-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AmsvEMynKUmLCj6vD3GrrRs2xiuh/nFgRFIbrGqtPYw4jvKSdCez+PON2MSZdkOA +2Ac6AxE0BDlMRn63dWKHQ== 0000912057-95-010555.txt : 19951202 0000912057-95-010555.hdr.sgml : 19951202 ACCESSION NUMBER: 0000912057-95-010555 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19950903 FILED AS OF DATE: 19951130 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: PRICE/COSTCO INC CENTRAL INDEX KEY: 0000909832 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-VARIETY STORES [5331] IRS NUMBER: 330572969 STATE OF INCORPORATION: CA FISCAL YEAR END: 0830 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-20355 FILM NUMBER: 95597552 BUSINESS ADDRESS: STREET 1: 4649 MORENA BOULEVARD CITY: SAN DIEGO STATE: CA ZIP: 92117 BUSINESS PHONE: 6195815350 MAIL ADDRESS: STREET 1: 4241 JUTLAND DRIVE #300 CITY: SAN DIEGO STATE: CA ZIP: 92117 10-K405 1 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K --------------- (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) FOR THE FISCAL YEAR ENDED SEPTEMBER 3, 1995 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) FOR THE TRANSITION PERIOD FROM ____________ TO ____________. COMMISSION FILE NUMBER 0-20355 ------------------------ PRICE/COSTCO, INC. (Exact name of registrant as specified in its charter) DELAWARE 33-0572969 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 999 LAKE DRIVE, ISSAQUAH, WA 98027 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (206) 313-8100 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock $.01 Par Value ------------------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes _X_ No ___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by nonaffiliates of the registrant at October 31, 1995, was $2,863,618,868. The number of shares outstanding of the registrant's common stock as of October 31, 1995, was 195,235,264. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Company's Proxy Statement for the Annual Meeting of Stockholders to be held on February 1, 1996 are incorporated by reference into Part III of this Form 10-K. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PRICE/COSTCO, INC. ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 3, 1995
PAGE ---- PART I Item 1. Business.................................................... 3 Item 2. Properties.................................................. 7 Item 3. Legal Proceedings........................................... 7 Item 4. Submission of Matters to a Vote of Security Holders......... 8 Item 4A. Executive Officers of the Registrant........................ 9 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters........................................ 10 Item 6. Selected Financial Data..................................... 11 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................. 14 Item 8. Financial Statements........................................ 19 Item 9. Change in and Disagreements with Accountants on Accounting and Financial Disclosure................................... 19 PART III Item 10. Directors and Executive Officers of the Registrant.......... 19 Item 11. Executive Compensation...................................... 19 Item 12. Security Ownership of Certain Beneficial Owners and Management................................................. 19 Item 13. Certain Relationships and Related Transactions.............. 19 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........................................................ 19
2 PART I ITEM 1 -- BUSINESS Price/Costco, Inc. ("PriceCostco" or the "Company") began operations in 1976 in San Diego, California as The Price Company ("Price"), pioneering the membership warehouse concept. Costco Wholesale Corporation ("Costco") began operations in 1983 in Seattle, Washington with a similar membership warehouse concept. PriceCostco was formed in October 1993 as a result of a merger of Price and Costco -- a combination that resulted in a company with over $15 billion in sales, more than 200 warehouse clubs in operation and in excess of 40,000 employees throughout the United States and Canada (See "Note 2 -- Merger of Price and Costco"). In the second quarter of fiscal 1995, the Company completed the spin-off of Price Enterprises, Inc. ("Price Enterprises"). Price Enterprises consisted of PriceCostco's discontinued non-club commercial real estate operations and certain other assets. (See "Note 3 -- Spin-off of Price Enterprises, Inc. and Discontinued Operations"). GENERAL PriceCostco operates membership warehouses based on the concept that offering members very low prices on a limited selection of nationally branded and selected private label products in a wide range of merchandise categories will produce rapid inventory turnover and high sales volumes. This rapid inventory turnover, when combined with the operating efficiencies achieved by volume purchasing, efficient distribution and reduced handling of merchandise in no-frills, self-service warehouse facilities, enables PriceCostco to operate profitably at significantly lower gross margins than traditional wholesalers, discount retailers and supermarkets. PriceCostco buys virtually all of its merchandise directly from manufacturers for shipment either directly to PriceCostco's selling warehouses or to a consolidation point where various shipments are combined so as to minimize freight and handling costs. As a result, PriceCostco eliminates many of the costs associated with multiple step distribution channels, which include purchasing from distributors as opposed to manufacturers, use of central receiving, storing and distributing warehouses and storage of merchandise in locations off the sales floor. By providing this more cost effective means of distributing goods, PriceCostco meets the needs of business customers who otherwise would pay a premium for small purchases and for the distribution services of traditional wholesalers, and who cannot otherwise obtain the full range of their product requirements from any single source. In addition, these business members will often combine personal shopping with their business purchases. Individuals shopping for their personal needs are primarily motivated by the cost savings on brand name merchandise. PriceCostco's merchandise selection is designed to appeal to both the business and consumer requirements of its members by offering a wide range of nationally branded and selected private label products, often in case, carton or multiple-pack quantities, at attractively low prices. Because of its high sales volume and rapid inventory turnover, PriceCostco generally has the opportunity to receive cash from the sale of a substantial portion of its inventory at mature warehouse operations before it is required to pay all its merchandise vendors, even though PriceCostco takes advantage of early payment terms to obtain payment discounts. As sales in a given warehouse increase and inventory turnover becomes more rapid, a greater percentage of the inventory is financed through payment terms provided by vendors rather than by working capital. PriceCostco's typical warehouse format averages approximately 125,000 square feet. Floor plans are designed for economy and efficiency in the use of selling space, in the handling of merchandise and in the control of inventory. Because shoppers are attracted principally by the availability of low prices on brand name and selected private label goods, PriceCostco's warehouses need not be located on prime commercial real estate sites or have elaborate facilities. 3 By strictly controlling the entrances and exits of its warehouses and by limiting membership to selected groups and businesses, PriceCostco has been able to limit inventory losses to less than one-half of one percent of net sales, well below those of typical discount retail operations. Losses associated with dishonored checks have also been minimal, since individual memberships are limited primarily to members of qualifying groups, and bank information from business members is verified prior to establishing a check purchase limit. Memberships are invalidated at the point of sale for those members who have issued dishonored checks to PriceCostco. PriceCostco's policy is generally to limit advertising and promotional expenses to new warehouse openings and occasional direct mail advertisements to prospective new members. These practices result in lower marketing expenses as compared to typical discount retailers and supermarkets. In connection with new warehouse openings, PriceCostco's marketing teams personally contact businesses in the area who are potential wholesale members. These contacts are supported by direct mailings during the period immediately prior to opening. Potential Gold Star (individual) members are contacted by direct mail generally distributed through credit unions, employee associations and other entities representing the individuals who are eligible for Gold Star membership. After a membership base is established in an area, most new memberships result from word of mouth advertising, follow-up contact by direct mail distributed through regular payroll or other organizational communications to employee groups, and ongoing direct solicitations of prospective wholesale members. PriceCostco's warehouses generally operate on a seven-day, 68-hour week, and are open somewhat longer during the holiday season. Generally, warehouses are open weekdays between 10:00 a.m. and 8:30 p.m. Because these hours of operation are shorter than those of traditional discount grocery retailers and supermarkets, labor costs are lower relative to the volume of sales. Merchandise is generally stored on racks above the sales floor and displayed on pallets containing large quantities of each item, thereby reducing labor required for handling and stocking. In addition, sales are processed through a centralized, automated check-out facility. Items are not individually price marked. Rather, each item is barcoded so it can be scanned into PriceCostco's electronic cash registers. This allows price changes without remarking merchandise. Substantially all manufacturers provide special, larger package sizes and merchandise pre-marked with the item numbers and bar codes. PriceCostco's merchandising strategy is to provide the customer with a broad range of high quality merchandise at prices consistently lower than could be obtained through traditional wholesalers, discount retailers or supermarkets. An important element of this strategy is to carry only those products on which PriceCostco can provide its members significant cost savings. Items which members may request but which cannot be purchased at prices low enough to pass along meaningful cost savings are usually not carried. PriceCostco seeks to limit specific items in each product line to fast selling models, sizes and colors and therefore carries only an average of approximately 3,500 to 4,500 active stockkeeping units ("SKU's") per warehouse as opposed to discount retailers and supermarkets which normally stock 40,000 to 60,000 SKU's or more. These practices are consistent with PriceCostco's membership policies of satisfying both the business and personal shopping needs of its wholesale members, thereby encouraging high volume shopping. Many consumable products are offered for sale in case, carton or multiple-pack quantities only. Appliances, equipment and tools often feature commercial and professional models. PriceCostco's policy is to accept returns of merchandise within a reasonable time after purchase. 4 The following table indicates the approximate percentage of net sales accounted for by each major category of items sold by PriceCostco during fiscal 1995, 1994 and 1993:
1995 1994 1993 ----------- ----------- ----------- SUNDRIES (including candy, snack foods, health and beauty aids, tobacco, alcoholic beverages, soft drinks and cleaning and institutional supplies)... 32% 32% 32% FOOD (including dry and fresh foods and institutionally packaged foods)...... 32 31 31 HARDLINES (including major appliances, video and audio tape, electronics, tools, office supplies, furniture and automotive supplies).................. 22 22 21 SOFTLINES (including apparel, domestics, cameras, jewelry, housewares, books and small appliances)....................................................... 11 12 13 OTHER........................................................................ 3 3 3 --- --- --- 100% 100% 100% --- --- --- --- --- ---
PriceCostco has direct buying relationships with many producers of national brand name merchandise. No significant portion of merchandise is obtained by PriceCostco from any one of these or other suppliers. PriceCostco has not experienced any difficulty in obtaining sufficient quantities of merchandise, and believes that if one or more of its current sources of supply became unavailable, it would be able to obtain alternative sources without experiencing a substantial disruption of its business. PriceCostco also purchases different national brand name or selected private label merchandise of the same product, as long as cost, quality and customer demand are comparable. PriceCostco is incorporated in the State of Delaware, and reports on a 52/53 week fiscal year, consisting of 13 four-week periods and ending on the Sunday nearest the end of August. The first, second and third quarters consist of three periods each, and the fourth quarter consists of four periods (five weeks in the thirteenth period in a 53-week year). There is no material seasonal impact on PriceCostco's operations, except an increased level of sales and earnings during the Christmas holiday season. MEMBERSHIP POLICY PriceCostco's membership format is designed to reinforce customer loyalty and provide a continuing source of membership fee revenue. PriceCostco has two primary types of members; Business and Gold Star (individual members). Businesses, including individuals with a business license, retail sales license or other evidence of business existence, may become Business members. PriceCostco promotes Business membership through its merchandise selection and its membership marketing programs. Business members generally pay an annual membership fee of $30 for the primary membership card with additional membership cards available for an annual fee of $15. Individual memberships are available to employees of federal, state and local governments, financial institutions, corporations, utility and transportation companies, public and private educational institutions, and other selected organizations. Individual members generally pay an annual membership fee of $35 which includes a spouse card. As of September 3, 1995, PriceCostco had approximately 3.3 million Business memberships and approximately 6.7 million Gold Star memberships. Members can utilize their memberships at any Price Club or Costco Wholesale location. LABOR As of September 3, 1995, PriceCostco had approximately 52,000 employees, about 50% of which were part time. Substantially all of Price's 11,000 hourly employees in California, Connecticut, 5 Maryland, Massachusetts, New Jersey, New York and one Price Club warehouse in Virginia are represented by the International Brotherhood of Teamsters. All remaining hourly Price employees and all employees of Costco are non-union. PriceCostco considers its employee relations to be good. COMPETITION The Company operates in the rapidly changing and highly competitive merchandising industry. When Price pioneered the membership warehouse club concept in 1976, the dominant companies selling comparable lines of merchandise were department stores, grocery stores and traditional wholesalers. Since then, new merchandising concepts and aggressive marketing techniques have led to a more intense and focused competitive environment. Wal-Mart and Kmart have become the largest retailers in the United States and have recently expanded into food merchandising. Target has also emerged as a significant retail competitor. Approximately 850 warehouse clubs exist across the U.S. and Canada, including the 240 warehouses operated by the Company, and every major metropolitan area has some, if not several, club operations. Low cost operators selling a single category or narrow range of merchandise, such as Home Depot, Office Depot, Petsmart, Toys-R-Us, Circuit City and Barnes & Noble Books, have significant market share in their respective categories. New forms of retailing involving modern technology are boosting sales in stores such as The Sharper Image, while home shopping is becoming increasingly popular. Likewise, in the institutional food business, companies such as Smart & Final, which operates in Arizona and California, are capturing an increasingly greater share of the institutional food business from wholesale operators and others; and many supermarkets now offer food lines in bulk sizes and at prices comparable to those offered by the Company. (See "Item 7 -- Management's Discussion and Analysis of Financial Condition and Results of Operations") REGULATION Certain state laws require that the Company apply minimum markups to its selling prices for specific goods, such as tobacco products and alcoholic beverages, and prohibit the sale of specific goods, such as tobacco and alcoholic beverages, at different prices in one location. While compliance with such laws may cause the Company to charge somewhat higher prices than it otherwise would charge, other retailers are also typically governed by the same restrictions, and the Company believes that compliance with such laws does not have a material adverse effect on its operations. It is the policy of the Company to sell at lower than manufacturers' suggested retail prices. Some manufacturers attempt to maintain the resale price of their products by refusing to sell to the Company or to other purchasers that do not adhere to suggested retail prices. To date, the Company believes that it has not been materially affected by its inability to purchase directly from such manufacturers. Both federal and state legislation is proposed from time to time which, if enacted, would restrict the Company's ability to purchase goods or extend the application of laws enabling the establishment of minimum prices. The Company cannot predict the effect on its business of the enactment of such federal or state legislation. 6 ITEM 2 -- PROPERTIES WAREHOUSE PROPERTIES At September 3, 1995, PriceCostco operated warehouse clubs in 21 states, 7 Canadian provinces and the United Kingdom under the "Price Club" and "Costco Wholesale" names. The following is a summary of owned and leased warehouses by region: NUMBER OF WAREHOUSES
OWN LAND AND LEASE LAND AND/OR BUILDING BUILDING GRAND TOTALS -------------------- -------------------- -------------------- PRICE COSTCO TOTAL PRICE COSTCO TOTAL PRICE COSTCO TOTAL ----- ------ ----- ----- ------ ----- ----- ------ ----- UNITED STATES............................ 65 89 154 15 22 37 80 111 191 CANADA................................... 15 18 33 9 3 12 24 21 45 UNITED KINGDOM........................... -- 4 4 -- -- -- -- 4 4 ----- ------ ----- ----- ------ ----- ----- ------ ----- Grand Totals........................... 80 111 191 24 25 49 104 136 240 ----- ------ ----- ----- ------ ----- ----- ------ ----- ----- ------ ----- ----- ------ ----- ----- ------ -----
The following schedule shows warehouse openings (net of warehouse closings) by region for the past five fiscal years and expected openings (net of closings) through December 31, 1995:
TOTAL OTHER WAREHOUSES OPENINGS BY FISCAL YEAR UNITED STATES CANADA INTERNATIONAL TOTAL IN OPERATION - ---------------------------------------- ------------- ------- -------------- ------- ------------ 1990 and prior.......................... 107 12 -- 119 119 1991.................................... 13 8 -- 21 140 1992.................................... 27 3 -- 30 170 1993.................................... 23 7 -- 30 200 1994.................................... 12 7 2 21 221 1995.................................... 9 8 2 19 240 1996 (through 12/31/95)................. 2 7 1 10 250 --- ------- --- ------- Total............................... 193 52 5(a) 250 --- ------- --- ------- --- ------- --- -------
- ------------------------ (a) As of September 3, 1995, the Company operated (through a 50%-owned joint venture) thirteen warehouses in Mexico (one opened in fiscal 1992, two opened in fiscal 1993, five opened in fiscal 1994, and five opened in fiscal 1995). These warehouses are not included in the number of warehouses open in any period because the joint venture is accounted for on the equity basis and therefore its operations are not consolidated in the Company's financial statements. The Company's headquarters are located in Issaquah, Washington. Additionally, the Company maintains regional buying and administrative offices, operates regional cross-docking facilities for the consolidation and distribution of certain shipments to the warehouses and operates various processing and packaging facilities to support ancillary businesses. DISCONTINUED OPERATIONS - NON-CLUB REAL ESTATE SEGMENT As a result of the Exchange Transaction, the Company's business consists primarily of its warehouse club operations in the United States, Canada and the United Kingdom, and the Company has ceased to have any significant real estate activities that are not directly related to its warehouse club business. ITEM 3 -- LEGAL PROCEEDINGS On April 6, 1992, Price was served with a Complaint in an action entitled FECHT ET AL. V. THE PRICE COMPANY ET AL., Case No. 92-497, United States District Court, Southern District of California (the "Court"). Subsequently, on April 22, 1992, Price was served with a First Amended Complaint in the action. The case was dismissed without prejudice by the Court on September 21, 1992, on the grounds the plaintiffs had failed to state a sufficient claim against defendants. 7 Subsequently, plaintiffs filed a Second Amended Complaint which, in the opinion of the Company's counsel, alleged substantially the same facts as the prior complaint. The Complaint alleged violation of certain state and federal laws during the time period prior to Price's earnings release for the second quarter of fiscal year 1992. The case was dismissed with prejudice by the Court on March 9, 1993, on grounds the plaintiffs had failed to state a sufficient claim against defendants. Plaintiffs filed an Appeal in the Ninth Circuit Court of Appeals. In an opinion dated November 20, 1995, the Ninth Circuit reversed and remanded the lawsuit. The Company believes that this lawsuit is without merit and is vigorously defending the lawsuit. The Company does not believe that the ultimate outcome of such litigation will have a material adverse effect on the Company's financial position or results of operations. On December 19, 1994, a Complaint was filed against PriceCostco in an action entitled SNYDER V. PRICE/COSTCO, INC. ET. AL., Case No. C94-1874Z, United States District Court, Western District of Washington. On January 4, 1995, a Complaint was filed against PriceCostco in an action entitled BALSAM V. PRICE/COSTCO, INC. ET. AL., Case No. C95-0009Z, United States District Court, Western District of Washington. The Snyder and Balsam Cases were subsequently consolidated and on March 15, 1995, plaintiffs' counsel filed a First Amended And Consolidated Class Action And Derivative Complaint. On November 9, 1995, plaintiffs' counsel filed a Second Amended And Consolidated Class Action And Derivative Complaint. The Second Amended Complaint alleges violation of certain state and federal laws arising from the spin-off and Exchange Transaction and the merger between Price and Costco. The Company believes that this lawsuit is without merit and is vigorously defending against this lawsuit. The Company does not believe that the ultimate outcome of such litigation will have a material adverse effect on the Company's financial position or results of operations. The Company is involved from time to time in claims, proceedings and litigation arising from its business and property ownership. The Company does not believe that any such claim, proceeding or litigation, either alone or in the aggregate, will have a material adverse effect on the Company's financial position or results of operations. ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company's annual meeting is scheduled for 10:00 a.m. on February 1, 1996 at The Pan Pacific Hotel in Anaheim, California. Matters to be voted on will be included in the Company's proxy statement to be filed with the Securities and Exchange Commission and distributed to stockholders prior to the meeting. 8 ITEM 4A -- EXECUTIVE OFFICERS OF THE REGISTRANT The following is a list of the names, ages and positions of the executive officers of the registrant.
NAME AGE POSITION WITH COMPANY - -------------------- --- ------------------------------ James D. Sinegal 59 President and Chief Executive Officer Jeffrey H. Brotman 53 Chairman of the Board Richard D. DiCerchio 52 Executive Vice President -- Merchandising, Distribution, Construction and Marketing Richard A. Galanti 39 Executive Vice President and Chief Financial Officer Franz E. Lazarus 48 Executive Vice President -- International Operations David B. Loge 53 Executive Vice President -- Manufacturing and Ancillary Businesses Walter C. Jelinek 43 Executive Vice President, Chief Operating Officer -- Northern Division Edward B. Maron 68 Executive Vice President, Chief Operating Officer -- Canadian Division Joseph P. Portera 42 Executive Vice President, Chief Operating Officer -- Eastern Division Dennis R. Zook 46 Executive Vice President, Chief Operating Officer -- Southern Division
James D. Sinegal has been President, Chief Executive Officer and a director of the Company since October 1993 upon consummation of the merger of Costco Wholesale Corporation ("Costco") and The Price Company (the "Merger"). From its inception until 1993, he was President and Chief Operating Officer of Costco and served as Chief Executive Officer from August 1988 until October 1993. Mr. Sinegal is a co-founder of Costco and has been a director of Costco since its inception. Mr. Sinegal is a director of Price Enterprises, Inc. ("Price Enterprises") but his term as a director of Price Enterprises will expire as of that company's next election of directors on January 16, 1996. Mr. Sinegal does not intend to stand for reelection to Price Enterprise's Board of Directors. Jeffrey H. Brotman is a native of the Pacific Northwest and is a 1967 graduate of the University of Washington Law School. Mr. Brotman was elected Chairman of the Board of the Company on December 21, 1994. Mr. Brotman was the Vice Chairman of the Board of the Company from October 1993 (upon consummation of the Merger) until December 21, 1994. He is a co-founder of Costco and founder of a number of other specialty retail chains. Mr. Brotman is a director of Seafirst Bank, Starbucks Corp., The Sweet Factory and Garden Botanika. Richard D. DiCerchio has been Executive Vice President -- Merchandising, Distribution, Construction and Marketing and a director of the Company since October 1993 (upon consummation of the Merger) and, until mid-August 1994, also served as Executive Vice President, Chief Operating Officer -- Northern Division. He was elected Chief Operating Officer -- Western Region of Costco in August 1992 and was elected Executive Vice President and director of Costco in April 1986. From June 1985 to April 1986, he was Senior Vice President, Merchandising of Costco. He joined Costco as Vice President, Operations in May 1983. Richard A. Galanti has been Executive Vice President and Chief Financial Officer of PriceCostco since the Merger and has been a Director of PriceCostco since January 1995. He was Senior Vice President, Chief Financial Officer and Treasurer of Costco since January 1985, having joined Costco as Vice President - -- Finance in March 1984. From 1978 to February 1984, Mr. Galanti was an Associate with Donaldson, Lufkin & Jenrette Securities Corporation. 9 Franz E. Lazarus was named Executive Vice President -- International Operations in September, 1995, prior to which he had served as Executive Vice President, Chief Operating Officer -- Northern Division of PriceCostco since August 1994 and Executive Vice President, Chief Operating Officer -- Eastern Division since the Merger. He was named Executive Vice President, Chief Operating Officer -- East Coast Operations of Costco in August 1992. Mr. Lazarus joined Costco in November 1983 and has held various positions prior to his current position. David B. Loge has been Executive Vice President -- Manufacturing and Ancillary Businesses since August 1994. Mr. Loge joined Price as a Director of Price Club Industries in March 1989 and became Vice President of Price and President of Price Club Industries in December 1990. Prior to joining Price, he served as Vice President of Operations of Sundale Beverage in Belmont, California. Walter C. ("Craig") Jelinek has been Executive Vice President, Chief Operating Officer -- Northern Division since September 1995. He had been Senior Vice President, Operations -- Northwest Region since September 1992. From May 1986 to September 1994 he was Vice President, Regional Operations Manager -- Los Angeles Region and has held various management positions since joining Costco in April 1984. Edward B. Maron has been Executive Vice President, Chief Operating Officer - -- Canadian Division of PriceCostco since the Merger. He had been Senior Vice President -- Canadian Division of Costco since April 1990. He has held various management positions since joining Costco in June 1985. Joseph P. Portera has been Executive Vice President, Chief Operating Officer - -- Eastern Division of PriceCostco since August, 1994. He was Senior Vice President, Operations -- Northern California Region from October, 1993 to August 1994. From August 1991 to October 1993 he was Senior Vice President, Merchandising -- Non Foods of Costco, and has held various management positions since joining Costco in April 1984. Dennis R. Zook has been Executive Vice President, Chief Operating Officer -- Southern Division of PriceCostco since the Merger. He was Executive Vice President of Price since February 1989. Mr. Zook became Vice President of West Coast Operations of Price in October 1988 and has held various management positions since joining Price in October 1981. PART II ITEM 5 -- MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Trading in PriceCostco Common Stock commenced on October 22, 1993, and is quoted on The Nasdaq Stock Market's National Market under the symbol "PCCW." Prior to October 21, 1993, Price Common Stock was quoted on The Nasdaq Stock Market's National Market under the symbol "PCLB" and Costco Common Stock was quoted on The Nasdaq Stock Market's National Market under the symbol "COST." In the Merger between Price and Costco, which occurred on October 21, 1993, each share of Price Common Stock, par value $.10 per share, was exchanged for 2.13 shares of PriceCostco Common Stock and each share of Costco Common Stock, par value $.0033 per share, was exchanged for one share of PriceCostco Common Stock. 10 The following table sets forth the high and low sales prices of PriceCostco Common Stock for the period October 22, 1993 through October 31, 1995, and Price Common Stock and Costco Common Stock for the periods indicated. All Price Common Stock data below has been adjusted to reflect the 2.13 exchange ratio in the Merger. The quotations are as reported in published financial sources.
