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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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 16, 1997
/ / 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
COSTCO COMPANIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 33-0572969
(State or other (I.R.S.Employer
jurisdiction of Identification
incorporation or No.)
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 211,133,408 common shares, par value $.01, outstanding at
March 14, 1997.
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COSTCO COMPANIES, INC.
AND SUBSIDIARIES
INDEX TO FORM 10-Q
PART I--FINANCIAL INFORMATION
PAGE
-----
ITEM 1--FINANCIAL STATEMENTS............................................................................... 3
Condensed Consolidated Balance Sheets.................................................................... 12
Condensed Consolidated Statements of Operations.......................................................... 13
Condensed Consolidated Statements of Cash Flows.......................................................... 14
Notes to Condensed Consolidated Financial Statements..................................................... 15
ITEM 2--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.............. 3
PART II--OTHER INFORMATION
ITEM 1--LEGAL PROCEEDINGS............................................................. 8
ITEM 2--CHANGES IN SECURITIES......................................................... 8
ITEM 3--DEFAULTS UPON SENIOR SECURITIES............................................... 9
ITEM 4--SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........................... 9
ITEM 5--OTHER INFORMATION............................................................. 9
ITEM 6--EXHIBITS AND REPORTS ON FORM 8-K.............................................. 10
Exhibit 3(a) Restated And Amended Certificate of Incorporation of Costco Companies,
Inc.
Exhibit (27) Financial Data Schedule
Exhibit (28) Report of Independent Public Accountants............................... 19
2
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Costco Companies, Inc.'s (the "Company" or "Costco"; formerly Price/Costco,
Inc.) unaudited condensed consolidated balance sheet as of February 16, 1997,
and the condensed consolidated balance sheet as of September 1, 1996, unaudited
condensed consolidated statements of operations for the 12- and 24-week periods
ended February 16, 1997, and February 18, 1996, 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 1997 is a
52-week year with period 13 ending on August 31, 1997. 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 1996 annual report on
Form 10-K previously filed with the Securities and Exchange Commission.
COMPARISON OF THE 12 WEEKS ENDED FEBRUARY 16, 1997 AND FEBRUARY 18, 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income for the second quarter of fiscal 1997 increased 36% to $97,449,
or $0.46 per share (fully diluted), from $71,426, or $0.35 per share (fully
diluted), during the second quarter of fiscal 1996.
Net sales increased 12% to $5,147,425 during the second quarter of fiscal
1997 from $4,606,070 during the second quarter of fiscal 1996. This increase was
primarily due to an increase in comparable warehouse sales and opening a net of
8 warehouses (19 opened--14 new, 5 relocated and 11 closed) since the end of the
second quarter of fiscal 1996. Comparable sales, that is sales in warehouses
open for at least a year, increased 9 percent during the second quarter of
fiscal 1997, 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 11% to $91,468 or 1.78% of net
sales in the second quarter of fiscal 1997 from $82,625 or 1.79% of net sales in
the second quarter of fiscal 1996. Membership fees include membership sign-ups
at the new warehouses opened since the end of the second quarter of fiscal 1996.
The increase in membership fees also reflects the increase in the annual
membership fee for the Business "Add-on" members from $15 to $20, effective with
renewals in the United States subsequent to April 1, 1996. Currently, there are
approximately 3.4 million U.S. Business "Add-on" members.
Gross margin (defined as net sales minus merchandise costs) increased 17% to
$528,217 or 10.26% of net sales in the second quarter of fiscal 1997 from
$452,078 or 9.81% of net sales in the second quarter of fiscal 1996. The 45
basis point increase in gross margin as a percentage of net sales reflects
strong first half physical inventory results, the Company's greater purchasing
power, expanded use of its depot facilities, improved fresh foods margins,
improved softlines margins, 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 1997 and 1996 each included a $2,500 LIFO provision.
Selling, general and administrative expenses as a percent of net sales
decreased to 8.47% during the second quarter of fiscal 1997 from 8.51% during
the second quarter of fiscal 1996. This improvement in
3
selling, general and administrative expenses as a percent of net sales was due
to the operating expense leverage from the increase in comparable warehouse
sales noted above, resulting in a year-over-year improvement at the Company's
core warehouse operations and Central and Regional administrative offices. This
expense improvement was partially offset by higher expenses as a percent of net
sales associated with international expansion and certain ancillary businesses.
