<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 MAY 11, 1997
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-20355
COSTCO COMPANIES, INC.
(Exact name of registrant as specified in its charter)
<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 212,524,549 common shares, par value $.01, outstanding at
May 30, 1997.
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
<PAGE>
COSTCO COMPANIES, 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.................................................................... 11
Condensed Consolidated Statements of Operations.......................................................... 12
Condensed Consolidated Statements of Cash Flows.......................................................... 13
Notes to Condensed Consolidated Financial Statements..................................................... 14
ITEM 2--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.............. 3
PART II--OTHER INFORMATION
ITEM 1--LEGAL PROCEEDINGS.................................................................................. 8
ITEM 2--CHANGES IN SECURITIES.............................................................................. 9
ITEM 3--DEFAULTS UPON SENIOR SECURITIES.................................................................... 9
ITEM 4--SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................................................ 9
ITEM 5--OTHER INFORMATION.................................................................................. 9
ITEM 6--EXHIBITS AND REPORTS ON FORM 8-K................................................................... 9
Exhibit (28) Report of Independent Public Accountants................................................... 18
</TABLE>
2
<PAGE>
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Costco Companies, Inc.'s (the "Company" or "Costco"; formerly Price/Costco,
Inc.) unaudited condensed consolidated balance sheet as of May 11, 1997, and the
condensed consolidated balance sheet as of September 1, 1996, unaudited
condensed consolidated statements of operations for the 12- and 36-week periods
ended May 11, 1997, and May 12, 1996, and unaudited condensed consolidated
statements of cash flows for the 36-week periods then ended are included
elsewhere herein. Also, included elsewhere herein are notes to the unaudited
condensed consolidated financial statements and the results of the limited
review performed by Arthur Andersen LLP, independent public accountants.
The Company reports on a 52/53-week fiscal year, consisting of 13 four-week
periods and ending on the Sunday nearest the end of August. Fiscal 1997 is a
52-week year with period 13 ending on August 31, 1997. The first, second, and
third quarters consist of 12 weeks each and the fourth quarter consists of 16
weeks.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
It is suggested that this management discussion be read in conjunction with
the management discussion included in the Company's fiscal 1996 annual report on
Form 10-K previously filed with the Securities and Exchange Commission.
COMPARISON OF THE 12 WEEKS ENDED MAY 11, 1997 AND MAY 12, 1996 (DOLLARS IN
THOUSANDS, EXCEPT PER SHARE DATA)
Net income for the third quarter of fiscal 1997 increased 61% to $66,265, or
$0.31 per share (fully diluted), from $41,274, or $0.21 per share (fully
diluted), during the third quarter of fiscal 1996.
Net sales increased 12% to $4,752,445 during the third quarter of fiscal
1997 from $4,236,207 during the third quarter of fiscal 1996. This increase was
primarily due to an increase in comparable warehouse sales and opening a net of
9 warehouses (17 opened--10 new, 7 relocated and 8 closed) since the end of the
third quarter of fiscal 1996. Comparable sales, that is sales in warehouses open
for at least a year, increased 10 percent during the third quarter of fiscal
1997, reflecting new marketing and merchandising efforts, including the rollout
of fresh foods and various ancillary businesses to certain existing locations.
Changes in prices of merchandise did not materially contribute to sales
increases.
Membership fees and other revenue increased 11% to $83,784 or 1.76% of net
sales in the third quarter of fiscal 1997 from $75,281 or 1.78% of net sales in
the third quarter of fiscal 1996. Membership fees include membership sign-ups at
the new warehouses opened since the end of the third 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 16% to
$469,288 or 9.87% of net sales in the third quarter of fiscal 1997 from $406,284
or 9.59% of net sales in the third quarter of fiscal 1996. The 28 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, 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 third quarter of fiscal 1997 and 1996 each included
a $2,500 LIFO provision.
Selling, general and administrative expenses as a percent of net sales
decreased to 8.98% during the third quarter of fiscal 1997 from 9.05% during the
third quarter of fiscal 1996. This improvement in selling, general and
administrative expenses as a percent of net sales was due to the operating
expense leverage
3
<PAGE>
from the increase in comparable warehouse sales noted above, resulting in a
year-over-year improvement at the Company's core warehouse operations and
Central and Regional administrative offices. This expense improvement was
partially offset by higher expenses as a percent of net sales associated with
international expansion and certain ancillary businesses.
Preopening expenses totaled $2,458 or .05% of net sales during the third
quarter of fiscal 1997 compared to $4,738 or 0.11% of net sales during the third
quarter of fiscal 1996. Two warehouses were opened in the third quarter of
fiscal 1997 compared to four warehouses opened during last year's third quarter.
