<PAGE>
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UNITED STATES
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 NOVEMBER 20, 1994
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________________ TO _____________________
COMMISSION FILE NUMBER 0-20355
PRICE/COSTCO, INC.
(Exact name of registrant as specified in its charter)
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<S> <C>
DELAWARE 33-0572969
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
10809 - 120TH AVENUE N.E.
KIRKLAND, WASHINGTON 98033
(Address of principal executive offices)
(206) 803-8100
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports, and (2) has been subject to such
filing requirements for the past 90 days. YES ______________ NO ______________
The registrant had 217,843,000 common shares, par value $.01, outstanding at
December 7, 1994.
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<PAGE>
PRICE/COSTCO, INC.
AND SUBSIDIARIES
INDEX TO FORM 10-Q
PART I -- FINANCIAL INFORMATION
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PAGE
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ITEM 1 -- FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets.................................................................... 8
Condensed Consolidated Statements of Operations.......................................................... 9
Condensed Consolidated Statements of Cash Flows.......................................................... 10
Notes to Condensed Consolidated Financial Statements..................................................... 11
ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............ 3
PART II -- OTHER INFORMATION
ITEM 1 -- LEGAL PROCEEDINGS................................................................................ 6
ITEM 2 -- CHANGES IN SECURITIES............................................................................ 6
ITEM 3 -- DEFAULTS UPON SENIOR SECURITIES.................................................................. 6
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............................................. 6
ITEM 5 -- OTHER INFORMATION................................................................................ 6
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K................................................................. 6
Exhibit (28) -- Independent Public Accountants' Letter................................................... 19
</TABLE>
2
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Price/Costco, Inc.'s (the "Company" or "PriceCostco") unaudited condensed
consolidated balance sheet as of November 20, 1994, and the audited condensed
consolidated balance sheet as of August 28, 1994, and unaudited condensed
consolidated statements of operations and cash flows for the 12-week periods
ended November 20, 1994, and November 21, 1993, are included elsewhere herein.
Also included elsewhere herein are notes to the unaudited 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 1995 is a
53-week year with period 13 consisting of five weeks ending on September 3,
1995. The first, second and third quarters consist of 12 weeks each and the
fourth quarter consists of 17 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 1994 annual report on
Form 10-K previously filed with the Securities and Exchange Commission.
COMPARISON OF THE 12 WEEKS ENDED NOVEMBER 20, 1994, AND NOVEMBER 21, 1993
(DOLLARS IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
Net operating results for first quarter of fiscal 1995 reflect net income of
$48,527 or $0.22 per share as compared to a net loss of $32,991 or $0.15 per
share in the first quarter of fiscal 1994. The loss in the first quarter of the
prior year includes a provision for merger and restructuring costs of $120,000
pre-tax ($80,000 or $0.36 per share after tax) related to the merger of the
Price Company and Costco Wholesale Corporation (the "Merger"). The Merger was
approved by Price and Costco shareholders and completed on October 21, 1993.
CONTINUING OPERATIONS
Income from continuing operations for the first quarter of fiscal 1995 was
$48,527 or $0.22 per share, compared to a loss from continuing operations for
the first quarter of fiscal 1994 of $36,938 or $0.17 per share. Excluding the
$120,000 pre-tax merger and restructuring charge, income from continuing
operations for the first quarter of fiscal 1994 would have been $43,062 or $0.19
per share.
Net sales increased approximately 10% to $3,943,718 in the first quarter of
fiscal 1995 from $3,599,797 in the first quarter of fiscal 1994. This increase
was due to: (i) sales at the 11 new warehouses opened during the first quarter
of fiscal 1995, which increase was partially offset by sales at 4 warehouses
closed during the first quarter of fiscal 1995 that were in operation during the
first quarter of fiscal 1994; and (ii) increased sales at 29 warehouses that
were opened since the first quarter of 1994 and that were in operation for the
first quarter of fiscal year 1995, and (iii) an increase in sales at existing
locations opened prior to fiscal 1994. Changes in prices did not materially
impact sales levels.
Comparable sales, that is sales in warehouses open for at least a year,
increased approximately 1% for the first quarter of fiscal 1995 compared to
negative 5% during the first quarter of fiscal 1994. The favorable rate of
comparable sales was attributed to the positive effect on sales of relocating
six warehouses in existing markets since the first quarter of fiscal 1994 and
improving operating results in the Eastern United States. Comparable sales
results were negatively impacted by sales cannibalization caused by the
company's warehouse expansion in Northern California and the Pacific Northwest
during the past several months.
Membership fees and other revenue increased 6% from $81,330, or 2.26% of net
sales, in the first quarter of fiscal 1994 to $86,205, or 2.19% of net sales in
the first quarter of fiscal 1995. This increase reflects membership sign-ups at
the 29 new warehouses opened since the first quarter of fiscal 1994 and the
partial year effect of membership fee increases implemented in January 1994. As
anticipated,
3
<PAGE>
the Company experienced a decline in membership renewals at existing warehouses
due to overlapping memberships and offering Price and Costco members reciprocal
member privileges effective November 1, 1993. The negative impact of the
reciprocal member privileges on membership fee revenue is expected to be a less
significant factor after November 1994.
Gross margin (defined as net sales minus merchandise costs) increased 12%
from $327,627, or 9.10% of net sales in the first quarter of fiscal 1994 to
$366,274, or 9.29% of net sales in the first quarter of fiscal 1995. The
increase in the gross margin as a percentage of net sales is the result of
greater purchasing power realized since the Merger. The gross margin figures
reflect accounting for merchandise inventory costs on the last-in, first-out
(LIFO) method. For the first quarter of fiscal 1995 there was a $2,500 LIFO
charge or $.01 per share due to the use of the LIFO method compared to the
first-in, first-out (FIFO) method. This compares to a $1,900 LIFO charge or $.01
per share in the first quarter of fiscal 1994.