Preopening expenses totaled $6,087 or 0.12% of net sales during the second
quarter of fiscal 1997 compared to $5,970 or 0.13% of net sales during the
second quarter of fiscal 1996. Two warehouses were opened in the second quarter
of fiscal 1997 (including a relocated warehouse), compared to eight new
locations opened during the last year's second quarter (including a relocated
warehouse). Preopening expenses also includes costs related to remodel activity,
including expanded fresh foods and ancillary operations at existing warehouses.
Interest expense totaled $17,243 in the second quarter of fiscal 1997
compared to $17,501 in the second quarter of fiscal 1996. The decrease in
interest expense is primarily related to the call for redemption of both the
Company's 6 3/4%($285.1 million principal amount) and 5 1/2% ($179.3 million
principal amount) Convertible Subordinated Debentures during the second quarter
of fiscal 1997, which resulted in a net reduction of debt by over $300 million
following the completion of these two transactions. See "Note 2--Debt". This
decrease in interest expense was partially offset by the redemption premium paid
to debenture holders who elected to redeem their debentures and the issuance in
April 1996 of a $140,000 unsecured note payable.
Interest income and other totaled $3,461 in the second quarter of fiscal
1997 compared to $2,287 in the second quarter of fiscal 1996. The increase is
primarily due to the Company incurring an elimination in its share of losses in
certain unconsolidated joint ventures and improved earnings in its Mexico joint
venture operation.
The effective income tax rate on earnings in the second quarter of fiscal
1997 was 40.50% compared to a 41.25% effective tax rate in the second quarter of
fiscal 1996. The decrease in the effective tax rate was related primarily to
decreases in foreign taxes.
COMPARISON OF THE 24 WEEKS ENDED FEBRUARY 16, 1997 AND FEBRUARY 18, 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Net operating results for the first half of fiscal 1997 reflect net income
of $129,259, or $0.62 per share (fully diluted), compared to net income of
$120,979, or $0.59 per share (fully diluted), during the first half of fiscal
1996. Net income in the first half of fiscal 1997 included a non-cash, pretax
charge of $65,000 ($38,675 after-tax) reflecting a provision for the impairment
of long-lived assets as required by the Company's adoption of Statement of
Financial Accounting Standard No. 121. Excluding the $65,000 ($38,675 after-tax)
asset impairment charge, net income for the first half of fiscal 1997 would have
increased 39% to $167,934, or $0.79 per share (fully diluted). The Company also
recorded in the first half of fiscal 1997, a pretax provision for warehouse
closing costs of $5,000, or $0.01 per share on an after-tax basis (fully
diluted). This provision primarily includes estimated closing costs for five
warehouses closed in the first half of fiscal 1997 and additional costs related
to warehouses closed in the prior year. There were no warehouse closing costs in
the first half of fiscal 1996.
Net sales increased 12% to $9,933,061 during the first half of fiscal 1997
from $8,901,932 during the first half of fiscal 1996. This increase was
primarily due to an increase in comparable warehouse sales and opening a net of
8 warehouses (19 opened--14 new, 5 relocated and 11 closed) since the end of the
second quarter of fiscal 1996. Comparable sales, that is sales in warehouses
open for at least a year, increased 9 percent during the first half of fiscal
1997, 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.
4
Membership fees and other revenue increased to $189,240 or 1.91% of net
sales in the first half of fiscal 1997 from $170,327 or 1.91% of net sales in
the first half of fiscal 1996. Membership fees include membership sign-ups at
the new warehouses opened since the end of the second quarter of fiscal 1996.
The increase in membership fees also reflects the increase in the annual
membership fee for the Business "Add-on" members from $15 to $20, effective with
renewals in the United States subsequent to April 1, 1996. Currently, there are
approximately 3.4 million U.S. Business "Add-on" members.
Gross margin (defined as net sales minus merchandise costs) increased 17% to
$1,005,483 or 10.12% of net sales in the first half of fiscal 1997 from $860,824
or 9.67% of net sales in the first half of fiscal 1996. The 45 basis point
increase in gross margin reflects strong first half physical inventory results,
the Company's greater purchasing power, expanded use of the Company's depot
facilities, improved fresh foods margins, improved softlines margins, 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 1997 and 1996 each
include a $5,000 LIFO provision.
Selling, general and administrative expenses as a percent of net sales
decreased to 8.68% during the first half of fiscal 1997 from 8.74% during the
first half of fiscal 1996. This improvement in selling, general and
administrative expenses as a percent of net sales was due to the increase in
comparable warehouse sales noted above, and a year-over-year improvement at the
Company's core warehouse operations and Central and Regional administrative
offices, which was partially offset by higher expenses as a percent of net sales
associated with international expansion and certain ancillary businesses.
