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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 13, 1994
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
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.)
4649 MORENA BOULEVARD 10809 - 120TH AVENUE N.E.
SAN DIEGO, CALIFORNIA 92117 KIRKLAND, WASHINGTON 98033
(Address of principal executive offices)
(619) 581-4600 (206) 803-8100
(Registrant's telephone number, including area code)
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 ___
The registrant had 217,667,717 common shares, par value $.01, outstanding at
March 25, 1994.
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PRICE/COSTCO, INC.
INDEX TO FORM 10-Q
PART I -- FINANCIAL INFORMATION
PAGE
----
ITEM 1 -- FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets................................. 10
Condensed Consolidated Statements of Operations....................... 11
Condensed Consolidated Statements of Cash Flows....................... 12
Notes to Condensed Consolidated Financial Statements.................. 13
ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS..................................... 3
PART II -- OTHER INFORMATION
ITEM 1 -- LEGAL PROCEEDINGS............................................. 7
ITEM 2 -- CHANGES IN SECURITIES......................................... 7
ITEM 3 -- DEFAULTS UPON SENIOR SECURITIES............................... 7
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........... 7
ITEM 5 -- OTHER INFORMATION............................................. 8
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K.............................. 8
Exhibit (28) -- Independent Public Accountants' Letter................ 18
2
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Price/Costco, Inc.'s (the "Company" or "Price/Costco") unaudited condensed
consolidated balance sheet as of February 13, 1994, and the audited condensed
consolidated balance sheet as of August 29, 1993 and unaudited condensed
consolidated statements of operations for the 12-and 24-week periods ended
February 13, 1994, and February 14, 1993, and unaudited condensed consolidated
statements of cash flows for the 24-week periods then ended are attached. Also
attached are notes to the unaudited condensed consolidated financial statements
and the results of the limited review performed by Arthur Andersen & Co.,
independent public accountants.
The Company reports on a 52/53-week fiscal year, consisting of 13 four-week
periods and ending on Sunday nearest the end of August. Fiscal 1994 will end on
August 28, 1994. The first, second and third quarters consist of 12 weeks each
and the fourth quarter consists of 16 weeks.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This management discussion should be read in conjunction with the management
discussion included in the Company's fiscal 1993 annual report on Form 10-K
previously filed with the Securities and Exchange Commission.
(A) COMPARISON OF THE 12 WEEKS ENDED FEBRUARY 13, 1994, AND FEBRUARY 14, 1993
(DOLLARS IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
Net income during the second quarter of fiscal 1994 decreased 10% to
$62,275, or $.28 per share (fully diluted), as compared to $69,029, or $.30 per
share (fully diluted) during the second quarter of fiscal 1993. Included in the
second quarter of fiscal 1993's results was a $6,710 pre-tax gain, or $.02 per
share, related to the sale of non-club property. Included in the second quarter
fiscal 1994 results was a $2,500 pre-tax charge, or $.01 per share related to
costs associated with the January 1994 Los Angeles earthquake in which four
warehouses in the San Fernando Valley suffered damage.
Net sales increased 8% to $4,019,417 during the second quarter of fiscal
1994, from $3,736,234 during the second quarter of fiscal 1993. This increase
was due to sales at the 31 warehouses that were opened since the end of the
second quarter of fiscal 1993, which increases were partially offset by negative
comparable sales at existing locations opened prior to fiscal 1993, and by
discontinued sales from seven warehouses closed during fiscal 1993 and six
warehouses closed in the first half of fiscal 1994.
Comparable sales, sales in warehouses open for at least a year, were a
negative 1% during the second quarter of fiscal 1994. The comparable sales
decrease was attributed to several factors, including the following: the effect
of sales cannibalization by opening additional warehouses in existing markets;
increased competition in many markets; price deflation in certain merchandise
categories; the January 1994 earthquake; extreme winter weather conditons in the
Northeast and Mid-Atlantic states; and a weaker Canadian dollar where the
Company derives approximately 15% of net sales. The negative 1% comparable sales
recorded during the second quarter represents an improvement over the first
quarter of fiscal 1994 when comparable sales were negative 5%.
Membership fees and other revenue increased from $75,125, or 2.01% of net
sales, in the second quarter of fiscal 1993 to $78,245, or 1.95 % of net sales
in the second quarter of fiscal 1994. This increase reflects new membership
sign-ups at the 31 new warehouses opened since the end of the second quarter of
1993, and the effect of membership fee increases in certain markets implemented
in 1993 and 1994. As anticipated, the Company is experiencing a small decline in
membership renewals at existing warehouses attributable to overlapping Price
Club and Costco memberships and offering Price Club and Costco members
reciprocal membership privileges effective November 1, 1993.
