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Filed pursuant to Rule 424(b)(3)
Registration No. 333-40049
PROSPECTUS
COSTCO COMPANIES, INC.
$900,000,000 ZERO COUPON CONVERTIBLE
SUBORDINATED NOTES DUE 2017
10,219,050 SHARES OF COMMON STOCK
This Prospectus relates to $900,000,000 aggregate principal amount of Zero
Coupon Convertible Subordinated Notes due 2017 (the "Notes") of Costco
Companies, Inc. (the "Company") owned by certain Holders identified in this
Prospectus (collectively, the "Selling Securityholders") and the 10,219,050
shares of the Company's common stock, $0.01 par value per share (the "Common
Stock") into which the Notes are convertible, plus such additional indeterminate
number of shares of Common Stock as may become issuable upon conversion of the
Notes as a result of adjustments to the conversion price (together, the
"Shares"). See "Selling Securityholders." There will be no periodic payments of
interest. The Notes will mature on August 19, 2017. They were issued in
connection with a private transaction on August 19, 1997 at a price of $499.60
per $1,000 principal amount at maturity (the "Issue Price") with a yield to
maturity of 3 1/2% per annum (computed on a semi-annual bond equivalent basis)
calculated from August 19, 1997. The Notes are subordinated to all existing and
future Senior Indebtedness of the Company ($465 million aggregate principal
amount of which was outstanding as of August 31, 1997) and are effectively
subordinated to all existing and future liabilities of the Company's
subsidiaries ($1.42 billion as of August 31, 1997, of which $1.30 billion were
trade payables. See "Description of the Notes--Subordination."
Each Note is convertible into shares of Common Stock at the option of the
Holder at any time on or prior to maturity, unless previously redeemed or
otherwise purchased by the Company, at a conversion rate of 11.3545 shares of
Common Stock per $1,000 principal amount of such Note at maturity. The
conversion rate will not be adjusted at any time during the term of the Notes
for accrued Original Issue Discount, but will be subject to adjustment upon the
occurrence of certain events affecting the Common Stock. Upon conversion, a
Holder will not receive any cash payment in consideration of accrued Original
Issue Discount. See "Description of the Notes--Conversion."
Notes will be purchased by the Company at the option of the Holder on August
19, 2002, August 19, 2007 and August 19, 2012 for a purchase price per Note of
$594.25, $706.82 and $840.73 (Issue Price plus accrued Original Issue Discount
to the relevant purchase date), respectively, payable at the Company's option in
cash or Common Stock. See "Description of the Notes--Purchase of Notes at the
Option of Holders." In addition, 35 business days after the occurrence of any
Change of Control (as defined) of the Company on or prior to August 19, 2002,
the Notes will be purchased for cash by the Company, at the option of the
Holder, at a price equal to the issue price, plus accrued Original Issue
Discount to the date of such purchase.
The Notes will not be redeemable at the option of the Company prior to
August 19, 2002. Beginning on August 19, 2002, the Notes will be redeemable, in
whole or in part, for cash at any time at the option of the Company at a
redemption price equal to the issue price plus accrued Original Issue Discount
to the date of redemption. See "Description of the Notes-- Redemption of Notes
at the Option of the Company."
The Company will receive no part of the proceeds of any sales made
hereunder. See "Use of Proceeds." The Notes and the Shares are being registered
to permit public secondary trading of the Notes and, upon conversion, the
underlying Common Stock, by the Holders thereof from time to time after the date
of this Prospectus. The Company has agreed, among other things, to bear all
expenses (other than underwriting discounts and selling commissions) of the
Holders of the Notes or the underlying Common Stock in connection with the
registration and sale of the Notes and the underlying Common Stock covered by
this Prospectus. See "Selling Securityholders."
The Notes and the Shares may be offered in negotiated transactions or
otherwise, at market prices prevailing at the time of sale or at negotiated
prices. In addition, the Notes and the Shares may be offered from time to time
through ordinary brokerage transactions on any automated quotation system or
national securities exchange on which the Notes or the Common Stock may be
listed or traded. The Company does not intend to list the Notes on The Nasdaq
Stock Market or any U.S. or foreign exchange. The Notes may trade in the
over-the-counter market, but there can be no assurance that such a market will
develop, or, if developed, will continue to exist. See "Plan of Distribution."
The Company's Common Stock is traded on The Nasdaq National Market under the
symbol "COST." On November 26, 1997, the last reported sale price of the Common
Stock was $44 5/8 per share. The Notes were issued with original issue discount
which will have certain federal income tax consequences for Holders subject to
U.S. tax laws. See "Description of the Notes" and "Certain United States Federal
Income Tax Considerations."
FOR A DISCUSSION OF CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
FOR HOLDERS OF THE NOTES, SEE "CERTAIN UNITED STATES FEDERAL INCOME TAX
CONSIDERATIONS."
The Selling Securityholders and any broker-dealers participating in the
distribution of the Notes and the Shares may be deemed to be "underwriters"
within the meaning of the Securities Act, and any commissions or discounts given
to any such broker-dealer may be regarded as underwriting commissions or
discounts under the Securities Act.
--------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS NOVEMBER 26, 1997.
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AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange Act
and in accordance therewith files reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission"). Such
reports, proxy statements and other information can be inspected and copied at
the public reference facilities maintained by the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
Commission's Regional Offices located at Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511, and at 7 World Trade Center,
13th Floor, New York, New York 10048. Copies of such documents may also be
obtained from the Public Reference Room of the Commission at Judiciary Plaza,
450 Fifth Street, N.W., Washington D.C. 20549, at prescribed rates. The Company
files its reports, proxy statements and other information with the Commission
electronically, and the Commission maintains a Web site located at
http://www.sec.gov containing such information. In addition, reports and other
information concerning the Company are available for inspection and copying at
the offices of The Nasdaq Stock Market at 1735 K Street, N.W., Washington D.C.
20006-1506.
The Company has filed with the Commission a registration statement on Form
S-3 (such registration statement, together with all amendments and exhibits
thereto, being hereinafter referred to as the "Registration Statement") under
the Securities Act, for the registration under the Securities Act of the Notes
and Shares offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement, certain parts of which are
omitted in accordance with the rules and regulations of the Commission.
Reference is hereby made to the Registration Statement for further information
with respect to the Company and the securities offered hereby. Statements
contained herein concerning the provisions of documents filed as exhibits to the
Registration Statement are necessarily summaries of such documents, and each
such statement is qualified in its entirety by reference to the copy of the
applicable document filed with the Commission. Copies of the Registration
Statement and the exhibits may be inspected, without charge, at the offices of
the Commission, or obtained at prescribed rates from the Public Reference
Section of the Commission at the address set forth above.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission by the Company under File
No. 0-20353 are incorporated herein by reference: the Company's Annual Report on
Form 10-K for the fiscal year ended August 31, 1997, and the description of the
Common Stock contained in the Company's Registration Statement on Form 8-A,
including any amendments or reports filed for the purpose of updating such
description filed by the Company with the Commission.
All reports and other documents filed by the Company pursuant to Sections
13(a), 13(c), 14 and 15(d) of the Exchange Act subsequent to the date of this
Prospectus and prior to termination of the offering of any securities offered
hereby shall be deemed to be incorporated by reference herein and to be a part
hereof from the date of the filing of such reports and documents. Any statement
contained in a document incorporated or deemed to be incorporated by reference
herein shall be deemed to be modified or superseded for purposes of this
Prospectus to the extent that a statement contained herein or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Prospectus.
The Company hereby undertakes to provide without charge to each person to
whom a Prospectus is delivered, upon written or oral request of such person, a
copy of any document incorporated herein by reference, other than exhibits to
such documents (unless such exhibits are specifically incorporated by reference
in such documents). Requests should be directed to Richard J. Olin, Vice
President, Costco Companies, Inc., 999 Lake Drive, Issaquah, Washington 98027,
telephone number (425) 313-8100.
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THE COMPANY
THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED IN DOCUMENTS
INCORPORATED HEREIN BY REFERENCE AND IS NOT INTENDED TO BE COMPLETE AND IS
QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION CONTAINED IN THE
OTHER DOCUMENTS INCORPORATED HEREIN BY REFERENCCE.
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
(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 is the parent and sole owner
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., consisting of Costco's discontinued non-club commercial
real estate operations and certain other assets.
The Company operates, principally through subsidiaries, a chain of cash and
carry membership warehouses primarily under the name "Costco Wholesale." The
Company's business is based on the concept that offering members very low prices
on a limited selection of nationally branded and selected private label products
in a wide range of merchandise categories will produce rapid inventory turnover
and high sales volumes. This rapid inventory turnover, when combined with
operating efficiencies achieved by volume purchasing, efficient distribution and
reduced handling of merchandise in no-frills, self-service warehouse facilities,
has enabled the Company to operate profitably at significantly lower gross
margins than traditional wholesalers, discount retailers and supermarkets.
The Company buys virtually all of its merchandise directly from
manufacturers for shipment either directly to the Company's selling warehouses
or to a consolidation point where various shipments are combined so as to
minimize freight and handling costs. As a result, the Company 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, the Company 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. The Company'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 low prices.
At November 26, 1997, the Company operated 268 warehouses in 23 states (204
locations), nine Canadian provinces (56 locations), the United Kingdom (seven
locations, through a majority-owned subsidiary) and Taiwan (one location,
through a majority-owned subsidiary). In addition, the Company operated 14
warehouses in Mexico through a joint venture in which the Company has a 50%
interest. Additionally the Company operates two warehouses in Korea under a
licensing agreement.
The Company is incorporated in the State of Delaware. The Company's offices
are located at 999 Lake Drive, Issaquah, Washington 98027, telephone (425)
313-8100.