Preopening expenses totaled $16,284 or 0.16% of net sales during the first
half of fiscal 1997 compared to $15,420 or 0.17% of net sales during the first
half of fiscal 1996. Eleven warehouses were opened in the first half of fiscal
1997 (including four relocated warehouses), compared to twelve new locations
during the last year's first half (including a relocated warehouse). Preopening
expenses also includes costs related to remodels, including expanded fresh foods
and ancillary operations at existing warehouses.
Interest expense totaled $36,176 in the first half of fiscal 1997 compared
to $35,272 in the first half of fiscal 1996. The increase in interest expense is
primarily related to the issuance in April 1996 of a $140,000 unsecured note
payable and the redemption premium paid to debenture holders who elected to
redeem their debentures. This increase is offset by lower interest expense in
the second quarter on convertible subordinated debentures following the
redemption/conversion of the Company's 6 3/4% ($285.l million principal amount)
and 5 1/2% ($179.3 million principal amount) Convertible Subordinated
Debentures.
Interest income and other totaled $7,119 in the first half of fiscal 1997
compared to $3,378 in the first half of fiscal 1996. The increase is primarily
due to the Company incurring an elimination in its share of losses in certain
unconsolidated joint ventures and improved earnings in its Mexico joint venture
operation.
The effective income tax rate on earnings in the first half of fiscal 1997
was 40.50% compared to a 41.25% effective tax rate in the first half of fiscal
1996. The decrease in the effective tax rate was related primarily to decreases
in foreign taxes.
LIQUIDITY AND CAPITAL RESOURCES
(DOLLARS IN THOUSANDS)
The discussion below contains forward-looking statements that involve risks
and uncertainties, and should be read in conjunction with the Company's reports
filed previously with the Securities and Exchange Commission. Actual results may
differ materially.
5
EXPANSION PLANS
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, as well as additional
capital for international expansion through investments in foreign subsidiaries
and joint ventures.
While there can be no assurance that current expectations will be realized,
and plans are subject to change upon further review, it is management's current
intention to spend an aggregate of approximately $400,000 to $425,000 during
fiscal 1997 in the United States and Canada for real estate, construction,
remodeling and equipment for warehouse clubs and related operations; and
approximately $80,000 to $100,000 for international expansion, including the
United Kingdom, Asia and other potential ventures. These expenditures will be
financed with a combination of cash provided from operations, the use of cash
and cash equivalents (which totaled $87,548 at February 16, 1997), short-term
borrowings under revolving credit facilities and/or commercial paper facilities,
and other financing sources as required.
Expansion plans for the United States and Canada during fiscal 1997 are to
open approximately 20 new warehouse clubs, including seven relocations. Through
the end of the first half of fiscal 1997, the Company has opened ten warehouses
in the United States (including the relocation of four warehouses), closed
outright one warehouse in Canada, and opened one warehouse in Taiwan in January
1997. The Company expects to continue expansion of its international operations
and plans to open one to two additional United Kingdom units through its
60%-owned subsidiary during the second half of fiscal 1997. Other markets are
being assessed, particularly in the Pacific Rim.
Costco Companies, Inc. and its Mexico-based joint venture partner,
Controladora Comercial Mexicana, each own a 50% interest in Price Club Mexico
following the Company's acquisition of Price Enterprises' interest in Price Club
Mexico in April, 1995. Price Club Mexico's expansion plans include the opening
one to two new warehouse clubs during fiscal 1997. As of February 16, 1997,
Price Club Mexico operated 13 Price Club warehouses in Mexico.
BANK LINES OF CREDIT AND COMMERCIAL PAPER PROGRAMS (ALL AMOUNTS STATED IN US
DOLLARS)
The Company has a domestic multiple-option loan facility with a group of 12
banks, which provides for borrowings of up to $500,000 or standby support for a
$500,000 commercial paper program. Of this amount, $250,000 expires on January
26, 1998, 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 16, 1997, no amount was outstanding under the loan facility and
$156,000 was outstanding under the commercial paper program.