PRICE COSTCO PRICECOSTCO COMMON STOCK COMMON STOCK COMMON STOCK ------------------ ------------------ ------------------ HIGH LOW HIGH LOW HIGH LOW ------- ------- ------- ------- ------- ------- Calendar Quarters -- 1993 First Quarter............................................. 18 3/4 14 3/4 25 1/4 18 1/2 -- -- Second Quarter............................................ 18 1/2 13 1/4 19 3/4 15 3/4 -- -- Third Quarter............................................. 18 14 3/4 18 1/2 15 -- -- Fourth Quarter (through October 21, 1993)................. 19 7/8 17 1/2 19 5/8 16 3/4 -- -- Fourth Quarter (October 22, 1993 through December 31, 1993)..................................................... -- -- -- -- 21 3/8 17 1/8 Calendar Quarters -- 1994 First Quarter............................................. -- -- -- -- 21 5/8 16 7/8 Second Quarter............................................ -- -- -- -- 18 1/4 13 Third Quarter............................................. -- -- -- -- 16 1/2 13 3/4 Fourth Quarter............................................ -- -- -- -- 16 3/4 12 1/2 Calendar Quarters -- 1995 First Quarter............................................. -- -- -- -- 15 1/8 12 Second Quarter............................................ -- -- -- -- 16 5/8 13 5/16 Third Quarter............................................. -- -- -- -- 19 1/2 16 1/4 Fourth Quarter (through October 31, 1995)................. -- -- -- -- 18 1/8 16 3/8
On October 31, 1995, the last reported sales price per share of PriceCostco Common Stock was $17.00. On October 31, 1995, the Company had 9,025 stockholders of record. DIVIDEND POLICY PriceCostco does not pay regular dividends and does not anticipate the declaration of a cash dividend in the forseeable future. Under its two revolving credit agreements, PriceCostco is generally permitted to pay dividends in any fiscal year up to an amount equal to 50% of its consolidated net income for that fiscal year. ITEM 6 -- SELECTED FINANCIAL DATA SELECTED FINANCIAL AND OPERATING DATA The following tables set forth selected financial and operating data for the ten fiscal years in the period ended September 3, 1995 for PriceCostco, giving effect to the Merger using the pooling-of-interests method of accounting and treating the non-club real estate segment as a discontinued operation. This selected financial and operating data should be read in conjunction with "Item 7 - -- Management's Discussion and Analysis of Financial Condition and Results of Operations," and the consolidated financial statements of PriceCostco for fiscal 1995. 11 PRICE/COSTCO, INC. SELECTED CONSOLIDATED FINANCIAL DATA (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
53 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS ENDED ENDED ENDED ENDED ENDED ENDED SEPTEMBER 3, AUGUST 28, AUGUST 29, AUGUST 30, SEPTEMBER 1, SEPTEMBER 2, 1995 1994 1993 1992 1991 1990 ------------ ----------- ----------- ----------- ------------ ------------ OPERATING DATA Revenue Net sales............................. $17,905,926 $16,160,911 $15,154,685 $13,820,380 $11,813,509 $9,346,099 Membership fees and other............. 341,360 319,732 309,129 276,998 228,742 185,144 ------------ ----------- ----------- ----------- ------------ ------------ Total revenue......................... 18,247,286 16,480,643 15,463,814 14,097,378 12,042,251 9,531,243 Operating expenses Merchandise costs..................... 16,225,848 14,662,891 13,751,153 12,565,463 10,755,823 8,518,951 S,G&A expenses........................ 1,555,588 1,425,549 1,314,660 1,128,898 934,120 719,446 Preopening expenses................... 25,018 24,564 28,172 25,595 16,289 11,691 Provision for estimated warehouse closing costs........................ 7,500 7,500 5,000 2,000 1,850 6,000 ------------ ----------- ----------- ----------- ------------ ------------ Operating income...................... 433,332 360,139 364,829 375,422 334,169 275,155 Other income (expense) Interest expense...................... (67,911) (50,472) (46,116) (35,525) (26,041) (18,769) Interest income and other............. 2,783 13,888 17,750 28,958 33,913 19,239 Provision for merger and restructuring expenses............................. -- (120,000) -- -- -- -- ------------ ----------- ----------- ----------- ------------ ------------ Income from continuing operations before provision for income taxes............. 368,204 203,555 336,463 368,855 342,041 275,625 Provision for income taxes.............. 150,963 92,657 133,620 145,833 134,748 107,899 ------------ ----------- ----------- ----------- ------------ ------------ Income from continuing operations....... 217,241 110,898 202,843 223,022 207,293 167,726 Discontinued operations: Income (loss), net of tax........... -- (40,766) 20,404 19,385 11,566 6,854 Loss on disposal.................... (83,363) (182,500) -- -- -- -- Extraordinary items..................... -- -- -- -- -- -- ------------ ----------- ----------- ----------- ------------ ------------ Net income (loss)....................... $ 133,878 $ (112,368) $ 223,247 $ 242,407 $ 218,859 $ 174,580 ------------ ----------- ----------- ----------- ------------ ------------ ------------ ----------- ----------- ----------- ------------ ------------ Per Share Data -- Fully Diluted Income from continuing operations..... $ 1.05 $ 0.51 $ 0.92 $ 0.98 $ 0.93 $ 0.79 Discontinued Operations: Income (loss), net of tax........... -- (0.19) 0.08 0.08 0.05 0.03 Loss on Disposal.................... (0.37) (0.83) -- -- -- -- Extraordinary items................... -- -- -- -- -- -- ------------ ----------- ----------- ----------- ------------ ------------ Net income (loss)..................... $ 0.68 $ (0.51) $ 1.00 $ 1.06 $ 0.98 $ 0.82 ------------ ----------- ----------- ----------- ------------ ------------ ------------ ----------- ----------- ----------- ------------ ------------ Shares used in calculation............ 224,079 219,334 240,162 245,090 234,202 219,532 53 WEEKS 52 WEEKS 52 WEEKS 52 WEEKS ENDED ENDED ENDED ENDED SEPTEMBER 3, AUGUST 28, AUGUST 30, AUGUST 31, 1989 1988 1987 1986 ------------ ---------- ---------- ---------- OPERATING DATA Revenue Net sales............................. $7,844,539 $6,042,159 $4,606,352 $3,337,361 Membership fees and other............. 157,621 125,985 98,201 70,695 ------------ ---------- ---------- ---------- Total revenue......................... 8,002,160 6,168,144 4,704,553 3,408,056 Operating expenses Merchandise costs..................... 7,168,907 5,531,626 4,198,768 3,040,115 S,G&A expenses........................ 590,465 458,013 355,178 256,407 Preopening expenses................... 11,685 6,509 12,784 4,031 Provision for estimated warehouse closing costs........................ 1,609 4,000 -- -- ------------ ---------- ---------- ---------- Operating income...................... 229,494 167,996 137,823 107,503 Other income (expense) Interest expense...................... (24,583) (20,949) (13,840) (8,249) Interest income and other............. 24,275 22,341 20,936 21,281 Provision for merger and restructuring expenses............................. -- -- -- -- ------------ ---------- ---------- ---------- Income from continuing operations before provision for income taxes............. 229,186 169,388 144,919 120,535 Provision for income taxes.............. 88,742 67,533 68,019 58,162 ------------ ---------- ---------- ---------- Income from continuing operations....... 140,444 101,855 76,900 62,373 Discontinued operations: Income (loss), net of tax........... 3,600 -- -- -- Loss on disposal.................... -- -- -- -- Extraordinary items..................... -- 2,856 1,510 995 ------------ ---------- ---------- ---------- Net income (loss)....................... $ 144,044 $ 104,711 $ 78,410 $ 63,368 ------------ ---------- ---------- ---------- ------------ ---------- ---------- ---------- Per Share Data -- Fully Diluted Income from continuing operations..... $ 0.69 $ 0.56 $ 0.42 $ 0.37 Discontinued Operations: Income (loss), net of tax........... 0.02 -- -- -- Loss on Disposal.................... -- -- -- -- Extraordinary items................... -- 0.02 0.01 0.01 ------------ ---------- ---------- ---------- Net income (loss)..................... $ 0.71 $ 0.58 $ 0.43 $ 0.38 ------------ ---------- ---------- ---------- ------------ ---------- ---------- ---------- Shares used in calculation............ 212,772 181,336 180,887 168,324
12 PRICE/COSTCO, INC. SELECTED CONSOLIDATED FINANCIAL DATA (DOLLARS IN THOUSANDS, EXCEPT WAREHOUSE AND PER SHARE DATA)
SEPTEMBER 3, AUGUST 28, AUGUST 29, AUGUST 30, SEPTEMBER 1, SEPTEMBER 2, SEPTEMBER 3, AUGUST 28, 1995 1994 1993 1992 1991 1990 1989 1988 ------------ ---------- ---------- ---------- ------------ ------------ ------------ ---------- BALANCE SHEET DATA Working capital (deficit).............. $ 9,381 $ (113,009) $ 127,312 $ 281,592 $ 304,703 $ 14,342 $ 103,252 $ 208,569 Property and equipment, net.................... 2,535,593 2,146,396 1,966,601 1,704,052 1,183,432 935,767 752,912 511,784 Total assets............ 4,437,419 4,235,659 3,930,799 3,576,543 2,986,094 2,029,931 1,740,332 1,445,814 Short-term debt......... 75,725 149,340 23,093 -- -- 139,414 114,000 -- Long-term debt and capital lease obligations, net....... 1,094,615 795,492 812,576 813,976 500,440 199,506 234,017 327,760 Stockholders' equity (a)(b)................. 1,530,744 1,684,960 1,796,728 1,593,943 1,429,703 988,458 777,730 585,598 WAREHOUSES IN OPERATION Beginning of year....... 221 200 170 140 119 104 84 77 Opened.................. 24 29 37 31 23 19 20 10 Closed.................. (5) (8) (7) (1) (2) (4) -- (3) ------------ ---------- ---------- ---------- ------------ ------------ ------------ ---------- End of Year............. 240 221 200 170 140 119 104 84 ------------ ---------- ---------- ---------- ------------ ------------ ------------ ---------- ------------ ---------- ---------- ---------- ------------ ------------ ------------ ---------- AUGUST 30, AUGUST 31, 1987 1986 ---------- ----------- BALANCE SHEET DATA Working capital (deficit).............. $ 244,783 $ 173,765 Property and equipment, net.................... 411,590 234,813 Total assets............ 1,205,843 769,799 Short-term debt......... -- -- Long-term debt and capital lease obligations, net....... 333,503 124,475 Stockholders' equity (a)(b)................. 468,045 384,275 WAREHOUSES IN OPERATION Beginning of year....... 47 36 Opened.................. 30 11 Closed.................. -- -- ---------- ----------- End of Year............. 77 47 ---------- ----------- ---------- -----------
- ------------------------ (a) In 1989 Price paid to its shareholders a one-time special cash dividend of $74,621 or $1.50 per share of Price Common Stock. (b) In 1989 stockholders' equity reflects a $20,100 reduction of retained earnings related to conforming Price's accounting for income tax method to Costco's accounting for income tax method as of fiscal 1989. 13 ITEM 7 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS COMPARISON OF FISCAL 1995 (53 WEEKS) AND FISCAL 1994 (52 WEEKS): (DOLLARS IN THOUSANDS, EXCEPT EARNINGS PER SHARE) Net operating results for fiscal 1995 reflect net income of $133,878 or $.68 per share (fully diluted), as compared to a fiscal 1994 net loss of $112,368 or $.51 per share (fully diluted). The fiscal 1995 results include a non-cash charge of $83,363 or $.37 per share, reflecting the final calculation for the loss on the disposal of the discontinued real estate operations following the completion of the Spin-off of Price Enterprises. The fiscal 1994 loss of $112,368 includes the provision for merger and restructuring costs of $120,000 pre-tax ($80,000 or $.36 per share after tax), a provision included in loss from discontinued operations of $80,500 pre-tax ($47,500 or $.22 per share after tax) arising from a change in accounting estimates caused by the Exchange Transaction, and a non-cash charge of $182,500, or $.83 per share, reflecting the estimated loss on disposal of the discontinued non-club real estate operations. CONTINUING OPERATIONS Income from continuing operations for fiscal 1995 was $217,241 or $1.05 per share, compared to income from continuing operations for fiscal 1994 of $110,898 or $.51 per share. Excluding the $120,000 pre-tax ($80,000 after tax) merger and restructuring charge, income from continuing operations for fiscal 1994 would have been $190,898 or $.87 per share. Net sales increased 10.8% to $17,905,926 in fiscal 1995 from $16,160,911 in fiscal 1994. This increase was due to: (i) first year sales at the 24 new warehouses opened during fiscal 1995, which increase was partially offset by 5 warehouses closed during fiscal 1995 that were in operation during fiscal 1994; (ii) increased sales at 29 warehouses that were opened in fiscal 1994 and that were in operation for the entire 1995 fiscal year; (iii) higher sales at existing locations opened prior to fiscal 1994; and (iv) one additional week of sales related to having a 53-week fiscal year. Changes in prices did not materially impact sales levels. Comparable sales, that is sales in warehouses open for at least a year, increased at a 2% annual rate in fiscal 1995, compared to a negative 3% annual rate during fiscal 1994. The improvement in comparable sales levels in fiscal 1995, as compared to fiscal 1994, reflects new marketing and merchandising efforts, including the rollout of fresh foods and various ancillary businesses to certain existing locations. Membership fees and other revenue increased 6.8% from $319,732, or 1.98% of net sales, in fiscal 1994 to $341,360, or 1.91% of net sales in fiscal 1995. This increase is primarily due to membership sign-ups at the 24 new warehouses opened in fiscal 1995 and one additional week of membership fees related to having a 53-week fiscal year. Gross margin (defined as net sales minus merchandise costs) increased 12.2% from $1,498,020, or 9.27% of net sales in fiscal 1994 to $1,680,078, or 9.38% of net sales in fiscal 1995. Gross margin as a percentage of net sales increased due to greater purchasing power realized since the Merger and the expanded use of the Company's depot facilities. The gross margin figures reflect accounting for most U.S merchandise inventories on the last-in, first-out (LIFO) method. For fiscal 1995 there was a $9,500 LIFO provision, or $.03 per share (fully diluted), decreasing income after tax due to the use of the LIFO method compared to the first-in, first-out (FIFO) method. This compares to a $2,600 LIFO benefit or $.01 per share (fully diluted) in fiscal 1994. Selling, general and administrative expenses as a percent of net sales improved from 8.82% during fiscal 1994 to 8.69% during fiscal 1995, reflecting lower expense ratios resulting from improved comparable sales increases, as well as the implementation of front-end scanning and automated receiving at certain existing warehouses, partially offset by higher expenses associated with international expansion and certain ancillary operations. Preopening expenses totaled $25,018 or 0.14% of net sales during fiscal 1995 and $24,564 or 0.15% of net sales during fiscal 1994. During fiscal 1995, the Company opened 24 new warehouses 14 compared to opening 29 new warehouses during fiscal 1994. Fiscal 1995 preopening expenses also included an increased level of costs associated with remodels and expanding fresh foods and ancillary operations at existing warehouses. The Company recorded a pre-tax provision for warehouse closing costs of $7,500 or $.02 per share on an after-tax basis (fully diluted). The provision includes estimated closing costs for certain warehouses, which were or will be replaced by new warehouses, the closing of a regional office and additional costs related to warehouse clubs closed in prior years. Warehouse closing costs were also $7,500 (pre-tax) or $.02 per share in fiscal 1994. Interest expense totaled $67,911 in fiscal 1995, and $50,472 in fiscal 1994. In both fiscal years, interest expense was incurred as a result of the interest on the convertible subordinated debentures and interest on borrowings on the Company's bank lines and commercial paper programs. Interest expense in fiscal 1995 also includes interest on the Senior Notes (as hereafter defined) issued in June, 1995. The increase in interest expense is primarily related to higher borrowings and interest rates under the Company's bank lines and commercial paper programs and the issuance of the Senior Notes. Interest income and other totaled $2,783 in fiscal 1995, and $13,888 in fiscal 1994. This decrease was primarily due to the Company reflecting its share of losses in certain unconsolidated joint ventures, the elimination of interest income on certain notes receivable that were transferred to Price Enterprises as of fiscal 1994 year-end, and an approximate $2,500 pre-tax charge representing the Company's share of foreign currency exchange losses incurred by Price Club Mexico due to Mexico's currency devaluation during fiscal 1995. The $120,000 pre-tax provision for merger and restructuring costs reflected in fiscal 1994 includes direct transaction costs, expenses related to consolidating and restructuring certain functions, the closing of certain facilities and disposal of related properties, severance and employee payouts, write-offs of certain redundant capitalized costs and certain other costs. These costs were provided for in the first quarter of fiscal 1994. For additional information see "Note 2 -- Merger of Price and Costco" to the consolidated financial statements. In fiscal 1995 and 1994, the effective income tax rate on income from continuing operations before provision for income taxes was 41.0% (excluding the merger and restructuring charges in fiscal 1994). DISCONTINUED OPERATIONS Income from discontinued real estate operations is not included in operating results for periods subsequent to the announcement date (fourth quarter of fiscal 1994) and through the date of disposal (second quarter of fiscal 1995). The fiscal 1994 loss on discontinued real estate operations (net of operating expenses and taxes) included the results of income-producing properties, gains on sale of property, interest income and a provision of $90,200 pre-tax, of which $80,500 pre-tax ($47,500 after tax or $.22 per share) related to a change in calculating estimated losses for assets which were considered to be economically impaired. This change in accounting estimates resulted from the spin-off of the real estate segment assets into Price Enterprises, and Price Enterprises' decision to pursue business plans and operating strategies as a stand-alone entity which were significantly different than the strategies of the Company. Discontinued operations in fiscal 1995 includes a non-cash charge of $83,363 or $.37 per share, reflecting the final calculation for the loss on disposal of the discontinued real estate operations. Fiscal 1994 includes a $182,500 or $.83 per share charge for the estimated loss on the disposal of the discontinued real estate operations. These charges relate to the transfer of the Company's commercial real estate operations, together with certain other assets, to Price Enterprises as part of the Exchange Transaction. The Exchange Transaction was completed on December 20, 1994, and the estimated loss on disposal was adjusted to actual. For a more detailed discussion of the Exchange Transaction, see "Note 3 -- Spin-off of Price Enterprises, Inc. and Discontinued Operations." 15 COMPARISON OF FISCAL 1994 (52 WEEKS) AND FISCAL 1993 (52 WEEKS): (DOLLARS IN THOUSANDS, EXCEPT EARNINGS PER SHARE) Net operating results for fiscal 1994 reflected a net loss of $112,368 or $.51 per share (fully diluted), as compared to fiscal 1993 net income of $223,247 or $1.00 per share (fully diluted). The fiscal 1994 net loss included the provision for merger and restructuring costs of $120,000 pre-tax ($80,000 or $.36 per share after tax), a non-cash provision of $80,500 pre-tax ($47,500 or $.22 per share after tax) arising from a change in accounting estimates caused by the Exchange Transaction, and a non-cash charge of $182,500, or $.83 per share, reflecting the estimated loss on disposal of the discontinued non-club real estate operations. CONTINUING OPERATIONS Income from continuing operations for fiscal 1994 was $110,898 or $.51 per share, compared to income from continuing operations for fiscal 1993 of $202,843 or $.92 per share. Excluding the $120,000 pre-tax merger and restructuring charge, income from continuing operations for fiscal 1994 would have been $190,898 or $.87 per share. Net sales increased 6.6% to $16,160,911 in fiscal 1994 from $15,154,685 in fiscal 1993. This increase was due to: (i) first year sales at the 29 new warehouses opened during fiscal 1994, which increase was partially offset by eight warehouses closed during fiscal 1994 that were in operation during fiscal 1993; and (ii) increased sales at 37 warehouses that were opened in 1993 and that were in operation for the entire 1994 fiscal year, which increase was partially offset by lower sales at existing locations opened prior to fiscal 1993. Changes in prices did not materially affect sales levels. Comparable sales, that is sales in warehouses open for at least a year, were a negative 3% annual rate in fiscal 1994 -- similar to the negative 3% annual rate during fiscal 1993. The negative rate of comparable sales was attributed to several factors, including the following: the effect of sales cannibalization by opening additional warehouses in existing markets; increased competition in several markets; deflation in several merchandise categories; a generally poor economic environment, especially in California; and a weak Canadian dollar where the Company derived 16% and 15% of net sales in fiscal 1994 and 1993, respectively. Membership fees and other revenue increased 3.4% from $309,129, or 2.04% of net sales, in fiscal 1993 to $319,732, or 1.98% of net sales in fiscal 1994. This increase reflects a continued strong membership base at existing warehouses, membership sign-ups at the 29 new warehouses and an annualized effect of membership fee increases in certain markets implemented in fiscal 1993. Gross margin (defined as net sales minus merchandise costs) increased 6.7% from $1,403,532, or 9.26% of net sales in fiscal 1993 to $1,498,020, or 9.27% of net sales in fiscal 1994. The gross margin figures reflect accounting for merchandise inventory costs on the last-in, first-out (LIFO) method. For fiscal 1994 there was a $2,600 LIFO benefit or $.01 per share (fully diluted) to increase income after tax due to the use of the LIFO method compared to the first-in, first-out (FIFO) method. This compares to a $5,350 LIFO benefit or $.01 per share (fully diluted) in fiscal 1993. Selling, general and administrative expenses as a percent of net sales increased from 8.67% during fiscal 1993 to 8.82% during fiscal 1994, reflecting a combination of comparable unit sales decreases in the 200 warehouses in operation during both fiscal periods; higher expense ratios at the 29 units opened during fiscal 1994 (newer units generally operate at significantly lower annual sales volumes than mature units and, therefore, incur higher expense ratios than mature units); and higher expense factors associated with certain ancillary operations. Preopening expenses totaled $28,172 or 0.19% of net sales during fiscal 1993, and $24,564 or 0.15% of net sales during fiscal 1994. During fiscal 1994, the Company opened 29 new warehouses compared to opening 37 new warehouses during fiscal 1993. The Company recorded a pre-tax provision for warehouse closing costs of $7,500 or $.02 per share on an after-tax basis (fully diluted). The provision included $5,750 (pre-tax) related to settlement of a 16 lease dispute and additional closing costs related to warehouse clubs closed in prior years, and $1,750 (pre-tax) related to the estimated closing costs of six warehouses which were replaced by new warehouses. This compared to $5,000 (pre-tax) or $.01 per share in fiscal 1993. Interest expense totaled $46,116 in fiscal 1993 and $50,472 in fiscal 1994. In both fiscal years interest expense was incurred as a result of the interest on the convertible subordinated debentures and interest on borrowings on the Company's bank lines and commercial paper programs. Interest income and other totaled $17,750 in fiscal 1993, and $13,888 in fiscal 1994. This decrease was primarily due to lower average investment balances and lower interest rates. The effective income tax rate (excluding the merger and restructuring charge and loss on disposal of the discontinued operations) on earnings in fiscal 1994 was 41.0%, compared to 39.7% in the prior year. The Company's effective income tax rate increased due to a higher federal statutory rate implemented in the Company's fourth quarter of fiscal 1993 and by changes in the impact of foreign operations on the effective tax rate. DISCONTINUED OPERATIONS Income from discontinued real estate operations (net of operating expenses and taxes) was $20,404 or $.08 per share in fiscal 1993, compared to a loss from discontinued real estate operations of $40,766 or $.19 per share in fiscal 1994. Discontinued real estate operations include the results of income producing properties, gains on sale of property, and interest income. In fiscal 1994 the results included a provision of $90,200 pre-tax of which $80,500 pre-tax ($47,500 after tax or $.22 per share) related to a change in calculating estimated losses for assets which are considered to be economically impaired. The loss on disposal of the discontinued real estate operations of $182,500 or $.83 per share, reflected in the fourth quarter of fiscal 1994, related to the transfer of the Company's commercial real estate operations, together with certain other assets, to Price Enterprises as part of the Exchange Transaction. For a description of the Exchange Transaction, see "Note 3 -- Spin-off of Price Enterprises, Inc. and Discontinued Operations." RECENT SALES RESULTS PriceCostco's net sales for the eight-week period ended October 29, 1995 were approximately $2,756,000 an increase of 9.2% from approximately $2,524,000 for the same eight-week period of the prior fiscal year. Comparable warehouse sales (sales in warehouses open for at least a year) increased by 3 percent during the eight-week period. LIQUIDITY AND CAPITAL RESOURCES (DOLLARS IN THOUSANDS) PriceCostco's primary requirement for capital is the financing of the land, building and equipment costs for new warehouses plus the costs of initial warehouse operations and working capital requirements, as well as additional capital for international expansion through investments in foreign subsidiaries and joint ventures. In fiscal 1995, cash provided from operations was approximately $278,000. In June 1995, the Company issued $300,000 of 7 1/8% Senior Notes due June 15, 2005 (the "Senior Notes"). The net proceeds from the sale of the Senior Notes were used to repay existing indebtedness incurred under the Company's $500,000 commercial paper program. The Senior Notes indenture contains limitations on the Company's and certain subsidiaries ability to create liens securing indebtedness and to enter certain sale-leaseback transactions. Cash flow from operations, borrowings under the Company's commercial paper program and the proceeds from the Senior Notes provided the primary sources of funds for additions to property and equipment for warehouse clubs and related operations of $531,000 and other investing activities related primarily to investments in unconsolidated joint ventures of $11,500. 