<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 26, 1995
/ / 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)
<TABLE>
<S> <C>
DELAWARE 33-0572969
(State or other jurisdiction (I.R.S. Employer
of Identification
incorporation or No.)
organization)
</TABLE>
999 LAKE DRIVE
ISSAQUAH, WASHINGTON 98027
(Address of principal executive office)
(206) 313-8100
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES _X_ NO ___
The registrant had 195,302,985 common shares, par value $.01, outstanding at
December 31, 1995.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PRICE/COSTCO, INC.
AND SUBSIDIARIES
INDEX TO FORM 10-Q
PART I -- FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
ITEM 1 -- FINANCIAL STATEMENTS............................................................................. 3
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................................................................................ 5
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 (27) Financial Data Schedule
Exhibit (28) Report of Independent Public Accountants.................................................... 13
</TABLE>
2
<PAGE>
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Price/Costco, Inc.'s (the "Company" or "PriceCostco") unaudited condensed
consolidated balance sheet as of November 26, 1995, and the condensed
consolidated balance sheet as of September 3, 1995, unaudited condensed
consolidated statements of operations and cash flows for the 12-week periods
ended November 26, 1995, and November 20, 1994 are included elsewhere herein.
Also included elsewhere herein are notes to the unaudited condensed consolidated
financial statements and the results of the limited review performed by Arthur
Andersen LLP, independent public accountants.
The Company reports on a 52/53-week fiscal year, consisting of 13 four-week
periods and ending on the Sunday nearest the end of August. Fiscal 1996 is a
52-week year with period 13 ending on September 1, 1996. The first, second, and
third quarters consist of 12 weeks each and the fourth quarter consists of 16
weeks.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
It is suggested that this management discussion be read in conjunction with
the management discussion included in the Company's fiscal 1995 annual report on
Form 10-K previously filed with the Securities and Exchange Commission.
COMPARISON OF THE 12 WEEKS ENDED NOVEMBER 26, 1995 AND NOVEMBER 20, 1994
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income for the first quarter of fiscal 1996 increased 2% to $49,553 or
$.25 per share (fully diluted) from $48,527 or $0.22 per share (fully diluted)
during the first quarter of fiscal 1995. The 14% earnings per share increase
reflects the increase in net income as well as the reduction of 23.2 million
outstanding shares of PriceCostco Common Stock beginning on December 20, 1994,
following the completion of the spin-off of Price Enterprises.
Net sales increased 9% to $4,295,862 during the first quarter of fiscal 1996
from $3,943,718 during the first quarter of fiscal 1995. This increase was
primarily due to opening a net of 15 new warehouses (17 opened, 2 closed) since
the end of the first quarter of fiscal 1995 and an increase in comparable
warehouse sales. Comparable sales, that is sales in warehouses open for at least
a year, increased 3 percent during the first quarter of fiscal 1996, reflecting
new marketing and merchandising efforts, including the rollout of fresh foods
and various ancillary businesses to certain existing locations. Changes in
prices of merchandise did not materially contribute to sales increases.
Membership fees and other revenue increased to $87,702 or 2.04% of net sales
in the first quarter of fiscal 1996 from $86,205 or 2.19% of net sales in the
first quarter of fiscal 1995. Membership fees include new membership sign-ups at
the 15 warehouses opened since the end of the first quarter of fiscal 1995.
Gross margin (defined as net sales minus merchandise costs) increased 12% to
$408,746 or 9.51% of net sales in the first quarter of fiscal 1996 from
$366,274, or 9.29% of net sales in the first quarter of fiscal 1995. Gross
margin as a percentage of net sales increased due to greater purchasing power,
expanded use of the Company's depot facilities, and increased sales penetration
of certain higher gross margin ancillary businesses. The gross margin figures
reflect accounting for merchandise costs on the last-in, first-out (LIFO)
method. The first quarters of fiscal 1996 and 1995 each include a $2,500 LIFO
charge to income due to the use of the LIFO method.
Selling, general and administrative expenses as a percent of net sales
increased to 8.98% during the first quarter of fiscal 1996 from 8.88% during the
first quarter of fiscal 1995, reflecting higher expenses associated with
international expansion and certain ancillary operations.
