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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(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 3, 1995
[ ] 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
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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. [ ]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant at October 31, 1995, was $2,863,618,868.
The number of shares outstanding of the registrant's common stock as of
October 31, 1995, was 195,235,264.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Proxy Statement for the Annual Meeting of
Stockholders to be held on February 1, 1996 are incorporated by reference into
Part III of this Form 10-K.
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PRICE/COSTCO, INC.
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 3, 1995
<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
PART I
Item 1. Business.................................................... 3
Item 2. Properties.................................................. 7
Item 3. Legal Proceedings........................................... 7
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.............. 19
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K........................................................ 19
</TABLE>
2
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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 with over $15 billion in
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"). Price Enterprises consisted 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 rapid inventory turnover and high sales volumes. 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 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 125,000 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
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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 the
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. 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 a centralized,
automated check-out facility. Items are not individually price marked. Rather,
each item is barcoded so it can be scanned into PriceCostco's 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.
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The following table indicates the approximate percentage of net sales
accounted for by each major category of items sold by PriceCostco during fiscal
1995, 1994 and 1993:
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
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 31 31
HARDLINES (including major appliances, video and audio tape, electronics,
tools, office supplies, furniture and automotive supplies).................. 22 22 21
SOFTLINES (including apparel, domestics, cameras, jewelry, housewares, books
and small appliances)....................................................... 11 12 13
OTHER........................................................................ 3 3 3
--- --- ---
100% 100% 100%
--- --- ---
--- --- ---
</TABLE>
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 $15.
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 3, 1995, PriceCostco had approximately 3.3 million Business
memberships and approximately 6.7 million Gold Star memberships. Members can
utilize their memberships at any Price Club or Costco Wholesale location.
LABOR
As of September 3, 1995, PriceCostco had approximately 52,000 employees,
about 50% of which were part time. Substantially all of Price's 11,000 hourly
employees in California, Connecticut,
5
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Maryland, Massachusetts, New Jersey, New 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 850 warehouse clubs exist across the U.S. and Canada, including
the 240 warehouses operated by the Company, 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 and
California, 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
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ITEM 2 -- PROPERTIES
WAREHOUSE PROPERTIES
At September 3, 1995, PriceCostco operated warehouse clubs in 21 states, 7
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
<TABLE>
<CAPTION>
OWN LAND AND LEASE LAND AND/OR
BUILDING BUILDING GRAND TOTALS
-------------------- -------------------- --------------------
PRICE COSTCO TOTAL PRICE COSTCO TOTAL PRICE COSTCO TOTAL
----- ------ ----- ----- ------ ----- ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
UNITED STATES............................ 65 89 154 15 22 37 80 111 191
CANADA................................... 15 18 33 9 3 12 24 21 45
UNITED KINGDOM........................... -- 4 4 -- -- -- -- 4 4
----- ------ ----- ----- ------ ----- ----- ------ -----
Grand Totals........................... 80 111 191 24 25 49 104 136 240
----- ------ ----- ----- ------ ----- ----- ------ -----
----- ------ ----- ----- ------ ----- ----- ------ -----
</TABLE>
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, 1995:
<TABLE>
<CAPTION>
TOTAL
OTHER WAREHOUSES
OPENINGS BY FISCAL YEAR UNITED STATES CANADA INTERNATIONAL TOTAL IN OPERATION
- ---------------------------------------- ------------- ------- -------------- ------- ------------
<S> <C> <C> <C> <C> <C>
1990 and prior.......................... 107 12 -- 119 119
1991.................................... 13 8 -- 21 140
1992.................................... 27 3 -- 30 170
1993.................................... 23 7 -- 30 200
1994.................................... 12 7 2 21 221
1995.................................... 9 8 2 19 240
1996 (through 12/31/95)................. 2 7 1 10 250
--- ------- --- -------
Total............................... 193 52 5(a) 250
--- ------- --- -------
--- ------- --- -------
</TABLE>
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(a) As of September 3, 1995, 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 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 Exchange Transaction, the Company's business 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.
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.
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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 alleges violation of certain state and federal laws
arising from the spin-off and Exchange Transaction and the merger between Price
and Costco. The Company believes that this lawsuit is without merit and is
vigorously defending against this 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.
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 10:00 a.m. on February 1, 1996
at The Pan Pacific Hotel in Anaheim, California. 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.
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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.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH COMPANY
- -------------------- --- ------------------------------
<S> <C> <C>
James D. Sinegal 59 President and Chief Executive
Officer
Jeffrey H. Brotman 53 Chairman of the Board
Richard D. DiCerchio 52 Executive Vice President --
Merchandising, Distribution,
Construction and Marketing
Richard A. Galanti 39 Executive Vice President and
Chief Financial Officer
Franz E. Lazarus 48 Executive Vice President --
International Operations
David B. Loge 53 Executive Vice President --
Manufacturing and Ancillary
Businesses
Walter C. Jelinek 43 Executive Vice President,
Chief Operating Officer --
Northern Division
Edward B. Maron 68 Executive Vice President,
Chief Operating Officer --
Canadian Division
Joseph P. Portera 42 Executive Vice President,
Chief Operating Officer --
Eastern Division
Dennis R. Zook 46 Executive Vice President,
Chief Operating Officer --
Southern Division
</TABLE>
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 (the "Merger"). 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. Mr. Sinegal is a director of Price Enterprises, Inc. ("Price
Enterprises") but his term as a director of Price Enterprises will expire as of
that company's next election of directors on January 16, 1996. Mr. Sinegal does
not intend to stand for reelection to Price Enterprise's Board of Directors.
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 elected
Chairman of the Board of the Company on December 21, 1994. Mr. Brotman was the
Vice Chairman of the Board of the Company from October 1993 (upon consummation
of the Merger) until December 21, 1994. He is a co-founder of Costco and founder
of a number of other specialty retail chains. Mr. Brotman is a director of
Seafirst Bank, Starbucks Corp., The Sweet Factory and Garden Botanika.
Richard D. DiCerchio has been Executive Vice President -- 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.
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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 positions prior to his
current position.
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."
Prior to October 21, 1993, Price Common Stock was quoted on The Nasdaq Stock
Market's National Market under the symbol "PCLB" and Costco Common Stock was
quoted on The Nasdaq Stock Market's National Market under the symbol "COST."
In the Merger between Price and Costco, which occurred on October 21, 1993,
each share of Price Common Stock, par value $.10 per share, was exchanged for
2.13 shares of PriceCostco Common Stock and each share of Costco Common Stock,
par value $.0033 per share, was exchanged for one share of PriceCostco Common
Stock.
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The following table sets forth the high and low sales prices of PriceCostco
Common Stock for the period October 22, 1993 through October 31, 1995, and Price
Common Stock and Costco Common Stock for the periods indicated. All Price Common
Stock data below has been adjusted to reflect the 2.13 exchange ratio in the
Merger. The quotations are as reported in published financial sources.
<TABLE>
<CAPTION>
PRICE COSTCO PRICECOSTCO
COMMON STOCK COMMON STOCK COMMON STOCK
------------------ ------------------ ------------------
HIGH LOW HIGH LOW HIGH LOW
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Calendar Quarters -- 1993
First Quarter............................................. 18 3/4 14 3/4 25 1/4 18 1/2 -- --
Second Quarter............................................ 18 1/2 13 1/4 19 3/4 15 3/4 -- --
Third Quarter............................................. 18 14 3/4 18 1/2 15 -- --
Fourth Quarter (through October 21, 1993)................. 19 7/8 17 1/2 19 5/8 16 3/4 -- --
Fourth Quarter (October 22, 1993 through December 31,
1993)..................................................... -- -- -- -- 21 3/8 17 1/8
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 (through October 31, 1995)................. -- -- -- -- 18 1/8 16 3/8
</TABLE>
On October 31, 1995, the last reported sales price per share of PriceCostco
Common Stock was $17.00. On October 31, 1995, the Company had 9,025 stockholders
of record.
DIVIDEND POLICY
PriceCostco does not pay regular dividends and does not anticipate the
declaration of a cash dividend in the forseeable 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 the
ten fiscal years in the period ended September 3, 1995 for PriceCostco, 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. 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
1995.
11
<PAGE>
PRICE/COSTCO, INC.
SELECTED CONSOLIDATED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
53 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS
ENDED ENDED ENDED ENDED ENDED ENDED
SEPTEMBER 3, AUGUST 28, AUGUST 29, AUGUST 30, SEPTEMBER 1, SEPTEMBER 2,
1995 1994 1993 1992 1991 1990
------------ ----------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA
Revenue
Net sales............................. $17,905,926 $16,160,911 $15,154,685 $13,820,380 $11,813,509 $9,346,099
Membership fees and other............. 341,360 319,732 309,129 276,998 228,742 185,144
------------ ----------- ----------- ----------- ------------ ------------
Total revenue......................... 18,247,286 16,480,643 15,463,814 14,097,378 12,042,251 9,531,243
Operating expenses
Merchandise costs..................... 16,225,848 14,662,891 13,751,153 12,565,463 10,755,823 8,518,951
S,G&A expenses........................ 1,555,588 1,425,549 1,314,660 1,128,898 934,120 719,446
Preopening expenses................... 25,018 24,564 28,172 25,595 16,289 11,691
Provision for estimated warehouse
closing costs........................ 7,500 7,500 5,000 2,000 1,850 6,000
------------ ----------- ----------- ----------- ------------ ------------
Operating income...................... 433,332 360,139 364,829 375,422 334,169 275,155
Other income (expense)
Interest expense...................... (67,911) (50,472) (46,116) (35,525) (26,041) (18,769)
Interest income and other............. 2,783 13,888 17,750 28,958 33,913 19,239
Provision for merger and restructuring
expenses............................. -- (120,000) -- -- -- --
------------ ----------- ----------- ----------- ------------ ------------
Income from continuing operations before
provision for income taxes............. 368,204 203,555 336,463 368,855 342,041 275,625
Provision for income taxes.............. 150,963 92,657 133,620 145,833 134,748 107,899
------------ ----------- ----------- ----------- ------------ ------------
Income from continuing operations....... 217,241 110,898 202,843 223,022 207,293 167,726
Discontinued operations:
Income (loss), net of tax........... -- (40,766) 20,404 19,385 11,566 6,854
Loss on disposal.................... (83,363) (182,500) -- -- -- --
Extraordinary items..................... -- -- -- -- -- --
------------ ----------- ----------- ----------- ------------ ------------
Net income (loss)....................... $ 133,878 $ (112,368) $ 223,247 $ 242,407 $ 218,859 $ 174,580
------------ ----------- ----------- ----------- ------------ ------------
------------ ----------- ----------- ----------- ------------ ------------
Per Share Data -- Fully Diluted
Income from continuing operations..... $ 1.05 $ 0.51 $ 0.92 $ 0.98 $ 0.93 $ 0.79
Discontinued Operations:
Income (loss), net of tax........... -- (0.19) 0.08 0.08 0.05 0.03
Loss on Disposal.................... (0.37) (0.83) -- -- -- --
Extraordinary items................... -- -- -- -- -- --
------------ ----------- ----------- ----------- ------------ ------------
Net income (loss)..................... $ 0.68 $ (0.51) $ 1.00 $ 1.06 $ 0.98 $ 0.82
------------ ----------- ----------- ----------- ------------ ------------
------------ ----------- ----------- ----------- ------------ ------------
Shares used in calculation............ 224,079 219,334 240,162 245,090 234,202 219,532
<CAPTION>
53 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS
ENDED ENDED ENDED ENDED
SEPTEMBER 3, AUGUST 28, AUGUST 30, AUGUST 31,
1989 1988 1987 1986
------------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
OPERATING DATA
Revenue
Net sales............................. $7,844,539 $6,042,159 $4,606,352 $3,337,361
Membership fees and other............. 157,621 125,985 98,201 70,695
------------ ---------- ---------- ----------
Total revenue......................... 8,002,160 6,168,144 4,704,553 3,408,056
Operating expenses
Merchandise costs..................... 7,168,907 5,531,626 4,198,768 3,040,115
S,G&A expenses........................ 590,465 458,013 355,178 256,407
Preopening expenses................... 11,685 6,509 12,784 4,031
Provision for estimated warehouse
closing costs........................ 1,609 4,000 -- --
------------ ---------- ---------- ----------
Operating income...................... 229,494 167,996 137,823 107,503
Other income (expense)
Interest expense...................... (24,583) (20,949) (13,840) (8,249)
Interest income and other............. 24,275 22,341 20,936 21,281
Provision for merger and restructuring
expenses............................. -- -- -- --
------------ ---------- ---------- ----------
Income from continuing operations before
provision for income taxes............. 229,186 169,388 144,919 120,535
Provision for income taxes.............. 88,742 67,533 68,019 58,162
------------ ---------- ---------- ----------
Income from continuing operations....... 140,444 101,855 76,900 62,373
Discontinued operations:
Income (loss), net of tax........... 3,600 -- -- --
Loss on disposal.................... -- -- -- --
Extraordinary items..................... -- 2,856 1,510 995
------------ ---------- ---------- ----------
Net income (loss)....................... $ 144,044 $ 104,711 $ 78,410 $ 63,368
------------ ---------- ---------- ----------
------------ ---------- ---------- ----------
Per Share Data -- Fully Diluted
Income from continuing operations..... $ 0.69 $ 0.56 $ 0.42 $ 0.37
Discontinued Operations:
Income (loss), net of tax........... 0.02 -- -- --
Loss on Disposal.................... -- -- -- --
Extraordinary items................... -- 0.02 0.01 0.01
------------ ---------- ---------- ----------
Net income (loss)..................... $ 0.71 $ 0.58 $ 0.43 $ 0.38
------------ ---------- ---------- ----------
------------ ---------- ---------- ----------
Shares used in calculation............ 212,772 181,336 180,887 168,324
</TABLE>
12
<PAGE>
PRICE/COSTCO, INC.
SELECTED CONSOLIDATED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT WAREHOUSE AND PER SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 3, AUGUST 28, AUGUST 29, AUGUST 30, SEPTEMBER 1, SEPTEMBER 2, SEPTEMBER 3, AUGUST 28,
1995 1994 1993 1992 1991 1990 1989 1988
------------ ---------- ---------- ---------- ------------ ------------ ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Working capital
(deficit).............. $ 9,381 $ (113,009) $ 127,312 $ 281,592 $ 304,703 $ 14,342 $ 103,252 $ 208,569
Property and equipment,
net.................... 2,535,593 2,146,396 1,966,601 1,704,052 1,183,432 935,767 752,912 511,784
Total assets............ 4,437,419 4,235,659 3,930,799 3,576,543 2,986,094 2,029,931 1,740,332 1,445,814
Short-term debt......... 75,725 149,340 23,093 -- -- 139,414 114,000 --
Long-term debt and
capital lease
obligations, net....... 1,094,615 795,492 812,576 813,976 500,440 199,506 234,017 327,760
Stockholders' equity
(a)(b)................. 1,530,744 1,684,960 1,796,728 1,593,943 1,429,703 988,458 777,730 585,598
WAREHOUSES IN OPERATION
Beginning of year....... 221 200 170 140 119 104 84 77
Opened.................. 24 29 37 31 23 19 20 10
Closed.................. (5) (8) (7) (1) (2) (4) -- (3)
------------ ---------- ---------- ---------- ------------ ------------ ------------ ----------
End of Year............. 240 221 200 170 140 119 104 84
------------ ---------- ---------- ---------- ------------ ------------ ------------ ----------
------------ ---------- ---------- ---------- ------------ ------------ ------------ ----------
<CAPTION>
AUGUST 30, AUGUST 31,
1987 1986
---------- -----------
<S> <C> <C>
BALANCE SHEET DATA
Working capital
(deficit).............. $ 244,783 $ 173,765
Property and equipment,
net.................... 411,590 234,813
Total assets............ 1,205,843 769,799
Short-term debt......... -- --
Long-term debt and
capital lease
obligations, net....... 333,503 124,475
Stockholders' equity
(a)(b)................. 468,045 384,275
WAREHOUSES IN OPERATION
Beginning of year....... 47 36
Opened.................. 30 11
Closed.................. -- --
---------- -----------
End of Year............. 77 47
---------- -----------
---------- -----------
</TABLE>
- ------------------------
(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
<PAGE>
ITEM 7 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 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.
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 fiscal 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 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% from $319,732, or 1.98% of
net sales, in fiscal 1994 to $341,360, or 1.91% of net sales in fiscal 1995.
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%
from $1,498,020, or 9.27% of net sales in fiscal 1994 to $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 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 provision, 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 from 8.82% during fiscal 1994 to 8.69% during fiscal 1995, 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 warehouses, 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
14
<PAGE>
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). 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 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 includes interest on the 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.
In 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 is 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 includes 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 includes a $182,500 or $.83
per share charge for the estimated loss on the disposal of the discontinued real
estate operations. These charges relate 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."
15
<PAGE>
COMPARISON OF FISCAL 1994 (52 WEEKS) AND FISCAL 1993 (52 WEEKS):
(DOLLARS IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
Net operating results for fiscal 1994 reflected a net loss of $112,368 or
$.51 per share (fully diluted), as compared to fiscal 1993 net income of
$223,247 or $1.00 per share (fully diluted). The fiscal 1994 net loss included
the provision for merger and restructuring costs of $120,000 pre-tax ($80,000 or
$.36 per share after tax), a non-cash provision of $80,500 pre-tax ($47,500 or
$.22 per share after tax) arising from a change in accounting estimates caused
by the 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.
CONTINUING OPERATIONS
Income from continuing operations for fiscal 1994 was $110,898 or $.51 per
share, compared to income from continuing operations for fiscal 1993 of $202,843
or $.92 per share. Excluding the $120,000 pre-tax merger and restructuring
charge, income from continuing operations for fiscal 1994 would have been
$190,898 or $.87 per share.