Preopening expenses also includes costs related to remodel activity, including
expanded fresh foods and ancillary operations at existing warehouses.
In the third quarter of fiscal 1997 the Company recorded a pre-tax provision
for warehouse closing costs of $3,500, or $.01 per share on an after-tax basis
(fully diluted), compared to a pre-tax provision for warehouse closing costs of
$6,000 or $.02 per share on an after-tax basis (fully diluted) recorded in the
third quarter of fiscal 1996. The provisions include estimated closing costs for
warehouses closed in the third quarter of each respective fiscal year, including
closing costs associated with warehouses which were relocated to new facilities.
Interest expense totaled $14,662 in the third quarter of fiscal 1997
compared to $19,194 in the third quarter of fiscal 1996. The decrease in
interest expense is primarily related to the call for redemption of both the
Company's 6 3/4% ($285.1 million principal amount) and 5 1/2% ($179.3 million
principal amount) Convertible Subordinated Debentures during the second quarter
of fiscal 1997, which resulted in a net reduction of debt of over $300 million
following the completion of these two transactions. See "Note 2-- Debt".
Interest income and other totaled $4,055 in the third quarter of fiscal 1997
compared to $2,007 in the third quarter of fiscal 1996. The increase is
primarily due to the Company terminating certain unconsolidated joint ventures
which had been incurring losses, improved earnings in its Mexico joint venture
operation, and a third quarter net gain on the sale of certain excess land
parcels.
The effective income tax rate on earnings in the second quarter of fiscal
1997 was 39.50% compared to a 41.25% effective tax rate in the third quarter of
fiscal 1996. The decrease in the effective tax rate was related primarily to
decreases in foreign taxes.
COMPARISON OF THE 36 WEEKS ENDED MAY 11, 1997 AND MAY 12, 1996 (DOLLARS IN
THOUSANDS, EXCEPT PER SHARE DATA)
Net operating results for the first 36 weeks of fiscal 1997 reflect net
income of $195,524, or $0.92 per share (fully diluted), compared to net income
of $162,253, or $0.80 per share (fully diluted), during the first 36 weeks of
fiscal 1996. Net income in the first 36 weeks of fiscal 1997 included a
non-cash, pretax charge of $65,000 ($38,675 after-tax) reflecting a provision
for the impairment of long-lived assets as required by the Company's adoption of
Statement of Financial Accounting Standard No. 121. Excluding the $65,000
($38,675 after-tax) asset impairment charge, net income for the first 36 weeks
of fiscal 1997 would have increased 44% to $234,199, or $1.10 per share (fully
diluted). The Company also recorded in the first 36 weeks of fiscal 1997 a
pretax provision for warehouse closing costs of $8,500, or $.02 per share on an
after-tax basis (fully diluted) compared to a warehouse closing provision of
$6,000 or $.02 per share on an after-tax basis (fully diluted) for the first 36
weeks of fiscal 1996. These provisions primarily include estimated closing costs
for certain warehouses closed in the first 36 weeks of each respective fiscal
year and additional costs related to warehouses closed in the prior year.
Net sales increased 12% to $14,685,506 during the first 36 weeks of fiscal
1997 from $13,138,139 during the first 36 weeks of fiscal 1996. This increase
was primarily due to an increase in comparable warehouse sales and opening a net
of 9 warehouses (17 opened--10 new, 7 relocated and 8 closed) since the end of
the third quarter of fiscal 1996. Comparable sales, that is sales in warehouses
open for at least a
4
<PAGE>
year, increased 9 percent during the first 36 weeks of fiscal 1997, reflecting
new marketing and merchandising efforts, including the rollout of fresh foods
and various ancillary businesses to certain existing locations. Changes in
prices of merchandise did not materially contribute to sales increases.
Membership fees and other revenue increased to $273,024 or 1.86% of net
sales in the first 36 weeks of fiscal 1997 from $245,608 or 1.87% of net sales
in the first 36 weeks of fiscal 1996. Membership fees include membership
sign-ups at the new warehouses opened since the end of the third 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 16% to
$1,474,770 or 10.04% of net sales in the first 36 weeks of fiscal 1997 from
$1,267,108 or 9.64% of net sales in the first 36 weeks of fiscal 1996. The 40
basis point increase in gross margin reflects strong physical inventory results
for the 1st half of the fiscal year, the Company's greater purchasing power,
expanded use of the Company's depot facilities, improved fresh foods and
softlines margins, and increased sales penetration of certain higher gross
margin ancillary businesses. The gross margin figures reflect accounting for
merchandise costs on the last-in, first-out (LIFO) method. The first 36 weeks of
fiscal 1997 and 1996 each include a $7,500 LIFO provision.