Revenue from real estate operations is net of operating expense and includes
the results of income-producing properties as well as gains on sales of
property. Revenue from real estate operations
3
decreased from $9,981 in the second quarter of fiscal 1993 to $3,700 in the
second quarter of fiscal 1994. The decrease is due to a $6,710 pre-tax gain
recognized on the sale of non-club property in the second quarter of fiscal
1993, for which there was no similar gain in the second quarter of fiscal 1994.
Gross margin (defined as net sales minus merchandise costs) increased from
$358,438, or 9.59% of net sales in the second quarter of fiscal 1993 to
$384,690, or 9.57% of net sales in the second quarter of fiscal 1994. The gross
margin reflects improved buying and distribution techniques of the combined
company and an increased proportion of sales from ancillary businesses (such as
pharmacy, fresh food, one-hour photo, optical and food services) which typically
have higher gross margin characteristics. These positive effects to gross margin
were offset by a lower inventory shrinkage recovery reflected in the second
quarter of FY 1994, as compared to such recovery in the second quarter of fiscal
1993, due to a reduction in the inventory shrinkage provision in the first
quarter of fiscal 1994.
The gross margin figures reflect accounting for merchandise inventories on
the last-in, first-out (LIFO) method. For the second quarter of both fiscal 1994
and 1993 there was a $1,900 LIFO charge to income due to the use of the LIFO
method compared to the first-in, first-out (FIFO) method.
Selling, general and administrative expenses as a percent of net sales
increased from 8.48% during the second quarter of fiscal 1993 to 8.65% during
the second quarter of fiscal 1994, reflecting a combination of comparable unit
sales decreases in warehouses in operation during both fiscal periods and higher
expense ratios at warehouses opened during fiscal 1994 and fiscal 1993 (newer
units generally operate at significantly lower annual sales volumes than mature
units and, therefore, incur higher expense ratios than mature units). Included
in selling, general and administrative expenses is the $2,500 pre-tax charge
related to costs associated with the January 1994 Los Angeles earthquake.
Preopening expenses totaled $4,834 or 0.13% of net sales during the second
quarter of fiscal 1993 and $4,915 or .12% of net sales during the second quarter
of fiscal 1994. During the second quarter of fiscal 1994, the company opened 10
new warehouses. The Company opened 7 new warehouses during the second quarter of
fiscal 1993.
Interest expense totaled $10,963 in the second quarter of fiscal 1993 and
$11,655 in the second quarter of fiscal 1994. In both fiscal quarters interest
expense was incurred as a result of the interest on the three series of
convertible subordinated debentures, as well as interest on borrowings under the
Company's credit facilities.
Interest and other income totaled $4,264 in the second quarter of fiscal
1993 and $3,212 in the second quarter of fiscal 1994. This decrease was
primarily due to lower average balances of cash and short-term investments and
lower interest rates in the second quarter of fiscal 1994.
(B) COMPARISON OF THE 24 WEEKS ENDED FEBRUARY 13, 1994 AND FEBRUARY 14, 1993
Net income during the first half of fiscal 1994 totaled $29,284, or $.13 per
share (fully diluted), compared to $113,357 or $.51 per share (fully diluted)
during last year's first half. This year's income figure includes the merger and
restructuring charge of $120,000 pre-tax ($80,000 after tax), or $.36 per share
(fully diluted), related to combining The Price Company and Costco Wholesale
Corporation. Excluding the merger and restructuring charge, net income during
the first half would have been $109,284, or $.49 per share (fully diluted). In
addition to the Los Angeles earthquake charge included in this year's first half
results is a $4,210 pre-tax gain or $.01 per share related to the sale of
non-club property.
Net sales increased 6% to $7,619,214 during the first half of fiscal 1994,
from $7,158,691 during the first half of fiscal 1993. This increase was due to:
sales at the 31 warehouses that were opened since the end of the first half of
fiscal 1993, which increases were partially offset by negative comparable sales
at existing locations opened prior to fiscal 1993, and by discontinued sales
from seven warehouses closed during fiscal 1993 and six warehouses closed in the
first half of fiscal 1994.
Comparable sales, sales in warehouses open for at least a year, were a
negative 3% during the first half of fiscal 1994. The comparable sales decrease
was attributed to several factors, including the
4
following: the effect of sales cannibalization by opening additional warehouses
in existing markets; increased competition in most markets; price deflation in
certain merchandise categories; the January 1994 Los Angeles earthquake; extreme
weather conditions in the Northeast and Mid-Atlantic states; and a weaker
Canadian dollar where the Company derives approximately 15% of net sales.
Membership fees and other revenue increased from $155,139, or 2.17% of net
sales, in the first half of fiscal 1993 to $159,575, or 2.09% of net sales in
the first half of fiscal 1994. This increase reflects new membership sign-ups at
the 31 new warehouses opened since the end of the second quarter of 1993, and
the effect of membership fee increases implemented in certain markets in fiscal
1993. As anticipated, the Company is experiencing a decline in membership
renewals at existing warehouses attributable to overlapping memberships and
offering Price and Costco members reciprocal membership privileges effective
November 1, 1993.
