<PAGE>
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- - --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED NOVEMBER 24, 1996
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-20355
PRICE/COSTCO, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 33-0572969
(State or other (I.R.S. Employer
jurisdiction 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 196,773,068 common shares, par value $.01, outstanding at
November 30, 1996.
- - --------------------------------------------------------------------------------
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<PAGE>
PRICE/COSTCO, INC.
AND SUBSIDIARIES
INDEX TO FORM 10-Q
PART I--FINANCIAL INFORMATION
<TABLE>
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PAGE
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<S> <C>
ITEM 1--FINANCIAL STATEMENTS............................................................................... 3
Condensed Consolidated Balance Sheets.................................................................... 9
Condensed Consolidated Statements of Operations.......................................................... 10
Condensed Consolidated Statements of Cash Flows.......................................................... 11
Notes to Condensed Consolidated Financial Statements..................................................... 12
ITEM 2--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.............. 3
PART II--OTHER INFORMATION
ITEM 1--LEGAL PROCEEDINGS.................................................................................. 7
ITEM 2--CHANGES IN SECURITIES.............................................................................. 7
ITEM 3--DEFAULTS UPON SENIOR SECURITIES.................................................................... 8
ITEM 4--SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................................................ 8
ITEM 5--OTHER INFORMATION.................................................................................. 8
ITEM 6--EXHIBITS AND REPORTS ON FORM 8-K................................................................... 8
Exhibit (27) Financial Data Schedule
Exhibit (28) Report of Independent Public Accountants.................................................... 15
</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 24, 1996, and the condensed
consolidated balance sheet as of September 1, 1996, unaudited condensed
consolidated statements of operations and cash flows for the 12-week periods
ended November 24, 1996, and November 26, 1995 are included elsewhere herein.
Also, included elsewhere herein are notes to the unaudited condensed
consolidated financial statements and the results of the limited review
performed by Arthur Andersen LLP, independent public accountants.
The Company reports on a 52/53-week fiscal year, consisting of 13 four-week
periods and ending on the Sunday nearest the end of August. Fiscal 1997 is a
52-week year with period 13 ending on August 31, 1997. The first, second, and
third quarters consist of 12 weeks each and the fourth quarter consists of 16
weeks.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
It is suggested that this management discussion be read in conjunction with
the management discussion included in the Company's fiscal 1996 annual report on
Form 10-K previously filed with the Securities and Exchange Commission.
COMPARISON OF THE 12 WEEKS ENDED NOVEMBER 24, 1996 AND NOVEMBER 26, 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Net operating results for the first quarter of fiscal 1997 reflect net
income of $31,810, or $.16 per share (fully diluted), compared to net income of
$49,553, or $.25 per share (fully diluted), during the first quarter of fiscal
1996. The net income in the first quarter of fiscal 1997 includes a non-cash,
pretax charge of $65,000 ($38,675 after-tax) reflecting a provision for the
impairment of long-lived assets as required by the Company's adoption of
Statement of Financial Accounting Standard No. 121. Excluding the $65,000
($38,675 after-tax) asset impairment charge, net income for the first quarter of
fiscal 1997 would have been $70,485, or $.34 per share (fully diluted). The
Company also recorded in the first quarter of fiscal 1997, a pretax provision
for warehouse closing costs of $5,000, or $.01 per share on an after-tax basis
(fully-diluted). This provision primarily includes estimated closing costs for
four warehouses closed in the first quarter of fiscal 1997 and additional costs
related to warehouse clubs closed in the prior year. There were no warehouse
closing costs in the first quarter of fiscal 1996.