Net sales increased 6.6% to $16,160,911 in fiscal 1994 from $15,154,685 in
fiscal 1993. This increase was due to: (i) first year sales at the 29 new
warehouses opened during fiscal 1994, which increase was partially offset by
eight warehouses closed during fiscal 1994 that were in operation during fiscal
1993; and (ii) increased sales at 37 warehouses that were opened in 1993 and
that were in operation for the entire 1994 fiscal year, which increase was
partially offset by lower sales at existing locations opened prior to fiscal
1993. Changes in prices did not materially affect sales levels.
Comparable sales, that is sales in warehouses open for at least a year, were
a negative 3% annual rate in fiscal 1994 -- similar to the negative 3% annual
rate during fiscal 1993. The negative rate of comparable sales was attributed to
several factors, including the following: the effect of sales cannibalization by
opening additional warehouses in existing markets; increased competition in
several markets; deflation in several merchandise categories; a generally poor
economic environment, especially in California; and a weak Canadian dollar where
the Company derived 16% and 15% of net sales in fiscal 1994 and 1993,
respectively.
Membership fees and other revenue increased 3.4% from $309,129, or 2.04% of
net sales, in fiscal 1993 to $319,732, or 1.98% of net sales in fiscal 1994.
This increase reflects a continued strong membership base at existing
warehouses, membership sign-ups at the 29 new warehouses and an annualized
effect of membership fee increases in certain markets implemented in fiscal
1993.
Gross margin (defined as net sales minus merchandise costs) increased 6.7%
from $1,403,532, or 9.26% of net sales in fiscal 1993 to $1,498,020, or 9.27% of
net sales in fiscal 1994. The gross margin figures reflect accounting for
merchandise inventory costs on the last-in, first-out (LIFO) method. For fiscal
1994 there was a $2,600 LIFO benefit or $.01 per share (fully diluted) to
increase income after tax due to the use of the LIFO method compared to the
first-in, first-out (FIFO) method. This compares to a $5,350 LIFO benefit or
$.01 per share (fully diluted) in fiscal 1993.
Selling, general and administrative expenses as a percent of net sales
increased from 8.67% during fiscal 1993 to 8.82% during fiscal 1994, reflecting
a combination of comparable unit sales decreases in the 200 warehouses in
operation during both fiscal periods; higher expense ratios at the 29 units
opened during fiscal 1994 (newer units generally operate at significantly lower
annual sales volumes than mature units and, therefore, incur higher expense
ratios than mature units); and higher expense factors associated with certain
ancillary operations.
Preopening expenses totaled $28,172 or 0.19% of net sales during fiscal
1993, and $24,564 or 0.15% of net sales during fiscal 1994. During fiscal 1994,
the Company opened 29 new warehouses compared to opening 37 new warehouses
during fiscal 1993.
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). The provision
included $5,750 (pre-tax) related to settlement of a
16
<PAGE>
lease dispute and additional closing costs related to warehouse clubs closed in
prior years, and $1,750 (pre-tax) related to the estimated closing costs of six
warehouses which were replaced by new warehouses. This compared to $5,000
(pre-tax) or $.01 per share in fiscal 1993.
Interest expense totaled $46,116 in fiscal 1993 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 income and other totaled $17,750 in fiscal 1993, and $13,888 in
fiscal 1994. This decrease was primarily due to lower average investment
balances and lower interest rates.
The effective income tax rate (excluding the merger and restructuring charge
and loss on disposal of the discontinued operations) on earnings in fiscal 1994
was 41.0%, compared to 39.7% in the prior year. The Company's effective income
tax rate increased due to a higher federal statutory rate implemented in the
Company's fourth quarter of fiscal 1993 and by changes in the impact of foreign
operations on the effective tax rate.
DISCONTINUED OPERATIONS
Income from discontinued real estate operations (net of operating expenses
and taxes) was $20,404 or $.08 per share in fiscal 1993, compared to a loss from
discontinued real estate operations of $40,766 or $.19 per share in fiscal 1994.
Discontinued real estate operations include the results of income producing
properties, gains on sale of property, and interest income. In fiscal 1994 the
results included 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 are considered to be economically impaired.
The loss on disposal of the discontinued real estate operations of $182,500
or $.83 per share, reflected in the fourth quarter of fiscal 1994, 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.
For a description 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 eight-week period ended October 29, 1995
were approximately $2,756,000 an increase of 9.2% from approximately $2,524,000
for the same eight-week period of the prior fiscal year. Comparable warehouse
sales (sales in warehouses open for at least a year) increased by 3 percent
during the eight-week period.
LIQUIDITY AND CAPITAL RESOURCES
(DOLLARS IN THOUSANDS)
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 1995, cash provided from operations was approximately $278,000. In
June 1995, the Company issued $300,000 of 7 1/8% Senior Notes due June 15, 2005
(the "Senior Notes"). The net proceeds from the sale of the Senior Notes were
used to repay existing indebtedness incurred under the Company's $500,000
commercial paper program. The Senior Notes indenture contains limitations on the
Company's and certain subsidiaries ability to create liens securing indebtedness
and to enter certain sale-leaseback transactions. Cash flow from operations,
borrowings under the Company's commercial paper program and the proceeds from
the Senior Notes 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.
17
<PAGE>
Expansion plans for the United States and Canada during fiscal 1996 are to
open 20-25 new warehouse clubs. The Company also expects to continue expansion
of its international operations. To date the Company has opened four warehouses
in the United Kingdom through a 60%-owned subsidiary, and plans to open three to
four additional United Kingdom units during fiscal 1996. Other markets are being
assessed, particularly in the Pacific Rim, and include the planned opening of a
warehouse club location in Taiwan during the summer of 1996.
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 3,
1995, 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 $450,000 to $500,000 during
fiscal 1996 in the United States and Canada for real estate, construction,
remodeling and equipment for warehouse clubs and related operations; and
approximately $50,000 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 $45,688 at September 3, 1995), 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 13
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
30, 1996, and $250,000 expires on January 30, 1998. The interest rate on bank
borrowings is based on LIBOR or rates bid at auction by the participating banks.
At September 3, 1995, no amounts were outstanding under the loan facility and
$51,965 was outstanding under 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 30, 1996 at substantially the same terms.
In addition, the Company's wholly-owned Canadian subsidiary has a $103,000
commercial paper program supported by a bank credit facility with three Canadian
banks, of which $63,000 will expire in April 1996 and $40,000 will expire in
April 1999. The interest rate on bank borrowings is based on the prime rate or
the "Bankers' Acceptance" rate. At September 3, 1995, no amounts were
outstanding under the bank credit facility and $23,760 was outstanding under the
Canadian commercial paper program.
The Company also has separate letter of credit facilities (for commercial
and standby letters of credit), totaling approximately $196,000. The outstanding
commitments under these facilities at September 3, 1995 totaled approximately
$127,000, including approximately $51,000 in standby letters of credit for
workers' compensation requirements.
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 3, 1995, working capital totaled $9,000 compared to a working capital
(deficit) of ($113,000) at August 28, 1994. This increase in net working capital
is primarily related to reductions in notes payable of $74,000 as long-term debt
proceeds were used to refinance certain short-term borrowings.
In fiscal 1994, cash provided from operations was approximately $248,000.
These funds, combined with beginning fiscal year balances of cash, cash
equivalents and short-term investments, along with borrowings under the
Company's commerical paper program were used to finance: 1) additions to
property and equipment for warehouse clubs and related operations of $475,000;
2) net inventory
18
<PAGE>
investment (merchandise inventories less accounts payable) of $66,000; and 3)
other investing activities related primarily to net discontinued operations and
investments in unconsolidated joint ventures, which together totaled
approximately $73,500.
ITEM 8 -- FINANCIAL STATEMENTS
Financial statements of PriceCostco are as follows:
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Report of Independent Public Accountants................................................................... 22
Consolidated Balance Sheets, as of September 3, 1995 and August 28, 1994................................... 23
Consolidated Statements of Operations, for the 53 weeks ended September 3, 1995 and the 52 weeks ended
August 28, 1994, and August 29, 1993...................................................................... 24
Consolidated Statements of Stockholders' Equity, for the 53 weeks ended September 3, 1995 and the 52 weeks
ended August 28, 1994, and August 29, 1993................................................................ 25
Consolidated Statements of Cash Flows, for the 53 weeks ended September 3, 1995 and the 52 weeks ended
August 28, 1994, and August 29, 1993...................................................................... 26
Notes to Consolidated Financial Statements................................................................. 27
</TABLE>
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 February 1, 1996, to be filed with the Commission pursuant to Regulation 14A.
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 February 1, 1996, to be filed with the Commission pursuant to Regulation 14A.
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 February 1, 1996, to be filed with the Commission pursuant to Regulation 14A.
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 February 1, 1996, to be filed with the Commission pursuant to Regulation 14A.
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.
(b) No reports on Form 8-K were filed during the last quarter of the period
covered by this Annual Report.
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.
19
<PAGE>
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 22, 1995
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.
<TABLE>
<S> <C>
By /s/ JAMES D. SINEGAL November 22, 1995
----------------------------------------
James D. Sinegal
PRESIDENT, CHIEF EXECUTIVE OFFICER AND
DIRECTOR
By /s/ JEFFREY H. BROTMAN November 22, 1995
----------------------------------------
Jeffrey H. Brotman
CHAIRMAN OF THE BOARD
By /s/ RICHARD D. DICERCHIO November 22, 1995
----------------------------------------
Richard D. DiCerchio
EXECUTIVE VICE PRESIDENT -- MERCHANDISING,
DISTRIBUTION, CONSTRUCTION AND MARKETING
AND DIRECTOR
By /s/ RICHARD A. GALANTI November 22, 1995
----------------------------------------
Richard A. Galanti
EXECUTIVE VICE PRESIDENT, CHIEF FINANCIAL
OFFICER AND DIRECTOR (PRINCIPAL FINANCIAL
OFFICER)
By /s/ DAVID S. PETTERSON November 22, 1995
----------------------------------------
David S. Petterson
SENIOR VICE PRESIDENT AND CONTROLLER
(PRINCIPAL ACCOUNTING OFFICER)
By /s/ DANIEL BERNARD November 22, 1995
----------------------------------------
Daniel Bernard
DIRECTOR
</TABLE>
20
<PAGE>
<TABLE>
<S> <C>
By /s/ HAMILTON E. JAMES November 22, 1995
----------------------------------------
Hamilton E. James
DIRECTOR
By /s/ RICHARD M. LIBENSON November 22, 1995
----------------------------------------
Richard M. Libenson
DIRECTOR
By /s/ JOHN W. MEISENBACH November 22, 1995
----------------------------------------
John W. Meisenbach
DIRECTOR
By /s/ FREDERICK O. PAULSELL November 22, 1995
----------------------------------------
Frederick O. Paulsell
DIRECTOR
</TABLE>
21
<PAGE>
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 3,
1995 and August 28, 1994, and the related statements of operations,
stockholders' equity and cash flows for the 53-week period ended September 3,
1995, and the 52-week periods ended August 28, 1994 and August 29, 1993. 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 did not audit the financial statements of The Price Company and
subsidiaries (Price), which statements reflect total revenues of 51% of the
consolidated totals for the 52-week period ended August 29, 1993. Those
statements were audited by other auditors whose report has been furnished to us,
and our opinion, insofar as it relates to the amounts included for Price, is
based solely on the report of the other auditors.
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 3,
1995 and August 28, 1994, and the results of its operations and its cash flows
for the 53-week period ended September 3, 1995, and the 52-week periods ended
August 28, 1994, and August 29, 1993 in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Seattle, Washington
October 25, 1995
22
<PAGE>
PRICE/COSTCO, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
AUGUST 28,
SEPTEMBER 3, 1995 1994
----------------- --------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents................................................... $ 45,688 $ 53,638
Short-term investments and restricted cash.................................. -- 9,268
Receivables, net............................................................ 146,665 130,278
Merchandise inventories, net................................................ 1,422,272 1,260,476
Other current assets........................................................ 87,694 80,638
----------------- --------------
Total current assets...................................................... 1,702,319 1,534,298
----------------- --------------
PROPERTY AND EQUIPMENT
Land, land rights, and land improvements.................................... 1,143,860 975,439
Buildings and leasehold improvements........................................ 1,215,706 994,492
Equipment and fixtures...................................................... 624,398 523,310
Construction in progress.................................................... 78,071 78,264
----------------- --------------
3,062,035 2,571,505
Less -- accumulated depreciation and amortization........................... (526,442) (425,109)
----------------- --------------
Net property and equipment................................................ 2,535,593 2,146,396
----------------- --------------
OTHER ASSETS................................................................ 199,507 177,880
DISCONTINUED OPERATIONS --NET ASSETS........................................ -- 377,085
----------------- --------------
$ 4,437,419 $ 4,235,659
----------------- --------------
----------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bank checks outstanding, less cash on deposit............................... $ 12,721 $ 6,804
Notes payable............................................................... 75,725 149,340
Accounts payable............................................................ 1,233,128 1,073,326
Accrued salaries and benefits............................................... 205,236 207,570
Accrued sales and other taxes............................................... 91,843 81,736
Other current liabilities................................................... 74,285 128,531
----------------- --------------
Total current liabilities................................................. 1,692,938 1,647,307
LONG-TERM DEBT................................................................ 1,094,615 795,492
DEFERRED INCOME TAXES......................................................... 64,293 65,679
OTHER LIABILITIES............................................................. 3,991 7,442
----------------- --------------
Total liabilities......................................................... 2,855,837 2,515,920
----------------- --------------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST............................................................. 50,838 34,779
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; 195,164,000 and
217,795,000 shares issued and outstanding.................................. 1,952 2,178
Additional paid-in capital.................................................. 303,989 582,148
Accumulated foreign currency translation.................................... (52,289) (42,580)
Retained earnings........................................................... 1,277,092 1,143,214
----------------- --------------
Total stockholders' equity.................................................. 1,530,744 1,684,960
----------------- --------------
$ 4,437,419 $ 4,235,659
----------------- --------------
----------------- --------------
</TABLE>
The accompanying notes are an integral part of these balance sheets.
23
<PAGE>
PRICE/COSTCO, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
53 WEEKS ENDED 52 WEEKS ENDED 52 WEEKS ENDED
SEPTEMBER 3, AUGUST 28, AUGUST 29,
1995 1994 1993
-------------- -------------- --------------
<S> <C> <C> <C>
REVENUE
Net sales...................................................... $ 17,905,926 $ 16,160,911 $ 15,154,685
Membership fees and other...................................... 341,360 319,732 309,129
-------------- -------------- --------------
Total revenue................................................ 18,247,286 16,480,643 15,463,814
OPERATING EXPENSES
Merchandise costs.............................................. 16,225,848 14,662,891 13,751,153
Selling, general and administrative............................ 1,555,588 1,425,549 1,314,660
Preopening expenses............................................ 25,018 24,564 28,172
Provision for estimated warehouse closing costs................ 7,500 7,500 5,000
-------------- -------------- --------------
Operating income............................................. 433,332 360,139 364,829
OTHER INCOME (EXPENSE)
Interest expense............................................... (67,911) (50,472) (46,116)
Interest income and other...................................... 2,783 13,888 17,750
Provision for merger and restructuring expenses................ -- (120,000) --
-------------- -------------- --------------
INCOME FROM CONTINUING OPERATIONS
BEFORE PROVISION FOR INCOME TAXES................................ 368,204 203,555 336,463
Provision for income taxes..................................... 150,963 92,657 133,620
-------------- -------------- --------------
INCOME FROM CONTINUING OPERATIONS................................ 217,241 110,898 202,843
DISCONTINUED OPERATIONS:
Income (loss), net of tax...................................... -- (40,766) 20,404
Loss on disposal............................................... (83,363) (182,500) --
-------------- -------------- --------------
NET INCOME (LOSS)................................................ $ 133,878 $ (112,368) $ 223,247
-------------- -------------- --------------
-------------- -------------- --------------
NET INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE --
PRIMARY:
Continuing operations:......................................... $ 1.06 $ 0.51 $ 0.92
-------------- -------------- --------------
-------------- -------------- --------------
FULLY DILUTED:
Continuing operations:......................................... $ 1.05 $ 0.51 $ 0.92
Discontinued operations:
Income (loss), net of tax.................................... -- (0.19) 0.08
Loss on disposal............................................. (0.37) (0.83) --
-------------- -------------- --------------
Net income (loss).............................................. $ 0.68 $ (0.51) $ 1.00
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
24
<PAGE>
PRICE/COSTCO, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE 53 WEEKS ENDED SEPTEMBER 3, 1995 AND THE 52 WEEKS ENDED AUGUST 28, 1994,
AND AUGUST 29, 1993
(IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL FOREIGN
---------------------- PAID-IN CURRENCY RETAINED
SHARES AMOUNT CAPITAL TRANSLATION EARNINGS TOTAL
--------- ----------- ----------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT AUGUST 30, 1992................. 216,020 $ 2,160 $ 564,362 $ (4,914) $1,032,335 $1,593,943
Stock options exercised including income
tax benefits............................ 1,529 15 13,436 -- -- 13,451
Shares repurchased....................... (475) (4) (6,530) -- -- (6,534)
Net income............................... -- -- -- -- 223,247 223,247
Foreign currency translation
adjustment.............................. -- -- -- (27,379) -- (27,379)
--------- ----------- ----------- ------------ ---------- ----------
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
--------- ----------- ----------- ------------ ---------- ----------
--------- ----------- ----------- ------------ ---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
25
<PAGE>
PRICE/COSTCO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
53 WEEKS 52 WEEKS 52 WEEKS
ENDED ENDED ENDED
SEPTEMBER 3, AUGUST 28, AUGUST 29,
1995 1994 1993
------------ ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)...................................................... $ 133,878 $ (112,368) $ 223,247
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization.......................................... 142,022 136,317 106,236
Net (gain) loss on sale of property and equipment and other............ (384) 3,282 3,079
Provision for asset impairments........................................ -- 90,200 --
Loss on disposal of discontinued operations............................ 83,363 182,500 --
Increase (decrease) in deferred income taxes........................... (3,559) (41,623) 10,954
Change in receivables, other current assets, accrued expenses and other
current liabilities................................................... (81,729) 64,044 (26,917)
Increase in merchandise inventories.................................... (160,114) (271,332) (137,855)
Increase in accounts payable........................................... 155,851 205,213 136,142
Other.................................................................. 9,054 (3,013) (5,031)
Discontinued operations, net........................................... -- (5,415) (14,047)
------------ ----------- -----------
Total adjustments.................................................... 144,504 360,173 72,561
------------ ----------- -----------
Net cash provided by operating activities............................ 278,382 247,805 295,808
------------ ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property and equipment.................................... (530,638) (474,553) (533,025)
Proceeds from the sale of property and equipment....................... 7,337 15,960 12,198
Investment in unconsolidated joint ventures............................ (11,487) (39,795) (21,905)
Decrease in short-term investments and restricted cash................. 9,268 80,848 31,018
Increase in other assets and other, net................................ (10,932) (8,416) (8,947)
Discontinued operations, net........................................... -- (33,721) 70,572
------------ ----------- -----------
Net cash used in investing activities.................................. (536,452) (459,677) (450,089)
------------ ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings (repayments) under short-term credit facilities............. (73,194) 130,344 22,620
Net proceeds from issuance of long-term debt........................... 299,026 13,805 8,580
Repayments of long-term debt........................................... (3,194) (29,937) (9,805)
Changes in bank overdraft.............................................. 5,668 (15,477) (2,757)
Proceeds from minority interests....................................... 16,603 36,557 --
Exercise of stock options and warrants, including income tax benefit... 4,077 11,383 13,451
Repurchases of common stock............................................ -- (496) (6,534)
------------ ----------- -----------
Net cash provided by financing activities.............................. 248,986 146,179 25,555
------------ ----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH.................................. 1,134 (896) (5,039)
------------ ----------- -----------
Net decrease in cash and cash equivalents.............................. (7,950) (66,589) (133,765)
CASH AND CASH EQUIVALENTS BEGINNING OF YEAR.............................. 53,638 120,227 253,992
------------ ----------- -----------
CASH AND CASH EQUIVALENTS END OF YEAR.................................... $ 45,688 $ 53,638 $ 120,227
------------ ----------- -----------
------------ ----------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest (net of amount capitalized)................................... $ 75,583 $ 50,787 $ 44,944
Income taxes........................................................... $ 165,269 $ 97,685 $ 149,150
</TABLE>
The accompanying notes are an integral part of these financial statements.