Selling, general and administrative expenses as a percent of net sales
increased from 8.79% the during the first quarter of fiscal 1994 to 8.88% during
the first quarter of fiscal 1995, reflecting higher expenses associated with
international expansion and certain ancillary operations partially offset by
lower expenses associated with implementing front-end scanning and automated
receiving at certain existing warehouses.
Preopening expenses totaled $6,991 or 0.18% of net sales during the first
quarter of fiscal 1995 compared to $11,130 or 0.31% of net sales during the
first quarter of fiscal 1994. During the first quarter of fiscal 1995 the
Company opened 11 new warehouses, including 4 relocations (which generally incur
lower preopening costs) as compared to 12 new warehouses during the first
quarter of fiscal 1994. In addition, the Company opened 8 new warehouses
subsequent to the first quarter of fiscal 1994 in which a significant portion of
the preopening costs were expensed in the first quarter of fiscal 1994, as
compared to 3 new warehouses opened subsequent to the first quarter of 1995.
Interest expense totaled $10,823 in the first quarter of fiscal 1994
compared to $14,139 in the first quarter of fiscal 1995. In both fiscal quarters
interest was incurred on the convertible subordinated debentures, borrowings on
the Company's bank lines and commercial paper programs. Interest income and
other totaled $2,522 in the first quarter of fiscal 1994, compared to $1,079 in
the first quarter of fiscal 1995. Interest income decreased during the first
quarter of fiscal 1995 as compared to the first quarter of fiscal 1994 due to
lower average cash balances on hand.
The effective income tax rate (excluding the merger and restructuring
charge) on earnings in the first quarter of both fiscal 1994 and 1995 was 41%.
DISCONTINUED OPERATIONS
For the first quarter of fiscal 1995, income from discontinued real estate
operations (approximately $.01 per share) is not included in operating results
for periods subsequent to the announcement date (fourth quarter of fiscal 1994)
and through the date of disposal (second quarter of fiscal 1995). In the first
quarter of fiscal 1994, there was after-tax income from discontinued real estate
operations of $3,947, or $.02 per share, including a $4,210 pre-tax gain ($.01
per share after tax) on the sale of a shopping center. Upon completion of the
spin-off of Price Enterprises, the Company will adjust its estimated loss on
disposal of the discontinued real estate segment recorded in the fourth quarter
of fiscal 1994 to the actual loss based on the trading price of Price
Enterprises' common stock following the completion of the Exchange Offer. The
Exchange Offer expired on December 20, 1994 in accordance with the terms of the
Exchange Offer.
LIQUIDITY AND CAPITAL RESOURCES
(DOLLARS IN THOUSANDS)
PriceCostco's primary requirement for capital is the financing of the land,
building and equipment costs for new warehouses plus the costs of initial
warehouse operations and working capital requirements. PriceCostco does not
expect to make significant investments in non-club real estate in the future.
Additional capital will be required for international expansion through
investments in foreign subsidiaries and joint ventures.
4
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In the first quarter of fiscal 1995, net cash used in operating activities
totalled $37,906 and cash invested in property and equipment totalled $96,608.
These activities, among others, were financed by additions to notes payable of
$162,702.
Expansion plans for the United States and Canada during fiscal 1995 are to
open approximately 30 new warehouse clubs including 6 locations that will
replace existing warehouses. The Company also expects to continue expansion of
its international operations. The Company opened two warehouses in the United
Kingdom through a 60%-owned subsidiary in fiscal 1994, with a third location due
to open in June, 1995. In October 1994, under a licensing agreement with
PriceCostco, a Price Club opened in Seoul, Korea. The Company has a 50% interest
in a joint venture that operates 11 warehouse clubs as of December, 1994 in
Mexico. On December 6, 1994 the Company announced a non-binding expression of
intent to sell to Comercial Mexicana or its assignee the Company's 50% interest
in the Mexico operations.
While there can be no assurance that current expectations will be realized
and plans are subject to change upon further review, it is management's current
intention to spend an aggregate of approximately $450,000 to $500,000 during
fiscal 1995 in the United States and Canada for real estate, construction,
remodeling and equipment for warehouse clubs and related operations; and
approximately $25,000 to $75,000 for international expansion, including the
United Kingdom and other potential ventures. These expenditures will be financed
with a combination of cash, cash equivalents and short-term investments, which
totaled $62,906 at August 28, 1994 and $85,035 at November 20, 1994; short-term
borrowings under revolving credit facilities and/or commercial paper facilities;
possible issuance of long-term debt; and other financing sources as required.
The Company has a domestic multiple option loan facility with a group of 14
banks which provides for borrowings of up to $500,000 or for standby support for
a $500,000 commercial paper program. Of this amount, $250,000 expires on January
30, 1995, and $250,000 expires on January 30, 1998. The interest rate on bank
borrowings is based on LIBOR or rates bid at auction by the participating banks.
At November 20, 1994 and December 21, 1994, the amounts outstanding under the
Company's commercial paper program were $312,042 and $54,000, respectively. The
Company expects to renew the $250,000 portion of the loan facility expiring on
January 30, 1995, at substantially the same terms.
In addition, the Company's wholly-owned Canadian subsidiary has a $65,800
line of credit with a group of four Canadian banks of which $29,200 expires on
February 27, 1995 (the short-term portion) and $36,600 expires in various
amounts through January 5, 1998 (the long-term portion). The interest rate on
borrowings is based on the prime rate or the "Bankers' Acceptance" rate. At
November 20, 1994, no amounts were outstanding under these programs. The Company
expects to renew the $29,200 short-term portion of the line of credit expiring
on February 27, 1995 at substantially the same terms.