Net sales increased 11% to $4,785,636 during the first quarter of fiscal
1997 from $4,295,862 during the first quarter of fiscal 1996. This increase was
due to opening a net of 14 new warehouses (25 opened, 11 closed) since the end
of the first quarter of fiscal 1996 and an increase in comparable warehouse
sales. Comparable sales, that is sales in warehouses open for at least a year,
increased 8 percent during the first quarter of fiscal 1997 compared to 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 11% to $97,772 or 2.04% of net
sales in the first quarter of fiscal 1997 from $87,702 or 2.04% of net sales in
the first quarter of fiscal 1996. Membership fees include new membership
sign-ups at the 14 warehouses (net) opened since the end of the first quarter of
fiscal 1996. The increase in membership fees also reflects the increase in the
annual membership fee for the Business "Add-on" members from $15 to $20,
effective with renewals in the United States subsequent to April 1, 1996.
Currently, there are approximately 3.4 million U.S. Business "Add-on" members.
Gross margin (defined as net sales minus merchandise costs) increased 17% to
$477,267 or 9.97% of net sales in the first quarter of fiscal 1997 from
$408,746, or 9.51% of net sales in the first quarter of fiscal
3
<PAGE>
1996. The 46 basis point increase in gross margin as a percentage of net sales
reflects the Company's greater purchasing power, expanded use of its depot
facilities, improved fresh foods margins, and increased sales penetration of
certain higher gross margin ancillary businesses. The gross margin figures
reflect accounting for merchandise costs on the last-in, first-out (LIFO)
method. The first quarter of fiscal 1996 and 1995 each included a $2,500 LIFO
provision.
Selling, general and administrative expenses as a percent of net sales
decreased to 8.90% during the first quarter of fiscal 1997 from 8.98% during the
first quarter of fiscal 1996. This improvement in selling, general and
administrative expenses as a percent of net sales was due to the increase in
comparable warehouse sales noted above; and a year-over-year improvement at the
Company's core warehouse operations and Central and Regional administrative
offices, which was partially offset by higher expenses associated with
international expansion and certain ancillary businesses.
Preopening expenses totaled $10,197 or 0.21% of net sales during the first
quarter of fiscal 1997 compared to $9,450 or 0.22% of net sales during the first
quarter of fiscal 1996. Nine warehouses were opened in the first quarter of
fiscal 1997 (including three relocated warehouses), compared to four new
locations during last year's first quarter. Preopening expenses also includes
costs related to remodels, including expanded fresh foods and ancillary
operations at existing warehouses.
Interest expense totaled $18,933 in the first quarter of fiscal 1997
compared to $17,771 in the first quarter of fiscal 1996. The increase in
interest expense is primarily related to the issuance in April 1996 of a
$140,000 unsecured note payable. Interest income and other totaled $3,657 in the
first quarter of fiscal 1997 compared to $1,091 in the first quarter of fiscal
1996. The increase is primarily due to the Company reflecting a reduction in its
share of losses in certain unconsolidated joint ventures and improved earnings
in the Mexico joint venture.
The effective income tax rate on earnings in the first quarter of fiscal
1997 was 40.50% compared to a 41.25% effective tax rate in the first quarter of
fiscal 1996.
LIQUIDITY AND CAPITAL RESOURCES
(DOLLARS IN THOUSANDS)
The discussion below contains forward-looking statements that involve risks
and uncertainties, and should be read in conjunction with the Company's reports
filed previously with the Securities and Exchange Commission. Actual results may
differ materially.
EXPANSION PLANS
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, as well as additional
capital for international expansion through investments in foreign subsidiaries
and joint ventures.
While there can be no assurance that current expectations will be realized,
and plans are subject to change upon further review, it is management's current
intention to spend an aggregate of approximately $400,000 to $450,000 during
fiscal 1997 in the United States and Canada for real estate, construction,
remodeling and equipment for warehouse clubs and related operations; and
approximately $80,000 to $100,000 for international expansion, including the
United Kingdom and other potential ventures. These expenditures will be financed
with a combination of cash provided from operations, the use of cash and cash
equivalents (which totaled $101,955 at September 1, 1996), short-term borrowings
under revolving credit facilities and/or commercial paper facilities, and other
financing sources as required.
