<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 2, 1994
REGISTRATION NO. 33-55481
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
POST-EFFECTIVE AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
PRICE ENTERPRISES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 6512 33-0628740
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
4649 MORENA BOULEVARD
SAN DIEGO, CALIFORNIA 92117
(619) 581-4600
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
DONALD E. BURDICK, ESQ.
PRICE/COSTCO, INC.
10809 120TH AVENUE NE
KIRKLAND, WASHINGTON 98033
(206) 803-8100
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
COPIES TO:
<TABLE>
<S> <C> <C>
SCOTT N. WOLFE, ESQ. JONATHAN K. LAYNE, ESQ. JOSEPH J. GIUNTA, ESQ.
LATHAM & WATKINS GIBSON, DUNN & CRUTCHER SKADDEN, ARPS, SLATE, MEAGHER &
701 "B" STREET, SUITE 333 SOUTH GRAND AVENUE FLOM
2100 LOS ANGELES, CALIFORNIA 300 SOUTH GRAND AVENUE
SAN DIEGO, CALIFORNIA 90071 LOS ANGELES, CALIFORNIA 90071
92101
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF SECURITIES TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT IS DECLARED EFFECTIVE.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PRICE ENTERPRISES, INC.
CROSS-REFERENCE SHEET FOR REGISTRATION STATEMENT ON FORM S-4
AND OFFERING CIRCULAR/PROSPECTUS
<TABLE>
<CAPTION>
FORM S-4 ITEM NUMBER AND CAPTION CAPTION IN OFFERING CIRCULAR/PROSPECTUS
- --------------------------------------------------- ----------------------------------------
<C> <S> <C>
A. INFORMATION ABOUT THE TRANSACTION
1. Forepart of Registration Statement and
Outside Front Cover Page of
Prospectus............................. Facing Page of Registration Statement;
Cross-Reference Sheet; Cover Page of
Offering Circular/Prospectus
2. Inside Front and Outside Back Cover
Pages
of Prospectus.......................... Available Information; Table of Contents
3. Risk Factors, Ratio of Earnings to Fixed
Charges, and Other Information......... Summary of Offering Circular/Prospectus;
Price Enterprises, Inc. Selected
Historical Financial Data; Price
Enterprises, Inc. Selected Unaudited
Pro Forma Financial Data; PriceCostco
Selected Historical Financial and
Operating Data; PriceCostco Selected
Unaudited Pro Forma Financial Data;
Comparative Per Share Data; Comparative
Market Prices and Dividends; Special
Considerations/Risk Factors; The
Transaction; The Exchange Offer; Price
Enterprises, Inc. Unaudited Pro Forma
Financial Information; PriceCostco
Unaudited Pro Forma Condensed Financial
Information; Price Enterprises, Inc.'s
Management's Discussion and Analysis of
Financial Condition and Results of
Operations; Selected Information with
Respect to PriceCostco; Business and
Properties of Price Enterprises;
Supplement
4. Terms of the Transaction................ Available Information; Summary of
Offering Circular/Prospectus; The
Transaction; The Exchange Offer; The
Agreement of Transfer and Plan of
Exchange; Certain Related Agreements;
Selected Information with Respect to
PriceCostco; Business and Properties of
Price Enterprises; Management of Price
Enterprises; Security Ownership; Price
Enterprises' Certificate of
Incorporation and Bylaws; Description
of Price Enterprises' Securities;
Comparison of Rights of Stockholders of
PriceCostco and Price Enterprises;
Supplement
5. PRO FORMA Financial Information......... Price Enterprises, Inc. Selected
Unaudited Pro Forma Financial Data;
PriceCostco Selected Unaudited Pro
Forma Financial Data; Price
Enterprises, Inc. Unaudited Pro Forma
Financial Information; PriceCostco
Unaudited Pro Forma Condensed Financial
Information; Supplement
6. Material Contacts With the
Company Being Acquired................. The Transaction; Business and Properties
of Price Enterprises; Management of
Price Enterprises; Supplement
</TABLE>
<PAGE>
<TABLE>
<C> <S> <C>
7. Additional Information Required for
Reoffering by Persons and Parties
Deemed to Be Underwriters.............. Not Applicable
8. Interests of Named Experts and
Counsel................................ The Transaction; The Exchange Offer;
Legal Matters; Experts
9. Disclosure of Commission Position on
Indemnification For Securities Act
Liabilities............................ Not Applicable
B. INFORMATION ABOUT THE REGISTRANT
10. Information With Respect to S-3
Registrants............................ Not Applicable
11. Incorporation of Certain Information
by Reference........................... Not Applicable
12. Information With Respect to S-2 or
S-3 Registrants........................ Not Applicable
13. Incorporation of Certain Information
by Reference........................... Not Applicable
14. Information With Respect to Registrants
Other Than S-3 or S-2 Registrants...... Price Enterprises, Inc. Selected
Historical Financial Data; Price
Enterprises, Inc. Selected Unaudited
Pro Forma Financial Data; Comparative
Per Share Data; Comparative Market
Prices and Dividends; Special
Considerations/Risk Factors; The
Transaction; The Exchange Offer; The
Agreement of Transfer and Plan of
Exchange; Certain Related Agreements;
Price Enterprises, Inc. Unaudited Pro
Forma Financial Information; Price
Enterprises, Inc.'s Management's
Discussion and Analysis of Financial
Condition and Results of Operations;
Business and Properties of Price
Enterprises; Management of Price
Enterprises; Security Ownership; Price
Enterprises' Certificate of
Incorporation and Bylaws; Description
of Price Enterprises' Securities;
Comparison of Rights of Stockholders of
PriceCostco and Price Enterprises;
Supplement
</TABLE>
<PAGE>
<TABLE>
<C> <S> <C>
C. INFORMATION ABOUT THE COMPANY BEING ACQUIRED
15. Information With Respect to S-3
Companies.............................. PriceCostco Selected Historical
Financial and Operating Data;
PriceCostco Selected Unaudited Pro
Forma Financial Data; Comparative Per
Share Data; Comparative Market Prices
and Dividends; Special
Considerations/Risk Factors; The
Transaction; The Exchange Offer; The
Agreement of Transfer and Plan of
Exchange; Certain Related Agreements;
PriceCostco Unaudited Pro Forma
Condensed Financial Information;
Selected Information with Respect to
PriceCostco; Security Ownership;
Supplement
16. Information With Respect to S-2 or S-3
Companies.............................. Not Applicable
17. Information With Respect to Companies
Other Than S-2 or S-3 Companies........ Not Applicable
D. VOTING AND MANAGEMENT INFORMATION
18. Information if Proxies, Consents or
Authorizations Are to be Solicited..... Not Applicable
19. Information if Proxies, Consents or
Authorizations Are Not to be Solicited,
or in an Exchange Offer................ Summary of Offering Circular/Prospectus;
The Transaction; The Agreement of
Transfer and Plan of Exchange; Business
and Properties of Price Enterprises;
Management of Price Enterprises;
Security Ownership; Supplement
</TABLE>
<PAGE>
[PriceCostco Logo]
December , 1994
Dear Stockholder:
Attached is a Supplement to the Offering Circular/Prospectus dated November
21, 1994.
On December 1, 1994, PriceCostco, Price Enterprises, Inc., Mexico Clubs,
L.L.C., Price Club de Mexico, S.A. de C.V. and Controladora Comercial Mexicana,
S.A. de C.V. executed a nonbinding expression of intent regarding the proposed
sale by Mexico Clubs of its 50% interest in Price Club Mexico to Controladora
Comercial Mexicana (or its assignee). The nonbinding expression of intent also
contemplates that, in connection with any such sale, certain agreements will be
entered into by PriceCostco and Price Club Mexico with respect to the use of the
"Price Club" name by Price Club Mexico, the sourcing of certain merchandise to
Price Club Mexico by PriceCostco, the use of certain computer software by Price
Club Mexico and the training of employees of Price Club Mexico by PriceCostco.
As described in the Offering Circular/Prospectus, Mexico Clubs is owned 51% by
Price Enterprises and 49% by PriceCostco; Controladora Comercial is a Mexican
company that holds the other 50% interest in Price Club Mexico.
This nonbinding expression of intent does not represent a binding agreement
of the parties, preliminary or otherwise. Consummation of the transactions
contemplated by the nonbinding expression of intent is subject to the execution
of definitive agreements. There can be no assurances that the parties will enter
into definitive agreements or that, if such agreements are entered into, that
the terms thereof will not vary from those described in the attached Supplement.
The Offering Circular/Prospectus, which was previously distributed to
PriceCostco stockholders, provides you with detailed information regarding the
transaction pursuant to which Price Enterprises will become a separate, publicly
traded company. The attached Supplement provides you with detailed information
regarding the proposed sale by Mexico Clubs of its 50% interest in Price Club
Mexico. We urge you to read the Offering Circular/Prospectus and the Supplement
carefully.
NEITHER PRICECOSTCO NOR THE BOARD OF DIRECTORS MAKES ANY RECOMMENDATION TO
ANY STOCKHOLDER WHETHER TO TENDER OR REFRAIN FROM TENDERING SHARES OF
PRICECOSTCO COMMON STOCK PURSUANT TO THE EXCHANGE OFFER. EACH STOCKHOLDER MUST
MAKE HIS OR HER DECISION WHETHER TO TENDER SHARES OF PRICECOSTCO COMMON STOCK
PURSUANT TO THE EXCHANGE OFFER AND, IF SO, HOW MANY SHARES TO TENDER.
Sincerely,
<TABLE>
<S> <C>
Robert E. Price James D. Sinegal
Chairman of the Board President and Chief Executive Officer
</TABLE>
THE TERMS OF THE TRANSACTION, INCLUDING THE EXCHANGE OFFER, HAVE NOT BEEN
MODIFIED FROM THE TERMS DESCRIBED IN THE OFFERING CIRCULAR/PROSPECTUS DATED
NOVEMBER 21, 1994.
ADDITIONAL COPIES OF THE OFFERING CIRCULAR/PROSPECTUS DATED NOVEMBER 21,
1994 MAY BE OBTAINED FROM THE INFORMATION AGENT AT THE ADDRESS OR TELEPHONE
NUMBER SET FORTH ON THE BACK COVER OF THE ATTACHED SUPPLEMENT.
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED DECEMBER 2, 1994.
SUPPLEMENT TO
PRICE/COSTCO, INC.
OFFERING CIRCULAR
---------------
PRICE ENTERPRISES, INC.
PROSPECTUS
---------------
OFFER TO EXCHANGE
ONE SHARE OF COMMON STOCK OF PRICE ENTERPRISES, INC.
FOR EACH SHARE OF COMMON STOCK OF PRICE/COSTCO, INC.
---------------------
THE EXCHANGE OFFER WILL EXPIRE AT 12:00 MIDNIGHT,
NEW YORK CITY TIME, ON DECEMBER 20, 1994.
This Supplement constitutes a Supplement to the Offering Circular of
Price/Costco, Inc. ("PriceCostco") dated November 21, 1994 and a Supplement to
the Prospectus of Price Enterprises, Inc. dated November 21, 1994 (together, and
as supplemented by this Supplement, the "Offering Circular/Prospectus") pursuant
to which PriceCostco is offering, upon the terms and subject to the conditions
set forth in the Offering Circular/Prospectus and in the related Letters of
Transmittal (which, together with the Offering Circular/Prospectus constitute
the "Exchange Offer"), to exchange one share of common stock, par value $.0001
per share ("Price Enterprises Common Stock"), of Price Enterprises, Inc., a
newly formed Delaware corporation and an indirect, wholly owned subsidiary of
PriceCostco ("Price Enterprises"), for each share of common stock, par value
$.01 per share ("PriceCostco Common Stock"), of PriceCostco, up to a maximum of
27 million shares of Price Enterprises Common Stock (constituting all of the
outstanding shares of Price Enterprises Common Stock). If more than 27 million
shares of PriceCostco Common Stock are validly tendered and not withdrawn in the
Exchange Offer prior to the Expiration Date, then, upon the terms and subject to
the conditions set forth in the Offering Circular/Prospectus and the Letters of
Transmittal, PriceCostco will accept 27 million shares for exchange on a pro
rata basis and shares of Price Enterprises Common Stock will be exchanged
therefor. If less than 21.6 million shares of PriceCostco Common Stock are
validly tendered in the Exchange Offer, then PriceCostco will accept such shares
for exchange and will distribute to holders of PriceCostco Common Stock all the
remaining shares of Price Enterprises Common Stock held by PriceCostco on a pro
rata basis. If at least 21.6 million shares of PriceCostco Common Stock, but
less than 27 million shares, are validly tendered, then PriceCostco will accept
such shares for exchange and will, at its option, either (i) distribute the
remaining shares of Price Enterprises Common Stock held by PriceCostco, as set
forth in the previous sentence, or (ii) sell such shares to Price Enterprises in
exchange for a promissory note, all as more fully described in the Offering
Circular/Prospectus. In such event, PriceCostco currently intends to sell such
shares to Price Enterprises in exchange for a promissory note.
THIS SUPPLEMENT SUPPLEMENTS AND AMENDS THE OFFERING CIRCULAR/PROSPECTUS AND
SHOULD BE READ ONLY IN CONJUNCTION WITH THE OFFERING CIRCULAR/PROSPECTUS AND THE
DOCUMENTS INCORPORATED BY REFERENCE THEREIN. Capitalized terms used but not
defined in this Supplement shall have the meanings set forth in the Offering
Circular/Prospectus. A copy of the Offering Circular/Prospectus has previously
been furnished to all PriceCostco stockholders of record as of November 15,
1994. Requests for information or additional copies of the Offering Circular/
Prospectus should be directed to the Information Agent at the address or
telephone number set forth on the back cover of this Supplement.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THE OFFERING CIRCULAR/PROSPECTUS
IN CONNECTION WITH THE OFFERING OF SECURITIES MADE BY THE OFFERING
CIRCULAR/PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY PRICECOSTCO OR PRICE
ENTERPRISES. THE DELIVERY OF THE OFFERING CIRCULAR/PROSPECTUS OR ANY
DISTRIBUTION OF SECURITIES MADE THEREUNDER, SHALL NOT UNDER ANY CIRCUMSTANCES
CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE INFORMATION SET
FORTH THEREIN SINCE THE DATE OF THIS SUPPLEMENT. THE OFFERING
CIRCULAR/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF
AN OFFER TO BUY, ANY SECURITIES BY ANYONE IN ANY JURISDICTION IN WHICH SUCH
OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER
OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO
MAKE SUCH SOLICITATION.
The procedures for tendering shares of PriceCostco Common Stock in the
Exchange Offer are described in the section of the Offering Circular/Prospectus
entitled "THE EXCHANGE OFFER -- Procedures for Tendering." Tendering
stockholders may use the Letter of Transmittal and the Notice of Guaranteed
Delivery previously mailed to stockholders or the Letter of Transmittal and the
Notice of Guaranteed delivery enclosed with this Supplement. ANY STOCKHOLDER WHO
HAS PROPERLY TENDERED SHARES OF PRICECOSTCO COMMON STOCK PRIOR TO THE DATE OF
THIS SUPPLEMENT, AND WHO HAS NOT WITHDRAWN SUCH SHARES, NEED NOT TAKE ANY ACTION
UNLESS SUCH STOCKHOLDER WISHES TO WITHDRAW SUCH PREVIOUSLY TENDERED SHARES.
------------------------------
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 OFFERING CIRCULAR/PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE
MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
------------------------
THE OFFERING CIRCULAR/PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH
ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. SUCH DOCUMENTS (OTHER THAN
EXHIBITS TO SUCH DOCUMENTS UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY
REFERENCE) ARE AVAILABLE TO ANY PERSON, INCLUDING ANY BENEFICIAL OWNER, TO WHOM
THIS OFFERING CIRCULAR/PROSPECTUS IS DELIVERED, ON WRITTEN OR ORAL REQUEST,
WITHOUT CHARGE, DIRECTED TO PRICE/COSTCO, INC., 10809 120TH AVENUE NE, KIRKLAND,
WASHINGTON 98033 (TELEPHONE NUMBER (206) 803-8100), ATTENTION: DONALD E.
BURDICK, VICE PRESIDENT. IN ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS,
ANY REQUESTS SHOULD BE MADE BY DECEMBER 13, 1994.
------------------------------
The date of this Supplement is December , 1994.
<PAGE>
INTRODUCTION
The purpose of this Supplement is to advise PriceCostco stockholders that on
December 1, 1994, PriceCostco, Price Enterprises, Mexico Clubs, Price Club
Mexico and Comercial Mexicana executed a Memorandum of Understanding (the
"Memorandum of Understanding") regarding (i) the proposed purchase by Comercial
Mexicana or its assignee of the 50% interest in Price Club Mexico owned
indirectly by Mexico Clubs and (ii) PriceCostco and Price Club Mexico entering
into certain agreements, in connection with such transaction, with respect to
the use of the "Price Club" name by Price Club Mexico, the sourcing of certain
merchandise to Price Club Mexico by PriceCostco, the use of certain computer
software by Price Club Mexico and the training of employees of Price Club Mexico
by PriceCostco.
The Memorandum of Understanding expresses the non-binding intent of the
parties and is not intended to be a binding agreement, preliminary or otherwise.
Consummation of the transactions contemplated by the Memorandum of Understanding
is subject to the execution of definitive agreements. If definitive agreements
are not executed on or before December 31, 1994, the Memorandum of Understanding
will have no further force or effect.
The Memorandum of Understanding contemplates that Comercial Mexicana (or its
assignee, subject to the consent of PriceCostco) will purchase the 50% interest
in Price Club Mexico by purchasing all of the shares of capital stock of Primex
owned by Mexico Clubs for a purchase price of $95 million in cash in U.S.
Dollars. Primex is a wholly owned subsidiary of Mexico Clubs that holds Mexico
Clubs' 50% interest in Price Club Mexico. The Memorandum of Understanding
provides that such purchase is to occur within 120 days of December 1, 1994. The
Memorandum of Understanding also provides that all amounts payable to
PriceCostco and Mexico Clubs by Price Club Mexico pursuant to the open account
payable of Price Club Mexico shall have been paid in full in U.S. Dollars before
execution of any definitive stock purchase agreement. As of November 28, 1994,
the amount of such account payable was approximately $15.3 million.
The Memorandum of Understanding also contemplates that PriceCostco (or one
of its subsidiaries) and Price Club Mexico will enter into certain agreements,
including (a) a service and trademark license agreement pursuant to which
PriceCostco will grant Price Club Mexico a limited, nontransferable right to use
the trade and service mark "Price Club" in Mexico for the operation of
membership warehouses selling food and non-food items through a central checkout
utilizing at least 4,000 square meters and PriceCostco will allow employees of
Price Club Mexico to attend certain training courses, (b) a computer software
agreement pursuant to which Price Club Mexico will have the right to use certain
computer software owned by PriceCostco and (c) a merchandise supply agreement
pursuant to which PriceCostco will source certain goods for Price Club Mexico.
Under the proposed service and trademark license agreement, PriceCostco would
receive a payment of $6.125 million from Price Club Mexico payable in the form
of a promissory note, and quarterly royalties based on sales of products and
services by Price Club Mexico. Under the proposed merchandise supply agreement,
Price Club Mexico would purchase the on-hand inventory located at PriceCostco's
City of Industry depot facility and at Mexico Clubs' depot facility in Laredo,
Texas. Price Club Mexico would also assume responsibility for the operation of
the Laredo, Texas depot facility and would assume the lease for such facility.
Separate and apart from the proposed merchandise supply agreement between
PriceCostco and Price Club Mexico, Mexico Clubs will offer to source goods to
Price Club Mexico, but there can be no assurances that the parties will agree on
acceptable terms for such sales or that any such sales would occur.
Upon the closing of the transactions contemplated by the Memorandum of
Understanding, the parties would terminate the existing Joint Venture Agreement
relating to Price Club Mexico. In addition, at such time, the Mexico Operating
Agreement between Mexico Clubs, Price Enterprises, Price and PriceCostco would
terminate by its terms.
Any proceeds received by Mexico Clubs as a result of the sale of capital
stock of Primex to Comercial Mexicana (or its assignee) will be distributed to
PriceCostco and Price Enterprises based on their ownership interests in Mexico
Clubs, which are 49% and 51%, respectively.
2
<PAGE>
The Board of Directors of Price Enterprises, and Price Enterprises and
PriceCostco as the owners of Mexico Clubs, have preliminarily approved the sale
of the shares of capital stock of Primex to Comercial Mexicana (or its
assignee), having concluded that such sale is in the best interests of each of
Price Enterprises and Mexico Clubs. The Board of Directors of PriceCostco has
preliminarily approved the agreements to be entered into between PriceCostco and
Price Club Mexico, having concluded that the sale of the shares of capital stock
of Primex to Comercial Mexicana (or its assignee) and entering into the
agreements contemplated by the Memorandum of Understanding are in the best
interests of PriceCostco.
THE MEMORANDUM OF UNDERSTANDING EXPRESSES THE NON-BINDING INTENT OF
PRICECOSTCO, PRICE ENTERPRISES, MEXICO CLUBS, PRICE CLUB MEXICO AND COMERCIAL
MEXICANA AND IS NOT INTENDED TO BE A BINDING AGREEMENT, PRELIMINARY OR
OTHERWISE. CONSUMMATION OF THE TRANSACTIONS CONTEMPLATED BY THE MEMORANDUM OF
UNDERSTANDING IS SUBJECT TO THE EXECUTION OF DEFINITIVE AGREEMENTS. IF
DEFINITIVE AGREEMENTS ARE NOT EXECUTED ON OR BEFORE DECEMBER 31, 1994, THE
MEMORANDUM OF UNDERSTANDING WILL HAVE NO FURTHER FORCE OR EFFECT. THERE CAN BE
NO ASSURANCES THAT THE PARTIES WILL ENTER INTO DEFINITIVE AGREEMENTS WITH
RESPECT TO THE TRANSACTIONS CONTEMPLATED BY THE MEMORANDUM OF UNDERSTANDING OR
THAT, IF SUCH AGREEMENTS ARE ENTERED INTO, THAT THE TERMS THEREOF WILL NOT VARY
FROM THOSE DESCRIBED ABOVE. IN ADDITION, IF A DEFINITIVE STOCK PURCHASE
AGREEMENT IS EXECUTED, CONSUMMATION OF THE TRANSACTIONS CONTEMPLATED THEREBY
WILL LIKELY BE SUBJECT TO CERTAIN CONDITIONS. THERE CAN BE NO ASSURANCES THAT
SUCH CONDITIONS WILL BE SATISFIED OR WAIVED AND THAT THE TRANSACTIONS
CONTEMPLATED BY ANY SUCH AGREEMENT WILL BE CONSUMMATED.
3
<PAGE>
PRICE ENTERPRISES, INC.
SELECTED UNAUDITED SUPPLEMENTAL PRO FORMA FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The selected historical and pro forma income statement and balance sheet
data has been derived from "PRICE ENTERPRISES, INC. SELECTED UNAUDITED PRO FORMA
FINANCIAL DATA" and "PRICE ENTERPRISES, INC. UNAUDITED PRO FORMA FINANCIAL
INFORMATION" which is included in the Offering Circular/Prospectus. The selected
unaudited supplemental pro forma financial data of Price Enterprises set forth
below has been derived from "PRICE ENTERPRISES, INC. UNAUDITED SUPPLEMENTAL PRO
FORMA FINANCIAL INFORMATION," which is included elsewhere in this Supplement,
and includes certain supplemental pro forma adjustments to the unaudited pro
forma financial data of Price Enterprises included in the Offering
Circular/Prospectus. The selected unaudited supplemental pro forma income
statement data for the fiscal year ended August 28, 1994 have been prepared
assuming the sale by Mexico Clubs of its 50% interest in Price Club Mexico on
the terms described in this Supplement and as if the sale of such interest in
Price Club Mexico occurred on the first day of fiscal 1994. The selected
unaudited supplemental pro forma balance sheet data has been prepared assuming
the sale by Mexico Clubs of its 50% interest in Price Club Mexico on the terms
described in this Supplement and as if the sale of such interest in Price Club
Mexico occurred on August 28, 1994. The supplemental selected unaudited pro
forma financial data set forth below is not necessarily indicative of the
financial position or results of operations that actually would have occurred if
the sale of such interest in Price Club Mexico had been consummated as of the
first day of fiscal 1994 or as of August 28, 1994. The unaudited supplemental
pro forma selected financial data should be read in connection with "PRICE
ENTERPRISES, INC. UNAUDITED SUPPLEMENTAL PRO FORMA FINANCIAL INFORMATION" and
the related notes and assumptions.
<TABLE>
<CAPTION>
FISCAL YEAR 1994 (1)
----------------------------------------
SUPPLEMENTAL
HISTORICAL PRO FORMA(2) PRO FORMA(3)
---------- ------------ ------------
<S> <C> <C> <C>
Income Statement Data
Real estate rentals....................................... $ 29,265 $ 36,281 $ 36,281
Gains on sale of real estate.............................. 5,474 5,474 5,474
Merchandise sales......................................... 53,015 53,015 53,015
Real estate expenses...................................... 17,623 17,796 17,796
Merchandise costs and expenses............................ 57,997 57,997 57,997
General and administrative................................ 1,600 3,100 3,100
Provision for asset impairments........................... 90,227 90,227 90,227
Operating loss............................................ (79,693) (74,350) (74,350)
Interest income and other, net............................ 9,947 9,947 8,234
Loss before benefit for income taxes...................... (69,746) (64,403) (66,116)
Net loss (4)(5)........................................... $ (41,479) $(38,327) $(40,040)
Net loss per common share (4)(5).......................... $ (1.42) $ (1.48)
Number of shares used in calculation...................... 27,000 27,000
</TABLE>
<TABLE>
<CAPTION>
AUGUST 28, 1994
----------------------------------------
SUPPLEMENTAL
HISTORICAL PRO FORMA(2) PRO FORMA(3)
---------- ------------ ------------
<S> <C> <C> <C>
Balance Sheet Data
Real estate assets, net................................... $ 447,387 $449,487 $448,698
Total assets.............................................. 650,553 624,919 599,153
Long-term debt (5)........................................ -- -- --
Investment by PriceCostco/Stockholders' equity (5)........ 578,788 574,269 581,830
</TABLE>
- ------------------------
(1) Price Enterprises reports its financial position and results of operations
utilizing a 52 or 53 week fiscal year which ends on the Sunday nearest
August 31.
(FOOTNOTES CONTINUED ON NEXT PAGE)
4
<PAGE>
(2) As more fully described in the Offering Circular/Prospectus under "PRICE
ENTERPRISES, INC. UNAUDITED PRO FORMA FINANCIAL INFORMATION," the unaudited
pro forma adjustments to the income statement data record (i) the inclusion
of the Warehouse Properties' rentals and related expenses, (ii) certain
additional general and administrative expenses, (iii) a reduction of
depreciation expense and (iv) related income tax effects. The unaudited pro
forma adjustments to the balance sheet data include the elimination of
working capital retained by PriceCostco, accrual of estimated organization
costs and the transfer of remaining real estate assets purchased and
transferred by PriceCostco in fiscal 1995.
(3) As more fully described herein under "PRICE ENTERPRISES, INC. UNAUDITED
SUPPLEMENTAL PRO FORMA FINANCIAL INFORMATION," the unaudited supplemental
pro forma adjustments to the income statement data reflect the elimination
of Price Enterprises' share of equity in earnings of Price Club Mexico,
which assumes the sale by Mexico Clubs of its 50% interest in Price Club
Mexico on the terms described in this Supplement. The unaudited supplemental
pro forma adjustments to the balance sheet data record (i) the elimination
of the 50% interest in Price Club Mexico and PriceCostco's minority interest
in Mexico Clubs and (ii) the net after-tax cash proceeds as of August 28,
1994 of approximately $42.2 million for Price Enterprises' 51% interest in
Mexico Clubs including approximately $6 million reflecting the after-tax
gain on the sale. The supplemental pro forma statement of income does not
include any adjustment to reflect interest earnings on the $42.2 million of
net after-tax cash proceeds. Net after-tax cash proceeds of $42.2 million
does not include returns of fiscal 1995 contributions and earnings of
approximately $2.1 million.
(4) Unaudited pro forma net loss per common share, long-term debt and
stockholders' equity assumes all shares of Price Enterprises Common Stock
are issued in the Exchange Offer or distributed to PriceCostco stockholders
following the Exchange Offer. If only 21.6 million shares of Price
Enterprises Common Stock are issued in the Exchange Offer, and Price
Enterprises purchases the remaining 5.4 million shares of Price Enterprises
Common Stock from PriceCostco for a note in the principal amount of
approximately $82.4 million (assuming a per share price for Price
Enterprises Common Stock of $15.25, and an interest rate on the outstanding
note of approximately 6%), then unaudited pro forma net loss per common
share for fiscal 1994 would be $1.91, and long-term debt and stockholders'
equity as of August 28, 1994 would be approximately $82.4 million and $491.9
million, respectively. Assuming the sale of the 50% interest in Price Club
Mexico was also completed, then unaudited pro forma net loss per common
share for fiscal 1994 would be $1.92, and long-term debt and stockholders'
equity as of August 28, 1994 would be approximately $40.2 million and $499.0
million, respectively. See "THE TRANSACTION -- The Distribution" in the
Offering Circular/Prospectus for a description of the terms of the notes.
(5) Includes a provision for asset impairments of $90,200 pre-tax which includes
$80,500 pre-tax ($47,500 after tax or $1.76 net loss per pro forma common
share) related to a change in calculating estimated losses for assets which
are considered to be economically impaired. If the $80,500 pre-tax provision
for asset impairments were excluded, pro forma net income for fiscal 1994
would have been approximately $9,173 or $.34 per common share. Assuming the
sale of the 50% interest in Price Club Mexico was completed, then unaudited
supplemental pro forma net income for fiscal 1994 would have been
approximately $7,460 or $.28 per common share.
5
<PAGE>
PRICE ENTERPRISES, INC.
UNAUDITED SUPPLEMENTAL PRO FORMA FINANCIAL INFORMATION
The following unaudited supplemental pro forma condensed balance sheet of
Price Enterprises as of August 28, 1994 and unaudited supplemental pro forma
statement of income for the 52 weeks ended August 28, 1994 have been prepared
assuming the sale by Mexico Clubs of its 50% interest in Price Club Mexico on
the terms described in this Supplement, and includes certain pro forma
adjustments to the pro forma financial data of Price Enterprises included in the
Offering Circular/Prospectus required to reflect such sale. The unaudited
supplemental pro forma condensed balance sheet has been prepared as if the
Transaction and the sale of such interest in Price Club Mexico occurred on
August 28, 1994. The unaudited supplemental pro forma statement of income has
been prepared as if the Transaction and the sale of such interest in Price Club
Mexico occurred on the first day of fiscal 1994. The unaudited supplemental pro
forma financial information is not necessarily indicative of the results that
actually would have occurred if the Transaction and the sale by Mexico Clubs of
its 50% interest in Price Club Mexico had been consummated as of August 28, 1994
or at the beginning of fiscal 1994.
6
<PAGE>
PRICE ENTERPRISES, INC.
UNAUDITED SUPPLEMENTAL PRO FORMA CONDENSED BALANCE SHEET
AS OF AUGUST 28, 1994
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
SUPPLEMENTAL
PRO FORMA SUPPLEMENTAL
PRO FORMA ADJUSTMENTS PRO FORMA
--------- ----------- ---------
<S> <C> <C> <C>
REAL ESTATE ASSETS, NET..................................... $449,487 $ (789)(2) $448,698
CURRENT ASSETS.............................................. 2,678 42,249(1) 44,927
INVESTMENT IN PRICE CLUB MEXICO
JOINT VENTURE.............................................. 67,226 (67,226)(2) --
NOTES RECEIVABLE............................................ 73,023 73,023
DEFERRED INCOME TAXES....................................... 23,282 23,282
OTHER ASSETS................................................ 9,223 9,223
--------- ----------- ---------
$624,919 $ (25,766) $599,153
--------- ----------- ---------
--------- ----------- ---------
LIABILITIES AND INVESTMENT BY PRICECOSTCO/STOCKHOLDERS' EQUITY
LIABILITIES................................................. $ 15,739 $ -- $ 15,739
LONG-TERM DEBT.............................................. --(3) -- --(3)
MINORITY INTEREST OF PRICECOSTCO............................ 34,911 (33,327)(2) 1,584
INVESTMENT BY PRICECOSTCO/STOCKHOLDERS' EQUITY.............. 574,269(3) 42,249(1) 581,830(3)
(34,688)(2)
--------- ----------- ---------
$624,919 $ (25,766) $599,153
--------- ----------- ---------
--------- ----------- ---------
</TABLE>
7
<PAGE>
PRICE ENTERPRISES, INC.
UNAUDITED SUPPLEMENTAL PRO FORMA STATEMENT OF INCOME
FIFTY-TWO WEEKS ENDED AUGUST 28, 1994
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SUPPLEMENTAL
PRO FORMA SUPPLEMENTAL
PRO FORMA ADJUSTMENTS PRO FORMA
--------- ----------- -----------
<S> <C> <C> <C>
REVENUES
Real estate rentals.................... $ 36,281 $-- $36,281
Gains on sale of real estate........... 5,474 -- 5,474
Merchandise sales...................... 53,015 -- 53,015
--------- ----------- -----------
Total revenues....................... 94,770 -- 94,770
OPERATING EXPENSES
Real estate expenses................... 17,796 -- 17,796
Merchandise costs and expenses......... 57,997 -- 57,997
General and administrative............. 3,100 -- 3,100
Provision for asset impairments........ 90,227 -- 90,227
--------- ----------- -----------
Total operating expenses............. 169,120 -- 169,120
--------- ----------- -----------
Operating loss....................... (74,350) -- (74,350)
INTEREST AND OTHER....................... 9,947 (1,713)(4) 8,234
--------- ----------- -----------
Loss before provision for income
taxes............................... (64,403) (1,713) (66,116)
BENEFIT FOR INCOME TAXES................. (26,076) -- (4) (26,076)
--------- ----------- -----------
Net loss............................. $(38,327) $(1,713) $(40,040)
--------- ----------- -----------
--------- ----------- -----------
Net loss per common share (2)........ $(1.42)(5) $(1.48)(5)
Number of shares used in
calculation....................... 27,000 27,000
</TABLE>
8
<PAGE>
PRICE ENTERPRISES, INC.
NOTES AND ASSUMPTIONS TO UNAUDITED SUPPLEMENTAL
PRO FORMA FINANCIAL INFORMATION
(1) To record the estimated net after-tax cash proceeds as of August 28, 1994 of
approximately $42.2 million for Price Enterprises' 51% interest in Mexico
Clubs including a net after-tax gain of approximately $6 million realized by
Price Enterprises on the sale by Mexico Clubs of the shares of capital stock
of Primex owned by Mexico Clubs. The supplemental pro forma statement of
income does not include any adjustment to reflect interest earnings on the
$42.2 million of net cash proceeds. Net after-tax cash proceeds of $42.2
million does not include returns of fiscal 1995 contributions and earnings
of approximately $2.1 million.
(2) To reflect the sale of the 50% interest in Price Club Mexico and the
elimination of PriceCostco's minority interest in Mexico Clubs.
(3) Unaudited pro forma net loss per common share, long-term debt and
stockholders' equity assumes all shares of Price Enterprises Common Stock
are issued in the Exchange Offer or distributed to PriceCostco stockholders
following the Exchange Offer. If only 21.6 million shares of Price
Enterprises Common Stock are issued in the Exchange Offer, and Price
Enterprises purchases the remaining 5.4 million shares of Price Enterprises
Common Stock from PriceCostco for a note in the principal amount of
approximately $82.4 million (assuming a per share price for Price
Enterprises Common Stock of $15.25, and an interest rate on the outstanding
note of approximately 6%), then unaudited pro forma net loss per common
share for fiscal 1994 would be $1.91, and long-term debt and stockholders'
equity as of August 28, 1994 would be approximately $82.4 million and $491.9
million, respectively. Assuming the sale of the 50% interest in Price Club
Mexico was also completed, then unaudited pro forma net loss per common
share for fiscal 1994 would be $1.92, and long-term debt and stockholders'
equity as of August 28, 1994 would be approximately $40.2 million and $499.0
million, respectively. See "THE TRANSACTION -- The Distribution" in the
Offering Circular/Prospectus for a description of the terms of the notes.
(4) To eliminate Price Enterprises' share of equity in earnings of Price Club
Mexico included in Interest and other income on an after-tax basis.
(5) Includes a provision for asset impairments of $90,200 pre-tax which includes
$80,500 pre-tax ($47,500 after tax or $1.76 net loss per pro forma common
share) related to a change in calculating estimated losses for assets which
are considered to be economically impaired. If the $80,500 pre-tax provision
for asset impairments were excluded, pro forma net income for fiscal 1994
would have been approximately $9,173 or $.34 per common share. Assuming the
sale of the 50% interest in Price Club Mexico was also completed, then
unaudited pro forma net income for fiscal 1994 would have been approximately
$7,460 or $.28 per common share.
9
<PAGE>
SUPPLEMENTAL LIQUIDITY AND CAPITAL RESOURCES
Assuming the proposed sale of the 50% interest in Price Club Mexico owned
indirectly by Mexico Clubs is completed, then Price Enterprises would not be
required to make any additional investment in Mexico Clubs, which was
anticipated to be approximately $35 to $40 million during fiscal year 1995 and
which totalled approximately $2 million from August 29, 1994 through November
20, 1994. In addition, Price Enterprises would receive net after-tax cash
proceeds of approximately $44 million, which would be available to fund other
activities or reduce any outstanding indebtedness.
PROCEDURES FOR TENDERING SHARES
OF PRICECOSTCO COMMON STOCK
The procedures for tendering shares of PriceCostco Common Stock in the
Exchange Offer are described in the section of the Offering Circular/Prospectus
entitled "THE EXCHANGE OFFER -- Procedures for Tendering." Tendering
stockholders may use the Letter of Transmittal and the Notice of Guaranteed
Delivery previously mailed to stockholders or the Letter of Transmittal and the
Notice of Guaranteed Delivery enclosed with this Supplement. ANY STOCKHOLDER WHO
HAS PROPERLY TENDERED SHARES OF PRICECOSTCO COMMON STOCK PRIOR TO THE DATE OF
THIS SUPPLEMENT, AND WHO HAS NOT WITHDRAWN SUCH SHARES, NEED NOT TAKE ANY ACTION
UNLESS SUCH STOCKHOLDER WISHES TO WITHDRAW SUCH PREVIOUSLY TENDERED SHARES.
10
<PAGE>
The Letters of Transmittal, certificates for shares of PriceCostco Common
Stock and any other required documents should be sent or delivered by each
stockholder of PriceCostco or his or her broker, dealer, commercial bank, trust
company or other nominee to the Exchange Agent at one of the addresses set forth
below:
FIRST INTERSTATE BANK OF WASHINGTON, N.A., EXCHANGE AGENT
<TABLE>
<S> <C> <C>
BY MAIL: BY OVERNIGHT DELIVERY: BY HAND (ONLY):
First Interstate Bank of First Interstate Bank of First Interstate Bank of
Washington, N.A. Washington, N.A. Washington, N.A.
c/o MSTS c/o MSTS Stock Transfer, 14th Floor
P.O. Box 845 Attn: Reorg. Dept., 1st Floor 999 Third Ave.
Midtown Station 85 Challenger Rd. Seattle, WA 91804
New York, NY 10018 Ridgefield Park, NJ 07660 or
Special Services Section
26610 West Agoura Road
Calabasas, CA 91302
or
120 Broadway, 33rd Floor
New York, NY 10271
</TABLE>
Questions and requests for assistance may be directed to the Information
Agent at the address and telephone numbers set forth below. Additional copies of
the Offering Circular/Prospectus, this Supplement, the Letter of Transmittal and
other Exchange Offer materials may be obtained from the Information Agent as set
forth below. You may also contact your broker, dealer, commercial bank, trust
company or other nominee for assistance concerning the Exchange Offer.
THE INFORMATION AGENT FOR THE EXCHANGE OFFER IS:
[GEORGESON LOGO]
Wall Street Plaza
New York, NY 10005
Banks and Brokers Call Collect: (212) 440-9800
All Others Call Toll-Free: (800) 223-2064
<PAGE>
[PriceCostco Letterhead]
November 21, 1994
Dear Stockholder:
It is our pleasure to enclose for your review a copy of the Offering
Circular/Prospectus describing the transaction in which Price Enterprises, Inc.
will become a separate, publicly-traded company. The transaction has been
structured as an exchange offer so that PriceCostco stockholders desiring to
invest in Price Enterprises may exchange shares of PriceCostco common stock for
shares of Price Enterprises common stock on a one-for-one basis, up to a maximum
of 27 million shares of Price Enterprises Common Stock. All PriceCostco
stockholders are being allowed an equal opportunity to participate in this
offer.
PriceCostco has contributed to Price Enterprises its commercial real estate
operations, certain other real properties (including four PriceCostco warehouse
club facilities), the Atlas Hotel note and certain other notes receivable, as
well as a 51% interest in (i) the Quest interactive electronic shopping
business, (ii) a currently operating export/import business and the right to
develop a warehouse club business in certain geographical areas outside of the
United States and (iii) PriceCostco's interest in its Mexican joint venture.
Robert Price has been named Chairman of the Board, President and Chief
Executive Officer of Price Enterprises. Mr. Price will resign from the
PriceCostco Board of Directors upon the closing of the exchange transaction. Jim
Sinegal will remain President and Chief Executive Officer of PriceCostco.
If more than 27 million shares of PriceCostco common stock are tendered for
exchange, shares will be accepted for exchange on a pro rata basis. If less than
21.6 million shares of Price Enterprises common stock are distributed in the
offer in exchange for shares of PriceCostco common stock, the remaining shares
of Price Enterprises will be distributed by PriceCostco on a pro rata basis to
all holders of record of PriceCostco common stock as of a date following the
expiration of the offer. If more than 21.6 million shares of Price Enterprises
common stock, but less than 27 million shares, are distributed in the offer in
exchange for shares of PriceCostco common stock, PriceCostco may elect, at its
option, to either distribute the remaining shares of Price Enterprises common
stock, as described in the preceding sentence, or sell such shares to Price
Enterprises in exchange for a promissory note.
The attached Offering Circular/Prospectus provides you with detailed
information regarding the transaction. We urge you to read it carefully.
NEITHER PRICECOSTCO NOR THE BOARD OF DIRECTORS MAKES ANY RECOMMENDATION TO
ANY STOCKHOLDER WHETHER TO TENDER OR REFRAIN FROM TENDERING SHARES OF
PRICECOSTCO COMMON STOCK PURSUANT TO THE EXCHANGE OFFER. EACH STOCKHOLDER MUST
MAKE HIS OR HER DECISION WHETHER TO TENDER SHARES OF PRICECOSTCO COMMON STOCK
PURSUANT TO THE EXCHANGE OFFER AND, IF SO, HOW MANY SHARES TO TENDER.
Sincerely,
<TABLE>
<S> <C>
Robert E. Price James D. Sinegal
Chairman of the Board President and Chief Executive Officer
</TABLE>
<PAGE>
OFFERING CIRCULAR/PROSPECTUS
PRICE/COSTCO, INC.
OFFERING CIRCULAR
---------------
PRICE ENTERPRISES, INC.
PROSPECTUS
---------------
OFFER TO EXCHANGE
ONE SHARE OF COMMON STOCK OF PRICE ENTERPRISES, INC.
FOR EACH SHARE OF COMMON STOCK OF PRICE/COSTCO, INC.
---------------------
THE EXCHANGE OFFER WILL EXPIRE AT 12:00 MIDNIGHT,
NEW YORK CITY TIME, ON DECEMBER 20, 1994.
Price/Costco, Inc., a Delaware corporation ("PriceCostco"), hereby offers,
upon the terms and subject to the conditions set forth in this Offering
Circular/Prospectus and in the accompanying Letter of Transmittal (which
together constitute the "Exchange Offer"), to exchange one share of common
stock, par value $.0001 per share ("Price Enterprises Common Stock"), of Price
Enterprises, Inc., a newly formed Delaware corporation and an indirect, wholly
owned subsidiary of PriceCostco ("Price Enterprises"), for each share of common
stock, par value $.01 per share ("PriceCostco Common Stock"), of PriceCostco, up
to a maximum of 27 million shares of Price Enterprises Common Stock
(constituting all of the outstanding shares of Price Enterprises Common Stock).
If more than 27 million shares of PriceCostco Common Stock are validly tendered
and not withdrawn in the Exchange Offer prior to the Expiration Date, then, upon
the terms and subject to the conditions set forth in this Offering
Circular/Prospectus and the Letter of Transmittal, PriceCostco will accept 27
million shares for exchange on a pro rata basis and shares of Price Enterprises
Common Stock will be exchanged therefor. If less than 21.6 million shares of
PriceCostco Common Stock are validly tendered in the Exchange Offer, then
PriceCostco will accept such shares for exchange and will distribute to holders
of PriceCostco Common Stock all the remaining shares of Price Enterprises Common
Stock held by PriceCostco on a pro rata basis. If at least 21.6 million shares
of PriceCostco Common Stock, but less than 27 million shares are validly
tendered, then PriceCostco will accept such shares for exchange and will, at its
option, either (i) distribute the remaining shares of Price Enterprises Common
Stock held by PriceCostco, as set forth in the previous sentence, or (ii) sell
such shares to Price Enterprises in exchange for a promissory note, all as more
fully described herein. In such event, PriceCostco currently intends to sell
such shares to Price Enterprises in exchange for a promissory note.
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PRICECOSTCO
STOCKHOLDERS IN DECIDING WHETHER OR NOT TO TENDER SHARES OF PRICECOSTCO COMMON
STOCK FOR SHARES OF PRICE ENTERPRISES COMMON STOCK IN THE EXCHANGE OFFER, SEE
"SPECIAL CONSIDERATIONS/RISK FACTORS."
The Exchange Offer is not conditioned upon any minimum number of shares of
PriceCostco Common Stock being tendered for exchange. The Exchange Offer is,
however, subject to certain other conditions described under "THE EXCHANGE OFFER
- -- Conditions to the Exchange Offer."
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS OFFERING CIRCULAR/PROSPECTUS
IN CONNECTION WITH THE OFFERING OF SECURITIES MADE BY THIS OFFERING CIRCULAR/
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY PRICECOSTCO OR PRICE ENTERPRISES.
NEITHER THE DELIVERY OF THIS OFFERING CIRCULAR/PROSPECTUS NOR ANY DISTRIBUTION
OF SECURITIES MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE INFORMATION SET FORTH HEREIN
SINCE THE DATE OF THIS OFFERING CIRCULAR/PROSPECTUS. THIS OFFERING CIRCULAR/
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER
TO BUY, ANY SECURITIES BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO
MAKE SUCH SOLICITATION.
------------------------
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 OFFERING CIRCULAR/PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE
MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
------------------------
The date of this Offering Circular/Prospectus is November 21, 1994.
<PAGE>
AVAILABLE INFORMATION
PriceCostco is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). The reports, proxy
statements and other information filed by PriceCostco with the Commission can be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the Commission's Regional Offices at 7 World Trade Center, 13th Floor, New York,
New York 10048 and at Northwestern Atrium Center, 500 West Madison Street,
Chicago, Illinois 60661-2511. Copies of such material also can be obtained from
the Public Reference Section of the Commission at Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549 at prescribed rates. In addition, material
filed by PriceCostco can be inspected at the offices of the National Association
of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C. 20006.
Price Enterprises has filed with the Commission a Registration Statement on
Form S-4 (together with any amendments thereto, the "Registration Statement")
under the Securities Act of 1933, as amended (the "Securities Act"), with
respect to the Price Enterprises Common Stock to be issued pursuant to or as
contemplated by this Offering Circular/Prospectus. PriceCostco has filed a
Schedule 13E-4 Issuer Tender Offer Statement (the "Schedule 13E-4") under the
Exchange Act with the Commission with respect to the Exchange Offer. This
Offering Circular/Prospectus does not contain all the information set forth or
incorporated by reference in the Registration Statement and the Schedule 13E-4,
and the exhibits and schedules relating thereto, certain portions of which have
been omitted as permitted by the rules and regulations of the Commission. For
further information, reference is made to the Registration Statement and the
Schedule 13E-4 and the exhibits filed or incorporated as a part thereof, which
are on file at the offices of the Commission and may be obtained from the
Commission's principal office in Washington, D.C. Statements contained in this
Offering Circular/Prospectus, or in any document incorporated in this Offering
Circular/ Prospectus by reference, as to the contents of any contract or other
document referred to herein or therein are not necessarily complete, and in each
instance reference is made to the copy of such contract or other document filed
as an exhibit to the Registration Statement or the Schedule 13E-4 or such other
document; each such statement is qualified in all respects by such reference.
2
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission by PriceCostco pursuant to
the Exchange Act are incorporated by reference in this Offering
Circular/Prospectus:
1. PriceCostco's Annual Report on Form 10-K for the fiscal year ended
August 28, 1994;
2. PriceCostco's Proxy Statement dated December 8, 1993 for the annual
meeting of stockholders held January 13, 1994; and
3. PriceCostco's Registration Statement on Form 8-A dated October 18, 1993.
All documents and reports subsequently filed by PriceCostco pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this
Offering Circular/Prospectus and prior to the termination of the offering of the
shares of Price Enterprises Common Stock shall be deemed to be incorporated by
reference in this Offering Circular/Prospectus and to be a part hereof from the
date of filing of such documents or reports. 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 Offering Circular/
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 Offering Circular/Prospectus.
THIS OFFERING CIRCULAR/PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH
ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. SUCH DOCUMENTS (OTHER THAN
EXHIBITS TO SUCH DOCUMENTS UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY
REFERENCE) ARE AVAILABLE TO ANY PERSON, INCLUDING ANY BENEFICIAL OWNER, TO WHOM
THIS OFFERING CIRCULAR/PROSPECTUS IS DELIVERED, ON WRITTEN OR ORAL REQUEST,
WITHOUT CHARGE, DIRECTED TO PRICE/COSTCO, INC., 10809 120TH AVENUE NE, KIRKLAND,
WASHINGTON 98033 (TELEPHONE NUMBER (206) 803-8100), ATTENTION: DONALD E.
BURDICK, VICE PRESIDENT. IN ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS,
ANY REQUESTS SHOULD BE MADE BY DECEMBER 13, 1994.
3
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----------
<S> <C>
Summary of Offering Circular/Prospectus..................... 5
Price Enterprises, Inc. Selected Historical Financial
Data....................................................... 11
Price Enterprises, Inc. Selected Unaudited Pro Forma
Financial Data............................................. 13
PriceCostco Selected Historical Financial and Operating
Data....................................................... 15
PriceCostco Selected Unaudited Pro Forma Financial Data..... 17
Comparative Per Share Data.................................. 20
Comparative Market Prices and Dividends..................... 22
Special Considerations/Risk Factors......................... 24
The Transaction............................................. 31
General................................................... 31
The Exchange Offer........................................ 31
Transactions Undertaken Prior to the Exchange Offer....... 32
The Distribution.......................................... 34
Other Actions to be Taken in Connection with the
Transaction.............................................. 35
Certain Other Information................................. 35
Background of the Transaction............................. 36
Reasons for the Transaction............................... 42
Certain Effects of the Transaction........................ 43
Analysis of Financial Advisors to PriceCostco............. 43
Interests of Certain Persons in the Transaction........... 47
Certain Federal Income Tax Consequences................... 49
Anticipated Accounting Treatment.......................... 50
Regulatory Approvals...................................... 51
Quotation of Price Enterprises Common Stock on The Nasdaq
Stock Market's National Market........................... 51
Effect of the Transaction on Convertible Securities....... 52
The Exchange Offer.......................................... 53
Terms of the Exchange Offer............................... 53
Expiration Date; Extensions; Termination.................. 53
Procedures for Tendering.................................. 53
Guaranteed Delivery Procedure............................. 55
Conditions to the Exchange Offer.......................... 55
Withdrawal Rights......................................... 56
Acceptance of PriceCostco Common Stock for Exchange;
Delivery of Price Enterprises Common Stock............... 57
Exchange Agent and Information Agent...................... 58
Financial Advisors........................................ 58
Payment of Expenses....................................... 58
The Agreement of Transfer and Plan of Exchange.............. 59
Certain Related Agreements.................................. 69
Operating Agreements...................................... 69
Stockholders Agreements................................... 69
Limited Liability Company Agreement....................... 69
Tax Allocation Agreements................................. 69
Advance Agreement......................................... 70
<CAPTION>
PAGE
----------
<S> <C>
Price Enterprises, Inc. Unaudited Pro Forma Financial
Information................................................ 71
PriceCostco Unaudited Pro Forma Condensed Financial
Information................................................ 74
Price Enterprises, Inc. Management's Discussion and Analysis
of Financial Condition and Results of Operations........... 78
Selected Information with Respect to PriceCostco............ 82
Business and Properties of Price Enterprises................ 86
Management of Price Enterprises............................. 112
Board of Directors of Price Enterprises................... 112
Committees of Price Enterprises........................... 113
Compensation of the Board of Directors.................... 114
Executive Officers........................................ 114
Certain Other Officers.................................... 116
Indemnification Agreements................................ 116
Compensation of Executive Officers........................ 117
Certain Relationships and Related Transactions............ 122
Information Concerning The Price Enterprises 1995 Combined
Stock Grant and Stock Option Plan........................ 122
Continuation of PriceCostco Stock Options................. 126
Information Concerning The Price Enterprises Directors'
1995 Stock Option Plan................................... 127
Retirement Plan........................................... 128
Compensation Committee Interlocks and Insider
Participation............................................ 129
Security Ownership.......................................... 129
PriceCostco............................................... 129
Price Enterprises......................................... 132
Price Enterprises' Certificate of Incorporation and
Bylaws..................................................... 134
Description of Price Enterprises' Securities................ 136
Comparison of Rights of Stockholders of PriceCostco and
Price Enterprises.......................................... 137
Legal Matters............................................... 138
Experts..................................................... 138
Independent Auditors........................................ 138
Index to Price Enterprises, Inc. Financial Statements....... F-1
Annex I -- Index to Defined Terms........................... I-1
Annex II -- Amended and Restated Agreement of Transfer and
Plan of Exchange........................................... II-1
Annex III -- Form of Restated Certificate of Incorporation
of Price Enterprises, Inc.................................. III-1
Annex IV -- Form of Amended and Restated Bylaws of Price
Enterprises, Inc........................................... IV-1
Annex V -- Form of Price/Costco, Inc. Amended and Restated
Bylaws..................................................... V-1
Annex VI -- The Price Enterprises 1995 Combined Stock Grant
and Stock Option Plan...................................... VI-1
Annex VII -- The Price Enterprises Directors' 1995 Stock
Option Plan................................................ VII-1
</TABLE>
4
<PAGE>
SUMMARY OF OFFERING CIRCULAR/PROSPECTUS
DEFINED TERMS USED IN THIS OFFERING CIRCULAR/PROSPECTUS, AND REFERENCES TO
THE PAGES HEREIN ON WHICH SUCH TERMS ARE DEFINED, ARE LISTED IN
AN INDEX WHICH IS ATTACHED TO THIS OFFERING
CIRCULAR/PROSPECTUS AS ANNEX I.
THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE IN
THIS OFFERING CIRCULAR/PROSPECTUS. THIS SUMMARY IS INTENDED ONLY TO HIGHLIGHT
CERTAIN INFORMATION CONTAINED IN THIS OFFERING CIRCULAR/PROSPECTUS. IT IS NOT
INTENDED TO BE COMPLETE IN ITSELF, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO THE DETAILED INFORMATION CONTAINED ELSEWHERE IN THIS OFFERING
CIRCULAR/PROSPECTUS, THE DOCUMENTS REFERRED TO HEREIN AND THE ANNEXES HERETO,
INCLUDING THE TRANSFER AND EXCHANGE AGREEMENT (AS HEREINAFTER DEFINED) ATTACHED
TO THIS OFFERING CIRCULAR/PROSPECTUS AS ANNEX II. STOCKHOLDERS ARE URGED TO READ
THIS OFFERING CIRCULAR/PROSPECTUS AND THE ANNEXES HERETO IN THEIR ENTIRETY.
THE COMPANIES
<TABLE>
<S> <C>
Price/Costco, Inc. .................. PriceCostco operates cash and carry membership
10809 120th Avenue NE warehouses. As a result of the Transaction,
Kirkland, Washington 98033 PriceCostco's business consists primarily of its
(206) 803-8100 warehouse club operations in the United States,
Canada and the United Kingdom, and PriceCostco has
ceased to have any significant real estate
activities which are not directly related to its
warehouse club business. See "SELECTED INFORMATION
WITH RESPECT TO PRICECOSTCO."
Price Enterprises, Inc. .............. The principal business of Price Enterprises is to
4649 Morena Boulevard acquire, develop, operate, manage, lease and sell
San Diego, California 92117 real properties. Price Enterprises owns or leases
(619) 581-4600 79 properties, including numerous retail shopping
centers and other commercial properties, four
warehouse club properties which have been leased
to PriceCostco, two office properties and certain
notes receivable related to its real estate
business. Of Price Enterprises' 79 properties, 18
are fully developed, 35 are in various stages of
construction and development and 26 properties are
unimproved. As of August 28, 1994, on an
historical cost basis, real estate assets
constituted approximately 85% of the book value of
Price Enterprises' total assets.
Price Enterprises also holds a 51% interest in
Mexico Clubs, L.L.C, a newly formed Delaware
limited liability company ("Mexico Clubs"), and
51% of the outstanding capital stock of each of
two newly formed Delaware corporations: Price
Quest, Inc. ("Price Quest") and Price Global
Trading, Inc. ("Price Global" and, together with
Mexico Clubs and Price Quest, the "Subsidiary
Corporations"). Mexico Clubs will continue the
development of warehouse club businesses in Mexico
through its 50% interest in Price Club Mexico, a
joint venture that develops, owns and operates ten
Price Clubs in Mexico as of October 31, 1994.
Price Quest owns the Quest interactive electronic
shopping business and related businesses presently
conducted in certain PriceCostco warehouse clubs.
Price Global owns an export and import business
and has certain rights to develop warehouse club
businesses in certain specified international
markets.
For a further description of Price Enterprises,
see "BUSINESS AND PROPERTIES OF PRICE
ENTERPRISES."
</TABLE>
5
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<TABLE>
<S> <C>
THE TRANSACTION
The Exchange Offer.................... Upon the terms and subject to the conditions set
forth in this Offering Circular/Prospectus and the
accompanying Letter of Transmittal, PriceCostco is
offering to exchange one share of Price
Enterprises Common Stock for each share of
PriceCostco Common Stock, up to a maximum of 27
million shares of Price Enterprises Common Stock
(constituting all of the outstanding shares of
Price Enterprises Common Stock). If more than 27
million shares of PriceCostco Common Stock are
validly tendered and not withdrawn in the Exchange
Offer prior to the Expiration Date, then, upon the
terms and subject to the conditions set forth in
this Offering Circular/Prospectus and the Letter
of Transmittal, PriceCostco will accept 27 million
shares for exchange on a pro rata basis and shares
of Price Enterprises Common Stock will be
exchanged therefor. See "THE EXCHANGE OFFER --
Terms of the Exchange Offer."
IN DECIDING WHETHER OR NOT TO TENDER SHARES OF
PRICECOSTCO COMMON STOCK IN EXCHANGE FOR SHARES OF
PRICE ENTERPRISES COMMON STOCK, HOLDERS OF
PRICECOSTCO COMMON STOCK SHOULD CAREFULLY CONSIDER
ALL OF THE INFORMATION CONTAINED IN THIS OFFERING
CIRCULAR/PROSPECTUS, INCLUDING THE CONSIDERATIONS
SET FORTH IN "SPECIAL CONSIDERATIONS/RISK
FACTORS."
Background and Reasons for
the Transaction...................... In October 1993, each of The Price Company
("Price") and Costco Wholesale Corporation
("Costco") merged with a separate, wholly owned
subsidiary of PriceCostco pursuant to which Price
and Costco each became a wholly owned subsidiary
of PriceCostco (the "Merger"). Following the
Merger, certain basic philosophical differences
developed between the former Costco executives and
the former Price executives regarding management
strategies central to the direction of
PriceCostco's business operations. The former
Costco executives believed that PriceCostco should
devote its business resources primarily to its
core warehouse club business, whereas the former
Price executives believed that substantial
resources should be devoted to PriceCostco's
non-club real estate development, non-warehouse
activities such as Quest electronic shopping,
business delivery, the Mexican joint venture and
various ancillary businesses and Pacific Rim,
Latin American and South American expansion. These
differences were discussed in detail by the Board
of Directors and senior management of PriceCostco,
but not satisfactorily resolved. Members of the
Board and senior management of PriceCostco, as
well as Sol Price, a founder of Price and a
significant stockholder of PriceCostco, became
concerned that the philosophical differences that
had developed since the Merger between the former
executives of Costco and the former executives of
Price and the inability of the Board to resolve
such differences would hinder PriceCostco's
ability to compete effectively and operate effi-
ciently, and impede management's ability to
continue to function in a manner capable of
maximizing the value of PriceCostco and, ultimate-
ly, stockholder value. Following meetings among
various PriceCostco directors, members of
PriceCostco senior management and various advisors
to PriceCostco, the Board of Directors of
PriceCostco determined that the best way to
maximize available business opportunities
</TABLE>
6
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<S> <C>
would be to effect the Transaction. While the
Board considered certain alternatives, it
concluded that none of the alternatives appeared
to be as attractive as the Transaction in
resolving such basic philosophical differences or
in maximizing the value of PriceCostco and,
ultimately, stockholder value. See "THE
TRANSACTION -- Background of the Transaction" and
"-- Reasons for the Transaction."
NEITHER PRICECOSTCO NOR THE BOARD OF DIRECTORS OF
PRICECOSTCO MAKES ANY RECOMMENDATION TO ANY
STOCKHOLDER WHETHER TO TENDER OR REFRAIN FROM
TENDERING SHARES OF PRICECOSTCO COMMON STOCK
PURSUANT TO THE EXCHANGE OFFER. EACH STOCKHOLDER
MUST MAKE HIS OR HER OWN DECISION WHETHER TO
TENDER SHARES OF PRICECOSTCO COMMON STOCK PURSUANT
TO THE EXCHANGE OFFER AND, IF SO, HOW MANY SHARES
TO TENDER.
Possible Control of
Price Enterprises by
Certain Stockholders................. Each of Robert E. Price, who is Chairman of the
Board, President and Chief Executive Officer of
Price Enterprises, and Sol Price, a founder of
Price, significant stockholder of PriceCostco and
the father of Robert E. Price, has informed
PriceCostco that, while not agreeing to tender all
shares of PriceCostco Common Stock beneficially
owned by him in the Exchange Offer, he currently
intends to tender substantially all such shares,
so long as, prior to the consummation of the
Exchange Offer, there does not occur any event
that materially impairs the assets or business of
Price Enterprises. If Robert E. Price and Sol
Price each tenders all of the shares of
PriceCostco Common Stock he beneficially owns for
exchange pursuant to the Exchange Offer, and the
Exchange Offer is fully subscribed but not
oversubscribed and subject to proration (i.e., 27
million shares of PriceCostco Common Stock are
tendered and accepted for exchange by
PriceCostco), or the Exchange Offer is
undersubscribed and the remaining shares of Price
Enterprises Common Stock are distributed to
PriceCostco stockholders, then, in each case,
Messrs. Price would beneficially own approximately
41.3% of the shares of Price Enterprises Common
Stock outstanding immediately after consummation
of the Exchange Offer. If 21.6 million shares of
PriceCostco Common Stock are tendered and accepted
for exchange by PriceCostco, each of Robert E.
Price and Sol Price tenders all of the shares of
PriceCostco Common Stock he beneficially owns for
exchange pursuant to the Exchange Offer and Price
Enterprises purchases the remaining 5.4 million
shares of Price Enterprises Common Stock owned by
PriceCostco (as described in "THE TRANSACTION --
The Distribution"), then Messrs. Price would
beneficially own approximately 51.7% of the shares
of Price Enterprises Common Stock outstanding
immediately after consummation of the Exchange
Offer. See "SECURITY OWNERSHIP -- PriceCostco." In
such cases, these stockholders would effectively
control the outcome of all matters submitted to
Price Enterprises' stockholders for approval,
including the election of directors, and could
affect the trading price of Price Enterprises
Common Stock. See "SPECIAL CONSIDERATIONS/RISK
FACTORS -- Special Considerations with Respect to
Price Enterprises -- POSSIBLE CONTROL OF PRICE
ENTERPRISES BY CERTAIN STOCKHOLDERS" and "SECURITY
OWNERSHIP -- PriceCostco."
</TABLE>
7
<PAGE>
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<S> <C>
Transactions Undertaken Prior to the
Exchange Offer....................... Pursuant to the Transfer and Exchange Agreement,
as of August 28, 1994, PriceCostco caused, or, in
certain cases, will cause to be transferred to
Price Enterprises the Transferred Assets. In
consideration for such transfer, Price Enterprises
(i) issued to Price 27 million shares of Price
Enterprises Common Stock, which constitutes all of
the outstanding shares of Price Enterprises Common
Stock, (ii) assumed certain liabilities and
obligations of PriceCostco and its subsidiaries
relating to or arising out of the Transferred
Assets and (iii) made all other deliveries
required to be made by Price Enterprises pursuant
to the Transfer and Exchange Agreement. See "THE
TRANSACTION -- Transactions Undertaken Prior to
the Exchange Offer."
PriceCostco and Price Enterprises have caused to
be formed Mexico Clubs, of which Price and Price
Enterprises own a 49% and 51% interest,
respectively. PriceCostco has caused to be formed
Price Global and Price Quest. PriceCostco has also
caused to be transferred to the Subsidiary
Corporations certain assets, as described in "THE
TRANSACTION -- Transactions Undertaken Prior to
the Exchange Offer." Each of Price Global and
Price Quest has issued 100 shares of its common
stock to Price. PriceCostco subsequently caused
51% of the outstanding capital stock of each of
Price Global and Price Quest to be transferred to
Price Enterprises. See "THE TRANSACTION -- Trans-
actions Undertaken Prior to the Exchange Offer"
and "BUSINESS AND PROPERTIES OF PRICE ENTERPRISES
-- General."
The following table summarizes the aggregate
historical net book value of Price Enterprises as
of August 28, 1994 as compared to the aggregate
estimated fair value of its real estate assets.
The estimated fair value of the Real Properties is
based on the appraisal of 45 of the 79 Real
Properties by Cushman & Wakefield, representing
approximately 75% of the aggregate book value of
all of the Real Properties, and management's
estimated fair value of the other 34 Real
Properties based on a risk-adjusted discounted
cash flow approach. See "BUSINESS AND PROPERTIES
OF PRICE ENTERPRISES -- Real Estate Business."
</TABLE>
<TABLE>
<CAPTION>
AGGREGATE
AGGREGATE ESTIMATED
NUMBER OF NET BOOK FAIR
(DOLLARS IN MILLIONS, EXCEPT PER SHARE) PROPERTIES VALUE VALUE
--------------- ----------- -------------
<S> <C> <C> <C>
Real Properties with estimated fair
value higher than net book value....... 35 $ 260 $ 300
Real Properties adjusted downward to
fair value............................. 44 183(1) 183
--
----------- -----
Subtotal............................ 79 443 $ 483
--
--
-----
-----
Notes receivable (Atlas and City
Notes)................................. 73(1)
51% interest in Mexico Clubs............................. 35
Deferred income taxes.................................... 23
Other assets and liabilities (net)....................... 5
-----------
Net assets of Price Enterprises (Historical)............. 579
Net pro forma adjustments................................ (5)
-----------
Pro forma net assets -- Price Enterprises................ $ 574
-----------
-----------
Pro forma book value per common share.................... $ 21.27(2)
<FN>
- ------------------------------
(1) Historical net book value of real estate properties and related assets were
reduced by an $80.5 million change in estimate related to the Transaction. See
"Notes to Price Enterprises, Inc. Financial Statements."
(2) Does not give effect to the fair values of the properties with fair value higher
than net book value, approximately $40 million pre-tax, or $.87 book value per
pro forma common share after-tax effect. For purposes of estimating its loss on
the Transaction, PriceCostco used the price of its own stock, $15.25 on October
24, 1994, as the estimate of Price Enterprises' share price, since Price
Enterprises' Common Stock was not yet trading. The $6.02 per share difference
between the $21.27 unaudited pro forma book value per share of Price Enterprises
and the
</TABLE>
8
<PAGE>
<TABLE>
<S> <C> <C> <C>
assumed per share price of $15.25 is attributable to a combination of factors.
These factors include an expectation that Price Enterprises Common Stock may
trade at a discount from its book value (although the price at which shares of
Price Enterprises will trade cannot be predicted). There may also be some
premium to tendering shareholders included in the exchange ratio, although any
such premium cannot be objectively measured. See "SPECIAL CONSIDERATIONS/RISK
FACTORS -- Special Considerations Applicable to all PriceCostco Stockholders --
The Exchange Ratio" and "THE TRANSACTION -- Background of the Transaction" and
"-- Anticipated Accounting Treatment."
</TABLE>
<TABLE>
<S> <C>
The Distribution...................... If the number of shares of PriceCostco Common
Stock validly tendered in the Exchange Offer by
holders of PriceCostco Common Stock is less than
21.6 million, PriceCostco will accept such validly
tendered shares for exchange and will distribute
the remaining shares of Price Enterprises Common
Stock pro rata to holders of record of PriceCostco
Common Stock as of a date no more than 20 business
days after the Closing Date. If the number of
shares of PriceCostco Common Stock validly
tendered in the Exchange Offer by holders of
PriceCostco Common Stock is greater than 21.6
million, but less than 27 million, PriceCostco
will accept such validly tendered shares for
exchange and will, at its option, either (i)
distribute the remaining shares of Price
Enterprises Common Stock pro rata to PriceCostco
stockholders, as set forth in the preceding
sentence, or (ii) sell such remaining shares to
Price Enterprises in exchange for a promissory
note. In such event, PriceCostco currently intends
to sell such shares to Price Enterprises in
exchange for a promissory note. See "THE
TRANSACTION -- The Distribution."
Analysis of Financial Advisors to
PriceCostco.......................... PriceCostco has engaged Donaldson, Lufkin &
Jenrette Securities Corporation and Lehman
Brothers Inc. to act jointly as its Financial
Advisors in connection with the Transaction.
Representatives of DLJ and Lehman assisted senior
management of PriceCostco in structuring the
Transaction and in analyzing the potential impact
of the Transaction on stockholder values of both
Price Enterprises and PriceCostco following
consummation of the Transaction. In particular,
the Financial Advisors gave advice to management
regarding the proposed number of shares of Price
Enterprises Common Stock to be issued in the
exchange and with respect to other significant
terms and conditions of the Exchange Offer.
Because of the voluntary pro rata nature of the
Transaction, the Board of Directors did not ask
for, and the Financial Advisors did not deliver,
an opinion as to the fairness to the holders of
PriceCostco Common Stock, from a financial point
of view, of the Transaction. See "THE TRANSACTION
-- Analysis of Financial Advisors to PriceCostco."
Certain Federal Income Tax
Consequences......................... PriceCostco and Price Enterprises will receive an
opinion, based upon certain representations of
PriceCostco, Price Enterprises and certain
significant stockholders of PriceCostco, from
Skadden, Arps, Slate, Meagher & Flom, to the
effect that, although the matter is not entirely
free from doubt, the Transaction should qualify as
a tax-free distribution for Federal income tax
purposes. See "THE TRANSACTION -- Certain Federal
Income Tax Consequences." Each stockholder should
consult his or her tax advisor as to the
particular consequences of the Transaction to such
stockholder.
Regulatory Approvals.................. Except as set forth below, PriceCostco and Price
Enterprises do not believe that any material
Federal or state regulatory approvals will be
necessary in connection with the Transaction. No
filings under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976 (the "HSR Act") are
required in connection with the Exchange Offer
generally. To the extent certain stockholders of
PriceCostco decide to participate in the Exchange
Offer and to acquire a number of shares of Price
Enterprises Common Stock that exceeds one of the
thresholds stated in the regulations under the HSR
Act, and if exceptions under those regulations do
not apply, such stockholders and PriceCostco would
be required to make
</TABLE>
9
<PAGE>
<TABLE>
<S> <C>
filings under the HSR Act, and the waiting period
requirements under the HSR Act would have to be
satisfied, before the exchanges by those
particular stockholders could be carried out.
Robert E. Price and PriceCostco, and The Price
Family Charitable Trust (the "Price Family Trust")
and PriceCostco, have to date made filings under
the HSR Act that would, upon expiration of the
required waiting period under the HSR Act, enable
Robert Price to acquire $15 million or more but
less than 15 percent of the shares of Price
Enterprises Common Stock and the Price Family
Trust to acquire 25 percent or more but less than
50 percent of the shares of Price Enterprises
Common Stock. These amounts and percentages
reflect the thresholds at which these filings have
been made under the HSR Act regulations. They do
not necessarily indicate the actual shares to be
acquired by Mr. Price or the Price Family Trust,
which will depend on the number of shares of
PriceCostco Common Stock validly tendered and not
withdrawn by them and by other stockholders in the
Exchange Offer. Early termination of the waiting
period under the HSR Act occurred for each of
these filings on November 9, 1994. See "THE
TRANSACTION -- Regulatory Approvals."
Trading Markets....................... Following the Closing Date, PriceCostco Common
Stock will continue to be traded and quoted on The
Nasdaq Stock Market's National Market under the
symbol "PCCW." There is currently no trading mar-
ket for Price Enterprises Common Stock. Following
the Closing Date, it is anticipated that Price
Enterprises Common Stock will be publicly traded
and quoted on The Nasdaq Stock Market's National
Market under the symbol "PREN."
No Appraisal Rights................... No appraisal rights are available to stockholders
in connection with the Transaction.
THE EXCHANGE OFFER
Expiration Date....................... The Exchange Offer will expire at 12:00 midnight,
New York City time, on December 20, 1994, unless
extended as provided in this Offering
Circular/Prospectus. See "THE EXCHANGE OFFER --
Expiration Date; Extensions; Termination."
Procedures for Tendering.............. To be tendered properly, certificates for shares
of PriceCostco Common Stock, together with a
properly completed and duly executed Letter of
Transmittal (or facsimile thereof), and any other
documents required by the Letter of Transmittal,
or an Agent's Message in connection with a
book-entry transfer of shares, must be received by
the Exchange Agent at one of the addresses set
forth on the back cover of this Offering
Circular/Prospectus prior to 12:00 midnight on the
Expiration Date, or stockholders must comply with
the specific procedures for guaranteed delivery
described herein. See "THE EXCHANGE OFFER --
Procedures for Tendering" and "-- Guaranteed
Delivery Procedure."
Conditions to the
Exchange Offer....................... The Exchange Offer is not conditioned upon any
minimum number of shares of PriceCostco Common
Stock being tendered for exchange. The Exchange
Offer is, however, subject to certain other
conditions. See "THE EXCHANGE OFFER -- Conditions
to the Exchange Offer."
Withdrawal Rights..................... Subject to the conditions set forth herein, shares
of PriceCostco Common Stock may be withdrawn at
any time prior to the Expiration Date and, unless
theretofore accepted for exchange by PriceCostco
pursuant to the Exchange Offer, may also be
withdrawn at any time after the expiration of 40
business days from the commencement of the Ex-
change Offer. See "THE EXCHANGE OFFER --
Withdrawal Rights."
Exchange Agent........................ First Interstate Bank of Washington, N.A. is
serving as Exchange Agent in connection with the
Exchange Offer.
Information Agent..................... Georgeson & Company Inc. is serving as Information
Agent in connection with the Exchange Offer.
</TABLE>
10
<PAGE>
PRICE ENTERPRISES, INC.
SELECTED HISTORICAL FINANCIAL DATA
(IN THOUSANDS)
Price Enterprises' real estate business has historically been conducted as a
separate division of Price. Accordingly, although Price Enterprises was formed
in 1994 and acquired its business and assets as of August 28, 1994, the
financial data of Price Enterprises included herein has been prepared on an
historical basis as though Price Enterprises has been a stand-alone business
operating the non-club real estate and other businesses acquired in the
Transaction during all periods presented. Certain pro forma adjustments required
as a result of the Transaction are not reflected in the Price Enterprises
historical financial data. See "PRICE ENTERPRISES, INC. SELECTED UNAUDITED PRO
FORMA FINANCIAL DATA" and "PRICE ENTERPRISES, INC. UNAUDITED PRO FORMA FINANCIAL
INFORMATION." See Footnote 1 of "Price Enterprises, Inc. Notes to Financial
Statements" included in this Offering Circular/ Prospectus for a description of
the businesses and assets included in Price Enterprises' historical financial
statements.
The following table sets forth selected historical financial data of Price
Enterprises for the five fiscal years in the period ended August 28, 1994. The
selected historical financial data as of August 30, 1992, August 29, 1993 and
August 28, 1994 and for each of the four fiscal years in the period ended August
28, 1994 have been derived from the audited financial statements of Price
Enterprises. The selected historical financial data as of September 2, 1990 and
September 1, 1991 and for the fiscal year ended September 2, 1990 have been
derived from the unaudited books and records of Price Enterprises. Historical
per share data has not been presented.
<TABLE>
<CAPTION>
FISCAL YEARS (1)
-------------------------------------------------------------------
1990 1991 1992 1993 1994
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Income Statement Data
Real estate rentals (2).................... $ 18,525 $ 26,691 $ 28,263 $ 22,144 $ 29,265
Gains on sale of real estate (2)........... 1,409 6,149 15,078 21,540 5,474
Merchandise sales (3)...................... -- -- 8,212 28,671 53,015
Real estate expenses (2)(4)................ 7,581 14,889 13,855 13,310 17,623
Merchandise costs and expenses (3)......... -- -- 9,102 30,882 57,997
General and administrative (5)............. 700 1,000 1,300 1,500 1,600
Provision for asset impairments (6)........ -- -- -- -- 90,227
Operating income (loss).................... 11,653 16,951 27,296 26,663 (79,693)
Interest and other (7)..................... 2,993 4,629 5,575 8,503 9,947
Income (loss) before provision for income
taxes..................................... 14,646 21,580 32,871 35,166 (69,746)
Net income (loss).......................... $ 8,767 $ 12,905 $ 19,361 $ 20,551 $ (41,479)
</TABLE>
<TABLE>
<CAPTION>
SEPT. 2, SEPT. 1, AUGUST 30, AUGUST 29, AUGUST 28,
1990 1991 1992 1993 1994
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data
Real estate assets, net (2)................ $236,132 $364,118 $ 337,258 $ 387,475 $ 447,387
Total assets............................... 319,109 429,420 454,063 499,867 650,553
Long-term debt............................. -- -- -- -- --
Investment by PriceCostco (8).............. 303,533 412,585 429,672 454,357 578,788
<FN>
- ------------------------
(1) Price Enterprises reports its financial position and results of operations
utilizing a 52 or 53 week fiscal year which ends on the Sunday nearest
August 31. All fiscal years presented were 52 weeks.
(2) Real estate rentals and related expenses reflect all properties which were
owned and operated by Price Enterprises during the respective periods.
Accordingly, these amounts include the results of operations of certain
real estate assets that have since been sold, which accounts for the
fluctuation in real estate rentals and expenses and for the gains on sale
of such real estate in the periods presented. See footnote 9 of "Price
Enterprises, Inc. Notes to Financial Statements" included in Offering
Circular/ Prospectus for a description of real estate sales during fiscal
1992, 1993 and 1994.
</TABLE>
(FOOTNOTES CONTINUED ON NEXT PAGE)
11
<PAGE>
<TABLE>
<S> <C>
(3) Merchandise sales, costs of sales and operating expenses relate to
activities of Quest and CMI, each of which commenced operations in fiscal
1992.
(4) Real estate expenses include operating, maintenance, property taxes,
administrative expenses and depreciation and amortization.
(5) PriceCostco historically provided services to Price Enterprises. Amounts
allocated to Price Enterprises for general and administrative expenses for
fiscal 1992, 1993 and 1994 were $1,300, $1,500 and $1,600, respectively.
Costs incurred by PriceCostco on behalf of Price Enterprises are charged to
Price Enterprises by specific identification or allocated based on total
assets or sales revenues. In the opinion of Price Enterprises' management,
the aforementioned costs allocated to Price Enterprises fairly represents
its general and administrative expenses.
(6) The provision for asset impairments of $90,200 pre-tax includes $80,500
pre-tax ($47,500 after tax) related to a change in calculating estimated
losses for assets which are considered to be economically impaired. This
change in accounting estimates results from the spin-off of the real estate
segment assets to Price Enterprises and Price Enterprises' decision to
pursue business plans and operating strategies as a stand-alone entity
which are significantly different than the strategies of PriceCostco. Price
Enterprises' management believes that as a separate operating business it
will not have the same access to capital as PriceCostco or generate
internal funds from operations to the same extent as PriceCostco.
PriceCostco's accounting policies with respect to estimating the amount of
impairments on individual real estate properties and related assets were
such that impairment losses would be recorded if the carrying amount of the
asset could not be recovered from estimated future cash flows on an undis-
counted basis. Price Enterprises' management believes that in view of its
strategies with respect to the number and nature of properties that would
be selected for potential disposition, it would be more appropriate to
estimate impairment losses based on fair values of the real estate
properties as determined by appraisals and/or a risk-adjusted discounted
cash flow approach. In determining impairment losses, individual real
estate assets were reduced to estimated fair value, if lower than
historical cost. For those assets which have an estimated fair value in
excess of cost, the asset continues to be recorded at cost. The impairment
losses recorded as a result of this change in accounting estimates reduced
the book basis of certain of the real estate and related assets.
Under the previous policy, PriceCostco and Price Enterprises had determined
that a provision for asset impairments of approximately $9,700 was required
relating to four properties which were under final contract or in final
negotiations for sale.
(7) Interest and other includes interest income from notes receivable, other
income, equity in earnings of joint ventures and PriceCostco's minority
interest in the Subsidiary Corporations.
(8) Investment by PriceCostco represents the net assets transferred and the
earnings of the businesses and assets comprising Price Enterprises on a
historical basis.
</TABLE>
12
<PAGE>
PRICE ENTERPRISES, INC.
SELECTED UNAUDITED PRO FORMA FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The selected unaudited pro forma financial data of Price Enterprises set
forth below has been derived from "PRICE ENTERPRISES, INC. UNAUDITED PRO FORMA
FINANCIAL INFORMATION," which is included elsewhere in this Offering
Circular/Prospectus, and includes certain pro forma adjustments to historical
financial data of Price Enterprises required as a result of the Transaction. The
selected unaudited pro forma income statement data for the fiscal year ended
August 28, 1994 have been prepared as if the Transaction occurred on the first
day of fiscal 1994. The selected pro forma balance sheet data has been prepared
as if the Transaction occurred on August 28, 1994. The selected unaudited pro
forma financial data set forth below is not necessarily indicative of the
financial position or results of operations that actually would have occurred if
the Transaction had been consummated as of the first day of fiscal 1994 or as of
August 28, 1994. The unaudited pro forma selected financial data should be read
in connection with "PRICE ENTERPRISES, INC. UNAUDITED PRO FORMA FINANCIAL
INFORMATION" and the related notes and assumptions.
<TABLE>
<CAPTION>
FISCAL YEAR 1994 (1)
-----------------------------------------
PRO FORMA
HISTORICAL ADJUSTMENTS (2) PRO FORMA
---------- --------------- ----------
<S> <C> <C> <C>
Income Statement Data
Real estate rentals (3)................................... $ 29,265 $7,016 $ 36,281
Gains on sale of real estate (3).......................... 5,474 -- 5,474
Merchandise sales......................................... 53,015 -- 53,015
Real estate expenses (3)(4)............................... 17,623 173 17,796
Merchandise costs and expenses............................ 57,997 -- 57,997
General and administrative................................ 1,600 1,500 3,100
Provision for asset impairments (5)....................... 90,227 -- 90,227
Operating loss............................................ (79,693) 5,343 (74,350)
Interest income and other, net (6)........................ 9,947 -- 9,947
Loss before benefit for income taxes...................... (69,746) 5,343 (64,403)
Net loss.................................................. $ (41,479) $3,152 $(38,327)
Net loss per common
share (7)................................................ $ (1.42)(8)
Number of shares used in
calculation.............................................. 27,000
</TABLE>
<TABLE>
<CAPTION>
AUGUST 28, 1994
------------------------------------------
PRO FORMA
HISTORICAL ADJUSTMENTS (2) PRO FORMA
---------- ---------------- ----------
<S> <C> <C> <C>
Balance Sheet Data
Real estate assets, net................................... $ 447,387 $ 2,100 $449,487
Total assets.............................................. 650,553 (25,634) 624,919
Long-term debt (7)........................................ -- -- --
Investment by PriceCostco/Stockholders' equity (7)........ 578,788 (4,519) 574,269
</TABLE>
- ------------------------
(1) Price Enterprises reports its financial position and results of operations
utilizing a 52 or 53 week fiscal year which ends on the Sunday nearest
August 31.
(2) As more fully described herein under "PRICE ENTERPRISES, INC. UNAUDITED PRO
FORMA FINANCIAL INFORMATION," the unaudited pro forma adjustments to the
income statement data record (i) the inclusion of the Warehouse Properties'
rentals and related expenses, (ii) certain additional general and
administrative expenses, (iii) a reduction of depreciation expense and (iv)
related income tax effects. The unaudited pro forma adjustments to balance
sheet data include the elimination of working capital retained by
PriceCostco, accrual of estimated organization costs and the transfer of
remaining real estate assets purchased and transferred by PriceCostco in
fiscal 1995.
(FOOTNOTES CONTINUED ON NEXT PAGE)
13
<PAGE>
(3) Real estate rentals and related expenses reflect all properties which were
owned and operated by Price Enterprises during the respective periods.
Accordingly, these amounts include certain real estate assets which have
been sold.
(4) Real estate expenses include operating, maintenance, property taxes,
administrative expenses and depreciation and amortization.
(5) The provision for asset impairments of $90,200 pre-tax which includes
$80,500 pre-tax ($47,500 after tax or $1.76 net loss per pro forma common
share) related to a change in calculating estimated losses for assets which
are considered to be economically impaired. This change in accounting
estimates results from the spin-off of the real estate segment assets to
Price Enterprises and Price Enterprises' decision to pursue business plans
and operating strategies as a stand-alone entity which are significantly
different than the strategies of PriceCostco. Price Enterprises' management
believes that as a separate operating business it will not have the same
access to capital as PriceCostco or generate internal funds from operations
to the same extent as PriceCostco.
PriceCostco's accounting policies with respect to estimating the amount of
impairments on individual real estate properties and related assets were
such that impairment losses would be recorded if the carrying amount of the
asset could not be recovered from estimated future cash flows on an
undiscounted basis. Price Enterprises' management believed that in view of
its strategies with respect to the number and nature of properties that
would be selected for potential disposition, it would be more appropriate to
estimate impairment losses based on fair values of the real estate
properties as determined by appraisals and/or a risk-adjusted discounted
cash flow approach. In determining impairment losses, individual real estate
assets were reduced to estimated fair value, if lower than historical cost.
For those assets which have an estimated fair value in excess of cost, the
asset continues to be recorded at cost. The impairment losses recorded as a
result of this change in accounting estimates reduced the book basis of
certain of the real estate and related assets.
Under the previous policy, PriceCostco and Price Enterprises had determined
that a provision for asset impairments of approximately $9,700 was required
relating to four properties which were under final contract or in final
negotiations for sale.
(6) Interest and other includes interest income from the notes receivable, other
income, equity in earnings of joint ventures and PriceCostco's minority
interest in the Subsidiary Corporations.
(7) Unaudited pro forma net loss per common share, long-term debt and
stockholders' equity assumes all shares of Price Enterprises Common Stock
are issued in the Exchange Offer or distributed to PriceCostco stockholders
following the Exchange Offer. If only 21.6 million shares of Price
Enterprises Common Stock are issued in the Exchange Offer, and Price
Enterprises purchases the remaining 5.4 million shares of Price Enterprises
Common Stock from PriceCostco for a note in the principal amount of
approximately $82.4 million (assuming a per share price for Price
Enterprises Common Stock of $15.25, and an interest rate on the outstanding
note of approximately 6%), then unaudited pro forma net loss per common
share for fiscal 1994 would be $1.91, and long-term debt and stockholders'
equity as of August 28, 1994 would be approximately $82.4 million and $491.9
million, respectively. See "THE TRANSACTION -- The Distribution" for a
description of the terms of the notes.
(8) Includes a provision for asset impairments of $90,200 pre-tax which includes
$80,500 pre-tax ($47,500 after tax or $1.76 net loss per pro forma common
share) related to a change in calculating estimated losses for assets which
are considered to be economically impaired. If the $80,500 pre-tax provision
for asset impairments were excluded, pro forma net income for fiscal 1994
would have been approximately $9,173 or $.34 per common share.
14
<PAGE>
PRICE/COSTCO, INC.
SELECTED HISTORICAL FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
The consolidated financial statements of PriceCostco, from which the
selected historical financial data have been derived, have been prepared
following the pooling-of-interests method of accounting as a result of the
Merger and reflect the combined financial position and operating results of
Price and Costco for all periods presented. The selected historical financial
and operating data of PriceCostco includes the financial position and results of
operations of Price Enterprises for all periods presented.
The following table sets forth selected historical financial and operating
data of PriceCostco for the five fiscal years ended August 28, 1994. The
selected historical financial data for the five fiscal years ended August 28,
1994 have been derived from the audited consolidated financial statements of
PriceCostco.
<TABLE>
<CAPTION>
FISCAL YEAR (1)
--------------------------------------------------------------
1990 1991 1992 1993 1994
---------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Income Statement Data (2)(3)
Net sales............................. $9,346,099 $11,813,509 $13,820,380 $15,154,685 $16,160,911
Gross profit (4)...................... 827,148 1,057,686 1,254,917 1,403,532 1,498,020
Membership fees and other............. 185,144 228,742 276,998 309,129 319,732
Operating expenses (5)................ 737,137 952,259 1,156,493 1,347,832 1,457,613
Operating income...................... 275,155 334,169 375,422 364,829 360,139
Other income (expense) (6)............ 470 7,872 (6,567) (28,366) (36,584)
Provisions for merger and
restructuring expense................ -- -- -- -- 120,000
Income from continuing operations....... $ 167,726 $ 207,293 $ 223,024 $ 202,843 $ 110,898
Discontinued operations
Income (loss), net of tax (2)....... 6,854 11,566 19,385 20,404 (40,766)
Loss on disposal (3)................ -- -- -- -- (182,500)
Net income (loss)....................... $ 174,580 $ 218,859 $ 242,407 $ 223,247 $ (112,368)
Income (loss) per common and common
equivalent share (fully diluted).......
Continuing operations................. $ .79 $ .93 $ .98 $ .92 $ .51(6)
Discontinued operations
Income (loss) net of tax (2)........ .03 .05 .08 .08 (.19)
Loss on disposal (3)................ -- -- -- -- (.83)
---------- ----------- ----------- ----------- -----------
Net income (loss)..................... $ .82 $ .98 $ 1.06 $ 1.00 $ (.51)
---------- ----------- ----------- ----------- -----------
---------- ----------- ----------- ----------- -----------
Operating Data
Warehouses open at end of period
(8).................................. 119 140 170 200 221
Comparable warehouse sales increase
(decrease) (9)....................... 7% 10% 6% (3%) (3%)
</TABLE>
<TABLE>
<CAPTION>
SEPT. 2, SEPT. 1, AUGUST 30, AUGUST 29, AUGUST 28,
1990 1991 1992 1993 1994
---------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data
Working capital (deficit)............. $ 14,342 $ 304,703 $ 281,592 $ 127,312 $ (113,009)
Total assets.......................... 2,029,931 2,986,094 3,576,543 3,930,799 4,235,659
Long-term debt (10)................... 199,506 500,440 813,976 812,576 795,492
Stockholders' equity (11)............. 988,458 1,429,703 1,593,943 1,796,728 1,684,960
<FN>
- --------------------------
(1) PriceCostco reports its financial position and results of operations
utilizing a 52 or 53 week fiscal year which ends on the Sunday nearest
August 31. All fiscal years presented were 52 weeks.
</TABLE>
(FOOTNOTES CONTINUED ON NEXT PAGE)
15
<PAGE>
<TABLE>
<S> <C>
(2) The fiscal 1994 loss from discontinued operations includes a provision for
asset impairments of $90,200 pre-tax which includes $80,500 pre-tax
($47,500 after tax or $.22 per share) related to a change in calculating
estimated losses for assets which are considered to be economically
impaired. This change in accounting estimates results from the spin-off of
the real estate segment assets to Price Enterprises and Price Enterprises'
decision to pursue business plans and operating strategies as a stand-alone
entity which are significantly different than the strategies of
PriceCostco. Price Enterprises' management believes that as a separate
operating business it will not have the same access to capital as
PriceCostco or generate internal funds from operations to the same extent
as PriceCostco.
PriceCostco's accounting policies with respect to estimating the amount of
impairments on individual real estate properties and related assets were
such that impairment losses would be recorded if the carrying amount of the
asset could not be recovered from estimated future cash flows on an undis-
counted basis. Price Enterprises' management believes that in view of its
strategies with respect to the number and nature of properties that would
be selected for potential disposition, it would be more appropriate to
estimate impairment losses based on fair values of the real estate
properties as determined by appraisals and/or a risk-adjusted discounted
cash flow approach. In determining impairment losses, individual real
estate assets were reduced to estimated fair value, if lower than
historical cost. For those assets which have an estimated fair value in
excess of cost, the asset continues to be recorded at cost. The impairment
losses recorded as a result of this change in accounting estimates reduced
the book basis of certain of the real estate and related assets.
Under the previous policy, PriceCostco and Price Enterprises had determined
that a provision for asset impairments of approximately $9,700 was required
relating to four properties which were under final contract or in final
negotiations for sale.
(3) In the fourth quarter of fiscal 1994, as a result of the Transaction,
PriceCostco reported its non-club real estate segment as a discontinued
operation resulting in income statement data being restated in every period
presented. An estimated loss on disposal of the non-club real estate
segment of approximately $182.5 million was recorded in the fourth quarter
of fiscal 1994. The estimated loss on disposal is calculated as the
difference between PriceCostco's net book value of the Transferred Assets
of $578.8 million (after a net reduction for a change in the estimate for
calculating asset impairments of approximately $47.5 million on an after
tax basis) and the estimated market value of 27 million shares of Price
Enterprises Common Stock of $411.8 million (assuming a per share price of
$15.25, the last reported sales price of Price Enterprises Common Stock on
October 24, 1994) and direct expenses and other costs related to the
Transaction of approximately $15.5 million. The actual loss will be
determined following consummation of the Exchange Transaction, at which
time the estimated loss will be adjusted, as necessary. For a discussion on
the computation of the actual loss, see "THE TRANSACTION -- Anticipated
Accounting Treatment."
(4) Gross profit is comprised of net sales less merchandise costs.
(5) Operating expenses include selling, general and administrative expenses,
preopening expenses and provision for estimated warehouse closing costs.
(6) Other income (expense) includes interest expense, interest income and other
income.
(7) Includes a merger and restructuring charge of $120 million pre-tax ($80
million or $.36 per share, after tax), related to the Merger. If such
merger and restructuring charge were excluded, net income for fiscal 1994
would have been approximately $190.9 million or $.87 per share (fully
diluted).
(8) As of August 28, 1994, PriceCostco also operated eight warehouses in Mexico
through a 50% owned joint venture. These are not included in the above
warehouses because the joint venture is accounted for on an equity basis
and therefore its operations are not consolidated in PriceCostco's
financial statements. See "BUSINESS AND PROPERTIES OF PRICE ENTERPRISES --
Mexico Clubs."
(9) Net sales for the eight-week period ended October 23, 1994 were $2.52
billion, an increase of 11% from $2.28 billion for the same eight-week
period of the prior fiscal year. Comparable warehouse sales (sales in
warehouses open for at least a year) increased by one percent during the
eight-week period.
(10) Long-term debt includes convertible subordinated debt and other long-term
debt.
(11) PriceCostco did not pay any dividends on its common stock during the
periods presented.
</TABLE>
16
<PAGE>
PRICE/COSTCO, INC.
SELECTED UNAUDITED PRO FORMA FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table sets forth selected unaudited pro forma financial data
of PriceCostco giving effect to the Transaction as of August 28, 1994 and for
the fiscal year ended August 28, 1994. The selected unaudited pro forma
financial data as of and for the fiscal year ended August 28, 1994 have been
derived from "PRICECOSTCO UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION,"
which is included elsewhere in this Offering Circular/Prospectus. The selected
unaudited pro forma financial data set forth below may not be indicative of the
results that would actually have occurred if the Transaction had been
consummated as of the first day of fiscal 1994. The selected unaudited pro forma
financial data should be read in connection with "PRICECOSTCO UNAUDITED PRO
FORMA CONDENSED FINANCIAL INFORMATION" and the related notes and assumptions.
<TABLE>
<CAPTION>
FISCAL YEAR 1994 (1)
----------------------------------------------
PRO FORMA
HISTORICAL ADJUSTMENTS(2) PRO FORMA
------------ ------------- ---------------
<S> <C> <C> <C>
Income Statement Data (3)(4)
Net sales............................. $ 16,160,911 $ (53,015) $ 16,107,896
Gross profit (5)...................... 1,498,020 (3,566) 1,494,454
Membership fees and other............. 319,732 -- 319,732
Operating expenses (6)................ 1,457,613 (4,680) 1,452,933
Operating income...................... 360,139 1,114 361,253
Other income (expense) (7)............ (36,584) (5,487) (42,071)
Provision for merger and restructuring
expense.............................. 120,000 -- 120,000
Income from continuing operations..... 110,898 (2,580) 108,318
Discontinued operations
Loss, net of tax (3)................ (40,766) 40,766 --
Loss on disposal (4)................ (182,500) 182,500 --
Net income (loss)..................... $ (112,368) $ 220,686 $ 108,318
Net income (loss) per common and
common equivalent share (fully
diluted):
Continuing operations............... $.51(8)
Discontinued operations
Loss, net of tax (3).............. (.19)
Loss on disposal (4).............. (.83)
------------
Net loss............................ $(.51)
Pro Forma income from continuing
operations per common and common
equivalent share (fully diluted)
based on level of participation in
Exchange Offer (9):
100% (27.0 million shares)...... $ .56
80% (21.6 million shares)....... .55(10)
50% (13.5 million shares)....... .53
0% (No shares tendered)......... .49
</TABLE>
<TABLE>
<CAPTION>
AS OF AUGUST 28, 1994
-----------------------------------------------
PRO FORMA
HISTORICAL ADJUSTMENTS(2) PRO FORMA
------------ -------------- ---------------
<S> <C> <C> <C>
Balance Sheet Data
Working capital (deficit)............. $ (113,009) $ 1,049 $ (111,960)
Discontinued operations-net assets.... 377,085 (377,085) --
Total assets.......................... 4,235,659 (415,477) 3,820,182(10)
Long-term debt (11)................... 795,492 -- 795,492(9)
Stockholders' equity.................. 1,684,960 (411,750) 1,273,210(10)
</TABLE>
(FOOTNOTES ON NEXT PAGE)
17
<PAGE>
<TABLE>
<S> <C> <C> <C>
<FN>
- ------------------------
(1) PriceCostco reports its financial position and results of operations
utilizing a 52 or 53 week fiscal year which ends on the Sunday nearest
August 31.
(2) As more fully described herein under "PRICECOSTCO UNAUDITED PRO FORMA CON-
DENSED FINANCIAL INFORMATION," the unaudited pro forma adjustments to the
income statement data (i) eliminate the operating results of the
Transferred Assets, (ii) record the Warehouse Properties' lease expense
offset by elimination of depreciation expense and (iii) recognize the
related income tax effects. The unaudited pro forma adjustments to balance
sheet data primarily eliminates the net assets transferred to Price
Enterprises from PriceCostco.
(3) In the fourth quarter of fiscal 1994, as a result of the Transaction,
PriceCostco reported its non-club real estate segment as a discontinued
operation resulting in income statement data being restated in every period
presented. An estimated loss on disposal of the non-club real estate
segment of approximately $182.5 million was recorded in the fourth quarter
of fiscal 1994. The estimated loss on disposal is calculated as the
difference between PriceCostco's net book value of the Transferred Assets
of $578.8 million (after a net reduction for a change in the estimate for
calculating asset impairments of approximately $47.5 million on an after
tax basis) and the estimated market value of 27 million shares of Price
Enterprises Common Stock of $411.8 million (assuming a per share price of
$15.25, the last reported sales price of PriceCostco Common Stock on
October 24, 1994) and direct expenses and other costs related to the
Transaction of approximately $15.5 million. The actual loss will be
determined following consummation of the Exchange Transaction, at which
time the estimated loss will be adjusted, as necessary. For a discussion on
the computation of the actual loss, see "THE TRANSACTION -- Anticipated
Accounting Treatment."