Selling, general and administrative expenses as a percent of net sales
decreased to 8.78% during the first 36 weeks of fiscal 1997 from 8.84% during
the first 36 weeks of fiscal 1996. This improvement in selling, general and
administrative expenses as a percent of net sales was due to the increase in
comparable warehouse sales noted above, and a year-over-year improvement at the
Company's core warehouse operations and Central and Regional administrative
offices, which was partially offset by higher expenses as a percent of net sales
associated with international expansion and certain ancillary businesses.
Preopening expenses totaled $18,743 or 0.13% of net sales during the first
36 weeks of fiscal 1997 compared to $20,158 or 0.15% of net sales during the
first 36 weeks of fiscal 1996. In the first 36 weeks of fiscal 1997 the Company
opened 13 warehouses (including 6 relocated warehouses), compared to 16
warehouses opened during last year's first 36 weeks (including one relocated
warehouse). Preopening expenses also includes costs related to remodels,
including expanded fresh foods and ancillary operations at existing warehouses.
Interest expense totaled $50,839 in the first 36 weeks of fiscal 1997
compared to $54,466 in the first 36 weeks of fiscal 1996. The decrease in
interest expense is primarily related to the call for redemption of both the
Company's 6 3/4% ($285.1 million principal amount) and 5 1/2% ($179.3 million
principal amount) Convertible Subordinated Debentures during the second quarter
of fiscal 1997, which resulted in a net reduction of debt of over $300 million
following the completion of these two transactions. See "Note 2-- Debt".
Interest income and other totaled $11,177 in the first 36 weeks of fiscal
1997 compared to $5,385 in the first 36 weeks of fiscal 1996. The increase is
primarily due to the Company's termination of certain unconsolidated joint
ventures which had been incurring losses, improved earnings in its Mexico joint
venture operation, and a third quarter net gain on the sale of certain excess
land parcels.
The effective income tax rate on earnings in the first 36 weeks of fiscal
1997 was 40.16% compared to a 41.25% effective tax rate in the first weeks of
fiscal 1996. The decrease in the effective tax rate was related primarily to
decreases in foreign taxes.
5
<PAGE>
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
Costco's primary requirement for capital is the financing of the land,
building and equipment costs for new warehouses plus the costs of initial
warehouse operations and working capital requirements, as well as additional
capital for international expansion through investments in foreign subsidiaries
and joint ventures.
While there can be no assurance that current expectations will be realized,
and plans are subject to change upon further review, it is management's current
intention to spend an aggregate of approximately $400,000 to $425,000 during
fiscal 1997 in the United States and Canada for real estate, construction,
remodeling and equipment for warehouse clubs and related operations; and
approximately $80,000 to $100,000 for international expansion, including the
United Kingdom, Asia and other potential ventures. These expenditures will be
financed with a combination of cash provided from operations, the use of cash
and cash equivalents (which totaled $136,660 at May 11, 1997), short-term
borrowings under revolving credit facilities and/or commercial paper facilities,
and other financing sources as required. A total of approximately $391,000 has
been spent on capital expenditures during the first 36 weeks of fiscal 1997.
Expansion plans for the United States and Canada during fiscal 1997 are to
open approximately 19 new warehouse clubs, including seven relocations. Through
the end of the first 36 weeks of fiscal 1997, the Company has opened 12
warehouses in the United States (including the relocation of 6 warehouses),
closed outright one warehouse in Canada, and opened one warehouse in Taiwan in
January 1997. The Company expects to continue expansion of its international
operations and plans to open one additional unit in the United Kingdom through
its 60%-owned subsidiary during the fourth quarter of fiscal 1997. Other
international markets are being assessed, particularly in the Pacific Rim.
Costco Companies, Inc. and its Mexico-based joint venture partner,
Controladora Comercial Mexicana, each own a 50% interest in Price Club Mexico
following the Company's acquisition of Price Enterprises' interest in Price Club
Mexico in April, 1995. Price Club Mexico's expansion plans include the opening
of one additional warehouse club prior to the end of the calendar year. As of
May 11, 1997, Price Club Mexico operated 13 Price Club warehouses in Mexico.
BANK LINES OF CREDIT AND COMMERCIAL PAPER PROGRAMS (ALL AMOUNTS STATED IN US
DOLLARS)
The Company has a domestic multiple-option loan facility with a group of 12
banks, which provides for borrowings of up to $500,000 or standby support for a
$500,000 commercial paper program. Of this amount, $250,000 expires on January
26, 1998, and $250,000 expires on January 30, 2001. The interest rate on bank
borrowings is based on LIBOR or rates bid at auction by the participating banks.
At May 11, 1997, no amount was outstanding under the loan facility and $171,000
was outstanding under the commercial paper program.