Expansion plans for the United States and Canada during fiscal 1997 are to
open approximately 20 new warehouse clubs, including seven relocations. Through
the end of the first 12 weeks of fiscal 1997, the Company has opened nine
warehouses in the United States (including the relocation of its North Orlando,
4
<PAGE>
Florida; South San Jose, California; and Albuquerque, New Mexico warehouses) and
closed outright its warehouse in St. Laurent, Canada. The Company also expects
to continue expansion of its international operations and plans to open one to
two additional United Kingdom units through its 60%-owned subsidiary during the
second half of fiscal 1997. Other markets are being assessed, particularly in
the Pacific Rim, and include the planned opening of a warehouse club in Taiwan
in January 1997.
PriceCostco and its Mexico-based joint venture partner, Controladora
Comercial Mexicana, each own a 50% interest in Price Club Mexico following the
Company's acquisition of Price Enterprises' interest in Price Club Mexico in
April, 1995. Price Club Mexico's expansion plans include the opening of two new
warehouse clubs during fiscal 1997. As of November 24, 1996, Price Club Mexico
operated 13 Price Club warehouses in Mexico.
BANK LINES OF CREDIT AND COMMERCIAL PAPER PROGRAMS
The Company has a domestic multiple-option loan facility with a group of 12
banks, which provides for borrowings of up to $500,000 or standby support for a
$500,000 commercial paper program. Of this amount, $250,000 expires on January
27, 1997, and $250,000 expires on January 30, 2001. The interest rate on bank
borrowings is based on LIBOR or rates bid at auction by the participating banks.
At November 24, 1996, no amounts were outstanding under the loan facility and
$86,000 was outstanding under the commercial paper program. The Company expects
to renew for an additional one-year term the $250,000 portion of the loan
facility expiring on January 27, 1997 at substantially the same terms.
In addition, a wholly-owned Canadian subsidiary has a $105,000 commercial
paper program supported by a bank credit facility with three Canadian banks, of
which $64,000 will expire in March 1997 and $41,000 will expire in March 1999.
The interest rate on bank borrowings is based on the prime rate or the "Bankers'
Acceptance" rate. At November 24, 1996, no amount was outstanding under the bank
credit facility and $77,000 was outstanding under the Canadian commercial paper
program. The Company expects to renew for an additional one-year term the
$64,000 portion of the loan facility expiring in March 1997, at substantially
the same terms.
LETTERS OF CREDIT
The Company also has separate letter of credit facilities (for commercial
and standby letters of credit), totaling approximately $176,000. The outstanding
commitments under these facilities at November 24, 1996 totaled approximately
$67,000, including approximately $31,000 in standby letters of credit for
workers' compensation requirements.
DEBENTURE REDEMPTIONS (ACTUAL DOLLARS, NOT IN THOUSANDS)
On November 19, 1996, The Price Company, a wholly-owned subsidiary of the
Company, gave notice of its intention to redeem all $285.1 million of its 6 3/4%
Convertible Subordinated Debentures due 2001 (the "Debentures"). As of the
redemption date, December 4, 1996, approximately $159.4 million principal amount
of the Debentures were converted into approximately 7.1 million shares of
PriceCostco Common Stock and the remaining $125.7 million of Debentures were
redeemed at a total cost of $130.3 million (including accrued interest and
redemption premium). The redemption portion of the transaction was financed with
short-term bank borrowings.