Revenue from real estate operations is net of operating expenses and
includes the results of income-producing properties as well as gains on sales of
property. Revenue from real estate operations decreased from $11,754 in the
first half of fiscal 1993 to $10,221 in the second quarter of fiscal 1994. The
decrease is due primarily to a $6,710 pre-tax gain recognized on the sale of
property in the first half of fiscal 1993, compared to $4,210 in the first half
of 1994.
Gross margin (defined as net sales minus merchandise costs) increased from
$663,581, or 9.27% of net sales in the first half of fiscal 1993 to $717,442, or
9.42% of net sales in the first half of fiscal 1994. The gross margin reflects
improved buying and distribution techniques of the combined company and an
increased proportion of sales from ancillary businesses (such as pharmacy, fresh
food, one-hour photo, optical and food services) which typically have higher
gross margin characteristics.
The gross margin figures reflect accounting for merchandise inventory costs
on the last-in, first-out (LIFO) method. For the first half of fiscal 1994 there
was a $3,800 LIFO charge to income due to the use of the LIFO method compared to
the first-in, first-out (FIFO) method. This compares to a $4,100 LIFO charge in
the first half of fiscal 1993.
Selling, general and administrative expenses as a percent of net sales
increased from 8.57% during the first half of fiscal 1993 to 8.79% during the
first half of fiscal 1994, reflecting a combination of comparable unit sales
decreases in warehouses in operation during both fiscal periods and higher
expense ratios at warehouses opened during fiscal 1993 and fiscal 1994 (newer
warehouses generally operate at significantly lower annual sales volumes than
mature units and, therefore, experience higher expense ratios than mature
units). Included in selling general and administrative expenses is the $2,500
pre-tax charge related to costs associated with the January 1994 Los Angeles
earthquake.
Preopening expenses totaled $16,385 or 0.23% of net sales during the first
half of fiscal 1993 and $16,045 or 0.21% of net sales during the first half of
fiscal 1994. During the first half of fiscal 1994, the company opened 21 new
warehouses. The Company opened 27 new warehouses during the first half of fiscal
1993.
Interest expense totaled $20,407 in the first half of fiscal 1993 and
$22,478 in the first half of fiscal 1994. In both fiscal periods interest
expense was incurred as a result of the interest on the three series of
convertible subordinated debentures, as well as interest on borrowings under the
Company's credit facilities.
Interest income and other totaled $8,977 in the first half of fiscal 1993
and $5,923 in the first half of fiscal 1994. This decrease was primarily due to
lower average balances of cash and short-term investments and lower interest
rates in the first half of fiscal 1994.
The $120,000 pre-tax ($80,000 after-tax) provision for merger and
restructuring costs includes approximately $20,000 of direct transaction costs
related to the merger, as well as estimated expenses related to consolidating
and restructuring certain functions, the closing of certain facilities and sale
of related properties, severance and employee payments, write-offs of certain
redundant capitalized costs and certain other costs. Under the
pooling-of-interests accounting method, these estimated costs
5
are expensed in the quarter in which the merger was consummated (first quarter
of fiscal 1994). The provision for income tax in the first half of fiscal 1994
reflects certain merger-related costs that are not deductible for income tax
purposes.
LIQUIDITY AND CAPITAL RESOURCES
(DOLLARS IN THOUSANDS)
Price/Costco's primary requirement for capital is the financing of the land,
building and equipment costs for new warehouses plus the costs of initial
warehouse operations and working capital requirements; non-club real estate
development, including real estate joint ventures; and international expansion
through investment in foreign subsidiaries and joint ventures.
In the first half of fiscal 1994, cash provided by operations totaled
$69,934. Proceeds generated from property sales were $28,657. These funds,
combined with a $148,625 reduction of cash and cash equivalents and short-term
investments and $80,407 of increased borrowings under revolving credit
agreements were used to finance additions to property and equipment for
warehouse clubs and related operations of $246,956, other investing activities
related primarily to non-club real estate development, and other assets, which
together totaled $89,681, including the purchase from a bank of a $41,000 note
receivable which was previously guaranteed by the Company.
For fiscal 1994, expansion plans for the United States and Canada are to
open approximately 31 new warehouse clubs including the 21 new warehouses opened
in the first half of fiscal 1994. As of March 15, 1994, a total of 22 new
warehouses had been opened in fiscal 1994, less two Texas units closed during
the first quarter, four units in the 2nd quarter and one unit in the third
quarter. The Company opened a warehouse in the United Kingdom on November 30,
1993, with other U.K. locations expected to follow in calendar year 1994. The
Company has continued to develop its interests in Mexico through a joint venture
which operates five Price Clubs in Mexico, two of which were opened subsequent
to August 29, 1993. This joint venture has not had a material effect on the
Company's results of operations to date. Other markets are being assessed,
including Pacific Rim and Latin American countries.
