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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 18, 1996
/ / 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 (I.R.S. Employer
of Identification No.)
incorporation or organization)
999 LAKE DRIVE
ISSAQUAH, WASHINGTON 98027
(Address of principal executive office)
(206) 313-8100
(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 195,616,011 common shares, par value $.01, outstanding at
March 22, 1996.
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PRICE/COSTCO, INC.
AND SUBSIDIARIES
INDEX TO FORM 10-Q
PART I -- FINANCIAL INFORMATION
PAGE
----
ITEM 1 -- FINANCIAL STATEMENTS............................................. 3
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 (27) Financial Data Schedule
Exhibit (28) Report of Independent Public Accountants.................... 15
2
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Price/Costco, Inc.'s (the "Company" or "PriceCostco") unaudited condensed
consolidated balance sheet as of February 18, 1996, and the condensed
consolidated balance sheet as of September 3, 1995, unaudited condensed
consolidated statements of operations for the 12-and 24-week periods ended
February 18, 1996, and February 12, 1995, and unaudited condensed consolidated
statements of cash flows for the 24-week periods then ended are included
elsewhere herein. Also, included elsewhere herein are notes to the unaudited
condensed consolidated financial statements and the results of the limited
review performed by Arthur Andersen LLP, independent public accountants.
The Company reports on a 52/53-week fiscal year, consisting of 13 four-week
periods and ending on the Sunday nearest the end of August. Fiscal 1996 is a
52-week year with period 13 ending on September 1, 1996. 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
It is suggested that this management discussion be read in conjunction with
the management discussion included in the Company's fiscal 1995 annual report on
Form 10-K previously filed with the Securities and Exchange Commission.
COMPARISON OF THE 12 WEEKS ENDED FEBRUARY 18, 1996 AND FEBRUARY 12, 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Income from continuing operations for the second quarter of fiscal 1996
increased 10% to $71,426, or $.35 per share (fully diluted), from $64,771, or
$.31 per share (fully diluted), during the second quarter of fiscal 1995.
Earnings per share increased 13%, reflecting the higher level of earnings, as
well as a reduction of 23.2 million outstanding PriceCostco shares beginning on
December 20, 1994, following the conclusion of the Company's spin-off of Price
Enterprises, Inc. During the second quarter of fiscal 1995, the Company recorded
a non-cash charge of $83,363, or $.37 per share, reflecting the loss on disposal
of discontinued operations in the spin-off of Price Enterprises, Inc. ("Price
Enterprises"). Including this non-cash charge, last year's second quarter
results totaled a net loss of $18,592, or $.06 per share.
Net sales increased 9% to $4,606,070 during the second quarter of fiscal
1996 from $4,230,160 during the second quarter of fiscal 1995. This increase was
primarily due to opening a net of 19 new warehouses (22 opened, 3 closed) since
the end of the second quarter of fiscal 1995 and an increase in comparable
warehouse sales. Comparable sales, that is sales in warehouses open for at least
a year, increased 5 percent during the second quarter of fiscal 1996, reflecting
new marketing and merchandising efforts, including the rollout of fresh foods
and various ancillary businesses to certain existing locations. Changes in
prices of merchandise did not materially contribute to sales increases.
Membership fees and other revenue increased to $82,625 or 1.79% of net sales
in the second quarter of fiscal 1996 from $77,162 or 1.82% of net sales in the
second quarter of fiscal 1995. Membership fees include new membership sign-ups
at the 19 warehouses opened since the end of the second quarter of fiscal 1995.
Gross margin (defined as net sales minus merchandise costs) increased 11% to
$452,078 or 9.81% of net sales in the second quarter of fiscal 1996 from
$408,366, or 9.65% of net sales in the second quarter of fiscal 1995. The
increase in gross margin as a percentage of net sales reflects strong first half
physical inventory results and good control over post-season markdowns, as well
as greater purchasing power, expanded use of the Company's depot facilities, and
increased sales penetration of certain higher gross margin ancillary businesses.
The gross margin figures reflect accounting for merchandise costs on the
last-in, first-out (LIFO) method. The second quarters of fiscal 1996 and 1995
each included a $2,500 LIFO provision.
3
Selling, general and administrative expenses as a percent of net sales
increased to 8.51% during the second quarter of fiscal 1996 from 8.47% during
the second quarter of fiscal 1995, reflecting higher expenses associated with
international expansion and certain ancillary operations.