3
<PAGE>
Preopening expenses totaled $9,450 or 0.22% of net sales during the first
quarter of fiscal 1996 compared to $6,991 or 0.18% of net sales during the first
quarter of fiscal 1995. The increase in preopening expenses is primarily due to
remodels and expanded fresh foods and ancillary operations at existing
warehouses.
Interest expense totaled $17,771 in the first quarter of fiscal 1996
compared to $14,139 in the first quarter of fiscal 1995. The increase in
interest expense is primarily related to higher average borrowings and interest
rates, which include the issuance in June 1995 of $300,000 of 7 1/8% Senior
Notes. Interest income and other totaled $1,091 in the first quarter of fiscal
1996 compared to $1,079 in the first quarter of fiscal 1995.
The effective income tax rate on earnings in the first quarter of fiscal
1996 was 41.25% compared to 41.0% effective tax rate in the first quarter of
fiscal 1995. The increase in the effective tax rate is related primarily to an
increase in the proportion of Canadian earnings which have a higher tax rate.
LIQUIDITY AND CAPITAL RESOURCES
(DOLLARS IN THOUSANDS)
EXPANSION PLANS
PriceCostco's primary capital requirements are for financing the expansion
of its United States and Canadian operations and its international ventures
(presently Mexico, United Kingdom and Asia). While there can be no assurance
that current expectations will be realized and plans are subject to change upon
further review, during fiscal 1996 management's intention is to spend
approximately $450,000 to $500,000 for its United States and Canadian operations
and approximately $50,000 to $100,000 for its international ventures. Capital
expenditures are primarily for real estate, construction, remodeling and
equipment for warehouses and related operations.
Expansion plans for the United States and Canada during fiscal 1996 are to
open a net of 23 to 25 warehouse clubs, including the relocation of two to three
warehouses to larger and better-located facilities and the closing of two to
three unprofitable locations. The Company is continuing its remodeling and
expansion of fresh foods and ancillary operations and expects to dedicate
approximately $110,000 to $115,000 to these efforts. The Company expects that
annual spending on remodeling activities will be reduced by one-half for the
next several years, as much of the major remodel work will have been completed.
International expansion plans during fiscal 1996 include opening two to
three additional warehouse clubs in the United Kingdom through a 60%-owned
subsidiary, and to develop additional warehouse club ventures, primarily in
Asia.
Expansion will be financed with a combination of cash and cash equivalents,
which totaled $45,688 at September 3, 1995; net cash provided by operating
activities; short-term borrowings under revolving credit facilities and/or
commercial paper facilities; and other financing sources as required.
BANK LINES OF CREDIT AND COMMERCIAL PAPER PROGRAMS
The Company has a domestic multiple option loan facility with a group of 13
banks which provides for borrowings up to $500,000 or standby support for a
$500,000 commercial paper program. Of this amount, $250,000 expires on January
30, 1996, 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 26, 1995, $158,000 was outstanding under the commercial paper
program and no amount was outstanding under the loan facility. The Company
expects to renew for an additional one-year term the $250,000 portion of the
loan facility expiring on January 30, 1996 at substantially the same terms.
In addition, the Company's wholly-owned Eastern Canadian subsidiary has a
$103,000 commercial paper program supported by a bank credit facility with three
Canadian banks, of which $63,000 will expire in April 1996 and $40,000 will
expire in April 1999. The interest rate on bank borrowings is
4
<PAGE>
based on the prime rate or the "Bankers' Acceptance" rate. At November 26, 1995,
$89,000 was outstanding under the Canadian commercial paper program and no
amounts were outstanding under the bank credit facility.
The Company also has separate letter of credit facilities (for commercial
and standby letters of credit) totaling approximately $197,000. The outstanding
commitments under these facilities at November 26, 1995 totaled approximately
$104,000, including approximately $51,000 in standby letters of credit for
workers' compensation requirements.
