than the scheduled last day of the Interest Period applicable thereto, whether pursuant to SECTION 3.1 or otherwise; (b) any Loans not being made as LIBO Rate Loans in accordance with the Borrowing Request therefor; or (c) any Loans not being continued as, or converted into, LIBO Rate Loans in accordance with the Continuation/ Conversion Notice therefor, then, upon the written notice of such Lender to the Borrower (with a copy to the Agent), the Borrower shall, within five days of its receipt thereof, pay directly to such Lender such amount as will (in the reasonable determination of such Lender) reimburse such Lender for such loss or expense. Such written notice (which shall include calculations in reasonable detail) shall be presumed correct. SECTION 4.5. INCREASED CAPITAL COSTS. If any change in, or the introduction, adoption, effectiveness, interpretation, reinterpretation or phase-in of, any law or regulation, directive, guideline, decision or request (whether or not having the force of law) of any court, central bank, regulator or other governmental authority affects or would affect the amount of capital required or expected to be maintained by any Lender or any Person controlling such Lender, and such Lender determines (in its sole and absolute discretion) that the rate of return on its or such controlling Person's capital as a consequence of its Commitment or the Loans made by such Lender is reduced to a level below that which such Lender or such controlling Person could have achieved but for the occurrence of any such circumstance, then, in any such case upon notice from time to time by such Lender to the Borrower, the Borrower shall immediately pay directly to such Lender additional amounts sufficient to compensate such Lender or such controlling Person for such reduction in rate of return. A statement of such Lender as to any such additional amount or amounts (including calculations thereof in reasonable detail) shall be presumed correct. In determining such amount, such Lender may use any method of -27- averaging and attribution that it (in its sole and absolute discretion) shall deem applicable. SECTION 4.6. TAXES. All payments by the Borrower of principal of, and interest on, the Loans and all other amounts payable hereunder shall be made free and clear of and without deduction for any present or future income, excise, stamp or franchise taxes and other taxes, fees, duties, withholdings or other charges of any nature whatsoever imposed by any taxing authority, but excluding franchise taxes and taxes imposed on or measured by any Lender's overall net income or gross receipts (such non-excluded items being called "TAXES"). In the event that any withholding or deduction from any payment to be made by the Borrower hereunder is required in respect of any Taxes pursuant to any applicable law, rule or regulation, then the Borrower will (a) pay directly to the relevant authority the full amount required to be so withheld or deducted; (b) promptly forward to the Agent an official receipt or other documentation satisfactory to the Agent evidencing such payment to such authority; and (c) pay to the Agent for the account of the Lenders such additional amount or amounts as is necessary to ensure that the net amount actually received by each Lender will equal the full amount such Lender would have received had no such withholding or deduction been required. Without limitation of the foregoing, if any taxes, fees, duties, withholdings or other charges of any nature whatsoever imposed by any taxing authority, including franchise taxes and taxes imposed on or measured by any Lender's overall net income or gross receipts (other than a change in the rate of tax based solely on the overall net or gross income of such Lender) ("Further Taxes") are directly or indirectly asserted against the Agent or any Lender with respect to any payment received by the Agent or such Lender under Section 4.6(a) or (c) or this sentence, the Agent or such Lender may pay such Further Taxes and the Borrower will promptly pay to the Agent or such Lender, at the time interest is paid, such additional amounts (including any penalties, interest -28- or expenses) that the respective Lender or Agent specifies as necessary to preserve the after-tax yield that the Agent or Lender would have received if such Taxes or Further Taxes had not been imposed. If the Borrower fails to pay any Taxes when due to the appropriate taxing authority or fails to remit to the Agent, for the account of the respective Lenders, the required receipts or other required documentary evidence, the Borrower shall indemnify the Lenders for any incremental Taxes, interest or penalties that may become payable by any Lender as a result of any such failure. For purposes of this SECTION 4.6, a distribution hereunder by the Agent or any Lender to or for the account of any Lender shall be deemed a payment by the Borrower. Each Lender represents and warrants that it is subject to the tax laws of the United States, including but not limited to the fact that the interest income derived from this Agreement is effectively connected with its United States trade or business. Each Lender agrees to provide internal revenue service forms reasonably requested by the Borrower in connection with the foregoing. The Borrower will not be obligated to pay any amounts pursuant to this Section 4.6 (and no Guarantor will be obligated to pay any amounts pursuant to any corresponding provision in any Guarantee) to the extent such amounts are incurred as a result of the representation contained in the first sentence of this paragraph not being true and correct at any time during the term of this Agreement. SECTION 4.7. PAYMENTS, COMPUTATIONS, ETC. Unless otherwise expressly provided, all payments by the Borrower pursuant to this Agreement, the Notes or any other Loan Document shall be made by the Borrower to the Agent for the PRO RATA account of the Lenders entitled to receive such payment. All such payments required to be made to the Agent shall be made, without setoff, deduction or counterclaim, not later than 1:00 p.m., New York time, on the date due, in same day or immediately available funds, to such account as the Agent shall specify from time to time by notice to the Borrower. Funds received after that time shall be deemed to have been received by the Agent on the next succeeding Business Day. The Agent shall promptly remit in same day funds to each Lender its share, if any, of such -29- payments received by the Agent for the account of such Lender. All interest and fees shall be computed on the basis of the actual number of days (including the first day but excluding the last day) occurring during the period for which such interest or fee is payable over a year comprised of 360 days (or, in the case of interest on a Base Rate Loan, 365 days or, if appropriate, 366 days). Whenever any payment to be made shall otherwise be due on a day which is not a Business Day, such payment shall (except as otherwise required by CLAUSE (c) of the definition of the term "INTEREST PERIOD" with respect to LIBO Rate Loans) be made on the next succeeding Business Day and such extension of time shall be included in computing interest and fees, if any, in connection with such payment. SECTION 4.8. SHARING OF PAYMENTS. If any Lender shall obtain any payment or other recovery (whether voluntary, involuntary, by application of setoff or otherwise) on account of any Loan (other than pursuant to the terms of SECTIONS 4.3, 4.4 and 4.5) in excess of its PRO RATA share of payments then or therewith obtained by all Lenders, such Lender shall purchase from the other Lenders such participations in Loans made by them as shall be necessary to cause such purchasing Lender to share the excess payment or other recovery ratably with each of them; PROVIDED, HOWEVER, that if all or any portion of the excess payment or other recovery is thereafter recovered from such purchasing Lender, the purchase shall be rescinded and each Lender which has sold a participation to the purchasing Lender shall repay to the purchasing Lender the purchase price to the ratable extent of such recovery together with an amount equal to such selling Lender's ratable share (according to the proportion of (a) the amount of such selling Lender's required repayment to the purchasing Lender TO (b) the total amount so recovered from the purchasing Lender) of any interest or other amount paid or payable by the purchasing Lender in respect of the total amount so recovered. The Borrower -30- agrees that any Lender so purchasing a participation from another Lender pursuant to this Section may, to the fullest extent permitted by law, exercise all its rights of payment (including pursuant to SECTION 4.9) with respect to such participation as fully as if such Lender were the direct creditor of the Borrower in the amount of such participation. If under any applicable bankruptcy, insolvency or other similar law, any Lender receives a secured claim in lieu of a setoff to which this Section applies, such Lender shall, to the extent practicable, exercise its rights in respect of such secured claim in a manner consistent with the rights of the Lenders entitled under this Section to share in the benefits of any recovery on such secured claim. SECTION 4.9. SETOFF. Each Lender shall, upon the occurrence of any Default described in CLAUSES (a) through (d) of SECTION 8.1.9 or, with the consent of the Required Lenders, upon the occurrence of any other Event of Default, have the right to appropriate and apply to the payment of the Obligations owing to it (whether or not then due), and (as security for such Obligations) the Borrower hereby grants to each Lender a continuing security interest in, any and all balances, credits, deposits, accounts or moneys of the Borrower then or thereafter maintained with such Lender; PROVIDED, HOWEVER, that any such appropriation and application shall be subject to the provisions of SECTION 4.8. Each Lender agrees promptly to notify the Borrower and the Agent after any such setoff and application made by such Lender; PROVIDED, HOWEVER, that the failure to give such notice shall not affect the validity of such setoff and application. The rights of each Lender under this Section are in addition to other rights and remedies (including other rights of setoff under applicable law or otherwise) which such Lender may have. SECTION 4.10. USE OF PROCEEDS. The Borrower shall apply the proceeds of each Borrowing in