<PAGE>
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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 AUGUST 31, 1997
[ ] 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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COSTCO COMPANIES, 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: (425) 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, 1997, was $7,992,988,812.
The number of shares outstanding of the registrant's common stock as of
October 31, 1997 was 213,867,058.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Proxy Statement for the Annual Meeting of
Stockholders to be held on January 21, 1998 are incorporated by reference into
Part III of this Form 10-K.
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<PAGE>
COSTCO COMPANIES, INC.
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED AUGUST 31, 1997
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I
Item 1. Business.......................................................... 3
Item 2. Properties........................................................ 7
Item 3. Legal Proceedings................................................. 8
Item 4. Submission of Matters to a Vote of Security Holders............... 8
Item 4A. Executive Officers of the Registrant.............................. 8
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.......................................................... 10
Item 6. Selected Financial Data........................................... 10
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................ 13
Item 8. Financial Statements.............................................. 18
Item 9. Change in and Disagreements with Accountants on Accounting and
Financial Disclosure............................................. 18
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
<PAGE>
PART I
ITEM 1--BUSINESS
Costco Companies, Inc. ("Costco" or the "Company") began operations in 1976
in San Diego, California as The Price Company, pioneering the membership
warehouse concept. Costco Wholesale Corporation began operations in 1983 in
Seattle, Washington with a similar membership warehouse concept. Costco
Companies, Inc. (formerly Price/Costco, Inc. prior to a name change approved by
the shareholders in January 1997), a Delaware corporation, publicly traded under
the NASDAQ ticker symbol "COST", was formed in October 1993 as a result of a
merger of Costco Wholesale Corporation and The Price Company. Costco Companies,
Inc. is the parent company of Costco Wholesale Corporation and The Price Company
which operate membership warehouses primarily under the Costco Wholesale name.
In the second quarter of fiscal 1995, the Company completed a spin-off of
Price Enterprises, Inc. ("Price Enterprises"), consisting of Costco's
discontinued non-club commercial real estate operations and certain other
assets. (See "Note 2--Spin-off of Price Enterprises, Inc. and Discontinued
Operations").
GENERAL
Costco operates membership warehouses based on the concept that offering
members very low prices on a limited selection of nationally-branded and
selected private label products in a wide range of merchandise categories will
produce high sales volumes and rapid inventory turnover. This rapid inventory
turnover, when combined with the operating efficiencies achieved by volume
purchasing, efficient distribution and reduced handling of merchandise in
no-frills, self-service warehouse facilities, enables Costco to operate
profitably at significantly lower gross margins than traditional wholesalers,
discount retailers and supermarkets.
Costco buys nearly all of its merchandise directly from manufacturers for
shipment either directly to Costco's selling warehouses or to a consolidation
point ("depot") where various shipments are combined so as to minimize freight
and handling costs. As a result, Costco 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, Costco
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. Costco'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, Costco
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 Costco 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.
Costco's typical warehouse format averages approximately 129,000 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, Costco'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, Costco 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 Costco.
Costco'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, Costco's marketing teams personally contact businesses in
the area who are potential wholesale members. These contacts are supported by
direct mailings during the period immediately prior to opening. Potential Gold
Star (individual) members are contacted by direct mail generally distributed
through credit unions, employee associations and other entities representing
individuals who are eligible for Gold Star membership. After a membership base
is established in an area, most new memberships result from word of mouth
advertising, follow-up contact by direct mail distributed through regular
payroll or other organizational communications to employee groups, and ongoing
direct solicitations to prospective wholesale members.
Costco's warehouses generally operate on a seven-day, 68-hour week, and are
open somewhat longer during the holiday season. Generally, warehouses are open
weekdays between 10:00 a.m. and 8:30 p.m., with earlier closing hours on the
weekend. Because these hours of operation are shorter than those of traditional
discount grocery retailers and supermarkets, labor costs are lower relative to
the volume of sales. Merchandise is generally stored on racks above the sales
floor and displayed on pallets containing large quantities of each item, thereby
reducing labor required for handling and stocking. In addition, sales are
processed through centralized, automated check-out stands. Items are not
individually price marked; rather, each item is bar-coded so it can be scanned
into electronic cash registers. This allows price changes without remarking
merchandise. Substantially all manufacturers provide merchandise pre-marked with
the item numbers and bar codes and many provide special, larger package sizes.
Costco'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
Costco 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. Costco seeks to limit specific
items in each product line to fast selling models, sizes and colors and
therefore carries only an average of approximately 3,600 to 4,000 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 Costco'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. Costco's policy is to
accept returns of merchandise within a reasonable time after purchase.
4
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The following table indicates the approximate percentage of net sales
accounted for by each major category of items sold by Costco during fiscal 1997,
1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
SUNDRIES (including candy, snack foods, health and
beauty aids, tobacco, alcoholic beverages, soft
drinks and cleaning and institutional
supplies)........................................ 31% 32% 32%
FOOD (including dry and fresh foods and
institutionally packaged foods).................. 32% 32% 32%
HARDLINES (including major appliances, video and
audio tape, electronics, tools, office supplies,
furniture and automotive supplies)............... 20% 21% 22%
SOFTLINES (including apparel, domestics, cameras,
jewelry, housewares, books and small
appliances)...................................... 12% 11% 11%
OTHER (including pharmacy, optical, one-hour
photo, print shop, hearing aid and gas
stations)........................................ 5% 4% 3%
--- --- ---
100% 100% 100%
--- --- ---
--- --- ---
</TABLE>
Costco has direct buying relationships with many producers of national brand
name merchandise. No significant portion of merchandise is obtained by Costco
from any one of these or any other single supplier. Costco 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. Costco 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.
Costco 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 Costco's operations, except an
increased level of sales and earnings during the Christmas holiday season.
MEMBERSHIP POLICY
Costco's membership format is designed to reinforce customer loyalty and
provide a continuing source of membership fee revenue. Costco 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.
Costco promotes Business membership through its merchandise selection and its
membership marketing programs. Business members generally pay an annual
membership fee of $30 for the primary membership card with additional membership
cards available for an annual fee of $20.
Individual memberships are available to employees of federal, state and
local governments, financial institutions, corporations, utility and
transportation companies, public and private educational institutions, and other
selected organizations. Individual members generally pay an annual membership
fee of $35, which includes a spouse card.
As of August 31, 1997, Costco had approximately 4.0 million Business
memberships and approximately 7.7 million Gold Star memberships. Members can
utilize their memberships at any wholesale location.
LABOR
As of August 31, 1997, Costco had approximately 57,000 employees, about 50%
of which were part time. Approximately 12,500 hourly employees in California,
Maryland, New Jersey, New York and one
5
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warehouse in Virginia are represented by the International Brotherhood of
Teamsters. All remaining hourly employees are non-union. Costco considers its
employee relations to be good.
COMPETITION
The Company operates in the rapidly changing and highly competitive
merchandising industry. When The Price Company 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 has become the largest retailer in the United States and has expanded
into food merchandising. Target has also emerged as a significant retail
competitor. Approximately 750 warehouse clubs exist across the U.S. and Canada,
including the 254 warehouses operated by the Company in North America; and every
major metropolitan area has some, if not several, club operations. Low cost
operators selling a single category or narrow range of merchandise, such as Home
Depot, Office Depot, PetSmart, Toys-R-Us, Circuit City and Barnes & Noble, 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 and electronic commerce over the Internet is becoming
increasingly popular. Likewise, in the institutional food business, companies
such as Smart & Final, which operates in Arizona, California and Florida, are
capturing an increasingly greater share of the institutional food business from
wholesale operators and others; and many supermarkets now offer food lines in
bulk sizes and at prices comparable to those offered by the Company. (See
"Item--7 Management's Discussion and Analysis of Financial Condition and Results
of Operations")
REGULATION
Certain state laws require that the Company apply minimum markups to its
selling prices for specific goods, such as tobacco products and alcoholic
beverages. 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 August 31, 1997, Costco operated 261 warehouse clubs: 200 in the United
States (in 23 states); 54 in Canada (in 9 Canadian provinces); six in the United
Kingdom; and one in Taiwan--mainly under the "Costco Wholesale" name. 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 TOTAL
----------------- --------------------- -----
<S> <C> <C> <C>
UNITED STATES..................................... 160 40 200
CANADA............................................ 43 11 54
UNITED KINGDOM.................................... 6 -- 6
TAIWAN............................................ -- 1 1
--- --- ---
Total......................................... 209 52 261
--- --- ---
--- --- ---
</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, 1997:
<TABLE>
<CAPTION>
TOTAL
OTHER WAREHOUSES IN
OPENINGS BY FISCAL YEAR UNITED STATES CANADA INTERNATIONAL TOTAL OPERATION
- ---------------------------------------- ----------------- ----------- --------------- ----- ---------------
<S> <C> <C> <C> <C> <C>
1992 and prior.......................... 147 23 -- 170 170
1993.................................... 23 7 -- 30 200
1994.................................... 12 7 2 21 221
1995.................................... 9 8 2 19 240
1996.................................... 1 10 1 12 252
1997.................................... 8 (1) 2 9 261
1998 (through 12/31/97)................. 4 2 1 7 268
--- --- --- ---
Total............................... 204 56 8(a) 268
--- --- --- ---
--- --- --- ---
</TABLE>
- ------------------------
(a) As of August 31, 1997, 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). An additional warehouse was opened in Monterrey, Mexico in September,
1997. 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 their operations are not consolidated in the Company's
financial statements. Additionally, the Company operates two warehouses in
Korea under a licensing agreement. These warehouses are not included in the
number of warehouses open in any period because the arrangement is accounted
for as a licensing agreement.
The Company's headquarters are located in Issaquah, Washington.
Additionally, the Company maintains regional buying and administrative offices,
operates regional cross-docking facilities (depots) for the consolidation and
distribution of certain shipments to the warehouses and operates various
processing and packaging facilities to support ancillary businesses.
DISCONTINUED OPERATIONS--NON-CLUB REAL ESTATE SEGMENT
As a result of the 1995 spin-off of Price Enterprises, the Company's
business now consists primarily of its warehouse club operations in the United
States, Canada and the United Kingdom; and the Company has ceased to have any
significant real estate activities that are not directly related to its
warehouse club business.
7
<PAGE>
ITEM 3--LEGAL PROCEEDINGS
On April 6, 1992, The Price Company 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, The Price Company 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 Price 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 The
Price Company'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. In
February 1997, the Court granted the plaintiffs' motion for certification of a
class consisting of all purchasers of the common stock of The Price Company from
April 3, 1991 through April 2, 1992. 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.
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 January 21,
1998, at the Meydenbauer Center Hall in Bellevue, Washington. 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.
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 61 President and Chief Executive Officer
Jeffrey H. Brotman 55 Chairman of the Board
Richard D. DiCerchio 54 Sr. Executive Vice President, Chief Operating
Officer-- Merchandising, Distribution,
Construction and Marketing
Richard A. Galanti 41 Executive Vice President and Chief Financial
Officer
Franz E. Lazarus 50 Executive Vice President--International Operations
David B. Loge 55 Executive Vice President--Manufacturing and
Ancillary Businesses
Walter C. Jelinek 45 Executive Vice President, Chief Operating
Officer--Northern Division
Edward B. Maron 70 Executive Vice President, Chief Operating
Officer--Canadian Division
Joseph P. Portera 44 Executive Vice President, Chief Operating
Officer--Eastern Division
Dennis R. Zook 48 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 and The Price Company. From its inception until 1993, he
was President and Chief Operating Officer of Costco Wholesale Corporation and
served as Chief Executive Officer from August 1988 until October 1993. Mr.
Sinegal was a co-founder of Costco Wholesale Corporation and has been a director
since its inception.
8
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Jeffrey H. Brotman is a native of the Pacific Northwest and is a 1967
graduate of the University of Washington Law School. Mr. Brotman was a founder
and Chairman of the Board of Costco Wholesale Corporation from its inception.
Upon the consummation of the Merger, Mr. Brotman became the Vice Chairman of the
Company, and has served as Chairman since December, 1994. Mr. Brotman is a
founder of a number of other specialty retail chains. He is a director of
Starbucks Corp., the Sweet Factory and Garden Botanika, and serves as an
Advisory Board Member of Seafirst Bank.
Richard D. DiCerchio was named Senior Executive Vice President of the
Company in 1997. He has been Executive Vice President and Chief Operating
Officer--Merchandising, Distribution, Construction and Marketing and a director
of the Company since October 1993. Until mid-August 1994, he also served as
Executive Vice President, Chief Operating Officer--Northern Division. He was
appointed Chief Operating Officer--Western Region of Costco Wholesale
Corporation in August 1992 and was appointed Executive Vice President and
director of Costco Wholesale Corporation in April 1986. From June 1985 to April
1986, he was Senior Vice President, Merchandising of Costco Wholesale
Corporation. He joined Costco Wholesale Corporation as Vice President,
Operations in May 1983.
Richard A. Galanti has been Executive Vice President and Chief Financial
Officer of the Company since the Merger and has been a director of the Company
since January 1995. He was Senior Vice President, Chief Financial Officer and
Treasurer of Costco Wholesale Corporation since January 1985, having joined
Costco Wholesale Corporation as Vice President--Finance in March 1984. From 1978
to February 1984, Mr. Galanti was an Associate with Donaldson, Lufkin & Jenrette
Securities Corporation. Mr. Galanti also currently serves as a director of
Hollywood Entertainment Corporation.
Franz E. Lazarus was named Executive Vice President--International
Operations in September 1995, prior to which he had served as Executive Vice
President, Chief Operating Officer--Northern Division of the Company 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 Wholesale Corporation in
August 1992. Mr. Lazarus joined Costco Wholesale Corporation in November 1983
and has held various management positions prior to his current position.
David B. Loge has been Executive Vice President--Manufacturing and Ancillary
Businesses since August 1994. Mr. Loge joined The Price Company as a Director of
Price Club Industries in March 1989 and became a Vice President of The Price
Company and President of Price Club Industries in December 1990. Prior to
joining The Price Company, 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
Wholesale Corporation in April 1984.
Edward B. Maron has been Executive Vice President, Chief Operating
Officer--Canadian Division of the Company since the Merger. He had been Senior
Vice President--Canadian Division of Costco Wholesale Corporation since April
1990. He has held various management positions since joining Costco Wholesale
Corporation in June 1985.
Joseph P. Portera has been Executive Vice President, Chief Operating
Officer--Eastern Division of the Company 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 Wholesale Corporation, and has held various
management positions since joining Costco Wholesale Corporation in April 1984.
Dennis R. Zook has been Executive Vice President, Chief Operating
Officer--Southern Division of the Company since the Merger. He was Executive
Vice President of The Price Company since February 1989. Mr. Zook became Vice
President of West Coast Operations of The Price Company in
9
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October 1988 and has held various management positions since joining The Price
Company in October 1981.
PART II
ITEM 5--MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Trading in Costco Common Stock commenced on October 22, 1993, as
Price/Costco, Inc. quoted on The Nasdaq Stock Market's National Market under the
symbol "PCCW". On January 29, 1997, the shareholders of the Company approved a
name change to Costco Companies, Inc. The stock is now quoted on The Nasdaq
Stock Market's National Market under the symbol "COST."
The following table sets forth the closing high and low sales prices of
Costco Common Stock for the period January 1, 1995 through October 31, 1997. The
quotations are as reported in published financial sources.
<TABLE>
<CAPTION>
COSTCO COMMON STOCK
-------------------
HIGH LOW
-------- ---
<S> <C> <C>
Calendar Quarters--1995
First Quarter................................... 15 1/8 12
Second Quarter.................................. 16 5/8 13 5/16
Third Quarter................................... 19 1/2 16 1/4
Fourth Quarter.................................. 17 3/4 14 3/8
Calendar Quarters--1996
First Quarter................................... 19 1/2 14 3/4
Second Quarter.................................. 21 5/8 17 1/2
Third Quarter................................... 22 1/8 19 3/4
Fourth Quarter.................................. 25 5/8 19 1/8
Calendar Quarters--1997
First Quarter................................... 30 24 1/8
Second Quarter.................................. 35 3/16 26 7/8
Third Quarter................................... 39 1/8 31 7/16
Fourth Quarter (through October 31, 1997)....... 39 5/8 35 1/8
</TABLE>
On October 31, 1997, the Company had 7,611 stockholders of record.
DIVIDEND POLICY
Costco does not pay regular dividends and presently has no plans to declare
a cash dividend. Under its two revolving credit agreements, Costco 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
Costco for the ten fiscal years in the period ended August 31, 1997, giving
effect to the merger of Costco Wholesale Corporation and The Price Company using
the pooling-of-interests method of accounting and treating the non-club real
estate segment as a discontinued operation prior to its spin-off in 1994. This
selected financial and operating data should be read in conjunction with "Item
7--Management's Discussion and Analysis of Financial Condition and Results of
Operations," and the consolidated financial statements of Costco for fiscal
1997.
10
<PAGE>
COSTCO COMPANIES, INC.
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
52 WEEKS 52 WEEKS 53 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS
ENDED ENDED ENDED ENDED ENDED ENDED ENDED
AUGUST 31, SEPTEMBER 1, SEPTEMBER 3, AUGUST 28, AUGUST 29, AUGUST 30, SEPTEMBER 1,
1997 1996 1995 1994 1993 1992 1991
---------- ------------ ------------ ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA
Revenue
Net sales.......................... $21,484,118 $19,213,866 $17,905,926 $16,160,911 $15,154,685 $13,820,380 $11,813,509
Membership fees and other.......... 390,286 352,590 341,360 319,732 309,129 276,998 228,742
---------- ------------ ------------ ---------- ---------- ---------- ------------
Total revenue...................... 21,874,404 19,566,456 18,247,286 16,480,643 15,463,814 14,097,378 12,042,251
Operating expenses
Merchandise costs.................. 19,314,485 17,345,315 16,225,848 14,662,891 13,751,153 12,565,463 10,755,823
Selling, General &
Administrative................... 1,876,759 1,691,187 1,555,588 1,425,549 1,314,660 1,128,898 934,120
Preopening expenses................ 27,448 29,231 25,018 24,564 28,172 25,595 16,289
Provision for impaired assets and
warehouse closing costs.......... 75,000(a) 10,000 7,500 7,500 5,000 2,000 1,850
---------- ------------ ------------ ---------- ---------- ---------- ------------
Operating income................... 580,712 490,723 433,332 360,139 364,829 375,422 334,169
Other income (expense)
Interest expense................... (76,281) (78,078) (67,911) (50,472) (46,116) (35,525) (26,041)
Interest income and other.......... 15,898 10,832 2,783 13,888 17,750 28,958 33,913
Provision for merger and
restructuring expenses........... -- -- -- (120,000) -- -- --
---------- ------------ ------------ ---------- ---------- ---------- ------------
Income from continuing operations
before provision for income
taxes.............................. 520,329 423,477 368,204 203,555 336,463 368,855 342,041
Provision for income taxes........... 208,132 174,684 150,963 92,657 133,620 145,833 134,748
---------- ------------ ------------ ---------- ---------- ---------- ------------
Income from continuing operations.... 312,197 248,793 217,241 110,898 202,843 223,022 207,293
Discontinued operations:
Income (loss), net of tax........ -- -- -- (40,766) 20,404 19,385 11,566
Loss on disposal................. -- -- (83,363) (182,500) -- -- --
Extraordinary items................ -- -- -- -- -- -- --
---------- ------------ ------------ ---------- ---------- ---------- ------------
Net income (loss).................. $ 312,197 $ 248,793 $ 133,878 $ (112,368) $ 223,247 $ 242,407 $ 218,859
---------- ------------ ------------ ---------- ---------- ---------- ------------
---------- ------------ ------------ ---------- ---------- ---------- ------------
Per Share Data--Fully Diluted
Income from continuing
operations....................... $ 1.46 $ 1.22 $ 1.05 $ 0.51 $ 0.92 $ 0.98 $ 0.93
Discontinued Operations:
Income (loss), net of tax.......... -- -- -- (0.19) 0.08 0.08 0.05
Loss on Disposal................... -- -- (0.37) (0.83) -- -- --
Extraordinary items.................. -- -- -- -- -- -- --
---------- ------------ ------------ ---------- ---------- ---------- ------------
Net income (loss).................. $ 1.46 $ 1.22 $ 0.68 $ (0.51) $ 1.00 $ 1.06 $ 0.98
---------- ------------ ------------ ---------- ---------- ---------- ------------
---------- ------------ ------------ ---------- ---------- ---------- ------------
Shares used in calculation......... 226,195 218,363 224,079 219,334 240,162 245,090 234,202
<CAPTION>
52 WEEKS 53 WEEKS 52 WEEKS
ENDED ENDED ENDED
SEPTEMBER 2, SEPTEMBER 3, AUGUST 28,
1990 1989 1988
------------ ------------ -----------
<S> <C> <C> <C>
OPERATING DATA
Revenue
Net sales.......................... $9,346,099 $7,844,539 $6,042,159
Membership fees and other.......... 185,144 157,621 125,985
------------ ------------ -----------
Total revenue...................... 9,531,243 8,002,160 6,168,144
Operating expenses
Merchandise costs.................. 8,518,951 7,168,907 5,531,626
Selling, General &
Administrative................... 719,446 590,465 458,013
Preopening expenses................ 11,691 11,685 6,509
Provision for impaired assets and
warehouse closing costs.......... 6,000 1,609 4,000
------------ ------------ -----------
Operating income................... 275,155 229,494 167,996
Other income (expense)
Interest expense................... (18,769) (24,583) (20,949)
Interest income and other.......... 19,239 24,275 22,341
Provision for merger and
restructuring expenses........... -- -- --
------------ ------------ -----------
Income from continuing operations
before provision for income
taxes.............................. 275,625 229,186 169,388
Provision for income taxes........... 107,899 88,742 67,533
------------ ------------ -----------
Income from continuing operations.... 167,726 140,444 101,855
Discontinued operations:
Income (loss), net of tax........ 6,854 3,600 --
Loss on disposal................. -- -- --
Extraordinary items................ -- -- 2,856
------------ ------------ -----------
Net income (loss).................. $ 174,580 $ 144,044 $ 104,711
------------ ------------ -----------
------------ ------------ -----------
Per Share Data--Fully Diluted
Income from continuing
operations....................... $ 0.79 $ 0.69 $ 0.56
Discontinued Operations:
Income (loss), net of tax.......... 0.03 0.02 --
Loss on Disposal................... -- -- --
Extraordinary items.................. -- -- 0.02
------------ ------------ -----------
Net income (loss).................. $ 0.82 $ 0.71 $ 0.58
------------ ------------ -----------
------------ ------------ -----------
Shares used in calculation......... 219,532 212,772 181,336
</TABLE>
- ------------------------------
(a) Includes the effect of adopting SFAS 121, a $65,000 pre-tax ($38,675
after-tax or $0.17 per share) charge for asset impairment.
11
<PAGE>
COSTCO COMPANIES, INC.
SELECTED CONSOLIDATED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT WAREHOUSE DATA)
<TABLE>
<CAPTION>
AUGUST 31, SEPTEMBER 1, SEPTEMBER 3, AUGUST 28, AUGUST 29, AUGUST 30,
1997 1996 1995 1994 1993 1992
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Working capital (deficit)......... $ 145,903 $ 56,710 $ 9,381 $ (113,009) $ 127,312 $ 281,592
Property and equipment, net....... 3,154,634 2,888,310 2,535,593 2,146,396 1,966,601 1,704,052
Total assets...................... 5,476,314 4,911,861 4,437,419 4,235,659 3,930,799 3,576,543
Short-term debt................... 25,460 59,928 75,725 149,340 23,093 --
Long-term debt and capital lease
obligations, net................ 917,001 1,229,221 1,094,615 795,492 812,576 813,976
Stockholders' equity(a)(b)........ $ 2,468,116 $ 1,777,798 $ 1,530,744 $ 1,684,960 $ 1,796,728 $ 1,593,943
WAREHOUSES IN OPERATION
Beginning of year................. 252 240 221 200 170 140
Opened(c)......................... 17 20 24 29 37 31
Closed(d)......................... (8) (8) (5) (8) (7) (1)
------------ ------------ ------------ ------------ ------------ ------------
End of Year....................... 261 252 240 221 200 170
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
<CAPTION>
SEPTEMBER 1, SEPTEMBER 2, SEPTEMBER 3, AUGUST 28,
1991 1990 1989 1988
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA
Working capital (deficit)......... $ 304,703 $ 14,342 $ 103,252 $ 208,569
Property and equipment, net....... 1,183,432 935,767 752,912 511,784
Total assets...................... 2,986,094 2,029,931 1,740,332 1,445,814
Short-term debt................... -- 139,414 114,000 --
Long-term debt and capital lease
obligations, net................ 500,440 199,506 234,017 327,760
Stockholders' equity(a)(b)........ $ 1,429,703 $ 988,458 $ 777,730 $ 585,598
WAREHOUSES IN OPERATION
Beginning of year................. 119 104 84 77
Opened(c)......................... 23 19 20 10
Closed(d)......................... (2) (4) -- (3)
------------ ------------ ------------ ------------
End of Year....................... 140 119 104 84
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
- --------------------------
(a) In 1989 The Price Company paid to its shareholders a one-time special cash
dividend of $74,621 or $1.50 per share of The Price Company Common Stock.
(b) In 1989 stockholders' equity reflects a $20,100 reduction of retained
earnings related to conforming The Price Company's accounting for income tax
method to Costco Wholesale Corporation's accounting for income tax method as
of fiscal 1989.
(c) Includes relocations as well as new warehouse openings.
(d) Includes relocations as well as outright closings.
12
<PAGE>
ITEM 7--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
COMPARISON OF FISCAL 1997 (52 WEEKS) AND FISCAL 1996 (52 WEEKS):
(DOLLARS IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
Net operating results for fiscal 1997 reflect net income of $312,197 or
$1.46 per share (fully diluted), compared to a fiscal 1996 net income of
$248,793, or $1.22 per share (fully diluted). The net income for fiscal 1997
includes a non-cash, pre-tax charge of $65,000 ($38,675 after-tax, or $.17 per
share) reflecting a provision for the impairment of long-lived assets as
required by the Company's adoption of the Financial Accounting Standards Board
Statement No. 121. In addition, net income was impacted by one-time, pre-tax
charges of approximately $13,000 ($7,800 after-tax, or $.03 per share) related
to the call and majority redemption of $764,000 of convertible subordinated
debentures.
Net sales increased 12% to $21,484,118 in fiscal 1997 from $19,213,866 in
fiscal 1996. This increase was due to: (i) first year sales at the 17 new
warehouses opened during fiscal 1997, which increase was partially offset by
eight warehouses closed during fiscal 1997 that were in operation during fiscal
1996; (ii) increased sales at 20 warehouses that were opened in fiscal 1996 and
that were in operation for the entire 1997 fiscal year; and (iii) higher sales
at existing locations opened prior to fiscal 1996. 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 9% annual rate in fiscal 1997 compared to a 5% annual rate during
fiscal 1996. The improvement in comparable sales levels in fiscal 1997, as
compared to fiscal 1996, reflected continued marketing and merchandising
efforts, including the expansion of various ancillary businesses at certain
existing locations.
Membership fees and other revenue increased 11% to $390,286, or 1.82% of net
sales, in fiscal 1997 from $352,590, or 1.84% of net sales, in fiscal 1996. This
increase is primarily due to membership sign-ups at the 17 new warehouses opened
in fiscal 1997. The decrease as percent of sales is due to increasing sales
volumes.
Gross margin (defined as net sales minus merchandise costs) increased 16% to
$2,169,633, or 10.10% of net sales, in fiscal 1997 from $1,868,551, or 9.73% of
net sales, in fiscal 1996. Gross margin as a percentage of net sales increased
due to greater purchasing power, favorable inventory shrink results, the
expanded use of the Company's depot facilities, and improved performance of the
Company's international operations. The gross margin figures reflect accounting
for most U.S. merchandise inventories on the last-in, first-out (LIFO) method.
For both fiscal 1997 and 1996 there was no LIFO charge due to the use of the
LIFO method compared to the first-in, first-out (FIFO) method.
Selling, general and administrative expenses as a percent of net sales
decreased to 8.74% during fiscal 1997 from 8.80% during fiscal 1996, primarily
reflecting the increase in comparable warehouse sales noted above; and a
year-over-year improvement at the Company's core warehouse operations and
Central and Regional administrative offices, which was partially offset by
higher expenses associated with international expansion and certain ancillary
businesses.
Preopening expenses totaled $27,448, or 0.13% of net sales, during fiscal
1997 and $29,231, or 0.15% of net sales, during fiscal 1996. During fiscal 1997,
the Company opened 17 new warehouses compared to 20 new warehouses during fiscal
1996.
The provision for impaired assets and warehouse closing costs includes the
non-cash, pre-tax charge of $65,000 ($38,675 after-tax, or $.17 per share) for
the impairment of long-lived assets, discussed above, and a pre-tax provision
for warehouse closing costs of $10,000, or $.03 per share, during fiscal 1997.
The provision for warehouse closing costs includes estimated closing costs for
certain warehouses, which were or will be replaced by new warehouses. Warehouse
closing costs were $10,000 (pre-tax), or $.03 per share, in fiscal 1996.
13
<PAGE>
Interest expense totaled $76,281 in fiscal 1997, and $78,078 in fiscal 1996.
The decrease in interest expense is primarily related to the call for redemption
of three convertible subordinated debenture issues during fiscal 1997. Both the
Company's 6 3/4% ($285,100 principal amount), and 5 1/2% ($179,300 principal
amount) debentures were called for redemption in the second quarter of fiscal
1997. Approximately $302,000 of these two series of debentures were converted
into common stock, thereby eliminating future interest payments associated
therewith. The 5 3/4% ($300,000 principal amount) debentures were called for
redemption in the fourth quarter of fiscal 1997. The reduction in interest
expense related to the three redemptions was partially offset by the one-time
costs of the redemption call premiums and write-offs of unamortized issuance
costs associated with the redemptions of these convertible subordinated
debentures. Also, in the fourth quarter of fiscal 1997, the Company issued
$900,000 (principal amount at maturity) of Zero Coupon Convertible Subordinated
Notes, priced with a yield to maturity of 3 1/2%, resulting in gross proceeds to
the Company of $449,600, approximately $312,000 of which was used to redeem the
5 3/4% convertible subordinated debentures referred to above.
Interest income and other totaled $15,898 in fiscal 1997 compared to $10,832
in fiscal 1996. The increase was primarily due to the Company terminating
certain unconsolidated joint ventures which had been incurring losses and
improved earnings in its Mexico joint venture operation.
The effective income tax rate on earnings in fiscal 1997 was 40.0% compared
to a 41.25% effective tax rate in fiscal 1996. The decrease in the effective tax
rate was related primarily to decreases in foreign taxes.
COMPARISON OF FISCAL 1996 (52 WEEKS) AND FISCAL 1995 (53 WEEKS):
(DOLLARS IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
Net operating results for fiscal 1996 reflect net income of $248,793, or
$1.22 per share (fully diluted), as compared to a fiscal 1995 net income of
$133,878, or $.68 per share (fully diluted). The fiscal 1995 results include a
non-cash charge of $83,363, or $.37 per share, reflecting the final calculation
for the loss on the disposal of the discontinued real estate operations
following the completion of the spin-off of Price Enterprises.
CONTINUING OPERATIONS
Income from continuing operations for fiscal 1996 was $248,793, or $1.22 per
share (fully diluted), compared to income from continuing operations for fiscal
1995 of $217,241, or $1.05 per share.
Net sales increased 7% to $19,213,866 in fiscal 1996 (a 52-week year) from
$17,905,926 in fiscal 1995 (a 53-week year). This increase was due to: (i) first
year sales at the 20 new warehouses opened during fiscal 1996, which increase
was partially offset by eight warehouses closed during fiscal 1996 that were in
operation during fiscal 1995; (ii) increased sales at 24 warehouses that were
opened in fiscal 1995 and that were in operation for the entire 1996 fiscal
year; and (iii) higher sales at existing locations opened prior to fiscal 1995.
Changes in prices did not materially impact sales levels.
Comparable sales, that is sales in warehouses open for at least a year,
increased at a 5% annual rate in fiscal 1996, compared to a 2% annual rate
during fiscal 1995. The improvement in comparable sales levels in fiscal 1996,
as compared to fiscal 1995, reflects new marketing and merchandising efforts,
including the rollout of fresh foods and various ancillary businesses to certain
existing locations.
Membership fees and other revenue increased 3% to $352,590, or 1.84% of net
sales, in fiscal 1996 from $341,360, or 1.91% of net sales, in fiscal 1995. This
increase was primarily due to membership sign-ups at the 20 new warehouses
opened in fiscal 1996. Effective with renewals in the United States, subsequent
to April 1, 1996, the Company increased the annual membership fee for its
Business "Add-on" members from $15 to $20. There were approximately 3.4 million
"Add-on" members as of fiscal 1996 year-end.
14
<PAGE>
Gross margin (defined as net sales minus merchandise costs) increased 11% to
$1,868,551, or 9.73% of net sales, in fiscal 1996 from $1,680,078, or 9.38% of
net sales, in fiscal 1995. Gross margin as a percentage of net sales increased
due to greater purchasing power realized since the merger of Costco Wholesale
Corporation and The Price Company, favorable inventory shrink results, the
expanded use of the Company's depot facilities and increased sales penetration
of certain ancillary businesses. The gross margin figures reflect accounting for
most U.S. merchandise inventories on the last-in, first-out (LIFO) method. For
fiscal 1996 there was no LIFO charge due to the use of the LIFO method compared
to the first-in, first-out (FIFO) method. This compares to a $9,500 LIFO charge,
or $.03 per share (fully diluted), in fiscal 1995.
Selling, general and administrative expenses as a percent of net sales
increased to 8.80% during fiscal 1996 from 8.69% during fiscal 1995, primarily
reflecting higher expenses associated with international expansion and certain
ancillary operations. In addition, as a result of a strong second half
performance, the Company achieved its annual profit goals for the 1996 fiscal
year, resulting in a year-over-year increase of $11,200 in the employee bonus
accrual, which covers bonuses payable to more than seven hundred management
employees participating in the Company's Annual Bonus Plan.
Preopening expenses totaled $29,231, or 0.15% of net sales, during fiscal
1996 and $25,018, or 0.14% of net sales, during fiscal 1995. During fiscal 1996,
the Company opened 20 new warehouses compared to 24 new warehouses opened during
fiscal 1995. Fiscal 1996 preopening expenses also included an increased level of
costs associated with remodeling and expanding fresh foods and ancillary
operations at existing warehouses.
The Company recorded a pre-tax provision for warehouse closing costs of
$10,000, or $.03 per share, on an after-tax basis (fully diluted) in fiscal
1996. The provision included estimated closing costs for certain warehouses,
which were or will be replaced by new warehouses, the closing of a regional
office and additional costs related to warehouse clubs closed in prior years.
Warehouse closing costs were $7,500 (pre-tax), or $.02 per share, in fiscal
1995.
Interest expense totaled $78,078 in fiscal 1996, and $67,911 in fiscal 1995.
In both fiscal years, interest expense was incurred as a result of the interest
on the convertible subordinated debentures and interest on borrowings on the
Company's bank lines and commercial paper programs. The increase in interest
expense is primarily related to higher borrowings and interest rates under the
Company's bank lines and commercial paper programs and the issuance of $300,000
in Senior Notes in June 1995.
Interest income and other totaled $10,832 in fiscal 1996, and $2,783 in
fiscal 1995. This increase was primarily due to the Company reflecting a
reduction in its share of losses in certain unconsolidated joint ventures,
(primarily PriceQuest) and an increase in income from its joint venture with
Price Club Mexico.
In fiscal 1996 and 1995, the effective income tax rate on income from
continuing operations before provision for income taxes was 41.25% and 41.00%
respectively.
Discontinued operations in fiscal 1995 included a non-cash charge of
$83,363, or $.37 per share, reflecting the final calculation for the loss on
disposal of the discontinued real estate operations. These charges related to
the transfer of the Company's commercial real estate operations, together with
certain other assets, to Price Enterprises as part of the Exchange Transaction.
The Exchange Transaction was completed on December 20, 1994, and the estimated
loss on disposal was adjusted to actual. For a more detailed discussion of the
Exchange Transaction, see "Note 2--Spin-off of Price Enterprises, Inc. and
Discontinued Operations."
RECENT SALES RESULTS
(DOLLARS IN THOUSANDS)
Costco's net sales for the nine-week period ended November 2, 1997 were
approximately $3,860,000, an increase of 11% from approximately $3,470,000 for
the same nine-week period of the prior fiscal year.
15
<PAGE>
Comparable warehouse sales (sales in warehouses open for at least a year)
increased by eight percent during the nine-week period.
LIQUIDITY AND CAPITAL RESOURCES
(DOLLARS IN THOUSANDS)
The discussion below contains forward-looking statements that involve risks
and uncertainties, and should be read in conjunction with the Company's reports
filed previously with the Securities and Exchange Commission. Actual results may
differ materially.
EXPANSION PLANS
Costco'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.
While there can be no assurance that current expectations will be realized,
and plans are subject to change upon further review, it is management's current
intention to spend an aggregate of approximately $400,000 to $450,000 during
fiscal 1998 in the United States and Canada for real estate, construction,
remodeling and equipment for warehouse clubs and related operations; and
approximately $80,000 to $100,000 for international expansion, including Mexico,
the United Kingdom, Asia 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 $175,508 at August 31, 1997); if necessary,
short-term borrowings under revolving credit facilities and/or commercial paper
facilities; and other financing sources as required.
Expansion plans for the United States and Canada during fiscal 1998 are to
open approximately 20 new warehouse clubs, including one or two relocations. The
Company expects to continue expansion of its international operations and plans
to open one or two additional units in the United Kingdom through its 60%-owned
subsidiary during fiscal 1998. Additionally the Company expects to open one
warehouse in Taiwan through a joint venture. Other international markets are
being assessed, particularly in the Pacific Rim.
The Company has entered into a purchase agreement with Hechinger Company to
acquire seven of Hechinger's locations in Michigan. The acquisition is subject
to certain conditions including third party approvals and permits. The Company
intends to invest approximately $80,000 in these facilities, including the
initial warehouse purchase and remodeling costs and working capital
requirements.
Costco 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.
As of August 31, 1997, Price Club Mexico operated 13 Price Club warehouses in
Mexico and one additional warehouse was opened in September 1997.
COMMERCIAL PAPER PROGRAMS AND BANK CREDIT FACILITIES (ALL AMOUNTS STATED IN US
DOLLARS)
The Company has in place a $500,000 commercial paper program supported by a
$500,000 bank credit facility with a group of 12 banks, of which $250,000
expires on January 26, 1998, and $250,000 expires on January 30, 2001. At August
31, 1997, no amount was outstanding under the loan facility or the commercial
paper program.
In addition, a wholly-owned Canadian subsidiary has a $144,000 commercial
paper program supported by a $101,000 bank credit facility with three Canadian
banks, of which $61,000 expires in March 1998 and $40,000 expires in March 1999.
At August 31, 1997, no amount was outstanding under the bank credit facility and
$25,460 was outstanding under the Canadian commercial paper program.
16
<PAGE>
The Company has agreed to limit the combined amount outstanding under the
U.S. and Canadian commercial paper programs to the $601,000 combined amounts of
the respective supporting bank credit facilities.
LETTERS OF CREDIT
The Company has separate letter of credit facilities (for commercial and
standby letters of credit), totaling approximately $254,000. The outstanding
commitments under these facilities at August 31, 1997 totaled approximately
$184,000, including approximately $42,000 in standby letters of credit for
workers' compensation requirements.
REDEMPTION/CONVERSION OF CONVERTIBLE SUBORDINATED DEBENTURES
On November 19, 1996, The Price Company, a wholly-owned subsidiary of the
Company, called for redemption all $285,100 of its 6 3/4% Convertible
Subordinated Debentures due 2001. On the redemption date, December 4, 1996,
approximately $159,400 principal amount of the Debentures were converted into
approximately 7.1 million shares of Costco Common Stock and the remaining
$125,700 of Debentures were redeemed at a total cost of $130,300 (including
accrued interest and redemption premium). The redemption portion of the
transaction was initially financed with short-term bank borrowings.
On December 16, 1996, The Price Company called for redemption all $179,300
of its 5 1/2% Convertible Subordinated Debentures due 2012. On the redemption
date, January 6, 1997, approximately $142,700 principal amount of the Debentures
were converted into approximately 6.0 million shares of Costco Common Stock and
the remaining $36,600 of Debentures were redeemed at a total cost of $37,500
(including accrued interest and redemption premium). The redemption portion of
the transaction was paid with cash on hand.
On August 4, 1997, Costco Wholesale Corporation, a wholly-owned subsidiary
of the Company, called for redemption all $300,000 of its 5 3/4% Convertible
Subordinated Debentures due 2002. On the redemption date, August 21, 1997,
virtually all of the Debentures were redeemed at a total cost of $312,000
(including accrued interest and redemption premium). The transaction was
financed with proceeds from the issuance of 3 1/2% Zero Coupon Convertible
Subordinated Notes (see below).
On August 19, 1997, the Company completed the sale of $900,000 principal
amount at maturity of Zero Coupon Subordinated Notes (the "Notes") due August
19, 2017. The Notes were priced with a yield to maturity of 3 1/2%, resulting in
gross proceeds to the Company of $449,640. The Notes are convertible into a
maximum of 10,219,090 shares of Costco Common Stock at an initial conversion
price of $44.00 per share. Holders of the notes may require the Company to
purchase the Notes (at the discounted issue price plus accrued interest to date
of purchase) on August 19, 2002, 2007, or 2012. The Company, at its option, may
redeem the Notes (at the discounted issue price plus accrued interest to date of
redemption) any time on or after August 19, 2002. Approximately $312,000 of the
proceeds from the offering were used to redeem Costco Wholesale Corporation's
$300,000 principal amount of 5 3/4% Convertible Subordinated Debentures due
2002, including the redemption premium and accrued interest. The remaining
proceeds will be used for general corporate purposes.
The Company has limited involvement with derivative financial instruments
and uses them only 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
1997 was immaterial to the Company's results of operations or its financial
position.
17
<PAGE>
FINANCIAL POSITION AND CASH FLOWS
Due to rapid inventory turnover, the Company's operations provide a higher
level of supplier trade payables in relation to inventory than generally
encountered in other forms of retailing. When combined with other current
liabilities, the resulting amount typically approaches or exceeds the current
assets needed to operate the business (e.g., merchandise inventories, accounts
receivable and other current assets). Working capital totaled approximately
$146,000 at August 31, 1997, compared to working capital of $57,000 at September
1, 1996. The increase in net working capital was primarily due to an increase in
cash and cash equivalents of approximately $74,000, an increase in owned
inventories (inventories less accounts payable) of approximately $27,000,
increases in receivables and other current assets of approximately $22,000,
reductions in short-term borrowings of approximately $34,000, offset by
increases in accrued salaries and benefits of approximately $46,000 and
increases in other current liabilities of approximately $23,000.
Net cash provided by operating activities totaled $590,249 in fiscal 1997
compared to $426,359 in fiscal 1996. The increase in net cash from operating
activities is primarily a result of increased net income, adjusted for the
non-cash provision for asset impairments, and decreased owned inventory during
fiscal 1997 compared to fiscal 1996.
Net cash used in investing activities totaled $543,173 in fiscal 1997
compared to $543,249 in fiscal 1996. The investing activities primarily relate
to additions to property and equipment for new and remodeled warehouses of
$553,374 and $506,782 in fiscal 1997 and 1996, respectively. Additionally, the
Company received proceeds from the sale of property and equipment of $40,946 in
fiscal 1997 compared to $4,665 in fiscal 1996.
Net cash provided by financing activities totaled $25,144 in fiscal 1997
compared to $173,749 in fiscal 1996. This decrease is due to the redemption of
the convertible debentures in fiscal 1997, partially offset by utilizing
short-term borrowings and issuing the Zero Coupon Subordinated Notes.
The Company's balance sheet as of August 31, 1997 reflects a $564,453 or 11%
increase in total assets since September 1, 1996. The increase is primarily due
to a net increase in property and equipment and merchandise inventory related to
the Company's expansion program.
ITEM 8--FINANCIAL STATEMENTS
Financial statements of Costco are as follows:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................................. 22
Consolidated Balance Sheets, as of August 31, 1997 and September 1,
1996..................................................................... 23
Consolidated Statements of Operations, for the 52 weeks ended August 31,
1997 and
September 1, 1996, and the 53 weeks ended September 3, 1995.............. 24
Consolidated Statements of Stockholders' Equity, for the 52 weeks ended
August 31, 1997 and
September 1, 1996, and the 53 weeks ended September 3, 1995.............. 25
Consolidated Statements of Cash Flows, for the 52 weeks ended August 31,
1997 and
September 1, 1996, and the 53 weeks ended September 3, 1995.............. 26
Notes to Consolidated Financial Statements................................ 27
</TABLE>
ITEM 9--CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
18
<PAGE>
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
Costco's Proxy Statement for its Annual Meeting of Stockholders, to be held on
January 21, 1998, to be filed with the Securities and Exchange Commission within
120 days of the end of the Company's fiscal year.
ITEM 11--EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference to
Costco's Proxy Statement for its Annual Meeting of Stockholders, to be held on
January 21, 1998, to be filed with the Securities and Exchange Commission within
120 days of the end of the Company's fiscal year.
ITEM 12--SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated herein by reference to
Costco's Proxy Statement for its Annual Meeting of Stockholders to be held on
January 21, 1998 to be filed with the Securities and Exchange Commission within
120 days of the end of the Company's fiscal year.
ITEM 13--CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by reference to
Costco's Proxy Statement for its Annual Meeting of Stockholders, to be held on
January 21, 1998 to be filed with the Securities and Exchange Commission within
120 days of the end of the Company's fiscal year.
PART IV
ITEM 14--EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report are as follows:
1. Financial Statements:
See listing of Financial Statements included as a part of this Form
10-K on Item 8 of Part II.
2. Financial Statement Schedules--None.
3. Exhibits:
The required exhibits are included at the end of the Form 10-K Annual
Report and are described in the Exhibit Index immediately preceding
the first exhibit.
(b) Current Report on Form 8-K was filed on August 18, 1997, reporting Item
5.
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 7, 1997
COSTCO COMPANIES, 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>
<C> <S>
By /s/ JAMES D. SINEGAL November 7, 1997
---------------------------------------------
James D. Sinegal
PRESIDENT, CHIEF EXECUTIVE OFFICER
AND DIRECTOR
By /s/ JEFFREY H. BROTMAN November 7, 1997
---------------------------------------------
Jeffrey H. Brotman
CHAIRMAN OF THE BOARD
By /s/ RICHARD D. DICERCHIO November 7, 1997
---------------------------------------------
Richard D. DiCerchio
SR. EXECUTIVE VICE PRESIDENT, CHIEF OPERATING
OFFICER-MERCHANDISING, DISTRIBUTION,
CONSTRUCTION AND MARKETING AND DIRECTOR
By /s/ RICHARD A. GALANTI November 7, 1997
---------------------------------------------
Richard A. Galanti
EXECUTIVE VICE PRESIDENT, CHIEF FINANCIAL
OFFICER AND DIRECTOR (PRINCIPAL FINANCIAL
OFFICER)
By /s/ DAVID S. PETTERSON November 7, 1997
---------------------------------------------
David S. Petterson
SENIOR VICE PRESIDENT AND CONTROLLER
(PRINCIPAL ACCOUNTING OFFICER)
By /s/ HAMILTON E. JAMES November 7, 1997
---------------------------------------------
Hamilton E. James
DIRECTOR
</TABLE>
20
<PAGE>
<TABLE>
<C> <S>
By /s/ RICHARD M. LIBENSON November 7, 1997
---------------------------------------------
Richard M. Libenson
DIRECTOR
By /s/ JOHN W. MEISENBACH November 7, 1997
---------------------------------------------
John W. Meisenbach
DIRECTOR
By /s/ CHARLES T. MUNGER November 7, 1997
---------------------------------------------
Charles T. Munger
DIRECTOR
By /s/ FREDERICK O. PAULSELL November 7, 1997
---------------------------------------------
Frederick O. Paulsell
DIRECTOR
By /s/ JILL S. RUCKELSHAUS November 7, 1997
---------------------------------------------
Jill S. Ruckelshaus
DIRECTOR
</TABLE>
21
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Costco Companies, Inc.:
We have audited the accompanying consolidated balance sheets of Costco
Companies, Inc. (a Delaware corporation) and subsidiaries (Costco) as of August
31, 1997 and September 1, 1996, and the related consolidated statements of
operations, stockholders' equity and cash flows for the 52 weeks ended August
31, 1997 and September 1, 1996, and the 53 weeks ended September 3, 1995. These
financial statements are the responsibility of Costco's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Costco as of August 31, 1997
and September 1, 1996, and the results of its operations and its cash flows for
the 52 weeks ended August 31, 1997 and September 1, 1996, and the 53 weeks ended
September 3, 1995 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Seattle, Washington
October 13, 1997
22
<PAGE>
COSTCO COMPANIES, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS EXCEPT PAR VALUE)
ASSETS
<TABLE>
<CAPTION>
AUGUST 31, SEPTEMBER 1,
1997 1996
----------- ------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents........................................................... $ 175,508 $ 101,955
Receivables, net.................................................................... 147,133 137,467
Merchandise inventories, net........................................................ 1,686,525 1,500,842
Other current assets................................................................ 100,784 88,040
----------- ------------
Total current assets.............................................................. 2,109,950 1,828,304
----------- ------------
PROPERTY AND EQUIPMENT
Land and land rights................................................................ 1,094,607 1,055,208
Buildings and leasehold and land improvements....................................... 1,933,740 1,667,697
Equipment and fixtures.............................................................. 840,578 716,448
Construction in progress............................................................ 81,417 104,183
----------- ------------
3,950,342 3,543,536
Less-accumulated depreciation and amortization...................................... (795,708) (655,226)
----------- ------------
Net property and equipment........................................................ 3,154,634 2,888,310
----------- ------------
OTHER ASSETS.......................................................................... 211,730 195,247
----------- ------------
$ 5,476,314 $4,911,861
----------- ------------
----------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bank checks outstanding............................................................. $ 14,930 $ 22,330
Short-term borrowings............................................................... 25,460 59,928
Accounts payable.................................................................... 1,379,379 1,220,426
Accrued salaries and benefits....................................................... 302,681 256,951
Accrued sales and other taxes....................................................... 90,774 84,545
Other current liabilities........................................................... 150,823 127,414
----------- ------------
Total current liabilities......................................................... 1,964,047 1,771,594
LONG-TERM DEBT........................................................................ 917,001 1,229,221
DEFERRED INCOME TAXES................................................................. 33,544 56,734
OTHER LIABILITIES..................................................................... 5,423 4,168
----------- ------------
Total liabilities................................................................. 2,920,015 3,061,717
----------- ------------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST..................................................................... 88,183 72,346
----------- ------------
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; 213,593,000 and
196,436,000 shares issued and outstanding......................................... 2,136 1,964
Additional paid-in capital.......................................................... 706,324 321,832
Accumulated foreign currency translation............................................ (78,426) (71,883)
Retained earnings................................................................... 1,838,082 1,525,885
----------- ------------
Total stockholders' equity........................................................ 2,468,116 1,777,798
----------- ------------
$ 5,476,314 $4,911,861
----------- ------------
----------- ------------
</TABLE>
The accompanying notes are an integral part of these balance sheets.
23
<PAGE>
COSTCO COMPANIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
52 WEEKS 52 WEEKS 53 WEEKS
ENDED ENDED ENDED
AUGUST 31, SEPTEMBER 1, SEPTEMBER 3,
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
REVENUE
Net sales....................................................... $ 21,484,118 $ 19,213,866 $ 17,905,926
Membership fees and other....................................... 390,286 352,590 341,360
------------- ------------- -------------
Total revenue................................................. 21,874,404 19,566,456 18,247,286
OPERATING EXPENSES
Merchandise costs............................................... 19,314,485 17,345,315 16,225,848
Selling, general and administrative............................. 1,876,759 1,691,187 1,555,588
Preopening expenses............................................. 27,448 29,231 25,018
Provision for impaired assets and warehouse
closing costs................................................. 75,000 10,000 7,500
------------- ------------- -------------
Operating income.............................................. 580,712 490,723 433,332
OTHER INCOME (EXPENSE)
Interest expense................................................ (76,281) (78,078) (67,911)
Interest income and other....................................... 15,898 10,832 2,783
------------- ------------- -------------
INCOME FROM CONTINUING OPERATIONS BEFORE PROVISION FOR INCOME
TAXES........................................................... 520,329 423,477 368,204
Provision for income taxes...................................... 208,132 174,684 150,963
------------- ------------- -------------
INCOME FROM CONTINUING OPERATIONS................................. 312,197 248,793 217,241
DISCONTINUED OPERATIONS:
Loss on disposal................................................ -- -- (83,363)
------------- ------------- -------------
NET INCOME........................................................ $ 312,197(a) $ 248,793 $ 133,878
------------- ------------- -------------
------------- ------------- -------------
NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE--
PRIMARY:
Continuing operations:.......................................... $ 1.47 $ 1.24 $ 1.06
------------- ------------- -------------
------------- ------------- -------------
FULLY DILUTED:
Continuing operations:.......................................... $ 1.46 $ 1.22 $ 1.05
Discontinued operations:
Loss on disposal.............................................. -- -- (0.37)
------------- ------------- -------------
Net income...................................................... $ 1.46(a) $ 1.22 $ 0.68
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
- ------------------------
(a) Net income and net income per common and common equivalent share would have
been $350,872 and $1.63, respectively, without the effect of adopting SFAS
No. 121, using 226,195 fully-diluted shares.
The accompanying notes are an integral part of these financial statements.