The Company has separate letter of credit facilities (for commercial and
standby letters of credit), totaling approximately $248,000. The outstanding
commitments under these facilities at November 20, 1994 was approximately
$91,000, including approximately $53,000 in standby letters for workers'
compensation requirements.
Due to rapid inventory turnover, the Company's operations provide a higher
level of supplier trade payables than generally encountered in other forms of
retailing. When combined with other current liabilities, the resulting amount
typically approaches the current assets needed to operate the business (e.g.,
merchandise inventories, accounts receivable and other current assets). At
November 20, 1994, the working capital deficit totaled $134,600 compared to a
working capital deficit of $113,000 at August 28, 1994. This change is primarily
related to an increase in cash and cash equivalents of $31,400, a decrease in
short-term investments and restricted cash of $9,000, and an increase in net
inventories (defined as merchandise inventories less accounts payable) of
$104,400.
5
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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 Price's counsel, alleged substantially the same facts as the
prior complaint. The case was dismissed with prejudice by the Court on March 9,
1993, on grounds the plaintiffs had failed to state a sufficient claim against
defendants. Plaintiffs have filed a Notice of Appeal in the Ninth Circuit Court
of Appeals, which was argued on October 4, 1994. The Company is currently
awaiting a Ninth Circuit Court of Appeals decision. If the Ninth Circuit Court
of Appeals renders a decision that is adverse to the Company, the Company
intends to vigorously defend the suit. 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, PriceCostco was served with a Complaint in an action
entitled SNYDER V. PRICE/COSTCO, INC. ET. AL., Case No. C94-1874, United States
District Court, Western District of Washington. The Complaint alleges violation
of certain state and federal laws arising from the Exchange Transaction. The
Company believes that this suit is without merit and will vigorously defend
against this suit. 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 is scheduled for 10:00 a.m. on January 27, 1995
at the Bellevue Inn in Bellevue, Washington. Matters to be voted on are included
in the Company's proxy statement filed with the Securities and Exchange
Commission and distributed to stockholders in December 1994.
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:
(28) Independent Public Accountants' Letter
(b) No reports on Form 8-K were filed for the 12 weeks ended November 20,
1994.
6
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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
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Date: December 22, 1994 /s/ JAMES D. SINEGAL
------------------------------
James D. Sinegal
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
Date: December 22, 1994 /s/ RICHARD A. GALANTI
------------------------------
Richard A. Galanti
EXECUTIVE VICE PRESIDENT,
CHIEF FINANCIAL OFFICER
</TABLE>
7
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PRICE/COSTCO, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS
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NOVEMBER 20, AUGUST 28,
1994 1994
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(UNAUDITED)
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CURRENT ASSETS
Cash and cash equivalents......................................................... $ 85,035 $ 53,638
Short-term investments............................................................ -- 9,268
Receivables, net.................................................................. 154,580 130,278
Merchandise inventories........................................................... 1,724,289 1,260,476
Other current assets.............................................................. 75,330 80,638
------------- -------------
Total current assets............................................................ 2,039,234 1,534,298
------------- -------------
PROPERTY AND EQUIPMENT
Land, land rights, and land improvements.......................................... 905,870 878,858
Buildings and leasehold improvements.............................................. 1,156,911 1,091,073
Equipment and fixtures............................................................ 549,572 523,310
Construction in progress.......................................................... 60,751 78,264
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2,673,104 2,571,505
Less -- accumulated depreciation and amortization................................. (454,411) (425,109)
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Net property and equipment...................................................... 2,218,693 2,146,396
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OTHER ASSETS........................................................................ 107,210 110,654
INVESTMENT IN PRICE CLUB MEXICO JOINT VENTURE....................................... 69,186 67,226
DISCONTINUED OPERATIONS............................................................. 377,085 377,085
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$ 4,811,408 $ 4,235,659
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bank checks outstanding, less cash on deposit..................................... $ 4,053 $ 6,804
Notes payable..................................................................... 312,042 149,340
Accounts payable.................................................................. 1,432,789 1,073,326
Accrued salaries and benefits..................................................... 204,413 207,570
Accrued sales and other taxes..................................................... 92,945 81,736
Other current liabilities......................................................... 127,627 128,531
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Total current liabilities....................................................... 2,173,869 1,647,307
LONG-TERM DEBT...................................................................... 795,229 795,492
DEFERRED INCOME TAXES AND OTHER LIABILITIES......................................... 72,263 73,121
------------- -------------
Total liabilities............................................................... 3,041,361 2,515,920
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MINORITY INTEREST................................................................... 35,073 34,779
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STOCKHOLDERS' EQUITY
Preferred stock $.01 par value; 100,000,000 shares authorized;
no shares issued and outstanding................................................. -- --
Common stock $.01 par value; 900,000,000 shares authorized;
217,839,000 and 217,795,000 shares issued and outstanding........................ 2,178 2,178
Additional paid-in capital........................................................ 582,557 582,148
Accumulated foreign currency translation.......................................... (41,502) (42,580)
Retained earnings................................................................. 1,191,741 1,143,214
------------- -------------
Total stockholders' equity...................................................... 1,734,974 1,684,960
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$ 4,811,408 $ 4,235,659
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</TABLE>
The accompanying notes are an integral part of these balance sheets.