In addition, a wholly-owned Canadian subsidiary has a $148,000 commercial
paper program supported by a $104,000 bank credit facility with three Canadian
banks, of which $63,000 will expire in April 1997 and $41,000 will expire in
March 1999. The interest rate on bank borrowings is based on the prime rate or
the "Bankers' Acceptance" rate. At February 16, 1997, no amount was outstanding
under the bank credit facility and $63,000 was outstanding under the Canadian
commercial paper program. The Company expects to renew for an additional
one-year term the $63,000 portion of the loan facility expiring in April 1997,
at substantially the same terms.
The Company has agreed to limit the combined amount outstanding under the
U.S. and Canadian commercial paper programs to the $604,000 combined amounts of
the respective supporting bank credit facilities.
LETTERS OF CREDIT
The Company also has separate letter of credit facilities (for commercial
and standby letters of credit), totaling approximately $179,000. The outstanding
commitments under these facilities at February 16, 1997
6
totaled approximately $72,000, including approximately $37,000 in standby
letters of credit for workers' compensation requirements.
REDEMPTION/CONVERSION OF CONVERTIBLE SUBORDINATED DEBENTURES
On November 19, 1996, The Price Company, a wholly-owned subsidiary of the
Company, called for redemption all $285,100 of its 6 3/4% Convertible
Subordinated Debentures due 2001. On the redemption date, December 4, 1996,
approximately $159,400 principal amount of the Debentures were converted into
approximately 7.1 million shares of Costco Companies, Inc. Common Stock and the
remaining $125,700 of Debentures were redeemed at a total cost of $130,300
(including accrued interest and redemption premium). The redemption portion of
the transaction was financed with short-term bank borrowings.
On December 16, 1996, The Price Company called for redemption all $179,300
of its 5 1/2% Convertible Subordinated Debentures due 2012. On the redemption
date, January 6, 1997, approximately $142,700 principal amount of the Debentures
were converted into approximately 6.0 million shares of Costco Companies, Inc.
Common Stock and the remaining $36,600 of Debentures were redeemed at a total
cost of $37,500 (including accrued interest and redemption premium). The
redemption portion of the transaction was paid with cash on hand.
FINANCIAL POSITION AND CASH FLOWS
Due to rapid inventory turnover, the Company's operations provide a higher
level of supplier trade payables in relation to inventory than generally
encountered in other forms of retailing. When combined with other current
liabilities, the resulting amount typically approaches or exceeds the current
assets needed to operate the business (e.g., merchandise inventories, accounts
receivable and other current assets). The working capital deficit totaled
approximately ($100,700) at February 16, 1997, compared to working capital of
$57,000 at September 1, 1996. The decrease in net working capital was primarily
due to the short-term financing of the redemption of the Convertible
Subordinated Debentures.
Net cash provided by operating activities totaled $247,746 in the first half
of fiscal 1997 compared to $90,059 in the first half of fiscal 1996. The
increase in net cash from operating activities is primarily a result of
increased net income, adjusted for the non-cash provision for asset impairments,
and reduced net inventory requirements during the first 24 weeks of this fiscal
year versus last fiscal year.
Net cash used in investing activities totaled $285,539 in the first half of
fiscal 1997 compared to $275,077 in the first half of fiscal 1996. The investing
activities primarily related to additions to property and equipment for new and
remodeled warehouses of $285,113 and $265,076 in the first half of fiscal 1997
and 1996, respectively.
Net cash provided by financing activities totaled $23,155 in the first half
of fiscal 1997 compared to $179,144 in the first half of fiscal 1996. This
decrease is primarily the result of utilizing short-term borrowings to finance
the repayment of long-term debt in fiscal 1997 compared to investments in
property and equipment in fiscal 1996.
The Company's balance sheet as of February 16, 1997 reflects a $313,512 or
6% increase in total assets since September 1, 1996. The increase is primarily
due to a net increase in property and equipment primarily related to the
Company's expansion program.
7
PART II--OTHER INFORMATION
(DOLLARS IN THOUSANDS)
ITEM 1. LEGAL PROCEEDINGS
On April 6, 1992, The Price Company 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, The Price Company 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 The
Price Company'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. In
February 1997, the Court granted the plaintiffs' motion for certification of a
class consisting of all purchasers of the Common Stock of The Price Company from
April 3, 1991 through April 2, 1992. 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 and certain
current and former directors 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 alleged
violation of certain state and federal laws arising from the spin-off and
exchange transaction (whereby Price Enterprises, Inc. became a separate,
publicly-traded company), and the merger between Costco and The Price Company.
In July 1996, an agreement in principle was reached to resolve the lawsuit.