In addition, a wholly-owned Canadian subsidiary has a $144,000 commercial
paper program supported by a $101,000 bank credit facility with three Canadian
banks, of which $61,000 will expire in March 1998 and $40,000 will expire in
March 1999. The interest rate on bank borrowings is based on the prime rate or
the "Bankers' Acceptance" rate. At May 11, 1997, no amount was outstanding under
the bank credit facility and $55,000 was outstanding under the Canadian
commercial paper program.
6
<PAGE>
The Company has agreed to limit the combined amount outstanding under the
U.S. and Canadian commercial paper programs to the $601,000 combined amounts of
the respective supporting bank credit facilities.
LETTERS OF CREDIT
The Company also has separate letter of credit facilities (for commercial
and standby letters of credit), totaling approximately $184,000. The outstanding
commitments under these facilities at May 11, 1997 totaled approximately
$103,000, including approximately $44,000 in standby letters of credit for
workers' compensation requirements.
REDEMPTION/CONVERSION OF CONVERTIBLE SUBORDINATED DEBENTURES
On November 19, 1996, The Price Company, a wholly-owned subsidiary of the
Company, called for redemption all $285,100 of its 6 3/4% Convertible
Subordinated Debentures due 2001. On the redemption date, December 4, 1996,
approximately $159,400 principal amount of the Debentures were converted into
approximately 7.1 million shares of Costco Companies, Inc. Common Stock and the
remaining $125,700 of Debentures were redeemed at a total cost of $130,300
(including accrued interest and redemption premium). The redemption portion of
the transaction was financed with short-term bank borrowings.
On December 16, 1996, The Price Company called for redemption all $179,300
of its 5 1/2% Convertible Subordinated Debentures due 2012. On the redemption
date, January 6, 1997, approximately $142,700 principal amount of the Debentures
were converted into approximately 6.0 million shares of Costco Companies, Inc.
Common Stock and the remaining $36,600 of Debentures were redeemed at a total
cost of $37,500 (including accrued interest and redemption premium). The
redemption portion of the transaction was paid with cash on hand.
FINANCIAL POSITION AND CASH FLOWS
Due to rapid inventory turnover, the Company's operations provide a higher
level of supplier trade payables in relation to inventory than generally
encountered in other forms of retailing. When combined with other current
liabilities, the resulting amount typically approaches or exceeds the current
assets needed to operate the business (e.g., merchandise inventories, accounts
receivable and other current assets). The working capital deficit totaled
approximately ($66,000) at May 11, 1997, compared to working capital of $57,000
at September 1, 1996.
Net cash provided by operating activities totaled $368,041 in the first 36
weeks of fiscal 1997 compared to $239,804 in the first 36 weeks of fiscal 1996.
The increase in net cash from operating activities is primarily a result of
increased net income, adjusted for the non-cash provision for asset impairments,
and reduced net inventory requirements during the first 36 weeks of this fiscal
year versus last fiscal year.
Net cash used in investing activities totaled $374,410 in the first 36 weeks
of fiscal 1997 compared to $369,396 in the first 36 weeks of fiscal 1996. The
investing activities primarily related to additions to property and equipment
for new and remodeled warehouses of $391,008 and $354,469 in the first 36 weeks
of fiscal 1997 and 1996, respectively.
Net cash provided by financing activities totaled $39,775 in the first 36
weeks of fiscal 1997 compared to $164,291 in the first 36 weeks of fiscal 1996.
This decrease is primarily the result of utilizing borrowings to finance the
repayment of long-term debt in fiscal 1997 compared to investments in property
and equipment in fiscal 1996.
The Company's balance sheet as of May 11, 1997 reflects a $347,103 or 7%
increase in total assets since September 1, 1996. The increase is primarily due
to a net increase in property and equipment and merchandise inventory primarily
related to the Company's expansion program.
7
<PAGE>
PART II--OTHER INFORMATION
(DOLLARS IN THOUSANDS)
ITEM 1. LEGAL PROCEEDINGS
On April 6, 1992, The Price Company was served with a Complaint in an action
entitled FECHT ET AL. V. THE PRICE COMPANY ET AL., Case No. 92-497, United
States District Court, Southern District of California (the "Court").