accordance with the FOURTH RECITAL; without limiting the foregoing, no proceeds of any Loan will be used to acquire or carry any equity security of a class which is registered pursuant to Section 12 of the Securities Exchange Act of 1934 or any "margin stock", as defined in F.R.S. Board Regulation U. -31- ARTICLE V CONDITIONS TO BORROWING SECTION 5.1. CONDITIONS TO BORROWING. The obligations of the Lenders to fund the Borrowing shall be subject to the prior or concurrent satisfaction of each of the conditions precedent set forth in this SECTION 5.1. SECTION 5.1.1. RESOLUTIONS, ETC. The Agent shall have received from each Obligor a certificate, dated the date of the initial Borrowing, of its Secretary or Assistant Secretary as to (a) resolutions of its Board of Directors then in full force and effect authorizing the execution, delivery and performance of this Agreement, the Notes and each other Loan Document to be executed by it; and (b) the incumbency and signatures of those of its officers authorized to act with respect to this Agreement, the Notes and each other Loan Document executed by it, upon which certificate each Lender may conclusively rely until it shall have received a further certificate of the Secretary of such Obligor canceling or amending such prior certificate. SECTION 5.1.2. DELIVERY OF NOTES. The Agent shall have received, for the account of each Lender, its Note duly executed and delivered by the Borrower. SECTION 5.1.3. GUARANTEES. The Agent shall have received the Guarantees, dated the date hereof, duly executed by each of the Guarantors. SECTION 5.1.4. OPINIONS OF COUNSEL. The Agent shall have received opinions, dated the date of the initial Borrowing and addressed to the Agent and all Lenders, from (a) Foster, Pepper & Shefelman, counsel to the Obligors, substantially in the form of EXHIBIT E hereto; -32- (b) Stewart McKelvey Stirling Scales, special Canadian counsel to the Obligors, substantially in the form of EXHIBIT F hereto; (c) Osler Hoskin & Harcourt, special Canadian tax counsel to the Obligors, substantially in the form of EXHIBIT G hereto. SECTION 5.1.5. CLOSING FEES, EXPENSES, ETC. The Agent shall have received for its own account all fees, costs and expenses due and payable pursuant to SECTIONS 19 and 20 of The Price Company Guaranty Agreement dated concurrently herewith, if then invoiced. SECTION 5.1.6. COMPLIANCE WITH WARRANTIES, NO DEFAULT, ETC. Both before and after giving effect to the Borrowing, the following statements shall be true and correct (a) the representations and warranties set forth in ARTICLE VI (excluding, however, those contained in SECTION 6.7) shall be true and correct with the same effect as if then made (unless stated to relate solely to an early date, in which case such representations and warranties shall be true and correct as of such earlier date); (b) except as disclosed by the Borrower to the Agent and the Lenders pursuant to SECTION 6.7 (i) no labor controversy, litigation, arbitration or governmental investigation or proceeding shall be pending or, to the knowledge of the Borrower, threatened against the Borrower which might materially adversely affect the Borrower's business, operations, assets, revenues, properties or prospects or which purports to affect the legality, validity or enforceability of this Agreement, the Notes or any other Loan Document; and (ii) no development shall have occurred in any labor controversy, litigation, arbitration or governmental investigation or proceeding disclosed pursuant to SECTION 6.7 which might materially -33- adversely affect the consolidated businesses, operations, assets, revenues, properties or prospects of the Borrower; and (c) no Default shall have then occurred and be continuing, and neither the Borrower nor any other Obligor is in material violation of any law or governmental regulation or court order or decree. SECTION 5.1.7. BORROWING REQUEST. The Agent shall have received a Borrowing Request for such Borrowing. Each of the delivery of a Borrowing Request and the acceptance by the Borrower of the proceeds of such Borrowing shall constitute a representation and warranty by the Borrower that on the date of such Borrowing (both immediately before and after giving effect to such Borrowing and the application of the proceeds thereof) the statements made in SECTION 5.1.6 are true and correct. SECTION 5.1.8. SATISFACTORY LEGAL FORM. All documents executed or submitted pursuant hereto by or on behalf of the Borrower or any other Obligors shall be satisfactory in form and substance to the Agent and its counsel. ARTICLE VI REPRESENTATIONS AND WARRANTIES In order to induce the Lenders and the Agent to enter into this Agreement and to make Loans hereunder, the Borrower represents and warrants unto the Agent and each Lender as set forth in this ARTICLE VI. SECTION 6.1. ORGANIZATION, ETC. The Borrower is an entity validly organized and existing and in good standing under the laws of the jurisdiction of its formation, is duly qualified to do business and is in good standing as a foreign entity in each jurisdiction where the nature of its business requires such qualification, and has full power and authority and holds all requisite governmental licenses, permits and other approvals to enter into and perform its Obligations under this Agreement, the Notes and each other Loan Document to which it is a party and to -34- own and hold under lease its property and to conduct its business substantially as currently conducted by it. SECTION 6.2. DUE AUTHORIZATION, NON-CONTRAVENTION, ETC. The execution, delivery and performance by the Borrower of this Agreement, the Notes and each other Loan Document executed or to be executed by it, and the execution, delivery and performance by each other Obligor of each Loan Document executed or to be executed by it, are within the Borrower's and each such Obligor's corporate powers, have been duly authorized by all necessary corporate action, and do not (a) contravene the Borrower's or any such Obligor's Organic Documents; (b) contravene any contractual restriction, law or governmental regulation or court decree or order binding on or affecting the Borrower or any such Obligor; or (c) result in, or require the creation or imposition of, any Lien on any of any Obligor's properties. SECTION 6.3. GOVERNMENT APPROVAL, REGULATION, ETC. No authorization or approval or other action by, and no notice to or filing with, any governmental authority or regulatory body or other Person is required for the due execution, delivery or performance by the Borrower or any other Obligor of this Agreement, the Notes or any other Loan Document to which it is a party. The Borrower is not an "investment company" within the meaning of the Investment Company Act of 1940, as amended, or a "holding company", or a "subsidiary company" of a "holding company", or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company", within the meaning of the Public Utility Holding Company Act of 1935, as amended. SECTION 6.4. VALIDITY, ETC. This Agreement constitutes, and the Notes and each other Loan Document executed by the Borrower will, on the due execution and delivery thereof, constitute, the legal, valid and binding obligations of the Borrower enforceable in accordance with their respective terms; and each Loan Document executed pursuant hereto by each other Obligor will, on the due execution and delivery thereof by such -35- Obligor, be the legal, valid and binding obligation of such Obligor enforceable in accordance with its terms. SECTION 6.5. FINANCIAL INFORMATION. The balance sheet of the Borrower as at the Effective Date, a copy of which has been furnished to the Agent and each Lender, has been prepared in accordance with GAAP consistently applied, and presents fairly the financial condition of the Borrower as at the date thereof. SECTION 6.6. NO MATERIAL ADVERSE CHANGE. Since the date of the financial statements described in SECTION 6.5, there has been no material adverse change in the financial condition, operations, assets, business, properties or prospects of the Borrower. SECTION 6.7. LITIGATION, LABOR CONTROVERSIES, ETC. There is no pending or, to the knowledge of the Borrower, threatened litigation, action, proceeding, or labor controversy affecting the Borrower, or any of its respective properties, businesses, assets or revenues, which may materially adversely affect the financial condition, operations, assets, business, properties or prospects of the Borrower or which purports to affect the legality, validity or enforceability of this Agreement, the Notes or any other Loan Document, except as disclosed in ITEM 6.7 ("Litigation") of the Disclosure Schedule. SECTION 6.8. SUBSIDIARIES. The Borrower has no Subsidiaries. SECTION 6.9. OWNERSHIP OF PROPERTIES. The Borrower owns good and marketable title to all of its properties and assets, real and personal, tangible and intangible, of any nature whatsoever (including patents, trademarks, trade names, service marks and copyrights), free and clear of all Liens, charges or claims (including infringement claims with respect to patents, trademarks, copyrights and the like) except as permitted pursuant to SECTION 7.2.3. SECTION 6.10. TAXES. The Borrower has filed all tax returns and reports required by law to have been filed by it and has paid all taxes and governmental charges thereby shown to be owing, except any such taxes or charges which are being -36- diligently contested in good faith by appropriate proceedings and for which adequate reserves in accordance with GAAP shall have been set aside on its books. SECTION 6.11. ENVIRONMENTAL WARRANTIES. Except as set forth in ITEM 6.11 ("Environmental Matters") of the Disclosure Schedule: (a) all facilities and property (including underlying groundwater) owned or leased by the Borrower have been, and continue to be, owned or leased by the Borrower in material compliance with all Environmental Laws; (b) there have been no past, and there are no pending or threatened (i) claims, complaints, notices or requests for information received by the Borrower with respect to any alleged violation of any Environmental Law, or (ii) complaints, notices or inquiries to the Borrower regarding potential liability under any Environmental Law; (c) there have been no Releases of Hazardous Materials at, on or under any property now or previously owned or leased by the Borrower that, singly or in the aggregate, have, or may reasonably be expected to have, a material adverse effect on the financial