(4) The fiscal 1994 loss from discontinued operations includes a provision for
asset impairments of $90,200 pre-tax which includes $80,500 pre-tax
($47,500 after tax or $.22 per share) related to a change in calculating
estimated losses for assets which are considered to be economically
impaired. This change in accounting estimates results from the spin-off of
the real estate segment assets to Price Enterprises and Price Enterprises'
decision to pursue business plans and operating strategies as a stand-alone
entity which are significantly different than the strategies of
PriceCostco. Price Enterprises' management believes that as a separate
operating business it will not have the same access to capital as
PriceCostco or generate internal funds from operations to the same extent
as PriceCostco.
PriceCostco's accounting policies with respect to estimating the amount of
impairments on individual real estate properties and related assets were
such that impairment losses would be recorded if the carrying amount of the
asset could not be recovered from estimated future cash flows on an undis-
counted basis. Price Enterprises' management believes that in view of its
strategies with respect to the number and nature of properties that would
be selected for potential disposition, it would be more appropriate to
estimate impairment losses based on fair values of the real estate
properties as determined by appraisals and/or a risk-adjusted discounted
cash flow approach. In determining impairment losses, individual real
estate assets were reduced to estimated fair value, if lower than
historical cost. For those assets which have an estimated fair value in
excess of cost, the asset continues to be recorded at cost. The impairment
losses recorded as a result of this change in accounting estimates reduced
the book basis of certain of the real estate and related assets.
Under the previous policy, PriceCostco and Price Enterprises had determined
that a provision for asset impairments of approximately $9,700 was required
relating to four properties which were under final contract or in final
negotiations for sale.
(5) Gross profit is comprised of net sales less merchandise costs.
(6) Operating expenses include selling, general and administrative expenses,
preopening expenses and provision for estimated warehouse closing costs.
(7) Other income (expense) includes interest expense, interest income and other
income.
</TABLE>
18
<PAGE>
<TABLE>
<S> <C>
(8) Includes a merger and restructuring charge of $120 million pre-tax ($80
million or $.36 per share, after tax) related to the Merger. If such merger
and restructuring charge were excluded, income from continuing operations
fiscal 1994 would have been approximately $190.9 million or $.87 per share
(fully diluted).
(9) Unaudited pro forma net income per common and common equivalent share is
calculated assuming various levels of participation in the Exchange Offer
and assuming that all remaining shares of Price Enterprises Common Stock
held by PriceCostco after the Exchange Offer are distributed to PriceCostco
stockholders. Unaudited pro forma net income per common and common
equivalent share of PriceCostco is calculated to reflect the effect of any
adjustment in the conversion price of the outstanding PriceCostco
convertible subordinated debentures as a result of the Transaction. Such
adjustment is calculated assuming shares of PriceCostco Common Stock have a
market price of $15.25 and shares of Price Enterprises Common Stock are
deemed to have an equal value at the time of the Distribution. See "THE
TRANSACTION -- Effect of the Transaction on Convertible Securities."
(10) If only 21.6 million shares of Price Enterprises Common Stock are issued in
the Exchange Offer and Price Enterprises purchases the remaining 5.4
million shares of Price Enterprises Common Stock from PriceCostco for a
note in the principal amount of approximately $82.4 million (assuming a per
share price for Price Enterprises Common Stock of $15.25 and an interest
rate on the outstanding note of approximately 6%), then unaudited pro forma
net income per common and common equivalent share for fiscal year 1994
would be $.56 (or $.92 per share excluding the merger and restructuring
charge), respectively, and, as of August 28, 1994, total assets and
stockholders' equity would be $82.4 million higher. See "THE TRANSACTION --
The Distribution" for a discussion of the terms of the note.
(11) Long-term debt includes convertible subordinated debt and other long-term
debt.
</TABLE>
19
<PAGE>
COMPARATIVE PER SHARE DATA
The following table sets forth (1) the historical net income per common and
common equivalent share (fully diluted) of PriceCostco for the fiscal year ended
August 28, 1994; (2) the historical book value per outstanding share of
PriceCostco Common Stock as of August 28, 1994; and (3) the unaudited pro forma
net income per common and common equivalent share (fully diluted) and the
unaudited pro forma book value per share of Price Enterprises Common Stock and
PriceCostco Common Stock for the respective periods and dates. The information
presented in the table should be read in conjunction with "PRICE ENTERPRISES,
INC. UNAUDITED PRO FORMA FINANCIAL INFORMATION" and "PRICECOSTCO UNAUDITED PRO
FORMA CONDENSED FINANCIAL INFORMATION" and the separate historical financial
statements of Price Enterprises and PriceCostco and the notes thereto appearing
elsewhere herein or incorporated by reference.
<TABLE>
<CAPTION>
PRICECOSTCO (1)
-------------------------------------------------------------------
PRO FORMA (2)
PRICE -----------------------------------------------------
ENTERPRISES 27
PRO MILLION 21.6 MILLION 13.5 MILLION
FORMA SHARES SHARES SHARES NO SHARES
(2) HISTORICAL EXCHANGED EXCHANGED EXCHANGED TENDERED
------ ------- --------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
52 weeks ended August 28,
1994:
Net income (loss) per common
and common equivalent share
(fully diluted)............ $(1.42)(3) $ .51(4) $ .56 $ .55 $ .53 $ .49
Number of shares used in
calculation (millions)..... 27.0 219.3 192.3 197.7 205.8 219.3
August 28, 1994 (unaudited):
Book value per share........ $21.27 $ 7.74 $ 6.67 $ 6.49 $ 6.23 $ 5.84
Number of shares outstanding
(millions)................. 27.0 217.8 190.8 196.2 204.3 217.8
</TABLE>
- ------------------------
(1) Net income (loss) per common and common equivalent share for PriceCostco
represents income from continuing operations which excludes the results of
the non-club real estate segment which were treated as discontinued
operations in fiscal 1994.
(2) Unaudited pro forma net loss per common share and book value per share of
Price Enterprises assumes that all outstanding shares of Price Enterprises
Common Stock are exchanged for PriceCostco Common Stock in the Exchange
Offer or distributed to PriceCostco stockholders following the Exchange
Offer. Unaudited pro forma net income per common and common equivalent share
of PriceCostco is calculated assuming that there is an adjustment in the
conversion price of the outstanding PriceCostco convertible subordinated
debentures as a result of the Transaction. Such adjustment is calculated
assuming shares of PriceCostco Common Stock have a market price of $15.25
and shares of Price Enterprises Common Stock have an equal value at the time
of the Distribution. See "THE TRANSACTION -- Effect of the Transaction on
Convertible Securities." If only 21.6 million shares of Price Enterprises
Common Stock are issued in the Exchange Offer and Price Enterprises
purchases the remaining 5.4 million shares of Price Enterprises Common Stock
from PriceCostco for a note in the principal amount of approximately $82.4
million (assuming a per share price for Price Enterprises
(FOOTNOTES CONTINUED ON NEXT PAGE)
20
<PAGE>
Common Stock of $15.25 and an interest rate on the outstanding note of
approximately 6%), then unaudited pro forma net income (loss) per common and
common equivalent share and book value per share for Price Enterprises and
PriceCostco would be as follows:
<TABLE>
<CAPTION>
PRICE ENTERPRISES PRICECOSTCO
----------------- -----------
<S> <C> <C>
52 weeks ended August 28,
1994:
Net income (loss) per common
and common equivalent share
(fully diluted)............ $ (1.91) $ .56
Number of shares used in
calculation (millions)..... 21.6 197.7
August 28, 1994:
Book value per share........ $ 22.77 $ 6.90
Number of shares outstanding
(millions)................. 21.6 196.2
<FN>
(3) Includes a provision for asset impairments of $90,200 pre-tax which
includes $80,500 pre-tax ($47,500 after tax or $1.76 net loss per pro forma
common share) related to a change in calculating estimated losses for
assets which are considered to be economically impaired. If the $80,500
pre-tax provision for asset impairments were excluded, pro forma net income
for fiscal 1994 would have been approximately $9,173 or $.34 per common
share. See "Price Enterprises, Inc. Notes to Financial Statements."
(4) Includes a merger and restructuring charge of $120 million pre-tax ($80
million or $.36 per share, after-tax) related to the Merger. If such merger
and restructuring charge were excluded, income from continuing operations
for fiscal 1994 would have been approximately $190.9 million or $.87 per
share (fully diluted).
</TABLE>
21
<PAGE>
COMPARATIVE MARKET PRICES AND DIVIDENDS
PRICECOSTCO
In the Merger, which occurred on October 21, 1993, each share of common
stock, par value $.10 per share, of Price ("Price Common Stock") was exchanged
for 2.13 shares of PriceCostco Common Stock and each share of common stock, par
value $.0033 per share, of Costco ("Costco Common Stock") was exchanged for one
share of PriceCostco Common Stock.
Until October 21, 1993, Price Common Stock was quoted on The Nasdaq Stock
Market's National Market under the symbol "PCLB" and Costco Common Stock was
quoted on The Nasdaq Stock Market's National Market under the symbol "COST."
Trading in PriceCostco Common Stock commenced on October 22, 1993. PriceCostco
Common Stock is quoted on The Nasdaq Stock Market's National Market under the
symbol "PCCW."
The following table sets forth the high and low sales prices of PriceCostco
Common Stock for the period October 22, 1993 through October 31, 1994, and Price
Common Stock and Costco Common Stock for the periods indicated. The quotations
are as reported in published financial sources.
<TABLE>
<CAPTION>
PRICE COSTCO PRICECOSTCO
COMMON STOCK COMMON STOCK COMMON STOCK
------------------ ------------------ ------------------
HIGH LOW HIGH LOW HIGH LOW
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Calendar Quarters -- 1991
First Quarter............................................. 22 1/8 17 3/4 24 7/8 15 1/8 -- --
Second Quarter............................................ 27 1/2 21 1/2 30 1/2 22 7/8 -- --
Third Quarter............................................. 30 5/8 23 1/2 33 3/8 26 3/8 -- --
Fourth Quarter............................................ 29 1/8 20 1/2 39 1/2 24 5/8 -- --
Calendar Quarters -- 1992
First Quarter............................................. 25 7/8 21 42 5/8 35 1/8 -- --
Second Quarter............................................ 21 7/8 13 3/4 38 1/4 25 1/2 -- --
Third Quarter............................................. 16 1/2 14 30 20 1/2 -- --
Fourth Quarter............................................ 21 1/8 14 1/2 30 1/2 20 1/4 -- --
Calendar Quarters -- 1993
First Quarter............................................. 18 3/4 14 3/4 25 1/4 18 1/2 -- --
Second Quarter............................................ 18 1/2 13 1/4 19 3/4 15 3/4 -- --
Third Quarter............................................. 18 14 3/4 18 1/2 15 -- --
Fourth Quarter (through October 21, 1993)................. 19 7/8 17 1/2 19 5/8 16 3/4 -- --
Fourth Quarter (October 22, 1993
through December 31, 1993)............................... -- -- -- -- 21 3/8 17 1/8
Calendar Quarters -- 1994
First Quarter............................................. -- -- -- -- 21 5/8 16 7/8
Second Quarter............................................ -- -- -- -- 18 1/4 13
Third Quarter............................................. -- -- -- -- 16 1/2 13 3/4
Fourth Quarter (through November 15, 1994)................ -- -- -- -- 16 3/4 14 7/8
</TABLE>
All Costco common share data has been adjusted to reflect a two-for-one
stock split effected April 30, 1991 and a three-for-two stock split effected
March 6, 1992. All Price common share data has been adjusted to reflect the 2.13
exchange ratio in the Merger.
On July 15, 1994, the last trading day prior to the public announcement by
PriceCostco of the Transaction, the last reported sales price for each share of
PriceCostco Common Stock was $14.6875. On November 15, 1994, the last reported
sales price per share of PriceCostco Common Stock was $15.375.
PriceCostco does not pay regular dividends and does not anticipate the
declaration of a cash dividend prior to the Closing Date. However, Price paid to
shareholders a one-time special cash dividend of $1.50 per
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share of Price Common Stock on July 28, 1989. Under its two revolving credit
agreements, PriceCostco is generally permitted to pay dividends in any fiscal
year up to an amount equal to 50% of its consolidated net income for that fiscal
year.
PRICE ENTERPRISES
Price Enterprises is a newly formed entity. There is currently no trading
market for Price Enterprises Common Stock and no dividends have ever been paid.
Following the Closing Date, it is anticipated that Price Enterprises Common
Stock will be publicly traded and quoted on The Nasdaq Stock Market's National
Market under the symbol "PREN."
Price Enterprises presently intends to retain future earnings to finance the
growth and development of all of its business segments; and, therefore, Price
Enterprises does not currently anticipate paying any cash dividends. Any future
determination relating to dividend policy will be made at the discretion of the
Board of Directors of Price Enterprises. Such determinations will depend on a
number of factors, including the future earnings, capital requirements,
financial condition and prospects for Price Enterprises, possible loan or
financing covenant restrictions, and such other factors as the Board of
Directors of Price Enterprises may deem relevant.
Price Enterprises consists of certain assets transferred from PriceCostco,
as described in "THE TRANSACTION -- Transactions Undertaken Prior to the
Exchange Offer." NOTHING HEREIN SHOULD BE CONSTRUED TO SUGGEST THAT THE TRADING
PRICE OF PRICECOSTCO COMMON STOCK AT ANY POINT IN TIME MAY BE USED AS A
SUBSTITUTE FOR THE TRADING PRICE OF PRICE ENTERPRISES COMMON STOCK. No assurance
can be given that Price Enterprises Common Stock will trade at a price per share
reflecting the earnings per share or other multiple, or other attributes, of
PriceCostco. See "SPECIAL CONSIDERATIONS/RISK FACTORS -- Special Considerations
with Respect to Price Enterprises."
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<PAGE>
DEFINED TERMS USED IN THIS OFFERING CIRCULAR/PROSPECTUS, AND REFERENCES TO
THE PAGES HEREIN ON WHICH SUCH TERMS ARE DEFINED, ARE LISTED ON
AN INDEX WHICH IS ATTACHED TO THIS OFFERING
CIRCULAR/PROSPECTUS AS ANNEX I.
SPECIAL CONSIDERATIONS/RISK FACTORS
In deciding whether or not to tender shares of PriceCostco Common Stock in
exchange for shares of Price Enterprises Common Stock, holders of PriceCostco
Common Stock should carefully consider the following factors, in addition to
those discussed elsewhere in this Offering Circular/Prospectus.
SPECIAL CONSIDERATIONS APPLICABLE TO ALL PRICECOSTCO STOCKHOLDERS
THE EXCHANGE RATIO
For ease of administration, it was determined that the exchange ratio for
the Exchange Offer would be one share of Price Enterprises Common Stock for each
share of PriceCostco Common Stock. In structuring the Transaction -- and
determining that 27 million shares of Price Enterprises Common Stock would be
offered in the Exchange Offer -- one goal was to provide a reasonable prospect
of achieving 100% subscription for the shares of Price Enterprises Common Stock
offered in the Exchange Offer. In that regard, in making its determination to
approve the Transaction, one of the factors considered by the Board of Directors
of PriceCostco was a range of illustrative high and low per share values for
Price Enterprises and the implied per share premium in the Exchange Offer based
on such illustrative values as compared to the per share price of PriceCostco
Common Stock at July 14, 1994 of $14.75 (assuming 27 million shares of Price
Enterprises Common Stock outstanding and a one-for-one exchange ratio). See "THE
TRANSACTION -- Background of the Transaction" and "-- Analysis of Financial
Advisors of PriceCostco." While believing that some premium to tendering
stockholders is included in the exchange ratio, the Board did not quantify any
such premium, recognizing that it could not do so since the range of prices at
which Price Enterprises Common Stock may trade cannot be predicted. See "Special
Considerations with Respect to Price Enterprises -- Market Uncertainties with
Respect to Price Enterprises Common Stock."
PriceCostco has recorded an estimated loss on disposal of its discontinued
operations (the non-club real estate segment); the actual loss will be
determined following consummation of the Exchange Offer. For purposes of
recording such estimated loss, PriceCostco assumed, among other things, a per
share price of Price Enterprises Common Stock of $15.25 (the closing sales price
of PriceCostco Common Stock on October 24, 1994). Such actual loss will be
determined based, in part, on the unaudited pro forma book value per share of
Price Enterprises Common Stock of $21.27. See "THE TRANSACTION -- Anticipated
Accounting Treatment." The $6.02 difference between such amounts is attributable
to a combination of factors. These factors include an expectation that Price
Enterprises may trade at a discount from its book value as well as a belief by
the PriceCostco Board that some premium to tendering stockholders is included in
the exchange ratio, as described above. Neither the assumed per share price, nor
the unaudited pro forma book value per share, of Price Enterprises Common Stock
set forth above should be viewed as a substitute for the trading price of Price
Enterprises Common Stock or as an indicator of any premium that may be realized
by tendering stockholders; the prices at which Price Enterprises Common Stock
may trade cannot be predicted. See "Special Considerations with Respect to Price
Enterprises -- Market Uncertainties with Respect to Price Enterprises Common
Stock."
NO ASSURANCES CAN BE GIVEN THAT PRICE ENTERPRISES COMMON STOCK WILL TRADE AT
PRICES IN EXCESS OF THE PER SHARE PRICE OF PRICECOSTCO COMMON STOCK AT THE
EXPIRATION DATE OF THE EXCHANGE OFFER OR THAT PRICE ENTERPRISES COMMON STOCK
WILL NOT TRADE AT PRICES BELOW SUCH PER SHARE PRICE.
TENDERING AND NONTENDERING STOCKHOLDERS AFFECTED DIFFERENTLY BY THE
TRANSACTION
Holders of shares of PriceCostco Common Stock will be affected by the
Transaction regardless of whether such holders tender their shares of
PriceCostco Common Stock for exchange pursuant to the Exchange Offer. If the
Exchange Offer is not oversubscribed and subject to proration, holders of shares
of PriceCostco Common Stock who tender all of their shares for exchange pursuant
to the Exchange Offer will no longer have an ownership interest in PriceCostco.
See "THE EXCHANGE OFFER -- Terms of the
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<PAGE>
Exchange Offer." Holders of shares of PriceCostco Common Stock who do not tender
any of their shares for exchange pursuant to the Exchange Offer (assuming that
some holders of PriceCostco Common Stock do tender their shares pursuant to the
Exchange Offer) will have an increased ownership interest in PriceCostco. The
magnitude of such increase will depend upon the number of shares of PriceCostco
Common Stock tendered pursuant to the Exchange Offer and accepted for exchange
by PriceCostco. If the Exchange Offer is fully subscribed (I.E., 27 million
shares of PriceCostco Common Stock are tendered and accepted for exchange by
PriceCostco), the ownership interest in PriceCostco represented by each
outstanding share of PriceCostco Common Stock would be increased from
1/217,824,520 to 1/190,824,520 based upon the shares of PriceCostco Common Stock
outstanding on October 31, 1994. In addition, as a result of the Transaction,
PriceCostco will no longer own any Price Enterprises Common Stock and will no
longer own any significant non-warehouse club real estate, although PriceCostco
will retain 49% of the outstanding equity securities or interests, as the case
may be, of each of the Subsidiary Corporations.
TAX TREATMENT OF THE TRANSACTION
Although PriceCostco and Price Enterprises will receive an opinion of
Skadden, Arps, Slate, Meagher & Flom ("Skadden Arps") to the effect that,
although the matter is not entirely free from doubt, the Transaction should
qualify as a tax-free distribution for Federal income tax purposes to
PriceCostco, Price Enterprises and the stockholders who receive Price
Enterprises Common Stock, such opinion will not be binding on the Internal
Revenue Service ("IRS"). To qualify for tax-free treatment, the Transaction must
satisfy a number of legal requirements, some of which are inherently factual and
subject to differing interpretations. If the IRS were to assert successfully
that the Transaction did not qualify for tax-free treatment, the receipt of
Price Enterprises Common Stock in the Transaction would be a taxable transaction
for Federal income tax purposes and for other tax purposes as well. See "THE
TRANSACTION -- Certain Federal Income Tax Consequences."
SPECIAL CONSIDERATIONS WITH RESPECT TO PRICE ENTERPRISES
MARKET UNCERTAINTIES WITH RESPECT TO PRICE ENTERPRISES COMMON STOCK
There is no existing market for Price Enterprises Common Stock. Although
Price Enterprises has applied for quotation of Price Enterprises Common Stock on
The Nasdaq Stock Market's National Market, no assurance can be given that an
active trading market for Price Enterprises Common Stock will develop. Prices at
which Price Enterprises Common Stock may trade cannot be predicted. Nothing
herein should be construed to suggest that the trading price of PriceCostco
Common Stock at any point in time may be used as a substitute for the trading
price of Price Enterprises Common Stock. The prices at which the shares of Price
Enterprises Common Stock will trade will be determined by the marketplace and
may be influenced by many factors, including, among others, the depth and
liquidity of the market for Price Enterprises Common Stock, investor perception
of Price Enterprises and the industries in which Price Enterprises operates, as
well as general economic and market conditions.
If a significant number of holders of PriceCostco Common Stock who receive
shares of Price Enterprises Common Stock in the Transaction sell or attempt to
sell such shares contemporaneously on the open market, the market price for
Price Enterprises Common Stock in the short term could be adversely affected.
POSSIBLE CONTROL OF PRICE ENTERPRISES BY CERTAIN STOCKHOLDERS
Each of Robert E. Price, who is the Chairman of the Board, President and
Chief Executive Officer of Price Enterprises, and Sol Price, a founder of Price,
significant stockholder of PriceCostco and the father of Robert E. Price, has
informed PriceCostco that, while not agreeing to tender all shares of
PriceCostco Common Stock beneficially owned by him in the Exchange Offer, he
currently intends to tender substantially all such shares, so long as, prior to
the consummation of the Exchange Offer, there does not occur any event which
materially impairs the assets or business of Price Enterprises.
If Robert E. Price and Sol Price each tenders all of the shares of
PriceCostco Common Stock he beneficially owns for exchange pursuant to the
Exchange Offer, and the Exchange Offer is fully subscribed but not
oversubscribed and subject to proration (I.E., 27 million shares of PriceCostco
Common Stock are tendered and accepted for exchange by PriceCostco) or the
Exchange Offer is undersubscribed and the
25
<PAGE>
remaining shares of Price Enterprises Common Stock are distributed to
PriceCostco stockholders, then, in each case, Messrs. Price would beneficially
own an aggregate of 11,164,589 shares of Price Enterprises Common Stock, or
approximately 41.3% of the shares of Price Enterprises Common Stock outstanding
immediately after consummation of the Exchange Offer. If 21.6 million shares of
PriceCostco Common Stock are tendered and accepted for exchange by PriceCostco,
each of Robert E. Price and Sol Price tenders all of the shares of PriceCostco
Common Stock he beneficially owns for exchange pursuant to the Exchange Offer
and Price Enterprises purchases the remaining 5.4 million shares of Price
Enterprises Common Stock owned by PriceCostco, as described in "THE TRANSACTION
- -- The Distribution," then Messrs. Price would beneficially own approximately
51.7% of the shares of Price Enterprises Common Stock outstanding immediately
after consummation of the Exchange Offer. See "SECURITY OWNERSHIP --
PriceCostco." In such cases, these stockholders would effectively control the
outcome of all matters submitted to Price Enterprises' stockholders for
approval, including the election of directors. In addition, such ownership could
discourage acquisition of Price Enterprises Common Stock by potential investors,
and could have an anti-takeover effect, possibly depressing the trading price of
Price Enterprises Common Stock. Moreover, in light of the limited number of
shares of Price Enterprises Common Stock that may be held by stockholders other
than Robert Price and Sol Price under such scenarios, there can be no assurance
that an active public market for Price Enterprises Common Stock will develop or
continue after the Closing Date.
LACK OF INDEPENDENT OPERATING HISTORY; RELIANCE ON PRICECOSTCO
Price Enterprises is a newly formed corporation with no independent
operating history. Although the real estate operations of Price Enterprises have
been historically operated as a separate division of Price, prior to the Merger,
and of PriceCostco, subsequent to the Merger, the real estate and other
operations transferred to Price Enterprises have neither been operated as a
stand-alone business nor conducted without the benefit of the financial and
other resources of Price or PriceCostco. There can be no assurance that Price
Enterprises will not encounter financial, managerial or other difficulties as a
result of its lack of independent operating history or inability to continue to
rely on the financial and other resources of PriceCostco.
Following the consummation of the Transaction, Price Enterprises will
continue to rely to a substantial extent on its relations with PriceCostco in
pursuing its investments in the Quest interactive electronic shopping business
and its Mexico and international warehouse club ventures through the Subsidiary
Corporations. Pursuant to operating agreements (the "Operating Agreements")
entered into on the Transfer Closing Date among Price Enterprises, PriceCostco,
Price and each of the Subsidiary Corporations (which are described in "BUSINESS
AND PROPERTIES OF PRICE ENTERPRISES"), the Subsidiary Corporations will rely
upon PriceCostco for certain buying and technological support, training and
other services and, with respect to Quest, space in certain PriceCostco
warehouse clubs for Quest kiosks and the staffing of such kiosks. The Operating
Agreements have a five-year term and cannot be extended without the agreement of
both PriceCostco and Price Enterprises. Although PriceCostco, as a 49%
stockholder of each of the Subsidiary Corporations (or the owner of a 49%
interest, in the case of Mexico Clubs), will have an incentive to foster the
financial prospects of the Subsidiary Corporations and to cooperate with Price
Enterprises with respect to the Subsidiary Corporations, there can be no
assurance that disputes will not arise between PriceCostco and Price Enterprises
with respect to their ongoing business dealings, which could adversely impact
the service and support received by Price Enterprises, or that PriceCostco will
continue to provide the services and support provided for in the Operating
Agreements following the expiration of the five-year term. To the extent that
PriceCostco determines that a business being pursued by Price Enterprises, such
as the Quest business (which has not yet generated earnings), is not worthy of
further investment and support, PriceCostco may cease to provide service and
support for the business after the expiration of the term of the Operating
Agreements, which could materially and adversely affect the viability of such
business.
RISKS ATTENDANT TO MEXICO BUSINESS
Price Enterprises owns a 51% interest in Mexico Clubs, which indirectly owns
a 50% interest in Price Club de Mexico, S.A. de C.V. ("Price Club Mexico"), a
joint venture with Controladora Comercial Mexicana, S.A. de C.V. ("Comercial
Mexicana"), which owns and operates ten Price Club warehouse clubs in Mexico as
of October 31, 1994. Mexico Clubs may also provide certain buying services to
Price Club Mexico.
26
<PAGE>
As described under "THE TRANSACTION -- Background of the Transaction," Price
Enterprises, PriceCostco and Comercial Mexicana have engaged in discussions
regarding a possible transaction pursuant to which Comercial Mexicana or a third
party would purchase the 50% interest in Price Club Mexico owned indirectly by
Mexico Clubs. Based on the discussions to date, Price Enterprises and
PriceCostco believe that if any such purchase occurs, it would most likely
involve payment for the 50% interest in Price Club Mexico in a combination of
cash, promissory notes or stock or other securities. However, as of the date of
this Offering Circular/Prospectus, no agreement, preliminary or otherwise, has
been reached with Comercial Mexicana regarding such proposed purchase. ALTHOUGH
PRICE ENTERPRISES AND PRICECOSTCO CURRENTLY ANTICIPATE THAT DISCUSSIONS
REGARDING SUCH PROPOSED PURCHASE WILL CONTINUE, NO ASSURANCES CAN BE GIVEN THAT
ANY AGREEMENT WILL BE REACHED REGARDING SUCH A PURCHASE BY COMERCIAL MEXICANA OR
SUCH THIRD PARTY OR, IF SUCH AN AGREEMENT IS REACHED, THE TERMS OF ANY SUCH
PURCHASE.
Pursuant to an Agreement to form a Corporate Joint Venture, dated June 21,
1991, between Price, Price Venture Mexico, a California corporation ("Primex"),
and Comercial Mexicana (the "Joint Venture Agreement"), if the Board of
Directors of Price Club Mexico becomes deadlocked over, or because of a lack of
a quorum or related majority is unable to act upon, any matter, and if
Commercial Mexicana and Primex are unable to reach an agreement within 30 days
thereof, then the Joint Venture Agreement will be terminated, and one of the
parties' interest in Price Club Mexico will be sold to the other party, as
described under "BUSINESS AND PROPERTIES OF PRICE ENTERPRISES -- Mexico Clubs --
The Joint Venture Agreement." In addition, for a period of 90 days commencing
June 21, 1995, either Primex or Comercial Mexicana may give written notice to
the other that it elects to terminate the Joint Venture Agreement, for any
reason and without cause, effective as of the ninetieth day following June 21,
1995. Upon any such termination, Price Club Mexico will be dissolved and
liquidated. See "BUSINESS AND PROPERTIES OF PRICE ENTERPRISES -- Mexico Clubs
- --The Joint Venture Agreement."
Various challenges and risks are attendant to doing business in Mexico,
including relatively high real estate prices, a shortage of skilled
middle-management employees compared to the United States, foreign currency
exchange rate fluctuations, the potential for inflation, an uncertain political
situation and a proliferation of competition in the warehouse club and general
retail businesses. In addition, Price Club Mexico has substantial investments in
real estate in Mexico. Any downturn in the Mexico real estate market or other
adverse developments would adversely affect the value of such investments. A
substantial portion of the products sold by Price Club Mexico is imported from
the United States and abroad. Any disruption in the transfer of goods to Mexico
from foreign countries could have an adverse effect on Price Club Mexico. There
can be no assurance that some or all of these risks will not adversely impact
the business and operations of Mexico Clubs in the future. Total sales by Price
Club Mexico were $93 million and $255 million in calendar years 1992 and 1993,
respectively, and total sales for calendar year 1994 are expected to exceed
total sales in such prior years. Price Club Mexico was profitable in each of the
calendar years 1992 and 1993, and is expected to be profitable in calendar year
1994. While total sales by Price Club Mexico for 1995 are expected to increase,
as compared to total sales for calendar year 1994, and Price Club Mexico is
budgeted to be profitable in calendar year 1995, comparable sales trends for the
last three months (based on sales at warehouse locations open for more than one
year) have declined. Price Enterprises believes that such decline is due to,
among other things, cannibalization in Mexico City, increased levels of
competition and a slowdown in the Mexican economy. The foregoing is not intended
as a projection by Price Enterprises or PriceCostco of actual results of
operations of Price Club Mexico for calendar year 1994 or 1995. The actual
results of operations of Price Club Mexico for such period may be significantly
more favorable or less favorable than as set forth above and should not be
relied upon or regarded as a representation as to actual results of operations.
RISKS ATTENDANT TO INTERNATIONAL BUSINESSES
Price Enterprises owns 51% of the outstanding capital stock of Price Global,
which, among other things, owns all of the outstanding capital stock of Club
Merchandising, Inc., an export and import company ("CMI"), and has the right to
develop Club Businesses (as hereinafter defined) in the Specified Geographical
Areas (as hereinafter defined). Various risks are attendant to international
business operations, including foreign currency exchange rate fluctuations, the
potential for inflation, uncertain political situations and a
27
<PAGE>
proliferation of global competition. In addition, any disruption or impediment
to the transfer of goods into foreign countries from the United States and
elsewhere could have a material adverse effect on Price Global. There can be no
assurance that some or all of these risks will not have a material adverse
effect on the business and operations of Price Global in the future.
RISKS ATTENDANT TO QUEST
Price Enterprises owns 51% of the outstanding capital stock of Price Quest.
The Quest interactive electronic shopping business is a developing business,
which was commenced by Price in 1992 and has incurred operating losses from its
commencement to present. Quest utilizes a computer shopping terminal,
historically located in certain PriceCostco warehouse clubs, which allows
customers to browse and purchase products through an electronic catalogue of
goods and services. The growth and viability of Quest will depend, in part, on
the acceptance of such shopping technology by consumers. In addition, the Quest
kiosk electronic interface and supporting software system are subject to ongoing
research and development. There can be no assurance that Price Enterprises will
have the technological and financial resources to complete such development.
Although Quest kiosks are presently installed at 38 PriceCostco warehouse clubs,
Quest technology has not yet been implemented on a broad basis. There can be no
assurance that Price Enterprises will successfully complete the wide-scale
implementation of Quest. In addition, Federal copyright laws could limit the
availability of certain products on Quest kiosks in the future.
PRICE ENTERPRISES LIQUIDITY AND CAPITAL RESOURCES
Price Enterprises will require substantial capital to pursue its business
strategy, as described in "PRICE ENTERPRISES, INC. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and "BUSINESS AND
PROPERTIES OF PRICE ENTERPRISES." Although management of Price Enterprises
believes it has sufficient available sources of funds to finance its expected
capital expenditures, there can be no assurance that economic conditions,
unforseen capital expenses or delays in the divestiture of certain real
properties will not adversely impact Price Enterprises' ability to pursue its
business strategy.
There can be no assurance that Price Enterprises and/or the Subsidiary
Corporations will not encounter capital requirements in excess of those
currently anticipated. Likewise, there can be no assurance that the planned real
estate sales will be completed by the expected dates, if at all, or that the
proceeds of the sales will be fully realized, or that unforseen financial
difficulties of Price Enterprises' commercial property tenants will not
adversely impact cash flow from real property rentals. Although Price
Enterprises believes it will be able to fund any capital requirements through
its revolving credit facility with PriceCostco (see "CERTAIN RELATED AGREEMENTS
- -- Advance Agreement"), that facility expires six months following consummation
of the Exchange Offer, and Price Enterprises does not currently have any
arrangements in place to provide a source of working capital funding after the
facility expires. If Price Enterprises were to experience a shortfall in
available cash as a result of these or any other matters, it could be forced to
delay completion of construction with respect to certain existing real estate
projects and/or curtail its investments in the Subsidiary Corporations.
COMPETITION WITH RESPECT TO THE SUBSIDIARY CORPORATIONS
Price Enterprises believes that competitive pressures in the Mexico retail
market and other international markets will continue to increase. Price Quest
competes directly or indirectly with most merchandising businesses, other
discount retailers (including PriceCostco warehouse clubs), catalogue and other
direct marketing sales, televised home shopping, travel agency services,
traditional residential real estate brokers, other affinity buying services and
similar interactive kiosks that are or may be operated by other retailers. Price
Enterprises believes that, as further advances in computer technology are made
and as more interactive computer-based services become available to consumers in
the home and retail environments, competitive pressures on Price Quest will
intensify.
The Subsidiary Corporations may also face competition from PriceCostco in
the future. Pursuant to the Operating Agreements, PriceCostco has agreed to
refrain from competing with the Subsidiary Corporations
28
<PAGE>
in certain respects for a period of five years. There can be no assurance that,
after the termination of the Operating Agreements, PriceCostco will not elect to
pursue businesses competitive with Price Enterprises or the Subsidiary
Corporations.
NOTES RECEIVABLE
Price Enterprises holds the City Notes (as hereinafter defined). Repayment
of each City Note by the relevant municipality is generally made based on that
municipality's allocation of sales tax revenues generated by retail businesses
located on a particular property associated with such City Note. Under the terms
of most of the City Notes, the unpaid balance of the note is forgiven at its
maturity date. In part as a result of the recent recession, sales tax revenues
generated by the retail businesses located on the properties associated with the
City Notes have declined in recent years. Consequently, there can be no
assurance that the full book value of the City Notes will be repaid by their
maturity.
Price Enterprises also owns the Atlas Note, which is collateralized by a
hotel and convention center property. The Atlas Note matured on May 8, 1994. The
borrower has not repaid the principal amount and otherwise has been and is
currently in violation of certain of its debt covenants. Price Enterprises has
agreed to forbear its foreclosure rights pending consummation of a restructuring
of the debt obligations, which is expected to occur by mid-December 1994. There
can be no assurance that the loan restructuring will be consummated. In the
event a restructuring cannot be consummated, Price Enterprises has retained its
foreclosure rights under the Atlas Note. See "BUSINESS AND PROPERTIES OF PRICE
ENTERPRISES -- Real Estate Business -- City Notes and Atlas Note."
POTENTIAL CONFLICTS OF INTEREST
Historically, The Price REIT, Inc. (the "REIT") has performed property
management services for certain properties held by Price Enterprises. It is
anticipated that Price Enterprises will continue such arrangements with the
REIT. There are no understandings or agreements to purchase or sell properties
between Price Enterprises and the REIT. However, there have been preliminary
discussions between representatives of the REIT and Price Enterprises regarding
possible transactions between the companies in the future. Price Enterprises
intends to continue to explore and study these possible transactions, including
the possibility of entering into joint ventures or other synergistic
transactions with the REIT. Sol Price is the Chairman of the Board of the REIT
and has beneficial ownership through various family and charitable trusts of
approximately 9% of the Class B Common Stock of the REIT. Certain other
officers, directors and principal stockholders of the REIT may become directors,
officers or principal stockholders of Price Enterprises. In such case, these
persons would face conflicts of interest in determining how to allocate real
estate investment opportunities between Price Enterprises and the REIT and in
connection with any transactions between Price Enterprises and the REIT. Price
Enterprises and the REIT have not determined how such conflicts, if any, in
allocating real estate investment opportunities between them will be resolved.
Any transactions between Price Enterprises and the REIT will be subject to the
approval of an independent committee of the Board of Directors of Price
Enterprises, comprised of directors who are not officers, directors or
stockholders of the REIT. See "BUSINESS AND PROPERTIES OF PRICE ENTERPRISES --
Real Estate Business -- Relationship with The Price REIT."
DEPENDENCE ON KEY PERSONNEL
Price Enterprises is dependent on the efforts of its executive management
team. While Price Enterprises believes that it could find replacements for these
key personnel, the loss of their services could have a temporary adverse effect
on the operations of Price Enterprises. Some, but not all, of these officers
have entered into employment agreements with Price Enterprises. See "MANAGEMENT
OF PRICE ENTERPRISES -- Compensation of Executive Officers." Price Enterprises
has not purchased "key man" insurance with respect to any members of its
executive management team and does not anticipate purchasing such insurance in
the future.
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<PAGE>
SPECIAL CONSIDERATIONS WITH RESPECT TO PRICE ENTERPRISES' REAL ESTATE
INVESTMENTS
ECONOMIC PERFORMANCE AND VALUE OF RETAIL CENTERS DEPENDENT ON MANY FACTORS
Real property investments are subject to varying degrees of risk. The
economic performance and value of real estate can be affected by changes in the
national, regional and local economic climate, local conditions such as an
oversupply of space or a reduction in demand for real estate in the area, the
attractiveness of the properties to tenants, competition from other available
space, the ability of the owner to provide adequate maintenance and insurance
and increased operating costs. Owners of retail centers, such as Price
Enterprises, must monitor the conditions of their properties and continually
evaluate the need to remodel or upgrade their properties. In addition, real
estate values can be affected by such factors as government regulations and
changes in real estate, zoning or tax laws, interest rate levels, availability
of financing and potential liability under environmental and other laws.
DEPENDENCE ON RENTAL INCOME FROM REAL PROPERTY; RELIANCE UPON KEY TENANTS
As a substantial portion of Price Enterprises' income is derived from rental
income from real property, Price Enterprises' income would be adversely affected
if a significant number of Price Enterprises' lessees were unable to meet their
obligations to Price Enterprises or if Price Enterprises was unable to lease a
significant amount of space in its retail centers on economically favorable
lease terms. In the event of default by a lessee, Price Enterprises could
experience delays in enforcing its rights as lessor and could incur substantial
costs in protecting its investment. Price Enterprises' four largest tenants
account for approximately 42.3% of its total base rent revenues, and, therefore,
Price Enterprises is substantially dependent upon the financial stability of
such tenants. The bankruptcy or insolvency of a major tenant may have a material
adverse effect on the retail centers affected and the income produced by such
properties. A bankruptcy or insolvency of one or more of its four major tenants
could have a material adverse impact on Price Enterprises' results of
operations. To Price Enterprises' knowledge, none of its major tenants is
currently in bankruptcy or insolvent.
ILLIQUIDITY OF REAL ESTATE INVESTMENTS
Price Enterprises' equity real estate investments are relatively illiquid
and therefore tend to limit the ability of Price Enterprises to vary its
portfolio promptly in response to changes in economic or other conditions. In
addition, certain significant expenditures associated with each equity
investment (such as mortgage payments, real estate taxes and maintenance costs)
are generally not reduced when circumstances cause a reduction in income from
the investment. Should such events occur, Price Enterprises' income and cash
flow would be adversely affected.
ECONOMIC CONDITIONS
Although inflation and other economic conditions could cause base rents
under Price Enterprises' long-term leases to be less than prevailing market
rates, most of Price Enterprises' leases are triple net leases which require
tenants to pay their share of operating expenses, including common area
maintenance, real estate taxes, insurance and promotion, thereby reducing
exposure to increases in costs and operating expenses resulting from inflation.
Many regions of the United States, including Southern California and parts
of the Northeastern United States, where a significant portion of Price
Enterprises' properties are located, have experienced an economic recession, and
if such recession were to continue, it could adversely affect the performance of
Price Enterprises' tenants and the value of its properties.
COMPETITION IN THE REAL ESTATE INDUSTRY
Price Enterprises competes for tenants in its retail shopping centers
primarily on the basis of customer traffic generated by its national and
regional retail anchor tenants, such as Price Club, The Home Depot and The
Sports Authority. Price Enterprises also attracts smaller tenants by offering
desirable locations and competitive lease terms. The closing or relocation of
any anchor tenant could have a material adverse effect on the operation of the
shopping center. In addition, the closing or relocation by PriceCostco of its
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warehouse club operations at certain of Price Enterprises' properties could
trigger provisions in leases of certain tenants at those properties which would
allow such tenants to terminate their leases prior to the current lease
expiration date.
Price Enterprises competes with a wide variety of corporate and individual
real estate developers and real estate investment trusts which have investment
objectives similar to those of Price Enterprises and which may have greater
resources and longer operating histories than Price Enterprises.
UNINSURED LOSS
Each of Price Enterprises' properties is covered by comprehensive liability,
fire, flood, extended coverage and rental loss insurance, with policy
specifications and insured limits customarily carried for similar properties.
Price Enterprises believes that its properties are adequately insured in
accordance with industry standards. A substantial number of Price Enterprises'
properties are located in California, which is generally subject to regular
seismic activity that could damage or destroy these properties. Such properties
are not currently insured in respect of earthquake losses, as the insurance
against such losses, in the opinion of Price Enterprises' management, is not
currently available on commercially reasonable terms. Should an uninsured loss
occur, Price Enterprises could lose invested capital in, and anticipated profits
from, the property.
LIABILITIES FOR ENVIRONMENTAL MATTERS
Price Enterprises' ownership of real estate could subject Price Enterprises
to certain environmental liabilities. There are certain sites among the real
properties owned by Price Enterprises with known environmental liabilities,
including certain other sites located in areas of current or former industrial
activity where environmental contamination may have occurred. Even if not
currently known, Price Enterprises subsequently could discover potential
environmental liabilities arising from its sites or from neighboring facilities.
In addition, undeveloped sites may be affected by regulations enacted to protect
sensitive environmental resources, including threatened and endangered species
and wetlands, so as to restrict Price Enterprises' development and/or diminish
the value of those sites. See "BUSINESS AND PROPERTIES OF PRICE ENTERPRISES --
Real Estate Business -- Environmental Matters." Price Enterprises has agreed to
indemnify PriceCostco for all of PriceCostco's environmental liabilities arising
out of PriceCostco's prior ownership and/or operation of the real property
transferred to Price Enterprises. However, PriceCostco has agreed to indemnify
and hold Price Enterprises harmless in respect of one-half of all environmental
liabilities relating to the property located in Phoenix, Arizona and known as
the Phoenix (Fry's) site. See "THE AGREEMENT OF TRANSFER AND PLAN OF EXCHANGE --
Indemnification."
THE TRANSACTION
GENERAL
PriceCostco intends to implement a spin-off reorganization pursuant to the
terms and conditions of an Amended and Restated Agreement of Transfer and Plan
of Exchange, dated as of November 14, 1994 (the "Transfer and Exchange
Agreement"), by and between PriceCostco and Price Enterprises. For a description
of the Transfer and Exchange Agreement, see "THE AGREEMENT OF TRANSFER AND PLAN
OF EXCHANGE."
The transactions contemplated by the Transfer and Exchange Agreement are
referred to herein as the "Transaction." The date and time of the closing of the
transactions contemplated by the Transfer and Exchange Agreement, other than
those actions that were taken and transactions that were consummated as of the
Transfer Closing Date (as hereinafter defined), are referred to herein as the
"Closing Date." It is anticipated that the Closing Date will occur on the date
immediately following the expiration of the Exchange Offer, or if such date is
not a business day, on the next business day thereafter.
THE EXCHANGE OFFER
Pursuant to the Transfer and Exchange Agreement and upon the terms and
subject to the conditions set forth in this Offering Circular/Prospectus and the
accompanying Letter of Transmittal, PriceCostco is offering to exchange one
share of Price Enterprises Common Stock for each share of PriceCostco Common
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Stock, up to a maximum of 27 million shares of Price Enterprises Common Stock.
If more than 27 million shares of PriceCostco Common Stock are validly tendered
and not withdrawn in the Exchange Offer prior to the Expiration Date, then, upon
the terms and subject to the conditions set forth in this Offering Circular/
Prospectus and the Letter of Transmittal, PriceCostco will accept 27 million
shares for exchange on a pro rata basis, and shares of Price Enterprises Common
Stock will be exchanged therefor. For a description of certain actions to be
taken in the event that fewer than 27 million shares of PriceCostco Common Stock
are tendered in the Exchange Offer, see "The Distribution" below. The Exchange
Offer is not conditioned upon any minimum number of shares of PriceCostco Common
Stock being tendered for exchange. The Exchange Offer is, however, subject to
certain other conditions described under "THE EXCHANGE OFFER -- Conditions to
the Exchange Offer."
TRANSACTIONS UNDERTAKEN PRIOR TO THE EXCHANGE OFFER
THE TRANSFER OF ASSETS TO PRICE ENTERPRISES
Pursuant to the Transfer and Exchange Agreement, as of August 28, 1994 ("the
Transfer Closing Date"), PriceCostco caused to be transferred, or, in certain
cases, will cause to be transferred (the "Transfer"), to Price Enterprises the
following assets (the "Transferred Assets"):
(i) certain commercial real estate specified in the Transfer
and Exchange Agreement which was not integral to PriceCostco's
merchandising operations;
(ii) the net proceeds from the sale of certain commercial real
estate (such real estate, together with the real estate described
in the foregoing clause (i), the "Commercial Properties")
occurring on or after June 1, 1994 and prior to the transfer of
the Commercial Properties to Price Enterprises;
(iii) the commercial real estate comprising PriceCostco's
warehouse club facilities at Pentagon City in Arlington,Virginia;
Wayne, New Jersey; Westbury, New York; and Morena Boulevard in San
Diego, California (including fixtures permanently attached to such
structures, but excluding inventory, furniture, trade fixtures and
equipment) (the "Warehouse Properties");
(iv) the commercial real estate known as 4455 and 4649 Morena
Boulevard, San Diego, California (the "San Diego Property" and,
together with the Commercial Properties and the Warehouse
Properties, the "Real Properties"), and certain furniture,
fixtures and equipment located at the San Diego Property;
(v) a note in the principal amount of $41 million made by
Atlas Hotels, Inc. secured by a hotel and convention center
property located in San Diego, California (the "Atlas Note");
(vi) notes receivable with an aggregate book value as of
August 28, 1994 of approximately $32 million, which were
originally made and delivered by various governmental agencies in
connection with the financing of the development of certain
warehouse club and adjacent sites (the "City Notes");
(vii) 51% of the outstanding capital stock of each of the
Subsidiary Corporations (as described under "The Transfer of
Assets to the Subsidiary Corporations" below); and
(viii) all claims, rights, entitlements and causes of action
of PriceCostco and its subsidiaries in respect of the assets
described in clauses (i) through (vii) above (other than any such
claims, rights, entitlements and causes of actions arising out of
the Retained Liabilities (as hereinafter defined)).
As of the date of this Offering Circular/Prospectus, commercial real estate
representing approximately 34% of the book value of the Real Properties remains
to be transferred from PriceCostco to Price Enterprises. The Transfer and
Exchange Agreement specifies the actions to be taken if PriceCostco is unable to
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transfer any of the Real Properties to Price Enterprises on or prior to February
25, 1995. See "THE AGREEMENT OF TRANSFER AND PLAN OF EXCHANGE -- Transfer of
Assets; Assumption of Liabilities."
In consideration for the Transfer, Price Enterprises (i) issued to Price, a
subsidiary of PriceCostco, 27 million shares of Price Enterprises Common Stock,
which constitute all of the outstanding shares of Price Enterprises Common
Stock; (ii) assumed (x) all liabilities and obligations of PriceCostco and its
subsidiaries relating to or arising out of the Transferred Assets and that arise
out of events occurring at or after the Transfer Closing Date, (y) all
liabilities and obligations relating to or arising in respect of Materials of
Environmental Concern (as hereinafter defined) and violations or purported
violations of Environmental Laws (as hereinafter defined) that relate to or
arise out of the Real Properties and that arise out of events occurring prior
to, at or after the Transfer Closing Date and (z) all costs to complete
construction of the Commercial Properties incurred after June 1, 1994, as set
forth in the Transfer and Exchange Agreement (the "Assumed Construction Costs");
and (iii) made all other deliveries required to be made by Price Enterprises
pursuant to the Transfer and Exchange Agreement. See "THE AGREEMENT OF TRANSFER
AND PLAN OF EXCHANGE -- Transfer of Assets; Assumption of Liabilities --
Consideration for Transfer."
In connection with the Transaction, on the Transfer Closing Date PriceCostco
and Price Enterprises entered into a revolving credit agreement (the "Advance
Agreement") pursuant to which PriceCostco has agreed to advance to Price
Enterprises up to a maximum of $85 million (reduced by an amount equal to the
net proceeds from the sale of any of the Commercial Properties between the
Transfer Closing Date and the Closing Date) from time to time during the period
from the Transfer Closing Date until six months following the earlier of (i) the
Closing Date and (ii) the date on which Price Enterprises Common Stock is
distributed to holders of PriceCostco Common Stock. As of October 31, 1994, the
outstanding principal balance under the Advance Agreement was $7,796,000. For a
description of the Advance Agreement, see "CERTAIN RELATED AGREEMENTS -- Advance
Agreement."
THE TRANSFER OF ASSETS TO THE SUBSIDIARY CORPORATIONS
PriceCostco and Price Enterprises have caused to be formed Mexico Clubs, of
which Price and Price Enterprises own 49% and 51% interests, respectively.
PriceCostco has caused to be formed Price Global and Price Quest. PriceCostco
has caused to be conveyed, assigned, transferred and delivered to:
(i) Mexico Clubs (A) all shares of capital stock of Primex,
owned, directly or indirectly, by PriceCostco, (B) all other
noncurrent assets of PriceCostco and its subsidiaries specifically
related to the conduct of business in Mexico and (C) certain other
assets (such assets, collectively, the "Mexico Assets"); PROVIDED,
HOWEVER, that the term "Mexico Assets" does not include (x) the
Joint Venture Agreement, (y) any right, title or interest in or to
the names "Price Club," "Price Club Costco" or "Price Costco" and
(z) any computer software;
(ii) Price Global (A) the right to develop Club Businesses in
the Specified Geographical Areas (other than Mexico), (B) all
shares of capital stock of CMI owned, directly or indirectly, by
PriceCostco (the "CMI Stock"), (C) all right, title and interest
in and to, or, in certain cases, a long-term license to use, the
names "Price Club," "Price Club Costco" and "Price Costco" in each
of the Specified Geographical Areas (other than Mexico) and (D)
all other noncurrent assets of PriceCostco and its subsidiaries
(other than those included in CMI) specifically related to the
conduct of business in the Specified Geographical Areas (such
assets, collectively, the "International Assets"); and
(iii) Price Quest (A) all of the noncurrent assets of
PriceCostco or any of its subsidiaries specifically related to the
business and operations then conducted by PriceCostco through its
Quest interactive electronic shopping business, together with
Price Club Travel, Price Club Realty and the Price Club automobile
advertising/referral business (collectively, the "Quest
Business"), (B) all right, title and interest, if any, of
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PriceCostco or any of its subsidiaries to, or, in certain cases, a
long-term license to use, the names "Price Club Quest" and "Quest"
and (C) certain other assets (such assets, collectively, the
"Quest Assets").
Each of Price Global and Price Quest have issued 100 shares of its common stock
to Price, which constitutes all of the outstanding capital stock of each such
Subsidiary Corporation. As of the Transfer Closing Date, PriceCostco caused to
be transferred to Price Enterprises as a part of the Transferred Assets 51
shares of common stock of each of Price Global and Price Quest, representing 51%
of the outstanding capital stock of each such Subsidiary Corporation.
As used in the Transfer and Exchange Agreement and in this Offering
Circular/Prospectus "Club Business" means any merchandising activity utilizing
70,000 square feet or more in a single location, operated with membership and
selling food and non-food items through a central checkout; and "Specified
Geographical Areas" means Australia, New Zealand, the Northern Marianas Islands
(including Guam and Saipan), the Republic of Panama, those Central American
countries situated north of the Republic of Panama and south of Mexico, Mexico
and those islands situated in the Western Hemisphere north of the Equator and
lying within a certain geographical area in the Gulf of Mexico and the Atlantic
Ocean, as specified in the Transfer and Exchange Agreement (including Bermuda
but excluding Puerto Rico and any portion of the United States (other than the
U.S. Virgin Islands) or Canada lying within such geographical area).
THE DISTRIBUTION
The terms of the Transfer and Exchange Agreement provide that if the number
of shares of PriceCostco Common Stock validly tendered in the Exchange Offer by
holders of PriceCostco Common Stock is less than 21.6 million, the Board of
Directors of PriceCostco will accept such validly tendered shares for exchange
and will distribute the remaining shares of Price Enterprises Common Stock pro
rata to PriceCostco stockholders. The distribution will be payable to holders of
record of shares of PriceCostco Common Stock as of a date no more than 20
business days after the Closing Date (the "Distribution Record Date"), and, with
respect to each share of PriceCostco Common Stock, will consist of a portion of
a share of Price Enterprises Common Stock equal to a fraction, the numerator of
which is the number of shares of Price Enterprises Common Stock owned by
PriceCostco following termination or consummation of the Exchange Offer and the
denominator of which is the number of shares of PriceCostco Common Stock
outstanding on the Distribution Record Date (the "Distribution Fraction").
If the Exchange Offer is consummated and the number of shares validly
tendered by holders of PriceCostco Common Stock is greater than 21.6 million,
but less than 27 million, PriceCostco will accept such validly tendered shares
for exchange and will, at its option, take one of the following actions: (i) the
Board of Directors of PriceCostco will cause to occur a distribution on each
share of PriceCostco Common Stock payable to holders of record of shares of
PriceCostco Common Stock as of the Distribution Record Date, such distribution
to consist of a portion of a share of Price Enterprises Common Stock equal to
the Distribution Fraction; or (ii) on the thirtieth business day following the
Closing Date, PriceCostco shall sell to Price Enterprises all shares of Price
Enterprises Common Stock owned by PriceCostco following consummation of the
Exchange Offer, and Price Enterprises shall be required to purchase such shares
by delivering in exchange therefor a promissory note (the "Promissory Note"). In
such event, PriceCostco currently intends to sell such shares to Price
Enterprises in exchange for a promissory note. Any such sale will be at a price
per share equal to the average of the closing sales price of Price Enterprises
Common Stock for the 20 trading days commencing on the sixth trading day
following the Expiration Date (or, if Price Enterprises Common Stock does not
trade on any such day, the average of the high bid and low asked price per share
on such day), which right of PriceCostco to so sell shall be exercised by
delivering written notice to Price Enterprises within 20 business days after the
Closing Date specifying (A) the number of shares of Price Enterprises Common
Stock owned by PriceCostco and (B) that PriceCostco desires to sell such shares
to Price Enterprises. Principal on the Promissory Note will be payable two years
following the earlier of (i) the Closing Date and (ii) the date on which Price
Enterprises Common Stock is distributed to holders of PriceCostco Common Stock.
Accrued interest will be payable monthly on unpaid principal at an annual rate
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equal to either (x) the 90-day LIBOR rate plus 15 basis points, adjusted
quarterly, or (y) the two-year U.S. Treasury Bill rate plus 50 basis points, as
selected by Price Enterprises at the time of borrowing. The obligations of Price
Enterprises under the Promissory Note will be secured by a first priority
security interest in the shares of Price Enterprises Common Stock sold to Price
Enterprises by PriceCostco pursuant to a security and pledge agreement entered
into by PriceCostco and Price Enterprises concurrently with the delivery of the
Promissory Note (the "Security and Pledge Agreement").
No certificates or scrip for fractional shares of Price Enterprises Common
Stock shall be issued in any distribution of such shares as set forth above, and
no dividend or other distribution, stock split or interest with respect to
shares of Price Enterprises Common Stock shall relate to any fractional
security, and such fractional interests shall not entitle the owner thereof to
vote or to any other rights of a stockholder. In lieu of such fractional shares,
each holder of shares of PriceCostco Common Stock who would otherwise have been
entitled to a fraction of a share of Price Enterprises Common Stock shall
receive a cash payment (without interest) in lieu of such fractional share equal
to such fraction multiplied by the average closing price per share of Price
Enterprises Common Stock on The Nasdaq Stock Market's National Market (or on
such other quotation service or exchange as Price Enterprises Common Stock shall
be quoted or listed), during the ten trading days immediately following the date
of distribution of shares of Price Enterprises Common Stock by PriceCostco.
Any distribution by PriceCostco of shares of Price Enterprises Common Stock
to holders of PriceCostco Common Stock, as described above, is referred to
herein as the "Distribution."
OTHER ACTIONS TO BE TAKEN IN CONNECTION WITH THE TRANSACTION
At or prior to the Closing Date, (i) the Certificate of Incorporation of
Price Enterprises will be amended to read in its entirety as set forth in Annex
III (see "PRICE ENTERPRISES' CERTIFICATE OF INCORPORATION AND BYLAWS"); (ii) the
Bylaws of Price Enterprises will be amended to read in their entirety as set
forth in Annex IV (see "PRICE ENTERPRISES' CERTIFICATE OF INCORPORATION AND
BYLAWS"); and (iii) the authorized number of directors comprising the Board of
Directors of Price Enterprises will be expanded, and the Board of Directors of
Price Enterprises, by a majority vote, will fill such newly created
directorships. See "MANAGEMENT OF PRICE ENTERPRISES -- Board of Directors of
Price Enterprises." At the Closing Date, without any further action on the part
of PriceCostco or Price Enterprises, (A) the Bylaws of PriceCostco will be
amended to read in their entirety as set forth in Annex V (see "SELECTED
INFORMATION WITH RESPECT TO PRICECOSTCO -- Amendment of PriceCostco Bylaws") and
(B) the resignations of all Price Designees from the Board of Directors of
PriceCostco, other than Richard M. Libenson and Duane Nelles (which resignations
were submitted to the Board of Directors of PriceCostco on July 28, 1994), will
become effective. In addition, on the Closing Date certain other transactions
contemplated by the Transfer and Exchange Agreement will be effected, all as
more fully described in this Offering Circular/Prospectus.
CERTAIN OTHER INFORMATION
As used herein, the term "Price Designees" means those persons designated by
Price in the Agreement and Plan of Reorganization, dated as of June 15, 1993, by
and among Costco, Price and PriceCostco, as initial members of the Board of
Directors of PriceCostco as of the effective time of the Merger, or their direct
or indirect replacements. The current Price Designees on the Board of Directors
of PriceCostco are J. Paul Kinloch, Richard M. Libenson, Mitchell G. Lynn, Duane
Nelles (who was elected to the PriceCostco Board of Directors on July 28, 1994
following the resignation of Joseph K. Kornwasser), Paul A. Peterson and Robert
E. Price.
As used herein, the term "Costco Designees" means those persons designated
by Costco in the Plan of Reorganization as initial members of the Board of
Directors of PriceCostco as of the effective time of the Merger, or their direct
or indirect replacements. The current Costco Designees are Jeffrey H. Brotman,
Daniel Bernard, Richard D. DiCerchio, Hamilton E. James, John W. Meisenbach and
James D. Sinegal.
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As of October 31, 1994, 217,824,520 shares of PriceCostco Common Stock were
outstanding. This Offering Circular/Prospectus and the Letter of Transmittal are
being sent to persons who were holders of record of PriceCostco Common Stock at
the close of business on November 15, 1994.
As of October 31, 1994, directors and executive officers of PriceCostco and
their affiliates, as a group, beneficially owned 11,548,557 shares of
PriceCostco Common Stock, representing approximately 5.3% of PriceCostco Common
Stock outstanding as of such date. PRICECOSTCO HAS BEEN INFORMED THAT SUCH
DIRECTORS AND EXECUTIVE OFFICERS, AS A GROUP, INTEND TO TENDER 3,069,618 SHARES
OF PRICECOSTCO COMMON STOCK IN THE EXCHANGE OFFER (INCLUDING 2,790,929 SUCH
SHARES BENEFICIALLY OWNED BY ROBERT E. PRICE), WHICH SHARES REPRESENT
APPROXIMATELY 1.4% OF PRICECOSTCO COMMON STOCK OUTSTANDING AS OF OCTOBER 31,
1994. EACH OF ROBERT E. PRICE AND SOL PRICE HAS INFORMED PRICECOSTCO THAT, WHILE
NOT AGREEING TO TENDER ALL SHARES OF PRICECOSTCO COMMON STOCK BENEFICIALLY OWNED
BY HIM IN THE EXCHANGE OFFER, HE CURRENTLY INTENDS TO TENDER SUBSTANTIALLY ALL
SUCH SHARES, SO LONG AS, PRIOR TO THE CONSUMMATION OF THE EXCHANGE OFFER, THERE
DOES NOT OCCUR ANY EVENT WHICH MATERIALLY IMPAIRS THE ASSETS OR BUSINESS OF
PRICE ENTERPRISES. PRICECOSTCO HAS BEEN INFORMED BY FOURCAR B.V., A SUBSIDIARY
OF CARREFOUR S.A. AND THE BENEFICIAL OWNER OF 21,191,301 SHARES OF PRICECOSTCO
COMMON STOCK AS OF OCTOBER 31, 1994, THAT FOURCAR B.V. DOES NOT INTEND TO TENDER
ANY OF SUCH SHARES IN THE EXCHANGE OFFER.
The information contained in this Offering Circular/Prospectus with respect
to PriceCostco has been supplied by PriceCostco, and the information contained
herein with respect to Price Enterprises has been supplied by Price Enterprises.
The principal executive offices of PriceCostco are located at 10809 120th
Avenue NE, Kirkland, Washington 98033. The telephone number at those offices is
(206) 803-8100.
The principal executive offices of Price Enterprises are located at 4649
Morena Boulevard, San Diego, California 92117. The telephone number at those
offices is (619) 581-4600.
BACKGROUND OF THE TRANSACTION
In the Merger, which occurred in October 1993, Price and Costco each merged
with separate, wholly owned subsidiaries of PriceCostco pursuant to which Price
and Costco each became a wholly owned subsidiary of PriceCostco. The Merger was
structured such that management of PriceCostco would be shared between the
former executives of Price and the former executives of Costco. It was agreed in
the Merger that PriceCostco would maintain two home offices: the former Price
headquarters in San Diego, California and the former Costco headquarters in
Kirkland, Washington, and that PriceCostco's Board of Directors would consist of
twelve directors, which would include six Price Designees and six Costco
Designees. In addition, the terms of the Merger required PriceCostco to
establish an Executive Committee of the Board consisting of two Price Designees
and two Costco Designees and a Nominating Committee consisting of one Price
Designee and one Costco Designee. Following the Merger, oversight and management
of PriceCostco's combined warehouse club operations were assigned primarily to
the former senior management of Costco, while Price's former senior management
was given primary oversight and management of PriceCostco's non-club real estate
development, non-warehouse activities such as Quest electronic shopping,
business delivery, the Mexican joint venture and various ancillary businesses
and Pacific Rim expansion.
Notwithstanding this division of senior management responsibilities, in the
months following the Merger, certain basic philosophical differences developed
between the former Price executives and the former Costco executives regarding
management strategies central to the direction of PriceCostco's business
operations. The former Costco executives believed that PriceCostco should devote
its business resources primarily to its core warehouse club business, whereas
the former Price executives believed that substantial resources should be
devoted to PriceCostco's non-club real estate development, non-warehouse
activities such as Quest electronic shopping, business delivery, the Mexican
joint venture and various ancillary businesses and Pacific Rim, Latin American
and South American expansion. At meetings of the Board of Directors of
PriceCostco held on May 31 and June 1, 1994, such management differences were
discussed in detail, but not satisfactorily resolved. Following such Board
meetings, members of the Board and senior management of PriceCostco, as well as
Sol Price, a founder of Price and a significant stockholder of
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PriceCostco, became concerned that the philosophical differences that had
developed between the former executives of Price and the former executives of
Costco since the Merger and the inability of the Board to resolve such
differences would hinder PriceCostco's ability to compete effectively and
operate efficiently, and impede management's ability to continue to function in
a manner capable of maximizing the value of PriceCostco and, ultimately,
stockholder value. As a result, during the period from June 1 to June 22, 1994,
certain of the Price Designees on the Board of Directors, including Paul Kinloch
and Robert Price, engaged in conversations and meetings with Sol Price regarding
possible solutions to the philosophical differences that had arisen. During the
same period, certain Costco Designees on the Board of Directors, including Jim
Sinegal, Jeffrey Brotman and Hamilton James, engaged in separate conversations
and meetings during which they also attempted to develop solutions to such
philosophical differences.
On June 16, 1994, Jim Sinegal, Robert Price and Sol Price met to discuss the
philosophical differences that had arisen. Although Mr. Sinegal and Messrs.
Price were unable to identify any resolution of such philosophical differences,
they agreed that Jim Sinegal and Sol Price should meet again, together with
Hamilton James and Paul Kinloch, to attempt to resolve such philosophical
differences.
On June 22, 1994, Jim Sinegal, Hamilton James, Sol Price and Paul Kinloch
met to discuss potential solutions to the issues facing PriceCostco, including
the notion of dividing certain of PriceCostco's businesses into separately owned
companies. During the meeting on June 22, a preliminary understanding was
reached that, if a spin-off transaction were pursued, the businesses of
PriceCostco would be divided such that the newly formed subsidiary to be spun
off to stockholders would generally be allocated all of PriceCostco's
non-warehouse club real estate assets, PriceCostco's Quest interactive
electronic shopping business and PriceCostco's interest in its Mexican joint
venture and, possibly, the right to develop a warehouse club business in certain
territories outside the United States and PriceCostco's interest in CMI. In
addition, PriceCostco would make a capital contribution of $100 million in cash
to the new company. The group also discussed, as an alternative to the spin-off
transaction, changes in PriceCostco's management structure that might possibly
achieve a resolution to the philosophical differences that had arisen without
requiring PriceCostco's businesses to be divided. Other solutions, including the
sale of non-club real estate and/or additional borrowing to provide a source of
funds to buy back shares of PriceCostco Common Stock, were also discussed.
On June 30, 1994, Robert Price and Jim Sinegal met in an attempt to
determine the feasibility of alternatives to the proposed spin-off, such as
effecting a reorganization of the management structure that had been put in
place at the time of the Merger. Following their meeting, Sol Price, Jim
Sinegal, Hamilton James and Paul Kinloch met to discuss possible solutions to
the issues facing PriceCostco. Mr. Sinegal informed the group that he and Robert
Price had been unable to conceive of any management reorganization short of a
division of PriceCostco's businesses that they believed would be acceptable to
both the Price Designees and the Costco Designees and that would be likely to
resolve such philosophical differences. During the meeting on June 30, the
preliminary understanding reached at the June 22 meeting regarding the proposed
transaction was revised in that (i) the Warehouse Properties, the City Notes,
the Atlas Note and the San Diego Property would also be included in the real
estate assets to be transferred to the newly formed subsidiary, (ii) the new
company's ownership interest in PriceCostco's Quest interactive electronic
shopping business and PriceCostco's interest in its Mexican joint venture (and,
possibly, the right to develop a warehouse club business in certain territories
outside the United States and PriceCostco's interest in CMI) would be limited to
a 51 percent interest with the remaining 49 percent interest to be retained by
PriceCostco and (iii) PriceCostco would not make a capital contribution of $100
million in cash to the newly formed subsidiary. In addition, at such meeting Sol
Price suggested the possibility of pursuing the spin-off transaction that had
been under consideration by means of an exchange offer in which PriceCostco,
rather than distributing shares of the newly formed subsidiary, would offer to
repurchase shares of PriceCostco Common Stock in exchange for the outstanding
common stock of the newly formed subsidiary. Sol Price indicated, preliminarily,
that he would consider agreeing to tender all shares of PriceCostco Common Stock
beneficially owned by him in such exchange offer, subject to the resolution of
various issues relating to the proposed transaction. A consensus was reached
among those present at the meeting to consider and analyze in more detail the
possibility of a division of PriceCostco along the lines that had been
discussed.
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On July 6, 1994, Jim Sinegal, Hamilton James, Sol Price and Paul Kinloch met
to discuss in more detail the terms of a possible spin-off transaction. Messrs.
Sinegal, James, Price and Kinloch discussed in detail the specific assets that
would be included in the spun-off subsidiary (referred to hereinafter as "Price
Enterprises"), the prospective make-up of the Board of Directors and management
of PriceCostco and Price Enterprises following the proposed transaction, the
terms of the proposed exchange offer and the terms and conditions of Price
Enterprises' majority interest in, and control over, PriceCostco's Quest
interactive electronic shopping business and PriceCostco's interest in its
Mexican joint venture. In addition, Messrs. Sinegal, James, Price and Kinloch
discussed which territories might be included if PriceCostco were to transfer to
Price Enterprises the right to develop a warehouse club business in certain
territories outside the United States and Mexico. At the conclusion of these
discussions, a consensus was reached that, subject to the Board's review and
approval, PriceCostco would pursue the proposed spin-off transaction, subject to
the Board's satisfaction that the proposed transaction would meet the following
basic axioms:
(1) No stockholder or group of stockholders would receive
preferential treatment in the proposed transaction;
(2) The proposed transaction would not impact the
pooling-of-interests accounting treatment utilized for the Merger;
(3) While the proposed transaction would not be conditioned on
tax-free treatment, it would be preferable that it qualify as a tax-free
spin-off with respect to PriceCostco and PriceCostco's stockholders;
(4) The proposed transaction should not have a material adverse
impact on PriceCostco's projected earnings per share; and
(5) Price Enterprises would commence operations as a viable
operating company.
In addition to the meetings described above, during the period from June 1
through July 15, discussions with respect to the proposed transaction ensued
among Messrs. Sinegal, James and Kinloch, Sol Price and members of senior
management of PriceCostco.
During the period from June 22, 1994 to July 15, 1994, PriceCostco's
financial advisors, Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ")
and Lehman Brothers Inc. ("Lehman"), in consultation with certain executive
officers of PriceCostco, considered the number of shares of Price Enterprises
Common Stock that should be issued to PriceCostco upon the transfer of assets to
Price Enterprises. It was determined for ease of administration that the
exchange ratio would be one Price Enterprises share for each share of
PriceCostco Common Stock, and that the number of outstanding Price Enterprises
shares should be determined after analyzing the relative value of Price
Enterprises in comparison to PriceCostco. PriceCostco's financial advisors
indicated that the proposed transaction should be structured so that PriceCostco
would have a reasonable prospect of achieving 100% subscription for the Price
Enterprises shares in the proposed exchange offer. Following discussions among
certain members of senior management of PriceCostco, Sol Price, DLJ and Lehman,
it was determined that Price Enterprises would issue 27 million shares of common
stock to PriceCostco in exchange for the transferred assets.
On July 13, 1994, Jim Sinegal, Robert Price, Sol Price, Hamilton James, Paul
Kinloch and Richard Galanti (the Executive Vice President and Chief Financial
Officer of PriceCostco) met to discuss the terms of the proposed transaction,
including the number of shares of Price Enterprises Common Stock that would be
issued to PriceCostco upon the transfer of assets to Price Enterprises.
A special meeting of the Board of Directors was held on July 15, 1994 (the
"July 15 Meeting") to consider the proposed transaction and to discuss
alternatives to the proposed transaction. The meeting was attended in person by
all of PriceCostco's directors. Also in attendance were certain executive
officers of PriceCostco, a representative of Daniel Bernard, representatives of
Gibson, Dunn & Crutcher ("Gibson, Dunn") and Skadden Arps, counsel and special
counsel to PriceCostco, respectively, representatives of DLJ and Lehman, and a
representative of Arthur Andersen LLP ("Arthur Andersen"), independent public
accountants for PriceCostco. At the July 15 Meeting, members of the Board
discussed in detail the terms of the proposed transaction and received advice
from PriceCostco's legal, financial and accounting advisors.
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DLJ and Lehman advised the Board regarding certain financial matters related to
the proposed transaction, but, due to the voluntary pro rata nature of the
proposed transaction, neither DLJ nor Lehman was requested to render, and
neither has rendered, any opinion as to the fairness of the proposed transaction
from a financial point of view.
At the July 15 Meeting, the Board was advised that, under the proposed
transaction as then structured, Sol Price and Robert Price, while not agreeing
to tender all of the PriceCostco Common Stock beneficially owned by them, were
inclined to tender all shares of PriceCostco Common Stock owned by them and
members of their family (including shares controlled through trusts and other
entities), but that they desired to wait until they had an opportunity to review
the documents relating to the proposed transaction and analyze market
conditions, as other stockholders would have the opportunity to do, before
committing to tender shares of PriceCostco Common Stock in the proposed exchange
offer. The Board was advised that Messrs. Sinegal and Brotman would not tender
their shares of PriceCostco Common Stock in the proposed exchange offer.
At the July 15 Meeting, the Board discussed several possible alternatives to
the proposed transaction, including selling the real estate to be transferred to
Price Enterprises in the market and utilizing the cash proceeds to buy back
PriceCostco Common Stock, borrowing money and utilizing the proceeds to buy back
shares of PriceCostco Common Stock and paying off debt with the future sale of
real estate. Various modifications to these alternatives were also discussed.
Those alternatives, while not addressing directly the philosophical differences
that had arisen between the former Price executives and the former Costco
executives, were considered a possible means of refocusing PriceCostco's
business development energies on its core warehouse club business, thereby
minimizing the potential for dispute regarding the proper allocation of business
resources. The Board, after considering advice from its financial advisors and
other relevant factors, determined that it was not an advantageous time to sell
to third parties a significant amount of real estate assets and that
PriceCostco's stockholders would be in a more advantageous financial position to
attempt to capture future real estate values through the proposed transaction.
Furthermore, the Board concluded that a sale of a significant portion of its
real estate portfolio would take substantial time, thereby delaying for too long
a possible resolution of the issues facing PriceCostco.
At the July 15 Meeting, Arthur Andersen advised the Board as to the
accounting treatment applicable to the proposed transaction, Gibson, Dunn
advised the Board as to the Board's legal and fiduciary responsibilities in
considering whether to approve the proposed transaction and Skadden Arps advised
the Board as to the proposed terms, and probable tax treatment, of the proposed
transaction. See "Anticipated Accounting Treatment" and "Certain Federal Income
Tax Consequences."
At the July 15 Meeting, representatives of DLJ and Lehman and senior
management of PriceCostco advised the Board as to the pro forma impact of the
proposed transaction on PriceCostco's income statement and balance sheet.
Representatives of DLJ and Lehman also discussed various methods of determining
a value for Price Enterprises and reviewed with the Board their analysis with
respect to the number of Price Enterprises shares that would be issued to
PriceCostco and, hence, the number of PriceCostco shares that could be
repurchased by PriceCostco in the proposed exchange offer. DLJ and Lehman
presented to the Board illustrative high and low per share values for Price
Enterprises and discussed the implied premium based upon such illustrative
values as compared to the per share price of PriceCostco Common Stock at July
14, 1994, assuming 27 million outstanding Price Enterprises shares and a
one-for-one exchange ratio. Representatives of DLJ and Lehman discussed with the
Board that the creation of a separate public market for the equity of Price
Enterprises would allow the financial markets to evaluate more effectively the
respective values of PriceCostco's warehouse club business and Price
Enterprises' real estate and other holdings, thereby potentially enhancing
overall stockholder value. Representatives of DLJ and Lehman discussed with the
Board the pro forma impact of the proposed exchange offer on the cash flow per
share and earnings per share of PriceCostco, assuming various levels of shares
tendered in the proposed exchange offer, and the potential impact on
PriceCostco's stock price. Representatives of DLJ and Lehman also discussed with
the Board the anticipated impact of the proposed transaction on PriceCostco's
credit standing and indicated that they did not believe the proposed transaction
would have a significant impact on PriceCostco's credit ratings, although
PriceCostco would probably be put on "credit watch," and that
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PriceCostco would not likely suffer any material increase in its borrowing costs
or significant loss of liquidity as a result of the proposed transaction. The
representatives of DLJ and Lehman noted that the analysis they performed was not
necessarily indicative of actual values or future results, which might be
significantly more or less favorable than suggested by such analyses, and that
the analysis did not constitute an opinion regarding valuation or a prediction
or estimate as to the prices at which Price Enterprises Common Stock and
PriceCostco Common Stock will actually trade. Because of the voluntary pro rata
nature of the Transaction, the Board did not ask for, and neither DLJ nor Lehman
delivered, an opinion as to the fairness to the holders of PriceCostco Common
Stock, from a financial point of view, of the Transaction. See "Analysis of
Financial Advisors to PriceCostco."
Prior to voting on the proposed transaction, each of Messrs. Price, James,
Kinloch and Kornwasser indicated that, although he was in favor of the proposed
transaction, each believed he had potential conflicts of interest in connection
with the proposed transaction and, therefore, abstained from voting. See
"Interests of Certain Persons in the Transaction." After completing its
deliberations, the Board by unanimous vote (with each of Messrs. Price, James,
Kinloch and Kornwasser abstaining) preliminarily approved the proposed
transaction, subject to the Board's consideration of further analysis of the
proposed transaction by its legal, financial and accounting advisors and the
Board's review and approval of definitive documentation at a subsequent meeting.
During the period between July 15, 1994 and July 28, 1994, representatives
of PriceCostco and PriceCostco's legal and financial advisors met with
representatives of Sol Price and Robert Price and Latham & Watkins, legal
counsel to Price Enterprises, to negotiate the terms of definitive documentation
covering the transfer of assets to Price Enterprises and the proposed exchange
offer, as well as definitive documentation governing PriceCostco's joint
ownership and management with Price Enterprises of Price Quest, Mexico Clubs and
Price Global.
On July 28, 1994, a second special meeting of the Board of Directors (the
"July 28 Meeting") was held to review and discuss the proposed Agreement of
Transfer and Plan of Exchange and ancillary agreements, to receive further
advice and analysis from PriceCostco's legal, financial and accounting advisors
regarding the proposed transaction and to vote upon the proposed transaction as
reflected in the form of Agreement of Transfer and Plan of Exchange, which had
been previously distributed to each of the directors. The meeting was attended
in person by all of PriceCostco's directors other than John Meisenbach, who
attended the meeting by conference telephone, and Daniel Bernard, who was unable
to attend. Also in attendance were certain executive officers of PriceCostco, a
representative of Mr. Bernard, representatives of Gibson, Dunn and Skadden Arps,
representatives of DLJ and Lehman and Duane Nelles, a designee for appointment
to the Board.
At the July 28 Meeting, the Board discussed in detail the terms of the
proposed transaction and the provisions of the proposed Agreement of Transfer
and Plan of Exchange and ancillary agreements. DLJ and Lehman provided the Board
with an updated financial analysis regarding the proposed transaction and
reviewed in detail the impact of the proposed transaction on PriceCostco's three
outstanding classes of convertible debentures. Skadden Arps discussed with the
Board the potential tax treatment of the proposed transaction and reviewed in
detail the terms of the proposed Agreement of Transfer and Plan of Exchange and
ancillary documents.
Following presentations to the Board by the Board's advisors, members of the
Board discussed in detail the advantages and disadvantages of the proposed
transaction (which are discussed above and are reflected below in the factors
considered by the Board in reaching its determination to approve the proposed
transaction) and a consensus was reached that the proposed transaction was in
the best interests of PriceCostco and its stockholders. The members of the Board
of Directors in attendance at the July 28 Meeting unanimously approved the terms
of the proposed transaction (with each of Messrs. Price, James, Kinloch and
Kornwasser abstaining due to potential conflicts of interest, although each
indicated his approval of the terms of the proposed transaction). In making its
determination, the Board considered the following factors: (i) the terms of the
Agreement of Transfer and Plan of Exchange and ancillary agreements, (ii) the
potential adverse effect that the philosophical differences between the former
Price executives and
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the former Costco executives could have on PriceCostco's business and the
absence of other viable alternative solutions to resolving those philosophical
differences, (iii) the anticipated accounting treatment of the Transaction, (iv)
the impact of the Transaction on PriceCostco's income statement, cash flow and
earnings per share assuming various levels of shares tendered in the Exchange
Offer, (v) the potential impact of the Transaction on PriceCostco's
creditworthiness, (vi) the possible tax-free treatment of the Transaction for
Federal income tax purposes and the Board's belief that, even if the Transaction
should be determined to be a taxable transaction for Federal income tax
purposes, the Transaction would still be in the best interests of PriceCostco
and its stockholders, (vii) the impact of the Transaction on employees of
PriceCostco and on existing options, warrants and convertible debentures of
PriceCostco, (viii) the fact that all stockholders would be treated equally in
the Transaction, (ix) a range of illustrative high and low per share values for
Price Enterprises and the implied per share premium in the Exchange Offer based
on such illustrative values as compared to the per share price of PriceCostco
Common Stock at July 14, 1994 (assuming 27 million outstanding Price Enterprises
shares and a one-for-one exchange ratio) and (x) the price at which PriceCostco
Common Stock was trading in the public markets at the time of the Board's
deliberations. Such factors constitute all of the material factors considered by
the Board. In view of the variety of factors considered by the Board, the Board
did not find it practicable to quantify or otherwise assign relative weights to
the specific factors considered.
As contemplated by the Transfer and Exchange Agreement, at the July 28
Meeting the Board approved the formation of two separate Executive Committees of
the Board to oversee PriceCostco's business during the interim period from the
time of transfer of assets to Price Enterprises (which occurred as of August 28,
1994) until the earliest to occur of (i) the consummation of the Exchange Offer,
(ii) the date on which Price Enterprises Common Stock is first distributed to
holders of PriceCostco Common Stock or (iii) January 31, 1995 (the "Interim
Period"). One Executive Committee, consisting of Jim Sinegal, Robert Price and
Paul Peterson (the "Price Enterprises Executive Committee"), was charged with
overseeing the management and operations of Price Enterprises, while a second
Executive Committee, consisting of the Costco Designees and Richard Libenson and
Duane Nelles (the "PriceCostco Executive Committee"), was charged with
overseeing the management and operations of PriceCostco other than Price
Enterprises. The Board also reorganized its existing Compensation and Audit
Committees and formed two additional committees, the Finance Committee and the
Real Estate Committee, stipulating that, during the Interim Period, each would
consist of two Price Designees and two Costco Designees. See "THE AGREEMENT OF
TRANSFER AND PLAN OF EXCHANGE -- Certain Additional Matters -- Certain
Committees."
At the July 28 Meeting, Joseph K. Kornwasser resigned from the Board of
Directors of PriceCostco, and Duane Nelles was elected to the Board of Directors
of PriceCostco to fill the vacancy created by such resignation.
At the conclusion of the July 28 Meeting, each of J. Paul Kinloch, Mitchell
G. Lynn, Robert E. Price and Paul A. Peterson (each of whom is a Price Designee)
tendered his letter of resignation as a director of PriceCostco, effective as of
the earlier to occur of (i) the Closing Date and (ii) the date on which shares
of Price Enterprises Common Stock are distributed to holders of PriceCostco
Common Stock. Each such resignation letter provides that if neither of the
events described in clause (i) and (ii) of the previous sentence occur on or
prior to January 31, 1995, such resignation will, without further action, be
withdrawn and have no force and effect.
In late September 1994, representatives of Comercial Mexicana commenced
discussions with Robert Price and Jim Sinegal regarding the proposed transfer of
Primex to Mexico Clubs as part of the Transaction. Primex owns a 50% interest in
Price Club Mexico, the joint venture corporation which develops, owns and
operates Price Club warehouse clubs in Mexico. The other 50% interest in Price
Club Mexico is owned by Comercial Mexicana. See "BUSINESS AND PROPERTIES OF
PRICE ENTERPRISES -- Mexico Clubs." The representatives of Comercial Mexicana
indicated that Comercial Mexicana was interested in a continuing relationship
with PriceCostco, rather than embarking on a new relationship with Price
Enterprises.
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Discussions continued among representatives of Comercial Mexicana, Price
Enterprises and PriceCostco through mid-November 1994. Such discussions have
centered on a possible transaction pursuant to which Comercial Mexicana or a
third party would purchase the 50% interest in Price Club Mexico then owned by
PriceCostco (and currently owned by Mexico Clubs) and PriceCostco and Price Club
Mexico would enter into certain agreements with respect to the use of the "Price
Club" name and certain computer software by Price Club Mexico and with respect
to the sourcing of certain merchandise to Price Club Mexico by PriceCostco.
Based on the discussions to date, Price Enterprises and PriceCostco believe that
if any such purchase occurs, it would likely involve payment for the 50%
interest in Price Club Mexico by a combination of cash, promissory notes or
stock or other securities. However, as of the date of this Offering Circular/
Prospectus, no agreement, preliminary or otherwise, has been reached with
Comercial Mexicana regarding such proposed purchase. ALTHOUGH PRICE ENTERPRISES
AND PRICECOSTCO CURRENTLY ANTICIPATE THAT DISCUSSIONS REGARDING SUCH PROPOSED
PURCHASE WILL CONTINUE, NO ASSURANCES CAN BE GIVEN THAT ANY AGREEMENT WILL BE
REACHED REGARDING SUCH A PURCHASE BY COMERCIAL MEXICANA OR SUCH THIRD PARTY OR,
IF SUCH AN AGREEMENT IS REACHED, THE TERMS OF ANY SUCH PURCHASE.
By unanimous written consent dated as of November 14, 1994, the Board of
Directors of each of PriceCostco and Price Enterprises approved certain
revisions to the Agreement of Transfer and Plan of Exchange dated July 28, 1994
between PriceCostco and Price Enterprises. Such revisions related generally to
the transfer by PriceCostco of the Mexico Assets to Mexico Clubs (which had not
occurred at the Transfer Closing pending further discussions with Comercial
Mexicana), implementing a structure with respect to Mexico Clubs that is more
tax efficient (regardless of whether the proposed transaction is consummated)
and certain other amendments of a technical nature. (Such amendments are
reflected in the Transfer and Exchange Agreement, which is attached to this
Offering Circular/Prospectus as Annex II.)
REASONS FOR THE TRANSACTION
In light of the basic philosophical differences among members of PriceCostco
management and the inability of the Board of Directors of PriceCostco to resolve
such differences, as described above, the Board determined that PriceCostco
could not compete effectively or operate efficiently nor could it maximize the
value of PriceCostco and, ultimately, stockholder value as long as such
differences prevailed, and that the best way to maximize available business
opportunities would be to operate the current businesses of PriceCostco as
separate entities along the lines proposed. While the Board considered certain
alternatives, described above, the Board concluded that none of such
alternatives appeared to be as attractive as the Transaction in resolving the
basic philosophical differences, described above, or in maximizing the value of
the business and, ultimately enhancing stockholder value. In addition, the Board
of Directors of PriceCostco believed that the financial markets may not fully
value the non-warehouse club real estate assets that were transferred to Price
Enterprises. Accordingly, the Board of Directors of PriceCostco believes that
the creation of a separate public market for the equity of Price Enterprises
will allow the financial markets to evaluate more effectively the respective
values of PriceCostco's core warehouse club business and Price Enterprises' real
estate holdings, thereby enhancing overall stockholder value. The Board of
Directors of PriceCostco also believes that allowing Price Enterprises'
management to pursue its business plan for the Price Enterprises assets free of
any constraints imposed by PriceCostco management, and allowing PriceCostco's
management to pursue its business plan for the warehouse club assets free of any
constraints imposed by Price Enterprises' management, should enhance the ability
of each to maximize the value of the respective operations for the benefit of
its respective stockholders.
PriceCostco is pursuing the Transaction as an exchange offer rather than as
a pro rata distribution of Price Enterprises shares in part to enable those
stockholders who wish to concentrate their investments in one segment of
PriceCostco (principally, non-warehouse club real estate in the case of Price
Enterprises) versus the other (principally, warehouse clubs in the case of
PriceCostco), or to allocate their investments between the two segments in any
proportion that the stockholder elects, to do so by either participating or
refraining from participating in the Exchange Offer. In addition, the Board was
aware that if the Exchange Offer is fully subscribed (or if approximately 14
million or more shares of PriceCostco Common Stock are tendered in the Exchange
Offer and exchanged for shares of Price Enterprises Common Stock), the
Transaction could potentially enhance PriceCostco's earnings per share following
the Transaction. The Board was also aware that, if no PriceCostco stockholders
tender shares of PriceCostco Common Stock in
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the Exchange Offer, PriceCostco would experience a dilution in earnings per
share as PriceCostco transfers income generating assets to Price Enterprises but
experiences no reduction in the number of its outstanding shares; however, under
such scenario, each PriceCostco stockholder would receive shares of Price
Enterprises Common Stock in the Distribution. See "Analysis of Financial
Advisors to PriceCostco" and "SPECIAL CONSIDERATIONS/RISK FACTORS -- Special
Considerations Applicable to All PriceCostco Stockholders."
NEITHER PRICECOSTCO NOR THE BOARD OF DIRECTORS OF PRICECOSTCO MAKES ANY
RECOMMENDATION TO ANY STOCKHOLDER WHETHER TO TENDER OR REFRAIN FROM TENDERING
SHARES OF PRICECOSTCO COMMON STOCK PURSUANT TO THE EXCHANGE OFFER. EACH
STOCKHOLDER MUST MAKE HIS OR HER DECISION WHETHER TO TENDER SHARES OF
PRICECOSTCO COMMON STOCK PURSUANT TO THE EXCHANGE OFFER AND, IF SO, HOW MANY
SHARES TO TENDER.
CERTAIN EFFECTS OF THE TRANSACTION
Holders of shares of PriceCostco Common Stock will be affected by the
Transaction regardless of whether such holders tender their shares for exchange
pursuant to the Exchange Offer. Holders of shares of PriceCostco Common Stock
who tender all their shares will no longer have an ownership interest in
PriceCostco, unless more than 27 million shares of PriceCostco Common Stock are
validly tendered for exchange, resulting in the acceptance for exchange of
tendered shares by PriceCostco being prorated. If the Exchange Offer is
partially or fully subscribed, the number of outstanding shares of PriceCostco
Common Stock will be reduced, which will increase the proportionate ownership of
PriceCostco stockholders who do not tender their shares of PriceCostco Common
Stock in the Exchange Offer. If no shares of PriceCostco Common Stock are
tendered in the Exchange Offer, stockholders who hold shares of PriceCostco
Common Stock immediately prior to and immediately after the Exchange Offer will
own the same proportionate interest in PriceCostco, but will, following the
Distribution, also have an ownership interest in Price Enterprises. In addition,
if less than 27 million shares of PriceCostco Common Stock are validly tendered
in the Exchange Offer and accepted for exchange by PriceCostco, holders of
PriceCostco Common Stock as of a record date (to be determined) following the
expiration of the Exchange Offer, will receive shares of Price Enterprises
Common Stock in the Distribution; PROVIDED, HOWEVER, that, if less than 5.4
million Price Enterprises shares are held by PriceCostco after the expiration of
the Exchange Offer, PriceCostco, in lieu of distributing the shares, may compel
Price Enterprises to purchase such shares from PriceCostco in exchange for the
Promissory Note. In any event, as a result of the Transaction, PriceCostco will
no longer own any interest in Price Enterprises and will cease to have any
significant real estate operations unrelated to its warehouse club business.
Any PriceCostco Common Stock acquired by PriceCostco pursuant to the
Exchange Offer will become treasury shares and will be available for issuance by
PriceCostco without further stockholder action (except as required by applicable
law or the rules of The Nasdaq Stock Market's National Market or any national
securities exchanges on which PriceCostco Common Stock may be listed) for
general or other corporate purposes, including stock splits or dividends,
acquisitions, the raising of additional capital for use in PriceCostco's
business and the implementation of employee benefit plans.
ANALYSIS OF FINANCIAL ADVISORS TO PRICECOSTCO
PriceCostco has engaged DLJ and Lehman (the "Financial Advisors") to act
jointly as its financial advisors in connection with the Transaction.
Representatives of DLJ and Lehman assisted senior management of PriceCostco in
structuring the Transaction and in analyzing the potential impact of the
Transaction on stockholder values of both Price Enterprises and PriceCostco
following consummation of the Transaction. In particular, the Financial Advisors
gave advice to management regarding the proposed number of shares of Price
Enterprises Common Stock to be issued in the exchange and with respect to other
significant terms and conditions of the Exchange Offer. For additional
information concerning the involvement of Hamilton James and Paul Kinloch,
managing directors of DLJ and Lehman, respectively, see "Background of the
Transaction."
On July 15, 1994 and on July 28, 1994 in connection with the evaluation of
the Transaction by the Board of Directors of PriceCostco, the Financial Advisors
made presentations to the Board with respect to the Transaction.
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No restrictions or limitations were imposed by the PriceCostco Board of
Directors upon the Financial Advisors with respect to the investigations made or
procedures followed in performing their analysis, except that PriceCostco did
not authorize the Financial Advisors to solicit, and they did not solicit, any
third party indications of interest in a purchase of the assets of Price
Enterprises. Because of the voluntary pro rata nature of the Transaction, the
Board of Directors of PriceCostco also did not ask for, and the Financial
Advisors did not deliver, an opinion as to the fairness to the holders of
PriceCostco Common Stock, from a financial point of view, of the Transaction.
The Financial Advisors also did not make any recommendation to any stockholder
whether to tender shares of PriceCostco Common Stock pursuant to the Exchange
Offer.
In performing their analysis, the Financial Advisors reviewed the Transfer
and Exchange Agreement, the Operating Agreements and Stockholders Agreements
with respect to Mexico Clubs, Price Global and Price Quest and certain other
documents related to the Transaction. The Financial Advisors also reviewed
financial and other information that was publicly available or furnished to them
by PriceCostco, including information provided during discussions with the
management of PriceCostco and certain pro forma projected financial statements
and other information of PriceCostco and Price Enterprises for fiscal 1994 and
fiscal 1995 prepared by the management of PriceCostco. In addition, the
Financial Advisors analyzed for illustrative purposes the implied valuation of
the different operating segments of Price Enterprises, compared certain
financial data of Price Enterprises with selected companies whose securities are
traded in public markets, compared the relative contribution of the operations
of Price Enterprises to the revenue, earnings before depreciation, amortization,
interest expense and income taxes ("EBITDA"), net income, total assets and other
measures of PriceCostco with the percentage of PriceCostco's shares to be
exchanged in the Transaction, examined the impact of the Transaction on the
projected earnings per share of PriceCostco Common Stock given a range of
possible Price Enterprises shares subscribed for in the Exchange Offer, reviewed
the impact of the Transaction on PriceCostco's balance sheet and on its credit
standing, summarized the impact of the Transaction on the ownership of
PriceCostco given a range of possible Price Enterprises shares subscribed for in
the Exchange Offer and analyzed the impact of the Transaction on the conversion
price provisions of PriceCostco's outstanding convertible subordinated
debentures. The Financial Advisors also discussed the past and current
operations, financial condition and prospects of PriceCostco and of Price
Enterprises with the management of PriceCostco and conducted such other
financial studies, analyses and investigations as the Financial Advisors deemed
appropriate for purposes of their analysis.
In performing their analysis, the Financial Advisors relied upon and
assumed, without independent verification, the accuracy and completeness of all
of the financial and other information that was available to it from public
sources, that was provided to it by PriceCostco or its representatives, or that
was otherwise reviewed by them. The Financial Advisors also assumed that the
financial projections supplied to them were reasonably prepared on a basis
reflecting the best currently available estimates and judgments of the
management of PriceCostco as to the future operating and financial performance
of PriceCostco and Price Enterprises. The Financial Advisors did not make any
independent evaluation of the assets, liabilities or operations of PriceCostco
or Price Enterprises.
The analysis presented by the Financial Advisors was necessarily based on
economic, market, financial and other conditions as they existed on, and on the
information made available to it as of, the date of their analysis.
The following is a summary of the principal financial analyses performed by
the Financial Advisors in their presentations to the PriceCostco Board of
Directors. All material factors that the Financial Advisors considered in
performing such financial analyses and all material financial and comparative
analyses that the Financial Advisors performed are described herein.
1. SEGMENT ANALYSIS. The Financial Advisors analyzed for illustrative
purposes the implied valuation of the different operating segments of Price
Enterprises, based on certain assumptions as follows. That portion of the Real
Properties which had significant potential lease income, based on estimates
prepared by PriceCostco, was valued on the basis of capitalization rates
(ranging from 7.5 percent to 10.0 percent) for comparable commercial property
real estate investment trusts as adjusted to reflect estimated capital
expenditures necessary to effect completion. That portion of the Real Properties
which was undeveloped or which did not produce income was valued at a discount
to the estimates of market value prepared by
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PriceCostco. The Mexico Assets and the International Assets were valued together
on the basis of a range of multiples of projected 1995 net income related to
such assets, as prepared by the management of PriceCostco. The Quest Assets were
valued on the basis of the possible prospects for Quest and on the basis of the
cumulative capital invested in Quest through May 8, 1994. The City Notes and the
Atlas Note were valued at a discount to the book value of these assets at May 8,
1994. The Financial Advisors also noted that although these implied values, if
aggregated without consideration of taxes that would be payable if such assets
were individually sold, resulted in a range of values on a per share basis for
Price Enterprises that represented notional premiums of 11.9 percent to 59.6
percent over the $14.75 closing price of PriceCostco Common Stock on July 14,
1994, the segment analysis was prepared for illustrative purposes only and did
not constitute an opinion regarding valuation or a prediction or estimate as to
the range of prices within which Price Enterprises Common Stock would actually
trade.
2. ANALYSIS OF CERTAIN OTHER PUBLICLY TRADED COMPANIES. To provide
contextual data and comparative market information, the Financial Advisors
compared selected historical and projected pro forma share price, earnings and
operating and financial ratios of PriceCostco of Price Enterprises to those of
certain other companies whose securities are publicly traded. Such data and
ratios included its market capitalization plus total debt less cash equivalents
("Adjusted Price"), as a multiple of revenues, EBITDA, operating profit and
total assets for the latest reported twelve months. In conducting their
analysis, the Financial Advisors relied upon certain assumptions described above
and on the financial projections provided by the management of PriceCostco. The
ratio of Adjusted Price to total assets for the companies reviewed was in the
range of 0.57 to 1.18 times. This compares to a multiple of 0.63 times total
assets for Price Enterprises assuming the value of Price Enterprises Common
Stock is equal to the $14.75 closing price of PriceCostco Common Stock at July
14, 1994, based on historical total assets of Price Enterprises at May 8, 1994
before the recognition of any write-down in connection with the Transaction. The
ratios of market capitalization to latest twelve-month net income and
stockholders' equity for the comparable companies were in the range of 10.3 to
36.5 times and 0.4 to 9.4 times, respectively. This compares to multiples for
Price Enterprises of 32.3 times 1994 pro forma net income and 0.6 times
historical book value at May 8, 1994, before the recognition of any write-down
in connection with the Transaction, assuming the value of Price Enterprises
Common Stock is equal to the $14.75 closing price of PriceCostco Common Stock at
July 14, 1994.
In aggregate, the Financial Advisors compared Price Enterprises to twelve
selected publicly-traded real estate development companies. Although the
Financial Advisors used these companies for comparison purposes, none of such
companies is directly comparable to Price Enterprises.