24
<PAGE>
COSTCO COMPANIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE 52 WEEKS ENDED AUGUST 31, 1997 AND SEPTEMBER 1, 1996,
AND THE 53 WEEKS ENDED SEPTEMBER 3, 1995
(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 28, 1994...................... 217,795 $ 2,178 $ 582,148 $ (42,580) $ 1,143,214 $ 1,684,960
Stock options exercised including income tax
benefits.................................... 593 6 4,071 -- -- 4,077
Shares exchanged.............................. (23,224) (232) (282,230) -- -- (282,462)
Net income.................................... -- -- -- -- 133,878 133,878
Foreign currency translation adjustment....... -- -- -- (9,709) -- (9,709)
--------- --------- ----------- ------------ ------------ ------------
BALANCE AT SEPTEMBER 3, 1995.................... 195,164 1,952 303,989 (52,289) 1,277,092 1,530,744
Stock options exercised including income tax
benefits.................................... 1,272 12 17,843 -- -- 17,855
Net income.................................... -- -- -- -- 248,793 248,793
Foreign currency translation adjustment....... -- -- -- (19,594) -- (19,594)
--------- --------- ----------- ------------ ------------ ------------
BALANCE AT SEPTEMBER 1, 1996.................... 196,436 1,964 321,832 (71,883) 1,525,885 1,777,798
Stock options exercised including income tax
benefits.................................... 4,077 41 78,186 -- -- 78,227
Conversion of convertible debentures.......... 13,080 131 306,306 -- -- 306,437
Net income.................................... -- -- -- -- 312,197 312,197
Foreign currency translation adjustment....... -- -- -- (6,543) -- (6,543)
--------- --------- ----------- ------------ ------------ ------------
BALANCE AT AUGUST 31, 1997...................... 213,593 $ 2,136 $ 706,324 $ (78,426) $ 1,838,082 $ 2,468,116
--------- --------- ----------- ------------ ------------ ------------
--------- --------- ----------- ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
25
<PAGE>
COSTCO COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
52 WEEKS 52 WEEKS 53 WEEKS
ENDED ENDED ENDED
AUGUST 31, SEPTEMBER 1, SEPTEMBER 3,
1997 1996 1995
----------- ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................................................ $ 312,197 $ 248,793 $ 133,878
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization......................................... 182,326 161,632 142,022
Net (gain) loss on sale of property and equipment and other........... (602) 3,494 (384)
Provision for asset impairments....................................... 65,000 -- --
Loss on disposal of discontinued operations........................... -- -- 83,363
Decrease in deferred income taxes..................................... (4,322) (4,520) (3,559)
Change in receivables, other current assets, accrued and other current
liabilities......................................................... 66,303 105,156 (81,729)
Increase in merchandise inventories................................... (189,323) (82,411) (160,114)
Increase (decrease) in accounts payable............................... 162,628 (8,345) 155,851
Other................................................................. (3,958) 2,560 9,054
----------- ------------ ------------
Total adjustments................................................... 278,052 177,566 144,504
----------- ------------ ------------
Net cash provided by operating activities........................... 590,249 426,359 278,382
----------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property and equipment................................... (553,374) (506,782) (530,638)
Proceeds from the sale of property and equipment...................... 40,946 4,665 7,337
Investment in unconsolidated joint ventures........................... (4,750) (5,312) (11,487)
Decrease in short-term investments and restricted cash................ -- -- 9,268
Increase in other assets and other, net............................... (25,995) (35,820) (10,932)
----------- ------------ ------------
Net cash used in investing activities................................. (543,173) (543,249) (536,452)
----------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments under short-term credit facilities, net.................... (33,990) (14,354) (73,194)
Net proceeds from issuance of long-term debt.......................... 461,035 141,851 299,026
Repayments of long-term debt.......................................... (471,791) (3,270) (3,194)
Changes in bank overdraft............................................. (7,244) 9,835 5,668
Proceeds from minority interests...................................... 15,119 21,832 16,603
Exercise of stock options............................................. 62,015 17,855 4,077
----------- ------------ ------------
Net cash provided by financing activities............................. 25,144 173,749 248,986
----------- ------------ ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH................................. 1,333 (592) 1,134
----------- ------------ ------------
Net increase (decrease) in cash and cash equivalents.................. 73,553 56,267 (7,950)
CASH AND CASH EQUIVALENTS BEGINNING OF YEAR............................. 101,955 45,688 53,638
----------- ------------ ------------
CASH AND CASH EQUIVALENTS END OF YEAR................................... $ 175,508 $ 101,955 $ 45,688
----------- ------------ ------------
----------- ------------ ------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest (excludes amounts capitalized and paid for redemption
premiums)........................................................... $ 76,233 $ 65,752 $ 75,583
Income taxes.......................................................... $ 195,241 $ 163,004 $ 165,269
</TABLE>
The accompanying notes are an integral part of these financial statements.
26
<PAGE>
COSTCO COMPANIES, 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 Costco
Companies, Inc., a Delaware corporation, and its subsidiaries ("Costco" or the
"Company"). On January 29, 1997, the shareholders of the Company approved a name
change from Price/Costco, Inc. to Costco Companies, Inc. Costco is a holding
company which operates primarily through its major subsidiaries, The Price
Company and subsidiaries, and Costco Wholesale Corporation and subsidiaries. All
intercompany transactions between the Company and its subsidiaries have been
eliminated in consolidation. The Price Company and Costco Wholesale Corporation
primarily operate membership warehouses under the Costco Wholesale name.
Costco operates membership warehouses that offer very low prices on a
limited selection of nationally-branded and selected private label products in a
wide range of merchandise categories in no-frills, self-service warehouse
facilities. At August 31, 1997, Costco operated 261 warehouse clubs: 200 in the
United States (in 23 states); 54 in Canada (in nine Canadian provinces); six in
the United Kingdom; and one in Taiwan--primarily under the "Costco Wholesale"
name. As of August 31, 1997, the Company also operated (through a 50%-owned
joint venture) 13 warehouses in Mexico, and had a license agreement for the
operation of two membership warehouses in Korea.
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 years 1997 and 1996 were 52 weeks, and fiscal
year 1995 was 53 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. Unrealized holding gains and losses were not significant.
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 $4,360 at August 31, 1997 and $3,498 at September 1, 1996.
27
<PAGE>
COSTCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
MERCHANDISE INVENTORIES
Merchandise inventories are valued at the lower of cost or market as
determined primarily by the retail inventory method, and are stated using the
last-in, first-out (LIFO) method for substantially all U.S. merchandise
inventories. The Company believes the LIFO method more fairly presents the
results of operations by more closely matching current costs with current
revenues. If all merchandise inventories had been valued using the first-in,
first-out (FIFO) method, inventories would have been higher by $16,150 at both
August 31, 1997 and September 1, 1996.
<TABLE>
<CAPTION>
AUGUST 31, SEPTEMBER 1,
1997 1996
------------ ------------
<S> <C> <C>
Merchandise inventories consist of:
United States (primarily LIFO).................................. $ 1,358,917 $1,216,131
Foreign (FIFO).................................................. 327,608 284,711
------------ ------------
Total......................................................... $ 1,686,525 $1,500,842
------------ ------------
------------ ------------
</TABLE>
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.
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 $4,097 in fiscal 1997, $5,612 in fiscal
1996, and $3,275 in fiscal 1995.
GOODWILL
Goodwill, included in other assets, totaled $48,136 at August 31, 1997 and
$50,746 at September 1, 1996, resulting from certain previous business
combinations and the purchase of Price Enterprises' interest in Price Club
Mexico in March 1995. Goodwill is being amortized over 5 to 40 years using the
straight-line method. Accumulated amortization was $11,574 at August 31, 1997,
and $8,815 at September 1, 1996.
NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE
The calculation of net income per common and common equivalent share for
each period eliminates interest expense, net of income taxes, on the 5 1/2%
convertible subordinated debentures (primary and fully diluted), the 6 3/4%
convertible subordinated debentures (fully diluted only), and includes the
additional shares issuable upon conversion of these instruments for the portion
of the year they were outstanding. In
28
<PAGE>
COSTCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
fiscal year 1997, the calculation also eliminates the 5 3/4% convertible
subordinated debentures (fully diluted only), and the 3 1/2% zero coupon
subordinated notes and includes the additional shares issuable upon conversion
of these instruments for the portion of the year they were outstanding. The
weighted average number of common and common equivalent shares outstanding for
primary and fully diluted share calculations for fiscal 1997, 1996, and 1995
were as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Primary...................................................... 214,349 205,242 210,962
Fully diluted................................................ 226,195 218,363 224,079
</TABLE>
PREOPENING EXPENSES
Preopening expenses related to new warehouses, major remodels/expansions,
regional offices and other startup operations are expensed as incurred.
MEMBERSHIP FEES
Membership fee revenue represents annual membership fees paid by
substantially all of the Company's members. In accordance with historical and
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 as well as its investment in the Price Club
Mexico joint venture (prior to the 1997 calendar year). Foreign currency
translation is determined by application of the current rate method and included
in the determination of consolidated stockholders' equity at the respective
balance sheet dates.
Because cumulative inflation in Mexico exceeded 100% in the three-year
calendar period 1994-1996, a hyper-inflation accounting treatment is required in
calendar 1997, whereby foreign currency translation gains or losses are
reflected in the Statement of Operations rather than as an adjustment to
stockholders' equity. For the first nine months of calendar year 1997,
translation gains and losses were not material.
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 1997 NON-CASH ACTIVITIES
- In December 1996, approximately $159,400 principal amount of the $285,100,
6 3/4% Convertible Subordinated Debentures were converted into
approximately 7.1 million shares of Costco Common Stock as a result of a
call for redemption of the $285,100 Convertible Subordinated Debentures.
29
<PAGE>
COSTCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
- In January 1997, approximately $142,700 principal amount of the $179,300,
5 1/2% Convertible Subordinated Debentures were converted into
approximately 6.0 million shares of Costco Common Stock as a result of the
call for redemption of the Convertible Subordinated Debentures.
- In fiscal 1997, the Company recorded a pre-tax, non-cash charge of $65,000
reflecting its estimate of impairment relating principally to excess
property and closed warehouses in connection with the adoption of the
Financial Accounting Standards Board Statement No. 121.
FISCAL 1996 NON-CASH ACTIVITIES
- None.
FISCAL 1995 NON-CASH ACTIVITIES
- During December 1994, the Company exchanged approximately 23.2 million
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 approximately 3.8 million shares
of Price Enterprises common stock valued at $45,925 for an
interest-bearing note receivable from Price Enterprises.
- As of August 28, 1994, the net assets of Price Enterprises consisted
primarily of the discontinued operations net assets of $377,085 and
certain other assets. In connection with the spin-off of Price
Enterprises, all of these assets were eliminated from the Company's
consolidated balance sheet during fiscal 1995. For additional information
see "Note 2--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.
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 1997 was immaterial to the Company's results of operations or its
financial position.
ADOPTION OF FINANCIAL ACCOUNTING STANDARDS BOARD STATEMENT NO. 121
The Company adopted the Financial Accounting Standards Board Statement No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" (SFAS No. 121), as of the first quarter of fiscal
1997. In accordance with SFAS No. 121, the Company recorded a pretax, non-cash
charge of $65,000 reflecting its estimate of impairment relating principally to
excess property and
30
<PAGE>
COSTCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
closed warehouses. The charge reflects the difference between carrying value and
fair value, which was based on market valuations for those assets whose carrying
value was not recoverable through future cash flows.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings per Share" (SFAS No. 128). SFAS No. 128 establishes new
standards for computing and presenting earnings per share (EPS) for entities
with publicly-held common stock. The Company is required to adopt SFAS No. 128
at the beginning of fiscal 1998. If the provisions of SFAS No. 128 had been used
to calculate EPS for the 1997 and 1996 fiscal years, proforma EPS would have
been:
<TABLE>
<CAPTION>
52 WEEKS ENDED
------------------------------
SEPTEMBER 1,
AUGUST 31, 1997 1996
--------------- -------------
<S> <C> <C>
Basic........................................................... $ 1.51 $ 1.27
Diluted......................................................... $ 1.47 $ 1.22
</TABLE>
Excluding the non-cash, pre-tax charge of $65,000 ($38,675 after-tax) for
asset impairment, basic and diluted earnings per share for the 52 weeks ended
August 31, 1997 would have been $1.69 and $1.64, respectively.
RECLASSIFICATIONS
Certain reclassifications have been reflected in the financial statements in
order to conform prior years to the current year presentation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
NOTE 2--SPIN-OFF OF PRICE ENTERPRISES, INC. AND DISCONTINUED OPERATIONS
On July 28, 1994, the Company 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 Costco, formed in July 1994. The
transactions contemplated by the Transfer and Exchange Agreement are referred to
herein as the "Exchange Transaction."
The Exchange Transaction was completed on December 20, 1994, with 23,224,028
shares of Costco Common Stock tendered and exchanged for an equal number of
shares of Price Enterprises Common Stock. On February 9, 1995, Price Enterprises
purchased from Costco 3,775,972 shares of Price Enterprises Common Stock,
constituting all of the remaining shares of Price Enterprises Common Stock held
by Costco. Based on the aggregate number of shares of Price Enterprises Common
Stock (27 million shares)
31
<PAGE>
COSTCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 2--SPIN-OFF OF PRICE ENTERPRISES, INC. AND DISCONTINUED OPERATIONS
(CONTINUED)
exchanged for Costco 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 from the estimated loss recorded in
fiscal 1994 (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 1995.
Costco transferred to Price Enterprises substantially all of the real estate
properties which historically formed the non-club real estate segment of Costco,
four warehouse facilities, notes receivable from various municipalities and
agencies and a note receivable from Atlas Hotels, Inc. In addition, Costco
transferred to Price Enterprises 51% of the outstanding capital stock of Price
Quest, Inc. ("Price Quest") and Price Global Trading, Inc. ("Price Global").
Price Quest operated the Quest interactive electronic shopping business and
provided other services to members. Price Global had the rights to develop
membership warehouse club businesses in certain geographical areas specified in
the Transfer and Exchange Agreement.
Costco 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.
On or about September 1, 1996, Price Quest discontinued the Quest
interactive electronic shopping business in the Company's warehouses, but
continues to provide other services to members, including auto referral and
travel related services.
As part of the resolution of a shareholder lawsuit arising from the spin-off
and Exchange Transaction, Costco and Price Enterprises amended the Transfer and
Exchange Agreement, effective May 28, 1997. Under the amendment to the Transfer
and Exchange Agreement, Costco retained no ownership interest in Price Quest or
Price Global.
NOTE 3--DEBT
SHORT-TERM BORROWINGS
The Company has in place a $500,000 commercial paper program supported by a
$500,000 bank credit facility with a group of 12 banks, of which $250,000
expires on January 26, 1998, and $250,000 expires on January 30, 2001. At August
31, 1997, no amount was outstanding under the loan facility or the commercial
paper program.
In addition, a wholly-owned Canadian subsidiary has a $144,000 commercial
paper program supported by a $101,000 bank credit facility with three Canadian
banks, of which $61,000 expires in March 1998 and $40,000 expires in March 1999.
At August 31, 1997, no amount was outstanding under the bank credit facility and
$25,460 was outstanding under the Canadian commercial paper program.
The Company has agreed to limit the combined amount outstanding under the
U.S. and Canadian commercial paper programs to the $601,000 combined amounts of
the respective supporting bank credit facilities.
32
<PAGE>
COSTCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 3--DEBT (CONTINUED)
The weighted average borrowings, highest borrowings and interest rate under
all short-term borrowing arrangements were as follows for fiscal 1997, 1996, and
1995:
<TABLE>
<CAPTION>
MAXIMUM AMOUNT AVERAGE AMOUNT WEIGHTED AVERAGE
OUTSTANDING OUTSTANDING INTEREST RATE
CATEGORY OF AGGREGATE DURING THE DURING THE DURING THE
SHORT-TERM BORROWINGS PERIOD PERIOD PERIOD
- --------------------------------------- ----------------- --------------- -----------------
<S> <C> <C> <C>
PERIOD ENDED AUGUST 31, 1997
Bank borrowings:
U.S.................................. $ -- $ -- --%
Canadian............................. 10,169 732 5.74
Commercial Paper:
U.S.................................. 279,000 85,140 5.54
Canadian............................. 100,716 52,486 3.43
PERIOD ENDED SEPTEMBER 1, 1996
Bank borrowings:
U.S.................................. $ -- $ -- --%
Canadian............................. 32,904 6,795 5.99
Commercial Paper:
U.S.................................. 198,000 55,239 5.71
Canadian............................. 102,368 69,775 5.40
PERIOD ENDED SEPTEMBER 3, 1995
Bank borrowings:
U.S.................................. $ -- $ -- --%
Canadian............................. 9,374 1,776 8.04
Commercial Paper:
U.S.................................. 468,000 215,683 5.75
Canadian............................. 23,760 3,912 5.56
</TABLE>
The Company has separate letter of credit facilities (for commercial and
standby letters of credit) totaling approximately $254,000. The outstanding
commitments under these facilities at August 31, 1997 totaled approximately
$184,000, including approximately $42,000 in standby letters for workers'
compensation requirements.
33
<PAGE>
COSTCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 3--DEBT (CONTINUED)
LONG-TERM DEBT
Long-term debt at August 31, 1997 and September 1, 1996 consists of:
<TABLE>
<CAPTION>
1997 1996
---------- ------------
<S> <C> <C>
5 3/4% Convertible subordinated debentures due May 2002............. $ -- $ 300,000
6 3/4% Convertible subordinated debentures due March 2001........... -- 285,079
5 1/2% Convertible subordinated debentures due February 2012........ -- 179,338
7 1/8% Senior Notes due June 2005................................... 300,000 300,000
3 1/2% Zero Coupon convertible subordinated notes due August 2017... 450,207 --
Unsecured note payable to banks due April 2001...................... 140,000 140,000
Notes payable secured by trust deeds on real estate................. 16,327 21,956
Capital lease obligations and other................................. 19,426 12,247
---------- ------------
925,960 1,238,620
Less current portion (included in other current liabilities)........ 8,959 9,399
---------- ------------
Total long-term debt................................................ $ 917,001 $ 1,229,221
---------- ------------
---------- ------------
</TABLE>
On August 4, 1997, Costco Wholesale Corporation, a wholly-owned subsidiary
of the Company, called for redemption all $300,000 of its 5 3/4% Convertible
Subordinated Debentures due 2002. On the redemption date, August 21, 1997,
virtually all of the Debentures were redeemed at a total cost of $312,000
(including accrued interest and redemption premium). The transaction was
financed with proceeds from the issuance of 3 1/2% Zero Coupon Convertible
Subordinated Notes (see below).
On November 19, 1996, The Price Company, a wholly-owned subsidiary of the
Company, called for redemption all $285,100 of its 6 3/4% Convertible
Subordinated Debentures due 2001. On the redemption date, December 4, 1996,
approximately $159,400 principal amount of the Debentures were converted into
approximately 7.1 million shares of Costco Common Stock and the remaining
$125,700 of Debentures were redeemed at a total cost of $130,300 (including
accrued interest and redemption premium). The redemption portion of the
transaction was financed with short-term bank borrowings.
On December 16, 1996, The Price Company called for redemption all $179,300
of its 5 1/2% Convertible Subordinated Debentures due 2012. On the redemption
date, January 6, 1997, approximately $142,700 principal amount of the Debentures
were converted into approximately 6.0 million shares of Costco Common Stock and
the remaining $36,600 of Debentures were redeemed at a total cost of $37,500
(including accrued interest and redemption premium). The redemption portion of
the transaction was paid with cash on hand.
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
certain limitations on the Company's and certain subsidiaries' ability to create
liens securing indebtedness and to enter into certain sale leaseback
transactions.
34
<PAGE>
COSTCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 3--DEBT (CONTINUED)
On August 19, 1997, the Company completed the sale of $900,000 principal
amount at maturity of Zero Coupon Subordinated Notes (the "Notes") due August
19, 2017. The Notes were priced with a yield to maturity of 3 1/2%, resulting in
gross proceeds to the Company of $449,640. The Notes are convertible into a
maximum of 10,219,090 shares of Costco Common Stock at an initial conversion
price of $44.00. Holders of the notes may require the Company to purchase the
Notes (at the discounted issue price plus accrued interest to date of purchase)
on August 19, 2002, 2007, or 2012. The Company, at its option, may redeem the
Notes (at the discounted issue price plus accrued interest to date of
redemption) any time on or after August 19, 2002.
In April 1996, the Company borrowed $140,000 from a group of banks under a
five-year unsecured term loan. Interest only is payable quarterly at rates based
on LIBOR. Proceeds of the loan were used to retire $40,000 outstanding under the
Canadian commercial paper program and $100,000 outstanding under the U.S.
commercial paper program.
In February, 1996, the Company filed with the Securities and Exchange
Commission a shelf registration statement for $500,000 of senior debt
securities. Although the registration statement was declared effective, no
securities have been issued under this filing.
At August 31, 1997, the fair value of the 7 1/8% Senior Notes, based on
market quotes on August 31, 1997, was approximately $305,000. The Senior Notes
are not redeemable prior to maturity. The fair value of the 3 1/2% Zero Coupon
Subordinated Notes at August 31, 1997 was approximately $450,000.
Maturities of long-term debt during the next five fiscal years and
thereafter are as follows:
<TABLE>
<S> <C>
1998.......................... $ 8,959
1999.......................... 6,390
2000.......................... 3,676
2001.......................... 142,109
2002.......................... 1,275
Thereafter.................... 763,551
-------------
Total....................... $ 925,960
-------------
-------------
</TABLE>
NOTE 4--LEASES
The Company leases land and/or warehouse buildings at 52 of the 261
warehouses open at August 31, 1997 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.
35
<PAGE>
COSTCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 4--LEASES (CONTINUED)
Aggregate rental expense for fiscal 1997, 1996, and 1995, was $54,019,
$55,686, and $53,600, respectively. Future minimum payments during the next five
fiscal years and thereafter under noncancelable leases with terms in excess of
one year, at August 31, 1997, were as follows:
<TABLE>
<S> <C>
1998.......................... $ 57,490
1999.......................... 54,513
2000.......................... 53,596
2001.......................... 51,905
2002.......................... 51,730
Thereafter.................... 499,452
-------------
Total minimum payments.... $ 768,686
-------------
-------------
</TABLE>
NOTE 5--STOCK OPTIONS
Prior to the Merger, The Price Company and Costco Wholesale Corporation
adopted various incentive and non-qualified stock option plans which allowed
certain key employees and directors to purchase or be granted common stock of
The Price Company and Costco Wholesale Corporation (collectively the Old Stock
Option Plans). Options were granted for a maximum term of ten years, and were
exercisable upon vesting. Options granted under these plans generally vest
ratably over five to nine years. Subsequent to the Merger, new grants of options
are not being made under the Old Stock Option Plans.
The Costco Companies, Inc. 1993 Combined Stock Grant and Stock Option Plan
(the New Stock Option Plan) provides for the issuance of up to 20 million shares
of the Company's common stock pursuant to the exercise of stock options or up to
1,666,666 shares through stock grants.
The Company applies Accounting Principles Board Opinion No. 25 and related
Interpretations in accounting for stock options. Accordingly, no compensation
cost has been recognized for the plans. In fiscal year 1997, the Company adopted
the disclosure requirements of Statement of Financial Accounting Standards No.
123 (SFAS No.123), "Accounting for Stock-Based Compensation." Had compensation
cost for the Company's stock-based compensation plans been determined based on
the fair value at the grant dates for awards under those plans consistent with
SFAS No. 123, the Company's net income and net income per share would have been
reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Net income:
As reported................. $ 312,197 $ 248,793
Pro forma................... $ 301,947 $ 246,208
Net income per share (fully
diluted):
As reported................. $ 1.46 $ 1.22
Pro forma................... $ 1.41 $ 1.21
</TABLE>
36
<PAGE>
COSTCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 5--STOCK OPTIONS (CONTINUED)
The effects of applying SFAS No. 123 on pro forma disclosures of net income
and earnings per share for fiscal 1997 and 1996 are not likely to be
representative of the pro forma effects on net income and earnings per share in
future years.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Risk free interest rate....... 6.40% 6.15%
Expected life................. 7 years 7 years
Expected volatility........... 34% 32%
Expected dividend yield....... 0% 0%
</TABLE>
Stock option transactions relating to the Old and New Stock Option Plans are
summarized below (shares in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
---------------------- ---------------------- ----------------------
SHARES PRICE(1) SHARES PRICE(1) SHARES PRICE(1)
--------- ----------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Under option at beginning of
year.......................... 16,972 $ 17.14 15,963 $ 16.71 14,691 $ 17.07
Granted(2)...................... 4,610 26.13 2,645 17.35 3,516 13.76
Exercised....................... (4,077) 15.24 (1,272) 10.60 (593) 5.72
Cancelled....................... (184) 18.37 (364) 18.26 (1,651) 17.59
--------- ----------- --------- ----------- --------- -----------
Under option at end of year..... 17,321 $ 19.96 16,972 $ 17.14 15,963 $ 16.71
--------- ----------- --------- ----------- --------- -----------
--------- ----------- --------- ----------- --------- -----------
</TABLE>
- ------------------------
(1) Weighted-average exercise price
(2) The weighted-average fair value of options granted during fiscal 1997 and
1996 was $11.47 and $7.46, respectively.
The following table summarizes information regarding stock options
outstanding at August 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------------------- OPTIONS EXERCISABLE
REMAINING
CONTRACTUAL ------------------------
RANGE OF PRICES NUMBER LIFE PRICE(1) NUMBER PRICE(1)
- ----------------------------------------- ----------- --------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$2.75 - $17.13.......................... 5,832 5.3 $ 13.08 2,852 $ 11.89
$17.25 - $24.00.......................... 5,977 5.7 19.32 2,891 19.69
$24.53 - $40.17.......................... 5,512 8.2 27.99 1,375 31.50
--
----------- ----------- ----- -----------
$2.75 - $40.17.......................... 17,321 6.4 $ 19.96 7,118 $ 18.85
</TABLE>
- ------------------------
(1) Weighted-average exercise price
37
<PAGE>
COSTCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 6--RETIREMENT PLANS
The Company has a 401(k) Retirement Plan which is available to all U.S.
employees who have one year or more of service, except California union
employees. The plan allows pre-tax deferral against which the Company matches
50% of the first one thousand dollars of employee contributions. In addition,
the Company will provide each eligible participant a contribution based on
salary and years of service. The Company has a defined contribution plan for
Canadian and United Kingdom employees and contributes a percentage of each
employee's salary.
California union employees participate in a defined benefit plan sponsored
by its union. The Company makes contributions based upon its union agreement. In
June 1995, the Company also established a 401(k) plan for the California union
employees. The plan allows pre-tax deferral against which the Company matches
50% of the first two hundred fifty dollars of employee contributions.
Amounts expensed under these plans were $59,960, $51,996, and $37,298 for
fiscal 1997, 1996, and 1995, 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 7--INCOME TAXES
The provisions for income taxes from continuing operations for fiscal 1997,
1996, and 1995 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- --------------
<S> <C> <C> <C>
Federal:
Current......................................... $ 151,433 $ 131,978 $ 102,481
Deferred........................................ (13,249) (4,515) (4,445)
------------- ------------- --------------
Total federal................................. 138,184 127,463 98,036
------------- ------------- --------------
State:
Current......................................... 34,666 27,926 23,009
Deferred........................................ (3,178) (976) 51
------------- ------------- --------------
Total state................................... 31,488 26,950 23,060
------------- ------------- --------------
Foreign:
Current......................................... 40,192 20,882 29,051
Deferred........................................ (1,732) (611) 816
------------- ------------- --------------
Total foreign................................. 38,460 20,271 29,867
------------- ------------- --------------
Total provision for income taxes.................. $ 208,132 $ 174,684 $ 150,963
------------- ------------- --------------
------------- ------------- --------------
</TABLE>
38
<PAGE>
COSTCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (CONTINUED)
NOTE 7--INCOME TAXES (CONTINUED)
A reconciliation between the statutory tax rate and the effective rate from
continuing operations for fiscal 1997, 1996, and 1995 is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Federal taxes at statutory rate................... $ 182,115 35.00% $ 148,217 35.00% $ 128,871 35.00%
State taxes, net.................................. 22,374 4.30 17,786 4.20 15,465 4.20
Foreign taxes, net................................ 5,452 1.05 4,658 1.10 4,471 1.21
Other............................................. (1,809) (.35) 4,023 .95 2,156 0.59
--------- -------- --------- -------- --------- --------
Provision at effective tax rate................... $ 208,132 40.00% $ 174,684 41.25% $ 150,963 41.00%
--------- -------- --------- -------- --------- --------
--------- -------- --------- -------- --------- --------
</TABLE>
The components of the deferred tax assets and liabilities related to
continuing operations are as follows:
<TABLE>
<CAPTION>
AUGUST 31, SEPTEMBER 1,
1997 1996
------------- -------------
<S> <C> <C>
Accrued liabilities.......................... $ 79,663 $ 64,809
Other........................................ 15,735 12,402
------------- -------------
Total deferred tax assets.................. 95,398 77,211
------------- -------------
Property and equipment....................... 45,647 53,590
Merchandise inventories...................... 22,765 21,683
Other........................................ 1,208 3,220
------------- -------------
Total deferred tax liabilities............. 69,620 78,493
------------- -------------
Net deferred tax assets (liabilities)...... $ 25,778 $ (1,282)
------------- -------------
------------- -------------
</TABLE>
The deferred tax accounts at August 31, 1997 and September 1, 1996 include
current deferred income tax assets of $59,322 and $55,452, respectively, and
non-current deferred income tax liabilities of $33,544 and $56,734,
respectively.
NOTE 8--COMMITMENTS AND CONTINGENCIES
COMMITMENTS
The Company has entered into a purchase agreement with Hechinger Company to
acquire seven of Hechinger's locations in Michigan. The acquisition is subject
to certain conditions including third party approvals and permits. The Company
intends to invest approximately $80,000 in these facilities, including the
initial warehouse purchase and remodeling costs and working capital
requirements.
LEGAL PROCEEDINGS
On April 6, 1992, The Price Company 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, The Price Company 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 Price Company's counsel, alleged
substantially the same facts as the prior complaint. The Complaint alleged
violation of certain state and
39
<PAGE>
COSTCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (CONTINUED)
NOTE 8--COMMITMENTS AND CONTINGENCIES (CONTINUED)
federal laws during the time period prior to The Price Company'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. In February 1997, the Court granted
the plaintiffs' motion for certification of a class consisting of all purchasers
of the Common Stock of The Price Company from April 3, 1991 through April 2,
1992. 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.
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 9--GEOGRAPHIC INFORMATION
The following table indicates the relative amounts of total revenue,
operating income and identifiable assets for the Company during fiscal 1997,
1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ -------------
<S> <C> <C> <C>
Total revenue:
United States................................... $ 17,572,440 $ 15,709,258 $ 14,967,611
Foreign......................................... 4,301,964 3,857,198 3,279,675
------------ ------------ -------------
$ 21,874,404 $ 19,566,456 $ 18,247,286
------------ ------------ -------------
------------ ------------ -------------
Operating income:
United States................................... $ 459,339 $ 419,074 $ 357,463
Foreign......................................... 121,373 71,649 75,869
------------ ------------ -------------
$ 580,712 $ 490,723 $ 433,332
------------ ------------ -------------
------------ ------------ -------------
<CAPTION>
AUGUST 31, SEPTEMBER 1,
1997 1996
------------ ------------
<S> <C> <C> <C>
Identifiable assets:
United States................................... $ 4,220,610 $ 3,885,726
Foreign......................................... 1,255,704 1,026,135
------------ ------------
$ 5,476,314 $ 4,911,861
------------ ------------
------------ ------------
</TABLE>
NOTE 10--QUARTERLY FINANCIAL DATA (UNAUDITED)
The tables that follow on the next two pages reflect the unaudited quarterly
results of operations for fiscal 1997 and 1996.
Shares used in the earnings per share calculation fluctuate by quarter
depending primarily upon whether convertible subordinated debentures are
dilutive during the respective period.
40
<PAGE>
COSTCO COMPANIES, INC.
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
52 WEEKS ENDED AUGUST 31, 1997
---------------------------------------------------------------------------
FIRST SECOND FOURTH
QUARTER 12 QUARTER 12 THIRD QUARTER QUARTER 16 TOTAL
WEEKS WEEKS 12 WEEKS WEEKS 52 WEEKS
------------ ------------ ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
REVENUE
Net sales....................................... $ 4,785,636 $ 5,147,425 $ 4,752,445 $ 6,798,612 $ 21,484,118
Membership fees and other....................... 97,772 91,468 83,784 117,262 390,286
------------ ------------ ------------- ------------- -------------
Total revenue................................. 4,883,408 5,238,893 4,836,229 6,915,874 21,874,404
OPERATING EXPENSES
Merchandise costs............................... 4,308,369 4,619,208 4,283,157 6,103,751 19,314,485
Selling, general and administrative............. 426,104 436,036 426,980 587,639 1,876,759
Preopening expenses............................. 10,197 6,087 2,458 8,706 27,448
Provision for impaired assets and warehouse
closing costs................................. 70,000 -- 3,500 1,500 75,000
------------ ------------ ------------- ------------- -------------
Operating income.............................. 68,738 177,562 120,134 214,278 580,712
OTHER INCOME (EXPENSE)
Interest expense................................ (18,933) (17,243) (14,662) (25,443) (76,281)
Interest income and other....................... 3,657 3,461 4,055 4,725 15,898
------------ ------------ ------------- ------------- -------------
INCOME BEFORE PROVISION FOR INCOME TAXES.......... 53,462 163,780 109,527 193,560 520,329
Provision for income taxes...................... 21,652 66,331 43,262 76,887 208,132
------------ ------------ ------------- ------------- -------------
NET INCOME........................................ $ 31,810(a) $ 97,449 $ 66,265 $ 116,673 $ 312,197(b)
------------ ------------ ------------- ------------- -------------
------------ ------------ ------------- ------------- -------------
NET INCOME PER COMMON AND
COMMON EQUIVALENT SHARE--
FULLY DILUTED:
Net income...................................... $ 0.16(a) $ 0.46 $ 0.31 $ 0.54 $ 1.46(b)
------------ ------------ ------------- ------------- -------------
------------ ------------ ------------- ------------- -------------
Shares used in calculation...................... 199,630 223,296 216,362 225,949 226,195
------------ ------------ ------------- ------------- -------------
------------ ------------ ------------- ------------- -------------
</TABLE>
- ------------------------
(a) Net income and net income per common and common equivalent share would have
been $70,485 and $.34, respectively, without the effect of adopting SFAS No.
121, using 227,096 fully-diluted shares.
(b) Net income and net income per common and common equivalent share would have
been $350,872 and $1.63, respectively, without the effect of adopting SFAS
No. 121, using 226,195 fully-diluted shares.
41
<PAGE>
COSTCO COMPANIES, INC.
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
52 WEEKS ENDED SEPTEMBER 1, 1996
---------------------------------------------------------------------------
FIRST SECOND FOURTH
QUARTER 12 QUARTER 12 THIRD QUARTER QUARTER 16 TOTAL
WEEKS WEEKS 12 WEEKS WEEKS 52 WEEKS
------------ ------------ ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
REVENUE
Net sales....................................... $ 4,295,862 $ 4,606,070 $ 4,236,207 $ 6,075,727 $ 19,213,866
Membership fees and other....................... 87,702 82,625 75,281 106,982 352,590
------------ ------------ ------------- ------------- -------------
Total revenue................................. 4,383,564 4,688,695 4,311,488 6,182,709 19,566,456
OPERATING EXPENSES
Merchandise costs............................... 3,887,116 4,153,992 3,829,923 5,474,284 17,345,315
Selling, general and administrative............. 385,973 391,943 383,387 529,884 1,691,187
Preopening expenses............................. 9,450 5,970 4,738 9,073 29,231
Provision for impaired assets and warehouse
closing costs................................. -- -- 6,000 4,000 10,000
------------ ------------ ------------- ------------- -------------
Operating income.............................. 101,025 136,790 87,440 165,468 490,723
OTHER INCOME (EXPENSE)
Interest expense................................ (17,771) (17,501) (19,194) (23,612) (78,078)
Interest income and other....................... 1,091 2,287 2,007 5,447 10,832
------------ ------------ ------------- ------------- -------------
INCOME BEFORE PROVISION FOR INCOME TAXES.......... 84,345 121,576 70,253 147,303 423,477
Provision for income taxes...................... 34,792 50,150 28,979 60,763 174,684
------------ ------------ ------------- ------------- -------------
NET INCOME........................................ $ 49,553 $ 71,426 $ 41,274 $ 86,540 $ 248,793
------------ ------------ ------------- ------------- -------------
------------ ------------ ------------- ------------- -------------
NET INCOME PER COMMON AND COMMON EQUIVALENT
SHARE-- FULLY DILUTED:
Net income...................................... $ 0.25 $ 0.35 $ 0.21 $ 0.42 $ 1.22
------------ ------------ ------------- ------------- -------------
------------ ------------ ------------- ------------- -------------
Shares used in calculation...................... 217,311 224,737 218,336 219,084 218,363
------------ ------------ ------------- ------------- -------------
------------ ------------ ------------- ------------- -------------
</TABLE>
42
<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>
2.1.1 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.(1)
2.1.2 Agreement Concerning Transfer of certain assets between and among Price/Costco, Inc., Price
Enterprises, Inc., The Price Company, Price Costco International, Inc., Costco Wholesale Corporation,
Price Global Trading, L.L.C., PGT, Inc., Price Quest, L.L.C., and PQI, Inc., dated as of November 21,
1996, with an effective date of May 28, 1997
2.1.3 Amendment No. 1 to Agreement Concerning Transfer of Certain Assets dated May 29, 1997
3.1 Restated Certificate of Incorporation of Costco Companies, Inc.(2)
3.2 Bylaws of Costco Companies, Inc.(3)
4.1.1 Form of 7 1/8% Senior Notes(4)
4.1.2 Indenture between Price/Costco, Inc. and American National Association, as Trustee(4)
4.2.1 Form of Zero Coupon Note due 2017
4.2.2 Indenture dated as of August 19, 1997 between Costco Companies, Inc. and Firstar Bank of Minnesota as
Trustee
4.2.3 Registration Rights Agreement dated August 19, 1997
4.3 Costco Companies, Inc. Stock Certificate
10.1.1 Costco Companies, Inc. 1993 Combined Stock Grant and Stock Option Plan(1)
10.1.2 Amendments to Stock Option Plan(8)
10.2 Form of Indemnification Agreement(5)
10.4 Restated Corporate Joint Venture Agreement between The Price Company, Price Venture Mexico and
Controladora Comercial Mexicana S.A. de C.V. dated March 1995(6)
10.5.1 A $250 million Short-Term Revolving Credit Agreement among Price/Costco, Inc. and a group of twelve
banks dated January 31, 1994(7)
10.5.2 A $250 million Extended Revolving Credit Agreement among Price/Costco, Inc. and a group of twelve
banks, dated January 31, 1994(7)
10.5 A $140 million Credit Agreement, dated as of April 11, 1996, among Price/Costco Nova Scotia Company,
certain financial institutions and Canadian Imperial Bank of Commerce(6)
12.1 Statements re computation of ratios
21.1 Subsidiaries of the Company
23.1 Consent of Arthur Andersen LLP
27.1 Financial Data Schedule
</TABLE>
- ------------------------
(1) Incorporated by reference to the exhibits filed as part of the Registration
Statement of Price/Costco, Inc. on Form S-4 (File No. 33-50359) dated
September 22, 1993
(2) Incorporated by reference to the exhibits filed as part of the Quarterly
Report on Form 10-Q of Costco Companies, Inc. for the quarterly period ended
February 16, 1997
(3) 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
(4) Incorporated by reference to the exhibits filed as part of the Registration
Statement of Price/Costco, Inc. on Form S-3 (File No. 33-59403) dated May
17, 1995
(5) Incorporated by reference to the exhibits filed as part of the Annual Report
on Form 10-K of Price/Costco, Inc. for the fiscal year ended August 28, 1994
(6) Incorporated by reference to the exhibits filed as part of the Annual Report
on Form 10-K of Price/Costco, Inc. for the fiscal year ended September 1,
1996
(7) Incorporated by reference to the exhibits filed as part of the Quarterly
Report on Form 10-Q of Price/Costco, Inc. for the quarterly period ended
February 13, 1994
(8) Incorporated by reference to the exhibits filed as part of the Annual Report
on Form 10-K of Price/Costco, Inc. for the fiscal year ended September 3,
1995
43
<PAGE>
AGREEMENT CONCERNING
TRANSFER OF CERTAIN ASSETS
BETWEEN AND AMONG
PRICE/COSTCO, INC., PRICE ENTERPRISES, INC.,
THE PRICE COMPANY, PRICE COSTCO INTERNATIONAL, INC.,
COSTCO WHOLESALE CORPORATION, PRICE GLOBAL TRADING, L.L.C.,
PGT, INC., PRICE QUEST, L.L.C., AND PQI, INC.
DATED AS OF
NOVEMBER ____, 1996
<PAGE>
TABLE OF CONTENTS
Page
----
1. DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
2. ACTIONS CONCERNING PRICE GLOBAL. . . . . . . . . . . . . . . . . . . . . .6
2.1 Price Costco Global Marks . . . . . . . . . . . . . . . . . . . . . .6
2.2 Future Assignments For Costa Rica & Panama. . . . . . . . . . . . . .6
2.3 Marianas, Guam & Panama License . . . . . . . . . . . . . . . . . . 11
2.4 Interest In Price Global. . . . . . . . . . . . . . . . . . . . . . 13
2.5 Price Global Operating Agreement. . . . . . . . . . . . . . . . . . 13
3. ACTIONS CONCERNING PRICE QUEST . . . . . . . . . . . . . . . . . . . . . 14
3.1 Price Quest Marks . . . . . . . . . . . . . . . . . . . . . . . . . 14
3.2 Price Quest License . . . . . . . . . . . . . . . . . . . . . . . . 14
3.3 Interest In Price Quest . . . . . . . . . . . . . . . . . . . . . . 14
3.4 Price Quest Operating Agreement . . . . . . . . . . . . . . . . . . 15
3.5 Quest Operations At PriceCostco . . . . . . . . . . . . . . . . . . 15
3.6 Auto & Travel Operations at PriceCostco . . . . . . . . . . . . . . 15
4. NON-COMPETITION COVENANTS. . . . . . . . . . . . . . . . . . . . . . . . 20
4.1 Termination of Non-Compete Agreements . . . . . . . . . . . . . . . 20
4.2 Marianas, Guam & Panama Non-compete . . . . . . . . . . . . . . . . 20
4.3 Auto/Travel Limits on PriceCostco . . . . . . . . . . . . . . . . . 20
4.4 Auto/Travel Limits on PEI and PriceCostco . . . . . . . . . . . . . 21
4.5 Injunctive Relief . . . . . . . . . . . . . . . . . . . . . . . . . 21
5. COSTS & OTHER MATTERS CONCERNING THE TRANSFERS . . . . . . . . . . . . . 21
5.1 Fees & Costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
5.2 Representations . . . . . . . . . . . . . . . . . . . . . . . . . . 22
5.3 Trademark Documents . . . . . . . . . . . . . . . . . . . . . . . . 23
5.4 Interim Safeguards. . . . . . . . . . . . . . . . . . . . . . . . . 23
6. CERTAIN "PRICE" MARKS. . . . . . . . . . . . . . . . . . . . . . . . . . 25
6.1 "PriceSmart" Agreement. . . . . . . . . . . . . . . . . . . . . . . 25
6.2 Promotion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
6.3 Registration Preclusion . . . . . . . . . . . . . . . . . . . . . . 26
6.4 Claims to "Price" Marks . . . . . . . . . . . . . . . . . . . . . . 26
7. GENERAL PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
7.1 Further Assurances. . . . . . . . . . . . . . . . . . . . . . . . . 27
7.2 Affiliate Compliance. . . . . . . . . . . . . . . . . . . . . . . . 27
7.3 Guaranties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
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<PAGE>
7.4 Arbitration . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
7.5 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
7.6 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
7.7 Amendment; Waiver . . . . . . . . . . . . . . . . . . . . . . . . . 29
7.8 Binding Effect; No Assignments. . . . . . . . . . . . . . . . . . . 30
7.9 Severability. . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
7.10 Interpretation. . . . . . . . . . . . . . . . . . . . . . . . . . . 30
7.11 Complete Agreement. . . . . . . . . . . . . . . . . . . . . . . . . 30
7.12 Counterparts. . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
7.13 Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
-ii-
<PAGE>
AGREEMENT CONCERNING TRANSFER OF CERTAIN ASSETS
This AGREEMENT, dated as of November ___, 1996, is by and between
Price/Costco, Inc. ("PRICECOSTCO"); Price Enterprises, Inc. ("PEI"); The
Price Company, a California corporation and wholly-owned subsidiary of
PriceCostco ("TPC"); Price Costco International, Inc., a Nevada corporation
and wholly-owned subsidiary of PriceCostco ("PCII"); Costco Wholesale
Corporation, a Washington corporation and a wholly-owned subsidiary of Price
Costco ("CWC"); Price Global Trading, L.L.C., a Delaware limited liability
company ("PRICE GLOBAL"); PGT, Inc., a Delaware corporation and wholly-owned
subsidiary of PEI ("PGT"); Price Quest, L.L.C., a Delaware limited liability
company ("PRICE QUEST"); and PQI, Inc., a Delaware corporation and
wholly-owned subsidiary of PEI ("PQI").
-1-
<PAGE>
WHEREAS:
A. PriceCostco and PEI are parties to an Amended and Restated
Agreement of Transfer and Plan of Exchange dated as of November 14, 1994 (the
"1994 TRANSFER AGREEMENT"). In connection with the 1994 Transfer Agreement,
PriceCostco, TPC, PEI, and the predecessors of Price Global and Price Quest
entered into various agreements (including operating agreements, stockholders
agreements and trademark assignments and licenses), which set forth certain
rights and obligations of the parties with respect to Price Quest, Inc.,
Price Global Trading, Inc. and their assets and operations, and which
transferred several foreign trademarks and service marks from PriceCostco and
its Affiliates to PEI and its Affiliates.
B. In November 1995, PriceCostco (through TPC) and PEI (through
PGT and PQI) formed two limited liability companies, Price Quest and Price
Global, which succeeded to the rights, liabilities, assets, businesses and
operations of Price Quest, Inc. and Price Global Trading, Inc., respectively.
C. This Agreement is being executed simultaneously with a
Stipulation of Settlement of this date among PriceCostco, PEI and certain
other parties to effect a settlement of litigation entitled IN RE PRICECOSTCO
SHAREHOLDER LITIGATION, Case No. C-94-1874C, pending in the United States
District Court for the Western District of Washington (the "STIPULATION OF
SETTLEMENT").
D. On the terms set forth in this Agreement, PriceCostco and PEI
now desire to modify their relationship, effective as of the Effective Date
defined in the Stipulation of Settlement ("Effective Date"), by transferring
and assigning certain
-2-
<PAGE>
trademarks and assets (including, in particular, a transfer of foreign
trademarks and service marks back to PriceCostco and its Affiliates), by
terminating certain of the non-compete agreements between the parties, and
modifying or terminating certain other agreements between or among the
parties concerning the operations of Price Quest and Price Global.
NOW, THEREFORE, for good and adequate consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
1. DEFINITIONS
1.1 "AUTO REFERRAL PROGRAM" and "TRAVEL PROGRAM" mean,
respectively, (i) the automobile advertising/referral program and (ii) the
travel program, both as operated by Price Quest under the "PriceCostco" name
as of the date of this Agreement.
1.2 "EFFECTIVE DATE" shall have the meaning set forth in the
Stipulation of Settlement.
1.3 "PRICECOSTCO WAREHOUSE" means a "Costco" or "Price Club"
warehouse location at which PriceCostco or its Downstream Affiliates operate
a Club Business.
1.4 "PRICE COSTCO GLOBAL MARKS" means all rights of Price Global,
PGT and PEI and its Affiliates in and to the names, trade names, commercial
names, trademarks and service marks "PRICE CLUB," "PRICE COSTCO" and "PRICE
CLUB
-3-
<PAGE>
COSTCO" in the Specified Geographical Areas, including but not limited to all
stylized presentations of PRICE CLUB, PRICE CLUB COSTCO and PRICE COSTCO, all
designs, logos and marks containing those names, and all pending applications
and registrations for the aforementioned names and marks that have been made
by Price Global, PQI or PEI or its Affiliates.
1.5 "PRICE GLOBAL LLC AGREEMENT" means the Limited Liability
Company Agreement of Price Global Trading, L.L.C. dated as of 27 November
1995, between TPC and PGT.
1.6 "PRICE GLOBAL LICENSE AGREEMENT" means The License Agreement
made as of August 28, 1994 by and among PriceCostco, TPC, Price Global
Trading, Inc. and PEI, relating among other things to the "PRICE CLUB" and
"PRICE COSTCO" trademarks in the Northern Mariana Islands (including Guam and
Saipan) and the U.S. Virgin Islands.
1.7 "PRICE GLOBAL OPERATING AGREEMENT" means the Operating
Agreement by and among Price Global Trading, Inc., PEI, PriceCostco and TPC
dated as of August 28, 1994.
1.8 "PRICE GLOBAL'S JOETEN LICENSE" means the License, Software,
Merchandise & Technical Support Agreement entered into as of December 12,
1994 by and among Price Global Trading, Inc. and Joeten Enterprises, Inc.
1.9 "PRICE GLOBAL'S PANAMA LICENSE" means the License, Software,
Merchandise & Technical Support Agreement entered into as of September 21,
1995 by and between Price Global Trading, Inc. and PriceCostco Panama, S.A.
-4-
<PAGE>
1.10 "PRICE QUEST MARKS" means all rights of Price Quest, PQI and
PEI and its Affiliates in and to the names, trademarks and service marks
"PRICE CLUB QUEST," "PRICE QUEST" and "QUEST" worldwide, including but not
limited to all stylized presentations of "PRICE CLUB QUEST," "PRICE QUEST"
and "QUEST" and all pending applications and registrations for the
aforementioned names and marks that have been made by Price Quest, PQI or PEI
or its Affiliates.
1.11 "PRICE QUEST LLC AGREEMENT" means the Limited Liability Company
Agreement of Price Quest, L.L.C. dated as of 27 November 1995, between TPC
and PQI.
1.12 "PRICE QUEST LICENSE AGREEMENT" means The License Agreement
made as of August 28, 1994 by and among PriceCostco, TPC, Price Quest, Inc.
and PEI.
1.13 "PRICE QUEST OPERATING AGREEMENT" means the Operating Agreement
by and among Price Quest, Inc., PEI, PriceCostco and TPC dated as of August
28, 1994.
1.14 "STIPULATION OF SETTLEMENT" shall have the meaning set forth in
Recital C above.
1.15 "1994 TRANSFER AGREEMENT" shall have the meaning set forth in
Recital A above.
1.16 The definitions in Article I of the 1994 Transfer Agreement, in
Section 1 of the Price Global Operating Agreement and in Section 1 of the
Price Quest Operating Agreement among certain of the parties to the extent
not inconsistent with this
-5-
<PAGE>
Agreement, are hereby incorporated by reference and made a part of this
Agreement; EXCEPT that
(a) "SPECIFIED GEOGRAPHICAL AREAS" shall no longer include
Mexico and after the Effective Date shall mean only the Commonwealth of the
Northern Mariana Islands, Guam, Costa Rica and Panama, and
(b) "SPECIFIED COMPANIES" shall mean after the Effective Date
only Sam's Warehouse Club, BJ's Wholesale Club, and Wal-Mart Stores, Inc. and
each of its Affiliates.
2. ACTIONS CONCERNING PRICE GLOBAL
2.1 PRICE COSTCO GLOBAL MARKS. As of the Effective Date, Price
Global, PGT and PEI hereby convey, transfer and assign to PCII, free and
clear of any liens or encumbrances (but without warranty of registrability,
enforceability or lack of conflict with any third party's trademarks or
service marks), all of their rights, title and interest to and in the Price
Costco Global Marks, and in all applications, registrations and claims
relating to those marks; PROVIDED THAT the "PRICE COSTCO" mark in Costa Rica
and Panama will be assigned only as set forth in paragraph 2.2 below.
Contemporaneously with this Agreement, PEI, PGT and Price Global shall
execute the Trademark Assignments at Exhibits 2.1A through 2.1H hereto, but
PCII shall not attempt to file the Assignments with any governmental
authority before the Effective Date.