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RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth the ratio of earnings to fixed charges for
the Company for each of the periods indicated. The ratio of earnings to fixed
charges has been computed by dividing earnings (defined as income from
continuing operations before provision for income taxes) plus fixed charges
(excluding capitalized interest) by fixed charges. Fixed charges consist of
interest, debt amortization expense, the estimated interest component of
property rentals and capitalized interest.
<TABLE>
<CAPTION>
FISCAL YEARS
- ---------------------------------------------------------------
1993 1994 1995 1996 1997
----- ----- ----- ----- -----
<S> <C> <C> <C> <C>
5.2 3.3(1) 4.5 4.6 5.6(2)
</TABLE>
- ------------------------
(1) If a $120,000,000 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.
(2) If a $65,000,000 pre-tax provision for asset impairment were excluded, the
ratio of earnings to fixed charges would have been 6.2.
USE OF PROCEEDS
The Company will not receive any of the proceeds from the sales of the Notes
or the Shares by the Selling Securityholders. See "Selling Securityholders" for
a list of those persons and entities receiving the proceeds from the sale of the
Notes or the Shares.
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DESCRIPTION OF THE NOTES
The Notes are issued under an indenture dated as of August 19, 1997 (the
"Indenture"), among the Company and Firstar Bank of Minnesota, N.A., as trustee
(the "Trustee"). A copy of the form of Indenture is available from the Company.
The following summaries of certain provisions of the Notes and the Indenture do
not purport to be complete and are subject to, and are qualified in their
entirety by reference to, all of the provisions of the Notes and the Indenture,
including the definitions therein of certain terms which are not otherwise
defined in this Prospectus. Wherever particular provisions or defined terms of
the Indenture (or of the Form of Note which is a part thereof) are referred to,
such provisions or defined terms are incorporated herein by reference.
GENERAL
The Notes are unsecured, subordinated, general obligations of the Company
limited to $900,000,000 aggregate principal amount at maturity and will mature
on August 19, 2017. The principal amount at maturity of each Note is $1,000 and
is payable at the office of the Paying Agent, which initially will be the
Trustee, or an office or agency maintained by the Company for such purpose in
the Borough of Manhattan, The City of New York. For purposes of this Description
of the Notes, "Issue Date" means August 19, 1997, and "Issue Price" means
$499.60 per $1,000 principal amount at maturity of the Notes.
The Notes were sold at a substantial discount from their principal amount at
maturity. See "Certain United States Federal Income Tax Considerations--Original
Issue Discount." There will be no periodic payments of interest. The calculation
of the accrual of Original Issue Discount (the difference between the Issue
Price and the principal amount at maturity of a Note) in the period during which
a Note remains outstanding will be on a semi-annual bond equivalent basis using
a 360-day year comprised of twelve 30-day months; such accrual commenced on the
Issue Date. In the event of the maturity, conversion, purchase by the Company at
the option of a Holder or redemption of a Note, Original Issue Discount and
interest, if any, will cease to accrue on such Note, under the terms and subject
to the conditions of the Indenture. The Company may not reissue a Note that has
matured or been converted, purchased by the Company at the option of a Holder,
redeemed or otherwise cancelled (except for registration of transfer, exchange
or replacement thereof).
The Notes were issued in fully registered form, without coupons, in
denominations of $1,000 principal amount at maturity and integral multiples
thereof. Notes may be presented for conversion at the office of the Conversion
Agent and for exchange or registration of transfer at the office of the
Registrar. Each such agent shall initially be the Trustee. No service charge
will be made for any registration of transfer or exchange of Notes, but the
Company may require payment by a Holder of a sum sufficient to cover any tax,
assessment or other governmental charge payable in connection therewith.
Due to the fact that substantial operations of the Company are conducted
through wholly-owned subsidiaries, the Company's cash flow and consequent
ability to meet its debt obligations are dependent upon the earnings of its
subsidiaries and on dividends and other payments therefrom. Since the Notes are
solely an obligation of the Company, the Company's subsidiaries are not
obligated or required to pay any amounts due pursuant to the Notes or to make
funds available therefor in the form of dividends or advances to the Company.
CONVERSION RIGHTS
A Holder of a Note may convert it into Common Stock at any time before the
close of business on August 19, 2017, PROVIDED, HOWEVER, that if a Note is
called for redemption, the Holder may convert it at any time before the close of
business on the date that is seven days immediately prior to the Redemption Date
(or if such date is not a business day, the business day immediately following
such date). A Note in respect of which a Holder has delivered a Purchase Notice
or a Change of Control Purchase Notice exercising the option of such Holder to
require the Company to purchase such Note may be converted only if such notice
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is withdrawn by a written notice of withdrawal delivered by the Holder to the
Paying Agent prior to the close of business on the Purchase Date or the Change
of Control Purchase Date, as the case may be, in accordance with the terms of
the Indenture.
To convert a Note, a Holder must (i) complete and manually sign the
conversion notice on the back of the Note (or complete and manually sign a
facsimile thereof) and deliver such notice to the Conversion Agent (initially
the Trustee) at the office maintained by the Conversion Agent for such purpose,
(ii) surrender the Note to the Conversion Agent, (iii) if required, furnish
appropriate endorsements and transfer documents, and (iv) if required, pay all
transfer or similar taxes. The date on which all of the foregoing requirements
have been satisfied is the Conversion Date.
The initial Conversion Rate for the Notes is 11.3545 shares of Common Stock
per $1,000 principal amount at maturity, subject to adjustment upon the
occurrence of certain events described below. A Holder otherwise entitled to a
fractional share of Common Stock will receive cash equal to the market value of
such fractional share based on the closing Sale Price on the Trading Day
immediately preceding the Conversion Date. A Holder may convert a portion of
such Holder's Notes so long as such portion is $1,000 principal amount at
maturity or an integral multiple thereof.
Upon conversion of a Note, a Holder will not receive any cash payment
representing accrued Original Issue Discount. The Company's delivery to the
Holder of the fixed number of shares of Common Stock into which the Note is
convertible (together with the cash payment in lieu of any fractional shares)
will satisfy the Company's obligation to pay the principal amount at maturity of
the Note, including the accrued Original Issue Discount attributable to the
period from the Issue Date to the Conversion Date. Thus, the accrued Original
Issue Discount will be deemed to be paid in full rather than cancelled,
extinguished or forfeited. The Conversion Rate will not be adjusted during the
term of the Notes for accrued Original Issue Discount. A certificate for the
number of full shares of Common Stock into which any Note is converted (and cash
in lieu of any fractional shares) will be delivered through the Conversion Agent
no later than the seventh day following the Conversion Date. For a discussion of
the tax treatment of a Holder receiving Common Stock upon conversion, see
"Certain United States Federal Income Tax Considerations--Conversion."
The Conversion Rate will be adjusted for dividends or distributions on
Common Stock payable in Common Stock or other Capital Stock of the Company;
certain subdivisions, combinations or reclassifications of Common Stock;
distributions to all holders of Common Stock of certain rights, warrants or
options to purchase Common Stock or securities convertible into Common Stock for
a period expiring within 60 days after the record date for such distribution at
a price per share less than the Market Price at the time; and distributions to
all holders of Common Stock of assets or debt securities of the Company or
rights, warrants or options to purchase securities of the Company (excluding
cash dividends or other cash distributions from consolidated current net
earnings or earned surplus or dividends payable in Common Stock but including
Extraordinary Cash Dividends). However, no adjustment need be made if Holders
may participate in the transactions otherwise giving rise to an adjustment on a
basis and with notice that the Board of Directors of the Company determines to
be fair and appropriate, or in certain other cases. In cases where the fair
market value of the portion of assets, debt securities or rights, warrants or
options to purchase securities of the Company applicable to one share of Common
Stock distributed to stockholders exceeds the Market Price per share of Common
Stock, or such Market Price exceeds such fair market value of such portion of
assets, debt securities or rights, warrants or options so distributed by less
than $1.00, rather than being entitled to an adjustment in the Conversion Rate,
the Holder of a Note upon conversion thereof will be entitled to receive, in
addition to the shares of Common Stock into which such Note is convertible, the
kind and amounts of assets, debt securities or rights, options or warrants
comprising the distribution that such Holder would have received if such Holder
had converted such Note immediately prior to the record date for determining the
stockholders entitled to receive the distribution. The Indenture permits the
Company to increase the Conversion Rate from time to time. "Extraordinary Cash
Dividends" means during any 12-month period, a cash distribution with respect to
the Company's
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Common Stock (other than repurchases of shares of Common Stock) in excess of
12.5% of the Market Capitalization of the Company's 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.
If the Company is party to a consolidation, merger or binding share exchange
or a transfer of all or substantially all of its assets which is otherwise
permitted under the terms of the Indenture, the right to convert a Note into
Common Stock may be changed into a right to convert it into the kind and amount
of securities, cash or other assets which the Holder would have received if the
Holder had converted such Holder's Notes immediately prior to the transaction.
In the event of a taxable distribution to holders of Common Stock which
results in an adjustment of the Conversion Rate (or in which Holders otherwise
participate) or in the event the Conversion Rate is increased at the discretion
of the Company, the Holders of the Notes may, in certain circumstances, be
deemed to have received a distribution subject to United States federal income
tax as a dividend. See "Certain United States Federal Income Tax
Considerations--Constructive Dividend."
SUBORDINATION
The Indenture provides that no payment may be made by the Company on account
of the principal of, premium, if any, and interest on the Notes, or to acquire
any of the Notes (including repurchases of Notes at the option of the Holder)
for cash or property, or on account of the redemption provisions of the Notes,
(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 of the Company 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.
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
the 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 setoff or otherwise) may be made by or on behalf of the Company on account
of the principal of, premium, if any, interest on the Notes, or to acquire or
repurchase any of the Notes for cash or property, or on account of the
redemption provisions of the Notes. Notwithstanding the foregoing provisions of
this paragraph, 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 Notes during the Payment Blockage Period
due to the foregoing prohibitions and to resume all other payments as and when
due on the Notes. 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 event of 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.