Total planned capital expenditures for fiscal 1994 are approximately
$700,000 to fund warehouse club expansion in the United States and Canada, other
international warehouse club expansion, non-club real estate development, and
other activities such as Quest electronic shopping, business delivery,
processing and packaging operations and alternative methods of distributing
goods and services. The expenditures will be financed with a combination of cash
provided from operations; the use of cash, cash equivalents and short-term
investments, which totaled $210,343 at August 29, 1993 and $61,718 at February
13, 1994; short-term borrowings under revolving credit facilities and/or
commercial paper facilities; issuance of long-term debt; and other financing
sources including the sale of certain real estate investments to third parties,
and proceeds from minority joint venture partners in international subsidiaries,
as required.
The company has recently implemented a domestic multiple option loan
facility with a group of 14 banks which provides for borrowings of up to
$500,000, or for standby support for a commercial paper program. Of this amount,
$250,000 expires on January 30, 1995, and $250,000 expires on January 30, 1998.
The interest rate on bank borrowings is based on LIBOR, the prime or federal
funds rate or rates bid at auction by the participating banks. Notes payable at
February 13, 1994, in the accompanying balance sheet consist primarily of
advances from three of the participating banks under separate uncommitted lines.
Subsequent to February 13, 1994 the Company established a $500,000 commercial
paper program.
In addition, the Company's wholly-owned Canadian subsidiary has a $66,865
line of credit with a group of three Canadian banks of which $37,147 expires on
December 1, 1994 (the short-term portion) and $29,718 expires in various amounts
through December 1, 1997 (the long-term portion). The
6
interest rate on borrowings is based on the prime rate or the "Bankers'
Acceptance" rate. At February 13, 1994, $22,511 was borrowed under the
short-term portion, and $7,429 was borrowed under the long-term portion.
Due to rapid inventory turnover, the Company's operations provide higher
level of supplier accounts payable than generally encountered in other forms of
retailing. When combined with accrued expenses and other current liabilities,
the resulting amount typically exceeds the current assets needed to operate the
business (e.g., cash, merchandise inventories, receivable and other current
assets). At February 13, 1994, working capital totaled a negative $75,607
compared to a positive $130,717 at August 29, 1993. This decrease is primarily
related to a reduction in cash and cash equivalents of $83,842, a decrease in
short-term investments of $64,783 and an increase in notes payable of $80,407
offset by increases in other working capital accounts of $22,708.
The Company's balance sheet as of February 13, 1994, reflects a $200,513 or
5% increase in total assets since August 29, 1993. This increase is composed
primarily of: (1) increased inventory levels of $118,090, primarily reflecting
the Company's expansion program; and (2) increases in property and equipment,
non-club real estate investments, and other assets totaling $336,637, primarily
related to the Company's fiscal 1994 expansion activities and the purchase of
the $41,000 note receivable; was partially offset by the $148,625 decrease in
cash and cash equivalents and short-term investments used to finance investing
activities. Stockholders' equity increased due primarily to net income of
$29,284 for the twenty-four weeks ended February 13, 1994.
PART II -- OTHER INFORMATION
ITEM 1. 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. 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 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 have filed an Appeal in the Ninth Circuit Court
of Appeals. The Company intends to vigorously defend the suit and believes the
ultimate outcome of the litigation will not have a material effect on the
financial statements.
The Company is a party to litigation in the ordinary course of business to
which its property is subject. The Company's management does not believe that
the ultimate resolution of any of these matters will have a material adverse
impact on the financial position of the Company.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
7
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's annual meeting of stockholders was held on January 13, 1994,
and certain matters presented for vote received the required majority approval
and had total for, against, and abstained votes, as follows:
(1) To elect four Class I directors to hold office until the 1997 Annual
Meeting of Stockholders or until their successors are elected and qualified.
W/H AUTHORITY
AND
TOTAL SHARES AGAINST ABSTAINED VOTES/
VOTED/(%) FOR VOTES/(%) VOTES/(%) (%)
-------------- -------------- ------------- ----------------
Robert E. Price 178,224,717 175,622,553 -- 2,602,164
82.0% 80.8% -- 1.2%
Mitchell G. Lynn 178,224,717 175,623,123 -- 2,601,594
82.0% 80.8% -- 1.2%
James D. Sinegal 178,224,717 175,670,118 -- 2,554,599
82.0% 80.8% -- 1.2%
Jeffrey H. Brotman 178,224,717 175,665,843 -- 2,558,874
82.0% 80.8% -- 1.2%
(2) To consider and approve indemnity agreements to be entered into
between the Company and each of its directors and certain of its executive
officers.