2.2 FUTURE ASSIGNMENTS FOR COSTA RICA & PANAMA. As shown in Exhibit
5.2A, PGT has five pending applications in both Panama and Costa Rica for the
-6-
<PAGE>
"PRICE COSTCO" mark in classes 16, 37, 39, 40 and 42. The parties understand
that (1) under present Panamanian law registrations on the five applications
in Panama can issue only if registrations for those same marks first issue in
Costa Rica in the name of Price Global Trading, Inc., (2) the five
applications for those marks have been rejected in Costa Rica and those
rejections have been appealed, and (3) it is in the interest of all of the
parties to determine if the registrations will be issued on these pending
applications before they are assigned to PriceCostco or its Affiliates
hereunder. Based on these understandings, the parties agree as follows:
(a) As of the date of this Agreement and until both the "PRICE
COSTCO" mark for Costa Rica and Panama is assigned to PCII and the rights of
Price Global's joint venturer in Panama to use that mark are terminated, PEI,
PGT and Price Global will have the rights and duties (i) diligently to pursue
and prosecute the five pending applications and appeal in Costa Rica, and the
five pending applications in Panama, listed in Exhibit 5.2A for Costa Rica
and Panama covering the "PRICE COSTCO" mark, (ii) to promptly give
PriceCostco notice of all government actions in Costa Rica and in Panama
relating to such applications and appeal; (iii) to oppose Almacenes Cosco's
use of and applications for tradenames, commercial names, service marks and
trademarks in Panama which may in Price Global's view infringe upon the
"PRICE COSTCO" mark or otherwise be confusingly similar thereto; (iv) to take
all reasonable steps against Almacenes Cosco and any other Person using, or
filing any application to register as a trademark, service mark, tradename or
commercial name in Panama, the "PRICE COSTCO" mark or any mark or name which
in Price Global's view
-7-
<PAGE>
is confusingly similar thereto; (v) to promptly inform PriceCostco of any
use, application or registration in Panama of any mark or name of which it is
aware and which infringes or is substantially similar to the "PRICE COSTCO"
mark; and (vi) to promptly inform PriceCostco of the steps it takes to carry
out its rights and duties under this paragraph 2.2, including providing
PriceCostco with copies of all related correspondence and other documents;
(b) In the event PriceCostco believes that PEI, PGT or Price
Global has not taken, but should be taking some action under paragraph
2.2(a), PriceCostco may so inform PEI; if then PEI, PGT or Price Global
declines or fails to commence such action within fourteen (14) days
thereafter, then PriceCostco may take such action. PEI, PGT and Price Global
will provide any requested consents, and PriceCostco shall promptly inform
Price Global of the steps it so takes, including providing PEI with copies of
all related correspondence and other documents. PEI, PGT and Price Global
(i) shall have liability under paragraph 2.2(a) only for gross negligence and
willful acts or willful omissions where such negligence, acts or omissions
materially adversely affect the "PRICE COSTCO" mark, or any right,
application or registration in or for such mark, and (ii) may assert as a
defense that any loss or damage could have been mitigated or avoided if
PriceCostco had taken action under this paragraph 2.2(b);
(c) As a "safety net" in case registrations on PGT's pending
applications are denied, PriceCostco or PCII will (i) promptly file and
diligently pursue and prosecute in Panama applications for the "PRICE COSTCO"
mark in classes 16, 37, 39, 40 and 42, and PEI, PGT and Price Global will
provide any requested consents;
-8-
<PAGE>
(ii) promptly give PEI notice of all government actions in Panama relating to
such applications; (iii) promptly inform PEI of the steps it takes to carry
out its rights and duties of any party under this paragraph 2.2(c), including
providing PEI with copies of all related correspondence and other documents;
(d) Each party agrees to promptly sign, and to cause its
Downstream Affiliates to promptly sign, any documentation (including
consents) reasonably necessary to carry out the rights and duties of any
party under paragraphs 2.2(a), (b) and (c), to provide all evidence
reasonably necessary, and to otherwise cooperate, and to cause its Downstream
Affiliates to cooperate, with the other party;
(e) PriceCostco, PCII and CWC may pursue applications in
Panama for "COSTCO", "PRICE CLUB" and "PRICE CLUB COSTCO" trademarks, service
marks, tradenames and commercial names, respond to oppositions thereto, and
in consultation with Price Global oppose Almacenes Cosco's and other Persons'
uses of and applications for tradenames, commercial names, service marks and
trademarks in Panama which may in PriceCostco's view infringe upon any
"COSTCO", "PRICE CLUB" and "PRICE CLUB COSTCO" names or marks; PROVIDED THAT
PriceCostco, PCII and CWC will provide any requested consents regarding PGT's
pending applications for the "PRICE COSTCO" mark in Panama; and PROVIDED also
that nothing in this paragraph 2.2(e) shall be deemed to affect any party's
position concerning any claim of right of PriceCostco and its Affiliates to
operate a business in Panama while Price Global has the right to use the
"PRICE COSTCO" mark in Panama;
-9-
<PAGE>
(f) All action undertaken by Price Global and its Affiliates
pursuant to paragraphs 2.2(a) through (e) shall be at Price Global's expense,
and all action undertaken by PriceCostco and its Affiliates pursuant to
paragraphs 2.2(a) through (e) shall be at PriceCostco's expense; PROVIDED,
however, that if there is a termination of all rights to use the "PRICE
COSTCO" mark by Price Global's joint venturer in Panama before any of the
dates listed below, the reasonable expenses that are described above and have
been incurred solely with respect to the "PRICE COSTCO" marks will be
totalled and PriceCostco and Price Global shall pay (and reimburse each other
for) those expenses in the following proportions:
If Before PriceCostco Pays Price Global Pays
--------- ---------------- -----------------
10/31/97 100% 0%
10/31/98 66.7% 33.3%
10/31/99 33.3% 66.7%
PROVIDED ALSO THAT a party whose reasonable expenses are to be paid or
reimbursed shall first provide to the reimbursing party detailed invoices
from and proofs of payment to the payee of each such expense;
(g) As of the Effective Date, PEI, PGT, Price Global and their
Affiliates will not use the "PRICE COSTCO" mark in Costa Rica (except to
pursue the five pending applications there) or allow any other Person to use
them;
(h) PEI, PGT and Price Global will promptly assign to PCII the
"PRICE COSTCO" mark for Costa Rica and for Panama, and promptly execute
assignments in the form requested by PCII if, for all of the five Classes of
marks for which applications are pending (whether in Costa Rica or in
Panama), any of the following
-10-
<PAGE>
has occurred after the Effective Date: (1) a rejection that has become final
after appeal of a pending application in Costa Rica or in Panama, (2)
issuance of a registration in Panama, (3) a termination of rights to use the
"PRICE COSTCO" mark by Price Global's joint venturer in Panama, or (4) a
determination by an arbitrator that PEI or its Affiliates have materially
breached any of its duties under paragraphs 2.2(a) through (g) subject to the
standard set out in paragraph 2.2(b); PROVIDED THAT PCII shall not attempt to
file the assignments in Panama until registrations have issued in Panama. As
an example of the conditions described in items (1) and (2) of this
paragraph, if registrations are issued in Panama for the marks in Classes 16
and 37 and if applications are denied in Costa Rica for marks in Classes 39,
40 and 42, the conditions for assignment to PCII under this paragraph 2.2(h)
will have been satisfied; and
(i) Price Global shall use diligent and reasonable efforts to
negotiate with its licensee in the Northern Mariana Islands and Guam and with
its joint venturer in Panama termination dates of their rights to use the
Price Costco Global Marks by October 3, 1998; and, if that does not occur, at
the earliest possible date before December 12, 2009 for the Northern Mariana
Islands and Guam and December 21, 2015 for Panama.
(j) PEI and its Downstream Affiliates shall use diligent and
reasonable efforts to obtain from Price Global's joint venture partner in
Panama, and from that partner's Affiliates, all applications, registrations,
marks and commercial names containing the words "Price Costco" and "Price
Club." Upon acquiring the same and at the time the "PRICE COSTCO" mark for
Panama is to be assigned under paragraph 2.2(h)
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above, PEI and its Downstream Affiliates shall promptly assign to PCII such
applications, registrations, marks and commercial names and promptly execute
assignments in the form requested by PCII. Until and unless such marks and
names have been assigned to Price Global or PGT, PriceCostco and its
Downstream Affiliates may oppose or challenge such applications,
registrations, marks or commercial names, but will discontinue any opposition
or challenge upon such assignment to Price Global or PGT.
2.3 MARIANAS, GUAM & PANAMA LICENSE. As of the Effective Date, the
Price Global License Agreement is hereby amended as follows:
(a) The definition of "Territory" in such license agreement is
modified to mean only the Commonwealth of the Northern Mariana Islands and
Guam and no other territory or country, PROVIDED THAT if the "PRICE COSTCO"
mark for Panama is assigned to PCII, or if registration is granted upon the
"safety net" applications described in paragraph 2.2(c) above, before the
earliest of the dates determined under paragraph 2.3(c) below, then Panama
shall also be included in the definition of "Territory" and the definition of
"Marks" shall include the "PRICE COSTCO" mark in Panama;
(b) The Commonwealth of the Northern Mariana Islands and Guam
shall be deleted from the definition of "Territory" in such license agreement
on the earlier of (i) December 12, 2009 (or any earlier date negotiated under
paragraph 2.2(i) above), or (ii) a termination of the rights of Price
Global's licensee in the Northern Mariana Islands and Guam to use the Price
Costco Global Marks under Price Global's Joeten License;
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(c) Panama shall be deleted from the definition of "Territory"
in such license agreement on the earlier of (i) December 21, 2015 (or any
earlier date negotiated under paragraph 2.2(i) above), or (ii) a termination
of the rights of Price Global's joint venturer in Panama to use the "PRICE
COSTCO" mark under Price Global's Panama License;
(d) With respect to Panama, the Marks licensed shall include
only the "PRICE COSTCO" mark; and paragraphs 2.2(a), (b), (d), (e), (f) and
(i) above are incorporated by reference and made a part of the Price Global
License Agreement if and so long as Panama is a "Territory" under such
license agreement;
(e) The Price Global License Agreement shall terminate without
any right to renew when all of the Commonwealth of the Northern Mariana
Islands, Guam and Panama have been deleted from, or are not included within,
the definition of "Territory" in such license agreement;
(f) Except as expressly stated above, the Price Global License
Agreement shall remain in full force and effect;
(g) Any party to the Price Global License Agreement will upon
request sign a reasonable amendment to the Price Global License Agreement
that incorporates the provisions of this paragraph 2.3.
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2.4 INTEREST IN PRICE GLOBAL. For one dollar and other good and
valuable consideration the receipt of which is hereby acknowledged, and as of
the Effective Date, TPC hereby sells, conveys, transfers and assigns to PEI
(or to PEI's Downstream Affiliate that PEI has so designated by written
notice to PriceCostco before the Effective Date), free and clear of any liens
or encumbrances, TPC's 49% ownership interest in Price Global, at which time
PEI (or such Downstream Affiliate that PEI has designated above) shall assume
all rights and liabilities of TPC as an LLC member of Price Global; PROVIDED
THAT, with respect to any act, occurrence or communication before the
Effective Date, TPC shall be entitled to enforce Sections 3.15 and 7.5 of the
Price Global LLC Agreement (respectively, concerning "Indemnification" and
"Confidentiality") and shall remain subject to the obligations of said
Section 7.5.
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2.5 PRICE GLOBAL OPERATING AGREEMENT. The Price Global Operating
Agreement is hereby terminated and shall be of no further force and effect as
of the Effective Date; EXCEPT that Section 2.2(e) thereof concerning
"Confidentiality" shall remain in effect; EXCEPT that Price Global and PEI
shall, within thirty (30) days of the Effective Date, return to PriceCostco
any information received from PriceCostco or its Affiliates under Section
2.2(a), (f) & (g) thereof without retaining any copies thereof; and EXCEPT
that PriceCostco and PEI (and their Downstream Affiliates) shall permit the
continuation of reciprocal shopping privileges with respect to stores
operated under the Price Costco Global Marks and owned (i) by Joeten
Enterprises, Inc. in the Commonwealth of the Northern Mariana Islands or
Guam, or (ii) by PriceCostco Panama, S.A. in Panama, until the Price Costco
Global Marks are no longer licensed under paragraph 2.3 above for the
territory in which the particular stores are located.
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3. ACTIONS CONCERNING PRICE QUEST
3.1 PRICE QUEST MARKS. As of the Effective Date, Price Quest, PQI
and PEI hereby convey, transfer and assign to TPC, free and clear of any
liens or encumbrances (but without warranty of registrability, enforceability
or lack of conflict with any third party's trademarks or service marks), all
of their rights, title and interest to and in the Price Quest Marks, and in
all applications, registrations and claims relating to those marks.
Contemporaneously with this Agreement, PEI, PQI and Price Quest shall execute
the Trademark Assignment at Exhibit 3.1 hereto, but TPC shall not attempt to
file the Assignment with any governmental authority before the Effective
Date. After the Effective Date, Price Quest, PEI and their Affiliates will
not use the names "Quest," "Price Quest" or "Price Club Quest" as a trademark
or service mark, but Price Quest may use the words "Price Quest" solely in
its LLC name.
3.2 PRICE QUEST LICENSE. As of the Effective Date, the Price Quest
License Agreement is hereby terminated.
3.3 INTEREST IN PRICE QUEST. For one dollar and other good and
valuable consideration the receipt of which is hereby acknowledged, and as of
the Effective Date, TPC hereby sells, conveys, transfers and assigns to PEI
(or to PEI's Downstream Affiliate that PEI has so designated by written
notice to PriceCostco before the Effective Date), free and clear of any liens
or encumbrances, TPC's 49% ownership interest in Price Quest, at which time
PEI (or such Downstream Affiliate that PEI has designated above) shall assume
all rights and liabilities of TPC as an LLC member of Price Quest; PROVIDED
THAT, with respect to any act, occurrence or communication before
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the Effective Date, TPC shall be entitled to enforce Sections 3.15 and 7.5 of
the Price Quest LLC Agreement (respectively, concerning "Indemnification" and
"Confidentiality") and shall remain subject to the obligations of said
Section 7.5.
3.4 PRICE QUEST OPERATING AGREEMENT. The Price Quest Operating
Agreement is hereby terminated and of no further force and effect as of the
Effective Date; EXCEPT as stated in paragraph 3.6 below, and EXCEPT that
Section 2.5(f) concerning "Confidentiality" shall remain in effect, and that
Price Quest and PEI shall, within thirty (30) days of the Effective Date and
subject to 3.6(j) below, return to PriceCostco any information and materials
received from PriceCostco or its Affiliates under Section 2.2(a) and 2.3(a)
thereof.
3.5 QUEST OPERATIONS AT PRICECOSTCO. From and after the Effective
Date, neither PEI nor its Affiliates shall operate any part of the Quest
Business in PriceCostco Warehouses or otherwise in connection with or with
reference to PriceCostco except as stated in paragraph 3.6 below.
3.6 AUTO & TRAVEL OPERATIONS AT PRICECOSTCO. From and after the
Effective Date, PEI (or PEI's Downstream Affiliate that PEI has so designated
by written notice to PriceCostco) shall have the right and duty to operate
the Auto Referral Program and the Travel Program, and shall do so only in
those PriceCostco Warehouses in the United States in which they are currently
operated by Price Quest (or which are added under paragraph 3.6(d) below),
through advertisements published in The PriceCostco Connection and through
promotional materials linked to and from PriceCostco's Internet home page,
under the following terms and conditions:
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(a) The Auto Referral Program and the Travel Program shall be
operated in substantially the same manner, at the same or higher level of
quality and value, and using the same or equivalent space in PriceCostco
Warehouses, as on the date of this Agreement (and, in each such warehouse,
PriceCostco shall (i) provide sufficient space to display one brochure rack
for the Auto Referral Program and one brochure rack and display panel for the
Travel Program and (ii) use best efforts to provide sufficient space to
display one automobile); PROVIDED THAT PEI (or its Downstream Affiliate)
shall provide to PriceCostco, for PriceCostco's prior review and approval
(which approval shall not be unreasonably withheld, or delayed if PriceCostco
has received reasonable advance notice), all brochures, flyers, display
panels, advertisements in The PriceCostco Connection, promotional materials
on the Internet, and other materials concerning these programs, prior to any
publication or distribution thereof to PriceCostco members or to others when
using any PriceCostco name or mark;
(b) PEI (or its Downstream Affiliate) may purchase advertising
for these programs in The PriceCostco Connection on the same terms, net of
discounts, as other advertisers for equivalent advertising space purchased;
(c) PriceCostco will, in PriceCostco Warehouses and in
substantially the same manner as on the date of this Agreement, maintain and
stock brochure racks for the Auto Referral Program and Travel Program and
provide for security of these racks and of displayed automobiles;
(d) In each of the fiscal years ending August 1997, 1998 and
1999, PriceCostco shall permit the Auto Referral Program and the Travel
Program to
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expand into as many as ten (10) additional PriceCostco Warehouses in the
United States (to the extent they exist) which will be selected by
PriceCostco with PEI's consent (which consent shall not be unreasonably
withheld), utilizing space equivalent to the space so used in existing
PriceCostco Warehouses, unless otherwise agreed by the parties.
(e) PEI (or its Downstream Affiliate) may without liability
terminate its rights and duties set forth in this paragraph 3.6 with respect
to either the Auto Referral Program or the Travel Program or both, upon sixty
(60) days written notice to PriceCostco, and such rights and duties will
terminate without any right to renew sixty (60) days from such notice. If
not earlier terminated, all rights and duties under this paragraph 3.6 with
respect to both the Auto Referral Program and the Travel Program will
terminate on October 31, 1999, without any right to renew;
(f) From all operations of these programs that occur before
these rights terminate, PEI (or its Downstream Affiliate) shall pay to
PriceCostco each of the following: (i) for the Auto Program, 20% of the
gross revenues derived from the PriceCostco Auto Program Internet site linked
to and from PriceCostco's Internet home page, and 55% of the gross revenues
derived from all other advertising or promotion via PriceCostco Warehouses,
The PriceCostco Connection or other medium which utilizes the "PriceCostco"
name or mark; (ii) for car rentals, hotel bookings and other travel services
besides vacation packages and cruises, 15% of the received commissions
derived from any advertising or promotion via PriceCostco Warehouses, The
PriceCostco Connection, the PriceCostco Travel Program Internet site linked
to and from PriceCostco's Internet home page, or other medium which utilizes
the "PriceCostco" name or mark; and (iii) for
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vacation packages and cruises, 1% of the net sales derived from any
advertising or promotion via PriceCostco Warehouses, The PriceCostco
Connection, the PriceCostco Travel Program Internet site linked to and from
PriceCostco's Internet home page, or other medium which utilizes the
"PriceCostco" name or mark;
(g) All such amounts shall be paid within fourteen (14)
calendar days of the end of PriceCostco's four-week accounting period in
which the revenues, commissions or sales payments are received by PEI (or its
Downstream Affiliate);
(h) Pursuant to and solely in accordance with the License
Agreement at Exhibit 3.6(h) which PEI shall execute contemporaneously with
this Agreement, PEI (or its Downstream Affiliate) (i) shall only use a
"PriceCostco Auto Program" mark and a "PriceCostco Travel Program" mark in
connection with these programs, and (ii) shall use these marks solely in
flyers and brochures and on brochure racks and display panels placed in
PriceCostco Warehouses, in advertisements in The PriceCostco Connection and
in promotional materials linked to and from the PriceCostco Internet home
page, and in non-public communications with auto dealers and travel service
providers;
(i) To the extent they are not inconsistent with the above or
with any other provision of this Agreement, Sections 2.2(b), 2.4(a)(i),
2.5(a)(i), and 2.7 of the Price Quest Operating Agreement are hereby
incorporated by reference EXCEPT that all references to the Quest Business
shall be deemed to mean only the Auto Referral Program and the Travel Program;
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(j) Price Quest may retain only such membership information
from PriceCostco's membership database that has become a part of its own
customer database pursuant to Section 2.7 of the Price Quest Operating
Agreement, and neither it nor PEI nor its Affiliates may market or describe
its membership information to others as originating from or including data of
PriceCostco or its Affiliates; and
(k) Notwithstanding any other provisions of this Agreement,
PEI (and its Affiliates) may own and operate any automobile related
businesses, any travel related businesses, and any other Quest Business, in
any manner, using any medium, and in any location (and without any monetary
obligation to PriceCostco), provided that such businesses do not use in any
way the names or marks "PriceCostco," "Price Club" or "Costco," and provided
further that any such activity is not precluded under Section 4.4 of this
Agreement.
(l) Price Quest has registered Internet domain names containing
the words "Price Costco Auto" and "Price Costco Travel." PEI and its Downstream
Affiliates will promptly assign to Price Costco (or to a Downstream Affiliate
designated by PriceCostco) or relinquish as directed by PriceCostco (i) the
Internet domain name(s) containing the words "Price Costco Auto" upon any
termination of the Auto Referral Program under paragraph 3.6(e) above or of the
license to use the mark "Price Costco Auto Program" mentioned in paragraph
3.6(h), and (ii) the Internet domain name(s) containing the words "Price Costco
Travel" upon any termination of the Travel Program under paragraph 3.6(e) above
or of the license to use the mark "Price Costco Travel Program" mentioned in
paragraph 3.6(h)
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4. NON-COMPETITION COVENANTS
4.1 TERMINATION OF NON-COMPETE AGREEMENTS. All agreements and
covenants not to compete between (i) PriceCostco or its Affiliates and (ii)
PEI or its Affiliates (including without limitation Section 6.6 of the 1994
Transfer Agreement) are hereby terminated as of the Effective Date and shall
be of no further force and effect, except as explicitly stated in paragraphs
4.2, 4.3 and 4.4 below.
4.2 MARIANAS, GUAM & PANAMA NON-COMPETE. As of the Effective Date
the covenants not to compete in Section 6.6(b)(i) of the 1994 Transfer
Agreement and in Section 2.1(a) of the Price Global Operating Agreement shall
continue only (i) within the Commonwealth of the Northern Mariana Islands,
Guam and Panama, and (ii) in duration as follows:
(A) With respect to the Northern Mariana Islands and Guam,
only until the earlier of October 31, 1999, or a termination of Price
Global's Joeten License, and
(B) With respect to Panama, only until the earlier of October
31, 1999, or a termination of Price Global's Panama License.
4.3 AUTO/TRAVEL LIMITS ON PRICECOSTCO. As of the Effective Date
until October 31, 1999, PriceCostco and its Downstream Affiliates may not
conduct, and will not allow any third party to conduct, the Auto Referral
Program and the Travel Program or substantially similar programs in the
United States through PriceCostco Warehouses, The PriceCostco Connection or
the Internet; PROVIDED THAT PriceCostco and its
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Downstream Affiliates may without restriction (i) sell directly to their
members automobiles (but not by referral to a third party other than a
PriceCostco Downstream Affiliate), vacation packages (but not cruises) and
airline tickets, and (ii) investigate, experiment with and develop other
concepts in the auto and travel businesses.
4.4 AUTO/TRAVEL LIMITS ON PEI AND PRICECOSTCO. From the Effective
Date until October 31, 1999, neither PEI nor its Downstream Affiliates, nor
PriceCostco nor its Downstream Affiliates, shall operate or conduct the Auto
Referral Program, the Travel Program or a substantially similar program with,
or from within a location that is owned or operated by, any of the Specified
Companies.
4.5 INJUNCTIVE RELIEF. In the event of a breach or threatened
breach of paragraphs 4.2, 4.3 or 4.4 by any party, the parties agree that
money damages, alone, would be an inadequate remedy, and that the aggrieved
party may, pending arbitration or as part of an arbitral award under
paragraph 7.4 below, apply for and obtain injunctive and other equitable
relief without necessity of bond or other security, to prevent or remedy such
breach.
5. COSTS & OTHER MATTERS CONCERNING THE TRANSFERS
5.1 FEES & COSTS. Fees and costs shall be paid as follows:
(A) Paragraphs 5.4 below shall apply to certain fees and costs
incurred between the date of this Agreement and the Effective Date with
respect to interim safeguards;
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(B) Paragraph 2.2(f) above shall apply to certain fees and
costs incurred with respect to Panama;
(C) Except as provided in paragraph 2.2(f) for Panama, TPC and
PCII will prepare the documentation for, and cause the filing and recordation
of, the assignments to them under this Agreement, and reimburse those
reasonable fees and costs that PEI and its Affiliates incur to third parties
in connection with such assignments after the Effective Date for acts taken
at the express direction of TPC or PCII; PROVIDED THAT PEI provides detailed
invoices from and proofs of payment to the payee of each expense covered by
this paragraph 5.1(c); and
(D) Otherwise, each party shall be solely responsible for all
fees and costs it incurs with respect to any act or transaction contemplated
by this Agreement.
5.2 REPRESENTATIONS. PEI, PGT, PQI, Price Global and Price Quest
warrant and represent that:
(A) Complete and accurate lists of all applications and
registrations of the Price Costco Global Marks, and of the Price Quest Marks,
that they or their Affiliates own or have filed with any governmental
authority (or that were previously assigned by PriceCostco or its
Affiliates), and of the file numbers, trademark or service mark classes,
registration dates, application dates and status thereof, appear respectively
in Exhibit 5.2A and Exhibit 5.2B hereof;
(B) PGT or Price Global own each of the Price Costco Global
Marks, and neither they nor their Affiliates have (i) licensed or
sub-licensed any of the Price Costco Global Marks except to Joeten
Enterprises, Inc. pursuant to Price Global's
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Joeten License and to PriceCostco Panama, S.A. pursuant to Price Global's
Panama License, or (ii) assigned any of the Price Costco Global Marks (except
that PGT has previously assigned certain of these Marks to Price Global); and
(c) Neither PEI, PQI nor Price Quest nor their Affiliates have
(i) licensed or sub-licensed any of the Price Quest Marks, or (ii) assigned
any of the Price Quest Marks (except that PQI has previously assigned certain
of these Marks to Price Quest).
5.3 TRADEMARK DOCUMENTS. After the Effective Date, PEI, Price
Global and Price Quest shall (i) promptly deliver to PriceCostco all file
wrappers, applications, registrations, files of trademark counsel, and
correspondence to or from any governmental authority that are in their
custody or control and that concern the Price Costco Global Marks and the
Price Quest Marks, and (ii) will promptly sign, and to cause their Downstream
Affiliates to promptly sign, any documentation reasonably necessary to file,
perfect or transfer to PriceCostco and its Affiliates (e.g., PCII and TPC)
any applications or registrations that concern those marks, to provide all
evidence reasonably necessary for these purposes, and to otherwise cooperate,
and to cause their Downstream Affiliates to cooperate, with PriceCostco and
its Affiliates, and use diligent and reasonable efforts to cause their other
Affiliates to do each of the foregoing; PROVIDED THAT this paragraph 5.3 will
apply to the "PRICE COSTCO" mark in Costa Rica and Panama when assignment of
such mark is required under paragraph 2.2(h) above.
5.4 INTERIM SAFEGUARDS. Between the date of this Agreement and the
Effective Date, Price Global, Price Quest, PEI and their Downstream
Affiliates shall
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(A) As to Panama, apply paragraphs 2.2(a) through 2.2(f) of
this Agreement as if it applied between the date of this Agreement and the
Effective Date; PROVIDED that no reimbursement of expenses will occur if the
settlement referred to in Recital C does not become final;
(B) As to all other countries in the Specified Geographical
Areas, take all necessary or appropriate steps to preserve all applications
and registrations, including all rights and claims relating to those
applications and registrations, with respect to the Price Costco Global
Marks, or the Price Quest Marks, so that no such right, claim application or
registration is abandoned or materially adversely affected, and will at the
request of PriceCostco make filings to preserve rights with respect to the
marks and take steps to oppose uses, applications and registrations that in
PriceCostco's view conflict with any such marks, and PriceCostco will
reimburse PEI for the costs of those steps which are taken between the date
of this Agreement and the Effective Date, which PriceCostco has approved in
advance (which approval may not be unreasonably withheld if PEI gives
reasonable advance notice of the estimated costs and of the specific services
for which such costs will be incurred), and for which PEI provides detailed
invoices from and proofs of payment to the payee of each such expense;
PROVIDED THAT, whether or not the settlement referred to in Recital C becomes
final, PriceCostco will reimburse such costs incurred for new applications
filed at PriceCostco's request and for actions taken at PriceCostco's request
to oppose uses, applications and registrations in countries where PGT or
Price Global do not have applications listed in Exhibit 5.2A; and PROVIDED
further that no other
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reimbursement will occur if the settlement referred to in Recital C does not
become final; and
(C) Promptly inform PriceCostco of any use, application or
registration in the Specified Geographical Areas (except Panama) of any mark
or name of which they are aware and which infringes or is substantially
similar to any of the Price Costco Global Marks, and, at PriceCostco's
election, direction and expense, prosecute or oppose any such use,
application or registration; PROVIDED, however that Price Global, Price
Quest, PEI and their Affiliates may elect to so prosecute or oppose such use,
at their own direction and expense.
5.6 Any reference to a "mark" in this Agreement shall be deemed to
include any stylized form of the mark and any logo or design that includes
the mark.
5.7 Nothing in this Agreement shall affect any rights or
liabilities between or among the parties arising from any tax allocation
agreement, or from any balances owed on previous commercial transactions
between PriceCostco or any of its Downstream Affiliates and either Price
Global, PGT, Price Quest, or PQI.
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6. CERTAIN "PRICE" MARKS
6.1 "PRICESMART" AGREEMENT. PriceCostco on behalf of itself and
its Downstream Affiliates and PEI on behalf of itself and its Downstream
Affiliates agree that PEI and its Downstream Affiliates may use the name
"Price" in a "PriceSmart" mark, but they shall not use a "PriceSmart" mark
for or in connection with a Club Business or any other membership activity
named "PriceSmart" in the United States, Canada or Mexico; no such limitation
applies outside the United States, Canada or Mexico.
This limitation as to use of the name "Price" and the mark
"PriceSmart" shall no longer apply commencing 24 months after PriceCostco and
its Downstream Affiliates cease their use of the names and marks "Price
Costco" and "Price Club."
6.2 PROMOTION. PEI and its Downstream Affiliates shall not in any
way promote their businesses using the "PriceCostco" or "Price Club" names or
marks, or the goodwill associated with those names and marks except as
otherwise in this Agreement provided.
Nothing contained herein shall restrict the employees of PEI or its
Downstream Affiliates from truthfully referencing their prior employment and
responsibilities with PriceCostco or its Downstream Affiliates if, at the
same time, they expressly disclaim any present association with PriceCostco
and Price Club.
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6.3 REGISTRATION PRECLUSION. PEI and its Downstream Affiliates and
PriceCostco and its Downstream Affiliates shall each take reasonable steps
and cooperate with each other so that
(A) any application or registration of the "PriceSmart" mark
does not preclude any application or registration by PriceCostco or its
Downstream Affiliates of the "Price Costco" or "Price Club" marks; and
(B) any application or registration of the "Price Costco" or
"Price Club" marks does not preclude any application or registration by PEI
or its Downstream Affiliates of the "PriceSmart" mark.
6.4 CLAIMS TO "PRICE" MARKS. Neither this Agreement, nor the
License Agreement to be executed under paragraph 3.6(h) above, nor any
trademark assignments to be executed pursuant to this Agreement, nor any
Exhibit to this Agreement, nor the Stipulation of Settlement will
(A) Affect any existing or future rights or liabilities of any
party, or between or among the parties, concerning PEI's or its Affiliates'
application for, or registration or use of, or any claim of right or cause of
action by any of them to apply for, register or use, currently or in the
future, the "PRICE ONLINE" mark or any other mark or name of which the word
"PRICE" is an element, or any claims, causes of action, oppositions, and
objections of PriceCostco and its Affiliates with respect thereto -- except
as explicitly provided in paragraphs 6.1 through 6.3 above and in the
licenses and assignments to be executed pursuant to this Agreement (and said
licenses and assignments
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shall not be deemed to affect marks or names other than those which are the
subjects of those licenses and assignments); or
(B) Be deemed a waiver of or estoppel with respect to any
rights or liabilities, or an acquiescence in any act or circumstance, with
respect to any such marks.
7. GENERAL PROVISIONS
7.1 FURTHER ASSURANCES. Subject to the terms and conditions of
this Agreement, parties shall (i) use all reasonable efforts to take or cause
to be taken all actions, and do or cause to be done all things, that are
necessary, proper or advisable to consummate and make effective the
transactions contemplated by this Agreement, (ii) to promptly execute any
assignments, documents, instruments or conveyances of any kind which may be
reasonably necessary or advisable to carry out any of the transactions
contemplated hereunder, and (iii) to cooperate with each other in connection
with the foregoing.
7.2 AFFILIATE COMPLIANCE. PriceCostco and PEI shall each cause
each of their Downstream Affiliates, whether now existing or hereafter formed
and whether or not named herein, and shall use best efforts to cause any
Person who may hereafter control either of them as well as any such Person's
Downstream Affiliates, (i) to comply with the terms of this Agreement, and
(ii) to take no act that would interfere or be inconsistent with any of the
terms of this Agreement; and shall use diligent and reasonable efforts to
cause their other Affiliates to do each of the foregoing.
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7.3 GUARANTIES. To the extent any Downstream Affiliates of PEI or
PriceCostco perform any duties or assume any liabilities hereunder, PEI and
PriceCostco each hereby guarantee the performance of such duties and the
discharge of such liabilities by its respective Downstream Affiliates.
7.4 ARBITRATION. All claims and disputes between or among the
parties to this Agreement relating in any way to this Agreement or its
performance, interpretation, validity, breach or subject matter (including
any contract, tort or statutory claim), shall be resolved by binding
arbitration in the manner set forth in Section 10.3 of the 1994 Transfer
Agreement, which is hereby incorporated by reference and made a part of this
Agreement. Before a party commences any arbitration, it will give the
opposing party or parties written notice of the claim or dispute, and, during
the seven (7) days following the notice, the parties concerned will make
diligent and reasonable efforts to confer at least once (by telephone or in
person) in an attempt to resolve the claim or dispute.
7.5 GOVERNING LAW. This Agreement shall be governed by the laws of
the State of New York (regardless of the laws that might be applicable under
principles of conflicts of law) as to all matters, including but not limited
to matters of validity, construction, effect, performance and remedies.
7.6 NOTICES. Any notices or other communications required or
permitted hereunder shall be in writing and shall be deemed duly given upon
(a) transmitter's confirmation of a receipt of a facsimile transmission, (b)
confirmed delivery by a standard overnight carrier or (c) the expiration of
five (5) business days after the day when mailed by certified or registered
mail, postage prepaid, addressed to the
-31-
<PAGE>
following addresses (or at such other address as PriceCostco or PEI shall
specify by like notice):
If to PriceCostco or TPC, to:
Price/Costco, Inc.
999 Lake Drive
Issaquah, Washington 95027
Attention: James D. Sinegal
and
Joel Benoliel
If to PEI, Price Global or Price Quest, to:
Price Enterprises, Inc.
4649 Morena Boulevard
San Diego, California 92117
Attention: Robert E. Price
and
Robert M. Gans
Any matter or material for which consent or approval is sought or required
under paragraph 5.4(b) of this Agreement shall first be sent under this
notice provisions to the party from whom consent or approval is sought.
7.7 AMENDMENT; WAIVER. This Agreement may not be amended except by
an instrument in writing signed by each of the parties hereto. Any agreement
on the part of a party hereto to an extension or waiver with respect to any
obligation or condition hereunder shall be valid only if set forth in an
instrument in writing signed on behalf of such party.
7.8 BINDING EFFECT; NO ASSIGNMENTS. This Agreement and all of the
provisions hereof shall be binding upon and inure to the benefit of the
parties hereto and
-32-
<PAGE>
their respective successors and assigns. No party may assign any of its
rights or delegate any of its duties hereunder, except as expressly stated
herein or except to a party's Downstream Affiliate.
7.9 SEVERABILITY. If any provision of this Agreement shall be held
invalid, illegal or unenforceable in any respect by a court of competent
jurisdiction, such invalidity, illegality or unenforceability shall not
affect any other provision hereof.
7.10 INTERPRETATION. The descriptive headings contained in this
Agreement are solely for convenience of reference, and do not constitute a
part of this Agreement and shall not in any way affect the meaning or
interpretation of this Agreement.
7.11 COMPLETE AGREEMENT. This Agreement and the Stipulation of
Settlement constitute the entire agreement of the parties with respect to the
subject matter hereof and supersedes all prior agreements and understandings
with respect thereto.
7.12 COUNTERPARTS. This Agreement may be executed in two or more
counterparts all of which shall be considered one and the same agreement and
each of which shall be deemed an original.
7.13 TERMINATION. This Agreement will terminate and be of no
further force or effect if, before the Effective Date, the Stipulation of
Settlement terminates.
-33-
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement
to be executed by its duly authorized officers as of the day and year first
above written.
PRICE/COSTCO, INC.
By:
---------------------------------------------
Name:
------------------------------------------
Title:
-----------------------------------------
PRICE ENTERPRISES, INC.
By:
---------------------------------------------
Name:
------------------------------------------
Title:
-----------------------------------------
THE PRICE COMPANY
By:
---------------------------------------------
Name:
------------------------------------------
Title:
-----------------------------------------
PRICE COSTCO INTERNATIONAL, INC.
By:
---------------------------------------------
Name:
------------------------------------------
Title:
-----------------------------------------
COSTCO WHOLESALE CORPORATION
By:
---------------------------------------------
Name:
------------------------------------------
Title:
-----------------------------------------
-34-
<PAGE>
PRICE GLOBAL TRADING, L.L.C.
By:
---------------------------------------------
Name:
------------------------------------------
Title:
-----------------------------------------
PRICE QUEST, L.L.C.
By:
---------------------------------------------
Name:
------------------------------------------
Title:
------------------------------------------
PGT, INC.
By:
---------------------------------------------
Name:
------------------------------------------
Title:
-----------------------------------------
PQI, INC.
By:
---------------------------------------------
Name:
------------------------------------------
Title:
-----------------------------------------
-35-
<PAGE>
LIST OF EXHIBITS
<TABLE>
<S> <C>
Exhibit 2.1A Assignment (for Australia)
Exhibit 2.1B Assignment (for New Zealand)
Exhibit 2.1C Assignment (for Costa Rica)
Exhibit 2.1D Assignment (for Panama)
Exhibit 2.1E Assignment (for Nicaragua)
Exhibit 2.1F Assignment (for El Salvador)
Exhibit 2.1G Assignment (for Guatemala)
Exhibit 2.1H Assignment (for Honduras)
Exhibit 2.1J Assignment (for Jamaica)
Exhibit 2.1K Assignment (for Dominican Republic)
Exhibit 2.1L Assignment (for Trinidad or Tobago)
Exhibit 2.1M Assignment (for the Bahamas)
Exhibit 2.1N Assignment (for Barbados)
Exhibit 3.1 Assignment (Price Quest Marks)
Exhibit 3.6(h)License Agreement (for Auto/Travel)
Exhibit 5.2A List of Applications and Registrations for
Price Costco Global Marks
Exhibit 5.2B List of Applications and Registrations by PEI and
Its Downstream Affiliates for Price Quest Marks
</TABLE>
<PAGE>
AMENDMENT NO. 1 TO AGREEMENT CONCERNING TRANSFER
OF CERTAIN ASSETS
Costco Companies, Inc., formerly known as Price/Costco, Inc. ("Costco"),
Price Enterprises, Inc ("PEI"), The Price Company ("TPC"), Price Costco
International, Inc. ("PCII"), Costco Wholesale Corporation ("CWC"), Price Global
Trading, L.L.C. ("Price Global"), PGT, Inc. ("PGT"), Price Quest, L.L.C. ("Price
Quest") and PQI, Inc. ("PQI") hereby amend their Agreement Concerning Transfer
of Certain Assets dated November 21, 1996 (the "Transfer Agreement"), as
follows:
The references in paragraph 3.6(f) and 3.6(h) of the Transfer Agreement to the
"Price Costco", "Price Costco Auto Program", and "Price Costco Travel
Program" marks or names are hereby amended to refer, respectively, to the
"Costco", "Costco Auto Program", and "Costco Travel" marks and names.
All obligations of PEI and its Downstream Affiliates under paragraph 3.6(l) of
the Transfer Agreement with respect to Internet domain names shall apply
also to Internet domain names containing (a) the term "Costcoauto", or (b)
the word "Costco" either alone or as part of any other term.
Except as explicitly stated in paragraph 1 and 2 above, all of the other
provisions, terms and conditions of the Transfer Agreement remain
unchanged.
Dated the 29th day of May, 1997.
COSTCO COMPANIES, INC.
By:
----------------------------
Name:
Title:
PRICE ENTERPRISES, INC.
By:
----------------------------
1
<PAGE>
Name:
Title:
THE PRICE COMPANY
By:
----------------------------
Name:
Title:
PRICE COSTCO INTERNATIONAL, INC.
By:
----------------------------
Name:
Title:
COSTCO WHOLESALE CORPORATION
By:
----------------------------
Name:
Title:
PRICE GLOBAL TRADING, L.L.C.
By:
----------------------------
Name:
2
<PAGE>
Title:
3
<PAGE>
PRICE QUEST, L.L.C.
By:
----------------------------
Name:
Title:
PQI, INC.
By:
----------------------------
Name:
Title:
4
<PAGE>
[FORM OF FACE OF NOTE]
FOR PURPOSES OF SECTIONS 1273 AND 1275 OF THE INTERNAL REVENUE CODE
OF 1986, AS AMENDED, THE AMOUNT OF ORIGINAL ISSUE DISCOUNT WITH RESPECT TO
EACH $1,000 OF PRINCIPAL AMOUNT OF THIS SECURITY IS $500.60. THE ISSUE
DATE IS AUGUST 19, 1997, AND THE YIELD TO STATED MATURITY IS 3.50% PER
ANNUM (COMPUTED ON A SEMIANNUAL BOND EQUIVALENT BASIS).
"THIS NOTE (OR ITS PREDECESSOR)HAS NOT BEEN REGISTERED UNDER THE U.S.
SECURITIES ACT OF 1933, AS AMENDED (THE SECURITIES ACT"), AND,
ACCORDINGLY, MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED
WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, U.S.
PERSONS, EXCEPT AS SET FORTH IN THE FOLLOWING SENTENCE. BY ITS
ACQUISITION HEREOF OR OF A BENEFICIAL INTEREST HEREIN, THE HOLDER (1)
REPRESENTS THAT (A) IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN
RULE 144A UNDER THE SECURITIES ACT) (A "QIB"), OR (B) IT IS NOT A U.S.
PERSON, IS NOT ACQUIRING THIS NOTE FOR THE ACCOUNT OR BENEFIT OF A U.S.
PERSON AND IS ACQUIRING THIS NOTE IN AN OFFSHORE TRANSACTION IN COMPLIANCE
WITH REGULATION S UNDER THE SECURITIES ACT, (2) AGREES THAT IT WILL NOT,
WITHIN THE TIME PERIOD REFERRED TO UNDER RULE 144(k) (TAKING INTO ACCOUNT
THE PROVISIONS OF RULE 144(d) UNDER THE SECURITIES ACT, IF APPLICABLE)
UNDER THE SECURITIES ACT AS IN EFFECT ON THE DATE OF THE TRANSFER OF THIS
NOTE, RESELL OR OTHERWISE TRANSFER THIS NOTE EXCEPT (A) TO THE COMPANY,
(B) TO A PERSON WHOM THE HOLDER REASONABLY BELIEVES IS A QIB PURCHASING
FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QIB IN COMPLIANCE WITH RULE
144A UNDER THE SECURITIES ACT, (C) OUTSIDE THE UNITED STATES IN AN
OFFSHORE TRANSACTION IN COMPLIANCE WITH RULE 904 UNDER THE SECURITIES ACT,
(D) PURSUANT TO THE EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER
THE SECURITIES ACT (IF AVAILABLE, AND BASED UPON AN OPINION OF COUNSEL
ACCEPTABLE TO THE COMPANY), (E) PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE SECURITIES ACT, (F) TO AN INSTITUTIONAL INVESTOR THAT
IS AN "ACCREDITED INVESTOR" WITHIN THE MEANING OF RULE 501(A)(1),(2),(3)
OR (7) UNDER THE SECURITIES ACT WHICH DELIVERS A CERTIFICATE IN THE FORM
OF EXHIBIT B TO THE INDENTURE TO THE INDENTURE TRUSTEE UNDER THE INDENTURE
DATED AS OF AUGUST 19, 1997, BETWEEN THE COMPANY AND FIRSTAR BANK OF
MINNESOTA, N.A., AS INDENTURE TRUSTEE, OR (G) IN ACCORDANCE WITH ANOTHER
EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT (AND
BASED UPON AN OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY) AND, IN EACH
CASE, IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS, AND (3) AGREES
THAT IT WILL DELIVER TO EACH PERSON TO WHOM THIS NOTE OR AN INTEREST
HEREIN IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND.
AS USED HEREIN, THE TERMS "OFFSHORE TRANSACTION," "UNITED STATES" AND
"U.S. PERSON" HAVE THE MEANINGS GIVEN TO THEM BY RULE 902 OF REGULATION S
UNDER THE SECURITIES ACT. THE INDENTURE CONTAINS A PROVISION REQUIRING
THE TRUSTEE TO REFUSE TO REGISTER ANY TRANSFER OF THIS NOTE IN VIOLATION
OF THE FOREGOING RESTRICTIONS.
<PAGE>
COSTCO COMPANIES, INC.
ZERO COUPON CONVERTIBLE SUBORDINATED NOTE DUE 2017
No. Q-1
Issue Date: August 19, 1997 CUSIP No. 22160QAAO
Issue Price: $499.60
Original Issue Discount: $500.40
(for each $1,000 Principal amount)
Costco Companies, Inc., a Delaware corporation, promises to pay to
Cede & Co., or registered assigns, the Principal Amount of $200,000,000.00
Dollars on August 19, 2017.
This Security shall not bear interest except as specified on the other
side of this Security. Original Issue Discount will accrue as specified
on the other side of this Security. This Security is convertible as
specified on the other side of this Security. All capitalized terms used
herein without definition shall have the respective meanings assigned
thereto in the Indenture referred to on the other side of this Security.
<PAGE>
Additional provisions of this Security are set forth on the other
side of this Security.
COSTCO COMPANIES, INC.
By: ________________________
Title:
ATTEST:
_______________________________
Date: ________________________
TRUSTEE'S CERTIFICATE OF
AUTHENTICATION
________________________________
as Trustee, certifies that this Security
is one of the Securities referred to
in the within-mentioned Indenture.
By: __________________________________
Authorized Signatory
<PAGE>
[FORM OF REVERSE SIDE OF NOTE]
ZERO COUPON CONVERTIBLE SUBORDINATED NOTE DUE 2017
Unless and until it is exchanged in whole or in part for
Securities in definitive form, this Security may not be transferred except
as a whole by the Depositary to a nominee of the Depositary or by a
nominee of the Depositary to the Depositary or another nominee of the
Depositary or by the Depositary or any such nominee to a successor
Depositary or a nominee of such successor Depositary. Unless this
certificate is presented by an authorized representative of The Depository
Trust Company, a New York corporation ("DTC"), to the Company or its agent
for registration of transfer, exchange or payment, and any certificate
issued is registered in the name of Cede & Co. or in such other name as is
requested by an authorized representative of DTC (and any payment is made
to Cede & Co. or to such other entity as is requested by an authorized
representative of DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE
OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL inasmuch as the registered
owner hereof, Cede & Co., has an interest therein.
1. INTEREST
This Security shall not bear interest except as specified in this
paragraph. If the Principal Amount hereof or any portion of such
Principal Amount is not paid when due (whether upon acceleration pursuant
to Section 6.02 of the Indenture, upon the date set for payment of the
Redemption Price pursuant to paragraph 5 hereof, upon the date set for
payment of a Purchase Price or Change of Control Purchase Price pursuant
to paragraph 6 hereof or upon the Stated Maturity of this Security) or if
shares of Common Stock (or cash in lieu of fractional shares) in respect
of a conversion of this Security in accordance with the terms of Article
10 of the Indenture is not delivered when due, then in each such case the
overdue amount shall bear interest at the rate of 3.50% per annum,
compounded semiannually (to the extent that the payment of such interest
shall be legally enforceable), which interest shall accrue from the date
such overdue amount was due to the date payment of such amount, including
interest thereon, has been made or duly provided for. All such interest
shall be payable on demand.
Original Issue Discount (the difference between the Issue Price and
the Principal Amount of the Security), in the period during which a
Security remains outstanding, shall accrue at 3.50% per annum, on a
semiannual bond equivalent basis using a 360-day year composed of twelve
30-day months, commencing on the Issue Date of this Security, and cease to
accrue on the earlier of (a) the date on which the Principal Amount at
Stated Maturity hereof or any portion of such
- -----------------
Include if Global certificate.
<PAGE>
Principal Amount at Stated Maturity becomes due and payable and (b) any
Redemption Date, Conversion Date, Change of Control Purchase Date, Purchase
Date or other date on which such Original Issue Discount shall cease to
accrue in accordance with Section 2.08 of the Indenture.
2. METHOD OF PAYMENT
Subject to the terms and conditions of the Indenture, Costco
Companies, Inc. (the "Company") will make payments in respect of the
Securities to the persons who are registered Holders of Securities at the
close of business on the Business Day preceding the Redemption Date or
Stated Maturity, as the case may be, or at the close of business on a
Purchase Date, Change of Control Purchase Date or Conversion Date, as the
case may be. Holders must surrender Securities to a Paying Agent to
collect such payments in respect of the Securities. The Company will pay
cash amounts in money of The United States of America that at the time of
payment is legal tender for payment of public and private debts. However,
the Company may make such cash payments in respect of a certificated
Security, if applicable, by check payable in such money; provided that
payment by wire transfer of immediately available funds will be required
with respect to payments in respect of all Global Securities and all other
Securities the Holders of which shall have provided written wire transfer
instructions to the Company or the Paying Agent five days before the
payment date.
3. PAYING AGENT, CONVERSION AGENT AND REGISTRAR
Initially, Firstar Bank of Minnesota, N.A., as trustee (the
"Trustee"), will act as Paying Agent, Conversion Agent and Registrar. The
Company may appoint and change any Paying Agent, Conversion Agent,
Registrar or co-registrar, upon notice to the Trustee and the Holders.
The Company or any of its Subsidiaries or any of their Affiliates may act
as Paying Agent, Conversion Agent, Registrar or co-registrar.
4. INDENTURE
The Company issued the Securities under an Indenture, dated as of
August 19, 1997 (the "Indenture"), between the Company and the Trustee.
The terms of the Securities include those stated in the Indenture and
those made part of the Indenture by reference to the Trust Indenture Act
of 1939, as amended by the Trust Indenture Reform Act of 1990, and, as in
effect on the date of the Indenture (the "TIA"), except as provided in
Section 9.03 of the Indenture. Capitalized terms used herein or on the
face hereof and not defined herein have the meanings ascribed thereto in
the Indenture. The Securities are subject to all such terms, and
Securityholders are referred to the Indenture and the TIA for a statement
of those terms.
The Securities are general, unsecured obligations of the Company
limited to the aggregate Principal Amount specified in Section 2.02 of the
Indenture (subject to Section 2.07 of the Indenture). The
<PAGE>
Indenture does not limit other indebtedness of the Company, secured or
unsecured.
5. REDEMPTION AT THE OPTION OF THE COMPANY
No sinking fund is provided for the Securities. The Securities are
redeemable as a whole, or from time to time in part, at any time at the
option of the Company at the Redemption Prices set forth below, PROVIDED,
that the Securities are not redeemable prior to August 19, 2002.
The table below shows the Redemption Prices of a Security per $1,000
Principal Amount on the dates shown below and at Stated Maturity, which
prices reflect accrued Original Issue Discount calculated to each such
date. The Redemption Price of a Security redeemed between such dates
would include an additional amount reflecting the additional Original
Issue Discount accrued from and including the next preceding date in the
table through the actual Redemption Date.
REDEMPTION
REDEMPTION DATE PRICE
- --------------- -----
August 19, 2002.................. $594.25
August 19, 2003.................. 615.23
August 19, 2004.................. 636.95
August 19, 2005.................. 659.44
August 19, 2006.................. 682.72
August 19, 2007.................. 706.82
August 19, 2008.................. 731.78
August 19, 2009.................. 757.62
August 19, 2010.................. 784.36
August 19, 2011.................. 812.06
August 19, 2012.................. 840.73
August 19, 2013.................. 870.41
August 19, 2014.................. 901.14
August 19, 2015.................. 932.96
August 19, 2016.................. 965.90
At maturity..................... 1,000.00
6. PURCHASE BY THE COMPANY AT THE OPTION OF THE HOLDER
Subject to the terms and conditions of the Indenture, the Company
shall become obligated to purchase, at the option of the Holder, the
Securities held by such Holder on the following Purchase Dates and at the
following Purchase Prices per $1,000 Principal Amount at Stated Maturity
of such Securities, upon delivery of a Purchase Notice containing the
information set forth in the Indenture, at any time from the opening of
business on the date that is 20 Business Days prior to
<PAGE>
such Purchase Date until the close of business on such Purchase Date and upon
delivery of the Securities to the Paying Agent by the Holder as set forth in
the Indenture. Such Purchase Price (equal to the Issue Price plus accrued
Original Issue Discount through such Purchase Date) may be paid, at the
option of the Company, in cash or by the issuance and delivery of shares of
Common Stock of the Company, or in any combination thereof.
Purchase Date Purchase Price
------------- --------------
August 19, 2002 $594.25
August 19, 2007 $706.82
August 19, 2012 $840.73
Subject to the terms and conditions of the Indenture, if any Change of
Control occurs on or prior to August 19, 2002, the Company shall, at the
option of the Holder, purchase all Securities for which a Change of Control
Purchase Notice shall have been delivered as provided in the Indenture and
not withdrawn, on the date that is 35 Business Days after the occurrence of
such Change of Control, for a Change of Control Purchase Price equal to the
Issue Price, plus accrued Original Issue Discount through the Change of
Control Purchase Date, which Change of Control Purchase Price shall be paid
in cash.
Holders have the right to withdraw any Purchase Notice or Change of
Control Purchase Notice, as the case may be, by delivering to the Paying
Agent a written notice of withdrawal in accordance with the provisions of the
Indenture prior to the close of business on the Purchase Date or Change of
Control Purchase Date, as the case may be.
If cash sufficient to pay the Purchase Price or Change of Control
Purchase Price of all Securities or portions thereof to be purchased as of
the Purchase Date or the Change of Control Purchase Date, as the case may be,
is deposited with the Paying Agent on the Business Day following the Purchase
Date or the Change of Control Purchase Date, as the case may be, Original
Issue Discount ceases to accrue on such Securities (or portions thereof) on
and after such date, and the Holders thereof shall have no other rights as
such (other than the right to receive the Purchase Price or Change of Control
Purchase Price, as the case may be, upon surrender of such Security).
7. NOTICE OF REDEMPTION
Notice of redemption will be mailed at least 20 days but not more
than 60 days before the Redemption Date to each Holder of Securities to be
redeemed at the Holder's registered address. If money sufficient to pay
the Redemption Price of all Securities (or portions thereof) to be
redeemed on the Redemption Date is deposited with the Paying Agent prior
to or on the Redemption Date, on and after such date Original Issue
Discount ceases to accrue on such Securities or portions thereof.
Securities in denominations larger than $1,000 of Principal Amount may
<PAGE>
be redeemed in part but only in integral multiples of $1,000 of Principal
Amount.
