Common use of MERCHANDISE INVENTORIES Clause in Contracts

MERCHANDISE INVENTORIES. Merchandise inventories are valued at the lower of cost or market as determined by the retail inventory method, and are stated using the last-in, first-out (LIFO) method for U.S. merchandise inventories, and the first-in, first-out (FIFO) method for foreign merchandise inventories. If the FIFO method had been used merchandise inventory would have been $9,150 and $6,650 higher at November 20, 1994 and August 28, 1994, respectively. The Company provides for estimated inventory losses between physical inventory counts on the basis of a standard percentage of sales. This provision is adjusted 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. NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE Net income per common and common equivalent share is based on the weighted average number of common and common equivalent shares outstanding. For the quarter ended November 20, 1994 this calculation eliminated 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. The quarter ended November 21, 1993 does not reflect the effect of options, warrants and convertible debentures as they were not dilutive for either primary or fully-diluted purposes. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOVEMBER 20, 1994 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) 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 subsidiaries of PriceCostco (the Merger). Pursuant to the Merger, Price and Costco became subsidiaries of PriceCostco. Shareholders of Price received 2.13 shares of PriceCostco common stock for each share of Price common stock and shareholders of Costco received one share of PriceCostco common stock for each share of Costco. The Merger 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 consummation of the combination 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. Components of the $120,000 provision for merger and restructuring expenses, including amounts expended and the remaining accrual related to completing the merger and restructuring effort at November 20, 1994, are as follows: AMOUNTS ESTIMATE TO EXPENDED COMPLETE Direct transaction expenses including investment banking, legal, accounting, printing, filing and other professional fees................................. $ 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 -- 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, all of which is expected to be completed in fiscal 1995..................................................... 30,787 8,213 Costs of converting management information systems, primarily merchandising, operating, and membership systems in fiscal 1994 and planned conversion of payroll, sales audit, and other systems in fiscal 1995....................... 14,452 6,548 Other expenses................................................................ Total..................................................................... 9,728 ----------- $ 104,463 ----------- ----------- 776 ----------- $ 15,537 ----------- ----------- 12 PRICE/COSTCO, INC. NOTE (2) -- MERGER OF PRICE AND COSTCO (CONTINUED) The following summarizes amounts reported by Price and Costco prior to the Merger for the first quarter of fiscal 1994. MEMBERSHIP FEES INCOME FROM DISCONTINUED NET SALES AND OTHER INCOME OPERATIONS Fiscal 1994 Merger)............................ $ 1,092,891 $ 28,525 $ 10,145 $ 3,092 Costco (8 weeks prior to the Merger)............................ 1,204,765 23,818 9,301 -- PriceCostco (4 weeks after the Merger)............................ 1,302,141 28,987 (56,384) 855 Combined............................ $ 3,599,797 $ 81,330 $ (36,938)(a) $ 3,947 <FN> -

MERCHANDISE INVENTORIES. Merchandise inventories are valued at the lower of cost or market as determined by the retail inventory method, and are stated using the last-in, first-out (LIFO) method for U.S. merchandise inventories, and the first-in, first-out (FIFO) method for foreign merchandise inventories. If the FIFO method had been used merchandise inventory would have been $9,150 14,150 and $6,650 higher at November 20May 7, 1994 1995, and August 28, 1994, respectively. The Company provides for estimated inventory losses between physical inventory counts on the basis of a standard percentage of sales. This provision is adjusted 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. NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE Net income per common and common equivalent share is based on the weighted average number of common and common equivalent shares outstanding. For The calculation for the quarter 12- and 36-week periods ended November May 7, 1995, reflects the reduction of approximately 23.2 million PriceCostco shares tendered in exchange for an equivalent number of Price Enterprises shares as of December 20, 1994 this 1994. The calculation eliminated for the 36-week period ended May 7, 1995, also eliminates interest expense, net of PRICE/COSTCO, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MAY 7, 1995 (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (UNAUDITED) NOTE (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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. The quarter 12- and 36-week periods ended November 21May 7, 1993 does and the 36-week period ended May 8, 1994 do not reflect the effect of options, warrants and convertible debentures as they were not dilutive for either primary or fully-diluted purposes. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOVEMBER 20, 1994 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) 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 subsidiaries of PriceCostco (the Merger). Pursuant to the Merger, Price and Costco became subsidiaries of PriceCostco. Shareholders of Price received 2.13 shares of PriceCostco common stock for each share of Price common stock and shareholders of Costco received one share of PriceCostco common stock for each share of Costco. The Merger 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 consummation of the combination 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. Components of the $120,000 provision for merger and restructuring expenses, including amounts expended and the remaining accrual related to completing the merger and restructuring effort at November 20, 1994, are as follows: AMOUNTS ESTIMATE TO EXPENDED COMPLETE Direct transaction expenses including investment banking, legal, accounting, printing, filing and other professional fees................................. $ 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 -- 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, all of which is expected to be completed in fiscal 1995..................................................... 30,787 8,213 Costs of converting management information systems, primarily merchandising, operating, and membership systems in fiscal 1994 and planned conversion of payroll, sales audit, and other systems in fiscal 1995....................... 14,452 6,548 Other expenses................................................................ Total..................................................................... 9,728 ----------- $ 104,463 ----------- ----------- 776 ----------- $ 15,537 ----------- ----------- 12 PRICE/COSTCO, INC. NOTE (2) -- MERGER OF PRICE AND COSTCO (CONTINUED) The following summarizes amounts reported by Price and Costco prior to the Merger for the first quarter of fiscal 1994. MEMBERSHIP FEES INCOME FROM DISCONTINUED NET SALES AND OTHER INCOME OPERATIONS Fiscal 1994 Merger)............................ $ 1,092,891 $ 28,525 $ 10,145 $ 3,092 Costco (8 weeks prior to the Merger)............................ 1,204,765 23,818 9,301 -- PriceCostco (4 weeks after the Merger)............................ 1,302,141 28,987 (56,384) 855 Combined............................ $ 3,599,797 $ 81,330 $ (36,938)(a) $ 3,947 <FN> -.