Subsequently, on April 22, 1992, The Price Company was served with a First
Amended Complaint in the action. The case was dismissed without prejudice by the
Court on September 21, 1992, on the grounds the plaintiffs had failed to state a
sufficient claim against defendants. Subsequently, plaintiffs filed a Second
Amended Complaint which, in the opinion of the Company's counsel, alleged
substantially the same facts as the prior complaint. The Complaint alleged
violation of certain state and federal laws during the time period prior to The
Price Company's earnings release for the second quarter of fiscal year 1992. The
case was dismissed with prejudice by the Court on March 9, 1993, on grounds the
plaintiffs had failed to state a sufficient claim against defendants. Plaintiffs
filed an Appeal in the Ninth Circuit Court of Appeals. In an opinion dated
November 20, 1995, the Ninth Circuit reversed and remanded the lawsuit. In
February 1997, the Court granted the plaintiffs' motion for certification of a
class consisting of all purchasers of the Common Stock of The Price Company from
April 3, 1991 through April 2, 1992. The Company believes that this lawsuit is
without merit and is vigorously defending the lawsuit. The Company does not
believe that the ultimate outcome of such litigation will have a material
adverse effect on the Company's financial position or results of operations.
On December 19, 1994, a Complaint was filed against PriceCostco and certain
current and former directors in an action entitled SNYDER V. PRICE/COSTCO, INC.
ET. AL., Case No. C94-1874Z, United States District Court, Western District of
Washington. On January 4, 1995, a Complaint was filed against PriceCostco in an
action entitled BALSAM V. PRICE/COSTCO, INC. ET. AL., Case No. C95-0009Z, United
States District Court, Western District of Washington. The Snyder and Balsam
Cases were subsequently consolidated and on March 15, 1995, plaintiffs' counsel
filed a First Amended And Consolidated Class Action And Derivative Complaint. On
November 9, 1995, plaintiffs' counsel filed a Second Amended And Consolidated
Class Action And Derivative Complaint. The Second Amended Complaint alleged
violation of certain state and federal laws arising from the spin-off and
exchange transaction (whereby Price Enterprises, Inc. became a separate,
publicly-traded company), and the merger between Costco and The Price Company.
In July 1996, an agreement in principle was reached to resolve the lawsuit, and
by Order dated April 28, 1997, the Court approved the settlement and dismissed
the lawsuit with prejudice. The resolution involves 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 was funded by the
Company's director and officer insurance coverage and by Price Enterprises. The
Company contributed no money to the settlement.
In May 1996, the Company reached an agreement in principle with the
Environmental Protection Agency and the U.S. Department of Justice to settle an
enforcement action under the Federal Clean Air Act. The action is based on
claims that the Company failed to maintain required documentation related to its
sale of freon products. Under the terms of the proposed settlement, the Company
agreed to pay a civil penalty of $232 and to comply with federal regulations
relating to the sale of ozone-depleting substances. The settlement was finalized
by a Consent Decree entered in March 1997 and the settlement payment was made in
April 1997.
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.
8
<PAGE>
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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 May 11, 1997.
9
<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.
<TABLE>
<S> <C>
REGISTRANT COSTCO COMPANIES, INC.
Date: May 30, 1997 /s/ JAMES D. SINEGAL
---------------------------------------------
James D. Sinegal
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Date: May 30, 1997 /s/ RICHARD A. GALANTI
---------------------------------------------
Richard A. Galanti
EXECUTIVE VICE PRESIDENT,
CHIEF FINANCIAL OFFICER
</TABLE>
10
<PAGE>
COSTCO COMPANIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
MAY 11, 1997 SEPTEMBER 1, 1996
-------------- -------------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents............... $ 136,660 $ 101,955
Receivables, net........................ 131,038 137,467
Merchandise inventories, net............ 1,647,216 1,500,842
Other current assets.................... 78,636 88,040
-------------- -------------------
Total current assets.................. 1,993,550 1,828,304
-------------- -------------------
PROPERTY AND EQUIPMENT
Land and land rights.................... 1,089,993 1,055,208
Buildings and leasehold and land
improvements.......................... 1,855,716 1,667,697
Equipment and fixtures.................. 819,371 716,448
Construction in progress................ 64,691 104,183
-------------- -------------------
3,829,771 3,543,536
Less accumulated depreciation and
amortization.......................... (749,793) (655,226)
-------------- -------------------
Net property and equipment............ 3,079,978 2,888,310
-------------- -------------------
OTHER ASSETS............................ 185,436 195,247
-------------- -------------------
$5,258,964 $4,911,861
-------------- -------------------
-------------- -------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bank checks outstanding................. $ 6,356 $ 22,330
Short-term borrowings................... 225,471 59,928
Accounts payable........................ 1,307,035 1,220,426
Accrued salaries and benefits........... 268,385 256,951
Accrued sales and other taxes........... 97,398 84,545
Other current liabilities............... 155,032 127,414
-------------- -------------------
Total current liabilities............. 2,059,677 1,771,594
LONG-TERM DEBT.......................... 760,010 1,229,221
DEFERRED INCOME TAXES AND OTHER
LIABILITIES........................... 36,742 60,902
-------------- -------------------
Total liabilities..................... 2,856,429 3,061,717
-------------- -------------------
MINORITY INTERESTS...................... 89,197 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; 212,143,000 and
196,436,000 shares issued and
outstanding........................... 2,121 1,964
Additional paid-in capital.............. 666,515 321,832