FINANCIAL POSITION AND CASH FLOWS
Due to rapid inventory turnover, the Company's operations provide higher
level of supplier accounts payable than generally encountered in other forms of
retailing. When combined with other current liabilities, the resulting amount
typically exceeds the current assets needed to operate the business. Working
capital deficit (current liabilities in excess of current assets) totaled
$44,934 at November 26, 1995 compared to working capital of $9,381 at September
3, 1995. The decrease in working capital was primarily due to: 1) financing the
Company's seasonal working capital requirements through short-term borrowings;
and 2) capital expenditures in excess of operating cash flows.
The Company's balance sheet as of November 26, 1995, reflects a $488,053 or
11% increase in total assets since September 3, 1995. The net increase is
primarily due to higher inventory levels associated with seasonal inventory
needs leading into the Christmas holiday season, and a net increase in property
and equipment principally related to the Company's expansion program.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On April 6, 1992, Price was served with a complaint in an action entitled
FECHT ET AL. V. THE PRICE COMPANY ET AL., Case No. 92-497, United States
District Court, Southern District of California (the "Court"). Subsequently, on
April 22, 1992, Price was served with a First Amended Complaint in the action.
The case was dismissed without prejudice by the Court on September 21, 1992, on
the grounds the plaintiffs had failed to state a sufficient claim against
defendants. Subsequently, plaintiffs filed a Second Amended Complaint which, in
the opinion of the Company's counsel, alleged substantially the same facts as
the prior complaint. The Complaint alleged violation of certain state and
federal laws during the time period prior to Price's earnings release for the
second quarter of fiscal year 1992. The case was dismissed with prejudice by the
Court on March 9, 1993, on grounds the plaintiffs had failed to state a
sufficient claim against defendants. Plaintiffs filed an Appeal in the Ninth
Circuit Court of Appeals. In an opinion dated November 20, 1995, the Ninth
Circuit reversed and remanded the lawsuit. The Company believes that this
lawsuit is without merit and is vigorously defending the lawsuit. The Company
does not believe that the ultimate outcome of such litigation will have a
material adverse effect on the Company's financial position or results of
operations.
On December 19, 1994, a Complaint was filed against PriceCostco in an action
entitled SNYDER V. PRICE/COSTCO, INC. ET. AL., Case No. C94-1874Z, United States
District Court, Western District of Washington. On January 4, 1995, a Complaint
was filed against PriceCostco in an action entitled BALSAM V. PRICE/COSTCO, INC.
ET. AL., Case No. C95-0009Z, United States District Court, Western District of
Washington. The Snyder and Balsam Cases were subsequently consolidated and on
March 15, 1995, plaintiffs' counsel filed a First Amended And Consolidated Class
Action And Derivative Complaint. On November 9, 1995, plaintiffs' counsel filed
a Second Amended And Consolidated Class Action And Derivative Complaint. The
Second Amended Complaint alleges violation of certain state and federal laws
arising from the spin-off and Exchange Transaction and the merger between Price
and Costco. The Company believes that this lawsuit is without merit and is
vigorously defending against this lawsuit. The Company does not believe that the
ultimate outcome of such litigation will have a material adverse effect on the
Company's financial position or results of operations.
5
<PAGE>
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 February 1, 1996
at The Disneyland Pacific Hotel (formerly The Pan Pacific Hotel) in Anaheim,
California. Matters to be voted on were included in the Company's proxy
statement filed with the Securities and Exchange Commission and distributed to
stockholders of record in December 1995.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included herein or incorporated by reference:
(27) Financial Data Schedule
(28) Report of Independent Public Accountants
(b) No reports on Form 8-K were filed for the 12 weeks ended November 26,
1995.