Subject to court approval, the resolution will involve the transfer from Price
Enterprises, Inc. to the Company of certain intangible assets, including
elimination of certain existing non-compete restrictions and operating
agreements and the termination or amendment of certain trademark license and
assignment agreements. The cash portion of the settlement will be funded by the
Company's director and officer insurance coverage and by Price Enterprises. The
Company will contribute no money to the settlement.
In May 1996, the Company reached an agreement in principle with the
Environmental Protection Agency and the U.S. Department of Justice to settle an
enforcement action under the Federal Clean Air Act. The action is based on
claims that the Company failed to maintain required documentation related to its
sale of freon products. Under the terms of the proposed settlement, the Company
agreed to pay a civil penalty of $232 and to comply with federal regulations
relating to the sale of ozone-depleting substances.
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.
8
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 January 29, 1997 at
the DoubleTree Paradise Valley Resort in Scottsdale, Arizona. Stockholders of
record at the close of business on December 6, 1996 were entitled to notice of
and to vote in person or by proxy at the annual meeting. At the date of record,
there were 203,861,799 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.
(1) To elect three Class I directors to hold office until the 2000 Annual
Meeting of Stockholders and, in each case, until his successor is elected and
qualified.
W/H AUTHORITY
TOTAL AND
SHARES FOR AGAINST ABSTAINED
VOTED/(%) VOTES/(%) VOTES/(%) VOTES/(%)
---------- ---------- --------- ---------------
Jeffrey H. Brotman..... 175,119,511 170,628,182 -- 4,491,329
(Class I) 85.9% 83.7% 2.2%
James D. Sinegal....... 175,119,511 170,630,686 -- 4,488,825
(Class I) 85.9% 83.7% 2.2%
Richard A. Galanti..... 175,119,511 165,210,311 -- 9,909,200
(Class I) 85.9% 81.0% 4.9%
(2) To amend The Price/Costco, Inc. 1993 Combined Stock Grant and Stock
Option Plan to increase the number of shares of common stock available for
issuance from 10 million shares to 20 million shares.
W/H AUTHORITY
TOTAL AND
SHARES FOR AGAINST ABSTAINED
VOTED/(%) VOTES/(%) VOTES/(%) VOTES/(%)
---------- ---------- --------- ---------------
175,119,511 141,861,981 31,043,334 2,214,196
85.9% 69.6% 15.2% 1.1%
(3) To authorize the amendment of the Company's Certificate of Incorporation
to change the name of the Company from Price/Costco, Inc. to Costco Companies,
Inc.
W/H AUTHORITY
TOTAL AND
SHARES FOR AGAINST ABSTAINED
VOTED/(%) VOTES/(%) VOTES/(%) VOTES/(%)
---------- ---------- --------- ---------------
175,119,511 171,376,961 1,559,823 2,182,727
85.9% 84.0% 0.8% 1.1%
(4) To consider and ratify the selection of the Company's independent public
accountants, Arthur Andersen LLP.
W/H AUTHORITY
TOTAL AND
SHARES FOR AGAINST ABSTAINED
VOTED/(%) VOTES/(%) VOTES/(%) VOTES/(%)
---------- ---------- --------- ---------------
Arthur Andersen LLP.... 175,119,511 174,728,995 138,469 252,047
85.9% 85.7% 0.1% 0.1%
ITEM 5. OTHER INFORMATION
None.
9
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included herein or incorporated by reference:
3(a) Restated And Amended Certificate of Incorporation of Costco
Companies, Inc.
(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 16,
1997.
10
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.
COSTCO COMPANIES, INC.