On December 16, 1996, The Price Company, a wholly-owned subsidiary of
PriceCostco, gave notice of its intention to redeem all $179.3 million of its
5 1/2% Convertible Subordinated Debentures due 2012 (the "Debentures"). Holders
of the Debentures have until the close of business January 6, 1997, to either:
(i) convert their Debentures into Common Stock of PriceCostco, Inc. at the
conversion price of $23.77 per share (or approximately 42.07 shares of Common
Stock per $1,000 principal amount of Debentures); or (ii) redeem their
Debentures at a redemption price of $1,024.60 per $1,000 principal amount, which
includes a redemption premium of $5.50 and accrued interest to January 6, 1997
of $19.10 per $1,000
5
<PAGE>
principal amount. If all the Debentures are converted, approximately 7.54
million shares of Common Stock would be issued. Holders who elect to convert
their Debentures will forgo both the call premium and the accrued interest from
August 31, 1996. If all the Debentures are redeemed, the approximately $183.7
million of proceeds required to complete the redemption, which includes the
redemption premium and current accrued interest, will be financed with cash and
short-term borrowings. See "Note (5)--Subsequent Events" for additional
information regarding these transactions.
FINANCIAL POSITION AND CASH FLOWS
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). Working
capital totaled approximately $12,000 at November 24, 1996 compared to working
capital of $57,000 at September 1, 1996. The decrease in net working capital was
primarily due to (i) financing the Company's seasonal working capital
requirements through short-term borrowings; and (ii) capital expenditures in
excess of operating cash flows.
Net cash provided by (used in) operating activities totaled $80,812 in the
first 12 weeks of fiscal 1997 compared to ($76,329) in the first 12 weeks of
fiscal 1996. The increase in net cash from operating activities is primarily a
result of the increase in merchandise inventories being financed by a higher
level of supplier accounts payable.
Net cash used in investing activities totaled $174,561 in the first 12 weeks
of fiscal 1997 compared to $145,270 in the first 12 weeks of fiscal 1996. The
investing activities primarily related to additions to property and equipment
for new and remodeled warehouses of $164,764 and $131,676 in the first 12 weeks
of fiscal 1997 and 1996 respectively. The Company opened nine warehouses
(including three relocated warehouses) in the first 12 weeks of fiscal 1997
compared to four warehouses in the first 12 weeks of fiscal 1996.
Net cash provided by financing activities totaled $100,487 in the first 12
weeks of fiscal 1997 compared to $188,937 in the first 12 weeks of fiscal 1996.
In both periods the Company utilized its bank lines and commercial paper
programs to finance operations and expansion plans. Net proceeds from short-term
borrowings totaled $102,650 and $171,813 in the first 12 weeks of fiscal 1997
and 1996 respectively.
The Company's balance sheet as of November 24, 1996 reflects a $608,738 or
12.4% increase in total assets since September 1, 1996. The 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 primarily related to the Company's expansion program.
6
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PART II--OTHER INFORMATION
(DOLLARS IN THOUSANDS)
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 alleged violation of certain state and federal laws
arising from the spin-off and Exchange Transaction (whereby Price Enterprises,
Inc. became a separate, publicly-traded Company) and the merger between Price
and Costco. In July 1996, an agreement in principle was reached to resolve the
lawsuit. Subject to court approval, the resolution will involve the transfer
from Price Enterprises, Inc. to the Company of certain intangible assets,
including elimination of certain existing non-compete restrictions and operating
agreements and the termination or amendment of certain trademark license and
assignment agreements. The cash portion of the settlement will be funded by the
Company's director and officer insurance coverage and by Price Enterprises. The
Company will contribute no money to the settlement.
In May 1996, PriceCostco reached an agreement in principle with the
Environmental Protection Agency and the U.S. Department of Justice to settle an
enforcement action under the Federal Clean Air Act. The action is based on
claims that PriceCostco failed to maintain required documentation related to its
sale of freon products. Under the terms of the proposed settlement, PriceCostco
agreed to pay a civil penalty of $232 and to comply with federal regulations
relating to the sale of ozone-depleting substances.
The Company is involved from time to time in claims, proceedings and
litigation arising from its business and property ownership. The Company does
not believe that any such claim, proceeding or litigation, either alone or in
the aggregate, will have a material adverse effect on the Company's financial
position or results of operations.
ITEM 2. CHANGES IN SECURITIES
None.