8. CONVERSION
Subject to the next two succeeding sentences, a Holder of a Security may
convert it into Common Stock of the Company at any time before the close of
business on August 19, 2017; PROVIDED, HOWEVER, that if a Security is called
for redemption, the Holder may convert it at any time before the close of
business on the date that is seven days prior to the Redemption Date. The
number of shares of Common Stock to be delivered upon conversion of a
Security into Common Stock per $1,000 of Principal Amount shall be equal to
the Conversion Rate. A Security in respect of which a Holder has delivered a
Purchase Notice or Change of Control Purchase Notice exercising the option of
such Holder to require the Company to purchase such Security may be converted
only if the notice of exercise is withdrawn in accordance with the terms of
the Indenture.
The initial Conversion Rate is 11.3545 shares of Common Stock per $1,000
Principal Amount, subject to adjustment in certain events described in the
Indenture. The Company will deliver cash or a check in lieu of any
fractional share of Common Stock.
To convert a Security a Holder must (i) complete and manually sign the
conversion notice on the back of the Security (or complete and manually sign
a facsimile of such notice) and deliver such notice to the Conversion Agent
(or the office or agency referred to in Section 4.05 of the Indenture), (ii)
furnish appropriate endorsements and transfer documents if required by the
Conversion Agent, the Company or the Trustee and (iii) pay any transfer or
similar tax, if required.
If the Holder converts more than one Security at the same time, the
number of shares of Common Stock issuable upon the conversion shall be based
on the total Principal Amount of the Securities converted.
A Holder may convert a portion of a Security if the Principal Amount of
such portion is $1,000 or an integral multiple of $1,000. No payment or
adjustment will be made for dividends on the Common Stock, except as provided
in the Indenture. On conversion of a Security, that portion of accrued
Original Issue Discount attributable to the period from the Issue Date to the
Conversion Date with respect to the converted Security shall not be
cancelled, extinguished or forfeited, but rather shall be deemed paid in full
to the Holder thereof through the delivery of the Common Stock in exchange
for the Security being converted pursuant to the terms hereof, and the fair
market value of such Common Stock (together with any cash payment in lieu of
fractional shares of Common Stock) shall be treated as issued, to the extent
thereof, first in exchange for Original Issue Discount accrued through the
Conversion Date, and the balance, if any, of such fair market value of such
shares of Common Stock (and any such cash payment) shall be
<PAGE>
treated as issued in exchange for the Issue Price of the Security being
converted pursuant to the provisions hereof.
The Conversion Rate will be adjusted for dividends or distributions on
Common Stock payable in Common Stock or other Capital Stock; subdivisions,
combinations or certain reclassifications of Common Stock; distributions to
all holders of Common Stock of certain rights to purchase Common Stock for a
period expiring within 60 days at less than the Market Price at the Time of
Determination; and distributions to such holders of assets or debt securities
of the Company or certain rights to purchase securities of the Company
(excluding certain cash dividends or distributions). However, no adjustment
need be made if Securityholders may participate in the transaction or in
certain other cases. The Company from time to time may voluntarily increase
the Conversion Rate.
If the Company is a party to a consolidation, merger or binding share
exchange of the type specified in the Indenture, or certain transfers of all
or substantially all of its assets to another person, or in certain other
circumstances described in the Indenture, the right to convert a Security
into Common Stock may be changed into a right to convert it into securities,
cash or other assets of the Company or another person.
9. CONVERSION ARRANGEMENT ON CALL FOR REDEMPTION
Any Securities called for redemption, unless surrendered for conversion
before the Redemption Date, may be deemed to be purchased from the Holders of
such Securities at an amount not less than the Redemption Price, together
with accrued interest if any, to the Redemption Date, by one or more
investment bankers or other purchasers who may agree with the Company to
purchase such Securities from the Holders and to make payment for such
Securities to the Trustee in trust for such Holders.
10. DENOMINATIONS; TRANSFER; EXCHANGE
The Securities are in fully registered form, without coupons, in
denominations of $1,000 of Principal Amount and integral multiples of $1,000.
A Holder may transfer or exchange Securities in accordance with the
Indenture. The Registrar may require a Holder, among other things, to
furnish appropriate endorsements and transfer documents and to pay any taxes
and fees required by law or permitted by the Indenture. The Registrar need
not transfer or exchange any Securities selected for redemption (except, in
the case of a Security to be redeemed in part, the portion of the Security
not to be redeemed) or any Securities in respect of which a Purchase Notice
or Change of Control Purchase Notice has been given and not withdrawn
(except, in the case of a Security to be purchased in part, the portion of
the Security not to be purchased) or any Securities for a period of 15 days
before a selection of Securities to be redeemed.
<PAGE>
11. PERSONS DEEMED OWNERS
The registered Holder of this Security may be treated as the owner of
this Security for all purposes.
12. UNCLAIMED MONEY OR SECURITIES
The Trustee and the Paying Agent shall return to the Company upon
written request any money or securities held by them for the payment of any
amount with respect to the Securities that remains unclaimed for two years,
PROVIDED, HOWEVER, that at the Company's request, the Trustee or such Paying
Agent, before being required to make any such return, shall at the expense of
the Company cause to be published once in THE WALL STREET JOURNAL or another
newspaper of national circulation or mail to each such Holder notice that
such money or securities remains unclaimed and that, after a date specified
therein, which shall not be less than 30 days from the date of such
publication or mailing, any unclaimed money or securities then remaining will
be returned to the Company. After return to the Company, Holders entitled to
the money or securities must look to the Company for payment as general
creditors unless an applicable abandoned property law designates another
person, and the Trustee and the Paying Agent shall have no further liability
with respect to such money or securities for that period commencing after the
return thereof.
13. AMENDMENT; WAIVER
Subject to certain exceptions set forth in the Indenture, (i) the
Indenture or the Securities may be amended with the written consent of the
Holders of at least a majority in aggregate Principal Amount of the
Securities at the time outstanding and (ii) certain defaults or noncompliance
with certain provisions may be waived with the written consent of the Holders
of a majority in aggregate Principal Amount of the Securities at the time
outstanding. Subject to certain exceptions set forth in the Indenture,
without the consent of any Securityholder, the Company and the Trustee may
amend the Indenture or the Securities to cure any ambiguity, defect or
inconsistency, or to comply with Article 5 or Section 10.14 of the Indenture
or to make any change that does not adversely affect the rights of any
Securityholder.
<PAGE>
14. DEFAULTS AND REMEDIES
Under the Indenture, Events of Default include (i) default in payment of
the Principal Amount, Issue Price, accrued Original Issue Discount,
Redemption Price, Purchase Price or Change of Control Purchase Price, as the
case may be, in respect of the Securities when the same becomes due and
payable; (ii) failure either to deliver shares of Common Stock (or cash in
lieu of fractional shares) in accordance with the terms of the Indenture when
such Common Stock (or cash in lieu of fractional shares) is required to be
delivered following conversion of a Security and such failure is not remedied
for a period of 10 days; (iii) failure by the Company to comply with other
agreements in the Indenture or the Securities, subject to notice and lapse of
time; (iv) default (A) in the payment of any principal on any debt for
borrowed money of the Company, in an aggregate principal amount in excess of
$10 million when due at its final maturity, or (B) in the performance of any
term or provision of any debt for borrowed money of the Company in an
aggregate principal amount in excess of $10 million that results in such debt
becoming or being declared due and payable prior to the date on which it
would otherwise become due and payable; or (v) certain events of bankruptcy
or insolvency. If an Event of Default occurs and is continuing, the Trustee,
or the Holders of at least 25% in aggregate Principal Amount of the
Securities at the time outstanding, may declare all the Securities to be due
and payable immediately. Certain events of bankruptcy or insolvency are
Events of Default that will result in the Securities becoming due and payable
immediately upon the occurrence of such Events of Default.
Securityholders may not enforce the Indenture or the Securities, except
as provided in the Indenture. The Trustee may refuse to enforce the
Indenture or the Securities unless it receives reasonable indemnity or
security. Subject to certain limitations, Holders of a majority in aggregate
Principal Amount of the Securities at the time outstanding may direct the
Trustee in its exercise of any trust or power. The Trustee may withhold from
Securityholders notice of any continuing Default (except a Default in payment
of amounts specified in clause (i) above) if it determines that withholding
notice is in their interests.
15. TRUSTEE DEALINGS WITH THE COMPANY
Subject to certain limitations imposed by the TIA, the Trustee under the
Indenture, in its individual or any other capacity, may become the owner or
pledgee of Securities and may otherwise deal with and collect obligations
owed to it by the Company or its Affiliates and may otherwise deal with the
Company or its Affiliates with the same rights it would have if it were not
Trustee.
16. NO RECOURSE AGAINST OTHERS
A director, officer, employee or stockholder, as such, of the Company
shall not have any liability for any obligations of the Company
<PAGE>
under the Securities or the Indenture or for any claim based on, in respect
of or by reason of such obligations or their creation. By accepting a
Security, each Securityholder waives and releases all such liability. The
waiver and release are part of the consideration for the issue of the
Securities.
17. ADDITIONAL RIGHTS OF HOLDERS OF TRANSFER RESTRICTED SECURITIES
In addition to the rights provided to Holders of Securities under the
Indenture, Holders of Securities shall have all the rights set forth in the
Registration Rights Agreement.
18. SUBORDINATION
The Securities are subordinated to Senior Indebtedness (as defined in
the Indenture), and all obligations of the Company with respect to the Senior
Indebtedness. To the extent provided in the Indenture, Senior Indebtedness
must be paid before the Securities may be paid. The Company agrees, and each
Holder by accepting a Security consents and agrees, to the subordination
provided in the Indenture and authorizes the Trustee to give it effect.
19. AUTHENTICATION
This Security shall not be valid until an authorized signatory of the
Trustee manually signs the Certificate of Authentication on the other side of
this Security.
20. ABBREVIATIONS
Customary abbreviations may be used in the name of a Securityholder or
an assignee, such as TEN COM (=tenants in common), TEN ENT (=tenants by the
entireties), JT TEN (=joint tenants with right of survivorship and not as
tenants in common) and CUST (=custodian), and UNIF TRANS MIN ACT (=Uniform
Transfers to Minors Act).
21. GOVERNING LAW
THE INDENTURE AND THIS SECURITY SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, AS APPLIED TO CONTRACTS
MADE AND TO BE PERFORMED WITHIN THE STATE OF NEW YORK WITHOUT REGARD TO
PRINCIPLES OF CONFLICTS OF LAWS. THE COMPANY HEREBY IRREVOCABLY SUBMITS TO
THE JURISDICTION OF ANY NEW YORK STATE COURT SITTING IN THE BOROUGH OF
MANHATTAN IN THE CITY OF NEW YORK OR
- -------------------
This certificate shall be included only for the Transfer Restricted
Securities.
<PAGE>
ANY FEDERAL COURT SITTING IN THE BOROUGH OF MANHATTAN IN THE CITY OF NEW YORK
IN RESPECT OF ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO
THIS AGREEMENT, AND IRREVOCABLY ACCEPTS FOR ITSELF AND IN RESPECT OF ITS
PROPERTY, GENERALLY AND UNCONDITIONALLY, JURISDICTION OF THE AFORESAID
COURTS. THE COMPANY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT IT MAY
EFFECTIVELY DO SO UNDER APPLICABLE LAW, ANY OBJECTION THAT IT MAY NOW OR
HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY SUCH SUIT, ACTION OR
PROCEEDING BROUGHT IN ANY SUCH COURT AND ANY CLAIM THAT ANY SUCH SUIT, ACTION
OR PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT
FORUM.
-------------------
The Company will furnish to any Securityholder upon written request and
without charge a copy of the Indenture which has in it the text of this
Security in larger type. Requests may be made to:
Costco Companies, Inc.
999 Lake Drive
Issaquah, Washington 98027
Attn: Treasurer
<PAGE>
ASSIGNMENT FORM CONVERSION NOTICE
To assign this Security, fill To convert this Security into
in the form below: Common Stock of the Company,
check the box:
----
I or we assign and transfer : :
this Security to : :
-----
------------------------
(Insert assignee's soc.
sec. or tax ID no.) To convert only part of this
Security, state the Principal
- ------------------------------ Amount to be converted (which
must be $1,000 or an integral
- ------------------------------ multiple of $1,000):
----------
- ------------------------------ :$ :
----------
- ------------------------------
(Print or type assignee's
name, address and zip code) If you want the stock
certificate made out in
and irrevocably appoint another person's name, fill
____________________ agent in the form below:
to transfer this Security on
the books of the Company. The ----------
agent may substitute another : :
to act for him. ----------
(Insert person's soc.
EXCHANGE FORM sec. or tax ID no.)
To exchange its beneficial ------------------------------
interest in Global Security
held by the Depositary for a ------------------------------
Security or Securities in
definitive, registered form of ------------------------------
authorized denominations and an
aggregate principal amount equal ------------------------------
to its beneficial interest in (Print or type person's name,
such Global Security, a Holder address and zip code)
should check the box
-----
: :
: :
-----
- ------------------------------------------------------------------------------
Date: Your Signature: *
---------------- ------------------------
- ------------------------------------------------------------------------------
<PAGE>
(Sign exactly as your name appears on the other side of this Security)
* Your signature must be guaranteed by an "eligible guarantor institution"
meeting the requirements of the Registrar, which requirements include
membership or participation in the Security Transfer Agent Medallion Program
("STAMP") or such other "signature guarantee program" as may be determined by
the Registrar in addition to, or in substitution for, STAMP, all in
accordance with the Securities Exchange Act of 1934, as amended.
<PAGE>
SCHEDULE OF EXCHANGES OF DEFINITIVE SECURITIES***
The following exchanges of a part of this Global Security for
Definitive Securities have been made:
Amount of Amount of Principal Amount
decrease in increase in at Maturity Signature of
Principal Amount Principal Amount of this Global authorized
at Maturity at Maturity of Security following signatory of
Date of of this Global this Global such decrease (or Trustee or
Exchange Security Security increase) Securities
Custodian
- -------------------------------------------------------------------------------
<PAGE>
- -------------------
*** This schedule should only be added if the Security is issued in
global form.
<PAGE>
CERTIFICATE TO BE DELIVERED UPON EXCHANGE OR REGISTRATION OF TRANSFER OF
SECURITIES
Re: ZERO COUPON CONVERTIBLE SUBORDINATED NOTES DUE 2017 OF COSTCO
COMPANIES, INC.
This Certificate relates to $______ principal amount of Securities held
in (check applicable box) _____ book-entry or ______ definitive form by
_____ (the "Transferor").
The Transferor (check applicable box):
/ / has requested the Registrar by written order to deliver in exchange
for its beneficial interest in the Global Security held by the Depositary a
Security or Securities in definitive, registered form of authorized
denominations and an aggregate principal amount equal to its beneficial
interest in such Global Security (or the portion thereof indicated above); or
/ / has requested the Registrar by written order to exchange or
register the transfer of a Security or Securities.
In connection with such request and in respect of each such
Security, the Transferor does hereby certify that Transferor is familiar with
the Indenture relating to the above-captioned Securities and as provided in
Section 2.06 of such Indenture, the transfer of this Security does not
require registration under the Securities Act (as defined below) because:
/ / Such Security is being acquired for the Transferor's own account,
without transfer (in satisfaction of Section 2.06(a)(ii)(A) or Section
2.06(d)(i)(A) of the Indenture).
/ / Such Security is being transferred to a "qualified institutional
buyer" (within the meaning of Rule 144A promulgated under the Securities
Act), that is aware that any sale of Securities to it will be made in
reliance on Rule 144A under the Securities Act and that is acquiring such
Transfer Restricted Security for its own account, or for the account of
another such "qualified institutional buyer" (in satisfaction of Section
2.06(a)(ii)(B) or Section 2.06 (d)(i)(B) of the Indenture).
/ / Such Security is being transferred pursuant to an exemption from
registration in accordance with Rule 144, or Regulation S under the
Securities Act, or pursuant to an effective registration statement under the
Securities Act (in satisfaction of Section 2.06(a)(ii)(C) or Section
2.06(d)(i)(C) of the Indenture).
- -------------------
<PAGE>
/ / Such Security is being transferred to an institutional "accredited
investor" within the meaning of subparagraph (a)(1), (2), (3) or (7) of Rule
501 under the Securities Act, that is purchasing such Security for its own
account or for the account of such an institutional "accredited investor" in
each case in a minimum principal amount of $250,000, not with a view to or
for offer for sale in connection with any distribution in violation of the
Securities Act. A signed transferee letter of representation accompanies
this Certificate (in satisfaction of Section 2.06(a)(ii)(D) or Section
2.06(d)(i)(D) of the Indenture)
---------------------------
[INSERT NAME OF TRANSFEROR]
By:
------------------------
Date:
---------------------------
<PAGE>
- -------------------------------------------------------------------------------
COSTCO COMPANIES, INC.,
ISSUER,
and
Firstar Bank of Minnesota, N.A.,
Trustee
-----------------------
INDENTURE
Dated as of August 19, 1997
-----------------------
ZERO COUPON CONVERTIBLE SUBORDINATED NOTES DUE 2017
- -------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
NOTE: This Table of Contents shall not, for any purpose, be deemed to be
part of the Indenture.
<TABLE>
Page
----
ARTICLE 1
DEFINITIONS AND INCORPORATION BY REFERENCE
<S> <C> <C>
SECTION 1.01. Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . .1
SECTION 1.02. Other Definitions. . . . . . . . . . . . . . . . . . . . . . . .7
SECTION 1.03. Incorporation by Reference of Trust Indenture Act. . . . . . . .7
SECTION 1.04. Rules of Construction. . . . . . . . . . . . . . . . . . . . . .8
ARTICLE 2
THE SECURITIES
SECTION 2.01. Form and Dating. . . . . . . . . . . . . . . . . . . . . . . . .8
SECTION 2.02. Execution and Authentication . . . . . . . . . . . . . . . . . .8
SECTION 2.03. Registrar, Paying Agent and Conversion Agent . . . . . . . . . .9
SECTION 2.04. Paying Agent To Hold Money and Securities in Trust . . . . . . 10
SECTION 2.05. Securityholder Lists . . . . . . . . . . . . . . . . . . . . . 10
SECTION 2.06. Transfer and Exchange. . . . . . . . . . . . . . . . . . . . . 11
SECTION 2.07. Replacement Securities . . . . . . . . . . . . . . . . . . . . 17
SECTION 2.08. Outstanding Securities; Determinations of Holders' Action. . . 18
SECTION 2.09. Temporary Securities . . . . . . . . . . . . . . . . . . . . . 19
SECTION 2.10. Cancellation . . . . . . . . . . . . . . . . . . . . . . . . . 20
SECTION 2.11. CUSIP Numbers. . . . . . . . . . . . . . . . . . . . . . . . . 20
ARTICLE 3
REDEMPTION AND PURCHASES
SECTION 3.01. Right to Redeem; Notices to Trustee. . . . . . . . . . . . . . 20
SECTION 3.02. Selection of Securities to Be Redeemed . . . . . . . . . . . . 21
SECTION 3.03. Notice of Redemption . . . . . . . . . . . . . . . . . . . . . 21
SECTION 3.04. Effect of Notice of Redemption . . . . . . . . . . . . . . . . 23
SECTION 3.05. Deposit of Redemption Price. . . . . . . . . . . . . . . . . . 23
SECTION 3.06. Securities Redeemed in Part. . . . . . . . . . . . . . . . . . 23
SECTION 3.07. Conversion Arrangement on
i
<PAGE>
Call for Redemption. . . . . . . . . 23
SECTION 3.08. Purchase of Securities at the Option of the Holder . . . . . . 24
SECTION 3.09. Purchase of Securities at Option
of the Holder upon Change of Control . . . . . . . . . . . . . 31
SECTION 3.10. Effect of Purchase Notice
or Change in Control Purchase Notice . . . . . . . . . . . . . 33
SECTION 3.11. Deposit of Purchase Price or
Change in Control Purchase Price . . . . . . . . . . . . . . . 35
SECTION 3.12. Securities Purchased in Part . . . . . . . . . . . . . . . . . 35
SECTION 3.13. Covenant to Comply with Securities Laws upon Purchase of
Securities . . . . . . . . . . . . . . . . . . . . . . . . . . 35
SECTION 3.14. Repayment to the Company . . . . . . . . . . . . . . . . . . . 36
ARTICLE 4
COVENANTS
SECTION 4.01. Payment of Securities. . . . . . . . . . . . . . . . . . . . . 36
SECTION 4.02. SEC Reports. . . . . . . . . . . . . . . . . . . . . . . . . . 37
SECTION 4.03. Compliance Certificate; Notice of Defaults . . . . . . . . . . 37
SECTION 4.04. Further Instruments and Acts . . . . . . . . . . . . . . . . . 38
SECTION 4.05. Maintenance of Office or Agency. . . . . . . . . . . . . . . . 38
SECTION 4.06. Calculation of Original
Issue Discount . . . . . . . . . . . . . . . . . . . . . . . . 39
ARTICLE 5
SUCCESSOR CORPORATION
SECTION 5.01. When Company May Merge or Transfer Assets. . . . . . . . . . . 39
SECTION 5.02. Successor Company Substituted. . . . . . . . . . . . . . . . . 40
ARTICLE 6
DEFAULTS AND REMEDIES
SECTION 6.01. Events of Default. . . . . . . . . . . . . . . . . . . . . . . 40
SECTION 6.02. Acceleration . . . . . . . . . . . . . . . . . . . . . . . . . 42
SECTION 6.03. Other Remedies . . . . . . . . . . . . . . . . . . . . . . . . 42
SECTION 6.04. Waiver of Past Defaults. . . . . . . . . . . . . . . . . . . . 43
SECTION 6.05. Control by Majority. . . . . . . . . . . . . . . . . . . . . . 43
SECTION 6.06. Limitation on Suits. . . . . . . . . . . . . . . . . . . . . . 43
SECTION 6.07. Rights of Holders to Receive Payment . . . . . . . . . . . . . 44
SECTION 6.08. Collection Suit by Trustee . . . . . . . . . . . . . . . . . . 44
SECTION 6.09. Trustee May File Proofs of Claim . . . . . . . . . . . . . . . 44
SECTION 6.10. Priorities . . . . . . . . . . . . . . . . . . . . . . . . . . 45
SECTION 6.11. Undertaking for Costs. . . . . . . . . . . . . . . . . . . . . 45
SECTION 6.12. Notice of Defaults . . . . . . . . . . . . . . . . . . . . . . 46
SECTION 6.13. Waiver of Stay, Extension
ii
<PAGE>
or Usury Laws. . . . . . . . . . . . . . . . . . . . . . . . . 46
ARTICLE 7
TRUSTEE
SECTION 7.01. Rights of Trustee. . . . . . . . . . . . . . . . . . . . . . . 47
SECTION 7.02. Individual Rights of Trustee . . . . . . . . . . . . . . . . . 48
SECTION 7.03. Trustee's Disclaimer . . . . . . . . . . . . . . . . . . . . . 48
SECTION 7.04. Notice of Defaults . . . . . . . . . . . . . . . . . . . . . . 49
SECTION 7.05. Reports by Trustee to Holders. . . . . . . . . . . . . . . . . 49
SECTION 7.06. Compensation and Indemnity . . . . . . . . . . . . . . . . . . 49
SECTION 7.07. Replacement of Trustee . . . . . . . . . . . . . . . . . . . . 50
SECTION 7.08. Successor Trustee by Merger. . . . . . . . . . . . . . . . . . 51
SECTION 7.09. Eligibility; Disqualification. . . . . . . . . . . . . . . . . 51
SECTION 7.10. Preferential Collection of Claims Against Company . . . . . . 51
SECTION 7.11. Money Held in Trust. . . . . . . . . . . . . . . . . . . . . . 52
ARTICLE 8
DISCHARGE OF INDENTURE
SECTION 8.01. Discharge of Liability on Securities . . . . . . . . . . . . . 52
SECTION 8.02. Repayment to the Company . . . . . . . . . . . . . . . . . . . 52
ARTICLE 9
AMENDMENTS
SECTION 9.01. Without Consent of Holders . . . . . . . . . . . . . . . . . . 53
SECTION 9.02. With Consent of Holders. . . . . . . . . . . . . . . . . . . . 53
SECTION 9.03. Compliance with Trust Indenture Act. . . . . . . . . . . . . . 54
SECTION 9.04. Revocation and Effect of Consents,
Waivers and Actions. . . . . . . . . . . . . . . . . . . . . . 55
SECTION 9.05. Notation on or Exchange
of Securities. . . . . . . . . . . . . . . . . . . . . . . . . 55
SECTION 9.06. Trustee to Sign Supplemental
Indentures . . . . . . . . . . . . . . . . . . . . . . . . . . 55
SECTION 9.07. Effect of Supplemental Indentures. . . . . . . . . . . . . . . 55
ARTICLE 10
CONVERSION
SECTION 10.01. Conversion Privilege . . . . . . . . . . . . . . . . . . . . . 55
SECTION 10.02. Conversion Procedure . . . . . . . . . . . . . . . . . . . . . 56
SECTION 10.03. Fractional Shares. . . . . . . . . . . . . . . . . . . . . . . 57
SECTION 10.04. Taxes on Conversion. . . . . . . . . . . . . . . . . . . . . . 57
SECTION 10.05. Company to Provide Stock . . . . . . . . . . . . . . . . . . . 58
SECTION 10.06. Adjustment for Change in
Capital Stock. . . . . . . . . . . . . . . . . . . . . . . . . 58
iii
<PAGE>
SECTION 10.07. Adjustment for Rights Issue. . . . . . . . . . . . . . . . . . 59
SECTION 10.08. Adjustment for Other Distributions . . . . . . . . . . . . . . 60
SECTION 10.09. When Adjustment May Be Deferred. . . . . . . . . . . . . . . . 61
SECTION 10.10. When No Adjustment Required. . . . . . . . . . . . . . . . . . 61
SECTION 10.11. Notice of Adjustment . . . . . . . . . . . . . . . . . . . . . 61
SECTION 10.12. Voluntary Increase . . . . . . . . . . . . . . . . . . . . . . 62
SECTION 10.13. Notice of Certain Transactions . . . . . . . . . . . . . . . . 62
SECTION 10.14. Reorganization of Company; Special
Distributions. . . . . . . . . . . . . . . . . . . . . . . . . 62
SECTION 10.15. Company Determination Final. . . . . . . . . . . . . . . . . . 63
SECTION 10.16. Trustee's Adjustment Disclaimer. . . . . . . . . . . . . . . . 64
SECTION 10.17. Simultaneous Adjustments . . . . . . . . . . . . . . . . . . . 64
SECTION 10.18. Successive Adjustments . . . . . . . . . . . . . . . . . . . . 64
ARTICLE 11
SUBORDINATION
SECTION 11.01. Securities Subordinated to Senior
Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . 64
SECTION 11.02. No Payment on Securities in
Certain Circumstances. . . . . . . . . . . . . . . . . . . . . 65
SECTION 11.03. Securities Subordinated to Prior
Payment of All Senior Indebtedness
on Dissolution, Liquidation or
Reorganization . . . . . . . . . . . . . . . . . . . . . . . . 66
SECTION 11.04. Securityholders to be Subrogated
to Rights of Holders of Senior
Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . 67
SECTION 11.05. Obligations of the Company Uncondi-
tional . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
SECTION 11.06. Trustee Entitled to Assume Payments
Not Prohibited in Absence of Notices . . . . . . . . . . . . . 68
SECTION 11.07. Application by Trustee of Assets
Deposited with It. . . . . . . . . . . . . . . . . . . . . . . 69
SECTION 11.08. Subordination Rights Not Impaired by
Acts or Omissions of the Company or
Holders of Senior Indebtedness . . . . . . . . . . . . . . . . 69
SECTION 11.09. Securityholders Rights Not Impaired
by Acts or Omissions of the Company
or Holders of Senior Indebtedness. . . . . . . . . . . . . . . 69
SECTION 11.10. Right of Trustee to Hold Senior
Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . 70
SECTION 11.11. Article XI Not to Prevent Events of
Default. . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
SECTION 11.12. No Fiduciary Duty of Trustee to
Holders of Senior Indebtedness . . . . . . . . . . . . . . . . 70
MISCELLANEOUS
SECTION 12.01. Trust Indenture Act Controls . . . . . . . . . . . . . . . . . 71
SECTION 12.02. Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
SECTION 12.03. Communication by Holders with
iv
<PAGE>
Other Holders. . . . . . . . . . . . . . . . . . . . . . . . . 72
SECTION 12.04. Certificate and Opinion as
to Conditions Precedent. . . . . . . . . . . . . . . . . . . . 72
SECTION 12.05. Statements Required in Certificate or Opinion. . . . . . . . . 72
SECTION 12.06. Separability Clause. . . . . . . . . . . . . . . . . . . . . . 73
SECTION 12.07. Rules By Trustee, Paying Agent,
Conversion Agent and Registrar . . . . . . . . . . . . . . . . 73
SECTION 12.08. Legal Holiday. . . . . . . . . . . . . . . . . . . . . . . . . 73
SECTION 12.09. GOVERNING LAW. . . . . . . . . . . . . . . . . . . . . . . . . 73
SECTION 12.10. No Recourse Against Others . . . . . . . . . . . . . . . . . . 73
SECTION 12.12. Successors . . . . . . . . . . . . . . . . . . . . . . . . . . 74
SECTION 12.12. Multiple Originals . . . . . . . . . . . . . . . . . . . . . . 74
v
<PAGE>
vi
<PAGE>
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
EXHIBIT A FORM OF FACE OF NOTE. . . . . . . . . . . . . . . . . . . . . . . . . .A-1
</TABLE>
vii
<PAGE>
CROSS-REFERENCE TABLE*
TIA Indenture
Section Section
- ---------- ----------
310(a)(1) ............................................ 7.09
(a)(2) ............................................ 7.09
(a)(3) ............................................ N.A.
(a)(4) ............................................ N.A.
(b) ............................................ 7.07; 7.09
(c) ............................................ N.A.
311(a) ............................................ 7.10
(b) ............................................ 7.10
(c) ............................................ N.A.
312(a) ............................................ 2.05
(b) ............................................ 12.03
(c) ............................................ 12.03
313(a) ............................................ 7.05
(b) ............................................ 7.05
(c) ............................................ 12.02
(d) ............................................ 7.05
314(a) ............................................ 4.02; 12.02
(b) ............................................ N.A.
(c)(1) ............................................ 12.04
(c)(2) ............................................ 12.04
(c)(3) ............................................ N.A.
(d) ............................................ N.A.
(e) ............................................ 12.05
(f) ............................................ N.A.
315(a) ............................................ 7.01
(b) ............................................ 7.04; 12.02
(c) ............................................ 7.01
(d) ............................................ 7.01
(e) ............................................ 6.11
316(a)(last sentence) ................................ 2.08
(a)(1)(A) ........................................ 6.05
(a)(1)(B) ........................................ 6.04
(a)(2) ............................................ N.A.
(b) ............................................ 6.07
317(a)(1) ............................................ 6.08
(a)(2) ............................................ 6.09
(b) ............................................ 2.04
318(a) ............................................ 12.01
N.A. means Not Applicable.
- ----------------
* Note: This Cross Reference Table shall not, for any purpose, be
deemed to be part of the Indenture.
<PAGE>
INDENTURE, dated as of August 19, 1997, between COSTCO COMPANIES, INC.,
a Delaware corporation ("COMPANY"), and Firstar Bank of Minnesota, N.A., as
trustee (the "TRUSTEE").
Each party agrees as follows for the benefit of the other party and for
the equal and ratable benefit of the Holders of the Company's Zero Coupon
Convertible Subordinated Notes due 2017 (the "SECURITIES"):
ARTICLE 1
DEFINITIONS AND INCORPORATION BY REFERENCE
SECTION 1.01. DEFINITIONS.
"AFFILIATE" of any specified person means any other person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified person. For the purposes of this definition,
"CONTROL", when used with respect to any specified person, means the power to
direct or cause the direction of the management and policies of such person,
directly or indirectly, whether through the ownership of voting securities,
by contract or otherwise; and the terms "CONTROLLING" and "CONTROLLED" have
meanings correlative to the foregoing.
"AUTHORIZED NEWSPAPER" means the WALL STREET JOURNAL or other national
newspaper, printed in the English language, customarily published on each
Business Day, whether or not published on Saturdays, Sundays or holidays, and
of general circulation. Whenever successive publications are required to be
made in Authorized Newspapers, the successive publications may be made in the
same or in different Authorized Newspapers in the same city meeting the
foregoing requirements and in each case on any Business Day.
"BANKRUPTCY LAW" means Title 11, United States Code, or any similar
Federal or state law for the relief of debtors generally.
"BOARD OF DIRECTORS" or "BOARD" means, with respect to any matter,
either the board of directors of the Company or any committee of such board
duly authorized, with respect to such matter, to exercise the powers of such
board.
"BUSINESS DAY" means each day of the year on which banking institutions
in The City of New York are not required or authorized to close.
"CAPITAL STOCK" for any corporation means any and all shares, interests,
rights to purchase, warrants, options, participations or
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other equivalents of or interests in (however designated) capital stock
issued by that corporation.
"CASH" or "CASH" means such coin or currency of The United States of
America as at any time of payment is legal tender for the payment of public
and private debts.
"CHANGE OF CONTROL" occurs upon any of the following events: (i) upon
any merger or consolidation of the Company with or into any person or any
sale, transfer or other conveyance, whether direct or indirect, of all or
substantially all of the assets of the Company, on a consolidated basis, in
one transaction or a series of related transactions, if, immediately after
giving effect to such transaction, any "person" or "group" is or becomes the
"beneficial owner," directly or indirectly, of more than 50% of the total
voting power in the aggregate normally entitled to vote in the election of
directors, managers, or trustees, as applicable, of the transferee or
surviving entity, or (ii) when any "person" or "group" is or becomes the
"beneficial owner," directly or indirectly, of more than 50% of the total
voting power in the aggregate normally entitled to vote in the election of
directors of the Company. For purposes of this definition of "Change of
Control," (i) the terms "person" and "group" shall have the meaning used for
purposes of Rules 13d-3 and 13d-5 of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), as in effect on the date of this Indenture,
whether or not applicable; and (ii) the term "beneficial owner" shall have
the meaning used in Rules 13d-3 and 13d-5 under the Exchange Act as in effect
on the date of this Indenture, whether or not applicable, except that a
"person" shall be deemed to have "beneficial ownership" of all shares that
any such person has the right to acquire, whether such right is exercisable
immediately or only after the passage of time or upon the occurrence of
certain events.
"COMMON STOCK" means the Common Stock, $0.01 par value per share, of the
Company as it exists on the date of this Indenture or any other shares of
capital stock of the Company into which such common stock shall be
reclassified or changed.
"COMPANY" means the party named as the "Company" in the first paragraph
of this Indenture until a successor replaces it pursuant to the applicable
provisions of this Indenture and, thereafter, shall mean such successor. The
foregoing sentence shall likewise apply to any subsequent such successor or
successors.
"COMPANY REQUEST" or "COMPANY ORDER" means a written request or order
signed in the name of the Company by either of its Chairman or Vice Chairman
of the Board, its President, any Vice President, its Treasurer, or any
Assistant Treasurer, and by its Secretary or an Assistant Secretary, and
delivered to the Trustee.
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"CONSOLIDATED SUBSIDIARY" means, at any date, any Subsidiary the
accounts of which are consolidated with those of the Company as of such date
for public financial reporting purposes.
"CUSTODIAN" means any receiver, trustee, assignee, liquidator, custodian
or similar official under any Bankruptcy Law.
"DEFAULT" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
"DEFINITIVE SECURITIES" means Securities that are in the form of
Security attached hereto as Exhibit A that does not include the paragraph and
schedule referred to in footnotes 1 and 2, respectively.
"DEPOSITARY" means, with respect to the Securities issuable or issued in
whole or in part in global form, the person specified in Section 2.3 as the
Depositary with respect to the Securities, until a successor shall have been
appointed and become such pursuant to the applicable provision of this
Indenture, and, thereafter, "Depositary" shall mean or include such successor.
"EXTRAORDINARY CASH DIVIDENDS" means, a cash distribution (other than
repurchases of shares of Common Stock) which when combined with all other
cash distributions (other than repurchases of shares of Common Stock) during
the 12-month period immediately preceding and ending on the date of such
distribution, would be in excess of 12.5% of the Market Capitalization of the
Common Stock. "Market Capitalization" for this purpose shall mean the number
of shares of the Company's publicly traded Common Stock multiplied by the
Sale Price of the Common Stock on the Trading Day immediately prior to such
distribution.
"GLOBAL SECURITY" means a Security that contains the paragraph and the
schedule referred to in footnotes 1 and 2, respectively, in the form of
Security attached hereto as Exhibit A.
"HOLDER" or "SECURITYHOLDER" means a person in whose name a Security is
registered on the Registrar's books.
"INDENTURE" means this Indenture as amended or supplemented from time to
time in accordance with the terms hereof, including the provisions of the TIA
that are deemed to be a part hereof.
"INITIAL PURCHASERS" means Donaldson Lufkin & Jenrette Securities
Corporation and J.P. Morgan Securities Inc.
"ISSUE DATE" of any Security means the date on which the Security was
originally issued or deemed issued as set forth on the face of the Security.
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"ISSUE PRICE" of any Security means, in connection with the original
issuance of such Security, the initial issue price at which the Security is
sold as set forth on the face of the Security.
"MARKET PRICE" means the average of the Sale Price of the Common Stock
for the five Trading Day period ending on and including the third Trading Day
immediately prior to but not including, the applicable Purchase Date for
purposes of Section 3.08 or date of Time of Determination for purposes of
Article 10, appropriately adjusted to take into account the actual
occurrence, during the seven Trading Days preceding such Purchase Date for
purposes of Section 3.08 or date of Time of Determination for purposes of
Article 10, of any event described in Section 10.06, 10.07 or 10.08; SUBJECT,
HOWEVER, to the conditions set forth in Sections 10.09 and 10.10.
"OFFICER" means either Chairman or Vice Chairman of the Board, the
President, any Vice President, the Treasurer, the Secretary, any Assistant
Treasurer or Assistant Secretary of the Company.
"OFFICERS' CERTIFICATE" means a written certificate containing the
information specified in Sections 12.04 and 12.05, (i) signed in the name of
the Company by either its Chairman of the Board, Vice Chairman of the Board,
President, any Vice President, Treasurer, any Assistant Treasurer,
Controller, or any Assistant Controller, and (ii) attested to by its
Secretary or any Assistant Secretary, and delivered to the Trustee.
"OPINION OF COUNSEL" means a written opinion containing the information
specified in Sections 12.04 and 12.05, if applicable, rendered by legal
counsel who may be (i) an employee of, or counsel to, the Company or (ii)
other counsel designated by the Company and reasonably acceptable to the
Trustee.
"ORIGINAL ISSUE DISCOUNT" of any Security means the difference between
the Issue Price and the Principal Amount of the Security as set forth on the
face of the Security.
"PERSON" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization or
government or any agency or political subdivision thereof.
"PRINCIPAL," "PRINCIPAL AMOUNT" OR "PRINCIPAL AMOUNT" of a Security
means the principal amount due at the maturity date of the Security as set
forth on the face of the Security.
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"PURCHASE AGREEMENT" means the agreement dated August 14, 1997 between
the Company and the Initial Purchasers relating to the offer and sale of the
Securities.
"REDEMPTION DATE" or "REDEMPTION DATE" shall mean the date specified for
redemption of any of the Securities in accordance with the terms of the
Securities and this Indenture.
"REDEMPTION PRICE" or "REDEMPTION PRICE" shall have the meaning set
forth in paragraph 5 of the Securities.
"REGISTRATION RIGHTS AGREEMENT" means that certain agreement among the
Company and the Initial Purchasers of even date herewith relating to the
registration of the Securities under the Securities Act.
"SALE PRICE" of a single share of Common Stock on any Trading Date means
the closing per share sale price (or if no closing sale price is reported,
the average of the bid and ask prices or, if more than one in either case the
average of the average bid and the average ask prices) on such Trading Date
as reported in composite transactions for the principal United States
securities exchange on which the Common Stock is traded or, if the Common
Stock is not listed on a United States national or regional stock exchange,
as reported by the National Association of Securities Dealers Automated
Quotation System.
"SEC" means the Securities and Exchange Commission.
"SECURITIES" or "SECURITY" means any of the Company's Zero Coupon
Convertible Subordinated Notes due 2017, as amended or supplemented from time
to time in accordance with the terms hereof, issued under this Indenture.
"SECURITIES CUSTODIAN" means the Registrar as custodian with respect to
the Securities in global form, or any successor entity thereto.
"SECURITYHOLDER" or "HOLDER" means a person in whose name a Security is
registered on the Registrar's books.
"SENIOR INDEBTEDNESS" means, without duplication, the principal, premium
(if any) and unpaid interest on all present and future (i) indebtedness of
the Company for borrowed money, (ii) obligations of the Company evidenced by
bonds, debentures, notes or similar instruments, (iii) indebtedness incurred,
assumed or guaranteed by the Company in connection with the acquisition by it
or a Subsidiary of any business, properties or assets (except trade debt
classified as accounts payable under generally accepted accounting
principals), (iv) obligations of the Company as lessee under leases required
to be capitalized on the balance sheet of the
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lessee under generally accepted accounting principals, (v) reimbursement
obligations of the Company in respect of letters of credit relating to
indebtedness or other obligations of the Company that qualify as indebtedness
or obligations of the kind referred to in clauses (i) through (iv) above, and
(vi) obligations of the Company under direct or indirect guaranties in
respect of, and obligations (contingent or otherwise) to purchase or
otherwise acquire, or otherwise assure a creditor against loss in respect of,
indebtedness or obligations of others of the kinds referred to in clauses (i)
through (v) above, in each case unless the instrument creating or evidencing
the indebtedness or obligation or pursuant to which the same is outstanding
provides that such indebtedness or obligation is not senior in right of
payment to the Notes.
"STATED MATURITY", when used with respect to any Security, means the
date specified in such Security as the final fixed date on which the
Principal of such Security is due and payable.
"SUBSIDIARY" means (i) a corporation, a majority of whose Capital Stock
with voting power, under ordinary circumstances, to elect directors is, at
the date of determination, directly or indirectly owned by the Company, by
one or more subsidiaries of the Company or by the Company and one or more
subsidiaries of the Company, (ii) a partnership in which the Company or a
subsidiary of the Company holds a majority interest in the equity capital or
profits of such partnership, or (iii) any other person (other than a
corporation) in which the Company, a subsidiary of the Company or the Company
and one or more subsidiaries of the Company, directly or indirectly, at the
date of determination, has (x) at least a majority ownership interest or (y)
the power to elect or direct the election of a majority of the directors or
other governing body of such person.
"TIA" means the Trust Indenture Act of 1939, as amended by the Trust
Indenture Reform Act of 1990, and as in effect on the date of this Indenture,
except as provided in Section 9.03.
"TIME OF DETERMINATION" means the time and date of the determination of
stockholders entitled to receive rights, warrants, options or a distribution,
in each case, to which Sections 10.07 or 10.08 apply.
"TRADING DAY" means each day on which the primary securities exchange or
quotation system which is used to determine the Sale Price is open for
trading or quotation.
"TRANSFER RESTRICTED SECURITY" shall have the meaning set forth in the
Registration Rights Agreement.
"TRUST OFFICER" means any officer of the Trustee assigned by the Trustee
to administer its corporate trust matters.
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"TRUSTEE" means the party named as the "Trustee" in the first paragraph
of this Indenture until a successor replaces it pursuant to the applicable
provisions of this Indenture and, thereafter, shall mean such successor.
SECTION 1.02. OTHER DEFINITIONS.
Defined in
Term Section
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"BENEFICIAL OWNER" ................................... 3.09(a)
"CHANGE OF CONTROL PURCHASE DATE" .................... 3.09(a)
"CHANGE OF CONTROL PURCHASE NOTICE"................... 3.09(c)
"CHANGE OF CONTROL PURCHASE PRICE" ................... 3.09(a)
"COMPANY NOTICE" ..................................... 3.08(e)
"COMPANY NOTICE DATE" ................................ 3.08(e)
"CONVERSION AGENT" ................................... 2.03
"CONVERSION DATE" .................................... 10.02
"CONVERSION RATE" .................................... 10.01
"DTC" ................................................ 2.03
"EVENT OF DEFAULT" ................................... 6.01
"EXCHANGE ACT" ....................................... 3.08(d)
"LEGAL HOLIDAY" ...................................... 11.08
"MARKET PRICE" ....................................... 3.08(d)
"NOTICE OF DEFAULT" .................................. 6.01
"OPTION".............................................. 2.02
"PAYING AGENT"........................................ 2.03
"PURCHASE DATE" ...................................... 3.08(a)
"PURCHASE NOTICE" .................................... 3.08(a)
"PURCHASE PRICE" ..................................... 3.08(a)
"REPRESENTATIVE"...................................... 11.2
"REGISTRAR" .......................................... 2.03
"SECURITIES ACT" ..................................... 3.08(d)
"SENIOR INDEBTEDNESS"................................. 11.2
"TIME OF DETERMINATION" .............................. 10.01
SECTION 1.03. INCORPORATION BY REFERENCE OF TRUST INDENTURE ACT.
Whenever this Indenture refers to a provision of the TIA, such provision is
incorporated by reference in and made a part of this Indenture. The
following TIA terms used in this Indenture have the following meanings:
"COMMISSION" means the SEC.
"INDENTURE SECURITIES" means the Securities.
"INDENTURE SECURITY HOLDER" means a Securityholder.
"INDENTURE TO BE QUALIFIED" means this Indenture.
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"INDENTURE TRUSTEE" or "INSTITUTIONAL TRUSTEE" means the Trustee.
"OBLIGOR" on the indenture securities means the Company.
All other TIA terms used in this Indenture that are defined by the TIA
or defined by TIA reference to another statute or regulation have the
meanings assigned to them by such definitions.
SECTION 1.04. RULES OF CONSTRUCTION. Unless the context
otherwise requires:
(1) a term has the meaning assigned to it;
(2) an accounting term not otherwise defined has the meaning
assigned to it in accordance with generally accepted accounting
principles as in effect from time to time in The United States of
America;
(3) "or" is not exclusive;
(4) "including" means including, without limitation; and
(5) words in the singular include the plural, and words in
the plural include the singular.
ARTICLE 2
THE SECURITIES
SECTION 2.01. FORM AND DATING. The Securities and the Trustee's
certificate of authentication shall be substantially in the form of Exhibit
A, which is a part of this Indenture. The Securities may have notations,
legends or endorsements required by law, stock exchange rule or usage
(PROVIDED that any such notation, legend or endorsement required by usage is
in a form acceptable to the Company and the Trustee). Each Security shall be
dated the date of its authentication.
The Securities are being offered and sold by the Company pursuant to a
Purchase Agreement, dated August 14, 1997, between the Company and the
Initial Purchasers (the "Purchase Agreement").
SECTION 2.02. EXECUTION AND AUTHENTICATION. The Securities shall be
executed by the Company by either of its Chairman or Vice Chairman of the
Board, its President or one of its Vice Presidents, under its corporate seal
reproduced thereon attested by its Secretary or one of its Assistant
Secretaries. The signature of any of these officers on the Securities may be
manual or facsimile.
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Securities bearing the manual or facsimile signatures of individuals who
were at any time the proper Officers of the Company shall bind the Company,
notwithstanding that such individuals or any of them have ceased to hold such
offices prior to the authentication and delivery of such Securities or did
not hold such offices at the Issue Date of such Securities.
No Security shall be entitled to any benefit under this Indenture or be
valid or obligatory for any purpose unless there appears on such Security a
certificate of authentication substantially in the form provided for herein
duly executed by the Trustee by manual signature of an authorized signatory,
and such certificate upon any Security shall be conclusive evidence, and the
only evidence, that such Security has been duly authenticated and delivered
hereunder.
The Trustee shall authenticate and deliver Securities for original issue
in an aggregate Principal Amount of up to $800,000,000 upon a Company Order
without any further action by the Company; PROVIDED, HOWEVER, that in the
event that the Initial Purchasers buy any Additional Securities pursuant to
the overallotment option (the "Option") granted pursuant to the Purchase
Agreement, then the Trustee shall authenticate and deliver Securities for
original issue in an aggregate Principal Amount of up to $800,000,000, plus
up to $100,000,000 in aggregate Principal Amount or such lesser amount of
Securities in either case, sold pursuant to the Option upon a Company Order.
The aggregate Principal Amount of Securities outstanding at any time may not
exceed the amount set forth in the foregoing sentence, subject to the proviso
set forth therein, except as provided in Section 2.07.
The Securities shall be issued only in registered form without coupons
and only in denominations of $1,000 Principal Amount and only integral
multiples thereof.
SECTION 2.03. REGISTRAR, PAYING AGENT AND CONVERSION AGENT. The
Company shall maintain an office or agency where Securities may be presented
for registration of transfer or for exchange ("REGISTRAR"), an office or
agency where Securities may be presented for purchase or payment ("PAYING
AGENT") and an office or agency where Securities may be presented for
conversion ("CONVERSION AGENT"). The Registrar shall keep a register of the
Securities and of their transfer and exchange. The Company may have one or
more co-registrars, one or more additional paying agents and one or more
additional conversion agents. The term Paying Agent includes any additional
paying agent. The term Conversion Agent includes any additional conversion
agent.
The Company shall enter into an appropriate agency agreement with any
Registrar, Paying Agent, Conversion Agent or co-registrar other than the
Trustee. The agreement shall implement the provisions of this Indenture that
relate to such agent. The
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Company shall notify the Trustee and the Holders of the name and address of
any such agent and of any change in the office or agency referred to in
Section 4.05. If the Company fails to maintain a Registrar, Paying Agent or
Conversion Agent, the Trustee shall act as such and shall be entitled to
appropriate compensation therefor pursuant to Section 7.06. The Company or
any Subsidiary or an Affiliate of either of them may act as Paying Agent,
Registrar, Conversion Agent or co-registrar.
The Company initially appoints the Trustee as Registrar, Conversion
Agent and Paying Agent in connection with the Securities.
The Company initially appoints The Depository Trust Company ("DTC") to
act as Depositary with respect to the Global Securities.
The Company initially appoints the Registrar to act as Securities
Custodian with respect to the Global Securities.
SECTION 2.04. PAYING AGENT TO HOLD MONEY AND SECURITIES IN TRUST. In
accordance with Section 4.05 and except as otherwise provided herein, prior
to 12:00 noon, New York City time, or on each due date of payments in respect
of any Security, the Company shall deposit with the Paying Agent a sum of
money or, if permitted by the terms hereof, securities sufficient to make
such payments when so becoming due. The Company shall require each Paying
Agent (other than the Trustee) to agree in writing that the Paying Agent
shall hold in trust for the benefit of Securityholders or the Trustee all
money and securities held by the Paying Agent for the making of payments in
respect of the Securities and shall notify the Trustee of any default by the
Company in making any such payment. At any time during the continuance of
any default by the Company in making any payments in respect of the
Securities, the Paying Agent shall, upon the written request of the Trustee,
forthwith pay to the Trustee all money and securities so held in trust. If
the Company, a Subsidiary or an Affiliate of any of them acts as Paying
Agent, it shall segregate the money and securities held by it as Paying Agent
and hold it as a separate trust fund. The Company at any time may require a
Paying Agent to pay all money and securities held by it to the Trustee and to
account for any money and securities disbursed by it. Upon doing so, the
Paying Agent shall have no further liability for the money and securities.
SECTION 2.05. SECURITYHOLDER LISTS. The Trustee shall preserve in as
current a form as is reasonably practicable the most recent list available to
it of the names and addresses of Securityholders. If the Trustee is not the
Registrar, the Company shall furnish or cause to be furnished to the Trustee
(i) at least semiannually on June 1 and December 1 a list of the names and
addresses of Securityholders dated within 15 days of the date on which the
list is furnished and (ii) at such other times as the
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Trustee may request in writing a list, in such form and as of such date as
the Trustee may reasonably require, of the names and addresses of
Securityholders.
SECTION 2.06. TRANSFER AND EXCHANGE.
(a) TRANSFER AND EXCHANGE OF DEFINITIVE SECURITIES. (i) Upon surrender
for registration of transfer of any Definitive Security, together with a
written instrument of transfer satisfactory to the Trustee duly executed by
the Securityholder or such Securityholder's attorney duly authorized in
writing, at the office or agency of the Company designated as Registrar or
co-registrar pursuant to Section 2.03 or at the office or agency referred to
in Section 4.05, the Company shall execute, and the Trustee shall
authenticate and deliver, in the name of the designated transferee or
transferees, one or more new Definitive Securities of any authorized
denomination or denominations, of a like aggregate Principal Amount. The
Company shall not charge a service charge for any registration of transfer or
exchange, but the Company may require payment of a sum sufficient to pay all
taxes, assessments or other governmental charges that may be imposed in
connection with the transfer or exchange of the Definitive Securities from
the Securityholder requesting such transfer or exchange (other than any
exchange of a temporary Security for a Definitive Security not involving any
change in ownership) and (ii) in the case of Transfer Restricted Securities
that are Definitive Securities, the request for transfer shall be accompanied
by the following additional information and documents, as applicable:
(A) if such Transfer Restricted Security is being
delivered to the Registrar by a Holder for registration in the name
of such Holder, without transfer, a certification from such Holder
(to that effect (in substantially the form set forth on the reverse
of the Security)); or
(B) if such Transfer Restricted Security is being
transferred to a "qualified institutional buyer" (within the
meaning of Rule 144A promulgated under the Securities Act), that is
aware that any sale of Securities to it will be made in reliance on
Rule 144A under the Securities Act and that is acquiring such
Transfer Restricted Security for its own account, or for the
account of another such "qualified institutional buyer", a
certification from such Holder to that effect (in substantially the
form set forth on the reverse of the Security); or
(C) if such Transfer Restricted Security is being
transferred pursuant to an exemption from registration in
accordance with Rule 144, or Regulation S under the Securities Act,
or pursuant to an effective
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registration statement under the Securities Act, a certification
from such Holder to that effect (in substantially the form set
forth on the reverse of the Security); or
(D) if such Transfer Restricted Security is being
transferred to an institutional "accredited investor" within the
meaning of subparagraph (a)(1), (2), (3) or (7) of Rule 501 under
the Securities Act, that is purchasing the Security for its own
account or for the account of such an institutional "accredited
investor", in each case in a minimum purchase price of $250,000,
not with a view to or for offer for sale in connection with any
distribution in violation of the Securities Act, a certification
from such Holder to that effect (in substantially the form set
forth on the reverse of the Security) and a signed transferee
letter of representation in substantially the form set forth in the
Offering Memorandum.