In the event that, notwithstanding the foregoing, 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
foregoing provisions, such payment or distribution shall be held in trust for
the benefit of the holders of Senior Indebtedness of the Company, and shall be
paid or delivered by the Trustee or such
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Holders, as the case may be, to the holders of the Senior Indebtedness of the
Company 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 of the Company may have been issued,
ratably according to the aggregate amounts remaining unpaid on account of the
Senior Indebtedness of the Company held or represented by each, for application
to the payment of all Senior Indebtedness of the Company remaining unpaid, to
the extent necessary to pay all such Senior Indebtedness in full after giving
effect to any concurrent payment or distribution to the holders of such Senior
Indebtedness.
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, (i) the holders of all Senior Indebtedness
of the Company will first be entitled to receive payment in full before the
Holders are entitled to receive any payment on account of the principal of,
premium, if any, or interest on, the Notes and (ii) 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 subordination provisions
contained in the Indenture, will be paid by the liquidating trustee or agent or
other person making such a payment or distribution directly to the holders of
Senior Indebtedness of the Company 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.
The Indenture defines "Senior Indebtedness" as, 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 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.
No provision contained in the Indenture or the Notes affects the obligation
of the Company, which is absolute and unconditional, to pay, when due, principal
of, premium, if any, and interest on the Notes. The subordination provisions of
the Indenture and the Notes do not prevent the occurrence of any Default or
Event of Default under the Indenture.
The Company conducts substantial operations through its subsidiaries.
Accordingly, the Company's ability to meet its cash obligations is dependent
upon the ability of its subsidiaries to make cash distributions to the Company.
The ability of its subsidiaries to make distributions to the Company is and will
continue to be restricted by, among other limitations, applicable laws and
contractual provisions. The Indenture will not limit the ability of the
Company's subsidiaries to incur such restrictions in the future.
As of August 31, 1997, there was approximately $465 million of Senior
Indebtedness outstanding. There are no restrictions under the Indenture on the
creation of additional indebtedness, including Senior Indebtedness.
The Notes are effectively subordinated to all existing and future
liabilities of the Company's subsidiaries. Any right of the Company to
participate in any distribution of the assets of the Company's subsidiaries upon
the liquidation, reorganization or insolvency of such subsidiary (and the
consequent right of the
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Holders of the Notes to participate in those assets) will be subject to the
claims of the creditors (including trade creditors) of such subsidiary, except
to the extent that claims of the Company itself as a creditor of such subsidiary
may be recognized, in which case the claims of the Company would still be
subordinate to any liabilities of such subsidiary senior to that held by the
Company. As of August 31, 1997, liabilities of the Company's subsidiaries
aggregated approximately $1.42 billion, of which $1.30 billion were trade
payables.
REDEMPTION AT THE OPTION OF THE COMPANY
No sinking fund is provided for the Notes. Prior to August 19, 2002, the
Notes are redeemable at the option of the Company. On and after that date, the
Company may redeem the Notes for cash as a whole at any time, or from time to
time in part, upon not less than 20 nor more than 60 days' notice of redemption
given by mail to Holders of Notes (unless a shorter notice shall be satisfactory
to the Trustee). Any such redemption must be in integral multiples of $1,000
principal amount at maturity.
The table below shows Redemption Prices of a Note per $1,000 principal
amount on maturity at August 19, 2002, at each August 19 thereafter prior to
maturity and at maturity on August 19, 2017. The Redemption Price of a Note
redeemed between such dates would include an additional amount reflecting the
additional Original Issue Discount accrued since the next preceding date in the
table to and including the Redemption Date.
<TABLE>
<CAPTION>
NOTE ACCRUED ORIGINAL
ISSUE ISSUE DISCOUNT REDEMPTION
REDEMPTION DATE PRICE AT 3 1/2% PRICE
- ---------------------------------------------------------------------- ---------- ---------------- -----------
<S> <C> <C> <C>
August 19, 2002....................................................... $ 499.60 $ 94.65 $ 594.25
August 19, 2003....................................................... 499.60 115.63 615.23
August 19, 2004....................................................... 499.60 137.35 636.95
August 19, 2005....................................................... 499.60 159.84 659.44
August 19, 2006....................................................... 499.60 183.12 682.72
August 19, 2007....................................................... 499.60 207.22 706.82
August 19, 2008....................................................... 499.60 232.18 731.78
August 19, 2009....................................................... 499.60 258.02 757.62
August 19, 2010....................................................... 499.60 284.76 784.36
August 19, 2011....................................................... 499.60 312.46 812.06
August 19, 2012....................................................... 499.60 341.13 840.73
August 19, 2013....................................................... 499.60 370.81 870.41
August 19, 2014....................................................... 499.60 401.54 901.14
August 19, 2015....................................................... 499.60 433.36 932.96
August 19, 2016....................................................... 499.60 466.30 965.90
At Maturity........................................................... 499.60 500.40 1,000.00
</TABLE>
If fewer than all of the Notes are to be redeemed, the Trustee shall select
the Notes to be redeemed in principal amounts at maturity of $1,000 or integral
multiples thereof by lot, PRO RATA or by another method the Trustee considers
fair and appropriate. If a portion of a Holder's Notes is selected for partial
redemption and such Holder converts a portion of such Notes prior to such
redemption, such converted portion shall be deemed, solely for purposes of
determining the aggregate principal amount at maturity of Notes to be redeemed
by the Company, to be of the portion selected for redemption.
9
<PAGE>
PURCHASE OF NOTES AT THE OPTION OF THE HOLDER
On August 19, 2002, August 19, 2007 and August 19, 2012 (each, a "Purchase
Date"), the Company will become obligated to purchase, at the option of the
Holder thereof, any outstanding Note for which a written notice (a "Purchase
Notice") has been delivered by the Holder to the Paying Agent or an office or
agency maintained by the Company for such purpose in the Borough of Manhattan,
The City of New York, at any time from the opening of business on the date that
is 20 business days preceding such Purchase Date until the close of business on
such Purchase Date and for which such Purchase Notice has not been withdrawn,
subject to certain additional conditions set forth in part in the following
paragraphs.
The table below shows the purchase prices (each a "Purchase Price") of a
Note as of the specified Purchase Dates:
<TABLE>
<CAPTION>
PURCHASE DATE PURCHASE PRICE
- ------------------------------------------------------------------------------ --------------
<S> <C>
August 19, 2002............................................................... $ 594.25
August 19, 2007............................................................... 706.82
August 19, 2012............................................................... 840.73
</TABLE>
The Company, at its option, may elect to pay such Purchase Price in cash or
Common Stock, or any combination thereof. For a discussion of the tax treatment
of such a transaction, see "Certain Tax United States Federal Income Tax
Considerations--Other Disposition."
The Company will give notice (the "Company Notice") not less than 20
business days prior to each Purchase Date (the "Company Notice Date") to all
Holders at their addresses shown in the register of the Registrar (and to
beneficial owners as required by applicable law) stating, among other things,
(i) whether the Company will pay the Purchase Price of the Notes in cash or
Common Stock, or any combination thereof, and (ii) the procedures that Holders
must follow to require the Company to purchase Notes from such Holders.
The Purchase Notice given by any Holder requiring the Company to purchase
Notes shall state (i) the certificate numbers of the Notes to be delivered by
such Holder for purchase by the Company; (ii) the portion of the principal
amount at maturity of Notes to be purchased, which portion must be $1,000 or an
integral multiple thereof; (iii) that such Notes are to be purchased by the
Company pursuant to the applicable provisions of the Notes; and (iv) if the
Company elects, pursuant to the Company Notice, to pay a specified percentage of
the Purchase Price in Common Stock but such specified percentage is ultimately
to be paid in cash because any of the conditions to payment of such specified
percentage of the Purchase Price in Common Stock contained in the Indenture is
not satisfied prior to the close of business on the Purchase Date, as described
below, that such Holder elects (a) to withdraw such Purchase Notice as to some
or all of the Notes to which it relates (stating the principal amount at
maturity and certificate numbers of the Notes as to which such withdrawal shall
relate) or (b) to receive cash in respect of the Purchase Price of all Notes
subject to such Purchase Notice. If the Holder fails to indicate such Holder's
choice with respect to the election described in clause (iv) above in the
Purchase Notice, such Holder shall be deemed to have elected to receive cash for
the specified percentage of the Purchase Price that was to have been payable in
Common Stock. See "Certain United States Federal Income Tax Considerations--
Other Disposition."
Any Purchase Notice may be withdrawn by the Holder by a written notice of
withdrawal delivered to the Paying Agent prior to the close of business on the
Purchase Date. The notice of withdrawal shall state the principal amount at
maturity and the certificate numbers of the Notes as to which the withdrawal
notice relates and the principal amount at maturity, if any, which remains
subject to the Purchase Notice.
If the Company elects to pay the Purchase Price, in whole or in part, in
shares of Common Stock, the number of shares to be delivered in respect of the
specified percentage of the Purchase Price to be paid in Common Stock shall be
equal to the dollar amount of such specified percentage of the Purchase Price
10
<PAGE>
divided by the Market Price of a share of Common Stock. However, no fractional
shares of Common Stock will be delivered upon any purchase by the Company of
Notes in payment, in whole or in part, of the Purchase Price. Instead, the
Company will pay cash based on the Market Price for all fractional shares of
Common Stock. Each Holder whose Notes are purchased at the option of such Holder
as of the Purchase Date shall receive the same percentage of cash or Common
Stock in payment of the Purchase Price for such Notes, except as described above
with regard to the payment of cash in lieu of fractional shares of Common Stock.
See "Certain United States Federal Income Tax Considerations--Other
Disposition."