7
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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 7:30 p.m. on January 29, 1997
at the DoubleTree Paradise Valley Resort in Scottsdale, Arizona. 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
prior to the meeting.
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 24, 1996.
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: December 19, 1996 James D. Sinegal
PRESIDENT AND CHIEF EXECUTIVE OFFICER
/s/ RICHARD A. GALANTI
--------------------------------------
Date: December 19, 1996 Richard A. Galanti
EXECUTIVE VICE PRESIDENT,
CHIEF FINANCIAL OFFICER
8
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PRICE/COSTCO, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NOVEMBER SEPTEMBER
24, 1996 1, 1996
----------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents........................................... $ 111,011 $ 101,955
Receivables, net.................................................... 169,822 137,467
Merchandise inventories, net........................................ 1,992,675 1,500,842
Other current assets................................................ 74,748 88,040
----------- -----------
Total current assets............................................ 2,348,256 1,828,304
----------- -----------
PROPERTY AND EQUIPMENT
Land, land rights, and land improvements............................ 1,278,565 1,273,811
Buildings and leasehold improvements................................ 1,568,310 1,449,094
Equipment and fixtures.............................................. 766,683 716,448
Construction in progress............................................ 64,345 104,183
----------- -----------
3,677,903 3,543,536
Less accumulated depreciation and amortization...................... (693,279) (655,226)
----------- -----------
Net property and equipment........................................ 2,984,624 2,888,310
----------- -----------
OTHER ASSETS........................................................ 187,719 195,247
----------- -----------
$5,520,599 $4,911,861
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bank checks outstanding............................................. $ -- $ 22,330
Short-term borrowings............................................... 162,565 59,928
Accounts payable.................................................... 1,651,520 1,220,426
Accrued salaries and benefits....................................... 270,346 256,951
Accrued sales and other taxes....................................... 90,809 84,545
Other current liabilities........................................... 160,959 127,414
----------- -----------
Total current liabilities......................................... 2,336,199 1,771,594
LONG-TERM DEBT...................................................... 1,231,174 1,229,221
DEFERRED INCOME TAXES AND OTHER LIABILITIES......................... 34,508 60,902
----------- -----------
Total liabilities................................................. 3,601,881 3,061,717
----------- -----------
MINORITY INTERESTS.................................................. 89,138 72,346
STOCKHOLDERS' EQUITY
Preferred stock $.01 par value; 100,000,000 shares authorized; no
shares issued and outstanding..................................... -- --
Common stock $.01 par value; 900,000,000 shares authorized;
196,658,000 and 196,436,000 shares issued and outstanding......... 1,967 1,964
Additional paid-in capital.......................................... 324,535 321,832
Accumulated foreign currency translation............................ (54,617) (71,883)
Retained earnings................................................... 1,557,695 1,525,885
----------- -----------
Total stockholders' equity........................................ 1,829,580 1,777,798
----------- -----------
$5,520,599 $4,911,861
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
9
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PRICE/COSTCO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
12 WEEKS ENDED
--------------------------
NOVEMBER 24, NOVEMBER 26,
1996 1995
------------ ------------
<S> <C> <C>
REVENUE
Net sales......................................................................... $4,785,636 $4,295,862
Membership fees and other......................................................... 97,772 87,702
------------ ------------
Total revenue................................................................... 4,883,408 4,383,564
OPERATING EXPENSES
Merchandise costs................................................................. 4,308,369 3,887,116
Selling, general and administrative............................................... 426,104 385,973
Preopening expenses............................................................... 10,197 9,450
Provision for impaired assets and warehouse closing costs......................... 70,000 --
------------ ------------
Operating income................................................................ 68,738 101,025
OTHER INCOME (EXPENSE)
Interest expense.................................................................. (18,933) (17,771 )
Interest income and other......................................................... 3,657 1,091
------------ ------------
INCOME BEFORE PROVISION FOR INCOME TAXES.......................................... 53,462 84,345
Provision for income taxes........................................................ 21,652 34,792
------------ ------------
NET INCOME........................................................................ $ 31,810(a) $ 49,553
------------ ------------
------------ ------------
NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE--FULLY DILUTED:
Net income........................................................................ $ 0.16(a) $ 0.25
------------ ------------
------------ ------------
Shares used in calculation (000's)................................................ 199,630 217,311
------------ ------------
------------ ------------
</TABLE>
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(a) Net income and net income per common and common equivalent share would have
been $70,485 and $.34, respectively, without the effect of adopting FAS No.