17 Expansion plans for the United States and Canada during fiscal 1996 are to open 20-25 new warehouse clubs. The Company also expects to continue expansion of its international operations. To date the Company has opened four warehouses in the United Kingdom through a 60%-owned subsidiary, and plans to open three to four additional United Kingdom units during fiscal 1996. Other markets are being assessed, particularly in the Pacific Rim, and include the planned opening of a warehouse club location in Taiwan during the summer of 1996. PriceCostco and its Mexico-based joint venture partner, Controladora Comercial Mexicana, each own a 50% interest in Price Club Mexico following the Company's acquisition of Price Enterprises' interest in Price Club Mexico in April, 1995. See "Note 4 -- Acquisition of Price Enterprises' Interest in Price Club Mexico" in Notes to Consolidated Financial Statements. As of September 3, 1995, Price Club Mexico operated 13 Price Club warehouses in Mexico. While there can be no assurance that current expectations will be realized, and plans are subject to change upon further review, it is management's current intention to spend an aggregate of approximately $450,000 to $500,000 during fiscal 1996 in the United States and Canada for real estate, construction, remodeling and equipment for warehouse clubs and related operations; and approximately $50,000 to $100,000 for international expansion, including the United Kingdom and other potential ventures. These expenditures will be financed with a combination of cash provided from operations; the use of cash and cash equivalents (which totaled $45,688 at September 3, 1995), short-term borrowings under revolving credit facilities and/or commercial paper facilities, and other financing sources as required. The Company has a domestic multiple-option loan facility with a group of 13 banks, which provides for borrowings of up to $500,000 or standby support for a $500,000 commercial paper program. Of this amount, $250,000 expires on January 30, 1996, and $250,000 expires on January 30, 1998. The interest rate on bank borrowings is based on LIBOR or rates bid at auction by the participating banks. At September 3, 1995, no amounts were outstanding under the loan facility and $51,965 was outstanding under the commercial paper program. The Company expects to renew for an additional one-year term the $250,000 portion of the loan facility expiring on January 30, 1996 at substantially the same terms. In addition, the Company's wholly-owned Canadian subsidiary has a $103,000 commercial paper program supported by a bank credit facility with three Canadian banks, of which $63,000 will expire in April 1996 and $40,000 will expire in April 1999. The interest rate on bank borrowings is based on the prime rate or the "Bankers' Acceptance" rate. At September 3, 1995, no amounts were outstanding under the bank credit facility and $23,760 was outstanding under the Canadian commercial paper program. The Company also has separate letter of credit facilities (for commercial and standby letters of credit), totaling approximately $196,000. The outstanding commitments under these facilities at September 3, 1995 totaled approximately $127,000, including approximately $51,000 in standby letters of credit for workers' compensation requirements. Due to rapid inventory turnover, the Company's operations provide a higher level of supplier trade payables than generally encountered in other forms of retailing. When combined with other current liabilities, the resulting amount typically approaches the current assets needed to operate the business (e.g., merchandise inventories, accounts receivable and other current assets). At September 3, 1995, working capital totaled $9,000 compared to a working capital (deficit) of ($113,000) at August 28, 1994. This increase in net working capital is primarily related to reductions in notes payable of $74,000 as long-term debt proceeds were used to refinance certain short-term borrowings. In fiscal 1994, cash provided from operations was approximately $248,000. These funds, combined with beginning fiscal year balances of cash, cash equivalents and short-term investments, along with borrowings under the Company's commerical paper program were used to finance: 1) additions to property and equipment for warehouse clubs and related operations of $475,000; 2) net inventory 18 investment (merchandise inventories less accounts payable) of $66,000; and 3) other investing activities related primarily to net discontinued operations and investments in unconsolidated joint ventures, which together totaled approximately $73,500. ITEM 8 -- FINANCIAL STATEMENTS Financial statements of PriceCostco are as follows:
PAGE --------- Report of Independent Public Accountants................................................................... 22 Consolidated Balance Sheets, as of September 3, 1995 and August 28, 1994................................... 23 Consolidated Statements of Operations, for the 53 weeks ended September 3, 1995 and the 52 weeks ended August 28, 1994, and August 29, 1993...................................................................... 24 Consolidated Statements of Stockholders' Equity, for the 53 weeks ended September 3, 1995 and the 52 weeks ended August 28, 1994, and August 29, 1993................................................................ 25 Consolidated Statements of Cash Flows, for the 53 weeks ended September 3, 1995 and the 52 weeks ended August 28, 1994, and August 29, 1993...................................................................... 26 Notes to Consolidated Financial Statements................................................................. 27
ITEM 9 -- CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10 -- DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT For information with respect to the executive officers of the Registrant, see Item 4A -- "Executive Officers of the Registrant" at the end of Part I of this report. The information required by this Item concerning the Directors and nominees for Director of the Company is incorporated herein by reference to PriceCostco's Proxy Statement for its Annual Meeting of Stockholders, to be held on February 1, 1996, to be filed with the Commission pursuant to Regulation 14A. ITEM 11 -- EXECUTIVE COMPENSATION The information required by this Item is incorporated herein by reference to PriceCostco's Proxy Statement for its Annual Meeting of Stockholders, to be held on February 1, 1996, to be filed with the Commission pursuant to Regulation 14A. ITEM 12 -- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item is incorporated herein by reference to PriceCostco's Proxy Statement for its Annual Meeting of Stockholders to be held on February 1, 1996, to be filed with the Commission pursuant to Regulation 14A. ITEM 13 -- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is incorporated herein by reference to PriceCostco's Proxy Statement for its Annual Meeting of Stockholders, to be held on February 1, 1996, to be filed with the Commission pursuant to Regulation 14A. PART IV ITEM 14 -- EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Documents filed as part of this report are as follows: 1. Financial Statements: See listing of Financial Statements included as a part of this Form 10-K on Item 8 of Part II. 2. Financial Statement Schedules -- None. (b) No reports on Form 8-K were filed during the last quarter of the period covered by this Annual Report. 3. Exhibits: The required exhibits are included at the end of the Form 10-K Annual Report and are described in the Exhibit Index immediately preceding the first exhibit. 19 SIGNATURES Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. November 22, 1995 Price/Costco, Inc. (Registrant) By /s/ RICHARD A. GALANTI -------------------------------------- Richard A. Galanti EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By /s/ JAMES D. SINEGAL November 22, 1995 ---------------------------------------- James D. Sinegal PRESIDENT, CHIEF EXECUTIVE OFFICER AND DIRECTOR By /s/ JEFFREY H. BROTMAN November 22, 1995 ---------------------------------------- Jeffrey H. Brotman CHAIRMAN OF THE BOARD By /s/ RICHARD D. DICERCHIO November 22, 1995 ---------------------------------------- Richard D. DiCerchio EXECUTIVE VICE PRESIDENT -- MERCHANDISING, DISTRIBUTION, CONSTRUCTION AND MARKETING AND DIRECTOR By /s/ RICHARD A. GALANTI November 22, 1995 ---------------------------------------- Richard A. Galanti EXECUTIVE VICE PRESIDENT, CHIEF FINANCIAL OFFICER AND DIRECTOR (PRINCIPAL FINANCIAL OFFICER) By /s/ DAVID S. PETTERSON November 22, 1995 ---------------------------------------- David S. Petterson SENIOR VICE PRESIDENT AND CONTROLLER (PRINCIPAL ACCOUNTING OFFICER) By /s/ DANIEL BERNARD November 22, 1995 ---------------------------------------- Daniel Bernard DIRECTOR
20 By /s/ HAMILTON E. JAMES November 22, 1995 ---------------------------------------- Hamilton E. James DIRECTOR By /s/ RICHARD M. LIBENSON November 22, 1995 ---------------------------------------- Richard M. Libenson DIRECTOR By /s/ JOHN W. MEISENBACH November 22, 1995 ---------------------------------------- John W. Meisenbach DIRECTOR By /s/ FREDERICK O. PAULSELL November 22, 1995 ---------------------------------------- Frederick O. Paulsell DIRECTOR
21 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Price/Costco, Inc.: We have audited the accompanying consolidated balance sheets of Price/Costco, Inc. (a Delaware corporation) and subsidiaries (PriceCostco) as of September 3, 1995 and August 28, 1994, and the related statements of operations, stockholders' equity and cash flows for the 53-week period ended September 3, 1995, and the 52-week periods ended August 28, 1994 and August 29, 1993. These financial statements are the responsibility of PriceCostco's management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of The Price Company and subsidiaries (Price), which statements reflect total revenues of 51% of the consolidated totals for the 52-week period ended August 29, 1993. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for Price, is based solely on the report of the other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of PriceCostco as of September 3, 1995 and August 28, 1994, and the results of its operations and its cash flows for the 53-week period ended September 3, 1995, and the 52-week periods ended August 28, 1994, and August 29, 1993 in conformity with generally accepted accounting principles. Arthur Andersen LLP Seattle, Washington October 25, 1995 22 PRICE/COSTCO, INC. CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS) ASSETS
AUGUST 28, SEPTEMBER 3, 1995 1994 ----------------- -------------- CURRENT ASSETS Cash and cash equivalents................................................... $ 45,688 $ 53,638 Short-term investments and restricted cash.................................. -- 9,268 Receivables, net............................................................ 146,665 130,278 Merchandise inventories, net................................................ 1,422,272 1,260,476 Other current assets........................................................ 87,694 80,638 ----------------- -------------- Total current assets...................................................... 1,702,319 1,534,298 ----------------- -------------- PROPERTY AND EQUIPMENT Land, land rights, and land improvements.................................... 1,143,860 975,439 Buildings and leasehold improvements........................................ 1,215,706 994,492 Equipment and fixtures...................................................... 624,398 523,310 Construction in progress.................................................... 78,071 78,264 ----------------- -------------- 3,062,035 2,571,505 Less -- accumulated depreciation and amortization........................... (526,442) (425,109) ----------------- -------------- Net property and equipment................................................ 2,535,593 2,146,396 ----------------- -------------- OTHER ASSETS................................................................ 199,507 177,880 DISCONTINUED OPERATIONS --NET ASSETS........................................ -- 377,085 ----------------- -------------- $ 4,437,419 $ 4,235,659 ----------------- -------------- ----------------- -------------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Bank checks outstanding, less cash on deposit............................... $ 12,721 $ 6,804 Notes payable............................................................... 75,725 149,340 Accounts payable............................................................ 1,233,128 1,073,326 Accrued salaries and benefits............................................... 205,236 207,570 Accrued sales and other taxes............................................... 91,843 81,736 Other current liabilities................................................... 74,285 128,531 ----------------- -------------- Total current liabilities................................................. 1,692,938 1,647,307 LONG-TERM DEBT................................................................ 1,094,615 795,492 DEFERRED INCOME TAXES......................................................... 64,293 65,679 OTHER LIABILITIES............................................................. 3,991 7,442 ----------------- -------------- Total liabilities......................................................... 2,855,837 2,515,920 ----------------- -------------- COMMITMENTS AND CONTINGENCIES MINORITY INTEREST............................................................. 50,838 34,779 STOCKHOLDERS' EQUITY Preferred stock $.01 par value; 100,000,000 shares authorized; no shares issued and outstanding..................................................... -- -- Common stock $.01 par value; 900,000,000 shares authorized; 195,164,000 and 217,795,000 shares issued and outstanding.................................. 1,952 2,178 Additional paid-in capital.................................................. 303,989 582,148 Accumulated foreign currency translation.................................... (52,289) (42,580) Retained earnings........................................................... 1,277,092 1,143,214 ----------------- -------------- Total stockholders' equity.................................................. 1,530,744 1,684,960 ----------------- -------------- $ 4,437,419 $ 4,235,659 ----------------- -------------- ----------------- --------------
The accompanying notes are an integral part of these balance sheets. 23 PRICE/COSTCO, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
53 WEEKS ENDED 52 WEEKS ENDED 52 WEEKS ENDED SEPTEMBER 3, AUGUST 28, AUGUST 29, 1995 1994 1993 -------------- -------------- -------------- REVENUE Net sales...................................................... $ 17,905,926 $ 16,160,911 $ 15,154,685 Membership fees and other...................................... 341,360 319,732 309,129 -------------- -------------- -------------- Total revenue................................................ 18,247,286 16,480,643 15,463,814 OPERATING EXPENSES Merchandise costs.............................................. 16,225,848 14,662,891 13,751,153 Selling, general and administrative............................ 1,555,588 1,425,549 1,314,660 Preopening expenses............................................ 25,018 24,564 28,172 Provision for estimated warehouse closing costs................ 7,500 7,500 5,000 -------------- -------------- -------------- Operating income............................................. 433,332 360,139 364,829 OTHER INCOME (EXPENSE) Interest expense............................................... (67,911) (50,472) (46,116) Interest income and other...................................... 2,783 13,888 17,750 Provision for merger and restructuring expenses................ -- (120,000) -- -------------- -------------- -------------- INCOME FROM CONTINUING OPERATIONS BEFORE PROVISION FOR INCOME TAXES................................ 368,204 203,555 336,463 Provision for income taxes..................................... 150,963 92,657 133,620 -------------- -------------- -------------- INCOME FROM CONTINUING OPERATIONS................................ 217,241 110,898 202,843 DISCONTINUED OPERATIONS: Income (loss), net of tax...................................... -- (40,766) 20,404 Loss on disposal............................................... (83,363) (182,500) -- -------------- -------------- -------------- NET INCOME (LOSS)................................................ $ 133,878 $ (112,368) $ 223,247 -------------- -------------- -------------- -------------- -------------- -------------- NET INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE -- PRIMARY: Continuing operations:......................................... $ 1.06 $ 0.51 $ 0.92 -------------- -------------- -------------- -------------- -------------- -------------- FULLY DILUTED: Continuing operations:......................................... $ 1.05 $ 0.51 $ 0.92 Discontinued operations: Income (loss), net of tax.................................... -- (0.19) 0.08 Loss on disposal............................................. (0.37) (0.83) -- -------------- -------------- -------------- Net income (loss).............................................. $ 0.68 $ (0.51) $ 1.00 -------------- -------------- -------------- -------------- -------------- --------------
The accompanying notes are an integral part of these financial statements. 24 PRICE/COSTCO, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE 53 WEEKS ENDED SEPTEMBER 3, 1995 AND THE 52 WEEKS ENDED AUGUST 28, 1994, AND AUGUST 29, 1993 (IN THOUSANDS)
ACCUMULATED COMMON STOCK ADDITIONAL FOREIGN ---------------------- PAID-IN CURRENCY RETAINED SHARES AMOUNT CAPITAL TRANSLATION EARNINGS TOTAL --------- ----------- ----------- ------------ ---------- ---------- BALANCE AT AUGUST 30, 1992................. 216,020 $ 2,160 $ 564,362 $ (4,914) $1,032,335 $1,593,943 Stock options exercised including income tax benefits............................ 1,529 15 13,436 -- -- 13,451 Shares repurchased....................... (475) (4) (6,530) -- -- (6,534) Net income............................... -- -- -- -- 223,247 223,247 Foreign currency translation adjustment.............................. -- -- -- (27,379) -- (27,379) --------- ----------- ----------- ------------ ---------- ---------- BALANCE AT AUGUST 29, 1993................. 217,074 2,171 571,268 (32,293) 1,255,582 1,796,728 Stock options exercised including income tax benefits............................ 748 7 11,376 -- -- 11,383 Shares repurchased....................... (27) -- (496) -- -- (496) Net loss................................. -- -- -- -- (112,368) (112,368) Foreign currency translation adjustment.............................. -- -- -- (10,287) -- (10,287) --------- ----------- ----------- ------------ ---------- ---------- BALANCE AT AUGUST 28, 1994................. 217,795 2,178 582,148 (42,580) 1,143,214 1,684,960 Stock options exercised including income tax benefits............................ 593 6 4,071 -- -- 4,077 Shares exchanged......................... (23,224) (232) (282,230) -- -- (282,462) Net income............................... -- -- -- -- 133,878 133,878 Foreign currency translation adjustment.............................. -- -- -- (9,709) -- (9,709) --------- ----------- ----------- ------------ ---------- ---------- BALANCE AT SEPTEMBER 3, 1995............... 195,164 $ 1,952 $ 303,989 $ (52,289) $1,277,092 $1,530,744 --------- ----------- ----------- ------------ ---------- ---------- --------- ----------- ----------- ------------ ---------- ----------
The accompanying notes are an integral part of these financial statements. 25 PRICE/COSTCO, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
53 WEEKS 52 WEEKS 52 WEEKS ENDED ENDED ENDED SEPTEMBER 3, AUGUST 28, AUGUST 29, 1995 1994 1993 ------------ ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss)...................................................... $ 133,878 $ (112,368) $ 223,247 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization.......................................... 142,022 136,317 106,236 Net (gain) loss on sale of property and equipment and other............ (384) 3,282 3,079 Provision for asset impairments........................................ -- 90,200 -- Loss on disposal of discontinued operations............................ 83,363 182,500 -- Increase (decrease) in deferred income taxes........................... (3,559) (41,623) 10,954 Change in receivables, other current assets, accrued expenses and other current liabilities................................................... (81,729) 64,044 (26,917) Increase in merchandise inventories.................................... (160,114) (271,332) (137,855) Increase in accounts payable........................................... 155,851 205,213 136,142 Other.................................................................. 9,054 (3,013) (5,031) Discontinued operations, net........................................... -- (5,415) (14,047) ------------ ----------- ----------- Total adjustments.................................................... 144,504 360,173 72,561 ------------ ----------- ----------- Net cash provided by operating activities............................ 278,382 247,805 295,808 ------------ ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Additions to property and equipment.................................... (530,638) (474,553) (533,025) Proceeds from the sale of property and equipment....................... 7,337 15,960 12,198 Investment in unconsolidated joint ventures............................ (11,487) (39,795) (21,905) Decrease in short-term investments and restricted cash................. 9,268 80,848 31,018 Increase in other assets and other, net................................ (10,932) (8,416) (8,947) Discontinued operations, net........................................... -- (33,721) 70,572 ------------ ----------- ----------- Net cash used in investing activities.................................. (536,452) (459,677) (450,089) ------------ ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Borrowings (repayments) under short-term credit facilities............. (73,194) 130,344 22,620 Net proceeds from issuance of long-term debt........................... 299,026 13,805 8,580 Repayments of long-term debt........................................... (3,194) (29,937) (9,805) Changes in bank overdraft.............................................. 5,668 (15,477) (2,757) Proceeds from minority interests....................................... 16,603 36,557 -- Exercise of stock options and warrants, including income tax benefit... 4,077 11,383 13,451 Repurchases of common stock............................................ -- (496) (6,534) ------------ ----------- ----------- Net cash provided by financing activities.............................. 248,986 146,179 25,555 ------------ ----------- ----------- EFFECT OF EXCHANGE RATE CHANGES ON CASH.................................. 1,134 (896) (5,039) ------------ ----------- ----------- Net decrease in cash and cash equivalents.............................. (7,950) (66,589) (133,765) CASH AND CASH EQUIVALENTS BEGINNING OF YEAR.............................. 53,638 120,227 253,992 ------------ ----------- ----------- CASH AND CASH EQUIVALENTS END OF YEAR.................................... $ 45,688 $ 53,638 $ 120,227 ------------ ----------- ----------- ------------ ----------- ----------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for: Interest (net of amount capitalized)................................... $ 75,583 $ 50,787 $ 44,944 Income taxes........................................................... $ 165,269 $ 97,685 $ 149,150
The accompanying notes are an integral part of these financial statements. 26 PRICE/COSTCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The consolidated financial statements include the accounts of Price/Costco, Inc., a Delaware corporation, and its subsidiaries ("PriceCostco" or the "Company"). PriceCostco is a holding company which operates primarily through its major subsidiaries, The Price Company and subsidiaries ("Price"), and Costco Wholesale Corporation and subsidiaries ("Costco"). As described more fully in "Note 2 -- Merger of Price and Costco", on October 21, 1993, Price and Costco became wholly-owned subsidiaries of PriceCostco. Price and Costco primarily operate cash and carry membership warehouses. As described more fully in "Note 3 -- Spin-off of Price Enterprises, Inc. and Discontinued Operations," the Company treated the spin-off of its non-club real estate operations as discontinued operations in the fourth quarter of fiscal 1994. The Company's investment in the Price Club Mexico joint venture and in other unconsolidated joint ventures that are less than majority owned are accounted for under the equity method. FISCAL YEARS The Company reports on a 52/53 week fiscal year basis which ends on the Sunday nearest August 31st. Fiscal year 1995 was 53 weeks and fiscal year 1994 and 1993 were each 52 weeks. CASH AND CASH EQUIVALENTS The Company considers all investments in highly liquid debt instruments maturing within 90 days after purchase as cash equivalents unless amounts are held in escrow for future property purchases or restricted by agreements. SHORT-TERM INVESTMENTS AND RESTRICTED CASH Short-term investments include highly liquid investments in United States and Canadian government obligations, along with other investment vehicles, some of which have maturities of three months or less at the time of purchase. The Company's policy is to classify these investments as short-term investments rather than cash equivalents if they are acquired and disposed of through its investment trading account, held for future property purchases, or restricted by agreement. MERCHANDISE INVENTORIES Merchandise inventories are valued at the lower of cost or market as determined primarily by the retail inventory method, and are stated using the last-in, first-out (LIFO) method for U.S. merchandise inventories. The Company believes the LIFO method more fairly presents the results of operations by more closely matching current costs with current revenues. If all merchandise inventories had been valued using the first-in, first-out (FIFO) method, inventories would have been higher by $16,150 at September 3, 1995, $6,650 at August 28, 1994, and $9,250 at August 29, 1993.