The "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 or
distribution, as applicable, appropriately adjusted to take into account the
actual occurrence, during the seven Trading Days preceding such Purchase Date or
distribution, as applicable, of certain events that would result in an
adjustment of the Conversion Rate with respect to the Common Stock. The "Sale
Price" on any Trading Day means the closing per share sale price for the Common
Stock (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
average ask prices) on such Trading Day as reported in the 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 securities exchange, as reported by the National
Association of Securities Dealers Automated Quotation System. A "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. Due
to the fact that the Market Price of the Common Stock is determined prior to the
Purchase Date, Holders of Notes 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. The Company may pay the Purchase Price, in whole or in
part, 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.
Upon determination of the actual number of shares of Common Stock issuable
in accordance with the foregoing provisions, the Company will publish such
determination in The Wall Street Journal or another daily newspaper of national
circulation.
The Company's right to purchase Notes, in whole or in part, with shares of
Common Stock is subject to the Company's satisfying various conditions,
including the registration of the Common Stock under the Securities Act and the
Exchange Act, unless there exists an applicable exemption to registration
thereunder. If such conditions are not satisfied prior to the close of business
on the Purchase Date, the Company will pay the Purchase Price of the Notes in
cash. The Company will comply with the provisions of Rule 13e-4 and any other
tender offer rules under the Exchange Act which may then be applicable and will
file Schedule 13e-4 or any other schedule required thereunder in connection with
any offer by the Company to purchase Notes at the option of the Holders thereof
on a Purchase Date. The Company may not change the form of consideration (or
components or percentages of components thereof) to be paid once the Company has
given its Company Notice to Holders of Notes except as described in the second
sentence of this paragraph.
Payment of the Purchase Price for a Note for which a Purchase Notice has
been delivered and not withdrawn is conditioned upon delivery of such Note
(together with necessary endorsements) to the Paying Agent or an office or
agency maintained by the Company for such purpose in the Borough of Manhattan,
The City of New York, at any time (whether prior to, on or after the Purchase
Date) after delivery of such Purchase Notice. Payment of the Purchase Price for
such Note will be made promptly following the later of the business day
following the Purchase Date and the time of delivery of such Note. If the Paying
Agent holds, in accordance with the terms of the Indenture, money or securities
sufficient to pay the Purchase Price of such Note on the business day following
the Purchase Date, then, on and after the Purchase Date, such Note will cease to
be outstanding and Original Issue Discount on such Note will cease to accrue and
11
<PAGE>
will be deemed paid, whether or not such Note is delivered to the Paying Agent,
and all other rights of the Holder shall terminate (other than the right to
receive the Purchase Price upon delivery of such Note).
REPURCHASE OF NOTES AT THE OPTION OF THE HOLDER UPON A CHANGE OF CONTROL
In the event of any Change of Control of the Company occurring on or prior
to August 19, 2002 each Holder of Notes will have the right, at the Holder's
option, subject to the terms and conditions of the Indenture, to require the
Company to purchase all or any part (PROVIDED that the principal amount at
maturity must be $1,000 or an integral multiple thereof) of the Holder's Notes
on the date that is 35 business days (or such other period as would be required
by applicable law) after the occurrence of such Change of Control (the "Change
of Control Purchase Date") at a cash price equal to the Issue Price, plus
accrued Original Issue Discount to and including the Change of Control Purchase
Date (the "Change in Control Purchase Price"). Holders will not have any right
to require the Company to purchase Notes in the event of any Change of Control
of the Company occurring after August 19, 2002.
Within 15 business days after the Change of Control, the Company shall mail
to the Trustee and to each Holder (and to beneficial owners as required by
applicable law) a notice regarding the Change of Control, which notice shall
state, among other things: (i) the date of such Change of Control and, briefly,
the events causing such Change of Control, (ii) the date by which the Change of
Control Purchase Notice must be given, (iii) the Change of Control Purchase
Date, (iv) the Change of Control Purchase Price, (v) the name and address of the
Paying Agent and the Conversion Agent, (vi) the Conversion Rate and any
adjustments thereto, (vii) that Notes with respect to which a Change of Control
Purchase Notice is given by the Holder may be converted into shares of Common
Stock only if the Change of Control Purchase Notice has been withdrawn in
accordance with the terms of the Indenture, (viii) the procedures that Holders
must follow to exercise these rights, (ix) the procedures for withdrawing a
Change of Control Purchase Notice, (x) that Holders who want to convert Notes
must satisfy the requirements set forth in the Notes and (xi) briefly, the
conversion rights of Holders of Notes. The Company will cause a copy of such
notice to be published in The Wall Street Journal or another daily newspaper of
national circulation.
To exercise the purchase right, the Holder must deliver written notice of
the exercise of such right (a "Change of Control Purchase Notice") to the Paying
Agent or an office or agency maintained by the Company for such purpose in the
Borough of Manhattan, The City of New York, prior to the close of business on
the Change of Control Purchase Date. The Change of Control Purchase Notice shall
state (i) the certificate numbers of the Notes to be delivered by the Holder
thereof for purchase by the Company; (ii) the portion of the principal amount at
maturity of Notes to be purchased, which portion must be $1,000 or an integral
multiple thereof; and (iii) that such Notes are to be purchased by the Company
pursuant to the applicable provisions of the Notes.
Any Change of Control Purchase Notice may be withdrawn by the Holder by a
written notice of withdrawal delivered to the Paying Agent prior to the close of
business on the Change of Control Purchase Date. The notice of withdrawal shall
state the principal amount at maturity and the certificate numbers of the Notes
as to which the withdrawal notice relates and the principal amount at maturity,
if any, which remains subject to a Change of Control Purchase Notice.
Payment of the Change of Control Purchase Price for a Note for which a
Change of Control Purchase Notice has been delivered and not withdrawn is
conditioned upon delivery of such Note (together with necessary endorsements) to
the Paying Agent or an office or agency maintained by the Company for such
purpose in the Borough of Manhattan, The City of New York, at any time (whether
prior to, on or after the Change of Control Purchase Date) after the delivery of
such Change of Control Purchase Notice. Payment of the Change of Control
Purchase Price for such Note will be made promptly following the later of the
Business Day following the Change of Control Purchase Date and the time of
delivery of such Note to the Company. If the Paying Agent holds, in accordance
with the terms of the Indenture, money sufficient to pay the Change of Control
Purchase Price of such Note on the Business Day following the Change of Control
Purchase Date, then, on and after the Change of Control Purchase Date, such Note
will cease to
12
<PAGE>
be outstanding and Original Issue Discount on such Note will cease to accrue
thereafter and will be deemed paid, whether or not such Note is delivered to the
Paying Agent, and all other rights of the Holder shall terminate (other than the
right to receive the Change of Control Purchase Price upon delivery of such
Note).
The Indenture provides that a "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. The Indenture does not permit the Board of Directors to waive the
Company's obligation to purchase Notes at the option of a Holder in the event of
a Change of Control 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 Issue Date, 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 Issue Date, 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.
The phrase "all or substantially all" of the assets of the Company is likely
to be interpreted by reference to applicable state law at the relevant time, and
will be dependent on the facts and circumstances existing at such time. As a
result, there may be a degree of uncertainty in ascertaining whether a sale or
transfer is of "all or substantially all" of the assets of the Company.
The Company will comply with the provisions of Rule 13e-4, Rule 14e-1 and
any other tender offer rules under the Exchange Act which may then be
applicable, and will file Schedule 13e-4 or any other schedule required
thereunder in connection with any offer by the Company to purchase Notes at the
option of the Holders thereof upon a Change of Control. The Change of Control
purchase feature of the Notes may in certain circumstances make more difficult
or discourage a takeover of the Company and, thus, the removal of incumbent
management. The Change of Control purchase feature, however, is not the result
of management's knowledge of any specific effort to accumulate shares of Common
Stock or to obtain control of the Company by means of a merger, tender offer,
solicitation or otherwise, or part of a plan by management to adopt a series of
anti-takeover provisions. Instead, the Change of Control purchase feature is a
standard term contained in other similar note offerings that have been marketed
by the Initial Purchasers, and the terms of such feature result from
negotiations between the Company and the Initial Purchasers.
The Company's ability to purchase Notes with cash may be limited by the
terms of its then-existing borrowing agreements. No Notes may be purchased
pursuant to the provisions described above if there has occurred and is
continuing an Event of Default described under "Events of Default; Notice and
Waiver," below (other than as a result of a default in the payment of the Change
in Control Purchase Price with respect to such Notes).
LIMITATION ON MERGER, SALE OR CONSOLIDATION
The Indenture provides that the Company may not, directly or indirectly,
consolidate with or merge with or into another person or sell, lease, convey or
transfer all or substantially all of its assets (computed on a consolidated
basis), whether in a single transaction or a series of related transactions, to
another
13
<PAGE>
person or group of affiliated persons, unless (i) either (a) in the case of a
merger or consolidation, the Company is the surviving entity, or (b) the
resulting, surviving or transferee entity is a corporation organized under the
laws of the United States, any state thereof or the District of Columbia and
expressly assumes by supplemental indenture all of the obligations of the
Company in connection with the Notes and the Indenture, and (ii) no Default or
Event of Default shall exist or shall occur immediately after giving effect on a
pro forma basis to such transaction.
Upon any consolidation or merger or any transfer of all or substantially all
of the assets of the Company in accordance with the foregoing, the successor
corporation formed by such consolidation or into which the Company is merged or
to which such transfer is made, shall succeed to, and be substituted for, and
may exercise every right and power of, the Company under the Indenture with the
same effect as if such successor corporation had been named therein as the
Company, and the Company will be released from its obligations under the
Indenture and the Notes, except as to any obligations that arise from or as a
result of such transaction.
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.
REPORTS
Whether or not the Company is subject to the reporting requirements of
Section 13 or 15(d) of the Exchange Act, the Company shall deliver to the
Trustee and to each Holder, within 15 days after it is or would have been
required to file such with the Securities and Exchange Commission (the
"Commission"), annual and quarterly consolidated financial statements
substantially equivalent to financial statements that would have been included
in reports filed with the Commission if the Company was subject to the
requirements of Section 13 or 15(d) of the Exchange Act, 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 Registrable Securities (as
defined), the Company will continue to provide to Holders of Notes and to
prospective purchasers of the Notes the information required by Rule 144A(d)(4).