3. CONTRIBUTION ANALYSIS. The Financial Advisors analyzed the relative
contribution of Price Enterprises to PriceCostco with respect to revenues,
EBITDA, net income, total assets and stockholders' equity. In conducting their
analysis, the Financial Advisors relied upon certain assumptions described above
and on the financial projections provided by the management of PriceCostco. Such
analysis was considered in both absolute dollar terms and on a percentage basis
and was made, where applicable, for each of fiscal year 1994 and 1995. As a
result of the Transaction, assuming that the Exchange Offer were to be fully
subscribed, 12.4% of the shares of PriceCostco Common Stock outstanding on a
primary basis would be exchanged for Price Enterprises Common Stock. This
compares with Price Enterprises' contribution to PriceCostco's projected results
for fiscal 1995 of 1.5% of revenues, 1.8% of EBITDA, 6.3% of net income, 15.0%
of total assets and 33.4% of stockholders' equity. The projected financial
results for fiscal 1995 prepared by the management of PriceCostco reflect the
restatement in the fourth quarter of fiscal 1994 of PriceCostco's non-club real
estate segment as a discontinued operation. For purposes of such analysis,
management provided the Financial Advisors a preliminary estimate of the
earnings per share of PriceCostco of $1.16 for fiscal 1995 (based on 217.7
million shares of PriceCostco Common Stock outstanding); however, management
cautioned, and the Board and the Financial Advisors were aware, that the assumed
level of earnings was preliminary (as final budgets had not been completed by
management or approved by the Board of Directors) and, therefore, did not
represent the opinion of management of PriceCostco as to the actual results
which may be achieved by PriceCostco, but was utilized principally to compare
the difference between earnings per share at a given level before and after
giving effect to the proposed transaction. Accordingly, management has cautioned
that such earnings level should not be regarded as any indication that
PriceCostco or Price Enterprises considers it an accurate prediction of future
events, and PriceCostco and Price Enterprises disclaim any responsibility for
updating or revising such analysis.
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4. PRO FORMA ANALYSIS. The Financial Advisors analyzed the pro forma
effects of the Transaction on the revenue, EBITDA, operating income, net income,
balance sheet and other measures of PriceCostco. In conducting their analysis,
the Financial Advisors relied upon certain assumptions described above and on
the financial projections provided by management of PriceCostco. In particular,
the Financial Advisors analyzed the pro forma effect of the Transaction on the
projected earnings per share of PriceCostco. The analysis indicated that the pro
forma earnings per share of PriceCostco, ASSUMING NO PRICECOSTCO STOCKHOLDERS
SUBSCRIBED TO THE EXCHANGE OFFER, would be lower in fiscal 1994 and fiscal 1995
than comparable projections for PriceCostco in the same period if the
Transaction were not undertaken. While earnings per share would be lower in such
case, PriceCostco stockholders would receive approximately 0.124 shares of Price
Enterprises Common Stock as a dividend for each share of PriceCostco Common
Stock. The analysis indicated that the pro forma earnings per share of
PriceCostco, ASSUMING THAT THE EXCHANGE OFFER WERE TO BE FULLY SUBSCRIBED, would
be higher in fiscal year 1994 and fiscal year 1995 than comparable projections
for PriceCostco in the same period if the Transaction were not undertaken.
5. CREDIT AND LEVERAGE RATIOS. The Financial Advisors analyzed the pro
forma effect of the transaction on certain credit and leverage ratios of
PriceCostco. In conducting its analysis, the Financial Advisors relied upon
certain assumptions described above and on the financial projections provided by
the management of PriceCostco. The analysis indicated that, as a result of the
transaction, the projected ratios of operating profit to total interest and of
EBITDA to total interest would decrease for fiscal 1994 from 8.8 times and 11.9
times respectively to 8.0 times and 10.6 times respectively, on a pro forma
basis after giving effect to the Transaction while the ratio of total debt to
total capitalization at May 8, 1994 would increase from 31.7% to 41.1% on the
same basis.
6. PRO FORMA OWNERSHIP ANALYSIS. The Financial Advisors analyzed the pro
forma effect of the transaction on the ownership of PriceCostco. In conducting
its analysis, the Financial Advisors relied upon certain assumptions described
above and on information as to ownership provided by the management of
PriceCostco. The analysis indicated that, assuming the Exchange Offer were to be
fully subscribed and not oversubscribed and subject to proration and that the
Price family were to tender all of the PriceCostco shares held by them, the
Price family would own approximately 42.7% of the Price Enterprises shares
outstanding immediately after consummation of the Exchange Offer.
The summary set forth above does not purport to be a complete description of
the analyses performed by the Financial Advisors. The analysis of the
Transaction involved various determinations as to the most appropriate and
relevant methods of financial analysis and the application of these methods to
the particular circumstances and, therefore, such an analysis is not readily
susceptible to summary description. In performing their analyses, the Financial
Advisors did not attribute any particular weight to any factor considered by
them, but rather made qualitative judgments as to the significance and relevance
of each factor. Accordingly, notwithstanding the separate factors summarized
above, the Financial Advisors believe that their analyses must be considered as
a whole and that selecting portions of their analysis and the factors considered
by them, without considering all analyses and factors, could create an
incomplete view of the evaluation process. In performing their analyses, the
Financial Advisors made numerous assumptions with respect to industry
performance, business and economic conditions and other matters, many of which
are beyond PriceCostco's control. The analyses performed by the Financial
Advisors are not necessarily indicative of actual values or future results,
which may be significantly more or less favorable than suggested by such
analyses. These analyses do not constitute an opinion regarding valuation or a
prediction or estimate as to the prices at which Price Enterprises Common Stock
and PriceCostco Common Stock will actually trade. Such prices will depend upon
the future business operations and prospects of each company and changes in
market conditions and other factors that generally influence securities prices,
the market for securities of businesses of this type and economic, monetary,
regulatory and other relevant factors.
The Board of Directors of PriceCostco selected DLJ and Lehman to act jointly
as its financial advisor because they are nationally recognized investment
banking firms and the principals of both DLJ and Lehman have substantial
experience in transactions similar to the Transaction. In addition DLJ served as
financial advisor to Costco in the Merger and Lehman served as financial advisor
to Price in the Merger, and each of DLJ and Lehman is familiar with PriceCostco
and its business. As part of its investment banking business, each of DLJ and
Lehman is continually engaged in the analysis of businesses and their securities
in connection with public offerings and merger and acquisition transactions.
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Pursuant to the terms of an engagement letter dated June 25, 1994,
PriceCostco has paid each of the Financial Advisors $500,000 for acting as
financial advisors in connection with the Transaction. In addition, PriceCostco
has agreed to pay each of the Financial Advisors an additional $1,500,000 upon
consummation of the Transaction. PriceCostco has agreed to indemnify each of the
Financial Advisors and certain related persons against certain liabilities in
connection with its engagement, including liabilities under the Federal
securities laws. The terms of the fee arrangement with each of the Financial
Advisors were negotiated at arm's length between PriceCostco and the Financial
Advisors, reviewed and recommended by the Audit Committee of the Board of
Directors of PriceCostco and approved by the Board of Directors of PriceCostco.
DLJ has from time to time rendered various investment banking and other
financial advisory services to Costco and PriceCostco including acting as
financial advisor to Costco in the Merger. Since September 1, 1992, DLJ has
earned compensation with respect to such services of $10,878,000 (including the
$500,000 referenced above). Hamilton E. James, a Managing Director of DLJ, is a
director of PriceCostco. Since September 1, 1992, Mr. James has received
directors' fees in the amount of $38,350. During such periods, Mr. James has
been granted options to acquire 11,250 shares of PriceCostco Common Stock at an
exercise price of $18.00 per share and 8,000 such shares at an exercise price of
$18.125 per share.
Lehman acted as financial advisor to Price in connection with the Merger.
Since September 1, 1992, Lehman has earned compensation of $7,500,000 from Price
and PriceCostco (including the $500,000 referenced above). Additionally, the
REIT, a real estate investment trust which is independent of PriceCostco, but
may be deemed an affiliate of PriceCostco, completed a public offering of
securities in August 1993 in which Lehman acted as co-manager and for which it
received approximately $3,200,000 in fees and commissions. J. Paul Kinloch, a
Managing Director of Lehman, is a member of the Board of Directors of
PriceCostco. Since September 1, 1992, Mr. Kinloch has received directors' fees
in the amount of $74,340. During such periods, Mr. Kinloch has been granted
options to acquire 8,000 shares of PriceCostco Common Stock at an exercise price
of $18.125 per share.
In the ordinary course of business, both DLJ and Lehman actively trade the
securities of PriceCostco for their own account and for the accounts of their
customers and, accordingly, may at any time hold a long or short position in
such securities.
INTERESTS OF CERTAIN PERSONS IN THE TRANSACTION
In considering whether to tender shares pursuant to the Exchange Offer,
stockholders should be aware that certain members of PriceCostco's Board of
Directors and management and certain persons who will become members of Price
Enterprises's Board of Directors and management on the Closing Date have certain
interests in the Transaction that are in addition to the interests of
stockholders of PriceCostco generally. The Board of Directors of PriceCostco was
aware of these interests and considered them, among other factors, in approving
the Transaction. These interests are as follows:
BOARD OF DIRECTORS. At the earlier to occur of the Closing Date and the
date on which shares of Price Enterprises Common Stock are first distributed to
holders of PriceCostco Common Stock, the resignation of each of Robert E. Price,
Mitchell G. Lynn, J. Paul Kinloch and Paul A. Peterson as a member of the Board
of Directors of PriceCostco will become effective.
The Board of Directors of Price Enterprises consists of three members,
Robert E. Price, Paul A. Peterson and James D. Sinegal, each of whom is
currently a member of the Board of Directors of PriceCostco, although each of
Messrs. Price and Peterson has tendered his resignation as a director of
PriceCostco, effective as of the earlier to occur of (i) the Closing Date and
(ii) the date on which shares of Price Enterprises Common Stock are distributed
to holders of PriceCostco Common Stock. Prior to the Closing Date, the existing
Board of Directors of Price Enterprises will cause the authorized number of
directors comprising such Board to be expanded and, by a majority vote, will
fill such newly created directorships. See "MANAGEMENT OF PRICE ENTERPRISES --
Board of Directors of Price Enterprises."
CONVERTIBLE SECURITIES. Mitchell Lynn, a director of PriceCostco, and Sol
Price, the beneficial owner of 8,745,964 shares of PriceCostco Common Stock,
representing approximately 4.0% of PriceCostco Common Stock outstanding as of
October 31, 1994, hold outstanding 6 3/4% Convertible Subordinated Debentures
due 2001 of Price (the "6 3/4% Debentures"). If fewer than 27 million shares of
PriceCostco Common Stock are
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tendered pursuant to the Exchange Offer and shares of Price Enterprises Common
Stock are distributed to holders of PriceCostco Common Stock in the Distribution
as described above in "The Distribution," then there may be an adjustment to the
conversion price of the 6 3/4% Debentures. See "Effect of the Transaction on
Convertible Securities."
FINANCIAL ADVISORS. PriceCostco has paid fees and incurred contingent
obligations to DLJ and Lehman Brothers in connection with the Transaction. See
"Analysis of Financial Advisors to PriceCostco." Each of Hamilton E. James and
J. Paul Kinloch is a director of PriceCostco and managing director of DLJ and
Lehman, respectively.
INTEREST IN PRICECOSTCO COMMON STOCK. During the 40 business days prior to
the date of this Offering Circular/Prospectus, neither PriceCostco nor Price
Enterprises nor, to the best knowledge of PriceCostco, any executive officer,
director or subsidiary of PriceCostco has effected any transaction in
PriceCostco Common Stock.
OTHER. Following the consummation of the Transaction, PriceCostco intends
to grant replacement options to Mitchell Lynn in respect of all PriceCostco
Options (as hereinafter defined) held by Mr. Lynn as of December 31, 1995,
regardless of whether such PriceCostco Options are then exercisable, and such
PriceCostco Options will be cancelled. It is contemplated that such replacement
options will be granted on the same terms and conditions (including the exercise
price thereof) as the PriceCostco Options which they replace.
Joseph K. Kornwasser, who resigned as a director of PriceCostco on July 28,
1994, is a general partner and has a two-thirds ownership interest in Kornwasser
and Friedman Shopping Center Properties ("K&F"). Until August 28, 1994, K&F was
a partner with PriceCostco in two partnerships, P and K Group II Properties and
P and K Group III Properties. On August 28, 1994, PriceCostco purchased K&F's
interests in such partnerships for an aggregate amount of $1,658,925 as part of
the Transaction.
PriceCostco entered into an agreement, dated September 1, 1993, with K&F for
the development of four properties (the "Development Agreement"). In fiscal year
1994, PriceCostco paid $1,024,000 in fees to K&F under the Development
Agreement. On August 28, 1994, PriceCostco purchased K&F's rights under the
Development Agreement for $841,456 as part of the Transaction.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
PriceCostco and Price Enterprises will receive an opinion, based on certain
representations of PriceCostco, Price Enterprises and certain significant
stockholders of PriceCostco, from Skadden Arps, to the effect that, although the
matter is not entirely free from doubt, the Exchange Offer and the Distribution
should qualify as tax-free distributions for Federal income tax purposes and
that, accordingly:
(i) no gain or loss will be recognized by a holder of PriceCostco Common
Stock solely as result of the receipt of shares of Price Enterprises Common
Stock in the Exchange Offer and/or the Distribution (which are referred to
herein as the Transaction), except to the extent that cash is received in
lieu of fractional shares of Price Enterprises Common Stock. A holder of
PriceCostco Common Stock who receives cash in lieu of fractional shares will
recognize gain or loss to the extent of the difference between the holder's
basis allocable to the fractional share and the amount of cash received for
such fractional share (assuming the fractional shares are held as capital
assets);
(ii) a holder's tax basis in any Price Enterprises Common Stock received
pursuant to the Exchange Offer will equal such holder's tax basis in the
PriceCostco Common Stock exchanged therefor. If PriceCostco were to
distribute any Price Enterprises Common Stock pro rata to holders of
PriceCostco Common Stock, then a holder's tax basis in the PriceCostco
Common Stock held at the time of the Distribution will be allocated, based
on relative fair market values at the time of the Distribution, between such
PriceCostco Common Stock and the Price Enterprises Common Stock received in
the Distribution;
(iii) a holder's holding period for Price Enterprises Common Stock
received in the Transaction will include the holding period during which
PriceCostco Common Stock exchanged therefor was held (assuming such
PriceCostco Common Stock was held as a capital asset);
(iv) no gain or loss will be recognized by PriceCostco or Price
Enterprises in the Transaction; and
(v) no gain or loss will be recognized by a holder of PriceCostco Common
Stock who does not participate in the Exchange Offer, regardless of whether
such holder receives any shares of Price Enterprises Common Stock in the
Distribution.
PriceCostco does not intend to seek a ruling from the IRS as to the Federal
income tax treatment of the Transaction, and it is possible that it would not
receive such a ruling were it to apply for one. Consummation of the Transaction
is not conditioned on the receipt of a ruling or an opinion.
The opinion of Skadden Arps will not be binding on the IRS or a court and
there can be no assurance that the IRS will not challenge the validity of the
Transaction as a tax-free distribution for Federal income tax purposes or that
such challenge would not ultimately prevail. The Internal Revenue Code of 1986,
as amended (the "Code"), imposes a number of requirements for a transaction such
as the Transaction to qualify for tax-free treatment, and some of these
requirements are inherently factual and subject to differing interpretations. In
particular, among other things, PriceCostco must establish to the satisfaction
of the IRS that (i) the Transaction serves a valid corporate business purpose
and (ii) Price Enterprises will be engaged in an active, five-year-old trade or
business (as defined under the Code) immediately after the Transaction. Based on
certain representations of PriceCostco, Price Enterprises and others, Skadden
Arps has concluded that these and the other applicable requirements should be
satisfied and that the Transaction should, therefore, qualify as a tax-free
distribution for Federal income tax purposes, although the matter is not
entirely free from doubt.
If the Transaction fails to qualify as a tax-free distribution for Federal
income tax purposes, a holder of PriceCostco Common Stock who receives shares of
Price Enterprises Common Stock in the Distribution will be considered to have
received a taxable dividend includible in income in an amount equal to the fair
market value on the Distribution Record Date of such Price Enterprises Common
Stock received, plus the amount of cash, if any, received in lieu of fractional
shares. In addition, a holder participating in the Exchange Offer will generally
recognize capital gain or loss in an amount equal to the difference between the
fair market value of the Price Enterprises Common Stock received and the
holder's tax basis in the PriceCostco Common Stock exchanged therefor, provided
that such holder has reduced his percentage interest in PriceCostco. If such
holder has not reduced his percentage interest in PriceCostco, such holder will
be considered to have received a taxable dividend that will be includible in
income in an amount equal to the
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fair market value on the Distribution Record Date of the Price Enterprises
Common Stock received in such exchange. At the present time, PriceCostco does
not believe that it would have a significant Federal income tax liability if the
Transaction were not to qualify for tax-free treatment.
THE FOREGOING IS A SUMMARY OF THE ANTICIPATED MATERIAL FEDERAL INCOME TAX
CONSEQUENCES OF THE TRANSACTION UNDER CURRENT LAW. IT DOES NOT PURPORT TO
ADDRESS ALL FEDERAL INCOME TAX CONSEQUENCES, OR TAX CONSEQUENCES THAT MAY ARISE
UNDER THE TAX LAWS OF OTHER JURISDICTIONS OR THAT MAY APPLY TO PARTICULAR
CATEGORIES OF STOCKHOLDERS. EACH STOCKHOLDER SHOULD CONSULT HIS OR HER TAX
ADVISOR AS TO THE PARTICULAR CONSEQUENCES OF THE TRANSACTION TO SUCH
STOCKHOLDER, INCLUDING THE APPLICATION OF FEDERAL, STATE, LOCAL AND FOREIGN TAX
LAWS, AND THE EFFECT OF POSSIBLE CHANGES IN TAX LAWS THAT MAY AFFECT THE TAX
CONSEQUENCES DESCRIBED ABOVE.
For a description of an agreement pursuant to which PriceCostco and Price
Enterprises have provided for certain tax sharing and other tax-related matters,
see "CERTAIN RELATED AGREEMENTS -- Tax Allocation Agreements."
ANTICIPATED ACCOUNTING TREATMENT
PriceCostco has treated the non-club real estate segment as a discontinued
operation for all periods presented. In the fourth quarter of fiscal 1994,
PriceCostco recorded an estimated loss on disposal of its discontinued
operations (the non-club real estate segment) as a result of entering into the
Transfer and Exchange Agreement. While the Exchange Offer is not expected to be
completed until December 20, 1994, PriceCostco determined that the Exchange
Offer will, in all likelihood, result in a significant loss for financial
reporting purposes and that there was a reasonable basis for estimating the
loss. The actual loss for financial reporting purposes will be determined
following consummation of the Exchange Offer. Such loss will be the difference
between the unaudited pro forma book value per share of Price Enterprises and
the product of (a) the fair market value per share of Price Enterprises and (b)
the number of shares exchanged. The loss also includes the direct expenses
related to the Transaction. For purposes of recording such estimated loss,
PriceCostco assumed that (i) the Exchange Offer would be fully subscribed, (ii)
a per share price of Price Enterprises Common Stock of $15.25 (the closing sales
price of PriceCostco Common Stock on October 24, 1994) and (iii) direct expenses
and other costs related to the Transaction of approximately $15 million. The
unaudited pro forma book value per common share of Price Enterprises Common
Stock is $21.27.
The $6.02 per common share difference between the $21.27 unaudited pro forma
book value per share of Price Enterprises Common Stock and the assumed per share
price of Price Enterprises Common Stock of $15.25 is attributable to a
combination of factors. These factors include an expectation that Price
Enterprises Common Stock may trade at a discount from its book value (although
the prices at which Price Enterprises Common Stock will trade cannot be
predicted).
As described under "SPECIAL CONSIDERATIONS/RISK FACTORS -- Special
Considerations Applicable to All PriceCostco Stockholders -- The Exchange
Ratio," in making its determination to approve the Transaction, one of the
factors considered by the Board of Directors of PriceCostco was a range of
illustrative high and low per share values for Price Enterprises and the implied
per share premium in the Exchange Offer based on such illustrative values as
compared to the per share price of PriceCostco Common Stock at July 14, 1994 of
$14.75 (assuming 27 million shares of Price Enterprises Common Stock outstanding
and a one-for-one exchange ratio). While believing that some premium to
tendering stockholders is included in the exchange ratio, the Board did not
quantify any such premium, recognizing that it could not do so since the range
of prices at which Price Enterprises Common Stock may trade cannot be predicted.
If any such premium could be objectively measured, it would be accounted for as
a cost of the treasury shares to be acquired by PriceCostco. Since any premium
cannot be objectively measured, PriceCostco believes that it is appropriate in
the circumstances to include any premium as part of the estimated loss on the
disposal of the non-club real estate segment, recognizing that the amount of the
loss is subject to revision after the Exchange Offer closes.
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The estimated loss was determined assuming that the Exchange Offer would be
fully subscribed. Any subsequent adjustment to the estimated loss will be
affected by the extent to which the Exchange Offer is subscribed. If the
Exchange Offer is at least 80% subscribed and PriceCostco elects to sell the
unsubscribed shares to Price Enterprises for a note, the loss as a result of the
Transaction will be the same as if the Exchange Offer were fully subscribed. Any
unsubscribed shares distributed to stockholders pro rata will be excluded from
the loss determination and accounted for as a dividend. The dividend would be
measured by the $21.27 unaudited pro forma book value per common share
multiplied by the number of shares of Price Enterprises Common Stock distributed
and will be charged directly to retained earnings. Furthermore, to the extent
that the fair market value of Price Enterprises Common Stock differs from the
assumed share price of $15.25 used above, the product of the per share
difference times the number of shares exchanged will be reclassified from the
loss on disposal reflected in the income statement and included in the cost of
PriceCostco's treasury shares acquired. In measuring the actual loss on the
Exchange Transaction, PriceCostco expects to measure the fair market value of
Price Enterprises' stock based on the average closing sales price of Price
Enterprises Common Stock during the 20 trading days commencing on the sixth
trading day following the closing of the Exchange Offer (the "20 Day Period").
However, other factors may also need to be considered in making the final
determination.
The historical financial statements of Price Enterprises present its
financial position, results of operations and cash flows as if Price Enterprises
were a separate subsidiary of PriceCostco for all periods presented. The
Transferred Assets to Price Enterprises are reflected at their historical book
value, including the effect of certain impairment writedowns recorded in the
fourth quarter ended August 28, 1994.
The Merger qualified as a "pooling-of-interests" for accounting and
financial reporting purposes. PriceCostco does not believe that the Transaction
will impact the pooling-of-interests accounting treatment utilized for the
Merger.
REGULATORY APPROVALS
No filings under the HSR Act are required in connection with the Exchange
Offer generally. To the extent certain stockholders of PriceCostco decide to
participate in the Exchange Offer and to acquire a number of shares of Price
Enterprises Common Stock that exceeds one of the thresholds stated in the
regulations under the HSR Act, and if exceptions under those regulations do not
apply, such stockholders and PriceCostco would be required to make filings under
the HSR Act, and the waiting period requirements under the HSR Act would have to
be satisfied, before the exchanges by those particular stockholders could be
carried out.
Robert E. Price and PriceCostco, and the Price Family Trust and PriceCostco,
have to date made filings under the HSR Act that would, upon expiration of the
required waiting period under the HSR Act, enable Robert Price to acquire $15
million or more but less than 15 percent of the shares of Price Enterprises
Common Stock and the Price Family Trust to acquire 25 percent or more but less
than 50 percent of the shares of Price Enterprises Common Stock. These amounts
and percentages reflect the thresholds at which these filings have been made
under the HSR Act regulations. They do not indicate the actual shares to be
acquired by Mr. Price or the Price Family Trust, which will depend on the number
of shares of Price Costco Common Stock validly tendered and not withdrawn by
them and by other stockholders in the Exchange Offer. Early termination of the
required waiting period under the HSR Act occurred for each of these filings on
November 9, 1994.
Except as stated above, PriceCostco and Price Enterprises do not believe
that any material Federal or state regulatory approvals will be necessary in
connection with the Transaction.
QUOTATION OF PRICE ENTERPRISES COMMON STOCK ON THE NASDAQ STOCK MARKET'S
NATIONAL MARKET
It is anticipated that, after the Closing Date, Price Enterprises Common
Stock will be quoted on The Nasdaq Stock Market's National Market under the
symbol "PREN." Although Price Enterprises has commenced the process for
quotation of Price Enterprises Common Stock on The Nasdaq Stock Market's
National Market, there can be no assurance that Price Enterprises Common Stock
will be so quoted.
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EFFECT OF THE TRANSACTION ON CONVERTIBLE SECURITIES
PriceCostco currently has outstanding (i) $285,079,000 aggregate principal
amount of 6 3/4% Debentures issued under an indenture, dated as of February 19,
1987 (the "6 3/4% Indenture"), (ii) $179,338,000 aggregate principal amount of
5 1/2% Convertible Subordinated Debentures due 2012 of Price (the "5 1/2%
Debentures") issued under an indenture, dated as of February 19, 1987 (the
"5 1/2% Indenture"), and (iii) $300,000,000 aggregate principal amount of 5 3/4%
Convertible Subordinated Debentures due 2002 of Costco (the "5 3/4% Debentures"
and, together with the 6 3/4% Debentures and the 5 1/2% Debentures, the
"Debentures") issued under an indenture, dated as of May 15, 1992 (the "5 3/4%
Indenture" and, together with the 6 3/4% Indenture and the 5 1/2% Indenture, the
"Indentures"). A holder of any 6 3/4% Debentures is currently entitled at any
time prior to the close of business on March 1, 2001, subject to prior
redemption or purchase by PriceCostco, to convert the 6 3/4% Debentures or
portions thereof into shares of PriceCostco Common Stock at the conversion price
of $22.535 per share, subject to adjustment as described in the 6 3/4%
Indenture. A holder of any 5 1/2% Debentures is currently entitled at any time
prior to the close of business on February 28, 2012, subject to prior
redemption, to convert the 5 1/2% Debentures or portions thereof into shares of
PriceCostco Common Stock at the conversion price of $23.768 per share, subject
to adjustment as described in the 5 1/2% Indenture. The holder of any 5 3/4%
Debentures is currently entitled at any time prior to the close of business on
May 15, 2002, subject to prior redemption, to convert the 5 3/4% Debentures or
portions thereof into share of PriceCostco Common Stock at the conversion price
of $41.25 per share, subject to adjustment as described in the 5 3/4% Indenture.
All three of the Indentures include typical antidilution provisions that
provide that, if PriceCostco distributes any assets to holders of PriceCostco
Common Stock (which would include shares of Price Enterprises Common Stock), the
conversion price of the respective Debentures will be adjusted downward pursuant
to formulas contained in the Indentures. Such anti-dilution provisions become
relevant if (i) PriceCostco holds less than 5,400,000 shares of Price
Enterprises Common Stock following the consummation of the Exchange Offer and
elects to distribute the remaining shares of Price Enterprises Common Stock to
PriceCostco stockholders pro rata or (ii) PriceCostco holds more than 5,400,000
shares of Price Enterprises Common Stock following the consummation of the
Exchange Offer and is thus required to distribute all of the remaining Price
Enterprises shares pro rata to PriceCostco stockholders. Pursuant to the
conversion adjustment formula in each Indenture, as the number of shares of
Price Enterprises Common Stock distributed increases, the Debenture conversion
price under each Indenture is reduced, and holders of outstanding Debentures
will be entitled to convert their Debentures into a larger number of shares of
PriceCostco Common Stock. It is estimated that, if no shares of PriceCostco
Common Stock are tendered in the Exchange Offer and all of the shares of Price
Enterprises Common Stock are distributed to PriceCostco stockholders pursuant to
the Distribution, the conversion prices under the Indentures will be adjusted to
approximately $19.74, $20.82 and $36.13 under the 6 3/4% Debentures, the 5 1/2%
Debentures and the 5 3/4% Debentures, respectively (assuming shares of
PriceCostco Common Stock have a market price of $15.25 and shares of Price
Enterprises Common Stock are deemed to have an equal value at the time of the
Distribution). Based on unaudited pro forma net income for each of fiscal 1993
and for the 36 weeks ended May 8, 1994. An adjustment, if any, to the conversion
price of the 5 3/4% Debentures would not be dilutive to PriceCostco's unaudited
pro forma net income per common and common equivalent share on a fully diluted
basis.
In addition, the 5 3/4% Indenture includes a special antidilution provision
which requires an additional adjustment to the 5 3/4% Debenture conversion price
in connection with certain PriceCostco stock repurchase transactions (the
"5 3/4% Adjustment"). The 5 3/4% Adjustment will apply to the Exchange Offer if
PriceCostco repurchases shares of PriceCostco Common Stock in the Exchange Offer
for consideration having an aggregate fair market value greater than 12.5% of
the total market capitalization of PriceCostco, based on the average market
price per share of PriceCostco Common Stock during any five consecutive trading
days ending not less than two nor more than ten trading days prior to the
consummation of the Exchange Offer (the "PriceCostco Pre-Closing Market Price").
Since the total number of shares of Price Enterprises Common Stock to be issued
in the Exchange Offer is less than 12.5% of the total number of shares of
PriceCostco Common Stock outstanding as of August 31, 1994 (approximately
12.4%), the 5 3/4%
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Adjustment will not apply if the value of a Price Enterprises share is less than
or equal to the PriceCostco Pre-Closing Market Price. If the value of a Price
Enterprises share is more than the PriceCostco Pre-Closing Market Price, then
the 5 3/4% Adjustment may apply, assuming sufficient shares are tendered in the
Exchange Offer such that the total value of the Price Enterprises Common Stock
exchanged exceeds 12.5% of the market capitalization of PriceCostco (based on
the PriceCostco Pre-Closing Market Price). If the 5 3/4% Adjustment applies, it
will result in a downward adjustment in the conversion price, and the holders of
the 5 3/4% Debentures will be entitled to convert their debentures into a larger
number of shares of PriceCostco Common Stock. As noted above, any adjustment to
the conversion price of the 5 3/4% Debentures would not be dilutive to
PriceCostco's unaudited pro forma net income per common and common equivalent
share on a fully diluted basis for fiscal 1994.
THE EXCHANGE OFFER
TERMS OF THE EXCHANGE OFFER
PriceCostco hereby offers, on the terms and subject to the conditions set
forth herein and in the Letter of Transmittal, to exchange one share of Price
Enterprises Common Stock for each share of PriceCostco Common Stock properly
tendered and accepted for exchange (up to a maximum of 27 million such shares).
PriceCostco will accept for exchange (and thereby purchase) all shares of
PriceCostco Common Stock that have been validly tendered and not withdrawn (up
to a maximum of 27 million such shares), and shall pay for each such share by
issuing in exchange therefor one share of Price Enterprises Common Stock
promptly following the Expiration Date.
If more than 27 million shares of PriceCostco Common Stock are validly
tendered and not withdrawn in the Exchange Offer prior to the Expiration Date,
then, upon the terms and subject to the conditions set forth in this Offering
Circular/Prospectus and the Letter of Transmittal, PriceCostco will accept 27
million shares for exchange on a pro rata basis, and shares of Price Enterprises
Common Stock will be issued in exchange therefor. Tendering holders will not be
required to pay brokerage commissions or fees or, subject to the instructions in
the Letter of Transmittal, transfer taxes with respect to the exchange of
PriceCostco Common Stock pursuant to the Exchange Offer. PriceCostco will pay
all transfer taxes of tendering stockholders, other than certain applicable
taxes, in connection with the Exchange Offer. See "Payment of Expenses."
No fractional shares of Price Enterprises Common Stock shall be issued in
the Exchange Offer in exchange for any fractional shares of PriceCostco Common
Stock.
EXPIRATION DATE; EXTENSIONS; TERMINATION
The Exchange Offer will expire at 12:00 midnight, New York City time, on
December 20, 1994, subject to extension by PriceCostco by notice to the Exchange
Agent as herein provided (the "Expiration Date"). In the event of such
extension, the term "Expiration Date" shall mean the time and date on which the
Exchange Offer as so extended shall expire. PriceCostco will notify the Exchange
Agent of any extension by oral or written notice and will make a public
announcement thereof, each prior to 9:00 a.m., New York City time, on the next
business day after the previously scheduled Expiration Date. Without limiting
the manner in which PriceCostco may choose to make a public announcement of any
extension, amendment or termination of the Exchange Offer, PriceCostco shall
have no obligation to publicly advertise, or otherwise communicate any such
public announcement, other than by making a timely release to the Dow Jones News
Service.
PriceCostco reserves the right to extend the Exchange Offer or to terminate
the Exchange Offer and not accept for exchange any shares of PriceCostco Common
Stock not previously accepted for exchange by giving oral or written notice of
such delay, extension or termination to the Exchange Agent. Any such delay in
acceptance for exchange, extension or termination will be followed as promptly
as practicable by public announcement thereof. The rights reserved by
PriceCostco in this paragraph are in addition to PriceCostco's rights set forth
under "Conditions to the Exchange Offer" below.
PROCEDURES FOR TENDERING
The participation by a holder of PriceCostco Common Stock in the Exchange
Offer pursuant to one of the procedures set forth below will constitute an
agreement between such holder and PriceCostco in accordance with the terms and
subject to the conditions set forth herein and in the Letter of Transmittal.
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To be tendered properly, certificates for shares of PriceCostco Common
Stock, together with the properly completed and duly executed Letter of
Transmittal (or facsimile thereof), and any other documents required by the
Letter of Transmittal, or an Agent's Message (as hereinafter defined) in the
case of a book-entry transfer of shares, must be received by the Exchange Agent
at one of the addresses set forth below in "Withdrawal Rights" prior to 12:00
midnight, New York City time, on the Expiration Date, except as otherwise
provided under "Guaranteed Delivery Procedure." LETTERS OF TRANSMITTAL AND
CERTIFICATES FOR SHARES OF PRICECOSTCO COMMON STOCK SHOULD NOT BE SENT TO
PRICECOSTCO OR TO THE INFORMATION AGENT.
Signatures on a Letter of Transmittal must be guaranteed unless the shares
of PriceCostco Common Stock tendered pursuant thereto are tendered (i) by a
registered holder who has not completed the box entitled "Special Issuance and
Delivery Instructions" on the Letter of Transmittal or (ii) for the account of
an Eligible Institution. In the event that signatures on a Letter of Transmittal
are required to be guaranteed, such guarantee must be by an Eligible
Institution. An "Eligible Institution" means a firm or other entity identified
in Rule 17Ad-15 under the Exchange Act including (as such terms are defined
therein): (i) a bank; (ii) a broker, dealer, municipal securities dealer,
municipal securities broker, government securities dealer or government
securities broker; (iii) a credit union; (iv) a national securities exchange,
registered securities association or clearing agency; or (v) savings institution
that is a participant in a Securities Transfer Association recognized program. A
verification by a notary public alone is not acceptable.
THE METHOD OF DELIVERY OF SHARES OF PRICECOSTCO COMMON STOCK AND OTHER
DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF THE HOLDER.
Mailing should be made sufficiently in advance of the Expiration Date to permit
delivery to the Exchange Agent prior to 12:00 midnight, New York City time, on
the Expiration Date.
The Exchange Agent will make a request to establish accounts with respect to
the shares of PriceCostco Common Stock at The Depository Trust Company ("DTC"),
the Midwest Securities Transfer Company ("MSTC") and the Philadelphia Depository
Trust Company ("PHILADEP" and, together with DTC and MSTC, the "Book-Entry
Transfer Facilities") promptly after the date of this Offering
Circular/Prospectus for the purpose of the Exchange Offer, and any financial
institution that is a participant in any of the Book-Entry Transfer Facilities'
systems may make book-entry transfer of the shares of PriceCostco Common Stock
by causing DTC, MSTC or PHILADEP to transfer such shares of PriceCostco Common
Stock into the Exchange Agent's account in accordance with such Book-Entry
Transfer Facility's procedure for such transfer. Although delivery of shares of
PriceCostco Common Stock may be effected through book-entry transfer to the
Exchange Agent's account at DTC, MSTC or PHILADEP, the Letter of Transmittal (or
facsimile thereof), with all required signature guarantees and any other
required documents, or an Agent's Message must, in any case, be transmitted to
and received or confirmed by the Exchange Agent at one of its addresses set
forth on the back cover of this Offering Circular/Prospectus prior to 12:00
midnight, New York City time, on the Expiration Date, except as otherwise
provided under "Guaranteed Delivery Procedure." "Agent's Message" means a
message transmitted through electronic means by a Book-Entry Transfer Facility
to and received by the Exchange Agent and forming a part of a book-entry
confirmation, which states that such Book-Entry Transfer Facility has received
an express acknowledgement from the participant in such Book-Entry Transfer
Facility tendering the shares that such participant has received and agrees to
be bound by the Letter of Transmittal. DELIVERY OF DOCUMENTS TO A BOOK-ENTRY
TRANSFER FACILITY IN ACCORDANCE WITH ITS PROCEDURES DOES NOT CONSTITUTE DELIVERY
TO THE EXCHANGE AGENT AS REQUIRED HEREBY.
If the Letter of Transmittal is signed by a person other than a registered
holder of any certificate(s) listed, such certificate(s) must be endorsed or
accompanied by appropriate stock powers, in either case signed exactly as the
name or names of the registered holder or holders appear on the certificate(s).
If the Letter of Transmittal or Notice of Guaranteed Delivery or any
certificates or stock powers are signed by trustees, executors, administrators,
guardians, attorneys-in-fact, officers of corporations or others acting in a
fiduciary or representative capacity, such persons should so indicate when
signing, and, unless waived by PriceCostco, proper evidence satisfactory to
PriceCostco of their authority so to act must be submitted.
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All questions as to the validity, form, eligibility (including time of
receipt), and acceptance of tendered shares of PriceCostco Common Stock will be
resolved by PriceCostco, whose determination will be final and binding.
PriceCostco reserves the absolute right to reject any or all tenders that are
not in proper form or the acceptance of which would, in the opinion of counsel
for PriceCostco, be unlawful. PriceCostco also reserves the right to waive any
irregularities or conditions of tender as to particular shares of PriceCostco
Common Stock. PriceCostco's interpretation of the terms and conditions of the
Exchange Offer (including the instructions in the Letter of Transmittal) will be
final and binding. Unless waived, any irregularities in connection with tenders
must be cured within such time as PriceCostco shall determine. Neither
PriceCostco nor the Exchange Agent shall be under any duty to give notification
of defects in such tenders or shall incur any liability for failure to give such
notification. Tenders of shares of PriceCostco Common Stock will not be deemed
to have been made until such irregularities have been cured or waived. Any
shares of PriceCostco Common Stock received by the Exchange Agent that are not
properly tendered and as to which the irregularities have not been cured or
waived will be returned by the Exchange Agent to the tendering holder, unless
otherwise provided in the Letter of Transmittal, promptly following the
Expiration Date.
If any certificate representing shares of PriceCostco Common Stock has been
destroyed, lost or stolen, the stockholder must (i) furnish to the Exchange
Agent evidence, satisfactory to it in its discretion, of the ownership of and
the destruction, loss or theft of such certificate, (ii) furnish to the Exchange
Agent indemnity, satisfactory to it in its discretion and (iii) comply with such
other reasonable regulations as the Exchange Agent may prescribe.
GUARANTEED DELIVERY PROCEDURE
If a holder desires to tender his or her shares of PriceCostco Common Stock
and the certificate(s) representing such shares of PriceCostco Common Stock are
not immediately available, or time will not permit such holder's certificate(s)
or any other required documents to reach the Exchange Agent before 12:00
midnight, New York City time, on the Expiration Date, a tender may be effected
if:
(a) The tender is made through an Eligible Institution;
(b) Prior to 12:00 midnight, New York City time, on the Expiration
Date, the Exchange Agent receives from such Eligible Institution a
properly completed and duly executed Notice of Guaranteed Delivery (by
telegram, facsimile transmission, mail or hand delivery) setting forth
the name and address of the holder and the number of shares of
PriceCostco Common Stock tendered, stating that the tender is being made
thereby and guaranteeing that, within five New York Stock Exchange, Inc.
(the "NYSE") trading days after the Expiration Date, the certificate(s)
representing the shares of PriceCostco Common Stock, accompanied by all
other documents required by the Letter of Transmittal, will be deposited
by the Eligible Institution with the Exchange Agent; and
(c) The certificate(s) for all tendered shares of PriceCostco Common
Stock, or a confirmation of a book-entry transfer of such shares of
PriceCostco Common Stock into the Exchange Agent's applicable account at
a Book-Entry Transfer Facility as described above, together with a
properly completed and duly executed Letter of Transmittal (or manually
signed facsimile thereof) and any required signature guarantees, or an
Agent's Message in connection with a book-entry transfer, as well as all
other documents required by the Letter of Transmittal, are received by
the Exchange Agent within five NYSE trading days after the Expiration
Date.
CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provision of the Exchange Offer, and in addition
to the condition that the Registration Statement filed by Price Enterprises with
the Commission shall have become effective in accordance with the provisions of
the Securities Act, and no stop order suspending such effectiveness shall have
been issued and remain in effect, PriceCostco shall not be required to accept
for exchange, and may
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postpone the acceptance for exchange of shares of PriceCostco Common Stock
tendered to it, and may terminate or amend the Exchange Offer, if prior to the
acceptance for exchange of shares of PriceCostco Common Stock, any of the
following events shall occur:
(a) there shall have been any statute, rule, injunction or other
order promulgated, enacted, entered or enforced by any state or federal
government or governmental authority or by any court and be in effect
that would make the consummation of the Exchange Offer illegal or
otherwise prohibit or restrict consummation of the Exchange Offer;
(b) there shall have occurred:
(1) any general suspension of trading in, or limitation on
prices for, securities on any national securities exchange or in
the over-the-counter market;
(2) the declaration of any banking moratorium or suspension of
payments in respect of banks in the United States;
(3) any limitation by any governmental, regulatory or
administrative agency or authority on the extension of credit by
banks or other lending institutions; or
(4) in the case of any of the situations described in clauses
(1) through (3) inclusive, existing as of the date hereof, a
material acceleration or worsening thereof (in the reasonable
determination of PriceCostco);
(c) a tender or exchange offer for any or all of the shares of
PriceCostco Common Stock (other than the Exchange Offer), or any merger,
business combination or other similar transaction with or involving
PriceCostco, shall have been proposed, announced or made by any person;
or
(d) Price Enterprises shall have breached or failed to perform in
any material respect any of its covenants or agreements under the
Transfer and Exchange Agreement, which, in the judgment of PriceCostco
in any such case, and regardless of the circumstances giving rise to any
such condition, makes it inadvisable to proceed with such acceptance for
payment.
The foregoing conditions are for the sole benefit of PriceCostco and may be
asserted by PriceCostco regardless of the circumstances giving rise to such
conditions or may be waived by PriceCostco in whole or in part at any time and
from time to time in its sole discretion. Any determination by PriceCostco
concerning the events described above will be final and binding upon all
parties.
WITHDRAWAL RIGHTS
Except as otherwise provided herein, any tender of shares of PriceCostco
Common Stock made pursuant to the Exchange Offer is irrevocable. Shares of
PriceCostco Common Stock tendered pursuant to the Exchange Offer may be
withdrawn at any time prior to the Expiration Date and, unless theretofore
accepted for exchange by PriceCostco pursuant to the Exchange Offer, may also be
withdrawn at any time after the expiration of 40 business days from the
commencement of the Exchange Offer. If PriceCostco extends the period of time
during which the Exchange Offer is open, is delayed in its acceptance of shares
of PriceCostco Common Stock for exchange or is unable to accept shares of
PriceCostco Common Stock for exchange pursuant to the Exchange Offer for any
reason, then, without prejudice to PriceCostco's rights under the Exchange
Offer, the Exchange Agent may, on behalf of PriceCostco, retain all shares of
PriceCostco Common Stock tendered, and such shares of PriceCostco Common Stock
may not be withdrawn except as otherwise provided herein, subject to Rule
13e-4(f)(5) under the Exchange Act, which provides that the person making an
issuer tender offer shall either pay the consideration offered or return
tendered securities, promptly after the termination or withdrawal of the offer.
To be effective, a written, telegraphic or facsimile transmission notice of
withdrawal must be timely received by the Exchange Agent at one of its addresses
set forth below and must specify the name of the person who tendered the shares
of PriceCostco Common Stock to be withdrawn and the number of shares of
PriceCostco Common Stock to be withdrawn precisely as it appears on the Letter
of Transmittal.
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FIRST INTERSTATE BANK OF WASHINGTON, N.A., EXCHANGE AGENT
<TABLE>
<S> <C> <C>
BY MAIL: OVERNIGHT DELIVERY: BY HAND (ONLY):
First Interstate Bank of First Interstate Bank of First Interstate Bank of
Washington, N.A. Washington, N.A. Washington, N.A.
c/o MSTS c/o MSTS Stock Transfer, 14th Floor
P. O. Box 845 Attn: Reorg Dept., 1st Floor 999 Third Ave.
Midtown Station 85 Challenger Rd. Seattle, WA 91804
New York, NY 10018 Ridgefield Park, NJ 07660 or
Special Services Section
26610 West Agoura Road
Calabasas, CA 91302
or
120 Broadway, 33rd Floor
New York, NY 10271
</TABLE>
If the shares of PriceCostco Common Stock to be withdrawn have been
delivered to the Exchange Agent, a signed notice of withdrawal must be submitted
prior to the release of such shares of PriceCostco Common Stock. In addition,
such notice must specify, in the case of shares of PriceCostco Common Stock
tendered by delivery of certificates, the name of the registered holder (if
different from that of the tendering stockholder) and the serial numbers shown
on the particular certificates evidencing the shares of PriceCostco Common Stock
to be withdrawn or, in the case of shares of PriceCostco Common Stock tendered
by book-entry transfer, the name and number of the account at one of the
Book-Entry Transfer Facilities to be credited with the withdrawn shares of
PriceCostco Common Stock. Withdrawals may not be rescinded, and shares of
PriceCostco Common Stock withdrawn will thereafter be deemed not validly
tendered for purposes of the Exchange Offer. However, withdrawn shares of
PriceCostco Common Stock may be retendered by again following one of the
procedures described in "Procedures for Tendering" at any time prior to the
Expiration Date.
All questions as to the form and validity (including time of receipt) of any
notice of withdrawal will be determined by PriceCostco, in its sole discretion,
which determination shall be final and binding. None of PriceCostco, the
Exchange Agent, the Information Agent or any other person will be under any duty
to give notification of any defect or irregularity in any notice of withdrawal
or incur any liability for failure to give any such notification.
ACCEPTANCE OF PRICECOSTCO COMMON STOCK FOR EXCHANGE; DELIVERY OF PRICE
ENTERPRISES COMMON STOCK
Subject to the terms and conditions set forth herein, PriceCostco will
accept for exchange any and all shares of PriceCostco Common Stock properly
tendered and not withdrawn in the Exchange Offer prior to 12:00 midnight, New
York City time, on the Expiration Date, up to a maximum of 27 million shares.
PriceCostco will deliver shares of Price Enterprises Common Stock issued in the
Exchange Offer promptly following the Expiration Date.
For purposes of the Exchange Offer, PriceCostco will be deemed to have
accepted for exchange (and thereby to have purchased) validly tendered shares of
PriceCostco Common Stock when, as and if PriceCostco has given oral or written
notice thereof to the Exchange Agent. The Exchange Agent will act as agent for
the tendering holders for the purpose of receiving shares of Price Enterprises
Common Stock from PriceCostco.
If any tendered shares of PriceCostco Common Stock are not accepted for
exchange because such shares were not tendered properly, the occurrence of
certain other events set forth herein or otherwise, certificates for any such
unexchanged shares of PriceCostco Common Stock will be returned, without
expense, to the tendering holder thereof (or, in the case of shares of
PriceCostco Common Stock tendered by book-entry transfer, to an account
maintained at the respective Book-Entry Transfer Facility), promptly after the
expiration or termination of the Exchange Offer.
PriceCostco expressly reserves the right to seek to acquire PriceCostco
Common Stock in the future by means of open market purchases, privately
negotiated acquisitions, subsequent exchange or tender offers or
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otherwise, at prices and terms to be determined by PriceCostco, which prices or
terms, depending on a variety of circumstances that may exist at the time, may
be higher or lower or more or less favorable, as the case may be, than those in
the Exchange Offer.
EXCHANGE AGENT AND INFORMATION AGENT
First Interstate Bank of Washington, N.A. has been appointed as exchange
agent (the "Exchange Agent") for the Exchange Offer, and Georgeson & Company,
Inc. has been appointed as information agent (the "Information Agent") for the
Exchange Offer. All correspondence in connection with the Exchange Offer and the
Letter of Transmittal should be addressed to the Exchange Agent or the
Information Agent at the addresses or telephone numbers set forth on the back
cover page of this Offering Circular/Prospectus.
Requests for information or additional copies of this Offering
Circular/Prospectus or the Letter of Transmittal and all other documents
required by the Letter of Transmittal should be directed to the Exchange Agent
or the Information Agent. Neither the Exchange Agent nor the Information Agent
will solicit tenders in connection with the Exchange Offer.
FINANCIAL ADVISORS
PriceCostco has retained DLJ and Lehman Brothers to advise PriceCostco with
respect to the Transaction. Neither DLJ nor Lehman Brothers has been retained to
render an opinion as to the fairness of the Exchange Offer.
For a description of the services rendered by, and fee arrangements with,
DLJ and Lehman Brothers in connection with the Transaction, see "THE TRANSACTION
- -- Analysis of Financial Advisors to PriceCostco."
PAYMENT OF EXPENSES
Neither PriceCostco nor Price Enterprises has retained any dealer-manager or
similar soliciting agent in connection with the Exchange Offer and will not make
any payments to brokers, dealers or others soliciting acceptances of the
Exchange Offer. PriceCostco will pay the Exchange Agent and the Information
Agent reasonable and customary fees for their services and will reimburse them
for their reasonable out-of-pocket expenses in connection therewith. PriceCostco
will also pay brokerage houses and other custodians, nominees and fiduciaries
the reasonable out-of-pocket expenses incurred by them in forwarding copies of
this Offering Circular/Prospectus and related documents to the beneficial owners
of PriceCostco Common Stock and in handling or forwarding tenders for their
customers.
The cash expenses to be incurred in connection with the Exchange Offer,
including the fees and expenses of the Exchange Agent and the Information Agent,
and printing, accounting and legal fees, will be paid by PriceCostco except
that, if the Transaction is consummated, all costs and expenses of Latham &
Watkins, counsel to Price Enterprises, and Kenneth Leventhal & Company, an
advisor to Price Enterprises, will be paid by Price Enterprises.
PriceCostco will pay all transfer taxes, if any, applicable to the transfer
and sale of PriceCostco Common Stock to it or its order pursuant to the Exchange
Offer. If, however, shares of Price Enterprises Common Stock are to be delivered
to, or are to be registered or issued in the name of, any person other than the
registered holder of the PriceCostco Common Stock tendered hereby, or if
tendered certificates are registered in the name of any person other than the
person signing the Letter of Transmittal, or if a transfer tax is imposed for
any reason other than the transfer and sale of PriceCostco Common Stock to
PriceCostco or its order pursuant to the Exchange Offer, the amount of any such
transfer taxes (whether imposed on the registered holder or any other persons)
will be payable by the tendering holder. If satisfactory evidence of payment of
such taxes or exemption therefrom is not submitted herewith, the amount of such
transfer taxes will be billed directly to such tendering holder.
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THE AGREEMENT OF TRANSFER AND PLAN OF EXCHANGE
The following is a summary of the material provisions of the Transfer and
Exchange Agreement, a copy of which is attached as Annex II hereto and
incorporated herein by reference. Such summary is qualified in its entirety by
reference to the full text of the Transfer and Exchange Agreement.
TRANSFER OF ASSETS; ASSUMPTION OF LIABILITIES
TRANSACTIONS OCCURRING PRIOR TO THE CLOSING DATE
Pursuant to the Transfer and Exchange Agreement, the Subsidiary Corporations
were formed and PriceCostco caused the Mexico Assets to be transferred to Mexico
Clubs, the International Assets to be transferred to Price Global and the Quest
Assets to be transferred to Price Quest. Each of Price Global and Price Quest
issued 100 shares of its common stock to Price, which constituted all of the
outstanding capital stock of such Subsidiary Corporation. See "THE TRANSACTION
- -- Transactions Undertaken Prior to the Exchange Offer."
CONVEYANCE OF TRANSFERRED ASSETS
Upon the terms and subject to the satisfaction of the conditions contained
in the Transfer and Exchange Agreement, as of the Transfer Closing Date,
PriceCostco transferred or caused to be transferred to Price Enterprises the
Transferred Assets. See "THE TRANSACTION -- Transactions Undertaken Prior to the
Exchange Offer." With respect to Transferred Assets that PriceCostco was unable
to convey, assign, transfer or deliver (or to cause such action to occur) as of
the Transfer Closing Date, PriceCostco has taken all reasonable actions to
preserve for, or transfer to, Price Enterprises the benefits of such Transferred
Asset, pending the conveyance, assignment, transfer or delivery thereof to Price
Enterprises. In the event that PriceCostco is unable to convey, assign, transfer
or deliver (or cause such action to occur) any of the Real Properties to Price
Enterprises on or prior to February 28, 1995, Price Enterprises and PriceCostco
will agree to either (i) an arrangement, if legally permissible, pursuant to
which PriceCostco will lease such Real Property to Price Enterprises pursuant to
a long-term lease for an annual rent of $1.00 per year or (ii) a conveyance by
PriceCostco to Price Enterprises of other real property owned by PriceCostco or
its subsidiaries satisfactory to Price Enterprises in substitution thereof.
However, if both of such alternatives deprive either PriceCostco or Price
Enterprises of the benefits of transferring ownership of the property
contemplated by the Transfer and Exchange Agreement by February 28, 1995, then
the Transfer and Exchange Agreement requires PriceCostco to remit to Price
Enterprises in cash the value of such property, as specified in the Transfer and
Exchange Agreement.
CONSIDERATION FOR TRANSFER
For a description of the consideration for the Transfer, see "THE
TRANSACTION -- Transactions Undertaken Prior to the Exchange Offer."
THE EXCHANGE OFFER AND THE DISTRIBUTION
The Transfer and Exchange Agreement requires PriceCostco to make the
Exchange Offer (subject
to the terms and conditions set forth in "THE EXCHANGE OFFER -- Terms of the
Exchange Offer"
and "-- Conditions to the Exchange Offer") and the Distribution (see "THE
TRANSACTION -- The Distribution").
THE CLOSING
The Transfer and Exchange Agreement provides that the closing of the
transactions contemplated thereby, other than those actions that were taken and
transactions that were consummated as of the Transfer Closing Date, will take
place on the date immediately following the Expiration Date, or if such date is
not a business day, and PriceCostco so elects, on the next business day
thereafter.
On the Closing Date, the following actions will be taken (if such actions
have not been taken prior to the Closing Date): (a) PriceCostco will deliver to
the Exchange Agent a number of shares of Price Enterprises Common Stock (up to a
maximum of 27 million such shares) equal to the number of shares of PriceCostco
Stock validly tendered and not withdrawn in the Exchange Offer and accepted for
payment by PriceCostco; (b) the Certificate of Incorporation of Price
Enterprises will be amended to read in its entirety as set forth in
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Annex III and shall be filed with the Secretary of State of the State of
Delaware; (c) the Bylaws of Price Enterprises will be amended to read in their
entirety as set forth in Annex IV; (d) the Bylaws of PriceCostco will be amended
to read in their entirety as set forth in Annex V; (e) the Board of Directors of
Price Enterprises shall be expanded and the newly created directorships shall be
filled, as described in "MANAGEMENT OF PRICE ENTERPRISES -- Board of Directors
of Price Enterprises"; and (f) the resignations of all of the Price Designees
from the Board of Directors of PriceCostco, other than Richard M. Libenson and
Duane Nelles (which resignations were submitted to the Board of Directors of
PriceCostco on July 28, 1994), shall become effective. Unless removed for cause,
each of Messrs. Libenson and Nelles shall serve on the Board of Directors of
PriceCostco until the earlier of (i) the date two years following the Closing
Date and (ii) such time as Sol Price and Robert E. Price and their affiliates in
the aggregate cease to beneficially own at least two million shares of
PriceCostco Common Stock (including any such shares owned by charitable trusts
established by either of them).
REPRESENTATIONS AND WARRANTIES
The Transfer and Exchange Agreement contains no representations or
warranties with respect to the Transferred Assets, the Mexico Assets, the
International Assets or the Quest Assets other than certain representations and
warranties of PriceCostco relating to (a) title to property and (b) brokers and
finders.
CERTAIN ADDITIONAL MATTERS
Pursuant to the Transfer and Exchange Agreement, PriceCostco and Price
Enterprises made certain additional agreements related to the Transfer and the
Exchange Offer, including, among others, those related to the matters set forth
below.
CERTAIN COMMITTEES
Pursuant to the Transfer and Exchange Agreement, the Board of Directors of
PriceCostco has reconstituted the PriceCostco Executive Committee and created
the Price Enterprises Executive Committee, each to serve during the Interim
Period. Pursuant to the Transfer and Exchange Agreement, the Board has also
reconstituted its audit and compensation committees and formed new finance and
real estate committees, each to exist during the Interim Period.
The charter of the Price Enterprises Executive Committee provides that,
during the Interim Period, the Price Enterprises Executive Committee has and may
exercise all the powers and authority of the Board of Directors of PriceCostco
in the management of the business and affairs of Price Enterprises and, during
such period, shall cause Price Enterprises to conduct its operations only in
accordance with the ordinary and usual course of business consistent with
PriceCostco's past operations of the Transferred Assets and the business of
Price Enterprises, it being expressly acknowledged that any operations
undertaken that are in accordance with the fiscal 1995 operating and capital
budget of Price Enterprises (the "Price Enterprises Budget"), which was prepared
by management, reviewed by the Finance Committee (as hereinafter defined) and
approved by the Board on or prior to the Transfer Closing Date, shall be
considered operations conducted in the ordinary and usual course of business;
PROVIDED, HOWEVER, that any action proposed to be taken by the Price Enterprises
Executive Committee with respect to real property assets shall be subject to the
approval of the Real Estate Committee; and PROVIDED, FURTHER, that the Price
Enterprises Executive Committee has no power or authority to (i) amend the
Certificate of Incorporation of Price Enterprises, (ii) adopt an agreement of
merger or consolidation with respect to Price Enterprises under Section 251 or
252 of the Delaware General Corporation Law (the "DGCL"), (iii) approve (or
recommend to PriceCostco's stockholders) the sale, lease or exchange of all or
substantially all of Price Enterprises' property and assets, (iv) approve (or
recommend to PriceCostco's stockholders) a dissolution of Price Enterprises or a
revocation of a dissolution, (v) amend the Bylaws of Price Enterprises, (vi)
declare a dividend on shares of Price Enterprises capital stock, (vii) authorize
the issuance of stock of Price Enterprises, (viii) adopt a certificate of
ownership and merger with respect to Price Enterprises pursuant to Section 253
of the DGCL or (ix) approve any of the matters listed in clauses (i) through
(viii) with respect to PriceCostco that the PriceCostco Executive Committee is
also prohibited from approving. In addition, the Price Enterprises Executive
Committee has no power or authority to make any expenditure or to take any
action in connection therewith that is not in
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the ordinary and usual course of business of Price Enterprises unless such
expenditure or action is unanimously approved by the Board of Directors of Price
Enterprises. The Price Enterprises Executive Committee consists of Robert E.
Price, Paul A. Peterson and James D. Sinegal.
The charter of the current PriceCostco Executive Committee has been amended
to provide that, during the Interim Period, the PriceCostco Executive Committee
has and may exercise all the powers and authority of the Board of Directors of
PriceCostco in the management of the business and affairs of PriceCostco,
excluding the business and affairs of Price Enterprises, and, during such
period, shall cause PriceCostco to conduct its operations only in accordance
with the ordinary and usual course of business consistent with past practice, it
being expressly acknowledged that any operations undertaken in accordance with
the fiscal 1995 operating and capital budget of PriceCostco, excluding Price
Enterprises (the "PriceCostco Budget"), which was prepared by management,
reviewed by the Finance Committee and approved by the Board on or prior to the
Transfer Closing Date, shall be considered operations conducted in the ordinary
and usual course of business; PROVIDED, HOWEVER, that any action proposed to be
taken by the PriceCostco Executive Committee with respect to matters that
require approval of the Real Estate Committee shall be subject to the approval
of the Real Estate Committee; and PROVIDED, FURTHER, that the PriceCostco
Executive Committee has no power or authority to (i) amend the Certificate of
Incorporation of PriceCostco, (ii) adopt an agreement of merger or consolidation
under Section 251 or 252 of the DGCL, (iii) recommend to the stockholders the
sale, lease or exchange of all or substantially all of PriceCostco's property
and assets, (iv) recommend to the stockholders a dissolution of PriceCostco or a
revocation of a dissolution, (v) amend the Bylaws of PriceCostco, (vi) declare a
dividend, (vii) authorize the issuance of stock or (viii) adopt a certificate of
ownership and merger pursuant to Section 253 of the DGCL. In addition, the
PriceCostco Executive Committee shall have no power or authority to make any
expenditure or to take any action in connection therewith that is not in the
ordinary and usual course of business of PriceCostco unless such expenditure or
action is approved by the Board of Directors of PriceCostco. The PriceCostco
Executive Committee consists of Richard M. Libenson, Duane Nelles and all of the
Costco Designees.
The charter of the current audit committee of the Board of Directors of
PriceCostco (such committee, as reconstituted, the "Audit Committee") has been
amended to provide that, during the Interim Period, the Audit Committee shall
meet as and when necessary to review the results of the year-end audit of
PriceCostco performed by the independent public accountants, review and evaluate
internal accounting controls and recommend the selection of independent public
accountants and review and approve (or ratify) related party transactions, and
it is authorized to conduct such reviews and examinations as it deems necessary
with respect to the practices and policy, and the relationship between
PriceCostco and its independent auditors, including the availability of
PriceCostco's records, information and personnel. The Audit Committee consists
of two Costco Designees (Daniel Bernard and John Meisenbach) and two Price
Designees (Richard Libenson and Paul Peterson).
The charter of the current compensation committee of the Board of Directors
of PriceCostco (such committee, as reconstituted, the "Compensation Committee")
has been amended to provide that, during the Interim Period, the Compensation
Committee shall meet as and when necessary to review salaries, bonuses and stock
options of senior officers of PriceCostco, and shall administer PriceCostco's
compensation and stock option programs. The Compensation Committee consists of
two Costco Designees (Hamilton James and John Meisenbach) and two Price
Designees (Paul Kinloch and Duane Nelles).
The charter of the finance committee of the Board of Directors of
PriceCostco (the "Finance Committee") provides that, during the Interim Period,
the Finance Committee will review and make recommendations regarding the
PriceCostco Budget and the Price Enterprises Budget and will, from time to time
during the Interim Period, meet as and when necessary to review and make
recommendations with respect to (i) the creation, incurrence, assumption or
guaranty by PriceCostco of any indebtedness, obligation or liability made during
the Interim Period, (ii) investments by PriceCostco during the Interim Period
and (iii) all new financings made during the Interim Period, except, in each
case, for any such transactions entered into by PriceCostco in the ordinary and
usual course of business of PriceCostco or under PriceCostco's existing
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working capital loans or commercial paper program and consistent with past
practice. The Finance Committee consists of two Costco Designees (Jeffrey
Brotman and Richard DiCerchio) and two Price Designees (Mitchell Lynn and Duane
Nelles).
The charter of the real estate committee of the Board of Directors of
PriceCostco (the "Real Estate Committee") provides that, during the Interim
Period, the Real Estate Committee will review and approve (i) any sale
(including sale-leaseback), lease, conveyance, transfer or other disposition of
real property of PriceCostco, and (ii) any purchase, lease or other acquisition
of real property, in either case the value of which is in excess of one million
dollars; PROVIDED, HOWEVER, that no such review and approval is required with
respect to contractual obligations of PriceCostco that arose on or prior to July
28, 1994. The Real Estate Committee consists of two Costco Designees (Hamilton
James and James Sinegal) and two Price Designees (Robert Price and Paul
Peterson).
AGREEMENT NOT TO COMPETE
Pursuant to the Transfer and Exchange Agreement, for a period of five years
following the Closing Date, Price Enterprises shall not, nor shall it permit or
suffer any of its subsidiaries to: (i) directly or indirectly engage in or
conduct any Club Business in any geographical area other than the Specified
Geographical Areas, own any interest in another company that conducts a Club
Business in any area other than the Specified Geographical Areas (PROVIDED that
none of Price Enterprises, Price Global or any of their subsidiaries shall be
prohibited from purchasing and owning securities of any such company as a
passive investment so long as such securities in the aggregate represent no more
than 10% of the equity securities of such company) or knowingly sell to or
provide services to a Club Business in any such area, and in the Specified
Geographical Areas shall conduct a Club Business only through the relevant
Subsidiary Corporation; (ii) sell, assign, lease, transfer or otherwise convey
(A) any Commercial Property, or any portion thereof, to any person for use as a
Club Business (other than PriceCostco), if any Club Business operated by
PriceCostco as of July 28, 1994 is located on, adjacent to or within the same
development as such latter Club Business or (B) certain specified Commercial
Properties to any person for use as a Club Business so long as PriceCostco or
one of its subsidiaries shall operate a Club Business in the same trade area;
(iii) conduct a Quest Business from within a location that is owned or operated
by any of certain specified companies or in any Club Business other than a Club
Business operated by PriceCostco, Price Enterprises, the Subsidiary Corporations
or any of the licensees of the Subsidiary Corporations; or (iv) without the
prior written consent of PriceCostco (which shall not unreasonably be withheld),
engage in any business with any of certain specified companies, except that
Price Enterprises and its subsidiaries may (A) except as provided in clause (ii)
above, sell, assign, lease, transfer or otherwise convey any real property to,
or purchase, lease or otherwise take possession of any real property from, any
of certain specified companies and (B) purchase merchandise from any of certain
specified companies in the ordinary course of business and consistent with
PriceCostco's past practice.
The Transfer and Exchange Agreement also provides that, for a period of five
years following the Closing Date, PriceCostco shall not, nor shall it permit or
suffer any of its subsidiaries to: (i) directly or indirectly conduct a Club
Business in any of the Specified Geographical Areas other than through the
Subsidiary Corporations, own any interest in another company that conducts a
Club Business in any of the Specified Geographical Areas (PROVIDED that neither
PriceCostco nor any of its subsidiaries shall be prohibited from purchasing and
owning securities of any such company as a passive investment so long as such
securities in the aggregate represent no more than 10% of the equity securities
of such company) or transfer to any person (other than Price Enterprises or the
relevant Subsidiary Corporation) the right to conduct a Club Business in any of
the Specified Geographical Areas, including, without limitation, any right to
use the name "Costco" in such Specified Geographical Areas; PROVIDED, HOWEVER,
that, with respect to Mexico, the foregoing restrictions set forth in this
clause (i) will terminate and have no further force and effect upon any sale of
all of the shares of capital stock of Primex, or all of the shares of capital
stock of Price Club Mexico, owned, directly or indirectly, by Mexico Clubs to
Comercial Mexicana or any of its affiliates (as such term is defined under Rule
12b-2 promulgated pursuant to the Exchange Act); (ii) conduct a Quest Business;
PROVIDED, HOWEVER, that nothing in the Transfer and Exchange Agreement shall
prohibit PriceCostco or its subsidiaries from conducting business (other than
any business conducted through the Quest Assets) in the
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manner heretofore conducted or, with Price Enterprises' consent (which shall not
be unreasonably withheld), from conducting interactive promotional and
advertising activities other than through an electronic interactive shopping
format; or (iii) without the prior consent of Price Enterprises (which shall not
unreasonably be withheld), engage in any business with any of certain specified
companies, except that PriceCostco and its subsidiaries may (A) sell, assign,
lease, transfer or otherwise convey any Club Business or any real property to,
or purchase, lease or otherwise take possession of any Club Business or any real
property from, any of certain specified companies and (B) purchase merchandise
from any of the certain specified companies in the ordinary course of business
and consistent with past practice.
The Transfer and Exchange Agreement further provides that prior to entering
into any agreement or arrangement with any person (other than PriceCostco) to
own, operate or develop a Club Business in any Specified Geographical Area,
whether pursuant to a joint venture, license, equity investment by such person
in Price Global or otherwise, Price Enterprises or Price Global shall obtain the
agreement of such person that such person will not directly or indirectly use
any proprietary information or know-how acquired from Price Global with respect
to the ownership and operation of a Club Business in such person's other
business activities (other than the Club Business owned, operated or developed
with Price Global in the Specified Geographical Area), and such agreement shall
expressly state that PriceCostco shall be a third party beneficiary of such
agreement. In addition, any such agreement with Coles Myer Ltd. shall also
provide that Coles Myer Ltd. will not enter into a Club Business outside the
Specified Geographical Areas.
CONTINUANCE OF EXISTING INDEMNIFICATION RIGHTS
Pursuant to the Transfer and Exchange Agreement, PriceCostco will continue
the indemnification rights of its present and former officers and directors for
the period from the Closing Date until six years thereafter and for two years
after the Closing Date will cause to be maintained the current policies of the
officers' and directors' liability insurance maintained by PriceCostco covering
the persons who are presently covered by such policies with respect to actions
and omissions occurring prior to the Closing Date to the extent available and on
terms specified in the Transfer and Exchange Agreement.
ADDITIONAL AGREEMENTS
Pursuant to the terms of the Transfer and Exchange Agreement, PriceCostco
and Price Enterprises have entered into certain other agreements, including the
Operating Agreements (as described in "CERTAIN RELATED AGREEMENTS -- Operating
Agreements"), the Stockholders Agreements (as defined and described in "CERTAIN
RELATED AGREEMENTS -- Stockholders Agreements"), the PriceCostco Warehouse
Leases (as defined and described in "BUSINESS AND PROPERTIES OF PRICE
ENTERPRISES -- Real Estate Business -- Leases"), the Tax Allocation Agreements
(as defined and described in "CERTAIN RELATED AGREEMENTS -- Tax Allocation
Agreements") and the Advance Agreement (as described in CERTAIN RELATED
AGREEMENTS -- Advance Agreement") (collectively, the "Additional Agreements").
APPORTIONMENT
Pursuant to the terms of the Transfer and Exchange Agreement, as of the
Transfer Closing Date, PriceCostco and Price Enterprises apportioned (i) the
real property taxes on all real property included in the Transferred Assets and
transferred to Price Enterprises thereunder and (ii) other similar recurring
municipal and state charges and assessments relating to the Transferred Assets.
All such prorations were allocated so that items relating to time periods ending
prior to the Transfer Closing Date were allocated to PriceCostco and items
relating to time periods beginning on or after the Transfer Closing Date were
allocated to Price Enterprises. The amount of all such prorations were settled
and paid on the Transfer Closing Date, except that final payments with respect
to prorations that were not able to be calculated as of the Transfer Closing
Date will be calculated and paid as soon as practicable thereafter. PriceCostco
and Price Enterprises agreed in the Transfer and Exchange Agreement to furnish
each other with such documents and other records as were reasonably requested to
confirm all proration calculations.
STANDSTILL AGREEMENTS
Pursuant to the terms of the Transfer and Exchange Agreement, each of
PriceCostco and Price Enterprises agreed and covenanted that, until five years
after the Closing Date, without the other's written
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consent, it will not and will cause each of its subsidiaries not to acquire,
offer or propose to acquire, or agree to acquire, directly or indirectly, by
purchase or otherwise, any of the common stock of the other or direct or
indirect rights or options to acquire (through purchase, exchange, conversion or
otherwise), any such common stock, except that PriceCostco may exercise all of
its remedies pursuant to the Security and Pledge Agreement, if such agreement is
entered into. See "THE TRANSACTION -- The Distribution."
CERTAIN MATTERS WITH RESPECT TO THE CITY NOTES
For a description of the terms of the Transfer and Exchange Agreement with
respect to the City Notes, see "BUSINESS AND PROPERTIES OF PRICE ENTERPRISES --
Real Estate Business -- City Notes and Atlas Note."
CERTAIN INSURANCE PROCEEDS
Pursuant to the terms of the Transfer and Exchange Agreement, if, at or
after the Transfer Closing Date, PriceCostco receives proceeds pursuant to any
insurance policy maintained by PriceCostco or any of its subsidiaries in respect
of liabilities or obligations relating to or arising in respect of Materials of
Environmental Concern and violations or purported violations of Environmental
Laws that relate to or arise out of any Real Property transferred to Price
Enterprises under the Transfer and Exchange Agreement and that arise out of
events occurring prior to the Transfer Closing Date, then PriceCostco agrees to
remit, or cause to be remitted, such proceeds to Price Enterprises.
CERTAIN REAL ESTATE MATTERS
The Transfer and Exchange Agreement provides that, to the extent not
undertaken or completed prior to the execution of the Transfer and Exchange
Agreement, PriceCostco take certain actions required to effect the transfer of
the Real Properties thereunder and that PriceCostco and Price Enterprises enter
into appropriate agreements covering access, parking and similar matters with
respect to the Real Properties, consistent with the current operations of the
Real Properties.
The Transfer and Exchange Agreement further provides that PriceCostco is (a)
entitled to receive all condemnation proceeds payable due to condemnation
proceedings occurring prior to the Transfer Closing Date with respect to the
Commercial Property located in Santee, California and (b) required to satisfy in
full all liabilities and obligations pursuant to outstanding indebtedness, which
is secured by the Commercial Property located in Northridge, California and
PriceCostco's Club Business real estate located adjacent thereto (the
"Northridge Mortgage") at the earliest time it may do so without incurring any
prepayment penalty and, upon such satisfaction, use all reasonable efforts to
secure the release of all liens relating to such mortgage.
CERTAIN OTHER AGREEMENTS
Pursuant to the Transfer and Exchange Agreement, PriceCostco and Price
Enterprises agreed to use all reasonable efforts to consummate and make
effective the Transaction. In accordance with the terms of the Transfer and
Exchange Agreement, PriceCostco afforded to Price Enterprises and its
representatives access during normal business hours throughout the period prior
to the Transfer Closing Date to all of the Real Properties and all of
PriceCostco's contracts, commitments, books and records relating thereto. Price
Enterprises agreed, unless otherwise required by law, to hold, and to cause each
of its officers, employees, accountants, counsel and advisors to hold, any such
information which is nonpublic in confidence until such time as such information
otherwise becomes publicly available through no wrongful act of Price
Enterprises or any such person and in the event of termination of the Transfer
and Exchange Agreement for any reason, Price Enterprises will promptly return,
or cause to be returned, all nonpublic documents obtained from PriceCostco.
CERTAIN MATTERS WITH RESPECT TO MEXICO CLUBS
If a sale by Mexico Clubs of all of the shares of capital stock of Primex,
or all of the shares of capital stock of Price Club Mexico, owned directly or
indirectly by Mexico Clubs to Comercial Mexicana is not consummated on or before
October 1, 1995, then, at the election of either PriceCostco or Price
Enterprises (delivered to the other in writing), PriceCostco and Price
Enterprises have agreed to, and agreed to cause Mexico Clubs to, (i) take all
necessary actions so that Mexico Clubs will cease to be a limited liability
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company and shall instead become a corporation organized under the laws of the
State of Delaware and (ii) execute and deliver a Stockholders' Agreement, the
material terms of which are described in "THE BUSINESS AND PROPERTIES OF PRICE
ENTERPRISES -- Mexico Clubs."
EMPLOYEE MATTERS
EMPLOYEES
Pursuant to the terms of the Transfer and Exchange Agreement, as of January
1, 1995, Price Enterprises is required to offer to employ certain specified
employees of PriceCostco who remain as employees of PriceCostco immediately
prior to January 1, 1995. Each such employee who accepts such offer of
employment shall, as of January 1, 1995, be transferred to the employment, and
become an employee, of Price Enterprises (each such employee and each person who
becomes an employee of Price Enterprises during the two-year period following
the Closing Date, a "Price Enterprises Employee"). During the period beginning
on the Transfer Closing Date and ending on December 31, 1994 (the "Transition
Period"), PriceCostco will continue to employ each such employee (collectively,
and together with any additional persons who become employees of PriceCostco
during the Transition Period at the request of Price Enterprises, hereinafter
referred to in connection with the Transition Period as "Retained Employees")
and will provide employee benefits at its cost to the Retained Employees under
substantially the same terms and conditions as those under which such employees
are employed as of the Transfer Closing Date. PriceCostco has, however, retained
the right, at Price Enterprises' request, to terminate a Retained Employee for
any reason. During the Transition Period, Price Enterprises is required to lease
from PriceCostco the services of the Retained Employees and shall be liable, and
reimburse PriceCostco, for the cost of such services based on PriceCostco's
actual cost in respect thereof, including without limitation salary, wages,
vacation accrual, fringe benefits and employee benefit costs and related
expenses payable to or on behalf of the Retained Employees in accordance with
the terms of the Transfer and Exchange Agreement. PriceCostco will be solely
liable and retain sole responsibility for the payment of bonuses to the Retained
Employees in respect of the 1994 fiscal year.
PRICECOSTCO PLANS
With respect to each "employee pension benefit plan," as such term is
defined in section 3(2) of the Employee Retirement Income Security Act of 1974,
as from time to time amended ("ERISA"), maintained or contributed to by
PriceCostco ("PriceCostco Plans"), Price Enterprises is required to, effective
as of January 1, 1995, take, or cause to be taken, all action necessary and
appropriate to establish and maintain substantially equivalent employee benefit
plans (the "Price Enterprises Plans") for the benefit of Price Enterprises
Employees who participated in the respective, comparable PriceCostco Plan. Price
Enterprises agreed that each Price Enterprises Employee eligible to participate
in a PriceCostco Plan shall immediately become eligible to participate in the
comparable Price Enterprises Plan, and, for all purposes under such Price
Enterprises Plan, each Price Enterprises Employee shall be entitled to service
and any accrued benefit or account balance, as the case may be, credited to such
Price Enterprises Employee as of January 1, 1995 under the terms of the
comparable PriceCostco Plan as if such service had been rendered to Price
Enterprises and as if such accrued benefit or account balance had originally
been credited to such Price Enterprises Employee under such Price Enterprises
Plan.
In the case of each PriceCostco Plan that is a defined contribution plan,
PriceCostco will direct the trustee of each such plan to transfer, on, or as
soon as is practicable after, January 1, 1995, to the trustee or other funding
agent of the applicable Price Enterprises Plan, in cash, securities, other
property or a combination thereof, as determined by PriceCostco, subject to
approval by Price Enterprises (which approval shall not be unreasonably
withheld), the respective account balances of the Price Enterprises Employees as
of the date of transfer, plus that portion of any unallocated contributions that
is attributable to the Price Enterprises Employees.
WELFARE AND CERTAIN OTHER PLANS
PriceCostco and its subsidiaries shall be solely responsible for, or cause
their insurance carriers to be responsible for, the satisfaction of all claims
for medical, life insurance, health, accident, workers' compensation or
disability benefits brought by or in respect to any of the Price Enterprises
Employees under each
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"employee welfare benefit plan," as such term is defined in section 3(1) of
ERISA (the "PriceCostco Welfare Plans"), which claims relate to events occurring
prior to the Transfer Closing Date, regardless of when notices of such claims
are properly filed, without interruption as a result of the employment by Price
Enterprises or any of its subsidiaries of any such employees. During the
Transition Period, and thereafter until the second anniversary of the Closing
Date, PriceCostco is required to continue to provide coverage under PriceCostco
Welfare Plans to Retained Employees, directors of Price Enterprises and Price
Enterprises Employees, respectively, on the same terms and conditions as were in
effect prior to the Transfer Closing Date except for changes in such terms and
conditions that apply to similarly situated employees of PriceCostco or provide
such coverage under an alternative arrangement. Price Enterprises shall be
liable, and is required to reimburse PriceCostco, for the provision of such
coverage based on PriceCostco's actual cost, on an average per capita basis (not
including any incremental costs attributable to the use of an alternative
arrangement), with respect to claims relating to events occurring on or after
the Transfer Closing Date. Price Enterprises and its subsidiaries shall be
liable, and reimburse PriceCostco and its subsidiaries, for or indemnify
PriceCostco and its subsidiaries against any and all liabilities and obligations
whatsoever in connection with claims for medical, life insurance, health,
accident or disability benefits brought by or in respect of Price Enterprises
Employees under PriceCostco Welfare Plans or otherwise, which claims relate to
events occurring on or after the second anniversary of the Closing Date.
Price Enterprises shall assume all obligations and liabilities with respect
to any other employment-related right, claim, cause of action, expense,
obligation, liability or cost ("Costs") with respect to a Retained Employee or
Price Enterprises Employee (including but not limited to such Costs arising
under the Age Discrimination in Employment Act, Title VII of the Civil Rights
Act of 1964, the WARN Act and other Federal, state or local laws respecting the
terms and conditions of employment not otherwise provided for in the Transfer
and Exchange Agreement), which Costs are attributable to events occurring on or
after the Transfer Closing Date; and PriceCostco shall retain all obligations
and liabilities with respect to such Costs that are attributable to events
occurring prior to the Transfer Closing Date.
On, or as soon as practicable after, January 1, 1995, PriceCostco will
transfer to Price Enterprises an amount in cash equal to the dollar value of any
accrued but unused vacation days attributable to Price Enterprises Employees as
determined as of the Transfer Closing Date.
EMPLOYEE STOCK OPTIONS
Subject to certain provisos set forth in the Transfer and Exchange
Agreement, each outstanding option ("PriceCostco Option") for the purchase of
shares of PriceCostco Common Stock granted under any stock option plan of Price,
Costco or PriceCostco, which PriceCostco Option is held, as of January 1, 1995,
by a Price Enterprises Employee and is then exercisable or would have been
exercisable using the formula set forth in Section 8(b) of such stock option
plan had the employment of the Price Enterprises Employee been terminated on
such date, shall continue to be exercisable on the same terms and conditions set
forth in the agreement evidencing the grant of PriceCostco Option.
SEVERANCE PAY
PriceCostco and Price Enterprises have agreed in the Transfer and Exchange
Agreement that the employment of Price Enterprises Employees by Price
Enterprises or any of its subsidiaries on or after January 1, 1995 shall not be
deemed a severance of employment from PriceCostco and its subsidiaries for
purposes of the payment of severance, salary continuation or similar benefits
pursuant to any policy, plan, program or agreement of PriceCostco or its
subsidiaries to the extent that any such policy, plan, program or agreement now
exists, if any. Price Enterprises and its subsidiaries will assume and be solely
responsible for all liabilities and obligations whatsoever in connection with
claims made by or on behalf of the Retained Employees and the Price Enterprises
Employees in respect of severance pay, salary continuation and similar
obligations relating to the termination or alleged termination of any such
person's employment on or after the Transfer Closing Date, and PriceCostco will
remain responsible for such liabilities and obligations in connection with
PriceCostco employees who do not become Retained Employees.
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ADMINISTRATIVE SERVICES
Pursuant to the Transfer and Exchange Agreement, Price Enterprises is
required to pay PriceCostco the sum of $500,000 in two equal installments of
$250,000 each (which shall be due on June 30, 1995 and June 30, 1996) for making
available to Price Enterprises administrative services in connection with the
Price Enterprises Plans and PriceCostco Welfare Plans whether or not any such
services are used by Price Enterprises. At the request of Price Enterprises,
PriceCostco is required to provide to Price Enterprises such administrative
services in connection with the Price Enterprises Plans as Price Enterprises and
PriceCostco shall mutually agree upon, during the two-year period following the
Closing Date. During such period, if PriceCostco shall incur any incremental,
third-party out-of-pocket expenses in connection with procuring or providing
employee benefits to any employee of Price Enterprises, Price Enterprises is
required to reimburse PriceCostco for any such expenses.
INDEMNIFICATION
Pursuant to the terms of the Transfer and Exchange Agreement, PriceCostco
agreed to indemnify Price Enterprises against and hold Price Enterprises
harmless from any loss, liability, claim, damage or expense (including
reasonable legal fees and expenses) suffered or incurred by Price Enterprises
arising from, relating to or otherwise in respect of (i) any material breach of,
or inaccuracy in, any representation or warranty of PriceCostco contained in the
Transfer and Exchange Agreement; (ii) any material breach of any covenant of
PriceCostco contained in the Transfer and Exchange Agreement; (iii) one-half of
all liabilities relating to Materials of Environmental Concern and violations or
purported violations of Environmental Laws arising out of or relating to the
Commercial Property located in Phoenix, Arizona and known as the Phoenix Fry's
property; (iv) the Retained Liabilities; (v) the Northridge Mortgage; and (vi)
all liabilities to which Price Enterprises may become subject under the
Securities Act or any other statute or common law (including any amount paid in
settlement of any litigation, commenced or threatened, if such settlement is
effected with the written consent of PriceCostco) insofar as any such
liabilities and obligations arise out of or are based upon any untrue statement
or alleged untrue statement of a material fact contained in the Registration
Statement or the Schedule 13E-4, or the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading; PROVIDED, HOWEVER, that the indemnification
agreement contained in this paragraph shall not apply to any losses,
liabilities, claims, damages, or expenses arising out of, or based upon, any
such untrue statement or alleged untrue statement, or any such omission or
alleged omission, which was made in reliance upon and in conformity with
information furnished to PriceCostco by Price Enterprises for use in connection
with the Registration Statement or the Schedule 13E-4.
The Transfer and Exchange Agreement provides that (a) PriceCostco shall
indemnify Price Enterprises and Mexico Clubs against and hold Price Enterprises
and Mexico Clubs harmless from any loss, liability, claim, damage or expense
(including reasonable legal fees and expenses) suffered or incurred by Mexico
Clubs arising from, relating to or otherwise in respect of any Retained
Liabilities relating to or arising out of the Mexico Assets; (b) PriceCostco
shall indemnify Price Enterprises and Price Global against and hold Price
Enterprises and Price Global harmless from any loss, liability, claim, damage or
expense (including reasonable legal fees and expenses) suffered or incurred by
Price Global arising from, relating to or otherwise in respect of any Retained
Liabilities relating to or arising out of the International Assets; and (c)
PriceCostco shall indemnify Price Enterprises and Price Quest against and hold
Price Enterprises and Price Quest harmless from any loss, liability, claim,
damage or expense (including reasonable legal fees and expenses) suffered or
incurred by Price Quest arising from, relating to or otherwise in respect of any
Retained Liabilities relating to or arising out of the Quest Assets.
In addition, the Transfer and Exchange Agreement provides that Price
Enterprises will indemnify PriceCostco against and hold PriceCostco harmless
from any loss, liability, claim, damage or expense (including reasonable legal
fees and expenses) suffered or incurred by PriceCostco arising from, relating to
or otherwise in respect of (i) any material breach of any covenant of Price
Enterprises contained in the Transfer and Exchange Agreement; (ii) the Assumed
Liabilities (as hereinafter defined); and (iii) all liabilities and obligations
to which PriceCostco may become subject under the Securities Act or any other
statute or common law (including any amount paid in settlement of any
litigation, commenced or
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threatened, if such settlement is effected with the written consent of Price
Enterprises) insofar as any such liabilities and obligations arise out of or are
based upon any untrue statement or alleged untrue statement of a material fact
contained in the Registration Statement or the Schedule 13E-4, or the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading; PROVIDED,
HOWEVER, that the indemnification agreement contained in this paragraph shall
not apply to any losses, liabilities, claims, damages, or expenses arising out
of, or based upon, any such untrue statement or alleged untrue statement, or any
such omission or alleged omission, which was made in reliance upon and in
conformity with information furnished to Price Enterprises by PriceCostco for
use in connection with the Registration Statement or the Schedule 13E-4.
In addition, (a) Price Enterprises agreed to cause Mexico Clubs to indemnify
PriceCostco against and hold PriceCostco harmless from any loss, liability,
claim, damage or expense (including reasonable legal fees and expenses) suffered
or incurred by PriceCostco arising from, relating to or otherwise in respect of
the Mexico Assets which arise out of events occurring at or after the Transfer
Closing Date; (b) Price Enterprises agreed to cause Price Global to indemnify
PriceCostco against and hold PriceCostco harmless from any loss, liability,
claim, damage or expense (including reasonable legal fees and expenses) suffered
or incurred by PriceCostco arising from, relating to or otherwise in respect of
the International Assets which arise out of events occurring at or after the
Transfer Closing Date; and (c) Price Enterprises agreed to cause Price Quest to
indemnify PriceCostco against and hold PriceCostco harmless from any loss,
liability, claim, damage or expense (including reasonable legal fees and
expenses) suffered or incurred by PriceCostco arising from, relating to or
otherwise in respect of the Quest Assets which arise out of events occurring at
or after the Transfer Closing Date.
Pursuant to the Transfer and Exchange Agreement, Price Enterprises has
guaranteed to PriceCostco the full and prompt performance by each Subsidiary
Corporation of each and every obligation required of each of them pursuant to
such indemnification provisions.
As used in the Transfer and Exchange Agreement and this Offering
Circular/Prospectus "Assumed Liabilities" means (A) all liabilities or
obligations relating to or arising in respect of emissions, discharges,
releases, or threatened releases of toxic or hazardous substances, materials or
wastes, or petroleum and petroleum products ("Materials of Environmental
Concern") and violations or purported violations of all Federal, state, local
and foreign laws and regulations relating to pollution or protection of human
health or the environment, including, without limitation, laws and regulations
relating to Materials of Environmental Concern, or otherwise relating to the
generation, storage, disposal, transport or handling of Materials of
Environmental Concern ("Environmental Laws") that relate to or arise out of the
Real Properties and that arise out of events occurring prior to, at or after the
Transfer Closing Date and (B) the Assumed Construction Costs; and "Retained
Liabilities" means all liabilities and obligations of PriceCostco and its
subsidiaries relating to or arising out of (i) the Mexico Assets (other than
shares of capital stock of Price Venture Mexico), the International Assets
(other than the CMI Stock) and the Quest Assets that arose out of events
occurring prior to the Transfer Closing Date and (ii) the Transferred Assets
that arose out of events occurring prior to the Transfer Closing Date, but
excluding the Assumed Liabilities.
ARBITRATION
The Transfer and Exchange Agreement provides that in the event that, from
time of time, any controversy or claim shall arise out of or relate to the
Transfer and Exchange Agreement, any of the Additional Agreements, the
transactions contemplated thereby or any documents or agreements contemplated by
or delivered thereunder, or any substantive issue or dispute shall be raised by
either PriceCostco or Price Enterprises with the amount in controversy believed
in good faith by both parties to be $15 million or less, such controversy,
claim, substantive issue or dispute shall be settled by arbitration in San
Francisco, California in accordance therewith and with the then prevailing
Commercial Arbitration Rules of the American Arbitration Association, Expedited
Procedures. Each of PriceCostco and Price Enterprises used reasonable efforts,
acting in good faith, to mutually select one person prior to the Transfer
Closing Date who shall serve as the arbitrator with respect to any such
arbitration proceeding.
68
<PAGE>
The Transfer and Exchange Agreement also provides that in the event that,
from time to time, any controversy or claim shall arise out of or relate to the
Transfer and Exchange Agreement, any of the Additional Agreements, the
transactions contemplated thereby or any documents or agreements contemplated by
or delivered thereunder, or any substantive issue or dispute shall be raised by
either PriceCostco or Price Enterprises, with the amount in controversy believed
in good faith by either party to be in excess of $15 million such controversy,
claim, substantive issue or dispute shall be settled by arbitration in San
Francisco, California in accordance therewith and with the then prevailing
Commercial Arbitration Rules of the American Arbitration Association.
The decision of the arbitrator or arbitrators under the Transfer and
Exchange Agreement shall be final and binding on the parties from which no
appeal may be taken.
CERTAIN RELATED AGREEMENTS
OPERATING AGREEMENTS
PriceCostco and Price, on the one hand, and Price Enterprises and each of
the Subsidiary Corporations, on the other, have entered into Operating
Agreements to clarify the ongoing business relationship between PriceCostco and
the respective Subsidiary Corporations. For a description of the material terms
of the Operating Agreements, see "BUSINESS AND PROPERTIES OF PRICE ENTERPRISES
- -- Mexico Clubs," "-- Price Quest" and "-- Price Global."
STOCKHOLDERS AGREEMENTS
PriceCostco and Price, on the one hand, and Price Enterprises and each of
Price Quest and Price Global, on the other, have entered into Stockholders
Agreements to clarify certain rights and obligations of PriceCostco and Price
Enterprises as stockholders of the respective Subsidiary Corporations
(collectively, the "Stockholders Agreements"). For a description of the material
terms of the Stockholders Agreements, see "BUSINESS AND PROPERTIES OF PRICE
ENTERPRISES -- Price Quest" and "-- Price Global."
LIMITED LIABILITY COMPANY AGREEMENT
Price and Price Enterprises have entered into a Limited Liability Company
Agreement with respect to Mexico Clubs that sets forth the rights and
obligations of each of Price and Price Enterprises with respect to its interest
in Mexico Clubs (the "LLC Agreement"). For a description of the material terms
of the LLC Agreement, see "BUSINESS AND PROPERTIES OF PRICE ENTERPRISES --
Mexico Clubs."
TAX ALLOCATION AGREEMENTS
PriceCostco has entered into tax allocation agreements (the "Tax Allocation
Agreements") with Price Enterprises and each of Price Global, Price Quest and
Primex to determine their responsibilities for taxes attributable to periods
before and after August 28, 1994. Under the terms of the Tax Allocation
Agreements, PriceCostco is generally responsible for the payment of all taxes
attributable to the operations of PriceCostco, including the assets transferred
to Price Enterprises and the Subsidiary Corporations in the Transaction, until
August 28, 1994 and will indemnify Price Enterprises and Price Global, Price
Quest or Primex, as the case may be, with respect to such taxes. PriceCostco is
generally responsible for filing all tax returns of PriceCostco (including of
Price Enterprises, Price Global, Price Quest and Primex) for periods beginning
prior to the Closing Date and is principally responsible for handling tax
controversies with respect to such tax returns and the tax treatment of the
Transaction. PriceCostco is also responsible for the payment of (i) any taxes
that may be imposed on PriceCostco as a result of the Transaction failing to
qualify as tax-free under section 355 of the Code and (ii) real property
transfer taxes attributable to the transfer of assets to Price Enterprises and
the Subsidiary Corporations in the Transaction.
The Tax Allocation Agreements provide that Price Enterprises or Price
Global, Price Quest or Primex, as the case may be, is responsible for the
payment of all taxes attributable to the operations and assets transferred to
Price Enterprises and the Subsidiary Corporations in the Transaction for all
periods beginning on or after August 28, 1994 and will indemnify PriceCostco
with respect to such taxes. Price Enterprises and Price Global, Price Quest or
Primex, as the case may be, are generally responsible for filing all tax returns
of Price Enterprises, Price Global, Price Quest and Primex, respectively, for
periods beginning on or after the Closing Date and are principally responsible
for handling tax controversies with respect to such tax returns.
69
<PAGE>
Under the terms of the Tax Allocation Agreements, each party has agreed to
treat the Transaction for all tax purposes as a tax-free distribution under
section 355 of the Code and the contribution of assets to Price Enterprises and
the Subsidiary Corporations contemplated by the Transfer and Exchange Agreement
as transactions described in sections 351 and 368 of the Code.
ADVANCE AGREEMENT
PriceCostco and Price Enterprises have entered into the Advance Agreement
pursuant to which PriceCostco will advance Price Enterprises funds for a certain
period of time to enable Price Enterprises to conduct its business and
operations. The loan is in the form of an unsecured revolving credit facility,
up to a maximum principal amount of $85 million (reduced by an amount equal to
the net proceeds from the sale of any Commercial Properties between the Transfer
Closing Date and the Closing Date). At the request of Price Enterprises, funds
will be advanced to Price Enterprises by PriceCostco from time to time during
the period from the Transfer Closing Date until six months following the earlier
of (i) the Closing Date and (ii) the date on which Price Enterprises Common
Stock is distributed to holders of PriceCostco Common Stock. Price Enterprises
may in turn advance funds borrowed under such facility to the Subsidiary
Corporations, provided that the amount of such advances outstanding at any one
time is limited to $5 million in each Subsidiary Corporation. Under the Advance
Agreement, all costs to complete the construction of any of the Commercial
Properties incurred by PriceCostco on or after June 1, 1994, are deemed to be
advances and interest thereon began to accrue on August 29, 1994. All advances,
including interest thereon, are to be repaid six months following the Closing
Date. The interest rate under the Advance Agreement is described under "PRICE
ENTERPRISES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- Liquidity and Capital Resources." The Advance
Agreement contains other terms customary in loan agreements between third
parties.
70
<PAGE>
PRICE ENTERPRISES, INC.
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma balance sheet of Price Enterprises as of
August 28, 1994 and unaudited pro forma statements of income for the 52 weeks
ended August 28, 1994 have been prepared to reflect the results of the
Transaction. The unaudited pro forma balance sheet has been prepared as if the
Transaction occurred on August 28, 1994. The unaudited pro forma statement of
income has been prepared as if the Transaction occurred on the first day of
fiscal 1994. The unaudited pro forma financial information is not necessarily
indicative of the results that actually would have occurred if the Transaction
had been consummated as of August 28, 1994 or at the beginning of fiscal 1994.
PRICE ENTERPRISES, INC.
UNAUDITED PRO FORMA CONDENSED BALANCE SHEET
AS OF AUGUST 28, 1994
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
REAL ESTATE ASSETS, NET..................................... $ 447,387 $ 2,100(1) $449,487
CURRENT ASSETS.............................................. 30,412 (27,734)(2) 2,678
INVESTMENT IN PRICE CLUB MEXICO
JOINT VENTURE.............................................. 67,226 -- 67,226
NOTES RECEIVABLE............................................ 73,023 -- 73,023
DEFERRED INCOME TAXES....................................... 23,282 -- 23,282
OTHER ASSETS................................................ 9,223 -- 9,223
---------- ----------- ---------
$ 650,553 $ (25,634) $624,919
---------- ----------- ---------
---------- ----------- ---------
LIABILITIES AND INVESTMENT BY PRICECOSTCO/STOCKHOLDERS' EQUITY
LIABILITIES................................................. $ 31,124 $ (16,585)(2) $ 15,739
1,200(3)
LONG-TERM DEBT.............................................. -- -- --(4)
MINORITY INTEREST OF PRICECOSTCO............................ 40,641 (5,730)(2) 34,911
INVESTMENT BY PRICECOSTCO/STOCKHOLDERS' EQUITY.............. 578,788 2,100(1) 574,269(4)
(5,419)(2)
(1,200)(3)
---------- ----------- ---------
$ 650,553 $ (25,634) $624,919
---------- ----------- ---------
---------- ----------- ---------
</TABLE>
See accompanying notes and assumptions.
71
<PAGE>
PRICE ENTERPRISES, INC.
UNAUDITED PRO FORMA STATEMENT OF INCOME
FIFTY-TWO WEEKS ENDED AUGUST 28, 1994
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
REVENUES
Real estate rentals.................... $ 29,265 $ 7,016(5) $ 36,281
Gains on sale of real estate........... 5,474 -- 5,474
Merchandise sales...................... 53,015 -- 53,015
---------- ----------- ---------
Total revenues....................... 87,754 7,016 94,770
OPERATING EXPENSES
Real estate expenses................... 17,623 1,548(5) 17,796
(1,375)(6)
Merchandise costs and expenses......... 57,997 -- 57,997
General and administrative............. 1,600 1,500(7) 3,100
Provision for asset impairments........ 90,227 -- 90,227
---------- ----------- ---------
Total operating expenses............. 167,447 1,673 169,120
---------- ----------- ---------
Operating loss....................... (79,693) 5,343 (74,350)
INTEREST AND OTHER....................... 9,947 -- 9,947
---------- ----------- ---------
Loss before provision for income
taxes............................... (69,746) 5,343 (64,403)
BENEFIT FOR INCOME TAXES................. (28,267) 2,191(8) (26,076)
---------- ----------- ---------
Net loss............................. $ (41,479) $ 3,152 $(38,327)
---------- ----------- ---------
---------- ----------- ---------
Net loss per common share (2)........ -- $(1.42)(9)
Number of shares used in
calculation....................... 27,000
</TABLE>
See accompanying notes and assumptions.
72
<PAGE>
PRICE ENTERPRISES, INC.
NOTES AND ASSUMPTIONS TO UNAUDITED PRO FORMA FINANCIAL INFORMATION
(1) To reflect the transfer of one remaining real estate asset valued at $2,100
million which was purchased and transferred by PriceCostco in fiscal 1995.
(2) To eliminate working capital retained by PriceCostco in accordance with the
Transfer and Exchange Agreement. Working capital retained by PriceCostco
primarily relates to the Subsidiary Corporations. These adjustments reduced
minority interests and investment by PriceCosto.
(3) To record the accrual for estimated organization costs which have been
treated as a reduction of stockholders' equity.
(4) Unaudited pro forma net loss per common share, long-term debt and
stockholders' equity assumes all shares of Price Enterprises Common Stock
are issued in the Exchange Offer or distributed to PriceCostco stockholders
following the Exchange Offer. If only 21.6 million shares of Price
Enterprises Common Stock are issued in the Exchange Offer, and Price
Enterprises purchases the remaining 5.4 million shares of Price Enterprises
Common Stock from PriceCostco for a note in the principal amount of
approximately $82.4 million (assuming a per share price for Price
Enterprises Common Stock of $15.25, and an interest rate on the outstanding
note of approximately 6.0%), then unaudited pro forma net loss per common
share for fiscal 1994 would be $1.91, and long-term debt and stockholders'
equity as of August 28, 1994 would be approximately $82.4 million and $491.9
million, respectively. See "THE TRANSACTION -- The Distribution" for the
terms of the note.