SEPTEMBER 3, AUGUST 28, 1995 1994 ------------- ------------- Merchandise inventories consist of: United States (primarily LIFO).......................................... $ 1,174,067 $ 1,089,924 Foreign (FIFO).......................................................... 248,205 170,552 ------------- ------------- Total................................................................. $ 1,422,272 $ 1,260,476 ------------- ------------- ------------- -------------
27 PRICE/COSTCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The Company provides for estimated inventory losses between physical inventory counts on the basis of a standard percentage of sales. This provision is adjusted periodically to reflect the actual shrinkage results of the physical inventory counts which generally occur in the second and fourth quarters of the Company's fiscal year. When required in the normal course of business, the Company enters into agreements securing vendor interests in inventories. RECEIVABLES Receivables consist primarily of vendor rebates and promotional allowances and other miscellaneous amounts due to the Company, and are net of allowance for doubtful accounts of $4,628 at September 3, 1995 and $3,045 at August 28, 1994. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation and amortization expenses are computed using the straight-line method for financial reporting purposes and by accelerated methods for tax purposes. Buildings are depreciated over twenty-five to thirty-five years; equipment and fixtures are depreciated over three to ten years; and land rights and leasehold improvements are amortized over the initial term of the lease. Interest costs incurred on property and equipment during the construction period are capitalized. The amount of interest costs capitalized related to continuing operations was approximately $3,275 in fiscal 1995, $5,209 in fiscal 1994 and $5,423 in fiscal 1993. The amount of capitalized interest relating to the discontinued real estate operations for fiscal 1994 and 1993 was $1,961 and $4,060, respectively. GOODWILL Goodwill, included in other assets, totaled $51,063 at September 3, 1995 and $38,761 at August 28, 1994 and resulted from certain previous business combinations and the purchase of Price Enterprises' interest in Price Club Mexico in March 1995. Goodwill is being amortized over 5 to 40 years using the straight-line method. Accumulated amortization was $7,016 at September 3, 1995 and $5,986 at August 28, 1994. NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE The calculation of net income per common and common equivalent share for each period presented prior to the Merger reflects the issuance of 2.13 shares of PriceCostco Common Stock for each share of Price Common Stock used in such calculation and one share of PriceCostco Common Stock for each share of Costco Common Stock used in such calculation. For fiscal 1995 and 1993, this calculation eliminates interest expense, net of income taxes, on the 5 1/2% convertible subordinated debentures (primary and fully diluted) and the 6 3/4% convertible subordinated debentures (fully diluted only), and includes the additional shares issuable upon conversion of these debentures. For fiscal 1994, the 6 3/4% and 5 1/2% convertible subordinated debentures were not dilutive for either primary or fully diluted purposes. For all periods presented, the 5 3/4% convertible subordinated debentures were not dilutive for either primary or fully diluted purposes. The weighted average number of common and common equivalent shares outstanding for primary and fully diluted share calculations for fiscal 1995, 1994 and 1993 were as follows (in thousands):
1995 1994 1993 --------- --------- --------- Primary.............................................................. 210,962 219,332 227,331 Fully diluted........................................................ 224,079 219,334 240,162
28 PRICE/COSTCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) PREOPENING EXPENSES Preopening expenses related to new warehouses, major remodels/expansion, regional offices and other startup operations are expensed as incurred. MEMBERSHIP FEES Membership fee revenue represents annual membership fees paid by substantially all of the Company's members. In accordance with industry practice, annual membership fees are recognized as income when received. FOREIGN CURRENCY TRANSLATION The accumulated foreign currency translation relates to the Company's consolidated foreign operations and its investment in the Price Club Mexico joint venture. It is determined by application of the current rate method and included in the determination of consolidated stockholders' equity at the respective balance sheet dates. INCOME TAXES The Company accounts for income taxes under the provisions of Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." That standard requires companies to account for deferred income taxes using the asset and liability method. SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES FISCAL 1995 NON-CASH ACTIVITIES - During December 1994, the Company exchanged 23,224,028 shares of Price Enterprises common stock valued at $282,462 for an equal number of shares of Price Costco common stock. - In February 1995, the Company exchanged 3,775,972 shares of Price Enterprises common stock valued at $45,925 for an interest-bearing note receivable from Price Enterprises due in December 1996. - As of August 28, 1994, the net assets of Price Enterprises consisted primarily of the discontinued operations net assets of $377,085 and certain other assets. In connection with the spin-off of Price Enterprises, all of these assets were eliminated from the consolidated balance sheet during fiscal 1995. For additional information see "Note 3 -- Spin-off of Price Enterprises, Inc. and Discontinued Operations." - In April 1995, the Company purchased Price Enterprises' 25.5% interest in Price Club Mexico for $30,500 by a partial offset to the $45,925 note receivable due from Price Enterprises. - During fiscal 1995, the company increased its investment in certain unconsolidated joint ventures by $23,100 through reductions of accounts receivable due from those joint ventures. FISCAL 1994 NON-CASH ACTIVITIES - During fiscal 1994, the Company transferred approximately $127,055 of property and equipment and other assets to its discontinued non-club real estate operations. FISCAL 1993 NON-CASH ACTIVITIES - During fiscal 1993, the Company transferred approximately $72,093 of property and equipment and other assets to its discontinued non-club real estate operations. 29 PRICE/COSTCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) DERIVATIVES The Company has limited involvement with derivative financial instruments and only uses them to manage well-defined interest rate and foreign exchange risks. Forward foreign exchange contracts are used to hedge the impact of fluctuations of foreign exchange on inventory purchases. The amount of interest rate and foreign exchange contracts outstanding at year-end or in place during fiscal 1995 was immaterial to the Company's results of operations or its financial position. RECENT ACCOUNTING PRONOUNCEMENTS In March 1995, the Financial Accounting Standards Board issued Statement No. 121 ("SFAS No. 121") on accounting for the impairment of long-lived assets, certain identifiable intangibles, and goodwill related to assets to be held and used. SFAS No. 121 also establishes accounting standards for long-lived assets and certain identifiable intangibles to be disposed of. The Company is required to adopt SFAS No. 121 no later than fiscal 1996. The Company has not yet determined when SFAS No. 121 will be adopted or what the impact of adoption will be on the carrying value of its long-lived and related intangible assets. In November 1995, the Financial Accounting Standards Board issued Statement No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), which established financial accounting and reporting standards for stock-based employee compensation plans. SFAS No. 123 specifies a fair value based method of accounting for stock-based compensation plans and encourages (but does not require) entities to adopt that method in place of the provisions of APB Opinion 25, "Accounting for Stock Issued to Employees". The Company has not yet determined which method of accounting will be used or what impact the adoption of the accounting requirements of SFAS No. 123 might have on the Company's results of operations. RECLASSIFICATIONS Certain reclassifications have been reflected in the financial statements in order to conform prior years to the current year presentation. NOTE 2 -- MERGER OF PRICE AND COSTCO On October 21, 1993, the shareholders of both Price and Costco approved the mergers of Price and Costco into PriceCostco (the "Merger"). PriceCostco was formed to effect the Merger which qualified as a "pooling-of-interests" for accounting and financial reporting purposes. The pooling-of-interests method of accounting is intended to present as a single interest two or more common shareholder interests which were previously independent. Consequently, the historical financial statements for periods prior to the Merger were restated as though the companies had been combined. The restated financial statements were adjusted to conform the accounting policies of the separate companies. All fees and expenses related to the Merger and to the consolidation and restructuring of the combined companies were expensed as required under the pooling-of-interests accounting method. In the first quarter of fiscal 1994, the Company recorded a provision for merger and restructuring costs of $120,000 pre-tax ($80,000 after tax) related to the Merger. 30 PRICE/COSTCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 2 -- MERGER OF PRICE AND COSTCO (CONTINUED) Components of the $120,000 provision for merger and restructuring expenses are as follows:
AMOUNTS EXPENDED ------------------------------------- FISCAL 1994 FISCAL 1995 TOTAL ----------- ----------- ----------- Direct transaction expenses including investment banking, legal, accounting, printing, filing and other professional fees........ $ 24,548 $ -- $ 24,548 Cost of closing eight operating warehouses including property write-downs, severance, future lease costs, and other closing expenses; write-downs of abandoned warehouse projects and restructuring of redundant international expansion efforts...... 24,948 -- 24,948 Costs of consolidating central administrative functions including information systems, accounting, merchandising and human resources and costs associated with restructuring regional and warehouse support activities including merchandise re-alignment and distribution................................................ 30,178 9,300 39,478 Costs of converting management information systems, primarily merchandising, operating, membership, payroll, and sales audit........................................................... 13,904 3,969 17,873 Other expenses................................................... 9,224 3,929 13,153 ----------- ----------- ----------- Total........................................................ $ 102,802 $ 17,198 $ 120,000 ----------- ----------- ----------- ----------- ----------- -----------
NOTE 3 -- SPIN-OFF OF PRICE ENTERPRISES, INC. AND DISCONTINUED OPERATIONS On July 28, 1994, PriceCostco entered into an Agreement of Transfer and Plan of Exchange (as amended and restated, the "Transfer and Exchange Agreement") with Price Enterprises, Inc. ("Price Enterprises"). Price Enterprises was an indirect, wholly-owned subsidiary of PriceCostco, formed in July 1994. The transactions contemplated by the Transfer and Exchange Agreement are referred to herein as the "Exchange Transaction." Pursuant to the Transfer and Exchange Agreement, PriceCostco offered to exchange one share of Price Enterprises Common Stock for each share of PriceCostco Common Stock, up to a maximum of 27 million shares of Price Enterprises Common Stock (the "Exchange Offer"). In the fourth quarter of fiscal 1994, the Company recorded an estimated loss on disposal of its discontinued operations (the non-club real estate segment) of $182,500 as a result of entering into the Transfer and Exchange Agreement. The loss also included the direct expenses related to the Exchange Transaction. For purposes of recording such estimated loss, the Company assumed that (i) the Exchange Offer would be fully subscribed, (ii) a per share price of Price Enterprises Common Stock of $15.25 (the closing sales price of PriceCostco Common Stock on October 24, 1994), and (iii) direct expenses and other costs related to the Exchange Transaction of approximately $15,250. The Exchange Transaction was completed on December 20, 1994, with 23,224,028 shares of PriceCostco Common Stock tendered and exchanged for an equal number of shares of Price Enterprises Common Stock. On February 9, 1995 Price Enterprises purchased from PriceCostco 3,775,972 31 PRICE/COSTCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 3 -- SPIN-OFF OF PRICE ENTERPRISES, INC. AND DISCONTINUED OPERATIONS (CONTINUED) shares of Price Enterprises Common Stock, constituting all of the remaining shares of Price Enterprises Common Stock held by PriceCostco. Price Enterprises issued to PriceCostco a secured promissory note in the amount of $45,925 due in December 1996 as payment for such shares, based on an average closing sales price $12.1625 of Price Enterprises Common Stock. The price per share of Price Enterprises Common Stock represented the average closing sales price of Price Enterprises Common Stock during the 20 trading days commencing on the sixth trading day following the closing of the Exchange Offer. Based on the aggregate number of shares of Price Enterprises Common Stock (27 million shares) exchanged for PriceCostco Common Stock and sold to Price Enterprises for a secured promissory note and an average closing sales price of $12.1625 per share for Price Enterprises Common Stock, the loss on disposal of the discontinued real estate operations increased by $83,363 (27 million shares multiplied by $3.0875 per share representing the difference between the estimated and actual price per share). This non-cash charge was reflected as an additional loss on disposal of discontinued operations in the second quarter ended May 7, 1995. The following real estate related assets were transferred to Price Enterprises: - Substantially all of the real estate properties which historically formed the non-club real estate segment of PriceCostco. - Four Price Club warehouses ("Warehouse Properties") which were adjacent to existing non-club real estate properties, which are now being leased back to PriceCostco, effective August 29, 1994, at initial collective annual rentals of approximately $8,600. - Notes receivable from various municipalities and agencies ("City Notes"). - Note receivable in the principal amount of $41,000 made by Atlas Hotels, Inc., secured by a hotel and convention center property located in San Diego, California ("Atlas Note"). In addition, PriceCostco transferred to Price Enterprises 51% of the outstanding capital stock of Price Quest, Inc. ("Price Quest") and Price Global Trading, Inc. ("Price Global"). Price Quest operates the Quest interactive electronic shopping business and provides other services to members. Price Global has the rights to develop membership warehouse club businesses in certain geographical areas specified in the Transfer and Exchange Agreement. PriceCostco also transferred to Price Enterprises a 25.5% interest in the Price Club Mexico joint venture. This interest was subsequently acquired from Price Enterprises in fiscal 1995. Price Club Mexico is a joint venture with Controladora Comercial Mexicana, S.A. de CV. operating Price Clubs in Mexico. See "Note 4 -- Acquisition of Price Enterprises' Interest in Price Club Mexico." PriceCostco and Price Enterprises entered into an unsecured revolving credit agreement under which PriceCostco agreed to advance Price Enterprises up to a maximum principal amount of $85,000. All amounts have been paid under this agreement and PriceCostco no longer has any obligations to provide financing for Price Enterprises. DISCONTINUED OPERATIONS Historically, the Company treated non-club real estate investments as a separate reportable business segment. The primary assets generating operating income for the segment were non-club real estate properties, consisting of property owned directly and property owned by real estate joint 32 PRICE/COSTCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 3 -- SPIN-OFF OF PRICE ENTERPRISES, INC. AND DISCONTINUED OPERATIONS (CONTINUED) venture partnerships in which the Company had a controlling interest. Real estate joint ventures related to real estate partnerships that were less than majority owned. In fiscal 1994, the Atlas Note was purchased and the related interest income was included in the non-club real estate segment. Additionally, the Warehouse Properties and City Notes transferred to Price Enterprises as of August 28, 1994 were included in the net assets of the discontinued operations as of August 28, 1994, in the accompanying consolidated balance sheet. However, the operating expenses of the Warehouse Properties and the interest income on the City Notes have not been included in the real estate segment operating results because historically these amounts have been included as part of merchandising operations and other income. The operating results and net assets of the Price Quest, Price Global and the 25.5% interest in the Price Club Mexico joint venture transferred to Price Enterprises are included in continuing operations because they were not related to the discontinued real estate operations. DISCONTINUED OPERATIONS -- NET ASSETS Net assets related to discontinued real estate operations as shown on the consolidated balance sheet at August 28, 1994 consisted of the following:
1994 ------------ 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 ------------ ------------
INCOME (LOSS) FROM DISCONTINUED OPERATIONS Components of net income (loss) from discontinued operations for fiscal 1994 and 1993, prior to the effective date of the Exchange Transaction, were as follows:
1994 1993 ---------- ---------- Real estate rentals............................................................ $ 29,753 $ 22,802 Operating expenses............................................................. (17,158) (10,457) Gains on sale of non-club real estate properties............................... 6,135 21,500 Provision for asset impairments (including a change in estimate related to the Exchange Transaction)......................................................... (90,200) -- ---------- ---------- Operating income (loss).................................................... (71,470) 33,845 Interest income................................................................ 2,319 -- Provision (benefit) for income taxes........................................... (28,385) 13,441 ---------- ---------- Net income (loss).......................................................... $ (40,766) $ 20,404 ---------- ---------- ---------- ----------
PROVISION FOR ASSET IMPAIRMENTS The loss on discontinued real estate operations includes a provision of $90,200 of which $80,500 ($47,500 after tax) relates to a change in calculating estimated losses for assets which are economically 33 PRICE/COSTCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 3 -- SPIN-OFF OF PRICE ENTERPRISES, INC. AND DISCONTINUED OPERATIONS (CONTINUED) impaired. This change in accounting estimates results from the spin-off of the real estate segment assets into Price Enterprises and Price Enterprises' decision to pursue business plans and operating strategies as a stand-alone entity which are significantly different than the previous strategies of the Company. Price Enterprises' management believes that as a separate operating business it will not have the same access to capital as the Company or generate internal funds from operations to the same extent as the Company. PriceCostco's accounting policies with respect to estimating the amount of impairments on individual real estate properties and related assets were such that impairment losses would be recorded if the carrying amount of the asset could not be recovered from estimated future cash flows on an undiscounted basis. Price Enterprises' management believed that in view of its strategies with respect to the number and nature of properties that would be selected for disposition, it would be more appropriate to estimate impairment losses based on fair values of the real estate properties as determined by appraisals and/or a risk-adjusted discounted cash flow approach. In determining impairment losses, individual real estate assets were reduced to estimated fair value, if lower than historical cost. For those assets which have an estimated fair value in excess of cost, the asset continues to be recorded at cost. The impairment losses recorded as a result of this change in accounting estimates reduced the book basis of certain of the real estate and related assets. Under the previous policy, PriceCostco and Price Enterprises had determined that a provision for asset impairments of approximately $9,700 was required relating to four properties which were under contract or in final negotiations for sale. GAINS ON SALE OF NON-CLUB REAL ESTATE PROPERTIES During fiscal 1994, the Company entered into a transaction with The Price REIT, Inc. On October 1, 1993, the Company sold a single shopping center and adjacent Price Club (which is being leased back to the Company) for $28,200. The Company recorded a $4,210 pre-tax gain in connection with this sale. During fiscal 1993, the Company entered into two transactions with The Price REIT: (a) On December 18, 1992, the Company sold a former Price Club property for $14,350. The Company recorded a pre-tax gain of $6,710 in connection with this sale. (b) On August 12, 1993, the Company sold three shopping centers and adjacent Price Clubs (which are being leased back to the Company) and its 49.6% interest in a joint venture which owns five shopping centers, for which the Company received proceeds of approximately $117,000 and recognized a $14,320 pre-tax gain. RELATED PARTY TRANSACTIONS Joseph Kornwasser, a former director of PriceCostco until July 28, 1994, is a general partner and has a two-thirds ownership interest in Kornwasser and Friedman Shopping Center Properties (K & F). K & F was a partner with Price in two partnerships. As of August 28, 1994, Price's total capital contributions to the partnerships were $83,000. Aggregate cumulative distributions from these partnerships were $14,300 at August 28, 1994. Price had also entered into a Development Agreement with K & F for the development of four additional properties. As of August 28, 1994, Price's total capital expenditures for these properties were $58,000. Aggregate cumulative distributions from these properties were $4,500 at August 28, 1994. Both partnership agreements and the Development Agreement provided for a preferred return to Price on a varying scale from 9% to 10% on its invested capital after which operating cash flows or profits are distributed 75% to Price and 25% to 34 PRICE/COSTCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 3 -- SPIN-OFF OF PRICE ENTERPRISES, INC. AND DISCONTINUED OPERATIONS (CONTINUED) K & F. On August 12, 1993, Mr. Kornwasser became Chief Executive Officer and director of The Price REIT. On that date, The Price REIT also obtained the right to acquire certain of the partnership interest of K & F described above. On August 28, 1994, the Company purchased both K & F's interest in the two partnerships and its rights under the Development Agreement for a total of $2,500. NOTE 4 -- ACQUISITION OF PRICE ENTERPRISES' INTEREST IN PRICE CLUB MEXICO In April 1995, the Company purchased Price Enterprises' 25.5% interest in Price Club Mexico for $30,500. The purchase price was paid by a partial offset of the $45,925 secured promissory note owed to PriceCostco by Price Enterprises (see "Note 1 -- Summary of Significant Accounting Policies"). As a result of the purchase, the Company owns a 50% interest in the Price Club Mexico joint venture. Controladora Comercial Mexicana owns the other 50% interest in the Price Club Mexico joint venture. In January 1995, PriceCostco assumed management responsibility over operations, merchandising and site acquisitions for Price Club Mexico. NOTE 5 -- DEBT SHORT-TERM BORROWINGS The company has a domestic multiple option loan facility with a group of 13 banks which provides for borrowings of up to $500,000 or standby support for a $500,000 commercial paper program. Of this amount, $250,000 expires on January 30, 1996, and $250,000 expires on January 30, 1998. The interest rate on bank borrowings is based on LIBOR or rates bid at auction by the participating banks. At September 3, 1995, no amounts were outstanding under the loan facility and $51,965 was outstanding under the Company's commercial paper program. The Company expects to renew for an additional one-year term the $250,000 portion of the loan facility expiring on January 30, 1996, at substantially the same terms. The weighted average borrowings, highest borrowings and interest rate under all short-term borrowing arrangements were as follows for fiscal 1995, 1994 and 1993:
MAXIMUM AMOUNT AVERAGE AMOUNT WEIGHTED AVERAGE CATEGORY OF AGGREGATE OUTSTANDING DURING OUTSTANDING DURING INTEREST RATE DURING SHORT-TERM BORROWINGS THE PERIOD THE PERIOD THE PERIOD - ---------------------------------------------------- ------------------ ------------------ --------------------- Period ended September 3, 1995 Bank borrowings: U.S............................................. $ -- $ -- -- Canadian........................................ 9,374 1,776 8.04 Commercial Paper: U.S............................................. 468,000 215,683 5.75 Canadian........................................ 23,760 3,912 5.56 Period ended August 28, 1994 Bank borrowings: U.S............................................. $ 142,000 $ 16,786 3.46% Canadian........................................ 25,369 8,072 6.47 Commercial Paper.................................. 149,340 35,655 3.92 Period ended August 29, 1993 Bank borrowings: U.S............................................. $ 55,000 $ 15,455 3.56% Canadian........................................ 12,358 3,295 6.05 Commercial Paper.................................. 55,000 16,119 3.29
35 PRICE/COSTCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 5 -- DEBT (CONTINUED) In addition, the Company's wholly-owned Canadian subsidiary has a $103,000 commercial paper program supported by a bank credit facility with three Canadian banks of which $63,000 will expire in April 1996 and $40,000 will expire in April 1999. The interest rate on bank borrowings is based on the prime rate or the "Bankers' Acceptance" rate. At September 3, 1995, no amounts were outstanding under the bank credit facility and $23,760 was outstanding under the Canadian commercial paper program. The Company has separate letter of credit facilities (for commercial and standby letters of credit) totaling approximately $196,000. The outstanding commitments under these facilities at September 3, 1995 totaled approximately $127,000, including approximately $51,000 in standby letters for workers' compensation requirements. LONG-TERM DEBT Long-term debt at September 3, 1995 and August 28, 1994 consists of:
1995 1994 ------------- ----------- 5 3/4% Convertible subordinated debentures due May 2002..................... $ 300,000 $ 300,000 6 3/4% Convertible subordinated debentures due March 2001................... 285,079 285,079 5 1/2% Convertible subordinated debentures due February 2012................ 179,338 179,338 7 1/8% Senior Notes due June 2005........................................... 300,000 -- Notes payable secured by trust deeds on real estate......................... 27,377 31,235 Banker's Acceptances and other.............................................. 8,021 6,266 ------------- ----------- 1,099,815 801,918 Less current portion (included in other current liabilities)................ 5,200 6,426 ------------- ----------- Total long-term debt...................................................... $ 1,094,615 $ 795,492 ------------- ----------- ------------- -----------