8
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PRICE/COSTCO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
12 WEEKS 12 WEEKS
ENDED ENDED
NOVEMBER 20, NOVEMBER 21,
1994 1993
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(UNAUDITED) (UNAUDITED)
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REVENUE
Net sales......................................................................... $ 3,943,718 $ 3,599,797
Membership fees and other......................................................... 86,205 81,330
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Total revenue................................................................... 4,029,923 3,681,127
OPERATING EXPENSES
Merchandise costs................................................................. 3,577,444 3,272,170
Selling, general and administrative............................................... 350,178 316,559
Preopening expenses............................................................... 6,991 11,130
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Operating income................................................................ 95,310 81,268
OTHER INCOME (EXPENSE)
Interest expense.................................................................. (14,139) (10,823)
Interest income and other......................................................... 1,079 2,522
Provision for merger and restructuring costs...................................... -- (120,000)
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INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE PROVISION FOR INCOME TAXES.......... 82,250 (47,033)
Provision (benefit) for income taxes.............................................. 33,723 (10,095)
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INCOME (LOSS) FROM CONTINUING OPERATIONS............................................ 48,527 (36,938)
DISCONTINUED OPERATIONS:
Income, net of tax................................................................ -- 3,947
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NET INCOME (LOSS)................................................................. $ 48,527 $ (32,991)
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NET INCOME (LOSS) PER COMMON AND COMMON
EQUIVALENT SHARE --
FULLY DILUTED:
Continuing operations............................................................. $ 0.22 $ (0.17)
Discontinued operations:
Income, net of tax.............................................................. -- 0.02
------------- -------------
Net income (loss)................................................................. $ 0.22 $ (0.15)
------------- -------------
------------- -------------
Shares used in calculation (000's).............................................. 239,757 217,191
</TABLE>
The accompanying notes are an integral part of these statements.
9
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PRICE/COSTCO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
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12 WEEKS 12 WEEKS
ENDED ENDED
NOVEMBER NOVEMBER
20, 1994 21, 1993
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(UNAUDITED) (UNAUDITED)
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CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss).................................................................. $ 48,527 $ (32,991)
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization.................................................... 30,790 27,769
Increase in merchandise inventories.............................................. (464,024) (344,726)
Increase in accounts payable..................................................... 359,636 272,579
Other............................................................................ (12,835) 58,057
----------- -----------
Total adjustments.............................................................. (86,433) 13,679
----------- -----------
Net cash used in operating activities.......................................... (37,906) (19,312)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property and equipment................................................ (96,608) (141,961)
Additions to non-club real estate investments...................................... -- (28,446)
Proceeds from the sale of property and equipment................................... 202 28,059
Decrease in short-term investments and restricted cash............................. 9,268 38,050
Increase in other assets and other................................................. (4,089) (46,249)
----------- -----------
Net cash used in investing activities.......................................... (91,227) (150,547)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Additions to notes payable......................................................... 162,702 99,784
Changes in bank checks outstanding, less cash on deposit........................... (2,797) (2,042)
Exercise of stock options, including income tax benefit............................ 410 3,780
Other.............................................................................. 10 (772)
----------- -----------
Net cash provided by financing activities...................................... 160,325 100,750
----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH.............................................. 205 (376)
----------- -----------
Net increase (decrease) in cash and cash equivalents................................. 31,397 (69,485)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR....................................... 53,638 120,227
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD........................................... $ 85,035 $ 50,742
----------- -----------
----------- -----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amounts capitalized).............................................. $ 25,398 $ 23,417
Income taxes....................................................................... $ 19,617 $ 8,410
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Owned property was transferred or invested as follows:
Property and equipment............................................................. $ 6,100 $ (42,345)
Non-club real estate investments................................................... -- 43,524
Other assets....................................................................... (6,100) (1,179)
</TABLE>
The accompanying notes are an integral part of these statements.
10
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PRICE/COSTCO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 20, 1994
(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.) On October 21, 1993, Price and
Costco became wholly owned subsidiaries of PriceCostco. These unaudited
consolidated financial statements have been prepared following the
pooling-of-interests method of accounting and reflect the combined financial
position and operating results of Price and Costco for all periods presented.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial reporting and pursuant to the rules and regulations of the Securities
and Exchange Commission. While these statements reflect all normal recurring
adjustments which are, in the opinion of management, necessary for fair
presentation of the results of the interim period, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. For further information, refer to
the financial statements and footnotes thereto included in the Company's annual
report filed on Form 10-K for the year ended August 28, 1994.
BUSINESS
The Company historically operated in two reporting business segments: a cash
and carry merchandising operation and a non-club real estate operation. As of
July 1994 the Company discontinued its non-club real estate operations. 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 1995 is 53 weeks with
period 13 consisting of 5 weeks ending on September 3, 1995. The first, second
and third quarters consist of 12 weeks each and the fourth quarter consists of
17 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 $9,150 and $6,650 higher at
November 20, 1994 and August 28, 1994, respectively.
The Company provides for estimated inventory losses between physical
inventory counts on the basis of a standard percentage of sales. This provision
is adjusted to reflect the actual shrinkage results of the physical inventory
counts which generally occur in the second and fourth quarters of the Company's
fiscal year.
NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE
Net income per common and common equivalent share is based on the weighted
average number of common and common equivalent shares outstanding. For the
quarter ended November 20, 1994 this calculation eliminated interest expense,
net of income taxes, on the 5 1/2% convertible subordinated debentures (primary
and fully diluted) and the 6 3/4% convertible subordinated debentures (fully
diluted only), and includes the additional shares issuable upon conversion of
these debentures. The quarter ended November 21, 1993 does not reflect the
effect of options, warrants and convertible debentures as they were not dilutive
for either primary or fully-diluted purposes.
11
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PRICE/COSTCO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOVEMBER 20, 1994
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
NOTE (2) -- MERGER OF PRICE AND COSTCO
On October 21, 1993, the shareholders of both Price and Costco approved the
mergers of Price and Costco into subsidiaries of PriceCostco (the Merger).