(5) To record rental income and related depreciation expense on the four
Warehouse Properties included in the Transferred Assets and which are being
leased back to PriceCostco. Rental payments are specified in lease
agreements between PriceCostco and Price Enterprises. Depreciation expense
is based on the useful life of buildings with PriceCostco responsible for
all property taxes and maintenance of the Warehouse Properties.
Unaudited pro forma real estate rentals and depreciation expense for each
Warehouse Property is based upon straight-line rents prorated for the number
of weeks each Warehouse Property was open for business during fiscal 1994 as
follows (in thousands):
<TABLE>
<CAPTION>
52 WEEKS ENDED
ANNUAL (A) AUGUST 28, 1994
------------------------ ------------------------
WAREHOUSE RENTAL DEPRECIATION RENTAL DEPRECIATION
- -------------------------------------- --------- ------------- --------- -------------
<S> <C> <C> <C> <C>
Morena................................ $ 892 $ 578 $ 892 $ 578
Pentagon City (b)..................... 2,793 506 1,235 224
Wayne................................. 2,171 420 2,171 420
Westbury.............................. 2,718 326 2,718 326
--------- ------ --------- ------
$ 8,574 $ 1,830 $ 7,016 $ 1,548
--------- ------ --------- ------
--------- ------ --------- ------
<FN>
(a) Annual rentals are calculated on a straight-line basis over the
initial term of the lease agreement for each of the Warehouse
Properties.
(b) Pentagon City was opened in March 1994. If Pentagon City had been
operating for the entire 52 weeks ended August 28, 1994 then unaudited
pro forma net loss per common share would have been $1.39.
(6) To record the reduction of historical depreciation expense as a result of
the provision for asset impairments recorded in the fourth quarter of
fiscal 1994.
(7) To reflect estimated additional general and administrative costs associated
with Price Enterprises becoming a separate public company.
(8) To adjust the benefit for income taxes at an effective income tax rate of
41%.
(9) Includes a provision for asset impairments of $90,200 pre-tax which
includes $80,500 pre-tax ($47,500 after tax or $1.76 net loss per pro forma
common share) related to a change in calculating estimated losses for
assets which are considered to be economically impaired. If the $80,500
pre-tax provision for asset impairments were excluded, pro forma net income
for fiscal 1994 would have been approximately $9,173 or $.34 per common
share.
</TABLE>
73
<PAGE>
PRICECOSTCO
UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION
The following unaudited pro forma condensed balance sheet of PriceCostco as
of August 28, 1994 and unaudited pro forma condensed statements of income for
the 52 weeks ended August 28, 1994 have been prepared to reflect the
Transaction. The unaudited pro forma balance sheet has been prepared as if the
Transaction occurred on August 28, 1994. The unaudited pro forma condensed
statement of income has been prepared as if the Transaction occurred on the
first day of fiscal 1994. The unaudited pro forma condensed financial
information is not necessarily indicative of the results that actually would
have occurred if the Transaction had been consummated as of August 28, 1994 or
at the beginning of fiscal 1994.
PRICECOSTCO
UNAUDITED PRO FORMA CONDENSED BALANCE SHEET
AS OF AUGUST 28, 1994
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ------------- -------------
<S> <C> <C> <C>
CURRENT ASSETS........................ $1,534,298 $ (2,678)(1a) $1,531,620
PROPERTY AND EQUIPMENT, net........... 2,146,396 (4,014)(1a) 2,142,382
DISCONTINUED OPERATIONS -- NET
ASSETS............................... 377,085 (377,085)(1b) --
INVESTMENT IN PRICE CLUB MEXICO JOINT
VENTURE.............................. 67,226 (34,285)(1c) 32,941
OTHER ASSETS.......................... 110,654 2,585(1a) 113,239
---------- ------------- -------------
$4,235,659 $(415,477) $3,820,182(5)
---------- ------------- -------------
---------- ------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES................... $1,647,307 $ (3,727)(1a) $1,643,580
LONG-TERM DEBT........................ 795,492 -- 795,492
DEFERRED INCOME TAXES AND OTHER
LIABILITIES.......................... 73,121 -- 73,121
---------- ------------- -------------
Total liabilities................. 2,515,920 (3,727) 2,512,193
---------- ------------- -------------
MINORITY INTERESTS.................... 34,779 -- 34,779
---------- ------------- -------------
STOCKHOLDERS' EQUITY.................. 1,684,960 (411,750)(1d)(8) 1,273,210(5)
---------- ------------- -------------
$4,235,659 $(415,477) $3,820,182
---------- ------------- -------------
---------- ------------- -------------
</TABLE>
See accompanying notes and assumptions.
74
<PAGE>
PRICECOSTCO
UNAUDITED PRO FORMA STATEMENT OF INCOME
FOR THE FIFTY-TWO WEEKS ENDED AUGUST 28, 1994
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
----------- --------- -----------
<S> <C> <C> <C>
REVENUES
Net sales..................................................................... $16,160,911 $(53,015)(1e) $16,107,896
Membership fees and other..................................................... 319,732 -- 319,732
----------- --------- -----------
Total revenues.............................................................. 16,480,643 (53,015) 16,427,628
MERCHANDISE COSTS............................................................... 14,662,891 (49,449)(1e) 14,613,442
OPERATING EXPENSES.............................................................. 1,457,613 (10,148)(1e) 1,452,933
5,468(6)
----------- --------- -----------
Operating income............................................................ 360,139 1,114 361,253
OTHER INCOME (EXPENSE)
Interest expense.............................................................. (50,472) -- (50,472)
Interest and other income..................................................... 13,888 (5,487)(1f) 8,401
Provision for merger and restructuring expenses............................... (120,000) (120,000)
----------- --------- -----------
Income before provision for income taxes...................................... 203,555 (4,373) 199,182
PROVISION FOR INCOME TAXES...................................................... 92,657 (1,793)(7) 90,864
----------- --------- -----------
Income from continuing operations........................................... $ 110,898 $ (2,580) $ 108,318
DISCONTINUED OPERATIONS
Loss, net of tax (2).......................................................... (40,766) 40,766(1g)(9) --
Loss on disposal (3).......................................................... (182,500) 182,500(1g) --
----------- --------- -----------
NET INCOME (LOSS)............................................................... $ (112,368) $220,686 $ 108,318
----------- --------- -----------
----------- --------- -----------
Net income (loss) per common and common equivalent share (fully diluted):
Continuing operations......................................................... $ .51
Discontinued operations
Loss, net of tax (2)........................................................ (.19)
Loss on disposal (3)........................................................ (.83)
-----------
Net loss...................................................................... $ (.51)
-----------
-----------
Pro forma income from continuing operations per common and common equivalent
share (fully diluted) based on level of participation in Exchange Offer (4):
100% (27.0 million shares).......................................................................... $ .56
80% (21.6 million shares)........................................................................... .55(5)
50% (13.5 million shares)........................................................................... .53
0% (No Shares Tendered)............................................................................. .49
</TABLE>
See accompanying notes and assumptions.
75
<PAGE>
PRICECOSTCO
NOTES AND ASSUMPTIONS TO UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION
(1) To record the following transfers by PriceCostco of the Transferred Assets
to Price Enterprises:
(a) All the assets of Price Global and the noncurrent assets of Price Quest
less a remaining 49% investment recorded as other assets.
(b) Net assets related to discontinued real estate operations as shown on
the consolidated balance sheets of PriceCostco at August 28, 1994 consist
of the following:
<TABLE>
<CAPTION>
1994
<S> <C>
Non-Club Real Estate properties, net of accumulated depreciation................... $ 351,958
Warehouse Properties, net of accumulated depreciation.............................. 91,415
City and Atlas Notes............................................................... 73,023
Other assets....................................................................... 8,672
Deferred tax assets................................................................ 23,282
Liabilities........................................................................ (4,015)
-----------
544,335
Less: Reserve for estimated loss on disposal....................................... (167,250)
-----------
Discontinued operations -- net assets.............................................. $ 377,085
-----------
-----------
</TABLE>
(c) Transfer of 51% interest in the investment in Price Club Mexico joint
venture.
(d) Reduction of stockholders' equity equal to the net assets of Price
Enterprises at August 28, 1994.
To eliminate income statement results of the Transferred Assets for the period
presented as follows:
(e) Eliminate merchandise sales, cost of sales and operating expenses
related to Price Quest and Price Global and general and administrative
expenses related to Price Enterprises.
(f) Eliminate interest income on City Notes, equity in net earnings of Price
Club Mexico other income of Price Enterprises offset by minority interest
retained.
(g) Eliminate discontinued non-club real estate operations including the
estimated loss on disposal.
(2) The fiscal 1994 loss from discontinued operations includes a provision for
asset impairments of $90,200 pre-tax which includes $80,500 pre-tax ($47,500
after tax or $.22 per share) related to a change in calculating estimated
losses for assets which are considered to be economically impaired. This
change in accounting estimates results from the spin-off of the real estate
segment assets to Price Enterprises and Price Enterprises' decision to
pursue business plans and operating strategies as a stand-alone entity which
are significantly different than the strategies of PriceCostco. Price
Enterprises' management believes that as a separate operating business it
will not have the same access to capital as PriceCostco or generate internal
funds from operations to the same extent as PriceCostco.
PriceCostco's accounting policies with respect to estimating the amount of
impairments on individual real estate properties and related assets were
such that impairment losses would be recorded if the carrying amount of the
asset could not be recovered from estimated future cash flows on an
undiscounted basis. Price Enterprises' management believes that in view of
its strategies with respect to the number and nature of properties that
would be selected for potential disposition, it would be more appropriate to
estimate impairment losses based on fair values of the real estate
properties as determined by appraisals and/or a risk-adjusted discounted
cash flow approach. In determining impairment losses, individual real estate
assets were reduced to estimated fair value, if lower than historical cost.
For those assets which have an estimated fair value in excess of cost, the
asset continues to be recorded at cost. The impairment losses recorded as a
result of this change in accounting estimates reduced the book basis of
certain of the real estate and related assets.
Under the previous policy, PriceCostco and Price enterprises had determined
that a provision for asset impairments of approximately $9,700 was required
relating to four properties which were under final contract or in final
negotiations for sale.
(3) In the fourth quarter of fiscal 1994, as a result of the Transaction,
PriceCostco reported its non-club real estate segment as a discontinued
operation resulting in income statement data being restated in every
76
<PAGE>
period presented. An estimated loss on disposal of the non-club real estate
segment of approximately $182.5 million was recorded in the fourth quarter
of fiscal 1994. The estimated loss on disposal is calculated as the
difference between PriceCostco's net book value of the Transferred Assets of
$578.8 million (after a net reduction for a change in estimate for
calculating asset impairments of approximately $47.5 million on an after tax
basis) and the estimated market value of 27 million shares of Price
Enterprises Common Stock of $411.8 million (assuming a per share price of
$15.25, the last reported sales price of PriceCostco Common Stock on October
24, 1994) and direct expenses and other costs related to the Transaction of
approximately $15.5 million. The actual loss will be determined following
consummation of the Transaction, at which time the estimated loss will be
adjusted, as necessary. For a discussion on the computation of the actual
loss, see "THE TRANSACTION -- Anticipated Accounting Treatment."
(4) Unaudited pro forma net income per common and common equivalent share is
calculated assuming various levels of participation in the Exchange Offer
and assuming that all remaining shares of Price Enterprises Common Stock
held by PriceCostco after the Exchange Offer are distributed to PriceCostco
stockholders. Unaudited pro forma net income per common and common
equivalent share of PriceCostco is calculated to reflect the effect of any
adjustment in the conversion price of the outstanding PriceCostco
convertible subordinated debentures as a result of the Transaction. Such
adjustment is calculated assuming shares of PriceCostco Common Stock have a
market price of $15.25 and shares of Price Enterprises Common Stock are
deemed to have an equal value at the time of the Distribution. See "THE
TRANSACTION -- Effect of the Transaction on Convertible Securities."
(5) If only 21.6 million shares of Price Enterprise Common Stock are issued in
the Exchange Offer and Price Enterprises purchases the remaining 5.4 million
shares of Price Enterprises Common Stock from PriceCostco for a note in the
principal amount of approximately $82.4 million (assuming a per share price
for Price Enterprises Common Stock of $15.25 and an interest rate on the
outstanding note of approximately 6%), then unaudited pro forma net income
per common and common equivalent share for fiscal year 1994 would be $.56,
and, as of August, 1994, total assets and stockholders' equity would be
approximately $82.4 million higher. See "The Transaction -- The
Distribution" for a discussion of the terms of the note.
(6) To record the annual straight-line lease expense of the four Warehouse
Properties and the elimination of depreciation expense related to the
Warehouse Properties. See Note 3 to Price Enterprises Unaudited Pro Forma
Financial Information for more details of this adjustment.
(7) To record the income tax impact of pro forma adjustments at an assumed rate
of 41%.
(8) Reconciliation of Price Enterprises (Historical) net assets to PriceCostco
Pro Forma Adjustments:
<TABLE>
<S> <C>
Investment by PriceCostco/Stockholders' equity
Price Enterprises -- Historical......................... $ 578,788
Loss on disposal of discontinued operations............. (182,500)
Transaction and other costs............................. 15,462
---------------
Pro Forma Adjustment -- PriceCostco..................... $ 411,750
---------------
---------------
</TABLE>
(9) Reconciliation of Price Enterprises -- historical net loss to PriceCostco --
loss from discontinued operations:
<TABLE>
<S> <C>
Price Enterprises -- historical net loss.................... $(41,479)
PriceCostco's Pro Forma Adjustments:
Income from continuing operations, net of tax............. (2,580)
Rent expense on Warehouse Properties...................... 5,468
Tax effect of rent expense on Warehouse Properties at
41%...................................................... (2,242)
Other, net................................................ 67
---------------
PriceCostco -- loss from discontinued operations............ $(40,766)
---------------
---------------
</TABLE>
77
<PAGE>
PRICE ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PERCENTAGES)
The following discussion should be read in conjunction with "PRICE
ENTERPRISES, INC. SELECTED HISTORICAL FINANCIAL DATA" and "Price Enterprises,
Inc. Financial Statements," each of which appear elsewhere in this Offering
Circular/Prospectus.
Price Enterprises operates in two business segments, real estate and
merchandising. The discussion and analysis below describes the significant
changes in real estate rental operations as well as gains on sale of real
estate. Merchandising operations consists of the operations of Quest and CMI,
both of which commenced operations in fiscal 1992. Interest and other income
presents the income generated by Price Enterprises' investment in the City
Notes, the Atlas Note, real estate joint ventures and the Price Club Mexico
joint venture. The following discussion compares the results of operations for
fiscal 1994 to fiscal 1993 and fiscal 1993 to fiscal 1992. In those instances
throughout the following discussion where changes are attributed to more than
one factor, such factors have been presented in descending order of importance.
RESULTS OF OPERATIONS -- FISCAL 1994 COMPARED TO FISCAL 1993 COMPARED TO FISCAL
1992
<TABLE>
<CAPTION>
REVENUE PERCENT OPERATING PERCENT
REAL ESTATE RENTAL OPERATIONS AMOUNT CHANGE INCOME CHANGE CHANGE
--------- ----------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C>
Fiscal 1994............................ $ 29,265 32.2% $ 11,642 $ 2,808 31.8%
Fiscal 1993............................ 22,144 (21.7)% 8,834 (5,574) (38.7)%
Fiscal 1992............................ 28,263 -- 14,408 -- --
</TABLE>
Operating income is defined as rental revenue less the related real estate
expenses, but does not include the impairment writedown discussed below. In
1994, the increase in revenue and operating income was due to the increases in
rental revenue from properties located in Signal Hill, California; Seekonk,
Massachusetts; Bensalem, Pennsylvania; Carmel Mountain, California; Fountain
Valley, California; Northridge, California; Wayne, New Jersey and Westbury, New
York, somewhat offset by declines in revenues due to the sale of certain
properties to the REIT. In 1993, the declines of revenue and operating income
were due to the impact of the sale of certain properties to the REIT, offset by
increases of rental income from properties located in Wayne, New Jersey;
Fairfax, Virginia; Glen Burnie, Maryland; and Fountain Valley, California.
<TABLE>
<CAPTION>
GAINS PERCENT
GAINS ON SALE OF REAL ESTATE ON SALE CHANGE CHANGE
--------- --------- ----------
<S> <C> <C> <C> <C> <C>
Fiscal 1994............................ $ 5,474 $ (16,066) (74.6)%
Fiscal 1993............................ 21,540 6,462 42.9%
Fiscal 1992............................ 15,078 -- --
</TABLE>
In 1994, gains on the sale of real estate related primarily to the sale of
three properties, two shopping centers located in Glendale and Tempe, Arizona,
which were sold to the REIT, and a sale of land located in San Antonio, Texas to
an unrelated third party, but does not include the impairment writedown
discussed below. These gains were somewhat offset by a loss on the sale of land
located in Austin, Texas to an unrelated third party. In 1993, gains on sale of
real estate related principally to sales of properties to the REIT. These
properties included rental properties located in Santa Ana, California; Fairfax,
Virginia; White Marsh, Maryland; and Copaigue, New York, in addition to a 49.6%
interest in a joint venture which owns five shopping centers. These gains were
offset by a loss incurred on the disposition of a former warehouse club
location. In 1992, gains on property sales related principally to sales of
property to the REIT. These properties included a 50.4% interest in a joint
venture which owns five shopping centers and rental properties located in
Cerritos, California and Corona, California.
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<TABLE>
<CAPTION>
SALES PERCENT GROSS % OF PERCENT
MERCHANDISING OPERATIONS AMOUNT CHANGE MARGIN SALES CHANGE
--------- ------------ --------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Fiscal 1994............................ $ 53,015 85% $ 3,566 6.7% 148%
Fiscal 1993............................ 28,671 249% 1,438 5.0% 286%
Fiscal 1992............................ 8,212 -- 373 4.5% --
</TABLE>
Gross margin is defined as merchandise sales less the related merchandise
costs. In 1994, the increase in sales and gross margin are primarily attributed
to the expansion of Quest which earns a higher gross margin than Price
Enterprises' other merchandising operations and which represented 37% of total
sales. In 1993, most of the increases in sales and gross margin relate to a full
year of activity for CMI. In addition, Quest sales at PriceCostco warehouse club
locations began to contribute to sales in fiscal 1993; however, these amounts,
which earn a higher gross margin, represented less than 20% of total sales for
the year and had very little impact on the overall reported gross margin.
<TABLE>
<CAPTION>
PERCENT
MERCHANDISING OPERATING EXPENSES AMOUNT CHANGE CHANGE
--------- --------- ----------
<S> <C> <C> <C> <C> <C>
Fiscal 1994............................ $ 8,548 $ 4,899 134.3%
Fiscal 1993............................ 3,649 2,386 188.9%
Fiscal 1992............................ 1,263 -- --
</TABLE>
In 1994, the increase in merchandising operating expenses was primarily due
to the expansion of the Quest Business. In 1993, the increase was primarily due
to the expansion of the Quest Business and to a smaller extent the inclusion of
a full year of CMI expenses.
<TABLE>
<CAPTION>
PERCENT
GENERAL AND ADMINISTRATIVE EXPENSES AMOUNT CHANGE CHANGE
--------- --------- ----------
<S> <C> <C> <C> <C> <C>
Fiscal 1994............................ $ 1,600 $ 100 6.7%
Fiscal 1993............................ 1,500 200 15.4%
Fiscal 1992............................ 1,300 -- --
</TABLE>
PriceCostco historically provided services to Price Enterprises and charged
these expenses to Price Enterprises by specific identification or by allocations
based on total assets or sales revenues. In 1994 and 1993, the small increases
in expenses reflect the continued growth of Price Enterprises.
<TABLE>
<CAPTION>
PERCENT
INTEREST AND OTHER INCOME AMOUNT CHANGE CHANGE
--------- --------- ----------
<S> <C> <C> <C> <C> <C>
Fiscal 1994............................ $ 9,947 $ 1,444 17.0%
Fiscal 1993............................ 8,503 2,928 52.5%
Fiscal 1992............................ 5,575 -- --
</TABLE>
In 1994, the increase in interest and other income was due to the favorable
impact of PriceCostco's minority interest in the increased losses of the Quest
Business, an increase in the equity in earnings of Price Club Mexico partially
offset by a decrease in the earnings of real estate joint ventures. In 1993, the
increase in interest and other income was due to increases in earnings from real
estate joint ventures, increases in the equity in earnings of Price Club Mexico
and the favorable impact of PriceCostco's minority interest in the increased
losses of the Quest Business.
PROVISION FOR ASSET IMPAIRMENTS
The provision for asset impairments of $90,200 pre-tax which includes
$80,500 pre-tax ($47,500 after tax) related to a change in calculating estimated
losses for assets which are considered to be economically impaired. This change
in accounting estimates results from the spin-off of the real estate segment
assets to Price Enterprises and Price Enterprises' decision to pursue business
plans and operating strategies as a stand-alone entity which are significantly
different than the strategies of PriceCostco. Price Enterprises' management
believes that as a separate operating business it will not have the same access
to capital as PriceCostco or generate internal funds from operations to the same
extent as PriceCostco.
PriceCostco's accounting policies with respect to estimating the amount of
impairments on individual real estate properties and related assets were such
that impairment losses would be recorded if the carrying
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amount of the asset could not be recovered from estimated future cash flows on
an undiscounted basis. Price Enterprises' management believes that in view of
its strategies with respect to the number and nature of properties that would be
selected for potential disposition, it would be more appropriate to estimate
impairment losses based on fair values of the real estate properties as
determined by appraisals and/or a risk-adjusted discounted cash flow approach.
In determining impairment losses, individual real estate assets were reduced to
estimated fair value, if lower than historical cost. For those assets which have
an estimated fair value in excess of cost, the asset continues to be recorded at
cost. The impairment losses recorded as a result of this change in accounting
estimates reduced the book basis of certain of the real estate and related
assets.
<TABLE>
<CAPTION>
PERCENT EFFECTIVE
PROVISION (BENEFIT) FOR INCOME TAXES AMOUNT CHANGE CHANGE RATE
--------- --------- --------- -------
<S> <C> <C> <C> <C> <C>
Fiscal 1994..................................... $ (28,267) 42,882 N/A 40.5 %
Fiscal 1993..................................... 14,615 1,105 8.2% 41.6 %
Fiscal 1992..................................... 13,510 -- -- 41.1 %
</TABLE>
In 1994, the income tax benefit is the net of current tax expense of $8,192
and deferred tax benefits of $36,459. The deferred benefit relates primarily to
the provision for asset impairments which is not deductible currently for income
tax purposes. The increase in the effective tax rate in fiscal 1993 is primarily
due to an increase in the Federal statutory rate from 34% to 35% in the fourth
quarter of fiscal 1993. The changes in the effective tax rate in all fiscal
years presented is due primarily to the net operating losses of certain
Subsidiary Corporations, which are currently not recognized as a reduction of
income tax expense.
LIQUIDITY AND CAPITAL RESOURCES
Price Enterprises expects to finance its business activities through several
sources. The cash flow generated by its real estate activities, as well as cash
flow that may ultimately be generated by the Subsidiary Corporations, is
expected to be reinvested in either additional real estate development efforts
or through capital contributions or loans to the Subsidiary Corporations or
other business activities. In the immediate future, pursuant to the Advance
Agreement, PriceCostco will provide an $85 million revolving facility credit
(subject to reduction for proceeds of certain real property sales) to Price
Enterprises as interim financing to satisfy any cash requirements during the six
months following the Closing Date. Under such revolving credit facility, the
interest rate is the weighted average commercial paper rate on borrowings by
PriceCostco during each four-week period (including, without limitation,
amortization of lender commitment fees and other costs associated with the
backup line of credit and all miscellaneous costs and fees), or if commercial
paper is unavailable under PriceCostco's commercial paper program, the bank rate
on borrowings by PriceCostco pursuant to its working capital credit facility
(including, without limitation, amortization of lender commitment fees and other
costs associated with such credit facility and all miscellaneous costs and
fees). See "CERTAIN RELATED AGREEMENTS -- Advance Agreement." In the future, to
the extent that investment opportunities exceed available cash flow from
operations, Price Enterprises will seek additional funds, as appropriate,
through bank credit facilities, securitized debt and/or public equity offerings.
Consistent with historical trends, operating income from real estate
activities increases as properties are developed and declines as properties are
sold. Price Enterprises' liquidity is primarily affected by the timing and
magnitude of rental property acquisition, development and disposition, and of
capital contributions to Mexico Clubs.
During fiscal year 1995, Price Enterprises currently anticipates investing
approximately $40-50 million in commercial real estate development on owned
property (a portion of which represents commitments under executed construction
contracts), approximately $35 to 40 million for investment in Mexico Clubs,
approximately $5 million in capital contributions to Price Global and
approximately $8-10 million for investment in Price Quest. Price Enterprises has
four leases on former warehouse club properties with remaining terms ranging
from three to thirty years. Acquisition of additional real estate properties,
while not predictable at this time, may also occur. Cash flow from operations,
in addition to proceeds of approximately $26 million from the expected sales of
real estate, is expected to result in the need to incur debt at the end of
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fiscal year 1995 in the principal amount of approximately $35 to $50 million. In
addition, Price Ventures will be considering other business opportunities from
time to time which could result in other significant investments.
INFLATION
Because a substantial number of Price Enterprises' leases contain provisions
for rent increases based on changes in various consumer price indices and
additional rent if sales exceed certain base amounts, inflation is not expected
to have a significant material impact on future net income or cash flow from
developed and operating properties. In addition, substantially all leases are
"triple net" whereby specified operating expenses and property taxes are passed
through to the tenant.
For undeveloped and under-developed properties, inflation could increase
Price Enterprises' cost of carrying and developing the properties, however,
inflation would likely increase the future sales value of the properties.
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<PAGE>
SELECTED INFORMATION WITH
RESPECT TO PRICECOSTCO
The following sets forth certain information with respect to PriceCostco,
and is not intended as a complete description of the business or operations of
PriceCostco after the Closing Date.
BUSINESS OF PRICECOSTCO FOLLOWING THE TRANSACTION
As a result of the Transaction, PriceCostco's business consists primarily of
its warehouse club operations in the United States, Canada and the United
Kingdom, and PriceCostco has ceased to have any significant real estate
activities which are not directly related to its warehouse club business.
However, from time to time PriceCostco may determine to close one or more of its
warehouses, and as a result may own non-club real estate.
In addition, as a result of the Transaction, PriceCostco will no longer own
the Mexico Assets, the International Assets and the Quest Assets in their
entireties, but will own a 49% interest in each of the Subsidiary Corporations.
For a description of certain rights of PriceCostco as a stockholder of each of
the Subsidiary Corporations, see "BUSINESS AND PROPERTIES OF PRICE ENTERPRISES
- -- Mexico Clubs," "-- Price Quest" and "-- Price Global."
HEADQUARTERS
After the Closing Date, PriceCostco will maintain its home office and
headquarters in the Puget Sound area of Washington.
MANAGEMENT OF PRICECOSTCO
BOARD OF DIRECTORS
After the Closing Date, the PriceCostco Board of Directors will consist of
Jeffrey H. Brotman, Daniel Bernard, Richard D. DiCerchio, Hamilton E. James,
John W. Meisenbach and James D. Sinegal. In addition, Richard M. Libenson and
Duane A. Nelles will serve on the Board of Directors of PriceCostco until the
earlier to occur of (i) the date two years following the Closing Date and (ii)
such time as Sol Price and Robert E. Price and their affiliates in the aggregate
cease to beneficially own at least two million shares of PriceCostco Common
Stock (including any such shares owned by charitable trusts established by
either of them). The Board of Directors of PriceCostco is divided into three
classes. Class I directors' (Messrs. Brotman and Sinegal) terms as directors
expire in 1997. Class II directors' (Messrs. James and Bernard) terms as
directors expire in 1995. Class III directors' (Messrs. DiCerchio, Nelles,
Libenson and Meisenbach) terms as directors expire in 1996.
Jeffrey H. Brotman is a native of the Pacific Northwest and is a 1967
graduate of the University of Washington Law School. Mr. Brotman has been the
Vice Chairman of the Board of PriceCostco since the Merger. He is a founder of
Costco and a number of other speciality retail chains. Mr. Brotman is a director
of Seafirst Bank; Carrefour, U.S.; Starbucks Corp.; The Sweet Factory and Garden
Botanika.
Daniel Bernard has been a director of PriceCostco since 1994. Mr. Bernard
has been the Chief Executive Officer of Carrefour S.A. since the beginning of
1993. From 1989 to 1992, Mr. Bernard was a member of the executive board of
Metro International, a German retailer.
Richard D. DiCerchio has been Executive Vice President -- Merchandising,
Distribution, Construction and Marketing and a director of Price Costco since
the Merger and, until mid-August 1994, also served as Executive Vice President,
Chief Operating Officer -- Northern Division. He was elected Chief Operating
Officer -- Western Region of Costco in August 1992 and was elected Executive
Vice President and Director of Costco in April 1986. From June 1985 to April
1986, he was Senior Vice President, Merchandising of Costco. He joined Costco as
Vice President, Operations in May 1983.
Hamilton E. James has been a director of PriceCostco since the Merger and
was a director of Costco since August 1988. Mr. James has been a Managing
Director at DLJ since 1986 and for the past six years has been in charge of its
merchant banking activities. Mr. James also currently serves as a director of
County Seat Stores, Inc. and Flagstar Companies.
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Richard M. Libenson has been a director of PriceCostco since the Merger. He
was a director of Price since its formation in 1976, and was an executive
officer of Price from that time until October 1989, when he retired from active
involvement as an officer of Price. He served as Chief Operating Officer of
Price from August 1986 through October 1988, and Vice Chairman of the Price
Board from October 1988 through September 1989. Mr. Libenson is Robert Price's
second cousin.
John W. Meisenbach has been a director of PriceCostco since the Merger and
was a director of Costco since its inception. He is President of MCM Financial,
Inc., a financial services company, which he founded in 1962. He also has served
on the boards of Pioneer Federal Savings from February 1983 to February 1993 and
Expeditors International since 1991. Mr. Meisenbach is a trustee of the Elite
Fund, an investment company registered under the Investment Company Act of 1940.
Duane A. Nelles has been a director of PriceCostco since July 28, 1994. He
has been in the personal investment business since 1987. He also serves as a
director of QUALCOMM Inc., a telecommunications company.
James D. Sinegal has been President, Chief Executive Officer and a director
of PriceCostco since the Merger. He was President, Chief Operating Officer and a
director of Costco since its inception and was elected Chief Executive Officer
of Costco in August 1988. Mr. Sinegal is a co-founder of Costco and a director
of Price Enterprises.
EXECUTIVE OFFICERS
After the Closing Date, the Executive Officers of PriceCostco will be as
follows:
<TABLE>
<CAPTION>
NAME OFFICE
- ------------------------- ------------------------------------------------------------------------------------
<S> <C>
Jeffrey H. Brotman Chairman of the Board
James D. Sinegal President and Chief Executive Officer
Richard A. Galanti Executive Vice President and Chief Financial Officer
Richard D. DiCerchio Executive Vice President -- Merchandising, Distribution, Construction and Marketing
Franz E. Lazarus Executive Vice President, Chief Operating Officer -- Northern Division
Dennis R. Zook Executive Vice President, Chief Operating Officer -- Southern Division
Edward B. Maron, Jr. Executive Vice President, Chief Operating Officer -- Canadian Division
Joseph P. Portera Executive Vice President, Chief Operating Officer -- Eastern Division
David Loge Executive Vice President -- PriceCostco Industries
</TABLE>
AMENDMENT OF PRICECOSTCO BYLAWS
Pursuant to the Transfer and Exchange Agreement, upon consummation of the
Transaction, the Bylaws of PriceCostco (the "PriceCostco Bylaws") will be
amended to read in their entirety as set forth in Annex V (as amended, the
"Amended PriceCostco Bylaws"). Such amendments were approved by the requisite
vote of the Board of Directors of PriceCostco. The amendments to the PriceCostco
Bylaws are summarized below. This summary is qualified in its entirety by
reference to the Amended PriceCostco Bylaws, the complete text of which are
attached as Annex V hereto.
HOME OFFICES AND HEADQUARTERS. The PriceCostco Bylaws provide that
PriceCostco will maintain home offices and headquarters in the Puget Sound area
of Washington and San Diego, California. There is no such provision in the
Amended PriceCostco Bylaws. Following consummation of the Transaction,
PriceCostco intends to maintain a home office and headquarters only in the Puget
Sound area of Washington.
SPECIAL MEETINGS OF STOCKHOLDERS. The PriceCostco Bylaws provide that a
Special Meeting of Stockholders will be called by certain officers at the
request in writing, during the two year period following the effective time of
the Merger (the "Effective Time"), by a majority of the authorized number of
directors (I.E., the number of directors authorized as constituting the full
Board regardless of the number of directors actually holding office as
directors) and thereafter by a majority of the entire Board of Directors (I.E.,
the number of directors actually holding office as directors, regardless of the
number of directors that may be authorized to constitute the full Board), or at
the request in writing of stockholders owning a majority of the
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capital stock of PriceCostco issued and outstanding and entitled to vote. The
Amended PriceCostco Bylaws provide that a Special Meeting of Stockholders will
be called by certain officers at the request in writing by a majority of the
entire Board of Directors, or at the request in writing of stockholders owning a
majority of the capital stock of PriceCostco issued and outstanding and entitled
to vote.
NUMBER OF DIRECTORS. The PriceCostco Bylaws provide that the Board of
Directors of PriceCostco will consist of twelve members, until changed by
amendment of the PriceCostco Bylaws. The Amended PriceCostco Bylaws provide that
the Board will consist of one or more members, the exact number of which shall
be fixed from time to time by the Board of Directors.
VACANCIES ON THE BOARD OF DIRECTORS. The PriceCostco Bylaws provide that
vacancies, and newly created directorships resulting from any increase in the
authorized number of directors, may be filled by the Nominating Committee in the
manner described below under "Nominating Committee" or, if no Nominating
Committee then exists, by a majority of the directors then in office, though
less than a quorum, or by a sole remaining director. The Amended PriceCostco
Bylaws provide that vacancies, and newly created directorships resulting from
any increase in the authorized number of directors, may be filled by a majority
of the directors then in office, though less than a quorum or by a sole
remaining director.
QUORUM. The PriceCostco Bylaws provide that (i) at all meetings of the
Board of Directors, (A) during the two year period following the Effective Time,
a majority of the authorized number of directors will constitute a quorum for
the transaction of business and (B) thereafter, a majority of the entire Board
of Directors will constitute a quorum for the transaction of business, and (ii)
during the two year period following the Effective Time, the act of a majority
of the authorized number of directors shall be the act of the Board of Directors
and, thereafter, the act of a majority of the directors present at any meeting
at which there is a quorum shall be the act of the Board of Directors.
The Amended PriceCostco Bylaws provide that (i) at all meetings of the Board
of Directors a majority of the entire Board of Directors will constitute a
quorum for the transaction of business, and (ii) the act of a majority of the
directors present at any meeting at which there is a quorum shall be the act of
the Board of Directors.
COMMITTEES. The PriceCostco Bylaws provide that the Board of Directors may,
by resolution passed by a majority of the authorized number of directors during
the two year period following the Effective Time, and thereafter by a majority
of the entire Board of Directors, designate one or more committees of the Board.
The Amended PriceCostco Bylaws provide that the Board of Directors may, by
resolution passed by a majority of the entire Board of Directors, designate one
or more committees of the Board.
The PriceCostco Bylaws also provide that, to the extent possible, during the
two year period following the Effective Time, any transaction or matter in which
one or more directors is interested shall be referred to, and decided by, a
committee of the Board comprised of equal numbers of Price Designees and Costco
Designees (as such terms are hereinafter defined) (which committee may be a two
person committee), none of whom is interested in the matter or transaction. The
Amended PriceCostco Bylaws do not contain such a provision.
NOMINATING COMMITTEE. The PriceCostco Bylaws provide for a Nominating
Committee of the Board of Directors to consist of Robert E. Price and James D.
Sinegal, who will be the only members of the Nominating Committee (unless and
until replaced as provided in the PriceCostco Bylaws). The Nominating Committee
is to continue in existence, with the power and authority specified in the
PriceCostco Bylaws, until two years after the Effective Time and thereafter
until such bylaw is amended by the Board of Directors at a duly held meeting
thereof. The PriceCostco Bylaws further provide that in the event that either
Robert E. Price or James D. Sinegal, or a direct or indirect replacement of
either, shall cease to serve as a member of the Nominating Committee for any
reason, he or she shall be replaced as a member of the Nominating Committee (so
long as it shall still exist as provided above) by a person who is designated
with the concurrence of the Price Designees, if Robert E. Price or a direct or
indirect replacement of Robert E. Price shall so cease to serve, or by a person
who is designated with the concurrence of the Costco Designees, if James D.
Sinegal or a direct or indirect replacement of James D. Sinegal shall so cease
to serve. Pursuant
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to the PriceCostco Bylaws, so long as it shall remain in existence, the
Nominating Committee has the exclusive power, acting by unanimous vote, to
nominate persons to serve as directors of PriceCostco, subject only to any
rights of stockholders under law to nominate persons to serve as directors. So
long as it shall remain in existence, if the Nominating Committee is unable to
nominate a candidate for PriceCostco's Board of Directors by unanimous vote, no
nomination shall be made to the Board of Directors by the directors unless, in
the case of replacing a Price Designee, a majority of the remaining Price
Designees give their concurrence or, in the case of replacing a Costco Designee,
a majority of the remaining Costco Designees give their concurrence.
The Amended PriceCostco Bylaws do not provide for a nominating committee
(although the Board of Directors may establish a nominating committee; see
"Committees" above).
EXECUTIVE COMMITTEE. The PriceCostco Bylaws provide for an Executive
Committee of the Board of Directors to consist of Robert E. Price, James D.
Sinegal, Jeffrey H. Brotman and Mitchell G. Lynn, who will be the only members
of such committee (unless and until replaced as provided in the PriceCostco
Bylaws). The PriceCostco Bylaws further provide that the Executive Committee is
to continue in existence, with the power and authority specified in the
PriceCostco Bylaws, until two years after the Effective Time and thereafter
until such bylaw is amended by the Board of Directors at a duly held meeting
thereof. In the event that Robert E. Price, James D. Sinegal, Jeffrey H. Brotman
or Mitchell G. Lynn, or a direct or indirect replacement of any of them, shall
cease to serve as a member of the Executive Committee for any reason, he or she
shall be replaced as a member of the Executive Committee (so long as it shall
still exist as provided above) by a person who is designated with the
concurrence of the Price Designees, if Robert E. Price or Mitchell G. Lynn or a
direct or indirect replacement of Robert E. Price or Mitchell G. Lynn shall so
cease to serve, or by a person who is designated with the concurrence of the
Costco Designees, if James D. Sinegal or Jeffrey H. Brotman or a direct or
indirect replacement of James D. Sinegal or Jeffrey H. Brotman shall so cease to
serve. Pursuant to the PriceCostco Bylaws, the Executive Committee, during
intervals between meetings of the Board of Directors, has and may exercise all
the powers and authority of the Board of Directors in the management of the
business and affairs of PriceCostco except as provided in the DGCL.
The Amended PriceCostco Bylaws do not provided for an executive committee
(although the Board of Directors may establish an executive committee; see
"Committees" above).
ELECTION OF OFFICERS. The PriceCostco Bylaws provide that any officer
elected by the Board of Directors may be removed at any time by the affirmative
vote of a majority of the authorized number of directors during the two year
period following the Effective Time, and thereafter by a majority of the entire
Board of Directors. The PriceCostco Bylaws also provide that any vacancy
occurring in any office of PriceCostco will be filled (i) during the two year
period following the Effective Time, by a majority of the authorized number of
directors and (ii) thereafter, by a majority of the entire Board of Directors.
In addition, the PriceCostco Bylaws provide that each of the Chairman of the
Board and President may only be appointed or removed (i) during the two year
period following the Effective Time, by a majority of the authorized number of
directors and (ii) thereafter, by a majority of the entire Board of Directors.
The Amended PriceCostco Bylaws provide that any officer elected by the Board
of Directors may be removed at any time by the affirmative vote of a majority of
the entire Board of Directors. The Amended PriceCostco Bylaws also provide that
any vacancy occurring in any office of PriceCostco will be filled by a majority
of the entire Board of Directors. In addition, the Amended PriceCostco Bylaws
provide that each of the Chairman of the Board and President may only be
appointed or removed by a majority of the entire Board of Directors.
AMENDMENTS. Amendments to the PriceCostco Bylaws must be approved by either
the holders of a majority of the outstanding capital stock entitled to vote
thereon or during the two year period following the Effective Time by a majority
of the authorized number of directors and thereafter, by a majority of the
entire Board of Directors.
Amendments to the Amended PriceCostco Bylaws must be approved by either the
holders of a majority of the outstanding capital stock entitled to vote thereon
or by a majority of the entire Board of Directors.
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BUSINESS AND PROPERTIES OF PRICE ENTERPRISES
The following sets forth certain information with respect to Price
Enterprises. The following is not intended to be a complete description of the
business or operations of Price Enterprises.
GENERAL
Price Enterprises, a wholly owned subsidiary of PriceCostco, was formed in
July 1994 to acquire the Transferred Assets from PriceCostco. The principal
business of Price Enterprises is to acquire, develop, operate, manage, lease and
sell real properties. Price Enterprises' real estate assets include the
Commercial Properties, the four Warehouse Properties, the San Diego Property,
the City Notes and the Atlas Note. See "THE TRANSACTION -- Transactions
Undertaken Prior to the Exchange Offer." As of August 28, 1994, on an historical
basis, real estate assets constituted approximately 85% of the book value of
Price Enterprises' total assets.
Price Enterprises also holds 51% of the outstanding equity securities or
interests, as the case may be, of each of the Subsidiary Corporations. Mexico
Clubs will continue the development of warehouse club businesses in Mexico
through its 50% interest in Price Club Mexico, a joint venture that develops,
owns and operates ten Price Clubs in Mexico as of October 31, 1994. Price Quest
owns the Quest interactive electronic shopping business and related businesses
presently conducted in certain PriceCostco warehouse clubs. Price Global owns
CMI, an export and import business, and has certain rights to develop warehouse
club businesses in certain specified international markets. The remaining 49%
ownership interest in the Subsidiary Corporations is held by Price. In addition,
Price Ventures, Inc., a wholly owned subsidiary of Price Enterprises ("Price
Ventures"), has been formed to pursue and develop other business opportunities.
The organizational structure of Price Enterprises and its subsidiaries, as
well as PriceCostco's ownership interest in the Subsidiary Corporations, are set
forth below:
[LOGO]
BUSINESS STRATEGY
The strategy of Price Enterprises with respect to its real properties is to
own and manage retail shopping centers anchored by national retail warehouse
tenants such as Price Club, The Home Depot, HomeBase, The Sports Authority and
Marshall's. These tenants typically enter into long-term (ten to twenty years)
triple net leases with contractual rent increases and/or percentage rents. Price
Enterprises' business objective is to continue to increase net operating income
and the value of its properties through the acquisition or development of
additional properties, contractual rent increases and/or percentage rents,
reletting of
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<PAGE>
existing space at higher rents and expansion or remodeling of existing
properties. While Price Enterprises generally intends to hold its properties to
benefit from rental revenues and the opportunity for investment, it will
continue to dispose of property that is not consistent with its business
strategy or if it deems such disposition to be advantageous. Price Enterprises
plans to develop, redevelop or sell its unimproved properties and its non-income
producing properties, so as to maximize its return on its real estate assets. As
of June 1, 1994, the estimated cost to complete Price Enterprises' pending
development projects was approximately $43 million. Price Enterprises'
geographic focus has been metropolitan areas in the southwestern and eastern
United States, as these were Price's areas of concentration.
Although most of Price Enterprises' net assets, net earnings and cash flows
are generated by its real estate activities, Price Enterprises' other businesses
have separate and distinct strategies. Mexico Clubs' business strategy is (i) to
pursue Club Business opportunities in Mexico through the joint venture that owns
and operates Price Clubs in Mexico and (ii) to provide entrepreneurial advice
and possibly buying support to such joint venture. Price Quest's business
strategy is (A) to provide to PriceCostco's cardholders a wide range of products
and services through an interactive electronic interface, (B) to leverage
emerging, multi-media technologies to provide goods, services and information to
consumers in a cost-efficient manner and (C) to develop a customer base which
extends beyond PriceCostco's membership group. Price Global's business strategy
is (x) to develop trading relationships through CMI throughout the Specified
Geographical Areas and with certain specified customers in Hong Kong, Japan and
the Phillipines to maximize the export of goods from the United States while
seeking opportunities to import merchandise from such areas and (y) to develop
Club Businesses in the Specified Geographical Areas. Price Ventures' business
strategy is to pursue and develop other business opportunities which may arise
from time to time.
REAL ESTATE BUSINESS
GENERAL
The Real Properties acquired by Price Enterprises from PriceCostco in the
Transfer include the following: 16 fully developed and leased properties; 35
properties in various stages of construction and development ("Partially
Developed Properties"); 26 unimproved properties; and the San Diego Property,
consisting of two office properties. Most of the fully developed and leased
properties and Partially Developed Properties are retail shopping centers
anchored by national and regional retail tenants under long-term triple net
leases.
Under the Transfer and Exchange Agreement, on the Transfer Closing Date,
Price Enterprises assumed (i) all liabilities and obligations of PriceCostco and
its subsidiaries relating to or arising out of the Transferred Assets and that
arise out of events occurring at or after the Transfer Closing Date, (ii) the
Environmental Liabilities and (iii) the Assumed Construction Costs. PriceCostco
has, however, indemnified Price Enterprises against and held Price Enterprises
harmless from any loss incurred by Price Enterprises arising from one-half of
the Environmental Liabilities arising out of or relating to the Commercial
Property located in Phoenix, Arizona and known as the Phoenix Fry's Property.
For a further description of the indemnification provisions, see "THE AGREEMENT
OF TRANSFER AND PLAN OF EXCHANGE -- Indemnification." The income and expenses
associated with the Commercial Properties, including proceeds from the sales of
properties which are currently in escrow, were transferred by PriceCostco to
Price Enterprises as of the Transfer Closing Date, and the parties intend to
complete the transfers of the remaining properties as soon as practicable.
Price Enterprises conducts its real estate business directly and holds title
to or, in certain cases, the leases to, 74 of the Real Properties. Five of the
Real Properties, however, are held by Price Enterprises' wholly-owned
subsidiary, Price Real Estate, Inc. ("Price Real Estate"). Although Price
Enterprises and Price Real Estate are separately existing and individually
capitalized corporations, for convenience of reference throughout this Offering
Circular/Prospectus, all of the Real Properties and other real estate-related
assets are described as if owned or leased directly by Price Enterprises.
In connection with the preliminary approval of the Transaction by the
PriceCostco Board of Directors on July 15, 1994, senior management of
PriceCostco estimated that the value of the Real Properties as of September 1,
1994 would be approximately $389 million, excluding the four Warehouse
Properties and the
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San Diego Property. Subsequently, PriceCostco retained Cushman & Wakefield (the
"Appraiser") to appraise 45 of the 79 Real Properties (the "Appraised
Properties"), which excluded the Warehouse Properties but which nonetheless
constitute approximately 75% of the aggregate book value of the Real Properties
as of September 1, 1994. The appraisals indicate that the aggregate market value
of the Appraised Properties was within 1% of the estimate of PriceCostco's
senior management of such value (utilizing substantially similar assumptions in
the case of each Appraised Property). The appraisals were primarily based on the
income valuation approach, which estimates the going concern value of a property
by the discounted cash flow method. For this purpose, projected operating income
was determined based on actual and projected occupancy and rents. Operating
data, financial data and legal descriptions provided to the Appraiser by or on
behalf of Price Enterprises were assumed accurate and correct, and no audit or
verification was undertaken by the Appraiser. Because an appraisal is only an
estimate of value, it cannot be relied upon as a precise measure of realizable
value. Moreover to the extent that an appraisal of any of the Appraised
Properties is based on projected operating data, such appraisal is necessarily
based on assumptions, some of which may not materialize. The appraisals assume
that the Appraised Properties would be sold on an orderly basis under stable
market conditions. No adjustment has been made to reflect a bulk sale of all of
the Appraised Properties.
The four Warehouse Properties owned by Price Enterprises are occupied by
PriceCostco warehouse club facilities. These four warehouse club sites have been
leased back to PriceCostco, each on a triple net lease. For a description of the
terms of these leases, see "Leases" set forth below. As a result of these long-
term triple net leases, Price Enterprises did not seek appraisals of the
Warehouse Properties.
Price Enterprises also holds the City Notes and the Atlas Note. For a
description of the terms of these notes, see "City Notes and Atlas Note" set
forth below.
Price Enterprises is currently under contract or in final negotiations to
sell four properties that are expected to generate approximately $26 million in
aggregate gross proceeds. Price Enterprises recorded an asset impairment loss in
the fourth quarter of fiscal 1994 of approximately $9.7 million, $6.5 million of
which relates to the four properties currently in escrow. The sales of these
four properties are expected to close at various times in February and March
1995. There can be no assurance, however, that such sales will be completed by
the expected dates, if at all, or that such proceeds will be fully realized.
Set forth below are tables which contain certain summary data with respect
to all Real Properties which are owned or leased by Price Enterprises.
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<PAGE>
FULLY DEVELOPED PROPERTIES
<TABLE>
<CAPTION>
GROSS LEASABLE
AREA PERCENTAGE
LOCATION ACREAGE (SQ. FT.) LEASED PRINCIPAL TENANTS
- ------------------------------ ------- -------------- ------ ----------------------------------------
<S> <C> <C> <C> <C>
Phoenix, AZ 37.06 486,973 100.0% Fry's Distribution
San Diego, CA 29.90 420,411(1) 100.0% Price Club, ARA, Rose Canyon Mini
Storage
Westbury, NY 30.71 400,387(2) 100.0% Price Club, Kmart, Marshall's, Sports
Authority, Borders Books
Inglewood, CA 6.30 119,880 100.0% Home Base
Fountain Valley, CA 12.80 119,186 95.0% Sports Authority, PetsMart
Worcester, MA 11.46 115,038 100.0% Bradlee's
Milwaukee, WI 8.76 115,000(3) 100.0% Roundy's
New Britain, CT 17.79 112,380 100.0% Nestle
Smithtown, NY 5.88 55,580 100.0% Levitz
Redwood City, CA 6.31 50,000(4) 100.0% Orchard Supply Hardware
Hampton, VA 3.50 45,605 100.0% Sports Authority, Commerce Bank
Carmel Mountain Ranch, CA 6.02 35,000(5) 100.0% Claim Jumper, Islands Restaurant
Northridge, CA 4.44 30,000 100.0% Barnes & Noble, Fresh Choice
Riverside, CA 4.59 18,750 100.0% Mayflower
S.E. San Diego, CA 2.78 15,141(6) 86.8% Burger King, Navy Federal Credit Union
Sunnyvale, CA 1.60 7,800 100.0% Souplantation
------- -------------- ------
Total 189.90 2,147,131 99.5%
------- -------------- ------
------- -------------- ------
<FN>
- ------------------------
(1) Gross leaseable area includes 81,785 square feet of office space
attributable to the San Diego Property.
(2) Gross leasable area includes 51,427 square feet on parcels leased to
tenants under long-term ground leases. Such tenants own their respective
buildings and improvements located on such leased parcels.
(3) Price Enterprises leases the land and buildings at this site.
(4) Price Enterprises leases this property to the tenant under a long-term
ground lease. Such tenant owns the building and improvements located on
this property.
(5) Gross leasable area includes 16,000 square feet on parcels leased to
tenants under long-term ground leases. Such tenants own their respective
buildings and improvements located on such leased parcels.
(6) Gross leaseable area includes 3,475 square feet on a parcel leased to a
tenant under a long-term ground lease. Such tenant owns the building and
improvements located on such leased parcel.
</TABLE>
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The table set forth below describes certain of Price Enterprises' properties
which (i) are under development, (ii) have additional development potential, or
(iii) are not yet fully leased. Approximately 2 million square feet of gross
leasable area, or 46.5% of the total shown below, is not currently leased. Price
Enterprises is in various stages of negotiation for 280,000 square feet of such
space at nine Real Properties and is currently under contract to sell 169,000
square feet of such space. In addition, Price Enterprises intends to actively
pursue leases for unoccupied space in other of its properties. There can,
however, be no assurance that such transactions will ultimately be consummated.
PARTIALLY DEVELOPED AND/OR PARTIALLY LEASED PROPERTIES
<TABLE>
<CAPTION>
GROSS
LEASABLE AREA PERCENTAGE
LOCATION ACREAGE (SQ. FT.) LEASED PRINCIPAL TENANTS
- ------------------------------ ------- ------------- ------ --------------------------------------
<S> <C> <C> <C> <C>
Wayne, NJ 19.64 406,324 58.2% Price Club, Sports Authority, Today's
Man, Nobody Beats The Wiz
Richmond, CA 24.06 399,134 45.3% U.S. Post Office, Bio-Rad, PriceCostco
Business Delivery
Pentagon City, VA 18.15 315,419(1) 100.0% Price Club, Marshalls, Best Buy,
Linens-'N-Things, Borders Books
Bensalem, PA 29.38 300,025(2) 65.8% Home Depot, AMC Theaters, Acme Markets
Seekonk, MA 44.70 226,968(3) 89.5% Bradlee's, Sports Authority, Circuit
City
Maple Shade, NJ 19.00 175,813(4) 100.0% Caldor, Sports Authority
Houston, TX 25.22 192,024(5) 12.0% Pep Boys
Glen Burnie, MD 18.54 157,886(6) 100.0% Sports Authority, Computer City,
PetsMart
Signal Hill, CA 14.92 156,595(7) 94.7% Home Depot, PetsMart
Hayward, CA 4.70 155,374 0.0% (8)
Dallas, TX 14.61 153,890 0.0% (8)
Bakersfield, CA 15.78 151,801 32.5% PetsMart, Jack LaLanne
Sacramento/Florin, CA 13.59 135,923 14.8% (9)
Colton, CA 25.75 125,840 100.0% Grossmans
Azusa, CA 17.80 117,000 43.0% Taco Bell, Carls Jr., PriceCostco
Business Delivery
Riverside, CA(10) 10.29 115,878 0.0% (8)
Cheektowaga, NY 16.11 115,420 100.0% Builders Square
Marlow Heights, MD 13.28 113,703 22.0% PriceCostco Business Delivery
Palm Harbor, FL 13.00 113,700 0.0% (8)
San Jose, CA(10) 7.90 105,570 0.0% (8)
W. Palm Beach, FL(10) 6.59 105,405 0.0% (8)
Tacoma, WA(10) 7.23 105,175 100.0% Tacoma Discount World
Santee, CA 9.00 103,780 35.0% 24-Hour Nautilus
Edison, NJ 10.45 80,200 0.0% (8)
San Juan Capistrano, CA 6.23 71,387(11) 55.0% PetsMart, Burger King
Sacramento, CA 5.50 50,000(12) 100.0% PetsMart, Office Depot
N.W. Tucson, AZ 15.10 38,091 100.0% PetsMart
Silver City, NM 7.18 30,000 0.0% (8)
Mesa, AZ 6.20 24,154 100.0% PetsMart
S.W. Denver, CO 3.66 23,952 100.0% PetsMart
Bakersfield, CA(13) .52 13,053 0.0% (8)
Casa Grande, AZ .55 9,470 0.0% (8)
Aurora, CO 1.82 7,300 100.0% Red Robin
Hazlet, NJ(14) 1.15 6,800 100.0% Bertucci's
North Highlands, CA 3.59 3,516 100.0% Carls Jr.
------- ------------- ------
Total 451.19 4,406,570 53.5%
------- ------------- ------
------- ------------- ------
<FN>
- ------------------------
(1) Includes 165,419 square feet of gross leasable area which is presently
under construction.
(2) Includes 80,270 square feet of gross leasable area for which construction
has not yet commenced.
(3) Includes 18,000 square feet of gross leasable area for which construction
has not yet commenced.
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
(4) Although Price Enterprises owns the building and improvements located at
(5) this site, it controls the underlying real estate through a long-term
ground lease.
Gross leasable area includes 23,000 square feet on parcels leased to
tenants under long-term ground leases. Such tenants own their respective
buildings and improvements located on such leased parcels.
(6) Includes 38,650 square feet of gross leasable area which is presently under
construction.
(7) Includes 8,000 square feet of gross leasable area which is presently under
construction.
(8) Fully developed but currently vacant.
(9) This is a fully developed property. Although the site is occupied by a
number of smaller tenants, the former Price Club warehouse at this property
is currently vacant.
(10) Price Enterprises leases the land and buildings at this site.
(11) Includes 16,865 square feet of net gross leasable area for which
construction has not yet commenced.
(12) Includes 50,000 square feet of gross leasable area which is presently under
construction.
(13) This property has been sold to a third party, and the proceeds from such
sale have been transferred to Price Enterprises.
(14) Price Enterprises leases this property to the tenant under a long-term
ground lease. Such tenant owns the building and improvements located on
this property.
</TABLE>
UNIMPROVED PROPERTIES
<TABLE>
<CAPTION>
LOCATION ACREAGE
- --------------------------------------------------------------------------- ---------
<S> <C>
Schaumburg, IL 22.50
E. Mesa, AZ 20.98
Fairfield, CA 20.51
Fairfax, VA 16.40
White Marsh, MD 15.35
Chesterfield, VA 13.74
Fresno, CA 13.57
Meadowlands, NJ 12.88
Chula Vista, CA 12.31
Fremont, CA 11.30
Other Properties (16 total) 56.52
---------
Total 216.06
</TABLE>
SUMMARIES OF CERTAIN SIGNIFICANT PROPERTIES
Price Enterprises owns three fully developed properties which are estimated
to account for more than 10% of its annual net operating income. Certain
detailed information concerning each of these three significant properties is
set forth below.
WESTBURY PROPERTY. The property located in Westbury, New York, 25 miles
east of New York City, contains 400,387 square feet of gross leasable area on a
30.73 acre site (the "Westbury Property"). The center was developed by K&F and
has been managed by the REIT since 1993. The center consists of 8 buildings, and
includes a total of 2,200 parking spaces. As of August 29, 1994, the center was
leased and occupied. The total annual base rent for the Westbury Property is
$7.1 million, and its annual base rent per square foot is $17.70. One tenant is
subject to annual rent increases, while most tenants are typically subject to
rent increases at least every five years.
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<PAGE>
The table below sets forth certain information related to the shopping
center's principal tenants. Other tenants include Borders Books (a bookstore and
a subsidiary of Kmart Corporation), The Olive Garden (restaurant), Ruby
Tuesday's (restaurant) and California Pizza Kitchen (restaurant).
<TABLE>
<CAPTION>
GROSS RENEWAL OPTIONS
TENANT NAME/ LEASABLE AREA LEASE NO./TERM
TYPE OF BUSINESS (SQ. FT.) EXP. (1) (YEARS)
- ------------------------------------------------------------- ------------- ----------- -------------------
<S> <C> <C> <C>
Price Club................................................... 150,080 2009 7/5
(membership warehouse club)
Kmart........................................................ 110,054 2013 4/5
(general merchandiser)
Marshall's................................................... 45,826 2009 3/5
(discount apparel)
The Sports Authority......................................... 43,000 2013 4/5
(sporting goods)
<FN>
- ------------------------
(1) The date indicates the year the lease is scheduled to expire, without
taking into account the exercise of any renewal options.
</TABLE>
PENTAGON CITY PROPERTY. The property located in Arlington, Virginia, 1.5
miles from Washington, D.C., contains 315,419 square feet of gross leasable area
on a 16.88 acre site (the "Pentagon City Property"). The center is being
developed by Price Enterprises and K&F Development Company and will be managed
by the REIT upon completion in December 1994. The center will consist of a
single building, and the site includes a total of 1,217 parking spaces. As of
August 29, 1994, the center was 99.5% leased but 48% occupied. The total annual
base rent, upon completion, for the Pentagon City Property will be $6.3 million,
and its annual base rent per square foot will be $17.80. One tenant will be
subject to annual rent increases, while most tenants will be typically subject
to rent increases at least every five years.
The table below sets forth certain information related to the shopping
center's principal tenants. Other tenants include Chevy's (restaurant), Fresh
Choice (restaurant) and California Pizza Kitchen (restaurant).
<TABLE>
<CAPTION>
GROSS RENEWAL OPTIONS
TENANT NAME/ LEASABLE AREA LEASE NO./TERM
TYPE OF BUSINESS (SQ. FT.) EXP. (1) (YEARS)
- ------------------------------------------------------------- ------------- ----------- -------------------
<S> <C> <C> <C>
Price Club................................................... 150,000 2009 7/5
(membership warehouse club)
Marshall's................................................... 41,437 2009 3/5
(discount apparel)
Best Buy..................................................... 35,373 2009 3/5
(consumer electronics)
Linens-'N-Things............................................. 33,912 2009 3/5
(home decor)
Borders Books................................................ 32,085 2009 4/5
(book stores)
<FN>
- ------------------------
(1) The date indicates the year the lease is scheduled to expire, without
taking into account the exercise of any renewal options.
</TABLE>
WAYNE PROPERTY
The property located in Wayne, New Jersey, 25 miles west of New York City,
contains 406,324 square feet of gross leasable area of which 170,000 square feet
is located in two non-retail floors above The Sports Authority and Todays' Man
space (the "Wayne Property"). The center was developed by K&F and has been
managed by the REIT since 1993. The center consists of two buildings and
includes a total of 1,273 parking spaces. As of August 29, 1994, the retail
portion of the center was 100% leased (excluding the second/third floors, which
are primarily office space) and the total center was 58.2% leased. The total
annual base rent for the Wayne Property is $3.7 million and its annual base rent
per square foot is $15.80. One tenant is subject to annual rent increases, while
most tenants are typically subject to rent increases every 5 years.
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<PAGE>
The table below sets forth certain information related to the shopping
center's principal tenants.
<TABLE>
<CAPTION>
GROSS RENEWAL OPTIONS
TENANT NAME/ LEASABLE AREA LEASE NO./TERM
TYPE OF BUSINESS (SQ. FT.) EXP. (1) (YEARS)
- ------------------------------------------------------------- ------------- ----------- -----------------
<S> <C> <C> <C>
Price Club................................................... 130,112 2009 7/5
(membership warehouse)
The Sports Authority......................................... 44,767 2012 4/5
(sporting goods)
Todays' Man.................................................. 33,400 2002 2/5
(mens apparel)
Nobody Beats The Wiz......................................... 28,045 2018 None
(consumer electronics)
</TABLE>
FOUR LARGEST TENANTS
Price Enterprises' four largest tenants account for approximately 21.3% of
its total gross leasable area and approximately 42.3% of its total base rent
revenues. Certain information with respect to Price Enterprises' four largest
tenants is set forth in the following table:
<TABLE>
<CAPTION>
PERCENT OF PERCENT OF
NUMBER AREA UNDER GROSS LEASABLE TOTAL
OF LEASE (SQ. AREA UNDER ANNUAL BASE
TENANT LEASES FT.) LEASE BASE RENT RENT REVENUES
- -------------------------------- ------------- -------------- --------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Price Club 4 569,068 9.2% $ 7,954,400 21.0%
The Sports Authority 7 297,844 4.9% 3,354,480 8.9%
Home Depot 2 212,423 3.5% 2,550,662 6.8%
PetsMart 9 224,969 3.7% 2,124,537 5.6%
</TABLE>
Price Club, which is owned by PriceCostco, is Price Enterprises' largest
tenant in terms of gross leaseable area, with four locations totalling 569,068
square feet or 9.2% of Price Enterprises' total gross leaseable area. Price Club
accounts for 21.0% of Price Enterprises' base rental revenues.
The Sports Authority is Price Enterprises' second largest tenant in terms of
gross leaseable area, with seven locations totalling 297,844 square feet or 4.9%
of Price Enterprises' total gross leaseable area. The Sports Authority accounts
for 8.9% of Price Enterprises' base rental revenues. The Sports Authority, a
retailer of sporting goods and clothing.
Price Enterprises' other principal tenants include Home Depot and PetsMart.
Home Depot leases two properties, representing 3.5% of Price Enterprises' total
gross leaseable area and 6.8% of its total base rental revenues. Home Depot's
principal business is selling home improvement materials and building supplies.
PetsMart leases nine properties representing 3.7% of Price Enterprises' total
gross leaseable area and 5.6% of its total base rental revenues. PetsMart is a
specialty retailer of pet food, pet supplies, accessories and pet services.
COMPETITION
Price Enterprises competes for tenants in its retail shopping centers
primarily on the basis of customer traffic generated by its national and
regional retail anchor tenants, such as Price Club, Home Depot and The Sports
Authority. Price Enterprises also attracts smaller tenants by offering desirable
locations, competitive lease terms and high occupancy rates. The closing or
relocation of any anchor tenant could have a material adverse effect on the
operation of a shopping center. In addition, the closing or relocation by Price
Club at certain of Price Enterprises' properties could trigger provisions in
leases of certain tenants at those properties which would allow such tenants to
terminate their leases.
Price Enterprises competes with a wide variety of corporate and individual
real estate developers and other real estate investment trusts which have
investment objectives similar to those of Price Enterprises and which may have
greater financial revenues, larger staffs and longer operating histories than
Price Enterprises.
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ENVIRONMENTAL MATTERS
Price Enterprises' ownership of the Real Properties could subject Price
Enterprises to certain environmental liabilities. As discussed below, there are
certain sites among the Real Properties with known environmental liabilities,
including certain other sites located in areas of current or former industrial
activity, where environmental contamination may have occurred. Even if not
currently known, Price Enterprises subsequently could discover potential
environmental liabilities arising from its sites or from neighboring facilities.
In addition, undeveloped sites may be affected by regulations enacted to protect
sensitive environmental resources, including threatened and endangered species
and wetlands, so as to restrict Price Enterprises' development and/or diminish
the value of those sites.
Price Enterprises has agreed to indemnify PriceCostco against and hold
PriceCostco harmless from all environmental liabilities that relate to or arise
out of the Real Properties and that arise out of events occurring prior to, at
or after the Transfer Closing Date. As discussed more fully under "THE AGREEMENT
OF TRANSFER AND PLAN OF EXCHANGE -- Indemnification," PriceCostco has agreed to
indemnify and hold Price Enterprises harmless in respect of one-half of all
liabilities relating to Materials of Environmental Concern and violations or
purported violations of Environmental Laws relating to the Commercial Property
located in Phoenix, Arizona and known as the Phoenix (Fry's) site.
LEGAL OVERVIEW. Under various Federal, state and local environmental laws,
ordinances and regulations, a current or previous owner or operator of real
estate may be required to investigate and remediate releases or threatened
releases of hazardous or toxic substances or petroleum products located at such
property, and may be held liable to a governmental entity or to third parties
for property damage and for investigation and remediation costs incurred by such
parties in connection with the contamination. Many such laws, including the
Comprehensive Environmental Response, Compensation and Liability Act, as amended
by the Superfund Amendments and Reauthorization Act of 1986 ("CERCLA"), impose
liability without regard to whether the owner knew of or caused the presence of
the contaminants, and liability under such laws has been interpreted to be joint
and several unless the harm is divisible and there is a reasonable basis for
allocation of responsibility. The cost of investigation, remediation or removal
of such substances may be substantial, and the presence of such substances, or
the failure to remediate properly the contamination on such property, may
adversely affect the owner's ability to sell or rent such property or to borrow
money using such property as collateral. In connection with its ownership and
operation of the Real Properties, Price Enterprises may be potentially liable
for such costs.
In addition, persons who arrange for the disposal or treatment of hazardous
or toxic substances at a disposal or treatment facility also may be liable for
the costs of removal or remediation of a release or threatened release of
hazardous or toxic substances at such disposal or treatment facility, whether or
not such facility is owned or operated by such person. Some environmental laws
create a lien on a contaminated site in favor of the government for damages and
costs incurred in connection with the contamination. The owner of a contaminated
site also may be subject to common law claims by third parties based on damages
and costs resulting from environmental contamination emanating from such site.
In connection with its ownership and operation of the Real Properties, Price
Enterprises may be potentially liable for such costs.
Certain Federal, state and local laws, regulations and ordinances also
govern the removal, encapsulation or disturbance of asbestos-containing
materials ("ACMs") when such materials are in poor condition or in the event of
construction, remodeling, renovation or demolition of a building. Such laws may
impose liability for release of ACMs and may provide for third parties to seek
recovery from owners or operators of such properties for personal injury
associated with ACMs. In connection with its ownership and operation of the Real
Properties, Price Enterprises may be potentially liable for such costs. Certain
of the Real Properties contain ACMs, but Price Enterprises does not expect to
incur significant costs associated with ACMs unless such properties are
demolished or substantially renovated.
Certain Federal, state and local laws, regulations and ordinances also have
been enacted to protect sensitive environmental resources, including threatened
and endangered species and wetlands. Such laws may restrict the development and
diminish the value of property which is inhabited by an endangered or threatened
species, is designated as critical habitat for an endangered or threatened
species or is characterized as wetlands. Therefore, Price Enterprises' ability
to develop certain unimproved sites may be restricted, and the value of such
sites diminished, if those sites are inhabited by a threatened or endangered
species, are designated as critical habitat for a threatened or endangered
species, or are characterized as wetlands.
PriceCostco engaged environmental consultants to conduct Phase I assessments
at each of the sites that constitute the Real Properties. The Phase I
assessments were carried out in accordance with accepted
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<PAGE>
industry practices and consisted of non-invasive investigations of environmental
conditions at each of the sites that constitute the Real Properties, including a
preliminary investigation of the sites and identification of publicly known
conditions concerning properties in the vicinity of the sites, physical site
inspections, review of aerial photographs and relevant governmental records
where readily available, interviews with knowledgeable parties, investigation
for the presence of above ground and underground storage tanks presently or
formerly at the sites, a visual inspection of suspect friable ACMs where
appropriate and the preparation and issuance of written reports. The Phase I
assessments were completed in November 1994.
Price Enterprises is unaware of any environmental liability and compliance
with applicable environmental laws or regulations arising out of the Real
Properties that Price Enterprises believes would have a material adverse effect
on its business, assets and/or results of operations. Nevertheless, there can be
no assurance that Price Enterprises' knowledge is complete with regard to, or
that the Phase I assessments have identified, all material environmental
liabilities.
Price Enterprises also believes that, with respect to the Real Properties,
it is in compliance in all material respects with all Federal, state and local
laws, ordinances and regulations regarding hazardous or toxic substances or
petroleum products. Price Enterprises has not been notified by any governmental
authority, and is not otherwise aware, of any material liability or claim
relating to hazardous or toxic substances or petroleum products in connection
with any of the Real Properties. Set forth below are summaries of certain
environmental matters relating to certain of the Real Properties.
AZUSA. The Azusa site is a 17.8 acre site located in Azusa, California.
Price purchased the Azusa site in 1983 from Huffy Corporation ("Huffy"). Huffy
operated a bicycle manufacturing facility on the Azusa site from 1959 until
1982. After purchasing the Azusa site, Price converted the bicycle manufacturing
facility into a Price Club warehouse and tire center. The warehouse at this
property is presently vacant.
The Azusa site currently is located within the Baldwin Park Operable Unit
("BPOU") of the San Gabriel Valley Area 2 federal CERCLA site. The BPOU
addresses a large area of groundwater contamination in the San Gabriel Valley.
Volatile organic compounds ("VOCs"), including trichloroethylene and
perchloroethylene, are present in the groundwater throughout a several mile long
area, extending beneath the cities of Azusa, Irwindale, and Baldwin Park,
California. Price received a general notice of potential liability letter from
the United States Environmental Protection Agency (the "EPA") for the BPOU dated
August 4, 1993, and is one of approximately 110 potentially responsible parties
("PRPs"), representing 20-25 contaminated parcels, to have received such notice
for the BPOU. While it was operated by Huffy, the Huffy site contained a
degreasing facility that allegedly released VOCs into the soil.
In March 1994, the EPA published a Record of Decision ("ROD") which
documents the selection of remedial alternatives for the BPOU. The EPA estimates
that its preferred remedy, as outlined in the ROD, will cost between $100 and
$130 million. The San Gabriel Basin Water Quality Authority ("SGBWQA") has
proposed an alternative remedy for the BPOU, which will cost an estimated $25 to
$30 million. A group of PRPs, including Price and Huffy, the SGBWQA and the EPA
currently are negotiating the final remedy for the BPOU. Price Enterprises lacks
sufficient information regarding the activity of other PRPs to form an estimate
of the equitable share of total costs that could be allocated to its Azusa site.
To date, Price and Huffy have spent approximately $225,000 in investigation
and monitoring costs and have agreed informally to share those costs equally. To
the extent there is any liability associated with the Azusa site, Price
Enterprises believes such liability should be attributed to Huffy. Price
Enterprises (as successor to Price) and Huffy have not negotiated a final
allocation of costs as between themselves. There can be no assurance that Huffy
will contribute to any further costs. Based upon a number of factors, including
the current status of negotiations regarding the alternative remedy, the cost of
the final remedy, and Price Enterprises' allocated equitable share of that cost
as between it, Huffy and/or other PRPs, Price Enterprises' liability associated
with the Azusa site would not have a material adverse effect on the financial
condition and results of operations of Price Enterprises.
PHOENIX (FRY'S). The Phoenix (Fry's) site is a 37.06 acre site located in
Phoenix, Arizona. Fry's Food Distribution Center leases and operates a food
distribution facility on the premises. The Phoenix (Fry's) site is located
within the West Van Buren Study Area (the "WVBSA"). VOCs and petroleum
hydrocarbons are present in groundwater in the WVBSA. To date, Price Enterprises
(as successor to Price) has not been identified as a PRP for the WVBSA and is
unaware of any releases or threatened releases of hazardous substances,
including VOCs and petroleum hydrocarbons, resulting from operations at the
Phoenix (Fry's) site. Nevertheless, Price Enterprises' ownership of the Phoenix
(Fry's) site creates the potential of liability
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for remediation costs associated with groundwater beneath the site. As discussed
more fully under "THE AGREEMENT OF TRANSFER AND PLAN OF EXCHANGE --
Indemnification," PriceCostco has agreed to indemnify and hold Price Enterprises
harmless in respect of one-half of all liabilities relating to Materials of
Environmental Concern and violations or purported violations of Environmental
Laws relating to the Commercial Property located in Phoenix, Arizona and known
as the Phoenix (Fry's) site. To date, Price has not been required to conduct any
investigation or remediation at this location. Price Enterprises lacks
sufficient information about the activity of the WVBSA PRPs to form an estimate
of the equitable share of total liability that could be allocated to this site,
if any.
Although designated by Arizona law as a "study area," the WVBSA is not a
federal CERCLA site and is not listed on the National Priorities List ("NPL").
Immediately to the east of the WVBSA, however, is the East Washington Study Area
(the "EWSA"), which is listed on the NPL. VOCs are also present in groundwater
in the EWSA. If the contamination plumes from the WVBSA and the EWSA merge, the
possibility exists that the two study areas will be merged into one federal
CERCLA site.
MEADOWLANDS. The Meadowlands site is an unimproved, 12.88 acre site located
in Meadowlands, New Jersey. A prior owner used this site as a debris disposal
area. Elevated levels of heavy metals (including a small area contaminated with
polychlorinated biphenyls) and petroleum hydrocarbons are present in soil at the
Meadowlands site. Price Enterprises, however, has not been notified by any
governmental authority, and is not otherwise aware, of any material
noncompliance, liability or claim relating to hazardous or toxic substances or
petroleum products in connection with the Meadowlands site. Nevertheless, Price
Enterprises' ownership of the Meadowlands site creates the potential of
liability for remediation costs associated with groundwater beneath the site.
Additionally, a significant portion of the Meadowlands site may be characterized
as wetlands. Therefore, Price Enterprises' ability to develop the Meadowlands
site in the future may be restricted, and consequently the value of the site
could be materially and adversely affected.
PENTAGON CITY. The Pentagon City site is a 16.88 acre site in Arlington,
Virginia. Elevated levels of heavy metals are present in groundwater beneath the
Pentagon City site. Also, petroleum hydrocarbons are present in soil at the
site. By letters dated January 31, 1994, and March 22, 1994, the Virginia
Department of Environmental Quality is requiring no further action at the site
with regard to the heavy metals and petroleum hydrocarbon contamination,
respectively. Price Enterprises has not been notified by any governmental
authority, and is not otherwise aware, of any other material noncompliance,
liability or claim relating to hazardous or toxic substances or petroleum
products in connection with the Pentagon City site. Nevertheless, Price
Enterprises' ownership of the Pentagon City site creates the potential of
liability for remediation costs associated with groundwater beneath, and soils
at, the site.
COLTON. The Colton site is a 25.75 acre site in Colton, California. The
Colton site is inhabited by a species of sand fly which the United States Fish
and Wildlife Service ("USF&WS") is considering designating as either endangered
or threatened. Also, the Colton site is located within a geographic area
currently being considered by the USF&WS for designation as critical habitat for
the sand fly. If the sand fly ultimately is designated as threatened or
endangered and/or the Colton site is designated as critical habitat for the sand
fly, Price Real Estate's ability to develop the Colton site in the future may be
restricted, and the value of the site may be materially adversely affected.
SIGNAL HILL. The Signal Hill site is a 14.92 acre site in Signal Hill,
California. This site, and the adjoining properties, historically have been used
for oil and gas extraction activities, and the site currently has several active
and abandoned oil and gas production and injection wells. Prior to development
in the early 1990s, the prior owner excavated and treated over 100,000 cubic
yards of petroleum hydrocarbon contaminated soil. However, in 1992, certain
areas of the site were known to be still contaminated with petroleum
hydrocarbons and certain solvents in varying concentrations. PriceCostco's
environmental consultant has been unable to document final closure by the
regulatory agencies regarding remedial activities at the site. The City of
Signal Hill Redevelopment Agency has indemnified the prior owner for
environmental expenses incurred with respect to such site through 1996. This
indemnity has been transferred to Price Enterprises.
OTHER PROPERTIES. Two Real Properties (New Britain and Silver City) contain
or have contained petroleum hydrocarbons and/or VOCs in the soil and ground
water. PriceCostco has and Price Enterprises will continue to remediate the soil
and ground water under supervision of local authorities. Price Enterprises
estimates that the total cost of this remediation is not expected to exceed
$650,000 in aggregate over the next three years.
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LEASES
GENERAL. The majority of leases with Price Enterprises' anchor tenants
provide for lease terms of between ten and twenty years and the leases with
Price Enterprises' smaller space tenants typically provide for lease terms of
between five and ten years. Price Enterprises typically seeks to structure the
leases on its properties as triple net leases that impose on the tenant all
obligations for real property taxes and assessments, repairs, maintenance and
insurance, and the duty to restore the leased premises in case of casualty or
condemnation. Through the use of triple net leases, Price Enterprises seeks to
reduce operational costs and risks and the demands upon managerial time
typically associated with investment in real estate. These leases may also
provide opportunities for income growth from contractual rent increases without
corresponding increases in operational costs. Price Enterprises' leases
generally provide for contractual rent increases over the life of the lease
based on a fixed amount or consumer price indices, and/or percentage rent,
calculated as a percentage of a tenant's gross sales above predetermined
thresholds. Although Price Enterprises' properties are primarily subject to
triple net leases, for certain of its properties Price Enterprises has agreed to
retain the responsibility for some of the obligations that would be the
responsibility of the tenant under a triple net lease (such as replacement of
the roof and structural repair).
LEASEBACK OF THE WAREHOUSE PROPERTIES. The Warehouse Properties have been
leased back to PriceCostco, as of the Transfer Closing Date, each on a triple
net lease. Each lease has an original, fixed term of 15 years with seven
successive five-year renewal options. Under the terms of each lease, PriceCostco
will pay an initial base rent to Price Enterprises at a rate of nine percent of
the agreed value of the Warehouse Property site (totalling nine percent of
approximately $88 million in the aggregate), increasing each year of the lease
term, including option periods, at a rate of 0.1% of such agreed value per year,
not compounded. Through June 30, 1997, the office space reasonably required and
currently being used by PriceCostco at Price Enterprises' Morena Boulevard
office property is included within the rent charged for the Morena Boulevard
Warehouse Property. The use of such office space is not assignable or
subleasable by PriceCostco. The four Warehouse Property leases (collectively,
the "PriceCostco Warehouse Leases") require PriceCostco to pay all operating
costs of the warehouse club sites, including property taxes, insurance and
maintenance, and require that Price Enterprises be indemnified against all
claims and liabilities arising under the PriceCostco Warehouse Leases
(including, without limitation, claims arising from operations and environmental
matters), unless due to Price Enterprises' own default, negligence or tortious
acts. Additionally, renovations or alterations to any of the warehouse club
sites are at the expense of PriceCostco and will remain the property of
PriceCostco until the expiration of the subject lease, when they will become the
property of Price Enterprises.
Under the terms of each of the PriceCostco Warehouse Leases, PriceCostco has
a right of first refusal to purchase the relevant Warehouse Property if Price
Enterprises decides to sell such Warehouse Property. In the event Price
Enterprises intends to sell a Warehouse Property, or all or substantially all of
a parcel or shopping center including a Warehouse Property, during the term of
the lease covering such Warehouse Property, Price Enterprises is required to
notify PriceCostco of its intention prior to the sale. Such notification is
required to include the terms of the proposed sale and a copy of a bona fide
written offer by the proposed purchaser. So long as PriceCostco is not then in
default under the subject lease, PriceCostco will have an option for 30 days to
elect to purchase the Warehouse Property or the larger property (whichever Price
Enterprises has proposed to sell), at the same price and on the same terms as
the written offer. If PriceCostco fails to exercise such option, or if
PriceCostco exercises the option but fails to close in a timely manner, Price
Enterprises will be free for 90 days to sell the Warehouse Property or the
larger property (whichever Price Enterprises has proposed to sell), in the
manner provided in Price Enterprises' notice to PriceCostco. This PriceCostco
right of first refusal with respect to prospective sales of any Warehouse
Properties could have the effect of discouraging other potential buyers from
making offers to acquire the properties in the event Price Enterprises decides
to sell any of the properties.
The PriceCostco Warehouse Leases do not impose a duty on PriceCostco to
continue to operate a business at the Warehouse Property sites. In the event
PriceCostco ceases to operate a business at a Warehouse Property, and in the
event PriceCostco fails to sublease the premises or assign the subject lease to
a new tenant for a permitted use within six months after PriceCostco's cessation
of operations, Price Enterprises may elect to terminate the lease and enter into
a new lease with another tenant.
CITY NOTES AND ATLAS NOTE
CITY NOTES. Price Enterprises holds the City Notes from various California
municipalities and agencies, which range in individual book value as of August
28, 1994 from approximately $400,000 to $5,700,000, with
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interest rates as set forth below. These loans represent amounts lent by
PriceCostco to facilitate Price Club warehouse real estate acquisitions and for
reimbursement of specific improvements. Repayment of each City Note by the
relevant municipality is generally based on that municipality's allocation of
sales tax revenues generated by retail businesses located on a particular
property associated with such City Note. City Note repayments are calculated in
accordance with specific revenue sharing agreements between PriceCostco and the
respective municipality or agency (which agreements have been assigned to Price
Enterprises). Under the terms of most of the City Notes, the unpaid balance of
the note is forgiven at its maturity date. In part as a result of the recent
recession, sales tax revenues generated by the retail business located on the
properties associated with the City Notes have declined in recent years.
Consequently, there can be no assurance that the full book value of the City
Notes will be repaid by their maturity. See "PRICE ENTERPRISES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Results of Operations -- Fiscal 1994 Compared to Fiscal 1993
Compared to Fiscal 1992 -- Provision for Asset Impairments."
Under the terms of the Transfer and Exchange Agreement, if PriceCostco
ceases to operate a warehouse club business at any site with respect to which a
governmental agency has executed a City Note, or if PriceCostco takes any action
that would entitle such agency to withhold payments under its City Note, Price
Enterprises is entitled to cause PriceCostco to purchase such City Note for an
amount of cash equal to 72% of the sum of (i) the June 5, 1994 book balance less
any subsequent principal repayments, and (ii) all accrued and unpaid interest
from June 5, 1994.
Set forth below is certain information with respect to the book balance,
interest rate and maturity date of the City Notes.
<TABLE>
<CAPTION>
CITY 8/28/94
MUNICIPALITY/AGENCY OBLIGOR NOTE DATE BOOK BALANCE INTEREST RATE MATURITY DATE
- ---------------------------------------------------------- --------- ------------- ------------- ---------------
<S> <C> <C> <C> <C>
(IN
THOUSANDS)
Alhambra, CA.............................................. 6/10/87 $ 966 7.00%(1) 2012
Azusa, CA................................................. 10/4/88 1,860 9.50 2014
Colton, CA................................................ 12/2/86 1,277 7.00 (2)
Corona, CA................................................ 4/1/88 5,740 8.75 2028
Fountain Valley, CA....................................... 1/10/89 4,740 7.75(3) 2010
Inglewood, CA............................................. 4/2/90 400 8.00 1999
Moreno Valley, CA......................................... 2/17/93 1,200 8.00 2015
Rancho Cucamonga, CA...................................... 2/4/92 1,540 9.00 2015
Rancho Del Rey, CA........................................ 6/4/93 1,700 8.00 2003
San Juan Capistrano, CA................................... 6/4/87 540 8.25 2010
Santa Clarita, CA......................................... 2/26/91 2,350 10.00 2022
Signal Hill, CA........................................... 10/29/91 4,340 10.00 2012
Signal Hill, CA........................................... 10/29/91 720 10.00 1997
South San Francisco, CA................................... 4/29/88 1,690 8.50 2006
Yorba Linda, CA........................................... 5/3/91 2,960 9.00 1996
-------------
Total............................................. $ 32,023
-------------
-------------
<FN>
- ------------------------
(1) This is a non-interest bearing note. However, for accounting purposes,
interest was imputed using a 7% interest rate.
(2) Obligations continue until the City Note is paid in full in accordance with
its terms.
(3) Interest is based on the prime interest rate quoted by Bank of America,
N.A., adjusted as of August 15 of each year but not to exceed 12%.
</TABLE>
ATLAS NOTE. Price Enterprises also owns the Atlas Note, which is
collateralized by a hotel and convention center. The Atlas Note bears interest
at 0.25% below Wells Fargo Bank, N.A.'s base rate and matured on May 8, 1994.
Although all interest payments and fees have been paid timely, the borrower has
not repaid the principal payment amount and otherwise has been and is currently
in violation of certain of its debt covenants. Price Enterprises has agreed to
forbear its foreclosure rights pending the consummation of a restructuring of
the debt obligations, which is expected to occur by mid-December 1994. The
restructuring would require repayment within five years of all outstanding
indebtedness, with interest accruing on the outstanding principal at 10% per
annum. Interest would be payable monthly at a rate equal to the six month
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LIBOR rate plus 2.5% per annum (not to exceed 8% per annum through December 1,
1996), and the interest not yet payable would be added to the principal amount
of the loan. Subject to the fulfillment of certain anticipated contingencies,
Price Enterprises has agreed to fund an additional amount, up to a maximum of
$4.1 million, to be used to retire the approximate $2.9 million balance of the
loan held by the lender with a first priority security interest in the hotel and
convention center, to fund certain capital repairs and improvements to the hotel
and convention center and to pay a portion of the borrower's legal fees and
certain expenses incurred in connection with the restructuring. The restructured
loan would be secured by the existing hotel and convention center property in
San Diego, California and certain assets associated with property in Cabo San
Lucas, Mexico. There can be no assurance that the loan restructuring will be
consummated on these terms, if at all. In the event a restructuring of the Atlas
Note cannot be consummated, Price Enterprises has retained its foreclosure
rights under the Atlas Note.
PENDING TRANSACTIONS
SALES. Price Enterprises is currently under contract or in final
negotiations to sell four properties that are expected to generate approximately
$26 million in aggregate gross proceeds. Price Enterprises recorded an asset
impairment loss in the fourth quarter of fiscal 1994 of approximately $9.7
million, $6.5 million of which relates to the four properties currently in
escrow. The sales of these properties are expected to close at various times in
February and March 1995. There can be no assurance, however, that such sales
will be completed by the expected dates, if at all, or that such proceeds will
be fully realized.
LEASING. Price Enterprises is in various stages of lease negotiations for
leasable space at 9 Real Properties that would generate approximately $1.8
million in annual rent. These potential leases are part of the ordinary course
of business of Price Enterprises, and there can be no assurance that such
potential leases will ultimately be consummated.
DEVELOPMENT ACTIVITIES
Price Enterprises is currently engaged in various development activities in
several states. Under the Transfer and Exchange Agreement, Price Enterprises has
agreed to assume the costs to complete these projects incurred from and after
June 1, 1994. The total cost to complete all of the existing development
projects is estimated to be approximately $43 million as of June 1, 1994 and $40
million as of August 28, 1994. Price Enterprises expects that its expenses
incurred in the completion of the development projects will be financed out of
proceeds from property sales or through advances under the Advance Agreement.
See "CERTAIN RELATED AGREEMENTS -- Advance Agreement." The table below sets
forth certain information with respect to Price Enterprises' existing
development projects:
<TABLE>
<CAPTION>
ESTIMATED COST
TO COMPLETE AS
OF 6/1/94
PROPERTY (IN THOUSANDS)
- ---------------------------------------------------------------------------- ----------------
<S> <C>
Pentagon City Property...................................................... $ 16,600
Bensalem, PA................................................................ 8,000
Sacramento, CA.............................................................. 3,000
Seekonk, MA................................................................. 2,800
Glen Burnie, MD............................................................. 2,800
Other Projects.............................................................. 9,800
-------
Total................................................................... $ 43,000
-------
-------
</TABLE>
There can be no assurance that such development projects will ultimately be
undertaken, and if completed, that the total cost to complete such potential
development projects will not exceed the foregoing estimate. It is also possible
that Price Enterprises may undertake additional development projects not
contemplated at this time.
RELATIONSHIP WITH THE PRICE REIT
Historically, the REIT has performed property management services for
certain of the properties which are now held by Price Enterprises. In fiscal
year 1994, PriceCostco paid $550,000 in fees to the REIT for such management
services. It is anticipated that Price Enterprises will continue such an
arrangement with the REIT, and may expand such services to include other
properties in the future.
It is anticipated that Price Enterprises will enter into a development
agreement with K&F Development Company for the development of four of the Real
Properties. Under such proposed agreement, K&F
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Development Company would receive development fees of 6% of the aggregate
construction costs expended with respect to such properties. The REIT owns all
of the outstanding preferred stock and is entitled to receive 90% of the cash
flow of K&F Development Company.
K&F Development Company and Price entered into a development agreement,
dated December 16, 1993, in connection with the development of the Pentagon City
Property (except for development of the Price Club located on such property). In
connection with the Transaction, Price has assigned such agreement to Price
Enterprises. Pursuant to this agreement (i) K&F Development Company receives a
development fee equal to 3% of the aggregate construction costs expended with
respect to such property; (ii) all operating cash flows generated from the
Pentagon City Property (other than the Price Club located on such property) are
allocated to Price Enterprises until the property generates a return on
"invested capital" of 9% ("invested capital" means all costs associated with the
development of the property, plus 4% of such costs, compounded annually); and
(iii) all operating cash flows in excess of the amount allocated to Price
Enterprises (as described in the previous clause) are allocated 75% to Price
Enterprises and 25% to K&F Development Company. In addition, upon any sale of
the Pentagon City Property by Price Enterprises in which the return on invested
capital exceeds 9%, K&F Development Company is entitled to receive 25% of the
net sale proceeds in excess of Price Enterprises' invested capital and its
return on such invested capital of 9%.
In addition, Price Enterprises has entered into an agreement with K&F
Development Company pursuant to which K&F will provide strategic and consulting
services for the next two years to Price Enterprises. K&F Development Company
will receive $500,000 annually as payment for such services. Moreover, K&F
Development Company may be a developer or joint venturer in other developments
undertaken by Price Enterprises in the future.
The REIT was originally organized by Price in 1991, and during the past
three years, a number of properties have been acquired by the REIT from Price.
There are no understandings or agreements to purchase or sell properties between
Price Enterprises and the REIT. There have, however, been preliminary
discussions between representatives of the REIT and Price Enterprises regarding
possible transactions between the companies in the future. Price Enterprises
intends to continue to explore and study these possible transactions, including
the possibility of entering into joint ventures or other synergistic
transactions with the REIT. Sol Price is the Chairman of the Board of the REIT
and has beneficial ownership through various family and charitable trusts of
approximately 9% of the Class B Common Stock of the REIT. Certain other
officers, directors and principal stockholders of the REIT may become directors,
officers or principal stockholders of Price Enterprises; however, any
transactions between Price Enterprises and the REIT will be subject to the
approval of an independent committee of the Board of Directors of Price
Enterprises, comprised of directors who are not officers, directors or
stockholders of the REIT.
MEXICO CLUBS
GENERAL. Mexico Clubs was formed to own (A) all shares of capital stock of
Primex owned, directly or indirectly, by PriceCostco, (B) all other noncurrent
assets of PriceCostco and its subsidiaries specifically related to the conduct
of business in Mexico (excluding the Joint Venture Agreement, any right, title
or interest in or to the names "Price Club," "Price Club Costco" or
"PriceCostco" and any computer software) and (C) certain other assets. The
interests in Mexico Clubs are owned 51% by Price Enterprises and 49% by Price.
Primex owns a 50% interest in Price Club Mexico, the joint venture corporation
which develops, owns and operates ten Price Club warehouse clubs in Mexico as of
October 31, 1994. The other 50% interest in Price Club Mexico is owned by
Comercial Mexicana, one of the leading retailers in Mexico. In addition to the
business conducted through Price Club Mexico, Mexico Clubs will offer to export
(including purchasing, storage, bulk splitting and transshipment) consumer goods
and other products to Mexico for sale by Price Club Mexico.
PRICE CLUB MEXICO. In June 1991, Price and Primex entered into the Joint
Venture Agreement to form a joint venture to develop and operate warehouse club
facilities in Mexico under the name Price Club. This joint venture, Price Club
Mexico, is currently owned 50% by Primex and 50% by Comercial Mexicana. Through
fiscal year 1994, Price Club Mexico has received $66 million in capital
contributions from PriceCostco (through Primex). Under the terms of the LLC
Agreement, Price Enterprises and PriceCostco are obligated to make capital
contributions to Mexico Clubs of up to an aggregate of $63 million (plus an
additional amount for purchase of certain merchandise inventory) allocated 51%
and 49%, respectively, in
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fiscal year 1995 to support expansion of operations in Mexico. A substantial
portion of the capital raised, or expected to be raised, will fund the
acquisition and construction of real estate for Price Club locations in Mexico.
In calendar year 1995, Price Club Mexico expects to open between five and
nine additional warehouse club facilities in Mexico. Warehouse club facilities
operated by Price Club Mexico are generally similar to warehouse clubs operated
by PriceCostco in the United States. Price Club Mexico is headquartered in
Mexico City and is managed in Mexico by an executive staff comprised of Mexican
nationals. Total sales by Price Club Mexico were $93 million and $255 million in
calendar years 1992 and 1993, respectively, and total sales for calendar year
1994 are expected to exceed total sales in such prior years. Price Club Mexico
was profitable in each of the calendar years 1992 and 1993, and is expected to
be profitable in calendar year 1994. While total sales by Price Club Mexico for
1995 are expected to increase, as compared to total sales for
calendar year 1994, and Price Club Mexico is budgeted to be profitable in
calendar year 1995, comparable sales trends for the last three months (based on
sales at warehouse locations open for more than one year) have declined. Price
Enterprises believes that such decline is due to, among other things,
cannibalization in Mexico City, increased levels of competition and a slowdown
in the Mexican economy. The foregoing is not intended as a projection by Price
Enterprises or PriceCostco of actual results of operations of Price Club Mexico
for calendar year 1994 or 1995. The actual results of operations of Price Club
Mexico for such period may be significantly more favorable or less favorable
than as set forth above and should not be relied upon or regarded as a
representation as to actual results of operations.
DISCUSSIONS CONCERNING POTENTIAL SALE OF JOINT VENTURE INTEREST. In late
September 1994, representatives of Comercial Mexicana commenced discussions with
Robert Price and Jim Sinegal regarding the proposed transfer of Primex to Mexico
Clubs as part of the Transaction. The representatives of Comercial Mexicana
indicated that Comercial Mexicana was interested in a continuing relationship
with PriceCostco, rather than embarking on a new relationship with Price
Enterprises.
Discussions continued among representatives of Comercial Mexicana, Price
Enterprises and PriceCostco through mid-November 1994. Such discussions centered
on a possible transaction pursuant to which Comercial Mexicana or a third party
would purchase the 50% interest in Price Club Mexico then owned by PriceCostco
(and currently owned by Mexico Clubs) and PriceCostco and Price Club Mexico
would enter into certain agreements with respect to the use of the "Price Club"
name and certain computer software by Price Club Mexico and with respect to the
sourcing of certain merchandise to Price Club Mexico by PriceCostco. Based on
the discussions to date, Price Enterprises and PriceCostco believe that if any
such purchase occurs, it would likely involve payment for the 50% interest in
Price Club Mexico by a combination of cash, promissory notes or stock or other
securities. However, as of the date of this Offering Circular/ Prospectus, no
agreement, preliminary or otherwise, has been reached with Comercial Mexicana
regarding such proposed purchase. ALTHOUGH PRICE ENTERPRISES AND PRICECOSTCO
CURRENTLY ANTICIPATE THAT DISCUSSIONS REGARDING SUCH PROPOSED PURCHASE WILL
CONTINUE, NO ASSURANCES CAN BE GIVEN THAT ANY AGREEMENT WILL BE REACHED
REGARDING SUCH A PURCHASE BY COMERCIAL MEXICANA OR SUCH THIRD PARTY OR, IF SUCH
AN AGREEMENT IS REACHED, THE TERMS OF ANY SUCH PURCHASE.
MEXICO CLUBS' BUYING ACTIVITIES. From the United States, Mexico Clubs will
offer to provide merchandising support to Price Club Mexico through its San
Diego-based buying group, which purchases products and arranges for the storage,
bulksplitting and transshipment of goods. Price may also provide buying services
to Price Club Mexico pursuant to the Joint Venture Agreement. In addition,
Mexico Clubs operates Los Angeles, California and Laredo, Texas distribution and
storage centers for goods destined for Mexico.
THE JOINT VENTURE AGREEMENT. The Joint Venture Agreement provides that
Price Club Mexico will be managed by a six-member board of directors, three of
whom are designated by Comercial Mexicana and three of whom are designated by
Primex. Price and Comercial Mexicana have agreed to jointly and cooperatively
train new employees of Price Club Mexico (i) in the conduct of Price Club
warehouse club format operations and (ii) in the discharge of Price Club
Mexico's administrative, financial, marketing and related needs. Price Club
Mexico will reimburse Price and Comercial Mexicana for the expenses associated
with such training.
Pursuant to the Joint Venture Agreement, without the prior written consent
of Comercial Mexicana, neither Price nor any of its affiliates may (i) manage,
operate, license or franchise any business, other than Price Club Mexico,
conducting Price Club warehouse club format operations in Mexico or which is
otherwise
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directly or indirectly competitive with Price Club Mexico, Comercial Mexicana
and/or its affiliates in Mexico or (ii) possess any ownership interest in any
legal entity, other than Price Club Mexico, which is dedicated to the operation
and/or management of any such business in Mexico.
Similarly, without the prior written consent of Price, neither Comercial
Mexicana nor any of its affiliates may (i) manage, operate, license or franchise
any business, other than Price Club Mexico, conducting Price Club warehouse club
format operations in the U.S. or elsewhere or which is otherwise directly
competitive with Price and/or its affiliates in the U.S. or elsewhere, or with
Price Club Mexico in Mexico where such competition directly relates to Price
Club warehouse club format operations or (ii) possess any ownership interest in
any legal entity, other than Price Club Mexico, which is dedicated to the
operation and/or management of any such business. Comercial Mexicana and its
affiliates are not prohibited, however, from managing, operating, licensing,
franchising or owning any other business in Mexico which may be competitive with
Price, so long as Comercial Mexicana provides Price with notice of such
intention and allows Price a right of first refusal to participate in such
business.