REGISTRANT
/s/ JAMES D. SINEGAL
------------------------------
Date: March 31, 1997 James D. Sinegal
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
/s/ RICHARD A. GALANTI
------------------------------
Date: March 31, 1997 Richard A. Galanti
EXECUTIVE VICE PRESIDENT,
CHIEF FINANCIAL OFFICER
11
COSTCO COMPANIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
FEBRUARY 16, SEPTEMBER 1,
1997 1996
------------ ------------
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash and cash equivalents............................................................. $ 87,548 $ 101,955
Receivables, net...................................................................... 167,865 137,467
Merchandise inventories, net.......................................................... 1,660,210 1,500,842
Other current assets.................................................................. 78,338 88,040
------------ ------------
Total current assets................................................................ 1,993,961 1,828,304
------------ ------------
PROPERTY AND EQUIPMENT
Land and land rights.................................................................. 1,068,494 1,055,208
Buildings and leasehold and land improvements......................................... 1,830,443 1,667,697
Equipment and fixtures................................................................ 790,238 716,448
Construction in progress.............................................................. 72,584 104,183
------------ ------------
3,761,759 3,543,536
Less accumulated depreciation and amortization........................................ (720,382) (655,226)
------------ ------------
Net property and equipment.......................................................... 3,041,377 2,888,310
------------ ------------
OTHER ASSETS.......................................................................... 190,035 195,247
------------ ------------
$ 5,225,373 $4,911,861
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bank checks outstanding............................................................... $ 12,832 $ 22,330
Short-term borrowings................................................................. 218,564 59,928
Accounts payable...................................................................... 1,319,321 1,220,426
Accrued salaries and benefits......................................................... 300,223 256,951
Accrued sales and other taxes......................................................... 89,581 84,545
Other current liabilities............................................................. 154,114 127,414
------------ ------------
Total current liabilities........................................................... 2,094,635 1,771,594
LONG-TERM DEBT........................................................................ 765,421 1,229,221
DEFERRED INCOME TAXES AND OTHER LIABILITIES........................................... 37,030 60,902
------------ ------------
Total liabilities................................................................... 2,897,086 3,061,717
------------ ------------
MINORITY INTERESTS.................................................................... 89,271 72,346
------------ ------------
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; 210,796,000 and
196,436,000 shares issued and outstanding............................................ 2,108 1,964
Additional paid-in capital............................................................ 646,624 321,832
Accumulated foreign currency translation.............................................. (64,860) (71,883)
Retained earnings..................................................................... 1,655,144 1,525,885
------------ ------------
Total stockholders' equity.......................................................... 2,239,016 1,777,798
------------ ------------
$ 5,225,373 $4,911,861
------------ ------------
------------ ------------
The accompanying notes are an integral part of these financial statements.
12
COSTCO COMPANIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
12 WEEKS ENDED 24 WEEKS ENDED
-------------------------- --------------------------
FEBRUARY 16, FEBRUARY 18, FEBRUARY 16, FEBRUARY 18,
1997 1996 1997 1996
------------ ------------ ------------ ------------
REVENUE
Net sales................................................ $ 5,147,425 $ 4,606,070 $ 9,933,061 $ 8,901,932
Membership fees and other................................ 91,468 82,625 189,240 170,327
------------ ------------ ------------ ------------
Total revenue.......................................... 5,238,893 4,688,695 10,122,301 9,072,259
OPERATING EXPENSES
Merchandise costs........................................ 4,619,208 4,153,992 8,927,578 8,041,108
Selling, general and administrative...................... 436,036 391,943 862,140 777,916
Preopening expenses...................................... 6,087 5,970 16,284 15,420
Provision for impaired assets and warehouse closing
costs.................................................. -- -- 70,000 --
------------ ------------ ------------ ------------
Operating income....................................... 177,562 136,790 246,299 237,815
OTHER INCOME (EXPENSE)
Interest expense......................................... (17,243) (17,501) (36,176) (35,272)
Interest income and other................................ 3,461 2,287 7,119 3,378
------------ ------------ ------------ ------------
INCOME BEFORE PROVISION FOR INCOME TAXES................. 163,780 121,576 217,242 205,921
Provision for income taxes............................... 66,331 50,150 87,983 84,942
------------ ------------ ------------ ------------
NET INCOME............................................... $ 97,449 $ 71,426 $ 129,259(a) $ 120,979
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE--FULLY
DILUTED:
Net income............................................... $ 0.46 $ 0.35 $ 0.62(a) $ 0.59
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Shares used in calculation (000's)....................... 223,296 224,737 218,549 217,431
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
- ------------------------
(a) Net income and net income per common and common equivalent share would have
been $167,934 and $0.79, respectively, without the effect of adopting FAS
No. 121, using 225,822 fully-diluted shares.
The accompanying notes are an integral part of these financial statements.