EVENTS OF DEFAULT; NOTICE AND WAIVER
The Indenture provides that, if an Event of Default specified therein shall
have occurred and be continuing, either the Trustee or the Holders of not less
than 25% in aggregate principal amount at maturity of the Notes then outstanding
may declare the Issue Price and accrued Original Issue Discount to and including
the date of default (in the case of an Event of Default specified in (i) or (ii)
of the following paragraph) or to the date of such declaration (in the case of
an Event of Default specified in (iii) or (iv) of the following paragraph) on
all the Notes to be immediately due and payable. In the case of certain events
of bankruptcy or insolvency, the Issue Price and accrued Original Issue Discount
to and including the occurrence of such event shall automatically become and be
immediately due and payable. Under certain circumstances, the Holders of a
majority in aggregate principal amount at maturity of the outstanding Notes may
rescind any such acceleration with respect to the Notes and its consequences.
Interest shall accrue and be payable on demand upon a default in the payment of
principal amount at maturity, Issue Price, accrued Original Issue Discount,
Redemption Price, Purchase Price, Change of Control Purchase Price or shares of
Common Stock (or cash in lieu thereof) to be delivered on conversion of Notes,
in each case to the extent that the payment of such interest shall be legally
enforceable.
Under the Indenture, Events of Default include: (i) default in payment of
the principal amount at maturity, Issue Price, accrued Original Issue Discount,
Redemption Price, Purchase Price or Change of Control Purchase Price with
respect to any Note, when the same becomes due and payable (whether or not
14
<PAGE>
such payment is prohibited by the provisions of the Indenture); (ii) failure by
the Company to deliver shares of Common Stock (or cash in lieu thereof) when
such Common Stock (or cash in lieu thereof) is required to be delivered
following conversion of a Note and continuance of such default for 10 days;
(iii) failure by the Company to comply with any of its other agreements in the
Notes or the Indenture upon the receipt by the Company of notice of such default
from the Trustee or from Holders of not less than 25% in aggregate principal
amount at maturity of the Notes then outstanding and the Company's failure to
cure such default within 60 days after receipt by the Company of such notice;
(iv) default in the payment at maturity or resulting in acceleration of any
indebtedness, where the aggregate amount thereof exceeds $10 million; or (v)
certain events of bankruptcy, reorganization, or insolvency.
The Trustee shall, within 90 days after the occurrence of any default, mail
to all Holders of the Notes 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 the Trustee may withhold such notice as to any
default other than a payment default, if it determines in good faith that
withholding the notice is in the interests of the Holders.
The Holders of a majority in aggregate principal amount at maturity of the
outstanding Notes may direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or exercising any trust or
power conferred on the Trustee, PROVIDED that such direction shall not be in
conflict with any law or the indenture and subject to certain other limitations.
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.
No Holder of any Note will have any right to pursue any remedy with respect to
the Indenture or the Notes, unless (i) such Holder shall have previously given
the Trustee written notice of a continuing Event of Default; (ii) the Holders of
at least 25% in aggregate principal amount at maturity of the outstanding Notes
shall have made a written request to the Trustee to pursue such remedy; (iii)
such Holder or Holders shall have offered to the Trustee reasonable security or
indemnity against any loss, liability or expense satisfactory to it; (iv) the
Trustee shall have failed to comply with the request within 60 days after
receipt of such notice, request and offer of security or indemnity; and (v) the
Holders of a majority in aggregate principal amount at maturity of the
outstanding Notes shall not have given the Trustee a direction inconsistent with
such request within 60 days after receipt of such request.
The right of any Holder (a) to receive payment of the principal amount at
maturity, Issue Price, accrued Original Issue Discount, Redemption Price,
Purchase Price, Change of Control Purchase Price or interest, if any, in respect
of the Notes held by such Holder on or after the respective due dates expressed
in the Notes or as of any Redemption Date, (b) to convert such Notes, or (c) 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 adversely affected
without such Holder's consent.
The Holders of a majority in aggregate principal amount at maturity of the
outstanding Notes may waive any existing default and its consequences, except
(i) any default in any payment on the Notes, (ii) any default with respect to
the conversion rights of the Notes, or (iii) any default in respect of certain
covenants or provisions in the Indenture which may not be modified without the
consent of the Holder of each Note as described in "Amendments and Supplements"
below. 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.
The Company will be required to furnish to the Trustee annually a statement
as to any default by the Company in the performance and observance of its
obligations under the Indenture. In addition, the Company shall file with the
Trustee written notice of the occurrence of any default or Event of Default
within five days of its becoming aware of such default or Event of Default.
15
<PAGE>
AMENDMENTS AND SUPPLEMENTS
Modification and amendment of the Indenture or the Notes may be effected by
the Company and the Trustee with the consent of the Holders of not less than a
majority in aggregate principal amount at maturity of the Notes then
outstanding. However, without the consent of each Holder affected thereby, no
amendment may, among other things, (i) reduce the principal amount at maturity,
Issue Price, Purchase Price, Change of Control Purchase Price or Redemption
Price with respect to any Note, or extend the stated maturity of any Note or
alter the manner or rate of accrual of Original Issue Discount or interest, or
make any Note payable in money or securities other than that stated in the Note;
(ii) make any reduction in the principal amount at maturity of Notes whose
Holders must consent to an amendment or any waiver under the Indenture or modify
the Indenture provisions relating to such amendments or waivers; (iii) make any
change that adversely affects the right to convert any Note or the right to
require the Company to purchase a Note; (iv) modify the provisions of the
Indenture relating to the subordination of the Notes in a manner adverse to the
Holders of the Notes; or (v) impair the right to institute suit for the
enforcement of any payment with respect to, or conversion of, the Notes. No
change that adversely affects the rights of any holder of Senior Indebtedness of
the Company under the subordination provisions of the Indenture may be made,
unless the requisite holders of Senior Indebtedness consent to such change
pursuant to the terms of such Senior Indebtedness.
Without the consent of any Holder of Notes, the Company and the Trustee may
amend the Indenture to (i) cure any ambiguity, defect or inconsistency,
PROVIDED, HOWEVER, that such amendment does not materially adversely affect the
rights of any Holder, (ii) provide for the assumption by a successor to the
Company of the obligations of the Company under the Indenture, (iii) provide for
uncertificated Notes in addition to certificated Notes, as long as such
uncertificated Notes are in registered form adequate for United States federal
income tax purposes, (iv) make any change that does not adversely affect the
rights of any Holder of Notes, (v) make any change to comply with any
requirement of the Commission in connection with the qualification of the
Indenture under the Trust Indenture Act of 1939, as amended, or (vi) add to the
covenants or obligations of the Company under the Indenture or surrender any
right, power or option conferred by the Indenture on the Company.
DISCHARGE OF THE INDENTURE
The Company may satisfy and discharge its obligations under the Indenture by
delivering to the Trustee for cancellation all outstanding Notes or by
depositing with the Trustee, the Paying Agent or the Conversion Agent, if
applicable, after the Notes have become due and payable, whether at stated
maturity, or any Redemption Date, or any Purchase Date, or a Change of Control
Purchase Date, upon conversion or otherwise, cash or Common Stock (as applicable
and as permitted by the terms of the Indenture) sufficient to pay all of the
outstanding Notes and paying all other sums payable under the Indenture by the
Company.
NO PERSONAL LIABILITY OF STOCKHOLDERS, OFFICERS, DIRECTORS AND EMPLOYEES
The Indenture provides that no past, present or future stockholder,
employee, officer or director, as such, of the Company or any successor
corporation shall have any personal liability in respect of the obligations of
the Company under the Indenture or the Notes by reason of his, her or its status
as such stockholder, employee, officer or director.
LIMITATIONS OF CLAIMS IN BANKRUPTCY
If a bankruptcy proceeding is commenced in respect of the Company, under
Title 11 of the United States Code, the claim of the Holder of a Note will
likely be limited to the Issue Price of the Note, plus that portion of the
Original Issue Discount that is deemed to have accrued from the date of issue to
the commencement of the proceeding.
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<PAGE>
INFORMATION CONCERNING THE TRUSTEE
Firstar Bank of Minnesota, N.A. serves as the Trustee, Registrar, Paying
Agent and Conversion Agent under the Indenture.
BOOK-ENTRY, DELIVERY AND FORM
The Notes were issued in the form of registered Notes in global form (the
"Global Notes"). Each Global Note was deposited on the date of the closing of
the sale of the Notes (the "Closing Date") with, or on behalf of, The Depository
Trust Company ("DTC" or the "Depositary") and registered in the name of Cede &
Co., as nominee of the Depositary. The Notes sold to Institutional Accredited
Investors initially were in the form of registered, certified (I.E., non-global)
Notes. Such non-global Notes held by Institutional Accredited Investors may only
be transferred to a person who takes delivery thereof in the form of an interest
in a Global Note and exchanged for a beneficial interest in a Global Note.
DTC is a limited-purpose trust company organized under the New York Banking
Law, a "banking organization" within the meaning of the New York Banking Law, a
member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code, and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Exchange Act. DTC
holds securities that its participants ("Participants") deposit with DTC. DTC
also facilitates the settlement among Participants of securities transactions,
such as transfers and pledges, in deposited securities through electronic
computerized book-entry changes in Participants' accounts, thereby eliminating
the need for physical movement of securities certificates. Direct Participants
include securities brokers and dealers, banks, trust companies, clearing
corporations, and certain other organizations ("Direct Participants"). DTC is
owned by a number of its Direct Participants and by the New York Stock Exchange,
Inc., the American Stock Exchange, Inc. and the National Association of
Securities Dealers, Inc. Access to the DTC system is also available to others
such as securities brokers and dealers, banks and trust companies that clear
through or maintain a custodial relationship with a Direct Participant, either
directly or indirectly ("Indirect Participants"). The rules applicable to DTC
and its Participants are on file with the SEC.