Pursuant to the Merger, Price and Costco became subsidiaries of PriceCostco.
Shareholders of Price received 2.13 shares of PriceCostco common stock for each
share of Price common stock and shareholders of Costco received one share of
PriceCostco common stock for each share of Costco.
The Merger qualified as a "pooling-of-interests" for accounting and
financial reporting purposes. The pooling-of-interests method of accounting is
intended to present as a single interest two or more common shareholder
interests which were previously independent. Consequently, the historical
financial statements for periods prior to the consummation of the combination
were restated as though the companies had been combined. The restated financial
statements were adjusted to conform the accounting policies of the separate
companies.
All fees and expenses related to the Merger and to the consolidation and
restructuring of the combined companies were expensed as required under the
pooling-of-interests accounting method. In the first quarter of fiscal 1994, the
Company recorded a provision for merger and restructuring costs of $120,000
pre-tax ($80,000 after tax) related to the Merger.
Components of the $120,000 provision for merger and restructuring expenses,
including amounts expended and the remaining accrual related to completing the
merger and restructuring effort at November 20, 1994, are as follows:
<TABLE>
<CAPTION>
AMOUNTS ESTIMATE TO
EXPENDED COMPLETE
----------- -----------
<S> <C> <C>
Direct transaction expenses including investment banking, legal, accounting,
printing, filing and other professional fees................................. $ 24,548 $ --
Cost of closing eight operating warehouses including property write-downs,
severance, future lease costs, and other closing expenses; write-downs of
abandoned warehouse projects and restructuring of redundant international
expansion efforts............................................................ 24,948 --
Costs of consolidating central administrative functions including information
systems, accounting, merchandising and human resources and costs associated
with restructuring regional and warehouse support activities including
merchandise re-alignment and distribution, all of which is expected to be
completed in fiscal 1995..................................................... 30,787 8,213
Costs of converting management information systems, primarily merchandising,
operating, and membership systems in fiscal 1994 and planned conversion of
payroll, sales audit, and other systems in fiscal 1995....................... 14,452 6,548
Other expenses................................................................ 9,728 776
----------- -----------
Total..................................................................... $ 104,463 $ 15,537
----------- -----------
----------- -----------
</TABLE>
12
<PAGE>
PRICE/COSTCO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOVEMBER 20, 1994
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
NOTE (2) -- MERGER OF PRICE AND COSTCO (CONTINUED)
The following summarizes amounts reported by Price and Costco prior to the
Merger for the first quarter of fiscal 1994.
<TABLE>
<CAPTION>
CONTINUING OPERATIONS
-----------------------------------------------
MEMBERSHIP FEES INCOME FROM DISCONTINUED
NET SALES AND OTHER INCOME OPERATIONS
------------- ---------------- -------------- ------------------------
<S> <C> <C> <C> <C>
Fiscal 1994
Price (8 weeks prior to the
Merger)............................ $ 1,092,891 $ 28,525 $ 10,145 $ 3,092
Costco (8 weeks prior to the
Merger)............................ 1,204,765 23,818 9,301 --
PriceCostco (4 weeks after the
Merger)............................ 1,302,141 28,987 (56,384) 855
------------- -------- -------------- -------
Combined............................ $ 3,599,797 $ 81,330 $ (36,938)(a) $ 3,947
------------- -------- -------------- -------
------------- -------- -------------- -------
<FN>
- ------------------------
(a) Income from continuing operations in fiscal 1994 includes the provision for
merger and restructuring expenses of $120,000 pre-tax ($80,000 after tax).
</TABLE>
NOTE (3) -- SPIN-OFF OF PRICE ENTERPRISES, INC. AND DISCONTINUED OPERATIONS
SPIN-OFF OF PRICE ENTERPRISES, INC.
On July 28, 1994, PriceCostco entered into an Agreement of Transfer and Plan
of Exchange (as amended and restated, the Transfer and Exchange Agreement) with
Price Enterprises, Inc. (Price Enterprises). Price Enterprises is an indirect,
wholly-owned subsidiary of PriceCostco, formed in July 1994. The transactions
contemplated by the Transfer and Exchange Agreement are referred to herein as
the "Exchange Transaction."
Pursuant to the Transfer and Exchange Agreement, PriceCostco will offer to
exchange one share of Price Enterprises Common Stock for each share of
PriceCostco Common Stock, up to a maximum of 27 million shares of Price
Enterprises Common Stock (the Exchange Offer). If more than 27 million shares of
PriceCostco Common Stock are validly tendered and not withdrawn in the Exchange
Offer prior to the expiration thereof, then PriceCostco will accept 27 million
shares on a pro rata basis and shares of Price Enterprises Common Stock will be
exchanged therefor. If the number of shares of PriceCostco Common Stock validly
tendered in the Exchange Offer by holders of PriceCostco Common Stock is less
than 21.6 million, PriceCostco will accept such validly tendered shares for
exchange and will distribute the remaining shares of Price Enterprises Common
Stock pro rata to PriceCostco stockholders. If the number of shares of
PriceCostco Common Stock validly tendered in the Exchange Offer by holders of
PriceCostco Common Stock is greater than 21.6 million, but less than 27 million,
PriceCostco will accept such validly tendered shares for exchange and will, at
its option, either (i) distribute the remaining shares of Price Enterprises
Common Stock pro rata to PriceCostco stockholders or (ii) sell such remaining
shares to Price Enterprises in exchange for a promissory note.
The following real estate related assets have been or will be transferred to
Price Enterprises:
- Substantially all of the real estate properties which historically formed
the non-club real estate segment of PriceCostco.