Preopening expenses totaled $5,970 or 0.13% of net sales during the second
quarter of fiscal 1996 compared to $3,451 or 0.08% of net sales during the
second quarter of fiscal 1995. The increase in preopening expenses is primarily
due to an increased level of spending on remodels including expanded fresh foods
and ancillary operations at existing warehouses.
Interest expense totaled $17,501 in the second quarter of fiscal 1996
compared to $13,480 in the second quarter of fiscal 1995. The increase in
interest expense is primarily related to higher average borrowings and interest
rates, which include the issuance in June 1995 of $300,000 of 7 1/8% Senior
Notes. Interest income and other totaled $2,287 in the second quarter of fiscal
1996 compared to $298 in the second quarter of fiscal 1995.
The effective income tax rate on earnings in the second quarter of fiscal
1996 was 41.25% compared to a 41.36% effective tax rate in the second quarter of
fiscal 1995.
COMPARISON OF THE 24 WEEKS ENDED FEBRUARY 18, 1996 AND FEBRUARY 12, 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Income from continuing operations for the first half of fiscal 1996
increased 7% to $120,979, or $0.59 per share (fully diluted), from $113,298, or
$0.52 per share (fully diluted), during the first half of fiscal 1995. The 13%
earnings per share increase reflects the increase in net income as well as the
reduction of 23.2 million outstanding shares of PriceCostco Common Stock
beginning on December 20, 1994, following the completion of the spin-off of
Price Enterprises. Net operating results for the first half of fiscal 1995
include the non-cash charge of $83,363, or $.36 per share, reflecting the loss
on disposal of discontinued operations in the spin-off of Price Enterprises.
Including this non-cash charge, net income for the first half of fiscal 1995 was
$29,935, or $.16 per share, compared to net income of $120,979, or $.59 per
share, for the first half of fiscal 1996.
Net sales increased 9% to $8,901,932 during the first half of fiscal 1996
from $8,173,878 during the first half of fiscal 1995. This increase was
primarily due to opening a net of 19 new warehouses (22 opened, 3 closed) since
the end of the first half of fiscal 1995 and an increase in comparable warehouse
sales. Comparable sales, that is sales in warehouses open for at least a year,
increased 4 percent during the first half of fiscal 1996, reflecting new
marketing and merchandising efforts, including the rollout of fresh foods and
various ancillary businesses to certain existing locations. Changes in prices of
merchandise did not materially contribute to sales increases.
Membership fees and other revenue increased to $170,327 or 1.91% of net
sales in the first half of fiscal 1996 from $163,367 or 2.00% of net sales in
the first half of fiscal 1995. Membership fees include new membership sign-ups
at the 19 warehouses opened since the end of the second quarter of fiscal 1995.
Gross margin (defined as net sales minus merchandise costs) increased 11% to
$860,824 or 9.67% of net sales in the first half of fiscal 1996 from $774,640,
or 9.48% of net sales in the first half of fiscal 1995. The increase in gross
margin as a percentage of net sales reflects strong first half physical
inventory results and good control over post-season markdowns, as well as
greater purchasing power, expanded use of the Company's depot facilities, and
increased sales penetration of certain higher gross margin ancillary businesses.
The gross margin figures reflect accounting for merchandise costs on the
last-in, first-out (LIFO) method. The first half of fiscal 1996 and 1995 each
include a $5,000 LIFO provision.
Selling, general and administrative expenses as a percent of net sales
increased to 8.74% during the first half of fiscal 1996 from 8.67% during the
first half of fiscal 1995, reflecting higher expenses associated with
international expansion and certain ancillary operations.
4
Preopening expenses totaled $15,420 or 0.17% of net sales during the first
half of fiscal 1996 compared to $10,442 or 0.13% of net sales during the first
half of fiscal 1995. The increase in preopening expenses is primarily due to
increased remodeling activity, including expanded fresh foods and ancillary
operations at existing warehouses.
Interest expense totaled $35,272 in the first half of fiscal 1996 compared
to $27,619 in the first half of fiscal 1995. The increase in interest expense is
primarily related to higher average borrowings and interest rates, which include
the issuance in June 1995 of $300,000 of 7 1/8% Senior Notes. Interest income
and other totaled $3,378 in the first half of fiscal 1996 compared to $1,377 in
the first half of fiscal 1995, with much of the increase reflecting improvement
in the Mexico joint venture operations.