26
<PAGE>
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"). 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.
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.
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.
FISCAL YEARS
The Company reports on a 52/53 week fiscal year basis which ends on the
Sunday nearest August 31st. Fiscal year 1995 was 53 weeks and fiscal year 1994
and 1993 were each 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.
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 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 September 3, 1995, $6,650 at
August 28, 1994, and $9,250 at August 29, 1993.
<TABLE>
<CAPTION>
SEPTEMBER 3, AUGUST 28,
1995 1994
------------- -------------
<S> <C> <C>
Merchandise inventories consist of:
United States (primarily LIFO).......................................... $ 1,174,067 $ 1,089,924
Foreign (FIFO).......................................................... 248,205 170,552
------------- -------------
Total................................................................. $ 1,422,272 $ 1,260,476
------------- -------------
------------- -------------
</TABLE>
27
<PAGE>
PRICE/COSTCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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 $4,628 at September 3, 1995 and $3,045 at August 28, 1994.
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 $3,275 in fiscal 1995, $5,209 in fiscal
1994 and $5,423 in fiscal 1993. The amount of capitalized interest relating to
the discontinued real estate operations for fiscal 1994 and 1993 was $1,961 and
$4,060, respectively.
GOODWILL
Goodwill, included in other assets, totaled $51,063 at September 3, 1995 and
$38,761 at August 28, 1994 and resulted 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 $7,016 at September 3, 1995
and $5,986 at August 28, 1994.
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 1995 and 1993, this
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 1995, 1994 and 1993 were as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Primary.............................................................. 210,962 219,332 227,331
Fully diluted........................................................ 224,079 219,334 240,162
</TABLE>
28
<PAGE>
PRICE/COSTCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PREOPENING EXPENSES
Preopening expenses related to new warehouses, major remodels/expansion,
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.
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES
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 due in December 1996.
- 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 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.
FISCAL 1993 NON-CASH ACTIVITIES
- During fiscal 1993, the Company transferred approximately $72,093 of
property and equipment and other assets to its discontinued non-club real
estate operations.
29
<PAGE>
PRICE/COSTCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 1995 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 of. The Company is required
to adopt SFAS No. 121 no later than fiscal 1996. The Company has not yet
determined when SFAS No. 121 will be adopted or what the impact of adoption will
be on the carrying value of its long-lived and related intangible assets.
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.
RECLASSIFICATIONS
Certain reclassifications have been reflected in the financial statements in
order to conform prior years to the current year presentation.
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.
30
<PAGE>
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
are as follows:
<TABLE>
<CAPTION>
AMOUNTS EXPENDED
-------------------------------------
FISCAL 1994 FISCAL 1995 TOTAL
----------- ----------- -----------
<S> <C> <C> <C>
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
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
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
31
<PAGE>
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)
shares of 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 operates 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.
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 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
32
<PAGE>
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)
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 the 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.
DISCONTINUED OPERATIONS -- NET ASSETS
Net assets related to discontinued real estate operations as shown on the
consolidated balance sheet at August 28, 1994 consisted of the following:
<TABLE>
<CAPTION>
1994
------------
<S> <C>
Non-Club Real Estate properties, net of accumulated depreciation.......................... $ 351,958
Warehouse Properties, net of accumulated depreciation..................................... 91,415
City and Atlas Notes...................................................................... 73,023
Other assets.............................................................................. 8,672
Deferred tax assets....................................................................... 23,282
Liabilities............................................................................... (4,015)
------------
544,335
Less: Reserve for estimated loss on disposal.............................................. (167,250)
------------
Discontinued operations -- net assets..................................................... $ 377,085
------------
------------
</TABLE>
INCOME (LOSS) FROM DISCONTINUED OPERATIONS
Components of net income (loss) from discontinued operations for fiscal 1994
and 1993, prior to the effective date of the Exchange Transaction, were as
follows:
<TABLE>
<CAPTION>
1994 1993
---------- ----------
<S> <C> <C>
Real estate rentals............................................................ $ 29,753 $ 22,802
Operating expenses............................................................. (17,158) (10,457)
Gains on sale of non-club real estate properties............................... 6,135 21,500
Provision for asset impairments (including a change in estimate related to the
Exchange Transaction)......................................................... (90,200) --
---------- ----------
Operating income (loss).................................................... (71,470) 33,845
Interest income................................................................ 2,319 --
Provision (benefit) for income taxes........................................... (28,385) 13,441
---------- ----------
Net income (loss).......................................................... $ (40,766) $ 20,404
---------- ----------
---------- ----------
</TABLE>
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
33
<PAGE>
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)
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 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.
During fiscal 1993, the Company entered into two transactions with The Price
REIT:
(a) On December 18, 1992, the Company sold a former Price Club property
for $14,350. The Company recorded a pre-tax gain of $6,710 in connection
with this sale.
(b) On August 12, 1993, the Company sold three shopping centers and
adjacent Price Clubs (which are being leased back to the Company) and its
49.6% interest in a joint venture which owns five shopping centers, for
which the Company received proceeds of approximately $117,000 and recognized
a $14,320 pre-tax gain.
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
34
<PAGE>
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)
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 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 13
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
30, 1996, and $250,000 expires on January 30, 1998. The interest rate on bank
borrowings is based on LIBOR or rates bid at auction by the participating banks.
At September 3, 1995, no amounts were outstanding under the loan facility and
$51,965 was outstanding under the Company's 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 30, 1996, at substantially the same terms.
The weighted average borrowings, highest borrowings and interest rate under all
short-term borrowing arrangements were as follows for fiscal 1995, 1994 and
1993:
<TABLE>
<CAPTION>
MAXIMUM AMOUNT AVERAGE AMOUNT WEIGHTED AVERAGE
CATEGORY OF AGGREGATE OUTSTANDING DURING OUTSTANDING DURING INTEREST RATE DURING
SHORT-TERM BORROWINGS THE PERIOD THE PERIOD THE PERIOD
- ---------------------------------------------------- ------------------ ------------------ ---------------------
<S> <C> <C> <C>
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.................................. 149,340 35,655 3.92
Period ended August 29, 1993
Bank borrowings:
U.S............................................. $ 55,000 $ 15,455 3.56%
Canadian........................................ 12,358 3,295 6.05
Commercial Paper.................................. 55,000 16,119 3.29
</TABLE>
35
<PAGE>
PRICE/COSTCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 5 -- DEBT (CONTINUED)
In addition, the Company's wholly-owned Canadian subsidiary has a $103,000
commercial paper program supported by a bank credit facility with three Canadian
banks of which $63,000 will expire in April 1996 and $40,000 will expire in
April 1999. The interest rate on bank borrowings is based on the prime rate or
the "Bankers' Acceptance" rate. At September 3, 1995, no amounts were
outstanding under the bank credit facility and $23,760 was outstanding under the
Canadian commercial paper program.
The Company has separate letter of credit facilities (for commercial and
standby letters of credit) totaling approximately $196,000. The outstanding
commitments under these facilities at September 3, 1995 totaled approximately
$127,000, including approximately $51,000 in standby letters for workers'
compensation requirements.
LONG-TERM DEBT
Long-term debt at September 3, 1995 and August 28, 1994 consists of:
<TABLE>
<CAPTION>
1995 1994
------------- -----------
<S> <C> <C>
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 --
Notes payable secured by trust deeds on real estate......................... 27,377 31,235
Banker's Acceptances and other.............................................. 8,021 6,266
------------- -----------
1,099,815 801,918
Less current portion (included in other current liabilities)................ 5,200 6,426
------------- -----------
Total long-term debt...................................................... $ 1,094,615 $ 795,492
------------- -----------
------------- -----------
</TABLE>
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
36
<PAGE>
PRICE/COSTCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 5 -- DEBT (CONTINUED)
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.
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.
At September 3, 1995, 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 $276,000, $291,000, and $173,000 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 3, 1995,
were approximately $302,000. 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:
<TABLE>
<S> <C>
1996........................................................... $ 5,200
1997........................................................... 6,768
1998........................................................... 2,469
1999........................................................... 1,753
2000........................................................... 1,931
Thereafter..................................................... 1,081,694
----------
Total...................................................... $1,099,815
----------
----------
</TABLE>
NOTE 6 -- LEASES
The Company leases land and/or warehouse buildings at 49 warehouses open at
September 3, 1995 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.
Aggregate rental expense for fiscal 1995, 1994 and 1993 was $53,600,
$44,900, and $38,700, respectively. Future minimum payments during the next five
fiscal years and thereafter under noncancelable leases with terms in excess of
one year, at September 3, 1995, were as follows:
<TABLE>
<S> <C>
1996............................................................. $ 53,849
1997............................................................. 52,906
1998............................................................. 48,957
1999............................................................. 46,617
2000............................................................. 46,107
Thereafter....................................................... 537,958
---------
Total minimum payments....................................... $ 786,394
---------
---------
</TABLE>
37
<PAGE>
PRICE/COSTCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
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.
Stock option transactions relating to the Old Stock Option Plans are
summarized below:
<TABLE>
<CAPTION>
STOCK OPTIONS
(IN RANGE OF EXERCISE
THOUSANDS) PRICE PER SHARE
------------- -----------------
<S> <C> <C>
Under option at August 29, 1993...................................... 12,904 $ .17 - 40.17
Granted............................................................ 68 18.00
Exercised.......................................................... (748) 1.46 - 19.00
Cancelled.......................................................... (507) 5.67 - 40.17
-------------
Under option at August 28, 1994...................................... 11,717 .17 - 40.17
Granted............................................................ 0 --
Exercised.......................................................... (578) .17 - 17.49
Cancelled.......................................................... (1,230) 11.33 - 40.16
-------------
Under option at September 3, 1995.................................... 9,909 2.75 - 40.17
-------------
-------------
Options exercisable at September 3, 1995............................. 7,046
-------------
-------------
</TABLE>
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 through stock grants.
Stock option and grant transactions relating to the New Stock Option Plan
are summarized below:
<TABLE>
<CAPTION>
STOCK OPTIONS RANGE OF EXERCISE
(IN THOUSANDS) PRICE PER SHARE
--------------- -----------------
<S> <C> <C>
Under option at August 29, 1993...................................... -- $ --
Granted............................................................ 3,252 14.00 - 19.00
Exercised.......................................................... -- --
Cancelled.......................................................... (278) 14.00 - 19.00
-----
Under option at August 28, 1994...................................... 2,974 14.00 - 19.00
Granted............................................................ 3,516 12.50 - 19.00
Exercised.......................................................... (17) 13.31 - 15.13
Cancelled.......................................................... (419) 12.50 - 19.00
-----
Under option at September 3, 1995.................................... 6,054 12.50 - 19.00
-----
-----
Options exercisable at September 3, 1995............................. 958
-----
-----
</TABLE>
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 3, 1995, 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
38
<PAGE>
PRICE/COSTCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 7 -- STOCK OPTIONS AND WARRANTS (CONTINUED)
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 eligible employee contributions up to a maximum Company contribution per
employee per year. 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 contribution 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 Company matches 25% of eligible employee
contributions up to a maximum Company contribution per employee per year.
Amounts expensed under these plans were $37,298, $27,859, and $26,609 for
fiscal 1995, 1994 and 1993, 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."
NOTE 9 -- INCOME TAXES
The provisions for income taxes from continuing operations for fiscal 1995,
1994, and 1993 are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
----------- --------- -----------
<S> <C> <C> <C>
Federal:
Current............................................... $ 102,481 $ 64,721 $ 87,933
Deferred.............................................. (4,445) (5,920) 6,924
----------- --------- -----------
Total federal....................................... 98,036 58,801 94,857
State:
Current............................................... 23,009 15,402 20,149
Deferred.............................................. 51 (963) 2,321
----------- --------- -----------
Total state......................................... 23,060 14,439 22,470
Foreign:
Current............................................... 29,051 18,211 14,639
Deferred.............................................. 816 1,206 1,654
----------- --------- -----------
Total foreign....................................... 29,867 19,417 16,293
----------- --------- -----------
Total provision for income taxes...................... $ 150,963 $ 92,657 $ 133,620
----------- --------- -----------
----------- --------- -----------
</TABLE>
39
<PAGE>
PRICE/COSTCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 9 -- INCOME TAXES (CONTINUED)
A reconciliation between the statutory tax rate and the effective rate from
continuing operations for fiscal 1995, 1994 and 1993 is as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------------------------ ---------------------- ------------------------
<S> <C> <C> <C> <C> <C> <C>
Federal taxes at statutory rate............... $ 128,871 35.0% $ 71,244 35.0% $ 116,652 34.7%
State taxes, net.............................. 15,465 4.2 8,753 4.3 15,141 4.5
Foreign taxes, net............................ 4,471 1.2 1,074 0.5 1,878 0.6
Increase in deferred income taxes due to
statutory rate change........................ -- -- -- -- 600 0.2
Other......................................... 2,156 0.6 2,386 1.2 (651) (.3)
Tax effect of merger-related expenses......... -- -- 9,200 4.5 -- --
----------- --- --------- --- ----------- ---
Provision at effective tax rate............... $ 150,963 41.0% $ 92,657 45.5% $ 133,620 39.7%
----------- --- --------- --- ----------- ---
----------- --- --------- --- ----------- ---
</TABLE>
The components of the deferred tax assets and liabilities related to
continuing operations are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 3, AUGUST 28,
1995 1994
------------- -----------
<S> <C> <C>
Accrued liabilities................................................ $ 71,109 $ 75,697
Other.............................................................. 7,113 6,145
------------- -----------
Total deferred tax assets...................................... 78,222 81,842
Property and equipment............................................. 65,350 66,118
Merchandise inventories............................................ 17,903 21,199
Other.............................................................. 2,353 5,487
------------- -----------
Total deferred tax liabilities................................. 85,606 92,804
------------- -----------
Net deferred tax (assets) liabilities.......................... $ 7,384 $ 10,962
------------- -----------
------------- -----------
</TABLE>
The net deferred tax (assets) liabilities at September 3, 1995 and August
28, 1994 include current deferred income tax assets of $56,909 and $54,717,
respectively, and non-current deferred income tax liabilities of $64,293 and
$65,679, 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
40
<PAGE>
PRICE/COSTCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 10 -- COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 alleges violation of certain state and federal laws
arising from the spin-off and Exchange Transaction and the merger between Price
and Costco. The Company believes that this suit 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.
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.