The Joint Venture Agreement provides that if the board of directors of Price
Club Mexico becomes deadlocked over, or because of a lack of a quorum or a
required majority is unable to act upon, any matter, such matter shall be
referred to Comercial Mexicana and Primex for a period of mutual consultation
not to exceed 30 days (unless an extension is mutually agreed to), after which,
in the absence of agreement, either Primex or Comercial Mexicana may for a
period of 15 days thereafter offer to purchase all shares of Price Club Mexico
held by the other. If no such agreement to purchase is reached within such
period (or any extension thereof), then the Joint Venture Agreement shall be
terminated. Such termination shall be accomplished by each of Primex and
Comercial Mexicana submitting sealed, U.S. Dollar denominated written bids for
the purchase of all securities of Price Club Mexico held by the other. Each
sealed bid shall be placed in an identical envelope, and one envelope shall be
selected at random by the then chairman of the board of Price Club Mexico. The
party whose bid is not drawn will have the option either (i) to purchase the
securities of Price Club Mexico held by the party whose bid is drawn at the bid
price or (ii) to sell its securities of Price Club Mexico to the other party at
the bid price. The purchaser may elect to pay cash in U.S. Dollars at the
closing or to receive the following purchase terms from the seller: 20 percent
cash in U.S. Dollars at closing with the balance in four annual U.S. Dollar
installments of principal plus interest at a rate equal to 175 basis points
above the then equivalent four-year U.S. treasury note rate. The closing shall
occur 120 days after the date of delivery of the first sealed bid, as described
above.
In addition, for a period of 90 days commencing on June 21, 1995, either
Primex or Comercial Mexicana may give written notice to the other that it elects
to terminate the Joint Venture Agreement, for any reason and without cause,
effective as of the ninetieth day following June 21, 1995. Upon any such
termination, Price Club Mexico shall be dissolved and liquidated.
In addition, the Joint Venture Agreement provides that each of Price, Primex
and Comercial Mexicana will not disclose certain confidential information
concerning the parties' businesses and operations unless prior written consent
to such disclosure has been obtained from each other party.
While Price and Primex continue to be parties to the Joint Venture Agreement
and subject to its terms, Mexico Clubs will not become a party to the Joint
Venture Agreement and will not be subject to its terms (except by virtue of its
ownership of Primex).
THE LIMITED LIABILITY COMPANY AGREEMENT.
Pursuant to the LLC Agreement, Price and Price Enterprises have agreed to
certain terms governing their rights and obligations with respect to their
interests in Mexico Clubs.
The LLC Agreement also provides that, from time to time throughout fiscal
year 1995, Mexico Clubs may require Price and Price Enterprises to contribute
cash to Mexico Clubs (as reasonably necessary for the conduct of Mexico Clubs'
business and not in excess of Mexico Clubs capital requirements for 90 days
following the date of the LLC Agreement consistent with the budget of Mexico
Clubs for the fiscal year 1995, as approved by the managers of Mexico Clubs) pro
rata with such capital contribution allocated 51% to Price Enterprises and 49%
to Price. However, Price Enterprises and Price are only obligated to contribute
in cash to the capital of Mexico Clubs throughout fiscal year 1995 up to an
aggregate of the sum of $63 million plus an amount equal to the inventory
purchased by Mexico Clubs as of August 28, 1994 (which is currently estimated to
be $4 million). The LLC Agreement also provides for optional capital
contributions by each of its members (a "Member") after fiscal year 1995, and if
Members elect not to make such capital contributions, their percentage interest
in Mexico Clubs will be reduced proportionally.
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Pursuant to the LLC Agreement, the management of Mexico Clubs' business is
vested in a group of managers elected by the Members. The managers may delegate
any or all of the day-to-day management and conduct of Mexico Clubs' business to
the officers of Mexico Clubs.
The LLC Agreement prohibits any sale, transfer, assignment, pledge,
hypothecation, exchange or other disposition by a Member of all or any portion
of its interest in Mexico Clubs, except with the prior written consent of the
other Members.
The LLC Agreement provides that the term of Mexico Clubs began on the date
the Certificate of Formation was filed with the Delaware Secretary of State and
will continue until that same date in the year 1999, unless terminated sooner in
accordance with the provisions of the LLC Agreement, by unanimous agreement of
the Members or pursuant to the Delaware Limited Liability Company Act.
THE OPERATING AGREEMENT WITH PRICECOSTCO. Pursuant to the Operating
Agreement dated as of August 28, 1994 by and among Mexico Clubs, Price
Enterprises, Price and PriceCostco (the "Mexico Operating Agreement"), the
parties have agreed to certain terms governing their future business
relationship, and PriceCostco has agreed to provide certain support services to
Mexico Clubs.
The Mexico Operating Agreement provides that, for a period of five years
from the Transfer Closing Date (the "Five-Year Period"), neither PriceCostco nor
its Downstream Affiliates (as hereinafter defined) will directly or indirectly
(i) conduct a Club Business in Mexico, (ii) own an interest in another company
that conducts a Club Business in any such area (provided that neither
PriceCostco nor its affiliates shall be prohibited from purchasing and owning
securities of any such company as a passive investment so long as such
securities in the aggregate represent no more than ten percent of the equity
securities of such company), (iii) knowingly sell to or provide services to a
Club Business in Mexico (except for the Club Business conducted directly or
indirectly by Mexico Clubs or its Downstream Affiliates), (iv) use or license
the use of the tradename and trademark "Costco" in Mexico or (v) otherwise
compete with the activities of Mexico Clubs. The restrictions set forth in the
preceeding sentence will, however, terminate and have no further force and
effect upon any sale of all of the shares of capital stock of Primex, or all of
the shares of capital stock of Price Club Mexico, owned, directly or indirectly,
by Mexico Clubs to Comercial Mexicana or any of its affiliates.
The Mexico Operating Agreement also provides that, for the Five-Year Period,
none of Price Enterprises, its Downstream Affiliates, Mexico Clubs or any of its
Downstream Affiliates (except, with respect to Price Enterprises and Price
Global, as set forth in the Price Global Operating Agreement (as hereinafter
defined and described below)) will, directly or indirectly, (i) conduct a Club
Business in any geographical area other than Mexico, (ii) own an interest in
another company that conducts a Club Business in any such area (provided that
neither Price Enterprises, Mexico Clubs or any of their Downstream Affiliates
shall be prohibited from purchasing and owning securities of any such company as
a passive investment so long as such securities in the aggregate represent no
more than ten percent of the equity securities of such company) or (iii)
knowingly sell to or provide services to a Club Business in any such area. The
Mexico Operating Agreement also provides that, for the Five-Year Period, in
Mexico, Price Enterprises, its Downstream Affiliates, Mexico Clubs and its
Downstream Affiliates and Price Club Mexico shall conduct a Club Business only
through Mexico Clubs or Price Club Mexico. PriceCostco may acquire another
company that conducts a Club Business in Mexico, provided that in such acquired
company's last complete fiscal year prior to such acquisition, the acquired
company derived no more than 20% of its annual revenues from such Club Business
in Mexico. Pursuant to the Mexico Operating Agreement, PriceCostco agreed to
hold separate such Club Business so acquired and to divest of such Club Business
as soon as practicable following the consummation of such acquisition. The
Mexico Operating Agreement further provides that prior to divesting such Club
Business to any bona fide, arm's length purchaser, PriceCostco must first offer
the opportunity to purchase such Club Business to Mexico Clubs. In addition, the
Mexico Operating Agreement provides that, except as expressly permitted by the
Transfer and Exchange Agreement or certain other agreements, for the Five-Year
Period, the parties to the Mexico Operating Agreement and their Downstream
Affiliates will not engage in any business with any Club Business or with
certain specified companies.
During the Five-Year Period or until such earlier date (if any) when Price
Enterprises sells all of its interest in Mexico Clubs to any party unrelated to
it, PriceCostco has agreed to provide to Mexico Clubs, at Mexico Clubs' request
solely for Mexico Clubs' use in Mexico, with certain support services, including
the following: support from PriceCostco's buying office to assist Mexico Clubs
in sourcing and acquiring merchandise and services for itself and its affiliates
and joint ventures in Mexico and reasonable support from PriceCostco's buying
offices for placement of orders for merchandise; access to PriceCostco's vendors
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for placing orders for merchandise; certain data with respect to PriceCostco's
inventory and costs; assistance in establishing management information systems;
and filling of certain orders for private label merchandise sold by PriceCostco.
PriceCostco has also agreed to provide a portion of the warehouse space at its
City of Industry, California warehouse at cost and to provide to Mexico Clubs
splitting and transshipment of bulk orders for delivery to Mexico. In addition,
PriceCostco has agreed to provide Mexico Clubs with access to two PriceCostco
warehouse club locations in Southern California for training purposes.
During the Five-Year Period, PriceCostco and its Downstream Affiliates have
agreed to use their good faith efforts to maximize their importation of products
produced in Mexico. To the extent PriceCostco and its Downstream Affiliates
receive credits for such imports from Mexico, they are obligated to transfer
such credits to Mexico Clubs or its designee.
For a period of two years after the termination of the Mexico Operating
Agreement, Mexico Clubs, Price Enterprises, Price and PriceCostco and each of
their respective Downstream Affiliates will maintain in strict confidence all
information obtained pursuant to the Mexico Operating Agreement or otherwise,
relating to the business, operations, properties, assets, products, condition
(financial or otherwise), liabilities, employee relations, customers, suppliers,
prospects, technology, or trade secrets of the other party; except to the extent
such information (i) is in the public domain through no act or omission of the
disclosing party, (ii) is required to be disclosed by law or (iii) is
independently learned by the disclosing party. With respect to information
regarding any such party's membership and membership database, the obligation to
hold in confidence such information (as set forth in the previous sentence)
shall continue until five years from the termination of the Mexico Operating
Agreement.
The Mexico Operating Agreement further provides for reciprocal shopping
privileges among the members of PriceCostco and Mexico Clubs and for the
purchase by Mexico Clubs of certain inventory formerly held by PriceCostco.
As used in the Mexico Operating Agreement, each of the other Operating
Agreements and each of the Stockholders Agreements (i) an "affiliate" of any
person means any entity which is owned, directly or indirectly, thirty percent
or more by the person, which holds an interest, directly or indirectly, of
thirty percent or more in the person, or which has a common owner with the
person which owner has, directly or indirectly, thirty percent or more of both
the person and the affiliate; and (ii) a "Downstream Affiliate" of any person
means any entity which is controlled directly or indirectly by the person.
The Mexico Clubs Operating Agreement (other than the provisions relating to
confidentiality) will terminate and have no further force and effect upon any
sale of all of the shares of Primex, or all of the shares of capital stock of
Price Club Mexico, owned, directly or indirectly, by Mexico Clubs to Comercial
Mexicana or any of its affiliates.
STOCKHOLDERS AGREEMENT. If a sale by Mexico Clubs of all of the shares of
capital stock of Primex, or all of the shares of capital stock of Price Club
Mexico owned directly or indirectly by Mexico Clubs to Comercial Mexicana has
not been consummated on or before October 1, 1995, Price Enterprises,
PriceCostco, Price and Mexico Clubs will enter into a stockholders agreement
(the "Mexico Stockholders Agreement") with the following material terms.
The Mexico Stockholders Agreement will provide that, from time to time after
fiscal year 1995, the Board of Directors of Mexico Clubs may request additional
funds from the stockholders, either in the form of advances or additional
capital contributions. Both Price and Price Enterprises, as the stockholders of
Mexico Clubs, will be entitled to participate in an advance or additional
capital contribution, pro rata in proportion to their respective percentage
ownership interest in Mexico Clubs. Advances will be made in the form of loans
bearing interest at three hundred basis points over the 5-Year Treasury Bill
rate at the time of the advance, and will include such other terms as specified
by the Board of Directors of Mexico Clubs. With respect to additional capital
contributions, if a stockholder declines to make all or part of its respective
additional capital contribution, the Board of Directors of Mexico Clubs will
issue to the fully participating stockholders, pro rata in proportion to their
additional capital contribution, additional shares of common stock of Mexico
Clubs, such that each non-participating stockholders' percentage ownership
interest in Mexico Clubs will be decreased proportionally.
The Mexico Stockholders Agreement will set forth certain restrictions if
either Price Enterprises or Price offers to transfer, sell, assign or otherwise
dispose of any shares of common stock of Mexico Clubs, and further provides
stockholders with certain preemptive rights. In addition, at any one time after
ten years from the Closing Date, PriceCostco may demand that Mexico Clubs
register under the Securities Act any of
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PriceCostco's shares of common stock of Mexico Clubs with a value in excess $10
million. In lieu of registering such shares of stock, Mexico Clubs may elect to
purchase such shares at their fair market value. Moreover, in the event of
future public offerings by Mexico Clubs of its common stock or securities
convertible or exchangeable into such common stock, Price and Price Enterprises
will have the right to participate in such offering on the same terms and
conditions as Mexico Clubs, subject to certain conditions. No party to the
Mexico Stockholders Agreement may transfer any of its shares of common stock of
Mexico Clubs or any other ownership interest in Mexico Clubs to a Club Business
or to certain specified companies, nor may any party transfer such shares or
other ownership interest to any person without such person having become a party
to the Mexico Stockholders Agreement.
The Mexico Stockholders Agreement will contain confidentiality provisions
that are substantially similar to those contained in the Mexico Operating
Agreement. The parties will also be required to comply with the provisions of
the Joint Venture Agreement.
The Mexico Stockholders Agreement will further provide that for as long as
Price owns at least 20% of Mexico Clubs' outstanding common stock, Price is
entitled to appoint one director to the three member Board of Directors of
Mexico Clubs. In addition, the three directors of Mexico Clubs will also serve
as the directors of Mexico Clubs' wholly owned subsidiary, Primex.
COMPETITION. Price Club Mexico's primary competitor with respect to
warehouse club facilities is Sam's Club (an affiliate of Wal-Mart Stores, Inc.).
Other major retail competitors in Mexico include Cifra, Gigante, Wal-Mart
Stores, Inc., Kmart Corporation and Carrefour S.A. In addition, other major
United States retailers have announced plans to enter the Mexico market. Mexico
Clubs believes that competitive pressures in the Mexico retail market will
continue to intensify over time.
PRICE QUEST
GENERAL. Price Quest was formed to acquire (A) all of the noncurrent assets
of PriceCostco or any of its subsidiaries specifically related to the Quest
Business, (B) all right, title and interest, if any, of PriceCostco or any of
its subsidiaries to, or, in certain cases, a long-term license to use, the names
"Price Club Quest" and "Quest" and (C) certain other assets. Price Quest is
owned 51% by Price Enterprises and 49% by Price.
QUEST BUSINESS. The Quest Business was commenced by Price in 1992. The
Quest Business utilizes an interactive electronic shopping kiosk to sell goods
and services in certain warehouse clubs to PriceCostco members. A Quest kiosk
has a computer shopping terminal upon which members can browse and purchase
products through an electronic catalogue of goods and services. Typically,
sample items for popular products are on display in the area surrounding the
Quest Business kiosk. Members select products and complete the ordering process
on the computer terminal at the Quest Business kiosk. Members pay for their
merchandise either in the Quest merchandise department or at the normal
check-out registers at that particular PriceCostco warehouse club facility. The
merchandise is then promptly shipped to the member's home or other designated
address.
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Price Quest now has kiosk centers installed and operating at 38 PriceCostco
warehouse clubs in nine states. In addition to the kiosks at the PriceCostco
warehouse clubs, Price Quest intends to develop Quest Business centers in venues
other than PriceCostco warehouse clubs.
Price Quest presently offers over 9,000 different products on the Quest
Business electronic shopping catalogue. Over time, Price Quest is continuing to
add many products, as well as various services and information for sale to its
customers.
Price Quest also has acquired Price Club Travel, which offers discount
airline tickets and travel packages to PriceCostco members. In addition, Price
Quest's assets also include Price Club Realty, a real estate brokerage business
for PriceCostco members, and the Price Club automobile referral/advertising
program, which publishes advertisements for automobile dealers who provide
discount purchasing programs to PriceCostco members in the vicinity of certain
PriceCostco warehouse clubs.
The Quest Business has achieved net sales of $.3 million, $3.0 million and
$19.9 million for fiscal years 1992, 1993, 1994, respectively. Although net
sales have been steadily increasing, the Quest Business has incurred operating
losses from its commencement to present.
OPERATING AGREEMENT WITH PRICECOSTCO. Pursuant to the Operating Agreement
dated as of August 28, 1994 by and among Price Quest, Price Enterprises, Price
and PriceCostco (the "Quest Operating Agreement"), the parties have agreed to
certain terms governing their future business relationship and PriceCostco has
agreed to provide certain support services to Price Quest.
The Quest Operating Agreement provides that, during the Five-Year Period,
neither PriceCostco nor its Downstream Affiliates will (i) directly or
indirectly conduct a Quest Business, (ii) own any interest in another company
that conducts a Quest Business other than Price Quest (provided that neither
PriceCostco nor its affiliates shall be prohibited from purchasing and owning
securities of any such company as a passive investment so long as such
securities in the aggregate represent no more than ten percent of the equity
securities of such company), or (iii) knowingly sell to or provide services to a
Quest Business (except for the Quest Business conducted by Price Quest).
PriceCostco may acquire another company that conducts a business substantially
similar to, and that competes with, the Quest Business (a "Similar Quest
Business"), provided that in such acquired company's last complete fiscal year
prior to such acquisition, the acquired company derived no more than 20% of its
annual revenues from the Similar Quest Business. Pursuant to the Quest Operating
Agreement, PriceCostco agreed to hold separate the Similar Quest Business so
acquired and to divest of such Similar Quest Business as soon as practicable
following the consummation of such acquisition. The Quest Operating Agreement
further provides that prior to divesting such Similar Quest Business to any bona
fide, arm's length purchaser, PriceCostco must first offer the opportunity to
purchase such Similar Quest Business to Price Quest. Moreover, except as
otherwise expressly permitted in the Transfer and Exchange Agreement or certain
other agreements, for the Five-Year Period, Price Quest, Price Enterprises,
PriceCostco and each of their Downstream Affiliates will not engage in any
business with certain specified companies.
The Quest Operating Agreement also provides that, for the Five-Year Period,
none of Price Enterprises, its Downstream Affiliates, Price Quest, or any of its
Downstream Affiliates will operate or conduct a Quest Business in any Club
Business (other than a Club Business operated by PriceCostco, or one of the
Subsidiary Corporations or its licensees) or in a location that is owned or
operated by certain specified companies.
For the Five-Year Period, PriceCostco has agreed to provide to Price Quest
at Price Quest's request solely for Price Quest's use in a Quest Business access
to PriceCostco's membership databases, and space for a Quest Business kiosk in
the 38 PriceCostco warehouse clubs where the Quest Business is currently
operating (provided that the Quest Business at such locations meets certain
ongoing minimum sales volumes). In addition, during the Five-Year Period,
PriceCostco has agreed to allow Price Quest to expand into at least ten
additional PriceCostco warehouse club locations annually (selected by
PriceCostco with Price Quest's consent). The Quest Operating Agreement also
provides that Price Quest shall be entitled to existing space in all PriceCostco
warehouse clubs which presently contain airline ticketing equipment used in
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connection with Price Club Travel, or which is occupied by Price Club Realty and
the Price Club automobile advertising/referral program. Price Quest is also
entitled to the continued use of a portion of Price's warehouse in the City of
Industry, California at PriceCostco's cost.
For the Five-Year Period, PriceCostco has agreed to provide Price Quest with
certain support services, including the following: support from PriceCostco's
buying offices to assist Price Quest in sourcing and acquiring merchandise and
services for itself and its affiliates and joint ventures and reasonable support
from PriceCostco's buying offices for placement of orders for merchandise;
access to PriceCostco's vendors for placing orders for merchandise; assistance
in establishing management information systems; certain historical data with
respect to PriceCostco's inventory and costs; filling of orders for private
label merchandise sold by PriceCostco; access to PriceCostco's management
information system's communications network for operation of kiosks in
PriceCostco warehouse club locations; and, under certain circumstances, use of
home delivery software on PriceCostco's management information system.
PriceCostco has also agreed to provide Price Quest with certain personnel
and staffing services during the Five-Year Period in connection with the
operation of the Quest Business. These services include assistance in handling
customer courtesies and cashiering services; assignment of personnel to staff
the Quest Business kiosks in accordance with Price Quest staffing requirements;
and other warehouse club support services including receiving, inventory
storage, returns, security and administrative assistance. PriceCostco is
obligated to reimburse Price Quest for inventory shrinkage in excess of
historical shrinkage rates at the PriceCostco warehouse clubs.
For the Five-Year Period, Price Quest has agreed that the Quest Business
kiosks, products, and services will be at least equal in quality and value to
the standards of PriceCostco, and that personnel working in the Quest Business
kiosk area adhere to PriceCostco personnel policies. Further, for the Five-Year
Period, Price Quest has agreed to provide PriceCostco with access to Price
Quest's customer database; reasonable support from Price Quest and its buying
offices for placement of orders for merchandise and services on behalf of
PriceCostco; and filling of orders from PriceCostco for any private label
merchandise sold by Price Quest.
During the Five-Year Period, Price Quest will pay PriceCostco two percent of
net sales at PriceCostco warehouse club locations of all Quest Business goods
and services (excluding Price Club Travel, Price Club Realty and the Price Club
automobile advertising/referral program), and one percent of net sales of Quest
Business goods and services which are transacted at the central register
checkout at PriceCostco warehouse clubs. During each of the first two years of
the Five-Year Period, payments by Price Quest will be a minimum of $1.5 million
annually in satisfaction of these percentage payment obligations. In addition,
during the Five-Year Period, Price Quest is obligated to pay to PriceCostco 55%
of all revenues from the PriceCostco Club Business locations' automobile
advertising/referral programs, except that during the first two years of the
Five-Year Period, PriceCostco shall receive the greater of such 55%, or 100% of
all such revenues up to $3 million. During the Five-Year Period, PriceCostco is
also entitled to 10% of the commissions collected by Price Club Travel on
airline ticket sales and one percent of net sales of vacation packages. During
the Five-Year Period, Price Quest will pay PriceCostco two percent of net
revenues earned by Price Club Realty at the PriceCostco warehouse club
locations.
For a period of two years after the termination of the Quest Operating
Agreement, Price Quest, Price Enterprises, Price and PriceCostco and each of
their respective Downstream Affiliates will maintain in strict confidence all
information obtained pursuant to the Quest Operating Agreement or otherwise,
relating to the business, operations, properties, assets, products, condition
(financial or otherwise), liabilities, employee relations, customers, suppliers,
prospects, technology, or trade secrets of the other party; except to the extent
such information (i) is in the public domain through no act or omission of the
disclosing party, (ii) is required to be disclosed by law, or (iii) is
independently learned by the disclosing party. With respect to the information
regarding any such party's membership and membership database, the obligation to
hold in confidence such information (as set forth in the previous sentence)
shall continue until five years from the termination of the Quest Operating
Agreement.
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Price Quest also must make advertising purchases in PriceCostco's customer
publications and membership renewal mailings of at least $3 million (at the
publications' most favorable rates) in each of the first two fiscal years of the
Five-Year Period. Price Quest also will purchase certain inventory from
PriceCostco with such purchases being financed by a pro rata capital
contribution of Price Enterprises and PriceCostco.
STOCKHOLDERS AGREEMENT. Pursuant to the Stockholders Agreement dated as of
August 28, 1994 by and among Price Enterprises, PriceCostco, Price and Price
Quest (the "Price Quest Stockholders Agreement"), Price Enterprises and
PriceCostco have agreed to certain specific rights and obligations as
stockholders of Price Quest. The Price Quest Stockholders Agreement provides
that, from time to time during fiscal year 1995, the Board of Directors of Price
Quest may require Price Enterprises and Price to make mandatory capital
contributions to the corporation, pro rata allocated 51% to Price Enterprises
and 49% to Price, up to an aggregate of the sum of $15 million plus the purchase
price of certain inventory (approximately $4 million) purchased by Price Quest
from PriceCostco at the Transfer Closing Date. In the event any stockholder
defaults in its obligation to make such a capital contribution, the Board of
Directors of Price Quest may treat the default in one or more of the following
ways: (i) enforce the obligation by arbitration, including interest compounded
annually, at the lesser of (a) three hundred basis points over the prime rate
published by major national banks or (b) the highest rate permitted by
applicable law (the "Default Rate"); (ii) treat the defaulted amount as a loan
to the defaulting stockholder by Price Quest, which shall bear interest at the
Default Rate; or (iii) retain dividends or other distributions otherwise payable
to the defaulting stockholder, such funds to be applied to the repayment of the
loan.
The Price Quest Stockholders Agreement provides that the Board of Directors
of Price Quest may request additional capital infusions from stockholders after
fiscal year 1995, either in the form of advances or additional capital
contributions. Both Price and Price Enterprises, as the stockholders of Price
Quest, are entitled to participate in an advance or additional capital
contribution, pro rata in proportion to their respective percentage ownership
interest in Price Quest. Advances will be made in the form of loans bearing
interest at three hundred basis points over the 5-Year Treasury Bill rate at the
time of the advance, and will include such other terms as specified by the Board
of Directors of Price Quest. With respect to additional capital contributions,
if a stockholder declines to make all or part of its respective additional
capital contribution, the Board of Directors of Price Quest will issue to the
fully participating stockholders, pro rata in proportion to their additional
capital contribution, additional shares of common stock of Price Quest, such
that each non-participating stockholders' percentage ownership interest in Price
Quest will be decreased proportionally.
The Price Quest Stockholders Agreement sets forth certain restrictions if
either Price Enterprises or Price offers to transfer, sell, assign or otherwise
dispose of any shares of common stock of Price Quest, and further provides
stockholders with certain preemptive rights. In addition, at any one time after
ten years from the Closing Date, PriceCostco may demand that Price Quest
register under the Securities Act any of Price's shares of common stock of Price
Quest with a value in excess $10 million. In lieu of registering such shares of
stock, Price Quest may elect to purchase such shares at their fair market value.
Moreover, in the event of future public offerings by Price Quest of its common
stock or securities convertible or exchangeable into such common stock, Price
and Price Enterprises will each have the right to participate in such offering
on the same terms and conditions as Price Quest, subject to certain conditions.
No party to the Price Quest Stockholders Agreement may transfer any of its
shares of common stock of Price Quest or any other ownership interest in Price
Quest to a Club Business or to certain specified companies, nor may any party
transfer such shares or other ownership interest to any person without such
person having become a party to the Price Quest Stockholders Agreement.
The Price Quest Stockholders Agreement contains confidentiality provisions
that are substantially similar to those contained in the Price Quest Operating
Agreement.
The Price Quest Stockholders Agreement further provides that for as long as
Price owns at least 20% of Price Quest's outstanding common stock, Price is
entitled to appoint one director to the three member Board of Directors of Price
Quest. Price's initial appointee is James D. Sinegal.
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COMPETITION. Price Quest competes directly or indirectly with most
merchandising businesses, other discount retailers (including PriceCostco
warehouse clubs), catalogue and other direct marketing sales, televised home
shopping, travel agency services, traditional residential real estate brokers,
other affinity buying services and similar interactive kiosks that are or may be
operated by other retailers. Price Enterprises believes that, as further
advances in computer technology are made and as more interactive computer-based
services become available to consumers in the home and retail environments,
competitive pressures on Price Quest will intensify.
PRICE GLOBAL
GENERAL. Price Global was formed to acquire (A) the right to develop Club
Businesses in the Specified Geographical Areas (other than Mexico), (B) the CMI
Stock, (C) all right, title and interest in and to, or in certain cases, a
long-term license to use, the names "Price Club," "Price Club Costco" and "Price
Costco" in each of the Specified Geographical Areas (other than Mexico) and (D)
all other noncurrent assets of PriceCostco and its subsidiaries (other than
those included in CMI) specifically related to the conduct of business in the
Specified Geographical Areas. Price Global is owned 51% by Price Enterprises and
49% by Price.
PRICE GLOBAL BUSINESS. Price Global's business is to develop Club
Businesses in the Specified Geographical Areas (other than Mexico). Price Global
also owns all of the outstanding capital stock of CMI, an export and import
business which does business in the Specified Geographical Areas and with
certain specified customers in Hong Kong, Japan and the Phillipines. CMI's net
sales totalled $8.0 million, $25.7 million and $33.6 million for the fiscal
years 1992, 1993 and 1994, respectively. In fiscal year 1994, substantially all
of CMI's net sales related to exports of United States products. Of such
amounts, sales to CMI's two principal customers, GrandMart Limited, a Hong
Kong-based retailer and wholesaler, and Comercial Mexicana, represented 55% and
35% of CMI's net sales, respectively.
OPERATING AGREEMENT WITH PRICECOSTCO. Pursuant to the Operating Agreement
dated as of August 28, 1994 by and among Price Global, Price Enterprises, Price
and PriceCostco (the "Price Global Operating Agreement"), the parties have
agreed to certain provisions governing their future business relationship, and
PriceCostco has agreed to provide certain ongoing support services to Price
Global.
The Price Global Operating Agreement provides that during the Five-Year
Period neither PriceCostco nor its Downstream Affiliates will (i) directly or
indirectly conduct a Club Business in the Specified Geographical Areas other
than through Price Global and Mexico Clubs; (ii) own an interest in another
company that conducts a Club Business in the Specified Geographical Areas
(provided that neither PriceCostco nor its affiliates shall be prohibited from
purchasing and owning securities of any such company as a passive investment so
long as such securities in the aggregate represent no more than ten percent of
the equity securities of such company); (iii) knowingly sell to or provide
services to a Club Business in the Specified Geographical Areas; or (iv)
transfer to any person (other than Price Enterprises or the relevant Subsidiary
Corporation) the right to conduct a Club Business in the Specified Geographical
Areas, including, without limitation, any right to use the name "Costco" in the
Specified Geographical Areas. PriceCostco may acquire another company that
conducts a Club Business in the Specified Geographic Areas (other than Mexico),
provided that in such acquired company's last complete fiscal year prior to such
acquisition, the acquired company derived no more than 20% of its annual
revenues from such Club Business in the Specified Geographic Area (other than
Mexico). Pursuant to the Price Global Operating Agreement, PriceCostco agreed to
hold separate such Club Business so acquired and to divest of such Club Business
as soon as practicable following the consummation of such acquisition. The Price
Global Operating Agreement further provides that prior to divesting such Club
Business to any bona fide, arm's length purchaser, PriceCostco must first offer
the opportunity to purchase such Club Business to Price Global. Moreover, except
as otherwise expressly permitted in the Transfer and Exchange Agreement or the
Additional Agreements, for the Five-Year Period Price Global, Price Enterprises,
PriceCostco and each of their Downstream Affiliates will not engage in any
business with certain specified companies.
The Price Global Operating Agreement also provides that, for the Five-Year
Period, none of Price Enterprises, its Downstream Affiliates, Price Global or
any of its Downstream Affiliates will (i) directly or
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indirectly conduct a Club Business in any geographical area other than the
Specified Geographical Areas; (ii) own any interest in another company that
conducts a Club Business in the Specified Geographical Areas (provided that none
of Price Enterprises, Price Global or any of their Downstream Affiliates shall
be prohibited from purchasing and owning securities of any such company as a
passive investment so long as such securities in the aggregate represent no more
than ten percent of the equity securities of such company); or (iii) knowingly
sell to or provide services to a Club Business in any of the Specified
Geographical Areas. For the Five Year Period, in the Specified Geographical
Areas, Price Enterprises, its Downstream Affiliates, Price Global and its
Downstream Affiliates may only conduct a Club Business through Price Global.
During the Five-Year Period or until such earlier date (if any) when Price
Enterprises sells all of its shares of stock in Price Global to any party
unrelated to it, PriceCostco has agreed to provide Price Global at Price
Global's request solely for Price Global's and CMI's use in the Specified
Geographical Areas and for CMI's use with certain specified companies with
certain support services, including the following: support from PriceCostco's
buying office to assist Price Global in sourcing and acquiring merchandise and
services for itself and its affiliates and joint ventures and reasonable support
from PriceCostco's buying offices for placement of orders for merchandise;
access to PriceCostco's vendors for placing orders for merchandise; assistance
in establishing management information systems; certain historical data with
respect to PriceCostco's inventory and costs; and filling of certain orders for
private label merchandise sold by PriceCostco. PriceCostco also has agreed to
continue to provide a portion of the warehouse space at Price's City of
Industry, California warehouse at cost, and to provide splitting and
transshipment of bulk orders for delivery abroad. In addition, PriceCostco has
agreed to provide employees of Price Global, and its affiliates, joint ventures
and licensees, with training in accounting and management information systems
and with access to two PriceCostco warehouse club locations in Southern
California for training in operational and warehouse management practices.
For the Five-Year Period, PriceCostco has granted Price Global the
non-exclusive, royalty-free and non-transferrable right to use certain software
owned by PriceCostco for Price Global's use in the Specified Geographical Areas.
PriceCostco has agreed to provide Price Global with ordinary fixes, upgrades and
improvements to such software. PriceCostco has also agreed to make reasonable
efforts to provide technical support for such software at the reasonable request
of Price Global. Price Global is entitled to use information concerning any such
software prior to the end of the Five-Year Period in connection with the
development, testing and use of new software, provided that such new software
does not infringe on any of PriceCostco's patents or copyrights in the software
provided to Price Global under the Price Global Operating Agreement.
For the Five-Year Period, Price Global and its Downstream Affiliates have
agreed to provide to PriceCostco certain services including the following:
access to Price Global's vendors for placing orders for merchandise and certain
historical data with respect to Price Global's inventory and costs.
For a period of two years after the termination of the Price Global
Operating Agreement, Price Global, Price Enterprises, Price and PriceCostco and
each of their respective Downstream Affiliates will maintain in strict
confidence all information obtained pursuant to the Price Global Operating
Agreement or otherwise, relating to the business, operations, properties,
assets, products, condition (financial or otherwise), liabilities, employee
relations, customers, suppliers, prospects, technology, or trade secrets of the
other party; except to the extent such information (i) is in the public domain
through no act or omission of the disclosing party, (ii) is required to be
disclosed by law, or (iii) is independently learned by the disclosing party.
With respect to information regarding any such party's membership and membership
database, the obligation to hold in confidence such information (as set forth in
the previous sentence) shall continue until five years from the termination of
the Price Global Operating Agreement.
The Price Global Operating Agreement provides that, except as expressly
prohibited in the Price Global Operating Agreement, the Transfer and Exchange
Agreement or the other Additional Agreements, each of
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Price Enterprises, PriceCostco and their respective affiliates shall be entitled
to pursue and develop other business opportunities from time to time, and shall
not be required to present or offer any business opportunities, international or
otherwise, to Price Global or CMI prior to pursuing and developing such
opportunities.
The Price Global Operating Agreement further provides for reciprocal
shopping privileges among the members of PriceCostco and warehouse clubs
affiliated with Price Global.
STOCKHOLDERS AGREEMENT. Pursuant to the Stockholders Agreement dated as of
August 28, 1994 by and among Price Enterprises, PriceCostco, Price and Price
Global (the "Price Global Stockholders Agreement"), Price Enterprises and Price
have agreed to certain specific rights and obligations as stockholders of Price
Global. The Price Global Stockholders Agreement required that Price Enterprises
and Price make mandatory capital contributions to the corporation of $510,000
and $490,000, respectively, on the Transfer Closing Date. The Price Global
Stockholders Agreement provides that the Price Global Board of Directors may
request additional capital infusions from stockholders either in the form of
advances or additional capital contributions. Each stockholder is entitled to
participate in an advance or additional capital contribution, pro rata in
proportion to its percentage ownership interest in Price Global. Advances will
be made in the form of loans bearing interest at three hundred basis points over
the 5-Year Treasury Bill rate at the time of the advance and will include such
other terms as specified by the Board of Directors of Price Global. With respect
to additional capital contributions, if a stockholder declines to make all or
part of its respective additional capital contribution, the Board of Directors
of Price Global will issue to the fully participating stockholders, pro rata in
proportion to their additional capital contribution, additional shares of common
stock of Price Global, such that each non-participating stockholders' percentage
ownership interest in Price Global will be decreased proportionally.
The Price Global Stockholders Agreement sets forth certain restrictions if
either Price Enterprises or Price offers to transfer, sell, assign or otherwise
dispose of any shares of common stock of Price Global, and further provides
stockholders with certain preemptive rights. In addition, at any one time after
ten years from the Closing Date, PriceCostco may demand that Price Global
register under the Securities Act any of Price's shares of common stock of Price
Global with a value in excess $10 million. In lieu of registering such shares of
stock, Price Global may elect to purchase such shares at their fair market
value. Moreover, in the event of future public offerings by Price Global of its
common stock or securities convertible or exchangeable into such common stock,
Price and Price Enterprises will have the right to participate in such offering
on the same terms and conditions as Price Global, subject to certain conditions.
No party to the Price Global Stockholders Agreement may transfer any of its
shares of common stock of Price Global or any other ownership interest in Price
Global to a Club Business or to certain specified companies, nor may any party
transfer such shares or other ownership interest to any person without that
person having become a party to the Price Global Stockholders Agreement.
The Price Global Stockholders Agreement contains confidentiality provisions
that are substantially similar to those contained in the Price Global Operating
Agreement. Moreover, prior to entering into any agreement or arrangement with
any other person (other than PriceCostco or Price Enterprises) to own, operate
or develop a Club Business in any of the Specified Geographical Areas, whether
pursuant to a joint venture, license, equity investment by such person in Price
Global or otherwise, such person, directly or indirectly, will neither use any
proprietary information or knowhow acquired from Price Global with respect to
ownership and operation of a Club Business to establish, own or operate a Club
Business in any geographical area other than the Specified Geographical Areas,
nor assist or advise in any manner any other person with respect to ownership
and operation of a Club Business in any geographical area other than the
Specified Geographical Areas.
The Price Global Stockholders Agreement further provides that for as long as
Price owns at least 20% of Price Global's outstanding common stock, Price is
entitled to appoint one director to Price Global's three member Board of
Directors. Price's initial appointee is James D. Sinegal.
SAIPAN LETTER OF INTENT. Price Global has executed a nonbinding letter of
intent with J.C. Tenorio Enterprises, Inc. ("Joeten") in contemplation of a
proposed agreement to license certain intellectual property and software, and to
provide merchandising, training and technical support services to Joeten for
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use in Guam and the Commonwealth of the Northern Mariana Islands. In exchange
for a 15-year license and various other support services, Joeten contemplates
paying to Price Global a one-time fee and certain royalties based on annual
sales, plus certain other costs and expenses which may be incurred by Price
Global in the course of performing its obligations under the proposed agreement
with Joeten. Under the proposed agreement, Joeten would be obligated to open its
first warehouse retail facility by December 31, 1995.
COMPETITION. Price Global competes with exporters, wholesalers and trading
companies in various international markets. In the Specified Geographical Areas,
Price Global's joint ventures and licensees compete with traditional retail
stores and wholesalers.
PRICE VENTURES
Price Ventures is a wholly owned subsidiary of Price Enterprises. Although
Price Ventures presently has no active operations, Price Ventures may engage in,
operate or invest in various businesses.
EMPLOYEES
Price Enterprises and its subsidiaries lease approximately 340 employees
from PriceCostco. See "AGREEMENT OF TRANSFER AND PLAN OF EXCHANGE -- Employee
Matters." On January 1, 1995, such leased employees will become employees of
Price Enterprises. It is anticipated that of Price Enterprises' approximately
340 prospective employees, 35 will be employed by Price Enterprises, 155 by
Price Quest, 35 by Price Global and 115 by Mexico Clubs.
SEASONALITY
Price Enterprises real estate operations are not generally subject to
seasonal fluctuations. Price Quest, Price Global and Mexico Clubs are subject to
traditional retail sales trends associated with the year-end holiday season.
CORPORATE HEADQUARTERS
Price Enterprises and its subsidiaries have executive offices in the San
Diego Property. Price Enterprises believes that its current facilities meet the
expected requirements of Price Enterprises and its subsidiaries over the next 12
months.
LEGAL PROCEEDINGS
Price Enterprises is not presently involved in any material litigation nor,
to its knowledge, is any material litigation threatened against Price
Enterprises, its subsidiaries or their properties, other than the proceedings
relating to environmental matters described above in "Real Estate Business --
Environmental Matters."
MANAGEMENT OF PRICE ENTERPRISES
BOARD OF DIRECTORS OF PRICE ENTERPRISES
The Board of Directors of Price Enterprises currently has three members. It
is the Board's intention to increase the number of directors to seven. Each
director serves a one-year term. Set forth below are the names, positions with
Price Enterprises and ages of the persons who will be directors of Price
Enterprises upon consummation of the Exchange Offer:
<TABLE>
<CAPTION>
NAME POSITION WITH PRICE ENTERPRISES AGE
- --------------------- -------------------------------- ---
<S> <C> <C>
Robert E. Price Chairman of the Board, President 52
and Chief Executive Officer
Paul A. Peterson Vice Chairman of the Board 66
James D. Sinegal Director 58
Katherine L. Hensley* Director 57
Nancy Y. Bekavac* Director 47
Murray L. Galinson* Director 57
</TABLE>
(FOOTNOTE ON NEXT PAGE)
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* At or prior to the Closing Date, the authorized number of directors
comprising the Board of Directors of Price Enterprise will be expanded
and the Board of Directors of Price Enterprises, by a majority vote,
will fill such newly created directorships with Ms. Hensley, Ms.
Bekavac, Mr. Galinson and, possibly, one additional director.
.
Robert E. Price has been Chairman of the Board, President and Chief
Executive Officer of Price Enterprises since July 28, 1994. Mr. Price has been
Chairman of the Board of PriceCostco since October 1993, although he has
tendered his letter of resignation as a director of PriceCostco, effective as
described in "THE TRANSACTION -- Background of the Transaction." From 1976 to
October 1993, he was Chief Executive Officer and a director of Price. Mr. Price
served as Chairman of the Board of Price from January 1989 to October 1993, and
its President from 1976 until December 1990. In addition to his role in Price
Enterprises, Mr. Price will serve as President and Chief Executive Officer of
Price Real Estate, Price Global and Mexico Clubs, and the Chief Executive
Officer of Price Ventures.
Paul A. Peterson is a lawyer and is a senior member of the law firm of
Peterson & Price in San Diego. He has been a director of PriceCostco since
October 1993, although he has tendered his letter of resignation as a director
of PriceCostco, effective as described in "THE TRANSACTION -- Background of the
Transaction." From 1976 to October 1993, he was Secretary and, except for a
period of eleven months in 1982, a director of Price. Mr. Peterson served as
Vice Chairman of the Board of Price from November 1991 to October 1993.
James D. Sinegal has been President, Chief Executive Officer and a director
of PriceCostco since October 1993. He was President, Chief Operating Officer and
a director and founder of Costco since its inception and was elected Chief
Executive Officer of Costco in August 1988.
Katherine L. Hensley is presently Of Counsel to the law firm of O'Melveny &
Myers in Los Angeles, California. Ms. Hensley joined O'Melveny & Myers in 1978
and was a partner from 1986 to February 1992. Ms. Hensley is a Trustee of
Security First Trust, an open-end investment management company registered under
the Investment Company Act of 1940.
Nancy Y. Bekavac has been the President of Scripps College in Claremont,
California since July 1990. From September 1988 to May 1990, Ms. Bekavac was
Counselor to the President of Dartmouth College in Hanover, New Hampshire. Ms.
Bekavac is also a director of Pioneer Hi-Bred International, Inc. and Electro
Rent Corporation.
Murray L. Galinson has been the President and Chief Executive Officer of San
Diego National Bank and SDNB Financial Corp. since September 1984 and has been a
director of both entities since their inception in 1981.
COMMITTEES OF PRICE ENTERPRISES
AUDIT COMMITTEE. The Audit Committee, which will consist of Ms. Bekavac,
Ms. Hensley and Mr. Peterson, will review the annual audits of Price
Enterprises' independent public accountants; will review and evaluate internal
accounting controls; will recommend the selection of independent public
accountants; will review and pass upon (or ratify) related party transactions;
and will conduct such reviews and examinations as it deems necessary with
respect to the practices and policies of, and the relationship between, Price
Enterprises and its independent public accountants.
COMPENSATION COMMITTEE. The Compensation Committee, which will consist of
Ms. Bekavac, Mr. Galinson and Mr. Hensley, will review salaries, bonuses and
stock options of senior officers of Price Enterprises, and will administer Price
Enterprises' compensation and stock option plans.
EXECUTIVE COMMITTEE. After the Interim Period, the Executive Committee will
consist of Messrs. Price and Peterson. The Executive Committee will be
established with all powers and rights necessary to exercise the full authority
of the Board of Directors in the management of the business and affairs of Price
Enterprises except as provided in the DGCL or the Bylaws of Price Enterprises.
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FINANCE COMMITTEE. The Finance Committee, which will consist of Messrs.
Price and Galinson and another director yet to be named, will review and make
recommendations with respect to (i) annual budgets, (ii) investments, (iii)
financing arrangements and (iv) the creation, incurrence, assumption or guaranty
by Price Enterprises of any indebtedness, obligation or liability, except, in
each case, for any such transactions entered into in the ordinary course of
business of Price Enterprises.
NOMINATING COMMITTEE. The Nominating Committee, which will consist of
Messrs. Peterson and Price, will recommend candidates to fill vacancies on the
Board of Directors or any committee thereof, which vacancies may be created by
the departure of any directors, or the expansion of the number of members of the
Board.
REAL ESTATE COMMITTEE. The Real Estate Committee, which will consist of
Messrs. Peterson and Price, will review and approve (i) sales (including
sale-leasebacks), leases, conveyances, transfers or other dispositions of real
property, and (ii) purchases, leases or other acquisitions of real property,
except, in each case, for any such transactions entered into in the ordinary
course of business of Price Enterprises.
COMPENSATION OF THE BOARD OF DIRECTORS
Each outside director of Price Enterprises (other than Mr. Sinegal and Mr.
Peterson) will receive $20,000 per year for serving on the Board of Directors
and an additional $5,000 per year for serving as chairman of any committee of
the Board. Mr. Peterson will receive $75,000 per year for his services as Vice
Chairman of the Board and as a chairman or member of any committee of the Board.
In addition, outside directors (other than Mr. Sinegal and Mr. Peterson) who
serve on committees of the Board (in a capacity other than chairman of a
committee) will receive $500 for each meeting attended. The chairman or vice
chairman of any Committee may receive additional compensation to be fixed by the
Board. Each non-employee director (other than Mr. Sinegal) will be eligible to
receive stock grants and stock options pursuant to The Price Enterprises
Directors' 1995 Stock Option Plan. Employee directors will be eligible to
receive stock grants and stock options pursuant to the Price Enterprises 1995
Combined Stock Grant and Stock Option Plan.
Directors also will receive reimbursement for travel expenses incurred in
connection with their duties as directors.
EXECUTIVE OFFICERS
Set forth below are the names, positions and ages of the executive officers
of Price Enterprises and other key officers of its subsidiaries:
<TABLE>
<CAPTION>
NAME POSITION WITH PRICE ENTERPRISES AGE
- ----------------------- -------------------------------------- ---
<S> <C> <C>
Robert E. Price Chairman of the Board, President and 52
Chief Executive Officer
Daniel T. Carter Executive Vice President, Chief 38
Financial Officer and Secretary
Robert M. Gans Executive Vice President, 45
General Counsel
Mark T. Livingston Chief Executive Officer of Price Quest 45
Joseph J. Tebo President of Price Ventures 58
Steven A. Velazquez President of Price Quest 39
Theodore Wallace Executive Vice President 46
</TABLE>
Robert E. Price has been Chairman of the Board, President and Chief
Executive Officer of Price Enterprises since July 28, 1994. Mr. Price has been
Chairman of the Board of PriceCostco since October 1993, although he has
tendered his resignation as a director of PriceCostco, effective as described in
"THE TRANSACTION -- Background of the Transaction." From 1976 to October 1993,
he was Chief Executive Officer and a director of Price. Mr. Price served as
Chairman of the Board of Price from
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January 1989 to October 1993, and its President from 1976 until December 1990.
In addition to his role in Price Enterprises, Mr. Price will serve as President
and Chief Executive Officer of Price Real Estate, Price Global and Mexico Clubs,
and the Chief Executive Officer of Price Ventures.
Daniel T. Carter has been Executive Vice President, Chief Financial Officer
and Secretary of Price Enterprises since July 28, 1994. Mr. Carter has been
Senior Vice President of PriceCostco since October 1993 overseeing financial
duties for certain international and San Diego-based businesses. He joined Price
as the Financial Planning and Audit Manager in June 1986 and became its Vice
President of Finance in October 1987. Prior to joining Price, Mr. Carter held
financial management roles with several diverse companies, as well as having
worked for three years with the accounting firm of Ernst & Whinney. Mr. Carter
is also the Chief Financial Officer and Secretary of Price Global, Mexico Clubs,
Price Quest, Price Ventures and Price Real Estate.
Robert M. Gans has been Executive Vice President, General Counsel for Price
Enterprises since October 17, 1994. Mr. Gans has actively practiced law in
private practice since 1975, and from 1988 until October 1994, was the senior
member of the law firm of Gans, Blackmar & Stevens, A.P.C., of San Diego,
California.
Mark T. Livingston has been the Chief Executive Officer of Price Quest since
November 9, 1994. From January to October 1994, Mr. Livingston was President and
Chief Operating Officer of Roadrunner Sports, Inc., a San Diego, California
direct marketer of running and fitness products with approximately $70 million
in annual sales. From May 1992 to January 1994, Mr. Livingston was Executive
Vice President and Chief Operating Officer of Roadrunner Sports. From October
1991 to May 1992, Mr. Livingston worked as an independent consultant to
Roadrunner Sports. From January 1990 to October 1991, Mr. Livingston was Chief
Operating Officer of Motels of America in San Diego, California, a lodging chain
with approximately 100 properties. Mr. Livingston is also a certified public
accountant.
Joseph J. Tebo has been the President of Price Ventures since November 14,
1994. From May 1994 to November 1994 Mr. Tebo was President of the Tebo Group,
an international retail consulting firm. From January 1990 to April 1994 Mr.
Tebo was President and Chief Executive Officer of AM/PM International, a wholly
owned subsidiary of Atlantic Richfield Company (ARCO), which has developed
licensing and joint venture arrangements for AM/PM convenience stores in 10
countries throughout the Pacific Rim and the Americas. Mr. Tebo spent more than
30 years in the Atlantic Richfield domestic and international sales and
marketing organizations, and was instrumental in developing the AM/PM Mini-Mart
concept and the PayPoint electronic payment system.
Steven A. Velazquez has been President of Price Quest since November 1994.
Mr. Velazquez has been Executive Vice President of PriceCostco since October
1993 overseeing the development of the Quest Business. He joined Price as a
buyer in July 1981, became Vice President in February 1989, and became Executive
Vice President of merchandising in April 1990. Prior to joining Price, Mr.
Velazquez was a buyer for Safeway Stores, San Diego Division. Mr. Velazquez
resigned from his executive offices at Price Costco and Price in early November
1994.
Theodore Wallace has been an Executive Vice President of Price Enterprises
since November 1994. Mr. Wallace has been Executive Vice President of
PriceCostco since October 1993 overseeing international expansion into the
Pacific Rim and other markets. Mr. Wallace became an Executive Vice President of
Price in 1984 and, from 1988 until Fall 1992, he was Chief Operating Officer
(East Coast) of Price. He was a director of Price from October 1988 to October
1993. He joined Price as a warehouse manager in September 1977 and was its Vice
President of Operations from 1983 to 1988. Mr. Wallace resigned from his
executive offices at PriceCostco and Price in early November 1994.
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CERTAIN OTHER OFFICERS
Set forth below are the names, positions and ages of certain other officers
of Price Enterprises and its subsidiaries:
<TABLE>
<CAPTION>
NAME POSITION AGE
- ----------------------- ---------------- ---
<S> <C> <C>
William J. Hamilton Vice President 37
Thomas L. Hammer Vice President 40
Thomas D. Martin Vice President 37
Lois L. Miller Vice President 44
Joseph R. Satz Vice President 53
Robert M. Siordia Vice President 34
John O. Skousen Vice President 37
</TABLE>
William J. Hamilton has been Vice President of PriceCostco since October
1993. Mr. Hamilton became Vice President of Price in July 1992, and has overseen
various businesses for the companies. He joined Price in February 1989, and
prior to joining Price, Mr. Hamilton was a District Sales Manager for Guardian
Photo.
Thomas L. Hammer has been Vice President of PriceCostco since October 1993,
overseeing the merchandising area of Price Club Mexico. He joined Price in July
1983 as a buyer, became Vice President of merchandising in October 1992 and has
served in various management roles in the buying office.
Thomas D. Martin has been Vice President of Price Costco since October 1993,
overseeing CMI as well as merchandise development for the Korea Price Club
warehouse. He joined Price in May 1977, became Vice President of merchandising
in March 1989 and has served in various management roles in both buying and
warehouse operations with Price.
Lois J. Miller has been Vice President of PriceCostco since October 1993,
overseeing land use entitlements and environmental issues for both the club and
non-club real estate. She joined Price as Planning Director in September 1984
and became Vice President in August 1991. Prior to joining Price, Ms. Miller was
Chief of Land Use Planning for San Diego County.
Joseph R. Satz has been Vice President and Counsel of PriceCostco since
October 1993, overseeing real estate matters. He joined Price in 1984 and became
Vice President in January 1988. Prior to joining Price, Mr. Satz was General
Counsel for the Weingart Foundation and was also in the private practice of law.
Robert M. Siordia has been Assistant Vice President of PriceCostco since
October 1993 overseeing the non-club real estate. He joined Price in October
1980, and has held a variety of positions primarily within the commercial real
estate division.
John O. Skousen has been Vice President of PriceCostco since October 1993,
overseeing the development of Price Club Mexico since its inception in February
1991. In December 1992, he was promoted to Vice President. Prior to February
1991, he held various financial management positions at Price and developed
several businesses at Price Club Industries. Before joining Price in 1987, Mr.
Skousen worked for Fujitsu Ltd. and Price Waterhouse.
INDEMNIFICATION AGREEMENTS
Price Enterprises will enter into indemnification agreements with its
directors and certain executive officers (each, an "Indemnified Person"). An
Indemnified Person is specifically indemnified and held harmless under such
agreements for costs and expenses, including without limitation, damages,
judgments, amounts paid in settlement, reasonable costs of investigation,
reasonable attorneys fees, costs of investigative, judicial or administrative
proceedings or appeals, costs or attachment of similar bonds, fines, penalties,
and excise taxes assessed with respect to employee benefit plans actually and
reasonably incurred in connection with a threatened, pending or completed claim,
action, suit or proceeding by reason of the fact that (i) he or she is or was a
director, officer, employee and/or agent of Price Enterprises; or (ii) is or was
serving as a director, officer, employee, trustee and/or agent of another
corporation or entity at the request of Price Enterprises. To qualify for
indemnification, the claim must not be: (i) based solely upon an
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Indemnified Person's gaining in fact any personal profit or advantage to which
he or she was not legally entitled; (ii) an accounting for profits made from the
purchase or sale of securities pursuant to Section 16(b) of the Exchange Act;
and (iii) based solely upon knowingly fraudulent, deliberately dishonest, or
willful misconduct on the part of the Indemnified Person. Price Enterprises will
indemnify the Indemnified Person to the extent that (i) the Indemnified Person
gives Price Enterprises prompt written notice of any claim; (ii) expenses have
not been advanced pursuant to Article Eighth of Price Enterprises Restated
Certificate of Incorporation; (iii) the Indemnified Person has not already
received payment pursuant to collectible insurance policies; and (iv)
indemnification is not unlawful.
Under such indemnification agreements, Price Enterprises will advance costs
and expenses incurred by the Indemnified Person in advance of the final
disposition of an action, suit or proceeding if he or she undertakes to repay
amounts advanced if it is ultimately determined by a court of competent
jurisdiction that he or she is not entitled to be indemnified by Price
Enterprises. Price Enterprises will advance costs and expenses related to
defending or investigating an action, suit or proceeding unless a determination
is made that (i) the Indemnified Person did not act in good faith and in a
manner he or she reasonably believed to be in or not opposed to the best
interests of Price Enterprises; (ii) the Indemnified Person intentionally
breached his or her duty to Price Enterprises or its stockholders; or (iii) with
respect to any criminal action or proceeding, the Indemnified Person had
reasonable cause to believe his or her conduct was unlawful. Such determination
will be made by a majority vote of a quorum of the Board consisting of directors
not a party to the suit, action or proceeding, by a written opinion of
independent legal counsel, by the stockholders or by a final, nonappealable
adjudication in a court of competent jurisdiction. If Price Enterprises advances
costs and expenses of any action, suit or proceeding, Price Enterprises reserves
the right to assume the defense of such action, suit or proceeding upon written
notice to the Indemnified Person of its intention to do so. After delivery of
such notice, Price Enterprises shall not be liable for any costs or expenses
incurred by the Indemnified Person in retaining separate counsel unless (i) the
employment of separate counsel was previously authorized by Price Enterprises;
(ii) the Indemnified Person reasonably concludes that joint representation would
entail a conflict of interest; or (iii) Price Enterprises shall not, in fact,
have employed counsel to assume the defense of such action, suit or proceeding.
The indemnification provisions and provisions for advancing expenses in such
agreements are expressly not exclusive of any other rights of indemnification or
advancement of expenses pursuant to the DGCL and Price Enterprises Restated
Certificate of Incorporation and Bylaws.
COMPENSATION OF EXECUTIVE OFFICERS
SUMMARY COMPENSATION
The following table sets forth, for the fiscal years ended August 28, 1994,
August 29, 1993 and August 30, 1992, the cash compensation paid by PriceCostco,
as well as certain other compensation paid or accrued for those years, to (i)
Mr. Price, who will serve as President and Chief Executive Officer of Price
Enterprises following consummation of the Exchange Offer and (ii) each of Price
Enterprises' four other most highly-compensated executive officers or employees
other than Mr. Price who received salary and bonus in excess of $100,000 during
fiscal year 1994 (collectively, the "named executive officers").
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SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
-------------
FISCAL YEAR COMPENSATION SECURITIES
NAME AND ----------------------------------------- UNDERLYING
PRINCIPAL POSITION OTHER ANNUAL OPTIONS/ ALL OTHER
WITH PRICE ENTERPRISES FISCAL YEAR SALARY($) BONUS ($) COMPENSATION($) SARS(#) COMPENSATION($)(2)
- ------------------------ ----------- ----------- --------- ----------------- ------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
Robert E. Price 1994 295,385 -0- -0- 34,100 16,759
President & CEO 1993 270,000 -0- -0- -0- 16,563
1992 270,000 4,050 -0- -0- 15,946
Theodore Wallace 1994 259,584 36,000 70,528(1) 20,000 16,759
Executive Vice 1993 259,584 -0- -0- 21,300 16,563
President 1992 259,584 3,894 -0- -0- 15,946
Steven A. Velazquez 1994 225,000 36,000 -0- 20,000 16,000
Executive Vice 1993 211,615 -0- -0- 13,312 15,334
President 1992 196,000 2,940 -0- 5,782 14,301
Daniel T. Carter 1994 147,692 27,000 -0- 15,000 10,588
Executive Vice 1993 133,846 -0- -0- 7,987 9,790
President, 1992 125,000 1,875 -0- -0- 9,211
CFO & Secretary
Thomas D. Martin (3) 1994 155,002 22,500 -0- -0- 11,100
Vice President 1993 145,190 -0- -0- 7,987 10,599
1992 140,000 2,100 -0- 3,980 10,287
<FN>
- ------------------------------
(1) Represents $52,190 paid to reimburse Mr. Wallace for a decline in the
market value of his home which was sold in connection with his relocation
at the request of PriceCostco (net of a mortgage prepayment penalty which
was paid by Mr. Wallace) and $18,338 paid to reimburse Mr. Wallace for
income taxes related to such payment.
(2) Amounts shown for fiscal year 1994 constitute contributions to The Price
Company Retirement Plan and PriceCostco's annual matching 401k
contributions of $250 for each named executive officer.
(3) Although Mr. Martin was one of Price Enterprises' five most highly
compensated employees in fiscal year 1994, Mr. Martin will not be an
executive officer of Price Enterprises in fiscal year 1995.
</TABLE>
OPTION GRANTS
The following table provides information concerning the grant of stock
options by PriceCostco to the named executive officers of Price Enterprises
during fiscal year 1994. PriceCostco does not have any outstanding stock
appreciation rights.
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<PAGE>
OPTION GRANTS IN THE LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
NUMBER OF % OF TOTAL STOCK PRICE
SECURITIES OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM
OPTIONS EMPLOYEES IN OR BASE EXPIRATION --------------------
NAME GRANTED (#)(1) FISCAL YEAR PRICE ($/SH) DATE 5%($) 10%($)
- ----------------------------------- -------------- ------------- ------------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Robert E. Price.................... 34,100 1.03% 19.000 11/17/99 220,348 499,894
Theodore Wallace................... 20,000 0.60% 15.125 05/02/04 190,241 482,107
Steven A. Velazquez................ 20,000 0.60% 15.125 05/02/04 190,241 482,107
Daniel T. Carter................... 15,000 0.45% 15.125 05/02/04 142,680 361,580
Thomas D. Martin................... -0- -0- N/A N/A N/A N/A
<FN>
- ------------------------
(1) By their terms, these options become exercisable at 20% per year over a
period of five years. However, certain of these options will be cancelled
as of December 31, 1994. These cancellations include: for Mr. Price,
26,439; for Mr. Wallace, 17,326; for Mr. Velazquez, 17,326; and for Mr.
Carter, 12,995. See "Continuation of PriceCostco Stock Options."
</TABLE>
OPTION EXERCISES AND OPTION VALUES AT FISCAL YEAR-END
The following table provides information as of August 28, 1994 with respect
to the named executive officers, concerning the exercise of PriceCostco stock
options during fiscal year 1994 and unexercised PriceCostco options held as of
the end of fiscal year 1994.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF UNEXERCISED
UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS OPTIONS AT FY-END
AT FY-END (#) ($)
------------------- --------------------
SHARES ACQUIRED VALUE REALIZED EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE (#) ($) UNEXERCISABLE UNEXERCISABLE
- ---------------------------------- ----------------- ---------------- ------------------- --------------------
<S> <C> <C> <C> <C>
Robert E. Price................... -0- -0- -0-/34,100(1) -0-/-0-
Theodore Wallace.................. 3,727 $ 20,997 98,124/93,913(2) 75,564/37,783
Steven A. Velazquez............... -0- -0- 38,010/63,107(3) -0-/-0-
Daniel T. Carter.................. -0- -0- 45,262/41,625(4) -0-/-0-
Thomas D. Martin.................. -0- -0- 20,077/27,313(5) -0-/-0-
<FN>
- ------------------------
(1) 26,439 of these unexercisable options will be cancelled as of December 31,
1994. The remaining 7,661 options will become exercisable at that time. See
"Continuation of PriceCostco Stock Options."
(2) 64,349 of these unexercisable options will be cancelled as of December 31,
1994. Mr. Wallace will then hold a total of 127,688 exercisable options at
that time. See "Continuation of PriceCostco Stock Options."
(3) 10,650 of these exercisable options expire on November 24, 1994. 49,054 of
these unexercisable options will be cancelled as of December 31, 1994. Mr.
Velazquez will then hold a total of 41,413 exercisable options at that
time. See "Continuation of PriceCostco Stock Options."
(4) 30,479 of these unexercisable options will be cancelled as of December 31,
1994. Mr. Carter will then hold a total of 56,408 exercisable options at
that time. See "Continuation of PriceCostco Stock Options."
(5) 3,537 of these exercisable options expire on November 24, 1994. 19,710 of
these unexercisable options will be cancelled as of December 31, 1994. Mr.
Martin will then hold a total of 24,145 exercisable options at that time.
See "Continuation of PriceCostco Stock Options."
</TABLE>
119
<PAGE>
EXECUTIVE COMPENSATION DURING FISCAL YEAR 1995
During fiscal year 1995, Mr. Price will receive, as Chairman of the Board,
President and Chief Executive Officer of Price Enterprises, a base salary of
$225,000. In addition, Mr. Price will be eligible to receive a bonus under Price
Enterprises' bonus plan (the "Bonus Plan"), pursuant to which certain employees
may earn annual performance bonuses. Mr. Price also will be eligible to
participate in The Price Enterprises Retirement Plan (described below), into
which Price Enterprises will make annual contributions at the direction of the
Board of Directors based upon Price Enterprises' pre-tax profits above a
threshold level.
Mr. Wallace will receive a base salary of $200,000 during fiscal year 1995,
plus a retention bonus in the amount of $100,000 for agreeing to transfer
employment from PriceCostco to Price Enterprises. In addition, it is anticipated
that Mr. Wallace will receive options to purchase 100,000 shares of Price
Enterprises Common Stock under the Stock Plan (as defined and described below),
subject to the independent committee of directors granting such options at its
sole discretion. Mr. Wallace also will be eligible to receive an annual bonus
under the Bonus Plan, and to participate in The Price Enterprises Retirement
Plan.
Mr. Carter will receive a base salary of $175,000, the right to receive an
annual bonus under the Bonus Plan and the right to participate in The Price
Enterprises Retirement Plan. It is anticipated that Mr. Carter will receive
options to purchase 75,000 shares of Price Enterprises Common Stock under the
Stock Plan, subject to the independent committee of directors granting such
options at its sole discretion.
The stock options to be granted to Messrs. Wallace and Carter would have an
exercise price equal to the fair market value of Price Enterprises Common Stock
at the date of grant and would become exerciseable at 20% per year over a five
year period.
Mr. Velazquez has entered into an employment agreement with Price
Enterprises for a term of one year commencing November 1, 1994. Pursuant to this
agreement, Mr. Velazquez will serve as President and Chief Operating Officer of
Price Quest at a base annual salary of $175,000 during the term of this
agreement. Mr. Velazquez may not engage in any activities, with or without
compensation, that would interfere with the performance of his duties or that
would be adverse to Price Enterprises' interests, without the prior written
consent of Price Enterprises. The agreement provides that Mr. Velazquez will be
eligible to participate in the Bonus Plan and receive all other benefits offered
to officers under Price Enterprises' standard company benefits practices and
plans. The agreement also anticipates that Mr. Velazquez will receive options to
purchase 75,000 shares of Price Enterprises Common Stock under the Stock Plan,
subject to the independent committee of directors granting such options at its
sole discretion. Such options would become exercisable at 20% per year over a
five year period. Mr. Velazquez may terminate the agreement at any time on 30
days' prior written notice. Price Enterprises may terminate the agreement for
cause upon immediate notice thereof, or upon the death or disability of Mr.
Velazquez. In the event that Price Enterprises terminates the agreement for any
reason other than cause, or if there is a substantial and material change in Mr.
Velazquez' job responsibilities resulting from an action by Price Enterprises,
Mr. Velazquez shall be entitled to a severance payment of $337,500, less
applicable deductions and withholdings, and to inclusion in the Stock Plan,
Retirement Plan and medical plans of Price Enterprises for the remainder of the
term of the agreement. The foregoing severance benefits are the exclusive
benefits that would be payable to Mr. Velazquez by reason of his termination,
and Price Enterprises is not obligated to segregate any assets or procure any
investment in order to fund such severance benefits. The agreement also contains
confidentiality provisions and other terms and conditions customary to executive
employment agreements. In addition, Mr. Velazquez will receive a retention bonus
in the amount of $75,000 for agreeing to transfer employment from PriceCostco to
Price Enterprises.
Mr. Robert Gans has entered into an employment agreement with Price
Enterprises for a term of three years commencing October 17, 1994. Pursuant to
this agreement, Mr. Gans will serve as Executive Vice President-General Counsel
of Price Enterprises at a base annual salary of $150,000 during the term of this
agreement. Mr. Gans may not engage in any activities, with or without
compensation, that would interfere with the performance of his duties or that
would be adverse to Price Enterprises' interests, without the prior written
consent of Price Enterprises. The agreement provides that Mr. Gans will be
eligible to participate in the Bonus Plan and receive all other benefits offered
to officers under Price Enterprises' standard company
120
<PAGE>
benefits practices and plans. The agreement also anticipates that Mr. Gans will
receive options to purchase 75,000 shares of Price Enterprises Common Stock
under the Stock Plan, subject to the independent committee of directors granting
such options at its sole discretion. Such options would become exercisable at
20% per year over a five year period. Mr. Gans may terminate the agreement at
any time on 90 days' prior written notice. Price Enterprises may terminate the
agreement for cause upon immediate notice thereof, or upon the death or
disability of Mr. Gans. In the event that Price Enterprises terminates the
agreement for any reason other than cause, Mr. Gans shall be entitled for the
remainder of the term of the agreement to the continuation of his base salary
payable in conformity with Price Enterprises' normal payroll period, and to
inclusion in the Stock Plan, Retirement Plan and medical plans of Price
Enterprises for the remainder of such term. The foregoing severance benefits are
the exclusive benefits that would be payable to Mr. Gans by reason of his
termination, and Price Enterprises is not obligated to segregate any assets or
procure any investment in order to fund such severance benefits. The agreement
also contains indemnification and confidentiality provisions, and other terms
and conditions customary to executive employment agreements.
Mr. Mark Livingston has entered into an employment agreement with Price
Enterprises for a term of one year commencing November 9, 1994. Pursuant to this
agreement, Mr. Livingston will serve as Chief Executive Officer of Price Quest
at a base annual salary of $200,000 during the term of this agreement. Mr.
Livingston may not engage in any activities, with or without compensation, that
would interfere with the performance of his duties or that would be adverse to
Price Enterprises' interests, without the prior written consent of Price
Enterprises. However, the agreement provides that Mr. Livingston will be
entitled to remain as a member of an advisory board of Roadrunner Sports, Inc.,
a direct marketer of running and fitness products in which Mr. Livingston owns a
3% ownership interest, subject to certain conditions. The agreement provides
that Mr. Livingston will submit to the Board of Price Enterprises a business
plan for Price Quest within 45 days of commencing employment that will also
contain a bonus plan for Mr. Livingston and other management personnel of Price
Quest based on improvements in profitability and increases in stockholder value.
Mr. Livingston will be eligible to receive all other benefits offered to
officers under Price Enterprises' standard company benefits practices and plans.
The agreement also anticipates that Mr. Livingston will receive options to
purchase 100,000 shares of Price Enterprises Common Stock under the Stock Plan,
subject to the independent committee of directors granting such options at its
sole discretion. Such options would become exercisable at 20% per year over a
five year period. Mr. Livingston may terminate the agreement at any time on 30
days' prior written notice. Price Enterprises may terminate the agreement for
cause upon immediate notice thereof, or upon the death or disability of Mr.
Livingston. In the event that Price Enterprises terminates the agreement for any
reason other than cause, Mr. Livingston shall be entitled to the continuation of
his base salary for a period of six months, payable in conformity with Price
Enterprises' normal payroll period. The foregoing severance benefits are the
exclusive benefits that would be payable to Mr. Livingston by reason of his
termination, and Price Enterprises is not obligated to segregate any assets or
procure any investment in order to fund such severance benefits. Under the
agreement, Price Enterprises also has agreed to make an unsecured loan to Mr.
Livingston in the amount of $50,000. Such loan will bear interest at a rate of
9.5% per annum, compounded annually, and will become due and payable on November
10, 1996. Mr. Livingston has assigned to Price Enterprises any bonus payable to
Mr. Livingston following his first year of employment, up to a maximum of
$25,000, which will be applied in payment of the interest and principal
outstanding under the loan. The agreement also contains confidentiality
provisions and other terms and conditions customary to executive employment
agreements.
Mr. Joseph Tebo has entered into an employment agreement with Price
Enterprises for a term of one year commencing November 14, 1994. Pursuant to
this agreement, Mr. Tebo will serve as President of Price Ventures at a base
annual salary of $200,000 during the term of this agreement. Mr. Tebo may not
engage in any activities, with or without compensation, that would interfere
with the performance of his duties or that would be adverse to Price
Enterprises' interests, without the prior written consent of Price Enterprises.
The agreement provides that Mr. Tebo will be eligible to participate in the
Bonus Plan and receive all other benefits offered to officers under Price
Enterprises' standard company benefits practices and plans. The agreement also
anticipates that Mr. Tebo will receive options to purchase 100,000 shares of
Price Enterprises Common Stock under the Stock Plan, subject to the independent
committee of directors granting such options at its sole discretion. Such
options would become exercisable at 20% per year over a five year period.
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<PAGE>
Mr. Tebo may terminate the agreement at any time on 30 days' prior written
notice. Price Enterprises may terminate the agreement for cause upon immediate
notice thereof, or upon the death or disability of Mr. Tebo. In the event that
Price Enterprises terminates the agreement for any reason other than cause, Mr.
Tebo shall be entitled for the remainder of the term of the agreement to the
continuation of his base salary payable in conformity with Price Enterprises'
normal payroll period. The foregoing severance benefits are the exclusive
benefits that would be payable to Mr. Tebo by reason of his termination, and
Price Enterprises is not obligated to segregate any assets or procure any
investment in order to fund such severance benefits. The agreement also contains
confidentiality provisions and other terms and conditions customary to executive
employment agreement.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Each of Robert E. Price, Paul A. Peterson and James D. Sinegal is a director
of each of Price Enterprises and PriceCostco (although Messrs. Price and
Peterson have each tendered his resignation as a director of PriceCostco
effective as of the earlier of (i) the Closing Date and (ii) the date on which
shares of Price Enterprises Common Stock are distributed to PriceCostco
stockholders). Price Enterprises leases the four Warehouse Properties to Price,
and Price is expected to pay rents to Price Enterprises in fiscal year 1995 of
approximately $8.6 million. The Subsidiary Corporations will also engage in
certain transactions with PriceCostco. See "BUSINESS AND PROPERTIES OF PRICE
ENTERPRISES -- Mexico Clubs," "-- Price Quest," and "-- Price Global."
PriceCostco and Price Enterprises also have entered into an unsecured revolving
credit facility. See "CERTAIN RELATED AGREEMENTS -- Advance Agreement."
Sol Price is the father of Robert Price, the Chairman of the Board,
President and Chief Executive Officer of Price Enterprises. Sol Price is the
Chairman of the Board of the REIT and has beneficial ownership through various
family and charitable trusts of approximately 9% of the Class B Common Stock of
the REIT. The REIT is expected to provide certain services to Price Enterprises
in fiscal year 1995. See "BUSINESS AND PROPERTIES OF PRICE ENTERPRISES -- Real
Estate Business -- Relationship with The Price REIT."
INFORMATION CONCERNING THE PRICE ENTERPRISES 1995 COMBINED STOCK GRANT
AND STOCK OPTION PLAN
GENERAL
The Board of Directors of Price Enterprises adopted The Price Enterprises
1995 Combined Stock Grant and Stock Option Plan (the "Stock Plan") as of
November 14, 1994. The Stock Plan became effective as of such date, upon
approval of the Stock Plan by written consent of Price, as the sole stockholder
of Price Enterprises, and will terminate on the tenth anniversary of such date.
The purpose of the Stock Plan is to attract and retain employees of ability and
experience and to furnish such personnel significant incentives to improve
operations and increase profits of Price Enterprises. All officers and certain
key employees of Price Enterprises and any parent or subsidiary corporation of
Price Enterprises are eligible to receive options or stock under the Stock Plan.
In general, the Stock Plan authorizes Price Enterprises to grant stock
options, either non-qualified stock options or incentive stock options (as
defined in section 422 of the Code), to purchase up to 1,500,000 shares of Price
Enterprises Common Stock (the "Option Program") and to make stock grants in the
amount of up to 250,000 shares of Price Enterprises Common Stock (the "Grant
Program") (subject to adjustment to protect against dilution). The Stock Plan
provides that for every six shares of Price Enterprises Common Stock on which a
discretionary option is granted under the Option Program, one share will be
removed from those available for future grants under the Grant Program, and for
every share of Price Enterprises Common Stock granted under the Grant Program,
six shares will be removed from those available for future stock options under
the discretionary Option Program.
The authority to grant discretionary options and make discretionary stock
grants and to administer the Stock Plan is vested in the Compensation Committee
of the Board of Directors of Price Enterprises (the "Price Enterprises
Compensation Committee"). Notwithstanding the foregoing, with respect to
decisions to grant Price Enterprises Common Stock or to award options under the
Stock Plan to officers and employee directors of Price Enterprises who are
subject to the reporting requirements under Section 16 of the
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<PAGE>
Exchange Act, an independent committee consisting of two or more directors none
of whom has during the one year prior to service on such independent committee
been granted or awarded Price Enterprises Common Stock or options under the
Stock Plan or any other discretionary stock option or stock grant plan shall
make such decisions (the "Independent Committee") (the Independent Committee and
the Price Enterprises Compensation Committee shall hereinafter be referred to as
the "Authorized Committee"). Pursuant to the Board's authorizing resolutions
with respect to the Stock Plan, all options and stock granted under the Stock
Plan are subject to the consummation of the Exchange Offer.
The following summary of the material terms and provisions of the Stock Plan
is qualified in its entirety by the full text of the Stock Plan which is
attached hereto as Annex VI.
OPTION PROGRAM
The purchase price of each share of Price Enterprises Common Stock covered
by an option may not be less than 100% of the fair market value of Price
Enterprises Common Stock, as determined by the Authorized Committee, on the date
of grant of the option or 110% of the fair market value in the case of an
incentive stock option granted to a person who owns, directly or indirectly,
more than 10% of the total combined voting power of all classes of stock of
Price Enterprises. The aggregate fair market value (determined as of the time
the option is granted) of the shares of Price Enterprises Common Stock with
respect to which incentive stock options are exercisable for the first time by
an optionee during any calendar year may not exceed $100,000.
Price Enterprises Common Stock purchased upon the exercise of options may be
paid for by the optionee either (i) in cash, (ii) by delivering shares of Price
Enterprises Common Stock owned by the optionee with a fair market value on the
last business day prior to the date of delivery equal to the aggregate purchase
price of the shares with respect to which the option or portion is thereby
exercised, or (iii) in any combination of the consideration described in the
foregoing clauses (i) and (ii), provided that the delivery of shares of Price
Enterprises Common Stock already owned by the optionee is not a disqualifying
disposition under section 425(h) of the Code. The Stock Plan does not permit
stock pyramiding for stock options intended to qualify as incentive stock
options. Stock pyramiding is the practice of first delivering one share upon
exercise of an option and then successively exchanging newly acquired shares for
more and more option shares.
The Stock Plan provides that options granted are not to be exercisable until
one year from the date of grant nor after 10 years and one day from the date of
grant (or 10 years from the date of grant in the case of incentive stock
options). Within these limits, discretionary options granted to officers or
employees may be exercisable at any time the Authorized Committee may determine
at the time of grant. However, no incentive stock options granted to a person
who owns, on the date of grant, more than 10% of the total combined voting power
of all classes of stock of Price Enterprises may be exercisable after the
expiration of five years from the date of grant.
The Stock Plan provides that the total number of shares covered by it and
the price and number of shares subject to any outstanding options will be
adjusted to reflect certain events which affect Price Enterprises Common Stock,
including certain reorganizations, recapitalizations and mergers, stock
dividends and stock splits.
The Stock Plan provides that options are non-transferable other than by will
or by the laws of descent and distribution and are exercisable during the
optionee's lifetime only by the optionee. If an optionee dies, his or her
options may be exercised for a period of 12 months from the date of death (but
not beyond the option period) by the executor or administrator of the optionee's
estate, or, if there is no such executor or administrator, then by the person or
persons to whom the optionee's rights under the option have passed by will or
the laws of descent and distribution.
If a holder of a discretionary option ceases to be an officer or employee of
Price Enterprises for any reason other than death or termination for cause, or
ceases to hold a position in which employees are eligible to receive options,
that former participant may exercise options in accordance with their terms only
for a period of 90 days after leaving Price Enterprises or his or her former
position (but not beyond the option
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<PAGE>
period); provided, however, that if such cessation is due to an optionee's
disability (within the meaning of section 22(e)(3) of the Code), that former
participant may exercise options in accordance with their terms only for a
period of 12 months after such cessation (but not beyond the option period). The
former participant may only exercise the number of shares that could have been
purchased on the date of termination of employment or change in position, plus a
fraction of the shares that would have become exercisable on the next
anniversary of the original option grant.
If the termination of an optionee's position as an officer or employee of
Price Enterprises is for cause (as determined in the sole judgment of the Board
of Directors), any option or options shall thereupon be cancelled and the
optionee would have no right to exercise any part of the option after such
termination.
The Authorized Committee has the authority to establish additional terms of
the discretionary options, which need not be identical for each option, and to
amend or terminate the Stock Plan at any time, without stockholder approval;
however, the Board of Directors and the Authorized Committee have no authority,
without stockholder approval, to increase the number of shares subject to the
Stock Plan, to reduce the price at which Price Enterprises Common Stock may be
purchased to below the fair market value on the option grant date, or to expand
the availability of the Stock Plan to persons other than eligible employees, as
specified in the Stock Plan.
GRANT PROGRAM
Under the Grant Program, an aggregate of 250,000 shares of Price Enterprises
Common Stock will be available for grants to employees. The grants may be made
by the Board of Directors or the Authorized Committee, which may also establish
such vesting schedules, repurchase rights and obligations and other terms and
conditions as it may deem appropriate from time to time. Such shares may be
issued for any lawful consideration deemed appropriate, including services or
labor previously rendered, but not including future services. It is expected
that shares under the Stock Plan will be issued without any monetary
consideration required from the recipient. The number of shares granted will be
considerably less than the number of options that would have been granted to the
same employee under similar circumstances.
Price Enterprises does not intend to issue both grants and options to the
maximum degrees that would be permitted under the two programs combined.
Accordingly, the Stock Plan submitted provides that for every six shares of
Price Enterprises Common Stock on which a discretionary option is granted under
the Option Program, one share will be removed from those available under the
Grant Program, and for every share of common stock granted under the Grant
Program, six shares will be removed from those available for stock options under
the discretionary Option Program.
ANTICIPATED GRANTS OF OPTIONS AND STOCK
STOCK OPTIONS. It is anticipated that Theodore Wallace, Executive Vice
President of Price Enterprises; Mark T. Livingston, Chief Executive Officer of
Price Quest; and Joseph J. Tebo, President of Price Ventures, will each receive
options to purchase 100,000 shares of Price Enterprises Common Stock under the
Stock Plan, subject to the Independent Committee granting such options at its
sole discretion. It is also anticipated that Steven A. Velazquez, President of
Price Quest; Daniel T. Carter, Executive Vice President, Chief Financial Officer
and Secretary of Price Enterprises; and Robert M. Gans, Executive Vice President
and General Counsel of Price Enterprises, will each receive options to purchase
75,000 shares of Price Enterprises Common Stock under the Stock Plan, subject to
the Independent Committee granting such options at its sole discretion.
The stock options to be granted to Messrs. Wallace, Livingston, Tebo,
Velazquez, Carter and Gans would have an exercise price equal to the fair market
value of Price Enterprises Common Stock at the date of grant and would become
exercisable at 20% per year over a five-year period, as described in "MANAGEMENT
OF PRICE ENTERPRISES -- Compensation of Executive Officers -- Executive
Compensation During Fiscal Year 1995."
It is anticipated that additional options to purchase shares of Price
Enterprises Common Stock under the Stock Plan will be granted from time to time
to persons eligible to receive such options in accordance with the terms and
conditions set forth in the Stock Plan.
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<PAGE>
STOCK GRANTS. It is anticipated that shares of Price Enterprises Common
Stock under the Stock Plan will be granted from time to time to persons eligible
to receive such shares in accordance with the terms and conditions set forth in
the Stock Plan.
FEDERAL INCOME TAX CONSEQUENCES
The following is a brief summary of the principal Federal income tax
consequences of transactions based on current Federal income tax laws. This
summary of material Federal income tax consequences is not intended to be
exhaustive and does not describe state, local or foreign tax consequences.
Participants are strongly urged to consult their own tax advisors regarding the
Federal, state, local or other tax consequences of awards and other transactions
under the Stock Plan.
INCENTIVE STOCK OPTIONS. No taxable income is realized by an optionee upon
the grant or exercise of an incentive stock option. If shares of Price
Enterprises Common Stock are issued to an optionee pursuant to the exercise of
an incentive stock option granted under the Stock Plan and if no disqualifying
disposition of such shares is made by such optionee within two years after the
date of grant or within one year after the receipt of such shares by such
optionee, then (a) upon the sale of such shares, any amount realized in excess
of the option price will be taxed to such optionee as a long-term capital gain
and any loss sustained will be a long-term capital loss, and (b) no deduction
will be allowed to Price Enterprises. Under present Federal income tax law,
capital gains are subject to tax at a lower statutory rate, 28%, than ordinary
income, for which the highest marginal statutory rate is 39.6%. Additionally,
the exercise of an incentive stock option will give rise to an item of tax
preference that may result in alternative minimum tax liability for the
optionee.
If shares of Price Enterprises Common Stock acquired upon the exercise of an
incentive stock option are disposed of prior to the expiration of either holding
period described above, generally (a) the optionee will realize ordinary income
in the year of disposition in an amount equal to the excess (if any) of the fair
market value of the shares at exercise (or, if less, the amount realized on the
disposition of the shares) over the option price thereof, and (b) Price
Enterprises will be entitled to deduct such amount. Any further gain or loss
realized by the optionee will be subject to tax as short-term or long-term
capital gain or loss, as the case may be, and will not result in any deduction
by Price Enterprises. If an optionee pays the exercise price in full or in part
with previously acquired shares of Price Enterprises Common Stock, the exchange
should not affect the tax treatment of the exercise. Upon such exchange, no gain
or loss generally will be recognized upon the delivery of the previously
acquired shares to Price Enterprises, and the shares of Price Enterprises Common
Stock received by the optionee, equal in number to the previously acquired
shares of Price Enterprises Common Stock exchanged therefor, will have the same
basis and holding period for long-term capital gain purposes as the previously
acquired shares. An optionee, however, would not be able to utilize the holding
period for the previously acquired shares for purposes of satisfying the
incentive stock option statutory holding period requirements. Shares of Price
Enterprises Common Stock received by the optionee in excess of the number of
previously acquired shares of Price Enterprises Common Stock will have a basis
of zero and a holding period which commences the date the Price Enterprises
Common Stock is issued to the optionee upon exercise of the incentive stock
option. If such an exercise is effected using shares of Price Enterprises Common
Stock previously acquired through the exercise of an incentive stock option, the
exchange of the previously acquired shares may be considered a disqualifying
disposition of such Price Enterprises Common Stock for purposes of the incentive
stock option rules.
If an incentive stock option is exercised at a time when it no longer
qualifies as an incentive stock option, the option will be treated as a
non-qualified option. Subject to certain exceptions for disability or death, an
incentive stock option generally will not be eligible for the Federal income tax
treatment described above if it is exercised more than three months following
the termination of employment.
NON-QUALIFIED STOCK OPTIONS. No income is realized by an optionee at the
time a non-qualified stock option is granted. Upon exercise, ordinary income is
generally realized by the optionee in an amount equal to the difference between
the option price (the amount paid for the shares) and the fair market value of
the shares on the date of exercise, and Price Enterprises will be entitled to
deduct a like amount. Generally, Price Enterprises will be required to withhold
taxes on the income realized by the holder at the time of exercise. Upon
disposition, appreciation or depreciation after the date of exercise will be
treated as either short-term or long-term capital gain or loss, as the case may
be.
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<PAGE>
Generally, upon exercise, a corporate insider will include in income, in the
taxable year in which he or she would no longer be subject to short-swing profit
liability under Section 16(b) of the Exchange Act were he or she to sell his or
her shares at a profit ("16(b) Liability"), an amount equal to the excess of (i)
the fair market value of the shares on the date he or she would no longer be
subject to 16(b) Liability over (ii) the option purchase price, and the holding
period for treating any gain or loss as long-term capital gain or loss will
begin at such time. Accordingly, taxation generally will not occur until at
least six months after the date of grant of the option. An optionee who would be
subject to 16(b) Liability at the time of exercise may elect, within 30 days
after exercise, to be taxed at the time of exercise. If such an election is
made, an "insider" will have ordinary income equal to the excess, if any, of the
aggregate fair market value of the shares of Price Enterprises Common Stock on
the date of exercise of the non-qualified stock option over the aggregate
exercise price.
If a non-qualified stock option is exercised using shares of Price
Enterprises Common Stock, an optionee will realize no income upon such exercise
with respect to the same number of shares of Price Enterprises Common Stock
received as are used to exercise the non-qualified stock option (the
"Replacement Shares"), but otherwise will be taxed according to the rules
described above. Thus, the optionee will realize ordinary income with respect to
any additional shares of Price Enterprises Common Stock received (the "Excess
Shares") in an amount equal to the fair market value of the Excess Shares. For
purposes of any subsequent sales, the optionee's basis for the Replacement
Shares will equal his or her basis for the shares of Price Enterprises Common
Stock used to exercise the non-qualified stock option and his or her basis for
the Excess Shares will equal the amount included in his or her income with
respect to the receipt of the Excess Shares.
Upon a subsequent sale of any shares of Price Enterprises Common Stock
acquired pursuant to the exercise of a non-qualified stock option, a participant
will have capital gain (or loss) equal to the difference between the amount
realized upon such sale and the participant's adjusted tax basis in the shares
of Price Enterprises Common Stock. The participant's basis is equal to the sum
of the exercise price under the option and the amount of income, if any,
recognized upon the exercise of such option. Such gain will be long-term or
short-term and will depend on whether the participant holds the shares of Price
Enterprises Common Stock for more than six months from the date the options are
exercised.
STOCK GRANTS. Unless an election is made under section 83(b) of the Code,
an employee to whom stock is granted will not have taxable income upon issuance
and Price Enterprises will not then be entitled to a deduction until any
forfeiture or transfer restrictions which may have been imposed on such shares
of stock expire, at which time the employee will realize ordinary income and
Price Enterprises will be entitled to a deduction in an amount equal to the fair
market value of the shares at the date such restrictions lapse, less any
purchase price therefor. If an election is made under section 83(b), the
employee will realize ordinary income at the date of issuance equal to the
difference between the fair market value of the shares at the date of issuance
(determined without regard to the forfeiture and transfer restrictions) less any
purchase price therefor, and Price Enterprises will be entitled to a deduction
in the same amount. Generally, whether or not an election is made under section
83(b), Price Enterprises will be required to withhold taxes on the income
realized by the holder. Gain or loss realized by the holder on the subsequent
sale or disposition of the shares will normally be taxable as capital gain or
loss and no further deduction will be allowed to Price Enterprises.
CONTINUATION OF PRICECOSTCO STOCK OPTIONS
Each outstanding option for the purchase of shares of PriceCostco Common
Stock granted under any stock option plan of Price, Costco or PriceCostco (the
"PriceCostco Option Plan"), which option is held as of January 1, 1995 by a
Price Enterprises employee and is then exercisable will remain vested and
exercisable under the PriceCostco Option Plan on generally the same terms and
conditions set forth in the agreement evidencing the grant of such option;
PROVIDED, HOWEVER, that the term of such option will expire no later than 30
days following termination of such employee's employment with Price Enterprises.
Under the terms of the Transfer and Exchange Agreement, PriceCostco is required
to take all action necessary and appropriate to amend the PriceCostco Option
Plan to provide for such continued exercisability; PROVIDED, HOWEVER, that
PriceCostco would not be required to so amend such plan with respect to such
employees who are subject to
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<PAGE>
Section 16 of the Exchange Act ("Insiders"). With respect to such Insiders, the
options currently held by such Insiders would either be cancelled or permitted
to expire according to their terms (I.E., 30 days following the termination of
such Insider's employment with PriceCostco) and, upon such cancellation or
expiration, PriceCostco would grant new options, outside such plan, in the same
number and with the same exercise price as the cancelled or expired options and
otherwise generally on the same terms and conditions as set forth in the
agreements evidencing the grant of the options currently held by the Insiders.
INFORMATION CONCERNING THE PRICE ENTERPRISES
DIRECTORS' 1995 STOCK OPTION PLAN
GENERAL NATURE AND PURPOSE. The Board of Directors of Price Enterprises
adopted The Price Enterprises Directors' 1995 Stock Option Plan (the "Directors'
Plan") as of November 14, 1994. The Directors' Plan became effective as of such
date, upon approval of the Directors' Plan by written consent of Price, as the
sole stockholder of Price Enterprises, and will terminate on the tenth
anniversary of such date. The Directors' Plan was adopted to further the growth,
development and financial success of Price Enterprises by providing additional
incentives to its non-employee directors, and to enable Price Enterprises to
obtain and retain the services of the type of directors considered essential to
the long-range success of Price Enterprises.
The following summary of the material terms and provisions of the Directors'
Plan is qualified in its entirety by the full text of the Directors' Plan which
is attached hereto as Annex VII.
OPTIONS AUTHORIZED; PARTICIPATING DIRECTORS. The Directors' Plan authorizes
Price Enterprises to grant stock options to purchase up to 150,000 shares of
Price Enterprises Common Stock, subject to certain adjustments, to directors of
Price Enterprises (other than James D. Sinegal) who are not, at the time they
receive options, employees of Price Enterprises or any of its subsidiaries.
Pursuant to the Board's authorizing resolutions with respect to the Directors'
Plan, all options granted under the Directors' Plan are subject to the
consummation of the Exchange Offer.
ADMINISTRATION. The Directors' Plan is administered by a committee (the
"Committee") consisting of two or more directors, appointed by the Board of
Directors of Price Enterprises. In addition to administering the Directors'
Plan, the Committee is also authorized to interpret the Directors' Plan and to
prescribe, amend and revoke rules and regulations relating to the Directors'
Plan.
GRANT OF OPTIONS. The Directors' Plan provides that participating
directors, other than the Vice Chairman of the Board, will be granted options
for 10,000 shares of Price Enterprises Common Stock (except in the case of
reorganizations, recapitalizations, stock splits or other combinations of
shares, as described below), on the date on which he or she first is elected as
a director of Price Enterprises, and that the Vice Chairman of the Board will be
granted options for 50,000 shares of Price Enterprises Common Stock (except in
the case of reorganizations, recapitalizations, stock splits or other
combinations of shares, as described below), on the date on which he or she
first is elected as a director of Price Enterprises. In consideration of
receiving the options, the participating director is deemed to have agreed to
remain as a director of Price Enterprises for a period of at least one year
after the date of grant. The Directors' Plan provides, however, that nothing
therein shall confer upon any participating director any right to continue as a
director of Price Enterprises or shall interfere with or restrict in any way the
rights of Price Enterprises or Price Enterprises' stockholders to remove any
participating director at any time for any reason whatsoever, with or without
cause, to the extent permitted by Price Enterprises' bylaws and applicable law.
TERMS AND EXERCISE OF OPTIONS. The term of any option cannot be longer than
10 years from the date of grant. Options granted under the Directors' Plan
become exerciseable at 20% per year over the five year period commencing at the
date of grant. Payment for shares purchased upon any exercise of an option must
be made in full at the time of such exercise (i) in cash, (ii) by delivering
shares of Price Enterprises Common Stock already owned by the optionee, or (iii)
a combination of in cash and by delivering shares of Price Enterprises Common
Stock already owned by the optionee.
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<PAGE>
Options which are exercisable upon termination of a participating director's
status as a director of Price Enterprises generally expire 90 days following
such termination, unless a director ceases to be a director due to death or
disability, in which case options terminate within one year of such event.
The exercise price of each option is equal to the aggregate fair market
value of the shares of Price Enterprises Common Stock optioned on the date of
grant of such option. For this purpose, such fair market value means the mean of
the bid and asked prices (or the closing price per share if Price Enterprises
Common Stock is listed on The Nasdaq Stock Market's National Market) of Price
Enterprises Common Stock in effect immediately prior to the date of grant, or,
in the event Price Enterprises Common Stock is listed on a stock exchange, the
fair market value per share is the closing price on such exchange on the date
immediately prior to the grant of the option, or if no such quotations are
reported such fair market value means the value established by what the
Committee in its judgment then deems to be the most nearly comparable valuation
method.
NONASSIGNABILITY. Options may be transferred only by will or by the laws of
descent and distribution and during a holder's lifetime are exercisable only by
the option holder.
ADJUSTMENTS UPON CHANGE IN CAPITALIZATION. If the outstanding shares of
Price Enterprises Common Stock subject to options are changed into or exchanged
for a different number or kind of shares of Price Enterprises or other
securities of Price Enterprises by reason of a stock split, reverse stock split,
stock dividend, combination or reclassification of shares or otherwise, the
Committee will make an appropriate adjustment in the number and kind of shares
as to which all outstanding options or portions thereof then unexercised, will
be exercisable, to the end that after such event the option holder's
proportionate interests will be maintained as before the occurrence of such
event. Upon the dissolution or liquidation of Price Enterprises, or upon a
reorganization, merger or consolidation of Price Enterprises as a result of
which the outstanding shares of Price Enterprises Common Stock are changed or
exchanged for cash or property or securities not of Price Enterprises' issue, or
upon a sale of substantially all the property of Price Enterprises to another
corporation or person, the Directors' Plan will terminate, and all options
granted thereunder will terminate, unless otherwise provided in writing in
connection with such transaction.
AMENDMENTS. The Board of Directors of Price Enterprises may at any time
amend or otherwise modify, suspend or terminate the Directors' Plan, provided
that no such action shall deprive an option holder, without his or her consent,
of any option previously granted pursuant to the Directors' Plan or of any of
the option holder's rights under such option.
GRANTS OF OPTIONS. Subject to the terms and conditions of the Directors'
Plan and the consummation of the Exchange Offer, Paul A. Peterson, Vice Chairman
of the Board of Price Enterprises, has been granted 50,000 options under the
Directors' Plan. It is anticipated that Katherine L. Hensley, Nancy Y. Bekavac
and Murray L. Galinson, each of whom will be appointed as a director of Price
Enterprises immediately following the consummation of the Exchange Offer, will
be granted 10,000 options under the Directors' Plan at the time of such
appointment.
FEDERAL TAX ASPECTS. The Federal income tax aspects of the Directors' Plan
are identical to those described above for the Stock Plan under the heading
"Federal Income Tax Consequences -- Non-Qualified Stock Options."
RETIREMENT PLAN
From the Transfer Closing Date until January 1, 1995, employees of
PriceCostco who are leased to Price Enterprises and its subsidiaries and who
currently receive benefits under The Price Company Retirement Plan or under The
Price Company 401(k) Plan will continue to enjoy benefits under such plans. Upon
consummation of the Exchange Offer, the Board of Directors of Price Enterprises
intends to adopt the Price Enterprises Retirement Plan (the "Retirement Plan"),
which will include terms and conditions substantially similar to The Price
Company Retirement Plan and The Price Company 401(k) Plan.
It is anticipated that the Retirement Plan will be a profit-sharing plan
designed to be a "qualified" plan under applicable provisions of the Code,
covering all non-union employees who have completed one year of service, as that
term is defined in the Retirement Plan. Under the Retirement Plan, Price
Enterprises may, in
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<PAGE>
its discretion, make annual contributions which shall not exceed for each
participant the lesser of: (a) 25% of the participant's compensation for such
year, or (b) the greater of (i) 25% of the defined benefit dollar limitation
then in effect under section 415(b)(1) of the Code or (ii) $30,000. In addition,
participants may make voluntary contributions. In addition, the Retirement Plan
will permit employees to defer (in accordance with section 401(k) of the Code) a
portion of their salary and contribute those deferrals to the Retirement Plan.
All participants in the Retirement Plan are fully vested in their voluntary
contributions. Vesting in the remainder of a participant's account is based upon
his or her years of service with Price Enterprises and in their salary
deferrals. A participant initially will be 10% vested after the completion of
two years of service with Price Enterprises, an additional 10% vested after the
completion of three years of service, and an additional 20% vested after the
completion of each of his or her next four years of service, so that the
participant will be 100% vested after the completion of seven years of service.
A participant becomes fully vested in his or her entire account upon
retirement due to permanent disability, attainment of age 65, or death. In
addition, the Retirement Plan provides that the Board of Directors of Price
Enterprises may at any time declare the Retirement Plan partially or completely
terminated, in which event the account of each participant with respect to whom
the Retirement Plan is terminated will become fully vested.
The Board of Directors also has the right at any time to discontinue
contributions to the Retirement Plan. If Price Enterprises fails to make one or
more substantial contributions to the Retirement Plan for any period of three
consecutive years in each year of which Price Enterprises realized substantial
current earnings, such failure will automatically be deemed a complete
discontinuance of contributions. In the event of such a complete discontinuance
of contributions, the account of each participant will become fully vested.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During fiscal year 1994, the PriceCostco Compensation Committee consisted of
Hamilton E. James, J. Paul Kinloch and John W. Meisenbach. None of these
individuals is expected to be an officer, director or employee of Price
Enterprises or any of its subsidiaries.