Effective upon consummation of the Merger, PriceCostco became a co-obligor under each of the convertible subordinated debentures originally issued by Price and Costco. These debentures are convertible into shares of PriceCostco. Conversion rates of Price subordinated debentures have been adjusted for the exchange ratio pursuant to the Merger. The 5 3/4% convertible subordinated debentures due May 2002 are convertible at any time prior to maturity, unless previously redeemed, into shares of PriceCostco common stock at a conversion price of $41.25 per share, subject to adjustment in certain events. Interest on the debentures is payable semiannually on November 15 and May 15. Commencing on June 1, 1995, these debentures are redeemable at the option of the Company, in whole or in part, at certain redemption prices. The 6 3/4% convertible subordinated debentures are convertible into shares of PriceCostco common stock at any time on or before March 2001, unless previously redeemed, at a conversion price of $22.54 per share, subject to adjustment in certain events. Interest on the debentures is payable semiannually on March 1 and September 1. The debentures are redeemable at the option of the Company after March 1, 1994 at certain redemption prices. During fiscal 1994 in connection with the Merger, approximately $2,421 of these debentures were purchased at their face value. The 5 1/2% convertible subordinated debentures are convertible into shares of PriceCostco common stock at a conversion price of $23.77 per share, subject to adjustment in certain events. The debentures provide for payments to an annual sinking fund in the amount of 5% of the original principal amount ($10,000), commencing February 1998, calculated to retire 70% of the principal 36 PRICE/COSTCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 5 -- DEBT (CONTINUED) amount prior to maturity. During fiscal 1990, the Company repurchased debentures with a face value of $20,597 and will apply this purchase to the initial sinking fund payments. Interest is payable semiannually on February 28 and August 31. The 7 1/8% Senior Notes were issued on June 7, 1995. Interest on the notes is payable semiannually on June 15 and December 15. The indentures contain limitations on the Company's and certain subsidiaries' ability to create liens securing indebtedness and to enter into certain sale leaseback transactions. At September 3, 1995, the fair values of the 5 3/4%, 6 3/4% and 5 1/2% convertible subordinated debentures, based on current market quotes, were approximately $276,000, $291,000, and $173,000 respectively. Early retirement of these debentures would result in the Company paying a call premium. The fair value of the 7 1/8% Senior Notes, based on market quotes on September 3, 1995, were approximately $302,000. The Senior Notes are not redeemable prior to maturity. Maturities of long-term debt during the next five fiscal years and thereafter are as follows: 1996........................................................... $ 5,200 1997........................................................... 6,768 1998........................................................... 2,469 1999........................................................... 1,753 2000........................................................... 1,931 Thereafter..................................................... 1,081,694 ---------- Total...................................................... $1,099,815 ---------- ----------
NOTE 6 -- LEASES The Company leases land and/or warehouse buildings at 49 warehouses open at September 3, 1995 and certain other office and distribution facilities under operating leases with remaining terms ranging from 2 to 30 years. These leases generally contain one or more of the following options which the Company can exercise at the end of the initial lease term: (a) renewal of the lease for a defined number of years at the then fair market rental rate; (b) purchase of the property at the then fair market value; (c) right of first refusal in the event of a third party purchase offer. Certain leases provide for periodic rental increases based on the price indices and some of the leases provide for rents based on the greater of minimum guaranteed amounts or sales volume. Contingent rents have not been material. Additionally, the Company leases certain equipment and fixtures under short-term operating leases which permit the Company to either renew for a series of one-year terms or to purchase the equipment at the then fair market value. Aggregate rental expense for fiscal 1995, 1994 and 1993 was $53,600, $44,900, and $38,700, respectively. Future minimum payments during the next five fiscal years and thereafter under noncancelable leases with terms in excess of one year, at September 3, 1995, were as follows: 1996............................................................. $ 53,849 1997............................................................. 52,906 1998............................................................. 48,957 1999............................................................. 46,617 2000............................................................. 46,107 Thereafter....................................................... 537,958 --------- Total minimum payments....................................... $ 786,394 --------- ---------
37 PRICE/COSTCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 7 -- STOCK OPTIONS AND WARRANTS Prior to the Merger, Price and Costco adopted various incentive and non-qualified stock option plans which allowed certain key employees and directors to purchase or be granted common stock of Price and Costco (collectively the Old Stock Option Plans). Options were granted for a maximum term of ten years, and were exercisable upon vesting. Options granted under these plans generally vest ratably over five to nine years. Subsequent to the Merger, new grants of options are not being made under the Old Stock Option Plans. Stock option transactions relating to the Old Stock Option Plans are summarized below:
STOCK OPTIONS (IN RANGE OF EXERCISE THOUSANDS) PRICE PER SHARE ------------- ----------------- Under option at August 29, 1993...................................... 12,904 $ .17 - 40.17 Granted............................................................ 68 18.00 Exercised.......................................................... (748) 1.46 - 19.00 Cancelled.......................................................... (507) 5.67 - 40.17 ------------- Under option at August 28, 1994...................................... 11,717 .17 - 40.17 Granted............................................................ 0 -- Exercised.......................................................... (578) .17 - 17.49 Cancelled.......................................................... (1,230) 11.33 - 40.16 ------------- Under option at September 3, 1995.................................... 9,909 2.75 - 40.17 ------------- ------------- Options exercisable at September 3, 1995............................. 7,046 ------------- -------------
The PriceCostco 1993 Combined Stock Grant and Stock Option Plan (the New Stock Option Plan) provides for the issuance of up to 10 million shares of the Company's common stock pursuant to the exercise of stock options or up to 1,666,666 through stock grants. Stock option and grant transactions relating to the New Stock Option Plan are summarized below:
STOCK OPTIONS RANGE OF EXERCISE (IN THOUSANDS) PRICE PER SHARE --------------- ----------------- Under option at August 29, 1993...................................... -- $ -- Granted............................................................ 3,252 14.00 - 19.00 Exercised.......................................................... -- -- Cancelled.......................................................... (278) 14.00 - 19.00 ----- Under option at August 28, 1994...................................... 2,974 14.00 - 19.00 Granted............................................................ 3,516 12.50 - 19.00 Exercised.......................................................... (17) 13.31 - 15.13 Cancelled.......................................................... (419) 12.50 - 19.00 ----- Under option at September 3, 1995.................................... 6,054 12.50 - 19.00 ----- ----- Options exercisable at September 3, 1995............................. 958 ----- -----
A foreign subsidiary of the Company has a separate stock option plan whereby employees of the subsidiary receive stock option grants of subsidiary stock. At September 3, 1995, stock option grants were approximately 1% of the subsidiary's outstanding shares. In 1986 and 1987, Price granted warrants to purchase a total of 1,065,000 shares of common stock at $17.37 per share to a joint venture partner. The warrants granted in 1987 vested over a five year 38 PRICE/COSTCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 7 -- STOCK OPTIONS AND WARRANTS (CONTINUED) period from the date of issuance and were exercisable up to eight years and one month from the grant date. A total of 532,500 warrants have been exercised. The remaining 532,500 warrants were cancelled during fiscal 1995. NOTE 8 -- RETIREMENT PLANS On January 1, 1995, the Company amended and restated The Price Company Retirement Plan, The Price Company 401(k) Plan and the Costco Wholesale 401(k) Plan into the PriceCostco 401(k) Retirement Plan. This new plan is available to all U.S. employees who have one year or more of service except California union employees. The plan allows pre-tax deferral against which the Company matches 50% of eligible employee contributions up to a maximum Company contribution per employee per year. In addition, the Company will provide each participant a contribution based on salary and years of service. The Company has a defined contribution plan for Canadian Price, Canadian Costco and United Kingdom Costco employees and contributes a percentage of each employee's salary. California union employees participate in a defined contribution plan sponsored by its union. The Company makes contributions based upon its union agreement. In June 1995, the Company also established a 401(k) plan for the California union employees. The Company matches 25% of eligible employee contributions up to a maximum Company contribution per employee per year. Amounts expensed under these plans were $37,298, $27,859, and $26,609 for fiscal 1995, 1994 and 1993, respectively. The Company has defined contribution 401(k) and retirement plans only and thus has no liability for postretirement benefit obligations under the Financial Accounting Standards Board Statement No. 106 "Employer's Accounting for Postretirement Benefits Other than Pensions." NOTE 9 -- INCOME TAXES The provisions for income taxes from continuing operations for fiscal 1995, 1994, and 1993 are as follows:
1995 1994 1993 ----------- --------- ----------- Federal: Current............................................... $ 102,481 $ 64,721 $ 87,933 Deferred.............................................. (4,445) (5,920) 6,924 ----------- --------- ----------- Total federal....................................... 98,036 58,801 94,857 State: Current............................................... 23,009 15,402 20,149 Deferred.............................................. 51 (963) 2,321 ----------- --------- ----------- Total state......................................... 23,060 14,439 22,470 Foreign: Current............................................... 29,051 18,211 14,639 Deferred.............................................. 816 1,206 1,654 ----------- --------- ----------- Total foreign....................................... 29,867 19,417 16,293 ----------- --------- ----------- Total provision for income taxes...................... $ 150,963 $ 92,657 $ 133,620 ----------- --------- ----------- ----------- --------- -----------
39 PRICE/COSTCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 9 -- INCOME TAXES (CONTINUED) A reconciliation between the statutory tax rate and the effective rate from continuing operations for fiscal 1995, 1994 and 1993 is as follows:
1995 1994 1993 ------------------------ ---------------------- ------------------------ Federal taxes at statutory rate............... $ 128,871 35.0% $ 71,244 35.0% $ 116,652 34.7% State taxes, net.............................. 15,465 4.2 8,753 4.3 15,141 4.5 Foreign taxes, net............................ 4,471 1.2 1,074 0.5 1,878 0.6 Increase in deferred income taxes due to statutory rate change........................ -- -- -- -- 600 0.2 Other......................................... 2,156 0.6 2,386 1.2 (651) (.3) Tax effect of merger-related expenses......... -- -- 9,200 4.5 -- -- ----------- --- --------- --- ----------- --- Provision at effective tax rate............... $ 150,963 41.0% $ 92,657 45.5% $ 133,620 39.7% ----------- --- --------- --- ----------- --- ----------- --- --------- --- ----------- ---
The components of the deferred tax assets and liabilities related to continuing operations are as follows:
SEPTEMBER 3, AUGUST 28, 1995 1994 ------------- ----------- Accrued liabilities................................................ $ 71,109 $ 75,697 Other.............................................................. 7,113 6,145 ------------- ----------- Total deferred tax assets...................................... 78,222 81,842 Property and equipment............................................. 65,350 66,118 Merchandise inventories............................................ 17,903 21,199 Other.............................................................. 2,353 5,487 ------------- ----------- Total deferred tax liabilities................................. 85,606 92,804 ------------- ----------- Net deferred tax (assets) liabilities.......................... $ 7,384 $ 10,962 ------------- ----------- ------------- -----------
The net deferred tax (assets) liabilities at September 3, 1995 and August 28, 1994 include current deferred income tax assets of $56,909 and $54,717, respectively, and non-current deferred income tax liabilities of $64,293 and $65,679, respectively. NOTE 10 -- COMMITMENTS AND CONTINGENCIES LEGAL PROCEEDINGS On April 6, 1992, Price was served with a Complaint in an action entitled FECHT ET AL. V. THE PRICE COMPANY ET AL., Case No. 92-497, United States District Court, Southern District of California (the "Court"). Subsequently, on April 22, 1992, Price was served with a First Amended Complaint in the action. The case was dismissed without prejudice by the Court on September 21, 1992, on the grounds the plaintiffs had failed to state a sufficient claim against defendants. Subsequently, plaintiffs filed a Second Amended Complaint which, in the opinion of the Company's counsel, alleged substantially the same facts as the prior complaint. The Complaint alleged violation of certain state and federal laws during the time period prior to Price's earnings release for the second quarter of fiscal year 1992. The case was dismissed with prejudice by the Court on March 9, 1993, on grounds the plaintiffs had failed to state a sufficient claim against defendants. Plaintiffs filed an Appeal in the Ninth Circuit Court of Appeals. In an opinion dated November 20, 1995, the Ninth Circuit reversed and remanded the lawsuit. The Company believes that this lawsuit is without merit 40 PRICE/COSTCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 10 -- COMMITMENTS AND CONTINGENCIES (CONTINUED) and is vigorously defending the lawsuit. The Company does not believe that the ultimate outcome of such litigation will have a material adverse effect on the Company's financial position or results of operations. On December 19, 1994, a Complaint was filed against PriceCostco in an action entitled SNYDER V. PRICE/COSTCO, INC. ET. AL., Case No. C94-1874Z, United States District Court, Western District of Washington. On January 4, 1995, a Complaint was filed against PriceCostco in an action entitled BALSAM V. PRICE/COSTCO, INC. ET. AL., Case No. C95-0009Z, United States District Court, Western District of Washington. The Snyder and Balsam Cases were subsequently consolidated and on March 15, 1995, plaintiffs' counsel filed a First Amended And Consolidated Class Action And Derivative Complaint. On November 9, 1995, plaintiff's counsel filed a Second Amended And Consolidated Class Action And Derivative Complaint. The Second Amended Complaint alleges violation of certain state and federal laws arising from the spin-off and Exchange Transaction and the merger between Price and Costco. The Company believes that this suit is without merit and is vigorously defending the lawsuit. The Company does not believe that the ultimate outcome of such litigation will have a material adverse effect on the Company's financial position or results of operations. The Company is involved from time to time in claims, proceedings and litigation arising from its business and property ownership. The Company does not believe that any such claim, proceeding or litigation, either alone or in the aggregate, will have a material adverse effect on the Company's financial position or results of operations. NOTE 11 -- GEOGRAPHIC INFORMATION The following table indicates the relative amounts of total revenue, operating income and identifiable assets for the Company during fiscal 1995, 1994 and 1993:
1995 1994 1993 -------------- -------------- -------------- Total revenue: United States.................................................. $ 14,967,611 $ 13,770,316 $ 13,167,175 Foreign........................................................ 3,279,675 2,710,327 2,296,639 -------------- -------------- -------------- $ 18,247,286 $ 16,480,643 $ 15,463,814 -------------- -------------- -------------- -------------- -------------- -------------- Operating income: United States.................................................. $ 357,463 $ 298,303 $ 321,084 Foreign........................................................ 75,869 61,836 43,745 -------------- -------------- -------------- $ 433,332 $ 360,139 $ 364,829 -------------- -------------- -------------- -------------- -------------- -------------- SEPTEMBER 3, AUGUST 28, 1995 1994 -------------- -------------- Identifiable assets: United States.................................................. $ 3,508,325 $ 3,221,210 Foreign........................................................ 929,094 637,364 Discontinued operations -- net assets (all United States)........................................... -- 377,085 -------------- -------------- $ 4,437,419 $ 4,235,659 -------------- -------------- -------------- --------------
41 PRICE/COSTCO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 12 -- QUARTERLY FINANCIAL DATA (UNAUDITED) The tables that follow on the next two pages reflect the unaudited quarterly results of operations for fiscal 1995 and 1994. Shares used in the earnings per share calaculation fluctuate by quarter depending primarily upon whether convertible subordinated debentures are dilutive during the respective period. 42 PRICECOSTCO, INC. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
53 WEEKS ENDED SEPTEMBER 3, 1995 -------------------------------------------------------------------------- FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER TOTAL 12 WEEKS 12 WEEKS 12 WEEKS 17 WEEKS 53 WEEKS ------------ -------------- ------------- -------------- ------------- REVENUE Net sales........................ $3,943,718 $ 4,230,160 $ 3,824,841 $ 5,907,207 $ 17,905,926 Membership fees and other........ 86,205 77,162 71,397 106,596 341,360 ------------ -------------- ------------- -------------- ------------- Total revenue.................. 4,029,923 4,307,322 3,896,238 6,013,803 18,247,286 OPERATING EXPENSES Merchandise costs................ 3,577,444 3,821,794 3,476,324 5,350,286 16,225,848 Selling, general and administrative expenses......... 350,178 358,431 345,246 501,733 1,555,588 Preopening expenses.............. 6,991 3,451 3,332 11,244 25,018 Provision for estimated warehouse closing costs................... -- -- -- 7,500 7,500 ------------ -------------- ------------- -------------- ------------- Operating income............... 95,310 123,646 71,336 143,040 433,332 OTHER INCOME (EXPENSE) Interest expense................. (14,139) (13,480) (16,747) (23,545) (67,911) Interest income and other........ 1,079 298 1,068 338 2,783 ------------ -------------- ------------- -------------- ------------- INCOME (LOSS) FROM CONTINUTING OPERATIONS BEFORE PROVISION FOR INCOME TAXES...................... 82,250 110,464 55,657 119,833 368,204 Provision for income taxes....... 33,723 45,693 23,042 48,505 150,963 ------------ -------------- ------------- -------------- ------------- INCOME FROM CONTINUING OPERATIONS........................ 48,527 64,771 32,615 71,328 217,241 DISCONTINUED OPERATIONS: Income (loss), net of tax........ -- -- -- -- -- Loss on disposal................. -- (83,363) -- -- (83,363) ------------ -------------- ------------- -------------- ------------- NET INCOME (LOSS)................ $ 48,527 $ (18,592) $ 32,615 $ 71,328 $ 133,878 ------------ -------------- ------------- -------------- ------------- ------------ -------------- ------------- -------------- ------------- NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE -- FULLY DILUTED: Continuing operations............ $ 0.22 $ 0.31 $ 0.17 $ 0.35 $ 1.05 Discontinued operations: Income (loss), net of tax...... -- -- -- -- -- Loss on disposal............... -- (0.37) -- -- (0.37) ------------ -------------- ------------- -------------- ------------- Net Income (loss)................ $ 0.22 $ (0.06) $ 0.17 $ 0.35 $ 0.68 ------------ -------------- ------------- -------------- ------------- ------------ -------------- ------------- -------------- ------------- Shares used in calculation....... 239,757 224,685 196,078 217,203 224,079 ------------ -------------- ------------- -------------- ------------- ------------ -------------- ------------- -------------- -------------
43 PRICECOSTCO, INC. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
52 WEEKS ENDED AUGUST 28, 1994 -------------------------------------------------------------------------- FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER TOTAL 12 WEEKS 12 WEEKS 12 WEEKS 16 WEEKS 52 WEEKS ------------ -------------- ------------- -------------- ------------- REVENUE Net sales........................ $3,599,797 $ 4,019,417 $ 3,546,445 $ 4,995,252 $ 16,160,911 Membership fees and other........ 81,330 78,245 69,367 90,790 319,732 ------------ -------------- ------------- -------------- ------------- Total revenue.................. 3,681,127 4,097,662 3,615,812 5,086,042 16,480,643 OPERATING EXPENSES Merchandise costs................ 3,272,170 3,640,174 3,226,011 4,524,536 14,662,891 Selling, general and administrative expenses......... 316,559 342,279 328,314 438,397 1,425,549 Preopening expenses.............. 11,130 4,915 1,967 6,552 24,564 Provision for estimated warehouse closing costs................... -- -- -- 7,500 7,500 ------------ -------------- ------------- -------------- ------------- Operating income............... 81,268 110,294 59,520 109,057 360,139 OTHER INCOME (EXPENSE) Interest expense................. (10,823) (11,655) (12,155) (15,839) (50,472) Interest income and other........ 2,522 2,573 2,542 6,251 13,888 Provisions for merger and restructuring expenses.......... (120,000) -- -- -- (120,000) ------------ -------------- ------------- -------------- ------------- INCOME (LOSS) FROM CONTINUTING OPERATIONS BEFORE PROVISION FOR INCOME TAXES...................... (47,033) 101,212 49,907 99,469 203,555 Provision (benefit) for income taxes........................... (10,095) 41,503 20,467 40,782 92,657 ------------ -------------- ------------- -------------- ------------- INCOME (LOSS) FROM CONTINUING OPERATIONS........................ (36,938) 59,709 29,440 58,687 110,898 DISCONTINUED OPERATIONS: Income (loss), net of tax........ 3,947 2,566 2,600 (49,879) (40,766) Loss on disposal................. -- -- -- (182,500) (182,500) ------------ -------------- ------------- -------------- ------------- NET INCOME (LOSS).................. $ (32,991) $ 62,275 $ 32,040 $ (173,692) $ (112,368) ------------ -------------- ------------- -------------- ------------- ------------ -------------- ------------- -------------- ------------- NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE -- FULLY DILUTED Continued operations............. $ (0.17) $ 0.27 $ 0.14 $ 0.27 $ 0.51 Disctonintued operations: Income (loss), net of tax...... 0.02 0.01 0.01 (0.23) (0.19) Loss on disposal............... -- -- -- (0.83) (0.83) ------------ -------------- ------------- -------------- ------------- Net Income (loss)................ $ (0.15) $ 0.28 $ 0.15 $ (0.79) $ (0.51) ------------ -------------- ------------- -------------- ------------- ------------ -------------- ------------- -------------- ------------- Shares used in calculation....... 217,191 240,011 219,516 219,279 219,334 ------------ -------------- ------------- -------------- ------------- ------------ -------------- ------------- -------------- -------------
44 EXHIBIT INDEX The following exhibits are filed as part of this Annual Report on Form 10-K or are incorporated herein by reference. Where an exhibit is incorporated by reference, the number which follows the description of the exhibit indicates the document to which cross reference is made. See the end of this exhibit index for a listing of cross reference documents.
EXHIBIT NO. DESCRIPTION - ----------------- ---------------------------------------------------------------------------------------------------- 2(a) Amended and Restated Agreement of Transfer and Plan of Exchange dated as of November 14, 1994 by and between Price/Costco, Inc. and Price Enterprises, Inc. (14) 3(a) Restated Certificate of Incorporation of Price/Costco, Inc. (4) 3(b) Bylaws of Price/Costco, Inc. (9) 3(c) Form of Amended and Restated Bylaws of Price/Costco, Inc. to become effective as specified in the Amended and Restated Agreement of Transfer and Plan of Exchange (see Exhibit 2(a) above). (10) 4(a)(1) 5 1/2% Convertible Subordinated Debenture. (1) 4(a)(2) Indenture by and between Price and First Interstate Bank of California, as Trustee, with respect to the 5 1/2% Convertible Subordinated Debentures. (1) 4(a)(3) Supplemental Indenture dated as of October 21, 1993 by and among Price, PriceCostco and First Interstate Bank of California, as Trustee, with respect to the 5 1/2% Convertible Subordinated Debentures. (7) 4(a)(4) Supplemental Indenture dated as of October 22, 1993 by and among Price, PriceCostco and First Interstate Bank of California, as Trustee, with respect to the 5 1/2% Convertible Subordinated Debentures. (7) 4(a)(5) Incorporated by reference in Form 8-A filed with respect to the Registration Statement of the Company's 5 1/2% Convertible Subordinated Debentures dated December 21, 1993 4(a)(6) Incorporated by reference in Form 15 with respect to the notice of termination of the Registration of Price's 5 1/2% Convertible Subordinated Debentures dated January 3, 1994 4(b)(1) 6 3/4% Convertible Subordinated Debenture (2) 4(b)(2) Indenture by and between Price and First Interstate Bank of California, as Trustee, with respect to the 6 3/4% Convertible Subordinated Debentures (2) 4(b)(3) Supplemental Indenture dated as of October 21, 1993 by and among Price, PriceCostco and First Interstate Bank of California, as Trustee, with respect to the 6 3/4% Convertible Subordinated Debentures (7) 4(b)(4) Supplemental Indenture dated as of October 22, 1993 by and among Price, PriceCostco and First Interstate Bank of California, as Trustee, with respect to the 6 3/4% Convertible Subordinated Debentures (7) 4(c)(1) 5 3/4% Convertible Subordinated Debenture (5) 4(c)(2) Indenture dated as of May 15, 1992 between Costco and First Trust National Association, as Trustee (5) 4(c)(3) First Supplemental Indenture dated as of October 21, 1993 between Costco, PriceCostco and First Trust National Association, as Trustee (8) 4(d)(1) 7 1/8% Senior Notes and Indentures (13) 4(d)(2) Form of Indenture between Price/Costco, Inc. and American National Association, as Trustee (13) 4(e) Price/Costco, Inc. Stock Certificate (4) 10(a)(1) The Price/Costco, Inc. 1993 Combined Stock Grant and Stock Option Plan (4) 10(a)(2) Amendments to Stock Option Plans 10(b) Indemnification Agreement (14) 10(c) Special Severance Agreement (12) 10(j)(5) Agreement between The Price Company, Price Venture Mexico and Controladora Comercial Mexicana S.A. de C.V. to form a Corporate Joint Venture (7)
10(j)(6) Restated Corporate Joint Venture Agreement between The Price Company, Price Venture Mexico and Controladora Comercial Mexicana S.A. de C.V. dated March, 1995 10(z)(1) A $250,000 Short-Term Revolving Credit Agreement among Price/Costco, Inc. and a group of fourteen banks dated January 31, 1994 (12) 10(z)(2) A $250,000 Extended Revolving Credit Agreement among Price/Costco, Inc. and a group of fourteen banks, dated January 31, 1994 (12) 10(z)(3) Revolving Credit Agreement, dated as of August 28, 1994, between Price/Costco, Inc. and Price Enterprises, Inc. (11) 12.1 Statements re computation of ratios 23.1 Consent of Arthur Andersen LLP 23.2 Report of Ernst & Young LLP on The Price Company Fiscal 1993 Annual Report 27.1 Financial Data Schedule