NOTE 11 -- GEOGRAPHIC INFORMATION
The following table indicates the relative amounts of total revenue,
operating income and identifiable assets for the Company during fiscal 1995,
1994 and 1993:
<TABLE>
<CAPTION>
1995 1994 1993
-------------- -------------- --------------
<S> <C> <C> <C>
Total revenue:
United States.................................................. $ 14,967,611 $ 13,770,316 $ 13,167,175
Foreign........................................................ 3,279,675 2,710,327 2,296,639
-------------- -------------- --------------
$ 18,247,286 $ 16,480,643 $ 15,463,814
-------------- -------------- --------------
-------------- -------------- --------------
Operating income:
United States.................................................. $ 357,463 $ 298,303 $ 321,084
Foreign........................................................ 75,869 61,836 43,745
-------------- -------------- --------------
$ 433,332 $ 360,139 $ 364,829
-------------- -------------- --------------
-------------- -------------- --------------
<CAPTION>
SEPTEMBER 3, AUGUST 28,
1995 1994
-------------- --------------
<S> <C> <C> <C>
Identifiable assets:
United States.................................................. $ 3,508,325 $ 3,221,210
Foreign........................................................ 929,094 637,364
Discontinued operations -- net assets
(all United States)........................................... -- 377,085
-------------- --------------
$ 4,437,419 $ 4,235,659
-------------- --------------
-------------- --------------
</TABLE>
41
<PAGE>
PRICE/COSTCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 12 -- QUARTERLY FINANCIAL DATA (UNAUDITED)
The tables that follow on the next two pages reflect the unaudited quarterly
results of operations for fiscal 1995 and 1994.
Shares used in the earnings per share calaculation fluctuate by quarter
depending primarily upon whether convertible subordinated debentures are
dilutive during the respective period.
42
<PAGE>
PRICECOSTCO, INC.
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
53 WEEKS ENDED SEPTEMBER 3, 1995
--------------------------------------------------------------------------
FIRST
QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER TOTAL
12 WEEKS 12 WEEKS 12 WEEKS 17 WEEKS 53 WEEKS
------------ -------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
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 (LOSS) FROM CONTINUTING
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:
Income (loss), net of tax........ -- -- -- -- --
Loss on disposal................. -- (83,363) -- -- (83,363)
------------ -------------- ------------- -------------- -------------
NET INCOME (LOSS)................ $ 48,527 $ (18,592) $ 32,615 $ 71,328 $ 133,878
------------ -------------- ------------- -------------- -------------
------------ -------------- ------------- -------------- -------------
NET INCOME PER COMMON AND COMMON
EQUIVALENT SHARE -- FULLY DILUTED:
Continuing operations............ $ 0.22 $ 0.31 $ 0.17 $ 0.35 $ 1.05
Discontinued operations:
Income (loss), net of tax...... -- -- -- -- --
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
------------ -------------- ------------- -------------- -------------
------------ -------------- ------------- -------------- -------------
</TABLE>
43
<PAGE>
PRICECOSTCO, INC.
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
52 WEEKS ENDED AUGUST 28, 1994
--------------------------------------------------------------------------
FIRST
QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER TOTAL
12 WEEKS 12 WEEKS 12 WEEKS 16 WEEKS 52 WEEKS
------------ -------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
REVENUE
Net sales........................ $3,599,797 $ 4,019,417 $ 3,546,445 $ 4,995,252 $ 16,160,911
Membership fees and other........ 81,330 78,245 69,367 90,790 319,732
------------ -------------- ------------- -------------- -------------
Total revenue.................. 3,681,127 4,097,662 3,615,812 5,086,042 16,480,643
OPERATING EXPENSES
Merchandise costs................ 3,272,170 3,640,174 3,226,011 4,524,536 14,662,891
Selling, general and
administrative expenses......... 316,559 342,279 328,314 438,397 1,425,549
Preopening expenses.............. 11,130 4,915 1,967 6,552 24,564
Provision for estimated warehouse
closing costs................... -- -- -- 7,500 7,500
------------ -------------- ------------- -------------- -------------
Operating income............... 81,268 110,294 59,520 109,057 360,139
OTHER INCOME (EXPENSE)
Interest expense................. (10,823) (11,655) (12,155) (15,839) (50,472)
Interest income and other........ 2,522 2,573 2,542 6,251 13,888
Provisions for merger and
restructuring expenses.......... (120,000) -- -- -- (120,000)
------------ -------------- ------------- -------------- -------------
INCOME (LOSS) FROM CONTINUTING
OPERATIONS BEFORE PROVISION FOR
INCOME TAXES...................... (47,033) 101,212 49,907 99,469 203,555
Provision (benefit) for income
taxes........................... (10,095) 41,503 20,467 40,782 92,657
------------ -------------- ------------- -------------- -------------
INCOME (LOSS) FROM CONTINUING
OPERATIONS........................ (36,938) 59,709 29,440 58,687 110,898
DISCONTINUED OPERATIONS:
Income (loss), net of tax........ 3,947 2,566 2,600 (49,879) (40,766)
Loss on disposal................. -- -- -- (182,500) (182,500)
------------ -------------- ------------- -------------- -------------
NET INCOME (LOSS).................. $ (32,991) $ 62,275 $ 32,040 $ (173,692) $ (112,368)
------------ -------------- ------------- -------------- -------------
------------ -------------- ------------- -------------- -------------
NET INCOME PER COMMON AND COMMON
EQUIVALENT SHARE -- FULLY DILUTED
Continued operations............. $ (0.17) $ 0.27 $ 0.14 $ 0.27 $ 0.51
Disctonintued operations:
Income (loss), net of tax...... 0.02 0.01 0.01 (0.23) (0.19)
Loss on disposal............... -- -- -- (0.83) (0.83)
------------ -------------- ------------- -------------- -------------
Net Income (loss)................ $ (0.15) $ 0.28 $ 0.15 $ (0.79) $ (0.51)
------------ -------------- ------------- -------------- -------------
------------ -------------- ------------- -------------- -------------
Shares used in calculation....... 217,191 240,011 219,516 219,279 219,334
------------ -------------- ------------- -------------- -------------
------------ -------------- ------------- -------------- -------------
</TABLE>
44
<PAGE>
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.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------------- ----------------------------------------------------------------------------------------------------
<C> <S>
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. (14)
3(a) Restated Certificate of Incorporation of Price/Costco, Inc. (4)
3(b) Bylaws of Price/Costco, Inc. (9)
3(c) Form of Amended and Restated Bylaws of Price/Costco, Inc. to become effective as specified in the
Amended and Restated Agreement of Transfer and Plan of Exchange (see Exhibit 2(a) above). (10)
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(a)(5) Incorporated by reference in Form 8-A filed with respect to the Registration Statement of the
Company's 5 1/2% Convertible Subordinated Debentures dated December 21, 1993
4(a)(6) Incorporated by reference in Form 15 with respect to the notice of termination of the Registration
of Price's 5 1/2% Convertible Subordinated Debentures dated January 3, 1994
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(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 (13)
4(d)(2) Form of Indenture between Price/Costco, Inc. and American National Association, as Trustee (13)
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 (14)
10(c) Special Severance Agreement (12)
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)
</TABLE>
<PAGE>
<TABLE>
<C> <S>
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 fourteen
banks dated January 31, 1994 (12)
10(z)(2) A $250,000 Extended Revolving Credit Agreement among Price/Costco, Inc. and a group of fourteen
banks, dated January 31, 1994 (12)
10(z)(3) Revolving Credit Agreement, dated as of August 28, 1994, between Price/Costco, Inc. and Price
Enterprises, Inc. (11)
12.1 Statements re computation of ratios
23.1 Consent of Arthur Andersen LLP
23.2 Report of Ernst & Young LLP on The Price Company Fiscal 1993 Annual Report
27.1 Financial Data Schedule
</TABLE>
- ------------------------
(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 Amendment No. 1
to the Registration Statement on Form S-4 of Price Enterprises, Inc. (File
No. 33-55481) filed on November 3, 1994
(12) 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
(13) 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.
(14) Incorporated by reference to the exhibits filed as part of the Annual
Report on Form 10K of Price/ Costco, Inc. for the fiscal year ended August
28, 1994.
<PAGE>
AMENDMENT TO
THE PRICE COMPANY 1981 STOCK OPTION PLAN
Pursuant to resolution of the Board of Directors of Price/Costco, Inc., The
Price Company 1981 Stock Option Plan is hereby amended, effective as of January
30, 1995, by adding a new Section 13 providing as follows:
13. EXTENSION OF STOCK OPTIONS
(a) Notwithstanding the foregoing provisions of the Plan or any written
option agreement, each option granted under the Plan held by an employee of
Price/Costco, Inc. whose employment terminated as of January 1, 1995 and who
became an employee of Price Enterprises, Inc. ("PEI") as of such date shall, to
the extent such option was exercisable as of such date (as determined under the
formula in Section 8(b) of the Plan), continue to be exercisable on the same
terms and conditions set forth in the written agreement evidencing the grant of
such stock option; PROVIDED, that service with PEI shall be treated as service
with Price/Costco, Inc. for purposes of determining the date on which such
option shall subsequently terminate; PROVIDED, FURTHER, that to the extent such
option was not so exercisable as of January 1, 1995, it shall expire in
accordance with its terms.
(b) Notwithstanding the foregoing provisions of the Plan or any written
option agreement, the Chief Executive Officer of Price/Costco, Inc. (or such
other person or persons from time to time designated by the Board of Directors)
shall have the authority, in his discretion, to provide for the continued
exercisability of options granted under the Plan in the event of the retirement,
disability or death of the holder of such options (or such other event that
would otherwise result in termination of the options prior to expiration of the
option term); PROVIDED, that in no event shall such period of continued
exercisability extend beyond the original expiration date of such options.
<PAGE>
(c) The provisions of this Section 13 shall not apply to any options held
by any individual who is or was at any time subject to the reporting and
disclosure requirements of Section 16 of the Securities Exchange Act of 1934, as
amended, with respect to Price/Costco, Inc.
Pursuant to resolution of the Board of Directors of Price/Costco, Inc.,
Section 9 of The Price Company 1981 Stock Option Plan is hereby amended,
effective as of January 1, 1995, by adding the following sentence to the end
thereof:
Notwithstanding anything herein to the contrary, the committee
administering the Plan may amend outstanding options to provide
for the transfer of such options to a living trust of the option
holder and that such options may be exercised by the trustee of
such living trust.
PRICE/COSTCO, INC.
Date: January 26, 1995
By: /s/ Don E. Burdick
-----------------------------------
Name: Don E. Burdick
Title: Assistant Secretary
2
<PAGE>
AMENDMENT TO THE PRICE COMPANY
1991 COMBINED STOCK GRANT AND STOCK OPTION PLAN
Pursuant to resolution of the Board of Directors of Price/Costco, Inc., The
Price Company 1991 Combined Stock Grant and Stock Option Plan is hereby amended,
effective as of January 30, 1995, by adding a new Section 13 providing as
follows:
13. EXTENSION OF STOCK OPTIONS
(a) Notwithstanding the foregoing provisions of the Plan or any written
option agreement, each option granted under the Plan held by an employee of
Price/Costco, Inc. whose employment terminated as of January 1, 1995 and who
became an employee of Price Enterprises, Inc. ("PEI") as of such date shall, to
the extent such option was exercisable as of such date (as determined under the
formula in Section 8(b) of the Plan), continue to be exercisable on the same
terms and conditions set forth in the written agreement evidencing the grant of
such stock option; PROVIDED, that service with PEI shall be treated as service
with Price/Costco, Inc. for purposes of determining the date on which such
option shall subsequently terminate; PROVIDED, FURTHER, that to the extent such
option was not so exercisable as of January 1, 1995, it shall expire in
accordance with its terms.
(b) Notwithstanding the foregoing provisions of the Plan or any written
option agreement, the Chief Executive Officer of Price/Costco, Inc. (or such
other person or persons from time to time designated by the Board of Directors)
shall have the authority, in his discretion, to provide for the continued
exercisability of options granted under the Plan in the event of the retirement,
disability or death of the holder of such options (or such other event that
would otherwise result in termination of the options prior to expiration of the
option term); PROVIDED, that in no event shall such period of continued
exercisability extend beyond the original expiration date of such options.
<PAGE>
(c) The provisions of this Section 13 shall not apply to any options held
by any individual who is or was at any time subject to the reporting and
disclosure requirements of Section 16 of the Securities Exchange Act of 1934, as
amended, with respect to Price/Costco, Inc.
Pursuant to resolution of the Board of Directors of Price/Costco, Inc.,
Section 9 of The Price Company 1991 Combined Stock Grant and Stock Option Plan
is hereby amended, effective as of January 1, 1995, by adding the following
sentence to the end thereof:
Notwithstanding anything herein to the contrary, the committee
administering the Plan may amend outstanding options to provide
for the transfer of such options to a living trust of the option
holder and that such options may be exercised by the trustee of
such living trust.
PRICE/COSTCO, INC.
Date: January 26, 1995
By: /s/ Don E. Burdick
-----------------------------------
Name: Don E. Burdick
Title: Assistant Secretary
2
<PAGE>
AMENDMENT TO AND CLARIFICATION OF THE PRICE/COSTCO, INC.
1993 COMBINED STOCK GRANT AND STOCK OPTION PLAN
Pursuant to resolution of the Board of Directors of Price/Costco, Inc. (the
"Company"), The Price/Costco, Inc. 1993 Combined Stock Grant and Stock Option
Plan is hereby amended, effective as of January 30, 1995, by adding a new
Section 14 providing as follows-
14. EXTENSION OF STOCK OPTIONS
(a) Notwithstanding the foregoing provisions of the Plan or any written
option agreement, each option granted under the Plan held by an employee of the
Company whose employment terminated as of January 1, 1995 and who became an
employee of Price Enterprises, Inc. ("PEI") as of such date shall, to the extent
such option was exercisable as of such date (as determined under the formula in
Section 8(b) of the Plan), continue to be exercisable on the same terms and
conditions set forth in the written agreement evidencing the grant of such stock
option; PROVIDED, that service with PEI shall be treated as service with the
Company for purposes of determining the date on which such option shall
subsequently terminate; PROVIDED, FURTHER, that to the extent such option was
not so exercisable as of January 1, 1995, it shall expire in accordance with its
terms.
(b) Notwithstanding the foregoing provisions of the Plan or any written
option agreement, the Chief Executive Officer of the Company (or such other
person or persons designated from time to time by the Board of Directors) shall
have the authority, in his discretion, to provide for the continued
exercisability of options granted under the Plan in the event of the retirement,
disability or death of the holder of such options (or such other event that
would otherwise result in termination of the options prior to expiration of the
option term); PROVIDED, that in no event shall such period of continued
exercisability extend beyond the original expiration date of such options.
<PAGE>
(c) The provisions of this Section 14 shall not apply to any options held
by any individual who is or was at any time subject to the reporting and
disclosure requirements of Section 16 of the Securities Exchange Act of 1934, as
amended, with respect to the Company.
Pursuant to resolution of the Board of Directors of the Company, Section 9
of The Price/Costco, Inc. 1993 Combined Stock Grant and Stock Option Plan is
hereby clarified by adding the following sentence to the end of thereof:
Notwithstanding anything to the contrary herein, options granted
hereunder that are intended to be exempt from Section 16 of the
Securities Exchange Act of 1934, as amended, pursuant to Rule
16b-3 thereunder, shall not be transferable except to the
executor or administrator of the optionee's estate or to the
optionee's heirs or legatees, and shall be exercisable during the
optionee's lifetime only by the optionee.
PRICE/COSTCO, INC.
Date: January 26, 1995
By: /s/ Don E. Burdick
-----------------------------------
Name: Don E. Burdick
Title: Assistant Secretary
2
<PAGE>
AMENDMENT TO
THE COSTCO WHOLESALE CORPORATION
COMBINED 1984 INCENTIVE STOCK OPTION PLAN AND
1984 NON-QUALIFIED STOCK OPTION PLAN
Pursuant to resolution of the Board of Directors of Price/Costco, Inc.,
Section 11 of the Costco Wholesale Corporation Combined 1984 Incentive Stock
Option Plan and 1984 Non-Qualified Stock Option Plan is hereby amended,
effective as of January 1, 1995, by adding the following sentence to the end
thereof:
Notwithstanding anything herein to the contrary, the committee
administering the Plan may amend outstanding options to provide
for the transfer of such options to a living trust of the option
holder and that such options may be exercised by the trustee of
such living trust.
PRICE/COSTCO, INC.
Date: January 26, 1995
By: /s/ Don E. Burdick
-----------------------------------
Name: Don E. Burdick
Title: Assistant Secretary
<PAGE>
DISCRETIONARY OPTION EXTENSION ARRANGEMENT
Pursuant to resolution of the Board of Directors of Price/Costco, Inc., the
Discretionary Option Extension Arrangement is hereby adopted, effective as of
the date set forth below, as follows:
The Chief Executive Officer of Price/Costco, Inc. (the "Company") (or such
other person or persons from time to time designated by the Board of Directors
of the Company), shall have the authority, exercisable in his discretion, to
grant replacement stock options hereunder to employees of the Company who are
holders of stock options under the Costco Wholesale Corporation Combined 1984
Incentive Stock Option Plan and 1984 Nonqualified Stock Option Plan, effective
upon the termination of such stock options in the event of such employees,
retirement, disability or death, or otherwise.
The grant of replacement stock options shall be subject to the following
terms and conditions:
1. The provisions of the replacement stock options regarding (a) the
number of shares subject to such options and (b) the exercise price of such
options shall be as provided under the stock option agreements evidencing the
stock options to be replaced, including any adjustments thereto; and the
expiration date of the replacement stock options shall be no later than the
original expiration date of the stock options to be replaced.
2. The remaining terms and conditions of the replacement stock options
shall be substantially similar to those set forth in the existing option
agreements, with such changes thereto as the appropriate officers of the
Corporation, upon the advice of counsel, shall approve, such approval evidenced
by his or her execution thereof; and the effectiveness of any replacement option
grant shall be subject to the optionee's written consent to such terms and
conditions; PROVIDED, as a condition of any replacement option grant, the
optionee must agree to surrender his or her original option to the Company.