Accumulated foreign currency
translation........................... (76,707) (71,883)
Retained earnings....................... 1,721,409 1,525,885
-------------- -------------------
Total stockholders' equity............ 2,313,338 1,777,798
-------------- -------------------
$5,258,964 $4,911,861
-------------- -------------------
-------------- -------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
11
<PAGE>
COSTCO COMPANIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
12 WEEKS ENDED 36 WEEKS ENDED
----------------------------- ------------------------------
MAY 11, 1997 MAY 12, 1996 MAY 11, 1997 MAY 12, 1996
------------ --------------- ------------- ---------------
<S> <C> <C> <C> <C>
REVENUE
Net sales......................................... $4,752,445 $ 4,236,207 $ 14,685,506 $ 13,138,139
Membership fees and other......................... 83,784 75,281 273,024 245,608
------------ --------------- ------------- ---------------
Total revenue................................... 4,836,229 4,311,488 14,958,530 13,383,747
OPERATING EXPENSES
Merchandise costs................................. 4,283,157 3,829,923 13,210,736 11,871,031
Selling, general and administrative............... 426,980 383,387 1,289,119 1,161,303
Preopening expenses............................... 2,458 4,738 18,743 20,158
Provision for impaired assets and warehouse
closing costs................................... 3,500 6,000 73,500 6,000
------------ --------------- ------------- ---------------
Operating income................................ 120,134 87,440 366,432 325,255
OTHER INCOME (EXPENSE)
Interest expense.................................. (14,662) (19,194) (50,839) (54,466)
Interest income and other......................... 4,055 2,007 11,177 5,385
------------ --------------- ------------- ---------------
INCOME BEFORE PROVISION FOR INCOME TAXES.......... 109,527 70,253 326,770 276,174
Provision for income taxes........................ 43,262 28,979 131,246 113,921
------------ --------------- ------------- ---------------
NET INCOME........................................ $ 66,265 $ 41,274 $ 195,524(a) $ 162,253
------------ --------------- ------------- ---------------
------------ --------------- ------------- ---------------
NET INCOME PER COMMON AND COMMON EQUIVALENT
SHARE-- FULLY DILUTED:
Net income........................................ $ 0.31 $ 0.21 $ 0.92(a) $ 0.80
------------ --------------- ------------- ---------------
------------ --------------- ------------- ---------------
Shares used in calculation (000's)................ 216,362 218,336 218,433 218,145
------------ --------------- ------------- ---------------
------------ --------------- ------------- ---------------
</TABLE>
- - ------------------------
(a) Net income and net income per common and common equivalent share would have
been $234,199 and $1.10, respectively, without the effect of adopting FAS
No. 121, using 225,706 fully-diluted shares.
The accompanying notes are an integral part of these financial statements.
12
<PAGE>
COSTCO COMPANIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
36 WEEKS ENDED
-----------------------------
MAY 11, 1997 MAY 12, 1996
------------ ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income........................................................................ $ 195,524 $ 162,253
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization................................................... 122,429 109,714
Provision for asset impairments................................................. 65,000 --
Increase in merchandise inventories............................................. (150,123) (79,758)
Increase (decrease) in accounts payable......................................... 90,615 (37,876)
Other........................................................................... 44,596 85,471
------------ ---------------
Total adjustments............................................................. 172,517 77,551
------------ ---------------
Net cash provided by operating activities....................................... 368,041 239,804
------------ ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property and equipment............................................... (391,008) (354,469)
Proceeds from the sale of property and equipment.................................. 19,416 3,363
Investment in unconsolidated joint ventures....................................... -- (5,000)
Other............................................................................. (2,818) (13,290)
------------ ---------------
Net cash used in investing activities........................................... (374,410) (369,396)
------------ ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from short-term borrowings........................................... 167,751 21,335
Decrease in bank checks outstanding............................................... (16,039) (11,670)
Net proceeds from long-term borrowings............................................ 2,570 139,253
Payments on long-term debt and notes payable...................................... (169,618) (2,100)
Proceeds from minority interests, net............................................. 16,545 9,512
Exercise of stock options, including income tax benefit........................... 38,566 7,961
Other............................................................................. -- --
------------ ---------------
Net cash provided by financing activities....................................... 39,775 164,291
------------ ---------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH........................................... 1,299 144
------------ ---------------
Net increase in cash and cash equivalents....................................... 34,705 34,843
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.................................... 101,955 45,688
------------ ---------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD........................................ $ 136,660 $ 80,531
------------ ---------------
------------ ---------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amounts capitalized) (a)....................................... $ 55,791 $ 39,134
Income taxes.................................................................... 126,178 111,201
</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, 1995.