The Company expects that pursuant to procedures established by the
Depositary ownership of the Notes evidenced by the Global Notes will be shown
on, and the transfer of ownership thereof will be effected only through, records
maintained by the Depositary (with respect to the interests of Participants),
the Participants and the Indirect Participants. The laws of some states require
that certain persons take physical delivery in definitive form of securities
that they own and that security interests in negotiable instruments can only be
perfected by delivery of certificates representing the instruments.
Consequently, the ability to transfer Notes evidenced by the Global Notes will
be limited to such extent.
So long as the Depositary or its nominee is the registered owner of a Note,
the Depositary or such nominee, as the case may be, will be considered the sole
owner or holder of the Notes represented by the Global Note for all purposes
under the Indenture. Except as provided below, owners of beneficial interests in
a Global Note will not be entitled to have Notes represented by such Global Note
registered in their names, will not receive or be entitled to receive physical
delivery of Certificated Notes and will not be considered the owners or holders
thereof under the Indenture for any purpose, including with resect to the giving
of any directions, instructions or approvals to the Trustee thereunder. As a
result, the ability of a person having a beneficial interest in Notes
represented by a Global Note to pledge such interest to persons or entities that
do not participate in the Depositary's system, or to otherwise take actions with
respect to such interest, may be affected by the lack of a physical certificate
evidencing such interest.
Neither the Company nor the Trustee will have any responsibility or
liability for any aspect of the records relating to or payments made on account
of Notes by the Depositary, or for maintaining, supervising or reviewing any
records of the Depositary relating to such Notes.
Payments with respect to the principal of, premium, if any, interest on, any
Note represented by a Global Note registered in the name of the Depositary or
its nominee on the applicable record date will be
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<PAGE>
payable by the Trustee to or at the direction of the Depositary or its nominee
in its capacity as the registered Holder of the Global Note representing such
Notes under the Indenture. Under the terms of the Indenture, the Company and the
Trustee may treat the persons in whose names the Notes, including the Global
Notes, are registered as the owners thereof for the purpose of receiving such
payments and for any and all other purposes whatsoever. Consequently, neither
the Company nor the Trustee has or will have any responsibility or liability for
the payment of such amounts to beneficial owners of Notes (including principal,
premium, if any, or interest), or to immediately credit the accounts of the
relevant Participants with such payment, in amounts proportionate to their
respective holdings in principal amount of beneficial interests in the Global
Note as shown on the records of the Depositary. Payments by the Participants and
the Indirect Participants to the beneficial owners of Notes will be governed by
standing instructions and customary practice and will be the responsibility of
the Participants or the Indirect Participants.
CERTIFICATED NOTES
If the Company notifies the Trustee in writing that the Depositary is no
longer willing or able to act as a depositary and the Company is unable to
locate a qualified successor within 90 days, then, upon surrender by the
Depositary of the Global Notes, Certificated Notes will be issued to each person
that the Depositary identifies as the beneficial owner of the Notes represented
by Global Notes. Upon any such issuance, the Trustee is required to register
such Certificated Notes in the name of such person or persons (or the nominee of
any thereof), and cause the same to be delivered thereto.
Neither the Company nor the Trustee shall be liable for any delay by the
Depositary or any Participant or Indirect Participant in identifying the
beneficial owners of the Notes, and the Company and the Trustee may conclusively
rely on, and shall be protected in relying on, instructions from the Depositary
for all purposes (including with respect to the registration and delivery, and
the respective principal amounts, of the Notes to be issued).
The information in this section concerning the Depositary and the
Depositary's book-entry system has been obtained from sources that the Company
believes to be reliable. The Company has no responsibility for the performance
by the Depositary or its Participants of their respective obligations as
described hereunder or under the rules and procedures governing their respective
operations.
SAME-DAY FUNDS SETTLEMENT AND PAYMENT
The Indenture requires that payments in respect of the Notes represented by
the Global Notes (including principal, premium, if any, and interest) be made by
wire transfer of immediately available funds to the accounts specified by the
Depositary. With respect to Notes represented by Certificated Notes, the Company
will make all payments of principal, premium, if any, and interest, by mailing a
check to each such Holder's registered address. The Notes trade in the
Depositary's Same-Day Funds Settlement System until maturity, or until the Notes
are issued in certificated form, and secondary market trading activity in the
Notes is therefore required by the Depositary to settle in immediately available
funds. No assurance can be given as to the effect, if any, of settlement in
immediately available funds on trading activity in the Notes.
DESCRIPTION OF CAPITAL STOCK
The following statements with respect to the capital stock of the Company
are subject to the detailed provisions of the Company's restated certificate of
incorporation, as amended (the "Certificate of Incorporation"), and by-laws, as
amended (the "By-Laws"). These statements do not purport to be complete, or to
give full effect to the provisions of statutory or common law, and are subject
to, and are qualified in their entirety by reference to, the terms of the
Certificate of Incorporation and the By-Laws. The Certificate of Incorporation
and the By-Laws are incorporated by reference in the Company's Annual Report on
Form 10-K for the fiscal year ended August 31, 1997. The authorized capital
stock of the
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<PAGE>
Company consists of 900,000,000 shares of Common Stock, $0.01 par value, and
100,000,000 shares of undesignated preferred stock, $0.01 par value (the
"Preferred Stock"). At October 31, 1997, 213,867,058 shares of Common Stock and
no shares of Preferred Stock were outstanding.
COMMON STOCK
Each holder of Common Stock is entitled to one vote for each share held. The
holders of Common Stock, voting as a single class, are currently entitled to
elect all of the directors of the Company. In all matters other than the
election of directors, when a quorum is present at any stockholders' meeting,
the affirmative vote of the majority of shares present in person or represented
by proxy shall decide any question before such meeting. Directors are elected by
a plurality of the votes of the shares present in person or represented by proxy
at a stockholders' meeting. The holders of Common Stock are entitle to receive
ratably such dividends as may be declared by the board of directors out of funds
legally available therefor. In the event of a liquidation, dissolution or
winding up of the Company, the holders of Common Stock would be entitled to
share in the Company's assets remaining after the payment of liabilities and the
satisfaction of any liquidation preference granted the holders of any
outstanding shares of Preferred Stock. Holders of Common Stock have no
preemptive or other subscription rights. The shares of Common Stock are not
convertible into any other security. The outstanding shares of Common Stock are,
and the shares of Common Stock issuable upon conversion of the Notes will be,
fully paid and nonassessable.
PREFERRED STOCK
The Company is authorized to issue 100,000,000 shares of Preferred Stock
with such voting rights, designations, preferences and rights and such
qualifications, limitations or restrictions thereof, as may be determined by the
board of directors. The authorized shares of Preferred Stock, as well as shares
of Common Stock, will be available for issuance without further action by
stockholders of the Company, unless such action is required by applicable law or
the rules of any stock exchange or quotation system on which the Company's
securities may be listed or quoted.
CLASSIFIED BOARD OF DIRECTORS
The Company's board of directors is currently divided into three classes.
The members of the board of directors are elected to serve for three-year terms,
which are are staggered so that the term of one class of directors expires in
each year over a three year period. A classified board of directors may make it
more difficult to effect a change in control of the Company. This provision may
only be altered, amended or repealed with the approval of 66 2/3% of the
combined voting power of the Company's Voting Stock voting together as a single
class. "Voting Stock" means the securities of the Company which are entitled to
vote generally for the election of directors of the Company.
DELAWARE ANTI-TAKEOVER STATUTE
The Company is subject to Section 203 of the Delaware General Corporation
Law which prohibits a Delaware corporation from engaging in any business
combination with any interested stockholder for a period of three years
following the date that such stockholder became an interested stockholder,
unless, generally: (i) prior to such date, the board of directors of the
corporation approved either the business combination or the transaction which
resulted in the stockholder becoming an interested stockholder; (ii) upon
consummation of the transaction which resulted in the stockholder becoming an
interested stockholder, the interested stockholder owned at least 85% of the
voting stock of the corporation, subject to certain exclusions, outstanding at
the time the transaction commenced; or (iii) on or subsequent to such date, the
business combination is approved by the board of directors and authorized at an
annual or special meeting of stockholders, and not by written consent, by the
affirmative vote of at least 66 2/3% of the outstanding voting stock which is
not owned by the interested stockholder.
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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following summary of United States federal income tax considerations is
based on current law, regulations and judicial and administrative
interpretations thereof, all of which are subject to change. The tax treatment
of a Holder of a Note may vary depending upon his particular situation. Certain
Holders (including insurance companies, tax-exempt organizations, individual
retirement and other tax-deferred accounts, financial institutions, broker
dealers, foreign corporations and individuals who are not citizens or residents
of the United States) may be subject to special rules not discussed below. This
summary does not discuss the tax considerations of subsequent purchasers of
Notes and is limited to investors who hold Notes as capital assets. Each
purchaser of Notes should consult his tax advisor as to the particular tax
consequences to him of acquiring, holding, converting or otherwise disposing of
the Notes, including the applicability and the effect of any state, local or
foreign tax laws and recent changes in applicable tax laws.
The Company has been advised by its counsel that, based on current laws,
regulations and administrative and judicial standards, all of which are subject
to change, the Notes will be treated as indebtedness for United States federal
income tax purposes. Counsel has advised Costco that it is counsel's opinion
that, while the following does not purport to discuss all tax matters relating
to the Notes, based upon the Notes being treated as indebtedness, the following
are the material federal income tax consequences of the Notes, subject to the
qualifications set forth above.