W/H AUTHORITY AND
TOTAL SHARES AGAINST ABSTAINED
VOTED/(%) FOR VOTES/(%) VOTES/(%) VOTES/(%)
- -------------- -------------- ------------- -----------------
178,224,717 161,604,552 11,645,850 4,974,315
82.0% 74.3% 5.4% 2.3%
(3) To consider and ratify the selection of the Company's independent
auditors, Arthur Andersen & Co.
W/H AUTHORITY
TOTAL SHARES AGAINST AND ABSTAINED
VOTED/(%) FOR VOTES/(%) VOTES/(%) VOTES/(%)
- -------------- -------------- ------------- ---------------
178,224,717 177,423,244 111,214 690,259
82.0% 81.6% .1% .3%
<FN>
- ------------------------
Note: There were 217,347,955 total shares outstanding as of the November 23,
1993 record date.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included herein or incorporated by reference:
10(c)(8) Special Severance Agreement
10(z)(14) A $250,000,000 Short-Term Revolving Credit Agreement among
Price/Costco, Inc. and a group of fourteen banks dated January
31, 1994.
10(z)(15) A $250,000,000 Extended Revolving Credit Agreement among
Price/Costco, Inc. and a group of fourteen banks, dated
January 31, 1994.
(28) Independent Public Accountants' Letter
(b) No reports on Form 8-K were filed for the 12 weeks ended February 13,
1994.
8
SIGNATURES
Pursuant to the requirements 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.
PRICE/COSTCO, INC.
REGISTRANT
Date: March 30, 1994 /s/ James D. Sinegal
-------------------------------------------------
James D. Sinegal
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
Date: March 30, 1994 /s/ Richard A. Galanti
-------------------------------------------------
Richard A. Galanti
EXECUTIVE VICE PRESIDENT,
CHIEF FINANCIAL OFFICER
9
PRICE/COSTCO, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
FEBRUARY AUGUST 29,
13, 1994 1993
---------- ----------
(UNAUDITED)
CURRENT ASSETS
Cash and cash equivalents...................................... $ 36,385 $ 120,227
Short-term investments......................................... 25,333 90,116
Receivables, net............................................... 131,457 114,828
Merchandise inventories........................................ 1,109,138 993,729
Other current assets........................................... 57,949 70,134
---------- ----------
Total current assets......................................... 1,360,262 1,389,034
---------- ----------
PROPERTY AND EQUIPMENT
Land, land rights, and land improvements....................... 914,335 906,588
Buildings and leasehold improvements........................... 1,071,678 905,396
Equipment and fixtures......................................... 484,170 433,502
Construction in progress....................................... 42,406 116,346
---------- ----------
2,512,589 2,361,832
Less -- accumulated depreciation and amortization.............. (378,219) (330,150)
---------- ----------
Net property and equipment................................... 2,134,370 2,031,682
---------- ----------
NON-CLUB REAL ESTATE INVESTMENTS, NET............................ 393,929 334,491
OTHER ASSETS..................................................... 252,027 184,868
---------- ----------
$4,140,588 $3,940,075
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bank checks outstanding, less cash on deposit.................. $ 21,357 $ 18,361
Notes payable.................................................. 103,500 23,093
Accounts payable............................................... 891,757 872,851
Accrued salaries and benefits.................................. 189,495 178,397
Accrued sales and other taxes.................................. 101,240 77,784
Other current liabilities...................................... 128,520 87,831
---------- ----------
Total current liabilities.................................... 1,435,869 1,258,317
LONG-TERM DEBT................................................... 814,898 812,576
DEFERRED INCOME TAXES AND OTHER LIABILITIES...................... 64,182 72,454
---------- ----------
Total liabilities.............................................. 2,314,949 2,143,347
---------- ----------
COMMITMENTS AND CONTINGENCIES.................................... -- --
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;
217,635,000 and 217,074,000 shares issued and outstanding..... 2,176 2,171
Additional paid-in capital..................................... 577,144 571,268
Accumulated foreign currency translation....................... (38,547) (32,293)
Retained earnings.............................................. 1,284,866 1,255,582
---------- ----------
Total stockholders' equity................................... 1,825,639 1,796,728
---------- ----------
$4,140,588 $3,940,075
---------- ----------
---------- ----------
The accompanying notes are an integral part of these balance sheets.