13
<PAGE>
PRICE/COSTCO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOVEMBER 20, 1994
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
NOTE (3) -- SPIN-OFF OF PRICE ENTERPRISES, INC. AND DISCONTINUED
OPERATIONS (CONTINUED)
- Four existing Price Club warehouses ("Warehouse Properties") which are
adjacent to existing non-club real estate properties which are being
leased back to PriceCostco effective August 29, 1994, at initial
collective annual rentals of approximately $8,600.
- Notes receivable from various municipalities and agencies ("City Notes").
- Note receivable in the principal amount of $41,000 made by Atlas Hotels,
Inc., secured by a hotel and convention center property located in San
Diego, California ("Atlas Note").
In addition, PriceCostco agreed to transfer to Price Enterprises 51% of the
outstanding capital stock of two newly formed, wholly owned subsidiaries of the
Company: Price Quest, Inc. (Price Quest) and Price Global Trading, Inc. (Price
Global), Price and Price Enterprises also own 49% and 51% interests,
respectively, in Mexico Clubs, L.L.C., a limited liability company (Mexico
Clubs, which together with Price Quest and Price Global comprise the Subsidiary
Corporations).
Mexico Clubs will own the Company's 50% interest in Price Club de Mexico and
affiliates (Price Club Mexico), a 50-50 joint venture with Controladora
Comercial Mexicana S.A. de C.V., which develops, owns and operates Price Clubs
in Mexico. The investment in Price Club Mexico is accounted for under the equity
method. At December 1994, eleven Price Clubs were in operation in Mexico. The
Company owns a 49% interest in Mexico Clubs.
Price Quest will continue to operate the Quest interactive electronic
shopping business of PriceCostco. The Quest business includes electronic
shopping through kiosks located in certain PriceCostco club warehouses; Price
Club Travel, which offers discount airline tickets and travel packages to
PriceCostco members; Price Club Realty, a real estate brokerage business for
PriceCostco members; and the Price Club automobile referral/advertising program,
which publishes advertisements for automobile dealers who provide discount
purchasing programs to PriceCostco members in the vicinity of certain
PriceCostco warehouse clubs. The Company owns 49% of the capital stock of Price
Quest.
Price Global has the rights to develop club businesses in certain
geographical areas specified in the Transfer and Exchange Agreement and owns
100% of the outstanding shares of Club Merchandising, Inc. (CMI), which was
acquired by the Company in March 1992. The Company owns 49% of the capital stock
of Price Global.
For purposes of governing the ongoing relationships between PriceCostco,
Price Enterprises, and the Subsidiary Corporations, PriceCostco and Price, on
the one hand, and Price Enterprises and the Subsidiary Corporations, on the
other, have entered into operating agreements. PriceCostco and Price, on the one
hand, and Price Enterprises and each of Price Global and Price Quest, on the
other, have entered into stockholders agreements to clarify certain rights and
obligations of PriceCostco and Price Enterprises as stockholders of Price Global
and Price Quest. Price and Price Enterprises have entered into a Limited
Liability Company Agreement with respect to Mexico Clubs that sets forth the
rights and obligations of each of Price and Price Enterprises with respect to
its membership interest in Mexico Clubs. PriceCostco and Price Enterprises have
entered into an unsecured revolving credit agreement under which PriceCostco has
agreed to advance Price Enterprises up to a maximum principal amount of $85
million (reduced by the net proceeds from the sale of certain commercial
properties).
14
<PAGE>
PRICE/COSTCO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOVEMBER 20, 1994
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
NOTE (3) -- SPIN-OFF OF PRICE ENTERPRISES, INC. AND DISCONTINUED
OPERATIONS (CONTINUED)
DISCONTINUED OPERATIONS
Historically, the Company has treated non-club real estate investments as a
separate reportable business segment. The primary assets generating operating
income for the segment have been non-club real estate properties, consisting of
property owned directly and property owned by real estate joint venture
partnerships in which the Company has a controlling interest. Real estate joint
ventures relate to real estate partnerships that are less than majority owned.
In fiscal 1994, the Atlas Note was purchased and the related interest income has
been included in the non-club real estate segment.
Additionally, the Warehouse Properties, and City Notes transferred to Price
Enterprises as of August 28, 1994 have been included in the net assets of the
discontinued operations as of November 20, 1994 and August 28, 1994, in the
accompanying consolidated balance sheets. The operating results and net assets
of the Subsidiary Corporations transferred to Price Enterprises are included in
continuing operations because they were not related to the discontinued real
estate operations.
GAINS ON SALE OF NON-CLUB REAL ESTATE PROPERTIES
During the first quarter fiscal 1994, the Company entered into a transaction
with The Price REIT, Inc. (REIT). On October 1, 1993, the Company sold a single
shopping center and adjacent Price Club (which is being leased back to the
Company) for $28,200. The Company recorded a $4,210 pre-tax gain in connection
with this sale. No gain was recognized for the portion of the sale involving the
Price Club warehouse which is being leased back.
ESTIMATED LOSS ON DISPOSAL AND SUBSEQUENT ADJUSTMENT
In the fourth quarter of fiscal 1994, the Company recorded an estimated loss
on disposal of its discontinued operations (the non-club real estate segment) as
a result of entering into the Transfer and Exchange Agreement. While the
Exchange Transaction is not expected to be completed until December 1994, the
Company determined that the Exchange Transaction will, in all likelihood, result
in a significant loss for financial reporting purposes and that there is a
reasonable basis for estimating the loss. The actual loss for financial
reporting purposes will be determined following consummation of the Exchange
Transaction. Such loss will be the product of: (a) the difference between the
book value per share of the assets transferred to Price Enterprises (at
historical cost), and the fair market value per share; and (b) the actual number
of shares exchanged. The loss also includes the direct expenses related to the
Exchange Transaction. For purposes of recording such estimated loss, the Company
assumed that (i) the Exchange Offer would be fully subscribed, (ii) a per share
price of Price Enterprises Common Stock of $15.25 (the closing sales price of
PriceCostco Common Stock on October 24, 1994) and (iii) direct expenses and
other costs related to the Exchange Transaction of approximately $15,250.