ORIGINAL ISSUE DISCOUNT
The Notes were issued at a substantial discount from their principal amount
at maturity. For United States federal income tax purposes, the difference
between the issue price (the initial price at which the Notes are sold) or the
price at which the Notes were purchased and the stated principal amount at
maturity of each Note constitutes original issue discount ("Original Issue
Discount"). Holders of the Notes will be required to include Original Issue
Discount in income periodically over the term of the Notes before receipt of the
cash or other payment attributable to such income.
For United States income tax purposes, each Holder of a Note must generally
include in gross income a portion of the Original Issue Discount in each taxable
year during which the Note is held in an amount equal to the Original Issue
Discount that accrues on the Note during such period, determined by using a
constant yield to maturity method. The Original Issue Discount included in
income for each year will be calculated under a compounding formula that will
result in the allocation of less Original Issue Discount to the earlier years of
the term of the Note and more Original Issue Discount to later years. For the
approximate cumulative total amount of the Original Issue Discount accrued
annually, see the chart under "Description of the Notes--Redemptions of Notes at
the Option of the Company." Any amount included in income as Original Issue
Discount will increase a Holder's tax basis in the Note.
CONVERSION
A Holder's conversion of a Note into Common Stock is not a taxable event
(except with respect to cash received in lieu of a fractional share of Common
Stock). The Holder's tax basis in the Common Stock received on conversion of a
Note will be the same as the Holder's adjusted tax basis in the Note at the time
of conversion (exclusive of any basis allocable to a fractional share of Common
stock), and the holding period of the Common Stock received on conversion will
include the holding period of the Note converted, except that it is possible
that the Internal Revenue Service may argue that the holding period of the
common stock allocable to accrued Original Issue Discount will commence on the
date of the conversion.
OTHER DISPOSITION
If a Holder elects to exercise his option to tender a Note to the Company on
a Purchase Date and the Company issues Common Stock in satisfaction of the
Purchase Price, such exchange will be treated the same as a conversion. If a
Holder elects to exercise his option to tender a Note to the Company on a
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<PAGE>
Purchase Date and the Company delivers a combination of cash and Common stock in
satisfaction of the Purchase Price, a Holder that is an original purchaser of
the Notes generally should not have gain or loss. A holder that is not an
original purchaser of the Notes may have to recognize gain or loss if the cash
and the value of the Common Stock received is more or less than the Holder's tax
basis in the Note. A Holder's basis in the Common Stock received would be the
same as the Holder's basis in the Note put to the Company by the Holder
(exclusive of any basis allocable to a fractional share), decreased by the
amount of cash (other than cash received in lieu of a fractional share), if any,
received and increased by the amount of gain, if any recognized by the Holder
(other than gain with respect to a fractional share).
If a Holder elects to exercise his option to tender a Note to the Company on
a Purchase Date or a Change in Control Purchase Date and the Holder receives
cash, such a tender and purchase will be a taxable sale. The Holder will
recognize gain or loss upon the sale, measured by the difference between the
amount of cash transferred by the Company to the Holder in satisfaction of the
Purchase Price or the Change in Control Purchase Price and the Holder's basis in
the tendered Note. Gain or loss recognized by the Holder would be capital gain
or loss.
If a Holder sells a Note in the market, it will be a taxable sale with the
same results as a tender to the Company with a payment in cash.
Under the Taxpayer Relief Act of 1997, net capital gain (I.E., generally,
capital gain in excess of capital loss) recognized by the Holder upon the
disposition of a Note or such Common Stock that has been held for more than 18
months will generally be subject to tax at a rate not to exceed 20%. Net capital
gain recognized by the Holder upon the disposition of a Note or such Common
Stock that has been held for more than 12 months but not for more than 18 months
will continue to be subject to tax at a rate not to exceed 28% and capital gain
recognized from the disposition of a Note or Common Stock that has been held for
12 months or less will continue to be subject to tax at ordinary income tax
rates. In addition, capital gain recognized by a corporate taxpayer will
continue to be subject to tax at the ordinary income tax rates applicable to
corporations.
CONSTRUCTIVE DIVIDENDS
If at any time the Company makes a distribution of property to its
shareholders that would be taxable to such shareholders as a dividend for United
States federal income tax purposes and, in accordance with the anti-dilution
provisions of the Note, the Conversion Rate of the Note is increased, such
increase may be deemed to be the payment of a taxable dividend to Holders of the
Note. For example, an increase in the Conversion Rate in the event of
distributions of evidences of indebtedness or assets of the Company or an
increase in the event of an Extraordinary Cash Dividend will generally result in
deemed dividend treatment to Holders of the Note, but generally an increase in
the event of stock dividends or the distribution of rights to subscribe for
Common Stock will not. See "Description of the Notes-- Conversion."
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SELLING SECURITYHOLDERS
The following table sets forth certain information as of November 26 1997
(except as otherwise indicated) as to the security ownership of the Selling
Securityholders. JP Morgan Securities Inc. and Donaldson, Lufkin & Jenrette
Securities Corp. ("DLJ") have provided and will continue to provide financial
advisory services to the Company for which they have received customary fees.
Hamilton E. James, a Managing Director of DLJ, is a member of the Board of
Directors of the Company. Except as set forth for JP Morgan Securities Inc. and
DLJ, none of the Selling Securityholders has had a material relationship with
the Company or any of its predecessors or affiliates within the past three
years.
<TABLE>
<CAPTION>
FACE AMOUNT SHARES OF
OF NOTES COMMON STOCK
OWNED PRIOR OWNED PRIOR
SELLING SECURITYHOLDER TO OFFERING TO OFFERING(1)
- --------------------------------------------------------------------------------- -------------- --------------
<S> <C> <C>
American Investors Life Insurance Company........................................ $ 7,000,000 79,482(2)
American Travellers Life Insurance Company Convertible Fund...................... $ 333,000 3,781
Argent Classic Convertible Arbitrage Fund L.P.................................... $ 2,500,000 28,386
Aristeia Trading................................................................. $ 10,000,000 113,545
Associated Electric Gas & Insurance Services..................................... $ 1,750,000 19,870
Bankers Life & Casualty Convertible Fund......................................... $ 667,000 7,573
Beneficial Standard Life Insurance Company Convertible Fund...................... $ 1,000,000 11,355
BS Debt Income Fund--Class A..................................................... $ 25,000 284
Calamos Convertible Fund......................................................... $ 2,300,000 26,115
Calamos Global Growth and Income Fund............................................ $ 200,000 2,271
Calamos Growth and Income Fund................................................... $ 700,000 7,948
Capitol American Life Insurance Company Convertible Fund......................... $ 335,000 3,804
Champion International Corp. Master Retirement Trust............................. $ 2,950,000 33,496
City of Birmingham Retirement & Relief........................................... $ 3,000,000 34,064
Delta Airlines Master Trust...................................................... $ 6,550,000 74,372
Donaldson, Lufkin & Jenrette Securities Corporation.............................. $ 61,580,000 699,210
Dorinco Reinsurance Company...................................................... $ 3,000,000 34,064
The Dow Chemical Company Employees' Retirement Plan.............................. $ 4,775,000 54,218
Employers Reinsurance Corp....................................................... $ 8,000,000 90,836(2)
The Fondren Foundation........................................................... $ 175,000 1,987
FSA Inc.......................................................................... $ 1,240,000 14,080(3)
General Electric Mortgage Insurance Corporation.................................. $ 8,000,000 90,836
General Motors Investment Management Corporation................................. $ 35,000,000 397,408(2)
Genesee County Employees' Retirement System...................................... $ 1,250,000 14,193
Great American Reserve Insurance Company Convertible Fund........................ $ 667,000 7,573
Hawaiian Airlines Employees Pension Plan--IAM.................................... $ 285,000 3,236(3)
Hawaiian Airlines Pension Plan for Salaried Employees............................ $ 70,000 795(3)
Hawaiian Airlines Retirement Plan for Pilots..................................... $ 440,000 4,996(3)
Highbridge Capital Corporation................................................... $ 47,000,000 533,662
</TABLE>
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<TABLE>
<CAPTION>
FACE AMOUNT SHARES OF
OF NOTES COMMON STOCK
OWNED PRIOR OWNED PRIOR
SELLING SECURITYHOLDER TO OFFERING TO OFFERING(1)
- --------------------------------------------------------------------------------- -------------- --------------
Island Insurance Convertible Fund................................................ $ 300,000 3,406(3)
<S> <C> <C>
Kapiolani Medical System......................................................... $ 640,000 7,267(3)
The Kettering Medical Center Funded Depreciation Account......................... $ 200,000 2,271
Merrill Lynch Insurance Group.................................................... $ 320,000 3,633
Merrill Lynch, Pierce, Fenner & Smith Inc........................................ $ 54,339,000 616,992
JP Morgan Securities Inc......................................................... $ 22,125,000 251,218
Motors Insurance Corp............................................................ $ 4,500,000 51,095(2)
Nomura International PLC......................................................... $ 28,500,000 323,603
Occidental Petroleum Corp........................................................ $ 80,000 908
Orrington International Fund Ltd................................................. $ 1,400,000 15,896
Orrington Investments Limited Partnership........................................ $ 2,600,000 29,522
Physicians' Reciprocal Insurers Account #7....................................... $ 2,150,000 24,412
Port Authority of Allegheny County Retirement and Disability Allowance Plan for
the Employees Represented by Local 85 of the Amalgamated Transit Union......... $ 3,940,000 44,737
PRIM Board....................................................................... $ 3,750,000 42,579(3)
Regence Washington Health........................................................ $ 1,060,00 12,036(3)
RJR Nabisco, Inc. Defined Benefit Master Trust................................... $ 3,010,000 34,177
Salomon Brothers Total Return Fund............................................... $ 750,000 8,516(2)
SBC Warburg Dillon Read Inc.(4).................................................. $ 14,860,000 168,728
SoundShore Partners, L.P......................................................... $ 5,000,000 56,773
Southern Farm Bureau Life Insurance Company...................................... $ 1,100,000 12,490
SPT.............................................................................. $ 2,975,000 33,780
Starvest Investment Grade........................................................ $ 940,000 10,673(3)
State of Oregon Equity........................................................... $ 12,500,000 141,931(3)
State of Oregon/SAIF Corporation................................................. $ 8,000,000 90,836(3)
The Strategic Money Management Company B.V....................................... $ 3,000,000 34,064
Swiss Bank Corporation--London Branch(4)......................................... $ 33,630,000 381,852
Unifi, Inc. Profit Sharing Plan & Trust.......................................... $ 400,000 4,542
United Food and Commercial Workers Local 1262 and Employers Pension Fund......... $ 1,100,000 12,490
Valley Insurance Co.............................................................. $ 190,000 2,157(3)
-------------- --------------
TOTAL........................................................................ $ 424,151,000 4,816,024
</TABLE>
- ------------------------
(1) Includes the Shares into which the Notes are convertible.