6
<PAGE>
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
/S/ JAMES D. SINEGAL
-----------------------------------
Date: January 8, 1996 James D. Sinegal
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
/S/ RICHARD A. GALANTI
-----------------------------------
Date: January 8, 1996 Richard A. Galanti
EXECUTIVE VICE PRESIDENT,
CHIEF FINANCIAL OFFICER
7
<PAGE>
PRICE/COSTCO, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
NOVEMBER 26, SEPTEMBER 3,
1995 1995
------------ ------------
<S> <C> <C>
(UNAUDITED)
CURRENT ASSETS
Cash and cash equivalents................................................ $ 12,876 $ 45,688
Receivables, net......................................................... 177,164 146,665
Merchandise inventories.................................................. 1,818,165 1,422,272
Other current assets..................................................... 82,532 87,694
------------ ------------
Total current assets................................................... 2,090,737 1,702,319
------------ ------------
PROPERTY AND EQUIPMENT
Land, land rights, and land improvements................................. 1,149,671 1,143,860
Buildings and leasehold improvements..................................... 1,326,695 1,215,706
Equipment and fixtures................................................... 640,967 624,398
Construction in progress................................................. 60,304 78,071
------------ ------------
3,177,637 3,062,035
Less accumulated depreciation and amortization........................... (551,836) (526,442)
------------ ------------
Net property and equipment............................................. 2,625,801 2,535,593
OTHER ASSETS............................................................... 208,934 199,507
------------ ------------
$ 4,925,472 $ 4,437,419
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bank checks outstanding, less cash on deposit............................ $ 30,120 $ 12,721
Short-term borrowings.................................................... 247,108 75,725
Accounts payable......................................................... 1,438,309 1,233,128
Accrued salaries and benefits............................................ 243,579 205,236
Accrued sales and other taxes............................................ 75,489 91,843
Other current liabilities................................................ 101,066 74,285
------------ ------------
Total current liabilities.............................................. 2,135,671 1,692,938
LONG-TERM DEBT............................................................. 1,093,580 1,094,615
DEFERRED INCOME TAXES AND OTHER LIABILITIES................................ 68,236 68,284
------------ ------------
Total liabilities...................................................... 3,297,487 2,855,837
------------ ------------
MINORITY INTERESTS......................................................... 49,322 50,838
------------ ------------
STOCKHOLDERS EQUITY
Preferred stock $.01 par value; 100,000,000 shares authorized; no shares
issued and outstanding.................................................. -- --
Common stock $.01 par value; 900,000,000 shares authorized; 195,260,000
and 195,164,000 shares issued and outstanding........................... 1,953 1,952
Additional paid-in capital............................................... 304,895 303,989
Accumulated foreign currency translation................................. (54,830) (52,289)
Retained earnings........................................................ 1,326,645 1,277,092
------------ ------------
Total stockholders' equity............................................. 1,578,663 1,530,744
------------ ------------
$ 4,925,472 $ 4,437,419
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
8
<PAGE>
PRICE/COSTCO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
12 WEEKS ENDED
----------------------------
NOVEMBER 26, NOVEMBER 20,
1995 1994
------------- -------------
<S> <C> <C>
REVENUE
Net Sales......................................................................... $ 4,295,862 $ 3,943,718
Membership fees and other......................................................... 87,702 86,205
------------- -------------
Total revenue................................................................. 4,383,564 4,029,923
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OPERATING EXPENSES
Merchandise costs................................................................. 3,887,116 3,577,444
Selling, general and administrative............................................... 385,973 350,178
Preopening expenses............................................................... 9,450 6,991
------------- -------------
Operating income.............................................................. 101,025 95,310
------------- -------------
OTHER INCOME (EXPENSE)
Interest expense.................................................................. (17,771) (14,139)
Interest income and other......................................................... 1,091 1,079
------------- -------------
INCOME FROM CONTINUING OPERATIONS BEFORE PROVISION FOR INCOME TAXES................. 84,345 82,250
Provision for income taxes........................................................ 34,792 33,723
------------- -------------
INCOME FROM CONTINUING OPERATIONS................................................... $ 49,553 $ 48,527
DISCONTINUED OPERATIONS:
Loss on disposal.................................................................. -- --
------------- -------------
NET INCOME.......................................................................... $ 49,553 $ 48,527
------------- -------------
------------- -------------
NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE -- FULLY DILUTED:
Continuing operations:............................................................ $ 0.25 $ 0.22
Discontinued operations:
Loss on disposal................................................................ -- --
------------- -------------
Net income........................................................................ $ 0.25 $ 0.22