121, using 227,096 fully-diluted shares.
The accompanying notes are an integral part of these financial statements.
10
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PRICE/COSTCO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
12 WEEKS ENDED
--------------------------
NOVEMBER 24, NOVEMBER 26,
1996 1995
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income........................................................................... $ 31,810 $ 49,553
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Depreciation and amortization...................................................... 37,442 34,556
Provision for asset impairments.................................................... 65,000 --
Increase in merchandise inventories................................................ (483,954) (397,935)
Increase in accounts payable....................................................... 424,154 207,297
Other.............................................................................. 6,360 30,200
------------ ------------
Total adjustments................................................................ 49,002 (125,882)
------------ ------------
Net cash provided by (used in) operating activities................................ 80,812 (76,329)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property and equipment.................................................. (164,764) (131,676)
Proceeds from the sale of property and equipment..................................... 1,072 395
Other................................................................................ (10,869) (13,989)
------------ ------------
Net cash used in investing activities.............................................. (174,561) (145,270)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from short-term borrowings.............................................. 102,650 171,813
Increase (decrease) in bank checks outstanding....................................... (22,467) 17,501
Net proceeds from long-term borrowings............................................... 2,587 --
Payments on long-term debt and notes payable......................................... (1,075) (893)
Proceeds from minority interests, net................................................ 16,086 (391)
Exercise of stock options, including income tax benefit.............................. 2,706 907
------------ ------------
Net cash provided by financing activities.......................................... 100,487 188,937
------------ ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH.............................................. 2,318 (150)
------------ ------------
Net increase (decrease) in cash and cash equivalents............................... 9,056 (32,812)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR....................................... 101,955 45,688
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD........................................... $ 111,011 $ 12,876
------------ ------------
------------ ------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amounts capitalized) (a).......................................... $ 28,870 $ 9,952
Income taxes....................................................................... 8,319 17,491
</TABLE>
- - ------------------------
(a) Semi-annual interest payments on the 5 1/2% and 6 3/4% convertible
debentures were paid on September 3, 1996, subsequent to the beginning of
the first quarter of fiscal 1997, which began September 2, 1996. In fiscal
year 1996, these interest payments were paid prior to the first quarter,
which began on September 4, 1996.
The accompanying notes are an integral part of these financial statements.
11
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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"). All intercompany
transactions between the Company and its subsidiaries have been eliminated in
consolidation. Price and Costco primarily operate cash and carry membership
warehouses.
PriceCostco operates membership warehouses that offer very low prices on a
limited selection of nationally-branded and selected private label products in a
wide range of merchandise categories in no-frills, self-service warehouse
facilities. As of November 24, 1996, PriceCostco operated 257 warehouses under
the "Price Club" and "Costco Wholesale" names: 198 warehouses in the United
States (23 states), 54 warehouses in nine Canadian provinces and five warehouses
in the United Kingdom. As of November 24, 1996, the Company also operated
(through a 50%-owned joint venture) 13 warehouses in Mexico and had a license
agreement for the operation of a membership warehouse in Seoul, Korea.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial reporting and pursuant to the rules and regulations of the Securities
and Exchange Commission. While these statements reflect all normal recurring
adjustments which are, in the opinion of management, necessary for fair
presentation of the results of the interim period, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. For further information, refer to
the financial statements and footnotes thereto included in the Company's annual
report filed on Form 10-K for the fiscal year ended September 1, 1996.