SECURITY OWNERSHIP
PRICECOSTCO
The following table sets forth, as of October 31, 1994, information
regarding the number of shares of PriceCostco Common Stock beneficially owned by
each director of PriceCostco, all directors and executive officers of
PriceCostco as a group and certain beneficial owners of PriceCostco Common
Stock, and the ownership (expressed as a percentage) of PriceCostco Common Stock
and Price Enterprises Common Stock by each such person or group upon
consummation of the Transaction. The expected percentage ownership is expressed
in the alternative, assuming that the Exchange Offer is (i) oversubscribed, with
all outstanding shares of PriceCostco Common Stock validly tendered and 27
million such shares accepted for exchange by PriceCostco; (ii) oversubscribed by
27 million shares and therefore subject to proration (I.E., 54 million shares of
PriceCostco Common Stock are validly tendered but only 27 million such shares
are accepted for exchange by PriceCostco); (iii) fully subscribed but not
oversubscribed (I.E., 27 million shares are validly tendered and accepted for
exchange by PriceCostco); (iv) undersubscribed, with 21.6 million shares of
PriceCostco Common Stock validly tendered and accepted for exchange by
PriceCostco; (v) undersubscribed, with 13.5 million shares of PriceCostco Common
Stock validly tendered and accepted for exchange by PriceCostco; and (vi)
undersubscribed, with no shares of PriceCostco Common Stock tendered. The
percentages with respect to each person or group contained in the following
table (except for Messrs. Brotman and Sinegal, who have agreed not to tender any
shares of PriceCostco Common Stock in the Exchange Offer, and Messrs. Bernard
and Kinloch, who do not beneficially own any shares of PriceCostco Common Stock)
are based upon three alternative assumptions as to the person's or group's
participation in the Exchange Offer: (x) none of such person's or group's shares
of PriceCostco Common Stock are tendered in the Exchange offer, (y) 50% of such
person's or group's holdings of PriceCostco Common Stock are so tendered and (z)
all of such person's or group's holdings of PriceCostco Common Stock are so
tendered.
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<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OWNERSHIP IF PERCENTAGE OWNERSHIP IF PERCENTAGE OWNERSHIP IF
CURRENT HOLDINGS OF
PRICECOSTCO ALL OUTSTANDING SHARES 54 MILLION SHARES 27 MILLION SHARES
COMMON STOCK TENDERED AND 27 MILLION TENDERED AND 27 MILLION TENDERED AND 27 MILLION
------------------------ SHARES EXCHANGED (1) SHARES EXCHANGED (2) SHARES EXCHANGED (3)
SHARES ------------------------- ------------------------- -------------------------
BENEFICIALLY PRICE PRICE PRICE
DIRECTORS: OWNED PERCENT PRICECOSTCO ENTERPRISES PRICECOSTCO ENTERPRISES PRICECOSTCO ENTERPRISES
- -------------------- -------------- ------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Jeffrey H.
Brotman............ 3,606,312(6) 1.7
No shares
tendered......... -- -- 1.9 -- 1.9 --
Daniel Bernard...... -- -- -- -- -- -- -- --
Richard D.
DiCerchio.......... 485,502(7) *
No shares
tendered......... -- -- * -- * --
50% of current
holdings
tendered......... -- -- * * * *
All current
holdings
tendered......... * * * * * *
Hamilton E. James... 123,465(8) *
No shares
tendered......... -- -- * -- * --
50% of current
holdings
tendered......... -- -- * * * *
All current
holdings
tendered......... * * * * * *
J. Paul Kinloch..... -- (9) -- -- -- -- -- -- --
Richard M.
Libenson........... 59,640(10) *
No shares
tendered......... -- -- * -- * --
50% of current
holdings
tendered......... -- -- * * * *
All current
holdings
tendered......... * * * * -- *
Mitchell G. Lynn.... 111,942(11) *
No shares
tendered......... -- -- * -- * --
50% of current
holdings
tendered......... -- -- * * * *
All current
holdings
tendered......... * * * * * *
John W.
Meisenbach......... 279,246(12) *
No shares
tendered......... -- -- * -- * --
50% of current
holdings
tendered......... -- -- * * * *
All current
holdings
tendered......... * * * * * *
Duane Nelles........ 2,330 *
No shares
tendered......... -- -- * -- * --
50% of current
holdings
tendered......... -- -- * * * *
All current
holdings
tendered......... * * * * -- *
Paul A. Peterson.... 278,689(13) *
No shares
tendered......... -- -- * -- * --
50% of current
holdings
tendered......... -- -- * * * *
All current
holdings
tendered......... * * * * -- 1.0
Robert E. Price..... 2,798,571(14) 1.3
No shares
tendered......... -- -- 1.5 -- 1.5 --
50% of current
holdings
tendered......... -- -- 1.1 2.6 * 5.2
All current
holdings
tendered......... 1.3 1.3 * 5.2 * 10.3
James D. Sinegal.... 3,088,922(15) 1.4
No shares
tendered......... -- -- 1.6 -- 1.6 --
ALL DIRECTORS AND
EXECUTIVE OFFICERS
AS A GROUP
(20 PERSONS)....... 11,548,439(16) 5.3
No shares
tendered......... -- -- 6.0 -- 6.0 --
50% of current
holdings
tendered......... -- -- 4.7 9.4 3.3 18.9
All current
holdings
tendered......... 5.3 4.7 2.9 18.9 * 37.8
<CAPTION>
CERTAIN BENEFICIAL
OWNERS:
- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fourcar B.V. (17)... 21,191,301 9.7
No shares
tendered......... -- -- 11.1 -- 11.1 --
50% of current
holdings
tendered......... -- -- 8.3 19.6 5.6 39.2
All current
holdings
tendered......... 9.7 9.7 4.8 39.2 -- 78.5
Sol Price (19)...... 8,745,964 4.0
No shares
tendered......... -- -- 4.6 -- 4.6 --
50% of current
holdings
tendered......... -- -- 3.5 7.8 2.4 15.5
All current
holdings
tendered......... 4.0 3.8 2.1 15.5 * 31.0
<CAPTION>
PERCENTAGE OWNERSHIP IF PERCENTAGE OWNERSHIP IF
PERCENTAGE OWNERSHIP IF
21.6 MILLION SHARES 13.5 MILLION SHARES
TENDERED AND 21.6 MILLION TENDERED AND 13.5 MILLION NO SHARES TENDERED AND NO
SHARES EXCHANGED (4) SHARES EXCHANGED (5) SHARES EXCHANGED (5)
------------------------- ------------------------- -------------------------
PRICE PRICE PRICE
DIRECTORS: PRICECOSTCO ENTERPRISES PRICECOSTCO ENTERPRISES PRICECOSTCO ENTERPRISES
- -------------------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Jeffrey H.
Brotman............
No shares
tendered......... 1.8 -- 1.8 * 1.7 1.6
Daniel Bernard...... -- -- -- --
Richard D.
DiCerchio..........
No shares
tendered......... * -- * * * *
50% of current
holdings
tendered......... * * * * -- --
All current
holdings
tendered......... * 1.2 * * -- --
Hamilton E. James...
No shares
tendered......... * -- * * * *
50% of current
holdings
tendered......... * * * * -- --
All current
holdings
tendered......... * * * * -- --
J. Paul Kinloch..... -- -- -- -- -- --
Richard M.
Libenson...........
No shares
tendered......... * -- * * * *
50% of current
holdings
tendered......... * * * * -- --
All current
holdings
tendered......... -- * -- * -- --
Mitchell G. Lynn....
No shares
tendered......... * -- * * * *
50% of current
holdings
tendered......... * * * * -- --
All current
holdings
tendered......... * * * * -- --
John W.
Meisenbach.........
No shares
tendered......... * -- * * * *
50% of current
holdings
tendered......... * * * * -- --
All current
holdings
tendered......... * * * * -- --
Duane Nelles........
No shares
tendered......... * -- * * * *
50% of current
holdings
tendered......... * * * * -- --
All current
holdings
tendered......... -- * -- * -- --
Paul A. Peterson....
No shares
tendered......... * -- * * * *
50% of current
holdings
tendered......... * * * * -- --
All current
holdings
tendered......... -- 1.3 -- 1.0 -- --
Robert E. Price.....
No shares
tendered......... 1.4 -- 1.4 * 1.3 1.3
50% of current
holdings
tendered......... * 6.5 * 5.5 -- --
All current
holdings
tendered......... * 12.9 * 10.3 -- --
James D. Sinegal....
No shares
tendered......... 1.6 -- 1.5 * 1.4 1.4
ALL DIRECTORS AND
EXECUTIVE OFFICERS
AS A GROUP
(20 PERSONS).......
No shares
tendered......... 5.8 -- 5.6 2.5 5.3 4.7
50% of current
holdings
tendered......... 3.3 23.6 3.1 20.1 -- --
All current
holdings
tendered......... * 47.2 * 37.8 -- --
CERTAIN BENEFICIAL
OWNERS:
- --------------------
<S> <C> <C> <C> <C> <C> <C>
Fourcar B.V. (17)...
No shares
tendered......... 10.8 -- 10.4 5.3 9.7 9.7
50% of current
holdings
tendered......... 5.4 49.1 5.2 41.8 -- --
All current
holdings
tendered......... -- 98.1 -- (18) -- (18) -- --
Sol Price (19)......
No shares
tendered......... 4.5 -- 4.3 2.1 4.0 4.0
50% of current
holdings
tendered......... 2.3 20.2 2.2 16.5 -- --
All current
holdings
tendered......... * 38.8 * 31.0 -- --
<FN>
- ----------------------------------------
* Less than 1%.
</TABLE>
130
<PAGE>
<TABLE>
<S> <C>
<FN>
(1) Assumes that all outstanding shares of PriceCostco Common Stock
(217,824,520 shares as of October 31, 1994) are tendered in the Exchange
Offer, but only 27 million such shares are accepted for exchange by
PriceCostco.
(2) Assumes that the Exchange Offer is oversubscribed by 27 million shares and
therefore subject to proration (i.e., 54 million shares of PriceCostco
Common Stock are validly tendered but only 27 million such shares are
accepted for exchange by PriceCostco).
(3) Assumes that the Exchange Offer is fully subscribed but not oversubscribed
and subject to proration (i.e., 27 million shares of PriceCostco Common
Stock are validly tendered and accepted for exchange by PriceCostco).
(4) Assumes that 21.6 million shares of PriceCostco Common Stock are validly
tendered and accepted for exchange by PriceCostco, and PriceCostco elects
to sell to Price Enterprises the remaining 5.4 million shares of Price
Enterprises Common Stock owned by PriceCostco. See "THE TRANSACTION -- The
Distribution."
(5) Assumes that 13.5 million shares of PriceCostco Common Stock are validly
tendered and accepted for exchange by PriceCostco and the remaining 13.5
million shares of Price Enterprises Common Stock held by PriceCostco are
distributed to holders of record of PriceCostco Common Stock, as described
in "THE TRANSACTION -- The Distribution."
(6) Includes 3,404,323 shares held by a trust of which Mr. Brotman is a
principal beneficiary. Also includes 143,715 shares issuable under
currently exercisable stock options and options exercisable within sixty
days of October 31, 1994. Mr. Brotman has agreed not to tender any shares
of PriceCostco Common Stock beneficially owned by him in the Exchange
Offer.
(7) Includes 229,480 shares issuable under currently exercisable stock options
and options exercisable within sixty days of October 31, 1994.
(8) Includes 71,250 shares issuable under currently exercisable stock options
and options exercisable within sixty days of October 31, 1994. Does not
include 8,000 stock options granted subject to stockholder approval.
(9) Does not include 8,000 stock options granted subject to stockholder
approval.
(10) Does not include 8,000 stock options granted subject to stockholder
approval.
(11) Includes 1,109 shares issuable upon conversion of 6 3/4% Debentures and
100,044 shares issuable under currently exercisable stock options and
options exercisable within sixty days of October 31, 1994.
(12) Includes 85,496 shares held by a trust of which Mr. Meisenbach is the
principal beneficiary, of which he may be deemed to be beneficial owner,
and 193,750 shares issuable under currently exercisable stock options and
options exercisable within sixty days of October 31, 1994. Does not include
8,000 director stock options granted subject to stockholder approval.
(13) Does not include 8,000 director stock options granted subject to
stockholder approval.
(14) Mr. Price's wife is one of the three trustees of four trusts holding an
aggregate of 115,360 shares, of which 86,520 shares are held for the
benefit of the children of Mr. and Mrs. Price. Mr. Price disclaims
beneficial ownership in any of those shares, which are not included in the
table above. Includes 7,642 shares issuable under currently exercisable
stock options and options exercisable within sixty days of October 31,
1994.
(15) Includes 122,714 shares issuable under currently exercisable stock options
and options exercisable within sixty days of October 31, 1994. Mr. Sinegal
has agreed not to tender any shares of PriceCostco Common Stock
beneficially owned by him in the Exchange Offer.
(16) Includes 1,109 shares issuable upon conversion of 6 3/4% Debentures and
1,355,174 shares issuable under currently exercisable stock options and
options exercisable within sixty days of October 31, 1994. Does not include
40,000 stock options granted to each non-employee director of PriceCostco
subject to stockholder approval.
(17) The address of Fourcar B.V. is Blaak 28-34, 3011 TA Rotterdam, The
Netherlands.
(18) Not applicable since Fourcar B.V. beneficially owns more than 13.5 million
shares of PriceCostco Common Stock.
(19) Sol Price has sole beneficial ownership of the shares indicated as owned by
him, most of which are held in charitable trusts of which he is a trustee
with full power to vote and dispose of such shares. Includes 372,304 shares
issuable upon conversion of 6 3/4% Debentures and excludes 500 shares owned
by the Sol & Helen Price Foundation, of which Mr. Price is a board member,
but over which he disclaims beneficial ownership. Mr. Price's address is
7979 Ivanhoe Avenue, La Jolla, California 92037.
</TABLE>
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<PAGE>
PRICE ENTERPRISES
The following table sets forth, as of October 31, 1994, information
regarding the number of shares of Price Enterprises Common Stock beneficially
owned by each director of Price Enterprises and all directors and executive
officers as a group, and the expected ownership (expressed as a percentage) of
Price Enterprises Common Stock of each such person or group upon consummation of
the Transaction. The expected percentage ownership is expressed in the
alternative, assuming that the Exchange Offer is (i) over subscribed, with all
outstanding shares of PriceCostco Common Stock validly tendered and 27 million
such shares accepted for exchange by PriceCostco; (ii) oversubscribed by 27
million shares and therefore subject to proration (I.E., 54 million shares of
PriceCostco Common Stock are validly tendered but only 27 million such shares
are accepted for exchange by PriceCostco); (iii) fully subscribed but not
oversubscribed (I.E., 27 million shares are tendered and accepted for exchange
by PriceCostco); (iv) undersubscribed, with 21.6 million shares of PriceCostco
Common Stock validly tendered and accepted for exchange by PriceCostco; (v)
undersubscribed, with 13.5 million shares of PriceCostco Common Stock validly
tendered and accepted for exchange by PriceCostco; and (vi) undersubscribed,
with no shares of PriceCostco Common Stock tendered. The percentages with
respect to each director of Price Enterprises and all directors and executive
officers of Price Enterprises as a group contained in the following table
(except for Mr. Sinegal, who has agreed not to tender any shares of PriceCostco
Common Stock in the Exchange Offer) are based upon three alternative assumptions
as to the person's or group's participation in the Exchange Offer; (x) none of
such person's or group's shares of PriceCostco Common Stock are tendered in the
Exchange Offer, (y) 50% of such person or group's holdings of PriceCostco Common
Stock are so tendered and (z) all of such person or group's holdings of
PriceCostco Common Stock are so tendered.
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<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OWNERSHIP IF PERCENTAGE OWNERSHIP IF PERCENTAGE OWNERSHIP IF
CURRENT HOLDINGS OF
PRICECOSTCO ALL OUTSTANDING SHARES 54 MILLION SHARES 27 MILLION SHARES
COMMON STOCK TENDERED AND 27 MILLION TENDERED AND 27 MILLION TENDERED AND 27 MILLION
-------------------------- SHARES EXCHANGED (1) SHARES EXCHANGED (2) SHARES EXCHANGED (3)
SHARES ------------------------- ------------------------- -------------------------
BENEFICIALLY PRICE PRICE PRICE
OWNED PERCENT PRICECOSTCO ENTERPRISES PRICECOSTCO ENTERPRISES PRICECOSTCO ENTERPRISES
------------ ----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Paul A. Peterson.... 278,689(6) *
No shares
tendered......... -- -- * -- * --
50% of current
holdings
tendered......... -- -- * * * *
All current
holdings
tendered......... * * * * -- 1.0
Robert E. Price..... 2,798,571(7) 1.3
No shares
tendered......... -- -- 1.5 -- 1.5 --
50% of current
holdings
tendered......... -- -- 1.1 2.6 * 5.2
All current
holdings
tendered......... 1.3 1.3 * 5.2 * 10.3
James D. Sinegal.... 3,088,922(8) 1.4
No shares
tendered......... -- -- 1.6 -- 1.6 --
Katherine L.
Hensley............ -- -- -- -- -- -- -- --
Nancy Y. Bekavac.... -- -- -- -- -- -- -- --
Murray L.
Galinson........... -- -- -- -- -- -- -- --
All directors and
executive officers
as a group
(11 persons)....... 6,433,340(9) 2.8
No shares
tendered......... -- -- 3.4 -- 3.4 --
50% of current
holdings
tendered......... -- -- -- 5.6 1.8 11.3
All current
holdings
tendered......... 2.6 2.8 1.6 11.3 * 22.5
<CAPTION>
PERCENTAGE OWNERSHIP IF
PERCENTAGE OWNERSHIP IF 13.5 MILLION SHARES
TENDERED AND PERCENTAGE OWNERSHIP IF
21.6 MILLION SHARES 13.5 MILLION SHARES
TENDERED AND 21.6 MILLION NO SHARES TENDERED AND NO
SHARES EXCHANGED (4) EXCHANGED (5) SHARES EXCHANGED (5)
------------------------- ------------------------- -------------------------
PRICE PRICE PRICE
PRICECOSTCO ENTERPRISES PRICECOSTCO ENTERPRISES PRICECOSTCO ENTERPRISES
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Paul A. Peterson....
No shares
tendered......... * -- * * * *
50% of current
holdings
tendered......... * * * * -- --
All current
holdings
tendered......... -- 1.3 -- 1.0 -- --
Robert E. Price.....
No shares
tendered......... 1.4 -- 1.4 * 1.3 1.3
50% of current
holdings
tendered......... * 6.5 * 5.5 -- --
All current
holdings
tendered......... * 12.9 * 10.3 -- --
James D. Sinegal....
No shares
tendered......... 1.6 -- 1.5 * 1.4 1.4
Katherine L.
Hensley............ -- -- -- -- -- --
Nancy Y. Bekavac.... -- -- -- -- -- --
Murray L.
Galinson........... -- -- -- -- -- --
All directors and
executive officers
as a group
(11 persons).......
No shares
tendered......... 3.3 -- 3.1 1.5 2.9 2.8
50% of current
holdings
tendered......... 1.7 14.1 * 12.0 -- --
All current
holdings
tendered......... * 28.1 * 22.5 -- --
<FN>
- ------------------------------
* Less than 1%.
(1) Assumes that all outstanding shares of PriceCostco Common Stock
(217,824,520 shares as of October 31, 1994) are tendered in the Exchange
Offer, but only 27 million such shares are accepted for exchange by
PriceCostco.
(2) Assumes that the Exchange Offer is oversubscribed by 27 million shares and
therefore subject to proration (i.e., 54 million shares of PriceCostco
Common Stock are validly tendered but only 27 million such shares are
accepted for exchange by PriceCostco).
(3) Assumes that the Exchange Offer is fully subscribed (i.e., 27 million
shares of PriceCostco Common Stock are validly tendered and accepted for
exchange by PriceCostco), but not oversubscribed and subject to proration.
(4) Assumes that 21.6 million shares of PriceCostco Common Stock are validly
tendered and accepted for exchange by PriceCostco, and PriceCostco elects
to sell to Price Enterprises the remaining 5.4 million shares of Price
Enterprises Common Stock owned by PriceCostco. See "THE TRANSACTION -- The
Distribution."
(5) Assumes that 13.5 million shares of PriceCostco Common Stock are validly
tendered and accepted for exchange by PriceCostco and the remaining 13.5
million shares of Price Enterprises Common Stock held by PriceCostco are
distributed to holders of record of PriceCostco Common Stock, as described
in "THE TRANSACTION -- The Distribution."
(6) Does not include 8,000 director stock options granted subject to
stockholder approval.
(7) Mr. Price's wife is one of the three trustees of four trusts holding an
aggregate of 115,360 shares, of which 86,520 shares are held for the
benefit of the children of Mr. and Mrs. Price. Mr. Price disclaims
beneficial ownership in any of those shares, which are not included in the
table above. Includes 7,642 shares issuable under currently exercisable
stock options and options exercisable within sixty days of October 31,
1994.
(8) Includes 122,714 shares issuable under currently exercisable stock options
and options exercisable within sixty days of October 31, 1994. Mr. Sinegal
has agreed not to tender any shares of PriceCostco Common Stock
beneficially owned by him in the Exchange Offer.
(9) Includes 355,884 shares issuable under currently exercisable stock options
and options exercisable within 60 days of October 31, 1994. Does not
include 8,000 stock options granted subject to stockholder approval.
</TABLE>
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<PAGE>
PRICE ENTERPRISES' CERTIFICATE OF INCORPORATION
AND BYLAWS
The following is a summary of the Restated Certificate of Incorporation of
Price Enterprises (the "Price Enterprises Certificate") and the Bylaws of Price
Enterprises (the "Price Enterprises Bylaws") and is qualified in its entirety by
reference to the complete text of the Price Enterprises Certificate as set forth
on Annex III hereto, and the Price Enterprises Bylaws as set forth in Annex IV.
AUTHORIZED STOCK
The Price Enterprises Certificate provides that Price Enterprises is
authorized to issue 70,000,000 shares of stock, consisting of 60,000,000 shares
of Price Enterprises Common Stock, and 10,000,000 shares of preferred stock, par
value $.0001 per share ("Price Enterprises Preferred Stock"). Shares of Price
Enterprises Preferred Stock may be issued from time to time, in one or more
series, each of which series shall have such voting powers, designations,
preferences and rights, and the qualifications, limitations or restrictions
relating thereto, as shall be authorized by the Board of Directors of Price
Enterprises. See "DESCRIPTION OF PRICE ENTERPRISES' SECURITIES."
DIRECTORS
The Price Enterprises Bylaws provide that the number of directors shall
consist of three or more members, the exact number of which shall be fixed by
the Board of Directors from time to time. Initially, the Board will have seven
members. The Price Enterprises Bylaws provide that, except as otherwise provided
by law or the Price Enterprises Certificate, a quorum of the Board for the
transaction of business shall consist of a majority of the entire Board of
Directors. The act of a majority of the directors present at any meeting at
which there is a quorum shall be the act of the Board of Directors. The Price
Enterprises Certificate and Bylaws do not provide for a classified Board or for
cumulative voting in the election of directors to the Board. The Price
Enterprises Bylaws provide that vacancies and any newly-created directorships
resulting from an increase in the authorized number of directors may be filled
by a majority of the directors then in office, though less than a quorum, or by
a sole remaining director.
LIABILITY FOR MONETARY DAMAGES
The Price Enterprises Certificate provides that no director will be
personally liable to Price Enterprises or its stockholders for monetary damages
for breach of fiduciary duty as a director, other than liability for breach of
the duty of loyalty to Price Enterprises or its stockholders, acts or omissions
not in good faith, intentional misconduct, a knowing violation of law, certain
unlawful dividends, stock repurchases or redemptions or any transaction from
which the director derived an improper personal benefit. Any repeal or
modification of such provision by the stockholders of Price Enterprises will not
adversely affect any right or protection of a director existing at the time of
such repeal or modification with respect to acts or omissions occurring prior to
such repeal or modification.
ANTI-TAKEOVER EFFECT OF AUTHORIZED BUT UNDESIGNATED PREFERRED STOCK
As described above, the Price Enterprises Board will be authorized to
provide for the issuance of shares of Price Enterprises Preferred Stock, in one
or more series, and to fix by resolution of the Price Enterprises Board and to
the extent permitted by the DGCL, the terms and conditions of each such series.
Price Enterprises believes that the availability of Price Enterprises Preferred
Stock will provide Price Enterprises with increased flexibility in structuring
possible future financings and acquisitions and in meeting other corporate needs
which might arise from time to time. The authorized shares of Price Enterprises
Preferred Stock, as well as authorized but unissued shares of Price Enterprises
Common Stock, will be available for issuance without further action by Price
Enterprises stockholders, unless such action is required by applicable law or
the rules of any stock exchange or automated quotation system on which any class
of Price Enterprises stock may then be listed for trading.
Although the Board has no present intention of doing so, it could issue a
series of Price Enterprises Preferred Stock that could, depending on its terms,
either impede or facilitate the completion of a merger, tender offer or other
takeover attempt. For instance, such new shares might impede a business
combination by including class voting rights which would enable the holder to
block such transaction or facilitate a
134
<PAGE>
business combination by including voting rights which would provide a required
percentage vote of stockholders. The Board will make any determination to issue
such shares based on its judgment as to the best interests of Price Enterprises
and its then existing stockholders. The Board, in so acting, could issue Price
Enterprises Preferred Stock having terms which would discourage an acquisition
attempt or other transaction that some or a majority of the stockholders might
believe to be in their best interests or in which stockholders might receive a
premium for their stock over the then market price of such stock.
INDEMNIFICATION AND ADVANCEMENT OF EXPENSES
The Price Enterprises Certificate provides for the indemnification of
present and former directors and officers of Price Enterprises and persons
serving as directors, officers, employees or agents of another corporation or
entity at the request of Price Enterprises (each, an "Indemnified Party") to the
fullest extent permitted by the DGCL. Indemnified Parties are specifically
indemnified in the Price Enterprises Certificate and the Price Enterprises
Bylaws (the "Indemnification Provisions") for expenses, including attorneys'
fees, judgments, fines and amounts paid in settlement actually and reasonably
incurred by an Indemnified Party (i) in connection with a threatened, pending or
completed action, suit or proceeding (whether civil, criminal, administrative or
investigative) by reason of the fact that he or she is or was a director or
officer of Price Enterprises or is or was serving as a director, officer,
employee or agent of another corporation or entity at the request of Price
Enterprises, or (ii) in connection with the defense or settlement of a
threatened, pending or completed action or suit by or in right of Price
Enterprises, provided that such indemnification is permitted only with judicial
approval if the Indemnified Party is adjudged to be liable to Price Enterprises.
Such Indemnified Party must have acted in good faith and in a manner he or she
reasonably believed to be in or not opposed to the best interests of the subject
corporation and, with respect to any criminal action or proceeding, must have
had no reasonable cause to believe his or her conduct was unlawful. Any
indemnification under the Indemnification Provisions must be authorized based on
a determination that the indemnification is proper if the applicable standard of
conduct has been met by the Indemnified Party, provided that no such
authorization is required, and indemnification is mandatory, where a director or
officer of Price Enterprises is successful in the defense of such action, suit
or proceeding or any claim or matter therein. Otherwise, such determination will
be made by a majority vote of a quorum of the Board consisting of directors not
a party to the suit, action or proceeding, by a written opinion of independent
legal counsel or by the stockholders. In the event that a determination is made
that a director or officer is not entitled to indemnification under the
Indemnification Provisions, the Indemnification Provisions provide that the
Indemnified Party may seek a judicial determination of his or her right to
indemnification. The Indemnification Provisions further provide that the
Indemnified Party is entitled to indemnification for all expenses (including
attorneys' fees) incurred in any proceeding seeking to collect from Price
Enterprises an indemnity claim under the Indemnification Provisions if such
Indemnified Party is successful. Other than proceedings to enforce rights to
indemnification, Price Enterprises is not obligated to indemnify any person in
connection with a proceeding initiated by such person, unless authorized by the
Board of Price Enterprises.
Price Enterprises will pay expenses incurred by a director or officer of
Price Enterprises, or a former director or officer of Price Enterprises, in
advance of the final disposition of an action, suit or proceeding, if he or she
undertakes to repay amounts advanced if it is ultimately determined that he or
she is not entitled to be indemnified by Price Enterprises.
The Indemnification Provisions and provisions for advancing expenses in the
Price Enterprises Certificate are expressly not exclusive of any other rights of
indemnification or advancement of expenses pursuant to the Price Enterprises
Bylaws. The Indemnification Provisions and provisions for advancing expenses in
the Price Enterprises Bylaws and the Price Enterprises Certificate are expressly
not exclusive of any other rights of indemnification or advancement of expenses
pursuant to any agreement, vote of the stockholders or disinterested directors
or pursuant to judicial direction. Price Enterprises is authorized to purchase
insurance on behalf of an Indemnified Party for liabilities incurred, whether or
not Price Enterprises would have the power or obligation to indemnify him or her
pursuant to the Price Enterprises Certificate, the Price Enterprises Bylaws or
the DGCL.
135
<PAGE>
In addition, Price Enterprises will enter into indemnification agreements
with its directors and certain of its executive officers pursuant to which such
persons are indemnified for costs and expenses actually and reasonably incurred
by such persons in connection with a threatened, pending or completed claim
arising out of service as a director, officer, employee, trustee and/or agent of
Price Enterprises or another entity at the request of Price Enterprises. See
"MANAGEMENT OF PRICE ENTERPRISES -- Indemnification Agreements."
AMENDMENT OF THE PRICE ENTERPRISES CERTIFICATE OF INCORPORATION AND BYLAWS
The DGCL provides that approval of a majority of the stockholders entitled
to vote thereon is required to amend the Price Enterprises Certificate. A bylaw
may be amended or repealed, or a new bylaw adopted, by (i) the affirmative vote
of the holders of a majority of the stock entitled to vote thereon or (ii) a
majority of the entire Board of Directors.
TRANSACTIONS WITH INTERESTED OFFICERS OR DIRECTORS
The Price Enterprises Bylaws and the DGCL provide that contracts or
transactions between Price Enterprises and a director or officer of Price
Enterprises or a corporation or entity in which such officer or director is also
an officer or director or has a financial interest, are not void or voidable
solely for such reason or solely because the Price Enterprises officer or
director is present at or participates in any meeting of the Board which
authorizes the transaction or contract, or solely because such officer's or
director's vote is counted for such purpose, if (i) the material facts as to his
or her relationship or interest are disclosed or are known to the Board or a
committee and the Board or a committee in good faith authorizes such contract or
transaction; (ii) the material facts as to his or her relationship or interest
are disclosed or are known to the stockholders entitled to vote thereon and the
stockholders in good faith specifically approve such contract or transaction; or
(iii) the contract or transaction is fair to Price Enterprises at the time it is
authorized, approved or ratified by the Board, a committee or the stockholders.
In addition, the Price Enterprises Bylaws provide that any transactions with
interested directors or officers or their affiliates shall be made on
commercially reasonable terms substantially equivalent to terms available from
third parties in an arm's-length transaction in the competitive marketplace.
DESCRIPTION OF PRICE ENTERPRISES' SECURITIES
COMMON STOCK
The Price Enterprises Certificate authorizes 60,000,000 shares of Price
Enterprises Common Stock. Currently 27,000,000 shares of Price Enterprises
Common Stock are issued and outstanding, all of which are owned by PriceCostco.
All shares of Price Enterprises Common Stock are identical and each entitles
the holder thereof to one vote on matters to be voted upon by stockholders
generally, including the election of the Board of Directors. Except as provided
in any resolution by the Board with respect to any series of Price Enterprises
Preferred Stock or as otherwise required by law, the holders of Price
Enterprises Common Stock will possess all of the voting power of Price
Enterprises. The Price Enterprises Certificate does not provide for cumulative
voting for the election of directors. Subject to any preferences provided for by
resolution of the Board of Directors for any series of Price Enterprises
Preferred Stock, the holders of Price Enterprises Common Stock will be entitled
to such dividends as may be legally declared from time to time by the Board and,
upon liquidation, to receive pro rata all assets, if any, of Price Enterprises
available for distribution after the payment of necessary expenses and all prior
claims.
Upon consummation of the Exchange Offer, no holder of any authorized stock
of Price Enterprises will have any preemptive right to subscribe to any
securities of Price Enterprises.
PREFERRED STOCK
The Price Enterprises Certificate authorizes 10,000,000 shares of Price
Enterprises Preferred Stock, none of which are issued and outstanding. The Price
Enterprises Preferred Stock is issuable in one or more series, any or all of
which may have such voting powers, designations, preferences and relative,
participating, optional or other special rights, and such qualifications,
limitations or restrictions relating thereto, including
136
<PAGE>
voting rights, dividends, rights on liquidation, dissolution or winding up of
Price Enterprises, conversion or exchange rights and redemption provisions, if
any, as are set forth in the resolutions adopted by the Board of Directors
providing for the issue of such stock and as permitted by the DGCL. The issuance
in the future of Price Enterprises Preferred Stock or the designation of
authorized but unissued shares of Price Enterprises Preferred Stock with voting
and other rights which may be established by the Price Enterprises Board in its
discretion, without stockholder approval, may be used by Price Enterprises to
create voting impediments or otherwise delay or prevent a change in control of
Price Enterprises. By issuance of Price Enterprises Preferred Stock, the Board
of Directors could modify the rights of holders of Price Enterprises Common
Stock.
COMPARISON OF RIGHTS OF
STOCKHOLDERS OF PRICECOSTCO AND PRICE ENTERPRISES
Upon consummation of the Exchange Offer, stockholders of PriceCostco who
exchange their shares of PriceCostco Common Stock for Price Enterprises Common
Stock will become stockholders of Price Enterprises. The rights of a Price
Enterprises stockholder will be defined and governed by the Price Enterprises
Certificate and the Price Enterprises Bylaws rather than the Certificate of
Incorporation of PriceCostco and the Amended PriceCostco Bylaws. Certain
provisions of the Price Enterprises Certificate and the Price Enterprises Bylaws
alter the rights of stockholders from those that PriceCostco stockholders
presently have and also alter certain powers of management. These provisions are
summarized below. This summary is qualified in its entirety by reference to the
Price Enterprises Certificate, the Price Enterprises Bylaws, the Restated
Certificate of Incorporation of PriceCostco (the "PriceCostco Certificate"), the
Amended PriceCostco Bylaws and applicable law.
CAPITAL STOCK
PRICECOSTCO. The PriceCostco Certificate authorizes 1,000,000,000 shares of
capital stock, 900,000,000 of which are shares of PriceCostco Common Stock and
100,000,000 of which are shares of authorized but undesignated preferred stock,
par value $.01 per share of PriceCostco (the "PriceCostco Preferred Stock").
PRICE ENTERPRISES. The Price Enterprises Certificate authorizes 70,000,000
shares of capital stock, 60,000,000 of which are shares of Price Enterprises
Common Stock and 10,000,000 of which are shares of authorized but undesignated
Price Enterprises Preferred Stock. Each of the PriceCostco Certificate and the
Price Enterprises Certificate authorizes its respective board of directors to
establish the rights, preferences and limitations of PriceCostco Preferred Stock
and Price Enterprises Preferred Stock. As noted above, if and when issued, such
preferred stock could, without stockholder approval, have the effect of delaying
or preventing a change in control or modifying the rights of holders of common
stock of PriceCostco or Price Enterprises, as the case may be.
BOARD OF DIRECTORS
PRICECOSTCO. The Amended PriceCostco Bylaws provide that its Board of
Directors shall consist of one or more members, the exact number of which shall
be fixed from time to time by the Board of Directors. The PriceCostco Board is
divided into three classes, and, following the expiration of his or her initial
term, each director is elected for a three-year term.
PRICE ENTERPRISES. The Price Enterprises Bylaws provide that its Board of
Directors shall consist of three or more members, the exact number of which
shall be fixed from time to time by the Board of Directors. The Price
Enterprises Board of Directors is not divided into classes and all directors are
elected at each annual meeting. Because Price Enterprises Board of Directors is
not divided into three classes, it would be easier for stockholders to
effectuate an immediate change in control of the Board of Price Enterprises
compared to PriceCostco.
AMENDMENT OF CERTIFICATE OF INCORPORATION
The DGCL provides that approval of a majority of the shares entitled to vote
thereon is required to amend the PriceCostco Certificate and the Price
Enterprises Certificate. However, the PriceCostco Certificate further requires
the affirmative vote of 66 2/3% of the combined voting power of all of the
securities of
137
<PAGE>
PriceCostco entitled to vote generally for the election of directors, voting
together as a single class, to alter, amend, rescind, or repeal the provisions
providing for a classified board of directors, and the other provisions of the
PriceCostco Certificate relating to the number of directors, the length of
directors' terms and the filling of vacancies. The Price Enterprises Certificate
does not contain any such additional voting requirements and therefore, it would
be easier for stockholders to effectuate an immediate change in control of the
Board of Price Enterprises compared to PriceCostco.
LEGAL MATTERS
The validity of Price Enterprises Common Stock to be issued in the Exchange
Offer will be passed upon by Latham & Watkins, San Diego, California. In
addition, the description of Federal income tax consequences contained herein is
based upon the opinion of Skadden Arps.
EXPERTS
The consolidated financial statements and schedules of PriceCostco for the
three fiscal years ended August 28, 1994, incorporated herein by reference, have
been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their reports with respect thereto. In those reports, that firm
states that with respect to Price for fiscal years 1993 and 1992, its opinion is
based on the reports of other independent auditors, namely Ernst & Young LLP.
The consolidated financial statements referred to above have been incorporated
herein by reference in reliance upon the reports of said firms and upon the
authority of those firms as experts in accounting and auditing.
The financial statements of Price Enterprises at August 29, 1993, and for
each of the two fiscal years ended August 29, 1993, appearing in this Offering
Circular/Prospectus, have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report appearing elsewhere herein and are
included in reliance upon such report given upon the authority of such firm as
experts in accounting and auditing.
The financial statements and schedule of Price Enterprises as of August 28,
1994, and for the fiscal year ended August 28, 1994, appearing in this Offering
Circular/Prospectus, have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their reports with respect thereto, and are
included in reliance upon the authority of said firm as experts in accounting
and auditing.
INDEPENDENT AUDITORS
Price Enterprises anticipates that Ernst & Young LLP will be appointed as
its independent auditors immediately following the Closing Date.
Price Enterprises' stockholders will receive annual reports containing
audited consolidated financial statements with a report thereon by Price
Enterprises' independent certified public accountants and quarterly reports
containing unaudited financial information for each of the first three quarters
of each fiscal year.
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<PAGE>
PRICE ENTERPRISES, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Annual Financial Statements
Report of Ernst & Young LLP, Independent
Auditors....................................... F-2
Report of Arthur Andersen LLP, Independent
Public Accountants............................. F-3
Balance Sheets as of August 29, 1993 and August
28, 1994....................................... F-4
Statements of Income for the 52 weeks ended
August 30, 1992, August 29, 1993 and August 28,
1994........................................... F-5
Statements of Changes in Investment by
PriceCostco for the 52 weeks ended August 30,
1992, August 29, 1993 and August 28, 1994...... F-6
Statements of Cash Flows for the 52 weeks ended
August 30, 1992, August 29, 1993 and August 28,
1994........................................... F-7
Notes to Financial Statements................... F-8
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors
Price Enterprises, Inc.
We have audited the accompanying balance sheet of Price Enterprises, Inc. at
August 29, 1993, and the related statements of income, changes in investment by
PriceCostco and cash flows for each of the 52-week periods ended August 30, 1992
and August 29, 1993. These financial statements are the responsibility of the
Price Enterprises' management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Price Enterprises, Inc. as
of August 29, 1993, and the results of its operations and its cash flows for
each of the 52-week periods ended August 30, 1992 and August 29, 1993 in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
San Diego, California,
September 12, 1994
F-2
<PAGE>
REPORT OF ARTHUR ANDERSEN LLP, INDEPENDENT PUBLIC ACCOUNTANTS
To Price Enterprises, Inc.:
We have audited the accompanying balance sheet of Price Enterprises, Inc. as
of August 28, 1994, and the related statements of income, changes in investment
by PriceCostco and cash flows for the 52-week period ended August 28, 1994.
These financial statements are the responsibility of Price Enterprises, Inc.'s
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Price Enterprises, Inc. as
of August 28, 1994, and the results of its operations and its cash flows for the
52-week period ended August 28, 1994 in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Seattle, Washington
November 14, 1994
F-3
<PAGE>
PRICE ENTERPRISES, INC.
BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
AUGUST 29, AUGUST 28,
1993 1994
---------- ----------
<S> <C> <C>
REAL ESTATE ASSETS
Land and improvements........................... $ 236,232 $ 258,545
Buildings and improvements...................... 135,039 206,374
Construction in progress........................ 43,965 11,421
Furniture, fixtures and equipment............... 2,114 4,375
---------- ----------
Real estate assets, at cost................... 417,350 480,715
Accumulated depreciation........................ (29,875) (33,328)
---------- ----------
Real estate assets, net....................... 387,475 447,387
CURRENT AND OTHER ASSETS
Cash............................................ 1,655 1,644
Receivables, net................................ 17,173 20,873
Merchandise inventories......................... 2,915 7,895
Deferred rents, net............................. 3,405 3,965
Deferred leasing costs, net..................... 1,876 4,707
Investment in real estate joint ventures........ 11,200 --
Investment in Price Club Mexico joint venture... 24,072 67,226
Notes receivable................................ 49,638 73,023
Prepaids and other assets....................... 458 551
Deferred income taxes........................... -- 23,282
---------- ----------
$ 499,867 $ 650,553
---------- ----------
---------- ----------
</TABLE>
LIABILITIES AND INVESTMENT BY PRICECOSTCO
<TABLE>
<S> <C> <C>
LIABILITIES
Accounts payable and accrued expenses........... $ 15,189 $ 19,222
Payable to PriceCostco, net..................... -- 6,797
Accrued real estate taxes....................... 355 265
Unearned rent and security deposits............. 472 825
Reserve for future lease losses................. -- 4,015
Deferred income taxes........................... 12,681 --
---------- ----------
28,697 31,124
---------- ----------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST OF PRICECOSTCO.................. 16,813 40,641
INVESTMENT BY PRICECOSTCO......................... 454,357 578,788
---------- ----------
$ 499,867 $ 650,553
---------- ----------
---------- ----------
</TABLE>
See accompanying notes.
F-4
<PAGE>
PRICE ENTERPRISES, INC.
STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
52 WEEKS ENDED
------------------------------------------
AUGUST 30, AUGUST 29, AUGUST 28,
1992 1993 1994
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES
Real estate rentals............................. $28,263 $22,144 $ 29,265
Gains on sale of real estate, net............... 15,078 21,540 5,474
Merchandise sales............................... 8,212 28,671 53,015
------------ ------------ ------------
Total revenues................................ 51,553 72,355 87,754
OPERATING EXPENSES
Real estate:
Operating, maintenance and administrative..... 4,553 4,596 5,713
Property taxes................................ 3,357 3,052 4,808
Depreciation and amortization................. 5,945 5,662 7,102
------------ ------------ ------------
13,855 13,310 17,623
------------ ------------ ------------
Merchandising:
Cost of sales................................. 7,839 27,233 49,449
Operating expenses............................ 1,263 3,649 8,548
------------ ------------ ------------
9,102 30,882 57,997
General and administrative...................... 1,300 1,500 1,600
Provision for asset impairments................. -- -- 90,227
------------ ------------ ------------
Total operating expenses...................... 24,257 45,692 167,447
------------ ------------ ------------
Operating income (loss)....................... 27,296 26,663 (79,693)
INTEREST AND OTHER
Interest income, net............................ 2,856 2,874 4,797
Other income.................................... 205 205 222
Equity in earnings of real estate joint
ventures....................................... 2,409 3,649 829
Equity in earnings (loss) of Price Club Mexico
joint venture.................................. (650) 1,357 3,359
PriceCostco's minority interest................. 755 418 740
------------ ------------ ------------
5,575 8,503 9,947
------------ ------------ ------------
Income (loss) before provision (benefit) for
income taxes................................. 32,871 35,166 (69,746)
PROVISION (BENEFIT) FOR INCOME TAXES.............. 13,510 14,615 (28,267)
------------ ------------ ------------
Net income (loss)............................. $19,361 $20,551 $ (41,479)
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See accompanying notes.
F-5
<PAGE>
PRICE ENTERPRISES, INC.
STATEMENTS OF CHANGES IN INVESTMENT BY PRICECOSTCO
(IN THOUSANDS)
<TABLE>
<S> <C>
BALANCE, September 1, 1991........................ $ 412,585
Net income...................................... 19,361
Net return to PriceCostco....................... (2,274)
------------
BALANCE, August 30, 1992.......................... 429,672
Net income...................................... 20,551
Net investment by PriceCostco................... 4,134
------------
BALANCE, August 29, 1993.......................... 454,357
Net loss........................................ (41,479)
Net investment by PriceCostco................... 165,910
------------
BALANCE, August 28, 1994.......................... $ 578,788
------------
------------
</TABLE>
See accompanying notes.
F-6
<PAGE>
PRICE ENTERPRISES, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
52 WEEKS ENDED
------------------------------------------
AUGUST 30, AUGUST 29, AUGUST 28,
1992 1993 1994
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)............................... $ 19,361 $20,551 $ (41,479)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities --
Depreciation and amortization................. 6,070 5,919 7,693
Gains on sale of real estate assets........... (15,078) (21,540) (5,474)
Provision for asset impairments............... -- -- 90,227
Equity in earnings of joint ventures.......... (1,759) (5,006) (4,188)
Deferred income taxes......................... 1,932 10 (36,459)
Change in receivables and other assets........ (9,826) (9,208) (8,773)
Change in accounts payable and other
liabilities.................................. 1,272 9,553 10,740
Deferred rents and leasing costs.............. 617 (481) (3,738)
Unearned rent and security deposits........... (162) (60) 353
Other, net.................................... (1,327) (958) 213
------------ ------------ ------------
Total adjustments........................... (18,261) (21,771) 50,594
------------ ------------ ------------
Net cash flows from operating activities.... 1,100 (1,220) 9,115
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to real estate assets................. (92,307) (63,054) (44,628)
Proceeds from sale of real estate assets........ 91,999 99,311 39,878
Proceeds from (investment in) real estate joint
ventures....................................... (34,032) 39,786 12,029
Investment in Price Club Mexico joint venture... (2,557) (20,291) (39,795)
Additions to notes receivable................... (17,662) (1,908) (41,000)
Payments of notes receivable.................... 7,908 1,725 1,902
------------ ------------ ------------
Net cash flows from investing activities.... (46,651) 55,569 (71,614)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Minority interest of PriceCostco................ 4,830 11,699 23,828
Net investment by (return to) PriceCostco....... 42,003 (66,423) 38,660
------------ ------------ ------------
Net cash flows from financing activities.... 46,833 (54,724) 62,488
------------ ------------ ------------
Net increase (decrease) in cash............. 1,282 (375) (11)
CASH, AT BEGINNING OF YEAR........................ 748 2,030 1,655
------------ ------------ ------------
CASH, AT END OF YEAR.............................. $ 2,030 $ 1,655 $ 1,644
------------ ------------ ------------
------------ ------------ ------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Income taxes.................................. $ 11,578 $14,605 $ 8,192
Assets (liabilities) transferred from (to)
PriceCostco:
Real estate assets............................ (36,172) 70,853 127,055
Notes receivable.............................. (8,101) (296) --
Deferred tax liabilities...................... -- -- (496)
------------ ------------ ------------
Investment by PriceCostco..................... (44,273) 70,557 126,559
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See accompanying notes.
F-7
<PAGE>
PRICE ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS
AUGUST 28, 1994
(IN THOUSANDS)
1. ORGANIZATION AND BASIS OF PRESENTATION
On July 28, 1994, Price/Costco, Inc. (PriceCostco) entered into an Agreement
of Transfer and Plan of Exchange (as amended and restated, the Transfer and
Exchange Agreement) with Price Enterprises, Inc. (Price Enterprises), an
indirect, wholly owned subsidiary of PriceCostco formed in July 1994, pursuant
to which PriceCostco transferred certain businesses and assets to Price
Enterprises.
PriceCostco is a holding company which operates primarily through its major
subsidiaries, The Price Company and subsidiaries (Price), and Costco Wholesale
Corporation and subsidiaries (Costco). On October 21, 1993, Price and Costco
each became wholly owned subsidiaries of PriceCostco in a transaction accounted
for under the pooling-of-interests method of accounting. Price Enterprises'
operations, prior to the pooling transaction, were primarily conducted as part
of Price. For purposes of this presentation, references to PriceCostco assumes
Price and Costco have been combined for all periods presented.
The following businesses and assets have been or will be transferred to
Price Enterprises and are included in the accompanying financial statements:
- Substantially all of the real estate assets which historically formed the
non-club real estate segment of PriceCostco.
- Four existing Price Club warehouses (the Warehouse Properties) which are
adjacent to existing properties included above and which will be leased
back to PriceCostco commencing on the first day of fiscal 1995 (i.e.,
August 29, 1994), at initial annual rentals of approximately $8,600. The
Warehouse Properties are reflected in the balance sheets and statements of
cash flows at their historical costs, but are not included in the
statements of income because the lease agreements were not in place for
any of the periods presented.
- A 51% ownership interest in Price Quest, Inc. (Price Quest), which will
continue to operate the Quest business of PriceCostco. The Quest business
includes electronic shopping through kiosks located in certain PriceCostco
club warehouses. PriceCostco will retain the remaining 49% interest.
- A 51% ownership interest in Price Global Trading, Inc. (Price Global),
which has the rights to develop a club business in certain geographical
areas specified in the Transfer and Exchange Agreement and owns 100% of
the outstanding shares of Club Merchandising, Inc. (CMI). CMI operates a
merchandise import/export business, and was acquired by PriceCostco in
March 1992. PriceCostco will retain the remaining 49% interest.
- Notes receivables from various municipalities and agencies (the City
Notes).
- A note in the principal amount of $41,000 made by Atlas Hotels, Inc.
secured by a hotel and convention center property located in San Diego,
California (the Atlas Note) -- See Note 6.
In addition, Price and Price Enterprises own 49% and 51% interests,
respectively, in Mexico Clubs, L.L.C (Mexico Clubs), which has a 50% ownership
interest in Price Club de Mexico and affiliates (Price Club Mexico), a joint
venture whose other 50% interest is owned by Controladora Comercial Mexicana,
S.A. de C.V. Price Club Mexico develops, owns and operates Price Clubs in
Mexico. The investment in Price Club Mexico is accounted for under the equity
method. At August 28, 1994, eight Price Clubs were in operation in Mexico.
PriceCostco will retain the remaining 49% interest.
These financial statements include the assets, liabilities, revenues and
expenses associated with the businesses and assets described above, except that
expenses associated with the Warehouse Properties have
F-8
<PAGE>
PRICE ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AUGUST 28, 1994
(IN THOUSANDS)
1. ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED)
been excluded since these expenses are included as part of PriceCostco's
warehouse club business. The operating expenses associated with the Warehouse
Properties (including operating and maintenance, property taxes and
depreciation) for fiscal 1992, 1993 and 1994 were as follows:
<TABLE>
<CAPTION>
1992 1993 1994
--------- --------- ---------
<S> <C> <C> <C>
Operating and maintenance.................................................... $ 530 $ 746 $ 790
Property taxes............................................................... 437 1,138 2,041
Depreciation and amortization................................................ 683 1,126 1,548
</TABLE>
The minority interest of PriceCostco relates to the 49% interest in certain
businesses, as noted above.
For purposes of governing certain of the ongoing relationships between
PriceCostco and Price Enterprises, PriceCostco and Price Enterprises have
entered into certain Operating Agreements, Stockholders' Agreements, an Advance
Agreement and certain agreements with respect to employees and employee
benefits. The terms of each agreement are more fully described in the Offering
Circular/Prospectus. Under the Advance Agreement, PriceCostco will provide an
unsecured revolving credit facility, up to a maximum principal amount of $85
million (reduced by the net proceeds from the sale of certain commercial
properties, until six months following completion of the Exchange Offer. The
interest rate is the weighted average commercial paper rate on borrowings by
PriceCostco during each four-week period (including, without limitation,
amortization of lender commitment fees and other costs associated with the
backup line of credit and all miscellaneous costs and fees), or if commercial
paper is unavailable under PriceCostco's commercial paper program, the bank rate
on borrowings by PriceCostco pursuant to its working capital credit facility
(including, without limitation, amortization of lender commitment fees and other
costs associated with such credit facility and all miscellaneous costs and
fees).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FISCAL YEAR
Price Enterprises' fiscal year is on a 52/53 week basis and ends on the
Sunday nearest August 31. Fiscal years 1992, 1993 and 1994 were each 52 weeks.
REAL ESTATE ASSETS
Real estate assets are recorded at historical cost as may be adjusted for
recognition of impairment losses. Prior to the fourth quarter of fiscal 1994,
impairment loss provisions were determined using undiscounted estimated future
cash flows to calculate the assets net realizable value. As more fully explained
in "Note 3 -- Provision for asset impairments," beginning in the fourth quarter
of fiscal 1994, Price Enterprises concluded that net realizable value should be
determined using discounted estimated cash flows.
Real estate assets are depreciated using the straight-line method over their
estimated useful lives, which are as follows:
<TABLE>
<S> <C>
Land improvements.............................................. 15-25 years
Buildings and improvements..................................... 10-25 years
Term of related
Tenant improvements............................................ lease
Furniture, fixtures and equipment.............................. 5 years
</TABLE>
Interest costs incurred by PriceCostco during construction are capitalized.
Interest capitalized for fiscal 1992, 1993 and 1994 was $987, $4,060 and $1,486,
respectively.
F-9
<PAGE>
PRICE ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AUGUST 28, 1994
(IN THOUSANDS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
MERCHANDISE INVENTORIES
Merchandise inventories, which includes merchandise for resale and display
samples, are valued at the lower of cost (first-in, first-out) or market.
REAL ESTATE RENTALS AND DEFERRED RENTS
All leases are classified as operating leases. Rentals are recognized using
the straight-line method over the terms of the leases. Deferred rents represent
the excess of real estate rentals recognized on the straight-line basis over
cash received under the applicable lease provisions.
DEFERRED LEASING COSTS
Costs incurred in connection with leasing are deferred and amortized using
the straight-line method over the term of the related lease. Unamortized leasing
costs are charged to expense upon early termination of the lease.
INCOME TAXES
Income taxes have been provided for in accordance with Statement of
Financial Accounting Standard (SFAS) No. 109, "Accounting for Income Taxes."
SFAS No. 109 requires accounting for income taxes based on the asset and
liability method and, accordingly, deferred income taxes are provided to reflect
temporary differences between financial and tax reporting.
The operations of Price Enterprises have been included in the consolidated
tax returns of PriceCostco. Income taxes in the accompanying financial
statements have been computed assuming that Price Enterprises was a stand-alone
entity. Cash paid for income taxes as shown in the accompanying statements of
cash flows represents the current portion of Price Enterprises' income tax
provision which has been reflected in the Investment by PriceCostco account.
Actual payments were made by PriceCostco.
Income taxes have been provided for all items included in the statements of
income, regardless of the period when such items will be reported for tax
purposes. The principal temporary differences between financial and tax
reporting arise from the provision for asset impairments, deferred gains on
sales of real estate, depreciation, deferred rents and notes receivable.
3. PROVISION FOR ASSET IMPAIRMENTS
The provision for asset impairments of $90,200 pre-tax which includes
$80,500 pre-tax ($47,500 after tax) related to a change in calculating estimated
losses for assets which are considered to be economically impaired. This change
in accounting estimates results from the spin-off of the real estate segment
assets to Price Enterprises and Price Enterprises' decision to pursue business
plans and operating strategies as a stand-alone entity which are significantly
different than the strategies of PriceCostco. Price Enterprises' management
believes that as a separate operating business it will not have the same access
to capital as PriceCostco or generate internal funds from operations to the same
extent as PriceCostco.
PriceCostco's accounting policies with respect to estimating the amount of
impairments on individual real estate properties and related assets were such
that impairment losses would be recorded if the carrying amount of the asset
could not be recovered from estimated future cash flows on an undiscounted
basis. Price Enterprises' management believes that in view of its strategies
with respect to the number and nature of properties that would be selected for
potential disposition, it would be more appropriate to estimate impairment
losses based on fair values of the real estate properties as determined by
appraisals and/or a risk-adjusted discounted cash flow approach. In determining
impairment losses, individual real estate assets were
F-10
<PAGE>
PRICE ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AUGUST 28, 1994
(IN THOUSANDS)
3. PROVISION FOR ASSET IMPAIRMENTS (CONTINUED)
reduced to estimated fair value, if lower than historical cost. For those assets
which have an estimated fair value in excess of cost, the asset continues to be
recorded at cost. The impairment losses recorded as a result of this change in
accounting estimates reduced the book basis of certain of the real estate and
related assets.
Under the previous policy, PriceCostco and Price Enterprises had determined
that a provision for asset impairments of approximately $9,700 (pre-tax) was
required related to properties which were under contract or in final
negotiations for sale.
4. RELATED PARTY TRANSACTIONS
PriceCostco historically provided services to Price Enterprises. Amounts
allocated to Price Enterprises for general and administrative expenses for
fiscal 1992, 1993 and 1994 were $1,300, $1,500 and $1,600, respectively. Costs
incurred by PriceCostco on behalf of Price Enterprises are charged to Price
Enterprises by specific identification or allocated based on total assets or
sales revenues. In the opinion of Price Enterprises' management, the
aforementioned costs allocated to Price Enterprises fairly represents its
general and administrative expenses.
Joseph Kornwasser, a Director of PriceCostco during fiscal 1994 until July
28, 1994 and an officer and Director of The Price REIT (See Note 9), is a
general partner and has a two-thirds ownership interest in Kornwasser and
Friedman Shopping Center Properties (K & F). As of August 28, 1994, K & F was a
partner with PriceCostco in two partnerhips. The assets, liabilities, equity and
results of operations of these partnerships have been included in these
financial statements. As of August 28, 1994, PriceCostco's total capital
contributions to the partnerships were $82,900. Aggregate cumulative
distributions from these partnerships were $22,300 at August 28, 1994. As of
August 28, 1994, PriceCostco had also entered into a Development Agreement with
K & F for the development of four additional properties. As of August 28, 1994,
PriceCostco's total capital expenditures for these properties were $58,000 and
aggregate cumulative distributions from these properties were $4,500. Both
partnership agreements and the Development Agreement provided for a preferred
return to PriceCostco on a varying scale from 9% to 10% on its invested capital.
After the preferred returns, plus PriceCostco's invested capital, are
distributed to PriceCostco, operating cash flows are distributed 75% to
PriceCostco and 25% to K & F. Effective August 28, 1994, Price Enterprises
purchased the K & F partnership interest and terminated the Development
Agreement for $2,500.
5. LEASING ACTIVITY
As of August 28, 1994, future minimum real estate rentals due under
noncancelable operating leases (including the Warehouse Properties) are as
follows:
<TABLE>
<CAPTION>
FISCAL YEAR AMOUNT
- ---------------------------------------------------------------------------------- ----------
<S> <C>
1995.............................................................................. $ 38,108
1996.............................................................................. 38,681
1997.............................................................................. 37,926
1998.............................................................................. 37,539
1999.............................................................................. 37,823
Thereafter........................................................................ 435,264
</TABLE>
Certain tenant leases contain renewal options for up to 30 years. However,
the above table assumes that all leases expire without renewal. Therefore,
neither renewal rentals nor rentals from replacement tenants are included.
Minimum future rentals also exclude contingent rentals which may be received
under certain leases based on tenants' sales revenues or increases in Consumer
Price Indices.
F-11
<PAGE>
PRICE ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AUGUST 28, 1994
(IN THOUSANDS)
5. LEASING ACTIVITY (CONTINUED)
In addition to minimum rental payments, tenants pay reimbursements for their
pro rata share of specified operating expenses. These reimbursements are
included as real estate rentals and the related expenses are recorded as
operating and maintenance expenses or property taxes in the accompanying
statements of income. Certain of the leases also provide for the payment of
additional rent based on a percentage of the tenant's revenues in excess of
specified amounts. Tenant reimbursements and percentage rents for fiscal 1992,
1993 and 1994 were as follows:
<TABLE>
<CAPTION>
1992 1993 1994
--------- --------- ---------
<S> <C> <C> <C>
Tenant reimbursements............................................ $ 3,181 $ 3,092 $ 5,379
Percentage rents................................................. 168 20 49
</TABLE>
6. NOTES RECEIVABLE
Notes receivable consist of the City Notes with interest rates that vary
from 7% to 10%. These loans represent amounts loaned to municipalities and
agencies to facilitate real property acquisitions and improvements. Repayment of
the majority of these notes is generally based on that municipality's allocation
of sales tax revenues generated by retail businesses located on a particular
property associated with such City Note. In connection with Price Enterprises'
decision to change from an undiscounted cash flow approach to a discounted cash
flow approach for determining net realizable value of its assets, the estimated
future cash flows of each of the City Notes was discounted based on the stated
interest rate resulting in a provision for asset impairments of approximately
$15,500 recorded as part of the provision for asset impairments. Balances for
the City Notes are considered by management to be fairly stated as of August 28,
1994.
In fiscal 1991 Price Enterprises guaranteed the Atlas Note totaling
approximately $41,000, which is collateralized by an operating hotel property in
San Diego, California. Price Enterprises recognized guarantee fees related to
the Atlas Note of approximately $200 for each of fiscal 1992, 1993 and 1994,
which is included in other income in the accompanying statements of operations.
On October 15, 1993, Price Enterprises purchased and assumed all of the rights
and obligations of the Atlas Note which it had previously guaranteed. The
borrower has been and is currently in violation of certain of its debt covenants
and therefore the note is due and payable. Price Enterprises has agreed to
forbear its foreclosure rights pending consummation of a restructuring of the
Atlas Note debt obligations, which is expected to occur mid-December 1994. The
restructuring would require repayment within five years of all outstanding
indebtedness, with interest accruing on the outstanding principal at 10% per
annum. Interest would be payable monthly at a rate equal to the six month LIBOR
rate plus 2.5% per annum (not to exceed 8% per annum through December 1, 1996),
and the interest not yet payable would be added to the principal amount of the
loan. In the event a restructuring of the Atlas Note cannot be consummated,
Price Enterprises has retained its foreclosure rights under the Atlas Note. Due
to the lack of an established market to obtain a market value for the Atlas
Note, management has evaluated this asset by considering projected future cash
flows from the borrower and previous appraisals of the underlying collateral.
Based on this review, the Atlas Note balance is considered by management to be
fairly stated as of August 28, 1994.
7. INVESTMENT IN JOINT VENTURES
Investments in and advances to real estate joint ventures relate to real
estate partnerships that are less than majority owned and recorded under the
equity method. In fiscal 1992, Price Enterprises entered into a real estate
joint venture with the REIT. (See note 8).
PriceCostco and Price Enterprises, through Mexico Clubs, have agreed to
provide merchandising support to Price Club Mexico including purchasing products
on behalf of Price Club Mexico and arranging for the storage, splitting and
transshipment of bulk orders. Merchandising support activities for Price Club
Mexico result in Price Enterprises maintaining merchandise inventories,
receivables and accounts payable.
F-12
<PAGE>
PRICE ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AUGUST 28, 1994
(IN THOUSANDS)
8. RETIREMENT AND STOCK OPTION PLANS
PriceCostco has a defined contribution retirement plan which covers
substantially all employees of Price Enterprises. Price Enterprises recognizes
as its net retirement plan cost the actual contributions made on behalf of its
employees and an allocation of retirement plan administrative expenses.
During fiscal 1992, a 401(k) plan was established for all employees eligible
for the retirement plan. Price Enterprises matches 50% of eligible employee
contributions.
Certain employees of Price Enterprises participated in various PriceCostco
stock option plans. Pursuant to the Transfer and Exchange Agreement, employees
of Price Enterprises will generally be allowed to continue to hold vested but
unexercised PriceCostco stock options under the terms of the existing
PriceCostco stock option plans.
9. GAINS ON SALE OF REAL ESTATE
During fiscal 1994, Price Enterprises entered into four significant
transactions:
a. On October 1, 1993, Price Enterprises sold a shopping center to the
Price REIT for $21,700 recognizing a pre-tax gain of $4,211.
b. On April 15, 1994, Price Enterprises sold a 50% interest in a shopping
center to the Price REIT for $11,400. Price Enterprises recognized a
pre-tax gain of $935 on the sale.
c. On April 29, 1994, Price Enterprises sold land to an unrelated third
party for $5,600 recognizing a pre-tax loss of $879.
d. On June 16, 1994, Price Enterprises sold land to an unrelated third
party for $10,200 recognizing a pre-tax gain of $1,358.
During fiscal 1993, Price Enterprises entered into two transactions with the
REIT.
a. On December 18, 1992, Price Enterprises sold a former Price Club
warehouse property for $14,350 recognizing a pre-tax gain on sale of real
estate of $6,710.
b. On August 12, 1993, Price Enterprises sold three shopping centers and
its 49.6% interest in a real estate joint venture which owns five
shopping centers. Price Enterprises received proceeds of approximately
$89,825 and recognized a pre-tax gain on sale of real estate of $14,830.
During fiscal 1992, Price Enterprises entered into two transactions with the
REIT.
a. On December 1, 1991 Price Enterprises sold a 50.4% interest in five
shopping centers for $44,150. The REIT and Price Enterprises then formed
a real estate joint venture. Price Enterprises agreed, for a specified
period, to subordinate its portion of the operational cash flow of the
joint venture to allow the REIT shareholders to receive a specified
return on their investment (9% the first year, increasing to 9.5% in year
five). Price Enterprises recorded a pre-tax gain on sale of real estate
of $4,061 after establishment of a $2,000 subordination reserve.
b. On April 29, 1992, Price Enterprises sold two shopping centers for
$58,500, recognizing a pre-tax gain on sale of real estate of $11,017.
10. BUSINESS SEGMENT INFORMATION
Price Enterprises operates principally in two segments, real estate and
merchandising. The real estate segment consists primarily of shopping centers
and other commercial properties, and undeveloped land
F-13
<PAGE>
PRICE ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AUGUST 28, 1994
(IN THOUSANDS)
10. BUSINESS SEGMENT INFORMATION (CONTINUED)
owned directly or through various joint ventures, the City Notes and the Atlas
Note. Merchandising activities include Mexico Clubs, Price Quest and Price
Global. Many of the real estate assets are still in the development stage and do
not generate any operating revenues.
Price Enterprises' segment information for fiscal 1992, 1993 and 1994 is as
follows:
<TABLE>
<CAPTION>
1992 1993 1994
---------- ---------- ----------
<S> <C> <C> <C>
Revenues
Real estate............................................ $ 43,341 $ 43,684 $ 34,739
Merchandising.......................................... 8,212 28,671 53,015
---------- ---------- ----------
Total................................................ $ 51,553 $ 72,355 $ 87,754
---------- ---------- ----------
---------- ---------- ----------
Income (loss) before provision for income taxes
Real estate............................................ $ 34,956 $ 37,102 $ (67,263)
Merchandising.......................................... (785) (436) (883)
General and administrative............................. (1,300) (1,500) (1,600)
---------- ---------- ----------
Total................................................ $ 32,871 $ 35,166 $ (69,746)
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
AUGUST 29 AUGUST 28,
1993 1994
---------- ----------
<S> <C> <C> <C>
Identifiable assets
Real estate............................................ $ 454,261 $ 550,086
Merchandising.......................................... 45,606 100,467
---------- ----------
Total................................................ $ 499,867 $ 650,553
---------- ----------
---------- ----------
</TABLE>
11. INCOME TAXES
Provisions (benefits) for income taxes for fiscal 1992, 1993 and 1994
include the following:
<TABLE>
<CAPTION>
1992 1993 1994
--------- --------- ----------
<S> <C> <C> <C>
Current:
Federal................................................... $ 8,895 $ 11,274 $ 7,066
State..................................................... 2,683 3,331 1,126
--------- --------- ----------
11,578 14,605 8,192
Deferred:
Federal................................................... 1,558 70 (31,168)
State..................................................... 374 (60) (5,291)
--------- --------- ----------
1,932 10 (36,459)
--------- --------- ----------
$ 13,510 $ 14,615 $ (28,267)
--------- --------- ----------
--------- --------- ----------
</TABLE>
During 1994, PriceCostco transferred a deferred tax liability of $496
relating to real estate assets transferred to Price Enterprises.
F-14
<PAGE>
PRICE ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AUGUST 28, 1994
(IN THOUSANDS)
11. INCOME TAXES (CONTINUED)
A reconciliation between the federal statutory rate and Price Enterprises'
effective tax rate for fiscal 1992, 1993 and 1994 follows:
<TABLE>
<CAPTION>
1992 1993 1994
--------- --------- ----------
<S> <C> <C> <C>
Expected provision (benefit) at the statutory rate.......... $ 11,176 $ 12,203 $ (24,411)
State income taxes, net of federal tax benefit.............. 2,005 2,145 (4,220)
All other, net.............................................. 329 267 364
--------- --------- ----------
$ 13,510 $ 14,615 $ (28,267)
--------- --------- ----------
--------- --------- ----------
</TABLE>
The significant components of deferred income taxes at August 29, 1993 and
August 28, 1994 are attributable to the following temporary differences:
<TABLE>
<CAPTION>
AUGUST 29, AUGUST 28,
1993 1994
----------- -----------
<S> <C> <C>
Deferred tax liabilities:
Properties.......................................................... $ 14,333 $ --
Deferred rents...................................................... 1,655 1,628
All other, net...................................................... 630 843
----------- -----------
Total deferred tax liabilities.................................... 16,618 2,471
Deferred tax assets:
Properties.......................................................... -- 13,310
Notes receivable.................................................... 3,937 10,773
All other, net...................................................... -- 1,670
----------- -----------
Total deferred tax assets......................................... 3,937 25,753
----------- -----------
Net deferred tax assets (liabilities)................................. $ (12,681) $ 23,282
----------- -----------
----------- -----------
</TABLE>
12. COMMITMENTS AND CONTINGENCIES
LEASES
Price Enterprises has four leases on former warehouse club properties with
remaining terms ranging from three to seven years. Aggregate rental expense for
fiscal 1994 was $253. Future minimum payments during the next five fiscal years
and thereafter under these non-cancelable leases at August 28, 1994, were as
follows:
<TABLE>
<S> <C>
1995............................................................... $ 2,423
1996............................................................... 2,423
1997............................................................... 1,853
1998............................................................... 1,662
1999............................................................... 1,551
Thereafter......................................................... 15,180
---------
Total minimum payments............................................. $ 25,092
---------
---------
</TABLE>
The reserve for future lease losses of $4,015 represents primarily the
Company's future minimum lease payments in excess of expected future sub-lease
receipts.
F-15
<PAGE>
PRICE ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
AUGUST 28, 1994
(IN THOUSANDS)
12. COMMITMENTS AND CONTINGENCIES (CONTINUED)
LEGAL PROCEEDINGS
Price Enterprises is party to routine litigation incident to its business
and to which its property is subject. Management of Price Enterprises does not
believe that the ultimate resolution of any of these matters, including
environmental matters, will have a material adverse impact on the financial
position or results of operations of Price Enterprises.
F-16
<PAGE>
INDEX TO DEFINED TERMS
ANNEX I
<TABLE>
<CAPTION>
TERM PAGE
- -------------------------------------------------- --------
<S> <C>
ACMs.............................................. 94
Additional Agreements............................. 63
Adjusted Price.................................... 45
Advance Agreement................................. 33
Agent's Message................................... 54
Amended PriceCostco Bylaws........................ 83
Appraised Properties.............................. 88
Appraiser......................................... 88
Arthur Andersen................................... 38
Assumed Construction Costs........................ 33
Assumed Liabilities............................... 68
Atlas Note........................................ 32
Audit Committee................................... 61
Authorized Committee.............................. 123
Bonus Plan........................................ 120
Book-Entry Transfer Facilities.................... 54
BPOU.............................................. 95
CERCLA............................................ 94
City Notes........................................ 32
Closing Date...................................... 31
Club Business..................................... 34
CMI............................................... 27
CMI Stock......................................... 33
Code.............................................. 49
Comercial Mexicana................................ 26
Commercial Properties............................. 32
Commission........................................ 2
Committee......................................... 127
Compensation Committee............................ 61
Costco............................................ 6
Costco Common Stock............................... 22
Costco Designees.................................. 35
Costs............................................. 66
Debentures........................................ 52
Default Rate...................................... 108
Development Agreement............................. 48
DGCL.............................................. 60
Directors' Plan................................... 127
Distribution...................................... 35
Distribution Fraction............................. 34
Distribution Record Date.......................... 34
DLJ............................................... 38
Downstream Affiliate.............................. 104
DTC............................................... 54
EBITDA............................................ 44
Effective Time.................................... 83
Eligible Institution.............................. 54
Environmental Laws................................ 68
<CAPTION>
TERM PAGE
- -------------------------------------------------- --------
<S> <C>
EPA............................................... 95
ERISA............................................. 65
EWSA.............................................. 96
Excess Shares..................................... 126
Exchange Act...................................... 2
Exchange Agent.................................... 58
Exchange Offer.................................... 1
Expiration Date................................... 53
5 1/2% Debentures................................. 52
5 1/2% Indenture.................................. 52
5 3/4% Adjustment................................. 52
5 3/4% Debentures................................. 52
5 3/4% Indenture.................................. 52
Finance Committee................................. 61
Financial Advisors................................ 43
Five-Year Period.................................. 103
Gibson, Dunn...................................... 38
Grant Program..................................... 122
HSR Act........................................... 9
Huffy............................................. 95
Indemnification Provisions........................ 135
Indemnified Party................................. 135
Indemnified Person................................ 116
Indentures........................................ 52
Independent Committee............................. 123
Information Agent................................. 58
Insiders.......................................... 127
Interim Period.................................... 41
International Assets.............................. 33
IRS............................................... 25
Joeten............................................ 111
Joint Venture Agreement........................... 27
July 15 Meeting................................... 38
July 28 Meeting................................... 40
K&F............................................... 48
Lehman............................................ 38
LLC Agreement..................................... 69
Materials of Environmental Concern................ 68
Member............................................ 102
Merger............................................ 6
Mexico Assets..................................... 33
Mexico Clubs...................................... 5
Mexico Operating Agreement........................ 103
Mexico Stockholders Agreement..................... 104
MSTC.............................................. 54
Northridge Mortgage............................... 64
NPL............................................... 96
NYSE.............................................. 55
</TABLE>
I-1
<PAGE>
<TABLE>
<CAPTION>
TERM PAGE
- -------------------------------------------------- --------
<S> <C>
Operating Agreements.............................. 26
Option Program.................................... 122
Partially Developed Properties.................... 87
Pentagon City Property............................ 92
PHILADEP.......................................... 54
Price............................................. 6
Price Club Mexico................................. 26
Price Common Stock................................ 22
Price Designees................................... 35
Price Enterprises................................. 1
Price Enterprises Budget.......................... 60
Price Enterprises Bylaws.......................... 134
Price Enterprises Certificate..................... 134
Price Enterprises Common Stock.................... 1
Price Enterprises Compensation Committee.......... 122
Price Enterprises Employee........................ 65
Price Enterprises Executive Committee............. 41
Price Enterprises Plans........................... 65
Price Enterprises Preferred Stock................. 134
Price Family Trust................................ 10
Price Global...................................... 5
Price Global Operating Agreement.................. 109
Price Global Stockholders Agreement............... 111
Price Quest....................................... 5
Price Quest Stockholders Agreement................ 108
Price Real Estate................................. 87
Price Ventures.................................... 86
PriceCostco....................................... 1
PriceCostco Budget................................ 61
PriceCostco Bylaws................................ 83
PriceCostco Certificate........................... 137
PriceCostco Common Stock.......................... 1
PriceCostco Executive Committee................... 41
PriceCostco Option................................ 66
PriceCostco Option Plan........................... 126
PriceCostco Plans................................. 65
PriceCostco Pre-Closing Market Price.............. 52
PriceCostco Preferred Stock....................... 137
PriceCostco Warehouse Leases...................... 97
PriceCostco Welfare Plans......................... 66
Primex............................................ 27
<CAPTION>
TERM PAGE
- -------------------------------------------------- --------
<S> <C>
Promissory Note................................... 34
PRPs.............................................. 95
Quest Assets...................................... 34
Quest Business.................................... 33
Quest Operating Agreement......................... 106
Real Estate Committee............................. 62
Real Properties................................... 32
Registration Statement............................ 2
REIT.............................................. 29
Replacement Shares................................ 126
Retained Employees................................ 65
Retained Liabilities.............................. 68
Retirement Plan................................... 128
ROD............................................... 95
San Diego Property................................ 32
Schedule 13E-4.................................... 2
Securities Act.................................... 2
Security and Pledge Agreement..................... 35
SGBWQA............................................ 95
Similar Quest Business............................ 106
6 3/4% Debentures................................. 47
6 3/4% Indenture.................................. 52
16(b) Liability................................... 126
Skadden Arps...................................... 25
Specified Geographical Areas...................... 34
Stockholders Agreements........................... 69
Stock Plan........................................ 122
Subsidiary Corporations........................... 5
Tax Allocation Agreements......................... 69
Transaction....................................... 31
Transfer and Exchange Agreement................... 31
Transfer Closing Date............................. 32
Transfer.......................................... 32
Transferred Assets................................ 32
Transition Period................................. 65
20 Day Period..................................... 51
USF&WS............................................ 96
VOCs.............................................. 95
Warehouse Properties.............................. 32
Wayne Property.................................... 92
Westbury Property................................. 91
WVBSA............................................. 95
</TABLE>
I-2
<PAGE>
ANNEX II
AMENDED AND RESTATED
AGREEMENT OF TRANSFER
AND
PLAN OF EXCHANGE
BY AND BETWEEN
PRICE/COSTCO, INC.
AND
PRICE ENTERPRISES, INC.
DATED AS OF NOVEMBER 14, 1994
II-1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C> <C>
ARTICLE I CERTAIN DEFINITIONS................................................................... II-4
ARTICLE II TRANSFER OF ASSETS; ASSUMPTION OF LIABILITIES......................................... II-9
Section 2.1 Transactions Occurring Prior to the Transfer Closing Date............................. II-9
Section 2.2 Conveyance of Transferred Assets...................................................... II-10
Section 2.3 Consideration for Transfer............................................................ II-10
Section 2.4 Time and Place of the Transfer Closing................................................ II-10
Section 2.5 Deliveries at the Transfer Closing.................................................... II-10
Section 2.6 Conveyance of Mexico Assets........................................................... II-11
ARTICLE III THE EXCHANGE OFFER; THE DISTRIBUTION.................................................. II-11
Section 3.1 Commencement of the Exchange Offer.................................................... II-11
Section 3.2 Term of Exchange Offer................................................................ II-11
Section 3.3 The Distribution...................................................................... II-11
ARTICLE IV THE CLOSING........................................................................... II-12
Section 4.1 Closing............................................................................... II-12
Section 4.2 Actions to be taken at the Closing.................................................... II-13
ARTICLE V REPRESENTATIONS AND WARRANTIES OF THE COMPANY......................................... II-13
Section 5.1 Title to Property..................................................................... II-13
Section 5.2 Brokers and Finders................................................................... II-13
Section 5.3 No Other Representations or Warranties................................................ II-13
ARTICLE VI ADDITIONAL MATTERS RELATED TO THE TRANSFER AND THE EXCHANGE OFFER..................... II-14
Section 6.1 Certain Committees.................................................................... II-14
Section 6.2 Certificate of Incorporation and Bylaws of Newco...................................... II-14
Section 6.3 Amendment of Bylaws of the Company.................................................... II-14
Section 6.4 Board of Directors of Newco........................................................... II-14
Section 6.5 Board of Directors of the Company..................................................... II-15
Section 6.6 Agreement Not to Compete.............................................................. II-15
Section 6.7 Continuance of Existing Indemnification Rights........................................ II-16
Section 6.8 [Intentionally omitted]
Section 6.9 [Intentionally omitted]
Section 6.10 Certain Advances by the Company to Newco.............................................. II-16
Section 6.11 Expenses.............................................................................. II-16
Section 6.12 Further Assurances.................................................................... II-16
Section 6.13 Access................................................................................ II-16
Section 6.14 Apportionment......................................................................... II-17
Section 6.15 Consents.............................................................................. II-17
Section 6.16 Filings............................................................................... II-17
Section 6.17 Standstill Agreements................................................................. II-17
Section 6.18 Certain Matters with Respect to City Notes............................................ II-17
Section 6.19 Certain Insurance Proceeds............................................................ II-17
Section 6.20 Certain Real Estate Matters........................................................... II-18
ARTICLE VII EMPLOYEE MATTERS...................................................................... II-18
Section 7.1 Employees............................................................................. II-18
Section 7.2 Company Plans......................................................................... II-19
Section 7.3 Welfare Plans; Certain Other Plans.................................................... II-19
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------
<S> <C> <C>
Section 7.4 Employee Stock Options................................................................ II-20
Section 7.5 Severance Pay......................................................................... II-21
Section 7.6 Seniority............................................................................. II-21
Section 7.7 Administrative Services............................................................... II-21
Section 7.8 Membership Privileges................................................................. II-21
ARTICLE VIII [Intentionally omitted]
ARTICLE IX INDEMNIFICATION....................................................................... II-21
Section 9.1 Indemnification....................................................................... II-21
Section 9.2 Procedures Relating to Indemnification................................................ II-23
ARTICLE X MISCELLANEOUS......................................................................... II-24
Section 10.1 Amendment and Modification............................................................ II-24
Section 10.2 Waiver of Compliance.................................................................. II-24
Section 10.3 Arbitration........................................................................... II-24
Section 10.4 Notices............................................................................... II-25
Section 10.5 Assignment............................................................................ II-25
Section 10.6 Interpretation........................................................................ II-26
Section 10.7 Governing Law......................................................................... II-26
Section 10.8 Counterparts.......................................................................... II-26
Section 10.9 Third Parties......................................................................... II-26
Section 10.10 Complete Agreement.................................................................... II-26
Section 10.11 Severability.......................................................................... II-26
</TABLE>
II-3
<PAGE>
AMENDED AND RESTATED AGREEMENT OF TRANSFER AND PLAN OF EXCHANGE, dated as of
November 14, 1994, between Price/Costco, Inc., a Delaware corporation (the
"Company"), and Price Enterprises, Inc., a Delaware corporation ("Newco").
WHEREAS, on July 28, 1994, the Board of Directors of the Company considered
and approved a restructuring of the Company (the "Transaction") whereby, among
other things, subject to the terms and conditions hereof (i) the Company will
transfer or cause to be transferred to Newco certain assets in exchange for 27
million shares of common stock, par value $.0001 per share, of Newco ("Newco
Common Stock") and the assumption by Newco of certain liabilities related to
such transferred assets; (ii) the Company will distribute such shares of Newco
Common Stock to the stockholders of the Company by means of an exchange offer
and/or a pro rata distribution; (iii) the Company may sell certain shares of
Newco Common Stock to Newco; and (iv) the Company will make certain advances to
Newco to enable Newco to conduct its business and operations as a stand-alone
company (subject to repayment of such advances, as set forth herein);
WHEREAS, Newco desires to acquire the assets comprising the business and
operations of the Company and certain of its subsidiaries relating to the
development of certain real estate (and certain real estate activities incident
thereto) as well as certain other assets relating to certain other businesses
and operations, as set forth herein;
WHEREAS, Newco is willing to issue such shares of Newco Common Stock and to
assume such liabilities in exchange for such transferred assets and to take such
other actions as set forth herein;
WHEREAS, the Company and Newco are willing to indemnify each other against
certain liabilities, as set forth herein;
WHEREAS, as part of the Transaction, the Company intends to offer to each of
its stockholders the right to exchange one share of common stock of the Company,
par value $.01 per share ("Company Common Stock"), for one share of Newco Common
Stock;
WHEREAS, if less than 21.6 million shares of Company Common Stock are
exchanged for shares of Newco Common Stock, the Company shall distribute to
holders of Company Common Stock all the remaining shares of Newco Common Stock
held by the Company on a pro rata basis;
WHEREAS, if at least 21.6 million shares of Company Common Stock, but less
than 27 million shares are so exchanged, the Company shall, at its option,
either (i) distribute the remaining shares of Newco Common Stock held by the
Company, as set forth above or (ii) sell such shares to Newco in exchange for a
promissory note; and
WHEREAS, the Company and Newco have previously entered into an Agreement of
Transfer and Plan of Exchange dated July 28, 1994, providing for the foregoing,
and the parties now wish to provide for certain amendments and modifications to
such Agreement of Transfer and Plan of Exchange.
NOW, THEREFORE, in consideration of the foregoing premises and the
respective representations, warranties, covenants, agreements and conditions
hereinafter set forth, and intending to be legally bound hereby, the parties
hereto agree that the aforementioned Agreement of Transfer and Plan of Exchange
shall be amended and restated in its entirety as follows:
ARTICLE I
CERTAIN DEFINITIONS
For the purposes of this Agreement, the following terms shall have the
following meanings:
Section 1.1 "Additional Agreements" shall mean the Advance Agreement, the
Leases, the Office Lease, the Operating Agreements, the Reciprocal Easement
Agreements, the Stockholders' Agreements and the Tax Allocation Agreements.
Section 1.2 "Advance Agreement" shall have the meaning set forth in Section
6.11 hereof.
II-4
<PAGE>
Section 1.3 "Agreement" shall mean this Amended and Restated Agreement of
Transfer and Plan of Exchange.
Section 1.4 "Assets" shall mean properties (including personal property),
assets, Contracts, rights and entitlements.
Section 1.5 "Assumed Construction Costs" shall mean all costs to complete
construction of the Commercial Properties, as set forth on Schedule 1.14 hereto.
Section 1.6 "Assumed Liabilities" shall mean (i) all Liabilities of the
Company and its subsidiaries relating to or arising out of the Transferred
Assets and which arise out of events occurring at or after the Transfer Closing
Date; (ii) the Environmental Liabilities; and (iii) the Assumed Construction
Costs.
Section 1.7 "Atlas Note" shall mean the note receivable described on
Schedule 1.7 hereto.
Section 1.8 "City Notes" shall mean the notes receivable described on
Schedule 1.8 hereto.
Section 1.9 "Closing" shall have the meaning set forth in Section 4.1
hereof.
Section 1.10 "Closing Date" shall have the meaning set forth in Section 4.1
hereof.
Section 1.11 "Club Business" shall mean any merchandising activity
utilizing 70,000 square feet or more in a single location, operated with
membership and selling food and non-food items through a central checkout.
Section 1.12 "CMI Stock" shall have the meaning set forth in Section 1.32
hereof.
Section 1.13 "Code" shall mean the Internal Revenue Code of 1986, as
amended.
Section 1.13A "Comercial Mexicana" shall mean Controladora Comercial
Mexicana, S.A., de C.V., a corporation organized under the laws of Mexico.
Section 1.14 "Commercial Properties" shall mean the commercial real estate
listed on Schedule 1.14 hereto.
Section 1.15 "Company" shall have the meaning set forth in the introductory
clause hereto.
Section 1.16 "Company Common Stock" shall have the meaning set forth in the
introductory clauses hereto.
Section 1.17 "Company Executive Committee" shall have the meaning set forth
in Section 6.1 hereof.
Section 1.18 "Company Option" shall have the meaning set forth in Section
7.4 hereof.
Section 1.19 "Company Option Plans" shall have the meaning set forth in
Section 7.4 hereof.
Section 1.20 "Company Plans" shall mean each "employee pension benefit
plan," as such term is defined in section 3(2) of ERISA, maintained or
contributed to by the Company.
Section 1.21 "Company Welfare Plans" shall have the meaning set forth in
Section 7.3 hereof.
Section 1.22 "Contract" shall mean any contract, agreement, commitment,
indenture, lease, note, bond, mortgage, license, plan, arrangement or
understanding.
Section 1.23 "Costco Designees" shall have the meaning set forth in the
Bylaws of the Company.
Section 1.24 "Distribution" shall have the meaning set forth in Section 3.3
hereof.
Section 1.25 "Distribution Record Date" shall have the meaning set forth in
Section 3.3 hereof.
Section 1.26 "Environmental Liabilities" shall mean all Liabilities
relating to or arising in respect of Materials of Environmental Concern and
violations or purported violations of Environmental Laws, which relate to or
arise out of the Real Properties and which arise out of events occurring prior
to, at or after the Transfer Closing Date.
II-5
<PAGE>
Section 1.27 "Environmental Laws" shall mean all Federal, state, local and
foreign laws and regulations relating to pollution or protection of human health
or the environment, including, without limitation, laws and regulations relating
to emissions, discharges, releases, or threatened releases of toxic or hazardous
substances, materials or wastes, or petroleum and petroleum products ("Materials
of Environmental Concern"), or otherwise relating to the generation, storage,
disposal, transport or handling of Materials of Environmental Concern.
Section 1.28 "ERISA" shall mean the Employee Retirement Income Security Act
of 1974, as from time to time amended.
Section 1.29 "Exchange Offer" shall have the meaning set forth in Section
3.1 hereof.
Section 1.30 "Finance Committee" shall have the meaning set forth in
Section 6.2 hereof.
Section 1.31 "Instrument of Assignment and Assumption" shall have the
meaning set forth in Section 2.5 hereof.
Section 1.32 "International Assets" shall mean (i) the right to develop a
Club Business in the Specified Geographical Areas (other than Mexico); (ii) all
shares of capital stock of Club Merchandising, Inc. owned, directly or
indirectly, by the Company (the "CMI Stock"); (iii) all right, title and
interest in and to the names "Price Club," "Price Club Costco" and "Price
Costco" in each of the Specified Geographical Areas (other than Mexico, the
Northern Mariana Islands (including Guam and Saipan) and the U.S. Virgin
Islands); (iv) an exclusive license to use the names "Price Club" and "Price
Costco" in the Northern Mariana Islands (including Guam and Saipan) and the U.S.
Virgin Islands pursuant to the terms of a license agreement entered into by the
Company, Price, Subsidiary Corporation #2 and Newco at the Transfer Closing: and
(v) all other noncurrent Assets of the Company and its subsidiaries (other than
those included in CMI) specifically related to the conduct of business in the
Specified Geographical Areas.
Section 1.33 "Leases" shall mean agreements substantially in the form
attached hereto as Exhibit A pursuant to which the Company will lease back each
of the Warehouse Properties following the transfer of such properties to Newco.
Section 1.34 "Liabilities" shall mean liabilities and obligations, secured
or unsecured, whether absolute, accrued, contingent or otherwise, and whether or
not due, including without limitation all such liabilities relating to or
arising in respect of Materials of Environmental Concern and violations or
purported violations of Environmental Laws.
Section 1.35 "Materials of Environmental Concern" shall have the meaning
set forth in Section 1.27.
Section 1.36 "Mexico Assets" shall mean (i) all shares of capital stock of
Primex owned, directly or indirectly, by the Company; (ii) the assets listed on
Schedule 1.36 hereto (the "Scheduled Mexico Assets"); and (iii) all other
noncurrent Assets of the Company and its subsidiaries specifically related to
the conduct of business in the United Mexican States; PROVIDED, HOWEVER, that
the term "Mexico Assets" shall not include (A) the Agreement between Price,
Primex and Comercial Mexicana to Form a Corporate Joint Venture dated June 21,
1991, as amended, (B) any right, title or interest in or to the names "Price
Club," "Price Club Costco" or "Price Costco" and (C) any computer software.
Section 1:36A "Mexico Interest" shall have the meaning set forth in Section
2.6(b).
Section 1.37 "net proceeds" shall mean the proceeds remaining from any sale
after the payment of all direct costs and expenses associated with such sale,
including, without limitation, all Federal, state and local income and transfer
taxes payable in connection therewith.
Section 1.38 "Newco" shall have the meaning set forth in the introductory
clauses hereto.
Section 1.39 "Newco Assets" shall mean all furniture, fixtures and
equipment used by employees of the Company who will become Retained Employees
and (excluding the Company's AS-400 data center) located at the San Diego
Property.
II-6
<PAGE>
Section 1.40 "Newco Common Stock" shall have the meaning set forth in the
introductory clauses hereto.
Section 1.41 "Newco Employees" shall have the meaning set forth in Section
7.1 hereof.
Section 1.42 "Newco Executive Committee" shall have the meaning set forth
in Section 6.1 hereof.
Section 1.43 "Newco Option" shall have the meaning set forth in Section 7.4
hereof.
Section 1.44 "Newco Option Plan" shall have the meaning set forth in
Section 7.4 hereof.
Section 1.45 "Newco Plans" shall have the meaning set forth in Section 7.2
hereof.
Section 1.46 "Northridge Mortgage" shall mean outstanding indebtedness in
an original principal amount of $5,000,000 with an outstanding principal amount
as of July 28, 1994 of approximately $3,500,000, which is secured by the
Commercial Property located in Northridge, California (denoted as item number 6
on Schedule 1.14 hereto) and the Company's Club Business real estate located
adjacent thereto.
Section 1.47 "Note" shall have the meaning set forth in Section 3.3 hereof.
Section 1.48 "Notes Receivable" shall mean the Atlas Note and the City
Notes.
Section 1.49 "Office Lease" shall mean an agreement pursuant to which the
Company will lease certain office space located at 4649 Morena Boulevard, San
Diego, California (not to exceed the square footage currently being used by the
business and operations of the Company excluding the business and operations of
Newco) substantially in the form attached hereto as Exhibit A except that (i)
the term thereof shall end on or about July 1997, (ii) the rent with respect
thereto shall be included within the rent charged pursuant to the Warehouse
Property located at Morena Boulevard, San Diego, California and (iii) such
agreement shall not be assignable or subleaseable by the Company.
Section 1.50 "Operating Agreements" shall mean agreements substantially in
the forms attached hereto as Exhibits B, C and D.
Section 1.51 "person" shall mean any individual, corporation, partnership,
joint venture, association, joint-stock company, trust, unincorporated
organization or government or other agency or political subdivision thereof, or
any other entity.
Section 1.51A "Price" shall mean The Price Company, a California
corporation and a wholly owned subsidiary of the Company.
Section 1.51B "Price Club Mexico" shall mean Price Club de Mexico, S.A. de
C.V., a corporation organized under the laws of Mexico.
Section 1.52 "Price Designees" shall have the meaning set forth in the
Bylaws of the Company.
Section 1.52A "Primex" shall mean Price Venture Mexico, a California
corporation and a wholly owned subsidiary of Price.
Section 1.53 "Quest Assets" shall mean (i) all of the noncurrent Assets of
the Company or any of its subsidiaries specifically related to the Quest
Business as currently conducted; (ii) an exclusive license to use the service
mark "Price Club Quest" in the United States and throughout the world (except
for the Specified Geographical Areas other than Mexico) pursuant to the terms of
a license agreement entered into by the Company, Price, Subsidiary Corporation
#3 and Newco at the Transfer Closing; (iii) all right, title and interest (to
the extent such exists) in and to the common law interests in and to the
trademark and service mark "Quest"; and (iv) the Assets listed on Schedule 1.53
hereto.
Section 1.54 "Quest Business" shall mean all of the business and operations
currently conducted by the Company or any of its subsidiaries through its Quest
interactive electronic shopping business, together with Price Club Travel, Price
Club Realty and the Price Club automobile advertising/referral business and as
such business may be expanded from time to time; PROVIDED, HOWEVER, that any
expansions into new concepts in the Company's warehouse operations shall be
subject to the prior approval of the Chief Executive Officer of the Company
(which approval shall not be unreasonably withheld).
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Section 1.55 "Real Estate Committee" shall have the meaning set forth in
Section 6.1 hereof.
Section 1.56 "Real Properties" shall mean the Commercial Properties, the
Warehouse Properties and the San Diego Property.
Section 1.57 "Reciprocal Easement Agreements" shall have the meaning set
forth in Section 6.20 hereof.
Section 1.58 "Registration Statement" shall have the meaning set forth in
Section 3.1 hereof.
Section 1.59 "Retained Employees" shall have the meaning set forth in
Section 7.1 hereof.
Section 1.60 "Retained Liabilities" shall mean all Liabilities of the
Company and its subsidiaries relating to or arising out of (i) the Mexico Assets
(other than shares of capital stock of Price Venture Mexico), the International
Assets (other than the CMI Stock) and the Quest Assets, which arise out of
events occurring prior to the Transfer Closing Date and (ii) the Transferred
Assets which arise out of events occurring prior to the Transfer Closing Date,
but excluding the Environmental Liabilities and the Assumed Construction Costs.
Section 1.61 "San Diego Office Space" shall mean certain office space
located in the San Diego Property, as described in the Lease.
Section 1.62 "San Diego Property" shall mean the commercial real estate
known as 4455 and 4649 Morena Boulevard, San Diego, California.
Section 1.63 "Scheduled Mexico Assets" shall have the meaning set forth in
Section 1.29 hereof.
Section 1.64 "Securities Act" shall mean the Securities Act of 1933, as
amended.
Section 1.65 "SEC" shall mean the Securities and Exchange Commission.
Section 1.65A "Specified Companies" shall mean Wal-Mart Stores Inc., Target
Stores, Kmart Corporation, The Home Depot, Inc. and Office Depot, Inc. and each
of their affiliates (as such term is defined in Rule 12b-2 under the Securities
Exchange Act of 1934, as amended).
Section 1.66 "Specified Geographical Areas" shall mean Australia, New
Zealand, the Northern Mariana Islands (including Guam and Saipan), the Republic
of Panama, those Central American countries situated north of the Republic of
Panama and south of Mexico, Mexico and those islands situated in the Western
Hemisphere north of the Equator and lying within the area marked on the map
attached hereto as Exhibit E (including Bermuda but excluding Puerto Rico and
any portion of the United States (other than the U.S. Virgin Islands) or Canada
lying within such marked area).
Section 1.67 "Stockholders' Agreements" shall mean agreements substantially
in the form attached hereto as Exhibits F, G and H.
Section 1.68 "subsidiary" of any person shall mean any corporation or other
entity of which outstanding securities having ordinary voting power to elect a
majority of the board of directors of such corporation or a majority of the
voting equity interest of such other entity is owned directly or indirectly by
such person.
Section 1.69 "Subsidiary Corporations" shall mean, collectively, Subsidiary
Corporation #1, Subsidiary Corporation #2 and Subsidiary Corporation #3.
Section 1.70 "Subsidiary Corporation #1" shall mean Mexico Clubs, L.L.C., a
Delaware limited liability company, to which the Company shall cause to be
contributed the Mexico Assets.
Section 1.71 "Subsidiary Corporation #2" shall mean Price Global Trading,
Inc., a Delaware corporation, to which the Company caused to be contributed the
International Assets.
Section 1.72 "Subsidiary Corporation #3" shall mean Price Quest, Inc., a
Delaware corporation, to which the Company caused to be contributed the Quest
Assets.
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Section 1.73 "Subsidiary Interests" shall mean, collectively, 51 percent of
the outstanding capital stock of each of Subsidiary Corporation #2 and
Subsidiary Corporation #3.
Section 1.74 "Tax Allocation Agreements" shall mean tax allocation
agreements to be entered into between the Company, on the one hand, and each of
Newco and each Subsidiary Corporation, on the other, pursuant to which Newco or
such Subsidiary Corporation, as the case may be, will be required to make
payments to the Company in respect of its Federal, state, local and foreign
income tax liabilities on and after the Transfer Closing Date, as if Newco, and
its subsidiaries or such Subsidiary Corporation, as the case may be, were
separate corporations for Federal income tax purposes on and after such date.
Section 1.75 [Intentionally omitted.]
Section 1.76 "Third Party Claim" shall have the meaning set forth in
Section 9.2 hereof.
Section 1.77 "Transaction" shall have the meaning set forth in the
introductory clauses hereto.
Section 1.78 "Transfer" shall have the meaning set forth in Section 2.2
hereof.
Section 1.79 "Transferred Assets" shall mean (i) the Commercial Properties,
other than any Commercial Property that is sold to a third party prior to the
Transfer Closing Date (A) pursuant to an agreement in existence as of July 28,
1994 or (B) following approval of such sale by the Real Estate Committee; (ii)
the net proceeds from the sale of any Commercial Property occurring prior to the
actual transfer of such Commercial Property by the Company to Newco; (iii) the
Warehouse Properties; (iv) the San Diego Property; (v) the Notes Receivable;
(vi) the Newco Assets; (vii) the Subsidiary Interests; (viii) the Mexico
Interest; and (ix) all claims, rights, entitlements and causes of action of the
Company and its Subsidiaries in respect of the Transferred Assets (other than
any such claims, rights, entitlements and cause of action arising out of or
relating to the Retained Liabilities).
Section 1.80 "Transfer Closing" shall have the meaning set forth in Section
2.4 hereof.
Section 1.81 "Transfer Closing Date" shall have the meaning set forth in
Section 2.4 hereof.
Section 1.82 "Transition Period" shall have the meaning set forth in
Section 7.1 hereof.
Section 1.83 "Warehouse Properties" shall mean the commercial real estate
comprising the Company's warehouse club operations at Pentagon City in
Arlington,Virginia; Wayne, New Jersey; Westbury, New York; and Morena Boulevard
in San Diego, California (including fixtures permanently attached to such
structures, but excluding inventory, furniture, trade fixtures and equipment).
ARTICLE II
TRANSFER OF ASSETS; ASSUMPTION OF LIABILITIES
Section 2.1 TRANSACTIONS OCCURRING PRIOR TO THE TRANSFER CLOSING
DATE. (a) Prior to the Transfer Closing Date the Company caused to be formed
Subsidiary Corporation #2 and Subsidiary Corporation #3.