<PAGE>
Notwithstanding anything to the contrary herein, no replacement stock
options shall be granted hereunder to any individual who is or was at any time
subject to the reporting and disclosure requirements of Section 16 of the
Securities and Exchange Act of 1934, as amended, with respect to the Company.
PRICE/COSTCO, INC.
Date: January 26, 1995
By: /s/ Don E. Burdick
-----------------------------------
Name: Don E. Burdick
Title: Assistant Secretary
2
<PAGE>
RESTATED CORPORATE JOINT VENTURE AGREEMENT
THIS AGREEMENT is between (1) THE PRICE COMPANY, a corporation organized
under the laws of the State of California, United States of America ("PRICE")
and (2) PRICE VENTURE MEXICO, a corporation organized under the laws of the
State of California, United States of America ("PRIMEX"), on the one hand, and
(3) CONTROLADORA COMERCIAL MEXICANA, S.A. de C.V., a corporation organized under
the laws of the United Mexican States ("COMERCIAL"), on the other, and is made
with reference to the following facts and other recitals:
A. PRICE is in the business of operating membership warehouse club
outlets and has substantial and valuable experience in such business.
PRIMEX is or is about to become a wholly-owned subsidiary of PRICE.
B. COMERCIAL is in the business of operating retail department stores and
has substantial and valuable experience in such business.
C. The parties hereto entered into a Corporate Joint Venture Agreement
dated June 21, 1991 and amendments thereto ("Original Joint Venture
Agreement").
D. Execution of this Agreement is a condition to the Price Enterprises
Transaction and is intended to take effect only upon Closing of the
Price Enterprises Transaction.
E. Upon becoming effective, this Agreement is intended to supersede and
replace the Original Joint Venture Agreement in all respects.
F. Pursuant to the Original Joint Venture Agreement, PRIMEX and COMERCIAL
established Price Club de Mexico, S.A. de C.V. ("Price Club de
Mexico"), of which they each own 50% of the outstanding capital stock,
to engage in membership warehouse club operations in the United
Mexican States. PRICE has licensed Price Club de Mexico INTER ALIA to
use the service mark "Price Club" pursuant to a Service Mark License
Agreement dated February 1, 1992 ("Original Service Mark Agreement").
G. As part of the activities contemplated by the Original Joint Venture
Agreement, PRIMEX and COMERCIAL also established (i) CONTROLADORA
PRICE CLUB, S.A. de C.V. (the "Holding Company"), of which they each
own 50% of the outstanding capital stock, and (ii) IMPORTADORA PRIMEX,
S.A. de C.V. ("Importadora"), of which PRIMEX owns 49% and COMERCIAL
51% of the outstanding capital stock. The Holding Company in turn
owns a number of subsidiaries, including companies which own real
property upon which Warehouses operated by Price Club de Mexico are
located.
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H. In connection with the Price Enterprises Transaction, the parties have
agreed that PRICE's parent Price/Costco, Inc. ("PriceCostco") or an
Affiliate will take over management of Price Club de Mexico,
Importadora and the Holding Company and its subsidiaries (hereinafter
sometimes collectively referred to as the "Pricemex Group").
PriceCostco is willing to do so subject to certain conditions,
including without limitation the execution of this Agreement and the
execution of management agreements between PriceCostco and each of
Price Club de Mexico, the Holding Company and Importadora (the
"Management Agreements").
I. The parties also wish to reorganize the Pricemex Group so that the
Holding Company, owned 50% each by PRIMEX and COMERCIAL, in turn owns
all of the other companies in the Pricemex Group (the
"Reorganization").
J. "Joint Venture Companies" mean the Holding Company and, until the
Reorganization occurs, also Price Club de Mexico and Importadora.
K. "Pricemex Group Companies" mean the Joint Venture Companies and all
subsidiaries of these companies.
L. A glossary of terms used with initial capital letters and other terms
defined for purposes of this Agreement is set forth in Exhibit "A"
hereto.
THEREFORE, in consideration of the foregoing and the mutual promises
contained in this Agreement, the parties hereto agree as follows:
1. PURPOSE OF THIS AGREEMENT; THE REORGANIZATION.
1.1 PURPOSE. This Agreement is intended to govern the present and future
business relationship of the parties, and to provide for the future
management and operation of the Pricemex Group Companies. Those
companies have been formed to engage in Mexico in the Club Business
and to own and operate related real estate and related businesses.
1.2 REORGANIZATION.
1.2.1 Promptly following the execution of this Agreement, the
parties shall cause the Reorganization to occur, so that
Price Club de Mexico and Importadora are wholly owned
subsidiaries of the Holding Company.
1.2.2 The Reorganization shall be accomplished in a tax-free
manner. The parties' ownership interests in the Holding
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Company and the Holding Company's ownership interests in its
subsidiaries shall not change.
1.2.3 All costs of the Reorganization shall be borne by the Holding
Company.
1.2.4 In connection with the Reorganization, PRIMEX shall pay
COMERCIAL the sum of N$1,000 as compensation for the
equalization of the ownership of Importadora. (As used
hereinafter, "N$" denominates currency in new Mexican pesos
and "U.S.$" denominates currency in U.S. dollars.)
1.3 AMENDED CHARTER. The parties agree that the charter (including the
articles of incorporation and bylaws) of the Holding Company and of
all other Pricemex Group Companies, and of any direct or indirect
subsidiaries the Holding Company creates in the future, shall be
substantially the same as those attached hereto as Exhibit 1.3. To
the extent the charter of any company in the Pricemex Group does not
now conform to Exhibit 1.3, the parties shall forthwith cause them to
be amended to so conform.
1.4 REQUIRED FILINGS. Each of the parties hereto shall make, execute,
register and file, and shall cause the Holding Company and the other
Pricemex Group Companies to make, execute, register and file, all
charter documents, certificates, deeds, agreements and other
instruments as may be necessary or appropriate for the Reorganization
and the management and operation of the business of the Pricemex
Group as contemplated by this Agreement.
2. CAPITALIZATION, SHARE ISSUANCE, GUARANTIES.
2.1 COMPOSITION OF CAPITAL STOCK.
2.1.1 The capital stock of the Holding Company shall consist of
both fixed shares and variable shares. The minimum fixed
capital stock of the Holding Company without the right of
withdrawal shall be N$50,000, represented by 50,000 totally
subscribed shares of capital stock.
2.1.2 Each share of capital stock of the Holding Company and
(pending the Reorganization) of Price Club de Mexico and
Importadora (the "Shares") will each have one vote and shall
otherwise be alike in all respects, and the holders thereof
shall be entitled, in proportion to their respective holdings
of such Shares, to identical ownership rights and privileges,
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except as otherwise provided herein or in the Articles of
Incorporation and Bylaws of such companies.
2.2 OWNERSHIP OF SHARES. The current ownership of the Shares of the
Joint Venture Companies is as set forth in Exhibit 2.2.
2.3 CASH PAYMENTS. All payments for Shares hereunder shall be in cash,
unless in-kind payments are agreed upon by COMERCIAL and PRIMEX.
2.4 PREEMPTIVE RIGHTS TO ACQUIRE NEW SHARES. If the capital stock of any
company in the Pricemex Group is increased by contribution of new
capital, the stockholders of such company shall have preemptive
rights to subscribe for any new shares; provided such rights will not
exist when new Shares are issued under Section 2.6.2 below.
2.5 ADDITIONAL CAPITAL CONTRIBUTIONS.
2.5.1 The parties shall make additional capital contributions
and/or loans to any of the Joint Venture Companies in the
amounts and at the times decided by the shareholders.
2.5.2 The Shareholders of Price Club de Mexico have decided and
agreed and they shall make additional capital contributions
in the aggregate amount of U.S. $45,000,000 (respectively
U.S. $22,500,000 from PRIMEX and U.S. $22,500,000 from
COMERCIAL), in the time and manner specified in the initial
plan in Exhibit 3.11.
2.6 FAILURE TO MAKE ADDITIONAL CAPITAL CONTRIBUTIONS. In the event that
either PRIMEX or COMERCIAL (the "Non-Contributing Party") fails to
make or advance all or any portion of an additional capital
contribution such party is required to make under Section 2.5
("Delinquent Advance"), such party shall be in breach of its
obligations hereunder and, provided that the other party (the
"Contributing Party") has advanced the full amount that the
Contributing Party was obligated to make, the Contributing Party
shall have the following remedies exercisable by written notice
within thirty (30) Days following the date of delinquency:
2.6.1 The Contributing Party may give notice of an election to
invoke immediately the Buy-Out provisions of Section 8.3
hereof ("Buy-Out Notice") and Section 8.3 shall then apply,
or
2.6.2 The Contributing Party may advance to the company in cash an
amount equal to the Delinquent Advance, and treat the
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<PAGE>
advance either as (i) a capital contribution for stock, in
which event such party shall be issued additional Shares in
the company at the subscription value determined at the time
the additional capital contribution was decided (or, if no
subscription value was so determined, at the par value), or
(ii) a loan to the company, in which event the loan shall be
repayable upon demand and shall bear interest, in the case of
a loan by COMERCIAL at its Specified Borrowing Rate plus two
percent (2%), or in the case of a loan by PRIMEX at the then
current borrowing rate of PriceCostco from its principal
lender plus two percent (2%).
2.7 LOANS, CREDITS AND GUARANTIES.
2.7.1 All loans or credits required by any of the Pricemex Group
Companies shall be structured to be financeable solely to
such company and, if possible, on a non-recourse basis.
2.7.2 Neither PRICE nor COMERCIAL shall be required to provide
leasing, mortgage or other guaranties in favor of third-party
creditors of such company.
2.7.3 However, if approved in writing by both PRICE and COMERCIAL,
such guaranties shall be provided in the same proportion
(1) as to PRICE, in which PRIMEX owns the fixed and variable
capital of the Holding Company and (2) as to COMERCIAL, in
which COMERCIAL owns the fixed and variable capital of the
Holding Company, and shall not terminate without the written
agreement of PRICE and COMERCIAL.
2.8 FAILURE TO PROVIDE OR MAINTAIN GUARANTIES. If either party fails to
provide or to maintain a guaranty as required by Section 2.7.3 and
the other party has provided or maintained such a guaranty, the other
party may give notice of an election to invoke immediately the Buy-
Out provisions of Section 8.3 hereof ("Buy-Out Notice") and Section
8.3 shall then apply.
2.9 NON-TRANSFERABILITY OF SHARES.
2.9.1 Neither COMERCIAL nor PRIMEX shall voluntarily sell,
transfer, assign, pledge or otherwise dispose of all or any
portion of its Shares in any of the Joint Venture Companies,
or permit or cause the transfer of any capital stock of any
of the Pricemex Group Companies, without the prior approval
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<PAGE>
of the company's Board of Directors under Section 4.3.5
below, except (1) to a wholly-owned subsidiary of PriceCostco
or of COMERCIAL, as the case may be, that has assumed and
agreed to be bound by the provisions of this Agreement by an
assumption agreement in form and substance satisfactory to
the other party, or (2) in connection with a "Buy-Out"
pursuant to Section 8.3 hereof.
2.9.2 If a party violates or attempts to violate Section 2.9.1, the
other party may give notice of an election to invoke
immediately the Buy-Out provisions of Section 8.3 hereof
("Buy-Out Notice") and Section 8.3 shall then apply.
2.10 OTHER REMEDIES. The exercise by any party of any remedy provided in
Sections 2.6, 2.8 or 2.9 shall be cumulative and in addition to any
other remedy available to the company or to such party, such as in an
arbitration under Section 12.8 hereof.
2.11 AMENDMENT TO CAPITALIZATION. If PRIMEX and COMERCIAL mutually agree
to sell any Shares to the public, as a precondition to any such sale,
PRIMEX and COMERCIAL shall agree on such amendments to the
capitalization of the Holding Company as may be necessary or
desirable.
2.12 GOVERNMENTAL CONSENTS. The Joint Venture Companies and the parties
hereto shall file such notices and shall obtain, or cause to be
obtained, any permits, consents, approvals, authorizations,
qualifications or registrations required by any governmental
authority (whether in the United States of America or in the United
Mexican States) to issue any Shares and/or Capital Notes to COMERCIAL
or PRIMEX.
2.13 SECURITIES LAW MATTERS. The Joint Venture Companies and the parties
hereto shall make, or cause to be made, to one another or to third
parties, any filings, notices or representations required for any
Shares and/or Capital Notes issued by any of the Joint Venture
Companies to comply with applicable securities laws.
2.14 NOTICES AND LEGENDS. The certificates representing the Shares and
the Capital Notes shall bear a legend reflecting the restrictions on
transfer provided for in Section 2.9.1 above as well as any other
notices or written legends required by applicable securities laws or
by the charters of the Pricemex Group Companies.
2.15 SHAREHOLDER ADVANCES. A party may make a voluntary advance to any of
the Joint Venture Companies at any time, but solely to the fund
working capital needs of the company's operations incurred in the
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ordinary course of business. Such advance will be made in U.S.
Dollars and treated as a loan, and it will earn interest at the
applicable rate provided under Section 2.6.2(ii).
3. OPERATIONS.
3.1 MANNER OF OPERATION. The Holding Company, Price Club de Mexico, and
each other company in the Pricemex Group shall be operated in
accordance with the Management Agreements and the objectives of the
Business Plan.
3.2 LOCATION OF PRINCIPAL OFFICE. The principal office of the Holding
Company and of Price Club de Mexico shall be located in Mexico City,
D.F., Mexico or its greater metropolitan area. Other offices of the
Pricemex Group Companies shall be located at such places as the Board
of Directors or Executive Committee shall determine.
3.3 MANAGEMENT AGREEMENTS. Contemporaneously with the Effective Date of
this Agreement, the parties will cause Price Club de Mexico, the
Holding Company and Importadora to enter into the Management
Agreements in form the same as that attached hereto as Exhibit 3.3.
At the request of PRICE, the parties shall cause any other company in
the Pricemex Group also to enter into a Management Agreement.
3.4 ACCOUNTING.
3.4.1 If and to the extent required by Mexican law, the fiscal year
of the Pricemex Group Companies will begin on January 1 and
end on December 31 of each calendar year.
3.4.2 The Pricemex Group Companies shall also keep accounts by a
fiscal year that begins on the Monday nearest September 1 of
each year, and by successive accounting periods of four weeks
beginning with the first Day of each such fiscal year.
3.4.3 The accounting methods and systems employed by each of the
companies shall conform to generally accepted accounting
principles in the United Mexican States as customarily
employed by corporations of a similar nature, but the Joint
Venture Companies shall cause to be prepared and delivered to
PRICE, at no cost to PRICE, (i) regular periodic financial
statements of each company in the Pricemex Group prepared in
accordance with those generally accepted accounting
principles then currently employed by PRICE in the United
States of America, in such form and detail, and certified if
so requested, as may be required by the
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<PAGE>
independent certified accountants of PRICE, and
(ii) documents and information necessary to prepare U.S.
income tax filings and returns during the term of this
Agreement and for a period of three years thereafter.
3.5 PAYMENT OF EXPENSES. All expenses of the business and operations of
the Joint Venture Companies shall be paid out of the capital or
earnings of the company concerned or their subsidiaries and shall not
be the responsibility of the parties hereto.
3.6 INSURANCE. Each of the Pricemex Group Companies shall maintain in
force policies of insurance, insuring its assets and business against
such losses and risks in such amounts as its Board of Directors or
Executive Committee shall determine and in accordance with the laws
of the United Mexican States.
3.7 LAREDO CLOSURE. The parties shall promptly cause Price Club de
Mexico to pay or reimburse PRICE all of the costs and expenses
incurred in closing PRICE's distribution facility located at Laredo,
Texas, including, but not be limited to, lease payments (rent and
common areas), utility payments, employee severance, and all other
costs arising from such termination and wind-up.
3.8 MANAGEMENT PERSONNEL BUDGET. The budget of Price Club de Mexico for
Management Personnel to be provided under its Management Agreement
shall be U.S. $1,500,000 per calendar year, or such greater amount
approved under Section 4 below.
3.9 RECONCILIATION OF ACCOUNTS. The parties agree that the accounts and
balances of all Indebtedness of each of the Pricemex Group Companies
to COMERCIAL, PRIMEX, PRICE and each of its Affiliates, and Price
Enterprises, Inc. are accurately stated, accounted for and reconciled
in Exhibit 3.9 hereof. The parties shall cause all such accounts and
balances to be accurately stated, accounted for and reconciled at the
end of each month hereafter. The existing letter of credit in favor
of Price Enterprises, Inc. shall be reissued in favor of PRICE and
extended through May 31, 1995.
3.10 PURCHASE COMMITMENTS. The parties agree that Exhibit 3.10 hereof
sets forth an accurate listing of merchandise that has been ordered
by Price Club de Mexico from PRICE or its Affiliates, and of Price
Club de Mexico's commitment to purchase and pay for such merchandise,
subject to any merchandise having been delivered under the applicable
terms of sale.
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3.11 BUSINESS PLAN.
3.11.1 The parties hereby agree to the Business Plan, which shall
consist of the initial plan set forth in Exhibit 3.11 hereof,
the additional capital contributions established under
Section 2.5.2 above, and the other matters set forth in
Sections 3.7, 3.8, 3.9, and 3.10 above.
3.11.2 The General Director will communicate to the Board of
Directors of Price Club de Mexico no later than March 31,
1995 a more detailed plan which, if adopted by the Board of
Directors, will become part of, or modify, the Business Plan.
3.12 INITIAL AUDITORS. The external auditors, shall be a major
international accounting firm with offices in Mexico City. The
parties agree that the initial external auditors shall be Arthur
Andersen & Co. (whose current member in Mexico City is Ruiz, Urquiza
y Cia., S.C.)