- ------------------------ (1) Registration Statement of The Price Company on Form SE filed February 12, 1987 is hereby incorporated by reference (2) Registration Statement of The Price Company on Form S-3 (File No. 33-38966) filed February 27, 1991 is hereby incorporated by reference (3) Incorporated herein by reference to the identical exhibit filed as part of The Price Company's Form 10-K for the fiscal year ending August 31, 1991 (4) Incorporated by reference to the Registration Statement of Price/Costco, Inc. Form S-4 (File No. 33-50359) dated September 22, 1993 (5) Incorporated by reference to Costco's Registration Statement on Form S-3 (File No. 33-47750) filed May 22, 1992 (6) Incorporated by reference to Schedule 13E-4 of The Price Company and Price/Costco, Inc. filed November 4, 1993 (7) Incorporated by reference to the exhibits filed as part of Amendment No. 1 to the Registration Statement on Form 8-A of The Price Company (8) Incorporated by reference to the exhibits filed as part of Amendment No. 2 to the Registration Statement on Form 8-A of Costco (9) Incorporated by reference to the exhibits filed as part of the Annual Report on Form 10-K/A of Price/Costco, Inc. for the fiscal year ended August 29, 1993 (10) Incorporated by reference to the exhibits filed as part of the Registration Statement on Form S-4 of Price Enterprises, Inc. (File No. 33-55481) filed on September 15, 1994 (11) Incorporated by reference to the exhibits filed as part of Amendment No. 1 to the Registration Statement on Form S-4 of Price Enterprises, Inc. (File No. 33-55481) filed on November 3, 1994 (12) Incorporated by reference to the exhibits filed as part of the Quarterly Report on Form 10-Q of Price/Costco, Inc. for the 12 weeks ended February 13, 1994 (13) Incorporated by reference to the exhibits filed as part of the Registration Statement on Form S-3 of Price/Costco, Inc. (File No. 33-59403) filed on May 17, 1995. (14) Incorporated by reference to the exhibits filed as part of the Annual Report on Form 10K of Price/ Costco, Inc. for the fiscal year ended August 28, 1994. EX-10.(A)(2) 2 EXHIBIT 10(A)(2) AMENDMENT TO THE PRICE COMPANY 1981 STOCK OPTION PLAN Pursuant to resolution of the Board of Directors of Price/Costco, Inc., The Price Company 1981 Stock Option Plan is hereby amended, effective as of January 30, 1995, by adding a new Section 13 providing as follows: 13. EXTENSION OF STOCK OPTIONS (a) Notwithstanding the foregoing provisions of the Plan or any written option agreement, each option granted under the Plan held by an employee of Price/Costco, Inc. whose employment terminated as of January 1, 1995 and who became an employee of Price Enterprises, Inc. ("PEI") as of such date shall, to the extent such option was exercisable as of such date (as determined under the formula in Section 8(b) of the Plan), continue to be exercisable on the same terms and conditions set forth in the written agreement evidencing the grant of such stock option; PROVIDED, that service with PEI shall be treated as service with Price/Costco, Inc. for purposes of determining the date on which such option shall subsequently terminate; PROVIDED, FURTHER, that to the extent such option was not so exercisable as of January 1, 1995, it shall expire in accordance with its terms. (b) Notwithstanding the foregoing provisions of the Plan or any written option agreement, the Chief Executive Officer of Price/Costco, Inc. (or such other person or persons from time to time designated by the Board of Directors) shall have the authority, in his discretion, to provide for the continued exercisability of options granted under the Plan in the event of the retirement, disability or death of the holder of such options (or such other event that would otherwise result in termination of the options prior to expiration of the option term); PROVIDED, that in no event shall such period of continued exercisability extend beyond the original expiration date of such options. (c) The provisions of this Section 13 shall not apply to any options held by any individual who is or was at any time subject to the reporting and disclosure requirements of Section 16 of the Securities Exchange Act of 1934, as amended, with respect to Price/Costco, Inc. Pursuant to resolution of the Board of Directors of Price/Costco, Inc., Section 9 of The Price Company 1981 Stock Option Plan is hereby amended, effective as of January 1, 1995, by adding the following sentence to the end thereof: Notwithstanding anything herein to the contrary, the committee administering the Plan may amend outstanding options to provide for the transfer of such options to a living trust of the option holder and that such options may be exercised by the trustee of such living trust. PRICE/COSTCO, INC. Date: January 26, 1995 By: /s/ Don E. Burdick ----------------------------------- Name: Don E. Burdick Title: Assistant Secretary 2 AMENDMENT TO THE PRICE COMPANY 1991 COMBINED STOCK GRANT AND STOCK OPTION PLAN Pursuant to resolution of the Board of Directors of Price/Costco, Inc., The Price Company 1991 Combined Stock Grant and Stock Option Plan is hereby amended, effective as of January 30, 1995, by adding a new Section 13 providing as follows: 13. EXTENSION OF STOCK OPTIONS (a) Notwithstanding the foregoing provisions of the Plan or any written option agreement, each option granted under the Plan held by an employee of Price/Costco, Inc. whose employment terminated as of January 1, 1995 and who became an employee of Price Enterprises, Inc. ("PEI") as of such date shall, to the extent such option was exercisable as of such date (as determined under the formula in Section 8(b) of the Plan), continue to be exercisable on the same terms and conditions set forth in the written agreement evidencing the grant of such stock option; PROVIDED, that service with PEI shall be treated as service with Price/Costco, Inc. for purposes of determining the date on which such option shall subsequently terminate; PROVIDED, FURTHER, that to the extent such option was not so exercisable as of January 1, 1995, it shall expire in accordance with its terms. (b) Notwithstanding the foregoing provisions of the Plan or any written option agreement, the Chief Executive Officer of Price/Costco, Inc. (or such other person or persons from time to time designated by the Board of Directors) shall have the authority, in his discretion, to provide for the continued exercisability of options granted under the Plan in the event of the retirement, disability or death of the holder of such options (or such other event that would otherwise result in termination of the options prior to expiration of the option term); PROVIDED, that in no event shall such period of continued exercisability extend beyond the original expiration date of such options. (c) The provisions of this Section 13 shall not apply to any options held by any individual who is or was at any time subject to the reporting and disclosure requirements of Section 16 of the Securities Exchange Act of 1934, as amended, with respect to Price/Costco, Inc. Pursuant to resolution of the Board of Directors of Price/Costco, Inc., Section 9 of The Price Company 1991 Combined Stock Grant and Stock Option Plan is hereby amended, effective as of January 1, 1995, by adding the following sentence to the end thereof: Notwithstanding anything herein to the contrary, the committee administering the Plan may amend outstanding options to provide for the transfer of such options to a living trust of the option holder and that such options may be exercised by the trustee of such living trust. PRICE/COSTCO, INC. Date: January 26, 1995 By: /s/ Don E. Burdick ----------------------------------- Name: Don E. Burdick Title: Assistant Secretary 2 AMENDMENT TO AND CLARIFICATION OF THE PRICE/COSTCO, INC. 1993 COMBINED STOCK GRANT AND STOCK OPTION PLAN Pursuant to resolution of the Board of Directors of Price/Costco, Inc. (the "Company"), The Price/Costco, Inc. 1993 Combined Stock Grant and Stock Option Plan is hereby amended, effective as of January 30, 1995, by adding a new Section 14 providing as follows- 14. EXTENSION OF STOCK OPTIONS (a) Notwithstanding the foregoing provisions of the Plan or any written option agreement, each option granted under the Plan held by an employee of the Company whose employment terminated as of January 1, 1995 and who became an employee of Price Enterprises, Inc. ("PEI") as of such date shall, to the extent such option was exercisable as of such date (as determined under the formula in Section 8(b) of the Plan), continue to be exercisable on the same terms and conditions set forth in the written agreement evidencing the grant of such stock option; PROVIDED, that service with PEI shall be treated as service with the Company for purposes of determining the date on which such option shall subsequently terminate; PROVIDED, FURTHER, that to the extent such option was not so exercisable as of January 1, 1995, it shall expire in accordance with its terms. (b) Notwithstanding the foregoing provisions of the Plan or any written option agreement, the Chief Executive Officer of the Company (or such other person or persons designated from time to time by the Board of Directors) shall have the authority, in his discretion, to provide for the continued exercisability of options granted under the Plan in the event of the retirement, disability or death of the holder of such options (or such other event that would otherwise result in termination of the options prior to expiration of the option term); PROVIDED, that in no event shall such period of continued exercisability extend beyond the original expiration date of such options. (c) The provisions of this Section 14 shall not apply to any options held by any individual who is or was at any time subject to the reporting and disclosure requirements of Section 16 of the Securities Exchange Act of 1934, as amended, with respect to the Company. Pursuant to resolution of the Board of Directors of the Company, Section 9 of The Price/Costco, Inc. 1993 Combined Stock Grant and Stock Option Plan is hereby clarified by adding the following sentence to the end of thereof: Notwithstanding anything to the contrary herein, options granted hereunder that are intended to be exempt from Section 16 of the Securities Exchange Act of 1934, as amended, pursuant to Rule 16b-3 thereunder, shall not be transferable except to the executor or administrator of the optionee's estate or to the optionee's heirs or legatees, and shall be exercisable during the optionee's lifetime only by the optionee. PRICE/COSTCO, INC. Date: January 26, 1995 By: /s/ Don E. Burdick ----------------------------------- Name: Don E. Burdick Title: Assistant Secretary 2 AMENDMENT TO THE COSTCO WHOLESALE CORPORATION COMBINED 1984 INCENTIVE STOCK OPTION PLAN AND 1984 NON-QUALIFIED STOCK OPTION PLAN Pursuant to resolution of the Board of Directors of Price/Costco, Inc., Section 11 of the Costco Wholesale Corporation Combined 1984 Incentive Stock Option Plan and 1984 Non-Qualified Stock Option Plan is hereby amended, effective as of January 1, 1995, by adding the following sentence to the end thereof: Notwithstanding anything herein to the contrary, the committee administering the Plan may amend outstanding options to provide for the transfer of such options to a living trust of the option holder and that such options may be exercised by the trustee of such living trust. PRICE/COSTCO, INC. Date: January 26, 1995 By: /s/ Don E. Burdick ----------------------------------- Name: Don E. Burdick Title: Assistant Secretary DISCRETIONARY OPTION EXTENSION ARRANGEMENT Pursuant to resolution of the Board of Directors of Price/Costco, Inc., the Discretionary Option Extension Arrangement is hereby adopted, effective as of the date set forth below, as follows: The Chief Executive Officer of Price/Costco, Inc. (the "Company") (or such other person or persons from time to time designated by the Board of Directors of the Company), shall have the authority, exercisable in his discretion, to grant replacement stock options hereunder to employees of the Company who are holders of stock options under the Costco Wholesale Corporation Combined 1984 Incentive Stock Option Plan and 1984 Nonqualified Stock Option Plan, effective upon the termination of such stock options in the event of such employees, retirement, disability or death, or otherwise. The grant of replacement stock options shall be subject to the following terms and conditions: 1. The provisions of the replacement stock options regarding (a) the number of shares subject to such options and (b) the exercise price of such options shall be as provided under the stock option agreements evidencing the stock options to be replaced, including any adjustments thereto; and the expiration date of the replacement stock options shall be no later than the original expiration date of the stock options to be replaced. 2. The remaining terms and conditions of the replacement stock options shall be substantially similar to those set forth in the existing option agreements, with such changes thereto as the appropriate officers of the Corporation, upon the advice of counsel, shall approve, such approval evidenced by his or her execution thereof; and the effectiveness of any replacement option grant shall be subject to the optionee's written consent to such terms and conditions; PROVIDED, as a condition of any replacement option grant, the optionee must agree to surrender his or her original option to the Company. Notwithstanding anything to the contrary herein, no replacement stock options shall be granted hereunder to any individual who is or was at any time subject to the reporting and disclosure requirements of Section 16 of the Securities and Exchange Act of 1934, as amended, with respect to the Company. PRICE/COSTCO, INC. Date: January 26, 1995 By: /s/ Don E. Burdick ----------------------------------- Name: Don E. Burdick Title: Assistant Secretary 2 EX-10.(J)(6) 3 EXHIBIT 10(J)(6) RESTATED CORPORATE JOINT VENTURE AGREEMENT THIS AGREEMENT is between (1) THE PRICE COMPANY, a corporation organized under the laws of the State of California, United States of America ("PRICE") and (2) PRICE VENTURE MEXICO, a corporation organized under the laws of the State of California, United States of America ("PRIMEX"), on the one hand, and (3) CONTROLADORA COMERCIAL MEXICANA, S.A. de C.V., a corporation organized under the laws of the United Mexican States ("COMERCIAL"), on the other, and is made with reference to the following facts and other recitals: A. PRICE is in the business of operating membership warehouse club outlets and has substantial and valuable experience in such business. PRIMEX is or is about to become a wholly-owned subsidiary of PRICE. B. COMERCIAL is in the business of operating retail department stores and has substantial and valuable experience in such business. C. The parties hereto entered into a Corporate Joint Venture Agreement dated June 21, 1991 and amendments thereto ("Original Joint Venture Agreement"). D. Execution of this Agreement is a condition to the Price Enterprises Transaction and is intended to take effect only upon Closing of the Price Enterprises Transaction. E. Upon becoming effective, this Agreement is intended to supersede and replace the Original Joint Venture Agreement in all respects. F. Pursuant to the Original Joint Venture Agreement, PRIMEX and COMERCIAL established Price Club de Mexico, S.A. de C.V. ("Price Club de Mexico"), of which they each own 50% of the outstanding capital stock, to engage in membership warehouse club operations in the United Mexican States. PRICE has licensed Price Club de Mexico INTER ALIA to use the service mark "Price Club" pursuant to a Service Mark License Agreement dated February 1, 1992 ("Original Service Mark Agreement"). G. As part of the activities contemplated by the Original Joint Venture Agreement, PRIMEX and COMERCIAL also established (i) CONTROLADORA PRICE CLUB, S.A. de C.V. (the "Holding Company"), of which they each own 50% of the outstanding capital stock, and (ii) IMPORTADORA PRIMEX, S.A. de C.V. ("Importadora"), of which PRIMEX owns 49% and COMERCIAL 51% of the outstanding capital stock. The Holding Company in turn owns a number of subsidiaries, including companies which own real property upon which Warehouses operated by Price Club de Mexico are located. -1- H. In connection with the Price Enterprises Transaction, the parties have agreed that PRICE's parent Price/Costco, Inc. ("PriceCostco") or an Affiliate will take over management of Price Club de Mexico, Importadora and the Holding Company and its subsidiaries (hereinafter sometimes collectively referred to as the "Pricemex Group"). PriceCostco is willing to do so subject to certain conditions, including without limitation the execution of this Agreement and the execution of management agreements between PriceCostco and each of Price Club de Mexico, the Holding Company and Importadora (the "Management Agreements"). I. The parties also wish to reorganize the Pricemex Group so that the Holding Company, owned 50% each by PRIMEX and COMERCIAL, in turn owns all of the other companies in the Pricemex Group (the "Reorganization"). J. "Joint Venture Companies" mean the Holding Company and, until the Reorganization occurs, also Price Club de Mexico and Importadora. K. "Pricemex Group Companies" mean the Joint Venture Companies and all subsidiaries of these companies. L. A glossary of terms used with initial capital letters and other terms defined for purposes of this Agreement is set forth in Exhibit "A" hereto. THEREFORE, in consideration of the foregoing and the mutual promises contained in this Agreement, the parties hereto agree as follows: 1. PURPOSE OF THIS AGREEMENT; THE REORGANIZATION. 1.1 PURPOSE. This Agreement is intended to govern the present and future business relationship of the parties, and to provide for the future management and operation of the Pricemex Group Companies. Those companies have been formed to engage in Mexico in the Club Business and to own and operate related real estate and related businesses. 1.2 REORGANIZATION. 1.2.1 Promptly following the execution of this Agreement, the parties shall cause the Reorganization to occur, so that Price Club de Mexico and Importadora are wholly owned subsidiaries of the Holding Company. 1.2.2 The Reorganization shall be accomplished in a tax-free manner. The parties' ownership interests in the Holding -2- Company and the Holding Company's ownership interests in its subsidiaries shall not change. 1.2.3 All costs of the Reorganization shall be borne by the Holding Company. 1.2.4 In connection with the Reorganization, PRIMEX shall pay COMERCIAL the sum of N$1,000 as compensation for the equalization of the ownership of Importadora. (As used hereinafter, "N$" denominates currency in new Mexican pesos and "U.S.$" denominates currency in U.S. dollars.) 1.3 AMENDED CHARTER. The parties agree that the charter (including the articles of incorporation and bylaws) of the Holding Company and of all other Pricemex Group Companies, and of any direct or indirect subsidiaries the Holding Company creates in the future, shall be substantially the same as those attached hereto as Exhibit 1.3. To the extent the charter of any company in the Pricemex Group does not now conform to Exhibit 1.3, the parties shall forthwith cause them to be amended to so conform. 1.4 REQUIRED FILINGS. Each of the parties hereto shall make, execute, register and file, and shall cause the Holding Company and the other Pricemex Group Companies to make, execute, register and file, all charter documents, certificates, deeds, agreements and other instruments as may be necessary or appropriate for the Reorganization and the management and operation of the business of the Pricemex Group as contemplated by this Agreement. 2. CAPITALIZATION, SHARE ISSUANCE, GUARANTIES. 2.1 COMPOSITION OF CAPITAL STOCK. 2.1.1 The capital stock of the Holding Company shall consist of both fixed shares and variable shares. The minimum fixed capital stock of the Holding Company without the right of withdrawal shall be N$50,000, represented by 50,000 totally subscribed shares of capital stock. 2.1.2 Each share of capital stock of the Holding Company and (pending the Reorganization) of Price Club de Mexico and Importadora (the "Shares") will each have one vote and shall otherwise be alike in all respects, and the holders thereof shall be entitled, in proportion to their respective holdings of such Shares, to identical ownership rights and privileges, -3- except as otherwise provided herein or in the Articles of Incorporation and Bylaws of such companies. 2.2 OWNERSHIP OF SHARES. The current ownership of the Shares of the Joint Venture Companies is as set forth in Exhibit 2.2. 2.3 CASH PAYMENTS. All payments for Shares hereunder shall be in cash, unless in-kind payments are agreed upon by COMERCIAL and PRIMEX. 2.4 PREEMPTIVE RIGHTS TO ACQUIRE NEW SHARES. If the capital stock of any company in the Pricemex Group is increased by contribution of new capital, the stockholders of such company shall have preemptive rights to subscribe for any new shares; provided such rights will not exist when new Shares are issued under Section 2.6.2 below. 2.5 ADDITIONAL CAPITAL CONTRIBUTIONS. 2.5.1 The parties shall make additional capital contributions and/or loans to any of the Joint Venture Companies in the amounts and at the times decided by the shareholders. 2.5.2 The Shareholders of Price Club de Mexico have decided and agreed and they shall make additional capital contributions in the aggregate amount of U.S. $45,000,000 (respectively U.S. $22,500,000 from PRIMEX and U.S. $22,500,000 from COMERCIAL), in the time and manner specified in the initial plan in Exhibit 3.11. 2.6 FAILURE TO MAKE ADDITIONAL CAPITAL CONTRIBUTIONS. In the event that either PRIMEX or COMERCIAL (the "Non-Contributing Party") fails to make or advance all or any portion of an additional capital contribution such party is required to make under Section 2.5 ("Delinquent Advance"), such party shall be in breach of its obligations hereunder and, provided that the other party (the "Contributing Party") has advanced the full amount that the Contributing Party was obligated to make, the Contributing Party shall have the following remedies exercisable by written notice within thirty (30) Days following the date of delinquency: 2.6.1 The Contributing Party may give notice of an election to invoke immediately the Buy-Out provisions of Section 8.3 hereof ("Buy-Out Notice") and Section 8.3 shall then apply, or 2.6.2 The Contributing Party may advance to the company in cash an amount equal to the Delinquent Advance, and treat the -4- advance either as (i) a capital contribution for stock, in which event such party shall be issued additional Shares in the company at the subscription value determined at the time the additional capital contribution was decided (or, if no subscription value was so determined, at the par value), or (ii) a loan to the company, in which event the loan shall be repayable upon demand and shall bear interest, in the case of a loan by COMERCIAL at its Specified Borrowing Rate plus two percent (2%), or in the case of a loan by PRIMEX at the then current borrowing rate of PriceCostco from its principal lender plus two percent (2%). 2.7 LOANS, CREDITS AND GUARANTIES. 2.7.1 All loans or credits required by any of the Pricemex Group Companies shall be structured to be financeable solely to such company and, if possible, on a non-recourse basis. 2.7.2 Neither PRICE nor COMERCIAL shall be required to provide leasing, mortgage or other guaranties in favor of third-party creditors of such company. 2.7.3 However, if approved in writing by both PRICE and COMERCIAL, such guaranties shall be provided in the same proportion (1) as to PRICE, in which PRIMEX owns the fixed and variable capital of the Holding Company and (2) as to COMERCIAL, in which COMERCIAL owns the fixed and variable capital of the Holding Company, and shall not terminate without the written agreement of PRICE and COMERCIAL. 2.8 FAILURE TO PROVIDE OR MAINTAIN GUARANTIES. If either party fails to provide or to maintain a guaranty as required by Section 2.7.3 and the other party has provided or maintained such a guaranty, the other party may give notice of an election to invoke immediately the Buy- Out provisions of Section 8.3 hereof ("Buy-Out Notice") and Section 8.3 shall then apply. 2.9 NON-TRANSFERABILITY OF SHARES. 2.9.1 Neither COMERCIAL nor PRIMEX shall voluntarily sell, transfer, assign, pledge or otherwise dispose of all or any portion of its Shares in any of the Joint Venture Companies, or permit or cause the transfer of any capital stock of any of the Pricemex Group Companies, without the prior approval -5- of the company's Board of Directors under Section 4.3.5 below, except (1) to a wholly-owned subsidiary of PriceCostco or of COMERCIAL, as the case may be, that has assumed and agreed to be bound by the provisions of this Agreement by an assumption agreement in form and substance satisfactory to the other party, or (2) in connection with a "Buy-Out" pursuant to Section 8.3 hereof. 2.9.2 If a party violates or attempts to violate Section 2.9.1, the other party may give notice of an election to invoke immediately the Buy-Out provisions of Section 8.3 hereof ("Buy-Out Notice") and Section 8.3 shall then apply. 2.10 OTHER REMEDIES. The exercise by any party of any remedy provided in Sections 2.6, 2.8 or 2.9 shall be cumulative and in addition to any other remedy available to the company or to such party, such as in an arbitration under Section 12.8 hereof. 2.11 AMENDMENT TO CAPITALIZATION. If PRIMEX and COMERCIAL mutually agree to sell any Shares to the public, as a precondition to any such sale, PRIMEX and COMERCIAL shall agree on such amendments to the capitalization of the Holding Company as may be necessary or desirable. 2.12 GOVERNMENTAL CONSENTS. The Joint Venture Companies and the parties hereto shall file such notices and shall obtain, or cause to be obtained, any permits, consents, approvals, authorizations, qualifications or registrations required by any governmental authority (whether in the United States of America or in the United Mexican States) to issue any Shares and/or Capital Notes to COMERCIAL or PRIMEX. 2.13 SECURITIES LAW MATTERS. The Joint Venture Companies and the parties hereto shall make, or cause to be made, to one another or to third parties, any filings, notices or representations required for any Shares and/or Capital Notes issued by any of the Joint Venture Companies to comply with applicable securities laws. 2.14 NOTICES AND LEGENDS. The certificates representing the Shares and the Capital Notes shall bear a legend reflecting the restrictions on transfer provided for in Section 2.9.1 above as well as any other notices or written legends required by applicable securities laws or by the charters of the Pricemex Group Companies. 2.15 SHAREHOLDER ADVANCES. A party may make a voluntary advance to any of the Joint Venture Companies at any time, but solely to the fund working capital needs of the company's operations incurred in the -6- ordinary course of business. Such advance will be made in U.S. Dollars and treated as a loan, and it will earn interest at the applicable rate provided under Section 2.6.2(ii). 3. OPERATIONS. 3.1 MANNER OF OPERATION. The Holding Company, Price Club de Mexico, and each other company in the Pricemex Group shall be operated in accordance with the Management Agreements and the objectives of the Business Plan. 3.2 LOCATION OF PRINCIPAL OFFICE. The principal office of the Holding Company and of Price Club de Mexico shall be located in Mexico City, D.F., Mexico or its greater metropolitan area. Other offices of the Pricemex Group Companies shall be located at such places as the Board of Directors or Executive Committee shall determine. 3.3 MANAGEMENT AGREEMENTS. Contemporaneously with the Effective Date of this Agreement, the parties will cause Price Club de Mexico, the Holding Company and Importadora to enter into the Management Agreements in form the same as that attached hereto as Exhibit 3.3. At the request of PRICE, the parties shall cause any other company in the Pricemex Group also to enter into a Management Agreement. 3.4 ACCOUNTING. 3.4.1 If and to the extent required by Mexican law, the fiscal year of the Pricemex Group Companies will begin on January 1 and end on December 31 of each calendar year. 3.4.2 The Pricemex Group Companies shall also keep accounts by a fiscal year that begins on the Monday nearest September 1 of each year, and by successive accounting periods of four weeks beginning with the first Day of each such fiscal year. 3.4.3 The accounting methods and systems employed by each of the companies shall conform to generally accepted accounting principles in the United Mexican States as customarily employed by corporations of a similar nature, but the Joint Venture Companies shall cause to be prepared and delivered to PRICE, at no cost to PRICE, (i) regular periodic financial statements of each company in the Pricemex Group prepared in accordance with those generally accepted accounting principles then currently employed by PRICE in the United States of America, in such form and detail, and certified if so requested, as may be required by the -7- independent certified accountants of PRICE, and (ii) documents and information necessary to prepare U.S. income tax filings and returns during the term of this Agreement and for a period of three years thereafter. 3.5 PAYMENT OF EXPENSES. All expenses of the business and operations of the Joint Venture Companies shall be paid out of the capital or earnings of the company concerned or their subsidiaries and shall not be the responsibility of the parties hereto. 3.6 INSURANCE. Each of the Pricemex Group Companies shall maintain in force policies of insurance, insuring its assets and business against such losses and risks in such amounts as its Board of Directors or Executive Committee shall determine and in accordance with the laws of the United Mexican States. 