(b) RESTRICTIONS ON TRANSFER OF A DEFINITIVE SECURITY FOR A BENEFICIAL
INTEREST IN A GLOBAL SECURITY. A Definitive Security may not be exchanged
for a beneficial interest in a Global Security, except upon satisfaction of
the requirements set forth below. Upon receipt by the Registrar of a
Definitive Security, duly endorsed or accompanied by appropriate instruments
of transfer, in form satisfactory to the Registrar, together with written
instructions of the Holder directing the Registrar to make, or to direct the
Securities Custodian to make, an endorsement on the Global Security to
reflect an increase in the aggregate principal amount of the Securities
represented by the Global Security, then the Registrar shall cancel such
Definitive Security and cause, or direct the Securities Custodian to cause,
in accordance with the standing instructions and procedures existing between
the Depositary and the Securities Custodian, the aggregate principal amount
of Securities represented by the Global Security to be increased accordingly.
If no Global Securities are then outstanding, the Company shall issue and
the Trustee shall authenticate a new Global Security in the appropriate
principal amount.
(c) TRANSFER AND EXCHANGE OF GLOBAL SECURITIES. The transfer and
exchange of Global Securities or beneficial interests therein shall be
effected through the Depositary, in accordance with this Indenture and the
procedures of the Depositary therefor.
(d) TRANSFER OF A BENEFICIAL INTEREST IN A GLOBAL SECURITY FOR A
DEFINITIVE SECURITY.
(i) Any Person having a beneficial interest in a Global Security
may upon request exchange such beneficial interest for a Definitive
Security. Upon receipt by the Registrar of written instructions or such
other form of instructions as is
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customary for the Depositary from the Depositary or its nominee on
behalf of any Person having a beneficial interest in a Global Security,
and, if such beneficial interest is being transferred to the Person
designated by the Depositary as being the beneficial owner, a
certification from such person to that effect and in the case of a
Transfer Restricted Security only, the following additional information
and documents (all of which may be submitted by facsimile):
(A) if such beneficial interest is being transferred to
the Person designated by the Depositary as being the beneficial
owner, a certification from such person to that effect (in
substantially the form set forth on the reverse of the Security); or
(B) if such beneficial interest is being transferred to
a "qualified institutional buyer" (within the meaning of Rule 144A
promulgated under the Securities Act), that is aware that any sale
of Securities to it will be made in reliance on Rule 144A under the
Securities Act and that is acquiring such Transfer Restricted
Security for its own account, or for the account of another such
"qualified institutional buyer", a certification to that effect
from the transferor (in substantially the form set forth on the
reverse of the Security); or
(C) if such beneficial interest is being transferred
pursuant to an exemption from registration in accordance with Rule
144, or Regulation S under the Securities Act, or pursuant to an
effective registration statement under the Securities Act, a
certification to that effect (in substantially the form set forth
on the reverse of the Security); or
(D) if such beneficial interest is being transferred to
an institutional "accredited investor" within the meaning of
subparagraph (a)(1), (2), (3) or (7) of Rule 501 under the
Securities Act, that is purchasing the Security for its own account
or for the account of such an institutional "accredited investor",
in each case in a minimum principal amount of $250,000, not with a
view to or for offer for sale in connection with any distribution
in violation of the Securities Act, a certification from such
Holder to that effect (in substantially the form set forth on the
reverse of the Security) and a signed transferee letter of
representation in substantially the form set forth in the Offering
Memorandum. (in substantially the form set forth on the reverse of
the Security)(all of which may be submitted by facsimile), then the
Registrar or the Securities Custodian, at the direction of the
Trustee, will cause, in accordance with the standing instructions
and
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procedures existing between the Depositary and the Securities
Custodian, the aggregate principal amount of the Global Security to
be reduced and, following such reduction, the Company will execute
and, upon receipt of an authentication order in the form of an
Officers' Certificate, the Trustee or the Trustee's authenticating
agent will authenticate and deliver to the transferee a Definitive
Security.
(ii) Definitive Securities issued in exchange for a beneficial
interest in a Global Security pursuant to this Section 2.6(d) shall be
registered in such names and in such authorized denominations as the
Depositary, pursuant to instructions from its direct or indirect
participants or otherwise, shall instruct the Registrar. The Registrar
shall deliver such Definitive Securities to the persons in whose names
such Securities are so registered.
(e) RESTRICTIONS ON TRANSFER AND EXCHANGE OF GLOBAL SECURITIES.
Notwithstanding any other provisions of this Indenture (other than the
provisions set forth in subsection (f) of this Section 2.6), a Global
Security may not be transferred as a whole, except by the Depositary to a
nominee of the Depositary or by a nominee of the Depositary to the Depositary
or another nominee of the Depositary or by the Depositary or any such nominee
to a successor Depositary or a nominee of such successor Depositary.
(f) AUTHENTICATION OF DEFINITIVE SECURITIES IN ABSENCE OF DEPOSITARY.
If at any time:
(i) the Depositary for the Securities notifies the Company that
the Depositary is unwilling or unable to continue as Depositary for the
Global Securities and a successor Depositary for the Global Securities
is not appointed by the Company within 90 days after delivery of such
notice; or
(ii) the Company, in its sole discretion, notifies the Trustee and
the Registrar in writing that it elects to cause the issuance of
Definitive Securities under this Indenture,
then the Company will execute, and the Trustee, upon receipt of an Officers'
Certificate requesting the authentication and delivery of Definitive
Securities, will, or its authenticating agent will, authenticate and deliver
Definitive Securities, in an aggregate principal amount equal to the
principal amount of the Global Securities, in exchange for such Global
Securities.
(g) CANCELLATION AND/OR ADJUSTMENT OF GLOBAL SECURITY. At such time as
all beneficial interests in a Global Security have either been exchanged for
Definitive Securities, redeemed, repurchased or cancelled, such Global
Security shall be returned to or retained and cancelled by the Registrar. At
any time prior to such cancellation, if any beneficial interest in a Global
Security
<PAGE>
is exchanged for Definitive Securities, redeemed, repurchased or cancelled,
the principal amount of Securities represented by such Global Security shall
be reduced and an endorsement shall be made on such Global Security, by the
Registrar or the Securities Custodian, at the direction of the Registrar, to
reflect such reduction.
(h) OBLIGATIONS WITH RESPECT TO TRANSFERS AND EXCHANGES. At the option
of the Holder, Securities may be exchanged for other Securities of any
authorized denomination or denominations, of a like aggregate Principal
Amount, upon surrender of the Securities to be exchanged, together with a
written instrument of transfer satisfactory to the Registrar duly executed by
the Securityholder or such Securityholder's attorney duly authorized in
writing, at such office or agency. Whenever any Securities are so surrendered
for exchange, the Company shall execute, and the Trustee shall authenticate
and deliver, the Securities which the Holder making the exchange is entitled
to receive.
The Company shall not be required to make, and the Registrar need not
register, transfers or exchanges of (a) Definitive Securities selected for
redemption (except, in the case of Securities to be redeemed in part, the
portion thereof not to be redeemed), (b) any Securities in respect of which a
Purchase Notice or a Change in Control Purchase Notice has been given and not
withdrawn by the Holder thereof in accordance with the terms of this
Indenture (except, in the case of Securities to be purchased in part, the
portion thereof not to be purchased) or (c) any Securities for a period of 15
days before the mailing of a notice of redemption.
Successive registrations and registrations of transfers and exchanges as
aforesaid may be made from time to time as desired, and each such
registration shall be noted on the register for the Securities.
Any Registrar appointed pursuant to Section 2.03 hereof shall provide to
the Trustee such information as the Trustee may reasonably require in
connection with the delivery by such Registrar of Securities upon transfer or
exchange of Securities.
No Registrar shall be required to make registrations of transfer or
exchange of Securities during any periods designated in the text of the
Securities or in this Indenture as periods during which such registration of
transfers and exchanges need not be made.
(i) LEGENDS. (i) Except as permitted by the following paragraph (ii),
each Security certificate evidencing the Global Securities and the Definitive
Securities (and all Securities issued in exchange therefor or substitution
thereof) shall bear a legend in substantially the following form:
<PAGE>
"THIS NOTE (OR ITS PREDECESSOR) HAS NOT BEEN REGISTERED UNDER
THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT")
AND, ACCORDINGLY, MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE
TRANSFERRED WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR
BENEFIT OF, U.S. PERSONS, EXCEPT AS SET FORTH IN THE FOLLOWING
SENTENCE. BY ITS ACQUISITION HEREOF OR OF A BENEFICIAL INTEREST
HEREIN, THE HOLDER (1) REPRESENTS THAT (A) IT IS A "QUALIFIED
INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE SECURITIES
ACT) (A "QIB"), (B) IT IS ACQUIRING THIS NOTE IN AN OFFSHORE
TRANSACTION IN COMPLIANCE WITH REGULATION S UNDER THE SECURITIES
ACT OR (C) IT IS AN INSTITUTIONAL "ACCREDITED INVESTOR" (AS DEFINED
IN RULE 501(A)(1), (2), (3) OR (7) OF REGULATION D UNDER THE
SECURITIES ACT) (AN "IAI"), (2) AGREES THAT IT WILL NOT, WITHIN THE
TIME PERIOD REFERRED TO UNDER RULE 144(k) (TAKING INTO ACCOUNT THE
PROVISIONS OF RULE 144(d) UNDER THE SECURITIES ACT, IF APPLICABLE)
UNDER THE SECURITIES ACT AS IN EFFECT ON THE DATE OF THE TRANSFER
OF THIS NOTE, RESELL OR OTHERWISE TRANSFER THIS NOTE EXCEPT (A) TO
THE COMPANY OR ANY GUARANTOR, (B) TO A PERSON WHOM THE HOLDER
REASONABLY BELIEVES IS A QIB PURCHASING FOR ITS OWN ACCOUNT OR FOR
THE ACCOUNT OF A QIB IN COMPLIANCE WITH RULE 144A UNDER THE
SECURITIES ACT, (C) IN AN OFFSHORE TRANSACTION MEETING THE
REQUIREMENTS OF RULE 904 OF THE SECURITIES ACT, (D) PURSUANT TO THE
EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER THE
SECURITIES ACT (IF AVAILABLE), (E) TO AN IAI WHICH PRIOR TO SUCH
TRANSFER, FURNISHES TO THE TRUSTEE A SIGNED LETTER CONTAINING
CERTAIN REPRESENTATIONS AND AGREEMENTS RELATING TO THE REGISTRATION
OF TRANSFER OF THIS NOTE (THE FORM OF WHICH LETTER CAN BE OBTAINED
FROM THE TRUSTEE) AND, IF SUCH TRANSFER IS IN RESPECT OF AN
AGGREGATE PRINCIPAL AMOUNT OF NOTES AT THE TIME OF TRANSFER OF LESS
THAN $250,000, AN OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY THAT
SUCH TRANSFER IS IN COMPLIANCE WITH THE SECURITIES ACT OR (F)
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE
SECURITIES ACT AND, IN EACH CASE, IN ACCORDANCE WITH APPLICABLE
STATE SECURITIES LAWS, AND (3) AGREES THAT IT WILL DELIVER TO EACH
PERSON TO WHOM THIS NOTE OR AN INTEREST HEREIN IS TRANSFERRED A
NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. AS USED HEREIN,
THE TERMS "OFFSHORE TRANSACTION", "UNITED STATES" AND "U.S. PERSON"
HAVE THE MEANINGS GIVEN THEM BY RULE 902 OF REGULATION S UNDER THE
SECURITIES ACT. THE INDENTURE CONTAINS A PROVISION REQUIRING THE
TRUSTEE TO REFUSE TO REGISTER ANY TRANSFER OF THIS NOTE IN
VIOLATION OF THE FOREGOING RESTRICTIONS."
(1)Upon any sale or transfer of a Transfer Restricted Security (including any
Transfer Restricted Security represented by a Global Security) pursuant to
Rule 144 under the Act or an effective registration statement under the Act:
<PAGE>
(A) in the case of any Transfer Restricted Security that
is a Definitive Security, the Registrar shall permit the Holder
thereof to exchange such Transfer Restricted Security for a
Definitive Security that does not bear the legend set forth above
and rescind any restriction on the transfer of such Transfer
Restricted Security; and
(B) any such Transfer Restricted Security represented by
a Global Security shall not be subject to the provisions set forth
in (i) above (such sales or transfers being subject only to the
provisions of Section 2.6(c) of this Indenture); PROVIDED, HOWEVER,
that with respect to any request for an exchange of a Transfer
Restricted Security that is represented by a Global Security for a
Definitive Security that does not bear a legend, which request is
made in reliance upon Rule 144, the Holder thereof shall certify in
writing to the Registrar that such request is being made pursuant
to Rule 144 (such certification to be substantially in the form set
forth on the reverse of the Security).
SECTION 2.07. REPLACEMENT SECURITIES. If (a) any mutilated Security is
surrendered to the Company or the Trustee, or (b) the Company and the Trustee
receive evidence to their satisfaction of the destruction, loss or theft of
any Security, and there is delivered to the Company and the Trustee such
security or indemnity as may be required by them to save each of them
harmless, then, in the absence of notice to the Company or the Trustee that
such Security has been acquired by a BONA FIDE purchaser, the Company shall
execute, and upon its written request the Trustee shall authenticate and
deliver, in exchange for any such mutilated Security or in lieu of any such
destroyed, lost or stolen Security, a new Security of like tenor and
Principal Amount, bearing a number not contemporaneously outstanding.
In case any such mutilated, destroyed, lost or stolen Security has
become or is about to become due and payable, or is about to be purchased by
the Company pursuant to Article 3 hereof, the Company in its discretion may,
instead of issuing a new Security, pay or purchase such Security, as the case
may be.
Upon the issuance of any new Securities under this Section, the Company
may require the payment of a sum sufficient to cover any tax or other
governmental charge that may be imposed in relation thereto and any other
expenses (including the fees and expenses of the Trustee) in connection
therewith.
Every new Security issued pursuant to this Section in lieu of any
mutilated, destroyed, lost or stolen Security shall constitute an original
additional contractual obligation of the Company,
<PAGE>
whether or not the destroyed, lost or stolen Security shall be at any time
enforceable by anyone, and shall be entitled to all benefits of this
Indenture equally and proportionately with any and all other Securities duly
issued hereunder.
The provisions of this Section are exclusive and shall preclude (to the
extent lawful) all other rights and remedies with respect to the replacement
or payment of mutilated, destroyed, lost or stolen Securities.
SECTION 2.08. OUTSTANDING SECURITIES; DETERMINATIONS OF HOLDERS'
ACTION. Securities outstanding at any time are all the Securities
authenticated by the Trustee (including any Security represented by a Global
Security) except for those cancelled by it, those delivered to it for
cancellation, mutilated, destroyed, lost or stolen Securities for which the
Trustee has authenticated and delivered a new Security in lieu therefor
pursuant to Section 2.07, those paid pursuant to Section 2.07, those
reductions in the interest in a Global Security effected by the Registrar
hereunder and those described in this Section 2.08 as not outstanding. A
Security does not cease to be outstanding because the Company or an Affiliate
thereof holds the Security; PROVIDED, HOWEVER, that in determining whether
the Holders of the requisite Principal Amount of Securities have given or
concurred in any request, demand, authorization, direction, notice, consent
or waiver hereunder, Securities owned by the Company or any other obligor
upon the Securities or any Affiliate of the Company or such other obligor
shall be disregarded and deemed not to be outstanding, except that, in
determining whether the Trustee shall be protected in relying upon any such
request, demand, authorization, direction, notice, consent or waiver, only
Securities which the Trustee actually knows to be so owned shall be so
disregarded. Subject to the foregoing, only Securities outstanding at the
time of such determination shall be considered in any such determination
(including, without limitation, determinations pursuant to Articles 6 and 9).
If a Security is replaced pursuant to Section 2.07, it ceases to be
outstanding, unless the Trustee receives proof satisfactory to it that the
replaced Security is held by a BONA FIDE purchaser.
If the Paying Agent holds, in accordance with this Indenture, on a
Redemption Date, or on the Business Day following a Purchase Date or a Change
in Control Purchase Date, or at Stated Maturity, money or, if permitted by
the terms hereof including, without limitation, Section 3.08, securities
sufficient to pay the Securities payable on that date, then on and after that
date such Securities shall cease to be outstanding and Original Issue
Discount and interest, if any, on such Securities shall cease to accrue and
all other rights of the Holder shall terminate (other than the right to
receive the applicable Redemption Price, Purchase Price or Change in Control
Purchase Price, as the case may be, upon delivery of the Security in
accordance with the terms of this
<PAGE>
Indenture); PROVIDED that if such Securities are to be redeemed, notice of
such redemption has been duly given pursuant to this Indenture or provision
therefor satisfactory to the Trustee has been made.
If a Security is converted in accordance with Article 10, then from and
after the Conversion Date such Security shall cease to be outstanding and
Original Issue Discount and interest, if any, shall cease to accrue on such
Security.
SECTION 2.09. TEMPORARY SECURITIES. Pending the preparation of
definitive Securities, the Company may execute, and upon Company Order the
Trustee shall authenticate and deliver, temporary Securities which are
printed, lithographed, typewritten, mimeographed or otherwise produced, in
any authorized denomination, substantially of the tenor of the definitive
Securities in lieu of which they are issued and with such appropriate
insertions, omissions, substitutions and other variations as the Officers
executing such Securities may determine, as conclusively evidenced by their
execution of such Securities.
If temporary Securities are issued, the Company will cause definitive
Securities to be prepared without unreasonable delay. After the preparation
of definitive Securities, the temporary Securities shall be exchangeable for
definitive Securities upon surrender of the temporary Securities at the
office or agency of the Company designated for such purpose pursuant to
Section 2.03 or 4.05, without charge to the Holder. Upon surrender for
cancellation of any one or more temporary Securities the Company shall
execute and the Trustee shall authenticate and deliver in exchange therefor a
like Principal Amount of definitive Securities of authorized denominations.
Until so exchanged the temporary Securities shall in all respects be entitled
to the same benefits under this Indenture as definitive Securities.
SECTION 2.10. CANCELLATION. All Securities surrendered for payment,
redemption or purchase by the Company pursuant to Article 3, conversion
pursuant to Article 10, registration of transfer or exchange shall, if
surrendered to any person other than the Trustee, be delivered to the Trustee
and shall be promptly cancelled by it. The Company may at any time deliver to
the Trustee for cancellation any Securities previously authenticated and
delivered hereunder which the Company may have acquired in any manner
whatsoever, and all Securities so delivered shall be promptly cancelled by
the Trustee. The Company may not issue new Securities to replace Securities
it has paid or delivered to the Trustee for cancellation or that any Holder
has converted pursuant to Article 10. No Securities shall be authenticated
in lieu of or in exchange for any Securities cancelled as provided in this
Section 2.10, except as expressly permitted by this Indenture. All cancelled
Securities held by the Trustee shall be delivered to the Company.
<PAGE>
SECTION 2.11. CUSIP NUMBERS. The Company in issuing the
Securities may use "CUSIP" numbers (if then generally in use), and, if
so, the Trustee shall use "CUSIP" numbers in notices of redemption as
a convenience to Holders; PROVIDED that any such notice may state that
no representation is made as to the correctness of such numbers either
as printed on the Securities or as contained in any notice of a
redemption and that reliance may be placed only on the other
identification numbers printed on the Securities, and any such
redemption shall not be affected by any defect in or omission of such
numbers. The Company will promptly notify the Trustee of any change
in the CUSIP numbers.
ARTICLE 3
REDEMPTION AND PURCHASES
SECTION 3.01. RIGHT TO REDEEM; NOTICES TO TRUSTEE. The Company,
at its option, may redeem the Securities for cash in accordance with
the provisions set forth in paragraphs 5 and 7 of the Securities. If
the Company elects to redeem Securities pursuant to paragraph 5 of the
Securities, it shall notify the Trustee in writing of the Redemption
Date, the Principal Amount of Securities to be redeemed and the
Redemption Price.
The Company shall give the notice to the Trustee provided for in
this Section 3.01 at least 30 days but not more than 60 days before
the Redemption Date (unless a shorter notice shall be satisfactory to
the Trustee). If fewer than all the Securities are to be redeemed,
the record date relating to such redemption shall be selected by the
Company and given to the Trustee, which record date shall not be less
than ten days after the date of notice to the Trustee.
SECTION 3.02. SELECTION OF SECURITIES TO BE REDEEMED. If less
than all the Securities are to be redeemed, the Trustee shall select
the Securities to be redeemed by lot, PRO RATA or by any other method
the Trustee considers fair and appropriate (so long as such method is
not prohibited by the rules of any stock exchange on which the
Securities are then listed). The Trustee shall make the selection at
least 30 but not more than 60 days before the Redemption Date from
outstanding Securities not previously called for redemption. The
Trustee may select for redemption portions of the Principal Amount of
Securities that have denominations larger than $1,000. Securities and
portions of them the Trustee selects shall be in Principal Amounts of
$1,000 or an integral multiple of $1,000. Provisions of this
Indenture that apply to Securities called for redemption also apply to
portions of Securities called
<PAGE>
for redemption. The Trustee shall notify the Company promptly of the
Securities or portions of Securities to be redeemed.
If any Security selected for partial redemption is thereafter
surrendered for conversion in part before termination of the
conversion right with respect to the portion of the Security so
selected, the converted portion of such Security shall be deemed (so
far as may be), solely for purposes of determining the aggregate
Principal Amount of Securities to be redeemed by the Company, to be
the portion selected for redemption. Securities that have been
converted during a selection of Securities to be redeemed may be
treated by the Trustee as outstanding for the purpose of such
selection. Nothing in this Section 3.02 shall affect the right of any
Holder to convert any Security pursuant to Article 10 before the
termination of the conversion right with respect thereto.
SECTION 3.03. NOTICE OF REDEMPTION. At least 20 days but not more
than 60 days before a Redemption Date, the Trustee, in the name and at
the expense of the Company, shall cause notice of redemption to be
mailed, first-class postage prepaid, to each Holder of Securities to
be redeemed at his address as it appears on the list of
Securityholders maintained pursuant to Section 2.05. At the Company's
written request, the Trustee shall, in the name and at the expense of
the Company, cause a similar notice to be published at least once in
an Authorized Newspaper in each place of payment.
The notice shall identify the Securities to be redeemed and shall
state:
(1) the Redemption Date (upon which the Redemption Price
shall be paid);
(2) the Redemption Price;
(3) the Conversion Rate;
(4) the name and address of the Paying Agent and Conversion
Agent and of the office or agency referred to in Section 4.05;
(5) that Securities called for redemption may be converted
at any time before the close of business on the date that is
seven days immediately prior to the Redemption Date;
(6) that Holders who want to convert Securities must satisfy
the requirements set forth in paragraph 8 of the Securities;
<PAGE>
(7) that Securities called for redemption must be
surrendered to the Paying Agent or at the office or agency
referred to in Section 4.05 to collect the Redemption Price;
(8) the CUSIP number of the Securities;
(9) if fewer than all the outstanding Securities are to be
redeemed, the certificate numbers and Principal Amounts of the
particular Securities to be redeemed; and
(10) that, unless the Company defaults in payment of the
Redemption Price, Original Issue Discount on Securities called
for redemption and interest, if any, will cease to accrue on and
after the Redemption Date.
At the Company's written request, the Trustee shall give the
notice of redemption in the Company's name and at the Company's
expense, PROVIDED that the Company makes such request at least three
Business Days prior to such notice of redemption.
SECTION 3.04. EFFECT OF NOTICE OF REDEMPTION. Once notice of
redemption is given, Securities called for redemption become due and
payable on the Redemption Date stated in the notice and at the
Redemption Price therefor except for Securities that are converted in
accordance with the terms of this Indenture. Upon the later of the
Redemption Date and the date such Securities are surrendered to the
Paying Agent or at the office or agency referred to in Section 4.05,
such Securities called for redemption shall be paid at the Redemption
Price therefor.
SECTION 3.05. DEPOSIT OF REDEMPTION PRICE. Prior to or on the
Redemption Date, the Company shall deposit with the Paying Agent (or
if the Company or a Subsidiary or an Affiliate of either of them is
the Paying Agent, shall segregate and hold in trust) money sufficient
to pay the Redemption Price of all Securities to be redeemed on that
date other than Securities or portions of Securities called for
redemption which prior thereto have been delivered by the Company to
the Trustee for cancellation. The Paying Agent shall as promptly as
practicable return to the Company any money, with interest, if any,
thereon (subject to the provisions of Section 7.01(f)), not required
for that purpose because of conversion of Securities pursuant to
Article 10. If such money is then held by the Company or a Subsidiary
or an Affiliate of the Company in trust and is not required for such
purpose it shall be discharged from such trust.
SECTION 3.06. SECURITIES REDEEMED IN PART. Upon surrender of a
Security that is redeemed in part, the Company shall execute, and the
Trustee shall authenticate and deliver to the Holder, a new Security
in an authorized denomination equal in Principal Amount to the
unredeemed portion of the Security surrendered.
<PAGE>
SECTION 3.07. CONVERSION ARRANGEMENT ON CALL FOR REDEMPTION. In
connection with any redemption of Securities, the Company may arrange,
in lieu of redemption, for the purchase and conversion of any
Securities called for redemption by an agreement with one or more
investment bankers or other purchasers to purchase all or a portion of
such Securities by paying to the Trustee in trust for the
Securityholders whose Securities are to be so purchased, on or before
the close of business on the Redemption Date, an amount that, together
with any amounts deposited with the Trustee by the Company for
redemption of such Securities, is not less than the Redemption Price,
together with interest, if any, accrued to the Redemption Date, of
such Securities. Notwithstanding anything to the contrary contained
in this Article 3, the obligation of the Company to pay the Redemption
Price of such Securities, including all accrued interest, if any,
shall be deemed to be satisfied and discharged to the extent such
amount is so paid by such purchasers, but no such agreement shall
relieve the Company of its obligation to pay such Redemption Price and
interest, if any. If such an agreement is entered into, any
Securities not duly surrendered for conversion by the Holders thereof
may, at the option of the Company, be deemed, to the fullest extent
permitted by law, acquired by such purchasers from such Holders and
(notwithstanding anything to the contrary contained in Article 10)
surrendered by such purchasers for conversion, all as of immediately
prior to the close of business on the Redemption Date, subject to
payment of the above amount as aforesaid. The Trustee shall hold and
pay to the Holders whose Securities are selected for redemption any
such amount paid to it for purchase and conversion in the same manner
as it would moneys deposited with it by the Company for the redemption
of Securities. Without the Trustee's prior written consent, no
arrangement between the Company and such purchasers for the purchase
and conversion of any Securities shall increase or otherwise affect
any of the powers, duties, responsibilities or obligations of the
Trustee as set forth in this Indenture, and the Company agrees to
indemnify the Trustee from, and hold it harmless against, any loss,
liability or expense arising out of or in connection with any such
arrangement for the purchase and conversion of any Securities between
the Company and such purchasers, including the costs and expenses
incurred by the Trustee in the defense of any claim or liability
arising out of or in connection with the exercise or performance of
any of its powers, duties, responsibilities or obligations under this
Indenture.
SECTION 3.08. PURCHASE OF SECURITIES AT THE OPTION OF THE
HOLDER. (a) GENERAL. Securities shall be purchased by the Company
pursuant to paragraph 6 of the Securities as of August 19, 2002,
August 19, 2007 and August 19, 2012 (each, a "PURCHASE DATE"), at the
purchase price specified therein (each, a "PURCHASE PRICE"), at the
option of the Holder thereof, upon:
<PAGE>
(1) delivery to the Paying Agent or to the office or agency
referred to in Section 4.05 by the Holder of a written notice of
purchase (a "PURCHASE NOTICE") at any time from the opening of
business on the date that is 20 Business Days prior to a Purchase
Date until the close of business on such Purchase Date stating:
(A) the certificate number of the Security that the
Holder will deliver to be purchased;
(B) the portion of the Principal Amount of the Security
which the Holder will deliver to be purchased, which portion
must be $1,000 or an integral multiple thereof;
(C) that such Security shall be purchased on the
Purchase Date pursuant to the terms and conditions specified
in this Indenture and in paragraph 6 of the Securities; and
(D) if the Company elects pursuant to Section 3.08(b)
to pay the Purchase Price on such Purchase Date, in whole or
in part, in shares of Common Stock, but such portion of the
Purchase Price to be paid in Common Stock is ultimately to
be paid in cash because any condition in Section 3.08(d) is
not satisfied, such Holder elects (i) to withdraw such
Purchase Notice as to some or all of the Securities to which
it relates (stating the Principal Amount and certificate
numbers of the Securities as to which such withdrawal shall
relate), or (ii) to receive cash in respect of the Purchase
Price for all Securities subject to such Purchase Notice;
and
(2) delivery of such Security prior to, on or after the
Purchase Date (together with all necessary endorsements) to the
Paying Agent at the offices of the Paying Agent or to the office
or agency referred to in Section 4.05, such delivery being a
condition to receipt by the Holder of the Purchase Price
therefor; PROVIDED, HOWEVER, that such Purchase Price shall be so
paid pursuant to this Section 3.08 only if the Security so
delivered conforms in all respects to the description thereof in
the related Purchase Notice.
If a Holder, in such Holder's Purchase Notice and in any written
notice of withdrawal delivered by such Holder pursuant to the terms of
Section 3.10, fails to indicate such Holder's choice with respect to
the election set forth in clause (D) of Section 3.08(a)(1) above, such
Holder shall be deemed to have elected to receive cash in respect of
the Purchase Price otherwise payable in Common Stock.
The Company shall purchase from the Holder thereof, pursuant to
this Section 3.08, a portion of a Security if the Principal
<PAGE>
Amount of such portion is $1,000 or an integral multiple of $1,000.
Provisions of this Indenture that apply to the purchase of all of a Security
also apply to the purchase of such portion of such Security.
Any purchase by the Company contemplated pursuant to the provisions
hereof shall be consummated by the delivery of the consideration to be
received by the Holder promptly following the later of the Purchase Date and
the time of delivery of the Security.
Notwithstanding anything herein to the contrary, any Holder delivering
to the Paying Agent or the office or agency referred to in Section 4.05 the
Purchase Notice contemplated by this Section 3.08(a) shall have the right to
withdraw at any time prior to the close of business on the Purchase Date such
Purchase Notice by delivery of a written notice of withdrawal to the Paying
Agent or such office or agency in accordance with Section 3.10.
The Paying Agent shall promptly notify the Company of the receipt by it
of any Purchase Notice or written notice of withdrawal thereof.
(b) COMPANY'S RIGHT TO ELECT MANNER OF PAYMENT OF PURCHASE PRICE.
The Securities to be purchased pursuant to Section 3.08(a) may be paid
for, at the election of the Company, in cash or Common Stock, or in
any combination of cash and Common Stock, subject to the conditions
set forth in this Section 3.08. The Company shall designate, in the
notice from the Company delivered pursuant to Section 3.08(e), whether
the Company will purchase the Securities for cash or Common Stock,
and, if a combination thereof, the percentages of the Purchase Price
of Securities in respect of which it will pay in cash or Common Stock;
PROVIDED that the Company will pay cash for fractional interests of
shares of Common Stock. For purposes of determining the existence of
potential fractional interests, all Securities subject to purchase by
the Company held by a Holder shall be considered together (no matter
how many separate certificates are to be presented). Each Holder
whose Securities are purchased pursuant to this Section 3.08 shall
receive the same percentage of cash or Common Stock in payment of the
Purchase Price for such Securities, except (i) as provided in Section
3.08(d) with regard to the payment of cash in lieu of fractional
shares of Common Stock and (ii) in the event that the Company is
unable to purchase the Securities of a Holder or Holders for Common
Stock because any necessary qualifications or registrations of the
Common Stock under applicable state securities laws cannot be
obtained, the Company may purchase the Securities of such Holder or
Holders for cash. The Company may not change its election with
respect to the consideration (or components or percentages of
components thereof) to be paid once the Company has given notice
thereof to Securityholders except pursuant to this Section 3.08(b) or
Section 3.08(d).
<PAGE>
At least five Business Days before the Company Notice Date (as
defined below), the Company shall deliver an Officers' Certificate to
the Trustee specifying:
(i) the manner of payment selected by the Company;
(ii) the information required by Section 3.08(e);
(iii) that the conditions to such manner of payment set forth
in Section 3.08(d) have or will be complied with; and
(iv) whether the Company desires the Trustee to give the
notice required by Section 3.08(e).
(c) PURCHASE WITH CASH. On each Purchase Date, at the option of
the Company, the Principal Amount of the Securities in respect of
which a Purchase Notice pursuant to Section 3.08(a) has been given, or
a specified percentage thereof, may be purchased by the Company with
cash equal to the aggregate Purchase Price of such Securities.
(d) PAYMENT BY COMMON STOCK. On each Purchase Date, at the
option of the Company, the Principal Amount of the Securities in
respect of which a Purchase Notice pursuant to Section 3.08(a) has
been given, or a specified percentage thereof, may be purchased by the
Company by the issuance of a number of shares of Common Stock equal to
the quotient obtained by dividing (i) the amount of cash to which the
Securityholders would have been entitled had the Company elected to
pay all or such specified percentage, as the case may be, of the
Purchase Price of such Securities in cash by (ii) the Market Price (as
defined below) of a share of Common Stock, subject to the next
succeeding paragraph.
The Company will not issue a fractional share of Common Stock in
payment of the Purchase Price. Instead the Company will pay cash for
the current market value of the fractional share. The current market
value of a fraction of a share shall be determined by multiplying the
Market Price by such fraction and rounding the product to the nearest
whole cent, with one-half cent being rounded upward. It is understood
that if a Holder elects to have more than one Security purchased, the
number of shares of Common Stock shall be based on the aggregate
amount of Securities to be purchased.
The Company's right to exercise its election to purchase the
Securities pursuant to this Section 3.08 through the issuance of
shares of Common Stock shall be conditioned upon:
(i) the Company's not having given notice of an election to
pay entirely in cash and its giving of timely notice of election
to purchase all or a specified percentage of the Securities with
Common Stock as provided herein;
<PAGE>
(ii) the registration of the shares of Common Stock to be
issued in respect of the payment of the Purchase Price under the
Securities Act of 1933, as amended (the "SECURITIES ACT") and the
Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"),
in each case if required for the initial issuance thereof;
(iii)any necessary qualification or registration under
applicable state securities laws or the availability of an
exemption from such qualification and registration; and
(iv) the receipt by the Trustee of an Officers' Certificate
and an Opinion of Counsel each stating that (A) the terms of the
issuance of the Common Stock are in conformity with this
Indenture and (B) the shares of Common Stock to be issued by the
Company in payment of the Purchase Price in respect of Securities
have been duly authorized and, when issued and delivered pursuant
to the terms of this Indenture in payment of the Purchase Price
in respect of the Securities, will be validly issued, fully paid
and nonassessable and shall be free of any preemptive rights and
any lien or adverse claim (PROVIDED that such Opinion of Counsel
may state that, insofar as it relates to the absence of such
preemptive rights, liens and adverse claims, it is given upon the
best knowledge of such counsel), and, in the case of such
Officers' Certificate, that conditions (i), (ii) and (iii) above
have been satisfied and, in the case of such Opinion of Counsel,
that conditions (ii) and (iii) above have been satisfied.
Such Officers' Certificate shall also set forth the number of
shares of Common Stock to be issued for each $1,000 Principal Amount
of Securities and the Sale Price of a share of Common Stock on each of
the seven Business Days prior to the Purchase Date. The Company may
elect to pay in Common Stock only if the information necessary to
calculate the Market Price is reported in THE WALL STREET JOURNAL or
another daily newspaper of national circulation. If such conditions
are not satisfied prior to or on the Purchase Date and the Company
elected to purchase the Securities pursuant to this Section 3.08
through the issuance of shares of Common Stock, the Company shall pay,
without further notice, the Purchase Price in cash.
(e) NOTICE OF ELECTION. The Company shall send notices of its
election (the "COMPANY NOTICE") to purchase with cash or Common Stock
or any combination thereof to the Holders (and to beneficial owners as
required by applicable law) in the manner provided in Section 3.03.
The Company Notice shall be sent to Holders (and to beneficial owners
as required by applicable law) on a date not less than 20 Business
Days prior to the Purchase Date (such date not less than 20 Business
Days prior to the Purchase Date being herein referred to as the
"COMPANY NOTICE DATE"). Such notices shall
<PAGE>
state the manner of payment elected and shall contain the following
information:
In the event the Company has elected to pay the Purchase Price
(or any specified percentage thereof) with Common Stock, the notice
shall:
(1) state that each Holder will receive Common Stock with a
Market Price determined as of a specified date prior to the
Purchase Date equal to such specified percentage of the Purchase
Price of the Securities held by such Holder (except for any cash
amount to be paid in lieu of fractional shares);
(2) set forth the method of calculating the Market Price of
the Common Stock; and
(3) state that because the Market Price of Common Stock
will be determined prior to the Purchase Date, Holders will bear
the market risk with respect to the value of the Common Stock to
be received from the date such Market Price is determined to the
Purchase Date.
In any case, each notice shall include a form of Purchase Notice
to be completed by the Securityholder and shall state:
(i) the Purchase Price and Conversion Rate;
(ii) the name and address of the Paying Agent and the
Conversion Agent and of the office or agency referred to in
Section 4.05;
(iii) that Securities as to which a Purchase Notice has been
given may be converted into Common Stock at any time prior to the
close of business on the applicable Purchase Date only if the
applicable Purchase Notice has been withdrawn in accordance with
the terms of this Indenture;
(iv) that Securities must be surrendered to the Paying Agent
or to the office or agency referred to in Section 4.05 to collect
payment;
(v) that the Purchase Price for any security as to which a
Purchase Notice has been given and not withdrawn will be paid
promptly following the later of the Purchase Date and the time of
surrender of such Security as described in (iv);
(vi) the procedures the Holder must follow to exercise rights
under Section 3.08 and a brief description of those rights;
(vii) briefly, the conversion rights of the Securities and that
Holders who want to convert Securities must satisfy the
requirements set forth in paragraph 8 of the Securities; and
<PAGE>
(viii) the procedures for withdrawing a Purchase Notice
(including, without limitation, for a conditional withdrawal
pursuant to the terms of Section 3.08(a)(1)(D) or Section 3.10).
At the Company's written request, the Trustee shall give such
notice in the Company's name and at the Company's expense;
PROVIDED, HOWEVER, that, in all cases, the text of such notice shall
be prepared by the Company.
Upon determination of the actual number of shares of Common Stock
to be issued for each $1,000 Principal Amount of Securities, the
Company will publish such determination in THE WALL STREET JOURNAL or
another daily newspaper of national circulation and furnish the
Trustee with an affidavit of publication.
(f) COVENANTS OF THE COMPANY. All shares of Common Stock
delivered upon purchase of the Securities shall be newly issued shares
or treasury shares, shall be duly authorized, validly issued, fully
paid and nonassessable and shall be free from preemptive rights and
free of any lien or adverse claim.
The Company shall use its best efforts to list or cause to have
quoted any shares of Common Stock to be issued to purchase Securities
on the principal national securities exchange or over-the-counter or
other domestic market on which any other shares of the Common Stock
are then listed or quoted. The Company will promptly inform the
Trustee in writing of any such listing.
(g) PROCEDURE UPON PURCHASE. The Company shall deposit cash (in
respect of a cash purchase under Section 3.08(c) or for fractional
interests, as applicable) or shares of Common Stock, or any
combination thereof, as applicable, at the time and in the manner as
provided in Section 3.11, sufficient to pay the aggregate Purchase
Price of all Securities to be purchased pursuant to this Section 3.08.
As soon as practicable after the later of the Purchase Date and the
date such Securities are surrendered to the Paying Agent or at the
office or agency referred to in Section 4.05, the Company shall
deliver to each Holder entitled to receive Common Stock through the
Paying Agent a certificate for the number of full shares of Common
Stock issuable in payment of the Purchase Price and cash in lieu of
any fractional interests. The person in whose name the certificate
for Common Stock is registered shall be treated as a holder of record
of such Common Stock on the Business Day following the related
Purchase Date. Subject to Section 3.08(d), no payment or adjustment
will be made for dividends on the Common Stock the record date for
which occurred prior to the Purchase Date.
(h) TAXES. If a Holder of a Security is paid in Common Stock,
the Company shall pay any documentary, stamp or similar issue or
transfer tax due on such issue of shares of Common Stock. However,
the Holder shall pay any such tax which is due because
<PAGE>
the Holder requests the shares of Common Stock to be issued in a name other
than the Holder's name. The Paying Agent may refuse to deliver the
certificates representing the Common Stock being issued in a name other than
the Holder's name until the Paying Agent receives a sum sufficient to pay any
tax which will be due, as set forth in an Officers' Certificate, because the
shares of Common Stock are to be issued in a name other than the Holder's
name. Nothing herein shall preclude any income tax withholding required by
law or regulations.
SECTION 3.09. PURCHASE OF SECURITIES AT OPTION OF THE HOLDER UPON
CHANGE OF CONTROL. (a) If on or prior to August 19, 2002 there shall have
occurred a Change of Control, Securities shall be purchased, at the option of
the Holder thereof, by the Company at the purchase price specified in
paragraph 6 of the Securities (the "CHANGE OF CONTROL PURCHASE PRICE"), on
the date that is 35 Business Days after the occurrence of the Change of
Control (the "CHANGE OF CONTROL PURCHASE DATE"), subject to satisfaction by
or on behalf of the Holder of the requirements set forth in Section 3.09(c).
Notwithstanding the foregoing provisions of this Section 3.09, a Change
of Control shall not be deemed to have occurred if at any time the Company,
any Subsidiary, any employee stock ownership plan or any other employee
benefit plan of the Company or any Subsidiary, or any person holding Common
Stock for or pursuant to the terms of any such employee benefit plan files or
becomes obligated to file a report under or in response to Schedule 13D or
Schedule 14D-1 (or any successor schedule, form or report) under the Exchange
Act disclosing beneficial ownership by it of shares of Common Stock, whether
in excess of 50% or otherwise.
(b) Within 15 Business Days after the occurrence of a Change of Control,
(i) the Company shall mail a written notice of such Change of Control by
first-class mail to the Trustee and to each Holder (and to beneficial owners
if required by applicable law) and (ii) the Company shall cause a copy of
such notice to be published in THE WALL STREET JOURNAL or another daily
newspaper of national circulation. The notice shall include a form of Change
of Control Purchase Notice to be completed by the Securityholder and shall
state:
(1) the events causing a Change of Control and the date such Change
of Control is deemed to have occurred for purposes of this Section 3.09;
(2) the date by which the Change of Control Purchase Notice pursuant
to this Section 3.09 must be given;
(3) the Change of Control Purchase Date;
(4) the Change of Control Purchase Price;
<PAGE>
(5) the name and address of the Paying Agent and the Conversion Agent
and the office or agency referred to in Section 4.05;
(6) the Conversion Rate and any adjustments thereto;
(7) that Securities as to which a Change of Control Purchase Notice
has been given may be converted into Common Stock (or, in lieu thereof,
cash, if the Company shall so elect) at any time prior to the close of
business on the Change of Control Purchase Date only if the Change of
Control Purchase Notice has been withdrawn by the Holder in accordance
with the terms of this Indenture;
(8) that Securities must be surrendered to the Paying Agent or the
office or agency referred to in Section 4.05 to collect payment;
(9) that the Change of Control Purchase Price for any Security as
to which a Purchase Notice has been duly given and not withdrawn will
be paid promptly following the later of the Change of Control Purchase
Date and the time of surrender of such Security as described in (8);
(10) the procedures the Holder must follow to exercise rights
under this Section 3.09 and a brief description of those rights;
(11) briefly, the conversion rights of the Securities; and
(12) the procedures for withdrawing a Change of Control Purchase
Notice.
(c) A Holder may exercise its rights specified in Section 3.09(a) upon
delivery of a written notice of purchase (a "CHANGE OF CONTROL PURCHASE
NOTICE") to the Paying Agent or to the office or agency referred to in
Section 4.05 at any time prior to the close of business on the Change of
Control Purchase Date, stating:
(1) the certificate number of the Security which the Holder
will deliver to be purchased;
(2) the portion of the Principal Amount of the Security which
the Holder will deliver to be purchased, which portion must be $1,000
or an integral multiple thereof; and
(3) that such Security shall be purchased on the Change of Control
Purchase Date pursuant to the terms and conditions specified in paragraph
6 of the Securities.
<PAGE>
Receipt of the Security by the Paying Agent prior to, on or after the
Change of Control Purchase Date (together with all necessary endorsements),
at the offices of the Paying Agent or to the office or agency referred to in
Section 4.05 shall be a condition to the receipt by the Holder of the Change
of Control Purchase Price therefor; PROVIDED, HOWEVER, that such Change of
Control Purchase Price shall be so paid pursuant to this Section 3.09 only if
the Security so delivered to the Paying Agent or such office or agency shall
conform in all respects to the description thereof set forth in the related
Change of Control Purchase Notice.
The Company shall purchase from the Holder thereof, pursuant to this
Section 3.09, a portion of a Security if the Principal Amount of such portion
is $1,000 or an integral multiple of $1,000. Provisions of this Indenture
that apply to the purchase of all of a Security also apply to the purchase of
such portion of such Security.
Any purchase by the Company contemplated pursuant to the provisions of
this Section 3.09 shall be consummated by the delivery of the consideration
to be received by the Holder promptly following the later of the Change of
Control Purchase Date and the date such Securities are surrendered to the
Paying Agent or at the office or agency referred to in Section 4.05.
Notwithstanding anything herein to the contrary, any Holder delivering
to the Paying Agent or to the office or agency referred to in Section 4.05
the Change of Control Purchase Notice contemplated by this Section 3.09(c)
shall have the right to withdraw such Change of Control Purchase Notice at
any time prior to or on the Change of Control Purchase Date by delivery of a
written notice of withdrawal to the Paying Agent or to such office or agency
in accordance with Section 3.10.
The Paying Agent shall promptly notify the Company of the receipt by it
of any Change of Control Purchase Notice or written withdrawal thereof.
SECTION 3.10. EFFECT OF PURCHASE NOTICE OR CHANGE OF CONTROL PURCHASE
NOTICE. Upon receipt by the Paying Agent of the Purchase Notice or Change of
Control Purchase Notice specified in Section 3.08(a) or Section 3.09(c), as
applicable, the Holder of the Security in respect of which such Purchase
Notice or Change of Control Purchase Notice, as the case may be, was given
shall (unless such Purchase Notice or Change of Control Purchase Notice is
withdrawn as specified in the following two paragraphs) thereafter be
entitled to receive solely the Purchase Price or Change of Control Purchase
Price, as the case may be, with respect to such Security. Such Purchase
Price or Change of Control Purchase Price shall be paid to such Holder
promptly following the later of (x) the Business Day following the Purchase
Date or the Change of Control Purchase Date, as the case may be, with respect
<PAGE>
to such Security (provided the conditions in Section 3.08(a) or Section
3.09(c), as applicable, have been satisfied) and (y) the time of delivery of
such Security to the Paying Agent or to the office or agency referred to in
Section 4.05 by the Holder thereof in the manner required by Section 3.08(a)
and (g) or Section 3.09(c), as applicable. Securities in respect of which a
Purchase Notice or Change of Control Purchase Notice, as the case may be, has
been given by the Holder thereof may not be converted into shares of Common
Stock on or after the date of the delivery of such Purchase Notice or Change
of Control Purchase Notice, as the case may be, unless such Purchase Notice
or Change of Control Purchase Notice, as the case may be, has first been
validly withdrawn as specified in the following two paragraphs.
A Purchase Notice or Change of Control Purchase Notice, as the case may
be, may be withdrawn by means of a written notice of withdrawal delivered to
the office of the Paying Agent or to the office or agency referred to in
Section 4.05 at any time on or prior to the Purchase Date or the Change of
Control Purchase Date, as the case may be, specifying:
(1) the certificate number of the Security in respect of
which such notice of withdrawal is being submitted;
(2) the Principal Amount of the Security with respect to
which such notice of withdrawal is being submitted; and
(3) the Principal Amount, if any, of such Security which
remains subject to the original Purchase Notice or Change of
Control Purchase Notice, as the case may be, and which has been
or will be delivered for purchase by the Company.
A written notice of withdrawal of a Purchase Notice may be in the form
set forth in the preceding paragraph or may be in the form of (i) a
conditional withdrawal contained in a Purchase Notice pursuant to the terms
of Section 3.08(a)(1)(D) or (ii) a conditional withdrawal containing the
information set forth in Section 3.08(a)(1)(D) and the preceding paragraph
and contained in a written notice of withdrawal delivered to the Paying Agent
as set forth in the preceding paragraph.
There shall be no purchase of any Securities pursuant to Sections 3.08
(other than through the issuance of Common Stock in payment of the Purchase
Price, including cash in lieu of fractional shares of Common Stock) or 3.09
if there has occurred (prior to, on or after, as the case may be, the giving,
by the Holders of such Securities, of the required Purchase Notice or Change
of Control Purchase Notice, as the case may be) and is continuing an Event of
Default (other than a default in the payment of the Purchase Price or Change
of Control Purchase Price, as the case may be, with respect to such
Securities). The Paying Agent will promptly return to the respective Holders
thereof any Securities (x) with respect to which a Purchase Notice or Change
of Control Purchase Notice, as the case may be, has been withdrawn in
compliance with this
<PAGE>
Indenture, or (y) held by it during the continuance of an Event of
Default (other than a default in the payment of the Purchase Price or Change
of Control Purchase Price, as the case may be, with respect to such
Securities) in which case, upon such return, the Purchase Notice or Change of
Control Purchase Notice with respect thereto shall be deemed to have been
withdrawn.
SECTION 3.11. DEPOSIT OF PURCHASE PRICE OR CHANGE OF CONTROL PURCHASE
PRICE. Prior to 3:00 p.m. (local time in The City of New York) on the
Business Day following the Purchase Date or the Change of Control Purchase
Date, as the case may be, the Company shall deposit with the Trustee or with
the Paying Agent (or, if the Company or a Subsidiary or an Affiliate of
either of them is acting as Paying Agent, shall segregate and hold in trust
as provided in Section 2.04) an amount of cash in immediately available funds
or securities, if expressly permitted hereunder, sufficient to pay the
aggregate Purchase Price or Change of Control Purchase Price, as the case may
be, of all the Securities or portions thereof which are to be purchased as of
the Purchase Date or Change of Control Purchase Date, as the case may be.
SECTION 3.12. SECURITIES PURCHASED IN PART. Any Security which is to be
purchased only in part shall be surrendered at the office of the Paying Agent
or the office or agency referred to in Section 4.05 (with, if the Company or
the Trustee so requires, due endorsement, or a written instrument of transfer
in form satisfactory to the Company and the Trustee executed by the Holder or
such Holder's attorney duly authorized in writing) and the Company shall
execute and the Trustee shall authenticate and deliver to the Holder of such
Security, without service charge, a new Security or Securities, of any
authorized denomination as requested by such Holder in aggregate Principal
Amount equal to, and in exchange for, the portion of the Principal Amount of
the Security so surrendered which is not purchased.
SECTION 3.13. COVENANT TO COMPLY WITH SECURITIES LAWS UPON PURCHASE OF
SECURITIES. In connection with any offer to purchase or purchase of
Securities under Section 3.08 or 3.09 hereof, the Company shall (i) comply
with Rule 13e-4 and Rule 14e-1 under the Exchange Act, if applicable, (ii)
file the related Schedule 13E-4 (or any successor schedule, form or report)
under the Exchange Act, if applicable, and (iii) otherwise comply with all
Federal and state securities laws regulating the offer and delivery of shares
of Common Stock upon purchase of the Securities (including positions of the
SEC under applicable no-action letters) so as to permit the rights and
obligations under Sections 3.08 and 3.09 to be exercised in the time and in
the manner specified in Sections 3.08 and 3.09.
SECTION 3.14. REPAYMENT TO THE COMPANY. The Trustee and the Paying
Agent shall return to the Company, upon written request, any
<PAGE>
cash or shares of Common Stock, together with interest on such cash as
hereinafter provided and dividends on such shares of Common Stock, if any
(subject to the provisions of Section 7.01(f)), held by them for the payment
of a Purchase Price or Change of Control Purchase Price, as the case may be,
of the Securities that remain unclaimed as provided in paragraph 12 of the
Securities; PROVIDED, HOWEVER, that to the extent that the aggregate amount
of cash or shares of Common Stock deposited by the Company pursuant to
Section 3.11 exceeds the aggregate Purchase Price or Change of Control
Purchase Price, as the case may be, of the Securities or portions thereof to
be purchased, then promptly after the Business Day following the Purchase
Date or Change of Control Purchase Date, as the case may be, the Trustee
shall return any such excess to the Company together with interest as
hereinafter provided or dividends, if any, thereon (subject to the provisions
of Section 7.01(f)). Any cash deposited with the Trustee or with the Paying
Agent pursuant to Section 3.11 hereof, shall be invested by the Trustee or
Paying Agent, as applicable, in short term obligations of, or fully
guaranteed by, the United States of America, or commercial paper rated A-1 or
better by Standard and Poor's Corporation or P-1 or better by Moody's
Investors Service, Inc. as specifically directed in writing by the Company.
Interest earned on such investments shall be repaid to the Company pursuant
to this Section 3.14. Except as provided for in this Section 3.14, the
Trustee shall be under no liability for interest on any money received by it
pursuant to this Indenture.