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<PAGE>
(2) Salomon Brothers Asset Management Inc, as discretionary investment adviser
for the Selling Securityholder's account and others, may be deemed to be the
beneficial owner of 945,100 Shares, including the Selling Securityholder's
Shares.
(3) Froley Revy Investment Company Inc., as discretionary investment adviser for
the Selling Securityholder's account and others, may be deemed to be the
beneficial owner of 333,992 Shares, including the Selling Securityholder's
Shares.
(4) SBC Warburg Dillon Read Inc. acts as an investment adviser for Swiss Bank
Corporation--London Branch.
The preceding table has been prepared based upon information furnished to
the Company by Firstar Bank of Minnesota, N.A., as trustee under the Indenture,
and by or on behalf of the Selling Securityholders.
Information concerning the Selling Securityholders may change from time to
time and will be set forth in supplements to this Prospectus. As of the date of
this Prospectus, the aggregate principal amount at maturity of Notes outstanding
is $900,000,000. Because the Selling Securityholders may offer all or some of
the Notes and the Shares pursuant to the offering contemplated by this
Prospectus, and because there are currently no agreements, arrangements or
understandings with respect to the sale of any of the Notes or Shares by the
Selling Securityholders, no estimate can be given as to the principal amount of
Notes or Shares that will be held by the Selling Securityholders after
completion of this offering. See "Plan of Distribution."
PLAN OF DISTRIBUTION
The Notes and the Shares may be sold from time to time by the Selling
Securityholders, or by their pledgees, donees, transferees or other successors
in interest. Such sales may be made in an underwritten public offering, on any
national securities exchange or automated quotation system on which the Notes or
the Common Stock is listed or traded, in negotiated transactions or otherwise,
at prices then prevailing or related to the then-current market price or at
negotiated prices. The Notes and the Shares may be sold directly or through
brokers or dealers. Notes and Shares may be sold in a block trade (which may
involve crosses) in which the broker or dealer so engaged will attempt to sell
Shares as agent but may position and resell a portion of the block as principal
to facilitate the transaction, and the Notes and the Shares may be sold through
methods including: (a) purchases by a broker or dealer as principal and resale
by such broker or dealer for its account pursuant to this Prospectus; (b)
ordinary brokerage transactions and transactions in which the broker solicits
purchasers; and (c) privately negotiated transactions. In effecting sales,
brokers and dealers engaged by Selling Securityholders may arrange for other
brokers or dealers to participate. Brokers or dealers may receive commissions or
discounts from Selling Securityholders (or, if any such broker-dealer acts as
agent for the purchaser of such Shares, from such purchaser) in amounts to be
negotiated which are not expected to exceed those customary in the types of
transactions involved. A broker-dealer may agree with Selling Securityholders to
sell a specified number of Shares at a stipulated price per share, or a
specified principal amount of Notes at a stipulated price, and, to the extent
such broker-dealer is unable to do so acting as agent for such Selling
Securityholders, to purchase as principal any unsold Shares or principal amount
of Notes at the price required to fulfill the broker-dealer's commitment to such
Selling Securityholders. Broker-dealers that acquire Notes or Shares as
principal may thereafter resell such Notes or Shares, as the case may be, from
time to time in transactions (which may involve crosses and, block transactions
and sales to and through other broker-dealers, including transactions of the
nature described above) in the over-the-counter market or otherwise at prices
and on terms then prevailing at the time of sale, at prices then related to the
then-current market price or in negotiated transactions and, in connection with
such resales, may pay to or receive from the purchasers of such Notes or Shares
commissions as described above.
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<PAGE>
In connection with the distribution of the Notes and Shares, the Selling
Securityholders may enter into hedging transactions with broker-dealers. In
connection with such transactions, broker-dealers may engage in short sales of
the Shares in the course of hedging the positions they assume with the Selling
Securityholders. The Selling Securityholders may also sell the Shares short and
redeliver the Shares to close out the short positions. The Selling
Securityholders may also enter into option or other transactions with
broker-dealers which require the delivery to the broker-dealer of the Shares.
The Selling Securityholders may also loan or pledge the Shares to a
broker-dealer and the broker-dealer may sell the Shares so loaned or upon a
default the broker-dealer may effect sales of the pledged Shares. In addition to
the foregoing, the Selling Securityholders may enter into, from time to time,
other types of hedging transactions.
The outstanding Common Stock is listed for trading on The Nasdaq National
Market, and the Shares have been approved for listing thereon. The Notes are not
listed on The Nasdaq National Market or any U.S. or foreign exchange.
Accordingly, no assurance can be given as to the development of liquidity of any
trading market that may develop for the Notes.
The Selling Securityholders and any broker-dealers participating in the
distributions of the Notes and the Shares may be deemed to be "underwriters"
within the meaning of Section 2(11) of the Securities Act and any profit on the
sale of Notes and Shares by the Selling Securityholders and any commissions or
discounts given to any such broker-dealer may be deemed to be underwriting
commissions or discounts under the Securities Act.
Any securities covered by this Prospectus that qualify for sale pursuant to
Rule 144, Rule 144A or another exemption under the Securities Act may be sold
under Rule 144, Rule 144A or such other exemption rather than pursuant to this
Prospectus. There is no assurance that any Selling Securityholder will sell any
or all of the Notes or Shares described herein, and any Selling Securityholder
may transfer, devise or gift such securities by other means not described
herein.
The Company will pay all of the expenses incident to the offering and sale
of the Notes and the Shares, other than underwriting discounts and selling
commissions.
REGISTRATION RIGHTS AGREEMENT
The Company has filed the Registration Statement of which this Prospectus
forms a part pursuant to a Registration Rights Agreement dated as of August 19,
1997 between the Company and the Initial Purchasers of the Notes. The Company
has agreed to use its best efforts to keep the Registration Statement current
and effective until two years after the date the Registration Statement is
declared effective or such earlier date as all securities registrable thereunder
(the "Registrable Securities") shall have been disposed of or on which all
Registrable Securities held by persons that are not affiliates of the Company
may be resold without registration pursuant to Rule 144(k) under the Securities
Act.
The managing underwriters in an underwritten offering or placement agent in
a private offering of the Company's securities generally will have the right in
certain circumstances to prevent holders of the Notes and Shares from effecting
any private sale or distribution of the Notes or the Shares during the period
beginning 10 days prior to, and ending 90 days after, the closing date of such
offering.
Under the Registration Rights Agreement, the Company agrees to indemnify the
Initial Purchasers of the Notes, each Holder of Registrable Securities,
controlling persons of the foregoing and the respective officers, directors,
partners, employees, representatives and agents of the foregoing (any such
person, an "Indemnified Person") for any losses resulting from any material
misstatement or omission in this Prospectus or the Registration Statement of
which it forms a part, except those resulting from misstatements or omissions in
information relating to any Indemnified Person furnished in writing to the
Company by or on behalf of such Indemnified Person or resulting from the failure
of such Indemnified Person to deliver any prospectus required by the Securities
Act, which has been received by the Indemnified Person
25
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from the Company. A Holder of Registrable Securities participating in the
Registration Statment of which this Prospectus forms a part, agrees severally
and not jointly, to indemnify the Company, its directors, its officers and any
person controlling the Company within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act for any losses resulting from
any material misstatement or omission in information provided by the Indemnified
Person to the Company, and for the failure to make delivery of any prospectus
required by the Securities Act, which has been received by the Indemnified
Person from the Company.
This summary of certain provisions of the Registration Rights Agreement does
not purport to be complete and is subject to, and qualified in its entirety by
reference to, all the provisions of the Registration Rights Agreement.
LEGAL MATTERS
The validity of the Notes and the Shares offered hereby have been passed
upon for the Company by Foster Pepper & Shefelman PLLC, Seattle, Washington.
EXPERTS
The consolidated financial statements of the Company incorporated herein by
reference in this Prospectus have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report with respect
thereto and are incorporated herein by reference in reliance upon the report of
said firm and upon the authority of said firm as experts in accounting and
auditing.
26
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NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED
HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH
OFFER IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE
MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE SUCH DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
AVAILABLE INFORMATION..................................................... 2
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE........................... 2
THE COMPANY............................................................... 3
RATIO OF EARNINGS TO FIXED CHANGES........................................ 4
USE OF PROCEEDS........................................................... 4
DESCRIPTION OF THE NOTES.................................................. 5
DESCRIPTION OF CAPITAL STOCK.............................................. 18
CERTAIN UNITED STATES FEDERAL TAX CONSEQUENCES............................ 20
SELLING SECURITYHOLDERS................................................... 22
PLAN OF DISTRIBUTION...................................................... 24
LEGAL MATTERS............................................................. 26
EXPERTS................................................................... 26
</TABLE>
COSTCO COMPANIES, INC.
[LOGO]
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PROSPECTUS
---------------------
$900,000,000
ZERO COUPON CONVERTIBLE
SUBORDINATED NOTES DUE 2017
AND
10,219,050 SHARES OF COMMON STOCK
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