3.13 COMISARIOS. PRIMEX and COMERCIAL shall each be entitled respectively
to appoint one examiner (comisario), or may for any period agree to
appoint the other party's examiner.
4. MANAGEMENT.
4.1 BOARD OF DIRECTORS.
4.1.1 Subject to the Management Agreements, the Holding Company and
Price Club de Mexico shall each be managed by a six member
Board of Directors, three of whom shall be designated by
COMERCIAL and three of whom shall be designated by PRIMEX.
The parties may mutually agree to name alternates.
4.1.2 The other Pricemex Group Companies shall each have a six
member Board of Directors, consisting of the same members as
the Board of Directors of the Holding Company. As used
herein, unless the context otherwise so requires, "Board of
Directors" refers to the Board of Directors of such company
in the Pricemex Group as is involved in the matter in
question.
4.1.3 At each meeting of shareholders held for the purpose of
electing members to the Board of Directors, COMERCIAL and
PRIMEX shall vote their shares to ensure such designees shall
be elected.
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4.1.4 The Chairman of the Board of Directors of the Holding Company
and of Price Club de Mexico shall always be chosen from among
the directors designated by COMERCIAL, but the Chairman shall
not have a tie-breaking vote. The Secretary shall always be
chosen from among the directors designated by PRIMEX.
4.1.5 The Board of Directors of the Holding Company and Price Club
de Mexico shall meet not less than quarterly. The powers and
duties, indemnification and other terms and conditions of
Board membership shall be as set forth in the charters of the
Pricemex Group Companies.
4.2 BOARD QUORUM & VOTING. No meeting of any Board of Directors of the
Pricemex Group Companies shall occur unless four directors are
present and unless at least two of the directors designated by PRIMEX
and at least two of the directors designated by COMERCIAL are
present. All decisions of the Board of Directors of any company in
the Pricemex Group shall require the affirmative majority vote of the
entire Board of Directors (at least four directors).
4.3 MATTERS REQUIRING SPECIAL CONSENT. Each Board of Directors shall
delegate its authority (i) to the officers who are Management
Personnel under the Management Agreements as provided in Section 4.5
below, and (ii) to an Executive Committee as provided in Section 4.4
below, except for the following matters which shall be decided by the
full Board of Directors:
4.3.1 BUSINESS PLAN, BUDGETS. The approval of revisions and
modifications to the Business Plan, including operating and
capital budgets. In order that operations may continue, if
there is no agreement on any budget as a whole, the items
that can be agreed upon within the budget may be approved,
but for those items upon which there is no agreement, the
previous budget for those items shall continue until approved
under this Agreement.
4.3.2 UNBUDGETED OBLIGATIONS. If not provided for in the Business
Plan, the approval of any contract, expenditure, loan,
credit, indebtedness, guaranty, or acquisition or disposition
of real estate, interests in real estate or other fixed
assets (hereinafter an "Obligation"), (i) that will result in
a specific liability or expense in excess of U.S. $2,000,000
or its equivalent, or (ii) that the Executive Committee has
authority to approve, but has not approved, under Section 4.5
below.
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4.3.3 MANAGEMENT AGREEMENT CHANGES. The rescission, termination,
modification or amendment of any of the Management Agreements
or the removal or replacement of any of the Management
Personnel (it being understood and agreed that PriceCostco or
its assignee may replace or rotate Management Personnel from
time to time or any time pursuant to the terms of the
Management Agreements as it deems appropriate).
4.3.4 OFFICER ELECTIONS. Subject to Section 4.5.1 below, the
election and removal of officers.
4.3.5 SHARE TRANSFERS. The transfer of any Shares of any of the
Joint Venture Companies, except (1) to a wholly-owned
subsidiary of PriceCostco or of COMERCIAL, as the case may
be, that has assumed and agreed to be bound by the provisions
of this Agreement by an assumption agreement in form and
substance satisfactory to the other party, or (2) in
connection with a "Buy-Out" pursuant to Section 8.3 hereof.
4.3.6 AUDITORS. The appointment of new external auditors or
removal of the existing auditors.
4.3.7 OTHER MATTERS. The approval of any other matter referred to
the Board of Directors by the Executive Committee.
4.4 EXECUTIVE COMMITTEES.
4.4.1 The Boards of Directors of the Pricemex Group Companies shall
each delegate the authority described below to an Executive
Committee to be composed of the chief executive officer of
COMERCIAL and the chief executive officer of PRIMEX.
4.4.2 If not provided for in the Business Plan, the Executive
Committee shall have full authority to approve any Obligation
that will result in a specific liability or expense in excess
of U.S. $250,000 or its equivalent but not greater than U.S.
$2,000,000 or its equivalent.
4.4.3 The Executive Committees shall have full authority to take
any other actions which the Board of Directors would
otherwise have authority to take (other than those matters
described in Section 4.3 hereof).
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4.4.4 The authority delegated to each Executive Committee shall be
exercised by the affirmative vote of both of its members.
4.5 OFFICERS.
4.5.1 At each meeting of the Board or Directors of any of the
Pricemex Group Companies at which officers are elected, the
parties shall cause their designees on the Board of Directors
to vote for the Management Personnel provided under the
Management Agreements and, thus, to elect these persons to
the positions for which they have been designated by
PriceCostco.
4.5.2 Officers who are Management Personnel under the Management
Agreements shall have authority to undertake and enter into
any Obligation (i) that is provided for in the Business Plan,
(ii) that has been approved by the Board of Directors or
Executive Committee, or (iii) that will result in a specific
liability or expense that is no greater than U.S.$250,000 or
its equivalent. They shall also be given Powers of Attorney
in the form of Exhibit 4.5.
4.6 SHAREHOLDER MEETINGS. Ordinary shareholder meetings of any company
in the Pricemex Group shall deal only with the matters mentioned in
Article 181 of the General Corporation Law of Mexico. Extraordinary
shareholder meetings shall deal with all other matters to be
considered by the shareholders. The affirmative vote of at least
sixty percent (60%) of the total capital stock of such company shall
be required for action by the shareholders at an extraordinary
shareholders meeting.
4.7 CORPORATE RESOLUTIONS. To give effect to the purposes of the
Management Agreements and this Agreement, the parties shall promptly
cause shareholder resolutions and Board of Directors resolutions in a
form substantially the same as set forth in Exhibit 4.7 to be adopted
respectively by the shareholders and Boards of Directors of the
Pricemex Group Companies designated in Exhibit 4.7.
4.8 ACCESS TO INFORMATION. The officers of each company in the Pricemex
Group shall keep its Board of Directors or Executive Committee (as
applicable) informed of the material financial, business, marketing
and other general information necessary for the Board of Directors or
Executive Committee to fulfill their responsibilities and duties.
4.9 AUDITS. Each of PRIMEX and COMERCIAL shall have the right, at its
own expense, to have an independent audit of the financial condition
of any company in the Primex Group performed by auditors of its own
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selection at any time during the term of this Agreement and for a
period of three years thereafter.
4.10 WEEKLY MEETINGS. PRICE will cause the General Director to meet upon
request once per week with COMERCIAL's chief executive officer in a
meeting at a mutually convenient time and place.
4.11 STATEMENTS TO PUBLIC OR GOVERNMENT.
4.11.1 PRIMEX will cause the General Director to consult with
COMERCIAL's chief executive officer before Price Club de
Mexico issues any statement to the public or to the
Government of the United Mexican States or other governmental
entity.
4.11.2 The parties will use reasonable efforts under the
circumstances to advise each other in advance of public
statements (but not including filings that must be promptly
made under applicable securities laws) that relate to Price
Club de Mexico and to provide copies of such statements after
they are issued.
4.12 SERVICE MARK AGREEMENT. Contemporaneously with the Effective Date of
this Agreement, the parties will cause Price Club de Mexico to enter
into a Restated Service Mark License Agreement in the form of
Exhibit 4.12, to replace and supersede the Original Service Mark
Agreement.
4.13 TRAINING OF EMPLOYEES. PRICE and COMERCIAL will jointly and
cooperatively train employees of Price Club de Mexico (1) in the
conduct of membership warehouse club operations and (2) in the
discharge of that Company's administrative, financial, marketing and
related needs. Any training will first be determined by the
Management Personnel under the Management Agreements. Price Club de
Mexico will reimburse PRICE and COMERCIAL for the expenses associated
with such training pursuant to jointly approved employee training
budgets and supporting documentation. Such expenses shall include,
without limitation, all withholding taxes required to be paid in the
U.S.A. and the United Mexican States.
4.14 PURCHASE OF MERCHANDISE.
4.14.1 If merchandise is purchased from PRICE or COMERCIAL, the
purchase price and related overhead expenses will be set
forth in invoices or other written documents agreed upon
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between Price Club de Mexico and PRICE or COMERCIAL, as the
case may be, in advance.
4.14.2 Contemporaneously with the Effective Date of this Agreement,
the parties will cause Price Club de Mexico to enter into a
Merchandise Sourcing Agreement in the form of Exhibit 4.14
under which PRICE and its Affiliate will act as purchasing
agent for, and thereby supply merchandise to, Price Club de
Mexico.
4.14.3 The inventory purchase prices payable by Price Club de Mexico
to COMERCIAL will be COMERCIAL's direct costs which shall be
(1) the F.O.B. factory cost (less all discounts and rebates)
and (2) the Buying Services Costs (as defined in the
Merchandise Sourcing Agreement) incurred by COMERCIAL on the
transaction.
4.15 REAL ESTATE SUBDIVISION AGREEMENT. Contemporaneously with the
Effective Date of this Agreement, COMERCIAL and certain subsidiaries
of the Holding Company will enter into an agreement, in the form of
Exhibit 4.15, to subdivide real estate jointly owned by COMERCIAL and
those subsidiaries. The parties will use best efforts to effect
promptly those subdivisions.
4.16 OTHER AGREEMENTS. Other agreements between any of the Pricemex Group
Companies and PRICE, PRIMEX or any their Affiliates ("Prior
Agreements") that are listed in Exhibit 4.16 hereof will remain in
effect after the date of this Agreement. Any Prior Agreements not
listed in Exhibit 4.16 are hereby terminated.
5. REPRESENTATIONS AND WARRANTIES OF PRICE AND PRIMEX. PRICE and PRIMEX
hereby represent and warrant to COMERCIAL that:
5.1 ORGANIZATION AND STANDING. Each of PRICE and PRIMEX is a corporation
organized, existing and in good standing under the laws of the State
of California with the requisite power to enter this Agreement and to
fulfill its obligations hereunder; and PriceCostco is the parent
company of PRICE and is a corporation organized, existing and in good
standing under the laws of the State of Delaware.
5.2 AUTHORITY. Each of PRICE and PRIMEX has the right, power and
authority to execute, deliver and perform this Agreement and has
taken all required corporate action to approve this Agreement.
Subject to Section 13 below, this Agreement constitutes a valid and
binding obligation of each of PRICE and PRIMEX enforceable in
accordance with its terms, except to the extent that enforcement may
be subject to
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bankruptcy, insolvency and other laws of general applicability
relating to or affecting creditors' rights and to general equity
principles.
5.3 ABSENCE OF CONFLICTS. Entering this Agreement and performing all of
their obligations hereunder does not (1) violate or conflict with the
Articles of Incorporation or Bylaws of PRICE or PRIMEX or any
agreement or instrument binding on either of them, (2) violate or
conflict with any law, rule, judgment, order or the like applicable
to PRICE or PRIMEX, or (3) require the consent or approval of any
other person or entity.
5.4 PENDING PROCEEDINGS. There is no dispute, investigation, litigation
or other proceeding pending or overtly threatened against PRICE or
PRIMEX which, if unfavorably concluded, would adversely affect the
ability of either of them to enter this Agreement or to fulfill its
obligations hereunder.
6. REPRESENTATIONS AND WARRANTIES OF COMERCIAL. COMERCIAL hereby represents
and warrants to PRICE and PRIMEX that:
6.1 ORGANIZATION AND STANDING. COMERCIAL is a corporation duly
organized, existing and in good standing under the laws of the United
Mexican States with the requisite power to enter this Agreement and
to fulfill its obligations hereunder.
6.2 AUTHORITY. COMERCIAL has the right, power and authority to execute,
deliver and perform this Agreement and has taken all required
corporate action to approve this Agreement. Subject to Section 13
below, this Agreement constitutes a valid and binding obligation of
COMERCIAL enforceable in accordance with its terms, except to the
extent that enforcement may be subject to bankruptcy, insolvency, and
other laws of general applicability relating to or affecting
creditors' rights and to general equity principles.
6.3 ABSENCE OF CONFLICTS. Entering this Agreement and performing all of
its obligations hereunder does not (1) violate or conflict with the
charter of COMERCIAL or any agreement or instrument binding on it,
(2) violate or conflict with any law, rule, judgment, order or the
like applicable to COMERCIAL, or (3) require the consent or approval
of any other person or entity.
6.4 PENDING PROCEEDINGS. There is no dispute, investigation, litigation
or other proceeding pending or overtly threatened against COMERCIAL
which, if unfavorably concluded, would adversely affect the ability
of COMERCIAL to enter this Agreement or to fulfill its obligations
hereunder.
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6.5 INFORMATION ABOUT PRICEMEX GROUP. All information concerning the
Pricemex Group Companies as stated in Exhibit 6.5 hereof is accurate,
true and correct. COMERCIAL will provide to PRICE on the Effective
Date, a certificate signed by COMERCIAL's chief executive officer,
certifying the accuracy of this information.
7. NON-COMPETITION AND OTHER COVENANTS.
7.1 NONCOMPETE BY COMERCIAL. Without the prior written approval of
PRICE, during the term of this Agreement (and, if it is a defaulting
party under Sections 8.2 and 9.4, for a period of five years
thereafter), neither COMERCIAL nor any of its Affiliates shall
directly or indirectly, in Mexico or in the United States of America
or elsewhere, other than by way of their interest in the Joint
Venture Companies,
7.1.1 own, operate, manage, license or assist, any Club Business or
company that engages in a Club Business, or
7.1.2 engage in any business with any of the Specified Companies
(except non-continuous purchases of goods where it has a
reasonable basis to believe the goods are being sold by a
Specified Company below cost).
7.2 NONCOMPETE BY PRICE. Without the prior written approval of
COMERCIAL, during the term of this Agreement (and, if it is a
defaulting party under Sections 8.2 and 9.4, for a period of five
years thereafter), neither PRICE nor any of its Affiliates shall
directly or indirectly, in Mexico, other than by way of their
interest in the Joint Venture Companies,
7.2.1 own, operate, manage, license or assist any Club Business or
company that engages in a Club Business, or
7.2.2 engage in any business with any of the Specified Companies
(except non-continuous purchases of goods where it has a
reasonable basis to believe the goods are being sold by a
Specified Company below cost).
7.3 BEST EFFORTS. The parties shall use best efforts to carry out the
terms and purposes of this Agreement and the Management Agreements.
7.4 COOPERATION. PRIMEX and COMERCIAL shall cooperate with each other
and shall cause their employees to cooperate to support the
businesses and operations of the Pricemex Group Companies.
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7.5 TAX REIMBURSEMENT. The parties will cause the Pricemex Group
Companies to indemnify and hold harmless PRICE and its Affiliates
from, and reimburse PRICE and its Affiliates and COMERCIAL and its
Affiliates respectively for, all Liabilities in connection with any
determination by tax authorities in the United States of America or
in the United Mexican States (i) that any amount paid for
merchandise, services, technical assistance or intellectual property
rights under this Agreement or the Associated Agreements is
insufficient under applicable "transfer pricing" laws and
regulations, or (ii) that PRICE or its Affiliates or COMERCIAL and
its Affiliates have a tax liability with respect to this Agreement,
the Associated Agreements or their subject matter other than from the
amounts actually paid.
8. DEADLOCK, DEFAULT, & BUY-OUT.
8.1 DEADLOCK OF SHAREHOLDERS OR DIRECTORS.
8.1.1 DEADLOCK NOTICE. If at any time after December 31, 1996, the
shareholders or Board of Directors of any of the Primex Group
Companies become (or remain) deadlocked over or, because of a
lack of a quorum or a required majority, are unable to act or
agree upon any matter including any inability to agree on
additional capital requirements or the provisions of
guaranties for such company (a "Deadlock"), any party may
give a notice of deadlock to the other parties ("Deadlock
Notice").
8.1.2 CONSULTATION PERIOD. Within sixty (60) Days after any
Deadlock Notice is given ("Consultation Period"), the chief
executive officers of PRICE and of COMERCIAL shall meet
personally and attempt to resolve the Deadlock, and any
resolution shall be set forth in a written agreement among
the parties.
8.1.3 MEDIATION PERIOD. If the Deadlock is not resolved by a
written agreement during the Consultation Period, then within
the immediately following sixty (60) Days ("Mediation
Period") the parties will attempt to have the Deadlock
resolved by non-binding mediation under Section 8.5 below.
8.1.4 BUY-OUT NOTICE. If the Deadlock is not resolved by a written
agreement during the Consultation Period and Mediation
Period, either may give notice of an election to invoke the
Buy-Out provisions of Section 8.3 hereof ("Buy-Out Notice")
and Section 8.3 shall apply.
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8.1.5 PRE-1997 DEADLOCKS. If any Deadlock exists on or before
December 31, 1996, the parties shall continue to operate the
Pricemex Group Companies in accordance with all matters that
have been agreed upon including this Agreement, the
Management Agreements and the Business Plan.
8.2 DEFAULT AND INSOLVENCY.
8.2.1 DEFAULT NOTICE. Upon a Default either by PRICE or PRIMEX or
by COMERCIAL (the "Defaulting Party"), the other party may
give written notice of the Default ("Default Notice") to the
Defaulting Party specifying the Default. The Default Notice
shall be given within a reasonable time (but in any event
within 90 Days) after discovery of the Default.