As indicated above, the estimated loss was determined assuming that the
Exchange Offer would be fully subscribed. Any subsequent adjustment to the
estimated loss will be affected by the extent to which the Exchange Offer is
subscribed. If the Exchange Offer is at least 80% subscribed and PriceCostco
elects to sell the unsubscribed shares to Price Enterprises for a note, the loss
on the Transaction will be the same as if it were fully subscribed. Any
unsubscribed shares distributed to stockholders pro rata will be excluded from
the loss determination and accounted for as a dividend. The dividend will be
measured by the book value per share of Price Enterprises shares distributed and
will be is charged directly to retained earnings. Furthermore, to the extent
that the Price Enterprises'
15
<PAGE>
PRICE/COSTCO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOVEMBER 20, 1994
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
NOTE (3) -- SPIN-OFF OF PRICE ENTERPRISES, INC. AND DISCONTINUED
OPERATIONS (CONTINUED)
fair market value per share differs from the estimated share price used above,
the per share difference times the number of shares exchanged will be
reclassified from the loss on disposal reflected in the income statement and
included in the cost of the Company's treasury shares acquired. In measuring the
actual loss on the Exchange Transaction, PriceCostco expects to measure the fair
market value of Price Enterprises' stock based on the average closing sales
price of Price Enterprises Common Stock during the 20 trading days commencing on
the sixth trading day following the closing of the Exchange Offer. However,
other factors may also need to be considered in making the final determination.
If the Exchange Offer is at least 80% subscribed and PriceCostco decides to
sell the unsubscribed shares to Price Enterprises in exchange for a note, the
loss on the Transaction will be the same as if it were fully subscribed.
Otherwise, the actual loss will be reduced by approximately $6 per share. The
actual loss determination will also be affected by the fair market price of
Price Enterprises stock. The fair market value of Price Enterprises stock will
be used to measure the cost per share of each PriceCostco share acquired in the
Exchange Offer. For each dollar per share difference in Price Enterprises' stock
value from the $15.25 amount used for purposes of estimating the loss, the
actual loss will change by one dollar for every share exchanged. An increase in
Price Enterprises' stock value would reduce the amount of the loss, while a
decrease in Price Enterprises' stock value would cause the loss to be greater.
Determination of the actual loss will not affect PriceCostco's pro forma
balance sheet, because any change in the amount of the loss on disposal, as it
is ultimately measured, will result in an offsetting change in stockholders'
equity, either as dividends, as an adjustment to the cost of treasury shares
being acquired, or both.
UNAUDITED SELECTED PRO FORMA INFORMATION
The following unaudited pro forma selected balance sheet data of PriceCostco
as of November 20, 1994 reflects the unaudited pro forma adjustments of the
Exchange Transaction as if it had occurred on November 20, 1994, regardless of
the ultimate treatment of the estimated loss on disposal as discussed above:
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS (A) PRO FORMA
------------- -------------- -------------
<S> <C> <C> <C>
ASSETS
Discontinued operations; net assets................................ $ 377,085 $ (377,085) $ --
Investment in Price Club Mexico.................................... 67,226 (34,285) 32,941
Total assets....................................................... 4,235,659 (415,477) 3,820,182
LIABILITIES AND STOCKHOLDERS' EQUITY
Long-term debt..................................................... 795,492 -- 795,492
Stockholders' equity............................................... 1,684,960 (411,750) 1,273,210
<FN>
- ------------------------
(a) The unaudited pro forma adjustments to the selected balance sheet data
reflect the elimination of net assets of Price Enterprises including the
discontinued operations net assets and the net assets of the Subsidiary
Corporations.
</TABLE>
16
<PAGE>
PRICE/COSTCO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOVEMBER 20, 1994
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
NOTE (4) -- DEBT
BANK LINES OF CREDIT
The company has a domestic multiple option loan facility with a group of 14
banks which provides for borrowings of up to $500,000 or for standby support for
a $500,000 commercial paper program. Of this amount, $250,000 expires on January
30, 1995, and $250,000 expires on January 30, 1998. The interest rate on bank
borrowings is based on LIBOR or rates bid at auction by the participating banks.
Notes payable at November 20, 1994, in the accompanying balance sheet consist of
amounts outstanding under the Company's commercial paper program. The Company
expects to renew the $250,000 portion of the loan facility expiring on January
30, 1995, at substantially the same terms.
In addition, the Company's wholly-owned Canadian subsidiary has a $65,800
line of credit with a group of four Canadian banks of which $29,200 expires on
February 27, 1995 (the short-term portion) and $36,600 expires in various
amounts through January 5, 1998 (the long-term portion). The interest rate on
borrowings is based on the prime rate or the "Bankers' Acceptance" rate. At
November 20, 1994, no amounts were outstanding under these programs. The Company
expects to renew the $29,200 short-term portion of the line of credit expiring
on February 27, 1995 at substantially the same terms.
The Company has separate letter of credit facilities (for commercial and
standby letters of credit), totaling approximately $248,000. The outstanding
commitments under these facilities at November 20, 1994 were approximately
$91,000 including approximately $53,000 in standby letters for workers'
compensation requirements.