13
COSTCO COMPANIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
24 WEEKS ENDED
--------------------------
FEBRUARY 16, FEBRUARY 18,
1997 1996
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................................................................ $ 129,259 $ 120,979
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization....................................................... 79,909 71,963
Provision for asset impairments..................................................... 65,000 --
Decrease (increase) in merchandise inventories...................................... (155,362) 21,572
Increase (decrease) in accounts payable............................................. 96,502 (132,608)
Other............................................................................... 32,438 8,153
------------ ------------
Total adjustments................................................................. 118,487 (30,920)
------------ ------------
Net cash provided by operating activities........................................... 247,746 90,059
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property and equipment................................................... (285,113) (265,076)
Proceeds from the sale of property and equipment...................................... 7,603 2,554
Investment in unconsolidated joint ventures........................................... -- (5,000)
Other................................................................................. (8,029) (7,555)
------------ ------------
Net cash used in investing activities............................................... (285,539) (275,077)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from short-term borrowings............................................... 159,477 159,809
Increase (decrease) in bank checks outstanding........................................ (9,618) 7,604
Net proceeds from long-term borrowings................................................ 2,589 --
Payments on long-term debt and notes payable.......................................... (164,624) (1,413)
Proceeds from minority interests, net................................................. 16,669 10,588
Exercise of stock options, including income tax benefit............................... 18,662 2,225
Other................................................................................. -- 331
------------ ------------
Net cash provided by financing activities........................................... 23,155 179,144
------------ ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH............................................... 231 682
------------ ------------
Net decrease in cash and cash equivalents........................................... (14,407) (5,192)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR........................................ 101,955 45,688
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............................................ $ 87,548 $ 40,496
------------ ------------
------------ ------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amounts capitalized) (a)........................................... $ 45,763 $ 22,670
Income taxes (b).................................................................... 65,400 104,714
- ------------------------
(a) Semi-annual interest payments on the 5 1/2% and 6 3/4% convertible
debentures were paid on September 3, 1996, subsequent to the beginning of
the first quarter of fiscal 1997, which began September 2, 1996. In fiscal
year 1996, these interest payments were paid prior to the first quarter,
which began on September 4, 1995.
(b) The second quarter of fiscal 1997 estimated tax payments were due and paid
subsequent to the end of the second quarter. In fiscal 1996, these payments
were made prior to the end of the second quarter.
The accompanying notes are an integral part of these financial statements.
14
COSTCO COMPANIES, 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
Costco Companies, Inc., a Delaware corporation, and its subsidiaries ("Costco
Companies, Inc." or the "Company"). Costco Companies, Inc. is a holding company
which operates primarily through its major subsidiaries, The Price Company and
subsidiaries ("Price"), and Costco Wholesale Corporation and subsidiaries
("Costco"). All intercompany transactions between the Company and its
subsidiaries have been eliminated in consolidation. Price and Costco primarily
operate cash and carry membership warehouses, primarily under the "Costco
Wholesale" name.
Costco Companies, Inc. operates membership warehouses that offer very low
prices on a limited selection of nationally-branded and selected private label
products in a wide range of merchandise categories in no-frills, self-service
warehouse facilities. As of February 16, 1997, Costco Companies, Inc. operated
258 warehouses under the "Costco Wholesale" and "Price Club" names: 198
warehouses in the United States (23 states), 54 warehouses in nine Canadian
provinces, five warehouses in the United Kingdom, and one warehouse in Taiwan.
As of February 16, 1997, the Company also operated (through a 50%-owned joint
venture) 13 warehouses in Mexico and had a license agreement for the operation
of a membership warehouse in Seoul, Korea.
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 1, 1996.
FISCAL YEARS
The Company reports on a 52/53-week fiscal year, ending on the Sunday
nearest the end of August. Fiscal 1997 is a 52-week fiscal year, with the first,
second and third quarters consisting of 12 weeks each and the fourth quarter,
ending August 31, 1997, 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 higher at both
February 16, 1997 and February 18, 1996.
15
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
NOTE (1)--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company provides for estimated inventory losses between physical
inventory counts on the basis of a standard percentage of sales. This provision
is adjusted to reflect the actual shrinkage results of physical inventory counts
which generally occur in the second and fourth fiscal quarters.
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 16, 1997 and February
18, 1996, eliminates interest expense, net of income taxes, on the 5 1/2%
convertible subordinated debentures (primary and fully diluted) prior to the
December 4, 1996 redemption date, the 6 3/4% convertible subordinated debentures
(fully diluted only) prior to the January 6, 1997 redemption date, and the
5 3/4% convertible subordinated debentures (fully diluted only), and includes
the additional shares issuable upon conversion of these debentures.
ADOPTION OF FINANCIAL ACCOUNTING STANDARDS BOARD STATEMENT NO. 121
The Company adopted Statement of Financial Accounting Standard No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of " (SFAS No. 121), as of the first quarter of fiscal 1997. In
accordance with SFAS No. 121, the Company recorded a pretax, non-cash charge of
$65,000 reflecting its estimate of impairment relating principally to excess
property and closed warehouses. The charge reflects the difference between
carrying value and fair-market value, which was based on market valuations for
those assets whose carrying value was not recoverable through future cash flows.