8.2.2 CONSULTATION PERIOD. Within sixty (60) Days after any
Default Notice is given ("Consultation Period"), the chief
executive officers of PRICE and of COMERCIAL shall meet
personally and attempt to resolve the Default, and any
resolution shall be set forth in a written agreement among
the parties.
8.2.3 MEDIATION PERIOD. If the Deadlock is not resolved by a
written agreement during the Consultation Period, then within
the immediately following sixty (60) Days ("Mediation
Period") the parties will attempt to have the Deadlock
resolved by non-binding mediation under Section 8.5 below
8.2.4 BUY-OUT NOTICE. If the Default (i) is not resolved by a
written agreement during the Consultation Period and
Mediation Period and (ii) is not cured within 90 Days of the
Default Notice, the non-defaulting party may give notice of
an election to invoke the Buy-Out provisions of Section 8.3
hereof ("Buy-Out Notice") and Section 8.3 shall apply.
8.2.5 ARBITRATION REMEDY. Either party may in any case seek a
remedy by arbitration under Section 12.8 below. Any bona
fide dispute between the parties over the existence or nature
of a Default or the cure thereof shall be resolved pursuant
to the terms of Section 12.8.
8.2.6 INSOLVENCY NOTICE. If a party is insolvent, has been
declared bankrupt, has had a receiver or trustee appointed to
manage its assets or affairs, or is the subject of a petition
for insolvency or bankruptcy that has not been discharged
within sixty (60) Days of its filing ("Insolvent Party"), any
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other party may give the Insolvent Party written notice
thereof and elect to invoke the Buy-Out provisions of
Section 8.3 hereof ("Insolvency Notice") and Section 8.3
shall apply.
8.3 BUY-OUT.
8.3.1 DETERMINE FMV. In the event of a Buy-Out Notice under
Sections 2.6.1, 2.8, 2.9, 8.1.4, 8.2.4 or 8.8, or an
Insolvency Notice under Section 8.2.6 above, the Fair Market
Value of the Pricemex Group Companies as of the date the Buy-
Out Notice is given shall be determined under Section 8.4
below.
8.3.2 PRIMEX ELECTION. PRIMEX shall then have thirty (30) Days
from the date upon which the Fair Market Value shall have
been determined in which to elect (for itself or an
Affiliate), by written notice, to purchase all of the Shares
of COMERCIAL in the Joint Venture Companies for a price equal
to one hundred percent (100%) of the Fair Market Value
multiplied by COMERCIAL's percentage ownership of the Shares
of the Holding Company.
8.3.3 COMERCIAL ELECTION. If within the 30-Day period described in
Section 8.3.2 PRIMEX has not elected to purchase COMERCIAL's
Shares, COMERCIAL shall thereupon have a further thirty (30)
Days in which to elect (for itself or an Affiliate), by
written notice, to purchase all of the Shares of PRIMEX in
the Joint Venture Companies for a price equal to one hundred
percent (100%) of the Fair Market Value multiplied by
PRIMEX's percentage ownership of the Shares of the Holding
Company.
8.3.4 ADJUSTMENT OF FMV. If no election has been made under
Sections 8.3.2 or 8.3.3 above, then, immediately upon
expiration of the 30-Day period described in Section 8.3.3,
the Fair Market Value shall become an amount that is ninety
percent (90%) of the previous Fair Market Value, and the
procedures of Sections 8.3.2, 8.3.3 and this 8.3.4 will
continue to be repeated in sequence until an election is made
under Section 8.3.2 or Section 8.3.3.
8.3.5 PURCHASE TERMS. Once an election is made under Section 8.3.2
or Section 8.3.3, then (i) the parties shall promptly perform
all acts required of them and use their best efforts to cause
third parties to perform all acts required to enable
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the purchaser to consummate forthwith its purchase of the
Shares (the "Required Acts"), and (ii) the purchaser shall
pay the purchase price in cash and in U.S. Dollars within 120
Days after the date of the election or within twenty (20)
Days after completion of the Required Acts, whichever occurs
earlier.
8.4 FAIR MARKET VALUE.
8.4.1 PROPOSED & AGREED VALUES. Within thirty (30) Days after any
Buy-Out Notice is given under Section 8.1 or Section 8.2
above, the parties shall communicate to each other by written
notice a proposed fair market value in U.S. dollars (the
"Proposed Value") and attempt to arrive at an agreed Fair
Market Value in U.S. dollars for the Pricemex Group
Companies. Any such agreed-upon value, when approved in
writing by the parties, shall be deemed to be the Fair Market
Value.
8.4.2 APPRAISER DETERMINES FMV. If no such agreement has been
reached within the 30-Day period described in Section 8.4.1,
then the Fair Market Value in U.S. dollars shall be
determined in writing by an independent appraiser.
8.4.3 SELECTION OF APPRAISER. The Holding Company's external
auditors shall serve as the appraiser or, if unwilling to do
so, appoint the appraiser or, if no appraiser has been
appointed within sixty (60) Days after the Buy-Out Notice is
given, the President of Mexico's Association of Charted
Accountants or other authority agreed on in writing by the
parties shall at request of any party appoint the appraiser.
The appraiser shall in all cases be a member of a major
international accounting firm with offices in Mexico City.
8.4.4 COST. The fees and expenses of the appraiser shall be borne
equally by the parties.
8.4.5 BASIS OF APPRAISAL. The appraiser is to make his or her own
determination in writing of the fair market value in U.S.
dollars of the Shares of the Joint Venture Companies, based
on what an arm's length purchaser would pay for the Shares
taking into account the going concern value of the Pricemex
Group Companies (if still carrying on business).
8.4.6 ASSISTANCE. The parties shall give all reasonable assistance
to the appraiser, and require the officers, directors and
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auditors of the Pricemex Group Companies to give such
assistance. The parties may make written representations to
the appraiser, but the appraiser will not be obligated to
agree with them.
8.4.7 APPRAISED VALUE. Within sixty (60) Days after the
appointment of the appraiser (or as soon thereafter as it can
be accomplished), the appraiser shall submit to the parties
the fair market value as determined by the appraiser (the
"Appraised Value") together with a copy of a written
appraisal report prepared by such appraiser with respect to
such value.
8.4.8 USE OF PROPOSED OR APPRAISED VALUE. If the Appraised Value
is higher than the higher of either party's Proposed Value or
lower than the lower of either party's Proposed Value (or, if
only one Proposed Value was timely communicated, that
Proposed Value), then the nearest Proposed Value shall be the
Fair Market Value. Otherwise, the Appraised Value determined
by the appraiser shall be the Fair Market Value.
8.4.9 DATE FMV DETERMINED. The Fair Market Value shall be deemed
determined on (i) the date of any written approval of an
agreed Fair Market Value under Section 8.4.1, or (ii) the
date the written appraisal report prepared by the appraiser
under Section 8.4.7 is given to the last party to receive it,
or (iii) if the Fair Market Value has been reduced under
Section 8.3.4, the time described in Section 8.3.4.
8.5 MEDIATION PROCEDURE. Mediation under this Agreement shall occur
under the then current Center for Public Resources ("CPR") Model
Procedure for Mediation of Business Disputes (Model Procedure). The
mediator will be selected from the CPR Panels of Neutrals under the
Model Procedure, unless the parties have first selected a different
mediator.
8.6 INTERIM OPERATION. During any period of Deadlock, Default, Dispute,
existence of an Insolvent Party, Consultation Period, Mediation
Period, Buy-Out and any period thereafter until a sale is concluded
under Section 8.3, the parties shall continue to operate the Pricemex
Group Companies in accordance with all matters that have been agreed
upon including this Agreement, the Management Agreements and the
Business Plan, and otherwise in the best interests of the
shareholders.
8.7 OTHER REMEDIES UPON DEFAULT OR SALE. The provisions of this
Section 8 are not intended to be penal clauses, and the rights
therein shall be in
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addition to and not in substitution for any other remedies that may
be available to a non-defaulting party. No sale under Section 8.4
shall relieve any party from any obligations accrued to the date of
such sale or relieve a defaulting party from liability and damages to
any other party for breach of this Agreement.
8.8 CHANGE IN CONTROL. If there is a Change in Control Event with
respect either to PriceCostco or to COMERCIAL, the other party may
within thirty days of receiving notice of the Change in Control Event
elect by written notice to invoke immediately the Buy-Out provisions
of Section 8.3 hereof ("Buy-Out Notice") and Section 8.3 shall then
apply; PROVIDED THAT
8.8.1 The election must be made within five (5) years of the
Effective Date of this Agreement, and
8.8.2 The party making the election may not be in Default under
this Agreement and the Deadlock, Default and Buy-Out
procedures of Sections 8.1, 8.2 or 8.3 shall not otherwise
have commenced, and
8.8.3 If the election is properly made by COMERCIAL, COMERCIAL will
have the first right to purchase under Section 8.3.2 hereof
and, if COMERCIAL fails to elect to purchase under Section
8.3.2, then PRIMEX will have a right to elect to purchase
under Section 8.3.3.
8.9 STANDBY LICENSE AGREEMENT. If COMMERCIAL completes a Buy-Out (i)
under Section 8.3.3 after PRIMEX fails to elect to purchase under
Section 8.3.2 or (ii) under Section 8.8, the parties shall cause a
Standby License Agreement substantially in the form of Exhibit 8.9
hereof to be executed.
8.10 PUBLIC OFFERING LIMITATION. If pursuant to the mutual agreement of
the parties Shares of the Holding Company have been offered and sold
to the public, the parties intend that this Agreement will be
appropriately amended and that the Buy-Out provisions hereof will be
similarly amended.
9. TERM, TERMINATION & DISSOLUTION.
9.1 TERM. The term of this Agreement shall be from the Effective Date
until terminated under Section 9.2.
9.2 TERMINATION OF AGREEMENT. This Agreement shall be terminated on the
date:
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9.2.1 PRICE, PRIMEX and COMERCIAL agree in writing to terminate the
Agreement;
9.2.2 A sale is completed by either party of all its Shares in the
Joint Venture Companies by written agreement or under the
"Buy-Out" provisions of Section 8.3 above;
9.2.3 120 Days after the charter of the Holding Company expires, or
is revoked, provided it is not reinstated (or a new charter
is not issued) within these 120 Days.
9.3 SURVIVAL OF PROVISIONS. Sections 7, 8.5, 8.7, 10, 9.4, 9.5, 12, any
other provision hereof which specifically so provides, and any
provision hereof where the context so requires, shall survive any
termination of this Agreement. Termination shall not affect any
liability or obligation accrued before the date of termination.
9.4 POST-TERMINATION COMPETITION. After the date of a termination, PRICE
and its Affiliates and COMERCIAL and its Affiliates may compete with
one another in the United States of America and the United Mexican
States subject to the provisions of this Agreement including the
provisions of Section 10 hereof relating to confidentiality and
return of materials embodying Confidential Information (as defined in
Section 10.3); provided, however, that in the event of termination of
this Agreement upon a Buy-Out of a party's Shares following a Default
or other breach hereof, the defaulting or breaching party shall
remain bound by the provisions of Section 7.1 or 7.2 hereof (as
applicable) for a period of five years following the date of
termination.
9.5 DISSOLUTION. Dissolution of the Holding Company shall occur only in
accordance with the applicable provisions of law and the charter of
the Holding Company.
10. CONFIDENTIALITY.
10.1 DUTY OF CONFIDENTIALITY. Each of PRICE, PRIMEX and COMERCIAL
acknowledges that it will be made aware of and have access to
Confidential Information (as defined in Section 10.3). No party
hereto shall disclose, during the term of this Agreement or
thereafter, any Confidential Information to any person other than an
Affiliate, agent or employee of PRICE, PRIMEX or COMERCIAL, and then
only in furtherance of the interests of the Pricemex Group Companies,
unless prior written consent to such disclosure has been obtained
from each other party.
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10.2 CONFIDENTIAL INFORMATION. For purpose of this Section 10,
Confidential Information shall mean all confidential or proprietary
information owned, possessed or used by PRICE, PRIMEX or COMERCIAL or
their Affiliates, including, but not limited to, trade secrets and
know-how and other such information or data which is declared to be
confidential or proprietary by any party to this Agreement prior to
its disclosure. Confidential Information for purposes of this
Section 10 shall not include information which: (1) was in the
public domain at the time it was disclosed, (2) was already validly
in a recipient's possession at the time it was disclosed, and the
evidence of such possession is reasonably satisfactory to the party
seeking to restrict disclosure, (3) was independently developed by
the recipient, (4) or becomes known to the recipient from a source
other than a disclosing party without the disclosing party breaching
its obligations hereunder.
10.3 MEASURES BY AFFILIATES. The parties shall cause their Affiliates,
the Pricemex Group Companies, and the employees and agents of each of
the foregoing, not to disclose, and to exercise the same degree of
care to protect, the Confidential Information of PRICE, PRIMEX and
COMERCIAL that it would use to preserve and safeguard its own
confidential information. Such care shall include, but not be
limited to, requiring any such entities, or their agents and
employees, to execute a reasonable confidentiality agreement in a
form submitted by one party to any other party.
10.4 RETURN OF CONFIDENTIAL INFORMATION. Upon the termination of this
Agreement, each of PRICE, PRIMEX and COMERCIAL shall return to the
others of them, and shall cause the Pricemex Group Companies to so
return, all materials embodying Confidential Information which such
party has received from any of the others since April 1, 1991.
11. FOREIGN CORRUPT PRACTICES ACT AND OTHER LAWS.
11.1 FCPA COMPLIANCE. The parties hereto acknowledge their familiarity
with the United States Foreign Corrupt Practices Act ("FCPA") and
will comply fully with the FCPA.
11.2 LEGAL COMPLIANCE. The parties shall cause all of the Pricemex Group
Companies to comply with all applicable laws and regulations in
Mexico, to comply with the FCPA, and to assist PRICE and PRIMEX in
complying with any applicable law of Mexico or the United States.
12. MISCELLANEOUS.
12.1 ASSIGNMENT. No party to this Agreement may assign, transfer or
otherwise convey any or all of its rights or obligations hereunder
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without the prior written consent of the others, except to an
Affiliate to whom the Shares have been conveyed as permitted by
Section 2.9 above. No such assignment to an Affiliate shall relieve
the assigning party of any of its obligations hereunder.
12.2 ENTIRE AGREEMENT. This Agreement (including all exhibits hereto),
together with the Management Agreements, sets forth the entire
agreement among the parties with respect to the subject matter hereof
and supersedes the Original Joint Venture Agreement, which is hereby
terminated, and supersedes all prior discussions, understandings and
agreements relating to the subject matter hereof.
12.3 SEVERABILITY. If any one or more of the provisions contained in this
Agreement or in any document executed in connection herewith shall be
held invalid, illegal or unenforceable in any respect under
applicable law, the validity, legality, and enforceability of the
remaining provisions contained herein shall not in any way be
affected or impaired; provided, however, that in such case the
parties shall use their best efforts to achieve the purpose of the
affected provision in a manner which is not invalid, illegal or
unenforceable.
12.4 GOVERNING LAW. This Agreement and all actions and arbitrations
contemplated hereby shall be governed by and construed and enforced
in accordance with the internal laws of the State of Texas, United
States of America, excluding the principles of conflict of laws
thereof.
12.5 GOVERNING TEXT AND LANGUAGE. The parties shall execute three English
language originals of this Agreement, one to be held by each party.
The parties understand and agree that this document has been prepared
in the English language and that the English language is the official
language of this Agreement. The parties shall also promptly cause an
official, certified Spanish language text to be prepared, but should
any discrepancy of interpretation occur between the English original
and the Spanish text, the English original shall be controlling.
12.6 NO WAIVER OF RIGHTS. Except as otherwise provided herein, no failure
or delay on the part of either party in the exercise of any power or
right hereunder shall operate as a waiver thereof, nor shall any
single or partial exercise of any such power or right preclude other
or further exercise thereof or of any other right or power.
12.7 FORCE MAJEURE.
12.7.1 Failure on the part of a party to perform any of its
obligations hereunder will not be deemed to be a breach of
the Agreement to the extent that such failure arises from
force
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majeure. If through force majeure the fulfillment by either
party of any obligation set forth in this Agreement will be
delayed, the period of such delay will not be counted in
computing periods prescribed by this Agreement.
12.7.2 Any party failing to perform its obligations under this
Agreement because of force majeure shall give notice in
writing of such force majeure as soon as possible after the
occurrence to the other party.
12.7.3 Force majeure will mean any war, civil commotion, strike,
lockout, accident, epidemic, or other event that is fully
beyond the control of the parties, and that directly prevents
a party from performing an obligation hereunder.
12.7.4 Any party hereto who fails because of force majeure to
perform an obligation hereunder will upon the cessation of
the force majeure take all reasonable steps within its power
to resume with the least possible delay compliance with that
obligation.
12.8 DISPUTE RESOLUTION.
12.8.1 The parties shall attempt to settle any Dispute between them
by consultation and non-binding mediation, during a
Consultation Period and Mediation Period, as provided by
Sections 8.1.2, 8.1.3, 8.2.2, 8.2.3 and 8.5 above. If no
Notice of Deadlock or Notice of Default has been given, a
party shall first give a written notice specifying the
Dispute and the Consultation Period will begin with that
notice.