10
PRICE/COSTCO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
12 WEEKS 12 WEEKS 24 WEEKS 24 WEEKS
ENDED ENDED ENDED ENDED
FEBRUARY 13, FEBRUARY 14, FEBRUARY 13, FEBRUARY 14,
1994 1993 1994 1993
------------- ------------- ------------- -------------
REVENUE
Net sales............................................ $ 4,019,417 $ 3,736,234 $ 7,619,214 $ 7,158,691
Membership fees and other............................ 78,245 75,125 159,575 155,139
Real estate operations............................... 3,700 9,981 10,221 11,754
------------- ------------- ------------- -------------
Total revenue...................................... 4,101,362 3,821,340 7,789,010 7,325,584
OPERATING EXPENSES
Merchandise costs.................................... 3,634,727 3,377,796 6,901,772 6,495,110
Selling, general and administrative expenses......... 347,726 316,963 669,410 613,731
Preopening expenses.................................. 4,915 4,834 16,045 16,385
------------- ------------- ------------- -------------
Operating income................................... 113,994 121,747 201,783 200,358
OTHER INCOME (EXPENSE)
Interest expense..................................... (11,655) (10,963) (22,478) (20,407)
Interest and other income............................ 3,212 4,264 5,923 8,977
------------- ------------- ------------- -------------
Income before provision for merger and
restructuring expense and income taxes............ 105,551 115,048 185,228 188,928
PROVISION FOR MERGER AND RESTRUCTURING EXPENSE....... -- -- 120,000 --
------------- ------------- ------------- -------------
Income before provision for income taxes........... 105,551 115,048 65,228 188,928
PROVISION FOR INCOME TAXES........................... 43,276 46,019 35,944 75,571
------------- ------------- ------------- -------------
Net income......................................... $ 62,275 $ 69,029 $ 29,284 $ 113,357
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE --
PRIMARY............................................ $ .28 $ .31 $ .13 $ .51
Shares used in calculation (000's)................. 227,253 227,583 219,549 227,603
FULLY DILUTED...................................... $ .28 $ .30 $ .13 $ .51
Shares used in calculation (000's)................. 240,011 240,341 219,549 240,362
The accompanying notes are an integral part of these statements.
11
PRICE/COSTCO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
24 WEEKS 24 WEEKS
ENDED ENDED
FEBRUARY 13, FEBRUARY 14,
1994 1993
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income....................................................................... $ 29,284 $ 113,357
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization.................................................. 56,182 50,517
Increase in merchandise inventories............................................ (118,090) (221,675)
Increase in accounts payable................................................... 28,486 82,002
Other.......................................................................... 74,072 (34,557)
------------ ------------
Total adjustments............................................................ 40,650 (123,713)
------------ ------------
Net cash (used) provided by operating activities............................. 69,934 (10,356)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property and equipment.............................................. (246,956) (232,951)
Additions to non-club real estate investments.................................... (28,115) (30,193)
Proceeds from non-club real estate investments and property and equipment........ 28,657 15,956
Decrease in short-term investments and restricted cash........................... 64,783 71,919
Other............................................................................ (61,566) (32,240)
------------ ------------
Net cash used in investing activities........................................ (243,197) (207,509)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Additions to notes payable....................................................... 80,407 25,052
Net proceeds from issuance of long-term debt..................................... 6,931 3,134
Changes in bank checks outstanding, less cash on deposit......................... 3,346 (9,814)
Payments on long-term debt....................................................... (6,698) (350)
Exercise of stock options, including income tax benefit.......................... 5,881 6,517
Other............................................................................ -- (786)
------------ ------------
Net cash provided by financing activities.................................... 89,867 23,753
------------ ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH............................................ (446) (7,061)
------------ ------------
Net decrease in cash and cash equivalents.................................... (83,842) (201,173)
------------ ------------
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR..................................... 120,227 253,992
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF QUARTER........................................ $ 36,385 $ 52,819
------------ ------------
------------ ------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amounts capitalized)............................................ $ 24,165 $ 21,475
Income taxes..................................................................... 48,282 68,314
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
Owned property was transferred or invested as follows:
Property and equipment........................................................... $ (50,067) $ 28,315
Non-club real estate investments................................................. 51,522 (25,474)
Other assets..................................................................... (1,455) (2,841)
The accompanying notes are an integral part of these statements.
12
PRICE/COSTCO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 13, 1994
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE (1) -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements include the
accounts of Price/Costco, Inc. a Delaware corporation, and its subsidiaries
("Price/Costco" or the "Company"). Price/Costco 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 -- the Transaction, on October 21,
1993, Price and Costco became wholly owned subsidiaries of Price/Costco. These
unaudited consolidated financial statements have been prepared following the
pooling-of-interests method of accounting and reflect the combined financial
position and operating results of Price and Costco for all periods presented.
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial reporting and pursuant to the rules and regulations of the
Securities and Exchange Commission. While these statements reflect all normal
recurring adjustments which are, in the opinion of management, necessary for
fair presentation of the results of the interim period, they do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. For further information, refer to
the financial statements and footnotes thereto included in the Company's annual
report filed on Form 10-K for the year ended August 29, 1993.
BUSINESS
The Company operates in two reporting business segments-cash and carry
merchandising and real estate operations. The Company reports on a 52/53-week
fiscal year, consisting of 13 four-week periods and ending on Sunday nearest the
end of August. Fiscal 1994 will end on August 28, 1994. The first, second and
third quarters consist of 12 weeks each, and the fourth quarter consists of 16
weeks.