3.7 LAREDO CLOSURE. The parties shall promptly cause Price Club de Mexico to pay or reimburse PRICE all of the costs and expenses incurred in closing PRICE's distribution facility located at Laredo, Texas, including, but not be limited to, lease payments (rent and common areas), utility payments, employee severance, and all other costs arising from such termination and wind-up. 3.8 MANAGEMENT PERSONNEL BUDGET. The budget of Price Club de Mexico for Management Personnel to be provided under its Management Agreement shall be U.S. $1,500,000 per calendar year, or such greater amount approved under Section 4 below. 3.9 RECONCILIATION OF ACCOUNTS. The parties agree that the accounts and balances of all Indebtedness of each of the Pricemex Group Companies to COMERCIAL, PRIMEX, PRICE and each of its Affiliates, and Price Enterprises, Inc. are accurately stated, accounted for and reconciled in Exhibit 3.9 hereof. The parties shall cause all such accounts and balances to be accurately stated, accounted for and reconciled at the end of each month hereafter. The existing letter of credit in favor of Price Enterprises, Inc. shall be reissued in favor of PRICE and extended through May 31, 1995. 3.10 PURCHASE COMMITMENTS. The parties agree that Exhibit 3.10 hereof sets forth an accurate listing of merchandise that has been ordered by Price Club de Mexico from PRICE or its Affiliates, and of Price Club de Mexico's commitment to purchase and pay for such merchandise, subject to any merchandise having been delivered under the applicable terms of sale. -8- 3.11 BUSINESS PLAN. 3.11.1 The parties hereby agree to the Business Plan, which shall consist of the initial plan set forth in Exhibit 3.11 hereof, the additional capital contributions established under Section 2.5.2 above, and the other matters set forth in Sections 3.7, 3.8, 3.9, and 3.10 above. 3.11.2 The General Director will communicate to the Board of Directors of Price Club de Mexico no later than March 31, 1995 a more detailed plan which, if adopted by the Board of Directors, will become part of, or modify, the Business Plan. 3.12 INITIAL AUDITORS. The external auditors, shall be a major international accounting firm with offices in Mexico City. The parties agree that the initial external auditors shall be Arthur Andersen & Co. (whose current member in Mexico City is Ruiz, Urquiza y Cia., S.C.) 3.13 COMISARIOS. PRIMEX and COMERCIAL shall each be entitled respectively to appoint one examiner (comisario), or may for any period agree to appoint the other party's examiner. 4. MANAGEMENT. 4.1 BOARD OF DIRECTORS. 4.1.1 Subject to the Management Agreements, the Holding Company and Price Club de Mexico shall each be managed by a six member Board of Directors, three of whom shall be designated by COMERCIAL and three of whom shall be designated by PRIMEX. The parties may mutually agree to name alternates. 4.1.2 The other Pricemex Group Companies shall each have a six member Board of Directors, consisting of the same members as the Board of Directors of the Holding Company. As used herein, unless the context otherwise so requires, "Board of Directors" refers to the Board of Directors of such company in the Pricemex Group as is involved in the matter in question. 4.1.3 At each meeting of shareholders held for the purpose of electing members to the Board of Directors, COMERCIAL and PRIMEX shall vote their shares to ensure such designees shall be elected. -9- 4.1.4 The Chairman of the Board of Directors of the Holding Company and of Price Club de Mexico shall always be chosen from among the directors designated by COMERCIAL, but the Chairman shall not have a tie-breaking vote. The Secretary shall always be chosen from among the directors designated by PRIMEX. 4.1.5 The Board of Directors of the Holding Company and Price Club de Mexico shall meet not less than quarterly. The powers and duties, indemnification and other terms and conditions of Board membership shall be as set forth in the charters of the Pricemex Group Companies. 4.2 BOARD QUORUM & VOTING. No meeting of any Board of Directors of the Pricemex Group Companies shall occur unless four directors are present and unless at least two of the directors designated by PRIMEX and at least two of the directors designated by COMERCIAL are present. All decisions of the Board of Directors of any company in the Pricemex Group shall require the affirmative majority vote of the entire Board of Directors (at least four directors). 4.3 MATTERS REQUIRING SPECIAL CONSENT. Each Board of Directors shall delegate its authority (i) to the officers who are Management Personnel under the Management Agreements as provided in Section 4.5 below, and (ii) to an Executive Committee as provided in Section 4.4 below, except for the following matters which shall be decided by the full Board of Directors: 4.3.1 BUSINESS PLAN, BUDGETS. The approval of revisions and modifications to the Business Plan, including operating and capital budgets. In order that operations may continue, if there is no agreement on any budget as a whole, the items that can be agreed upon within the budget may be approved, but for those items upon which there is no agreement, the previous budget for those items shall continue until approved under this Agreement. 4.3.2 UNBUDGETED OBLIGATIONS. If not provided for in the Business Plan, the approval of any contract, expenditure, loan, credit, indebtedness, guaranty, or acquisition or disposition of real estate, interests in real estate or other fixed assets (hereinafter an "Obligation"), (i) that will result in a specific liability or expense in excess of U.S. $2,000,000 or its equivalent, or (ii) that the Executive Committee has authority to approve, but has not approved, under Section 4.5 below. -10- 4.3.3 MANAGEMENT AGREEMENT CHANGES. The rescission, termination, modification or amendment of any of the Management Agreements or the removal or replacement of any of the Management Personnel (it being understood and agreed that PriceCostco or its assignee may replace or rotate Management Personnel from time to time or any time pursuant to the terms of the Management Agreements as it deems appropriate). 4.3.4 OFFICER ELECTIONS. Subject to Section 4.5.1 below, the election and removal of officers. 4.3.5 SHARE TRANSFERS. The transfer of any Shares of any of the Joint Venture Companies, except (1) to a wholly-owned subsidiary of PriceCostco or of COMERCIAL, as the case may be, that has assumed and agreed to be bound by the provisions of this Agreement by an assumption agreement in form and substance satisfactory to the other party, or (2) in connection with a "Buy-Out" pursuant to Section 8.3 hereof. 4.3.6 AUDITORS. The appointment of new external auditors or removal of the existing auditors. 4.3.7 OTHER MATTERS. The approval of any other matter referred to the Board of Directors by the Executive Committee. 4.4 EXECUTIVE COMMITTEES. 4.4.1 The Boards of Directors of the Pricemex Group Companies shall each delegate the authority described below to an Executive Committee to be composed of the chief executive officer of COMERCIAL and the chief executive officer of PRIMEX. 4.4.2 If not provided for in the Business Plan, the Executive Committee shall have full authority to approve any Obligation that will result in a specific liability or expense in excess of U.S. $250,000 or its equivalent but not greater than U.S. $2,000,000 or its equivalent. 4.4.3 The Executive Committees shall have full authority to take any other actions which the Board of Directors would otherwise have authority to take (other than those matters described in Section 4.3 hereof). -11- 4.4.4 The authority delegated to each Executive Committee shall be exercised by the affirmative vote of both of its members. 4.5 OFFICERS. 4.5.1 At each meeting of the Board or Directors of any of the Pricemex Group Companies at which officers are elected, the parties shall cause their designees on the Board of Directors to vote for the Management Personnel provided under the Management Agreements and, thus, to elect these persons to the positions for which they have been designated by PriceCostco. 4.5.2 Officers who are Management Personnel under the Management Agreements shall have authority to undertake and enter into any Obligation (i) that is provided for in the Business Plan, (ii) that has been approved by the Board of Directors or Executive Committee, or (iii) that will result in a specific liability or expense that is no greater than U.S.$250,000 or its equivalent. They shall also be given Powers of Attorney in the form of Exhibit 4.5. 4.6 SHAREHOLDER MEETINGS. Ordinary shareholder meetings of any company in the Pricemex Group shall deal only with the matters mentioned in Article 181 of the General Corporation Law of Mexico. Extraordinary shareholder meetings shall deal with all other matters to be considered by the shareholders. The affirmative vote of at least sixty percent (60%) of the total capital stock of such company shall be required for action by the shareholders at an extraordinary shareholders meeting. 4.7 CORPORATE RESOLUTIONS. To give effect to the purposes of the Management Agreements and this Agreement, the parties shall promptly cause shareholder resolutions and Board of Directors resolutions in a form substantially the same as set forth in Exhibit 4.7 to be adopted respectively by the shareholders and Boards of Directors of the Pricemex Group Companies designated in Exhibit 4.7. 4.8 ACCESS TO INFORMATION. The officers of each company in the Pricemex Group shall keep its Board of Directors or Executive Committee (as applicable) informed of the material financial, business, marketing and other general information necessary for the Board of Directors or Executive Committee to fulfill their responsibilities and duties. 4.9 AUDITS. Each of PRIMEX and COMERCIAL shall have the right, at its own expense, to have an independent audit of the financial condition of any company in the Primex Group performed by auditors of its own -12- selection at any time during the term of this Agreement and for a period of three years thereafter. 4.10 WEEKLY MEETINGS. PRICE will cause the General Director to meet upon request once per week with COMERCIAL's chief executive officer in a meeting at a mutually convenient time and place. 4.11 STATEMENTS TO PUBLIC OR GOVERNMENT. 4.11.1 PRIMEX will cause the General Director to consult with COMERCIAL's chief executive officer before Price Club de Mexico issues any statement to the public or to the Government of the United Mexican States or other governmental entity. 4.11.2 The parties will use reasonable efforts under the circumstances to advise each other in advance of public statements (but not including filings that must be promptly made under applicable securities laws) that relate to Price Club de Mexico and to provide copies of such statements after they are issued. 4.12 SERVICE MARK AGREEMENT. Contemporaneously with the Effective Date of this Agreement, the parties will cause Price Club de Mexico to enter into a Restated Service Mark License Agreement in the form of Exhibit 4.12, to replace and supersede the Original Service Mark Agreement. 4.13 TRAINING OF EMPLOYEES. PRICE and COMERCIAL will jointly and cooperatively train employees of Price Club de Mexico (1) in the conduct of membership warehouse club operations and (2) in the discharge of that Company's administrative, financial, marketing and related needs. Any training will first be determined by the Management Personnel under the Management Agreements. Price Club de Mexico will reimburse PRICE and COMERCIAL for the expenses associated with such training pursuant to jointly approved employee training budgets and supporting documentation. Such expenses shall include, without limitation, all withholding taxes required to be paid in the U.S.A. and the United Mexican States. 4.14 PURCHASE OF MERCHANDISE. 4.14.1 If merchandise is purchased from PRICE or COMERCIAL, the purchase price and related overhead expenses will be set forth in invoices or other written documents agreed upon -13- between Price Club de Mexico and PRICE or COMERCIAL, as the case may be, in advance. 4.14.2 Contemporaneously with the Effective Date of this Agreement, the parties will cause Price Club de Mexico to enter into a Merchandise Sourcing Agreement in the form of Exhibit 4.14 under which PRICE and its Affiliate will act as purchasing agent for, and thereby supply merchandise to, Price Club de Mexico. 4.14.3 The inventory purchase prices payable by Price Club de Mexico to COMERCIAL will be COMERCIAL's direct costs which shall be (1) the F.O.B. factory cost (less all discounts and rebates) and (2) the Buying Services Costs (as defined in the Merchandise Sourcing Agreement) incurred by COMERCIAL on the transaction. 4.15 REAL ESTATE SUBDIVISION AGREEMENT. Contemporaneously with the Effective Date of this Agreement, COMERCIAL and certain subsidiaries of the Holding Company will enter into an agreement, in the form of Exhibit 4.15, to subdivide real estate jointly owned by COMERCIAL and those subsidiaries. The parties will use best efforts to effect promptly those subdivisions. 4.16 OTHER AGREEMENTS. Other agreements between any of the Pricemex Group Companies and PRICE, PRIMEX or any their Affiliates ("Prior Agreements") that are listed in Exhibit 4.16 hereof will remain in effect after the date of this Agreement. Any Prior Agreements not listed in Exhibit 4.16 are hereby terminated. 5. REPRESENTATIONS AND WARRANTIES OF PRICE AND PRIMEX. PRICE and PRIMEX hereby represent and warrant to COMERCIAL that: 5.1 ORGANIZATION AND STANDING. Each of PRICE and PRIMEX is a corporation organized, existing and in good standing under the laws of the State of California with the requisite power to enter this Agreement and to fulfill its obligations hereunder; and PriceCostco is the parent company of PRICE and is a corporation organized, existing and in good standing under the laws of the State of Delaware. 5.2 AUTHORITY. Each of PRICE and PRIMEX has the right, power and authority to execute, deliver and perform this Agreement and has taken all required corporate action to approve this Agreement. Subject to Section 13 below, this Agreement constitutes a valid and binding obligation of each of PRICE and PRIMEX enforceable in accordance with its terms, except to the extent that enforcement may be subject to -14- bankruptcy, insolvency and other laws of general applicability relating to or affecting creditors' rights and to general equity principles. 5.3 ABSENCE OF CONFLICTS. Entering this Agreement and performing all of their obligations hereunder does not (1) violate or conflict with the Articles of Incorporation or Bylaws of PRICE or PRIMEX or any agreement or instrument binding on either of them, (2) violate or conflict with any law, rule, judgment, order or the like applicable to PRICE or PRIMEX, or (3) require the consent or approval of any other person or entity. 5.4 PENDING PROCEEDINGS. There is no dispute, investigation, litigation or other proceeding pending or overtly threatened against PRICE or PRIMEX which, if unfavorably concluded, would adversely affect the ability of either of them to enter this Agreement or to fulfill its obligations hereunder. 6. REPRESENTATIONS AND WARRANTIES OF COMERCIAL. COMERCIAL hereby represents and warrants to PRICE and PRIMEX that: 6.1 ORGANIZATION AND STANDING. COMERCIAL is a corporation duly organized, existing and in good standing under the laws of the United Mexican States with the requisite power to enter this Agreement and to fulfill its obligations hereunder. 6.2 AUTHORITY. COMERCIAL has the right, power and authority to execute, deliver and perform this Agreement and has taken all required corporate action to approve this Agreement. Subject to Section 13 below, this Agreement constitutes a valid and binding obligation of COMERCIAL enforceable in accordance with its terms, except to the extent that enforcement may be subject to bankruptcy, insolvency, and other laws of general applicability relating to or affecting creditors' rights and to general equity principles. 6.3 ABSENCE OF CONFLICTS. Entering this Agreement and performing all of its obligations hereunder does not (1) violate or conflict with the charter of COMERCIAL or any agreement or instrument binding on it, (2) violate or conflict with any law, rule, judgment, order or the like applicable to COMERCIAL, or (3) require the consent or approval of any other person or entity. 6.4 PENDING PROCEEDINGS. There is no dispute, investigation, litigation or other proceeding pending or overtly threatened against COMERCIAL which, if unfavorably concluded, would adversely affect the ability of COMERCIAL to enter this Agreement or to fulfill its obligations hereunder. -15- 6.5 INFORMATION ABOUT PRICEMEX GROUP. All information concerning the Pricemex Group Companies as stated in Exhibit 6.5 hereof is accurate, true and correct. COMERCIAL will provide to PRICE on the Effective Date, a certificate signed by COMERCIAL's chief executive officer, certifying the accuracy of this information. 7. NON-COMPETITION AND OTHER COVENANTS. 7.1 NONCOMPETE BY COMERCIAL. Without the prior written approval of PRICE, during the term of this Agreement (and, if it is a defaulting party under Sections 8.2 and 9.4, for a period of five years thereafter), neither COMERCIAL nor any of its Affiliates shall directly or indirectly, in Mexico or in the United States of America or elsewhere, other than by way of their interest in the Joint Venture Companies, 7.1.1 own, operate, manage, license or assist, any Club Business or company that engages in a Club Business, or 7.1.2 engage in any business with any of the Specified Companies (except non-continuous purchases of goods where it has a reasonable basis to believe the goods are being sold by a Specified Company below cost). 7.2 NONCOMPETE BY PRICE. Without the prior written approval of COMERCIAL, during the term of this Agreement (and, if it is a defaulting party under Sections 8.2 and 9.4, for a period of five years thereafter), neither PRICE nor any of its Affiliates shall directly or indirectly, in Mexico, other than by way of their interest in the Joint Venture Companies, 7.2.1 own, operate, manage, license or assist any Club Business or company that engages in a Club Business, or 7.2.2 engage in any business with any of the Specified Companies (except non-continuous purchases of goods where it has a reasonable basis to believe the goods are being sold by a Specified Company below cost). 7.3 BEST EFFORTS. The parties shall use best efforts to carry out the terms and purposes of this Agreement and the Management Agreements. 7.4 COOPERATION. PRIMEX and COMERCIAL shall cooperate with each other and shall cause their employees to cooperate to support the businesses and operations of the Pricemex Group Companies. -16- 7.5 TAX REIMBURSEMENT. The parties will cause the Pricemex Group Companies to indemnify and hold harmless PRICE and its Affiliates from, and reimburse PRICE and its Affiliates and COMERCIAL and its Affiliates respectively for, all Liabilities in connection with any determination by tax authorities in the United States of America or in the United Mexican States (i) that any amount paid for merchandise, services, technical assistance or intellectual property rights under this Agreement or the Associated Agreements is insufficient under applicable "transfer pricing" laws and regulations, or (ii) that PRICE or its Affiliates or COMERCIAL and its Affiliates have a tax liability with respect to this Agreement, the Associated Agreements or their subject matter other than from the amounts actually paid. 8. DEADLOCK, DEFAULT, & BUY-OUT. 8.1 DEADLOCK OF SHAREHOLDERS OR DIRECTORS. 8.1.1 DEADLOCK NOTICE. If at any time after December 31, 1996, the shareholders or Board of Directors of any of the Primex Group Companies become (or remain) deadlocked over or, because of a lack of a quorum or a required majority, are unable to act or agree upon any matter including any inability to agree on additional capital requirements or the provisions of guaranties for such company (a "Deadlock"), any party may give a notice of deadlock to the other parties ("Deadlock Notice"). 8.1.2 CONSULTATION PERIOD. Within sixty (60) Days after any Deadlock Notice is given ("Consultation Period"), the chief executive officers of PRICE and of COMERCIAL shall meet personally and attempt to resolve the Deadlock, and any resolution shall be set forth in a written agreement among the parties. 8.1.3 MEDIATION PERIOD. If the Deadlock is not resolved by a written agreement during the Consultation Period, then within the immediately following sixty (60) Days ("Mediation Period") the parties will attempt to have the Deadlock resolved by non-binding mediation under Section 8.5 below. 8.1.4 BUY-OUT NOTICE. If the Deadlock is not resolved by a written agreement during the Consultation Period and Mediation Period, either may give notice of an election to invoke the Buy-Out provisions of Section 8.3 hereof ("Buy-Out Notice") and Section 8.3 shall apply. -17- 8.1.5 PRE-1997 DEADLOCKS. If any Deadlock exists on or before December 31, 1996, the parties shall continue to operate the Pricemex Group Companies in accordance with all matters that have been agreed upon including this Agreement, the Management Agreements and the Business Plan. 8.2 DEFAULT AND INSOLVENCY. 8.2.1 DEFAULT NOTICE. Upon a Default either by PRICE or PRIMEX or by COMERCIAL (the "Defaulting Party"), the other party may give written notice of the Default ("Default Notice") to the Defaulting Party specifying the Default. The Default Notice shall be given within a reasonable time (but in any event within 90 Days) after discovery of the Default. 8.2.2 CONSULTATION PERIOD. Within sixty (60) Days after any Default Notice is given ("Consultation Period"), the chief executive officers of PRICE and of COMERCIAL shall meet personally and attempt to resolve the Default, and any resolution shall be set forth in a written agreement among the parties. 8.2.3 MEDIATION PERIOD. If the Deadlock is not resolved by a written agreement during the Consultation Period, then within the immediately following sixty (60) Days ("Mediation Period") the parties will attempt to have the Deadlock resolved by non-binding mediation under Section 8.5 below 8.2.4 BUY-OUT NOTICE. If the Default (i) is not resolved by a written agreement during the Consultation Period and Mediation Period and (ii) is not cured within 90 Days of the Default Notice, the non-defaulting party may give notice of an election to invoke the Buy-Out provisions of Section 8.3 hereof ("Buy-Out Notice") and Section 8.3 shall apply. 8.2.5 ARBITRATION REMEDY. Either party may in any case seek a remedy by arbitration under Section 12.8 below. Any bona fide dispute between the parties over the existence or nature of a Default or the cure thereof shall be resolved pursuant to the terms of Section 12.8. 8.2.6 INSOLVENCY NOTICE. If a party is insolvent, has been declared bankrupt, has had a receiver or trustee appointed to manage its assets or affairs, or is the subject of a petition for insolvency or bankruptcy that has not been discharged within sixty (60) Days of its filing ("Insolvent Party"), any -18- other party may give the Insolvent Party written notice thereof and elect to invoke the Buy-Out provisions of Section 8.3 hereof ("Insolvency Notice") and Section 8.3 shall apply. 8.3 BUY-OUT. 8.3.1 DETERMINE FMV. In the event of a Buy-Out Notice under Sections 2.6.1, 2.8, 2.9, 8.1.4, 8.2.4 or 8.8, or an Insolvency Notice under Section 8.2.6 above, the Fair Market Value of the Pricemex Group Companies as of the date the Buy- Out Notice is given shall be determined under Section 8.4 below. 8.3.2 PRIMEX ELECTION. PRIMEX shall then have thirty (30) Days from the date upon which the Fair Market Value shall have been determined in which to elect (for itself or an Affiliate), by written notice, to purchase all of the Shares of COMERCIAL in the Joint Venture Companies for a price equal to one hundred percent (100%) of the Fair Market Value multiplied by COMERCIAL's percentage ownership of the Shares of the Holding Company. 8.3.3 COMERCIAL ELECTION. If within the 30-Day period described in Section 8.3.2 PRIMEX has not elected to purchase COMERCIAL's Shares, COMERCIAL shall thereupon have a further thirty (30) Days in which to elect (for itself or an Affiliate), by written notice, to purchase all of the Shares of PRIMEX in the Joint Venture Companies for a price equal to one hundred percent (100%) of the Fair Market Value multiplied by PRIMEX's percentage ownership of the Shares of the Holding Company. 8.3.4 ADJUSTMENT OF FMV. If no election has been made under Sections 8.3.2 or 8.3.3 above, then, immediately upon expiration of the 30-Day period described in Section 8.3.3, the Fair Market Value shall become an amount that is ninety percent (90%) of the previous Fair Market Value, and the procedures of Sections 8.3.2, 8.3.3 and this 8.3.4 will continue to be repeated in sequence until an election is made under Section 8.3.2 or Section 8.3.3. 8.3.5 PURCHASE TERMS. Once an election is made under Section 8.3.2 or Section 8.3.3, then (i) the parties shall promptly perform all acts required of them and use their best efforts to cause third parties to perform all acts required to enable -19- the purchaser to consummate forthwith its purchase of the Shares (the "Required Acts"), and (ii) the purchaser shall pay the purchase price in cash and in U.S. Dollars within 120 Days after the date of the election or within twenty (20) Days after completion of the Required Acts, whichever occurs earlier. 8.4 FAIR MARKET VALUE. 8.4.1 PROPOSED & AGREED VALUES. Within thirty (30) Days after any Buy-Out Notice is given under Section 8.1 or Section 8.2 above, the parties shall communicate to each other by written notice a proposed fair market value in U.S. dollars (the "Proposed Value") and attempt to arrive at an agreed Fair Market Value in U.S. dollars for the Pricemex Group Companies. Any such agreed-upon value, when approved in writing by the parties, shall be deemed to be the Fair Market Value. 8.4.2 APPRAISER DETERMINES FMV. If no such agreement has been reached within the 30-Day period described in Section 8.4.1, then the Fair Market Value in U.S. dollars shall be determined in writing by an independent appraiser. 8.4.3 SELECTION OF APPRAISER. The Holding Company's external auditors shall serve as the appraiser or, if unwilling to do so, appoint the appraiser or, if no appraiser has been appointed within sixty (60) Days after the Buy-Out Notice is given, the President of Mexico's Association of Charted Accountants or other authority agreed on in writing by the parties shall at request of any party appoint the appraiser. The appraiser shall in all cases be a member of a major international accounting firm with offices in Mexico City. 8.4.4 COST. The fees and expenses of the appraiser shall be borne equally by the parties. 8.4.5 BASIS OF APPRAISAL. The appraiser is to make his or her own determination in writing of the fair market value in U.S. dollars of the Shares of the Joint Venture Companies, based on what an arm's length purchaser would pay for the Shares taking into account the going concern value of the Pricemex Group Companies (if still carrying on business). 8.4.6 ASSISTANCE. The parties shall give all reasonable assistance to the appraiser, and require the officers, directors and -20- auditors of the Pricemex Group Companies to give such assistance. The parties may make written representations to the appraiser, but the appraiser will not be obligated to agree with them. 8.4.7 APPRAISED VALUE. Within sixty (60) Days after the appointment of the appraiser (or as soon thereafter as it can be accomplished), the appraiser shall submit to the parties the fair market value as determined by the appraiser (the "Appraised Value") together with a copy of a written appraisal report prepared by such appraiser with respect to such value. 8.4.8 USE OF PROPOSED OR APPRAISED VALUE. If the Appraised Value is higher than the higher of either party's Proposed Value or lower than the lower of either party's Proposed Value (or, if only one Proposed Value was timely communicated, that Proposed Value), then the nearest Proposed Value shall be the Fair Market Value. Otherwise, the Appraised Value determined by the appraiser shall be the Fair Market Value. 8.4.9 DATE FMV DETERMINED. The Fair Market Value shall be deemed determined on (i) the date of any written approval of an agreed Fair Market Value under Section 8.4.1, or (ii) the date the written appraisal report prepared by the appraiser under Section 8.4.7 is given to the last party to receive it, or (iii) if the Fair Market Value has been reduced under Section 8.3.4, the time described in Section 8.3.4. 8.5 MEDIATION PROCEDURE. Mediation under this Agreement shall occur under the then current Center for Public Resources ("CPR") Model Procedure for Mediation of Business Disputes (Model Procedure). The mediator will be selected from the CPR Panels of Neutrals under the Model Procedure, unless the parties have first selected a different mediator. 8.6 INTERIM OPERATION. During any period of Deadlock, Default, Dispute, existence of an Insolvent Party, Consultation Period, Mediation Period, Buy-Out and any period thereafter until a sale is concluded under Section 8.3, the parties shall continue to operate the Pricemex Group Companies in accordance with all matters that have been agreed upon including this Agreement, the Management Agreements and the Business Plan, and otherwise in the best interests of the shareholders. 