RECENT ACCOUNTING PRONOUNCEMENT
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings per Share" (SFAS No. 128). SFAS No. 128 establishes new
standards for computing and presenting earnings per share (EPS) for entities
with publicly-held common stock. The Company is required to adopt SFAS No. 128
at the beginning of fiscal 1998. If the provisions of SFAS No. 128 had been used
to calculate EPS for the 12- and 24-weeks ended February 16, 1997 and February
18, 1996, proforma EPS would have been:
12 WEEKS ENDED 24 WEEKS ENDED
---------------------------------------- ----------------------------------------
FEBRUARY 16, 1997 FEBRUARY 18, 1996 FEBRUARY 16, 1997 FEBRUARY 18, 1996
------------------- ------------------- ------------------- -------------------
Basic.............. $ .47 $ .37 $ .64 $ .62
--- --- --- ---
--- --- --- ---
Diluted............ $ .46 $ .35 $ .62 $ .59
--- --- --- ---
--- --- --- ---
RECLASSIFICATIONS
Certain reclassifications have been reflected in the financial statements in
order to conform prior years to the current year presentation.
16
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
NOTE (1)--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
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 of up to $500,000 or standby support for a
$500,000 commercial paper program. Of this amount, $250,000 expires on January
26, 1998, 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 16, 1997, no amount was outstanding under the loan facility and
$156,000 was outstanding under the commercial paper program.
In addition, a wholly-owned Canadian subsidiary has a $148,000 commercial
paper program supported by a $104,000 bank credit facility with three Canadian
banks, of which $63,000 will expire in April 1997 and $41,000 will expire in
April 1999. The interest rate on bank borrowings is based on the prime rate or
the "Bankers' Acceptance" rate. At February 16, 1997, no amount was outstanding
under the bank credit facility and $63,000 was outstanding under the Canadian
commercial paper program. The Company expects to renew for an additional
one-year term the $63,000 portion of the loan facility expiring in April 1997,
at substantially the same terms.
The Company has agreed to limit the combined amount outstanding under the
U.S. and Canadian commercial paper programs to the $604,000 combined amounts of
the respective supporting bank credit facilities.
LETTERS OF CREDIT
The Company also has separate letter of credit facilities (for commercial
and standby letters of credit), totaling approximately $179,000. The outstanding
commitments under these facilities at February 16, 1997 totaled approximately
$72,000, including approximately $37,000 in standby letters of credit for
workers' compensation requirements.
REDEMPTION/CONVERSION OF CONVERTIBLE SUBORDINATED DEBENTURES
On November 19, 1996, The Price Company, a wholly-owned subsidiary of the
Company, called for redemption all $285,100 of its 6 3/4% Convertible
Subordinated Debentures due 2001. On the redemption date, December 4, 1996,
approximately $159,400 principal amount of the Debentures were converted into
approximately 7.1 million shares of Costco Companies, Inc. Common Stock and the
remaining $125,700 of Debentures were redeemed at a total cost of $130,300
(including accrued interest and redemption premium). The redemption portion of
the transaction was financed with short-term bank borrowings.
17
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
NOTE (2)--DEBT (CONTINUED)
On December 16, 1996, The Price Company called for redemption all $179,300
of its 5 1/2% Convertible Subordinated Debentures due 2012. On the redemption
date, January 6, 1997, approximately $142,700 principal amount of the Debentures
were converted into approximately 6.0 million shares of Costco Companies, Inc.
Common Stock and the remaining $36,600 of Debentures were redeemed at a total
cost of $37,500 (including accrued interest and redemption premium). The
redemption portion of the transaction was paid with cash on hand.
NOTE (3)--INCOME TAXES
The following is a reconciliation of the federal statutory income tax rate
to the effective income tax rate for income before income taxes:
24 WEEKS ENDED 24 WEEKS ENDED
FEBRUARY 16, 1997 FEBRUARY 18, 1996
--------------------------- ---------------------------
Federal statutory income tax rate...................... $76,035 35.00% $72,072 35.00%
State, foreign and other income taxes, net............. 11,948 5.50% 12,870 6.25%
------------ ------------- ------------ -------------
$87,983 40.50% $84,942 41.25%
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
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 on page 8 for
outstanding legal matters.
18