(b) Prior to the Transfer Closing Date, the Company caused (i) the
International Assets to be conveyed, assigned, transferred and delivered to
Subsidiary Corporation #2; and (ii) the Quest Assets to be conveyed, assigned,
transferred and delivered to Subsidiary Corporation #3. Each such conveyance,
assignment, transfer and delivery was effected by such bills of sale,
endorsements, assignments or other instruments of transfer and conveyance, as
appropriate.
(c) In full consideration for the conveyances, assignments, transfers and
deliveries described in subsection (b) above, each of Subsidiary Corporation #2
and Subsidiary Corporation #3 issued 100 shares of its common stock to Price,
which constituted all of the outstanding capital stock of such Subsidiary
Corporation.
Section 2.2 CONVEYANCE OF TRANSFERRED ASSETS. At the Transfer Closing, the
Company caused to be conveyed, assigned, transferred and delivered to Newco (or
to a subsidiary of Newco, as agreed to by the parties) the Transferred Assets,
other than certain Real Properties (together with the transfer to Newco of all
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Real Properties not heretofore transferred and the conveyance, assignment,
transfer and delivery contemplated by Section 2.6(e), the "Transfer"). With
respect to certain Transferred Assets that the Company was unable to convey,
assign, transfer or deliver (or cause to occur) as of the Transfer Closing Date,
the Company will take all reasonable actions to preserve for, or transfer to,
Newco the benefits of such Transferred Asset, pending the conveyance,
assignment, transfer or delivery thereof to Newco. In the event that the Company
is unable to convey, assign, transfer or deliver (or cause such action to occur)
any of the Real Properties to Newco on or prior to February 28, 1995, Newco and
the Company shall agree to either (i) an arrangement, if legally permissible,
pursuant to which the Company shall lease such Real Property to Newco pursuant
to a long-term lease for an annual rent of $1.00 per year or (ii) a conveyance
by the Company to Newco of other real property owned by the Company or its
subsidiaries satisfactory to Newco in substitution thereof; PROVIDED, that if
both of such alternatives shall deprive either party of the benefits of
transferring ownership of the property contemplated by this Agreement by
February 28, 1995, then the Company shall remit to Newco in cash the value of
such property, as listed on Schedule 1.14 hereto under the column entitled "Est.
Value @ Sept 1, 1994."
Section 2.3 CONSIDERATION FOR TRANSFER. In full consideration for the
Transfer, on the Transfer Closing Date, Newco (i) issued to Price 27 million
shares of Newco Common Stock; (ii) assumed the Assumed Liabilities; and (iii)
made all other deliveries required to be made by Newco pursuant to this
Agreement.
Section 2.4 TIME AND PLACE OF THE TRANSFER CLOSING. The closing of the
Transfer (the "Transfer Closing") took place at the offices of Skadden, Arps,
Slate, Meagher & Flom, 300 South Grand Avenue, Los Angeles, California and at
the offices of the Company, 4649 Morena Boulevard, San Diego, California at
10:00 a.m., local time, on October 28, 1994. The date and time at which the
Transfer Closing actually occurred is hereinafter referred to as the "Transfer
Closing Date;" PROVIDED, HOWEVER, that in any case, and regardless of the actual
date and time at which the Transfer Closing actually occurred, the Transfer
Closing Date shall be deemed to have occurred at the close of business on August
28, 1994.
Section 2.5 DELIVERIES AT THE TRANSFER CLOSING. At the Transfer Closing:
(a) Newco delivered to the Company:
(i) a duly executed counterpart of a bill of sale in substantially
the form attached hereto as Exhibit K (the "Bill of Sale");
(ii) a duly executed counterpart of an instrument of assignment and
assumption in substantially the form attached hereto as Exhibit L (the
"Instrument of Assignment and Assumption");
(iii) duly executed counterparts of the Additional Agreements;
(iv) all other documents, instruments and writings required to be
delivered by Newco at or prior to the Transfer Closing Date pursuant to
this Agreement.
(b) The Company delivered or caused to be delivered to Newco:
(i) the books and records included in the Transferred Assets;
(ii) deeds in recordable form conveying to Newco all of the Company's
right, title and interest in and to the owned real properties included in
the Transferred Assets;
(iii) immediately available funds in an amount equal to the net
proceeds from the sale of any Commercial Property occurring prior to the
Transfer Closing Date;
(iv) stock certificates representing the Subsidiary Interests;
(v) a duly executed counterpart of the Instrument of Assignment and
Assumption;
(vi) duly executed counterparts of the Additional Agreements;
(vii) such bills of sale, endorsements, assignments and other
instruments of transfer and conveyance as were necessary to effect the
conveyance, assignment, transfer and delivery of the Transferred Assets
(other than the owned real property included in the Transferred Assets);
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(viii) all other documents, instruments and writings required to be
delivered by the Company at or prior to the Transfer Closing Date
pursuant to this Agreement; and
(ix) ALTA owner's title insurance policies for all Real Properties
transferred and conveyed at the Transfer Closing showing title consistent
with this Agreement.
Section 2.6 CONVEYANCE OF MEXICO ASSETS. (a) Prior to the date hereof the
Company and Newco have caused to be formed Subsidiary Corporation #1.
(b) As soon as practicable following the execution of this Agreement,
(i) the Company shall cause 51 percent of the Mexico Assets to be
contributed to Newco, (ii) the Company shall cause the remaining Mexico
Assets to be conveyed, assigned, transferred and delivered to Subsidiary
Corporation #1 and (iii) Newco shall convey, assign, transfer and deliver to
Subsidiary Corporation #1 the portion of the Mexico Assets referred to in
clause (i) of this Subsection (b). Such conveyances, assignments, transfers
and deliveries shall be effected by such bills of sales, endorsements,
assignments or other instruments of transfer and conveyance as appropriate.
As a result of such conveyances, assignments, transfers and deliveries, the
Company and Newco will own 49% and 51% membership interests, respectively,
in Subsidiary Corporation #1 (such 51% interest, the "Mexico Interest").
(c) Concurrently with such conveyances, assignments, transfers and
deliveries, the Company and Newco shall, and the Company shall cause
Subsidiary #1 to, execute and deliver the Additional Agreements to which
such entities are parties.
ARTICLE III
THE EXCHANGE OFFER; THE DISTRIBUTION
Section 3.1 COMMENCEMENT OF THE EXCHANGE OFFER. As soon as practicable
after the date hereof, Newco shall file with, and use its best efforts to cause
to be declared effective by, the SEC, a registration statement on Form S-4 (such
registration statement, as the same may be amended from time to time, the
"Registration Statement") pursuant to which it will register under the
Securities Act, 27 million shares of Newco Common Stock to be issued in the
Exchange Offer. As soon as practicable after the Registration Statement has been
declared effective under the Securities Act, the Company shall file with the SEC
an Issuer Tender Offer Statement on Schedule 13E-4 and commence an issuer tender
offer (the "Exchange Offer") pursuant to which the Company will offer to
exchange, subject to the terms and conditions set forth in this Agreement and in
Exhibit M hereto, one share of Newco Common Stock for each share of Company
Common Stock up to a maximum of 27 million shares of Newco Common Stock.
Section 3.2 TERM OF EXCHANGE OFFER. The Exchange Offer shall have a
scheduled expiration date 20 business days following the date of commencement.
Subject to the terms and conditions of the Exchange Offer, the Company shall
accept for payment all shares of Company Common Stock which have been validly
tendered and not withdrawn pursuant to the Exchange Offer (up to a maximum of 27
million such shares), and shall pay for each such share by issuing in exchange
therefor one share of Newco Common Stock, at the earliest time following
expiration of the Exchange Offer that all conditions to the Exchange Offer shall
have been satisfied. If more than 27 million shares of Company Common Stock are
validly tendered and not withdrawn in the Exchange Offer prior to the expiration
thereof, 27 million shares of Company Common Stock so tendered shall be accepted
for payment, and shares of Newco Common Stock issued in exchange therefor, on a
pro rata basis. The Company shall not extend the term of the Exchange Offer,
except that the Company Executive Committee or the Newco Executive Committee may
extend the term of the Exchange Offer to comply with applicable law; PROVIDED,
HOWEVER, that in no event shall the time of expiration be extended beyond
January 31, 1995.
Section 3.3 THE DISTRIBUTION. (a) If the Exchange Offer is terminated with
no shares exchanged or is consummated and the number of shares validly tendered
by holders of Company Common Stock, and exchanged by the Company for shares of
Newco Common Stock, is less than 21.6 million, the Board of Directors of the
Company will declare a distribution on each share of Company Common Stock
payable to holders of record of shares of Company Common Stock as of a date no
more than 20 business days after the
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Closing Date (the "Distribution Record Date"), such distribution to consist of a
portion of a share of Newco Common Stock equal to a fraction, the numerator of
which is the number of shares of Newco Common Stock owned by the Company
following termination or consummation of the Exchange Offer and the denominator
of which is the number of shares of Company Common Stock outstanding on the
Distribution Record Date (the "Distribution Fraction").
(b) If the Exchange Offer is consummated and the number of shares validly
tendered by holders of Company Common Stock, and exchanged by the Company for
shares of Newco Common Stock, is greater than 21.6 million, but less than 27
million, the Company, at its option, shall take one of the following actions:
(i) the Board of Directors of the Company will cause to occur a
distribution on each share of Company Common Stock payable to holders of
record of shares of Company Common Stock as of the Distribution Record Date,
such dividend to consist of a portion of a share of Newco Common Stock equal
to the Distribution Fraction; or
(ii) on the thirtieth business day following the Closing Date, the
Company shall sell to Newco all shares of Newco Common Stock owned by the
Company following consummation of the Exchange Offer, including, without
limitation, such shares representing aggregated fractional shares which
would have been distributed to holders of Company Common Stock but for
subsection (c) below (and Newco shall be required to purchase such shares by
delivering in exchange therefor its Promissory Note substantially in the
form attached hereto as Exhibit N), at a price per share equal to the
average of the closing sales price of Newco Common Stock for the 20 trading
days commencing on the sixth trading day following the expiration of the
Exchange Offer (or if Newco Common Stock does not trade on any such day, the
average of the high bid and low asked price per share on such day), which
right of the Company to so sell shall be exercised by delivering written
notice to Newco within 20 business days after the Closing Date specifying
(A) the number of shares of Newco Common Stock owned by the Company and (B)
that the Company desires to sell such shares to Newco.
(c) Notwithstanding any other provision of this Agreement, no certificates
or scrip for fractional shares of Newco Common Stock shall be issued in any
distribution of such shares as set forth above, and no dividend or other
distribution, stock split or interest with respect to shares of Newco Common
Stock shall relate to any fractional security, and such fractional interests
shall not entitle the owner thereof to vote or to any other rights of a
stockholder. In lieu of such fractional shares, each holder of shares of Company
Common Stock who would otherwise have been entitled to a fraction of a share of
Newco Common Stock shall be entitled to receive a cash payment (without
interest) in lieu of such fractional share equal to such fraction multiplied by
the average closing price per share of Newco Common Stock on the National
Association of Securities Dealers Inc. Automated Quotation/National Market
System (or on such other quotation service or exchange as the Newco Common Stock
shall be quoted or listed), during the ten trading days immediately following
the date of distribution of shares of Newco Common Stock by the Company. If,
following any distribution of shares of Newco Common Stock by the Company, as
set forth in this Section 3.3, the Company shall own any shares of Newco Common
Stock representing aggregated fractional shares which would have been
distributed to holders of Company Common Stock but for this subsection (c), the
Company shall sell such shares to Newco, in the manner and valued in accordance
with subsection (b)(ii) above.
ARTICLE IV
THE CLOSING
Section 4.1 CLOSING. The closing (the "Closing") of the transactions
contemplated by this Agreement, other than those actions that are taken and
transactions that were consummated pursuant to Article II hereof at the Transfer
Closing and that will be consummated pursuant to section 2.6 hereof, shall take
place on the date immediately following the expiration of the Exchange Offer, or
if such date is not a business day, and the Company so elects, on the next
business day thereafter (the "Closing Date"). The Closing shall take place at
the offices of Skadden, Arps, Slate, Meagher & Flom, 300 South Grand Avenue, Los
Angeles, California at 10:00 a.m., local time, or at such other time and place
as the parties may mutually agree.
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Section 4.2 ACTIONS TO BE TAKEN AT THE CLOSING. At the Closing the
following actions shall be taken (if such actions have not been taken prior to
the Closing):
(a) the Company will deliver to a bank or trust company (designated by
the Company to serve as the agent of the Company for exchanging shares of
Newco Common Stock for shares of Company Common Stock in the Exchange
Offer), a number of shares of Newco Common Stock (up to a maximum of 27
million such shares) equal to the number of shares of Company Common Stock
validly tendered and not withdrawn in the Exchange Offer and accepted for
payment by the Company;
(b) the amended Certificate of Incorporation of Newco shall be filed
with the Secretary of State of the State of Delaware;
(c) the amendments to the Bylaws of Newco, which shall have been amended
in accordance with Section 6.2 hereof, shall become effective;
(d) the amendment of the Bylaws of the Company to read in their entirety
as set forth in Exhibit O hereto shall become effective;
(e) the Board of Directors of Newco shall be expanded and the newly
created directorships shall be filled, as described in Section 6.4 hereof;
(f) the resignations of certain Price Designees from the Board of
Directors of the Company, as described in Section 6.5 hereof, shall become
effective; and
(g) each of the Company and Newco shall deliver or cause to be delivered
all other documents, instruments and writings required to be delivered by
the Company or Newco, as the case may be, at or prior to the Closing Date
pursuant to this Agreement.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to Newco as follows:
Section 5.1 TITLE TO PROPERTY. All of the real and personal property owned
by the Company or any of its subsidiaries and included in the Transferred
Assets, the Scheduled Mexico Assets, the International Assets or the Quest
Assets is owned by the Company or such subsidiary free and clear of any minority
interest (in the case of all owned Commercial Properties) and free and clear of
all liens except for (i) liens imposed by operation of law for current taxes not
yet due and payable in the ordinary course of business, (ii) mechanics',
repairmen's, materialmen's and other like liens in respect of liabilities which
are not yet due or which are being contested in good faith, (iii) liens arising
out of or relating to Environmental Liabilities, (iv) liens which have been
previously disclosed by the Company or any of its subsidiaries to Newco or with
respect to which Newco has knowledge, and (v) those liens that do not materially
and adversely affect the marketability or intended use of such property.
Section 5.2 BROKERS AND FINDERS. Other than Donaldson, Lufkin & Jenrette
Securities Corporation and Lehman Brothers, none of the Company or any of its
subsidiaries nor any of their respective directors, officers or employees has
employed any broker or finder (including, without limitation, any real estate
broker) or incurred any liability for any financial advisory fees, commissions
or similar payments in connection with the transactions contemplated by this
Agreement.
Section 5.3 NO OTHER REPRESENTATIONS OR WARRANTIES. Except as set forth in
Sections 5.1 and 5.2, the Company is not, in this Agreement nor in any other
agreement or document contemplated by this Agreement, making any representations
or warranties with respect to the Transferred Assets, the Mexico Assets, the
International Assets or the Quest Assets.
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ARTICLE VI
ADDITIONAL MATTERS RELATED TO THE
TRANSFER AND THE EXCHANGE OFFER
Section 6.1 CERTAIN COMMITTEES. (a) The Board of Directors of the Company
has heretofore taken all necessary actions so that, at the Transfer Closing Date
(i) there shall be formed an executive committee of the Board of
Directors of Newco (the "Newco Executive Committee"), the charter of which
shall read as set forth in Exhibit P hereto, consisting of James D. Sinegal
and two persons designated by the Price Designees then serving on the Board
of Directors of the Company;
(ii) the charter of the current Executive Committee of such Board will
be amended to read as set forth in Exhibit P hereto and such Executive
Committee will be reconstituted, the members thereof to consist of (A)
Richard M. Libenson; (B) Duane Nelles; and (C) all of the Costco Designees
then serving on the Board of Directors of the Company (such committee, as
reconstituted, the "Company Executive Committee");
(iii) the charter of the current Audit and Compensation Committees of
such Board will be amended to read as set forth in Exhibit Q and each such
committee will consist of two Costco Designees and two Price Designees; and
(iv) there shall be formed a real estate committee (the "Real Estate
Committee") and a finance committee (the "Finance Committee"), the charters
of which shall read as set forth in Exhibit Q, each such committee to
consist of two Costco Designees and two Price Designees.
(b) Each of the Newco Executive Committee, the Company Executive Committee,
the Audit Committee, the Compensation Committee, the Real Estate Committee and
the Finance Committee shall exist from the time of execution of this Agreement
until the earliest to occur of (i) the consummation of the Exchange Offer, (ii)
January 31, 1995 or (iii) the date on which Newco Common Stock is first
distributed to the stockholders of the Company.
Section 6.2 CERTIFICATE OF INCORPORATION AND BYLAWS OF NEWCO. At or prior
to the Closing Date the Certificate of Incorporation and Bylaws of Newco shall
be amended in a manner specified by Newco prior to the Transfer Closing Date.
Section 6.3 AMENDMENT OF BYLAWS OF THE COMPANY. The Board of Directors of
the Company has heretofore taken all necessary actions so that the Bylaws of the
Company shall be amended to read in their entirety as set forth in Exhibit O
hereto, which amendment shall become effective as of the earlier to occur of (A)
the Closing Date or (B) the date that shares of Newco Common Stock are
distributed to holders of Company Common Stock.
Section 6.4 BOARD OF DIRECTORS OF NEWCO. At the Closing Date, the existing
Board of Directors of Newco shall cause such Board to be expanded and the Board
of Directors of Newco, by a majority vote, shall fill such newly created
directorships.
Section 6.5 BOARD OF DIRECTORS OF THE COMPANY. (a) At the Closing Date,
the resignation of each Price Designee other than Richard M. Libenson and Duane
Nelles shall become effective. Each such resignation shall be set forth in a
letter from each such Price Designee (in the form attached hereto as Exhibit R),
which shall be executed concurrently with the execution of this Agreement.
(b) Unless removed for cause, each of Messrs. Libenson and Nelles shall
serve on the Board of Directors of the Company until the earlier of (i) the date
two years following the Closing Date and (ii) such time as Sol Price and Robert
Price and their affiliates in the aggregate cease to beneficially own at least
two million shares of Company Common Stock (including any such shares owned by
charitable trusts established by either of them).
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Section 6.6 AGREEMENT NOT TO COMPETE. (a) For a period of five years
following the Closing Date, Newco shall not, nor shall it permit or suffer any
of its subsidiaries to: (i) directly or indirectly engage in or conduct any Club
Business in any geographical area other than the Specified Geographical Areas,
own any interest in another company that conducts a Club Business in any area
other than the Specified Geographical Areas (PROVIDED that none of Newco,
Subsidiary Corporation #2 or any of their subsidiaries shall be prohibited from
purchasing and owning securities of any such company as a passive investment so
long as such securities in the aggregate represent no more than 10% of the
equity securities of such company) or knowingly sell to or provide services to a
Club Business in any such area, and in the Specified Geographical Areas shall
conduct a Club Business only through the relevant Subsidiary Corporation; (ii)
sell, assign, lease, transfer or otherwise convey (A) any Commercial Property,
or any portion thereof, to any person for use as a Club Business (other than the
Company), if any Club Business operated by the Company as of the date hereof is
located on, adjacent to or within the same development as such latter Club
Business or (B) any of the Commercial Properties listed on Schedule 6.6 hereto
to any person for use as a Club Business so long as the Company or one of its
subsidiaries shall operate a Club Business in the same trade area; (iii) conduct
a Quest Business from within a location that is owned or operated by any of the
Specified Companies or in any Club Business other than a Club Business operated
by the Company, Newco, the Subsidiary Corporations or any of the licensees of
the Subsidiary Corporations; or (iv) without the prior written consent of the
Company (which shall not unreasonably be withheld), engage in any business with
any of the Specified Companies, except that Newco and its subsidiaries may (A)
except as provided in clause (ii) above, sell, assign, lease, transfer or
otherwise convey any real property to, or purchase, lease or otherwise take
possession of any real property from, any of the Specified Companies and (B)
purchase merchandise from any of the Specified Companies in the ordinary course
of business and consistent with the Company's past practice.
(b) For a period of five years following the Closing Date, the Company shall
not, nor shall it permit or suffer any of its subsidiaries to: (i) directly or
indirectly conduct a Club Business in any of the Specified Geographical Areas
other than through the Subsidiary Corporations, own any interest in another
company that conducts a Club Business in any of the Specified Geographical Areas
(PROVIDED that neither the Company nor any of its subsidiaries shall be
prohibited from purchasing and owning securities of any such company as a
passive investment so long as such securities in the aggregate represent no more
than 10% of the equity securities of such company) or transfer to any person
(other than Newco or the relevant Subsidiary Corporation) the right to conduct a
Club Business in any of the Specified Geographical Areas, including, without
limitation, any right to use the name "Costco" in such Specified Geographical
Areas, PROVIDED, HOWEVER, that, with respect to Mexico, the foregoing
restrictions set forth in this clause (i) shall terminate and have no further
force or effect upon any sale of all of the shares of capital stock of Primex,
or all of the shares of capital stock of Price Club Mexico, owned, directly or
indirectly, by Subsidiary Corporation #1 to Comercial Mexicana or any of its
affiliates (as such term is defined under Rule 12b-2 promulgated pursuant to the
Securities Exchange Act of 1934, as amended); (ii) conduct a Quest Business;
PROVIDED, HOWEVER, that nothing herein shall prohibit the Company or its
subsidiaries from conducting business (other than any business conducted through
the Quest Assets) in the manner heretofore conducted or, with Newco's consent
(which shall not be unreasonably withheld), from conducting interactive
promotional and advertising activities other than through an electronic
interactive shopping format; or (iii) without the prior consent of Newco (which
shall not unreasonably be withheld), engage in any business with any of the
Specified Companies, except that the Company and its subsidiaries may (A) sell,
assign, lease, transfer or otherwise convey any Club Business or any real
property to, or purchase, lease or otherwise take possession of any Club
Business or any real property from, any of the Specified Companies and (B)
purchase merchandise from any of the Specified Companies in the ordinary course
of business and consistent with past practice.
(c) Prior to entering into any agreement or arrangement with any person
(other than the Company) to own, operate or develop a Club Business in any
Specified Geographical Area, whether pursuant to a joint venture, license,
equity investment by such person in Subsidiary Corporation #2 or otherwise,
Newco or Subsidiary Corporation #2 shall obtain the agreement of such person
that such person will not directly or indirectly use any proprietary information
or know-how acquired from Subsidiary Corporation #2 with respect to the
ownership and operation of a Club Business in such person's other business
activities (other
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than the Club Business owned, operated or developed with Subsidiary Corporation
#2 in the Specified Geographical Area), and such agreement shall expressly state
that the Company shall be a third party beneficiary of such agreement. In
addition, any such agreement with Coles Myer Ltd shall also provide that Coles
Myer Ltd will not enter into a Club Business outside the Specified Geographical
Areas.
Section 6.7 CONTINUANCE OF EXISTING INDEMNIFICATION RIGHTS. (a) From and
after the Closing Date, and for a period of six years thereafter, the Company
shall continue the indemnification rights of present and former directors and
officers of the Company provided for in the Restated Certificate of
Incorporation and Bylaws of the Company as in effect on the date hereof, with
respect to indemnification for acts and omissions occurring prior to the Closing
Date, including, without limitation, with respect to the litigation entitled
FECHT ET AL. V. THE PRICE COMPANY ET AL, for so long as such matters which have
arisen prior to the end of such six-year period remain outstanding.
(b) For two years after the Closing Date the Company shall cause to be
maintained the current policies of the officers' and directors' liability
insurance maintained by the Company covering the persons who are presently
covered by the Company's officers' and directors' liability insurance policies
with respect to actions and omissions occurring prior to the Closing Date to the
extent available; PROVIDED, that policies of at least the same coverage
containing terms and conditions which are no less advantageous to the insureds
may be substituted therefor; and PROVIDED, FURTHER, that in no event shall the
Company, utilizing its best efforts, be required to expend to maintain or
procure insurance coverage pursuant to this Section 6.7(a) in any amount per
annum in excess of 125% of the current annual premiums for the twelve-month
period ended December 31, 1993 (the "Maximum Premium") with respect to such
insurance, or, if the cost of such coverage exceeds the Maximum Premium, the
maximum amount of coverage that can be purchased for the Maximum Premium.
Section 6.8 [Intentionally omitted]
Section 6.9 [Intentionally omitted]
Section 6.10 CERTAIN ADVANCES BY THE COMPANY TO NEWCO. During the period
commencing on the Transfer Closing Date and ending six months after the Closing
Date, the Company shall advance to Newco funds in accordance with the terms and
conditions set forth on Exhibit S hereto to enable Newco to conduct its business
and operations during such period, which advances shall be repaid by Newco in
accordance with the terms and conditions of such Exhibit. The terms and
conditions set forth on such Exhibit are reflected in a definitive loan
agreement entered into by the Company and Newco at the Transfer Closing Date
(the "Advance Agreement").
Section 6.11 EXPENSES. All costs and expenses incurred in connection with
this Agreement and the transactions contemplated hereby or arising in respect
hereof (including any taxes arising from the transfer of the Transferred Assets
to Newco) shall be paid by the Company, except that, if the Transaction is
consummated, all costs and expenses of Latham & Watkins, counsel to Newco, and
Kenneth Leventhal & Company, an advisor to Newco, shall be paid by Newco.
Section 6.12 FURTHER ASSURANCES. Subject to the terms and conditions of
this Agreement, each of the parties hereto shall use all reasonable efforts to
take, or cause to be taken, all actions and to do, or cause to be done, all
things necessary, proper or advisable under applicable laws and regulations to
consummate and make effective the transactions contemplated by this Agreement.
In case at any time after the Closing Date any further action is necessary or
desirable to carry out the purposes of this Agreement, the proper officers and
directors of each party to this Agreement shall take all necessary actions to
the extent not inconsistent with their other duties and obligations or
applicable law.
Section 6.13 ACCESS. Upon reasonable notice, the Company shall afford to
Newco and its officers, employees, accountants, counsel, advisors and other
representatives access during normal business hours to all of the real
properties included in the Transferred Assets and all of the Company's
contracts, commitments, books and records relating thereto and all of the
Company's contracts, commitments, books and records relating to the
International Assets, the Mexico Assets and the Quest Assets. Unless otherwise
required by law, Newco will, and will cause each of its officers, employees,
accountants, counsel and advisors
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to, hold any such information which is nonpublic in confidence until such time
as such information otherwise becomes publicly available through no wrongful act
of Newco or any such person and in the event of termination of this Agreement
for any reason, Newco will promptly return, or cause to be returned, all
nonpublic documents obtained from the Company.
Section 6.14 APPORTIONMENT. The Company and Newco shall, as of the
Transfer Closing Date, apportion (i) the real property taxes on all real
property included in the Transferred Assets and transferred to Newco hereunder
and (ii) other similar recurring municipal and state charges and assessments
relating to the Transferred Assets. All such prorations shall be allocated so
that items relating to time periods ending prior to the Transfer Closing Date
shall be allocated to the Company and items relating to time periods beginning
on or after the Transfer Closing Date shall be allocated to Newco. The amount of
all such prorations shall be settled and paid on the Transfer Closing Date;
PROVIDED, HOWEVER, that final payments with respect to prorations that are not
able to be calculated as of the Transfer Closing Date will be calculated and
paid as soon as practicable thereafter. The parties hereto agree to furnish each
other with such documents and other records as shall be reasonably requested to
confirm all proration calculations.
Section 6.15 CONSENTS. Each of the Company and Newco shall use its
reasonable efforts to obtain consents of all persons and governmental and
regulatory authorities necessary for the consummation of the transactions
contemplated by this Agreement.
Section 6.16 FILINGS. The Company shall make or cause to be made all
filings and submissions under laws and regulations applicable to the Company, if
any, as may be required by the Company for the consummation of the transactions
contemplated by this Agreement. Newco shall make or cause to be made all such
other filings and submissions under laws and regulations applicable to Seller
for the consummation of transactions contemplated by this Agreement. The Company
and Newco shall coordinate and cooperate with one another in exchanging such
information and reasonable assistance as may be requested by either of them in
connection with this Section 6.16.
Section 6.17 STANDSTILL AGREEMENTS. (a) The Company agrees and covenants
that, until five years after the Closing Date, without Newco's prior written
consent, the Company will not and will cause each of its subsidiaries not to
acquire, offer or propose to acquire, or agree to acquire, directly or
indirectly, by purchase or otherwise, any Newco Common Stock or direct or
indirect rights or options to acquire (through purchase, exchange, conversion or
otherwise), any Newco Common Stock; PROVIDED, HOWEVER, that the foregoing shall
not limit any rights of Newco pursuant to the Security and Pledge Agreement
which may be entered into by the Company and Newco pursuant to the Note.
(b) Newco agrees and covenants that, until five years after the Closing
Date, without the Company's prior written consent, Newco will not and will cause
each of its subsidiaries not to acquire, offer or propose to acquire, or agree
to acquire, directly or indirectly, by purchase or otherwise, any Company Common
Stock, or direct or indirect rights or options to acquire (through purchase,
exchange, conversion or otherwise), any Company Common Stock.
Section 6.18 CERTAIN MATTERS WITH RESPECT TO CITY NOTES. If the Company
should cease to operate a Club Business at any site with respect to which any
governmental agency has executed and delivered one of the City Notes in
connection with the development of such site, or the Company should take any
other action that would entitle such governmental agency to withhold payment of
all or any portion of the unpaid principal of or interest payable on such City
Note, Newco shall have the right to sell to the Company such City Note (and the
Company shall be required to purchase such City Note from Newco) for an amount
of cash equal to 72% of the sum of (a) the outstanding book balance shown on
Schedule 1.8 owed on each such City Note, reduced by any principal repayment
since the date of such book balance, plus (b) all accrued and unpaid interest
from the date of such book balance. Newco shall be entitled to any principal
payments to the Company with respect to the City Notes made between June 5, 1994
and the Transfer Closing Date.
Section 6.19 CERTAIN INSURANCE PROCEEDS. If, at or after the Transfer
Closing Date, the Company receives proceeds pursuant to any insurance policy
maintained by the Company or any of its subsidiaries in respect of Liabilities
relating to or arising in respect of Materials of Environmental Concern and
violations
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or purported violations of Environmental Laws, which relate to or arise out of
any Real Property transferred to Newco hereunder and which arise out of events
occurring prior to the Transfer Closing Date, then the Company agrees to remit,
or cause to be remitted, such proceeds to Newco. The Company shall cooperate
with Newco and shall take all actions to vest in Newco the right to receive any
such proceeds.
Section 6.20 CERTAIN REAL ESTATE MATTERS. (a) To the extent not heretofore
undertaken or completed, as soon as practicable after the date hereof, the
Company shall (i) engage local counsel, as appropriate, in jurisdictions where
the Real Properties are situated, to prepare local addenda to this Agreement to
be executed by the Company and Newco where reasonably necessary or appropriate
for the transfer of any Real Properties in such jurisdictions; (ii) cause to be
commenced and completed the subdivision (in accordance with applicable law) of
any of the Real Properties as may be required to effect the transfers of any
such Real Property; (iii) cause to be commenced and completed such surveys as
may be required to effect the transfer of any Real Property hereunder; and (iv)
seek to obtain environmental reports in Real Properties to the extent requested
by the Company or Newco.
(b) At or prior to the transfer to Newco of any of the Real Properties not
heretofore transferred, the parties shall enter into appropriate agreements
covering access, parking and similar matters with respect to such Real
Properties, as appropriate, consistent with the current operation of such Real
Properties (the "Reciprocal Easement Agreements").
(c) The Company shall be entitled to receive all condemnation proceeds
payable due to condemnation proceedings occurring prior to the Transfer Closing
Date with respect to the Commercial Property located in Santee, California
(denoted as item Number 34 on Schedule 1.14 hereto).
(d) The Company shall satisfy in full all Liabilities pursuant to the
Northridge Mortgage at the earliest time that it may do so without incurring any
prepayment penalty and, upon such satisfaction, will use all reasonable efforts
to secure the release of all liens relating to such mortgage.
Section 6.21 CERTAIN MATTERS WITH RESPECT TO SUBSIDIARY CORPORATION #1. If
a sale by Subsidiary Corporation #1 of all of the shares of capital stock of
Primex, or all of the shares of capital stock of Price Club Mexico, owned
directly or indirectly by Subsidiary Corporation #1 to Comercial Mexicana shall
not have been consummated on or before October 1, 1995, then, at the election of
either PriceCostco or Price Enterprises (delivered to the other in writing),
PriceCostco and Price Enterprises shall, and shall cause Subsidiary Corporation
#1 to, (i) take all necessary actions so that Subsidiary Corporation #1 shall
cease to be a limited liability company and shall instead become a corporation
organized under the laws of the State of Delaware, the certificate of
incorporation and bylaws of which shall be substantially in the forms attached
hereto as Exhibits I and J and (ii) execute and deliver a Stockholders'
Agreement substantially in the form attached hereto as Exhibit F.
ARTICLE VII
EMPLOYEE MATTERS
Section 7.1 EMPLOYEES. As of January 1, 1995, Newco shall offer to employ
each employee of the Company who is listed on a Schedule previously delivered to
the Company, and who remains an employee of the Company immediately prior to
January 1, 1995. Each such employee who accepts such offer of employment shall,
as of January 1, 1995, be transferred to the employment, and become an employee,
of Newco (each such employee and each person who becomes an employee of Newco
during the two-year period following the Closing Date, a "Newco Employee").
During the period beginning on the Transfer Closing Date and ending on December
31, 1994 (the "Transition Period"), the Company shall continue to employ each
employee listed on the foregoing Schedule (collectively, and together with any
additional persons who become employees of the Company during the Transition
Period at the request of Newco, hereinafter referred to in connection with the
Transition Period as "Retained Employees") and shall provide employee benefits
to the Retained Employees under substantially the same terms and conditions as
those under which such employees are employed as of the Transfer Closing Date;
PROVIDED, HOWEVER, that the Company shall retain the right, at Newco's request,
to terminate a Retained Employee for any reason. During the Transition
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Period, Newco shall lease from the Company the services of the Retained
Employees and shall be liable, and reimburse the Company, for the cost of such
services based on the Company's actual cost in respect thereof, including
without limitation salary, wages, vacation accrual, fringe benefits and employee
benefit costs and related expenses payable to or on behalf of the Retained
Employees in accordance with the terms of this Article VII; PROVIDED, HOWEVER,
that the Company shall be solely liable and retain sole responsibility for the
payment of bonuses to the Retained Employees in respect of the 1994 fiscal year.
Section 7.2 COMPANY PLANS.
(a) With respect to the Company Plans, including, but not limited to, the
plans listed on Schedule 7.2(a), Newco shall, effective as of January 1, 1995,
take, or cause to be taken, all action necessary and appropriate to establish
and maintain substantially equivalent employee benefit plans (the "Newco Plans")
for the benefit of Newco Employees who participated in the respective,
comparable Company Plan. Newco agrees that each Newco Employee eligible to
participate in a Company Plan shall immediately become eligible to participate
in the comparable Newco Plan, and, for all purposes under such Newco Plan, each
Newco Employee shall be entitled to service and any accrued benefit or account
balance, as the case may be, credited to such Newco Employee as of January 1,
1995 under the terms of the comparable Company Plan as if such service had been
rendered to Newco and as if such accrued benefit or account balance had
originally been credited to such Newco Employee under such Newco Plan. The
Company agrees to provide Newco, as soon as practicable after the Transfer
Closing Date (with the cooperation of Newco to the extent that relevant
information is in the possession of Newco or its subsidiaries), with a list of
the Retained Employees who were, to the best knowledge of the Company,
participants in the Company Plans immediately prior to the Transfer Closing
Date, together with a listing of each such employee's service for eligibility,
vesting and benefit accrual purposes under such plan and a list of each such
Retained Employee's accrued benefit or account balance thereunder. The Company
shall, as soon as practicable after the Transfer Closing Date, provide Newco
with such additional information (not already in the possession of Newco or its
subsidiaries) as may be reasonably requested by Newco and necessary in order for
Newco and its subsidiaries to effectively maintain and administer the Newco
Plans.
(b) In the case of each Company Plan that is a defined contribution plan,
the Company agrees to direct the trustee of each such plan to transfer, on, or
as soon as is practicable after, January 1, 1995, to the trustee or other
funding agent of the applicable Newco Plan, in cash, securities, other property
or a combination thereof, as determined by the Company, subject to approval by
Newco (which approval shall not be unreasonably withheld), the respective
account balances of the Newco Employees as of the date of transfer, plus that
portion of any unallocated contributions that is attributable to the Newco
Employees.
(c) The Company and Newco shall, in connection with the transfers described
in Section 7.2(b), cooperate in making any filings required under the Code or
ERISA, and the regulations thereunder and any applicable securities laws, and
take all such action as may be necessary and appropriate to cause such transfers
to take place as soon as practicable after the Transfer Closing Date.
(d) Except as specifically set forth in this Section 7.2 and in Section 7.7,
from and after January 1, 1995, the Company and its subsidiaries shall cease to
have any liability or obligation whatsoever with respect to Newco Employees
under the Company Plans, and Newco and its subsidiaries shall assume and be
solely responsible for all liabilities and obligations whatsoever of the Company
and its subsidiaries with respect to Newco Employees under the Company Plans and
shall be solely responsible for all liabilities and obligations whatsoever under
the Newco Plans. Without limiting the generality of the foregoing, the Company
and its subsidiaries shall contribute or cause to be contributed to each Company
Plan not later than such time as may be required by law or such earlier time as
may be required under the applicable plan, the contribution with respect to the
1994 plan year required to be made under the terms of such plan and applicable
law, and Newco shall reimburse the Company for that portion of such contribution
attributable to the Retained Employees during the Transition Period.
Section 7.3 WELFARE PLANS; CERTAIN OTHER PLANS.
(a) The Company and its subsidiaries shall be solely responsible for, or
cause their insurance carriers to be responsible for, the satisfaction of all
claims for medical, life insurance, health, accident, workers'
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compensation or disability benefits brought by or in respect to any of the Newco
Employees under each "employee welfare benefit plan," as such term is defined in
Section 3(1) of ERISA, including, but not limited to, the plans, programs, and
arrangements listed in Schedule 7.3(a) (the "Company Welfare Plans"), which
claims relate to events occurring prior to the Transfer Closing Date, regardless
of when notices of such claims are properly filed, without interruption as a
result of the employment by Newco or any of its subsidiaries of any such
employees.
(b) During the Transition Period, and thereafter until the second
anniversary of the Closing Date, the Company shall continue to provide coverage
under the Company Welfare Plans to Retained Employees, directors of Newco and
Newco Employees, respectively, on the same terms and conditions as were in
effect prior to the Transfer Closing Date except for changes in such terms and
conditions that apply to similarly situated employees of the Company or provide
such coverage under an alternative arrangement. The Company shall take all
action necessary and appropriate to amend the Company Welfare Plans or provide
for such an alternative arrangement to provide for such continued coverage.
Newco shall be liable, and reimburse the Company, for the provision of such
coverage based on the Company's actual cost, on an average per capita basis (not
including any incremental costs attributable to the use of an alternative
arrangement), with respect to claims relating to events occurring on or after
the Transfer Closing Date.
(c) Newco and its subsidiaries shall be liable, and reimburse the Company
and its subsidiaries, for or indemnify the Company and its subsidiaries against
any and all liabilities and obligations whatsoever in connection with claims for
medical, life insurance, health, accident or disability benefits brought by or
in respect of Newco Employees under the Company Welfare Plans or otherwise,
which claims relate to events occurring on or after the second anniversary of
the Closing Date.
(d) Newco shall assume all obligations and liabilities with respect to any
other employment-related right, claim, cause of action, expense, obligation,
liability or cost ("Costs") with respect to a Retained Employee or Newco
Employee (including but not limited to such Costs arising under the Age
Discrimination in Employment Act, Title VII of the Civil Rights Act of 1964, the
WARN Act and other federal, state or local laws respecting the terms and
conditions of employment not otherwise provided for in this Article VII), which
Costs are attributable to events occurring on or after the Transfer Closing
Date; and the Company shall retain all obligations and liabilities with respect
to such Costs that are attributable to events occurring prior to the Transfer
Closing Date.
(e) On, or as soon as practicable after, January 1, 1995, the Company shall
transfer to Newco an amount in cash equal to the dollar value of any accrued but
unused vacation days attributable to Newco Employees as determined as of the
Transfer Closing Date.
Section 7.4 EMPLOYEE STOCK OPTIONS. Each outstanding option ("Company
Option") for the purchase of shares of Common Stock granted under the Company's
stock option plans (the "Company Option Plans"), which Company Option is held,
as of January 1, 1995, by a Newco Employee and is then exercisable or would have
been exercisable using the formula set forth in any of the Company Option Plans
had the employment of the Newco Employee been terminated on such date, shall
continue to be exercisable on the same terms and conditions set forth in the
agreement evidencing the grant of the Company Option; PROVIDED, HOWEVER, that
the term of the Company Option shall expire no later than the date that is 30
days following the date on which the holder ceases to be a Newco Employee; and
PROVIDED FURTHER, HOWEVER, that, to the extent a Company Option is not
exercisable as set forth above, it shall expire as of such date, it being
understood that the Exchange Offer shall not constitute an event causing the
acceleration of the exercisability of any such Company Option. The Company shall
take all action necessary and appropriate to amend the Company Option Plan to
provide for the continued exercise of Company Options as described in this
Section 7.4; PROVIDED, HOWEVER, that to the extent that such amendment would
adversely affect the status of any Company Option Plan under Rule 16b-3 of the
Securities Exchange Act of 1934, as amended, alternate adjustments shall be made
(which may include the grant of a substituted option to purchase Company Common
Stock outside the Company Option Plans).
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Section 7.5 SEVERANCE PAY.
(a) The Company and Newco agree that the employment of Newco Employees by
Newco or any of its subsidiaries on or after January 1, 1995, shall not be
deemed a severance of employment from the Company and its subsidiaries for
purposes of the payment of severance, salary continuation or similar benefits
pursuant to any policy, plan, program or agreement of the Company or its
subsidiaries to the extent that any such policy, plan, program or agreement now
exists.
(b) Newco and its subsidiaries shall assume and be solely responsible for
all liabilities and obligations whatsoever in connection with claims made by or
on behalf of the Retained Employees and the Newco Employees in respect of
severance pay, salary continuation and similar obligations relating to the
termination or alleged termination of any such person's employment on or after
the Transfer Closing Date, and the Company shall remain responsible for such
liabilities and obligations in connection with Company employees who do not
become Retained Employees.
Section 7.6 SENIORITY. If the Company rehires any Newco Employee at any
time during the one-year period following the Transfer Closing Date, such person
shall be reinstated without any loss of seniority; PROVIDED, HOWEVER, that this
Section 7.6 shall not be construed to obligate the Company to offer to rehire
any Newco Employee.
Section 7.7 ADMINISTRATIVE SERVICES. Newco shall pay the Company the sum
of $500,000 in two equal installments of $250,000 each (which shall be due on
June 30, 1995 and June 30, 1996) for making available to Newco administrative
services in connection with the Newco Plans and the Company Welfare Plans
whether or not any such services are used by Newco. At the request of Newco, the
Company shall provide to Newco such administrative services in connection with
the Newco Plans as Newco and the Company shall mutually agree upon, during the
two-year period following the Closing Date. During such period, if the Company
shall incur any incremental, third-party out-of-pocket expenses in connection
with procuring or providing employee benefits to any employee of Newco, Newco
shall reimburse the Company for any such expenses.
Section 7.8 MEMBERSHIP PRIVILEGES. Newco Employees shall be entitled to
free PriceCostco warehouse club memberships so long as they remain in the employ
of Newco or one of its subsidiaries.
ARTICLE VIII
[Intentionally omitted]
ARTICLE IX
INDEMNIFICATION
Section 9.1 INDEMNIFICATION.
(a) The Company shall indemnify Newco against and hold Newco harmless from
any loss, liability, claim, damage or expense (including reasonable legal fees
and expenses) suffered or incurred by Newco arising from, relating to or
otherwise in respect of (i) any material breach of, or inaccuracy in, any
representation or warranty of the Company contained in this Agreement; (ii) any
material breach of any covenant of the Company contained in this Agreement;
(iii) one-half of all Liabilities relating to Materials of Environmental Concern
and violations or purported violations of Environmental Laws arising out of or
relating to the Commercial Property located in Phoenix, Arizona and known as the
Phoenix Fry's property (denoted as item number 4 on Schedule 1.14 hereto); (iv)
the Retained Liabilities; (v) the Northridge Mortgage; and (vi) all Liabilities
to which Newco may become subject under the Securities Act or any other statute
or common law (including any amount paid in settlement of any litigation,
commenced or threatened, if such settlement is effected with the written consent
of the Company) insofar as any such Liabilities arise out of or are based upon
any untrue statement or alleged untrue statement of a material fact contained in
the Registration Statement or the Tender Offer Statement on Schedule 13E-4, or
the omission or alleged omission to state therein a material fact required to be
stated herein or necessary to make the
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statements therein not misleading; PROVIDED, HOWEVER, that the indemnification
agreement contained in this clause shall not apply to any losses, liabilities,
claims, damages, or expenses arising out of, or based upon, any such untrue
statement or alleged untrue statement, or any such omission or alleged omission,
which was made in reliance upon and in conformity with information furnished to
the Company by Newco for use in connection with the Registration Statement or
the Tender Offer Statement on Schedule 13E-4.
(b) The Company shall indemnify Newco and Subsidiary Corporation #1 against
and hold Newco and Subsidiary Corporation #1 harmless from any loss, liability,
claim, damage or expense (including reasonable legal fees and expenses) suffered
or incurred by Subsidiary Corporation #1 arising from, relating to or otherwise
in respect of any Retained Liabilities relating to or arising out of the Mexico
Assets.
(c) The Company shall indemnify Newco and Subsidiary Corporation #2 against
and hold Newco and Subsidiary Corporation #2 harmless from any loss, liability,
claim, damage or expense (including reasonable legal fees and expenses) suffered
or incurred by Subsidiary Corporation #2 arising from, relating to or otherwise
in respect of any Retained Liabilities relating to or arising out of the
International Assets.
(d) The Company shall indemnify Newco and Subsidiary Corporation #3 against
and hold Newco and Subsidiary Corporation #3 harmless from any loss, liability,
claim, damage or expense (including reasonable legal fees and expenses) suffered
or incurred by Subsidiary Corporation #3 arising from, relating to or otherwise
in respect of any Retained Liabilities relating to or arising out of the Quest
Assets.
(e) Newco shall indemnify the Company against and hold the Company harmless
from any loss, liability, claim, damage or expense (including reasonable legal
fees and expenses) suffered or incurred by the Company arising from, relating to
or otherwise in respect of (i) any material breach of any covenant of Newco
contained in this Agreement; (ii) the Assumed Liabilities; and (iii) all
Liabilities to which the Company may become subject under the Securities Act or
any other statute or common law (including any amount paid in settlement of any
litigation, commenced or threatened, if such settlement is effected with the
written consent of Newco) insofar as any such Liabilities arise out of or are
based upon any untrue statement or alleged untrue statement of a material fact
contained in the Registration Statement or the Tender Offer Statement on
Schedule 13E-4, or the omission or alleged omission to state therein a material
fact required to be stated herein or necessary to make the statements therein
not misleading; PROVIDED, HOWEVER, that the indemnification agreement contained
in this clause shall not apply to any losses, liabilities, claims, damages, or
expenses arising out of, or based upon, any such untrue statement or alleged
untrue statement, or any such omission or alleged omission, which was made in
reliance upon and in conformity with information furnished to Newco by the
Company for use in connection with the Registration Statement or the Tender
Offer Statement on Schedule 13E-4.
(f) Newco shall cause Subsidiary Corporation #1 to indemnify the Company
against and hold the Company harmless from any loss, liability, claim, damage or
expense (including reasonable legal fees and expenses) suffered or incurred by
the Company arising from, relating to or otherwise in respect of the Mexico
Assets which arise out of events occurring at or after the Transfer Closing
Date.
(g) Newco shall cause Subsidiary Corporation #2 to indemnify the Company
against and hold the Company harmless from any loss, liability, claim, damage or
expense (including reasonable legal fees and expenses) suffered or incurred by
the Company arising from, relating to or otherwise in respect of the
International Assets which arise out of events occurring at or after the
Transfer Closing Date.
(h) Newco shall cause Subsidiary Corporation #3 to indemnify the Company
against and hold the Company harmless from any loss, liability, claim, damage or
expense (including reasonable legal fees and expenses) suffered or incurred by
the Company arising from, relating to or otherwise in respect of the Quest
Assets which arise out of events occurring at or after the Transfer Closing
Date.
(i) Newco guarantees to the Company the full and prompt performance by each
Subsidiary Corporation of each and every obligation required of each of them
pursuant to this Section 9.1. Newco hereby waives presentment demand and similar
defenses to the enforcement of this guarantee.
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Section 9.2 PROCEDURES RELATING TO INDEMNIFICATION.
(a) Each person to be indemnified pursuant to Section 9.1 (an "indemnified
party") shall give prompt notice to the indemnifying party of the assertion of
any claim, or the commencement of any suit, action or proceeding, brought
against or sought to be collected from such indemnified party (each a "Third
Party Claim"), in respect of which indemnity may be sought by such indemnified
party under Section 9.1; PROVIDED that the omission so to promptly notify the
indemnifying party with respect to a Third Party Claim brought against or sought
to be collected from such indemnified party will not relieve the indemnifying
party from any liability which it may have to such indemnified party under
Section 9.1 except to the extent that such indemnifying party demonstrates that
such failure has materially prejudiced such indemnifying party with respect to
the defense of such Third Party Claim. If any indemnified party shall seek
indemnity under Section 9.1 with respect to a Third Party Claim brought against
or sought to be collected from such indemnified party, the indemnifying party
shall be entitled to participate therein and, to the extent that it wishes, to
assume and direct the defense and settlement thereof with counsel satisfactory
to such indemnified party; PROVIDED that if such indemnifying party shall so
assume the defense and settlement of any Third Party Claim brought against or
sought to be collected from such indemnified party, such Third Party Claim shall
be conclusively deemed a matter in respect of which such indemnified party is
entitled to be indemnified by such indemnifying party under Section 9.1; and
PROVIDED FURTHER that if any Third Party Claim brought against or sought to be
collected from any indemnified party includes a request for injunctive or other
equitable relief that, if granted, is reasonably likely to have a material
adverse effect on the business, assets, financial or other condition, results of
operations or prospects on such indemnified party, such indemnified party shall
be entitled to control and direct the defense and settlement thereof and in such
event the legal and other expenses subsequently incurred by such indemnified
party in connection with the defense thereof shall be paid by the indemnifying
party. After notice from the indemnifying party to an indemnified party of its
election to assume and direct the defense and settlement of a Third Party Claim
brought against or sought to be collected from such indemnified party which such
indemnifying party is entitled to assume and direct under the terms hereof, the
indemnifying party shall not be liable to such indemnified party under Section
9.1 for any legal or other expenses subsequently incurred by such indemnified
party in connection with the defense thereof other than reasonable costs of
investigation; PROVIDED that such indemnified party shall have the right to
employ counsel to represent such party if such party is advised by counsel that
a conflict exists between the interests of such party and the indemnifying party
such that, as a result, such party should be represented by separate counsel,
and in such event the fees and expenses of such separate counsel shall be paid
by the indemnifying party. Notwithstanding the foregoing provisions of this
Section 9.2(a), the indemnifying party shall not (A) without the prior written
consent of an indemnified party, effect any settlement of any pending or
threatened proceeding in respect of which such indemnified party is, or with
reasonable foreseeability, could have been a party and indemnity could have been
sought hereunder by such indemnified party for a Third Party Claim brought
against or sought to be collected from such indemnified party, unless such
settlement includes an unconditional release of such indemnified party from all
liability arising out of such proceeding (PROVIDED that, whether or not such a
release is required to be obtained, the indemnifying party shall remain liable
to such indemnified party in accordance with Section 9.1 in the event that a
Third Party Claim is subsequently brought against or sought to be collected from
such indemnified party) or (B) be liable for any settlement of any Third Party
Claim brought against or sought to be collected from an indemnified party
effected without such indemnifying party's written consent (which shall not be
unreasonably withheld), but if settled with such indemnifying party's written
consent, or if there is a final judgment for the plaintiff in any such Third
Party Claim, such indemnifying party agrees (to the extent stated above) to
indemnify the indemnified party from and against any loss, liability, claim,
damage or expense by reason of such settlement or judgment. The indemnification
required by Section 9.1 shall be made by periodic payments of the amount thereof
during the course of the investigation or defense, as and when bills are
received or loss, liability, claim, damage or expense is incurred.
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<PAGE>
(b) In the event any indemnified party should have a claim against any
indemnifying party under Section 9.1 that does not involve a Third Party Claim
being asserted against or sought to be collected from such indemnified party,
the indemnified party shall deliver notice of such claim with reasonable
promptness to the indemnifying party. The failure by any indemnified party to so
notify the indemnifying party shall not relieve the indemnifying party from any
liability that it may have to such indemnified party under Section 9.1 except to
the extent that the indemnifying party demonstrates that it has been materially
prejudiced by such failure. If the indemnifying party does not notify the
indemnified party within 15 calendar days following its receipt of such notice
that the indemnifying party disputes its liability to the indemnified party
under Section 9.1, such claim specified by the indemnified party in such notice
will be conclusively deemed a liability of the indemnifying party under Section
9.1 and the indemnifying party shall pay the amount of such liability to the
indemnified party on demand or, in the case of any notice in which the amount of
the claim (or any portion thereof) is estimated, on such later date when the
amount of such claim (or such portion thereof) becomes finally determined. If
the indemnifying party has timely disputed its liability with respect to such
claim, as provided above, the indemnifying party and the indemnified party agree
to proceed in good faith to negotiate a resolution of such dispute and, if not
resolved through negotiations, such dispute will be resolved by arbitration in
accordance herewith.
ARTICLE X
MISCELLANEOUS
Section 10.1 AMENDMENT AND MODIFICATION. This Agreement may be amended,
modified or supplemented only by written agreement of the Company and Newco.
Section 10.2 WAIVER OF COMPLIANCE. Except as otherwise provided in this
Agreement, any failure of any party hereto to comply with any obligation,
covenant, agreement or condition herein may be waived by the party entitled to
the benefits thereof only by a written instrument signed by the party granting
such waiver, but such waiver or failure to insist upon strict compliance with
such obligation, covenant, agreement or condition shall not operate as a waiver
of, or estoppel with respect to, any subsequent or other failure.
Section 10.3 ARBITRATION.
(a) In the event that, from time of time, any controversy or claim shall
arise out of or relate to this Agreement, any of the Additional Agreements, the
transactions contemplated hereby or thereby or any documents or agreements
contemplated by or delivered hereunder or thereunder, or any substantive issue
or dispute shall be raised by either the Company or Newco with the amount in
controversy believed in good faith by both parties to be $15 million or less,
such controversy, claim, substantive issue or dispute shall be settled by
arbitration in San Francisco, California in accordance herewith and with the
then prevailing Commercial Arbitration Rules of the American Arbitration
Association, Expedited Procedures. Each of the Company and Newco shall use
reasonable efforts, acting in good faith, to mutually select one person prior to
the Transfer Closing Date who shall serve as the arbitrator with respect to any
such arbitration proceeding.
(b) In the event that, from time to time, any controversy or claim shall
arise out of or relate to this Agreement, any of the Additional Agreements, the
transactions contemplated hereby or thereby or any documents or agreements
contemplated by or delivered hereunder or thereunder, or any substantive issue
or dispute shall be raised by either the Company or Newco, with the amount in
controversy believed in good faith by either party to be in excess of $15
million, such controversy, claim, substantive issue or dispute shall be settled
by arbitration in San Francisco, California in accordance herewith and with the
then prevailing Commercial Arbitration Rules of the American Arbitration
Association. The parties will have 14 days from service of the arbitration
demand to mutually agree on and select an arbitrator. If no such agreement and
selection occurs, the arbitrator shall be a member of the AAA's Large Complex
Case Panel, and shall be selected under the AAA Commercial Arbitration Rule. All
documents and information relevant to the claim or dispute in the possession of
any party shall be made available to the other party not later than sixty (60)
days after the demand for arbitration is served, and the arbitrator may permit
such depositions or other discovery deemed necessary for a fair hearing. The
hearing may not exceed two days. The award shall be
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<PAGE>
rendered within 120 days of the demand and may not include punitive damages. The
decision of the arbitrator or arbitrators shall be in writing and, where
appropriate, shall be presented in separate findings of fact and conclusions of
law.
(c) The decision of the arbitrator or arbitrators hereunder shall be final
and binding on the parties from which no appeal may be taken. The prevailing
party in any arbitration hereunder (or if there is no prevailing party, the
party, if any, designated by the arbitrator) shall be entitled to recover
reasonable attorneys' fees and expenses from the other party, which fees and
expenses shall be in addition to any other relief that may be awarded.
Section 10.4 NOTICES. Any notices or other communications required or
permitted hereunder shall be in writing and shall be deemed duly given upon (a)
transmitter's confirmation of a receipt of a facsimile transmission, (b)
confirmed delivery by a standard overnight carrier or (c) the expiration of five
business days after the day when mailed by certified or registered mail, postage
prepaid, addressed at the following addresses (or at such other address as the
Company or Newco shall specify by like notice):
If to the Company, to:
Price/Costco, Inc.
10809 120th Avenue NE
Kirkland, Washington 98033
Attention: Donald E. Burdick, Esq.
Copy to:
Skadden, Arps, Slate, Meagher & Flom
300 South Grand Avenue
Suite 3400
Los Angeles, California 90071
Attention: Joseph J. Giunta, Esq.
and
Gibson, Dunn & Crutcher
333 South Grand Avenue
Los Angeles, California 90071
Attention: Jonathan K. Layne, Esq.
If to Newco, to:
Price Enterprises, Inc.
4649 Morena Boulevard
San Diego, California 92117
Attention: Robert E. Price
Copy to:
Latham & Watkins
701 "B" Street
Suite 2100
San Diego, California 92101
Attention: Scott N. Wolfe, Esq.
Section 10.5 ASSIGNMENT. This Agreement and all of the provisions hereof
shall be binding upon and inure to the benefit of the Company and Newco and
their respective successors and permitted assigns, but
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<PAGE>
neither this Agreement nor any of the rights, interests, or obligations
hereunder shall be assigned by either the Company or Newco without the prior
written consent of the other party, except as otherwise provided in the
Operating Agreements.
Section 10.6 INTERPRETATION. The descriptive headings contained in this
Agreement are solely for convenience of reference, and do not constitute a part
of this Agreement and shall not in any way affect the meaning or interpretation
of this Agreement.
Section 10.7 GOVERNING LAW. This Agreement shall be governed by the laws
of the State of New York (regardless of the laws that might be applicable under
principles of conflicts of law) as to all matters, including but not limited to
matters of validity, construction, effect, performance and remedies.
Section 10.8 COUNTERPARTS. This Agreement may be executed in two or more
counterparts all of which shall be considered one and the same agreement and
each of which shall be deemed an original.
Section 10.9 THIRD PARTIES. Nothing herein expressed or implied is
intended or shall be construed to confer upon or give any person other than the
parties hereto and their successors and assigns, any rights or remedies under or
by reason of this Agreement. Notwithstanding the foregoing, each of the
Subsidiary Corporations is intended to be, and hereby expressly is constituted,
a third party beneficiary of the agreements of the Company contained in Article
IX hereof that relate to such Subsidiary Corporation.
Section 10.10 COMPLETE AGREEMENT. This Agreement constitutes the entire
agreement of the Company and Newco with respect to the subject matter hereof and
supersedes all prior arrangements or understandings with respect thereto. There
are no restrictions, agreements, promises, warranties, covenants or undertakings
other than those expressly set forth herein.
Section 10.11 SEVERABILITY. If any provision of this Agreement shall be
held invalid, illegal or unenforceable in any respect by a court of competent
jurisdiction, such invalidity, illegality or unenforceability shall not affect
any other provision hereof.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be executed by its duly authorized officers as of the day and year first above
written.
PRICE/COSTCO, INC.
By:
-----------------------------------
Name: James D. Sinegal
Title: President and Chief
Executive Officer
PRICE ENTERPRISES, INC.
By:
-----------------------------------
Name: Robert E. Price
Title: Director
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<PAGE>
ANNEX III
FORM OF
RESTATED CERTIFICATE OF INCORPORATION
OF
PRICE ENTERPRISES, INC.
FIRST: The name of the Corporation is Price Enterprises, Inc.
(hereinafter the "Corporation").
SECOND: The address of the registered office of the Corporation in the
State of Delaware is 1209 Orange Street, in the City of Wilmington, County
of New Castle. The name of its registered agent at that address is The
Corporation Trust Company.
THIRD: The purpose of the Corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General
Corporation Law of the State of Delaware (the "GCL").
FOURTH: The total number of shares of stock which the Corporation shall
have the authority to issue is 70,000,000, which shall consist of 60,000,000
shares of Common Stock, each having a par value of $.0001 (the "Common
Stock") and 10,000,000 shares of Preferred Stock, each having a par value of
$.0001 (the "Preferred Stock").
The Board of Directors is hereby authorized from time to time to provide
by resolution for the issuance of shares of preferred stock in one of more
series not exceeding in the aggregate the number of shares of Preferred
Stock authorized by this Certificate of Incorporation, as amended from time
to time; and to determine with respect to each such series the voting
powers, if any (which voting powers, if granted, may be full or limited),
designations, preference and relative, participating, optional or other
special rights, and the qualifications, limitations or restrictions relating
thereto, including without limiting the generality of the foregoing, the
voting rights relating to shares of Preferred Stock of any series (which may
be one of more votes per share or a fraction of a vote per share, which may
vary over time and which may be applicable generally or only upon the
happening and continuance of stated events or conditions), the rate of
dividend to which holders of Preferred Stock of any series may be entitled
(which may be cumulative or noncumulative), the rights of holders of
Preferred Stock of any series in the event of liquidation, dissolution or
winding up of the affairs of the Corporation, the rights, if any, of holders
of Preferred Stock of any series to convert or exchange such shares of
Preferred Stock of such series for shares of any other class or series of
capital stock or for any other securities, property or assets of the
Corporation or any subsidiary (including the determination of the price or
prices or the rate or rates applicable to such rights to convert or exchange
and the adjustment thereof, the time or times during which the right to
convert or exchange shall be applicable and the time or times during which a
particular price or rate shall be applicable), whether or not the shares of
that series shall be redeemable, and, if so, the terms and conditions of
such redemption, including the date or dates upon or after which they shall
be redeemable, and the amount per share payable in case of redemption, which
amount may vary under different conditions and at different redemption
dates, and whether any shares of that series shall be redeemed pursuant to a
retirement or sinking fund or otherwise and the terms and conditions of such
obligation.
Before the Corporation shall issue any shares of Preferred Stock of any
series, a certificate setting forth a copy of the resolution or resolutions
of the Board of Directors, fixing the voting powers, designations,
preferences, the relative, participating, optional or other rights, if any,
and the qualifications, limitations and restrictions, if any, relating to
the shares of Preferred Stock of such series, and the number of shares of
Preferred Stock of such series authorized by the Board of Directors to be
issued shall be made under seal of the Corporation and signed by and shall
be filed and a copy thereof recorded in the manner prescribed by the GCL.
The Board of Directors is further authorized to increase or decrease (but
not below the number of such shares of such series then outstanding) the
number of shares of any series subsequent to the issuance of shares of that
series.
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<PAGE>
FIFTH: The following provisions are inserted for the management of the
business and the conduct of the affairs of the Corporation, and for further
definition, limitation and regulation of the powers of the Corporation and
of its directors and stockholders:
(a) The business and affairs of the Corporation shall be managed by
or under the direction of the Board of Directors.
(b) The directors shall have concurrent power with the stockholders
to make, alter, amend, change, add to or repeal the Bylaws of the
Corporation.
(c) The number of directors of the Corporation shall be as from time
to time fixed by, or in the manner provided in, the Bylaws of the
Corporation. The election of directors need not be by written ballot
unless the Bylaws so provide.
(d) In addition to the powers and authority hereinbefore or by
statute expressly conferred upon them, the directors are hereby empowered
to exercise all such powers and do all such acts and things as may be
exercised or done by the Corporation, subject, nevertheless, to the
provisions of the GCL, this Certificate of Incorporation, and any Bylaws
adopted by the stockholders; PROVIDED, HOWEVER, that no Bylaws hereafter
adopted by the stockholders shall invalidate any prior act of the
directors which would have been valid if such Bylaws had not been
adopted.
SIXTH: Meetings of stockholders may be held within or without the State
of Delaware, as the Bylaws may provide. The books of the Corporation may be
kept (subject to any provision contained in the GCL) outside the State of
Delaware at such place or places as may be designated from time to time by
the Board of Directors or in the Bylaws of the Corporation.
SEVENTH: The Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Certificate of Corporation in the
manner now or hereafter prescribed by statute, and all rights conferred upon
stockholders herein are granted subject to this reservation.
EIGHTH: (a) Subject to Article EIGHTH (c), the Corporation shall
indemnify any person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (other than an
action by or in the right of the Corporation) by reason of the fact that he
is or was a director or officer of the Corporation, or is or was serving at
the request of the Corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust, employee benefit
plan or other enterprise, against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the Corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful. The termination of any action, suit or proceeding by
judgment, order, settlement, conviction, or upon a plea of nolo contendere
or its equivalent, shall not, of itself, create a presumption that the
person did not act in good faith and in a manner which he reasonably
believed to be in or not opposed to the best interests of the Corporation,
and, with respect to any criminal action or proceeding, had reasonable cause
to believe that his conduct was unlawful.
(b) Subject to Article EIGHTH (c), the Corporation shall indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
Corporation to procure a judgment in its favor by reason of the fact that he
is or was a director or officer of the Corporation, or is or was serving at
the request of the Corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust, employee benefit
plan or other enterprise against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of the
Corporation; except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to
be liable to the Corporation unless and only to the extent that the Court of
Chancery or the court in which such action or suit was brought shall
determine upon
III-2
<PAGE>
application that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably entitled
to indemnity for such expenses which the Court of Chancery or such other
court shall deem proper.
(c) Any indemnification under this Article EIGHTH (unless ordered by a
court) shall be made by the Corporation only as authorized in the specific
case upon a determination that indemnification of the director or officer is
proper in the circumstances because he has met the applicable standard of
conduct set forth in Article EIGHTH (a) or Article EIGHTH (b), as the case
may be. Such determination shall be made (i) by the Board of Directors by a
majority vote of a quorum consisting of directors who were not parties to
such action, suit or proceeding, or (ii) if such a quorum is not obtainable,
or, even if obtainable, a quorum of disinterested directors so directs, by
independent legal counsel in a written opinion, or (iii) by the
stockholders. To the extent, however, that a present or former director or
officer of the Corporation has been successful on the merits or otherwise in
defense of any action, suit or proceeding referred to in Article EIGHTH (a)
or Article EIGHTH (b), or in defense of any claim, issue or matter therein,
he shall be indemnified against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection therewith, without the
necessity of authorization in the specific case.
(d) Notwithstanding any contrary determination in the specific case
under Article EIGHTH (c), and notwithstanding the absence of any
determination thereunder, any present or former director or officer of the
Corporation may apply to any court of competent jurisdiction in the State of
Delaware for indemnification to the extent otherwise permissible under
Article EIGHTH (a) and Article EIGHTH (b). The basis of such indemnification
by a court shall be a determination by such court that indemnification of
such person is proper in the circumstances because he has met the applicable
standards of conduct set forth in Article EIGHTH (a) or Article EIGHTH (b),
as the case may be. Neither a contrary determination in the specific case
under Article EIGHTH (c) nor the absence of any determination thereunder
shall be a defense to such application or create a presumption that such
person seeking indemnification has not met any applicable standard of
conduct. Notice of any application for indemnification pursuant to this
Article EIGHTH (d) shall be given to the Corporation promptly upon the
filing of such application. If successful, in whole or in part, such person
seeking indemnification shall also be entitled to be paid the expense of
prosecuting such application.
(e) Expenses incurred by a person who is or was a director or officer of
the Corporation in defending or investigating a threatened or pending
action, suit or proceeding shall be paid by the Corporation in advance of
the final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such person to repay such amount if it shall
ultimately be determined that he is not entitled to be indemnified by the
Corporation as authorized in this Article EIGHTH.
(f) The indemnification and advancement of expenses provided by or
granted pursuant to this Article EIGHTH shall not be deemed exclusive of any
other rights to which those seeking indemnification or advancement of
expenses may be entitled under any Bylaw, agreement, contract, vote of
stockholders or disinterested directors or pursuant to the direction
(howsoever embodied) of any court of competent jurisdiction or otherwise,
both as to action in his official capacity and as to action in another
capacity while holding such office, it being the policy of the Corporation
that indemnification of the persons specified in Article EIGHTH (a) and
Article EIGHTH (b) shall be made to the fullest extent permitted by law. The
provisions of this Article EIGHTH shall not be deemed to preclude the
indemnification of any person who is not specified in Article EIGHTH (a) or
Article EIGHTH (b) but whom the Corporation has the power or obligation to
indemnify under the provisions of the GCL, or otherwise.
(g) The Corporation may purchase and maintain insurance on behalf of any
person who is or was a director or officer of the Corporation, or is or was
serving at the request of the Corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise against any liability asserted against him
and incurred by him in any
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<PAGE>
such capacity, or arising out of his status as such, whether or not the
Corporation would have the power or the obligation to indemnify him against
such liability under the provisions of this Article EIGHTH or Section 145 of
the GCL.
(h) For purposes of this Article EIGHTH, references to "the Corporation"
shall include, in addition to the resulting corporation, any constituent
corporation (including any constituent of a constituent) absorbed in a
consolidation or merger which, if its separate existence had continued,
would have had power and authority to indemnify its directors or officers,
so that any person who is or was a director or officer of such constituent
corporation, or is or was serving at the request of such constituent
corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust, employee benefit plan or
other enterprise, shall stand in the same position under the provisions of
this Article EIGHTH with respect to the resulting or surviving corporation
as he would have with respect to such constituent corporation if its
separate existence had continued. For purposes of this Article EIGHTH,
references to "fines" shall include any excise taxes assessed on a person
with respect to an employee benefit plan; and references to "serving at the
request of the Corporation" shall include any service as a director,
officer, employee or agent of the Corporation which imposes duties on, or
involves services by, such person with respect to an employee benefit plan,
its participants or beneficiaries; and a person who acted in good faith and
in a manner he reasonably believed to be in the interest of the participants
and beneficiaries of an employee benefit plan shall be deemed to have acted
in a manner "not opposed to the best interests of the Corporation" as
referred to in this Article EIGHTH. For purposes of any determination under
Article EIGHTH (c), a person shall be deemed to have acted in good faith in
a manner he reasonably believed to be in or not opposed to the best
interests of the Corporation, or, with respect to any criminal action or
proceeding, to have had no reasonable cause to believe his conduct was
unlawful, if his action is based on the records or books of account of the
Corporation or another enterprise, or on information supplied to him by the
officers of the Corporation or another enterprise in the course of their
duties, or on the advice of legal counsel for the Corporation or another
enterprise or on information or records given or reports made to the
Corporation or another enterprise by an independent certified public
accountant or by an appraiser or other expert selected with reasonable care
by the Corporation or another enterprise. The term "another enterprise" is
used in this Article EIGHTH (h) shall mean any other corporation or any
partnership, joint venture, trust, employee benefit plan or other enterprise
of which such person is or was serving at the request of the Corporation as
a director, officer, employee or agent. The provisions of this Article
EIGHTH (h) shall not be deemed to be exclusive or to limit in any way the
circumstances in which a person may be deemed to have met the applicable
standard of conduct set forth in Article EIGHTH (a) or (b), as the case may
be.
(i) The indemnification and advancement of expenses provided by, or
granted pursuant to, this Article EIGHTH shall, unless otherwise provided
when authorized or ratified, continue as to a person who has ceased to be a
director or officer of the Corporation and shall inure to the benefit of the
heirs, executors and administrators of such a person.
(j) Notwithstanding anything contained in this Article EIGHTH to the
contrary, except for proceedings to enforce rights to indemnification (which
shall be governed by Article EIGHTH (d)), the Corporation shall not be
obligated to indemnify any person in connection with a proceeding (or part
thereof) initiated by such person unless such proceeding (or part thereof)
was authorized or consented to by the Board of Directors of the Corporation.
(k) The Corporation may, to the extent authorized from time to time by
the Board of Directors, provide rights to indemnification and to the
advancement of expenses to employees and agents of the Corporation similar
to those conferred in this Article EIGHTH to directors and officers of the
Corporation.
NINTH: No director shall be personally liable to the Corporation or any
of its stockholders for monetary damages for breach of fiduciary duty as a
director, except for liability (i) for any breach of the director's duty of
loyalty to the Corporation or its stockholders, (ii) for acts or omissions
not in good
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<PAGE>
faith or which involve intentional misconduct or a knowing violation of law,
(iii) pursuant to Section 174 of the GCL, or (iv) for any transaction from
which the director derived an improper personal benefit. Any repeal or
modification of this Article NINTH by the stockholders of the Corporation
shall not adversely affect any right or protection of a director of the
Corporation existing at the time of such repeal or modification with respect
to acts or omissions occurring prior to such repeal or modification.
III-5
<PAGE>
ANNEX IV
FORM OF
AMENDED AND RESTATED
BYLAWS
OF
PRICE ENTERPRISES, INC.
(HEREINAFTER CALLED THE "CORPORATION")
ARTICLE I
OFFICES
SECTION 1. REGISTERED OFFICE. The registered office of the Corporation
shall be established and maintained in the City of Wilmington, County of New
Castle, State of Delaware.
SECTION 2. OTHER OFFICES. The Corporation may also have offices at such
other places both within and without the State of Delaware as the Board of
Directors may from time to time determine.
ARTICLE II
MEETINGS OF STOCKHOLDERS
SECTION 1. PLACE OF MEETINGS. Meetings of the stockholders for the
election of directors or for any other purpose shall be held at such time and
place, either within or without the State of Delaware, as shall be designated
from time to time by the Board of Directors and stated in the notice of the
meeting or in a duly executed waiver of notice thereof.
SECTION 2. ANNUAL MEETINGS. The Annual Meetings of Stockholders shall be
held on such date and at such time as shall be designated from time to time by
the Board of Directors and stated in the notice of the meeting, at which meeting
the stockholders shall elect Directors in the manner provided in the Certificate
of Incorporation and in the Bylaws, and transact such other business as may
properly be brought before the meeting. Written notice of the Annual Meeting
stating the place, date and hour of the meeting shall be given to each
stockholder entitled to vote at such meeting not less than ten nor more than
sixty days before the date of the meeting.
SECTION 3. SPECIAL MEETINGS. Unless otherwise prescribed by law or by the
Certificate of Incorporation, Special Meetings of Stockholders, for any purpose
or purposes may be called by either (i) the Chairman, (ii) the Vice Chairman,
(iii) the President, (iv) any Vice President, (v) the Secretary or (vi) any
Assistant Secretary, if there be one, and shall be called by any such officer at
the request in writing by a majority of the entire Board of Directors, or at the
request in writing of stockholders owning a majority of the capital stock of the
Corporation issued and outstanding and entitled to vote. Such request shall
state the purpose or purposes of the proposed meeting. Written notice of a
Special Meeting stating the place, date and hour of the meeting and the purpose
or purposes for which the meeting is called shall be given not less than ten nor
more than sixty days before the date of the meeting to each stockholder entitled
to vote at such meeting.
SECTION 4. QUORUM. Except as otherwise provided by law or by the
Certificate of Incorporation, the holders of a majority of the capital stock
issued and outstanding and entitled to vote thereat, present in person or
represented by proxy, shall constitute a quorum at all meetings of the
stockholders for the transaction of business. A quorum, once established, shall
not be broken by the withdrawal of enough votes to leave less than a quorum and
the votes present may continue to transact business until adjournment. If,
however, such quorum shall not be present or represented at any meeting of the
stockholders, the stockholders entitled to vote thereat, present in person or
represented by proxy, shall have power to adjourn the meeting from time to time,
without notice other than announcement at the meeting, until a quorum shall be
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present or represented. At such adjourned meeting at which a quorum shall be
present or represented, any business may be transacted which might have been
transacted at the meeting as originally noticed. If the adjournment is for more
than thirty days, or if after the adjournment a new record date is fixed for the
adjourned meeting, a notice of the adjourned meeting shall be given to each
stockholder entitled to vote at the meeting.
SECTION 5. VOTING. Unless otherwise required by law, the Certificate of
Incorporation or these Bylaws, any question brought before any meeting of
stockholders shall be decided by the vote of the holders of a majority of the
stock represented and entitled to vote thereat. Each stockholder represented at
a meeting of stockholders shall be entitled to cast one vote for each share of
the capital stock entitled to vote thereat held by such stockholder. Such votes
may be cast in person or by proxy but no proxy shall be voted on or after three
years from its date, unless such proxy provides for a longer period. The Board
of Directors, in its discretion, or the officer of the Corporation presiding at
a meeting of stockholders, in his discretion, may require that any votes cast at
such meeting shall be cast by written ballot.
SECTION 6. CONSENT OF STOCKHOLDERS IN LIEU OF MEETING. Unless otherwise
provided in the Certificate of Incorporation, any action required or permitted
to be taken at any Annual or Special Meeting of Stockholders of the Corporation,
may be taken without a meeting, without prior notice and without a vote, if a
consent in writing, setting forth the action so taken, shall be signed by the
holders of outstanding stock having not less than the minimum number of votes
that would be necessary to authorize or take such action at a meeting at which
all shares entitled to vote thereon were present and voted. Prompt notice of the
taking of the corporate action without a meeting by less than unanimous written
consent shall be given to those stockholders who have not consented in writing.
SECTION 7. LIST OF STOCKHOLDERS ENTITLED TO VOTE. The officer of the
Corporation who has charge of the stock ledger of the Corporation shall prepare
and make, at least ten days before every meeting of stockholders, a complete
list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open to
the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten days prior to the
meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder of the Corporation who is
present.
SECTION 8. STOCK LEDGER. The stock ledger of the Corporation shall be the
only evidence as to who are the stockholders entitled to examine the stock
ledger, the list required by Section 7 of this Article II or the books of the
Corporation, or to vote in person or by proxy at any meeting of stockholders.
ARTICLE III
DIRECTORS
SECTION 1. NUMBER AND ELECTION OF DIRECTORS. The Board of Directors shall
consist of three or more members, the exact number of which shall be fixed from
time to time by the Board of Directors. Except as provided in Section 2 of this
Article, directors shall be elected by a plurality of the votes cast at Annual
Meetings of Stockholders, and each director so elected shall hold office until
the Annual Meeting in which his term expires and until his successor is duly
elected and qualified, or until his earlier resignation or removal. Any director
may resign at any time upon written notice to the Corporation. Directors need
not be stockholders.
SECTION 2. VACANCIES. Vacancies, and newly created directorships resulting
from any increase in the authorized number of directors, may be filled by a
majority of the directors then in office, though less than a quorum, or by a
sole remaining director. The directors so chosen shall hold office until the
next annual
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election of directors and until their successors are duly elected and qualified,
or until their earlier resignation or removal. If there are no directors in
office, then an election of directors may be held in the manner provided by
statute.
SECTION 3. DUTIES AND POWERS. The business of the Corporation shall be
managed by or under the direction of the Board of Directors which may exercise
all such powers of the Corporation and do all such lawful acts and things as are
not by statute or by the Certificate of Incorporation or by these Bylaws
directed or required to be exercised or done by the stockholders.
SECTION 4. MEETINGS. The Board of Directors of the Corporation may hold
meetings, both regular and special, either within or without the State of
Delaware. Regular meetings of the Board of Directors may be held without notice
at such time and at such place as may from time to time be determined by the
Board of Directors. Special meetings of the Board of Directors may be called by
the Chairman, the Vice Chairman, the President, or any director. Notice thereof
stating the place, date and hour of the meeting shall be given to each director
either by mail, telephone, facsimile or telegram not less than forty-eight (48)
hours before the date of the meeting.
SECTION 5. QUORUM. Except as may be otherwise specifically provided by
law, the Certificate of Incorporation or these Bylaws, at all meetings of the
Board of Directors a majority of the entire Board of Directors shall constitute
a quorum for the transaction of business. The act of a majority of the directors
present at any meeting at which there is a quorum shall be the act of the Board
of Directors. If a quorum shall not be present at any meeting of the Board of
Directors, the directors present thereat may adjourn the meeting from time to
time without notice other than announcement at the meeting, until a quorum shall
be present.
SECTION 6. ACTIONS OF BOARD. Unless otherwise provided by the Certificate
of Incorporation or these Bylaws, any action required or permitted to be taken
at any meeting of the Board of Directors or of any committee thereof may be
taken without a meeting, if all the members of the Board of Directors or
committee, as the case may be, consent thereto in writing, and the writing or
writings are filed with the minutes of proceedings of the Board of Directors or
committee.
SECTION 7. MEETINGS BY MEANS OF CONFERENCE TELEPHONE. Unless otherwise
provided by the Certificate of Incorporation or these Bylaws, members of the
Board of Directors of the Corporation, or any committee designated by the Board
of Directors, may participate in a meeting of the Board of Directors or such
committee by means of a conference telephone or similar communications equipment
by means of which all persons participating in the meeting can hear each other,
and participation in a meeting pursuant to this Section 7 shall constitute
presence in person at such meeting.
SECTION 8. COMMITTEES. The Board of Directors may, by resolution passed by
a majority of the entire Board of Directors, designate one or more committees,
each committee to consist of one or more of the Directors of the Corporation.
The Board of Directors may designate one or more directors as alternate members
of any committee, who may replace any absent or disqualified member at any
meeting of any such committee. Any committee, to the extent allowed by law and
provided in these Bylaws or the resolution establishing such committee, shall
have and may exercise all the powers and authority of the Board of Directors in
the management of the business and affairs of the Corporation; but no committee
shall have the power or authority in reference to amending the Certificate of
Incorporation, adopting an agreement of merger or consolidation, recommending to
the stockholders the sale, lease or exchange of all or substantially all of the
Corporation's property and assets, recommending to the stockholders a
dissolution of the Corporation or a revocation of a dissolution, or amending the
Bylaws of the Corporation; and, unless the resolution or the Certificate of
Incorporation expressly so provides, no committee shall have the power or
authority to declare a dividend or to authorize the issuance of stock. Each
committee shall keep regular minutes and report to the Board of Directors when
required.
SECTION 9. COMPENSATION. The directors may be paid their expenses, if any,
of attendance at each meeting of the Board of Directors and may be paid a fixed
sum for attendance at each meeting of the Board
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of Directors or a stated salary as director. No such payment shall preclude any
director from serving the Corporation in any other capacity and receiving
compensation therefor. Members of special or standing committees may be allowed
like compensation for attending committee meetings.
SECTION 10. INTERESTED DIRECTORS. No contract or transaction between the
Corporation and one or more of its directors or officers, or between the
Corporation and any other corporation, partnership, association, or other
organization in which one or more of its directors or officers are directors or
officers, or have a financial interest, shall be void or voidable solely for
that reason, or solely because the director or officer is present at or
participates in the meeting of the Board of Directors or committee thereof which
authorizes the contract or transaction, or solely because his or their votes are
counted for such purpose if (i) the material facts as to his or their
relationship or interest and as to the contract or transaction are disclosed or
are known to the Board of Directors or the committee, and the Board of Directors
or committee in good faith authorizes the contract or transaction by the
affirmative votes of a majority of the disinterested directors, even though the
disinterested directors be less than a quorum; or (ii) the material facts as to
his or their relationship or interest and as to the contract or transaction are
disclosed or are known to the stockholders entitled to vote thereon and the
contract or transaction is specifically approved in good faith by vote of the
stockholders; or (iii) the contract or transaction is fair as to the Corporation
as of the time it is authorized, approved or ratified by the Board of Directors,
a committee thereof or the stockholders. Common or interested directors may be
counted in determining the presence of a quorum at a meeting of the Board of
Directors or of a committee which authorizes the contract or transaction. Any
such contract or transaction shall be made on commercially reasonable terms
substantially equivalent to terms available from third parties in an
arm's-length transaction in the competitive marketplace.
ARTICLE IV
OFFICERS
SECTION 1. GENERAL. The executive officers of the Corporation shall be
chosen by the Board of Directors and shall include a Chairman of the Board of
Directors, a President and Chief Executive Officer, a Secretary and a Chief
Financial Officer. The Board of Directors, in its discretion, may also choose
one or more Executive Vice Presidents (each of whom shall also be an executive
officer) a Treasurer (who shall also be an executive officer) and Vice
Presidents, Assistant Secretaries, Assistant Treasurers and other officers. Any
number of offices may be held by the same person, unless otherwise prohibited by
law, the Certificate of Incorporation or these Bylaws. The officers of the
Corporation need not be stockholders of the Corporation nor, except in the case
of the Chairman of the Board of Directors and the Vice Chairman of the Board of
Directors, need such officers be directors of the Corporation.
SECTION 2. ELECTION. The Board of Directors at its first meeting held
after each Annual Meeting of Stockholders shall elect the officers of the
Corporation who shall hold their offices for such terms and shall exercise such
powers and perform such duties as shall be determined from time to time by the
Board of Directors; and all officers of the Corporation shall hold office until
their successors are chosen and qualified, or until their earlier resignation or
removal. Any officer elected by the Board of Directors may be removed at any
time by the affirmative vote of a majority of the entire Board of Directors. Any
vacancy occurring in any office of the Corporation shall be filled by a majority
of the entire Board of Directors. The salaries of all executive officers of the
Corporation shall be fixed by the Board of Directors.
SECTION 3. CHAIRMAN OF THE BOARD OF DIRECTORS. The Chairman of the Board
of Directors shall preside at all meetings of the stockholders and of the Board
of Directors. Except where by law the signature of the President is required,
the Chairman of the Board of Directors shall possess the same power as the
President to sign all contracts, certificates and other instruments of the
Corporation which may be authorized by the Board of Directors. During the
absence or disability of the President, the Chairman of the Board of Directors
shall exercise all the powers and discharge all the duties of the President. The
Chairman of the Board of Directors shall also perform such other duties and may
exercise such other powers as from time to time may be assigned to him by these
Bylaws or by the Board of Directors. The Chairman of the Board of Directors may
only be appointed or removed by a majority of the entire Board of Directors.
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SECTION 4. VICE CHAIRMAN OF THE BOARD OF DIRECTORS. The Vice Chairman of
the Board of Directors shall, in the absence or disability of the Chairman of
the Board of Directors, preside at meetings of the stockholders and the Board of
Directors. The Vice Chairman of the Board of Directors shall also perform such
other duties and may exercise such other powers as from time to time may be
assigned to him by these Bylaws or by the Board of Directors.
SECTION 5. PRESIDENT. The President shall, subject to the control of the
Board of Directors, have general supervision of the business of the Corporation
and shall see that all orders and resolutions of the Board of Directors are
carried into effect. He shall execute all bonds, mortgages, contracts and other
instruments of the Corporation requiring a seal, under the seal of the
Corporation, except where required or permitted by law to be otherwise signed
and executed and except that the other officers of the Corporation may sign and
execute documents when so authorized by these Bylaws, the Board of Directors or
the President. In the absence or disability of the Chairman of the Board of
Directors or the Vice Chairman of the Board of Directors, or if there be none,
the President shall preside at all meetings of the stockholders and the Board of
Directors. The President shall be the Chief Executive Officer of the
Corporation. The President shall also perform such other duties and may exercise
such other powers as from time to time may be assigned to him by these Bylaws or
by the Board of Directors. The President may only be appointed or removed by a
majority of the entire Board of Directors.
SECTION 6. EXECUTIVE VICE PRESIDENTS AND VICE PRESIDENTS. At the request
of the President or in his absence or in the event of his inability or refusal
to act (and if there be no Chairman of the Board of Directors), the Senior
Executive Vice President, and then the Executive Vice President or the Executive
Vice Presidents if there is more than one (in the order designated by the Board
of Directors) shall perform the duties of the President, and when so acting,
shall have all the powers of and be subject to all the restrictions upon the
President. Each Vice President (including Senior Executive and Executive Vice
Presidents) shall perform such other duties and have such other powers as the
Board of Directors from time to time may prescribe. If there be no Chairman of
the Board of Directors and no Vice President, the Board of Directors shall
designate the officer of the Corporation who, in the absence of the President or
in the event of the inability or refusal of the President to act, shall perform
the duties of the President, and when so acting, shall have all the powers of
and be subject to all the restrictions upon the President.
SECTION 7. SECRETARY. The Secretary shall attend all meetings of the Board
of Directors and all meetings of stockholders and record all the proceedings
thereat in a book or books to be kept for that purpose; the Secretary shall also
perform like duties for the standing committees when required. The Secretary
shall give, or cause to be given, notice of all meetings of the stockholders and
special meetings of the Board of Directors, and shall perform such other duties
as may be prescribed by the Board of Directors or President, under whose
supervision he or she shall be. If the Secretary shall be unable or shall refuse
to cause to be given notice of all meetings of the stockholders and special
meetings of the Board of Directors, and if there be no Assistant Secretary, then
either the Board of Directors or the President may choose another officer to
cause such notice to be given. The Secretary shall have custody of the seal of
the Corporation and the Secretary or any Assistant Secretary, if there be one,
shall have authority to affix the same to any instrument requiring it and when
so affixed, it may be attested by the signature of the Secretary or by the
signature of any such Assistant Secretary. The Board of Directors may give
general authority to any other officer to affix the seal of the Corporation and
to attest the affixing by his signature. The Secretary shall see that all books,
reports, statements, certificates and other documents and records required by
law to be kept or filed are properly kept or filed, as the case may be.
SECTION 8. CHIEF FINANCIAL OFFICER. The Chief Financial Officer shall also
serve as the Treasurer unless a Treasurer shall be separately appointed by the
Board of Directors and shall have the custody of the corporate funds and
securities and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the Corporation and shall deposit all moneys
and other valuable effects in the name and to the credit of the Corporation in
such depositories as may be designated by the Board of Directors. The Chief
Financial Officer shall disburse the funds of the Corporation as may be ordered
by the Board of
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Directors, taking proper vouchers for such disbursements, and shall render to
the President and the Board of Directors, at its regular meetings, or when the
Board of Directors so requires, an account of all his transactions as Chief
Financial Officer and of the financial condition of the Corporation.
SECTION 9. ASSISTANT SECRETARIES. Except as may be otherwise provided in
these Bylaws, Assistant Secretaries, if there be any, shall perform such duties
and have such powers as from time to time may be assigned to them by the Board
of Directors, the President, any Vice President, if there be one, or the
Secretary, and in the absence of the Secretary or in the event of his disability
or refusal to act, shall perform the duties of the Secretary, and when so
acting, shall have all the powers of and be subject to all the restrictions upon
the Secretary.
SECTION 10. ASSISTANT TREASURERS. Assistant Treasurers, if there be any,
shall perform such duties and have such powers as from time to time may be
assigned to them by the Board of Directors, the President, any Vice President,
if there be one, or the Treasurer, and in the absence of the Treasurer or in the
event of his disability or refusal to act, shall perform the duties of the
Treasurer, and when so acting, shall have all the powers of and be subject to
all the restrictions upon the Treasurer.
SECTION 11. OTHER OFFICERS. Such other officers as the Board of Directors
may choose shall perform such duties and have such powers as from time to time
may be assigned to them by the Board of Directors. The Board of Directors may
delegate to any other officer of the Corporation the power to choose such other
officers and to prescribe their respective duties and powers.
ARTICLE V
STOCK
SECTION 1. FORM OF CERTIFICATES. Every holder of stock in the Corporation
shall be entitled to have a certificate signed, in the name of the Corporation
(i) by the Chairman or Vice Chairman of the Board of Directors, or the President
or a Vice President and (ii) by the Treasurer or an Assistant Treasurer, or the
Secretary or an Assistant Secretary of the Corporation, certifying the number of
shares owned by him in the Corporation. If the Corporation shall be authorized
to issue more than one class of stock or more than one series of any class, the
designations, preferences and relative, participating, optional or other special
rights of each class of stock or series thereof and the qualifications,
limitations, or restrictions of such preferences and/or rights shall be set
forth in full or summarized on the face or back of the certificate which the
Corporation shall issue to represent such class or series of stock, provided
that, except as otherwise provided in section 202 of the General Corporation Law
of Delaware, in lieu of the foregoing requirements, there may be set forth on
the face or back of the certificate which the Corporation shall issue to
represent such class or series of stock, a statement that the Corporation will
furnish without charge to each stockholder who so requests the powers,
designations, preferences and relative, participating, optional or other special
rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/ or rights.
SECTION 2. SIGNATURES. Where a certificate is countersigned by (i) a
transfer agent other than the Corporation or its employee, or (ii) a registrar
other than the Corporation or its employee, any other signature on the
certificate may be a facsimile. In case any officer, transfer agent or registrar
who has signed or whose facsimile signature has been placed upon a certificate
shall have ceased to be such officer, transfer agent or registrar before such
certificate is issued, it may be issued by the Corporation with the same effect
as if he were such officer, transfer agent or registrar at the date of issue.
SECTION 3. LOST CERTIFICATES. The Board of Directors may direct a new
certificate to be issued in place of any certificate theretofore issued by the
Corporation alleged to have been lost, stolen or destroyed, upon the making of
an affidavit of that fact by the person claiming the certificate of stock to be
lost, stolen or destroyed (unless otherwise authorized by the Board). When
authorizing such issue of a new certificate, the Board of Directors may, in its
discretion and as a condition precedent to the issuance thereof, require the
owner of such lost, stolen or destroyed certificate, or his legal
representative, to advertise the same in such
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manner as the Board of Directors shall require and/or to give the Corporation a
bond in such sum as it may direct as indemnity against any claim that may be
made against the Corporation with respect to the certificate alleged to have
been lost, stolen or destroyed.
SECTION 4. TRANSFERS. Stock of the Corporation shall be transferable in
the manner prescribed by law and in these Bylaws. Transfers of stock shall be
made on the books of the Corporation only by the person named in the certificate
or by his attorney lawfully constituted in writing and upon the surrender of the
certificate therefor, which shall be cancelled before a new certificate shall be
issued.
SECTION 5. RECORD DATE. In order that the Corporation may determine the
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, or entitled to express consent to corporate action in
writing without a meeting, or entitled to receive payment of any dividend or
other distribution or allotment of any rights, or entitled to exercise any
rights in respect of any change, conversion or exchange of stock, or for the
purpose of any other lawful action, the Board of Directors may fix, in advance,
a record date, which shall not be more than sixty days nor less than ten days
before the date of such meeting, nor more than sixty days prior to any other
action. A determination of stockholders of record entitled to notice of or to
vote at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for the
adjourned meeting.
SECTION 6. BENEFICIAL OWNERS. The Corporation shall be entitled to
recognize the exclusive right of a person registered on its books as the owner
of shares to receive dividends, and to vote as such owner, and to hold liable
for calls and assessments a person registered on its books as the owner of
shares, and shall not be bound to recognize any equitable or other claim to or
interest in such share or shares on the part of any other person, whether or not
it shall have express or other notice thereof, except as otherwise provided by
law.
ARTICLE VI
NOTICES
SECTION 1. NOTICES. Whenever written notice is required by law, the
Certificate of Incorporation or these Bylaws, to be given to any director,
member of a committee or stockholder, such notice may be given by mail,
addressed to such director, member of a committee or stockholder, at his address
as it appears on the records of the Corporation, with postage thereon prepaid,
and such notice shall be deemed to be given at the time when the same shall be
deposited in the United States mail. Written notice may also be given personally
or by telegram, telex, facsimile or cable, in which event notice shall be deemed
given upon receipt.
SECTION 2. WAIVERS OF NOTICE. Whenever any notice is required by law, the
Certificate of Incorporation or these Bylaws, to be given to any director,
member of a committee or stockholder, a waiver thereof in writing, signed, by
the person or persons entitled to said notice, whether before or after the time
stated therein, shall be deemed equivalent thereto. Neither the business
transacted or to be transacted at, nor the purpose of any meeting need be
specified in any written waiver of notice thereof.
ARTICLE VII
GENERAL PROVISIONS
SECTION 1. DIVIDENDS. Dividends upon the capital stock of the Corporation,
subject to the provisions of the Certificate of Incorporation, if any, may be
declared by the Board of Directors at any regular or special meeting, and may be
paid in cash, in property, or in shares of the capital stock. Before payment of
any dividend, there may be set aside out of any funds of the Corporation
available for dividends such sum or sums as the Board of Directors from time to
time, in its absolute discretion, deems proper as a reserve or reserves to meet
contingencies, or for equalizing dividends, or for repairing or maintaining any
property of the Corporation, or for any proper purpose, and the Board of
Directors may modify or abolish any such reserve.
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SECTION 2. DISBURSEMENTS. All checks or demands for money and notes of the
Corporation shall be signed by such officer or officers or such other person or
persons as the Board of Directors may from time to time designate.
SECTION 3. FISCAL YEAR. The fiscal year of the Corporation shall be fixed
by resolution of the Board of Directors.
SECTION 4. CORPORATE SEAL. The corporate seal shall have inscribed thereon
the name of the Corporation, the year of its organization and the words
"Corporate Seal, Delaware". The seal may be used by causing it or a facsimile
thereof to be impressed or affixed or reproduced or otherwise.
ARTICLE VIII
INDEMNIFICATION
The power, right and obligation of the Corporation to indemnify any director
or officer of the Corporation and employees and agents of the Corporation shall
be as set forth in Article EIGHTH of the Certificate of Incorporation. All
directors and officers of the Corporation shall be entitled to indemnification
as set forth in the Certificate of Incorporation.
ARTICLE IX
AMENDMENTS
SECTION 1. These Bylaws may be altered, amended or repealed, in whole or in
part, or new Bylaws may be adopted by the stockholders or by the Board of
Directors; provided, however, that notice of such alteration, amendment, repeal
or adoption of new Bylaws be contained in the notice of such meeting of
stockholders or Board of Directors as the case may be. All such amendments must
be approved by either the holders of a majority of the outstanding capital stock
entitled to vote thereon or by a majority of the entire Board of Directors.
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ANNEX V
FORM OF
AMENDED AND RESTATED
BYLAWS
OF
PRICE/COSTCO, INC.
(HEREINAFTER CALLED THE "CORPORATION")
ARTICLE I
OFFICES
Section 1. REGISTERED OFFICE. The registered office of the Corporation
shall be established and maintained in the City of Wilmington, County of New
Castle, State of Delaware.
Section 2. OTHER OFFICES. The Corporation may also have offices at such
other places both within and without the State of Delaware as the Board of
Directors may from time to time determine.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. PLACE OF MEETINGS. Meetings of the stockholders for the
election of directors or for any other purpose shall be held at such time and
place, either within or without the State of Delaware as shall be designated
from time to time by the Board of Directors and stated in the notice of the
meeting or in a duly executed waiver of notice thereof.
Section 2. ANNUAL MEETINGS. The Annual Meetings of Stockholders shall be
held on such date and at such time as shall be designated from time to time by
the Board of Directors and stated in the notice of the meeting, at which meeting
the stockholders shall elect Directors in the manner provided in the Certificate
of Incorporation and in the Bylaws, and transact such other business as may
properly be brought before the meeting. Written notice of the Annual Meeting
stating the place, date and hour of the meeting shall be given to each
stockholder entitled to vote at such meeting not less than ten nor more than
sixty days before the date of the meeting.
Section 3. SPECIAL MEETINGS. Unless otherwise prescribed by law or by the
Certificate of Incorporation, Special Meetings of Stockholders, for any purpose
or purposes may be called by either (i) the Chairman, (ii) the Vice Chairman,
(iii) the President, (iv) any Vice President, (v) the Secretary or (vi) any
Assistant Secretary, if there be one, and shall be called by any such officer at
the request in writing by a majority of the entire Board of Directors, or at the
request in writing of stockholders owning a majority of the capital stock of the
Corporation issued and outstanding and entitled to vote. Such request shall
state the purpose or purposes of the proposed meeting. Written notice of a
Special Meeting stating the place, date and hour of the meeting and the purpose
or purposes for which the meeting is called shall be given not less than ten nor
more than sixty days before the date of the meeting to each stockholder entitled
to vote at such meeting.
Section 4. QUORUM. Except as otherwise provided by law or by the
Certificate of Incorporation, the holders of a majority of the capital stock
issued and outstanding and entitled to vote thereat, present in person or
represented by proxy, shall constitute a quorum at all meetings of the
stockholders for the transaction of business. If, however, such quorum shall not
be present or represented at any meeting of the stockholders, the stockholders
entitled to vote thereat, present in person or represented by proxy; shall have
power to adjourn the meeting from time to time, without notice other than
announcement at the meeting,
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until a quorum shall be, present or represented. At such adjourned meeting at
which a quorum shall be present or represented, any business may be transacted
which might have been transacted at the meeting as originally noticed. If the
adjournment is for more than thirty days, or if after the adjournment a new
record date is fixed for the adjourned meeting, a notice of the adjourned
meeting shall be given to each stockholder entitled to vote at the meeting.