The accompanying notes are an integral part of these financial statements.
13
<PAGE>
COSTCO COMPANIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
NOTE (1)--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The unaudited consolidated financial statements include the accounts of
Costco Companies, Inc., a Delaware corporation, and its subsidiaries ("Costco
Companies, Inc." or the "Company"). Costco Companies, Inc. is a holding company
which operates primarily through its major subsidiaries, The Price Company and
subsidiaries ("Price"), and Costco Wholesale Corporation and subsidiaries
("Costco"). All intercompany transactions between the Company and its
subsidiaries have been eliminated in consolidation. Price and Costco primarily
operate cash and carry membership warehouses, primarily under the "Costco
Wholesale" name.
Costco Companies, Inc. operates membership warehouses that offer very low
prices on a limited selection of nationally-branded and selected private label
products in a wide range of merchandise categories in no-frills, self-service
warehouse facilities. As of May 11, 1997, Costco Companies, Inc. operated 258
warehouses under the "Costco Wholesale" and "Price Club" names: 198 warehouses
in the United States (23 states), 54 warehouses in nine Canadian provinces, five
warehouses in the United Kingdom, and one warehouse in Taiwan. As of May 11,
1997, the Company also operated (through a 50%-owned joint venture) 13
warehouses in Mexico and had a license agreement for the operation of a
membership warehouse in Seoul, Korea.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial reporting and pursuant to the rules and regulations of the Securities
and Exchange Commission. While these statements reflect all normal recurring
adjustments which are, in the opinion of management, necessary for fair
presentation of the results of the interim period, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. For further information, refer to
the financial statements and footnotes thereto included in the Company's annual
report filed on Form 10-K for the fiscal year ended September 1, 1996.
FISCAL YEARS
The Company reports on a 52/53-week fiscal year, ending on the Sunday
nearest the end of August. Fiscal 1997 is a 52-week fiscal year, with the first,
second and third quarters consisting of 12 weeks each and the fourth quarter,
ending August 31, 1997, consisting of 16 weeks.
MERCHANDISE INVENTORIES
Merchandise inventories are recorded 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 $23,650 higher at both May
11, 1997 and May 12, 1996.
The Company provides for estimated inventory losses between physical
inventory counts on the basis of a standard percentage of sales. This provision
is adjusted to reflect the actual shrinkage results of physical inventory counts
which generally occur in the second and fourth fiscal quarters.
14
<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- and 36-week periods ended May 12, 1996 and the 36-week
period ended May 11, 1997, eliminates interest expense, net of income taxes, on
the 5 1/2% convertible subordinated debentures (primary and fully diluted) prior
to the December 4, 1996 redemption date, the 6 3/4% convertible subordinated
debentures (fully diluted only) prior to the January 6, 1997 redemption date,
and includes the additional shares issuable upon conversion of these debentures.
ADOPTION OF FINANCIAL ACCOUNTING STANDARDS BOARD STATEMENT NO. 121
The Company adopted Statement of Financial Accounting Standard No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of " (SFAS No. 121), as of the first quarter of fiscal 1997. In
accordance with SFAS No. 121, the Company recorded a pretax, non-cash charge of
$65,000 reflecting its estimate of impairment relating principally to excess
property and closed warehouses. The charge reflects the difference between
carrying value and fair-market value, which was based on market valuations for
those assets whose carrying value was not recoverable through future cash flows.
RECENT ACCOUNTING PRONOUNCEMENT
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings per Share" (SFAS No. 128). SFAS No. 128 establishes new
standards for computing and presenting earnings per share (EPS) for entities
with publicly-held common stock. The Company is required to adopt SFAS No. 128
at the beginning of fiscal 1998. If the provisions of SFAS No. 128 had been used
to calculate EPS for the 12- and 36-weeks ended May 11, 1997 and May 12, 1996,
proforma EPS would have been:
<TABLE>
<CAPTION>
12 WEEKS ENDED 36 WEEKS ENDED
-------------------------------- --------------------------------
MAY 11, 1997 MAY 12, 1996 MAY 11, 1997 MAY 12, 1996
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Basic............................... $ 0.31 $ 0.21 $ 0.95 $ 0.83
----- ----- ----- -----
----- ----- ----- -----
Diluted............................. $ 0.31 $ 0.21 $ 0.93 $ 0.80
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
RECLASSIFICATIONS
Certain reclassifications have been reflected in the financial statements in
order to conform prior years to the current year presentation.
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.