ARTICLE 4
COVENANTS
SECTION 4.01. PAYMENT OF SECURITIES. The Company shall promptly make
all payments in respect of the Securities on the dates and in the manner
provided in the Securities or pursuant to this Indenture. Principal Amount,
Issue Price, accrued Original Issue Discount, Redemption Price, Purchase
Price, Change of Control Purchase Price and interest, if any, shall be
considered paid on the applicable date due if on such date the Trustee or the
Paying Agent holds, in accordance with this Indenture, cash or securities, if
expressly permitted hereunder, sufficient to pay all such amounts then due.
The Company shall, to the extent permitted by law, pay interest on
overdue amounts at the per annum rate of interest set forth in paragraph 1 of
the Securities, compounded semi-annually, which interest on overdue amounts
(to the extent payment of such interest shall be legally enforceable) shall
accrue from the date such overdue amounts were originally due and payable.
<PAGE>
SECTION 4.02. SEC REPORTS. The Company shall file with the Trustee,
within 15 days after it files such annual and quarterly reports, information,
documents and other reports with the SEC, copies of its annual and quarterly
reports and of the information, documents and other reports (or copies of
such portions of any of the foregoing as the SEC may by rules and regulations
prescribe) which the Company is required to file with the SEC pursuant to
Section 13 or 15(d) of the Exchange Act (or any such successor provisions
thereto). In the event the Company is at any time no longer subject to the
reporting requirements of Section 13 or 15(d) of the Exchange Act (or any
such successor provisions), it shall continue to provide the Trustee with
reports containing substantially the same information as would have been
required to be filed with the SEC had the Company continued to have been
subject to such reporting requirements, including, with respect to annual
information only, a report thereon by the Company's certified independent
public accountants as such would be required in such reports to the
Commission and, in each case, together with a management's discussion and
analysis of results of operations and financial condition as such would be so
required. In addition, for so long as the Notes are Transfer Restricted
Securities, the Company will continue to provide to Holders and to
prospective purchasers of the Securities, the information required by Rule
144A(d)(4) under the Securities Act, and the Trustee shall make any such
reports available to Securityholders upon request. In such event, such
reports shall be provided at the times the Company would have been required
to provide reports had it continued to have been subject to such reporting
requirements. The Company also shall comply with the other provisions of TIA
Section 314(a), to the extent such provisions are applicable.
SECTION 4.03. COMPLIANCE CERTIFICATE; NOTICE OF DEFAULTS. (a) To the
extent required by applicable law, the Company shall deliver to the Trustee
within 120 days after the end of each fiscal year of the Company (beginning
with the fiscal year ending nearest September 1, 1997) a certificate of the
principal executive officer, the principal financial officer, or principal
accounting officer of the Company stating whether or not, to the knowledge of
the signer, the Company has complied with all conditions and covenants on its
part contained in this Indenture and, if the signer has obtained knowledge of
any default by the Company in the performance, observance or fulfillment of
any such condition or covenant, specifying each such default and the nature
thereof. For the purpose of this Section 4.03, compliance shall be
determined without regard to any grace period or requirement of notice
provided pursuant to the terms of this Indenture.
(b) The Company shall file with the Trustee written notice of the
occurrence of any Default or Event of Default within five Business Days of
its becoming aware of such Default or Event of Default.
<PAGE>
SECTION 4.04. FURTHER INSTRUMENTS AND ACTS. Upon request of the
Trustee, the Company will execute and deliver such further instruments
and do such further acts as may be reasonably necessary or proper to
carry out more effectively the purposes of this Indenture.
SECTION 4.05. MAINTENANCE OF OFFICE OR AGENCY. The Company will
maintain in the Borough of Manhattan, The City of New York, in such location
as may be required by the rules of any securities exchange or quotation
system on which the Securities may from time to time be listed, an office or
agency where Securities may be presented or surrendered for payment, where
Securities may be surrendered for registration of transfer, exchange,
purchase, redemption or conversion and where notices and demands to or upon
the Company in respect of the Securities and this Indenture may be served.
The office of the Trustee in The City of New York, at which at any particular
time its corporate trust business shall be principally administered, which
office on the date hereof is located at IBJ Schroeder Bank & Trust, 1 State
Street Plaza, New York, New York 10004, shall be such office or agency for
all of the aforesaid purposes unless the Company shall maintain some other
office or agency for such purposes and shall give prompt written notice to
the Trustee of the location, and any change of location, of such other office
or agency. If at any time the Company shall fail to maintain any such
required office or agency or shall fail to furnish the Trustee with the
address thereof, such presentations, surrenders, notices and demands may be
made or served at the address of the Trustee set forth in Section 12.02.
The Company may also from time to time designate one or more other
offices or agencies where the Securities may be presented or surrendered for
any or all such purposes and may from time to time rescind such designations;
PROVIDED, HOWEVER, that no such designation or rescission shall in any manner
relieve the Company of its obligation to maintain an office or agency in The
Borough of Manhattan, The City of New York, for such purposes.
SECTION 4.06. CALCULATION OF ORIGINAL ISSUE DISCOUNT. The Company
shall file with the Trustee promptly following the end of each calendar year
a written notice specifying the amount of original issue discount (including
daily rates and accrual periods) accrued on outstanding Securities as of the
end of such year.
ARTICLE 5
SUCCESSOR CORPORATION
SECTION 5.01. WHEN COMPANY MAY MERGE OR TRANSFER ASSETS. So long as
any Securities shall be outstanding, the Company shall not,
<PAGE>
directly or indirectly, consolidate with or merge with or into any other
corporation or other person or sell, lease, convey or transfer all or
substantially all of its properties and assets (computed on a consolidated
basis), whether in a single transaction or a series of related transactions,
to another person or group of affiliated persons (such successor corporation
or person, as the case may be, shall in this Article 5 be referred to as the
"Successor Company"), unless
(1) either (x) in the case of a merger or consolidation,
the Company shall be the continuing corporation or (y) the
Successor Company (if other than the Company) shall be organized
and existing under the laws of the United States of America or
any State or the District of Columbia, and shall expressly assume
by an indenture supplemental hereto, executed and delivered to
the Trustee, in form satisfactory to the Trustee, the due and
punctual payment of the principal of and premium, if any, and
interest, if any, on all the Securities and the performance of
every covenant of this Indenture and in the Securities on the
part of the Company to be performed or observed;
(2) immediately after giving effect to such transaction, no
Event of Default, and no event that, after notice or lapse of
time, or both, would become an Event of Default, shall have
happened and be continuing;
(3) the Company has delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel each stating that such
consolidation, merger, conveyance, transfer or lease and such
supplemental indenture comply with this Article and that all
conditions precedent herein provided for relating to such
transaction have been complied with.
For purposes of the foregoing, the transfer (by lease, assignment, sale
or otherwise) of all or substantially all of the properties and assets of one
or more subsidiaries, the Company's interest in which constitutes all or
substantially all of the properties and assets of the Company shall be deemed
to be the transfer of all or substantially all of the properties and assets
of the Company.
<PAGE>
SECTION 5.02. SUCCESSOR COMPANY SUBSTITUTED. Upon any consolidation
with or merger into any other corporation or other person, or any conveyance,
transfer or lease of the properties and assets of the Company substantially
as an entirety in accordance with Section 5.01, the Successor Company or
person formed by such consolidation or into which the Company is merged or to
which such conveyance, transfer or lease is made shall succeed to, and be
substituted for, and may exercise every right and power of, the Company under
this Indenture with the same effect as if such Successor Company or person
had been named as the Company herein, and thereafter, except in the case of a
lease and obligations the Company may have under a supplemental indenture
pursuant to Section 10.14, the predecessor corporation shall be relieved of
all obligations and covenants under this Indenture and the Securities.
Subject to Section 9.06, the Company, the Trustee and the successor person
shall enter into a supplemental indenture to evidence the succession and
substitution of such successor person and such discharge and release of the
Company.
ARTICLE 6
DEFAULTS AND REMEDIES
SECTION 6.01. EVENTS OF DEFAULT. An "EVENT OF DEFAULT" occurs if:
(1) the Company defaults in the payment of the Principal
Amount, Issue Price, accrued Original Issue Discount, Redemption
Price, Purchase Price or Change of Control Purchase Price on any
Security, when the same becomes due and payable at its Stated
Maturity, upon redemption, upon declaration, when due for
purchase by the Company or otherwise, whether or not such payment
shall be prohibited by this Indenture;
(2) the Company fails to comply with any of its agreements
in the Securities or this Indenture and such failure continues
for 60 days after receipt by the Company of a Notice of Default;
(3) the Company pursuant to or within the meaning of any
Bankruptcy Law:
(A) commences a voluntary case or proceeding;
(B) consents to the entry of an order for relief
against it in an involuntary case or proceeding or the
commencement of any case against it;
(C) consents to the appointment of a Custodian of it or
for any substantial part of its property;
<PAGE>
(D) makes a general assignment for the benefit of its
creditors;
(E) files a petition in bankruptcy or answer or consent
seeking reorganization or relief; or
(F) consents to the filing of such petition or the
appointment of or taking possession by a Custodian;
(4) a court of competent jurisdiction enters an order or
decree under any Bankruptcy Law that:
(A) is for relief against the Company in an involuntary
case or proceeding, or adjudicates the Company insolvent or
bankrupt;
(B) appoints a Custodian of the Company or for any
substantial part of its property; or
(C) orders the winding up or liquidation of the
Company;
and the order or decree remains unstayed and in effect for 60
days;
(5) the Company fails to deliver shares of Common Stock or
pay cash in lieu of fractional shares in accordance with the
terms hereof when such Common Stock or cash in lieu of fractional
shares is required to be delivered, upon conversion of a Security
and such failure is not remedied for a period of 10 days; or
(6) (a) default shall occur (i) in the payment of any
principal on any debt for borrowed money of the Company, in an
aggregate principal amount in excess of $10.0 million, when due
at its final maturity, or (ii) in the performance of any term or
provision of any debt for borrowed money of the Company in an
aggregate principal amount in excess of $10.0 million that
results in such debt becoming or being declared due and payable.
A Default under clause (2) above is not an Event of Default until the
Trustee notifies the Company, or the Holders of at least 25% in aggregate
Principal Amount of the Securities at the time outstanding notify the Company
and the Trustee, of the Default and the Company does not cure such Default
within the time specified in clause (2) above after receipt of such notice.
Any such notice must specify the Default, demand that it be remedied and
state that such notice is a "Notice of Default."
The Company shall deliver to the Trustee, within 30 days after it
becomes aware of the occurrence thereof, written notice of any event which
with the giving of notice and the lapse of time or both
<PAGE>
would become an Event of Default under clause (2) or clause (6), its status
and what action the Company is taking or proposes to take with respect
thereto.
SECTION 6.02. ACCELERATION. If an Event of Default (other than an
Event of Default specified in Section 6.01(3) or (4)) occurs and is
continuing, unless the Principal Amount of all the Securities shall have
already become due and payable, either the Trustee by notice to the Company,
or the Holders of at least 25% in aggregate Principal Amount of the
Securities at the time outstanding by notice to the Company and the Trustee,
may declare the Issue Price and accrued Original Issue Discount through the
date of declaration on all the Securities to be immediately due and payable,
whereupon such Issue Price and accrued Original Issue Discount shall be due
and payable immediately; PROVIDED that, if an Event of Default specified in
Section 6.01(3) or (4) occurs and is continuing, the Issue Price and accrued
Original Issue Discount on all the Securities through the date of the
occurrence of such Event of Default shall become and be immediately due and
payable without any declaration or other act on the part of the Trustee or
any Securityholders. The Holders of a majority in aggregate Principal Amount
of the Securities at the time outstanding, by notice to the Trustee (and
without notice to any other Securityholder) may rescind an acceleration and
its consequences if the rescission would not conflict with any judgment or
decree and if all existing Events of Default have been cured or waived except
nonpayment of the Issue Price and accrued Original Issue Discount that have
become due solely as a result of acceleration and if all amounts due to the
Trustee under Section 7.06 have been paid. No such rescission shall affect
any subsequent Default or impair any right consequent thereto.
SECTION 6.03. OTHER REMEDIES. If an Event of Default occurs and is
continuing, the Trustee may pursue any available remedy to collect the
payment of the Issue Price and accrued Original Issue Discount on the
Securities or to enforce the performance of any provision of the Securities
or this Indenture.
The Trustee may maintain a proceeding even if the Trustee does not
possess any of the Securities or does not produce any of the Securities in
the proceeding. A delay or omission by the Trustee or any Securityholder in
exercising any right or remedy accruing upon an Event of Default shall not
impair the right or remedy or constitute a waiver of, or acquiescence in, the
Event of Default. No remedy is exclusive of any other remedy. All available
remedies are cumulative.
SECTION 6.04. WAIVER OF PAST DEFAULTS. The Holders of a majority in
aggregate Principal Amount of the Securities at the time outstanding, by
notice to the Trustee (and without notice to any other Securityholder), may
waive an existing Default and its consequences except (a) an Event of Default
described in Section
<PAGE>
6.01(1), (b) a Default in respect of a provision that under Section 9.02
cannot be amended without the consent of each Securityholder affected or (c)
a Default under Article 10. When a Default is waived, it is deemed cured and
shall cease to exist, but no such waiver shall extend to any subsequent or
other Default or impair any consequent right.
SECTION 6.05. CONTROL BY MAJORITY. The Holders of a majority in
aggregate Principal Amount of the Securities at the time outstanding may
direct the time, method and place of conducting any proceeding for any remedy
available to the Trustee or of exercising any trust or power conferred on the
Trustee. However, the Trustee may refuse to follow any direction that
conflicts with law or this Indenture or that the Trustee determines in good
faith is unduly prejudicial to the rights of other Securityholders or would
involve the Trustee in personal liability unless the Trustee shall have been
provided with reasonable security or indemnity against such liability
satisfactory to the Trustee.
SECTION 6.06. LIMITATION ON SUITS. A Securityholder may not pursue any
remedy with respect to this Indenture or the Securities unless:
(1) the Holder gives to the Trustee written notice stating
that an Event of Default is continuing;
(2) the Holders of at least 25% in aggregate Principal
Amount of the Securities at the time outstanding make a written
request to the Trustee to pursue the remedy;
(3) such Holder or Holders offer to the Trustee reasonable
security or indemnity against any loss, liability or expense
satisfactory to the Trustee;
(4) the Trustee does not comply with the request within 60
days after receipt of the notice, the request and the offer of
security or indemnity; and
(5) the Holders of a majority in aggregate Principal Amount
of the Securities at the time outstanding do not give the Trustee
a direction inconsistent with the request during such 60-day
period.
A Securityholder may not use this Indenture to prejudice the rights of
any other Securityholder or to obtain a preference or priority over any other
Securityholder.
SECTION 6.07. RIGHTS OF HOLDERS TO RECEIVE PAYMENT. Notwithstanding any
other provision of this Indenture, the right of any Holder to receive payment
of the Principal Amount, Issue Price, accrued Original Issue Discount,
Redemption Price, Purchase Price, Change of Control Purchase Price or
interest, if any, in respect of the Securities held by such Holder, on or
after the respective due
<PAGE>
dates expressed in the Securities or any Redemption Date, and to convert the
Securities in accordance with Article 10 or to bring suit for the enforcement
of any such payment on or after such respective dates or the right to
convert, shall not be impaired or affected adversely without the consent of
each such Holder.
SECTION 6.08. COLLECTION SUIT BY TRUSTEE. If an Event of Default
described in Section 6.01(1) occurs and is continuing, the Trustee may
recover judgment in its own name and as trustee of an express trust against
the Company for the whole amount owing with respect to the Securities and the
amounts provided for in Section 7.06.
SECTION 6.09. TRUSTEE MAY FILE PROOFS OF CLAIM. In case of the
pendency of any receivership, insolvency, liquidation, bankruptcy,
reorganization, arrangement, adjustment, composition or other judicial
proceeding relative to the Company or any other obligor upon the Securities
or the property of the Company or of such other obligor or their creditors,
the Trustee (irrespective of whether the Principal Amount, Issue Price,
accrued Original Issue Discount, Redemption Price, Purchase Price, Change of
Control Purchase Price or interest, if any, in respect of the Securities
shall then be due and payable as therein expressed or by declaration or
otherwise and irrespective of whether the Trustee shall have made any demand
on the Company for the payment of any such amount) shall be entitled and
empowered, by intervention in such proceeding or otherwise:
(a) to file and prove a claim for the whole amount of the
Principal Amount, Issue Price, accrued Original Issue Discount,
Redemption Price, Purchase Price, Change of Control Purchase
Price or interest, if any, and to file such other papers or
documents as may be necessary or advisable in order to have the
claims of the Trustee (including any claim for the reasonable
compensation, expenses, disbursements and advances of the
Trustee, its agents and counsel) and of the Holders allowed in
such judicial proceeding; and
(b) to collect and receive any moneys or other property
payable or deliverable on any such claims and to distribute the
same;
and any Custodian, receiver, assignee, trustee, liquidator, sequestrator or
similar official in any such judicial proceeding is hereby authorized by each
Holder to make such payments to the Trustee and, in the event that the
Trustee shall consent to the making of such payments directly to the Holders,
to pay the Trustee any amount due it for the reasonable compensation,
expenses, disbursements and advances of the Trustee, its agents and counsel,
and any other amounts due the Trustee under Section 7.06.
<PAGE>
Nothing herein contained shall be deemed to authorize the Trustee to
authorize or consent to or accept or adopt on behalf of any Holder any plan
of reorganization, arrangement, adjustment or composition affecting the
Securities or the rights of any Holder thereof, or to authorize the Trustee
to vote in respect of the claim of any Holder in any such proceeding.
SECTION 6.10. PRIORITIES. If the Trustee collects any money pursuant to
this Article 6, it shall pay out the money in the following order:
FIRST: to the Trustee for amounts due under Section 7.06;
SECOND: to Securityholders for amounts due and unpaid on the
Securities for the Principal Amount, Issue Price, accrued Original Issue
Discount, Redemption Price, Purchase Price, Change of Control Purchase Price
or interest, if any, as the case may be, ratably, without preference or
priority of any kind, according to such amounts due and payable on the
Securities; and
THIRD: the balance, if any, to the Company.
The Trustee may fix a record date and payment date for any payment to
Securityholders pursuant to this Section 6.10. At least 15 days before such
record date, the Company shall mail to each Securityholder and the Trustee a
notice that states the record date, the payment date and amount to be paid.
SECTION 6.11. UNDERTAKING FOR COSTS. In any suit for the enforcement of
any right or remedy under this Indenture or in any suit against the Trustee
for any action taken or omitted by it as Trustee, a court in its discretion
may require the filing by any party litigant (other than the Trustee) in the
suit of an undertaking to pay the costs of the suit, and the court in its
discretion may assess reasonable costs, including reasonable attorneys' fees
and expenses, against any party litigant in the suit, having due regard to
the merits and good faith of the claims or defenses made by the party
litigant. This Section 6.11 does not apply to a suit initiated by the
Trustee, a suit by a Holder pursuant to Section 6.07 or a suit by Holders of
more than 10% in aggregate Principal Amount of the Securities at the time
outstanding.
SECTION 6.12. NOTICE OF DEFAULTS. The Trustee shall, within 90 days
after the occurrence of any Default, mail to all Holders of Securities, as
the names and addresses of such Holders appear on the books of registry of
the Company, notice of all Defaults of which the Trustee shall be aware,
unless such Defaults shall have been cured or waived before the giving of
such notice; PROVIDED that, except in the case of a Default described in
Section 6.01(1), the Trustee shall be protected in withholding such notice if
and so long as the board of directors, the executive committee, or a trust
<PAGE>
committee of directors or Trust Officers of the Trustee in good faith
determines that the withholding of such notice is in the interests of the
Holders of Securities.
SECTION 6.13. WAIVER OF STAY, EXTENSION OR USURY LAWS. The Company
covenants (to the extent it may lawfully do so) that it shall not at any time
insist upon, or plead, or in any manner whatsoever claim or take the benefit
or advantage of, any stay or extension law or any usury or other law,
wherever enacted, now or at any time hereafter in force, that would prohibit
or forgive the Company from paying all or any portion of the Principal
Amount, Issue Price, accrued Original Issue Discount, Redemption Price,
Purchase Price or Change of Control Purchase Price in respect of the
Securities, or any interest on any such amounts, as contemplated herein, or
that may affect the covenants or the performance of this Indenture or the
Securities; and the Company (to the extent that it may lawfully do so) hereby
expressly waives all benefit or advantage of any such law, and covenants that
it will not hinder, delay or impede the execution of any power herein granted
to the Trustee, but will suffer and permit the execution of every such power
as though no such law had been enacted.
ARTICLE 7
TRUSTEE
SECTION 7.01. RIGHTS OF TRUSTEE. (a) Before the Trustee acts or
refrains from acting, it may require an Officers' Certificate or an Opinion
of Counsel. The Trustee shall not be liable for any action it takes or omits
to take in good faith in reliance on such Officers' Certificate or Opinion of
Counsel.
(b) The Trustee may act through agents and shall not be responsible for
the misconduct or negligence of any agent appointed with due care.
(c) The Trustee shall not be liable for any action it takes or omits to
take in good faith which it believes to be authorized or within its rights or
powers.
(d) The Trustee may refuse to perform any duty or exercise any right or
power or extend or risk its own funds or otherwise incur any financial
liability unless it receives indemnity satisfactory to it against any loss,
liability or expense.
(e) Money held by the Trustee in trust hereunder need not be segregated
from other funds except to the extent required by law. Except as provided in
Section 3.14 hereof, the Trustee (acting in any capacity hereunder) shall be
under no liability for interest on any money received by it hereunder.
<PAGE>
(f) The Trustee undertakes to perform such duties and only such duties
as are specifically set forth in this Indenture, and no implied covenants or
obligations shall be read into this Indenture against the Trustee.
(g) In the absence of bad faith on its part, the Trustee may
conclusively rely, as to the truth of the statements and the correctness of
the opinions expressed therein, upon certificates or opinions furnished to
the Trustee and conforming to the requirements of this Indenture; but in the
case of any such certificates or opinions that by any provision hereof are
specifically required to be furnished to the Trustee, the Trustee shall be
under a duty to examine the same to determine whether or not they conform to
the requirements of this Indenture (but need not confirm or investigate the
accuracy of mathematical calculations or other facts stated therein).
(h) The Trustee shall not be liable for any error of judgment made in
good faith by a Trust Officer, unless it shall be proved that the Trustee was
negligent in ascertaining the pertinent facts.
(i) The Trustee shall not be liable with respect to any action taken or
omitted to be taken by it in good faith in accordance with the direction of
the Holders of a majority in principal amount of the outstanding Securities
relating to the time, method and place of conducting any proceeding for any
remedy available to the Trustee, or exercising any trust or power conferred
upon the Trustee, under this Indenture with respect to the Securities.
(j) The Trustee may consult with counsel of its selection and the
advice of such counsel or any Opinion of Counsel shall be full and complete
authorization and protection in respect of any action taken, suffered or
omitted by it hereunder in good faith and in reliance thereon.
(k) The Trustee shall not be bound to make any investigation into the
facts or matters stated in any resolution, certificate, statement,
instrument, opinion, report, notice, request, direction, consent, order,
bond, debenture, note, other evidence of indebtedness or other paper or
document, but the Trustee, in its discretion, may make such further inquiry
or investigation into such facts or matters as it may see fit, and, if the
Trustee reasonably believes that a default may exist, it shall be entitled to
examine the books, records and premises of the Company, personally or by
agent or attorney at the sole cost of the Company and shall incur no
liability or additional liability of any kind by reason of such inquiry or
investigation.
(l) No provision of this Indenture shall require the Trustee to expend
or risk its own funds or otherwise incur any financial liability in the
performance of any of its duties hereunder, or in the exercise of any of its
rights or powers, if it shall have
<PAGE>
reasonable grounds for believing that repayment of such funds or adequate
indemnity against such risk or liability is not reasonably assured to it.
(m) The Trustee may rely and shall be protected in acting or refraining
from acting upon any resolution, certificate, statement, instrument, opinion,
report, notice, request, direction, consent, order, bond, debenture, note,
other evidence of indebtedness or other paper or document believed by it to
be genuine and to have been signed or presented by the proper party or
parties.
SECTION 7.02. INDIVIDUAL RIGHTS OF TRUSTEE. The Trustee in its
individual or any other capacity may become the owner or pledgee of
Securities and may otherwise deal with the Company or its Affiliates with the
same rights it would have if it were not Trustee. Any Paying Agent,
Registrar, Conversion Agent or co-registrar may do the same with like rights.
However, the Trustee must comply with Sections 7.09 and 7.10.
SECTION 7.03. TRUSTEE'S DISCLAIMER. The Trustee makes no
representation as to the validity or adequacy of this Indenture or the
Securities, it shall not be accountable for the Company's use of the proceeds
from the Securities, it shall not be responsible for any statement in the
registration statement for the Securities under the Securities Act or in the
Indenture or the Securities (other than its certificate of authentication),
or the determination as to which beneficial owners are entitled to receive
any notices hereunder.
SECTION 7.04. NOTICE OF DEFAULTS. The Trustee shall, within 90 days
after the occurrence of any Default, mail to all Holders of Securities, as
the names and addresses of such Holders appear on the books of registry of
the Company, notice of all Defaults of which the Trustee shall be aware,
unless such Defaults shall have been cured or waived before the giving of
such notice. Except in the case of a Default described in Section 6.01(1),
the Trustee shall be protected in withholding such notice if and so long as
the board of directors, the executive committee, or a trust committee of
directors or Trust Officers of the Trustee in good faith determines that the
withholding of such notice is in the interests of the Holders of Securities.
SECTION 7.05. REPORTS BY TRUSTEE TO HOLDERS. Within 60 days after each
May 15 beginning with the May 15, 1997 following the date of this Indenture,
the Trustee shall mail to each Securityholder a brief report dated as of such
June 1 that complies with TIA Section 313(a), if required by said Section.
The Trustee also shall comply with TIA Section 313(b).
A copy of each report at the time of its mailing to Securityholders
shall be provided to the Company and shall be filed with the SEC and each
stock exchange on which the Securities are
<PAGE>
listed. The Company agrees promptly to notify the Trustee whenever the
Securities become listed on any stock exchange and of any delisting thereof.
SECTION 7.06. COMPENSATION AND INDEMNITY. The Company agrees:(a) to
pay to the Trustee from time to time such compensation (in accordance with a
fee schedule agreed upon from time to time) for all services rendered by it
hereunder (which compensation shall not (to the extent permitted by law) be
limited by any provision of law in regard to the compensation of a trustee of
an express trust);
(b) to reimburse the Trustee (in accordance with a fee schedule agreed
upon from time to time) upon its request and, if required by the Company,
submission of reasonable documentation for all reasonable expenses,
disbursements and advances incurred or made by the Trustee in accordance with
any provision of this Indenture (including the reasonable compensation and
the expenses, advances and disbursements of its agents and counsel), except
any such expense, disbursement or advance as may be attributable to its
negligence or bad faith; and
(c) to indemnify each of the Trustee or any predecessor Trustee for, and
to hold it harmless against, any and all loss, liability, damage, claim or
expense, including taxes (other than taxes based upon, measured or determined
by the income of the Trustee), incurred without negligence or bad faith on
its part, arising out of or in connection with the acceptance or
administration of this trust, including the reasonable costs and expenses of
defending itself against any claim or liability in connection with the
exercise or performance of any of its powers or duties hereunder.
The Trustee shall give the Company notice of any claim or liability for
which the Trustee might be entitled to indemnification under subparagraph (c)
of this Section 7.06, within a reasonable amount of time after a Trust
Officer of the Trustee actually becomes aware of such claim or liability. To
secure the Company's payment obligations in this Section 7.06, the Trustee
shall have a lien prior to the Securities on all money or property held or
collected by the Trustee.
The Company's payment obligations pursuant to this Section 7.06 shall
survive the discharge of this Indenture. When the Trustee incurs expenses
after the occurrence of a Default specified in Section 6.01(3) or (4), the
expenses are intended to constitute expenses of administration under the
Bankruptcy Law. The provisions of this Section shall survive the termination
of this Indenture.
SECTION 7.07. REPLACEMENT OF TRUSTEE. The Trustee may resign by so
notifying the Company; PROVIDED, HOWEVER, no such resignation
<PAGE>
shall be effective until a successor Trustee has accepted its appointment
pursuant to this Section 7.07. The Holders of a majority in aggregate
Principal Amount of the Securities at the time outstanding may remove the
Trustee by so notifying the Trustee and may appoint a successor Trustee
(subject to the consent of the Company, such consent not to be unreasonably
withheld). The Company shall remove the Trustee if:
(1) the Trustee fails to comply with Section 7.09;
(2) the Trustee is adjudged bankrupt or insolvent;
(3) a receiver or other public officer takes charge of the
Trustee or its property; or
(4) the Trustee otherwise becomes incapable of acting.
If the Trustee resigns or is removed or if a vacancy exists in the
office of Trustee for any reason, the Company shall promptly appoint, by
resolution of its Board of Directors, a successor Trustee.
A successor Trustee shall deliver a written acceptance of its
appointment to the retiring Trustee and to the Company. Thereupon the
resignation or removal of the retiring Trustee shall become effective, and
the successor Trustee shall have all the rights, powers and duties of the
Trustee under this Indenture. The successor Trustee shall mail a notice of
its succession to Securityholders. The retiring Trustee shall promptly
transfer all property held by it as Trustee to the successor Trustee, subject
to the lien provided for in Section 7.06.
If a successor Trustee does not take office within 30 days after the
retiring Trustee resigns or is removed, the retiring Trustee, the Company or
the Holders of a majority in aggregate Principal Amount of the Securities at
the time outstanding may petition any court of competent jurisdiction for the
appointment of a successor Trustee.
If the Trustee fails to comply with Section 7.09, any Securityholder may
petition any court of competent jurisdiction for the removal of the Trustee
and the appointment of a successor Trustee.
SECTION 7.08. SUCCESSOR TRUSTEE BY MERGER. If the Trustee consolidates
with, merges or converts into, or transfers all or substantially all its
corporate trust business or assets to, another corporation, the resulting,
surviving or transferee corporation without any further act shall be the
successor Trustee.
SECTION 7.09. ELIGIBILITY; DISQUALIFICATION. The Trustee shall at all
times satisfy the requirements of TIA Sections
<PAGE>
310(a)(1) and 310(b). The Trustee shall have a combined capital and surplus
of at least $100,000,000 as set forth in its most recent published annual
report of condition. In determining whether the Trustee has conflicting
interests as defined in TIA Section 310(b)(1), the provisions contained in
the proviso to TIA Section 310(b)(1) shall be deemed incorporated herein.
SECTION 7.10. PREFERENTIAL COLLECTION OF CLAIMS AGAINST COMPANY. The
Trustee shall comply with TIA Section 311(a), excluding any creditor
relationship listed in TIA Section 311(b). A Trustee who has resigned or
been removed shall be subject to TIA Section 311(a) to the extent indicated
therein.
SECTION 7.11. MONEY HELD IN TRUST. Money held by the Trustee in trust
hereunder need not be segregated from other funds except to the extent
required by law. The Trustee shall be under no liability for interest on any
money received by it hereunder except as otherwise agreed in writing with the
Company.
ARTICLE 8
DISCHARGE OF INDENTURE
SECTION 8.01. DISCHARGE OF LIABILITY ON SECURITIES. When (i) the
Company delivers to the Trustee all outstanding Securities (other than
Securities replaced pursuant to Section 2.07) for cancellation or (ii) all
outstanding Securities have become due and payable and the Company deposits
with the Trustee cash or, if expressly permitted by the terms hereof,
securities sufficient to pay at Stated Maturity the Principal Amount of all
outstanding Securities (other than Securities replaced pursuant to Section
2.07), and if in either case the Company pays all other sums payable
hereunder by the Company (including, without limitation, sums payable by
delivery of shares of Common Stock pursuant to Section 3.08), then this
Indenture shall, subject to Section 7.06, cease to be of further effect. The
Trustee shall join in the execution of a document prepared by the Company
acknowledging satisfaction and discharge of this Indenture on demand of the
Company accompanied by an Officers' Certificate and Opinion of Counsel and at
the cost and expense of the Company.
SECTION 8.02. REPAYMENT TO THE COMPANY. The Trustee and the Paying
Agent shall return to the Company upon written request any money or
securities held by them for the payment of any amount with respect to the
Securities that remains unclaimed for two years; PROVIDED, HOWEVER, that at
the Company's written request, the Trustee or such Paying Agent, before being
required to make any such return, shall, at the expense of the Company, cause
to be
<PAGE>
published once in THE WALL STREET JOURNAL or another daily newspaper of
national circulation or mail to each such Holder notice that such money or
securities remains unclaimed and that, after a date specified therein, which
shall not be less than 30 days from the date of such mailing, any unclaimed
money or securities then remaining will be returned to the Company. After
return to the Company, Holders entitled to the money or securities must look
to the Company for payment as general creditors unless an applicable
abandoned property law designates another person, and the Trustee and the
Paying Agent shall have no further liability with respect to such money or
securities for that period commencing after the return thereof.
ARTICLE 9
AMENDMENTS
SECTION 9.01. WITHOUT CONSENT OF HOLDERS. The Company and the Trustee
may amend this Indenture or the Securities without the consent of any
Securityholder:
(1) to cure any ambiguity, omission, defect or inconsistency;
PROVIDED, HOWEVER, that such amendment does not materially adversely
affect the rights of any Securityholder;
(2) to comply with Article 5 or Section 10.14;
(3) to provide for uncertificated Securities in addition to or in
place of certificated Securities so long as such uncertificated
Securities are in registered form for purposes of the Internal Revenue
Code of 1986, as amended;
(4) to make any change that does not adversely affect the rights of
any Securityholder;
(5) to add to the covenants or obligations of the Company
hereunder, for the benefit of the Securityholders, or to surrender any
right, power or option herein conferred upon the Company; or
(6) to make any change to comply with the TIA.
SECTION 9.02. WITH CONSENT OF HOLDERS. With the written consent of the
Holders of at least a majority in aggregate Principal Amount of the
Securities at the time outstanding, the Company and the Trustee may amend
this Indenture or the Securities. However, without the consent of each
Securityholder affected, an amendment or supplement to this Indenture or the
Securities may not:
<PAGE>
(1) make any change to the Principal Amount of Securities whose
Holders must consent to an amendment;
(2) make any change to the rate of accrual in connection with
Original Issue Discount, reduce the rate of interest referred to in
paragraph 1 of the Securities or extend the time for payment of accrued
Original Issue Discount or interest, if any, on any Security;
(3) reduce the Principal Amount or the Issue Price of or extend the
Stated Maturity of any Security;
(4) reduce the amount of cash payable in respect of conversion upon
the Company's election to pay cash with respect thereto, the Redemption
Price, Purchase Price or Change of Control Purchase Price of any
Security or extend the date on which the Purchase Price or Change of
Control Purchase Price of any Security is payable;
(5) make any Security payable in money or securities other than
that stated in the Security;
(6) make any change in Section 6.04 or this Section 9.02, except to
increase any percentage referred to therein, or make any change in
Section 6.07;
(7) make any change that adversely affects the right to convert any
Security (including the right to receive cash in lieu of Common Stock
except as set forth in Section 9.01(4));
(8) make any change that adversely affects the right to require the
Company to purchase the Securities in accordance with the terms thereof
and this Indenture (including the right to receive cash if the Company
has elected to pay cash upon such purchase);
(9) make any change to the provisions of this Indenture relating to
the purchase of Securities at the option of the Holder pursuant to
Section 3.08 or 3.09 which change would result in a violation of
applicable federal or state securities laws (including positions of the
SEC under applicable no-action letters), whether as a result of the
exercise or performance of any rights or obligations under such
provisions or otherwise; or
(10) impair the right to institute suit for the enforcement of any
payment with respect to, or conversion of, the Securities.
It shall not be necessary for the consent of the Holders under this
Section 9.02 to approve the particular form of any proposed amendment, but it
shall be sufficient if such consent approves the substance thereof.
<PAGE>
After an amendment under this Section 9.02 becomes effective, the
Company shall mail to each Holder a notice briefly describing the amendment.
SECTION 9.03. COMPLIANCE WITH TRUST INDENTURE ACT. Every supplemental
indenture executed pursuant to this Article shall comply with the TIA as then
in effect.
SECTION 9.04. REVOCATION AND EFFECT OF CONSENTS, WAIVERS AND ACTIONS.
Until an amendment or waiver becomes effective, a consent to it or any other
action by a Holder of a Security hereunder is a continuing consent by the
Holder and every subsequent Holder of that Security or portion of the
Security that evidences the same obligation as the consenting Holder's
Security, even if notation of the consent, waiver or action is not made on
the Security. However, any such Holder or subsequent Holder may revoke the
consent, waiver or action as to such Holder's Security or portion of the
Security if the Trustee receives the notice of revocation before the date the
amendment, waiver or action becomes effective. After an amendment, waiver or
action becomes effective, it shall bind every Securityholder, except as
provided in Section 9.02.
SECTION 9.05. NOTATION ON OR EXCHANGE OF SECURITIES. Securities
authenticated and delivered after the execution of any supplemental indenture
pursuant to this Article 9 may, and shall if required by the Trustee, bear a
notation in form approved by the Trustee as to any matter provided for in
such supplemental indenture. If the Company shall so determine, new
Securities so modified as to conform, in the opinion of the Trustee and the
Company, to any such supplemental indenture may be prepared and executed by
the Company and authenticated and delivered by the Trustee in exchange for
outstanding Securities.
SECTION 9.06. TRUSTEE TO SIGN SUPPLEMENTAL INDENTURES. The Trustee
shall sign any supplemental indenture authorized pursuant to this Article 9
if the amendment does not adversely affect the rights, duties, liabilities or
immunities of the Trustee. If it does, the Trustee may, but need not, sign
it. In signing such amendment the Trustee shall be entitled to receive, and
(subject to the provisions of Section 7.01) shall be fully protected in
relying upon, an Officers' Certificate and an Opinion of Counsel stating that
such amendment is authorized or permitted by this Indenture.
SECTION 9.07. EFFECT OF SUPPLEMENTAL INDENTURES. Upon the execution of
any supplemental indenture under this Article, this Indenture shall be
modified in accordance therewith, and such supplemental indenture shall form
a part of this Indenture for all purposes; and every Holder of Securities
theretofore or thereafter authenticated and delivered hereunder shall be
bound thereby.
<PAGE>
ARTICLE 10
CONVERSION
SECTION 10.01. CONVERSION PRIVILEGE. A Holder of a Security may
convert such Security into Common Stock at any time (subject to the
limitation described in Section 3.03(5)) during the period stated in
paragraph 8 of the Securities. The number of shares of Common Stock
issuable upon conversion of a Security per $1,000 of Principal Amount
thereof (the "CONVERSION RATE") shall be that set forth in paragraph 8
in the Securities, subject to adjustment as herein set forth.
A Holder may convert a portion of the Principal Amount of a
Security if the portion is $1,000 or an integral multiple of $1,000.
Provisions of this Indenture that apply to conversion of all of a
Security also apply to conversion of a portion of a Security.
SECTION 10.02. CONVERSION PROCEDURE. To convert a Security a
Holder must satisfy the requirements in paragraph 8 of the Securities.
The date on which the Holder satisfies all those requirements is the
conversion date (the "CONVERSION DATE"). The Company shall deliver to
the Holder no later than the seventh Business Day following the
Conversion Date, through the Conversion Agent, a certificate for the
number of full shares of Common Stock issuable upon the conversion and
cash in lieu of any fractional share determined pursuant to Section
10.03.
The person in whose name the certificate is registered shall be treated
as a stockholder of record on and after the Conversion Date; PROVIDED,
HOWEVER, that no surrender of a Security on any date when the stock transfer
books of the Company shall be closed shall be effective to constitute the
person or persons entitled to receive the shares of Common Stock upon such
conversion as the record holder or holders of such shares of Common Stock on
such date, but such surrender shall be effective to constitute the person or
persons entitled to receive such shares of Common Stock as the record holder
or holders thereof for all purposes at the close of business on the next
succeeding day on which such stock transfer books are open; PROVIDED,
FURTHER, that such conversion shall be at the Conversion Rate in effect on
the date that such Security shall have been surrendered for conversion, as if
the stock transfer books of the Company had not been closed. Upon conversion
of a Security, such person shall no longer be a Holder of such Security.
Holders may surrender a Security for conversion by means of book
entry delivery in accordance with paragraph 8 of the
<PAGE>
Securities and the regulations of the applicable book entry facility.
No payment or adjustment will be made for dividends on any Common Stock
except as provided in this Article 10. On conversion of a Security, that
portion of accrued Original Issue Discount attributable to the period from
the Issue Date to the Conversion Date with respect to the converted Security
shall not be cancelled, extinguished or forfeited, but rather shall be deemed
to be paid in full to the Holder thereof through delivery of the Common Stock
(together with the cash payment, if any, in lieu of fractional shares) in
exchange for the Security being converted pursuant to the provisions hereof;
and the fair market value of such shares of Common Stock (together with any
such cash payment in lieu of any fractional shares of Common Stock) shall be
treated as issued, to the extent thereof, first in exchange for Original
Issue Discount accrued through the Conversion Date, and the balance, if any,
of such fair market value of such shares of Common Stock (and any such cash
payment) shall be treated as issued in exchange for the Issue Price of the
Security being converted pursuant to the provisions hereof.
If the Holder converts more than one Security at the same time, the
number of shares of Common Stock issuable upon the conversion shall be
computed based on the total Principal Amount of the Securities converted.
Upon surrender of a Security that is converted in part, the Company
shall execute, and the Trustee shall authenticate and deliver to the Holder,
a new Security in an authorized denomination equal in Principal Amount to the
unconverted portion of the Security surrendered.
If the last day on which a Security may be converted is a Legal Holiday
in a place where the Conversion Agent is located, the Security may be
surrendered to such Conversion Agent on the next succeeding day that is not a
Legal Holiday.
SECTION 10.03. FRACTIONAL SHARES. The Company will not issue a
fractional share of Common Stock upon conversion of a Security. Instead, the
Company will deliver cash for the current market value of the fractional
share. The current market value of a fractional share shall be determined to
the nearest 1/1,000th of a share by multiplying the Sale Price, on the last
Trading Day prior to the Conversion Date, of a full share by the fractional
amount and rounding the product to the nearest whole cent.
SECTION 10.04. TAXES ON CONVERSION. If a Holder converts a Security,
the Company shall pay any documentary, stamp or similar issue or transfer tax
due on the issue of shares of Common Stock upon such conversion. However,
the Holder shall pay any such tax which is due because the Holder requests
the shares to be issued in
<PAGE>
a name other than the Holder's name. The Conversion Agent may refuse to
deliver the certificates representing the Common Stock being issued in a name
other than the Holder's name until the Conversion Agent receives a sum
sufficient to pay any tax which will be due, as set forth in an Officers'
Certificate, because the shares are to be issued in a name other than the
Holder's name. Nothing herein shall preclude any tax withholding required by
law or regulations.
SECTION 10.05. COMPANY TO PROVIDE STOCK. The Company shall, prior to
issuance of any Securities hereunder, and from time to time as may be
necessary, reserve out of its authorized but unissued Common Stock a
sufficient number of shares of Common Stock to permit the conversion of the
Securities for shares of Common Stock.
All shares of Common Stock delivered upon conversion of the Securities
shall be newly issued shares or treasury shares, shall be duly and validly
issued and fully paid and nonassessable and shall be free from preemptive
rights and free of any lien or adverse claim.
The Company will endeavor promptly to comply with all Federal and state
securities laws regulating the offer and delivery of shares of Common Stock
upon conversion of Securities, if any, and will list or cause to have quoted
such shares of Common Stock on each national securities exchange or in the
over-the-counter market or such other market on which the Common Stock is
then listed or quoted.
SECTION 10.06. ADJUSTMENT FOR CHANGE IN CAPITAL STOCK. If, after the
Issue Date, the Company:
(1) pays a dividend or makes a distribution on its Common
Stock in shares of its Common Stock;
(2) subdivides its outstanding shares of Common Stock into a
greater number of shares;
(3) combines its outstanding shares of Common Stock into a
smaller number of shares;
(4) pays a dividend or makes a distribution on its Common
Stock in shares of its Capital Stock (other than Common Stock or
rights, warrants or options for its Capital Stock); or
(5) issues by reclassification of its Common Stock any
shares of its Capital Stock (other than rights, warrants or
options for its Capital Stock),
<PAGE>
then the conversion privilege and the Conversion Rate in effect immediately
prior to such action shall be adjusted so that the Holder of a Security
thereafter converted may receive the number of shares or other units of
Capital Stock of the Company which such Holder would have owned immediately
following such action if such Holder had converted the Security immediately
prior to such action.
The adjustment shall become effective immediately after the record date
in the case of a dividend or distribution and immediately after the effective
date in the case of a subdivision, combination or reclassification.
If after an adjustment a Holder of a Security upon conversion of such
Security may receive shares or other units of two or more classes or series
of Capital Stock of the Company, the Conversion Rate shall thereafter be
subject to adjustment upon the occurrence of an action taken with respect to
any such class or series of Capital Stock as is contemplated by this Article
10 with respect to the Common Stock, on terms comparable to those applicable
to Common Stock in this Article 10.
SECTION 10.07. ADJUSTMENT FOR RIGHTS ISSUE. If, after the Issue Date,
the Company distributes any rights, warrants or options to all holders of its
Common Stock entitling them, for a period expiring within 60 days after the
record date for such distribution, to purchase shares of Common Stock at a
price per share less than the Market Price as of the Time of Determination,
the Conversion Rate shall be adjusted in accordance with the formula:
(0 + N)
-----------
R' = R x 0 + (N x P)
-----
M
where:
R' = the adjusted Conversion Rate.
R = the current Conversion Rate.
0 = the number of shares of Common Stock outstanding on the
record date for the distribution.
N = the number of additional shares of Common Stock offered
pursuant to the distribution.
P = the offering price per share of such additional shares.
M = the Market Price.
The adjustment shall become effective immediately after the
record date for the determination of shareholders entitled to
<PAGE>
receive the rights, warrants or options to which this Section 10.07 applies.
No adjustment shall be made under this Section 10.07 if the application
of the formula stated above in this Section 10.07 would result in value of R'
that is equal to or less than the value of R.
SECTION 10.08. ADJUSTMENT FOR OTHER DISTRIBUTIONS. If, after the Issue
Date, the Company distributes to all holders of its Common Stock any of its
assets or debt securities or any rights, warrants or options to purchase
securities of the Company (including securities or cash, but excluding (x)
distributions of Capital Stock referred to in Section 10.06 and distributions
of rights, warrants or options referred to in Section 10.07 and (y) cash
dividends or other cash distributions that are paid out of consolidated
current net earnings or earned surplus as shown on the books of the Company,
unless such cash dividends or other cash distributions are Extraordinary Cash
Dividends, the Conversion Rate shall be adjusted, subject to the provisions
of the last paragraph of this Section 10.08, in accordance with the formula:
M
---
R' = R x M-F
where:
R' = the adjusted Conversion Rate.
R = the current Conversion Rate.
M = the Market Price.
F = the fair market value (on the record date for the
distribution to which this Section 10.08 applies) of the
assets, securities, rights, warrants or options to be
distributed in respect of each share of Common Stock in the
distribution to which this Section 10.08 is being applied
(including, in the case of cash dividends or other cash
distributions giving rise to an adjustment, all such cash
distributed concurrently).
The Board of Directors shall determine fair market values for the
purpose of this Section 10.08.
The adjustment shall become effective immediately after the record date
for the determination of shareholders entitled to receive the distribution to
which this Section 10.08 applies.
In the event that, with respect to any distribution to which this
Section 10.08 would otherwise apply, the difference "M-F" as defined
in the above formula is less than $1.00 or "F" is greater than "M",
then the adjustment provided by this Section 10.08 shall
<PAGE>
not be made and in lieu thereof the provisions of Section 10.14 shall apply
to such distribution.
SECTION 10.09. WHEN ADJUSTMENT MAY BE DEFERRED. No adjustment in the
Conversion Rate need be made unless the adjustment would require an increase
or decrease of at least 1% (E.G., if the Conversion Rate is 4, an increase or
decrease of .04 (1% of 4)) in the Conversion Rate. Any adjustments that are
not made shall be carried forward and taken into account in any subsequent
adjustment.
All calculations under this Article 10 shall be made to the nearest cent
or to the nearest 1/1,000th of a share, as the case may be, with one-half of
a cent and 5/10,000ths of a share being rounded upwards.
SECTION 10.10. WHEN NO ADJUSTMENT REQUIRED. No adjustment need be made
for a transaction referred to in Section 10.06, 10.07, 10.08 or 10.14 if
Securityholders are to participate in the transaction on a basis and with
notice that the Board of Directors determines to be fair and appropriate in
light of the basis and notice on which holders of Common Stock participate in
the transaction.
No adjustment need be made for rights to purchase Common Stock pursuant
to a Company plan for reinvestment of dividends or interest.
No adjustment need be made for a change in the par value or no
par value of the Common Stock.
No adjustment need be made unless such adjustment, together with any
other adjustments similarly deferred equals at least 1% of the then current
Conversion Rate.
To the extent the Securities become convertible into cash pursuant to
the terms of Section 10.08 or 10.14, no adjustment need be made thereafter as
to the cash. Interest will not accrue on the cash.
Notwithstanding any provision to the contrary in this Indenture, no
adjustment shall be made in the Conversion Rate to the extent, but only to
the extent, such adjustment results in the following quotient being less than
the par value of the Common Stock: (i) the Issue Price plus accrued Original
Issue Discount as of the date such adjustment would otherwise be effective
divided by (ii) the Conversion Rate as so adjusted.
SECTION 10.11. NOTICE OF ADJUSTMENT. Whenever the Conversion
Rate is adjusted, the Company shall file with the Trustee and the
Conversion Agent a notice of such adjustment and a certificate from
the Company's independent public accountants briefly stating the
<PAGE>
facts requiring the adjustment and the manner of computing it. The
Conversion Agent will promptly mail such notice to Securityholders at the
Company's expense. The certificate shall be conclusive evidence that the
adjustment is correct. Neither the Trustee nor any Conversion Agent shall be
under any duty or responsibility with respect to any such certificate except
to exhibit the same to any Holder desiring inspection thereof.
SECTION 10.12. VOLUNTARY INCREASE. The Company from time to time may
increase the Conversion Rate by any amount and for any period of time
(PROVIDED that such period is not less than 20 Business Days). Whenever the
Conversion Rate is increased, the Company shall mail to Securityholders and
file with the Trustee and the Conversion Agent a notice of the increase. The
Company shall mail the notice at least 15 days before the date the increased
Conversion Rate takes effect. The notice shall state the increased
Conversion Rate and the period it will be in effect.
A voluntary increase of the Conversion Rate does not change or adjust
the Conversion Rate otherwise in effect for purposes of Sections 10.06, 10.07
or 10.08.
SECTION 10.13. NOTICE OF CERTAIN TRANSACTIONS. If:
(1) the Company takes any action that would require an
adjustment in the Conversion Rate pursuant to Section 10.06,
10.07 or 10.08 (unless no adjustment is to occur pursuant to
Section 10.10); or
(2) the Company takes any action that would require a
supplemental indenture pursuant to Section 10.14; or
(3) there is a liquidation or dissolution of the Company;
then the Company shall mail to Securityholders and file with the Trustee and
the Conversion Agent a notice stating the proposed record date for a dividend
or distribution of the proposed effective date of a subdivision, combination,
reclassification, consolidation, merger, binding share exchange, transfer,
liquidation or dissolution. The Company shall file and mail the notice at
least 15 days before such date. Failure to file or mail the notice or any
defect in it shall not affect the validity of the transaction.
SECTION 10.14. REORGANIZATION OF COMPANY; SPECIAL DISTRIBUTIONS.
If the Company is a party to a transaction subject to Section 5.01
(other than a sale of all or substantially all of the assets of the
Company in a transaction in which the holders of Common Stock
immediately prior to such transaction do not receive securities, cash
or other assets of the Company or any other person) or a merger or
binding share exchange which reclassifies or
<PAGE>
changes its outstanding Common Stock, the person obligated to deliver
securities, cash or other assets upon conversion of Securities shall enter
into a supplemental indenture. If the issuer of securities deliverable upon
conversion of Securities is an Affiliate of the successor Company, that
issuer shall join in the supplemental indenture.
The supplemental indenture shall provide that the Holder of a Security
may convert it into the kind and amount of securities, cash or other assets
which such Holder would have received immediately after the consolidation,
merger, binding share exchange or transfer if such Holder had converted the
Security immediately before the effective date of the transaction, assuming
(to the extent applicable) that such Holder (i) was not a constituent person
or an Affiliate of a constituent person to such transaction; (ii) made no
election with respect thereto; and (iii) was treated alike with the plurality
of non-electing Holders. The supplemental indenture shall provide for
adjustments which shall be as nearly equivalent as may be practical to the
adjustments provided for in this Article 10. The successor Company shall
mail to Securityholders a notice briefly describing the supplemental
indenture.
If this Section applies, neither Section 10.06 nor 10.07 applies.
If the Company makes a distribution to all holders of its Common Stock
of any of its assets, or debt securities or any rights, warrants or options
to purchase securities of the Company that, but for the provisions of the
last paragraph of Section 10.08, would otherwise result in an adjustment in
the Conversion Rate pursuant to the provisions of Section 10.08, then, from
and after the record date for determining the holders of Common Stock
entitled to receive the distribution, a Holder of a Security that converts
such Security in accordance with the provisions of this Indenture shall upon
such conversion be entitled to receive, in addition to the shares of Common
Stock into which the Security is convertible, the kind and amount of
securities, cash or other assets comprising the distribution that such Holder
would have received if such Holder had converted the Security immediately
prior to the record date for determining the holders of Common Stock entitled
to receive the distribution.
SECTION 10.15. COMPANY DETERMINATION FINAL. Any determination that the
Company or the Board of Directors must make pursuant to this Article 10 is
conclusive.