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 first-in,
first-out (FIFO) method for Canadian merchandise inventories. If the FIFO method
had been used merchandise inventory would have been $13,050 and $9,250 higher at
February 13, 1994 and August 29, 1993, 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.
NOTES RECEIVABLE
Notes receivable included in other assets totaled $120,806 at February 13,
1994 and $75,419 at August 29, 1993 and consist primarily of a $41,000 loan to a
hotel company (the Hotel loan) and amounts due from various municipalities,
agencies and developers. On October 15, 1993, the Company purchased and assumed
all of the rights and obligations of the Hotel loan which it had previously
guaranteed. The borrower, a hotel company, had been in violation of its debt
covenants. The note is collateralized by certain hotel property. If the
collateral were deemed worthless, the Company could incur an after-tax loss of
up to $25,000. The Company believes that the likelihood of any material loss
from this note receivable is remote.
13
PRICE/COSTCO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FEBRUARY 13, 1994
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE (1) -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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. The 24-week
period ended February 13, 1994 does not reflect the effect of convertible
debentures, as they were not dilutive for either primary or fully-diluted
purposes. For the quarter ended February 14, 1993 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.
NOTE (2) -- THE TRANSACTION
On October 21, 1993, the shareholders of both Price and Costco approved an
agreement that provided for the mergers of Price and Costco into Price/Costco
(the Transaction). Pursuant to the Transaction, Price and Costco became
subsidiaries of Price/Costco. Shareholders of Price received 2.13 shares of
Price/Costco common stock for each share of Price common stock and shareholders
of Costco received one share of Price/Costco common stock for each share of
Costco.
The Transaction 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
are restated as though the companies had been combined. The restated financial
statements are adjusted to conform the accounting policies of the separate
companies.
All fees and expenses related to the Transaction and to the consolidation
and restructuring of the combined companies have been expensed as required under
the pooling-of-interests accounting method in the unaudited consolidated
statement of operations of Price/Costco for the 12 weeks ended November 21,
1993. Such fees and expenses are approximately $120,000 ($80,000 after tax), of
which approximately $20,000 are direct transaction costs, and the remainder is
the estimated expense related to consolidating and restructuring certain
functions, the closing of certain facilities and sales of related properties,
severance and employee payments, write-offs of certain redundant capitalized
costs and certain other costs. The actual cost of the Transaction could vary
significantly from those estimates.
The calculation of net income per common and common equivalent share for
each period presented prior to the Transaction reflects the issuance of 2.13
shares of Price/Costco Common Stock for each share of Price Common Stock used in
such calculation and one share of Price/Costco Common Stock for each share of
Costco Common Stock used in such calculation without consideration for
fractional shares or dissenting shares of Price or dissenting shares of Costco.
Costco's consolidated financial statements reported income taxes following
the requirements of SFAS No. 109, "Accounting for Income Taxes." Price's
consolidated financial statements reported income taxes following the
requirements of Accounting Principles Board Opinion No. 11, "Accounting for
Income Taxes." To conform Price's accounting practice to SFAS No. 109, an
adjustment was made to increase the deferred tax liability and to reduce
retained earnings as of fiscal 1989 (the year Costco adopted the liability
method of accounting for income taxes) by approximately $20,100.
14
PRICE/COSTCO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FEBRUARY 13, 1994
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE (2) -- THE TRANSACTION (CONTINUED)
The following summarizes amounts of Price and Costco prior to the
Transaction.
MEMBERSHIP
FEES AND REAL ESTATE
NET SALES OTHER OPERATIONS NET INCOME
------------- ----------- ----------- -----------
24 weeks ended February 13, 1994:
Price (8 weeks prior to the Transaction)....... $ 1,092,891 $ 28,525 $ 5,241 $ 13,237
Costco (8 weeks prior to the Transaction)...... 1,204,765 23,818 -- 9,301
Price/Costco (16 weeks after the
Transaction).................................. 5,321,558 107,232 4,980 6,746
------------- ----------- ----------- -----------
Combined..................................... $ 7,619,214 $ 159,575 $ 10,221 $ 29,284
------------- ----------- ----------- -----------
------------- ----------- ----------- -----------
24 weeks ended February 14, 1993:
Price.......................................... $ 3,690,938 $ 86,044 $ 11,754 $ 56,605
Costco......................................... 3,467,753 69,095 -- 56,752
------------- ----------- ----------- -----------
Combined..................................... $ 7,158,691 $ 155,139 $ 11,754 $ 113,357
------------- ----------- ----------- -----------
------------- ----------- ----------- -----------
NOTE (3) -- NON-CLUB REAL ESTATE INVESTMENTS
Non-club real estate investments consist of the following components:
FEBRUARY 13, AUGUST 29,
1994 1993
------------ -----------
Property held for development or lease to others................ $ 399,960 $ 347,274
Less accumulated depreciation................................... 16,591 23,352
------------ -----------
383,369 323,922
Investments in and advances to real estate joint ventures....... 10,560 10,569
------------ -----------
$ 393,929 $ 334,491
------------ -----------
------------ -----------
Property held for development or lease to others consists of property owned
directly and property owned by real estate joint venture partnerships in which
the Company has a controlling interest. Investments in and advances to real
estate joint ventures relate to real estate partnerships that are less than
majority owned.