MERCHANDISE INVENTORIES. Merchandise inventories are valued at the lower of cost or market as determined by the retail inventory method, and are stated using the last-in, first-out (LIFO) method for U.S. merchandise inventories, and the first-in, first-out (FIFO) method for foreign merchandise inventories. If the FIFO method had been used merchandise inventory would have been $9,150 23,650 and $6,650 16,150 higher at November 20May 12, 1994 1996 and August 28September 3, 19941995, respectively. The Company provides for estimated inventory losses between physical inventory counts on the basis of a standard percentage of sales. This provision is adjusted 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 yearquarters. NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE Net income per common and common equivalent share is based on the weighted average number of common and common equivalent shares outstanding. For The calculation for the quarter 12- and 36-week periods ended November May 12, 1996 and May 7, 1995, reflects the reduction of approximately 23.2 million PriceCostco shares tendered in exchange for an equivalent number of Price Enterprises, Inc. shares as of December 20, 1994 this 1994. The calculation eliminated also eliminates interest expense, net of income taxes, on the 5 1/2% convertible subordinated debentures (primary and fully diluted) , and excluding the third quarter of fiscal 1995), and the 6 3/4% convertible subordinated debentures (fully diluted onlyonly and excluding the third quarter of fiscal 1995). PRICE/COSTCO, and includes the additional shares issuable upon conversion of these debentures. The quarter ended November 21, 1993 does not reflect the effect of options, warrants and convertible debentures as they were not dilutive for either primary or fully-diluted purposesINC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOVEMBER 20, 1994 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) NOTE (2) -- MERGER DEBT BANK LINES OF PRICE CREDIT AND COSTCO On October 21COMMERCIAL PAPER PROGRAMS The Company has a domestic multiple option loan facility with a group of 12 banks which provides for borrowings up to $500,000 or standby support for a $500,000 commercial paper program. Of this amount, 1993$250,000 expires on January 27, 1997, and $250,000 expires on January 30, 2001. The interest rate on bank borrowings is based on LIBOR or rates bid at auction by the participating banks. At May 12, 1996, $11,000 was outstanding under the commercial paper program and no amount was outstanding under the loan facility. In addition, the shareholders Company's wholly-owned Eastern Canada subsidiary has a $102,000 commercial paper program supported by a bank credit facility with three Canadian banks, of both Price which $61,000 will expire in March 1997 and Costco approved the mergers of Price and Costco into subsidiaries of PriceCostco (the Merger). Pursuant to the Merger, Price and Costco became subsidiaries of PriceCostco. Shareholders of Price received 2.13 shares of PriceCostco common stock for each share of Price common stock and shareholders of Costco received one share of PriceCostco common stock for each share of Costco$41,000 will expire in March 1999. The Merger qualified as a interest rate on bank borrowings is based on the prime rate or the "pooling-of-interestsBankers' Acceptance" for accounting and financial reporting purposesrate. 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. ConsequentlyAt May 12, the historical financial statements for periods prior to the consummation of the combination 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 1996, $83,000 was outstanding under the pooling-of-interests accounting methodCanadian commercial paper program. In the first quarter of fiscal 1994April 1996, the Company recorded borrowed $140,000 from a provision group of banks under a five-year unsecured term loan. Interest only is payable quarterly at rates based on LIBOR. Proceeds of the loan were used to retire $40,000 outstanding under the Canadian commercial paper program and $100,000 outstanding under the U.S. commercial paper program. The Company also has separate letter of credit facilities (for merger commercial and restructuring costs standby letters of credit) totaling approximately $120,000 pre-187,000. The outstanding commitments under these facilities at May 12, 1996 totaled approximately $88,000, including approximately $42,000 in standby letters of credit for workers' compensation requirements. On February 21, 1996, the Company filed with the Securities and Exchange Commission a shelf registration statement relating to $500,000 of senior debt