8.7 OTHER REMEDIES UPON DEFAULT OR SALE. The provisions of this Section 8 are not intended to be penal clauses, and the rights therein shall be in -21- addition to and not in substitution for any other remedies that may be available to a non-defaulting party. No sale under Section 8.4 shall relieve any party from any obligations accrued to the date of such sale or relieve a defaulting party from liability and damages to any other party for breach of this Agreement. 8.8 CHANGE IN CONTROL. If there is a Change in Control Event with respect either to PriceCostco or to COMERCIAL, the other party may within thirty days of receiving notice of the Change in Control Event elect by written notice to invoke immediately the Buy-Out provisions of Section 8.3 hereof ("Buy-Out Notice") and Section 8.3 shall then apply; PROVIDED THAT 8.8.1 The election must be made within five (5) years of the Effective Date of this Agreement, and 8.8.2 The party making the election may not be in Default under this Agreement and the Deadlock, Default and Buy-Out procedures of Sections 8.1, 8.2 or 8.3 shall not otherwise have commenced, and 8.8.3 If the election is properly made by COMERCIAL, COMERCIAL will have the first right to purchase under Section 8.3.2 hereof and, if COMERCIAL fails to elect to purchase under Section 8.3.2, then PRIMEX will have a right to elect to purchase under Section 8.3.3. 8.9 STANDBY LICENSE AGREEMENT. If COMMERCIAL completes a Buy-Out (i) under Section 8.3.3 after PRIMEX fails to elect to purchase under Section 8.3.2 or (ii) under Section 8.8, the parties shall cause a Standby License Agreement substantially in the form of Exhibit 8.9 hereof to be executed. 8.10 PUBLIC OFFERING LIMITATION. If pursuant to the mutual agreement of the parties Shares of the Holding Company have been offered and sold to the public, the parties intend that this Agreement will be appropriately amended and that the Buy-Out provisions hereof will be similarly amended. 9. TERM, TERMINATION & DISSOLUTION. 9.1 TERM. The term of this Agreement shall be from the Effective Date until terminated under Section 9.2. 9.2 TERMINATION OF AGREEMENT. This Agreement shall be terminated on the date: -22- 9.2.1 PRICE, PRIMEX and COMERCIAL agree in writing to terminate the Agreement; 9.2.2 A sale is completed by either party of all its Shares in the Joint Venture Companies by written agreement or under the "Buy-Out" provisions of Section 8.3 above; 9.2.3 120 Days after the charter of the Holding Company expires, or is revoked, provided it is not reinstated (or a new charter is not issued) within these 120 Days. 9.3 SURVIVAL OF PROVISIONS. Sections 7, 8.5, 8.7, 10, 9.4, 9.5, 12, any other provision hereof which specifically so provides, and any provision hereof where the context so requires, shall survive any termination of this Agreement. Termination shall not affect any liability or obligation accrued before the date of termination. 9.4 POST-TERMINATION COMPETITION. After the date of a termination, PRICE and its Affiliates and COMERCIAL and its Affiliates may compete with one another in the United States of America and the United Mexican States subject to the provisions of this Agreement including the provisions of Section 10 hereof relating to confidentiality and return of materials embodying Confidential Information (as defined in Section 10.3); provided, however, that in the event of termination of this Agreement upon a Buy-Out of a party's Shares following a Default or other breach hereof, the defaulting or breaching party shall remain bound by the provisions of Section 7.1 or 7.2 hereof (as applicable) for a period of five years following the date of termination. 9.5 DISSOLUTION. Dissolution of the Holding Company shall occur only in accordance with the applicable provisions of law and the charter of the Holding Company. 10. CONFIDENTIALITY. 10.1 DUTY OF CONFIDENTIALITY. Each of PRICE, PRIMEX and COMERCIAL acknowledges that it will be made aware of and have access to Confidential Information (as defined in Section 10.3). No party hereto shall disclose, during the term of this Agreement or thereafter, any Confidential Information to any person other than an Affiliate, agent or employee of PRICE, PRIMEX or COMERCIAL, and then only in furtherance of the interests of the Pricemex Group Companies, unless prior written consent to such disclosure has been obtained from each other party. -23- 10.2 CONFIDENTIAL INFORMATION. For purpose of this Section 10, Confidential Information shall mean all confidential or proprietary information owned, possessed or used by PRICE, PRIMEX or COMERCIAL or their Affiliates, including, but not limited to, trade secrets and know-how and other such information or data which is declared to be confidential or proprietary by any party to this Agreement prior to its disclosure. Confidential Information for purposes of this Section 10 shall not include information which: (1) was in the public domain at the time it was disclosed, (2) was already validly in a recipient's possession at the time it was disclosed, and the evidence of such possession is reasonably satisfactory to the party seeking to restrict disclosure, (3) was independently developed by the recipient, (4) or becomes known to the recipient from a source other than a disclosing party without the disclosing party breaching its obligations hereunder. 10.3 MEASURES BY AFFILIATES. The parties shall cause their Affiliates, the Pricemex Group Companies, and the employees and agents of each of the foregoing, not to disclose, and to exercise the same degree of care to protect, the Confidential Information of PRICE, PRIMEX and COMERCIAL that it would use to preserve and safeguard its own confidential information. Such care shall include, but not be limited to, requiring any such entities, or their agents and employees, to execute a reasonable confidentiality agreement in a form submitted by one party to any other party. 10.4 RETURN OF CONFIDENTIAL INFORMATION. Upon the termination of this Agreement, each of PRICE, PRIMEX and COMERCIAL shall return to the others of them, and shall cause the Pricemex Group Companies to so return, all materials embodying Confidential Information which such party has received from any of the others since April 1, 1991. 11. FOREIGN CORRUPT PRACTICES ACT AND OTHER LAWS. 11.1 FCPA COMPLIANCE. The parties hereto acknowledge their familiarity with the United States Foreign Corrupt Practices Act ("FCPA") and will comply fully with the FCPA. 11.2 LEGAL COMPLIANCE. The parties shall cause all of the Pricemex Group Companies to comply with all applicable laws and regulations in Mexico, to comply with the FCPA, and to assist PRICE and PRIMEX in complying with any applicable law of Mexico or the United States. 12. MISCELLANEOUS. 12.1 ASSIGNMENT. No party to this Agreement may assign, transfer or otherwise convey any or all of its rights or obligations hereunder -24- without the prior written consent of the others, except to an Affiliate to whom the Shares have been conveyed as permitted by Section 2.9 above. No such assignment to an Affiliate shall relieve the assigning party of any of its obligations hereunder. 12.2 ENTIRE AGREEMENT. This Agreement (including all exhibits hereto), together with the Management Agreements, sets forth the entire agreement among the parties with respect to the subject matter hereof and supersedes the Original Joint Venture Agreement, which is hereby terminated, and supersedes all prior discussions, understandings and agreements relating to the subject matter hereof. 12.3 SEVERABILITY. If any one or more of the provisions contained in this Agreement or in any document executed in connection herewith shall be held invalid, illegal or unenforceable in any respect under applicable law, the validity, legality, and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired; provided, however, that in such case the parties shall use their best efforts to achieve the purpose of the affected provision in a manner which is not invalid, illegal or unenforceable. 12.4 GOVERNING LAW. This Agreement and all actions and arbitrations contemplated hereby shall be governed by and construed and enforced in accordance with the internal laws of the State of Texas, United States of America, excluding the principles of conflict of laws thereof. 12.5 GOVERNING TEXT AND LANGUAGE. The parties shall execute three English language originals of this Agreement, one to be held by each party. The parties understand and agree that this document has been prepared in the English language and that the English language is the official language of this Agreement. The parties shall also promptly cause an official, certified Spanish language text to be prepared, but should any discrepancy of interpretation occur between the English original and the Spanish text, the English original shall be controlling. 12.6 NO WAIVER OF RIGHTS. Except as otherwise provided herein, no failure or delay on the part of either party in the exercise of any power or right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such power or right preclude other or further exercise thereof or of any other right or power. 12.7 FORCE MAJEURE. 12.7.1 Failure on the part of a party to perform any of its obligations hereunder will not be deemed to be a breach of the Agreement to the extent that such failure arises from force -25- majeure. If through force majeure the fulfillment by either party of any obligation set forth in this Agreement will be delayed, the period of such delay will not be counted in computing periods prescribed by this Agreement. 12.7.2 Any party failing to perform its obligations under this Agreement because of force majeure shall give notice in writing of such force majeure as soon as possible after the occurrence to the other party. 12.7.3 Force majeure will mean any war, civil commotion, strike, lockout, accident, epidemic, or other event that is fully beyond the control of the parties, and that directly prevents a party from performing an obligation hereunder. 12.7.4 Any party hereto who fails because of force majeure to perform an obligation hereunder will upon the cessation of the force majeure take all reasonable steps within its power to resume with the least possible delay compliance with that obligation. 12.8 DISPUTE RESOLUTION. 12.8.1 The parties shall attempt to settle any Dispute between them by consultation and non-binding mediation, during a Consultation Period and Mediation Period, as provided by Sections 8.1.2, 8.1.3, 8.2.2, 8.2.3 and 8.5 above. If no Notice of Deadlock or Notice of Default has been given, a party shall first give a written notice specifying the Dispute and the Consultation Period will begin with that notice. 12.8.2 If the Dispute is not resolved by written agreement within the Consultation Period and the Mediation Period, it shall be resolved by binding arbitration under the Commercial Arbitration Rules of the American Arbitration Association ("AAA"), in English at San Diego, California, before one neutral arbitrator who may be a national of any party and who shall be a lawyer with at least 15 years experience in commercial law and a member of the AAA's Large Complex Case Panel. All documents and information relevant to the claim or dispute in the possession of any party shall be made available to the other party not later than sixty (60) Days after the demand for arbitration is served, and the arbitrator may permit such depositions or other discovery deemed necessary for a fair hearing. The hearing may not exceed two Days. The award shall be rendered within 120 Days of -26- the demand. The arbitrator may award interim and final injunctive relief and other remedies, but may not award punitive damages. No time limit herein is jurisdictional. Any award of the arbitrator (including awards of interim or final remedies) shall be final and not subject to appeal or review, and may be confirmed or enforced in any court having jurisdiction and under the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. 12.8.3 Notwithstanding Sections 12.8.1 and 12.8.2 above, the parties may bring court proceedings or claims against each other only (i) as part of separate litigation commenced by an unrelated third party, or (ii) if not first sought from the arbitrator, solely to obtain preliminary injunctive relief or other interim remedies pending conclusion of the arbitration. 12.8.4 The prevailing party in any arbitration or legal action involving any Dispute shall be awarded its reasonable attorney's fees against the non-prevailing party. 12.9 NOTICES. All notices and other communications hereunder shall be in writing in the English language and may be personally delivered or sent by telefax and then confirmed by certified or registered first class air mail. Any such notice or other communication shall be deemed effectively given (a) on the date of delivery if personally delivered; or (b) on the first business day after being sent by telefax. All such notices and communications shall be delivered or sent to the addresses below or such other address(es) as a party may specify in a written notice: If to PRICE or PRIMEX: PRICE/COSTCO, INC. 10809 - 120th Avenue N.E. Kirkland, Washington 98033-9777 U.S.A. Telefax Number: (206) 803-8103 Attention: James D. Sinegal Chief Executive Officer with a copy to: PRICE/COSTCO, INC. 10809 - 120th Avenue N.E. Kirkland, Washington 98033-9777 U.S.A. -27- Telefax Number: (206) 803-8114 Attention: Donald E. Burdick If to COMERCIAL: Controladora Comercial Mexicana, S.A. de C.V. 27 Fernando de Alba Ixtlixochitl Colonia Obrera Mexico, D.F. C.P. 06800 Telefax Number: (52-5) 588-5024 Attention: Carlos Gonzalez Zabalegui Chief Executive Officer with copies to: Lic. Jose Luis Rico Maciel Legal Director Controladora Comercial Mexicana, S.A. de C.V. 27 Fernando de Alba Ixtlixochitl Colonia Obrera Mexico, D.F. C.P. 06800 Telefax Number: (52-5) 588-5024 and Santamarina y Steta, S.C. Campos Eliseos 345 Mexico, D.F. 11560 Telefax Number: (525) 281-3955, 280-6226 Attention: Lic. Alberto Saavedra O. 12.10 EXHIBITS. The Exhibits hereto are an integral part of this Agreement and all references herein to this Agreement shall encompass such Exhibits. 12.11 COUNTERPARTS. This Agreement may be executed simultaneously in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 12.12 HEADINGS. The headings of the sections and paragraphs of this Agreement have been inserted for convenience of reference only and do not constitute a part of this Agreement. -28- 12.13 AMENDMENT AND MODIFICATION. This Agreement may be amended or modified only by a writing executed by all parties. 12.14 TRADE AND TAX LAW CHANGES. PRICE, PRIMEX and COMERCIAL acknowledge that the governments of their respective countries from time to time consider changes in their respective trade and tax laws. It is the intention of the parties that, in the event of any such changes which are major and which are to become effective during the term hereof, they will consult with each other and consider whether it would be mutually beneficial to make any revisions hereto. 12.15 FURTHER INSTRUMENTS AND ACTS. The parties hereto will execute and deliver such further instruments and do such further acts as may be necessary or proper to carry out more effectively the purposes of this Agreement. 13. CONDITION TO VALIDITY. 13.1 This Agreement is conditioned on, and will enter to effect, only if the Closing of the Price Enterprises Transaction occurs on or before March 31, 1995 or such later date that the parties hereto agree upon in writing (the "Nullity Date"). 13.2 If the Closing of the Price Enterprises Transaction has not occurred on or before the Nullity Date, this Agreement will be null and void. If, -29- however, that Closing occurs on or before the Nullity Date, this Agreement enter into effect simultaneously with the conclusion of that Closing. INTENDING TO BE LEGALLY BOUND subject to Section 13 above, the parties have caused this Agreement to be executed by their duly authorized officers as of the _____ day of _________________, 1995. CONTROLADORA COMERCIAL MEXICANA, THE PRICE COMPANY S.A. DE C.V. By By ----------------------------- ---------------------------- Carlos Gonzalez Zabalegui James D. Sinegal Chief Executive Officer Chief Executive Officer By PRICE VENTURE MEXICO ----------------------------- Its Director of Foreign Trade By ---------------------------- Robert E. Price Chief Executive Officer -30- LIST OF EXHIBITS: Exhibit A: Definitions & Glossary of Terms Exhibit 1.3: Amended Charters (Articles and Bylaws) Exhibit 2.2: Share Ownership of Joint Venture Companies Exhibit 3.3: Management Agreements Exhibit 3.9: Statement and Reconciliation of Accounts Exhibit 3.10: Purchase Commitments Exhibit 3.11: Initial Plan Exhibit 4.5: Powers of Attorney for Management Personnel Exhibit 4.7: Corporate Resolutions Exhibit 4.12: Restated Service Mark License Agreement Exhibit 4.14: Merchandise Sourcing Agreement Exhibit 4.15: Real Estate Subdivision Agreement Exhibit 4.16: Other Agreements Exhibit 6.5: Information About the Pricemex Group Companies Exhibit 8.9: Standby License Agreement -31- EXHIBIT "A" DEFINITIONS & GLOSSARY OF TERMS "Affiliate" of a party means (1) a parent corporation of a party; (2) a subsidiary corporation of a party, or a partnership, joint venture, business trust or other association or entity in which a party directly or indirectly owns or controls at least twenty-five percent of the voting stock, partnership interests, or other equity interests, or which a party controls by way of contract, covenant or otherwise; (3) an entity which is under the common control of a parent of a party; (4) any officer, director, shareholder, partner or other controlling person of any of the foregoing entities; and (5) any family member of the family of any of the foregoing persons. Notwithstanding the foregoing, the Pricemex Group Companies shall not be deemed to be affiliates of PRICE, PRIMEX or COMERCIAL. "Appraised Value" has the meaning set forth in Section 8.4.7 hereof. "Associated Agreements" means those other agreements referred to in, or contemplated by, this Agreement. "Board of Directors" has the meaning set forth in Section 4.1.2 hereof. "Business Plan" means the operating and capital expansion plan beginning January 1, 1995 and continuing five years thereafter (including any budget for estimated capital and pre-opening expenditures, revenue and expense projections for Warehouse operations and membership, cash flow estimates, financing plans, and marketing strategies) and shall consist of (i) the initial plan, additional capital contributions and other matters mentioned in Section 3.11, and (ii) any modifications or revisions adopted under Sections 3.11.2 or 4.3.1 hereof. "Buy-Out" means the process and procedure described in Section 8.3 hereof, under which PRIMEX or COMERCIAL may purchase all Shares of the other party in the Joint Venture Companies. "Buy-Out Notice" has the meaning set forth in Sections 8.1.3 and 8.2.4 hereof. "Change in Control Event" means that the ownership of more than fifty percent (50%) of the voting shares of COMERCIAL or of PriceCostco has been acquired by a third party or a third party has acquired the power to appoint a majority of such Company's board of directors, or an agreement has been concluded by COMERCIAL or by PriceCostco to do any of the foregoing. "Club Business" means any merchandising activity utilizing 4,000 square meters or more in a single location, operated with membership and selling food and non-food items through a central check-out. A-1 "Closing" means the closing of the Price Enterprises Transaction. "COMERCIAL" means Controladora Comercial Mexicana, S.A. de C.V., a corporation organized under the laws of the United Mexican States. "Confidential Information" has the meaning set forth in Section 10.3 hereof. "Consultation Period" has the meaning set forth in Sections 8.1.2, 8.2.2 and 12.8.1 hereof. "Days" means calendar days. "Deadlock" has the meaning set forth in Section 8.1.1 hereof. "Deadlock Notice" has the meaning set forth in Section 8.1.1 hereof. "Default" means any breach or failure to perform an obligation under this Agreement, except a failure to make additional capital contributions or a failure to provide or maintain a guaranty under Sections 2.5 through 2.8 or a transfer of shares or other Act in violation of Section 2.9 hereof (which are considered major defaults and create a right immediately to invoke the Buy-Out provisions of Section 8.3). "Default Notice" has the meaning set forth in Section 8.2.1 hereof. "Defaulting Party" has the meaning set forth in Section 8.2.1 hereof. "Dispute" means (1) any differences in the interpretation of this Agreement, (2) any controversy or claim arising out of or relating to this Agreement (including Section 12.8 hereof) or the validity, breach or termination of this Agreement, or (3) any controversy or claim arising out of or relating to one or more of the Pricemex Group Companies, including without limitation any Deadlock, Default, failure to make additional capital contributions or a failure to provide or maintain a guaranty under Sections 2.5 through 2.8 hereof, or a transfer of shares or other act in violation of Section 2.9 hereof. "Effective Date" means the date of the Closing of the Price Enterprises Transaction, provided that such Closing occurs on or before March 31, 1995 or such later date that the parties hereto agree upon in writing. "Executive Committee(s)" has the meaning set forth in Section 4.4 hereof. "Fair Market Value" means the value of the Shares of the Joint Venture Companies as determined under Section 8.4 and (if applicable) under Section 8.3.4. A-2 "General Director" means the General Director of Price Club de Mexico under the Management Agreements. "Holding Company" means Controladora Price Club S.A. de C.V. "Importadora" means Importadora Primex, S.A. de C.V. "Indebtedness means any amount owed including without limitation notes payable, merchandise payables, liabilities for merchandise in transit, and any other amount owed of any nature. "Insolvency Notice" has the meaning set forth in Section 8.2.6 hereof. "Joint Venture Companies" means The Holding Company and, until the Reorganization occurs, also Price Club de Mexico and Importadora. "Liabilities" shall have the same meaning as in Section 7.1 of the Restated Service Mark Agreement." "Management Agreements" means the Management Agreements described in Recital "F" and Section 3.3 hereof. "Mediation Period" has the meaning set forth in Sections 8.1.3, 8.2.3 and 12.8.1 hereof. "Obligation" has the meaning set forth in Section 4.3.6 hereof. "Original Joint Venture Agreement" means the Agreement between The Price Company, Price Venture Mexico and Controladora Comercial Mexicana, S.A. de C.V. to Form a Corporate Joint venture, dated June 21, 1991, and all amendments thereto including without limitation an Amendment to Corporate Joint Venture Agreement dated June 21, 1991, executed as of July 15, 1991 and an Amendment to a certain Corporate Joint Venture Agreement dated June 21, 1991 etc. executed in San Diego, California on January 29, 1992 and in Mexico City on January 28, 1992. "Original Service Mark Agreement" has the meaning set forth in Recital "D" hereof. "PRICE" means The Price Company, a corporation organized under the laws of the State of California. "Price Club de Mexico" means Price Club de Mexico S.A. de C.V. "PriceCostco" means Price/Costco, Inc., a Delaware corporation, and parent company of PRICE. A-3 "Price Enterprises Transaction" means the transaction in which PRICE will acquire the interest of Price Enterprises, Inc. in the immediate parent of PRIMEX. "PRIMEX" means Price Venture Mexico, a corporation organized under the laws of the State of California. "Pricemex Group" means Price Club de Mexico, Importadora, and The Holding Company and subsidiaries of the foregoing. "Pricemex Group Companies" means all companies in the Pricemex Group. "Proposed Value" has the meaning set forth in Section 8.4.1 hereof. "Reorganization" means the reorganization described in Recital "G" and Section 1.2.1 hereof. "Shares" means the shares of capital stock of the Holding Company and (pending the Reorganization) also of Price Club de Mexico and Importadora, as set forth in Section 2.1.2 hereof. "Specified Companies" means Wal-Mart Stores, Inc., Cifra, Gigante, Kmart Corporation, Home Depot, Inc., Office Depot, Inc., and their respective subsidiaries. "Specified Borrowing Rate" means the borrowing rate (1) under COMERCIAL's then current commercial paper program, or (2) if there is no such program, under COMERCIAL's then current Eurobond borrowing, or (3) if there is neither, equal to the prime rate published in the WALL STREET JOURNAL on the first business day after the loan in question is made. "Warehouse Business" means any wholesale or retail merchandising activity, selling food items, non-food items or both through a central check out, and operated out of facilities with warehouse-style fixtures and furnishings or with products displayed in their shipping cartons or pallets, with or without membership. "Warehouses" means locations at which Club Business is operated. A-4 EX-12.1 4 EXHIBIT 12.1 EXHIBIT 12.1 PRICE/COSTCO, INC. COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (DOLLARS IN THOUSANDS)
53 WEEKS 52 WEEKS ENDED ENDED ------------------------------------------------------ ------------ SEPTEMBER 1, AUGUST 30, AUGUST 29, AUGUST 28, SEPTEMBER 3, 1991 1992 1993 1994 1995 ------------ ----------- ----------- -------------- ------------ Earnings(1)................................ $ 342,041 $ 368,855 $ 336,463 $ 203,555(3) $ 368,204 Less: Capitalized interest................. 4,114 8,487 9,483 7,170 3,275 Add: Interest on debt(2)................... 30,155 44,012 55,599 57,642 71,186 Portion of rent under long-term operating leases representative of an interest factor.................................. 17,972 20,208 23,220 26,940 32,160 ------------ ----------- ----------- -------------- ------------ Total earnings available for fixed charges................................... $ 386,054 $ 424,588 $ 405,799 $ 280,967 $ 468,275 ------------ ----------- ----------- -------------- ------------ ------------ ----------- ----------- -------------- ------------ Fixed Charges: Interest on debt(2)...................... $ 30,155 $ 44,012 $ 55,599 $ 57,642 $ 71,186 Portion of rent under long-term operating leases representative of an interest factor.................................. 17,972 20,208 23,220 26,940 32,160 ------------ ----------- ----------- -------------- ------------ Total fixed charges........................ $ 48,127 $ 64,220 $ 78,819 $ 84,582 $ 103,346 ------------ ----------- ----------- -------------- ------------ ------------ ----------- ----------- -------------- ------------ Ratio of earnings to fixed charges......... 8.0 6.6 5.2 3.3(4) 4.5 ------------ ----------- ----------- -------------- ------------
- ------------------------ (1) Earnings represent income from continuing operations before provision for income taxes. (2) Includes amortization of debt expense and capitalized interest. (3) Includes provision for merger and restructuring expenses of $120,000 pre-tax ($80,000 or $.36 per share after tax), related to the merger of The Price Company and Costco Wholesale Corporation in October 1993. If such provision for merger and restructuring expenses were excluded, income from continuing operations before provision for income taxes for fiscal 1994 would have been $323,555. (4) If the $120,000 pre-tax provision for merger and restructuring expenses were excluded, the ratio of earnings to fixed charges for fiscal 1994 would have been 4.7. EX-23.1 5 EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports included in this Form 10-K, into the Price/Costco, Inc.'s previously filed Registration Statement File No. 33-50799. Arthur Andersen LLP Seattle, Washington November 22, 1995 EX-23.2 6 EXHIBIT 23.2 EXHIBIT 23.2 REPORT OF INDEPENDENT AUDITORS Board of Directors The Price Company We have audited the consolidated balance sheet of The Price Company and subsidiaries as of August 31, 1993 and 1992 and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended August 31, 1993. Our audits also included the financial statement schedules for The Price Company listed in the index at Item 14(a). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these statements and schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As discussed in Note N, the Company, in a transaction accounted for as a pooling-of-interests, merged with Costco Wholesale Corporation (Costco) to form Price/Costco, Inc. Effective October 21, 1993, the Company and Costco will operate as wholly-owned subsidiaries in Price/Costco, Inc. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of The Price Company and subsidiaries at August 31, 1993 and 1992, and the consolidated results of their operations and their cash flows for each of the three years in the period ended August 31, 1993 in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. Ernst & Young LLP San Diego, California November 19, 1993 EX-27 7 EXHIBIT 27
5 1,000 12-MOS SEP-03-1995 AUG-29-1994 SEP-03-1995 45,688 0 151,293 4,628 1,422,272 1,702,319 3,062,035 526,442 4,437,419 1,692,938 1,099,815 305,941 0 0 1,224,803 4,437,419 17,905,926 18,247,286 16,225,848 17,813,954 0 0 67,911 368,204 150,963 217,241 (83,363) 0 0 133,878 0 0.68
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