condition, operations, assets, business, properties or prospects of the Borrower; (d) the Borrower has been issued and are in material compliance with all permits, certificates, approvals, licenses and other authorizations relating to environmental matters and necessary or desirable for their businesses; (e) no property now or previously owned or leased by the Borrower is listed or proposed for listing (with respect to owned property only) on the National Priorities List pursuant to CERCLA, on the CERCLIS or on any similar state list of sites requiring investigation or clean-up; -37- (f) there are no underground storage tanks, active or abandoned, including petroleum storage tanks, on or under any property now or previously owned or leased by the Borrower that, singly or in the aggregate, have, or may reasonably be expected to have, a material adverse effect on the financial condition, operations, assets, business, properties or prospects of the Borrower; (g) the Borrower has not directly transported or directly arranged for the transportation of any Hazardous Material to any location which is listed or proposed for listing on the National Priorities List pursuant to CERCLA, on the CERCLIS or on any similar state list or which is the subject of federal, state or local enforcement actions or other investigations which may lead to material claims against the Borrower thereof for any remedial work, damage to natural resources or personal injury, including claims under CERCLA; (h) there are no polychlorinated biphenyls or friable asbestos present at any property now or previously owned or leased by the Borrower that, singly or in the aggregate, have, or may reasonably be expected to have, a material adverse effect on the financial condition, operations, assets, business, properties or prospects of the Borrower; and (i) no conditions exist at, on or under any property now or previously owned or leased by the Borrower which, with the passage of time, or the giving of notice or both, would give rise to liability under any Environmental Law. SECTION 6.12. REGULATIONS G, U AND X. The Borrower is not engaged in the business of extending credit for the purpose of purchasing or carrying margin stock, and no proceeds of any Loans will be used for a purpose which violates, or would be inconsistent with, F.R.S. Board Regulation G, U or X. Terms for which meanings are provided in F.R.S. Board Regulation G, U or X or any regulations substituted therefor, as from time to time in effect, are used in this Section with such meanings. -38- SECTION 6.13. ACCURACY OF INFORMATION. All factual information heretofore or contemporaneously furnished by or on behalf of the Borrower in writing to the Agent or any Lender for purposes of or in connection with this Agreement or any transaction contemplated hereby is, and all other such factual information hereafter furnished by or on behalf of the Borrower to the Agent or any Lender will be, true and accurate in every material respect on the date as of which such information is dated or certified and as of the date of execution and delivery of this Agreement by the Agent and such Lender, and such information is not, or shall not be, as the case may be, incomplete by omitting to state any material fact necessary to make such information not misleading. ARTICLE VII COVENANTS SECTION 7.1. AFFIRMATIVE COVENANTS. The Borrower agrees with the Agent and each Lender that, until all Commitments have terminated and all Obligations have been paid and performed in full, the Borrower will perform the obligations set forth in this SECTION 7.1. SECTION 7.1.1. FINANCIAL INFORMATION, REPORTS, NOTICES, ETC. The Borrower will furnish, or will cause to be furnished, to each Lender and the Agent copies of the following financial statements, reports, notices and information: (a) as soon as possible and in any event within three days after the occurrence of each Default, a statement of the chief financial Authorized Officer of the Borrower setting forth details of such Default and the action which the Borrower has taken and proposes to take with respect thereto; and (b) as soon as possible and in any event within three days after (x) the occurrence of any adverse development with respect to any litigation, action, proceeding, or labor controversy described in SECTION 6.7 or (y) the commencement of any labor controversy, litigation, action, -39- proceeding of the type described in SECTION 6.7, notice thereof and copies of all documentation relating thereto. SECTION 7.1.2. COMPLIANCE WITH LAWS, ETC. The Borrower will comply in all material respects with all applicable laws, rules, regulations and orders, such compliance to include (without limitation): (a) the maintenance and preservation of its corporate existence and qualification as a foreign corporation in each jurisdiction necessary to make the representation set forth in Section 6.1 true and correct; and (b) the payment, before the same become delinquent, of all taxes, assessments and governmental charges imposed upon it or upon its property except to the extent being diligently contested in good faith by appropriate proceedings and for which adequate reserves in accordance with GAAP shall have been set aside on its books. SECTION 7.1.3. BOOKS AND RECORDS. The Borrower will keep reasonable books and records which accurately reflect all of its business affairs and transactions and permit the Agent and each Lender or any of their respective representatives, at reasonable times and intervals, to visit all of its offices, to discuss its financial matters with its officers and independent public accountant (and the Borrower hereby authorizes such independent public accountant to discuss the Borrower's financial matters with each Lender or its representatives whether or not any representative of the Borrower is present) and to examine (and, at the expense of the Borrower, photocopy extracts from) any of its books or other corporate records, other than any such information reasonably believed by the Borrower to be confidential. The Borrower shall pay any fees of such independent public accountant incurred in connection with the Agent's or any Lender's exercise of its rights pursuant to this Section. SECTION 7.2. NEGATIVE COVENANTS. The Borrower agrees with the Agent and each Lender that, until all Commitments have terminated and all Obligations have been paid and performed in -40- full, the Borrower will perform the obligations set forth in this SECTION 7.2. SECTION 7.2.1. BUSINESS ACTIVITIES. The Borrower will not engage in any business activity, except those described in the FIRST RECITAL and such activities as may be incidental or related thereto. SECTION 7.2.2. INDEBTEDNESS. The Borrower will not create, incur, assume or suffer to exist or otherwise become or be liable in respect of any Indebtedness, other than (i) Indebtedness in respect of the Loans and other Obligations and (ii) Indebtedness to Affiliates. SECTION 7.2.3. LIENS. The Borrower will not create, incur, assume or suffer to exist any Lien upon any of its property, revenues or assets, whether now owned or hereafter acquired, except: (a) Liens for taxes, assessments or other governmental charges or levies not at the time delinquent or thereafter payable without penalty or being diligently contested in good faith by appropriate proceedings and for which adequate reserves in accordance with GAAP shall have been set aside on its books; (b) Liens of carriers, warehousemen, mechanics, materialmen and landlords incurred in the ordinary course of business for sums not overdue or being diligently contested in good faith by appropriate proceedings and for which adequate reserves in accordance with GAAP shall have been set aside on its books; (c) Liens incurred in the ordinary course of business in connection with workmen's compensation, unemployment insurance or other forms of governmental insurance or benefits, or to secure performance of tenders, statutory obligations, leases and contracts (other than for borrowed money) entered into in the ordinary course of business or to secure obligations on surety or appeal bonds; and -41- (d) judgment Liens in existence less than 15 days after the entry thereof or with respect to which execution has been stayed or the payment of which is covered in full (subject to a customary deductible) by insurance maintained with responsible insurance companies. SECTION 7.2.4. INVESTMENTS. The Borrower will not make, incur, assume or suffer to exist any Investment in any other Person, except: (a) Cash Equivalent Investments; PROVIDED, HOWEVER, that any Investment which when made complies with the requirements of the definition of the term "CASH EQUIVALENT INVESTMENT" may continue to be held notwithstanding that such Investment if made thereafter would not comply with such requirements; and (b) Investments by the Borrower in any Affiliate of Price/Costco, Inc. (i) by way of loans or advances maturing on or prior to the Stated Maturity Date or (ii) by way of equity investments. SECTION 7.2.5. RESTRICTED PAYMENTS, ETC. On and at all times after the Effective Date: (a) the Borrower will not declare, pay or make any dividend or distribution (in cash, property or obligations) on any shares of any class of capital stock (now or hereafter outstanding) of the Borrower or on any warrants, options or other rights with respect to any shares of any class of capital stock (now or hereafter outstanding) of the Borrower (other than dividends or distributions payable in its common stock or warrants to purchase its common stock or splitups or reclassifications of its stock into additional or other shares of its common stock) or apply any of its funds, property or assets to the purchase, redemption, sinking fund or other retirement of, or agree to purchase or redeem, any shares of any class of capital stock (now or hereafter outstanding) of the Borrower, or warrants, options or other rights with respect to any shares of any class of capital stock (now or hereafter outstanding) of the Borrower; and -42- (b) the Borrower will not make any deposit for any of the foregoing purposes. SECTION 7.2.6. CAPITAL EXPENDITURES, ETC. The Borrower will not make or commit to make any Capital Expenditures. SECTION 7.2.7. CONSOLIDATION, MERGER, ETC. The Borrower will not liquidate or dissolve, consolidate with, or merge into or with, any other corporation, or purchase or otherwise acquire all or substantially all of the assets of any Person (or of any division thereof). SECTION 