Components of real estate operations are as follows:
12 WEEKS 12 WEEKS 24 WEEKS 24 WEEKS
ENDED ENDED ENDED ENDED
FEBRUARY 13, FEBRUARY 14, FEBRUARY 13, FEBRUARY 14,
1994 1993 1994 1993
------------ ------------ ------------ ------------
Rental and other revenue........................ $ 5,981 $ 5,616 $ 9,802 $ 8,973
Operating expenses.............................. (2,281) (2,345) (3,791) (3,929)
Gains(loss) on sale of non-club real estate
investments.................................... -- 6,710 4,210 6,710
------------ ------------ ------------ ------------
Real estate operations, net..................... $ 3,700 $ 9,981 $ 10,221 $ 11,754
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
15
PRICE/COSTCO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FEBRUARY 13, 1994
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE (3) -- NON-CLUB REAL ESTATE INVESTMENTS (CONTINUED)
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 property
consists of a 117,400 square foot warehouse and 217,700 square foot shopping
center on 36.37 acres of land. The Company recorded a $4,210 pre-tax gain in
connection with this sale. On December 18, 1992, the Company sold a former Price
Club property for $14,350. The property consisted of a 120,800 square foot
warehouse and 11.9 acres of land. The Company recorded a pre-tax gain of $6,710
in connection with this sale.
NOTE (4) -- DEBT
BANK LINES OF CREDIT
The Company has a recently implemented domestic multiple option loan
facility with a group of 14 banks which provides for borrowings of up to
$500,000 or for standby support for a commercial paper program. Of this amount,
$250,000 expires on January 30, 1995, and $250,000 expires on January 30, 1998.
The interest rate on bank borrowings is based on LIBOR, the prime or federal
funds rate or rates bid at auction by the participating banks. Notes payable at
February 13, 1994, in the accompanying balance sheet consist primarily of
advances from three of the participating banks under separate uncommitted lines.
Subsequent to February 13, 1994, the Company established a $500,000 commercial
paper program.
In addition, the Company's wholly-owned Canadian subsidiary has a $66,865
line of credit with a group of three Canadian banks of which $37,147 expires on
December 1, 1994 (the short-term portion) and $29,718 expires in various amounts
through December 1, 1997 (the long-term portion). The interest rate on
borrowings is based on the prime rate or the "Bankers' Acceptance" rate. At
February 13, 1994, $22,511 was borrowed under the short-term portion, and $7,429
was borrowed under the long-term portion.
The Company has separate letter of credit facilities (for commercial and
standby letters of credit), totaling approximately $184,500. The outstanding
commitments under these facilities at February 13, 1994 was approximately
$82,000, including approximately $55,000 in standby letters for workers'
compensation requirements.
LONG-TERM DEBT
On November 4, 1993, notice was given to 6 3/4% convertible debenture
holders advising of their option to redeem the debentures for cash equal to the
principal amount plus accrued interest due to a change of control of Price that
was effective as a result of the merger, and that the holders had until December
6, 1993, to exercise such options. Approximately $2,300 of debentures were
purchased by the Company at their face value pursuant to these rights.
NOTE (5) -- INCOME TAXES
The following is a reconciliation of the federal statutory tax rate to the
effective tax rate for the 24-week periods ended February 13, 1994 and February
14, 1993:
24 WEEKS ENDED 24 WEEKS ENDED
FEBRUARY 13, 1994 FEBRUARY 14, 1993
----------------- -----------------
Federal statutory tax rate...... $22,830 35.0% $64,235 34.0%
State, foreign and other income
taxes, net..................... 3,914 6.0 11,336 6.0
Nondeductible merger-related
costs.......................... 9,200 14.1 -- --
------- ----- ------- -----
$35,944 55.1% $75,571 40.0%
------- ----- ------- -----
------- ----- ------- -----
16
PRICE/COSTCO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FEBRUARY 13, 1994
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE (6) -- STOCK OPTIONS
Under the Company's combined incentive and non-qualified stock option plan
approved by shareholders of Price and Costco on October 21, 1993, a total of
1,257,400 options were granted during the first half of fiscal 1994 at an
exercise price of $19 per share.
NOTE (7) -- 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. 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 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 have filed an Appeal in the Ninth Circuit Court
of Appeals. The Company intends to vigorously defend the suit and believes the
ultimate outcome of the litigation will not have a material effect on the
financial statements.
The Company is party to routine litigation in the normal course of business,
to which its property is subject. The Company's management does not believe that
the ultimate resolution of any of these matters will have a material adverse
impact on the financial position of the Company.
17