SECTION 10.16. TRUSTEE'S ADJUSTMENT DISCLAIMER. The Trustee has no duty
to determine when an adjustment under this Article 10 should be made, how it
should be made or what it should be. The Trustee has no duty to determine
whether a supplemental indenture under Section 10.14 need be entered into or
whether any provisions of any supplemental indenture are correct. The
Trustee shall not
<PAGE>
be accountable for and makes no representation as to the validity or value of
any securities or assets issued upon conversion of Securities. The Trustee
shall not be responsible for the Company's failure to comply with this
Article 10. Each Conversion Agent (other than the Company or an Affiliate of
the Company) shall have the same protection under this Section 10.16 as the
Trustee.
SECTION 10.17. SIMULTANEOUS ADJUSTMENTS. If this Article 10 requires
adjustments to the Conversion Rate under more than one of Sections 10.06(4),
10.07 or 10.08, and the record dates for the distributions giving rise to
such adjustments shall occur on the same date, then such adjustments shall be
made by applying, first, the provisions of Section 10.06, second, the
provisions of Section 10.08 and, third, the provisions of Section 10.07.
SECTION 10.18. SUCCESSIVE ADJUSTMENTS. After an adjustment to the
Conversion Rate under this Article 10, any subsequent event requiring an
adjustment under this Article 10 shall cause an adjustment to the Conversion
Rate as so adjusted.
ARTICLE 11
SUBORDINATION
SECTION 11.01. SECURITIES SUBORDINATED TO SENIOR INDEBTEDNESS.
The Company and each Holder, by its acceptance of Securities,
agrees that (a) the payment of the principal, premium of and interest on the
Securities and (b) any other payment in respect of the Securities, including
on account of the acquisition or redemption of the Securities by the Company
(including, without limitation, pursuant to Article 3) is subordinated, to
the extent and in the manner provided in this Article 11, to the prior
payment in full of all Senior Indebtedness, whether outstanding at the date
of this Indenture or thereafter created, incurred, assumed or guaranteed, and
that these subordination provisions are for the benefit of the holders of
Senior Indebtedness.
This Article 11 shall constitute a continuing offer to all Persons
who, in reliance upon such provisions, become holders of, or continue to
hold, Senior Indebtedness, and such provisions are made for the benefit of
the holders of Senior Indebtedness, and such holders are made obligees
hereunder and any one or more of them may enforce such provisions.
SECTION 11.02. NO PAYMENT ON SECURITIES IN CERTAIN CIRCUMSTANCES.
(a) No payment may be made by the Company on account of the
principal of, premium, if any, or interest on, the Securities, or
<PAGE>
to acquire any of the Securities (including repurchases of Securities at the
option of the Holder) for cash or property, or on account of the redemption
provisions of the Securities, (i) upon the maturity of any Senior
Indebtedness of the Company by lapse of time, acceleration (unless waived) or
otherwise, unless and until all principal of, premium, if any, and interest
on such Senior Indebtedness are first paid in full, or (ii) in the event of
default in the payment of any principal of, premium, if any, or interest on
any Senior Indebtedness when it becomes due and payable, whether at maturity
or at a date fixed for prepayment or by declaration or otherwise (a "Payment
Default"), unless and until such Payment Default has been cured or waived or
otherwise has ceased to exist.
(b) Upon (i) the happening of an event of default (other than a Payment
Default) that permits the holders of Senior Indebtedness or their
representative immediately to accelerate its maturity and (ii) written notice
of such event of default given to the Company and the Trustee by the holders
of at least 25% in aggregate principal amount outstanding of such Senior
Indebtedness or their representative (a "Payment Notice"), then, unless and
until such event of default has been cured or waived or otherwise has ceased
to exist, no payment (by set-off or otherwise) may be made by or on behalf of
the Company on account of the principal of, premium, if any, or interest on,
the Securities, or to acquire or repurchase any of the Securities for cash or
property, or on account of the redemption provisions of the Securities.
Notwithstanding the foregoing provisions of this Subsection 11.02(b), unless
(i) the Senior Indebtedness in respect of which such event of default exists
has been declared due and payable in its entirety within 179 days after the
Payment Notice is delivered as set forth above (the "Payment Blockage
Period"), and (ii) such declaration has not been rescinded or waived, at the
end of the Payment Blockage Period, the Company shall be required to pay all
sums not paid to the Holders of the Securities during the Payment Blockage
Period due to the foregoing prohibitions and to resume all other payments as
and when due on the Securities. Any number of Payment Notices may be given;
PROVIDED, HOWEVER, that (i) not more than one Payment Notice shall be given
within a period of any 360 consecutive days, and (ii) no default that existed
upon the date of such Payment Notice or the commencement of such Payment
Blockage Period (whether or not such event of default is on the same issue of
Senior Indebtedness) shall be made the basis for the commencement of any
other Payment Blockage Period.
(c) In the event that, notwithstanding the foregoing provisions of this
Section 11.02, any payment or distribution of assets of the Company shall be
received by the Trustee or the Holders at a time when such payment or
distribution is prohibited by the provisions of this Section 11.02, then such
payment, Paying Agent or distribution (subject to the provisions of Section
11.07) shall be received and held in trust by the Trustee or such Holder
<PAGE>
or Paying Agent for the benefit of the holders of Senior Indebtedness, and
shall be paid or delivered by the Trustee or such Holders or such Paying
Agent, as the case may be, to the holders of Senior Indebtedness remaining
unpaid or their representative or representatives, or to the trustee or
trustees under any indenture pursuant to which any instruments evidencing any
of such Senior Indebtedness may have been issued, ratably according to the
aggregate amounts remaining unpaid on account of the Senior Indebtedness held
or represented by each, for application to the payment of all Senior
Indebtedness remaining unpaid to the extent necessary to pay all such Senior
Indebtedness in full after giving effect to any concurrent payment and
distribution to the holders of such Senior Indebtedness.
SECTION 11.03. SECURITIES SUBORDINATED TO PRIOR PAYMENT OF ALL SENIOR
INDEBTEDNESS ON DISSOLUTION, LIQUIDATION OR REORGANIZATION.
Upon any distribution of assets of the Company upon any
dissolution, winding up, total or partial liquidation or reorganization of
the Company, whether voluntary or involuntary, in bankruptcy, insolvency,
receivership or a similar proceeding or upon assignment for the benefit of
creditors or any marshalling of assets or liabilities:
(a) the holders of all Senior Indebtedness shall first be entitled to
receive payments in full before the Holders are entitled to receive any
payment on account of the principal of, premium, if any, and interest on, or
with respect to the Securities;
(b) any payment or distribution of assets of the Company of any kind or
character, whether in cash, property or securities to which the Holders or
the Trustee on behalf of the Holders would be entitled (by setoff or
otherwise), except for the provisions of this Article 11, shall be paid by
the liquidating trustee or agent or other Person making such a payment or
distribution directly to the holders of Senior Indebtedness or their
representative to the extent necessary to make payment in full of all such
Senior Indebtedness remaining unpaid, after giving effect to any concurrent
payment or distribution to the holders of such Senior Indebtedness; and
(c) in the event that, notwithstanding the foregoing, any payment or
distribution of assets of the Company of any kind or character, whether in
cash, property or securities, shall be received by the Trustee or the Holders
or any Paying Agent (or, if the Company or any Affiliate of the Company is
acting as its own Paying Agent, money for any such payment or distribution
shall be segregated or held in trust) on account of the principal of or
interest on the Securities before all Senior Indebtedness is paid in full,
such payment or distribution (subject to the provisions of Section 11.07)
shall be received and held in trust by the Trustee
<PAGE>
or such Holder or Paying Agent for the benefit of the holders of such Senior
Indebtedness, or their respective representative, ratably according to the
respective amounts of such Senior Indebtedness held or represented by each,
to the extent necessary to make payment as provided herein of all such Senior
Indebtedness remaining unpaid after giving effect to all concurrent payments
and distributions and all provisions therefor to or for the holders of such
Senior Indebtedness, but only to the extent that as to any holder of such
Senior Indebtedness, as promptly as practical following notice from the
Trustee to the holders of such Senior Indebtedness that such prohibited
payment has been received by the Trustee, Holder(s) or Paying Agent (or has
been segregated as provided above), such holder (or a representative
therefor) notifies the Trustee of the amounts then due and owing on such
Senior Indebtedness, if any, held by such holder and only the amounts
specified in such notices to the Trustee shall be paid to the holders of such
Senior Indebtedness.
SECTION 11.04. SECURITYHOLDERS TO BE SUBROGATED TO RIGHTS OF HOLDERS OF
SENIOR INDEBTEDNESS.
Subject to the payment in full of all Senior Indebtedness as
provided herein, the Holders of Securities shall be subrogated to the rights
of the holders of such Senior Indebtedness to receive payments or
distributions of assets of the Company applicable to the Senior Indebtedness
until all amounts owing on the Securities shall be paid in full, and for the
purpose of such subrogation no such payments or distributions to the holders
of such Senior Indebtedness by the Company, or by or on behalf of the Holders
by virtue of this Article 11, which otherwise would have been made to the
Holders shall, as between the Company and the Holders, be deemed to be
payment by the Company or on account of such Senior Indebtedness, it being
understood that the provisions of this Article 11 are and are intended solely
for the purpose of defining the relative rights of the Holders, on the one
hand, and the holders of such Senior Indebtedness, on the other hand.
If any payment or distribution to which the Holders would otherwise
have been entitled but for the provisions of this Article 11 shall have been
applied, pursuant to the provisions of this Article 11, to the payment of
amounts payable under Senior Indebtedness, then the Holders shall be entitled
to receive from the holders of such Senior Indebtedness any payments or
distributions received by such holders of Senior Indebtedness in excess of
the amount sufficient to pay all amounts payable under or in respect of such
Senior Indebtedness in full.
SECTION 11.05. OBLIGATIONS OF THE COMPANY UNCONDITIONAL.
Nothing contained in this Article 11 or elsewhere in this Indenture
or in the Securities is intended to or shall impair as between the Company
and the Holders, the Company's obligation,
<PAGE>
which is absolute and unconditional, to pay to the Holders the principal of,
premium, if any, and interest on, the Securities as and when the same shall
become due and payable in accordance with their terms, or is intended to or
shall affect the relative rights of the Holders and creditors of the Company
other than the holders of the Senior Indebtedness, nor shall anything herein
or therein prevent the Trustee or any Holder from exercising all remedies
otherwise permitted by applicable law upon default under this Indenture,
subject to the rights, if any, under this Article 11, of the holders of
Senior Indebtedness in respect of cash, property or securities of the Company
received upon the exercise of any such remedy. Notwithstanding anything to
the contrary in this Article 11 or elsewhere in this Indenture or in the
Securities, upon any distribution of assets of the Company referred to in
this Article 11, the Trustee and the Holders shall be entitled to rely upon
any order or decree made by any court of competent jurisdiction in which such
dissolution, winding up, liquidation or reorganization proceedings are
pending, or a certificate of the liquidating trustee or agent or other Person
making any distribution to the Trustee or to the Holders for the purpose of
ascertaining the Persons entitled to participate in such distribution, the
holders of the Senior Indebtedness and other indebtedness of the Company, the
amount thereof or payable thereon, the amount or amounts paid or distributed
thereon and all other facts pertinent thereto or to this Article 11 so long
as such court has been apprised of the provisions of, or the order, decree or
certificate makes reference to, the provisions of this Article 11. Nothing
in this Section 11.05 shall apply to the claims of, or payments to, the
Trustee under or pursuant to Section 7.06.
SECTION 11.06. TRUSTEE ENTITLED TO ASSUME PAYMENTS NOT
PROHIBITED IN ABSENCE OF NOTICE.
The Trustee shall not at any time be charged with knowledge of the
existence of any facts which would prohibit the making of any payment to or
by the Trustee unless and until a Trust Officer of the Trustee or any Paying
Agent shall have received, no later than one Business Day prior to such
payment, written notice thereof from the Company or from one or more holders
of Senior Indebtedness or from any representative therefor and, prior to the
receipt of any such written notice, the Trustee shall be entitled in all
respects conclusively to assume that no such fact exists.
SECTION 11.07. APPLICATION BY TRUSTEE OF ASSETS DEPOSITED WITH
IT.
Amounts deposited in trust with the Trustee pursuant to and in
accordance with Article 8 shall be for the sole benefit of Securityholders
and, to the extent allocated for the payment of Securities, shall not be
subject to the subordination provisions of this Article 11. Otherwise, any
deposit of assets with the Trustee or the Agent (whether or not in trust) for
the payment of principal
<PAGE>
of or interest on any Securities shall be subject to the provisions of
Sections 11.01, 11.02, 11.03 and 11.04; PROVIDED that, if prior to one
Business Day preceding the date on which by the terms of this Indenture any
such assets may become distributable for any purpose (including, without
limitation, the payment of either principal of or interest on any Security)
the Trustee or such Paying Agent shall not have received with respect to such
assets the written notice provided for in Section 11.06, then the Trustee or
such Paying Agent shall have full power and authority to receive such assets
and to apply the same to the purpose for which they were received, and shall
not be affected by any notice to the contrary which may be received by it on
or after such date.
SECTION 11.08. SUBORDINATION RIGHTS NOT IMPAIRED BY ACTS OR OMISSIONS
OF THE COMPANY OR HOLDERS OF SENIOR INDEBTEDNESS.
No right of any present or future holders of any Senior
Indebtedness to enforce subordination provisions contained in this Article 11
shall at any time in any way be prejudiced or impaired by any act or failure
to act on the part of the Company or by any act or failure to act, in good
faith, by any such holder, or by any noncompliance by the Company with the
terms of this Indenture, regardless of any knowledge thereof which any such
holder may have or be otherwise charged with. The holders of Senior
Indebtedness may extend, renew, modify or amend the terms of the Senior
Indebtedness or any security therefor and release, sell or exchange such
security and otherwise deal freely with the Company, all without affecting
the liabilities and obligations of the parties to this Indenture or the
Holders.
SECTION 11.09. SECURITYHOLDERS AUTHORIZE TRUSTEE TO EFFECTUATE
SUBORDINATION OF SECURITIES.
Each Holder of the Securities by his acceptance thereof authorizes
and expressly directs the Trustee on his behalf to take such action as may be
necessary or appropriate to effectuate the subordination provisions contained
in this Article 11 and to protect the rights of the Holders pursuant to this
Indenture, and appoints the Trustee his attorney-in-fact for such purpose,
including, in the event of any dissolution, winding up, liquidation or
reorganization of the Company (whether in bankruptcy, insolvency or
receivership proceedings or upon an assignment for the benefit of creditors
of the Company), the immediate filing of a claim for the unpaid balance of
his Securities in the form required in said proceedings and cause said claim
to be approved. If the Trustee does not file a proper claim or proof of debt
in the form required in such proceeding prior to 30 days before the
expiration of the time to file such claim or claims, then the holders of the
Senior Indebtedness or their representative are or is hereby authorized to
have the right to file and are or is hereby authorized to file an appropriate
claim for and on behalf of the Holders of said Securities. Nothing herein
contained shall be deemed to authorize
<PAGE>
the Trustee or the holders of Senior Indebtedness or their representative to
authorize or consent to or accept or adopt on behalf of any Securityholder
any plan of reorganization, arrangement, adjustment or composition affecting
the Securities or the rights of any Holder thereof, or to authorize the
Trustee or the holders of Senior Indebtedness or their representative to vote
in respect of the claim of any Securityholder in any such proceeding.
SECTION 11.10. RIGHT OF TRUSTEE TO HOLD SENIOR INDEBTEDNESS.
The Trustee shall be entitled to all of the rights set forth in
this Article 11 in respect of any Senior Indebtedness at any time held by it
to the same extent as any other holder of Senior Indebtedness, and nothing in
this Indenture shall be construed to deprive the Trustee of any of its rights
as such holder.
SECTION 11.11. ARTICLE XI NOT TO PREVENT EVENTS OF DEFAULT.
The failure to make a payment on account of principal of, premium,
if any, interest on, the Securities by reason of any provision of this
Article 11 shall not be construed as preventing the occurrence of a Default
or an Event of Default under Article 6 or in any way prevent the Holders from
exercising any right hereunder.
SECTION 11.12. NO FIDUCIARY DUTY OF TRUSTEE TO HOLDERS OF SENIOR
INDEBTEDNESS.
The Trustee shall not be deemed to owe any fiduciary duty to the
holders of Senior Indebtedness, and shall not be liable to any such holders
(other than for its willful misconduct or negligence) if it shall in good
faith mistakenly pay over or distribute to the Holders of Securities or the
Company or any other Person, cash, property or securities to which any
holders of Senior Indebtedness shall be entitled by virtue of this Article 11
or otherwise. Nothing in this Section 11.12 shall affect the obligation of
any other such Person to hold such payment for the benefit of, and to pay
such payment over to, the holders of Senior Indebtedness or their
representative. The TIA is incorporated by reference into this Indenture as
if the Notes were registered under the Securities Act.
ARTICLE 12
MISCELLANEOUS
SECTION 12.01. TRUST INDENTURE ACT CONTROLS. If any provision
of this Indenture limits, qualifies or conflicts with another
provision which is required to be included in this Indenture by the
TIA, the required provision shall control.
<PAGE>
SECTION 12.02 NOTICES. Any notice or communication shall be in
writing and delivered in person or mailed by first-class mail, postage
prepaid, addressed as follows:
if to the Company:
Costco Companies, Inc.
999 Lake Drive
Issaquah, Washington 98027
Attention: Treasurer
Telephone: (425) 313-6750
if to the Trustee:
Firstar Bank of Minnesota, N.A.
Corporate Trust Trustee Administration
101 East Fifth Street
St. Paul, Minnesota 55101-1860
The Company or the Trustee by notice to the other may designate
additional or different addresses for subsequent notices or
communications.
Any notice or communication given to a Securityholder shall be
mailed by first-class mail to the Securityholder at the
Securityholder's address as it appears on the registration books of
the Registrar and shall be sufficiently given if so mailed within the
time prescribed.
Failure to mail a notice or communication to a Securityholder or
any defect in it shall not affect its sufficiency with respect to
other Securityholders. If a notice or communication is mailed in the
manner provided above, it is duly given, whether or not received by
the addressee.
If the Company mails a notice or communication to the
Securityholders, it shall mail a copy to the Trustee and each
Registrar, Paying Agent, Conversion Agent or co-registrar.
SECTION 12.03 COMMUNICATION BY HOLDERS WITH OTHER HOLDERS.
Securityholders may communicate pursuant to TIA Section 312(b) with
other Securityholders with respect to their rights under this
Indenture or the Securities. The Company, the Trustee, the Registrar,
the Paying Agent, the Conversion Agent and anyone else shall have the
protection of TIA Section 312(c).
SECTION 12.04 CERTIFICATE AND OPINION AS TO CONDITIONS
PRECEDENT. Upon any request or application by the Company to the
<PAGE>
Trustee to take any action under this Indenture, the Trustee may
require the Company to furnish either or both of the following:
(1) an Officers' Certificate stating that, in the opinion of
the principal signer thereof, all conditions precedent, if any,
provided for in this Indenture relating to the proposed action
have been complied with; and
(2) an Opinion of Counsel stating that, in the opinion of
such counsel, all such conditions precedent have been complied
with.
SECTION 12.05 STATEMENTS REQUIRED IN CERTIFICATE OR OPINION.
Each Officers' Certificate or Opinion of Counsel with respect to
compliance with a covenant or condition provided for in this Indenture
shall include:
(1) a statement that the principal signer of such Officers'
Certificate or Opinion of Counsel has read such covenant or
condition;
(2) a brief statement as to the nature and scope of the
examination or investigation upon which the statements or
opinions contained in such Officers' Certificate or Opinion of
Counsel are based;
(3) a statement that, in the opinion of the principal
signer, he or she has made such examination or investigation as
is necessary to enable such person to express an informed opinion
as to whether or not such covenant or condition has been complied
with; and
(4) a statement that, in the opinion of such person, such
covenant or condition has been complied with.
SECTION 12.06 SEPARABILITY CLAUSE. In case any provision in
this Indenture or in the Securities shall be invalid, illegal or
unenforceable, the validity, legality and enforceability of the
remaining provisions shall not in any way be affected or impaired
thereby.
SECTION 12.07 RULES BY TRUSTEE, PAYING AGENT, CONVERSION AGENT
AND REGISTRAR. The Trustee may make reasonable rules for action by or
a meeting of the Securityholders. The Registrar, Conversion Agent and
the Paying Agent may make reasonable rules for their functions.
SECTION 12.08 LEGAL HOLIDAY. A "Legal Holiday" is any day other
than a Business Day. If any specified date (including a date for
giving notice) is a Legal Holiday, the action shall be taken on the
next succeeding day that is not a Legal Holiday, and to the
<PAGE>
extent applicable no Original Issue Discount or interest, if any, shall
accrue for the intervening period.
SECTION 12.09 GOVERNING LAW. THIS INDENTURE AND THE SECURITIES
SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE
STATE OF NEW YORK, AS APPLIED TO CONTRACTS MADE AND PERFORMED WITHIN
THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES OF CONFLICT OF
LAWS. THE COMPANY HEREBY IRREVOCABLY SUBMITS TO THE JURISDICTION OF
ANY NEW YORK STATE COURT SITTING IN THE BOROUGH OF MANHATTAN IN THE
CITY OF NEW YORK OR ANY FEDERAL COURT SITTING IN THE BOROUGH OF
MANHATTAN IN THE CITY OF NEW YORK IN RESPECT OF ANY SUIT, ACTION OR
PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT, AND
IRREVOCABLY ACCEPTS FOR ITSELF AND IN RESPECT OF ITS PROPERTY,
GENERALLY AND UNCONDITIONALLY, JURISDICTION OF THE AFORESAID COURTS.
THE COMPANY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT IT MAY
EFFECTIVELY DO SO UNDER APPLICABLE LAW, ANY OBJECTION THAT IT MAY NOW
OR HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY SUCH SUIT, ACTION
OR PROCEEDING BROUGHT IN ANY SUCH COURT AND ANY CLAIM THAT ANY SUCH
SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT
IN AN INCONVENIENT FORUM.
SECTION 12.10 NO RECOURSE AGAINST OTHERS. A director, officer,
employee or stockholder, as such, of the Company shall not have any
liability for any obligations of the Company under the Securities or
this Indenture or for any claim based on, in respect of or by reason
of such obligations or their creation. By accepting a Security, each
Securityholder shall waive and release all such liability. The waiver
and release shall be part of the consideration for the issue of the
Securities.
SECTION 12.11 SUCCESSORS. All agreements of the Company in this
Indenture and the Securities shall bind its successor. All agreements
of the Trustee in this Indenture shall bind its successor.
SECTION 12.12 MULTIPLE ORIGINALS. The parties may sign any
number of copies of this Indenture. Each signed copy shall be an
original, but all of them together represent the same agreement. One
signed copy is enough to prove this Indenture.
<PAGE>
SIGNATURES
IN WITNESS WHEREOF, the undersigned, being duly authorized, have
executed this Indenture on behalf of the respective parties hereto as
of the date first above written.
COSTCO COMPANIES, INC.
By
-----------------------------
Title:
FIRSTAR BANK OF MINNESOTA N.A.
as Trustee
By
-----------------------------
Title:
72
<PAGE>
EXHIBIT A
[FORM OF FACE OF NOTE]
FOR PURPOSES OF SECTIONS 1273 AND 1275 OF THE INTERNAL REVENUE CODE
OF 1986, AS AMENDED, THE AMOUNT OF ORIGINAL ISSUE DISCOUNT WITH RESPECT TO
EACH $1,000 OF PRINCIPAL AMOUNT OF THIS SECURITY IS $500.60. THE ISSUE
DATE IS AUGUST 19, 1997, AND THE YIELD TO STATED MATURITY IS 3.50% PER
ANNUM (COMPUTED ON A SEMIANNUAL BOND EQUIVALENT BASIS).
"THIS NOTE (OR ITS PREDECESSOR)HAS NOT BEEN REGISTERED UNDER THE U.S.
SECURITIES ACT OF 1933, AS AMENDED (THE SECURITIES ACT"), AND,
ACCORDINGLY, MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED
WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, U.S.
PERSONS, EXCEPT AS SET FORTH IN THE FOLLOWING SENTENCE. BY ITS
ACQUISITION HEREOF OR OF A BENEFICIAL INTEREST HEREIN, THE HOLDER (1)
REPRESENTS THAT (A) IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN
RULE 144A UNDER THE SECURITIES ACT) (A "QIB"), OR (B) IT IS NOT A U.S.
PERSON, IS NOT ACQUIRING THIS NOTE FOR THE ACCOUNT OR BENEFIT OF A U.S.
PERSON AND IS ACQUIRING THIS NOTE IN AN OFFSHORE TRANSACTION IN COMPLIANCE
WITH REGULATION S UNDER THE SECURITIES ACT, (2) AGREES THAT IT WILL NOT,
WITHIN THE TIME PERIOD REFERRED TO UNDER RULE 144(k) (TAKING INTO ACCOUNT
THE PROVISIONS OF RULE 144(d) UNDER THE SECURITIES ACT, IF APPLICABLE)
UNDER THE SECURITIES ACT AS IN EFFECT ON THE DATE OF THE TRANSFER OF THIS
NOTE, RESELL OR OTHERWISE TRANSFER THIS NOTE EXCEPT (A) TO THE COMPANY,
(B) TO A PERSON WHOM THE HOLDER REASONABLY BELIEVES IS A QIB PURCHASING
FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QIB IN COMPLIANCE WITH RULE
144A UNDER THE SECURITIES ACT, (C) OUTSIDE THE UNITED STATES IN AN
OFFSHORE TRANSACTION IN COMPLIANCE WITH RULE 904 UNDER THE SECURITIES ACT,
(D) PURSUANT TO THE EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER
THE SECURITIES ACT (IF AVAILABLE, AND BASED UPON AN OPINION OF COUNSEL
ACCEPTABLE TO THE COMPANY), (E) PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE SECURITIES ACT, (F) TO AN INSTITUTIONAL INVESTOR THAT
IS AN "ACCREDITED INVESTOR" WITHIN THE MEANING OF RULE 501(A)(1),(2),(3)
OR (7) UNDER THE SECURITIES ACT WHICH DELIVERS A CERTIFICATE IN THE FORM
OF EXHIBIT B TO THE INDENTURE TO THE INDENTURE TRUSTEE UNDER THE INDENTURE
DATED AS OF AUGUST 19, 1997, BETWEEN THE COMPANY AND FIRSTAR BANK OF
MINNESOTA, N.A., AS INDENTURE TRUSTEE, OR (G) IN ACCORDANCE WITH ANOTHER
EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT (AND
BASED UPON AN OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY) AND, IN EACH
CASE, IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS, AND (3) AGREES
THAT IT WILL DELIVER TO EACH PERSON TO WHOM THIS NOTE OR AN INTEREST
HEREIN IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND.
AS USED HEREIN, THE TERMS "OFFSHORE TRANSACTION," "UNITED STATES" AND
"U.S. PERSON" HAVE THE MEANINGS GIVEN TO THEM BY RULE 902 OF REGULATION S
UNDER THE SECURITIES ACT. THE INDENTURE CONTAINS A PROVISION REQUIRING
THE TRUSTEE TO REFUSE TO REGISTER ANY TRANSFER OF THIS NOTE IN VIOLATION
OF THE FOREGOING RESTRICTIONS.
A-1
<PAGE>
COSTCO COMPANIES, INC.
ZERO COUPON CONVERTIBLE SUBORDINATED NOTE DUE 2017
No.
Issue Date: CUSIP No.
Issue Price: $
Original Issue Discount: $
(for each $1,000 Principal amount)
Costco Companies, Inc., a Delaware corporation, promises to pay to
_________, or registered assigns, the Principal Amount of______________
_____Dollars on August 19, 2017.
This Security shall not bear interest except as specified on the other
side of this Security. Original Issue Discount will accrue as specified
on the other side of this Security. This Security is convertible as
specified on the other side of this Security. All capitalized terms used
herein without definition shall have the respective meanings assigned
thereto in the Indenture referred to on the other side of this Security.
A-2
<PAGE>
Additional provisions of this Security are set forth on the other
side of this Security.
COSTCO COMPANIES, INC.
By: ________________________
Title:
ATTEST:
_______________________________
Date: ________________________
TRUSTEE'S CERTIFICATE OF
AUTHENTICATION
________________________________
as Trustee, certifies that this Security
is one of the Securities referred to
in the within-mentioned Indenture.
By: __________________________________
Authorized Signatory
A-3
<PAGE>
[FORM OF REVERSE SIDE OF NOTE]
ZERO COUPON CONVERTIBLE SUBORDINATED NOTE DUE 2017
Unless and until it is exchanged in whole or in part for
Securities in definitive form, this Security may not be transferred except
as a whole by the Depositary to a nominee of the Depositary or by a
nominee of the Depositary to the Depositary or another nominee of the
Depositary or by the Depositary or any such nominee to a successor
Depositary or a nominee of such successor Depositary. Unless this
certificate is presented by an authorized representative of The Depository
Trust Company, a New York corporation ("DTC"), to the Company or its agent
for registration of transfer, exchange or payment, and any certificate
issued is registered in the name of Cede & Co. or in such other name as is
requested by an authorized representative of DTC (and any payment is made
to Cede & Co. or to such other entity as is requested by an authorized
representative of DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE
OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL inasmuch as the registered
owner hereof, Cede & Co., has an interest therein.
1. INTEREST
This Security shall not bear interest except as specified in this
paragraph. If the Principal Amount hereof or any portion of such
Principal Amount is not paid when due (whether upon acceleration pursuant
to Section 6.02 of the Indenture, upon the date set for payment of the
Redemption Price pursuant to paragraph 5 hereof, upon the date set for
payment of a Purchase Price or Change of Control Purchase Price pursuant
to paragraph 6 hereof or upon the Stated Maturity of this Security) or if
shares of Common Stock (or cash in lieu of fractional shares) in respect
of a conversion of this Security in accordance with the terms of Article
10 of the Indenture is not delivered when due, then in each such case the
overdue amount shall bear interest at the rate of 3.50% per annum,
compounded semiannually (to the extent that the payment of such interest
shall be legally enforceable), which interest shall accrue from the date
such overdue amount was due to the date payment of such amount, including
interest thereon, has been made or duly provided for. All such interest
shall be payable on demand.
Original Issue Discount (the difference between the Issue Price and
the Principal Amount of the Security), in the period during which a
Security remains outstanding, shall accrue at 3.50% per annum, on a
semiannual bond equivalent basis using a 360-day year composed of twelve
30-day months, commencing on the Issue Date of this Security, and cease to
accrue on the earlier of (a) the date on which the Principal Amount at
Stated Maturity hereof or any portion of such
- -----------------
Include if Global certificate.
A-4
<PAGE>
Principal Amount at Stated Maturity becomes due and payable and (b) any
Redemption Date, Conversion Date, Change of Control Purchase Date, Purchase
Date or other date on which such Original Issue Discount shall cease to
accrue in accordance with Section 2.08 of the Indenture.
2. METHOD OF PAYMENT
Subject to the terms and conditions of the Indenture, Costco
Companies, Inc. (the "Company") will make payments in respect of the
Securities to the persons who are registered Holders of Securities at the
close of business on the Business Day preceding the Redemption Date or
Stated Maturity, as the case may be, or at the close of business on a
Purchase Date, Change of Control Purchase Date or Conversion Date, as the
case may be. Holders must surrender Securities to a Paying Agent to
collect such payments in respect of the Securities. The Company will pay
cash amounts in money of The United States of America that at the time of
payment is legal tender for payment of public and private debts. However,
the Company may make such cash payments in respect of a certificated
Security, if applicable, by check payable in such money; provided that
payment by wire transfer of immediately available funds will be required
with respect to payments in respect of all Global Securities and all other
Securities the Holders of which shall have provided written wire transfer
instructions to the Company or the Paying Agent five days before the
payment date.
3. PAYING AGENT, CONVERSION AGENT AND REGISTRAR
Initially, Firstar Bank of Minnesota, N.A., as trustee (the
"Trustee"), will act as Paying Agent, Conversion Agent and Registrar. The
Company may appoint and change any Paying Agent, Conversion Agent,
Registrar or co-registrar, upon notice to the Trustee and the Holders.
The Company or any of its Subsidiaries or any of their Affiliates may act
as Paying Agent, Conversion Agent, Registrar or co-registrar.
4. INDENTURE
The Company issued the Securities under an Indenture, dated as of
August 19, 1997 (the "Indenture"), between the Company and the Trustee.
The terms of the Securities include those stated in the Indenture and
those made part of the Indenture by reference to the Trust Indenture Act
of 1939, as amended by the Trust Indenture Reform Act of 1990, and, as in
effect on the date of the Indenture (the "TIA"), except as provided in
Section 9.03 of the Indenture. Capitalized terms used herein or on the
face hereof and not defined herein have the meanings ascribed thereto in
the Indenture. The Securities are subject to all such terms, and
Securityholders are referred to the Indenture and the TIA for a statement
of those terms.
The Securities are general, unsecured obligations of the Company
limited to the aggregate Principal Amount specified in Section 2.02 of the
Indenture (subject to Section 2.07 of the Indenture). The
A-5
<PAGE>
Indenture does not limit other indebtedness of the Company, secured or
unsecured.
5. REDEMPTION AT THE OPTION OF THE COMPANY
No sinking fund is provided for the Securities. The Securities are
redeemable as a whole, or from time to time in part, at any time at the
option of the Company at the Redemption Prices set forth below, PROVIDED,
that the Securities are not redeemable prior to August 19, 2002.
The table below shows the Redemption Prices of a Security per $1,000
Principal Amount on the dates shown below and at Stated Maturity, which
prices reflect accrued Original Issue Discount calculated to each such
date. The Redemption Price of a Security redeemed between such dates
would include an additional amount reflecting the additional Original
Issue Discount accrued from and including the next preceding date in the
table through the actual Redemption Date.
REDEMPTION
REDEMPTION DATE PRICE
- --------------- -----
August 19, 2002.................. $594.25
August 19, 2003.................. 615.23
August 19, 2004.................. 636.95
August 19, 2005.................. 659.44
August 19, 2006.................. 682.72
August 19, 2007.................. 706.82
August 19, 2008.................. 731.78
August 19, 2009.................. 757.62
August 19, 2010.................. 784.36
August 19, 2011.................. 812.06
August 19, 2012.................. 840.73
August 19, 2013.................. 870.41
August 19, 2014.................. 901.14
August 19, 2015.................. 932.96
August 19, 2016.................. 965.90
At maturity..................... 1,000.00
6. PURCHASE BY THE COMPANY AT THE OPTION OF THE HOLDER
Subject to the terms and conditions of the Indenture, the Company
shall become obligated to purchase, at the option of the Holder, the
Securities held by such Holder on the following Purchase Dates and at the
following Purchase Prices per $1,000 Principal Amount at Stated Maturity
of such Securities, upon delivery of a Purchase Notice containing the
information set forth in the Indenture, at any time from the opening of
business on the date that is 20 Business Days prior to
A-6
<PAGE>
such Purchase Date until the close of business on such Purchase Date and upon
delivery of the Securities to the Paying Agent by the Holder as set forth in
the Indenture. Such Purchase Price (equal to the Issue Price plus accrued
Original Issue Discount through such Purchase Date) may be paid, at the
option of the Company, in cash or by the issuance and delivery of shares of
Common Stock of the Company, or in any combination thereof.
Purchase Date Purchase Price
------------- --------------
August 19, 2002 $594.25
August 19, 2007 $706.82
August 19, 2012 $840.73
Subject to the terms and conditions of the Indenture, if any Change of
Control occurs on or prior to August 19, 2002, the Company shall, at the
option of the Holder, purchase all Securities for which a Change of Control
Purchase Notice shall have been delivered as provided in the Indenture and
not withdrawn, on the date that is 35 Business Days after the occurrence of
such Change of Control, for a Change of Control Purchase Price equal to the
Issue Price, plus accrued Original Issue Discount through the Change of
Control Purchase Date, which Change of Control Purchase Price shall be paid
in cash.
Holders have the right to withdraw any Purchase Notice or Change of
Control Purchase Notice, as the case may be, by delivering to the Paying
Agent a written notice of withdrawal in accordance with the provisions of the
Indenture prior to the close of business on the Purchase Date or Change of
Control Purchase Date, as the case may be.
If cash sufficient to pay the Purchase Price or Change of Control
Purchase Price of all Securities or portions thereof to be purchased as of
the Purchase Date or the Change of Control Purchase Date, as the case may be,
is deposited with the Paying Agent on the Business Day following the Purchase
Date or the Change of Control Purchase Date, as the case may be, Original
Issue Discount ceases to accrue on such Securities (or portions thereof) on
and after such date, and the Holders thereof shall have no other rights as
such (other than the right to receive the Purchase Price or Change of Control
Purchase Price, as the case may be, upon surrender of such Security).
7. NOTICE OF REDEMPTION
Notice of redemption will be mailed at least 20 days but not more
than 60 days before the Redemption Date to each Holder of Securities to be
redeemed at the Holder's registered address. If money sufficient to pay
the Redemption Price of all Securities (or portions thereof) to be
redeemed on the Redemption Date is deposited with the Paying Agent prior
to or on the Redemption Date, on and after such date Original Issue
Discount ceases to accrue on such Securities or portions thereof.
Securities in denominations larger than $1,000 of Principal Amount may
A-7
<PAGE>
be redeemed in part but only in integral multiples of $1,000 of Principal
Amount.
8. CONVERSION
Subject to the next two succeeding sentences, a Holder of a Security may
convert it into Common Stock of the Company at any time before the close of
business on August 19, 2017; PROVIDED, HOWEVER, that if a Security is called
for redemption, the Holder may convert it at any time before the close of
business on the date that is seven days prior to the Redemption Date. The
number of shares of Common Stock to be delivered upon conversion of a
Security into Common Stock per $1,000 of Principal Amount shall be equal to
the Conversion Rate. A Security in respect of which a Holder has delivered a
Purchase Notice or Change of Control Purchase Notice exercising the option of
such Holder to require the Company to purchase such Security may be converted
only if the notice of exercise is withdrawn in accordance with the terms of
the Indenture.
The initial Conversion Rate is 11.3545 shares of Common Stock per $1,000
Principal Amount, subject to adjustment in certain events described in the
Indenture. The Company will deliver cash or a check in lieu of any
fractional share of Common Stock.
To convert a Security a Holder must (i) complete and manually sign the
conversion notice on the back of the Security (or complete and manually sign
a facsimile of such notice) and deliver such notice to the Conversion Agent
(or the office or agency referred to in Section 4.05 of the Indenture), (ii)
furnish appropriate endorsements and transfer documents if required by the
Conversion Agent, the Company or the Trustee and (iii) pay any transfer or
similar tax, if required.
If the Holder converts more than one Security at the same time, the
number of shares of Common Stock issuable upon the conversion shall be based
on the total Principal Amount of the Securities converted.
A Holder may convert a portion of a Security if the Principal Amount of
such portion is $1,000 or an integral multiple of $1,000. No payment or
adjustment will be made for dividends on the Common Stock, except as provided
in the Indenture. On conversion of a Security, that portion of accrued
Original Issue Discount attributable to the period from the Issue Date to the
Conversion Date with respect to the converted Security shall not be
cancelled, extinguished or forfeited, but rather shall be deemed paid in full
to the Holder thereof through the delivery of the Common Stock in exchange
for the Security being converted pursuant to the terms hereof, and the fair
market value of such Common Stock (together with any cash payment in lieu of
fractional shares of Common Stock) shall be treated as issued, to the extent
thereof, first in exchange for Original Issue Discount accrued through the
Conversion Date, and the balance, if any, of such fair market value of such
shares of Common Stock (and any such cash payment) shall be
A-8
<PAGE>
treated as issued in exchange for the Issue Price of the Security being
converted pursuant to the provisions hereof.
The Conversion Rate will be adjusted for dividends or distributions on
Common Stock payable in Common Stock or other Capital Stock; subdivisions,
combinations or certain reclassifications of Common Stock; distributions to
all holders of Common Stock of certain rights to purchase Common Stock for a
period expiring within 60 days at less than the Market Price at the Time of
Determination; and distributions to such holders of assets or debt securities
of the Company or certain rights to purchase securities of the Company
(excluding certain cash dividends or distributions). However, no adjustment
need be made if Securityholders may participate in the transaction or in
certain other cases. The Company from time to time may voluntarily increase
the Conversion Rate.
If the Company is a party to a consolidation, merger or binding share
exchange of the type specified in the Indenture, or certain transfers of all
or substantially all of its assets to another person, or in certain other
circumstances described in the Indenture, the right to convert a Security
into Common Stock may be changed into a right to convert it into securities,
cash or other assets of the Company or another person.
9. CONVERSION ARRANGEMENT ON CALL FOR REDEMPTION
Any Securities called for redemption, unless surrendered for conversion
before the Redemption Date, may be deemed to be purchased from the Holders of
such Securities at an amount not less than the Redemption Price, together
with accrued interest if any, to the Redemption Date, by one or more
investment bankers or other purchasers who may agree with the Company to
purchase such Securities from the Holders and to make payment for such
Securities to the Trustee in trust for such Holders.
10. DENOMINATIONS; TRANSFER; EXCHANGE
The Securities are in fully registered form, without coupons, in
denominations of $1,000 of Principal Amount and integral multiples of $1,000.
A Holder may transfer or exchange Securities in accordance with the
Indenture. The Registrar may require a Holder, among other things, to
furnish appropriate endorsements and transfer documents and to pay any taxes
and fees required by law or permitted by the Indenture. The Registrar need
not transfer or exchange any Securities selected for redemption (except, in
the case of a Security to be redeemed in part, the portion of the Security
not to be redeemed) or any Securities in respect of which a Purchase Notice
or Change of Control Purchase Notice has been given and not withdrawn
(except, in the case of a Security to be purchased in part, the portion of
the Security not to be purchased) or any Securities for a period of 15 days
before a selection of Securities to be redeemed.
A-9
<PAGE>
11. PERSONS DEEMED OWNERS
The registered Holder of this Security may be treated as the owner of
this Security for all purposes.
12. UNCLAIMED MONEY OR SECURITIES
The Trustee and the Paying Agent shall return to the Company upon
written request any money or securities held by them for the payment of any
amount with respect to the Securities that remains unclaimed for two years,
PROVIDED, HOWEVER, that at the Company's request, the Trustee or such Paying
Agent, before being required to make any such return, shall at the expense of
the Company cause to be published once in THE WALL STREET JOURNAL or another
newspaper of national circulation or mail to each such Holder notice that
such money or securities remains unclaimed and that, after a date specified
therein, which shall not be less than 30 days from the date of such
publication or mailing, any unclaimed money or securities then remaining will
be returned to the Company. After return to the Company, Holders entitled to
the money or securities must look to the Company for payment as general
creditors unless an applicable abandoned property law designates another
person, and the Trustee and the Paying Agent shall have no further liability
with respect to such money or securities for that period commencing after the
return thereof.
13. AMENDMENT; WAIVER
Subject to certain exceptions set forth in the Indenture, (i) the
Indenture or the Securities may be amended with the written consent of the
Holders of at least a majority in aggregate Principal Amount of the
Securities at the time outstanding and (ii) certain defaults or noncompliance
with certain provisions may be waived with the written consent of the Holders
of a majority in aggregate Principal Amount of the Securities at the time
outstanding. Subject to certain exceptions set forth in the Indenture,
without the consent of any Securityholder, the Company and the Trustee may
amend the Indenture or the Securities to cure any ambiguity, defect or
inconsistency, or to comply with Article 5 or Section 10.14 of the Indenture
or to make any change that does not adversely affect the rights of any
Securityholder.
A-10
<PAGE>
14. DEFAULTS AND REMEDIES
Under the Indenture, Events of Default include (i) default in payment of
the Principal Amount, Issue Price, accrued Original Issue Discount,
Redemption Price, Purchase Price or Change of Control Purchase Price, as the
case may be, in respect of the Securities when the same becomes due and
payable; (ii) failure either to deliver shares of Common Stock (or cash in
lieu of fractional shares) in accordance with the terms of the Indenture when
such Common Stock (or cash in lieu of fractional shares) is required to be
delivered following conversion of a Security and such failure is not remedied
for a period of 10 days; (iii) failure by the Company to comply with other
agreements in the Indenture or the Securities, subject to notice and lapse of
time; (iv) default (A) in the payment of any principal on any debt for
borrowed money of the Company, in an aggregate principal amount in excess of
$10 million when due at its final maturity, or (B) in the performance of any
term or provision of any debt for borrowed money of the Company in an
aggregate principal amount in excess of $10 million that results in such debt
becoming or being declared due and payable prior to the date on which it
would otherwise become due and payable; or (v) certain events of bankruptcy
or insolvency. If an Event of Default occurs and is continuing, the Trustee,
or the Holders of at least 25% in aggregate Principal Amount of the
Securities at the time outstanding, may declare all the Securities to be due
and payable immediately. Certain events of bankruptcy or insolvency are
Events of Default that will result in the Securities becoming due and payable
immediately upon the occurrence of such Events of Default.
Securityholders may not enforce the Indenture or the Securities, except
as provided in the Indenture. The Trustee may refuse to enforce the
Indenture or the Securities unless it receives reasonable indemnity or
security. Subject to certain limitations, Holders of a majority in aggregate
Principal Amount of the Securities at the time outstanding may direct the
Trustee in its exercise of any trust or power. The Trustee may withhold from
Securityholders notice of any continuing Default (except a Default in payment
of amounts specified in clause (i) above) if it determines that withholding
notice is in their interests.
15. TRUSTEE DEALINGS WITH THE COMPANY
Subject to certain limitations imposed by the TIA, the Trustee under the
Indenture, in its individual or any other capacity, may become the owner or
pledgee of Securities and may otherwise deal with and collect obligations
owed to it by the Company or its Affiliates and may otherwise deal with the
Company or its Affiliates with the same rights it would have if it were not
Trustee.
16. NO RECOURSE AGAINST OTHERS
A director, officer, employee or stockholder, as such, of the Company
shall not have any liability for any obligations of the Company
A-11
<PAGE>
under the Securities or the Indenture or for any claim based on, in respect
of or by reason of such obligations or their creation. By accepting a
Security, each Securityholder waives and releases all such liability. The
waiver and release are part of the consideration for the issue of the
Securities.
17. ADDITIONAL RIGHTS OF HOLDERS OF TRANSFER RESTRICTED SECURITIES
In addition to the rights provided to Holders of Securities under the
Indenture, Holders of Securities shall have all the rights set forth in the
Registration Rights Agreement.
18. SUBORDINATION
The Securities are subordinated to Senior Indebtedness (as defined in
the Indenture), and all obligations of the Company with respect to the Senior
Indebtedness. To the extent provided in the Indenture, Senior Indebtedness
must be paid before the Securities may be paid. The Company agrees, and each
Holder by accepting a Security consents and agrees, to the subordination
provided in the Indenture and authorizes the Trustee to give it effect.
19. AUTHENTICATION
This Security shall not be valid until an authorized signatory of the
Trustee manually signs the Certificate of Authentication on the other side of
this Security.
20. ABBREVIATIONS
Customary abbreviations may be used in the name of a Securityholder or
an assignee, such as TEN COM (=tenants in common), TEN ENT (=tenants by the
entireties), JT TEN (=joint tenants with right of survivorship and not as
tenants in common) and CUST (=custodian), and UNIF TRANS MIN ACT (=Uniform
Transfers to Minors Act).
21. GOVERNING LAW
THE INDENTURE AND THIS SECURITY SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, AS APPLIED TO CONTRACTS
MADE AND TO BE PERFORMED WITHIN THE STATE OF NEW YORK WITHOUT REGARD TO
PRINCIPLES OF CONFLICTS OF LAWS. THE COMPANY HEREBY IRREVOCABLY SUBMITS TO
THE JURISDICTION OF ANY NEW YORK STATE COURT SITTING IN THE BOROUGH OF
MANHATTAN IN THE CITY OF NEW YORK OR
- -------------------
This certificate shall be included only for the Transfer Restricted
Securities.
A-12
<PAGE>
ANY FEDERAL COURT SITTING IN THE BOROUGH OF MANHATTAN IN THE CITY OF NEW YORK
IN RESPECT OF ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO
THIS AGREEMENT, AND IRREVOCABLY ACCEPTS FOR ITSELF AND IN RESPECT OF ITS
PROPERTY, GENERALLY AND UNCONDITIONALLY, JURISDICTION OF THE AFORESAID
COURTS. THE COMPANY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT IT MAY
EFFECTIVELY DO SO UNDER APPLICABLE LAW, ANY OBJECTION THAT IT MAY NOW OR
HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY SUCH SUIT, ACTION OR
PROCEEDING BROUGHT IN ANY SUCH COURT AND ANY CLAIM THAT ANY SUCH SUIT, ACTION
OR PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT
FORUM.
-------------------
The Company will furnish to any Securityholder upon written request and
without charge a copy of the Indenture which has in it the text of this
Security in larger type. Requests may be made to:
Costco Companies, Inc.
999 Lake Drive
Issaquah, Washington 98027
Attn: Treasurer
A-13
<PAGE>
ASSIGNMENT FORM CONVERSION NOTICE
To assign this Security, fill To convert this Security into
in the form below: Common Stock of the Company,
check the box:
----
I or we assign and transfer : :
this Security to : :
-----
------------------------
(Insert assignee's soc.
sec. or tax ID no.) To convert only part of this
Security, state the Principal
- ------------------------------ Amount to be converted (which
must be $1,000 or an integral
- ------------------------------ multiple of $1,000):
----------
- ------------------------------ :$ :
----------
- ------------------------------
(Print or type assignee's
name, address and zip code) If you want the stock
certificate made out in
and irrevocably appoint another person's name, fill
____________________ agent in the form below:
to transfer this Security on
the books of the Company. The ----------
agent may substitute another : :
to act for him. ----------
(Insert person's soc.
EXCHANGE FORM sec. or tax ID no.)
To exchange its beneficial ------------------------------
interest in Global Security
held by the Depositary for a ------------------------------
Security or Securities in
definitive, registered form of ------------------------------
authorized denominations and an
aggregate principal amount equal ------------------------------
to its beneficial interest in (Print or type person's name,
such Global Security, a Holder address and zip code)
should check the box
-----
: :
: :
-----
- ------------------------------------------------------------------------------
Date: Your Signature: *
---------------- ------------------------
- ------------------------------------------------------------------------------
A-14
<PAGE>
(Sign exactly as your name appears on the other side of this Security)
* Your signature must be guaranteed by an "eligible guarantor institution"
meeting the requirements of the Registrar, which requirements include
membership or participation in the Security Transfer Agent Medallion Program
("STAMP") or such other "signature guarantee program" as may be determined by
the Registrar in addition to, or in substitution for, STAMP, all in
accordance with the Securities Exchange Act of 1934, as amended.
A-15
<PAGE>
SCHEDULE OF EXCHANGES OF DEFINITIVE SECURITIES***
The following exchanges of a part of this Global Security for
Definitive Securities have been made:
Amount of Amount of Principal Amount
decrease in increase in at Maturity Signature of
Principal Amount Principal Amount of this Global authorized
at Maturity at Maturity of Security following signatory of
Date of of this Global this Global such decrease (or Trustee or
Exchange Security Security increase) Securities
Custodian
- -------------------------------------------------------------------------------
A-16
<PAGE>
- -------------------
*** This schedule should only be added if the Security is issued in
global form.
A-17
<PAGE>
CERTIFICATE TO BE DELIVERED UPON EXCHANGE OR REGISTRATION OF TRANSFER OF
SECURITIES
Re: ZERO COUPON CONVERTIBLE SUBORDINATED NOTES DUE 2017 OF COSTCO
COMPANIES, INC.
This Certificate relates to $______ principal amount of Securities held
in (check applicable box) _____ book-entry or ______ definitive form by
_____ (the "Transferor").
The Transferor (check applicable box):
/ / has requested the Registrar by written order to deliver in exchange
for its beneficial interest in the Global Security held by the Depositary a
Security or Securities in definitive, registered form of authorized
denominations and an aggregate principal amount equal to its beneficial
interest in such Global Security (or the portion thereof indicated above); or
/ / has requested the Registrar by written order to exchange or
register the transfer of a Security or Securities.
In connection with such request and in respect of each such
Security, the Transferor does hereby certify that Transferor is familiar with
the Indenture relating to the above-captioned Securities and as provided in
Section 2.06 of such Indenture, the transfer of this Security does not
require registration under the Securities Act (as defined below) because:
/ / Such Security is being acquired for the Transferor's own account,
without transfer (in satisfaction of Section 2.06(a)(ii)(A) or Section
2.06(d)(i)(A) of the Indenture).
/ / Such Security is being transferred to a "qualified institutional
buyer" (within the meaning of Rule 144A promulgated under the Securities
Act), that is aware that any sale of Securities to it will be made in
reliance on Rule 144A under the Securities Act and that is acquiring such
Transfer Restricted Security for its own account, or for the account of
another such "qualified institutional buyer" (in satisfaction of Section
2.06(a)(ii)(B) or Section 2.06 (d)(i)(B) of the Indenture).
/ / Such Security is being transferred pursuant to an exemption from
registration in accordance with Rule 144, or Regulation S under the
Securities Act, or pursuant to an effective registration statement under the
Securities Act (in satisfaction of Section 2.06(a)(ii)(C) or Section
2.06(d)(i)(C) of the Indenture).
- -------------------
A-18
<PAGE>
/ / Such Security is being transferred to an institutional "accredited
investor" within the meaning of subparagraph (a)(1), (2), (3) or (7) of Rule
501 under the Securities Act, that is purchasing such Security for its own
account or for the account of such an institutional "accredited investor" in
each case in a minimum principal amount of $250,000, not with a view to or
for offer for sale in connection with any distribution in violation of the
Securities Act. A signed transferee letter of representation accompanies
this Certificate (in satisfaction of Section 2.06(a)(ii)(D) or Section
2.06(d)(i)(D) of the Indenture)
---------------------------
[INSERT NAME OF TRANSFEROR]
By:
------------------------
Date:
---------------------------
A-19
<PAGE>
ZERO COUPON CONVERTIBLE SUBORDINATED NOTES DUE 2017
REGISTRATION RIGHTS AGREEMENT
DATED AS OF AUGUST 19, 1997
BY AND AMONG
COSTCO COMPANIES INC.