NOTE (5) -- INCOME TAXES
The following is a reconciliation of the federal statutory tax rate to the
effective tax rate from continuing operations for the 12 weeks ended November
20, 1994 and November 21, 1993:
<TABLE>
<CAPTION>
12 WEEKS ENDED 12 WEEKS ENDED NOVEMBER
NOVEMBER 20, 1994 21, 1993
---------------------- -----------------------
<S> <C> <C> <C> <C>
Federal statutory tax rate............................. $ 28,788 35.0% $ (16,462) (35.0)%
State, foreign and other income taxes, net............. 4,935 6.0 (2,833) (6.0)
Tax effects of merger-related expenses................. -- -- 9,200 19.5
--------- ----- ---------- -----
$ 33,723 41.0% $ (10,095) (21.5)%
--------- ----- ---------- -----
--------- ----- ---------- -----
</TABLE>
NOTE (6) -- COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS
On April 6, 1992, Price was served with a complaint in an action entitled
FECHT ET AL. V. THE PRICE COMPANY ET AL., Case No. 92-497, United States
District Court, Southern District of California (the Court). Subsequently on
April 22, 1992, Price was served with a first amended complaint in the action.
The case was dismissed without prejudice by the Court on September 21, 1992, on
the grounds the plaintiffs had failed to state a sufficient claim against
defendants. Subsequently, plaintiffs filed a Second Amended Complaint which, in
the opinion of Price's counsel, alleged substantially the same facts as the
prior complaint. The case was dismissed with prejudice by the Court on March 9,
1993, on grounds the plaintiffs had failed to state a sufficient claim against
defendants. Plaintiffs have filed a Notice of Appeal in the Ninth Circuit Court
of Appeals, which was argued on October 4, 1994. The Company is currently
awaiting a Ninth Circuit Court of Appeals decision. If the Ninth Circuit Court
of
17
<PAGE>
PRICE/COSTCO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOVEMBER 20, 1994
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
NOTE (6) -- COMMITMENTS AND CONTINGENCIES (CONTINUED)
Appeals renders a decision that is adverse to the Company, the Company intends
to vigorously defend the suit. The Company does not believe that the ultimate
outcome of such litigation will have a material adverse effect on the Company's
financial position or results of operations.
The Company is involved from time to time in claims, proceedings and
litigation arising from its business and property ownership. The Company does
not believe that any such claim, proceeding or litigation, either alone or in
the aggregate, will have a material adverse effect on the Company's financial
position or results of operations.
NOTE (7) -- SUBSEQUENT EVENTS
On December 1, 1994 the Company and Controladora Comercial Mexicana, S.A. de
C.V. (Comercial Mexicana) executed a non-binding expression of intent to sell to
Comercial Mexicana or its assignee the Company's 50% interest in Price Club
Mexico for $95 million. Comercial Mexicana currently owns the remaining 50%
interest in Price Club Mexico. The gain on the sale will be recorded in the
period that the transaction is consummated, and net proceeds from the sale of
Price Club Mexico will be divided 49% to PriceCostco and 51% to Price
Enterprises. In addition, the non-binding expression of intent contemplates that
PriceCostco and Price Club Mexico will enter into agreements with respect to the
use by Price Club Mexico of the name "Price Club", sourcing of certain
merchandise and certain other training and software arrangements. There can be
no assurances that the parties will enter into definitive agreements or that, if
such agreements are entered into, that the terms will not vary from the terms
described above.
On December 19, 1994, PriceCostco was served with a Complaint in an action
entitled SNYDER V. PRICE/COSTCO, INC. ET. AL., Case No. C94-1874, United States
District Court, Western District of Washington. The Complaint alleges violation
of certain state and federal laws arising from the Exchange Transaction. The
Company believes that this suit is without merit and will vigorously defend
against this suit. 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.
PriceCostco closed the Exchange Transaction on December 21, 1994.
Approximately 23,040,000 shares of PriceCostco common stock were tendered in the
Exchange Transaction. Based upon the preliminary count, PriceCostco will hold
approximately 3,960,000 shares of Price Enterprises common stock. Pursuant to
the Exchange Agreement between PriceCostco and Price Enterprises, PriceCostco
may, at its option, either (i) distribute the remaining shares of Price
Enterprises common stock on a pro-rata basis to PriceCostco stockholders; or
(ii) sell such shares to Price Enterprises in exchange for a promissory note.
PriceCostco will exercise this option no later than January 23, 1995. If the
Company elects to dividend the Price Enterprises shares, all PriceCostco
stockholders as of a record date in January will be distributed shares of stock
of Price Enterprises on a pro-rata basis. Alternatively, if the Company elects
to sell the 3,960,000 shares to Price Enterprises, PriceCostco will sell the
shares based upon the average closing price of Price Enterprises common stock
based upon a 20-trading day period beginning on December 29, 1994.
18
<PAGE>
EXHIBIT 28
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Price/Costco, Inc:
We have made a review of the accompanying condensed consolidated balance
sheet of Price/ Costco, Inc., (a Delaware corporation) and subsidiaries as of
November 20, 1994, and the related condensed consolidated statements of
operations and cash flows for the twelve-week periods ended November 20, 1994,
and November 21, 1993, in accordance with standards established by the American
Institute of Certified Public Accountants. We did not review the interim
financial information of The Price Company, whose total assets comprised 52% as
of November 21, 1993, and total revenues comprised 48% for the twelve-week
periods ended November 21, 1993, of the related consolidated totals but were
furnished with the report of other accountants based on their review of those
statements.
A review of interim financial information consists principally of obtaining
an understanding of the system for the preparation of interim financial
information, applying analytical review procedures to the financial data and
making inquiries of persons responsible for financial and accounting matters. It
is substantially less in scope than an audit 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 and the report of other accountants, we are not aware of
any material modifications that should be made to the condensed financial
statements referred to above for them to be in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Seattle, Washington
December 21, 1994
19