The effective income tax rate on earnings in the first half of fiscal 1996
was 41.25% compared to a 41.21% effective tax rate in the first half of fiscal
1995.
RECENT EVENTS
In its fiscal 1996 third quarter-to-date period, the Company has opened
three warehouses (all in Canada) and closed five warehouses in the United
States. The costs associated with the five warehouse closings will be recognized
as anticipated warehouse closing costs in the third quarter of fiscal 1996, the
12 weeks ending May 12, 1996.
LIQUIDITY AND CAPITAL RESOURCES
(DOLLARS IN THOUSANDS)
EXPANSION PLANS
PriceCostco's primary capital requirements are for financing the expansion
of its United States and Canadian operations and its international ventures
(presently Mexico, United Kingdom and Asia). While there can be no assurance
that current expectations will be realized and plans are subject to change upon
further review, during fiscal 1996 management's intention is to spend
approximately $450,000 to $500,000 for its United States and Canadian operations
and approximately $50,000 to $100,000 for its international ventures. Capital
expenditures are primarily for real estate, construction, remodeling and
equipment for warehouses and related operations.
Expansion plans for the United States and Canada during fiscal 1996 are to
open 20 to 23 warehouse clubs, less the relocation of two to three warehouses to
larger and better-located facilities and the outright closing of six to seven
locations. Through the end of the first half, the Company has opened 12
warehouses, including the relocation of its San Leandro, California warehouse,
and closed a warehouse in Concord, California.
The Company continues the remodeling and expansion of fresh foods and
ancillary operations and expects to spend approximately $120,000 to $130,000 on
these efforts. The Company expects that annual spending on remodeling activities
will be reduced by at least one-half during fiscal 1997, as much of the major
remodel work will have been completed.
International expansion plans during fiscal 1996 include opening one to two
additional warehouse clubs in the United Kingdom through a 60%-owned subsidiary,
and to develop additional warehouse club ventures, primarily in Asia.
Expansion will be financed with a combination of cash and cash equivalents,
which totaled $40,496 at February 18, 1996; net cash provided by operating
activities; short-term borrowings under revolving credit facilities and/or
commercial paper facilities; and other financing sources as required.
BANK LINES OF CREDIT AND COMMERCIAL 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, $250,000 expires on January
27, 1997, and $250,000 expires on January 30, 2001. The
5
interest rate on bank borrowings is based on LIBOR or rates bid at auction by
the participating banks. At February 18, 1996, $126,000 was outstanding under
the commercial paper program and no amount was outstanding under the loan
facility.
In addition, the Company's wholly-owned Eastern Canada subsidiary has a
$101,000 commercial paper program supported by a bank credit facility with three
Canadian banks, of which $61,000 will expire in March 1997 and $40,000 will
expire in March 1999. The interest rate on bank borrowings is based on the prime
rate or the "Bankers' Acceptance" rate. At February 18, 1996, the Canadian
commercial paper program was fully utilized and an additional $7,000 was
outstanding through Bankers' Acceptance borrowing under the $101,000 bank credit
facility.
The Company also has separate letter of credit facilities (for commercial
and standby letters of credit) totaling approximately $194,000. The outstanding
commitments under these facilities at February 18, 1996 totaled approximately
$77,000, including approximately $51,000 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 million of senior
debt securities. The registration statement was declared effective on February
29, 1996. As part of this filing, the Company announced its intention to offer
$300 million of senior notes to refinance existing indebtedness. The Company has
deferred issuance of these notes due to unfavorable interest rate market
conditions.
FINANCIAL POSITION AND CASH FLOWS
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 other current liabilities, the resulting amount
typically exceeds the current assets needed to operate the business. Working
capital deficit (current liabilities in excess of current assets) totaled
$50,319 at February 18, 1996 compared to working capital of $9,381 at September
3, 1995. The decrease in working capital was primarily due to: 1) financing the
Company's working capital requirements through short-term borrowings; and 2)
capital expenditures in excess of operating cash flows.
Net cash provided by (used in) operating activities totaled $90,059 in the
first half of fiscal 1996 compared to ($7,717) in the first half of fiscal 1995.
The increase in net cash from operating activities is a result of increased net
income from continuing operations, higher depreciation and amortization expense
and approximately $62,000 reduction in net merchandise inventories (merchandise
inventories less supplier accounts payable) in the first half of fiscal 1996
compared to the first half of fiscal 1995.