7.2.8. ASSET DISPOSITIONS, ETC. Except as permitted by Section 7.2.4, the Borrower will not sell, transfer, lease, contribute or otherwise convey, or grant options, warrants or other rights with respect to, all or any substantial part of its assets to any Person. SECTION 7.2.9. NEGATIVE PLEDGES, RESTRICTIVE AGREEMENTS, ETC. The Borrower will not enter into any agreement (excluding this Agreement or any other Loan Document) prohibiting the creation or assumption of any Lien upon its properties, revenues or assets, whether now owned or hereafter acquired, or the ability of the Borrower or any other Obligor to amend or otherwise modify this Agreement or any other Loan Document. SECTION 7.2.10. CREATION OF SUBSIDIARIES. The Borrower will not create any new Subsidiary. ARTICLE VIII EVENTS OF DEFAULT SECTION 8.1. LISTING OF EVENTS OF DEFAULT. Each of the following events or occurrences described in this SECTION 8.1 shall constitute an "EVENT OF DEFAULT". SECTION 8.1.1. NON-PAYMENT OF OBLIGATIONS. The Borrower shall default in the payment or prepayment when due of any principal of or interest on any Loan, or the Borrower or any Obligor shall default (and such default shall continue unremedied -43- for a period of five days) in the payment when due of any facility fee or of any other Obligation. SECTION 8.1.2. BREACH OF WARRANTY. Any representation or warranty of the Borrower or any other Obligor made or deemed to be made hereunder or in any other Loan Document executed by it or any other writing or certificate furnished by or on behalf of the Borrower or any other Obligor to the Agent or any Lender for the purposes of or in connection with this Agreement or any such other Loan Document (including any certificates delivered pursuant to ARTICLE V) is or shall be incorrect when made in any material respect. SECTION 8.1.3. NON-PERFORMANCE OF CERTAIN COVENANTS AND OBLIGATIONS. The Borrower shall default in the due performance and observance of any of its obligations under SECTION 7.2 (other than SECTION 7.2.3) or SECTION 7.1.1(A). SECTION 8.1.4. NON-PERFORMANCE OF OTHER COVENANTS AND OBLIGATIONS. Any Obligor shall default in the due performance and observance of any other agreement contained herein or in any other Loan Document executed by it, and such default shall continue unremedied for a period of 30 days after notice thereof shall have been given to the Borrower by the Agent or any Lender. SECTION 8.1.5. DEFAULT ON OTHER INDEBTEDNESS. A default shall occur in the payment when due (subject to any applicable grace period), whether by acceleration or otherwise, of any Indebtedness for borrowed money (other than Indebtedness described in SECTION 8.1.1) of the Borrower or any other Obligor, or a default shall occur in the performance or observance of any obligation or condition with respect to such Indebtedness if the effect of such default is to accelerate the maturity of any such Indebtedness or such default shall continue unremedied for any applicable period of time sufficient to permit the holder or holders of such Indebtedness, or any trustee or agent for such holders, to cause such Indebtedness to become due and payable prior to its expressed maturity. SECTION 8.1.6. JUDGMENTS. Any judgment or order for the payment of money in excess of $30,000,000 shall be rendered against the Borrower or any other Obligor and either -44- (a) enforcement proceedings shall have been commenced by any creditor upon such judgment or order; or (b) there shall be any period of 30 consecutive days during which a stay of enforcement of such judgment or order, by reason of a pending appeal or otherwise, shall not be in effect. SECTION 8.1.7. PENSION PLANS. Any of the following events shall occur with respect to any Pension Plan (a) the institution of any steps by the Borrower, any member of its Controlled Group or any other Person to terminate a Pension Plan if, as a result of such termination, the Borrower or any such member could be required to make a contribution to such Pension Plan, or could reasonably expect to incur a liability or obligation to such Pension Plan, in excess of $500,000; or (b) a contribution failure occurs with respect to any Pension Plan sufficient to give rise to a Lien under Section 302(f) of ERISA. SECTION 8.1.8. CHANGE IN CONTROL. Any Change in Control shall occur. SECTION 8.1.9. BANKRUPTCY, INSOLVENCY, ETC. The Borrower or any other Obligor shall (a) become insolvent or generally fail to pay, or admit in writing its inability or unwillingness to pay, debts as they become due; (b) apply for, consent to, or acquiesce in, the appointment of a trustee, receiver, sequestrator or other custodian for the Borrower or any other Obligor or any property of any thereof, or make a general assignment for the benefit of creditors; (c) in the absence of such application, consent or acquiescence, permit or suffer to exist the appointment of a trustee, receiver, sequestrator or other custodian for -45- the Borrower or any other Obligor or for a substantial part of the property of any thereof, and such trustee, receiver, sequestrator or other custodian shall not be discharged within 60 days, provided that the Borrower and each other Obligor hereby expressly authorizes the Agent and each Lender to appear in any court conducting any relevant proceeding during such 60-day period to preserve, protect and defend their rights under the Loan Documents; (d) permit or suffer to exist the commencement of any bankruptcy, reorganization, debt arrangement or other case or proceeding under any bankruptcy or insolvency law, or any dissolution, winding up or liquidation proceeding, in respect of the Borrower or any other Obligor, and, if any such case or proceeding is not commenced by the Borrower or such other Obligor, such case or proceeding shall be consented to or acquiesced in by the Borrower or such other Obligor or shall result in the entry of an order for relief or shall remain for 60 days undismissed, provided that the Borrower and each other Obligor hereby expressly authorizes the Agent and each Lender to appear in any court conducting any such case or proceeding during such 60-day period to preserve, protect and defend their rights under the Loan Documents; or (e) take any corporate action authorizing, or in furtherance of, any of the foregoing, other than those resolutions dated March 28, 1996, copies of which have been furnished to the Agent and the Lenders. SECTION 8.1.10. IMPAIRMENT OF SECURITY, ETC. Any Loan Document shall (except in accordance with its terms), in whole or in part, terminate, cease to be effective or cease to be the legally valid, binding and enforceable obligation of any Obligor party thereto; the Borrower, any other Obligor or any other party shall, directly or indirectly, contest in any manner such effectiveness, validity, binding nature or enforceability. SECTION 8.2. ACTION IF BANKRUPTCY. If any Event of Default described in CLAUSES (a) through (d) of SECTION 8.1.9 shall occur with respect to the Borrower or any other Obligor, the Commitments (if not theretofore terminated) shall -46- automatically terminate and the outstanding principal amount of all outstanding Loans and all other Obligations shall automatically be and become immediately due and payable, without notice or demand. SECTION 8.3. ACTION IF OTHER EVENT OF DEFAULT. If any Event of Default (other than any Event of Default described in CLAUSES (a) through (d) of SECTION 8.1.9 with respect to the Borrower or any other Obligor) shall occur for any reason, whether voluntary or involuntary, and be continuing, the Agent, upon the direction of the Required Lenders, shall by notice to the Borrower declare all or any portion of the outstanding principal amount of the Loans and other Obligations to be due and payable and/or the Commitments (if not theretofore terminated) to be terminated, whereupon the full unpaid amount of such Loans and other Obligations which shall be so declared due and payable shall be and become immediately due and payable, without further notice, demand or presentment, and/or, as the case may be, the Commitments shall terminate. ARTICLE IX THE AGENT SECTION 9.1. ACTIONS. Each Lender hereby appoints CIBC as its Agent under and for purposes of this Agreement, the Notes and each other Loan Document. Each Lender authorizes the Agent to act on behalf of such Lender under this Agreement, the Notes and each other Loan Document and, in the absence of other written instructions from the Required Lenders received from time to time by the Agent (with respect to which the Agent agrees that it will comply, except as otherwise provided in this Section or as otherwise advised by counsel), to exercise such powers hereunder and thereunder as are specifically delegated to or required of the Agent by the terms hereof and thereof, together with such powers as may be reasonably incidental thereto. Each Lender hereby indemnifies (which indemnity shall survive any termination of this Agreement) the Agent, PRO RATA according to such Lender's Percentage, from and against any and all liabilities, obligations, losses, damages, claims, costs or expenses of any kind or nature whatsoever which may at any time be imposed on, -47- incurred by, or asserted against, the Agent in any way relating to or arising out of this Agreement, the Notes and any other Loan Document, including reasonable attorneys' fees, and as to which the Agent is not reimbursed by the Borrower; PROVIDED, HOWEVER, that no Lender shall be liable for the payment of any portion of such liabilities, obligations, losses, damages, claims, costs or expenses which are determined by a court of competent jurisdiction in a final proceeding to have resulted solely from the Agent's gross negligence or wilful misconduct. The Agent shall not be required to take any action hereunder, under the Notes or under any other Loan Document, or to prosecute or defend any suit in respect of this Agreement, the Notes or any other Loan Document, unless it is indemnified hereunder to its satisfaction. If any indemnity in favor of the Agent shall be or become, in the Agent's determination, inadequate, the Agent may call for additional indemnification from the Lenders and cease to do the acts indemnified against hereunder until such additional indemnity is given. SECTION 9.2. FUNDING RELIANCE, ETC. Unless the Agent shall have been notified by telephone, confirmed in writing, by any Lender by 5:00 p.m., New York time, on the day prior to a Borrowing that such Lender will not make