FISCAL YEARS
The Company reports on a 52/53-week fiscal year, ending on the Sunday
nearest the end of August. Fiscal 1997 is a 52-week fiscal year, with the first,
second and third quarters consisting of 12 weeks each and the fourth quarter,
ending August 31, 1997, consisting of 16 weeks.
MERCHANDISE INVENTORIES
Merchandise inventories are valued at the lower of cost or market as
determined by the retail inventory method, and are stated using the last-in,
first-out (LIFO) method for U.S. merchandise inventories, and the first-in,
first-out (FIFO) method for foreign merchandise inventories. If the FIFO method
had been used merchandise inventory would have been $18,650 higher at both
November 24, 1996 and November 26, 1995.
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 fiscal quarters.
12
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
NOTE (1)--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE
Net income per common and common equivalent share is based on the weighted
average number of common and common equivalent shares outstanding. The
calculation for the 12-week period ended November 26, 1995, 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.
ADOPTION OF FINANCIAL ACCOUNTING STANDARDS BOARD STATEMENT NO. 121
The Company has adopted Statement of Financial Accounting Standard No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of " (SFAS No. 121), as of the first quarter of fiscal 1997. In
accordance with SFAS No. 121, the Company recorded a pretax, non-cash charge of
$65,000 reflecting its estimate of impairment relating principally to excess
property and closed warehouses. The charge reflects the difference between
carrying value and fair value, which was based on market valuations for those
assets whose carrying value was not recoverable through future cash flows.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
NOTE (2)--DEBT
The Company has a domestic multiple option loan facility with a group of 12
banks which provides for borrowings up to $500,000 or standby support for a
$500,000 commercial paper program. Of this amount, $250,000 expires on January
27, 1997, and $250,000 expires on January 30, 2001. The interest rate on bank
borrowings is based on LIBOR or rates bid at auction by the participating banks.
At November 24, 1996, $86,000 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 27, 1997 at substantially the same terms.
In addition, the Company's wholly-owned Eastern Canada subsidiary has a
$105,000 commercial paper program supported by a bank credit facility with three
Canadian banks, of which $64,000 will expire in March 1997 and $41,000 will
expire in March 1999. The interest rate on bank borrowings is based on the prime
rate or the "Bankers' Acceptance" rate. At November 24, 1996, no amount was
outstanding under the bank credit facility and $77,000 was outstanding under the
Canadian commercial paper program. The Company expects to renew for an
additional one-year term the $64,000 portion of the loan facility expiring in
March 1997, at substantially the same terms.
The Company also has separate letter of credit facilities (for commercial
and standby letters of credit) totaling approximately $176,000. The outstanding
commitments under these facilities at November 24, 1996 totaled approximately
$67,000, including approximately $31,000 in standby letters of credit for
workers' compensation requirements.
13
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
NOTE (2)--DEBT (CONTINUED)
On February 21, 1996, the Company filed with the Securities and Exchange
Commission a shelf registration statement relating to $500,000 of senior debt
securities. The registration statement was declared effective on February 29,
1996. As part of that filing, the Company announced its intention to offer
$300,000 of senior notes to refinance existing indebtedness. The Company has
deferred issuance of these notes due to unfavorable interest rate market
conditions.
NOTE (3)--INCOME TAXES
The following is a reconciliation of the federal statutory income tax rate
to the effective income tax rate for income before income taxes:
<TABLE>
<CAPTION>
12 WEEKS ENDED 12 WEEKS ENDED
NOVEMBER 24, 1996 NOVEMBER 26, 1995
---------------------- ----------------------
<S> <C> <C> <C> <C>
Federal statutory income tax rate..................................... $ 18,712 35.00% $ 29,521 35.00%
State, foreign and other income taxes, net............................ 2,940 5.50% 5,271 6.25%
--------- ----- --------- -----
$ 21,652 40.50% $ 34,792 41.25%
--------- ----- --------- -----
--------- ----- --------- -----
</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. See Legal Proceedings on page 7 for
outstanding legal matters.