Net cash used in investing activities totaled $275,077 in the first half of
fiscal 1996 compared to $187,715 in the first half of fiscal 1995. This increase
is primarily the result of opening more warehouses in the first half of fiscal
1996 than in the first half of fiscal 1995 and the increase in the level of
remodeling activity in the first half of fiscal 1996.
Net cash provided by financing activities totaled $179,144 in the first half
of fiscal 1996 compared to $187,362 in the first half of fiscal 1995. In both
periods the Company utilized its bank lines and commercial paper programs to
finance operations and expansion plans. Net proceeds from short-term borrowings
totaled $159,809 in the first half of fiscal 1996 compared to $180,993 in the
first half of fiscal 1995.
The Company's balance sheet as of February 18, 1996, reflects a $163,272 or
4% increase in total assets since September 3, 1995. The increase is primarily
due to a net increase in property and equipment principally related to the
Company's remodeling and expansion program.
6
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 (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 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 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's annual meeting of stockholders was held on February 1, 1996 at
The Disneyland Pacific Hotel in Anaheim, California. Stockholders of record at
the close of business on December 8, 1995 were entitled to notice of and to vote
in person or by proxy at the annual meeting. At the date of record, there were
195,293,609 shares outstanding. Certain matters presented for vote received the
required majority approval and had the following total, for, against and
abstained votes as noted below.
7
(1) To elect three Class III directors to hold office until the 1999 Annual
Meeting of Stockholders and, in each case, until his successor is elected and
qualified.
W/H AUTHORITY
TOTAL SHARES AGAINST AND
VOTED/(%) FOR VOTES/(%) VOTES/(%) ABSTAINED VOTES/(%)
------------ ------------- ----------- -------------------
Richard D. DiCerchio ............................................... 165,870,879 164,187,327 1,683,552
(Class III) 84.9% 84.1% -- 0.8%
Richard M. Libenson ................................................ 165,870,879 162,741,354 3,129,525
(Class III) 84.9% 83.3% -- 1.6%
John W. Meisenbach ................................................. 165,870,879 162,831,379 3,039,500
(Class III) 84.9% 83.4% -- 1.5%
(2) To consider and ratify the selection of the Company's independent public
accountants, Arthur Andersen LLP.
W/H AUTHORITY
TOTAL SHARES AGAINST AND
VOTED/(%) FOR VOTES/(%) VOTES/(%) ABSTAINED VOTES/(%)
------------ ------------- ----------- -------------------
165,870,879 165,368,019 174,697 328,164
Arthur Andersen LLP................................................. 84.9% 84.7% 0.1% 0.1%
In a related matter, the Board of Directors was increased to ten (10)
members and Mrs. Jill Ruckelshaus was appointed to the Board as a Class II
director on February 1, 1996.
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:
(27) Financial Data Schedule
(28) Report of Independent Public Accountants
(b) No reports on Form 8-K were filed for the 12 weeks ended February 18,
1996.
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: April 2, 1996 /s/ JAMES D. SINEGAL
--------------------------------- ----------------------------------
James D. Sinegal
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
Date: April 2, 1996 /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 PER SHARE DATA)
ASSETS
SEPTEMBER 3,
1995
FEBRUARY 18, ------------
1996
------------
(UNAUDITED)
CURRENT ASSETS
Cash and cash equivalents........................... $ 40,496 $ 45,688
Receivables, net.................................... 176,196 146,665
Merchandise inventories............................. 1,393,803 1,422,272
Other current assets................................ 88,832 87,694
------------ ------------
Total current assets.............................. 1,699,327 1,702,319
------------ ------------
PROPERTY AND EQUIPMENT
Land, land rights, and land improvements............ 1,207,627 1,143,860
Buildings and leasehold improvements................ 1,341,627 1,215,706
Equipment and fixtures.............................. 669,359 624,398
Construction in progress............................ 65,120 78,071
------------ ------------
3,283,733 3,062,035
Less accumulated depreciation and amortization...... (579,823) (526,442)
------------ ------------
Net property and equipment........................ 2,703,910 2,535,593
------------ ------------
OTHER ASSETS.......................................... 197,454 199,507
------------ ------------
$ 4,600,691 $ 4,437,419
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bank checks outstanding, less cash on deposit....... $ 19,902 $ 12,721
Short-term borrowings............................... 233,575 75,725
Accounts payable.................................... 1,094,006 1,233,128
Accrued salaries and benefits....................... 228,949 205,236
Accrued sales and other taxes....................... 80,131 91,843
Other current liabilities........................... 93,083 74,285
------------ ------------
Total current liabilities......................... 1,749,646 1,692,938
------------ ------------
LONG-TERM DEBT........................................ 1,092,842 1,094,615
DEFERRED INCOME TAXES AND OTHER LIABILITIES........... 68,154 68,284
------------ ------------
Total liabilities................................. 2,910,642 2,855,837
------------ ------------
MINORITY INTERESTS.................................... 61,375 50,838
------------ ------------
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; 195,394,000 and 195,164,000 shares
issued and outstanding............................. 1,954 1,952
Additional paid-in capital.......................... 306,212 303,989
Accumulated foreign currency translation............ (77,562) (52,289)
Retained earnings................................... 1,398,070 1,277,092
------------ ------------
Total stockholders' equity........................ 1,628,674 1,530,744
------------ ------------
$ 4,600,691 $ 4,437,419
------------ ------------
------------ ------------
The accompanying notes are an integral part of these financial statements.