12.8.2 If the Dispute is not resolved by written agreement within
the Consultation Period and the Mediation Period, it shall be
resolved by binding arbitration under the Commercial
Arbitration Rules of the American Arbitration Association
("AAA"), in English at San Diego, California, before one
neutral arbitrator who may be a national of any party and who
shall be a lawyer with at least 15 years experience in
commercial law and a member of the AAA's Large Complex Case
Panel. All documents and information relevant to the claim
or dispute in the possession of any party shall be made
available to the other party not later than sixty (60) Days
after the demand for arbitration is served, and the
arbitrator may permit such depositions or other discovery
deemed necessary for a fair hearing. The hearing may not
exceed two Days. The award shall be rendered within 120 Days
of
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the demand. The arbitrator may award interim and final
injunctive relief and other remedies, but may not award
punitive damages. No time limit herein is jurisdictional.
Any award of the arbitrator (including awards of interim or
final remedies) shall be final and not subject to appeal or
review, and may be confirmed or enforced in any court having
jurisdiction and under the New York Convention on the
Recognition and Enforcement of Foreign Arbitral Awards.
12.8.3 Notwithstanding Sections 12.8.1 and 12.8.2 above, the parties
may bring court proceedings or claims against each other only
(i) as part of separate litigation commenced by an unrelated
third party, or (ii) if not first sought from the arbitrator,
solely to obtain preliminary injunctive relief or other
interim remedies pending conclusion of the arbitration.
12.8.4 The prevailing party in any arbitration or legal action
involving any Dispute shall be awarded its reasonable
attorney's fees against the non-prevailing party.
12.9 NOTICES. All notices and other communications hereunder shall be in
writing in the English language and may be personally delivered or
sent by telefax and then confirmed by certified or registered first
class air mail. Any such notice or other communication shall be
deemed effectively given (a) on the date of delivery if personally
delivered; or (b) on the first business day after being sent by
telefax. All such notices and communications shall be delivered or
sent to the addresses below or such other address(es) as a party may
specify in a written notice:
If to PRICE or PRIMEX:
PRICE/COSTCO, INC.
10809 - 120th Avenue N.E.
Kirkland, Washington 98033-9777
U.S.A.
Telefax Number: (206) 803-8103
Attention: James D. Sinegal
Chief Executive Officer
with a copy to:
PRICE/COSTCO, INC.
10809 - 120th Avenue N.E.
Kirkland, Washington 98033-9777
U.S.A.
-27-
<PAGE>
Telefax Number: (206) 803-8114
Attention: Donald E. Burdick
If to COMERCIAL:
Controladora Comercial Mexicana, S.A. de C.V.
27 Fernando de Alba Ixtlixochitl
Colonia Obrera
Mexico, D.F.
C.P. 06800
Telefax Number: (52-5) 588-5024
Attention: Carlos Gonzalez Zabalegui
Chief Executive Officer
with copies to:
Lic. Jose Luis Rico Maciel
Legal Director Controladora Comercial
Mexicana, S.A. de C.V.
27 Fernando de Alba Ixtlixochitl
Colonia Obrera
Mexico, D.F.
C.P. 06800
Telefax Number: (52-5) 588-5024
and
Santamarina y Steta, S.C.
Campos Eliseos 345
Mexico, D.F. 11560
Telefax Number: (525) 281-3955, 280-6226
Attention: Lic. Alberto Saavedra O.
12.10 EXHIBITS. The Exhibits hereto are an integral part of this
Agreement and all references herein to this Agreement shall
encompass such Exhibits.
12.11 COUNTERPARTS. This Agreement may be executed simultaneously in any
number of counterparts, each of which shall be deemed an original,
but all of which together shall constitute one and the same
instrument.
12.12 HEADINGS. The headings of the sections and paragraphs of this
Agreement have been inserted for convenience of reference only and
do not constitute a part of this Agreement.
-28-
<PAGE>
12.13 AMENDMENT AND MODIFICATION. This Agreement may be amended or
modified only by a writing executed by all parties.
12.14 TRADE AND TAX LAW CHANGES. PRICE, PRIMEX and COMERCIAL acknowledge
that the governments of their respective countries from time to time
consider changes in their respective trade and tax laws. It is the
intention of the parties that, in the event of any such changes
which are major and which are to become effective during the term
hereof, they will consult with each other and consider whether it
would be mutually beneficial to make any revisions hereto.
12.15 FURTHER INSTRUMENTS AND ACTS. The parties hereto will execute and
deliver such further instruments and do such further acts as may be
necessary or proper to carry out more effectively the purposes of
this Agreement.
13. CONDITION TO VALIDITY.
13.1 This Agreement is conditioned on, and will enter to effect, only if
the Closing of the Price Enterprises Transaction occurs on or before
March 31, 1995 or such later date that the parties hereto agree upon
in writing (the "Nullity Date").
13.2 If the Closing of the Price Enterprises Transaction has not occurred
on or before the Nullity Date, this Agreement will be null and void.
If,
-29-
<PAGE>
however, that Closing occurs on or before the Nullity Date, this
Agreement enter into effect simultaneously with the conclusion of
that Closing.
INTENDING TO BE LEGALLY BOUND subject to Section 13 above, the parties have
caused this Agreement to be executed by their duly authorized officers as of the
_____ day of _________________, 1995.
CONTROLADORA COMERCIAL MEXICANA, THE PRICE COMPANY
S.A. DE C.V.
By By
----------------------------- ----------------------------
Carlos Gonzalez Zabalegui James D. Sinegal
Chief Executive Officer Chief Executive Officer
By PRICE VENTURE MEXICO
-----------------------------
Its Director of Foreign Trade
By
----------------------------
Robert E. Price
Chief Executive Officer
-30-
<PAGE>
LIST OF EXHIBITS:
Exhibit A: Definitions & Glossary of Terms
Exhibit 1.3: Amended Charters (Articles and Bylaws)
Exhibit 2.2: Share Ownership of Joint Venture Companies
Exhibit 3.3: Management Agreements
Exhibit 3.9: Statement and Reconciliation of Accounts
Exhibit 3.10: Purchase Commitments
Exhibit 3.11: Initial Plan
Exhibit 4.5: Powers of Attorney for Management Personnel
Exhibit 4.7: Corporate Resolutions
Exhibit 4.12: Restated Service Mark License Agreement
Exhibit 4.14: Merchandise Sourcing Agreement
Exhibit 4.15: Real Estate Subdivision Agreement
Exhibit 4.16: Other Agreements
Exhibit 6.5: Information About the Pricemex Group Companies
Exhibit 8.9: Standby License Agreement
-31-
<PAGE>
EXHIBIT "A"
DEFINITIONS & GLOSSARY OF TERMS
"Affiliate" of a party means (1) a parent corporation of a party; (2) a
subsidiary corporation of a party, or a partnership, joint venture, business
trust or other association or entity in which a party directly or indirectly
owns or controls at least twenty-five percent of the voting stock, partnership
interests, or other equity interests, or which a party controls by way of
contract, covenant or otherwise; (3) an entity which is under the common control
of a parent of a party; (4) any officer, director, shareholder, partner or other
controlling person of any of the foregoing entities; and (5) any family member
of the family of any of the foregoing persons. Notwithstanding the foregoing,
the Pricemex Group Companies shall not be deemed to be affiliates of PRICE,
PRIMEX or COMERCIAL.
"Appraised Value" has the meaning set forth in Section 8.4.7 hereof.
"Associated Agreements" means those other agreements referred to in, or
contemplated by, this Agreement.
"Board of Directors" has the meaning set forth in Section 4.1.2 hereof.
"Business Plan" means the operating and capital expansion plan beginning
January 1, 1995 and continuing five years thereafter (including any budget for
estimated capital and pre-opening expenditures, revenue and expense projections
for Warehouse operations and membership, cash flow estimates, financing plans,
and marketing strategies) and shall consist of (i) the initial plan, additional
capital contributions and other matters mentioned in Section 3.11, and (ii) any
modifications or revisions adopted under Sections 3.11.2 or 4.3.1 hereof.
"Buy-Out" means the process and procedure described in Section 8.3 hereof,
under which PRIMEX or COMERCIAL may purchase all Shares of the other party in
the Joint Venture Companies.
"Buy-Out Notice" has the meaning set forth in Sections 8.1.3 and 8.2.4
hereof.
"Change in Control Event" means that the ownership of more than fifty
percent (50%) of the voting shares of COMERCIAL or of PriceCostco has been
acquired by a third party or a third party has acquired the power to appoint a
majority of such Company's board of directors, or an agreement has been
concluded by COMERCIAL or by PriceCostco to do any of the foregoing.
"Club Business" means any merchandising activity utilizing 4,000 square
meters or more in a single location, operated with membership and selling food
and non-food items through a central check-out.
A-1
<PAGE>
"Closing" means the closing of the Price Enterprises Transaction.
"COMERCIAL" means Controladora Comercial Mexicana, S.A. de C.V., a
corporation organized under the laws of the United Mexican States.
"Confidential Information" has the meaning set forth in Section 10.3
hereof.
"Consultation Period" has the meaning set forth in Sections 8.1.2, 8.2.2
and 12.8.1 hereof.
"Days" means calendar days.
"Deadlock" has the meaning set forth in Section 8.1.1 hereof.
"Deadlock Notice" has the meaning set forth in Section 8.1.1 hereof.
"Default" means any breach or failure to perform an obligation under this
Agreement, except a failure to make additional capital contributions or a
failure to provide or maintain a guaranty under Sections 2.5 through 2.8 or a
transfer of shares or other Act in violation of Section 2.9 hereof (which are
considered major defaults and create a right immediately to invoke the Buy-Out
provisions of Section 8.3).
"Default Notice" has the meaning set forth in Section 8.2.1 hereof.
"Defaulting Party" has the meaning set forth in Section 8.2.1 hereof.
"Dispute" means (1) any differences in the interpretation of this
Agreement, (2) any controversy or claim arising out of or relating to this
Agreement (including Section 12.8 hereof) or the validity, breach or termination
of this Agreement, or (3) any controversy or claim arising out of or relating to
one or more of the Pricemex Group Companies, including without limitation any
Deadlock, Default, failure to make additional capital contributions or a failure
to provide or maintain a guaranty under Sections 2.5 through 2.8 hereof, or a
transfer of shares or other act in violation of Section 2.9 hereof.
"Effective Date" means the date of the Closing of the Price Enterprises
Transaction, provided that such Closing occurs on or before March 31, 1995 or
such later date that the parties hereto agree upon in writing.
"Executive Committee(s)" has the meaning set forth in Section 4.4 hereof.
"Fair Market Value" means the value of the Shares of the Joint Venture
Companies as determined under Section 8.4 and (if applicable) under Section
8.3.4.
A-2
<PAGE>
"General Director" means the General Director of Price Club de Mexico under
the Management Agreements.
"Holding Company" means Controladora Price Club S.A. de C.V.
"Importadora" means Importadora Primex, S.A. de C.V.
"Indebtedness means any amount owed including without limitation notes
payable, merchandise payables, liabilities for merchandise in transit, and any
other amount owed of any nature.
"Insolvency Notice" has the meaning set forth in Section 8.2.6 hereof.
"Joint Venture Companies" means The Holding Company and, until the
Reorganization occurs, also Price Club de Mexico and Importadora.
"Liabilities" shall have the same meaning as in Section 7.1 of the Restated
Service Mark Agreement."
"Management Agreements" means the Management Agreements described in
Recital "F" and Section 3.3 hereof.
"Mediation Period" has the meaning set forth in Sections 8.1.3, 8.2.3 and
12.8.1 hereof.
"Obligation" has the meaning set forth in Section 4.3.6 hereof.
"Original Joint Venture Agreement" means the Agreement between The Price
Company, Price Venture Mexico and Controladora Comercial Mexicana, S.A. de C.V.
to Form a Corporate Joint venture, dated June 21, 1991, and all amendments
thereto including without limitation an Amendment to Corporate Joint Venture
Agreement dated June 21, 1991, executed as of July 15, 1991 and an Amendment to
a certain Corporate Joint Venture Agreement dated June 21, 1991 etc. executed in
San Diego, California on January 29, 1992 and in Mexico City on January 28,
1992.
"Original Service Mark Agreement" has the meaning set forth in Recital "D"
hereof.
"PRICE" means The Price Company, a corporation organized under the laws of
the State of California.
"Price Club de Mexico" means Price Club de Mexico S.A. de C.V.
"PriceCostco" means Price/Costco, Inc., a Delaware corporation, and parent
company of PRICE.
A-3
<PAGE>
"Price Enterprises Transaction" means the transaction in which PRICE will
acquire the interest of Price Enterprises, Inc. in the immediate parent of
PRIMEX.
"PRIMEX" means Price Venture Mexico, a corporation organized under the laws
of the State of California.
"Pricemex Group" means Price Club de Mexico, Importadora, and The Holding
Company and subsidiaries of the foregoing.
"Pricemex Group Companies" means all companies in the Pricemex Group.
"Proposed Value" has the meaning set forth in Section 8.4.1 hereof.
"Reorganization" means the reorganization described in Recital "G" and
Section 1.2.1 hereof.
"Shares" means the shares of capital stock of the Holding Company and
(pending the Reorganization) also of Price Club de Mexico and Importadora, as
set forth in Section 2.1.2 hereof.
"Specified Companies" means Wal-Mart Stores, Inc., Cifra, Gigante, Kmart
Corporation, Home Depot, Inc., Office Depot, Inc., and their respective
subsidiaries.
"Specified Borrowing Rate" means the borrowing rate (1) under COMERCIAL's
then current commercial paper program, or (2) if there is no such program, under
COMERCIAL's then current Eurobond borrowing, or (3) if there is neither, equal
to the prime rate published in the WALL STREET JOURNAL on the first business day
after the loan in question is made.
"Warehouse Business" means any wholesale or retail merchandising activity,
selling food items, non-food items or both through a central check out, and
operated out of facilities with warehouse-style fixtures and furnishings or with
products displayed in their shipping cartons or pallets, with or without
membership.
"Warehouses" means locations at which Club Business is operated.
A-4
<PAGE>
EXHIBIT 12.1
PRICE/COSTCO, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
53 WEEKS
52 WEEKS ENDED ENDED
------------------------------------------------------ ------------
SEPTEMBER 1, AUGUST 30, AUGUST 29, AUGUST 28, SEPTEMBER 3,
1991 1992 1993 1994 1995
------------ ----------- ----------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Earnings(1)................................ $ 342,041 $ 368,855 $ 336,463 $ 203,555(3) $ 368,204
Less: Capitalized interest................. 4,114 8,487 9,483 7,170 3,275
Add: Interest on debt(2)................... 30,155 44,012 55,599 57,642 71,186
Portion of rent under long-term operating
leases representative of an interest
factor.................................. 17,972 20,208 23,220 26,940 32,160
------------ ----------- ----------- -------------- ------------
Total earnings available for fixed
charges................................... $ 386,054 $ 424,588 $ 405,799 $ 280,967 $ 468,275
------------ ----------- ----------- -------------- ------------
------------ ----------- ----------- -------------- ------------
Fixed Charges:
Interest on debt(2)...................... $ 30,155 $ 44,012 $ 55,599 $ 57,642 $ 71,186
Portion of rent under long-term operating
leases representative of an interest
factor.................................. 17,972 20,208 23,220 26,940 32,160
------------ ----------- ----------- -------------- ------------
Total fixed charges........................ $ 48,127 $ 64,220 $ 78,819 $ 84,582 $ 103,346
------------ ----------- ----------- -------------- ------------
------------ ----------- ----------- -------------- ------------
Ratio of earnings to fixed charges......... 8.0 6.6 5.2 3.3(4) 4.5
------------ ----------- ----------- -------------- ------------
</TABLE>
- ------------------------
(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.
<PAGE>
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 File No. 33-50799.
Arthur Andersen LLP
Seattle, Washington
November 22, 1995
<PAGE>
EXHIBIT 23.2
REPORT OF INDEPENDENT AUDITORS
Board of Directors
The Price Company
We have audited the consolidated balance sheet of The Price Company and
subsidiaries as of August 31, 1993 and 1992 and the related consolidated
statements of income, shareholders' equity and cash flows for each of the three
years in the period ended August 31, 1993. Our audits also included the
financial statement schedules for The Price Company listed in the index at Item
14(a). These financial statements and schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
statements and schedules 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.
As discussed in Note N, the Company, in a transaction accounted for as a
pooling-of-interests, merged with Costco Wholesale Corporation (Costco) to form
Price/Costco, Inc. Effective October 21, 1993, the Company and Costco will
operate as wholly-owned subsidiaries in Price/Costco, Inc.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of The
Price Company and subsidiaries at August 31, 1993 and 1992, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended August 31, 1993 in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedules, when considered in relation to the basic financial statements taken
as a whole, present fairly in all material respects the information set forth
therein.
Ernst & Young LLP
San Diego, California
November 19, 1993
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-03-1995
<PERIOD-START> AUG-29-1994
<PERIOD-END> SEP-03-1995
<CASH> 45,688
<SECURITIES> 0
<RECEIVABLES> 151,293
<ALLOWANCES> 4,628
<INVENTORY> 1,422,272
<CURRENT-ASSETS> 1,702,319
<PP&E> 3,062,035
<DEPRECIATION> 526,442
<TOTAL-ASSETS> 4,437,419
<CURRENT-LIABILITIES> 1,692,938
<BONDS> 1,099,815
<COMMON> 305,941
0
0
<OTHER-SE> 1,224,803
<TOTAL-LIABILITY-AND-EQUITY> 4,437,419
<SALES> 17,905,926
<TOTAL-REVENUES> 18,247,286
<CGS> 16,225,848
<TOTAL-COSTS> 17,813,954
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 67,911
<INCOME-PRETAX> 368,204
<INCOME-TAX> 150,963
<INCOME-CONTINUING> 217,241
<DISCONTINUED> (83,363)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 133,878
<EPS-PRIMARY> 0
<EPS-DILUTED> 0.68
</TABLE>