15
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
NOTE (2)--DEBT
BANK LINES OF CREDIT AND COMMERCIAL PAPER PROGRAMS
The Company has a domestic multiple-option loan facility with a group of 12
banks, which provides for borrowings of up to $500,000 or standby support for a
$500,000 commercial paper program. Of this amount, $250,000 expires on January
26, 1998, and $250,000 expires on January 30, 2001. The interest rate on bank
borrowings is based on LIBOR or rates bid at auction by the participating banks.
At May 11, 1997, no amount was outstanding under the loan facility and $171,000
was outstanding under the commercial paper program.
In addition, a wholly-owned Canadian subsidiary has a $144,000 commercial
paper program supported by a $101,000 bank credit facility with three Canadian
banks, of which $61,000 will expire in March 1998 and $40,000 will expire in
March 1999. The interest rate on bank borrowings is based on the prime rate or
the "Bankers' Acceptance" rate. At May 11, 1997, no amount was outstanding under
the bank credit facility and $55,000 was outstanding under the Canadian
commercial paper program.
The Company has agreed to limit the combined amount outstanding under the
U.S. and Canadian commercial paper programs to the $601,000 combined amounts of
the respective supporting bank credit facilities.
LETTERS OF CREDIT
The Company also has separate letter of credit facilities (for commercial
and standby letters of credit), totaling approximately $184,000. The outstanding
commitments under these facilities at May 11, 1997 totaled approximately
$103,000, including approximately $44,000 in standby letters of credit for
workers' compensation requirements.
REDEMPTION/CONVERSION OF CONVERTIBLE SUBORDINATED DEBENTURES
On November 19, 1996, The Price Company, a wholly-owned subsidiary of the
Company, called for redemption all $285,100 of its 6 3/4% Convertible
Subordinated Debentures due 2001. On the redemption date, December 4, 1996,
approximately $159,400 principal amount of the Debentures were converted into
approximately 7.1 million shares of Costco Companies, Inc. Common Stock and the
remaining $125,700 of Debentures were redeemed at a total cost of $130,300
(including accrued interest and redemption premium). The redemption portion of
the transaction was financed with short-term bank borrowings.
On December 16, 1996, The Price Company called for redemption all $179,300
of its 5 1/2% Convertible Subordinated Debentures due 2012. On the redemption
date, January 6, 1997, approximately $142,700 principal amount of the Debentures
were converted into approximately 6.0 million shares of Costco Companies, Inc.
Common Stock and the remaining $36,600 of Debentures were redeemed at a total
cost of $37,500 (including accrued interest and redemption premium). The
redemption portion of the transaction was paid with cash on hand.
16
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
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>
36 WEEKS ENDED 36 WEEKS ENDED
MAY 11, 1997 MAY 12, 1996
--------------------- ---------------------
<S> <C> <C> <C> <C>
Federal statutory income tax rate................................. $ 114,370 35.00% $ 96,661 35.00%
State, foreign and other income taxes, net........................ 16,876 5.16% 17,260 6.25%
---------- --------- ---------- ---------
$ 131,246 40.16% $ 113,921 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 8 for
outstanding legal matters.
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-START> SEP-02-1996
<PERIOD-END> MAY-11-1997
<CASH> 136,660
<SECURITIES> 0
<RECEIVABLES> 134,933
<ALLOWANCES> 3,895
<INVENTORY> 1,647,216
<CURRENT-ASSETS> 1,993,550
<PP&E> 3,829,771
<DEPRECIATION> 749,793
<TOTAL-ASSETS> 5,258,964
<CURRENT-LIABILITIES> 2,059,677
<BONDS> 760,010
0
0
<COMMON> 668,636
<OTHER-SE> 1,644,702
<TOTAL-LIABILITY-AND-EQUITY> 5,258,964
<SALES> 14,685,506
<TOTAL-REVENUES> 14,958,530
<CGS> 13,210,736
<TOTAL-COSTS> 14,592,098
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 50,839
<INCOME-PRETAX> 326,770
<INCOME-TAX> 131,246
<INCOME-CONTINUING> 195,524
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 195,524
<EPS-PRIMARY> .93
<EPS-DILUTED> .92
</TABLE>
<PAGE>
EXHIBIT 28
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Costco Companies, Inc.:
We have reviewed the accompanying condensed consolidated balance sheet of
Costco Companies, Inc. (a Delaware corporation) and subsidiaries as of May 11,
1997, and the related condensed consolidated statements of operations for the
twelve-week and thirty-six-week periods ended May 11, 1997 and May 12, 1996, and
the condensed consolidated statements of cash flows for the thirty-six-week
periods then ended. These financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to be in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Seattle, Washington
May 27, 1997
18