available the amount which would constitute its Percentage of such Borrowing on the date specified therefor, the Agent may assume that such Lender has made such amount available to the Agent and, in reliance upon such assumption, make available to the Borrower a corresponding amount. If and to the extent that such Lender shall not have made such amount available to the Agent, such Lender and the Borrower severally agree to repay the Agent forthwith on demand such corresponding amount together with interest thereon, for each day from the date the Agent made such amount available to the Borrower to the date such amount is repaid to the Agent, at the Federal Funds Rate. SECTION 9.3. EXCULPATION. Neither the Agent nor any of its directors, officers, employees or agents shall be liable to any Lender for any action taken or omitted to be taken by it under this Agreement or any other Loan Document, or in connection herewith or therewith, except for its own wilful misconduct or gross negligence, nor responsible for any recitals or warranties herein or therein, nor for the effectiveness, enforceability, -48- validity or due execution of this Agreement or any other Loan Document, nor to make any inquiry respecting the performance by the Borrower of its obligations hereunder or under any other Loan Document. Any such inquiry which may be made by the Agent shall not obligate it to make any further inquiry or to take any action. The Agent shall be entitled to rely upon advice of counsel concerning legal matters and upon any notice, consent, certificate, statement or writing which the Agent believes to be genuine and to have been presented by a proper Person. SECTION 9.4. SUCCESSOR. The Agent may resign as such at any time upon at least 30 days' prior notice to the Borrower and all Lenders. If the Agent at any time shall resign, the Required Lenders may appoint another Lender as a successor Agent which shall thereupon become the Agent hereunder. If no successor Agent shall have been so appointed by the Required Lenders, and shall have accepted such appointment, within 30 days after the retiring Agent's giving notice of resignation, then the retiring Agent may, on behalf of the Lenders, appoint a successor Agent, which shall be one of the Lenders or a commercial banking institution organized under the laws of the U.S. (or any State thereof) or a U.S. branch or agency of a commercial banking institution, and having a combined capital and surplus of at least $500,000,000. Upon the acceptance of any appointment as Agent hereunder by a successor Agent, such successor Agent shall be entitled to receive from the retiring Agent such documents of transfer and assignment as such successor Agent may reasonably request, and shall thereupon succeed to and become vested with all rights, powers, privileges and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations under this Agreement. After any retiring Agent's resignation hereunder as the Agent, the provisions of (a) this ARTICLE IX shall inure to its benefit as to any actions taken or omitted to be taken by it while it was the Agent under this Agreement; and (b) SECTION 20 of The Price Company Guaranty Agreement dated concurrently herewith and SECTION 10.4 shall continue to inure to its benefit. -49- SECTION 9.5. LOANS BY CIBC. CIBC shall have the same rights and powers with respect to (x) the Loans made by it or any of its Affiliates, and (y) the Notes held by it or any of its Affiliates as any other Lender and may exercise the same as if it were not the Agent. CIBC and its Affiliates may accept deposits from, lend money to, and generally engage in any kind of business with the Borrower or Affiliate of the Borrower as if CIBC were not the Agent hereunder. SECTION 9.6. CREDIT DECISIONS. Each Lender acknowledges that it has, independently of the Agent and each other Lender, and based on such Lender's review of the financial information of the Borrower, this Agreement, the other Loan Documents (the terms and provisions of which being satisfactory to such Lender) and such other documents, information and investigations as such Lender has deemed appropriate, made its own credit decision to extend its Commitment. Each Lender also acknowledges that it will, independently of the Agent and each other Lender, and based on such other documents, information and investigations as it shall deem appropriate at any time, continue to make its own credit decisions as to exercising or not exercising from time to time any rights and privileges available to it under this Agreement or any other Loan Document. SECTION 9.7. COPIES, ETC. The Agent shall give prompt notice to each Lender of each notice or request required or permitted to be given to the Agent by the Borrower pursuant to the terms of this Agreement (unless concurrently delivered to the Lenders by the Borrower). The Agent will distribute to each Lender each document or instrument received for its account and copies of all other communications received by the Agent from the Borrower for distribution to the Lenders by the Agent in accordance with the terms of this Agreement. ARTICLE X MISCELLANEOUS PROVISIONS SECTION 10.1. WAIVERS, AMENDMENTS, ETC. The provisions of this Agreement and of each other Loan Document may from time to time be amended, modified or waived, if such amendment, -50- modification or waiver is in writing and consented to by the Borrower and the Required Lenders; PROVIDED, HOWEVER, that no such amendment, modification or waiver which would: (a) modify any requirement hereunder that any particular action be taken by all the Lenders or by the Required Lenders shall be effective unless consented to by each Lender; (b) modify this SECTION 10.1, change the definition of "REQUIRED LENDERS", terminate any Guarantees, increase the Commitment Amount or the Percentage of any Lender, reduce any fees described in ARTICLE III, or extend the Commitment Termination Date shall be made without the consent of each Lender; (c) extend the due date for, or reduce the amount of, any scheduled repayment or prepayment of principal of or interest on any Loan (or reduce the principal amount of or rate of interest on any Loan) shall be made without the consent of the holder of that Note evidencing such Loan; or (d) affect adversely the interests, rights or obligations of the Agent QUA the Agent shall be made without consent of the Agent. No failure or delay on the part of the Agent, any Lender or the holder of any Note in exercising any power or right under this Agreement or any other Loan Document shall operate as a waiver thereof, nor shall any single or partial exercise of any such power or right preclude any other or further exercise thereof or the exercise of any other power or right. No notice to or demand on the Borrower in any case shall entitle it to any notice or demand in similar or other circumstances. No waiver or approval by the Agent, any Lender or the holder of any Note under this Agreement or any other Loan Document shall, except as may be otherwise stated in such waiver or approval, be applicable to subsequent transactions. No waiver or approval hereunder shall require any similar or dissimilar waiver or approval thereafter to be granted hereunder. -51- SECTION 10.2. NOTICES. All notices and other communications provided to any party hereto under this Agreement or any other Loan Document shall be in writing or by facsimile and addressed, delivered or transmitted to such party at its address or facsimile number set forth below its signature hereto or set forth in the Lender Assignment Agreement or at such other address or facsimile number as may be designated by such party in a notice to the other parties. Any notice, if mailed and properly addressed with postage prepaid or if properly addressed and sent by pre-paid courier service, shall be deemed given when received; any notice, if transmitted by facsimile, shall be deemed given when transmitted. SECTION 10.3. INDEMNIFICATION. In consideration of the execution and delivery of this Agreement by each Lender and the extension of the Commitments, the Borrower hereby indemnifies, exonerates and holds the Agent and each Lender and each of their respective officers, directors, employees and agents (collectively, the "INDEMNIFIED PARTIES") free and harmless from and against any and all actions, causes of action, suits, losses, costs, liabilities and damages, and expenses incurred in connection therewith (irrespective of whether any such Indemnified Party is a party to the action for which indemnification hereunder is sought), including reasonable attorneys' fees and disbursements (collectively, the "INDEMNIFIED LIABILITIES"), incurred by the Indemnified Parties or any of them as a result of, or arising out of, or relating to (a) any transaction financed or to be financed in whole or in part, directly or indirectly, with the proceeds of any Loan; (b) the entering into and performance of this Agreement and any other Loan Document by any of the Indemnified Parties (including any action brought by or on behalf of the Borrower as the result of any determination by the Required Lenders pursuant to ARTICLE V not to fund the Borrowing); (c) any investigation, litigation or proceeding related to any acquisition or proposed acquisition by the Borrower of all or any portion of the stock or assets of -52- any Person, whether or not the Agent or such Lender is party thereto; (d) any investigation, litigation or proceeding related to any environmental cleanup, audit, compliance or other matter relating to the protection of the environment or the Release by the Borrower of any Hazardous Material; or (e) the presence on or under, or the escape, seepage, leakage, spillage, discharge, emission, discharging or releases from, any real property owned or operated by the Borrower thereof of any Hazardous Material (including any losses, liabilities, damages, injuries, costs, expenses or claims asserted or arising under any Environmental Law), regardless of whether caused by, or within the control of, the Borrower, except for any such Indemnified Liabilities arising for the account of a particular Indemnified Party (i) by reason of the relevant Indemnified Party's gross negligence or wilful misconduct or (ii) solely in connection with disputes by and among the Agent and the Lenders (or any assignees or participants thereof) or among the Lenders (or any assignees or participants thereof). If and to the extent that the foregoing undertaking may be unenforceable for any