10
PRICE/COSTCO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
12 WEEKS ENDED 24 WEEKS ENDED
--------------------------- ---------------------------
FEBRUARY 18, FEBRUARY 12, FEBRUARY 18, FEBRUARY 12,
1996 1995 1996 1995
------------ ------------ ------------ ------------
REVENUE
Net sales........................... $ 4,606,070 $ 4,230,160 $ 8,901,932 $ 8,173,878
Membership fees and other........... 82,625 77,162 170,327 163,367
------------ ------------ ------------ ------------
Total revenue..................... 4,688,695 4,307,322 9,072,259 8,337,245
OPERATING EXPENSES
Merchandise costs................... 4,153,992 3,821,794 8,041,108 7,399,238
Selling, general and
administrative..................... 391,943 358,431 777,916 708,609
Preopening expenses................. 5,970 3,451 15,420 10,442
------------ ------------ ------------ ------------
Operating income.................. 136,790 123,646 237,815 218,956
OTHER INCOME (EXPENSE)
Interest expense.................... (17,501) (13,480) (35,272) (27,619)
Interest income and other........... 2,287 298 3,378 1,377
------------ ------------ ------------ ------------
INCOME FROM CONTINUING OPERATIONS
BEFORE PROVISION FOR INCOME TAXES... 121,576 110,464 205,921 192,714
Provision for income taxes.......... 50,150 45,693 84,942 79,416
------------ ------------ ------------ ------------
INCOME FROM CONTINUING OPERATIONS..... 71,426 64,771 120,979 113,298
DISCONTINUED OPERATIONS:
Loss on disposal.................... -- (83,363) -- (83,363)
------------ ------------ ------------ ------------
NET INCOME (LOSS)..................... $ 71,426 $ (18,592) $ 120,979 $ 29,935
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
NET INCOME (LOSS) PER COMMON AND
COMMON EQUIVALENT SHARE -- FULLY
DILUTED:
Continuing operations:.............. $ 0.35 $ 0.31 $ 0.59 $ 0.52
Discontinued operations:
Loss on disposal.................. -- (0.37) -- (0.36)
------------ ------------ ------------ ------------
Net income (loss)................... $ 0.35 $ (0.06) $ 0.59 $ 0.16
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Shares used in calculation
(000's)............................ 224,737 224,685 217,431 232,096
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
The accompanying notes are an integral part of these financial statements.
11
PRICE/COSTCO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
24 WEEKS ENDED
---------------------------
FEBRUARY 18, FEBRUARY 12,
1996 1995
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.................................... $ 120,979 $ 29,935
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Depreciation and amortization................. 71,963 61,633
Loss on disposal of discontinued operations... -- 83,363
Decrease (increase) in merchandise
inventories.................................. 21,572 (150,134)
Decrease in accounts payable.................. (132,608) (22,944)
Other......................................... 8,153 (9,570)
------------ ------------
Total adjustments........................... (30,920) (37,652)
------------ ------------
Net cash provided by (used in) operating
activities................................... 90,059 (7,717)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property and equipment........... (265,076) (196,692)
Proceeds from the sale of property and
equipment.................................... 2,554 6,175
Investment in unconsolidated joint ventures... (5,000) (3,430)
Decrease in short-term investments and
restricted cash.............................. -- 9,268
Other......................................... (7,555) (3,036)
------------ ------------
Net cash used in investing activities....... (275,077) (187,715)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from short-term borrowings....... 159,809 180,993
Increase in bank checks outstanding, less cash
on deposit................................... 7,604 5,855
Payments on long-term debt and notes
payable...................................... (1,413) (999)
Proceeds from minority interests, net......... 10,588 --
Exercise of stock options, including income
tax benefit.................................. 2,225 896
Other......................................... 331 617
------------ ------------
Net cash provided by financing activities... 179,144 187,362
------------ ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH......... 682 198
------------ ------------
Decrease in cash and cash equivalents......... (5,192) (7,872)
CASH AND CASH EQUIVALENTS AT BEGINNING OF
YEAR........................................... 45,688 53,638
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD...... $ 40,496 $ 45,766
------------ ------------
------------ ------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest (net of amounts capitalized)......... $ 22,670 $ 28,488
Income taxes.................................. 104,714 59,456
The accompanying notes are an integral part of these financial statements.