NOTE (5)--SUBSEQUENT EVENTS (ACTUAL DOLLARS, NOT IN THOUSANDS)
On November 19, 1996 The Price Company, a wholly-owned subsidiary of the
Company, gave notice of its intention to redeem all $285.1 million of its 6 3/4%
Convertible Subordinated Debentures due 2001 (the "Debentures"). Holders of the
Debentures had until the close of business December 4, 1996 to either: (i)
convert their Debentures into Common Stock of PriceCostco, Inc. at a conversion
price of $22.535 per share (or approximately 44.38 shares of Common Stock per
$1,000 principal amount of Debentures); or (ii) redeem their Debentures at a
redemption price of $1,036.74 per $1,000 principal amount, which included a
redemption premium of $19.30 and accrued interest of $17.44 per $1,000 principal
amount. Approximately $159.4 million principal amount of the Debentures were
converted into approximately 7.1 million shares of PriceCostco Common Stock and
the remaining $125.7 million of Debentures were redeemed at a total cost of
$130.3 million (including accrued interest and redemption premium). The
redemption portion of the transaction was financed with short-term bank
borrowings.
On December 16, 1996, The Price Company, a wholly-owned subsidiary of
PriceCostco, gave notice of its intention to redeem all $179.3 million of its
5 1/2% Convertible Subordinated Debentures due 2012 (the "Debentures"). Holders
of the Debentures have until the close of business January 6, 1997, to either:
(i) convert their Debentures into Common Stock of PriceCostco, Inc. at the
conversion price of $23.77 per share (or approximately 42.07 shares of Common
Stock per $1,000 principal amount of Debentures); or (ii) redeem their
Debentures at a redemption price of $1,024.60 per $1,000 principal amount, which
includes a redemption premium of $5.50 and accrued interest to January 6, 1997
of $19.10 per $1,000 principal amount. If all the Debentures are converted,
approximately 7.54 million shares of Common Stock
14
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
NOTE (5)--SUBSEQUENT EVENTS (ACTUAL DOLLARS, NOT IN THOUSANDS) (CONTINUED)
would be issued. Holders who elect to convert their Debentures will forgo both
the call premium and the accrued interest from September 1, 1996. If all the
Debentures are redeemed, the approximately $183.7 million of proceeds required
to complete the redemption, which includes the redemption premium and current
accrued interest, will be financed with cash and short-term borrowings.
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-START> SEP-02-1996
<PERIOD-END> NOV-24-1996
<CASH> 111,011
<SECURITIES> 0
<RECEIVABLES> 174,234
<ALLOWANCES> 4,412
<INVENTORY> 1,992,675
<CURRENT-ASSETS> 2,348,256
<PP&E> 3,677,903
<DEPRECIATION> 693,279
<TOTAL-ASSETS> 5,520,599
<CURRENT-LIABILITIES> 2,336,199
<BONDS> 1,231,174
0
0
<COMMON> 326,502
<OTHER-SE> 1,503,078
<TOTAL-LIABILITY-AND-EQUITY> 5,520,599
<SALES> 4,785,636
<TOTAL-REVENUES> 4,883,408
<CGS> 4,308,369
<TOTAL-COSTS> 4,814,670
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18,933
<INCOME-PRETAX> 53,462
<INCOME-TAX> 21,652
<INCOME-CONTINUING> 31,810
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 31,810
<EPS-PRIMARY> .16
<EPS-DILUTED> .16
</TABLE>
<PAGE>
EXHIBIT 28
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Price/Costco, Inc.:
We have reviewed the accompanying condensed consolidated balance sheets of
Price/Costco, Inc. (a Delaware corporation) and subsidiaries as of November 24,
1996, and the related condensed consolidated statements of operations and cash
flows for the 12-week periods ended November 24, 1996 and November 26, 1995.
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 16, 1996
16