------------- -------------
------------- -------------
Shares used in calculation (000's)............................................ 217,311 239,757
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
9
<PAGE>
PRICE/COSTCO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
12 WEEKS ENDED
--------------------------
NOVEMBER 26, NOVEMBER 20,
1995 1994
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income......................................................................... $ 49,553 $ 48,527
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization...................................................... 34,556 30,790
Increase in merchandise inventories................................................ (397,935) (464,024)
Increase in accounts payable....................................................... 207,297 359,636
Other.............................................................................. 30,200 (12,835)
------------ ------------
Total adjustments................................................................ (125,882) (86,433)
------------ ------------
Net cash used in operating activities............................................ (76,329) (37,906)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property and equipment................................................ (131,676) (96,608)
Proceeds from the sale of property and equipment................................... 395 202
Decrease in short-term investments and restricted cash............................. -- 9,268
Other.............................................................................. (13,989) (4,089)
------------ ------------
Net cash used in investing activities............................................ (145,270) (91,227)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from short-term borrowings............................................ 171,813 162,702
Increase (decrease) in bank checks outstanding, less cash on deposit............... 17,501 (2,797)
Payments on long-term debt and notes payable....................................... (893) --
Exercise of stock options, including income tax benefit............................ 907 410
Other.............................................................................. (391) 10
------------ ------------
Net cash provided by financing activities........................................ 188,937 160,325
------------ ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH.............................................. (150) 205
------------ ------------
Increase (decrease) in cash and cash equivalents................................... (32,812) 31,397
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR....................................... 45,688 53,638
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD........................................... $ 12,876 $ 85,035
------------ ------------
------------ ------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amounts capitalized) (a)........................................ $ 9,952 $ 25,398
Income taxes..................................................................... 17,491 19,617
</TABLE>
- ------------------------
(a) Semi-annual interest payments on the 5 1/2% and 6 3/4% convertible
debentures were paid on August 31, and September 1, respectively, prior to
the beginning of the first quarter of fiscal 1996, which began on September
4, 1995. In the prior fiscal year, these interest payments were included in
the first quarter, which began August 29, 1994.
The accompanying notes are an integral part of these financial statements.
10
<PAGE>
PRICE/COSTCO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
NOTE (1) -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The unaudited consolidated financial statements include the accounts of
Price/Costco, Inc., a Delaware corporation, and its subsidiaries ("PriceCostco"
or the "Company".) PriceCostco is a holding company which operates primarily
through its major subsidiaries, The Price Company and subsidiaries ("Price"),
and Costco Wholesale Corporation and subsidiaries ("Costco"). 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.
Price and Costco primarily operate cash and carry membership warehouses.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial reporting and pursuant to the rules and regulations of the Securities
and Exchange Commission. While these statements reflect all normal recurring
adjustments which are, in the opinion of management, necessary for fair
presentation of the results of the interim period, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. For further information, refer to
the financial statements and footnotes thereto included in the Company's annual
report filed on Form 10-K for the fiscal year ended September 3, 1995.
BUSINESS
The Company historically operated in two reporting business segments: a cash
and carry merchandising operation and a non-club real estate operation. In July
1994 the Company discontinued its non-club real estate operations through a
spin-off of Price Enterprises, Inc., completed in December, 1994.
FISCAL YEARS
The Company reports on a 52/53-week fiscal year, ending on the Sunday
nearest the end of August. Fiscal 1996 is 52 weeks with the first, second and
third quarters consisting of 12 weeks each and the fourth quarter, ending
September 1, 1996, consisting of 16 weeks.
MERCHANDISE INVENTORIES
Merchandise inventories are valued at the lower of cost or market as
determined by the retail inventory method, and are stated using the last-in,
first-out (LIFO) method for U.S. merchandise inventories, and the first-in,
first-out (FIFO) method for foreign merchandise inventories. If the FIFO method
had been used merchandise inventory would have been $18,650 and $16,150 higher
at November 26, 1995 and September 3, 1995, respectively.
The Company provides for estimated inventory losses between physical
inventory counts on the basis of a standard percentage of sales. This provision
is adjusted to reflect the actual shrinkage results of the physical inventory
counts which generally occur in the second and fourth quarters of the Company's
fiscal year.
NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE
Net income per common and common equivalent share is based on the weighted
average number of common and common equivalent shares outstanding. The
calculation for the 12-week period ended November 26, 1995, reflects the
reduction of approximately 23.2 million PriceCostco shares tendered in exchange
for an equivalent number of Price Enterprises shares as of December 20, 1994.
The
11
<PAGE>
PRICE/COSTCO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
NOTE (1) -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
calculation also eliminates interest expense, net of income taxes, on the 5 1/2%
convertible subordinated debentures (primary and fully diluted) and the 6 3/4%
convertible subordinated debentures (fully diluted only), and includes the
additional shares issuable upon conversion of these debentures.
NOTE (2) -- DEBT
BANK LINES OF CREDIT AND COMMERCIAL PAPER PROGRAMS
The Company has a domestic multiple option loan facility with a group of 13
banks which provides for borrowings up to $500,000 or standby support for a
$500,000 commercial paper program. Of this amount, $250,000 expires on January
30, 1996, 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 26, 1995, $158,000 was outstanding under the commercial paper
program and no amount was outstanding under the loan facility. The Company
expects to renew for an additional one-year term the $250,000 portion of the
loan facility expiring on January 30, 1996 at substantially the same terms.
In addition, the Company's wholly-owned Eastern Canadian subsidiary has a
$103,000 commercial paper program supported by a bank credit facility with three
Canadian banks, of which $63,000 will expire in April 1996 and $40,000 will
expire in April 1999. The interest rate on bank borrowings is based on the prime
rate or the "Bankers' Acceptance" rate. At November 26, 1995, $89,000 was
outstanding under the Canadian commercial paper program and no amounts were
outstanding under the bank credit facility.
The Company also has separate letter of credit facilities (for commercial
and standby letters of credit) totaling approximately $197,000. The outstanding
commitments under these facilities at November 26, 1995 totaled approximately
$104,000, including approximately $51,000 in standby letters of credit for
workers' compensation requirements.
NOTE (3) -- INCOME TAXES
The following is a reconciliation of the federal statutory income tax rate
to the effective income tax rate for income from continuing operations:
<TABLE>
<CAPTION>
12 WEEKS ENDED 12 WEEKS ENDED
NOVEMBER 26, 1995 NOVEMBER 20, 1994
---------------------- ----------------------
<S> <C> <C> <C> <C>
Federal statutory income tax rate........................... $ 29,521 35.0% $ 28,788 35.0%
State, foreign and other income taxes, net.................. 5,271 6.25% 4,935 6.0%
--------- ----- --------- ---
$ 34,792 41.25% $ 33,723 41.0%
--------- ----- --------- ---
--------- ----- --------- ---
</TABLE>
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.
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-01-1996
<PERIOD-START> SEP-04-1995
<PERIOD-END> NOV-26-1995
<CASH> 12,876
<SECURITIES> 0
<RECEIVABLES> 182,190
<ALLOWANCES> 5,026
<INVENTORY> 1,818,165
<CURRENT-ASSETS> 2,090,737
<PP&E> 3,177,637
<DEPRECIATION> 551,836
<TOTAL-ASSETS> 4,925,472
<CURRENT-LIABILITIES> 2,135,671
<BONDS> 1,098,681
0
0
<COMMON> 306,848
<OTHER-SE> 1,271,815
<TOTAL-LIABILITY-AND-EQUITY> 4,925,472
<SALES> 4,295,862
<TOTAL-REVENUES> 4,383,564
<CGS> 3,887,116
<TOTAL-COSTS> 4,282,539
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,771
<INCOME-PRETAX> 84,345
<INCOME-TAX> 34,792
<INCOME-CONTINUING> 49,553
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 49,553
<EPS-PRIMARY> 0
<EPS-DILUTED> .25
</TABLE>
<PAGE>
EXHIBIT 28
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Price/Costco, Inc.:
We have reviewed the accompanying condensed consolidated balance sheet of
Price/Costco, Inc. (a Delaware corporation) and subsidiaries as of November 26,
1995, and the related condensed consolidated statements of operations and cash
flows for the twelve-week periods ended November 26, 1995 and November 20, 1994.
These financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to be in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Seattle, Washington
December 18, 1995
13