securities. The registration statement was declared effective on February 29, 1996. As part of that filing, the Company announced its intention to offer $300,000 of senior notes to refinance existing indebtedness. The Company has deferred issuance of these notes due to unfavorable interest rate market conditions. NOTE (3) -- INCOME TAXES The following is a reconciliation of the federal statutory income tax ($80,000 after tax) related rate to the Merger. Components of the $120,000 provision effective income tax rate for merger and restructuring expensesincome from continuing operations: 36 WEEKS ENDED 36 WEEKS ENDED MAY 12, including amounts expended and the remaining accrual related to completing the merger and restructuring effort at November 201996 MAY 7, 19941995 ---------------------- ---------------------- Federal statutory income tax rate........................... $ 96,661 35.00% $ 86,930 35.00% State, are as follows: AMOUNTS ESTIMATE TO EXPENDED COMPLETE Direct transaction expenses including investment banking, legal, accounting, printing, filing foreign and other professional fees................................. income taxes, net.................. 17,260 6.25% 15,528 6.25% ----------- --------- ----------- --------- $ 24,548 113,921 41.25% $ 102,458 41.25% ----------- --------- ----------- --------- ----------- --------- ----------- --------- NOTE (4) -- Cost COMMITMENTS AND CONTINGENCIES 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 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 -- 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, all of which is expected to be completed in fiscal 1995..................................................... 30,787 8,213 Costs of converting management information systems, primarily merchandising, operating, and membership systems in fiscal 1994 and planned conversion of payroll, sales audit, and other systems in fiscal 1995....................... 14,452 6,548 Other expenses................................................................ Total..................................................................... 9,728 ----------- $ 104,463 ----------- ----------- 776 ----------- $ 15,537 ----------- ----------- 12 operations. See Legal Proceedings at page 7 for outstanding legal matters. PRICE/COSTCO, INC. NOTE (2) -- MERGER OF PRICE AND COSTCO NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) NOTE (5) -- SUBSEQUENT EVENT On May 23, 1996, the Company filed a registration statement with the Securities and Exchange Commission in connection with an underwritten public offering of 19,500,000 shares of Common Stock. All of the 19,500,000 shares being offered are being sold by a selling stockholder, Fourcar B.V., an indirect subsidiary of Carrefour S.A. Fourcar B.V. has granted the underwriters an option to purchase up to an additional 1,691,301 shares of Common Stock to cover over-allotments, if any. After the offering, and assuming the full exercise of the over-allotment option, Fourcar B.V. will no longer own any shares of Common Stock of PriceCostco. The following summarizes amounts reported Company will not receive any proceeds from the shares being offered by Price the selling stockholder. In a May 23, 1996 news release, Carrefour indicated that: "Carrefour wishes to focus on the development of its hypermarket concept on a worldwide basis. This transaction will allow each company to forge their own local partnerships, without conflicts of interest." PriceCostco and Costco prior Carrefour have begun to overlap one another in certain countries, including Mexico, Korea and Taiwan. ▇▇▇▇▇▇ ▇▇▇▇▇▇▇, Chief Executive Officer of Carrefour, is also a director of PriceCostco. ▇▇. ▇▇▇▇▇▇▇ intends to resign from PriceCostco's Board of Directors upon Fourcar's sale of its PriceCostco common stock. U.S. $140,000,000‌ as the Merger Borrower, as the Lenders, THIS CREDIT AGREEMENT, dated as of April 11, 1996, among PRICE COSTCO NOVA SCOTIA COMPANY, a Nova Scotia unlimited company (the "BORROWER"), the various financial institutions as are or may become parties hereto (collectively, the "LENDERS"), and CANADIAN IMPERIAL BANK OF COMMERCE ("CIBC"), as agent (the "AGENT") for the first quarter of fiscal 1994. MEMBERSHIP FEES INCOME FROM DISCONTINUED NET SALES AND OTHER INCOME OPERATIONS Fiscal 1994 Merger)............................ $ 1,092,891 $ 28,525 $ 10,145 $ 3,092 Costco (8 weeks prior to the Merger)............................ 1,204,765 23,818 9,301 -- PriceCostco (4 weeks after the Merger)............................ 1,302,141 28,987 (56,384) 855 Combined............................ $ 3,599,797 $ 81,330 $ (36,938)(a) $ 3,947 <FN> -Lenders,