reason, the Borrower hereby agrees to make the maximum contribution to the payment and satisfaction of each of the Indemnified Liabilities which is permissible under applicable law. SECTION 10.4. SURVIVAL. The obligations of the Borrower under SECTIONS 4.3, 4.4, 4.5, 4.6, and 10.4, the obligations of The Price Company under Section 20 of The Price Company Guaranty Agreement dated concurrently herewith, and the obligations of the Lenders under SECTION 9.1, shall in each case survive any termination of this Agreement, the payment in full of all Obligations and the termination of all Commitments. The representations and warranties made by each Obligor in this Agreement and in each other Loan Document shall survive the execution and delivery of this Agreement and each such other Loan Document. -53- SECTION 10.5. SEVERABILITY. Any provision of this Agreement or any other Loan Document which is prohibited or unenforceable in any jurisdiction shall, as to such provision and such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions of this Agreement or such Loan Document or affecting the validity or enforceability of such provision in any other jurisdiction. SECTION 10.6. HEADINGS. The various headings of this Agreement and of each other Loan Document are inserted for convenience only and shall not affect the meaning or interpretation of this Agreement or such other Loan Document or any provisions hereof or thereof. SECTION 10.7. EXECUTION IN COUNTERPARTS, EFFECTIVENESS, ETC. This Agreement may be executed by the parties hereto in several counterparts, each of which shall be executed by the Borrower and the Agent and be deemed to be an original and all of which shall constitute together but one and the same agreement. This Agreement shall become effective when counterparts hereof executed on behalf of the Borrower and each Lender (or notice thereof satisfactory to the Agent) shall have been received by the Agent and notice thereof shall have been given by the Agent to the Borrower and each Lender. SECTION 10.8. GOVERNING LAW; ENTIRE AGREEMENT. THIS AGREEMENT, THE NOTES AND EACH OTHER LOAN DOCUMENT SHALL EACH BE DEEMED TO BE A CONTRACT MADE UNDER AND GOVERNED BY THE INTERNAL LAWS OF THE STATE OF NEW YORK. This Agreement, the Notes and the other Loan Documents (including the Fee Letter) constitute the entire understanding among the parties hereto with respect to the subject matter hereof and supersede any prior agreements, written or oral, with respect thereto. SECTION 10.9. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns; PROVIDED, HOWEVER, that: -54- (a) the Borrower may not assign or transfer its rights or obligations hereunder without the prior written consent of the Agent and all Lenders; and (b) the rights of sale, assignment and transfer of the Lenders are subject to SECTION 10.10. Notwithstanding the foregoing, the Borrower may assign its rights and obligations hereunder to The Price Company, provided that the Guarantees remain in full force and effect and the Agent and the Lenders receive reaffirmations to such effect and such other documents as they may reasonably require in connection with any such assignment. SECTION 10.10. SALE AND TRANSFER OF LOANS AND NOTE; PARTICIPATIONS IN LOANS AND NOTE. Each Lender may assign, or sell participations in, its Loans and Commitment to one or more other Persons in accordance with this SECTION 10.10. SECTION 10.10.1. ASSIGNMENTS. Any Lender, (a) with the written consents of the Borrower and the Agent (which consents shall not be unreasonably delayed or withheld and which consent, in the case of the Borrower, shall be deemed to have been given in the absence of a written notice delivered by the Borrower to the Agent, on or before the fifth Business Day after receipt by the Borrower of such Lender's request for consent, stating, in reasonable detail, the reasons why the Borrower proposes to withhold such consent) may at any time assign and delegate to one or more commercial banks or other financial institutions which are subject to the tax laws of the United States, including but not limited to the fact that the interest income derived from this Agreement shall be effectively connected with such assignee's United States trade or business; and (b) with notice to the Borrower and the Agent, but without the consent of the Borrower or the Agent, may assign and delegate to any of its Affiliates or to any other Lender which is subject to the tax laws of the United States, including but not limited to the fact that the -55- interest income derived from this Agreement shall be effectively connected with such assignee's United States trade or business (each Person described in either of the foregoing clauses as being the Person to whom such assignment and delegation is to be made, being hereinafter referred to as an "ASSIGNEE LENDER"), all or any fraction of such Lender's total Loans and Commitment (which assignment and delegation shall be of a constant, and not a varying, percentage of all the assigning Lender's Loans and Commitment) in a minimum aggregate amount of $5,000,000; PROVIDED, HOWEVER, that, the Borrower, each other Obligor and the Agent shall be entitled to continue to deal solely and directly with such Lender in connection with the interests so assigned and delegated to an Assignee Lender until (c) written notice of such assignment and delegation, together with payment instructions, addresses and related information with respect to such Assignee Lender, shall have been given to the Borrower and the Agent by such Lender and such Assignee Lender; (d) such Assignee Lender shall have executed and delivered to the Borrower and the Agent a Lender Assignment Agreement, accepted by the Agent; and (e) the processing fees described below shall have been paid. From and after the date that the Agent accepts such Lender Assignment Agreement, (x) the Assignee Lender thereunder shall be deemed automatically to have become a party hereto and to the extent that rights and obligations hereunder have been assigned and delegated to such Assignee Lender in connection with such Lender Assignment Agreement, shall have the rights and obligations of a Lender hereunder and under the other Loan Documents, and (y) the assignor Lender, to the extent that rights and obligations hereunder have been assigned and delegated by it in connection with such Lender Assignment Agreement, shall be released from its obligations hereunder and under the other Loan Documents. Within five Business Days after its receipt of notice that the Agent has received an executed Lender Assignment -56- Agreement, the Borrower shall execute and deliver to the Agent (for delivery to the relevant Assignee Lender) a new Note evidencing such Assignee Lender's assigned Loans and Commitment and, if the assignor Lender has retained Loans and its Commitment hereunder, a replacement Note in the principal amount of the Loans and Commitment retained by the assignor Lender hereunder (such Note to be in exchange for, but not in payment of, that Note then held by such assignor Lender). Each such Note shall be dated the date of the predecessor Note. The assignor Lender shall mark the predecessor Note "exchanged" and deliver it to the Borrower. Accrued interest on that part of the predecessor Note evidenced by the new Note, and accrued fees, shall be paid as provided in the Lender Assignment Agreement. Accrued interest on that part of the predecessor Note evidenced by the replacement Note shall be paid to the assignor Lender. Accrued interest and accrued fees shall be paid at the same time or times provided in the predecessor Note and in this Agreement. Such assignor Lender or such Assignee Lender must also pay a processing fee to the Agent upon delivery of any Lender Assignment Agreement in the amount of $3,000. Any attempted assignment and delegation not made in accordance with this SECTION 10.10.1 shall be null and void. Nothing in this SECTION 10.10.1 shall prevent or prohibit any Lender from pledging its rights (but not its obligations to make Loans) under this Agreement and/or its Loans and/or its Notes hereunder to a Federal Reserve Bank in support of borrowings made by such Lender from such Federal Reserve Bank. SECTION 10.10.2. PARTICIPATIONS. Any Lender may at any time sell to one or more commercial banks or other Persons which are subject to the tax laws of the United States, including but not limited to the fact that the interest income derived from this Agreement shall be effectively connected with such Person's United States trade or business (each of such commercial banks and other Persons being herein called a "PARTICIPANT") participating interests in any of the Loans, Commitment, or other interests of such Lender hereunder; PROVIDED, HOWEVER, that (a) no participation contemplated in this SECTION 10.10 shall relieve such Lender from its Commitment or its other obligations hereunder or under any other Loan Document; -57- (b) such Lender shall remain solely responsible for the performance of its Commitment and such other obligations; (c) the Borrower and each other Obligor and the Agent shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement and each of the other Loan Documents; (d) no Participant, unless such Participant is an Affiliate of such Lender, or is itself a Lender, shall be entitled to require such Lender to take or refrain from taking any action hereunder or under any other Loan Document, except that such Lender may agree with any Participant that such Lender will not, without such Participant's consent, take any actions of the type described in CLAUSE (b) or (c) of SECTION 10.1; and (e) the Borrower shall not be required to pay any amount under SECTION 4.6 that is greater than the amount which it would have been required to pay had no participating interest been sold. The Borrower acknowledges and agrees that each Participant, for purposes of SECTIONS 4.3, 4.4, 4.5, 4.6, 4.8, 4.9, and 10.4, shall be considered a Lender. SECTION 10.11. OTHER TRANSACTIONS. Nothing contained herein shall preclude the Agent or any other Lender from engaging in any transaction, in addition to those contemplated by this Agreement or any other Loan Document, with the Borrower or any of its Affiliates in which the Borrower or such Affiliate is not restricted hereby from engaging with any other Person. SECTION 10.12. FORUM SELECTION AND CONSENT TO JURISDICTION. ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH, THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF THE AGENT, THE LENDERS OR THE BORROWER MAY BE BROUGHT AND MAINTAINED IN THE COURTS OF THE STATE OF NEW YORK OR IN THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK. THE BORROWER HEREBY EXPRESSLY -58- AND IRREVOCABLY SUBMITS TO THE JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK AND OF THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK FOR THE PURPOSE OF ANY SUCH LITIGATION AS SET FORTH ABOVE AND IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT RENDERED THEREBY IN CONNECTION WITH SUCH LITIGATION. THE BORROWER FURTHER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS BY REGISTERED MAIL, POSTAGE PREPAID, OR BY PERSONAL SERVICE WITHIN OR WITHOUT THE STATE OF NEW YORK. THE BORROWER HEREBY EXPRESSLY AND IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY HAVE OR HEREAFTER MAY HAVE TO THE LAYING OF VENUE OF ANY SUCH LITIGATION BROUGHT IN ANY SUCH COURT REFERRED TO ABOVE AND ANY CLAIM THAT ANY SUCH LITIGATION HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. TO THE EXTENT THAT THE BORROWER HAS OR HEREAFTER MAY ACQUIRE ANY IMMUNITY FROM JURISDICTION OF ANY COURT OF FROM ANY LEGAL PROCESS (WHETHER THROUGH SERVICE OR NOTICE, ATTACHMENT PRIOR TO JUDGMENT, ATTACHMENT IN AID OF EXECUTION OR OTHERWISE) WITH RESPECT TO ITSELF OR ITS PROPERTY, THE BORROWER HEREBY IRREVOCABLY WAIVES SUCH IMMUNITY IN RESPECT OF ITS OBLIGATIONS UNDER THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS. SECTION 10.13. WAIVER OF JURY TRIAL. THE AGENT, THE LENDERS AND THE BORROWER HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE ANY RIGHTS THEY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH, THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF THE AGENT, THE LENDERS OR THE BORROWER. THE BORROWER ACKNOWLEDGES AND AGREES THAT IT HAS RECEIVED FULL AND SUFFICIENT CONSIDERATION FOR THIS PROVISION (AND EACH OTHER PROVISION OF EACH OTHER LOAN DOCUMENT TO WHICH IT IS A PARTY) AND THAT THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE AGENT AND THE LENDERS ENTERING INTO THIS AGREEMENT AND EACH SUCH OTHER LOAN DOCUMENT. -59- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized as of the day and year first above written. PRICE COSTCO NOVA SCOTIA COMPANY By -------------------------------------------- Title: Address: ------------------------------------- ------------------------------------- Facsimile No.: ------------------------------- Attention: ----------------------------------- ----------------------------------- CANADIAN IMPERIAL BANK OF COMMERCE, as the Agent By -------------------------------------------- Title: Address: 425 Lexington Avenue New York, New York 10017 Facsimile No.: (212) 856-3799 Attention: Syndications Department -60- PERCENTAGE LENDERS ---------- ------- CIBC INC. 28.5715% ($40,000,000.00) By -------------------------------------------- Title: Notice Address: 425 Lexington Avenue New York, New York 10017 Attention: Syndications Department Facsimile No.: (212) 856-3799 with a copy to: CIBC Inc. 350 South Grand Avenue, 26th Floor Los Angeles, California 90071 Attention: Mr. Ray Mendoza Facsimile No.: (213) 346-0157 Domestic Office: 425 Lexington Avenue New York, New York 10017 Facsimile No.: (212) 856-3799 Attention: ----------------------------------- ----------------------------------- LIBOR Office: 425 Lexington Avenue New York, New York 10017 Facsimile No.: (212) 856-3799 -61- Attention: ----------------------------------- ----------------------------------- -62- 11.9050% (16,667,000.00) BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION By -------------------------------------------- Title: Notice Address: Credit Products #3838 555 California Street, 41st Floor San Francisco, CA 94104 Attention: Maria Vickroy-Peralta Facsimile No.: (415) 622-4585 Domestic Office: Bank of America NT&SA 1850 Gateway Blvd. 4th Floor Concord, CA 94520 Facsimile No.: (510) 603-7242 Attention: Jill Wilson Account Administrator LIBOR Office: Bank of America NT&SA 1850 Gateway Blvd. 4th Floor Concord, CA 94520 Facsimile No.: (510) 603-7242 Attention: Jill Wilson Account Administrator -63- 23.8095% ($33,333,333.33) MORGAN GUARANTY TRUST COMPANY OF NEW YORK By -------------------------------------------- Title: Notice Address: 22/60 Wall Street New York, NY 10260-0060 Attention: Robert Osieski Facsimile No.: (212) 648-5014 Domestic Office: J.P. Morgan Services Inc. 500 Stanton Christiana Road Newark, DE 19713 2107 Facsimile No.: (302) 634-1092 Attention: Loan Department LIBOR Office: J.P. Morgan Services Inc. Euro-Loan Servicing Unit 500 Stanton Christiana Road Newark, DE 19713 2107 Facsimile No.: (302) 634-1092 -64- 11.9045% ($16,666,333.34) BANK OF AMERICA NW, N.A. doing business as SeaFirst Bank By -------------------------------------------- Title: Notice Address: SeaFirst Bank N.W. National Division 701 5th Ave., Floor 12 Seattle, WA 98104 Attention: Hendrikus T. Knottnerus Facsimile No.: (206) 358-3113 Domestic Office: Bank of America NW, N.A. d/b/a SeaFirst Bank Northwest National Div. 701 Fifth Avenue, Floor 12 Seatlle, WA 98104 Facsimile No.: (206) 358-3113 Attention: Alice Kraus Stakke Operations Officer LIBOR Office: Bank of America NW, N.A. d/b/a SeaFirst Bank Northwest National Div. 701 Fifth Avenue, Floor 12 Seatlle, WA 98104 Facsimile No.: (206) 358-3113 Attention: Alice Kraus Stakke Operations Officer -65- -66- 23.8095% ($33,333,333.33) NATIONSBANK OF TEXAS, N.A. By -------------------------------------------- Title: Domestic Office: ------------------------------------- ------------------------------------- Facsimile No.: ------------------------------- Attention: ----------------------------------- ----------------------------------- LIBOR Office: ------------------------------------- ------------------------------------- Facsimile No.: ------------------------------- Attention: ----------------------------------- ---- 100% ---- -67- SCHEDULE I DISCLOSURE SCHEDULE ITEM 6.7 LITIGATION. DESCRIPTION OF PROCEEDING ACTION OR CLAIM SOUGHT NONE. ITEM 6.11 ENVIRONMENTAL MATTERS. NONE. EXHIBIT A NOTE $_________________________ __________________, 19___ FOR VALUE RECEIVED, the undersigned, PRICE COSTCO NOVA SCOTIA COMPANY, a Canadian unlimited liability company (the "BORROWER"), promises to pay to the order of _____________________________ (the "LENDER") the principal sum of ______________________ DOLLARS ($__________) or, if less, the aggregate unpaid principal amount of all Loans shown on the schedule attached hereto (and any continuation thereof) made by the Lender pursuant to that certain Credit Agreement, dated as of April __, 1996 (together with all amendments and other modifications, if any, from time to time thereafter made thereto, the "CREDIT AGREEMENT"), among the Borrower, CANADIAN IMPERIAL BANK OF COMMERCE, as Agent, the various financial institutions (including the Lender) as are, or may from time to time become, parties thereto, payable as set forth in the Credit Agreement, with a final payment (in the amount necessary to pay in full this Note) due and payable on April 11, 2001. The Borrower also promises to pay interest on the unpaid principal amount hereof from time to time outstanding from the date hereof until maturity (whether by acceleration or otherwise) and, after maturity, until paid, at the rates per annum and on the dates specified in the Credit Agreement. Payments of both principal and interest are to be made in lawful money of the United States of America in same day or immediately available funds to the account designated by the Agent pursuant to the Credit Agreement. This Note is a Note referred to in, and evidences Indebtedness incurred under, the Credit Agreement, to which reference is made (i) for a statement of the terms and conditions on which the Borrower is permitted and required to make prepayments and repayments of principal of the Indebtedness evidenced by this Note and on which such Indebtedness may be declared to be immediately due and payable, and (ii) for restrictions relating to the transfer or assignment of this Note. Unless otherwise defined, terms used herein have the meanings provided in the Credit Agreement. All parties hereto, whether as makers, endorsers, or otherwise, severally waive presentment for payment, demand, protest and notice of dishonor. THIS NOTE SHALL BE DEEMED TO BE MADE UNDER AND GOVERNED BY THE INTERNAL LAWS OF THE STATE OF NEW YORK. PRICE COSTCO NOVA SCOTIA COMPANY By: ---------------------------------------- Title: -2- LOANS AND PRINCIPAL PAYMENTS
- - -------------------------------------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------------------------------------- Amount of Loan Amount of Unpaid Principal Made Principal Repaid Balance Nota- -------------- Interest --------------------------------------- tion Base LIBO Period (if Base LIBO Base LIBO Made Date Rate Rate applicable) Rate Rate Rate Rate Total By - - -------------------------------------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------------------------------------- - - --------------------------------------------------------------------------------------------------------------
TABLE OF CONTENTS