AS THE COMPANY,
AND
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
AND
J. P. MORGAN & CO.
AS PURCHASERS
<PAGE>
This Registration Rights Agreement is made and entered into as of
August 19, 1997, by and among Costco Companies, Inc., a Delaware corporation
(the "Company"), and Donaldson, Lufkin & Jenrette Securities Corporation and J.
P. Morgan & Co. (the "Purchasers").
This Agreement is made pursuant to the Purchase Agreement, dated
August 14, 1997, among the Company and the Purchasers (the "Purchase
Agreement"). In order to induce the Purchasers to enter into the Purchase
Agreement, the Company has agreed to provide the registration rights provided
for in this Agreement to the Purchasers and their respective direct and indirect
transferees. The execution of this Agreement is a condition to the closing of
the transactions contemplated by the Purchase Agreement.
The parties hereby agree as follows:
1. DEFINITIONS
As used in this Agreement, the following terms shall have the
following meanings:
ADVICE: As defined in the last paragraph of Section 4(q) hereof.
AFFILIATE of any specified person shall mean any other person directly
or indirectly controlling or controlled by or under direct or indirect common
control with such specified person. For the purposes of this definition,
"control," when used with respect to any person, means the power to direct the
management and policies of such person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise and the terms
"affiliated," "controlling" and "controlled" have meanings correlative to the
foregoing.
AGREEMENT: This Registration Rights Agreement, as the same may be
amended, supplemented or modified from time to time in accordance with the terms
hereof.
BUSINESS DAY: Each Monday, Tuesday, Wednesday, Thursday and Friday
that is not a day on which banking institutions in New York, New York are
authorized or obligated by law or executive order to close.
CLOSING DATE: The Closing Date as defined in the Purchase Agreement.
COMMON STOCK: Common Stock, $.01 par value per share, of the Company.
2
<PAGE>
COMPANY: Costco Companies, Inc., a Delaware corporation, and any
successor corporation thereto.
CONTROLLING PERSON: As defined in Section 6(a) hereof.
DAMAGE PAYMENT DATE: Each September 1 and March 1 as long as this
Agreement is in effect.
EFFECTIVENESS PERIOD: As defined in Section 2(a) hereof.
EFFECTIVENESS TARGET DATE: The 180th day following the Closing Date.
EXCHANGE ACT: The Securities Exchange Act of 1934, as amended, and
the rules and regulations promulgated by the SEC pursuant thereto.
FILING DATE: The 90th day after the Closing Date.
HOLDER: Each registered holder of any Transfer Restricted Securities.
INDEMNIFIED PERSON: As defined in Section 6(a) hereof.
INDENTURE: The Indenture, dated the date hereof, between the Company
and the Trustee thereunder, pursuant to which the Notes are being issued, as
amended, modified or supplemented from time to time in accordance with the terms
thereof.
LIQUIDATED DAMAGES: As defined in Section 3(a) hereof.
NOTES: The up to $900,000,000 aggregate principal amount at maturity
of Zero Coupon Convertible Subordinated Notes due 2017 of the Company being
issued pursuant to the Purchase Agreement.
PAYING AGENT: As defined in the Indenture.
PROCEEDING: An action, claim, suit or proceeding (including, without
limitation, an investigation or partial proceeding, such as a deposition),
whether commenced or threatened.
3
<PAGE>
PROSPECTUS: The prospectus included in any Registration Statement
(including, without limitation, a prospectus that discloses information
previously omitted from a prospectus filed as part of an effective registration
statement in reliance upon Rule 430A promulgated pursuant to the Securities
Act), as amended or supplemented by any prospectus supplement, with respect to
the terms of the offering of any portion of the Transfer Restricted Securities
covered by such Registration Statement, and all other amendments and supplements
to any such prospectus, including post-effective amendments, and all material
incorporated by reference or deemed to be incorporated by reference, if any, in
such prospectus.
PURCHASERS: As defined in the preamble hereof.
REGISTRATION DEFAULT: As defined in Section 3(a) hereof.
REGISTRATION STATEMENT: Any registration statement of the Company
that covers any of the Notes pursuant to the provisions of this Agreement,
including the Prospectus, amendments and supplements to such registration
statement or Prospectus, including pre- and post-effective amendments, all
exhibits thereto, and all material incorporated by reference or deemed to be
incorporated by reference, if any, in such registration statement.
RULE 144: Rule 144 promulgated by the SEC pursuant to the Securities
Act, as such Rule may be amended from time to time, or any similar rule or
regulation hereafter adopted by the SEC as a replacement thereto having
substantially the same effect as such Rule.
RULE 144A: Rule 144A promulgated by the SEC pursuant to the
Securities Act, as such Rule may be amended from time to time, or any similar
rule or regulation hereafter adopted by the SEC as a replacement thereto having
substantially the same effect as such Rule.
RULE 158: Rule 158 promulgated by the SEC pursuant to the Securities
Act, as such Rule may be amended from time to time, or any similar rule or
regulation hereafter adopted by the SEC as a replacement thereto having
substantially the same effect as such Rule.
RULE 174: Rule 174 promulgated by the SEC pursuant to the Securities
Act, as such Rule may be amended from time to time, or any similar rule or
regulation hereafter adopted by the SEC as a replacement thereto having
substantially the same effect as such Rule.
RULE 415: Rule 415 promulgated by the SEC pursuant to the Securities
Act, as such Rule may be amended from time to time, or any similar rule or
regulation hereafter adopted by the SEC as a replacement thereto having
substantially the same effect as such Rule.
4
<PAGE>
RULE 424: Rule 424 promulgated by the SEC pursuant to the Securities
Act, as such Rule may be amended from time to time, or any similar rule or
regulation hereafter adopted by the SEC as a replacement thereto having
substantially the same effect as such Rule.
SEC: The Securities and Exchange Commission.
SECURITIES ACT: The Securities Act of 1933, as amended, and the rules
and regulations promulgated by the SEC thereunder.
SHELF REGISTRATION: As defined in Section 2 hereof.
SPECIAL COUNSEL: Any special counsel to the holders of Transfer
Restricted Securities, for which holders of Transfer Restricted Securities will
be reimbursed pursuant to Section 5 hereof.
TIA: The Trust Indenture Act of 1939, as amended.
TRANSFER RESTRICTED SECURITIES: The Notes and the shares of Common
Stock into which the Notes are convertible, upon original issuance thereof, and
at all times subsequent thereto, until, in the case of any such Note or share,
(i) the date on which it has been registered effectively pursuant to the
Securities Act and disposed of in accordance with the Registration Statement
relating to it, (ii) the date on which either such Note or the shares of Common
Stock issued upon conversion of such Note are distributed to the public pursuant
to Rule 144 (or any similar provisions then in effect) or are saleable pursuant
to Rule 144(k) promulgated by the SEC pursuant to the Securities Act or (iii)
the date on which it ceases to be outstanding.
TRUSTEE: The Firstar Bank of Minnesota, N.A., the trustee under the
Indenture.
UNDERWRITTEN REGISTRATION OR UNDERWRITTEN OFFERING: A registration in
connection with which securities of the Company are sold to an underwriter for
reoffering to the public pursuant to an effective Registration Statement.
2. SHELF REGISTRATION
(a) The Company agrees to file with the SEC as soon as practicable
after the Closing Date, but in no event later than the Filing Date, a
Registration Statement for an offering to be made on a continuous basis pursuant
to Rule 415 covering all of the Transfer Restricted Securities (the "Shelf
Registration"). The Shelf Registration shall be on Form S-3
5
<PAGE>
under the Securities Act or another appropriate form permitting registration
of such Transfer Restricted Securities for resale by the Holders in the
manner or manners reasonably designated by them (including, without
limitation, one or more underwritten offerings). The Company shall not
permit any securities other than the Transfer Restricted Securities to be
included in the Shelf Registration. The Company shall use its reasonable
best efforts, as described in Section 4, to cause the Shelf Registration to
be declared effective pursuant to the Securities Act as promptly as
practicable following the filing thereof, but in no event later than the
Effectiveness Target Date, and to keep the Shelf Registration continuously
effective under the Securities Act for 24 months after the Closing Date
(subject to extension pursuant to the last paragraph of Section 4(q) hereof)
(the "Effectiveness Period"), or such shorter period ending when either (1)
all Transfer Restricted Securities covered by the Shelf Registration have
been sold in the manner set forth and as contemplated in the Shelf
Registration or (2) there cease to be outstanding any Transfer Restricted
Securities.
(b) SUPPLEMENTS AND AMENDMENTS. The Company shall use its reasonable
best efforts to keep the Shelf Registration continuously effective by
supplementing and amending the Shelf Registration if required by the rules,
regulations or instructions applicable to the registration form used for such
Shelf Registration, if required by the Securities Act, or if reasonably
requested by the holders of a majority in amount of the Transfer Restricted
Securities covered by such Registration Statement or by any underwriter of such
Transfer Restricted Securities; PROVIDED that the Effectiveness Period shall be
extended to the extent required to permit dealers to comply with the applicable
prospectus delivery requirements of Rule 174 and as otherwise provided herein.
3. LIQUIDATED DAMAGES
(a) The Company and the Purchasers agree that the Holders of Transfer
Restricted Securities will suffer damages if the Company fails to fulfill its
obligations pursuant to Section 2 hereof and that it would not be possible to
ascertain the extent of such damages. Accordingly, in the event of such failure
by the Company to fulfill such obligations, the Company hereby agrees to pay
liquidated damages ("Liquidated Damages") to each Holder of Transfer Restricted
Securities under the circumstances and to the extent set forth below:
(i) if the Shelf Registration has not been filed with the SEC on
or prior to the Filing Date; or
(ii) if the Shelf Registration is not declared effective by the
SEC on or prior to the Effectiveness Target Date; or
6
<PAGE>
(iii) the Shelf Registration has been declared effective by
the SEC and such Shelf Registration ceases to be effective or usable
at any time during the Effectiveness Period for a period of time which
shall exceed 90 days in the aggregate during any 12-month period.
(any of the foregoing, a "Registration Default") then the Company shall pay
Liquidated Damages in cash to each Holder of Transfer Restricted Securities
following the occurrence of such Registration Default in an amount equal to $.02
per week per $1,000 principal amount of Notes and, if applicable, $.005 per week
per share (subject to adjustment in the event of stock splits, stock
recombinations, stock dividends and the like) of Common Stock constituting
Transfer Restricted Securities held by such Holder for each week or portion
thereof that the Registration Default continues. The amount of such Liquidated
Damages will increase by an additional $.02 per week per $1,000 principal amount
at matury of Notes and $.005 per week per share (subject to adjustment as set
forth above) of Common Stock constituting Transfer Restricted Securities for
each subsequent 90-day period until all Registration Defaults have been cured;
PROVIDED, HOWEVER, that Liquidated Damages shall not at any time exceed $.10 per
week per $1,000 principal amount at maturity of Notes or $.025 per week per
share (subject to adjustment as set forth above) of Common Stock constituting
Transfer Restricted Securities. Following the cure of all Registration Defaults
relating to any Transfer Restricted Securities, the accrual of Liquidated
Damages with respect to such Transfer Restricted Securities will cease. A
Registration Default under clause (i) above shall be cured on the date that the
Shelf Registration is filed with the SEC; a Registration Default under clause
(ii) above shall be cured on the date that the Shelf Registration is declared
effective by the SEC; and a Registration Default under clause (iii) above shall
be cured on the date the Shelf Registration is declared effective or is usable.
(b) The Company shall notify the Trustee within one Business Day
after each and every date on which a Registration Default occurs. Liquidated
Damages shall be paid by the Company to the Holders by wire transfer of
immediately available funds to the accounts specified by them or by mailing
checks to their registered addresses if no such accounts have been specified on
or before the Damage Payment Date. Each obligation to pay Liquidated Damages
shall be deemed to commence accruing on the date of the applicable Registration
Default and to cease accruing when all Registration Defaults have been cured.
In no event shall the Company pay Liquidated Damages in excess of the applicable
maximum weekly amount set forth above, regardless of whether one or multiple
Registration Defaults exist.
4. REGISTRATION PROCEDURES
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In connection with the Company's registration obligations hereunder,
the Company shall effect such registrations on the appropriate form available
for the sale of the Transfer Restricted Securities to permit the sale of
Transfer Restricted Securities in accordance with the method or methods of
disposition thereof specified by the holders of a majority in amount of Transfer
Restricted Securities, and pursuant thereto the Company shall as expeditiously
as possible:
(a) No fewer than five Business Days prior to the initial filing of a
Registration Statement or Prospectus and no fewer than two Business Days prior
to the filing of any amendment or supplement thereto (other than any document
that would be incorporated or deemed to be incorporated therein by reference),
furnish to the Holders of the Transfer Restricted Securities, their Special
Counsel and the managing underwriters, if any, copies of all such documents
proposed to be filed, which documents (other than those incorporated or deemed
to be incorporated by reference) will be subject to the review of such Holders,
their Special Counsel and such underwriters, if any, and cause the officers and
directors of the Company, counsel to the Company and independent certified
public accountants to the Company to respond to such inquiries as shall be
necessary in connection with such Registration Statement, in the opinion of
respective counsel to such Holders and such underwriters, to conduct a
reasonable investigation within the meaning of the Securities Act; PROVIDED,
HOWEVER, that the Company shall not be deemed to have kept a Registration
Statement effective during the applicable period if it voluntarily takes or
fails to take any action that results in selling Holders of the Transfer
Restricted Securities covered thereby not being able to sell such Transfer
Restricted Securities pursuant to Federal securities laws during that period
(and the time period during which such Registration Statement is required to
remain effective hereunder shall be extended by the number of days during which
such selling Holders of Transfer Restricted Securities are not able to sell
Transfer Restricted Securities). The Company shall not file any such
Registration Statement or related Prospectus or any amendments or supplements
thereto to which the Holders of a majority of the Transfer Restricted
Securities, their Special Counsel, or the managing underwriters, if any, shall
reasonably object on a timely basis;
(b) Prepare and file with the SEC such amendments, including post-
effective amendments, to each Registration Statement as may be necessary to keep
such Registration Statement continuously effective for the applicable time
period; cause the related Prospectus to be supplemented by any required
Prospectus supplement, and as so supplemented to be filed pursuant to Rule 424
(or any similar provisions then in force) under the Securities Act; and comply
with the provisions of the Securities Act and the Exchange Act with respect to
the disposition of all securities covered by such Registration Statement during
such period in
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accordance with the intended methods of disposition by the sellers thereof
set forth in such Registration Statement as so amended or in such Prospectus
as so supplemented;
(c) Notify the Holders of Transfer Restricted Securities to be sold
or their Special Counsel and the managing underwriters, if any, promptly (and in
the case of an event specified by clause (i)(A) of this paragraph in no event
fewer than two Business Days prior to such filing), and (if requested by any
such person), confirm such notice in writing, (i)(A) when a Prospectus or any
Prospectus supplement or post-effective amendment is proposed to be filed, and,
(B) with respect to a Registration Statement or any post-effective amendment,
when the same has become effective, (ii) of any request by the SEC or any other
Federal or state governmental authority for amendments or supplements to a
Registration Statement or related Prospectus or for additional information,
(iii) of the issuance by the SEC, any state securities commission, any other
governmental agency or any court of any stop order, order or injunction
suspending or enjoining the use or the effectiveness of a Registration Statement
or the initiation of any proceedings for that purpose, (iv) if at any time any
of the representations and warranties of the Company contained in any agreement
(including any underwriting agreement) contemplated by Section 4(m) hereof cease
to be true and correct in all material respects, (v) of the receipt by the
Company of any notification with respect to the suspension of the qualification
or exemption from qualification of any of the Transfer Restricted Securities for
sale in any jurisdiction, or the initiation or threatening of any proceeding for
such purpose, and (vi) of the happening of any event that makes any statement
made in such Registration Statement or related Prospectus or any document
incorporated or deemed to be incorporated therein by reference untrue in any
material respect or that requires the making of any changes in such Registration
Statement, Prospectus or documents so that, in the case of the Registration
Statement, it will not contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary to make
the statements therein, not misleading, and that in the case of the Prospectus,
it will not contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading;
(d) Use its reasonable best efforts to avoid the issuance of, or, if
issued, obtain the withdrawal of any order enjoining or suspending the use or
effectiveness of a Registration Statement or the lifting of any suspension of
the qualification (or exemption from qualification) of any of the Transfer
Restricted Securities for sale in any jurisdiction, at the earliest practicable
moment;
(e) If requested by the managing underwriters, if any, or the Holders
of a majority in amount of the Transfer Restricted Securities being sold in
connection with such
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<PAGE>
offering, (i) promptly incorporate in a Prospectus supplement or
post-effective amendment such information as the managing underwriters, if
any, and such Holders agree should be included therein, and (ii) make all
required filings of such Prospectus supplement or such post-effective
amendment as soon as practicable after the Company has received notification
of the matters to be incorporated in such Prospectus supplement or
post-effective amendment; PROVIDED, HOWEVER, that the Company shall not be
required to take any action pursuant to this Section 4(e) that would, in the
opinion of counsel for the Company, violate applicable law;
(f) Furnish to each Holder of Transfer Restricted Securities, their
Special Counsel and each managing underwriter, if any, without charge, at least
one conformed copy of each Registration Statement and each amendment thereto,
including financial statements (but excluding schedules, all documents
incorporated or deemed to be incorporated therein by reference and all exhibits,
unless requested in writing by such Holder, counsel or managing underwriter);
(g) Deliver to each Holder of Transfer Restricted Securities, their
Special Counsel, and the underwriters, if any, without charge, as many copies of
the Prospectus or Prospectuses (including each form of prospectus) and each
amendment or supplement thereto as such persons reasonably request; and the
Company hereby consents to the use of such Prospectus and each amendment or
supplement thereto by each of the selling Holders of Transfer Restricted
Securities and the underwriters, if any, in connection with the offering and
sale of the Transfer Restricted Securities covered by such Prospectus and any
amendment or supplement thereto;
(h) Prior to any public offering of Transfer Restricted Securities,
use its reasonable best efforts to register or qualify or cooperate with the
Holders of Transfer Restricted Securities to be sold or tendered for, the
underwriters, if any, and their respective counsel in connection with the
registration or qualification (or exemption from such registration or
qualification) of such Transfer Restricted Securities for offer and sale under
the securities or Blue Sky laws of such jurisdictions within the United States
as any Holder or underwriter reasonably requests in writing; keep each such
registration or qualification (or exemption therefrom) effective during the
period such Registration Statement is required to be kept effective and do any
and all other acts or things necessary or advisable to enable the disposition in
such jurisdictions of the Transfer Restricted Securities covered by the
applicable Registration Statement; PROVIDED, HOWEVER, that the Company shall not
be required to qualify generally to do business in any jurisdiction where it is
not then so qualified or to take any action that would subject it to general
service of process in any such jurisdiction where it is not then so subject or
subject the Company to any tax in any such jurisdiction where it is not then so
subject;
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(i) In connection with any sale or transfer of Transfer Restricted
Securities that will result in such securities no longer being Transfer
Restricted Securities, cooperate with the Holders and the managing
underwriters, if any, to facilitate the timely preparation and delivery of
certificates representing Transfer Restricted Securities to be sold, which
certificates shall not bear any restrictive legends and shall be in a form
eligible for deposit with The Depository Trust Company and to enable such
Transfer Restricted Securities to be in such denominations and registered in
such names as the managing underwriters, if any, or Holders may request at
least two Business Days prior to any sale of Transfer Restricted Securities;
(j) Use its reasonable best efforts to cause the offering of the
Transfer Restricted Securities covered by the Registration Statement to be
registered with or approved by such other governmental agencies or
authorities within the United States, except as may be required as a
consequence of the nature of such selling Holder's business, in which case
the Company will cooperate in all reasonable respects with the filing of such
Registration Statement and the granting of such approvals as may be necessary
to enable the seller or sellers thereof or the underwriters, if any, to
consummate the disposition of such Transfer Restricted Securities; PROVIDED,
HOWEVER, that the Company shall not be required to register the Transfer
Restricted Securities in any jurisdiction that would subject it to general
service of process in any such jurisdiction where it is not then so subject
or subject the Company to any tax in any such jurisdiction where it is not
then so subject or to require the Company to qualify to do business in any
jurisdiction where it is not then so qualified;
(k) Upon the occurrence of any event contemplated by Section
4(c)(vi) hereof, as promptly as practicable, prepare a supplement or
amendment, including, if appropriate, a post-effective amendment, to each
Registration Statement or a supplement to the related Prospectus or any
document incorporated or deemed to be incorporated therein by reference, and
file any other required document so that, as thereafter delivered, such
Prospectus will not contain an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading;
(l) Prior to the effective date of the first Registration
Statement relating to the Transfer Restricted Securities, to provide a CUSIP
number for the Transfer Restricted Securities;
(m) Enter into such agreements (including an underwriting
agreement in form, scope and substance as is customary in underwritten
offerings) and take all such other reasonable actions in connection therewith
(including those reasonably requested by the
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managing underwriters, if any, or the Holders of a majority in amount of the
Transfer Restricted Securities being sold) in order to expedite or facilitate
the disposition of such Transfer Restricted Securities, and in such
connection, whether or not an underwriting agreement is entered into and
whether or not the registration is an underwritten registration, (i) make
such representations and warranties to the Holders of such Transfer
Restricted Securities and the underwriters, if any, with respect to the
business of the Company and its subsidiaries (including with respect to
businesses or assets acquired or to be acquired by any of them), and the
Registration Statement, Prospectus and documents, if any, incorporated or
deemed to be incorporated by reference therein, in each case, in form,
substance and scope as are customarily made by issuers to underwriters in
underwritten offerings, and confirm the same if and when requested; (ii)
obtain opinions of counsel to the Company and updates thereof (which counsel
and opinions (in form, scope and substance) shall be reasonably satisfactory
to the managing underwriters, if any, and Special Counsel to the Holders of
the Transfer Restricted Securities being sold), addressed to each selling
Holder of Transfer Restricted Securities and each of the underwriters, if
any, covering the matters customarily covered in opinions requested in
underwritten offerings and such other matters as may be reasonably requested
by such Special Counsel and underwriters; (iii) obtain customary "cold
comfort" letters and updates thereof from the independent certified public
accountants of the Company (and, if necessary, any other independent
certified public accountants of any subsidiary of the Company or of any
business acquired by the Company for which financial statements and financial
data is, or is required to be, included in the Registration Statement),
addressed (where reasonably possible) to each selling Holder of Transfer
Restricted Securities and each of the underwriters, if any, such letters to
be in customary form and covering matters of the type customarily covered in
"cold comfort" letters in connection with underwritten offerings; (iv) if an
underwriting agreement is entered into, the same shall contain
indemnification provisions and procedures no less favorable to the selling
Holders of Transfer Restricted Securities and the underwriters, if any, than
those set forth in Section 6 hereof (or such other provisions and procedures
acceptable to Holders of a majority in amount of the Transfer Restricted
Securities covered by such Registration Statement and the managing
underwriters); and (v) deliver such documents and certificates as may be
reasonably requested by the Holders of a majority in amount of the Transfer
Restricted Securities being sold, their Special Counsel and the managing
underwriters, if any, to evidence the continued validity of the
representations and warranties made pursuant to clause (i) of this Section
4(m) and to evidence compliance with any customary conditions contained in
the underwriting agreement or other agreement entered into by the Company;
(n) Make available for inspection by a representative of the Holders
of Transfer Restricted Securities being sold, any underwriter participating in
any such disposition of Transfer Restricted Securities, if any, and any
attorney, consultant or accountant retained
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<PAGE>
by such selling Holders or underwriter, at the offices where normally kept,
during reasonable business hours, all financial and other records, pertinent
corporate documents and properties of the Company and its subsidiaries as
they may reasonably request (including with respect to business and assets
acquired or to be acquired to the extent that such information is available
to the Company), and cause the officers, directors, agents and employees of
the Company and its subsidiaries (including with respect to business and
assets acquired or to be acquired to the extent that such information is
available to the Company) to supply all information in each case reasonably
requested by any such representative, underwriter, attorney, consultant or
accountant in connection with such Registration Statement, PROVIDED, HOWEVER,
that such persons shall first agree in writing with the Company that any
information that is reasonably and in good faith designated by the Company in
writing as confidential at the time of delivery of such information shall be
kept confidential by such persons, unless (i) disclosure of such information
is required by court or administrative order or is necessary to respond to
inquiries of regulatory authorities, (ii) disclosure of such information is
required by law (including any disclosure requirements pursuant to Federal
securities laws in connection with the filing of any Registration Statement
or the use of any prospectus referred to in this Agreement), (iii) such
information becomes generally available to the public other than as a result
of a disclosure or failure to safeguard by any such person or (iv) such
information becomes available to any such person from a source other than the
Company and such source is not bound by a confidentiality agreement;
(o) Provide an indenture trustee for the Transfer Restricted
Securities, if applicable, and cause the Indenture to be qualified under the
TIA not later than the effective date of the first Registration Statement
relating to the Transfer Restricted Securities; and in connection therewith,
cooperate with the trustee under the Indenture and the holders of the
Transfer Restricted Securities to effect such changes to the Indenture as may
be required for such Indenture to be so qualified in accordance with the
terms of the TIA; and execute, and use its reasonable best efforts to cause
such trustee to execute, all customary documents as may be required to effect
such changes, and all other forms and documents required to be filed with the
SEC to enable the Indenture to be so qualified in a timely manner;
(p) Comply with applicable rules and regulations of the SEC and
make generally available to its security holders earning statements
satisfying the provisions of Section 11(a) of the Securities Act and Rule 158
thereunder (or any similar rule promulgated under the Securities Act), no
later than 45 days after the end of any 12-month period (or 90 days after the
end of any 12-month period if such period is a fiscal year) (i) commencing at
the end of any fiscal quarter in which Transfer Restricted Securities are
sold to underwriters in a firm commitment or reasonable efforts underwritten
offering and (ii) if not sold to underwriters in such an offering, commencing
on the first day of the first fiscal quarter after
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the effective date of a Registration Statement, which statement shall cover
said period, consistent with the requirements of Rule 158; and
(q) (i) list all Common Stock covered by such Registration
Statement on any securities exchange on which the Common Stock is then listed
or (ii) authorize for quotation on the National Association of Securities
Dealers Automated Quotation System ("NASDAQ") or the National Market System
of NASDAQ all Common Stock covered by such Registration Statement if the
Common Stock is then so authorized for quotation.
The Company may require each seller of Transfer Restricted
Securities as to which any registration is being effected to furnish to the
Company such information regarding the distribution of such Transfer
Restricted Securities as is required by law to be disclosed in the applicable
Registration Statement and the Company may exclude from such registration the
Transfer Restricted Securities of any seller who unreasonably fails to
furnish such information within a reasonable time after receiving such
request.
If any such Registration Statement refers to any Holder by name or
otherwise as the holder of any securities of the Company, then such Holder
shall have the right to require (i) the insertion therein of language, in
form and substance reasonably satisfactory to such Holder, to the effect that
the holding by such Holder of such securities is not to be construed as a
recommendation by such Holder of the investment quality of the Company's
securities covered thereby and that such holding does not imply that such
Holder will assist in meeting any future financial requirements of the
Company, or (ii) in the event that such reference to such Holder by name or
otherwise is not required by the Securities Act or any similar Federal
statute then in force, the deletion of the reference to such Holder in any
amendment or supplement to the Registration Statement filed or prepared
subsequent to the time that such reference ceases to be required.
Each Holder of Transfer Restricted Securities agrees by acquisition
of such Transfer Restricted Securities that, upon receipt of any notice from
the Company of the happening of any event of the kind described in Section
4(c)(ii), 4(c)(iii), 4(c)(v) or 4(c)(vi) hereof, such Holder will forthwith
discontinue disposition of such Transfer Restricted Securities covered by
such Registration Statement or Prospectus until such Holder's receipt of the
copies of the supplemented or amended Prospectus contemplated by Section 4(k)
hereof, or until it is advised in writing (the "Advice") by the Company that
the use of the applicable Prospectus may be resumed, and, in either case, has
received copies of any additional or supplemental filings that are
incorporated or deemed to be incorporated by reference in such Prospectus.
If the Company shall give any such notice, the Effectiveness Period shall be
extended by the number of days during such period from and including the date
of the giving
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of such notice to and including the date when each seller of Transfer
Restricted Securities covered by such Registration Statement shall have
received (x) the copies of the supplemented or amended Prospectus
contemplated by Section 4(k) hereof or (y) the Advice, and, in either case,
has received copies of any additional or supplemental filings that are
incorporated or deemed to be incorporated by reference in such Prospectus.
5. REGISTRATION EXPENSES
(a) All fees and expenses incident to the performance of or
compliance with this Agreement by the Company shall be borne by it whether or
not any Registration Statement is filed or becomes effective and whether or
not any securities are issued or sold pursuant to any Registration Statement.
The fees and expenses referred to in the foregoing sentence shall include,
without limitation, (i) all registration and filing fees (including, without
limitation, fees and expenses (A) with respect to filings required to be made
with the National Association of Securities Dealers, Inc. and (B) in
compliance with securities or Blue Sky laws (including, without limitation
and in addition to that provided for in (b) below, fees and disbursements of
counsel for the underwriters or Special Counsel for the Holders in connection
with Blue Sky qualifications of the Transfer Restricted Securities and
determination of the eligibility of the Transfer Restricted Securities for
investment under the laws of such jurisdictions as the managing underwriters,
if any, or Holders of a majority in amount of Transfer Restricted Securities
may designate)), (ii) printing expenses (including, without limitation,
expenses of printing certificates for Transfer Restricted Securities in a
form eligible for deposit with The Depository Trust Company and of printing
Prospectuses if the printing of Prospectuses is requested by the managing
underwriters, if any, or by the Holders of a majority in amount of the
Transfer Restricted Securities included in or tendered for in connection with
any Registration Statement), (iii) messenger, telephone and delivery
expenses, (iv) fees and disbursements of counsel for the Company and Special
Counsel for the Holders (plus any local counsel, deemed appropriate by the
Holders of a majority in amount of the Transfer Restricted Securities), in
accordance with the provisions of Section 5(b) hereof, (v) fees and
disbursements of all independent certified public accountants referred to in
Section 4(m)(iii) (including, without limitation, the expenses of any special
audit and "cold comfort" letters required by or incident to such
performance), (vi) Securities Act liability insurance, if the Company so
desires such insurance, and (vii) fees and expenses of all other persons
retained by the Company. In addition, the Company shall pay its internal
expenses (including, without limitation, all salaries and expenses of its
officers and employees performing legal or accounting duties), the expense of
any annual audit, and the fees and expenses incurred in connection with the
listing of the securities to be registered on any securities exchange.
Notwithstanding the foregoing or anything in this Agreement to the contrary,
each Holder
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shall pay all underwriting discounts and commissions of any underwriters with
respect to any Transfer Restricted Securities sold by it.
(b) In connection with any registration hereunder, the Company
shall reimburse the Holders of the Transfer Restricted Securities being
registered or tendered for in such registration for the reasonable fees and
disbursements of not more than one firm of attorneys representing the selling
Holders (in addition to any local counsel), which firm shall be chosen by the
Holders of a majority in amount of the Transfer Restricted Securities.
6. INDEMNIFICATION
(a) The Company agrees to indemnify and hold harmless (i) each of
the Purchasers, (ii) each Holder of Transfer Restricted Securities, (iii)
each person, if any, who controls (within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act) any of the foregoing (any
of the persons referred to in this clause (iii) being hereinafter referred to
as a "controlling person"), and (iv) the respective officers, directors,
partners, employees, representatives and agents of the Purchasers, each
Holder of Transfer Restricted Securities, or any controlling person (any
person referred to in clause (i), (ii), (iii) or (iv) may hereinafter be
referred to as an "INDEMNIFIED PERSON"), from and against any and all losses,
claims, damages, liabilities and judgments caused by any untrue statement or
alleged untrue statement of a material fact contained in any Registration
Statement, Prospectus or form of Prospectus or in any amendment or supplement
thereto or in any preliminary Prospectus, or caused by any omission or
alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein (in the case of any
Prospectus or form of Prospectus or supplement thereto, in light of the
circumstances under which they were made) not misleading, except insofar as
such losses, claims, damages, liabilities or judgments are caused by any such
untrue statement or omission or alleged untrue statement or omission based
upon information relating to any Indemnified Person furnished in writing to
the Company by or on behalf of such Indemnified Person expressly for use
therein; PROVIDED that the foregoing indemnity with respect to any
preliminary Prospectus shall not inure to the benefit of any Indemnified
Person from whom the person asserting such losses, claims, damages,
liabilities and judgments purchased securities if such untrue statement or
omission or alleged untrue statement or omission made in such preliminary
Prospectus is eliminated or remedied in the Prospectus and a copy of the
Prospectus shall not have been furnished to such person in a timely manner
due to the wrongful action or wrongful inaction of such Indemnified Person.
(b) In case any action shall be brought against any Indemnified
Person, based upon any Registration Statement or any such Prospectus or any
amendment or
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supplement thereto and with respect to which indemnity may be sought against
the Company, such Indemnified Person shall promptly notify the Company in
writing and the Company shall assume the defense thereof, including the
employment of counsel reasonably satisfactory to such Indemnified Person and
payment of all fees and expenses. Any Indemnified Person shall have the right
to employ separate counsel in any such action and participate in the defense
thereof, but the fees and expenses of such counsel shall be at the expense of
such Indemnified Person, unless (i) the employment of such counsel shall have
been specifically authorized in writing by the Company, (ii) the Company
shall have failed to assume the defense and employ counsel or (iii) the named
parties to any such action (including any impleaded parties) include both
such Indemnified Person and the Company and such Indemnified Person shall
have been advised by counsel that there may be one or more legal defenses
available to it which are different from or additional to those available to
the Company (in which case the Company shall not have the right to assume the
defense of such action on behalf of such Indemnified Person, it being
understood, however, that the Company shall not, in connection with any one
such action or separate but substantially similar or related actions in the
same jurisdiction arising out of the same general allegations or
circumstances, be liable for the reasonable fees and expenses of more than
one separate firm of attorneys (in addition to any local counsel) for all
such Indemnified Persons, which firm shall be designated in writing by such
Indemnified Persons, and that all such fees and expenses shall be reimbursed
as they are incurred). The Company shall not be liable for any settlement of
any such action effected without its written consent but if settled with the
written consent of the Company, the Company agrees to indemnify and hold
harmless any Indemnified Person from and against any loss or liability by
reason of such settlement. No indemnifying party shall, without the prior
written consent of the indemnified party, effect any settlement of any
pending or threatened proceeding in respect of which any indemnified party is
or could have been a party and indemnity could have been sought hereunder by
such indemnified party, unless such settlement includes an unconditional
release of such indemnified party from all liability on claims that are the
subject matter of such proceeding.
(c) In connection with any Registration Statement in which a Holder
of Transfer Restricted Securities is participating, such Holder of Transfer
Restricted Securities agrees, severally and not jointly, to indemnify and hold
harmless the Company, its directors, its officers and any person controlling the
Company within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act, to the same extent as the foregoing indemnity from the Company to
each Indemnified Person but only with reference to information relating to such
Indemnified Person furnished in writing by or on behalf of such Indemnified
Person expressly for use in such Registration Statement. In case any action
shall be brought against the Company, any of its directors, any such officer or
any person controlling the Company based on such Registration Statement and in
respect of which indemnity may be sought against any
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Indemnified Person, the Indemnified Person shall have the rights and duties
given to the Company (except that if the Company shall have assumed the
defense thereof, such Indemnified Person shall not be required to do so, but
may employ separate counsel therein and participate in defense thereof but
the fees and expenses of such counsel shall be at the expense of such
Indemnified Person), and the Company, its directors, any such officers and
any person controlling the Company shall have the rights and duties given to
the Indemnified Person, by Section 6(b) hereof.
(d) If the indemnification provided for in this Section 6 is
unavailable to an indemnified party in respect of any losses, claims,
damages, liabilities or judgments referred to therein, then each indemnifying
party, in lieu of indemnifying such indemnified party, shall contribute to
the amount paid or payable by such indemnified party as a result of such
losses, claims, damages, liabilities and judgments (i) in such proportion as
is appropriate to reflect the relative benefits received by the Company on
the one hand and each Indemnified Person on the other hand from the offering
of the Notes or (ii) if the allocation provided by clause (i) above is not
permitted by applicable law, in such proportion as is appropriate to reflect
not only the relative benefits referred to in clause (i) above but also the
relative fault of the Company and each such Indemnified Person in connection
with the statements or omissions which resulted in such losses, claims,
damages, liabilities or judgments, as well as any other relevant equitable
considerations. The relative fault of the Company and each such Indemnified
Person shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission to
state a material fact relates to information supplied by the Company or such
Indemnified Person and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The Company and the Purchasers agree that it would not be just and
equitable if contribution pursuant to this Section 6(d) were determined by PRO
RATA allocation (even if the Indemnified Person were treated as one entity for
such purpose) or by any other method of allocation which does not take account
of the equitable considerations referred to in the immediately preceding
paragraph. The amount paid or payable by an indemnified party as a result of
the losses, claims, damages, liabilities or judgments referred to in the
immediately preceding paragraph shall be deemed to include, subject to the
limitations set forth above, any legal or other expenses reasonably incurred by
such indemnified party in connection with investigating or defending any such
action or claim. Notwithstanding the provisions of this Section 6, no
Indemnified Person shall be required to contribute any amount in excess of the
amount by which the total net profit received by it in connection with the sale
of the Notes pursuant to this Agreement exceeds the amount of any damages which
such Indemnified Person has otherwise been required to pay by reason of such
untrue or alleged untrue statement or omission or alleged omission. No person
guilty of fraudulent misrepresentation
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(within the meaning of Section 11(f) of the Securities Act) shall be
entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Indemnified Persons' obligations to
contribute pursuant to this Section 6(d) are several in proportion to the
respective amount of Notes included in any such Registration Statement by
each Indemnified Person and not joint.
7. RULES 144 AND 144A
The Company shall use its best efforts to file the reports required
to be filed by it under the Securities Act and the Exchange Act in a timely
manner and, if at any time it is not required to file such reports but in the
past had been required to or did file such reports, it will, upon the request
of any holder of Transfer Restricted Securities, make available other
information as required by, and so long as necessary to permit, sales of its
Transfer Restricted Securities pursuant to Rule 144 and Rule 144A.
Notwithstanding the foregoing, nothing in this Section 7 shall be deemed to
require the Company to register any of its securities pursuant to the
Exchange Act.
8. UNDERWRITTEN REGISTRATIONS
(a) If any of the Transfer Restricted Securities covered by any
Shelf Registration are to be sold in an underwritten offering, the investment
banker or investment bankers and manager or managers that will administer the
offering will be selected by the Holders of a majority in amount of such
Transfer Restricted Securities included in such offering, subject to the
consent of the Company (which will not be unreasonably withheld or delayed).
No person may participate in any underwritten registration
hereunder unless such person (i) agrees to sell such person's Transfer
Restricted Securities on the basis reasonably provided in any underwriting
arrangements approved by the persons entitled hereunder to approve such
arrangements and (ii) completes and executes all questionnaires, powers of
attorney, indemnities, underwriting agreements and other documents required
under the terms of such underwriting arrangements.
(b) Each Holder of Transfer Restricted Securities agrees, if
requested (pursuant to a timely written notice) by the managing underwriters
in an underwritten offering or placement agent in a private offering of the
Company's securities, not to effect any private sale or distribution
(including a sale pursuant to Rule 144(k) and Rule 144A, but excluding
non-public sales to any of its affiliates, officers, directors, employees and
controlling persons) of any of the Notes, in the case of an offering of the
Company's debt securities, or the
19
<PAGE>
Common Stock, in the case of an offering of the Company's equity securities,
during the period beginning 10 days prior to, and ending 90 days after, the
closing date of the underwritten offering.
The foregoing provisions of Section 8(b) shall not apply to any
Holder of Transfer Restricted Securities if such Holder is prevented by
applicable statute or regulation from entering into any such agreement.
9. MISCELLANEOUS
(a) REMEDIES. In the event of a breach by the Company, or by a
holder of Transfer Restricted Securities, of any of their obligations under
this Agreement, each holder of Transfer Restricted Securities or the Company,
in addition to being entitled to exercise all rights granted by law,
including recovery of damages, will be entitled to specific performance of
its rights under this Agreement. The Company agrees that, in the event of any
action for specific performance in respect of such breach, it shall waive the
defense that a remedy at law would be adequate.
(b) NO INCONSISTENT AGREEMENTS. The Company shall not enter into
any agreement with respect to its securities that is inconsistent with the
rights granted to the holders of Transfer Restricted Securities in this
Agreement or otherwise conflicts with the provisions hereof. The Company is
not currently a party to any agreement granting any registration rights with
respect to any of its debt securities to any person. Without limiting the
generality of the foregoing, without the written consent of the Holders of a
majority amount of the then outstanding Transfer Restricted Securities, the
Company shall not grant to any person the right to request it to register any
of its debt securities under the Securities Act unless the rights so granted
are subject in all respects to the prior rights of the holders of Transfer
Restricted Securities set forth herein, and are not otherwise in conflict or
inconsistent with the provisions of this Agreement.
(c) NO PIGGYBACK ON REGISTRATIONS. The Company shall not grant to
any of its security holders (other than the Holders of Transfer Restricted
Securities in such capacity) the right to include any of its securities in
any Shelf Registration other than Transfer Restricted Securities.
(d) AMENDMENTS AND WAIVERS. The provisions of this Agreement,
including the provisions of this sentence, may not be amended, modified or
supplemented, and waivers or consents to departures from the provisions
hereof may not be given, without the written consent of the Holders of a
majority of the then outstanding Transfer Restricted Securities (on a fully
converted basis); PROVIDED, HOWEVER, that, for the purposes of this
Agreement, Transfer
20
<PAGE>
Restricted Securities that are owned, directly or indirectly, by either the
Company or an Affiliate of the Company are not deemed outstanding.
Notwithstanding the foregoing, a waiver or consent to depart from the
provisions hereof with respect to a matter that relates exclusively to the
rights of Holders of Transfer Restricted Securities whose securities are
being sold pursuant to a Registration Statement and that does not directly or
indirectly affect the rights of other Holders of Transfer Restricted
Securities may be given by Holders of a majority of the Transfer Restricted
Securities (on a fully converted basis) being sold by such Holders pursuant
to such Registration Statement; PROVIDED, HOWEVER, that the provisions of
this sentence may not be amended, modified, or supplemented except in
accordance with the provisions of the immediately preceding sentence.
(e) NOTICES. All notices and other communications provided for
herein shall be made in writing by hand-delivery, next-day air courier,
certified first-class mail, return receipt requested, telex or telecopy:
(i) if to the Company, as provided in the Purchase Agreement,
(ii) if to the Purchasers, as provided in the Purchase Agreement,
or
(iii) if to any other person who is then the registered Holder of
any Transfer Restricted Securities, to the address of such
Holder as it appears in the Note or Common Stock register of
the Company.
Except as otherwise provided in this Agreement, all such
communications shall be deemed to have been duly given: when delivered by
hand, if personally delivered; one Business Day after being timely delivered
to a next-day air courier; five Business Days after being deposited in the
mail, postage prepaid, if mailed; when answered back, if telexed; and when
receipt is acknowledged by the recipient's telecopier machine, if telecopied.
(f) SUCCESSORS AND ASSIGNS. This Agreement shall inure to the
benefit of and be binding upon the successors and permitted assigns of each
of the parties and shall inure to the benefit of each Holder of Transfer
Restricted Securities. The Company may not assign its rights or obligations
hereunder without the prior written consent of each Holder of Transfer
Restricted Securities. Notwithstanding the foregoing, no transferee shall
have any of the rights granted under this Agreement until such transferee
shall acknowledge its rights and obligations hereunder by a signed written
statement of such transferee's acceptance of such rights and obligations.
(g) COUNTERPARTS. This Agreement may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of which
when so
21
<PAGE>
executed shall be deemed to be an original and, all of which taken together
shall constitute one and the same Agreement.
(h) GOVERNING LAW; SUBMISSION TO JURISDICTION.
THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF NEW YORK, AS APPLIED TO CONTRACTS MADE AND
PERFORMED WITHIN THE STATE OF NEW YORK WITHOUT REGARD TO PRINCIPLES OF
CONFLICTS OF LAW. THE COMPANY HEREBY IRREVOCABLY SUBMITS TO THE JURISDICTION
OF ANY NEW YORK STATE COURT SITTING IN THE BOROUGH OF MANHATTAN IN THE CITY
OF NEW YORK OR ANY FEDERAL COURT SITTING IN THE BOROUGH OF MANHATTAN IN THE
CITY OF NEW YORK IN RESPECT OF ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF
OR RELATING TO THIS AGREEMENT, AND IRREVOCABLY ACCEPTS FOR ITSELF AND IN
RESPECT OF ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, JURISDICTION OF THE
AFORESAID COURTS. THE COMPANY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT IT
MAY EFFECTIVELY DO SO UNDER APPLICABLE LAW, ANY OBJECTION THAT IT MAY NOW OR
HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY SUCH SUIT, ACTION OR
PROCEEDING BROUGHT IN ANY SUCH COURT AND ANY CLAIM THAT ANY SUCH SUIT, ACTION
OR PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT
FORUM.
(i) SEVERABILITY. The remedies provided herein are cumulative and
not exclusive of any remedies provided by law. If any term, provision,
covenant or restriction of this Agreement is held by a court of competent
jurisdiction to be invalid, illegal, void or unenforceable, the remainder of
the terms, provisions, covenants and restrictions set forth herein shall
remain in full force and effect and shall in no way be affected, impaired or
invalidated, and the parties hereto shall use their reasonable efforts to
find and employ an alternative means to achieve the same or substantially the
same result as that contemplated by such term, provision, covenant or
restriction. It is hereby stipulated and declared to be the intention of the
parties that they would have executed the remaining terms, provisions,
covenants and restrictions without including any of such that may be
hereafter declared invalid, illegal, void or unenforceable.
(j) HEADINGS. The headings in this Agreement are for convenience
of reference only and shall not limit or otherwise affect the meaning hereof.
All references made in this Agreement to "Section" and "paragraph" refer to
such Section or paragraph of this Agreement, unless expressly stated
otherwise.
22
<PAGE>
(k) ATTORNEYS' FEES. In any action or proceeding brought to
enforce any provision of this Agreement, or where any provision hereof is
validly asserted as a defense, the prevailing party, as determined by the
court, shall be entitled to recover its reasonable attorneys' fees in
addition to any other available remedy.
23
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Registration
Rights Agreement to be duly executed as of the date first written above.
COSTCO COMPANIES, INC.
By:
-------------------------------
Name:
Title:
The foregoing Registration Rights
Agreement is hereby confirmed
and accepted as of the date
first above written.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
J. P. MORGAN & CO.
By: Donaldson, Lufkin & Jenrette
Securities Corporation
By:____________________________
Name: Randall L. Bort
Title: Vice President
<PAGE>
NUMBER SHARES
CC COSTCO
WHOLESALE
INCORPORATED UNDER THE LAWS SEE REVERSE FOR CERTAIN DEFINITIONS
OF THE STATE OF DELAWARE CUSIP 22160Q 10 2
This Certifies that
SPECIMEN
is the record holder of
FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK, $.01 PAR VALUE, OF
COSTCO COMPANIES, INC.
transferable on the books of the Corporation by the holder hereof in person
or by duly authorized attorney upon surrender of this certificate properly
endorsed. This certificate is not valid until countersigned by the Transfer
Agent and registered by the Registra.
WITNESS the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers.
Dated:
SPECIMEN [SEAL] SPECIMEN
SECRETARY PRESIDENT AND CHIEF
EXECUTIVE OFFICER
COUNTERSIGNED AND REGISTERED:
CHASEMELLON SHAREHOLDER SERVICES, L.L.C.
TRANSFER AGENT AND REGISTRAR
BY
AUTHORIZED SIGNATURE
<PAGE>
The Corporation shall furnish without charge to each stockholder who so
requests a statement of the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock of
the Corporation or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights. Such requests shall be made
to the Corporation's Secretary at the principal office of the Corporation.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM -- as tenants in common
TEN ENT -- as tenants by the entireties
JT TEN -- as joint tenants with right of
survivorship and not as tenants
in common
UNIF GIFT MIN ACT -- ...........Custodian.............
(Cust) (Minor)
under Uniform Gifts to Minors
Act..............................
(State)
UNIF TRF MIN ACT -- .......Custodian (until age.....)
(Cust)
..........under Uniform Transfers
(Minor)
to Minors Act....................
(State)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, ___________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------
- --------------------------------------
- ------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------Shares
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
- ----------------------------------------------------------------------Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated
--------------------------
X
------------------------------------------
X
------------------------------------------
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME(S) AS WRITTEN
UPON THE FACE OF THE CERTIFICATE IN EVERY
PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATEVER.
Signature(s) Guaranteed
By
---------------------------------------
THE SIGNATURE(S) MUST BE GUARANTEED BY AN
ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS
AND CREDIT UNIONS WITH MEMBERSHIP IN AN
APPROVED SIGNATURE GUARANTEE MEDALLION
PROGRAM). PURSUANT TO S.E.C. RULE 17Ad-15.
<PAGE>
EXHIBIT 12.1
COSTCO COMPANIES, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
53 WEEKS
52 WEEKS ENDED ENDED 52 WEEKS ENDED
------------------------ ------------ ----------------------
AUGUST 31, SEPTEMBER 1, SEPTEMBER 3, AUGUST 28, AUGUST 29,
1997 1996 1995 1994 1993
---------- ------------ ------------ ---------- ----------
<S> <C> <C> <C> <C> <C>
Earnings(1)...................................... $ 520,329(5) $ 423,477 $ 368,204 $ 203,555(3) $ 336,463
Less: Capitalized interest....................... (4,097) (5,612) (3,275) (7,170) (9,483)
Add: Interest on debt(2)......................... 80,378 83,690 71,186 57,642 55,599
Portion of rent under long-term operating
leases representative of an interest
factor....................................... 32,411 33,412 32,160 26,940 23,220
---------- ------------ ------------ ---------- ----------
Total earnings available for fixed charges....... $ 629,021 $ 534,967 $ 468,275 $ 280,967 $ 405,799
---------- ------------ ------------ ---------- ----------
---------- ------------ ------------ ---------- ----------
Fixed Charges:
Interest on debt(2)............................ $ 80,378 $ 83,690 $ 71,186 $ 57,642 $ 55,599
Portion of rent under long-term operating
leases representative of an interest
factor....................................... 32,411 33,412 32,160 26,940 23,220
---------- ------------ ------------ ---------- ----------
Total fixed charges.............................. $ 112,789 $ 117,102 $ 103,346 $ 84,582 $ 78,819
---------- ------------ ------------ ---------- ----------
---------- ------------ ------------ ---------- ----------
Ratio of earnings to fixed charges............... 5.6(6) 4.6 4.5 3.3(4) 5.2
---------- ------------ ------------ ---------- ----------
---------- ------------ ------------ ---------- ----------
</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.
(5) Includes the effect of adopting SFAS No. 121, a $65,000 pre-tax charge for
asset impairment. If such provision were excluded, income from continuing
operations before provision for income taxes for fiscal 1997 would have been
$585,329.
(6) If the $65,000 pre-tax provision for asset impairment were excluded, the
ratio of earnings to fixed charges would have been 6.2.
<PAGE>
COSTCO COMPANIES, INC.
SUBSIDIARIES
<TABLE>
<CAPTION>
STATE OR OTHER
JURISDICTION OF NAME UNDER WHICH
INCORPORATION OR SUBSIDIARY DOES
SUBSIDIARIES ORGANIZATION BUSINESS
- ------------ ---------------- ------------------------------
<S> <C> <C>
Costco Wholesale Corporation Washington Costco Wholesale Corporation, Costco Wholesale
The Price Company California The Price Company, Price Club, Costco Wholesale
Costco Wholesale Canada Ltd. Canadian Costco Wholesale Canada
Federal Ltd., Costco Wholesale
Price Costco Canada Inc. Canadian Price Costco Canada Inc.,
Federal Price Costco, Costco
Price Costco Canada Holdings Inc. Canadian Price Costco Canada Holdings Inc.
Federal
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCONTANTS
As independent public accountants, we hereby consent to the incorporation of
our reports included in this Form 10-K into Costco Companies, Inc.'s previously
filed Registration Statement Nos. 33-50799, 333-1127, 333-04355 and 333-21093.
ARTHUR ANDERSEN LLP
Seattle, Washington
November 7, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-START> SEP-02-1996
<PERIOD-END> AUG-31-1997
<EXCHANGE-RATE> 1
<CASH> 175,508
<SECURITIES> 0
<RECEIVABLES> 151,493
<ALLOWANCES> 4,360
<INVENTORY> 1,686,525
<CURRENT-ASSETS> 2,109,950
<PP&E> 3,950,342
<DEPRECIATION> 795,708
<TOTAL-ASSETS> 5,476,314
<CURRENT-LIABILITIES> 1,964,047
<BONDS> 917,001
0
0
<COMMON> 708,460
<OTHER-SE> 1,759,656
<TOTAL-LIABILITY-AND-EQUITY> 5,476,314
<SALES> 21,484,118
<TOTAL-REVENUES> 21,874,404
<CGS> 19,314,485
<TOTAL-COSTS> 21,293,692
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 76,281
<INCOME-PRETAX> 520,329
<INCOME-TAX> 208,132
<INCOME-CONTINUING> 312,197
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 312,197
<EPS-PRIMARY> 1.47
<EPS-DILUTED> 1.46
</TABLE>