12
PRICE/COSTCO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
NOTE (1) -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The unaudited 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"). Price and Costco
primarily operate cash and carry membership warehouses.
The accompanying unaudited 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 fiscal year ended September 3, 1995.
BUSINESS
The Company historically operated in two reporting business segments: a cash
and carry merchandising operation and a non-club real estate operation. In July
1994 the Company discontinued its non-club real estate operations through a
spin-off of Price Enterprises, Inc., completed in December, 1994.
FISCAL YEARS
The Company reports on a 52/53-week fiscal year, ending on the Sunday
nearest the end of August. Fiscal 1996 is a 52-week fiscal year, with the first,
second and third quarters consisting of 12 weeks each and the fourth quarter,
ending September 1, 1996, consisting 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 the first-in,
first-out (FIFO) method for foreign merchandise inventories. If the FIFO method
had been used merchandise inventory would have been $21,150 and $16,150 higher
at February 18, 1996 and September 3, 1995, 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. The
calculation for the 12- and 24-week periods ended February 18, 1996 and February
12, 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. The calculation also eliminates interest
expense, net of income taxes, on the 5 1/2% convertible subordinated debentures
(primary and fully diluted), the 6 3/4% convertible subordinated debentures
(fully diluted only), and the 5 3/4% convertible subordinated debentures (fully
diluted only, and for the second quarter of fiscal 1996 only).
13
PRICE/COSTCO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
NOTE (2) -- DEBT
BANK LINES OF CREDIT AND COMMERCIAL 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, $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 February 18, 1996, $126,000 was outstanding under the commercial paper
program and no amount was outstanding under the loan facility.
In addition, the Company's wholly-owned Eastern Canada subsidiary has a
$101,000 commercial paper program supported by a bank credit facility with three
Canadian banks, of which $61,000 will expire in March 1997 and $40,000 will
expire in March 1999. The interest rate on bank borrowings is based on the prime
rate or the "Bankers' Acceptance" rate. At February 18, 1996, the Canadian
commercial paper program was fully utilized and an additional $7,000 was
outstanding through Bankers' Acceptance borrowing under the $101,000 bank credit
facility.
The Company also has separate letter of credit facilities (for commercial
and standby letters of credit) totaling approximately $194,000. The outstanding
commitments under these facilities at February 18, 1996 totaled approximately
$77,000, including approximately $51,000 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 million of senior
debt securities. The registration statement was declared effective on February
29, 1996. As part of this filing, the Company announced its intention to offer
$300 million 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 rate
to the effective income tax rate for income from continuing operations:
24 WEEKS ENDED 24 WEEKS ENDED
FEBRUARY 18, FEBRUARY 12,
1996 1995
--------------- ---------------
Federal statutory income tax rate................. $72,072 35.00% $67,450 35.00%
State, foreign and other income taxes, net........ 12,870 6.25% 11,966 6.20%
------- ------ ------- ------
$84,942 41.25% $79,416 41.20%
------- ------ ------- ------
------- ------ ------- ------
NOTE (4) -- 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 operations. See Legal Proceedings at page 7 for
outstanding legal matters.
14
EXHIBIT 28
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Price/Costco, Inc.:
We have reviewed the accompanying condensed consolidated balance sheet of
Price/Costco, Inc. (a Delaware corporation) and subsidiaries as of February 18,
1996, and the related condensed consolidated statements of operations for the
twelve and twenty-four-week periods ended February 18, 1996 and February 12,
1995, and condensed consolidated statements of cash flows for the
twenty-four-week periods then ended. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to be in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Seattle, Washington
March 20, 1996
15