Page ---- I DEFINITIONS AND ACCOUNTING TERMS . . . . . . . . . . . . . . . . . . . . . . . .1 1.1. Defined Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 1.2. Use of Defined Terms. . . . . . . . . . . . . . . . . . . . . . . . . .14 1.3. Cross-References. . . . . . . . . . . . . . . . . . . . . . . . . . . .15 1.4. Accounting and Financial Determinations . . . . . . . . . . . . . . . .15 II COMMITMENTS, BORROWING PROCEDURES AND NOTES. . . . . . . . . . . . . . . . . . .15 2.1. Commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15 2.1.1. Commitment of Each Lender . . . . . . . . . . . . . . . . . . . . . . .15 2.1.2. Lenders Not Permitted or Required To Make Loans . . . . . . . . . . . .15 2.3. Continuation and Conversion Elections . . . . . . . . . . . . . . . . .16 2.4. Funding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17 2.5. Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17 III REPAYMENTS, PREPAYMENTS, INTEREST AND FEES . . . . . . . . . . . . . . . . . . .17 3.1. Repayments and Prepayments. . . . . . . . . . . . . . . . . . . . . . .17 3.2. Interest Provisions . . . . . . . . . . . . . . . . . . . . . . . . . .18 3.2.1. Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18 3.2.2. Post-Maturity Rates . . . . . . . . . . . . . . . . . . . . . . . . . .19 3.2.3. Payment Dates . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20 3.3. Facility Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20 IV CERTAIN LIBO RATE AND OTHER PROVISIONS . . . . . . . . . . . . . . . . . . . . .21 4.1. LIBO Rate Lending Unlawful. . . . . . . . . . . . . . . . . . . . . . .21 4.2. Deposits Unavailable. . . . . . . . . . . . . . . . . . . . . . . . . .21 4.3. Increased LIBO Rate Loan Costs, etc . . . . . . . . . . . . . . . . . .21 4.4. Funding Losses. . . . . . . . . . . . . . . . . . . . . . . . . . . . .22 4.5. Increased Capital Costs . . . . . . . . . . . . . . . . . . . . . . . .22 4.6. Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23 4.7. Payments, Computations, etc . . . . . . . . . . . . . . . . . . . . . .24 4.8. Sharing of Payments . . . . . . . . . . . . . . . . . . . . . . . . . .24 4.9. Setoff. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25 4.10. Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . .26 V CONDITIONS TO BORROWING. . . . . . . . . . . . . . . . . . . . . . . . . . . . .26 5.1. Conditions to Borrowing . . . . . . . . . . . . . . . . . . . . . . . .26 5.1.1. Resolutions, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . .26 5.1.2. Delivery of Notes . . . . . . . . . . . . . . . . . . . . . . . . . . .26 5.1.3. Guarantees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26 5.1.4. Opinions of Counsel . . . . . . . . . . . . . . . . . . . . . . . . . .27 5.1.5. Closing Fees, Expenses, etc . . . . . . . . . . . . . . . . . . . . . .27 5.1.6. Compliance with Warranties, No Default, etc . . . . . . . . . . . . . .27 5.1.7. Borrowing Request . . . . . . . . . . . . . . . . . . . . . . . . . . .28 5.1.8. Satisfactory Legal Form . . . . . . . . . . . . . . . . . . . . . . . .28 VI REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . . . . . . . . .28 -i- 6.1. Organization, etc . . . . . . . . . . . . . . . . . . . . . . . . . . .28 6.2. Due Authorization, Non-Contravention, etc . . . . . . . . . . . . . . .28 6.3. Government Approval, Regulation, etc. . . . . . . . . . . . . . . . . .29 6.4. Validity, etc.. . . . . . . . . . . . . . . . . . . . . . . . . . . . .29 6.5. Financial Information . . . . . . . . . . . . . . . . . . . . . . . . .29 6.6. No Material Adverse Change. . . . . . . . . . . . . . . . . . . . . . .29 6.7. Litigation, Labor Controversies, etc. . . . . . . . . . . . . . . . . .29 6.8. Subsidiaries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .30 6.9. Ownership of Properties . . . . . . . . . . . . . . . . . . . . . . . .30 6.10. Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .30 6.11. Environmental Warranties. . . . . . . . . . . . . . . . . . . . . . . .30 6.12. Regulations G, U and X. . . . . . . . . . . . . . . . . . . . . . . . .31 6.13. Accuracy of Information . . . . . . . . . . . . . . . . . . . . . . . .32 VII COVENANTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32 7.1. Affirmative Covenants . . . . . . . . . . . . . . . . . . . . . . . . .32 7.1.1. Financial Information, Reports, Notices, etc. . . . . . . . . . . . . .32 7.1.2. Compliance with Laws, etc . . . . . . . . . . . . . . . . . . . . . . .33 7.1.3. Books and Records . . . . . . . . . . . . . . . . . . . . . . . . . . .33 7.2. Negative Covenants. . . . . . . . . . . . . . . . . . . . . . . . . . .33 7.2.1. Business Activities . . . . . . . . . . . . . . . . . . . . . . . . . .33 7.2.2. Indebtedness. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33 7.2.3. Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .34 7.2.4. Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .34 7.2.5. Restricted Payments, etc. . . . . . . . . . . . . . . . . . . . . . . .34 7.2.6. Capital Expenditures, etc . . . . . . . . . . . . . . . . . . . . . . .35 7.2.7. Consolidation, Merger, etc. . . . . . . . . . . . . . . . . . . . . . .35 7.2.8. Asset Dispositions, etc . . . . . . . . . . . . . . . . . . . . . . . .35 7.2.9. Negative Pledges, Restrictive Agreements, etc . . . . . . . . . . . . .35 7.2.10. Creation of Subsidiaries. . . . . . . . . . . . . . . . . . . . . . . .35 VIII EVENTS OF DEFAULT . . . . . . . . . . . . . . . . . . . . . . . . . . . . .35 8.1. Listing of Events of Default. . . . . . . . . . . . . . . . . . . . . .36 8.1.1. Non-Payment of Obligations. . . . . . . . . . . . . . . . . . . . . . .36 8.1.2. Breach of Warranty. . . . . . . . . . . . . . . . . . . . . . . . . . .36 8.1.3. Non-Performance of Certain Covenants and Obligations. . . . . . . . . .36 8.1.4. Non-Performance of Other Covenants and Obligations. . . . . . . . . . .36 8.1.5. Default on Other Indebtedness . . . . . . . . . . . . . . . . . . . . .36 8.1.6. Judgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36 8.1.7. Pension Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . .37 8.1.8. Change in Control . . . . . . . . . . . . . . . . . . . . . . . . . . .37 8.1.9. Bankruptcy, Insolvency, etc . . . . . . . . . . . . . . . . . . . . . .37 8.1.10. Impairment of Security, etc . . . . . . . . . . . . . . . . . . . . . .38 8.2. Action if Bankruptcy. . . . . . . . . . . . . . . . . . . . . . . . . .38 8.3. Action if Other Event of Default. . . . . . . . . . . . . . . . . . . .38 IX THE AGENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .39 9.1. Actions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .39 9.2. Funding Reliance, etc . . . . . . . . . . . . . . . . . . . . . . . . .39 9.3. Exculpation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .40 9.4. Successor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .40 -ii- 9.5. Loans by CIBC . . . . . . . . . . . . . . . . . . . . . . . . . . . . .41 9.6. Credit Decisions. . . . . . . . . . . . . . . . . . . . . . . . . . . .41 9.7. Copies, etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .41 X MISCELLANEOUS PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . .41 10.1. Waivers, Amendments, etc. . . . . . . . . . . . . . . . . . . . . . . .41 10.2. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .42 10.3. Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . .43 10.4. Survival. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .44 10.5. Severability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .44 10.6. Headings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .44 10.7. Execution in Counterparts, Effectiveness, etc.. . . . . . . . . . . . .44 10.8. Governing Law; Entire Agreement . . . . . . . . . . . . . . . . . . . .45 10.9. Successors and Assigns. . . . . . . . . . . . . . . . . . . . . . . . .45 10.10. Sale and Transfer of Loans and Note; Participations in Loans and Note. . . . . . . . . . . . . . . . . . . . . . . . . . . . .45 10.10.1. Assignments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .45 10.10.2. Participations. . . . . . . . . . . . . . . . . . . . . . . . . . . . .47 10.11. Other Transactions. . . . . . . . . . . . . . . . . . . . . . . . . . .48 10.12. Forum Selection and Consent to Jurisdiction . . . . . . . . . . . . . .48 10.13. Waiver of Jury Trial. . . . . . . . . . . . . . . . . . . . . . . . . .49 EXHIBIT A FORM OF NOTE EXHIBIT B FORM OF BORROWING REQUEST EXHIBIT C FORM OF CONTINUATION/CONVERSION NOTICE EXHIBIT D FORM OF LENDER ASSIGNMENT AGREEMENT EXHIBIT E FORM OF OPINION OF COUNSEL TO THE OBLIGORS EXHIBIT F FORM OF OPINION OF SPECIAL CANADIAN COUNSEL TO THE OBLIGORS EXHIBIT G FORM OF OPINION OF SPECIAL CANADIAN TAX COUNSEL TO THE OBLIGORS EXHIBIT H FORM OF GUARANTEES
-iii- EX-12.1 4 COMPUTATION OF RATION OF EARNINGS TO FIXED CHARGES EXHIBIT 12.1 PRICE/COSTCO, INC. COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (DOLLARS IN THOUSANDS)
53 WEEKS 52 WEEKS 52 WEEKS ENDED ENDED ENDED ---------------------------------- ------------ ------------ AUGUST 30, AUGUST 29, AUGUST 28, SEPTEMBER 3, SEPTEMBER 1, 1992 1993 1994 1995 1996 ---------- ---------- ---------- ------------ ------------ Earnings(1)...................................... $ 368,855 $ 336,463 $ 203,555(3) $ 368,204 $ 423,477 Less: Capitalized interest....................... 8,487 9,483 7,170 3,275 5,612 Add: Interest on debt(2)......................... 44,012 55,599 57,642 71,186 83,690 Portion of rent under long-term operating leases representative of an interest factor....................................... 20,208 23,220 26,940 32,160 33,412 ---------- ---------- ---------- ------------ ------------ Total earnings available for fixed charges....... $ 424,588 $ 405,799 $ 280,967 $ 468,275 $ 534,967 ---------- ---------- ---------- ------------ ------------ ---------- ---------- ---------- ------------ ------------ Fixed Charges: Interest on debt(2)............................ $ 44,012 $ 55,599 $ 57,642 $ 71,186 $ 83,690 Portion of rent under long-term operating leases representative of an interest factor....................................... 20,208 23,220 26,940 32,160 33,412 ---------- ---------- ---------- ------------ ------------ Total fixed charges.............................. $ 64,220 $ 78,819 $ 84,582 $ 103,346 $ 117,102 ---------- ---------- ---------- ------------ ------------ ---------- ---------- ---------- ------------ ------------ Ratio of earnings to fixed charges............... 6.6 5.2 3.3(4) 4.5 4.6 ---------- ---------- ---------- ------------ ------------ ---------- ---------- ---------- ------------ ------------
- - ------------------------ (1) Earnings represent income from continuing operations before provision for income taxes. (2) Includes amortization of debt expense and capitalized interest. (3) Includes provision for merger and restructuring expenses of $120,000 pre-tax ($80,000 or $.36 per share after tax) related to the merger of The Price Company and Costco Wholesale Corporation in October 1993. If such provision for merger and restructuring expenses were excluded, income from continuing operations before provision for income taxes for fiscal 1994 would have been $323,555. (4) If the $120,000 pre-tax provision for merger and restructuring expenses were excluded, the ratio of earnings to fixed charges for fiscal 1994 would have been 4.7. EX-23.1 5 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports included in this Form 10-K into the Price/Costco, Inc.'s previously filed Registration Statement Nos. 33-50799 and 333-1127. ARTHUR ANDERSEN LLP Seattle, Washington November 7, 1996 EX-27 6 EX-27
5 1,000 12-MOS SEP-01-1996 SEP-04-1995 SEP-01-1996 101,955 0 140,965 3,498 1,500,842 1,828,304 3,543,536 655,226 4,911,861 1,771,594 1,229,221 0 0 323,796 1,454,002 4,911,861 19,213,866 19,566,456 17,345,315 19,075,733 0 0 78,078 423,477 174,684 248,793 0 0 0 248,793 1.24 1.22
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