Section 5. VOTING. Unless otherwise required by law, the Certificate of
Incorporation or these Bylaws, any question brought before any meeting of
stockholders shall be decided by the vote of the holders of a majority of the
stock represented and entitled to vote thereat. Each stockholder represented at
a meeting of stockholders shall be entitled to cast one vote for each share of
the capital stock entitled to vote thereat held by such stockholder. Such votes
may be cast in person or by proxy but no proxy shall be voted on or after three
years from its date, unless such proxy provides for a longer period. The Board
of Directors, in its discretion, or the officer of the Corporation presiding at
a meeting of stockholders, in his discretion, may require that any votes cast at
such meeting shall be cast by written ballot.
Section 6. CONSENT OF STOCKHOLDERS IN LIEU OF MEETING. Unless otherwise
provided in the Certificate of Incorporation, any action required or permitted
to be taken at any Annual or Special Meeting of Stockholders of the Corporation,
may be taken without a meeting, without prior notice and without a vote, if a
consent in writing, setting forth the action so taken, shall be signed by the
holders of outstanding stock having not less than the minimum number of votes
that would be necessary to authorize or take such action at a meeting at which
all shares entitled to vote thereon were present and voted. Prompt notice of the
taking of the corporate action without a meeting by less than unanimous written
consent shall be given to those stockholders who have not consented in writing.
Section 7. LIST OF STOCKHOLDERS ENTITLED TO VOTE. The officer of the
Corporation who has charge of the stock ledger of the Corporation shall prepare
and make, at least ten days before every meeting of stockholders, a complete
list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open to
the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten days prior to the
meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder of the Corporation who is
present.
Section 8. STOCK LEDGER. The stock ledger of the Corporation shall be the
only evidence as to who are the stockholders entitled to examine the stock
ledger, the list required by Section 7 of this Article II or the books of the
Corporation, or to vote in person or by proxy at any meeting of stockholders.
ARTICLE III
DIRECTORS
Section 1. NUMBER AND ELECTION OF DIRECTORS. The Board of Directors shall
consist of one or more members, the exact number of which shall be fixed from
time to time by the Board of Directors. Except as provided in Section 2 of this
Article, directors shall be elected by a plurality of the votes cast at Annual
Meetings of Stockholders, and each director so elected shall hold office until
the Annual Meeting in which his term expires and until his successor is duly
elected and qualified, or until his earlier resignation or removal. Any director
may resign at any time upon written notice to the Corporation. Directors need
not be stockholders.
Section 2. VACANCIES. Vacancies, and newly created directorships resulting
from any increase in the authorized number of directors, may be filled by a
majority of the directors then in office, though less than a quorum, or by a
sole remaining director. Directors so chosen shall be identified by the Class
(Class I, II or III, as set forth in Article EIGHTH of the corporation's
Certificate of Incorporation) to which they are named and shall hold office
until the next election of the Class for which such directors shall have been
chosen and until their successors are duly elected and qualified, or until their
earlier resignation or removal.
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Section 3. DUTIES AND POWERS. The business of the Corporation shall be
managed by or under the direction of the Board of Directors which may exercise
all such powers of the Corporation and do all such lawful acts and things as are
not by statute or by the Certificate of Incorporation or by these Bylaws
directed or required to be exercised or done by the stockholders.
Section 4. MEETINGS. The Board of Directors of the Corporation may hold
meetings, both regular and special, either within or without the State of
Delaware. Regular meetings of the Board of Directors may be held without notice
at such time and at such place as may from time to time be determined by the
Board of Directors. Special meetings of the Board of Directors may be called by
the Chairman, the Vice Chairman, the President, or any director. Notice thereof
stating the place, date and hour of the meeting shall be given to each director
either by mail, telephone, facsimile or telegram not less than forty-eight (48)
hours before the date of the meeting.
Section 5. QUORUM. Except as may be otherwise specifically provided by
law, the Certificate of Incorporation or these Bylaws, at all meetings of the
Board of Directors a majority of the entire Board of Directors shall constitute
a quorum for the transaction of business. The act of a majority of the directors
present at any meeting at which there is a quorum shall be the act of the Board
of Directors. If a quorum shall not be present at any meeting of the Board of
Directors, the directors present thereat may adjourn the meeting from time to
time without notice other than announcement at the meeting, until a quorum shall
be present.
Section 6. ACTIONS OF BOARD. Unless otherwise provided by the Certificate
of Incorporation or these Bylaws, any action required or permitted to be taken
at any meeting of the Board of Directors or of any committee thereof may be
taken without a meeting, if all the members of the Board of Directors or
committee, as the case may be, consent thereto in writing, and the writing or
writings are filed with the minutes of proceedings of the Board of Directors or
committee.
Section 7. MEETINGS BY MEANS OF CONFERENCE TELEPHONE. Unless otherwise
provided by the Certificate of Incorporation or these Bylaws, members of the
Board of Directors of the Corporation, or any committee designated by the Board
of Directors, may participate in a meeting of the Board of Directors or such
committee by means of a conference telephone or similar communications equipment
by means of which all persons participating in the meeting can hear each other,
and participation in a meeting pursuant to this Section 7 shall constitute
presence in person at such meeting.
Section 8. COMMITTEES. The Board of Directors may, by resolution passed by
a majority of the entire Board of Directors, designate one or more committees,
each committee to consist of one or more of the Directors of the Corporation.
The Board of Directors may designate one or more directors as alternate members
of any committee, who may replace any absent or disqualified member at any
meeting of any such committee. Any committee, to the extent allowed by law and
provided in these Bylaws or the resolution establishing such committee, shall
have and may exercise all the powers and authority of the Board of Directors in
the management of the business and affairs of the Corporation. Each committee
shall keep regular minutes and report to the Board of Directors when required.
Section 9. COMPENSATION. The directors may be paid their expenses, if any,
of attendance at each meeting of the Board of Directors and may be paid a fixed
sum for attendance at each meeting of the Board of Directors or a stated salary
as director. No such payment shall preclude any director from serving the
Corporation in any other capacity and receiving compensation therefor. Members
of special or standing committees may be allowed like compensation for attending
committee meetings.
Section 10. INTERESTED DIRECTORS. No contract or transaction between the
Corporation and one or more of its directors or officers, or between the
Corporation and any other corporation, partnership, association, or other
organization in which one or more of its directors or officers are directors or
officers, or have a financial interest, shall be void or voidable solely for
that reason, or solely because the director or officer is present at or
participates in the meeting of the Board of Directors or committee thereof which
authorizes the contract or transaction, or solely because his or their votes are
counted for such purpose if (i) the material facts as to his or their
relationship or interest and as to the contract or transaction are disclosed or
are known to the Board of Directors or the committee, and the Board of Directors
or committee in good faith authorizes the contract or transaction by the
affirmative votes of a majority of the disinterested directors, even though the
disinterested directors be less than a quorum; or (ii) the material facts as to
his or their relationship or interest and as to the contract or transaction are
disclosed or are known to the
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stockholders entitled to vote thereon and the contract or transaction is
specifically approved in good faith by vote of the stockholders; or (iii) the
contract or transaction is fair as to the Corporation as of the time it is
authorized, approved or ratified by the Board of Directors, a committee thereof
or the stockholders. Common or interested directors may be counted in
determining the presence of a quorum at a meeting of the Board of Directors or
of a committee which authorizes the contract or transaction.
ARTICLE IV
OFFICERS
Section 1. GENERAL. The executive officers of the Corporation shall be
chosen by the Board of Directors and shall include a Chairman of the Board of
Directors, a President and Chief Executive Officer, a Secretary and a Chief
Financial Officer. The Board of Directors, in its discretion, may also choose
one or more Executive Vice Presidents (each of whom shall also be an executive
officer) a Treasurer (who shall also be an executive officer) and Vice
Presidents, Assistant Secretaries, Assistant Treasurers and other officers. Any
number of offices may be held by the same person, unless otherwise prohibited by
law, the Certificate of Incorporation or these Bylaws. The officers of the
Corporation need not be stockholders of the Corporation nor, except in the case
of the Chairman of the Board of Directors and the Vice Chairman of the Board of
Directors, need such officers be directors of the Corporation.
Section 2. ELECTION. The Board of Directors at its first meeting held
after each Annual Meeting of Stockholders shall elect the officers of the
Corporation who shall hold their offices for such terms and shall exercise such
powers and perform such duties as shall be determined from time to time by the
Board of Directors; and all officers of the Corporation shall hold office until
their successors are chosen and qualified, or until their earlier resignation or
removal. Any officer elected by the Board of Directors may be removed at any
time by the affirmative vote of a majority of the entire Board of Directors. Any
vacancy occurring in any office of the Corporation shall be filled by a majority
of the entire Board of Directors. The salaries of all executive officers of the
Corporation shall be fixed by the Board of Directors.
Section 3. CHAIRMAN OF THE BOARD OF DIRECTORS. The Chairman of the Board
of Directors shall preside at all meetings of the stockholders and of the Board
of Directors. Except where by law the signature of the President is required,
the Chairman of the Board of Directors shall possess the same power as the
President to sign all contracts, certificates and other instruments of the
Corporation which may be authorized by the Board of Directors. During the
absence or disability of the President, the Chairman of the Board of Directors
shall exercise all the powers and discharge all the duties of the President. The
Chairman of the Board of Directors shall also perform such other duties and may
exercise such other powers as from time to time may be assigned to him by these
Bylaws or by the Board of Directors. The Chairman of the Board of Directors may
only be appointed or removed by a majority of the entire Board of Directors.
Section 4. VICE CHAIRMAN OF THE BOARD OF DIRECTORS. The Vice Chairman of
the Board of Directors shall, in the absence or disability of the Chairman of
the Board of Directors, preside at meetings of the stockholders and the Board of
Directors. The Vice Chairman of the Board of Directors shall also perform such
other duties and may exercise such other powers as from time to time may be
assigned to him by these Bylaws or by the Board of Directors.
Section 5. PRESIDENT. The President shall, subject to the control of the
Board of Directors, have general supervision of the business of the Corporation
and shall see that all orders and resolutions of the Board of Directors are
carried into effect. He shall execute all bonds, mortgages, contracts and other
instruments of the Corporation requiring a seal, under the seal of the
Corporation, except where required or permitted by law to be otherwise signed
and executed and except that the other officers of the Corporation may sign and
execute documents when so authorized by these Bylaws, the Board of Directors or
the President. In the absence or disability of the Chairman of the Board of
Directors or the Vice Chairman of the Board of Directors, or if there be none,
the President shall preside at all meetings of the stockholders and the Board of
Directors. The President shall be the Chief Executive Officer of the
Corporation. The President shall also perform such other duties and may exercise
such other powers as from time to time may be assigned to him by these Bylaws or
by the Board of Directors. The President may only be appointed or removed by a
majority of the entire Board of Directors.
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Section 6. EXECUTIVE VICE PRESIDENTS AND VICE PRESIDENTS. At the request
of the President or in his absence or in the event of his inability or refusal
to act (and if there be no Chairman of the Board of Directors), the Senior
Executive Vice President, and then the Executive Vice President or the Executive
Vice Presidents if there is more than one (in the order designated by the Board
of Directors) shall perform the duties of the President, and when so acting,
shall have all the powers of and be subject to all the restrictions upon the
President. Each Vice President (including Senior Executive and Executive Vice
Presidents) shall perform such other duties and have such other powers as the
Board of Directors from time to time may prescribe. If there be no Chairman of
the Board of Directors and no Vice President, the Board of Directors shall
designate the officer of the Corporation who, in the absence of the President or
in the event of the inability or refusal of the President to act, shall perform
the duties of the President, and when so acting, shall have all the powers of
and be subject to all the restrictions upon the President.
Section 7. SECRETARY. The Secretary shall attend all meetings of the Board
of Directors and all meetings of stockholders and record all the proceedings
thereat in a book or books to be kept for that purpose; the Secretary shall also
perform like duties for the standing committees when required. The Secretary
shall give, or cause to be given, notice of all meetings of the stockholders and
special meetings of the Board of Directors, and shall perform such other duties
as may be prescribed by the Board of Directors or President, under whose
supervision he or she shall be. If the Secretary shall be unable or shall refuse
to cause to be given notice of all meetings of the stockholders and special
meetings of the Board of Directors, and if there be no Assistant Secretary, then
either the Board of Directors or the President may choose another officer to
cause such notice to be given. The Secretary shall have custody of the seal of
the Corporation and the Secretary or any Assistant Secretary, if there be one,
shall have authority to affix the same to any instrument requiring it and when
so affixed, it may be attested by the signature of the Secretary or by the
signature of any such Assistant Secretary. The Board of Directors may give
general authority to any other officer to affix the seal of the Corporation and
to attest the affixing by his signature. The Secretary shall see that all books,
reports, statements, certificates and other documents and records required by
law to be kept or filed are properly kept or filed, as the case may be.
Section 8. CHIEF FINANCIAL OFFICER. The Chief Financial Officer shall also
serve as the Treasurer unless a Treasurer shall be separately appointed by the
Board of Directors and shall have the custody of the corporate funds and
securities and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the Corporation and shall deposit all moneys
and other valuable effects in the name and to the credit of the Corporation in
such depositories as may be designated by the Board of Directors. The Chief
Financial Officer shall disburse the funds of the Corporation as may be ordered
by the Board of Directors, taking proper vouchers for such disbursements, and
shall render to the President and the Board of Directors, at its regular
meetings, or when the Board of Directors so requires, an account of all his
transactions as Chief Financial Officer and of the financial condition of the
Corporation.
Section 9. ASSISTANT SECRETARIES. Except as may be otherwise provided in
these Bylaws, Assistant Secretaries, if there be any, shall perform such duties
and have such powers as from time to time may be assigned to them by the Board
of Directors, the President, any Vice President, if there be one, or the
Secretary, and in the absence of the Secretary or in the event of his disability
or refusal to act, shall perform the duties of the Secretary, and when so
acting, shall have all the powers of and be subject to all the restrictions upon
the Secretary.
Section 10. ASSISTANT TREASURERS. Assistant Treasurers, if there be any,
shall perform such duties and have such powers as from time to time may be
assigned to them by the Board of Directors, the President, any Vice President,
if there be one, or the Treasurer, and in the absence of the Treasurer or in the
event of his disability or refusal to act, shall perform the duties of the
Treasurer, and when so acting, shall have all the powers of and be subject to
all the restrictions upon the Treasurer.
Section 11. OTHER OFFICERS. Such other officers as the Board of Directors
may choose shall perform such duties and have such powers as from time to time
may be assigned to them by the Board of Directors. The Board of Directors may
delegate to any other officer of the Corporation the power to choose such other
officers and to prescribe their respective duties and powers.
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ARTICLE V
STOCK
Section 1. FORM OF CERTIFICATES. Every holder of stock in the Corporation
shall be entitled to have a certificate signed, in the name of the Corporation
(i) by the Chairman or Vice Chairman of the Board of Directors, or the President
or a Vice President and (ii) by the Treasurer or an Assistant Treasurer, or the
Secretary or an Assistant Secretary of the Corporation, certifying the number of
shares owned by him in the Corporation. If the corporation shall be authorized
to issue more than one class of stock or more than one series of any class, the
designations, preferences and relative, participating, optional or other special
rights of each class of stock or series thereof and the qualifications,
limitations, or restrictions of such preferences and/or rights shall be set
forth in full or summarized on the face or back of the certificate which the
corporation shall issue to represent such class or series of stock, provided
that, except as otherwise provided in section 202 of the General Corporation Law
of Delaware, in lieu of the foregoing requirements, there may be set forth on
the face or back of the certificate which the corporation shall issue to
represent such class or series of stock, a statement that the corporation will
furnish without charge to each stockholder who so requests the powers,
designations, preferences and relative, participating, optional or other special
rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/ or rights.
Section 2. SIGNATURES. Where a certificate is countersigned by (i) a
transfer agent other than the Corporation or its employee, or (ii) a registrar
other than the Corporation or its employee, any other signature on the
certificate may be a facsimile. In case any officer, transfer agent or registrar
who has signed or whose facsimile signature has been placed upon a certificate
shall have ceased to be such officer, transfer agent or registrar before such
certificate is issued, it may be issued by the Corporation with the same effect
as if he were such officer, transfer agent or registrar at the date of issue.
Section 3. LOST CERTIFICATES. The Board of Directors may direct a new
certificate to be issued in place of any certificate theretofore issued by the
Corporation alleged to have been lost, stolen or destroyed, upon the making of
an affidavit of that fact by the person claiming the certificate of stock to be
lost, stolen or destroyed (unless otherwise authorized by the Board). When
authorizing such issue of a new certificate, the Board of Directors may, in its
discretion and as a condition precedent to the issuance thereof, require the
owner of such lost, stolen or destroyed certificate, or his legal
representative, to advertise the same in such manner as the Board of Directors
shall require and/or to give the Corporation a bond in such sum as it may direct
as indemnity against any claim that may be made against the Corporation with
respect to the certificate alleged to have been lost, stolen or destroyed.
Section 4. TRANSFERS. Stock of the Corporation shall be transferable in
the manner prescribed by law and in these Bylaws. Transfers of stock shall be
made on the books of the Corporation only by the person named in the certificate
or by his attorney lawfully constituted in writing and upon the surrender of the
certificate therefor, which shall be cancelled before a new certificate shall be
issued.
Section 5. RECORD DATE. In order that the Corporation may determine the
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, or entitled to express consent to corporate action in
writing without a meeting, or entitled to receive payment of any dividend or
other distribution or allotment of any rights, or entitled to exercise any
rights in respect of any change, conversion or exchange of stock, or for the
purpose of any other lawful action, the Board of Directors may fix, in advance,
a record date, which shall not be more than sixty days nor less than ten days
before the date of such meeting, nor more than sixty days prior to any other
action. A determination of stockholders of record entitled to notice of or to
vote at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for the
adjourned meeting.
Section 6. BENEFICIAL OWNERS. The Corporation shall be entitled to
recognize the exclusive right of a person registered on its books as the owner
of shares to receive dividends, and to vote as such owner, and to hold liable
for calls and assessments a person registered on its books as the owner of
shares, and shall not be bound to recognize any equitable or other claim to or
interest in such share or shares on the part of any other person, whether or not
it shall have express or other notice thereof, except as otherwise provided by
law.
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ARTICLE VI
NOTICES
Section 1. NOTICES. Whenever written notice is required by law, the
Certificate of Incorporation or these Bylaws, to be given to any director,
member of a committee or stockholder, such notice may be given by mail,
addressed to such director, member of a committee or stockholder, at his address
as it appears on the records of the Corporation, with postage thereon prepaid,
and such notice shall be deemed to be given at the time when the same shall be
deposited in the United States mail. Written notice may also be given personally
or by telegram, telex, facsimile or cable, in which event notice shall be deemed
given upon receipt.
Section 2. WAIVERS OF NOTICE. Whenever any notice is required by law, the
Certificate of Incorporation or these Bylaws, to be given to any director,
member of a committee or stockholder, a waiver thereof in writing, signed, by
the person or persons entitled to said notice, whether before or after the time
stated therein, shall be deemed equivalent thereto. Neither the business
transacted or to be transacted at, nor the purpose of any meeting need be
specified in any written waiver of notice thereof.
ARTICLE VII
GENERAL PROVISIONS
Section 1. DIVIDENDS. Dividends upon the capital stock of the Corporation,
subject to the provisions of the Certificate of Incorporation, if any, may be
declared by the Board of Directors at any regular or special meeting, and may be
paid in cash, in property, or in shares of the capital stock. Before payment of
any dividend, there may be set aside out of any funds of the Corporation
available for dividends such sum or sums as the Board of Directors from time to
time, in its absolute discretion deems proper as a reserve or reserves to meet
contingencies, or for equalizing dividends, or for repairing or maintaining any
property of the Corporation, or for any proper purpose, and the Board of
Directors may modify or abolish any such reserve.
Section 2. DISBURSEMENTS. All checks or demands for money and notes of the
Corporation shall be signed by such officer or officers or such other person or
persons as the Board of Directors may from time to time designate.
Section 3. FISCAL YEAR. The fiscal year of the Corporation shall be fixed
by resolution of the Board of Directors.
Section 4. CORPORATE SEAL. The corporate seal shall have inscribed thereon
the name of the Corporation, the year of its organization and the words
"Corporate Seal, Delaware". The seal may be used by causing it or a facsimile
thereof to be impressed or affixed or reproduced or otherwise.
ARTICLE VIII
INDEMNIFICATION
The power, right and obligation of the Corporation to indemnify any director
or officer of the Corporation or a Predecessor Corporation (as defined in the
Certificate of Incorporation) and employees and agents of the Corporation shall
be as set forth in Article TENTH of the Certificate of Incorporation. All
directors and officers of the Corporation or a Predecessor Corporation shall be
entitled to indemnification as set forth in the Certificate of Incorporation.
ARTICLE IX
AMENDMENTS
Section 1. These Bylaws may be altered, amended or repealed, in whole or in
part, or new Bylaws may be adopted by the stockholders or by the Board of
Directors, provided, however, that notice of such alteration, amendment, repeal
or adoption of new Bylaws be contained in the notice of such meeting of
stockholders or Board of Directors as the case may be. All such amendments must
be approved by either the holders of a majority of the outstanding capital stock
entitled to vote thereon or by a majority of the entire Board of Directors.
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ANNEX VI
THE PRICE ENTERPRISES 1995 COMBINED
STOCK GRANT AND STOCK OPTION PLAN
1. ESTABLISHMENT AND PURPOSE OF PLAN.
Price Enterprises, Inc. (hereinafter referred to as the "Company") shall
grant to selected officers and key employees of the Company and its
subsidiaries:
(a) shares of the Company's Common Stock, par value $.0001 per share
("Common Stock"), and
(b) non-qualified stock options or incentive stock options or a
combination of each to purchase shares of Common Stock,
for the purpose of attracting and retaining employees of ability and experience
and to furnish such personnel maximum incentive to improve operations and
increase profits of the Company. Such options will be granted pursuant to the
plan herein set forth which shall be known as "The Price Enterprises 1995
Combined Stock Grant And Stock Option Plan" (hereinafter referred to as the
"Stock Plan"). As used in the Stock Plan, the term "incentive stock option"
means an option described in Section 422 of the Internal Revenue Code of 1986,
as amended (hereinafter referred to as the "Code"). The term "non-qualified
stock option" means a stock option other than an incentive stock option. The
term "Company" as used in Paragraphs 4 and 8 hereof shall include the Company
and any subsidiary of the Company.
2. MAXIMUM NUMBER OF SHARES SUBJECT TO STOCK PLAN.
(a) A maximum of 250,000 shares of Common Stock, which may consist, in whole
or in part, of authorized and unissued shares of treasury stock (subject to
adjustment in accordance with Paragraph 6) may be granted under the Stock Plan.
A maximum of 1,500,000 shares of Common Stock which may consist, in whole or in
part, of authorized and unissued shares or treasury shares (subject to
adjustment in accordance with Paragraph 6) may be issued upon exercise of the
options awarded under the Stock Plan.
(b) Subject to adjustment as provided in Paragraph 6, the number of shares
of Common Stock which may be granted under the Stock Plan shall be reduced by
one share for each option awarded under the Stock Plan to purchase six shares of
Common Stock; and the number of shares available for options under the Stock
Plan shall be reduced by six shares for each share that is granted under the
Stock Plan.
(c) Subject to the foregoing limitations upon the number of shares of Common
Stock which may be issued upon exercise of options, each share of Common Stock
covered by the unexercised portion of any option which is terminated or
cancelled without being exercised may be subject to a subsequent option awarded
under the Stock Plan and each six shares (subject to adjustment in accordance
with Paragraph 6) covered by the unexercised portion of any option which has
terminated or cancelled without being exercised shall restore one share (subject
to adjustment in accordance with Paragraph 6) to the total number of shares
which may be subject to grants made under the Stock Plan.
3. ADMINISTRATION OF THE STOCK PLAN.
(a) The authority to grant shares of Common Stock and to award options under
the Stock Plan shall be vested in the Compensation Committee of the Board of
Directors of the Company (which committee is hereinafter referred to as the
"Compensation Committee") as such committee may be appointed from time to time
by the Board of Directors (the "Board"). Notwithstanding the foregoing, an
independent committee consisting of two or more directors neither of whom has,
during the one year prior to service on such independent committee, been granted
or awarded Common Stock or options under the Stock Plan or any other
discretionary stock option or stock grant plan of the Company (the "Independent
Committee") shall make any and all decisions to grant Common Stock or to award
options under the Stock Plan to officers and employee directors of the Company
who are subject to the reporting requirements under Section 16 of the Securities
and Exchange Act of 1934, as amended. The members of the Independent Committee
shall at all times be "disinterested persons" within the meaning of Rule 16b-3
and "outside directors" within the meaning of Section 162(m)(4)(C)(ii) of the
Code. The Compensation Committee or the Board may also
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interpret the Stock Plan; prescribe, amend and rescind rules and regulations
relating to the Stock Plan; amend the Stock Plan from time to time (subject to
the limitations set forth in Paragraph 11); and make all other determinations
necessary or advisable for the administration of the Stock Plan. The
Compensation Committee or the Independent Committee, as the case may be, shall
hereinafter be referred to as the "Authorized Committee." All decisions made by
the Authorized Committee pursuant to the provisions of the Stock Plan shall be
final and binding on all persons, including the Company, any subsidiaries and
the participants.
(b) Subject to the provisions of the Stock Plan, the Authorized Committee,
from time to time on the recommendation of the chief executive officer of the
Company, shall determine the employees to whom, and the time or times at which,
shares of Common Stock shall be granted; the consideration to be received for
such shares of Common Stock; the vesting schedule, repurchase rights and
obligations applicable to such shares of Common Stock; and other terms and
conditions applicable to such shares of Common Stock. Grants of shares of Common
Stock need not be identical. Any terms of a grant of Common Stock hereunder may
be set forth in a written stock grant agreement between the grantee and the
Company. Shares of Common Stock may be issued for any lawful consideration
deemed appropriate by the Authorized Committee, including services or labor
previously rendered, but not including future services. Without limiting the
foregoing, it is specifically acknowledged that shares may be granted without
the grantee being required to pay any monetary consideration therefor.
(c) Subject to the provisions of the Stock Plan, the Authorized Committee,
from time to time on the recommendation of the chief executive officer of the
Company, shall determine the employees to whom, and the time or times at which,
options shall be granted; whether such options shall be incentive stock options;
the number of shares of Common Stock to be subject to each option; the period of
each option; and other terms and provisions of each option. Options need not be
identical. The terms of each option granted hereunder shall be set forth in a
written stock option agreement between the optionee and the Company which shall
clearly identify each option as an incentive stock option or as a non-qualified
stock option, as the case may be. An option which is not expressly identified as
an incentive stock option shall be conclusively deemed to be a non-qualified
stock option. The terms of incentive stock options and non-qualified stock
options granted hereunder must be set forth in separate stock option agreements.
4. ELIGIBILITY.
(a) Shares of Common Stock and/or options may be granted to any employee of
the Company.
(b) Any employee who has been granted shares of Common Stock or options
under this or any other stock option plan of the Company may be granted
additional shares of Common Stock or an additional option or options under this
or any other such plan; subject, however, to any restrictions that may be
contained in any other such plan.
(c) In no event shall any employee be granted an incentive stock option or
incentive stock options under the Stock Plan or any other plan of the Company if
such option or options would, during the calendar year in which they first
become exercisable, when combined with other incentive stock options which first
become exercisable in such calendar year, entitle such employee to purchase
shares of Common Stock, solely upon exercise of such incentive stock options,
having an aggregate fair market value (determined as of the time such option or
options are granted) in excess of $100,000. This Paragraph 4(c) of the Stock
Plan shall have no application to any option granted under the Stock Plan which
by its terms is intended not to be an incentive stock option.
5. EXERCISE PRICE OF OPTIONS.
The price to be paid for shares of Common Stock covered by each option shall
be not less than 100% (110% in the case of an incentive stock option if the
optionee at the time the option is granted owns or, under the provisions of
Section 424(d) of the Code, is considered to own shares of stock possessing more
than 10% of the total combined voting power of all classes of stock of the
Company) of the fair market value of such
VI-2
<PAGE>
shares of Common Stock as determined by the Authorized Committee on the date the
option is granted (the "Date Of Option Grant"), subject to adjustment as
provided in Paragraph 6. The price of any shares of Common Stock purchased upon
exercise of an option shall be paid in full at the time of each such exercise
(a) in cash,
(b) by delivering shares of Common Stock already owned by the optionee,
or
(c) by a combination of cash and delivery of shares of Common Stock
already owned by the optionee,
PROVIDED THAT any delivery of shares of Common Stock already owned by the
optionee shall not be allowed if it would constitute a disqualifying disposition
under Section 424(h) of the Code. For purposes of exercising an option, the
value of any shares of Common Stock delivered in payment shall be the fair
market value of such shares of Common Stock on the last business day prior to
delivery.
6. ADJUSTMENTS.
The number of shares of Common Stock subject to grants to employees under
the Stock Plan and the number of shares of Common Stock subject to options
granted under the Stock Plan shall be adjusted as follows:
(a) in the event that the outstanding shares of Common Stock are changed by
any stock dividend, stock split or combination of shares, the number of shares
of Common Stock subject to the Stock Plan and to options granted under the Stock
Plan shall be proportionately adjusted;
(b) except as provided in subparagraph 6(d), in the event of any merger,
consolidation or reorganization of the Company with any other corporation or
corporations, there may be substituted on an equitable basis as determined by
the Authorized Committee, for each share of Common Stock then subject to the
Stock Plan, whether or not at the time subject to outstanding options, the
number and kind of shares of stock or other securities or other property
(including cash) to which the holders of shares of Common Stock of the Company
will be entitled pursuant to such transaction;
(c) in the event of any other relevant change in the capitalization of the
Company, the Authorized Committee shall provide for an equitable adjustment in
the number of shares of Common Stock then subject to the Stock Plan, whether or
not then subject to outstanding options. In the event of any such adjustment,
the purchase price per share shall be proportionately adjusted; and
(d) notwithstanding the foregoing provisions of this Paragraph 6, upon the
dissolution of the Company, or upon any merger or consolidation of the Company:
(i) the surviving corporation (whether the Company or otherwise) shall
agree to exchange options to purchase its shares of stock for options
granted under the Stock Plan, on terms fairly reflecting the terms of the
merger or consolidation; or
(ii) all vesting schedules, repurchase rights and obligations, and other
terms and conditions applicable to shares of Common Stock granted under the
Stock Plan shall be eliminated, and all options granted under the Stock Plan
shall terminate and thereupon become null and void; PROVIDED, HOWEVER, that
the optionee shall have the right, immediately prior to such dissolution,
merger or consolidation, to exercise any such option without regard to any
otherwise applicable restriction as to time of exercise, other than
expiration of the Option Period (as defined below); or
(iii) the Authorized Committee shall make such other arrangements, which
may include termination of outstanding options against payment therefor, as
the Board or Authorized Committee may at the time deem fair and equitable in
its discretion.
7. OPTION PERIOD AND LIMITATION ON EXERCISE.
(a) Options shall be exercisable at such times and for such period (the
"Option Period") as may be fixed by the Authorized Committee at the Date Of
Option Grant; PROVIDED, HOWEVER, that in the case of non-qualified stock
options, no option shall be exercisable until one year from the Date Of Option
Grant, nor
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after the expiration of 10 years and one day from the Date Of Option Grant. In
the case of incentive stock options, no option shall be exercisable until one
year from the Date Of Option Grant, nor after the expiration of 10 years from
the Date Of Option Grant. Notwithstanding the foregoing provision to the
contrary, in the case of an optionee who, at the time the option is granted,
owns or, under the provisions of Section 424(d) of the Code, is considered to
own stock possessing more than 10% of the total combined voting power of all
classes of stock of the Company, no incentive stock option shall be exercisable
until one year from the Date Of Option Grant nor after the expiration of five
years from the Date Of Option Grant.
8. EFFECT OF TERMINATION OF EMPLOYMENT OR OF CHANGE IN EMPLOYMENT POSITION.
(a) The effect, if any, of termination of employment, change of position,
death or the like on a stock grant shall be as set forth in the relevant stock
grant agreement.
(b) If an optionee ceases to be an officer or employee of the Company, for
any reason other than death or termination for cause, or remains an employee of
the Company but ceases to be employed in a position in which employees are
eligible to receive options, as determined in the sole judgment of the
Authorized Committee, such optionee may exercise his or her options in
accordance with their terms only for a period of 90 days after such cessation
(but not beyond the Option Period); PROVIDED, HOWEVER, if such cessation is due
to an optionee's disability (within the meaning of Section 22(e)(3) of the
Code), such optionee may exercise his or her options in accordance with their
terms only for a period of 12 months after such cessation (but not beyond the
Option Period). Any exercise of options after such cessation may be only to the
extent of the full number of shares of Common Stock the optionee was entitled to
purchase under the option on the date of such cessation, plus a portion of the
additional number of shares, if any, he or she would have become entitled to
purchase on the next anniversary date of the Date Of Option Grant of the option
following such cessation, such portion to be determined by multiplying such
additional number of shares of Common Stock by a fraction, the numerator of
which shall be the number of days from the anniversary date of the Date Of
Option Grant preceding such cessation to the date of such cessation and the
denominator of which shall be 365. Such portion shall be rounded, if necessary,
to the nearest whole share of Common Stock. If an employee changes his or her
position in the Company to a position entitled to a lesser number of options,
the Authorized Committee may in its discretion make appropriate adjustments
(including cancellation) to options previously granted to such employee.
(c) If an optionee dies while an officer or employee of the Company, any
options held by the deceased optionee will continue in effect and may be
exercised in accordance with their terms for a period of 12 months from the date
of the optionee's death (but not beyond the Option Period) by the executor or
administrator of such optionee's estate, or by a designated beneficiary or
beneficiaries pursuant to a Beneficiary Designation Form in a form approved by
the Company, which Beneficiary Designation Form has been properly filed with the
Company prior to the optionee's death, or in the event there is no such executor
or administrator (or the person holding such position has been discharged) or
any such designated beneficiary, then by the person or persons to whom the
optionee's rights under the option shall pass by will or by the laws of descent
and distribution. Any exercise of options after such death may be only to the
extent of the full number of shares of Common Stock the optionee was entitled to
purchase under the option on the date of death, plus a portion of the additional
number of shares, if any, the optionee would have become entitled to purchase on
the next anniversary date of the Date Of Option Grant of the option following
such death, such portion to be determined by multiplying such additional number
of shares of Common Stock by a fraction, the numerator of which shall be the
number of days from the anniversary date of the Date Of Option Grant preceding
such death to the date of death and the denominator of which shall be 365. Such
portion shall be rounded, if necessary, to the nearest whole share of Common
Stock.
(d) If the termination of an optionee's position as an officer or employee
of the Company is for cause (as determined in the sole judgment of the
Authorized Committee), his or her option or options shall thereupon be cancelled
and such optionee shall have no right to exercise any part of such option or
options after such termination.
VI-4
<PAGE>
(e) Grants of shares of Common Stock and options shall not be affected by
authorized leaves of absence or, except as provided in Paragraphs 8(a) and 8(d),
by any change in employment so long as the grantee of shares of Common Stock or
optionee continues to be an employee of the Company.
(f) Nothing in the Stock Plan or in any grant of shares of Common Stock or
in any option that is awarded shall be deemed to interfere with or affect in any
way the right of the Company to terminate the employment of a grantee of shares
of Common Stock or of an optionee at any time, nor confer upon a grantee of
shares of Common Stock or an optionee any right to continue in the employ of the
Company.
9. NONTRANSFERABILITY OF OPTIONS.
Options granted hereunder shall not be transferable except to the executor
or administrator of the optionee's estate and to the optionee's heirs or
devisees and shall be exercisable during the optionee's lifetime only by the
optionee. Options may, however, be surrendered to the Company for cancellation
for such consideration and upon such terms as may be mutually agreed upon by the
Company and the holder of such options.
10. EFFECTIVE DATE AND EXPIRATION OF THE STOCK PLAN.
The Stock Plan shall become effective upon its adoption by the Board,
subject to approval by a majority of the outstanding voting shares of stock of
the Company within 12 months before or thereafter. Unless sooner terminated, the
Stock Plan shall expire 10 years from the earlier of the date the Stock Plan is
approved by stockholders of the Company or the date the Stock Plan is adopted by
the Board.
11. AMENDMENT AND TERMINATION OF STOCK PLAN PRIOR TO EXPIRATION DATE.
At any time prior to the expiration of the Stock Plan, the Compensation
Committee or the Board may terminate, suspend, modify or amend the Stock Plan,
PROVIDED THAT no such modification or amendment shall, without the approval of
the holders of a majority of the Company's voting shares that are present, or
represented, and entitled to vote at a meeting duly held for such purpose,
increase the total number of shares of Common Stock which may be granted or
issued upon exercise of options granted under the Stock Plan (except as provided
in Paragraph 6), change the class of employees to whom shares of Common Stock or
options may be granted under the Stock Plan or reduce the minimum exercise price
of options as provided in Paragraph 5. In no event shall any termination,
suspension, modification or amendment of the Stock Plan alter or impair, without
the consent of the respective grantees of shares of Common Stock or optionees,
any rights or obligations under stock grant agreements or options theretofore
granted under the Stock Plan, subject only to cancellation or modification as
provided in Paragraph 6 and in Paragraph 12.
12. COMPLIANCE WITH APPLICABLE LAW.
The Stock Plan, the grant of shares of Common Stock or options granted
hereunder, and the issuance of shares of Common Stock upon exercise of such
options are or may be subject to compliance with various applicable laws and the
rules, regulations and policies of various regulatory bodies and agencies,
including the Securities and Exchange Commission and the California Department
of Corporations, as now in effect or as may hereafter be adopted or amended. The
grant of shares of Common Stock or options under the Stock Plan and the issuance
of shares of Common Stock upon the exercise of options are each expressly
conditioned upon compliance with all such laws, rules, regulations and policies.
In the event that the Company, after making reasonable efforts to do so, shall
be unable to obtain any necessary authorization or permit required in order to
implement the Stock Plan or to issue shares of Common Stock granted under the
Stock Plan or upon exercise of options granted hereunder, or is otherwise unable
to comply with any such applicable law, rule, regulation or policy, the Company
may decline to allow the issuance of shares of Common Stock granted under the
Stock Plan or the exercise of any option granted under the Stock Plan until all
such permits or authorizations are issued or until it can effect such
compliance, or may make such grants, options and exercises subject to such
considerations and limitations as the Compensation Committee may deem reasonable
under the circumstances in its discretion. If it is ultimately determined, in
the sole judgment of the Compensation Committee, that the Company cannot
reasonably obtain any such permit or authorization or effect such compliance,
the grants to employees of unissued shares of Common Stock
VI-5
<PAGE>
granted under the Stock Plan affected thereby shall be cancelled upon notice to
such grantees and unexercised options granted under the Stock Plan affected
thereby shall thereupon be cancelled upon notice to the holders of such options,
all without any liability whatsoever of the Company to any grantee of shares of
Common Stock or optionee.
13. GENERAL PROVISIONS.
(a) An optionee shall generally have the rights to dividends and other
rights of a stockholder with respect to shares subject to the option only after
the optionee has given written notice of exercise, has paid in full for such
shares, and, if requested, has given the representation described in paragraph
(c) of this Paragraph.
(b) The Authorized Committee may require the voluntary surrender of all or a
portion of any stock option granted under the Stock Plan as a condition
precedent to a grant of a new stock option. Subject to the provisions of the
Stock Plan, such new stock option shall be exercisable at the price, during such
period and on such other terms and conditions as are specified by the Authorized
Committee at the time the new stock option is granted; PROVIDED, HOWEVER, should
the Authorized Committee so require, the number of shares subject to such new
stock option shall not be greater than the number of shares subject to the
surrendered stock option. Upon their surrender, the stock options shall be
cancelled and the shares previously subject to such cancelled stock options
shall again be available for the grants of stock options and other awards
hereunder.
(c) The Authorized Committee may require each person purchasing shares
pursuant to a stock option or acquiring shares pursuant to a stock grant to
represent to and agree with the Company in writing that such person is acquiring
the shares without a view to distribution thereof. The certificates for such
shares may include any legend which the Authorized Committee deems appropriate
to reflect any restrictions on transfer.
(d) All certificates for shares of Common Stock delivered under the Stock
Plan shall be subject to such stock-transfer orders and other restrictions as
the Authorized Committee may deem advisable under the rules, regulations, and
other requirements of the Securities and Exchange Commission, any stock exchange
upon which the Common Stock is then listed, and any applicable Federal or state
securities law, and the Authorized Committee may cause a legend or legends to be
placed on any such certificates to make appropriate reference to such
restrictions.
(e) Nothing contained in the Stock Plan shall prevent the Board from
adopting other or additional compensation arrangements, subject to stockholder
approval if such approval is required; and such arrangements may be either
generally applicable or applicable only in specific cases.
(f) Each participant shall, no later than the date as of which the value of
a grant or an award first becomes includable in the gross income of the
participant for Federal income tax purposes, pay to the Company, or make
arrangements satisfactory to the Authorized Committee regarding payment of, any
Federal, state, or local taxes of any kind required by law to be withheld with
respect to the grant or award. The obligations of the Company under the Stock
Plan shall be conditional on such payment or arrangements, and the Company (and,
where applicable, its subsidiaries) shall, to the extent permitted by law, have
the right to deduct any such taxes from any payment of any kind otherwise due to
the participant.
VI-6
<PAGE>
ANNEX VII
THE PRICE ENTERPRISES
DIRECTORS' 1995 STOCK OPTION PLAN
1. PURPOSE OF THE PLAN.
Under this Directors' 1995 Stock Option Plan (the "Plan") of Price
Enterprises, Inc. (the "Company"), options shall be granted to directors (other
than James D. Sinegal) who are not employees of the Company to purchase shares
of the Company's capital stock. The Plan is designed to enable the Company to
attract and retain outside directors of the highest caliber and experience.
2. STOCK SUBJECT TO PLAN.
The maximum number of shares of stock for which options granted hereunder
may be exercised shall be 150,000 shares of the Company's Common Stock, par
value $.0001 per share ("Common Stock"), subject to the adjustments provided in
Paragraph 7. Shares of stock subject to the unexercised portions of any options
granted under the Plan which expire or terminate or are cancelled may again be
subject to options under the Plan.
3. PARTICIPATING DIRECTORS.
The directors of the Company who shall participate in the Plan are those
directors (other than James D. Sinegal) who are not, at the time they receive
options hereunder, employees of the Company or any of its subsidiaries,
specifically including the Chairman of the Board and the Vice Chairman of the
Board if they are not employees of the Company or any of its subsidiaries.
4. ADMINISTRATION.
(a) The Plan shall be administered by a committee (the "Committee")
which shall consist of two or more directors, appointed by and holding
office at the pleasure of the Board of Directors of the Company (the
"Board"). Appointment of Committee members shall be effective upon
acceptance of appointment. Committee members may resign at any time by
delivering written notice to the Board. Vacancies on the Committee shall be
filled by the Board.
(b) It shall be the duty of the Committee to conduct the general
administration of the Plan in accordance with its provisions. The Committee
shall have the power to interpret the Plan and the options and to adopt such
rules for the administration, interpretation and application of the Plan as
are consistent therewith and to interpret, amend or revoke any such rules.
The Board shall have no right to exercise any of the rights or duties of the
Committee under the Plan.
(c) The Committee shall act by a majority of its members in office. The
Committee may act either by vote at a meeting or by a memorandum or other
written instrument signed by a majority of the Committee.
(d) Members of the Committee shall receive such compensation for their
services as members as may be determined by the Board. All expenses and
liabilities incurred by members of the Committee in connection with the
administration of the Plan shall be borne by the Company. The Committee may
employ attorneys, consultants, accountants, appraisers, brokers or other
persons. The Committee, the Company and its officers and directors shall be
entitled to rely upon the advice, opinions or valuations of any such
persons. All actions taken and all interpretations and determinations made
by the Committee in good faith shall be final and binding upon all option
holders, the Company and all other interested persons. No member of the
Committee shall be personally liable for any action, determination or
interpretation made in good faith with respect to the Plan or the options,
and all members of the Committee shall be fully protected by the Company
with respect to any such action, determination or interpretation.
VII-1
<PAGE>
5. GRANT OF OPTIONS.
Each participating director, other than the Vice Chairman of the Board,
shall be granted an option for 10,000 shares of Common Stock (subject to the
adjustments provided in Paragraph 7) on the date on which he or she first is
elected as a director of the Company (the "date of grant"). The Vice Chairman of
the Board shall be granted an option for 50,000 shares of Common Stock (subject
to the adjustments provided in Paragraph 7) on the date of grant.
Notwithstanding any other provision of the Plan, no option hereunder shall be
granted unless sufficient shares (subject to said adjustments) are then
available therefor under Paragraphs 2 and 7. In consideration of the granting of
the option, the option holder shall be deemed to have agreed to remain as a
director of the Company for a period of at least one year after the date of
grant. Nothing in the Plan shall, however, confer upon any option holder any
right to continue as a director of the Company or shall interfere with or
restrict in any way the rights of the Company or the Company's stockholders,
which are hereby expressly reserved, to remove any option holder at any time for
any reason whatsoever, with or without cause, to the extent permitted by the
Company's bylaws and applicable law.
6. OPTION PROVISIONS.
Each option granted under the Plan shall be evidenced by an agreement
between the Company and the participating director and shall contain such terms
and provisions as the Committee may authorize, including in any event the
following:
(a) The exercise price of each option shall be equal to the aggregate
fair market value of the shares of Common Stock optioned on the date of
grant of such option. For this purpose, such fair market value means the
mean of the bid and asked prices (or the closing price per share if the
Common Stock is listed on The Nasdaq Stock Market's National Market System)
of the Common Stock in effect immediately prior to the date of grant, as
reported in the Wall Street Journal (or, if not so reported, as otherwise
reported by the NASDAQ system), or, in the event the Common Stock is listed
on a stock exchange, the fair market value per share shall be the closing
price on such exchange on the date immediately prior to the grant of the
option, as reported in the Wall Street Journal, or if no such quotations are
reported such fair market value means the value established by what the
Committee in its judgment then deems to be the most nearly comparable
valuation method.
(b) Payment for stock purchased upon any exercise of the option shall be
made in full at the time of such exercise (i) in cash, (ii) by delivering
shares of Common Stock already owned by the optionee, or (iii) a combination
of in cash and by delivering shares of Common Stock already owned by the
optionee. For purposes of exercising the option, the value of any shares of
Common Stock delivered in payment shall be the fair market value of such
shares of Common Stock on the last business day prior to delivery.
(c) The option shall become exercisable in installments as follows: 20%
of the total number of shares optioned shall be exercisable one year after
the date of grant; 40% of the total number of shares optioned shall be
exercisable two years after the date of grant; 60% of the total number of
shares optioned shall be exercisable three years after the date of grant;
80% of the total number of shares optioned shall be exercisable four years
after the date of grant; and 100% of the total number of shares optioned
shall be exercisable five years after the date of grant; in each case to the
nearest whole share.
(d) When the option holder ceases to be a director of the Company,
whether because of death, resignation, removal, expiration of his or her
term of office or any other reason, the option shall terminate 90 days after
the date such option holder ceases to be a director of the Company and may
thereafter no longer be exercised; except that (i) upon the option holder's
death his or her legal representative(s) or the person(s) entitled to do so
under the option holder's last will and testament or under applicable
intestate laws shall have the right to exercise the option within one year
after the date of death (but not after the expiration date of the option),
but only for the number of shares as to which the option holder was entitled
to exercise the option on the date of his or her death and (ii) upon the
option holder's ceasing to be a director by reason of disability he or she
(or his or her guardian) shall have the right to exercise the option within
one year after the date the option holder ceased to be a director (but not
after the expiration date of the option), but only for the number of shares
as to which the option holder was entitled to exercise the option on the
date of his or her ceasing to be a director.
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<PAGE>
(e) Notwithstanding any other provision herein, such option may not be
exercised prior to approval of the Plan by the Company's stockholders having
a majority of the voting power of the outstanding stock; nor prior to the
admission of the shares of stock issuable on exercise of the option to
listing on notice of issuance on any stock exchange on which shares of the
same class are then listed; nor unless and until, in the opinion of counsel
for the Company, such securities may be issued and delivered without causing
the Company to be in violation of or incur any liability under any Federal,
state or other securities law, any requirement of any securities exchange
listing agreement to which the Company may be a party, or any other
requirement of law or of any regulatory body having jurisdiction over the
Company.
(f) The option shall not be transferable by the option holder other than
by will or the laws of descent and distribution, may not be pledged or
hypothecated, and shall be exercisable during the option holder's lifetime
only by the option holder or by his or her guardian or legal representative.
(g) The term of each option shall be 10 years from the date of grant
thereof or such shorter term as may be provided by the Committee.
7. ADJUSTMENTS.
Subject to any required action by the stockholders of the Company, the
number of shares of Common Stock covered by each outstanding option, and the
number of shares of Common Stock which have been authorized for issuance under
the Plan but as to which no options have yet been granted or which have been
returned to the Plan upon cancellation or expiration of an option, as well as
the price per share of Common Stock covered by each such outstanding option,
shall be proportionately adjusted for any increase or decrease in the number of
issued shares of Common Stock resulting from a stock split, reverse stock split,
stock dividend, combination or reclassification of the Common Stock, or any
other increase or decrease in the number of issued shares of Common Stock
effected without receipt of consideration by the Company; provided, however,
that conversion of any convertible securities of the Company shall not be deemed
to have been "effected without receipt of consideration." Such adjustment shall
be made by the Committee, whose determination in that respect shall be final,
binding and conclusive. Except as expressly provided herein, no issuance by the
Company of shares of stock of any class, or securities convertible into shares
of stock of any class, shall affect, and no adjustment by reason thereof shall
be made with respect to, the number or price of shares of Common Stock subject
to an option.
8. CORPORATE REORGANIZATIONS.
Upon the dissolution or liquidation of the Company, or upon a
reorganization, merger or consolidation of the Company as a result of which the
Company's outstanding shares of Common Stock are changed or exchanged for cash
or property or securities not of the Company's issue, or upon a sale of
substantially all the property of the Company to another corporation or person,
the Plan shall terminate, and all options thereto granted hereunder shall
terminate, unless provisions shall be made in writing in connection with such
transaction for the continuance of the Plan and/or for the assumption of options
theretofore granted, or the substitution for such options of options covering
the stock of a successor corporation, or a parent or subsidiary thereof, with
appropriate adjustments as to the number and kind of shares and prices, in which
event the Plan and options theretofore granted shall continue in the manner and
under the terms so provided. If the Plan and unexercised options shall terminate
pursuant to the foregoing sentence, all persons entitled to exercise any
unexercised portions of options then outstanding shall have the right, at such
time prior to the consummation of the transaction causing such termination as
the Company shall designate, to exercise the unexercised portions of their
options, including the portions thereof which would, but for this Paragraph 8,
not yet be exercisable.
9. DURATION, TERMINATION AND AMENDMENT OF PLAN.
The Plan shall become effective upon its adoption by the Board, subject to
approval by a majority of the outstanding voting shares of stock of the Company
within 12 months thereafter. Unless sooner terminated, the Plan shall expire 10
years from the date the Plan is approved by stockholders of the Company, so that
no option may be granted hereunder after that date although any option
outstanding on that date may thereafter be exercised in accordance with its
terms. The Board may alter, amend, suspend or terminate this
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<PAGE>
Plan, provided that no such action shall deprive an option holder, without his
or her consent, of any option previously granted pursuant to the Plan or of any
of the option holder's rights under such option. Except as herein provided, no
such action of the Board, unless taken with the approval of the stockholders of
the Company, may make any amendment to the Plan as to which approval by
stockholders is necessary for continued applicability of Rule 16b-3 of the
Exchange Act. Notwithstanding anything to the contrary contained herein, the
Board shall not amend or modify any provision of the Plan concerning the amount,
price or timing of any option (including, without limitation, the provisions of
Paragraphs 2, 5 and 6(a) of the Plan) more than once every six months other than
to comply with changes in the Code, the Employee Retirement Income Security Act
of 1974, as amended, or the respective rules and regulations thereunder.
VII-4
<PAGE>
The Letter of Transmittal, certificates for shares of PriceCostco Common
Stock and any other required documents should be sent or delivered by each
stockholder of PriceCostco or his or her broker, dealer, commercial bank, trust
company or other nominee to the Exchange Agent at one of the addresses set forth
below:
FIRST INTERSTATE BANK OF WASHINGTON, N.A., EXCHANGE AGENT
<TABLE>
<S> <C> <C>
BY MAIL: BY OVERNIGHT DELIVERY: BY HAND (ONLY):
First Interstate Bank of First Interstate Bank of First Interstate Bank of
Washington, N.A. Washington, N.A. Washington, N.A.
c/o MSTS c/o MSTS Stock Transfer, 14th Floor
P.O. Box 845 Attn: Reorg. Dept., 1st Floor 999 Third Ave.
Midtown Station 85 Challenger Rd. Seattle, WA 91804
New York, NY 10018 Ridgefield Park, NJ 07660 or
Special Services Section
26610 West Agoura Road
Calabasas, CA 91302
or
120 Broadway, 33rd Floor
New York, NY 10271
</TABLE>
Questions and requests for assistance may be directed to the Information
Agent at the address and telephone numbers set forth below. Additional copies of
this Offering Circular/Prospectus, the Letter of Transmittal and other Exchange
Offer materials may be obtained from the Information Agent as set forth below.
You may also contact your broker, dealer, commercial bank, trust company or
other nominee for assistance concerning the Exchange Offer.
THE INFORMATION AGENT FOR THE EXCHANGE OFFER IS:
[GEORGESON LOGO]
Wall Street Plaza
New York, NY 10005
Banks and Brokers Call Collect: (212) 440-9800
All Others Call Toll-Free: (800) 223-2064
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Price Enterprises Certificate provides for the indemnification of
present and former directors and officers of Price Enterprises and persons
serving as directors, officers, employees or agents of another corporation or
entity at the request of Price Enterprises (each, an "Indemnified Party") to the
fullest extent permitted by the DGCL. Indemnified Parties are specifically
indemnified in the Price Enterprises Certificate and the Price Enterprises
Bylaws (the "Indemnification Provisions") for expenses, including attorneys'
fees, judgments, fines and amounts paid in settlement actually and reasonably
incurred by an Indemnified Party (i) in connection with a threatened, pending or
completed action, suit or proceeding (whether civil, criminal, administrative or
investigative) by reason of the fact that he or she is or was a director or
officer of Price Enterprises or is or was serving as a director, officer,
employee or agent of another corporation or entity at the request of Price
Enterprises, or (ii) in connection with the defense or settlement of a
threatened, pending or completed action or suit by or in right of Price
Enterprises, provided that such indemnification is permitted only with judicial
approval if the Indemnified Party is adjudged to be liable to Price Enterprises.
Such Indemnified Party must have acted in good faith and in a manner he or she
reasonably believed to be in or not opposed to the best interests of the subject
corporation and, with respect to any criminal action or proceeding, must have
had no reasonable cause to believe his or her conduct was unlawful. Any
indemnification under the Indemnification Provisions must be authorized based on
a determination that the indemnification is proper if the applicable standard of
conduct has been met by the Indemnified Party, provided that no such
authorization is required, and indemnification is mandatory, where a director or
officer of Price Enterprises is successful in the defense of such action, suit
or proceeding or any claim or matter therein. Otherwise, such determination will
be made by a majority vote of a quorum of the Board consisting of directors not
a party to the suit, action or proceeding, by a written opinion of independent
legal counsel or by the stockholders. In the event that a determination is made
that a director or officer is not entitled to indemnification under the
Indemnification Provisions, the Indemnification Provisions provide that the
Indemnified Party may seek a judicial determination of his or her right to
indemnification. The Indemnification Provisions further provide that the
Indemnified Party is entitled to indemnification for all expenses (including
attorneys' fees) incurred in any proceeding seeking to collect from Price
Enterprises an indemnity claim under the Indemnification Provisions if such
Indemnified Party is successful. Other than proceedings to enforce rights to
indemnification, Price Enterprises is not obligated to indemnify any person in
connection with a proceeding initiated by such person, unless authorized by the
Board of Price Enterprises.
Price Enterprises will pay expenses incurred by a director or officer of
Price Enterprises, or a former director or officer of Price Enterprises, in
advance of the final disposition of an action, suit or proceeding, if he or she
undertakes to repay amounts advanced if it is ultimately determined that he or
she is not entitled to be indemnified by Price Enterprises.
The Indemnification Provisions and provisions for advancing expenses in the
Price Enterprises Certificate are expressly not exclusive of any other rights of
indemnification or advancement of expenses pursuant to the Price Enterprises
Bylaws. The Indemnification Provisions and provisions for advancing expenses in
the Price Enterprises Bylaws and the Price Enterprises Certificate are expressly
not exclusive of any other rights of indemnification or advancement of expenses
pursuant to any agreement, vote of the stockholders or disinterested directors
or pursuant to judicial direction. Price Enterprises is authorized to purchase
insurance on behalf of an Indemnified Party for liabilities incurred, whether or
not Price Enterprises would have the power or obligation to indemnify him or her
pursuant to the Price Enterprises Certificate, the Price Enterprises Bylaws or
the DGCL.
Pursuant to the Transfer and Exchange Agreement, from and after the Closing
Date, and for a period of six years thereafter, PriceCostco shall continue the
indemnification rights of present and former directors and officers of
PriceCostco provided for in the Certificate of Incorporation and Bylaws of
PriceCostco as in effect on July 28, 1994 with respect to indemnification for
acts and omissions occurring prior to the Closing Date, including, without
limitation, with respect to the litigation entitled FECHT ET AL. V. THE PRICE
COMPANY ET AL, for so long as such matters which have arisen prior to the end of
such six-year period remain outstanding.
II-1
<PAGE>
In addition for two years after the Closing Date, PriceCostco shall cause to
be maintained the current policies of the officers' and directors' liability
insurance maintained by PriceCostco covering the persons who are presently
covered by PriceCostco officers' and directors' liability insurance policies
with respect to actions and omissions occurring prior to the Closing Date to the
extent available; PROVIDED, that policies of at least the same coverage
containing terms and conditions which are no less advantageous to the insured
may be substituted therefor; and PROVIDED, FURTHER, that in no event shall
PriceCostco, utilizing its best efforts, be required to expend to maintain or
procure such insurance coverage in any amount per annum in excess of 125% of the
current annual premiums for the twelve-month period ended December 31, 1993 (the
"Maximum Premium") with respect to such insurance, or, if the cost of such
coverage exceeds the Maximum Premium, the maximum amount of coverage that can be
purchased for the Maximum Premium.
Price Enterprises will enter into indemnification agreements with its
directors and certain executive officers (each, an "Indemnified Party"). An
Indemnified Party is specifically indemnified and held harmless under such
agreements for costs and expenses, including without limitation, damages,
judgments, amounts paid in settlement, reasonable costs of investigation,
reasonable attorneys fees, costs of investigative, judicial or administrative
proceedings or appeals, costs of attachment or similar bonds, fines, penalties,
and excise taxes assessed with respect to employee benefit plans actually and
reasonably incurred in connection with a threatened, pending or completed claim,
action, suit or proceeding by reason of the fact that (i) he or she is or was a
director, officer, employee and/or agent of Price Enterprises; or (ii) is or was
serving as a director, officer, employee, trustee and/or agent of another
corporation or entity at the request of Price Enterprises. To qualify for
indemnification, the claim must not be: (i) based solely upon an Indemnified
Party's gaining in fact any personal profit or advantage to which he or she was
not legally entitled; (ii) an accounting for profits made from the purchase or
sale of securities pursuant to Section 16(b) of the Securities Exchange Act of
1934, as amended; and (iii) based solely upon knowingly fraudulent, deliberately
dishonest, or willful misconduct on the part of the Indemnified Party. Price
Enterprises will indemnify the Indemnified Party to the extent that (i) the
Indemnified Party gives Price Enterprises prompt written notice of any claim;
(ii) expenses have not been advanced pursuant to Article Eighth of Price
Enterprises Restated Certificate of Incorporation; (iii) the Indemnified Party
has not already received payment pursuant to collectible insurance policies; and
(iv) indemnification is not unlawful.
Under such indemnification agreements, Price Enterprises will advance costs
and expenses incurred by the Indemnified Party in advance of the final
disposition of an action, suit or proceeding if he or she undertakes to repay
amounts advanced if it is ultimately determined by a court of competent
jurisdiction that he or she is not entitled to be indemnified by Price
Enterprises. Price Enterprises will advance costs and expenses related to
defending or investigating an action, suit or proceeding unless a determination
is made that (i) the Indemnified Party did not act in good faith and in a manner
he or she reasonable believed to be in or not opposed to the best interest of
Price Enterprises; (ii) the Indemnified Party intentionally breached his or her
duty to Price Enterprises or its stockholders; or (iii) with respect to any
criminal action or proceeding, the Indemnified Party had reasonable cause to
believe his or her conduct was unlawful. Such determination will be made by a
majority vote of a quorum of the Board consisting of directors not a party to
the suit, action or proceeding, by a written opinion of independent legal
counsel, by the stockholders or by a final, nonappealable adjudication in a
court of competent jurisdiction. If Price Enterprises advances costs and
expenses of any action, suit or proceeding, Price Enterprises reserves the right
to assume the defense of such action, suit or proceeding upon written notice to
the Indemnified Party of its intention to do so. After delivery of such notice,
Price Enterprises shall not be liable for any costs or expenses incurred by the
Indemnified Party in retaining separate counsel unless (i) the employment of
separate counsel was previously authorized by Price Enterprises; (ii) the
Indemnified Party reasonably concludes that joint representation would entail a
conflict of interest; or (iii) Price Enterprises shall not, in fact, have
employed counsel to assume the defense of such action, suit or proceeding. The
indemnification provisions and provisions for advancing expenses in such
agreements are expressly not exclusive of any other rights of indemnification or
advancement of expenses pursuant to the DGCL and Price Enterprises Restated
Certificate of Incorporation and Bylaws.
II-2
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBITS
- ---------
<C> <S>
2.1 Amended and Restated Agreement of Transfer and Plan of Exchange, dated as of November 14, 1994,
between Price/Costco, Inc. and Price Enterprises, Inc. (included as Annex II to the Offering
Circular/Prospectus).
3.1 Certificate of Incorporation of Price Enterprises, Inc.*
3.1(a) Certificate of Amendment to Certificate of Incorporation of Price Enterprises, Inc.
3.2 Form of Restated Certificate of Incorporation of Price Enterprises, Inc. (included as Annex III
to the Offering Circular/Prospectus).
3.3 Bylaws of Price Enterprises, Inc.*
3.4 Form of Amended and Restated Bylaws of Price Enterprises, Inc. (included as Annex IV to the
Offering Circular/Prospectus).
4.1 Form of Price Enterprises, Inc. Stock Certificate.*
5 Opinion of Latham & Watkins.*
8 Opinion of Skadden, Arps, Slate, Meagher & Flom.*
10.1 Form of lease between Price Enterprises, Inc. and The Price Company with respect to the Price
Club at Pentagon Centre, Arlington County, Virginia.*
10.2 Agreement to Execute Guaranty and Security Agreement dated May 8, 1990 by and between the Atlas
Hotels, Inc. and The Price Company.(1)
10.3 Option Agreement dated May 8, 1990 between Atlas Hotels, Inc. and The Price Company.(1)
10.4 Continuing Guaranty to Wells Fargo Bank, N.A. dated May 8, 1990 by The Price Company and Atlas
Hotels, Inc.(1)
10.5 Agreement between The Price Company, Price Venture Mexico and Controladora Comercial Mexicana
S.A. de C.V. to form a Corporate Joint Venture.(2)
10.6 Operating Agreement, dated as of August 28, 1994, by and among Price Quest, Inc., Price
Enterprises, Inc., Price/Costco, Inc. and The Price Company.*
10.7 Operating Agreement, dated as of August 28, 1994, by and among Price Global Trading, Inc., Price
Enterprises, Inc., Price/Costco, Inc. and The Price Company.*
10.8 Stockholders Agreement, dated as of August 28, 1994, by and among Price Global Trading, Inc., The
Price Company, Price/Costco, Inc. and Price Enterprises, Inc.*
10.9 Stockholders Agreement, dated as of August 28, 1994, by and among Price Quest, Inc., The Price
Company, Price/Costco, Inc. and Price Enterprises, Inc.*
10.10 Revolving Credit Agreement, dated as of August 28, 1994, between Price/Costco, Inc. and Price
Enterprises, Inc.*
10.11 License Agreement, dated as of August 28, 1994, by and among Price/Costco, Inc., The Price
Company, Price Quest, Inc. and Price Enterprises, Inc.*
10.12 License Agreement, dated as of August 28, 1994, by and among Price/Costco, Inc., The Price
Company, Price Global Trading, Inc., and Price Enterprises, Inc.*
10.13 Employment Agreement, dated as of October 25, 1994, by and between Price Enterprises, Inc. and
Steve Velazquez.*
10.14 Employment Agreement, dated as of September 20, 1994, by and between Price Enterprises, Inc. and
Robert M. Gans.*
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS
- ---------
<C> <S>
10.15 Employment Agreement, dated as of October 24, 1994, by and between Price Enterprises, Inc. and
Joseph J. Tebo.*
10.16 Employment Agreement, dated as of November 9, 1994, by and between Price Enterprises, Inc. and
Mark Livingston.*
10.17 Form of Indemnity Agreement.*
10.18 Form of lease between Price Enterprises, Inc. and The Price Company with respect to the Price
Club at 4605 Morena Boulevard, San Diego, California.*
10.19 Form of lease between Price Enterprises, Inc. and Price Club East dba The Price Company with
respect to the Price Club at Wayne, New Jersey.*
10.20 Form of lease between Price Enterprises, Inc. and The Price Company with respect to the Price
Club at Westbury, New York.*
10.21 Form of Operating Agreement, by and among Mexico Clubs, L.L.C., Price Enterprises, Inc.,
Price/Costco, Inc. and The Price Company.*
10.22 Form of Limited Liability Company Agreement between The Price Company and Price Enterprises,
Inc.*
15.1 Letter of Arthur Andersen LLP Regarding Unaudited Interim Financial Information.*
21.1 List of Subsidiaries of Price Enterprises, Inc.*
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Ernst & Young LLP.
23.3 Consent of Latham & Watkins (included as part of the opinion submitted as Exhibit 5).
23.4 Consent of Katherine L. Hensley.*
23.5 Consent of Nancy Y. Bekavac.*
23.6 Consent of Murray L. Galinson.*
24.1 Powers of Attorney.*
27.1 Financial Data Schedule.*
99.1 Letter of Transmittal.*
99.2 Revised Letter of Transmittal.
<FN>
- ------------------------
* Previously filed.
(1) Incorporated herein by reference to the identical exhibit filed as part of
The Price Company's Form 10-K for the fiscal year ended August 31, 1990.
(2) Incorporated herein by reference to the identical exhibit filed as part of
The Price Company's Form 10-K for the fiscal year ended August 31, 1991.
</TABLE>
(b) Financial Statement Schedules
<TABLE>
<S> <C>
Price Enterprises, Inc.
Schedule XI -- Real Estate and Accumulated Depreciation
</TABLE>
Financial Statement Schedules other than those referred to above have been
omitted because they are not applicable or not required or because the
information is included elsewhere in the financial statements or the notes
thereto.
II-4
<PAGE>
ITEM 22. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in
the registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial BONA FIDE offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial BONA FIDE offering thereof.
(c) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(d) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11 or 13 of this form, within one business day of receipt of such
request, and to send the incorporated documents by first class mail or other
equally prompt means. This includes information contained in documents filed
subsequent to the effective date of the registration statement through the date
of responding to the request.
(e) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this post-effective amendment to the registration statement on
Form S-4 to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of San Diego, State of California, on December 1, 1994.
PRICE ENTERPRISES, INC.
By: /s/_ROBERT E. PRICE
-----------------------------------
Name: Robert E. Price
Title: Chairman of the Board,
President and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
post-effective amendment to the registration statement on Form S-4 has been
signed below by the following persons in the capacities and on the dates
indicated.
SIGNATURE TITLE DATE
- ---------------------------------- ------------------------ ------------------
* Director, Chairman of
- ---------------------------------- the Board, President and December 1, 1994
Robert E. Price Chief Executive Officer
* Chief Financial Officer
- ---------------------------------- and Chief Accounting December 1, 1994
Daniel T. Carter Officer
*
- ---------------------------------- Director and Vice December 1, 1994
Paul A. Peterson Chairman of the Board
*
- ---------------------------------- Director December 1, 1994
James D. Sinegal
*By: /s/ROBERT E. PRICE
Robert E. Price
ATTORNEY-IN-FACT
II-6
<PAGE>
EXHIBIT 3.1(A)
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
PRICE ENTERPRISES, INC.
Price Enterprises, Inc., a corporation organized and existing under and by
virtue of the General Corporation Law of the State of Delaware, does hereby
certify:
FIRST: That by unanimous written consent of the Board of Directors of Price
Enterprises, Inc., resolutions were duly adopted setting forth a proposed
amendment of the Certificate of Incorporation of said corporation, declaring
said amendment to be advisable and seeking the consent of the sole stockholder
of said corporation to said amendment. The resolution setting forth the proposed
amendment is as follows:
"RESOLVED, that the Certificate of Incorporation of this corporation be
amended by changing the Article thereof numbered "FOURTH" so that, as
amended, said Article shall be and read as follows:
'FOURTH: The total number of shares of stock which the Corporation shall
have the authority to issue is 27,000,000, shares of Common Stock, each
having a par value of $.0001.' "
SECOND: That thereafter, pursuant to resolution of its Board of Directors, a
written consent of the sole stockholder of said corporation was executed in
accordance with Section 228 of the General Corporation Law of the State of
Delaware.
THIRD: That said amendment was duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
FOURTH: That said amendment shall be executed, acknowledged, filed and
recorded in accordance with Section 103 of the General Corporation Law of the
State of Delaware.
IN WITNESS WHEREOF, said Price Enterprises, Inc. has caused this certificate
to be signed by Robert E. Price, its President, this 24th day of October, 1994.
BY: _________/s/_ROBERT E. PRICE________
President
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in the Registration Statement on Form S-4, as amended by
Post-Effective Amendment No. 1, and Prospectus of Price Enterprises, Inc. and
the Offering Circular of Price/Costco, Inc., as amended by the Supplement, of
our reports dated November 14, 1994 included in the Form 10-K of PriceCostco,
Inc. for the fiscal year ended August 28, 1994 and to all references to our firm
included therein.
ARTHUR ANDERSEN LLP
Seattle, Washington
December 1, 1994
<PAGE>
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG LLP
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated September 12, 1994 included in the Registration
Statement on Form S-4 of Price Enterprises, Inc., as amended by Post-Effective
Amendment No. 1, and the related Prospectus of Price Enterprises, Inc. and
Offering Circular of Price/Costco, Inc., as amended by the Supplement.
ERNST & YOUNG LLP
San Diego, California
December 1, 1994
<PAGE>
EXHIBIT 99.2
LETTER OF TRANSMITTAL
TO ACCOMPANY CERTIFICATES OF
COMMON STOCK OF
PRICE/COSTCO, INC.
TENDERED PURSUANT TO THE OFFERING CIRCULAR/PROSPECTUS DATED NOVEMBER 21, 1994
AND THE SUPPLEMENT DATED DECEMBER __, 1994
THE EXCHANGE OFFER WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME,
ON TUESDAY, DECEMBER 20, 1994, UNLESS EXTENDED.
To: FIRST INTERSTATE BANK OF WASHINGTON, N.A., EXCHANGE AGENT
<TABLE>
<S> <C> <C>
BY MAIL: BY OVERNIGHT DELIVERY: BY HAND (ONLY):
First Interstate Bank of First Interstate Bank of First Interstate Bank of
Washington, N.A. Washington, N.A. Washington, N.A.
c/o MSTS c/o MSTS Stock Transfer, 14th Floor
P.O. Box 845 Attn: Reorg. Dept., 1st Floor 999 Third Ave.
Midtown Station 85 Challenger Rd. Seattle, WA 98104
New York, NY 10018 Ridgefield Park, NJ 07660 or
Special Services Section
26610 West Agoura Road
Calabasas, CA 91302
or
120 Broadway, 33rd Floor
New York, NY 10271
</TABLE>
FOR INFORMATION CALL:
1-800-223-2064
<PAGE>
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
Ladies and Gentlemen:
Reference is made to the Offering Circular/Prospectus, dated November 21,
1994 (the "Offering Circular/Prospectus"), of Price/Costco, Inc.
("PriceCostco"), the Supplement, dated December __, 1994 (the "Supplement"), and
this Letter of Transmittal (the "Letter of Transmittal"), receipt of which is
hereby acknowledged, which together constitute PriceCostco's offer (the
"Exchange Offer") to exchange one share of common stock, par value $.0001 per
share ("Price Enterprises Common Stock"), of Price Enterprises, Inc. for each
share of common stock, par value $.01 per share ("PriceCostco Common Stock"), of
PriceCostco properly tendered pursuant to the Exchange Offer, up to a maximum of
27 million shares of Price Enterprises Common Stock.
The Exchange Offer will expire at 12:00 midnight, New York City time, on
December 20, 1994, subject to extension by PriceCostco by notice to the Exchange
Agent as herein provided (the "Expiration Date"). In the event of such
extension, the term "Expiration Date" shall mean the time and date on which the
Exchange Offer as so extended shall expire.
Upon the terms and subject to the conditions of the Exchange Offer, the
undersigned hereby tenders to PriceCostco the shares of PriceCostco Common Stock
represented by the certificate(s) described below (the "PriceCostco Shares").
Subject to, and effective upon, the acceptance for exchange of the PriceCostco
Shares tendered herewith, the undersigned hereby sells, assigns and transfers
to, or upon the order of, PriceCostco, all right, title and interest in and to
the PriceCostco Shares. The undersigned hereby irrevocably constitutes and
appoints the Exchange Agent as the true and lawful attorney-in-fact of the
undersigned (with full knowledge that said Exchange Agent also acts as the agent
of PriceCostco) with respect to the PriceCostco Shares with full power of
substitution (such power of attorney being deemed to be an irrevocable power
coupled with an interest) to: (a) deliver the PriceCostco Shares or transfer
ownership of the PriceCostco Shares on the account books maintained by The
Depository Trust Company ("DTC"), the Midwest Securities Trust Company ("MSTC")
or the Philadelphia Securities Depository Trust Company ("PHILADEP") and
deliver, in any such case, all accompanying evidences of transfer and
authenticity to or upon the order of PriceCostco upon receipt by the Exchange
Agent, as the undersigned's agent, of certificate(s) representing shares of
Price Enterprises Common Stock ("Price Enterprises Certificate(s)") to which the
undersigned is entitled upon the acceptance for exchange by PriceCostco of such
PriceCostco Shares under the Exchange Offer; (b) present certificate(s)
representing such PriceCostco Shares for transfer on the books of PriceCostco
and (c) receive all benefits and otherwise exercise all rights of beneficial
ownership of the PriceCostco Shares, all in accordance with the terms of the
Exchange Offer.
The undersigned hereby represents and warrants that the undersigned has full
power and authority to tender, sell, assign and transfer the PriceCostco Shares
tendered hereby and that PriceCostco will acquire good and unencumbered title
thereto, free and clear of all liens, restrictions, charges and encumbrances and
not subject to any adverse claim when the same are accepted for exchange by
PriceCostco. The undersigned will, upon request, execute and deliver any
additional documents deemed by the Exchange Agent or PriceCostco to be necessary
or desirable to complete the sale, assignment and transfer of the PriceCostco
Shares tendered hereby. All authority conferred or agreed to be conferred in
this Letter of Transmittal and every obligation of the undersigned hereunder
shall be binding upon the successors, assigns, heirs, executors, administrators,
trustees in bankruptcy and legal representatives of the undersigned and shall
not be affected by, and shall survive, the death or incapacity of the
undersigned. This tender may be withdrawn only in accordance with the procedures
set forth in the Offering Circular/Prospectus and the Instructions contained in
this Letter of Transmittal.
The undersigned understands that if more than 27 million shares of
PriceCostco Common Stock are validly tendered and not withdrawn in the Exchange
Offer in accordance with "THE EXCHANGE OFFER" section of the Offering
Circular/Prospectus, the PriceCostco Shares so tendered and not withdrawn shall
be accepted for exchange on a pro rata basis.
Unless otherwise indicated under "Special Issuance and Delivery
Instructions" below, please send (i) Price Enterprises Certificate(s) to which
the undersigned is entitled, (ii) if applicable, a check in lieu of a fractional
share equal to such fraction multiplied by the average closing price per share
of Price Enterprises Common Stock on The Nasdaq Stock Market's National Market
during the ten trading days immediately following the date of distribution of
shares of Price Enterprises Common Stock by PriceCostco and (iii) if applicable,
certificate(s) representing any shares of PriceCostco Common Stock not tendered
by the undersigned or any PriceCostco Shares not accepted for exchange by
PriceCostco at the address shown below. The undersigned understands that
stockholders who deliver PriceCostco Shares by book-entry transfer ("Book-Entry
Holders") may request that any shares of PriceCostco Common Stock not tendered
or any PriceCostco Shares not accepted for exchange be returned by crediting the
account maintained by DTC, MSTC or PHILADEP as such Book-Entry Holder may
designate by making an appropriate entry under "Special Issuance and Delivery
Instructions." The undersigned recognizes that PriceCostco has no obligation
pursuant to the "Special Issuance and Delivery Instructions" to transfer any
PriceCostco Shares from the name of the registered holder thereof if PriceCostco
does not accept for exchange the PriceCostco Shares.
<PAGE>
THE UNDERSIGNED, BY COMPLETING THE BOX BELOW AND SIGNING THIS LETTER OF
TRANSMITTAL, WILL BE DEEMED TO HAVE TENDERED SHARES OF PRICECOSTCO COMMON STOCK
REPRESENTED BY THE CERTIFICATE(S) DESCRIBED BELOW.
PLEASE SIGN HERE
(TO BE COMPLETED BY ALL TENDERING STOCKHOLDERS)
(SEE INSTRUCTIONS 1 AND 3)
X_______________________________________________________________________________
X_______________________________________________________________________________
Signature(s) of Owner(s)
AREA CODE AND TEL. NO.:____________________
Must be signed by the registered holder(s) as the name(s) appear(s) on the
PriceCostco Certificate(s) or on a security position listing or by person(s)
authorized to become registered holder(s) by endorsements and documents
transmitted herewith. If signature is by a trustee, executor, administrator,
guardian, officer or other person acting in a fiduciary or representative
capacity, please set forth full title. SEE INSTRUCTION 3.
Name(s): _______________________________________________________________________
_________________________________________________________________________
(Please Print)
Capacity: ______________________________________________________________________
Address: _______________________________________________________________________
_________________________________________________________________________
(Include Zip Code)
SIGNATURE GUARANTEE
Signature(s) Guaranteed by an Eligible Institution: ____________________________
(if required by INSTRUCTION 3) (Authorized Signature)
______________________________________________________________________________
(Title)
______________________________________________________________________________
(Name of Firm)
Dated: ____________________________, 199_
<PAGE>
PLEASE READ THE ENTIRE LETTER OF TRANSMITTAL
CAREFULLY BEFORE CHECKING ANY BOX BELOW
This Letter of Transmittal is to be used either if the certificate(s)
representing PriceCostco Shares are to be forwarded herewith or, unless an
Agent's Message is utilized, if tenders are to be made by book-entry transfer to
the account maintained by the Exchange Agent at DTC, MSTC or PHILADEP. Delivery
of documents to DTC, MSTC or PHILADEP does not constitute delivery to the
Exchange Agent.
Your bank or broker can assist you in completing this form. The Instructions
included with this Letter of Transmittal must be followed. Questions and
requests for assistance or for additional copies of the Offering
Circular/Prospectus, the Supplement and this Letter of Transmittal may be
directed to the Information Agent at the address indicated below.
List below the certificate(s) representing shares of PriceCostco Common
Stock to which this Letter of Transmittal relates. If the space provided below
is inadequate, the certificate numbers and number of shares represented thereby
should be listed on a separate signed schedule affixed hereto.
<TABLE>
<CAPTION>
DESCRIPTION OF CERTIFICATE(S)
NUMBER OF
SHARES
REPRESENTED NUMBER OF
NAME(S) AND ADDRESS(ES) OF REGISTERED HOLDER(S) CERTIFICATE BY SHARES
(PLEASE FILL IN, IF BLANK) NUMBER(S)* CERTIFICATE(S)* TENDERED**
<S> <C> <C> <C>
TOTAL
* NEED NOT BE COMPLETED BY BOOK-ENTRY HOLDERS (SEE BELOW).
** UNLESS OTHERWISE INDICATED IN THIS COLUMN, A HOLDER WILL BE DEEMED TO HAVE TENDERED ALL OF THE
SHARES OF PRICECOSTCO COMMON STOCK REPRESENTED BY THE CERTIFICATE(S) INDICATED IN THE SECOND
COLUMN. SEE INSTRUCTION 2.
</TABLE>
<PAGE>
/ / CHECK HERE IF THE CERTIFICATE(S) REPRESENTING TENDERED PRICECOSTCO SHARES
ARE ENCLOSED HEREWITH.
/ / CHECK HERE IF TENDERED PRICECOSTCO SHARES ARE BEING DELIVERED BY BOOK-ENTRY
TRANSFER MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH A TRUST
COMPANY SPECIFIED BELOW AND COMPLETE THE FOLLOWING:
Name of Tendering Institution: ____________________________________________
/ / DTC / / MSTC / / PHILADEP (check one) Account Number: _________________
Transaction Code Number: __________________________________________________
/ / CHECK HERE IF THE CERTIFICATE(S) REPRESENTING TENDERED PRICECOSTCO SHARES
ARE BEING DELIVERED PURSUANT TO A NOTICE OF GUARANTEED DELIVERY AND
COMPLETE THE FOLLOWING (SEE INSTRUCTION 1):
Name of Registered Owner(s): ______________________________________________
Date of Execution of Notice of Guaranteed Delivery: _______________________
Name of Institution that guaranteed delivery: _____________________________
/ / DTC / / MSTC / / PHILADEP (check one if applicable)
Account Number (if delivered by book-entry transfer): _____________________
___________________________________________________________________________
<TABLE>
<S> <C>
SPECIAL ISSUANCE AND DELIVERY
INSTRUCTIONS
(SEE INSTRUCTIONS 3 AND 4)
To be completed ONLY if shares of
PriceCostco Common Stock not tendered or
any PriceCostco Shares not accepted for
exchange, Price Enterprises
Certificate(s) and/or any check for
fractional shares issued in connection
therewith are to be issued in the name
of someone other than the undersigned or
if shares of PriceCostco Common Stock
delivered by book-entry transfer that
are not tendered or any PriceCostco
Shares not accepted for exchange are to
be returned by credit to an account
maintained by DTC, MSTC or PHILADEP.
Issue and mail:
(check appropriate box(es)):
/ / Price Enterprises Certificate(s) to:
/ / PriceCostco Certificate(s) to:
/ / Credit untendered PriceCostco
Certificate(s) delivered by
book-entry transfer to the
/ / DTC, / / MSTC or / / PHILADEP
(check one) account set forth below:
Name(s) ________________________________
(Please Print)
________________________________
(Please Print)
Address: _______________________________
_______________________________________
Zip Code
_______________________________________
(DTC, MSTC, or PHILADEP Account Number)
_______________________________________
Employer Identification or Social
Security No.
</TABLE>
<TABLE>
<S> <C>
SPECIAL DELIVERY
INSTRUCTIONS
(SEE INSTRUCTIONS 3 AND 4)
To be completed ONLY if shares of
PriceCostco Common Stock not tendered or
any PriceCostco Shares not accepted for
exchange, Price Enterprises
Certificate(s) and/or any check for
fractional shares issued in connection
therewith are to be sent to someone
other than the undersigned, or to the
undersigned at an address other than
that shown in the box entitled
"Description of Certificate(s)."
Issue and mail:
(check appropriate box(es)):
/ / Price Enterprises Certificate(s) to:
/ / PriceCostco Certificate(s) to:
Name(s) ________________________________
(Please Print)
_______________________________________
(Please Print)
Address: _______________________________
_______________________________________
Zip Code
_______________________________________
Employer Identification or Social
Security No.
</TABLE>
<PAGE>
TO BE COMPLETED BY ALL TENDERING STOCKHOLDERS
(SEE INSTRUCTION 5)
PAYOR'S NAME: PRICE/COSTCO, INC.
<TABLE>
<S> <C> <C>
PART 1 -- PLEASE PROVIDE YOUR TIN Social Security Number
SUBSTITUTE
FORM W-9 IN THE BOX AT RIGHT AND CERTIFY
Department of the Treasury, BY SIGNING AND DATING BELOW.
Internal Revenue Service OR
Employer Identification Number
Payor's Request for
Taxpayer Identification
Part 2 -- Awaiting TIN / /
Number (TIN)
CERTIFICATION -- UNDER THE PENALTIES OF PERJURY, I CERTIFY THAT (1) the number shown on this form is my
correct taxpayer identification number (or I am waiting for a number to be issued to me) and (2) I am not
subject to backup withholding either because (a) I am exempt from backup withholding, (b) I have not been
notified by the Internal Revenue Service that I am subject to backup withholding as a result of failure to
report all interest or dividends, or (c) the Internal Revenue Service has notified me that I am no longer
subject to backup withholding.
</TABLE>
Signature_______________________________ Date______________________________
You must cross out item (2) above if you have been notified by the Internal
Revenue Service that you are currently subject to backup withholding because of
underreporting interest or dividends on your tax return.
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU WROTE "APPLIED FOR" IN PART I
OF THE SUBSTITUTE FORM W-9.
CERTIFICATE OF AWAITING TAXPAYER
IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification number has
not been issued to me, and either (i) I have mailed or delivered an application
to receive a taxpayer identification number to the appropriate Internal Revenue
Service Center or Social Security Administration office or (ii) I intend to mail
or deliver an application in the near future. I understand that if I do not
provide a taxpayer identification number by the time of payment, I may be
subject to backup withholding in an amount equal to 31% of the gross proceeds
resulting from the Exchange Offer until I provide a number.
Signature_______________________________ Date______________________________
<PAGE>
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER
1. DELIVERY OF THIS LETTER OF TRANSMITTAL AND PRICECOSTCO CERTIFICATE(S)
This Letter of Transmittal is to be used either if the certificate(s)
representing PriceCostco Shares are to be forwarded herewith or, unless an
Agent's Message (as defined in the Offering Circular/Prospectus in "THE EXCHANGE
OFFER -- Procedures for Tendering") is utilized, if tenders are to be made
pursuant to the procedures for book-entry transfer set forth in the Offering
Circular/Prospectus under "THE EXCHANGE OFFER -- Procedures for Tendering" or if
the PriceCostco Shares will be tendered pursuant to the guaranteed delivery
procedures set forth in the Offering Circular/Prospectus under "THE EXCHANGE
OFFER -- Guaranteed Delivery Procedure." The certificate(s) representing
PriceCostco Shares, or confirmation of any book-entry transfer into the Exchange
Agent's account at DTC, MSTC, or PHILADEP of PriceCostco Shares tendered
electronically, as well as a properly completed and duly executed copy of this
Letter of Transmittal or a facsimile thereof, and any other documents required
by this Letter of Transmittal, must be received by the Exchange Agent at one of
its addresses set forth herein on or prior to the Expiration Date. The method of
delivery of this Letter of Transmittal, the certificate(s) representing
PriceCostco Shares and any other required documents is at the election and risk
of holder, but, except as otherwise provided below, the delivery will be deemed
made only when actually received or confirmed by the Exchange Agent. If
certificate(s) representing PriceCostco Shares are sent by mail, it is suggested
that the mailing be made sufficiently in advance of the Expiration Date to
permit delivery to the Exchange Agent on or before the Expiration Date by
registered mail with return receipt requested, properly insured.
Holders whose certificate(s) representing PriceCostco Shares are not
immediately available or who cannot deliver their certificate(s) and all other
required documents to the Exchange Agent on or prior to the Expiration Date may
tender their PriceCostco Shares pursuant to the guaranteed delivery procedure
set forth in the Offering Circular under "THE EXCHANGE OFFER -- Guaranteed
Delivery Procedure." Pursuant to such procedure: (i) such tender must be made by
or through an Eligible Institution (as defined in the Offering
Circular/Prospectus); (ii) prior to the Expiration Date, the Exchange Agent must
have received from such Eligible Institution a properly completed and duly
executed Notice of Guaranteed Delivery (by telegram, telex, facsimile
transmission, mail or hand delivery) setting forth the name and address of the
holder and the PriceCostco Shares tendered, stating that the tender is being
made thereby and guaranteeing that within five New York Stock Exchange trading
days after the Expiration Date, the certificate(s) representing such PriceCostco
Shares and any other documents required by this Letter of Transmittal will be
deposited by the Eligible Institution with the Exchange Agent; and (iii) the
certificate(s) representing the PriceCostco Shares, or a confirmation of a
book-entry transfer of such PriceCostco Shares into the Exchange Agent's account
at DTC, MSTC, or PHILADEP as described above, together with a properly completed
and duly executed Letter of Transmittal (or manually signed facsimile) and any
required signature guarantees, or an Agent's Message in connection with a
book-entry transfer, and all other documents required by this Letter of
Transmittal, must be received by the Exchange Agent within five New York Stock
Exchange trading days after the Expiration Date, all as provided in the Offering
Circular/Prospectus under "THE EXCHANGE OFFER -- Guaranteed Delivery Procedure."
See "THE EXCHANGE OFFER" section of the Offering Circular/Prospectus.
2. PARTIAL TENDERS; WITHDRAWALS.
If less than all of the shares of PriceCostco Common Stock evidenced by any
certificate(s) are to be tendered, the tendering holder should fill in the
number of shares to be tendered in the box entitled "Number of Shares Tendered."
A reissued certificate representing the number of shares of PriceCostco Common
Stock not tendered will be sent to such holder, unless otherwise provided in the
appropriate box on this Letter of Transmittal, as soon as practicable after the
Expiration Date. The entire number of shares of PriceCostco Common Stock
represented by any certificate(s) delivered to the Exchange Agent will be deemed
to have been tendered unless otherwise indicated.
Any holder of PriceCostco Shares who has tendered PriceCostco Shares may
withdraw the tender at any time prior to 12:00 midnight, New York City time, on
the Expiration Date, and, unless such tender has been previously accepted, at
any time after the expiration of 40 business days from the commencement of the
Exchange Offer, by delivery of written notice of withdrawal, to the Exchange
Agent.
To be effective, a written, telegraphic or facsimile transmission notice of
withdrawal must be timely received by the Exchange Agent, must have a guaranteed
signature included thereon (unless not required by the terms set forth in
Instruction 3) and must specify the name of the person having tendered the
PriceCostco Shares to be withdrawn and the number of shares of PriceCostco
Common Stock to be withdrawn. If the certificate(s) representing PriceCostco
Shares have been delivered or otherwise identified to the Exchange Agent, the
name of the registered holder and the serial numbers of the particular
certificate(s) must also be so furnished to the Exchange Agent as aforesaid
prior to the physical release of the certificate(s) representing the withdrawn
PriceCostco Shares. If PriceCostco Shares have been tendered pursuant to the
procedures for book-entry tender as set forth in the Offering
Circular/Prospectus under the caption "THE EXCHANGE OFFER -- Procedures for
Tendering," any notice of withdrawal must also specify the name and number of
the account at DTC, MSTC or PHILADEP to be credited with the withdrawn
PriceCostco Shares. Withdrawals of tenders of PriceCostco Shares may not be
rescinded, and any PriceCostco Shares withdrawn will thereafter be deemed not
validly tendered for purposes of the Exchange Offer; PROVIDED, HOWEVER, that
withdrawn PriceCostco Shares may be retendered by again following one of the
procedures described in the Offering Circular/ Prospectus under the caption "THE
EXCHANGE OFFER -- Withdrawal Rights" at any time prior to 12:00 midnight, New
York City time, on the Expiration Date.
3. SIGNATURES ON THIS LETTER OF TRANSMITTAL, STOCK POWERS AND ENDORSEMENTS;
GUARANTEE OF SIGNATURES.
If this Letter of Transmittal is signed by the registered holder of the
PriceCostco Shares tendered hereby, the signature must correspond exactly with
the name as written on the face of the certificate(s) representing the
PriceCostco Shares without any change whatsoever.
<PAGE>
If any of the PriceCostco Shares tendered hereby are registered in the name
of two or more joint owners, all such owners must sign this Letter of
Transmittal.
If any tendered PriceCostco Shares are registered in different names, it
will be necessary to complete, sign and submit as many separate copies of this
Letter of Transmittal as there are different registrations of certificates.
When this Letter of Transmittal is signed by the registered holder or
holders of the PriceCostco Shares listed and tendered hereby, no endorsements of
certificates or separate stock powers are required. If, however, Price
Enterprises Certificate(s) are to be issued, or certificate(s) for any
untendered shares of PriceCostco Common Stock are to be reissued, to a person
other than the registered holder, then endorsements of any certificates
transmitted hereby or separate stock powers are required.
If this Letter of Transmittal is signed by a person other than the
registered holder or holders of any PriceCostco Shares listed, the
certificate(s) representing such PriceCostco Shares must be endorsed or
accompanied by appropriate stock powers, in either case signed exactly as the
name or names of the registered holder or holders appear on such certificate(s).
If this Letter of Transmittal or any certificates or stock powers are signed
by trustees, executors, administrators, guardians, attorneys-in-fact, officers
of corporation or others acting in a fiduciary or representative capacity, such
persons should indicate when signing, and, unless waived by PriceCostco, proper
evidence satisfactory to PriceCostco of their authority to so act must be
submitted.
ENDORSEMENTS ON CERTIFICATE(S) OR SIGNATURES ON STOCK POWERS REQUIRED BY
THIS INSTRUCTION 3 MUST BE GUARANTEED BY AN ELIGIBLE INSTITUTION.
SIGNATURES ON THIS LETTER OF TRANSMITTAL NEED NOT BE GUARANTEED BY AN
ELIGIBLE INSTITUTION, PROVIDED THE PRICECOSTCO SHARES ARE TENDERED: (I) BY A
REGISTERED HOLDER OF SUCH PRICECOSTCO SHARES (WHICH TERM, FOR PURPOSES OF THIS
LETTER OF TRANSMITTAL, SHALL INCLUDE ANY PARTICIPANT IN DTC, MSTC, OR PHILADEP
WHOSE NAME APPEARS ON A SECURITY POSITION LISTING AS THE OWNER OF PRICECOSTCO
SHARES) WHO HAS NOT COMPLETED THE BOX ENTITLED "SPECIAL ISSUANCE AND DELIVERY
INSTRUCTIONS" OR "SPECIAL DELIVERY INSTRUCTIONS" ON THIS LETTER OF TRANSMITTAL;
OR (II) FOR THE ACCOUNT OF AN ELIGIBLE INSTITUTION.
4. SPECIAL ISSUANCE AND DELIVERY INSTRUCTIONS.
Tendering holders should indicate in the applicable box the name and address
to which Price Enterprises Certificate(s), a check for cash, if any, in lieu of
fractional interests and/or substitute certificate(s) for shares of PriceCostco
Common Stock not tendered or any PriceCostco Shares not accepted for exchange
are to be issued or sent, if different from the name and address of the person
signing this Letter of Transmittal. In the case of issuance in a different name,
the employer identification or social security number of the person named must
also be indicated. Book-Entry Holders may request that shares of PriceCostco
Common Stock not exchanged be credited to the account at DTC, MSTC, or PHILADEP
designated below in the box entitled "Description of PriceCostco
Certificate(s)."
5. TAXPAYER IDENTIFICATION NUMBER.
Federal income tax law requires that a holder whose tendered PriceCostco
Shares are accepted for exchange must provide PriceCostco (as payor) with his or
her correct taxpayer identification number ("TIN"),which, in the case of a
holder who is an individual, is his or her social security number. If
PriceCostco is not provided with the correct TIN or an adequate basis for
exemption, the holder may be subject to backup withholding in an amount equal to
31% of the gross proceeds resulting from the Exchange Offer. If withholding
results in an overpayment of taxes, a refund may be obtained.
Exempt holders (including, among others, all corporations and certain
foreign individuals) are not subject to these backup withholding and reporting
requirements. See the enclosed Guidelines for Certification of Taxpayer
Identification Number and Substitute Form W-9 for additional instructions.
To prevent backup withholding, each tendering holder must provide his or her
correct TIN by completing the "Substitute Form W-9" set forth herein, certifying
that the TIN provided is correct (or that such holder is awaiting a TIN) and
that (i) the holder is exempt from backup withholding, (ii) the holder has not
been notified by the Internal Revenue Service that he or she is subject to
backup withholding as a result of failure to report all interest or dividends or
(iii) the Internal Revenue Service has notified the holder that he or she is no
longer subject to backup withholding. In order to satisfy the Exchange Agent
that a foreign individual qualifies as an exempt recipient, such holders must
submit a statement signed under penalty of perjury attesting to such exempt
status. Such statements may be obtained from the Exchange Agent. If the
certificate(s) representing PriceCostco Shares are in more than one name or are
not in the name of the actual owner, consult the enclosed guidelines for
information on which TIN to report. If you do not have a TIN, consult the
enclosed guidelines for instructions on applying for a TIN, check the box in
Part 2 of the Substitute Form W-9, and write "applied for" in lieu of your TIN.
If you do not provide your TIN to the payor within 60 days, backup withholding
will begin and continue until you furnish your TIN to the payor.
6. TRANSFER TAXES.
PriceCostco will pay all transfer taxes, if any, applicable to the transfer
and sale of PriceCostco Shares to it or its order pursuant to the Exchange
Offer. If, however, certificate(s) for shares of PriceCostco Common Stock not
tendered are to be delivered to, or are to be registered or issued in the name
of, any person other than the registered holder of the PriceCostco Shares
tendered hereby, or if tendered PriceCostco Shares are registered in the name of
any person other than the person signing this Letter of Transmittal, or if a
transfer tax is imposed for any reason other than the transfer and sale of
PriceCostco Shares to PriceCostco or its order pursuant to the Exchange Offer,
the amount of any such transfer taxes whether imposed on the registered holder
or any other persons will be payable by the tendering holder. If satisfactory
evidence of payment of such taxes or exemption therefor is not submitted
herewith, the amount of such transfer taxes will be billed directly to such
tendering holder.
EXCEPT AS PROVIDED IN THIS INSTRUCTION 6, IT WILL NOT BE NECESSARY FOR
TRANSFER TAX STAMPS TO BE AFFIXED TO THE CERTIFICATE(S) REPRESENTING PRICECOSTCO
SHARES LISTED IN THIS LETTER OF TRANSMITTAL.
<PAGE>
7. WAIVER OF CONDITIONS.
PriceCostco reserves the absolute right to waive satisfaction of any of the
conditions enumerated in the Offering Circular/Prospectus.
8. NO CONDITIONAL OFFERS.
No alternative, conditional, irregular or contingent tenders will be
accepted. All tendering stockholders, by execution of this Letter of Transmittal
(or a facsimile thereof), shall waive any right to receive notice of the
acceptance for exchange of their PriceCostco Shares.
Neither PriceCostco, the Exchange Agent nor any other person is obligated to
give notice of defects or irregularities in any tender, nor shall any of them
incur any liability for failure to give any such notice.
9. MUTILATED, LOST, STOLEN OR DESTROYED PRICECOSTCO CERTIFICATES.
If any certificate representing shares of PriceCostco Common Stock has been
destroyed, lost or stolen, the stockholder must (i) furnish to the Exchange
Agent evidence, satisfactory to it in its discretion, of the ownership of and
the destruction, loss or theft of such certificate, (ii) furnish to the Exchange
Agent indemnity, satisfactory to it in its discretion and (iii) comply with such
other reasonable regulations as the Exchange Agent may prescribe. Any holder
whose certificate(s) representing shares of PriceCostco Common Stock have been
mutilated, lost, stolen or destroyed should contact the Exchange Agent at the
address indicated above for further instructions.
10. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES.
Questions relating to the procedure for tendering, as well as requests for
additional copies of the Offering Circular/ Prospectus, the Supplement and this
Letter of Transmittal, may be directed to the Information Agent at the address
indicated below.
THE INFORMATION AGENT FOR THE EXCHANGE OFFER IS:
[GEORGESON LOGO]
CALL TOLL FREE: 1-800-223-2064
WALL STREET PLAZA
NEW YORK, NEW YORK 10005
TELEPHONE: (212) 509-6240
BANKS AND BROKERS CALL
TELEPHONE: (212) 440-9800
